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 March 31,
2008
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, a non-accelerated filer, or a smaller reporting company. See definitions
of “accelerated filer,” “large accelerated filer,” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer x |
Accelerated
filer ____ |
Non-accelerated filer
___ |
Smaller reporting
company ___ |
|
|
|
(Do not check if a
smaller reporting company) |
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
|
126,786,394
|
Class |
Outstanding
on March 31, 2008
|
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.
CONSOLIDATED
CONDENSED STATEMENTS OF CONDITION
|
First
Horizon National Corporation
|
|
|
|
|
|
March
31
|
|
|
December
31
|
|
(Dollars
in thousands)(Unaudited)
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
$
|
851,875
|
|
$ |
861,534
|
|
$ |
1,170,220
|
|
Federal
funds sold and securities
|
|
|
|
|
|
|
|
|
|
|
|
purchased
under agreements to resell
|
|
|
|
898,615
|
|
|
1,757,365
|
|
|
1,089,495
|
|
Total
cash and cash equivalents
|
|
|
|
1,750,490
|
|
|
2,618,899
|
|
|
2,259,715
|
|
Interest-bearing
deposits with other financial institutions
|
|
|
46,382
|
|
|
15,739
|
|
|
39,422
|
|
Trading
securities
|
|
|
|
1,553,053
|
|
|
2,443,342
|
|
|
1,768,763
|
|
Loans
held for sale
|
|
|
|
3,616,018
|
|
|
2,921,629
|
|
|
3,461,712
|
|
Loans
held for sale-divestiture
|
|
|
|
207,672
|
|
|
-
|
|
|
289,878
|
|
Securities
available for sale
|
|
|
|
3,034,558
|
|
|
3,310,691
|
|
|
3,032,551
|
|
Securities
held to maturity (fair value of $242 on March 31, 2008; $272
on
|
|
|
|
|
|
|
|
March
31, 2007; and $242 on December 31, 2007)
|
|
|
240
|
|
|
269
|
|
|
240
|
|
Loans,
net of unearned income
|
|
|
|
21,932,020
|
|
|
22,268,190
|
|
|
22,103,516
|
|
Less:
Allowance for loan losses
|
|
|
|
483,203
|
|
|
220,806
|
|
|
342,341
|
|
Total
net loans
|
|
|
|
21,448,817
|
|
|
22,047,384
|
|
|
21,761,175
|
|
Mortgage
servicing rights, net
|
|
|
|
895,923
|
|
|
1,540,041
|
|
|
1,159,820
|
|
Goodwill
|
|
|
|
192,408
|
|
|
275,582
|
|
|
192,408
|
|
Other
intangible assets, net
|
|
|
|
52,017
|
|
|
61,672
|
|
|
56,907
|
|
Capital
markets receivables
|
|
|
|
1,680,057
|
|
|
1,144,135
|
|
|
524,419
|
|
Premises
and equipment, net
|
|
|
|
382,488
|
|
|
445,301
|
|
|
399,305
|
|
Real
estate acquired by foreclosure
|
|
|
|
106,018
|
|
|
68,613
|
|
|
103,982
|
|
Discontinued
assets
|
|
|
|
-
|
|
|
358
|
|
|
-
|
|
Other
assets
|
|
|
|
2,293,045
|
|
|
1,935,111
|
|
|
1,949,308
|
|
Other
assets-divestiture
|
|
|
|
8,759
|
|
|
-
|
|
|
15,856
|
|
Total
assets
|
|
|
$ |
37,267,945
|
|
$ |
38,828,766
|
|
$ |
37,015,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
$ |
4,217,215
|
|
$ |
3,607,674
|
|
$ |
3,872,684
|
|
Time
deposits
|
|
|
|
2,648,339
|
|
|
2,876,257
|
|
|
2,826,301
|
|
Other
interest-bearing deposits
|
|
|
|
1,986,556
|
|
|
1,941,422
|
|
|
1,946,933
|
|
Interest-bearing
deposits-divestiture
|
|
|
|
99,370
|
|
|
-
|
|
|
189,051
|
|
Certificates
of deposit $100,000 and more
|
|
|
|
2,222,016
|
|
|
8,559,807
|
|
|
3,129,532
|
|
Certificates
of deposit $100,000 and more-divestiture
|
|
|
1,153
|
|
|
-
|
|
|
12,617
|
|
Interest-bearing
|
|
|
|
11,174,649
|
|
|
16,985,160
|
|
|
11,977,118
|
|
Noninterest-bearing
|
|
|
|
4,995,696
|
|
|
5,506,791
|
|
|
5,026,417
|
|
Noninterest-bearing-divestiture
|
|
|
|
18,197
|
|
|
-
|
|
|
28,750
|
|
Total
deposits
|
|
|
|
16,188,542
|
|
|
22,491,951
|
|
|
17,032,285
|
|
Federal
funds purchased and securities
|
|
|
|
|
|
|
|
|
|
|
|
sold
under agreements to repurchase
|
|
|
|
3,678,217
|
|
|
3,173,476
|
|
|
4,829,597
|
|
Federal
funds purchased and securities
|
|
|
|
|
|
|
|
|
|
|
|
sold
under agreements to repurchase - divestiture
|
|
|
11,572
|
|
|
-
|
|
|
20,999
|
|
Trading
liabilities
|
|
|
|
531,259
|
|
|
678,796
|
|
|
556,144
|
|
Commercial
paper and other short-term borrowings
|
|
|
4,753,582
|
|
|
819,768
|
|
|
3,422,995
|
|
Term
borrowings
|
|
|
|
6,060,795
|
|
|
5,968,789
|
|
|
6,027,967
|
|
Other
collateralized borrowings
|
|
|
|
809,273
|
|
|
559,226
|
|
|
800,450
|
|
Total
long-term debt
|
|
|
|
6,870,068
|
|
|
6,528,015
|
|
|
6,828,417
|
|
Capital
markets payables
|
|
|
|
1,688,870
|
|
|
1,088,340
|
|
|
586,358
|
|
Discontinued
liabilities
|
|
|
|
-
|
|
|
32,608
|
|
|
-
|
|
Other
liabilities
|
|
|
|
1,136,461
|
|
|
1,205,859
|
|
|
1,305,868
|
|
Other
liabilities-divestiture
|
|
|
|
1,870
|
|
|
-
|
|
|
1,925
|
|
Total
liabilities
|
|
|
|
34,860,441
|
|
|
36,018,813
|
|
|
34,584,588
|
|
Preferred
stock of subsidiary
|
|
|
|
295,277
|
|
|
295,277
|
|
|
295,277
|
|
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 - 126,786,394 on March 31, 2008;
|
|
|
|
|
|
|
|
|
|
125,748,602
on March 31, 2007; and 126,366,177 on December 31, 2007)
|
|
79,242
|
|
|
78,593
|
|
|
78,979
|
|
Capital
surplus
|
|
|
|
362,823
|
|
|
341,491
|
|
|
361,826
|
|
Undivided
profits
|
|
|
|
1,704,559
|
|
|
2,155,007
|
|
|
1,742,892
|
|
Accumulated
other comprehensive (loss)/ income, net
|
|
|
(34,397
|
)
|
|
(60,415
|
)
|
|
(48,101
|
)
|
Total
shareholders' equity
|
|
|
|
2,112,227
|
|
|
2,514,676
|
|
|
2,135,596
|
|
Total
liabilities and shareholders' equity
|
|
|
$ |
37,267,945
|
|
$ |
38,828,766
|
|
$ |
37,015,461
|
|
See
accompanying notes to consolidated condensed financial
statements.
|
|
|
|
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
|
|
|
|
|
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
|
|
First
Horizon National Corporation
|
|
|
|
Three
Months Ended
|
|
|
|
March
31
|
|
(Dollars
in thousands except per share data)(Unaudited)
|
|
2008
|
|
|
2007
|
|
Interest
income:
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
331,676 |
|
|
$ |
410,427 |
|
Interest
on investment securities
|
|
|
40,735 |
|
|
|
54,270 |
|
Interest
on loans held for sale
|
|
|
58,438 |
|
|
|
58,845 |
|
Interest
on trading securities
|
|
|
35,896 |
|
|
|
40,563 |
|
Interest
on other earning assets
|
|
|
9,698 |
|
|
|
19,080 |
|
Total
interest income
|
|
|
476,443 |
|
|
|
583,185 |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
Interest
on deposits:
|
|
|
|
|
|
|
|
|
Savings
|
|
|
25,888 |
|
|
|
26,031 |
|
Time
deposits
|
|
|
31,502 |
|
|
|
33,037 |
|
Other
interest-bearing deposits
|
|
|
5,906 |
|
|
|
6,889 |
|
Certificates
of deposit $100,000 and more
|
|
|
31,068 |
|
|
|
106,276 |
|
Interest
on trading liabilities
|
|
|
9,615 |
|
|
|
16,361 |
|
Interest
on short-term borrowings
|
|
|
70,049 |
|
|
|
67,164 |
|
Interest
on long-term debt
|
|
|
74,323 |
|
|
|
90,008 |
|
Total
interest expense
|
|
|
248,351 |
|
|
|
345,766 |
|
Net
interest income
|
|
|
228,092 |
|
|
|
237,419 |
|
Provision
for loan losses
|
|
|
240,000 |
|
|
|
28,486 |
|
Net
interest (expense)/ income after provision for loan
losses
|
|
|
(11,908 |
) |
|
|
208,933 |
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
Capital
markets
|
|
|
131,457 |
|
|
|
87,113 |
|
Deposit
transactions and cash management
|
|
|
42,553 |
|
|
|
39,358 |
|
Mortgage
banking
|
|
|
158,712 |
|
|
|
73,097 |
|
Trust
services and investment management
|
|
|
9,109 |
|
|
|
9,688 |
|
Insurance
commissions
|
|
|
8,144 |
|
|
|
9,789 |
|
Revenue
from loan sales and securitizations
|
|
|
(4,097 |
) |
|
|
9,663 |
|
Equity
securities gains/(losses), net
|
|
|
65,015 |
|
|
|
3,962 |
|
Debt
securities gains/(losses), net
|
|
|
931 |
|
|
|
6,311 |
|
Losses
on divestitures
|
|
|
(995 |
) |
|
|
- |
|
All
other income and commissions
|
|
|
38,247 |
|
|
|
44,207 |
|
Total
noninterest income
|
|
|
449,076 |
|
|
|
283,188 |
|
Adjusted
gross income after provision for loan losses
|
|
|
437,168 |
|
|
|
492,121 |
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
Employee
compensation, incentives and benefits
|
|
|
287,470 |
|
|
|
246,343 |
|
Occupancy
|
|
|
28,591 |
|
|
|
28,784 |
|
Equipment
rentals, depreciation and maintenance
|
|
|
15,011 |
|
|
|
17,613 |
|
Operations
services
|
|
|
18,964 |
|
|
|
17,821 |
|
Communications
and courier
|
|
|
11,004 |
|
|
|
11,540 |
|
Amortization
of intangible assets
|
|
|
2,440 |
|
|
|
2,825 |
|
All
other expense
|
|
|
74,797 |
|
|
|
78,086 |
|
Total
noninterest expense
|
|
|
438,277 |
|
|
|
403,012 |
|
(Loss)/income
before income taxes
|
|
|
(1,109 |
) |
|
|
89,109 |
|
(Benefit)/provision
for income taxes
|
|
|
(8,146 |
) |
|
|
18,802 |
|
Income
from continuing operations
|
|
|
7,037 |
|
|
|
70,307 |
|
Income
from discontinued operations, net of tax
|
|
|
883 |
|
|
|
240 |
|
Net income
|
|
$ |
7,920 |
|
|
$ |
70,547 |
|
Earnings per common
share (Note 7)
|
|
$ |
.06 |
|
|
$ |
.56 |
|
Diluted earnings per common
share (Note 7)
|
|
$ |
.06 |
|
|
$ |
.55 |
|
Weighted average common shares
(Note 7)
|
|
|
126,116 |
|
|
|
125,342 |
|
Diluted average common
shares (Note 7)
|
|
|
126,660 |
|
|
|
128,704 |
|
See
accompanying notes to consolidated condensed financial
statements.
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
|
CONSOLIDATED
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
First
Horizon National Corporation
|
|
(Dollars
in thousands)(Unaudited)
|
|
2008
|
|
|
2007
|
|
Balance,
January 1
|
|
$ |
2,135,596 |
|
|
$ |
2,462,390 |
|
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 |
) |
Adjustment
to reflect adoption of measurement date provisions for SFAS No.
157
|
|
|
(12,502 |
) |
|
|
- |
|
Adjustment
to reflect change in accounting for split dollar life insurance
arrangements
|
|
|
|
|
|
|
|
|
(EITF
Issue No. 06-4)
|
|
|
(8,530 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
7,920 |
|
|
|
70,547 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized
fair value adjustments, net of tax:
|
|
|
|
|
|
|
|
|
Cash
flow hedges
|
|
|
(6 |
) |
|
|
(124 |
) |
Securities
available for sale
|
|
|
13,179 |
|
|
|
2,567 |
|
Recognized
pension and other employee benefit plans net periodic benefit
costs
|
|
|
531 |
|
|
|
1,281 |
|
Comprehensive
income
|
|
|
21,624 |
|
|
|
74,271 |
|
Cash
dividends declared
|
|
|
(25,220 |
) |
|
|
(56,337 |
) |
Common
stock repurchased
|
|
|
(68 |
) |
|
|
(457 |
) |
Common
stock issued for:
|
|
|
|
|
|
|
|
|
Stock
options and restricted stock
|
|
|
1,120 |
|
|
|
24,987 |
|
Excess
tax benefit from stock-based compensation arrangements
|
|
|
(1,531 |
) |
|
|
3,685 |
|
Stock-based
compensation expense
|
|
|
1,738 |
|
|
|
1,283 |
|
Other
|
|
|
- |
|
|
|
31 |
|
Balance,
March 31
|
|
$ |
2,112,227 |
|
|
$ |
2,514,676 |
|
See
accompanying notes to consolidated condensed financial
statements.
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
|
|
First
Horizon National Corporation
|
|
|
|
|
Three
Months Ended March 31
|
|
(Dollars
in thousands)(Unaudited)
|
|
2008
|
|
|
2007
|
|
Operating
|
Net
income
|
|
$ |
7,920 |
|
|
$ |
70,547 |
|
Activities |
Adjustments
to reconcile net income to net cash provided/(used) by operating
activities: |
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
240,000 |
|
|
|
28,486 |
|
|
(Benefit)/
provision for deferred income tax
|
|
|
(8,146 |
) |
|
|
18,802 |
|
|
Depreciation
and amortization of premises and equipment
|
|
|
11,815 |
|
|
|
13,712 |
|
|
Amortization
of intangible assets
|
|
|
2,440 |
|
|
|
2,825 |
|
|
Net
other amortization and accretion
|
|
|
12,809 |
|
|
|
18,094 |
|
|
Decrease
in derivatives, net
|
|
|
(372,772 |
) |
|
|
(60,205 |
) |
|
Market
value adjustment on mortgage servicing rights
|
|
|
259,041 |
|
|
|
17,888 |
|
|
Provision
for foreclosure reserve
|
|
|
2,759 |
|
|
|
3,440 |
|
|
Loss
on divestiture
|
|
|
995 |
|
|
|
- |
|
|
Stock-based
compensation expense
|
|
|
1,738 |
|
|
|
1,283 |
|
|
Excess
tax benefit from stock-based compensation arrangements
|
|
|
1,531 |
|
|
|
(3,685 |
) |
|
Equity
securities gains, net
|
|
|
(65,015 |
) |
|
|
(3,962 |
) |
|
Debt
securities gains, net
|
|
|
(931 |
) |
|
|
(6,311 |
) |
|
Net
losses on disposal of fixed assets
|
|
|
3,827 |
|
|
|
378 |
|
|
Net
(increase)/decrease in:
|
|
|
|
|
|
|
|
|
|
Trading
securities
|
|
|
200,493 |
|
|
|
(212,597 |
) |
|
Loans
held for sale
|
|
|
(122,806 |
) |
|
|
(48,052 |
) |
|
Capital
markets receivables
|
|
|
(1,155,638 |
) |
|
|
(411,853 |
) |
|
Interest
receivable
|
|
|
13,929 |
|
|
|
3,068 |
|
|
Other
assets
|
|
|
167,879 |
|
|
|
(186,912 |
) |
|
Net
increase/(decrease) in:
|
|
|
|
|
|
|
|
|
|
Capital
markets payables
|
|
|
1,102,512 |
|
|
|
288,851 |
|
|
Interest
payable
|
|
|
(11,387 |
) |
|
|
26,035 |
|
|
Other
liabilities
|
|
|
(279,676 |
) |
|
|
(106,979 |
) |
|
Trading
liabilities
|
|
|
(24,885 |
) |
|
|
(111,161 |
) |
|
Total
adjustments
|
|
|
(19,488 |
) |
|
|
(728,855 |
) |
|
Net
cash used by operating activities
|
|
|
(11,568 |
) |
|
|
(658,308 |
) |
Investing
|
Available
for sale securities:
|
|
|
|
|
|
|
|
|
Activities
|
Sales
|
|
|
80,590 |
|
|
|
612,606 |
|
|
Maturities
|
|
|
237,946 |
|
|
|
195,713 |
|
|
Purchases
|
|
|
(230,535 |
) |
|
|
(176,961 |
) |
|
Premises
and equipment:
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(8,019 |
) |
|
|
(7,896 |
) |
|
Net
decrease in securitization retained interests classified as trading
securities
|
|
|
14,889 |
|
|
|
- |
|
|
Net
decrease/(increase) in loans
|
|
|
88,162 |
|
|
|
(205,134 |
) |
|
Net
(increase)/decrease in interest-bearing deposits with other financial
institutions
|
|
|
(6,960 |
) |
|
|
2,302 |
|
|
Proceeds
from divestitures, net of cash and cash equivalents
|
|
|
(15,656 |
) |
|
|
- |
|
|
Net
cash provided by investing activities
|
|
|
160,417 |
|
|
|
420,630 |
|
Financing
|
Common
stock:
|
|
|
|
|
|
|
|
|
Activities
|
Exercise
of stock options
|
|
|
511 |
|
|
|
24,769 |
|
|
Cash
dividends paid
|
|
|
(25,220 |
) |
|
|
(55,821 |
) |
|
Repurchase
of shares
|
|
|
(68 |
) |
|
|
(457 |
) |
|
Excess
tax benefit from stock-based compensation arrangements
|
|
|
(1,531 |
) |
|
|
3,685 |
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
Issuance
|
|
|
4,502 |
|
|
|
769,909 |
|
|
Payments
|
|
|
(47,264 |
) |
|
|
(83,258 |
) |
|
Issuance
of preferred stock of subsidiary
|
|
|
- |
|
|
|
8 |
|
|
Repurchase
of preferred stock of subsidiary
|
|
|
- |
|
|
|
(1 |
) |
|
Net
increase/(decrease) in:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(758,816 |
) |
|
|
2,278,719 |
|
|
Short-term
borrowings
|
|
|
169,812 |
|
|
|
(2,227,068 |
) |
|
Net
cash (used)/provided by financing activities
|
|
|
(658,074 |
) |
|
|
710,485 |
|
|
Net
(decrease)/ increase in cash and cash equivalents
|
|
|
(509,225 |
) |
|
|
472,807 |
|
|
Cash
and cash equivalents at beginning of period
|
|
|
2,259,715 |
|
|
|
2,146,092 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
1,750,490 |
|
|
$ |
2,618,899 |
|
|
Total
interest paid
|
|
|
258,300 |
|
|
|
319,282 |
|
|
Total
income taxes paid
|
|
|
146,027 |
|
|
|
12,152 |
|
See
accompanying notes to consolidated condensed financial
statements.
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
|
Note
1 - Financial Information
The unaudited
interim consolidated condensed financial statements of First Horizon National
Corporation (FHN), including its subsidiaries, have been prepared in conformity
with accounting principles generally accepted in the United States of America
and follow general practices within the industries in which it
operates. This preparation requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. These estimates and assumptions are based on
information available as of the date of the financial statements and could
differ from actual results. In the opinion of management, all necessary
adjustments have been made for a fair presentation of financial position and
results of operations for the periods presented. The operating
results for the interim 2008 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 2007 Annual Report
to shareholders.
Investment
Securities. Venture capital investments are classified as
securities available for sale and are carried at fair value. Upon
adoption of Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (SFAS No. 157) on January 1, 2008, unrealized gains and losses on
such securities are recognized prospectively in noninterest
income. Prior to FHN’s adoption of SFAS No. 157, venture capital
investments were initially valued at cost based on their unmarketable nature.
Subsequently, these investments were adjusted to reflect changes in valuation as
a result of public offerings or other-than-temporary declines in
value.
