e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
|
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þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
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o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-15185
CIK number 0000036966
FIRST HORIZON NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
|
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|
Tennessee
|
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62-0803242 |
|
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|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
|
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|
165 Madison Avenue, Memphis, Tennessee
|
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38103 |
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|
(Address of principal executive offices)
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(Zip Code) |
(901) 523-4444
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of accelerated filer,
large accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer þ |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act)
Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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|
|
Class |
|
Outstanding on June 30, 2009 |
Common Stock, $.625 par value
|
|
215,207,891 |
FIRST HORIZON NATIONAL CORPORATION
INDEX
2
PART I.
FINANCIAL INFORMATION
This financial information reflects all adjustments that are, in the opinion of management,
necessary for a fair presentation of the financial position and results of operations for the
interim periods presented.
3
CONSOLIDATED CONDENSED STATEMENTS OF CONDITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Horizon National Corporation |
|
|
|
June 30 |
|
|
December 31 |
|
(Dollars in thousands)(Unaudited) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
419,696 |
|
|
$ |
838,376 |
|
|
$ |
552,423 |
|
Federal funds sold and securities purchased under agreements to resell |
|
|
531,638 |
|
|
|
1,166,982 |
|
|
|
772,357 |
|
|
|
|
|
Total cash and cash equivalents |
|
|
951,334 |
|
|
|
2,005,358 |
|
|
|
1,324,780 |
|
|
|
|
|
Interest-bearing cash |
|
|
672,553 |
|
|
|
39,829 |
|
|
|
207,792 |
|
Trading securities |
|
|
1,117,212 |
|
|
|
1,473,815 |
|
|
|
945,766 |
|
Trading securities divestiture |
|
|
|
|
|
|
89,239 |
|
|
|
|
|
Loans held for sale |
|
|
481,284 |
|
|
|
2,554,030 |
|
|
|
566,654 |
|
Securities available for sale (Note 3) |
|
|
2,821,079 |
|
|
|
2,896,688 |
|
|
|
3,125,153 |
|
Securities held to maturity (fair value of $- on June 30, 2009; $240 on June 30, 2008) (Note 3) |
|
|
|
|
|
|
240 |
|
|
|
|
|
Loans, net of unearned income (Note 4) |
|
|
19,585,827 |
|
|
|
22,225,232 |
|
|
|
21,278,190 |
|
Less: Allowance for loan losses |
|
|
961,482 |
|
|
|
575,149 |
|
|
|
849,210 |
|
|
|
|
|
Total net loans |
|
|
18,624,345 |
|
|
|
21,650,083 |
|
|
|
20,428,980 |
|
|
|
|
|
Mortgage servicing rights (Note 5) |
|
|
337,096 |
|
|
|
903,634 |
|
|
|
376,844 |
|
Mortgage servicing rights divestiture |
|
|
|
|
|
|
235,761 |
|
|
|
|
|
Goodwill (Note 6) |
|
|
192,408 |
|
|
|
192,408 |
|
|
|
192,408 |
|
Other intangible assets, net (Note 6) |
|
|
41,937 |
|
|
|
48,615 |
|
|
|
45,082 |
|
Capital markets receivables |
|
|
959,514 |
|
|
|
994,571 |
|
|
|
1,178,932 |
|
Premises and equipment, net |
|
|
325,666 |
|
|
|
344,410 |
|
|
|
333,931 |
|
Real estate acquired by foreclosure |
|
|
116,584 |
|
|
|
141,857 |
|
|
|
125,538 |
|
Other assets |
|
|
2,117,931 |
|
|
|
1,908,795 |
|
|
|
2,170,120 |
|
Other assets-divestiture |
|
|
|
|
|
|
70,628 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
28,758,943 |
|
|
$ |
35,549,961 |
|
|
$ |
31,021,980 |
|
|
|
|
|
Liabilities and equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
4,593,215 |
|
|
$ |
4,041,352 |
|
|
$ |
4,824,939 |
|
Time deposits |
|
|
2,149,812 |
|
|
|
2,468,521 |
|
|
|
2,294,644 |
|
Other interest-bearing deposits |
|
|
2,110,787 |
|
|
|
1,880,678 |
|
|
|
1,783,362 |
|
Certificates of deposit $100,000 and more |
|
|
1,434,008 |
|
|
|
1,953,432 |
|
|
|
1,382,236 |
|
|
|
|
|
Interest-bearing |
|
|
10,287,822 |
|
|
|
10,343,983 |
|
|
|
10,285,181 |
|
Noninterest-bearing |
|
|
4,689,639 |
|
|
|
4,453,332 |
|
|
|
3,956,633 |
|
Deposits-divestiture |
|
|
|
|
|
|
296,632 |
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
14,977,461 |
|
|
|
15,093,947 |
|
|
|
14,241,814 |
|
|
|
|
|
Federal funds purchased and securities sold under agreements to repurchase |
|
|
2,404,985 |
|
|
|
2,620,014 |
|
|
|
1,751,079 |
|
Trading liabilities |
|
|
286,282 |
|
|
|
464,225 |
|
|
|
359,502 |
|
Other short-term borrowings and commercial paper |
|
|
2,555,704 |
|
|
|
5,998,810 |
|
|
|
4,279,689 |
|
Term borrowings |
|
|
2,511,674 |
|
|
|
5,783,407 |
|
|
|
4,022,297 |
|
Other collateralized borrowings |
|
|
723,677 |
|
|
|
767,010 |
|
|
|
745,363 |
|
|
|
|
|
Total long-term debt |
|
|
3,235,351 |
|
|
|
6,550,417 |
|
|
|
4,767,660 |
|
|
|
|
|
Capital markets payables |
|
|
965,442 |
|
|
|
868,883 |
|
|
|
1,115,428 |
|
Other liabilities |
|
|
939,736 |
|
|
|
959,476 |
|
|
|
932,176 |
|
Other liabilities-divestiture |
|
|
|
|
|
|
1,466 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
25,364,961 |
|
|
|
32,557,238 |
|
|
|
27,447,348 |
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
First Horizon National Corporation Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock no par value (shares authorized 5,000,000; shares issued series CPP 866,540
on June 30, 2009 and December 31, 2008) (Note 12) |
|
|
790,596 |
|
|
|
|
|
|
|
782,680 |
|
Common stock $.625 par value (shares authorized - 400,000,000; shares
issued - 215,207,891 on June 30, 2009; 214,259,176 on June 30, 2008; and 214,084,507 on December 31, 2008) * |
|
|
134,505 |
|
|
|
122,345 |
|
|
|
128,302 |
|
Capital surplus |
|
|
1,128,286 |
|
|
|
980,428 |
|
|
|
1,048,602 |
|
Capital surplus common stock warrant CPP (Note 12) |
|
|
83,860 |
|
|
|
|
|
|
|
83,860 |
|
Accumulated other comprehensive loss, net |
|
|
(138,892 |
) |
|
|
(51,599 |
) |
|
|
(151,831 |
) |
Undivided profits |
|
|
1,100,462 |
|
|
|
1,646,272 |
|
|
|
1,387,854 |
|
|
|
|
|
Total First Horizon National Corporation Shareholders Equity |
|
|
3,098,817 |
|
|
|
2,697,446 |
|
|
|
3,279,467 |
|
|
|
|
|
Noncontrolling interest (Note 12) |
|
|
295,165 |
|
|
|
295,277 |
|
|
|
295,165 |
|
|
|
|
|
Total equity |
|
|
3,393,982 |
|
|
|
2,992,723 |
|
|
|
3,574,632 |
|
|
|
|
|
Total liabilities and equity |
|
$ |
28,758,943 |
|
|
$ |
35,549,961 |
|
|
$ |
31,021,980 |
|
|
|
|
|
See accompanying notes to consolidated financial statements.
Certain previously reported amounts have been reclassified to agree with current presentation.
|
|
|
* |
|
Outstanding shares have been restated to reflect stock
dividends distributed through July 1, 2009. |
4
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Horizon National Corporation |
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(Dollars in thousands except per share data)(Unaudited) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
197,688 |
|
|
$ |
285,419 |
|
|
$ |
403,427 |
|
|
$ |
617,095 |
|
Interest on investment securities |
|
|
36,460 |
|
|
|
39,212 |
|
|
|
76,562 |
|
|
|
79,947 |
|
Interest on loans held for sale |
|
|
6,577 |
|
|
|
54,217 |
|
|
|
14,309 |
|
|
|
112,655 |
|
Interest on trading securities |
|
|
14,067 |
|
|
|
30,182 |
|
|
|
29,722 |
|
|
|
66,078 |
|
Interest on other earning assets |
|
|
703 |
|
|
|
6,455 |
|
|
|
1,568 |
|
|
|
16,153 |
|
|
Total interest income |
|
|
255,495 |
|
|
|
415,485 |
|
|
|
525,588 |
|
|
|
891,928 |
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
|
8,865 |
|
|
|
18,362 |
|
|
|
24,269 |
|
|
|
44,250 |
|
Time deposits |
|
|
16,268 |
|
|
|
25,540 |
|
|
|
34,512 |
|
|
|
57,042 |
|
Other interest-bearing deposits |
|
|
896 |
|
|
|
3,556 |
|
|
|
1,964 |
|
|
|
9,462 |
|
Certificates of deposit $100,000 and more |
|
|
7,968 |
|
|
|
17,361 |
|
|
|
17,427 |
|
|
|
48,429 |
|
Interest on trading liabilities |
|
|
5,265 |
|
|
|
9,400 |
|
|
|
10,733 |
|
|
|
19,015 |
|
Interest on short-term borrowings |
|
|
3,535 |
|
|
|
49,425 |
|
|
|
7,798 |
|
|
|
119,474 |
|
Interest on long-term debt |
|
|
13,612 |
|
|
|
52,946 |
|
|
|
33,212 |
|
|
|
127,269 |
|
|
Total interest expense |
|
|
56,409 |
|
|
|
176,590 |
|
|
|
129,915 |
|
|
|
424,941 |
|
|
Net interest income |
|
|
199,086 |
|
|
|
238,895 |
|
|
|
395,673 |
|
|
|
466,987 |
|
Provision for loan losses |
|
|
260,000 |
|
|
|
220,000 |
|
|
|
560,000 |
|
|
|
460,000 |
|
|
Net interest income/(expense) after provision for loan losses |
|
|
(60,914 |
) |
|
|
18,895 |
|
|
|
(164,327 |
) |
|
|
6,987 |
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital markets |
|
|
187,478 |
|
|
|
122,338 |
|
|
|
401,702 |
|
|
|
253,795 |
|
Deposit transactions and cash management |
|
|
41,815 |
|
|
|
46,797 |
|
|
|
80,847 |
|
|
|
89,350 |
|
Mortgage banking |
|
|
15,483 |
|
|
|
172,418 |
|
|
|
131,232 |
|
|
|
331,130 |
|
Trust services and investment management |
|
|
7,651 |
|
|
|
8,883 |
|
|
|
14,471 |
|
|
|
17,992 |
|
Insurance commissions |
|
|
6,555 |
|
|
|
6,822 |
|
|
|
13,473 |
|
|
|
14,966 |
|
Gains/(losses) from loan sales and securitizations |
|
|
552 |
|
|
|
(6,984 |
) |
|
|
1,521 |
|
|
|
(11,081 |
) |
Debt securities gains/(losses), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
931 |
|
Losses on divestitures |
|
|
|
|
|
|
(429 |
) |
|
|
|
|
|
|
(1,424 |
) |
Equity securities gains/(losses), net |
|
|
(330 |
) |
|
|
(972 |
) |
|
|
(332 |
) |
|
|
64,043 |
|
All other income and commissions |
|
|
33,074 |
|
|
|
50,173 |
|
|
|
57,233 |
|
|
|
88,420 |
|
|
Total noninterest income |
|
|
292,278 |
|
|
|
399,046 |
|
|
|
700,147 |
|
|
|
848,122 |
|
|
Adjusted gross income after provision for loan losses |
|
|
231,364 |
|
|
|
417,941 |
|
|
|
535,820 |
|
|
|
855,109 |
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation, incentives and benefits |
|
|
199,650 |
|
|
|
277,078 |
|
|
|
448,161 |
|
|
|
564,548 |
|
Operations services |
|
|
17,930 |
|
|
|
19,124 |
|
|
|
34,469 |
|
|
|
38,088 |
|
Occupancy |
|
|
15,863 |
|
|
|
30,018 |
|
|
|
31,913 |
|
|
|
58,609 |
|
Legal and professional fees |
|
|
14,919 |
|
|
|
14,030 |
|
|
|
29,027 |
|
|
|
29,052 |
|
Equipment rentals, depreciation and maintenance |
|
|
8,338 |
|
|
|
18,268 |
|
|
|
17,036 |
|
|
|
33,279 |
|
Communications and courier |
|
|
7,171 |
|
|
|
11,477 |
|
|
|
14,375 |
|
|
|
22,481 |
|
Amortization of intangible assets |
|
|
1,509 |
|
|
|
2,182 |
|
|
|
3,145 |
|
|
|
4,622 |
|
All other expense |
|
|
146,552 |
|
|
|
90,822 |
|
|
|
251,134 |
|
|
|
146,536 |
|
|
Total noninterest expense |
|
|
411,932 |
|
|
|
462,999 |
|
|
|
829,260 |
|
|
|
897,215 |
|
|
Loss before income taxes |
|
|
(180,568 |
) |
|
|
(45,058 |
) |
|
|
(293,440 |
) |
|
|
(42,106 |
) |
Benefit for income taxes |
|
|
(74,538 |
) |
|
|
(28,821 |
) |
|
|
(122,315 |
) |
|
|
(36,967 |
) |
|
Loss from continuing operations |
|
|
(106,030 |
) |
|
|
(16,237 |
) |
|
|
(171,125 |
) |
|
|
(5,139 |
) |
Income from discontinued operations, net of tax |
|
|
548 |
|
|
|
|
|
|
|
548 |
|
|
|
883 |
|
|
Net loss |
|
$ |
(105,482 |
) |
|
$ |
(16,237 |
) |
|
$ |
(170,577 |
) |
|
$ |
(4,256 |
) |
|
Net income attributable to noncontrolling interest |
|
|
2,844 |
|
|
|
2,844 |
|
|
|
5,594 |
|
|
|
6,905 |
|
|
Net loss attributable to controlling interest |
|
$ |
(108,326 |
) |
|
$ |
(19,081 |
) |
|
$ |
(176,171 |
) |
|
$ |
(11,161 |
) |
|
Preferred stock dividends |
|
|
14,856 |
|
|
|
|
|
|
|
29,811 |
|
|
|
|
|
|
Net loss available to common shareholders |
|
$ |
(123,182 |
) |
|
$ |
(19,081 |
) |
|
$ |
(205,982 |
) |
|
$ |
(11,161 |
) |
|
Loss per share from continuing operations (Note 8) |
|
$ |
(0.58 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.96 |
) |
|
$ |
(0.07 |
) |
|
Diluted loss per share from continuing operations (Note 8) |
|
$ |
(0.58 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.96 |
) |
|
$ |
(0.07 |
) |
|
Loss per share available to common shareholders (Note 8) |
|
$ |
(0.58 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.96 |
) |
|
$ |
(0.07 |
) |
|
Diluted loss per share available to common shareholders (Note 8) |
|
$ |
(0.58 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.96 |
) |
|
$ |
(0.07 |
) |
|
|
Weighted average common shares outstanding basic (Note 8) |
|
|
213,735 |
|
|
|
187,911 |
|
|
|
213,733 |
|
|
|
162,976 |
|
|
Weighted average common shares outstanding diluted (Note 8) |
|
|
213,735 |
|
|
|
187,911 |
|
|
|
213,733 |
|
|
|
162,976 |
|
|
See accompanying notes to consolidated condensed financial statements.
Certain previously reported amounts have been reclassified to agree with current presentation.
5
CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Horizon National Corporation |
|
|
2009 |
|
2008 |
|
|
|
|
|
|
Noncontrolling |
|
|
|
|
|
|
|
|
|
Noncontrolling |
|
|
(Dollars in thousands)(Unaudited) |
|
Controlling Interest |
|
Interest |
|
Total |
|
Controlling Interest |
|
Interest |
|
Total |
|
Balance, January 1 |
|
$ |
3,279,467 |
|
|
$ |
295,165 |
|
|
$ |
3,574,632 |
|
|
$ |
2,135,596 |
|
|
$ |
295,277 |
|
|
$ |
2,430,873 |
|
Adjustment to reflect adoption of measurement date
provisions for SFAS No. 157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,502 |
) |
|
|
|
|
|
|
(12,502 |
) |
Adjustment to reflect change in accounting for split dollar
life insurance arrangements (EITF Issue No. 06-4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,530 |
) |
|
|
|
|
|
|
(8,530 |
) |
Net income/(loss) |
|
|
(176,171 |
) |
|
|
5,594 |
|
|
|
(170,577 |
) |
|
|
(11,161 |
) |
|
|
6,905 |
|
|
|
(4,256 |
) |
Other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized fair value adjustments, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
Securities available for sale |
|
|
16,854 |
|
|
|
|
|
|
|
16,854 |
|
|
|
(4,999 |
) |
|
|
|
|
|
|
(4,999 |
) |
Recognized pension and other employee benefit
plans net periodic benefit costs |
|
|
(3,915 |
) |
|
|
|
|
|
|
(3,915 |
) |
|
|
1,506 |
|
|
|
|
|
|
|
1,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss) |
|
|
(163,232 |
) |
|
|
5,594 |
|
|
|
(157,638 |
) |
|
|
(14,660 |
) |
|
|
6,905 |
|
|
|
(7,755 |
) |
|
Preferred stock (CPP) accretion |
|
|
7,916 |
|
|
|
|
|
|
|
7,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock (CPP) dividends |
|
|
(29,791 |
) |
|
|
|
|
|
|
(29,791 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,426 |
) |
|
|
|
|
|
|
(64,426 |
) |
Common stock issuance (69 million shares issued at $10
per share, net of offering costs) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
659,762 |
|
|
|
|
|
|
|
659,762 |
|
Common stock repurchased |
|
|
(365 |
) |
|
|
|
|
|
|
(365 |
) |
|
|
(214 |
) |
|
|
|
|
|
|
(214 |
) |
Common stock issued for |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock |
|
|
1,263 |
|
|
|
|
|
|
|
1,263 |
|
|
|
572 |
|
|
|
|
|
|
|
572 |
|
Excess tax benefit (shortfall) from stock-based
compensation arrangements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,531 |
) |
|
|
|
|
|
|
(1,531 |
) |
Stock-based compensation expense |
|
|
3,339 |
|
|
|
|
|
|
|
3,339 |
|
|
|
3,379 |
|
|
|
|
|
|
|
3,379 |
|
Dividends paid to noncontrolling interest of
subsidiary preferred stock |
|
|
|
|
|
|
(5,594 |
) |
|
|
(5,594 |
) |
|
|
|
|
|
|
(6,905 |
) |
|
|
(6,905 |
) |
Other changes in equity |
|
|
220 |
|
|
|
|
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30 |
|
$ |
3,098,817 |
|
|
$ |
295,165 |
|
|
$ |
3,393,982 |
|
|
$ |
2,697,446 |
|
|
$ |
295,277 |
|
|
$ |
2,992,723 |
|
|
See accompanying notes to consolidated condensed financial statements.
6
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
First Horizon National Corporation |
|
|
Six Months Ended June 30 |
(Dollars in thousands) (Unaudited) |
|
2009 |
|
2008 |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(170,577 |
) |
|
$ |
(4,256 |
) |
Adjustments to reconcile net loss to net cash provided/(used) by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
560,000 |
|
|
|
460,000 |
|
Benefit for deferred income tax |
|
|
(120,293 |
) |
|
|
(36,967 |
) |
Depreciation and amortization of premises and equipment |
|
|
16,901 |
|
|
|
23,075 |
|
Amortization of intangible assets |
|
|
3,145 |
|
|
|
4,622 |
|
Net other amortization and accretion |
|
|
23,549 |
|
|
|
23,901 |
|
Decrease/(increase) in derivatives, net |
|
|
199,383 |
|
|
|
(34,458 |
) |
Market value adjustment on mortgage servicing rights |
|
|
(79,330 |
) |
|
|
2,992 |
|
Provision for foreclosure reserve |
|
|
41,365 |
|
|
|
8,386 |
|
Loss on divestitures |
|
|
|
|
|
|
1,424 |
|
Stock-based compensation expense |
|
|
3,339 |
|
|
|
3,379 |
|
Excess tax benefit from stock-based compensation arrangements |
|
|
|
|
|
|
1,531 |
|
Equity securities (gains)/losses, net |
|
|
332 |
|
|
|
(64,043 |
) |
Debt securities gains, net |
|
|
|
|
|
|
(931 |
) |
Gains on repurchases of debt |
|
|
(60 |
) |
|
|
(12,596 |
) |
Net losses on disposal of fixed assets |
|
|
5,139 |
|
|
|
4,723 |
|
Net (increase)/decrease in: |
|
|
|
|
|
|
|
|
Trading securities |
|
|
(117,663 |
) |
|
|
171,252 |
|
Loans held for sale |
|
|
85,370 |
|
|
|
939,182 |
|
Capital markets receivables |
|
|
219,418 |
|
|
|
(470,152 |
) |
Interest receivable |
|
|
12,262 |
|
|
|
28,900 |
|
Other assets |
|
|
(138,854 |
) |
|
|
(48,515 |
) |
Net increase/(decrease) in: |
|
|
|
|
|
|
|
|
Capital markets payables |
|
|
(149,986 |
) |
|
|
282,525 |
|
Interest payable |
|
|
(21,338 |
) |
|
|
(39,776 |
) |
Other liabilities |
|
|
127,670 |
|
|
|
(297,053 |
) |
Trading liabilities |
|
|
(73,220 |
) |
|
|
(91,919 |
) |
|
Total adjustments |
|
|
597,129 |
|
|
|
859,482 |
|
|
Net cash provided by operating activities |
|
|
426,552 |
|
|
|
855,226 |
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Available for sale securities: |
|
|
|
|
|
|
|
|
Sales |
|
|
19,606 |
|
|
|
89,839 |
|
Maturities |
|
|
376,361 |
|
|
|
421,799 |
|
Purchases |
|
|
(60,865 |
) |
|
|
(313,613 |
) |
Premises and equipment: |
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
11,738 |
|
Purchases |
|
|
(13,775 |
) |
|
|
|
|
Net (increase)/decrease in: |
|
|
|
|
|
|
|
|
Securitization retained interests classified as trading securities |
|
|
(53,783 |
) |
|
|
35,276 |
|
Loans |
|
|
1,237,067 |
|
|
|
(176,354 |
) |
Interest-bearing cash |
|
|
(464,761 |
) |
|
|
(407 |
) |
Cash payments related to divestitures |
|
|
|
|
|
|
(113,300 |
) |
|
Net cash provided/(used) by investing activities |
|
|
1,039,850 |
|
|
|
(45,022 |
) |
|
Financing Activities |
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
3 |
|
|
|
511 |
|
Cash dividends paid |
|
|
|
|
|
|
(25,220 |
) |
Repurchase of shares |
|
|
(365 |
) |
|
|
(214 |
) |
Issuance of common shares |
|
|
|
|
|
|
659,762 |
|
Excess tax benefit from stock-based compensation arrangements |
|
|
|
|
|
|
(1,531 |
) |
Cash dividends paid preferred stock CPP |
|
|
(21,784 |
) |
|
|
|
|
Cash dividends paid preferred stock noncontrolling interest |
|
|
(6,959 |
) |
|
|
(8,740 |
) |
Long-term debt: |
|
|
|
|
|
|
|
|
Issuance |
|
|
|
|
|
|
25,002 |
|
Payments/Maturities |
|
|
(1,471,617 |
) |
|
|
(180,762 |
) |
Cash paid for repurchase of debt |
|
|
(4,710 |
) |
|
|
(139,454 |
) |
Net increase/(decrease) in: |
|
|
|
|
|
|
|
|
Deposits |
|
|
735,663 |
|
|
|
(1,739,180 |
) |
Short-term borrowings |
|
|
(1,070,079 |
) |
|
|
345,265 |
|
|
Net cash used by financing activities |
|
|
(1,839,848 |
) |
|
|
(1,064,561 |
) |
|
Net decrease in cash and cash equivalents |
|
|
(373,446 |
) |
|
|
(254,357 |
) |
|
Cash and cash equivalents at beginning of period |
|
|
1,324,780 |
|
|
|
2,259,715 |
|
|
Cash and cash equivalents at end of period |
|
$ |
951,334 |
|
|
$ |
2,005,358 |
|
|
Cash and cash equivalents from discontinued operations at end of period, included above |
|
$ |
548 |
|
|
$ |
|
|
Total interest paid |
|
|
150,878 |
|
|
|
463,052 |
|
Total income taxes paid |
|
$ |
106,734 |
|
|
$ |
185,964 |
|
|
See accompanying notes to consolidated condensed financial statements.
Certain previously reported amounts have been reclassified to agree
with current presentation.
7
Notes to Consolidated Condensed Financial Statements
Note 1 Financial Information
The unaudited interim consolidated condensed financial statements of First Horizon National
Corporation (FHN), including its subsidiaries, have been prepared in conformity with accounting
principles generally accepted in the United States of America and follow general practices within
the industries in which it operates. This preparation requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
These estimates and assumptions are based on information available as of the date of the financial
statements and could differ from actual results. In the opinion of management, all necessary
adjustments have been made for a fair presentation of financial position and results of operations
for the periods presented. The operating results for the interim 2009 periods are not necessarily
indicative of the results that may be expected going forward. For further information, refer to
the audited consolidated financial statements in the 2008 Annual Report to shareholders.
Subsequent Events. Events occurring after the date of the Consolidated Condensed Statements of
Condition but before the issuance of the financial statements included in this filing have been
evaluated through the time of this filing.
Investment Securities. Securities that FHN has the ability and positive intent to hold to maturity
are classified as securities held to maturity and are carried at amortized cost. The amortized cost
of all securities is adjusted for amortization of premium and accretion of discount to maturity, or
earlier call date if appropriate, using the level yield method. Such amortization and accretion is
included in interest income from securities. Investment securities are reviewed quarterly for
possible other-than-temporary impairment. The review includes an analysis of the facts and
circumstances of each individual investment such as the degree of loss, the length of time the fair
value has been below cost, the expectation for that securitys performance, the creditworthiness of
the issuer and FHNs intent and ability to hold the security. Securities that may be sold prior to
maturity and equity securities are classified as securities available for sale and are carried at
fair value. The unrealized gains and losses on securities available for sale, including debt
securities for which no credit impairment exists, are excluded from earnings and are reported, net
of tax, as a component of other comprehensive income within shareholders equity.
Upon adoption of FASB Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (FSP FAS 115-2) for the quarter ended March 31, 2009, the intent
and ability to hold to recovery indicator was replaced for debt securities with a requirement that
an entitys management assess whether it intends to sell a security or if it is
more-likely-than-not that it will be required to sell the security prior to recovery for the debt
security when determining other-than-temporary impairment. Realized gains and losses for investment
securities are determined by the specific identification method and reported in noninterest income.
Declines in value judged to be other-than-temporary based on FHNs analysis of the facts and
circumstances related to an individual investment, including securities that FHN has the intent to
sell, are also determined by the specific identification method, and reported in noninterest
income. After adoption of FSP FAS 115-2, for impaired debt securities that FHN does not intend to
sell and will not be required to sell prior to recovery but for which credit losses exist, the
other-than-temporary impairment recognized has been separated between the total impairment related
to credit losses which is reported in noninterest income, and the impairment related to all other
factors which is excluded from earnings and reported, net of tax, as a component of other
comprehensive income within shareholders equity.
Loans Held for Sale and Securitization. In conjunction with the adoption of FASB Staff Position
No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly(FSP FAS
157-4), FHN revised its methodology for determining the fair value of certain loans within its
mortgage warehouse. FHN now determines the fair value of the applicable loans using a discounted
cash flow model using observable inputs, including current mortgage rates for similar products,
with adjustments for differences in loan characteristics reflected in the models discount rates.
This change in methodology had a minimal effect on the valuation of the applicable loans.
Previously, fair values of these loans were determined through reference to recent security trade
prices for similar products, published third party bids or observable whole loan sale prices with
adjustments for differences in loan characteristics.
Accounting Changes. Effective June 30, 2009, FHN adopted FASB Staff Position No. FAS 107-1 and APB
28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1). FSP FAS
107-1 amends Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of
Financial Instruments (SFAS No. 107) to require disclosures about fair value of financial
instruments in interim financial statements. FSP FAS 107-1 requires that disclosures of
the methods and significant assumptions used to
estimate the fair value of financial instruments be included
in both interim and annual financial statements. Comparative disclosures are required only for
periods ending subsequent to initial adoption. Upon adoption of FSP FAS 107-1, FHN revised its
disclosures accordingly.
8
Note 1 Financial Information (continued)
Effective June 30, 2009, FHN adopted Statement of Financial Accounting Standards No. 165,
Subsequent Events (SFAS No. 165). SFAS No. 165 provides general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued. SFAS No. 165 requires disclosure of the date through which subsequent events have been
evaluated and whether that date is the date the financial statements were issued or the date the
financial statements were available to be issued. An assessment of subsequent events must be
performed for both interim and annual reporting periods. FHN applied the guidance of SFAS No. 165
when assessing subsequent events through the time of this filing and the effects of adoption were
not material.
In April 2009, the FASB issued FSP FAS 115-2 which replaces the intent and ability to hold to
recovery indicator of other-than-temporary impairment in FASB Staff Position No. FAS 115-1 and
124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
(FSP FAS 115-1) for debt securities. FSP FAS 115-2 specifies that a debt security is considered
other-than-temporarily impaired when an entitys management intends to sell the security or that it
is more-likely-than-not that the entity will be required to sell the security prior to recovery of
its cost basis. FSP FAS 115-2 requires that for impaired held-to-maturity and available-for-sale
debt securities that an entity does not intend to sell and will not be required to sell prior to
recovery but for which credit losses exist, the other-than-temporary impairment should be separated
between the total impairment related to credit losses, which should be recognized in current
earnings, and the amount of impairment related to all other factors, which should be recognized in
other comprehensive income. FSP FAS 115-2 discusses the proper interaction of its guidance with
other authoritative guidance, including FSP FAS 115-1, which provides additional factors that must
be considered in an other-than-temporary impairment analysis. FSP FAS 115-2 also provides that in
periods in which other-than-temporary impairments are recognized, the total impairment must be
presented in the investors income statement with an offset for the amount of total impairment that
is recognized in other comprehensive income. FSP FAS 115-2 requires additional disclosures
including a rollforward of amounts recognized in earnings for debt securities for which an
other-than-temporary impairment has been recognized and the noncredit portion of the
other-than-temporary impairment that has been recognized in other comprehensive income. FHN
initially applied the guidance of FSP FAS 115-2 when assessing debt securities for
other-than-temporary impairment as of March 31, 2009 and the effects of adoption were not material.
In April 2009, the FASB issued FSP FAS 157-4 which provides factors that an entity should consider
when determining whether a market for an asset is not active. If after evaluating the relevant
factors, the evidence indicates that a market is not active, FSP FAS 157-4 provides an additional
list of factors that an entity must consider when determining whether events and circumstances
indicate that a transaction which occurred in such inactive market is orderly. FSP FAS 157-4
requires that entities place more weight on observable transactions determined to be orderly and
less weight on transactions for which there is insufficient information to determine whether the
transaction is orderly when determining the fair value of an asset or liability under Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). FSP FAS 157-4
requires enhanced disclosures, including disclosure of a change in valuation technique which
results from its application and disclosure of fair value measurements for
debt and equity securities by major security types. FHN initially applied the guidance of FSP FAS
157-4 in its fair value measurements as of March 31, 2009 and the effects of adoption were not
significant.
Effective January 1, 2009, FHN adopted the provisions of SFAS No. 157 for existing fair value
measurement requirements related to non-financial assets and liabilities which are recognized at
fair value on a non-recurring basis. The effective date for the application of SFAS No. 157s
measurement framework to such non-financial assets and liabilities was previously delayed under
FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157. SFAS No. 157
establishes a hierarchy to be used in performing measurements of fair value. Additionally, SFAS
No. 157 emphasizes that fair value should be determined from the perspective of a market
participant while also indicating that valuation methodologies should first reference available
market data before using internally developed assumptions. SFAS No. 157 also provides expanded
disclosure requirements regarding the effects of fair value measurements on the financial
statements. The effect of adopting the provisions of SFAS No. 157 for non-financial assets and
liabilities which are recognized at fair value on a non-recurring basis on January 1, 2009, was not
significant to FHN. Effective January 1, 2008, FHN adopted SFAS No. 157 for existing fair value
measurement requirements related to financial assets and liabilities as well as to non-financial
assets and liabilities which are remeasured at least annually. Upon the adoption of the provisions
of SFAS No. 157 for financial assets and liabilities as well as non-financial assets and
liabilities remeasured at least annually on January 1, 2008, a negative after-tax cumulative-effect
adjustment of $12.5 million was made to the opening balance of undivided profits for interest rate
lock commitments which FHN previously measured under the guidance of EITF 02-3, Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities (EITF 02-3). Second quarter 2008 earnings were positively
impacted by a net of $13.7 million
related to the adoption of SFAS No. 157 as (1) FHN continued to deliver loans that had been
commitments upon adoption of SFAS No. 157, (2) some commitments existing at March 31, 2008 were
delivered as loans during the second quarter of 2008 and (3) additional commitments that would have
been deferred under EITF 02-3 were made. Substantially all commitments existing at August 31, 2008
were sold to MetLife Bank, N.A. (MetLife).
9
Note 1 Financial Information (continued)
Effective January 1, 2009, FHN adopted Statement of Financial Accounting Standards No. 141-R,
Business Combinations (SFAS No. 141-R) and Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51 (SFAS
No. 160). SFAS No. 141-R requires that an acquirer recognize the assets acquired and liabilities
assumed in a business combination, as well as any noncontrolling interest in the acquiree, at their
fair values as of the acquisition date, with limited exceptions. Additionally, SFAS No. 141-R
provides that an acquirer cannot specify an effective date for a business combination that is
separate from the acquisition date. SFAS No. 141-R also provides that acquisition-related costs
which an acquirer incurs should be expensed in the period in which the costs are incurred and the
services are received. SFAS No. 160 requires that acquired assets and liabilities be measured at
full fair value without consideration to ownership percentage. Under SFAS No. 160, any
noncontrolling interests in an acquiree should be presented as a separate component of equity
rather than on a mezzanine level. Additionally, SFAS No. 160 provides that net income or loss
should be reported in the consolidated income statement at its consolidated amount, with disclosure
on the face of the consolidated income statement of the amount of consolidated net income which is
attributable to the parent and noncontrolling interests, respectively. Upon adoption, the
retrospective application of SFAS No. 160s presentation and disclosure requirements resulted in an
increase to consolidated net income of $4.1 million for first quarter 2008. FHN also recognized an
increase of total shareholders equity of $295.2 million upon adoption of SFAS No. 160 as a result
of reclassifying the noncontrolling interest previously recognized on the Consolidated Condensed
Statements of Condition as Preferred stock of subsidiary as a separate component of equity.
Effective January 1, 2009, FHN adopted FASB Staff Position No. FAS 141(R)-1, Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP FAS
141(R)-1). FSP FAS 141(R)-1 amends SFAS No. 141-R to require that an acquirer recognize at fair
value as of the acquisition date an asset acquired or liability assumed in a business combination
that arises from a contingency if the acquisition-date fair value of the asset or liability can be
determined during the measurement period. FSP FAS 141(R)-1 provides that if the acquisition-date
fair value of an asset acquired or liability assumed in a business combination that arises from a
contingency cannot be determined during the measurement period, the asset or liability should be
recognized at the acquisition date if information available before the end of the measurement
period indicates that it is probable that an asset existed or a liability had been incurred at the
acquisition date and the amount of the asset or liability can be reasonably estimated.
Additionally, FSP FAS 141(R)-1 requires enhanced disclosures regarding assets and liabilities
arising from contingencies which are recognized at the acquisition date of a business combination,
including the nature of the contingencies, the amounts recognized at the acquisition date and the
measurement basis applied. The adoption of FSP FAS 141(R)-1 had no effect on FHNs statement of
condition or results of operations.
Effective January 1, 2009, FHN adopted Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement
No. 133 (SFAS No. 161). SFAS No. 161 requires enhanced disclosures related to derivatives
accounted for in accordance with SFAS No. 133 and reconsiders existing disclosure requirements for
such derivatives and any related hedging items. The disclosures provided in SFAS No. 161 are
required for both interim and annual reporting periods. Upon adoption of SFAS No. 161, FHN revised
its disclosures accordingly.
FHN also adopted FASB Staff Position No. FAS 140-3, Accounting for Transfers of Financial Assets
and Repurchase Financing Transactions (FSP FAS 140-3) as of January 1, 2009, for initial transfers
of financial assets executed after such date. FSP FAS 140-3 permits a transferor and transferee to
separately account for an initial transfer of a financial asset and a related repurchase financing
that are entered into contemporaneously with, or in contemplation of, one another if certain
specified conditions are met at the inception of the transaction. FSP FAS 140-3 requires that the
two transactions have a valid and distinct business or economic purpose for being entered into
separately and that the repurchase financing not result in the initial transferor regaining control
over the previously transferred financial asset. The effect of adopting FSP FAS 140-3 was
immaterial to FHN.
Effective December 31, 2008, FHN adopted FASB Staff Position No. EITF 99-20-1, Amendments to the
Impairment Guidance of EITF Issue No. 99-20 (FSP EITF 99-20-1). FSP EITF 99-20-1 amends EITF
Issue No. 99-20, Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in
Securitized Financial Assets (EITF 99-20) to align its impairment model with the impairment model
in Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities (SFAS No. 115), resulting in a consistent determination of whether
other-than-temporary impairments of available for sale or held to maturity debt securities have
occurred. Since FHN recognizes all retained interests from securitization transactions at fair
value as trading securities and as all of its beneficial interests classified as available for sale
securities are outside the scope of EITF 99-20, the effect of adopting FSP EITF 99-20-1 was
immaterial to FHN.
Effective December 31, 2008, FHN adopted FASB Staff Position No. FAS 140-4 and FIN 46(R)-8,
Disclosures by Public Entities about Transfers of Financial Assets and Interests in Variable
Interest Entities (FSP FAS 140-4) which requires additional disclosures related to
10
Note 1 Financial Information (continued)
transfers of financial assets as well as FHNs involvement with variable interest entities and
qualifying special purpose entities. Upon adoption of FSP FAS 140-4, FHN revised its disclosures
accordingly.
Effective December 31, 2008, FHN adopted FASB Staff Position No. FAS 133-1 and FIN 45-4,
Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No.
161 (FSP FAS 133-1). FSP FAS 133-1 requires sellers of credit derivatives and similar guarantee
contracts to make disclosures regarding the nature, term, fair value, potential losses and recourse
provisions for those contracts. Since FHN is not a seller of credit derivatives or similar
financial guarantees, the effect of adopting FSP FAS 133-1 was immaterial to FHN.
Effective January 1, 2008, FHN adopted SFAS No. 159 which allows an irrevocable election to measure
certain financial assets and liabilities at fair value on an instrument-by-instrument basis, with
unrealized gains and losses recognized currently in earnings. Under SFAS No. 159, the fair value
option may only be elected at the time of initial recognition of a financial asset or liability or
upon the occurrence of certain specified events. Additionally, SFAS No. 159 provides that application of the fair value option
must be based on the fair value of an entire financial asset or liability and not selected risks
inherent in those assets or liabilities. SFAS No. 159 requires that assets and liabilities which
are measured at fair value pursuant to the fair value option be reported in the financial
statements in a manner that separates those fair values from the carrying amounts of similar assets
and liabilities which are measured using another measurement attribute. SFAS No. 159 also provides
expanded disclosure requirements regarding the effects of electing the fair value option on the
financial statements. Upon adoption of SFAS No. 159, FHN elected the fair value option on a
prospective basis for almost all types of mortgage loans originated for sale purposes.
Additionally, in accordance with SFAS No. 159s amendment of SFAS No. 115, FHN began prospectively
classifying cash flows associated with its retained interests in securitizations recognized as
trading securities within investing activities in the Consolidated Condensed Statements of Cash
Flows.
Effective January 1, 2008, FHN adopted SEC Staff Accounting Bulletin No. 109, Written Loan
Commitments Recorded at Fair ValueThrough Earnings (SAB No. 109) prospectively for derivative loan
commitments issued or modified after that date. SAB No. 109 rescinds SAB No. 105s prohibition on
inclusion of expected net future cash flows related to loan servicing activities in the fair value
measurement of a written loan commitment. SAB No. 109 also applies to any loan commitments for
which fair value accounting is elected under SFAS No. 159. FHN did not elect fair value accounting
for any other loan commitments under SFAS No. 159. The prospective application of SAB No. 109 and
the prospective election to recognize substantially all new mortgage loan originations at fair
value under SFAS No. 159 resulted in a positive impact of $58.1 million on first quarter 2008
pre-tax earnings. Second quarter 2008 earnings were negatively impacted by $20.9 million related
to the adoption of SAB No. 109 and SFAS No. 159 as loans and commitments remaining on the balance
sheet at the end of first quarter 2008 were sold.
Effective January 1, 2008, FHN adopted FASB Staff Position No. FAS 157-1, Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (FSP FAS
157-1), which amends SFAS No. 157 to exclude Statement of Financial Accounting Standards No. 13,
Accounting for Leases (SFAS No. 13), and other accounting pronouncements that address fair value
measurements for
purposes of lease classification or measurement under SFAS No. 13 from its scope. The adoption of
FSP FAS 157-1 had no effect on FHNs statement of condition or results of operations.
Effective January 1, 2008, FHN adopted EITF Issue No. 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (EITF
06-4). EITF 06-4 requires that a liability be recognized for contracts written to employees which
provide future postretirement benefits that are covered by endorsement split-dollar life insurance
arrangements because such obligations are not considered to be effectively settled upon entering
into the related insurance arrangements. FHN recognized a decrease to undivided profits of $8.5
million, net of tax, upon adoption of EITF 06-4.
Effective January 1, 2008, FHN adopted FASB Staff Position No. FIN 39-1, Amendment of FASB
Interpretation No. 39 (FSP FIN 39-1). FSP FIN 39-1 permits the offsetting of fair value amounts
recognized for the right to reclaim cash collateral or the obligation to return cash collateral
against fair value amounts recognized for derivative instruments executed with the same
counterparty under the same master netting arrangement. Upon adoption of FSP FIN 39-1, entities
were permitted to change their previous accounting policy election to offset or
11
Note 1 Financial Information (continued)
not offset fair value amounts recognized for derivative instruments under master netting
arrangements. FSP FIN 39-1 requires additional disclosures for derivatives and collateral associated
with master netting arrangements, including the separate disclosure of amounts recognized for the right to reclaim cash collateral or the
obligation to return cash collateral under master netting arrangements as of the end of each
reporting period for entities that made an accounting policy decision to not offset fair value
amounts. FHN retained its previous accounting policy election to not offset fair value amounts
recognized for derivative instruments under master netting arrangements upon adoption of FSP FIN
39-1, and has revised its disclosures accordingly.
FHN also adopted FASB Statement 133 Implementation Issue No. E23, Issues Involving the Application
of the Shortcut Method under Paragraph 68 (DIG E23) as of January 1, 2008, for hedging
relationships designated on or after such date. DIG E23 amends SFAS No. 133 to explicitly permit
use of the shortcut method for hedging relationships in which an interest rate swap has a nonzero
fair value at inception of the hedging relationship which is attributable solely to the existence of a bid-ask spread in the
entitys principal market under SFAS No. 157. Additionally, DIG E23 allows an entity to apply the
shortcut method to a qualifying fair value hedge when the hedged item has a trade date that differs
from its settlement date because of generally established conventions in the marketplace in which
the transaction to acquire or issue the hedged item is executed. Preexisting shortcut hedging
relationships were analyzed as of DIG E23s adoption date to determine
whether they complied with the revised shortcut criteria at their inception or should be
dedesignated prospectively. The adoption of DIG E23 had no effect on FHNs financial position or
results of operations as all of FHNs preexisting hedging relationships met the requirements of DIG
E23 at their inception.
Accounting Changes Issued but Not Currently Effective. In June 2009, the FASB issued Statement of
Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets an
amendment of FASB Statement No. 140 (SFAS No. 166). SFAS No. 166 provides for the removal of the
qualifying special purpose entity (QSPE) concept from GAAP, resulting in the evaluation of all
former QSPEs for consolidation on and after January 1, 2010 in accordance with Statement of
Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No.
167). SFAS No. 166 modifies the criteria for achieving sale accounting for transfers of financial
assets and defines the term participating interest to establish specific conditions for reporting a
transfer of a portion of a financial asset as a sale. SFAS No. 166 also provides that a transferor
should recognize and initially measure at fair value all assets obtained (including a transferors
beneficial interest) and liabilities incurred as a result of a transfer of financial assets
accounted for as a sale. SFAS No. 166 requires enhanced disclosures which are generally consistent
with, and supersede, the disclosures previously required by FSP FAS 140-4. SFAS No. 166 is
effective prospectively for new transfers of financial assets occurring in fiscal years beginning
after November 15, 2009, and in interim periods within those fiscal years. SFAS No. 166s
disclosure requirements should be applied to transfers that occurred both before and after its
effective date, with comparative disclosures required only for periods subsequent to initial
adoption for those disclosures not previously required under FSP FAS 140-4. FHN is currently
assessing the effects of adopting SFAS No. 166.
