FORM
10-Q
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
(Mark
one)
(X) QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended June 30, 2007
OR
( ) 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)
Tennessee
|
62-0803242
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
165
Madison Avenue, Memphis, Tennessee
|
38103
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(901)
523-4444
(Registrant's
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 x
No____
Indicate
by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and
large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
x
Large accelerated filer ____
Accelerated filer ____ Non-accelerated filer
Indicate
by
check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act)
Yes
No x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the
number of shares outstanding of each of the issuer's classes of common stock,
as
of the latest practicable date.
Common
Stock, $.625 par value
|
126,236,535
|
Class
|
Outstanding
on June 30, 2007
|
FIRST
HORIZON NATIONAL CORPORATION
INDEX
Part
I.
Financial Information
Part
II.
Other Information
Signatures
Exhibit
Index
PART
I.
FINANCIAL
INFORMATION
Item
1. Financial
Statements
The
Consolidated Condensed Statements
of Condition
The
Consolidated Condensed Statements
of Income
The
Consolidated Condensed Statements
of Shareholders’ Equity
The
Consolidated Condensed Statements
of Cash Flows
The
Notes to Consolidated Condensed
Financial Statements
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)
|
|
|
2007
|
|
2006
|
|
|
2006
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
$ 799,428
|
|
$ 825,364
|
|
|
$ 943,555
|
|
Federal
funds sold and securities
|
|
|
|
|
|
|
|
|
|
purchased
under agreements to resell
|
|
|
1,121,052
|
|
1,572,143
|
|
|
1,202,537
|
|
Total
cash and cash equivalents
|
|
|
1,920,480
|
|
2,397,507
|
|
|
2,146,092
|
|
Investment
in bank time deposits
|
|
|
58,241
|
|
75,903
|
|
|
18,037
|
|
Trading
securities
|
|
|
2,291,704
|
|
2,183,102
|
|
|
2,230,745
|
|
Loans
held for sale
|
|
|
3,330,489
|
|
3,222,735
|
|
|
2,873,577
|
|
Securities
available for sale
|
|
|
3,374,583
|
|
3,137,667
|
|
|
3,923,215
|
|
Securities
held to maturity (fair value of $271 on June 30, 2007; $387
on
|
|
|
|
|
|
|
|
June
30, 2006; and $272 on December 31, 2006)
|
|
|
270
|
|
384
|
|
|
269
|
|
Loans,
net of unearned income
|
|
|
22,382,303
|
|
21,717,264
|
|
|
22,104,905
|
|
Less: Allowance
for loan losses
|
|
|
229,919
|
|
199,835
|
|
|
216,285
|
|
Total
net loans
|
|
|
22,152,384
|
|
21,517,429
|
|
|
21,888,620
|
|
Mortgage
servicing rights, net
|
|
|
1,522,966
|
|
1,595,413
|
|
|
1,533,942
|
|
Goodwill
|
|
|
279,825
|
|
281,910
|
|
|
275,582
|
|
Other
intangible assets, net
|
|
|
61,947
|
|
75,055
|
|
|
64,530
|
|
Capital
markets receivables
|
|
|
1,240,456
|
|
1,058,690
|
|
|
732,282
|
|
Premises
and equipment, net
|
|
|
438,807
|
|
431,385
|
|
|
451,708
|
|
Real
estate acquired by foreclosure
|
|
|
67,499
|
|
60,577
|
|
|
63,519
|
|
Discontinued
assets
|
|
|
-
|
|
696
|
|
|
416
|
|
Other
assets
|
|
|
1,654,433
|
|
1,430,781
|
|
|
1,715,725
|
|
Total
assets
|
|
|
$
38,394,084
|
|
$
37,469,234
|
|
|
$
37,918,259
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders' equity:
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
$ 3,520,757
|
|
$ 3,246,821
|
|
|
$ 3,354,180
|
|
Time
deposits
|
|
|
2,885,307
|
|
2,819,597
|
|
|
2,924,050
|
|
Other
interest-bearing deposits
|
|
|
1,822,076
|
|
1,894,707
|
|
|
1,969,700
|
|
Certificates
of deposit $100,000 and more
|
|
|
8,016,808
|
|
8,053,119
|
|
|
6,517,629
|
|
Interest-bearing
|
|
|
16,244,948
|
|
16,014,244
|
|
|
14,765,559
|
|
Noninterest-bearing
|
|
|
5,516,735
|
|
5,679,198
|
|
|
5,447,673
|
|
Total
deposits
|
|
|
21,761,683
|
|
21,693,442
|
|
|
20,213,232
|
|
Federal
funds purchased and securities
|
|
|
|
|
|
|
|
|
|
sold
under agreements to repurchase
|
|
|
3,841,251
|
|
3,387,711
|
|
|
4,961,799
|
|
Trading
liabilities
|
|
|
658,533
|
|
929,694
|
|
|
789,957
|
|
Commercial
paper and other short-term borrowings
|
|
|
246,815
|
|
721,227
|
|
|
1,258,513
|
|
Term
borrowings
|
|
|
5,828,138
|
|
5,325,014
|
|
|
5,243,961
|
|
Other
collateralized borrowings
|
|
|
821,966
|
|
281,280
|
|
|
592,399
|
|
Total
long-term debt
|
|
|
6,650,104
|
|
5,606,294
|
|
|
5,836,360
|
|
Capital
markets payables
|
|
|
1,144,029
|
|
1,057,617
|
|
|
799,489
|
|
Discontinued
liabilities
|
|
|
-
|
|
8,422
|
|
|
6,966
|
|
Other
liabilities
|
|
|
1,332,910
|
|
1,327,360
|
|
|
1,294,283
|
|
Total
liabilities
|
|
|
35,635,325
|
|
34,731,767
|
|
|
35,160,599
|
|
Preferred
stock of subsidiary
|
|
|
295,277
|
|
295,274
|
|
|
295,270
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock - no par value (5,000,000 shares authorized, but
unissued)
|
-
|
|
-
|
|
|
-
|
|
Common
stock - $.625 par value (shares authorized - 400,000,000;
|
|
|
|
|
|
|
|
shares
issued and outstanding - 126,236,535 on June 30, 2007;
|
|
|
|
|
|
|
|
123,947,391
on June 30, 2006; and 124,865,982 on December 31, 2006)
|
78,898
|
|
77,467
|
|
|
78,041
|
|
Capital
surplus
|
|
|
352,138
|
|
282,563
|
|
|
312,521
|
|
Undivided
profits
|
|
|
2,120,014
|
|
2,113,514
|
|
|
2,144,276
|
|
Accumulated
other comprehensive loss, net
|
|
|
(87,568
|
) |
(31,351
|
)
|
|
(72,448
|
) |
Total
shareholders' equity
|
|
|
2,463,482
|
|
2,442,193
|
|
|
2,462,390
|
|
Total
liabilities and shareholders' equity
|
|
|
$
38,394,084
|
|
$
37,469,234
|
|
|
$
37,918,259
|
|
See
accompanying notes to consolidated condensed financial
statements.
|
Certain
previously reported amounts have been reclassified to agree with
current
presentation.
|
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)
|
|
|
2007
|
|
2006
|
|
2007
|
2006
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
|
$413,254
|
|
$393,451
|
|
$
823,681
|
$756,934
|
|
Interest
on investment securities
|
|
|
47,105
|
|
41,747
|
|
101,375
|
77,886
|
|
Interest
on loans held for sale
|
|
|
65,923
|
|
75,832
|
|
124,768
|
152,174
|
|
Interest
on trading securities
|
|
|
50,069
|
|
43,598
|
|
90,632
|
82,113
|
|
Interest
on other earning assets
|
|
|
18,552
|
|
23,954
|
|
37,632
|
42,844
|
|
Total
interest income
|
|
|
594,903
|
|
578,582
|
|
1,178,088
|
1,111,951
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
Interest
on deposits:
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
29,919
|
|
21,827
|
|
55,950
|
37,173
|
|
Time
deposits
|
|
|
33,555
|
|
29,116
|
|
66,592
|
54,454
|
|
Other
interest-bearing deposits
|
|
|
6,808
|
|
6,361
|
|
13,697
|
11,912
|
|
Certificates
of deposit $100,000 and more
|
|
|
110,630
|
|
110,068
|
|
216,906
|
229,364
|
|
Interest
on trading liabilities
|
|
|
14,272
|
|
19,923
|
|
30,633
|
38,270
|
|
Interest
on short-term borrowings
|
|
|
68,932
|
|
67,380
|
|
136,096
|
123,624
|
|
Interest
on long-term debt
|
|
|
91,355
|
|
70,309
|
|
181,363
|
117,835
|
|
Total
interest expense
|
|
|
355,471
|
|
324,984
|
|
701,237
|
612,632
|
|
Net
interest income
|
|
|
239,432
|
|
253,598
|
|
476,851
|
499,319
|
|
Provision
for loan losses
|
|
|
44,408
|
|
18,653
|
|
72,894
|
36,452
|
|
Net
interest income after provision for loan losses
|
|
|
195,024
|
|
234,945
|
|
403,957
|
462,867
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
Capital
markets
|
|
|
85,054
|
|
102,165
|
|
172,167
|
195,023
|
|
Mortgage
banking
|
|
|
71,300
|
|
116,472
|
|
144,397
|
197,154
|
|
Deposit
transactions and cash management
|
|
|
43,079
|
|
42,756
|
|
82,437
|
80,779
|
|
Revenue
from loan sales and securitizations
|
|
|
9,615
|
|
12,212
|
|
19,278
|
23,569
|
|
Insurance
commissions
|
|
|
7,674
|
|
12,461
|
|
17,463
|
27,147
|
|
Trust
services and investment management
|
|
|
10,628
|
|
10,824
|
|
20,316
|
21,481
|
|
Equity
securities (losses)/gains, net
|
|
|
(995
|
) |
2,517
|
|
2,967
|
1,514
|
|
Debt
securities (losses)/gains, net
|
|
|
(19
|
) |
376
|
|
6,292
|
(78,902
|
) |
All
other income and commissions
|
|
|
53,963
|
|
35,229
|
|
98,170
|
64,857
|
|
Total
noninterest income
|
|
|
280,299
|
|
335,012
|
|
563,487
|
532,622
|
|
Adjusted
gross income after provision for loan losses
|
|
|
475,323
|
|
569,957
|
|
967,444
|
995,489
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
Employee
compensation, incentives and benefits
|
|
|
258,191
|
|
245,796
|
|
504,534
|
505,937
|
|
Occupancy
|
|
|
33,402
|
|
27,525
|
|
62,186
|
57,627
|
|
Equipment
rentals, depreciation and maintenance
|
|
|
21,791
|
|
17,858
|
|
39,404
|
38,122
|
|
Operations
services
|
|
|
17,457
|
|
17,075
|
|
35,278
|
34,515
|
|
Communications
and courier
|
|
|
10,746
|
|
13,409
|
|
22,286
|
28,321
|
|
Amortization
of intangible assets
|
|
|
2,623
|
|
2,881
|
|
5,448
|
5,769
|
|
All
other expense
|
|
|
113,030
|
|
98,467
|
|
191,116
|
187,801
|
|
Total
noninterest expense
|
|
|
457,240
|
|
423,011
|
|
860,252
|
858,092
|
|
Income
before income taxes
|
|
|
18,083
|
|
146,946
|
|
107,192
|
137,397
|
|
(Benefit)/provision
for income taxes
|
|
|
(3,861
|
) |
43,013
|
|
14,941
|
30,054
|
|
Income
from continuing operations
|
|
|
21,944
|
|
103,933
|
|
92,251
|
107,343
|
|
Income
from discontinued operations, net of tax
|
|
|
179
|
|
376
|
|
419
|
210,649
|
|
Income
before cumulative effect of changes in accounting
principle
|
22,123
|
|
104,309
|
|
92,670
|
317,992
|
|
Cumulative
effect of changes in accounting principle, net of tax
|
|
|
-
|
|
-
|
|
-
|
1,345
|
|
Net
income
|
|
|
$ 22,123
|
|
$104,309
|
|
$
92,670
|
$319,337
|
|
Earnings
per common share from continuing operations
|
|
|
$ .18
|
|
$ .84
|
|
$
.74
|
$ .86
|
|
Earnings
per common share from discontinued operations, net of tax
|
-
|
|
-
|
|
-
|
1.69
|
|
Earnings
per common share from cumulative effect of changes in accounting
principle
|
-
|
|
-
|
|
-
|
.01
|
|
Earnings
per common share (Note 7)
|
|
|
$ .18
|
|
$ .84
|
|
$
.74
|
$ 2.56
|
|
Diluted
earnings per common share from continuing operations
|
|
|
$ .17
|
|
$ .82
|
|
$
.72
|
$ .84
|
|
Diluted
earnings per common share from discontinued operations, net of
tax
|
-
|
|
-
|
|
-
|
1.64
|
|
Diluted
earnings per common share from cumulative effect of changes in
accounting
principle
|
-
|
|
-
|
|
-
|
.01
|
|
Diluted
earnings per common share (Note 7)
|
|
|
$ .17
|
|
$ .82
|
|
$
.72
|
$ 2.49
|
|
Weighted
average common shares (Note 7)
|
|
|
125,873
|
|
123,667
|
|
125,609
|
124,573
|
|
Diluted
average common shares (Note 7)
|
|
|
128,737
|
|
127,280
|
|
128,720
|
128,185
|
|
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 SHAREHOLDERS' EQUITY
|
First
Horizon National Corporation
|
|
(Dollars
in thousands)(Unaudited)
|
|
2007
|
|
2006
|
|
Balance,
January 1
|
|
$2,462,390
|
|
$2,347,539
|
|
Adjustment
to reflect change in accounting for tax benefits (FIN 48)
|
(862
|
) |
-
|
|
Adjustment
to reflect adoption of measurement date provisions for SFAS No.
158
|
6,233
|
|
-
|
|
Adjustment
to reflect change in accounting for purchases of life
insurance
|
|
|
|
|
(EITF
Issue No. 06-5)
|
|
(548
|
) |
-
|
|
Net
income
|
|
92,670
|
|
319,337
|
|
Other
comprehensive income:
|
|
|
|
|
|
Unrealized
fair value adjustments, net of tax:
|
|
|
|
|
|
Cash
flow hedges
|
|
(29
|
) |
966
|
|
Securities
available for sale
|
|
(25,963
|
) |
9,927
|
|
Comprehensive
income
|
|
66,678
|
|
330,230
|
|
Cash
dividends declared
|
|
(113,450
|
) |
(111,752
|
) |
Common
stock repurchased
|
|
(1,096
|
) |
(165,568
|
) |
Common
stock issued for:
|
|
|
|
|
|
Stock
options and restricted stock
|
|
30,506
|
|
34,878
|
|
Acquisitions
|
|
-
|
|
487
|
|
Excess
tax benefit from stock-based compensation arrangements
|
6,029
|
|
3,592
|
|
Adjustment
to reflect change in accounting for employee stock option
forfeitures
|
-
|
|
(1,780
|
) |
Recognized
pension and other employee benefit plans net periodic benefit
costs
|
2,562
|
|
-
|
|
Stock-based
compensation expense
|
|
5,009
|
|
4,567
|
|
Other
|
|
31
|
|
-
|
|
Balance,
June 30
|
|
$2,463,482
|
|
$2,442,193
|
|
See
accompanying notes to consolidated condensed financial statements.
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS |
First
Horizon National Corporation
|
|
|
|
Six
Months Ended June 30
|
|
(Dollars
in thousands)(Unaudited)
|
|
2007
|
|
|
2006
|
|
Operating
|
Net
income
|
|
|
$
92,670
|
|
|
|
$
319,337
|
|
Activities
|
Adjustments
to reconcile net income to net cash provided/(used) by operating
activities:
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
72,894
|
|
|
|
36,452
|
|
|
Provision
for deferred income tax
|
|
|
14,941
|
|
|
|
30,054
|
|
|
Depreciation
and amortization of premises and equipment
|
|
|
27,231
|
|
|
|
26,040
|
|
|
Amortization
of intangible assets
|
|
|
5,448
|
|
|
|
5,995
|
|
|
Net
other amortization and accretion
|
|
|
42,386
|
|
|
|
43,359
|
|
|
Decrease
in derivatives, net
|
|
|
58,724
|
|
|
|
1,643
|
|
|
Market
value adjustment on mortgage servicing rights
|
|
|
(100,230 |
) |
|
|
(167,031 |
) |
|
Provision
for foreclosure reserve
|
|
|
6,101
|
|
|
|
6,421
|
|
|
Cumulative
effect of changes in accounting principle, net of tax
|
|
|
-
|
|
|
|
(1,345 |
) |
|
Gain
on divestiture
|
|
|
-
|
|
|
|
(208,577 |
) |
|
Stock-based
compensation expense
|
|
|
5,009
|
|
|
|
4,567
|
|
|
Excess
tax benefit from stock-based compensation arrangements
|
|
|
(6,029 |
) |
|
|
(3,592 |
) |
|
Equity
securities gains, net
|
|
|
(2,967 |
) |
|
|
(1,514 |
) |
|
Debt
securities (gains)/losses, net
|
|
|
(6,292 |
) |
|
|
78,902
|
|
|
Net
losses on disposal of fixed assets
|
|
|
588
|
|
|
|
1,925
|
|
|
Net
(increase)/decrease in:
|
|
|
|
|
|
|
|
|
|
Trading
securities
|
|
|
(60,959 |
) |
|
|
(49,674 |
) |
|
Loans
held for sale
|
|
|
(456,912 |
) |
|
|
1,201,532
|
|
|
Capital
markets receivables
|
|
|
(508,174 |
) |
|
|
(547,182 |
) |
|
Interest
receivable
|
|
|
11,013
|
|
|
|
(6,258 |
) |
|
Other
assets
|
|
|
119,737
|
|
|
|
12,554
|
|
|
Net
increase/(decrease) in:
|
|
|
|
|
|
|
|
|
|
Capital
markets payables
|
|
|
344,540
|
|
|
|
466,290
|
|
|
Interest
payable
|
|
|
5,600
|
|
|
|
21,634
|
|
|
Other
liabilities
|
|
|
(48,599 |
) |
|
|
(74,303 |
) |
|
Trading
liabilities
|
|
|
(131,424 |
) |
|
|
136,056
|
|
|
Total
adjustments
|
|
|
(607,374 |
) |
|
|
1,013,948
|
|
|
Net
cash (used)/provided by operating activities
|
|
|
(514,704 |
) |
|
|
1,333,285
|
|
Investing
|
Available
for sale securities:
|
|
|
|
|
|
|
|
|
Activities
|
Sales
|
|
|
624,240
|
|
|
|
2,261,985
|
|
|
Maturities
|
|
|
368,577
|
|
|
|
374,135
|
|
|
Purchases
|
|
|
(469,738 |
) |
|
|
(2,891,770 |
) |
|
Premises
and equipment:
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
-
|
|
|
|
25
|
|
|
Purchases
|
|
|
(15,322 |
) |
|
|
(50,711 |
) |
|
Net
increase in loans
|
|
|
(367,402 |
) |
|
|
(1,192,658 |
) |
|
Net
increase in investment in bank time deposits
|
|
|
(40,200 |
) |
|
|
(65,216 |
) |
|
Proceeds
from divestitures, net of cash and cash equivalents
|
|
|
-
|
|
|
|
421,756
|
|
|
Acquisitions,
net of cash and cash equivalents acquired
|
|
|
-
|
|
|
|
(487 |
) |
|
Net
cash provided/(used) by investing activities
|
|
|
100,155
|
|
|
|
(1,142,941 |
) |
Financing
|
Common
stock:
|
|
|
|
|
|
|
|
|
Activities
|
Exercise
of stock options
|
|
|
30,571
|
|
|
|
34,676
|
|
|
Cash
dividends paid
|
|
|
(112,085 |
) |
|
|
(111,950 |
) |
|
Repurchase
of shares
|
|
|
(1,096 |
) |
|
|
(165,568 |
) |
|
Excess
tax benefit from stock-based compensation arrangements
|
|
|
6,029
|
|
|
|
3,592
|
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
Issuance
|
|
|
1,076,909
|
|
|
|
2,234,160
|
|
|
Payments
|
|
|
(227,604 |
) |
|
|
(18,718 |
) |
|
Issuance
of preferred stock of subsidiary
|
|
|
8
|
|
|
|
-
|
|
|
Repurchase
of preferred stock of subsidiary
|
|
|
(1 |
) |
|
|
-
|
|
|
Net
increase/(decrease) in:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,548,452
|
|
|
|
(1,743,091 |
) |
|
Short-term
borrowings
|
|
|
(2,132,246 |
) |
|
|
(428,821 |
) |
|
Net
cash provided/(used) by financing activities
|
|
|
188,937
|
|
|
|
(195,720 |
) |
|
Net
decrease in cash and cash equivalents
|
|
|
(225,612 |
) |
|
|
(5,376 |
) |
|
Cash
and cash equivalents at beginning of period
|
|
|
2,146,092
|
|
|
|
2,402,883
|
|
|
Cash
and cash equivalents at end of period
|
|
|
$1,920,480
|
|
|
|
$2,397,507
|
|
|
Cash
and cash equivalents from discontinued operations at beginning
of period,
included above
|
|
|
$
-
|
|
|
|
$
874
|
|
|
Total
interest paid
|
|
|
694,751
|
|
|
|
590,066
|
|
|
Total
income taxes paid
|
|
|
13,782
|
|
|
|
104,898
|
|
See
accompanying notes to consolidated condensed financial
statements.
|
Certain
previously reported amounts have been reclassified to agree with
current
presentation.
|
7
Note
1 - Financial Information
The
unaudited interim consolidated 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 2007 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 2006 Annual
Report
to shareholders.
