2012

ANNUAL

REPORT



 

 

 




(FIRST HORIZON NATIONAL CORPORATION LOGO)






 

CORPORATE OVERVIEW

 

 

 

 

 

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 2012 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 4,500 employees, on our support for the communities we serve and on the confidence of our shareholders. In 2012 we renewed our commitment to build that future.

 

 

 

 

 

 

 

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 in exceptional ways. Our employee focus and our distinctive corporate culture – First-power – have earned us national recognition as one of the best companies to work for in America. 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.

 

 

 

 

 

 

 

OUR CORE BUSINESSES

 

 

 

Regional banking: With more than 170 offices 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, and our employees are preparing to celebrate our 150th birthday in 2014. 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 personal service, advanced technology and helpful employees that set First Tennessee apart. Recent recognition includes 13 Excellence in Banking awards from Greenwich and Associates, putting us in the top 6 percent of more than 750 banks rated by the survey. Our customers continue to help tell our story of differentiated service in our advertisements in newspapers and on television.

 

 

Our goal is to be easy to do business with, to be the best at serving customers in all our business lines. We offer a full range of products, 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. In fact, First Tennessee was the first bank in our markets to offer mobile banking for commercial customers and mobile check deposit to consumers, and our customers have enthusiastically embraced these new ways of doing business. Above all, our knowledgeable employees strive to be proactive and 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 a distinctive customer experience – our competitive advantage. More information is available at www.FirstTennessee.com or at any of our convenient offices.

 

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. The strength of FTN Financial’s platform is its extensive fixed income distribution network of more than 6,000 institutional clients worldwide, including approximately 50 percent of all U.S. banks with portfolios over $100 million. FTN Financial also provides investment services and balance sheet management solutions.

 

With 19 offices in the U.S. and abroad, 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 2012 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.

 

 

 

 

 

We devote time and energy through our employee volunteer program, which won national recognition with a Financial Services Roundtable Community Service Leadership award. Our volunteers donated more than 37,000 hours of community service in 2012, and we support their efforts through leadership grants and matching gifts programs.

 

 

 

 

 

We established the First Tennessee Foundation in 1993 to support nonprofit organizations in the communities we serve. Through this private charitable foundation 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 responsible 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:

 

 

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.

 

 

Economic development: To encourage jobs and growth, we support Chambers of Commerce, regional development initiatives and small business resources.

 

 

Health and human services: In 2012 our foundation and employees donated more than $2.3 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 scores of agencies working to better our communities. To ensure that our employees and neighbors have access to top-quality care, First Tennessee supports healthcare institutions throughout the state.

 

 

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 sustainable practices:

 

 

 

 

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.

 

To reduce water consumption we use indigenous plants for landscaping at all new facilities.

 

Buildings are designed with a goal of enhancing energy efficiency and sustainability, from window blinds to the heating and cooling systems to motion-sensored lighting and low-volume flush valves and faucets.

 

Recycled products are used in carpeting, wallpaper, fabrics and parking abutments.

 

At our corporate headquarters air conditioning equipment uses environmentally friendly refrigerant, and we renovated the mechanical equipment to improve air quality and energy efficiency.

 

Employees who have a passion for the environment and sustainability meet to discuss green ideas, make recommendations to management and implement approved ideas. The group has a 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.

 

 

 

 

 

 

 

OUR PURPOSE

 

 

 

We strive to be admired by serving our customers, supporting our people, investing in our communities and rewarding our investors. Carrying on our 149-year tradition, First Horizon National Corp. is building for a bright future.





 

CHAIRMAN’S LETTER

 

 

Dear fellow shareholders:
First Horizon marked another year of progress in 2012. We took significant steps to position our business for the long term. By taking difficult actions and relying on core strengths, First Horizon has weathered the economic storm of the last few years to emerge a stronger and better-positioned company. We controlled what we could control to keep moving ahead.

 

 

 

Actions we took in 2012 cleared the path for future success. Among the milestones:

 

We built strong customer trends in a difficult operating environment.

 

We achieved our targeted 2013 operating expense annualized run rate in the fourth quarter of 2012, a full year ahead of our original target date.

 

We set aside $250 million as a reserve for loss on current and future expected mortgage repurchase requests from government-sponsored enterprises (GSEs), resulting in zero repurchase provision in the second half of 2012.

 

 

 


 

 

 

In short, our people – our greatest asset – executed on an array of tough challenges despite a sluggish economy. I am pleased with the momentum I see in our business, the enthusiasm of our people to serve our customers and build for the future, and the improving trends in our financial results.

 

 

 

STRATEGIC PRIORITIES

 

We continued to execute on our strategic priorities in 2012. We grew regional bank loans and deposits, improving our balance sheet and business mix. We reduced expenses, achieving near-term productivity and efficiency goals. We made significant progress in winding down the non-strategic segment, reducing the drag on future earnings of our core businesses of regional banking through First Tennessee and capital markets through FTN Financial. We continued to return capital to shareholders, repurchasing $131 million of common stock in 2012. We improved asset quality, with non-performing assets down 20 percent and net charge-offs down 43 percent year over year. We continued to improve risk management governance, processes and culture. Our core businesses remained solid performers. Both have leading market shares in their respective spheres of regional banking and capital markets.

 

 

 

 

FIRST TENNESSEE

 

 

 

Year over year, First Tennessee’s revenues rose 3 percent, driven by a 6 percent increase in net interest income. Average core deposits were up 11 percent in the regional bank, and average loans increased 10 percent, including 12 percent growth in the C&I portfolio. Loan growth in the bank offset the 17 percent decline in the non-strategic portfolio, resulting in a year-over-year increase of 2 percent in consolidated period-end loans.

 

 

 

According to the latest FDIC data, First Tennessee has the No. 1 market share in four out of the five major metro areas where we do business in the state, including West and East Tennessee. In Middle Tennessee, we have grown deposits 55 percent over the last three years, four times the market rate.

 

 

 

Our bankers focused on service to deepen existing customer relationships and build new ones. Their efforts were recognized. First Tennessee won top national and regional customer satisfaction honors in the 2012 Greenwich Excellence Awards for U.S. small business


 

 

 

 

and middle market banking. With 13 awards, we were the top recipient among Tennessee-based banks. A First Tennessee marketing campaign is based on survey findings that 96 percent of our customers would recommend us. That’s how we grow business in a tough environment.

 

 

 

FTN FINANCIAL

 

FTN Financial continued to be a major contributor to fee income and provided significant returns. Fixed income average daily revenue for the group was $1.2 million for 2012. FTN Financial expanded its product offerings in 2012 with a particular focus on the municipal sector, where we added sales and trading resources. A newly formed public finance department will complement our municipal trading and competitive underwriting capabilities. We made other strategic hires in sales and trading as well, further expanding our extensive distribution platform. FTN Financial transacts business with approximately 50 percent of all domestic depository institutions with investment portfolios over $100 million.





 

 

EFFICIENCY EFFORTS

 

 

 

We improved productivity and efficiency throughout the year. Our efforts helped improve the bank’s revenue-per-FTE (full-time equivalent employee) 9 percent from 2011. We offered a voluntary separation package, which resulted in severance-related charges in the fourth quarter but should translate into $20 million in annual cost savings, part of an additional $50 million in efficiencies we are targeting by the end of 2013. We will continue to identify expense reductions without impacting customer service or revenue.

 

 

 

 

 

 

 

OUTSIDE FORCES

 

 

 

Other than healthcare, probably no sector feels the force of increased regulation and a slow economy more than the financial services industry. Financial services, banking especially, is a mature business, yet changes in technology and customer preferences, coupled with changing regulation and a weak economy, will drive significant change for the industry over the coming years.

 

 

 

In 2012 the United States and Tennessee continued to experience slow economic growth, which has resulted in no significant reduction in unemployment. Interest rates have remained low, and the Federal Reserve expects that they will remain at historically low levels for an extended period. Low rates are usually good for stimulating borrowing and growth but have an offsetting impact on savers and lenders. For banks, low rates help improve credit quality by making payments more manageable and increase the demand for credit but put significant pressure on net interest income and margins.

 

 

 

The sluggishness of the economic recovery is not the result of any single thing. Europe is still in recession. The U.S. housing recovery has been uneven and slow to gain traction. A great deal of political uncertainty flows from Washington.

 

 

 

The situation in Europe seems to have stabilized some over the past few quarters as the result of major actions to reduce the risk of contagion and buy time. Steps being taken to deal with European fiscal imbalances will likely result in slower growth for the near term at least.

 

 

 

The U.S. housing recovery could be impacted positively or negatively by changing economic trends. In the short term, one of the greater risks to the housing recovery is the mortgage market. Recently issued rules and many more pending rules could adversely impact the availability and cost of mortgage credit to homebuyers and owners.






 

 

 

 

In my view, the lack of clarity from Washington is far greater than at any time in the past 30 years. Healthcare reform and aggressive financial regulation would create a great deal of uncertainty in any environment, but against a backdrop of significant fiscal imbalances and deficits, higher taxes and reduced government expenditures, the economic recovery appears mired in slow motion.

 

 

 

Implementation of Dodd-Frank continues for us, the industry and our regulators. Rule-making has been arduous due to the complex nature and broad scope of the task. Coupled with changes to industry capital levels under the proposed Basel accords, the rules are likely to have a significant impact on how we and the industry are able to serve customers. Although many of these regulations will erode the profitability and in some cases the availability of some of our products and services, we will adapt.

 

 

 

We can expect more consolidation in the banking industry in the next couple of years because of the economy, regulation, technological changes and excess capacity. Although we do not have to grow through acquisition, mergers and acquisitions with disciplined pricing can be an attractive way to deploy capital and expand in existing or new markets where our business model should be successful.

 

 

 

 

DOING BUSINESS THE WAY OUR CUSTOMERS PREFER

 

 

 

For a long time, technology has been changing customer behavior and thus our business. The difference today is the rapid pace of change and the fact that technology enables new competitors to encroach on the more financially attractive parts of our business. As our customers embrace new technologies, we see opportunity and respond:

 

 

 

 

We were the first bank in our markets to offer mobile banking — for both retail and commercial customers — and mobile remote deposit capture.

 

Nearly 15 percent of our customers now use our mobile banking, the quickest adoption of any new banking channel in recent history. We are processing more than 12,000 deposits per month through that delivery channel, equivalent to the work of about six tellers.

 

We are adopting social media to communicate with our customers who like to communicate through channels like Twitter, Facebook, LinkedIn and YouTube.

 

We are continually enhancing technology so when our customers contact us in any way, every experience is handled optimally.

 

The way customers are using our branches is changing, and we’re responding. Based on when and how our customers choose to visit our financial centers, we have adjusted branch hours and consolidated locations, which has reduced the size of our financial center network by 16 percent since 2008.





 

 

 

 

 

We’ve upgraded branch technology with new teller, loan and contact management systems to make it easier for our employees to provide a differentiated experience. We are experimenting with new tools in branches such as iPads and video screens in our drive-through lanes, and we are utilizing image-enabled ATMs.

 

 

We’re creating our “bank of the future” to continue evolving to meet our customers’ needs. We have developed a smaller prototype for new branches that will enable us to serve new markets and meet customer needs with enhanced technology in a smaller facility. And we will soon introduce a concierge center concept with “universal bankers,” who can meet all of our customers’ needs in a financial center, from teller transactions to product information, sales and service.

 

 

 

 

 

 

 

 

 

 

 

IMPROVING PROFITABILITY

 

 

 

 

 

Managing capital to generate returns is the key to our strategy to create value for our shareholders. Growth is important to us, but we intend to grow only with attractive returns on the capital required to support that growth. Our profitability measurement systems are aligned with the “bonefish,” our outline of strategic goals. In 2012 we improved our financial analytical tools to give greater clarity to our drivers of value creation. As we manage our company in this slow-growth, very competitive environment, we will continue to focus on where we create value today and opportunities to create value in the future. Aligning our strategies, financial measurement and incentives should propel our performance over the long term.

 

 

 

 

 

 

 

 

 

MOVING AHEAD

 

 

 

 

 

The turbulent economic waters left in the wake of the Great Recession are not likely to recede in 2013, but we believe First Horizon will continue to make headway. We have changed our company to focus on our strengths and position us for long-term success. We have responded to external forces beyond our control by looking inward to streamline operations, upgrade technology and become easier to do business with. We looked outward to provide customers with a differentiated experience. And we look forward with a goal of consistent, long-term profitability.

 

 

 

 

 

None of this success could be possible without the hard work and skill of the 4,500 employees at First Horizon. It is a privilege to work with such talented, dedicated people, and I thank them for their efforts every day to serve our customers.

 

 

 

 

 

We appreciate our customers. If we continue to provide value, they will continue to choose us. Thank you for allowing us to serve you.

 

 

 

 

 

 

 

 

 

 

We take our responsibility as corporate citizens seriously. That’s reflected in the way we support our communities. Our roots in Tennessee go back nearly 150 years, and we are working to sustain that legacy of trust and service.

 

We thank our shareholders for their investment in our company. We will continue to work to reward them with sustained returns. At First Horizon, we will continue to work to reward employees, customers and shareholders for their belief in us.

 

Sincerely,

 

-s- D. Bryan Jordan

D. Bryan Jordan

Chairman of the Board, President and CEO

March 1, 2013




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FINANCIAL INFORMATION AND DISCUSSION

TABLE OF CONTENTS

 

 

 

Selected Financial and Operating Data

 

2

 

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

3

 

 

 

General Information

 

3

 

 

 

Forward-Looking Statements

 

4

 

 

 

Financial Summary - 2012 compared to 2011

 

4

 

 

 

Business Line Review

 

6

 

 

 

Income Statement Review - 2012 compared to 2011

 

8

 

 

 

Statement of Condition Review - 2012 compared to 2011

 

17

 

 

 

Restructuring, Repositioning, and Efficiency Initiatives

 

21

 

 

 

Income Statement Review - 2011 compared to 2010

 

22

 

 

 

Capital

 

24

 

 

 

Asset Quality - Trend Analysis of 2012 Compared to 2011

 

27

 

 

 

Risk Management

 

44

 

 

 

Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations

 

52

 

 

 

Market Uncertainties and Prospective Trends

 

61

 

 

 

Critical Accounting Policies

 

64

 

 

 

Quarterly Financial Information

 

70

 

 

 

Non-GAAP Information

 

71

 

 

 

Glossary of Selected Financial Terms and Acronyms

 

73

 

 

 

Report of Management on Internal Control over Financial Reporting

 

79

 

 

 

Reports of Independent Registered Public Accounting Firm

 

80

 

 

 

Consolidated Statements of Condition

 

82

 

 

 

Consolidated Statements of Income

 

83

 

 

 

Consolidated Statements of Comprehensive Income

 

84

 

 

 

Consolidated Statements of Equity

 

85

 

 

 

Consolidated Statements of Cash Flows

 

87

 

 

 

Notes to Consolidated Financial Statements

 

88

 

 

 

Consolidated Historical Statements of Income

 

191

 

 

 

Consolidated Average Balance Sheets and Related Yields and Rates

 

192

 

 

 

Total Shareholder Return Performance Graph

 

194

FIRST HORIZON NATIONAL CORPORATION



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SELECTED FINANCIAL AND OPERATING DATA

                     

 

(Dollars in millions except per share data)

 

2012

 

2011

 

2010

 

2009

 

2008

 

                     

 

Income/(loss) from continuing operations

 

$

(16.4

)

$

134.0

 

$

72.9

 

$

(235.2

)

$

(172.6

)

Income/(loss) from discontinued operations, net of tax

 

 

0.1

 

 

8.6

 

 

(11.3

)

 

(23.2

)

 

(5.4

)

Net income/(loss)

 

 

(16.3

)

 

142.6

 

 

61.6

 

 

(258.4

)

 

(178.0

)

Income/(loss) available to common shareholders

 

 

(27.8

)

 

131.2

 

 

(57.8

)

 

(329.4

)

 

(199.4

)

                               

 

Common Stock Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings/(loss) per common share from continuing operations

 

$

(0.11

)

$

0.47

 

$

(0.20

)

$

(1.31

)

$

(0.94

)

Earnings/(loss) per common share

 

 

(0.11

)

 

0.50

 

 

(0.25

)

 

(1.41

)

 

(0.96

)

Diluted earnings/(loss) per common share from continuing operations

 

 

(0.11

)

 

0.47

 

 

(0.20

)

 

(1.31

)

 

(0.94

)

Diluted earnings/(loss) per common share

 

 

(0.11

)

 

0.50

 

 

(0.25

)

 

(1.41

)

 

(0.96

)

Cash dividends declared per common share

 

 

0.04

 

 

0.04

 

 

-

 

 

-

 

 

0.33

 

Book value per common share

 

 

9.09

 

 

9.28

 

 

9.05

 

 

9.35

 

 

10.63

 

Closing price of common stock per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

 

10.89

 

 

12.53

 

 

14.83

 

 

13.68

 

 

18.42

 

Low

 

 

7.55

 

 

5.63

 

 

9.24

 

 

6.52

 

 

4.20

 

Year-end

 

 

9.91

 

 

8.00

 

 

11.78

 

 

12.60

 

 

9.24

 

Cash dividends per common share/year-end closing price

 

 

0.4

%

 

0.5

%

 

N/A

 

 

N/A

 

 

3.6

%

Cash dividends per common share/diluted earnings per common share

 

 

(36.4

)%

 

8.0

%

 

N/A

 

 

N/A

 

 

NM

 

Compound stock dividend rate declared per share

 

 

N/A

 