Loans Held for
Sale and Securitization and Residual Interests. Loans
originated or purchased for resale, together with mortgage loans previously sold
which may be unilaterally called by FHN, are included in loans held for sale
in the consolidated
statements of condition. Effective January 1, 2008, upon adoption of
Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159), FHN elected the fair
value option on a prospective basis for almost all types of mortgage loans
originated for sale purposes including mortgage loan originations for which an
active secondary market and readily available market prices currently exist to
reliably support fair value pricing models used for such loans. Such
loans are carried at fair value, with changes in the fair value of these loans
recognized in the mortgage banking noninterest income section of the
Consolidated Condensed Statements of Income. For mortgage loans
originated for sale for which the fair value option is elected, loan origination
fees are recorded by FHN when earned and related direct loan origination costs
are recognized when incurred. Interests retained from the
securitization of such loans are included as a component of trading securities
on the Consolidated Condensed Statements of Condition, with related cash
receipts and payments classified prospectively in investing activities on the
Consolidated Condensed Statements of Cash Flows based on the purpose for which
such financial assets were retained. See Note 13 – Fair Values of
Assets and Liabilities for additional information.
FHN continues
to account for all mortgage loans held for sale which were originated prior to
2008 and for mortgage loans held for sale for which fair value accounting has
not been elected at the lower of cost or market value. For such
loans, net origination fees and costs are deferred and included in the basis of
the loans in calculating gains and losses upon sale. Gains and losses
realized from the sale of these assets are included in noninterest
income.
Accounting
Changes. Effective January 1, 2008, FHN adopted SFAS No. 159 which allows
an irrevocable election to measure certain financial assets and liabilities at
fair value on an instrument-by-instrument basis, with unrealized gains and
losses recognized currently in earnings. Under SFAS No. 159, the fair
value option may only be elected at the time of initial recognition of a
financial asset or liability or upon the occurrence of certain specified
events. Additionally, SFAS No. 159 provides that application of the
fair value option must be based on the fair value of an entire financial asset
or liability and not selected risks inherent in those assets or
liabilities. SFAS No. 159 requires that assets and liabilities which
are measured at fair value pursuant to the fair value option be reported in the
financial statements in a manner that separates those fair values from the
carrying amounts of similar assets and liabilities which are measured using
another measurement attribute. SFAS No. 159 also provides expanded
disclosure requirements regarding the effects of electing the fair value option
on the financial statements. Upon adoption of SFAS No. 159, FHN
elected the fair value option on a prospective basis for almost all types of
mortgage loans originated for sale purposes. Additionally, in
accordance with SFAS No. 159’s amendment of Statement of Financial Accounting
Standards No. 115, “Accounting for Certain Investments in Debt and Equity
Securities”, FHN began prospectively classifying cash flows associated with its
retained interests in securitizations recognized as trading securities within
investing activities in the Consolidated Condensed Statements of Cash
Flows.
Effective
January 1, 2008, FHN adopted SEC Staff Accounting Bulletin No. 109, “Written
Loan Commitments Recorded at Fair Value Through Earnings” (SAB No. 109)
prospectively for derivative loan commitments issued or modified after that
date. SAB No. 109 rescinds SAB No. 105’s prohibition on inclusion of
expected net future cash flows related to loan servicing activities in the fair
value measurement of a written loan commitment. SAB No. 109 also
applies to any loan commitments for which fair value accounting is elected under
SFAS No. 159. FHN did not elect fair value accounting for any other
loan commitments under SFAS No. 159.
Note
1 - Financial Information (continued)
The
prospective application of SAB No. 109 and the prospective election to recognize
substantially all new mortgage loan originations at fair value under SFAS No.
159 resulted in a positive impact of $58.1 million on first quarter 2008 pre-tax
earnings. This represents the estimated value of mortgage servicing
rights included in (1) interest rate lock commitments entered into in first
quarter 2008 that remained on the balance sheet at quarter end and (2) mortgage
warehouse loans originated in first quarter 2008 accounted for at elected fair
value which remained on the balance sheet at quarter end.
Effective
January 1, 2008, FHN adopted SFAS No. 157 for existing fair value measurement
requirements related to financial assets and liabilities as well as to
non-financial assets and liabilities which are remeasured at least
annually. In February 2008, the FASB staff issued FASB Staff Position
No. FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP FAS 157-2), which
delayed the effective date of SFAS No. 157 until fiscal years beginning after
November 15, 2008, for non-financial assets and liabilities which are recognized
at fair value on a non-recurring basis. SFAS No. 157 establishes a
hierarchy to be used in performing measurements of fair
value. Additionally, SFAS No. 157 emphasizes that fair value should
be determined from the perspective of a market participant while also indicating
that valuation methodologies should first reference available market data before
using internally developed assumptions. SFAS No. 157 also provides
expanded disclosure requirements regarding the effects of fair value
measurements on the financial statements. Upon the adoption of the provisions of
SFAS No. 157 for financial assets and liabilities as well as non-financial
assets and liabilities remeasured at least annually on January 1, 2008, a
negative after-tax cumulative-effect adjustment of $12.5 million was made to the
opening balance of undivided profits for interest rate lock commitments which
FHN previously measured under the guidance of EITF 02-3, “Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities” (EITF
02-3). The effect of the change in accounting for these
interest rate lock commitments produced a $15.7 million negative effect on first
quarter 2008 pre-tax earnings as the $14.2 million positive effect of delivering
the loans associated with the commitments existing at the beginning of the
quarter was more than offset by a negative impact of $29.9 million for
commitments remaining on the balance sheet at quarter end that was previously
deferred under EITF 02-3 until delivery of the associated loans. FHN
continues to assess the financial impacts of applying the provisions of SFAS No.
157 to non-financial assets and liabilities which are recognized at fair value
on a non-recurring basis.
Effective
January 1, 2008, FHN adopted FASB Staff Position No. FAS 157-1, “Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13” (FSP FAS 157-1), which amends
SFAS No. 157 to exclude Statement of Financial Accounting Standards No. 13,
“Accounting for Leases” (SFAS No. 13), and other accounting pronouncements that
address fair value measurements for purposes of lease classification or
measurement under SFAS No. 13 from its scope. The adoption of FSP FAS
157-1 had no effect on FHN’s statement of condition or results of
operations.
Effective
January 1, 2008, FHN adopted EITF Issue No. 06-4, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements” (EITF 06-4). EITF 06-4 requires that a
liability be recognized for contracts written to employees which provide future
postretirement benefits that are covered by endorsement split-dollar life
insurance arrangements because such obligations are not considered to be
effectively settled upon entering into the related insurance
arrangements. FHN recognized a decrease to undivided profits of $8.5
million, net of tax, upon adoption of EITF 06-4.
Effective
January 1, 2008, FHN adopted FASB Staff Position No. FIN 39-1, “Amendment of
FASB Interpretation No. 39” (FSP FIN 39-1). FSP FIN 39-1 permits the
offsetting of fair value amounts recognized for the right to reclaim cash
collateral or the obligation to return cash collateral against fair value
amounts recognized for derivative instruments executed with the same
counterparty under the same master netting arrangement. Upon adoption
of FSP FIN 39-1, entities were permitted to change their previous accounting
policy election to offset or not offset fair value amounts recognized for
derivative instruments under master netting arrangements. FSP FIN
39-1 requires additional disclosures for derivatives and collateral associated
with master netting arrangements, including the separate disclosure of amounts
recognized for the right to reclaim cash collateral or the obligation to return
cash collateral under master netting arrangements as of the end of each
reporting period for entities that made an accounting policy decision to not
offset fair value amounts. FHN retained its previous accounting
policy election to not offset fair value amounts recognized for derivative
instruments under master netting arrangements upon adoption of FSP FIN
39-1.
FHN also
adopted FASB Statement 133 Implementation Issue No. E23, “Issues Involving the
Application of the Shortcut Method under Paragraph 68” (DIG E23) as of January
1, 2008, for hedging relationships designated on or after such
date. DIG E23 amends SFAS No. 133 to explicitly permit use of the
shortcut method for hedging relationships in which an interest rate swap has a
nonzero fair value at inception of the hedging
Note
1 - Financial Information (continued)
relationship
which is attributable solely to the existence of a bid-ask spread in the
entity’s principal market under SFAS No. 157. Additionally, DIG E23
allows an entity to apply the shortcut method to a qualifying fair value hedge
when the hedged item has a trade date that differs from its settlement date
because of generally established conventions in the marketplace in which the
transaction to acquire or issue the hedged item is
executed. Preexisting shortcut hedging relationships were analyzed as
of DIG E23’s adoption date to determine whether they complied with the revised
shortcut criteria at their inception or should be dedesignated
prospectively. The adoption of DIG E23 had no effect on FHN’s
financial position or results of operations as all of FHN’s preexisting hedging
relationships met the requirements of DIG E23 at their inception.
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 FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (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. 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 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.
Accounting
Changes Issued but Not Currently Effective. In March 2008, the FASB issued
Statement of Financial Accounting Standards No. 161, "Disclosure about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
No. 133" (SFAS No. 161). SFAS No. 161 requires enhanced disclosures related to
derivatives accounted for in accordance with SFAS No. 133 and
reconsiders existing disclosure requirements for such derivatives and any
related hedging items. The disclosures provided in SFAS No. 161 will be required
for both interim and annual reporting periods. SFAS No. 161 is effective
prospectively for periods beginning after November 15, 2008. FHN is currently
assessing the effects of adopting SFAS No. 161.
In
February 2008, FASB Staff Position No. FAS 140-3, “Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions” (FSP FAS 140-3), was
issued. FSP FAS 140-3 permits a transferor and transferee to
separately account for an initial transfer of a financial asset and a related
repurchase financing that are entered into contemporaneously with, or in
contemplation of, one another if certain specified conditions are met at the
inception of the transaction. FSP FAS 140-3 requires that the two
transactions have a valid and distinct business or economic purpose for being
entered into separately and that the repurchase financing not result in the
initial transferor regaining control over the previously transferred financial
asset. FSP FAS 140-3 is effective prospectively for initial transfers
executed in reporting periods beginning on or after November 15,
2008. FHN is currently assessing the financial impact of
adopting FSP FAS 140-3.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141-R, “Business Combinations” (SFAS No. 141-R) and Statement of
Financial Accounting Standards No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB No. 51” (SFAS No.
160). SFAS No. 141-R requires that an acquirer recognize the assets
acquired and liabilities assumed in a business
Note
1 - Financial Information (continued)
combination,
as well as any noncontrolling interest in the acquiree, at their fair values as
of the acquisition date, with limited exceptions. Additionally, SFAS
No. 141-R provides that an acquirer cannot specify an effective date for a
business combination that is separate from
the acquisition date. SFAS No. 141-R also provides that
acquisition-related costs which an acquirer incurs should be expensed in the
period in which the costs are incurred and the services are
received. SFAS No. 160 requires that acquired assets and liabilities
be measured at full fair value without consideration to ownership
percentage. Under SFAS No. 160, any non-controlling interests in an
acquiree should be presented as a separate component of equity rather than on a
mezzanine level. Additionally, SFAS No. 160 provides that net income
or loss should be reported in the consolidated income statement at its
consolidated amount, with disclosure on the face of the consolidated income
statement of the amount of consolidated net income which is attributable to the
parent and noncontrolling interests, respectively. SFAS No. 141-R and
SFAS No. 160 are effective prospectively for periods beginning on or after
December 15, 2008, with the exception of SFAS No. 160’s presentation
and disclosure requirements which should be retrospectively applied to all
periods presented. FHN is currently assessing the financial impact of
adopting SFAS No. 141-R and SFAS No. 160.
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” (FSP
FIN 46(R)-7) was issued. FSP 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. In February 2008, the FASB issued FASB Staff Position No. SOP
07-1-1, “The Effective Date of AICPA Statement of Position 07-1” which
indefinitely defers the effective date of SOP 07-1 and FSP FIN
46(R)-7.
Note
2 - Acquisitions/Divestitures
Due to
efforts initiated by FHN in 2007 to improve profitability, in July 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. In September 2007, it was announced that
agreements for the sale of all 34 of the branches had been
reached. Aggregate gains of $15.7 million were recognized in fourth
quarter 2007 from the disposition of 15 of the
branches. Additionally, losses of $1.0 million were recognized in
first quarter 2008 from the disposition of the First Horizon Bank
branches. Sale of the remaining nine branches in Atlanta closed in
May 2008 and resulted in a minimal effect on earnings. This resulted
in the transfer of certain fixed assets, including branch locations, and
assumption of all the deposit relationships of the First Horizon Bank branches
being purchased. The assets and liabilities related to the remaining
nine branches to be sold, which are included in the Regional Banking segment,
are reflected as held-for-sale on the Consolidated Condensed Statements of
Condition. The aggregate carrying amounts of loans, deposits, other
assets and other liabilities held for divestiture were $208 million, $119
million, $9 million, and $13 million, respectively, as of March 31,
2008. The losses realized in the first quarter of 2008 from the
disposition of First Horizon Bank branches are included in the noninterest
income section of the Consolidated Condensed Statements of Income as losses on
divestitures.
In addition
to the divestitures mentioned above, FHN acquires or divests assets from time to
time in transactions that are considered business combinations or divestitures
but are not material to FHN individually or in the aggregate.
The
composition of the loan portfolio is detailed below:
|
|
March
31
|
|
|
December
31
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and industrial
|
|
$ |
7,238,630 |
|
|
$ |
7,371,873 |
|
|
$ |
7,140,087 |
|
Real
estate commercial
|
|
|
1,345,526 |
|
|
|
1,144,086 |
|
|
|
1,294,922 |
|
Real
estate construction
|
|
|
2,602,968 |
|
|
|
2,931,183 |
|
|
|
2,753,475 |
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate residential
|
|
|
7,858,109 |
|
|
|
7,856,197 |
|
|
|
7,791,885 |
|
Real
estate construction
|
|
|
1,814,863 |
|
|
|
2,073,293 |
|
|
|
2,008,289 |
|
Other
retail
|
|
|
138,253 |
|
|
|
151,959 |
|
|
|
144,019 |
|
Credit
card receivables
|
|
|
191,119 |
|
|
|
187,658 |
|
|
|
204,812 |
|
Real
estate loans pledged against other collateralized
|
|
|
|
|
|
|
|
|
|
|
|
|
borrowings
|
|
|
742,552 |
|
|
|
551,941 |
|
|
|
766,027 |
|
Loans,
net of unearned income
|
|
|
21,932,020 |
|
|
|
22,268,190 |
|
|
|
22,103,516 |
|
Allowance
for loan losses
|
|
|
483,203 |
|
|
|
220,806 |
|
|
|
342,341 |
|
Total
net loans
|
|
$ |
21,448,817 |
|
|
$ |
22,047,384 |
|
|
$ |
21,761,175 |
|
Nonperforming
loans consist of loans which management has identified as impaired, other
nonaccrual loans and loans which have been
restructured. On March 31, 2008 and 2007, there were no outstanding
commitments to advance additional funds to customers whose loans
had been restructured. The following table presents nonperforming
loans on:
|
|
March
31
|
|
|
December
31
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Impaired
loans
|
|
$ |
263,671 |
|
|
$ |
26,096 |
|
|
$ |
126,612 |
|
Other
nonaccrual loans*
|
|
|
273,581 |
|
|
|
57,871 |
|
|
|
180,475 |
|
Total
nonperforming loans
|
|
$ |
537,252 |
|
|
$ |
83,967 |
|
|
$ |
307,087 |
|
* On March
31, 2008 and 2007, and on December 31, 2007, other nonaccrual loans included
$9.7 million, $10.3 million, and $23.8 million,
respectively, of loans held
for sale.
Certain previously report amounts have been reclassified to agree
with current presentation.
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
|
|
|
|
March
31
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
Total
interest on impaired loans
|
|
$ |
62 |
|
|
$ |
340 |
|
Average
balance of impaired loans
|
|
|
222,034 |
|
|
|
42,321 |
|
Certain previously report amounts have been reclassified to agree
with current presentation.
Activity in
the allowance for loan losses related to non-impaired loans, impaired loans, and
for the total allowance for the three months ended March 31,
2008 and 2007, is summarized as follows:
(Dollars
in thousands)
|
|
Non-impaired
|
|
|
Impaired
|
|
|
Total
|
|
Balance
on December 31, 2006
|
|
$ |
206,292 |
|
|
$ |
9,993 |
|
|
$ |
216,285 |
|
Provision
for loan losses
|
|
|
21,145 |
|
|
|
7,341 |
|
|
|
28,486 |
|
Divestitures/acquisitions/transfers
|
|
|
2,655 |
|
|
|
- |
|
|
|
2,655 |
|
Charge-offs
|
|
|
(18,759 |
) |
|
|
(10,906 |
) |
|
|
(29,665 |
) |
Recoveries
|
|
|
3,045 |
|
|
|
- |
|
|
|
3,045 |
|
Net
charge-offs
|
|
|
(15,714 |
) |
|
|
(10,906 |
) |
|
|
(26,620 |
) |
Balance
on March 31, 2007
|
|
$ |
214,378 |
|
|
$ |
6,428 |
|
|
$ |
220,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
on December 31, 2007
|
|
$ |
325,297 |
|
|
$ |
17,044 |
|
|
$ |
342,341 |
|
Provision
for loan losses
|
|
|
200,202 |
|
|
|
39,798 |
|
|
|
240,000 |
|
Charge-offs
|
|
|
(50,678 |
) |
|
|
(51,078 |
) |
|
|
(101,756 |
) |
Recoveries
|
|
|
2,609 |
|
|
|
9 |
|
|
|
2,618 |
|
Net
charge-offs
|
|
|
(48,069 |
) |
|
|
(51,069 |
) |
|
|
(99,138 |
) |
Balance
on March 31, 2008
|
|
$ |
477,430 |
|
|
$ |
5,773 |
|
|
$ |
483,203 |
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
Note
4 - Mortgage Servicing Rights
FHN
recognizes all its classes of mortgage servicing rights (MSR) at fair
value. 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. The balance of MSR included on the Consolidated
Condensed Statements of Condition represents the rights to service approximately
$99.2 billion of mortgage loans on March 31, 2008, 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. Due to ongoing disruptions in the mortgage market, since
third quarter 2007, more emphasis has been placed on third party broker price
discovery and, when available, observable market trades in valuation modeling
for MSR.
Following is
a summary of changes in capitalized MSR as of March 31, 2008 and
2007:
|
|
First
|
|
|
Second
|
|
|
|
|
(Dollars
in thousands)
|
|
Liens
|
|
|
Liens
|
|
|
HELOC
|
|
Fair
value on January 1, 2007
|
|
$ |
1,495,215 |
|
|
$ |
24,091 |
|
|
$ |
14,636 |
|
Addition
of mortgage servicing rights
|
|
|
84,707 |
|
|
|
3,998 |
|
|
|
1,041 |
|
Reductions
due to loan payments
|
|
|
(61,698 |
) |
|
|
(2,378 |
) |
|
|
(1,683 |
) |
Changes
in fair value due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in current market interest rates
|
|
|
(17,833 |
) |
|
|
(1 |
) |
|
|
- |
|
Other
changes in fair value
|
|
|
(54 |
) |
|
|
- |
|
|
|
- |
|
Fair
value on March 31, 2007
|
|
$ |
1,500,337 |
|
|
$ |
25,710 |
|
|
$ |
13,994 |
|
Fair
value on January 1, 2008
|
|
$ |
1,122,415 |
|
|
$ |
25,832 |
|
|
$ |
11,573 |
|
Addition
of mortgage servicing rights
|
|
|
78,871 |
|
|
|
- |
|
|
|
887 |
|
Reductions
due to loan payments
|
|
|
(37,448 |
) |
|
|
(2,617 |
) |
|
|
(707 |
) |
Reductions
due to sale
|
|
|
(43,842 |
) |
|
|
- |
|
|
|
- |
|
Changes
in fair value due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in valuation model inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
or
assumptions
|
|
|
(254,076 |
) |
|
|
(3,089 |
) |
|
|
(1,935 |
) |
Other
changes in fair value
|
|
|
(65 |
) |
|
|
- |
|
|
|
124 |
|
Fair
value on March 31, 2008
|
|
$ |
865,855 |
|
|
$ |
20,126 |
|
|
$ |
9,942 |
|
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, 2006
|
|
$ |
275,582 |
|
|
$ |
64,530 |
|
Amortization
expense
|
|
|
- |
|
|
|
(2,825 |
) |
Divestitures
|
|
|
- |
|
|
|
(33 |
) |
March
31, 2007
|
|
$ |
275,582 |
|
|
$ |
61,672 |
|
December
31, 2007
|
|
$ |
192,408 |
|
|
$ |
56,907 |
|
Amortization
expense
|
|
|
- |
|
|
|
(2,440 |
) |
Impairment
|
|
|
- |
|
|
|
(2,434 |
) |
Divestitures
|
|
|
- |
|
|
|
(16 |
) |
March
31, 2008
|
|
$ |
192,408 |
|
|
$ |
52,017 |
|
*
Represents customer lists, acquired contracts, premium on purchased deposits,
and covenants not to compete.
The gross
carrying amount of other intangible assets subject to amortization is $133.2
million on March 31, 2008, net of $81.2 million of accumulated
amortization. Estimated aggregate amortization expense for the
remainder of 2008 is expected to be $6.4 million and is expected to be, $6.9
million, $6.0 million, $5.6 million and $4.1 million for the twelve-month
periods of 2009, 2010, 2011 and 2012, respectively.