Income
Taxes. FHN or one of its subsidiaries files
income tax returns in the U.S. federal jurisdiction and various state’s
jurisdiction. With few exceptions, FHN is no longer subject to U.S. federal
or
state and local income tax examinations by tax authorities for years before
2002. The Internal Revenue Service (IRS) has completed its examination of
all
U.S. federal returns through 2004, although 2003 and 2004 remain open under
the
statute. All proposed adjustments with respect to examinations of federal
returns filed for 2004 and prior years have been settled.
FHN
adopted
the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48), on January 1, 2007. As a result of the implementation of
FIN 48, FHN recognized a $.9 million increase in the liability for unrecognized
tax benefits, which was accounted for as a reduction to the January 1, 2007,
balance of undivided profits. The total balance of unrecognized tax benefits
at
January 1, 2007, was $41.0 million. First Horizon does not expect that
unrecognized tax benefits will significantly increase or decrease within
the
next 12 months. Included in the balance at January 1, 2007, were
$15.6 million of tax positions for which the ultimate deductibility is highly
certain but for which there is uncertainty about the timing of such
deductibility. Because of the impact of deferred tax accounting, other than
interest, the disallowance of the shorter deductibility period would not
affect
the annual effective tax rate but would accelerate the payment of cash to
the
taxing authority to an earlier period. FHN recognizes interest
accrued related to unrecognized tax benefits in tax expense and penalties
in tax
expense. FHN had approximately $4.8 million for the payment of interest accrued
at January 1, 2007. As of June 30, 2007, no significant changes to
these amounts have occurred since the adoption of FIN 48.
Accounting
Changes. Effective January 1, 2007, FHN adopted Statement of
Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial
Instruments” (SFAS No. 155), which permits fair value remeasurement for hybrid
financial instruments that contain an embedded derivative that otherwise
would
require bifurcation. Additionally, SFAS No. 155 clarifies the accounting
guidance for beneficial interests in securitizations. Under SFAS No. 155,
all
beneficial interests in a securitization require an assessment in accordance
with SFAS No. 133 to determine if an embedded derivative exists within the
instrument. In addition, effective January 1, 2007, FHN adopted Derivatives
Implementation
Group Issue B40, “Application of Paragraph 13(b) to Securitized Interests in
Prepayable Financial Assets” (DIG B40). DIG B40 provides an exemption from the
embedded derivative test of paragraph 13(b) of SFAS No. 133 for instruments
that
would otherwise require bifurcation if the test is met solely because of a
prepayment feature included within the securitized interest and prepayment
is
not controlled by the security holder. Since FHN presents all retained interests
in its proprietary securitizations as trading securities and due to the
clarifying guidance of DIG B40, the impact of adopting SFAS No. 155 was
immaterial to the results of operations.
Effective
January 1, 2007, FHN adopted FIN 48 which provides guidance for the financial
statement recognition and measurement of a tax position taken or expected
to be
taken in a tax return. FIN 48 also provides guidance on the
classification and disclosure of uncertain tax positions in the financial
statements. As previously mentioned, upon adoption of FIN 48, FHN
recognized a cumulative effect adjustment to the beginning balance of undivided
profits in the amount of $.9 million for differences between the tax benefits
recognized in the statements of condition prior to the adoption of FIN 48
and
the amounts reported after adoption.
Effective
January 1, 2007, FHN adopted EITF Issue No. 06-5, “Accounting for Purchases of
Life Insurance—Determining the Amount That Could Be Realized in Accordance with
FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance”
(EITF 06-5). EITF 06-5 provides that in addition to cash surrender
value, the asset recognized for a life insurance contract should consider
certain other provisions included in a policy’s contractual terms with
additional amounts being discounted if receivable beyond one
year. Additionally, EITF 06-5 requires
that the determination of the amount that could be realized under an insurance
contract be performed at the individual policy level. FHN recognized
a reduction of undivided profits in the amount of $.5 million as a result
of
adopting EITF 06-5.
Effective
January 1, 2007, FHN elected early adoption of the final provisions of Statement
of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (SFAS No. 158), which required that the annual
measurement date of a plan’s assets and liabilities be as
Note
1 - Financial Information (continued)
of
the date
of the financial statements. As a result of adopting the measurement date
provisions of SFAS No. 158, total equity was increased by $6.2 million on
January 1, 2007, consisting of a reduction to undivided profits of $2.1 million
and a credit to accumulated other comprehensive income of $8.3 million.
Effective December 31, 2006, FHN adopted the provisions of SFAS No. 158 related
to the requirements to recognize the overfunded or underfunded status of
a
defined benefit postretirement plan as an asset or liability in the statements
of condition. SFAS No. 158 did not change measurement or recognition
requirements for periodic pension and postretirement costs. SFAS No.
158 also provides that changes in the funded status of a defined benefit
postretirement plan should be recognized in the year such changes occur through
comprehensive income. As a result of adopting the recognition provisions
of SFAS
No. 158, unrecognized transition assets and obligations, unrecognized actuarial
gains and losses, and unrecognized prior service costs and credits were
recognized as a component of accumulated other comprehensive income resulting
in
a reduction in equity of $76.7 million, net of tax, on December 31,
2006.
In
fiscal
2006, FHN adopted SEC Staff Accounting Bulletin No. 108 (SAB No.
108). SAB No. 108 requires that registrants assess the impact on both
the statement of condition and the statement of income when quantifying and
evaluating the materiality of a misstatement. Under SAB No. 108,
adjustment of financial statements is required when either approach results
in
quantifying a misstatement that is material to a reporting period presented
within the financial statements, after considering all relevant quantitative
and
qualitative factors. The adoption of SAB No. 108 had no effect on
FHN’s statement of condition or results of operations.
Effective
January 1, 2006, FHN elected early adoption of SFAS No. 156, “Accounting for
Servicing of Financial Assets – an amendment of FASB Statement No.
140”. This amendment to SFAS No. 140 requires servicing rights be
initially measured at fair value. Subsequently, companies are
permitted to elect, on a class-by-class basis, either fair value or amortized
cost accounting for their servicing rights. FHN elected fair value
accounting for its MSR. Accordingly, FHN recognized the cumulative
effect of a change in accounting principle totaling $.2 million, net of tax,
representing the excess of the fair value of the servicing asset over the
recorded value on January 1, 2006.
FHN
also
adopted Statement of Financial Accounting Standards No. 154, “Accounting Changes
and Error Corrections” (SFAS No. 154), as of January 1, 2006. SFAS
No. 154 requires retrospective application of voluntary changes in accounting
principle. A change in accounting principle mandated by new
accounting pronouncements should follow the transition method specified by
the
new guidance. However, if transition guidance is not otherwise
specified, retrospective application will be required. SFAS No. 154
does not alter the accounting requirement for changes in estimates (prospective)
and error corrections (restatement). The adoption of SFAS No. 154 did
not affect FHN’s reported results of operations.
FHN
adopted
SFAS No. 123-R, “Share-Based Payment”, as of January 1, 2006. SFAS
No. 123-R requires recognition of expense over the requisite service period
for
awards of share-based compensation to employees. The grant date fair
value of an award is used to measure the compensation expense to be recognized
over the life of the award. For unvested awards granted prior to the
adoption of SFAS No. 123-R, the fair values utilized equal the values developed
in preparation of the disclosures required under the original SFAS No.
123. Compensation expense recognized after adoption of SFAS No. 123-R
incorporates an estimate of awards expected to ultimately vest, which requires
estimation of forfeitures as well as projections related to the satisfaction
of
performance conditions that determine vesting. As permitted by
SFAS No. 123-R, FHN retroactively applied the provisions of SFAS No. 123-R
to
its prior period financial statements. The Consolidated Condensed
Statements of Income were revised to incorporate expenses previously presented
in the footnote disclosures. The Consolidated Condensed Statements of
Condition were revised to reflect the effects of including equity compensation
expense in those prior periods. Additionally, all deferred
compensation balances were reclassified within equity to capital
surplus. Since FHN’s prior disclosures included forfeitures as they
occurred, a cumulative effect adjustment, as required by SFAS No. 123-R,
of $1.1
million net of tax, was made for unvested awards that are not expected to
vest
due to anticipated forfeiture.
Accounting
Changes Issued but Not Currently Effective. In June 2007, the
American Institute of Certified Public Accountants (AICPA) issued Statement
of
Position 07-1, “Clarification of the Scope of the Audit and Accounting Guide
Investment Companies and Accounting by Parent Companies and Equity
Method Investors for Investments in Investment Companies” (SOP 07-1), which
provides guidance for determining whether an entity is within the scope of
the
AICPA’s Investment Companies Guide. Additionally, SOP 07-1 provides
certain criteria that must be met in order for investment company accounting
applied by a subsidiary or equity method investee to be retained in the
financial statements of the parent company or an equity method
investor. SOP 07-1 also provides expanded disclosure requirements
regarding the retention of such investment company accounting in the
consolidated financial statements. In May 2007, FASB Staff Position
No. FIN 46(R)-7, “Application of FASB Interpretation No. 46(R) to Investment
Companies” (FIN 46(R)-7) was issued. FIN 46(R)-7 amends FIN 46(R) to
provide a permanent exception to its scope for companies within the scope
of the
revised Investment Companies Guide under SOP 07-1. SOP 07-1 and FIN
46(R)-7
Note
1 - Financial Information (continued)
are
effective for fiscal years beginning on or after December 15,
2007. FHN is currently assessing the financial impact of adopting SOP
07-1 and FIN 46(R)-7.
In
April
2007, FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No.
39” (FIN 39-1) was issued. 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 FIN 39-1, entities are
permitted to change their previous accounting policy election to offset or
not
offset fair value amounts recognized for derivative instruments under master
netting arrangements. Additionally, FIN 39-1 requires additional
disclosures for derivatives and collateral associated with master netting
arrangements. FIN 39-1 is effective for fiscal years beginning after
November 15, 2007, through retrospective application, with early application
permitted. FHN is currently assessing the financial impact of
adopting FIN 39-1.
In
February
2007, the FASB issued Statement of Financial Accounting Standards No. 159,
“The
Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No.
159), which allows an irrevocable election to measure certain financial assets
and financial 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 financial
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 financial 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. SFAS No. 159 is effective prospectively
for fiscal years beginning after November 15, 2007. FHN is currently
assessing the financial impact of adopting SFAS No. 159.
In
September
2006, the FASB issued Statement of Financial Accounting Standards No. 157,
“Fair
Value Measurements” (SFAS No. 157), which establishes a hierarchy to be used in
performing measurements of fair value. 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. Additionally, SFAS No. 157 provides expanded disclosure
requirements regarding the effects of fair value measurements on the financial
statements. SFAS No. 157 is effective prospectively for fiscal years
beginning after November 15, 2007. FHN is currently assessing the
financial impact of adopting SFAS No. 157.
In
September
2006, the consensus reached in EITF Issue No. 06-4, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar
Life
Insurance Arrangements” (EITF 06-4) was ratified by the FASB. 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. EITF 06-4 is effective for fiscal years beginning after
December 15, 2007, with the guidance applied using either a retrospective
approach or through a cumulative-effect adjustment to beginning undivided
profits. FHN is currently assessing the financial impact of adopting
EITF 06-4.
Note
2 - Acquisitions/Divestitures
On
June 28,
2006, First Horizon Merchant Services, Inc. (FHMS) sold all of the outstanding
capital stock of Global Card Services, Inc. (GCS), a wholly-owned
subsidiary. As a result, tax benefits of $4.2 million were recognized
associated with the difference between FHMS’ tax basis in the stock and net
proceeds from the sale.
On
March 1,
2006, FHN sold substantially all the assets of its national merchant processing
business conducted primarily through FHMS and GCS. The sale was to
NOVA Information Systems (NOVA), a wholly-owned subsidiary of U.S.
Bancorp. This transaction resulted in a pre-tax gain of $351.5
million. In addition, a supplement to the purchase price may be paid
to FHN if certain performance goals are achieved during a period following
closing. This
divestiture was accounted for as a discontinued operation, and prior periods
were adjusted to exclude the impact of merchant operations from the results
of
continuing operations. In conjunction with the sale, FHN entered into
a transitional service agreement with NOVA to provide or continue on-going
services such as telecommunications, back-end processing and disaster recovery
until NOVA converts the operations to their systems.
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.
Note
3 - Loans
The
composition of the loan portfolio is detailed below:
|
|
June
30
|
|
|
December
31
|
|
(Dollars
in thousands)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and industrial
|
|
|
$
7,218,582
|
|
|
|
$
6,705,925
|
|
|
|
$
7,201,009
|
|
Real
estate commercial
|
|
|
1,389,963
|
|
|
|
1,276,278
|
|
|
|
1,136,590
|
|
Real
estate construction
|
|
|
2,830,856
|
|
|
|
2,453,579
|
|
|
|
2,753,458
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate residential
|
|
|
7,614,887
|
|
|
|
8,562,733
|
|
|
|
7,973,313
|
|
Real
estate construction
|
|
|
2,158,775
|
|
|
|
2,076,004
|
|
|
|
2,085,133
|
|
Other
retail
|
|
|
149,157
|
|
|
|
163,121
|
|
|
|
161,178
|
|
Credit
card receivables
|
|
|
194,715
|
|
|
|
202,117
|
|
|
|
203,307
|
|
Real
estate loans pledged against other collateralized
|
|
|
|
|
|
|
|
|
|
|
|
|
borrowings
|
|
|
825,368
|
|
|
|
277,507
|
|
|
|
590,917
|
|
Loans,
net of unearned income
|
|
|
22,382,303
|
|
|
|
21,717,264
|
|
|
|
22,104,905
|
|
Allowance
for loan losses
|
|
|
229,919
|
|
|
|
199,835
|
|
|
|
216,285
|
|
Total
net loans
|
|
|
$22,152,384
|
|
|
|
$21,517,429
|
|
|
|
$21,888,620
|
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
Nonperforming
loans consist of loans which management has identified as impaired,
other
nonaccrual loans and loans which have been restructured. On
June 30, 2007 and 2006, there were no 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)
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
Impaired
loans
|
|
|
$
119,043
|
|
|
|
$
56,394
|
|
|
|
$
76,340
|
|
Other
nonaccrual loans*
|
|
|
21,466
|
|
|
|
19,940
|
|
|
|
17,290
|
|
Total
nonperforming loans
|
|
|
$
140,509
|
|
|
|
$
76,334
|
|
|
|
$
93,630
|
|
*
On
June 30, 2007 and 2006, and on December 31, 2006,
other nonaccrual loans
included $12.5 million, $15.0 million, and
|
$10.8
million, respectively, of loans held for
sale.
|
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)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Total
interest on impaired loans
|
|
|
$
154
|
|
|
|
$
165
|
|
|
|
$
495
|
|
|
|
$
344
|
|
Average
balance of impaired loans
|
|
|
95,777
|
|
|
|
48,689
|
|
|
|
89,722
|
|
|
|
46,261
|
|
Activity
in
the allowance for loan losses related to non-impaired loans,
impaired loans, and
for the total allowance for the six months ended June
30,
2007 and 2006, is summarized as follows:
(Dollars
in thousands)
|
|
Non-impaired
|
|
|
Impaired
|
|
|
Total
|
|
Balance
on December 31, 2005
|
|
|
$179,635
|
|
|
|
$10,070
|
|
|
|
$189,705
|
|
Provision
for loan losses
|
|
|
25,589
|
|
|
|
10,863
|
|
|
|
36,452
|
|
Divestitures/acquisitions/transfers
|
|
|
(1,195 |
) |
|
|
-
|
|
|
|
(1,195 |
) |
Charge-offs
|
|
|
(23,034 |
) |
|
|
(9,275 |
) |
|
|
(32,309 |
) |
Recoveries
|
|
|
5,533
|
|
|
|
1,649
|
|
|
|
7,182
|
|
Net
charge-offs
|
|
|
(17,501 |
) |
|
|
(7,626 |
) |
|
|
(25,127 |
) |
Balance
on June 30, 2006
|
|
|
$186,528
|
|
|
|
$13,307
|
|
|
|
$199,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
on December 31, 2006
|
|
|
$200,827
|
|
|
|
$15,458
|
|
|
|
$216,285
|
|
Provision
for loan losses
|
|
|
32,921
|
|
|
|
39,973
|
|
|
|
72,894
|
|
Divestitures/acquisitions/transfers
|
|
|
(10,961 |
) |
|
|
1,290
|
|
|
|
(9,671 |
) |
Charge-offs
|
|
|
(23,181 |
) |
|
|
(32,977 |
) |
|
|
(56,158 |
) |
Recoveries
|
|
|
4,489
|
|
|
|
2,080
|
|
|
|
6,569
|
|
Net
charge-offs
|
|
|
(18,692 |
) |
|
|
(30,897 |
) |
|
|
(49,589 |
) |
Balance
on June 30, 2007
|
|
|
$204,095
|
|
|
|
$25,824
|
|
|
|
$229,919
|
|
Note
4 - Mortgage Servicing Rights
On
January
1, 2006, FHN elected early adoption of SFAS No. 156, which requires servicing
rights be initially measured at fair value. Subsequently, companies are
permitted to elect, on a class-by-class basis, either fair value or amortized
cost accounting for their servicing rights. Accordingly, FHN began
initially recognizing all its classes of mortgage servicing rights (MSR)
at fair
value and elected to irrevocably continue application of fair value accounting
to all its classes of MSR. Classes of MSR are determined in
accordance with FHN’s risk management practices and market inputs used in
determining the fair value of the servicing asset. FHN recognized the
cumulative effect of a change in accounting principle totaling $.2 million,
net
of tax, representing the excess of the fair value of the servicing asset
over
the recorded value on January 1, 2006. The balance of MSR included on
the Consolidated Condensed Statements of Condition represents the rights
to
service approximately $106.3 billion of mortgage loans on June 30, 2007,
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,
like other participants in the mortgage banking business, 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.
Following
is
a summary of changes in capitalized MSR as of June 30, 2007 and
2006:
|
|
First
|
|
|
Second
|
|
|
|
|
(Dollars
in thousands)
|
|
Liens
|
|
|
Liens
|
|
|
HELOC
|
|
Fair
value on January 1, 2006
|
|
|
$1,318,219
|
|
|
|
$
5,470
|
|
|
|
$14,384
|
|
Addition
of mortgage servicing rights
|
|
|
212,821
|
|
|
|
10,627
|
|
|
|
3,862
|
|
Reductions
due to loan payments
|
|
|
(130,911 |
) |
|
|
(1,752 |
) |
|
|
(4,338 |
) |
Changes
in fair value due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in current market interest rates
|
|
|
165,182
|
|
|
|
95
|
|
|
|
1,029
|
|
Other
changes in fair value
|
|
|
338
|
|
|
|
17
|
|
|
|
370
|
|
Fair
value on June 30, 2006
|
|
|
$1,565,649
|
|
|
|
$14,457
|
|
|
|
$15,307
|
|
Fair
value on January 1, 2007
|
|
|
$1,495,215
|
|
|
|
$24,091
|
|
|
|
$14,636
|
|
Addition
of mortgage servicing rights
|
|
|
185,257
|
|
|
|
7,995
|
|
|
|
1,832
|
|
Reductions
due to loan payments
|
|
|
(124,359 |
) |
|
|
(4,547 |
) |
|
|
(2,837 |
) |
Changes
in fair value due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in current market interest rates
|
|
|
100,215
|
|
|
|
66
|
|
|
|
-
|
|
Reclassification
to trading assets
|
|
|
(174,547 |
) |
|
|
-
|
|
|
|
-
|
|
Other
changes in fair value
|
|
|
(54 |
) |
|
|
3
|
|
|
|
-
|
|
Fair
value on June 30, 2007
|
|
|
$1,481,727
|
|
|
|
$27,608
|
|
|
|
$13,631
|
|
In
conjunction with capital management initiatives, FHN modified Pooling and
Servicing Agreements (PSA) on its private securitizations during the second
quarter of 2007 to segregate the retained yield component from the master
servicing fee. The retained yield of $174.5 million was reclassified from
mortgage servicing rights to trading securities on the Consolidated Condensed
Statements of Condition.
