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CORPORATE OVERVIEW |
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Our commitment
At First Horizon National Corp. we are committed to our customers, our people, our communities and our shareholders. We demonstrate that commitment through financial performance and corporate responsibility. We make investments that benefit our stakeholders because when they prosper so do we. In 2011 we continued to make progress toward a future of sustained success – a future based on our nearly 150-year history of earning the trust of Tennesseans, on our core businesses of regional banking and capital markets, on the dedication of our 4,700 employees, on our support for the communities we serve and on the confidence of our shareholders. In 2011 we renewed our commitment to build that future.
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Our people |
We know that a company is only as strong as its people, and by that measure First Horizon is strong indeed. We seek to attract, develop and retain the best people and empower them to serve our customers. Our employee focus and our distinctive corporate culture – Firstpower – have earned us national recognition as an employer of choice. Firstpower is the attitude of embracing candor, change, inclusion and teamwork that each employee brings to the job every day. First Horizon has been recognized for outstanding employment practices by AARP and Working Mother magazines, The Dave Thomas Foundation for Adoption and the National Association for Female Executives.
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Our core businesses |
Regional banking: With more than 170 financial centers in and around Tennessee, First Tennessee Bank has relationships with more than one in four Tennessee households and the leading deposit share in four of the state’s five major metropolitan areas. We have been providing financial services in local communities since 1864. Our focus on consistently offering a distinctive customer experience has resulted in one of the highest customer retention rates of any bank in the country. We take great pride in external recognition of the convenient service and advice that set First Tennessee apart.
Recent recognition includes 12 Excellence in Banking awards from Greenwich and Associates, putting us in the top 5 percent of banks rated by the survey. In addition, First Tennessee is among the highest-rated in J.D. Power’s retail banking surveys. Recently, we used actual customers in our advertising to tell the story about the First Tennessee difference.
Our goal is to be easy to do business with and to provide client-focused advice in all our business lines. We offer a full product menu, convenient locations and hours, and the latest advances in mobile banking. We’ve been recognized by InformationWeek magazine as one of the most innovative users of technology. For example, in 2011 First Tennessee became one of the few banks in the nation to offer consumers the ability to deposit checks from their iPhone. Our business mobile banking was among the first to introduce unique cash management features. Above all, our knowledgeable employees provide proactive advice to help customers manage their money and make financial decisions for the future. Our Wealth Management team offers access to the same products available from national brokerage firms delivered by local professionals who care about our communities and customers. That adds up to creating a distinctive customer experience – our competitive advantage. More information is available at www.FirstTennessee.com.
Capital markets: Our capital markets business, FTN Financial, is an industry leader in fixed income sales, trading and strategies for institutional clients in the U.S. and abroad. FTN Financial also provides investment services and balance sheet management solutions. With an average daily trading volume of more than $5 billion, FTN Financial transacts business with approximately 40 percent of all domestic depository institutions with investment portfolios over $100 million.
With 16 domestic offices plus one in Hong Kong and one in Tokyo, FTN Financial provides a broad spectrum of financial services for the investment and banking communities through the integration of traditional capital markets securities activities, loan sales, portfolio advisory services and derivative sales.
In 2011 FTN Financial’s performance again demonstrated the strength of our capital markets platform, anchored in our experienced sales and trading resources and deep customer relationships. More information can be found at www.FTNFinancial.com.
Our communities
As a company and as individuals, we share the hopes of our neighbors for a better place to live and work. In addition to the financial services we provide and the jobs and spending we bring to local economies, we express our corporate citizenship through a volunteer spirit and community investment.
Volunteer spirit: We devote time and energy through our employee volunteer program, which won a Financial Services Roundtable Community Service Leadership award. Our volunteers donated more than 25,000 hours of community service in 2011, and we support their efforts through leadership grants and matching gifts programs.
First Tennessee Foundation: We established a private charitable foundation in 1993 to support nonprofit organizations in the communities we serve. We invest in a way that engages our employees, responds inclusively to needs and promotes progress and prosperity across Tennessee. Since its inception, the First Tennessee Foundation has donated more than $50 million to meet community needs. We are good stewards of our resources, supporting agencies that make the most impact on our communities. More information can be found at www.FirstTennesseeFoundation.com.
We focus our community investment in key areas:
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Education: To plant the seeds of success, we give to help educate young people. Our volunteers provide tutoring and other services to students, with a special emphasis on financial literacy. We support Adopt-a-School programs throughout the state. |
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Economic development: To encourage jobs and growth, we support Chambers of Commerce, regional development initiatives and small business resources. |
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Health and human services: In 2011 our company and employees donated more than $2 million to United Way, making us one of the largest supporters in Tennessee. Our executives serve in community-wide leadership roles, and our employees volunteer in member agencies. To ensure that our employees and neighbors have access to top-quality care, First Tennessee supports healthcare institutions throughout the state. |
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Arts and culture: Because art plays a vital role in a healthy community, the First Tennessee Foundation is a long-time supporter. Artists, museums, theaters, symphonies and cultural institutions throughout the state receive support. |
Our world
Concern for environmental sustainability is part of the way we do business. We work to be green, and we encourage our employees to do the same at work and at home. In addition to the company’s commitment, the First Tennessee Foundation supports green projects across the state such as nature conservancy, bike trails and historic preservation. Examples of our company’s current green or sustainable practices include:
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Buildings are designed with an awareness of energy consumption and the goal of enhancing our energy efficiency and sustainability, from window blinds to the heating and cooling systems to motion-sensored lighting to low volume flush valves and faucets. |
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Recycled products are used in carpeting, wallpaper, fabrics and parking abutments. |
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At our corporate headquarters air conditioning equipment uses environmentally friendly refrigerant, and we renovated the mechanical equipment to improve air quality and energy efficiency. |
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Our recycling program with Cintas Document Management earned us a Document Management Award for saving 5,156 trees, 114,689 gallons of oil and 2,154,800 gallons of water. We recycle an average of 10 tons of paper a month. Solar panels recently installed at one of our operations centers produce 3400KWH of electricity per month. |
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To reduce water consumption we use indigenous plants for landscaping at all new facilities. |
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Employees from various locations and backgrounds who have a passion for the environment and green initiatives meet to discuss green ideas, analyze costs, make recommendations to management and implement approved ideas. The group has a dedicated page on the company’s Intranet to share creative ways to be green in the workplace and encourage employees to sign a pledge to practice environmentally-friendly behaviors. |
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Our purpose
We strive to be the most respected regional financial services company by serving our customers, supporting our people, investing in our communities and rewarding our investors. Carrying on our 148-year tradition, First Horizon National Corp. is building for a bright future.
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CHAIRMAN’S LETTER |
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In challenging times, the successful company adapts and strives to excel. During the last few years of recession and slow recovery, First Horizon has worked to become leaner, more flexible and more responsive – better suited to navigate rough terrain. We controlled what we could control and prepared for what we could not. In 2011 as a result, our employees continued to make significant progress in strengthening our company for the future. Our team enhanced customer relationships, improved products and services, reduced our cost of doing business and upgraded our technology. First Horizon also returned capital to shareholders by reinstating a cash dividend and launching a $100 million share repurchase program. Our progress in a difficult environment is a testament to the soundness of our strategy and the hard work of our employees. Thanks to our adaptive change, we entered 2012 with strong momentum toward our goal of sustained success. |
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In 2011 our company returned to profitability as our core businesses performed solidly and the drag from our legacy businesses continued to diminish. Pre-tax income in our core businesses of regional banking, capital markets and corporate increased substantially, and consolidated income grew to $150 million from $52 million in 2010. We continued to improve our asset quality, significantly reducing
credit-related costs. From 2010 to 2011 net charge-offs dropped 38 percent, we reduced reserves by 42 percent and nonperforming assets declined 38 percent. We made headway in our efficiency initiatives, implementing more than $100 million in cost savings while maintaining high standards of service. We are on target to reduce our expenses at least 25 percent from 2010 levels by the end of 2013.
Core business performance
In our regional bank, First Tennessee, 2011 trends were positive. One number stands out: Year over year, First Tennessee grew period-end loans 6 percent compared to an industry average of 1.7 percent, according to Fed data. Full-year average regional bank deposits grew by more than $600 million, or 5 percent. According to the latest FDIC data, First Tennessee’s deposits were up 6.5 percent, 2 ½ times the growth rate in the overall Tennessee market. We have the number one market share in four of the five major metropolitan areas in the state, and in Middle Tennessee our deposits grew faster than those of any of the other top banks. We fortified our position as Tennessee’s bank.
In our capital markets business, FTN Financial, our unique distribution-focused business model allowed us to successfully navigate volatile market conditions during 2011 and produce strong revenues and profitability. Among FTN Financial’s 2011 highlights:
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We generated fixed-income average daily revenue of $1.3 million, a strong performance. |
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We further enhanced our extensive distribution network as we continued to make strategic hires of sales reps and traders, to build on our already extensive customer base by adding new acounts, and to focus on expanding our relationships with high-quality debt issuers. |
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We continued to produce high returns on capital. |
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Focus on service
Our performance is fueled by customer service. It’s the core of our operating model – it’s how we excel. While many of the adaptations we’ve made give us the capability of large banks, we will ensure that
new efficiencies and practices never undermine our community bank model. We’ll continue to think small when it comes to service. Our front-line folks feel good about this company because they can serve customers. We want to keep that focus and enhance it.
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Products are becoming more standardized, so our service must set us apart – and that depends on our people building relationships. As digital banking reduces face time with customers, we are working to maintain the personal connection. Our service and sales reps are making thousands of calls, strengthening bonds, finding solutions, winning new business, out-hustling the competition. Our value proposition is simple yet powerful: Serve our customers and invest in our communities. |
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Our front-line folks |
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Customer feedback
In 2011 we aimed to be easy to do business with, and feedback from customers indicates we’re succeeding. First Tennessee jumped two spots in the 2011 J.D. Power and Associates Retail Banking Satisfaction Study, maintaining our position as a high-performing bank that consistently provides exceptional customer service and putting us ahead of our local competition in the South Central region. First Tennessee also won top national and regional customer satisfaction honors in the 2011 Greenwich Excellence Awards for U.S. small business and middle market banking. With 12 total awards, we were the top recipient among Tennessee-based
banks. First Tennessee’s “Are You a 96?” marketing campaign is based on survey findings that 96 percent of our customers would recommend us. That’s a service record to be proud of.
Last year also saw the culmination of a $100 million-plus investment in technology, much of it targeted at improving the experience for customers and employees. We installed new systems to better manage customer relationships and improve service at the teller window, and we in-sourced our data center. We introduced advances in mobile banking for business and retail customers, including the ability to deposit a check by taking a picture with a smartphone.
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Regulatory impact |
The bank continued to adapt to pressure on fee income resulting from the Dodd-Frank regulatory reform legislation and other new rules. We anticipated and prepared for the impact of the Durbin amendment’s cap on fees banks charge merchants for debit card transactions. With free checking unsustainable, we introduced a new suite of checking account products. We explained the transition to customers and confirmed once again that if we deliver value, they will pay for it. We also focused on avoiding discounts, minimizing refunds and waivers and collecting the fees we are entitled to.
Mortgage repurchase issues from our legacy business drew media attention in 2011. Our exposure so far primarily has come from government sponsored entities (GSEs) such as Fannie Mae and Freddie Mac who bought conventional mortgages. GSE-related repurchase requests declined in 2011, and we expect a continuing decline.
Looking forward, we expect more of the same conditions: a slow recovery, regulatory pressure, low interest rates, low loan demand, tough competition. It’s not the environment we would have chosen, but we have adapted to it and excelled on a variety of fronts. We
have strengthened the company to take advantage as opportunities arise. The economy will improve, and our hard work and difficult choices now will pay off then.
I am confident in the future of First Horizon. It is a privilege to work with such a talented team of professionals. When I talk with our people – from tellers to relationship managers to bond sales reps to trust officers – I find an enthusiasm for what we’re doing and where we’re going. We have a broad array of competitive products and services. We have a great franchise. We have extraordinary customer relationships and strong community partnerships. We are heirs to a 148-year tradition of being Tennessee’s bank. Our progress in 2011 carries that tradition forward into a bright future.
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We have strengthened |
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We appreciate the support of our customers and our shareholders. In 2012, we renew our commitment to continue to earn that support and justify that confidence.
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Sincerely, |
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BRYAN JORDAN |
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Chairman of the Board, President
and Chief Executive Officer |
[THIS PAGE INTENTIONALLY LEFT BLANK]
FINANCIAL INFORMATION AND DISCUSSION
TABLE OF CONTENTS
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2 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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3 |
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3 |
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4 |
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5 |
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6 |
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8 |
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18 |
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21 |
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23 |
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25 |
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28 |
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46 |
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Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations |
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54 |
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64 |
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66 |
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73 |
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73 |
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75 |
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Report of Management on Internal Control over Financial Reporting |
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80 |
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81 |
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83 |
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84 |
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85 |
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87 |
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88 |
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187 |
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Consolidated Average Balance Sheets and Related Yields and Rates |
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188 |
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190 |
FIRST HORIZON NATIONAL CORPORATION
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(Dollars in millions except per share data) |
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2011 |
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2010 |
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2009 |
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2008 |
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2007 |
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2006 |
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Income/(loss) from continuing operations |
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$ |
134.0 |
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$ |
72.9 |
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$ |
(235.2 |
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$ |
(172.6 |
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$ |
(151.4 |
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$ |
267.0 |
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Income/(loss) from discontinued operations, net of tax |
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8.6 |
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(11.3 |
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(23.2 |
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(5.4 |
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0.1 |
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212.7 |
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Income/(loss) before cumulative effect of changes in accounting principle |
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142.6 |
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61.6 |
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(258.4 |
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(178.0 |
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(151.3 |
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479.7 |
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Cumulative effect of changes in accounting principle, net |
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- |
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- |
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- |
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- |
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- |
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1.4 |
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Net income/(loss) |
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142.6 |
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61.6 |
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(258.4 |
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(178.0 |
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(151.3 |
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481.1 |
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Income/(loss) available to common shareholders |
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131.2 |
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(57.8 |
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(329.4 |
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(199.4 |
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(170.1 |
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462.9 |
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Common Stock Data |
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Earnings/(loss) per common share from continuing |
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$ |
0.47 |
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$ |
(0.20 |
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$ |
(1.31 |
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$ |
(0.94 |
) |
$ |
(1.13 |
) |
$ |
1.67 |
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Earnings/(loss) per common share |
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0.50 |
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(0.25 |
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(1.41 |
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(0.96 |
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(1.13 |
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3.10 |
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Diluted earnings/(loss) per common share from continuing operations |
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0.47 |
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(0.20 |
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(1.31 |
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(0.94 |
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(1.13 |
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1.62 |
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Diluted earnings/(loss) per common share |
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0.50 |
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(0.25 |
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(1.41 |
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(0.96 |
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(1.13 |
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3.01 |
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Cash dividends declared per common share |
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0.04 |
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- |
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- |
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0.33 |
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1.50 |
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1.50 |
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Year-end book value per common share |
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9.28 |
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9.05 |
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9.35 |
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10.63 |
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14.08 |
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16.43 |
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Closing price of common stock per share: |
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High |
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12.53 |
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14.83 |
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13.68 |
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18.42 |
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37.60 |
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35.62 |
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Low |
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5.63 |
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9.24 |
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6.52 |
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4.20 |
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15.00 |
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30.99 |
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Year-end |
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8.00 |
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11.78 |
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12.60 |
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9.24 |
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15.12 |
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34.81 |
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Cash dividends per common share/year-end closing price |
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0.5 |
% |
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N/A |
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N/A |
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3.6 |
% |
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10.0 |
% |
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4.3 |
% |
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Cash dividends per common share/diluted earnings per |
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8.0 |
% |
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N/A |
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N/A |
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NM |
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NM |
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49.9 |
% |
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Compound stock dividend rate declared per share |
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N/A |
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6.3601 |
% |
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7.5320 |
% |
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4.9547 |
% |
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N/A |
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N/A |
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Price/earnings ratio |
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16.0 |
x |
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NM |
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NM |
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NM |
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NM |
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11.6x |
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Market capitalization |
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$ |
2,059.7 |
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$ |
3,102.5 |
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$ |
2,974.5 |
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$ |
2,169.8 |
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$ |
2,293.5 |
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$ |
5,216.9 |
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Average shares (thousands) |
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260,574 |
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235,699 |
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234,431 |
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206,681 |
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151,060 |
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149,391 |
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Average diluted shares (thousands) |
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262,861 |
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235,699 |
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234,431 |
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206,681 |
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151,060 |
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153,592 |
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Period-end shares outstanding (thousands) |
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257,468 |
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263,366 |
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|
236,098 |
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|
234,784 |
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151,687 |
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149,887 |
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Volume of shares traded (thousands) |
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1,049,982 |
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1,009,113 |
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1,256,124 |
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1,658,045 |
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583,647 |
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221,933 |
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Selected Average Balances |
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Total assets |
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$ |
24,733.6 |
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$ |
25,677.4 |
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$ |
28,147.8 |
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$ |
34,422.7 |
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$ |
38,175.4 |
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$ |
38,764.6 |
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Total assets – divestiture |
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- |
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- |
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- |
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182.3 |
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123.1 |
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- |
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Total loans, net of unearned income |
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16,056.8 |
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17,131.8 |
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19,579.3 |
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21,660.7 |
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22,106.7 |
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21,504.2 |
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Total loans held for sale – divestiture |
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- |
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- |
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- |
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110.4 |
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117.8 |
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|
- |
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Securities available for sale |
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|
3,182.9 |
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|
2,650.9 |
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|
2,852.1 |
|
|
2,964.0 |
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|
3,380.2 |
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|
3,481.5 |
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Earning assets |
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|
21,959.1 |
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|
22,960.2 |
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25,373.8 |
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|
30,426.2 |
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|
33,405.4 |
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|
34,042.3 |
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Total deposits |
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15,527.0 |
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|
15,204.3 |
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|
14,556.2 |
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|
14,920.9 |
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|
20,313.8 |
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|
22,751.7 |
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Total deposits – divestiture |
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|
- |
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- |
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|
- |
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|
48.8 |
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|
95.3 |
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|
- |
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Total term borrowings |
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|
2,582.6 |
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|
2,915.1 |
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|
3,506.9 |
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|
6,108.6 |
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|
6,567.7 |
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|
5,062.4 |
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Common equity |
|
|
2,409.9 |
|
|
2,211.6 |
|
|
2,365.6 |
|
|
2,534.1 |
|
|
2,423.5 |
|
|
2,423.0 |
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Total equity |
|
|
2,705.1 |
|
|
3,292.0 |
|
|
3,452.1 |
|
|
2,930.6 |
|
|
2,718.8 |
|
|
2,718.3 |
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|||||||||||||||||||
|
Selected Period-End Balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
24,789.4 |
|
$ |
24,699.0 |
|
$ |
26,068.7 |
|
$ |
31,022.0 |
|
$ |
37,015.5 |
|
$ |
37,918.3 |
|
|
Total assets – divestiture |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
305.7 |
|
|
- |
|
|
Total loans, net of unearned income |
|
|
16,397.1 |
|
|
16,782.6 |
|
|
18,123.9 |
|
|
21,278.2 |
|
|
22,103.5 |
|
|
22,104.9 |
|
|
Total loans held for sale – divestiture |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
289.9 |
|
|
- |
|
|
Securities available for sale |
|
|
3,066.3 |
|
|
3,031.9 |
|
|
2,694.5 |
|
|
3,125.2 |
|
|
3,032.8 |
|
|
3,923.5 |
|
|
Earning assets |
|
|
21,762.0 |
|
|
21,901.7 |
|
|
22,962.9 |
|
|
26,895.9 |
|
|
31,785.6 |
|
|
32,353.3 |
|
|
Total deposits |
|
|
16,213.0 |
|
|
15,208.2 |
|
|
14,867.2 |
|
|
14,241.8 |
|
|
17,032.3 |
|
|
20,213.2 |
|
|
Total deposits – divestiture |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
230.4 |
|
|
- |
|
|
Total term borrowings |
|
|
2,481.7 |
|
|
3,228.1 |
|
|
2,891.1 |
|
|
4,767.7 |
|
|
6,828.4 |
|
|
5,836.4 |
|
|
Common equity |
|
|
2,389.5 |
|
|
2,382.8 |
|
|
2,208.6 |
|
|
2,496.8 |
|
|
2,135.6 |
|
|
2,462.4 |
|
|
Total equity |
|
|
2,684.6 |
|
|
2,678.0 |
|
|
3,302.5 |
|
|
3,574.6 |
|
|
2,430.9 |
|
|
2,757.7 |
|
|
|
|||||||||||||||||||
|
Selected Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average common equity (a) |
|
|
5.45 |
% |
|
(2.61 |
)% |
|
(13.93 |
)% |
|
(7.87 |
)% |
|
(7.02 |
)% |
|
19.10 |
% |
|
Return on average assets (b) |
|
|
0.58 |
|
|
0.24 |
|
|
(0.92 |
) |
|
(0.52 |
) |
|
(0.40 |
) |
|
1.24 |
|
|
Net interest margin (c) |
|
|
3.22 |
|
|
3.20 |
|
|
3.06 |
|
|
2.95 |
|
|
2.82 |
|
|
2.93 |
|
|
Allowance for loan and lease losses to loans |
|
|
2.34 |
|
|
3.96 |
|
|
4.95 |
|
|
3.99 |
|
|
1.55 |
|
|
0.98 |
|
|
Net charge-offs to average loans |
|
|
2.02 |
|
|
3.07 |
|
|
4.25 |
|
|
2.64 |
|
|
0.60 |
|
|
0.26 |
|
|
Total period-end equity to period-end assets |
|
|
10.83 |
|
|
10.84 |
|
|
12.67 |
|
|
11.52 |
|
|
6.57 |
|
|
7.27 |
|
|
Tangible common equity to tangible assets (d) |
|
|
9.05 |
|
|
8.93 |
|
|
7.75 |
|
|
7.34 |
|
|
5.13 |
|
|
5.65 |
|
|
|
|||||||||||||||||||
|
|
|
N/A - not applicable |
|
NM - not meaningful |
|
See accompanying notes to consolidated financial statements. |
|
Certain previously reported amounts have been reclassified to agree with current presentation. |
|
(a) Calculated using net income/(loss) available to common shareholders divided by average common equity. |
|
(b) Calculated using net income divided by average assets. |
|
(c) Net interest margin is computed using total net interest income adjusted for fully taxable equivalent (“FTE”). |
|
(d) Represents a non-GAAP measure. Refer to Table 33 for the non-GAAP to GAAP reconciliation. |
|
|
|
|
2 |
FIRST HORIZON NATIONAL CORPORATION |
FIRST HORIZON NATIONAL
CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
First Horizon National Corporation (“FHN”) began as a community bank chartered in 1864 and as of December 31, 2011, was one of the 30 largest publicly traded banking organizations in the United States in terms of asset size.