The following
is a summary of goodwill detailed by reportable segments for the three months
ended March 31:
|
|
Regional
|
|
|
Mortgage
|
|
|
Capital
|
|
|
|
|
(Dollars
in thousands)
|
|
Banking
|
|
|
Banking
|
|
|
Markets
|
|
|
Total
|
|
December
31, 2006
|
|
$ |
94,276 |
|
|
$ |
66,240 |
|
|
$ |
115,066 |
|
|
$ |
275,582 |
|
March
31, 2007
|
|
$ |
94,276 |
|
|
$ |
66,240 |
|
|
$ |
115,066 |
|
|
$ |
275,582 |
|
December
31, 2007
|
|
$ |
77,342 |
|
|
$ |
- |
|
|
$ |
115,066 |
|
|
$ |
192,408 |
|
March
31, 2008
|
|
$ |
77,342 |
|
|
$ |
- |
|
|
$ |
115,066 |
|
|
$ |
192,408 |
|
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 March 31, 2008,
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 11.69 percent, 7.61 percent and 6.24 percent,
respectively, on March 31, 2008, and were 11.84 percent, 8.18 percent and 6.85
percent, respectively, on March 31, 2007.
|
|
First
Horizon National
|
|
|
First
Tennessee Bank
|
|
|
Corporation
|
|
|
National
Association
|
(Dollars
in thousands)
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
On
March 31, 2008:
|
|
|
|
|
|
|
|
|
|
Actual:
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
$3,864,902
|
|
13.01%
|
|
|
$3,667,303
|
|
12.42%
|
Tier 1
Capital
|
|
2,443,900
|
|
8.23%
|
|
|
2,348,599
|
|
7.95%
|
Leverage
|
|
2,443,900
|
|
6.62%
|
|
|
2,348,599
|
|
6.41%
|
|
|
|
|
|
|
|
|
|
|
For
Capital Adequacy Purposes:
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
2,376,745
|
>
|
8.00
|
|
|
2,362,202
|
>
|
8.00
|
Tier 1
Capital
|
|
1,188,373
|
>
|
4.00
|
|
|
1,181,101
|
>
|
4.00
|
Leverage
|
|
1,476,794
|
>
|
4.00
|
|
|
1,466,461
|
>
|
4.00
|
|
|
|
|
|
|
|
|
|
|
To Be
Well Capitalized Under Prompt
|
|
|
|
|
Corrective
Action Provisions:
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
|
2,952,753
|
>
|
10.00
|
Tier 1
Capital
|
|
|
|
|
|
|
1,771,652
|
>
|
6.00
|
Leverage
|
|
|
|
|
|
|
1,833,076
|
>
|
5.00
|
On
March 31, 2007:
|
|
|
|
|
|
|
|
|
|
Actual:
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
$4,063,128
|
|
12.95%
|
|
|
$3,828,139
|
|
12.34%
|
Tier 1
Capital
|
|
2,739,064
|
|
8.73
|
|
|
2,604,141
|
|
8.40
|
Leverage
|
|
2,739,064
|
|
7.15
|
|
|
2,604,141
|
|
6.85
|
|
|
|
|
|
|
|
|
|
|
For
Capital Adequacy Purposes:
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
2,509,438
|
>
|
8.00
|
|
|
2,481,042
|
>
|
8.00
|
Tier 1
Capital
|
|
1,254,719
|
>
|
4.00
|
|
|
1,240,521
|
>
|
4.00
|
Leverage
|
|
1,532,304
|
>
|
4.00
|
|
|
1,520,784
|
>
|
4.00
|
|
|
|
|
|
|
|
|
|
|
To Be
Well Capitalized Under Prompt
|
|
|
|
|
Corrective
Action Provisions:
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
|
3,101,303
|
>
|
10.00
|
Tier 1
Capital
|
|
|
|
|
|
|
1,860,782
|
>
|
6.00
|
Leverage
|
|
|
|
|
|
|
1,900,980
|
>
|
5.00
|
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
|
|
|
|
March
31
|
(In
thousands, except per share data)
|
|
|
2008
|
2007
|
Net
income from continuing operations
|
|
$ |
7,037
|
$ 70,307
|
Income
from discontinued operations, net of tax
|
|
|
883
|
240
|
Net
income
|
|
$ |
7,920
|
$ 70,547
|
|
|
|
|
|
Weighted
average common shares
|
|
|
126,116
|
125,342
|
Effect
of dilutive securities
|
|
|
544
|
3,362
|
Diluted
average common shares
|
|
|
126,660
|
128,704
|
|
|
|
|
|
Earnings
per common share
|
|
$ |
.06
|
$ .56
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$ |
.06
|
$ .55
|
Equity awards
of 16,083 and 3,815 with a weighted average exercise price of $35.71 and $43.81
per share for the three months ended March 31, 2008 and
2007, 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.
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. As a result of
mediation, FHN entered into a final settlement agreement related to the McGuire
lawsuit. 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. In connection with this settlement, FHN
agreed to pay, under agreed circumstances using an agreed methodology, an
aggregate of up to approximately $36 million. The period during which claims
under the settlement can be made ended in 2007. Claims have been evaluated and
objections made pursuant to the agreed upon challenge process. The challenge
process has not yet concluded. Unchallenged claims have been paid, and as claims
are paid, the reserve is reduced. At March 31, 2008, claims paid have totaled
approximately $27 million and the total reserve remaining for this matter, based
on the claims received and FHN’s evaluation of them to date, is approximately $4
million.
The loss
reserve for this matter reflects an estimate of the amount that ultimately would
be paid under the settlement. The amount reserved reflects the amount and value
of claims actually received by the claims deadline plus fees and expenses that
the settlement requires FHN to pay, all of which together are less than the
maximum amount possible under the settlement. The ultimate amount paid under the
settlement agreement 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.
In February
2008, a complaint was filed by Fifth Third Financial Corporation against FHN and
its subsidiary FTBNA in the Chancery Court for Davidson County, Tennessee. The
complaint alleged breach of a contract for the sale of nine bank branches in the
Atlanta, Georgia metropolitan area. On March 26, 2008 FHN announced that the
parties reached agreement on terms for the completion of the sale of nine
branches by FTBNA to Fifth Third. This transaction was completed in May
2008. Under the terms of the purchase agreement, Fifth Third is
required to promptly file for dismissal of the litigation. Fifth
Third acquired the nine branches and assumed the related deposits. First Horizon
retained all loans held at the branches.
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.
FHN is a
member of the Visa USA network. On October 3, 2007, the Visa organization of
affiliated entities completed a series of global restructuring transactions to
combine its affiliated operating companies, including Visa USA, under a single
holding company, Visa Inc. (“Visa”). Upon completion of the
reorganization, the members of the Visa USA network remained contingently liable
for certain Visa litigation matters. Based on its proportionate
membership share of Visa USA, FHN recognized a contingent liability of $55.7
million within noninterest expense in fourth quarter 2007 related to this
contingent obligation.
In March
2008, Visa completed its initial public offering (IPO). Visa funded an escrow
account from IPO proceeds that will be used to make payments related to the Visa
litigation matters. Upon funding of the escrow, FHN reversed $30.0
million of the contingent liability previously recognized with a corresponding
credit to noninterest expense for its proportionate share of the escrow
account. A portion of FHN’s Class B shares of Visa were redeemed as
part of the IPO resulting in $65.9 million of equity securities gains in first
quarter 2008.
After the
partial share redemption in conjunction with the IPO, FHN holds approximately
2.4 million Class B shares of Visa, which are included in the Consolidated
Condensed Statement of Condition at their historical cost of
$0. Transfer of these shares is restricted for a minimum of three
years with the shares ultimately being converted into Class A shares of
Visa. The final conversion ratio will fluctuate based on the ultimate
settlement of the Visa litigation matters for which FHN has a proportionate
contingent obligation.
First Horizon
Home Loans, a division of First Tennessee Bank National Association, services a
mortgage loan portfolio of $106.8 billion on March 31, 2008, 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
Note
8 -
Contingencies and Other Disclosures (continued)
portfolio of
$20.6 million and $15.5 million on March 31 2008 and 2007,
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 March 31, 2008
and 2007, First Horizon Home Loans had single-family residential loans with
outstanding balances of $99.0 million and $115.5 million, respectively, that
were serviced on a full recourse basis. On March 31, 2008 and 2007, 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 $3.6 billion and $3.1 billion,
respectively. Additionally, on March 31, 2008 and 2007, $5.7 billion
and $4.9 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 March 31, 2008, the outstanding principal balance of
these loans was $247.8 million and $66.7 million, respectively. On
March 31, 2007, the outstanding principal balance of securitized and sold HELOC
and second-lien mortgages was $335.3 million and $89.9 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 $17.1 million and $42.9
million on March 31, 2008 and 2007, 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 division 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. The Pension Plan was closed to new participants on September
1, 2007.
FHN also
maintains nonqualified pension plans for certain employees. These
plans are intended to provide supplemental retirement income to the participants
including situations where benefits under the pension plan have been limited
under the tax code. All benefits provided under these plans 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. FHN’s postretirement benefits include prescription drug
benefits. The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) introduces a prescription drug benefit under
Medicare Part D as well as a federal subsidy to sponsors of retiree health care
benefit plans that provide a benefit that is at least actuarially equivalent to
Medicare Part D FHN anticipates the plan to be actuarially equivalent
through 2012.
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 March 31 are
as follows:
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
(Dollars
in thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Components
of net periodic benefit cost/(benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
4,208 |
|
|
$ |
4,327 |
|
|
$ |
72 |
|
|
$ |
75 |
|
Interest
cost
|
|
|
7,340 |
|
|
|
6,154 |
|
|
|
390 |
|
|
|
278 |
|
Expected
return on plan assets
|
|
|
(11,791 |
) |
|
|
(10,637 |
) |
|
|
(439 |
) |
|
|
(441 |
) |
Amortization
of prior service cost/(benefit)
|
|
|
216 |
|
|
|
220 |
|
|
|
(44 |
) |
|
|
(44 |
) |
Recognized
losses/(gains)
|
|
|
493 |
|
|
|
1,810 |
|
|
|
(58 |
) |
|
|
(178 |
) |
Amortization
of transition obligation
|
|
|
- |
|
|
|
- |
|
|
|
247 |
|
|
|
247 |
|
Net
periodic cost/(benefit)
|
|
$ |
466 |
|
|
$ |
1,874 |
|
|
$ |
168 |
|
|
$ |
(63 |
) |
FHN expects to
make no additional contributions to the pension plan or to the other employee
benefit plan in 2008.
Note
10 – Business Segment Information
FHN has five
business segments, Regional Banking, Capital Markets, National Specialty
Lending, Mortgage Banking and Corporate. The Regional Banking segment offers
financial products and services, including traditional lending and deposit
taking, to retail and commercial customers in Tennessee and surrounding markets.
Additionally, Regional Banking provides investments, insurance, financial
planning, trust services and asset management, credit card, cash management, and
check clearing services. The Capital Markets segment consists of
traditional capital markets securities activities, structured finance, equity
research, investment banking, loan sales, portfolio advisory, and correspondent
banking. The National Specialty Lending segment consists of traditional consumer
and construction lending activities in other national markets. The
Mortgage Banking segment consists of core mortgage banking elements including
originations and servicing and the associated ancillary revenues related to
these businesses. The Corporate segment consists of restructuring,
repositioning and efficiency initiatives, unallocated corporate expenses,
expense on subordinated debt issuances and preferred stock, bank- owned life
insurance, unallocated interest income associated with excess equity, net impact
of raising incremental capital, revenue and expense associated with deferred
compensation plans, funds management, and venture capital. Periodically, FHN
adapts its segments to reflect changes in expense allocations among segments.
Previously reported amounts have been reclassified to agree with current
presentation.
In first
quarter 2008, FHN revised its business line segments to better align with its
strategic direction, representing a focus on its regional banking franchise and
capital markets business. To implement this change, the prior
Retail/Commercial Banking segment was split into its major components with the
national portions of consumer lending and construction lending assigned to a new
National Specialty Lending segment that more appropriately reflects the ongoing
wind down of these businesses. Additionally, correspondent banking
was shifted from Retail/Commercial Banking to the Capital Markets segment to
better represent the complementary nature of these businesses. To
reflect its geographic focus, the remaining portions of the Retail/Commercial
Banking segment now represent the new Regional Banking segment. All
prior period information has been revised to conform to the current segment
structure.
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 months ended March 31:
|
|
Three
Months Ended
|
|
|
|
March
31
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
Total
Consolidated
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
228,092 |
|
|
$ |
237,419 |
|
Provision
for loan losses
|
|
|
240,000 |
|
|
|
28,486 |
|
Noninterest
income
|
|
|
449,076 |
|
|
|
283,188 |
|
Noninterest
expense
|
|
|
438,277 |
|
|
|
403,012 |
|
Pre-tax
(loss)/ income
|
|
|
(1,109 |
) |
|
|
89,109 |
|
(Benefit)/ provision for income
taxes
|
|
|
(8,146 |
) |
|
|
18,802 |
|
Income
from continuing operations
|
|
|
7,037 |
|
|
|
70,307 |
|
Income
from discontinued operations, net of tax
|
|
|
883 |
|
|
|
240 |
|
Net
income
|
|
$ |
7,920 |
|
|
$ |
70,547 |
|
Average
assets
|
|
$ |
37,162,385 |
|
|
$ |
38,647,044 |
|
|
|
|
|
|
|
|
|
|
Regional
Banking
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
120,560 |
|
|
$ |
138,927 |
|
Provision
for loan losses
|
|
|
75,264 |
|
|
|
14,204 |
|
Noninterest
income
|
|
|
87,068 |
|
|
|
88,629 |
|
Noninterest
expense
|
|
|
150,520 |
|
|
|
156,319 |
|
Pre-tax (loss)/
income
|
|
|
(18,156 |
) |
|
|
57,033 |
|
(Benefit)/ provision for income
taxes
|
|
|
(13,542 |
) |
|
|
14,620 |
|
(Loss)/
income from continuing operations
|
|
|
(4,614 |
) |
|
|
42,413 |
|
Income
from discontinued operations, net of tax
|
|
|
883 |
|
|
|
240 |
|
Net
(loss)/ income
|
|
$ |
(3,731 |
) |
|
$ |
42,653 |
|
Average
assets
|
|
$ |
12,230,813 |
|
|
$ |
12,270,186 |
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
Note
10 – Business Segment Information (continued)
|
|
Three
Months Ended
|
|
|
|
March
31
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
Capital
Markets
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
19,649 |
|
|
$ |
10,729 |
|
Provision
for loan losses
|
|
|
15,031 |
|
|
|
1,162 |
|
Noninterest
income
|
|
|
133,930 |
|
|
|
91,308 |
|
Noninterest
expense
|
|
|
115,728 |
|
|
|
86,619 |
|
Pre-tax
income
|
|
|
22,820 |
|
|
|
14,256 |
|
Provision
for income taxes
|
|
|
8,437 |
|
|
|
5,287 |
|
Net
income
|
|
$ |
14,383 |
|
|
$ |
8,969 |
|
Average
assets
|
|
$ |
5,825,472 |
|
|
$ |
6,072,481 |
|
|
|
|
|
|
|
|
|
|
National
Specialty Lending
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
53,840 |
|
|
$ |
64,556 |
|
Provision
for loan losses
|
|
|
149,483 |
|
|
|
13,127 |
|
Noninterest
income
|
|
|
654 |
|
|
|
11,999 |
|
Noninterest
expense
|
|
|
25,149 |
|
|
|
35,179 |
|
Pre-tax
(loss)/ income
|
|
|
(120,138 |
) |
|
|
28,249 |
|
(Benefit)/
provision for income taxes
|
|
|
(46,589 |
) |
|
|
9,882 |
|
Net
(loss)/ income
|
|
$ |
(73,549 |
) |
|
$ |
18,367 |
|
Average
assets
|
|
$ |
9,298,726 |
|
|
$ |
9,677,039 |
|
|
|
|
|
|
|
|
|
|
Mortgage
Lending
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
31,012 |
|
|
$ |
20,596 |
|
Provision
for loan losses
|
|
|
222 |
|
|
|
(7 |
) |
Noninterest
income
|
|
|
168,014 |
|
|
|
76,709 |
|
Noninterest
expense
|
|
|
147,543 |
|
|
|
105,240 |
|
Pre-tax
income/ (loss)
|
|
|
51,261 |
|
|
|
(7,928 |
) |
Provision/
(benefit) for income taxes
|
|
|
18,513 |
|
|
|
(10,433 |
) |
Net
income
|
|
$ |
32,748 |
|
|
$ |
2,505 |
|
Average
assets
|
|
$ |
6,146,256 |
|
|
$ |
6,214,864 |
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
3,031 |
|
|
$ |
2,611 |
|
Noninterest
income
|
|
|
59,410 |
|
|
|
14,543 |
|
Noninterest
expense
|
|
|
(663 |
) |
|
|
19,655 |
|
Pre-tax
income/ (loss)
|
|
|
63,104 |
|
|
|
(2,501 |
) |
Provision/
(benefit) for income taxes
|
|
|
25,035 |
|
|
|
(554 |
) |
Net
income/ (loss)
|
|
$ |
38,069 |
|
|
$ |
(1,947 |
) |
Average
assets
|
|
$ |
3,661,118 |
|
|
$ |
4,412,476 |
|
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 price that would be received to sell a derivative asset
or paid to transfer a derivative liability in an orderly transaction between
market participants on the transaction date. Fair value is determined using
available market information and appropriate valuation methodologies. For a fair
value hedge, changes in the fair value of the derivative instrument and changes
in the fair value of the hedged asset or liability are recognized currently in
earnings. For a cash flow hedge, changes in the fair value of the
derivative instrument, to the extent that it is effective, are recorded in
accumulated other comprehensive income and subsequently reclassified to earnings
as the hedged transaction impacts net income. Any ineffective portion
of a cash flow hedge is recognized currently in earnings. For
freestanding derivative instruments, changes in fair value are recognized
currently in earnings. Cash flows from derivative contracts are
reported as operating activities on the Consolidated Condensed Statements of
Cash Flows.
Interest rate
forward contracts are over-the-counter contracts where two parties agree to
purchase and sell a specific quantity of a financial instrument at a specified
price, with delivery or settlement at a specified date. Futures
contracts are exchange-traded contracts where two parties agree to purchase and
sell a specific quantity of a financial instrument at a specific price, with
delivery or settlement at a specified date. Interest rate option
contracts give the purchaser the right, but not the obligation, to buy or sell a
specified quantity of a financial instrument, at a specified price, during a
specified period of time. Caps and floors are options that are linked
to a notional principal amount and an underlying indexed interest
rate. Interest rate swaps involve the exchange of interest payments
at specified intervals between two parties without the exchange of any
underlying principal. Swaptions are options on interest rate swaps
that give the purchaser the right, but not the obligation, to enter into an
interest rate swap agreement during a specified period of time.
On March 31,
2008, FHN had approximately $36.3 million of cash receivables and $238.8 million
of cash payables related to collateral posting under master netting arrangements
with derivative counterparties.
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 and futures
contracts 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,
Note
11 – Derivatives (continued)
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. Prior to adoption of SAB No.109 fair
value excluded the value of associated servicing rights. Additionally, on
January 1, 2008, FHN adopted SFAS No. 157 which affected the valuation of
interest rate lock commitments previously measured under the guidance of the
EITF 02-03 by requiring recognition of concessions upon entry into the
lock. Changes in the fair value of the derivatives that serve as
economic hedges of interest rate lock commitments
are also included in current earnings as a component of gain or loss on the sale
of loans in mortgage banking noninterest income.
First Horizon
Home Loans’ warehouse (mortgage loans held for sale) is subject to changes in
fair value, due to fluctuations in interest rates from the loan closing date
through the date of sale of the loan into the secondary market. Typically, the
fair value of the warehouse declines in value when interest rates increase and
rises in value when interest rates decrease. To mitigate this risk, 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.
FHN adopted
SFAS No. 159 on January 1, 2008. As discussed below, prior to adoption of
SFAS No. 159, all warehouse loans were carried at the lower of cost or market,
where carrying value was adjusted for successful hedging under SFAS No. 133 and
the comparison of carrying value to market was performed for aggregate loan
pools. To the extent that these interest rate derivatives were
designated to hedge specific similar assets in the warehouse and prospective
analyses indicate that high correlation was expected, the hedged loans were
considered for hedge accounting under SFAS No. 133. Anticipated
correlation was 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 were reset daily and the statistical correlation
was calculated using these daily data points. Retrospective hedge effectiveness
was measured using the regression correlation results. First Horizon Home Loans
generally maintained 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 resulted 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, were 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
$2.0 billion on March 31, 2007. The balance sheet impact of the
related derivatives were net assets of $.2 million on March 31, 2007. Net losses
of $.7 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 three
months ended March 31, 2007.
Upon adoption
of SFAS No. 159, FHN elected to prospectively account for substantially all of
its mortgage loan warehouse products at fair value upon origination and
correspondingly discontinued the application of SFAS No. 133 hedging
relationships for all new originations. First Horizon Home Loans
enters into forward sales and futures contracts to provide an economic hedge
against changes in fair value on a significant portion of the
warehouse.
In accordance
with SFAS No. 156, First Horizon revalues 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
Note
11 – Derivatives (continued)
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 Credit Risk
Management Committee.