In June 2009, the FASB issued SFAS No. 167 which revises the criteria for determining the primary
beneficiary of a variable interest entity (VIE) by replacing the prior quantitative-based risks and
rewards test required under FASB Interpretation No. 46-R, Consolidation of Variable Interest
Entities revised December 2003 (FIN 46-R) with a qualitative analysis. While SFAS No. 167
retains the guidance in FIN 46-R which requires a reassessment of whether an entity is a VIE only
when certain triggering events occur, it adds an additional criterion which triggers a reassessment
of an entitys status when an event occurs such that the holders of the equity investment at risk,
as a group, lose the power from voting rights or similar rights of those investments to direct the
activities of the entity that most significantly impact the entitys economic performance.
Additionally, SFAS No. 167 requires continual reconsideration of conclusions regarding which
interest holder is the VIEs primary beneficiary. SFAS No. 167 requires separate presentation on
the face of the balance sheet of the assets of a consolidated VIE that can only be used to settle
the VIEs obligations and the liabilities of a consolidated VIE for which creditors or beneficial
interest holders have no recourse to the general credit of the primary beneficiary. SFAS No. 167
also requires enhanced disclosures which are generally consistent with, and supersede, the
disclosures previously required by FSP FAS 140-4. SFAS No. 167 is effective for periods beginning
after November 15, 2009, and requires reevaluation under its amended consolidation requirements of
all QSPEs and entities currently subject to FIN 46-R as of the beginning of the first annual period
that begins after November 15, 2009. If consolidation of a VIE is required upon initial adoption,
the assets, liabilities, and noncontrolling interests of the VIE should be measured at their
carrying amounts as if SFAS No. 167 had been applied from inception of the VIE, with any difference
between the net amounts recognized and the amount of any previously recognized interests reflected
as a cumulative effect adjustment to undivided profits. However, if determining the carrying
amounts is not practicable, the assets, liabilities, and noncontrolling interests of the VIE may be
measured at fair value. Further, if determining the carrying amounts is not practicable, and if
the activities of the VIE are primarily related to securitizations or other forms of
12
Note 1 Financial Information (continued)
asset-backed financings and the assets of the VIE can be used only to settle obligations of the
entity, then the assets and liabilities of the VIE may be measured at their unpaid principal
balances. The fair value option provided under SFAS No. 159 may also be elected for financial
assets and financial liabilities requiring consolidation as a result of initial adoption, provided
that the election is made for all eligible financial assets and financial liabilities of the VIE.
If initial application of SFAS No. 167 results in deconsolidation of a VIE, any retained interest
in the VIE should be measured at its carrying value as if SFAS No. 167 had been applied from
inception of the VIE. Comparative disclosures are required only for periods subsequent to initial
adoption for those disclosures not previously required under FSP FAS 140-4. FHN is currently
assessing the effects of adopting SFAS No. 167.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
a replacement of FASB Statement No. 162 (SFAS No. 168). SFAS No. 168 establishes the FASB
Accounting Standards Codification as the single source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP, other than guidance issued by the SEC. Under SFAS No. 168, all
guidance contained in the FASB Accounting Standards Codification carries an equal level of
authority, with SFAS No. 168 superseding all then-existing non-SEC accounting and reporting
standards as of its effective date. SFAS No. 168 is effective for periods ending after September
15, 2009. The effect of adopting SFAS No. 168 will not be material to FHN.
In December 2008, FASB Staff Position No. FAS 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets (FSP FAS 132(R)-1), was issued. FSP FAS 132(R)-1 provides
detailed disclosure requirements to enhance the disclosures about an employers plan assets
currently required by Statement of Financial Accounting Standards No. 132(R), Employers
Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132(R)). FSP FAS 132(R)-1
is effective prospectively for annual periods ending after December 15, 2009. FHN is currently
assessing the effects of adopting FSP FAS 132(R)-1.
13
Note 2 Acquisitions/Divestitures
Effective August 31, 2008, FHN sold more than 230 retail
and wholesale mortgage origination offices
nationwide, the loan origination and servicing platform, substantially all of FHNs mortgage
origination pipeline and related hedges, certain fixed assets and other associated assets to
MetLife. MetLife did not acquire any portion of FHNs mortgage loan warehouse. FHN retained its
mortgage operations in and around Tennessee, continuing to originate home loans for customers in
its regional banking market footprint. FHN also sold servicing assets, and related hedges, on
$19.1 billion of first lien mortgage loans and associated custodial deposits. Additionally, FHN
entered into a subservicing agreement with MetLife for the remainder of FHNs servicing portfolio.
MetLife generally paid book value for the assets and liabilities it acquired, less a purchase price
reduction. The assets and liabilities related to the mortgage operations divested were included in
the Mortgage Banking segment and were reflected as divestiture on the Consolidated Condensed
Statements of Condition for the reporting period ended June 30, 2008. FHN recognized a loss on
divestiture of $17.5 million in the third quarter 2008 and a gain on divestiture of $0.9 million
in the fourth quarter of 2008. Gains and losses related to this transaction were included in the
noninterest income section of the Consolidated Condensed Statements of Income as gains/losses on
divestitures.
Due to efforts initiated by FHN in 2007 to improve
profitability, FHN sold 34 branches in Atlanta,
Baltimore, Dallas, and Northern Virginia which were outside the Regional Banks footprint. The
First Horizon Bank branch sales were completed in 2008 resulting in losses of $1.0 million, $0.4
million, and $1.0 million in the first, second, and fourth
quarters of 2008, respectively. Aggregate gains of
$15.7 million were recognized in fourth quarter 2007 from the disposition of 15 of the branches.
These transactions resulted in the transfer of certain loans, certain fixed assets (including
branch locations), and assumption of all the deposit relationships of the First Horizon Bank
branches that were divested. The assets and liabilities related to the First Horizon Bank branches
were included in the Regional Banking segment and were reflected as divestiture on the
Consolidated Condensed Statements of Condition for reporting periods ended prior to June 30, 2008.
The gains and losses realized on the disposition of First Horizon Bank branches were included in
the noninterest income section of the Consolidated Condensed Statements of Income as gains and
losses on divestitures.
In addition to the divestitures mentioned above,
FHN acquires or divests assets from time to time
in transactions that are considered business combinations or divestitures but are not material to
FHN individually or in the aggregate.
14
Note 3 Investment Securities
The following tables summarize FHNs securities held to maturity and available for sale on June 30,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 30, 2009 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(Dollars in thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
|
$ |
47,945 |
|
|
$ |
466 |
|
|
$ |
(5 |
) |
|
$ |
48,406 |
|
Government agency issued MBS (a) |
|
|
1,068,909 |
|
|
|
48,638 |
|
|
|
|
|
|
|
1,117,547 |
|
Government agency issued CMO (a) |
|
|
1,125,714 |
|
|
|
43,717 |
|
|
|
|
|
|
|
1,169,431 |
|
Other U.S. government agencies (a) |
|
|
121,416 |
|
|
|
3,802 |
|
|
|
|
|
|
|
125,218 |
|
States and municipalities |
|
|
46,200 |
|
|
|
45 |
|
|
|
|
|
|
|
46,245 |
|
Other |
|
|
2,212 |
|
|
|
11 |
|
|
|
(35 |
) |
|
|
2,188 |
|
Equity (b) |
|
|
311,852 |
|
|
|
303 |
|
|
|
(111 |
) |
|
|
312,044 |
|
|
Total securities available for sale (c) |
|
$ |
2,724,248 |
|
|
$ |
96,982 |
|
|
$ |
(151 |
) |
|
$ |
2,821,079 |
|
|
|
|
|
(a) |
|
Includes securities issued by
government sponsored entities. |
|
(b) |
|
Includes FHLB and FRB stock, venture capital, money market, and cost method investments. |
|
(c) |
|
Includes $2.4 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes. As of
June 30, 2009, FHN had pledged $1.4 billion of available for sale securities as collateral for securities sold under repurchase agreements. Additionally,
$59.2 million is restricted pursuant to a reinsurance contract agreement. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 30, 2008 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(Dollars in thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and municipalities |
|
$ |
240 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
240 |
|
|
Total securities held to maturity |
|
$ |
240 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
|
$ |
47,950 |
|
|
$ |
|
|
|
$ |
(178 |
) |
|
$ |
47,772 |
|
Government agency issued MBS (a) |
|
|
1,281,553 |
|
|
|
11,978 |
|
|
|
(945 |
) |
|
|
1,292,586 |
|
Government agency issued CMO (a) |
|
|
1,120,686 |
|
|
|
17,394 |
|
|
|
(823 |
) |
|
|
1,137,257 |
|
Other U.S. government agencies (a) |
|
|
136,439 |
|
|
|
|
|
|
|
(2,043 |
) |
|
|
134,396 |
|
States and municipalities |
|
|
31,630 |
|
|
|
|
|
|
|
(19 |
) |
|
|
31,611 |
|
Other |
|
|
3,127 |
|
|
|
3 |
|
|
|
(54 |
) |
|
|
3,076 |
|
Equity (b) |
|
|
250,000 |
|
|
|
35 |
|
|
|
(45 |
) |
|
|
249,990 |
|
|
Total securities available for sale (c) |
|
$ |
2,871,385 |
|
|
$ |
29,410 |
|
|
$ |
(4,107 |
) |
|
$ |
2,896,688 |
|
|
|
|
|
(a) |
|
Includes securities issued by
government sponsored entities. |
|
(b) |
|
Includes FHLB and FRB stock, venture capital, money market, and cost method investments. |
|
(c) |
|
Includes $2.6 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes. As of
June 30, 2008, FHN had pledged $1.3 billion of available for sale securities as collateral for securities sold under repurchase agreements. Additionally,
$47.2 million is restricted pursuant to a reinsurance contract agreement. |
15
Note 3 Investment Securities (continued)
The following tables provide information on investments within the available for sale portfolio
that have unrealized losses on June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 30, 2009 |
|
|
Less than 12 months |
|
12 Months or Longer |
|
Total |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
(Dollars in thousands) |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
U.S. Treasuries |
|
$ |
7,989 |
|
|
$ |
(5 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
7,989 |
|
|
$ |
(5 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
284 |
|
|
|
(35 |
) |
|
|
284 |
|
|
|
(35 |
) |
|
Total debt securities |
|
|
7,989 |
|
|
|
(5 |
) |
|
|
284 |
|
|
|
(35 |
) |
|
|
8,273 |
|
|
|
(40 |
) |
Equity |
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
(111 |
) |
|
|
120 |
|
|
|
(111 |
) |
|
Total temporarily impaired securities |
|
$ |
7,989 |
|
|
$ |
(5 |
) |
|
$ |
404 |
|
|
$ |
(146 |
) |
|
$ |
8,393 |
|
|
$ |
(151 |
) |
|
FHN has reviewed investment securities that are in unrealized loss positions in accordance with its
accounting policy for other-than-temporary impairment and does not consider them
other-than-temporarily impaired. FHN does not intend to sell the debt securities and it is
more-likely-than-not that FHN will not be required to sell the securities prior to recovery.
Additionally, the decline in value is not attributable to credit losses. For equity securities,
FHN has both the ability and intent to hold these securities for the time necessary to recover the
amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 30, 2008 |
|
|
Less than 12 months |
|
12 Months or Longer |
|
Total |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
(Dollars in thousands) |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
U.S. Treasuries |
|
$ |
47,671 |
|
|
$ |
(178 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
47,671 |
|
|
$ |
(178 |
) |
Government agency issued MBS |
|
|
399,880 |
|
|
|
(945 |
) |
|
|
|
|
|
|
|
|
|
|
399,880 |
|
|
|
(945 |
) |
Government agency issued CMO |
|
|
115,658 |
|
|
|
(823 |
) |
|
|
|
|
|
|
|
|
|
|
115,658 |
|
|
|
(823 |
) |
Other U.S. government agencies |
|
|
111,489 |
|
|
|
(1,635 |
) |
|
|
22,908 |
|
|
|
(408 |
) |
|
|
134,397 |
|
|
|
(2,043 |
) |
States and municipalities |
|
|
1,481 |
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
1,481 |
|
|
|
(19 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
580 |
|
|
|
(54 |
) |
|
|
580 |
|
|
|
(54 |
) |
|
Total debt securities |
|
|
676,179 |
|
|
|
(3,600 |
) |
|
|
23,488 |
|
|
|
(462 |
) |
|
|
699,667 |
|
|
|
(4,062 |
) |
Equity |
|
|
186 |
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
186 |
|
|
|
(45 |
) |
|
Total temporarily impaired securities |
|
$ |
676,365 |
|
|
$ |
(3,645 |
) |
|
$ |
23,488 |
|
|
$ |
(462 |
) |
|
$ |
699,853 |
|
|
$ |
(4,107 |
) |
|
16
Note 4 Loans
The composition of the loan portfolio is detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
December 31 |
(Dollars in thousands) |
|
2009 |
|
2008 |
|
2008 |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and industrial |
|
$ |
7,400,396 |
|
|
$ |
7,717,110 |
|
|
$ |
7,863,727 |
|
Real estate commercial |
|
|
1,506,911 |
|
|
|
1,463,726 |
|
|
|
1,454,040 |
|
Real estate construction |
|
|
1,337,330 |
|
|
|
2,271,533 |
|
|
|
1,778,140 |
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate residential |
|
|
7,785,906 |
|
|
|
8,196,622 |
|
|
|
8,161,435 |
|
Real estate construction |
|
|
557,822 |
|
|
|
1,513,845 |
|
|
|
980,798 |
|
Other retail |
|
|
129,848 |
|
|
|
138,970 |
|
|
|
135,779 |
|
Credit card receivables |
|
|
186,376 |
|
|
|
195,703 |
|
|
|
189,554 |
|
Real estate loans pledged against
other collateralized
borrowings |
|
|
681,238 |
|
|
|
727,723 |
|
|
|
714,717 |
|
|
Loans, net of unearned income |
|
|
19,585,827 |
|
|
|
22,225,232 |
|
|
|
21,278,190 |
|
Allowance for loan losses |
|
|
961,482 |
|
|
|
575,149 |
|
|
|
849,210 |
|
|
Total net loans |
|
$ |
18,624,345 |
|
|
$ |
21,650,083 |
|
|
$ |
20,428,980 |
|
|
FHN has a significant concentration of loans secured by residential real estate (51 percent of
total loans) primarily in three portfolios. The retail real estate residential portfolio including
real estate loans pledged against other collateralized borrowings (43 percent of total loans) was
primarily comprised of home equity lines and loans. While this portfolio has been stressed by the
downturn in the housing market and rising unemployment, it contains loans extended to strong
borrowers with high credit scores and is geographically diversified. The One-Time Close (OTC)
portfolio (3 percent of total loans) has been negatively impacted by the downturn in the housing
industry, certain discontinued product types, and the decreased availability of permanent mortgage
financing. The Residential CRE portfolio (5 percent of total loans) has also been negatively
impacted by the housing industry downturn as builder liquidity has been severely stressed.
On June 30, 2009, FHN had trust preferred loans to banks and insurance related businesses totaling
$.5 billion (2 percent of total loans) that are included within the Commercial, Financial, and
Industrial portfolio. Due to higher credit losses experienced throughout the financial services
industry and the limited availability of market liquidity, these loans have experienced some stress
during the economic downturn.
On June 30, 2009, FHN did not have any concentrations of Commercial, Financial and Industrial loans
in any single industry of 10 percent or more of total loans.
Nonperforming loans consist of loans which management has identified as impaired, other nonaccrual
loans, and loans which have been restructured. On June 30, 2009 and 2008, there were no
significant outstanding commitments to advance additional funds to customers whose loans had been
restructured. The following table presents nonperforming loans on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
December 31 |
(Dollars in thousands) |
|
2009 |
|
2008 |
|
2008 |
|
Impaired loans |
|
$ |
547,697 |
|
|
$ |
372,494 |
|
|
$ |
474,090 |
|
Other nonaccrual loans* |
|
|
579,261 |
|
|
|
397,524 |
|
|
|
579,558 |
|
|
Total nonperforming loans |
|
$ |
1,126,958 |
|
|
$ |
770,018 |
|
|
$ |
1,053,648 |
|
|
|
|
|
* |
|
On June 30, 2009 and 2008, and on December 31, 2008, other nonaccrual loans included $22.7 million, $9.9 million, and $8.5 million,
respectively, of loans held for sale. |
17
Note 4 Loans (continued)
Generally, interest payments received on impaired loans are applied to principal. Once all
principal has been received, additional payments are recognized as interest income on a cash basis.
The following table presents information concerning impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(Dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Total interest on impaired loans |
|
$ |
421 |
|
|
$ |
198 |
|
|
$ |
664 |
|
|
$ |
260 |
|
Average balance of impaired loans |
|
|
536,990 |
|
|
|
318,082 |
|
|
|
516,023 |
|
|
|
254,259 |
|
|
Activity in the allowance for loan losses related to non-impaired and impaired loans for the six
months ended June 30, 2009 and 2008 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Non-impaired |
|
|
Impaired |
|
|
Total |
|
|
Balance on December 31, 2007 |
|
$ |
325,883 |
|
|
$ |
16,458 |
|
|
$ |
342,341 |
|
Provision for loan losses |
|
|
378,778 |
|
|
|
81,222 |
|
|
|
460,000 |
|
Divestitures/acquisitions/transfers |
|
|
(382 |
) |
|
|
|
|
|
|
(382 |
) |
Charge-offs |
|
|
(140,331 |
) |
|
|
(92,810 |
) |
|
|
(233,141 |
) |
Recoveries |
|
|
5,849 |
|
|
|
482 |
|
|
|
6,331 |
|
|
Net charge-offs |
|
|
(134,482 |
) |
|
|
(92,328 |
) |
|
|
(226,810 |
) |
|
Balance on June 30, 2008 |
|
$ |
569,797 |
|
|
$ |
5,352 |
|
|
$ |
575,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance on December 31, 2008 |
|
$ |
836,907 |
|
|
$ |
12,303 |
|
|
$ |
849,210 |
|
Provision for loan losses |
|
|
402,092 |
|
|
|
157,908 |
|
|
|
560,000 |
|
Charge-offs |
|
|
(303,446 |
) |
|
|
(164,045 |
) |
|
|
(467,491 |
) |
Recoveries |
|
|
17,345 |
|
|
|
2,418 |
|
|
|
19,763 |
|
|
Net charge-offs |
|
|
(286,101 |
) |
|
|
(161,627 |
) |
|
|
(447,728 |
) |
|
Balance on June 30, 2009 |
|
$ |
952,898 |
|
|
$ |
8,584 |
|
|
$ |
961,482 |
|
|
18
Note 5 Mortgage Servicing Rights
FHN recognizes all its classes of mortgage servicing rights (MSR) at fair value. Classes of MSR
are determined in accordance with FHNs risk management practices and market inputs used in
determining the fair value of the servicing asset. The balance of MSR included on the Consolidated
Condensed Statements of Condition represents the rights to service approximately $48.6 billion of
mortgage loans on June 30, 2009, for which a servicing right has been capitalized.
Since sales of MSR tend to occur in private transactions and the precise terms and conditions of
the sales are typically not readily available, there is a limited market to refer to in determining
the fair value of MSR. As such, FHN relies primarily on a discounted cash flow model to estimate
the fair value of its MSR. This model calculates estimated fair value of the MSR using predominant
risk characteristics of MSR, such as interest rates, type of product (fixed vs. variable), age
(new, seasoned, or moderate), agency type and other factors. FHN uses assumptions in the model that
it believes are comparable to those used by brokers and other service providers. Due to ongoing
disruptions in the mortgage market, more emphasis has been placed on third party broker price
discovery and, when available, observable market trades in valuing MSR. FHN also periodically
compares its estimates of fair value and assumptions with brokers, service providers, and recent
market activity and against its own experience.
Following is a summary of changes in capitalized MSR related to proprietary securitization
activities utilizing qualifying special purpose entities (QSPEs) as of June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
|
(Dollars in thousands) |
|
Liens |
|
Liens |
|
HELOC |
|
Fair value on January 1, 2008 |
|
$ |
230,311 |
|
|
$ |
1,429 |
|
|
$ |
2,260 |
|
Addition of mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
101 |
|
Reductions due to loan payments |
|
|
(12,748 |
) |
|
|
(154 |
) |
|
|
(220 |
) |
Changes in fair value due to: |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation model inputs or
assumptions |
|
|
50,191 |
|
|
|
(9 |
) |
|
|
(362 |
) |
Other changes in fair value |
|
|
|
|
|
|
|
|
|
|
14 |
|
|
Fair value on June 30, 2008 |
|
$ |
267,754 |
|
|
$ |
1,266 |
|
|
$ |
1,793 |
|
|
Fair value on January 1, 2009 |
|
$ |
102,993 |
|
|
$ |
981 |
|
|
$ |
1,471 |
|
Addition of mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
11 |
|
Reductions due to loan payments |
|
|
(12,113 |
) |
|
|
(97 |
) |
|
|
(158 |
) |
Changes in fair value due to: |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation model inputs or
assumptions |
|
|
14,682 |
|
|
|
45 |
|
|
|
|
|
|
Fair value on June 30, 2009 |
|
$ |
105,562 |
|
|
$ |
929 |
|
|
$ |
1,324 |
|
|
Servicing, late and other ancillary fees recognized within mortgage banking income were $14.7
million and $21.3 million for the three months ended June 30, 2009 and 2008, respectively, related
to securitization activity and $33.5 million and $43.3 million for the six months ended June 30,
2009 and 2008, respectively. Servicing, late and other ancillary fees recognized within revenue
from loan sales and securitizations were $.2 million and $.3 million
for the three months ended June 30, 2009 and 2008, respectively, related to securitization
activity and $.5 million and $.6 million for the six months ended June 30, 2009 and 2008,
respectively.
19
Note 5 Mortgage Servicing Rights (continued)
Following is a summary of changes in capitalized MSR related to loan sale activity as of June 30,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
|
(Dollars in thousands) |
|
Liens |
|
Liens |
|
HELOC |
|
Fair value on January 1, 2008 |
|
$ |
892,104 |
|
|
$ |
24,403 |
|
|
$ |
9,313 |
|
Addition of mortgage servicing rights |
|
|
179,176 |
|
|
|
|
|
|
|
1,001 |
|
Reductions due to loan payments |
|
|
(63,298 |
) |
|
|
(4,200 |
) |
|
|
(978 |
) |
Reductions due to sale |
|
|
(116,113 |
) |
|
|
|
|
|
|
|
|
Changes in fair value due to: |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation model inputs or
assumptions |
|
|
(48,377 |
) |
|
|
(3,334 |
) |
|
|
(1,803 |
) |
Other changes in fair value |
|
|
(42 |
) |
|
|
3 |
|
|
|
727 |
|
|
Fair value on June 30, 2008 |
|
$ |
843,450 |
|
|
$ |
16,872 |
|
|
$ |
8,260 |
|
|
Fair value on January 1, 2009 |
|
$ |
251,404 |
|
|
$ |
12,576 |
|
|
$ |
7,419 |
|
Addition of mortgage servicing rights |
|
|
189 |
|
|
|
|
|
|
|
|
|
Reductions due to loan payments |
|
|
(23,880 |
) |
|
|
(3,563 |
) |
|
|
(1,037 |
) |
Reductions due to sale |
|
|
(77,591 |
) |
|
|
|
|
|
|
|
|
Changes in fair value due to: |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation model inputs or
assumptions |
|
|
64,603 |
|
|
|
|
|
|
|
|
|
Other changes in fair value |
|
|
(1,347 |
) |
|
|
64 |
|
|
|
444 |
|
|
Fair value on June 30, 2009 |
|
$ |
213,378 |
|
|
$ |
9,077 |
|
|
$ |
6,826 |
|
|
Servicing, late and other ancillary fees recognized within mortgage banking income were $13.0
million and $42.1 million for the three months ended June 30, 2009 and 2008, respectively, related
to loan sale activity and $29.4 million and $94.4 million for the six months ended June 30, 2009
and 2008, respectively. Servicing, late and other ancillary fees recognized within revenue from
loan sales and securitizations were $3.4 million and $4.0 million for the three months ended June
30, 2009 and 2008, respectively, related to loan sale activity and $6.9 million and $8.3 million
for the six months ended June 30, 2009 and 2008, respectively.
FHN services a portfolio of mortgage loans related to transfers performed by other parties
utilizing QSPEs. FHNs MSR represents its sole interest in these transactions. The total MSR
recognized by FHN related to these transactions was $7.4 million and $82.3 million at June 30, 2009
and 2008, respectively. The aggregate principal balance serviced by FHN for these transactions was
$1.0 billion and $5.6 billion at June 30, 2009 and 2008, respectively. FHN has no obligation to
provide financial support and has not provided any form of support to the
related trusts. The MSR recognized by FHN has been included in the first lien mortgage loans
column within the rollforward of MSR resulting from loan sales activity.
As of June 30, 2009, FHN had transferred $39.7 million of MSR to third parties in transactions that
did not qualify for sales treatment due to certain recourse provisions that were included within
the sale agreements. These MSR are included within the first liens mortgage loans column within
the rollforward of MSR resulting from loan sales activity. The proceeds from these transfers have
been recognized within commercial paper and other short term borrowings in the Consolidated
Condensed Statements of Condition as of June 30, 2009. Since MSR are recognized at fair value and
since changes in the fair value of related financing liabilities will exactly mirror the change in
fair value of the associated servicing assets, management elected to account for the financing
liabilities at fair value under SFAS No. 159.
20
Note 6 Intangible Assets
The following is a summary of intangible assets, net of accumulated amortization, included in the
Consolidated Condensed Statements of Condition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Intangible |
(Dollars in thousands) |
|
Goodwill |
|
Assets* |
|
December 31, 2007 |
|
$ |
192,408 |
|
|
$ |
56,907 |
|
Amortization expense |
|
|
|
|
|
|
(4,622 |
) |
Impairment |
|
|
|
|
|
|
(4,034 |
) |
Divestitures |
|
|
|
|
|
|
(26 |
) |
Additions |
|
|
|
|
|
|
390 |
|
|
June 30, 2008 |
|
$ |
192,408 |
|
|
$ |
48,615 |
|
|
December 31, 2008 |
|
$ |
192,408 |
|
|
$ |
45,082 |
|
Amortization expense |
|
|
|
|
|
|
(3,145 |
) |
|
June 30, 2009 |
|
$ |
192,408 |
|
|
$ |
41,937 |
|
|
|
|
|
* |
|
Represents customer lists, acquired contracts, premium on purchased deposits, and covenants not to compete. |
The gross carrying amount of other intangible assets subject to amortization is $126.4 million on
June 30, 2009, net of $84.5 million of accumulated amortization. Estimated aggregate amortization
expense is expected to be $3.0 million for the remainder of 2009, and $5.9 million, $5.7 million,
$4.2 million and $3.9 million and $3.6 million for the twelve-month periods of 2010, 2011, 2012,
2013 and 2014, respectively.
The following is a summary of goodwill detailed by reportable segments for the six months ended
June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional |
|
Capital |
|
|
(Dollars in thousands) |
|
Banking |
|
Markets |
|
Total |
|
December 31, 2007
|
|
$ |
77,342 |
|
|
$ |
115,066 |
|
|
$ |
192,408 |
|
|
June 30, 2008
|
|
$ |
77,342 |
|
|
$ |
115,066 |
|
|
$ |
192,408 |
|
|
December 31, 2008
|
|
$ |
77,342 |
|
|
$ |
115,066 |
|
|
$ |
192,408 |
|
|
June 30, 2009
|
|
$ |
77,342 |
|
|
$ |
115,066 |
|
|
$ |
192,408 |
|
|
There is no goodwill associated with the Mortgage Banking, National Specialty Lending, and Corporate segments.
21
Note 7 - Regulatory Capital
FHN is subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on FHNs financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, specific capital guidelines that involve
quantitative measures of assets, liabilities and certain derivatives as calculated under regulatory
accounting practices must be met. Capital amounts and classification are also subject to
qualitative judgment by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require FHN to maintain
minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1
capital to average assets (leverage). Management believes, as of June 30, 2009, that FHN met all
capital adequacy requirements to which it was subject.
The actual capital amounts and ratios of FHN and FTBNA are presented in the table below. In
addition, FTBNA must also calculate its capital ratios after excluding financial subsidiaries as
defined by the Gramm-Leach-Bliley Act of 1999. Based on this calculation FTBNAs Total Capital,
Tier 1 Capital and Leverage ratios were 18.62 percent, 14.34 percent and 11.64 percent,
respectively, on June 30, 2009, and were 13.87 percent, 9.90 percent and 8.10 percent,
respectively, on June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Horizon |
|
First Tennessee Bank |
|
|
National Corporation |
|
National Association |
(Dollars in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
On June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
$ |
4,801,814 |
|
|
|
20.77 |
% |
|
$ |
4,564,673 |
|
|
|
19.92 |
% |
Tier 1 Capital |
|
|
3,596,285 |
|
|
|
15.55 |
|
|
|
3,421,808 |
|
|
|
14.93 |
|
Leverage |
|
|
3,596,285 |
|
|
|
12.49 |
|
|
|
3,421,808 |
|
|
|
11.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital Adequacy Purposes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
|
1,849,870 |
³ |
|
|
8.00 |
|
|
|
1,833,312 |
³ |
|
|
8.00 |
|
Tier 1 Capital |
|
|
924,935 |
³ |
|
|
4.00 |
|
|
|
916,656 |
³ |
|
|
4.00 |
|
Leverage |
|
|
1,151,280 |
³ |
|
|
4.00 |
|
|
|
1,142,369 |
³ |
|
|
4.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well Capitalized Under Prompt
Corrective Action Provisions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
|
|
|
|
|
|
|
|
|
2,291,639 |
³ |
|
|
10.00 |
|
Tier 1 Capital |
|
|
|
|
|
|
|
|
|
|
1,374,984 |
³ |
|
|
6.00 |
|
Leverage |
|
|
|
|
|
|
|
|
|
|
1,427,961 |
³ |
|
|
5.00 |
|
|
On June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
$ |
4,376,408 |
|
|
|
15.15 |
% |
|
$ |
4,195,535 |
|
|
|
14.65 |
% |
Tier 1 Capital |
|
|
3,034,698 |
|
|
|
10.51 |
|
|
|
2,936,767 |
|
|
|
10.25 |
|
Leverage |
|
|
3,034,698 |
|
|
|
8.45 |
|
|
|
2,936,767 |
|
|
|
8.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital Adequacy Purposes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
|
2,310,774 |
³ |
|
|
8.00 |
|
|
|
2,291,784 |
³ |
|
|
8.00 |
|
Tier 1 Capital |
|
|
1,155,387 |
³ |
|
|
4.00 |
|
|
|
1,145,892 |
³ |
|
|
4.00 |
|
Leverage |
|
|
1,436,005 |
³ |
|
|
4.00 |
|
|
|
1,425,665 |
³ |
|
|
4.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well Capitalized Under Prompt
Corrective Action Provisions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
|
|
|
|
|
|
|
|
|
2,864,730 |
³ |
|
|
10.00 |
|
Tier 1 Capital |
|
|
|
|
|
|
|
|
|
|
1,718,838 |
³ |
|
|
6.00 |
|
Leverage |
|
|
|
|
|
|
|
|
|
|
1,782,082 |
³ |
|
|
5.00 |
|
|
22
Note 8 Earnings per Share
The following tables show a reconciliation of the numerators used in calculating earnings per share
attributable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
June 30 |
|
(In thousands, except per share data) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Loss from continuing operations |
|
|
(106,030 |
) |
|
|
(16,237 |
) |
|
|
(171,125 |
) |
|
|
(5,139 |
) |
Income from discontinued operations, net of tax |
|
|
548 |
|
|
|
|
|
|
|
548 |
|
|
|
883 |
|
|
Net loss |
|
|
(105,482 |
) |
|
|
(16,237 |
) |
|
|
(170,577 |
) |
|
|
(4,256 |
) |
Net income attributable to noncontrolling interest |
|
|
2,844 |
|
|
|
2,844 |
|
|
|
5,594 |
|
|
|
6,905 |
|
|
Net loss attributable to controlling interest |
|
|
(108,326 |
) |
|
|
(19,081 |
) |
|
|
(176,171 |
) |
|
|
(11,161 |
) |
Preferred stock dividends |
|
|
14,856 |
|
|
|
|
|
|
|
29,811 |
|
|
|
|
|
|
Net loss available to common shareholders |
|
|
(123,182 |
) |
|
|
(19,081 |
) |
|
|
(205,982 |
) |
|
|
(11,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(106,030 |
) |
|
|
(16,237 |
) |
|
|
(171,125 |
) |
|
|
(5,139 |
) |
Net income attributable to noncontrolling interest |
|
|
2,844 |
|
|
|
2,844 |
|
|
|
5,594 |
|
|
|
6,905 |
|
Preferred stock dividends |
|
|
14,856 |
|
|
|
|
|
|
|
29,811 |
|
|
|
|
|
|
Net loss from continuing operations available to
common shareholders |
|
|
(123,730 |
) |
|
|
(19,081 |
) |
|
|
(206,530 |
) |
|
|
(12,044 |
) |
|
The following table provides a reconciliation of weighted average common shares to diluted average
common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(In thousands, except per share data) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Weighted average common shares outstanding basic (a)
|
|
|
213,735 |
|
|
|
187,911 |
|
|
|
213,733 |
|
|
|
162,976 |
|
Effect of dilutive securities (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted (a)
|
|
|
213,735 |
|
|
|
187,911 |
|
|
|
213,733 |
|
|
|
162,976 |
|
|
|
|
|
(a) |
|
All share data has been restated to reflect stock dividends distributed through July 1, 2009. |
The following table provides a reconciliation of earnings/(loss) per common and diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
Earnings/(loss) per share common share: |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Loss per share from continuing operations available to
common shareholders |
|
|
(0.58 |
) |
|
|
(0.10 |
) |
|
|
(0.96 |
) |
|
|
(0.07 |
) |
Income per share from discontinued operations, net of tax |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
Net loss per share available to common shareholders |
|
|
(0.58 |
) |
|
|
(0.10 |
) |
|
|
(0.96 |
) |
|
|
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings/(loss) per share common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations available to
common shareholders |
|
|
(0.58 |
) |
|
|
(0.10 |
) |
|
|
(0.96 |
) |
|
|
(0.07 |
) |
Income per share from discontinued operations, net of tax |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
Net loss per share available to common shareholders |
|
|
(0.58 |
) |
|
|
(0.10 |
) |
|
|
(0.96 |
) |
|
|
(0.07 |
) |
|
Due to the net loss attributable to common shareholders for the three and six months ended June 30,
2009, no potentially dilutive shares were included in the loss per share calculations as including
such shares would have been antidilutive. Stock options of 14.0 million and 18.9 million with a
weighted average exercise price of $29.75 and $30.90 per share for the three months ended June 30,
2009, and 2008, respectively; and stock options of 14.5 million and 18.9 million with a weighted
average exercise price of $29.88 and $31.26 per share for the six months ended June 30, 2009, and
2008, respectively, were not included in the computation of diluted loss per common share because
such shares would have had an antidilutive effect on earnings per common share. Other equity
awards of 1.9 million and 1.2 million for the
23
Note 8 Earnings per Share (continued)
three months ended June 30, 2009, and 2008, respectively; and other equity awards of 1.6 million
and 1.1 million for the six months ended June 30, 2009, and 2008, respectively, were also excluded
because inclusion would have been antidilutive. 13.5 million potentially dilutive shares related
to the CPP common stock warrant were also excluded from the second quarter 2009, computation of
diluted loss per common share because such shares would have been antidilutive.
24
Note 9 Contingencies and Other Disclosures
Contingencies. Contingent liabilities arise in the ordinary course of business, including those
related to litigation. Various claims and lawsuits are pending against FHN and its subsidiaries. In
view of the inherent difficulty of predicting the outcome of legal matters, particularly where the
claimants seek very large or indeterminate damages, or where the cases present novel legal theories
or involve a large number of parties, FHN cannot state with confidence what the eventual outcome of
the pending matters will be, what the timing of the ultimate resolution of these matters will be,
or what the eventual loss or impact related to each pending matter may be. FHN establishes loss
contingency reserves for litigation matters when estimated loss is both probable and estimable as
prescribed by applicable financial accounting guidance. A reserve generally is not established when
a loss contingency either is not probable or its amount is not estimable. If loss for a matter is
probable and a range of possible loss outcomes is the best estimate available, accounting guidance
generally requires a reserve to be established at the low end of the range. Based on current
knowledge, and after consultation with counsel, management is of the opinion that loss
contingencies related to pending matters should not have a material adverse effect on the
consolidated financial condition of FHN, but may be material to FHNs operating results for any
particular reporting period.
FHN is a member of the Visa USA network. On October 3, 2007, the Visa organization of affiliated
entities completed a series of global restructuring transactions to combine its affiliated
operating companies, including Visa USA, under a single holding company, Visa Inc. (Visa). Upon
completion of the reorganization, the members of the Visa USA network remained contingently liable
for certain Visa litigation matters. Based on its proportionate membership share of Visa USA, FHN
recognized a contingent liability of $55.7 million within noninterest expense in fourth quarter
2007 related to this contingent obligation.
In March 2008, Visa completed its initial public offering (IPO). Visa funded an escrow account from
IPO proceeds that will be used to make payments related to the Visa litigation matters. Upon
funding of the escrow, FHN reversed $30.0 million of the contingent liability previously recognized
with a corresponding credit to noninterest expense for its proportionate share of the escrow
account. A portion of FHNs Class B shares of Visa were redeemed as part of the IPO resulting in
$65.9 million of equity securities gains in first quarter 2008.
In October 2008, Visa announced that it had agreed to settle litigation with Discover Financial
Services (Discover) for $1.9 billion. $1.7 billion of this settlement amount was funded from the
escrow account established as part of Visas IPO. In connection with this settlement, FHN
recognized additional expense of $11.0 million within noninterest expense in third quarter 2008.
In December 2008, Visa deposited additional funds into the escrow account and FHN recognized a
corresponding credit to noninterest expense of $11.0 million for its proportionate share of the
amount funded.
After the partial share redemption in conjunction with the IPO, FHN holds approximately 2.4 million
Class B shares of Visa, which are included in the Consolidated Condensed Statements of Condition at
their historical cost of $0. Conversion of these shares into Class A shares of Visa and, with
limited exceptions, transfer of these shares are restricted until the later of the third
anniversary of the IPO and the final resolution of the covered litigation. The final conversion
ratio, which was estimated to approximate 63 percent as of June 30, 2009, will fluctuate based on
the ultimate settlement of the Visa litigation matters for which FHN has a proportionate contingent
obligation. Future funding of the escrow will dilute this exchange rate by an amount that is yet
to be determined.
Other disclosures Indemnification agreements and guarantees. In the ordinary course of
business, FHN enters into indemnification agreements for legal proceedings against its directors
and officers and standard representations and warranties for underwriting agreements, merger and
acquisition agreements, loan sales, contractual commitments, and various other business
transactions or arrangements. The extent of FHNs obligations under these agreements depends upon
the occurrence of future events; therefore, it is not possible to estimate a maximum potential
amount of payouts that could be required with such agreements.
FHN services a mortgage loan portfolio of $48.6 billion on June 30, 2009; a significant portion of
which is held by GNMA, FNMA, FHLMC or private security holders. In connection with its servicing
activities, FHN guarantees the receipt of the scheduled principal and interest payments on the
underlying loans. In the event of customer non-performance on the loan, FHN is obligated to make
the payment to the security holder. Under the terms of the servicing agreements, FHN can utilize
payments received from other prepaid loans in order to make the security holder whole. In the
event payments are ultimately made by FHN to satisfy this obligation, for loans sold with no
recourse, all funds are recoverable from the government agency at foreclosure sale. See Note 13
Loan Sales and Securitizations for additional information on loans sold with recourse.
FHN is also subject to losses in its loan servicing portfolio due to loan foreclosures and other
recourse obligations. Certain agencies have the authority to limit their repayment guarantees on
foreclosed loans resulting in certain foreclosure costs being borne by servicers. In addition, FHN
has exposure on all loans it originated and sold with recourse. FHN has various claims for
reimbursement, repurchase obligations, and/or indemnification requests outstanding with government
agencies or private investors. FHN has evaluated all of its exposure under
25
Note 9 Contingencies and Other Disclosures (continued)
recourse obligations based on factors, which include loan delinquency status, foreclosure
expectancy rates and claims outstanding. Accordingly, FHN had an allowance for losses on the
mortgage servicing portfolio of approximately $52.5 million and $38.5 million on June 30, 2009 and
2008, respectively. FHN has sold certain mortgage loans with an agreement to repurchase the loans
upon default. For the single-family residential loans, in the event of borrower nonperformance, FHN
would assume losses to the extent they exceed the value of the collateral and private mortgage
insurance, FHA insurance or VA guarantees. On June 30, 2009 and 2008, FHN had single-family
residential loans with outstanding balances of $72.2 million and $92.4 million, respectively, that
were serviced on a full recourse basis. On June 30, 2009 and 2008, the outstanding principal
balance of loans sold with limited recourse arrangements where some portion of the principal is at
risk and serviced by FHN was $3.3 billion and $3.6 billion, respectively. Additionally, on June
30, 2009 and 2008, $1.2 billion and $1.8 billion, respectively, of mortgage loans were outstanding
which were sold under limited recourse arrangements where the risk is limited to interest and
servicing advances.
FHN has securitized and sold HELOC and second-lien mortgages which are held by private security
holders, and on June 30, 2009, the outstanding principal balance of these loans was $190.7 million
and $45.2 million, respectively. On June 30, 2008, the outstanding principal balance of
securitized and sold HELOC and second-lien mortgages was $231.3 million and $61.4 million,
respectively. In connection with its servicing activities, FTBNA does not guarantee the receipt of
the scheduled principal and interest payments on the underlying loans but does have residual
interests of $6.2 million and $7.8 million on June 30, 2009 and 2008, respectively, which are
available to make the security holder whole in the event of credit losses. FHN has projected
expected credit losses in the valuation of the residual interest.
FHN has also sold HELOC and second-lien mortgages without recourse through whole loan sales. On
June 30, 2009, the outstanding principal balance of these loans was $1.0 billion and $1.7 billion,
respectively. On June 30, 2008, the outstanding principal balance of these HELOC and second-lien
mortgages was $1.1 billion and $2.1 billion, respectively. FHN does not guarantee the receipt of
the scheduled principal and interest payments on the underlying loans but does have an obligation
to repurchase the loans for which there is a breach of warranties provided to the buyers. As of
June 30, 2009, FHN has recognized a liability of $24.4 million related to these repurchase
obligations.
A wholly-owned subsidiary of FHN has agreements with several providers of private mortgage
insurance whereby the subsidiary has agreed to accept insurance risk for specified loss corridors
for loans originated in each contract year in exchange for a portion of the private mortgage
insurance premiums paid by borrowers (i.e., reinsurance arrangements). The loss corridors vary for
each primary insurer for each contract year. No new reinsurance arrangements have been initiated
after 2008. As of June 30, 2009, FHN has reserved $60.8 million for its estimated liability under
the reinsurance arrangements. In accordance with the terms of the contracts with the primary
insurers, as of June 30, 2009, FHN has placed $59.2 million of prior premium collections in trust
for payment of claims arising under the reinsurance arrangements.
In conjunction with the sale of its servicing platform to MetLife, FHN entered into a three year
subservicing arrangement with MetLife for the remaining portion of its servicing portfolio. As
part of the subservicing agreement, FHN has agreed to a make-whole arrangement whereby if the
number of loans subserviced by MetLife falls below specified levels and the direct servicing cost
per loan (both determined by using loans serviced on behalf of both FHN and MetLife) exceeds a
specified threshold, FHN will make a payment to MetLife according to a contractually specified
formula. The make-whole payment is subject to a cap, which is $19.4 million if determined in the
four quarters immediately following the transaction, and which declines to $15.0 million if
triggered in later periods. As part of the divestiture transaction with MetLife, FHN recognized a
contingent liability of $1.2 million representing the estimated fair value of its performance
obligation under the make-whole arrangement.
26
Note 10 Pension and Other Employee Benefits
Pension plan. FHN closed participation in the noncontributory, qualified defined benefit pension
plan to employees hired or re-hired on September 1, 2007 or later. This did not impact the
benefits of employees currently participating in the plan. Certain employees of FHNs insurance
subsidiaries are not covered by the pension plan. Pension benefits are based on years of service,
average compensation near retirement, and estimated social security benefits at age 65. FHN
contributions are based upon actuarially determined amounts necessary to fund the total benefit
obligation. FHN made a $30.0 million contribution in December 2008 to the qualified pension plan.
A second contribution may be made in 2009 attributable to the 2008 plan year. This decision will
be based upon pension funding requirements under the Pension Protection Act, the maximum deductible
under the Internal Revenue Code, and the actual performance of plan assets during 2009. Given
these uncertainties, we cannot estimate the amount of a future contribution at this time. The
non-qualified pension plans and other post-retirement benefit plans are unfunded. Contributions to
these plans cover all benefits paid under the non-qualified plans. This amount was $6.2 million
for 2008. FHN anticipates this amount will be $5.6 million in 2009.
FHN also maintains nonqualified plans including a supplemental retirement plan that covers certain
employees whose benefits under the pension plan have been limited. Additionally, a program was
added under the FHN savings plan that is provided only to employees who are not eligible for the
pension plan. FHN made a contribution of $.5 million for this plan in 2009 related to the 2008
plan year.
