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
September 30,
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 |
(I.R.S.
Employer |
incorporation or
organization) |
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.
Class
|
Outstanding on September 30, 2008
|
Common Stock, $.625 par
value
|
201,593,623.521(a)
|
(a) Includes
5,986,902.521 stock dividend shares distributed on October 1, 2008 to
shareholders of record on September 12, 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
|
|
|
September
30
|
|
|
December
31
|
|
(Dollars
in thousands)(Unaudited)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
815,935 |
|
|
$ |
936,707 |
|
|
$ |
1,170,220 |
|
Federal
funds sold and securities
|
|
|
|
|
|
|
|
|
|
|
|
|
purchased
under agreements to resell
|
|
|
921,295 |
|
|
|
1,096,624 |
|
|
|
1,089,495 |
|
Total
cash and cash equivalents
|
|
|
1,737,230 |
|
|
|
2,033,331 |
|
|
|
2,259,715 |
|
Interest-bearing
deposits with other financial institutions
|
|
|
37,546 |
|
|
|
30,993 |
|
|
|
39,422 |
|
Trading
securities
|
|
|
1,561,024 |
|
|
|
1,734,653 |
|
|
|
1,768,763 |
|
Loans
held for sale
|
|
|
718,029 |
|
|
|
2,900,464 |
|
|
|
3,461,712 |
|
Loans
held for sale - divestiture
|
|
|
- |
|
|
|
565,492 |
|
|
|
289,878 |
|
Securities
available for sale
|
|
|
2,840,739 |
|
|
|
3,076,120 |
|
|
|
3,032,551 |
|
Securities
held to maturity (fair value of $- on September 30, 2008; $240
on
|
|
|
|
|
|
September
30, 2007; and $240 on December 31, 2007)
|
|
|
- |
|
|
|
240 |
|
|
|
240 |
|
Loans,
net of unearned income
|
|
|
21,601,898 |
|
|
|
21,973,004 |
|
|
|
22,103,516 |
|
Less: Allowance
for loan losses
|
|
|
760,456 |
|
|
|
236,611 |
|
|
|
342,341 |
|
Total
net loans
|
|
|
20,841,442 |
|
|
|
21,736,393 |
|
|
|
21,761,175 |
|
Mortgage
servicing rights, net
|
|
|
798,491 |
|
|
|
1,470,589 |
|
|
|
1,159,820 |
|
Goodwill
|
|
|
192,408 |
|
|
|
267,228 |
|
|
|
192,408 |
|
Other
intangible assets, net
|
|
|
46,887 |
|
|
|
58,738 |
|
|
|
56,907 |
|
Capital
markets receivables
|
|
|
1,651,547 |
|
|
|
1,219,720 |
|
|
|
524,419 |
|
Premises
and equipment, net
|
|
|
336,078 |
|
|
|
411,515 |
|
|
|
399,305 |
|
Real
estate acquired by foreclosure
|
|
|
151,461 |
|
|
|
75,656 |
|
|
|
103,982 |
|
Other
assets
|
|
|
1,891,494 |
|
|
|
1,874,497 |
|
|
|
1,949,308 |
|
Other
assets - divestiture
|
|
|
- |
|
|
|
22,623 |
|
|
|
15,856 |
|
Total
assets
|
|
$ |
32,804,376 |
|
|
$ |
37,478,252 |
|
|
$ |
37,015,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$ |
4,350,832 |
|
|
$ |
3,592,732 |
|
|
$ |
3,872,684 |
|
Time
deposits
|
|
|
2,510,344 |
|
|
|
2,822,792 |
|
|
|
2,826,301 |
|
Other
interest-bearing deposits
|
|
|
1,638,731 |
|
|
|
1,674,624 |
|
|
|
1,946,933 |
|
Interest-bearing
deposits-divestiture
|
|
|
- |
|
|
|
361,368 |
|
|
|
189,051 |
|
Certificates
of deposit $100,000 and more
|
|
|
1,470,089 |
|
|
|
5,142,169 |
|
|
|
3,129,532 |
|
Certificates
of deposit $100,000 and more - divestiture
|
|
|
- |
|
|
|
41,037 |
|
|
|
12,617 |
|
Interest-bearing
|
|
|
9,969,996 |
|
|
|
13,634,722 |
|
|
|
11,977,118 |
|
Noninterest-bearing
|
|
|
3,808,239 |
|
|
|
4,928,233 |
|
|
|
5,026,417 |
|
Deposits
- divestiture
|
|
|
- |
|
|
|
72,404 |
|
|
|
28,750 |
|
Total
deposits
|
|
|
13,778,235 |
|
|
|
18,635,359 |
|
|
|
17,032,285 |
|
Federal
funds purchased and securities
|
|
|
|
|
|
|
|
|
|
|
|
|
sold
under agreements to repurchase
|
|
|
1,890,681 |
|
|
|
4,039,827 |
|
|
|
4,829,597 |
|
Federal
funds purchased and securities
|
|
|
|
|
|
|
|
|
|
|
|
|
sold
under agreements to repurchase - divestiture
|
|
|
- |
|
|
|
- |
|
|
|
20,999 |
|
Trading
liabilities
|
|
|
380,896 |
|
|
|
543,060 |
|
|
|
556,144 |
|
Other
short-term borrowings and commercial paper
|
|
|
6,149,073 |
|
|
|
2,396,316 |
|
|
|
3,422,995 |
|
Term
borrowings
|
|
|
4,545,791 |
|
|
|
6,015,954 |
|
|
|
6,027,967 |
|
Other
collateralized borrowings
|
|
|
749,797 |
|
|
|
784,599 |
|
|
|
800,450 |
|
Total
long-term debt
|
|
|
5,295,588 |
|
|
|
6,800,553 |
|
|
|
6,828,417 |
|
Capital
markets payables
|
|
|
1,645,118 |
|
|
|
1,053,349 |
|
|
|
586,358 |
|
Other
liabilities
|
|
|
791,867 |
|
|
|
1,253,295 |
|
|
|
1,305,868 |
|
Other
liabilities-divestiture
|
|
|
- |
|
|
|
39,389 |
|
|
|
1,925 |
|
Total
liabilities
|
|
|
29,931,458 |
|
|
|
34,761,148 |
|
|
|
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 - 201,593,624 on September 30,
2008;
|
|
|
|
|
|
|
|
|
|
130,257,225 on
September 30, 2007; and 130,234,884 on December 31, 2007)
(a)
|
|
|
125,996 |
|
|
|
78,992 |
|
|
|
78,979 |
|
Capital
surplus
|
|
|
1,016,498 |
|
|
|
360,016 |
|
|
|
361,826 |
|
Undivided
profits
|
|
|
1,483,184 |
|
|
|
2,048,689 |
|
|
|
1,742,892 |
|
Accumulated
other comprehensive (loss)/income, net
|
|
|
(48,037 |
) |
|
|
(65,870 |
) |
|
|
(48,101 |
) |
Total
shareholders' equity
|
|
|
2,577,641 |
|
|
|
2,421,827 |
|
|
|
2,135,596 |
|
Total
liabilities and shareholders' equity
|
|
$ |
32,804,376 |
|
|
$ |
37,478,252 |
|
|
$ |
37,015,461 |
|
See
accompanying notes to consolidated condensed financial
statements.
Certain
previously reported amounts have been reclassified to agree with current
presentation.
(a)
Outstanding shares have been restated to reflect October 1, 2008 stock
dividend.
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
|
First
Horizon National Corporation
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
(Dollars
in thousands except per share data)(Unaudited)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
281,648 |
|
|
|
413,275 |
|
|
$ |
898,743 |
|
|
|
1,236,956 |
|
Interest
on investment securities
|
|
|
38,733 |
|
|
|
44,990 |
|
|
|
118,681 |
|
|
|
146,365 |
|
Interest
on loans held for sale
|
|
|
29,078 |
|
|
|
66,570 |
|
|
|
141,732 |
|
|
|
191,338 |
|
Interest
on trading securities
|
|
|
27,586 |
|
|
|
41,898 |
|
|
|
93,665 |
|
|
|
132,530 |
|
Interest
on other earning assets
|
|
|
6,198 |
|
|
|
16,002 |
|
|
|
22,350 |
|
|
|
53,634 |
|
Total
interest income
|
|
|
383,243 |
|
|
|
582,735 |
|
|
|
1,275,171 |
|
|
|
1,760,823 |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
16,707 |
|
|
|
29,140 |
|
|
|
60,957 |
|
|
|
85,090 |
|
Time
deposits
|
|
|
22,174 |
|
|
|
34,745 |
|
|
|
79,216 |
|
|
|
101,337 |
|
Other
interest-bearing deposits
|
|
|
3,478 |
|
|
|
6,179 |
|
|
|
12,940 |
|
|
|
19,876 |
|
Certificates
of deposit $100,000 and more
|
|
|
15,123 |
|
|
|
92,557 |
|
|
|
63,552 |
|
|
|
309,463 |
|
Interest
on trading liabilities
|
|
|
8,304 |
|
|
|
10,295 |
|
|
|
27,319 |
|
|
|
40,928 |
|
Interest
on short-term borrowings
|
|
|
47,192 |
|
|
|
75,114 |
|
|
|
166,666 |
|
|
|
211,210 |
|
Interest
on long-term debt
|
|
|
47,118 |
|
|
|
96,901 |
|
|
|
174,387 |
|
|
|
278,264 |
|
Total
interest expense
|
|
|
160,096 |
|
|
|
344,931 |
|
|
|
585,037 |
|
|
|
1,046,168 |
|
Net
interest income
|
|
|
223,147 |
|
|
|
237,804 |
|
|
|
690,134 |
|
|
|
714,655 |
|
Provision
for loan losses
|
|
|
340,000 |
|
|
|
43,352 |
|
|
|
800,000 |
|
|
|
116,246 |
|
Net
interest income/(loss) after provision for loan losses
|
|
|
(116,853 |
) |
|
|
194,452 |
|
|
|
(109,866 |
) |
|
|
598,409 |
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
markets
|
|
|
95,954 |
|
|
|
63,722 |
|
|
|
349,749 |
|
|
|
235,889 |
|
Deposit
transactions and cash management
|
|
|
45,802 |
|
|
|
44,863 |
|
|
|
135,152 |
|
|
|
127,300 |
|
Mortgage
banking
|
|
|
106,817 |
|
|
|
39,022 |
|
|
|
437,947 |
|
|
|
183,419 |
|
Trust
services and investment management
|
|
|
8,154 |
|
|
|
9,922 |
|
|
|
26,146 |
|
|
|
30,238 |
|
Insurance
commissions
|
|
|
7,332 |
|
|
|
6,747 |
|
|
|
22,298 |
|
|
|
24,210 |
|
Gains/(losses)
from loan sales and securitizations
|
|
|
3,238 |
|
|
|
4,774 |
|
|
|
(7,843 |
) |
|
|
24,052 |
|
Equity
securities gains/(losses), net
|
|
|
(210 |
) |
|
|
- |
|
|
|
63,833 |
|
|
|
2,967 |
|
Debt
securities gains, net
|
|
|
- |
|
|
|
- |
|
|
|
931 |
|
|
|
6,292 |
|
Losses
on divestitures
|
|
|
(17,489 |
) |
|
|
- |
|
|
|
(18,913 |
) |
|
|
- |
|
All
other income and commissions
|
|
|
55,575 |
|
|
|
34,425 |
|
|
|
143,995 |
|
|
|
132,595 |
|
Total
noninterest income
|
|
|
305,173 |
|
|
|
203,475 |
|
|
|
1,153,295 |
|
|
|
766,962 |
|
Adjusted
gross income after provision for loan losses
|
|
|
188,320 |
|
|
|
397,927 |
|
|
|
1,043,429 |
|
|
|
1,365,371 |
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation, incentives and benefits
|
|
|
215,498 |
|
|
|
236,683 |
|
|
|
780,046 |
|
|
|
741,217 |
|
Occupancy
|
|
|
27,210 |
|
|
|
34,778 |
|
|
|
85,819 |
|
|
|
96,964 |
|
Equipment
rentals, depreciation and maintenance
|
|
|
12,336 |
|
|
|
17,270 |
|
|
|
45,615 |
|
|
|
56,674 |
|
Operations
services
|
|
|
20,041 |
|
|
|
18,774 |
|
|
|
58,129 |
|
|
|
54,052 |
|
Communications
and courier
|
|
|
9,628 |
|
|
|
10,959 |
|
|
|
32,109 |
|
|
|
33,245 |
|
Amortization
of intangible assets
|
|
|
1,802 |
|
|
|
2,647 |
|
|
|
6,424 |
|
|
|
8,095 |
|
Goodwill
impairment
|
|
|
- |
|
|
|
13,010 |
|
|
|
- |
|
|
|
13,010 |
|
All
other expense
|
|
|
115,759 |
|
|
|
87,501 |
|
|
|
298,252 |
|
|
|
278,617 |
|
Total
noninterest expense
|
|
|
402,274 |
|
|
|
421,622 |
|
|
|
1,306,394 |
|
|
|
1,281,874 |
|
Income/(loss)
before income taxes
|
|
|
(213,954 |
) |
|
|
(23,695 |
) |
|
|
(262,965 |
) |
|
|
83,497 |
|
Provision/(benefit)
for income taxes
|
|
|
(88,859 |
) |
|
|
(9,330 |
) |
|
|
(125,826 |
) |
|
|
5,611 |
|
Income/(loss)
from continuing operations
|
|
|
(125,095 |
) |
|
|
(14,365 |
) |
|
|
(137,139 |
) |
|
|
77,886 |
|
Income
from discontinued operations, net of tax
|
|
|
- |
|
|
|
209 |
|
|
|
883 |
|
|
|
628 |
|
Net
income/(loss)
|
|
$ |
(125,095 |
) |
|
$ |
(14,156 |
) |
|
$ |
(136,256 |
) |
|
$ |
78,514 |
|
Earnings/(loss)
per common share (Note
8)
|
|
$ |
(.62 |
) |
|
$ |
(.11 |
) |
|
$ |
(.80 |
) |
|
$ |
.61 |
|
Diluted
earnings/(loss) per common share (Note
8)
|
|
$ |
(.62 |
) |
|
$ |
(.11 |
) |
|
$ |
(.80 |
) |
|
$ |
.60 |
|
Weighted
average common shares (Note
8)
|
|
|
201,184 |
|
|
|
129,917 |
|
|
|
169,482 |
|
|
|
129,611 |
|
Diluted
average common shares (Note
8)
|
|
|
201,184 |
|
|
|
129,917 |
|
|
|
169,482 |
|
|
|
131,760 |
|
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/(loss)
|
|
|
(136,256 |
) |
|
|
78,514 |
|
Other
comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
Unrealized
fair value adjustments, net of tax:
|
|
|
|
|
|
|
|
|
Cash
flow hedges
|
|
|
(6 |
) |
|
|
(268 |
) |
Securities
available for sale
|
|
|
(2,679 |
) |
|
|
(5,591 |
) |
Recognized
pension and other employee benefit plans net periodic benefit
costs
|
|
|
2,749 |
|
|
|
4,127 |
|
Comprehensive
income/(loss)
|
|
|
(136,192 |
) |
|
|
76,782 |
|
Cash
dividends declared
|
|
|
(64,431 |
) |
|
|
(170,620 |
) |
Common
stock issuance (69 million shares issued at $10 per share
|
|
|
659,659 |
|
|
|
- |
|
net
of offering costs)
|
|
|
|
|
|
|
|
|
Common
stock repurchased
|
|
|
(261 |
) |
|
|
(1,099 |
) |
Common
stock issued for:
|
|
|
|
|
|
|
|
|
Stock
options and restricted stock
|
|
|
572 |
|
|
|
34,243 |
|
Excess
tax benefit from stock-based compensation
arrangements
|
|
|
(1,531 |
) |
|
|
6,261 |
|
Stock-based
compensation expense
|
|
|
5,262 |
|
|
|
9,016 |
|
Other
|
|
|
- |
|
|
|
31 |
|
Balance,
September 30
|
|
$ |
2,577,642 |
|
|
$ |
2,421,827 |
|
See
accompanying notes to consolidated condensed financial
statements.
|
|
|
|
|
|
|
|
|
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
|
First
Horizon National Corporation
|
|
|
|
Nine
Months Ended September 30
|
|
(Dollars
in thousands)(Unaudited)
|
|
2008
|
|
|
2007
|
|
Operating
|
Net
(loss)/income
|
|
$ |
(129,451 |
) |
|
$ |
78,514 |
|
Activities
|
Adjustments
to reconcile net (loss)/income to net cash provided/(used) by operating
activities:
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
800,000 |
|
|
|
116,246 |
|
|
(Benefit)/provision
for deferred income tax
|
|
|
(221,764 |
) |
|
|
5,611 |
|
|
Depreciation
and amortization of premises and equipment
|
|
|
31,995 |
|
|
|
44,286 |
|
|
Amortization
of intangible assets
|
|
|
6,424 |
|
|
|
8,095 |
|
|
Net
other amortization and accretion
|
|
|
34,236 |
|
|
|
48,978 |
|
|
Decrease
in derivatives, net
|
|
|
(33,393 |
) |
|
|
(103,163 |
) |
|
Market
value adjustment on mortgage servicing rights
|
|
|
63,769 |
|
|
|
258 |
|
|
Provision
for foreclosure reserve
|
|
|
10,432 |
|
|
|
4,144 |
|
|
Loss
on divestitures
|
|
|
18,913 |
|
|
|
- |
|
|
Stock-based
compensation expense
|
|
|
5,262 |
|
|
|
9,016 |
|
|
Excess
tax benefit from stock-based compensation arrangements
|
|
|
1,531 |
|
|
|
(6,261 |
) |
|
Equity
securities gains, net
|
|
|
(63,833 |
) |
|
|
(2,967 |
) |
|
Debt
securities gains, net
|
|
|
(931 |
) |
|
|
(6,292 |
) |
|
Gains
on repurchases of debt
|
|
|
(31,515 |
) |
|
|
- |
|
|
Net
losses on disposal of fixed assets
|
|
|
23,795 |
|
|
|
1,093 |
|
|
Net
(increase)/decrease in:
|
|
|
|
|
|
|
|
|
|
Trading
securities
|
|
|
76,639 |
|
|
|
496,092 |
|
|
Loans
held for sale
|
|
|
2,775,183 |
|
|
|
(26,887 |
) |
|
Capital
markets receivables
|
|
|
(1,127,128 |
) |
|
|
(487,438 |
) |
|
Interest
receivable
|
|
|
24,753 |
|
|
|
3,466 |
|
|
Other
assets
|
|
|
122,709 |
|
|
|
24,965 |
|
|
Net
increase/(decrease) in:
|
|
|
|
|
|
|
|
|
|
Capital
markets payables
|
|
|
1,058,760 |
|
|
|
253,860 |
|
|
Interest
payable
|
|
|
(38,792 |
) |
|
|
4,984 |
|
|
Other
liabilities
|
|
|
(308,683 |
) |
|
|
(74,502 |
) |
|
Trading
liabilities
|
|
|
(175,248 |
) |
|
|
(246,897 |
) |
|
Total
adjustments
|
|
|
3,053,114 |
|
|
|
66,687 |
|
|
Net
cash provided by operating activities
|
|
|
2,923,663 |
|
|
|
145,201 |
|
Investing
|
Held to
maturity securities:
|
|
|
|
|
|
|
|
|
Activities
|
Maturities
|
|
|
240 |
|
|
|
29 |
|
|
Available
for sale securities:
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
104,940 |
|
|
|
636,188 |
|
|
Maturities
|
|
|
503,984 |
|
|
|
765,601 |
|
|
Purchases
|
|
|
(348,888 |
) |
|
|
(543,545 |
) |
|
Premises
and equipment:
|
|
|
|
|
|
|
|
|
|
Purchases/(Sales)
|
|
|
(37,050 |
) |
|
|
(24,194 |
) |
|
Net
decrease in securitization retained interests classified as trading
securities
|
|
|
43,237 |
|
|
|
- |
|
|
Net
increase/(decrease) in loans
|
|
|
272,115 |
|
|
|
(581,368 |
) |
|
Net
increase/(decrease) in interest-bearing deposits with other financial
institutions
|
|
|
1,876 |
|
|
|
(12,952 |
) |
|
Cash
payments related to divestitures
|
|
|
(20,518 |
) |
|
|
- |
|
|
Net
cash provided by investing activities
|
|
|
519,936 |
|
|
|
239,759 |
|
Financing
|
Common
stock:
|
|
|
|
|
|
|
|
|
Activities
|
Exercise
of stock options
|
|
|
511 |
|
|
|
34,450 |
|
|
Cash
dividends paid
|
|
|
(64,069 |
) |
|
|
(168,506 |
) |
|
Repurchase
of shares
|
|
|
(261 |
) |
|
|
(1,099 |
) |
|
Issuance
of shares
|
|
|
659,660 |
|
|
|
- |
|
|
Excess
tax benefit from stock-based compensation arrangements
|
|
|
(1,531 |
) |
|
|
6,261 |
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
Issuance
|
|
|
25,002 |
|
|
|
1,222,431 |
|
|
Payments
|
|
|
(1,354,261 |
) |
|
|
(265,056 |
) |
|
Cash
paid for repurchase of debt
|
|
|
(212,260 |
) |
|
|
- |
|
|
Issuance
of preferred stock of subsidiary
|
|
|
- |
|
|
|
8 |
|
|
Repurchase
of preferred stock of subsidiary
|
|
|
- |
|
|
|
(1 |
) |
|
Net
increase/(decrease) in:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(2,785,070 |
) |
|
|
(1,577,872 |
) |
|
Short-term
borrowings
|
|
|
(233,805 |
) |
|
|
251,663 |
|
|
Net
cash (used)/provided by financing activities
|
|
|
(3,966,084 |
) |
|
|
(497,721 |
) |
|
Net
decrease in cash and cash equivalents
|
|
|
(522,485 |
) |
|
|
(112,761 |
) |
|
Cash
and cash equivalents at beginning of period
|
|
|
2,259,715 |
|
|
|
2,146,092 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
1,737,230 |
|
|
$ |
2,033,331 |
|
|
Total
interest paid
|
|
|
621,812 |
|
|
|
1,039,828 |
|
|
Total
income taxes paid
|
|
|
183,536 |
|
|
|
14,016 |
|
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. 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 14 – Fair Values of Assets and Liabilities
for additional information.
After
adoption of SFAS No. 159, FHN continued 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 was not elected at the lower of cost or
market value. For such loans, net origination fees and costs were
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
were included in noninterest income. Interests retained from the sale
of such loans are included as a component of trading securities on the
Consolidated Condensed Statements of Condition.
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. Second
quarter 2008 earnings were negatively impacted by $20.9 million related to the
adoption of SAB No. 109 and SFAS No. 159 as loans and commitments remaining on
the balance sheet at the end of first quarter 2008 were sold. Third
quarter 2008 earnings were negatively affected by $35.2 million related to the
adoption of SAB No. 109 and SFAS No. 159 as remaining loans and
commitments on the balance sheet were sold either as part of the transaction
with MetLife Bank, N.A. or through subsequent deliveries of the mortgage
warehouse.
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.
Second
quarter 2008 earnings were positively impacted by a net of $13.7 million related
to the adoption of SFAS No. 157 as (1) FHN continued to deliver loans that had
been commitments upon adoption of SFAS No. 157, (2) some commitments existing at
March 31, 2008 were delivered as loans during the second quarter and (3)
additional commitments that would have been deferred under EITF 02-3 were
made. Third quarter 2008 earnings were positively impacted by a net
$20.8 million as (1) FHN continued to deliver loans that had been commitments
upon adoption of SFAS No. 157, (2) some commitments existing at June 30, 2008
were delivered as loans during the third quarter and (3) additional commitments
that would have been deferred under EITF 02-3 were
made. Substantially all commitments existing at August 31, 2008 were
sold to MetLife Bank, N. A. 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.
In October
2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset is Not Active” (FSP
FAS 157-3). FSP FAS 157-3 clarifies the application of SFAS No. 157
in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that asset is not active. FSP FAS 157-3 was effective upon
issuance, including prior periods for which financial statements had not been
issued. FHN applied the guidance of FSP FAS 157-3 in its fair value
measurements as of September 30, 2008 and the effects of adoption were not
material.
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
Note
1 - Financial Information (continued)
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 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
Note
1 - Financial Information (continued)
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 September
2008, the FASB issued FASB Staff Position No. FAS 133-1 and FIN 45-4,
“Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161” (FSP FAS 133-1). FSP FAS
133-1 requires sellers of credit derivatives and similar guarantee contracts to
make disclosures regarding the nature, term, fair value, potential losses and
recourse provisions for those contracts. FSP FAS 133-1 is effective
for reporting periods ending after November 15, 2008. Since FHN is
not a seller of credit derivatives or similar financial guarantees, the effect
of adopting FSP FAS 133-1 will not be material to FHN.
In May 2008,
the FASB issued Statement of Financial Accounting Standards No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (SFAS No.
162). SFAS No. 162 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United
States. As the GAAP hierarchy will reside in accounting literature
established by the FASB upon adoption of SFAS No. 162, it will become explicitly
and directly applicable to preparers of financial statements. SFAS
No. 162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles”. The adoption of SFAS No. 162 will have no effect on
FHN’s statement of condition or results of operations.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities - an amendment
of FASB Statement No. 133” (SFAS No. 161). SFAS No. 161 requires
enhanced disclosures related to derivatives accounted for in accordance with
SFAS No. 133 and reconsiders existing disclosure requirements for such
derivatives and any related hedging items. The disclosures provided
in SFAS No. 161 will be required for both interim and annual reporting
periods. SFAS No.
161 is
effective prospectively for quarterly interim 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. The effect of
adopting FSP FAS 140-3 will not be material to FHN.