The corporation’s two major brands – First Tennessee and FTN Financial – provide customers with a broad range of products and services. First Tennessee provides retail and commercial banking services throughout Tennessee and is the largest bank headquartered in the state. FTN Financial (“FTNF”) is an industry leader in fixed income sales, trading, and strategies for institutional clients in the U.S. and abroad.
In third quarter 2011, FHN sold First Horizon Msaver, Inc (“Msaver”), the former subsidiary of First Tennessee Bank, which provided administrative services for health savings accounts. In first quarter 2011, FHN agreed to sell First Horizon Insurance, Inc. (“FHI”), the former subsidiary of First Tennessee Bank, which provided property and casualty insurance to customers in over 40 states, and Highland Capital Management Corporation (“Highland”), the former subsidiary of First Horizon National Corporation, which provided asset management services. The results of operations for these divested businesses have been included in the Income/(loss) from discontinued operations, net of tax line on the Consolidated Statements of Income for all periods presented. Consistent with historical practice, these businesses were moved to the non-strategic segment with other exited businesses and discontinued products. For comparability, previously reported items have been revised to reflect these changes. The divestiture of Msaver closed in third quarter 2011, and the divestitures of FHI and Highland closed in second quarter 2011.
FHN is composed of the following operating segments:
|
|
|
|
• |
Regional banking offers financial products and services including traditional lending and deposit-taking to retail and commercial customers in Tennessee and surrounding markets. Additionally, regional banking provides investments, financial planning, trust services and asset management, credit cards, cash management, check clearing services, correspondent banking services, and mortgage originations within the regional banking footprint. |
|
|
|
|
• |
Capital markets provides financial services for depository and non-depository institutions through the sale and distribution of fixed income securities, loan sales, portfolio advisory services, and derivative sales. |
|
|
|
|
• |
Corporate consists of unallocated corporate income/expenses including gains and losses from the extinguishment of debt, expense on subordinated debt issuances and preferred stock, BOLI, unallocated interest income associated with excess equity, net impact of raising incremental capital, revenue and expense associated with deferred compensation plans, funds management, low income housing investment activities, and certain charges related to restructuring, repositioning, and efficiency initiatives. |
|
|
|
|
• |
Non-strategic includes exited businesses (including Msaver, FHI and Highland) and loan portfolios, other discontinued products and service lines, and certain charges related to restructuring, repositioning, and efficiency initiatives. |
For the purpose of this management’s discussion and analysis (“MD&A”), earning assets have been expressed as averages, unless otherwise noted, and loans have been disclosed net of unearned income. The following financial discussion should be read with the accompanying audited Consolidated Financial Statements and Notes.
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
3 |
Non-GAAP Measures
Certain ratios are included in the narrative and tables in MD&A that are non-GAAP, meaning they are not presented in accordance with generally accepted accounting principles (“GAAP”) in the U.S. FHN’s management believes such measures are relevant to understanding the capital position and results of the company. The non-GAAP ratios presented in this filing are net interest income adjusted for fully taxable equivalent (“FTE”), tangible common equity to tangible assets, adjusted tangible common equity to risk weighted assets, and the tier 1 common capital ratio. These measures are reported to FHN’s management and board of directors through various internal reports. Additionally, disclosure of the non-GAAP capital ratios provide a meaningful base for comparability to other financial institutions as these ratios have become an important measure of the capital strength of banks as demonstrated by the inclusion in the stress tests administered by the United States Treasury Department (“UST”) under the Capital Assistance Program. Non-GAAP measures are not formally defined by GAAP or codified in the federal banking regulations, and other entities may use calculation methods that differ from those used by FHN. Tier 1 capital is a regulatory term and is generally defined as the sum of core capital (including common equity and instruments that cannot be redeemed at the option of the holder) adjusted for certain items under risk-based capital regulations. Risk-weighted assets is a regulatory term which includes total assets adjusted for credit risk and is used to determine regulatory capital ratios. Refer to Table 33 for a reconciliation of non-GAAP to GAAP measures and presentation of the most comparable GAAP items.
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, global, general and local economic and business conditions, including economic recession or depression; the level and length of deterioration in the residential housing and commercial real estate markets; potential requirements for FHN to repurchase previously sold or securitized mortgages or securities based on such mortgages; potential claims relating to the foreclosure process; 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, including fluctuations in mortgage markets; inflation or deflation; customer, investor, regulatory, and legislative responses to any or all of these conditions; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geopolitical developments including possible terrorist activity; natural disasters; effectiveness and cost-efficiency of FHN’s hedging practices; technological changes; fraud, theft, or other incursions through conventional, electronic, or other means; 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, servicing, and holding loans and loan-based assets, including prepayment risks, pricing concessions, fluctuation in U.S. housing and other real estate 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”), the Federal Deposit Insurance Corporation (“FDIC”), Financial Industry Regulatory Authority (“FINRA”), the Consumer Financial Protection Bureau (“Bureau”), the Financial Stability Oversight Council (“Council”), and other regulators and agencies; regulatory, administrative, 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, perhaps materially, from those contemplated by the forward-looking statements. FHN assumes no obligation to update any forward-looking statements that are made from time to time. Actual results could differ, possibly materially, because of several factors, including those presented in this Forward-Looking Statements section, in other sections of this MD&A, in Item 1A of FHN’s 2011 Annual Report on Form 10-K, and in documents incorporated into this Annual Report.
|
|
|
|
4 |
FIRST HORIZON NATIONAL CORPORATION |
FINANCIAL SUMMARY – 2011 COMPARED TO 2010
In 2011, FHN reported net income available to common shareholders of $131.2 million or $.50 per diluted share compared to a net loss available to common shareholders of $57.8 million or loss per share of $.25 in 2010. The after-tax results of FHI, Highland, and Msaver, which were exited during 2011, are reflected in the discontinued operations, net of tax line on the Consolidated Statements of Income for all periods presented. Reported earnings are directly and significantly affected by a number of factors including the economic environment, regulatory reform, and strategic transactions occurring in both 2011 and 2010.
FHN remained well-positioned and was able to respond positively to the challenging operating environment, returning to profitability in 2011. U.S. economic growth continued to be slow due to a stressed housing market, high unemployment levels and uncertainty with global economic conditions and the political environment. This challenging operating environment has resulted in increased competition among financial institutions with limited loan demand from credit worthy borrowers. Despite the challenging operating environment, period-end loans increased within the regional bank, mitigating the runoff of non-strategic loan portfolios. Also, the unique business model, extensive distribution network and strong sales and trading force of FHN’s capital markets business allowed it to successfully manage through periods of market volatility. Capital markets’ results remained strong with fixed income average daily revenue at $1.3 million in 2011.
Because of the slow recovery, the Federal Reserve held interest rates at historically low levels during 2011, pressuring both the net interest margin and loan yields. However, the net interest margin increased slightly in 2011 due to an improved balance sheet mix as lower-return legacy assets continued to run-off and FHN remained disciplined with loan and deposit pricing.
The regulatory and legal environment has also been challenging for the industry. The implementation of new regulations during 2011 and 2010 directly affected fee revenue in both periods. In 2011, FHN continued to see a reduction in non-sufficient fund (“NSF”) fee income primarily due to the full-year impact of Regulation E of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Reform Law”) which became effective in the middle of 2010. Additionally, in fourth quarter 2011, the Durbin Amendment to the Reform Law became effective resulting in a decline in debit interchange fee income in late 2011. In response, FHN modified product and fee structures in order to mitigate the impact on revenue.
Overall FHN saw marked improvement in asset quality during 2011 from a year ago. Balances of higher risk non-strategic loans continue to decline and had a reduced impact on asset quality metrics in 2011. Management’s continued, proactive approach to managing asset quality combined with borrowers adapting to the current operating environment and a modestly improved economic environment resulted in a $280.4 million decrease in the allowance for loan losses. Additionally, in third quarter 2011, FHN took further steps to improve asset quality through the sale of approximately $150 million of nonperforming consumer and commercial loans. Overall improvement in asset quality and non-performing loan (“NPL”) sales resulted in a 38 percent decline in NPLs from a year ago. Net charge-offs and provision also decreased $202.2 million and $226.0 million, or 38 percent and 84 percent, respectively during 2011.
FHN executed on strategic initiatives during 2011 through further refinement of its business mix and investments in technology while retaining a focus on improved efficiency and overall cost savings. In 2011, FHN sold non-strategic businesses including Msaver, FHI, and Highland, resulting in after tax gains of $9.9 million. As part of this continued focus on core businesses, FHN recognized net charges of $26.9 million related to restructuring, repositioning, and efficiency initiatives in 2011. FHN’s continued efforts to manage legacy businesses resulted in the transitioning of its servicing to a new mortgage loan subservicer during third quarter 2011. This transition led to elevated subservicing costs during the second half of 2011; however, FHN expects to realize favorable loss mitigation results and reduced losses over the long-term.
Capital remained strong during 2011. FHN continued returning capital to shareholders during the year as a quarterly cash dividend was reinstated in 2011. Additionally, a share repurchase program was initiated in fourth quarter 2011 resulting in share buybacks approximating $44 million.
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
5 |
FHN’s improved results during 2011 were driven by a significant decline in the provision for loan losses, lower expenses, and no dividends associated with the preferred shares previously issued to the UST under the CPP in 2011. The results from asset quality improvement and lower expenses offset a decline in revenue from 2010. Net interest income was lower in 2011 primarily a result of the decline in non-strategic loans partially mitigated by declining funding costs. Although net interest income declined, the net interest margin expanded slightly from 3.20 basis points in 2010 to 3.22 basis points during 2011 due to disciplined loan pricing, deposit mix, and run-off of lower margin legacy assets.
Noninterest income was $786.0 million in 2011 compared with $932.7 million in 2010. A decline in mortgage banking, capital markets, and deposit transactions and cash management fee income, partially offset by increased securities gains contributed to the $146.7 million reduction in noninterest income. Mortgage banking income was $90.6 million and $167.4 million in 2011 and 2010, respectively. The reduction in 2011 was largely driven by a reduction in positive net hedging results due to more narrow spreads between mortgage and swap rates in 2011 and continued runoff of the underlying servicing portfolio, as well as a decline in servicing fees. Capital markets income decreased to $355.3 million in 2011 from $424.0 million in 2010, with fixed income average daily revenue of $1.3 million in 2011. Deposit transactions and cash management fee income was $134.1 million in 2011 compared to $143.2 million in 2010. This decline is primarily due to the full-year impact of Regulation E on deposit fee income and the negative impact of the Durbin Amendment on interchange fees which became effective in fourth quarter 2011. In both 2011 and 2010, FHN sold portions of its Visa, Inc. Class B shares resulting in securities gains of $35.1 million and $14.8 million, respectively.
Noninterest expense decreased $48.8 million in 2011 from $1.3 billion in 2010, primarily due to a decline in personnel costs and the repurchase and foreclosure provision during 2011, partially offset by increases in losses from litigation and regulatory matters, legal and professional fees, and contract employment and outsourcing charges. Personnel expense was $610.2 million in 2011 compared to $672.0 million in 2010. The decrease in personnel costs was primarily the result of reduced commission expense associated with the decline in capital markets’ fixed income sales revenue in 2011, headcount reductions since last year, and continued wind-down of non-strategic businesses. The repurchase and foreclosure provision declined $30.2 million to $159.6 million in 2011 due to aggregate improvement in trends relative to 2010. In 2011, FHN resolved a litigation matter resulting in a charge of $36.7 million. Additionally, contract employment and outsourcing costs increased $13.4 million from 2010 due to higher subservicing costs and one time transition costs associated with the change in subservicer in third quarter 2011. In 2010, FHN reversed $13.0 million of the contingent liability previously established for certain Visa legal matters while in 2011, FHN reversed $3.3 million. Additionally, in 2011 FHN recorded net expense of $9.4 million due to an increase in the derivative liabilities associated with prior sales of Visa, Inc. shares related to an expected decline in the conversion ratio. This resulted in a net $19.1 million increase in other expenses year over year associated with Visa-related items. Technology-related investments resulted in an increase in equipment rentals, depreciation, and maintenance costs, and computer software expense. Generally, all other expenses declined consistent with the continued wind-down of non-strategic businesses and focus on cost reductions throughout FHN.
Return on average common equity and return on average assets for 2011 were positive 5.45 percent and .58 percent, respectively, compared to negative 2.61 percent and positive .24 percent in 2010. The tangible common equity to tangible assets ratio improved to 9.05 percent in 2011 from 8.93 percent in 2010. Total capital and Tier 1 ratios were 17.99 percent and 14.23 percent, respectively on December 31, 2011, compared to 18.65 percent and 13.99 percent in 2010. Total assets were $24.8 billion in 2011, up slightly from $24.7 billion in 2010. Total equity was 2.7 billion as of December 31, 2011 and 2010.
|
|
|
|
6 |
FIRST HORIZON NATIONAL CORPORATION |
pricing. Regional banking recognized a provision credit of $61.5 million in 2011 compared to provision expense of $92.3 million in 2010. The change in provision was primarily driven by improved performance of the loan portfolios which was largely driven by improved economic conditions in comparison to a year ago and commercial borrowers adapting to the operating environment.
Noninterest income declined 7 percent or $19.8 million to $266.2 million in 2011. Total service charges on deposits declined $8.9 million primarily driven by lower NSF fee income due to the full-year effect of changes to Regulation E, which became effective in third quarter 2010. Additionally, the Durbin amendment which became effective in fourth quarter 2011 also negatively affected fee income. Mortgage banking origination income declined $10.8 million to $6.0 million due to higher mortgage refinance volume in early 2010.
Noninterest expense decreased to $564.9 million in 2011 from $605.9 million in 2010. While personnel costs accounted for $17.1 million of the decline, nearly all other categories of expenses declined from 2010 because of FHN’s focus on cost reductions throughout the organization. Additionally, operational costs associated with FHN’s Tennessee mortgage origination business declined commensurate with lower production volumes from last year.
Noninterest income declined $14.9 million to $33.8 million in 2011. The decline was largely due to $17.1 million of gains recognized on the extinguishment of debt in 2010 compared to $5.8 million in 2011. Additionally, bank-owned life insurance (“BOLI”) income declined $6.3 million in 2011 as BOLI income varies with the timing of receipts of policy benefits. Deferred compensation income declined $4.1 million due to a decrease in market value of deferred compensation assets during 2011. The decline in noninterest income from 2010 was mitigated by the recognition of $7.4 million of interest associated with tax refunds in 2011.
Securities gains were $36.1 million in 2011 compared to $15.3 million in 2010. In 2011 and 2010, FHN recognized a gain of $35.1 million and $14.8 million, respectively, due to the sale of a portion of FHN’s Visa, Inc. Class B shares.
Noninterest expense increased to $105.2 million in 2011 from $70.7 million in 2010 and was affected by several items. Restructuring and repositioning activities contributed to a majority of the increase as FHN recognized $26.8 million in 2011 compared to $6.4 million in 2010. The increase in 2011 was primarily driven by severance-related costs associated with efficiency initiatives within corporate and bank services functions and a $9.0 million charge to cancel a technology services-related contract. Visa related matters contributed to a $19.1 million increase in other expenses. In 2010, FHN reversed $13.0 million of the contingent liability previously established for certain Visa legal matters and in 2011 FHN recorded net expense of $6.1 million due to a $3.3 million reversal of the contingent liability and a $9.4 million increase in the derivative liability associated with prior sales of Visa, Inc. shares related to an expected decline in the conversion ratio. Legal and professional fees increased $5.5 million to
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
7 |
$31.8 million in 2011 due to litigation matters and consulting projects throughout the organization in 2011. Expenses associated with investments in technology increased in 2011 including: computer software expense and equipment rentals, depreciation, and maintenance. A $5.5 million decline in deferred compensation expense is directionally consistent with the reduction in deferred compensation income described above.
Noninterest income (including securities gains/losses) decreased to $94.1 million in 2011 from $158.5 million in 2010 primarily because of a $65.9 million decline in mortgage banking income. Servicing income, which includes fees for servicing mortgage loans, change in the value of MSR, results from hedging MSR, and the negative impact of runoff (loan payments) on the value of MSR, is the primary driver of mortgage banking income. Gross servicing fees were $70.2 million, a $22.0 million decline from 2010. This decline in servicing fees is consistent with the continued reduction in the size of the servicing portfolio. While still positive, net hedging results declined $53.0 million to $40.8 million as wider spreads between mortgage and swap rates contributed to the larger positive net hedge results in 2010. In 2011, negative fair value adjustments to the mortgage warehouse were $6.3 million in 2011 compared to $2.5 million in 2010. These declines were somewhat mitigated as the value of MSR was more adversely affected by runoff in 2010 when compared to 2011.
Noninterest expense was $302.1 million in 2011 compared to $346.9 million in 2010, a decrease of 13 percent. Noninterest expense declined primarily due to a $30.2 million decrease in the repurchase and foreclosure provision reflecting aggregate improved trends in the active pipeline, new claims, and resolutions throughout 2011 compared to 2010. Contract employment and outsourcing costs increased $13.1 million to $30.6 million in 2011 as FHN recognized elevated subservicing fees and transaction costs in connection with the transfer to a new loan subservicer in third quarter 2011. Generally, most other expense categories continued to decline given the continued wind-down of the legacy businesses.
INCOME STATEMENT REVIEW – 2011 COMPARED TO 2010
Total consolidated revenue decreased 11 percent to $1.5 billion in 2011 from $1.7 billion in 2010 primarily due to a decline in mortgage banking, capital markets, and net interest income, partially offset by an increase in securities gains.
The activity levels and related funding for FHN’s capital markets activities affect the net interest margin. Capital markets’ activities tend to compress the margin, especially when there are elevated levels of trading inventory, because of the strategy to reduce market risk by economically hedging a portion of its inventory on the balance sheet. As a result, FHN’s consolidated margin cannot be readily compared to that of other bank holding companies. Table 1 details the computation of the net interest margin for FHN for the last three years.
|
|
|
|
8 |
FIRST HORIZON NATIONAL CORPORATION |
The consolidated net interest margin increased slightly to 3.22 percent in 2011 from 3.20 percent in 2010. The net interest spread increased 5 basis points to 3.03 percent in 2011 from 2.98 percent in 2010 and the impact of free funding decreased to 19 basis points from 22 basis points. The net interest margin was relatively flat as improved deposit pricing more than offset the negative impact on the margin from a decline in investment securities and the issuance of senior debt in fourth quarter 2010.
Table 1 – Net Interest Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
Consolidated yields and rates: |
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income |
|
|
4.11 |
% |
|
4.09 |
% |
|
3.93 |
% |
|
Loans held for sale |
|
|
4.23 |
|
|
4.06 |
|
|
4.72 |
|
|
Investment securities |
|
|
3.72 |
|
|
4.32 |
|
|
4.98 |
|
|
Capital markets securities inventory |
|
|
3.33 |
|
|
3.82 |
|
|
3.79 |
|
|
Mortgage banking trading securities |
|
|
9.97 |
|
|
9.75 |
|
|
12.47 |
|
|
Other earning assets |
|
|
0.07 |
|
|
0.18 |
|
|
0.18 |
|
|
Yields on earning assets |
|
|
3.82 |
|
|
3.85 |
|
|
3.92 |
|
|
Interest-bearing core deposits |
|
|
0.60 |
|
|
0.77 |
|
|
1.20 |
|
|
Certificates of deposit $100,000 and more |
|
|
1.82 |
|
|
2.25 |
|
|
2.02 |
|
|
Federal funds purchased and securities sold under
agreements to |
|
|
0.23 |
|
|
0.24 |
|
|
0.21 |
|
|
Capital markets trading liabilities |
|
|
2.45 |
|
|
3.30 |
|
|
3.89 |
|
|
Other short-term borrowings |
|
|
0.29 |
|
|
0.56 |
|
|
0.29 |
|
|
Term borrowings |
|
|
1.49 |
|
|
1.10 |
|
|
1.43 |
|
|
Rates paid on interest-bearing liabilities |
|
|
0.79 |
|
|
0.87 |
|
|
1.12 |
|
|
Net interest spread |
|
|
3.03 |
|
|
2.98 |
|
|
2.80 |
|
|
Effect of interest-free sources |
|
|
0.19 |
|
|
0.22 |
|
|
0.26 |
|
|
Net interest margin (a) |
|
|
3.22 |
% |
|
3.20 |
% |
|
3.06 |
% |
|
|
|
|
(a) |
Calculated using total net interest income adjusted for FTE. Refer to the Non-GAAP to GAAP reconciliation - Table 33. |
FHN’s net interest margin is expected to remain flat or decline slightly in 2012 as FHN expects interest rates to remain at historically low levels which will result in continued pressure on reinvestment yields in the securities portfolio.
