Quarterly Report

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-15185

 

 

First Horizon National Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Tennessee   62-0803242

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

165 Madison Avenue   38103
Memphis, Tennessee   (Zip Code)
(Address of principal executive offices)  

(Registrant’s telephone number, including area code) (901) 523-4444

 

 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x   Yes     ¨   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x   Yes     ¨   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x      Accelerated filer   ¨
Non-accelerated filer   ¨    (Do not check if a smaller reporting company)   Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨   Yes     x   No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding on March 31, 2012

Common Stock, $.625 par value   252,666,860

 

 

 

Table of Contents

FIRST HORIZON NATIONAL CORPORATION

INDEX

 

Part I. Financial Information   

Item 1. Financial Statements

     3   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     74   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     117   

Item 4. Controls and Procedures

     117   
Part II. Other Information   

Item 1. Legal Proceedings

     118   

Item 1A. Risk Factors

     118   

Item 2. Unregistered Sales of Equity Securities and use of Proceeds

     118   

Item 3. Defaults upon Senior Securities

     118   

Item 4. Mine Safety Disclosures

     118   

Item 5. Other Information

     118   

Item 6. Exhibits

     119   
Signatures      121   
Exhibit Index   

Exhibit 10.3

  

Exhibit 10.4

  

Exhibit 10.5

  

Exhibit 10.6

  

Exhibit 31(a)

  

Exhibit 31(b)

  

Exhibit 32(a)

  

Exhibit 32(b)

  

Table of Contents

PART I.

FINANCIAL INFORMATION

 

Item 1. Financial Statements   

The Consolidated Condensed Statements of Condition

     4   

The Consolidated Condensed Statements of Income

     5   

The Consolidated Condensed Statements of Comprehensive Income

     6   

The Consolidated Condensed Statements of Equity

     7   

The Consolidated Condensed Statements of Cash Flows

     8   

The Notes to Consolidated Condensed Financial Statements

     9   

Note 1 Financial Information

     9   

Note 2 Acquisitions and Divestitures

     11   

Note 3 Investment Securities

     12   

Note 4 Loans

     15   

Note 5 Mortgage Servicing Rights

     25   

Note 6 Intangible Assets

     26   

Note 7 Other Income and Other Expense

     28   

Note 8 Earnings Per Share

     29   

Note 9 Contingencies and Other Disclosures

     30   

Note 10 Pension, Savings, and Other Employee Benefits

     40   

Note 11 Business Segment Information

     41   

Note 12 Loan Sales and Securitizations

     43   

Note 13 Variable Interest Entities

     46   

Note 14 Derivatives

     52   

Note 15 Fair Value of Assets & Liabilities

     58   

Note 16 Restructuring, Repositioning, and Efficiency Initiatives

     71   

Note 17 Other Events

     73   

This financial information reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented.

 

3

Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF CONDITION

 

       First Horizon National Corporation  
     March 31     December 31  

(Dollars in thousands, except restricted and share amounts)(Unaudited)

   2012     2011     2011  

Assets:

      

Cash and due from banks (Restricted - $1.7 million on March 31, 2012; $4.9 million on March 31, 2011; and $4.9 million on December 31, 2011)

   $ 349,604      $ 337,002      $ 384,667   

Federal funds sold and securities purchased under agreements to resell

     614,705        527,563        443,588   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents (Restricted - $1.7 million on March 31, 2012; $4.9 million on March 31, 2011; and $4.9 million on December 31, 2011)

     964,309        864,565        828,255   
  

 

 

   

 

 

   

 

 

 

Interest-bearing cash

     761,098        308,636        452,856   

Trading securities

     1,238,041        924,854        988,217   

Loans held-for-sale

     431,905        370,487        413,897   

Securities available-for-sale (Note 3)

     3,296,603        3,085,478        3,066,272   

Loans, net of unearned income (Restricted - $.2 billion on March 31, 2012; $.7 billion on March 31, 2011; and $.6 billion on December 31, 2011) (Note 4)

     15,971,330        15,972,372        16,397,127   

Less: Allowance for loan losses (Restricted - $10.4 million on March 31, 2012; $39.8 million on March 31, 2011; and $31.8 million on December 31, 2011) (Note 4)

     346,016        589,128        384,351   
  

 

 

   

 

 

   

 

 

 

Total net loans (Restricted - $.1 billion on March 31, 2012; $.7 billion on March 31, 2011; and $.6 billion on December 31, 2011)

     15,625,314        15,383,244        16,012,776   
  

 

 

   

 

 

   

 

 

 

Mortgage servicing rights (Note 5)

     142,956        207,748        144,069   

Goodwill (Note 6)

     134,242        152,080        133,659   

Other intangible assets, net (Note 6)

     25,638        31,545        26,243   

Capital markets receivables

     522,001        595,594        164,987   

Premises and equipment, net

     314,903        320,871        321,253   

Real estate acquired by foreclosure

     78,947        110,127        85,244   

Other assets (Restricted - $4.5 million on March 31, 2012; $16.7 million on March 31, 2011; and $13.4 million on December 31, 2011)

     2,143,012        2,083,115        2,151,656   
  

 

 

   

 

 

   

 

 

 

Total assets (Restricted - $.2 billion on March 31, 2012; $.7 billion on March 31, 2011; and $.6 billion on December 31, 2011)

   $ 25,678,969      $ 24,438,344      $ 24,789,384   
  

 

 

   

 

 

   

 

 

 

Liabilities and equity:

      

Deposits:

      

Savings

   $ 6,615,289      $ 6,296,533      $ 6,624,405   

Time deposits

     1,142,249        1,336,666        1,173,375   

Other interest-bearing deposits

     3,500,445        2,679,437        3,193,697   

Certificates of deposit $100,000 and more

     707,590        557,918        608,518   
  

 

 

   

 

 

   

 

 

 

Interest-bearing

     11,965,573        10,870,554        11,599,995   

Noninterest-bearing (Restricted - $1.1 million on March 31, 2011; and $ - on March 31, 2012 and December 31, 2011)

     4,969,597        4,480,413        4,613,014   
  

 

 

   

 

 

   

 

 

 

Total deposits (Restricted - $1.1 million on March 31, 2011; and $ - on March 31, 2012 and December 31, 2011)

     16,935,170        15,350,967        16,213,009   
  

 

 

   

 

 

   

 

 

 

Federal funds purchased and securities sold under agreements to repurchase

     1,801,234        2,125,793        1,887,052   

Trading liabilities

     567,571        384,250        347,285   

Other short-term borrowings

     181,570        237,583        172,550   

Term borrowings (Restricted - $.2 billion on March 31, 2012; $.7 billion on March 31, 2011; and $.6 billion on December 31, 2011)

     2,340,706        2,514,754        2,481,660   

Capital markets payables

     361,018        413,334        164,708   

Other liabilities (Restricted - $ - on March 31, 2012; $.1 million on March 31, 2011; and $.1 million on December 31, 2011)

     817,527        771,606        838,483   
  

 

 

   

 

 

   

 

 

 

Total liabilities (Restricted - $.2 billion on March 31, 2012; $.7 billion on March 31, 2011; and $.6 billion on December 31, 2011)

   $ 23,004,796        21,798,287        22,104,747   
  

 

 

   

 

 

   

 

 

 

Equity:

      