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
Note
1 - Financial Information (continued)
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
In June 2008,
FHN announced that it had reached a definitive agreement with MetLife Bank, N.A.
(MetLife), a wholly-owned subsidiary of MetLife, Inc., for the sale of more than
230 retail and wholesale mortgage origination offices nationwide as well as its
loan origination and servicing platform. Effective August 31, 2008,
the parties completed the initial settlement for MetLife’s acquisition of
substantially all of FHN’s mortgage origination pipeline, related hedges,
certain fixed assets and other associated assets. MetLife did not
acquire any portion of FHN’s mortgage loan warehouse. First Horizon
retained its mortgage operations in and around Tennessee, continuing to
originate home loans for customers in its banking market
footprint. FHN also agreed with MetLife for the sale of servicing
assets, and related hedges, on $19.1 billion of first lien mortgage loans and
associated custodial deposits. Additionally, FHN has entered into a
subservicing agreement with MetLife for the remainder of FHN’s servicing
portfolio. MetLife generally paid book value for the assets and
liabilities it acquired, less a purchase price reduction of approximately $10.0
million. The assets and liabilities related to the mortgage
operations divested were included in the Mortgage Banking segment and were
reflected as “divestiture” on the Consolidated Condensed Statements of Condition
for the reporting period ending June 30, 2008. In third quarter 2008,
FHN recognized a loss on divestiture of $17.5 million related to this
transaction which is included in the noninterest income section of the
Consolidated Condensed Statements of Income as losses on
divestitures. The purchase price is subject to a post-closing true up
which FHN currently expects to occur in fourth quarter 2008.
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 and $0.4 million were
recognized in the first and second quarters of 2008, respectively, from the
disposition of the remaining First Horizon Bank branches. These
transactions resulted in the transfer of certain loans, certain fixed assets
(including branch locations) and assumption of all the deposit relationships of
the First Horizon Bank branches that were divested. The assets and
liabilities related to the First Horizon Bank branches were included in the
Regional Banking segment and were reflected as “divestiture” on the Consolidated
Condensed Statements of Condition for reporting periods ending prior to June 30,
2008. The losses realized in the first and second quarters 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.
Note
3 – Investment Securities
|
The
following tables summarize FHN's investment securities as of September 30,
2008 and 2007:
|
|
|
On
September 30, 2008
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
Unrealized
|
|
Unrealized
|
|
Fair
|
(Dollars
in thousands)
|
Cost
|
Gains
|
|
Losses
|
|
Value
|
Total securities held to
maturity |
$ -
|
$ -
|
|
$ -
|
|
$ -
|
Securities
available for sale:
|
|
|
|
|
|
|
U.S.
Treasuries
|
$ 47,897
|
$ 134
|
|
$ -
|
|
$ 48,031
|
Government
agency issued MBS*
|
1,247,796
|
13,408
|
|
(340)
|
|
1,260,864
|
Government
agency issued CMO*
|
1,080,662
|
14,617
|
|
(491)
|
|
1,094,788
|
Other
U.S. government agencies*
|
133,402
|
2,118
|
|
(200)
|
|
135,320
|
States
and municipalities
|
31,630
|
44
|
|
-
|
|
31,674
|
Other
|
2,374
|
-
|
|
(239)
|
|
2,135
|
Equity**
|
267,876
|
51
|
|
-
|
|
267,927
|
Total
securities available for sale***
|
$2,811,637
|
$30,372
|
|
$
(1,270)
|
|
$2,840,739
|
*
|
Includes
securities issued by government sponsored entities which are not backed by
the full faith and credit of the U.S. government.
|
**
|
Includes
FHLB and FRB stock, venture capital, money market, and cost method
investments.
|
***
|
Includes
$2.5 billion of securities pledged to secure public deposits, securities
sold under agreements to repurchase and for other
purposes.
|
|
|
|
|
|
|
|
|
|
|
On
September 30, 2007
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
Unrealized
|
|
Unrealized
|
|
Fair
|
(Dollars
in thousands)
|
Cost
|
Gains
|
|
Losses
|
|
Value
|
Securities
held to maturity:
|
|
|
|
|
|
|
States
and municipalities
|
$ 240
|
$ -
|
|
$ -
|
|
$ 240
|
Total
securities held to maturity
|
$ 240
|
$ -
|
|
$ -
|
|
$ 240
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
U.S.
Treasuries
|
$ 34,891
|
$ 120
|
|
$ -
|
|
$ 35,011
|
Government
agency issued MBS*
|
1,343,123
|
2,840
|
|
(6,189)
|
|
1,339,774
|
Government
agency issued CMO*
|
1,236,325
|
7,367
|
|
(3,208)
|
|
1,240,484
|
Other
U.S. government agencies*
|
225,335
|
2,100
|
|
(957)
|
|
226,478
|
States
and municipalities
|
1,500
|
-
|
|
-
|
|
1,500
|
Other
|
9,070
|
8
|
|
(26)
|
|
9,052
|
Equity**
|
223,965
|
-
|
|
(144)
|
|
223,821
|
Total
securities available for sale***
|
$3,074,209
|
$12,435
|
|
$
(10,524)
|
|
$3,076,120
|
*
|
Included
securities issued by government sponsored entities which are not backed by
the full faith and credit of the U.S. government.
|
**
|
Included
FHLB and FRB stock, venture capital, money market, and cost method
investments.
|
***
|
Included
$2.8 billion of securities pledged to secure public deposits, securities
sold under agreements to repurchase and for other
purposes.
|
Note
3 – Investment Securities (continued)
|
|
|
|
|
|
|
|
|
The
following tables provide information on investments within the available
for sale portfolio that have unrealized losses as of
|
September
30, 2008 and 2007:
|
|
|
|
|
|
On
September 30, 2008
|
|
|
Less
than 12 months
|
12
Months or Longer
|
Total
|
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
(Dollars
in thousands)
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
Government
agency issued MBS
|
$ 67,057
|
$ (340)
|
$ -
|
$ -
|
$ 67,057
|
$ (340)
|
Government
agency issued CMO
|
81,425
|
(491)
|
-
|
-
|
81,425
|
(491)
|
Other
U.S. government agencies
|
-
|
-
|
22,647
|
(200)
|
22,647
|
(200)
|
Other
|
355
|
(17)
|
411
|
(222)
|
766
|
(239)
|
Total
debt securities
|
148,837
|
(848)
|
23,058
|
(422)
|
171,895
|
(1,270)
|
Equity
|
-
|
-
|
-
|
-
|
-
|
-
|
Total
temporarily impaired securities
|
$ 148,837
|
$ (848)
|
$ 23,058
|
$ (422)
|
$ 171,895
|
$ (1,270)
|
Gross unrealized losses
as of September 30, 2008 were principally related to U.S. Government
agencies and primarily caused by interest rate changes. FHN has
reviewed these securities in accordance with its accounting policy for
other-than-temporary impairments and does not consider them other- than-temporarily
impaired. FHN has both the intent and ability to hold these
securities for the time necessary to recover the amortized
cost.
|
|
|
|
|
|
|
|
|
|
|
On
September 30, 2007
|
|
|
Less
than 12 months
|
12
Months or Longer
|
Total
|
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
(Dollars
in thousands)
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
Government
agency issued MBS
|
$ 785,791
|
$ (6,189)
|
$ -
|
$ -
|
$ 785,791
|
$ (6,189)
|
Government
agency issued CMO
|
238,877
|
(671)
|
132,705
|
(2,537)
|
371,582
|
(3,208)
|
Other
U.S. government agencies
|
-
|
-
|
24,557
|
(957)
|
24,557
|
(957)
|
Other
|
1,398
|
(1)
|
2,894
|
(25)
|
4,292
|
(26)
|
Total
debt securities
|
1,026,066
|
(6,861)
|
160,156
|
(3,519)
|
1,186,222
|
(10,380)
|
Equity
|
211
|
(20)
|
35
|
(124)
|
246
|
(144)
|
Total
temporarily impaired securities
|
$ 1,026,277
|
$ (6,881)
|
$ 160,191
|
$ (3,643)
|
$ 1,186,468
|
$ (10,524)
|
Gross unrealized losses
as of September 30, 2007 were principally related to U.S. Government
agencies and primarily caused by interest rate changes. FHN
reviewed these securities in accordance with its accounting policy for
other-than-temporary impairments and did not consider them other- than-temporarily
impaired. As of September 30, 2007, FHN had both the intent and
ability to hold these securities for the time necessary to recover the
amortized
cost.
|
Note
4 - Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
composition of the loan portfolio is detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30
|
|
|
December
31
|
|
(Dollars
in thousands)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and industrial
|
|
|
|
|
$ |
7,642,684 |
|
|
$ |
6,978,643 |
|
|
$ |
7,140,087 |
|
Real
estate commercial
|
|
|
|
|
|
1,492,323 |
|
|
|
1,326,261 |
|
|
|
1,294,922 |
|
Real
estate construction
|
|
|
|
|
|
2,020,455 |
|
|
|
2,828,545 |
|
|
|
2,753,475 |
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate residential
|
|
|
|
|
|
8,192,926 |
|
|
|
7,544,048 |
|
|
|
7,791,885 |
|
Real
estate construction
|
|
|
|
|
|
1,201,911 |
|
|
|
2,160,593 |
|
|
|
2,008,289 |
|
Other
retail
|
|
|
|
|
|
139,441 |
|
|
|
144,526 |
|
|
|
144,019 |
|
Credit
card receivables
|
|
|
|
|
|
194,966 |
|
|
|
196,967 |
|
|
|
204,812 |
|
Real
estate loans pledged against other collateralized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
borrowings
|
|
|
|
|
|
717,192 |
|
|
|
793,421 |
|
|
|
766,027 |
|
Loans,
net of unearned income
|
|
|
|
|
|
21,601,898 |
|
|
|
21,973,004 |
|
|
|
22,103,516 |
|
Allowance
for loan losses
|
|
|
|
|
|
760,456 |
|
|
|
236,611 |
|
|
|
342,341 |
|
Total
net loans
|
|
|
|
|
$ |
20,841,442 |
|
|
$ |
21,736,393 |
|
|
$ |
21,761,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans consist of loans which management has identified as impaired, other
nonaccrual loans and loans which have
|
|
been
restructured. On September 30, 2008 and 2007, there were no
significant outstanding commitments to advance additional funds to
customers
|
|
whose
loans had been restructured. The following table presents
nonperforming loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30
|
|
|
December
31
|
|
(Dollars
in thousands)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
Impaired
loans
|
|
|
|
|
$ |
404,458 |
|
|
$ |
93,972 |
|
|
$ |
126,612 |
|
Other
nonaccrual loans*
|
|
|
|
|
|
495,518 |
|
|
|
114,334 |
|
|
|
180,475 |
|
Total
nonperforming loans
|
|
|
|
|
$ |
899,976 |
|
|
$ |
208,306 |
|
|
$ |
307,087 |
|
* On
September 30, 2008 and 2007, and on December 31, 2007, other nonaccrual
loans included $9.1 million, $18.5 million, and $23.8 million,
respectively, of
|
|
loans
held for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain
previously reported 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
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
|
September
30
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Total
interest on impaired loans
|
|
$ |
167 |
|
|
$ |
152 |
|
|
$ |
427 |
|
|
$ |
646 |
|
Average
balance of impaired loans
|
|
|
416,102 |
|
|
|
79,060 |
|
|
|
321,395 |
|
|
|
52,527 |
|
Certain
previously reported 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 nine months
ended
|
|
September
30, 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
|
|
|
|
|
|
|
81,630 |
|
|
|
34,616 |
|
|
|
116,246 |
|
Divestitures/acquisitions/transfers
|
|
|
|
|
|
|
(14,946 |
) |
|
|
- |
|
|
|
(14,946 |
) |
Charge-offs
|
|
|
|
|
|
|
(64,222 |
) |
|
|
(27,794 |
) |
|
|
(92,016 |
) |
Recoveries
|
|
|
|
|
|
|
10,088 |
|
|
|
954 |
|
|
|
11,042 |
|
Net
charge-offs
|
|
|
|
|
|
|
(54,134 |
) |
|
|
(26,840 |
) |
|
|
(80,974 |
) |
Balance
on September 30, 2007
|
|
|
|
|
|
$ |
218,842 |
|
|
$ |
17,769 |
|
|
$ |
236,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
on December 31, 2007
|
|
|
|
|
|
$ |
325,297 |
|
|
$ |
17,044 |
|
|
$ |
342,341 |
|
Provision
for loan losses
|
|
|
|
|
|
|
627,198 |
|
|
|
172,802 |
|
|
|
800,000 |
|
Divestitures/acquisitions/transfers
|
|
|
|
|
|
|
(382 |
) |
|
|
- |
|
|
|
(382 |
) |
Charge-offs
|
|
|
|
|
|
|
(219,760 |
) |
|
|
(173,581 |
) |
|
|
(393,341 |
) |
Recoveries
|
|
|
|
|
|
|
10,392 |
|
|
|
1,446 |
|
|
|
11,838 |
|
Net
charge-offs
|
|
|
|
|
|
|
(209,368 |
) |
|
|
(172,135 |
) |
|
|
(381,503 |
) |
Balance
on September 30, 2008
|
|
|
|
|
|
$ |
742,745 |
|
|
$ |
17,711 |
|
|
$ |
760,456 |
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
|
|
|
|
|
|
|
|
|
Note
5 - Mortgage Servicing Rights
FHN
recognizes all its classes of mortgage servicing rights (MSR) at fair
value. Classes of MSR are determined in accordance with 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
$65.3 billion of mortgage loans on September 30, 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, more
emphasis has been placed on third party broker price discovery and, when
available, observable market trades in valuing MSR.
Following is
a summary of changes in capitalized MSR as of September 30, 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
|
|
|
282,341 |
|
|
|
11,582 |
|
|
|
1,919 |
|
Reductions
due to loan payments
|
|
|
(173,323 |
) |
|
|
(7,106 |
) |
|
|
(3,961 |
) |
Changes
in fair value due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in valuation model inputs or assumptions
|
|
|
(387 |
) |
|
|
98 |
|
|
|
(39 |
) |
Reclassification
to trading assets
|
|
|
(174,547 |
) |
|
|
- |
|
|
|
- |
|
Other
changes in fair value
|
|
|
(54 |
) |
|
|
82 |
|
|
|
42 |
|
Fair
value on September 30, 2007
|
|
$ |
1,429,245 |
|
|
$ |
28,747 |
|
|
$ |
12,597 |
|
Fair
value on January 1, 2008
|
|
$ |
1,122,415 |
|
|
$ |
25,832 |
|
|
$ |
11,573 |
|
Addition
of mortgage servicing rights
|
|
|
240,676 |
|
|
|
- |
|
|
|
1,145 |
|
Reductions
due to loan payments
|
|
|
(96,137 |
) |
|
|
(4,968 |
) |
|
|
(1,681 |
) |
Reductions
due to sale
|
|
|
(436,595 |
) |
|
|
- |
|
|
|
- |
|
Changes
in fair value due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in valuation model inputs or assumptions
|
|
|
(37,380 |
) |
|
|
(3,343 |
) |
|
|
(2,165 |
) |
Other
changes in fair value
|
|
|
(22,358 |
) |
|
|
6 |
|
|
|
1,471 |
|
Fair
value on September 30, 2008
|
|
$ |
770,621 |
|
|
$ |
17,527 |
|
|
$ |
10,343 |
|
In
conjunction with capital management initiatives, FHN modified Pooling and
Servicing Agreements (PSA) on its private securitizations during the second
quarter of 2007 to segregate the retained yield component from the master
servicing fee. The retained yield of $174.5 million was reclassified from
mortgage servicing rights to trading securities on the Consolidated Condensed
Statements of Condition.
Note
6 - Intangible Assets
The following
is a summary of intangible assets, net of accumulated amortization, included in
the Consolidated Condensed Statements of Condition:
|
|
|
|
|
Other
|
|
|
|
|
|
|
Intangible
|
|
(Dollars
in thousands)
|
|
Goodwill
|
|
|
Assets*
|
|
December
31, 2006
|
|
$ |
275,582 |
|
|
$ |
64,530 |
|
Amortization
expense
|
|
|
- |
|
|
|
(8,095 |
) |
Impairment
|
|
|
(13,010 |
) |
|
|
(910 |
) |
Divestitures
|
|
|
- |
|
|
|
(93 |
) |
Additions**
|
|
|
4,656 |
|
|
|
3,306 |
|
September
30, 2007
|
|
$ |
267,228 |
|
|
$ |
58,738 |
|
December
31, 2007
|
|
$ |
192,408 |
|
|
$ |
56,907 |
|
Amortization
expense
|
|
|
- |
|
|
|
(6,424 |
) |
Impairment
|
|
|
- |
|
|
|
(4,034 |
) |
Divestitures
|
|
|
- |
|
|
|
(32 |
) |
Additions
|
|
|
- |
|
|
|
470 |
|
September
30, 2008
|
|
$ |
192,408 |
|
|
$ |
46,887 |
|
*
Represents customer lists, acquired contracts, premium on purchased
deposits, and covenants not to compete.
|
|
**
Preliminary purchase price allocations on acquisitions are based upon
estimates of fair value and are subject to change.
|
|
The gross
carrying amount of other intangible assets subject to amortization is $133.6
million on September 30, 2008, net of $86.8 million of accumulated
amortization. Estimated aggregate amortization expense for the
remainder of 2008 is expected to be $1.8 million and is expected to be $6.1
million, $5.9 million, $5.6 million and $4.2 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 nine months
ended September 30:
|
|
Regional
|
|
|
Mortgage
|
|
|
Capital
|
|
|
|
|
(Dollars
in thousands)
|
|
Banking
|
|
|
Banking
|
|
|
Markets
|
|
|
Total
|
|
December
31, 2006
|
|
$ |
94,276 |
|
|
$ |
66,240 |
|
|
$ |
115,066 |
|
|
$ |
275,582 |
|
Impairment
|
|
|
(13,010 |
) |
|
|
- |
|
|
|
- |
|
|
|
(13,010 |
) |
Additions*
|
|
|
- |
|
|
|
4,656 |
|
|
|
- |
|
|
|
4,656 |
|
September
30, 2007
|
|
$ |
81,266 |
|
|
$ |
70,896 |
|
|
$ |
115,066 |
|
|
$ |
267,228 |
|
December
31, 2007
|
|
$ |
77,342 |
|
|
$ |
- |
|
|
$ |
115,066 |
|
|
$ |
192,408 |
|
September
30, 2008
|
|
$ |
77,342 |
|
|
$ |
- |
|
|
$ |
115,066 |
|
|
$ |
192,408 |
|
* Preliminary
purchase price allocations on acquisitions are based upon estimates of
fair value and are subject to change.
|
|
Note
7 - Regulatory
Capital
FHN is
subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on 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 September 30,
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 14.65 percent, 10.43 percent and 8.46 percent,
respectively, on September 30, 2008, and were 11.78 percent, 8.12 percent and
6.81 percent, respectively, on September 30, 2007.
|
|
|
|
|
|
First
Horizon National
|
|
|
First
Tennessee Bank
|
|
|
|
|
|
|
Corporation
|
|
|
National
Association
|
(Dollars
in thousands)
|
|
|
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
On
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
$4,247,691
|
|
16.07%
|
|
|
$4,076,009
|
|
15.54%
|
Tier 1
Capital
|
|
|
|
|
|
2,933,984
|
|
11.10
|
|
|
2,844,757
|
|
10.84
|
Leverage
|
|
|
|
|
|
2,933,984
|
|
8.84
|
|
|
2,844,757
|
|
8.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
Capital Adequacy Purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
2,114,211
|
>
|
8.00
|
|
|
2,098,531
|
>
|
8.00
|
Tier 1
Capital
|
|
|
|
|
|
1,057,105
|
>
|
4.00
|
|
|
1,049,264
|
>
|
4.00
|
Leverage
|
|
|
|
|
|
1,327,049
|
>
|
4.00
|
|
|
1,317,648
|
>
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be
Well Capitalized Under Prompt
|
|
|
|
|
|
Corrective
Action Provisions:
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
|
|
|
|
|
2,623,163
|
>
|
10.00
|
Tier 1
Capital
|
|
|
|
|
|
|
|
|
|
|
1,573,898
|
>
|
6.00
|
Leverage
|
|
|
|
|
|
|
|
|
|
|
1,647,060
|
>
|
5.00
|
On
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
$3,988,233
|
|
12.85%
|
|
|
$3,796,610
|
|
12.38%
|
Tier 1
Capital
|
|
|
|
|
|
2,666,834
|
|
8.59
|
|
|
2,575,210
|
|
8.39
|
Leverage
|
|
|
|
|
|
2,666,834
|
|
7.12
|
|
|
2,575,210
|
|
6.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
Capital Adequacy Purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
2,483,350
|
>
|
8.00
|
|
|
2,454,189
|
>
|
8.00
|
Tier 1
Capital
|
|
|
|
|
|
1,241,675
|
>
|
4.00
|
|
|
1,227,094
|
>
|
4.00
|
Leverage
|
|
|
|
|
|
1,498,359
|
>
|
4.00
|
|
|
1,486,043
|
>
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be
Well Capitalized Under Prompt
|
|
|
|
|
|
Corrective
Action Provisions:
|
|
|
|
|
|
|
|
|
Total
Capital
|
|
|
|
|
|
|
|
|
|
|
3,067,736
|
>
|
10.00
|
Tier 1
Capital
|
|
|
|
|
|
|
|
|
|
|
1,840,642
|
>
|
6.00
|
Leverage
|
|
|
|
|
|
|
|
|
|
|
1,857,554
|
>
|
5.00
|
Note
8 - Earnings Per Share
The following
table shows a reconciliation of earnings per common share to diluted earnings
per common share:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
(In
thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income/(loss) from continuing operations
|
|
$ |
(125,095 |
) |
|
$ |
(14,365 |
) |
|
$ |
(137,139 |
) |
|
$ |
77,886 |
|
Income
from discontinued operations, net of tax
|
|
|
- |
|
|
|
209 |
|
|
|
883 |
|
|
|
628 |
|
Net
income/(loss)
|
|
$ |
(125,095 |
) |
|
$ |
(14,156 |
) |
|
$ |
(136,256 |
) |
|
$ |
78,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
201,184 |
|
|
|
129,917 |
|
|
|
169,482 |
|
|
|
129,611 |
|
Effect
of dilutive securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,149 |
|
Diluted
average common shares
|
|
|
201,184 |
|
|
|
129,917 |
|
|
|
169,482 |
|
|
|
131,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss)
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss) from continuing operations
|
|
$ |
(.62 |
) |
|
$ |
(.11 |
) |
|
$ |
(.81 |
) |
|
$ |
.60 |
|
Income
from discontinued operations, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
.01 |
|
|
|
.01 |
|
Earnings/(loss)
per common share
|
|
$ |
(.62 |
) |
|
$ |
(.11 |
) |
|
$ |
(.80 |
) |
|
$ |
.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings/(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss) from continuing operations
|
|
$ |
(.62 |
) |
|
$ |
(.11 |
) |
|
$ |
(.81 |
) |
|
$ |
.59 |
|
Income
from discontinued operations, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
.01 |
|
|
|
.01 |
|
Diluted
earnings/(loss) per common share
|
|
$ |
(.62 |
) |
|
$ |
(.11 |
) |
|
$ |
(.80 |
) |
|
$ |
.60 |
|
Due to the
net loss for the three months ended September 30, 2008, and September 30, 2007,
as well as the nine months ended September 30, 2008, the diluted earnings per
share calculation excludes all equity awards for those periods. Stock options of
16.9 million and 18.5 million with weighted average exercise prices of $32.46
and $33.88 per share for the three months ended September 30, 2008 and 2007,
respectively, and of 17.4 million and 8.3 million with weighted average exercise
prices of $33.00 and $39.93 per share for the nine months ended September 30,
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. Other equity awards of 1.3 million and .9
million for the three months ended September 30, 2008 and 2007, respectively,
and of 1.2 million and .3 million for the nine months ended September 30, 2008
and 2007, respectively, were also excluded from the computation of diluted
earnings per common share because such shares would have had an antidilutive
effect on earnings per common share. Weighted average common and diluted shares
have been restated to reflect the October 1, 2008 stock
dividend.
Note
9 - Contingencies and Other Disclosures
Contingencies.
Contingent liabilities arise in the ordinary course of business,
including those related to litigation. Various claims and lawsuits are pending
against FHN and its subsidiaries. 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 Corporation. 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 FHN 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 September 30, 2008, claims paid have
totaled approximately $29 million and the total reserve remaining for this
matter, based on the claims received and FHN’s evaluation of them to date, is
approximately $2.3 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.
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.
In October
2008, Visa announced that it had agreed to settle litigation with Discover
Financial Services (Discover) for $1.9 billion. $1.7 billion of this
settlement amount will be paid from the escrow account established as part of
Visa’s IPO. In connection with this settlement, FHN recognized
additional expense of $11.0 million within noninterest expense in third quarter
2008, increasing the contingent liability for Visa litigation matters to $36.7
million.
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 from the time the last covered litigation matter is disposed
of with the shares ultimately being converted into Class A shares of
Visa. The final conversion ratio, which was initially estimated to
approximate 70 percent, will fluctuate based on the ultimate settlement of the
Visa litigation matters for which FHN has a proportionate contingent
obligation. Future funding of the escrow will dilute this exchange
rate by an amount that is yet to be determined.
Note
9 -
Contingencies and Other Disclosures (continued)
FHN services
a mortgage loan portfolio of $65.3 billion on September 30, 2008, a significant
portion of which is held by GNMA, FNMA, FHLMC or private security
holders. In connection with its servicing activities, FHN guarantees
the receipt of the scheduled principal and interest payments on the underlying
loans. In the event of customer non-performance on the loan, FHN is
obligated to make the payment to the security holder. Under the terms
of the servicing agreements, FHN can utilize payments received from other
prepaid loans in order to make the security holder whole. In the
event payments are ultimately made by FHN to satisfy this obligation, for loans
sold with no recourse, all funds are recoverable from the government agency at
foreclosure sale.