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
9 |
Table 2 shows how the changes in yields or rates and average balances compared to the prior year affected net interest income.
Table 2 – Analysis of Changes in Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Fully taxable
equivalent (“FTE”)) |
|
2011 Compared to 2010 |
|
|
2010 Compared to 2009 |
|
||||||||||||||
|
|
|
|
||||||||||||||||||
|
|
Rate (b) |
|
Volume (b) |
|
Total |
|
|
Rate (b) |
|
Volume (b) |
|
Total |
|
|||||||
|
|
||||||||||||||||||||
|
Interest income – FTE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
4,604 |
|
$ |
(44,904 |
) |
$ |
(40,300 |
) |
|
$ |
29,101 |
|
$ |
(99,151 |
) |
$ |
(70,050 |
) |
|
Loans held for sale |
|
|
768 |
|
|
(3,626 |
) |
|
(2,858 |
) |
|
|
(3,348 |
) |
|
(3,696 |
) |
|
(7,044 |
) |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
(61 |
) |
|
(96 |
) |
|
(157 |
) |
|
|
(747 |
) |
|
314 |
|
|
(433 |
) |
|
U.S. Government agencies |
|
|
(20,346 |
) |
|
24,449 |
|
|
4,103 |
|
|
|
(18,079 |
) |
|
(8,439 |
) |
|
(26,518 |
) |
|
States and municipalities |
|
|
405 |
|
|
(366 |
) |
|
39 |
|
|
|
(319 |
) |
|
(192 |
) |
|
(511 |
) |
|
Other |
|
|
1,121 |
|
|
(1,296 |
) |
|
(175 |
) |
|
|
1,491 |
|
|
(1,649 |
) |
|
(158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total investment securities |
|
|
(17,281 |
) |
|
21,091 |
|
|
3,810 |
|
|
|
(18,055 |
) |
|
(9,565 |
) |
|
(27,620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Capital markets securities inventory |
|
|
(5,726 |
) |
|
3,910 |
|
|
(1,816 |
) |
|
|
255 |
|
|
5,067 |
|
|
5,322 |
|
|
Mortgage banking trading securities |
|
|
97 |
|
|
(1,421 |
) |
|
(1,324 |
) |
|
|
(2,996 |
) |
|
(9,036 |
) |
|
(12,032 |
) |
|
Other earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities purchased under agreements to resell |
|
|
(682 |
) |
|
36 |
|
|
(646 |
) |
|
|
(309 |
) |
|
(106 |
) |
|
(415 |
) |
|
Interest-bearing deposits with other financial institutions |
|
|
(377 |
) |
|
(1,053 |
) |
|
(1,430 |
) |
|
|
74 |
|
|
853 |
|
|
927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total other earning assets |
|
|
(1,390 |
) |
|
(686 |
) |
|
(2,076 |
) |
|
|
9 |
|
|
503 |
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total change in interest income – earning assets – FTE |
|
|
(6,300 |
) |
|
(38,264 |
) |
$ |
(44,564 |
) |
|
|
(17,800 |
) |
|
(93,112 |
) |
$ |
(110,912 |
) |
|
|
|
|||||||||||||||||||
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
(8,855 |
) |
$ |
4,510 |
|
$ |
(4,345 |
) |
|
$ |
(15,042 |
) |
$ |
7,464 |
|
$ |
(7,578 |
) |
|
Time deposits |
|
|
(1,965 |
) |
|
(7,362 |
) |
|
(9,327 |
) |
|
|
(7,720 |
) |
|
(14,535 |
) |
|
(22,255 |
) |
|
Other interest-bearing deposits |
|
|
(1,821 |
) |
|
(778 |
) |
|
(2,599 |
) |
|
|
877 |
|
|
2,956 |
|
|
3,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total interest-bearing core deposits |
|
|
(18,313 |
) |
|
2,042 |
|
|
(16,271 |
) |
|
|
(41,956 |
) |
|
15,956 |
|
$ |
(26,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Certificates of deposit $100,000 and more |
|
|
(2,363 |
) |
|
(826 |
) |
|
(3,189 |
) |
|
|
2,793 |
|
|
(17,495 |
) |
|
(14,702 |
) |
|
Federal funds purchased and securities sold under agreements to repurchase |
|
|
(110 |
) |
|
(1,055 |
) |
|
(1,165 |
) |
|
|
627 |
|
|
282 |
|
|
909 |
|
|
Capital markets trading liabilities |
|
|
(5,030 |
) |
|
1,899 |
|
|
(3,131 |
) |
|
|
(3,207 |
) |
|
429 |
|
|
(2,778 |
) |
|
Other short-term borrowings |
|
|
(723 |
) |
|
290 |
|
|
(433 |
) |
|
|
3,894 |
|
|
(10,324 |
) |
|
(6,430 |
) |
|
Term borrowings |
|
|
10,345 |
|
|
(3,999 |
) |
|
6,346 |
|
|
|
(10,374 |
) |
|
(7,646 |
) |
|
(18,020 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total change in interest expense – interest-bearing liabilities |
|
|
(14,142 |
) |
|
(3,701 |
) |
$ |
(17,843 |
) |
|
|
(44,388 |
) |
|
(22,633 |
) |
$ |
(67,021 |
) |
|
|
|
|||||||||||||||||||
|
Net interest income – FTE |
|
|
|
|
|
|
|
$ |
(26,721 |
) |
|
|
|
|
|
|
|
$ |
(43,891 |
) |
|
|
||||||||||||||||||||
|
|
|
|
(a) |
The changes in interest due to both rate and volume have been allocated to change due to rate and change due to volume in proportion to the absolute amounts of the changes in each. |
|
(b) |
Variances are computed on a line-by-line basis and are non-additive. |
|
|
|
|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
10 |
FIRST HORIZON NATIONAL CORPORATION |
Table 3 – Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
(Dollars in thousands) |
|
2011 |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
|
11/10 |
|
11/06 |
|
||||||||
|
|
||||||||||||||||||||||||||
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital markets |
|
$ |
355,291 |
|
$ |
424,034 |
|
$ |
632,093 |
|
$ |
483,526 |
|
$ |
284,236 |
|
$ |
320,004 |
|
|
|
(16.2 |
)% |
|
2.1 |
% |
|
Deposit transactions and cash management |
|
|
134,055 |
|
|
143,176 |
|
|
162,562 |
|
|
178,339 |
|
|
174,932 |
|
|
168,445 |
|
|
|
(6.4 |
)% |
|
(4.5 |
)% |
|
Mortgage banking |
|
|
90,586 |
|
|
167,364 |
|
|
235,450 |
|
|
518,034 |
|
|
69,454 |
|
|
370,613 |
|
|
|
(45.9 |
)% |
|
(24.6 |
)% |
|
Trust services and investment management |
|
|
24,952 |
|
|
25,674 |
|
|
26,171 |
|
|
29,371 |
|
|
34,716 |
|
|
34,018 |
|
|
|
(2.8 |
)% |
|
(6.0 |
)% |
|
Brokerage management fees and commissions |
|
|
23,534 |
|
|
24,536 |
|
|
26,862 |
|
|
32,122 |
|
|
37,696 |
|
|
37,036 |
|
|
|
(4.1 |
)% |
|
(8.7 |
)% |
|
Insurance commissions |
|
|
3,591 |
|
|
3,640 |
|
|
4,879 |
|
|
6,714 |
|
|
8,651 |
|
|
11,468 |
|
|
|
(1.3 |
)% |
|
(20.7 |
)% |
|
Debt securities gains/(losses), net |
|
|
773 |
|
|
374 |
|
|
- |
|
|
761 |
|
|
6,292 |
|
|
(75,900 |
) |
|
|
NM |
|
|
NM |
|
|
Equity securities gains/(losses), net |
|
|
35,391 |
|
|
10,548 |
|
|
(1,178 |
) |
|
65,349 |
|
|
(7,475 |
) |
|
10,271 |
|
|
|
NM |
|
|
28.1 |
% |
|
Gains/(losses) on divestitures |
|
|
- |
|
|
- |
|
|
(1,704 |
) |
|
(19,019 |
) |
|
15,695 |
|
|
- |
|
|
|
NM |
|
|
NM |
|
|
All other income and commissions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankcard income (credit card) |
|
|
22,388 |
|
|
19,761 |
|
|
20,161 |
|
|
22,081 |
|
|
24,874 |
|
|
26,105 |
|
|
|
13.3 |
% |
|
(3.0 |
)% |
|
Bank-owned life insurance |
|
|
19,615 |
|
|
25,898 |
|
|
19,744 |
|
|
25,143 |
|
|
25,172 |
|
|
19,064 |
|
|
|
(24.3 |
)% |
|
0.6 |
% |
|
ATM interchange fees |
|
|
13,690 |
|
|
14,169 |
|
|
11,335 |
|
|
9,224 |
|
|
8,472 |
|
|
7,091 |
|
|
|
(3.4 |
)% |
|
14.1 |
% |
|
Other service charges |
|
|
12,182 |
|
|
10,368 |
|
|
11,619 |
|
|
12,555 |
|
|
14,292 |
|
|
14,558 |
|
|
|
17.5 |
% |
|
(3.5 |
)% |
|
Letter of credit fees |
|
|
6,282 |
|
|
6,493 |
|
|
5,989 |
|
|
5,657 |
|
|
6,738 |
|
|
7,271 |
|
|
|
(3.2 |
)% |
|
(2.9 |
)% |
|
Electronic banking fees |
|
|
6,225 |
|
|
7,111 |
|
|
6,020 |
|
|
6,217 |
|
|
6,561 |
|
|
5,975 |
|
|
|
(12.5 |
)% |
|
0.8 |
% |
|
Gains on extinguishment of debt |
|
|
5,761 |
|
|
17,060 |
|
|
16,412 |
|
|
33,845 |
|
|
- |
|
|
- |
|
|
|
(66.2 |
)% |
|
NM |
|
|
Gains/(losses) from loans sales and securitizations |
|
|
1,813 |
|
|
2,883 |
|
|
2,545 |
|
|
(8,625 |
) |
|
23,881 |
|
|
51,675 |
|
|
|
(37.1 |
)% |
|
(48.8 |
)% |
|
Remittance processing |
|
|
931 |
|
|
2,008 |
|
|
11,765 |
|
|
12,953 |
|
|
13,451 |
|
|
14,737 |
|
|
|
(53.6 |
)% |
|
(42.4 |
)% |
|
Reinsurance fees |
|
|
178 |
|
|
2,310 |
|
|
9,130 |
|
|
11,919 |
|
|
9,052 |
|
|
6,792 |
|
|
|
(92.3 |
)% |
|
(51.7 |
)% |
|
Deferred compensation (a) |
|
|
(517 |
) |
|
3,621 |
|
|
7,497 |
|
|
(22,815 |
) |
|
7,727 |
|
|
14,647 |
|
|
|
NM |
|
|
NM |
|
|
Federal flood certifications |
|
|
- |
|
|
- |
|
|
- |
|
|
3,869 |
|
|
5,212 |
|
|
5,454 |
|
|
|
NM |
|
|
NM |
|
|
Other |
|
|
29,290 |
|
|
21,697 |
|
|
27,045 |
|
|
31,064 |
|
|
14,239 |
|
|
6,987 |
|
|
|
35.0 |
% |
|
33.2 |
% |
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Total all other income and commissions |
|
|
117,838 |
|
|
133,379 |
|
|
149,262 |
|
|
143,087 |
|
|
159,671 |
|
|
180,356 |
|
|
|
(11.7 |
)% |
|
(8.2 |
)% |
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Total noninterest income |
|
$ |
786,011 |
|
$ |
932,725 |
|
$ |
1,234,397 |
|
$ |
1,438,284 |
|
$ |
783,868 |
|
$ |
1,056,311 |
|
|
|
(15.7 |
)% |
|
(5.7 |
)% |
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
|
NM – not meaningful |
|
Certain previously reported amounts have been reclassified to agree with current presentation. |
|
(a) Deferred compensation market value adjustments are mirrored by changes in personnel expense. |
Capital Markets Noninterest Income
The
major component of capital markets income is generated from the purchase and
sale of fixed income securities as both principal and agent. Other revenues
consist of fees from loan sales, portfolio advisory, and derivative sales.
Securities inventory positions are generally procured for distribution to
customers by the sales staff. Capital markets noninterest income decreased to
$355.3 million in 2011 from $424.0 million in 2010. Revenue from fixed income
sales decreased from $390.1 million in 2010 to $327.7 million in 2011 as fixed
income production levels reflected normalized market conditions in 2011.
Revenue from other products declined to $27.6 million in 2011 from $33.9
million in 2010 and continued to be a smaller component of capital markets
income.
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
11 |
Table 4 – Capital Markets Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound |
|
|||||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
(Dollars in thousands) |
|
2011 |
|
2010 |
|
2009 |
|
11/10 |
|
11/09 |
|
|||||
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
327,723 |
|
$ |
390,133 |
|
$ |
598,604 |
|
|
(16.0 |
)% |
|
(26.0 |
)% |
|
Other product revenue |
|
|
27,568 |
|
|
33,901 |
|
|
33,489 |
|
|
(18.7 |
)% |
|
(9.3 |
)% |
|
|
|
|
|
|
|
|
||||||||||
|
Total capital markets noninterest income |
|
$ |
355,291 |
|
$ |
424,034 |
|
$ |
632,093 |
|
|
(25.0 |
)% |
|
(25.0 |
)% |
|
|
|
|
|
|
|
|
||||||||||
Mortgage Banking Noninterest Income
Mortgage
banking income decreased to $90.6 million in 2011 from $167.4 million in 2010.
Mortgage banking income is comprised of servicing income related to legacy
mortgage banking operations, fees from mortgage origination activity in the
regional banking footprint, and fair value adjustments to the mortgage
warehouse.
Servicing income, which includes fees for servicing mortgage loans, changes due to the value of servicing assets, results of hedging servicing assets, and the negative impact of runoff on the value of MSR, is the largest component of mortgage banking income. Servicing fees were $70.2 million in 2011, a $22.0 million decline from 2010. The decline in servicing fees is consistent with the continued reduction in the size of the mortgage servicing portfolio as the average unpaid principal balance (“UPB”) declined approximately 18 percent from 2010. Positive net hedging results decreased to $40.8 million in 2011 from $93.9 million in 2010 reflecting more narrow spreads between mortgage and swap rates in 2011 and continued runoff of the underlying servicing portfolio. The negative impact attributable to runoff was $21.5 million in 2011 compared to $35.0 million in 2010, which was primarily the result of a smaller servicing portfolio in 2011 driven by natural runoff and lower volumes of refinance activity.
Origination income from origination activities in and around Tennessee was $6.9 million in 2011 compared to $17.3 million in 2010. The decline is primarily attributable to lower production volumes in 2011 compared to a year ago. The mortgage warehouse valuation included $6.3 million of net negative fair value adjustments in 2011 compared to $2.5 million in 2010.
Table 5 – Mortgage Banking Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound |
|
|||||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
2011 |
|
2010 |
|
2009 |
|
11/10 |
|
11/09 |
|
|||||
|
|
||||||||||||||||
|
Noninterest income (thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination income |
|
$ |
6,908 |
|
$ |
17,270 |
|
$ |
30,733 |
|
|
(60.0 |
)% |
|
(52.6 |
)% |
|
Mortgage warehouse valuation |
|
|
(6,315 |
) |
|
(2,477 |
) |
|
(6,399 |
) |
|
NM |
|
|
(0.7 |
)% |
|
Servicing income/(expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Fees |
|
|
70,174 |
|
|
92,124 |
|
|
120,314 |
|
|
(23.8 |
)% |
|
(23.6 |
)% |
|
Change in MSR value – runoff |
|
|
(21,542 |
) |
|
(34,966 |
) |
|
(59,246 |
) |
|
(38.4 |
)% |
|
(39.7 |
)% |
|
Net hedging results |
|
|
40,807 |
|
|
93,855 |
|
|
145,815 |
|
|
(56.5 |
)% |
|
(47.1 |
)% |
|
|
|
|
|
|
|
|
||||||||||
|
Total Servicing income |
|
|
89,439 |
|
|
151,013 |
|
|
206,883 |
|
|
(40.8 |
)% |
|
(34.2 |
)% |
|
Other |
|
|
554 |
|
|
1,558 |
|
|
4,233 |
|
|
(64.4 |
)% |
|
(63.8 |
)% |
|
|
|
|
|
|
|
|
||||||||||
|
Total mortgage banking noninterest income |
|
$ |
90,586 |
|
$ |
167,364 |
|
$ |
235,450 |
|
|
(45.9 |
)% |
|
(38.0 |
)% |
|
|
|
|
|
|
|
|
||||||||||
|
Mortgage banking statistics (millions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinance originations |
|
$ |
234.4 |
|
$ |
668.7 |
|
$ |
1,086.6 |
|
|
(64.9 |
)% |
|
(53.6 |
)% |
|
Home-purchase originations |
|
|
50.1 |
|
|
180.6 |
|
|
192.3 |
|
|
(72.3 |
)% |
|
(49.0 |
)% |
|
|
|
|
|
|
|
|
||||||||||
|
Mortgage loan originations |
|
$ |
284.5 |
|
$ |
849.3 |
|
$ |
1,278.9 |
|
|
(66.5 |
)% |
|
(52.8 |
)% |
|
|
|
|
|
|
|
|
||||||||||
|
Servicing portfolio – owned (first lien mortgage loans) (a) |
|
$ |
21,076.8 |
|
$ |
25,809.0 |
|
$ |
38,215.6 |
|
|
(18.3 |
)% |
|
(25.7 |
)% |
|
|
|
|
|
|
|
|
||||||||||
|
|
|
NM – not meaningful |
|
(a) Excludes foreclosed assets |
|
|
|
|
12 |
FIRST HORIZON NATIONAL CORPORATION |
|
|
|
Deposit Transactions and Cash Management |
|
Deposit transactions include services related to retail and commercial deposit products (such as service charges on checking accounts), cash management products and services such as electronic transaction processing (Automated Clearing House and Electronic Data Interchange), account reconciliation services, cash vault services, lockbox processing, and information reporting to large corporate clients. Deposit transactions and cash management income declined $9.1 million to $134.1 million in 2011 primarily due to the negative impact on NSF fee income and interchange income from the overdraft provisions of Reg E and the Durbin Amendment, respectively, as well as a reduction in cash management fees as participation in the FDIC’s Transaction Account Guarantee (“TAG”) program ended in fourth quarter 2010. |
|
|
|
Trust Services and Investment Management |
|
Trust services and investment management fees include investment management, personal trust, employee benefits, and custodial trust services and are primarily influenced by equity and fixed income market activity. Noninterest income from trust services and investment management decreased slightly from $25.7 million in 2010 to $25.0 million in 2011, as all categories within trust services and investment management saw small declines from 2010. |
|
|
|
Brokerage Management Fees and Commissions |
|
Brokerage management fees and commissions include fees for portfolio management, trade commissions, and annuity and mutual fund sales. In 2011, brokerage and management fees declined slightly to $23.5 million compared to $24.5 million in 2010. |
|
|
|
Insurance Commissions |
|
Insurance commissions are derived from the sale of insurance products, including acting as an independent agent to provide life, long-term care, and disability insurance. Noninterest income from insurance commissions was flat at $3.6 million in 2011 and 2010. |
|
|
|
Gains/(Losses) on Divestitures |
|
There were no divestiture-related gains or losses in income from continuing operations during 2011 or 2010. See the discussion of Restructuring, Repositioning, and Efficiency Initiatives in MD&A and Note 2 – Acquisitions and Divestitures for further details. |
|
|
|
Securities Gains/(Losses) |
|
Net securities gains in 2011 were $36.2 million compared with $10.9 million in 2010. FHN sold portions of its Visa, Inc. Class B shares which resulted in gains of $35.1 million and $14.8 million during 2011 and 2010, respectively. FHN incurred securities losses of $4.6 million in 2010 related to fair value adjustments of venture capital investments. In 2011, FHN did not incur securities gains or losses associated with fair value adjustments of venture capital investments. |
|
|
|
All Other Noninterest Income and Commissions |
|
All other income includes bankcard fees, revenue from BOLI, remittance processing income, revenue related to deferred compensation plans (which are principally offset by a related item in noninterest expense), other service charges, gains from the repurchase of bank debt, and various other fees. |
|
|
|
All other income and commissions decreased to $117.8 million in 2011 from $133.4 million in 2010. FHN recognized $5.8 million of gains in 2011 on the repurchase of bank debt compared with $17.1 million in 2010. BOLI income decreased $6.3 million as a result of lower policy benefits received during 2011. Deferred compensation income, which is primarily driven by changes in the market value of underlying investments, declined $4.1 million. Reinsurance fee income declined $2.1 million as revenues associated with reinsurance contracts that have been settled by FHN during 2011 and 2010 are now assigned to the primary insurers. Other income was positively affected by a $2.6 million increase in bankcard income, as 2011 included $2.0 million in Visa volume incentives. All other income increased $7.6 million to $29.3 million from 2010 due in large part to the recognition of $7.4 million in interest related to tax refunds in 2011. |
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
13 |
|
|
|
NONINTEREST EXPENSE |
|
Total noninterest expense for 2011 decreased 4 percent or $48.8 million to $1.3 billion in 2011. Table 6 provides noninterest expense detail by category for the past six years with growth rates. Costs from restructuring, repositioning, and efficiency initiatives reflected in various categories of noninterest expense increased $21.2 million to $26.9 million in 2011. |
|
|
|
Employee compensation, incentives, and benefits (personnel expense), the largest component of noninterest expense, decreased $61.8 million to $610.2 million in 2011. The decline in personnel expense is primarily the result of a decline in variable compensation expense associated with lower fixed income sales revenue, headcount reductions, and lower deferred compensation expenses. The decline in personnel expense was partially offset by a $12.6 million increase in severance-related costs associated with restructuring, repositioning, and efficiency initiatives and an $8.6 million increase in net periodic benefit cost for FHN’s pension plan. |
|
|
|
The repurchase and foreclosure provision declined to $159.6 million from $189.8 million in 2011 reflecting positive trends in claims inflows, resolutions, and loss severities from a year ago. See the discussion of FHN’s repurchase obligations within the Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations section of MD&A and Note 18 – Contingencies and Other Disclosures for additional details. |