Other employee benefits. FHN provides post-retirement life insurance benefits to certain
employees. FHN also provides post-retirement medical insurance to retirement-eligible employees.
The post-retirement medical plan is contributory with retiree contributions adjusted annually and is
based on criteria that are a combination of the employees age and years of service. For any
employee retiring on or after January 1, 1995, FHN contributes a fixed amount based on years of
service and age at the time of retirement. FHNs post-retirement benefits include prescription
drug benefits. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act)
introduced a prescription drug benefit under Medicare Part D as well as a federal subsidy to
sponsors of retiree health care that provide a benefit that is actuarially equivalent to Medicare
Part D. FHN anticipates receiving a prescription drug subsidy under the Act through 2012.
The components of net periodic benefit cost for the three months ended June 30 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Benefits |
(Dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
4,401 |
|
|
$ |
4,206 |
|
|
$ |
339 |
|
|
$ |
71 |
|
Interest cost |
|
|
7,926 |
|
|
|
7,345 |
|
|
|
991 |
|
|
|
610 |
|
Expected return on plan assets |
|
|
(11,582 |
) |
|
|
(11,792 |
) |
|
|
(279 |
) |
|
|
(439 |
) |
Amortization of unrecognized: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition obligation |
|
|
|
|
|
|
|
|
|
|
247 |
|
|
|
247 |
|
Prior service cost/(credit) |
|
|
190 |
|
|
|
216 |
|
|
|
617 |
|
|
|
(44 |
) |
Actuarial loss/(gain) |
|
|
1,973 |
|
|
|
494 |
|
|
|
(124 |
) |
|
|
(58 |
) |
|
Net periodic benefit cost |
|
$ |
2,908 |
|
|
$ |
469 |
|
|
$ |
1,791 |
|
|
$ |
387 |
|
|
FAS 88 Settlement Expense |
|
$ |
|
|
|
$ |
715 |
|
|
$ |
|
|
|
$ |
|
|
|
Total FAS 87 and FAS 88 Expense |
|
$ |
2,908 |
|
|
$ |
1,184 |
|
|
$ |
1,791 |
|
|
$ |
387 |
|
|
27
Note 10 Pension and Other Employee Benefits (continued)
The components of net periodic benefit cost for the six months ended June 30 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Benefits |
(Dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
8,802 |
|
|
$ |
8,414 |
|
|
$ |
678 |
|
|
$ |
143 |
|
Interest cost |
|
|
15,852 |
|
|
|
14,685 |
|
|
|
1,982 |
|
|
|
1,220 |
|
Expected return on plan assets |
|
|
(23,164 |
) |
|
|
(23,583 |
) |
|
|
(558 |
) |
|
|
(878 |
) |
Amortization of unrecognized: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition obligation |
|
|
|
|
|
|
|
|
|
|
494 |
|
|
|
494 |
|
Prior service cost/(credit) |
|
|
380 |
|
|
|
433 |
|
|
|
1,234 |
|
|
|
(88 |
) |
Actuarial loss/(gain) |
|
|
3,946 |
|
|
|
987 |
|
|
|
(248 |
) |
|
|
(116 |
) |
|
Net periodic benefit cost |
|
$ |
5,816 |
|
|
$ |
936 |
|
|
$ |
3,582 |
|
|
$ |
775 |
|
|
FAS 88 Settlement Expense |
|
$ |
|
|
|
$ |
715 |
|
|
$ |
|
|
|
$ |
|
|
|
Total FAS 87 and FAS 88 Expense |
|
$ |
5,816 |
|
|
$ |
1,651 |
|
|
$ |
3,582 |
|
|
$ |
775 |
|
|
The 2009 net periodic benefit costs of Other Benefits includes the first quarter 2009 expense
related to company-paid life insurance benefits offered to certain employees beyond retirement. A
liability for these benefits was not previously recorded as premiums were expensed when incurred.
A $10.7 million cumulative adjustment related to prior periods is not included in the 2009 net
periodic benefit cost.
In second quarter 2008, distributions from a non-qualified post-retirement plan in conjunction with
an early retirement triggered settlement accounting. In accordance with its practice, FHN performed
a remeasurement of the plan in conjunction with the settlement and recognized $.7 million in
settlement expense.
28
Note 11 Business Segment Information
FHN has five business segments, Regional Banking, Capital Markets, National Specialty Lending,
Mortgage Banking and Corporate. The Regional Banking segment offers financial products and
services, including traditional lending and deposit taking, to retail and commercial customers in
Tennessee and surrounding markets. Additionally, Regional Banking provides investments, insurance,
financial planning, trust services and asset management, credit card, cash management, and check
clearing services. The Capital Markets segment consists of traditional capital markets securities
activities, equity research, loan sales, portfolio advisory, derivative sales and correspondent
banking. The National Specialty Lending segment consists of traditional consumer and construction
lending activities in other national markets. The Mortgage Banking segment consists of core
mortgage banking elements including originations and servicing and the associated ancillary
revenues related to these businesses. In August 2008, FHN completed the divestiture of certain
mortgage banking operations to MetLife. FHN continues to originate loans in and around the
Tennessee banking footprint and to service the remaining servicing portfolio. The Corporate segment
consists of restructuring, repositioning and efficiency initiatives, unallocated corporate
expenses, expense on subordinated debt issuances and preferred stock, bank- owned life insurance,
unallocated interest income associated with excess equity, net impact of raising incremental
capital, revenue and expense associated with deferred compensation plans, funds management, low
income housing investment activities, and venture capital.
Periodically, FHN adapts its segments to reflect changes in expense allocations among segments. In
the second quarter 2009, FHN reviewed funds transfer pricing methodologies and cost allocations
used to determine segment performance. As a result of this review, certain of these methodologies
were revised affecting all segments. Additionally, activities related to Low Income Housing
Investments were moved from Regional Banking to Corporate. For comparability, previously reported
items have been revised to reflect these changes.
Total revenue, expense and asset levels reflect those which are specifically identifiable or which
are allocated based on an internal allocation method. Because the allocations are based on
internally developed assignments and allocations, they are to an extent subjective. This assignment
and allocation has been consistently applied for all periods presented. The following table
reflects the amounts of consolidated revenue, expense, tax, and assets for each segment for the
three and six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
June 30 |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
199,086 |
|
|
$ |
238,895 |
|
|
$ |
395,673 |
|
|
$ |
466,987 |
|
Provision for loan losses |
|
|
260,000 |
|
|
|
220,000 |
|
|
|
560,000 |
|
|
|
460,000 |
|
Noninterest income |
|
|
292,278 |
|
|
|
399,046 |
|
|
|
700,147 |
|
|
|
848,122 |
|
Noninterest expense |
|
|
411,932 |
|
|
|
463,000 |
|
|
|
829,260 |
|
|
|
897,215 |
|
|
Loss before income taxes |
|
|
(180,568 |
) |
|
|
(45,059 |
) |
|
|
(293,440 |
) |
|
|
(42,106 |
) |
Benefit for income taxes |
|
|
(74,538 |
) |
|
|
(28,821 |
) |
|
|
(122,315 |
) |
|
|
(36,967 |
) |
|
Loss from continuing operations |
|
|
(106,030 |
) |
|
|
(16,238 |
) |
|
|
(171,125 |
) |
|
|
(5,139 |
) |
Income from discontinued
operations, net of tax |
|
|
548 |
|
|
|
|
|
|
|
548 |
|
|
|
883 |
|
|
Net loss |
|
$ |
(105,482 |
) |
|
$ |
(16,238 |
) |
|
$ |
(170,577 |
) |
|
$ |
(4,256 |
) |
|
Average assets |
|
$ |
28,929,543 |
|
|
$ |
36,146,101 |
|
|
$ |
29,694,129 |
|
|
$ |
36,654,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Banking |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
125,470 |
|
|
$ |
125,737 |
|
|
$ |
248,470 |
|
|
$ |
250,797 |
|
Provision for loan losses |
|
|
51,025 |
|
|
|
89,477 |
|
|
|
148,851 |
|
|
|
164,742 |
|
Noninterest income |
|
|
81,376 |
|
|
|
92,685 |
|
|
|
157,692 |
|
|
|
179,888 |
|
Noninterest expense |
|
|
168,424 |
|
|
|
146,328 |
|
|
|
336,663 |
|
|
|
292,925 |
|
|
Loss before income taxes |
|
|
(12,603 |
) |
|
|
(17,383 |
) |
|
|
(79,352 |
) |
|
|
(26,982 |
) |
Benefit for income taxes |
|
|
(4,810 |
) |
|
|
(6,625 |
) |
|
|
(30,018 |
) |
|
|
(10,324 |
) |
|
Loss from continuing operations |
|
|
(7,793 |
) |
|
|
(10,758 |
) |
|
|
(49,334 |
) |
|
|
(16,658 |
) |
Income from discontinued
operations, net of tax |
|
|
548 |
|
|
|
|
|
|
|
548 |
|
|
|
883 |
|
|
Net loss |
|
$ |
(7,245 |
) |
|
$ |
(10,758 |
) |
|
$ |
(48,786 |
) |
|
$ |
(15,775 |
) |
|
Average assets |
|
$ |
11,131,755 |
|
|
$ |
11,974,673 |
|
|
$ |
11,375,372 |
|
|
$ |
12,042,940 |
|
|
Certain previously reported amounts have been reclassified to agree with current presentation.
29
Note 11 Business Segment Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
June 30 |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Capital Markets |
Net interest income |
|
$ |
24,917 |
|
|
$ |
19,050 |
|
|
$ |
48,946 |
|
|
$ |
39,275 |
|
Provision for loan losses |
|
|
21,104 |
|
|
|
18,522 |
|
|
|
35,113 |
|
|
|
33,553 |
|
Noninterest income |
|
|
189,588 |
|
|
|
124,633 |
|
|
|
406,278 |
|
|
|
258,538 |
|
Noninterest expense |
|
|
114,423 |
|
|
|
100,802 |
|
|
|
266,384 |
|
|
|
216,809 |
|
|
Income before income taxes |
|
|
78,978 |
|
|
|
24,359 |
|
|
|
153,727 |
|
|
|
47,451 |
|
Provision for income taxes |
|
|
29,687 |
|
|
|
9,069 |
|
|
|
57,783 |
|
|
|
17,609 |
|
|
Net income |
|
$ |
49,291 |
|
|
$ |
15,290 |
|
|
$ |
95,944 |
|
|
$ |
29,842 |
|
|
Average assets |
|
$ |
4,212,078 |
|
|
$ |
5,364,153 |
|
|
$ |
4,358,094 |
|
|
$ |
5,587,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National Specialty Lending |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
31,157 |
|
|
$ |
53,460 |
|
|
$ |
64,698 |
|
|
$ |
107,665 |
|
Provision for loan losses |
|
|
176,348 |
|
|
|
108,000 |
|
|
|
364,921 |
|
|
|
257,482 |
|
Noninterest income/(loss) |
|
|
(9,050 |
) |
|
|
(14,598 |
) |
|
|
(15,748 |
) |
|
|
(14,046 |
) |
Noninterest expense |
|
|
41,019 |
|
|
|
29,026 |
|
|
|
72,902 |
|
|
|
56,023 |
|
|
Loss before income taxes |
|
|
(195,260 |
) |
|
|
(98,164 |
) |
|
|
(388,873 |
) |
|
|
(219,886 |
) |
Benefit for income taxes |
|
|
(73,573 |
) |
|
|
(36,988 |
) |
|
|
(146,527 |
) |
|
|
(82,853 |
) |
|
Net loss |
|
$ |
(121,687 |
) |
|
$ |
(61,176 |
) |
|
$ |
(242,346 |
) |
|
$ |
(137,033 |
) |
|
Average assets |
|
$ |
6,536,174 |
|
|
$ |
8,867,204 |
|
|
$ |
6,855,962 |
|
|
$ |
9,115,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Banking |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
10,792 |
|
|
$ |
35,128 |
|
|
$ |
21,795 |
|
|
$ |
68,402 |
|
Provision for loan losses |
|
|
11,523 |
|
|
|
4,001 |
|
|
|
11,115 |
|
|
|
4,223 |
|
Noninterest income |
|
|
19,233 |
|
|
|
187,305 |
|
|
|
140,433 |
|
|
|
351,725 |
|
Noninterest expense |
|
|
63,179 |
|
|
|
150,201 |
|
|
|
111,036 |
|
|
|
299,170 |
|
|
Income/(loss) before income taxes |
|
|
(44,677 |
) |
|
|
68,231 |
|
|
|
40,077 |
|
|
|
116,734 |
|
Provision/(benefit) for income taxes |
|
|
(16,835 |
) |
|
|
25,710 |
|
|
|
15,101 |
|
|
|
43,986 |
|
|
Net income/(loss) |
|
$ |
(27,842 |
) |
|
$ |
42,521 |
|
|
$ |
24,976 |
|
|
$ |
72,748 |
|
|
Average assets |
|
$ |
1,948,901 |
|
|
$ |
5,919,909 |
|
|
$ |
2,101,945 |
|
|
$ |
5,865,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
6,750 |
|
|
$ |
5,520 |
|
|
$ |
11,764 |
|
|
$ |
848 |
|
Noninterest income |
|
|
11,131 |
|
|
|
9,021 |
|
|
|
11,492 |
|
|
|
72,017 |
|
Noninterest expense |
|
|
24,887 |
|
|
|
36,643 |
|
|
|
42,275 |
|
|
|
32,288 |
|
|
Loss before income taxes |
|
|
(7,006 |
) |
|
|
(22,102 |
) |
|
|
(19,019 |
) |
|
|
40,577 |
|
Benefit for income taxes |
|
|
(9,007 |
) |
|
|
(19,987 |
) |
|
|
(18,654 |
) |
|
|
(5,385 |
) |
|
Net income/(loss) |
|
$ |
2,001 |
|
|
$ |
(2,115 |
) |
|
$ |
(365 |
) |
|
$ |
45,962 |
|
|
Average assets |
|
$ |
5,100,635 |
|
|
$ |
4,020,162 |
|
|
$ |
5,002,756 |
|
|
$ |
4,042,402 |
|
|
Certain previously reported amounts have been reclassified to agree with current presentation.
30
Note 12 Preferred Stock and Other Capital
FHN Preferred Stock and Warrant
On November 14, 2008, FHN issued and sold 866,540 preferred shares of Fixed Rate Cumulative
Perpetual Preferred Stock, Series CPP (Capital Purchase Program), along with a Warrant to
purchase common stock. The issuance occurred in connection with, and is governed by, the Treasury
Capital Purchase Program administered by the U.S. Treasury under the Troubled Asset Relief Program
(TARP). The Preferred Shares have an annual 5% cumulative preferred dividend rate, payable
quarterly. The dividend rate increases to 9% after five years. Dividends compound if they accrue
in arrears. Preferred Shares have a liquidation preference of $1,000 per share plus accrued
dividends. The Preferred Shares have no redemption date and are not subject to any sinking fund.
The Preferred Shares carry certain restrictions. The Preferred Shares have a senior rank and also
provide limitations on certain compensation arrangements of executive officers. Subsequent UST
regulations have expanded limitations on compensation agreements to include the twenty most highly
compensated employees. During the first three years following the issuance, FHN may not reinstate
a cash dividend on its common shares nor purchase equity shares without the approval of the U.S.
Treasury, subject to certain limited exceptions. FHN may not reinstate a cash dividend on its
common shares to the extent preferred dividends remain unpaid. Generally, the Preferred Shares
are non-voting. However, should FHN fail to pay six quarterly dividends, the holder may elect two
directors to FHNs Board of Directors until such dividends are paid. In connection with the
issuance of the Preferred Shares, a Warrant to purchase 12,743,235 common shares was issued with an
exercise price of $10.20 per share. The Warrant is immediately exercisable and expires in ten
years. The Warrant is subject to proportionate anti-dilution adjustment in the event of stock
dividends or splits, among other things. As a result of the stock dividends distributed on January
1, 2009, April 1, 2009, and July 1, 2009, the Warrant was adjusted to cover 13,533,744 common
shares at a purchase price of $9.60 per share.
The Preferred Shares and Warrant qualify as Tier 1 capital and are presented in permanent equity on
the Consolidated Condensed Statements of Condition as of June 30, 2009, in the amounts of $790.6
million and $83.9 million, respectively.
Subsidiary Preferred Stock
On September 14, 2000, FT Real Estate Securities Company, Inc. (FTRESC), an indirect subsidiary of
FHN, issued 50 shares of 9.50% Cumulative Preferred Stock, Class B (Class B Preferred Shares), with
a liquidation preference of $1.0 million per share. An aggregate total of 47 Class B Preferred
Shares have been sold privately to nonaffiliates. These securities qualify as Tier 2 capital and
are presented in the Consolidated Condensed Statements of Condition as Long-term debt. FTRESC is
a real estate investment trust (REIT) established for the purpose of acquiring, holding and
managing real estate mortgage assets. Dividends on the Class B Preferred Shares are cumulative and
are payable semi-annually.
The Class B Preferred Shares are mandatorily redeemable on March 31, 2031, and redeemable at the
discretion of FTRESC in the event that the Class B Preferred Shares cannot be accounted for as Tier
2 regulatory capital or there is more than an insubstantial risk that dividends paid with respect
to the Class B Preferred Shares will not be fully deductible for tax purposes. They are not subject
to any sinking fund and are not convertible into any other securities of FTRESC, FHN or any of its
subsidiaries. The shares are, however, automatically exchanged at the direction of the Office of
the Comptroller of the Currency for preferred stock of FTBNA, having substantially the same terms
as the Class B Preferred Shares in the event FTBNA becomes undercapitalized, insolvent or in danger
of becoming undercapitalized.
Effective January 1, 2009, FHN adopted SFAS No. 160 which provides that noncontrolling interests
should be presented as a separate component of equity rather than on a mezzanine level. In
accordance with SFAS No. 160, the balance for noncontrolling interests associated with preferred
stock previously issued by the following indirect, wholly-owned subsidiaries of FHN has been
included in the equity section of the Consolidated Condensed Statements of Condition for all
periods presented.
First Horizon Preferred Funding, LLC and First Horizon Preferred Funding II, LLC have each issued
$1.0 million of Class B Units of preferred stock. On June 30, 2009 and 2008, the amount of Class B
Preferred Shares and Units that are perpetual in nature that was recognized as Noncontrolling
interest on the Consolidated Condensed Statements of Condition was $.3 million and $.5 million,
respectively. The remaining balance has been eliminated in consolidation. Prior to the adoption of
SFAS No. 160, the balance for these preferred shares was recognized as Preferred stock of
subsidiary on the Consolidated Condensed Statements of Condition.
On March 23, 2005, FTBNA issued 300,000 shares of Class A Non-Cumulative Perpetual Preferred Stock
(Class A Preferred Stock) with a liquidation preference of $1,000 per share. These securities
qualify as Tier 1 capital. On June 30, 2009 and 2008, $294.8 million of Class A Preferred Stock was
recognized as Noncontrolling interest on the Consolidated Condensed Statements of Condition.
Prior to the adoption of SFAS No. 160, the balance of FTBNAs Class A Preferred Stock was
recognized as Preferred stock of subsidiary on the Consolidated Condensed Statements of
Condition.
31
Note 12 Preferred Stock and Other Capital (continued)
Due to the nature of the subsidiary preferred stock issued by First Horizon Preferred Funding, LLC,
First Horizon Preferred Funding II, LLC, and FTBNA, all components of other comprehensive
income/(loss) included in the Consolidated Condensed Statements of Equity have been attributed
solely to FHN as the controlling interest holder. The table below presents the amounts included in
the Consolidated Condensed Statements of Income for the three and six months ended June 30, 2009
and 2008 which are attributable to FHN as controlling interest holder for the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(Dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Net loss from continuing operations |
|
$ |
(108,874 |
) |
|
$ |
(19,081 |
) |
|
$ |
(176,719 |
) |
|
$ |
(12,044 |
) |
Income from discontinued operations, net of tax |
|
|
548 |
|
|
|
|
|
|
|
548 |
|
|
|
883 |
|
|
Net loss |
|
$ |
(108,326 |
) |
|
$ |
(19,081 |
) |
|
$ |
(176,171 |
) |
|
$ |
(11,161 |
) |
|
32
Note 13 Loan Sales and Securitizations
FHN historically utilized loan sales and securitizations as a significant source of liquidity for
its mortgage banking operations. With FHNs current focus on origination of mortgages within its
regional banking footprint and the related sale of national mortgage origination offices to
MetLife, loan sale and securitization activity has decreased significantly since third quarter
2008. Subsequent to the MetLife transaction, FHN generally does not retain financial interests in
loans it transfers to third parties. In accordance with applicable accounting standards, loan sale
and securitization activity for which FHN has retained an interest in the related transfers is
included in this disclosure. For classification purposes, all loans transferred to GSE (e.g.,
FNMA, FHLMC and GNMA), including those subsequently securitized by an agency, are considered loan
sales while transfers attributed to securitizations consist solely of proprietary securitizations
executed by FHN.
During second quarter 2009 and 2008, FHN transferred $.5 billion and $7.0 billion, respectively, of
single-family residential mortgage loans in sales that were not securitizations. During the six
months ended June 30, 2009, and 2008, FHN has transferred $.8 billion and $14.3 billion,
respectively, of single-family residential mortgage loans in sales that were not securitizations.
In 2008, the transactions primarily reflect sales to GSE. In second quarter 2009 and 2008, FHN
recognized net pre-tax gains of $4.3 million and $131.5 million, respectively,
from the sale of single-family residential mortgage loans which includes gains recognized on the
capitalization of MSR associated with these loans. During the six months ended June 30, 2009 and
2008, FHN recognized net pre-tax gains of $12.2 million and $216.4 million, respectively, from the
sale of single-family residential mortgage loans which include gains recognized on the
capitalization of MSR associated with these loans.
During second quarter 2009 and 2008, FHN transferred $3.2 million and $5.2 million, respectively,
of home equity loans and HELOC related to proprietary securitization transactions. During the six
months ended June 30, 2009 and 2008, FHN has transferred $6.5 million and $10.9 million,
respectively, of home equity loans and HELOC related to proprietary securitization transactions. In
second quarter 2009 and 2008, FHN recognized net pre-tax gains of $.1 million related to HELOC
securitizations which include gains recognized on the capitalization of MSR associated with these
loans. During the six months ended June 30, 2009 and 2008, FHN has recognized net pre-tax gains of
$.2 million related to HELOC securitizations which include gains recognized on the
capitalization of MSR associated with these loans
During second quarter 2008, FHN capitalized approximately $180.2 million in originated MSR related
to loan sales and $.1 million related to securitizations. During second quarter 2009, there were no
significant additions to MSR. These MSR, as well as other MSR held by FHN, are discussed further in
Note 5 Mortgage Servicing Rights. In certain cases, FHN continues to service and receive
servicing fees related to the transferred loans, and has also retained interests in loan sales and
securitizations including residual interest certificates and financial assets including excess
interest (structured as interest-only strips), principal-only strips, interest-only strips, or
subordinated bonds. FHN received annual servicing fees approximating .28 percent in second quarter
2009 and .27 percent in second quarter 2008 of the outstanding balance of underlying single-family residential
mortgage loans. FHN received annual servicing fees approximating .50 percent in second quarter
2009 and 2008 of the outstanding balance of underlying loans for HELOC and home equity loans
transferred. The investors and the securitization trusts have no recourse to other assets of FHN
for failure of debtors to pay when due. FHN is obligated to repurchase loans under standard
representations and warranties provided to the buyers, which include evidence of borrower fraud and
failure to adhere to underwriting guidelines.
Interests retained from loan sales, including agency securitizations, include MSR and excess
interest. Interests retained from proprietary securitizations include MSR and various financial
assets. MSR are initially valued at fair value, and the remaining retained interests are
initially valued by allocating the remaining cost basis of the loan between the security or loan
sold and the remaining retained interests based on their relative fair values at the time of sale
or securitization. MSR are recognized at fair value in periods subsequent to the related sale or
securitization with realized and unrealized gains and losses included in current earnings as a
component of noninterest income on the Consolidated Condensed Statements of Income.
Financial assets retained in a proprietary or GSE securitization may include certificated residual
interests, excess interest (structured as interest-only strips), interest-only strips,
principal-only strips, or subordinated bonds. Residual interests represent rights to receive
earnings to the extent of excess income generated by the underlying loans. Excess interest
represents rights to receive interest from serviced assets that exceed contractually specified
rates. Principal-only strips
33
Note 13 Loan Sales and Securitizations (continued)
are principal cash flow tranches, and interest-only strips are interest cash flow tranches.
Subordinated bonds are bonds with junior priority. All financial assets retained from a
securitization are recognized on the Consolidated Condensed
Statements of Condition in trading securities at fair value with realized and unrealized gains and
losses included in current earnings as a component of noninterest income on the Consolidated
Condensed Statements of Income.
As of June 30, 2009 and 2008, $105.6 million and $267.8 million, respectively, of first lien MSR
are associated with proprietary securitization transactions with the remainder associated with loan
sales. As of June 30, 2009 and 2008,
second lien MSR includes $.9 million and $1.3 million, respectively, of MSR related to prior
securitization activity with the remainder related to loan sales. As of June 30, 2009 and 2008,
HELOC MSR included $1.3 million and $1.8 million,
respectively, of MSR related to prior securitization activity with the remainder related to loan
sales. As of June 30, 2009 and 2008, $71.9 million and $126.3 million, respectively, of excess
interest IO are associated with proprietary securitization transactions with the remainder
associated with loan sales. All other retained interests relate to securitization activity.
The sensitivity of the fair value of all retained or purchased interests for MSR to immediate 10
percent and 20 percent adverse changes in assumptions on June 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands |
|
First |
|
Second |
|
|
except for annual cost to service) |
|
Liens |
|
Liens |
|
HELOC |
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of retained interests |
|
$ |
318,940 |
|
|
$ |
10,006 |
|
|
$ |
8,150 |
|
Weighted average life (in years) |
|
|
4.2 |
|
|
|
1.6 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual prepayment rate |
|
|
19.9 |
% |
|
|
45.2 |
% |
|
|
31.1 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(17,348 |
) |
|
$ |
(1,155 |
) |
|
$ |
(329 |
) |
Impact on fair value of 20% adverse change |
|
|
(33,061 |
) |
|
|
(2,197 |
) |
|
|
(627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual discount rate on servicing cash flows |
|
|
13.1 |
% |
|
|
14.0 |
% |
|
|
18.0 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(8,805 |
) |
|
$ |
(202 |
) |
|
$ |
(119 |
) |
Impact on fair value of 20% adverse change |
|
|
(17,070 |
) |
|
|
(394 |
) |
|
|
(231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual cost to service (per loan) |
|
$ |
108 |
|
|
$ |
50 |
|
|
$ |
50 |
|
Impact on fair value of 10% adverse change |
|
|
(7,111 |
) |
|
|
(192 |
) |
|
|
(88 |
) |
Impact on fair value of 20% adverse change |
|
|
(14,187 |
) |
|
|
(384 |
) |
|
|
(176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual earnings on escrow |
|
|
2.6 |
% |
|
|
1.3 |
% |
|
|
1.3 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(5,383 |
) |
|
$ |
(62 |
) |
|
$ |
(72 |
) |
Impact on fair value of 20% adverse change |
|
|
(10,776 |
) |
|
|
(118 |
) |
|
|
(137 |
) |
|
34
Note 13 Loan Sales and Securitizations (continued)
The sensitivity of the fair value of all retained or purchased interests for MSR to immediate 10
percent and 20 percent adverse changes in assumptions on June 30, 2008, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands |
|
First |
|
Second |
|
|
except for annual cost to service) |
|
Liens |
|
Liens |
|
HELOC |
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of retained interests |
|
$ |
1,111,204 |
|
|
$ |
18,138 |
|
|
$ |
10,053 |
|
Weighted average life (in years) |
|
|
5.7 |
|
|
|
2.2 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual prepayment rate |
|
|
14.7 |
% |
|
|
34.7 |
% |
|
|
37.0 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(41,670 |
) |
|
$ |
(1,394 |
) |
|
$ |
(736 |
) |
Impact on fair value of 20% adverse change |
|
|
(80,057 |
) |
|
|
(2,649 |
) |
|
|
(1,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual discount rate on servicing cash flows |
|
|
10.7 |
% |
|
|
14.0 |
% |
|
|
18.0 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(33,659 |
) |
|
$ |
(451 |
) |
|
$ |
(280 |
) |
Impact on fair value of 20% adverse change |
|
|
(64,948 |
) |
|
|
(878 |
) |
|
|
(544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual cost to service (per loan) |
|
$ |
52 |
|
|
$ |
50 |
|
|
$ |
50 |
|
Impact on fair value of 10% adverse change |
|
|
(11,301 |
) |
|
|
(373 |
) |
|
|
(295 |
) |
Impact on fair value of 20% adverse change |
|
|
(22,603 |
) |
|
|
(745 |
) |
|
|
(590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual earnings on escrow |
|
|
3.8 |
% |
|
|
2.2 |
% |
|
|
2.1 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(23,285 |
) |
|
$ |
(326 |
) |
|
$ |
(184 |
) |
Impact on fair value of 20% adverse change |
|
|
(46,570 |
) |
|
|
(651 |
) |
|
|
(367 |
) |
|
The sensitivity of the fair value of retained interests for other residuals to immediate 10 percent
and 20 percent adverse changes in assumptions on June 30, 2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual |
|
Residual |
|
|
Excess |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
Interest |
(Dollars in thousands |
|
Interest |
|
Certificated |
|
|
|
|
|
Subordinated |
|
Certificates |
|
Certificates |
except for annual cost to service) |
|
IO |
|
PO |
|
IO |
|
Bonds |
|
2nd Liens |
|
HELOC |
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of retained interests |
|
$ |
116,375 |
|
|
$ |
11,415 |
|
|
$ |
296 |
|
|
$ |
2,380 |
|
|
$ |
2,881 |
|
|
$ |
3,367 |
|
Weighted average life (in years) |
|
|
4.3 |
|
|
|
4.8 |
|
|
|
7.9 |
|
|
|
1.9 |
|
|
|
2.7 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual prepayment rate |
|
|
18.5 |
% |
|
|
30.5 |
% |
|
|
10.2 |
% |
|
|
6.8 |
% |
|
|
26.3 |
% |
|
|
28.0 |
% |
Impact on fair value of 10%
adverse change |
|
$ |
(5,702 |
) |
|
$ |
(416 |
) |
|
$ |
(9 |
) |
|
$ |
(37 |
) |
|
$ |
(32 |
) |
|
$ |
(351 |
) |
Impact on fair value of 20%
adverse change |
|
|
(10,962 |
) |
|
|
(825 |
) |
|
|
(18 |
) |
|
|
(63 |
) |
|
|
(58 |
) |
|
|
(659 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual discount rate on residual
cash flows |
|
|
10.9 |
% |
|
|
27.7 |
% |
|
|
34.7 |
% |
|
|
69.5 |
% |
|
|
34.9 |
% |
|
|
32.9 |
% |
Impact on fair value of 10%
adverse change |
|
$ |
(4,975 |
) |
|
$ |
(622 |
) |
|
$ |
(23 |
) |
|
$ |
(118 |
) |
|
$ |
(125 |
) |
|
$ |
(372 |
) |
Impact on fair value of 20%
adverse change |
|
|
(9,521 |
) |
|
|
(1,245 |
) |
|
|
(39 |
) |
|
|
(213 |
) |
|
|
(236 |
) |
|
|
(688 |
) |
|
35
Note 13 Loan Sales and Securitizations (continued)
The sensitivity of the fair value of retained interests for other residuals to immediate 10 percent
and 20 percent adverse changes in assumptions on June 30, 2008, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual |
|
Residual |
|
|
Excess |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
Interest |
(Dollars in thousands |
|
Interest |
|
Certificated |
|
|
|
|
|
Subordinated |
|
Certificates |
|
Certificates |
except for annual cost to service) |
|
IO |
|
PO |
|
IO |
|
Bonds |
|
2nd Liens |
|
HELOC |
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of retained interests |
|
$ |
375,999 |
|
|
$ |
13,288 |
|
|
$ |
296 |
|
|
$ |
17,740 |
|
|
$ |
3,937 |
|
|
$ |
3,845 |
|
Weighted average life (in years) |
|
|
5.5 |
|
|
|
4.3 |
|
|
|
3.6 |
|
|
|
8.7 |
|
|
|
2.5 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual prepayment rate |
|
|
14.6 |
% |
|
|
34.1 |
% |
|
|
27.6 |
% |
|
|
83.4 |
% |
|
|
32.0 |
% |
|
|
28.0 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(17,751 |
) |
|
$ |
(612 |
) |
|
$ |
(23 |
) |
|
$ |
(548 |
) |
|
$ |
(41 |
) |
|
$ |
(385 |
) |
Impact on fair value of 20% adverse change |
|
|
(34,833 |
) |
|
|
(1,282 |
) |
|
|
(42 |
) |
|
|
(1,067 |
) |
|
|
(78 |
) |
|
|
(711 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual discount rate on residual cash flows |
|
|
12.1 |
% |
|
|
19.5 |
% |
|
|
12.5 |
% |
|
|
28.4 |
% |
|
|
35.0 |
% |
|
|
33.0 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(14,807 |
) |
|
$ |
(510 |
) |
|
$ |
(10 |
) |
|
$ |
(1,055 |
) |
|
$ |
(144 |
) |
|
$ |
(401 |
) |
Impact on fair value of 20% adverse change |
|
|
(28,487 |
) |
|
|
(979 |
) |
|
|
(18 |
) |
|
|
(1,945 |
) |
|
|
(274 |
) |
|
|
(742 |
) |
|
These sensitivities are hypothetical and should not be considered to be predictive of future
performance. As the figures indicate, changes in fair value based on a 10 percent variation in
assumptions generally cannot necessarily be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, in this table, the effect of a
variation in a particular assumption on the fair value of the retained interest is calculated
independently from any change in another assumption. In reality, changes in one factor may result
in changes in another, which might magnify or counteract the sensitivities. Furthermore, the
estimated fair values as disclosed should not be considered indicative of future earnings on these
assets.
FHN uses assumptions and estimates in determining the fair value allocated to retained interests at
the time of initial securitization. The key economic assumptions used to measure the fair value of
the MSR at the date of securitization or loan sale were as follows during the second quarter 2008.
Subsequent to the MetLife sale, FHN generally no longer retains interests related to loan sales or
securitizations. During the three and six months ended June 30, 2009, additions to MSR were
immaterial.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
|
|
|
Liens |
|
Liens |
|
HELOC |
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average life (in years) |
|
|
5.5-7.0 |
|
|
|
2.7-3.1 |
|
|
|
1.7-1.8 |
|
Annual prepayment rate |
|
|
12%-16 |
% |
|
|
26%-30 |
% |
|
|
43%-44 |
% |
Annual discount rate |
|
|
9.5%-11.7 |
% |
|
|
14.0 |
% |
|
|
18.0 |
% |
Annual cost to service (per loan) |
|
|
$52-$60 |
|
|
|
$50 |
|
|
|
$50 |
|
Annual earnings on escrow |
|
|
3.28%-3.78 |
% |
|
|
3.80%-5.32 |
% |
|
|
5.32 |
% |
|
36
Note 13 Loan Sales and Securitizations (continued)
The key economic assumptions used to measure the fair value of other retained interests at the date
of securitization were as follows during second quarter 2008. There were no securitizations in which FHN retained an interest
during the three or six months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess |
|
|
|
|
|
|
Interest |
|
Certificated |
|
Subordinated |
|
|
IO |
|
PO |
|
Bond |
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average life (in years) |
|
|
4.8-6.1 |
|
|
|
N/A |
|
|
|
N/A |
|
Annual prepayment rate |
|
|
10.2%-18.4 |
% |
|
|
N/A |
|
|
|
N/A |
|
Annual discount rate |
|
|
11.8% |
|
|
|
N/A |
|
|
|
N/A |
|
|
For the three and six months ended June 30, cash flows received and paid related to loan sales were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(Dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Proceeds from initial sales |
|
$ |
459,167 |
|
|
$ |
7,012,805 |
|
|
$ |
840,197 |
|
|
$ |
14,333,372 |
|
Servicing fees retained* |
|
|
16,444 |
|
|
|
46,071 |
|
|
|
36,340 |
|
|
|
102,782 |
|
Purchases of GNMA guaranteed mortgages |
|
|
1,759 |
|
|
|
39,794 |
|
|
|
1,759 |
|
|
|
61,229 |
|
Purchases of delinquent or foreclosed assets |
|
|
9,016 |
|
|
|
7,698 |
|
|
|
16,817 |
|
|
|
11,125 |
|
Other cash flows received on retained interests |
|
|
15,593 |
|
|
|
15,047 |
|
|
|
23,171 |
|
|
|
24,229 |
|
|
|
|
|
* |
|
Includes servicing fees on MSR associated with loan sales
and purchased MSR. |
Certain previously reported amounts have been reclassified to agree with
current presentation.
For the three and six months ended June 30, cash flows received and paid related to securitizations
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(Dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Proceeds from initial securitizations |
|
$ |
3,235 |
|
|
$ |
5,175 |
|
|
$ |
6,523 |
|
|
$ |
10,901 |
|
Servicing fees retained |
|
|
14,966 |
|
|
|
21,642 |
|
|
|
33,967 |
|
|
|
43,957 |
|
Purchases of delinquent or foreclosed assets |
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
3,042 |
|
Other cash flows received on retained interests |
|
|
19,976 |
|
|
|
5,340 |
|
|
|
30,613 |
|
|
|
11,047 |
|
|
Certain previously reported amounts have been reclassified to agree with current
presentation.
37
Note 13 Loan Sales and Securitizations (continued)
As of June 30, 2009, the principal amount of loans transferred through loan sales and
securitizations and other loans managed with them, and the principal amount of delinquent loans, in
addition to net credit losses during the three and six months ended June 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Principal |
|
|
Principal Amount |
|
|
Net Credit |
|
(Dollars in thousands) |
|
Amount of Loans |
|
|
of Delinquent Loans (a) |
|
|
Losses (b) (c) |
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
On June 30, 2009 |
|
|
June 30, 2009 |
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Type of loan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate residential |
|
$ |
33,411,390 |
|
|
$ |
1,119,181 |
|
|
$ |
246,470 |
|
|
$ |
375,392 |
|
|
|
|
|
|
|
Total loans managed or transferred (d) |
|
$ |
33,411,390 |
|
|
$ |
1,119,181 |
|
|
$ |
246,470 |
|
|
$ |
375,392 |
|
|
|
|
|
|
|
|
|
|
Loans sold (e) |
|
|
(25,239,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale (e) |
|
|
(385,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans held in portfolio |
|
$ |
7,785,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Loans 90 days or more past due include $.3 million of GNMA guaranteed
mortgages. $576.5 million of delinquent loans have been securitized while $189.4 million have been sold. |
|
(b) |
|
Principal amount of loans securitized and sold includes $20.4 billion of loans securitized
through GNMA, FNMA or FHLMC. FHN retains interests other than servicing rights on a portion
of these securitized loans. No delinquency or net credit loss data is included for the
loans
securitized through FNMA or FHMLC because these agencies retain credit risk. The
remainder of loans securitized and sold were securitized through proprietary trusts,
where FHN retained interests other than servicing rights. |
|
(c) |
|
For the three months ended June 30, 2009, $81.4 million associated with loan sales and $36.5 million associated with securitizations;
for the six months ended June 30, 2009, $138.0 million associated with loan sales and $55.1 million associated with securitizations. |
|
(d) |
|
Transferred loans are real estate residential loans in which FHN has a retained
interest other than servicing rights. |
|
(e) |
|
$21.2 billion associated with loan sales and $4.4 billion associated with
securitizations. |
38
Note 13 Loan Sales and Securitizations (continued)
As of June 30, 2008, the principal amount of loans transferred through loan sales and
securitizations and other loans managed with them, and the principal amount of delinquent loans, in
addition to net credit losses during the three and six months ended June 30, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Principal |
|
|
Principal Amount |
|
|
Net Credit |
|
(Dollars in thousands) |
|
Amount of Loans |
|
|
of Delinquent Loans (a) |
|
|
Losses (b) (c) |
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Six months ended |
|
|
|
On June 30, 2008 |
|
|
June 30, 2008 |
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of loan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate residential |
|
$ |
78,462,395 |
|
|
$ |
461,856 |
|
|
$ |
140,624 |
|
|
|
|
|
|
$ |
191,019 |
|
|
|
|
|
|
|
Total loans managed or transferred (d) |
|
$ |
78,462,395 |
|
|
$ |
461,856 |
|
|
$ |
140,624 |
|
|
|
|
|
|
$ |
191,019 |
|
|
|
|
|
|
|
|
|
|
Loans sold (e) |
|
|
(67,839,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale (e) |
|
|
(2,426,708 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held in portfolio |
|
$ |
8,196,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Loans 90 days or more past due include $.2 million of GNMA guaranteed
mortgages. $220.6 million of delinquent loans have been securitized while $104.7 million have been sold. |
|
(b) |
|
Principal amount of loans securitized and sold includes $62.7 billion of loans securitized
through GNMA, FNMA or FHLMC. FHN retains interests other than servicing rights on a portion
of these securitized loans. No delinquency or net credit loss data is included for the loans
securitized through FNMA or FHMLC because these agencies retain credit risk. The
remainder of loans securitized and sold were securitized through proprietary trusts,
where FHN retained interests other than servicing rights. |
|
(c) |
|
For the three months ended June 30, 2008, $76.8 million associated with loan sales and $6.1 million associated with securitizations;
for the six months ended June 30, 2008, $104.6 million associated with loan sales and $8.7 million associated with securitizations.
|
|
(d) |
|
Transferred loans are real estate residential loans in which FHN has a retained
interest other than servicing rights. |
|
(e) |
|
$65.2 billion associated with loan sales and $5.1 billion associated with securitizations. |
Secured Borrowings. In 2007 and 2006, FTBNA executed several securitizations of retail real estate
residential loans for the purpose of engaging in secondary market financing. Since the related
trusts did not qualify as QSPE and since the cash flows on the loans are pledged to the holders of
the trusts securities, FTBNA recognized the proceeds as secured borrowings in accordance with SFAS
No. 140. As of June 30, 2009, FTBNA had recognized $681.2 million of loans net of unearned income
and $674.6 million of other collateralized borrowings in its Consolidated Condensed Statement of
Condition related to these transactions. As of June 30, 2008, FTBNA had recognized $727.7 million
of loans net of unearned income and $713.4 million of other collateralized borrowings in its
Consolidated Condensed Statement of Condition related to these transactions. See Note 14
Variable Interest Entities for additional information.
39
Note 14 Variable Interest Entities
Under the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities
revised December 2003 (FIN 46-R), FHN is deemed to be the primary beneficiary and required to
consolidate a variable interest entity (VIE) if it has a variable interest that will absorb the
majority of the VIEs expected losses, receive the majority of expected residual returns, or both.
A VIE exists when equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its activities by
itself. A variable interest is a contractual, ownership, or other interest that changes with changes
in the fair value of the VIEs net assets or the VIEs cash flows. Expected losses and expected
residual returns are measures of variability in the expected fair value or cash flow of a VIE.
Consolidated Variable Interest Entities. In 2007 and 2006, FTBNA established several Delaware
statutory trusts (Trusts), for the purpose of engaging in secondary market financing. Except for
recourse due to breaches of standard representations and warranties made by FTBNA in connection
with the sale of the retail real estate residential loans by FTBNA to the Trusts, the creditors of
the Trusts hold no recourse to the assets of FTBNA. Additionally, FTBNA has no contractual
requirements to provide financial support to the Trusts. Since the Trusts did not qualify as QSPE,
FTBNA treated the proceeds as secured borrowings in accordance with SFAS No. 140. FTBNA determined
that the Trusts were VIEs because the holders of the equity investment at risk did not have
adequate decision making ability over the trusts activities. Thus, FTBNA assessed whether it was
the primary beneficiary of the associated trusts. Since there was an overcollateralization of the
Trusts, any excess of cash flows received on the transferred loans above the amounts passed through
to the security holders would revert to FTBNA. Accordingly, FTBNA determined that it was the
primary beneficiary of the Trusts because it absorbed a majority of the expected losses of the
Trusts.
FTBNA holds variable interests in trusts which have issued mandatorily redeemable preferred capital
securities (trust preferreds) for smaller banking and insurance enterprises. FTBNA has no voting
rights for the trusts activities. The trusts only assets are junior subordinated debentures of
the issuing enterprises. The creditors of the trusts hold no recourse to the assets of FTBNA.
These trusts meet the definition of a VIE because the holders of the equity investment at risk do
not have adequate decision making ability over the trusts activities. In situations where FTBNA
holds a majority of the trust preferreds issued by a trust, it is considered the primary
beneficiary of that trust because FTBNA will absorb a majority of the trusts expected losses.
FTBNA has no contractual requirements to provide financial support to the trusts. In situations
where FTBNA holds a majority, but less than all, of the trust preferreds for a trust, consolidation
of the trust results in recognition of amounts received from other parties as debt.