 

N/A

 

 

6.3601

%

 

7.5320

%

 

4.9547

%

Price/earnings ratio

 

 

NM

 

 

16.0x

 

 

NM

 

 

NM

 

 

NM

 

Market capitalization

 

$

2,414.1

 

$

2,059.7

 

$

3,102.5

 

$

2,974.5

 

$

2,169.8

 

Average shares (thousands)

 

 

248,349

 

 

260,574

 

 

235,699

 

 

234,431

 

 

206,681

 

Average diluted shares (thousands)

 

 

248,349

 

 

262,861

 

 

235,699

 

 

234,431

 

 

206,681

 

Period-end shares outstanding (thousands)

 

 

243,598

 

 

257,468

 

 

263,366

 

 

236,098

 

 

234,784

 

Volume of shares traded (thousands)

 

 

1,221,242

 

 

1,049,982

 

 

1,009,113

 

 

1,256,124

 

 

1,658,045

 

                               

 

Selected Average Balances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

25,068.7

 

$

24,733.6

 

$

25,677.4

 

$

28,147.8

 

$

34,422.7

 

Total assets – divestiture

 

 

-

 

 

-

 

 

-

 

 

-

 

 

182.3

 

Total loans, net of unearned income

 

 

16,205.4

 

 

16,056.8

 

 

17,131.8

 

 

19,579.3

 

 

21,660.7

 

Total loans held-for-sale – divestiture

 

 

-

 

 

-

 

 

-

 

 

-

 

 

110.4

 

Securities available-for-sale

 

 

3,145.5

 

 

3,182.9

 

 

2,650.9

 

 

2,852.1

 

 

2,964.0

 

Earning assets

 

 

22,224.8

 

 

21,959.1

 

 

22,960.2

 

 

25,373.8

 

 

30,426.2

 

Total deposits

 

 

16,212.0

 

 

15,527.0

 

 

15,204.3

 

 

14,556.2

 

 

14,920.9

 

Total deposits – divestiture

 

 

-

 

 

-

 

 

-

 

 

-

 

 

48.8

 

Total term borrowings

 

 

2,326.8

 

 

2,582.6

 

 

2,915.1

 

 

3,506.9

 

 

6,108.6

 

Common equity

 

 

2,312.6

 

 

2,409.9

 

 

2,211.6

 

 

2,365.6

 

 

2,534.1

 

Total equity

 

 

2,607.8

 

 

2,705.1

 

 

3,292.0

 

 

3,452.1

 

 

2,930.6

 

                               

 

Selected Period-End Balances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

25,520.1

 

$

24,789.4

 

$

24,699.0

 

$

26,068.7

 

$

31,022.0

 

Total loans, net of unearned income

 

 

16,708.6

 

 

16,397.1

 

 

16,782.6

 

 

18,123.9

 

 

21,278.2

 

Securities available-for-sale

 

 

3,061.8

 

 

3,066.3

 

 

3,031.9

 

 

2,694.5

 

 

3,125.2

 

Earning assets

 

 

22,424.8

 

 

21,762.0

 

 

21,901.7

 

 

22,962.9

 

 

26,895.9

 

Total deposits

 

 

16,629.7

 

 

16,213.0

 

 

15,208.2

 

 

14,867.2

 

 

14,241.8

 

Total term borrowings

 

 

2,226.5

 

 

2,481.7

 

 

3,228.1

 

 

2,891.1

 

 

4,767.7

 

Common equity

 

 

2,214.0

 

 

2,389.5

 

 

2,382.8

 

 

2,208.6

 

 

2,496.8

 

Total equity

 

 

2,509.2

 

 

2,684.6

 

 

2,678.0

 

 

3,302.5

 

 

3,574.6

 

                               

 

Selected Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average common equity (a)

 

 

(1.20

)%

 

5.45

%

 

(2.61

)%

 

(13.93

)%

 

(7.87

)%

Return on average assets (b)

 

 

(0.07

)

 

0.58

 

 

0.24

 

 

(0.92

)

 

(0.52

)

Net interest margin (c) (d)

 

 

3.13

 

 

3.22

 

 

3.20

 

 

3.06

 

 

2.95

 

Allowance for loan and lease losses to loans

 

 

1.66

 

 

2.34

 

 

3.96

 

 

4.95

 

 

3.99

 

Net charge-offs to average loans

 

 

1.14

 

 

2.02

 

 

3.07

 

 

4.25

 

 

2.64

 

Total period-end equity to period-end assets

 

 

9.83

 

 

10.83

 

 

10.84

 

 

12.67

 

 

11.52

 

Tangible common equity to tangible assets (d)

 

 

8.11

 

 

9.05

 

 

8.93

 

 

7.75

 

 

7.34

 

                               

 

 

 

N/A - not applicable

NM - not meaningful

See accompanying notes to consolidated financial statements.

(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 29 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

GENERAL INFORMATION

First Horizon National Corporation (“FHN”) began as a community bank chartered in 1864 and as of December 31, 2012, 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.

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. Regional banking provides investments, financial planning, trust services and asset management, credit card and cash management. Additionally, the regional banking segment includes correspondent banking which provides credit, depository, and other banking related service to other financial institutions.

 

 

 

 

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, bank-owned life insurance (“BOLI”), unallocated interest income associated with excess equity, net impact of raising incremental capital, revenue and expense associated with deferred compensation plans, funds management, tax credit investment activities, and certain charges related to restructuring, repositioning, and efficiency initiatives.

 

 

 

 

Non-strategic includes exited businesses (including Msaver, FHI and Highland) and wind-down national consumer lending activities, other discontinued products, loan portfolios, 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.

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 the net interest margin using 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 their use by banking regulators in reviewing capital adequacy of financial institutions. 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

 

 

FIRST HORIZON NATIONAL CORPORATION

3



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 29 for a reconciliation of non-GAAP to GAAP measures and presentation of the most comparable GAAP items.

FORWARD-LOOKING STATEMENTS

This MD&A contains forward-looking statements with respect to FHN’s beliefs, plans, goals, expectations, and estimates. Forward-looking statements are statements that are not a representation of historical information but rather are related to future operations, strategies, financial results, or other developments. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “should,” “is likely,” “will,” “going forward,” and other expressions that indicate future events and trends identify forward-looking statements. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond FHN’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 or revise, whether as a result of new information, future events, or otherwise, any forward-looking statements that are made in this Annual Report or otherwise from time to time. Actual results could differ and expectations could change, possibly materially, because of one or more factors, including those presented in this Forward-Looking Statements section, in other sections of this MD&A, in Item 1A of FHN’s 2012 Annual Report on Form 10-K, and in documents incorporated into this Annual Report.

FINANCIAL SUMMARY – 2012 COMPARED TO 2011

In 2012, FHN reported a net loss available to common shareholders of $27.8 million or $.11 loss per diluted share compared to net income of $131.2 million or $.50 per diluted share in 2011. FHN’s loss in 2012 was largely driven by a significant increase in the mortgage repurchase provision and a decline in revenue, partially offset by a decrease in the provision for loan losses. Total revenue declined in 2012 due to a decline in net interest income, mortgage banking income, net securities gains, and capital markets income. The economic environment, regulatory reform, and strategic initiatives continued to directly and significantly impact reported earnings in both 2012 and 2011.

 

 

4

FIRST HORIZON NATIONAL CORPORATION



FHN executed on strategic initiatives during 2012 which were mainly focused on reducing costs throughout the organization and continuing to mitigate risks from legacy businesses. Significant new information obtained by FHN in 2012 from a government-sponsored enterprise (“GSE”) led FHN to take a $250.0 million pre-tax charge in the second quarter of 2012 to increase the mortgage repurchase liability to cover losses on pending and projected mortgage repurchase requests with respect to the Federal National Mortgage Association (“FNMA”, “Fannie Mae”, or “Fannie”) and the Federal Home Loan Mortgage Corporation (“FHLMC”, “Freddie Mac” or “Freddie”). FHN did not recognize any additional repurchase provision in the second half of 2012. As part of FHN’s focus on efficiency and cost-reduction throughout the organization, FHN launched a voluntary separation program (“VSP”) in 2012, and in 2011 FHN sold non-strategic businesses including Msaver, FHI, and Highland, resulting in after tax gains of $9.9 million. As a result, FHN recognized net pre-tax charges of $24.9 million and $26.9 million related to restructuring, repositioning, and efficiency initiatives in 2012 and 2011, respectively. Such charges are expected to benefit expenses in future periods. Generally, most expense categories declined in 2012 relative to 2011 consistent with the continued wind-down of non-strategic businesses and focus on cost reductions throughout FHN.

Capital remained strong during 2012. FHN continued returning capital to shareholders during 2012 through quarterly cash dividends and through an increase in the share repurchase program first initiated in fourth quarter 2011. Shares repurchased under this program approximated $131 million in 2012 compared to $44 million in 2011.

The regulatory and legal environment has been challenging for the industry. The Dodd-Frank and Wall Street Reform and Consumer Protection Act of 2010 (“Reform Act”), specifically the Durbin Amendment, resulted in a decline in revenues in both 2011 and 2012. In 2012, FHN continued to see a reduction in debit interchange fee income due to the full-year impact of the Durbin Amendment. In response, FHN has modified product and fee structures in order to lessen the impact on revenue.

FHN remained well-positioned and was able to respond positively to the challenging operating environment in 2012. The U.S. economy was affected by a historically weak housing market, unemployment that remains elevated and uncertainty concerning global economic conditions and the domestic political environment. In this challenging operating environment, there is strong competition among financial institutions for limited loan demand from creditworthy borrowers as interest rates are still at historical lows. However, FHN grew both period-end loans and deposits within the regional bank, offsetting the runoff of the non-strategic loan portfolios and strengthening the balance sheet. Additionally, 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 in 2012 with fixed income average daily revenue of $1.2 million compared to $1.3 million in 2011.

Because of the slow economic recovery, the Federal Reserve held interest rates at historically low levels during 2012, pressuring the net interest margin (“NIM”). The net interest margin was 3.13 percent in 2012 compared to 3.22 percent in 2011. The net interest margin decreased in 2012 as lower rates on interest bearing deposits within the bank were more than offset by declining yields on the investment portfolio, lower yielding commercial and bank installment loans, and run-off of the non-strategic loan portfolio. Net interest income (“NII”) declined in 2012 primarily attributable to run-off of the non-strategic loan portfolio and a lower yielding securities portfolio, which more than outpaced loan growth within the bank and declining rates on interest bearing deposits.

Overall FHN continued to see improvement in asset quality during 2012, but at a slower pace than 2011, despite negative effects on asset quality metrics from regulatory focus on risks associated with loans secured by residential real estate in 2012. Balances of higher risk non-strategic loans continue to decline and had a reduced impact on asset quality metrics in 2012. In 2012 changes in accounting and reporting of current second lien loans behind first liens with performance issues and residential real estate loans in which the borrower has been discharged in bankruptcy (“discharged bankruptcies”) led to increased loan loss provisioning and charge-offs and resulted in additions to non-performing loans (“NPL”) and troubled debt restructurings (“TDRs”). However, management’s proactive approach to managing asset quality combined with borrowers adapting to the current operating environment and a modestly improved economic environment resulted in a $107.4 million decrease in the allowance for loan losses in 2012. Additionally, non-performing assets and net charge-offs declined 20 percent and 43 percent, respectively, year-over-year.

 

 

FIRST HORIZON NATIONAL CORPORATION

5



Return on average common equity and return on average assets for 2012 were negative 1.20 percent and negative .07 percent, respectively, compared to positive 5.45 percent and .58 percent in 2011. The tangible common equity to tangible assets ratio declined to 8.11 percent in 2012 from 9.05 percent in 2011. Total capital and Tier 1 ratios were 15.94 percent and 13.10 percent, respectively on December 31, 2012, compared to 17.99 percent and 14.23 percent in 2011. Total assets were $25.5 billion in 2012, a 3 percent increase from $24.8 billion in 2011. Total equity was $2.5 billion as of December 31, 2012 compared to $2.7 billion as of December 31, 2011.

BUSINESS LINE REVIEW

Regional Banking
Pre-tax income within the regional banking segment was $284.0 million during 2012, compared to $325.3 million in 2011. The decline in pre-tax income was primarily driven by a reduction in the provision credit for loan losses in 2012 and lower fee income, partially offset by an increase in net interest income. Expenses increased slightly in 2012 from 2011.

Total revenue in 2012 was $850.7 million, a 3 percent increase from $828.7 million in 2011. NII increased 6 percent or $36.1 million to $598.0 million in 2012. The increase in NII was largely attributable to an increase in commercial balances, primarily loans to mortgage companies, and an increase in consumer real estate installment loans from a year ago. Additionally, improved deposit pricing favorably affected funding costs and NII relative to 2011. Regional banking recognized a provision credit of $.9 million in 2012 compared to $61.5 million in 2011. Provision in 2012 reflects a slower rate of improvement relative to 2011 and a 10 percent increase in total loans within the bank from a year ago.

Noninterest income declined 5 percent or $14.1 million in 2012 to $252.7 million. Total service charges on deposits declined $13.6 million to $119.8 million in 2012 and ATM interchange fees declined $3.2 million to $10.5 million in 2012 primarily driven by lower interchange income due to the full-year impact of the Durbin Amendment which became effective in fourth quarter 2011. Non-sufficient funds (“NSF”)/Overdraft fees declined 5 percent to $50.2 million in 2012 due to a decrease in the number of checking accounts coupled with changes in consumer spending behavior. Revenue in 2012 includes $3.4 million in gains related to the sale of bank branches.

Noninterest expense was $567.6 million in 2012 compared to $564.9 million in the prior year. Personnel-related costs increased during 2012 in large part associated with higher allocated pension-related costs, but were partially mitigated by headcount reductions from a year ago. The provision for unfunded commitments, which varies based on the risk profiles of FHN’s borrowers and the level of unfunded commitments, increased $4.1 million in 2012. Computer software expense increased $2.7 million to $17.1 million in 2012 as the company continues to focus on technology-related investments. Nearly all other categories of expenses declined from a year ago because of FHN’s continued focus on cost reductions throughout the organization.

Capital Markets
Pre-tax income in the capital markets segment increased from $57.0 million in 2011 to $92.0 million in 2012, primarily due to prior year expenses associated with the settlement of a litigation matter and related legal fees. Total revenue during 2012 decreased to $355.3 million from $377.8 million in 2011 as fixed income sales revenue was $308.0 million in 2012 compared to $329.7 million in 2011. Fixed income average daily revenue was $1.2 million during 2012 compared to $1.3 million in 2011 reflecting less favorable market conditions in 2012. Other product revenue increased to $27.0 million from $26.0 million in 2011. Noninterest expense was $263.3 million in 2012 compared to $320.8 million in 2011. The decrease is primarily due to a $36.7 million litigation settlement expense and associated legal and professional fees incurred in 2011 as well as lower variable compensation expenses as a result of lower fixed income revenues in 2012.

Corporate
The pre-tax loss for the corporate segment increased to $97.8 million in 2012 from $42.3 million in 2011, primarily due to a decline in noninterest income associated with securities gains recognized in 2011. Net interest income declined $17.1 million in 2012 primarily due to a lower-yielding securities portfolio.

 

 

6

FIRST HORIZON NATIONAL CORPORATION



Noninterest income (excluding securities gains) was $26.7 million in 2012 and $33.2 million in 2011. The decline in noninterest income is largely due to gains of $5.8 million associated with the extinguishment of debt and $7.4 million of interest income associated with tax refunds recognized in 2011. These decreases were partially offset by a $5.0 million increase in deferred compensation income due to improved market conditions in 2012 relative to 2011 and $1.0 million of interest associated with tax refunds recognized in 2012.

Securities gains were $.3 million in 2012 and $36.1 million in 2011. In 2011, FHN recognized a gain of $35.1 million due to the sale of a portion of FHN’s Visa, Inc. Class B Shares.

Noninterest expense declined 4 percent, or $3.9 million to $101.3 million in 2012. In 2012, FHN recognized a $1.8 million charge to increase the derivative liability associated with prior sales of Visa shares. In 2011, net Visa related charges were $6.1 million including a $3.3 million expense reversal associated with the contingent liability established for certain Visa legal matters and a $9.4 million charge to increase the derivative liability associated with prior sales of Visa, Inc. shares related to an expected decline in the conversion ratio. A decline in restructuring and repositioning activities from 2011 also contributed to the decline in noninterest expense. In 2011, FHN recorded a $9.0 million charge to cancel a technology services-related contract, partially offset by a $7.2 million increase in severance-related costs associated with efficiency initiatives within corporate and bank services functions. These decreases were partially offset by a $6.2 million increase in deferred compensation expense, which is directionally consistent with the increase in deferred compensation income described above.

Non-Strategic
The non-strategic segment’s pre-tax loss was $379.9 million in 2012 compared to $190.2 million in 2011 due to an increase in expenses and a decline in revenue, which more than offset a decline in loan loss provisioning.

Total revenue in 2012 was $150.5 million compared to $217.4 million in 2011 with net interest income declining to $93.9 million in 2012 from $123.3 million in the prior year. The decline in net interest income is primarily due to an 18 percent reduction in average loans from 2011. The provision for loan losses decreased $26.6 million to $78.9 million in 2012 due to continued stabilization and runoff of the non-strategic portfolios. In 2012, the loan loss provision included approximately $23 million associated with discharged bankruptcies which is largely attributable to the consumer real estate portfolio. In 2011, the loan loss provision included $29.8 million attributable to the sale of $188 million in unpaid principal balance (“UPB”) of nonperforming permanent mortgages.