Note
5 - 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, 2005
|
|
|
$281,440
|
|
|
|
$
76,647
|
|
Amortization
expense
|
|
|
-
|
|
|
|
(5,769 |
) |
Additions
|
|
|
1,580
|
|
|
|
4,300
|
|
Divestitures
|
|
|
(1,110 |
) |
|
|
(123 |
) |
June
30, 2006
|
|
|
$281,910
|
|
|
|
$
75,055
|
|
December
31, 2006
|
|
|
$275,582
|
|
|
|
$
64,530
|
|
Amortization
expense
|
|
|
-
|
|
|
|
(5,448 |
) |
Divestitures
|
|
|
-
|
|
|
|
(60 |
) |
Additions**
|
|
|
4,243
|
|
|
|
2,925
|
|
June
30, 2007
|
|
|
$279,825
|
|
|
|
$
61,947
|
|
*
Represents customer lists, acquired contracts, premium on purchased
deposits, covenants not to compete and assets related to the
minimum pension liability.
|
**
Preliminary purchase price allocations on acquisitions are based
upon
estimates of fair value and are subject to
change.
|
The
gross
carrying amount of other intangible assets subject to amortization is
$138.3
million on June 30, 2007, net of $76.4 million of accumulated
amortization. Estimated aggregate amortization expense for the
remainder of 2007 is expected to be $5.3 million and is expected to be
$8.9
million, $6.9 million, $6.0 million and $5.7 million for the twelve-month
periods of 2008, 2009, 2010 and 2011, respectively.
The
following is a summary of goodwill detailed by reportable segments for
the six
months ended June 30:
|
|
Retail/
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
Capital
|
|
|
|
|
(Dollars
in thousands)
|
|
Banking
|
|
|
Banking
|
|
|
Markets
|
|
|
Total
|
|
December
31, 2005
|
|
|
$104,781
|
|
|
|
$61,593
|
|
|
|
$115,066
|
|
|
|
$281,440
|
|
Divestitures
|
|
|
(1,110 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(1,110 |
) |
Additions
|
|
|
30
|
|
|
|
1,550
|
|
|
|
-
|
|
|
|
1,580
|
|
June
30, 2006
|
|
|
$103,701
|
|
|
|
$63,143
|
|
|
|
$115,066
|
|
|
|
$281,910
|
|
December
31, 2006
|
|
|
$
94,276
|
|
|
|
$66,240
|
|
|
|
$115,066
|
|
|
|
$275,582
|
|
Additions*
|
|
|
-
|
|
|
|
4,243
|
|
|
|
-
|
|
|
|
4,243
|
|
June
30, 2007
|
|
|
$
94,276
|
|
|
|
$70,483
|
|
|
|
$115,066
|
|
|
|
$279,825
|
|
*
Preliminary
purchase price allocations on acquisitions are based upon estimates of
fair
value and are subject to change.
14
Note
6 -
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 FHN's
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, 2007,
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 FTBNA’s Total Capital, Tier 1
Capital and Leverage ratios were 11.73 percent, 8.11 percent and 6.65 percent,
respectively, on June 30, 2007, and were 12.07 percent, 8.25 percent and
6.71
percent, respectively, on June 30, 2006.
|
|
|
|
|
|
First
Horizon National
|
|
|
First
Tennessee Bank
|
|
|
|
|
|
|
Corporation
|
|
|
National
Association
|
(Dollars
in thousands)
|
|
|
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
On
June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
$4,027,528
|
|
12.90%
|
|
|
$3,797,809
|
|
12.31%
|
Tier
1
Capital
|
|
|
|
|
|
2,711,329
|
|
8.68
|
|
|
2,581,611
|
|
8.37
|
Leverage
|
|
|
|
|
|
2,711,329
|
|
7.00
|
|
|
2,581,611
|
|
6.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
Capital Adequacy Purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
2,497,928
|
>
|
8.00
|
|
|
2,468,136
|
>
|
8.00
|
Tier
1
Capital
|
|
|
|
|
|
1,248,964
|
>
|
4.00
|
|
|
1,234,068
|
>
|
4.00
|
Leverage
|
|
|
|
|
|
1,549,325
|
>
|
4.00
|
|
|
1,537,335
|
>
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
Be
Well Capitalized Under Prompt
|
|
|
|
|
Corrective
Action Provisions:
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
|
|
|
|
|
3,085,170
|
>
|
10.00
|
Tier
1
Capital
|
|
|
|
|
|
|
|
|
|
|
1,851,102
|
>
|
6.00
|
Leverage
|
|
|
|
|
|
|
|
|
|
|
1,921,669
|
>
|
5.00
|
On
June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
$3,943,421
|
|
13.13%
|
|
|
$3,757,888
|
|
12.61%
|
Tier
1
Capital
|
|
|
|
|
|
2,612,228
|
|
8.70
|
|
|
2,526,694
|
|
8.48
|
Leverage
|
|
|
|
|
|
2,612,228
|
|
6.86
|
|
|
2,526,694
|
|
6.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
Capital Adequacy Purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
2,402,466
|
>
|
8.00
|
|
|
2,383,795
|
>
|
8.00
|
Tier
1
Capital
|
|
|
|
|
|
1,201,233
|
>
|
4.00
|
|
|
1,191,897
|
>
|
4.00
|
Leverage
|
|
|
|
|
|
1,523,082
|
>
|
4.00
|
|
|
1,511,220
|
>
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
Be
Well Capitalized Under Prompt
|
|
|
|
|
Corrective
Action Provisions:
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
|
|
|
|
|
2,979,744
|
>
|
10.00
|
Tier
1
Capital
|
|
|
|
|
|
|
|
|
|
|
1,787,846
|
>
|
6.00
|
Leverage
|
|
|
|
|
|
|
|
|
|
|
1,889,025
|
>
|
5.00
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
Note
7 - Earnings Per Share
The
following table shows a reconciliation of earnings per common share to
diluted
earnings per common share:
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30
|
|
June
30
|
(In
thousands, except per share data)
|
|
|
2007
|
2006
|
|
2007
|
2006
|
Net
income from continuing operations
|
|
|
$
21,944
|
$
103,933
|
|
$
92,251
|
$
107,343
|
Income
from discontinued operations, net of tax
|
|
|
179
|
376
|
|
419
|
210,649
|
Cumulative
effect of changes in accounting
|
|
|
|
|
|
|
|
principle,
net of tax
|
|
|
-
|
-
|
|
-
|
1,345
|
Net
income
|
|
|
$
22,123
|
$
104,309
|
|
$
92,670
|
$
319,337
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
125,873
|
123,667
|
|
125,609
|
124,573
|
Effect
of dilutive securities
|
|
|
2,864
|
3,613
|
|
3,111
|
3,612
|
Diluted
average common shares
|
|
|
128,737
|
127,280
|
|
128,720
|
128,185
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
Net
income from continuing operations
|
|
|
$ .18
|
$ .84
|
|
$ .74
|
$ .86
|
Income
from discontinued operations, net of tax
|
|
|
-
|
-
|
|
-
|
1.69
|
Cumulative
effect of changes in accounting
|
|
|
|
|
|
|
|
principle,
net of tax
|
|
|
-
|
-
|
|
-
|
.01
|
Net
income
|
|
|
$ .18
|
$ .84
|
|
$ .74
|
$ 2.56
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
Net
income from continuing operations
|
|
|
$ .17
|
$ .82
|
|
$ .72
|
$ .84
|
Income
from discontinued operations, net of tax
|
|
|
-
|
-
|
|
-
|
1.64
|
Cumulative
effect of changes in accounting
|
|
|
|
|
|
|
|
principle,
net of tax
|
|
|
-
|
-
|
|
-
|
.01
|
Net
income
|
|
|
$ .17
|
$ .82
|
|
$ .72
|
$ 2.49
|
Equity
awards
of 7,850 and 6,124 with weighted average exercise prices of $41.81
and $42.62
per share for the three months ended June 30, 2007 and 2006, respectively,
and
of 5,843 and 5,891 with weighted average exercise prices of $42.46
and $42.69
per share for the six months ended June 30, 2007 and 2006, respectively,
were
not included in the computation of diluted earnings per common share
because
such shares would have had an antidilutive effect on earnings per common
share.
In
first
quarter 2006, FHN purchased four million shares of its common stock.
This share
repurchase program was concluded for an adjusted
purchase price of $165.1 million in second quarter
2006.
16
Note
8 - 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. Although FHN cannot predict the outcome of these lawsuits,
after
consulting with counsel, management is of the opinion that when resolved,
these
lawsuits will not have a material adverse effect on the consolidated financial
statements of FHN.
In
November
2000, a complaint was filed in state court in Jackson County, Missouri against
FHN’s subsidiary, First Horizon Home Loans. The case generally concerned the
charging of certain loan origination fees, including fees permitted by Kansas
and federal law but allegedly restricted or not permitted by Missouri law,
when
First Horizon Home Loans or its predecessor, McGuire Mortgage Company, made
certain second-lien mortgage loans. Among other relief, plaintiffs sought
a
refund of fees, a repayment and forgiveness of loan interest, prejudgment
interest, punitive damages, loan rescission, and attorneys’ fees. In response to
pre-trial motions, the court certified a statewide class action involving
approximately 4,000 loans and made a number of rulings that could have
significantly affected the ultimate outcome of the case in the absence of
an
appeal. Trial had been scheduled for the fourth quarter of
2006.
As
a result
of mediation, FHN entered into a final settlement agreement related to the
McGuire lawsuit. In connection with this settlement, FHN agreed to pay, under
agreed circumstances using an agreed methodology, an aggregate of up to
approximately $36 million. At the present time, the period during
which claims under the settlement can be made has ended, and the claims that
have been received are being evaluated. The total amount currently reserved
for
this matter, based on the claims received and FHN’s evaluation of them to date,
is approximately $30 million. The settlement has received final
approval by the court, the court has entered its order making the settlement
final, there have been no appeals, and the time for any appeals has
expired.
The
loss
reserve for this matter reflects an estimate of the amount that ultimately
would
be paid under the settlement. The difference between the maximum amount possible
under the settlement and the amount reserved reflects the amount and value
of
claims received. The ultimate amount paid under the settlement is not expected
to be higher than the amount reserved at present, and may be lower in the
event
some of the claims are reduced or rejected for reasons set forth in the
settlement, and in any event cannot exceed the settlement amount.
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 FHN’s 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.
First
Horizon Home Loans services a mortgage loan portfolio of approximately $106.0
billion on June 30, 2007, a significant portion of which is held by GNMA,
FNMA,
FHLMC or private security holders. In connection with its servicing
activities, First Horizon Home Loans guarantees the receipt of the scheduled
principal and interest payments on the underlying loans. In the event
of customer non-performance on the loan, First Horizon Home Loans is obligated
to make the payment to the security holder. Under the terms of the
servicing agreements, First Horizon Home Loans can utilize payments received
from other prepaid loans in order to make the security holder
whole. In the event payments are ultimately made by First Horizon
Home Loans to satisfy this obligation, for loans sold with no recourse, all
funds are recoverable from the government agency at foreclosure
sale.
First
Horizon Home Loans 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, First Horizon
Home Loans has exposure on all loans sold with recourse. First Horizon Home
Loans has various claims for reimbursement, repurchase obligations, and/or
indemnification requests outstanding with government agencies or private
investors. First Horizon Home Loans has evaluated all of its exposure under
recourse obligations based on factors, which include loan delinquency status,
foreclosure expectancy rates and claims outstanding. Accordingly,
First Horizon Home Loans had an allowance for losses on the mortgage servicing
portfolio of approximately $14.6 million and $15.1 million on June 30, 2007
and
2006, respectively. First Horizon Home Loans 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, First Horizon Home Loans
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, 2007
and 2006, First Horizon Home Loans had single-family residential loans with
outstanding balances of $110.5 million and $146.2 million, respectively,
that
were serviced on a full recourse basis. On June 30, 2007 and 2006, the
outstanding principal balance of loans sold with limited recourse arrangements
where some portion of the principal is at risk and serviced by First Horizon
Home Loans was $3.2 billion and $2.9 billion,
Note
8 -
Contingencies and Other Disclosures (continued)
respectively. Additionally, on
June 30, 2007 and 2006, $4.8 billion and $5.3 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, 2007, the outstanding principal balance
of
these loans was $303.1 million and $82.5 million, respectively. On
June 30, 2006, the outstanding principal balance of securitized and sold
HELOC
and second-lien mortgages was $482.5 million and $116.0 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 $33.7 million and
$56.7
million on June 30, 2007 and 2006, 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.
Note
9 – Pension and Other Employee Benefits
Pension
plan. FHN provides pension benefits to employees
retiring under the provisions of a noncontributory, defined benefit pension
plan. Employees of FHN’s mortgage subsidiary and certain 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. The annual funding is
based on an actuarially determined amount using the entry age cost
method.
FHN
also
maintains a nonqualified supplemental executive retirement plan that covers
certain employees whose benefits under the pension plan have been limited
under
Tax Code Section 415 and Tax Code Section 401(a)(17), which limit compensation
to $225,000 for purposes of benefit calculations. Compensation is defined
in the
same manner as it is under the pension plan. Participants receive the
difference between the monthly pension payable, if tax code limits did not
apply, and the actual pension payable. All benefits provided under
this plan are unfunded and payments to plan participants are made by
FHN.
Other
employee benefits. FHN provides postretirement medical
insurance to full-time employees retiring under the provisions of the FHN
Pension Plan. The postretirement medical plan is contributory with
retiree contributions adjusted annually. The plan is based on
criteria that are a combination of the employee’s age and years of service and
utilizes a two-step approach. For any employee retiring on or after
January 1, 1995, FHN contributes a fixed amount based on years of service
and
age at time of retirement.
Effective
December 31,2006, FHN adopted SFAS No. 158, which required the recognition
of
the overfunded or underfunded status of a defined benefit plan and
postretirement plan as an asset or liability in the statements of condition.
SFAS No. 158 did not change measurement or recognition requirements for periodic
pension and postretirement costs. Effective January 1, 2007, FHN adopted
the
final provisions of SFAS No. 158, which required that the annual measurement
date of a plan’s assets and liabilities be as of the date of the financial
statements. As a result of adopting the measurement provisions of SFAS No.
158,
undivided profits were reduced by $2.1 million, net of tax, and accumulated
other comprehensive income was credited by $8.3 million, net of
tax.
The
components of net periodic benefit cost for the three months ended June 30
are
as follows:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
(Dollars
in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Components
of net periodic benefit cost/(benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
|
$
4,327
|
|
|
|
$
4,520
|
|
|
|
$
75
|
|
|
|
$
83
|
|
Interest
cost
|
|
|
6,154
|
|
|
|
5,486
|
|
|
|
278
|
|
|
|
279
|
|
Expected
return on plan assets
|
|
|
(10,637 |
) |
|
|
(8,945 |
) |
|
|
(441 |
) |
|
|
(421 |
) |
Amortization
of prior service cost/(benefit)
|
|
|
220
|
|
|
|
211
|
|
|
|
(44 |
) |
|
|
(44 |
) |
Recognized
losses/(gains)
|
|
|
1,810
|
|
|
|
1,769
|
|
|
|
(178 |
) |
|
|
(140 |
) |
Amortization
of transition obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
247
|
|
|
|
247
|
|
Net
periodic cost/(benefit)
|
|
|
$
1,874
|
|
|
|
$
3,041
|
|
|
|
$
(63 |
) |
|
|
$
4
|
|
The
components of net periodic benefit cost for the six months ended June 30
are as
follows:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
(Dollars
in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Components
of net periodic benefit cost/(benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
|
$ 8,654
|
|
|
|
$
9,040
|
|
|
|
$
150
|
|
|
|
$ 166
|
|
Interest
cost
|
|
|
12,308
|
|
|
|
10,971
|
|
|
|
556
|
|
|
|
558
|
|
Expected
return on plan assets
|
|
|
(21,274 |
) |
|
|
(17,889 |
) |
|
|
(882 |
) |
|
|
(841 |
) |
Amortization
of prior service cost/(benefit)
|
|
|
440
|
|
|
|
422
|
|
|
|
(88 |
) |
|
|
(88 |
) |
Recognized
losses/(gains)
|
|
|
3,620
|
|
|
|
3,537
|
|
|
|
(356 |
) |
|
|
(281 |
) |
Amortization
of transition obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
494
|
|
|
|
494
|
|
Net
periodic cost/(benefit)
|
|
|
$
3,748
|
|
|
|
$ 6,081
|
|
|
|
$(126 |
) |
|
|
$
8
|
|
Note
9 – Pension and Other Employee Benefits (continued)
FHN
made a
contribution of $37 million to the pension plan in fourth quarter 2006 and
made
an additional contribution of $37 million in first quarter 2007. Both of
these
contributions were attributable to the 2006 plan year. FHN expects to make
no
additional contributions to the pension plan or to the other employee benefit
plan in 2007.
20
Note
10 – Business Segment Information
FHN
has four
business segments, Retail/Commercial Banking, Mortgage Banking, Capital
Markets
and Corporate. The Retail/Commercial Banking segment offers financial products
and services, including traditional lending and deposit taking, to retail
and
commercial customers. Additionally, Retail/Commercial Banking provides
investments, insurance, financial planning, trust services and asset management,
credit card, cash management, check clearing, and correspondent services.
On
March 1, 2006, FHN sold its national merchant processing business. The
divestiture, which was accounted for as a discontinued operation, is included
in
the Retail/Commercial Banking segment. The Mortgage Banking segment consists
of
core mortgage banking elements including originations and servicing and
the
associated ancillary revenues related to these businesses. The Capital
Markets
segment consists of traditional capital markets securities activities,
structured finance, equity research, investment banking, loan sales, portfolio
advisory, and the sale of bank-owned life insurance. The Corporate segment
consists of 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, and venture capital. Periodically, FHN adapts its segments
to
reflect changes in expense allocations between segments. Previously reported
amounts have been reclassified to agree with current presentation.