In third
quarter 2007, Capital Markets hedged $47.5 million of held-to-maturity trust
preferred securities, which have an initial fixed rate term of five years before
conversion to a floating rate. Capital Markets has entered into pay fixed,
receive floating interest rate swaps to hedge the interest rate risk associated
with this initial five year term. The balance sheet impact of those swaps
was $3.6 million in other liabilities on March 31, 2008. Interest paid or
received for these swaps was recognized as an adjustment of the interest income
of the assets whose risk is being hedged.
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 had
entered into pay floating, receive fixed interest rate swaps to hedge the
interest rate risk of certain large institutional certificates of deposit,
totaling $61.7 million on March 31, 2007. These swaps matured in first quarter
2008 and had been accounted for as fair value hedges under the shortcut
method. The balance sheet impact of these swaps was $.8 million in
other liabilities on March 31, 2007. Interest paid or received for these swaps
was recognized as an adjustment of the interest expense of the liabilities whose
risk was 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 $1.2 billion
and $1.1 billion on March 31, 2008 and 2007, respectively. These swaps have been
accounted for as fair value hedges under the shortcut method. The balance sheet
impact of these swaps was $77.0 million in other assets on March 31, 2008, and
$2.2 million in other assets and $14.9 million in other liabilities on March 31,
2007. Interest paid or received for these swaps was recognized as an adjustment
of the interest expense of the liabilities whose risk was being
managed.
FHN
designates derivative transactions in hedging strategies to manage interest rate
risk on subordinated debt related to its trust preferred securities. These
qualify for hedge accounting under SFAS No. 133 using the long haul
method. FHN has entered into pay floating, receive fixed interest
rate swaps to hedge the interest rate risk of certain subordinated debt totaling
$.3 billion on March 31, 2008 and 2007. The balance sheet impact of these swaps
was $6.2 million and $17.8 million in other liabilities on March 31, 2008 and
2007, 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 had
utilized an interest rate swap as a cash flow hedge of the interest payment on
floating-rate bank notes with a fair value of $100.4 million on March 31, 2007,
and a maturity in first quarter 2009, which in first quarter 2008 was called
early. The balance sheet impact of this swap was $.4 million in other assets and
$.2 million, net of tax, in other comprehensive income on March 31, 2007. There
was no ineffectiveness related to this hedge.
Note
12 - Restructuring, Repositioning, and Efficiency Charges
Throughout
2007, FHN conducted a company-wide review of business practices with the goal of
improving its overall profitability and productivity. In addition,
during 2007 management announced its intention to sell 34 full-service First
Horizon Bank branches in its national banking markets, as well as plans to right
size First Horizon Home Loans’ mortgage banking operations and to downsize FHN’s
national lending operations, in order to redeploy capital to higher-return
businesses. As part of its strategy to reduce its national real
estate portfolio, FHN announced in January 2008 that it was discontinuing
national homebuilder and commercial real estate lending through its First
Horizon Construction Lending offices. Additionally, FHN is continuing
the repositioning of First Horizon Home Loans’ mortgage banking operations,
including sales of MSR in fourth quarter 2007 and first quarter
2008. Net costs recognized by FHN in the three months ended March 31,
2008 related to restructuring, repositioning, and efficiency activities were
$21.3 million. Of this amount, $15.1 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).
Significant
expenses in the first quarter of 2008 resulted from the following
actions:
·
|
Expense
of $15.1 million associated with organizational and compensation changes
due to right sizing operating segments, the divestiture of certain First
Horizon Bank branches, and consolidating functional
areas.
|
·
|
Losses
of approximately $1.0 million from the sales of certain First Horizon Bank
branches.
|
·
|
Transaction
costs of $2.7 million from the sale of mortgage servicing
rights.
|
·
|
Expense
of $2.5 million for the writedown of certain intangibles and other assets
resulting from the change in FHN’s national banking
strategy.
|
Losses from
the disposition of certain First Horizon Bank branches in first quarter 2008 are
included in losses on divestitures in the noninterest income section of the
Consolidated Condensed Statements of Income. Transaction costs
recognized in the first quarter of 2008 from selling mortgage servicing rights
are recorded as a reduction of mortgage banking income in the noninterest income
section of the Consolidated Condensed Statements of Income. All other
costs associated with the restructuring, repositioning, and efficiency
initiatives implemented by management are included in the noninterest expense
section of the Consolidated Condensed Statements of Income, including severance
and other employee-related costs recognized in relation to such initiatives
which are recorded in employee compensation, incentives, and benefits,
facilities consolidation costs and related asset impairment costs 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,
intangible asset impairment costs, and the accrual of amounts due in second
quarter 2008 in relation to the divestiture of the remaining First Horizon bank
branches to be sold, which are included in all other
expense. Additional amounts will be recognized in second quarter 2008
in relation to the conclusion of the First Horizon Bank branch divestitures and
the reduction in mortgage banking operations. However, at this time the
exact amounts of these additional charges are still being
determined.
Activity in
the restructuring and repositioning liability for the three months ended March
31, 2008 is presented in the following table, along with other restructuring and
repositioning expenses recognized. All costs associated with FHN’s
restructuring, repositioning, and efficiency initiatives in the first quarter of
2008 are recorded as unallocated corporate charges within the Corporate
segment.
Note
12 - Restructuring, Repositioning, and Efficiency Charges
(continued)
|
|
Three
Months Ended
|
|
(Dollars
in thousands)
|
|
March
31, 2008
|
|
|
|
|
|
|
|
|
|
|
Charged
to
|
|
|
|
|
|
|
Expense
|
|
|
Liability
|
|
Beginning
Balance
|
|
$ |
- |
|
|
$ |
19,675 |
|
Severance
and other employee related costs
|
|
|
7,390 |
|
|
|
7,390 |
|
Facility
consolidation costs
|
|
|
891 |
|
|
|
891 |
|
Other
exit costs, professional fees and other
|
|
|
6,832 |
|
|
|
6,832 |
|
Total
Accrued
|
|
|
15,113 |
|
|
|
34,788 |
|
Payments*
|
|
|
- |
|
|
|
11,475 |
|
Accrual
Reversals
|
|
|
- |
|
|
|
623 |
|
Restructuring
& Repositioning Reserve Balance
|
|
$ |
15,113 |
|
|
$ |
22,690 |
|
Other
Restructuring & Repositioning Expenses:
|
|
|
|
|
|
|
|
|
Mortgage
banking expense on servicing sale
|
|
|
2,667 |
|
|
|
|
|
Loss
on First Horizon Bank branch divestitures
|
|
|
995 |
|
|
|
|
|
Impairment
of premises and equipment
|
|
|
82 |
|
|
|
|
|
Impairment
of intangible assets
|
|
|
2,429 |
|
|
|
|
|
Total
Other Restructuring & Repositioning Expense
|
|
|
6,173 |
|
|
|
|
|
Total
Restructuring, Repositioning Charges
|
|
$ |
21,286 |
|
|
|
|
|
*
Includes payments related to:
|
Three
Months Ended
|
|
March
31, 2008
|
Severance
and other employee related costs
|
$ 6,655
|
Facility
consolidation costs
|
1,234
|
Other
exit costs, professional fees and other
|
3,586
|
|
$ 11,475
|
Cumulative
amounts incurred to date as of March 31, 2008, for costs associated with FHN’s
restructuring, repositioning, and efficiency initiatives are presented in the
following table:
|
|
Charged
to
|
|
(Dollars
in thousands)
|
|
Expense
|
|
Severance
and other employee related costs*
|
|
$ |
32,922 |
|
Facility
consolidation costs
|
|
|
14,022 |
|
Other
exit costs, professional fees and other
|
|
|
16,087 |
|
Other
Restructuring & Repositioning (Income) and Expense:
|
|
|
|
|
Loan
portfolio divestiture
|
|
|
7,672 |
|
Mortgage
banking expense on servicing sales
|
|
|
9,095 |
|
Net
gain on First Horizon Bank branch divestitures
|
|
|
(14,700 |
) |
Impairment
of premises and equipment
|
|
|
9,370 |
|
Impairment
of intangible assets
|
|
|
16,428 |
|
Impairment
of other assets
|
|
|
29,108 |
|
Total
Restructuring, Repositioning Charges Incurred to Date as of March 31,
2008
|
|
$ |
120,004 |
|
*Includes
$1.2 million of deferred severance-related payments that will be paid after
2008.
Note
13 – Fair Values of Assets and Liabilities
Effective
January 1, 2008, upon adoption of SFAS No. 159, FHN elected the fair value
option on a prospective basis for almost all types of mortgage loans originated
for sale purposes including mortgage loan originations for which an active
secondary market and readily available market prices currently exist to reliably
support fair value pricing models used for such loans. FHN believes such
election will reduce certain timing differences and better match changes in the
value of such loans with changes in the value of derivatives used as economic
hedges for these assets. No transition adjustment was required upon
adoption of SFAS No. 159 as FHN continues to account for mortgage loans held for
sale which were originated prior to 2008 at the lower of cost or market
value. Mortgage loans originated for sale are included in loans held
for sale on the Consolidated Condensed Statements of Condition. Other
interests retained in relation to residential loan sales and securitizations are
included in trading securities on the Consolidated Condensed Statements of
Condition. Additionally, effective January 1, 2008, FHN adopted SFAS No. 157 for
existing fair value measurement requirements related to financial assets and
liabilities as well as to non-financial assets and liabilities which are
re-measured at least annually. FSP FAS 157-2 delays the effective
date of SFAS No. 157 until fiscal years beginning after November 15, 2008, for
non-financial assets and liabilities which are recognized at fair value on a
non-recurring basis. Therefore, as of first quarter 2008, FHN has not
applied the provisions of SFAS No. 157 for non-recurring fair value measurements
prepared related to its non-financial long-lived assets under SFAS No. 144
(including real estate acquired by foreclosure) or its non-financial liabilities
for exit or disposal activities initially measured at fair value under SFAS No.
146, as well as to goodwill and indefinite-lived intangible assets which are
measured at fair value on a recurring basis for impairment assessment purposes
but are not recognized in the financial statements at fair value.
In accordance
with SFAS No. 157, FHN groups its assets and liabilities measured at fair value
in three levels, based on the markets in which such assets and liabilities are
traded and the reliability of the assumptions used to determine fair value. This
hierarchy requires FHN to maximize the use of observable market data, when
available, and to minimize the use of unobservable inputs when determining fair
value. Each fair value measurement is placed into the proper level
based on the lowest level of significant input. These levels
are:
§
|
Level 1
– Valuations based on observable inputs that reflect quoted prices for
assets and liabilities traded in active markets, such as the New York
Stock Exchange. Valuations are obtained from readily available pricing
sources for market transactions involving identical assets or
liabilities.
|
§
|
Level 2
– Valuations for assets and liabilities traded in less active dealer or
broker markets which are observable, either directly or indirectly. For
example, mortgage loans held for sale are valued based on what
securitization markets are currently offering for mortgage loans with
similar characteristics. Valuations are obtained from third party pricing
services for identical or comparable assets or
liabilities.
|
§
|
Level 3
– Valuations for assets and liabilities that include significant
unobservable inputs and are derived from other valuation methodologies,
including option pricing models, discounted cash flow models and similar
techniques, and not based on market exchange, dealer, or broker traded
transactions. Level 3 valuations incorporate certain assumptions and
projections in determining the fair value assigned to such assets or
liabilities.
|
The table
below presents the balances of assets and liabilities measured at fair value on
a recurring basis.
Note
13 – Fair Values of Assets and Liabilities (continued)
|
|
March
31, 2008
|
|
(Dollars
in thousands)
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Trading
securities
|
|
$ |
1,553,052 |
|
|
$ |
2,269 |
|
|
$ |
1,158,587 |
|
|
$ |
392,196 |
|
Loans
held for sale
|
|
|
2,302,261 |
|
|
|
- |
|
|
|
2,297,508 |
|
|
|
4,753 |
|
Securities
available for sale
|
|
|
2,910,971 |
|
|
|
39,218 |
|
|
|
2,718,377 |
|
|
|
153,376 |
|
Mortgage
servicing rights, net
|
|
|
895,923 |
|
|
|
- |
|
|
|
- |
|
|
|
895,923 |
|
Other
assets
|
|
|
811,373 |
|
|
|
121,861 |
|
|
|
207,840 |
|
|
|
481,672 |
|
Total
|
|
$ |
8,473,580 |
|
|
$ |
163,348 |
|
|
$ |
6,382,312 |
|
|
$ |
1,927,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
liabilities
|
|
$ |
531,259 |
|
|
$ |
58 |
|
|
$ |
531,201 |
|
|
$ |
- |
|
Other
liabilities
|
|
|
386,269 |
|
|
|
219,320 |
|
|
|
150,344 |
|
|
|
16,605 |
|
Total
|
|
$ |
917,528 |
|
|
$ |
219,378 |
|
|
$ |
681,545 |
|
|
$ |
16,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes
in Level 3 assets and liabilities measured at fair value on a recurring basis
are summarized as follows:
|
|
Three
Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Mortgage
|
|
|
Net
derivative
|
|
|
|
Trading
|
|
|
Loans
held
|
|
|
available
|
|
|
servicing
|
|
|
assets
and
|
|
(Dollars
in thousands)
|
|
securities
|
|
|
for
sale
|
|
|
for
sale
|
|
|
rights,
net
|
|
|
liabilities
|
|
Balance,
beginning of quarter
|
|
$ |
476,404 |
|
|
$ |
- |
|
|
$ |
159,301 |
|
|
$ |
1,159,820 |
|
|
$ |
81,517 |
|
Total
net gains/(losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the
quarter included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
(59,184 |
) |
|
|
- |
|
|
|
305 |
|
|
|
(262,165 |
) |
|
|
361,321 |
|
Other
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
(3,842 |
) |
|
|
- |
|
|
|
- |
|
Purchases,
sales, issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
settlements, net
|
|
|
(46,963 |
) |
|
|
- |
|
|
|
(2,388 |
) |
|
|
(1,732 |
) |
|
|
22,229 |
|
Net
transfers into/out of Level 3
|
|
|
21,939 |
|
|
|
4,753 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance,
end of quarter
|
|
$ |
392,196 |
|
|
$ |
4,753 |
|
|
$ |
153,376 |
|
|
$ |
895,923 |
|
|
$ |
465,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains/(losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
quarter relating to assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
liabilities held at March 31, 2008
|
|
$ |
(75,567 |
)
* |
|
$ |
(2,243 |
)
** |
|
$ |
305
|
*** |
|
$ |
(242,339 |
)
**** |
|
$ |
321,668
|
** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Includes
$.6 million included in Capital markets noninterest income, $74 million
included in Mortgage banking noninterest income, and
|
$.9
million included in Revenue from loan sales and
securitizations.
|
**Included
in Mortgage banking noninterest income.
|
***Represents recognized gains and losses attributable to venture
capital investments classified within securities available for sale
that
are included in Securities gains/(losses) in noninterest
income.
|
****Includes
$234.4 million included in Mortgage banking noninterest income and $7.9
million included in Revenue from loan sales
and securitizations.
|
Additionally,
FHN may be required, from time to time, to measure certain other financial
assets at fair value on a nonrecurring basis in accordance with GAAP. These
adjustments to fair value usually result from the application of lower of cost
or market accounting or write-downs of individual assets. For assets measured at
fair value on a nonrecurring basis in first quarter 2008 which were still held
in the balance sheet at quarter end, the following table provides the level of
valuation assumptions used to determine each adjustment and the carrying value
of the related individual assets or portfolios at quarter
end.
Note
13 – Fair Values of Assets and Liabilities (continued)
|
|
|
|
|
|
Three
Months Ended
|
|
Carrying
value at March 31, 2008
|
|
March
31, 2008
|
(Dollars
in thousands)
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
Total
losses
|
|
Loans
held for sale
|
$ 905,314
|
$ -
|
$ 500,019
|
$ 405,295
|
|
$ 53,166
|
|
Securities
available for sale
|
1,403
|
-
|
1,145
|
258
|
|
528
|
*
|
Loans,
net of unearned income**
|
263,671
|
-
|
-
|
263,671
|
|
-
|
|
Other
assets
|
121,067
|
-
|
-
|
121,067
|
|
2,151
|
|
|
|
|
|
|
|
$ 55,845
|
|
|
|
|
|
|
|
|
|
*Represents recognition of other than temporary impairment for cost method
investments classified within securities available for sale.
**Represents carrying value of loans for which adjustments are based on the
appraised value of the collateral. Writedowns on
these loans are recognized as part of provision.
In first
quarter 2008, FHN recognized a lower of cost or market reduction in value of
$36.2 million for its warehouse of trust preferred securities, which is
classified within level 3 for Loans held for sale. The determination
of estimated market value for the warehouse was based on a hypothetical
securitization transaction for the warehouse as a whole. FHN used
observable data related to prior securitization transactions as well as changes
in credit spreads in the CDO market since the most recent
transaction. FHN also incorporated significant internally developed
assumptions within its valuation of the warehouse, including estimated
prepayments and estimated defaults. In accordance with SFAS No. 157,
FHN excluded transaction costs related to the hypothetical securitization in
determining fair value.
FHN also
recognized a lower of cost or market reduction in value of $17.0 million
relating to mortgage warehouse loans during first quarter 2008.
Approximately $10.5 million is attributable to increased delinquencies or aging
of loans. The market values for these loans are estimated using
historical sales prices for these type loans, adjusted for incremental price
concessions that a third party investor is assumed to require due to tightening
credit markets and deteriorating housing prices. These assumptions are
based on published information about actual and projected deteriorations in the
housing market as well as changes in credit spreads. The remaining reduction in
value of $6.5 million is attributable to lower investor prices, due
primarily to credit spread widening. This reduction was calculated by
comparing the total fair value of loans (using the same methodology that is used
for fair value option loans) to carrying value for the aggregate population of
loans that were not delinquent or aged.
Fair
Value Option
The following
table reflects the differences between the fair value carrying amount of
mortgages held for sale measured at fair value under SFAS No. 159 and the
aggregate unpaid principal amount FHN is contractually entitled to
receive at maturity.
|
|
March
31, 2008
|
|
|
|
|
|
|
Fair
value
|
|
|
Fair
value
|
|
Aggregate
|
|
carrying
amount
|
|
|
carrying
|
|
unpaid
|
|
less
aggregate
|
(Dollars
in thousands)
|
|
amount
|
|
principal
|
|
unpaid
principal
|
Loans
held for sale reported at fair value:
|
|
|
|
|
|
|
Total
loans
|
|
$ 2,302,261
|
|
$ 2,267,034
|
|
$ 35,227
|
Nonaccrual
loans
|
|
-
|
|
-
|
|
-
|
Loans
90 days or more past due and still accruing
|
|
-
|
|
-
|
|
-
|
Assets
accounted for under SFAS No. 159 are initially measured at fair value. Gains and
losses from initial measurement and subsequent changes in fair value are
recognized in earnings. The change in fair value related to initial measurement
and subsequent changes in fair value for mortgage loans held for sale for which
FHN elected the fair value option are included in current period earnings with
classification in the income statement line item shown below. Such
amount includes approximately $9.5 million of losses included in current period
earnings attributable to changes in instrument-specific credit risk, which was
determined based on both a quality adjustment for delinquencies and the full
credit and liquidity spread on the non-conforming loans.
Note 13 – Fair
Values of Assets and Liabilities (continued)
|
|
Three
Months Ended
|
|
|
March
31, 2008
|
(Dollars
in thousands)
|
|
Loans
held for sale
|
Changes
in fair value included in net income:
|
|
|
Mortgage
banking noninterest income
|
|
$ 19,688
|
Interest income on mortgage loans held
for sale measured at fair value is calculated based on the note rate of the loan
and is recorded in the interest income section of the Consolidated Condensed
Statements of Income as interest on loans held for sale.
Note
14 – Other Events
FHN continues
to review its strategy with respect to its mortgage business activities. Based
on its current strategy, FHN could sell or significantly reduce portions of its
mortgage business. Currently, FHN is actively engaged in efforts to sell or
downsize its national mortgage origination and mortgage servicing business
activities. These efforts are not expected to include FHN’s mortgage loan
origination activities associated with its Tennessee-based banking operations.
Currently, FHN is actively negotiating for a sale of certain parts of its
mortgage business, but there can be no certainty that such a transaction will
occur or of the final terms of such sale.
If FHN is
unable to successfully sell portions of its mortgage business as contemplated
above, FHN may significantly reduce its national mortgage origination
activities. Any closing of mortgage business or portions thereof would likely
involve significant expenses primarily related to employee severance, lease
cancellations, and other associated assets.
Subsequent to
the end of the first quarter of 2008, FHN completed a public offering of $690
million of its common stock, including exercise of the underwriters’ over
allotment option. The net proceeds from the offering will approximate
$660 million after consideration of underwriters’ discounts and commissions as
well as estimated offering expenses. FHN intends to use substantially
all of the net proceeds from the sales of the securities for general corporate
purposes.