FHN is also
subject to losses in its loan servicing portfolio due to loan foreclosures and
other recourse obligations. Certain agencies have the authority to limit their
repayment guarantees on foreclosed loans resulting in certain foreclosure costs
being borne by servicers. In addition, FHN has exposure on all loans sold with
recourse. FHN has various claims for reimbursement, repurchase obligations,
and/or indemnification requests outstanding with government agencies or private
investors. FHN has evaluated all of its exposure under recourse obligations
based on factors, which include loan delinquency status, foreclosure expectancy
rates and claims outstanding. Accordingly, FHN had an allowance for
losses on the mortgage servicing portfolio of $36.7 million and $12.9 million on
September 30, 2008 and 2007, respectively. FHN has sold certain
mortgage loans with an agreement to repurchase the loans upon
default. For the single-family residential loans, in the event of
borrower nonperformance, FHN would assume losses to the extent they exceed the
value of the collateral and private mortgage insurance, FHA insurance or VA
guarantees. On September 30, 2008 and 2007, FHN had single-family
residential loans with outstanding balances of $83.4 million and $104.6 million,
respectively, that were serviced on a full recourse basis. On both September 30,
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 FHN was $3.3 billion. Additionally, on September 30, 2008
and 2007, $0.7 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 September 30, 2008, the outstanding principal balance
of these loans was $219.7 million and $57.9 million, respectively. On
September 30, 2007, the outstanding principal balance of securitized and sold
HELOC and second-lien mortgages was $285.4 million and $76.7 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 $7.4 million and $22.2
million on September 30, 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.
In
conjunction with the sale of its servicing platform to MetLife, FHN entered into
a three year subservicing arrangement with MetLife for the remaining portion of
its servicing portfolio. As part of the subservicing agreement, FHN
has agreed to a make-whole arrangement whereby if the number of loans
subserviced by MetLife and the direct servicing cost per loan (determined using
loans serviced on behalf of both FHN and MetLife) both fall below specified
levels, FHN will make a payment to MetLife according to a contractually
specified formula. The make-whole payment is subject to a cap, which
is $19.4 million if determined in the four quarters immediately following the
transaction, and which declines to $15.0 million if triggered in later
periods. As part of the divestiture transaction with MetLife, FHN
recognized a contingent liability of $1.2 million representing the
estimated fair value of its performance obligation under the make-whole
arrangement.
Note
10 – 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 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) introduced 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 September 30
are as follows:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Components
of net periodic benefit cost/(benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
3,448 |
|
|
$ |
4,324 |
|
|
$ |
67 |
|
|
$ |
74 |
|
Interest
cost
|
|
|
7,432 |
|
|
|
6,153 |
|
|
|
560 |
|
|
|
278 |
|
Expected
return on plan assets
|
|
|
(11,621 |
) |
|
|
(10,638 |
) |
|
|
(436 |
) |
|
|
(440 |
) |
Amortization
of prior service cost/(benefit)
|
|
|
215 |
|
|
|
220 |
|
|
|
(44 |
) |
|
|
(44 |
) |
Recognized
losses/(gains)
|
|
|
845 |
|
|
|
2,226 |
|
|
|
(126 |
) |
|
|
(177 |
) |
Amortization
of transition obligation
|
|
|
- |
|
|
|
- |
|
|
|
247 |
|
|
|
247 |
|
Net
periodic cost/(benefit)
|
|
$ |
319 |
|
|
$ |
2,285 |
|
|
$ |
268 |
|
|
$ |
(62 |
) |
FAS 88
Settlement Expense
|
|
$ |
111 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Total
FAS 87 and FAS 88 Expense (Income)
|
|
$ |
430 |
|
|
$ |
2,285 |
|
|
$ |
268 |
|
|
$ |
(62 |
) |
The
components of net periodic benefit cost for the nine months ended September 30
are as follows:
|
|
Pension
Benefits
|
|
|
Postretirement
Benefits
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Components
of net periodic benefit cost/(benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
11,862 |
|
|
$ |
12,978 |
|
|
$ |
210 |
|
|
$ |
224 |
|
Interest
cost
|
|
|
22,117 |
|
|
|
18,461 |
|
|
|
1,780 |
|
|
|
834 |
|
Expected
return on plan assets
|
|
|
(35,204 |
) |
|
|
(31,912 |
) |
|
|
(1,314 |
) |
|
|
(1,322 |
) |
Amortization
of prior service cost/(benefit)
|
|
|
648 |
|
|
|
660 |
|
|
|
(132 |
) |
|
|
(132 |
) |
Recognized
losses/(gains)
|
|
|
1,831 |
|
|
|
5,846 |
|
|
|
(242 |
) |
|
|
(533 |
) |
Amortization
of transition obligation
|
|
|
- |
|
|
|
- |
|
|
|
741 |
|
|
|
741 |
|
Net
periodic cost/(benefit)
|
|
$ |
1,254 |
|
|
$ |
6,033 |
|
|
$ |
1,043 |
|
|
$ |
(188 |
) |
FAS 88
Settlement Expense
|
|
$ |
826 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Total
FAS 87 and FAS 88 Expense (Income)
|
|
$ |
2,080 |
|
|
$ |
6,033 |
|
|
$ |
1,043 |
|
|
$ |
(188 |
) |
FHN expects
to make no contributions to the pension plan or to the other employee benefit
plans in 2008.
Note
11 – Business Segment Information
FHN has five
business segments Regional Banking, Capital Markets, National Specialty Lending,
Mortgage Banking and Corporate. The Regional Banking segment offers financial
products and services, including traditional lending and deposit taking, to
retail and commercial customers in Tennessee and surrounding markets.
Additionally, Regional Banking provides investments, insurance, financial
planning, trust services and asset management, credit card, cash management, and
check clearing services. The Capital Markets segment consists of
traditional capital markets securities activities, equity research, loan sales,
portfolio advisory, structured finance and correspondent banking. The National
Specialty Lending segment consists of traditional consumer and construction
lending activities in other national markets. The Mortgage Banking
segment consists of core mortgage banking elements including originations and
servicing and the associated ancillary revenues related to these
businesses. In August 2008, FHN completed the divestiture of certain
mortgage banking operations to MetLife. FHN will continue to
originate loans in and around the Tennessee banking footprint and service the
remaining servicing portfolio. The Corporate segment consists of restructuring,
repositioning and efficiency initiatives, gains and losses on repurchases of
debt, 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 and nine months ended September
30:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Total
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
223,146 |
|
|
$ |
237,804 |
|
|
$ |
690,133 |
|
|
$ |
714,655 |
|
Provision
for loan losses
|
|
|
340,000 |
|
|
|
43,352 |
|
|
|
800,000 |
|
|
|
116,246 |
|
Noninterest
income
|
|
|
305,174 |
|
|
|
203,475 |
|
|
|
1,153,296 |
|
|
|
766,962 |
|
Noninterest
expense
|
|
|
402,274 |
|
|
|
421,622 |
|
|
|
1,306,394 |
|
|
|
1,281,874 |
|
Pre-tax
income/(loss)
|
|
|
(213,954 |
) |
|
|
(23,695 |
) |
|
|
(262,965 |
) |
|
|
83,497 |
|
Provision/(benefit)
for income taxes
|
|
|
(88,859 |
) |
|
|
(9,330 |
) |
|
|
(125,826 |
) |
|
|
5,611 |
|
Income/(loss)
from continuing operations
|
|
|
(125,095 |
) |
|
|
(14,365 |
) |
|
|
(137,139 |
) |
|
|
77,886 |
|
Income
from discontinued operations, net of tax |
|
|
- |
|
|
|
209 |
|
|
|
883 |
|
|
|
628 |
|
Net
income/(loss)
|
|
$ |
(125,095 |
) |
|
$ |
(14,156 |
) |
|
$ |
(136,256 |
) |
|
$ |
78,514 |
|
Average
assets
|
|
$ |
33,381,493 |
|
|
$ |
37,754,038 |
|
|
$ |
35,555,364 |
|
|
$ |
38,487,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional
Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
122,378 |
|
|
$ |
136,935 |
|
|
$ |
363,327 |
|
|
$ |
413,544 |
|
Provision
for loan losses
|
|
|
58,201 |
|
|
|
18,523 |
|
|
|
222,942 |
|
|
|
46,798 |
|
Noninterest
income
|
|
|
87,919 |
|
|
|
91,643 |
|
|
|
267,526 |
|
|
|
271,901 |
|
Noninterest
expense
|
|
|
158,628 |
|
|
|
153,816 |
|
|
|
459,445 |
|
|
|
471,474 |
|
Pre-tax
income/(loss)
|
|
|
(6,532 |
) |
|
|
56,239 |
|
|
|
(51,534 |
) |
|
|
167,173 |
|
Provision/(benefit)
for income taxes
|
|
|
(11,671 |
) |
|
|
19,798 |
|
|
|
(45,050 |
) |
|
|
46,247 |
|
Income/(loss)
from continuing operations
|
|
|
5,139
|
|
|
|
36,441
|
|
|
|
(6,484 |
) |
|
|
120,926 |
|
Income
from discontinued operations, net of tax
|
|
|
- |
|
|
|
209 |
|
|
|
883 |
|
|
|
628 |
|
Net
income/(loss)
|
|
$ |
5,139 |
|
|
$ |
36,650 |
|
|
$ |
(5,601 |
) |
|
$ |
121,554 |
|
Average
assets
|
|
$ |
11,906,299 |
|
|
$ |
12,358,412 |
|
|
$ |
12,075,967 |
|
|
$ |
12,324,946 |
|
Note
11 – Business Segment Information (continued)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Capital
Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
18,992 |
|
|
$ |
14,138 |
|
|
$ |
57,134 |
|
|
$ |
38,560 |
|
Provision
for loan losses
|
|
|
38,451 |
|
|
|
2,018 |
|
|
|
72,004 |
|
|
|
6,853 |
|
Noninterest
income
|
|
|
98,535 |
|
|
|
64,484 |
|
|
|
357,122 |
|
|
|
248,789 |
|
Noninterest
expense
|
|
|
87,674 |
|
|
|
73,921 |
|
|
|
303,961 |
|
|
|
241,020 |
|
Pre-tax
income/(loss)
|
|
|
(8,598 |
) |
|
|
2,683 |
|
|
|
38,291 |
|
|
|
39,476 |
|
Provision/(benefit)
for income taxes
|
|
|
(3,375 |
) |
|
|
900 |
|
|
|
14,022 |
|
|
|
14,598 |
|
Net
income/(loss)
|
|
$ |
(5,223 |
) |
|
$ |
1,783 |
|
|
$ |
24,269 |
|
|
$ |
24,878 |
|
Average
assets
|
|
$ |
4,879,793 |
|
|
$ |
5,140,507 |
|
|
$ |
5,359,978 |
|
|
$ |
5,795,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Specialty Lending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
45,236 |
|
|
$ |
61,218 |
|
|
$ |
153,180 |
|
|
$ |
185,202 |
|
Provision
for loan losses
|
|
|
240,470 |
|
|
|
22,807 |
|
|
|
497,953 |
|
|
|
55,038 |
|
Noninterest
income
|
|
|
4,181 |
|
|
|
1,195 |
|
|
|
(9,671 |
) |
|
|
25,642 |
|
Noninterest
expense
|
|
|
23,487 |
|
|
|
33,622 |
|
|
|
75,308 |
|
|
|
107,010 |
|
Pre-tax
income/(loss)
|
|
|
(214,540 |
) |
|
|
5,984 |
|
|
|
(429,752 |
) |
|
|
48,796 |
|
Provision/(benefit)
for income taxes
|
|
|
(79,491 |
) |
|
|
1,810 |
|
|
|
(159,378 |
) |
|
|
17,676 |
|
Net
income/(loss)
|
|
$ |
(135,049 |
) |
|
$ |
4,174 |
|
|
$ |
(270,374 |
) |
|
$ |
31,120 |
|
Average
assets
|
|
$ |
8,259,105 |
|
|
$ |
9,773,484 |
|
|
$ |
8,801,088 |
|
|
$ |
9,727,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
22,524 |
|
|
$ |
26,939 |
|
|
$ |
84,411 |
|
|
$ |
75,917 |
|
Provision
for loan losses
|
|
|
2,878 |
|
|
|
4 |
|
|
|
7,101 |
|
|
|
(115 |
) |
Noninterest
income
|
|
|
115,821 |
|
|
|
42,120 |
|
|
|
474,297 |
|
|
|
193,774 |
|
Noninterest
expense
|
|
|
89,040 |
|
|
|
108,303 |
|
|
|
385,645 |
|
|
|
329,004 |
|
Pre-tax
income/(loss)
|
|
|
46,427 |
|
|
|
(39,248 |
) |
|
|
165,962 |
|
|
|
(59,198 |
) |
Provision/(benefit)
for income taxes
|
|
|
16,648 |
|
|
|
(13,984 |
) |
|
|
57,737 |
|
|
|
(31,271 |
) |
Net
income/(loss)
|
|
$ |
29,779 |
|
|
$ |
(25,264 |
) |
|
$ |
108,225 |
|
|
$ |
(27,927 |
) |
Average
assets
|
|
$ |
4,891,089 |
|
|
$ |
6,625,568 |
|
|
$ |
5,744,833 |
|
|
$ |
6,543,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income/(expense)
|
|
$ |
14,016 |
|
|
$ |
(1,426 |
) |
|
$ |
32,081 |
|
|
$ |
1,432 |
|
Provision
for loan losses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,672 |
|
Noninterest
income
|
|
|
(1,282 |
) |
|
|
4,033 |
|
|
|
64,022 |
|
|
|
26,856 |
|
Noninterest
expense
|
|
|
43,445 |
|
|
|
51,960 |
|
|
|
82,035 |
|
|
|
133,366 |
|
Pre-tax
income/(loss)
|
|
|
(30,711 |
) |
|
|
(49,353 |
) |
|
|
14,068 |
|
|
|
(112,750 |
) |
Provision/(benefit)
for income taxes
|
|
|
(10,970 |
) |
|
|
(17,854 |
) |
|
|
6,843 |
|
|
|
(41,639 |
) |
Net
income/(loss)
|
|
$ |
(19,741 |
) |
|
$ |
(31,499 |
) |
|
$ |
7,225 |
|
|
$ |
(71,111 |
) |
Average
assets
|
|
$ |
3,445,207 |
|
|
$ |
3,856,067 |
|
|
$ |
3,573,498 |
|
|
$ |
4,096,691 |
|
Certain
previously reported amounts have been reclassified to agree with current
presentation.
Note
12 – 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 September
30, 2008, FHN had approximately $32.2 million of cash receivables and $59.0
million of cash payables related to collateral posting under master netting
arrangements with derivative counterparties.
Mortgage
Banking
As a result
of the MetLife transaction, mortgage banking origination activity will be
significantly reduced in periods after third quarter 2008 as FHN focuses on
origination within its regional banking footprint. Accordingly, the
following discussion of pipeline and warehouse related derivatives is primarily
applicable to reporting periods occurring through the third quarter
2008.
Note
12 – Derivatives (continued)
Mortgage
banking interest rate lock commitments are short-term commitments to fund
mortgage loan applications in process (the pipeline) for a fixed term at a fixed
price. During the term of an interest rate lock commitment, FHN has the risk
that interest rates will change from the rate quoted to the borrower. FHN enters
into forward sales 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, 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.
FHN’s
warehouse (mortgage loans held for sale) is subject to changes in fair value,
due to fluctuations in interest rates from the loan closing date through the
date of sale of the loan into the secondary market. Typically, the fair value of
the warehouse declines in value when interest rates increase and rises in value
when interest rates decrease. To mitigate this risk, FHN enters into forward
sales contracts and futures contracts to provide an economic hedge against those
changes in fair value on a significant portion of the warehouse. These
derivatives are recorded at fair value with changes in fair value recorded in
current earnings as a component of the gain or loss on the sale of loans in
mortgage banking noninterest income.
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. FHN 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 $1.6
billion on September 30, 2007. There were no warehouse loans qualifying for SFAS
No. 133 hedge accounting treatment at September 30, 2008. The balance
sheet impact of the related derivatives was net liabilities of $9.5 million on
September 30, 2007. Net losses of $14.5 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 nine months ended September 30, 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. FHN 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, FHN revalues MSR to current fair value each
month. Changes in fair value are included in servicing income in
mortgage banking noninterest income. FHN also enters into economic hedges of the
MSR to minimize the effects of loss in value of MSR associated with increased
prepayment activity that generally results from declining interest rates. In a
rising interest rate environment, the value of the MSR generally will increase
while the value of the hedge instruments will decline. FHN enters into
interest rate contracts (including swaps, swaptions, and mortgage forward sales
contracts) to hedge against the effects of changes in fair value of its
MSR. Substantially all capitalized MSR are hedged for economic
purposes.
FHN utilizes
derivatives (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.
Note
12 – Derivatives (continued)
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 principally for
distribution to customers. When these securities settle on a delayed
basis, they are considered forward contracts. Capital Markets also
enters into interest rate contracts, including options, caps, swaps, and floors
for its customers. In addition, Capital Markets enters into futures
contracts to economically hedge interest rate risk associated with a portion of
its securities inventory. These transactions are measured at fair
value, with changes in fair value recognized currently in capital markets
noninterest income. Related assets and liabilities are recorded on the balance
sheet as other assets and other liabilities. Credit risk related to
these transactions is controlled through credit approvals, risk control limits
and ongoing monitoring procedures through the Credit Risk Management
Committee.
As of
September 30, 2008, Capital Markets hedged $244.6 million of held-to-maturity
trust preferred loans, 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 $9.3 million in other liabilities on September 30, 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 $62.2 million on September 30, 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 $.3 million in
other liabilities on September 30, 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 September 30, 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 $38.7 million in other assets on September 30,
2008, and $3.1 million in other assets and $10.7 million in other liabilities on
September 30, 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 loans. 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 September 30, 2008 and 2007. The balance sheet impact of these
swaps was $13.6 million and $21.4 million in other liabilities on September 30,
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 was 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 $100.1 million on September 30,
2007, and a maturity in first quarter 2009, which in first quarter 2008 was
called early. The balance sheet impact of this swap was $.1 million in other
assets and $82 thousand, net of tax, in other comprehensive income on September
30, 2007. There was no ineffectiveness related to this hedge.
Note
13 - 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. These sales
were completed in second quarter 2008. In the second half of 2007,
FHN also took actions 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 initiated the repositioning of First Horizon Home Loans’ mortgage banking
operations, which included sales of MSR in fourth quarter 2007 and the first,
second and third quarters of 2008.
In June 2008,
FHN announced that it had reached a definitive agreement with MetLife for the
sale of more than 230 retail and wholesale mortgage origination offices
nationwide as well as its loan origination and servicing
platform. Effective August 31, 2008, the parties completed the
initial settlement for MetLife’s acquisition of substantially all of FHN’s
mortgage origination pipeline, related hedges, certain fixed assets and other
associated assets. FHN also agreed with MetLife for the sale of
servicing assets, and related hedges, on $19.1 billion of first lien mortgage
loans and associated custodial deposits. MetLife generally paid book
value for the assets and liabilities it acquired, less a purchase price
reduction of approximately $10.0 million. In third quarter 2008, FHN
recognized a loss on divestiture of $17.5 million related to this
transaction. The purchase price is subject to a post-closing true up
which FHN currently expects to occur in fourth quarter 2008.
Net costs
recognized by FHN in the nine months ended September 30, 2008 related to
restructuring, repositioning, and efficiency activities were $81.1
million. Of this amount, $39.4 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 year to date for 2008 resulted from the following actions:
·
|
Expense
of $39.4 million associated with organizational and compensation changes
due to right-sizing operating segments, the divestiture of certain First
Horizon Bank branches, the divestiture of certain mortgage banking
operations and consolidating functional
areas
|
·
|
Loss of
$17.5 million on the divestiture of mortgage banking
operations
|
·
|
Loss of
$1.4 million from the sales of certain First Horizon Bank
branches
|
·
|
Transaction
costs of $12.7 million from the contracted sales of mortgage servicing
rights
|
·
|
Expense
of $10.1 million for the writedown of certain premises and equipment,
intangibles and other assets resulting from FHN’s divestiture of certain
mortgage operations and from the change in FHN’s national banking
strategy
|
Losses from
the mortgage banking divestiture and disposition of certain First Horizon Bank
branches in 2008 are included in losses/gains on divestitures in the noninterest
income section of the Consolidated Condensed Statements of
Income. Transaction costs recognized in 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 after September 30, 2008, which are included in all other
expense. Additional amounts will be recognized in fourth quarter 2008
in relation to the conclusion of the mortgage banking divestiture as well as
discontinuation of national businesses. At this time the amount of
these additional charges is expected to be between $5 and $15 million in the
fourth quarter 2008.
Activity in
the restructuring and repositioning liability for the three and nine months
ended September 30, 2008 and 2007 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 are recorded as unallocated corporate charges within the Corporate
segment.
Note
13 - Restructuring, Repositioning, and Efficiency Charges
(continued)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
(Dollars
in thousands)
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged
to
|
|
|
Charged
to
|
|
|
Charged
to
|
|
|
Charged
to
|
|
|
|
Expense
|
|
|
Liability
|
|
|
Expense
|
|
|
Liability
|
|
|
Expense
|
|
|
Liability
|
|
|
Expense
|
|
|
Liability
|
|
Beginning
Balance
|
|
$ |
- |
|
|
$ |
17,945 |
|
|
$ |
- |
|
|
$ |
10,849 |
|
|
$ |
- |
|
|
$ |
19,675 |
|
|
$ |
- |
|
|
$ |
- |
|
Severance
and other employee related costs
|
|
|
10,704 |
|
|
|
10,704 |
|
|
|
9,258 |
|
|
|
9,258 |
|
|
|
23,826 |
|
|
|
23,826 |
|
|
|
17,255 |
|
|
|
17,255 |
|
Facility
consolidation costs
|
|
|
4,176 |
|
|
|
4,176 |
|
|
|
2,836 |
|
|
|
2,836 |
|
|
|
8,030 |
|
|
|
8,030 |
|
|
|
6,624 |
|
|
|
6,624 |
|
Other
exit costs, professional fees and other
|
|
|
(906 |
) |
|
|
(906 |
) |
|
|
2,933 |
|
|
|
2,933 |
|
|
|
7,578 |
|
|
|
7,578 |
|
|
|
5,902 |
|
|
|
5,902 |
|
Total
Accrued
|
|
|
13,974 |
|
|
|
31,919 |
|
|
|
15,027 |
|
|
|
25,876 |
|
|
|
39,434 |
|
|
|
59,109 |
|
|
|
29,781 |
|
|
|
29,781 |
|
Payments*
|
|
|
- |
|
|
|
8,150 |
|
|
|
- |
|
|
|
8,690 |
|
|
|
- |
|
|
|
32,154 |
|
|
|
- |
|
|
|
12,595 |
|
Accrual
Reversals
|
|
|
- |
|
|
|
67 |
|
|
|
- |
|
|
|
294 |
|
|
|
- |
|
|
|
3,253 |
|
|
|
- |
|
|
|
294 |
|
Restructuring
& Repositioning Reserve Balance
|
|
$ |
13,974 |
|
|
$ |
23,702 |
|
|
$ |
15,027 |
|
|
$ |
16,892 |
|
|
$ |
39,434 |
|
|
$ |
23,702 |
|
|
$ |
29,781 |
|
|
$ |
16,892 |
|
Other
Restructuring & Repositioning Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan portfolio divestiture
|
|
$ |
- |
|
|
|
|
|
|
$ |
- |
|
|
|
|
|
|
$ |
- |
|
|
|
|
|
|
$ |
7,672 |
|
|
|
|
|
Mortgage
banking expense on servicing sales
|
|
|
656 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
12,667 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Loss
on divestitures
|
|
|
17,489 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
18,913 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Impairment
of premises and equipment
|
|
|
922 |
|
|
|
|
|
|
|
3,876 |
|
|
|
|
|
|
|
5,108 |
|
|
|
|
|
|
|
9,035 |
|
|
|
|
|
Impairment
of intangible assets
|
|
|
- |
|
|
|
|
|
|
|
13,919 |
|
|
|
|
|
|
|
4,030 |
|
|
|
|
|
|
|
13,919 |
|
|
|
|
|
Impairment
of other assets
|
|
|
862 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
993 |
|
|
|
|
|
|
|
11,733 |
|
|
|
|
|
Total
Other Restructuring & Repositioning Expense
|
|
|
19,929 |
|
|
|
|
|
|
|
17,795 |
|
|
|
|
|
|
|
41,711 |
|
|
|
|
|
|
|
42,359 |
|
|
|
|
|
Total
Restructuring & Repositioning Charges
|
|
$ |
33,903 |
|
|
|
|
|
|
$ |
32,822 |
|
|
|
|
|
|
$ |
81,145 |
|
|
|
|
|
|
$ |
72,140 |
|
|
|
|
|
Certain
previously reported amounts have been reclassified to agree with current
presentation
|
*
Includes payments related to:
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
Severance
and other employee related costs
|
|
$ |
8,590 |
|
|
|
|
|
|
$ |
5,001 |
|
|
|
|
|
|
$ |
19,483 |
|
|
|
|
|
|
$ |
7,338 |
|
|
|
|
|
Facility
consolidation costs
|
|
|
1,612 |
|
|
|
|
|
|
|
1,157 |
|
|
|
|
|
|
|
5,513 |
|
|
|
|
|
|
|
1,207 |
|
|
|
|
|
Other
exit costs, professional fees and other
|
|
|
(2,052 |
) |
|
|
|
|
|
|
2,532 |
|
|
|
|
|
|
|
7,158 |
|
|
|
|
|
|
|
4,050 |
|
|
|
|
|
|
|
$ |
8,150 |
|
|
|
|
|
|
$ |
8,690 |
|
|
|
|
|
|
$ |
32,154 |
|
|
|
|
|
|
$ |
12,595 |
|
|
|
|
|
Cumulative
amounts incurred beginning second quarter 2007, 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*
|
|
$ |
49,358 |
|
Facility
consolidation costs
|
|
|
21,161 |
|
Other
exit costs, professional fees and other
|
|
|
16,833 |
|
Other
Restructuring & Repositioning (Income) and Expense:
|
|
|
|
|
Loan
portfolio divestiture
|
|
|
7,672 |
|
Mortgage
banking expense on servicing sales
|
|
|
19,095 |
|
Net
loss on divestitures
|
|
|
3,218 |
|
Impairment
of premises and equipment
|
|
|
14,396 |
|
Impairment
of intangible assets
|
|
|
18,160 |
|
Impairment
of other assets
|
|
|
29,970 |
|
Total
Restructuring & Repositioning Charges Incurred as of September 30,
2008
|
|
$ |
179,863 |
|
*Includes
$1.2 million of deferred severance-related payments that will be paid after
2008.