First Horizon National Corporation Shareholders’ Equity:

      

Common stock - $.625 par value (shares authorized - 400,000,000; shares issued - 252,666,860 on March 31, 2012; 263,335,004 on March 31, 2011; and 257,468,092 on December 31, 2011)

     157,917        164,584        160,918   

Capital surplus

     1,560,343        1,636,623        1,601,346   

Undivided profits

     785,361        674,064        757,364   

Accumulated other comprehensive loss, net

     (124,613 )      (130,379 )      (130,156 ) 
  

 

 

   

 

 

   

 

 

 

Total First Horizon National Corporation Shareholders’ Equity

     2,379,008        2,344,892        2,389,472   
  

 

 

   

 

 

   

 

 

 

Noncontrolling interest

     295,165        295,165        295,165   
  

 

 

   

 

 

   

 

 

 

Total equity

     2,674,173        2,640,057        2,684,637   
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 25,678,969      $ 24,438,344      $ 24,789,384   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

4

Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

 

       First Horizon National Corporation  
       Three Months Ended
March 31 		 

(Dollars in thousands except per share data)(Unaudited)

   2012     2011  

Interest income:

    

Interest and fees on loans

   $ 161,577      $ 163,503   

Interest on investment securities

     26,306        29,192   

Interest on loans held for sale

     3,738        3,657   

Interest on trading securities

     9,436        10,844   

Interest on other earning assets

     446        409   
  

 

 

   

 

 

 

Total interest income

     201,503        207,605   
  

 

 

   

 

 

 

Interest expense:

    

Interest on deposits:

    

Savings

     5,619        7,250   

Time deposits

     5,916        8,032   

Other interest-bearing deposits

     1,518        1,552   

Certificates of deposit $100,000 and more

     2,306        2,710   

Interest on trading liabilities

     2,515        3,791   

Interest on short-term borrowings

     1,365        1,541   

Interest on term borrowings

     10,335        9,974   
  

 

 

   

 

 

 

Total interest expense

     29,574        34,850   
  

 

 

   

 

 

 

Net interest income

     171,929        172,755   

Provision for loan losses

     8,000        1,000   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     163,929        171,755   
  

 

 

   

 

 

 

Noninterest income:

    

Capital markets

     106,743        90,057   

Mortgage banking

     23,341        27,726   

Deposit transactions and cash management

     28,741        32,279   

Trust services and investment management

     5,808        6,360   

Brokerage management fees and commissions

     8,496        8,155   

Insurance commissions

     568        689   

Debt securities gains/(losses), net

     328        771   

Equity securities gains/(losses), net

     —          27   

Gain on divestiture

     200        —     

All other income and commissions (Note 7)

     28,216        30,271   
  

 

 

   

 

 

 

Total noninterest income

     202,441        196,335   
  

 

 

   

 

 

 

Adjusted gross income after provision for loan losses

     366,370        368,090   
  

 

 

   

 

 

 

Noninterest expense:

    

Employee compensation, incentives, and benefits

     175,458        156,512   

Repurchase and foreclosure provision

     49,256        37,203   

Legal and professional fees

     6,067        18,352   

Contract employment and outsourcing

     11,115        6,888   

Occupancy

     12,119        14,861   

Operations services

     9,127        13,861   

Equipment rentals, depreciation, and maintenance

     7,616        7,890   

Computer software

     9,465        8,085   

FDIC premium expense

     6,336        8,055   

Foreclosed real estate

     4,170        6,789   

Communications and courier

     4,499        5,219   

Amortization of intangible assets

     973        1,006   

Miscellaneous loan costs

     1,327        1,492   

All other expense (Note 7)

     24,466        27,583   
  

 

 

   

 

 

 

Total noninterest expense

     321,994        313,796   
  

 

 

   

 

 

 

Income/(loss)before income taxes

     44,376        54,294   

Provision/(benefit) for income taxes

     10,570        12,162   
  

 

 

   

 

 

 

Income/(loss) from continuing operations

     33,806        42,132   

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

     (435 )      871   
  

 

 

   

 

 

 

Net income/(loss)

   $ 33,371      $ 43,003   
  

 

 

   

 

 

 

Net income/(loss) attributable to noncontrolling interest

     2,844        2,844   

Net income/(loss) available to common shareholders

   $ 30,527      $ 40,159   
  

 

 

   

 

 

 

Basic earnings/(loss) per share from continuing operations (Note 8)

   $ 0.12      $ 0.15   
  

 

 

   

 

 

 

Diluted earnings/(loss) per share from continuing operations (Note 8)

   $ 0.12      $ 0.15   
  

 

 

   

 

 

 

Basic earnings/(loss) per share available to common shareholders (Note 8)

   $ 0.12      $ 0.15   
  

 

 

   

 

 

 

Diluted earnings/(loss) per share available to common shareholders (Note 8)

   $ 0.12      $ 0.15   
  

 

 

   

 

 

 

Weighted average common shares (Note 8)

     253,527        261,174   
  

 

 

   

 

 

 

Diluted average common shares (Note 8)

     255,369        265,556   
  

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

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

 

(a) Due to the nature of the subsidiary preferred stock issued by First Horizon Preferred Funding, LLC, First Horizon Preferred Funding II, LLC, and FTBNA, all components of Income/(loss) from discontinued operations, net of tax have been attributed solely to FHN as the controlling interest holder.

 

5

Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

       First Horizon National Corporation  
     Three Months Ended
March 31 		 

(Dollars in thousands)(Unaudited)

   2012      2011  

Net income

   $ 33,371       $ 43,003   

Other comprehensive income/(loss), net of tax:

     

Unrealized fair value adjustments:

     

Securities available for sale

     7         (6,028 ) 

Recognized pension and other employee benefit plans net periodic benefit costs

     5,536         3,195   
  

 

 

    

 

 

 

Other comprehensive income/(loss)

     5,543         (2,833 ) 
  

 

 

    

 

 

 

Comprehensive income/(loss)

     38,914         40,170   
  

 

 

    

 

 

 

Comprehensive income attributable to noncontrolling interest

     2,844         2,844   
  

 

 

    

 

 

 

Comprehensive income attributable to controlling interest

   $ 36,070       $ 37,326   
  

 

 

    

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

6

Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

 

     First Horizon National Corporation  
     2012     2011  

(Dollars in thousands except per share data)(Unaudited)

   Controlling
Interest 		    Noncontrolling
Interest 		    Total     Controlling
Interest 		    Noncontrolling
Interest 		    Total  

Balance, January 1

   $ 2,389,472      $ 295,165      $ 2,684,637      $ 2,382,840      $ 295,165      $ 2,678,005   

Net income/(loss)

     30,527        2,844        33,371        40,159        2,844        43,003   

Other comprehensive income/(loss) (a)

     5,543        —          5,543        (2,833 )      —          (2,833 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income/(loss)

     36,070        2,844        38,914        37,326        2,844        40,170   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common stock warrant repurchased – CPP

     —          —          —          (79,700 )      —          (79,700 ) 

Common stock repurchased (b)

     (46,624 )      —          (46,624 )      (471 )      —          (471 ) 

Cash dividends declared ($.01/share)

     (2,530 )      —          (2,530 )      (2,607 )      —          (2,607 ) 

Common stock issued for:

            

Stock options and restricted stock - equity awards

     —          —          —          160        —          160   

Stock-based compensation expense

     3,858        —          3,858        2,544        —          2,544   

Dividends declared - noncontrolling interest of subsidiary preferred stock

     —          (2,844 )      (2,844 )      —          (2,844 )      (2,844 ) 

Tax benefit reversals - stock-based compensation plans

     (1,238 )      —          (1,238 )      —          —          —     

Other changes in equity

     —          —          —          4,800        —          4,800   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31

   $ 2,379,008      $ 295,165      $ 2,674,173      $ 2,344,892      $ 295,165      $ 2,640,057   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

(a) Due to the nature of the subsidiary preferred stock issued by First Horizon Preferred Funding, LLC, First Horizon Preferred Funding II, LLC, and FTBNA, all components of Other comprehensive income/(loss) have been attributed solely to FHN as the controlling interest holder.
(b) First quarter 2012 includes $44.5 million repurchased under the share repurchase program launched in fourth quarter 2011.