Noninterest income (including securities gains/losses) declined to $56.6 million in 2012 from $94.1 million in 2011 due to a decline in mortgage banking income. The change in mortgage banking income was attributable to a $23.3 million decline in net hedging results and an $11.2 million decrease in servicing fees, partially offset by lower negative mortgage warehouse valuation adjustments in 2012. The decrease in net hedging results is attributable to more narrow spreads between mortgage and swap rates in 2012 relative to 2011. Servicing fees continue to decline consistent with the reduction in the size of the mortgage servicing portfolio. Noninterest income in 2012 included a $2.3 million gain associated with the settlement of a legal matter and net securities gains of $.4 million inclusive of a $5.1 million gain on the sale of a venture capital investment and a $4.7 million negative valuation adjustment related to a venture capital investment.

Noninterest expense increased to $451.5 million in 2012 from $302.1 million in 2011. The increase in expense from the prior year is primarily due to a $139.7 million increase in the repurchase and foreclosure provision due to a change in estimate of FHN’s repurchase obligations for alleged breaches of representations and warranties related to mortgage loans sold to Fannie and Freddie and a $30.8 million increase in loss accruals related to legal matters in 2012. Additionally, contract employment and outsourcing costs increased $3.2 million in 2012 to $33.8 million as FHN recognized elevated subservicing fees since the transfer to a new loan subservicer in third quarter 2011. These increases were partially offset by a $7.7 million decline in losses on foreclosed property due to stabilization of property values and lower balances from a year ago. Generally, most other expense categories continued to decline given the continued wind-down of the legacy businesses.

 

 

FIRST HORIZON NATIONAL CORPORATION

7



INCOME STATEMENT REVIEW – 2012 COMPARED TO 2011

Total consolidated revenue decreased 9 percent to $1.4 billion in 2012 from $1.5 billion in 2011 primarily due to a decline in mortgage banking income, a decline in net securities gains, and lower fixed income sales revenue within capital markets.

NET INTEREST INCOME
Net interest income declined to $688.7 million in 2012 from $700.8 million in 2011. The decline in net interest income was primarily attributable to run-off of the non-strategic loan portfolio and a lower yielding securities portfolio and was somewhat mitigated by higher loan volume and declining rates on interest bearing deposits. Average earning assets increased 1 percent to $22.2 billion as loan growth within the regional bank more than offset the run-off in the non-strategic portfolios. For purposes of computing yields and the net interest margin, FHN adjusts net interest income to reflect tax exempt income on an equivalent pre-tax basis which provides comparability of net interest income arising from both taxable and tax-exempt sources.

The consolidated net interest margin decreased to 3.13 percent in 2012 from 3.22 percent in 2011. The net interest spread declined 6 basis points to 2.97 percent in 2012 from 3.03 percent in 2011 and the impact of free funding decreased to 16 basis points from 19 basis points. The decline in net interest margin was primarily a result of lower reinvestment rates on investments and fixed rate loan products partially offset by lower rates on interest bearing deposits.

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




 

 

 

 

 

 

 

 

 

 

 

Table 1 – Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

2011

 

 

2010

 

                     

Assets:

 

 

 

 

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

Loans, net of unearned income:

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

3.86

%

 

3.88

%

 

3.82

%

Retail loans

 

 

4.28

 

 

4.38

 

 

4.38

 

                     

Total loans, net of unearned income

 

 

4.04

 

 

4.11

 

 

4.09

 

                     

Loans held for sale

 

 

3.58

 

 

4.23

 

 

4.06

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

 

0.30

 

 

0.59

 

 

0.68

 

U.S. government agencies

 

 

3.10

 

 

3.75

 

 

4.56

 

States and municipalities

 

 

1.17

 

 

2.85

 

 

1.40

 

Other

 

 

4.30

 

 

4.19

 

 

3.72

 

                     

Total investment securities

 

 

3.13

 

 

3.72

 

 

4.32

 

                     

Capital markets securities inventory

 

 

2.67

 

 

3.33

 

 

3.82

 

Mortgage banking trading securities

 

 

10.62

 

 

9.97

 

 

9.75

 

Other earning assets:

 

 

 

 

 

 

 

 

 

 

Federal funds sold and securities purchased under agreements to resell (a)

 

 

0.08

 

 

(0.02

)

 

0.09

 

Interest bearing cash

 

 

0.22

 

 

.20

 

 

.24

 

                     

Total other earning assets

 

 

0.14

 

 

0.07

 

 

0.18

 

                     

Interest income / total earning assets

 

 

3.63

%

 

3.82

%

 

3.85

%

                     

Liabilities:

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

Savings

 

 

0.31

%

 

0.42

%

 

0.57

%

Other interest-bearing deposits

 

 

0.17

 

 

0.22

 

 

0.29

 

Time deposits

 

 

1.93

 

 

2.29

 

 

2.42

 

                     

Total interest-bearing core deposits

 

 

0.43

 

 

0.60

 

 

0.77

 

Certificates of deposit $100,000 and more

 

 

1.37

 

 

1.82

 

 

2.25

 

                     

Federal funds purchased and securities sold under agreements to repurchase

 

 

0.24

 

 

0.23

 

 

0.24

 

Capital markets trading liabilities

 

 

1.77

 

 

2.45

 

 

3.30

 

Other short-term borrowings

 

 

0.15

 

 

0.29

 

 

0.56

 

Term borrowings

 

 

1.69

 

 

1.49

 

 

1.10

 

                     

Interest expense / total interest-bearing liabilities

 

 

0.66

 

 

0.79

 

 

0.87

 

                     

Net interest spread

 

 

2.97

%

 

3.03

%

 

2.98

%

Effect of interest-free sources used to fund earning assets

 

 

0.16

 

 

0.19

 

 

0.22

 

                     

Net interest margin (b)

 

 

3.13

%

 

3.22

%

 

3.20

%

                     

 

 

(a)

2011 driven by negative market rates on reverse repurchase agreements.

(b)

Calculated using total net interest income adjusted for FTE. Refer to the Non-GAAP to GAAP reconciliation - Table 29.

FHN’s net interest margin is expected to decline from the current level in 2013 as FHN expects interest rates to remain at historically low levels which will result in continued pressure on reinvestment yields in the loan and securities portfolios.

 

 

FIRST HORIZON NATIONAL CORPORATION

9



Table 2 – Analysis of Changes in Net Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Fully taxable equivalent (“FTE”))
(Dollars in thousands)

 

2012 Compared to 2011
Increase / (Decrease) Due to (a)

 

 

2011 Compared to 2010
Increase / (Decrease) Due to (a)

 

 

 

 

 

 

Rate (b)

 

Volume (b

)

Total

 

 

Rate (b)

 

Volume (b

)

Total

 

 

Interest income – FTE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

(11,809

)

$

6,666

 

$

(5,143

)

 

$

4,604

 

$

(44,904

)

$

(40,300

)

Loans held-for-sale

 

 

(2,635

)

 

1,632

 

 

(1,003

)

 

 

768

 

 

(3,626

)

 

(2,858

)

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury

 

 

(138

)

 

(76

)

 

(214

)

 

 

(61

)

 

(96

)

 

(157

)

U.S. government agencies

 

 

(18,755

)

 

(654

)

 

(19,409

)

 

 

(20,346

)

 

24,449

 

 

4,103

 

States and municipalities

 

 

(313

)

 

(96

)

 

(409

)

 

 

405

 

 

(366

)

 

39

 

Other

 

 

245

 

 

(8

)

 

237

 

 

 

1,121

 

 

(1,296

)

 

(175

)

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

     

Total investment securities

 

 

(18,435

)

 

(1,360

)

 

(19,795

)

 

 

(17,281

)

 

21,091

 

 

3,810

 

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

     

Capital markets securities inventory

 

 

(8,225

)

 

1,490

 

 

(6,735

)

 

 

(5,726

)

 

3,910

 

 

(1,816

)

Mortgage banking trading securities

 

 

183

 

 

(950

)

 

(767

)

 

 

97

 

 

(1,421

)

 

(1,324

)

Other earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and securities purchased under agreements to resell

 

 

562

 

 

4

 

 

566

 

 

 

(682

)

 

36

 

 

(646

)

Interest-bearing deposits with other financial institutions

 

 

96

 

 

218

 

 

314

 

 

 

(377

)

 

(1,053

)

 

(1,430

)

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

     

Total other earning assets

 

 

819

 

 

61

 

 

880

 

 

 

(1,390

)

 

(686

)

 

(2,076

)

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

     

Total change in interest income – earning assets – FTE

 

 

(43,064

)

 

10,501

 

$

(32,563

)

 

 

(6,300

)

 

(38,264

)

$

(44,564

)

                     

 

                 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

(7,288

)

$

69

 

$

(7,219

)

 

$

(8,855

)

$

4,510

 

$

(4,345

)

Time deposits

 

 

(4,300

)

 

(3,709

)

 

(8,009

)

 

 

(1,965

)

 

(7,362

)

 

(9,327

)

Other interest-bearing deposits

 

 

(1,562

)

 

1,211

 

 

(351

)

 

 

(1,821

)

 

(778

)

 

(2,599

)

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

     

Total interest-bearing core deposits

 

 

(18,172

)

 

2,593

 

 

(15,579

)

 

 

(18,313

)

 

2,042

 

 

(16,271

)

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

     

Certificates of deposit $100,000 and more

 

 

(2,606

)

 

1,100

 

 

(1,506

)

 

 

(2,363

)

 

(826

)

 

(3,189

)

Federal funds purchased and securities sold under agreements to repurchase

 

 

178

 

 

(539

)

 

(361

)

 

 

(110

)

 

(1,055

)

 

(1,165

)

Capital markets trading liabilities

 

 

(4,028

)

 

(480

)

 

(4,508

)

 

 

(5,030

)

 

1,899

 

 

(3,131

)

Other short-term borrowings

 

 

(538

)

 

347

 

 

(191

)

 

 

(723

)

 

290

 

 

(433

)

Term borrowings

 

 

4,816

 

 

(3,990

)

 

826

 

 

 

10,345

 

 

(3,999

)

 

6,346

 

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

     

Total change in interest expense – interest-bearing liabilities

 

 

(22,635

)

 

1,316

 

$

(21,319

)

 

 

(14,142

)

 

(3,701

)

$

(17,843

)

                     

 

                 

Net interest income – FTE

 

 

 

 

 

 

 

$

(11,244

)

 

 

 

 

 

 

 

$

(26,721

)

 

 

 

(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
Noninterest income was 49 percent of total revenue in 2012 compared to 53 percent in 2011 as total noninterest income decreased to $671.3 million in 2012 from $786.0 million in 2011. The decrease primarily resulted from declines in mortgage banking income, net securities gains, capital markets fixed income sales revenue, and deposit fee income. FHN’s noninterest income for the last three years is provided in Table 3. The following discussion provides additional information about various line items reported in the following table.

 

 

10

FIRST HORIZON NATIONAL CORPORATION



Table 3 – Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compound
Annual Growth
Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

     

(Dollars in thousands)

 

2012

 

2011

 

2010

 

12/11

 

12/10

 

   

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital markets

 

$

334,912

 

$

355,291

 

$

424,034

 

 

(6

)%

 

(11

)%

Deposit transactions and cash management

 

 

120,168

 

 

134,055

 

 

143,176

 

 

(10

)%

 

(8

)%

Mortgage banking

 

 

51,890

 

 

90,586

 

 

167,364

 

 

(43

)%

 

(44

)%

Brokerage, management fees and
commissions

 

 

34,934

 

 

32,964

 

 

27,862

 

 

6

%

 

12

%

Trust services and investment management

 

 

24,319

 

 

24,952

 

 

25,674

 

 

(3

)%

 

(3

)%

Insurance commissions

 

 

3,148

 

 

3,591

 

 

3,640

 

 

(12

)%

 

(7

)%

Debt securities gains/(losses), net

 

 

328

 

 

772

 

 

374

 

 

(58

)%

 

(6

)%

Equity securities gains/(losses), net

 

 

365

 

 

35,392

 

 

10,548

 

 

(99

)%

 

(81

)%

Gain on divestitures

 

 

200

 

 

-

 

 

-

 

 

NM

 

 

NM

 

All other income and commissions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bankcard income (credit card)

 

 

22,384

 

 

22,388

 

 

19,761

 

 

*

 

 

6

%

Bank-owned life insurance

 

 

18,805

 

 

19,615

 

 

25,898

 

 

(4

)%

 

(15

)%

Other service charges

 

 

12,935

 

 

12,182

 

 

10,368

 

 

6

%

 

12

%

ATM interchange fees

 

 

10,528

 

 

13,690

 

 

14,169

 

 

(23

)%

 

(14

)%

Electronic banking fees

 

 

6,537

 

 

6,225

 

 

7,111

 

 

5

%

 

(4

)%

Letter of credit fees

 

 

5,158

 

 

6,282

 

 

6,493

 

 

(18

)%

 

(11

)%

Deferred compensation (a)

 

 

4,461

 

 

(517

)

 

3,621

 

 

NM

 

 

11

%

Gains on extinguishment of debt

 

 

-

 

 

5,761

 

 

17,060

 

 

NM

 

 

NM

 

Other

 

 

20,257

 

 

22,782

 

 

25,572

 

 

(11

)%

 

(11

)%

                   

 

 

 

 

 

 

 

Total all other income and commissions

 

 

101,065

 

 

108,408

 

 

130,053

 

 

(7

)%

 

(12

)%

                   

 

 

 

 

 

 

 

Total noninterest income

 

$

671,329

 

$

786,011

 

$

932,725

 

 

(15

)%

 

(15

)%

                   

 

 

 

 

 

 

 

 

 

NM – not meaningful

* Amount is less than one percent

Certain previously reported amounts have been reclassified to agree with current presentation.

(a)

Deferred compensation market value adjustments are mirrored by adjustments to employee compensation, incentives and benefits 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 $334.9 million in 2012 from $355.3 million in 2011. Revenue from fixed income sales decreased from $329.7 million in 2011 to $308.0 million in 2012 reflecting less favorable market conditions in 2012. Revenue from other products increased to $26.9 million in 2012 from $25.6 million in 2011.

 

 

FIRST HORIZON NATIONAL CORPORATION

11



Table 4 – Capital Markets Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compound
Annual Growth
Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2012

 

2011

 

2010

 

12/11

 

12/10

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income

 

$

307,972

 

$

329,665

 

$

392,445

 

 

(7

)%

 

(11

)%

Other product revenue

 

 

26,940

 

 

25,626

 

 

31,589

 

 

5

%

 

(8

)%

                   

 

 

 

 

 

 

 

Total capital markets noninterest income

 

$

334,912

 

$

355,291

 

$

424,034

 

 

(6

)%

 

(11

)%

                   

 

 

 

 

 

 

 

Certain previously reported amounts have been reclassified to agree with current presentation.

Mortgage Banking Noninterest Income
Mortgage banking income decreased to $51.9 million in 2012 from $90.6 million in 2011. Mortgage banking income is comprised of servicing income related to legacy mortgage banking operations, fair value adjustments to the mortgage warehouse, and fees from mortgage origination activity in the regional banking footprint.

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. Total servicing income was $52.6 million in 2012 compared to $89.4 million in 2011. Servicing fees were $58.9 million in 2012, an $11.2 million decrease from 2011 and is consistent with the mortgage servicing portfolio decline. Positive net hedging results decreased to $17.5 million in 2012 from $40.8 million in 2011 reflecting more narrow spreads between mortgage and swap rates in 2012. The negative impact attributable to runoff was $23.8 million in 2012 compared to $21.5 million in 2011 due to increased prepayments in 2012. The mortgage warehouse valuation included $3.1 million of net negative fair value adjustments in 2012 compared to $6.3 million in 2011. Elevated levels of modifications within loans HFS negatively impacted the fair value of the mortgage warehouse in 2012.

Table 5 – Mortgage Banking Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compound
Annual Growth
Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

2010

 

12/11

 

12/10

 

 

 

 

Noninterest income (thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Origination income

 

$

4,734

 

$

6,908

 

$

17,270

 

 

(31

)%

 

(48

)%

Mortgage warehouse valuation

 

 

(3,053

)

 

(6,315

)

 

(2,477

)

 

52

%

 

(11

)%

Servicing income/(expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing fees

 

 

58,931

 

 

70,174

 

 

92,124

 

 

(16

)%

 

(20

)%

Change in MSR value - runoff

 

 

(23,804

)

 

(21,542

)

 

(34,966

)

 

11

%

 

(17

)%

Net hedging results

 

 

17,481

 

 

40,807

 

 

93,855

 

 

(57

)%

 

(57

)%

                   

 

 

 

 

 

 

 

Total servicing income

 

 

52,608

 

 

89,439

 

 

151,013

 

 

(41

)%

 

(41

)%

Other

 

 

(2,399

)

 

554

 

 

1,558

 

 

NM

 

 

NM

 

                   

 

 

 

 

 

 

 

Total mortgage banking noninterest income

 

$

51,890

 

$

90,586

 

$

167,364

 

 

(43

)%

 

(44

)%

                   

 

 

 

 

 

 

 

Mortgage banking statistics (millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinance originations

 

$

181

 

$

235

 

$

669

 

 

(23

)%

 

(48

)%

Home-purchase originations

 

 

32

 

 

50

 

 

180

 

 

(36

)%

 

(58

)%

                   

 

 

 

 

 

 

 

Mortgage loan originations

 

$

213

 

$

285

 

$

849

 

 

(25

)%

 

(50

)%

                   

 

 

 

 

 

 

 

Servicing portfolio – owned (first lien mortgage loans) (a)

 

$

16,487

 

$

21,077

 

$

25,809

 

 

(22

)%

 

(20

)%

                   

 

 

 

 

 

 

 

 

 

NM - not meaningful

(a)

Excludes foreclosed assets.