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)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Total
Consolidated
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ 239,432
|
|
$ 253,598
|
|
$ 476,851
|
|
$ 499,319
|
Provision
for loan losses
|
|
44,408
|
|
18,653
|
|
72,894
|
|
36,452
|
Noninterest
income
|
|
280,299
|
|
335,012
|
|
563,487
|
|
532,622
|
Noninterest
expense
|
|
457,240
|
|
423,011
|
|
860,252
|
|
858,092
|
Pre-tax
income
|
|
18,083
|
|
146,946
|
|
107,192
|
|
137,397
|
(Benefit)/provision
for income taxes
|
|
(3,861
|
) |
43,013
|
|
14,941
|
|
30,054
|
Income
from continuing operations
|
|
21,944
|
|
103,933
|
|
92,251
|
|
107,343
|
Income
from discontinued operations, net of tax
|
179
|
|
376
|
|
419
|
|
210,649
|
Income
before cumulative effect of changes
|
|
|
|
|
|
|
|
in
accounting principle
|
|
22,123
|
|
104,309
|
|
92,670
|
|
317,992
|
Cumulative
effect of changes in
|
|
|
|
|
|
|
|
|
accounting
principle, net of tax
|
|
-
|
|
-
|
|
-
|
|
1,345
|
Net
income
|
|
$ 22,123
|
|
$ 104,309
|
|
$ 92,670
|
|
$ 319,337
|
Average
assets
|
|
$
39,070,144
|
|
$
38,494,898
|
|
$
38,859,763
|
|
$
38,094,435
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
Note
10 – Business Segment
Information (continued)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30
|
|
June
30
|
(Dollars
in thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Retail/Commercial
Banking
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ 217,896
|
|
$ 232,496
|
|
$ 442,012
|
|
$ 458,236
|
Provision
for loan losses
|
|
36,847
|
|
18,361
|
|
65,340
|
|
36,387
|
Noninterest
income
|
|
106,649
|
|
113,984
|
|
209,608
|
|
221,723
|
Noninterest
expense
|
|
206,217
|
|
214,744
|
|
404,412
|
|
433,110
|
Pre-tax
income
|
|
81,481
|
|
113,375
|
|
181,868
|
|
210,462
|
Provision
for income taxes
|
|
22,774
|
|
29,581
|
|
53,032
|
|
57,210
|
Income
from continuing operations
|
|
58,707
|
|
83,794
|
|
128,836
|
|
153,252
|
Income
from discontinued operations, net of tax
|
179
|
|
376
|
|
419
|
|
210,649
|
Income
before cumulative effect
|
|
58,886
|
|
84,170
|
|
129,255
|
|
363,901
|
Cumulative
effect of changes in
|
|
|
|
|
|
|
|
|
accounting
principle, net of tax
|
|
-
|
|
-
|
|
-
|
|
522
|
Net
income
|
|
$ 58,886
|
|
$ 84,170
|
|
$ 129,255
|
|
$ 364,423
|
Average
assets
|
|
$
23,837,809
|
|
$
23,021,401
|
|
$
23,693,540
|
|
$
22,992,194
|
|
|
|
|
|
|
|
|
|
Mortgage
Banking
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ 24,353
|
|
$ 25,494
|
|
$ 41,696
|
|
$ 51,332
|
Provision
for loan losses
|
|
(111
|
) |
292
|
|
(118
|
) |
65
|
Noninterest
income
|
|
74,967
|
|
119,608
|
|
151,701
|
|
203,335
|
Noninterest
expense
|
|
115,565
|
|
115,155
|
|
220,896
|
|
229,911
|
Pre-tax
(loss)/income
|
|
(16,134
|
) |
29,655
|
|
(27,381
|
) |
24,691
|
(Benefit)/provision
for income taxes
|
|
(8,493
|
) |
10,392
|
|
(20,275
|
) |
8,598
|
Loss
before cumulative effect
|
|
(7,641
|
) |
19,263
|
|
(7,106
|
) |
16,093
|
Cumulative
effect of changes in
|
|
|
|
|
|
|
|
|
accounting
principle, net of tax
|
|
-
|
|
-
|
|
-
|
|
414
|
Net
(loss)/income
|
|
$ (7,641
|
) |
$ 19,263
|
|
$ (7,106
|
) |
$ 16,507
|
Average
assets
|
|
$ 6,818,527
|
|
$ 6,617,849
|
|
$ 6,536,236
|
|
$ 6,414,714
|
|
|
|
|
|
|
|
|
|
Capital
Markets
|
|
|
|
|
|
|
|
|
Net
interest expense
|
|
$ (3,865
|
) |
$
(4,642
|
) |
$ (9,702
|
) |
$ (10,336)
|
Noninterest
income
|
|
90,417
|
|
104,125
|
|
179,346
|
|
200,731
|
Noninterest
expense
|
|
73,846
|
|
83,629
|
|
153,572
|
|
166,230
|
Pre-tax
income
|
|
12,706
|
|
15,854
|
|
16,072
|
|
24,165
|
Provision
for income taxes
|
|
4,741
|
|
5,924
|
|
5,958
|
|
8,999
|
Income
before cumulative effect
|
|
7,965
|
|
9,930
|
|
10,114
|
|
15,166
|
Cumulative
effect of changes in
|
|
|
|
|
|
|
|
|
accounting
principle, net of tax
|
|
-
|
|
-
|
|
-
|
|
179
|
Net
income
|
|
$
7,965
|
|
$ 9,930
|
|
$ 10,114
|
|
$ 15,345
|
Average
assets
|
|
$
4,382,041
|
|
$ 5,079,308
|
|
$ 4,407,086
|
|
$ 4,928,022
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
Note
10 – Business Segment Information (continued)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30
|
|
June
30
|
|
(Dollars
in thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ 1,048
|
|
$ 250
|
|
$ 2,845
|
|
$ 87
|
|
Provision
for loan losses
|
|
7,672
|
|
-
|
|
7,672
|
|
-
|
|
Noninterest
income/(expense)
|
|
8,266
|
|
(2,705
|
) |
22,832
|
|
(93,167
|
) |
Noninterest
expense
|
|
61,612
|
|
9,483
|
|
81,372
|
|
28,841
|
|
Pre-tax
loss
|
|
$ (59,970
|
) |
$ (11,938
|
) |
$ (63,367
|
) |
$ (121,921
|
) |
Benefit
for income taxes
|
|
(22,883
|
) |
(2,884
|
) |
(23,774
|
) |
(44,753
|
) |
Loss
before cumulative effect
|
|
(37,087
|
) |
(9,054
|
) |
(39,593
|
) |
(77,168
|
) |
Cumulative
effect of changes in
|
|
|
|
|
|
|
|
|
|
accounting
principle, net of tax
|
|
-
|
|
-
|
|
-
|
|
230
|
|
Net
loss
|
|
$ (37,087
|
) |
$ (9,054
|
) |
$ (39,593
|
) |
$ (76,938
|
) |
Average
assets
|
|
$ 4,031,767
|
|
$ 3,776,340
|
|
$ 4,222,901
|
|
$ 3,759,505
|
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
Note
11 – 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 FHN’s 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 amount FHN would receive or pay in the market to
replace
the derivatives as of the valuation 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.
Mortgage
Banking
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, First Horizon
Home
Loans has the risk that interest rates will change from the rate quoted to
the
borrower. First Horizon Home Loans 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 are recorded at
fair
value, exclusive of the value of associated servicing rights, with changes
in
fair value recorded in current earnings as gain or loss on the sale of loans
in
mortgage banking noninterest income. Changes in the fair value of the
derivatives that serve as economic hedges of interest rate
lock
Note
11 – Derivatives (continued)
commitments
are also included in current earnings as a component of gain or loss on the
sale
of loans in mortgage banking noninterest income.
First
Horizon Home Loans’ warehouse (mortgage loans held for sale) is subject to
changes in fair value, primarily 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, First Horizon Home Loans 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.
To
the
extent that these interest rate derivatives are designated to hedge specific
similar assets in the warehouse and prospective analyses indicate that high
correlation is expected, the hedged loans are considered for hedge accounting
under SFAS No. 133. Anticipated correlation is determined by projecting a
dollar offset relationship for each tranche based on anticipated changes
in the
fair value of the hedged mortgage loans and the related derivatives, in response
to various interest rate shock scenarios. Hedges are reset daily and
the statistical correlation is calculated using these daily data points.
Retrospective hedge effectiveness is measured using the regression correlation
results. First Horizon Home Loans generally maintains a coverage ratio (the
ratio of expected change in the fair value of derivatives to expected change
in
the fair value of hedged assets) of approximately 100 percent on warehouse
loans
hedged under SFAS No. 133. Effective SFAS No. 133 hedging results in adjustments
to the recorded value of the hedged loans. These basis adjustments, as well
as
the change in fair value of derivatives attributable to effective hedging,
are
included as a component of the gain or loss on the sale of loans in mortgage
banking noninterest income.
Warehouse
loans qualifying for SFAS No. 133 hedge accounting treatment totaled $2.6
billion and $1.8 billion on June 30, 2007 and 2006, respectively. The balance
sheet impacts of the related derivatives were net assets of $20.0 million
and
$7.8 million on June 30, 2007 and 2006, respectively. Net losses of $1.6
million
and $10.4 million representing the ineffective portion of these fair value
hedges were recognized as a component of gain or loss on sale of loans for
the
six months ended June 30, 2007 and 2006, respectively.
In
2006, due
to adoption of SFAS No. 156, First Horizon began revaluing MSR to current
fair
value each month. Changes in fair value are included in servicing
income in mortgage banking noninterest income. First Horizon Home Loans 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. First Horizon Home Loans 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 for economic
purposes.
First
Horizon Home Loans 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 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.
Capital
Markets
Capital
Markets trades U.S. Treasury, U.S. Agency, mortgage-backed, corporate and
municipal fixed income securities, and other securities 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, futures and floors
for
its customers. In addition, Capital Markets enters into futures
contracts to economically hedge interest rate risk associated with 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 Senior Credit Policy
Committee.
Note
11 – Derivatives (continued)
In
2005,
Capital Markets utilized a forward contract as a cash flow hedge of the risk
of
change in the fair value of a forecasted sale of certain loans. In first
quarter
2006, $.1 million of net losses which were recorded in other comprehensive
income on December 31, 2005, were recognized in earnings. The amount
of SFAS No. 133 hedge ineffectiveness related to this cash flow hedge was
immaterial.
Interest
Rate Risk Management
FHN’s
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. FHN’s
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 large institutional certificates of deposit,
totaling $61.9 million and $60.8 million on June 30, 2007 and 2006,
respectively. These swaps have been accounted for as fair value hedges under
the
shortcut method. The balance sheet impact of these swaps was $.6
million and $1.7 million in other liabilities on June 30, 2007 and 2006,
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.
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
on on June 30, 2007 and 2006. These swaps have been accounted for as fair
value
hedges under the shortcut method. The balance sheet impact of these swaps
was
$41.5 million and $56.0 million in other liabilities on June 30, 2007 and
2006,
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.
In
first
quarter 2006, FHN determined that derivative transactions used in hedging
strategies to manage interest rate risk on subordinated debt related to its
trust preferred securities did not qualify for hedge accounting under the
shortcut method. As a result, any fluctuations in the market value of
the derivatives should have been recorded through the income statement with
no
corresponding offset to the hedged item. While management believes these
hedges
would have qualified for hedge accounting under the long haul method, that
accounting cannot be applied retroactively. FHN evaluated the impact
to all quarterly and annual periods since the inception of the hedges and
concluded that the impact was immaterial in each period. In first
quarter 2006, FHN recorded an adjustment to recognize the cumulative impact
of
these transactions that resulted in a negative $15.6 million impact to
noninterest income, which was included in current earnings. FHN has
subsequently redesignated these hedge relationships under SFAS No. 133 using
the
long haul method. For the period of time during first quarter 2006
that these hedge relationships were not redesignated under SFAS No. 133,
the
swaps were measured at fair value with gains or losses included in current
earnings. FHN has entered into pay floating, receive fixed interest
rate swaps to hedge the interest rate risk of certain subordinated debt totaling
$.3 billion on June 30, 2007 and 2006. The balance sheet impact of these
swaps
was $29.7 million and $33.1 million in other liabilities on June 30, 2007
and
2006, 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.
FHN
has
utilized an interest rate swap as a cash flow hedge of the interest payment
on
floating-rate bank notes with fair values of $100.5 million and $101.4 million
on June 30, 2007 and 2006, respectively, and a maturity in first quarter
2009.
The balance sheet impact of this swap was $.5 million in other assets and
$.3
million, net of tax, in other comprehensive income on June 30, 2007, and
was
$1.4 million in other assets and $.9 million, net of tax, in other comprehensive
income on June 30, 2006. There was no ineffectiveness related to this
hedge.
Note
12 - Restructuring, Repositioning, and Efficiency Charges
In
March
2007, FHN began Phases 2 and 3 of an ongoing, company-wide review of business
practices with the goal of improving FHN’s overall profitability and
productivity. As a result of actions taken in the second quarter of
2007, FHN recorded pretax expenses of $39.3 million. Of this amount,
$14.8 million represents exit costs that have been accounted for in accordance
with Statement of Financial Accounting Standards No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities” (SFAS No. 146).
Expenses
resulted from the following actions:
·
|
Expense
of $8.0 million associated with organizational and compensation
changes
for right sizing operating segments and consolidating functional
areas.
|
·
|
Non-core
business repositioning costs of $17.0 million, including costs
associated
with the exit of the collectible coin merchandising business and
the
transition of the non-prime mortgage origination business to a
broker
model.
|
·
|
Expense
of $14.3 million related to other restructuring, repositioning,
and
efficiency initiatives, including facilities consolidation, procurement
centralization, multi-sourcing and the divestiture of certain loan
portfolios.
|
Expenses
incurred in relation to the divestiture of a non-strategic loan portfolio
are
included in the provision for loan losses. All other costs associated with
the
restructuring, repositioning, and efficiency initiatives implemented by
management are included in the noninterest expense section of the income
statement, 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 which are included
in
occupancy, costs associated with the impairment of premises and equipment
which
are included in equipment rentals, depreciation, and maintenance, and other
costs associated with such initiatives, including professional fees, as well
as
asset impairment and repositioning costs associated with the exit from the
collectible coin merchandising business, which are included in all other
expense. Additional estimated pretax charges of up to $60 million are
anticipated to be recognized in relation to the continuing implementation
of the
currently identified restructuring, repositioning, and efficiency initiatives,
through the targeted completion date for Phases 2 and 3 at the end of
2007. Further, subsequent to the end of the second quarter of 2007,
management decided to pursue the sale, closure, or consolidation of 34
full-service First Horizon Bank branches in Atlanta, Baltimore, Dallas and
Northern Virginia, while maintaining a national specialty banking focus in
those
areas. Charges in addition to those currently identified are
anticipated from the sale, closure, or consolidation of such
branches. At this time, the amounts and exact timing of additional
charges cannot be reasonably estimated.
Activity
in
the restructuring and repositioning liability for the three months ended
June
30, 2007 is presented in the following table, along with other restructuring
and
repositioning expenses recognized. All costs associated with the
restructuring, repositioning, and efficiency initiatives implemented in the
second quarter of 2007 are recorded as unallocated corporate charges within
the
Corporate segment.
|
|
|
|
Three
Months Ended
|
(Dollars
in thousands)
|
|
|
|
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
Charged
to
|
|
|
|
|
|
Expense
|
Liability
|
Beginning
Balance
|
|
|
|
$
-
|
$
-
|
Severance
and other employee related costs*
|
|
|
|
7,997
|
7,997
|
Facility
consolidation costs
|
|
|
|
3,788
|
3,788
|
Other
exit costs, professional fees and other
|
|
|
|
2,969
|
2,969
|
Total
Accrued
|
|
|
|
14,754
|
14,754
|
Payments**
|
|
|
|
-
|
3,905
|
Accrual
Reversals
|
|
|
|
-
|
-
|
Restructuring
& Repositioning Reserve Balance
|
|
|
|
$14,754
|
$10,849
|
Other
Restructuring & Repositioning Expenses:
|
|
|
|
|
|
Loan
Portfolio Divestiture
|
|
|
|
7,672
|
|
Impairment
of Premises and Equipment
|
|
|
|
5,159
|
|
Impairment
of Other Assets
|
|
|
|
11,733
|
|
Total
Other Restructuring & Repositioning Expenses
|
|
|
|
24,564
|
|
Total
Charged to Expense
|
|
|
|
$39,318
|
|
*
|
Includes
$1.2 million of deferred severance-related payments that will be
paid
after 2008. |
**
|
Includes
payments of $2.3 milllion related to severance and other employee
related
costs, payment of $.1 million for facility consolidation costs, and
$1.5
million for payment related to exit costs, professional fees and
other. |
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
INFORMATION
FHN
is a
national financial services institution. From a small community bank
chartered in 1864, FHN has grown to be one of the 30 largest bank holding
companies in the United States in terms of asset size.
The
12,000
employees provide a broad array of financial services to individual and business
customers through hundreds of offices located in 47 states.
AARP,
Working Mother and Fortune magazine have recognized FHN companies as some
of the
nation’s best employers. FHN also was named one of the nation’s 100
best corporate citizens by Business Ethics magazine.
FHN
provides
a broad array of financial services to its customers through three national
businesses. The combined strengths of these businesses create an
extensive range of financial products and services. In addition, the
corporate segment provides essential support within the
corporation.
§
|
Retail/Commercial
Banking offers financial products and services, including traditional
lending and deposit-taking, to retail and commercial
customers. Additionally, the retail/commercial bank provides
investments, insurance, financial planning, trust services and
asset
management, credit card, cash management, check clearing, and
correspondent services. On March 1, 2006, FHN sold its national
merchant
processing business. The divestiture which was included in the
Retail/Commercial Banking segment was accounted for as a discontinued
operation.
|
§
|
Mortgage
Banking helps provide home ownership through First Horizon Home
Loans,
which operates offices in 46 states and is one of the top 20 mortgage
servicers and top 25 originators of mortgage loans to
consumers. This segment consists of core mortgage banking
elements including originations and servicing and the associated
ancillary
revenues related to these
businesses.
|
§
|
Capital
Markets provides a broad spectrum of financial services for the
investment
and banking communities through the integration of traditional
capital
markets securities activities, structured finance, equity research,
investment banking, loan sales, portfolio advisory, and the sale
of
bank-owned life insurance.
|
§
|
Corporate
consists of 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 and venture
capital.
|
For
the
purpose of this management discussion and analysis (MD&A), earning assets
have been expressed as averages, and loans have been disclosed net of unearned
income. The following is a discussion and analysis of the financial
condition and results of operations of FHN for the three-month and six-month
periods ended June 30, 2007, compared to the three-month and six-month periods
ended June 30, 2006. To assist the reader in obtaining a better
understanding of FHN and its performance, this discussion should be read
in
conjunction with FHN’s unaudited consolidated condensed financial statements and
accompanying notes appearing in this report. Additional information
including the 2006 financial statements, notes, and MD&A is provided in the
2006 Annual Report.
FORWARD-LOOKING
STATEMENTS
This
MD&A contains forward-looking statements with respect to FHN’s 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 company’s 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; 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; natural disasters; effectiveness of FHN’s hedging
practices; technology; demand for FHN’s product offerings; new products and
services in the industries in which FHN operates; and critical accounting
estimates. Other factors are those inherent in originating 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,
and
other regulators; regulatory and judicial proceedings and changes in laws
and
regulations applicable to FHN; and FHN’s 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.
FINANCIAL
SUMMARY (Comparison of
Second Quarter 2007 to Second Quarter 2006)
FINANCIAL
HIGHLIGHTS
Earnings
for
second quarter 2007 were $22.2 million or $.17 per diluted share. In
March 2007, FHN began Phases 2 and 3 of an ongoing, company-wide review of
business practices with the goal of improving the FHN’s overall profitability
and productivity. As a result of actions taken in the second quarter
of 2007, FHN recorded pretax expenses of $39.3 million. These
initiatives include:
·
|
Organizational
and compensation changes for right sizing operating segments and
consolidating functional areas
|
·
|
Procurement
centralization and multi-sourcing back office
functions
|
·
|
Repositioning
non-core businesses including redesigning non-prime mortgage origination
business and the exit of the collectible coin merchandising
business
|
·
|
Other
efforts, including facilities consolidation and divesting certain
loan
portfolios
|
The
retail/commercial bank continues to invest in the state of Tennessee while
Mortgage Banking experienced an increase in production, but was negatively
impacted by gain on sale margins. The provision for loan losses
increased as nonperforming assets increased compared to second quarter
2006. FHN was also impacted this quarter by legal settlements which
resulted in a $5.4 million net reduction in pre-tax earnings.
Return
on
average shareholders’ equity and return on average assets were 3.6 percent and
.23 percent, respectively, for second quarter 2007. Return on average
shareholders’ equity and return on average assets were 17.4 percent and 1.09
percent, respectively, for second quarter 2006. Total assets were
$38.4 billion and shareholders’ equity was $2.5 billion on June 30, 2007,
compared to $37.5 billion and $2.4 billion, respectively, on June 30,
2006.
BUSINESS
LINE REVIEW
Retail/Commercial
Banking
Pre-tax
income for Retail/Commercial Banking was $81.5 million for second quarter
2007
compared to $113.4 million for second quarter 2006. Total revenues
for Retail/Commercial Banking were $324.6 million for second quarter 2007
compared to $346.5 million for second quarter 2006.
Net
interest
income was $218.0 million in second quarter 2007 compared to $232.5 million
in
second quarter 2006. The Retail/Commercial Banking net interest
margin was 3.89 percent in second quarter 2007 compared to 4.31 percent in
the
second quarter of last year. This compression resulted from the
contracting housing market which created competitive pricing pressure and
additional nonaccrual construction loans. Also unfavorably impacting the
margin
were higher deposit rates paid in Tennessee markets.
Noninterest
income was $106.6 million in second quarter 2007 compared to $114.0 million
in
second quarter 2006. This decrease primarily resulted as revenues
from insurance commissions declined $4.9 million due to the sale of two
insurance subsidiaries in third quarter 2006. Revenue from loan sales
and securitizations decreased $2.9 million, or 27 percent, primarily due
to a
decline in the volume of loans delivered into the secondary
markets.
Provision
for loan losses increased to $36.8 million in second quarter 2007 from $18.3
million last year. The $18.5 million increase primarily reflects
deterioration in both homebuilder and one-time close construction
loans.
Noninterest
expense decreased 4 percent to $206.3 million in second quarter 2007 from
$214.8
million last year. A previously identified pool of construction loans
in which certain misrepresentations had been made resulted in a $7.9 million
negative impact on noninterest expense in second quarter
2006.
Mortgage
Banking
Mortgage
Banking had a pre-tax loss of $16.1 million in second quarter 2007, compared
to
pre-tax gain of $29.7 million in second quarter 2006. Total revenues
for Mortgage Banking were $99.4 million for second quarter 2007 compared
to
$145.1 million for second quarter 2006.
Net
interest
income was $24.4 million in second quarter 2007 compared to $25.5 million
in
second quarter 2006. The yield curve resulted in compression of the
spread on the warehouse, which was 1.14 percent in second quarter 2007 compared
to 1.44 percent for the same period in 2006. Additionally, a 2
percent decline in the warehouse negatively impacted net interest
income. During the second quarter 2007, net interest income was
favorably impacted by $5.4 million due to the reclassification of $175 million
from excess mortgage servicing rights to trading securities. This
reclassification was the outcome of capital management initiatives which
resulted in modification of the Pooling and Servicing Agreements (PSA) for
private (non-GSE) securitizations which were active as of March 31, 2007.