 

7

Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

       First Horizon National Corporation  
     Three Months Ended March 31  

(Dollars in thousands)

   2012     2011  

Operating Activities

    

Net income/(loss)

   $ 33,371      $ 43,003   

Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities:

    

Provision for loan losses

     8,000        1,000   

Provision/(benefit) for deferred income tax

     8,431        —     

Depreciation and amortization of premises and equipment

     8,717        8,548   

Amortization of intangible assets

     973        1,336   

Net other amortization and accretion

     19,596        13,052   

Net (increase)/decrease in derivatives

     (3,374 )      7,318   

Market value adjustment on mortgage servicing rights

     (4,471 )      (7,647 ) 

Repurchase and foreclosure provision

     49,256        37,203   

Fair value adjustment to foreclosed real estate

     5,225        5,039   

Goodwill impairment

     —          10,100   

Loss accruals from litigation and regulatory matters

     153        2,325   

Stock-based compensation expense

     3,858        2,544   

Tax benefit reversals stock-based compensation plans

     1,238        —     

Equity securities (gains)/losses, net

     —          (27 ) 

Debt securities gains, net

     (328 )      (771 ) 

Gains on extinguishment of debt

     —          (5,761 ) 

Net losses on disposal of fixed assets

     68        228   

Net (increase)/decrease in:

    

Trading securities

     (251,488 )      (157,332 ) 

Loans held-for-sale

     (18,008 )      4,802   

Capital markets receivables

     (357,014 )      (449,503 ) 

Interest receivable

     (7,844 )      (7,976 ) 

Other assets

     (21,650 )      5,078   

Net increase/(decrease) in:

    

Capital markets payables

     196,310        347,828   

Interest payable

     15,711        10,034   

Other liabilities

     (69,302 )      (117,551 ) 

Trading liabilities

     220,286        22,330   
  

 

 

   

 

 

 

Total adjustments

     (195,657 )      (267,803 ) 
  

 

 

   

 

 

 

Net cash provided/(used) by operating activities

     (162,286 )      (224,800 ) 
  

 

 

   

 

 

 

Investing Activities

    

Available-for-sale securities:

    

Sales

     39,097        458,314   

Maturities

     202,993        239,827   

Purchases

     (474,673 )      (762,182 ) 

Premises and equipment:

    

Purchases

     (2,435 )      (7,162 ) 

Net (increase)/decrease in:

    

Loans

     378,681        741,245   

Interests retained from securitizations classified as trading securities

     1,664        2,229   

Interest-bearing cash

     (308,242 )      209,103   
  

 

 

   

 

 

 

Net cash provided/(used) by investing activities

     (162,915 )      881,374   
  

 

 

   

 

 

 

Financing Activities

    

Common stock:

    

Cash dividends paid

     (2,575 )      —     

Repurchase of shares (a)

     (46,624 )      (471 ) 

Repurchase of common stock warrant - CPP

     —          (79,700 ) 

Tax benefit reversals stock-based compensation plans

     (1,238 )      —     

Cash dividends paid - preferred stock - noncontrolling interest

     (2,844 )      (2,813 ) 

Term borrowings:

    

Payments/maturities

     (131,686 )      (593,479 ) 

Increases in restricted term borrowings

     859        5,211   

Net cash paid for extinguishment of debt

     —          (100,000 ) 

Net increase/(decrease) in:

    

Deposits

     722,161        142,736   

Short-term borrowings

     (76,798 )      67,733   
  

 

 

   

 

 

 

Net cash provided/(used) by financing activities

     461,255        (560,783 ) 
  

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

     136,054        95,791   
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

     828,255        768,774   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 964,309      $ 864,565   
  

 

 

   

 

 

 

Supplemental Disclosures

    

Total interest paid

   $ 13,708      $ 24,658   

Total taxes paid

     27,927        9,744   

Total taxes refunded

     617        52   

Transfer from loans to other real estate owned

     10,207        16,105   
  

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

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

 

(a) First quarter 2012 includes $44.5 million repurchased under the share repurchase program launched in fourth quarter 2011.

 

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Notes to Consolidated Condensed Financial Statements

Note 1 - Financial Information

Basis of Accounting. The unaudited interim consolidated condensed financial statements of First Horizon National Corporation (“FHN”), including its subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which it operates. This preparation requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions are based on information available as of the date of the financial statements and could differ from actual results. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented. These adjustments are of a normal recurring nature unless otherwise disclosed in this filing. The operating results for the interim 2012 period are not necessarily indicative of the results that may be expected going forward. For further information, refer to the audited consolidated financial statements in the 2011 Annual Report to shareholders.

Summary of Accounting Changes . Effective January 1, 2012, the FASB issued Accounting Standards Update 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”). ASU 2011-08 provides that an entity may first perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, when determining whether it is necessary to perform the current two-step goodwill impairment test discussed in FASB Accounting Standards Codification 350, “Intangibles – Goodwill and Other” (“ASC 350”). Thus, if an entity concludes from its qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it must perform the two-step test. ASU 2011-08 provides examples of events and circumstances that should be considered in an evaluation of whether it is more likely than not that the fair value of an entity’s reporting unit is less than its carrying amount. The new qualitative indicators replace the guidance previously provided in ASC 350 which is used to determine whether an interim goodwill impairment test is required, and is applicable for assessing whether to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. Under the provisions of ASU 2011-08, entities will be allowed, on the basis of their discretion, to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test, and will be able to resume performing the qualitative assessment in any subsequent period. ASU 2011-08 removes the current alternative in ASC 350 which allows for the carryforward of the detailed calculation of the fair value of a reporting unit from one year to the next if certain conditions are met. The provisions of ASU 2011-08 are effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of the provisions of ASU 2011-08 had no effect on FHN’s statement of condition, results of operations, or cash flows.

Effective January 1, 2012, the FASB issued Accounting Standards Update 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 requires that net income and other comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 also provides that regardless of the method used to present comprehensive income, presentation is required on the face of the financial statements of reclassification adjustments for items that are reclassified from other comprehensive income to net income. ASU 2011-05 does not change the current option for entities to present components of other comprehensive income gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which other comprehensive income is presented or disclosed in the notes to the financial statements. The provisions of ASU 2011-05 are effective for periods beginning after December 15, 2011, with retrospective application to all periods presented in the financial statements required. No transition disclosures are required upon adoption. For interim reporting periods, filers are only required to present total comprehensive income in a single continuous statement or in two consecutive statements. On December 23, 2011, the FASB issued ASU 2011-12, which indefinitely defers the provisions of ASU 2011-05 that require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). Upon adoption of the provisions of ASU 2011-05 and ASU 2011-12 on January 1, 2012, FHN revised its financial statements and disclosures accordingly.