FHN has established certain rabbi trusts related to deferred compensation plans offered to its
employees. FHN contributes employee cash compensation deferrals to the trusts and directs the
underlying investments made by the trusts. The assets of these trusts are available to FHNs
creditors only in the event that FHN becomes insolvent. These trusts are considered VIEs because
either there is no equity at risk in the trusts or because FHN provided the equity interest to its
employees in exchange for services rendered. Given that the trusts were created in exchange for
the employees services, FHN is considered the primary beneficiary of the rabbi trusts because it
is most closely related to their purpose and design. FHN has the obligation to fund any
liabilities to employees that are in excess of a rabbi trusts assets.
The following table summarizes VIEs consolidated by FHN:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 |
|
|
|
|
|
|
Assets |
|
Liabilities |
(Dollars in thousands) |
|
Carrying |
|
|
|
Carrying |
|
|
Type |
|
Value |
|
Classification |
|
Value |
|
Classification |
|
On balance sheet consumer loan securitizations
|
|
$ |
681,239 |
|
|
Loans, net of unearned income
|
|
$ |
674,263 |
|
|
Other collateralized borrowings |
Small issuer trust preferred holdings
|
|
|
465,350 |
|
|
Loans, net of unearned income
|
|
|
30,500 |
|
|
Term borrowings |
Rabbi trusts used for deferred compensation plans
|
|
|
89,876 |
|
|
Other assets
|
|
|
57,720 |
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008 |
|
|
|
|
|
|
Assets |
|
Liabilities |
(Dollars in thousands) |
|
Carrying |
|
|
|
Carrying |
|
|
Type |
|
Value |
|
Classification |
|
Value |
|
Classification |
|
On balance sheet consumer loan securitizations
|
|
$ |
727,723 |
|
|
Loans, net of unearned income
|
|
$ |
713,364 |
|
|
Other collateralized borrowings |
Small issuer trust preferred holdings
|
|
|
465,350 |
|
|
Loans, net of unearned income
|
|
|
30,500 |
|
|
Term borrowings |
Rabbi trusts used for deferred compensation plans
|
|
|
149,409 |
|
|
Other assets
|
|
|
146,608 |
|
|
Other liabilities |
|
40
Note 14 Variable Interest Entities (continued)
Nonconsolidated Variable Interest Entities. Since 1997, First Tennessee Housing Corporation
(FTHC), a wholly-owned subsidiary, makes equity investments as a limited partner, in various
partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit
(LIHTC) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to
achieve a satisfactory return on capital and to support FHNs community reinvestment initiatives.
The activities of the limited partnerships include the identification, development, and operation
of multi-family housing that is leased to qualifying residential tenants generally within FHNs
primary geographic region. LIHTC partnerships are considered VIEs because FTHC, as the holder of
the equity investment at risk, does not have the ability to significantly affect the success of the
entity through voting rights. FTHC is not considered the primary beneficiary of the LIHTC
partnerships because an agent relationship exists between FTHC and the general partners, whereby
the general partners cannot sell, transfer or otherwise encumber their ownership interest without
the approval of FTHC. Because this results in a de facto agent relationship between the partners,
the general partners are considered the primary beneficiaries because their operations are most
closely associated with the LIHTC partnerships operations. FTHC has no contractual requirements
to provide financial support to the LIHTC partnerships beyond its initial funding commitments.
FTBNA holds variable interests in trusts which have issued mandatorily redeemable trust preferreds
for smaller banking and insurance enterprises. FTBNA has no voting rights for the trusts
activities. The trusts only assets are junior subordinated debentures of the issuing enterprises.
These trusts meet the definition of a VIE because the holders of the equity investment at risk do
not have adequate decision making ability over the trusts activities. In situations where FTBNA
did not hold a majority of the trust preferreds issued by a trust, it is not considered the primary
beneficiary of that trust because FTBNA does not absorb a majority of the expected losses of the
trust. FTBNA has no contractual requirements to provide financial support to the trusts.
In third quarter 2007, FTBNA executed a securitization of certain small issuer trust preferreds for
which the underlying trust did not qualify as a QSPE under SFAS No. 140. This trust was determined
to be a VIE because the holders of the equity investment at risk do not have adequate decision
making ability over the trusts activities. FTBNA determined that it was not the primary
beneficiary of the trust due to the size and priority of the interests it retained in the
securities issued by the trust. Accordingly, FTBNA has accounted for the funds received through
the securitization as a collateralized borrowing in its Consolidated Condensed Statement of
Condition. FTBNA has no contractual requirement to provide financial support to the trust.
In 1996 FHN issued junior subordinated debt to Capital I and Capital II totaling $309.0 million.
Both Capital I and Capital II are considered VIEs because FHNs capital contributions to these
trusts are not considered at risk in evaluating whether the equity investments at risk in the
trusts have adequate decision making ability over the trusts activities. Capital I and Capital II
are not consolidated by FHN because the holders of the securities issued by the trusts absorb a
majority of expected losses and residual returns.
Wholly-owned subsidiaries of FHN serve as investment advisor and administrator of certain fund of
funds investment vehicles, whereby the subsidiaries receive fees for management of the funds
operations and through revenue sharing agreements based on the funds performance. The funds are
considered VIEs because the holders of the equity at risk do not have voting rights or the ability
to control the funds operations. The subsidiaries have not made any investment in the funds.
Further, the subsidiaries are not obligated to provide any financial support to the funds. The
funds are not consolidated by FHN because its subsidiaries do not absorb a majority of expected
losses or residual returns.
41
Note 14 Variable Interest Entities (continued)
The following table summarizes VIEs that are not consolidated by FHN:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 |
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Maximum |
|
|
Liability |
|
|
|
|
Type |
|
Loss Exposure |
|
|
Recognized |
|
|
Classification |
|
|
Low Income Housing Partnerships (a) (b) |
|
$ |
120,768 |
|
|
$ |
|
|
|
Other assets |
Small Issuer Trust Preferred Holdings |
|
|
43,000 |
|
|
|
|
|
|
Loans, net of unearned income |
On Balance Sheet Trust Preferred Securitization |
|
|
64,760 |
|
|
|
49,414 |
|
|
|
(c) |
|
Proprietary Trust Preferred Issuances |
|
|
N/A |
|
|
|
309,000 |
|
|
Term borrowings |
Management of Fund of Funds |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
(a) |
|
Maximum loss exposure represents $115.0 million of current investments and $5.8 million of contractual funding commitments.
Only the current investment amount is included in Other Assets. |
|
(b) |
|
A liability is not recognized because investments are written down over the life of the related tax credit. |
|
(c) |
|
$112.5 million was classified as Loans, net of unearned income and $1.7 million was classified as Trading securities which are offset by
$49.4 million classified as Other collateralized borrowings. |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008 |
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Maximum |
|
|
Liability |
|
|
|
|
Type |
|
Loss Exposure |
|
|
Recognized |
|
|
Classification |
|
|
Low Income Housing Partnerships (a) (b) |
|
$ |
130,990 |
|
|
$ |
|
|
|
Other assets |
Small Issuer Trust Preferred Holdings |
|
|
43,000 |
|
|
|
|
|
|
Loans, net of unearned income |
On Balance Sheet Trust Preferred Securitization |
|
|
65,528 |
|
|
|
48,646 |
|
|
|
(c) |
|
Proprietary Trust Preferred Issuances |
|
|
N/A |
|
|
|
309,000 |
|
|
Term borrowings |
Management of Fund of Funds |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
(a) |
|
Maximum loss exposure represents $120.9 million of current investments and $10.1 million of contractual funding commitments.
Only the current investment amount is included in Other Assets. |
|
(b) |
|
A liability is not recognized because investments are written down over the life of the related tax credit. |
|
(c) |
|
$112.5 million was classified as Loans, net of unearned income and $1.7 million was classified as Trading securities which are offset by $48.6 million
classified as Other collateralized borrowings. |
42
Note 15 Derivatives
In the normal course of business, FHN utilizes various financial instruments, through its mortgage
banking, capital markets and risk management operations, which include derivative contracts and
credit-related arrangements, as part of its risk management strategy and as a means to meet
customers needs. These instruments are subject to credit and market risks in excess of the amount
recorded on the balance sheet in accordance with generally accepted accounting principles. The
contractual or notional amounts of these financial instruments do not necessarily represent credit
or market risk. However, they can be used to measure the extent of involvement in various types of
financial instruments. Controls and monitoring procedures for these instruments have been
established and are routinely reevaluated. The Asset/Liability Committee (ALCO) monitors the usage
and effectiveness of these financial instruments.
Credit risk represents the potential loss that may occur because a party to a transaction fails to
perform according to the terms of the contract. The measure of credit exposure is the replacement
cost of contracts with a positive fair value. FHN manages credit risk by entering into financial
instrument transactions through national exchanges, primary dealers or approved counterparties, and
using mutual margining agreements whenever possible to limit potential exposure. With
exchange-traded contracts, the credit risk is limited to the clearinghouse used. For non-exchange
traded instruments, credit risk may occur when there is a gain in the fair value of the financial
instrument and the counterparty fails to perform according to the terms of the contract and/or when
the collateral proves to be of insufficient value. Market risk represents the potential loss due
to the decrease in the value of a financial instrument caused primarily by changes in interest
rates, mortgage loan prepayment speeds or the prices of debt instruments. FHN manages market risk
by establishing and monitoring limits on the types and degree of risk that may be undertaken. FHN
continually measures this risk through the use of models that measure value-at-risk and
earnings-at-risk.
Derivative Instruments. FHN enters into various derivative contracts both in a dealer capacity, to
facilitate customer transactions, and also as a risk management tool. Where contracts have been
created for customers, FHN enters into transactions with dealers to offset its risk exposure.
Derivatives are also used as a risk management tool to hedge FHNs exposure to changes in interest
rates or other defined market risks.
Derivative instruments are recorded on the Consolidated Condensed Statements of Condition as other
assets or other liabilities measured at fair value. Fair value is defined as the price that would
be received to sell a derivative asset or paid to transfer a derivative liability in an orderly
transaction between market participants on the transaction date. Fair value is determined using
available market information and appropriate valuation methodologies. For a fair value hedge,
changes in the fair value of the derivative instrument and changes in the fair value of the hedged
asset or liability are recognized currently in earnings. For a cash flow hedge, changes in the
fair value of the derivative instrument, to the extent that it is effective, are recorded in
accumulated other comprehensive income and subsequently reclassified to earnings as the hedged
transaction impacts net income. Any ineffective portion of a cash flow hedge is recognized
currently in earnings. For freestanding derivative instruments, changes in fair value are
recognized currently in earnings. Cash flows from derivative contracts are reported as operating
activities on the Consolidated Condensed Statements of Cash Flows.
Interest rate forward contracts are over-the-counter contracts where two parties agree to purchase
and sell a specific quantity of a financial instrument at a specified price, with delivery or
settlement at a specified date. Futures contracts are exchange-traded contracts where two parties
agree to purchase and sell a specific quantity of a financial instrument at a specific price, with
delivery or settlement at a specified date. Interest rate option contracts give the purchaser the
right, but not the obligation, to buy or sell a specified quantity of a financial instrument, at a
specified price, during a specified period of time. Caps and floors are options that are linked to
a notional principal amount and an underlying indexed interest rate. Interest rate swaps involve
the exchange of interest payments at specified intervals between two parties without the exchange
of any underlying principal. Swaptions are options on interest rate swaps that give the purchaser
the right, but not the obligation, to enter into an interest rate swap agreement during a specified
period of time.
On June 30, 2009 and 2008 respectively, FHN had approximately $122.2 million and $25.2 million of
cash receivables and $74.3 million and $30.3 million of cash payables related to collateral posting
under master netting arrangements with derivative counterparties. Certain of FHNs agreements with
derivative counterparties contain provisions that require that FTBNAs debt maintain minimum credit
ratings from specified credit rating agencies. If FTBNAs debt were to fall below these minimums,
these provisions would be triggered, and the counterparties could terminate the agreements and
request immediate settlement of all derivative contracts under the agreements. The net fair value,
determined by individual counterparty, of all derivative instruments with credit-risk-related
contingent accelerated termination provisions were $18.8 million of liabilities on June 30, 2009.
As of June 30, 2009, FHN had posted collateral of $17.0 million in the normal course of business
related to these contracts.
43
Note 15 Derivatives (continued)
Additionally, certain of FHNs derivative agreements contain provisions whereby the collateral
posting thresholds under the agreements adjust based on the credit ratings of both counterparties.
If the credit rating of FHN and/or FTBNA is lowered, FHN would be required to post additional
collateral with the counterparties. The net fair value, determined by individual counterparty, of
all derivative instruments with adjustable collateral posting thresholds were $99.6 million of
assets and $99.3 million of liabilities on June 30, 2009. As of June 30, 2009, FHN had received
collateral of $79.2 million and posted collateral of $96.0 million in the normal course of business
related to these agreements.
Mortgage Banking
As a result of the MetLife transaction, mortgage banking origination activity was significantly
reduced in the period after third quarter 2008 as FHN focuses on origination within its regional
banking footprint. Accordingly, the following discussion of pipeline and warehouse related
derivatives is primarily applicable to reporting periods occurring through the third quarter 2008.
Mortgage banking interest rate lock commitments are short-term commitments to fund mortgage loan
applications in process (the pipeline) for a fixed term at a fixed price. During the term of an
interest rate lock commitment, FHN has the risk that interest rates will change from the rate
quoted to the borrower. FHN enters into forward sales contracts with respect to fixed rate loan
commitments and futures contracts with respect to adjustable rate loan commitments as economic
hedges designed to protect the value of the interest rate lock commitments from changes in value
due to changes in interest rates. Under SFAS No. 133, interest rate lock commitments qualify as
derivative financial instruments and as such do not qualify for hedge accounting treatment. As a
result, the interest rate lock commitments were recorded at fair value with changes in fair value
recorded in current earnings as gain or loss on the sale of loans in mortgage banking noninterest
income. Prior to the adoption of SAB No. 109 fair value excluded the value of associated servicing
rights. Additionally, on January 1, 2008, FHN adopted SFAS No. 157 which affected the valuation of
interest rate lock commitments previously measured under the guidance of EITF 02-03 by requiring
recognition of concessions upon entry into the lock. Changes in the fair value of the derivatives
that serve as economic hedges of interest rate lock commitments are also included in current
earnings as a component of gain or loss on the sale of loans in mortgage banking noninterest
income. Due to the reduction of mortgage banking origination operations after the MetLife
transaction, the fair value of interest rate lock commitments was immaterial as of June 30, 2009.
FHNs warehouse (mortgage loans held for sale) is subject to changes in fair value, due to
fluctuations in interest rates from the loan closing date through the date of sale of the loan into
the secondary market. Typically, the fair value of the warehouse declines in value when interest
rates increase and rises in value when interest rates decrease. To mitigate this risk, FHN enters
into forward sales contracts and futures contracts to provide an economic hedge against those
changes in fair value on a significant portion of the warehouse. These derivatives are recorded at
fair value with changes in fair value recorded in current earnings as a component of the gain or
loss on the sale of loans in mortgage banking noninterest income. Upon adoption of SFAS No. 159,
FHN elected to prospectively account for substantially all of its mortgage loan warehouse products
at fair value upon origination and correspondingly discontinued the application of SFAS No. 133
hedging relationships for all new originations.
In accordance with SFAS No. 156, FHN revalues MSR to current fair value each month. Changes in
fair value are included in servicing income in mortgage banking noninterest income. FHN also enters
into economic hedges of the MSR to minimize the effects of loss in value of MSR associated with
increased prepayment activity that generally results from declining interest rates. In a rising
interest rate environment, the value of the MSR generally will increase while the value of the
hedge instruments will decline. FHN enters into interest rate contracts (potentially including
swaps, swaptions, and mortgage forward sales contracts) to hedge against the effects of changes in
fair value of its MSR. Substantially all capitalized MSR are hedged for economic purposes.
FHN utilizes derivatives (potentially including swaps, swaptions, and mortgage forward sales
contracts) that change in value inversely to the movement of interest rates to protect the value of
its interest-only securities as an economic hedge. Changes in the fair value of these derivatives
are recognized currently in earnings in mortgage banking noninterest income as a component of
servicing income. Interest-only securities are included in trading securities with changes in fair
value recognized currently in earnings in mortgage banking noninterest income as a component of
servicing income.
44
Note 15 Derivatives (continued)
The following table summarizes FHNs derivatives associated with Mortgage Banking activities for
the three and six months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains/(Losses) |
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
Description |
|
Notional |
|
Assets |
|
Liabilities |
|
June 30, 2009 |
|
June 30, 2009 |
Pipeline and Warehouse Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forwards and Futures (c) (g) |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
229 |
|
|
$ |
510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Warehouse (d) (g) |
|
|
N/A |
|
|
$ |
281,514 |
|
|
|
N/A |
|
|
$ |
(10,106 |
) |
|
$ |
(8,329 |
)(a) |
Mortgage Pipeline (c) (g) |
|
|
N/A |
|
|
|
(b |
) |
|
|
(b |
) |
|
$ |
|
|
|
$ |
(233 |
)(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Interests Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forwards and Futures (c) (g) |
|
$ |
895,000 |
|
|
$ |
3,973 |
|
|
$ |
1,938 |
|
|
$ |
(26,333 |
) |
|
$ |
(3,824 |
) |
Interest Rate Swaps and Swaption
(c) (g) |
|
$ |
2,530,000 |
|
|
$ |
1,474 |
|
|
$ |
14,285 |
|
|
$ |
(32,559 |
) |
|
$ |
(13,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Servicing Rights (e) (g) |
|
|
N/A |
|
|
$ |
318,875 |
|
|
|
N/A |
|
|
$ |
44,232 |
|
|
$ |
71,510 |
|
Other Retained Interests (f) (g) |
|
|
N/A |
|
|
$ |
133,348 |
|
|
|
N/A |
|
|
$ |
20,814 |
|
|
$ |
36,270 |
|
|
|
|
|
(a) |
|
Economic hedging is attempted for only a small portion of warehouse loans and pipeline. |
|
(b) |
|
Due to the reduction of mortgage banking origination operations after the MetLife transaction, the fair value of interest rate lock commitments was immaterial as of June 30, 2009. |
|
(c) |
|
Assets included in the other assets section of the Consolidated Condensed Statements of Condition. Liabilities included in the other liabilities section of the Consolidated Condensed
Statements of Condition. |
|
(d) |
|
Assets included in the loans held for sale section of the Consolidated Condensed Statements of Condition. There are no associated liabilities. |
|
(e) |
|
Assets included in the mortgage servicing rights section of the Consolidated Condensed Statements of Condition. There are no associated liabilities. |
|
(f) |
|
Assets included in the trading securities section of the Consolidated Condensed Statements of Condition. There are no associated liabilities. |
|
(g) |
|
Gains/Losses included in the mortgage banking income section of the Consolidated Condensed Statements of Income. |
Capital Markets
Capital Markets trades U.S. Treasury, U.S. Agency, mortgage-backed, corporate and municipal fixed
income securities, and other securities principally for distribution to customers. When these
securities settle on a delayed basis, they are considered forward contracts. Capital Markets also
enters into interest rate contracts, including options, caps, swaps and floors for its customers.
In addition, Capital Markets enters into futures contracts to economically hedge interest rate risk
associated with a portion of its securities inventory. These transactions are measured at fair
value, with changes in fair value recognized currently in capital markets noninterest income.
Related assets and liabilities are recorded on the balance sheet as other assets and other
liabilities. Credit risk related to these transactions is controlled through credit approvals,
risk control limits and ongoing monitoring procedures through the Credit Risk Management Committee.
Total trading revenues related to fixed income sales, which constitutes substantially all of FHNs
trading activities, were $170.1 million and $367.1 million for the three and six months ended June
30, 2009, inclusive of both derivative and non-derivative financial instruments. Trading revenues
are included in capital markets noninterest income.
Near the end of second quarter 2009, Capital Markets acquired a pool of conforming mortgage loans
with the intent to transfer the loans to a counterparty shortly after June 30, 2009. As part of
this transaction, Capital Markets entered into forward delivery contracts to economically hedge
the value of the loans. Accordingly, FHN elected to recognize the loans at fair value and
classified them as trading loans within
trading securities in the Consolidated Condensed Statements of Condition as of June 30, 2009.
Delivery of the loans and the related settlement of the forward delivery contracts occurred in July
2009.
45
Note 15 Derivatives (continued)
The following table summarizes FHNs derivatives associated with Capital Markets trading activities
as of June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Description |
|
Notional |
|
Assets |
|
Liabilities |
Customer Interest Rate Contracts (a) |
|
$ |
1,624,790 |
|
|
$ |
42,226 |
|
|
$ |
19,882 |
|
Offsetting Upstream Interest Rate Contracts (a) |
|
$ |
1,624,790 |
|
|
$ |
19,887 |
|
|
$ |
42,236 |
|
Forwards and Futures Purchased (a) |
|
$ |
6,411,343 |
|
|
$ |
21,603 |
|
|
$ |
21,628 |
|
Forwards and Futures Sold (a) |
|
$ |
6,333,544 |
|
|
$ |
24,707 |
|
|
$ |
23,101 |
|
|
|
|
|
(a) |
|
Assets included in the other assets section of the Consolidated Condensed Statements of Condition. Liabilities included in the other liabilities section of the Consolidated Condensed
Statements of Condition. |
Capital Markets hedged held-to-maturity trust preferred loans with a principal balance of $244.6
million as of June 30, 2009 and 2008, respectively, which have an initial fixed rate term of five
years before conversion to a floating rate. Capital Markets has entered into pay fixed, receive
floating interest rate swaps to hedge the interest rate risk associated with this initial five year
term. These hedge relationships qualify as fair value hedges under SFAS No. 133. The balance
sheet impact of those swaps was $20.3 million and $6.8 million in other liabilities on June 30,
2009 and 2008, respectively. Interest paid or received for these swaps was recognized as an
adjustment of the interest income of the assets whose risk is being hedged. The following table
summarizes FHNs derivative activities associated with these loans for the three and six months
ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains/(Losses) |
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
Description |
|
Notional |
|
Assets |
|
Liabilities |
|
June 30, 2009 |
|
June 30, 2009 |
Loan Portfolio Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps (c) (e) |
|
$ |
244,583 |
|
|
|
N/A |
|
|
$ |
20,310 |
|
|
$ |
6,608 |
|
|
$ |
7,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust Preferred Loans (d) (e) |
|
|
N/A |
|
|
$ |
244,583 |
(a) |
|
|
N/A |
|
|
$ |
(6,601 |
) |
|
$ |
(7,363 |
) (b) |
|
|
|
|
(a) |
|
Represents principal balance being hedged. |
|
(b) |
|
Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in SFAS No. 133 hedging relationships. |
|
(c) |
|
There are no associated assets. Liabilities included in the other liabilities section of the Consolidated Condensed Statements of Condition. |
|
(d) |
|
Assets included in loans, net of unearned section of the Consolidated Condensed Statements of Condition. There are no associated liabilities. |
|
(e) |
|
Gains/Losses included in the all other income and commissions section of the Consolidated Condensed Statements of Income. |
Interest Rate Risk Management
FHNs ALCO focuses on managing market risk by controlling and limiting earnings volatility
attributable to changes in interest rates. Interest rate risk exists to the extent that
interest-earning assets and liabilities have different maturity or repricing characteristics. FHN
uses derivatives, including swaps, caps, options, and collars, that are designed to moderate the
impact on earnings as interest rates change.
FHNs interest rate risk management policy is to use derivatives not to speculate but to hedge
interest rate risk or market value of assets or liabilities. In addition, FHN has entered into
certain interest rate swaps and caps as a part of a product offering to commercial customers with
customer derivatives paired with offsetting market instruments that, when completed, are designed
to eliminate market risk. These contracts do not qualify for hedge accounting and are measured at
fair value with gains or losses included in current earnings in noninterest income.
FHN has entered into pay floating, receive fixed interest rate swaps to hedge the interest rate
risk of certain long-term debt obligations, totaling $1.1 billion and $1.2 billion on June 30, 2009
and 2008, respectively. These swaps have been accounted for as fair value hedges under the
shortcut method. The balance sheet impact of these swaps was $92.4 million and $29.1 million in
other assets on June 30, 2009 and 2008, respectively. Interest paid or received for these swaps
was recognized as an adjustment of the interest expense of the liabilities whose risk is being
managed.
46
Note 15 Derivatives (continued)
FHN designates derivative transactions in hedging strategies to manage interest rate risk on
subordinated debt related to its trust preferred securities. These qualify for hedge accounting
under SFAS No. 133 using the long haul method. FHN entered into pay floating, receive fixed
interest rate swaps to hedge the interest rate risk of certain subordinated debt totaling $.2
billion on June 30, 2009 and $.3 billion on June 30, 2008. The balance sheet impact of these swaps
was $4.6 million and $14.3 million in other liabilities on June 30, 2009 and 2008, respectively.
There was no ineffectiveness related to these hedges. Interest paid or received for these swaps was
recognized as an adjustment of the interest expense of the liabilities whose risk is being managed.
In first quarter 2009, FHNs counterparty called the swap associated with $.1 billion of
subordinated debt. Accordingly, hedge accounting was discontinued on the date of settlement and
the cumulative basis adjustments to the associated subordinated debt are being prospectively
amortized as an adjustment to yield over its remaining term.
The following table summarizes FHNs derivatives associated with interest rate risk management
activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains/(Losses) |
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
Description |
|
Notional |
|
Assets |
|
Liabilities |
|
June 30, 2009 |
|
June 30, 2009 |
Customer Interest Rate Contracts Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging Instruments and Hedged Items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Interest Rate Contracts (c) (e) |
|
$ |
1,129,671 |
|
|
$ |
77,962 |
|
|
$ |
1,052 |
|
|
$ |
190,392 |
|
|
$ |
196,297 |
|
Offsetting Upstream Interest Rate
Contracts (c) (e) |
|
$ |
1,129,671 |
|
|
$ |
1,052 |
|
|
$ |
77,962 |
|
|
$ |
(190,392 |
) |
|
$ |
(196,297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps (c) (e) |
|
$ |
1,200,000 |
|
|
$ |
92,420 |
|
|
$ |
4,625 |
|
|
$ |
(47,559 |
) |
|
$ |
(58,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt (d) (e) |
|
|
N/A |
|
|
|
N/A |
|
|
$ |
1,200,000 |
(a) |
|
$ |
47,559 |
(a) |
|
$ |
58,166 |
(b) |
|
|
|
|
(a) |
|
Represents par value of long term debt being hedged. |
|
(b) |
|
Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in SFAS No. 133 hedging relationships. |
|
(c) |
|
Assets included in the other assets section of the Consolidated Condensed Statements of Condition. Liabilities included in the other liabilities section of the Consolidated Condensed
Statements of Condition. |
|
(d) |
|
Liabilities included in the long-term debt section of the Consolidated Condensed Statements of Condition. There are no associated assets. |
|
(e) |
|
Gains/Losses included in the all other income and commissions section of the Consolidated Condensed Statements of Income. |
47
Note 16 Fair Value of Assets & Liabilities
Effective January 1, 2008, upon adoption of SFAS No. 159, FHN elected the fair value option on a
prospective basis for almost all types of mortgage loans originated for sale purposes. FHN
determined that the election reduced certain timing differences and better matched changes in the
value of such loans with changes in the value of derivatives used as economic hedges for these
assets. No transition adjustment was required upon adoption of SFAS No. 159 as FHN continued to
account for mortgage loans held for sale which were originated prior to 2008 at the lower of cost
or market value. Mortgage loans originated for sale are included in loans held for sale on the
Consolidated Condensed Statements of Condition. Other interests retained in relation to
residential loan sales and securitizations are included in trading securities on the Consolidated
Condensed Statements of Condition. Additionally, effective January 1, 2008, FHN adopted SFAS No.
157 for existing fair value measurement requirements related to financial assets and liabilities as
well as to non-financial assets and liabilities which are re-measured at least annually. Effective
January 1, 2009, FHN adopted the provisions of SFAS No. 157 for existing fair value measurement
requirements related to non-financial assets and liabilities which are recognized at fair value on
a non-recurring basis.
In accordance with SFAS No. 157, FHN groups its assets and liabilities measured at fair value in
three levels, based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value. This hierarchy requires FHN to
maximize the use of observable market data, when available, and to minimize the use of unobservable
inputs when determining fair value. Each fair value measurement is placed into the proper level
based on the lowest level of significant input. These levels are:
|
|
|
Level 1 Valuation is based upon quoted prices for identical instruments traded in
active markets. |
|
|
|
|
Level 2 Valuation is based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are not active,
and model-based valuation techniques for which all significant assumptions are observable
in the market. |
|
|
|
|
Level 3 Valuation is generated from model-based techniques that use significant
assumptions not observable in the market. These unobservable assumptions reflect our own
estimates of assumptions that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing models, discounted cash flow
models, and similar techniques. |
For applicable periods, all divestiture-related line items in the Consolidated Condensed Statements
of Condition have been combined with the related non-divestiture line items in preparation of the
disclosure tables in this footnote. The table below presents the balances of assets and
liabilities measured at fair value on a recurring basis as of June 30, 2009. Derivatives in an
asset position are included within Other Assets while derivatives in a liability position are
included within Other Liabilities. Derivative positions constitute the only recurring Level 3
measurements within Other Assets and Other Liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
(Dollars in thousands) |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Trading securities Capital Markets |
|
$ |
980,497 |
|
|
$ |
834 |
|
|
$ |
979,461 |
|
|
$ |
202 |
|
Trading securities Mortgage Banking |
|
|
136,715 |
|
|
|
|
|
|
|
11,415 |
|
|
|
125,300 |
|
Loans held for sale |
|
|
281,493 |
|
|
|
|
|
|
|
57,121 |
|
|
|
224,372 |
|
Securities available for sale |
|
|
2,627,012 |
|
|
|
42,221 |
|
|
|
2,461,362 |
|
|
|
123,429 |
|
Mortgage servicing rights |
|
|
337,096 |
|
|
|
|
|
|
|
|
|
|
|
337,096 |
|
Other assets |
|
|
312,901 |
|
|
|
31,569 |
|
|
|
281,332 |
|
|
|
|
|
|
Total |
|
$ |
4,675,714 |
|
|
$ |
74,624 |
|
|
$ |
3,790,691 |
|
|
$ |
810,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities Capital Markets |
|
$ |
286,282 |
|
|
$ |
|
|
|
$ |
286,282 |
|
|
$ |
|
|
Other short-term borrowings and
commercial paper |
|
|
39,720 |
|
|
|
|
|
|
|
|
|
|
|
39,720 |
|
Other liabilities |
|
|
227,031 |
|
|
|
1,938 |
|
|
|
225,093 |
|
|
|
|
|
|
Total |
|
$ |
553,033 |
|
|
$ |
1,938 |
|
|
$ |
511,375 |
|
|
$ |
39,720 |
|
|
48
Note 16 Fair Value of Assets & Liabilities (continued)
In accordance with FSP FAS 157-4, effective January 1, 2009 FHN revised the definition of its
major categories of equity and debt securities to be consistent with the major security types as
described in SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
The following table provides a detail of Capital Markets trading securities and trading liabilities
as well as securities available for sale that are measured at fair value on a recurring basis as of
June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
(Dollars in thousands) |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Trading securities Capital Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
|
$ |
71,361 |
|
|
$ |
|
|
|
$ |
71,361 |
|
|
$ |
|
|
Government agency issued MBS |
|
|
340,465 |
|
|
|
|
|
|
|
340,465 |
|
|
|
|
|
Government agency issued CMO |
|
|
53,682 |
|
|
|
|
|
|
|
53,682 |
|
|
|
|
|
Other U.S. government agencies |
|
|
170,794 |
|
|
|
|
|
|
|
170,794 |
|
|
|
|
|
States and municipalities |
|
|
15,917 |
|
|
|
|
|
|
|
15,917 |
|
|
|
|
|
Trading Loans |
|
|
130,426 |
|
|
|
|
|
|
|
130,426 |
|
|
|
|
|
Corporate and other debt |
|
|
194,309 |
|
|
|
|
|
|
|
194,119 |
|
|
|
190 |
(a) |
Equity, mutual funds and other |
|
|
3,543 |
|
|
|
834 |
|
|
|
2,697 |
|
|
|
12 |
|
|
Total |
|
$ |
980,497 |
|
|
$ |
834 |
|
|
$ |
979,461 |
|
|
$ |
202 |
|
|
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
|
$ |
48,406 |
|
|
$ |
|
|
|
$ |
48,406 |
|
|
$ |
|
|
Government agency issued MBS |
|
|
1,117,547 |
|
|
|
|
|
|
|
1,117,547 |
|
|
|
|
|
Government agency issued CMO |
|
|
1,169,431 |
|
|
|
|
|
|
|
1,169,431 |
|
|
|
|
|
Other U.S. government agencies |
|
|
125,218 |
|
|
|
|
|
|
|
22,105 |
|
|
|
103,113 |
|
States and municipalities |
|
|
46,245 |
|
|
|
|
|
|
|
44,700 |
|
|
|
1,545 |
|
Corporate and other debt |
|
|
2,189 |
|
|
|
824 |
|
|
|
|
|
|
|
1,365 |
|
Equity, mutual funds and other |
|
|
117,976 |
|
|
|
41,397 |
|
|
|
59,173 |
|
|
|
17,406 |
|
|
Total |
|
$ |
2,627,012 |
|
|
$ |
42,221 |
|
|
$ |
2,461,362 |
|
|
$ |
123,429 |
|
|
Trading liabilities Capital Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
|
$ |
160,465 |
|
|
$ |
|
|
|
$ |
160,465 |
|
|
$ |
|
|
Government agency issued MBS |
|
|
2,707 |
|
|
|
|
|
|
|
2,707 |
|
|
|
|
|
Other U.S. government agencies |
|
|
463 |
|
|
|
|
|
|
|
463 |
|
|
|
|
|
Corporate and other debt |
|
|
122,646 |
|
|
|
|
|
|
|
122,646 |
|
|
|
|
|
Equity, mutual funds and other |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
Total |
|
$ |
286,282 |
|
|
$ |
|
|
|
$ |
286,282 |
|
|
$ |
|
|
|
|
|
|
(a) |
|
Represents collateralized debt obligations |
49
Note 16 Fair Value of Assets & Liabilities (continued)
The table below presents the balances of assets and liabilities measured at fair value on a
recurring basis as of June 30, 2008. Derivatives in an asset position are included within Other
Assets while derivatives in a liability position are included within Other Liabilities. Derivative
positions constitute the only recurring Level 3 measurements within Other Assets and Other
Liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
(Dollars in thousands) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Trading securities |
|
$ |
1,563,055 |
|
|
$ |
2,929 |
|
|
$ |
1,131,109 |
|
|
$ |
429,017 |
|
Loans held for sale |
|
|
2,163,705 |
|
|
|
|
|
|
|
2,159,993 |
|
|
|
3,712 |
|
Securities available for sale |
|
|
2,756,820 |
|
|
|
32,086 |
|
|
|
2,577,863 |
|
|
|
146,871 |
|
Mortgage servicing rights |
|
|
1,139,395 |
|
|
|
|
|
|
|
|
|
|
|
1,139,395 |
|
Other assets |
|
|
306,985 |
|
|
|
108,787 |
|
|
|
97,363 |
|
|
|
100,835 |
|
|
Total |
|
$ |
7,929,960 |
|
|
$ |
143,802 |
|
|
$ |
5,966,328 |
|
|
$ |
1,819,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities |
|
$ |
464,225 |
|
|
$ |
31 |
|
|
$ |
464,194 |
|
|
$ |
|
|
Commercial paper and other
short-term borrowings |
|
|
205,412 |
|
|
|
|
|
|
|
|
|
|
|
205,412 |
|
Other liabilities |
|
|
105,950 |
|
|
|
9,860 |
|
|
|
90,775 |
|
|
|
5,315 |
|
|
Total |
|
$ |
775,587 |
|
|
$ |
9,891 |
|
|
$ |
554,969 |
|
|
$ |
210,727 |
|
|
In conjunction with the adoption of FSP FAS 157-4, FHN revised its methodology for determining the
fair value of certain loans within its mortgage warehouse. FHN now determines the fair value of
the applicable loans using a discounted cash flow model using observable inputs, including current
mortgage rates for similar products, with adjustments for differences in loan characteristics
reflected in the models discount rates. Upon implementation, this change in methodology had a
minimal effect on the valuation of the applicable loans. Previously, the fair values of these
loans was determined through reference to recent security trade prices for similar products,
published third party bids or observable whole loan sale prices with adjustments for differences in
loan characteristics. Consistent with the change in methodology, the applicable amounts are
presented as a transfer into Level 3 loans held for sale in the following rollforward for the three
and six month periods ended June 30, 2009 and June 30, 2008. The changes in Level 3 assets and
liabilities measured at fair value on a recurring basis are summarized as follows:
50
Note 16 Fair Value of Assets & Liabilities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
Mortgage |
|
Net derivative |
|
Other short-term |
|
|
Trading |
|
Loans held |
|
Investment |
|
Venture |
|
servicing |
|
assets and |
|
borrowings and |
(Dollars in thousands) |
|
securities (a) |
|
for sale |
|
portfolio |
|
Capital |
|
rights |
|
liabilities |
|
commercial paper |
|
Balance, beginning of quarter |
|
$ |
154,320 |
|
|
$ |
240,700 |
|
|
$ |
111,999 |
|
|
$ |
25,335 |
|
|
$ |
381,024 |
|
|
$ |
|
|
|
$ |
143,377 |
|
Total net gains/(losses)
for the quarter included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) |
|
|
27,042 |
|
|
|
(10,105 |
) |
|
|
|
|
|
|
(1,591 |
) |
|
|
55,043 |
|
|
|
|
|
|
|
10,124 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
(1,792 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, sales, issuances
and settlements, net |
|
|
(55,861 |
) |
|
|
(6,223 |
) |
|
|
(5,549 |
) |
|
|
(4,973 |
) |
|
|
(98,971 |
) |
|
|
|
|
|
|
(113,781 |
) |
Net transfers into/out of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of quarter |
|
$ |
125,502 |
|
|
$ |
224,372 |
|
|
$ |
104,658 |
|
|
$ |
18,771 |
|
|
$ |
337,096 |
|
|
$ |
|
|
|
$ |
39,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains/(losses)
included in net income for
the quarter relating to assets
and liabilities held at June 30, 2009 |
|
$ |
16,012 |
(b) |
|
$ |
(10,106) |
(c) |
|
$ |
|
|
|
$ |
(1,591) |
(d) |
|
$ |
52,418 |
(e) |
|
$ |
|
|
|
$ |
10,124 |
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Securities |
|
Mortgage |
|
Net derivative |
|
Commercial paper |
|
|
Trading |
|
Loans held |
|
available |
|
servicing |
|
assets and |
|
and other short- |
(Dollars in thousands) |
|
securities |
|
for sale |
|
for sale |
|
rights, net |
|
liabilities |
|
term borrowings |
|
Balance, beginning of quarter |
|
$ |
392,196 |
|
|
$ |
4,753 |
|
|
$ |
153,376 |
|
|
$ |
895,923 |
|
|
$ |
465,067 |
|
|
$ |
|
|
Total net gains/(losses)
for the quarter included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
79,261 |
|
|
|
(171 |
) |
|
|
(236 |
) |
|
|
254,066 |
|
|
|
(307,054 |
) |
|
|
16,685 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, sales, issuances
and settlements, net |
|
|
(42,440 |
) |
|
|
(849 |
) |
|
|
(2,933 |
) |
|
|
(10,594 |
) |
|
|
(70,069 |
) |
|
|
188,727 |
|
Net transfers into/out of Level 3 |
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
7,576 |
|
|
|
|
|
|
Balance, end of quarter |
|
$ |
429,017 |
|
|
$ |
3,712 |
|
|
$ |
146,871 |
|
|
$ |
1,139,395 |
|
|
$ |
95,520 |
|
|
$ |
205,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains/(losses)
included in net income for
the quarter relating to assets
and liabilities held at June 30, 2008 |
|
$ |
56,696 |
(f) |
|
$ |
(1,795) |
(c) |
|
$ |
69 |
(d) |
|
$ |
216,442 |
(g) |
|
$ |
(232,560) |
(c) |
|
$ |
(16,685) |
(c) |
|
|
|
|
|
Certain previously reported amounts have been reclassified to agree with current presentation. |
|
(a) |
|
Primarily represents Mortgage Banking trading securities. Capital Markets Level 3 trading securities are not significant. |
|
(b) |
|
Includes $(.1) million included in Capital Markets noninterest income, $17.8 million included in Mortgage Banking noninterest income, and $(1.7) million included in Revenue
from loan sales and securitizations. |
|
(c) |
|
Included in Mortgage Banking noninterest income. |
|
(d) |
|
Represents recognized gains and losses attributable to venture capital investments classified within securities available for sale that are included in Securities gains/(losses)
in noninterest income. |
|
(e) |
|
Includes $56.7 million included in Mortgage Banking noninterest income and $(4.2) million included in Revenue from loan sales and securitizations. |
|
(f) |
|
Includes $2.1 million included in Capital markets noninterest income, $68.1 million included in Mortgage banking noninterest income, and $9.3 million in Revenue from
loan sales and securitizations. |
|
(g) |
|
Includes $218.3 million in Mortgage banking noninterest income and $(1.9) million included in Revenue from loan sales and securitizations. |
51
Note 16 Fair Value of Assets & Liabilities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
Mortgage |
|
Net derivative |
|
Other short-term |
|
|
Trading |
|
Loans held |
|
Investment |
|
Venture |
|
servicing |
|
assets and |
|
borrowings and |
(Dollars in thousands) |
|
securities (a) |
|
for sale |
|
portfolio |
|
Capital |
|
rights |
|
liabilities |
|
commercial paper |
|
Balance, beginning of year |
|
$ |
153,542 |
|
|
$ |
11,330 |
|
|
$ |
111,840 |
|
|
$ |
25,307 |
|
|
$ |
376,844 |
|
|
$ |
233 |
|
|
$ |
27,957 |
|
Total net gains/(losses)
for the quarter included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) |
|
|
46,101 |
|
|
|
(8,328 |
) |
|
|
|
|
|
|
(1,593 |
) |
|
|
29,826 |
|
|
|
|
|
|
|
8,462 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
1,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, sales, issuances
and settlements, net |
|
|
(74,142 |
) |
|
|
(20,176 |
) |
|
|
(8,637 |
) |
|
|
(4,943 |
) |
|
|
(69,574 |
) |
|
|
(233 |
) |
|
|
3,301 |
|
Net transfers into/out of Level 3 |
|
|
|
|
|
|
241,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
125,502 |
|
|
$ |
224,372 |
|
|
$ |
104,658 |
|
|
$ |
18,771 |
|
|
$ |
337,096 |
|
|
$ |
|
|
|
$ |
39,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains/(losses) for the six months
ended June 30, 2009 included in net income
relating to assets and liabilities at
June 30, 2009 |
|
$ |
30,522 |
(b) |
|
$ |
(8,329 |
)(c) |
|
$ |
|
|
|
$ |
(3,596 |
)(d) |
|
$ |
27,252 |
(e) |
|
$ |
|
|
|
$ |
8,462 |
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Securities |
|
Mortgage |
|
Net derivative |
|
Commercial paper |
|
|
Trading |
|
Loans held |
|
available |
|
servicing |
|
assets and |
|
and other short- |
(Dollars in thousands) |
|
securities |
|
for sale |
|
for sale |
|
rights, net |
|
liabilities |
|
term borrowings |
|
Balance, beginning of year |
|
$ |
476,404 |
|
|
$ |
|
|
|
$ |
159,301 |
|
|
$ |
1,159,820 |
|
|
$ |
81,517 |
|
|
$ |
|
|
Total net gains/(losses)
for the period included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
20,077 |
|
|
|
(171 |
) |
|
|
69 |
|
|
|
(8,099 |
) |
|
|
54,267 |
|
|
|
16,685 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
(7,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, sales, issuances
and settlements, net |
|
|
(89,403 |
) |
|
|
(849 |
) |
|
|
(5,321 |
) |
|
|
(12,326 |
) |
|
|
(47,840 |
) |
|
|
188,727 |
|
Net transfers into/out of Level 3 |
|
|
21,939 |
|
|
|
4,732 |
|
|
|
|
|
|
|
|
|
|
|
7,576 |
|
|
|
|
|
|
Balance, end of period |
|
$ |
429,017 |
|
|
$ |
3,712 |
|
|
$ |
146,871 |
|
|
$ |
1,139,395 |
|
|
$ |
95,520 |
|
|
$ |
205,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains/(losses) for the six months
ended June 30, 2008 included in net income
relating to assets and liabilities at
June 30, 2008 |
|
$ |
(23,184) |
(f) |
|
$ |
(2,641) |
(c) |
|
$ |
69 |
(d) |
|
$ |
26,567 |
(g) |
|
$ |
53,062 |
(c) |
|
$ |
(16,685) |
(c) |
|
|
|
|
Certain previously reported amounts have been reclassified to agree with current presentation. |
|
(a) |
|
Primarily represents Mortgage Banking trading securities. Capital Markets Level 3 trading securities are not significant. |
|
(b) |
|
Includes $(2.0) million included in Capital Markets noninterest income, $26.5 million included in Mortgage Banking noninterest income, and $(2.0) million included in revenue
from loan sales and securitizations. |
|
(c) |
|
Included in Mortgage Banking noninterest income. |
|
(d) |
|
Represents recognized gains and losses attributable to venture capital investments classified within securities available for sale that are included in Securities gains/(losses)
in noninterest income. |
|
(e) |
|
Includes $34.3 million included in Mortgage Banking noninterest income and $(6.9) million included in Revenue from loan sales and securitizations. |
|
(f) |
|
Includes $2.7 million included in Capital markets noninterest income, $11.8 million included in Mortgage banking noninterest
income, and $9.3 million included in Revenue from loan sales and securitizations. |
|
(g) |
|
Includes $28.5 million included in Mortgage banking noninterest income and $(1.9) million included in Revenue from loan
sales and securitizations. |
Additionally, FHN may be required, from time to time, to measure certain other financial assets at
fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually
result from the application of lower of cost or market accounting or write-downs of individual
assets. For assets measured at fair value on a nonrecurring basis in the first half of 2009 and
2008 which were still held on the balance sheet at June 30, 2009 and 2008, respectively, the
following tables provide the level of valuation assumptions used to determine each adjustment and
the carrying value of the related individual assets or portfolios at June 30, 2009 and 2008,
respectively.