Note
14 – 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. FHN determined that such election reduced certain
timing differences and better matched changes in the value of such loans with
changes in the value of derivatives used as economic hedges for these
assets. No transition adjustment was required upon adoption of SFAS
No. 159 as FHN continued to account for mortgage loans held for sale which were
originated prior to 2008 at the lower of cost or market
value. Mortgage loans originated for sale are included in loans held
for sale on the Consolidated Condensed Statements of Condition. Other
interests retained in relation to residential loan sales and securitizations are
included in trading securities on the Consolidated Condensed Statements of
Condition. Additionally, effective January 1, 2008, FHN adopted SFAS No. 157 for
existing fair value measurement requirements related to financial assets and
liabilities as well as to non-financial assets and liabilities which are
re-measured at least annually. 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, in 2008, FHN has not applied the
provisions of SFAS No. 157 for non-recurring fair value measurements 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
– Valuation is based upon quoted prices for identical instruments traded
in active markets.
|
·
|
Level 2
– Valuation is based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the
market.
|
·
|
Level 3
– Valuation is generated from model-based techniques that use significant
assumptions not observable in the market. These unobservable assumptions
reflect our own estimates of assumptions that market participants would
use in pricing the asset or liability. Valuation techniques
include use of option pricing models, discounted cash flow models and
similar techniques.
|
For
applicable periods, all divestiture-related line items in the Consolidated
Condensed Statements of Condition have been combined with the related
non-divestiture line items in preparation of the disclosure tables in this
footnote. The table below presents the balances of assets and
liabilities measured at fair value on a recurring basis. Derivatives
in an asset position are included within Other assets while derivatives in a
liability position are included within Other liabilities. Derivative
positions constitute the only Level 3 measurements within Other assets and Other
liabilities.
Note
14 – Fair Values of Assets and Liabilities (continued)
|
|
September
30, 2008
|
|
(Dollars
in thousands)
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Trading
securities
|
|
$ |
1,561,024 |
|
|
$ |
2,159 |
|
|
$ |
1,272,453 |
|
|
$ |
286,412 |
|
Loans
held for sale
|
|
|
344,229 |
|
|
|
- |
|
|
|
334,112 |
|
|
|
10,117 |
|
Securities
available for sale
|
|
|
2,690,734 |
|
|
|
35,800 |
|
|
|
2,507,114 |
|
|
|
147,820 |
|
Mortgage
servicing rights, net
|
|
|
798,491 |
|
|
|
- |
|
|
|
- |
|
|
|
798,491 |
|
Other
assets *
|
|
|
341,276 |
|
|
|
83,133 |
|
|
|
257,814 |
|
|
|
329 |
|
Total
|
|
$ |
5,735,754 |
|
|
$ |
121,092 |
|
|
$ |
4,371,493 |
|
|
$ |
1,243,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
liabilities
|
|
$ |
380,896 |
|
|
$ |
114 |
|
|
$ |
380,782 |
|
|
$ |
- |
|
Commercial
paper and other short-term borrowings
|
|
|
107,266 |
|
|
|
- |
|
|
|
- |
|
|
|
107,266 |
|
Other
liabilities *
|
|
|
150,877 |
|
|
|
14,328 |
|
|
|
136,488 |
|
|
|
61 |
|
Total
|
|
$ |
639,039 |
|
|
$ |
14,442 |
|
|
$ |
517,270 |
|
|
$ |
107,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Derivatives
are included in this category.
In third
quarter 2008, FHN revised its methodology for valuing hedges of MSR and excess
interest that were retained from prior securitizations. FHN now
determines the fair value of the derivatives used to hedge MSR and excess
interests using inputs observed in active markets for similar instruments with
typical inputs including the LIBOR curve, option volatility and option
skew. Previously, fair values of these derivatives were obtained
through proprietary pricing models which were compared to market value quotes
received from third party broker-dealers in the derivative
markets. Accordingly, the applicable amounts are presented as a
transfer out of net derivative assets and liabilities in the following
rollforwards for the three and nine month periods ended September 30, 2008. The
changes in Level 3 assets and liabilities measured at fair value on a recurring
basis are summarized as follows:
|
|
Three
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Mortgage
|
|
|
Net
derivative
|
|
|
Commercial
paper
|
|
|
|
Trading
|
|
|
Loans
held
|
|
|
available
|
|
|
servicing
|
|
|
assets
and
|
|
|
and
other short-
|
|
(Dollars
in thousands)
|
|
securities
|
|
|
for
sale
|
|
|
for
sale
|
|
|
rights,
net
|
|
|
liabilities
|
|
|
term
borrowings
|
|
Balance,
beginning of quarter
|
|
$ |
429,017 |
|
|
$ |
3,712 |
|
|
$ |
146,871 |
|
|
$ |
1,139,395 |
|
|
$ |
95,520 |
|
|
$ |
205,412 |
|
Total
net gains/(losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the
quarter included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
(19,023 |
) |
|
|
(50 |
) |
|
|
(373 |
) |
|
|
(61,806 |
) |
|
|
92,577 |
|
|
|
(24,360 |
) |
Other
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
3,900 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Purchases,
sales, issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
settlements, net
|
|
|
(123,582 |
) |
|
|
(608 |
) |
|
|
(2,578 |
) |
|
|
(279,098 |
) |
|
|
(72,158 |
) |
|
|
(73,786 |
) |
Net
transfers into/out of Level 3
|
|
|
- |
|
|
|
7,063 |
|
|
|
- |
|
|
|
- |
|
|
|
(115,671 |
) |
|
|
- |
|
Balance,
end of quarter
|
|
$ |
286,412 |
|
|
$ |
10,117 |
|
|
$ |
147,820 |
|
|
$ |
798,491 |
|
|
$ |
268 |
|
|
$ |
107,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains/(losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
quarter relating to assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
liabilities held at September 30, 2008
|
|
$ |
(34,403 |
)
* |
|
$ |
(5,760 |
)
** |
|
$ |
(304 |
)
*** |
|
$ |
(31,470 |
)
**** |
|
$ |
97,856
|
** |
|
$ |
(24,360 |
) |
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Mortgage
|
|
|
Net
derivative
|
|
|
Commercial
paper
|
|
|
|
Trading
|
|
|
Loans
held
|
|
|
available
|
|
|
servicing
|
|
|
assets
and
|
|
|
and
other short-
|
|
(Dollars
in thousands)
|
|
securities
|
|
|
for
sale
|
|
|
for
sale
|
|
|
rights,
net
|
|
|
liabilities
|
|
|
term
borrowings
|
|
Balance,
beginning of year
|
|
$ |
476,404 |
|
|
$ |
- |
|
|
$ |
159,301 |
|
|
$ |
1,159,820 |
|
|
$ |
81,517 |
|
|
$ |
- |
|
Total
net gains/(losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the
period included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,054 |
|
|
|
(221 |
) |
|
|
(304 |
) |
|
|
(69,905 |
) |
|
|
146,844 |
|
|
|
(7,675 |
) |
Other
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
(3,278 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Purchases,
sales, issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
settlements, net
|
|
|
(212,985 |
) |
|
|
(1,457 |
) |
|
|
(7,899 |
) |
|
|
(291,424 |
) |
|
|
(119,998 |
) |
|
|
114,941 |
|
Net
transfers into/out of Level 3
|
|
|
21,939 |
|
|
|
11,795 |
|
|
|
- |
|
|
|
- |
|
|
|
(108,095 |
) |
|
|
- |
|
Balance,
end of period
|
|
$ |
286,412 |
|
|
$ |
10,117 |
|
|
$ |
147,820 |
|
|
$ |
798,491 |
|
|
$ |
268 |
|
|
$ |
107,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains/(losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
period relating to assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
liabilities held at September 30, 2008
|
|
$ |
(48,560 |
)
* |
|
$ |
(8,401 |
)
** |
|
$ |
(304 |
)
*** |
|
$ |
(59,668 |
)
**** |
|
$ |
21,301
|
** |
|
$ |
(7,675 |
) |
*
|
Nine months ended September 30, 2008 includes $12.2 million
included in Capital markets noninterest income, $25.6 million included in
Mortgage banking noninterest income, and $10.7 million included in Revenue
from loan sales and securitizations; three months ended September 30, 2008
included $12.2 million included in Capital markets noninterest income,
$21.7 million included in Mortgage banking noninterest income, and $0.5
million 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.
|
****
|
Nine
months
ended September 30, 2008 includes $49.7 million included in Mortgage
banking noninterest income and $10.0 million included in Revenue from loan
sales and securitizations; three months ended September 30, 2008 includes
$31.2 million in Mortgage banking noninterest income and $0.2 million
included in Revenue from loan sales and
securitizations.
|
Note
14 – Fair Values of Assets and Liabilities (continued)
Additionally,
FHN may be required, from time to time, to measure certain other financial
assets at fair value on a nonrecurring basis in accordance with GAAP. These
adjustments to fair value usually result from the application of lower of cost
or market accounting or write-downs of individual assets. For assets measured at
fair value on a nonrecurring basis in the first nine months of 2008 which were
still held in the balance sheet at September 30, 2008, 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
September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
Carrying
value at September 30, 2008
|
|
|
|
|
|
September
30, 2008
|
|
(Dollars
in thousands)
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
losses
|
|
Loans
held for sale
|
|
$ |
100,201 |
|
|
$ |
- |
|
|
$ |
55,149 |
|
|
$ |
45,052 |
|
|
$ |
27,070 |
|
Securities
available for sale
|
|
|
17 |
|
|
|
- |
|
|
|
17 |
|
|
|
- |
|
|
|
1,480 |
|
Loans,
net of unearned income**
|
|
|
364,097 |
|
|
|
- |
|
|
|
- |
|
|
|
364,097 |
|
|
|
142,683 |
|
Other
assets
|
|
|
119,979 |
|
|
|
- |
|
|
|
- |
|
|
|
119,979 |
|
|
|
14,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
185,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
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 loans, which was classified
within level 3 for Loans held for sale at March 31, 2008. The
determination of estimated market value for the warehouse was based on a
hypothetical securitization transaction for the warehouse as a
whole. FHN used observable data related to prior securitization
transactions as well as changes in credit spreads in the CDO market since the
most recent transaction. FHN also incorporated significant internally
developed assumptions within its valuation of the warehouse, including estimated
prepayments and estimated defaults. In accordance with SFAS No. 157,
FHN excluded transaction costs related to the hypothetical securitization in
determining fair value.
In second
quarter 2008, FHN designated its trust preferred warehouse as held to maturity.
Accordingly, these loans were excluded from loans held for sale in the
nonrecurring measurements table as of June 30, 2008. In conjunction with
the transfer of these loans to held to maturity status, FHN performed a lower of
cost or market analysis on the date of transfer. This analysis was based
on the pricing of market transactions involving securities similar to those held
in the trust preferred warehouse with consideration given, as applicable, to any
differences in characteristics of the market transactions,
including issuer credit quality, call features and term. As a
result of the lower of cost or market analysis, FHN determined that its existing
valuation of the trust preferred warehouse was appropriate.
In first
quarter 2008, FHN recognized a lower of cost or market reduction in value of
$17.0 million relating to mortgage warehouse loans. Approximately $10.5
million was attributable to increased delinquencies or aging of loans.
The market values for these loans were estimated using historical sales
prices for these type loans, adjusted for incremental price concessions that a
third party investor is assumed to require due to tightening credit markets and
deteriorating housing prices. These assumptions were based on published
information about actual and projected deteriorations in the housing market as
well as changes in credit spreads. The remaining reduction in value of $6.5
million was attributable to lower investor prices, due primarily to credit
spread widening. This reduction was calculated by comparing the total fair
value of loans (using the same methodology that is used for fair value option
loans) to carrying value for the aggregate population of loans that were not
delinquent or aged.
FHN also
recognized a lower of cost or market reduction in value of $8.3 million relating
to mortgage warehouse loans during second quarter of 2008. Approximately
$7.1 million was attributable to increased repurchases and delinquencies or
aging of warehouse loans; the remaining reduction in value was attributable
to lower investor prices, due primarily to credit spread widening. The
market values for these loans were estimated using historical sales prices for
these type loans, adjusted for incremental price concessions that a third party
investor is assumed to require due to tightening credit markets and
deteriorating housing prices. These assumptions were based on published
information about actual and projected deteriorations in the housing market as
well as changes in credit spreads.
Note
14 – Fair Values of Assets and Liabilities (continued)
FHN also
recognized a lower of cost or market reduction in value of $1.3 million relating
to mortgage warehouse loans during third quarter of 2008. This was
primarily attributable to increased repurchases and delinquencies of warehouse
loans with some reduction in value attributable to lower investor prices, due
primarily to credit spread widening. The market values for these loans
were estimated using historical sales prices for similar type loans, adjusted
for incremental price concessions that a third party investor is assumed to
require due to tightening credit markets and deteriorating housing prices.
These assumptions were based on published information about actual and projected
deteriorations in the housing market as well as changes in credit
spreads.
Fair
Value Option
As described
above, upon adoption of SFAS No. 159, management elected fair value accounting
for substantially all forms of mortgage loans originated for sale. In
the second and third quarters of 2008, agreements were reached for the transfer
of certain servicing assets and delivery of the servicing assets
occurred. However, due to certain recourse provisions, these
transactions did not qualify for sale treatment and the associated proceeds have
been recognized within Commercial paper and other short term borrowings in the
Consolidated Condensed Statement of Position as of September 30,
2008. Since servicing assets are recognized at fair value and since
changes in the fair value of related financing liabilities will exactly mirror
the change in fair value of the associated servicing assets, management elected
to account for the financing liabilities at fair value under SFAS No.
159. Additionally, as the servicing assets have already been
delivered to the buyer, the fair value of the financing liabilities associated
with the transaction does not reflect any instrument-specific credit
risk.
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.
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
Fair
value
|
|
|
|
Fair
value
|
|
|
Aggregate
|
|
|
carrying
amount
|
|
|
|
carrying
|
|
|
unpaid
|
|
|
less
aggregate
|
|
(Dollars
in thousands)
|
|
amount
|
|
|
principal
|
|
|
unpaid
principal
|
|
Loans
held for sale reported at fair value:
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
$ |
344,229 |
|
|
$ |
363,085 |
|
|
$ |
(18,856 |
) |
Nonaccrual
loans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Loans
90 days or more past due and still accruing
|
|
|
1,845 |
|
|
|
3,410 |
|
|
|
(1,565 |
) |
Assets and
liabilities accounted for under SFAS No. 159 are initially measured at fair
value. Gains and losses from initial measurement and subsequent changes in fair
value are recognized in earnings. The change in fair value related to initial
measurement and subsequent changes in fair value for mortgage loans held for
sale and other short term borrowings for which FHN elected the fair value option
are included in current period earnings with classification in the income
statement line item shown below.
The amounts
for loans held for sale includes approximately $8.8 million and $18.3 million of
losses included in earnings for the three and nine month periods ended September
30, 2008, respectively, attributable to changes in instrument-specific credit
risk, which was determined based on both a quality adjustment for delinquencies
and the full credit and liquidity spread on the non-conforming
loans.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2008
|
|
|
September
30, 2008
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
Changes
in fair value included in net income:
|
|
|
|
|
|
|
Mortgage
banking noninterest income
|
|
|
|
|
|
|
Loans
held for sale
|
|
$ |
(14,951 |
) |
|
$ |
(20,423 |
) |
Commercial
paper and other short-term borrowings
|
|
|
(24,360 |
) |
|
|
(7,675 |
) |
Estimated
changes in fair value due to credit risk
|
|
|
(8,849 |
) |
|
|
(18,310 |
) |
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
15 – Other Events
In October
2008, FHN received preliminary approval from the U.S. Treasury Department to
participate in its Capital Purchase Program (CPP), a voluntary initiative
assisting U.S. financial institutions in building capital to support Treasury's
plan to aid the economy by increasing financing to businesses and consumers.
Participation is subject to standard terms and conditions.
First Horizon
expects to issue approximately $866 million in non-voting cumulative preferred
stock to the Treasury, which would represent 3 percent of FHN’s risk-weighted
assets as of the end of second quarter 2008. To participate in the
CPP, FHN expects to agree to certain conditions including a 5 percent annual
dividend on the preferred shares for the first five years and 9 percent
thereafter, issuance to the Treasury of dilution–protected 10-year warrants to
purchase common stock equal in value on the issue date to 15 percent of the
preferred stock investment, restrictions on common cash dividends and common
share repurchases, restrictions on executive compensation, restrictions on
redemption of the preferred stock during the first three years, and other
items.
The preferred
stock may not be redeemed for a period of three years after issuance, except
with the proceeds from a Qualified Equity Offering of Tier I qualifying
perpetual preferred stock or common stock. After the third
anniversary of the initial investment, the preferred stock may be redeemed for
par value at FHN’s option.
Also in
October 2008, the Board of Directors of FHN determined that the dividend payable
on January 1, 2009, will be paid in shares of common stock at the rate of 1.837
percent, which means that 18.370 new dividend shares will be distributed for
every 1,000 shares held on the record date of December 12, 2008. The
dividend rate was determined to provide shareholders with new shares having a
value of approximately $0.20 for each share held on the record date, based on
FHN’s volume weighted average share price on October 16, 2008, of $10.8876 per
share. FHN currently intends to pay dividends in shares of common
stock for the foreseeable future.
FHN has
determined that certain historical mortgage loan sale activities resulted in the
monetization of amounts to be collected from borrowers related to lender paid
private mortgage insurance. However, in recording these transactions,
FHN did not establish a liability for the corresponding amounts that would be
remitted to private mortgage insurers over the life of the associated
loans. FHN has evaluated the financial impact of not recognizing the
liability at the time of sale for all quarterly and annual periods since
inception of the related transactions and concluded that the impact was
immaterial in each period. In third quarter 2008, FHN recorded an
adjustment to recognize the cumulative impact of these amounts that resulted in
a $15.5 million negative impact to mortgage banking income, which was included
in current earnings. Future payments to the applicable private
mortgage insurers will be recognized as a reduction of the liability
established.
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 6,000
employees of FHN provide financial
services to individuals and business customers through more than 200 bank
locations in and around Tennessee and 14 capital markets offices in the U.S. and
abroad. The corporation’s two major brands – First Tennessee and FTN
Financial– provide customers with a broad range of products and services
including:
·
|
Regional
banking, with one of the largest market shares 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
|
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, equity research, loan sales, portfolio
advisory services, structured finance 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 now consists of the origination of mortgage loans in and around
the regional banking footprint and servicing activities related to
the remaining portfolio. Historically, this division
provided mortgage loans and servicing to consumers and operated in
approximately 40 states. On August 31, 2008 First Horizon
completed the sale of its servicing platform, origination offices outside
Tennessee and $19.1 billion of the servicing portfolio to MetLife Bank,
N.A.
|
§
|
Corporate
consists of unallocated corporate expenses including restructuring,
repositioning, and efficiency initiatives, gains and losses on repurchases
of debt, expense on subordinated debt issuances and preferred stock,
bank-owned life insurance, unallocated interest income associated with
excess equity, net impact of raising incremental capital, revenue and
expense associated with deferred compensation plans, funds management and
venture capital.
|
For the
purpose of this management discussion and analysis (MD&A), earning assets
have been expressed as averages except as otherwise noted, and loans have been
disclosed net of unearned income. The following is a discussion and
analysis of the financial condition and results of operations of FHN for the
three-month and nine-month periods ended September 30, 2008, compared to the
three-month and nine-month periods ended September 30, 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.
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. On October 27, 2008, Visa
announced that it had agreed to settle litigation with Discover Financial
Services for $1.9 billion. $1.7 billion of this settlement amount
will be paid from an escrow account established as part of Visa’s
IPO. In connection with this settlement, FHN
recognized an $11.0 million increase to its contingent liability for Visa
litigation matters within noninterest expense. In accordance with
applicable accounting guidance, this amount should be reflected within the
results of operations for third quarter 2008. Due to the timing of
Visa’s announcement, the amounts included in FHN’s earnings release dated
October 17, 2008, and the related financial supplement and slide presentation
did not reflect this adjustment. Accordingly, FHN has revised its
financial statements
included in this Form 10-Q for third quarter 2008 to include this
adjustment.
FORWARD-LOOKING
STATEMENT
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; recent and
future legislative and regulatory developments; 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 September
30, 2008.
FINANCIAL SUMMARY (Comparison of
Third Quarter 2008 to Third Quarter 2007)
FINANCIAL
HIGHLIGHTS
For the third
quarter 2008, FHN reported a net loss of $125.1 million or $.62 per diluted
share compared to a net loss of $14.2 million or $.11 per diluted share for the
third quarter 2007. The third quarter 2008 was impacted by several
items including increased provisioning for loan losses, costs associated with
the company’s restructuring, repositioning, and efficiency initiatives, a
settlement loss related to Visa legal matters and gains related to the
repurchase of debt. Provisioning for loan losses increased by $296.6
million from the third quarter 2007 to $340.0 million in the current quarter as
loan loss reserves grew from 1.08 percent of total loans in the third quarter
2007 to 3.52 percent in the third quarter 2008. FHN recognized gains
of $18.9 million related to the repurchase of debt and incurred net charges of
$33.9 million in the third quarter 2008 from restructuring, repositioning, and
efficiency initiatives compared to $32.8 million in the third quarter
2007.
National
Specialty Lending, Regional Banking, Mortgage Banking and Capital Markets were
all impacted by increased provisioning in the third quarter 2008 as FHN
continued to actively manage the credit risk within its loan
portfolios. Capital Markets fixed income sales generated $80.1
million of revenues compared to $46.0 million in the third quarter of 2007 as
the Federal Reserve’s aggressive rate cuts in the first half of 2008 produced a
steeper yield curve. Mortgage Banking pre-tax income was $46.4
million in the third quarter 2008 compared to a pre-tax loss of $39.2 million in
the third quarter 2007 as origination income was positively impacted by higher
gain on sale margins and servicing income was favorably impacted by hedging
activities as compared to 2007.
FHN improved
its capital position in the third quarter 2008 as a result of a public offering
of 69 million shares of common stock in the second quarter 2008 and balance
sheet contraction throughout 2008. Key ratios were 7.18 percent for
tangible common equity to tangible assets, 11.10 percent for Tier I and 16.07
percent for total capital as of September 30, 2008. Corporate net
interest margin improved to 3.01 percent for the third quarter 2008 compared to
2.87 percent for the third quarter 2007.
Return on
average shareholders’ equity and return on average assets were (18.30) percent
and (1.49) percent, respectively, for the third quarter 2008 compared to (2.31)
percent and (.15) percent respectively, for the third quarter
2007. Total assets were $32.8 billion and shareholders’ equity was
$2.6 billion on September 30, 2008, as compared to $37.5 billion and $2.4
billion, respectively, on September 30, 2007.
BUSINESS LINE
REVIEW
Regional
Banking
The pre-tax
loss for Regional Banking was $6.5 million for the third quarter 2008 compared
to pre-tax income of $56.2 million for third quarter 2007. Total
revenues for Regional Banking were $210.3 million for third quarter 2008
compared to $228.6 million for the third quarter 2007.
Net interest
income was $122.4 million in the third quarter 2008 compared to $136.9 million
in the third quarter 2007. Regional Banking net interest margin was
4.43 percent in the third quarter 2008 compared to 4.85 percent in the third
quarter 2007. This compression resulted from narrowing spreads on
deposits as interest rates declined in the first half of 2008 and competition
for deposits increased.
Noninterest
income decreased slightly to $87.9 million in the third quarter 2008 as compared
to $91.6 million in the third quarter 2007. The decrease was
primarily driven by a decline in trust income of $1.8 million as the value of
assets under management declined due to economic conditions.
Provision for
loan losses increased to $58.2 million in the third quarter 2008 from $18.5
million for the third quarter 2007. This increase was primarily a
result of deterioration in commercial and home equity loan portfolios compared
to a year ago.
Noninterest
expense increased to $158.6 million in the third quarter 2008 from $153.8
million for the third quarter 2007. Declines of $4.4 million in
personnel expense were more than offset by increases in advertising, foreclosure
losses, expense for off balance sheet commitments and low income housing
corporation expenses.
Capital
Markets
Capital
Markets pre-tax loss was $8.6 million in the third quarter 2008 as compared to
pre-tax income of $2.7 million in the third quarter 2007. Total
revenues for Capital Markets were $117.5 million in the third quarter 2008 as
compared to $78.6 million in the third quarter 2007.
Net interest
income was $19.0 million in the third quarter 2008 as compared to $14.1 million
in the third quarter 2007. This increase is primarily attributable to
a steeper yield curve and the effect of increases in the average trust preferred
loan balance.