The
modifications separated master servicing from retained
yield. Offsetting the increase in net interest income was a decline
in servicing fees and a decline in the change of mortgage servicing
rights (MSR) value due to runoff.
Noninterest
income was $75.0 million in second quarter 2007 compared to $119.6 million
in
second quarter 2006. Noninterest income consists primarily of
mortgage banking-related revenue, net of costs, from the origination and
sale of
mortgage loans, fees from mortgage servicing and changes in fair value of
MSR
net of hedge gains or losses.
Net
origination income declined to $67.3 million in second quarter 2007 compared
to
$110.4 million last year as loans delivered into the secondary market were
flat
at $7.4 billion and the margin on deliveries decreased from 126 basis points
in
second quarter 2006 to 76 basis points in 2007. Total mortgage
servicing fees decreased 8 percent to $73.9 million from $80.2 million primarily
reflecting the change in PSA.
Servicing
hedging activities and changes other than runoff in the value of capitalized
servicing assets negatively impacted net revenues by $6.0 million this quarter
as compared to a year ago due to interest rate volatility, fluctuations in
MSR
values, higher cost to hedge, and the aforementioned change in
PSA. Additionally, the change in MSR value due to runoff was $62.7
million in second quarter 2007 compared to $72.3 million last year primarily
due
to the change in PSA.
Noninterest
expense was $115.6 million in second quarter 2007 compared to $115.1 million
in
second quarter 2006. Second quarter 2007 included $8.4 million of
increased expense related to a previously disclosed legal settlement as a
higher
number of claims were received by the end of the claims period than
projected.
Capital
Markets
Capital
Markets pre-tax earnings were $12.7 million in second quarter 2007 compared
to
$15.8 million in second quarter 2006. Total revenues for Capital
Markets were $86.6 million in second quarter 2007 compared to $99.4 million
in
second quarter 2006. Net interest expense was $3.9 million in second
quarter 2007 compared to net interest expense of $4.7 million in second quarter
2006.
Revenues
from fixed income sales increased to $48.3 million in second quarter 2007
from
$41.8 million in second quarter 2006, partially due to customer portfolio
restructuring activities. Other product revenues were $42.2 million
in second quarter 2007, including $3.0 million from a litigation settlement,
compared to $62.3 million in second quarter 2006. Revenues from other
products include fee income from activities such as structured finance, equity
research, investment banking, loan sales, portfolio advisory and the sale
of
bank-owned life insurance. The decrease from second quarter 2006 was
primarily due to lower fees from structured finance and equity research
activities. Other product revenues represented 47 percent and 60
percent of total product revenues in 2007 and 2006, respectively.
Noninterest
expense was $73.9 million in second quarter 2007 compared to $83.6 million
in
second quarter 2006. This decrease was primarily due to efficiency
initiatives and decreased variable compensation related to the decrease in
product revenues.
Corporate
The
Corporate segment’s results yielded a pre-tax loss of $60.0 million in second
quarter 2007 compared to a pre-tax loss of $11.9 million in second quarter
2006. Results for the second quarter 2007 include $39.3 million of
expense associated with implementation of restructuring, repositioning and
efficiency initiatives. See discussion of the restructuring,
repositioning and efficiency initiatives below for further
details. Also impacting results this quarter were net securities
losses of $1.1 million compared to $2.9 million of net securities gains in
second quarter 2006 related to the sale of MasterCard Inc. securities as
MasterCard’s initial public offering was completed.
RESTRUCTURING,
REPOSITIONING, AND EFFICIENCY INITIATIVES
In
March
2007, FHN began Phases 2 and 3 of an ongoing, company-wide review of business
practices with the goal of improving FHN’s overall profitability and
productivity. As a result of actions taken in the second quarter of
2007, FHN recorded pretax
expenses
of
$39.3 million, including $16.9 million of losses related to asset
impairments. Expenses incurred in relation to the divestiture of a
non-strategic loan portfolio are included in the provision for loan losses,
while all other costs incurred in relation to the restructuring, repositioning,
and efficiency initiatives implemented by management are included in noninterest
expense. All costs associated with the initiatives implemented in the
second quarter of 2007 are recorded as unallocated corporate charges within
the
Corporate segment. Significant expenses resulted from the following
actions:
·
|
Expense
of $8.0 million associated with organizational and compensation
changes
for right sizing operating segments and consolidating functional
areas.
|
·
|
Non-core
business repositioning costs of $17.0 million, including costs
associated
with the exit of the collectible coin merchandising business and
the
transition of the non-prime mortgage origination business to a
broker
model.
|
·
|
Expense
of $14.3 million related to other restructuring, repositioning,
and
efficiency initiatives, including facilities consolidation, procurement
centralization, multi-sourcing and the divestiture of certain loan
portfolios.
|
Additional
estimated pretax charges of up to $60 million are anticipated to be recognized
in relation to the continuing implementation of the currently identified
restructuring, repositioning, and efficiency initiatives, through the targeted
completion date for Phases 2 and 3 at the end of 2007. Settlement of
the obligations arising from current initiatives will primarily occur in
the
third and fourth quarters of 2007 and will be funded from operating cash
flows. Further, subsequent to the end of the second quarter of 2007,
management decided to pursue the sale, closure or consolidation of 34
full-service First Horizon Bank branches in Atlanta, Baltimore, Dallas and
Northern Virginia, while maintaining a national specialty banking focus in
those
areas. Charges in addition to those currently identified are
anticipated as a result of this decision. At this time, the amounts
and exact timing of additional charges cannot be reasonably
estimated. As a result of implementing phases 2 and 3 of the
restructuring, repositioning, and efficiency initiatives, it is anticipated
that approximately $125 million in profitability improvements should be
experienced by the first quarter of 2008. Due to the nature of the
actions being taken, several components of income and expense will be
affected.
Charges
related to restructuring, repositioning, and efficiency initiatives for the
three months ended June 30, 2007, are presented in the following table based
on
the income statement line item affected. See Note 12 – Restructuring,
Repositioning and Efficiency Charges for additional
information.
Table
1 - Charges for Restructuring, Repositioning, and Efficiency
Initiatives
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
June
30
|
(Dollars
in thousands)
|
|
|
|
|
|
|
2007
|
Provision
for loan losses
|
|
|
|
|
|
$
7,672
|
Noninterest
expense:
|
|
|
|
|
|
|
|
Employee compensation, incentives and benefits
|
|
|
|
7,997
|
Occupancy
|
|
|
|
|
|
|
|
3,726
|
Equipment rentals, depreciation and maintenance
|
|
|
|
5,221
|
All other expense
|
|
|
|
|
|
|
14,702
|
Total
noninterest expense
|
|
|
|
|
|
$ 31,646
|
Loss
before income taxes
|
|
|
|
|
|
$ 39,318
|
INCOME
STATEMENT REVIEW
Total
revenues (net interest income and noninterest income) were $519.8 million
in
second quarter 2007 compared to $588.6 million in 2006. Net interest
income was $239.5 million in second quarter 2007 compared to $253.6 million
in
2006 and noninterest income was $280.3 million in 2007 compared to $335.0
million in 2006. A discussion of the major line items
follows.
NET
INTEREST INCOME
Net
interest
income decreased 6 percent to $239.5 million in second quarter
2007. Earning assets grew 1 percent to $34.3 billion and
interest-bearing liabilities grew 2 percent to $29.6 billion in second quarter
2007.
The
activity
levels and related funding for FHN’s mortgage production and servicing and
capital markets activities affect the net interest margin. These
activities typically produce different margins than traditional banking
activities. Mortgage production and
servicing
activities can affect the overall margin based on a number of factors, including
the shape of the yield curve, the size of the mortgage warehouse, the time
it
takes to deliver loans into the secondary market, the amount of custodial
balances, and the level of MSR. Capital markets activities tend to
compress the margin because of its strategy to reduce market risk by
economically hedging a portion of its inventory on the balance
sheet. As a result of these impacts, FHN’s consolidated margin cannot
be readily compared to that of other bank holding companies.
The
consolidated net interest margin was 2.79 percent for second quarter 2007
compared to 2.99 percent for second quarter 2006. This compression in the
margin occurred as the net interest spread decreased to 2.13 percent from
2.34
percent in 2006 while the impact of free funding increased from 65 basis
points
to 66 basis points. The decline in margin is primarily attributable
to competitive pricing pressure in a contracting housing market, additional
nonaccrual construction loans and higher deposit rates in Tennessee
markets. The margin was also unfavorably affected by 7 basis points
resulting from an adjustment of loan origination deferrals. The
change in PSA described above had a positive impact on the margin this
quarter. Additionally, the yield curve resulted in compression of the
spread on the warehouse, which decreased 30 basis points to 1.14 percent
in
second quarter 2007.
Table
2 - Net Interest Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
June
30
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Consolidated
yields and rates:
|
|
|
|
|
|
|
|
|
Loans,
net of unearned income
|
|
|
|
|
7.43
|
% |
7.36
|
% |
Loans
held for sale
|
|
|
|
|
|
6.45
|
|
6.58
|
|
Investment
securities
|
|
|
|
|
|
5.55
|
|
5.52
|
|
Capital
markets securities inventory
|
|
|
|
|
5.35
|
|
5.41
|
|
Mortgage
banking trading securities
|
|
|
|
|
12.13
|
|
10.20
|
|
Other
earning assets
|
|
|
|
|
|
5.04
|
|
4.65
|
|
Yields
on earning assets
|
|
|
|
|
|
6.94
|
|
6.83
|
|
Interest-bearing
core deposits
|
|
|
|
|
3.39
|
|
2.90
|
|
Certificates
of deposits $100,000 and more
|
|
|
|
5.36
|
|
4.98
|
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
|
4.99
|
|
4.68
|
|
Capital
markets trading liabilities
|
|
|
|
|
5.43
|
|
5.84
|
|
Commercial
paper and other short-term borrowings
|
|
|
|
5.14
|
|
4.97
|
|
Long-term
debt
|
|
|
|
|
|
5.68
|
|
5.46
|
|
Rates
paid on interest-bearing liabilities
|
|
|
|
|
4.81
|
|
4.49
|
|
Net
interest spread
|
|
|
|
|
|
2.13
|
|
2.34
|
|
Effect
of interest-free sources
|
|
|
|
|
.66
|
|
.65
|
|
FHN
- NIM
|
|
|
|
|
|
|
2.79
|
% |
2.99
|
% |
Certain
previously reported amounts have been reclassified to agree with current
presentation.
Given
the
current uncertainties in the financial markets, competitive pricing in
the
retail lending and deposit markets, and FHN’s overall product mix, in the near
term, the net interest margin is expected to be relatively stable or
experience
modest compression.
NONINTEREST
INCOME
Mortgage
Banking Noninterest Income
First
Horizon Home Loans, a division of FTBNA, offers residential mortgage
banking
products and services to customers, which consist primarily of the origination
or purchase of single-family residential mortgage loans. First
Horizon Home Loans originates mortgage loans through its retail and wholesale
operations and also purchases mortgage loans from third-party mortgage
bankers
for sale to secondary market investors and subsequently provides servicing
for
the majority of those loans.
Origination
income includes origination fees, net of costs, gains/(losses) recognized
on
loans sold including the capitalized fair value of MSR, and the value
recognized
on loans in process including results from hedging. Origination fees,
net of costs (including incentives and other direct costs), are deferred
and
included in the basis of the loans in calculating gains and losses upon
sale. Gain or loss is recognized due to changes in fair value of an
interest rate lock commitment made to the customer. Gains or losses
from the sale of loans are recognized at the time a mortgage loan is
sold into
the secondary market. Origination income
declined
to
$67.3 million in second quarter 2007 compared to $110.4 million last year
as
loans delivered into the secondary market were flat at $7.4 billion and the
margin on deliveries decreased from 126 basis points in second quarter 2006
to
76 basis points in 2007.
Servicing
income includes servicing fees, changes in the fair value of the MSR asset
and
net gains or losses from hedging MSR. First Horizon Home Loans
employs hedging strategies intended to counter changes in the value of MSR
and
other retained interests due to changing interest rate environments (refer
to
discussion of MSR under Critical Accounting Policies). Total mortgage
servicing fees decreased 8 percent to $73.9 million from $80.2 million primarily
reflecting the change in PSA described in the Business Line Review.
Servicing
hedging activities and changes other than runoff in the value of capitalized
servicing assets negatively impacted net revenues by $6.0 million this quarter
as compared to a year ago due to interest rate volatility, fluctuations in
MSR
values, higher cost to hedge and the change in PSA described in the Business
Line Review. Additionally, the change in MSR value due to runoff was
$62.7 million in second quarter 2007 compared to $72.3 million last year
primarily due to the change in PSA described in the Business Line
Review.
Other
income
includes FHN’s share of earnings from nonconsolidated subsidiaries accounted for
under the equity method, which provide ancillary activities to mortgage banking,
and fees from retail construction lending.
Table
3 - Mortgage Banking Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Percent
|
|
|
Six
Months Ended
|
|
|
Percent
|
|
|
|
June
30
|
|
|
Change
|
|
|
June
30
|
|
|
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
(%)
|
|
|
2007
|
|
|
2006
|
|
|
(%)
|
|
Noninterest
income (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination
income
|
|
|
$
67,281
|
|
|
|
$
110,416
|
|
|
|
39.1
-
|
|
|
|
$
130,922
|
|
|
|
$
174,621
|
|
|
|
25.0
-
|
|
Servicing
income
|
|
|
(3,496 |
) |
|
|
(727 |
) |
|
NM
|
|
|
|
(488 |
) |
|
|
9,990
|
|
|
NM
|
|
Other
|
|
|
7,515
|
|
|
|
6,783
|
|
|
|
10.8
+
|
|
|
|
13,963
|
|
|
|
12,543
|
|
|
|
11.3
+
|
|
Total
mortgage banking noninterest income
|
|
|
$
71,300
|
|
|
|
$
116,472
|
|
|
|
38.8
-
|
|
|
|
$
144,397
|
|
|
|
$
197,154
|
|
|
|
26.8
-
|
|
Mortgage
banking statistics (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinance
originations
|
|
|
$
3,038.0
|
|
|
|
$
2,504.9
|
|
|
|
21.3
+
|
|
|
|
$
5,842.7
|
|
|
|
$
5,297.4
|
|
|
|
10.3
+
|
|
Home-purchase
originations
|
|
|
5,054.4
|
|
|
|
4,977.2
|
|
|
|
1.6
+
|
|
|
|
8,552.1
|
|
|
|
9,049.4
|
|
|
|
5.5 -
|
|
Mortgage
loan originations
|
|
|
$
8,092.4
|
|
|
|
$
7,482.1
|
|
|
|
8.2 +
|
|
|
|
$
14,394.8
|
|
|
|
$14,346.8
|
|
|
|
0.3 +
|
|
Servicing
portfolio
|
|
|
$105,652.0
|
|
|
|
$99,304.4
|
|
|
|
6.4 +
|
|
|
|
$105,652.0
|
|
|
|
$99,304.4
|
|
|
|
6.4 +
|
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
Capital
Markets Noninterest Income
Capital
markets noninterest income, the major component of revenue in the Capital
Markets segment, is generated from the purchase and sale of securities as
both
principal and agent, and from other fee sources including structured finance,
equity research, investment banking, loans sales, and portfolio advisory
activities. Inventory positions are limited to the procurement of
securities solely 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.
Revenues
from fixed income sales increased $6.4 million compared to second quarter
2006
partially due to customer portfolio restructuring activities. Other
product revenues decreased $23.4 million primarily due to lower fees from
structured finance and equity research activities.
Table
4 - Capital Markets Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
|
|
|
June
30
|
Growth
|
June
30
|
Growth
|
(Dollars
in thousands)
|
|
|
|
|
2007
|
2006
|
Rate
(%)
|
2007
|
2006
|
Rate
(%)
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
Fixed
income
|
|
|
|
|
$48,258
|
$
41,843
|
15.3 +
|
$
94,571
|
$
92,445
|
2.3 +
|
Other
product revenue
|
|
|
|
|
36,796
|
60,322
|
39.0 -
|
77,596
|
102,578
|
24.4 -
|
Total
capital markets noninterest income
|
|
|
|
$85,054
|
$102,165
|
16.7 -
|
$172,167
|
$195,023
|
11.7 -
|
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. Revenue from loan sales and securitizations
decreased $2.7 million, or 21 percent, primarily due to a decline in the
volume
of loans delivered into the secondary markets. Insurance commissions
decreased $4.7 million, or 38 percent, primarily due to the divestiture of
two
subsidiaries in third quarter 2006. Second quarter 2007 results
included $1.1 million of net securities losses while second quarter 2006
results
include $2.9 million of net securities gains, primarily due to the sale of
MasterCard Inc. securities. Other noninterest income increased $18.8
million reflecting an increase of $13.5 million in other revenues in 2007
related to deferred compensation plans, which is offset by a related increase
in
noninterest expense associated with these plans.
NONINTEREST
EXPENSE
Total
noninterest expense for second quarter 2007 increased 8 percent to $457.3
million from $423.0 million in 2006. Employee compensation,
incentives and benefits (personnel expense), the largest component of
noninterest expense, increased to $258.2 million from $245.8 million in
2006. Included in these results was an increase of $17.6 million in
2007 related to deferred compensation plans. Additionally impacting
compensation, incentives and benefits were $8.0 million of restructuring,
repositioning and efficiency charges. These increases were partially
offset by a continued corporate focus on efficiency and reductions in personnel
expense in mortgage banking and capital markets directly related to the
contraction in revenue. Increases in occupancy of $5.9 million and
equipment rentals, depreciation and maintenance of $4.0 million are primarily
related to restructuring, repositioning and efficiency charges. All
other noninterest expense increased 15 percent, or $14.5 million, from 2006
levels due to restructuring, repositioning and efficiency charges and $8.4
million of increased expense related to a previously disclosed legal settlement
as a higher number of claims were received by the end of the claims period
than
projected. In 2006, all other expense included $7.9 million related
to a previously identified pool of construction loans in which certain
misrepresentations had been made.
INCOME
TAXES
The
effective tax rate for second quarter 2007 was predominantly due to the effect
of permanent items and the level of pre-tax income for the
quarter. The provision for income taxes also reflects $3.1 million
for the favorable resolution of outstanding federal and state issues including
interest with taxing authorities.
PROVISION
FOR LOAN LOSSES / ASSET QUALITY
The
provision for loan losses is the charge to earnings that management determines
to be necessary to maintain the allowance for loan losses at an adequate
level
reflecting management’s estimate of probable incurred losses in the loan
portfolio. An analytical model based on historical loss experience
adjusted for current events, trends and economic conditions is 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 was $44.4 million in second quarter 2007 compared to $18.6 million
in
second quarter 2006. Excluding the impact of the sold loans described
in the Business Line Review for the quarter, the provision for loan losses
increased $18.1 million, reflecting deterioration in both homebuilder and
one-time close construction portfolios related to the general downturn in
the
housing industry. The net charge-off ratio increased to 41 basis
points in second quarter 2007 from 26 basis points in second quarter 2006
as net
charge-offs grew to $23.0 million from $13.8 million, driven mainly by the
maturation of the home equity portfolio and deterioration in the
one-time close residential real estate portfolio.
Table
5 - Net Charge-off Ratios *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
June
30
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Commercial
|
|
|
|
|
|
|
.32
|
% |
.32
|
% |
Retail
real estate
|
|
|
|
|
|
.43
|
|
.13
|
|
Other
retail
|
|
|
|
|
|
|
2.76
|
|
1.97
|
|
Credit
card receivables
|
|
|
|
|
|
3.16
|
|
2.96
|
|
Total
net charge-offs
|
|
|
|
|
|
.41
|
|
.26
|
|
*
Net
charge-off ratios are calculated based in average loans, net
of unearned
income.
|
Table
7
provides information on the relative size of each loan
portfolio.
|
Nonperforming
loans in the loan portfolio were $128.0 million on June 30, 2007, compared
to
$61.4 million on June 30, 2006. The ratio of nonperforming loans in
the loan portfolio to total loans was 57 basis points on June 30, 2007, and
28
basis points on June 30, 2006. The increase in nonperforming loans is
attributable to deterioration in the one-time close and homebuilder portfolios,
due primarily to the slowdown in the housing market. Nonperforming
assets were $194.1 million on June 30, 2007, compared to $112.7 million on
June
30, 2006. The nonperforming assets ratio was 81 basis points on June
30, 2007, and 45 basis points last year. In addition to the increase
in nonperforming loans, foreclosed assets increased $17.3 million, which
can be
attributed to the maturing of the home equity portfolio and the deterioration
in
the residential real estate loan portfolio. Foreclosed assets are
written down to net realizable value at foreclosure. The nonperforming
asset ratio is expected to remain under pressure throughout the balance of
the
negative housing cycle.