 

 

12

FIRST HORIZON NATIONAL CORPORATION



Deposit Transactions and Cash Management
Deposit transactions includes 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 $13.9 million to $120.2 million in 2012 primarily due to the full-year negative impact on interchange income from the Durbin Amendment which became effective in fourth quarter 2011. A decline in the number of checking accounts coupled with changes in consumer spending behavior also contributed to the decline.

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. In 2012, noninterest income from trust service and investment management declined slightly to $24.3 million compared to $25.0 million in 2011.

Brokerage, Management Fees and Commissions
Brokerage, management fees and commissions include fees for portfolio management, trade commissions, and annuity and mutual fund sales. Noninterest income from brokerage and management fees increased from $33.0 million in 2011 to $34.9 million in 2012, primarily associated with an increase in asset management fees due to FHN’s success in increasing the number of customers and assets under management in 2012.

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 declined from $3.6 million in 2011 to $3.1 million in 2012.

Securities Gains/Losses
Net securities gains were $.7 million in 2012 compared to $36.2 million in 2011. FHN sold portions of its Visa, Inc. Class B shares which resulted in gains of $35.1 million during 2011. In 2012, FHN recognized a net gain of $.4 million related to venture capital investments as a gain on sale of $5.1 million was partially offset by a $4.7 million negative fair value adjustment.

All Other Noninterest Income and Commissions
All other income includes bankcard fees, revenue from bank owned life insurance (“BOLI”), 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 $101.1 million in 2012 from $108.4 million in 2011. ATM interchange fees declined $3.2 million from 2011 largely due to the implementation of the Durbin Amendment in fourth quarter 2011 and BOLI income decreased $.8 million as a result of lower policy benefits received during 2012. Additionally, in 2011 FHN recognized $5.8 million of gains on the repurchase of bank debt. These decreases were partially offset by a $5.0 million increase in deferred compensation income resulting from more favorable market conditions in 2012 relative to 2011. All other income decreased $2.5 million to $20.3 million in 2012. Significant transactions in 2012 include gains of $3.4 million related to the sale of bank branches and a $2.3 million gain related to the settlement of a legal matter. FHN recognized interest related to tax refunds of $1.0 million in 2012 compared to $7.4 million in 2011.

NONINTEREST EXPENSE
Total noninterest expense increased 7 percent or $90.7 million to $1.4 billion in 2012. Table 6 provides noninterest expense detail by category for the last three years with growth rates.

 

 

FIRST HORIZON NATIONAL CORPORATION

13



The increase in noninterest expense in 2012 was due in large part to a significant increase in the repurchase and foreclosure provision. The repurchase and foreclosure provision increased to $299.3 million in 2012 from $159.6 million in 2011 driven by a $250.0 million charge in second quarter 2012 reflecting a change in estimate of FHN’s repurchase obligations for alleged breaches of representations and warranties related to mortgage loans sold to Fannie and Freddie. In third and fourth quarter 2012, an analysis of the repurchase liability was performed which concluded that the remaining portion of the liability established in second quarter was sufficient to cover estimated probable repurchase losses, and no additional provisioning was recorded during the second half of 2012. See 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.

Employee compensation, incentives, and benefits (personnel expense), the largest component of noninterest expense, increased $30.6 million to $640.9 million in 2012. The increase in personnel expense is primarily the result of a $23.9 million increase in pension-related costs, a $7.2 million increase in severance-related costs associated with restructuring, repositioning, and efficiency initiatives, and a $6.1 million increase in deferred compensation expense. It is expected that in 2013, pension costs should decline relative to 2012 due to the freeze of the pension plan. The amortization term for actuarial gains and losses will change from the estimated average remaining service period of active employees to the estimated average remaining life expectancy of the remaining participants effective January 1, 2013. The increase in personnel expense was partially offset by a decline in capital markets variable compensation expense. Computer software expense increased $5.4 million in 2012 as the company continues to focus on technology-related investments and efficiencies.

Legal and professional fees decreased from $69.6 million in 2011 to $38.8 million in 2012 primarily driven by legal fees associated with litigation matters and costs associated with consulting projects in the prior year. Expenses associated with foreclosed assets declined to $11.0 million in 2012 from $22.1 million in 2011 due to lower property preservation costs consistent with the decline in the balance of foreclosed real estate and stabilization of the housing market, as well as a decline in negative valuation adjustments. Noninterest expense was also favorably impacted by a decline in operations services, occupancy, and nearly all other categories of noninterest expense as a result of FHN’s continued cost reductions throughout the organization and wind-down of non-strategic businesses.

Total other expense decreased $19.4 million to $142.6 million in 2012. Charges associated with restructuring, repositioning, and efficiency initiatives declined $9.3 million in 2012 driven by a $9.0 million charge associated with the termination of a technology related services contract in 2011. Expenses associated with litigation and regulatory matters declined $8.0 million to $33.3 million in 2012 due to legal matters in the prior year. In 2012 other expenses included a $1.8 million increase in derivative liabilities associated with prior sales of Visa, Inc. Class B shares compared to a $9.4 million charge in the prior year. Expense in 2011 also included a $3.3 million reversal of the Visa contingent liability for legal matters. Other insurance and taxes declined $3.0 million to $10.7 million in 2012, largely driven by a $1.8 million favorable franchise tax adjustment recorded in 2012. Additionally, 2012 included a $1.8 million gain related to clean-up calls for first lien securitizations. These decreases were offset by a $4.5 million increase in the provision for unfunded commitments, $2.8 million related to the write-off on unrecoverable servicing advances, and a $1.5 million impairment charge related to tax credit investments in 2012. Generally, all other expense categories were relatively flat or declined in 2012 given FHN’s continued focus on cost reductions and efficiency throughout the organization.

 

 

14

FIRST HORIZON NATIONAL CORPORATION



Table 6 – Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compound
Annual Growth
Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2012

 

2011

 

2010

 

12/11

 

12/10

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation, incentives and benefits

 

$

640,857

 

$

610,225

 

$

672,007

 

 

5

%

 

(2

)%

Repurchase and foreclosure provision (a)

 

 

299,256

 

 

159,590

 

 

189,830

 

 

88

%

 

26

%

Occupancy

 

 

49,027

 

 

53,613

 

 

57,725

 

 

(9

)%

 

(8

)%

Contract employment and outsourcing

 

 

41,198

 

 

41,896

 

 

28,480

 

 

(2

)%

 

20

%

Computer software

 

 

40,018

 

 

34,656

 

 

30,356

 

 

15

%

 

15

%

Legal and professional fees

 

 

38,750

 

 

69,643

 

 

61,856

 

 

(44

)%

 

(21

)%

Operations services

 

 

35,429

 

 

50,347

 

 

59,148

 

 

(30

)%

 

(23

)%

Equipment rentals, depreciation, and
maintenance

 

 

31,246

 

 

32,914

 

 

28,387

 

 

(5

)%

 

5

%

FDIC premium expense

 

 

27,968

 

 

28,302

 

 

37,138

 

 

(1

)%

 

(13

)%

Communications and courier

 

 

18,318

 

 

19,100

 

 

22,132

 

 

(4

)%

 

(9

)%

Foreclosed real estate

 

 

11,041

 

 

22,076

 

 

24,944

 

 

(50

)%

 

(33

)%

Miscellaneous loan costs

 

 

4,126

 

 

4,664

 

 

12,363

 

 

(12

)%

 

(42

)%

Amortization of intangible assets

 

 

3,910

 

 

4,016

 

 

4,149

 

 

(3

)%

 

(3

)%

All other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Litigation and regulatory matters

 

 

33,313

 

 

41,279

 

 

2,398

 

 

(19

)%

 

NM

 

Tax credit investments

 

 

18,655

 

 

20,356

 

 

22,229

 

 

(8

)%

 

(8

)%

Advertising and public relations

 

 

17,439

 

 

16,884

 

 

22,840

 

 

3

%

 

(13

)%

Other insurance and taxes

 

 

10,734

 

 

13,721

 

 

11,523

 

 

(22

)%

 

(3

)%

Travel and entertainment

 

 

8,366

 

 

8,324

 

 

9,800

 

 

1

%

 

(8

)%

Customer relations

 

 

4,578

 

 

4,908

 

 

6,994

 

 

(7

)%

 

(19

)%

Employee training and dues

 

 

4,525

 

 

4,770

 

 

4,634

 

 

(5

)%

 

(1

)%

Supplies

 

 

3,752

 

 

3,800

 

 

4,519

 

 

(1

)%

 

(9

)%

Bank examinations costs

 

 

3,231

 

 

4,500

 

 

4,578

 

 

(28

)%

 

(16

)%

Loan insurance expense (b)

 

 

2,355

 

 

2,907

 

 

(686

)

 

(19

)%

 

NM

 

Fed service fees

 

 

999

 

 

1,435

 

 

2,610

 

 

(30

)%

 

(38

)%

Other

 

 

34,610

 

 

39,069

 

 

21,856

 

 

(11

)%

 

26

%

                   

 

 

 

 

 

 

 

Total all other expense

 

 

142,557

 

 

161,953

 

 

113,295

 

 

(12

)%

 

12

%

                   

 

 

 

 

 

 

 

Total noninterest expense

 

$

1,383,701

 

$

1,292,995

 

$

1,341,810

 

 

7

%

 

2

%

                   

 

 

 

 

 

 

 

 

 

NM – not meaningful

(a)

2012 increase reflects a change in estimate of FHN’s repurchase obligations for alleged breaches of reps and warranties related to mortgage loans sold to Fannie and Freddie recorded in second quarter 2012. There was no repurchase and foreclosure provision expense recorded in the second half of 2012.

(b)

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 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 qualitative 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 was $78.0 million in 2012 compared to $44.0 million in 2011. In 2012, FHN experienced continued overall improvement in the loan portfolio which resulted in a 38 percent decline in the allowance for loan losses and a 43 percent decline in net charge offs. In 2012, FHN recognized approximately $23 million of incremental loan loss provisioning related to charging down discharged bankruptcies to net realizable value. The provision expense in 2011 included approximately $36 million of losses associated with dispositions of nonperforming loans. See the Asset Quality section of MD&A for additional information.

 

 

FIRST HORIZON NATIONAL CORPORATION

15



INCOME TAXES
A comparison of the effective tax rate from 2012 to 2011 is not meaningful since pre-tax income was not consistent between the years. In 2012 and 2011, there were several items which positively affected the effective tax rate. Tax credits reduced tax expense by $18.1 million and $23.5 million, non-taxable income from life insurance reduced tax expense by $7.4 million and $6.8 million, and other changes in unrecognized tax benefits reduced tax expense by $9.0 million and $3.9 million in 2012 and 2011, respectively. Additionally, a subsidiary liquidation reduced tax expense by $6.7 million in 2012.

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, 2012, FHN’s gross DTA (net of a valuation allowance) and gross DTL were $430.3 million and $169.0 million, respectively, resulting in a net DTA of $261.3 million at December 31, 2012, compared with $165.8 million at December 31, 2011.

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 DTA based on both positive and negative evidence available at the time, including (as appropriate) scheduled reversals of DTLs, projected future taxable income, tax planning strategies, and recent financial operations. Realization is dependent on generating sufficient taxable income prior to the expiration of the carryforwards attributable to the DTA. In projecting future taxable income, FHN incorporates assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates used to manage the underlying business.

As of December 31, 2012, FHN had federal income tax net operating loss (“NOL”) and tax credit carryforwards and state income tax NOL carryforwards, which will expire in varying amounts between 2029 and 2032 and federal capital loss carryforwards, which will expire in 2017. FHN established a valuation allowance of $12.6 million against its state NOL carryfowards and $57.1 million against its capital loss carryforwards as of December 31, 2012, compared to a valuation allowance of $6.7 million against its state NOL carryforwards as of December 31, 2011. FHN’s DTA after valuation allowance was $430.3 million and $339.3 million as of December 31, 2012 and 2011, respectively. Based on current analysis, FHN believes that its ability to realize the remaining DTA is more likely than not. FHN monitors its DTA and the need for a valuation allowance on a quarterly basis. A significant adverse change in FHN’s taxable earnings outlook could result in the need for further valuation allowances. Additionally, there has been discussion by both major U.S. political parties that tax reform is needed. Enactment of rate reductions under tax reform could result in an impairment of the net DTA.

The total balance of unrecognized tax benefits on December 31, 2012, was $17.6 million compared with $33.0 million as of the end of 2011. On December 31, 2012 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 as of December 31, 2012 are subsequently recognized, approximately $11.4 million of tax benefits would impact tax expense and FHN’s 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, 2012 was $4.5 million compared to $6.6 million in 2011. The total amount of interest and penalties recognized in the Consolidated Statements of Income during 2012 was a benefit of $1.4 million.

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 2008. All proposed adjustments with respect to examinations of federal returns filed for 2009 and prior years have been settled. FHN is currently under audit in several states.

See also Note 16 - Income Taxes for additional information.

 

 

16

FIRST HORIZON NATIONAL CORPORATION



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. Income from discontinued operations was $.1 million in 2012 compared to $8.6 million in 2011. Income from discontinued operations in 2011 included a $9.9 million after-tax gain on the divestitures of Msaver, FHI, and Highland.

STATEMENT OF CONDITION REVIEW—2012 COMPARED TO 2011
Total period-end assets were $25.5 billion at December 31, 2012, compared to $24.8 billion at December 31, 2011. Average assets increased to $25.1 billion in 2012 from $24.7 billion in 2011. The change in average balance is largely attributable to an increase in loans, net of the allowance for loan losses.

EARNING ASSETS
Earning assets consist of loans, loans HFS, investment securities, and other earning assets. Earning assets averaged $22.2 billion and $22.0 billion in 2012 and 2011, respectively. A more detailed discussion of the major line items follows.

Loans
Period-end loans increased 2 percent to $16.7 billion in 2012 from $16.4 billion in 2011 as loan growth within the regional bank outpaced the continued run-off of the non-strategic portfolios. Average loans increased to $16.2 billion in 2012 compared to $16.1 billion in 2011.

Table 7 – Average Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2012

 

Percent
of Total

 

2012
Growth
Rate

 

2011

 

Percent
of Total

 

2011
Growth
Rate

 

2010

 

Percent
of Total

 

2010
Growth
Rate

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial,
and industrial

 

$

7,994,102

 

 

49

%

 

12

%

$

7,152,477

 

 

45

%

 

3

%

$

6,922,090

 

 

40

%

 

(6

)%

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income CRE

 

 

1,217,392

 

 

7

 

 

(10

)

 

1,346,074

 

 

8

 

 

(15

)

 

1,585,579

 

 

9

 

 

(18

)

Residential CRE

 

 

89,609

 

 

1

 

 

(53

)

 

192,395

 

 

1

 

 

(57

)

 

451,852

 

 

3

 

 

(53

)

               

 

 

 

           

 

 

 

           

 

 

 

Total commercial

 

 

9,301,103

 

 

57

 

 

7

 

 

8,690,946

 

 

54

 

 

(3

)

 

8,959,521

 

 

52

 

 

(12

)

               

 

 

 

           

 

 

 

           

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate

 

 

5,355,540

 

 

33

 

 

(1

)

 

5,406,937

 

 

34

 

 

(9

)

 

5,942,643

 

 

35

 

 

(19

)

Permanent mortgage

 

 

772,439

 

 

5

 

 

(20

)

 

967,316

 

 

6

 

 

(5

)

 

1,019,272

 

 

6

 

 

(7

)

Credit card, OTC and
other

 

 

280,197

 

 

2

 

 

(5

)

 

295,402

 

 

2

 

 

(21

)

 

375,241

 

 

2

 

 

(58

)

Restricted real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

loans and secured

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

borrowings (a) (b)

 

 

496,124

 

 

3

 

 

(29

)

 

696,217

 

 

4

 

 

(17

)

 

835,121

 

 

5

 

 

N/A

 

               

 

 

 

           

 

 

 

           

 

 

 

Total retail

 

 

6,904,300

 

 

43

 

 

(6

)

 

7,365,872

 

 

46

 

 

(10

)

 

8,172,277

 

 

48

 

 

(13

)

               

 

 

 

           

 

 

 

           

 

 

 

Total loans, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

unearned

 

$

16,205,403

 

 

100

%

 

1

%

$

16,056,818

 

 

100

%

 

(6

)%

$

17,131,798

 

 

100

%

 

(13

)%

               

 

 

 

           

 

 

 

           

 

 

 

 

 

N/A – not applicable

Certain previously reported amounts have been reclassified to agree with current presentation.

(a)

2012, 2011 and 2010 include $473.5 million, $649.6 million, and $776.0 million of consumer real estate loans and $22.6 million, $46.6 million, and $59.1 million of permanent mortgage loans, respectively.

(b)

Prior to 2010, amount was reported in consumer real estate and hence there is no growth rate in 2010.

C&I loans are the largest component of the commercial portfolio comprising 86 percent of total commercial loans in 2012 compared to 82 percent in 2011. The increase in average C&I loans was primarily driven by growth in loans to mortgage companies and corporate lending. Commercial real estate loans declined $.2 billion in 2012 to $1.3 billion as the commercial real estate market remains soft and the non-strategic components continue to wind down.