The Board of
Directors of FHN has determined that after the dividend payable on July 1, 2008,
of $.20 per share, it currently intends to pay dividends in shares of common
stock for the foreseeable future.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
INFORMATION
First Horizon National
Corp. (NYSE: 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 10,000
employees of FHN provide financial services to individuals and business
customers through hundreds of offices located in more than 40 states. The
corporation’s three major brands -- FTN Financial, First Horizon and First
Tennessee – provide customers with a broad range of products and services
including:
·
|
Regional
banking, with the largest market share in Tennessee and one of the highest
customer retention rates of any bank in the
country
|
·
|
Capital
markets, one of the nation’s top underwriters of U.S. government agency
securities
|
·
|
Mortgage
banking, one of the nation’s top mortgage originators and recipient of
consecutive awards for servicing excellence from Fannie Mae and Freddie
Mac
|
FHN companies
have been recognized as some of the nation’s best employers by AARP and Working
Mother magazines.
In first
quarter 2008, FHN revised its business line segments to better align with its
strategic direction, representing a focus on its regional banking franchise and
capital markets business. To implement this change, the prior Retail/Commercial
Banking segment was split into its major components with the national portions
of consumer lending and construction lending assigned to a new National
Specialty Lending segment that more appropriately reflects the ongoing wind down
of these businesses. Additionally, correspondent banking was shifted from
Retail/Commercial Banking to the Capital Markets segment to better represent the
complementary nature of these businesses. To reflect its geographic focus, the
remaining portions of the Retail/Commercial Banking segment now represent the
new Regional Banking segment. All prior period information has been revised to
conform to the current segment structure and the business line reviews below are
based on the new segment presentation.
§
|
Regional
Banking offers financial products and services, including traditional
lending and deposit-taking, to retail and commercial customers in
Tennessee and surrounding markets. Additionally, Regional
Banking provides investments, insurance, financial planning, trust
services and asset management, credit card, cash management, and check
clearing. On March 1, 2006, FHN sold its national merchant
processing business. The continuing effects of the divestiture, which is
included in the Regional Banking segment, are being accounted for as a
discontinued operation.
|
§
|
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 services, and
correspondent banking services.
|
§
|
National
Specialty Lending consists of traditional consumer and construction
lending activities outside the regional banking footprint. In
January 2008, FHN announced the discontinuation of national home builder
and commercial real estate lending through its First Horizon Construction
Lending offices.
|
§
|
Mortgage
Banking helps provide home ownership through First Horizon Home Loans, a
division of First Tennessee Bank National Association (FTBNA), which
operates offices in approximately 40 states and is one of the top 20
mortgage servicers and top 20 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.
|
§
|
Corporate
consists of unallocated corporate expenses including restructuring,
repositioning, and efficiency initiatives, 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 period ended
March 31, 2008, compared to the three-month period ended March 31,
2007. 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 2007
financial statements, notes, and MD&A is provided in the 2007 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; recession or other economic downturns, expectations of and actual
timing and amount of interest rate movements, including the slope of the yield
curve (which can have a significant impact on a financial services institution);
market and monetary fluctuations; inflation or deflation; customer and investor
responses to these conditions; the financial condition of borrowers and other
counterparties; competition within and outside the financial services industry;
geopolitical developments including possible terrorist activity; 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, selling and servicing loans including prepayment
risks, pricing concessions, fluctuation in U.S. housing prices, fluctuation of
collateral values, and changes in customer profiles. Additionally,
the actions of the Securities and Exchange Commission (SEC), the Financial
Accounting Standards Board (FASB), the Office of the Comptroller of the Currency
(OCC), the Board of Governors of the Federal Reserve System (Federal Reserve),
Financial Industry Regulatory Authority (FINRA), 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, in other sections of this MD&A, and
other parts of this Quarterly Report on Form 10-Q for the period ended March 31,
2008.
FINANCIAL SUMMARY (Comparison of
First Quarter 2008 to First Quarter 2007)
FINANCIAL
HIGHLIGHTS
Earnings for
first quarter 2008 were $7.9 million or $.06 per diluted share compared to
earnings of $70.5 million or $.55 per diluted share for first quarter
2007. First quarter 2008 was impacted by several items including
increased provisioning for loan losses, the effect of Visa, Inc.’s initial
public offering, record performance in fixed income sales, the adoption of
accounting standards and costs associated with the company’s restructuring,
repositioning, and efficiency initiatives. Provisioning for loan
losses increased by $211.5 million over first quarter 2007 to $240.0 million in
the current quarter as loan loss reserves grew from .99 percent of total loans
in the first quarter 2007 to 2.20 percent in the first quarter
2008. The completion of Visa’s IPO resulted in a $95.9 million
benefit to first quarter 2008 pre-tax earnings from the redemption of shares
totaling $65.9 million and the reversal of $30.0 million of the contingent
litigation accrual recognized in fourth quarter 2007 for certain Visa litigation
matters. Additionally, FHN incurred net charges of $21.3 million in
the first quarter 2008 from restructuring, repositioning, and efficiency
initiatives. Two items affecting first quarter 2007 were $10.3
million of net securities gains recognized as the investment portfolio was
reduced to compensate for loan growth and a $7.5 million reduction in income tax
expense as approval was received to consolidate the mortgage company into the
bank.
Regional
Banking, Capital Markets and National Specialty Lending were all adversely
affected by increased provisioning in first quarter 2008 as FHN continued to
actively manage the credit risk within its loan portfolios. First
quarter 2008 was a record quarter for Capital Markets fixed income sales
generating $152.2 million of revenues as the Federal Reserve’s aggressive rate
cuts produced a steeper yield curve. However, Capital Markets was
negatively impacted by the credit market disruptions as widening of CDO credit
spreads resulted in a $36.2 million LOCOM adjustment for the trust preferred
warehouse. Mortgage Banking recognized $42.4 million of pre-tax
benefit from the adoption of new accounting standards as they affected the
valuation of interest rate lock commitments and mortgage loans held for
sale. Mortgage Banking performance was adversely impacted in
comparison to first quarter 2007 as the credit market disruptions negatively
impacted gain on sale margins.
FHN remained
well capitalized in first quarter 2008. Key ratios were 8.23% for Tier I
and 13.01% for total capital as of March 31, 2008. Corporate net
interest margin remained stable at 2.81% for first quarter 2008 compared to
2.84% for first quarter 2007.
Return on
average shareholders’ equity and return on average assets were 1.47 percent and
..09 percent, respectively, for the first quarter 2008. Return on average
shareholders’ equity and return on average assets were 11.6 percent and .74
percent, respectively, for the first quarter 2007. Total assets were
$37.3 billion and shareholders’ equity was $2.1 billion on March 31, 2008, as
compared to $38.8 billion and $2.5 billion, respectively, on March 31,
2007.
BUSINESS LINE
REVIEW
Regional
Banking
The pre-tax
loss for Regional Banking was $18.2 million for first quarter 2008 compared to
pre-tax income of $57.0 million for first quarter 2007. Total
revenues for Regional Banking were $207.6 million for first quarter 2008
compared to $227.6 million for first quarter 2007.
Net interest
income was $120.6 million in first quarter 2008 compared to $138.9 million in
first quarter 2007. The Regional Banking net interest margin was 4.39
percent in first quarter 2008 compared to 5.08 percent in the first quarter
2007. This compression resulted as the effects of Federal Reserve
rate reductions were not fully passed through to deposit customers and as
nonaccrual commercial loans increased.
Noninterest
income declined slightly to $87.1 million in first quarter 2008 compared to
$88.6 million in first quarter 2007 as decreases in insurance commissions
primarily from softness in the property and casualty market and decreases in
coin sales revenues due to the closure of this business in second quarter 2007
exceeded an increase in deposit account fees from growth in demand deposits and
pricing initiatives.
Provision for
loan losses increased to $75.3 million in first quarter 2008 from $14.2 million
for the first quarter 2007. This increase was primarily a result of
deterioration in commercial loans.
Noninterest
expense decreased to $150.5 million in first quarter 2008 from $156.3 million
for the first quarter 2007. Noninterest expense decreased due to the
effects of efficiency initiatives implemented throughout 2007 and first quarter
2008.
Capital
Markets
Capital
Markets pre-tax income was $22.8 million in first quarter 2008 compared to $14.3
million in first quarter 2007. Total revenues for Capital Markets
were $153.6 million in first quarter 2008 compared to $102.0 million in first
quarter 2007.
Net interest
income was $19.6 million in first quarter 2008 compared to $10.7 million in
first quarter 2007. This increase is primarily attributable to
trading portfolio management activities implemented throughout 2007, a steeper
yield curve and the effect of increases in the average trust preferred
warehouse.
Income from
fixed income sales increased to $152.2 million in first quarter 2008 from $46.3
million in first quarter 2007, reflecting an increase in activity during first
quarter 2008 as the Federal Reserve aggressively lowered rates resulting in a
steeper yield curve. Other product revenues were $(18.3) million in
first quarter 2008 compared to $45.0 million in first quarter
2007. This decrease is primarily attributable to the effect of credit
market disruptions on the pooled trust preferred product, including both a LOCOM
adjustment on the warehouse and no transaction revenues in first quarter
2008.
Provision
increased to $15.0 million from $1.2 million to reflect deterioration of
correspondent banking loans.
Noninterest
expense was $115.7 million in first quarter 2008 compared to $86.6 million in
first quarter 2007. This increase is a result of higher production levels during
first quarter 2008.
National
Specialty Lending
National
Specialty Lending had a pre-tax loss of $120.1 million in first quarter 2008 as
compared to pre-tax income of $28.2 million in first quarter
2007. The pre-tax loss in 2008 is primarily a result of an increase
in the provision for loan losses to $149.5 million in first quarter 2008
compared to $13.1 million in first quarter 2007 due to deterioration in the
national construction and consumer lending portfolios.
Total
revenues for National Specialty Lending were $54.5 million for first quarter
2008 as compared to $76.6 million for first quarter 2007. Net
interest income declined to $53.8 million in the first quarter 2008, compared to
$64.6 million for the first quarter 2007, as a result of the increase in
nonaccrual construction loans. Noninterest income was $.7 million for
the first quarter 2008, compared to $12.0 million for the first quarter 2007, as
no consumer loan sales were executed in first quarter 2008.
Noninterest
expense was $25.1 million in first quarter 2008, compared to $35.2 million for
first quarter 2007. Noninterest expense declined due to the effects
of the business segment wind-down initiated during first quarter
2008.
Mortgage
Banking
Mortgage
Banking had a pre-tax income of $51.3 million in first quarter 2008, compared to
a pre-tax loss of $7.9 million in first quarter 2007. Total revenues
for Mortgage Banking were $199.0 million for first quarter 2008 compared to
$97.3 million for first quarter 2007. Pre-tax earnings for first
quarter 2008 were affected positively by $42.4 million related to the adoption
of the new accounting standards, including the prospective election of fair
value accounting for mortgage warehouse loans.
Net interest
income was $31.0 million in first quarter 2008 compared to $20.6 million in
first quarter 2007. The increase is consistent with the increase in
the warehouse spread to 2.63 percent in the current quarter compared to 1.12
percent in first quarter 2007.
Noninterest
income was $168.0 million in first quarter 2008 compared to $76.7 million in
first quarter 2007. Noninterest income consists primarily of mortgage
banking-related revenue from the origination and sale of mortgage loans, fees
from mortgage servicing and changes in fair value of mortgage servicing rights
(MSR) net of hedge gains or losses.
Net
origination income was $84.1 million in first quarter 2008 compared to $63.6
million last year. The increase in net origination income includes
$96.9 million of benefits related to the adoption of new accounting standards,
including the prospective election of fair value accounting for substantially
all types of mortgage warehouse loans. Gain on sales margins declined to
negative 20 basis points in the current quarter from 92 basis points in first
quarter 2007 as effects of the credit market pricing stresses resulted in
margins significantly below historical levels. Total mortgage
servicing fees decreased to $74.1 million in first quarter 2008 from $84.7
million in the first quarter 2007 reflecting the reclassification of $175
million from excess mortgage servicing rights to trading securities in second
quarter 2007. 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.
Servicing
hedging activities and changes other than runoff in the value of capitalized
servicing assets positively impacted net revenues by $32.7 million this quarter
as compared to a negative impact of $20.0 million in first quarter 2007,
primarily resulting from a steeper yield curve that resulted from Federal
Reserve rate reductions and widening of mortgage-swap
spreads. Additionally, the change in MSR value due to runoff was
$37.4 million in first quarter 2008 compared to $61.7 million last year as the
value of MSR that prepaid this quarter was less valuable than a year
ago.
Noninterest
expense was $147.5 million in first quarter 2008 compared to $105.2 million in
first quarter 2007. This increase in the first quarter of 2008
resulted primarily from a $54.5 million effect of no longer deferring
origination costs on warehouse loans accounted for at elected fair value in
first quarter 2008. This amount is offset by a corresponding increase
in origination income. The effects of cost reductions initiated
after first quarter 2007 as part of right sizing operations partially offset the
increase in nonintererst expense attributable to the fair value election for
warehouse loans.
Corporate
The Corporate
segment’s results yielded pre-tax income of $63.1 million in first quarter 2008
compared to a pre-tax loss of $2.5 million in first quarter 2007. The
first quarter 2008 results included the recognition of $65.9 million of
securities gains from the redemption of shares in conjunction with Visa, Inc.’s
initial public offering as well as a reversal of non-interest expense totaling
$30.0 million for a reduction in the contingent liability for certain Visa
litigation matters. Additionally, results for first quarter 2008
include $21.3 million of net charges associated with implementation of
restructuring, repositioning and efficiency initiatives. See discussion of the
restructuring, repositioning and efficiency initiatives below for further
details. First quarter 2007 results included $10.3 million of net
securities gains as the investment portfolio was reduced to compensate for loan
growth.
RESTRUCTURING,
REPOSITIONING, AND EFFICIENCY INITIATIVES
Throughout
2007, FHN conducted a company-wide review of business practices with the goal of
improving its overall profitability and productivity. In addition,
during 2007 management announced its intention to sell 34 full-service First
Horizon Bank branches in its national banking markets, as well as plans to right
size First Horizon Home Loans’ mortgage banking operations and to downsize FHN’s
national lending operations, in order to redeploy capital to higher-return
businesses. As part of its strategy to reduce its national real
estate portfolio, FHN announced in January 2008 that it was discontinuing
national homebuilder and commercial real estate lending through its First
Horizon Construction Lending offices. Additionally, FHN is continuing
the repositioning of First Horizon Home Loans’ mortgage banking operations,
including sales of MSR in fourth quarter 2007 and first quarter
2008. Net costs recognized by FHN in the three months ended March 31,
2008, related to restructuring, repositioning, and efficiency activities were
$21.3 million, including $2.5 million of losses related to asset
impairments. Losses from the disposition of certain First Horizon
Bank branches in first quarter 2008 are included in noninterest
income. Additionally, transaction costs recognized in the first
quarter of 2008 from selling mortgage servicing rights are recorded as a
reduction of mortgage banking income in noninterest income. 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 FHN’s restructuring,
repositioning, and efficiency initiatives in the first quarter of 2008 are
recorded as unallocated corporate charges within the Corporate
segment. Significant expenses in the first quarter of 2008 resulted
from the following actions:
·
|
Expense
of $15.1 million associated with organizational and compensation changes
due to right sizing operating segments, the divestiture of certain First
Horizon Bank branches, and consolidating functional
areas.
|
·
|
Losses
of approximately $1.0 million from the sales of certain First Horizon Bank
branches.
|
·
|
Transaction
costs of $2.7 million from the sale of
mortgage servicing rights.
|
|
Expense
of $2.5 million for the writedown of certain intangibles and other
assets resulting from the change in FHN’s national banking
strategy.
|
Settlement of
the obligations arising from current initiatives will be funded from operating
cash flows. The remaining assets and liabilities to be sold related
to the First Horizon Bank branches are reflected as held-for-sale on the
Consolidated Condensed Statements of Condition. Sale of the
remaining nine branches in Atlanta closed in May 2008 and resulted in a minimal
effect on earnings. The aggregate carrying amounts of loans,
deposits, other assets and other liabilities held for divestiture were $208
million, $119 million, $9 million, and $13 million, respectively, as of March
31, 2008. The effect of suspending depreciation on assets held for
sale was immaterial to FHN’s results of operations for first quarter
2008. As a result of the change in FHN’s national banking strategy, a
writedown of other intangibles of $2.4 million was recognized in first quarter
2008 related to certain banking licenses. The recognition of this impairment
loss will have no effect on FHN’s debt covenants. The impairment loss
related to such intangible assets is recorded as an unallocated corporate charge
within the Corporate segment and is included in all other expense on the
Consolidated Condensed Statements of Income. As a result of the
restructuring, repositioning, and efficiency initiatives implemented to date by
management, the effects of $175 million in aggregate annual pre-tax improvements
are being experienced by FHN in its first quarter 2008 run-rate, with an
additional $70 million in annual profitability improvements anticipated to be
experienced through 2008 in relation to the First Horizon Bank branch
divestitures and the restructuring of mortgage operations and national lending
operations. Due to the broad nature of the actions being taken, all
components of income and expense will be affected.
Charges
related to restructuring, repositioning, and efficiency initiatives for the
three months ended March 31, 2008, are presented in the following table based on
the income statement line item affected. See Note 12 – Restructuring,
Repositioning, and Efficiency Charges and Note 2 – Acquisitions/Divestitures for
additional information.
Table
1 - Charges for Restructuring, Repositioning, and Efficiency
Initiatives
|
Three
Months Ended
|
|
March
31
|
(Dollars
in thousands)
|
2008
|
Noninterest
income:
|
|
|
|
Mortgage
banking
|
|
$ |
(2,667 |
) |
Losses
on divestitures
|
|
|
(995 |
) |
Total
noninterest income
|
|
|
(3,662 |
) |
Noninterest
expense:
|
|
|
|
|
Employee
compensation, incentives and benefits
|
|
|
7,412 |
|
Occupancy
|
|
|
981 |
|
Equipment
rentals, depreciation and maintenance
|
|
|
83 |
|
Communications
and courier
|
|
|
6 |
|
All
other expense
|
|
|
9,142 |
|
Total
noninterest expense
|
|
|
17,624 |
|
Loss
before income taxes
|
|
$ |
(21,286 |
) |
Activity in
the restructuring and repositioning liability for the three months ended
March 31, 2008 is presented in the following table:
(Dollars
in thousands)
|
Liability
|
Beginning
Balance
|
|
$ |
19,675 |
|
Severance
and other employee related costs
|
|
|
7,390 |
|
Facility
consolidation costs
|
|
|
891 |
|
Other
exit costs, professional fees and other
|
|
|
6,832 |
|
Total
Accrued
|
|
|
34,788 |
|
Payments*
|
|
|
11,475 |
|
Accrual
Reversals
|
|
|
623 |
|
Restructuring
and Repositioning Reserve Balance
|
|
$ |
22,690 |
|
*
Includes payments related to:
|
Three
Months Ended
|
|
March
31, 2008
|
Severance
and other employee related costs
|
$ 6,655
|
Facility
consolidation costs
|
1,234
|
Other
exit costs, professional fees and other
|
3,586
|
|
$ 11,475
|
INCOME
STATEMENT
Total
revenues (net interest income and noninterest income) were $677.2 million in
first quarter 2008 compared to $520.6 million in 2007. Net interest
income was $228.1 million in first quarter 2008 compared to $237.4 million in
2007 and noninterest income was $449.1 million in 2008 compared to $283.2
million in 2007. A discussion of the major line items
follows.
NET
INTEREST INCOME
Net interest
income decreased 4 percent to $228.1 million in first quarter 2008. Earning
assets declined 3 percent to $32.7 billion and interest-bearing liabilities
declined 3 percent to $28.4 billion in first quarter 2008.
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 2.81 percent for first quarter 2008
compared to 2.84 percent for first quarter 2007. This compression in the
margin occurred as the net interest spread increased to 2.35 percent from 2.20
percent in 2007 while the impact of free funding decreased from 64 basis points
to 46 basis points.
Table
2 - Net Interest Margin
|
|
Three
Months Ended
|
|
|
March
31
|
|
|
2008
|
|
2007
|
Consolidated
yields and rates:
|
|
|
|
|
|
|
Loans,
net of unearned income
|
|
|
6.07 |
% |
|
|
7.56 |
% |
Loans
held for sale
|
|
|
5.88 |
|
|
|
6.46 |
|
Investment
securities
|
|
|
5.41 |
|
|
|
5.65 |
|
Capital
markets securities inventory
|
|
|
4.62 |
|
|
|
5.03 |
|
Mortgage
banking trading securities
|
|
|
13.18 |
|
|
|
12.44 |
|
Other
earning assets
|
|
|
2.89 |
|
|
|
5.03 |
|
Yields
on earning assets
|
|
|
5.86 |
|
|
|
6.97 |
|
Interest-bearing
core deposits
|
|
|
2.85 |
|
|
|
3.25 |
|
Certificates
of deposits $100,000 and more
|
|
|
4.63 |
|
|
|
5.36 |
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
|
|
2.95 |
|
|
|
4.89 |
|
Capital
markets trading liabilities
|
|
|
4.57 |
|
|
|
5.69 |
|
Commercial
paper and other short-term borrowings
|
|
|
3.29 |
|
|
|
5.25 |
|
Long-term
debt
|
|
|
4.37 |
|
|
|
5.64 |
|
Rates
paid on interest-bearing liabilities
|
|
|
3.51 |
|
|
|
4.77 |
|
Net
interest spread
|
|
|
2.35 |
|
|
|
2.20 |
|
Effect
of interest-free sources
|
|
|
.46 |
|
|
|
.64 |
|
FHN
- NIM
|
|
|
2.81 |
% |
|
|
2.84 |
% |
Certain
previously reported amounts have been reclassified to agree with current
presentation.