Table
6 - Asset Quality Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter
|
|
(Dollars
in thousands)
|
|
2007
|
|
|
2006
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
Beginning
balance on March 31
|
|
|
$
220,806
|
|
|
|
$
195,011
|
|
Provision
for loan losses
|
|
|
44,408
|
|
|
|
18,653
|
|
Divestitures/acquisitions/transfers
|
|
|
(12,326 |
) |
|
|
-
|
|
Charge-offs
|
|
|
(26,493 |
) |
|
|
(17,518 |
) |
Recoveries
|
|
|
3,524
|
|
|
|
3,689
|
|
Ending
balance on June 30
|
|
|
$
229,919
|
|
|
|
$
199,835
|
|
Reserve
for off-balance sheet commitments
|
|
|
10,494
|
|
|
|
9,250
|
|
Total
allowance for loan losses and reserve for off-balance sheet
commitments
|
|
|
$
240,413
|
|
|
|
$
209,085
|
|
|
|
June
30
|
|
|
|
2007
|
|
|
2006
|
|
Retail/Commercial
Banking:
|
|
|
|
|
|
|
|
|
Nonperforming
loans
|
|
|
$ 128,025
|
|
|
|
$
61,358
|
|
Foreclosed
real estate
|
|
|
36,635
|
|
|
|
24,425
|
|
Total
Retail/Commercial Banking
|
|
|
164,660
|
|
|
|
85,783
|
|
Mortgage
Banking:
|
|
|
|
|
|
|
|
|
Nonperforming
loans - held for sale
|
|
|
12,484
|
|
|
|
14,976
|
|
Foreclosed
real estate
|
|
|
16,953
|
|
|
|
11,899
|
|
Total
Mortgage Banking
|
|
|
29,437
|
|
|
|
26,875
|
|
Total
nonperforming assets
|
|
|
$
194,097
|
|
|
|
$
112,658
|
|
|
|
|
|
|
|
|
|
|
Total
loans, net of unearned income
|
|
|
$
22,382,303
|
|
|
|
$
21,717,264
|
|
Insured
loans
|
|
|
(986,893 |
) |
|
|
(753,116 |
) |
Loans
excluding insured loans
|
|
|
$
21,395,410
|
|
|
|
$
20,964,148
|
|
Foreclosed
real estate from GNMA loans
|
|
|
$
13,910
|
|
|
|
$
24,253
|
|
Potential
problem assets*
|
|
|
149,335
|
|
|
|
153,508
|
|
Loans
30 to 89 days past due
|
|
|
179,617
|
|
|
|
78,447
|
|
Loans
30 to 89 days past due - guaranteed portion**
|
|
|
50
|
|
|
|
79
|
|
Loans
90 days past due
|
|
|
34,462
|
|
|
|
26,841
|
|
Loans
90 days past due - guaranteed portion**
|
|
|
181
|
|
|
|
619
|
|
Loans
held for sale 30 to 89 days past due
|
|
|
26,457
|
|
|
|
34,194
|
|
Loans
held for sale 30 to 89 days past due - guaranteed
portion**
|
|
|
19,755
|
|
|
|
28,732
|
|
Loans
held for sale 90 days past due
|
|
|
136,565
|
|
|
|
138,918
|
|
Loans
held for sale 90 days past due - guaranteed portion**
|
|
|
130,677
|
|
|
|
135,910
|
|
Off-balance
sheet commitments***
|
|
|
7,201,579
|
|
|
|
7,305,293
|
|
Allowance
to total loans
|
|
|
1.03 |
% |
|
|
.92 |
% |
Allowance
to loans excluding insured loans
|
|
|
1.07
|
|
|
|
.95
|
|
Allowance
to nonperforming loans in the loan portfolio
|
|
|
180
|
|
|
|
326
|
|
Nonperforming
assets to loans, foreclosed real estate and other assets
|
|
|
|
|
|
|
|
|
(Retail/Commercial
Banking)
|
|
|
.75
|
|
|
|
.40
|
|
Nonperforming
assets to unpaid principal balance of servicing portfolio (Mortgage
Banking)
|
|
|
.03
|
|
|
|
.03
|
|
Allowance
to annualized net charge-offs
|
|
|
2.50
|
x |
|
|
3.61
|
x |
*
|
|
Includes
90 days past due loans. |
**
|
|
Guaranteed
loans include FHA, VA, student and GNMA loans repurchased through
the GNMA
repurchase program. |
***
|
|
Amount
of off-balance sheet commitments for which a reserve has been
provided. |
Certain
previously reported amounts have been reclassified to agree with
current
presentation.
|
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 borrower’s
ability to comply with present repayment terms. This definition is
believed to be substantially consistent with the standards established by
the
Office of the Comptroller of the Currency for loans classified
substandard. In total, potential problem assets were $149.3 million
on June 30, 2007, down from $153.5 million on June 30, 2006. Also,
loans 30 to 89 days past due increased to $179.6 million on June 30, 2007,
up
from $78.4 million on June 30, 2006. This significant increase
was primarily driven by the slowdown in the housing market and its impact
on
homebuilder, one-time close, home equity, and permanent mortgage
portfolios. The current expectation of losses from both potential
problem assets and loans 30 to 89 days past has been included in management’s
analysis for assessing the adequacy of the allowance for loan
losses.
Going
forward, the level of provision for loan losses will primarily be driven
by the
length and breadth of the housing market cycle, the strength or weakness of
the economies of the markets where FHN does business and early recognition
and
resolution of asset quality issues. In addition, asset quality ratios could
be
affected by balance sheet strategies and shifts in loan mix to and from products
with different risk/return profiles. Asset quality indicators are
expected to remain stressed during the remainder of the current housing industry
cycle.
STATEMENT
OF CONDITION REVIEW
EARNING
ASSETS
Earning
assets consist of loans, loans held for sale, investment securities, trading
securities and other earning assets. During second quarter 2007,
earning assets grew 1 percent and averaged $34.3 billion compared to $34.0
billion in 2006, as growth in loans and investment securities was offset
by a
decline in loans held for sale related to lower origination activity and
other
earning assets.
LOANS
Average
total loans increased 4 percent for second quarter 2007 to $22.3 billion
from
$21.4 billion in 2006. Average loans represented 65 percent of
average earning assets in second quarter 2007 and 63 percent in
2006.
Commercial,
financial and industrial loans increased 11 percent, or $722.1 million, since
second quarter 2006 reflecting increased market share in Tennessee, expansion
in
other markets, and continued economic growth. Commercial construction
loans grew 23 percent since second quarter 2006 or $539.1 million primarily
due
to growth in lending to homebuilders. It is important to note that
significant growth in this portfolio occurred during 2006. Even
though FHN experienced growth in 2007, its slowdown can be attributed to
weakening industry demand, FHN becoming more selective of loans, and curtailment
of the opening of new offices. Total retail loans decreased 4 percent
or $396.8 million reflecting a decline in home equity loans that was primarily
due to the strategy of selling a significant portion of production to third
party investors, and a slow down in the growth of one-time close loans that
was
due to a decrease in market demand and tighter underwriting standards (including
real estate loans pledged against other collateralized
borrowings). Additional loan information is provided in Table 7 –
Average Loans.
FHN
has a
significant concentration in loans secured by real estate, which is
geographically diversified nationwide. In 2007 and 2006, 65 percent
and 67 percent, respectively, of total loans are secured by real estate (see
Table 7). Three lending products have contributed to this level of
real estate lending including significant levels of retail residential real
estate, which comprise 35 percent of total loans. Also contributing
to the level of real estate lending are commercial construction loans, which
include loans to single-family builders and comprise 13 percent of total
loans,
and retail construction loans, First Horizon Home Loan’s one-time close product,
which comprises 9 percent of total loans. FHN’s other commercial real
estate lending, excluding single-family builders is well diversified by product
type and industry. On June 30, 2007, FHN did not have any
concentrations of 10 percent or more of commercial, financial and industrial
loans in any single industry.
Table
7 - Average Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Growth
|
|
|
|
|
|
Percent
|
|
(Dollars
in millions)
|
|
2007
|
|
|
of
Total
|
|
|
Rate
|
|
|
2006
|
|
|
of
Total
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and industrial
|
|
|
$
7,292.4
|
|
|
|
33 |
% |
|
|
11.0 |
% |
|
|
$
6,570.3
|
|
|
|
31 |
% |
Real
estate commercial
|
|
|
1,260.2
|
|
|
|
5
|
|
|
|
.1
|
|
|
|
1,259.4
|
|
|
|
6
|
|
Real
estate construction
|
|
|
2,919.5
|
|
|
|
13
|
|
|
|
22.6
|
|
|
|
2,380.4
|
|
|
|
11
|
|
Total
commercial
|
|
|
11,472.1
|
|
|
|
51
|
|
|
|
12.4
|
|
|
|
10,210.1
|
|
|
|
48
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate residential
|
|
|
7,854.8
|
|
|
|
35
|
|
|
|
(8.2 |
) |
|
|
8,560.1
|
|
|
|
40
|
|
Real
estate construction
|
|
|
2,095.0
|
|
|
|
9
|
|
|
|
3.3
|
|
|
|
2,028.5
|
|
|
|
9
|
|
Other
retail
|
|
|
150.0
|
|
|
|
1
|
|
|
|
(7.8 |
) |
|
|
162.6
|
|
|
|
1
|
|
Credit
card receivables
|
|
|
194.7
|
|
|
|
1
|
|
|
|
(1.5 |
) |
|
|
197.7
|
|
|
|
1
|
|
Real
estate loans pledged against other collateralized
borrowings
|
|
|
543.8
|
|
|
|
3
|
|
|
|
90.0
|
|
|
|
286.2
|
|
|
|
1
|
|
Total
retail
|
|
|
10,838.3
|
|
|
|
49
|
|
|
|
(3.5 |
) |
|
|
11,235.1
|
|
|
|
52
|
|
Total
loans, net of unearned
|
|
|
$
22,310.4
|
|
|
|
100 |
% |
|
|
4.0 |
% |
|
|
$
21,445.2
|
|
|
|
100 |
% |
Commercial
and retail loan growth should be primarily driven by the national sales platform
and market conditions.
LOANS
HELD FOR SALE
Loans
held
for sale consist of first-lien mortgage loans (warehouse), HELOC, second-lien
mortgages, student loans, and small issuer trust preferred
securities. The mortgage warehouse accounts for the majority of loans
held for sale. Loans held for sale decreased 11 percent to $4.1
billion in 2007 from $4.6 billion in 2006. This decline is related to
the lower demand for HELOC reflecting the soft housing market and a decline
in
small issuer trust preferred securities. FHN continues to fund loan
originations and manage liquidity position through whole-loan sales and
securitizations.
DEPOSITS
/ OTHER SOURCES OF FUNDS
Core
deposits increased 4 percent to $13.6 billion in second quarter 2007 compared
to
$13.1 billion in 2006, primarily due to growth in Retail/Commercial Banking
deposits reflecting market share gains in Tennessee markets and growth in
the
developing national markets. Short-term purchased funds
averaged $14.9 billion for second quarter 2007, down 7 percent or $1.1 billion
from second quarter 2006. In second quarter 2007, short-term
purchased funds accounted for 43 percent of FHN’s total funding down from 47
percent in second quarter 2006, which is comprised of core deposits, purchased
funds (including federal funds purchased, securities sold under agreements
to
repurchase, trading liabilities, certificates of deposit greater than $100,000,
and short-term borrowings) and long-term debt. Long-term debt
includes senior and subordinated borrowings, advances with original maturities
greater than one year and other collateralized borrowings. Long-term
debt averaged $6.4 billion in second quarter 2007 compared to $5.2 billion
in
second quarter 2006.
FINANCIAL
SUMMARY(Comparison of first
six months of 2007
to first six months of 2006)
Earnings
were $92.7 million or $.72 per diluted share for the six months ended June
30,
2007. Earnings were $319.3 million or $2.49 per diluted share for the
six months ended June 30, 2006, including the impact of the divestiture of
FHN’s
national merchant processing business. For the six months ended June
30, 2007, return on average shareholders’ equity and return on average assets
were 7.55 percent and .48 percent, respectively. Return on average
shareholders’ equity and return on average assets were 27.2 percent and 1.69
percent, respectively, for the six months ended June 30, 2006.
Comparisons
between reported earnings are directly and significantly affected by a number
of
factors in both 2007 and 2006. See the Corporate segment discussion
of the Business Line Review for the quarter for further details of the impact
on
2007. FHN’s year-to-date performance in 2006 was impacted by the gain
on the merchant divestiture, transactions through which the incremental capital
provided by the divestiture was utilized, various other transactions, and
accounting matters. The following discussion highlights these
items:
On
March 1,
2006, FHN sold its national merchant processing business for an after-tax
gain
of $209 million. This divestiture was accounted for as a discontinued
operation, and accordingly, all periods presented were adjusted to exclude
the
impact of merchant operations from the results of continuing
operations. In tandem with the merchant sale, FHN purchased 4 million
shares of its common stock to minimize the potentially dilutive effect
of the
merchant divestiture on future earnings per share. Also included in
results from continuing operations are securities losses of $77.4 million,
predominantly related to repositioning approximately $2.3 billion of investment
securities.
FHN
determined that certain derivative transactions used in hedging strategies
to
manage interest rate risk did not qualify for hedge accounting under the
"short
cut" method, as have a number of other banks. As a result, any
fluctuations in the market value of the derivatives should have been recorded
through the income statement with no corresponding offset to the hedged
item.
While management believes these hedges would have qualified for hedge accounting
under the "long haul" method, that accounting method cannot be applied
retroactively. FHN evaluated the impact to all quarterly and annual
periods since the inception of the hedges and concluded that the impact
was
immaterial in each period. In first quarter 2006, FHN recorded an
adjustment to recognize the cumulative impact of these transactions that
resulted in a negative $15.6 million impact to noninterest income, which
was
included in continuing operations. FHN has subsequently redesignated
these hedge relationships under SFAS No. 133 using the “long haul”
method.
Various
other items impacted results from continuing operations. In 2006, a pre-tax
loss
of $12.7 million was recognized from the sale of home equity lines of credit
(HELOC) upon which the borrower had not drawn funds. The loss
represents deferred loan origination costs, generally recognized over the
life
of the loan, which were recognized when the line of credit was
sold. Mortgage banking experienced foreclosure losses and other
expenses of $13.8 million related to nonprime mortgage loans. In
addition, expenses associated with devaluing inventories, consolidating
operations and closing offices, incremental expenditures on technology,
and
compensation expense related to early retirement, severance and retention
were
recognized in 2006.
2006
earnings also included a favorable impact of $1.3 million or $.01 per diluted
share from the cumulative effect of changes in accounting
principles. FHN adopted SFAS No. 123 (revised 2004), “Share-Based
Payment” (SFAS No. 123-R) in first quarter 2006 and retroactively applied the
provisions of the standard. Accordingly, results for periods prior to
2006 have been adjusted to reflect expensing of share-based
compensation. A cumulative effect adjustment of $1.1 million was
recognized, reflecting the change in accounting for share-based compensation
expense based on estimated forfeitures rather than actual
forfeitures. FHN also adopted SFAS No. 156, “Accounting for Servicing
of Financial Assets,” which allows servicing assets to be measured at fair value
with changes in fair value reported in current earnings. The adoption of
this
standard was applied on a prospective basis and resulted in a cumulative
effect
adjustment of $.2 million, representing the excess of the fair value of
the
servicing asset over the recorded value on January 1, 2006.
INCOME
STATEMENT REVIEW
For
the
first six months of 2007, total revenues were $1,040.4 million, an increase
of 1
percent from $1,031.9 million in 2006. Noninterest income for the
first six months of 2007 was $563.5 million and contributed 54 percent
to total
revenues as compared to $532.6 million, or 52 percent of total revenues
in
2006.
Mortgage
banking fee income decreased 27 percent to $144.4 million from $197.2
million. During this period, fees from the origination process
decreased 25 percent to $130.9 million from $174.6 million for 2007 as
loans
sold into the secondary market decreased 6 percent and gain on sale margins
declined.
Total
mortgage servicing fees were flat or $158.6 million in 2007 compared to
$158.1
million in 2006. Servicing net hedging activities and run-off of MSR
values negatively impacted net servicing revenues in 2007 with a net loss
of
$159.1 million as compared to a net loss of $148.1 million in
2006. Specifically, significant flattening of the yield curve reduced
net interest income derived from swaps utilized to hedge
MSR. Consequently, the cost of hedging MSR increased in 2007 compared
to 2006. The MSR value due to runoff negatively impacted servicing
revenue by $124.4 million in 2007 compared to $130.9 million last
year. Also impacting servicing fees and run-off of MSR in 2007 was
the modification to the PSA mentioned in the quarterly Business Line
Review. See Table 3 – Mortgage Banking Noninterest Income for a
breakout of noninterest income as well as mortgage banking origination
volume
and servicing portfolio levels.
Fee
income
from capital markets decreased 12 percent to $172.2 million from $195.0
million
for 2006 primarily due to decreased fees from investment banking and equity
research activities, partially offset by an increase in loan sales and
fixed
income revenues. In 2007 net securities gains of $9.2 million were
primarily related to changes in the investment portfolio that were made
to
compensate for loan growth. Net securities losses of $77.4 million in
2006 were primarily related to the restructuring of the investment portfolio
in
the first quarter 2006. Noninterest income from insurance commissions
declined 36 percent or $9.6 million due to the divestiture of two subsidiaries
in third quarter 2006. Revenue from loan sales and securitizations
decreased 18 percent
or
$4.3
million to $19.3 million in 2007 primarily due to a decline in the volume
of
loans delivered into the secondary markets. Other noninterest income
increased 51 percent, or $33.4 million, to $98.2 million. Other
noninterest income in 2006 included the unfavorable adjustment of $15.6 million
previously mentioned. Other items impacting this growth were
increases related to deferred compensation plans and increased levels of
bank
owned life insurance compared to 2006.
Net
interest
income decreased 5 percent to $476.9 million from $499.3 million for the
first
six months of 2007. The year-to-date consolidated margin decreased to
2.82 percent in 2007 from 2.99 percent in 2006. The reasons for the
year-to-date trends were similar to the quarterly trend information already
discussed.
Total
noninterest expense for the first six months of 2007 increased to $860.3
million
from $858.1 million in 2006. Employee compensation, incentives and
benefits (personnel expense), occupancy and equipment rentals, depreciation
and
maintenance were impacted by restructuring, repositioning and efficiency
initiatives previously discussed. These results also reflect reductions in
personnel expense in mortgage banking and capital markets directly related
to
the contraction in revenue. All other expense categories increased 2
percent or $3.3 million in 2007. Expenses of $14.7 million in 2007
were primarily related to the exit of the collectible coin merchandising
business. In 2006 this category included expense growth in the
collectible coin business, losses due to certain misrepresentations within
a
previously identified pool of construction loans, occupancy expense, dividends
on FTBNA perpetual preferred stock, nonprime mortgage loans, consolidating
operations, closing offices, and technology. Excluding the impact of
the sold loans described in the Business Line Review for the quarter, the
provision for loan losses increased 79 percent to $65.2 million from $36.4
million in the first six months of 2007 primarily reflecting deterioration
related to both homebuilder and one-time-close construction
loans. See further discussion in the Asset Quality section of the
MD&A.
BUSINESS
LINE REVIEW
Retail/Commercial
Banking
Total
revenues for the six-month period were $651.7 million, a decrease of 4 percent
from $680.0 million in 2006. Net interest income decreased 4 percent,
or $16.1 million. Noninterest income decreased 6 percent, or $12.2
million from $221.8 million in 2006. Revenue from insurance
commissions declined $9.8 million due to the sale of two insurance subsidiaries
in third quarter 2006. Revenue from loans sales and securitizations declined
$2.6 million primarily due to a decline in the volume of loans delivered
into
the secondary markets. Provision for loan losses increased 80 percent
in 2007 to $65.3 million from $36.3 million. The $29.0 million
increase primarily reflects an increase in nonperforming assets related to
both
homebuilder and one-time-close construction loans. Total noninterest
expense for the six-month period decreased 7 percent to $404.5 million from
$433.2 million in 2006. Total noninterest expense in 2006 was
impacted by costs associated with the coin inventory valuation and closing
of
retail sites, incremental costs associated with national businesses, losses
due
to certain misrepresentations within a previously identified pool of
construction loans, consolidation of remittance processing operations and
office
closing, and early retirement and severance costs. For the first six
months of 2007, pre-tax income decreased to $181.9 million from $210.5 million
in 2006.