Effective January 1, 2012, the FASB issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 provides that the highest-and-best use and valuation-premise concepts included in ASC 820 are only relevant when measuring the fair value of nonfinancial assets, thereby prohibiting the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. However, under ASU 2011-04 an exception is permitted which allows an entity to measure the fair value of financial instruments that are managed on the basis of the entity’s net exposure to a particular market risk, or to the credit risk of a particular counterparty, on a net basis when certain criteria are met. Such criteria include that there is evidence that the entity manages its financial instruments in that way, the entity applies such accounting policy election consistently from period to period, and the entity is required or has elected to measure those financial assets and financial liabilities at fair value in the statement of financial position at the end of each reporting period. Additionally, to qualify for the exception to the valuation premise, market risks that are being offset must be substantially the same. ASU 2011-04 also extends ASC 820’s prohibition on the use of blockage factors in fair value measurements to all three levels of the fair value hierarchy except for fair value measurements of Level 2 and 3 measurements when market participants would incorporate the premium or

 

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Note 1 - Summary of Significant Accounting Policies (continued)

 

discount into the measurement at the level of the unit of account specified in other guidance. ASU 2011-04 also provides that an entity should measure the fair value of its own equity instruments from the perspective of a market participant that holds the instruments as assets. Under ASC 820, as amended, expanded disclosures are required including disclosure of quantitative information about significant unobservable inputs used in Level 3 fair value measurements, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of recurring Level 3 measurements. Additional disclosures required under ASU 2011-04 include disclosure of fair value by level for each class of assets and liabilities not recorded at fair value but for which fair value is disclosed, and disclosure of any transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for those transfers. The provisions of ASU 2011-04 are effective for periods beginning after December 15, 2011, with disclosure of the change, if any, in valuation technique and related inputs resulting from application of the amendments to ASC 820 required upon adoption, along with quantification of the total effect of the change, if practicable. Upon adoption of the provisions of ASU 2011-04, FHN revised its disclosures accordingly. Adoption of ASU 2011-04 had no effect on FHN’s statement of condition, results of operations, or cash flows.

Effective January 1, 2012, the FASB issued Accounting Standards Update 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”). For entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity, ASU 2011-03 removes from the assessment of effective control under ASC 860, “Transfers and Servicing”, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, as well as the collateral maintenance implementation guidance related to that criterion. Under ASC 860-10, as amended, the remaining criteria related to whether effective control over transferred financial assets has been maintained would still need to be evaluated, including whether the financial assets to be repurchased or redeemed are the same or substantially the same as those transferred, the agreement is to repurchase or redeem them before maturity at a fixed or determinable price, and whether the agreement is entered into contemporaneously with, or in contemplation of, the transfer. The provisions of ASU 2011-03 are effective for periods beginning after December 15, 2011, with prospective application to transactions or modifications of existing transactions that occur on or after the effective date. Since FHN accounts for all of its repurchase agreements as secured borrowings, adopting the provisions of ASU 2011-03 did not have an effect on FHN’s statement of condition, results of operations, or cash flows.

Accounting Changes Issued but Not Currently Effective. In December 2011, the FASB issued Accounting Standards Update 2011-11, “Balance Sheet: Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). 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/transactions eligible for offset in the balance sheet and instruments/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 after January 1, 2013, with retrospective application to all periods presented in the financial statements required. FHN is currently assessing the effects of adopting the provisions of ASU 2011-11.

 

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Table of Contents

Note 2 – Acquisitions and Divestitures

In 2011, FHN sold First Horizon Insurance, Inc. (“FHI”), the former subsidiary of First Tennessee Bank, a property and casualty insurance agency that served customers in over 40 states, Highland Capital Management Corporation (“Highland”), the former subsidiary of First Horizon National Corporation which provided asset management services, and First Horizon Msaver, Inc. (“Msaver”), the former subsidiary of First Tennessee Bank which provided administrative services for health savings accounts. FHN recognized $4.2 million combined after-tax gains on the sales of FHI and Highland and a $5.7 million after-tax gain related to the sale of Msaver. Additionally, in connection with the agreement to sell FHI, FHN incurred a pre-tax goodwill impairment of $10.1 million which was more than offset by $11.1 million of tax benefits recognized in first quarter 2011 related to the sale. The sales of FHI and Highland closed in second quarter 2011 and the sale of Msaver closed in third quarter 2011. The financial results of these businesses, the goodwill impairment, the gains on sales, and associated tax effects are reflected in the Income/(loss) from discontinued operations, net of tax line on the Consolidated Condensed Statements of Income for all periods presented.

In addition to the divestitures mentioned above, FHN acquires or divests assets from time to time in transactions that are considered business combinations or divestitures but are not material to FHN individually or in the aggregate.

 

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Note 3 - Investment Securities

The following tables summarize FHN’s available for sale (“AFS”) securities on March 31, 2012 and 2011:

 

     On March 31, 2012  

(Dollars in thousands)

   Amortized
Cost 		     Gross
Unrealized
Gains 		     Gross
Unrealized
Losses 		    Fair
Value 		 

Securities available for sale:

          

U.S. treasuries

   $ 40,011       $ 26       $ —        $ 40,037   

Government agency issued mortgage-backed securities (“MBS”)

     1,352,827         74,936         (734 )      1,427,029   

Government agency issued collateralized mortgage obligations (“CMO”)

     1,537,732         35,104         —          1,572,836   

Other U.S. government agencies

     14,121         426         —          14,547   

States and municipalities

     18,070         —           —          18,070   

Equity (a)

     223,551         6         —          223,557   

Other

     510         17         —          527   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale (b)

   $ 3,186,822       $ 110,515       $ (734 )    $ 3,296,603   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Includes restricted investments in FHLB-Cincinnati stock of $125.5 million and FRB stock of $66.1 million. The remainder is money market, venture capital, and cost method investments.
(b) Includes $2.8 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes. Of this amount, $.4 billion was pledged as collateral for securities sold under repurchase agreements.

 

     On March 31, 2011  

(Dollars in thousands)

   Amortized
Cost 		     Gross
Unrealized
Gains 		     Gross
Unrealized
Losses 		    Fair
Value 		 

Securities available for sale:

          

U.S. treasuries

   $ 60,126       $ 196       $ —        $ 60,322   

Government agency issued MBS

     1,500,461         45,114         (3,346 )      1,542,229   

Government agency issued CMO

     1,187,262         22,360         (870 )      1,208,752   

Other U.S. government agencies

     20,218         907         —          21,125   

States and municipalities

     26,015         —           —          26,015   

Equity (a)

     226,502         —           (10 )      226,492   

Other

     511         32         —          543   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale (b)

   $ 3,021,095       $ 68,609       $ (4,226 )    $ 3,085,478   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Includes restricted investments in FHLB-Cincinnati stock of $125.5 million and FRB stock of $66.2 million. The remainder is money market, venture capital, and cost method investments.
(b) Includes $2.8 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes. Of this amount, $.9 billion was pledged as collateral for securities sold under repurchase agreements.