|
|
|
FDIC insurance was $28.3 million, down $8.8 million from 2010 primarily due to the FDIC’s change in premium expense calculation methodology in second quarter 2011. Expenses related to operations services, miscellaneous loan costs, occupancy, and communications and courier declined in 2011 as a result of cost reductions throughout the organization and wind-down of non-strategic businesses. Foreclosed properties expense declined $2.9 million to $22.1 million as the rate of decline in property values stabilized or improved in certain markets which resulted in lower negative fair value adjustments in 2011. The impact of expense reductions described above was diminished by increases in other areas. Contract employment and outsourcing costs increased $13.4 million in 2011 due to elevated subservicing and transition costs related to the transfer of servicing to a new mortgage servicer during 2011. Legal and professional fees increased to $69.6 million in 2011 compared to $61.9 million in 2010 primarily driven by costs related to litigation matters and cost associated with consulting projects in 2011. Additionally, expenses associated with investments in technology increased in 2011 resulting in an increase in computer software expense and equipment rentals, depreciation, and maintenance. |
|
|
|
All other expenses increased to $162.0 million in 2011 from $113.3 million in 2010. The increase was primarily due to a $36.7 million litigation settlement in second quarter 2011. Additionally, a component of this increase in all other expenses included a $9.4 million increase in derivative liabilities in 2011 associated with prior sales of Visa, Inc. Class B shares due to an expected decline in the conversion ratio. Charges associated with restructuring, repositioning, and efficiency initiatives increased $7.7 million, primarily due to a $9.0 million charge associated with the termination of a technology related services contract in 2011. Loan insurance expense increased $3.6 million in 2011 primarily due to the cancellation of a high loan-to-value (HLTV) insurance contract in early 2010 and return of $3.8 million of premium expense. In 2011, FHN reversed $3.3 million of its contingent liability for certain Visa legal matters compared with a $13.0 million reversal in 2010. These increases were partially offset by a $5.9 million reduction in operational costs associated with lower loan mortgage origination volume, a decline in provision associated with unfunded commitments, as well as a decrease in substantially all other categories due to FHN’s continued focus on cost reductions throughout the organization. |
|
|
|
|
14 |
FIRST HORIZON NATIONAL CORPORATION |
Table 6 – Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compound |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
(Dollars in thousands) |
|
2011 |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
11/10 |
|
11/06 |
|
||||||||
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation, incentives, and benefits |
|
$ |
610,225 |
|
$ |
672,007 |
|
$ |
755,167 |
|
$ |
905,823 |
|
$ |
908,123 |
|
$ |
954,560 |
|
|
(9.2 |
)% |
|
(8.6 |
)% |
|
Repurchase and foreclosure provision |
|
|
159,590 |
|
|
189,830 |
|
|
147,772 |
|
|
29,503 |
|
|
17,181 |
|
|
3,311 |
|
|
(15.9 |
)% |
|
NM |
|
|
Legal and professional fees |
|
|
69,643 |
|
|
61,856 |
|
|
65,616 |
|
|
61,935 |
|
|
52,456 |
|
|
40,581 |
|
|
12.6 |
% |
|
11.4 |
% |
|
Occupancy |
|
|
53,613 |
|
|
57,725 |
|
|
62,189 |
|
|
101,721 |
|
|
127,170 |
|
|
112,912 |
|
|
(7.1 |
)% |
|
(13.8 |
)% |
|
Operations services |
|
|
50,347 |
|
|
59,148 |
|
|
61,964 |
|
|
72,204 |
|
|
69,011 |
|
|
64,917 |
|
|
(14.9 |
)% |
|
(5.0 |
)% |
|
Contract employment and outsourcing (a) |
|
|
41,896 |
|
|
28,480 |
|
|
36,024 |
|
|
33,295 |
|
|
21,303 |
|
|
27,165 |
|
|
47.1 |
% |
|
9.1 |
% |
|
Computer software |
|
|
34,656 |
|
|
30,356 |
|
|
26,689 |
|
|
30,033 |
|
|
53,678 |
|
|
34,040 |
|
|
14.2 |
% |
|
0.4 |
% |
|
Equipment rentals, depreciation, and maintenance |
|
|
32,914 |
|
|
28,387 |
|
|
33,798 |
|
|
55,930 |
|
|
71,337 |
|
|
71,928 |
|
|
15.9 |
% |
|
(14.5 |
)% |
|
FDIC premium expense |
|
|
28,302 |
|
|
37,138 |
|
|
46,272 |
|
|
14,664 |
|
|
3,327 |
|
|
3,198 |
|
|
(23.8 |
)% |
|
54.7 |
% |
|
Foreclosed real estate |
|
|
22,076 |
|
|
24,944 |
|
|
66,197 |
|
|
21,471 |
|
|
7,581 |
|
|
2,743 |
|
|
(11.5 |
)% |
|
51.8 |
% |
|
Communications and courier |
|
|
19,100 |
|
|
22,132 |
|
|
26,496 |
|
|
37,640 |
|
|
41,604 |
|
|
46,671 |
|
|
(13.7 |
)% |
|
(16.4 |
)% |
|
Miscellaneous loan costs |
|
|
4,664 |
|
|
12,363 |
|
|
23,046 |
|
|
38,213 |
|
|
12,775 |
|
|
12,065 |
|
|
(62.3 |
)% |
|
(17.3 |
)% |
|
Amortization of intangible assets |
|
|
4,016 |
|
|
4,149 |
|
|
4,352 |
|
|
6,221 |
|
|
8,358 |
|
|
8,010 |
|
|
(3.2 |
)% |
|
(12.9 |
)% |
|
Goodwill impairment |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
84,084 |
|
|
- |
|
|
NM |
|
|
NM |
|
|
All other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses from litigation and regulatory matters (b) |
|
|
41,279 |
|
|
2,398 |
|
|
3,466 |
|
|
6,777 |
|
|
13,838 |
|
|
33,190 |
|
|
NM |
|
|
4.5 |
% |
|
Low income housing expense |
|
|
20,356 |
|
|
22,229 |
|
|
22,000 |
|
|
18,734 |
|
|
20,922 |
|
|
17,027 |
|
|
(8.4 |
)% |
|
3.6 |
% |
|
Advertising and public relations |
|
|
16,884 |
|
|
22,840 |
|
|
21,857 |
|
|
32,347 |
|
|
41,344 |
|
|
46,520 |
|
|
(26.1 |
)% |
|
(18.3 |
)% |
|
Other insurance and taxes |
|
|
13,721 |
|
|
11,523 |
|
|
11,872 |
|
|
8,445 |
|
|
9,542 |
|
|
9,213 |
|
|
19.1 |
% |
|
8.3 |
% |
|
Travel and entertainment |
|
|
8,324 |
|
|
9,800 |
|
|
8,992 |
|
|
14,226 |
|
|
22,499 |
|
|
27,819 |
|
|
(15.1 |
)% |
|
(21.4 |
)% |
|
Customer relations |
|
|
4,908 |
|
|
6,994 |
|
|
7,777 |
|
|
8,849 |
|
|
9,753 |
|
|
8,514 |
|
|
(29.8 |
)% |
|
(10.4 |
)% |
|
Employee training and dues |
|
|
4,770 |
|
|
4,634 |
|
|
5,048 |
|
|
5,898 |
|
|
6,299 |
|
|
6,548 |
|
|
2.9 |
% |
|
(6.1 |
)% |
|
Bank examinations costs |
|
|
4,500 |
|
|
4,578 |
|
|
4,884 |
|
|
4,144 |
|
|
4,504 |
|
|
4,367 |
|
|
(1.7 |
)% |
|
0.6 |
% |
|
Supplies |
|
|
3,800 |
|
|
4,519 |
|
|
4,483 |
|
|
10,311 |
|
|
13,311 |
|
|
14,123 |
|
|
(15.9 |
)% |
|
(23.1 |
)% |
|
Loan insurance expense (c) |
|
|
2,907 |
|
|
(686 |
) |
|
7,811 |
|
|
5,270 |
|
|
4,610 |
|
|
6,577 |
|
|
NM |
|
|
(15.1 |
)% |
|
Complimentary check expense |
|
|
1,992 |
|
|
2,387 |
|
|
3,506 |
|
|
4,586 |
|
|
4,958 |
|
|
5,250 |
|
|
(16.5 |
)% |
|
(17.6 |
)% |
|
Fed service fees |
|
|
1,435 |
|
|
2,610 |
|
|
5,078 |
|
|
7,053 |
|
|
6,047 |
|
|
6,543 |
|
|
(45.0 |
)% |
|
(26.2 |
)% |
|
Other |
|
|
37,077 |
|
|
19,469 |
|
|
74,457 |
|
|
44,160 |
|
|
105,704 |
|
|
52,383 |
|
|
90.4 |
% |
|
(6.7 |
)% |
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Total all other expense |
|
|
161,953 |
|
|
113,295 |
|
|
181,231 |
|
|
170,800 |
|
|
263,331 |
|
|
238,074 |
|
|
42.9 |
% |
|
(7.4 |
)% |
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Total noninterest expense |
|
$ |
1,292,995 |
|
$ |
1,341,810 |
|
$ |
1,536,813 |
|
$ |
1,579,453 |
|
$ |
1,741,319 |
|
$ |
1,620,175 |
|
|
(3.6 |
)% |
|
(4.4 |
)% |
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
|
|
|
NM – not meaningful |
|
|
Certain previously reported amounts have been reclassified to agree with current presentation. |
|
|
(a) |
2011 includes transaction costs and elevated subservicing costs in connection with the transfer of servicing to a new mortgage servicer. |
|
(b) |
2011 includes a $36.7 million litigation settlement. See note 18 – Contingencies and Other Disclosure. |
|
(c) |
2010 includes the cancellation of an HLTV insurance contract and return of $3.8 million of premiums. |
PROVISION FOR LOAN LOSSES
The provision for loan losses is the charge to earnings that management
determines to be necessary to maintain the allowance for loan losses (“ALLL”)
at a sufficient level reflecting management’s estimate of probable incurred
losses in the loan portfolio. Analytical models based on loss experience
subject to adjustment to reflect current events, trends, and conditions
(including economic considerations and trends) are used by management to
determine the amount of provision to be recognized and to assess the adequacy
of the ALLL. The provision for loan losses decreased 84 percent to $44.0
million in 2011 from $270.0 million in 2010. The provision expense decreased in
2011 due to overall improved asset quality because of proactive management of
the portfolio, moderately improved economic conditions, and an overall decline
in loan balances primarily within the non-strategic segment which resulted in a
lower required allowance for loan losses. The provision expense in 2011
included approximately $36 million of losses associated with dispositions of
nonperforming loans. See the Asset Quality section for more information.
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
15 |
INCOME TAXES
The
effective tax rate for 2011 was 10.57 percent compared to negative 40.93
percent in 2010. Since pre-tax income is the most important component in
determining the effective tax rate, the comparison of the tax rate from period
to period, by itself, will not provide meaningful information unless the level
and components of pre-tax income are fairly consistent. Tax credits reduced tax
expense by $23.5 million and $23.8 million and non-taxable gains resulting from
the increase in the cash surrender value of life insurance reduced tax expense
by $6.8 million and $9.7 million in 2011 and 2010, respectively. Although the
amounts of tax credits and non-taxable income from life insurance are
consistent from 2010 to 2011, their relationship to the low levels of pre-tax
income resulted in a significant change in the effective tax rate.
A deferred tax asset (“DTA”) or deferred tax liability (“DTL”) is recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax consequence is calculated by applying enacted statutory tax rates, applicable to future years, to these temporary differences. As of December 31, 2011, FHN’s net DTA was $165.8 million compared with $200.6 million at the end of 2010.
In order to support the recognition of the DTA, FHN’s management must conclude that the realization of the DTA is more likely than not. FHN evaluates the likelihood of realization of the remaining net DTA based on both positive and negative evidence available at the time. FHN’s three-year cumulative loss position at December 31, 2011 is significant negative evidence in determining whether the realizability of the DTA is more likely than not. However, other than the portion of a net DTA for state NOL carryforwards, FHN believes that the negative evidence of the three-year cumulative loss is overcome by sufficient positive evidence that the DTA will ultimately be realized. The positive evidence includes several different factors. First, a significant amount of the cumulative losses occurred in businesses that FHN has exited or is in the process of exiting. Secondly, earnings from FHN’s core segments (regional banking, capital markets, and corporate) have been positive in the aggregate from 2009 through 2011 and FHN forecasts substantially more taxable income in the carryforward period than needed to support the losses and credits included in the net deferred tax asset. Based on current analysis, FHN believes that its ability to realize the $165.8 million net DTA is more likely than not.
The total balance of unrecognized tax benefits on December 31, 2011, was $33.0 million compared with $38.4 million as of the end of 2010. On December 31, 2011 there were no tax positions included in the balance of unrecognized tax benefits for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. To the extent such unrecognized tax benefits on December 31, 2011, are subsequently recognized, approximately $21.4 million would impact the effective tax rate.
FHN’s ASC 740 policy is to recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. Interest accrued as of December 31, 2011 was approximately $6.6 million. The total amount of interest and penalties recognized in the Consolidated Statements of Income during 2011 was a benefit of $.5 million. See also Note 16 – Income Taxes for additional information.
FHN and its eligible subsidiaries are included in a consolidated federal income tax return. FHN files separate returns for subsidiaries that are not eligible to be included in a consolidated federal income tax return. Based on the laws of the applicable states where it conducts business operations, FHN either files consolidated, combined, or separate returns. With few exceptions, FHN is no longer subject to U.S. federal or state and local tax examinations by tax authorities for years before 2006. The Internal Revenue Service (“IRS”) is currently examining tax years 2006 through 2009. All proposed adjustments with respect to examinations of federal returns filed for 2005 and prior years have been settled. FHN is also currently under audit in several states.
DISCONTINUED OPERATIONS
The
results of operations, net of tax, for Msaver, FHI, and Highland are classified
as discontinued operations on the Consolidated Statements of Income for all
periods presented. In 2011, Income from discontinued operations was $8.6
million, which includes a $9.9 million after-tax gain on the divestitures of
Msaver, FHI, and Highland. In 2010, FHN recognized an $11.3 million loss from
discontinued operations. This loss includes the impact of exiting the
institutional equity research business after it was determined the contracted
sale would not close, as well as the operating results for Msaver, FHI, and
Highland.
|
|
|
|
16 |
FIRST HORIZON NATIONAL CORPORATION |
RESTRUCTURING, REPOSITIONING, AND EFFICIENCY
INITIATIVES
FHN
continues to refine its business mix in order to focus on higher-return core
businesses and explore opportunities to reduce operating costs. In 2011, the
sales of Msaver, FHI and Highland, along with market realignment in the
regional bank in order to flatten management structure and gain efficiencies,
were the result of these ongoing reviews.
Generally, restructuring, repositioning, and efficiency charges related to exited businesses are included in the non-strategic segment while charges related to corporate-driven actions are included in the corporate segment. The net charge from restructuring, repositioning, and efficiency activities was $26.9 million in 2011 compared to $17.2 million in 2010. Significant amounts recognized during 2011 were primarily associated with the sale of Msaver which resulted in a $9.4 million pre-tax gain in third quarter and the sale of FHI which resulted in a $.8 million pre-tax gain on sale in second quarter 2011 and $10.1 million goodwill impairment in first quarter 2011. Severance-related and other employee costs were $16.6 million during 2011 and primarily relate to efficiency initiatives within corporate and bank services functions. Additionally, FHN recognized a $9.0 million charge related to the termination of a technology services contract during 2011.
A majority of the restructuring charges recognized in 2010 are reflected in discontinued operations, net of tax and relate to the exit of the institutional equity research business. Including items presented in discontinued operations, significant expenses recognized in 2010 were $5.6 million of severance and employee costs related to the institutional equity research business and the 2009 sale of Louisville remittance processing operations, $4.1 million related to asset impairments, $3.3 million of goodwill impairment, and $2.3 million of lease abandonment expense related to the closure of the institutional equity research business.
Including items presented in discontinued operations, significant expenses recognized in 2009 were a goodwill impairment of $14.3 million and $2.3 million, respectively, related to an agreement to sell FTN ECM and the closure of the remaining Atlanta insurance business; a $13.4 million charge related to the cancellation of an external services contract; a $9.2 million loss on the divestitures of FERP and Atlanta insurance business, and $5.6 million of severance and employee costs related to the discontinuation of national lending operations and the sales and closures of FERP and the Atlanta insurance business.
Charges related to restructuring, repositioning, and efficiency initiatives for the years ended December 31, 2011, 2010, and 2009 are presented in the following table based on the income statement line item affected. See Note 26 – Restructuring, Repositioning, and Efficiency and Note 2 – Acquisitions and Divestitures for additional information.
Table 7 – Restructuring, Repositioning, and Efficiency Initiatives
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2011 |
|
2010 |
|
2009 |
|
|||
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking |
|
$ |
- |
|
$ |
(1,532 |
) |
$ |
(548 |
) |
|
Loss on divestitures |
|
|
- |
|
|
- |
|
|
(1,704 |
) |
|
All other income and commissions |
|
|
1,200 |
|
|
(19 |
) |
|
- |
|
|
Total noninterest income/(loss) |
|
|
1,200 |
|
|
(1,551 |
) |
|
(2,252 |
) |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
Employee compensation, incentives, and benefits |
|
|
15,652 |
|
|
3,023 |
|
|
4,771 |
|
|
Occupancy |
|
|
1,924 |
|
|
943 |
|
|
513 |
|
|
Legal and professional fees |
|
|
(27 |
) |
|
120 |
|
|
701 |
|
|
All other expense |
|
|
9,333 |
|
|
1,634 |
|
|
16,980 |
|
|
Total noninterest expense |
|
|
26,882 |
|
|
5,720 |
|
|
22,965 |
|
|
Loss before income taxes |
|
|
(25,682 |
) |
|
(7,271 |
) |
|
(25,217 |
) |
|
Loss from discontinued operations |
|
|
(1,206 |
) |
|
(9,950 |
) |
|
(26,709 |
) |
|
Net impact from restructuring, repositioning, and efficiency initiatives |
|
$ |
(26,888 |
) |
$ |
(17,221 |
) |
$ |
(51,926 |
) |
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
17 |
STATEMENT OF CONDITION REVIEW – 2011 COMPARED TO 2010
Total period-end assets were $24.8 billion at December 31, 2011, compared to $24.7 billion at December 31, 2010. Average assets decreased to $24.7 billion in 2011 from $25.7 billion in 2010. These changes in average balances reflect the reduction in size of the loan portfolio and other earning assets, partially offset by an increase in investment securities.
EARNING ASSETS
Earning
assets consist of loans, loans HFS, investment securities, and other earning
assets. Earning assets averaged $22.0 billion and $23.0 billion in 2011 and
2010, respectively. A more detailed discussion of the major line items follows.
Loans
Average
loans declined 6 percent in 2011 from 2010 primarily as a result of the
continued run-off of the non-strategic portfolios combined with weak loan
demand from strong relationship-oriented borrowers. The decline in loans within
the non-strategic segment accounted for nearly all of the decline in average
loans from last year. These declines were somewhat mitigated by a $.2 billion
increase in average C&I loans.