52
Note 16 Fair Value of Assets & Liabilities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
Carrying value at June 30, 2009 |
|
June 30, 2009 |
|
June 30, 2009 |
(Dollars in thousands) |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total losses/(gains) |
|
Total losses(gains) |
|
|
|
Loans held for sale |
|
$ |
71,020 |
|
|
$ |
|
|
|
$ |
39,735 |
|
|
$ |
31,285 |
|
|
$ |
(1,620 |
) |
|
$ |
(1,459 |
) |
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
516 |
|
|
|
516 |
(c) |
Loans, net of unearned income (a) |
|
|
502,249 |
|
|
|
|
|
|
|
|
|
|
|
502,249 |
|
|
|
81,251 |
|
|
|
154,823 |
|
Real estate acquired by
foreclosure (b) |
|
|
116,584 |
|
|
|
|
|
|
|
|
|
|
|
116,584 |
|
|
|
20,483 |
|
|
|
30,516 |
|
Other assets |
|
|
114,988 |
|
|
|
|
|
|
|
|
|
|
|
114,988 |
|
|
|
1,892 |
|
|
|
4,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
102,521 |
|
|
$ |
188,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
Carrying value at June 30, 2008 |
|
June 30, 2008 |
|
June 30, 2008 |
(Dollars in thousands) |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total losses/(gains) |
|
Total losses |
|
|
|
Loans held for sale |
|
$ |
149,469 |
|
|
$ |
|
|
|
$ |
94,763 |
|
|
$ |
54,706 |
|
|
$ |
8,303 |
|
|
$ |
25,303 |
|
Securities available for sale |
|
|
1,535 |
|
|
|
|
|
|
|
1,535 |
|
|
|
|
|
|
|
867 |
|
|
|
1,395 |
(c) |
Loans, net of unearned income (a) |
|
|
333,956 |
|
|
|
|
|
|
|
|
|
|
|
333,956 |
|
|
|
35,485 |
|
|
|
75,283 |
|
Other assets |
|
|
120,934 |
|
|
|
|
|
|
|
|
|
|
|
120,934 |
|
|
|
2,089 |
|
|
|
4,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
46,744 |
|
|
$ |
106,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents carrying value of loans for which adjustments are based on the appraised value of the collateral. Writedowns on
these loans are recognized as part of provision. |
|
(b) |
|
Represents the fair value and related losses of foreclosed properties that were measured subsequent to their initial classification as
foreclosed assets |
|
(c) |
|
Represents recognition of other than temporary impairment for cost method investments classified within securities available for sale. |
In first quarter 2008, FHN recognized a lower of cost or market reduction in value of $36.2 million
for its warehouse of trust preferred loans, which was classified within level 3 for loans held for
sale at March 31, 2008. The determination of estimated market value for the warehouse was based on
a hypothetical securitization transaction for the warehouse as a whole. FHN used observable data
related to prior securitization transactions as well as changes in credit spreads in the
collateralized debt obligation (CDO) market since the most recent transaction. FHN also
incorporated significant internally developed assumptions within its valuation of the warehouse,
including estimated prepayments and estimated defaults. In accordance with SFAS No. 157, FHN
excluded transaction costs related to the hypothetical securitization in determining fair value.
In second quarter 2008, FHN designated its trust preferred warehouse as held to maturity.
Accordingly, these loans were excluded from loans held for sale in the nonrecurring measurements
table as of December 31, 2008. In conjunction with the transfer of these loans to held to maturity
status, FHN performed a lower of cost or market analysis on the date of transfer. This analysis was
based on the pricing of market transactions involving securities similar to those held in the trust
preferred warehouse with consideration given, as applicable, to any differences in characteristics
of the market transactions, including issuer credit quality, call features and term. As a result of
the lower of cost or market analysis, FHN determined that its existing valuation of the trust
preferred warehouse was appropriate.
In first quarter 2008, FHN recognized a lower of cost or market reduction in value of $17.0 million
relating to mortgage warehouse loans. Approximately $10.5 million was attributable to increased
delinquencies or aging of loans. The market values for these loans were estimated using
historical sales prices for these type loans, adjusted for incremental price concessions that a
third party investor is assumed to require due to tightening credit markets and deteriorating
housing prices. These assumptions were based on published information about actual and projected
deteriorations in the housing market as well as changes in credit spreads. The remaining reduction
in value of $6.5 million was attributable to lower investor prices, due primarily to credit spread
widening. This reduction was calculated by comparing the total fair value of loans (using the same
methodology that is used for fair value option loans) to carrying value for the aggregate
population of loans that were not delinquent or aged.
FHN also recognized a lower of cost or market reduction in value of $8.3 million relating to
mortgage warehouse loans during second quarter
of 2008. Approximately $7.1 million was attributable to increased repurchases and delinquencies or
aging of warehouse loans; the remaining
reduction in value was attributable to lower investor prices, due primarily to credit spread
widening. The market values for these loans were estimated using historical sales prices for these
types of loans, adjusted for incremental price concessions that a third party investor was assumed
to require due to tightening credit markets and deteriorating housing prices. These assumptions
were based on published information about actual and projected deteriorations in the housing market
as well as changes in credit spreads.
53
Note 16 Fair Value of Assets & Liabilities (continued)
Fair Value Option
As described above, upon adoption of SFAS No. 159, management elected fair value accounting for
substantially all forms of mortgage loans originated for sale. In 2009 and 2008, agreements were
reached for the transfer of certain servicing assets and delivery of the servicing assets occurred.
However, due to certain recourse provisions, these transactions did not qualify for sale treatment
and the associated
proceeds have been recognized within commercial paper and other short term borrowings in the
Consolidated Condensed Statements of Condition as of June 30, 2009 and 2008. Since servicing
assets are recognized at fair value and since changes in the fair value of related financing
liabilities will exactly mirror the change in fair value of the associated servicing assets,
management elected to account for the financing liabilities at fair value under SFAS No. 159.
Additionally, as the servicing assets have already been delivered to the buyer, the fair value of
the financing liabilities associated with the transaction does not reflect any instrument-specific
credit risk.
Near the end of second quarter 2009, Capital Markets acquired a pool of conforming mortgage loans
with the intent to transfer the loans to a counterparty shortly after June 30, 2009. As part of
this transaction, Capital Markets entered into forward delivery contracts to economically hedge the
value of the loans. FHN elected to recognize the loans at fair value and classified them as
trading loans within trading securities in the Consolidated Condensed Statements of Condition as of
June 30, 2009. Delivery of the loans and the related settlement of the forward delivery contracts
occurred in July 2009. Due to the high credit standing and short holding period for these loans,
no credit risk was recognized for them in the Consolidated Condensed Statements of Income.
The following table reflects the differences between the fair value carrying amount of mortgages
held for sale measured at fair value under SFAS No. 159 and the aggregate unpaid principal amount
FHN is contractually entitled to receive at maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
Fair value |
|
Aggregate |
|
carrying amount |
|
|
carrying |
|
unpaid |
|
less aggregate |
(Dollars in thousands) |
|
amount |
|
principal |
|
unpaid principal |
|
Trading loans reported at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
130,426 |
|
|
$ |
129,544 |
|
|
$ |
882 |
|
Nonaccrual loans |
|
|
|
|
|
|
|
|
|
|
|
|
Loans 90 days or more past due and still accruing |
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale reported at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
281,493 |
|
|
$ |
326,691 |
|
|
$ |
(45,198 |
) |
Nonaccrual loans |
|
|
8,192 |
|
|
|
19,047 |
|
|
|
(10,855 |
) |
Loans 90 days or more past due and still accruing |
|
|
7,221 |
|
|
|
17,705 |
|
|
|
(10,484 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
Fair value |
|
Aggregate |
|
carrying amount |
|
|
carrying |
|
unpaid |
|
less aggregate |
(Dollars in thousands) |
|
amount |
|
principal |
|
unpaid principal |
|
Loans held for sale reported at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
2,163,705 |
|
|
$ |
2,157,321 |
|
|
$ |
6,384 |
|
Nonaccrual loans |
|
|
320 |
|
|
|
567 |
|
|
|
(247 |
) |
Loans 90 days or more past due and still accruing |
|
|
890 |
|
|
|
1,525 |
|
|
|
(635 |
) |
|
Assets and liabilities accounted for under SFAS No. 159 are initially measured at fair value. Gains
and losses from initial measurement and subsequent changes in fair value are recognized in
earnings. The change in fair value related to initial measurement and subsequent
changes in fair value for mortgage loans held for sale and other short term borrowings for which
FHN elected the fair value option are included in current period earnings with classification in
the income statement line item shown below.
54
Note 16 Fair Value of Assets & Liabilities (continued)
For the three and six months periods ended June 30, 2009, the amounts for loans held for sale
includes approximately $4.2 million and $13.0 million, respectively, of losses included in earnings
that are attributable to changes in instrument-specific credit risk, which was determined based on
both a quality adjustment for delinquencies and the full credit on the non-conforming loans.
For the three and six month periods ended June 30, 2008, the amounts for loans held for sale
includes approximately $5.2 million and $14.7 million, respectively, of losses included in earnings
that are attributable to changes in instrument-specific credit risk, which was determined based on
both a quality adjustment for delinquencies and the full credit and liquidity spread on the
non-conforming loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(Dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Changes in fair value included in net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital markets noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
Loans |
|
$ |
1,463 |
|
|
$ |
|
|
|
$ |
1,463 |
|
|
$ |
|
|
Mortgage banking noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
$ |
(6,816 |
) |
|
$ |
(25,159 |
) |
|
$ |
(5,038 |
) |
|
$ |
(5,471 |
) |
Commercial paper and other short-term borrowings |
|
|
10,124 |
|
|
|
(16,685 |
) |
|
|
11,763 |
|
|
|
(16,685 |
) |
Estimated changes in fair value due to credit risk
(loans held for sale) |
|
|
(4,207 |
) |
|
|
(5,204 |
) |
|
|
(13,048 |
) |
|
|
(14,665 |
) |
|
Interest income on mortgage loans held for sale measured at fair value is calculated based on the
note rate of the loan and is recorded in the interest income section of the Consolidated Condensed
Statements of Income as interest on loans held for sale.
Determination of Fair Value
In accordance with SFAS No. 157, fair values are based on the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. The following describes the assumptions and methodologies
used to estimate the fair value for financial instruments and MSR recorded at fair value in the
Consolidated Condensed Statements of Condition and for estimating the fair value of financial
instruments for which fair value is disclosed under Statement of Financial Accounting Standards No.
107, Disclosure about Fair Value of Financial Instruments (SFAS No. 107) and FSP FAS 107-1.
Short-term financial assets. Federal funds sold, securities purchased under agreements to resell
and interest bearing deposits with other financial institutions are carried at historical cost.
The carrying amount is a reasonable estimate of fair value because of the relatively short time
between the origination of the instrument and its expected realization.
Trading securities and trading liabilities. Trading securities and trading liabilities are
recognized at fair value through current earnings. Trading inventory held for broker-dealer
operations is included in trading securities and trading liabilities. Broker-dealer long positions
are valued at bid price in the bid-ask spread. Short positions are valued at the ask price.
Inventory positions are valued using observable inputs including current market transactions, LIBOR
and U.S. treasury curves, credit spreads and consensus prepayment speeds. Trading loans are valued
using observable inputs including current market transactions, swap rates, mortgage rates and
consensus prepayment speeds.
Trading securities also includes retained interests in prior securitizations that qualify as
financial assets which may include certificated residual interests, excess interest (structured as
interest-only strips), interest-only strips, principal-only strips, or subordinated bonds. Residual
interests represent rights to receive earnings to the extent of excess income generated by the
underlying loans. Excess interest represents rights to receive interest from serviced assets that
exceed contractually specified rates. Principal-only strips are principal cash
flow tranches, and interest-only strips are interest cash flow tranches. Subordinated bonds are
bonds with junior priority. All financial assets retained from a securitization are recognized on
the Consolidated Condensed Statements of Condition in trading securities at fair value with
realized and unrealized gains and losses included in current earnings as a component of noninterest
income on the Consolidated Condensed Statements of Income.
The fair values of the certificated residual interests and the excess interest are determined using
market prices from closely comparable assets such as MSR that are tested against prices determined
using a valuation model that calculates the present value of estimated future
55
Note 16 Fair Value of Assets & Liabilities (continued)
cash flows. The fair value of these retained interests typically changes based on changes in the
discount rate and differences between modeled prepayment speeds and credit losses and actual
experience. In some instances, FHN retains interests in the loans it securitized by
retaining certificated principal only strips or subordinated bonds. Subsequent to the MetLife
transaction, FHN uses observable inputs such as trades of similar instruments, yield curves, credit
spreads and consensus prepayment speeds to determine the fair value of principal only
strips. Prior to the MetLife transaction, FHN used the market prices from comparable assets such
as publicly traded FNMA trust principal only strips that are adjusted to reflect the relative risk
difference between readily marketable securities and privately issued securities in valuing the
principal only strips. The fair value of subordinated bonds is determined using the best available
market information, which may include trades of comparable securities, independently provided spreads to other marketable
securities, and published market research. Where no market information is available, the company
utilizes an internal valuation model. As of June 30, 2009, no market information was available,
and the subordinated bonds were valued using an internal model which includes assumptions about
timing, frequency and severity of loss, prepayment speeds of the underlying collateral, and the
yield that a market participant would require.
Securities available for sale. Securities available for sale includes the investment portfolio
accounted for as available-for-sale under SFAS No. 115, federal bank stock holdings, short-term
investments in mutual funds and venture capital investments. Valuations of available-for-sale
securities are performed using observable inputs obtained from market transactions in similar
securities. Typical inputs include LIBOR and U.S. treasury curves, consensus prepayment estimates
and credit spreads. When available, broker quotes are used to support these valuations.
Stock held in the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical
cost in the Consolidated Condensed Statements of Condition which is considered to approximate fair
value. Short-term investments in mutual funds are measured at the funds reported closing net
asset values. Venture capital investments are typically measured using significant internally
generated inputs including adjustments to referenced transaction values and discounted cash flows
analysis.
Loans held for sale. In conjunction with the adoption of FSP FAS 157-4, FHN revised its
methodology for determining the fair value of certain loans within its mortgage warehouse. FHN now
determines the fair value of the applicable loans using a discounted cash flow model using
observable inputs, including current mortgage rates for similar products, with adjustments for
differences in loan characteristics reflected in the models discount rates. For all other loans
held in the warehouse (and in prior periods for the loans converted to the discounted cash flow
methodology), the fair value of loans whose principal market is the securitization market is based
on recent security trade prices for similar product with a similar delivery date, with necessary
pricing adjustments to convert the security price to a loan price. Loans whose principal market is
the whole loan market are priced based on recent observable whole loan trade prices or published
third party bid prices for similar product, with necessary pricing adjustments to reflect
differences in loan characteristics. Typical adjustments to security prices for whole loan prices
include adding the value of MSR to the security price or to the whole loan price if the price is
servicing retained, adjusting for interest in excess of (or less than) the required coupon or note
rate, adjustments to reflect differences in the characteristics of the loans being valued as
compared to the collateral of the security or the loan characteristics in the benchmark whole loan
trade, adding interest carry, reflecting the recourse obligation that will remain after sale, and
adjusting for changes in market liquidity or interest rates if the benchmark security or loan price
is not current. Additionally, loans that are delinquent or otherwise significantly aged are
discounted to reflect the less marketable nature of these loans.
The fair value of non-mortgage loans held for sale is approximated by their carrying values based
on current transaction values.
Loans, net of unearned income. Loans, net of unearned income are recognized at the amount of funds
advanced, less charge offs and an estimation of credit risk represented by the allowance for loan
losses. The fair value estimates for disclosure purposes differentiate loans based on their
financial characteristics, such as product classification, loan category, pricing features and
remaining maturity.
The fair value of floating rate loans is estimated through comparison to recent market activity in
loans of similar product types, with adjustments made for differences in loan characteristics. In
situations where market pricing inputs are not available, fair value is considered to approximate
book value due to the monthly repricing for commercial and consumer loans, with the exception of
floating rate 1-4 family residential mortgage loans which reprice annually and will lag movements
in market rates. The fair value for floating rate 1-4 family mortgage loans is calculated by
discounting future cash flows to their present value. Future cash flows are discounted to their
present value by using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same time period.
Prepayment assumptions based on historical prepayment speeds and industry speeds for similar loans
have been applied to the floating rate 1-4 family residential mortgage portfolio.
56
Note 16 Fair Value of Assets & Liabilities (continued)
The fair value of fixed rate loans is estimated through comparison to recent market activity in
loans of similar product types, with adjustments made for differences in loan characteristics. In
situations where market pricing inputs are not available, fair value is estimated by discounting
future cash flows to their present value. Future cash flows are discounted to their present value
by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same time period.
Prepayment assumptions based on historical prepayment speeds and industry speeds for similar loans
have been applied to the fixed rate mortgage and installment loan portfolios.
Mortgage servicing rights. FHN recognizes all its classes of MSR at fair value. Since sales of
MSR tend to occur in private transactions and the precise terms and conditions of the sales are
typically not readily available, there is a limited market to refer to in determining the fair
value of MSR. As such, FHN relies primarily on a discounted cash flow model to estimate the fair
value of its MSR. This model calculates estimated fair value of the MSR using predominant risk
characteristics of MSR such as interest rates, type of product (fixed vs. variable), age (new,
seasoned, or moderate), agency type and other factors. FHN uses assumptions in the model that it
believes are comparable to those used by brokers and other service providers. FHN also periodically
compares its estimates of fair value and assumptions with brokers, service providers, and recent
market activity and against its own experience. Due to ongoing disruptions in the mortgage market,
more emphasis has been placed on third party broker price discovery and, when available, observable
market trades in valuing MSR.
Derivative assets and liabilities. Derivatives include interest rate lock commitments from
mortgage banking operations and other derivative instruments primarily used in risk management
activities. Interest rate lock commitments are derivatives pursuant to SFAS No. 133 and are
therefore recorded at estimates of fair value. Effective January 1, 2008, FHN applied the
provisions of SAB No. 109 prospectively for derivative loan commitments issued or modified after
that date. SAB No. 109 requires inclusion of expected net future cash
flows related to loan servicing activities in the fair value measurement of a written loan
commitment. Also on January 1, 2008, FHN adopted SFAS No. 157, which affected the valuation of
interest rate lock commitments previously measured under the guidance of EITF 02-3. The interest
rate lock commitment does not bind the potential borrower to entering into the loan, nor does it
guarantee that First Horizon Home Loans will approve the potential borrower for the loan.
Therefore, when determining fair value, FHN makes estimates of expected fallout (locked pipeline
loans not expected to close) using models which consider cumulative historical fallout rates and
other factors. Other valuation inputs associated with interest rate lock commitments are
determined in a manner consistent with that used for mortgage loans held for sale described above.
Fair value for forwards and futures contracts used to hedge the mortgage pipeline and warehouse are
based on current transactions involving identical securities. Valuations of other derivatives are
based on inputs observed in active markets for similar instruments. Typical inputs include the
LIBOR curve, option volatility and option skew.
Real estate acquired by foreclosure. Real estate acquired by foreclosure primarily consists of
properties that have been acquired in satisfaction of debt. These properties are carried at the
lower of the outstanding loan amount or estimated fair value less estimated costs to sell the real
estate. Estimated fair value is determined using appraised values with subsequent adjustments for
deterioration in values that are not reflected in the most recent appraisal. Real estate acquired
by foreclosure also includes properties acquired in compliance with HUD servicing guidelines which
are carried at the estimated amount of the underlying government assurance or guarantee.
Nonearning assets. For disclosure purposes, nonearning assets include cash and due from banks,
accrued interest receivable, and capital markets receivables. Due to the short-term nature of
cash and due from banks, accrued interest receivable and capital markets receivables, the fair
value is approximated by the book value.
Other assets. For disclosure purposes, other assets consists of investments in low income housing
partnerships and deferred compensation assets that are considered financial assets. Investments in
low income housing partnerships are written down to estimated fair value quarterly based on the
estimated value of the associated tax credits. Deferred compensation assets are recognized at fair
value, which is based on quoted prices in active markets.
Defined maturity deposits. The fair value is estimated by discounting future cash flows to their
present value. Future cash flows are discounted by using the current market rates of similar
instruments applicable to the remaining maturity. For disclosure purposes, defined maturity
deposits include all certificates of deposit and other time deposits.
57
Note 16 Fair Value of Assets & Liabilities (continued)
Undefined maturity deposits. In accordance with SFAS No. 107, the fair value is approximated by
the book value. For the purpose of this disclosure, undefined maturity deposits include demand
deposits, checking interest accounts, savings accounts, and money market accounts.
Short-term financial liabilities. The fair value of federal funds purchased, securities sold under
agreements to repurchase, commercial paper and other short-term borrowings is approximated by the
book value. The carrying amount is a reasonable estimate of fair value
because of the relatively short time between the origination of the instrument and its expected
realization. Commercial paper and short-term borrowings includes a liability associated with
transfers of mortgage servicing rights that did not qualify for sale accounting. This liability is
accounted for at elected fair value, which is measured consistent with the related MSR, as
described above.
Long-term debt. The fair value is approximated by the present value of the contractual cash flows
discounted by the investors yield which considers FHNs and FTBNAs debt ratings.
Other noninterest-bearing liabilities. For disclosure purposes, other noninterest-bearing
liabilities include accrued interest payable and capital markets payables. Due to the short-term
nature of these liabilities, the book value is considered to approximate fair value.
Loan Commitments. Fair values are based on fees charged to enter into similar agreements taking
into account the remaining terms of the agreements and the counterparties credit standing.
Other Commitments. Fair values are based on fees charged to enter into similar agreements.
FSP FAS 107-1 requires the disclosure of the estimated fair value of all assets, liabilities and
off-balance sheet financial instruments for interim reporting periods ending after June 15, 2009.
These disclosures are prepared consistent with the guidance of SFAS No. 107 which previously
applied only to annual reporting periods. The following fair value estimates are determined as of
a specific point in time utilizing various assumptions and estimates. The use of assumptions and
various valuation techniques, as well as the absence of secondary markets for certain financial
instruments, will likely reduce the comparability of fair value disclosures between financial
institutions. Due to market illiquidity, the fair values for loans, net of unearned income, loans
held for sale, and long-term debt as of June 30, 2009, involved the use of significant
internally-developed pricing assumptions for certain components of these line items. These
assumptions are considered to reflect inputs that market participants would use in transactions
involving these instruments as of the measurement date. In accordance with the requirements of SFAS
No. 107, we have not included assets and liabilities that are not financial instruments (including
MSR) in the table below. This includes the value of long-term relationships with deposit and trust
customers, premises and equipment, goodwill and other intangibles, deferred taxes and certain other
assets and other liabilities. Accordingly, the total of the fair value amounts does not represent,
and should not be construed to represent, the underlying value of the company.
58
Note 16 Fair Value of Assets & Liabilities (continued)
The following table summarizes the book value and estimated fair value of financial instruments
recorded in the Consolidated Condensed Statements of Condition as well as off-balance sheet
commitments as of June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
Book |
|
Fair |
(Dollars in thousands) |
|
Value |
|
Value |
|
Assets: |
|
|
|
|
|
|
|
|
Loans, net of unearned income and allowance
for loan losses |
|
$ |
18,624,345 |
|
|
$ |
16,936,999 |
|
Short-term financial assets |
|
|
1,204,191 |
|
|
|
1,204,191 |
|
Trading securities |
|
|
1,117,212 |
|
|
|
1,117,212 |
|
Loans held for sale |
|
|
481,284 |
|
|
|
481,284 |
|
Securities available for sale |
|
|
2,821,079 |
|
|
|
2,821,079 |
|
Derivative assets |
|
|
285,305 |
|
|
|
285,305 |
|
Other assets |
|
|
1,589,808 |
|
|
|
1,589,808 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Defined maturity |
|
$ |
3,583,820 |
|
|
$ |
3,664,197 |
|
Undefined maturity |
|
|
11,393,641 |
|
|
|
11,393,641 |
|
|
Total deposits |
|
|
14,977,461 |
|
|
|
15,057,838 |
|
Trading liabilities |
|
|
286,282 |
|
|
|
286,282 |
|
Short-term financial liabilities |
|
|
4,960,689 |
|
|
|
4,960,689 |
|
Long-term debt |
|
|
3,235,351 |
|
|
|
2,524,470 |
|
Derivative liabilities |
|
|
227,031 |
|
|
|
227,031 |
|
Other noninterest-bearing liabilities |
|
|
1,020,434 |
|
|
|
1,020,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual |
|
Fair |
|
|
Amount |
|
Value |
|
Off-Balance Sheet Commitments: |
|
|
|
|
|
|
|
|
Loan commitments |
|
$ |
8,970,594 |
|
|
$ |
1,378 |
|
Other commitments |
|
|
572,646 |
|
|
|
5,232 |
|
|
Certain previously reported amounts have been reclassified to agree with
current presentation.
59
Note 17 Restructuring, Repositioning, and Efficiency
In 2007, FHN began conducting a company-wide review of business practices with the goal of
improving its overall profitability and productivity. In order to redeploy capital to
higher-return businesses, FHN concluded the sale of 34 full-service First Horizon Bank branches in
its national banking markets in the second quarter 2008 while also taking actions to right size
First Horizon Home Loans mortgage banking operations and to downsize FHNs national lending
operations. Additionally, in January 2008, FHN discontinued national homebuilder and commercial
real estate lending through its First Horizon Construction Lending offices. FHN also repositioned
First Horizon Home Loans mortgage banking operations through various MSR sales.
Additionally, on August 31, 2008, FHN and MetLife completed the sale of substantially all of FHNs
mortgage origination pipeline, related hedges, certain fixed assets and other associated assets.
MetLife did not acquire any portion of FHNs mortgage loan warehouse. FHN retained its mortgage
operations in and around Tennessee, continuing to originate home loans for customers in its banking
market footprint. FHN also agreed with MetLife for the sale of servicing assets and related hedges
on $19.1 billion of first lien mortgage loans and associated custodial deposits. FHN also entered
into a subservicing agreement with MetLife for the remainder of FHNs servicing portfolio. MetLife
generally paid book value for the assets and liabilities it acquired, less a purchase price
reduction.
Net costs recognized by FHN in the six months ended June 30, 2009 related to restructuring,
repositioning, and efficiency activities were $5.0 million. Of this amount, $2.9 million
represented exit costs that were accounted for in accordance with Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No.
146).
Significant expenses recognized year to date 2009 resulted from the following actions:
|
|
Severance and related employee costs of $3.4 million related to discontinuation of national
lending operations. |
|
|
|
Transaction costs of $1.1 million from the sale of mortgage servicing rights. |
|
|
|
Expense of $1.0 million related to asset impairments from branch closures. |
Net costs recognized by FHN in the six months ended June 30, 2008 related to restructuring,
repositioning, and efficiency activities were $47.2 million. Of this amount, $25.5 million
represented exit costs that were accounted for in accordance with SFAS No. 146.
Significant expenses recognized in year to date 2008 resulted from the following actions:
|
|
Expense of $25.5 million associated with organizational and compensation changes due to
right sizing operating segments, the divestiture of certain First Horizon Bank branches, the
pending divestiture of certain mortgage banking operations, and consolidating functional
areas. |
|
|
|
Losses of approximately $1.4 million from the sales of certain First Horizon Bank branches. |
|
|
|
Transaction costs of $12.0 million from the sale of mortgage servicing rights. |
|
|
|
Expense of $8.3 million for the write-down of certain intangibles and other assets
resulting from FHNs divestiture of certain mortgage banking operations and from the change in
FHNs national banking strategy. |
Losses from the disposition of certain First Horizon Bank branches incurred during the periods
presented are included in losses on divestitures in the noninterest income section of the
Consolidated Condensed Statements of Income. Transaction costs recognized in the periods presented
from selling mortgage servicing rights are recorded as a reduction of mortgage banking income in
the noninterest income section of the Consolidated Condensed Statements of Income. All other costs
associated with the restructuring, repositioning, and efficiency initiatives implemented by
management are included in the noninterest expense section of the Consolidated Condensed Statements
of Income, including severance and other employee-related costs recognized in relation to such
initiatives which are recorded in employee compensation, incentives, and benefits; facilities
consolidation costs and related asset impairment costs are included in occupancy; costs associated
with the impairment of premises and equipment are included in equipment rentals; depreciation and
maintenance and other costs associated with such initiatives, including professional fees, and
intangible asset impairment costs are included in all other expense.
60
Note 17 Restructuring, Repositioning, and Efficiency (continued)
Activity in the restructuring and repositioning liability for the three and six months ended June
30, 2009 and 2008 is presented in the following table, along with other restructuring and
repositioning expenses recognized. All costs associated with the restructuring, repositioning, and
efficiency initiatives are recorded as unallocated corporate charges within the Corporate segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
|
Charged to |
|
|
|
|
|
|
Charged to |
|
|
|
|
|
|
Charged to |
|
|
|
|
|
|
Charged to |
|
|
|
|
(Dollars in thousands) |
|
Expense |
|
|
Liability |
|
|
Expense |
|
|
Liability |
|
|
Expense |
|
|
Liability |
|
|
Expense |
|
|
Liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance |
|
$ |
|
|
|
$ |
21,226 |
|
|
$ |
|
|
|
$ |
22,690 |
|
|
$ |
|
|
|
$ |
24,167 |
|
|
$ |
|
|
|
$ |
19,675 |
|
Severance and other employee related costs |
|
|
674 |
|
|
|
674 |
|
|
|
5,732 |
|
|
|
5,732 |
|
|
|
3,376 |
|
|
|
3,376 |
|
|
|
13,122 |
|
|
|
13,122 |
|
Facility consolidation costs |
|
|
|
|
|
|
|
|
|
|
2,963 |
|
|
|
2,963 |
|
|
|
|
|
|
|
|
|
|
|
3,854 |
|
|
|
3,854 |
|
Other exit costs, professional fees, and other |
|
|
(532 |
) |
|
|
(532 |
) |
|
|
1,652 |
|
|
|
1,652 |
|
|
|
(468 |
) |
|
|
(468 |
) |
|
|
8,484 |
|
|
|
8,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accrued |
|
|
142 |
|
|
|
21,368 |
|
|
|
10,347 |
|
|
|
33,037 |
|
|
|
2,908 |
|
|
|
27,075 |
|
|
|
25,460 |
|
|
|
45,135 |
|
Payments related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee related costs |
|
|
|
|
|
|
1,770 |
|
|
|
|
|
|
|
4,238 |
|
|
|
|
|
|
|
5,844 |
|
|
|
|
|
|
|
10,893 |
|
Facility consolidation costs |
|
|
|
|
|
|
652 |
|
|
|
|
|
|
|
2,667 |
|
|
|
|
|
|
|
2,212 |
|
|
|
|
|
|
|
3,901 |
|
Other exit costs, professional fees, and other |
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
5,624 |
|
|
|
|
|
|
|
114 |
|
|
|
|
|
|
|
9,210 |
|
Accrual reversals |
|
|
|
|
|
|
522 |
|
|
|
|
|
|
|
2,563 |
|
|
|
|
|
|
|
522 |
|
|
|
|
|
|
|
3,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and Repositioning Reserve Balance |
|
|
|
|
|
$ |
18,383 |
|
|
|
|
|
|
$ |
17,945 |
|
|
|
|
|
|
$ |
18,383 |
|
|
|
|
|
|
$ |
17,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Restructuring and Repositioning Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking expense on servicing sales |
|
|
|
|
|
|
|
|
|
|
9,344 |
|
|
|
|
|
|
|
1,142 |
|
|
|
|
|
|
|
12,011 |
|
|
|
|
|
Loss on divestitures |
|
|
|
|
|
|
|
|
|
|
429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,424 |
|
|
|
|
|
Impairment of premises and equipment |
|
|
142 |
|
|
|
|
|
|
|
4,104 |
|
|
|
|
|
|
|
973 |
|
|
|
|
|
|
|
4,186 |
|
|
|
|
|
Impairment of intangible assets |
|
|
|
|
|
|
|
|
|
|
1,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Restructuring and Repositioning Expense |
|
|
142 |
|
|
|
|
|
|
|
15,609 |
|
|
|
|
|
|
|
2,115 |
|
|
|
|
|
|
|
21,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Restructuring and Repositioning Charges |
|
$ |
284 |
|
|
|
|
|
|
$ |
25,956 |
|
|
|
|
|
|
$ |
5,023 |
|
|
|
|
|
|
$ |
47,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative amounts incurred to date as of June 30, 2009, for costs associated with FHNs
restructuring, repositioning, and efficiency initiatives are presented in the following table:
|
|
|
|
|
|
|
Charged to |
(Dollars in thousands) |
|
Expense |
|
Severance and other employee related costs* |
|
$ |
53,308 |
|
Facility consolidation costs |
|
|
29,882 |
|
Other exit costs, professional fees, and other |
|
|
16,689 |
|
Other restructuring & repositioning (income) and expense: |
|
|
|
|
Loan portfolio divestiture |
|
|
7,672 |
|
Mortgage banking expense on servicing sales |
|
|
20,237 |
|
Net loss on divestitures |
|
|
3,325 |
|
Impairment of premises and equipment |
|
|
15,911 |
|
Impairment of intangible assets |
|
|
18,029 |
|
Impairment of other assets |
|
|
30,101 |
|
|
Total Restructuring and Repositioning Charges Incurred to Date
as of June 30, 2009 |
|
$ |
195,154 |
|
|
|
|
|
* |
|
Includes $1.2 million of deferred severance-related payments that will be paid
after 2009. |
61
FIRST HORIZON NATIONAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL INFORMATION
First Horizon National Corporation (FHN) began as a small community bank chartered in 1864 and is
now one of the 40 largest bank holding companies in the United States in terms of asset size.
FHNs 6,000 employees provide financial services through more than 180 bank locations in and around
Tennessee and 19 capital markets offices in the U.S. and abroad.
The corporations two major brands First Tennessee and FTN Financial provide customers with a
broad range of products and services. First Tennessee has the leading combined deposit market
share in the 17 Tennessee counties where it does business and one of the highest customer retention
rates of any bank in the country. FTN Financial (FTNF) is an industry leader in fixed income
sales, trading, and strategies for institutional clients in the U.S. and abroad.
AARP and Working Mother magazine have recognized FHN as one of the nations best employers.
FHN is composed of the following operating segments:
|
|
|
Regional Banking offers financial products and services, including traditional lending
and deposit-taking, to retail and commercial customers in Tennessee and surrounding
markets. Additionally, Regional Banking provides investments, insurance, financial
planning, trust services and asset management, credit card, cash management, and check
clearing services. |
|
|
|
|
Capital Markets provides a broad spectrum of financial services for the investment and
banking communities through the integration of traditional capital markets securities
activities, equity research, loan sales, portfolio advisory services, structured finance,
derivative sales, and correspondent banking services. |
|
|
|
|
National Specialty Lending consists of legacy traditional consumer and construction
lending activities outside the regional banking footprint. In January 2008, FHN announced
the discontinuation of national home builder and commercial real estate lending. |
|
|
|
|
Mortgage Banking now consists of the origination of mortgage loans in and around the
regional banking footprint and legacy servicing. Prior to the August 31, 2008, sale of its
servicing platform and origination offices outside Tennessee to MetLife Bank, N.A.,
(MetLife), this division provided mortgage loans and servicing to consumers and operated in
approximately 40 states. |
|
|
|
|
Corporate consists of unallocated corporate expenses including restructuring,
repositioning, and efficiency initiatives, gains and losses on repurchases of debt, expense
on subordinated debt issuances and preferred stock, bank-owned life insurance, unallocated
interest income associated with excess equity, net impact of raising incremental capital,
revenue and expense associated with deferred compensation plans, funds management, low
income housing investment activities, and venture capital. |
In second quarter 2009, FHN reviewed funds transfer pricing methodologies and cost allocations used
to determine segment performance. As a result of this review, certain of these methodologies were
revised affecting all segments. Additionally, activities related to Low Income Housing Investments
were moved from Regional Banking to Corporate. For comparability, previously reported amounts have
been revised to reflect these changes.
For the purpose of this managements discussion and analysis (MD&A), earning assets have been
expressed as averages, unless otherwise noted, and loans have been disclosed net of unearned
income. The following financial discussion should be read with the accompanying unaudited
Consolidated Condensed Financial Statements and notes.
62
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements with respect to FHNs beliefs, plans, goals,
expectations, and estimates. Forward-looking statements are statements that are not a
representation of historical information but rather are related to future operations, strategies,
financial results, or other developments. The words believe, expect, anticipate, intend,
estimate, should, is likely, will, going forward, and other expressions that indicate
future events and trends identify forward-looking statements. Forward-looking statements are
necessarily based upon estimates and assumptions that are inherently subject to significant
business, operational, economic and competitive uncertainties and contingencies, many of which are
beyond a companys control, and many of which, with respect to future business decisions and
actions (including acquisitions and divestitures), are subject to change. Examples of
uncertainties and contingencies include, among other important factors, general and local economic
and business conditions; recession or other economic downturns; expectations of and actual timing
and amount of interest rate movements, including the slope of the yield curve (which can have a
significant impact on a financial services institution); market and monetary fluctuations;
inflation or deflation; customer and investor responses to these conditions; the financial
condition of borrowers and other counterparties; competition within and outside the financial
services industry; geopolitical developments including possible terrorist activity; recent and
future legislative and regulatory developments; natural disasters; effectiveness of FHNs hedging
practices; technology; demand for FHNs product offerings; new products and services in the
industries in which FHN operates; and critical accounting estimates. Other factors are those
inherent in originating, selling, and servicing loans including prepayment risks, pricing
concessions, fluctuation in U.S. housing prices, fluctuation of collateral values, and changes in
customer profiles. Additionally, the actions of the Securities and Exchange Commission (SEC), the
Financial Accounting Standards Board (FASB), the Office of the Comptroller of the Currency (OCC),
the Board of Governors of the Federal Reserve System (Federal Reserve), Financial Industry
Regulatory Authority (FINRA), U.S. Department of the Treasury (UST), and other regulators and
agencies; regulatory and judicial proceedings and changes in laws and regulations applicable to
FHN; and FHNs success in executing its business plans and strategies and managing the risks
involved in the foregoing, could cause actual results to differ. FHN assumes no obligation to
update any forward-looking statements that are made from time to time. Actual results could differ
because of several factors, including those presented in this Forward-Looking Statements section,
in other sections of this MD&A, and other parts of this Quarterly Report on Form 10-Q for the
periods ended June 30, 2009.
FINANCIAL SUMMARY
In second quarter 2009, FHN reported a net loss available to common shareholders of $123.2 million,
or $.58 diluted loss per share, compared to a net loss available to common shareholders of $19.1
million, or $.10 diluted loss per share in 2008. In 2009, net loss available to common
shareholders reflected $14.8 million of dividends on the CPP preferred shares.
The results of operations for second quarter 2009 were negatively affected by increased
provisioning for loan losses, charges related to repurchase and foreclosure reserves, and increased
foreclosure losses. Additionally, mortgage banking results decreased significantly from 2008 due
to the third quarter 2008 sale of the national mortgage origination and servicing platforms.
Favorable market conditions in second quarter 2009 resulted in strong fixed income sales at Capital
Markets. The sale of national mortgage banking operations contributed to a decline in operating
expenses. Provisioning for loan losses increased $40.0 million from second quarter 2008 to $260.0
million due to the adverse economic conditions and prolonged weakness in the housing market.
Earnings in second quarter 2008 were affected by charges of $26.0 million related to restructuring,
repositioning, and efficiency initiatives and a $12.6 million gain on the repurchase of debt.
Return on average common equity and return on average assets for second quarter 2009 were a
negative 20.96 percent and negative 1.46 percent, respectively, compared to negative 3.02 percent
and negative .18 percent in second quarter 2008. Capital ratios improved as tier 1 capital ratio
was 15.55 percent as of June 30, 2009 compared to 10.51 percent on June 30, 2008, and total capital
was 20.77 percent compared with 15.15 percent in 2008.
Total assets declined to $28.8 billion on June 30, 2009 from $35.5 billion on June 30, 2008, while
total equity increased to $3.4 billion on June 30, 2009 from $3.0 billion on June 30, 2008.
63
BUSINESS LINE REVIEW
Regional Banking
The Regional Banking segment had a pre-tax loss of $12.6 million in the second quarter 2009
compared to a pre-tax loss of $17.4 million in second quarter 2008. Total revenues decreased 5
percent to $206.8 million in second quarter 2009. The provision for loan losses decreased to $51.0
million in second quarter 2009 from $89.5 million in second quarter 2008 primarily due to proactive
recognition and management of problem assets.
Net interest income was flat at $125.5 million in second quarter 2009 from $125.7 million in second
quarter 2008 as net interest margin increased to 4.71 percent in second quarter 2009 compared to
4.58 percent in second quarter 2008. The increase in margin was primarily a result of increased
loan spreads due to lower cost funding.
Noninterest income declined $11.3 million in second quarter 2009 to $81.4 million. Deposit fees
were down $5.2 million mainly due to a decline in retail non-sufficient funds (NSF) fees. Annuity
income decreased $1.7 million due to a decrease in sales and a shift in product mix. Trust income
decreased by $1.2 million as the market value of managed trust assets declined. Other
miscellaneous income also declined as second quarter 2008 included a $2.3 million gain on the sale
of foreclosed assets. Noninterest expense increased to $168.4 million in second quarter 2009 from
$146.3 million in second quarter 2008. The increase is primarily a result of the Regional Banks
proportionate share of Federal Deposit Insurance Corporation (FDIC) premiums, including the special
assessment, credit-related costs, foreclosure losses, and technology costs.
Capital Markets
Pre-tax income increased from $24.4 million in second quarter 2008 to $79.0 million in second
quarter 2009 with total revenues of $214.5 million in the second quarter 2009 compared to $143.7
million in the second quarter 2008.
Net interest income was $24.9 million in second quarter 2009 compared to $19.1 million in the
second quarter 2008 as the net interest margin improved to 2.70 percent from 1.60 percent last
year. The increase is primarily attributable to higher spreads on the correspondent banking
portfolio.
Income from fixed income sales increased to $170.1 million in the second quarter 2009 from $105.0
million in the second quarter 2008 reflecting the benefits of Capital Markets extensive
distribution network combined with continued market volatility and illiquidity. Other product
revenues were $19.5 million in the second quarter 2009 compared to $19.6 million in second quarter
2008. Revenues from other products include fee income from activities such as equity research,
loan sales, portfolio advisory, derivative sales, structured finance, and correspondent banking
services. Provision expense increased slightly to $21.1 million in second quarter 2009 which
primarily reflected deterioration in the trust preferred loan portfolio.
Noninterest expense increased by $13.6 million to $114.4 million in second quarter 2009. Personnel
costs increased $7.1 million as the effect of increased production levels more than offset a
decline in expenses due to a reduced rate of incentive provisioning in second quarter 2009.
Mortgage Banking
Effective August 31, 2008, FHN completed the sale of Mortgage Bankings servicing operations and
origination offices outside Tennessee to MetLife. Additionally, in an effort to reduce balance
sheet risk, FHN has reduced the size of the servicing portfolio through bulk and flow sales
beginning in 2007. As a result of these transactions, components of origination activity,
servicing fees, and operating expenses for 2009 are significantly lower when compared to 2008.
The second quarter 2009 pre-tax loss was $44.7 million compared to pre-tax income of $68.2 million
in the second quarter 2008. Total revenues decreased by $192.4 million to $30.0 million in second
quarter 2009. Net interest income decreased to $10.8 million in second quarter 2009 from $35.1
million in the second quarter 2008 due to the
64
large decline in the average balance of the mortgage warehouse as a result of the sale of national
mortgage origination offices to MetLife.
Noninterest income was $19.2 million in the second quarter 2009 compared to $187.3 million in the
second quarter 2008. Total servicing income decreased $26.4 million to $16.2 million in the second
quarter 2009 primarily from a decline in the size of the servicing portfolio and volatility
associated with hedging the Mortgage Servicing Rights (MSR). Servicing fees were down $35.5
million consistent with the decline in the size of the servicing portfolio. Net hedging gains were
$7.0 million in 2009 compared to $16.5 million in 2008 due to a narrowing of spreads between
mortgage and swap rates. Net revenue from origination activity decreased to a loss of $1.3 million
in the second quarter 2009 from income of $134.1 million in the second quarter 2008. Second
quarter 2009 origination income was affected by a $10 million unhedged negative fair value
adjustment to the mortgage warehouse. Origination activity has significantly declined in
comparison to second quarter 2008 due to the sale of national mortgage origination platform.