 

 

FIRST HORIZON NATIONAL CORPORATION

17



Total retail loans declined 6 percent, or $461.6 million, to $6.9 billion in 2012. The permanent mortgage portfolio declined $194.9 million to $772.4 million in 2012 as the effect on balances of the NPL loan sale in third quarter 2011 and runoff were partially mitigated by loans added to this portfolio due to the exercise of clean-up calls related to off-balance sheet securitization trusts in second quarter 2011 and third quarter 2012. The consumer real estate portfolio (home equity lines and installment loans) declined $51.4 million, to $5.4 billion as continued wind-down of portfolios within the non-strategic segment outpaced growth in real estate installment loans due to new originations within the regional banking footprint and the increase related to the reclassification of previously restricted loans into consumer real estate as a result of cleanup calls exercised by FHN associated with securitization trusts in the first and second quarters of 2012. Restricted real estate loans and secured borrowings include loans consolidated due to the adoption of amendments to ASC 810 and securitized loans that did not qualify for sale treatment per GAAP. This portfolio segment declined $200.1 million since 2011 due to natural runoff and the impact of cleanup calls exercised by FHN related to 3 of the home equity lines (“HELOC”) securitization trusts and one second lien trust resulting in deconsolidation of the trusts in the first and second quarters of 2012. The loans were then reclassified from the “restricted” line item to the consumer real estate line.

Table 8 – Contractual Maturities of Commercial Loans on December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Period-end) (Dollars in thousands)

 

Within 1 Year

 

After 1 Year
Within 5 Years

 

After 5 Years

 

Total

 

                         

 

Commercial, financial, and industrial

 

$

4,329,595

 

$

3,290,739

 

$

1,176,622

 

$

8,796,956

 

Commercial real estate (a)

 

 

437,162

 

 

638,061

 

 

93,012

 

 

1,168,235

 

                         

 

Total commercial loans, net of unearned income

 

$

4,766,757

 

$

3,928,800

 

$

1,269,634

 

$

9,965,191

 

                         

 

For maturities over one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rates – floating

 

 

 

 

$

2,938,359

 

$

701,489

 

$

3,639,848

 

Interest rates – fixed

 

 

 

 

 

990,441

 

 

568,145

 

 

1,558,586

 

                         

 

Total maturities over one year

 

 

 

 

$

3,928,800

 

$

1,269,634

 

$

5,198,434

 

                         

 

(a) Includes income CRE and residential CRE.

 

 

 

 

 

 

 

 

 

 

 

 

 

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 consumer 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 loan portfolios is significantly less than the contractual period as indicated by historical trends. More recent, 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, historically weak 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.

 

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 9 shows information pertaining to the composition, yields, and contractual maturities of the investment securities portfolio. Investment securities averaged $3.1 billion in 2012 compared to $3.2 billion in 2011 and represented 14 percent of earning assets in both 2012 and 2011. Average investment securities declined as maturities and sales more than offset investment securities purchases since 2011. The amount of securities purchased for the investment portfolio is largely driven by the desire to maximize yield on FHN’s excess liquidity without negatively affecting future yields while operating in this historically low interest rate environment.


 

 

18

FIRST HORIZON NATIONAL CORPORATION



Government agency issued MBS and CMO, and other agencies averaged $2.9 billion in 2012 and 2011. U.S. treasury securities and municipal bonds averaged $60.1 million in 2012 compared to $79.5 million in 2011. Investments in equity securities averaged $222.0 million in 2012 compared with $222.3 million in 2011. A majority of these balances include restricted investments in the Federal Home Loan Bank (“FHLB”) and FRB stock which averaged over $190 million during 2012 and 2011. On December 31, 2012, total investment securities had $90.4 million of net unrealized gains that resulted in an increase in book equity of $55.2 million, net of $35.2 million of deferred income taxes. See Note 3 – Investment Securities for additional detail.

Table 9 – Contractual Maturities of Investment Securities on December 31, 2012 (Amortized Cost)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Period-end)
(Dollars in thousands)

 

Within 1 Year

 

After 1 Year
Within 5 Years

 

After 5 Years
Within 10 Years

 

After 10 Years

 

 

 

 

 

 

 

 

 

 

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

                                                 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government agency issued MBS and CMO (a)

 

$

-

 

 

-

%

$

-

 

 

-

%

$

972

 

 

5.43

%

$

2,694,655

 

 

2.82

%

U.S. treasuries

 

 

39,997

 

 

0.09

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Other U.S. government agencies

 

 

-

 

 

-

 

 

3,504

 

 

5.57

 

 

-

 

 

-

 

 

-

 

 

-

 

State and municipalities (b)

 

 

-

 

 

-

 

 

1,500

 

 

-

 

 

-

 

 

-

 

 

13,755

 

 

0.55

 

Other (c)

 

 

510

 

 

4.97

 

 

-

 

 

-

 

 

-

 

 

-

 

 

216,489

 

 

5.15

 

                                                 

 

Total

 

$

40,507

 

 

0.15

%

$

5,004

 

 

3.90

%

$

972

 

 

5.43

%

$

2,924,899

 

 

2.98

%

                         

 

                     

 

 

 

(a)

Represents government agency-issued mortgage-backed securities and collateralized mortgage obligations which, when adjusted for early pay downs, have estimated average life of 3.6 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)

The amount classified as maturing after 10 years represents equity securities with no stated maturity.


 

Loans Held-for-Sale (“HFS”)

Loans HFS consists of the mortgage warehouse (primarily repurchased loans), student, small business, and home equity loans. The average balance of loans HFS increased $40.6 million from 2011 and averaged $416.6 million in 2012. The increase in average loans was primarily attributable to a larger mortgage warehouse from repurchase activity. The mortgage warehouse, which consists of mortgage loans repurchased pursuant to requests from investors (primarily GSEs), mortgage loans remaining from the legacy mortgage banking business, and loans originated within the regional banking footprint awaiting transfer to the secondary market, averaged $340.6 million in 2012 compared to $310.2 million in 2011, and comprised 82 percent of loans HFS in 2012.

 

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 Federal Reserve Bank (“FRB”) and other financial institutions. All other earning assets averaged $2.5 billion in 2012 compared to $2.3 billion in 2011. The increase is primarily attributable to a $103.2 million increase in interest bearing cash and a $45.6 million increase in capital markets securities inventory. As of December 31, 2012, other earning assets were $2.3 billion compared to $1.9 billion at the end of 2011. The increase in period end balance primarily relates to an increase in FFS and trading securities, which fluctuate daily based on customer demand.

 

Core Deposits

Average core deposits increased 4 percent, or $620.0 million from 2011, to $15.6 billion in 2012. The increase in core deposits reflected growth due to the sustained low interest rate environment as deposit rates remain relatively competitive with other comparable investment products combined with the attractiveness of FDIC coverage on deposits which, under the Transaction Account Guarantee (“TAG”) program, was unlimited through the end of 2012 for non-interest bearing accounts. Some of this growth was diminished as a result of the transfer of escrow balances in conjunction with the transition of the mortgage servicing portfolio to the new subservicer in third


 

 

FIRST HORIZON NATIONAL CORPORATION

19



 

quarter 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 in 2012 and 2011. Average FFP, which currently is composed primarily of funds from correspondent banks, and securities sold under repurchase agreements was $1.9 billion in 2012 compared to $2.2 billion in 2011. FFP fluctuates depending on the amount of excess funding of correspondents and also the impact of FHN’s excess Fed deposits. The average balance of securities sold under agreements to repurchase declined $179.3 million to $380.9 million in 2012 given the low rates currently paid on these products combined with the ability to receive FDIC insurance coverage on business checking accounts. Certificates of deposit (“CDs”) greater than $100,000 increased $65.1 million to $604.9 million in 2012 primarily due to new bookings of jumbo public fund CDs, partially offset by a decline in corporate CDs. Other short-term borrowings averaged $450.7 million in 2012 compared to $290.3 million in 2011 due to increased Federal Home Loan Bank (“FHLB”) borrowings as result of deposit fluctuations and an increase in funding need for growth in loans to mortgage companies. 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 2012 and 2011. Short-term funds increased $.4 billion from $3.0 billion at December 31, 2011 to $3.4 billion at December 31, 2012 primarily due to increases in other short-term borrowings and trading liabilities. Trading liabilities fluctuate depending on expectations of customer demands. 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 10 percent, or $255.9 million, and averaged $2.3 billion in 2012. The decrease in average term-borrowings primarily relates to a decline in borrowings secured by residential real estate loans from the exercise of cleanup calls resulting in the collapse of securitization trusts and payoff of the associated term borrowings and runoff. See Note 10 – Term Borrowings for additional information.

 

ADOPTION OF ACCOUNTING UPDATES

In December 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-11, “Balance Sheet: Disclosures about Offsetting Assets and Liabilities”. ASU 2011-11 creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. ASU 2011-11 requires entities to disclose both gross and net information about both instruments and transactions eligible for offset in the balance sheet as well as instruments and transactions subject to an agreement similar to a master netting arrangement. The scope of ASU 2011-11 includes derivatives, sale and repurchase agreements/reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The provisions of ASU 2011-11 are effective for periods beginning on or after January 1, 2013, with retrospective application to all periods presented in the financial statements required. FHN will revise its disclosures accordingly. The adoption of the provisions of ASU 2011-11 will not have an effect on FHN’s statement of condition, results of operations, or cash flows.

 

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income: Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income”. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements. The provisions of ASU 2013-02 are effective for periods beginning after December 15, 2012, with prospective application to transactions or modifications of existing transactions that occur on or after the effective date. Upon adoption of the provisions of ASU 2013-02 on January 1, 2013, FHN will revise its financial statements and disclosures accordingly.


 

 

20

FIRST HORIZON NATIONAL CORPORATION



 

See Note 1 – Summary of Significant Accounting Policies for a complete discussion of accounting updates adopted during 2012 and 2011.

 

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 2012, FHN’s launch of the voluntary separation program as well as continued evaluation within the regional bank 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 $24.9 million in 2012 compared to $26.9 million in 2011. Significant charges recognized during 2012 include $22.9 million of severance-related costs primarily associated with the VSP program and a $2.6 million negative adjustment related to prior servicing sales.

 

Significant restructuring 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 the corporate and bank service 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. Inclusive of 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 tangible 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.

 

Charges related to restructuring, repositioning, and efficiency initiatives for the years ended December 31, 2012, 2011, and 2010 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 10 – Restructuring, Repositioning, and Efficiency Initiatives

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2012

 

2011

 

2010

 

             

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

Mortgage banking

 

$

(2,635

)

$

-

 

$

(1,532

)

Gain on divestiture

 

 

200

 

 

-

 

 

-

 

All other income and commissions

 

 

-

 

 

1,200

 

 

(19

)

                   

 

Total noninterest income/(loss)

 

 

(2,435

)

 

1,200

 

 

(1,551

)

                   

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

Employee compensation, incentives, and benefits

 

 

22,897

 

 

15,652

 

 

3,023

 

Occupancy

 

 

46

 

 

1,924

 

 

943

 

Legal and professional fees

 

 

15

 

 

(27

)

 

120

 

All other expense

 

 

34

 

 

9,333

 

 

1,634

 

                   

 

Total noninterest expense

 

 

22,992

 

 

26,882

 

 

5,720

 

                   

 

Loss before income taxes

 

 

(25,427

)

 

(25,682

)

 

(7,271

)

Income/(loss) from discontinued operations

 

 

569

 

 

(1,206

)

 

(9,950

)

                   

 

Net impact resulting from restructuring, repositioning, and efficiency initiatives

 

$

(24,858

)

$

(26,888

)

$

(17,221

)

                   

 


 

 

FIRST HORIZON NATIONAL CORPORATION

21




 

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 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. The provision expense in 2011 included approximately $36 million of losses associated with dispositions of nonperforming loans.

 

NET INTEREST INCOME

Net interest income declined to $700.8 million in 2011 from $730.8 million in 2010 as average earning assets declined 4 percent to $22.0 billion and average interest-bearing liabilities declined 3 percent to $16.7 billion in 2011. The decline in net interest income is primarily attributable to a decrease in the size of the loan portfolio largely due to continued runoff of the non-strategic portfolios and was partially mitigated by declining funding costs.

 

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.

 

NONINTEREST INCOME

Noninterest income was 53 percent of total revenue in 2011 compared to 56 percent in 2010 as total noninterest income decreased $146.7 million to $786.0 million in 2011. The decrease primarily resulted from a decline in mortgage banking and capital markets income, partially offset by an increase in securities gains. The following discussion provides additional information about various line items.

 

Capital Markets Noninterest Income

Capital markets noninterest income decreased to $355.3 million in 2011 from $424.0 million in 2010. Revenue from fixed income sales decreased from $392.4 million in 2010 to $329.7 million in 2011 as fixed income production levels reflected normalized market conditions in 2011. Revenue from other products declined to $25.6 million in 2011 from $31.6 million in 2010 and continued to be a smaller component of capital markets income.

 

Mortgage Banking Noninterest Income

Mortgage banking income decreased to $90.6 million in 2011 from $167.4 million in 2010. 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 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 was $6.9 million in 2011 compared to $17.3 million in 2010 and the decline was primarily attributable to a decline in refinance activity within the regional bank in 2011 compared to 2010. The mortgage warehouse valuation included $6.3 million of net negative fair value adjustments in 2011 compared to $2.5 million in 2010 due to increased credit deterioration.

 

Other Fee Income

Noninterest income from 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 certain deposit accounts were no longer eligible for coverage under the FDIC’s TAG program


 

 

22

FIRST HORIZON NATIONAL CORPORATION




 

beginning January 1, 2011. Fees 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 increased to $33.0 million in 2011 from $27.9 million in 2010 largely driven by an increase in asset management fees due to FHN’s success in increasing the number of customers and assets under management in 2011 relative to 2010. Noninterest income from insurance commissions was flat at $3.6 million in 2011 and 2010. 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 securities 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.

 

All Other Noninterest Income and Commissions

All other income and commissions decreased to $108.4 million in 2011 from $130.1 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. 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 decreased $2.8 million to $22.8 million from 2010 largely due to declines in reinsurance fee income, remittance processing, gains from loans sales and securitizations, and various other income sources, partially offset by the recognition of $7.4 million in interest related to tax refunds in 2011.

 

NONINTEREST EXPENSE

Total noninterest expense for 2011 decreased 4 percent or $48.8 million to $1.3 billion in 2011.

 

Personnel 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 the prior year. 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 expenses 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


 

 

FIRST HORIZON NATIONAL CORPORATION

23




 

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.

 

CAPITAL

Management’s objectives are to provide capital sufficient to cover the risks inherent in FHN’s businesses, to maintain excess capital to well-capitalized standards, and to assure ready access to the capital markets. Average equity was $2.6 billion in 2012 and $2.7 billion in 2011 and period-end equity was $2.5 billion in 2012 compared to $2.7 billion in 2011. In fourth quarter 2011, FHN launched a share repurchase program which enabled 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 second quarter 2012 this program was expanded to $200 million. Since the program’s inception in fourth quarter 2011, FHN has repurchased $175.1 million of common shares under the share repurchase program. The decline in equity is largely driven by the repurchase of shares under this program, coupled with the effect of the net loss in 2012.

 

In January 2013, FHN announced various equity-related transactions. Refer to Note 28 – Other Events for additional information.


 

 

24

FIRST HORIZON NATIONAL CORPORATION



The following table provides a reconciliation of Shareholder’s equity from the Consolidated Statements of Condition to Tier 1 and Total Regulatory Capital and certain selected capital ratios:

Table 11 – Regulatory Capital and Ratios

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2012

 

2011

 

2010

 

               

Shareholder’s equity

 

$

2,214,041

 

$

2,389,472

 

$

2,382,840

 

Regulatory adjustments:

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangibles

 

 

(128,639

)

 

(138,507

)

 

(175,453

)

Net unrealized (gains)/losses on AFS securities

 

 

(55,250

)

 

(67,069

)

 

(45,366

)

Minimum pension liability

 

 

201,593

 

 

197,225

 

 

172,912

 

Noncontrolling interest – FTBNA preferred stock

 

 

294,816

 

 

294,816

 

 

294,816

 

Trust preferred

 

 

200,000

 

 

200,000

 

 

200,000

 

Disallowed servicing assets

 

 

(7,638

)

 

(9,854

)

 

(16,801

)

Disallowed deferred tax assets

 

 

(77,714

)

 

(15,168

)

 

-

 

Other

 

 

(433

)

 

(463

)

 

(477

)

                     

Tier 1 capital

 

$

2,640,776

 

$

2,850,452

 

$

2,812,471

 

Tier 2 capital

 

 

571,232

 

 

751,819

 

 

937,115

 

                     

Total regulatory capital

 

$

3,212,008

 

$

3,602,271

 

$

3,749,586

 

                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

   

 

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

                           

Tier 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Horizon National Corporation

 

 

13.10

%

$

2,640,776

 

 

14.23

%

$

2,850,452

 

 

13.99

%

$

2,812,471

 

First Tennessee Bank National
Association (a)

 

 

15.64

 

 

3,122,204

 

 

16.37

 

 

3,247,268

 

 

15.76

 

 

3,137,624

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Horizon National Corporation

 

 

15.94

 

 

3,212,008

 

 

17.99

 

 

3,602,271

 

 

18.65

 

 

3,749,586

 

First Tennessee Bank National
Association (a)

 

 

18.49

 

 

3,691,056

 

 

20.05

 

 

3,976,672

 

 

20.26

 

 

4,032,289

 

Tier 1 Common (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Horizon National Corporation

 

 

10.65

 

 

2,145,960

 

 

11.76

 

 

2,355,636

 

 

11.53

 

 

2,317,655

 

Other Capital Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total period-end equity to period-end
assets

 

 

9.83

 

 

 

 

 

10.83

 

 

 

 

 

10.84

 

 

 

 

FHN’s Leverage

 

 

10.63

 

 

 

 

 

11.41

 

 

 

 

 

10.96

 

 

 

 

Adjusted tangible common equity to risk
weighted assets (b)

 

 

9.93

 

 

 

 

 

10.80

 

 

 

 

 

10.66

 

 

 

 

Tangible common equity to tangible
assets (b)

 

 

8.11

 

 

 

 

 

9.05

 

 

 

 

 

8.93

 

 

 

 

                                       

 

 

(a)

Excluding financial subsidiaries, FTBNA’s Tier 1 and Total Capital ratios were 14.82 percent and 16.76 percent, respectively, at December 31, 2012.