Table 8 – Average Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
2011 |
|
Percent |
|
2011 |
|
2010 |
|
Percent |
|
2010 |
|
2009 |
|
Percent |
|
2009 |
|
|||||||||
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and industrial |
|
$ |
7,162.7 |
|
45 |
% |
|
|
3.1 |
% |
$ |
6,945.6 |
|
41 |
% |
|
|
(4.9 |
)% |
$ |
7,302.0 |
|
37 |
% |
|
|
(1.0 |
)% |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income CRE |
|
|
1,344.9 |
|
8 |
|
|
|
(15.2 |
) |
|
1,586.1 |
|
9 |
|
|
|
(17.4 |
) |
|
1,920.0 |
|
10 |
|
|
|
(4.5 |
) |
|
Residential CRE |
|
|
183.3 |
|
1 |
|
|
|
(57.2 |
) |
|
427.8 |
|
2 |
|
|
|
(57.1 |
) |
|
998.1 |
|
5 |
|
|
|
(41.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total commercial |
|
|
8,690.9 |
|
54 |
|
|
|
(3.0 |
) |
|
8,959.5 |
|
52 |
|
|
|
(12.3 |
) |
|
10,220.1 |
|
52 |
|
|
|
(7.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate |
|
|
5,406.3 |
|
34 |
|
|
|
(9.0 |
) |
|
5,942.6 |
|
35 |
|
|
|
(19.4 |
) |
|
7,370.7 |
|
38 |
|
|
|
(6.6 |
) |
|
Permanent mortgage |
|
|
968.0 |
|
6 |
|
|
|
(5.0 |
) |
|
1,019.3 |
|
6 |
|
|
|
(7.3 |
) |
|
1,099.5 |
|
5 |
|
|
|
31.2 |
|
|
One-time-close residential construction (OTC) |
|
|
9.9 |
|
* |
|
|
|
(87.0 |
) |
|
75.9 |
|
* |
|
|
|
(86.8 |
) |
|
573.3 |
|
3 |
|
|
|
(61.8 |
) |
|
Credit card & other |
|
|
285.5 |
|
2 |
|
|
|
(4.6 |
) |
|
299.4 |
|
2 |
|
|
|
(5.2 |
) |
|
315.7 |
|
2 |
|
|
|
(5.0 |
) |
|
Restricted real estate loans (a) (b) |
|
|
696.2 |
|
4 |
|
|
|
(16.6 |
) |
|
835.1 |
|
5 |
|
|
|
N/A |
|
|
N/A |
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total retail |
|
|
7,365.9 |
|
46 |
|
|
|
(9.9 |
) |
|
8,172.3 |
|
48 |
|
|
|
(12.7 |
) |
|
9,359.2 |
|
48 |
|
|
|
(11.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total loans, net of unearned |
|
$ |
16,056.8 |
|
100 |
% |
|
|
(6.3 |
)% |
$ |
17,131.8 |
|
100 |
% |
|
|
(12.5 |
)% |
$ |
19,579.3 |
|
100 |
% |
|
|
(9.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
|
|
|
* Amount less than one percent. |
|
|
N/A – not applicable |
|
|
(a) |
Prior to 2010, amount was reported in Consumer Real Estate. |
|
(b) |
2011 and 2010 include $649.6 million and $776.0 million of Consumer Real Estate loans and $46.6 million and $59.1 million of Permanent Mortgage loans respectively. |
C&I loans comprised 82 percent of total commercial loans in 2011 compared to 78 percent in 2010. The increase in average C&I loans is primarily driven by growth in health care, municipalities and asset based lending. As of December 31, 2011 period-end C&I loans increased $.7 billion from December 31, 2010 largely due to an increase in loans to mortgage companies. Commercial real estate loans declined $.5 billion in 2011 to $1.5 billion during 2011 as the commercial real estate market remains soft and the non-strategic components continue to wind-down.
|
|
|
|
18 |
FIRST HORIZON NATIONAL CORPORATION |
Total retail loans declined 10 percent, or $.8 billion, to $7.4 billion in 2011. The consumer real estate portfolio (home equity lines and installment loans) contributed $.5 billion, or 9 percent, of the decline in retail loans primarily within the non-strategic segment reflecting the continued wind-down. The permanent mortgage portfolio declined slightly to $968.0 million in 2011 as runoff and the effect of the nonperforming loan sale was offset by loans added to this portfolio due to the exercise of clean-up calls related to securitization trusts in second quarter 2011 and fourth quarter 2010. Loans consolidated due to the adoption of amendments to ASC 810, combined with restricted home equity lines that were included in the consumer real estate portfolio prior to 2010, are reflected within restricted real estate loans. These loans declined $138.9 million since 2010 and are expected to continue to gradually decline with natural runoff.
Table 9 – Contractual Maturities of Commercial Loans on December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Period-end) (Dollars in thousands) |
|
Within 1 Year |
|
After 1 Year |
|
After 5 Years |
|
Total |
||||||||||
|
Commercial, financial, and industrial |
|
|
$ |
3,635,928 |
|
|
|
$ |
3,213,897 |
|
|
|
$ |
1,165,102 |
|
|
$ |
8,014,927 |
|
Commercial real estate (a) |
|
|
|
527,233 |
|
|
|
|
708,057 |
|
|
|
|
143,120 |
|
|
|
1,378,410 |
|
Total commercial loans, net of unearned income |
|
|
$ |
4,163,161 |
|
|
|
$ |
3,921,954 |
|
|
|
$ |
1,308,222 |
|
|
$ |
9,393,337 |
|
For maturities over one year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates – floating |
|
|
|
|
|
|
|
$ |
2,894,282 |
|
|
|
$ |
612,712 |
|
|
$ |
3,506,994 |
|
Interest rates – fixed |
|
|
|
|
|
|
|
|
1,027,672 |
|
|
|
|
695,510 |
|
|
|
1,723,182 |
|
Total maturities over one year |
|
|
|
|
|
|
|
$ |
3,921,954 |
|
|
|
$ |
1,308,222 |
|
|
$ |
5,230,176 |
Because of various factors, the contractual maturities of consumer loans are not indicative of the actual lives of such loans. A significant component of FHN’s loan portfolio consists of retail real estate loans – a majority of which are home equity lines of credit and home equity installment loans. Typical home equity lines originated by FHN are variable rate 5/15 or 10/10 lines. In a 5/15 line, a borrower may draw on the loan for 5 years and pay interest only during that period (“the draw period”), and for the next 15 years the customer pays principal and interest and may no longer draw on that line. A 10/10 loan has a 10 year draw period followed by a 10-year principal-and-interest period. Therefore, the contractual maturity for 5/15 and 10/10 home equity lines is 20 years. Numerous factors can contribute to the actual life of a home equity line or installment loan as the prepayment rates for these portfolios typically do not trend consistent with contractual maturities. In normalized market conditions, the average life of home equity line and installment portfolios is significantly less than the contractual period as indicated by historical trends. Recently, indicators suggest that the average life of these portfolios could be longer when compared to that observed in normalized market conditions. This could be attributed to the limited availability of new credit in the marketplace, poor performance of the housing market, and a historically low interest rate environment. However, the actual average life of home equity lines and loans is difficult to predict and changes in any of these factors could result in changes in projections of average lives.
The remaining retail real estate loans consist primarily of permanent mortgages that were originated through the legacy national mortgage origination platform. While most first lien mortgage loans originated through this channel were subsequently sold, the remaining balances consist of loans that were unable to be delivered to the secondary market and one-time-close (“OTC”) loans that modified into permanent mortgages. Currently, FHN originates first lien permanent mortgages through its regional banking channel.
Investment Securities
FHN’s
investment portfolio consists principally of debt securities including
government agency issued mortgage-backed securities (“MBS”) and government
agency issued collateralized mortgage obligations (“CMO”), all of which are
classified as available-for-sale (“AFS”). FHN utilizes the securities portfolio
as a source of income, liquidity and collateral for repurchase agreements for
public funds, and as a tool for managing risk of interest rate movements. Table
10 shows information pertaining to the composition, yields, and contractual
maturities of the investment securities portfolio. Investment securities
averaged $3.2 billion in 2011 compared to $2.7 billion in 2010 and represented
14 percent of earning assets in 2011 compared to 12 percent in 2010. Average
investment securities
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
19 |
increased as a result of purchasing approximately $1.3 billion of debt investment securities since 2010 which more than offset maturities and sales. The decision to purchase AFS securities was largely driven by excess liquidity combined with continued low loan demand.
Government agency issued MBS and CMO, and other agencies averaged $2.9 billion in 2011 compared to $2.3 billion in 2010. U.S. treasury securities and municipal bonds averaged $79.5 million in 2011 compared to $114.7 million in 2010. Investments in equity securities averaged $222.3 million in 2011 compared with $255.0 million in 2010. A majority of these balances include restricted investments in the Federal Home Loan Bank (“FHLB”) and FRB stock which averaged over $190 million during 2011. On December 31, 2011, total investment securities had $109.8 million of net unrealized gains that resulted in an increase in book equity of $67.1 million, net of $42.7 million of deferred income taxes. See Note 3 – Investment Securities for additional detail.
Table 10 – Contractual Maturities of Investment Securities on December 31, 2011 (Amortized Cost)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Period-end) |
|
Within 1 Year |
|
After 1 Year |
|
After 5 Years |
|
After 10 Years |
|
||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
|
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
|||||||||
|
Securities available for sale (“AFS”): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency issued MBS and CMO (a) |
|
$ |
- |
|
|
- |
% |
$ |
799 |
|
|
3.98 |
% |
$ |
13,750 |
|
|
5.43 |
% |
$ |
2,644,636 |
|
|
3.54 |
% |
|
U.S. treasuries |
|
|
40,030 |
|
|
0.66 |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
Other U.S. government agencies |
|
|
10,015 |
|
|
4.49 |
|
|
5,262 |
|
|
5.59 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
States and municipalities (b) |
|
|
- |
|
|
- |
|
|
1,500 |
|
|
- |
|
|
- |
|
|
- |
|
|
16,570 |
|
|
1.42 |
|
|
Other |
|
|
- |
|
|
- |
|
|
511 |
|
|
4.96 |
|
|
- |
|
|
- |
|
|
223,430 |
(c) |
|
4.14 |
|
|
|
|||||||||||||||||||||||||
|
Total |
|
$ |
50,045 |
|
|
1.43 |
% |
$ |
8,072 |
|
|
4.35 |
% |
$ |
13,750 |
|
|
5.43 |
% |
$ |
2,884,636 |
|
|
3.57 |
% |
|
|
|||||||||||||||||||||||||
|
|
|
|
(a) |
Represents government agency-issued mortgage-backed securities and collateralized mortgage obligations which, when adjusted for early paydowns, have an estimated average life of 2.98 years. |
|
(b) |
Weighted average yields on tax-exempt obligations have been computed by adjusting allowable tax-exempt income to a fully taxable equivalent basis. |
|
(c) |
Represents equity securities with no stated maturity. |
Loans Held-for-Sale
Loans
HFS consists of the mortgage warehouse (including repurchased loans), student,
small business, and home equity loans. The average balance of loans HFS
decreased $86.3 million since 2010 and averaged $376.0 million in 2011. The
decline from 2010 reflects the third quarter 2010 sale of approximately $120
million of student loans. The mortgage warehouse, which consists of mortgage
loans remaining from the legacy mortgage banking business, loans originated
within the regional banking footprint awaiting transfer to the secondary
market, and mortgage loans repurchased pursuant to requests from investors
(primarily GSEs), averaged $310.2 million, and comprised 83 percent of loans
HFS.
Other Earning Assets
All
other earning assets include trading securities, securities purchased under
agreements to resell, federal funds sold (“FFS”), and interest-bearing deposits
with the FRB and other financial institutions. All other earning assets
averaged $2.3 billion in 2011 compared to $2.7 billion in 2010. The decrease is
attributable to a decline in Federal Reserve Bank deposits as excess cash
balances were used to purchase securities for the AFS portfolio. As of December
31, 2011, other earning assets were $1.9 billion compared to $1.7 billion at
the end of 2010. The period end balance of capital markets trading inventory
was $962.1 million as of December 31, 2011, compared to $734.3 million at the
end of 2010. Generally, the period-end balances of trading inventory are lower
than the average trading inventory balances as a result of cyclical slowdowns
in trading volume at the end of the year.
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20 |
FIRST HORIZON NATIONAL CORPORATION |
Core Deposits
In
2011, average core deposits increased 2 percent, or $.4 billion, to $15.0
billion. The increase in core deposits reflects growth due to the historically
low interest rate environment as deposit holders were unable to obtain higher
rates on other comparable investment products and an increase in insured
network deposits. Some of this growth was diminished as certain business
deposits declined concurrent with the conclusion of the FDIC’s TAG program and
also due to the transfer of escrow balances in conjunction with the transition
of the mortgage servicing portfolio to the new subservicer in 2011. In fourth
quarter 2011, FHN transferred $174.3 million in certain deposits associated
with the sale of Msaver which were included in Non-interest bearing deposits on
the Consolidated Statements of Condition.
Short-Term Funds
Short-term
funds (certificates of deposit greater than $100,000, federal funds purchased
(“FFP”), securities sold under agreements to repurchase, trading liabilities,
and other short-term borrowings) averaged $3.6 billion during 2011, a decline
of 9 percent from $4.0 billion in 2010. FHN’s contracting balance sheet and
core deposit growth reduced reliance on higher-cost purchased short-term funds.
Average FFP, which currently is entirely composed of funds from correspondent
banks, and securities sold under repurchase agreements decreased to $1.6
billion in 2011 from $1.8 billion in 2010. FFP fluctuates depending on the
amount of excess funding of correspondent’s and also the impact of FHN’s excess
Fed deposits. The average balance of securities sold under agreements to
repurchase declined $.2 billion to $.6 billion in 2011 given the low rates
currently paid on these products combined with the ability to receive FDIC
insurance coverage on business checking accounts. Other borrowings increased to
$.3 billion in 2011 from $.2 billion in 2010 as FHN increased borrowings from
the FHLB. On average, short-term purchased funds accounted for 17 percent of
FHN’s funding (core deposits plus short-term purchased funds and term
borrowings) in 2011 compared to 18 percent in 2010. See Note 9 – Short-Term
Borrowings for additional information.
Term Borrowings
Term
borrowings include senior and subordinated borrowings and advances with
original maturities greater than one year. Average term borrowings decreased 11
percent, or $.3 billion, and averaged $2.6 billion in 2011. The decline in
average term-borrowings relates to maturities of the remaining long-term bank
notes and the redemption of FHN’s subordinated debentures (related to trust
preferred loans (“TRUPs”) which paid 8.07 percent) in first quarter 2011. These
declines were partially offset by the increase resulting from the fourth
quarter 2010 issuance of $500 million of senior debt. Borrowings secured by
restricted real estate loans declined $155.9 million which was generally
consistent with the runoff of the associated retail real estate loans. See note
10 – Term Borrowings for additional information.
See Note 1 – Summary of Significant Accounting Policies for a complete discussion of accounting updates adopted during 2011 and 2010.
INCOME STATEMENT REVIEW – 2010 COMPARED TO 2009
Total consolidated revenue decreased 17 percent to $1.7 billion from $2.0 billion in 2009 primarily due to decreases in capital markets, mortgage banking income, and net interest income. The provision for loan losses decreased 69 percent to $270.0 million in 2010 from $880.0 million in 2009. The provision expense decreased in 2010 primarily due to reduced exposure to the non-strategic construction portfolios, as well as improvement within certain components of the C&I portfolio. A more detailed discussion of the major line items follows:
NET INTEREST INCOME
Net
interest income declined to $730.8 million in 2010 from $776.5 million in 2009
as average earning assets declined 10 percent to $23.0 billion and average
interest-bearing liabilities declined 11 percent to $17.1 billion in 2010. The
decline in net interest income is primarily attributable to a decrease in the
size of the loan portfolio and lower returns on the investment securities
portfolio. This decline in net interest income from 2009 was partially
mitigated by improved pricing on commercial loans and certain deposit products.
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FIRST HORIZON NATIONAL CORPORATION |
21 |
The consolidated net interest margin improved to 3.20 percent in 2010 compared to 3.06 percent for 2009. The widening in the margin occurred as the net interest spread increased to 2.98 percent in 2010 from 2.80 percent in 2009 and the impact of free funding decreased to 22 basis points from 26 basis points. The increase in the margin was primarily attributable to an overall decline in lower-rate earning assets, improved deposit pricing, and lower wholesale funding costs. The margin during 2010 was negatively impacted by excess balances held at the Federal Reserve and a lower yielding investment portfolio.
NONINTEREST INCOME
Noninterest
income was 56 percent of total revenue in 2010 compared to 61 percent in 2009
as total noninterest income decreased by $301.7 million to $932.7 million in
2010. The decrease primarily resulted from a significant decline in capital
markets income as this business produced record fixed income sales revenue
during 2009. The following discussion provides additional information about
various line items.
Capital Markets Noninterest Income
Capital
markets noninterest income decreased to $424.0 million in 2010 from $632.1
million in 2009. Although revenue was still strong, revenues from fixed income
sales decreased $208.5 million to $390.1 million in 2010 reflecting normalizing
market conditions in comparison to the very favorable conditions in 2009.
Revenues from other products were relatively flat at $33.9 million and
continued to be a small component of capital markets income.
Mortgage Banking Noninterest Income
Mortgage
banking income decreased to $167.4 million in 2010 from $235.5 million in 2009.
Servicing fees were $92.1 million, a $28.2 million decline from 2009. The
decline in servicing fees was consistent with the continued reduction in the
size of the servicing portfolio as the UPB of the servicing portfolio declined
nearly $13 billion from the end of 2009 due to payments and bulk sales executed
during 2010. While still positive, net hedging results declined $52.0 million
to $93.9 million in 2010 as wider spreads between mortgage and swap rates
contributed to the larger positive net hedge results in 2009. The negative
impact attributable to runoff was $35.0 million in 2010 compared to $59.2 million
in 2009, which was primarily the result of a smaller servicing portfolio in
2010. Origination income was $17.3 million in 2010 compared to $30.7 million in
2009, and was attributable to reduction in refinance activity within the
regional banking footprint. Additionally, 2009 included a $3.4 million
non-prime reserve reversal associated with the legacy mortgage origination
business as the term of FHN’s obligations ended.
Other Fee Income
Noninterest
income from deposit transactions and cash management fees declined $19.4
million to $143.2 million in 2010 primarily due to the negative impact on NSF
fee income from the overdraft provisions of Reg E. Fees from trust services and
investment management were $25.7 million in 2010 compared to $26.2 million in
2009. The $.5 million decrease was due to a decline in trust services income
partially offset by an increase in investment management revenue which was
driven by customer growth during 2010. Brokerage and management fees were $24.5
million in 2010 compared to $26.9 million in 2009. The decline was partially
due to overall market conditions and a shift in customer investment mix to
lower-risk, less profitable products. There were no divestiture-related gains
or losses during 2010. In 2009, losses from divestitures were $1.7 million and
related to the sale of the Louisville First Express Remittance Processing
(lockbox service) location. Net securities gains in 2010 were $10.9 million
compared with securities losses of $1.2 million in 2009. In fourth quarter
2010, FHN sold a portion of its Visa, Inc. Class B shares resulting in a gain
of $14.8 million. FHN incurred securities losses of $4.6 million in 2010
related to fair value adjustments of venture capital investments compared with
$.6 million in 2009. In 2009, FHN recognized a $.5 million impairment of cost
method investments.
All Other Income and Commissions
All
other income and commissions decreased to $133.4 million in 2010 from $149.3
million in 2009. Other income was positively affected by a $6.2 million increase
in BOLI income as a result of higher policy benefits
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|
22 |
FIRST HORIZON NATIONAL CORPORATION |
received during 2010. ATM interchange fees increased $2.8 million due to increased transaction volume in 2010 and higher interchange rates paid by FHN’s vendor. Remittance processing income declined $9.8 million in 2010 as FHN sold the Louisville remittance processing business in fourth quarter 2009. Reinsurance fee income declined $6.8 million as revenues associated with reinsurance contracts that were settled by FHN during 2010 and 2009 were assigned to the primary insurers. Deferred compensation income, which is primarily driven by changes in the market value of underlying investments, declined $3.9 million. All other income declined $5.3 million to $21.7 million from 2009.
NONINTEREST EXPENSE
Total
noninterest expense for 2010 decreased 13 percent to $1.3 billion from $1.5
billion in 2009. Costs from restructuring, repositioning, and efficiency
initiatives reflected in various categories of noninterest expense declined
$17.2 million to $5.7 million in 2010. Generally, all expense categories
decreased from 2009 with the exception of the repurchase and foreclosure
provision and computer software.
Personnel expense, the largest component of noninterest expense, decreased $83.2 million to $672.0 million in 2010, primarily due to a reduction in variable compensation expense related to the decrease in capital markets’ fixed income revenues in 2010. The decline was also affected by the ongoing reduction of legacy businesses during 2010.
Expenses related to foreclosed properties declined by $41.3 million to $24.9 million as the rate of decline in property values stabilized or improved in certain markets which resulted in lower negative fair value adjustments in 2010. Various expenses (including contract employment and outsourcing; occupancy; equipment rental, maintenance, and depreciation; communication and courier; miscellaneous loan costs; and operations costs) declined primarily due to the continued wind-down of non-strategic businesses and the ongoing focus on efficiencies throughout the organization. FDIC insurance premiums declined $9.1 million as 2009 included the impact of the FDIC special assessment.
The repurchase and foreclosure provision increased to $189.8 million in 2010 from $147.8 million in 2009 reflecting an increase in repurchase and make-whole requests and MI cancellation notices related to loans that were previously sold or securitized primarily through FHN’s legacy mortgage banking business. Charges to increase the repurchase liability for prior junior lien consumer mortgage loan sales were immaterial in 2010 compared with $21.3 million in 2009. Expenses related to computer software increased $3.7 million to $30.4 million in 2010 primarily as a result of FHN’s continued focus on improving technology in order to streamline processes and create efficiencies.
All other expenses decreased $67.9 million to $113.3 million in 2010, in large part due to a reduction in charges related to reinsurance obligations, which were immaterial in 2010 compared to $25.6 million in 2009. Restructuring, repositioning, and efficiency-related charges included in other expenses declined $15.3 million in 2010. The provision for unfunded commitments decreased $8.2 million as a result of improved risk profiles of FHN’s borrowers. Variable operational costs related to the regional bank’s mortgage origination business declined $5.7 million to $9.8 million consistent with the reduction in origination income in 2010 compared with 2009. Loan insurance expense declined $8.5 million in 2010 from $7.8 million in 2009 primarily due to the reduction in legacy mortgage origination business and also as a result of the cancellation of a high loan-to-value (HLTV) insurance contract and return of $3.8 million of premium expense in early 2010. In 2010, FHN reversed $13.0 million of its contingent liability for certain Visa legal matters compared with a $7.0 million reversal in 2009.
STATEMENT OF CONDITION REVIEW – 2010 COMPARED TO 2009
Total period-end assets were $24.7 billion at December 31, 2010, compared to $26.1 billion at the end of 2009. Average assets decreased to $25.7 billion in 2010 from $28.1 billion in 2009. The decline in the both period-end and average balance of total assets primarily reflects the reduction in size of the loan portfolio.
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FIRST HORIZON NATIONAL CORPORATION |
23 |
EARNING ASSETS
Earning
assets averaged $23.0 billion and $25.4 billion for 2010 and 2009,
respectively. A more detailed discussion of the major line items follows.
Loans
Average
loans decreased 13 percent to $17.1 billion from $19.6 billion due to the
continued wind-down of the non-strategic portfolios combined with weak loan
demand. The loan portfolio represented 75 percent of average earning assets in
2010 and 77 percent in 2009.