Noninterest expense was $63.2 million in the second quarter 2009 compared to $150.2 million in the
second quarter 2008. The decline is mostly a result of the divestiture of certain mortgage banking
operations in the third quarter 2008. These broad declines were somewhat diminished by an increase
in expense of $16.8 million to increase the foreclosure and repurchase reserve from prior loan
sales related to the legacy origination platform and an $8.1 million charge to increase the private
mortgage insurance reserves due to increasing mortgage default expectations.
National Specialty Lending
National Specialty Lendings pre-tax loss increased to $195.3 million in the second quarter 2009
compared to a pre-tax loss of $98.2 million in the second quarter 2008 primarily due to increased
provisioning. Provision for loan losses increased $68.3 million to $176.3 million in the second
quarter 2009 as a result of deterioration in the national construction and the national home equity
loan portfolios.
Net interest income declined to $31.2 million in the second quarter 2009 compared to $53.5 million
in the second quarter 2008 as a result of the increase in nonaccrual loans and the wind-down of
national construction and consumer lending.
Noninterest income was a loss of $9.1 million in the second quarter 2009 compared to a loss of
$14.6 million in the second quarter 2008. Second quarter 2009 included a $12.0 million charge to
increase repurchase reserves compared to $8.7 million in 2008. Additionally, 2008 included a $9.4
million negative fair value adjustment to the residual interest retained from prior consumer loan
sales. Noninterest expense increased to $41.0 million from $29.0 million in 2008 primarily from
higher foreclosure costs. Operating-related expenses declined due to the wind-down of operations.
However, foreclosure losses increased to $11.2 million from $2.1 million primarily as a result of
Other real estate owned (OREO) fair value adjustments and net losses on dispositions.
Additionally, costs to manage and resolve problem loans have increased $5.0 million to $6.1 million
in the second quarter 2009.
Corporate
The Corporate segments pre-tax loss was $7.0 million in the second quarter 2009 compared to a loss
$22.1 million in the second quarter 2008. Noninterest income was $11.1 million in second quarter
2009 compared to $9.0 million in the second quarter 2008. Other income increased $1.4 million due
to an increase in deferred compensation income which was partially offset by a lower earnings rate
for bank-owned life insurance (BOLI). Other income in 2008 included a $12.6 million gain on the
repurchase of debt and restructuring costs of $9.7 million.
Noninterest expense decreased $11.8 million to $24.9 million in the second quarter 2009 from $36.6
million in 2008. Charges within noninterest expense that related to restructuring, repositioning,
and efficiency initiatives decreased by $16.0 million from 2008 while FDIC premiums increased to
$1.5 million due to the allocation of the special assessment.
Net interest income increased to $6.8 million in the second quarter 2009 from $5.5 million in 2008
as net interest margin was flat compared to second quarter 2008.
65
RESTRUCTURING, REPOSITIONING, AND EFFICIENCY INITIATIVES
Beginning in 2007, FHN began conducting a company-wide review of business practices with the goal
of improving its overall profitability and productivity. In order to redeploy capital to
higher-return businesses, FHN concluded the sale of 34 full-service First Horizon Bank branches in
its national banking markets in the second quarter 2008 while also taking actions to right size
First Horizon Home Loans mortgage banking operations and to downsize FHNs national lending
operations. Additionally, in January 2008, FHN discontinued national homebuilder and commercial
real estate lending through its First Horizon Construction Lending offices. FHN also repositioned
First Horizon Home Loans mortgage banking operations through various MSR sales.
On August 31, 2008, FHN and MetLife completed the sale of substantially all of FHNs mortgage
origination pipeline, related hedges, certain fixed assets and other associated assets. MetLife
did not acquire any portion of FHNs mortgage loan warehouse. FHN retained its mortgage operations
in and around Tennessee, continuing to originate home loans for customers in its regional banking
market footprint. As part of this transaction, FHN also agreed with MetLife for the sale of
servicing assets and related hedges on $19.1 billion of first lien mortgage loans and associated
custodial deposits. FHN also entered into a subservicing agreement with MetLife for the remainder
of FHNs servicing portfolio. MetLife generally paid book value for the assets and liabilities it
acquired, less a purchase price reduction.
Net costs recognized by FHN during the six months ended June 30, 2009 related to restructuring,
repositioning, and efficiency activities were $5.0 million. Of this amount, $2.9 million
represented exit costs that were accounted for in accordance with Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No.
146). Significant expenses recognized during the first half of 2009 resulted from the following
actions:
|
|
|
Severance and related employee costs of $3.4 million related to discontinuation of
national lending operations. |
|
|
|
|
Transaction costs of $1.1 million from the contracted sale of mortgage servicing rights. |
|
|
|
|
Loss of $1.0 million related to asset impairments from branch closures. |
Net costs recognized by FHN during the six months ended June 30, 2008, related to restructuring,
repositioning, and efficiency activities were $47.2 million. Of this amount, $25.5 million
represented exit costs that were accounted for in accordance with SFAS No. 146. Significant
expenses recognized during the first half of 2008 resulted from the following actions:
|
|
|
Expense of $25.5 million associated with organizational and compensation changes due to
right sizing operating segments, the divestiture of certain First Horizon Bank branches,
the pending divestiture of certain mortgage banking operations and consolidating functional
areas. |
|
|
|
|
Losses of approximately $1.4 million from the sales of certain First Horizon Bank
branches. |
|
|
|
|
Transaction costs of $12.0 million from the contracted sales of mortgage servicing
rights. |
|
|
|
|
Expense of $8.3 million for the write-down of certain intangibles and other assets
resulting from FHNs divestiture of certain mortgage operations and from the change in
FHNs national banking strategy |
Settlement of the obligations arising from current initiatives will be funded from operating cash
flows. The effect of suspending depreciation on assets held for sale was immaterial to FHNs
results of operations for all periods. As a result of the change in FHNs national banking
strategy, a write-down of other intangibles of $2.4 million was recognized in second quarter 2008
related to certain banking licenses. The recognition of these impairment losses will have no
effect on FHNs debt covenants. The impairment loss related to the intangible asset was recorded
as an unallocated corporate charge within the Corporate segment and is included in all other
expense on the Consolidated Condensed Statements of Income. Due to the broad nature of the actions
being taken, all components of income and expense will be affected from the efficiency benefits.
Charges related to restructuring, repositioning, and efficiency initiatives for the three and six
months ended June 30, 2009, and 2008 are presented in the following table based on the income
statement line item affected. See
66
Note 17 Restructuring, Repositioning, and Efficiency Charges and Note 2
Acquisitions/Divestitures for additional information.
Table 1 Restructuring, Repositioning, and Efficiency Initiatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(Dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking |
|
$ |
|
|
|
$ |
(9,344 |
) |
|
$ |
(1,142 |
) |
|
$ |
(12,011 |
) |
Losses on divestitures |
|
|
|
|
|
|
(429 |
) |
|
|
|
|
|
|
(1,424 |
) |
|
Total noninterest income |
|
|
|
|
|
|
(9,773 |
) |
|
|
(1,142 |
) |
|
|
(13,435 |
) |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation, incentives and benefits |
|
|
674 |
|
|
|
5,729 |
|
|
|
3,376 |
|
|
|
13,141 |
|
Occupancy |
|
|
(573 |
) |
|
|
3,338 |
|
|
|
(573 |
) |
|
|
4,319 |
|
Equipment rentals, depreciation and maintenance |
|
|
|
|
|
|
4,181 |
|
|
|
|
|
|
|
4,264 |
|
Legal and professional fees |
|
|
14 |
|
|
|
1,090 |
|
|
|
76 |
|
|
|
4,170 |
|
Communications and courier |
|
|
12 |
|
|
|
36 |
|
|
|
12 |
|
|
|
42 |
|
All other expense |
|
|
157 |
|
|
|
1,809 |
|
|
|
990 |
|
|
|
7,871 |
|
|
Total noninterest expense |
|
|
284 |
|
|
|
16,183 |
|
|
|
3,881 |
|
|
|
33,807 |
|
|
Loss before income taxes |
|
$ |
(284 |
) |
|
$ |
(25,956 |
) |
|
$ |
(5,023 |
) |
|
$ |
(47,242 |
) |
|
Activity in the restructuring and repositioning liability for the three and six months ended June
30, 2009, and 2008 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
Six Months Ended |
|
(Dollars in thousands) |
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
|
Charged to |
|
|
|
|
|
|
Charged to |
|
|
|
|
|
|
Charged to |
|
|
|
|
|
|
Charged to |
|
|
|
|
|
|
Expense |
|
|
Liability |
|
|
Expense |
|
|
Liability |
|
|
Expense |
|
|
Liability |
|
|
Expense |
|
|
Liability |
|
Beginning Balance |
|
$ |
|
|
|
$ |
21,226 |
|
|
$ |
|
|
|
$ |
22,690 |
|
|
$ |
|
|
|
$ |
24,167 |
|
|
$ |
|
|
|
$ |
19,675 |
|
Severance and other employee related costs |
|
|
674 |
|
|
|
674 |
|
|
|
5,732 |
|
|
|
5,732 |
|
|
|
3,376 |
|
|
|
3,376 |
|
|
|
13,122 |
|
|
|
13,122 |
|
Facility consolidation costs |
|
|
|
|
|
|
|
|
|
|
2,963 |
|
|
|
2,963 |
|
|
|
|
|
|
|
|
|
|
|
3,854 |
|
|
|
3,854 |
|
Other exit costs, professional fees and other |
|
|
(532 |
) |
|
|
(532 |
) |
|
|
1,652 |
|
|
|
1,652 |
|
|
|
(468 |
) |
|
|
(468 |
) |
|
|
8,484 |
|
|
|
8,484 |
|
|
|
|
|
|
|
|
|
|
Total Accrued |
|
|
142 |
|
|
|
21,368 |
|
|
|
10,347 |
|
|
|
33,037 |
|
|
|
2,908 |
|
|
|
27,075 |
|
|
|
25,460 |
|
|
|
45,135 |
|
Payments related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other employee related costs |
|
|
|
|
|
|
1,770 |
|
|
|
|
|
|
|
4,238 |
|
|
|
|
|
|
|
5,844 |
|
|
|
|
|
|
|
10,893 |
|
Facility consolidation costs |
|
|
|
|
|
|
652 |
|
|
|
|
|
|
|
2,667 |
|
|
|
|
|
|
|
2,212 |
|
|
|
|
|
|
|
3,901 |
|
Other exit costs, professional fees and other |
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
5,624 |
|
|
|
|
|
|
|
114 |
|
|
|
|
|
|
|
9,210 |
|
Accrual reversals |
|
|
|
|
|
|
522 |
|
|
|
|
|
|
|
2,563 |
|
|
|
|
|
|
|
522 |
|
|
|
|
|
|
|
3,186 |
|
|
|
|
|
|
|
|
|
|
Restructuring and Repositioning Reserve Balance |
|
|
|
|
|
$ |
18,383 |
|
|
|
|
|
|
$ |
17,945 |
|
|
|
|
|
|
$ |
18,383 |
|
|
|
|
|
|
$ |
17,945 |
|
|
|
|
|
|
|
|
|
|
Other Restructuring & Repositioning (Income)
and Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking expense on servicing sales |
|
|
|
|
|
|
|
|
|
|
9,344 |
|
|
|
|
|
|
|
1,142 |
|
|
|
|
|
|
|
12,011 |
|
|
|
|
|
Loss on divestitures |
|
|
|
|
|
|
|
|
|
|
429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,424 |
|
|
|
|
|
Impairment of premises and equipment |
|
|
142 |
|
|
|
|
|
|
|
4,104 |
|
|
|
|
|
|
|
973 |
|
|
|
|
|
|
|
4,186 |
|
|
|
|
|
Impairment of intangible assets |
|
|
|
|
|
|
|
|
|
|
1,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Restructuring and Repositioning
Income and Expense |
|
|
142 |
|
|
|
|
|
|
|
15,609 |
|
|
|
|
|
|
|
2,115 |
|
|
|
|
|
|
|
21,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Restructuring, Repositioning Charges |
|
$ |
284 |
|
|
|
|
|
|
$ |
25,956 |
|
|
|
|
|
|
$ |
5,023 |
|
|
|
|
|
|
$ |
47,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
INCOME STATEMENT
Total consolidated revenue decreased 23 percent to $491.4 million from $637.9 million in the second
quarter 2008 primarily from decreases in mortgage banking income and net interest income. Net
interest income declined to $199.1 million in second quarter 2009 from $238.9 million in 2009.
Noninterest income declined $106.8 million to $292.3 million in 2008 from $399.0 million 2008.
NET INTEREST INCOME
Net interest income declined to $199.1 million in the second quarter 2009 compared to $238.9
million in the second quarter 2008 as average earning assets declined 18 percent to $26.2 billion
and average interest-bearing liabilities declined 24 percent to $24.5 billion in the second quarter
2009.
The consolidated net interest margin was 3.05 percent for second quarter 2009 compared to 3.01
percent for second quarter 2008. A slight widening in the margin occurred as the net interest
spread increased to 2.77 percent from 2.66 percent in the second quarter 2009 while the impact of
free funding decreased from 35 basis points to 28 basis points. The slight increase in the margin
is largely attributable to lower cost of funding due to the low interest rate environment and
higher spreads on capital markets trading and correspondent banking portfolios.
Table 2 Net Interest Margin
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30 |
|
|
|
2009 |
|
|
2008 |
|
|
Consolidated yields and rates: |
|
|
|
|
|
|
|
|
Loans, net of unearned income |
|
|
3.95 |
% |
|
|
5.29 |
% |
Loans held for sale |
|
|
4.22 |
|
|
|
5.70 |
|
Investment securities |
|
|
4.98 |
|
|
|
5.27 |
|
Capital markets securities inventory |
|
|
3.97 |
|
|
|
4.45 |
|
Mortgage banking trading securities |
|
|
12.97 |
|
|
|
12.48 |
|
Other earning assets |
|
|
0.20 |
|
|
|
1.98 |
|
|
Yields on earning assets |
|
|
3.91 |
|
|
|
5.24 |
|
|
Interest-bearing core deposits |
|
|
1.27 |
|
|
|
2.21 |
|
Certificates of deposit $100,000 and more |
|
|
2.10 |
|
|
|
3.45 |
|
Federal funds purchased and securities sold under agreements to repurchase |
|
|
0.21 |
|
|
|
1.88 |
|
Capital markets trading liabilities |
|
|
4.29 |
|
|
|
4.92 |
|
Short-term borrowings and commercial paper |
|
|
0.26 |
|
|
|
2.30 |
|
Long-term debt |
|
|
1.48 |
|
|
|
3.17 |
|
|
Rates paid on interest-bearing liabilities |
|
|
1.14 |
|
|
|
2.58 |
|
|
Net interest spread |
|
|
2.77 |
|
|
|
2.66 |
|
Effect of interest-free sources |
|
|
.28 |
|
|
|
.35 |
|
|
FHN NIM |
|
|
3.05 |
% |
|
|
3.01 |
% |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
In the short term, the net interest margin is expected to improve modestly due to a focus on loan
and deposit pricing and as a result of the winding down of our national business. In the longer
term, FHN anticipates stronger margins presuming a more normalized credit and interest rate
environment.
NONINTEREST INCOME
Capital Markets Noninterest Income
The major component of capital markets revenue is generated from the purchase and sale of
securities as both principal and agent, and from other fee sources including equity research, loan
sales, portfolio advisory activities, structured finance, and derivative sales. Securities
inventory positions are generally procured for distribution to customers by the sales staff. A
portion of the inventory is hedged to protect against movements in fair value due to changes in
interest rates.
68
Capital markets noninterest income increased to $187.5 million in second quarter 2009 from $122.3
million in second quarter 2008. Revenues from fixed income sales increased by $65.1 million to
$170.1 million reflecting the benefits of Capital Markets extensive distribution network combined
with continued market volatility and illiquidity. Other product revenues were level at $17.4
million in second quarter 2009 compared to $17.3 million second quarter 2008.
Table 3 Capital Markets Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30 |
|
|
Growth |
|
|
June 30 |
|
|
Growth |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
Rate (%) |
|
|
2009 |
|
|
2008 |
|
|
Rate (%) |
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
170,106 |
|
|
$ |
105,002 |
|
|
|
62.0 + |
|
|
$ |
367,111 |
|
|
$ |
257,210 |
|
|
|
42.7 + |
|
Other product revenue |
|
|
17,372 |
|
|
|
17,336 |
|
|
|
* |
|
|
|
34,591 |
|
|
|
(3,415 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
Total capital markets noninterest income |
|
$ |
187,478 |
|
|
$ |
122,338 |
|
|
|
53.2 + |
|
|
$ |
401,702 |
|
|
$ |
253,795 |
|
|
|
58.3 + |
|
|
|
|
|
|
|
|
|
|
|
|
NM not meaningful
Mortgage Banking Noninterest Income
Effective August 31, 2008, FHN completed the sale of Mortgage Bankings servicing operations and
origination offices outside Tennessee to MetLife. Additionally, in an effort to reduce balance
sheet risk, FHN has reduced the size of the servicing portfolio through bulk sales which began in
2007. As a result of these transactions, components of origination activity, servicing fees, and
operating expenses for 2009 are significantly lower when compared to 2008.
Mortgage banking noninterest income decreased by $156.9 million in the second quarter 2009 to $15.5
million as shown in Table 4.
Table 4 Mortgage Banking Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30 |
|
|
Percent |
|
|
June 30 |
|
|
Percent |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
Noninterest income (thousands) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination income |
|
$ |
(759 |
) |
|
$ |
131,476 |
|
|
NM |
|
$ |
14,171 |
|
|
$ |
216,437 |
|
|
|
93.5 - |
|
Servicing income |
|
|
15,509 |
|
|
|
42,846 |
|
|
|
63.8 - |
|
|
|
116,751 |
|
|
|
112,274 |
|
|
|
4.0 + |
|
Other |
|
|
733 |
|
|
|
(1,904 |
) |
|
NM |
|
|
310 |
|
|
|
2,419 |
|
|
|
87.2 - |
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking noninterest income |
|
$ |
15,483 |
|
|
$ |
172,418 |
|
|
|
91.0 - |
|
|
$ |
131,232 |
|
|
$ |
331,130 |
|
|
|
60.4 - |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking statistics (millions) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinance originations |
|
$ |
396.6 |
|
|
$ |
3,292.3 |
|
|
|
88.0 - |
|
|
$ |
773.7 |
|
|
$ |
8,068.8 |
|
|
|
90.4 - |
|
Home-purchase originations |
|
|
48.2 |
|
|
|
3,533.5 |
|
|
|
98.6 - |
|
|
|
79.5 |
|
|
|
6,266.5 |
|
|
|
98.7 - |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan originations |
|
$ |
444.8 |
|
|
$ |
6,825.8 |
|
|
|
93.5 - |
|
|
$ |
853.2 |
|
|
$ |
14,335.3 |
|
|
|
94.0 - |
|
|
|
|
|
|
|
|
|
|
|
|
Servicing portfolio owned |
|
$ |
43,833.5 |
|
|
$ |
98,384.2 |
|
|
|
55.4 - |
|
|
$ |
43,833.5 |
|
|
$ |
98,384.2 |
|
|
|
55.4 - |
|
|
|
|
|
|
|
|
|
|
|
|
NM not meaningful
Servicing income includes servicing fees, changes in the fair value of MSR, and net gains/losses
from hedging the fair value of servicing assets. The servicing portfolio has decreased since 2008
as a result of the sale of the servicing platform to MetLife in the third quarter 2008 and through
a series of bulk sales. Total servicing income decreased to $15.5 million from $42.8 million in
the second quarter 2009. Gross servicing fees were down $42.2 million to $32.8 million in 2009
consistent with the decline in the size of the servicing portfolio. Net hedging gains also
decreased in 2009 to $7.0 million compared to $16.5 million in 2008 due to a widening of spreads
between mortgage and swap rates.
Net revenue from origination activity decreased significantly to $.8 million in the second quarter
2009 from $131.5 million in the second quarter 2008 as a result of the sale of national mortgage
origination offices. Gross origination income through the regional banking footprint was $8.8
million in the second quarter 2009, but was negated by a $10 million unhedged negative fair value
adjustment to the remaining mortgage warehouse.
69
Other Noninterest Income
Other noninterest income includes deposit transactions and cash management fees, revenue from loan
sales and securitizations, insurance commissions, trust services and investment management fees,
net securities gains and losses and other noninterest income. Fees from deposit transactions and
cash management were down $5.0 million primarily due to a volume decline in transactions resulting
in lower retail NSF fees. Trust fees decreased $1.2 million as the market value of managed trust
assets declined. Revenue from loan sales and securitizations was $.6 million in 2009 compared to a
loss of $7.0 million in 2008 as 2008 included a $9.4 million negative valuation adjustment to the
residual interest retained from prior consumer loan sales. Other noninterest income decreased
$15.7 million to $33.1 million in the second quarter 2008. The decrease is primarily the result of
a $12.6 million gain on the repurchase of debt recognized in 2008. Both quarters included charges
to increase the repurchase reserve related to prior HELOC and second lien loan sales.
NONINTEREST EXPENSE
Total noninterest expense for second quarter 2009 decreased 11 percent to $411.9 million from
$463.0 million in second quarter 2008. In 2008, noninterest expense included $16.3 million of
costs related to restructuring, repositioning, and efficiency initiatives.
Employee compensation, incentives and benefits (personnel expense), the largest component of
noninterest expense, decreased $77.4 million from $277.1 million in second quarter 2008 primarily
as a result of headcount reduction from the sale of national origination and servicing platforms to
MetLife in the third quarter 2008. The effect on personnel expense of increased capital markets
production was somewhat mitigated by a reduced rate of incentive provisioning. Additionally, 2008
included $5.7 million of costs related to restructuring, repositioning, and efficiency initiatives.
Occupancy, equipment rental, communications, and operations services expenses declined a combined
$29.6 million primarily as a result of the 2008 mortgage divestiture and a decline in costs related
to restructuring, repositioning, and efficiency initiatives. All other noninterest expense
increased $55.8 million to $146.6 million in the second quarter 2009 compared to $90.8 million in
the second quarter 2008. Charges related to the Mortgage Banking foreclosure and repurchase
reserve from the legacy origination platform increased to $29.1 million from $5.5 million in 2008
due to higher repurchase activity. FDIC premiums, including the special assessment, increased
$17.9 million to $21.4 million in the second quarter 2009. Losses on foreclosed property increased
$16.6 million to $21.8 million primarily as a result of fair value adjustments of OREO and net
losses on dispositions. Second quarter 2009 also included an $8.1 million charge to increase the
private mortgage insurance (PMI) reinsurance reserve as mortgage default expectations increased and
$5.6 million of costs related to mortgage originations in the regional banking footprint. All
other expense categories decreased consistent with FHNs focus on reduction of non-core businesses.
INCOME TAXES
The effective tax rate for the second quarter 2009 was 41 percent reflecting tax benefits due to
the reported loss in 2009. Second quarter 2009 includes approximately $8 million of favorable
permanent tax differences. The rate cannot be compared to second quarter 2008 due to the level of
net income reported in second quarter 2008. Second quarter 2008 included $10.5 million of
favorable permanent differences and a $2.0 million benefit from the favorable resolution of certain
outstanding tax issues with taxing authorities.
No valuation allowance related to deferred tax assets has been recorded as of June 30, 2009 other
than a full valuation reserve related to state net operating losses that are not expected to be
realized. The valuation reserve is primarily a result of FHNs strategy of exiting the national
mortgage business. The company has considered all available evidence, both positive and negative,
in making its determination with respect to the need for a valuation allowance. This evidence
includes, but is not limited to, a large carryback position that can absorb a significant portion
of the deferred tax assets, historical and future projected taxable income, projected future
reversals of existing deferred tax liabilities, and potential tax planning strategies.
70
ASSET QUALITY
Allowance for Loan Losses
Managements policy is to maintain the allowance for loan losses at a level sufficient to absorb
estimated probable incurred losses in the loan portfolio. The allowance for loan losses includes
the following components: reserves for commercial loans evaluated based on pools of credit graded
loans and reserves for pools of smaller-balance homogeneous retail and commercial loans, both
determined in accordance with SFAS No. 5, Accounting for Contingencies. Also included are
reserves, determined in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, related to loans determined by management to be individually impaired. The reserve factors
applied to these pools are an estimate of probable incurred losses based on managements evaluation
of historical net losses from loans with similar characteristics.
Beginning in the second quarter of 2009, management developed and utilized an Average Loss Rate
Model (ALR) for establishment of commercial portfolio reserve rates in accordance with SFAS No. 5.
ALR is a grade migration based approach that allows for robust segmentation and dynamic time period
consideration. In comparison with the prior commercial reserve rate establishment, ALR is more
sensitive to current portfolio conditions and provides management with additional detailed analysis
into historical portfolio net loss experience. ALR also uses the current assigned commercial
credit grades ranging from 1 to 16 thereby eliminating the previous need to back convert to the
historical grade range of 1 to 10 for the proper assignment of reserves. Consistent with the
preceding approach, these reserve rates are then subject to management adjustment to reflect
current events, trends and conditions (including economic considerations and trends) that affect
the asset quality of the commercial loan portfolio.
The provision for loan losses is the charge to earnings that management determines to be necessary
to maintain the allowance for loan and lease losses (ALLL) at a sufficient level reflecting
managements estimate of probable incurred losses in the loan portfolio. Analytical models based
on loss experience adjusted for current events, trends, and economic conditions are used by
management to determine the amount of provision to be recognized and to assess the adequacy of the
loan loss allowance. The provision for loan losses increased 18 percent to $260.0 million in
second quarter 2009 from $220.0 million in second quarter 2008.
Net Charge-Offs
Net charge offs increased to $239.4 million in the second quarter 2009 from $127.7 million in 2008
and the net charge off ratio was 477 basis points in 2009 compared to 235 basis points in 2008.
All portfolios reflected increased net charge-offs compared to second quarter 2008.
While charge-offs increased due to adverse economic conditions, FHNs methodology of charging down
collateral dependent commercial loans to net realizable value (NRV) also impacted charge-off
trends, especially in comparison to applicable ALLL. Generally, classified nonaccrual loans over
$1 million are deemed to be impaired in accordance with Statement of Financial Accounting
Standards, No. 114, Accounting by Creditors for Impairment of a Loan (SFAS No. 114) and are
assessed for impairment measurement. A majority of these SFAS No. 114 loans (generally commercial
loans over $1 million that are not expected to pay all contractually due principal and interest)
are included in the Residential CRE (Homebuilder and Condominium Construction) portfolio. When
impairment is detected, loans are then written down to the fair value of the underlying collateral,
less costs to sell (net realizable value). Fair value is based on recent appraisals of collateral.
Collateral values are monitored and further charge-offs are taken if it is determined that the
collateral values have continued to decline.
Also impacting increased charge-offs related to SFAS No. 114
loans are the significant declines in
collateral values experienced due to the prevailing real estate market conditions. Therefore,
charge-offs are not only higher due to the increased credit deterioration related to these loans,
but also due to the increased rate at which loans are charged down to net realizable value because
of rapidly declining collateral values. Net charge-offs related to collateral dependent SFAS No.
114 loans were $80.7 million or 34 percent of total net charge-offs during the second quarter of
2009. Because of the accelerated recognition of impairment of these loans, the elevated
charge-offs decrease the ALLL. Compression occurs in the ALLL to net charge-offs ratio as the ALLL
is generally not replenished for charge-offs related to SFAS No. 114 collateral dependent loans
because reserves are not carried for these loans.
71
Additionally, One-Time Close (OTC) loans are generally written down to appraised value if, when the
loan becomes 90 days past due or is considered substandard, recently obtained appraisals indicate a
decline in fair value. Subsequent charge downs are taken thereafter in accordance with regulatory
guidelines. In the second quarter 2009, net charge-offs related to OTC loans were $51.3 million,
approximately 21 percent of total net charge-offs.
Nonperforming Assets
As included in Table 5, nonperforming loans (NPLs) in the loan portfolio were $1.1 billion on June
30, 2009, compared to $.8 billion on June 30, 2008. The ratio of NPLs to total loans was 5.64
percent on June 30, 2009, and 3.42 percent on June 30, 2008. In the commercial portfolio, the
increase in NPLs is primarily attributable to deterioration in the residential CRE and
Income-producing Commercial Real Estate (income CRE) portfolios. NPLs in the residential CRE
portfolio increased $99.4 million to $388.8 million; NPLs in the income CRE portfolio increased
$90.0 million to $162.2 million; NPLs in the Commercial and Industrial (C&I) portfolio increased
$19.6 million to $112.2 million. Generally, the continued adverse economic conditions have
affected the income CRE and C&I portfolios while the weak housing market and large supply of newly
constructed homes and tightened liquidity have affected the residential CRE portfolio.
On the consumer side, nonperforming OTC loans increased $89.3 million to $357.4 million while
nonperforming permanent mortgages increased $46.9 million to $77.5 million. Both portfolios are
under stress due to the prolonged downturn in the housing market.
Nonperforming assets were $1.2 billion on June 30, 2009, compared to $.9 billion on June 30, 2008.
The nonperforming assets ratio was 6.15 percent on June 30, 2009 and 3.88 percent last year.
Foreclosed assets were flat when compared to second quarter 2008 as 2009 included higher levels of
overall asset reductions from disposition activity as well as fair value adjustments to reflect
current market conditions. Foreclosed assets are recognized at net realizable value, including
estimated costs of disposal at foreclosure. While nonperforming asset levels are expected to
flatten over the next few quarters, the NPA ratio will continue to remain under pressure throughout
the current economic downturn as loan balances continue to decline.
The ratio of ALLL to NPLs in the loan portfolio increased to .87 times in the second quarter 2009
compared to .76 times in the second quarter of 2008. While nonperforming loans increased from the
same period last year, a portion of these loans does not carry reserves. As of June 30, 2009, the
total amount of SFAS No. 114 commercial loans was $547.7 million. The SFAS No. 114 loans carried
at NRV and that do not carry reserves were $522.2 million on June 30, 2009. The SFAS No. 114 loans
mentioned above that are charged down to NRV represent 47 percent of nonperforming loans in the
loan portfolio as of June 30, 2009. This approach compresses the ALLL to nonperforming loans ratio
because SFAS 114 loans are included in nonperforming loans, but reserves for these loans are not
carried in the ALLL. Residential CRE loans were $325.0 million or 59 percent of all SFAS No. 114
loans while the remainder is included in the C&I and Income CRE portfolios. Additionally,
charged-down OTC loans are included in nonperforming loans. As of June 30, 2009, OTC loans
accounted for 32 percent of nonperforming loans in the loan portfolio. The ALLL related to OTC
loans was $164.3 million which provides a coverage ratio of 29 percent for inherent losses in the
remainder of that portfolio. Because of the methodologies described above, the ALLL to NPL ratio
is negatively impacted. Nonperforming loans in the loan portfolio for which reserves are actually
carried were approximately $399.9 million as of June 30, 2009.
Potential Problem Assets
Potential problem assets in the loan portfolio, which are not included in nonperforming assets,
represent those assets where information about possible credit problems of borrowers has caused
management to have serious doubts about the borrowers ability to comply with present repayment
terms. This definition is believed to be substantially consistent with the standards established
by the OCC for loans classified substandard. In total, potential problem assets were $1.5 billion
on June 30, 2009, up from $.7 billion on June 30, 2008. The significant increase in potential
problem assets primarily reflects downward credit grading and deterioration in the commercial
portfolio. Also, loans 30 to 89 days past due decreased slightly to $335.0 million on June 30,
2009, from $346.6 million on June 30, 2008. Commercial loans 30-89 days past due decreased 29
percent as a result of more effective portfolio management. Consumer loans 30-89 days
past due increased 37 percent, primarily driven by permanent mortgage and home equity portfolios.
Loans 90 days past due increased 58 percent primarily as a result of an increase in problem loans
in the permanent mortgage portfolio. The current expectation of losses
72
from both potential problem assets and loans 30 to 89 days past due has been included in
managements analysis for assessing the adequacy of the allowance for loan losses.
While asset quality is expected to remain stressed in 2009 and into 2010 due to the expectation
that economic conditions and the housing industry will remain weakened for the foreseeable future,
certain asset quality performance may begin to improve in the latter half of this year. Actual
results could differ because of several factors, including those presented in the Forward-Looking
Statements section of this MD&A discussion. Table 5, Asset Quality Information, provides summary
asset quality data referred to in the previous paragraphs and Table 6, Asset Quality by Portfolio,
provides various asset statistics based on FHNs internal loan classification.
73
Table 5 Asset Quality Information
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
(Dollars in thousands) |
|
2009 |
|
2008 |
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
Beginning balance on March 31 |
|
$ |
940,932 |
|
|
$ |
483,203 |
|
Provision for loan losses |
|
|
260,000 |
|
|
|
220,000 |
|
Divestitures/acquisitions/transfers |
|
|
|
|
|
|
(382 |
) |
Charge-offs |
|
|
(250,330 |
) |
|
|
(131,385 |
) |
Recoveries |
|
|
10,880 |
|
|
|
3,713 |
|
|
Ending balance on June 30 |
|
$ |
961,482 |
|
|
$ |
575,149 |
|
|
Reserve for off-balance sheet commitments |
|
|
22,823 |
|
|
|
22,303 |
|
Total allowance for loan losses and reserve for off-balance sheet commitments |
|
$ |
984,305 |
|
|
$ |
597,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30 |
Nonperforming
Assets by Segment |
|
2009 |
|
2008 |
|
Regional Banking: |
|
|
|
|
|
|
|
|
Nonperforming loans |
|
$ |
213,201 |
|
|
$ |
115,264 |
|
Foreclosed real estate |
|
|
29,410 |
|
|
|
37,594 |
|
|
Total Regional Banking |
|
|
242,611 |
|
|
|
152,858 |
|
|
Capital Markets: |
|
|
|
|
|
|
|
|
Nonperforming loans |
|
|
70,994 |
|
|
|
41,527 |
|
Foreclosed real estate |
|
|
596 |
|
|
|
600 |
|
|
Total Capital Markets |
|
|
71,590 |
|
|
|
42,127 |
|
|
National Specialty Lending: |
|
|
|
|
|
|
|
|
Nonperforming loans |
|
|
764,672 |
|
|
|
582,523 |
|
Foreclosed real estate |
|
|
50,386 |
|
|
|
45,384 |
|
|
Total National Specialty Lending |
|
|
815,058 |
|
|
|
627,907 |
|
|
Mortgage Banking: |
|
|
|
|
|
|
|
|
Nonperforming loans including held for sale (a) |
|
|
78,090 |
|
|
|
30,704 |
|
Foreclosed real estate |
|
|
25,728 |
|
|
|
22,542 |
|
|
Total Mortgage Banking |
|
|
103,818 |
|
|
|
53,246 |
|
|
Total nonperforming assets |
|
$ |
1,233,077 |
|
|
$ |
876,138 |
|
|
Total loans, net of unearned income |
|
$ |
19,585,827 |
|
|
$ |
22,225,232 |
|
Insured loans |
|
|
(466,455 |
) |
|
|
(739,276 |
) |
|
Loans excluding insured loans |
|
$ |
19,119,372 |
|
|
$ |
21,485,956 |
|
|
Foreclosed real estate from GNMA loans |
|
|
10,464 |
|
|
$ |
35,737 |
|
Potential problem assets (b) |
|
|
1,492,740 |
|
|
|
655,610 |
|
Loans 30 to 89 days past due |
|
|
334,999 |
|
|
|
346,556 |
|
Loans 30 to 89 days past due guaranteed portion (c) |
|
|
38 |
|
|
|
138 |
|
Loans 90 days past due |
|
|
143,711 |
|
|
|
90,678 |
|
Loans 90 days past due guaranteed portion (c) |
|
|
276 |
|
|
|
188 |
|
Loans held for sale 30 to 89 days past due |
|
|
42,402 |
|
|
|
53,666 |
|
Loans held for sale 30 to 89 days past due guaranteed portion (c) |
|
|
42,402 |
|
|
|
53,666 |
|
Loans held for sale 90 days past due |
|
|
38,757 |
|
|
|
66,599 |
|
Loans held for sale 90 days past due guaranteed portion (c) |
|
|
36,102 |
|
|
|
64,508 |
|
Off-balance sheet commitments (d) |
|
$ |
5,882,186 |
|
|
$ |
6,444,427 |
|
|
Allowance to total loans |
|
|
4.91 |
% |
|
|
2.59 |
% |
Allowance to nonperforming loans in the loan portfolio |
|
|
0.87 |
x |
|
|
0.76 |
x |
Allowance to loans excluding insured loans |
|
|
5.03 |
% |
|
|
2.68 |
% |
Allowance to annualized net charge-offs |
|
|
1.00 |
x |
|
|
1.13 |
x |
Nonperforming assets to loans and foreclosed real estate (e) |
|
|
6.15 |
% |
|
|
3.88 |
% |
Nonperforming loans in the loan portfolio to total loans, net of unearned income |
|
|
5.64 |
% |
|
|
3.42 |
% |
Total commercial net charge-offs (f) |
|
|
3.96 |
% |
|
|
1.73 |
% |
Retail real estate net charge-offs (f) |
|
|
5.61 |
% |
|
|
2.94 |
% |
Other retail net charge-offs (f) |
|
|
6.99 |
% |
|
|
4.19 |
% |
Credit card receivables net charge-offs (f) |
|
|
6.54 |
% |
|
|
5.63 |
% |
Total net charge-offs to average loans (f) |
|
|
4.77 |
% |
|
|
2.35 |
% |
|
|
|
|
(a) |
|
Second quarter 2009 and 2008 includes $55,425 and $20,788 of loans held-to-maturity,
respectively. |
|
(b) |
|
Includes 90 days past due loans. |
|
(c) |
|
Guaranteed loans include FHA, VA, student and GNMA loans repurchased through the GNMA
repurchase program. |
|
(d) |
|
Amount of off-balance sheet commitments for which a reserve has been provided. |
|
(e) |
|
Ratio is non-performing assets related to the loan portfolio to total loans plus foreclosed
real estate and other assets. |
|
(f) |
|
Net charge-off ratios are calculated based on average loans, net of unearned income. . |
74
Table 6 Asset Quality by Portfolio
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
|
2009 |
|
2008 |
|
Key Portfolio Details |
|
|
|
|
|
|
|
|
Commercial (C&I & Other) |
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
7,381 |
|
|
$ |
7,721 |
|
|
30+ Delinq. % (a) |
|
|
.82 |
% |
|
|
1.46 |
% |
NPL % |
|
|
1.52 |
% |
|
|
1.20 |
% |
Charge-offs % (qtr. annualized) |
|
|
1.43 |
% |
|
|
.84 |
% |
|
Allowance / Loans % |
|
|
3.40 |
% |
|
|
1.90 |
% |
Allowance / Charge-offs |
|
|
2.35 |
x |
|
|
2.46 |
x |
|
|
|
|
|
|
|
|
|
|
Income CRE (Income-producing Commercial Real Estate) |
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
1,871 |
|
|
$ |
2,039 |
|
|
30+ Delinq. % (a) |
|
|
2.82 |
% |
|
|
1.43 |
% |
NPL % |
|
|
8.67 |
% |
|
|
3.54 |
% |
Charge-offs % (qtr. annualized) |
|
|
6.40 |
% |
|
|
.63 |
% |
|
Allowance / Loans % |
|
|
5.77 |
% |
|
|
2.89 |
% |
Allowance / Charge-offs |
|
|
0.87 |
x |
|
|
4.82 |
x |
|
|
|
|
|
|
|
|
|
|
Residential CRE (Homebuilder and Condominium Construction) |
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
986 |
|
|
$ |
1,739 |
|
|
30+ Delinq. % (a) |
|
|
5.29 |
% |
|
|
6.36 |
% |
NPL % |
|
|
39.44 |
% |
|
|
16.65 |
% |
Charge-offs % (qtr. annualized) |
|
|
17.22 |
% |
|
|
6.23 |
% |
|
Allowance / Loans % |
|
|
9.87 |
% |
|
|
5.26 |
% |
Allowance / Charge-offs |
|
|
.53 |
x |
|
|
.76 |
x |
|
|
|
|
|
|
|
|
|
|
Consumer Real Estate (Home Equity Installment and HELOC) |
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
7,356 |
|
|
$ |
7,909 |
|
|
30+ Delinq. % (a) |
|
|
2.12 |
% |
|
|
1.27 |
% |
NPL % |
|
|
.08 |
% |
|
|
.09 |
% |
Charge-offs % (qtr. annualized) |
|
|
3.01 |
% |
|
|
1.78 |
% |
|
Allowance / Loans % |
|
|
3.04 |
% |
|
|
1.70 |
% |
Allowance / Charge-offs |
|
|
0.99 |
x |
|
|
.95 |
x |
|
|
|
|
|
|
|
|
|
|
OTC (Consumer Residential Construction Loans) |
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
558 |
|
|
$ |
1,522 |
|
|
30+ Delinq. % (a) |
|
|
7.90 |
% |
|
|
2.69 |
% |
NPL % |
|
|
64.06 |
% |
|
|
17.61 |
% |
Charge-offs % (qtr. annualized) |
|
|
30.53 |
% |
|
|
9.90 |
% |
|
Allowance / Loans % |
|
|
29.46 |
% |
|
|
7.75 |
% |
Allowance / Charge-offs |
|
|
0.80 |
x |
|
|
.78 |
x |
|
|
|
|
|
|
|
|
|
|
Permanent Mortgage |
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
1,112 |
|
|
$ |
1,004 |
|
|
30+ Delinq. % (a) |
|
|
9.44 |
% |
|
|
6.36 |
% |
NPL % |
|
|
6.97 |
% |
|
|
3.04 |
% |
Charge-offs % (qtr. annualized) |
|
|
7.97 |
% |
|
|
1.15 |
% |
|
Allowance / Loans % |
|
|
8.85 |
% |
|
|
1.24 |
% |
Allowance / Charge-offs |
|
|
1.08 |
x |
|
|
1.12 |
x |
|
|
|
|
|
|
|
|
|
|
Credit Card and Other |
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
323 |
|
|
$ |
291 |
|
|
30+ Delinq. % (a) |
|
|
2.08 |
% |
|
|
2.11 |
% |
NPL % |
|
|
|
|
|
|
|
|
Charge-offs % (qtr. annualized) |
|
|
6.57 |
% |
|
|
3.29 |
% |
|
Allowance / Loans % |
|
|
5.91 |
% |
|
|
5.43 |
% |
Allowance / Charge-offs |
|
|
0.90 |
x |
|
|
1.45 |
x |
|
|
|
|
Loans are expressed net of unearned income. All data is based on internal loan classification. |
|
(a) |
|
30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
75
STATEMENT OF CONDITION REVIEW
EARNING ASSETS
Earning assets consists of loans, investment securities, trading securities, loans held for sale,
and other earning assets. Earning assets averaged $26.2 billion and $31.8 billion in the second
quarter 2009 and second quarter 2008, respectively.
Loans
Average loans were $20.1 billion in the second quarter 2009 compared to $21.7 billion in the second
quarter 2008, a decline of 7 percent. The decrease was primarily driven by declines in both
commercial and consumer construction portfolios as FHN discontinued loan origination through its
national construction lending channel. Average commercial real estate construction declined 41
percent, or $1.0 billion, and consumer real estate construction loan portfolios declined by 60
percent, or $1.0 billion, from the second quarter 2008. Partially offsetting the declines were
slight increases in C&I loans as approximately $.3 billion of small issuer trust preferred loans,
net of a lower of cost or market value (LOCOM) adjustment, were transferred from held for sale to
the loan portfolio in second quarter 2008. Average loans represented 77 percent of average earning
assets in second quarter 2009 and 68 percent in second quarter 2008. Additional loan information
is provided in Table 7 Average Loans and Note 4 Loans.
The commercial and consumer construction and national home equity portfolios are expected to
continue to contract in 2009 due to conditions in the housing market and FHNs strategic goal to
reduce real estate concentrations in general. It is expected that average loans will continue to
decline in the near-term due to limited loan demand and as the national portfolios continue to
wind-down.