(b)

Refer to the Non-GAAP to GAAP Reconciliation – Table 29.


 

 

FIRST HORIZON NATIONAL CORPORATION

25



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, 2012, FHN and FTBNA had sufficient capital to qualify as well-capitalized institutions as shown in Note 13 – Regulatory Capital. Through 2013, capital ratios are expected to remain strong and significantly above current well-capitalized standards. Refer to the discussion of proposed rules that will impact capital ratios for the industry in the Market Uncertainties and Prospective Trends section of MD&A.

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 2012:

Table 12 – Issuer Purchases of Equity Securities

Compensation Plan-Related Repurchase Authority:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Volume in thousands)

 

Total Number
of Shares
Purchased

 

Average Price
Paid per Share

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Programs

 

Maximum Number
of Shares that May
Yet Be Purchased
Under the Programs

 

                 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 1 to October 31

 

 

4

 

 

$

9.46

 

 

 

4

 

 

 

34,061

 

November 1 to November 30

 

 

-

 

 

 

N/A

 

 

 

-

 

 

 

34,061

 

December 1 to December 31

 

 

19

 

 

 

9.74

 

 

 

19

 

 

 

34,042

 

                         

 

 

 

 

Total

 

 

23

 

 

$

9.69

 

 

 

23

 

 

 

 

 

                               

 

 

 

N/A – Not applicable

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, 2012, the maximum number of shares that may yet be purchased under the program was 34.0 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 during 2013.


 

 

26

FIRST HORIZON NATIONAL CORPORATION



Table 12 – Issuer Purchases of Equity Securities (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Repurchase Authority:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollar values and volume in
thousands, except per share data)

 

Total Number
of Shares
Purchased

 

Average Price
Paid per Share (a)

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Programs

 

Maximum Approximate
Dollar Value that May
Yet Be Purchased
Under the Programs

 

                 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 1 to October 31

 

 

350

 

 

$

9.32

 

 

 

350

 

 

 

$56,260

 

November 1 to November 30

 

 

1,450

 

 

 

9.39

 

 

 

1,450

 

 

 

$42,651

 

December 1 to December 31

 

 

1,875

 

 

 

9.48

 

 

 

1,875

 

 

 

$24,883

 

                         

 

 

 

 

Total

 

 

3,675

 

 

$

9.43

 

 

 

3,675

 

 

 

 

 

                               

 

 

 

(a)

Represents total costs including commissions paid. Average price paid per share for the quarter was $9.41 excluding commissions.

 

 

Other Programs:

On October 17, 2011, FHN announced a $100 million share purchase authority that would expire on August 31, 2012. In April 2012, FHN announced that this share purchase authority had been increased from $100 million to $200 million and the expiration had been extended to January 31, 2013. As of December 31, 2012, $175.1 million in purchases had been made under this authority at an average price per share of $8.59, $8.56 excluding commissions. In January 2013, FHN announced that this share purchase authority had been increased from $200 million $300 million and that the expiration had been extended to January 31, 2014. Purchases may be made in the open market or through privately negotiated transactions and will be subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions.

 

 

Refer to Note 28 – Other Events for additional information.

ASSET QUALITY (TREND ANALYSIS OF 2012 COMPARED TO 2011)

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”) and commercial real estate. Retail loans are composed of consumer real estate; permanent mortgage; credit card and other; and restricted and secured real estate loans. Key asset quality metrics for each of these portfolios can be found in Table 15 – 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 2012, there were no material changes to FHN’s credit underwriting guidelines or significant changes or additions to FHN’s product offerings. 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.

 

 

FIRST HORIZON NATIONAL CORPORATION

27



FHN may utilize availability of guarantors/sponsors to support lending decisions during the credit underwriting process and when determining the assignment of internal loan grades. Where guarantor contributions are determined to be a source of repayment, an assessment of the guarantee is made. This guarantee assessment would include but not be limited to factors such as type and feature of the guarantee, consideration for the guarantee, key provisions of the guarantee agreement, and ability of the guarantor to be a viable secondary source of repayment. Reliance on the guarantee as a viable secondary source of repayment is a function of an analysis proving capability to pay, factoring in, among other things, liquidity and direct/indirect debt cash flows. Therefore, a proper evaluation of each guarantor is critical. FHN establishes a guarantor’s ability (financial wherewithal) to support a credit based on an analysis of recent information on the guarantor’s financial condition. This would generally include income and asset information from sources such as recent tax returns, credit reports, and personal financial statements. In analyzing this information FHN seeks to assess a combination of liquidity, global cash flow, cash burn rate, and contingent liabilities to demonstrate the guarantor’s capacity to sustain support for the credit and fulfill the obligation. FHN also considers the volume and amount of guarantees provided for all global indebtedness and the likelihood of realization. Guarantor financial information is periodically updated throughout the life of the loan. FHN presumes a guarantor’s willingness to perform until financial support becomes necessary or if there is any current or prior indication or future expectation that the guarantor may not willingly and voluntarily perform under the terms of the guarantee. In FHN’s risk grading approach, it is deemed that financial support becomes necessary generally at a point when the loan would otherwise be graded substandard, reflecting a well-defined weakness. At that point, provided willingness and capacity to support are appropriately demonstrated, a strong, legally enforceable guarantee can mitigate the risk of default or loss, justify a less severe rating, and consequently reduce the level of allowance or charge-off that might otherwise be deemed appropriate. FHN establishes guarantor willingness to support the credit through documented evidence of previous and ongoing support of the credit. Previous performance under a guarantor’s obligation to pay is not considered if the performance was involuntary.

C&I
The C&I portfolio was $8.8 billion on December 31, 2012, and is comprised of loans used for general business purposes 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, 2012 and 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, 2012

 

December 31, 2011

 

 

 

 

 

   

(Dollars in thousands)

 

Amount

 

Percent

 

Amount

 

Percent

 

                   

Industry:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans to mortgage companies

 

$

1,824,347

 

 

21

%

 

$

1,394,190

 

 

17

%

 

Finance & insurance

 

 

1,603,624

 

 

18

 

 

 

1,571,747

 

 

20

 

 

Healthcare

 

 

708,907

 

 

8

 

 

 

621,905

 

 

8

 

 

Manufacturing

 

 

693,065

 

 

8

 

 

 

590,828

 

 

7

 

 

Wholesale trade

 

 

662,571

 

 

8

 

 

 

630,580

 

 

8

 

 

Retail trade

 

 

502,515

 

 

6

 

 

 

471,733

 

 

6

 

 

Real estate rental & leasing (a)

 

 

383,411

 

 

4

 

 

 

424,352

 

 

5

 

 

Other (transportation, education, arts, entertainment, etc) (b)

 

 

2,418,516

 

 

27

 

 

 

2,309,592

 

 

29

 

 

                               

Total C&I loan portfolio

 

$

8,796,956

 

 

100

%

 

$

8,014,927

 

 

100

%

 

                               

 

 

(a)

Leasing, rental of real estate, equipment, and goods.

(b)

Industries in this category each comprise less than 4 percent.


 

 

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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. FHN strives to identify problem assets early through comprehensive policies and guidelines, targeted portfolio reviews, and an emphasis on frequent grading. 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. As of December 31, 2012, balances of loans to mortgage companies were 21 percent of the C&I portfolio and includes volumes related to both home purchase and refinance activity. 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. Finance and insurance, the other large component, represents 18 percent of the C&I portfolio.

Finance and Insurance
The finance and insurance component of the C&I portfolio, which includes bank-related loans and TRUPs (i.e., long term unsecured loans to bank and insurance-related businesses), has been stressed but has seen the stronger borrowers stabilize as there have been upgrades within the TRUPs and bank stock portfolio. It also includes approximately $583 million of asset-based lending to consumer financing companies.

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 (generally less than $15 billion in total assets) and insurance institutions through FHN’s capital markets business. 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, 2012, seven TRUPs relationships have elected interest deferral, down from ten at year-end 2011; the three relationships that no longer make the election were upgraded to accrual status. 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.

 

 

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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, 2012, the UPB of trust preferred loans totaled $445.9 million ($289.7 million of bank TRUPs and $156.2 million of insurance TRUPs) with the UPB of other bank-related loans totaling approximately $105.0 million. Inclusive of a remaining lower of cost or market (“LOCOM”) valuation allowance on TRUPs of $34.2 million, total reserves (ALLL plus the LOCOM) for TRUPs and other bank-related loans were $53.2 million or 10 percent of outstanding UPB.

C&I Asset Quality Trends
During 2012, performance of the C&I portfolio continued to improve with a positive shift in the risk rating assignments and lower loss rates as commercial borrowers continue to adapt to the current operating environment. As a result, the ALLL declined $34.2 million to $96.2 million as of December 31, 2012, and the allowance as a percentage of period-end loans declined to 1.09 percent in 2012 from 1.63 percent in 2011. The decline was related to a lower ALLL and an increase in loans to mortgage companies balances in 2012 which require lower levels of reserves due to minimal credit risk associated with this portfolio. Net charge-offs as a percentage of average loans decreased to 0.25 percent from 0.84 percent reflecting the aggregate improvement in this portfolio. Nonperforming C&I loans, which peaked in third quarter 2010, decreased $39.6 million to $122.6 million on December 31, 2012, mainly due to 3 TRUPs amounting to $21 million (including LOCOM) that returned to accrual status in 2012. The nonperforming loan (“NPL”) ratio decreased to 1.39 percent in 2012 from 2.02 percent in 2011.

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 $1.1 billion on December 31, 2012. Subcategories of income CRE consist of retail (24 percent), apartments (23 percent), office (17 percent), industrial (14 percent), hospitality (8 percent), land/land development (6 percent), and other (8 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

 

 

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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 2012 as property stabilization and strong sponsors have positively affected performance. FHN does not capitalize interest or fund interest on distressed properties.

Income CRE Asset Quality Trends
Performance of income CRE loans improved in 2012 as market conditions improved and sponsors and guarantors provided additional financial support to borrowers as needed. Allowance as a percentage of loans decreased to 1.43 percent in 2012 from 3.15 percent in 2011. Outstanding balances declined 12 percent from 2011 and the level of allowance declined $23.7 million from 2011 to $15.9 million in 2012. Net charge-offs declined to $12.4 million in 2012 from $17.5 million in 2011. The level of nonperforming loans decreased 52 percent to $33.0 million as of December 31, 2012, or 2.97 percent of total income CRE loans. The decline in nonperforming loans is primarily attributable to the regional banking portion of the portfolio.

Residential CRE
The residential CRE portfolio was $58.3 million on December 31, 2012. 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.

The limited amount of new originations within the regional banking footprint and natural runoff combined with the wind-down of the non-strategic portion of this portfolio directly impacts the amount of net charge-offs and nonperforming loans and the level of the allowance. Balances of residential CRE loans declined 52 percent from a year ago. Net charge-offs declined $9.5 million from 2011 to $3.1 million during 2012. The ALLL declined $11.9 million to $4.1 million and nonperforming loans decreased $33.2 million to $12.6 million during 2012 from 2011. The ALLL to loans ratio and the nonperforming loans ratio remained elevated at 7.01 percent and 21.63 percent, respectively, but declined compared to 2011, due to a large relationship that returned to accrual status in third quarter 2012. 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

Regulatory Focus on Consumer Loan Accounting and Reporting
In first quarter 2012, the OCC issued interagency guidance related to ALLL estimation and nonaccrual practices and risk management policies related to junior lien loans. As a result, FHN modified its nonaccrual policies to place current second liens on nonaccrual if the first lien is owned or serviced by FHN and that first lien is 90 or more days past due. Additionally, FHN enhanced its ALLL methodology to qualitatively estimate probable incurred losses for all current second liens in the home equity portfolio that are behind first liens with performance issues. During 2012 and continuing into early 2013, FHN has been and is continuing to evaluate data provided by third

 

 

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parties, including vendors, on first liens not owned or serviced by FHN to determine if it may be reasonably relied upon in order to predict performance of the associated second liens. FHN is working to have a vendor selected in the first half of 2013. Therefore, methodologies, policies, and practices related to the ALLL and/or nonaccrual accounting and reporting may be revised in the future to incorporate usage of such data if deemed predictive of loan performance. It is possible that if FHN determines that third party data may reasonably be relied upon, future additions to NPLs may be material.

Additionally, in third quarter 2012, the OCC clarified that residential real estate loans in which personal liability has been discharged through bankruptcy and not reaffirmed by the borrower are collateral dependent and should be reported as nonaccruing TDRs. As a result, FHN charged-down such loans to the net realizable value of the collateral and the remaining balances were reported as nonaccruing TDRs regardless of the loan’s delinquency status. As of December 31, 2012, approximately 80 percent of these loans that were reported as nonperforming were current. Incremental provision expense associated with this change was approximately $23 million and the related net charge-offs were approximately $33 million in 2012. The incremental impacts to nonperforming loan and TDR levels cannot be directly linked as certain of the discharged bankruptcies in which charge-offs were recognized were either already reported as nonaccrual loans or TDRs, neither, or both in prior periods for other reasons.

Because of the composition of FHN’s residential real estate portfolios, these changes most significantly impacted the consumer real estate portfolio segment.

Consumer Real Estate
The consumer real estate portfolio was $5.3 billion on December 31, 2012, and is primarily composed of home equity lines and installment loans. Including restricted and secured balances (loans consolidated per amendments to ASC 810 and on-balance sheet securitizations) the largest geographical concentrations of balances as of December 31, 2012, are in Tennessee (49 percent) and California (11 percent) with no other state representing greater than 3 percent of the portfolio. At origination, approximately 45 percent of the consumer real estate and restricted and secured balances were in a first lien position. At origination, the weighted average FICO score of this portfolio was 742 and refreshed FICO scores averaged 733 as of December 31, 2012. Generally, performance of this portfolio is affected by life events when individuals have been impacted, the level of unemployment and home prices.

HELOCs comprise $3.2 billion of the consumer real estate portfolio and restricted HELOC balances. FHN’s HELOCs typically have a 5 or 10 year draw period followed by a 15 or 10 year repayment period, respectively. During the draw period, a borrower is able to draw on the line and is only required to make interest payments. The line is automatically frozen if a borrower becomes 45 days or more past due on payments. Once the draw period has concluded, the line is closed and the borrower is required to make both principal and interest payments monthly until the loan matures. The principal payment is fully amortizing, but payment amounts will adjust when variable rates reset to reflect changes in the prime rate.

As of December 31, 2012, approximately 80 percent of FHN’s HELOCs are in the draw period. Based on when draw periods are scheduled to end per the line agreement, it is expected that $1.8 billion, or 69 percent of HELOCs currently in the draw period will have entered the repayment period during the next 60 months. Delinquencies and charge-off rates for HELOCs that have entered the repayment period are higher than HELOCs still in the draw period because of the increased minimum payment requirement. The following table shows the HELOCs currently in the draw period and expected timing of conversion to the repayment period.

 

 

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Table 14 – HELOC Draw To Repayment Schedule

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

   

(Dollars in thousands)

 

Repayment
Amount

 

Percent

           

Months remaining in draw period:

 

 

 

 

 

 

 

0-12

 

$

216,275

 

 

8

%

13-24

 

 

324,616

 

 

13

%

25-36

 

 

454,193

 

 

18

%

37-48

 

 

333,979

 

 

13

%

49-60

 

 

427,383

 

 

17

%

>60

 

 

778,767

 

 

31

%

               

Total

 

$

2,535,213

 

 

100

%

               

As of December 31, 2012, approximately $3 billion or 54 percent of the consumer real estate portfolio are stand alone second lien loans. FHN owns or services less than 5 percent of the first liens that are senior to these home equity second liens. Historically, FHN sold a majority of the first lien mortgage loans that it originated on a servicing-retained basis. However since August 2008, FHN has sold a significant portion of its first lien servicing portfolio and therefore has no first-hand visibility into the performance status of a majority of the first liens associated with second liens in the consumer real estate portfolio. FHN does not have a reliable methodology to actively monitor the performance status of the first liens that are serviced by others. FHN may obtain first lien performance information through loss mitigation activities and beginning in first quarter 2013, FHN will place it’s stand-alone second liens on nonaccrual if it is discovered through this process that there are performance issues with the first liens. For FHN’s current second liens that are behind firsts that FHN either owns or services, FHN places the second lien on nonaccrual if the first lien is 90 days or more past due.

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.

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 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.

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 in order to mitigate risk of loss to FHN.