Income from
fixed income sales increased to $80.1 million in the third quarter 2008 from
$46.0 million in the third quarter 2007, reflecting an increase in activity
during the third quarter 2008 as the Federal Reserve aggressively lowered rates
in the first half of 2008 resulting in a steeper yield curve as compared to last
year. Other product revenues remained flat at $18.4 million in the
third quarter 2008 compared to $18.5 million in the third quarter
2007.
Provision for
loan losses increased to $38.5 million from $2.0 million to reflect
deterioration of correspondent banking loans from current stress in the
financial system.
Noninterest
expense was $87.7 million in the third quarter 2008 as compared to $73.9 million
in the third quarter 2007. This increase is a result of higher production levels
during the third quarter 2008.
National
Specialty Lending
National
Specialty Lending had a pre-tax loss of $214.5 million in the third quarter 2008
as compared to a pre-tax income of $6.0 million in the third quarter
2007. The pre-tax loss in 2008 is primarily a result of an increase
in the provision for loan losses to $240.5 million in the third quarter 2008 as
compared to $22.8 million in the third quarter 2007 due to deterioration in the
national construction lending portfolios.
Net interest
income declined to $45.2 million in the third quarter 2008 as compared to $61.2
million for the third quarter 2007, as a result of the increase in non-accrual
construction loans and continued contraction of loan portfolios from the
wind-down of operations. Noninterest income was $4.2 million for the
third quarter 2008 compared to $1.2 million for the third quarter
2007. A reduction in charges taken in 2007 related to declines in
residual values of prior securitizations and LOCOM adjustments were partially
offset by decreases in originations, MSR fair value, and gain on loan
sales.
Noninterest
expense was $23.5 million in the third quarter 2008 as compared to $33.6 million
for the third quarter 2007. Noninterest expense declined principally
due to lower personnel costs related to the business wind-down initiated during
first quarter 2008.
Mortgage
Banking
Effective
August 31, 2008, FHN completed the sale of Mortgage Banking's servicing
operations, origination offices outside of Tennessee and $19.1 billion of
servicing to MetLife Bank, N.A. As a result of this transaction, all components
of origination activity for third quarter 2008 are significantly lower when
compared to third quarter 2007.
Mortgage
Banking had pre-tax income of $46.4 million in the third quarter 2008 as
compared to a pre-tax loss of $39.2 million in the third quarter
2007. Total revenues for Mortgage Banking were $138.3 million for the
third quarter 2008 as compared to $69.1 million for the third quarter
2007.
Net interest
income was $22.5 million in the third quarter 2008 as compared to $26.9 million
in the third quarter 2007 as the size of the mortgage warehouse decreased due to
the sale of national origination offices and the warehouse spread increased to
3.83 percent in the current quarter compared to 1.34 percent in third
quarter 2007. Provision for loan losses was $2.9 million in the third
quarter 2008 reflecting deterioration of permanent mortgages in the
portfolio.
Noninterest
income was $115.8 million in the third quarter 2008 as compared to $42.1 million
in the third 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 increased to $19.8 million in the third quarter 2008 from a
loss of $17.5 million in the third quarter 2007 primarily due to increased
margin on deliveries to the secondary market and an increase of $6.7 million
attributable to adopting accounting standards in the first quarter
2008. Gross origination fees decreased by $33.0 million as
mortgage banking origination operations were sold to MetLife on August 31,
2008. Gain on loan sale deliveries increased $35.0 million as margins
increased to 21 bps in the third quarter 2008 compared to negative 33 bps in
2007. Gains in 2008 were negatively impacted by a $15.5 million
adjustment to reflect revised cash flow expectations related to mortgage
origination activity while 2007 was impacted by credit market disruptions which
negatively affected pricing and dealer concessions. See Note 15 –
Other Events for a detailed discussion of the liability adjustment.
Net servicing
income increased to $80.6 million in the third quarter 2008 from $49.7 million
in 2007. Service fees decreased by $26.8 million to $49.9 million in the third
quarter 2008 as the servicing portfolio declined to $65.3 billion from $108.4
billion in 2007. Servicing hedging activities positively impacted net
revenues by $50.8 million in the third quarter as compared to $22.0 million in
the third quarter 2007, primarily resulting from Federal Reserve interest rate
decreases creating a steeper yield curve in 2008. The decrease in MSR
value due to runoff was $20.1 million in the third quarter 2008 as compared to
$49.0 million in the third quarter 2007.
Noninterest
expense was $89.0 million in the third quarter 2008 as compared to $108.3
million in third quarter 2007. The decrease in the third quarter of
2008 was primarily the result of the divestiture of certain mortgage banking
operations offset by a $21.1 million effect of no longer deferring origination
costs on warehouse loans accounted for at elected fair value. This
amount is offset by a corresponding increase in origination income.
Corporate
The Corporate
segment’s results yielded a pre-tax loss of $30.7 million in the third quarter
2008 compared to a pre-tax loss of $49.4 million in the third quarter
2007. Net interest income increased to $14.0 million compared to net
interest expense of $1.4 million in the third quarter 2007 as proceeds from the
common stock issuance reduced the need for higher cost short term
funding. Results for the third quarter 2008 include $33.9 million of
net charges associated with implementation of restructuring, repositioning and
efficiency initiatives compared to $32.8 million of net charges in the third
quarter 2007. See discussion of the restructuring, repositioning and efficiency
initiatives below for further details. In the third quarter 2008,
gains of $18.9 million related to the repurchase of debt were partially offset
by an $11.0 million loss related to certain Visa legal settlement
matters.
RESTRUCTURING,
REPOSITIONING, AND EFFICIENCY INITIATIVES
Beginning in
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. These sales were
finalized in second quarter 2008. In the second half of 2007, FHN
also took actions 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 initiated the repositioning of First Horizon Home Loans’ mortgage banking
operations, which included sales of MSR in fourth quarter 2007 and the first,
second, and third quarters of 2008.
In June 2008,
FHN announced that it had reached a definitive agreement with MetLife for the
sale of more than 230 retail and wholesale mortgage origination offices
nationwide as well as its loan origination and servicing
platform. Effective August 31, 2008, the parties completed the
initial settlement for MetLife’s acquisition of substantially all of FHN’s
mortgage origination pipeline, related hedges, certain fixed assets and other
associated assets. FHN also agreed with MetLife for the sale of
servicing assets, and related hedges, on $19.1 billion of first lien mortgage
loans and associated custodial deposits. MetLife generally paid book
value for the assets and liabilities it acquired, less a purchase price
reduction of approximately $10.0 million. In third quarter 2008, FHN
recognized a loss on divestiture of $17.5 million related to this
transaction. The purchase price is subject to a post-closing true up
which FHN currently expects to occur in fourth quarter 2008.
Net costs
recognized by FHN in the nine months ended September 30, 2008, related to
restructuring, repositioning, and efficiency activities were $81.1 million
compared to $72.1 million for the first nine months of 2007. Included
in noninterest income are $12.7 million of transaction costs related to
contracted loan servicing sales and $18.9 million of losses related to the
Mortgage divestiture and First Horizon Bank branch sales. 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 are recorded as unallocated corporate
charges within the Corporate segment. Significant expenses for year
to date 2008 resulted from the following actions:
·
|
Expense
of $39.4 million associated with organizational and compensation changes
due to right-sizing operating segments, the divestiture of certain
mortgage banking operations and First Horizon Bank branches, and
consolidating functional areas
|
·
|
Loss of
$17.5 million on the divestiture of certain mortgage banking
operations
|
·
|
Loss of
$1.4 million from the sales of certain First Horizon Bank
branches
|
·
|
Transaction
costs of $12.7 million from the contracted sales of mortgage servicing
rights
|
·
|
Expense
of $10.1 million for the write-down of certain premises and equipment,
intangibles and other assets resulting from FHN’s divestiture of certain
mortgage operations and 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 effect of suspending depreciation on assets held for sale was
immaterial to FHN’s results of operations for all periods. As a result of the
change in FHN’s national banking strategy, a write-down of other intangibles of
$2.4 million was recognized in first quarter 2008 related to certain banking
licenses. As part of the divestiture of certain mortgage banking assets, an
impairment of $1.7 million was recognized in second quarter 2008 related to
noncompete agreements. The recognition of these impairment losses
will have no effect on FHN’s debt covenants. The impairment loss related to such
intangible assets was recorded as an unallocated corporate charge within the
Corporate segment and is included in all other expense on the Consolidated
Condensed Statements of Income. 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 beginning in its first quarter 2008 run-rate. An additional $70
million in annual profitability improvements is anticipated to be experienced by
the end of 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. Additional amounts will likely be
recognized in 2008 for adjustments related to the mortgage banking divestiture
as well as the discontinuance of national businesses. At this time,
the amount of these additional charges is expected to be between $5 and $15
million in the fourth quarter 2008.
Charges
related to restructuring, repositioning, and efficiency initiatives for the
three and nine month periods ended September 30, 2008, and 2007 are presented in
the following table based on the income statement line item
affected. See Note 13 – 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
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
|
|
|
September
30
|
|
|
September
30
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Mortgage
banking
|
|
$
|
(656 |
) |
|
$
|
- |
|
|
$ |
(12,667 |
) |
|
$ |
- |
|
Losses
on divestitures
|
|
|
(17,489 |
) |
|
|
- |
|
|
|
(18,913 |
)
|
|
|
- |
|
Total
noninterest income
|
|
$
|
(18,145 |
) |
|
$ |
- |
|
|
$ |
(31,580 |
) |
|
$ |
- |
|
Provision
for loan losses
|
|
$
|
- |
|
|
$
|
- |
|
|
$
|
- |
|
|
$
|
7,672 |
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation, incentives and benefits
|
|
|
10,704 |
|
|
|
9,269 |
|
|
|
23,845 |
|
|
|
17,266 |
|
Occupancy
|
|
|
3,960 |
|
|
|
5,074 |
|
|
|
8,279 |
|
|
|
8,800 |
|
Equipment
rentals, depreciation and maintenance
|
|
|
76 |
|
|
|
846 |
|
|
|
4,257 |
|
|
|
6,067 |
|
Operations
services
|
|
|
(1 |
) |
|
|
25 |
|
|
|
1 |
|
|
|
25 |
|
Communications
and courier
|
|
|
- |
|
|
|
27 |
|
|
|
42 |
|
|
|
27 |
|
Goodwill
impairment
|
|
|
- |
|
|
|
13,010 |
|
|
|
- |
|
|
|
13,010 |
|
All
other expense
|
|
|
1,019 |
|
|
|
4,571 |
|
|
|
13,141 |
|
|
|
19,273 |
|
Total
noninterest expense
|
|
|
15,758 |
|
|
|
32,822 |
|
|
|
49,565 |
|
|
|
64,468 |
|
Loss
before income taxes
|
|
$
|
(33,903 |
) |
|
$ |
(32,822 |
) |
|
$ |
(81,145 |
) |
|
$ |
(72,140 |
) |
Activity in
the restructuring and repositioning liability for the nine months ended
September 30, 2008 is presented in the following table:
(Dollars
in thousands)
|
|
Liability
|
|
Beginning
Balance
|
|
$ |
19,675 |
|
Severance
and other employee related costs
|
|
|
23,826 |
|
Facility
consolidation costs
|
|
|
8,030 |
|
Other
exit costs, professional fees and other
|
|
|
7,578 |
|
Total
Accrued
|
|
|
59,109 |
|
Payments*
|
|
|
32,154 |
|
Accrual
Reversals
|
|
|
3,253 |
|
Restructuring
and Repositioning Reserve Balance
|
|
$ |
23,702 |
|
*
Includes payments related to:
|
|
Nine
Months Ended
|
|
|
|
September
30, 2008
|
|
Severance
and other employee related costs
|
|
$ |
19,483 |
|
Facility
consolidation costs
|
|
|
5,513 |
|
Other
exit costs, professional fees and other
|
|
|
7,158 |
|
|
|
$ |
32,154 |
|
INCOME
STATEMENT
Total
revenues (net interest income and noninterest income) were $528.3 million in the
third quarter 2008 compared to $441.2 million in 2007. Net interest
income was $223.1 million in the third quarter 2008 as compared to $237.8
million in 2007 and noninterest income was $305.2 million in 2008 as compared to
$203.5 million in 2007. A discussion of the major line items
follows.
NET
INTEREST INCOME
Net interest
income declined slightly to $223.1 million in the third quarter 2008 as compared
to $237.8 million in the third quarter 2007. Average earning assets declined
10.0 percent to $29.5 billion and interest-bearing liabilities declined 11.0
percent to $25.3 billion in the third 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 3.01 percent for the third quarter 2008 as
compared to 2.87 percent for the third quarter 2007. The increased margin
occurred as the net interest spread widened to 2.65 percent from 2.21 percent in
2007 while the impact of free funding decreased from 66 basis points to 36 basis
points. The improvement in net interest margin primarily resulted
from a decline in average earning assets and improvements in funding costs as
FHN shifted to less costly funding sources such as the Federal Reserve Bank Term
Auction Facility and the Federal Home Loan Bank. Yields and rates for
the third quarter 2008 and 2007 are detailed in Table 2.
Table
2 - Net Interest Margin
|
|
Three
Months Ended
|
|
|
|
September
30
|
|
|
|
2008
|
|
|
2007
|
|
Consolidated
yields and rates:
|
|
|
|
|
|
|
Loans,
net of unearned income
|
|
|
5.16 |
% |
|
|
7.39 |
% |
Loans
held for sale
|
|
|
5.96 |
|
|
|
6.72 |
|
Investment
securities
|
|
|
5.41 |
|
|
|
5.57 |
|
Capital
markets securities inventory
|
|
|
4.69 |
|
|
|
5.59 |
|
Mortgage
banking trading securities
|
|
|
12.86 |
|
|
|
12.21 |
|
Other
earning assets
|
|
|
1.97 |
|
|
|
5.02 |
|
Yields
on earning assets
|
|
|
5.17 |
|
|
|
7.02 |
|
Interest-bearing
core deposits
|
|
|
2.06 |
|
|
|
3.40 |
|
Certificates
of deposits $100,000 and more
|
|
|
3.28 |
|
|
|
5.40 |
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
|
|
1.64 |
|
|
|
4.82 |
|
Capital
markets trading liabilities
|
|
|
4.66 |
|
|
|
5.28 |
|
Other
short-term borrowings and commercial paper
|
|
|
2.39 |
|
|
|
5.05 |
|
Long-term
debt
|
|
|
3.17 |
|
|
|
5.84 |
|
Rates
paid on interest-bearing liabilities
|
|
|
2.52 |
|
|
|
4.81 |
|
Net
interest spread
|
|
|
2.65 |
|
|
|
2.21 |
|
Effect
of interest-free sources
|
|
|
.36 |
|
|
|
.66 |
|
FHN
- NIM
|
|
|
3.01 |
% |
|
|
2.87 |
% |
In the short
term, margin could be negatively impacted from elevated LIBOR, increased funding
costs due to tightening liquidity, and slight asset sensitivity in the core
bank. In the longer term, net interest margin should be positively
influenced by the reduction of lower margin national businesses.
NONINTEREST
INCOME
Mortgage
Banking Noninterest Income
Prior to
adoption of new accounting standards in the 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.
Total
Mortgage Banking income increased to $106.8 million in the third quarter 2008
compared to $39.0 million in the third quarter 2007. (See Table
3) Origination income was $19.8 million in the third quarter 2008 as
compared to a loss of $17.5 million last year despite a decline in loans
delivered into the secondary market and a decrease in origination activity due
to the third quarter 2008 divestiture of national origination
offices. The adoption of accounting standards in the first
quarter 2008 positively impacted third quarter origination income by $6.7
million. Margin on deliveries increased from negative 33 basis points
in the third quarter 2007 to positive 21 basis points in 2008 largely due to
credit market disruptions in 2007 that increased dealer concessions and
negatively impacted pricing. In the third quarter 2008, gain on sale
margins were negatively impacted by a $15.5 million adjustment to reflect
revised cash flow expectations related to mortgage origination
activity. See Note 15 – Other Events for a detailed discussion of
this adjustment.
Servicing
income includes servicing fees, changes in the fair value of the MSR asset and
net gains or losses from hedging MSR. FHN 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). Net servicing income increased to
$80.6 million in the third quarter 2008 from $49.7 million in
2007. Gross servicing fees declined primarily related to sales of the
servicing portfolio in the fourth quarter 2007 and throughout
2008. Servicing hedging activities and changes other than runoff in
the value of capitalized servicing assets positively impacted net servicing
revenues by $50.8 million this quarter as compared to $22.0 million in the third
quarter 2007, due to Federal Reserve rate decreases and a steeper yield curve in
2008. Additionally, the change in MSR value due to runoff declined to
$20.1 million in the third quarter 2008 compared to $49.0 million last year due
to servicing sales and decreased loan refinancing.
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. Other
mortgage banking income was relatively flat in 2008 compared to the same period
in 2007. After the August 31, 2008 divestiture of certain mortgage
banking operations, the impact from these nonconsolidated subsidiaries will be
minimal.
Table
3 - Mortgage Banking Noninterest Income
|
|
Three
Months Ended
|
|
|
Percent
|
|
|
Nine
Months Ended
|
|
|
Percent
|
|
|
|
September
30
|
|
|
Change
|
|
|
September
30
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
(%)
|
|
|
2008
|
|
|
2007
|
|
|
(%)
|
|
Noninterest
income (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination
income
|
|
$ |
19,828 |
|
|
$ |
(17,494 |
) |
|
NM
|
|
|
$ |
237,979 |
|
|
$ |
113,428 |
|
|
|
109.8+
|
|
Servicing
income
|
|
|
80,603 |
|
|
|
49,738 |
|
|
|
62.1+
|
|
|
|
192,560 |
|
|
|
49,250 |
|
|
|
291.0+ |
|
Other
|
|
|
6,386 |
|
|
|
6,778 |
|
|
|
5.8 -
|
|
|
|
7,408 |
|
|
|
20,741 |
|
|
|
64.3 - |
|
Total
mortgage banking noninterest income
|
|
$ |
106,817 |
|
|
$ |
39,022 |
|
|
|
173.7+
|
|
|
$ |
437,947 |
|
|
$ |
183,419 |
|
|
|
138.8+
|
|
Mortgage
banking statistics (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinance
originations
|
|
$ |
907.1 |
|
|
$ |
2,067.1 |
|
|
|
56.1 - |
|
|
$ |
8,975.9 |
|
|
$ |
7,909.8 |
|
|
|
13.5+ |
|
Home-purchase
originations
|
|
|
2,199.4 |
|
|
|
4,605.2 |
|
|
|
52.2 - |
|
|
|
8,465.9 |
|
|
|
13,157.3 |
|
|
|
35.7 - |
|
Mortgage
loan originations
|
|
$ |
3,106.5 |
|
|
$ |
6,672.3 |
|
|
|
53.4 - |
|
|
$ |
17,441.8 |
|
|
$ |
21,067.1 |
|
|
|
17.2 - |
|
Servicing
portfolio - owned
|
|
$ |
65,345.3 |
|
|
$ |
108,400.8 |
|
|
|
39.7 - |
|
|
$ |
65,345.3 |
|
|
$ |
108,400.8 |
|
|
|
39.7 - |
|
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 equity research, loans
sales, portfolio advisory activities and structured
finance. Securities inventory positions are generally procured for
distribution to customers by the sales staff. A portion of the
inventory is hedged to protect against movements in fair value due to changes in
interest rates.
Revenues from
fixed income sales increased to $80.1 million as compared to $46.0 million in
the third quarter 2007 reflecting the effects of a steeper yield curve resulting
from the Federal Reserve’s aggressive rate cuts during the first half of 2008
and the associated positive impact on the demand for fixed income
products. Revenues from other products decreased slightly to $15.9
million in comparison to the third quarter 2007.
Table
4 - Capital Markets Noninterest Income
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
Growth
|
|
|
September
30
|
|
|
Growth
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
Rate
(%)
|
|
|
2008
|
|
|
2007
|
|
|
Rate
(%)
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income
|
|
$ |
80,104 |
|
|
$ |
46,003 |
|
|
|
74.1+ |
|
|
$ |
337,314 |
|
|
$ |
140,574 |
|
|
|
140.0+
|
|
Other
product revenue
|
|
|
15,850 |
|
|
|
17,719 |
|
|
|
10.5 - |
|
|
|
12,435 |
|
|
|
95,315 |
|
|
|
87.0 - |
|
Total
capital markets noninterest income
|
|
$ |
95,954 |
|
|
$ |
63,722 |
|
|
|
50.6+ |
|
|
$ |
349,749 |
|
|
$ |
235,889 |
|
|
|
48.3+ |
|
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 remained stable at $45.8 million compared to $44.9 million last
year. Revenue from loan sales and securitizations decreased slightly
to $3.2 million from $4.8 million in 2007. Trust services and
investment management income declined 17.8 percent or $1.7 million because of
market related declines in the value of trust assets and insurance commissions
were higher at $7.3 million from $6.7 million in 2007. All other
noninterest income increased by $3.5 million in the third quarter 2008 compared
to third quarter 2007. Gains related to the repurchase of debt
were $18.9 million which was partially offset by a $17.5 million loss on the
divestiture of certain mortgage banking operations. Also positively impacting
other noninterest income in 2008 was a reduction in LOCOM adjustments as a $7.3
million charge was taken in 2007 on HELOC and second lien consumer
loans. Revenues related to deferred compensation plans decreased by
$5.7 million in comparison to the third quarter 2007, which were offset by a
related decrease in noninterest expense associated with these
plans.
NONINTEREST
EXPENSE
Total
noninterest expense for the third quarter 2008 decreased 4.6 percent to $402.3
million from $421.6 million in 2007. This includes an increase of
$21.1 million related to the effect of no longer deferring origination costs on
warehouse loans accounted for at elected fair value. This amount is
offset by a corresponding increase in mortgage banking noninterest
income. Additionally, results for the third quarter 2008
include $15.7 million of charges associated with implementation of
restructuring, repositioning and efficiency initiatives compared to $32.8
million in 2007. 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, decreased to $215.5 million from $236.7 million in 2007
as the impact of headcount reductions more than offset the effects of no longer
deferring compensation directly attributable to the origination of mortgage
loans accounted for at elected fair value, increased capital markets production,
and severance related costs. Efficiency initiatives also impacted a
decline in occupancy expense as these expenses decreased 21.8 percent or $7.6
million as compared to third quarter 2007. Embedded in this decline
are increases related to restructuring charges of $3.9 million in 2008 and $5.1
million of restructuring charges in 2007. Equipment rental,
depreciation and maintenance expense declined by $4.9 million from last year due
to the continued repositioning and right-sizing of FHN.
Other
noninterest expense increased $28.3 million to $115.8 million in the third
quarter 2008 reflecting an $11.0 million loss related to Visa legal settlement
matters. Loan closing cost expense increased by $5.5 million as
increases related to the recognition of origination costs for loans measured at
fair value were partially offset by declines in volume related to the mortgage
divestiture. FDIC premiums, losses related to foreclosed property, and legal and
professional fees each increased other noninterest expense by approximately $3.5
million compared to 2007. The increases were partially offset
by general declines in other expense categories due to benefits related to
efficiency initiatives.
INCOME
TAXES
The effective
tax rate for the third quarter 2008 was 41.7 percent compared to 39.4 percent in
2007. The effective tax rate for the third quarter 2008 is based on the
pre-tax loss recorded for the quarter and favorable permanent tax benefits
booked during the quarter including $7.2 million of favorable tax benefits
related to affordable housing credits and increases in life insurance cash
surrender values. The effective tax rate for third quarter 2007 was based
on the pre-tax loss recorded for the quarter and offsetting permanent tax
benefits/costs booked during the quarter including $7.3 million of favorable tax
benefits related to affordable housing credits and increases in life insurance
cash surrender values and $6.6 million of unfavorable permanent tax costs
related to non-deductible goodwill included in restructuring charges. The
tax rates for both quarters do not include any unfavorable accounting
limitations on federal deferred tax assets related to loan loss reserves or
other deferred tax items.
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. Analytical models based on loss experience adjusted for
current events, trends and economic conditions are used by management to
determine the amount of provision to be recognized and to assess the adequacy of
the loan loss allowance. In response to economic conditions, in 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 $340.0 million in
the third quarter 2008 as compared to $43.4 million in the third quarter
2007. The provision for loan losses increased by $296.6 million
reflecting recognition of portfolio stress due to declining economic conditions
especially in the national construction lending, home equity and commercial
portfolios. The net charge-off ratio increased to 2.84 percent in the
third quarter 2008 from .57 percent in the third quarter 2007 as net charge-offs
grew to $154.7 million from $31.4 million, driven by problem loans primarily in
the national construction portfolios. (See Table 5
below)
While
charge-offs increased due to deteriorating economic conditions, FHN’s
methodology of charging down collateral dependent loans to net realizable value
(NRV) also impacted charge-offs, especially in comparison to applicable
reserves. Generally, classified non-accrual loans over $1 million are deemed to
be impaired in accordance with Statement of Financial Accounting Standards, No.
114, “Accounting by Creditors for Impairment of a Loan” (SFAS No. 114) and are
assessed for impairment measurement. A majority of these SFAS No. 114
loans (generally commercial loans over $1 million that are not expected to pay
all contractually due principal and interest) are included in the Residential
CRE (Homebuilder and Condominium Construction) portfolio. Once
impairment is detected, loans are then written down to the fair value of the
underlying collateral less costs to sell (net realizable value). Fair
value is based on recent appraisals of collateral. Collateral values
are monitored and further charge-offs are taken if it is determined that the
collateral values have continued to decline. Historically as problem loans
had been identified, estimated probable losses were reserved for in the
Allowance for Loan and Lease Losses (ALLL) and these loans were subsequently
charged-off as appropriate. Given the deterioration in the real
estate markets and the growing number of loans determined to be collateral
dependent under SFAS No. 114, charge-offs of these loans have been accelerated
to the point when the impairments are initially detected as opposed to
historical trends which reflected establishing reserves for probable inherent
losses.