National banks chartered by the federal government are, by law, members of the Federal Reserve System. Each member bank is required to own stock in its regional Federal Reserve Bank (“FRB”). Given this requirement, FRB stock may not be sold, traded, or pledged as collateral for loans. Membership in the Federal Home Loan Bank (“FHLB”) network requires ownership of capital stock. Member banks are entitled to borrow funds from the FHLB and are required to pledge mortgage loans as collateral. Investments in the FHLB are non-transferable and, generally, membership is maintained primarily to provide a source of liquidity as needed.

 

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Note 3 - Investment Securities (continued)

 

The amortized cost and fair value by contractual maturity for the available for sale securities portfolio on March 31, 2012 are provided below:

 

     Available for Sale  

(Dollars in thousands)

   Amortized
Cost 		     Fair
Value 		 

Within 1 year

   $ 49,366       $ 49,489   

After 1 year; within 5 years

     6,265         6,594   

After 5 years; within 10 years

     —           —     

After 10 years

     16,570         16,570   
  

 

 

    

 

 

 

Subtotal

     72,201         72,653   
  

 

 

    

 

 

 

Government agency issued MBS and CMO

     2,890,560         2,999,866   

Equity and other securities

     224,061         224,084   
  

 

 

    

 

 

 

Total

   $ 3,186,822       $ 3,296,603   
  

 

 

    

 

 

 

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The table below provides information on gross realized gains and gross realized losses from investment securities for the three months ended March 31:

 

(Dollars in thousands)

   2012      2011  

Gross gains on sales of securities

   $ 328       $ 9,421   

Gross (losses) on sales of securities

     —           (8,623 ) 
  

 

 

    

 

 

 

Net gain/(loss) on sales of securities (a)

   $ 328       $ 798   
  

 

 

    

 

 

 

Venture capital investments (b)

     —           —     

Net other than temporary impairment (“OTTI”) recorded

     —           —     
  

 

 

    

 

 

 

Total securities gain/(loss), net

   $ 328       $ 798   
  

 

 

    

 

 

 

 

(a) Proceeds from sales for the three months ended March 31, 2012, and 2011 were $39.1 million, and $458.3 million, respectively.
(b) Generally includes write-offs and/or unrealized fair value adjustments related to venture capital investments.

The following table provides information on investments within the available for sale portfolio that had unrealized losses on March 31, 2012 and 2011:

 

     On March 31, 2012  
     Less than 12 months     12 months or longer      Total  

(Dollars in thousands)

   Fair
Value 		     Unrealized
Losses 		    Fair
Value 		     Unrealized
Losses 		     Fair
Value 		     Unrealized
Losses 		 

Government agency issued MBS

   $ 101,397       $ (734 )      —           —         $ 101,397       $ (734 ) 
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 101,397       $ (734 )    $ —         $ —         $ 101,397       $ (734 ) 
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

     On March 31, 2011  
     Less than 12 months     12 months or longer      Total  

(Dollars in thousands)

   Fair
Value 		     Unrealized
Losses 		    Fair
Value 		     Unrealized
Losses 		     Fair
Value 		     Unrealized
Losses 		 

Government agency issued MBS

   $ 572,326       $ (3,346 )    $ —         $ —         $ 572,326       $ (3,346 ) 

Government agency issued CMO

     153,271         (870 )      —           —           153,271         (870 ) 

Equity

     33         (10 )      —           —           33         (10 ) 
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 725,630       $ (4,226 )    $ —         $ —         $ 725,630       $ (4,226 ) 
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 3 - Investment Securities (continued)

 

FHN has reviewed investment securities that were in unrealized loss positions in accordance with its accounting policy for OTTI and does not consider them other-than-temporarily impaired. For debt securities with unrealized losses, FHN does not intend to sell them and it is more-likely-than-not that FHN will not be required to sell them prior to recovery. The decline in value is primarily attributable to interest rates and not credit losses. For equity securities, FHN has both the ability and intent to hold these securities for the time necessary to recover the amortized cost.

 

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Note 4 – Loans

The following table provides the balance of loans by portfolio segment as of March 31, 2012, March 31, 2011 and December 31, 2011:

 

     March 31      December 31  
(Dollars in thousands)    2012      2011      2011  

Commercial:

        

Commercial, financial, and industrial

   $ 7,705,153       $ 6,808,163       $ 8,014,927   

Commercial real estate

        

Income CRE

     1,247,089         1,397,741         1,257,497   

Residential CRE

     99,837         221,113         120,913   

Retail:

        

Consumer real estate

     5,391,801         5,487,370         5,291,364   

Permanent mortgage

     750,723         1,037,611         787,597   

Credit card & other

     271,730         298,057         284,051   

Restricted real estate loans and secured borrowings (a)

     504,997         722,317         640,778   
  

 

 

    

 

 

    

 

 

 

Loans, net of unearned income

   $ 15,971,330       $ 15,972,372       $ 16,397,127   

Allowance for loan losses

     346,016         589,128         384,351   
  

 

 

    

 

 

    

 

 

 

Total net loans

   $ 15,625,314       $ 15,383,244       $ 16,012,776   
  

 

 

    

 

 

    

 

 

 

 

(a) Balances as of March 31, 2012 and 2011, and December 31, 2011, include $467.0 million, $672.4 million, and $600.2 million of consumer real estate loans and $38.0 million, $49.9 million, and $40.6 million of permanent mortgage loans, respectively.

Components of the Loan Portfolio

For purposes of this disclosure, the loan portfolio was disaggregated into segments and then further disaggregated into classes for certain disclosures. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. A class is generally determined based on the initial measurement attribute (i.e., amortized cost or purchased credit impaired), risk characteristics of the loan, and an entity’s method for monitoring and assessing credit risk. Commercial loan portfolio segments include commercial, financial, and industrial (“C&I”) and commercial real estate (“CRE”). Commercial classes within C&I include general C&I, loans to mortgage companies, and the trust preferred loans (“TRUPs”)(i.e., loans to bank and insurance-related businesses) portfolio. Loans to mortgage companies 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. Commercial classes within commercial real estate include income CRE and residential CRE. Retail loan portfolio segments include consumer real estate, permanent mortgage, and the credit card and other portfolio. Retail classes include home equity lines of credit (“HELOC”) and real estate (“R/E”) installment loans within the consumer real estate segment, permanent mortgage (which is both a segment and a class), and credit card and other. Restricted real estate loans and secured borrowings include 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 13 – 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.

Concentrations

FHN has a concentration of loans secured by residential real estate (42 percent of total loans), the majority of which is in the consumer real estate portfolio (34 percent of total loans). Additionally, on March 31, 2012, FHN had a sizeable portfolio of bank-related loans, including TRUPs totaling $.6 billion (8 percent of the C&I portfolio, or 4 percent of total loans). While the stronger borrowers in this portfolio class have stabilized, the weaker financial institutions remain under stress due to limited availability of market liquidity and capital, and the impact from economic conditions on these borrowers.