Mortgage
Banking
Total
revenues for the six-month period were $193.4 million, a decrease of 24 percent
from $254.7 million in 2006. During this period, fees from the
origination process decreased $43.7 million while net servicing income declined
$10.5 million. See Table 3 – Mortgage Banking Noninterest Income for
a breakout of noninterest income as well as mortgage banking origination
volume
and servicing portfolio levels. Total noninterest expense for the
six-month period decreased 4 percent to $220.9 million from $229.9 million
in
2006. This decrease primarily reflects lower personnel expense
related to the contraction in origination revenue and reductions in support
headcount offset by the recognition of $8.4 million of increased expense
related
to a previously disclosed legal settlement as a higher number of claims were
received by the end of the claims period than projected. For the
first six months of 2007 pre-tax income decreased to a loss of $27.4 million
from income of $24.7 million in 2006.
Capital
Markets
Total
revenues for the six-month period were $169.7 million, a decrease of 11 percent
from $190.3 million in 2006. This decline was primarily due to
decreases in investment banking and equity research activities partially
offset
by an increase in loan sales and fixed income revenues. For the first
six months of 2007 pre-tax income decreased 33 percent to $16.1 million from
$24.1 million in 2006.
Corporate
For
the
first six months of 2007, Corporate had a pre-tax loss of $63.4 million compared
to a pre-tax loss of $121.9 million in 2006. See restructuring,
repositioning and efficiency initiatives previously discussed for further
detail
on the noninterest expense impact in 2007. Included in 2006 were net
securities losses of $77.4 million primarily related to the restructuring
of the
investment portfolio in first quarter 2006. Also impacting 2006 was
the negative $15.6 million cumulative impact of derivative transactions used
in
hedging strategies to manage interest rate risk that management determined
did
not qualify for hedge accounting under the “short cut”
method.
CAPITAL
Management’s
objectives are to provide capital sufficient to cover the risks inherent
in
FHN’s businesses, to maintain excess capital to well-capitalized standards and
to assure ready access to the capital markets.
Average
shareholders’ equity increased 3 percent in second quarter 2007 to $2.5 billion
from $2.4 billion, reflecting internal capital generation. Period-end
shareholders’ equity was $2.5 billion on June 30, 2007, up 1 percent from the
prior year. 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.
In
first
quarter 2006, FHN entered into an agreement with Goldman Sachs & Co. to
purchase four million shares of FHN common stock in connection with an
accelerated share repurchase program under an existing share repurchase
authorization. This share repurchase program was concluded for an
adjusted purchase price of $165.1 million in second quarter 2006. The
share repurchase was funded with a portion of the proceeds from the merchant
processing sale.
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
|
2007
|
|
|
|
|
|
|
|
|
|
April
1 to April 30
|
|
|
9
|
|
$
39.79
|
|
9
|
|
30,402
|
May
1
to May 31
|
|
|
*
|
|
40.33
|
|
*
|
|
30,402
|
June
1
to June 30
|
|
|
-
|
|
-
|
|
-
|
|
30,402
|
Total
|
|
|
9
|
|
$
39.79
|
|
9
|
|
|
*
Amount is less than 1,000 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 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, 2007, the maximum number of shares that may
be purchased under the program was 28.8 million shares.
|
|
|
Other
Programs:
|
-
|
A
non-stock option plan-related authority was announced on October
18, 2000,
authorizing the purchase of up to 9.5 million shares. On
October 16, 2001, it was announced that FHN's board of directors
extended
the expiration date of this program from June 30, 2002, until December
31,
2004. On October 19, 2004, the board of directors extended the
authorization until December 31, 2007. On June 30, 2007, the
maximum number of shares that may be purchased under the program was
1.6 million shares.
|
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 institution’s
capital ratios decline below predetermined levels, it would become subject
to a
series of increasingly restrictive regulatory actions. The system
categorizes a depository institution’s 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, 2007,
FHN and FTBNA had sufficient capital to qualify as well-capitalized institutions
as shown in Note 6 – 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 CEO and other executive officers of FHN. The Executive Vice
President (EVP) of Risk Management 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 Senior Credit Policy Committee,
Asset/Liability Committee (ALCO), Capital Management Committee, Regulatory
Compliance Committee, Operational Risk Committee, and the Executive Program
Governance Forum. The Chief Credit Officer, EVP of Interest Rate Risk
Management, Corporate Treasurer, EVP of Regulatory Risk Management, EVP of
Risk
Management, and EVP of Corporate Services chair these committees
respectively. Reports regarding Credit, Asset/Liability Management,
Market Risk, Capital Management, Regulatory Compliance, and Operational Risks
are provided to the Credit Policy and Executive 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 also evaluates risk management activities. These
evaluations are reviewed with management and the Audit Committee, as
appropriate.
MARKET
UNCERTAINTIES AND PROSPECTIVE TRENDS
Given
the
significant current uncertainties in the mortgage and credit markets, it
is
anticipated that the second half of 2007 and 2008 will continue to be
challenging for the housing markets and for FHN. Competitive pricing
pressure is likely to continue related to mortgage (first- and
second-lien) gain on sale margins. In addition, current
volatility and reduced liquidity in the capital markets may adversely impact
market execution putting further pressure on margins as well as
revenues. Some improvement is anticipated once the market
stabilizes. However, as difficulties in the mortgage and credit
markets persist, the compression of gain on sale margins may prompt changes
in
FHN’s liquidity management strategies. Further deterioration of the
housing market 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 FHN’s 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. To the extent that earning assets reprice more quickly than
liabilities, this position should benefit net interest income in a rising
interest rate environment and could negatively impact net interest income
in a
declining interest rate environment. 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.
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 (refer to discussion of Pipeline and Warehouse under Critical
Accounting Policies) 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 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 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 and warehouse.
In
addition
to the balance sheet impacts, fee income and noninterest expense may be affected
by actual changes in interest rates or expectations of
changes. Mortgage banking revenue, which is generated from
originating, selling and servicing residential mortgage loans, is highly
sensitive to changes in interest rates due to the direct effect changes in
interest rates have on loan demand. 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. The earnings impact from originations and sales of loans
on total earnings is more significant than servicing-related
income. 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. In addition, a flattening or inverted yield
curve negatively impacts the demand for fixed income securities and, therefore,
Capital Markets’ revenue.
LIQUIDITY
MANAGEMENT
ALCO
focuses
on being able to fund assets with liabilities of the appropriate duration,
as
well as the risk of not being able to meet 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, maintaining sufficient unused borrowing capacity in the
national money markets, growing core deposits, and the repayment of loans
and
the capability to sell or securitize 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. Funds are available from a number of sources, including
core deposits, the securities available for sale portfolio, the Federal Home
Loan Bank (FHLB), the Federal Reserve Banks, access to capital markets through
issuance of senior or subordinated bank notes and institutional certificates
of
deposit, availability to the overnight and term Federal Funds markets, access
to
retail brokered certificates of deposit, dealer and commercial customer
repurchase agreements, and through the sale or securitization of
loans.
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. For second
quarter 2007 and 2006, the total loans, excluding loans held for sale and
real
estate loans pledged against other collateralized borrowings, to core deposits
ratio was 160 percent and 161 percent, respectively. One means of
maintaining a stable liquidity position is to sell loans either through
whole-loan sales or loan securitizations. During 2007 and 2006, FHN
sold loans through on-balance sheet securitizations structured as financings
for
accounting purposes. FHN periodically evaluates its liquidity
position in conjunction with determining its ability and intent to hold loans
for the foreseeable future.
FTBNA
has a
bank note program providing additional liquidity of $5.0
billion. This bank note program provides FTBNA with a facility under
which it may continuously issue and offer short- and medium-term unsecured
notes. On June 30, 2007, $1.7 billion was available under current
conditions through the bank note program as a funding source.
FHN
and
FTBNA have the ability to generate liquidity by issuing preferred equity
or
incurring other debt. Liquidity has been obtained through FTBNA’s
issuance of approximately $250 million of subordinated notes in
2006. FHN also evaluates alternative sources of funding, including
loan sales, securitizations, syndications, and FHLB borrowings in its management
of liquidity.
The
Consolidated Condensed Statements of Cash Flows provide information on cash
flows from operating, investing and financing activities for the six-month
periods ended June 30, 2007 and 2006. For the six months ended June
30, 2007, negative cash flows from operating activities exceeded net cash
provided by investing and financing activities primarily due to an increase
in
capital market receivables and loans held for sale. Positive
investing cash flows resulted as $.6 billion available for sale securities
were
sold in anticipation of loan growth. Cash flows from financing
activities reflected a $2.1 billion decrease in short-term borrowings as
deposits and long-term borrowings, which increased $1.5 billion and $1.1
billion
respectively, were utilized to fund the balance sheet. In 2006,
significant cash flows from investing activities included the sale of $2.3
billion investment securities and the subsequent purchase of $2.9 billion
investment securities as the portfolio was repositioned. Investing
activities also provided a $.4 billion increase in cash due to the merchant
divestiture, of which $.2 billion, the gain on the sale, is included in net
income. The impacts to cash flows from loan growth and an increase in
capital markets balances were largely offset by a decrease in loans held
for
sale. Cash flows from financing activities reflected a decrease of
$1.7 billion in deposits, primarily from certificates of deposit greater
than
$100,000, as long term borrowings, which increased $2.2 billion, were utilized
to fund the balance sheet. Also included in cash flows from financing
activities was a decrease of $165.6 million related to the share
repurchase.
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 dividends to shareholders and interest to debt holders. The amount paid
to
the parent company through FTBNA common dividends is managed as part of FHN’s
overall cash management process, subject to applicable regulatory restrictions
described in the next paragraph. The parent company also has the ability
to
enhance its liquidity position by raising equity or incurring debt. In addition,
$50 million of borrowings under an unsecured line of credit from non-affiliated
banks was available to the parent company to provide for general liquidity
needs.
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 FTBNA’s retained net income for the two most recent completed
years plus the current year to date. For any period, FTBNA’s
‘retained net income’ is equal to FTBNA’s regulatory net income reduced by the
preferred and common dividends declared by FTBNA. One effect of this
regulatory calculation method is that the amount available for preferred
or
common dividends by FTBNA without prior regulatory approval often changes
substantially at the beginning of each new fiscal year compared with the
last
day of the year just completed. FTBNA’s total amount available for dividends was
$642.7 million at December 31, 2006, and was reduced substantially at January
1,
2007 because in 2007 the regulatory calculation method no longer included
the
$344.4 million of retained net income associated with the year 2004. Earnings
(or losses) and dividends in 2007 have changed and will continue to change
the
amount available during the year until December 31. Another reduction will
occur
at January 1, 2008 with respect to $225.0 million of retained net income
for the
year 2005, and again at January 1, 2009 with respect to $73.3 million of
retained net income for the year 2006.
OFF-BALANCE
SHEET ARRANGEMENTS AND OTHER CONTRACTUAL OBLIGATIONS
First
Horizon Home Loans originates 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 are 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 of
the GSE has specific guidelines and criteria for sellers and servicers of
loans
backing their respective securities. Many private investors are 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 is generally
transferred to investors upon sale to the secondary market. To the
extent that transferred loans are subsequently determined not to meet the
agreed
upon qualifications or criteria, the purchaser has the right to return those
loans to FHN. In addition, certain mortgage loans are 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 are not reflected on the
Consolidated Condensed Statements of Condition.
FHN’s
use of
government agencies as an efficient outlet for mortgage loan production is
an
essential source of liquidity for FHN and other participants in the housing
industry. During second quarter 2007, approximately $4.8 billion of
conventional and federally insured mortgage loans were securitized and sold
by
First Horizon Home Loans through these investors.
Certain
of
FHN's originated loans, including non-conforming first-lien mortgages,
second-lien mortgages and HELOC originated primarily through FTBNA, do not
conform to the requirements for sale or securitization through government
agencies. FHN pools and securitizes these non-conforming loans in
proprietary transactions. After securitization and sale, these loans
are not reflected on the Consolidated Condensed Statements of
Condition. These transactions, which are conducted through
single-purpose business trusts, are an efficient way for FHN and other
participants in the housing industry to monetize these assets. On
June 30, 2007 and 2006, the outstanding principal amount of loans in these
off-balance sheet business trusts was $25.7 billion and $22.7 billion,
respectively. Given the significance of FHN's origination of
non-conforming loans, the use of single-purpose business trusts to securitize
these loans is an important source of liquidity to FHN.
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
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. Inventory positions are limited to the
procurement of securities solely 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 FHN’s businesses, to maintain excess capital to
well-capitalized standards and to assure ready access to the capital
markets. Management has a Capital Management committee 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 EVP
of
Risk Management. Key representatives from the business segments,
legal, shared services, risk management, and insurance are represented on
the
committee. Subcommittees manage and report on business continuity
planning, information technology, data security, insurance, compliance, records
management, product and system development, customer complaint, and reputation
risks. Summary reports of the committee’s 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 and other activities. Management, measurement, and
reporting of compliance risk are overseen by the Regulatory Compliance
Committee, which is chaired by the EVP of Regulatory Risk Management. Key
executives from the business segments, legal, risk management, and shared
services are represented on the committee. Summary reports of the committee’s
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’s 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
has
processes and management committees in place that are designed to assess
and
monitor credit risks. Management’s Asset Quality Committee has the
responsibility to evaluate its assessment of current asset quality for each
lending product. In addition, the Asset Quality Committee evaluates
the projected changes in classified loans, non-performing assets and
charge-offs. A primary objective of this committee is to provide
information about changing trends in asset quality by region or loan product,
and to provide to senior management a current assessment of credit quality
as
part of the estimation process for determining the allowance for loan
losses. The Senior Credit Watch Committee has primary responsibility
to enforce proper loan risk grading, to identify credit problems and to monitor
actions to rehabilitate certain credits. Management also has a Senior
Credit Policy Committee that is responsible for enterprise-wide credit risk
oversight and provides a forum for addressing management issues. The
committee also recommends credit policies, which are submitted for approval
to
the Credit Policy and Executive Committee of the Board, and underwriting
guidelines to manage the level and composition of credit risk in its loan
portfolio and review performance relative to these policies. In
addition, the Financial Counterparty Credit Committee, composed of senior
managers, assesses the credit risk of financial counterparties and sets limits
for exposure based upon the credit quality of the counterparty. FHN’s
goal is to manage risk and price loan products based on risk management
decisions and strategies. Management strives to identify potential
problem loans and nonperforming loans early enough to correct the
deficiencies. It is management’s objective that both charge-offs and
asset write-downs are recorded promptly, based on management’s assessments of
current collateral values and the borrower’s ability to repay.
CRITICAL
ACCOUNTING POLICIES
APPLICATION
OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
FHN’s
accounting policies are fundamental to understanding management’s 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 period to period,
that would have a material impact on the presentation of FHN’s financial
condition, changes in financial condition or results of operations.
It
is
management's 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 company’s
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.
Effective
January 1, 2006, FHN elected early adoption of SFAS No. 156. This
amendment to Statement of Financial Accounting Standards No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” (SFAS No. 140) required servicing rights be initially measured at
fair value. Subsequently, companies are permitted to elect, on a
class-by-class basis, either fair value or amortized cost accounting for
servicing rights. FHN elected fair value accounting for all classes
of mortgage servicing rights. Accordingly, FHN recognized the
cumulative effect of a change in accounting principle totaling $.2 million,
net
of tax, representing the excess of the fair value of the servicing asset
over
the recorded value on January 1, 2006.
MORTGAGE
SERVICING RIGHTS AND OTHER RELATED RETAINED INTERESTS
When
FHN
sells mortgage loans in the secondary market to investors, it generally retains
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 is 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
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 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,
like other participants in the mortgage banking business, 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, First Horizon Home Loans 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, including First Horizon
Home
Loans’ own historical prepayment experience. 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
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Prepayment
speeds
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
|
|
18.1
|
% |
18.3%
|
|
Estimated*
|
|
|
|
|
|
16.1
|
|
13.3
|
*
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.
First
Horizon Home Loans 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 a prominent independent mortgage-servicing
broker,
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, First Horizon Home
Loans reviews all information obtained during price discovery to determine
whether the estimated fair value of MSR is reasonable when compared to market
information. On June 30, 2007 and 2006, First Horizon Home Loans
determined that its MSR valuations and assumptions were reasonable based
on the
price discovery process.
The
First
Horizon Risk Management Committee (FHRMC) reviews the overall assessment
of the
estimated fair value of MSR monthly. The FHRMC is responsible for
approving the critical assumptions used by management to determine the estimated
fair value of First Horizon Home Loans’ MSR. In addition, FHN’s MSR
Committee reviews the initial capitalization rates for newly originated MSR,
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
First
Horizon Home Loans 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, First Horizon Home Loans 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.
First
Horizon Home Loans generally experiences increased loan origination and
production in periods of low interest rates which, at the time of sale, result
in the capitalization of new MSR associated with new production. This
provides for a “natural hedge” in the mortgage-banking business
cycle. New production and origination does not prevent First Horizon
Home Loans from recognizing losses due to reduction in carrying value of
existing servicing rights as a result of prepayments; rather, the new production
volume results 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 tends 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 can be significantly
offset by a strong replenishment rate and strong net margins on new loan
originations. To the extent that First Horizon Home Loans is unable
to
maintain
a
strong replenishment rate, or in the event that the net margin on new loan
originations declines from historical experience, the value of the natural
hedge
may diminish, thereby significantly impacting the results of operations in
a
period of increased borrower prepayments.
First
Horizon Home Loans 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), basis risk (meaning, the risk
that
changes in the benchmark interest rate may not correlate to changes in the
mortgage market interest rate), discount rates, cost to service and other
factors. To the extent that these other factors result in changes to
the fair value of MSR, First Horizon Home Loans 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 First Horizon Home Loans sells mortgage loans in the secondary
market, it retains 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 not typically readily available. Accordingly, First
Horizon Home Loans relies primarily on a discounted cash flow model to estimate
the fair value of its excess interest.
Estimating
the cash flow components and the resultant fair value of the excess interest
requires First Horizon Home Loans to make certain critical assumptions based
upon current market and loan production data. The primary critical
assumptions used by First Horizon Home Loans to estimate the fair value of
excess interest include prepayment speeds and discount rates, as discussed
above. First Horizon Home Loans' 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
First
Horizon Home Loans 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 First Horizon Home Loans. 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 First Horizon Home Loans’ ability to effectively
hedge certain components of the change in fair value of excess interest and
could result in significant earnings volatility.
Residual-Interest
Certificates Fair Value – HELOC and Second-lien Mortgages
In
certain
cases, when FHN sells HELOC or second-lien mortgages in the secondary market,
it
retains an interest in the loans sold primarily through a residual-interest
certificate. Residual-interest certificates are financial assets
which represent rights to receive earnings to the extent of excess income
generated by the underlying loan collateral of certain mortgage-backed
securities, which is not needed to meet contractual obligations of senior
security holders. The fair value of a residual-interest certificate typically
changes based on the differences between modeled prepayment speeds and credit
losses and actual experience. Additionally, similar to MSR and
interest-only certificates, the market for residual-interest certificates
is
limited, and the precise terms of transactions involving residual-interest
certificates are not typically readily available. Accordingly, FHN
relies primarily on a discounted cash flow model, which is prepared monthly,
to
estimate the fair value of its residual-interest certificates.
Estimating
the cash flow components and the resultant fair value of the residual-interest
certificates 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 residual-interest
certificates include prepayment speeds, credit losses and discount rates,
as
discussed above. FHN’s residual-interest certificates are 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 other income on the Consolidated Condensed Statements
of Income. FHN does not utilize derivatives to hedge against changes
in the fair value of residual-interest certificates.
PIPELINE
AND WAREHOUSE
During
the
period of loan origination and prior to the sale of mortgage loans in the
secondary market, First Horizon Home Loans 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 resulting in interest rate risk to
First
Horizon Home Loans. 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 (currently an average of approximately
30
days) into the secondary market. First Horizon Home Loans is exposed
to credit risk while a mortgage loan is in the warehouse. Third party
models are used in managing interest rate risk related to price movements
on
loans in the pipeline and the warehouse.
First
Horizon Home Loans’ warehouse (first-lien mortgage loans held for sale) is
subject to changes in fair value, primarily 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, First Horizon Home Loans 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.
To
the
extent that these interest rate derivatives are designated to hedge specific
similar assets in the warehouse and prospective analyses indicate that high
correlation is expected, the hedged loans are considered for hedge accounting
under SFAS No. 133. Anticipated correlation is determined by
projecting a dollar offset relationship for each tranche based on anticipated
changes in the fair value of the hedged mortgage loans and the related
derivatives, in response to various interest rate shock
scenarios. Hedges are reset daily and the statistical correlation is
calculated using these daily data points. Retrospective hedge
effectiveness is measured using the regression results. First Horizon Home
Loans
generally maintains a coverage ratio (the ratio of expected change in the
fair
value of derivatives to expected change in the fair value of hedged assets)
of
approximately 100 percent on warehouse loans accounted for under SFAS No.