Also
impacting increased charge-offs related to SFAS No. 114 loans are the dramatic
declines in collateral values experienced due to the prevailing real estate
market conditions. Therefore, charge-offs are not only higher due to the
increased credit deterioration related to these loans throughout 2008, but also
due to the increased rate at which loans are charged down to net realizable
value because of rapidly declining collateral values.
As of
September 30, 2008, the total value of SFAS No. 114 loans considered collateral
dependent was $364.1 million while net charge-offs related to these loans were
$63.4 million or 41.0 percent of total net charge-offs during the third
quarter. Because of the accelerated recognition of impairment of
these loans, the elevated charge-offs decrease the ALLL. Compression
occurs in the ALLL to net charge-offs ratio as the ALLL is not replenished for
charge-offs related to SFAS No.114 collateral dependent loans because reserves
are not carried for these loans. The one-time-close (OTC) portfolio
of the winding-down National Specialty Lending Segment has experienced
significant deterioration in 2008. Generally, OTC loans are written
down to appraised value if, when the loan becomes 90 days past due or is
considered substandard, recently obtained appraisals indicate a decline in fair
value. Subsequent charge-downs are taken periodically
thereafter. In the third quarter 2008, net charge-offs related to OTC
loans were $41.5 million, approximately 26.8 percent of total net
charge-offs.
Table
5 - Net Charge-off Ratios *
|
|
Three
Months Ended
|
|
|
|
September
30
|
|
|
|
2008
|
|
|
2007
|
|
Total
commercial
|
|
|
2.88 |
% |
|
|
.55 |
% |
Retail
real estate
|
|
|
2.72 |
|
|
|
.50 |
|
Other
retail
|
|
|
6.42 |
|
|
|
3.59 |
|
Credit
card receivables
|
|
|
4.70 |
|
|
|
3.01 |
|
Total
net charge-offs
|
|
|
2.84 |
|
|
|
.57 |
|
*Ratio is
annualized net charge-offs to average total loans, net of unearned
income.
Table 8
provides information on the relative size of each loan portfolio.
As included
in Table 6, non-performing loans in the loan portfolio were $890.9 million on
September 30, 2008, compared to $189.8 million on September 30, 2007. The ratio
of nonperforming loans in the loan portfolio to total loans was 4.12 percent on
September 30, 2008, and .86 percent on September 30, 2007. The increase in
nonperforming loans is primarily attributable to deterioration in the OTC and
homebuilder/condominium construction portfolios, due primarily to the slowdown
in the housing market. Nonperforming OTC loans (See Table 7)
increased to $347.9 million as of September 30, 2008 from $69.3 million as of
September 30, 2007. Nonperforming homebuilder/condominium
construction loans increased to $349.9 million on September 30, 2008 from $86.9
million on September 30, 2007.
Nonperforming
assets were $1.0 billion on September 30, 2008, compared to $268.4 million on
September 30, 2007. The nonperforming assets ratio was 4.63 percent
on September 30, 2008 and 1.13 percent last year. In addition to the
increase in nonperforming loans, foreclosed assets increased to $115.5 million
in the third quarter 2008 compared to $60.0 million last year which was
primarily attributable to deterioration in the national construction portfolios
and permanent mortgages. Foreclosed assets are recognized at net
realizable value, including estimated costs of disposal at foreclosure. The
nonperforming asset ratio is expected to remain under pressure throughout the
current economic downturn.
The ALLL to
non-performing loans in the loan portfolio (“NPL ratio”) decreased to .85 times
in the third quarter 2008 compared to 1.25 times in the third quarter of
2007. While non-performing loans increased from the same period last
year, a portion of these loans does not carry reserves. The SFAS No.
114 loans mentioned above that are charged down to NRV represent 40.9 percent of
non-performing loans in the loan portfolio as of September 30,
2008. This approach compresses the ALLL to non-performing loans ratio
because collateral dependent SFAS No. 114 loans are included in
non-performing loans, but reserves for these loans are not carried in the
ALLL. Residential CRE (Homebuilder and Condominium Construction)
loans were $285.5 million or 70.6 percent of all SFAS No. 114 loans while the
remainder is included in the C&I and Income CRE (Income-producing Commercial
Real Estate) portfolios. Additionally, OTC loans that are 90 days
past due are generally charged down to current appraised value (and over
time, to less than current appraised value) and are included in
non-performing loans. As of September 30, 2008, OTC loans accounted
for 39.1 percent of non-performing loans. The ALLL related to OTC
loans was $242.3 million which provides a coverage ratio of 20.16 percent for
inherent losses in the portfolio. Because of the methodologies described above,
the ALLL to NPL ratio is negatively impacted. Non-performing loans
for which reserves are actually carried were approximately $375.7 million as of
September 30, 2008.
Table
6 - Asset Quality Information
|
|
Three
Months Ended September 30
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
Beginning
balance on June 30
|
|
$ |
575,149 |
|
|
$ |
229,919 |
|
Provision
for loan losses
|
|
|
340,000 |
|
|
|
43,352 |
|
Divestitures/acquisitions/transfers
|
|
|
- |
|
|
|
(5,276 |
) |
Charge-offs
|
|
|
(160,200 |
) |
|
|
(35,858 |
) |
Recoveries
|
|
|
5,507 |
|
|
|
4,474 |
|
Ending
balance on September 30
|
|
$ |
760,456 |
|
|
$ |
236,611 |
|
Reserve
for off-balance sheet commitments
|
|
|
19,109 |
|
|
|
9,002 |
|
Total
allowance for loan losses and reserve for off-balance sheet
commitments
|
|
$ |
779,565 |
|
|
$ |
245,613 |
|
|
|
|
|
|
|
|
|
|
|
|
September
30
|
|
|
2008
|
|
|
2007
|
|
Regional
Banking:
|
|
|
|
|
|
|
|
|
Nonperforming
loans
|
|
$ |
133,138 |
|
|
$ |
37,102 |
|
Foreclosed
real estate
|
|
|
32,078 |
|
|
|
27,214 |
|
Total
Regional Banking
|
|
|
165,216 |
|
|
|
64,316 |
|
Capital
Markets:
|
|
|
|
|
|
|
|
|
Nonperforming
loans
|
|
|
27,284 |
|
|
|
10,051 |
|
Foreclosed
real estate
|
|
|
600 |
|
|
|
810 |
|
Total
Capital Markets
|
|
|
27,884 |
|
|
|
10,861 |
|
National
Specialty Lending:
|
|
|
|
|
|
|
|
|
Nonperforming
loans
|
|
|
718,624 |
|
|
|
142,645 |
|
Foreclosed
real estate
|
|
|
57,251 |
|
|
|
18,030 |
|
Total
National Specialty Lending
|
|
|
775,875 |
|
|
|
160,675 |
|
Mortgage
Banking:
|
|
|
|
|
|
|
|
|
Nonperforming
loans - held for sale (a)
|
|
|
20,930 |
|
|
|
18,508 |
|
Foreclosed
real estate
|
|
|
25,589 |
|
|
|
13,992 |
|
Total
Mortgage Banking
|
|
|
46,519 |
|
|
|
32,500 |
|
Total
nonperforming assets
|
|
$ |
1,015,494 |
|
|
$ |
268,352 |
|
|
|
|
|
|
|
|
|
|
Total
loans, net of unearned income
|
|
$ |
21,601,898 |
|
|
$ |
21,973,004 |
|
Insured
loans
|
|
|
(652,051 |
) |
|
|
(928,238 |
) |
Loans
excluding insured loans
|
|
$ |
20,949,847 |
|
|
$ |
21,044,766 |
|
Foreclosed
real estate from GNMA loans
|
|
|
35,943 |
|
|
$ |
15,610 |
|
Potential
problem assets (b)
|
|
|
1,023,065 |
|
|
|
171,426 |
|
Loans
30 to 89 days past due
|
|
|
423,593 |
|
|
|
179,014 |
|
Loans
30 to 89 days past due - guaranteed portion (c)
|
|
|
67 |
|
|
|
157 |
|
Loans
90 days past due
|
|
|
65,233 |
|
|
|
42,515 |
|
Loans
90 days past due - guaranteed portion (c)
|
|
|
232 |
|
|
|
179 |
|
Loans
held for sale 30 to 89 days past due
|
|
|
45,959 |
|
|
|
38,233 |
|
Loans
held for sale 30 to 89 days past due - guaranteed portion
(c)
|
|
|
45,959 |
|
|
|
31,804 |
|
Loans
held for sale 90 days past due
|
|
|
54,354 |
|
|
|
164,145 |
|
Loans
held for sale 90 days past due - guaranteed portion (c)
|
|
|
50,187 |
|
|
|
158,601 |
|
Off-balance
sheet commitments (d)
|
|
$ |
6,746,309 |
|
|
$ |
7,106,326 |
|
Allowance
to total loans
|
|
|
3.52 |
% |
|
|
1.08 |
% |
Allowance
to loans excluding insured loans
|
|
|
3.63 |
|
|
|
1.12 |
|
Nonperforming
assets to loans and foreclosed real estate (e)
|
|
|
4.63 |
|
|
|
1.13 |
|
Allowance
to nonperforming loans in the loan portfolio
|
|
|
.85 |
x |
|
|
1.25 |
x |
Allowance
to annualized net charge-offs
|
|
|
1.23 |
x |
|
|
1.88 |
x |
Certain
previously reported amounts have been reclassified to agree with current
presentation.
(a) 3Q 2008
includes $11,829 of loans held-to-maturity.
(b) Includes
90 days past due loans.
(c)
Guaranteed loans include FHA, VA, student and GNMA loans repurchased through the
GNMA repurchase program.
(d) Amount of
off-balance sheet commitments for which a reserve has been
provided.
(e) Ratio is
non-performing assets related to the loan portfolio to total loans plus
foreclosed real estate and other assets.
Table
7 - Asset Quality by Portfolio
|
|
Three
Months Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
Key
Portfolio Details
|
|
|
|
|
|
|
Commercial
(C&I & Other)
|
|
|
|
|
|
|
Period-end
loans ($ millions)
|
|
$ |
7,618 |
|
|
$ |
7,189 |
|
30+
Delinq. %
|
|
|
1.15 |
% |
|
|
.41 |
% |
NPL
%
|
|
|
1.05 |
|
|
|
.33 |
|
Charge-offs
% (qtr. annualized)
|
|
|
1.64 |
|
|
|
.57 |
|
Allowance
/ Loans %
|
|
|
2.29 |
% |
|
|
* |
|
Allowance
/ Charge-offs
|
|
|
1.41 |
x |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Income
CRE (Income-producing Commercial Real Estate)
|
|
|
|
|
|
|
|
|
Period-end
loans ($ millions)
|
|
$ |
2,038 |
|
|
$ |
1,970 |
|
30+
Delinq. %
|
|
|
3.47 |
% |
|
|
.86 |
% |
NPL
%
|
|
|
3.72 |
|
|
|
.06 |
|
Charge-offs
% (qtr. annualized)
|
|
|
.24 |
|
|
|
.12 |
|
Allowance
/ Loans %
|
|
|
3.73 |
% |
|
|
* |
|
Allowance
/ Charge-offs
|
|
|
15.48 |
x |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Residential
CRE (Homebuilder and Condominium Construction)
|
|
|
|
|
|
|
|
|
Period-end
loans ($ millions)
|
|
$ |
1,480 |
|
|
$ |
2,211 |
|
30+
Delinq. %
|
|
|
5.73 |
% |
|
|
1.25 |
% |
NPL
%
|
|
|
23.64 |
|
|
|
3.93 |
|
Charge-offs
% (qtr. annualized)
|
|
|
11.95 |
|
|
|
.51 |
|
Allowance
/ Loans %
|
|
|
7.55 |
% |
|
|
* |
|
Allowance
/ Charge-offs
|
|
|
.58 |
x |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Consumer
Real Estate (Home Equity Installment and HELOC)
|
|
|
|
|
|
|
|
|
Period-end
loans ($ millions)
|
|
$ |
7,830 |
|
|
$ |
7,648 |
|
30+
Delinq. %
|
|
|
1.49 |
% |
|
|
1.25 |
% |
NPL
%
|
|
|
.07 |
|
|
|
.09 |
|
Charge-offs
% (qtr. annualized)
|
|
|
1.41 |
|
|
|
.37 |
|
Allowance
/ Loans %
|
|
|
1.58 |
% |
|
|
* |
|
Allowance
/ Charge-offs
|
|
|
1.12 |
x |
|
|
* |
|
|
|
|
|
|
|
|
|
|
OTC
(Consumer Residential Construction Loans)
|
|
|
|
|
|
|
|
|
Period-end
loans ($ millions)
|
|
$ |
1,202 |
|
|
$ |
2,160 |
|
30+
Delinq. %
|
|
|
4.92 |
% |
|
|
1.91 |
% |
NPL
%
|
|
|
28.94 |
|
|
|
3.21 |
|
Charge-offs
% (qtr. annualized)
|
|
|
12.29 |
|
|
|
1.16 |
|
Allowance
/ Loans %
|
|
|
20.16 |
% |
|
|
* |
|
Allowance
/ Charge-offs
|
|
|
1.46 |
x |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Permanent
Mortgage
|
|
|
|
|
|
|
|
|
Period-end
loans ($ millions)
|
|
$ |
1,080 |
|
|
$ |
459 |
|
30+
Delinq. %
|
|
|
7.38 |
% |
|
|
1.29 |
% |
NPL
%
|
|
|
2.94 |
|
|
|
- |
|
Charge-offs
% (qtr. annualized)
|
|
|
.22 |
|
|
|
.47 |
|
Allowance
/ Loans %
|
|
|
1.17 |
% |
|
|
* |
|
Allowance
/ Charge-offs
|
|
|
5.48 |
x |
|
|
* |
|
|
|
|
|
|
|
|
|
|
Credit
Card and Other
|
|
|
|
|
|
|
|
|
Period-end
loans ($ millions)
|
|
$ |
354 |
|
|
$ |
336 |
|
30+
Delinq. %
|
|
|
2.08 |
% |
|
|
2.19 |
% |
NPL
%
|
|
|
- |
|
|
|
- |
|
Charge-offs
% (qtr. annualized)
|
|
|
5.30 |
% |
|
|
2.05 |
% |
Allowance
/ Loans %
|
|
|
5.52 |
% |
|
|
* |
|
Allowance
/ Charge-offs
|
|
|
1.06 |
x |
|
|
* |
|
* Prior
period information by loan portfolio is unavailable.
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 $1.0 billion on
September 30, 2008, up from $171.4 million on September 30, 2007. The
significant increase in potential problem assets reflects downward grade
migration in the commercial and OTC portfolios between the third quarter 2007
and throughout 2008. Also, loans 30 to 89 days past due increased to
$423.6 million on September 30, 2008, up from $179.0 million on September 30,
2007. This increase was primarily driven by the slowdown in the
housing markets and its impact on national construction 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
is expected to remain stressed in future quarters due to the expectation that
the housing industry and broader economic conditions may continue to
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 the third quarter 2008,
average earning assets decreased 10.4 percent and averaged $29.6 billion
compared to $33.0 billion in the third quarter 2007 as all earning asset groups
showed declines reflecting continued focus on reducing balance sheet
risk.
LOANS
Average total
loans decreased slightly to $21.8 billion for the third quarter 2008 compared to
$22.2 billion in the third 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 through the third quarter of
2008. Further, originations in the national construction
lending and national home equity portfolios were discontinued in the first
quarter 2008 which resulted in additional declines as compared to the third
quarter 2007 as existing balances pay down or charge off. Offsetting
these impacts were increases in the loan portfolio as certain consumer loans,
certain permanent mortgages, and certain trust preferred loans were included in
the portfolio in the third quarter 2008 compared to these loans being considered
as loans held for sale in the third quarter 2007.
Average loans
represented 73.6 percent of average earning assets in the third quarter 2008 and
67.2 percent in 2007. Total commercial loans were flat at $11.2
billion compared to the third quarter 2007. Commercial, financial and
industrial loans increased to $7.5 billion in comparison to $7.1 billion in the
third quarter 2007 as approximately $380 million of small issuer trust preferred
loans were moved to the portfolio in the second quarter
2008. Commercial Real Estate increased by 9.9 percent from 2007
mainly due to growth in income property lending in the first half of
2008. Commercial construction loans decreased 24.8 percent or $712.5
million since the third quarter 2007, primarily due to the effects of the
wind-down for national homebuilder lending announced in first quarter 2008 as
well as elevated charge-offs recognized in fourth quarter 2007 through the third
quarter of 2008 in this portfolio. FHN did not have any
concentrations of 10 percent or more of total loans in any single
industry.
Total retail
loans decreased 3.0 percent or $328.1 million despite an increase in residential
real estate of $564.9 million as approximately $330 million of first lien and
OTC converted permanent mortgages were moved to the portfolio in the second
quarter 2008. Approximately $90 million of additional OTC loans were
moved to the portfolio in the third quarter 2008. Real estate
construction loans declined by 37.1 percent to $1.4 billion from $2.1 billion
reflecting a decline in OTC loans that was primarily due to the curtailment of
National Construction lending and increased charge-offs in late 2007 through the
third quarter 2008. Additional loan information is provided in Table
8 – Average Loans.
Table
8 - Average Loans
|
|
Three
Months Ended
|
|
|
|
September
30
|
|
|
|
|
|
|
Percent
|
|
|
Growth
|
|
|
|
|
|
Percent
|
|
(Dollars
in millions)
|
|
2008
|
|
|
of
Total
|
|
|
Rate
|
|
|
2007
|
|
|
of
Total
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and industrial
|
|
$ |
7,530.7 |
|
|
|
35 |
% |
|
|
7 |
% |
|
$ |
7,061.1 |
|
|
|
32 |
% |
Real
estate commercial (a)
|
|
|
1,497.8 |
|
|
|
6 |
|
|
|
9.9 |
|
|
|
1,363.4 |
|
|
|
6 |
|
Real
estate construction (b)
|
|
|
2,162.8 |
|
|
|
10 |
|
|
|
(24.8 |
) |
|
|
2,875.3 |
|
|
|
13 |
|
Total
commercial
|
|
|
11,191.3 |
|
|
|
51 |
|
|
|
(1.0 |
) |
|
|
11,299.8 |
|
|
|
51 |
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate residential (c)
|
|
|
8,166.3 |
|
|
|
38 |
|
|
|
7.4 |
|
|
|
7,601.4 |
|
|
|
34 |
|
Real
estate construction (d)
|
|
|
1,350.1 |
|
|
|
6 |
|
|
|
(37.1 |
) |
|
|
2,144.9 |
|
|
|
10 |
|
Other
retail
|
|
|
138.8 |
|
|
|
1 |
|
|
|
(7.3 |
) |
|
|
149.7 |
|
|
|
1 |
|
Credit
card receivables
|
|
|
193.5 |
|
|
|
1 |
|
|
|
(0.5 |
) |
|
|
194.4 |
|
|
|
1 |
|
Real
estate loans pledged
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
against
other collateralized borrowings (e)
|
|
|
721.8 |
|
|
|
3 |
|
|
|
(10.7 |
) |
|
|
808.2 |
|
|
|
3 |
|
Total
retail
|
|
|
10,570.5 |
|
|
|
49 |
|
|
|
(3.0 |
) |
|
|
10,898.6 |
|
|
|
49 |
|
Total
loans, net of unearned
|
|
$ |
21,761.8 |
|
|
|
100 |
% |
|
|
(2.0 |
)% |
|
$ |
22,198.4 |
|
|
|
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 third quarter 2008 and 2007 -
$3.8 billion and $3.7 billion, respectively)
(d) Includes
one-time close product
(e) Includes
on-balance sheet securitizations of home equity loans
Total loans
are expected to continue to decline throughout 2008 as held-to-maturity
originations of the national home equity, OTC 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, and student loans. Small issuer trust preferred loans were included
in average loans held for sale in periods prior to third quarter
2008. The mortgage warehouse accounts for the majority of loans held
for sale, although significantly less than in prior quarters due to the sale of
national origination offices. Average loans held for sale decreased
by 50.8 percent to $2.0 billion in the third quarter 2008 from $4.0 billion in
2007. This change reflects decreases in the warehouse as certain
product types were curtailed in first quarter 2008 and because of the sale of
the national origination operations in the third quarter 2008 as the remaining
mortgage warehouse is delivered into the secondary market. Further
impacting the decline in average loans held for sale was the reclassification of
approximately $330 million of permanent mortgage loans and $380 million of
smaller issuer trust preferred loans in the second quarter of
2008. In the third quarter 2008, FHN continued to fund loan
originations and maintain a stable liquidity position through loan sales,
principally of conforming first lien mortgages.
TRADING
ASSETS AND SECURITIES HELD FOR SALE
Average
trading assets decreased by 27.0 percent or $634.0 million from the third
quarter 2007. This decline was primarily attributable to inventory
management initiatives at Capital Markets and the sale of mortgage trading
assets related to servicing sold during late 2007 and throughout
2008.
Average
securities held for sale declined by 11.0 percent or $354.0 million from $3.3
billion in the third quarter 2007. The decline was primarily in the U.S.
Treasury and U.S. government-backed agency debt securities
portfolios. The decrease was mainly because investment securities
matured and funds were used for other purposes rather than being reinvested in
the securities portfolio. Investment securities represented 9.7
percent of total earning assets as of September 30, 2008.
DEPOSITS
/ OTHER SOURCES OF FUNDS
Core deposits
declined to $12.2 billion in the third quarter 2008 compared to $13.3 billion in
2007 primarily reflecting decreases related to First Horizon Bank branch
divestitures, custodial deposits included in the divestiture of mortgage banking
operations to MetLife, and increased deposit competition. Short-term
purchased funds averaged $11.2 billion for the third quarter 2008, down 18.1
percent or $2.5 billion from $13.7 billion in the third quarter
2007. During the latter half of 2007 and through the third quarter of
2008, FHN 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 third quarter
2008, short-term purchased funds accounted for 38.2 percent of FHN’s total
funding down from 40.8 percent in third 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 $6.0 billion in
the third quarter 2008 compared to $6.6 billion in the third quarter
2007.
Financial
Summary (Comparison of first nine months of 2008 to first nine months of
2007)
FHN recorded
a net loss of $136.3 million or $.80 per diluted share for the nine months ended
September 30, 2008. Net income was $78.5 million or $.60 per diluted
share for the nine months ended September 30, 2007. For the nine
months ended September 30, 2008, return on average shareholder’s equity and
return on average assets were (7.35) percent and (.51) percent,
respectively. Return on average shareholder’s equity and return on
average assets were 4.27 percent and .27 percent for the nine months ended
September 30, 2007.
For the first
nine months of 2008, total revenues increased to $1.8 billion; an increase of
24.4 percent compared to $1.5 billion for the nine months ended
2007. Noninterest income for the first nine months of 2008 increased
to $1.2 billion from $766.9 million in 2007. Provision increased by
$683.8 million to $800.0 million in 2008 as compared to $116.2 million in
2007.
Mortgage
Banking fee income was $437.9 million for the nine months ended September 30,
2008 as compared to $183.4 million for the nine months ended September 30, 2007
as 2008 included $142.6 million of favorable impact related to the adoption of
the new accounting standards, including the prospective election of fair value
accounting for mortgage warehouse loans.
During this
period, origination income increased to $238.0 million for the nine months ended
September 30, 2008, an increase from $113.4 million as 2008 was net favorably
impacted by $142.6 million related to the adoption of new accounting
standards. Gain on sale margins were flat between the nine month
periods as credit market disruptions impacted both periods, and loan sales and
originations decreased in 2008. Servicing income increased as
positive impacts from hedging results and less significant decreases in MSR due
to run-off in 2008 more than offset declines in servicing fees due to servicing
sales occurring in fourth quarter 2007 and throughout 2008.
Capital
Markets noninterest income increased by 48.3 percent to $349.7 million for the
first nine months of 2008 from $235.9 million a year ago due to increased demand
for fixed income securities resulting from a steeper yield curve in
2008. The increased fixed income production more than offset a total
decline in other revenue of $82.9 million, which was primarily driven by $38.7
million of structured finance revenue in 2007 and a $36.2 million LOCOM
adjustment in the first quarter of 2008.
Noninterest
income was also impacted in the first nine months of 2008 by net securities
gains of $64.7 million. Securities gains were primarily impacted by
$65.9 million of gains related to Visa Inc.’s initial public offering compared
to less significant net gains of $9.3 million related to repositioning of
investment portfolio early in 2007.
Increases in
noninterest income were partially offset by declines in asset securitization
gains and divestiture losses. Loan sale and securitization income
decreased from $24.1 million for the nine months ended September 30, 2007 to a
loss of $7.8 million in 2008. Gain on second-lien and HELOC loan
sales for the nine months ended 2007 were $24.4 million while no sales were
executed in the first nine months of 2008. Declines in residual
values on prior securitizations of $7.2 million also negatively impacted loan
sale and securitization income in 2008. Also negatively impacting
noninterest income in 2008 were divestiture losses of $18.9 million, $17.5
million related to the divestiture of certain mortgage banking operations and
$1.4 million related to First Horizon Bank branch sales. Other
noninterest income increased $11.4 million as declines of $19.8 million of
deferred compensation income were offset by gains of $31.5 million on
repurchases of debt. The decline related to deferred compensation
income is partially offset by a corresponding decline in personnel
expense.
Provision for
loan losses increased by $683.8 million for the nine months ended September 30,
2008, up from $116.2 million from the first nine months of 2007 as the portfolio
experienced deterioration due to depressed real estate values and challenging
economic conditions.