Allowance for Loan Losses

The allowance for loan losses (“ALLL”) includes the following components: reserves for commercial loans evaluated based on pools of credit graded loans and reserves for pools of smaller-balance homogeneous retail loans, both determined in accordance with the ASC Topic related to Contingencies (“ASC 450-20-50”). The reserve factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics and are subject to adjustment by management to reflect current events, trends, and conditions (including economic considerations and trends). The slow economic recovery, weak housing market, elevated unemployment levels, and both positive and negative portfolio segment-specific trends, are examples of additional factors considered by management in determining the allowance for loan losses. Also included are reserves, determined in accordance with the Receivables Topic (“ASC 310-10-45”), for loans determined by management to be individually impaired.

 

15

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Note 4 – Loans (continued)

 

Commercial

For commercial loans, reserves are established using historical net loss factors by grade level, loan product, and business segment. An assessment of the quality of individual commercial loans is made utilizing credit grades assigned internally based on a dual grading system which estimates both the probability of default (“PD”) and loss severity in the event of default. PD grades range from 1-16 while estimated loss severities, or loss given default (“LGD”) grades, range from 1-12. This credit grading system is intended to identify and measure the credit quality of the loan portfolio by analyzing the migration of loans between grading categories. It is also integral to the estimation methodology utilized in determining the allowance for loan losses since an allowance is established for pools of commercial loans based on the credit grade assigned. The appropriate relationship team performs the process of categorizing commercial loans into the appropriate credit grades, initially as a component of the approval of the loan, and subsequently throughout the life of the loan as part of the servicing regimen. The proper loan grade for larger exposures is confirmed by a senior credit officer in the approval process. To determine the most appropriate credit grade for each loan, the credit risk grading system employs scorecards for particular categories of loans that consist of a number of objective and subjective measures that are weighted in a manner that produces a rank ordering of risk within pass-graded credits. Loan grading discipline is regularly reviewed by Credit Risk Assurance to determine if the process continues to result in accurate loan grading across the portfolio.

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.

Retail

The ALLL for smaller-balance homogenous retail loans is determined based on pools of similar loan types that have similar credit risk characteristics. FHN manages retail loan credit risk on a class basis. Reserves by portfolio are determined using segmented roll-rate models that incorporate various factors including historical delinquency trends, experienced loss frequencies, and experienced loss severities. Generally, reserves for retail loans reflect inherent losses in the portfolio that are expected to be recognized over the following twelve months.

Individually Impaired

Generally, classified nonaccrual commercial loans over $1 million and all commercial and consumer loans classified as troubled debt restructurings (“TDRs”) are deemed to be impaired and are individually assessed for impairment measurement in accordance with ASC 310-10. For all commercial portfolio segments, commercial TDRs and other individually impaired commercial loans are measured based on the present value of expected future payments discounted at the loan’s effective interest rate (“the DCF method”), observable market prices, or for loans that are solely dependent on the collateral for repayment, the estimated fair value of the collateral less estimated costs to sell (net realizable value). For loans measured using the DCF method or by observable market prices, if the recorded investment in the impaired loan exceeds this amount, a specific allowance is established as a component of the allowance for loan and lease losses until such time as a loss is expected and recognized; however, for impaired collateral-dependent loans, FHN will charge off the full difference between the book value and the best estimate of net realizable value. In first quarter 2012, the allowance for TDRs in all consumer portfolio segments was

 

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Note 4 – Loans (continued)

 

determined by estimating the expected future cash flows using the modified interest rate (if an interest rate concession), incorporating payoff and net charge-off rates specific to the TDRs within the portfolio segment being assessed, and discounted using the pre-modification interest rate. The discounted cash flows are then compared to the outstanding principal balance in order to determine required reserves.

The following table provides a rollforward of the allowance for loan losses by portfolio segment for the three months ending March 31, 2012 and 2011:

 

(Dollars in thousands)

   C&I     Commercial
Real Estate 		    Consumer
Real Estate 		    Permanent
Mortgage 		    Credit
Card and
Other 		    Total  

Balance as of January 1, 2011

   $ 239,469      $ 155,085      $ 192,350      $ 65,009      $ 12,886      $ 664,799   

Charge-offs

     (12,059 )      (14,286 )      (47,238 )      (9,417 )      (4,352 )      (87,352 ) 

Recoveries

     1,956        3,315        3,782        550        1,078        10,681   

Provision

     (8,766 )      (20,634 )      30,500        (502 )      402        1,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2011 (a) (b)

     220,600        123,480        179,394        55,640        10,014        589,128   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance - individually evaluated for impairment

     56,962        11,255        20,968        14,248        449        103,882   

Allowance - collectively evaluated for impairment

     163,638        112,225        158,426        41,392        9,565        485,246   

Loans, net of unearned as of March 31, 2011:

            

Individually evaluated for impairment

     214,167        221,400        78,571        103,890        1,314        619,342   

Collectively evaluated for impairment

     6,593,996        1,397,454        6,081,203        983,634        296,743        15,353,030   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unearned (a) (b)

     6,808,163        1,618,854        6,159,774        1,087,524        298,057        15,972,372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of January 1, 2012

     130,413        55,586        165,077        26,194        7,081        384,351   

Charge-offs

     (6,074 )      (9,619 )      (34,133 )      (4,638 )      (2,619 )      (57,083 ) 

Recoveries

     4,514        496        4,139        523        1,076        10,748   

Provision

     (9,275 )      (414 )      6,564        10,493        632        8,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012 (a) (b)

     119,578        46,049        141,647        32,572        6,170        346,016   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance - individually evaluated for impairment

     29,148        7,975        32,384        16,639        241        86,387   

Allowance - collectively evaluated for impairment

     90,430        38,074        109,263        15,933        5,929        259,629   

Loans, net of unearned as of March 31, 2012:

            

Individually evaluated for impairment

     157,126        110,123        117,556        102,033        1,028        487,866   

Collectively evaluated for impairment

     7,548,027        1,236,803        5,741,265        686,667        270,702        15,483,464   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unearned (a) (b)

   $ 7,705,153      $ 1,346,926      $ 5,858,821      $ 788,700      $ 271,730      $ 15,971,330   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Balances as of March 31, 2012 and 2011 include $20.1 million and $36.5 million of reserves, respectively, and $467.0 million and $672.4 million of balances in restricted consumer real estate loans and secured borrowings, respectively.
(b) Balances as of March 31, 2012 and 2011 include $5.4 million and $3.3 million of reserves, respectively, and $38.0 million and $49.9 million of balances in restricted permanent mortgage loans and secured borrowings, respectively.

Impaired Loans

The average balance of impaired loans was $483.8 million and $621.1 million for three months ended March 31, 2012 and 2011, respectively. Interest income of approximately $2 million and $1 million was recognized during the three months ended March 31, 2012 and 2011, respectively, related to such impaired loans.

The following tables provide information by class related to individually impaired loans. Recorded investment is defined as the amount of the investment in a loan, before valuation allowance but which does reflect any direct write-down of the investment.