 

 

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Low or Reduced Documentation Origination
In the past, FHN originated real estate secured 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. Beginning in 2012, FHN no longer originates stated income, or low or reduced documentation real estate secured loans except on an exception basis when mitigating factors are present.

Consumer Real Estate Asset Quality Trends
Overall, performance of the consumer real estate portfolio improved in 2012 when compared with 2011 as the higher-risk non-strategic portfolio runs off and is replaced by new, higher-quality originations within the regional bank. However the implementation of changes in 2012 somewhat offset improvement in certain asset quality metrics. The ALLL declined $23.7 million to $115.7 million in 2012 driven by lower delinquencies and run-off of the higher risk non-strategic component of the portfolio. The allowance as a percentage of loans decreased 44 basis points to 2.19 percent of loans as of December 31, 2012. The nonperforming loan balance was $57.2 million and $35.4 million as of December 31, 2012 and 2011, respectively. Balances of nonperforming loans as of December 31, 2012 include $26.9 million of discharged bankruptcies and $5.2 million of current second liens behind delinquent first liens that are serviced or owned by FHN. Loans delinquent 30 or more days and still accruing were 1.34 percent in 2012 compared to 1.70 percent in 2011 primarily due to enhanced collections practices, loss mitigation activities, and improved overall performance. The net charge-offs ratio decreased 15 basis points to 2.04 percent of average loans. 2012 net charge-offs include $27.1 million associated with charging down discharged bankruptcies to net realizable value.

Permanent Mortgage
The permanent mortgage portfolio was $.8 billion on December 31, 2012. This portfolio is primarily composed of jumbo mortgages and one-time-close (“OTC”) completed construction loans that were originated through legacy businesses. 25 percent of loan balances are in California, but the remainder of the portfolio is somewhat geographically diverse. Overall, recent performance has been affected by strong servicing and successful modification programs.

The ALLL increased $4.0 million from 2011 to $24.1 million as of December 31, 2012. Troubled debt restructuring (“TDR”) reserves comprise a significant majority of the ALLL for the permanent mortgage portfolio and these reserves increased by $17.3 million from a year ago, offsetting the impact of improved performance from the non-TDR component of the portfolio. Delinquencies declined $9.1 million to $17.1 million in 2012 and net charge-offs decreased $58.7 million to $10.6 million during 2012. Improvement in delinquencies is due to active servicing, loss mitigation activities and overall improved performance.

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 second quarter 2011 and in third quarter 2012, FHN exercised cleanup calls related to first lien securitizations resulting in the addition of mortgage loans to this portfolio, substantially all of which were performing upon exercise. Natural run-off combined with the impact of the exercise of cleanup calls resulted in a net decline in portfolio balances of $35.2 million from 2011. NPLs decreased slightly to $32.0 million in 2012.

Credit Card and Other
The credit card and other portfolios were $.3 billion on December 31, 2012, and primarily include credit card receivables, automobile loans, and to a lesser extent OTC construction loans and other consumer-related credits. FHN may originate other non-real estate secured consumer loans under a stated-income program for certain smaller size and lower risk transactions. In 2012, FHN charged-off $9.4 million of credit card and other consumer loans compared with $15.4 million during 2011. The allowance remained relatively flat at $6.9 million. Loans 30 days or more delinquent increased from 1.33 percent in 2011 to 1.45 percent in 2012.

 

 

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Restricted and Secured Real Estate Loans
Restricted and secured real estate loans ($.4 billion on December 31, 2012) includes residential real estate loans in both consolidated and nonconsolidated variable interest entities. Restricted real estate loans relate to consolidated securitization trusts and are discussed in Note 24 – Variable Interest Entities. Other real estate loans secure borrowings related to nonconsolidated VIEs and remain on FHN’s balance sheet as the securitizations do not qualify for sale treatment. In the first half of 2012, FHN exercised cleanup calls related to 3 of the HELOC securitization trusts and one permanent mortgage securitization trust, respectively, resulting in deconsolidation of the trusts. The loans were then reclassified from the “restricted” line item to the consumer real estate line which contributed to the $225.2 million year-over-year decline in restricted loan balances.

Loan Portfolio Concentrations
FHN has a concentration of loans secured by residential real estate (39 percent of total loans), the majority of which is in the consumer real estate portfolio (32 percent of total loans). FHN had loans to mortgage companies totaling $1.8 billion (21 percent of the C&I portfolio, or 11 percent of total loans) as of December 31, 2012. Additionally, FHN had a sizeable portfolio of bank-related loans, including TRUPs totaling $550.9 million (6 percent of the C&I portfolio, or 3 percent of total loans).

Except as previously discussed, on December 31, 2012, FHN did not have any other concentrations of C&I loans in any single industry of 10 percent or more of total loans.

 

 

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The following table provides additional asset quality data by loan portfolio:

 

 

 

 

 

 

 

 

 

 

 

Table 15 – Asset Quality by Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

2010

 

               

Key Portfolio Details

 

 

 

 

 

 

 

 

 

 

                     

C&I

 

 

 

 

 

 

 

 

 

 

Period-end loans ($millions)

 

$

8,797

 

$

8,015

 

$

7,338

 

                     

30+ Delinq. % (a)

 

 

0.22

 

 

0.15

 

 

0.36

 

NPL %

 

 

1.39

 

 

2.02

 

 

2.92

 

Charge-offs %

 

 

0.25

 

 

0.84

 

 

1.24

 

                     

Allowance / loans %

 

 

1.09

 

 

1.63

 

 

3.26

 

Allowance / charge-offs

 

 

4.87

x

 

2.17

x

 

2.80

x

                     

Income CRE

 

 

 

 

 

 

 

 

 

 

Period-end loans ($millions)

 

$

1,110

 

$

1,257

 

$

1,407

 

                     

30+ Delinq. % (a)

 

 

0.41

 

 

0.76

 

 

1.20

 

NPL %

 

 

2.97

 

 

5.50

 

 

10.06

 

Charge-offs %

 

 

1.02

 

 

1.30

 

 

3.29

 

                     

Allowance / loans %

 

 

1.43

 

 

3.15

 

 

8.87

 

Allowance / charge-offs

 

 

1.28

x

 

2.27

x

 

2.39

x

                     

Residential CRE

 

 

 

 

 

 

 

 

 

 

Period-end loans ($millions)

 

$

58

 

$

121

 

$

264

 

                     

30+ Delinq. % (a)

 

 

-

 

 

0.72

 

 

3.19

 

NPL % (b)

 

 

21.63

 

 

37.87

 

 

42.04

 

Charge-offs %

 

 

3.46

 

 

6.56

 

 

13.76

 

                     

Allowance / loans % (b)

 

 

7.01

 

 

13.20

 

 

11.51

 

Allowance / charge-offs

 

 

1.32

x

 

1.26

x

 

0.49

x

                     

Consumer Real Estate

 

 

 

 

 

 

 

 

 

 

Period-end loans ($millions)

 

$

5,286

 

$

5,291

 

$

5,618

 

                     

30+ Delinq. % (a)

 

 

1.34

 

 

1.70

 

 

2.07

 

NPL % (c)

 

 

1.08

 

 

0.67

 

 

0.58

 

Charge-offs %

 

 

2.04

 

 

2.19

 

 

2.92

 

                     

Allowance / loans %

 

 

2.19

 

 

2.63

 

 

2.67

 

Allowance / charge-offs

 

 

1.06

x

 

1.18

x

 

0.87

x

                     

Permanent Mortgage

 

 

 

 

 

 

 

 

 

 

Period-end loans ($millions)

 

$

752

 

$

788

 

$

1,087

 

                     

30+ Delinq. % (a)

 

 

2.28

 

 

3.33

 

 

5.16

 

NPL % (c)

 

 

4.26

 

 

4.15

 

 

11.27

 

Charge-offs % (d)

 

 

1.37

 

 

7.16

 

 

6.47

 

                     

Allowance / loans %

 

 

3.21

 

 

2.55

 

 

5.49

 

Allowance / charge-offs (d)

 

 

2.28

x

 

0.29

x

 

0.90

x

                     

Credit Card and Other

 

 

 

 

 

 

 

 

 

 

Period-end loans ($millions)

 

$

289

 

$

284

 

$

312

 

                     

30+ Delinq. % (a)

 

 

1.45

 

 

1.33

 

 

1.43

 

NPL %

 

 

0.59

 

 

0.75

 

 

6.18

 

Charge-offs %

 

 

3.36

 

 

5.23

 

 

10.75

 

                     

Allowance / loans %

 

 

2.39

 

 

2.49

 

 

4.13

 

Allowance / charge-offs

 

 

0.73

x

 

0.46

x

 

0.32

x

                     

Restricted real estate and secured borrowings

 

 

 

 

 

 

 

 

 

 

Period-end loans ($millions) (e)

 

$

416

 

$

641

 

$

757

 

                     

30+ Delinq. % (a)

 

 

1.68

 

 

3.15

 

 

3.12

 

NPL % (c)

 

 

1.92

 

 

1.04

 

 

0.82

 

Charge-offs %

 

 

4.19

 

 

4.50

 

 

5.63

 

                     

Allowance / loans %

 

 

3.39

 

 

4.97

 

 

6.26

 

Allowance / charge-offs

 

 

0.68

x

 

1.02

x

 

1.01

x

                     

 

 

Certain previously reported amounts have been reclassified to agree with current presentation. Loans are expressed net of unearned income.

(a)

30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.

(b)

2012 decline affected by a large relationship that was upgraded to accrual status.

(c)

2012 NPL levels affected by placing discharged bankruptcies and current second liens behind FHN-serviced first liens with performance issues on nonaccrual in 2012.

(d)

2011 includes $40.2 million of NCO recognized due to sale of nonperforming mortgages.

(e)

2012, 2011, and 2010 include $402.4 million, $600.2 million and $701.8 million of consumer real estate loans and $13.2 million, $40.6 million and $55.7 million of permanent mortgage loans, respectively.


 

 

36

FIRST HORIZON NATIONAL CORPORATION



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 28 percent to $277.0 million on December 31, 2012 from $384.4 million on December 31, 2011. Continued aggregate improvement in borrowers’ financial conditions in 2012 contributed to the decline in the ALLL from a year ago. Overall the portfolio composition has changed as more than $740 million of non-strategic balances have been reduced while the regional bank loan portfolio grew year over year driven by loans to mortgage companies, corporate lending, and consumer real estate installment loans. As loans with higher levels of probable incurred loss content have been removed from the portfolio, the allowance estimate results in lower required reserves. Additionally, the remaining portfolio has improved as commercial problem loan borrowers continue to adapt to the operating environment, FHN has been proactively identifying and working with problem borrowers, and there was modest improvement in economic conditions in 2012. The ratio of allowance for loan losses to total loans, net of unearned income, decreased to 1.66 percent on December 31, 2012, from 2.34 percent on December 31, 2011. The allowance attributable to individually impaired loans was $75.2 million compared to $88.1 million on December 31, 2012 and 2011, respectively.

The provision for loan losses is the charge to earnings 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 increased 77 percent to $78.0 million in 2012 from $44.0 million in 2011. Approximately $23 million of the 2012 provision is associated with implementation of the regulatory changes related to discharged bankruptcies. The provision in 2011 includes losses on loan sales of approximately $36 million relating to the sale of nonperforming permanent mortgages and commercial loans.

FHN expects asset quality trends to be relatively stable to slightly improving in 2013; that expectation depends upon a continued economic recovery, among other things, which may or may not occur. The C&I portfolio is expected to continue to show positive trends but the rate of improvement may continue to slow in 2013 and short-term volatility is possible. There has been aggregate improvement in the risk profile of commercial borrowers which has resulted in upward grade migration which began in late 2010 and continued through the end of 2012. 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 consumer real estate portfolio assumes an ongoing economic recovery as consumer delinquency and loss rates are highly correlated with unemployment trends. Additionally, certain asset quality ratios are likely to be impacted in 2013 as FHN continues to evaluate alternatives for obtaining performance data from third parties on first liens serviced by others related to FHN’s stand-alone second liens.

Consolidated Net Charge-offs
Net charge-offs were $185.4 million in 2012 compared with $324.4 million in 2011. The ALLL was 1.49 times net charge-offs for 2012 compared with 1.18 times net charge-offs for 2011. The net charge-offs to average loans ratio decreased from 2.02 percent in 2011 to 1.14 percent in 2012 due to a 43 percent decline in net charge-offs. Net charge-offs for all the portfolios declined in 2012 and were primarily attributable to improved performance of the loan portfolio and continued reduction of the non-strategic portfolios. Significant items affecting net charge-off trends were the recognition of approximately $33 million in charge-offs associated with charging-down discharged bankruptcies to net realizable value in 2012 and $47.6 million of charge-offs associated with bulk sales in 2011, a majority of which were in nonperforming permanent mortgages.

The decline in the commercial loan net charge-offs contributed to approximately 40 percent of the decline in the total consolidated net charge-offs. The improved performance of C&I loans contributed to a $40.4 million reduction of the commercial net charge-offs with the remaining decline of $14.6 million attributable to the CRE portfolio.

Improvement of the retail portfolios contributed to an $84.0 million decline in consolidated net charge-offs despite the impact of the regulatory changes related to discharged bankruptcies in 2012. $27.1 million of the net charge-offs related to the guidance were attributable to the consumer real estate portfolio, $3.3 million associated with restricted loans (mainly HELOCs), and $2.6 million were associated with the permanent mortgage portfolio. Net

 

 

FIRST HORIZON NATIONAL CORPORATION

37



charge-offs of consumer real estate loans declined $8.8 million with the majority attributable to the non-strategic segment. Permanent mortgage net charge-offs declined $58.7 million from a year ago as 2011 included $40.2 million of charge-offs associated with the bulk sale of nonperforming permanent mortgages. The net charge-offs of restricted and secured real estate loans decreased $10.6 million to $20.8 million in 2012 from 2011. Some of the decline is attributable to reclassification of approximately $137 million of loans to the unrestricted portfolio due to exercise of clean-up calls in 2012.

 

 

38

FIRST HORIZON NATIONAL CORPORATION



The following table provides consolidated asset quality information for 2008 through 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 16 – Analysis of Allowance for Loan Losses and Charge-offs

(Dollars in thousands)

 

2012

 

2011

 

2010

 

2009

 

2008

 

                       

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

384,351

 

$

664,799

 

$

896,914

 

$

849,210

 

$

342,341

 

Adjustment due to amendments of ASC 810

 

 

-

 

 

-

 

 

24,578

 

 

-

 

 

-

 

Provision for loan losses

 

 

78,000

 

 

44,000

 

 

270,000

 

 

880,000

 

 

1,080,000

 

Acquisitions/(divestitures), net

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(370

)

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial, and industrial

 

 

30,887

 

 

76,728

 

 

97,272

 

 

129,283

 

 

105,621

 

Commercial real estate

 

 

19,977

 

 

41,147

 

 

127,323

 

 

277,461

 

 

193,518

 

Consumer real estate

 

 

126,253

 

 

132,427

 

 

188,694

 

 

224,853

 

 

124,102

 

Permanent mortgage

 

 

13,604

 

 

74,614

 

 

67,829

 

 

63,004

 

 

6,913

 

OTC

 

 

452

 

 

5,236

 

 

30,609

 

 

161,730

 

 

143,541

 

Credit card and other

 

 

12,172

 

 

14,017

 

 

16,955

 

 

20,630

 

 

18,733

 

Restricted real estate loans and secured borrowings

 

 

21,665

 

 

33,099

 

 

47,859

 

 

N/A

 

 

N/A

 

                                 

Total charge-offs

 

 

225,010

 

 

377,268

 

 

576,541

 

 

876,961

 

 

592,428

 

                                 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial, and industrial

 

 

11,151

 

 

16,562

 

 

11,630

 

 

7,594

 

 

4,495

 

Commercial real estate

 

 

4,475

 

 

11,047

 

 

13,030

 

 

10,790

 

 

2,386

 

Consumer real estate

 

 

16,891

 

 

14,268

 

 

15,464

 

 

16,244

 

 

7,269

 

Permanent mortgage

 

 

3,024

 

 

5,375

 

 

1,658

 

 

797

 

 

546

 

OTC

 

 

295

 

 

327

 

 

4,162

 

 

6,529

 

 

2,253

 

Credit card and other

 

 

2,907

 

 

3,490

 

 

3,068

 

 

2,711

 

 

2,718

 

Restricted real estate loans and secured borrowings

 

 

879

 

 

1,751

 

 

836

 

 

N/A

 

 

N/A

 

                                 

Total recoveries

 

 

39,622

 

 

52,820

 

 

49,848

 

 

44,665

 

 

19,667

 

                                 

Net charge-offs

 

 

185,388

 

 

324,448

 

 

526,693

 

 

832,296

 

 

572,761

 

                                 

Ending balance

 

$

276,963

 

$

384,351

 

$

664,799

 

$

896,914

 

$

849,210

 

                                 

Reserve for unfunded commitments

 

$

4,145

 

$

6,945

 

$

14,253

 

$

19,685

 

$

18,752

 

Total of allowance for loan losses and reserve for unfunded commitments

 

 

281,108

 

 

391,296

 

 

679,052

 

 

916,599

 

 

867,962

 

                                 

Loans and commitments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total period end loans, net of unearned

 

$

16,708,582

 

$

16,397,127

 

$

16,782,572

 

$

18,123,884

 

$

21,278,190

 

Insured retail residential and construction loans (a)

 

 

40,672

 

 

99,024

 

 

174,621

 

 

365,602

 

 

591,116

 

                                 

Loans excluding insured loans

 

$

16,667,910

 

$

16,298,103

 

$

16,607,951

 

$

17,758,282

 

$

20,687,074

 

                                 

Remaining unfunded commitments

 

$

7,993,218

 

$

7,435,228

 

$

7,903,537

 

$

8,370,960

 

$

9,600,616

 

                                 

Average loans, net of unearned

 

$

16,205,403

 

$

16,056,818

 

$

17,131,798

 

$

19,579,267

 

$

21,660,704

 

                                 

Reserve Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total commercial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance/loans%

 

 

1.17

%

 

1.98

%

 

4.38

%

 

5.04

%

 

3.53

%

Period End Loans% of Total

 

 

60

 

 

57

 

 

54

 

 

53

 

 

52

 

Consumer real estate (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance/loans%

 

 

2.27

 

 

2.80

 

 

3.04

 

 

3.10

 

 

2.35

 

Period End Loans% of Total

 

 

34

 

 

36

 

 

38

 

 

38

 

 

36

 

Permanent mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance/loans% (b)

 

 

3.26

 

 

3.16

 

 

5.69

 

 

11.41

 

 

4.76

 

Period End Loans% of Total

 

 

4

 

 

5

 

 

6

 

 

6

 

 

5

 

OTC (Consumer Residential Construction Loans)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance/loans%

 

 

*

 

 

9.24

 

 

22.80

 

 

26.85

 

 

20.44

 

Period End Loans% of Total

 

 

*

 

 

*

 

 

*

 

 

1

 

 

5

 

Credit card and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance/loans%

 

 

2.40

 

 

2.44

 

 

2.90

 

 

4.45

 

 

6.60

 

Period End Loans% of Total

 

 

2

 

 

2

 

 

2

 

 

2

 

 

2

 

Allowance and net charge-off ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to total loans

 

 

1.66

 

 

2.34

 

 

3.96

 

 

4.95

 

 

3.99

 

Allowance to total loans excluding insured loans

 

 

1.66

 

 

2.36

 

 

4.00

 

 

5.05

 

 

4.11

 

Net charge-offs to average loans

 

 

1.14

 

 

2.02

 

 

3.07

 

 

4.25

 

 

2.64

 

Allowance to net charge-offs

 

 

1.49

x

 

1.18

x

 

1.26

x

 

1.08

x

 

1.48

x

                                 

 

 

* Amount is less than one percent.