C&I loans comprised 78 percent of total commercial loans in 2010 compared to 71 percent in 2009 and declined $356.5 million as loan demand was weak during 2010 relative to 2009. An increase in loans to mortgage providers and asset-based lending during 2010 mitigated a portion of the decline in the C&I portfolio. Despite the decline in the average balance, the C&I balance on December 31, 2010 was $7.3 billion reflecting a $.2 billion increase from December 31, 2009. The increase in the period-end balance was driven by loan growth within tax-free lending to government and municipalities and loans to mortgage providers in 2010. Commercial real estate loans declined $.9 billion in 2010 to $2.0 billion as result of continued efforts to wind down the non-strategic component of this portfolio as well as a significant reduction in active lending in and around Tennessee.
Total retail loans declined 13 percent, or $1.2 billion, to $8.2 billion in 2010. Consumer real estate loans contributed $1.4 billion to the decline in retail loans. Over half of these loans were originated through the national channel but account for over 90 percent of the decline as these loans continue to slowly runoff. Permanent mortgages declined 7 percent during 2010 to $1.0 billion. In fourth quarter 2010, FHN exercised clean-up calls of 8 securitization trusts resulting in approximately $175 million of jumbo permanent mortgages being acquired by FHN. Loans consolidated due to the adoption of amendments to ASC 810 combined with approximately $600 million of restricted home equity lines that were included in the consumer real estate portfolio prior to 2010, are reflected within restricted real estate loans. The remaining balance of the OTC portfolio was immaterial at the end of 2010.
Investment Securities
Investment
securities averaged $2.7 billion in 2010 compared to $2.9 billion in 2009 and
represented 12 percent of earning assets in 2010 compared to 11 percent in
2009. Average investment securities declined consistent with the overall
contraction of the balance sheet and the lack of investment opportunities at
desirable yields given historically low interest rates in 2010 compared to
2009. During 2010, FHN purchased nearly $2 billion of debt investment
securities which more than offset maturities during the year increasing the
period-end balance of the securities portfolio to $3.0 billion at the end of
2010 from $2.7 billion at the end of 2009. During 2010, securities included
over $190 million of restricted investments in FHLB and FRB stock. On December
31, 2010, total investment securities had $74.2 million of net unrealized gains
that resulted in an increase in book equity of $45.4 million, net of $28.9
million of deferred income taxes. On December 31, 2009, AFS securities had
$106.3 million of net unrealized gains that resulted in an increase in book
equity of $64.9 million, net of $41.1 million of deferred income taxes.
Loans Held-for-Sale
Loans
HFS averaged $462.3 million during 2010, a decrease of $84.5 million from 2009.
The mortgage warehouse averaged $333.7 million and comprised over 70 percent of
loans HFS in 2010. The period-end balance of loans HFS was $375.3 million in
2010 compared to $452.5 million at the end of 2009 due to the third quarter
2010 sale of approximately $120 million of student loans.
Trading Securities/Other Earning Assets
Average
trading securities increased $46.2 million to $1.2 billion in 2010 primarily as
a result of increased levels of capital markets trading inventory during 2010,
partially offset by FHN’s reduction of retained interests from prior
securitizations. Average other earning assets increased to $1.6 billion in 2010
from $1.3 billion in 2009. The increase was due to FHN holding excess deposits
with the FRB due to the limited availability of attractive
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24 |
FIRST HORIZON NATIONAL CORPORATION |
investment opportunities and low loan demand. Average FFS decreased primarily due to reduced short-term lending to correspondent banks as a result of elevated levels of liquidity in the market in 2010 compared with 2009.
Core Deposits
During
2010, average core deposits increased 11 percent or $1.4 billion to $14.6
billion. The increase in core deposits reflects efforts to increase customer
deposits within the wealth management group during 2010 and 2009, growth in
middle Tennessee (Metropolitan Nashville) deposits, and an increase in insured
network deposits. Growth was positively affected by FHN’s participation in the
FDIC’s TAG program and the historically low interest rate environment as deposit
holders were unable to obtain higher rates on other comparable investment
products.
Short-Term Funds/Term Borrowings
Short-term
funds averaged $4.0 billion during 2010, a decline of 44 percent from $7.1
billion during 2009. On December 31, 2010, short-term funds were $3.2 billion
compared to $4.5 billion on December 31, 2009. FHN’s contracting balance sheet
and core deposit growth reduced reliance on higher-cost purchased short-term
funds. The reduction in borrowings from the FRB’s Term Auction Facility (“TAF”)
contributed $2.1 billion of the decline as balances were fully repaid in first
quarter 2010. Average borrowings from the FHLB declined $.3 billion from 2009
and all borrowings from the FHLB were also fully repaid in 2010. Purchased CDs
declined by $.8 billion during 2010, as FHN focused on lower cost, more stable
funding sources. Average FFP and securities sold under repurchase agreements
increased to $2.6 billion during 2010 from $2.5 billion during 2009 due to
increased utilization of FFP and increased availability of overnight credit.
Both average and period-end balances of securities sold under agreements to
repurchase declined due to low rates paid on these products combined with the
ability to receive FDIC insurance coverage on business checking accounts. On
average, short-term purchased funds accounted for 18 percent of FHN’s funding
in 2010 compared to 30 percent in 2009.
Average term borrowings decreased 17 percent, or $.6 billion, and averaged $2.9 billion in 2010. As of December 31, 2010, term borrowings were $3.2 billion compared to $2.9 billion as of the end of 2009. The increase in the period-end balance reflects the $500 million senior debt offering which closed in fourth quarter 2010. Because the debt offering closed late in 2010, it had a minimal impact on the 2010 average balance. The decline in average term-borrowings relates to the reduction in long-term bank notes.
Management’s objectives are to provide capital sufficient to cover the risks inherent in FHN’s businesses, to maintain excess capital to well-capitalized standards, and to assure ready access to the capital markets. Average equity was $2.7 billion in 2011 compared to $3.3 billion in 2010. The decline in average equity is primarily driven by the fourth quarter 2010 repayment of the preferred-CPP which resulted in a $.8 billion decline in average equity. Additionally, in first quarter 2011, FHN repurchased $79.7 million of common stock warrants issued to the UST under the Capital Purchase Program (“CPP”) which also contributed to the reduction in average equity. A portion of these declines were offset by an increase in capital surplus due to the issuance of common shares in fourth quarter 2010 which raised $263.1 million in net proceeds. In fourth quarter 2011, FHN launched a share repurchase program which enables FHN to repurchase up to $100 million of its common stock in the open market or in privately negotiated transactions, subject to market conditions. In fourth quarter 2011, FHN repurchased $44 million of common shares under the share repurchase program. The share repurchases had little impact on the overall change in average equity in 2011 compared to 2010. Total period-end equity was $2.7 billion on December 31, 2011 and 2010. Net income recognized in 2011 more than offset the decline in capital surplus which was largely driven by the repurchase of the common stock warrant and the fourth quarter 2011 repurchase of shares under the recently announced repurchase program. The following table provides pertinent capital ratios for the years-ended 2011, 2010, and 2009:
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|
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FIRST HORIZON NATIONAL CORPORATION |
25 |
Table 11 – Regulatory Capital and Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2011 |
|
2010 |
|
2009 |
|
|||
|
Shareholder’s equity |
|
$ |
2,389,472 |
|
$ |
2,382,840 |
|
$ |
3,007,304 |
|
|
Regulatory adjustments: |
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles |
|
|
(138,507 |
) |
|
(175,453 |
) |
|
(188,931 |
) |
|
Net unrealized (gains)/losses on AFS securities |
|
|
(67,069 |
) |
|
(45,366 |
) |
|
(64,925 |
) |
|
Minimum pension liability |
|
|
197,225 |
|
|
172,912 |
|
|
179,133 |
|
|
Noncontrolling interest – FTBNA preferred stock |
|
|
294,816 |
|
|
294,816 |
|
|
294,816 |
|
|
Trust preferred |
|
|
200,000 |
|
|
200,000 |
|
|
300,000 |
|
|
Disallowed servicing assets |
|
|
(9,854 |
) |
|
(16,801 |
) |
|
(19,176 |
) |
|
Disallowed deferred tax assets |
|
|
(15,168 |
) |
|
- |
|
|
- |
|
|
Other |
|
|
(463 |
) |
|
(477 |
) |
|
(439 |
) |
|
Tier 1 capital |
|
$ |
2,850,452 |
|
$ |
2,812,471 |
|
|
3,507,782 |
|
|
Tier 2 capital |
|
|
751,819 |
|
|
937,115 |
|
|
1,183,228 |
|
|
Total regulatory capital |
|
$ |
3,602,271 |
|
$ |
3,749,586 |
|
$ |
4,691,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2010 |
|
2009 |
|
||||||||||||
|
|
|
|
|
||||||||||||||||
|
|
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
||||||
|
Tier 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Horizon National Corporation |
|
|
14.23 |
% |
$ |
2,850,452 |
|
|
13.99 |
% |
$ |
2,812,471 |
|
|
16.39 |
% |
$ |
3,507,782 |
|
|
First Tennessee Bank National |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Association (a) |
|
|
16.37 |
|
|
3,247,268 |
|
|
15.76 |
|
|
3,137,624 |
|
|
15.87 |
|
|
3,361,373 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Horizon National Corporation |
|
|
17.99 |
|
|
3,602,271 |
|
|
18.65 |
|
|
3,749,586 |
|
|
21.92 |
|
|
4,691,010 |
|
|
First Tennessee Bank National |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Association (a) |
|
|
20.05 |
|
|
3,976,672 |
|
|
20.26 |
|
|
4,032,289 |
|
|
21.16 |
|
|
4,481,786 |
|
|
Tier 1 Common (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Horizon National Corporation |
|
|
11.76 |
|
|
2,355,636 |
|
|
11.53 |
|
|
2,317,655 |
|
|
13.61 |
|
|
2,912,969 |
|
|
Other Capital Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total period-end equity to period-end |
|
|
10.83 |
|
|
|
|
|
10.84 |
|
|
|
|
|
12.67 |
|
|
|
|
|
FHN’s Leverage |
|
|
11.41 |
|
|
|
|
|
10.96 |
|
|
|
|
|
13.36 |
|
|
|
|
|
Adjusted tangible common equity to risk |
|
|
10.80 |
|
|
|
|
|
10.66 |
|
|
|
|
|
9.06 |
|
|
|
|
|
Tangible common equity to tangible |
|
|
9.05 |
|
|
|
|
|
8.93 |
|
|
|
|
|
7.75 |
|
|
|
|
|
|
|
|
(a) |
Excluding financial subsidiaries, FTBNA’s Tier 1 and Total Capital ratios were 15.64 percent and 18.47 percent, respectively, at December 31, 2011. |
|
(b) |
Refer to the Non-GAAP to GAAP Reconcilation – Table 33. |
|
|
|
|
26 |
FIRST HORIZON NATIONAL CORPORATION |
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 December 31, 2011, FHN and FTBNA had sufficient capital to qualify as well-capitalized institutions as shown in Note 13 – Regulatory Capital. In 2012, capital ratios are expected to remain strong and significantly above current well-capitalized standards despite the expectation of a difficult operating environment.
Pursuant to board authority, FHN may repurchase shares from time to time and will evaluate the level of capital and take action designed to generate or use capital, as appropriate, for the interests of the shareholders, subject to legal and regulatory restrictions. The following tables provide information related to securities repurchased by FHN during fourth quarter 2011:
Table 12 – Issuer Purchases of Equity Securities
Compensation Plan-Related Repurchase Authority:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Volume in thousands) |
|
Total Number |
|
Average Price |
|
Total Number of |
|
Maximum Number |
|
||||||
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
October 1 to October 31 |
|
1 |
|
|
|
$ |
6.66 |
|
|
1 |
|
|
34,353 |
|
|
|
November 1 to November 30 |
|
- |
|
|
|
|
- |
|
|
- |
|
|
34,353 |
|
|
|
December 1 to December 31 |
|
8 |
|
|
|
|
7.61 |
|
|
8 |
|
|
34,345 |
|
|
|
|
|
|
|
||||||||||||
|
Total |
|
9 |
|
|
|
$ |
7.53 |
|
|
9 |
|
|
|
|
|
|
|
|
|
Compensation Plan Programs: |
|
|
– |
A consolidated compensation plan share purchase program was announced on August 6, 2004. This plan consolidated into a single share purchase program all of the previously authorized compensation plan share programs as well as the renewal of the authorization to purchase shares for use in connection with two compensation plans for which the share purchase authority had expired. The total amount authorized under this consolidated compensation plan share purchase program, inclusive of a program amendment announced on April 24, 2006, is 29.6 million shares calculated before adjusting for stock dividends distributed through January 1, 2011. The shares may be purchased over the option exercise period of the various compensation plans on or before December 31, 2023. On December 31, 2011, the maximum number of shares that may yet be purchased under the program was 34.3 million shares. Purchases may be made in the open market or through privately negotiated transactions and are subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions. Management currently does not anticipate purchasing a material number of shares under this authority over the next twelve months. |
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
27 |
Table 12 – Issuer Purchases of Equity Securities (continued)
Other Repurchase Authority:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars and volume in thousands) |
|
Total Number |
|
Average Price |
|
Total Number of |
|
Maximum Approximate |
|
||||||||
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
October 1 to October 31 |
|
- |
|
|
|
|
N/A |
|
|
- |
|
|
|
$ |
100,000 |
|
|
|
November 1 to November 30 (b) |
|
4,909 |
|
|
|
$ |
7.03 |
|
|
4,909 |
|
|
|
$ |
65,508 |
|
|
|
December 1 to December 31 |
|
1,280 |
|
|
|
$ |
7.53 |
|
|
1,280 |
|
|
|
$ |
55,875 |
|
|
|
|
|
|
|
|
|
||||||||||||
|
Total |
|
6,189 |
|
|
|
$ |
7.13 |
|
|
6,189 |
|
|
|
|
|
|
|
|
|
|
|
N/A – Not applicable |
|
|
(a) |
Represents total costs including commissions paid. Average price paid per share for the quarter was $7.10 excluding commissions. |
|
(b) |
Excludes 4,360 shares purchased through the error account of FTBNA’s trust division. |
|
|
|
|
Other Programs: |
|
|
– |
On October 17, 2011, FHN announced a $100 million share purchase authority that will expire on August 31, 2012. As of December 31, 2011, $44.1 million in purchases had been made under this authority. Purchases may be made in the open market or through privately negotiated transactions and wil be subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions. |
|
|
|
Loan Portfolio Composition |
|
FHN groups its loans into portfolio segments based on internal classifications reflecting the manner in which the ALLL is established and how credit risk is measured, monitored, and reported. From time to time, and if conditions are such that certain subsegments are uniquely affected by economic or market conditions or are experiencing greater deterioration than other components of the loan portfolio, management may determine the ALLL at a more granular level. Commercial loans are composed of commercial, financial, and industrial (“C&I”), commercial real estate, and other loans. Retail loans are composed of consumer real estate; permanent mortgage; credit card and other; and restricted real estate loans. Key asset quality metrics for each of these portfolios can be found in Table 16 – Asset Quality by Portfolio. |
As economic and real estate conditions develop, enhancements to underwriting and credit policies and guidelines may be necessary or desirable. In 2011, there were no material changes to FHN’s credit underwriting guidelines. FHN did begin offering additional installment loan products with maturities of 20 and 30 years in certain cases. While such loans currently have strong credit characteristics, longer maturities can introduce additional credit risk (as the loans are outstanding for a longer period of time) and interest rate risk, particularly given the current interest rate environment and expectation that interest rates are likely to increase in the future. Loan policies and guidelines for all portfolios are approved by management risk committees that consist of business line managers and credit administration professionals to ensure that the resulting guidance addresses the associated risks and establishes reasonable underwriting criteria that appropriately mitigate risk. Policies and guidelines are reviewed, revised, and re-issued periodically at established review dates or earlier if changes in the economic environment, portfolio performance, the size of portfolio or industry concentrations, or regulatory guidance warrant an earlier review.
The following is a description of each portfolio:
COMMERCIAL LOAN PORTFOLIOS
FHN’s commercial loan approval process grants lending authority based upon job description, experience, and performance. The lending authority is delegated to the business line (Market Managers, Departmental Managers, Regional Presidents, Relationship Managers (“RM”) and Portfolio Managers (“PM”)) and to Credit Risk Managers. While individual limits vary, the predominant amount of approval authority is vested with the Credit Risk Manager function. Portfolio concentration limits for the various portfolios are established by executive management and approved by the Executive and Risk Committee of the Board.
|
|
|
|
28 |
FIRST HORIZON NATIONAL CORPORATION |
|
|
|
C&I |
|
The C&I portfolio was $8.0 billion on December 31, 2011, and is comprised of loans used for general business purposes, diversified by industry type, and primarily composed of relationship customers in Tennessee and certain neighboring states that are managed within the regional bank. Typical products include working capital lines of credit, term loan financing of owner-occupied real estate and fixed assets, and trade credit enhancement through letters of credit. The following table provides the composition of the C&I portfolio by industry as of December 31, 2011. For purposes of this disclosure, industries are determined based on the North American Industry Classification System (NAICS) industry codes used by Federal statistical agencies in classifying business establishments for the collection, analysis, and publication of statistical data related to the U.S. business economy. |
Table 13 – C&I Loan Portfolio by Industry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
December 31, 2010 |
|
||||||||
|
|
|
|
|||||||||||
|
(Dollars in thousands) |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
||||
|
Industry: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance & insurance |
|
$ |
1,571,747 |
|
|
20 |
% |
$ |
1,450,663 |
|
|
20 |
% |
|
Loans to mortgage companies |
|
|
1,394,190 |
|
|
17 |
% |
|
816,201 |
|
|
11 |
% |
|
Wholesale trade |
|
|
630,580 |
|
|
8 |
% |
|
569,419 |
|
|
8 |
% |
|
Healthcare |
|
|
621,905 |
|
|
8 |
% |
|
507,785 |
|
|
7 |
% |
|
Manufacturing |
|
|
590,828 |
|
|
7 |
% |
|
511,202 |
|
|
7 |
% |
|
Retail trade |
|
|
471,733 |
|
|
6 |
% |
|
357,784 |
|
|
5 |
% |
|
Real estate rental & leasing (a) |
|
|
424,352 |
|
|
5 |
% |
|
545,085 |
|
|
7 |
% |
|
Accommodation & Food service (b) |
|
|
240,363 |
|
|
3 |
% |
|
- |
|
|
- |
% |
|
Other (transportation, education, arts, |
|
|
2,069,229 |
|
|
26 |
% |
|
2,580,016 |
|
|
35 |
% |
|
Total C&I loan portfolio |
|
$ |
8,014,927 |
|
|
100 |
% |
$ |
7,338,155 |
|
|
100 |
% |
|
|
|
|
(a) |
Leasing, rental of real estate, equipment, and goods. |
|
(b) |
Category in 2010 comprised less than 3 percent and is included in Other. |
|
(c) |
Industries in this category each comprise less than 3 percent, except construction in 2010 that is 5 percent. |
C&I loans are underwritten in accordance with a well-defined credit origination process. This process includes applying minimum underwriting standards as well as separation of origination and credit approval roles. Underwriting typically includes due diligence of the borrower and the applicable industry of the borrower, analysis of the borrower’s available financial information, identification and analysis of the various sources of repayment and identification of the primary risk attributes. Stress testing the borrower’s financial capacity, adherence to loan documentation requirements, and assigning credit risk grades using internally developed scorecards are also used to help quantify the risk when appropriate. Underwriting parameters also include loan-to-value ratios (“LTVs”) which vary depending on collateral type, use of guaranties, loan agreement requirements, and other recommended terms such as equity requirements, amortization, and maturity. Approval decisions also consider various financial ratios and performance measures, such as cash flow and balance sheet leverage, liquidity, coverage of fixed charges, and working capital. Additionally, approval decisions consider the capital structure of the borrower, sponsorship, and quality/value of collateral. Generally, guideline and policy exceptions are identified and mitigated during the approval process. Pricing of C&I loans is based upon the determined credit risk specific to the individual borrower. These loans are typically based upon variable rates tied to the London Inter-Bank Offered Rate (“LIBOR”) or the prime rate of interest plus or minus the appropriate margin.
FHN’s commercial lending process incorporates the RM and PM for most commercial credits. The PM is responsible for assessing the credit quality of the borrower beginning with the initial underwriting and continuing through the servicing period while the RM is primarily responsible for communications with the customer and maintaining the relationship. Other specialists and the assigned RM/PM are organized into units called deal teams. Deal teams are constructed with specific job attributes that facilitate FHN’s ability to identify, mitigate, document, and manage ongoing risk. Portfolio managers and credit analysts provide enhanced analytical support during loan origination and servicing, including monitoring of the financial condition of the borrower and tracking compliance with loan agreements. Loan closing officers and the construction loan management unit specialize in loan documentation and the management of the construction lending process. Early identification of problem loan assets
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
29 |
has been strengthened by training on problem loan identification, more comprehensive policies and guidelines, targeted portfolio reviews, a greater emphasis on more frequent grading, as well as enhancements to the problem loan management process. For smaller commercial credits, generally less than $3 million, FHN utilizes a centralized underwriting unit in order to more efficiently and consistently originate and grade small business loans.