 

17

Table of Contents

Note 4 – Loans (continued)

 

     March, 31, 2012  
(Dollars in thousands)    Recorded
Investment 		     Unpaid
Principal
Balance 		     Related
Allowance 		     Average
Recorded
Investment 		     Interest
Income
Recognized 		 

Impaired loans with no related allowance recorded:

              

Commercial:

              

General C&I

   $ 63,595       $ 80,563       $ —         $ 69,288       $ 203   

TRUPs

     47,000         47,000         —           47,000         —     

Income CRE

     64,190         111,789         —           65,921         77   

Residential CRE

     24,210         41,518         —           24,250         72   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 198,995       $ 280,870       $ —         $ 206,459       $ 352   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with related allowance recorded:

              

Commercial:

              

General C&I

   $ 12,831       $ 12,993       $ 5,322       $ 13,637       $ 34   

TRUPs

     33,700         33,700         23,825         33,700         —     

Income CRE

     2,208         2,208         446         2,215         15   

Residential CRE

     19,515         19,515         7,530         20,334         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 68,254       $ 68,416       $ 37,123       $ 69,886       $ 49   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail:

              

HELOC

   $ 52,411       $ 52,411       $ 14,165       $ 51,165       $ 373   

R/E installment loans

     65,145         65,145         18,135         67,676         265   

Permanent mortgage

     102,033         102,033         16,722         87,548         656   

Credit card & other

     1,028         1,028         241         1,073         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 220,617       $ 220,617       $ 49,263       $ 207,462       $ 1,305   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

   $ 267,249       $ 349,286       $ 37,123       $ 276,345       $ 401   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

   $ 220,617       $ 220,617       $ 49,263       $ 207,462       $ 1,305   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 487,866       $ 569,903       $ 86,386       $ 483,807       $ 1,706   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     March 31, 2011  
(Dollars in thousands)    Recorded
Investment 		     Unpaid
Principal
Balance 		     Related
Allowance 		     Average
Recorded
Investment 		     Interest
Income
Recognized 		 

Impaired loans with no related allowance recorded:

              

Commercial:

              

General C&I

   $ 90,225       $ 112,750       $ —         $ 66,045       $ 257   

TRUPs

     38,000         38,000         —           33,000         —     

Income CRE

     123,269         200,128         —           115,578         139   

Residential CRE

     64,222         116,748         —           61,812         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 315,716       $ 467,626       $ —         $ 276,435       $ 471   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with related allowance recorded:

              

Commercial:

              

General C&I

   $ 55,942       $ 62,871       $ 29,696       $ 84,741       $ 60   

TRUPs

     30,000         30,000         27,266         30,000         —     

Income CRE

     11,603         11,603         3,378         23,072         —     

Residential CRE

     22,306         22,306         7,877         31,310         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 119,851       $ 126,780       $ 68,217       $ 169,123       $ 60   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail:

              

HELOC

   $ 30,398       $ 30,398       $ 10,073       $ 27,886       $ 140   

R/E installment loans

     48,173         48,173         10,895         46,286         162   

Permanent mortgage

     103,890         103,890         14,248         100,328         480   

Credit card & other

     1,314         1,314         449         1,039         12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 183,775       $ 183,775       $ 35,665       $ 175,539       $ 794   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

   $ 435,567       $ 594,406       $ 68,217       $ 445,558       $ 531   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

   $ 183,775       $ 183,775       $ 35,665       $ 175,539       $ 794   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 619,342       $ 778,181       $ 103,882       $ 621,097       $ 1,325   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

18

Table of Contents

Note 4 – Loans (continued)

 

Asset Quality Indicators

As previously discussed, FHN employs a dual grade commercial risk grading methodology to assign an estimate for PD and the LGD for each commercial loan, factors specific to various industry, portfolio, or product segments that result in a rank ordering of risk and the assignment of grades PD 1 to PD 16. Each PD grade corresponds to an estimated one-year default probability percentage; a PD 1 has the lowest expected default probability, and probabilities increase as grades progress down the scale. PD 1 through PD 12 are “pass” grades. Prior to second quarter 2011, all loans with an assigned PD grade of “12” which is the lowest pass grade were included on the Watch List. In second quarter 2011, FHN implemented an enhanced process for determining which loans warrant additional oversight and monitoring. The identification of Watch List loans is now determined by the appropriate relationship team and is generally driven by specific events that may impact borrowers, rather than being driven solely by the assigned PD grade. This process enhancement did not have a material impact on the allowance for loan losses. PD grades 13-16 correspond to the regulatory-defined categories of special mention (13), substandard (14), doubtful (15), and loss (16). Pass loan grades are required to be reassessed no less frequently than annually or whenever there has been a material change in the financial condition of the borrower or risk characteristics of the relationship. All commercial loans over $1 million and certain commercial loans over $500,000 that are graded 13 or worse are reassessed on a quarterly basis. LGD grades are assigned based on a scale of 1-12 and represent FHN’s expected recovery based on collateral type in the event a loan defaults.

The following tables provide the balances of commercial loan portfolio classes, disaggregated by PD grade as of March 31, 2012 and 2011:

 

     March 31, 2012  

(Dollars in millions)

   General
C&I 		     Loans to
Mortgage
Companies 		     TRUPS  (a)      Income
CRE 		     Residential
CRE 		     Total      Percent of
Total 		    Allowance
for Loan
Losses 		 

PD Grade:

                      

1

   $ 185       $ —         $ —         $ —         $ —         $ 185         2 %    $ —     

2

     189         —           —           3         —           192         2        —     

3

     163         —           —           21         —           184         2        —     

4

     216         —           —           6         —           222         2        —     

5

     384         —           —           31         —           415         5        1   

6

     883         123         —           97         4         1,107         12        4   

7

     886         434         —           214         6         1,540         17        9   

8

     979         367         —           151         —           1,497         16        13   

9

     609         128         —           158         3         898         10        12   

10

     491         19         —           94         2         606         7        9   

11

     464         —           —           125         1         590         7        12   

12

     153         —           —           16         3         172         2        4   

13

     226         —           334         67         8         635         7        12   

14,15,16

     311         —           4         198         29         542         6        53   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total loans collectively evaluated for impairment

     6,139         1,071         338         1,181         56         8,785         97        129   

Total loans individually evaluated for impairment

     82         —           75         66         44         267         3        37   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans

   $ 6,221       $ 1,071       $ 413       $ 1,247       $ 100       $ 9,052         100 %    $ 166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     March 31, 2011  

(Dollars in millions)

   General
C&I 		     Loans to
Mortgage
Companies 		     TRUPS  (a)      Income
CRE 		     Residential
CRE 		     Total      Percent of
Total 		    Allowance
for Loan
Losses 		 

PD Grade:

                      

1

   $ 89       $ —         $ —         $ —         $ —         $ 89         1 %    $ —     

2

     97         —           —           3         —           100         1        —     

3

     151         —           —           15         —           166         2        —     

4

     194         —           —           7         —           201         2        1   

5

     300         —           —           26         —           326         4        1   

6

     686         44         —           54         1         785         9        7   

7

     841         108         —           107         3         1,059         13        10   

8

     1,073         157         —           174         4         1,408         17        18   

9

     539         74         —           132         6         751         9        19   

10

     411         —           —           108         3         522         6        12   

11

     476         —           —           129         1         606         7        21   

12

     213         —           —           27         7         247         3        9   

13

     358         —           288         143         9         798         10        44   

14,15,16

     414         1         80         338         100         933         11        134   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total loans collectively evaluated for impairment

     5,842         384         368         1,263         134         7,991         95        276   

Total loans individually evaluated for impairment

     152         —           62         135         87         436         5        68   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans

   $ 5,994       $ 384       $ 430       $ 1,398       $ 221       $ 8,427         100 %    $ 344   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Balances as of March 31, 2012 and 2011 presented net of $34.2 million and $35.6 million respectively lower of cost or market (“LOCOM”) valuation allowance. Based on the underlying structure of the notes, the highest possible internal grade is "13". Portfolio reserve estimate considers recent financial performance of individual borrowers and other factors.