Prospectively, net interest margin is expected to be relatively
stable or perhaps show some improvement given a steeper yield curve and the
reduction of lower margin businesses.
NONINTEREST INCOME
Mortgage
Banking Noninterest Income
First Horizon
Home Loans, a division of FHN, 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 for sale
to secondary market investors and subsequently provides servicing for the
majority of those loans.
Prior to
adoption of new accounting standards in first quarter 2008, origination income
included 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), were deferred and
included in the basis of the loans in calculating gains and losses upon
sale. Gain or loss was 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 were recognized at the time a mortgage loan was sold into
the secondary market. See Critical Accounting Policies and Note 1 -
Financial Information for more discussion of the effects of adopting the new
accounting standards.
Upon adoption
of the new accounting standards, origination income includes origination fees,
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. Upon election of fair value accounting for substantially all
warehouse loans, the value recognized on these loans includes changes in
investor prices, MSR and concessions. The related origination fees are no longer
deferred but recognized in origination income upon closing of a
loan.
Origination
income increased to $84.1 million in first quarter 2008 compared to $63.6
million last year as loans delivered into the secondary market increased 19
percent to $7.5 billion and the margin on deliveries decreased from 92 basis
points in first quarter 2007 to negative 20 basis points in
2008. First quarter 2008 origination income includes a $96.9 million
effect of adopting the new accounting standards.
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 13 percent to $74.1 million in first quarter 2008 from
$84.7 million in the first quarter 2007 reflecting the effect of the
reclassification of excess mortgage servicing rights to trading securities in
conjunction with the modification of the PSA.
Servicing
hedging activities and changes other than runoff in the value of capitalized
servicing assets positively impacted net revenues by $32.7 million this quarter
as compared to a negative impact of $20.0 million in first quarter 2007,
primarily resulting from a steeper yield curve that resulted from Federal
Reserve rate reductions and widening of mortgage-swap
spreads. Additionally, the change in MSR value due to runoff was
$37.4 million in first quarter 2008 compared to $61.7 million last year as the
value of MSR that prepaid this quarter was less valuable than a year
ago.
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
|
|
|
March
31
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
(%)
|
Noninterest
income (thousands):
|
|
|
|
|
|
|
|
|
|
Origination
income
|
|
$ |
84,056 |
|
|
$ |
63,641 |
|
|
|
32.1 |
+
|
Servicing
income
|
|
|
69,344 |
|
|
|
3,008 |
|
|
NM
|
|
Other
|
|
|
5,312 |
|
|
|
6,448 |
|
|
|
17.6 |
-
|
Total
mortgage banking noninterest income
|
|
$ |
158,712 |
|
|
$ |
73,097 |
|
|
|
117.1 |
+
|
Mortgage
banking statistics (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinance
originations
|
|
$ |
4,776.0 |
|
|
$ |
2,804.7 |
|
|
|
70.3 |
+
|
Home-purchase
originations
|
|
|
2,733.5 |
|
|
|
3,497.7 |
|
|
|
21.8 |
-
|
Mortgage
loan originations
|
|
$ |
7,509.5 |
|
|
$ |
6,302.4 |
|
|
|
19.2 |
+
|
Servicing
portfolio - owned
|
|
$ |
99,021.5 |
|
|
$ |
102,821.5 |
|
|
|
3.7 |
-
|
NM - not meaningful
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, correspondent banking 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 $105.9 million compared to first quarter 2007
reflecting the effects of a steeper yield curve resulting from the Federal
Reserve’s aggressive rate cuts during the quarter and the associated positive
impact on the demand for fixed income products. Revenues from other
products decreased $61.6 million in comparison to first quarter 2007. This
decrease is primarily attributable to the effect of credit market disruptions on
the pooled trust preferred product, including both a $36.2 million LOCOM
adjustment on the warehouse and no transaction revenues in first quarter
2008.
Table
4 - Capital Markets Noninterest Income
|
|
Three
Months Ended
|
|
|
|
|
|
|
March
31
|
|
|
Growth
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
Rate
(%)
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
Fixed
income
|
|
$ |
152,208 |
|
|
$ |
46,313 |
|
|
|
228.7 |
+
|
Other
product revenue
|
|
|
(20,751 |
) |
|
|
40,800 |
|
|
NM
|
|
Total
capital markets noninterest income
|
|
$ |
131,457 |
|
|
$ |
87,113 |
|
|
|
50.9 |
+
|
NM - not meaningful
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. Deposit transactions and cash management
fees increased $3.2 million or 8 percent, reflecting growth in demand deposits
and pricing initiatives. Revenue from loan sales and securitizations
decreased $13.8 million due to the effects of credit market disruptions as the
market for consumer loans disappeared in the latter half of
2007. Insurance commissions decreased $1.6 million, or 17 percent,
primarily due to softness in the property and casualty market. First
quarter 2008 results included $65.9 million of net securities gains from the
redemption of shares in conjunction with Visa, Inc.’s initial public offering
while first quarter 2007 results include $10.3 million of net securities gains
as the investment portfolio was reduced to compensate for loan
growth. Other revenues related to deferred compensation plans
decreased $7.8 million in comparison to first quarter 2007, which is offset by a
related decrease in noninterest expense associated with these
plans.
NONINTEREST
EXPENSE
Total
noninterest expense for first quarter 2008 increased 9 percent to $438.3 million
from $403.0 million in 2007. This increase includes a $54.5 million
effect of no longer deferring origination costs on warehouse loans accounted for
at elected fair value in first quarter 2008. This amount is offset by
a corresponding increase in mortgage banking noninterest income. Also
affecting noninterest expense in first quarter 2008 is the reversal of $30.0
million of the contingent litigation accrual recognized in fourth quarter 2007
related to certain Visa litigation matters. Additionally, results for
first quarter 2008 include $21.3 million of net charges associated with
implementation of restructuring, repositioning and efficiency initiatives. See
discussion of the restructuring, repositioning and efficiency initiatives below
for further details.
Employee
compensation, incentives and benefits (personnel expense), the largest component
of noninterest expense, increased to $287.5 million from $246.4 million in 2007
reflecting the effects of no longer deferring compensation directly attributable
to the origination of mortgage loans accounted for at elected fair
value. Additionally, record capital markets fixed income sales in the
current quarter resulted in a related increase in compensation
costs. Partially offsetting these amounts is the effects of FHN’s
efficiency initiatives as headcount was significantly reduced in comparison to
first quarter 2007.
Also included
in noninterest expense was a decrease of $10.0 million compared to first quarter
2007 related to deferred compensation plans for which, as discussed above, there
was a related decrease in revenue. All other noninterest expense
decreased 4 percent, or $3.3 million, from the benefits of implementation of
efficiency initiatives throughout 2007.
INCOME
TAXES
The benefit
from income taxes in the current quarter results from approximately $8 million
of permanent quarterly tax benefits primarily related to investments in low
income housing partnerships and bank owned life insurance.
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. In first quarter 2008 and
fourth quarter 2007, FHN conducted focused portfolio management activities to
identify problem credits and to ensure appropriate provisioning and reserve
levels. See Critical Accounting Policies for additional discussion of
these procedures. The provision for loan losses was $240.0 million in
first quarter 2008 compared to $28.5 million in first quarter
2007. The provision for loan losses increased $211.5 million,
reflecting recognition of portfolio deterioration due to declining economic
conditions, especially in national construction and home equity
loans. The net charge-off ratio increased to 181 basis points in
first quarter 2008 from 48 basis points in first quarter 2007 as net charge-offs
grew to $99.1 million from $26.6 million, driven by problem loans
primarily in the national construction portfolios and an increase in
problem loans in the home equity portfolio.
Table
5 - Net Charge-off Ratios *
|
|
Three
Months Ended
|
|
|
|
March
31
|
|
|
|
2008
|
|
|
2007
|
|
Total
commercial
|
|
|
1.93 |
% |
|
|
.57 |
% |
Retail
real estate
|
|
|
1.61 |
|
|
|
.32 |
|
Other
retail
|
|
|
3.43 |
|
|
|
2.45 |
|
Credit
card receivables
|
|
|
3.92 |
|
|
|
2.79 |
|
Total
net charge-offs
|
|
|
1.81 |
|
|
|
.48 |
|
*Net
charge-off ratios are calculated based on 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 $527.6 million on March 31, 2008, compared to
$73.6 million on March 31, 2007. The ratio of nonperforming loans in the loan
portfolio to total loans was 241 basis points on March 31, 2008, and 33 basis
points on March 31, 2007. The increase in nonperforming loans is primarily
attributable to deterioration in the one-time close and homebuilder/condominiums
portfolios, due primarily to the slowdown in the housing
market. Nonperforming one-time close loans (the Retail Real Estate
Construction line on Table 7) increased to $199.7 million on March 31, 2008 from
$29.2 million on March 31, 2007. Nonperforming
homebuilder/condominiums loans increased to $238.9 million on March 31, 2008
from $7.7 million on March 31, 2007. These portfolios are included in the
Commercial Real Estate Construction line of Table 7.
Nonperforming
assets were $620.9 million on March 31, 2008, compared to $135.9 million on
March 31, 2007. The nonperforming assets ratio was 278 basis points
on March 31, 2008 and 56 basis points last year. In addition to the
increase in nonperforming loans, foreclosed assets increased $31.7 million,
which is primarily attributable to deterioration in the national construction
portfolios. 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
|
|
First
Quarter
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
Beginning
balance on December 31
|
|
$ |
342,341 |
|
|
$ |
216,285 |
|
Provision
for loan losses
|
|
|
240,000 |
|
|
|
28,486 |
|
Divestitures/acquisitions/transfers
|
|
|
- |
|
|
|
2,655 |
|
Charge-offs
|
|
|
(101,756 |
) |
|
|
(29,665 |
) |
Recoveries
|
|
|
2,618 |
|
|
|
3,045 |
|
Ending
balance on March 31
|
|
$ |
483,203 |
|
|
$ |
220,806 |
|
Reserve
for off-balance sheet commitments
|
|
|
11,786 |
|
|
|
9,406 |
|
Total
allowance for loan losses and reserve for off-balance sheet
commitments
|
|
$ |
494,989 |
|
|
$ |
230,212 |
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
|
|
2008
|
|
|
2007
|
|
Regional
Banking:
|
|
|
|
|
|
|
|
|
Nonperforming
loans
|
|
$ |
81,244 |
|
|
$ |
26,212 |
|
Foreclosed
real estate
|
|
|
38,019 |
|
|
|
27,204 |
|
Total
Regional Banking
|
|
|
119,263 |
|
|
|
53,416 |
|
Capital
Markets:
|
|
|
|
|
|
|
|
|
Nonperforming
loans
|
|
|
13,030 |
|
|
|
3,598 |
|
Foreclosed
real estate
|
|
|
600 |
|
|
|
810 |
|
Total
Capital Markets
|
|
|
13,630 |
|
|
|
4,408 |
|
National
Specialty Lending:
|
|
|
|
|
|
|
|
|
Nonperforming
loans
|
|
|
433,285 |
|
|
|
43,810 |
|
Foreclosed
real estate
|
|
|
29,680 |
|
|
|
12,040 |
|
Total
National Specialty Lending
|
|
|
462,965 |
|
|
|
55,850 |
|
Mortgage
Banking:
|
|
|
|
|
|
|
|
|
Nonperforming
loans - held for sale
|
|
|
9,693 |
|
|
|
10,347 |
|
Foreclosed
real estate
|
|
|
15,373 |
|
|
|
11,904 |
|
Total
Mortgage Banking
|
|
|
25,066 |
|
|
|
22,251 |
|
Total
nonperforming assets
|
|
$ |
620,924 |
|
|
$ |
135,925 |
|
|
|
|
|
|
|
|
|
|
Total
loans, net of unearned income
|
|
$ |
21,932,020 |
|
|
$ |
22,268,190 |
|
Insured
loans
|
|
|
(808,606 |
) |
|
|
(847,090 |
) |
Loans
excluding insured loans
|
|
$ |
21,123,414 |
|
|
$ |
21,421,100 |
|
Foreclosed
real estate from GNMA loans
|
|
$ |
22,346 |
|
|
$ |
16,655 |
|
Potential
problem assets*
|
|
|
475,302 |
|
|
|
161,280 |
|
Loans
30 to 89 days past due
|
|
|
257,798 |
|
|
|
146,638 |
|
Loans
30 to 89 days past due - guaranteed portion**
|
|
|
76 |
|
|
|
344 |
|
Loans
90 days past due
|
|
|
74,380 |
|
|
|
41,300 |
|
Loans
90 days past due - guaranteed portion**
|
|
|
247 |
|
|
|
182 |
|
Loans
held for sale 30 to 89 days past due
|
|
|
65,082 |
|
|
|
30,848 |
|
Loans
held for sale 30 to 89 days past due - guaranteed
portion**
|
|
|
65,082 |
|
|
|
24,462 |
|
Loans
held for sale 90 days past due
|
|
|
225,805 |
|
|
|
128,540 |
|
Loans
held for sale 90 days past due - guaranteed portion**
|
|
|
223,383 |
|
|
|
123,279 |
|
Off-balance
sheet commitments***
|
|
$ |
6,826,000 |
|
|
$ |
7,586,292 |
|
Allowance
to total loans
|
|
|
2.20 |
% |
|
|
.99 |
% |
Allowance
to loans excluding insured loans
|
|
|
2.29 |
|
|
|
1.03 |
|
Allowance
to nonperforming loans in the loan portfolio
|
|
|
92 |
|
|
|
300 |
|
Nonperforming
assets to loans and foreclosed real estate
|
|
|
2.77 |
|
|
|
.52 |
|
Nonperforming
assets to unpaid principal balance of servicing portfolio (Mortgage
Banking)
|
|
|
.03 |
|
|
|
.02 |
|
Allowance
to annualized net charge-offs
|
|
|
1.22 |
x |
|
|
2.07 |
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 $475.3 million
on March 31, 2008, up from $161.3 million on March 31, 2007. Also,
loans 30 to 89 days past due increased to $257.8 million on March 31, 2008, up
from $146.6 million on March 31, 2007. This significant increase was primarily
driven by the slowdown in the housing market and its impact on national
homebuilder and one-time close portfolios. The current expectation of losses
from both potential problem assets and loans 30 to 89 days past due has been
included in management’s analysis for assessing the adequacy of the allowance
for loan losses.
Asset quality
indicators are expected to remain stressed in 2008 due to the expectation that
the housing industry and broader economic conditions will deteriorate. Actual
results could differ because of several factors, including those presented in
the Forward-Looking Statements section of this MD&A discussion.
STATEMENT OF CONDITION
REVIEW
EARNING
ASSETS
Earning
assets consist of loans, loans held for sale, investment securities, trading
securities and other earning assets. During first quarter 2008,
earning assets decreased 3 percent and averaged $32.7 billion compared to $33.8
billion in first quarter 2007, as approximately $.6 billion of government agency
securities were sold late in first quarter 2007 to accommodate anticipated loan
growth. This activity did not have a significant impact on the
average balance for first quarter 2007. An emphasis on management of
the capital markets securities inventory also contributed to the decline in
average earning assets.
LOANS
Average total
loans remained constant at $22.0 million for first quarter 2008 as compared to
the first quarter 2007. This reflects the net effect of several
events affecting the loan portfolio. Reductions in loans occurred
from the sale of the First Horizon Bank branches and elevated charge off
levels in the latter half of 2007 and first quarter
2008. Offsetting these impacts were increases in the loan portfolio
as consumer lending and certain trust preferred loans were included in the
portfolio in first quarter 2008 compared to these loans being considered as
loans held for sale in first quarter 2007. Average loans represented
67 percent of average earning assets in first quarter 2008 and 65 percent in
2007. Commercial, financial and industrial loans remained flat at
$7.1 billion in comparison to first quarter 2007. Commercial
construction loans decreased 5 percent or $130.1 million since first quarter
2007, primarily due to the effects of the wind-down for national home builder
lending announced in first quarter 2008 as well as charge offs recognized in
fourth quarter 2007 and first quarter 2008 on this portfolio. On
March 31, 2008, FHN did not have any concentrations of 10 percent or more of
total loans in any single industry.
Total retail
loans decreased 1 percent or $99.5 million reflecting a decline in home equity
lines and loans that was primarily due to curtailment of national consumer
lending activity initiated in first quarter 2008. Additional loan
information is provided in Table 7 – Average Loans.
|
|
Three
Months Ended
|
|
|
March
31
|
|
|
|
|
|
Percent
|
Growth
|
|
|
|
|
Percent
|
(Dollars
in millions)
|
|
2008
|
|
of
Total
|
Rate
|
|
2007
|
|
of
Total
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and industrial
|
|
$ |
7,121.9 |
|
|
|
33 |
% |
|
|
(.1 |
)% |
|
$ |
7,131.1 |
|
|
|
32 |
% |
Real
estate commercial (a)
|
|
|
1,347.4 |
|
|
|
6 |
|
|
|
16.4 |
|
|
|
1,157.7 |
|
|
|
5 |
|
Real
estate construction (b)
|
|
|
2,713.2 |
|
|
|
12 |
|
|
|
(4.6 |
) |
|
|
2,843.3 |
|
|
|
13 |
|
Total
commercial
|
|
|
11,182.5 |
|
|
|
51 |
|
|
|
.5 |
|
|
|
11,132.1 |
|
|
|
50 |
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate residential (c)
|
|
|
7,774.4 |
|
|
|
35 |
|
|
|
(1.7 |
) |
|
|
7,908.0 |
|
|
|
36 |
|
Real
estate construction (d)
|
|
|
1,909.0 |
|
|
|
9 |
|
|
|
(6.7 |
) |
|
|
2,046.0 |
|
|
|
9 |
|
Other
retail
|
|
|
142.0 |
|
|
|
1 |
|
|
|
(7.6 |
) |
|
|
153.6 |
|
|
|
1 |
|
Credit
card receivables
|
|
|
195.1 |
|
|
|
1 |
|
|
|
(.1 |
) |
|
|
195.2 |
|
|
|
1 |
|
Real
estate loans pledged
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
against
other collateralized borrowings (e)
|
|
|
755.1 |
|
|
|
3 |
|
|
|
31.9 |
|
|
|
572.3 |
|
|
|
3 |
|
Total
retail
|
|
|
10,775.6 |
|
|
|
49 |
|
|
|
(.9 |
) |
|
|
10,875.1 |
|
|
|
50 |
|
Total
loans, net of unearned
|
|
$ |
21,958.1 |
|
|
|
100 |
% |
|
|
(.2 |
)% |
|
$ |
22,007.2 |
|
|
|
100 |
% |
(a)
Includes nonconstruction income property loans
|
(b)
Includes homebuilder, condominium, and income property construction
loans
|
(c)
Includes home equity loans and lines of credit (average for first quarter
2008 and 2007 - $3.7 billion and $4.2 billion,
respectively)
|
(d)
Includes one-time close product
|
(e)
Includes on-balance sheet securitizations of home equity
loans
|
Total loans
is expected to decline throughout 2008 as held-to-maturity originations of the
national home equity, one-time close and homebuilder lending products have been
discontinued and overall loan demand is expected to be soft given the economic
environment.
LOANS
HELD FOR SALE / LOANS HELD FOR SALE - DIVESTITURE
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 increased 2 percent to $3.7
billion in 2008 from $3.6 billion in 2007. This change is primarily
attributable to the increase in the average mortgage warehouse due to a lack of
market liquidity, which was partially offset by the decrease in consumer loans
held for sale as FHN transitioned consumer loans to the portfolio in response to
the credit market disruptions that commenced in the latter half of
2007. FHN continues to fund loan originations and maintain a stable
liquidity position through loan sales and securitizations principally of first
lien mortgage loans. On March 31, 2008, loans held for sale –
divestiture were $207.7 million. During first quarter 2008 loans held for sale –
divestiture averaged $248.8 million.
DEPOSITS
/ OTHER SOURCES OF FUNDS
Core deposits
increased slightly to $13.7 billion in first quarter 2008 compared to $13.3
billion in 2007, primarily reflecting growth in interest bearing savings
deposits. Short-term purchased funds averaged $12.7 billion for first
quarter 2008, down 14 percent or $2.0 billion from $14.7 billion in first
quarter 2007. During the latter half of 2007 and first quarter 2008,
FHN has shifted wholesale borrowings from short-term certificates of deposit
(CD) to less credit sensitive sources, including Federal Home Loan Bank advances
and the Federal Reserve’s Term Auction Facility. In the first quarter
2008, short-term purchased funds accounted for 38 percent of FHN’s total funding
down from 43 percent in first quarter 2007. Total funding 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 $6.8 billion in
first quarter 2008 compared to $6.4 billion in first quarter 2007.
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 decreased 12 percent in first quarter 2008 to $2.2 billion
from $2.5 billion. Period-end shareholders’ equity was $2.1 billion
on March 31, 2008, down 16 percent from the prior year. These
decreases principally resulted from the net loss recognized in
fourth
quarter 2007. 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.