Significant loan concentrations are considered to exist for a financial institution when there are loans to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Refer to Table 13 for detail of the C&I loan portfolio by industry. The largest component is finance and insurance (includes trust preferred and bank-related loans) which represents 20 percent of the C&I portfolio. The trust preferred and bank-related component of C&I is discussed below. As of December 31, 2011, balances of loans to mortgage companies were 17 percent of the C&I portfolio. The size of this portfolio class, which generally fluctuates with mortgage rates, includes commercial lines of credit to qualified mortgage companies exclusively for the temporary warehousing of eligible mortgage loans prior to the borrower’s sale of those mortgage loans to third party investors. Generally, lending to mortgage lenders increases when there is a decline in mortgage rates resulting in increased borrower refinance volumes.
|
|
|
Trust Preferred & Bank-Related Loans |
|
The finance and insurance component of the C&I portfolio, which includes bank-related and TRUPs (i.e., long-term unsecured loans to bank and insurance-related businesses), has seen the stronger borrowers stabilize, while the weaker financial institutions remain under stress due to limited availability of market liquidity and capital, and the impact from economic conditions on the asset quality of these borrowers. On December 31, 2011, approximately 8 percent of the C&I portfolio, or 4 percent of total loans, was composed of bank-related loans and TRUPs. |
TRUPs lending was originally extended as a form of “bridge” financing to participants in the pooled trust preferred securitization program offered primarily to smaller banking and insurance institutions through FHN’s capital markets operation. Origination of TRUPs lending ceased in early 2008. Individual TRUPs are re-graded at least quarterly as part of FHN’s commercial loan review process. Typically, the terms of these loans include a prepayment option after a 5 year initial term (with possible triggers of early activation), have a scheduled 30 year balloon payoff, and include an option to defer interest for up to 20 consecutive quarters. As of December 31, 2011, 10 TRUPs relationships have elected interest deferral. Since the vast majority of trust preferred issuers to which FHN has extended credit have less than $15 billion in total assets, the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is not expected to significantly affect future payoff rates for these loans. The risk of individual trust preferred loan default is somewhat mitigated by diversification within the trust preferred loan portfolio. The average size of a trust preferred loan is approximately $9 million.
Underwriting of other loans to financial institutions generally includes onsite due diligence, review of the customer’s policies and strategies, assessment of management, assessment of the relevant markets, a comprehensive assessment of the loan portfolio, and a review of the ALLL. Additionally, the underwriting analysis includes a focus on the customer’s capital ratios, profitability, loan loss coverage ratios, and regulatory status.
As of December 31, 2011, the UPB of trust preferred loans totaled $447.2 million ($290.9 million of bank TRUPs and $156.3 million of insurance TRUPs) with the UPB of other bank-related loans totaling approximately $161.8 million. Inclusive of a remaining valuation allowance on TRUPs of $34.2 million, total reserves (ALLL plus the valuation allowance) for TRUPs and other bank-related loans were $66.1 million or 11 percent of outstanding UPB.
|
|
|
C&I Asset Quality Trends |
|
During 2011, performance of the C&I portfolio continued to improve as there was an increase in the amount of credit upgrades in 2011 relative to 2010 and commercial borrowers continue to adapt to the current operating environment. The ALLL declined $109.1 million to $130.4 million as of December 31, 2011. The allowance as a percentage of period-end loans declined to 1.63 percent from 3.26 percent at the end of 2010. As previously discussed, the finance and insurance portion of this portfolio, especially the TRUPs, has been the most significantly impacted by the economic conditions. However, while this component of the C&I portfolio continues to be stressed, the stronger borrowers within this portfolio stabilized during 2010 and 2011. Net charge-offs as a percentage of average loans declined to .84 percent from 1.23 percent reflecting the aggregate improvement in this portfolio. Nonperforming C&I loans which peaked in third quarter 2010, decreased $51.8 million to $162.2 |
|
|
|
|
30 |
FIRST HORIZON NATIONAL CORPORATION |
million at the end of 2011. The decrease was partially offset by a $22.1 million increase in the nonperforming TRUPs loans from a year ago. The NPL ratio decreased to 2.02 percent from 2.92 percent.
|
|
|
Commercial Real Estate |
|
The commercial real estate portfolio includes both financings for commercial construction and nonconstruction loans. This portfolio is segregated between income commercial real estate (“CRE”) loans which contain loans, lines, and letters of credit to commercial real estate developers for the construction and mini-permanent financing of income-producing real estate, and residential CRE loans. The residential CRE portfolio includes loans to residential builders and developers for the purpose of constructing single-family detached homes, condominiums, and town homes. |
|
|
|
Income CRE |
|
The income CRE portfolio was $1.3 billion on December 31, 2011. Subcategories of income CRE consist of retail (23 percent), office (19 percent), apartments (18 percent), industrial (13 percent), hospitality (9 percent), land/land development (8 percent), and other (10 percent). |
Income CRE loans are underwritten in accordance with credit policies and underwriting guidelines that are reviewed at least annually and revised as necessary based on market conditions. Loans are underwritten based upon project type, size, location, sponsorship, and other market-specific data. Generally, minimum requirements for equity, debt service coverage ratios (“DSCRs”), and level of pre-leasing activity are established based on perceived risk in each subcategory. Loan-to-value (value is defined as the lower of cost or market) limits are set below regulatory prescribed ceilings and generally range between 50 and 80 percent depending on underlying product set. Term and amortization requirements are set based on prudent standards for interim real estate lending. Equity requirements are established based on the quantity, quality, and liquidity of the primary source of repayment. For example, more equity would be required for a speculative construction project or land loan than for a property fully leased to a credit tenant or a roster of tenants. Typically, a borrower must have at least 10 percent of cost invested in a project before FHN will fund loan dollars. Income properties are required to achieve a DSCR greater than or equal to 120 percent at inception or stabilization of the project based on loan amortization and a minimum underwriting (interest) rate refreshed quarterly. Some product types require a higher DSCR ranging from 125 percent to 150 percent of the debt service requirement. Variability depends on credit versus non-credit tenancy, lease structure, property type, and quality. A proprietary minimum underwriting interest rate is used to calculate compliance with underwriting standards. Generally, specific levels of pre-leasing must be met for construction loans on income properties. A global cash flow analysis is performed at the borrower and guarantor level. The majority of the portfolio is on a floating rate basis tied to appropriate spreads over LIBOR.
The credit administration and ongoing monitoring consists of multiple internal control processes. Construction loans are closed and administered by a centralized control unit. Credit grades are assigned utilizing internally developed scorecards to help quantify the level of risk in the transaction. Underwriters and credit approval personnel stress the borrower’s/project’s financial capacity utilizing numerous economic attributes such as interest rates, vacancy, and discount rates. Key information is captured from the various portfolios and then stressed at the aggregate level. Results are utilized to assist with the assessment of the adequacy of the ALLL and to steer portfolio management strategies. As discussed in the C&I portfolio section, income CRE also employs the RM/PM model and the “Deal Team” concept.
A substantial portion of the income CRE portfolio was originated through and continues to be managed by the regional bank. The income CRE portfolio showed improvement in 2011 as property stabilization and strong sponsors have positively affected performance. However, the weak market conditions have affected this portfolio through increased vacancies, slower stabilization rates, decreased rental rates, and lack of readily available financing in the industry. FHN does not capitalize interest or fund interest on distressed properties.
|
|
|
Income CRE Asset Quality Trends |
|
Performance of income CRE loans improved in 2011 as property values stabilized and sponsors and guarantors provided additional financial support to borrowers as needed. Allowance as a percentage of loans decreased to 3.15 percent in 2011 from 8.87 percent in 2010. Outstanding balances declined 11 percent from 2010 and the |
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
31 |
level of allowance declined $85.1 million from 2010 to $39.6 million at the end of 2011. Net charge-offs were $17.5 million in 2011 compared to $ 52.1 million in 2010 which is driven by improvement in the performance of this portfolio. The level of nonperforming loans decreased 51 percent to $69.2 million at the end of 2011, but remained elevated at 5.50 percent of total income CRE loans. The decline in nonperforming loans is primarily attributable to the wind-down of the non-strategic portion of the portfolio.
|
|
|
Residential CRE |
|
The residential CRE portfolio was $.1 billion on December 31, 2011. Originations through national construction lending ceased in early 2008 and balances have steadily decreased since that time. Active lending in the regional banking footprint is minimal with nearly all new originations limited to tactical advances to facilitate workout strategies with existing clients and selected new transactions with “strategic” clients. FHN considers a “strategic” residential CRE borrower as a homebuilder within the regional banking footprint who remained profitable during the down cycle and maintains high cash reserves. |
The wind-down of the non-strategic portion of this portfolio combined with the limited amount of new originations within the regional banking footprint directly impacts the amount of net charge-offs and nonperforming loans and the level of the allowance. Balances of residential CRE loans declined 54 percent from a year ago. Net charge-offs declined $49.6 million from 2010 to $12.6 million during 2011. The ALLL declined $14.4 million to $16.0 million and nonperforming loans decreased $65.2 million during 2011 to $45.8 million. The ALLL to loans ratio and the nonperforming loans ratio remained elevated at 13.20 percent and 37.87 percent, respectively. These metrics will remain skewed until the portfolio entirely winds down or until FHN actively originates this product and balances noticeably increase.
RETAIL LOAN PORTFOLIOS
|
|
|
Consumer Real Estate |
|
The consumer real estate portfolio was $5.3 billion on December 31, 2011, and is primarily composed of home equity lines and installment loans. Including restricted balances (loans consolidated at adoption of ASC 810 and on-balance sheet securitizations) the largest geographical concentrations of balances as of December 31, 2011, are in Tennessee (42 percent) and California (13 percent) with no other state representing greater than 4 percent of the portfolio. At origination, the weighted average FICO score of this portfolio was 738; refreshed FICO scores averaged 729 as of December 31, 2011. Deterioration has been most acute in areas with significant home price depreciation and is affected by poor economic conditions – primarily unemployment. |
|
|
|
Underwriting |
|
To obtain a consumer real estate loan, the loan applicant(s) in most cases must first meet a minimum qualifying FICO score. Applicants must also have the financial capacity (or available income) to service the debt by not exceeding a calculated Debt-to-Income (“DTI”) ratio. The amount of the loan is limited to a percentage of the lesser of the current value or sales price of the collateral. For the majority of loans in this portfolio, underwriting decisions are made through a centralized loan underwriting center. Minimum FICO score requirements are established by management for both loans secured by real estate as well as non-real estate secured loans. Management also establishes maximum loan amounts, loan-to-value ratios, and debt-to-income ratios for each consumer real estate product. Identified guideline and policy exceptions require established mitigating factors that have been approved for use by Credit Risk Management. |
Home equity line of credit (“HELOC”) interest rates are variable but only adjust in connection with movements in the index rate to which the line is tied. Such loans can have elevated risks of default – particularly in a rising interest rate environment potentially stressing borrower capacity to repay the loan at the higher interest rate. FHN’s current underwriting practice requires HELOC borrowers to qualify based on a fully indexed, fully amortized payment methodology. If the first mortgage loan is a non-traditional mortgage, the DTI calculation is based on a fully amortizing first mortgage payment. Prior to 2008, FHN’s underwriting guidelines required borrowers to qualify at an interest rate that was 200 basis points above the note rate. This mitigated risk to FHN in the event of a
|
|
|
|
32 |
FIRST HORIZON NATIONAL CORPORATION |
sharp rise in interest rates over a relatively short time horizon. FHN does not penalize borrowers (reset the rate) based on delinquency or any other factor during the life of the loan. FHN’s HELOC products typically have a 5 or 10 year draw period with repayment periods ranging between 10 and 20 years.
|
|
|
HELOC Portfolio Management |
|
FHN performs continuous HELOC account review processes in order to identify higher-risk home equity lines and initiate preventative and corrective actions. The reviews consider a number of account activity patterns and characteristics such as the number of times delinquent within recent periods, changes in credit bureau score since origination, score degradation, and account utilization. In accordance with FHN’s interpretation of regulatory guidance, FHN may block future draws on accounts and/or lower account limits. |
|
|
|
Low or Reduced Documentation Origination |
|
From time to time, FHN may originate consumer loans with low or reduced documentation. FHN generally defines low or reduced documentation loans, sometimes called “stated income” or “stated” loans, as any loan originated with anything less than pay stubs, personal financial statements, and tax returns from potential borrowers. |
Currently, stated-income or low or reduced documentation loans are limited to existing customers of FHN who have deposit accounts, other borrowings, or other business relationships with FHN with recurring consistent direct deposits from an employer. Such loans are currently only available for qualified non-purchase transactions. This exception, however, has certain restrictions. For example, self-employed customers are not eligible, deposits made directly by the borrower are not considered, direct deposits must indicate the employer’s name depositing the funds, and recurring deposits must be consistent per period and may not vary by more than 10 percent. If these and other conditions are not met, full income documentation is required. A verbal verification of employment is required in either situation.
As of December 31, 2011, $1.6 billion, or 27 percent, of the consumer real estate portfolio consisted of home equity lines and installment loans originated using stated-income compared to $1.8 billion, or 28 percent, as of December 31, 2010. These stated-income loans were 10 percent and 11 percent of the total loan portfolio as of December 31, 2011, and 2010, respectively. As of December 31, 2011, nearly three-fourths of the stated-income home equity loans in the portfolio were originated through legacy businesses that have been exited and these loan balances should continue to decline.
Stated-income loans accounted for nearly 33 percent of the net charge-offs for this portfolio during 2011 compared with 37 percent in 2010. Net charge-offs of stated-income home equity lines and installment loans were $47.8 million during 2011 and $81.9 million during 2010. As of the end of 2011 and 2010, approximately 1 percent of the stated income loans were nonperforming and 2 percent and 3 percent were more than 30 days delinquent, respectively.
|
|
|
Consumer Real Estate Asset Quality Trends |
|
Performance of the home equity portfolio improved in 2011 when compared with 2010. The ALLL declined $10.9 million to $139.3 million in 2011. The allowance as a percentage of loans decreased 4 basis points to 2.63 percent of loans. Delinquency rates and the net charge-offs ratio improved in 2011 when compared with 2010. Loans delinquent 30 or more days and still accruing were 1.70 percent in 2011 compared to 2.07 percent in 2010 primarily due to enhanced collections practices and loss mitigation activities. The net charge-offs ratio decreased 73 basis points to 2.19 percent of average loans. The improvement in performance is attributable to the strong borrower characteristics previously discussed, aging of the portfolio as well as modest improvement in the economy from a year ago as performance of this portfolio is highly correlated with the economic conditions and unemployment. |
|
|
|
Permanent Mortgage |
|
The permanent mortgage portfolio was $.8 billion on December 31, 2011. This portfolio is primarily composed of jumbo mortgages and OTC completed construction loans, although inflows from OTC modifications have now |
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
33 |
concluded. The portfolio is somewhat geographically diverse; however 24 percent of loan balances are in California. Overall, performance has been affected by economic conditions, primarily depressed retail real estate values and elevated unemployment.
In third quarter 2011, FHN executed a bulk sale, a significant majority of which were nonperforming permanent mortgages. The sale was approximately $188 million in UPB ($126 million after consideration for partial charge-offs and associated lower of cost or market (“LOCOM”) valuation allowance) and resulted in a loss on sale of $29.8 million (included in the provision for loan losses) and $40.2 million of net charge-offs. Additionally, in late 2010 and in second quarter 2011, FHN exercised clean-up calls for prior proprietary securitizations resulting in the addition of first lien jumbo mortgage loans to this portfolio, substantially all of which were performing upon exercise. The exercise of clean-up calls, which partially offset the impact of the nonperforming loan sale and natural runoff, resulted in a net decline in portfolio balances of $299.3 million. NPLs declined $89.8 million to $32.7 million during 2011, which was primarily attributable to the bulk sale. The ALLL declined $39.5 million from 2010 to $20.1 million as of December 31, 2011, primarily due to lower balances and improvement in delinquencies. The delinquencies declined $29.8 million to $26.3 million in 2011. Net charge-offs increased $3.1 million to $69.2 million as charge-offs in 2011 were elevated as a result of the loan sale.
|
|
|
Credit Card and Other |
|
The credit card and other portfolios were $.3 billion on December 31, 2011, and primarily include credit card receivables, automobile loans, and to a lesser extent OTC construction loans and other consumer related credits. As of the end of 2011, only $2.4 million of OTC loans remained in the portfolio with nearly all classified as nonperforming. In 2011, FHN charged-off $4.9 million other consumer loans compared with $26.4 million during 2010. The allowance declined $4.2 million to $0.2 million. |
|
|
|
Restricted Real Estate Loans |
|
The restricted real estate loan portfolio includes HELOCs that were previously securitized on balance sheet as well as HELOCs and some first and second lien mortgages that were consolidated on January 1, 2010, in conjunction with the adoption of amendments to ASC 810. The adoption of these amendments resulted in the consolidation of additional variable interest entities and this loan category was created to include all loans, primarily HELOC, that had previously been securitized but for which FHN retains servicing and other significant interests. As of December 31, 2011, this portfolio totaled $.6 billion and included $600.2 million of HELOC and $40.6 million of first and second lien mortgage loans. Although these loans share basic characteristics as the consumer real estate portfolio, generally, these loans have not performed at the same level. |
|
|
|
Payment-Option Adjustable Rate Mortgage (“ARM”) Loans and Sub-prime Lending |
|
Historically, FHN originated through its legacy mortgage banking business first lien adjustable rate mortgage loans with borrower payment options and first lien and home equity loans that were considered sub-prime. Such loans were originated with the intent to sell with servicing released. While a substantial portion of these loans were sold, a small amount remained unsold and the loans were subsequently moved from loans HFS to the loan portfolio. As of December 31, 2011, the remaining balances of payment-option ARMs and sub-prime loans in the portfolio were immaterial. Because only a small portion remains in the held-to-maturity (“HTM”) portfolio, the impact on the ALLL and on other loan portfolio asset quality metrics is immaterial. |
|
|
|
|
34 |
FIRST HORIZON NATIONAL CORPORATION |
The following table reflects originations of retail real estate loans from 2007 through 2011:
Table 14 – Origination Detail – Retail Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2011 |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
|||||
|
|
||||||||||||||||
|
Permanent mortgage (first liens) – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
originations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation |
|
$ |
284,385 |
|
$ |
847,096 |
|
$ |
1,278,570 |
|
$ |
16,417,603 |
|
$ |
21,784,104 |
|
|
Non full documentation |
|
|
- |
|
|
- |
|
|
- |
|
|
1,117,882 |
|
|
5,342,538 |
|
|
Payment choice (option ARM) (a) |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
63,270 |
|
|
Sub-prime |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
186,259 |
|
|
|
||||||||||||||||
|
Total permanent mortgage (first |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liens) – originations (b) |
|
$ |
284,385 |
|
$ |
847,096 |
|
$ |
1,278,570 |
|
$ |
17,535,485 |
|
$ |
27,376,171 |
|
|
|
||||||||||||||||
|
R/E installment loans – originations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation |
|
$ |
440,931 |
|
$ |
211,153 |
|
$ |
171,715 |
|
$ |
337,301 |
|
$ |
1,182,359 |
|
|
Non full documentation |
|
|
36,194 |
|
|
12,747 |
|
|
7,907 |
|
|
33,513 |
|
|
434,580 |
|
|
Sub-prime |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
389,902 |
|
|
|
||||||||||||||||
|
Home equity installment loans – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
originations (b) |
|
$ |
477,125 |
|
$ |
223,900 |
|
$ |
179,622 |
|
$ |
370,814 |
|
$ |
2,006,841 |
|
|
|
||||||||||||||||
|
HELOC – originations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation |
|
$ |
282,636 |
|
$ |
335,196 |
|
$ |
360,880 |
|
$ |
488,441 |
|
$ |
956,894 |
|
|
Non full documentation |
|
|
41,276 |
|
|
48,179 |
|
|
36,079 |
|
|
170,984 |
|
|
516,489 |
|
|
Sub-prime |
|
|
- |
|
|
- |
|
|
- |
|
|
316 |
|
|
74,832 |
|
|
|
||||||||||||||||
|
Total HELOC – originations |
|
$ |
323,912 |
|
$ |
383,375 |
|
$ |
396,959 |
|
$ |
659,741 |
|
$ |
1,548,215 |
|
|
|
||||||||||||||||
|
Total originations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation |
|
$ |
1,007,952 |
|
$ |
1,393,445 |
|
$ |
1,811,165 |
|
$ |
17,243,345 |
|
$ |
23,923,357 |
|
|
Non full documentation |
|
|
77,470 |
|
|
60,926 |
|
|
43,986 |
|
|
1,322,379 |
|
|
6,293,607 |
|
|
Payment choice (option ARM) |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
63,270 |
|
|
Sub-prime |
|
|
- |
|
|
- |
|
|
- |
|
|
316 |
|
|
650,993 |
|
|
|
||||||||||||||||
|
Total originations (c)(d) |
|
$ |
1,085,422 |
|
$ |
1,454,371 |
|
$ |
1,855,151 |
|
$ |
18,566,040 |
|
$ |
30,931,227 |
|
|
|
||||||||||||||||
|
|
|
|
(a) |
Adjustable rate mortgage (ARM). |
|
(b) |
2008 and 2007 include originations of OTC construction loans. |
|
(c) |
2008 and 2007 include $.2 billion and $2.6 billion of OTC construction loan originations, respectively. |
|
|
There were no originations of OTC construction loans in 2011, 2010 or 2009. |
|
(d) |
Includes originations of both HTM and HFS loans. |
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
35 |
Table 15 – HTM Loan Portfolio Detail – Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2011 |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
|||||
|
|
||||||||||||||||
|
Permanent mortgage (first liens) – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HTM: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation |
|
$ |
596,572 |
|
$ |
766,158 |
|
$ |
682,937 |
|
$ |
732,439 |
|
$ |
460,745 |
|
|
Non full documentation |
|
|
216,939 |
|
|
356,150 |
|
|
383,645 |
|
|
373,502 |
|
|
20,394 |
|
|
Payment choice (Option ARM) |
|
|
13,918 |
|
|
19,545 |
|
|
18,237 |
|
|
19,617 |
|
|
26,908 |
|
|
Sub-prime |
|
|
764 |
|
|
705 |
|
|
848 |
|
|
1,226 |
|
|
2,373 |
|
|
|
||||||||||||||||
|
Total permanent mortgage (first |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liens) – HTM (a) |
|
$ |
828,193 |
|
$ |
1,142,558 |
|
$ |
1,085,667 |
|
$ |
1,126,784 |
|
$ |
510,420 |
|
|
|
||||||||||||||||
|
R/E installment loans – HTM: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation |
|
$ |
1,758,792 |
|
$ |
1,687,504 |
|
$ |
1,912,747 |
|
$ |
2,227,494 |
|
$ |
2,398,247 |
|
|
Non full documentation |
|
|
442,719 |
|
|
548,865 |
|
|
721,101 |
|
|
1,006,450 |
|
|
1,186,966 |
|
|
Sub-prime |
|
|
- |
|
|
- |
|
|
- |
|
|
656 |
|
|
248 |
|
|
|
||||||||||||||||
|
Total home equity installment loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– HTM (b) |
|
$ |
2,201,511 |
|
$ |
2,236,369 |
|
$ |
2,633,848 |
|
$ |
3,234,600 |
|
$ |
3,585,461 |
|
|
|
||||||||||||||||
|
HELOC – HTM: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation |
|
$ |
2,546,826 |
|
$ |
2,818,823 |
|
$ |
2,908,790 |
|
$ |
3,011,524 |
|
$ |
3,026,204 |
|
|
Non full documentation |
|
|
1,143,209 |
|
|
1,264,219 |
|
|
1,388,797 |
|
|
1,503,244 |
|
|
1,435,827 |
|
|
|
||||||||||||||||
|
Total HELOC – HTM (c) |
|
$ |
3,690,035 |
|
$ |
4,083,042 |
|
$ |
4,297,587 |
|
$ |
4,514,768 |
|
$ |
4,462,031 |
|
|
|
||||||||||||||||
|
Pre-modification OTC – HTM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation |
|
$ |
734 |
|
$ |
6,001 |
|
$ |
71,448 |
|
$ |
381,348 |
|
$ |
974,504 |
|
|
Non full documentation |
|
|
1,557 |
|
|
12,728 |
|
|
151,531 |
|
|
586,720 |
|
|
1,013,875 |
|
|
Payment choice (Option ARM) |
|
|
67 |
|
|
547 |
|
|
6,508 |
|
|
12,730 |
|
|
19,910 |
|
|
|
||||||||||||||||
|
Total Pre-modification OTC – HTM |
|
$ |
2,358 |
|
$ |
19,276 |
|
$ |
229,487 |
|
$ |
980,798 |
|
$ |
2,008,289 |
|
|
|
||||||||||||||||
|
Total HTM: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full documentation |
|
$ |
4,902,924 |
|
$ |
5,278,486 |
|
$ |
5,575,922 |
|
$ |
6,352,805 |
|
$ |
6,859,700 |
|
|
Non full documentation |
|
|
1,804,424 |
|
|
2,181,962 |
|
|
2,645,074 |
|
|
3,469,916 |
|
|
3,657,062 |
|
|
Payment choice (Option ARM) |
|
|
13,985 |
|
|
20,092 |
|
|
24,745 |
|
|
32,347 |
|
|
46,818 |
|
|
Sub-prime |
|
|
764 |
|
|
705 |
|
|
848 |
|
|
1,882 |
|
|
2,621 |
|
|
|
||||||||||||||||
|
Total retail real estate |
|
$ |
6,722,097 |
|
$ |
7,481,245 |
|
$ |
8,246,589 |
|
$ |
9,856,950 |
|
$ |
10,566,201 |
|
|
|
||||||||||||||||
|
Other retail |
|
$ |
89,701 |
|
$ |
100,211 |
|
$ |
121,526 |
|
$ |
135,779 |
|
$ |
144,019 |
|
|
|
||||||||||||||||
|
Credit card receivables |
|
$ |
191,992 |
|
$ |
192,437 |
|
$ |
192,036 |
|
$ |
189,554 |
|
$ |
204,812 |
|
|
|
||||||||||||||||
|
Total consumer loans |
|
$ |
7,003,790 |
|
$ |
7,773,893 |
|
$ |
8,560,151 |
|
$ |
10,182,283 |
|
$ |
10,915,032 |
|
|
|
||||||||||||||||
|
|
|
|
(a) |
2011 includes $40.6 million of restricted permanent mortgages. |
|
(b) |
Home equity installment loans are primarily second liens. |
|
(c) |
2011 includes $600.2 million of restricted HELOC. |
|
|
|
Loan Portfolio Concentrations |
|
FHN has a concentration of loans secured by residential real estate (42 percent of total loans), the majority of which is in the consumer real estate portfolio (32 percent of total loans). Additionally, on December 31, 2011, FHN had a sizeable portfolio of bank-related loans, including TRUPs totaling $0.6 billion (8 percent of the C&I portfolio, or 4 percent of total loans). While the stronger borrowers in this portfolio class have stabilized, the weaker financial institutions remain under stress due to limited availability of market liquidity and capital, and the impact from economic conditions on these borrowers. |
On December 31, 2011, FHN did not have any concentrations of C&I loans in any single industry of 10 percent or more of total loans.