Noninterest
expense increased slightly to $1.3 billion for the nine months ended September
30, 2008 compared to the same period in 2007 despite the negative impact of
$121.8 million related to the first quarter 2008 adoption of new accounting
standards. For the nine months ended September 30 2008, personnel
expense was $780.0 million compared to $741.2 million in 2007 as increases in
capital markets production, severance and retention costs related to
restructuring, repositioning and efficiency initiatives and accelerated
recognition of origination costs related to the prospective fair value election
on substantially all of the mortgage warehouse loans more than offset declines
in expense related to deferred compensation and headcount
reductions. In 2008, the impact of restructuring costs on personnel
expense was $23.8 million compared to $17.3 million in 2007.
Offsetting
increases in personnel costs were decreases in occupancy, equipment rentals, and
asset impairments. Occupancy decreased by $11.1 million from $97.0
million in 2007. The decrease is due to branch and office closures
related to restructuring and efficiency efforts. Restructuring
charges impacted occupancy by $8.3 million in 2008 compared to $8.8 million in
2007 as costs were incurred to terminate leases and for premises
closings. Equipment rentals, depreciation and maintenance expense
declined by $11.1 million or 19.5 percent from 2007 primarily driven by results
of restructuring and efficiency initiatives. Restructuring charges
impacted this category by $4.3 million in 2008 compared to $6.1 million in 2007
as costs were incurred to write-down equipment. A goodwill impairment
of $13.0 million related to First Horizon Bank branch divestitures impacted 2007
noninterest expense.
Other
noninterest expense increased by 7.0 percent or $19.6 million for the nine
months ended September 30, 2008 compared to September 30, 2007 due to the effect
of several factors. The first nine months of 2008 were negatively
impacted by $19.0 million related to the contingent liability for certain Visa
legal matters. Additionally, other noninterest expense was negatively
impacted in 2008 by the recognition of origination costs for loans recognized at
fair value that were previously deferred, increased expenses related to
foreclosed property, and an increase in FDIC premiums. Partially
offsetting the increases in other noninterest expense was a decline in
restructuring charges from $19.3 million in 2007 to $13.1 million in 2008.
The first nine months of 2007 were negatively impacted by an $8.4 million legal
settlement.
Income taxes
for the nine months ended September 30, 2008 were positively impacted by state
tax settlements while 2007 was positively impacted by a $7.5 million tax benefit
due to legal consolidation of the mortgage company into the bank.
BUSINESS LINE
REVIEW
Regional
Banking
Total
revenues for the nine-month period were $630.9 million a decrease of 8.0 percent
from $685.4 million in 2007. Net interest income decreased 12.1
percent or $50.2 million. Noninterest income declined slightly to
$267.5 million from $271.9 million in 2007. An increase in deposit
transactions and cash management fees of $7.1 million was more than offset by
decreases in trust fees, insurance commissions, annuity income and other
miscellaneous revenues as compared to same period in 2007. Provision
for loan losses increased to $222.9 million in 2008 compared to $46.8 million in
2007. The increase was primarily due to deterioration in the home
equity and commercial lending portfolios. Noninterest expense decreased to
$459.4 million in 2008 compared to $471.5 million in 2007. The
decline was primarily in personnel expense as benefits from efficiency
initiatives were realized.
Capital
Markets
Total
revenues for 2008 increased to $414.3 million compared to $287.3 million for the
first nine months of 2007. Net interest income was $57.1 million in
2008, an increase of 48.2 percent from 2007. The increase in net
interest income is primarily due to a steeper yield curve in 2008 and increases
in average trust preferred loan balances.
Fixed income
revenue increased $196.7 million from 2007 to $337.3 million in 2008 as
production increased due to the Federal Reserve rate cuts in the first half of
2008 creating a steeper yield curve that increased demand for fixed income
products. Other revenue declined $88.4 million primarily related to disruptions
in the pooled trust preferred product in which no transactions were conducted in
2008 and a related LOCOM adjustment of $36.2 million was recognized in the first
quarter of 2008. Provision for loan losses was $72.0 million in 2008
compared to $6.9 million in 2007 reflecting deterioration in correspondent
banking loans related to stress in the financial system. Noninterest
expense was $304.0 million, an increase of $62.9 million from $241.0 million in
2007. The increase is primarily driven by increased personnel costs on higher
production in 2008.
National
Specialty Lending
Total
revenues for the nine months ended September 30, 2008 were $143.5 million
compared to $210.8 million in 2007. Net interest income was $153.2
million in 2008 compared to $185.2 million in 2007. The decline in
net interest income is primarily due to increases in nonaccrual
loans. Provision for loan losses increased to $498.0 million in 2008
compared to $55.0 million in 2007 reflecting the deterioration in the
winding-down national construction and national consumer lending
portfolios.
Noninterest
income was $(9.7) million for 2008 compared to $25.6 million in
2007. The decrease in noninterest income was partially due to
declines in residual values from prior securitizations and increased costs
related to estimated repurchase activity in 2008. Additionally, gains of
approximately $23.6 million were recognized in 2007 related to loan sales which
were not present in 2008. Noninterest expense declined to $75.3
million in 2008 compared to $107.0 million in 2007. The decline is
related to the wind-down of this business segment initiated in the first quarter
2008.
Mortgage
Banking
Total
revenues for the nine months ended September 30, 2008 were $558.7 million
compared to $269.7 million in 2007. Net interest income was $84.4
million, an increase of 11.2 percent from 2007 consistent with the increase in
the warehouse spread over 2007. Noninterest income was $474.3 million
in 2008 compared to $193.8 million in 2007. Provision for loan losses
was $7.1 million in 2008 compared to $(.1) million in 2007 reflecting
deterioration of permanent mortgages in the portfolio.
Origination
income was $238.0 million for the nine months ended September 30, 2008, an
increase of $124.6 million compared to the same period in 2007. Origination
income was favorably impacted by $142.6 million related to the adoption of new
accounting standards. Gain on sale margins were flat between the nine
month periods as credit market disruptions impacted both periods, and loan sales
and originations decreased in 2008. Servicing income increased by
$143.4 million to $192.6 million in 2008 as positive hedging results and lower
changes in MSR due to run-off more than offset declines in servicing fees
related to a decrease in the size of the servicing portfolio due to sales of
servicing rights.
Noninterest
expense for 2008 was $385.6 million compared to $329.0 million for the nine
months ended September 30, 2007. General declines in noninterest expense due to
the divestiture of certain mortgage banking operations and efficiency
initiatives were more than offset by several factors. Noninterest
expense was negatively impacted by the recognition of $121.8 million of
origination costs previously deferred due to adoption of fair value accounting
for substantially all of the mortgage warehouse loans. These
increased costs were offset in noninterest income by a corresponding increase in
gain on sale. Unfavorable impacts on noninterest expense were also
due to increased foreclosure and contract employment/outsourcing costs while
legal settlement costs negatively impacted 2007 noninterest expense by $8.4
million.
Corporate
Total
revenues for the nine months ended September 30, 2008 were $96.1 million
compared to $28.3 million in 2007. Net interest income for 2008 was $32.1
million, a $30.6 million increase over 2007. The increase in net interest income
was impacted by a reduced need for funding due to net proceeds from the common
stock issuance in the second quarter of 2008.
Noninterest
income was $64.0 million in 2008 compared to $26.9 million in
2007. Noninterest income increases were primarily driven by $65.9
million of securities gains related to Visa Inc.’s initial public offering in
2008 compared to $9.3 million of net securities gains in 2007 related to
repositioning of the investment portfolio. Also influencing the
increase were $31.5 million of gains on debt repurchases in 2008. Offsetting
these increases in 2008 were restructuring charges of $12.7 million of
transaction costs related to mortgage servicing sales, $18.9 million of losses
related to the mortgage banking and First Horizon Bank branch divestitures, and
a decrease of $19.7 million of deferred compensation income.
Noninterest
expense declined to $82.0 million in 2008 compared to $133.4 million in
2007. Restructuring, repositioning and efficiency charges declined
from $64.5 million in 2007 to $49.6 million in 2008. Personnel
expense declined by $21.2 million primarily reflecting a decrease of $26.1
million related to deferred compensation expense which was offset by a $6.6
million increase in restructuring related charges from a year
ago. Restructuring charges in other noninterest expense in 2008 were
$13.1 million compared to $32.3 million in 2007. Included in 2007
restructuring charges was a goodwill impairment of $13.0 million related to
First Horizon Bank branch divestitures. A net decrease of $19.0
million in the contingent liability for certain Visa legal matters was offset by
an $11.1 million increase in legal and professional fees and an $8.3 million
increase in FDIC premiums.
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.
In the second
quarter 2008, FHN completed a public offering of 69 million shares of common
stock, which generated net proceeds of $659.8 million after consideration of
underwriters’ discounts, commissions and offering costs. FHN then
contributed $610.0 million of the proceeds from the offering to First Tennessee
Bank, N.A. in the form of equity capital. To conserve FHN’s capital,
the quarterly cash dividend was replaced with a quarterly stock dividend at a
rate to be determined quarterly. See Note 15 – Other Events for a
discussion of the stock dividend approved in October 2008. FHN
currently intends to pay dividends in shares of common stock for the foreseeable
future.
Average
shareholders’ equity increased by 12.0 percent in third quarter 2008 to $2.7
billion from $2.4 billion in 2007. The common stock issuance from the
second quarter 2008 positively impacted average equity for the third quarter
2008 which was partially offset by net losses for the
period. Period-end shareholders’ equity was $2.6 billion on September
30, 2008, up 6.4 percent from the prior year. The increase is
primarily due to the common stock issuance in the second quarter of
2008. FHN’s board has authorized share repurchases from time to
time. FHN will evaluate the level of capital and take action designed
to generate or use capital as appropriate, for the interests of the
shareholders. At the present time, consistent with the board’s
determination to pay the quarterly dividend in shares, FHN intends to repurchase
shares only in connection with employee stock programs to accommodate tax
withholding and other similar needs.
In October
2008, FHN received preliminary approval from the U.S. Treasury Department to
participate in its Capital Purchase Program (CPP), a voluntary initiative
assisting U.S. financial institutions in building capital to support Treasury's
plan to aid the economy by increasing financing to businesses and consumers.
Participation is subject to standard terms and conditions. See Note 15 – Other
Items for a detailed discussion of this event.
Table
9 - 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
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1
to July 31
|
|
|
3 |
|
|
$
|
7.40 |
|
|
|
3 |
|
|
|
36,308 |
|
August
1 to August 31
|
|
|
* |
|
|
NA
|
|
|
|
* |
|
|
|
36,308 |
|
September
1 to September 30
|
|
|
2 |
|
|
|
11.73 |
|
|
|
2 |
|
|
|
36,306 |
|
Total
|
|
|
5 |
|
|
$
|
9.20 |
|
|
|
5 |
|
|
|
|
|
*
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 September 30, 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 September 30, 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 September 30,
2008 and 2007, FHN and FTBNA had sufficient capital to qualify as
well-capitalized institutions as shown in Note 7 – Regulatory
Capital.
RISK
MANAGEMENT
FHN has an
enterprise-wide approach to risk governance, measurement, management, and
reporting including an economic capital allocation process that is tied to risk
profiles used to measure risk-adjusted returns. The Enterprise-wide
Risk/Return Management Committee oversees risk management
governance. Committee membership includes the 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, Compliance Risk Committee, Operational Risk Committee, and
the Executive Program Governance Forum. The Chief Credit Officer, EVP
Funds Management and Corporate Treasurer, Chief Financial Officer, SVP Corporate
Compliance, EVP of Risk Management, and EVP and Chief Information Officer chair
these committees respectively. Reports regarding Credit,
Asset/Liability Management, Market Risk, Capital Management, Compliance, and
Operational Risks are provided to the Credit Policy and Executive and/or Audit
Committee of the Board and to the full Board.
Risk
management practices include key elements such as independent checks and
balances, formal authority limits, policies and procedures, and portfolio
management all executed through experienced personnel. The Internal
Audit Department, Credit Risk Assurance, Credit Policy and Regulations, and
Credit Portfolio Management also evaluate 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 that exist within the housing and credit
markets, it is anticipated that the remainder of 2008 and 2009 will continue to
be challenging for FHN. While the reduction of mortgage banking
operations is expected to significantly decrease sensitivity to market pricing
uncertainty, FHN will continue to be affected by market factors as it disposes
of the remaining loan warehouse and attempts to reduce the remaining servicing
portfolio. In addition, current volatility and reduced liquidity in
the capital markets may adversely impact market execution putting continued
pressure on revenues. As difficulties in the credit markets persist, FHN will
continue to adapt its liquidity management strategies. Further deterioration of
general economic conditions, or the housing market alone, 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
loans.
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. Prior to the sale of certain mortgage
banking operations to MetLife, the earnings impact from originations and sales
of loans on total earnings was more significant than servicing-related income.
Given the repositioning of mortgage banking operations in third quarter 2008,
the origination activity has been significantly reduced therefore limiting
interest rate risk exposure. 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 the funding of assets with liabilities of the appropriate duration, while
mitigating the risk of not meeting unexpected cash needs. The
objective of liquidity management is to ensure the continuous availability of
funds to meet the demands of depositors, other creditors and borrowers, and the
requirements of ongoing operations. This objective is met by
maintaining liquid assets in the form of trading securities and securities
available for sale, growing core deposits, and the repayment of
loans. ALCO is responsible for managing these needs by taking into
account the marketability of assets; the sources, stability and availability of
funding; and the level of unfunded commitments. Subject to market
conditions and compliance with applicable regulatory requirements from time to
time, funds are available from a number of sources, including core deposits, the
securities available for sale portfolio, the Federal Home Loan Bank (FHLB), the
Federal Reserve Banks, access to Federal Reserve Bank programs such as the Term
Auction Facility (TAF) and Troubled Asset Relief Program (TARP), availability to
the overnight and term Federal Funds markets, and dealer and commercial customer
repurchase agreements.
Core deposits
are a significant source of funding and have been a stable source of liquidity
for banks. The Federal Deposit Insurance Corporation insures these
deposits to the extent authorized by law. For the third 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 170
percent and 161 percent, respectively. The ratio is expected to
continue to decline as the national construction loan portfolios
decrease. FHN periodically evaluates its liquidity position in
conjunction with determining its ability and intent to hold loans for the
foreseeable future.
In 2005,
FTBNA established a bank note program providing additional liquidity of $5.0
billion. This bank note program is being replaced with less credit
sensitive sources of funding including secured sources such as FHLB borrowings
and the Federal Reserve Term Auction Facility (TAF). On September 30,
2008, $3.4 billion was outstanding through the bank note program with $2 billion
scheduled to mature by the first half of 2009.
FHN and FTBNA
have the ability to generate liquidity by incurring other debt subject to market
conditions and compliance with applicable regulatory requirements from time to
time. 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 nine-month
periods ended September 30, 2008 and 2007. For the nine months ended
September 30, 2008, net cash used in financing activities exceeded positive cash
flows from operating and investing activities. Negative cash flows
from financing activities was primarily due to a decline in deposits as FHN
reduced its use of wholesale funding source in response to the credit market
disruptions that started in third quarter 2007, as well as deposits transferred
related to the First Horizon Bank branch and the mortgage banking
divestitures. This was offset by positive cash flows of $.7 billion
provided by the common stock issuance in the second quarter
2008. Impacting positive financing cash flows in the first nine
months of 2007 was an increase in long-term borrowings of $1.2
billion. Cash provided by operating activities was positively
impacted by a decrease in loans held for sale partially offset by an increase in
capital markets receivables. Also positively impacting operating cash
flows was an increase in capital markets payables. Cash provided by
investing activities was $.5 million in 2008 compared to $.2 million in
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
cash dividends to shareholders and interest to debt holders. The
amount paid to the parent company through FTBNA common dividends is managed as
part of 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 subject to market
conditions and compliance with applicable regulatory requirements from time to
time. See Note 15 – Other Items for a discussion of FHN’s
participation in the U.S Treasury’s CPP.
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. 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. 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 so the
amount available for dividends at January 1, 2009 will be the same as that
available at December 31, 2008.
FTBNA
obtained approval from the OCC to declare and pay dividends on its preferred
stock outstanding payable in April, July, and October 2008, and recently
requested similar approval for dividends on that class of stock payable in
January 2009. FTBNA has not requested approval to pay common dividends to its
sole common stockholder, FHN. Although FHN has funds available for dividends
even without FTBNA dividends, availability of funds is not the sole factor
considered by 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 paid on July 1, 2008.
Instead, the Board is paying a dividend in shares of common stock with a value
equal to the previous 20 cents per share cash dividend rate. The first quarterly
stock dividend was distributed on October 1, 2008 followed by Board approval of
the stock dividend to be distributed in January 2009. The Board
currently intends to reinstate a cash dividend at an appropriate and prudent
level once earnings and other conditions improve sufficiently, consistent with
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, the former mortgage banking division of FHN, originated conventional
conforming and federally insured single-family residential mortgage
loans. Likewise, FTN Financial Capital Assets Corporation purchases
the same types of loans from customers. Substantially all of these
mortgage loans 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 was an
essential source of liquidity for FHN. During third quarter 2008,
approximately $4.2 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
September 30, 2008 and 2007, the outstanding principal amount of loans in these
off-balance sheet business trusts was $23.0 billion and $26.1 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 during the third 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.
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. Securities inventory positions are
generally procured for distribution to customers by the sales staff, and ALCO
policies and guidelines have been established with the objective of limiting the
risk in managing this inventory.
CAPITAL
MANAGEMENT
The capital
management objectives of FHN are to provide capital sufficient to cover the
risks inherent in 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 Compliance Risk Committee, which is chaired
by SVP Corporate Compliance. Key executives from the business
segments, legal, risk management, and service functions 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
policies and guidelines, and 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. Credit Risk Assurance is charged with
providing the Board and executive management with independent, objective, and
timely assessments of FHN’s portfolio quality, adequacy of credit policies, and
credit risk management processes. The Asset Quality Committee has the
responsibility of evaluating Management’s 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 and 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 the primary responsibility of
enforcing proper loan risk grading, identifying credit problems and monitoring
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 approves and recommends credit policies, which are submitted for final
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 and prevent further credit deterioration. 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 (51
percent of total loans) primarily in three portfolios. The retail
real estate residential portfolio (38 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 and economic conditions in general, it contains
loans extended to strong borrowers with high credit scores and is geographically
diversified.
The OTC
portfolio (6 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 (7 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 sold
mortgage loans in the secondary market to investors, it generally retained the
right to service the loans sold in exchange for a servicing fee that is
collected over the life of the loan as the payments are received from the
borrower. An amount was capitalized as MSR on the Consolidated
Condensed Statements of Condition at current fair value. The changes
in fair value of MSR are included as a component of Mortgage Banking –
Noninterest Income on the Consolidated Condensed Statements of
Income.
MSR
Estimated Fair Value
In accordance
with Statement of Financial Accounting Standards No. 156, “Accounting for
Servicing of Financial Assets – an Amendment of FASB Statement No. 140,” FHN 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, FHN utilizes a third-party prepayment
model, which is based upon statistically derived data linked to certain key
principal indicators involving historical borrower prepayment activity
associated with mortgage loans in the secondary market, current market interest
rates and other factors, including FHN’s 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
10 - Mortgage Banking Prepayment Assumptions
|
|
Three
Months Ended
|
|
|
|
September
30
|
|
|
|
2008
|
|
|
2007
|
|
Prepayment
speeds
|
|
|
|
|
|
|
Actual
|
|
|
9.7 |
% |
|
|
13.3 |
% |
Estimated*
|
|
|
21.8 |
|
|
|
14.7 |
|
* Estimated
prepayment speeds represent monthly average prepayment speed estimates for each
of the periods presented.
Discount Rate:
Represents the rate at which expected cash flows are discounted to arrive at the
net present value of servicing income. Discount rates will change
with market conditions (i.e., supply vs. demand) and be reflective of the yields
expected to be earned by market participants investing in MSR.
Cost to Service: Expected costs to
service are estimated based upon the incremental costs that a market participant
would use in evaluating the potential acquisition of MSR.
Float Income: Estimated float income
is driven by expected float balances (principal, interest and escrow payments
that are held pending remittance to the investor or other third party) and
current market interest rates, including the thirty-day London Inter-Bank
Offered Rate (LIBOR) and five-year swap interest rates, which are updated on a
monthly basis for purposes of estimating the fair value of MSR.
FHN engages
in a process referred to as “price discovery” on a quarterly basis to assess the
reasonableness of the estimated fair value of MSR. Price discovery is
conducted through a process of obtaining the following information: (a)
quarterly informal (and an annual formal) valuation of the servicing portfolio
by prominent independent mortgage-servicing brokers, and (b) a collection of
surveys and benchmarking data made available by independent third parties that
include peer participants in the mortgage banking business. Although
there is no single source of market information that can be relied upon to
assess the fair value of MSR, FHN reviews all information obtained during price
discovery to determine whether the estimated fair value of MSR is reasonable
when compared to market information. On September 30, 2008 and 2007,
FHN 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’s 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
FHN enters
into financial agreements to hedge MSR in order to minimize the effects of loss
in value of MSR associated with increased prepayment activity that generally
results from declining interest rates. In a rising interest rate
environment, the value of the MSR generally will increase while the value of the
hedge instruments will decline. Specifically, FHN enters into interest
rate contracts (including swaps, swaptions and mortgage forward sales contracts)
to hedge against the effects of changes in fair value of its
MSR. Substantially all capitalized MSR are hedged. The
hedges are economic hedges only, and are terminated and reestablished as needed
to respond to changes in market conditions. Changes in the value of
the hedges are recognized as a component of net servicing income in mortgage
banking noninterest income. Successful economic hedging will help
minimize earnings volatility that may result from carrying MSR at fair
value. Subsequent to the sale of mortgage banking operations to
MetLife, FHN determines the fair value of the derivatives used to hedge MSR (and
excess interests as discussed below) using inputs observed in active markets for
similar instruments with typical inputs including the LIBOR curve, option
volatility and option skew. Prior to the MetLife transaction, fair
values of these derivatives were obtained through proprietary pricing models
which are compared to market value quotes received from third party
broker-dealers in the derivative markets.
In
conjunction with the repositioning of its mortgage banking operations, FHN no
longer retains servicing on the loans it sells. In prior periods, FHN
generally experienced increased loan origination and production in periods of
low interest rates which resulted in the capitalization of new MSR associated
with new production. This provided for a “natural hedge” in the
mortgage-banking business cycle. New production and origination did
not prevent FHN from recognizing losses due to reduction in carrying value of
existing servicing rights as a result of prepayments; rather, the new production
volume resulted in loan origination fees and the capitalization of MSR as a
component of realized gains related to the sale of such loans in the secondary
market, thus the natural hedge, which tended to offset a portion of the
reduction in MSR carrying value during a period of low interest
rates. In a period of increased borrower prepayments, these losses
could have been significantly offset by a strong replenishment rate and strong
net margins on new loan originations. To the extent that First
Horizon Home Loans was unable to maintain a strong replenishment rate, or in the
event that the net margin on new loan originations declined from historical
experience, the value of the natural hedge might have diminished, thereby
significantly impacting the results of operations in a period of increased
borrower prepayments.
FHN does not
specifically hedge the change in fair value of MSR attributed to other risks,
including unanticipated prepayments (representing the difference between actual
prepayment experience and estimated prepayments derived from the model, as
described above), 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, FHN
experiences volatility in current earnings due to the fact that these risks are
not currently hedged.
Excess
Interest (Interest-Only Strips) Fair Value – Residential Mortgage
Loans
In certain
cases, when FHN sold mortgage loans in the secondary market, it retained an
interest in the mortgage loans sold primarily through excess
interest. These financial assets represent rights to receive earnings
from serviced assets that exceed contractually specified servicing fees and are
legally separable from the base servicing rights. Consistent with
MSR, the fair value of excess interest typically rises as market interest rates
increase and declines as market interest rates
decrease. Additionally, similar to MSR, the market for excess
interest is limited, and the precise terms of transactions involving excess
interest are not typically readily available. Accordingly, FHN 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 FHN to make certain critical assumptions based upon current market and
loan production data. The primary critical assumptions used by FHN to
estimate the fair value of excess interest include prepayment speeds and
discount rates, as discussed above. FHN’s excess interest is included
as a component of trading securities on the Consolidated Condensed Statements of
Condition, with realized and unrealized gains and losses included in current
earnings as a component of mortgage banking income on the Consolidated Condensed
Statements of Income.
Hedging
the Fair Value of Excess Interest
FHN utilizes
derivatives (including swaps, swaptions and mortgage forward sales contracts)
that change in value inversely to the movement of interest rates to protect the
value of its excess interest as an economic hedge. Realized and
unrealized gains and losses associated with the change in fair value of
derivatives used in the economic hedge of excess interest are included in
current earnings in mortgage banking noninterest income as a component of
servicing income. Excess interest is included in trading securities
with changes in fair value recognized currently in earnings in mortgage banking
noninterest income as a component of servicing income.