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
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1 to January 31
|
|
|
*
|
|
|
$ |
17.62 |
|
|
|
*
|
|
|
|
36,328 |
|
February
1 to February 29
|
|
|
*
|
|
|
|
23.44 |
|
|
|
*
|
|
|
|
36,328 |
|
March 1
to March 31
|
|
|
4 |
|
|
|
17.20 |
|
|
|
4 |
|
|
|
36,324 |
|
Total
|
|
|
4 |
|
|
$ |
17.31 |
|
|
|
4 |
|
|
|
|
|
*Amount is less than 500 shares
Compensation
Plan Programs:
|
-
|
A
consolidated compensation plan share purchase program was announced on
August 6, 2004. This plan consolidated into a single
share
|
|
purchase
program all of the previously authorized compensation plan share programs
as well as the renewal of the authorization to purchase
|
|
shares
for use in connection with two compensation plans for which the share
purchase authority had expired. The total number
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 March 31, 2008, the maximum
number
|
|
of
shares that may be purchased under the program was 28.8 million
shares.
|
|
|
Other
Programs:
|
-
|
On
October 16, 2007, the board of directors approved a 7.5 million share
purchase authority that will expire on December 31,
2010. Purchases
|
|
will
be made in the open market or through privately negotiated transactions
and will be subject to market conditions, accumulation
|
|
of
excess equity and prudent capital management. The new authority
is not tied to any compensation plan, and replaces an
older
|
|
non-plan
share purchase authority which was terminated. On March 31, 2008,
the maximum number of shares that may be purchased
|
|
under
the program was 7.5 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 March 31, 2008
and 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
Credit Risk Management 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 Funds Management and Corporate Treasurer, Chief Financial
Officer, EVP Risk Management, Government Relations and CRA, 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 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 continued pressure on margins as well
as revenues. As difficulties in the mortgage and credit markets persist, FHN
will continue to adapt its 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, warehouse and certain small issuer trust preferred
securities.
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, 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 first quarter 2008 and
2007, the total loans, excluding loans held for sale and real estate loans
pledged against other collateralized borrowings, to core deposits ratio was 155
percent and 161 percent, respectively. Should loan growth exceed core
deposit growth, alternative sources of funding loan growth may be necessary in
order to maintain an adequate liquidity position. One means of
maintaining a stable liquidity position is to sell loans either through
whole-loan sales or loan securitizations. During 2007,
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 March 31, 2008, $1.6 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 incurring other debt. FHN
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 three-month
periods ended March 31, 2008 and 2007. For the three months ended
March 31, 2008, net cash used in financing activities exceeded positive cash
flows from operating and investing activities primarily due to a decline in
wholesale deposits as FHN reduced its use of this more volatile funding source
in response to the credit market disruptions that started in third quarter
2007. Positive investing cash flows resulted from the decrease in the
loan portfolio as well as the prospective classification of retained
interests in securitizations within investing activities. Cash
provided by operating activities was positively impacted by decreases in trading
securities resulting from portfolio management activities within Capital
Markets. For the three months ended March 31, 2007, net cash provided
by investing and financing activities exceeded negative cash flows from
operating activities primarily due to a temporary increase in cash demands from
capital markets activities. Positive investing cash flows resulted as $.6
billion available for sale securities were sold in anticipation of loan growth,
and the issuance of $.8 billion in long term debt resulted in an increase in net
cash from financing activities. As deposits grew $2.3 billion, short-term
borrowings were reduced by $2.2 billion in first quarter 2007.
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 source 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. The parent company also has the ability to enhance its
liquidity position by raising equity or incurring debt.
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’ generally 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 can change substantially at
the beginning of each new fiscal year compared with the last day of the year
just completed. However, due to the net retained loss experienced in 2007,
during 2008, FTBNA’s excess dividends in the year 2007 may be applied against
retained net income for the year 2005. Also, during 2009, FTBNA’s excess
dividends in the year 2007 may be applied against the net retained net income
for the years 2005 and 2006. Applying the applicable rules, FTBNA’s total amount
available for dividends was ($74.0) million at December 31, 2007 and at January
1, 2008. Earnings (or losses) and dividends declared during 2008 will
change the amount available during 2008 until December 31. As long as the
dividends declared in 2008 do not exceed FTBNA’s net income in that year, the
amount available for dividends at January 1, 2009 will be the same as that
available at December 31, 2008.
FTBNA has
obtained approval from the OCC to declare and pay dividends on its preferred
stock outstanding payable in April
2008, and
recently requested similar approval for dividends on that class of stock payable
in July 2008. FTBNA has not requested approval to pay
common dividends to its sole common stockholder, FHN. Although FHN has funds
available for dividends even without FTBNA dividends, availability of funds is
not the sole factor considered by FHN’s Board in deciding whether or not to
declare a dividend of any particular size; the Board also must consider FHN’s
current and prospective capital, liquidity and other needs.
On April 27,
2008, FHN’s Board of Directors determined to cease paying cash dividends
following the cash dividend of 20 cents per share payable on July 1, 2008.
Instead, the Board intends to pay a dividend in shares of common stock with a
value equal to the previous 20 cents per share cash dividend rate. The Board
currently intends to reinstate a cash dividend at an appropriate and prudent
level once earnings and other conditions improve sufficiently, consistent with
regulatory and other constraints. The Board anticipates that this policy will
remain in effect for the foreseeable future.
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 first quarter 2008, approximately $4.3 billion of
conventional and federally insured mortgage loans were securitized and sold by
First Horizon Home Loans through these investors.
Historically,
certain of FHN's originated loans, including non-conforming first-lien
mortgages, second-lien mortgages and HELOC originated primarily through FTBNA,
have not conformed to the requirements for sale or securitization
through government agencies. FHN pooled and securitized these
non-conforming loans in proprietary transactions. After
securitization and sale, these loans are not reflected on the Consolidated
Condensed Statements of Condition. These transactions, which were
conducted through single-purpose business trusts, are an efficient way for FHN
and other participants in the housing industry to monetize these
assets. On March 31, 2008 and 2007, the outstanding principal amount
of loans in these off-balance sheet business trusts was $24.7 billion and $25.0
billion, respectively. FHN has substantially reduced its origination
of these loans in response to disruptions in the credit markets and did not
execute a securitization of these loans in first quarter 2008. Given
the historical significance of FHN's origination of non-conforming loans, the
use of single-purpose business trusts to securitize these loans was an important
source of liquidity to FHN. Future availability of this market will
be subject to market conditions.
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 activities. Management, measurement, and reporting of
compliance risk are overseen by the Regulatory Compliance Committee, which is
chaired by the EVP Risk
Management,
Government Relations and CRA. 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. These are subject to independent review by
FHN’s Credit Risk Assurance Group, which encompasses both Credit Review and
Credit Quality Control functions. The EVP of Credit Risk Assurance is
appointed by and reports to the Credit Policy & Executive Committee of the
Board. This group is charged with providing the Board and executive
management with independent, objective, and timely assessments of FHN’s
portfolio quality and credit risk management processes. 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 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 Credit Risk Management 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.
FHN has a
significant concentration of loans secured by residential real estate (53
percent of total loans) primarily in three portfolios. The retail
real estate residential portfolio (35 percent of total loans) is comprised of
primarily home equity lines and loans. While this portfolio is
showing increased stress related to loss severities experienced due to the
downturn in the housing market, it contains loans extended to strong borrowers
with high credit scores and is geographically diversified.
The OTC
portfolio (9 percent of total loans) has been negatively impacted by the
downturn in the housing industry, certain discontinued product types, and the
decreased availability of permanent mortgage financing. Portfolio
performance issues are more acute in certain volatile markets.
The
Residential CRE portfolio (9 percent of total loans) has also been negatively
impacted by the housing industry downturn as liquidity has been severely
stressed. Similar to the OTC portfolio, Residential CRE portfolio
performance was driven by conditions in markets that have been significantly
impacted by the downturn.
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.
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
In accordance
with Statement of Financial Accounting Standards No. 156, “Accounting for
Servicing of Financial Assets – an Amendment of FASB Statement No. 140,” FHN has
elected fair value accounting for all classes of mortgage servicing
rights. The fair value of MSR typically rises as market interest
rates increase and declines as market interest rates decrease; however, the
extent to which this occurs depends in part on (1) the magnitude of 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, and 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
|
|
|
March
31
|
|
|
2008
|
|
|
2007
|
|
Prepayment
speeds
|
|
|
|
|
|
|
Actual
|
|
|
18.4 |
% |
|
|
17.1 |
% |
Estimated*
|
|
|
25.8 |
|
|
|
14.0 |
|
* 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 brokers, and (b) a collection of surveys and benchmarking
data made available by independent third parties that include peer participants
in the mortgage banking business. Although there is no single source
of market information that can be relied upon to assess the fair value of MSR,
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 March 31, 2008 and 2007, 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. Fair
values of the derivatives used to hedge MSR (and excess interest as discussed
below) are obtained through price quotes received from third party
broker-dealers in the derivative markets.
First Horizon
Home Loans generally experiences increased loan origination and production in
periods of low interest rates which 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.
Principal
Only and Subordinated Bond Certificates
In some
instances, FHN retains interests in the loans it securitizes by retaining
certificated principal only strips or subordinated bonds. To
determine the fair value of principal only strips, FHN uses the market prices
from comparable assets such as publicly traded FNMA trust principal only strips
that are adjusted to reflect the relative risk difference between readily
marketable securities and privately issued securities. The fair value
of subordinated bonds is determined using the best available market information,
which may include trades of comparable securities, independently provided
spreads to other marketable securities, and published market
research. Where no market information is available, the company
utilizes an internal valuation model. As of March 31, 2008, no market
information was available, and the subordinated bonds were valued using an
internal model which includes assumptions about timing, frequency and severity
of loss, prepayment speeds of the underlying collateral, and the yield that a
market participant would require. The assumptions were consistent
with those embedded in the December 31, 2007 values, when there was more market
information available, except that loss frequency and loss severity assumptions
were worsened consistent with published industry cumulative historical loss
information and published market projections of future deteriorations in real
estate values. As of March 31, 2007, the subordinated bonds were
valued using trades of comparable market securities and independently provided
spreads. Both the principal only strips and the subordinated bonds
are collateralized by prime or Alt-A jumbo loans which FHN originated and
sold into private label securitizations, primarily in 2006 and
2007. FHN does not utilize derivatives to hedge against changes in
the fair value of these certificates.
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.
Sensitivity
of MSR and Other Retained Interests
The
sensitivity of the current fair value of all retained or purchased interests for
MSR to immediate 10 percent and 20 percent adverse changes in assumptions on
March 31, 2008, are as follows:
Table
10 - Sensitivity of the Current Fair Value of All Retained or Purchased Interest
for MSR
(Dollars
in thousands
|
|
First
|
|
|
Second
|
|
|
|
|
except
for annual cost to service)
|
|
Liens
|
|
|
Liens
|
|
|
HELOC
|
|
March
31, 2008
|
|
|
|
|
|
|
|
|
|
Fair
value of retained interests
|
|
$ |
865,855 |
|
|
$ |
20,126 |
|
|
$ |
9,942 |
|
Weighted
average life (in years)
|
|
|
4.4 |
|
|
|
2.4 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
prepayment rate
|
|
|
20.0 |
% |
|
|
33.8 |
% |
|
|
41.0 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(48,824 |
) |
|
$ |
(1,458 |
) |
|
$ |
(780 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(92,794 |
) |
|
|
(2,771 |
) |
|
|
(1,483 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
discount rate on servicing cash flows
|
|
|
11.2 |
% |
|
|
14.0 |
% |
|
|
18.0 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(27,982 |
) |
|
$ |
(510 |
) |
|
$ |
(260 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(54,171 |
) |
|
|
(993 |
) |
|
|
(505 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
cost to service (per loan)*
|
|
$ |
55 |
|
|
$ |
50 |
|
|
$ |
50 |
|
Impact
on fair value of 10% adverse change
|
|
|
(11,494 |
) |
|
|
(408 |
) |
|
|
(292 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(22,988 |
) |
|
|
(818 |
) |
|
|
(583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
earnings on escrow
|
|
|
2.8 |
% |
|
|
2.4 |
% |
|
|
2.4 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(17,569 |
) |
|
$ |
(368 |
) |
|
$ |
(221 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(35,137 |
) |
|
|
(736 |
) |
|
|
(443 |
) |
*The
annual cost to service includes an incremental cost to service delinquent
loans. Historically, this fair value sensitivity disclosure has
not included this incremental cost. The annual cost to service
first-lien mortgage loans without the incremental cost to service
delinquent loans was $49 as of March 31,
2008.
|
The
sensitivity of the current fair value of retained interests for other residuals
to immediate 10 percent and 20 percent adverse changes in assumptions on March
31, 2008, are as follows:
Table
11 - Sensitivity of the Current Fair Value for Other
Residuals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual
|
|
|
Residual
|
|
|
|
Excess
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Interest
|
|
(Dollars
in thousands
|
|
Interest
|
|
|
Certificated
|
|
|
|
|
|
Subordinated
|
|
|
Certificates
|
|
|
Certificates
|
|
except
for annual cost to service)
|
|
IO
|
|
|
PO
|
|
|
IO
|
|
|
Bonds
|
|
|
2nd
Liens
|
|
|
HELOC
|
|
March
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of retained interests
|
|
$ |
308,467 |
|
|
$ |
14,517 |
|
|
$ |
322 |
|
|
$ |
21,939 |
|
|
$ |
4,506 |
|
|
$ |
12,555 |
|
Weighted
average life (in years)
|
|
|
4.6 |
|
|
|
4.4 |
|
|
|
3.8 |
|
|
|
8.9 |
|
|
|
2.5 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
prepayment rate
|
|
|
18.5 |
% |
|
|
33.8 |
% |
|
|
24.3 |
% |
|
|
83.1 |
% |
|
|
33.0 |
% |
|
|
34.0 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(19,972 |
) |
|
$ |
(607 |
) |
|
$ |
(23 |
) |
|
$ |
(352 |
) |
|
$ |
(43 |
) |
|
$ |
(476 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(36,223 |
) |
|
|
(1,167 |
) |
|
|
(43 |
) |
|
|
(715 |
) |
|
|
(83 |
) |
|
|
(898 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
discount rate on residual cash flows
|
|
|
12.1 |
% |
|
|
15.1 |
% |
|
|
14.0 |
% |
|
|
39.4 |
% |
|
|
35.0 |
% |
|
|
33.0 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(10,619 |
) |
|
$ |
(511 |
) |
|
$ |
(11 |
) |
|
$ |
(1,382 |
) |
|
$ |
(157 |
) |
|
$ |
(521 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(20,522 |
) |
|
|
(986 |
) |
|
|
(21 |
) |
|
|
(2,623 |
) |
|
|
(300 |
) |
|
|
(982 |
) |
These
sensitivities are hypothetical and should not be considered to be predictive of
future performance. As the figures indicate, changes in fair value based on a 10
percent variation in assumptions generally cannot necessarily be extrapolated
because the relationship of the change in assumption to the change in fair value
may not be linear. Also, in this table, the effect of a variation in a
particular assumption on the fair value of the retained interest is calculated
independently from any change in another assumption. In reality, changes in one
factor may result in changes in another, which might magnify or counteract the
sensitivities. Furthermore, the estimated fair values as disclosed should not be
considered indicative of future earnings on these assets.
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. 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 (at quarter end an average of
approximately 40 days) into the secondary market.
Interest rate
lock commitments are derivatives pursuant to SFAS 133 and are therefore recorded
at estimates of fair value. Effective January 1, 2008, FHN applied
the provisions of Staff Accounting Bulletin No. 109, “Written Loan Commitments
Recorded at Fair Value Through Earnings” (SAB No. 109) prospectively for
derivative loan commitments issued or modified after that date. SAB
No. 109 requires inclusion of expected net future cash flows related to loan
servicing activities in the fair value measurement of a written loan
commitment. Also on January 1, 2008, FHN adopted Statement of
Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No.
157), which affected the valuation of interest rate lock commitments previously
measured under the guidance of EITF 02-3, “Issues Involved in Accounting for
Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities”.
FHN adopted
Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115” (SFAS No. 159) on January 1, 2008. Prior to
adoption of SFAS No. 159, all warehouse loans were carried at the lower of cost
or market, where carrying value was adjusted for successful hedging under SFAS
No. 133 and the comparison of carrying value to market was performed for
aggregate loan pools. Upon adoption of SFAS No. 159, FHN elected to
prospectively account for substantially all of its mortgage loan warehouse
products at fair value upon origination and correspondingly discontinued the
application of SFAS No. 133 hedging relationships for these new
originations.
The fair
value of interest rate lock commitments and the fair value of warehouse loans is
impacted principally by changes in interest rates, but also by changes in
borrower’s credit, and changes in profit margins required by investors for
perceived risks (i.e., liquidity). First Horizon Home Loans does not
hedge against credit and liquidity risk in the pipeline or
warehouse. Third party models are used to manage the interest rate
risk.
The fair
value of loans whose principal market is the securitization market is based on
recent security trade prices for similar product with a similar delivery date,
with necessary pricing adjustments to convert the security price to a loan
price. Loans whose principal market is the whole loan market
are priced based on recent observable whole loan trade prices or published third
party bid prices for similar product, with necessary pricing adjustments to
reflect differences in loan characteristics. Typical adjustments to
security prices or whole loan prices include adding the value of MSR to the
security price or to the whole loan price if the price is servicing retained,
adjusting for interest in excess of (or less than) the required coupon or note
rate, adjustments to reflect differences in the characteristics of the loans
being valued as compared to the collateral of the security or the loan
characteristics in the benchmark whole loan trade, adding interest carry,
reflecting the recourse obligation that will remain after sale, and adjusting
for changes in market liquidity or interest rates if the benchmark security or
loan price is not current. Additionally, loans that are delinquent or
otherwise significantly aged are discounted to reflect the less marketable
nature of these loans.
The fair
value of First Horizon Home Loans’ warehouse (first-lien mortgage loans held for
sale) changes with fluctuations in interest rates from the loan closing date
through the date of sale of the loan into the secondary market. Typically, the
fair value of the warehouse declines in value when interest rates increase and
rises in value when interest rates decrease. To mitigate this risk, 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.
Prior to the
adoption of SFAS No. 159, to the extent that these interest rate derivatives
were designated to hedge specific similar assets in the warehouse and
prospective analyses indicate that high correlation is expected, the hedged
loans were considered for hedge accounting under SFAS No.
133. Anticipated correlation was 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 were reset daily and
the statistical correlation was calculated using these daily data
points. Retrospective hedge effectiveness was measured using the
regression results. First Horizon Home Loans generally maintained 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 $2.0
billion on March 31 2007. The balance sheet impacts of the related
derivatives were net assets of $.2 million on March 31, 2007. Net losses
of $.7 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 three
months ended March 31, 2007.
Interest rate
lock commitments generally have a term of up to 60 days before the closing of
the loan. During this period, the value of the lock changes with
changes in interest rates. The interest rate lock commitment does not
bind the potential borrower to entering into the loan, nor does it guarantee
that First Horizon Home Loans will approve the potential borrower for the
loan. Therefore, when determining fair value, 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. Changes in the fair value of interest rate lock commitments
are recorded in current earnings as gain or loss on the sale of loans in
mortgage banking noninterest income.
Because
interest rate lock commitments are derivatives they do not qualify for hedge
accounting treatment under SFAS 133. However, First Horizon Home
Loans economically hedges the risk of changing interest rates by entering into
forward sales and futures contracts. 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
period ended March 31, 2008, the valuation model utilized to estimate the fair
value of loan applications locked prospectively from January 1,
2008, recognizes the full fair value of the ultimate loan adjusted
for estimated fallout and estimated cost assumptions a market participant would
use to convert the lock into a loan. Total interest rate lock
commitments were $7.8 million on March 31, 2008. For the period ended
March 31, 2007, the valuation model utilized to estimate the fair value of
interest rate lock commitments assumed a zero fair value on the date of the lock
with the borrower. Subsequent to the lock date, the model calculated
the change in value due solely to the change in interest rates and estimated
fallout resulting in a net asset with an estimated fair value of $12.6 million
on March 31, 2007.
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 March 31, 2008 and 2007, the
outstanding principal balance of mortgage loans sold with limited recourse
arrangements where some portion of the principal is a risk and serviced by First
Horizon Home Loans was $3.6 billion and $3.1 billion,
respectively. Additionally, on March 31, 2008 and 2007, $5.7 billion
and $4.9 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 March 31, 2008 and 2007, $99.0 million and
$115.5 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 March 31, 2008 and 2007, the foreclosure reserve was $20.6
million and $15.5 million, respectively. Table 12 provides a summary of reserves
for foreclosure losses for the periods ended March 31, 2008 and 2007.While the
servicing portfolio has slightly increased from $103.2 billion on March 31,
2007, to $106.8 billion on March 31, 2008, the foreclosure reserve has
experienced a more significant relative increase primarily due to increases in
both frequency and severity of projected losses.