N/A - not applicable

Certain previously reported amounts have been reclassified to agree with current presentation.

(a)

Whole-loans insurance has been obtained on certain retail residential and construction loans.

(b)

Includes restricted real estate loans.


 

 

FIRST HORIZON NATIONAL CORPORATION

39



Nonperforming Assets
Nonperforming loans are loans placed on nonaccrual status if it becomes evident that full collection of principal and interest is at risk, impairment has been recognized as a partial charge-off of principal balance, or on a case-by-case basis if FHN continues to receive payments but there are atypical loan structures or other borrower-specific issues. FHN does have a meaningful portion of loans that are classified as nonaccrual but where loan payments are received including residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy and current second liens behind FHN-serviced first liens with performance issues. These, along with foreclosed real estate, excluding foreclosed real estate from government insured mortgages, represent nonperforming assets (“NPAs”). Foreclosed assets are recognized at fair value less estimated costs of disposal at foreclosure. See Note 1 – Summary of Significant Accounting Policies for additional detail regarding FHN’s policies for nonaccrual loans.

Total nonperforming assets (including NPLs HFS) decreased to $419.4 million on December 31, 2012, from $521.2 million on December 31, 2011. Nonperforming assets (excluding NPLs HFS) decreased to $308.8 million on December 31, 2012, from $423.0 million on December 31, 2011. The nonperforming assets ratio (nonperforming assets excluding NPLs HFS to total period-end loans plus foreclosed real estate and other assets) decreased to 1.84 percent in 2012 from 2.57 percent in 2011 due to a 27 percent decline in nonperforming assets. Nonperforming loans declined $87.1 million to $267.0 million on December 31, 2012, largely driven by improvement in the commercial portfolios.

Nonperforming C&I loans decreased to $122.6 million in 2012 from $162.2 million in 2011. Commercial real estate NPLs decreased $69.4 million to $45.6 million in 2012. Both the C&I and Residential CRE portfolios had large individual credits upgraded to accrual status in 2012. Consumer nonperforming loans increased to $98.9 million from $76.9 million in 2011, with $21.8 million of the increase related to the consumer real estate portfolio. The increase in NPLs includes $42.3 million of discharged bankruptcies on nonaccrual in third quarter 2012, 80 percent of which are current. Additionally consumer NPLs also include $6.9 million of current second liens that were placed on nonaccrual status because the associated FHN-serviced first liens had performance issues. Nonperforming loans classified as HFS increased $12.4 million to $110.6 million before negative fair value adjustments of $59.2 million on December 31, 2012. Loans in HFS are recorded at elected fair value or lower of cost or market and do not carry reserves.

The ratio of ALLL to NPLs in the loan portfolio decreased to 1.04 times in 2012 compared to 1.09 times in 2011 driven by lower reserve balances. Because individually impaired collateral dependent loans are charged down to net realizable value, this ratio becomes skewed as these loans are included in nonperforming loans but reserves for these loans are typically not carried in the ALLL as impairment is charged off. The individually impaired collateral dependent loans that do not carry reserves were $117.1 million on December 31, 2012, compared with $125.3 million on December 31, 2011. Consequently, NPLs in the loan portfolio for which reserves are actually carried were $150.0 million as of December 31, 2012. Charged-down individually impaired collateral dependent loans represented 44 percent of nonperforming loans in the loan portfolio as of December 31, 2012.

Generally, when a loan is placed on nonaccrual status, FHN applies the entire amount of any subsequent payments (including interest) to the outstanding principal balance. Consequently, a substantial portion of the interest received related to nonaccrual loans has been applied to principal. Under the original terms of the loans, interest income would have been approximately $14 million, $17 million, and $34 million for nonaccrual and impaired loans during 2012, 2011, and 2010, respectively.

The balance of foreclosed real estate, exclusive of inventory from government insured mortgages, decreased to $41.8 million as of December 31, 2012 from $68.9 million as of December 31, 2011. Table 17 provides an activity rollforward of foreclosed real estate balances for December 31, 2012 and 2011. Both inflows of assets into foreclosure status and the amount disposed declined in 2012 when compared with 2011. The decline in inflow is primarily due to an overall slowdown in foreclosure proceedings nationwide given additional scrutiny from regulators of the foreclosure practices of financial institutions and mortgage companies and also due to FHN’s continued efforts to avoid foreclosures by restructuring loans and working with borrowers. Negative adjustments to the fair value of foreclosed assets decreased $8.0 million between the periods to $9.4 million in 2012. See the discussion of Foreclosure Practices in the Market Uncertainties and Prospective Trends section of MD&A for information regarding the impact on FHN.

 

 

40

FIRST HORIZON NATIONAL CORPORATION




Table 17 – Rollforward of Foreclosed Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2012

 

2011

 

         

 

Balance on January 1 (a)

 

$

68,884

 

$

110,536

 

Valuation adjustments

 

 

(9,422

)

 

(17,469

)

New foreclosed property

 

 

33,558

 

 

63,043

 

Capitalized expenses

 

 

659

 

 

2,340

 

Disposals:

 

 

 

 

 

 

 

Single transactions

 

 

(47,571

)

 

(83,006

)

Bulk sales

 

 

(4,341

)

 

(6,130

)

Auctions

 

 

-

 

 

(430

)

             

 

Balance on December 31 (a)

 

$

41,767

 

$

68,884

 

             

 

 

 

Certain previously reported amounts have been reclassified to agree with current presentation.

(a)

Excludes foreclosed real estate related to government insured mortgages.

Past Due Loans and Potential Problem Assets

Past due loans are loans contractually past due 90 days or more as to interest or principal payments, but which have not yet been put on nonaccrual status. Loans in the portfolio that are 90 days or more past due decreased to $42.3 million on December 31, 2012, from $51.8 million on December 31, 2011. Loans 30 to 89 days past due decreased $29.9 million to $80.9 million on December 31, 2012. The decrease of past due loan balances are mainly due to enhanced collection practices, loss mitigation activities and overall improvement in performance of the retail portfolios combined with run-off of the non-strategic components.

Potential problem assets represent those assets where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Office of the Comptroller of the Currency (“OCC”) for loans classified substandard. Potential problem assets in the loan portfolio, which includes loans past due 90 days or more and still accruing, decreased to $496.3 million on December 31, 2012, from $729.4 million on December 31, 2011. The current expectation of losses from potential problem assets has been included in management’s analysis for assessing the adequacy of the allowance for loan losses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 18 – Nonperforming Assets and Delinquencies on December 31

(Dollars in thousands)

 

2012

 

2011

 

2010

 

2009

 

2008

 

                       

Total nonperforming loans (a)

 

$

377,601

 

$

452,276

 

$

725,966

 

$

937,684

 

$

1,053,649

 

Total foreclosed real estate & other assets (b)

 

 

41,767

 

 

68,884

 

 

110,536

 

 

113,709

 

 

104,308

 

                                 

Total nonperforming assets

 

 

419,368

 

 

521,161

 

 

836,502

 

 

1,051,393

 

 

1,157,957

 

Total loans, net of unearned income

 

 

16,708,582

 

 

16,397,127

 

 

16,782,572

 

 

18,123,884

 

 

21,278,190

 

Foreclosed real estate from GNMA loans

 

 

18,923

 

 

16,360

 

 

14,865

 

 

11,481

 

 

21,230

 

Potential problem assets (c)

 

 

496,308

 

 

729,421

 

 

1,144,185

 

 

1,382,698

 

 

1,180,942

 

Loans 30 to 89 days past due

 

 

80,892

 

 

110,813

 

 

173,233

 

 

291,022

 

 

360,735

 

Loans 30 to 89 days past due – guaranteed portion (d)

 

 

47

 

 

67

 

 

3,801

 

 

76

 

 

94

 

Loans 90 days past due

 

 

42,250

 

 

51,776

 

 

79,244

 

 

137,823

 

 

85,364

 

Loans 90 days past due - guaranteed portion (d)

 

 

155

 

 

159

 

 

264

 

 

239

 

 

228

 

Loans held for sale 30 to 89 days past due

 

 

21,437

 

 

9,817

 

 

17,291

 

 

35,047

 

 

45,307

 

Loans held for sale 30 to 89 days past due – guaranteed portion (d)

 

 

14,665

 

 

7,418

 

 

6,980

 

 

35,047

 

 

45,296

 

Loans held for sale 90 days past due

 

 

43,767

 

 

54,649

 

 

49,409

 

 

44,520

 

 

47,704

 

Loans held for sale 90 days past due – guaranteed portion (d)

 

 

36,478

 

 

42,090

 

 

39,620

 

 

40,013

 

 

42,250

 

                                 

Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance to nonperforming loans in the loan portfolio

 

 

1.04

x

 

1.09

x

 

1.03

x

 

1.00

x

 

0.81

x

NPL% (e)

 

 

1.60

%

 

2.16

%

 

3.85

%

 

4.96

%

 

4.91

%

NPA% (f)

 

 

1.84

%

 

2.57

%

 

4.48

%

 

5.56

%

 

5.38

%

                                 

 

 

(a)

2012, 2011, 2010, 2009 and 2008 include $110.6 million, $98.2 million, $79.1 million, $38.3 million and $8.5 million respectively, of loans held for sale.

(b)

Excludes foreclosed real estate from government-insured mortgages.

(c)

Includes past due loans.

(d)

Guaranteed loans include FHA, VA, and GNMA loans repurchased through the GNMA buyout program.

(e)

Nonperforming loans in the loan portfolio to total period end loans.

(f)

Nonperforming assets related to the loan portfolio to total loans plus foreclosed real estate and other assets.


 

 

FIRST HORIZON NATIONAL CORPORATION

41



Troubled Debt Restructuring and Loan Modifications
As part of FHN’s ongoing risk management practices, FHN attempts to work with borrowers when appropriate, to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. In a situation where an economic concession has been granted to a borrower that is experiencing financial difficulty, FHN identifies and reports that loan as a Troubled Debt Restructuring (“TDR”). FHN considers regulatory guidelines when restructuring loans to ensure that prudent lending practices are followed. As such, qualification criteria and payment terms consider the borrower’s current and prospective ability to comply with the modified terms of the loan. Additionally, FHN structures loan modifications to amortize the debt within a reasonable period of time. See Note 4—Loans for further discussion regarding TDRs.

Commercial Loan Modifications
As part of FHN’s credit risk management governance processes, the Loan Rehab and Recovery Department (“LRRD”) is responsible for managing most commercial relationships with borrowers whose financial condition has deteriorated to such an extent that the credits are being considered for impairment, classified as substandard or worse, placed on nonaccrual status, foreclosed or in process of foreclosure, or in active or contemplated litigation. LRRD has the authority and responsibility to enter into workout and/or rehabilitation agreements with troubled commercial borrowers in order to mitigate and/or minimize the amount of credit losses recognized from these problem assets. The range of commercial workout strategies utilized by LRRD to mitigate the likelihood of loan losses is commensurate with the degree of commercial credit quality deterioration. While every circumstance is different, LRRD will generally use forbearance agreements (generally 3-6 months) as an element of commercial loan workouts, which include reduced interest rates, reduced payments, release of guarantor, or entering into short sale agreements. Senior credit management tracks classified loans and performs periodic reviews of such assets to understand FHN’s interest in the borrower, the most recent financial results of the borrower, and the associated loss mitigation approaches and/or exit plans that have been developed for those relationships. After initial identification, relationship managers prepare regular updates for review and discussion by more senior business line and credit officers.

The individual impairment assessments completed on commercial loans in accordance with the Accounting Standards Codification Topic related to Troubled Debt Restructurings (“ASC 310-40”) include loans classified as TDRs as well as loans that may have been modified yet not classified as TDRs by management. For example, a modification of loan terms that management would generally not consider to be a TDR could be a temporary extension of maturity to allow a borrower to complete an asset sale whereby the proceeds of such transaction are to be paid to satisfy the outstanding debt. Additionally, a modification that extends the term of a loan but does not involve reduction of principal or accrued interest, in which the interest rate is adjusted to reflect current market rates for similarly situated borrowers is not considered a TDR. Nevertheless, each assessment will take into account any modified terms and will be comprehensive to ensure appropriate impairment assessment. If individual impairment is identified, management will either hold specific reserves on the amount of impairment, or if the loan is collateral dependent, write down the carrying amount of the asset to the net realizable value of the collateral.

Consumer Loan Modifications
Although FHN does not currently participate in any of the loan modification programs sponsored by the U.S. government, FHN does modify consumer loans using the parameters of Home Affordable Modification Programs (“HAMP”). Generally, a majority of loans modified under any such proprietary programs are classified as TDRs. In 2012, the OCC clarified that the discharge of personal liability through bankruptcy proceedings should be considered a concession and bankruptcy evidences financial difficultly. As a result, FHN classified all non-reaffirmed residential real estate loans discharged through bankruptcy as nonaccruing TDRs in 2012.

Within the HELOC, R/E installment loans, and permanent mortgage classes of the consumer portfolio segment, TDRs are typically modified by reducing the interest rate (in increments of 25 basis points to a minimum of 1 percent for up to 5 years) and a possible maturity date extension to reach an affordable housing debt ratio. Contractual maturities may be extended to 40 years on permanent mortgages and to 30 years for consumer real estate loans. Within the credit card class of the consumer portfolio segment, TDRs are typically modified through

 

 

42

FIRST HORIZON NATIONAL CORPORATION



either a short-term credit card hardship program or a longer-term credit card workout program. In the credit card hardship program, borrowers may be granted rate and payment reductions for 6 months to 1 year. In the credit card workout program, customers are granted a rate reduction to 0 percent and term extensions for up to 5 years to pay off the remaining balance.

Following classification as a TDR, modified loans within the consumer portfolio which were previously evaluated for impairment on a collective basis determined by their smaller balances and homogenous nature become subject to the impairment guidance in ASC 310-10-35 which requires individual evaluation of the debt for impairment. However, as applicable accounting guidance allows, FHN may aggregate certain smaller-balance homogeneous TDRs and use historical statistics, such as aggregated charge-off amounts and average amounts recovered, along with a composite effective interest rate to measure impairment when such impaired loans have risk characteristics in common.

On December 31, 2012 and 2011, FHN had $372.4 million and $284.2 million portfolio loans classified as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reserves of $58.9 million and $52.7 million, or 16 percent and 19 percent of TDR balances, as of December 31, 2012 and 2011, respectively. Additionally, FHN had restructured $178.2 million and $98.0 million in UPB of loans HFS as of December 31, 2012 and 2011, respectively. The rise in TDRs from 2011 resulted from increased consumer loan modifications of troubled borrowers in an attempt to prevent foreclosure and to mitigate losses to FHN, and also due to the classification of discharged bankruptcies as TDRs.

The following table provides a summary of TDRs for the periods ended December 31, 2012 and 2011:

Table 19 – Troubled Debt Restructurings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of
December 31, 2012

 

As of
December 31, 2011

 

 

 

 

 

 

 

(Dollars in thousands)

 

Number

 

Amount

 

Number

 

Amount

 

                         

 

Held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Permanent mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

171

 

$

96,275

 

 

111

 

$

65,915

 

Delinquent

 

 

9

 

 

6,337

 

 

6

 

 

2,262

 

Non-accrual (a)

 

 

124

 

 

32,695

 

 

32