 

19

Table of Contents

Note 4 – Loans (continued)

 

The retail portfolio is comprised primarily of smaller-balance loans which are very similar in nature in that most are standard products and are backed by residential real estate. Because of the similarities of retail loan-types, FHN is able to utilize the Fair Isaac Corporation (“FICO”) score, among other attributes, to assess the quality of consumer borrowers. FICO scores are refreshed on a quarterly basis in an attempt to reflect the recent risk profile of the borrowers. Accruing delinquency amounts are also indicators of other retail portfolio asset quality.

The following tables reflect period-end balances and average FICO scores by origination vintage for the HELOC, real estate installment, and permanent mortgage classes of loans as of March 31, 2012 and 2011.

 

HELOC

(Dollars in millions)

   March 31, 2012      March 31, 2011  

Origination Vintage

   Period End
Balance (a) 		     Avg orig
FICO 		     Avg
Refreshed
FICO 		     Period End
Balance (a) 		     Avg orig
FICO 		     Avg Refreshed
FICO 		 

pre-2003

   $ 168         722         715       $ 218         724         720   

2003

     259         733         724         308         733         726   

2004

     566         728         718         662         728         721   

2005

     705         734         720         822         734         720   

2006

     524         741         724         610         742         727   

2007

     542         746         731         614         746         732   

2008

     286         755         749         314         755         751   

2009

     170         754         751         199         755         758   

2010

     168         755         755         199         757         757   

2011

     159         760         757         30         752         752   

2012

     35         762         758         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,582         740         729       $ 3,976         740         730   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Balances as of March 31, 2012 and 2011 include $467.0 million and $672.4 million of restricted loan and secured borrowing balances.

 

R/E Installment Loans

(Dollars in millions)

   March 31, 2012      March 31, 2011  

Origination Vintage

   Period End
Balance 		     Avg orig
FICO 		     Avg
Refreshed
FICO 		     Period End
Balance 		     Avg orig
FICO 		     Avg Refreshed
FICO 		 

pre-2003

   $ 51         689         685       $ 75         694         687   

2003

     147         722         730         206         724         732   

2004

     91         709         707         120         713         710   

2005

     254         720         713         322         722         713   

2006

     278         720         704         353         722         706   

2007

     389         729         712         489         731         715   

2008

     144         733         724         195         738         729   

2009

     85         750         748         125         753         752   

2010

     187         746         756         215         748         748   

2011

     462         761         758         84         755         754   

2012

     188         765         767         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,276         737         729       $ 2,184         730         722   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Permanent Mortgage

(Dollars in millions)

   March 31, 2012      March 31, 2011  

Origination Vintage

   Period End
Balance (a) 		     Avg orig
FICO 		     Avg
Refreshed
FICO 		     Period End
Balance (a) 		     Avg orig
FICO 		     Avg Refreshed
FICO 		 

pre-2004

   $ 153         725         733       $ 146         724         736   

2004

     10         722         696         13         717         701   

2005

     54         739         718         64         737         719   

2006

     75         737         708         130         726         685   

2007

     390         734         700         395         726         678   

2008

     107         744         712         340         728         678   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 789         734         711       $ 1,088         727         693   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Balances as of March 31, 2012 and 2011 include $38.0 million and $49.9 million of restricted loan and secured borrowing balances.

 

20

Table of Contents

Note 4 – Loans (continued)

 

The following table reflects accruing delinquency amounts for the credit card and other portfolio classes.

 

     Credit Card      Other  
(Dollars in millions)    March 31, 2012      March 31, 2011      March 31, 2012      March 31, 2011  

Accruing delinquent balances:

           

30-89 days past due

   $ 1.4       $ 1.7       $ 0.5       $ 0.9   

90+ days past due

     1.4         1.4         0.1         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2.8       $ 3.1       $ 0.6       $ 0.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual and Past Due Loans

For all portfolio segments and classes, loans are 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 principal and interest 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 it continues to receive payments.

The following table reflects accruing and non-accruing loans by class on March 31, 2012:

 

     Accruing      Non-Accruing     

 

 

(Dollars in thousands)

   Current      30-89
Days Past
Due 		     90 +
Days
Past Due 		     Total
Accruing 		     Current      30-89
Days
Past Due 		     90 + Days
Past Due 		     Total
Non-Accruing 		     Total
Loans 		 

Commercial (C&I) :

                          

General C&I

   $ 6,112,259       $ 29,520       $ 540       $ 6,142,319       $ 35,470       $ 13,202       $ 30,608       $ 79,280       $ 6,221,599   

Loans to mortgage companies

     1,070,581         —           —           1,070,581         —           —           —           —           1,070,581   

TRUPs (a)

     338,180         —           —           338,180         —           —           74,793         74,793         412,973   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  commercial (C&I)

     7,521,020         29,520         540         7,551,080         35,470         13,202         105,401         154,073         7,705,153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate:

                          

Income CRE

     1,168,182         9,160         —           1,177,342         23,289         2,701         43,757         69,747         1,247,089   

Residential CRE

     55,081         1,057         —           56,138         22,958         2,713         18,028         43,699         99,837   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  commercial real estate

     1,223,263         10,217         —           1,233,480         46,247         5,414         61,785         113,446         1,346,926   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer real estate:

                          

HELOC (b)

     3,482,488         34,419         23,398         3,540,305         26,822         6,426         8,901         42,149         3,582,454   

R/E installment loans

     2,226,170         21,185         9,834         2,257,189         11,097         1,561         6,520         19,178         2,276,367   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate

     5,708,658         55,604         33,232         5,797,494         37,919         7,987         15,421         61,327         5,858,821   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Permanent mortgage (b)

     735,156         8,454         8,900         752,510         14,401         987         20,802         36,190         788,700   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit card & other

                          

Credit card

     179,744         1,368         1,456         182,568         —           —           —           —           182,568   

Other

     86,425         533         65         87,023         4         —           2,135         2,139         89,162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit card & other

     266,169         1,901         1,521         269,591         4         —           2,135         2,139         271,730   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned

   $ 15,454,266       $ 105,696       $ 44,193       $ 15,604,155       $ 134,041       $ 27,590       $ 205,544       $ 367,175       $ 15,971,330   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Includes LOCOM valuation allowance $34.2 million.
(b) Includes restricted real estate loans and secured borrowings.

 

21

Table of Contents

Note 4 – Loans (continued)

 

The following table reflects accruing and non-accruing loans by class on March 31, 2011:

 

     Accruing      Non-Accruing         

(Dollars in thousands)

   Current      30-89 Days
Past Due 		     90 + Days
Past Due 		     Total
Accruing 		     Current      30-89 Days
Past Due 		     90 + Days
Past Due 		     Total Non-
Accruing 		     Total Loans  

Commercial (C&I) :

  

General C&I

   $ 5,813,511       $ 29,641       $ 1,478       $ 5,844,630       $ 85,803       $ 5,867       $ 58,623       $ 150,293       $ 5,994,923   

Loans to mortgage companies

     382,891         —           —           382,891         —           —           821         821         383,712   

TRUPs (a)

     367,291         —           —           367,291