Table 7 Average Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30 |
|
|
|
|
|
|
Percent |
|
Percent |
|
|
|
|
|
Percent |
(Dollars in millions) |
|
2009 |
|
of Total |
|
Change |
|
2008 |
|
of Total |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and industrial |
|
$ |
7,506.8 |
|
|
|
37 |
% |
|
|
4.1 |
% |
|
$ |
7,212.9 |
|
|
|
33 |
% |
Real estate commercial (a) |
|
|
1,542.1 |
|
|
|
8 |
|
|
|
10.1 |
|
|
|
1,401.3 |
|
|
|
7 |
|
Real estate construction (b) |
|
|
1,455.6 |
|
|
|
7 |
|
|
|
(41.4 |
) |
|
|
2,481.7 |
|
|
|
11 |
|
|
|
|
|
|
|
|
Total commercial |
|
|
10,504.5 |
|
|
|
52 |
|
|
|
(5.3 |
) |
|
|
11,095.9 |
|
|
|
51 |
|
|
|
|
|
|
|
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate residential (c) |
|
|
7,907.7 |
|
|
|
39 |
|
|
|
.4 |
|
|
|
7,878.8 |
|
|
|
36 |
|
Real estate construction (d) |
|
|
672.0 |
|
|
|
3 |
|
|
|
(59.7 |
) |
|
|
1,666.0 |
|
|
|
8 |
|
Other retail |
|
|
131.3 |
|
|
|
1 |
|
|
|
(5.0 |
) |
|
|
138.2 |
|
|
|
1 |
|
Credit card receivables |
|
|
184.2 |
|
|
|
1 |
|
|
|
(5.0 |
) |
|
|
193.9 |
|
|
|
1 |
|
Real estate loans pledged
against other collateralized borrowings (e) |
|
|
693.6 |
|
|
|
4 |
|
|
|
(5.7 |
) |
|
|
735.8 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Total retail |
|
|
9,588.8 |
|
|
|
48 |
|
|
|
(9.7 |
) |
|
|
10,612.7 |
|
|
|
49 |
|
|
|
|
|
|
|
|
Total loans, net of unearned |
|
$ |
20,093.3 |
|
|
|
100 |
% |
|
|
(7.4 |
)% |
|
$ |
21,708.6 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes nonconstruction income property loans and land loans not involving development. |
|
(b) |
|
Includes homebuilder, condominium, and income property construction and land development loans. |
|
(c) |
|
Includes home equity lines of credit (average for second quarter 2009 and 2008 $3.8 billion and $3.7 billion, respectively). |
|
(d) |
|
Includes one-time close product. |
|
(e) |
|
Includes on-balance sheet securitizations of home equity loans. |
Loans Held for Sale / Loans Held for Sale Divestiture
Loans held for sale consists of the mortgage warehouse, student, small business, and home equity
loans. During second quarter 2009 loans held for sale averaged $622.8 million, a decrease of 84
percent, or $3.2 billion from second quarter 2008. The majority of the decrease relates to the
mortgage warehouse which contracted by $2.8
76
billion as a result of the sale of the national
mortgage origination platform to MetLife in third quarter 2008. Small issuer trust preferred loans
decreased by $.3 billion as the loans, net of LOCOM, were moved to the portfolio during 2008. Loans
held for sale divestiture decreased $.2 billion as FHN completed the FH bank divestitures in
second quarter 2008.
Other Earning Assets
Trading securities decreased from $2.0 billion in 2008 to $1.1 billion in 2009 primarily as a
result of capital markets continued efforts to manage trading portfolio levels and also due to
current market conditions. Additionally federal funds sold and securities repurchase agreements
decreased $.6 billion from $1.3 billion in the second quarter 2008. Average federal funds sold
declined as result of a reduction in short-term lending to correspondent banks and securities
repurchase agreements declined consistent with capital markets trading portfolio.
Interest-bearing cash increased $.7 billion as Federal Reserve deposits converted to
interest-bearing accounts in the fourth quarter 2008.
Deposits/Other Sources of Funds
During the second quarter 2009, core deposits decreased 3 percent or $.4 billion and averaged $12.8
billion as custodial deposits were transferred due to servicing sales through the MetLife sale and
other bulk sales occurring in 2008 and 2009. Additionally, increased competition for deposits in
the marketplace has also affected the decline. Average short-term purchased funds decreased to $7.9
billion in the second quarter 2009 from $12.1 billion in the second quarter 2008 driven by a $2.6
billion decline in Federal Home Loan Bank borrowings primarily as a result of the contracting
balance sheet. Federal fund borrowings declined by $.1 billion as lending among financial
institutions tightened and also due to a reduced need for short-term funding. Average long-term
borrowings decreased by $3.0 billion consistent with balance sheet contraction as long term bank
notes matured or were repurchased and extendable notes were not renewed.
Financial Summary (Comparison of first six months of 2009 to first six months of 2008)
FHN reported a net loss available to common shareholders of $206.0 million or $.97 per diluted
share for the six months ended June 30, 2009. The net loss available to common shareholders was
$11.2 million or $.07 per diluted share in 2008. For the six months ended June 30, 2009, return on
average common equity and return on average assets were negative 17.11 percent and negative 1.16
percent, respectively. Return on average common equity and return on
average assets were negative .95 percent and negative .02 percent for the six months ended June 30, 2008.
For the first six months of 2009, total revenues were $1.1 billion; a decrease of 17 percent
compared to $1.3 billion for the six months ended 2008. Net interest income declined $71.3 million
to $395.7 million primarily as average earning assets declined $5.4 billion from 2008. Noninterest
income for the first six months of 2009 decreased to $700.1 million from $848.1 million in 2008.
Capital markets noninterest income increased by 58 percent to $401.7 million for the first half of
2009 from $253.8 million a year ago due to increased demand for fixed income securities resulting
from market volatility and illiquidity in the first half of 2009. A $36.2 million LOCOM adjustment
taken on the trust preferred warehouse in 2008 also contributed to the year over year increase in
capital markets noninterest income. These loans were transferred to the loan portfolio in the
second quarter 2008.
Loan sale and securitization income increased from a loss of $11.1 million for the six months ended
June 30, 2008, to a gain of $1.5 million in 2009. A decline in residual values from prior consumer
loan securitizations of $9.4 million negatively impacted loan sale and securitization income in
2008.
Mortgage banking income was $131.2 million for the six months ended June 30, 2009, compared to
$331.1 million for six months ended June 30, 2008. In the third quarter 2008, FHN sold the
national mortgage origination and servicing platform to MetLife. As a result, origination and
servicing income is significantly lower in 2009 when compared to the first half of 2008.
77
Origination income decreased to $13.2 million for the six months ended June 30, 2009 from $218.2
million. In 2009, origination income primarily includes origination activity related to the
regional banking footprint and fair value adjustments on the remaining warehouse. In the first
half of 2009, income from origination activity within the regional banking footprint was $14.1
million and a negative unhedged fair adjustment of the remaining mortgage warehouse was
approximately $8 million.
Servicing income increased to $116.8 million in the first half of 2009 from $112.3 million despite
a 55 percent decrease in the servicing portfolio. The increase is primarily related to net hedging
gains experienced in 2009 as a result of wider spreads between swap and mortgage rates due to
positive convexity in the first quarter 2009. The change in MSR value due to runoff declined to
$37.0 million in 2009 from $74.5 million in 2008.
The net securities loss in 2009 was $.3 million compared to a net $65.0 million gain in 2008. The
net securities gain in 2008 was due to the redemption of shares in connection with Visa Inc.s
initial public offering. Other noninterest income declined $29.8 million to $57.2 million in 2009
and was affected by debt repurchase gains of $12.6 million that occurred in 2008, an increase in
charges related to consumer lending repurchase reserves, and a decrease in the earnings rate of
BOLI.
Provision expense for loan losses increased by $100.0 million for the six months ended June 30,
2009, from $460.0 million in the first half of 2008 reflecting deterioration primarily in the
national commercial and consumer construction lending, national home equity, and C&I portfolios.
Noninterest expense decreased to $829.3 million for the six months ended June 30, 2009, from $897.2
million in 2008, primarily due to a decline of $116.4 million in personnel costs. In the first
half of 2009, personnel expense was $448.2 million compared to $564.5 million in the first half of
2008 driven by mortgage banking headcount reduction from the sale of the national mortgage and
servicing platforms to MetLife which was partially negated by an increase in capital markets
production. Severance costs included in restructuring, repositioning, and efficiency initiatives
declined by $9.7 million from the prior year.
Noninterest expense charges related to restructuring, repositioning and efficiency initiatives
(excluding personnel costs) were down $20.3 million for the six months ended June 30, 2009 from
$20.7 million in 2008. Occupancy, equipment rental and depreciation, and other operational costs
decreased from 2008 as a result of the sale of national mortgage origination and servicing
platforms to MetLife.
Partially offsetting the decreases noted above was an increase of $104.6 million in other expenses.
This increase is a result of a combination of various items. Provision for mortgage banking
foreclosure and repurchases related to legacy origination increased from the prior year as well as
losses on OREO valuation adjustments and dispositions. FDIC premiums were up $22.8 million in the
first half of 2009 primarily as a result of the 2009 special assessment. All other expenses
increased by $45.1 million for the six months ended June 30, 2009 compared to June 30, 2008. The
increase in other expense was affected by the $30.0 million reversal of the contingent liability
for certain Visa legal matters in 2008, charges related to the increase in PMI reinsurance reserves
in 2009, and an increase in processing costs related to the regional banking mortgage origination
business in 2009.
Income taxes for the six months ended June 30, 2009 were primarily affected by the effective tax
rate as well as permanent tax credits. The tax rate for the first half of 2008 cannot be compared
to that of 2009 due to the level of pre-tax income. The first half of 2008 was positively impacted
by favorable state tax settlements.
BUSINESS LINE REVIEW
Regional Banking
Total revenues for the six-month period were $406.2 million, a decrease of 6 percent from $430.7
million in 2008. Net interest income decreased slightly to $248.5 million in the first half of
2009 from $250.8 million in 2008. Noninterest income decreased $22.2 million to $157.7 million
during the first six months of 2009. Total service charges declined $9.0 million from lower
consumer NSF fees as trust fees declined $3.6 million consistent with the decline in the market
value of managed assets. Annuity fees, insurance premiums, and other miscellaneous income
contributed to the decline.
78
Provision expense for loan losses decreased $15.9 million in 2009 from $164.7 million in 2008
reflecting proactive recognition and management of problem assets. Noninterest expense increased
to $336.7 million in 2009 compared to $292.9 million in 2008. The increase is primarily a result
of expenses including higher FDIC premiums, including the 2009 special assessment, increased credit
and technology-related costs, and an adjustment related to employee life insurance benefits.
Capital Markets
Total revenues for 2009 increased to $455.2 million compared to $297.8 million for the first half
of 2008. Net interest income was $48.9 million in 2008, an increase of 25 percent from 2008. The
increase in net interest income is largely due to higher spreads on the correspondent banking loan
portfolio.
Fixed income revenue increased to $367.1 million in 2009 from $257.2 million in 2008 as production
increased reflecting the benefits of Capital Markets extensive distribution network combined with
continued market volatility and illiquidity during the first half of 2009. Other revenue increased
to $39.2 million from $1.3 million in 2008 as the prior year included a $36.2 million LOCOM
negative adjustment on the trust preferred warehouse. Provision for loan losses was $35.1 million
in 2009 compared to $33.6 million in 2008 reflecting incremental deterioration in the trust
preferred portfolio and correspondent banking loans. Noninterest expense was $266.4 million, an
increase of $49.6 million from $216.8 million in 2008. The increase is primarily driven by
increased production in the first half of 2009 which was partially mitigated in 2009 by a reduced
rate of incentive provisioning.
National Specialty Lending
Total revenues for the six months ended June 30, 2009, were $49.0 million compared to $93.6 million
in 2008. Net interest income was $64.7 million in 2009 compared to $107.7 million in 2008. The
decline in net interest income is primarily due to an increase in nonaccrual loans and the
wind-down of the national origination business. Provision for loan losses increased to $364.9
million in 2009 compared to $257.5 million in 2008, reflecting continued deterioration in the
national construction and consumer lending portfolios.
Noninterest income was a loss of $15.7 million for 2009 compared to a loss of $14.0 million in
2008. The first half of 2009 reflected increased charges related to higher estimated repurchase
activity from prior consumer loan sales. Repurchase costs were lower in 2008 but the prior year
reflected a negative fair value adjustment to the residual interests retained from prior consumer
loan sales. Noninterest expense rose to $72.9 million in 2009 compared to $56.0 million in 2008.
Noninterest expense declines related to the wind-down of operations were more than offset by
increased foreclosure losses and rising costs to manage and resolve problem assets.
Mortgage Banking
Total revenues for the six months ended June 30, 2008, were $162.2 million compared to $420.1
million in 2008. Net interest income was down $46.6 million to $21.8 million consistent with the
decline in the size of the mortgage warehouse. Noninterest income was $140.4 million in 2009
compared to $351.7 million in 2008 principally from decreased origination income. Provision for
loan losses increased to $11.1 million in 2009 compared to $4.2 million in 2008 reflecting
deterioration of permanent mortgages in the portfolio.
Origination income was $13.2 million for the six months ended June 30, 2009, a decrease from $218.2
million. In 2009, origination income primarily includes origination activity related to the
regional banking footprint and fair value adjustments on the remaining warehouse. In the first
half of 2009, income from origination activity within the regional banking footprint was $14.1
million and unhedged negative fair value adjustments to the remaining mortgage warehouse were
approximately $8 million.
Servicing income increased to $116.8 million in the first half of 2009 from $112.3 million despite
a 55 percent decrease in the servicing portfolio. The increase is primarily related to net hedging
gains experienced in 2009 as a result of wider spreads between swap and mortgage rates due to
positive convexity in the first quarter 2009. The change in MSR value due to runoff declined to
$37.0 million in 2009 from $74.5 million in 2008.
Noninterest expense in 2009 was $111.0 million compared to $299.2 million for the six months ended
June 30, 2008. Nearly all noninterest expense categories decreased as a result of the sale of
national mortgage origination and servicing platforms in 2008. The exceptions were increased
foreclosure and repurchase provision related to
79
legacy origination, a rise in charges to increase
the reserve related to PMI reinsurance contracts, and an increase in contract employment expenses
to facilitate transition of remaining operational tasks after the sale to MetLife.
Corporate
Total revenues for the six months ended June 30, 2009, were $23.3 million compared to $72.9 million
in 2008, primarily a result of the Visa securities gain in the prior year. Net interest income for
2009 was $11.8 million, a $10.9 million increase over 2008. The increase in net interest income is
primarily a result of a decrease in funding costs.
Noninterest income decreased to $11.5 million in 2009 compared to $72.0 million in 2008. The
decline in noninterest income was primarily driven by a $65.9 million security gain related to Visa
Inc.s initial public offering in 2008. Additionally, restructuring charges reflected in
noninterest income declined $12.3 million in 2009 and deferred compensation income increased $7.5
million compared to 2008. The increase in deferred compensation income is mirrored by an increase
in deferred compensation expense noted below. Partially balancing this increase in noninterest
income was a year over year decline of $12.6 million related to debt repurchase gains recognized in
2008 and a decrease in the earnings rate of BOLI.
Noninterest expense increased to $42.3 million in the first six months of 2009 compared to $32.3
million in the first half of 2008. Charges recorded in noninterest expense related to
restructuring, repositioning, and efficiency initiatives decreased $30.0 million to $3.9 million in
2009 compared to $33.9 million in the first half of 2008. The first half of 2008 included a $30.0
million reversal of a portion of the contingent liability previously established for certain Visa
legal matters while 2009 included an increase in deferred compensation expense.
CAPITAL
Managements objectives are to provide capital sufficient to cover the risks inherent in FHNs
businesses, to maintain excess capital to well-capitalized standards, and to assure ready access to
the capital markets.
Average equity increased to $3.4 billion in the second quarter 2009 from $2.8 billion in the second
quarter 2008. Period-end equity was $3.4 billion on June 30, 2009, an increase of 13 percent from
second quarter 2008. The increase is primarily a result of FHNs participation in the USTs
Capital Purchase Program (CPP) that generated $866.5 billion of proceeds through the issuance of
preferred stock and a common stock warrant. To a lesser extent, the common stock issuance which
closed in May 2008 also contributed to the increase in average equity. Pursuant to board
authority, FHN may repurchase shares from time to time and will evaluate the level of capital and
take action designed to generate or use capital, as appropriate, for the interests of the
shareholders, subject to legal, regulatory, and CPP constraints.
80
Table 8 Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number |
|
|
Total Number |
|
|
|
|
|
Shares Purchased |
|
of Shares that May |
|
|
of Shares |
|
Average Price |
|
as Part of Publicly |
|
Yet Be Purchased |
(Volume in thousands) |
|
Purchased |
|
Paid per Share |
|
Announced Programs |
|
Under the Programs |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1 to April 30 |
|
|
22 |
|
|
|
11.41 |
|
|
|
22 |
|
|
|
39,083 |
|
May 1 to May 31 |
|
|
* |
|
|
|
10.04 |
|
|
|
* |
|
|
|
39,083 |
|
June 1 to June 30 |
|
|
|
|
|
NA |
|
|
|
|
|
|
39,083 |
|
|
|
|
|
|
Total |
|
|
22 |
|
|
$ |
11.41 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than 500 shares |
Compensation Plan Programs:
|
|
A consolidated compensation plan share purchase program was announced on
August 6, 2004. This plan consolidated into a single share purchase
program all of the previously authorized compensation plan share programs as
well as the renewal of the authorization to purchase shares for use in
connection with two compensation plans for which the share purchase authority
had expired. The total amount originally authorized under this
consolidated compensation plan share purchase program is 25.1 million shares.
On April 24, 2006, an increase to the authority under this purchase
program of 4.5 million shares was announced for a new total authorization of
29.6 million shares. The authority has been increased to reflect the stock
dividends distributed through April 1, 2009. The shares may be purchased over
the option exercise period of the various compensation plans on or
before December 31, 2023. Stock options granted after January 2, 2004, must be
exercised no later than the tenth anniversary of the grant date. On
June 30, 2009, the maximum number of shares that may be purchased under the
program was 31.0 million shares. |
Other Programs:
|
|
On October 16, 2007, the board of directors approved a 7.5 million share
purchase authority that will expire on December 31, 2010. The authority has
been increased to reflect the stock dividends distributed through April 1,
2009. Purchases may be made in the open market or through privately
negotiated transactions and are subject to market conditions, accumulation of
excess equity, prudent capital management, and legal and regulatory
constraints. This authority is not tied to any compensation plan, and replaces
an older non-plan share purchase authority which was terminated. On
June 30, 2009, the maximum number of shares that may be purchased under the
program was 8.1 million shares. Until the third anniversary of the
sale of the preferred shares issued in the CPP, FHN may not repurchase common
or other equity shares (subject to certain limited exceptions) without
the USTs approval. |
Banking regulators define minimum capital ratios for bank holding companies and their bank
subsidiaries. Based
on the capital rules and definitions prescribed by the banking regulators, should any depository
institutions capital ratios decline below predetermined levels, it would become subject to a
series of increasingly restrictive regulatory actions. The system categorizes a depository
institutions capital position into one of five categories ranging from well-capitalized to
critically under-capitalized. For an institution to qualify as well-capitalized, Tier 1 Capital,
Total Capital, and Leverage capital ratios must be at least 6 percent, 10 percent and 5 percent,
respectively. As of June 30, 2009, and June 30, 2008, FHN and FTBNA had sufficient capital to
qualify as well-capitalized institutions as shown in Note 7 Regulatory Capital.
RISK MANAGEMENT
FHN has an enterprise-wide approach to risk governance, measurement, management, and reporting
including an economic capital allocation process that is tied to risk profiles used to measure
risk-adjusted returns. The Enterprise-wide Risk/Return Management Committee oversees risk
management governance. Committee membership includes the Chief Executive Officer and other
executive officers of FHN. The Chief Risk Officer oversees reporting for the committee. Risk
management objectives include evaluating risks inherent in business
strategies, monitoring proper balance of risks and returns, and managing risks to minimize the
probability of future negative outcomes. The Enterprise-wide Risk/Return Management Committee
oversees and receives regular reports from the Credit Risk Management Committee, Asset/Liability
Committee (ALCO), Capital Management Committee, Compliance Risk Committee, Operational Risk
Committee, and the Executive Program Governance Forum. The Chief Credit Officer, Executive Vice
President Funds Management and Corporate Treasurer (chairs both ALCO and Capital Management
Committee), Senior Vice President Corporate Compliance, Chief Risk Officer,
81
and Executive Vice President and Chief Information Officer chair these committees respectively.
Reports regarding Credit, Asset/Liability Management, Market Risk, Capital Management, Compliance,
and Operational Risks are provided to the Credit Policy and Executive Committee, and/or Audit
Committee of the Board and to the full Board.
Risk management practices include key elements such as independent checks and balances, formal
authority limits, policies and procedures, and portfolio management all executed through
experienced personnel. The Internal Audit Department, Credit Risk Assurance Group, Credit Policy
and Regulations Group, and Credit Portfolio Management Group also evaluate risk management
activities. These evaluations are reviewed with management and the Audit Committee, as
appropriate.
The Compensation Committee, Chief Risk Officer, and Chief Credit Officer will convene periodically,
as required by the U.S. Treasurys Troubled Asset Relief Program (TARP), to review and assess key
business risks and the relation of those risks to compensation plans across the company. The TARP
rules recently changed, and the first of such meetings is expected to occur in the third quarter of
2009. A somewhat similar meeting, limited to the compensation plans of certain executives, took
place in January under prior rules.
MARKET UNCERTAINTIES AND PROSPECTIVE TRENDS
Given the significant current uncertainties that exist within the housing and credit markets, it is
anticipated that 2009 will continue to be challenging for FHN. While the ongoing reduction of
mortgage banking operations is expected to significantly decrease sensitivity to market pricing
uncertainty, FHN will continue to be affected by market factors as it addresses the remaining
mortgage loan warehouse and attempts to reduce the remaining servicing portfolio. Despite the
significant reduction of mortgage banking operations, the current economic downturn could increase
borrower defaults resulting in elevated loan loss provision, loan repurchase obligations and losses
related to private mortgage insurance contracts. As difficulties in the credit markets persist,
FHN will continue to adapt its liquidity management strategies. Further deterioration of general
economic conditions could result in increased credit costs depending on the length and depth of
this market cycle.
INTEREST RATE RISK MANAGEMENT
Interest rate risk is the risk that changes in prevailing interest rates will adversely affect
assets, liabilities, capital, income, and/or expense at different times or in different amounts.
ALCO, a committee consisting of senior management that meets regularly, is responsible for
coordinating the financial management of interest rate risk. FHN primarily manages interest rate
risk by structuring the balance sheet to attempt to maintain the desired level of associated
earnings while operating within prudent risk limits and thereby preserving the value of FHNs
capital.
Net interest income and the financial condition of FHN are affected by changes in the level of
market interest rates as the repricing characteristics of loans and other assets do not necessarily
match those of deposits, other borrowings, and capital. When earning assets reprice more quickly
than liabilities, net interest income will benefit in a rising interest rate environment and will
be negatively impacted when interest rates decline. In the case of floating rate assets and
liabilities with similar repricing frequencies, FHN may also be exposed to basis risk which results
from changing spreads between earning and borrowing rates. Generally, when interest rates decline,
Mortgage Banking faces increased prepayment risk associated with MSR.
Due to the third quarter 2008 sale of certain mortgage banking operations, Mortgage Banking revenue
mix was significantly impacted. Through August 2008, Mortgage Banking revenue was primarily
generated by originating, selling, and servicing residential mortgage loans and was highly
sensitive to changes in interest rates due to the direct effect changes in interest rates have on
loan demand. After the 2008 divestiture, Mortgage Banking income was primarily composed of
servicing residential mortgage loans and fair value adjustments to the remaining warehouse. Given
the repositioning of mortgage banking operations, origination activity has been significantly
reduced thereby reducing interest rate risk exposure in periods after the divestiture. In general,
low or declining interest rates typically lead to increased origination fees and profit from the
sale of loans but potentially lower servicing-related income due to the impact of higher loan
prepayments on the value of mortgage servicing assets. Conversely, high or rising interest rates
typically reduce mortgage loan demand and hence income from originations and sales of loans while
servicing-related income may rise due to lower prepayments. Net interest income earned on
warehouse loans held for sale and on swaps and similar derivative instruments used to protect the
value of MSR increases when the yield curve steepens and decreases when the yield curve flattens or
inverts.
82
Lastly, a steepening yield curve generally has a positive impact on the demand for fixed income
securities and, therefore, Capital Markets revenue. Generally, the effects of a steepening yield
curve on FHNs consolidated pre-tax income are positive, especially when driven by falling short
term rates, benefiting Capital Markets and Mortgage Bankings results.
As a result of the MetLife transaction, mortgage banking origination activity was significantly
reduced in periods after third quarter 2008 as FHN focuses on origination within its regional
banking footprint. Accordingly, the following discussion of pipeline and warehouse related
derivatives is primarily applicable to reporting periods occurring through the third quarter 2008.
In certain cases, derivative financial instruments are used to aid in managing the exposure of the
balance sheet and related net interest income and noninterest income to changes in interest rates.
As discussed in Critical Accounting Policies, derivative financial instruments are used by mortgage
banking for two purposes. First, forward sales contracts and futures contracts are used to protect
against changes in fair value of the pipeline and mortgage warehouse, primarily used from the time
an interest rate is committed to the customer until the mortgage is sold into the secondary market
due to increases in interest rates. Second, interest rate contracts, forward sales contracts, and
futures contracts, are utilized to protect against MSR prepayment risk that generally accompanies
declining interest rates. As interest rates fall, the value of MSR should decrease and the value
of the servicing hedge should increase. The converse is also true.
Derivative instruments are also used to protect against the risk of loss arising from adverse
changes in the fair value of a portion of Capital Markets securities inventory due to changes in
interest rates. FHN does not use derivative instruments to protect against changes in fair value
of loans or loans held for sale other than the mortgage pipeline, warehouse and certain small
issuer trust preferred loans.
LIQUIDITY MANAGEMENT
ALCO focuses on the funding of assets with liabilities of the appropriate duration, while
mitigating the risk of not meeting unexpected cash needs. The objective of liquidity management is
to ensure the continuous availability of funds to meet the demands of depositors, other creditors,
and borrowers, and the requirements of ongoing operations. This objective is met by maintaining
liquid assets in the form of trading securities and securities available for sale, growing core
deposits, and the repayment of loans. ALCO is responsible for managing these needs by taking into
account the marketability of assets; the sources, stability and availability of funding; and the
level of unfunded commitments. Subject to market conditions and compliance with applicable
regulatory requirements from time to time, funds are available from a number of sources, including
core deposits, the securities available for sale portfolio, the Federal Reserve Banks, including
access to Federal Reserve Bank programs such as the Term Auction Facility (TAF), the Federal Home
Loan Bank (FHLB), availability to the overnight and term Federal Funds markets, and dealer and
commercial customer repurchase agreements.
Core deposits are a significant source of funding and have been a stable source of liquidity for
banks. The Federal Deposit Insurance Corporation insures these deposits to the extent authorized
by law. Generally, these limits were temporarily increased to $250 thousand per account owner
through 2013. Total loans, excluding loans held for sale and real estate loans pledged against
other collateralized borrowings, to core deposits ratio was 140 percent in second quarter 2009 and
167 percent in second quarter 2008. Should loan growth exceed core deposit growth, alternative
sources of funding loan growth may be necessary in order to maintain an adequate liquidity
position. The ratio is expected to continue to decline as the national loan portfolios decrease.
In 2005, FTBNA established a bank note program providing additional liquidity of $5.0 billion. On
June 30, 2009, $1.0 billion was outstanding through the bank note program with $.1 billion
scheduled to mature in the second half of 2009. During 2008 and continuing into 2009, market and
other conditions have been such that FTBNA has not been able to utilize the bank note program, and
instead has obtained less credit sensitive sources of funding including secured sources such as the
TAF program. FTBNA expects that its inability to use the bank note program will continue for some
time, and cannot predict when that inability will end.
FHN and FTBNA have the ability to generate liquidity by issuing preferred or common equity or
incurring other debt subject to market conditions and compliance with applicable regulatory
requirements from time to time. FHN also evaluates alternative sources of funding, including loan
sales, syndications, and FHLB borrowings in its management of liquidity.
83
Parent company liquidity is maintained by cash flows stemming from dividends and interest payments
collected from subsidiaries along with net proceeds from stock sales through employee plans, which
represent the primary sources of funds to pay cash dividends to shareholders and interest to debt
holders. The amount paid to the parent company through FTBNA common dividends is managed as part
of FHNs overall cash management process, subject to applicable regulatory restrictions described
in the next paragraph. As discussed above, the parent company also has the ability to enhance its
liquidity position by raising equity or incurring debt subject to market conditions and compliance
with applicable regulatory requirements from time to time.
Certain regulatory restrictions exist regarding the ability of FTBNA to transfer funds to FHN in
the form of cash, common dividends, loans, or advances. At any given time, the pertinent portions
of those regulatory restrictions allow FTBNA to declare preferred or common dividends without prior
regulatory approval in an amount equal to FTBNAs retained net income for the two most recent
completed years plus the current year to date. For any period, FTBNAs retained net income
generally is equal to FTBNAs regulatory net income reduced by the preferred and common dividends
declared by FTBNA. Excess dividends in either of the two most recent completed years may be offset
with available retained net income in the two years immediately preceding it. Applying the
applicable rules, FTBNAs total amount available for dividends was negative $385 million at June
30, 2009. Earnings (or losses) and dividends declared during 2009 will change the amount available
during 2009 until December 31.
FTBNA has requested approval from the OCC to declare and pay dividends on its preferred stock
outstanding payable in October 2009. FTBNA has not requested approval to pay common dividends to
its sole common stockholder, FHN. Although FHN has funds available for dividends even without
FTBNA dividends, availability of funds is not the sole factor considered by FHNs Board in deciding
whether or not to declare a dividend of any particular size; the Board also must consider FHNs
current and prospective capital, liquidity and other needs. Under the terms of the CPP, FHN is not
permitted to increase its cash common dividend rate for a period of three years from the date of
issuance without permission of the Treasury. At the time of the preferred share and common stock
warrant issuance, FHN did not pay a common cash dividend.
On July 21, 2009, the Board declared a dividend in shares of common stock at a rate of 1.5901% to
be distributed on October 1, 2009 to shareholders of record on September 11, 2009. The Board
currently intends to reinstate a cash dividend at an appropriate and prudent level once earnings
and other conditions improve sufficiently, consistent with legal, regulatory, CPP, and other
constraints. The Board has also approved the payment of the 5% (annualized) dividend on the CPP
preferred payable on August 17, 2009.
The Consolidated Condensed Statements of Cash Flows provide information on cash flows from
operating, investing, and financing activities for the six months ended June 30, 2009, and 2008.
In 2009, positive cash flows from investing and operating activities was exceeded by negative cash
flows from financing activities, primarily as a result of deceases in long-term debt and short-term
borrowing balances. The decline in long-term debt and short-term borrowings is primarily a result
of the contracting balance sheet. For 2009, net cash provided by investing and operating
activities were $1.0 billion, and $.4 billion, respectively, which were partially offset by $1.8
billion negative cash flows from financing activities.
Positive cash flows from investing activities was primarily affected by a $1.2 billion decrease in
loans, and was partially offset by cash used through an increase in interest-bearing cash. The
significant decrease in loans is attributable to the wind-down of the national construction and
consumer portfolio. Cash provided by operating activities was $.4 billion and was primarily driven
by an increase in provision for loan losses and decreases in capital markets receivables and
derivatives. Cash used by financing activities was $1.8 billion as cash flows from short-term
borrowings decreased by $1.1 billion but was primarily offset by a $.7 billion increase in
deposits. Funding from long-term debt decreased by $1.5 billion as bank notes matured consistent
with balance sheet contraction.
In second quarter 2008, negative cash flows from financing activities and investing activities
exceed cash provided by operating activities, driven by a $1.7 billion decline in wholesale
deposits. Cash flows from operating activities were $.9 billion primarily due to a decline in
loans held for sale and an increase in loan loss provision.
84
Off-balance Sheet Arrangements and Other Contractual Obligations
First Horizon Home Loans, the former mortgage banking division of FHN, originated conventional
conforming and federally insured single-family residential mortgage loans. Likewise, FTN Financial
Capital Assets Corporation purchases the same types of loans from customers. Substantially all of
these mortgage loans were exchanged for securities, which are issued through investors, including
government sponsored enterprises (GSE), such as Government National Mortgage Association (GNMA) for
federally insured loans and Federal National Mortgage Association (FNMA) and Federal Home Loan
Mortgage Corporation (FHLMC) for conventional loans, and then sold in the secondary markets. Each
GSE has specific guidelines and criteria for sellers and servicers of loans backing their
respective securities. Many private investors were also active in the secondary market as issuers
and investors. The risk of credit loss with regard to the principal amount of the loans sold was
generally transferred to investors upon sale to the secondary market. To the extent that
transferred loans were subsequently determined not to meet the agreed upon qualifications or
criteria, the purchaser had the right to return those loans to FHN. In addition, certain mortgage
loans were sold to investors with limited or full recourse in the event of mortgage foreclosure
(refer to discussion of foreclosure reserves under Critical Accounting Policies). After sale,
these loans were not reflected on the Consolidated Condensed Statements of Condition.
FHNs use of government agencies as an efficient outlet for mortgage loan production was an
essential source of liquidity for FHN and other participants in the housing industry in recent
years. The use of origination and subsequent sale or securitization of these loans to government
agencies has significantly declined due to FHNs sale of national mortgage origination offices in
third quarter 2008. During second quarter 2009 and second quarter 2008, approximately $22.2
million and $6.9 billion, respectively, of conventional and federally insured mortgage loans were
securitized and sold by FHN through these investors.
Historically, certain of FHNs originated loans, including non-conforming first-lien mortgages,
second-lien mortgages and HELOC did not conform to the requirements for sale or securitization
through government agencies. FHN pooled and securitized these non-conforming loans in proprietary
transactions. After securitization and sale, these loans were not reflected on the Consolidated
Condensed Statements of Condition. These transactions, which were conducted through single-purpose
business trusts, were an efficient way for FHN to monetize these assets. On June 30, 2009 and
2008, the outstanding principal amount of loans in these off-balance sheet business trusts was
$20.3 billion and $23.9 billion, respectively. FHN has substantially reduced its origination of
these loans in response to disruptions in the credit markets and did not execute a securitization
of these loans in 2008 and through the second quarter of 2009. Given the historical significance
of FHNs origination of non-conforming loans, the use of single-purpose business trusts to
securitize these loans was an important source of liquidity to FHN. See Note 13 Loan Sales and
Securitizations for additional information.
FHN has also sold HELOC and second-lien mortgages without recourse through whole loan sales. On
June 30, 2009, the outstanding principal balance of these loans was $1.0 billion and $1.7 billion,
respectively. On June 30, 2008, the outstanding principal balance of these HELOC and second-lien
mortgages was $1.1 billion and $2.1 billion, respectively. FHN does not guarantee the receipt of
the scheduled principal and interest payments on the underlying loans but does have an obligation
to repurchase the loans for which there is a breach of warranties provided to the buyers. As of
June 30, 2009, FHN has recognized a liability of $24.4 million related to these repurchase
obligations.
A wholly-owned subsidiary of FHN has agreements with several providers of private mortgage
insurance whereby the subsidiary has agreed to accept insurance risk for specified loss corridors
for loans originated in each contract year in exchange for a portion of the private mortgage
insurance premiums paid by borrowers (i.e., reinsurance arrangements). The loss corridors vary for
each primary insurer for each contract year. No new reinsurance arrangements have been initiated
after 2008. As of June 30, 2009, FHN has reserved $60.8 million for its estimated liability under
the reinsurance arrangements. As of June 30, 2009, in accordance with the terms of the contracts
with the primary insurers, FHN has placed $59.2 million of prior premium collections in trust for
payment of claims arising under the reinsurance arrangements.
FHN has various other financial obligations, which may require future cash payments. Purchase
obligations represent obligations under agreements to purchase goods or services that are
enforceable and legally binding on FHN and that specify all significant terms, including fixed or
minimum quantities to be purchased, fixed, minimum or variable price provisions, and the
approximate timing of the transaction. In addition, FHN enters into commitments
85
to extend credit to borrowers, including loan commitments, standby letters of credit, and
commercial letters of credit. These commitments do not necessarily represent future cash
requirements, in that these commitments often expire without being drawn upon.
MARKET RISK MANAGEMENT
Capital markets buys and sells various types of securities for its customers. When these
securities settle on a delayed basis, they are considered forward contracts. Securities inventory
positions are generally procured for distribution to customers by the sales staff, and ALCO
policies and guidelines have been established with the objective of limiting the risk in managing
this inventory.
CAPITAL MANAGEMENT
The capital management objectives of FHN are to provide capital sufficient to cover the risks
inherent in FHNs businesses, to maintain excess capital to well-capitalized standards and to
assure ready access to the capital markets. Management has a Capital Management committee, chaired
by the Executive Vice President Funds Management and Corporate Treasurer, that is responsible for
capital management oversight and provides a forum for addressing management issues related to
capital adequacy. The committee reviews sources and uses of capital, key capital ratios, segment
economic capital allocation methodologies, and other factors in monitoring and managing current
capital levels, as well as potential future sources and uses of capital. The committee also
recommends capital management policies, which are submitted for approval to the Enterprise-wide
Risk/Return Management Committee and the Board.
OPERATIONAL RISK MANAGEMENT
Operational risk is the risk of loss from inadequate or failed internal processes, people, and
systems or from external events. This risk is inherent in all businesses. Management,
measurement, and reporting of operational risk are overseen by the Operational Risk Committee,
which is chaired by the Chief Risk Officer. Key representatives from the business segments, legal,
risk management, information technology risk, corporate real estate, employee services, records
management, bank operations, funds management, and insurance are represented on the committee.
Subcommittees manage and report on business continuity planning, information technology risk,
insurance, records management, customer complaint, and reputation risks. Summary reports of the
committees activities and decisions are provided to the Enterprise-wide Risk/Return Management
Committee. Emphasis is dedicated to refinement of processes and tools to aid in measuring and
managing material operational risks and providing for a culture of awareness and accountability.
COMPLIANCE RISK MANAGEMENT
Compliance risk is the risk of legal or regulatory sanctions, material financial loss, or loss to
reputation as a result of failure to comply with laws, regulations, rules, related self-regulatory
organization standards, and codes of conduct applicable to banking activities. Management,
measurement, and reporting of compliance risk are overseen by the Compliance Risk Committee, which
is chaired by the SVP of Corporate Compliance. Key executives from the business segments, legal,
risk management, and service functions are represented on the committee. Summary reports of the
committees activities and decisions are provided to the Enterprise-wide Risk/Return Management
Committee, and to the Audit Committee of the Board, as applicable. Reports include the status of
regulatory activities, internal compliance program initiatives, and evaluation of emerging
compliance risk areas.
CREDIT RISK MANAGEMENT
Credit risk is the risk of loss due to adverse changes in a borrower or counterpartys ability to
meet its financial obligations under agreed upon terms. FHN is subject to credit risk in lending,
trading, investing, liquidity/funding, and asset management activities. The nature and amount of
credit risk depends on the types of transactions, the structure of those transactions and the
parties involved. In general, credit risk is incidental to trading, liquidity/funding and asset
management activities, while it is central to the profit strategy in lending. As a result, the
majority of credit risk is associated with lending activities.
FHN assesses and manages credit risk through a series of policies, processes, measurement systems,
and controls. The Credit Risk Management Committee (CRMC) is responsible for overseeing the
management of existing and emerging credit risks in the company within the broad risk tolerances
established by the Board of Directors.
86
The Credit Risk Management function, led by the Chief Credit Officer, provides strategic and
tactical credit leadership by maintaining policies, overseeing credit approval and servicing, and
managing portfolio composition and performance.
A series of regularly scheduled portfolio review meetings are in place to provide oversight
regarding the accuracy of credit risk grading and the adequacy of commercial credit servicing. A
series of watch list meetings are in place to oversee the management of emerging potential problem
commercial assets. The Credit Risk Management function assesses the portfolio trends and the
results of these meetings and utilizes this information to inform management regarding the current
state of credit quality as part of the estimation process for determining the allowance for loan
losses.
All of the above activities are subject to independent review by FHNs Credit Risk Assurance Group,
which encompasses both Credit Review and Credit Quality Control functions. The EVP of Credit Risk
Assurance is appointed by and reports to the Credit Policy & Executive Committee of the Board.
Credit Risk Assurance is charged with providing the Board and executive management with
independent, objective, and timely assessments of FHNs portfolio quality, adequacy of credit
policies, and credit risk management processes.
Management strives to identify potential problem loans and nonperforming loans early enough to
correct the deficiencies and prevent further credit deterioration. It is managements objective
that both charge-offs and asset write-downs are recorded promptly, based on managements
assessments of current collateral values and the borrowers ability to repay.
FHN has a significant concentration of loans secured by residential real estate (51 percent of
total loans) primarily in three portfolios. The retail real estate residential portfolio including
real estate loans pledged against other collateralized borrowings (43 percent of total loans) was
primarily comprised of home equity lines and loans. While this portfolio has been stressed by the
downturn in the housing market and rising unemployment, it contains loans extended to strong
borrowers with high credit scores and is geographically diversified. The OTC portfolio (3 percent
of total loans) has been negatively impacted by the downturn in the housing industry, certain
discontinued product types, and the decreased availability of permanent mortgage financing. The
Residential CRE portfolio (5 percent of total loans) has also been negatively impacted by the
housing industry downturn as builder liquidity has been severely stressed.
As of June 30, 2009, FHN had trust preferred loans to banks and insurance related businesses
totaling $.5 billion (2 percent of total loans) that are included within the Commercial, Financial,
and Industrial portfolio. Due to higher credit losses experienced throughout the financial
services industry and the limited availability of market liquidity, these loans have experienced
some stress during the economic downturn.
On June 30, 2009, FHN did not have any concentrations of Commercial, Financial, and Industrial
loans in any single industry of 10 percent or more of total loans.
CRITICAL ACCOUNTING POLICIES
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
FHNs accounting policies are fundamental to understanding managements discussion and analysis of
results of operations and financial condition. The consolidated condensed financial statements of
FHN are prepared in conformity with accounting principles generally accepted in the United States
of America and follow general practices within the industries in which it operates. The
preparation of the financial statements requires management to make certain judgments and
assumptions in determining accounting estimates. Accounting estimates are considered critical if
(a) the estimate requires management to make assumptions about matters that were highly uncertain
at the time the accounting estimate was made, and (b) different estimates reasonably could have
been used in the current period, or changes in the accounting estimate are reasonably likely to
occur from
87
period to period, that would have a material impact on the presentation of FHNs
financial condition, changes in financial condition or results of operations.
It is managements practice to discuss critical accounting policies with the Board of Directors
Audit Committee including the development, selection and disclosure of the critical accounting
estimates. Management believes the following critical accounting policies are both important to
the portrayal of the companys financial condition and results of operations and require subjective
or complex judgments. These judgments about critical accounting estimates are based on information
available as of the date of the financial statements.
ALLOWANCE FOR LOAN LOSSES
Managements policy is to maintain the ALLL at a level sufficient to absorb estimated probable
incurred losses in the loan portfolio. Management performs periodic and systematic detailed
reviews of its loan portfolio to identify trends and to assess the overall collectibility of the
loan portfolio. Accounting standards require that loan losses be recorded when management
determines it is probable that a loss has been incurred and the amount of the loss can be
reasonably estimated. Management believes the accounting estimate related to the ALLL is a
critical accounting estimate because: changes in it can materially affect the provision for loan
losses and net income, it requires management to predict borrowers likelihood or capacity to
repay, and it requires management to distinguish between losses incurred as of a balance sheet date
and losses expected to be incurred in the future. Accordingly, this is a highly subjective process
and requires significant judgment since it is often difficult to determine when specific loss
events may actually occur. The ALLL is increased by the provision for loan losses and recoveries
and is decreased by charged-off loans. Principal loan amounts are charged off against the ALLL in
the period in which the loan or any portion of the loan is deemed to be uncollectible. This
critical accounting estimate applies to all of FHNs business line segments. The Credit Policy and
Executive Committee of FHNs board of directors reviews quarterly the level of the ALLL.
FHNs methodology for estimating the ALLL is not only critical to the accounting estimate, but to
the credit risk management function as well. Key components of the estimation process are as
follows: (1) commercial loans determined by management to be individually impaired loans are
evaluated individually and specific reserves are determined based on the difference between the
outstanding loan amount and the estimated net realizable value of the collateral (if collateral
dependent) or the present value of expected future cash flows; (2) individual commercial loans not
considered to be individually impaired are segmented based on similar credit risk characteristics
and evaluated on a pool basis; (3) reserve rates for the commercial segment are calculated based on
historical net charge-offs and are subject to adjustment by management to reflect current events,
trends, and conditions (including economic considerations and trends); (4) managements estimate of
probable incurred losses reflects the reserve rate applied against the balance of loans in the
commercial segment of the loan portfolio; (5) retail loans are segmented based on loan type; (6)
reserve amounts for each retail portfolio segment are calculated using analytical models based on
net loss experience and are subject to adjustment by management to reflect current events, trends,
and conditions (including economic considerations and trends); and (7) the reserve amount for each
retail portfolio segment reflects managements estimate of probable incurred losses in the retail
segment of the loan portfolio.
Given the substantial instability in the current housing market and significant deterioration
experienced in the commercial, OTC and home equity portfolios, FHN proactively reviews and analyzes
these portfolios to more promptly identify and resolve problem loans.
For commercial loans, reserves are established using historical net loss factors by grade level,
loan product, and business segment. Relationship managers risk rate each loan using grades that
reflect both the probability of default and estimated loss severity in the event of default.
Portfolio reviews are conducted to provide independent oversight of risk grading decisions for
larger credits. Loans with emerging weaknesses receive increased oversight through our Watch
List process. For new Watch List loans, senior credit management reviews risk grade
appropriateness and action plans. After initial identification, relationship managers prepare
regular updates for review and discussion by more senior business line and credit officers. This
oversight is intended to bring consistent grading and allow timely identification of loans that
need to be further downgraded or placed on nonaccrual status. When a loan becomes classified, the
asset generally transfers to the specialists in our Loan Rehab and Recovery group where the
accounts receive more detailed monitoring; at this time, new appraisals are
88
typically ordered for
real estate collateral dependent credits. Loans are placed on non-accrual if it becomes evident
that full collection of principal and interest is at risk or if the loans become 90 days or more
past due.