133.
Warehouse
loans qualifying for SFAS No. 133 hedge accounting treatment totaled $2.6
billion and $1.8 billion on June 30, 2007 and 2006, respectively. The
balance sheet impacts of the related derivatives were net assets of $20.0
million and $7.8 million on June 30, 2007 and 2006,
respectively. Net losses of $1.6 million and $10.4 million
representing the ineffective portion of these fair value hedges were recognized
as a component of gain or loss on sale of loans for the six months ended
June
30, 2007 and 2006, respectively.
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, First
Horizon Home Loans has the risk that interest rates will change from the
rate
quoted to the borrower. First Horizon Home Loans 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 commitment 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 are 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. Interest rate lock commitments
generally have a term of up to 60 days before the closing of the
loan. The interest rate lock commitment, however, 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, First Horizon Home Loans 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. Once a loan is
closed, the risk of fallout is eliminated and the associated mortgage loan
is
included in the mortgage loan warehouse.
The
extent
to which First Horizon Home Loans is able to economically hedge changes in
the
mortgage pipeline depends largely on the hedge coverage ratio that is maintained
relative to mortgage loans in the pipeline. The hedge coverage ratio
can 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 can result in significant earnings volatility to
FHN.
For
the
periods ended June 30, 2007 and 2006, the valuation model utilized to estimate
the fair value of interest rate lock commitments assumes a zero fair value
on
the date of the lock with the borrower. Subsequent to the lock date,
the model calculates the change in value due solely to the change in interest
rates resulting in an asset with an estimated fair value of $11.4 million
and a
liability with an estimated fair value of $14.0 million on June 30, 2007,
compared to an asset with an estimated fair value of $8.2 million and a
liability with an estimated fair value of $6.7 million on June 30,
2006.
FORECLOSURE
RESERVES
As
discussed
above, First Horizon Home Loans typically originates mortgage loans with
the
intent to sell those loans to GSE and other private investors in the secondary
market. Certain of the mortgage loans are sold with limited or full
recourse in the event of foreclosure. On June 30, 2007 and 2006, $3.2
billion and $2.9 billion, respectively, of mortgage loans were outstanding
which
were sold under limited recourse arrangements where some portion of the
principal is at risk. Additionally, on June 30, 2007 and 2006, $4.8
billion and $5.3 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, 2007 and 2006, $110.5
million and $146.2 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). First Horizon Home Loans 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 First Horizon Home
Loans 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, 2007 and 2006, the foreclosure reserve was $14.6
million and $15.1 million, respectively. While the servicing portfolio has
grown
from $99.3 billion on June 30, 2006, to $106.0 billion on June 30, 2007,
the
foreclosure reserve has decreased primarily due to the decline in the limited
and full recourse portfolios.
ALLOWANCE
FOR LOAN LOSSES
Management’s
policy is to maintain the allowance for loan losses 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
allowance for loan losses 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 allowance for loan losses is increased
by the provision for loan losses and recoveries and is decreased by charged-off
loans. This critical accounting estimate applies primarily to the
Retail/Commercial Banking segment. The Credit Policy and Executive
Committee of FHN’s board of directors reviews quarterly the level of the
allowance for loan losses.
FHN’s
methodology for estimating the allowance for loan losses 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) retail loans are
segmented based on loan types and credit score bands and loan to value; (4)
reserve rates for each portfolio segment are calculated based on historical
charge-offs and are adjusted by management to reflect current events, trends
and
conditions (including economic factors and trends); and (5) management’s
estimate of probable incurred losses reflects the reserve rate applied against
the balance of loans in each segment of the loan portfolio.
Principal
loan amounts are charged off against the allowance for loan losses in the
period
in which the loan or any portion of the loan is deemed to be
uncollectible.
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 allowance for loan losses; (5) the economic factors 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 allowance
for
loan losses, future adjustments to the allowance for loan losses 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. There have been no significant changes to the
methodology for the quarters ended June 30, 2007 and 2006.
GOODWILL
AND ASSESSMENT OF IMPAIRMENT
FHN’s
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, 2006, FHN engaged an independent valuation
firm to compute the fair value estimates of each reporting unit as part of
its
annual impairment assessment. The independent valuation utilized
three separate valuation methodologies and applied a weighted average to
each
methodology in order to determine fair value for each reporting
unit. The valuation as of October 1, 2006, indicated no goodwill
impairment for any of the reporting units.
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 FHN’s future performance and cash
flows, as well as other prevailing market factors (interest rates, economic
trends, etc.). FHN’s policy allows management to make the
determination of fair value using internal cash flow models or by engaging
independent third parties. 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
Retail/Commercial Banking, Mortgage Banking, and Capital Markets business
segments. 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 unit’s 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 by the third party in its determination
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. The independent third party made other assumptions critical to
the process, including discount rates, asset and liability growth rates,
and
other income and expense estimates, through discussions with
management.
While
management uses the best information available to estimate future performance
for each reporting unit, future adjustments to management’s projections may be
necessary if economic 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 management’s
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. Management’s 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
management’s 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.
OTHER
ACCOUNTING
CHANGES
In
June
2007, the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position 07-1, “Clarification of the Scope of the Audit and
Accounting Guide Investment Companies and Accounting by Parent
Companies and Equity Method Investors for Investments in Investment Companies”
(SOP 07-1), which provides guidance for determining whether an entity is
within
the scope of the AICPA’s Investment Companies Guide. Additionally,
SOP 07-1 provides certain criteria that must be met in order for investment
company accounting applied by a subsidiary or equity method investee to be
retained in the financial statements of the parent company or an equity method
investor. SOP 07-1 also provides expanded disclosure requirements
regarding the retention of such investment company accounting in the
consolidated financial statements. In May 2007, FASB Staff Position
No. FIN 46(R)- 7, “Application of FASB Interpretation No. 46(R) to Investment
Companies” (FIN 46(R)-7) was issued. FIN 46(R)-7 amends FIN 46(R) to
provide a permanent exception to its scope for companies within the scope
of the
revised Investment Companies Guide under SOP 07-1. SOP 07-1 and FIN
46(R)-7 are effective for fiscal years beginning on or after December 15,
2007. FHN is currently assessing the financial impact of adopting SOP
07-1 and FIN 46(R)-7.
In
April
2007, FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No.
39” (FIN 39-1) was issued. 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 FIN 39-1, entities are
permitted to change their previous accounting policy election to offset or
not
offset fair value amounts recognized for derivative instruments under master
netting arrangements. Additionally, FIN 39-1 requires additional
disclosures for derivatives and collateral associated with master netting
arrangements. FIN 39-1 is effective for fiscal years beginning after November
15, 2007, through retrospective application, with early application
permitted. FHN is currently assessing the financial impact of
adopting FIN 39-1.
In
February
2007, the FASB issued Statement of Financial Accounting Standards No. 159,
“The
Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No.
159), which allows an irrevocable election to measure certain financial assets
and financial 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 financial
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 financial 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. SFAS No. 159 is effective prospectively
for fiscal years beginning after November 15, 2007. FHN is currently
assessing the financial impact of adopting SFAS No. 159.
In
September
2006, the FASB issued Statement of Financial Accounting Standards No. 157,
“Fair
Value Measurements” (SFAS No. 157), which establishes a hierarchy to be used in
performing measurements of fair value. 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. Additionally, SFAS No. 157
provides expanded disclosure requirements regarding the effects of fair value
measurements on the financial statements. SFAS No. 157 is effective
prospectively for fiscal years beginning after November 15, 2007. FHN
is currently assessing the financial impact of adopting SFAS No.
157.
In
September
2006, the consensus reached in EITF Issue No. 06-4, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar
Life
Insurance Arrangements” (EITF 06-4) was ratified by the FASB. 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. EITF 06-4 is effective for fiscal years beginning after
December 15, 2007, with the guidance applied using either a retrospective
approach or through a cumulative-effect adjustment to beginning undivided
profits. FHN is currently assessing the financial impact of adopting
EITF 06-4.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
The
information called for by this item is contained in (a) Management’s Discussion
and Analysis of Financial Condition and Results of Operations included as
Item 2
of Part I of this report at pages 28-53, (b) the section entitled “Risk
Management – Interest Rate Risk Management” of the Management’s Discussion and
Analysis of Results of Operations and Financial Condition section of FHN’s 2006
Annual Report to shareholders, and (c) the “Interest Rate Risk Management”
subsection of Note 25 to the Consolidated Financial Statements included in
FHN’s
2006 Annual Report to shareholders.
Item
4. Controls and Procedures
(a)
|
Evaluation
of Disclosure Controls and Procedures. FHN’s management, with the
participation of FHN’s chief executive officer and chief financial
officer, has evaluated the effectiveness of the design and operation
of
FHN’s 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 FHN’s disclosure controls and procedures are
effective to ensure that material information relating to FHN and
FHN’s
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 FHN’s internal control over financial reporting during
FHN’s last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, FHN’s internal control over financial
reporting.
|
Item
4(T). Controls and Procedures
Not
applicable
Part
II.
OTHER
INFORMATION
Items
1, 3,
and 5
As
of the
end of the second quarter 2007, the answers to Items 1, 3, and 5 were either
inapplicable or negative, and therefore, these items are omitted.
Item
1A Risk Factors
In
2007 the
Corporation has announced several initiatives to restructure, reposition,
expand, and otherwise alter its business operations in several
respects. Many of those changes have not been implemented and the
planning process is not yet complete. However, at the present time
the Corporation is able to identify certain changes to its previous disclosures
concerning risk factors.
The
discussion concerning “Growth Risks” in Item 1A of the Corporation’s annual
report on Form 10-K for the year 2006 is amended and restated as
follows:
Growth
Risks
Every
organization faces risks
associated with growth. Our growth in recent years has resulted primarily
from a
combination of: our expansion strategy in banking; acquisition of
customers from competitors that have merged with each other; and targeted
non-bank business acquisitions. In 2007 we modified our banking
growth strategy and determined to expand our capital markets business by
opening
Asian offices.
Our
banking growth strategy at present
is to leverage our national mortgage business by selling various banking
products to mortgage customers, and to invest capital and other resources
primarily in our current Tennessee-based market footprints. At the present
time we no longer are pursuing a strategy of offering full-service banking
in
local brick-and-mortar branches to customers outside of our Tennessee market
areas. Banking growth has been and continues to be primarily organic
rather than through substantial acquisitions. We believe that the
successful execution of our banking growth strategy depends upon a number
of key
elements, including:
|
●
|
our
ability to cross-sell our home mortgage customers into bank products
and
services;
|
|
●
|
our
ability to attract and retain banking customers in our Tennessee
market
areas;
|
|
●
|
our
ability to develop and retain profitable customer relationships
while
expanding our existing information processing, technology, and
other
operational infrastructures effectively and efficiently;
and
|
|
●
|
our
ability to manage the liquidity and capital requirements associated
with
organic growth.
|
We
have in
place a number of strategies designed to achieve each of those elements.
Our
challenge is to execute those strategies and adjust them as conditions
change.
To
the extent we engage in bank or
non-bank business acquisitions, we face various risks associated with that
practice, including:
●
|
our
ability to identify, analyze, and correctly assess the contingent
risks in
the acquisition and to price the transaction
appropriately;
|
●
|
our
ability to integrate the acquired company into our operations quickly
and
cost-effectively;
|
●
|
our
ability to integrate the name recognition and goodwill of the acquired
company with our own; and,
|
●
|
our
ability to retain customers and key employees of the acquired
company.
|
To
grow effectively, sometimes a
company must consider disposing of or otherwise exiting businesses or units
that
no longer fit into management’s plans for the future. Key risks associated with
dispositions and closures include:
●
|
our
ability to price a sale transaction appropriately and otherwise
negotiate
appropriate terms;
|
●
|
our
ability to identify and implement key customer and other transition
actions to avoid or minimize negative effects on retained businesses;
and
|
●
|
our
ability to assess and manage any loss of synergies that the disposed
or
exited business had with our retained
businesses.
|
The
discussion concerning “Geographic Risks” in Item 1A of the Corporation’s annual
report on Form 10-K for the year 2006 is amended and restated as
follows.
Geographic
Risks
Our
mortgage and capital markets
businesses are national in scope, and capital markets is developing
internationally. Our banking growth strategy has expanded our banking
business beyond our Tennessee market areas, with various banking products
being
sold through mortgage offices across the U.S. Nevertheless, most of our
traditional banking business remains grounded in, and depends upon, the major
Tennessee markets. As a result, to a greater degree than many of our competitors
that operate nationally or in much broader regions, our banking business
currently is exposed to adverse economic, regulatory, natural disaster, and
other risks that might primarily impact Tennessee and the mid-South region
of
the U.S.
The
following information supplements the discussion in Item 1A of the Corporation’s
annual report on Form 10-K for the year 2006:
Non-US
Operations Risks
In
2007 we determined to expand our
capital markets business by opening two Asian offices, our first offices
outside
of the United States. Opening and operating non-US offices creates a
number of new risks. Specific risks associated with any non-US presence
include: the risk that taxes, licenses, fees, prohibitions, and other
barriers and constraints may be created or increased by the U.S. or other
countries that would impact our ability to operate overseas profitably or
at
all; the risk that our assets and operations in a particular country could
be
nationalized in whole or part without adequate compensation; the risk that
currency exchange rates could move unfavorably so as to diminish or destroy
the
US dollar value of assets, or to enlarge the US dollar value of liabilities,
denominated in those currencies; and the risk that political or cultural
preferences in a particular host country might become antagonistic to US
companies. Our ability to manage those and other risks will depend upon a
number
of factors, including: our ability to recognize and anticipate differences
in
cultural and other expectations applicable to customers, employees, regulators,
and vendors and other business partners; our ability to recognize and act
upon
opportunities and constraints peculiar to the countries and cultures in which
our offices operate; our ability to recognize and manage any exchange rate
risks
to which we are exposed; and our ability to anticipate the stability of or
changes in the political, legal, and monetary systems of the countries in
which
our offices operate.
Item
2 Unregistered Sales of Equity Securities and Use of
Proceeds
|
(a)
|
On
March 1, 2005, FHN purchased all of the outstanding stock of Greenwich
Home Mortgage Corporation. A portion of the total purchase
price was paid to ten shareholders of Greenwich in the form of
a total of
90,867 shares of FHN’s common stock, par value of $0.625 per share,
inclusive of shares issued into escrow accounts established under
the
acquisition agreement. The agreement calls for possible
additional shares to be issued over certain periods based on certain
actions or results (collectively, “adjustment shares”). There
was no underwriter associated with the privately negotiated
transaction. The issuance of FHN shares in connection with the
transaction was and is exempt from registration pursuant, among
other
things, to Section 4(2) of the Securities Act of 1933, as
amended. In May 2007, a total of 1,358 escrow shares were
distributed to Greenwich shareholders pursuant to the agreement,
representing the final distribution from the escrow
accounts. Adjustment shares were not issued during the quarter,
but may be issued in the future under the
agreement.
|
|
(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 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations at page
41.
|
Item
4 Submission of Matters to a Vote of Securities Holders
|
(a)
|
The
Company’s annual meeting of shareholders was held on April 17,
2007.
|
|
(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 management’s three Class II and one Class I
nominees listed in the proxy statement: Robert C. Blattberg;
Michael D. Rose; Luke Yancy III; and (in Class I) Gerald L.
Baker. All of management’s nominees were
elected. Seven Class I and Class III directors continued in
office: R. Brad Martin; Vicki R. Palmer; William B. Sansom;
Simon F. Cooper; James A. Haslam, III; Colin V. Reed; and Mary
F.
Sammons.
|
|
(c)
|
In
addition to the election of directors, the shareholders approved
the 2002
Management Incentive Plan, as amended, and ratified the appointment
of
KPMG LLP as independent auditor for the year 2007. The specific
shareholder vote related to the election, approval, and ratification
items
is summarized below:
|
Vote
Item
|
Nominee
|
For
|
Withheld
|
Abstain
|
Broker
Nonvote
|
1.
Election
|
Robert
C. Blattberg
|
104,540,422
|
3,019,169
|
0
|
0
|
of
Directors
|
Michael
D. Rose
|
103,626,014
|
3,933,577
|
0
|
0
|
|
Luke
Yancy III
|
104,703,180
|
2,856,411
|
0
|
0
|
|
Gerald
L. Baker
|
104,052,739
|
3,506,852
|
0
|
0
|
|
|
|
|
|
|
Vote
Item
|
Plan
|
For
|
Against
|
Abstain
|
Broker
Nonvote
|
2.
Approval
|
2002
Management
|
101,089,306
|
4,593,603
|
1,876,682
|
0
|
of
Executive
|
Incentive
Plan,
|
|
|
|
|
Comp.
Plan
|
as
amended
|
|
|
|
|
|
|
|
|
|
|
Vote
Item
|
Auditor
|
For
|
Against
|
Abstain
|
Broker
Nonvote
|
3.
Ratification of Auditor
|
KPMG
LLP
|
105,054,621
|
1,580,356
|
924,614
|
0
|
Item
6 Exhibits
(a) Exhibits.
|
3.2
|
Bylaws
of the Corporation, as amended and restated as of July 17, 2007,
incorporated herein by reference to Exhibit 3.2 to the Corporation’s
Current Report on Form 8-K dated July 17,
2007.
|
|
4
|
Instruments
defining the rights of security holders, including
indentures.*
|
|
10.4(f)**
|
Form
of Performance Stock Units Grant Notice
[2007].
|
|
10.5(p)**
|
Form
of Management Stock Option Grant Notice
[2007].
|
|
10.6(c)**
|
Capital
Markets Incentive Compensation Plan, incorporated herein by reference
to
Exhibit 10.6(c) to the Corporation’s Quarterly Report on Form 10-Q for the
period ended September 30, 2006. Certain information in this
exhibit has been omitted pursuant to a request for confidential
treatment. The omitted information has been submitted
separately to the Securities and Exchange
Commission.
|
|
10.7(m)**
|
Conformed
copy of offer letter concerning employment of D. Bryan Jordan (principal
financial officer), incorporated herein by reference to Exhibit
10.7(m) to
the Corporation’s Current Report on Form 8-K dated April 13,
2007.
|
|
13
|
The
“Risk Management-Interest Rate Risk Management” subsection of the
Management’s Discussion and Analysis section and the “Interest Rate Risk
Management” subsection of Note 25 to the Corporation’s consolidated
financial statements, contained, respectively, at pages 23-25 and
page 108
in the Corporation’s 2006 Annual Report to shareholders furnished to
shareholders in connection with the Annual Meeting of Shareholders
on
April 17, 2007, 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. They
are
subject to contractual materiality standards. Exceptions to such representations
and warranties may be partially or fully waived by such parties in their
discretion. No such representation or warranty may be relied upon by any
other
person for any purpose.
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
7, 2007
|
By:
/s/ D. Bryan Jordan
D.
Bryan Jordan
Executive
Vice President and Chief
Financial
Officer (Duly Authorized
Officer
and Principal Financial Officer)
|
EXHIBIT
INDEX
|
3.2
|
Bylaws
of the Corporation, as amended and restated as of July 17, 2007,
incorporated herein by reference to Exhibit 3.2 to the Corporation’s
Current Report on Form 8-K dated July 17,
2007.
|
|
4
|
Instruments
defining the rights of security holders, including
indentures.*
|
|
10.4(f)**
|
Form
of Performance Stock Units Grant Notice
[2007].
|
|
10.5(p)**
|
Form
of Management Stock Option Grant Notice
[2007].
|
|
10.6(c)**
|
Capital
Markets Incentive Compensation Plan, incorporated herein by reference
to
Exhibit 10.6(c) to the Corporation’s Quarterly Report on Form 10-Q for the
period ended September 30, 2006. Certain information in this
exhibit has been omitted pursuant to a request for confidential
treatment. The omitted information has been submitted
separately to the Securities and Exchange
Commission.
|
|
10.7(m)**
|
Conformed
copy of offer letter concerning employment of D. Bryan Jordan (principal
financial officer), incorporated herein by reference to Exhibit
10.7(m) to
the Corporation’s Current Report on Form 8-K dated April 13,
2007.
|
|
13
|
The
“Risk Management-Interest Rate Risk Management” subsection of the
Management’s Discussion and Analysis section and the “Interest Rate Risk
Management” subsection of Note 25 to the Corporation’s consolidated
financial statements, contained, respectively, at pages 23-25 and
page 108
in the Corporation’s 2006 Annual Report to shareholders furnished to
shareholders in connection with the Annual Meeting of Shareholders
on
April 17, 2007, 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. They
are
subject to contractual materiality standards. Exceptions to such representations
and warranties may be partially or fully waived by such parties in their
discretion. No such representation or warranty may be relied upon by any
other
person for any purpose.