|
|
|
|
36 |
FIRST HORIZON NATIONAL CORPORATION |
The following table provides additional asset quality data by loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 16 – Asset Quality by Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
2010 |
|
2009 |
|
|||
|
C&I |
|
|
|
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
8,015 |
|
$ |
7,338 |
|
$ |
7,150 |
|
|
30+ Delinq. % (a) |
|
|
0.15 |
% |
|
0.36 |
% |
|
0.96 |
% |
|
NPL % |
|
|
2.02 |
|
|
2.92 |
|
|
1.89 |
|
|
Charge-offs % |
|
|
0.84 |
|
|
1.23 |
|
|
1.67 |
|
|
Allowance / Loans % |
|
|
1.63 |
|
|
3.26 |
|
|
3.87 |
|
|
Allowance / Charge-offs |
|
|
2.17x |
|
|
2.80x |
|
|
2.27x |
|
|
Income CRE |
|
|
|
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
1,257 |
|
$ |
1,407 |
|
$ |
1,774 |
|
|
30+ Delinq. % (a) |
|
|
0.76 |
% |
|
1.20 |
% |
|
3.13 |
% |
|
NPL % |
|
|
5.50 |
|
|
10.06 |
|
|
10.35 |
|
|
Charge-offs % |
|
|
1.30 |
|
|
3.29 |
|
|
4.75 |
|
|
Allowance / Loans % |
|
|
3.15 |
|
|
8.87 |
|
|
8.67 |
|
|
Allowance / Charge-offs |
|
|
2.27x |
|
|
2.39x |
|
|
1.68x |
|
|
Residential CRE |
|
|
|
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
121 |
|
$ |
264 |
|
$ |
640 |
|
|
30+ Delinq. % (a) |
|
|
0.72 |
% |
|
3.19 |
% |
|
3.71 |
% |
|
NPL % |
|
|
37.87 |
|
|
42.04 |
|
|
42.94 |
|
|
Charge-offs % |
|
|
6.88 |
|
|
14.53 |
|
|
17.54 |
|
|
Allowance / Loans % |
|
|
13.20 |
|
|
11.51 |
|
|
8.12 |
|
|
Allowance / Charge-offs |
|
|
1.26x |
|
|
0.49x |
|
|
0.30x |
|
|
Consumer Real Estate |
|
|
|
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
5,291 |
|
$ |
5,618 |
|
$ |
6,931 |
|
|
30+ Delinq. % (a) |
|
|
1.70 |
% |
|
2.07 |
% |
|
2.31 |
% |
|
NPL % |
|
|
0.67 |
|
|
0.58 |
|
|
0.26 |
|
|
Charge-offs % |
|
|
2.19 |
|
|
2.92 |
|
|
2.83 |
|
|
Allowance / Loans % |
|
|
2.63 |
|
|
2.67 |
|
|
3.10 |
|
|
Allowance / Charge-offs |
|
|
1.18x |
|
|
0.87x |
|
|
1.03x |
|
|
Permanent Mortgage |
|
|
|
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
788 |
|
$ |
1,087 |
|
$ |
1,086 |
|
|
30+ Delinq. % (a) |
|
|
3.33 |
% |
|
5.16 |
% |
|
8.49 |
% |
|
NPL % |
|
|
4.15 |
|
|
11.27 |
|
|
9.02 |
|
|
Charge-offs % |
|
|
7.15 |
|
|
6.49 |
|
|
5.66 |
|
|
Allowance / Loans % |
|
|
2.55 |
|
|
5.49 |
|
|
11.41 |
|
|
Allowance / Charge-offs |
|
|
0.29x |
|
|
0.90x |
|
|
1.99x |
|
|
Credit Card and Other |
|
|
|
|
|
|
|
|
|
|
|
Period-end loans ($ millions) |
|
$ |
284 |
|
$ |
312 |
|
$ |
543 |
|
|
30+ Delinq. % (a) |
|
|
1.33 |
% |
|
1.43 |
% |
|
5.36 |
% |
|
NPL % |
|
|
0.75 |
|
|
6.18 |
|
|
34.96 |
|
|
Charge-offs % |
|
|
5.23 |
|
|
10.75 |
|
|
19.47 |
|
|
Allowance / Loans % |
|
|
2.49 |
|
|
4.13 |
|
|
13.91 |
|
|
Allowance / Charge-offs |
|
|
0.46x |
|
|
0.32x |
|
|
0.44x |
|
|
Restricted Real Estate Loans (b) |
|
|
|
|
|
|
|
|
|
|
|
Period-end loans ($ millions) (c) |
|
$ |
641 |
|
$ |
757 |
|
|
N/A |
|
|
30+ Delinq. % (a) |
|
|
3.15 |
% |
|
3.12 |
% |
|
N/A |
|
|
NPL % |
|
|
1.04 |
|
|
0.82 |
|
|
N/A |
|
|
Charge-offs % |
|
|
4.50 |
|
|
5.63 |
|
|
N/A |
|
|
Allowance / Loans % |
|
|
4.97 |
|
|
6.26 |
|
|
N/A |
|
|
Allowance / Charge-offs |
|
|
1.02x |
|
|
1.01x |
|
|
N/A |
|
|
|
|
|
Certain previously reported
amounts have been reclassified to agree with current presentation. |
|
|
(a) |
30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
|
(b) |
Prior to 2010, certain amounts were included in Consumer Real Estate. |
|
(c) |
Includes $600.2 million of consumer real estate loans and $40.6 million of permanent mortgage loans. |
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
37 |
|
|
|
Allowance for Loan Losses |
|
Management’s policy is to maintain the ALLL at a level sufficient to absorb estimated probable incurred losses in the loan portfolio. See Note 1 – Summary of Significant Accounting Policies for detailed discussion regarding FHN’s policy for determining the ALLL. The total allowance for loan losses decreased 42 percent to $384.3 million on December 31, 2011, from $664.8 million on December 31, 2010. While there was aggregate improvement in borrowers’ financial conditions in 2011, some of the decline in the ALLL is also attributable to a smaller loan portfolio. Overall the portfolio characteristics have changed as more than $1 billion of non-strategic balances have been reduced while the regional bank had growth year over year. The growth in the regional bank was driven by loans to mortgage companies, asset-based lending, general C&I and consumer loans. This portfolio shrinkage has had a direct impact on the composition of the loan portfolio from one balance sheet date to the next and thus has had an impact on the levels of estimated probable incurred losses within the portfolio as of the end of the reporting periods. As loans with higher levels of probable incurred loss content have been removed from the portfolio, this has influenced the allowance estimate resulting in lower required reserves. Additionally, the remaining portfolio has improved as commercial problem loan borrowers continued to adapt to the operating environment, FHN has been proactively identifying and working with problem borrowers and there has been modest improvement in economic conditions. The ratio of allowance for loan losses to total loans, net of unearned income, decreased to 2.34 percent on December 31, 2011 from 3.96 percent on December 31, 2010. The allowance attributable to individually impaired loans was $88.1 million compared to $115.4 million on December 31, 2011 and 2010, respectively. |
The provision for loan losses is the charge to earnings that management determines to be necessary to maintain the ALLL at a sufficient level reflecting management’s estimate of probable incurred losses in the loan portfolio. The provision for loan losses decreased 84 percent to $44.0 million in 2011 from $270.0 million in 2010. In 2011, the provision includes losses on loan sales of approximately $36 million with $29.8 million attributable to a sale of mostly nonperforming permanent mortgages within the non-strategic segment and the remainder attributable to commercial nonperforming loan sales in both the regional bank and non-strategic segments.
Though the rate of improvement is likely to slow, overall asset quality trends are expected to improve during 2012 assuming the economic trends remain stable or improve. The C&I portfolio is expected to continue to show positive trends as there has been aggregate improvement in the risk profile of commercial borrowers which has resulted in upward grade migration beginning in late 2010 and continuing through end of 2011; however, some volatility is possible in the short term. The income CRE portfolio remains under stress; however, FHN has observed signs of improvement as property values stabilize and guarantors have been willing to support borrowers. The remaining non-strategic consumer real estate and permanent mortgage portfolios should continue to wind-down and will have less of an impact on the overall credit metrics in the future in comparison to prior periods. Continued improvement in performance of the home equity portfolio assumes an ongoing economic recovery as consumer delinquency and loss rates are highly correlated with unemployment trends.
The following table provides reserve rates and balances for the loan portfolio:
Table 17 – Reserve Rates
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|
|
|
|
|
|
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2011 |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
||||||||||||||||||||
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|
|||||||||||||||||||||||||
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|
|
ALLL/ |
|
Period End |
|
ALLL/ |
|
Period End |
|
ALLL/ |
|
Period End |
|
ALLL/ |
|
Period End |
|
ALLL/ |
|
Period End |
||||||||||
|
Total commercial loans |
|
1.98 |
% |
|
57 |
% |
|
4.38 |
% |
|
54 |
% |
|
5.04 |
% |
|
53 |
% |
|
3.53 |
% |
|
52 |
% |
|
2.00 |
% |
|
51 |
% |
|
Consumer real estate (a) |
|
2.80 |
|
|
36 |
|
|
3.10 |
|
|
38 |
|
|
3.10 |
|
|
38 |
|
|
2.35 |
|
|
36 |
|
|
0.56 |
|
|
36 |
|
|
Permanent mortgage (a) |
|
3.16 |
|
|
5 |
|
|
5.49 |
|
|
6 |
|
|
11.41 |
|
|
6 |
|
|
4.76 |
|
|
5 |
|
|
0.20 |
|
|
2 |
|
|
OTC (Consumer Residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Loans) |
|
9.24 |
|
|
* |
|
|
22.80 |
|
|
* |
|
|
26.85 |
|
|
1 |
|
|
20.44 |
|
|
5 |
|
|
2.99 |
|
|
9 |
|
|
Credit card and other |
|
2.44 |
|
|
2 |
|
|
2.90 |
|
|
2 |
|
|
4.45 |
|
|
2 |
|
|
6.60 |
|
|
2 |
|
|
3.44 |
|
|
2 |
|
|
|
|
|
* |
Amount is less than one percent. |
|
(a) |
Includes restricted real estate loans. |
|
|
|
|
38 |
FIRST HORIZON NATIONAL CORPORATION |
|
|
|
Consolidated Net Charge-offs |
|
Net charge-offs were $324.4 million in 2011 compared with $526.7 million in 2010. The ALLL was 1.18 times net charge-offs for 2011 compared with 1.26 times net charge-offs for 2010. The net charge-offs to average loans ratio decreased from 3.07 percent in 2010 to 2.02 percent in 2011 due to a 38 percent decline in net charge-offs and a 6 percent decrease in average loans from 2010. For all portfolios except permanent mortgage, net charge offs declined in 2011 and were primarily attributable to improved performance of the loan portfolio and continued reduction of the non-strategic portfolios. In 2011, FHN recognized $47.6 million of charge-offs associated with bulk sales, a majority of which were nonperforming permanent mortgages. |
The decline in commercial loan net charge-offs contributed to over half of the decline in total consolidated net charge-offs. The reduction in residential CRE net charge-offs was $49.6 million and drove a significant decline in commercial net charge-offs as FHN continues to wind down this portfolio. The borrowers’ ability to refinance with other institutions given their improved quality and less rigid industry credit standards contributed to a $34.6 million decline in commercial net charge-offs from 2010 while the improved performance of C&I loans contributed to a $25.5 million reduction of commercial net charge-offs.
Improvement of the retail portfolios contributed to a $92.6 million decline in consolidated net charge-offs. Net charge-offs of consumer real estate loans declined $55.1 million to $118.2 million in 2011 with nearly all of the decline attributable to the non-strategic segment. In 2011, net charge-offs of OTC loans were $4.9 million compared to $26.4 million in 2010. Net charge-offs of permanent mortgage portfolio increased $3.1 million to $69.2 million in 2011 from 2010. Net charge-offs in 2011 included $40.2 million associated with a bulk sale of nonperforming loans in 2011. The net charge-offs of restricted real estate and mortgage loans decreased $15.7 million to $31.3 million in 2011 from 2010.
The following table provides consolidated asset quality information for 2008 through 2011. When FHN began experiencing increased credit deterioration, reporting of credit metrics and methodologies for measuring and monitoring credit risk became more granular and internal classification of loans began to slightly deviate in certain cases from the disclosure line items previously established. The ALLL rollforward below is based on FHN’s portfolio segments defined in accordance with the adoptions of amendments to ASC 310. Consequently, asset quality metrics for certain historical periods are not available.
|
|
|
|
FIRST HORIZON NATIONAL CORPORATION |
39 |
Table 18 – Analysis of Allowance for Loan Losses and Charge-offs
|
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|
|
(Dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
664,799 |
|
$ |
896,914 |
|
$ |
849,210 |
|
$ |
342,341 |
|
|
Adjustment due to amendments of ASC 810 |
|
|
- |
|
|
24,578 |
|
|
- |
|
|
- |
|
|
Provision for loan losses |
|
|
44,000 |
|
|
270,000 |
|
|
880,000 |
|
|
1,080,000 |
|
|
Acquisitions/(divestitures), net |
|
|
- |
|
|
- |
|
|
- |
|
|
(370 |
) |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and industrial |
|
|
76,728 |
|
|
97,271 |
|
|
129,283 |
|
|
105,621 |
|
|
Commercial real estate |
|
|
41,147 |
|
|
127,323 |
|
|
277,461 |
|
|
193,518 |
|
|
Consumer real estate |
|
|
132,427 |
|
|
188,694 |
|
|
224,853 |
|
|
124,102 |
|
|
Permanent mortgages |
|
|
74,614 |
|
|
67,829 |
|
|
63,004 |
|
|
6,913 |
|
|
OTC |
|
|
5,236 |
|
|
30,609 |
|
|
161,730 |
|
|
143,541 |
|
|
Credit card and other |
|
|
14,017 |
|
|
16,956 |
|
|
20,630 |
|
|
18,733 |
|
|
Restricted real estate loans |
|
|
33,099 |
|
|
47,859 |
|
|
N/A |
|
|
N/A |
|
|
Total charge-offs |
|
|
377,268 |
|
|
576,541 |
|
|
876,961 |
|
|
592,428 |
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and industrial |
|
|
16,562 |
|
|
11,630 |
|
|
7,594 |
|
|
4,495 |
|
|
Commercial real estate |
|
|
11,047 |
|
|
13,030 |
|
|
10,790 |
|
|
2,386 |
|
|
Consumer real estate |
|
|
14,268 |
|
|
15,464 |
|
|
16,244 |
|
|
7,269 |
|
|
Permanent mortgages |
|
|
5,375 |
|
|
1,658 |
|
|
797 |
|
|
546 |
|
|
OTC |
|
|
327 |
|
|
4,162 |
|
|
6,529 |
|
|
2,253 |
|
|
Credit card and other |
|
|
3,490 |
|
|
3,068 |
|
|
2,711 |
|
|
2,718 |
|
|
Restricted real estate loans |
|
|
1,751 |
|
|
836 |
|
|
N/A |
|
|
N/A |
|
|
Total recoveries |
|
|
52,820 |
|
|
49,848 |
|
|
44,665 |
|
|
19,667 |
|
|
Net charge-offs |
|
|
324,448 |
|
|
526,693 |
|
|
832,296 |
|
|
572,761 |
|
|
Ending balance |
|
$ |
384,351 |
|
$ |
664,799 |
|
$ |
896,914 |
|
$ |
849,210 |
|
|
Reserve for unfunded commitments |
|
$ |
6,945 |
|
$ |
14,253 |
|
$ |
19,685 |
|
$ |
18,752 |
|
|
Total of allowance for loan losses and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserve for unfunded commitments |
|
|
391,296 |
|
|
679,052 |
|
|
916,599 |
|
|
867,962 |
|
|
Loans and commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end loans, net of unearned |
|
$ |
16,397,127 |
|
$ |
16,782,572 |
|
$ |
18,123,884 |
|
$ |
21,278,190 |
|
|
Insured retail residential and construction loans (a) |
|
|
99,024 |
|
|
174,621 |
|
|
365,602 |
|
|
591,116 |
|
|
Loans excluding insured loans |
|
$ |
16,298,103 |
|
$ |
16,607,951 |
|
$ |
17,758,282 |
|
$ |
20,687,074 |
|
|
Remaining unfunded commitments (millions) |
|
$ |
7,435 |
|
$ |
7,904 |
|
$ |
8,371 |
|
$ |
9,601 |
|
|
Average loans, net of unearned |
|
$ |
16,056,818 |
|
$ |
17,131,798 |
|
$ |
19,579,267 |
|
$ |
21,660,704 |
|
|
Allowance and net charge-off ratios (b): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance to total loans |
|
|
2.34 |
% |
|
3.96 |
% |
|
4.95 |
% |
|
3.99 |
% |
|
Allowance to total loans excluding insured loans |
|
|
2.36 |
|
|
4.00 |
|
|
5.05 |
|
|
4.11 |
|
|
Allowance to net charge-offs |
|
|
1.18 |
x |
|
1.26 |
x |
|
1.08 |
x |
|
1.48 |
x |
|
Net charge-offs to average loans |
|
|
2.02 |
% |
|
3.07 |
% |
|
4.25 |
% |
< | ||