The extent to
which the change in fair value of excess interest is offset by the change in
fair value of the derivatives used to hedge this asset depends primarily on the
hedge coverage ratio maintained by FHN. Also, as noted above, to the
extent that actual borrower prepayments do not react as anticipated by the
prepayment model (i.e., the historical data observed in the model does not
correspond to actual market activity), it is possible that the prepayment model
could fail to accurately predict mortgage prepayments, which could significantly
impact FHN’s 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 retained interests in the loans it securitized by retaining
certificated principal only strips or subordinated bonds. Subsequent
to the MetLife transaction, FHN uses observable inputs such as trades of similar
instruments, yield curves, credit spreads and consensus prepayment speeds to
determine the fair value of principal only strips. Prior to the
MetLife transaction, FHN used the market prices from comparable assets such as
publicly traded FNMA trust principal only strips that are adjusted to reflect
the relative risk difference between readily marketable securities and privately
issued securities in valuing the principal only strips. The fair
value of subordinated bonds is determined using the best available market
information, which may include trades of comparable securities, independently
provided spreads to other marketable securities, and published market
research. Where no market information is available, the company
utilizes an internal valuation model. As of September 30, 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 September 30, 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 sold HELOC or second-lien mortgages in the secondary market, it
retained 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, net of offsetting fair value liabilities, to immediate 10 percent and 20
percent adverse changes in assumptions on September 30, 2008, are as
follows:
Table
11 - 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
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
Fair
value of retained interests
|
|
$ |
770,621 |
|
|
$ |
17,526 |
|
|
$ |
10,345 |
|
Weighted
average life (in years)
|
|
|
5.2 |
|
|
|
2.3 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
prepayment rate
|
|
|
16.9 |
% |
|
|
34.7 |
% |
|
|
35.0 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(31,588 |
) |
|
$ |
(1,317 |
) |
|
$ |
(705 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(60,398 |
) |
|
|
(2,501 |
) |
|
|
(1,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
discount rate on servicing cash flows
|
|
|
10.4 |
% |
|
|
14.0 |
% |
|
|
18.0 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(16,260 |
) |
|
$ |
(436 |
) |
|
$ |
(301 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(32,520 |
) |
|
|
(851 |
) |
|
|
(584 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
cost to service (per loan)*
|
|
$ |
53 |
|
|
$ |
50 |
|
|
$ |
50 |
|
Impact
on fair value of 10% adverse change
|
|
|
(7,549 |
) |
|
|
(365 |
) |
|
|
(290 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(15,098 |
) |
|
|
(728 |
) |
|
|
(581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
earnings on escrow
|
|
|
3.6 |
% |
|
|
2.2 |
% |
|
|
2.1 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(23,103 |
) |
|
$ |
(308 |
) |
|
$ |
(174 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(44,635 |
) |
|
|
(617 |
) |
|
|
(348 |
) |
*
|
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 September
30, 2008.
|
The
sensitivity of the current fair value of retained interests for other residuals,
net of offsetting fair value liabilities, to immediate 10 percent and 20 percent
adverse changes in assumptions on September 30, 2008, are as
follows:
Table
12 - 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
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of retained interests
|
|
$ |
251,305 |
|
|
$ |
14,335 |
|
|
$ |
418 |
|
|
$ |
12,511 |
|
|
$ |
3,711 |
|
|
$ |
3,713 |
|
Weighted
average life (in years)
|
|
|
5.6 |
|
|
|
3.9 |
|
|
|
5.8 |
|
|
|
5.9 |
|
|
|
2.6 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
prepayment rate
|
|
|
14.3 |
% |
|
|
23.1 |
% |
|
|
15.3 |
% |
|
|
14.3 |
% |
|
|
30.0 |
% |
|
|
28.0 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(12,649 |
) |
|
$ |
(566 |
) |
|
$ |
(23 |
) |
|
$ |
(519 |
) |
|
$ |
(38 |
) |
|
$ |
(390 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(24,290 |
) |
|
|
(1,198 |
) |
|
|
(45 |
) |
|
|
(1,020 |
) |
|
|
(72 |
) |
|
|
(731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
discount rate on residual cash flows
|
|
|
12.3 |
% |
|
|
16.3 |
% |
|
|
12.3 |
% |
|
|
33.5 |
% |
|
|
35.0 |
% |
|
|
33.0 |
% |
Impact
on fair value of 10% adverse change
|
|
$ |
(9,556 |
) |
|
$ |
(490 |
) |
|
$ |
(17 |
) |
|
$ |
(500 |
) |
|
$ |
(142 |
) |
|
$ |
(403 |
) |
Impact
on fair value of 20% adverse change
|
|
|
(18,418 |
) |
|
|
(948 |
) |
|
|
(32 |
) |
|
|
(961 |
) |
|
|
(269 |
) |
|
|
(746 |
) |
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
As a result
of the MetLife transaction, mortgage banking origination activity will be
significantly reduced in periods after third quarter 2008 as FHN focuses on
origination within its regional banking footprint. Accordingly, the
following discussion of pipeline and warehouse related derivatives is primarily
applicable to reporting periods occurring through the third quarter
2008.
During the
period of loan origination and prior to the sale of mortgage loans in the
secondary market, FHN has exposure to mortgage loans that are in the “mortgage
pipeline” and the “mortgage warehouse”. The mortgage pipeline
consists of loan applications that have been received, but have not yet closed
as loans. Pipeline loans are either "floating" or
"locked". A floating pipeline loan is one on which an interest rate
has not been locked by the borrower. A locked pipeline loan is one on
which the potential borrower has set the interest rate for the loan by entering
into an interest rate lock commitment. Once a mortgage loan is closed and
funded, it is included within the mortgage warehouse, or the “inventory” of
mortgage loans that are awaiting sale and delivery (at quarter end an average of
approximately 35 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
are 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 for whole loan prices include adding the value of MSR to the
security price or to the whole loan price if the price is servicing retained,
adjusting for interest in excess of (or less than) the required coupon or note
rate, adjustments to reflect differences in the characteristics of the loans
being valued as compared to the collateral of the security or the loan
characteristics in the benchmark whole loan trade, adding interest carry,
reflecting the recourse obligation that will remain after sale, and adjusting
for changes in market liquidity or interest rates if the benchmark security or
loan price is not current. Additionally, loans that are delinquent or
otherwise significantly aged are discounted to reflect the less marketable
nature of these loans.
The fair
value of FHN’s warehouse (first-lien mortgage loans held for sale) changes with
fluctuations in interest rates from the loan closing date through the date of
sale of the loan into the secondary market. Typically, the fair value of the
warehouse declines in value when interest rates increase and rises in value when
interest rates decrease. To mitigate this risk, FHN 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. FHN 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 $1.6
billion on September 30, 2007. The balance sheet impacts of the
related derivatives were net liabilities of $9.5 million on September 30,
2007. Net losses of $14.5 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 nine months ended September 30, 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, FHN economically hedges
the risk of changing interest rates by entering into forward sales and futures
contracts. The extent to which FHN is able to economically hedge
changes in the mortgage pipeline 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 September 30, 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. The fair value of interest rate
lock commitments was $.3 million on September 30, 2008. For the
period ended September 30, 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 liability with an estimated fair value
of $5.8 million on September 30, 2007.
FORECLOSURE
RESERVES
As discussed
above, FHN originated mortgage loans with the intent to sell those loans to GSE
and other private investors in the secondary market. Certain of the
mortgage loans are sold with limited or full recourse in the event of
foreclosure. On both September 30, 2008 and 2007, the outstanding
principal balance of mortgage loans sold with limited recourse arrangements
where some portion of the principal is at risk and serviced by FHN was $3.3
billion. Additionally, on September 30, 2008 and 2007, $.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 September 30, 2008 and 2007, $83.4 million
and $104.6 million, respectively, of mortgage loans were outstanding which were
serviced under full recourse arrangements.
Loans sold
with limited recourse include loans sold under government guaranteed mortgage
loan programs including the Federal Housing Administration (FHA) and Veterans
Administration (VA). FHN continues to absorb losses due to
uncollected interest and foreclosure costs and/or limited risk of credit losses
in the event of foreclosure of the mortgage loan sold. Generally, the
amount of recourse liability in the event of foreclosure is determined based
upon the respective government program and/or the sale or disposal of the
foreclosed property collateralizing the mortgage loan. Another
instance of limited recourse is the VA/No bid. In this case, the VA
guarantee is limited and FHN may be required to fund any deficiency in excess of
the VA guarantee if the loan goes to foreclosure.
Loans sold
with full recourse generally include mortgage loans sold to investors in the
secondary market which are uninsurable under government guaranteed mortgage loan
programs, due to issues associated with underwriting activities, documentation
or other concerns.
Management
closely monitors historical experience, borrower payment activity, current
economic trends and other risk factors, and establishes a reserve for
foreclosure losses for loans sold with limited recourse, loans serviced with
full recourse, and loans sold with general representations and warranties,
including early payment defaults. Management believes the foreclosure
reserve is sufficient to cover incurred foreclosure losses relating to loans
being serviced as well as loans sold where the servicing was not
retained. The reserve for foreclosure losses is based upon a
historical progression model using a rolling 12-month average, which predicts
the probability or frequency of a mortgage loan entering
foreclosure. In addition, other factors are considered, including
qualitative and quantitative factors (e.g., current economic conditions, past
collection experience, risk characteristics of the current portfolio and other
factors), which are not defined by historical loss trends or severity of
losses. On September 30, 2008 and 2007, the foreclosure reserve was
$36.7 million and $12.9 million, respectively. Table 13 provides a summary of
reserves for foreclosure losses for the periods ended September 30, 2008 and
2007. The servicing portfolio has decreased from $108.4 billion on September 30,
2007, to $65.3 billion on September 30, 2008 as FHN has reduced its servicing
portfolio through sales through the third quarter of 2008, while the foreclosure
reserve has experienced increases primarily due to increases in both frequency
and severity of projected losses.
Table
13 - Reserves for Foreclosure Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
|
September
30
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
38,463 |
|
|
$ |
14,627 |
|
|
$ |
16,160 |
|
|
$ |
14,036 |
|
Provision
for foreclosure losses
|
|
|
3,397 |
|
|
|
(881 |
) |
|
|
25,153 |
|
|
|
5,229 |
|
Transfers*
|
|
|
(1,834 |
) |
|
|
(235 |
) |
|
|
5,528 |
|
|
|
(372 |
) |
Charge-offs
|
|
|
(3,617 |
) |
|
|
(1,948 |
) |
|
|
(10,713 |
) |
|
|
(8,306 |
) |
Recoveries
|
|
|
317 |
|
|
|
1,330 |
|
|
|
598 |
|
|
|
2,306 |
|
Ending
balance
|
|
$ |
36,726 |
|
|
$ |
12,893 |
|
|
$ |
36,726 |
|
|
$ |
12,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Primarily
represents reserves established against servicing advances for which the
related MSR has been legally sold.
|
|
Amounts are transferred to the foreclosure reserve when the advances are
delivered to the buyer but recourse to FHN remains. |
|
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, National Specialty Lending, and Capital Markets
segments. The Credit Policy and Executive Committees of FHN’s board
of directors review 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) reserve rates for the
commercial 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); (4) management’s estimate of probable
incurred losses reflects the reserve rate applied against the balance of loans
in the commercial segment of the loan portfolio; (5) retail loans are segmented
based on loan type; (6) reserve amounts for each retail portfolio segment are
calculated using analytical models based on loss experience adjusted by
management to reflect current events, trends and conditions (including economic
factors and trends); and (7) the reserve amount for each retail portfolio
segment reflects management’s estimate of probable incurred losses in the retail
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.
Given the
substantial instability in the current housing market and significant
deterioration experienced in the commercial, one-time-close (OTC) and home
equity portfolios, FHN proactively reviews and analyzes these portfolios
to more promptly identify and resolve problem loans.
For
commercial loans, reserves are established using historical loss factors by
grade level. Relationship managers risk rate each loan using grades that reflect
both the probability of default and estimated loss severity in the event of
default. Portfolio reviews are conducted quarterly by senior credit
officers to provide independent oversight of risk grading decisions for larger
credits. Loans with emerging weaknesses receive increased oversight
through our “Watch List” process. For new “Watch List” loans, senior
credit management reviews risk grade appropriateness and action
plans. After initial identification, relationship managers prepare
monthly updates for review and discussion by more senior business line and
credit officers. This oversight is intended to bring consistent
grading and allow timely identification of loans that need to be further
downgraded or placed on non-accrual status. When a loan becomes
classified, the asset generally transfers to the specialists in our Loan Rehab
and Recovery group where the accounts receive more detailed monitoring; at this
time, new appraisals are typically ordered for real estate collateral dependent
credits. Loans are placed on non-accrual if it becomes evident that
full collection of principal and interest is at risk or if the loans become 90
days or more past due.
Generally,
classified non-accrual loans over $1 million are deemed to be impaired in
accordance with SFAS 114 “Accounting by Creditors for Impairment of a Loan” and
are assessed for impairment measurement. For impaired assets viewed
as collateral dependent, fair value estimates are obtained from a recently
received and reviewed appraisal. Appraised values are adjusted down
for costs associated with asset disposal and for our estimate of any further
deterioration in values since the most recent appraisal. Upon the
determination of impairment, FHN charges off the full difference between book
value and our best estimate of the asset’s net realizable value. The total value of impaired
loans considered collateral dependent at September 30, 2008 was $364.1
million.
For OTC real
estate construction loans, reserve levels are established based on portfolio
modeling and monthly portfolio reviews conducted with business line managers and
credit officers. The inherent risk in credits is examined and
evaluated based on factors such as draw inactivity and borrower conditions,
often recognizing problems prior to delinquency. In addition, OTC
loans that reach 90 days past due are placed on non-accrual. A new
appraisal is ordered for loans that reach 90 days past due or are classified as
substandard during the monthly portfolio review. Loans are initially
written down to current appraised value. Loans are then assessed for
charge down again when they reach 180 days past due, and again when they are
taken into OREO.
For home
equity loans and lines, reserve levels are established through the use of
several models that look at historical losses, cumulative vintage performance,
and roll rates. Loans are classified substandard at 90 days
delinquent. Our collateral position is assessed prior to the asset
becoming 180 days delinquent. If the value does not support
foreclosure, balances are charged-off and other avenues of recovery are
pursued. If the value supports foreclosure, the loan is charged down
to net realizable value and is placed on non-accrual status. When
collateral is taken to OREO, the asset is assessed for further write down to
appraised value.
FHN believes
that the critical assumptions underlying the accounting estimate made by
management include: (1) the commercial loan portfolio has been properly risk
graded based on information about borrowers in specific industries and specific
issues with respect to single borrowers; (2) borrower specific information made
available to FHN is current and accurate; (3) the loan portfolio has been
segmented properly and individual loans have similar credit risk characteristics
and will behave similarly; (4) known significant loss events that
have occurred were considered by management at the time of assessing the
adequacy of the 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 strongly adverse 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.
In the second
quarter 2008, FHN continued to actively review its loan portfolios to identify
problem assets and the associated inherent losses. The commercial
loan portfolio experienced downward grade migration, negatively impacting
required reserves. FHN also continued to charge down impaired
commercial loans considered collateral dependent to estimates of fair value less
costs to sell. Additionally, enhanced analysis procedures were
applied to the home equity portfolio. Higher loss severities
more than offset the lower levels of delinquencies experienced in this
portfolio. These procedures resulted in FHN recognizing $220.0
million of provision in the quarter.
In third
quarter 2008, FHN maintained an aggressive approach to loan portfolio
remediation efforts especially in the winding-down national construction lending
portfolios, consistent loss recognition practices for impaired loans considered
collateral dependent and ensured adequate reserves that reflect current
observable inherent losses in the loan portfolio. The commercial loan
portfolio continued to experience downward grade migration driven primarily by
homebuilder finance and condominium construction loans and C&I sub-segments
impact by residential housing, including financial
institutions. During the quarter, FHN undertook an intensive review
of exposures to financial institutions which resulted in significant downward
grade migration and resultant reserve increase. Further, reviews of
the mature, winding-down OTC portfolio resulted in increased
provisioning in the third quarter 2008. Procedures applied by FHN
resulted in recognition of $340.0 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, March 31,
2008, June 30, 2008 or September 30, 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
ITEMS
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 14
below. As of September 30, 2008, the total amount of assets and
liabilities measured at fair value using significant unobservable inputs was
28.0 percent and 16.8 percent, respectively, in relation to the total amount of
assets and liabilities measured at fair value. See Note 14 – Fair
Values of Assets and Liabilities – for additional information.
Table
14 - Application of Fair Value Measurements
|
|
|
Line
Item
|
Description
of Accounting
|
Valuation
Discussion
|
Mortgage
trading securities and associated financing liabilities
|
Retained
interests in securitizations and associated financing liabilities, as
applicable, are recognized at fair value through current
earnings.
|
See
Critical Accounting Policies.
|
Capital
markets trading securities and trading liabilities
|
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 was measured at the lower of cost
or market prior to its transfer to the loan portfolio in second quarter
2008.
|
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 and associated financing liabilities
|
MSR and
associated financing liabilities, as applicable, are recognized at fair
value upon inception. Both 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.
|
Valuations
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 assets are measured at fair value with changes in fair value
recognized in current earnings.
|
Valuations
of applicable deferred compensation assets 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 was
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.
In the second
quarter 2008, FHN designated its trust preferred warehouse as held to maturity.
In conjunction with the transfer of these loans to held to maturity
status, FHN performed a lower of cost or market analysis on the date of
transfer. This analysis was based on the pricing of market transactions
involving securities similar to those held in the trust preferred warehouse with
consideration given, as applicable, to any differences in characteristics of the
market transactions, including issuer credit quality, call features
and term. As a result of the lower of cost or market analysis, FHN
determined that its existing valuation of the trust preferred warehouse was
appropriate.
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 was not
delinquent or aged.
FHN also
recognized a lower of cost or market reduction in value of $8.3 million relating
to mortgage warehouse loans during the second quarter of 2008.
Approximately $7.1 million is attributable to increased repurchases and
delinquencies or aging of warehouse loans; the remaining reduction in value
is attributable to lower investor prices, due primarily to credit spread
widening. 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.
FHN also
recognized a lower of cost or market reduction in value of $1.3 million relating
to mortgage warehouse loans during third quarter of 2008. This was
primarily attributable to increased repurchases and delinquencies of warehouse
loans with some reduction in value attributable to lower investor prices, due
primarily to credit spread widening. The market values for these loans
were estimated using historical sales prices for similar type loans, adjusted
for incremental price concessions that a third party investor is assumed to
require due to tightening credit markets and deteriorating housing prices.
These assumptions were based on published information about actual and projected
deteriorations in the housing market as well as changes in credit
spreads.
ACCOUNTING
CHANGES
In September
2008, the FASB issued FASB Staff Position No. FAS 133-1 and FIN 45-4,
“Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161” (FSP FAS 133-1). FSP FAS
133-1 requires sellers of credit derivatives and similar guarantee contracts to
make disclosures regarding the nature, term, fair value, potential losses and
recourse provisions for those contracts. FSP FAS 133-1 is effective
for reporting periods ending after November 15, 2008. Since FHN is
not a seller of credit derivatives or similar financial guarantees, the effect
of adopting FSP FAS 133-1 will not be material to FHN.
In May 2008,
the FASB issued Statement of Financial Accounting Standards No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (SFAS No.
162). SFAS No. 162 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United
States. As the GAAP hierarchy will reside in accounting literature
established by the FASB upon adoption of SFAS No. 162, it will become explicitly
and directly applicable to preparers of financial statements. SFAS
No. 162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles”. The adoption of SFAS No. 162 will have no effect on
FHN’s statement of condition or results of operations.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities - an amendment
of FASB Statement No. 133” (SFAS No. 161). SFAS No. 161 requires
enhanced disclosures related to derivatives
accounted for in accordance with SFAS No. 133 and reconsiders existing
disclosure requirements for such derivatives and any related hedging
items. The disclosures provided in SFAS No. 161 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. The effect of
adopting FSP FAS 140-3 will not be material to FHN.
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 35-66, (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 third 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 following
paragraphs supplement the discussion in Item 1A of our annual report on Form
10-K for the year ended December 31, 2007, as amended and supplemented by Item
1A of Part II of our quarterly report on Form 10-Q for the quarter ended March
31, 2008, and June 30, 2008:
The following
paragraph is added after the second paragraph under the heading “Operational
Risks”:
For
example, in 2008 we sold our national mortgage origination and servicing
platforms. We retained significant servicing right assets, however, and we
continue to originate mortgage products in our regional banking markets in and
around Tennessee. Of practical necessity, we have outsourced our servicing
functions to the purchaser of our platforms, and we have outsourced many key
roles in the Tennessee-based mortgage origination process to a third party.
Managing the operational, compliance, reputational, liability, and other risks
associated with this level of outsourcing in those business areas is an ongoing
challenge for us.
The following
paragraph is added after the third paragraph under the heading “Regulatory and
Legal Risks”:
In 2008
the U.S. Congress enacted the Emergency Economic Stabilization Act of 2008,
sometimes known as EESA. Under authority of EESA the U.S. Department of the
Treasury has initiated a Capital Purchase Program, sometimes referred to as the
CPP, which will be implemented in conjunction with the U.S. banking regulators.
Under the CPP, the Treasury would purchase preferred stock from approved
financial institutions upon terms and conditions set by the Treasury.
Participation in the CPP would subject an institution to restrictions on its
ability to pay cash dividends to common shareholders, purchase common shares,
and compensate senior executives, among many other things, and would give the
Treasury a fixed-price common stock purchase warrant. At the time
this Report is filed we have received preliminary approval to participate in the
CPP upon the Treasury’s standard terms. The Treasury has publicly discussed
other actions under EESA that also would directly affect financial institutions,
including a program to guarantee certain debt issued by institutions and a
program to purchase so-called troubled assets of institutions. EESA and its
programs are broad, large, and untested. Important terms of the CPP have been
published but details have not, and key terms of the other programs are unclear
at this time. These programs create risks that did not exist previously. Among
others, those risks include: whether participation in any of these
programs will expose us to intrusive, expensive, or counterproductive government
mandates or restrictions; whether failure to participate, especially if many
competitors do participate, will put us in a disadvantageous position; and,
whether the programs as a whole will have significant unintended or unexpected
effects on the financial services industry as a whole, or upon regional
companies in particular.
Item
2 Unregistered Sales of Equity
Securities and Use of Proceeds
|
(a) |
None |
|
|
|
|
(b) |
Not
applicable |
|
|
|
|
(c) |
The
Issuer Purchase of Equity Securities Table is incorporated herein by
reference to the table included in Item 2 of |
|
|
Part I
– First Horizon National Corporation – Management’s Discussion and
Analysis of Financial Condition and Results of Operations at page
56. |
Item
6 Exhibits
Exhibit
No. Description
|
3.2
|
Bylaws,
as amended and restated July 15, 2008, incorporated herein by reference to
Exhibit 3.2 to the Corporation’s Current Report on Form 8-K filed July 17,
2008.
|
|
4
|
Instruments
defining the rights of security holders, including
indentures.*
|
|
10.1(a)**
|
Rate
Applicable to Directors and Executive Officers Under the Directors and
Executives Deferred Compensation
Plan.
|
|
10.2(h)**
|
Amendments
to certain Stock-Based Plans of First Horizon National Corporation
Relating to Capital Adjustments.
|
|
10.6(c)**
|
Firstpower
Annual Bonus Plan, incorporated herein by reference to Exhibit 10.1 to the
Corporation’s Current Report on Form 8-K filed August 21,
2008.
|
|
10.7(t)**
|
Conformed
copy of Retirement Agreement with Gerald L.
Baker
|
|
10.7(u)**
|
Conformed
copy of Separation Agreement with Sarah L. Meyerrose dated August 12,
2008, incorporated herein by reference to Exhibit 10.1 to the
Corporation’s Current Report on Form 8-K filed August 14,
2008.
|
|
10.7(v)**
|
2008
annualized salary rate of Thomas C. Adams, Jr., incorporated herein by
reference to Exhibit 10.2 to the Corporation’s Current Report on Form 8-K
filed August 21, 2008.
|
|
10.7(w)**
|
Description
of special bonus paid to Elbert L.Thomas,
Jr.
|
|
10.7(x)**
|
2008
annualized salary rate of D. Bryan Jordan, changed effective September 1,
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. Exceptions to such representations and warranties may be
partially or fully waived by such parties, or not enforced by such parties, in
their discretion. No such representation or warranty may be relied upon by any
other person for any purpose.
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: |
November
6, 2008 |
By:
_/s/
|
Thomas C. Adams,
Jr._________ |
|
|
Name:
|
Thomas
C. Adams, Jr.
|
|
|
Title:
|
Executive
Vice President and Interim Chief Financial Officer (Duly Authorized
Officer and Principal Financial
Officer) |
EXHIBIT
INDEX
Exhibit
No. Description
|
3.2
|
Bylaws,
as amended and restated July 15, 2008, incorporated herein by reference to
Exhibit 3.2 to the Corporation’s Current Report on Form 8-K filed July 17,
2008.
|
|
4
|
Instruments
defining the rights of security holders, including
indentures.*
|
|
10.1(a)**
|
Rate
Applicable to Directors and Executive Officers Under the Directors and
Executives Deferred Compensation
Plan
|
|
10.2(h)**
|
Amendments
to certain Stock-Based Plans of First Horizon National Corporation
Relating to Capital Adjustments.
|
|
10.6(c)**
|
Firstpower
Annual Bonus Plan, incorporated herein by reference to Exhibit 10.1 to the
Corporation’s Current Report on Form 8-K filed August 21,
2008.
|
|
10.7(t)**
|
Conformed
copy of Retirement Agreement with Gerald L.
Baker
|
|
10.7(u)**
|
Conformed
copy of Separation Agreement with Sarah L. Meyerrose dated August 12,
2008, incorporated herein by reference to Exhibit 10.1 to the
Corporation’s Current Report on Form 8-K filed August 14,
2008.
|
|
10.7(v)**
|
2008
annualized salary rate of Thomas C. Adams, Jr., incorporated herein by
reference to Exhibit 10.2 to the Corporation’s Current Report on Form 8-K
filed August 21, 2008.
|
|
10.7(w)**
|
Description
of special bonus paid to Elbert L.Thomas,
Jr.
|
|
10.7(x)**
|
2008
annualized salary rate of D. Bryan Jordan, changed effective September 1,
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. Exceptions to such representations and warranties may be
partially or fully waived by such parties, or not enforced by such parties, in
their discretion. No such representation or warranty may be relied upon by any
other person for any purpose.
79