Generally, classified commercial non-accrual loans over $1 million are deemed to be impaired in
accordance with SFAS No. 114 Accounting by Creditors for Impairment of a Loan and are assessed
for impairment measurement. For impaired assets viewed as collateral dependent, fair value
estimates are obtained from a recently received and reviewed appraisal. Appraised values are
adjusted down for costs associated with asset disposal and for our estimate of any further
deterioration in values since the most recent appraisal. Upon the determination of impairment, FHN
charges off the full difference between book value and our best estimate of the assets net
realizable value. As of June 30, 2009, the total amount of SFAS No. 114 commercial loans was
$547.7 million; $522.2 million of these loans are carried at NRV and do not carry reserves.
For OTC real estate construction loans, reserve levels are established based on portfolio modeling
and regular portfolio reviews. OTC loans that reach 90 days past due are placed on nonaccrual. A new
appraisal is ordered for loans that reach 90 days past due or are classified as substandard during
the regular portfolio review. Loans are initially written down to current appraised value.
Periodically, loans are assessed for further charge down.
For home equity loans and lines, reserve levels are established through the use of segmented
roll-rate models. Loans are classified substandard at 90 days delinquent. Our collateral position
is assessed prior to the asset becoming 180 days delinquent. If the value does not support
foreclosure, balances are charged-off and other avenues of recovery are pursued. If the value
supports foreclosure, the loan is charged down to net realizable value and is placed on non-accrual
status. When collateral is taken to OREO, the asset is assessed for further write down relative to
appraised value.
FHN believes that the critical assumptions underlying the accounting estimate made by management
include: (1) the commercial loan portfolio has been properly risk graded based on information about
borrowers in specific industries and specific issues with respect to single borrowers; (2) borrower
specific information made available to FHN is current and accurate; (3) the loan portfolio has been
segmented properly and individual loans have similar credit risk characteristics and will behave
similarly; (4) known significant loss events that have occurred were considered by management at
the time of assessing the adequacy of the ALLL; (5) the adjustments for economic conditions
utilized in the allowance for loan losses estimate are used as a measure of actual incurred losses;
(6) the period of history used for historical loss factors is indicative of the current
environment; and (7) the reserve rates, as well as other adjustments estimated by management for
current events, trends, and conditions, utilized in the process reflect an estimate of losses that
have been incurred as of the date of the financial statements.
While management uses the best information available to establish the ALLL, future adjustments to
the ALLL and methodology may be necessary if economic or other conditions differ substantially from
the assumptions used in making the estimates or, if required by regulators, based upon information
at the time of their examinations. Such adjustments to original estimates, as necessary, are made
in the period in which these factors and other relevant considerations indicate that loss levels
vary from previous estimates.
MORTGAGE SERVICING RIGHTS AND OTHER RELATED RETAINED INTERESTS
When FHN sold mortgage loans in the secondary market to investors, it generally retained the right
to service the loans sold in exchange for a servicing fee that is collected over the life of the
loan as the payments are received from the borrower. An amount was capitalized as MSR on the
Consolidated Condensed Statements of Condition at current fair value. The changes in fair value of
MSR are included as a component of Mortgage Banking Noninterest Income on the Consolidated
Condensed Statements of Income.
MSR Estimated Fair Value
In accordance with Statement of Financial Accounting Standards No. 156, Accounting for Servicing
of Financial Assets an Amendment of FASB Statement No. 140, FHN elected fair value accounting
for all classes of mortgage servicing rights. The fair value of MSR typically rises as market
interest rates increase and declines as market interest rates decrease; however, the extent to
which this occurs depends in part on (1) the magnitude of
89
changes in market interest rates, and (2)
the differential between the then current market interest rates for mortgage loans and the mortgage
interest rates included in the mortgage-servicing portfolio.
Since sales of MSR tend to occur in private transactions and the precise terms and conditions of
the sales are typically not readily available, there is a limited market to refer to in determining
the fair value of MSR. As such, FHN relies primarily on a discounted cash flow model to estimate
the fair value of its MSR. This model calculates estimated fair value of the MSR using predominant
risk characteristics of MSR, such as interest rates, type of product (fixed vs. variable), age
(new, seasoned, moderate), agency type and other factors. FHN uses assumptions in the model that
it believes are comparable to those used by other participants in the mortgage banking business and
reviews estimated fair values and assumptions with third-party brokers and other service providers
on a quarterly basis. FHN also compares its estimates of fair value and assumptions to recent
market activity and against its own experience.
Estimating the cash flow components of net servicing income from the loan and the resultant fair
value of the MSR requires FHN to make several critical assumptions based upon current market and
loan production data.
Prepayment Speeds: Generally, when market interest rates decline and other factors
favorable to prepayments occur, there is a corresponding increase in prepayments as customers
refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is
prepaid the anticipated cash flows associated with servicing that loan are terminated, resulting in
a reduction of the fair value of the capitalized MSR. To the extent that actual borrower
prepayments do not react as anticipated by the prepayment model (i.e., the historical data observed
in the model does not correspond to actual market activity), it is possible that the prepayment
model could fail to accurately predict mortgage prepayments and could result in significant
earnings volatility. To estimate prepayment speeds, FHN utilizes a third-party prepayment model,
which is based upon statistically derived data linked to certain key principal indicators involving
historical borrower prepayment activity associated with mortgage loans in the secondary market,
current market interest rates and other factors. For purposes of model valuation, estimates are
made for each product type within the MSR portfolio on a monthly basis.
Table 9 Mortgage Banking Prepayment Assumptions
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30 |
|
|
2009 |
|
2008 |
|
Prepayment speeds |
|
|
|
|
|
|
|
|
Actual |
|
|
24.9 |
% |
|
|
14.4 |
% |
Estimated* |
|
|
31.4 |
|
|
|
31.5 |
|
|
|
|
|
* |
|
Estimated prepayment speeds represent monthly average prepayment speed estimates for each of the periods presented. |
Discount Rate: Represents the rate at which expected cash flows are discounted to arrive at
the net present value of servicing income. Discount rates will change with market conditions
(i.e., supply vs. demand) and be reflective of the yields expected to be earned by market
participants investing in MSR.
Cost to Service: Expected costs to service are estimated based upon the incremental costs
that a market participant would use in evaluating the potential acquisition of MSR.
Float Income: Estimated float income is driven by expected float balances (principal,
interest and escrow payments that are held pending remittance to the investor or other third party)
and current market interest rates, including the thirty-day London Inter-Bank Offered Rate (LIBOR)
and five-year swap interest rates, which are updated on a monthly basis for purposes of estimating
the fair value of MSR.
FHN engages in a process referred to as price discovery on a quarterly basis to assess the
reasonableness of the estimated fair value of MSR. Price discovery is conducted through a process
of obtaining the following information: (a) quarterly informal (and an annual formal) valuation of
the servicing portfolio by prominent independent mortgage-servicing brokers, and (b) a collection
of surveys and benchmarking data made available by independent third
parties that include peer participants in the mortgage banking business. Although there is no
single source of market information that can be relied upon to assess the fair value of MSR, FHN
reviews all information obtained
90
during price discovery to determine whether the estimated fair
value of MSR is reasonable when compared to market information. On June 30, 2009, and 2008, FHN
determined that its MSR valuations and assumptions were reasonable based on the price discovery
process.
The FHN Earnings at Risk Committee reviews the overall assessment of the estimated fair value of
MSR monthly and is responsible for approving the critical assumptions used by management to
determine the estimated fair value of FHNs MSR. In addition, the MSR Committee reviews the
initial capitalization rates for newly originated MSR, if any, the assessment of the fair value of
MSR, and the source of significant changes to the MSR carrying value each quarter.
Hedging the Fair Value of MSR
FHN enters into financial agreements to hedge MSR in order to minimize the effects of loss in value
of MSR associated with increased prepayment activity that generally results from declining interest
rates. In a rising interest rate environment, the value of the MSR generally will increase while
the value of the hedge instruments will decline. Specifically, FHN enters into interest rate
contracts (including swaps, swaptions and mortgage forward sales contracts) to hedge against the
effects of changes in fair value of its MSR. Substantially all capitalized MSR are hedged. The
hedges are economic hedges only, and are terminated and reestablished as needed to respond to
changes in market conditions. Changes in the value of the hedges are recognized as a component of
net servicing income in mortgage banking noninterest income. Successful economic hedging will help
minimize earnings volatility that may result from carrying MSR at fair value. Subsequent to the
sale of certain mortgage banking operations to MetLife, FHN determines the fair value of the
derivatives used to hedge MSR (and excess interests as discussed below) using quoted prices for
identical instruments in valuing forwards and using inputs observed in active markets for similar
instruments with typical inputs including the LIBOR curve, option volatility and option skew in
valuing swaps and swaptions. Prior to the MetLife transaction, fair values of these derivatives
were obtained through proprietary pricing models which were compared to market value quotes
received from third party broker-dealers in the derivative markets.
In conjunction with the repositioning of its mortgage banking operations, FHN no longer retains
servicing on the loans it sells. In prior periods, FHN generally experienced increased loan
origination and production in periods of low interest rates which resulted in the capitalization of
new MSR associated with new production. This provided for a natural hedge in the
mortgage-banking business cycle. New production and origination did not prevent FHN from
recognizing losses due to reduction in carrying value of existing servicing rights as a result of
prepayments; rather, the new production volume resulted in loan origination fees and the
capitalization of MSR as a component of realized gains related to the sale of such loans in the
secondary market, thus the natural hedge, which tended to offset a portion of the reduction in MSR
carrying value during a period of low interest rates. In a period of increased borrower
prepayments, these losses could have been significantly offset by a strong replenishment rate and
strong net margins on new loan originations. To the extent that First Horizon Home Loans was
unable to maintain a strong replenishment rate, or in the event that the net margin on new loan
originations declined from historical experience, the value of the natural hedge might have
diminished, thereby significantly impacting the results of operations in a period of increased
borrower prepayments.
FHN does not specifically hedge the change in fair value of MSR attributed to other risks,
including unanticipated prepayments (representing the difference between actual prepayment
experience and estimated prepayments derived from the model, as described above), discount rates,
cost to service, and other factors. To the extent that these other factors result in changes to
the fair value of MSR, FHN experiences volatility in current earnings due to the fact that these
risks are not currently hedged.
Excess Interest (Interest-Only Strips) Fair Value Residential Mortgage Loans
In certain cases, when FHN sold mortgage loans in the secondary market, it retained an interest in
the mortgage loans sold primarily through excess interest. These financial assets represent rights
to receive earnings from serviced assets that exceed contractually specified servicing fees and are
legally separable from the base servicing rights. Consistent with MSR, the fair value of excess
interest typically rises as market interest rates increase and declines as market interest rates
decrease. Additionally, similar to MSR, the market for excess interest is limited,
and the precise terms of transactions involving excess interest are typically not readily
available. Accordingly, FHN relies primarily on a discounted cash flow model to estimate the fair
value of its excess interest.
91
Estimating the cash flow components and the resultant fair value of the excess interest requires
FHN to make certain critical assumptions based upon current market and loan production data. The
primary critical assumptions used by FHN to estimate the fair value of excess interest include
prepayment speeds and discount rates, as discussed above. FHNs excess interest is included as a
component of trading securities on the Consolidated Condensed Statements of Condition, with
realized and unrealized gains and losses included in current earnings as a component of mortgage
banking income on the Consolidated Condensed Statements of Income.
Hedging the Fair Value of Excess Interest
FHN utilizes derivatives (including swaps, swaptions and mortgage forward sales contracts) that
change in value inversely to the movement of interest rates to protect the value of its excess
interest as an economic hedge. Realized and unrealized gains and losses associated with the change
in fair value of derivatives used in the economic hedge of excess interest are included in current
earnings in mortgage banking noninterest income as a component of servicing income. Excess
interest is included in trading securities with changes in fair value recognized currently in
earnings in mortgage banking noninterest income as a component of servicing income.
The extent to which the change in fair value of excess interest is offset by the change in fair
value of the derivatives used to hedge this asset depends primarily on the hedge coverage ratio
maintained by FHN. Also, as noted above, to the extent that actual borrower prepayments do not
react as anticipated by the prepayment model (i.e., the historical data observed in the model does
not correspond to actual market activity), it is possible that the prepayment model could fail to
accurately predict mortgage prepayments, which could significantly impact FHNs ability to
effectively hedge certain components of the change in fair value of excess interest and could
result in significant earnings volatility.
PIPELINE AND WAREHOUSE
As a result of the MetLife transaction, mortgage banking origination activity was significantly
reduced in periods after third quarter 2008 as FHN focuses on origination within its regional
banking footprint. Accordingly, the following discussion of pipeline and warehouse related
derivatives is primarily applicable to reporting periods in 2008.
During the period of loan origination and prior to the sale of mortgage loans in the secondary
market, FHN has exposure to mortgage loans that are in the mortgage pipeline and the mortgage
warehouse. The mortgage pipeline consists of loan applications that have been received, but have
not yet closed as loans. Pipeline loans are either floating or locked. A floating pipeline
loan is one on which an interest rate has not been locked by the borrower. A locked pipeline loan
is one on which the potential borrower has set the interest rate for the loan by entering into an
interest rate lock commitment. Once a mortgage loan is closed and funded, it is included within
the mortgage warehouse, or the inventory of mortgage loans that are awaiting sale and delivery
into the secondary market.
Interest rate lock commitments are derivatives pursuant to SFAS 133 and are therefore recorded at
estimates of fair value. Effective January 1, 2008, FHN applied the provisions of Staff Accounting
Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings (SAB No. 109)
prospectively for derivative loan commitments issued or modified after that date. SAB No. 109
requires inclusion of expected net future cash flows related to loan servicing activities in the
fair value measurement of a written loan commitment. Also on January 1, 2008, FHN adopted
Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157),
which affected the valuation of interest rate lock commitments previously measured under the
guidance of EITF 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management Activities.
FHN adopted Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115
(SFAS No. 159) on January 1, 2008. Prior to adoption of SFAS No. 159, all warehouse loans were
carried at the lower of cost or market, where carrying value was adjusted for successful hedging
under SFAS No. 133 and the comparison of carrying value to market was performed for aggregate loan
pools. Upon adoption of SFAS No. 159, FHN elected to prospectively
account for substantially all of its mortgage loan warehouse products at fair value upon
origination and correspondingly discontinued the application of SFAS No. 133 hedging relationships
for these new originations.
92
The fair value of interest rate lock commitments and the fair value of warehouse loans are impacted
principally by changes in interest rates, but also by changes in borrowers credit, and changes in
profit margins required by investors for perceived risks (i.e., liquidity). FHN does not hedge
against credit and liquidity risk in the pipeline or warehouse. Third party models are used to
manage the interest rate risk.
In conjunction with the adoption of FSP FAS 157-4, FHN revised its methodology for determining the
fair value of certain loans within its mortgage warehouse. FHN now determines the fair value of
the applicable loans using a discounted cash flow model using observable inputs, including current
mortgage rates for similar products, with adjustments for differences in loan characteristics
reflected in the models discount rates. Upon implementation, this change in methodology had a
minimal effect on the valuation of the applicable loans. For all other loans held in the warehouse
(and in prior periods for the loans converted to the discounted cash flow methodology), the fair
value of loans whose principal market is the securitization market is based on recent security
trade prices for similar product with a similar delivery date, with necessary pricing adjustments
to convert the security price to a loan price. Loans whose principal market is the whole loan
market are priced based on recent observable whole loan trade prices or published third party bid
prices for similar product, with necessary pricing adjustments to reflect differences in loan
characteristics. Typical adjustments to security prices for whole loan prices include adding the
value of MSR to the security price or to the whole loan price if the price is servicing retained,
adjusting for interest in excess of (or less than) the required coupon or note rate, adjustments to
reflect differences in the characteristics of the loans being valued as compared to the collateral
of the security or the loan characteristics in the benchmark whole loan trade, adding interest
carry, reflecting the recourse obligation that will remain after sale, and adjusting for changes in
market liquidity or interest rates if the benchmark security or loan price is not current.
Additionally, loans that are delinquent or otherwise significantly aged are discounted to reflect
the less marketable nature of these loans.
The fair value of FHNs warehouse (first-lien mortgage loans held for sale) changes with
fluctuations in interest rates from the loan closing date through the date of sale of the loan into
the secondary market. Typically, the fair value of the warehouse declines in value when interest
rates increase and rises in value when interest rates decrease. To mitigate this risk, FHN entered
into forward sales contracts and futures contracts to provide an economic hedge against those
changes in fair value on a significant portion of the warehouse. These derivatives are recorded at
fair value with changes in fair value recorded in current earnings as a component of the gain or
loss on the sale of loans in mortgage banking noninterest income.
Interest rate lock commitments generally have a term of up to 60 days before the closing of the
loan. During this period, the value of the lock changes with changes in interest rates. The
interest rate lock commitment does not bind the potential borrower to entering into the loan, nor
does it guarantee that FHN will approve the potential borrower for the loan. Therefore, when
determining fair value, FHN makes estimates of expected fallout (locked pipeline loans not
expected to close), using models, which consider cumulative historical fallout rates and other
factors. Fallout can occur for a variety of reasons including falling rate environments when a
borrower will abandon an interest rate lock commitment at one lender and enter into a new lower
interest rate lock commitment at another, when a borrower is not approved as an acceptable credit
by the lender, or for a variety of other non-economic reasons. Changes in the fair value of
interest rate lock commitments are recorded in current earnings as gain or loss on the sale of
loans in mortgage banking noninterest income.
Because interest rate lock commitments are derivatives, they do not qualify for hedge accounting
treatment under SFAS 133. However, FHN economically hedges the risk of changing interest rates by
entering into forward sales and futures contracts. The extent to which FHN is able to economically
hedge changes in the mortgage pipeline depended largely on the hedge coverage ratio that was
maintained relative to mortgage loans in the pipeline. The hedge coverage ratio could change
significantly due to changes in market interest rates and the associated forward commitment prices
for sales of mortgage loans in the secondary market. Increases or decreases in the hedge coverage
ratio could result in significant earnings volatility to FHN.
Due to the reduced level of origination activity after the sale of national origination offices to
MetLife, interest rate commitments are immaterial as of June 30, 2009. For the period ended June
30, 2008, the valuation model utilized to estimate the fair value of loan applications locked
recognizes the full fair value of the ultimate loan adjusted for
93
estimated fallout and estimated cost assumptions a market participant would use to convert the lock
into a loan. The fair value of interest rate lock commitments as of June 30, 2008 was $12.5
million.
FORECLOSURE AND REPURCHASE RESERVES
As discussed above, FHN originated mortgage loans with the intent to sell those loans to GSE and
other private investors in the secondary market. Certain of the mortgage loans were sold with
limited or full recourse in the event of foreclosure. On June 30, 2009 and 2008, the outstanding
principal balance of mortgage loans sold with limited recourse arrangements where some portion of
the principal is at risk and serviced by FHN was $3.3 billion and $3.6 billion, respectively.
Additionally, on June 30, 2009 and 2008, $1.2 billion and $1.8 billion, respectively, of mortgage
loans were outstanding which were sold under limited recourse arrangements where the risk is
limited to interest and servicing advances. On June 30, 2009 and 2008, $72.2 million and $92.4
million, respectively, of mortgage loans were outstanding which were serviced under full recourse
arrangements.
Loans sold with limited recourse include loans sold under government guaranteed mortgage loan
programs including the Federal Housing Administration (FHA) and Veterans Administration (VA). FHN
continues to absorb losses due to uncollected interest and foreclosure costs and/or limited risk of
credit losses in the event of foreclosure of the mortgage loan sold. Generally, the amount of
recourse liability in the event of foreclosure is determined based upon the respective government
program and/or the sale or disposal of the foreclosed property collateralizing the mortgage loan.
Another instance of limited recourse is the VA/No bid. In this case, the VA guarantee is limited
and FHN may be required to fund any deficiency in excess of the VA guarantee if the loan goes to
foreclosure.
Loans sold with full recourse generally include mortgage loans sold to investors in the secondary
market which are uninsurable under government guaranteed mortgage loan programs, due to issues
associated with underwriting activities, documentation, or other concerns.
Management closely monitors historical experience, borrower payment activity, current economic
trends and other risk factors, and establishes a reserve for foreclosure losses for loans sold with
limited recourse, loans serviced with full recourse, and loans sold with general representations
and warranties, including early payment defaults. Management believes the foreclosure reserve is
sufficient to cover incurred foreclosure losses relating to loans being serviced as well as loans
sold where the servicing was not retained. The reserve for foreclosure losses is based upon a
historical progression model using a rolling 12-month average, which predicts the probability or
frequency of a mortgage loan entering foreclosure. In addition, other factors are considered,
including qualitative and quantitative factors (e.g., current economic conditions, past collection
experience, risk characteristics of the current portfolio and other factors), which are not defined
by historical loss trends or severity of losses. On June 30, 2009 and 2008, the foreclosure
reserve was $52.5 million and $38.5 million, respectively. Table 10 provides a summary of reserves
for foreclosure losses for the periods ended June 30, 2009 and 2008. The servicing portfolio has
decreased from $98.4 billion on June 30, 2008, to
$48.6 billion on June 30, 2009, as FHN has reduced
its servicing portfolio through sales through June 30, 2009, while the foreclosure reserve has
experienced increases primarily due to increases in both frequency and severity of projected
losses.
Table 10 Reserves for Foreclosure and
Repurchase Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(Dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
Beginning balance |
|
$ |
37,836 |
|
|
$ |
20,614 |
|
|
$ |
36,956 |
|
|
$ |
16,160 |
|
Provision for foreclosure and repurchase losses |
|
|
29,098 |
|
|
|
15,927 |
|
|
|
37,984 |
|
|
|
21,756 |
|
Transfers* |
|
|
|
|
|
|
6,509 |
|
|
|
|
|
|
|
7,361 |
|
Charge-offs |
|
|
(15,126 |
) |
|
|
(4,587 |
) |
|
|
(23,280 |
) |
|
|
(7,097 |
) |
Recoveries |
|
|
684 |
|
|
|
|
|
|
|
832 |
|
|
|
283 |
|
|
Ending balance |
|
$ |
52,492 |
|
|
$ |
38,463 |
|
|
$ |
52,492 |
|
|
$ |
38,463 |
|
|
|
|
|
* |
|
Primarily represents reserves established against servicing advances for
which the related MSR has been legally sold. Amounts are transferred to the
foreclosure reserve when the advances are delivered to the buyer but recourse to FHN
remains. |
94
Additionally, FHN has also sold HELOC and second-lien mortgages without recourse through whole loan
sales. On June 30, 2009, the outstanding principal balance of these loans was $1.0 billion and
$1.7 billion, respectively. On June 30, 2008, the outstanding principal balance of these HELOC and
second-lien mortgages was $1.1 billion and $2.1 billion, respectively. FHN does not guarantee the
receipt of the scheduled principal and interest payments on the underlying loans but does have an
obligation to repurchase the loans for which there is a breach of warranties provided to the
buyers. As of June 30, 2009, FHN has recognized a liability of $24.4 million related to these
repurchase obligations.
GOODWILL AND ASSESSMENT OF IMPAIRMENT
FHNs policy is to assess goodwill for impairment at the reporting unit level on an annual basis or
between annual assessments if an event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying amount. Impairment is the
condition that exists when the carrying amount of goodwill exceeds its implied fair value.
Accounting standards require management to estimate the fair value of each reporting unit in making
the assessment of impairment at least annually. As of October 1, 2008, FHN engaged an independent
valuation firm to assist in the computation of the fair value estimates of each reporting unit as
part of its annual impairment assessment. The valuation utilized three separate methodologies and
applied a weighted average to each in order to determine fair value for each reporting unit. The
valuation as of October 1, 2008 indicated no goodwill impairment in any of the reporting units.
Based on further analysis and events subsequent to the measurement date of October 1, 2008, no
additional goodwill impairment was indicated as of December 31, 2008, March 31, 2009 or June 30,
2009.
Management believes the accounting estimates associated with determining fair value as part of the
goodwill impairment test is a critical accounting estimate because estimates and assumptions are
made about FHNs future performance and cash flows, as well as other prevailing market factors
(interest rates, economic trends, etc.). FHNs policy allows management to make the determination
of fair value using appropriate valuation methodologies and inputs, including utilization of market
observable data and internal cash flow models. Independent third parties may be engaging to assist
in the valuation process. If a charge to operations for impairment results, this amount would be
reported separately as a component of noninterest expense. This critical accounting estimate
applies to the Regional Banking and Capital Markets business segments. The National Specialty
Lending, Mortgage Banking, and Corporate segments have no associated goodwill. Reporting units
have been defined as the same level as the operating business segments.
The impairment testing process conducted by FHN begins by assigning net assets and goodwill to each
reporting unit. FHN then completes step one of the impairment test by comparing the fair value
of each reporting unit (as determined based on the discussion below) with the recorded book value
(or carrying amount) of its net assets, with goodwill included in the computation of the carrying
amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of that
reporting unit is not considered impaired, and step two of the impairment test is not necessary.
If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test
is performed to determine the amount of impairment. Step two of the impairment test compares the
carrying amount of the reporting units goodwill to the implied fair value of that goodwill. The
implied fair value of goodwill is computed by assuming all assets and liabilities of the reporting
unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill.
This adjusted goodwill balance is the implied fair value used in step two. An impairment charge is
recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value.
In connection with obtaining the independent valuation, management provided certain data and
information that was utilized in the estimation of fair value. This information included
budgeted and forecasted earnings of FHN at
the reporting unit level. Management believes that this information is a critical assumption
underlying the estimate of fair value. Other assumptions critical to the process were also made,
including discount rates, asset and liability growth rates, and other income and expense
estimates.
95
While management uses the best information available to estimate future performance for each
reporting unit, future adjustments to managements projections may be necessary if conditions
differ substantially from the assumptions used in making the estimates.
CONTINGENT LIABILITIES
A liability is contingent if the amount or outcome is not presently known, but may become known in
the future as a result of the occurrence of some uncertain future event. FHN estimates its
contingent liabilities based on managements estimates about the probability of outcomes and their
ability to estimate the range of exposure. Accounting standards require that a liability be
recorded if management determines that it is probable that a loss has occurred and the loss can be
reasonably estimated. In addition, it must be probable that the loss will be confirmed by some
future event. As part of the estimation process, management is required to make assumptions about
matters that are by their nature highly uncertain.
The assessment of contingent liabilities, including legal contingencies and income tax liabilities,
involves the use of critical estimates, assumptions, and judgments. Managements estimates are
based on their belief that future events will validate the current assumptions regarding the
ultimate outcome of these exposures. However, there can be no assurance that future events, such
as court decisions or I.R.S. positions, will not differ from managements assessments. Whenever
practicable, management consults with third party experts (attorneys, accountants, claims
administrators, etc.) to assist with the gathering and evaluation of information related to
contingent liabilities. Based on internally and/or externally prepared evaluations, management
makes a determination whether the potential exposure requires accrual in the financial statements.
ACCOUNTING CHANGES
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for
Transfers of Financial Assets an amendment of FASB Statement No. 140 (SFAS No. 166). SFAS No.
166 provides for the removal of the qualifying special purpose entity (QSPE) concept from GAAP,
resulting in the evaluation of all former QSPEs for consolidation on and after January 1, 2010 in
accordance with Statement of Financial Accounting Standards No. 167, Amendments to FASB
Interpretation No. 46(R) (SFAS No. 167). SFAS No. 166 modifies the criteria for achieving sale
accounting for transfers of financial assets and defines the term participating interest to
establish specific conditions for reporting a transfer of a portion of a financial asset as a sale.
SFAS No. 166 also provides that a transferor should recognize and initially measure at fair value
all assets obtained (including a transferors beneficial interest) and liabilities incurred as a
result of a transfer of financial assets accounted for as a sale. SFAS No. 166 requires enhanced
disclosures which are generally consistent with, and supersede, the disclosures previously required
by FSP FAS 140-4. SFAS No. 166 is effective prospectively for new transfers of financial assets
occurring in fiscal years beginning after November 15, 2009, and in interim periods within those
fiscal years. SFAS No. 166s disclosure requirements should be applied to transfers that occurred
both before and after its effective date, with comparative disclosures required only for periods
subsequent to initial adoption for those disclosures not previously required under FSP FAS 140-4.
FHN is currently assessing the effects of adopting SFAS No. 166.
In June 2009, the FASB issued SFAS No. 167 which revises the criteria for determining the primary
beneficiary of a variable interest entity (VIE) by replacing the prior quantitative-based risks and
rewards test required under FASB Interpretation No. 46-R, Consolidation of Variable Interest
Entities revised December 2003 (FIN 46-R) with a qualitative analysis. While SFAS No. 167
retains the guidance in FIN 46-R which requires a reassessment of whether an entity is a VIE only
when certain triggering events occur, it adds an additional criterion which triggers a reassessment
of an entitys status when an event occurs such that the holders of the equity investment at risk,
as a group, lose the power from voting rights or similar rights of those investments to direct the
activities of the entity that most significantly impact the entitys economic performance.
Additionally, SFAS No. 167 requires continual reconsideration of conclusions regarding which
interest holder is the VIEs primary beneficiary. SFAS No. 167 requires separate presentation on
the face of the balance sheet of the assets of a consolidated VIE that can only be used to settle
the VIEs obligations and the liabilities of a consolidated VIE for which creditors or beneficial
interest
holders have no recourse to the general credit of the primary beneficiary. SFAS No. 167 also
requires enhanced disclosures which are generally consistent with, and supersede, the disclosures
previously required by FSP FAS 140-4. SFAS No. 167 is effective for periods beginning after
November 15, 2009, and requires
96
reevaluation under its amended consolidation requirements of all
QSPEs and entities currently subject to FIN 46-R as of the beginning of the first annual period
that begins after November 15, 2009. If consolidation of a VIE is required upon initial adoption,
the assets, liabilities, and noncontrolling interests of the VIE should be measured at their
carrying amounts as if SFAS No. 167 had been applied from inception of the VIE, with any difference
between the net amounts recognized and the amount of any previously recognized interests reflected
as a cumulative effect adjustment to undivided profits. However, if determining the carrying
amounts is not practicable, the assets, liabilities, and noncontrolling interests of the VIE may be
measured at fair value. Further, if determining the carrying amounts is not practicable, and if
the activities of the VIE are primarily related to securitizations or other forms of asset-backed
financings and the assets of the VIE can be used only to settle obligations of the entity, then the
assets and liabilities of the VIE may be measured at their unpaid principal balances. The fair
value option provided under SFAS No. 159 may also be elected for financial assets and financial
liabilities requiring consolidation as a result of initial adoption, provided that the election is
made for all eligible financial assets and financial liabilities of the VIE. If initial
application of SFAS No. 167 results in deconsolidation of a VIE, any retained interest in the VIE
should be measured at its carrying value as if SFAS No. 167 had been applied from inception of the
VIE. Comparative disclosures are required only for periods subsequent to initial adoption for
those disclosures not previously required under FSP FAS 140-4. FHN is currently assessing the
effects of adopting SFAS No. 167.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
a replacement of FASB Statement No. 162 (SFAS No. 168). SFAS No. 168 establishes the FASB
Accounting Standards Codification as the single source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP, other than guidance issued by the SEC. Under SFAS No. 168, all
guidance contained in the FASB Accounting Standards Codification carries an equal level of
authority, with SFAS No. 168 superseding all then-existing non-SEC accounting and reporting
standards as of its effective date. SFAS No. 168 is effective for periods ending after September
15, 2009. The effect of adopting SFAS No. 168 will not be material to FHN.
In December 2008, FASB Staff Position No. FAS 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets (FSP FAS 132(R)-1), was issued. FSP FAS 132(R)-1 provides
detailed disclosure requirements to enhance the disclosures about an employers plan assets
currently required by Statement of Financial Accounting Standards No. 132(R), Employers
Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132(R)). FSP FAS 132(R)-1
is effective prospectively for annual periods ending after December 15, 2009. FHN is currently
assessing the effects of adopting FSP FAS 132(R)-1.
Other Events
In third
quarter 2009, FHN entered into an agreement to transfer to the original purchaser, or its
designated successor servicers, servicing rights retained from certain prior second lien and HELOC
loan sales. This agreement effectively caps all repurchase obligations and indemnification rights
related to these loans that were previously transferred to the original purchaser.
97
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information called for by this item is contained in (a) Managements Discussion and Analysis of
Financial Condition and Results of Operations included as Item 2 of Part I of this report at pages
62-97, (b) the section entitled Risk Management Interest Rate Risk Management of the
Managements Discussion and Analysis of Results of Operations and Financial Condition section of
FHNs 2008 Annual Report to shareholders, and (c) the Interest Rate Risk Management subsection of
Note 26 to the Consolidated Financial Statements included in FHNs 2008 Annual Report to
shareholders.
Item 4. Controls and Procedures
(a) |
|
Evaluation of Disclosure Controls and Procedures. FHNs management, with the participation
of FHNs chief executive officer and chief financial officer, has evaluated the effectiveness
of the design and operation of FHNs disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e)) as of the end of the period covered by this quarterly report.
Based on that evaluation, the chief executive officer and chief financial officer have
concluded that FHNs disclosure controls and procedures are effective to ensure that material
information relating to FHN and FHNs consolidated subsidiaries is made known to such officers
by others within these entities, particularly during the period this quarterly report was
prepared, in order to allow timely decisions regarding required disclosure. |
|
(b) |
|
Changes in Internal Control over Financial Reporting. There have not been any changes in
FHNs internal control over financial reporting during FHNs last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, FHNs internal control
over financial reporting. |
Item 4(T). Controls and Procedures
Not applicable
98
Part II.
OTHER INFORMATION
Item 1A Risk Factors
The following paragraphs supplement the Regulatory and Legal Risks discussion in Item 1A of our
annual report on Form 10-K for the year ended December 31, 2008. These supplemental paragraphs
relate principally to the third paragraph of that annual report discussion.
On June 29, 2009, the U.S. Supreme Court announced a decision in a case known as Cuomo v. Clearing
House Association L.L.C. In its decision the Court determined that the Office of the Comptroller
of the Currency (OCC) does not have the exclusive ability to enforce certain state and local laws
applicable to certain business activities of national banks which are not pre-empted by federal
law. The Supreme Courts decision modified the position of the OCC and lower court decisions that
had affirmed the OCCs regulations regarding its visitorial power, and limited the application of
a 2007 Supreme Court decision known as Watters v. Wachovia Bank N.A. which had been viewed as
indirectly supportive of the OCCs position.
It is not possible at this time to gauge what effects the Cuomo decision will have upon us.
Although our regional banking business operates primarily in the state of Tennessee, we have
branches in other states, we have customers in several more, and a component of our long-term
strategy is possible further expansion into states that neighbor Tennessee. In addition, our
capital markets business has customers and offices in many states, and our mortgage banking and
national specialty lending businesses hold assets originated across the U.S.
Cuomo holds that the National Bank Act allows states to enforce non-pre-empted laws through
judicial proceedings against national banks. Most states and some communities have in place
various laws pertaining to lending and other business activities conducted by banks, some of which
may not be pre-empted by federal law. Dealing with potential state and local enforcement activity
relating to non-pre-empted laws would, at a minimum, increase the compliance costs for national
banks.
Items 1, 3, and 5
As of the end of the second quarter 2009, the answers to Items 1, 3, and 5 were either inapplicable
or negative, and therefore these items are omitted.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
|
(a) |
|
None |
|
|
(b) |
|
Not applicable |
|
|
(c) |
|
The Issuer Purchase of Equity Securities Table is incorporated herein by reference to
the table included in Item 2 of
Part I First Horizon National Corporation Managements Discussion and Analysis of
Financial Condition and Results of Operations at page 62. |
Item 4 Submission of Matters to a Vote of Securities Holders
|
(a) |
|
The Companys annual meeting of shareholders was held on April 21, 2009. |
|
|
(b) |
|
Proxies for the annual meeting were solicited in accordance with Regulation 14A
under the Securities Exchange Act of 1934. There was no solicitation in opposition to
managements five nominees listed in the Proxy Statement: Mark A.
Emkes; D. Bryan Jordan; R. Brad Martin; Vicki R. Palmer; and William B. Sansom. All of
managements nominees were |
99
|
|
|
elected. Six directors continued in office: Robert B. Carter;
Simon F. Cooper; James A. Haslam, III; Colin V. Reed; Michael D. Rose; and Luke Yancy III. |
|
|
(c) |
|
In addition to the election of directors, the shareholders ratified the appointment
of KPMG LLP as independent auditor for the year 2009 (vote item 2 in the Proxy
Statement), and approved an advisory proposal regarding executive compensation (vote item
3 in the Proxy Statement). The specific shareholder vote related to the election,
approval, and ratification items is summarized below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker |
Vote Item |
|
Nominee |
|
For |
|
Withheld |
|
Abstain |
|
Nonvote |
1. Election of Directors [All elected] |
|
Mark A. Emkes |
|
|
174,763,688 |
|
|
|
3,008,162 |
|
|
|
0 |
|
|
|
0 |
|
|
D. Bryan Jordan |
|
|
175,661,744 |
|
|
|
2,110,106 |
|
|
|
0 |
|
|
|
0 |
|
|
R. Brad Martin |
|
|
172,680,557 |
|
|
|
5,091,293 |
|
|
|
0 |
|
|
|
0 |
|
|
|
Vicki R. Palmer |
|
|
166,948,457 |
|
|
|
10,823,393 |
|
|
|
0 |
|
|
|
0 |
|
|
|
William B. Sansom |
|
|
172,791,973 |
|
|
|
4,979,877 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker |
Vote Item |
|
Auditor |
|
For |
|
Against |
|
Abstain |
|
Nonvote |
2. Ratification of
Auditor
[Ratified] |
|
KPMG LLP |
|
|
167,692,611 |
|
|
|
11,434,432 |
|
|
|
663,638 |
|
|
|
0 |
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Broker |
Vote Item |
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Details |
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For |
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Against |
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Abstain |
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Nonvote |
3. Advisory |
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Advisory proposal |
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Proposal on |
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to approve |
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Executive |
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compensation of |
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Compensation |
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certain executive |
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[Approved] |
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officers as |
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described in the |
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Proxy Statement |
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170,068,920 |
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7,399,738 |
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2,322,023 |
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0 |
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Item 6 Exhibits
|
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Exhibit No. |
|
Description |
|
|
|
3.1
|
|
Restated Charter of First Horizon National Corporation, incorporated herein by
reference to Exhibit 3.1 to the Corporations Current Report on Form 8-K filed April
23, 2009. |
|
|
|
3.2
|
|
Bylaws of First Horizon National Corporation, as amended and restated April 20,
2009, incorporated herein by reference to Exhibit 3.2 to the Corporations Current
Report on Form 8-K filed April 23, 2009. |
|
|
|
4
|
|
Instruments defining the rights of security holders, including indentures.* |
100
|
|
|
Exhibit No. |
|
Description |
|
10.1(d)**
|
|
[1995] Non-Employee Directors Deferred Compensation Stock Option Plan, as
restated for amendments through December 15, 2008. |
|
|
|
10.1(e)**
|
|
2000 Non-Employee Directors Deferred Compensation Stock Option Plan, as restated
for amendments through December 15, 2008. |
|
|
|
10.1(f)**
|
|
[1991] Bank Advisory Director Deferral Plan, as restated for amendments through
December 15, 2008. |
|
|
|
10.1(g)**
|
|
[1996] Bank Director and Advisory Board Member Deferral Plan, as restated for
amendments through December 15, 2008. |
|
|
|
10.1(h)**
|
|
2002 Bank Director and Advisory Board Member Deferral Plan, as restated for
amendments through December 15, 2008. |
|
|
|
10.2(b)**
|
|
1992 Restricted Stock Incentive Plan, as restated for amendments through December 15, 2008. |
|
|
|
10.2(c)**
|
|
1995 Employee Stock Option Plan, as restated for amendments through December 15, 2008. |
|
|
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10.2(d)**
|
|
1997 Employee Stock Option Plan, as restated for amendments through December 15, 2008. |
|
|
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10.2(e)**
|
|
2000 Employee Stock Option Plan, as restated for amendments through December 15, 2008. |
|
|
|
10.2(f)**
|
|
2003 Equity Compensation Plan, as restated for amendments through December 15, 2008. |
|
|
|
10.6(a)**
|
|
2002 Management Incentive Plan, as restated for amendments through July 14, 2008. |
|
|
|
13
|
|
The Risk Management-Interest Rate Risk Management subsection of the
Managements Discussion and Analysis section and the Interest Rate Risk Management
subsection of Note 26 to the Corporations consolidated financial statements,
contained, respectively, at pages 29-32 and pages 140-141 in the Corporations 2008
Annual Report to shareholders furnished to shareholders in connection with the Annual
Meeting of Shareholders on April 21, 2009, and incorporated herein by reference.
Portions of the Annual Report not incorporated herein by reference are deemed not to be
filed with the Commission with this report. |
|
|
|
31(a)
|
|
Rule 13a-14(a) Certifications of CEO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) |
|
|
|
31(b)
|
|
Rule 13a-14(a) Certifications of CFO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) |
|
|
|
32(a)
|
|
18 USC 1350 Certifications of CEO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) |
|
|
|
32(b)
|
|
18 USC 1350 Certifications of CFO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) |
|
|
|
* |
|
The Corporation agrees to furnish copies of the instruments, including indentures,
defining the rights of the holders of the long-term debt of the Corporation and its
consolidated subsidiaries to the Securities and Exchange Commission upon request. |
|
** |
|
This is a management contract or compensatory plan required to be filed as an exhibit. |
In many agreements filed as exhibits, each party makes representations and warranties to other
parties. Those representations and warranties are made only to and for the benefit of those other
parties in the context of a business contract. Exceptions to such representations and warranties
may be partially or fully waived by such parties, or not enforced by such parties, in their
discretion. No such representation or warranty may be relied upon by any other person for any
purpose.
101
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION
(Registrant)
|
|
DATE: August 6, 2009 |
By: |
/s/ William C. Losch III
|
|
|
|
Name: |
William C. Losch III |
|
|
|
Title: |
Executive Vice
President and
Chief Financial Officer
(Duly Authorized Officer
and Principal Financial
Officer) |
|
102
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Description |
|
|
|
3.1
|
|
Restated Charter of First Horizon National Corporation, incorporated herein by
reference to Exhibit 3.1 to the Corporations Current Report on Form 8-K filed April
23, 2009. |
|
|
|
3.2
|
|
Bylaws of First Horizon National Corporation, as amended and restated April 20,
2009, incorporated herein by reference to Exhibit 3.2 to the Corporations Current
Report on Form 8-K filed April 23, 2009. |
|
|
|
4
|
|
Instruments defining the rights of security holders, including indentures.* |
|
|
|
10.1(d)**
|
|
[1995] Non-Employee Directors Deferred Compensation Stock Option Plan, as
restated for amendments through December 15, 2008. |
|
|
|
10.1(e)**
|
|
2000 Non-Employee Directors Deferred Compensation Stock Option Plan, as restated
for amendments through December 15, 2008. |
|
|
|
10.1(f)**
|
|
[1991] Bank Advisory Director Deferral Plan, as restated for amendments through
December 15, 2008. |
|
|
|
10.1(g)**
|
|
[1996] Bank Director and Advisory Board Member Deferral Plan, as restated for
amendments through December 15, 2008. |
|
|
|
10.1(h)**
|
|
2002 Bank Director and Advisory Board Member Deferral Plan, as restated for
amendments through December 15, 2008. |
|
|
|
10.2(b)**
|
|
1992 Restricted Stock Incentive Plan, as restated for amendments through December 15, 2008. |
|
|
|
10.2(c)**
|
|
1995 Employee Stock Option Plan, as restated for amendments through December 15, 2008. |
|
|
|
10.2(d)**
|
|
1997 Employee Stock Option Plan, as restated for amendments through December 15, 2008. |
|
|
|
10.2(e)**
|
|
2000 Employee Stock Option Plan, as restated for amendments through December 15, 2008. |
|
|
|
10.2(f)**
|
|
2003 Equity Compensation Plan, as restated for amendments through December 15, 2008. |
|
|
|
10.6(a)**
|
|
2002 Management Incentive Plan, as restated for amendments through July 14, 2008. |
|
|
|
13
|
|
The Risk Management-Interest Rate Risk Management subsection of the
Managements Discussion and Analysis section and the Interest Rate Risk Management
subsection of Note 26 to the Corporations consolidated financial statements,
contained, respectively, at pages 29-32 and pages 140-141 in the Corporations 2008
Annual Report to shareholders furnished to shareholders in connection with the Annual
Meeting of Shareholders on April 21, 2009, and incorporated herein by reference.
Portions of the Annual Report not incorporated herein by reference are deemed not to be
filed with the Commission with this report. |
|
|
|
31(a)
|
|
Rule 13a-14(a) Certifications of CEO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) |
|
|
|
31(b)
|
|
Rule 13a-14(a) Certifications of CFO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002) |
|
|
|
32(a)
|
|
18 USC 1350 Certifications of CEO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) |
|
|
|
32(b)
|
|
18 USC 1350 Certifications of CFO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) |
|
|
|
* |
|
The Corporation agrees to furnish copies of the instruments, including indentures,
defining the rights of the holders of the long-term debt of the Corporation and its
consolidated subsidiaries to the Securities and Exchange Commission upon request. |
103
|
|
|
** |
|
This is a management contract or compensatory plan required to be filed as an exhibit. |
In many agreements filed as exhibits, each party makes representations and warranties to other
parties. Those representations and warranties are made only to and for the benefit of those other
parties in the context of a business contract. Exceptions to such representations and warranties
may be partially or fully waived by such parties, or not enforced by such parties, in their
discretion. No such representation or warranty may be relied upon by any other person for any
purpose.
104