Table
12 - Reserves for Foreclosure Losses
|
|
Three
Months Ended
|
|
|
|
March
31
|
|
(Dollars
in thousands)
|
|
2008
|
|
2007
|
Beginning
balance
|
|
$ |
16,160 |
|
|
$ |
14,036 |
|
Provision
for foreclosure losses
|
|
|
6,681 |
|
|
|
2,080 |
|
Charge-offs
|
|
|
(2,510 |
) |
|
|
(1,178 |
) |
Recoveries
|
|
|
283 |
|
|
|
591 |
|
Ending
balance
|
|
$ |
20,614 |
|
|
$ |
15,529 |
|
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
Regional Banking and the National Specialty Lending segments. The
Credit Policy and Executive Committees 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.
In assessing
the credit risk associated with individually impaired commercial loans, FHN
considers the vast majority of these loans as collateral dependent in accordance
with Statement of Financial Accounting Standards No. 114, “Accounting by
Creditors for Impairment of a Loan.” After consideration of any prior net
charge offs, FHN typically determines the appropriate level of allowance and
chargeoff for collateral dependent loans from recent appraisals. Appraised
values are reduced by estimated costs to sell. When additional
deterioration in the value of the collateral has occurred since the time of the
last appraisal, FHN discounts the appraised value to reflect general valuation
trends for similar assets. The total value of loans considered
collateral dependent at March 31, 2008 was $263.7 million.
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.
In the fourth
quarter 2007, FHN’s quarterly review of the allowance for loan and lease losses
included additional reviews of the adequacy of the allowance associated with
residential real estate portfolios in light of the unprecedented real estate
market conditions that unfolded in the last half of 2007. It was
determined that loan losses were increasing due to the likelihood of default and
the severity of inherent losses within the residential real estate loan
portfolios. This is primarily a result of rapid material declines in
collateral values as well as certain high risk products and high risk geographic
locations within the homebuilder finance and OTC portfolios. This
analysis resulted in an increased provision level of $156.6 million recognized
in the fourth quarter 2007.
In first
quarter 2008, FHN continued to apply focused portfolio management activities to
identify problem assets. The procedures applied for homebuilder
finance and OTC portfolios identified additional losses within the OTC
portfolio. Additionally, loan level reviews of the commercial real
estate and C&I portfolios were conducted, identifying the need for
additional provisioning in these portfolios. Home equity loss trends
were also reviewed, resulting in the identification of increased loss severities
within this portfolio. As a result of these procedures FHN recognized
$240.0 million of provision in the quarter.
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, 2007, 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, 2007, indicated goodwill
impairment for the Mortgage Banking segment. Based on further
analysis and events subsequent to the measurement date of October 1, 2007, no
additional goodwill impairment was indicated as of December 31, 2007 or
March 31, 2008.
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 Regional
Banking, National Specialty Lending, 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 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
POSSIBLE SALE OR DOWNSIZING
OF MORTGAGE BUSINESS
FHN continues
to review its strategy with respect to its mortgage business activities. Based
on its current strategy, FHN could sell or significantly reduce portions of its
mortgage business. Currently, FHN is actively engaged in efforts to sell or
downsize its national mortgage origination and mortgage servicing business
activities. These efforts are not expected to include FHN’s mortgage loan
origination activities associated with its Tennessee-based banking operations.
Currently, FHN is actively negotiating for a sale of certain parts of its
mortgage business, but there can be no certainty that such a transaction will
occur or of the final terms of such sale.
If FHN is
unable to successfully sell portions of its mortgage business as contemplated
above, FHN may significantly reduce its national mortgage origination
activities. Any closing of mortgage business or portions thereof would likely
involve significant expenses primarily related to employee severance, lease
cancellations, and other associated assets.
SUBSEQUENT
EVENTS
Subsequent to
the end of the first quarter of 2008, FHN completed a public offering of $690
million of its common stock, including exercise of the underwriters’ over
allotment option. The net proceeds from the offering will approximate
$660 million after consideration of underwriters’ discounts and commissions as
well as estimated offering expenses. FHN intends to use substantially
all of the net proceeds from the sales of the securities for general corporate
purposes.
The Board of
Directors of FHN has determined that after the dividend payable on July 1, 2008
of $.20 per share, it currently intends to pay dividends in shares of common
stock for the foreseeable future.
FAIR VALUE
MEASUREMENTS
As a
financial services institution, fair value measurements are applied to a
significant portion of FHN’s Consolidated Condensed Statement of
Condition. A summary of line items significantly affected by fair
value measurements, a brief description of current accounting practices and a
description of current valuation methodologies are presented in Table 13
below. As of March 31, 2008, the total amount of assets and
liabilities measured at fair value using significant unobservable inputs was
27.8 percent and 1.8 percent, respectively, in relation to the total amount of
assets and liabilities measured at fair value. See Note 13 – Fair
Values of Assets and Liabilities – for additional
information.
Table
13 - Application of Fair Value Measurements
Line
Item
|
Description
of Accounting
|
Valuation
Discussion
|
Trading
securities and liabilities
|
Retained
interests in securitizations are recognized at fair value through current
earnings.
|
See
Critical Accounting Policies.
|
|
Capital
Markets trading positions are recognized at fair value through current
earnings.
|
Long
positions are valued at bid price in bid-ask spread. Short
positions are valued at ask price. Positions are valued using
observable inputs including current market transactions, LIBOR and U.S.
treasury curves, credit spreads and consensus prepayment
speeds.
|
Loans
held for sale
|
Substantially
all mortgage loans held for sale are recognized at elected fair value with
changes in fair value recognized currently in earnings.
|
See
Critical Accounting Policies.
|
|
The
warehouse of trust preferred securities is measured at the lower of cost
or market.
|
See
discussion below.
|
Securities
available for sale
|
Securities
are recognized at fair value with changes in fair value recorded, net of
tax, within other comprehensive income. Other than temporary
impairments are recognized by reducing the value of the investment to fair
value through earnings.
|
Valuations
are performed using observable inputs obtained from market transactions in
similar securities, when available. Typical inputs include
LIBOR and U.S. treasury yield curves, consensus prepayment estimates and
credit spreads. When available, broker quotes are used to
support valuations.
|
Allowance
for loan losses
|
The
appropriate reserve for collateral dependent loans is determined by
estimating the fair value of the collateral and reducing this amount by
estimated costs to sell.
|
See
Critical Accounting Policies.
|
Mortgage
servicing rights, net
|
MSR are
recognized at fair value upon inception. MSR are subsequently
recognized at elected fair value with changes in fair value recognized
through current earnings.
|
See
Critical Accounting Policies.
|
Other
assets and other liabilities
|
Interest
rate lock commitments qualifying as derivatives are recognized at fair
value with changes in fair value recognized through current
earnings.
|
See
Critical Accounting Policies.
|
|
Freestanding
derivatives and derivatives used for fair value hedging relationships
(whether economic or qualified under SFAS No. 133) are recognized at fair
value with changes in fair value included in earnings. Cash
flow hedges qualifying under SFAS No. 133 are recognized at fair value
with changes in fair value included in other comprehensive income, to the
extent the hedge is effective, until the hedged transaction
occurs. Ineffectiveness attributable to cash flow hedges is
recognized in current earnings.
|
Vaulations
for forwards and futures contracts are based on current transactions
involving identical securities. Valuations of other derivatives
are based on inputs observed in active markets for similar
instruments. Typical inputs include the LIBOR curve, option
volatility and option skew. See Critical Accounting Policies
for discussion of the valuation procedures for derivatives used to hedge
MSR and excess interest.
|
|
Deferred
compensation plan assets are measured at fair value with changes in fair
value recognized in current earnings. Deferred compensation
liabilities that are determined by the fair value of participant
investment elections are measured at fair value with changes in fair value
recognized in current earnings.
|
Valuations
of applicable deferred compensation and liabilities are based on quoted
prices in active markets.
|
In first
quarter 2008, FHN recognized a lower of cost or market reduction in value of
$36.2 million for its warehouse of trust preferred securities, which is
classified within level 3 for Loans held for sale. The determination
of estimated market value for the warehouse was based on a hypothetical
securitization transaction for the warehouse as a whole. FHN used
observable data related to prior securitization transactions as well as changes
in credit spreads in the CDO market since the most recent
transaction. FHN also incorporated significant internally developed
assumptions within its valuation of the warehouse, including estimated
prepayments and estimated defaults. In accordance with SFAS No. 157,
FHN excluded transaction costs related to the hypothetical securitization in
determining fair value.
FHN also
recognized a lower of cost or market reduction in value of $17.0 million
relating to mortgage warehouse loans during first quarter 2008.
Approximately $10.5 million is attributable to increased delinquencies or aging
of loans. The market values for these loans are estimated using
historical sales prices for these type loans, adjusted for incremental price
concessions that a third party investor is assumed to require due to tightening
credit markets and deteriorating housing prices. These assumptions are
based on published information about actual and projected deteriorations in the
housing market as well as changes in credit spreads. The remaining reduction in
value of $6.5 million is attributable to lower investor prices, due primarily to
credit spread widening. This reduction was calculated by comparing the
total fair value of loans (using the same methodology that is used for fair
value option loans) to carrying value for the aggregate population of loans that
were not delinquent or aged.
ACCOUNTING
CHANGES
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
"Disclosure about Derivative Instruments and Hedging Activities - an amendment
of FASB Statement No. 133" (SFAS No. 161). SFAS No. 161 requires enhanced
disclosures related to derivatives accounted for in accordance with SFAS No. 133
and reconsiders existing disclosure requirements for such derivatives and
any related hedging items. The disclosures provided in SFAS No. 161 will be
required for both interim and annual reporting periods. SFAS No. 161 is
effective prospectively for periods beginning after November 15, 2008. FHN is
currently assessing the effects of adopting SFAS No. 161.
In February
2008, FASB Staff Position No. FAS 140-3, “Accounting for Transfers of Financial
Assets and Repurchase Financing Transactions” (FSP FAS 140-3), was
issued. FSP FAS 140-3 permits a transferor and transferee to
separately account for an initial transfer of a financial asset and a related
repurchase financing that are entered into contemporaneously with, or in
contemplation of, one another if certain specified conditions are met at the
inception of the transaction. FSP FAS 140-3 requires that the two
transactions have a valid and distinct business or economic purpose for being
entered into separately and that the repurchase financing not result in the
initial transferor regaining control over the previously transferred financial
asset. FSP FAS 140-3 is effective prospectively for initial transfers
executed in reporting periods beginning on or after November 15,
2008. FHN is currently assessing the financial impact of
adopting FSP FAS 140-3.
In December
2007, the FASB issued Statement of Financial Accounting Standards No. 141-R,
“Business Combinations” (SFAS No. 141-R) and Statement of Financial Accounting
Standards No. 160, “Noncontrolling Interests in Consolidated Financial
Statements – an Amendment of ARB No. 51” (SFAS No. 160). SFAS No.
141-R requires that an acquirer recognize the assets acquired and liabilities
assumed in a business combination, as well as any noncontrolling interest in the
acquiree, at their fair values as of the acquisition date, with limited
exceptions. Additionally, SFAS No. 141-R provides that an acquirer cannot
specify an effective date for a business combination that is separate from the
acquisition date. SFAS No. 141-R also provides that
acquisition-related costs which an acquirer incurs should be expensed in the
period in which the costs are incurred and the services are
received. SFAS No. 160 requires that acquired assets and liabilities
be measured at full fair value without consideration to ownership
percentage. Under SFAS No. 160, any non-controlling interests in an
acquiree should be presented as a separate component of equity rather than on a
mezzanine level. Additionally, SFAS No. 160 provides that net income
or loss should be reported in the consolidated income statement at its
consolidated amount, with disclosure on the face of the consolidated income
statement of the amount of consolidated net income which is attributable to the
parent and noncontrolling interests, respectively. SFAS No. 141-R and
SFAS No. 160 are effective prospectively for periods beginning on or after
December 15, 2008, with the exception of SFAS No. 160’s presentation
and disclosure requirements which should be retrospectively applied to all
periods presented. FHN is currently assessing the financial impact of
adopting SFAS No. 141-R and SFAS No. 160.
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” (FSP
FIN 46(R)-7) was issued. FSP 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. In February 2008, the FASB issued FASB Staff Position No. SOP
07-1-1, “The Effective Date of AICPA Statement of Position 07-1” which
indefinitely defers the effective date of SOP 07-1 and FSP FIN
46(R)-7.
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 33-61, (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 2007
Annual Report to shareholders, and (c) the “Interest Rate Risk Management”
subsection of Note 25 to the Consolidated Financial Statements included in FHN’s
2007 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,
4, and 5
As of the end
of the first quarter 2008, the answers to Items 1, 3, 4, and 5 were
either inapplicable or negative, and therefore, these items are
omitted.
Item
1A Risk
Factors
The third
paragraph of the discussion concerning “Interest Rate and
Yield Curve Risks” in Item 1A of our Annual Report on Form 10-K
for the year ended December 31, 2007 is amended and restated as
follows:
Our mortgage
lending business is affected by changes in interest rates in another manner.
During the period of loan origination (when loans are in the “pipeline”) and
prior to the loan’s sale in the secondary market (when loans are in the
“warehouse”), we are exposed to the risk of interest rate changes for those
pipeline loans which we have agreed to lock in the customer’s mortgage rate and
for all warehouse loans, whether fixed-rate or adjustable-rate. We manage that
rate-change risk through hedging activities and other methods; however, it is
not possible to eliminate all such risks, and a rate change is just one of the
risks that could impact the demand for, and thus the value of, our pipeline and
warehouse loans. Additional information concerning those risks and our
management of them appears under the caption “Pipeline and Warehouse” beginning
on page 46 of the “Management’s Discussion and Analysis of Results of Operations
and Financial Condition” section of our 2007 Annual Report to Shareholders,
which is incorporated by reference into our Annual Report on Form 10-K for
2007.
The following
additional risk factors are added with this report:
Weakness
in the economy and in the real estate markets in which we operate has adversely
affected us and may continue to adversely affect us.
In recent
periods our operating results have been adversely affected by weakness in the
economy and in real estate markets. In particular, we have experienced
significant deterioration in our portfolios of national construction and home
equity loans and regional commercial loans. If the strength of the U.S. economy
in general and the strength of the local economies in which we conduct
operations continues to decline, this could result in, among other things, a
further deterioration in credit quality or a reduced demand for credit,
including a resultant adverse effect on our loan portfolio and allowance for
loan losses. A portion of our residential mortgage and commercial real estate
loan portfolios are comprised of loans to borrowers in certain geographic
markets that have been more adversely affected by declines in real estate values
and home sale volumes, job losses and declines in new home building, such as
certain markets in California, Florida, Northern Virginia/D.C. and Nevada. These
factors contributed to our increasing provisions for loan losses in the fourth
quarter of 2007 and first quarter of 2008 and the potential for future loan
losses and loss provisions for the remainder of 2008, which may result in loan
loss provisions in excess of charge-offs, higher delinquencies and/or greater
charge-offs in future periods, which may adversely affect our financial
condition and results of operations. In addition, further deterioration of the
U.S. economy may adversely impact our traditional banking business.
The
allowance for loan losses may prove inadequate or be negatively affected by
credit risk exposures.
Our banking
business depends on the creditworthiness of our borrowing customers. We
regularly review the allowance for loan losses for adequacy considering economic
conditions and trends, collateral values and credit quality indicators,
including past charge-off experience and levels of past due loans and
nonperforming assets as well as changes in housing price appreciation and
depreciation. Determining the appropriateness of the allowance is complex and
requires judgment by management about the effect of matters that are inherently
uncertain. If the credit quality of our customer base materially weakens, if the
risk profile of a market, industry or group of customers changes materially, or
if the allowance for loan losses is not adequate, our financial condition or
results of operations could be adversely affected.
Potential
regulatory and legislative actions may adversely affect our mortgage
business.
Legislative
and regulatory initiatives by federal, state or local legislative bodies or
administrative agencies, if enacted or adopted, could delay foreclosure, provide
new defenses to foreclosure or otherwise impair our ability to foreclose on a
defaulted mortgage loan, adversely affect our rights if a borrower declares
bankruptcy, or otherwise adversely affect our rights with respect to borrowers
who are in default or who qualify for such initiatives. The outcome of these
initiatives is uncertain.
Item
2 Unregistered Sales of Equity
Securities and Use of Proceeds
|
(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
45.
|
Item
6 Exhibits
Exhibit
No. Description
|
3.1
|
Amendment
to Charter, incorporated herein by reference to Exhibit 3.1 to the
Corporation’s Current Report on Form 8-K filed April 18,
2008.
|
|
3.2
|
Bylaws
of the Corporation, as amended and restated as of April 15,
2008.
|
|
4
|
Instruments
defining the rights of security holders, including
indentures.*
|
|
10.2(e)**
|
2000
Employee Stock Option Plan, as amended and restated April 14, 2008,
incorporated herein by reference to Exhibit 10.2 to the Corporation’s
Current Report on Form 8-K filed April 28,
2008.
|
|
10.2(f)**
|
2003
Equity Compensation Plan, as amended and restated April 14, 2008,
incorporated herein by reference to Exhibit 10.1 to the Corporation’s
Current Report on Form 8-K filed April 28,
2008.
|
|
10.5(r)**
|
Form of
stock option grant notice used for special grant to Mr. Jordan in lieu of
bonus, incorporated herein by reference to Exhibit 10.5(r) to the
Corporation’s Current Report on Form 8-K filed February 29,
2008.
|
|
10.5(s)**
|
Form of
Performance Restricted Stock award grant notice under 2003 Equity
Compensation Plan [2008]
|
|
10.5(t)**
|
Form of
Retention Restricted Stock award grant notice under 2003 Equity
Compensation Plan [2008]
|
|
10.6(a)**
|
2002
Management Incentive Plan, as amended and restated April 14, 2008,
incorporated herein by reference to Exhibit 10.3 to the Corporation’s
Current Report on Form 8-K filed April 28,
2008.
|
|
10.7(i2)**
|
Form of
amendment to 2004 form of Indemnity Agreement with directors and executive
officers, incorporated herein by reference to Exhibit 10.4 to the
Corporation’s Current Report on Form 8-K filed April 28,
2008.
|
|
10.7(i3)**
|
Form of
Indemnity Agreement with directors and executive officers (April 2008
revision), incorporated herein by reference to Exhibit 10.5 to the
Corporation’s Current Report on Form 8-K filed April 28,
2008.
|
|
10.7(r)**
|
Description
of salaries of the 2007 named executive officers, incorporated herein by
reference to Exhibit 10.7(r) to the Corporation’s Current Report on Form
8-K filed February 29, 2008.
|
|
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 28-30 and pages
114-115 in the Corporation’s 2007 Annual Report to shareholders furnished
to shareholders in connection with the Annual Meeting of Shareholders on
April 15, 2008, 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:
May 8,
2008
|
By:
/s/ D. Bryan
Jordan
Name: D.
Bryan Jordan
Title: Executive
Vice President and
Chief
Financial Officer
|
EXHIBIT
INDEX
Exhibit
No.
Description
|
3.1
|
Amendment
to Charter, incorporated herein by reference to Exhibit 3.1 to the
Corporation’s Current Report on Form 8-K filed April 18,
2008.
|
|
3.2
|
Bylaws
of the Corporation, as amended and restated as of April 15,
2008.
|
|
4
|
Instruments
defining the rights of security holders, including
indentures.*
|
|
10.2(e)**
|
2000
Employee Stock Option Plan, as amended and restated April 14, 2008,
incorporated herein by reference to Exhibit 10.2 to the Corporation’s
Current Report on Form 8-K filed April 28,
2008.
|
|
10.2(f)**
|
2003
Equity Compensation Plan, as amended and restated April 14, 2008,
incorporated herein by reference to Exhibit 10.1 to the Corporation’s
Current Report on Form 8-K filed April 28,
2008.
|
|
10.5(r)**
|
Form of
stock option grant notice used for special grant to Mr. Jordan in lieu of
bonus, incorporated herein by reference to Exhibit 10.5(r) to the
Corporation’s Current Report on Form 8-K filed February 29,
2008.
|
|
10.5(s)**
|
Form of
Performance Restricted Stock award grant notice under 2003 Equity
Compensation Plan [2008]
|
|
10.5(t)**
|
Form of
Retention Restricted Stock award grant notice under 2003 Equity
Compensation Plan [2008]
|
|
10.6(a)**
|
2002
Management Incentive Plan, as amended and restated April 14, 2008,
incorporated herein by reference to Exhibit 10.3 to the Corporation’s
Current Report on Form 8-K filed April 28,
2008.
|
|
10.7(i2)**
|
Form of
amendment to 2004 form of Indemnity Agreement with directors and executive
officers, incorporated herein by reference to Exhibit 10.4 to the
Corporation’s Current Report on Form 8-K filed April 28,
2008.
|
|
10.7(i3)**
|
Form of
Indemnity Agreement with directors and executive officers (April 2008
revision), incorporated herein by reference to Exhibit 10.5 to the
Corporation’s Current Report on Form 8-K filed April 28,
2008.
|
|
10.7(r)**
|
Description
of salaries of the 2007 named executive officers, incorporated herein by
reference to Exhibit 10.7(r) to the Corporation’s Current Report on Form
8-K filed February 29, 2008.
|
|
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 28-30 and pages
114-115 in the Corporation’s 2007 Annual Report to shareholders furnished
to shareholders in connection with the Annual Meeting of Shareholders on
April 15, 2008, 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.