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FHN > SEC Filings for FHN > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for FIRST HORIZON NATIONAL CORP

Form 10-Q for FIRST HORIZON NATIONAL CORP


8-May-2014

Quarterly Report


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

  General Information                                                            76

  Forward-Looking Statements                                                     77

  Financial Summary                                                              77

  Restructuring, Repositioning, and Efficiency Initiatives                       84

  Statement of Condition Review                                                  84

  Capital                                                                        86

  Asset Quality-Trend Analysis of First Quarter 2014 to First Quarter 2013       88

  Risk Management                                                                99

  Repurchase Obligations, Off-Balance Sheet Arrangements, and Other
Contractual Obligations                                                         104

  Market Uncertainties and Prospective Trends                                   108

  Critical Accounting Policies                                                  110

  Non-GAAP Information                                                          111


Table of Contents

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 March 31, 2014, was one of the 40 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 largely in Tennessee and other selected markets. Regional banking provides investments, financial planning, trust services and asset management, along with credit card and cash management. Additionally, the regional banking segment includes correspondent banking which provides credit, depository, and other banking related services to other financial institutions nationally.

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 expenses, 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, acquisition-related costs, and various charges related to restructuring, repositioning, and efficiency initiatives.

Non-strategic includes exited businesses 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.

On June 7, 2013, First Tennessee Bank National Association ("FTBNA"), a subsidiary of FHN, acquired substantially all of the assets and assumed substantially all of the liabilities of Mountain National Bank ("MNB") from the Federal Deposit Insurance Corporation ("FDIC"), as receiver. Excluding purchase accounting adjustments, FHN acquired approximately $452 million in assets, including approximately $249 million in loans excluding loan discounts, and assumed approximately $362 million of MNB deposits. Refer to Note 2-Acquisitions and Divestitures for additional information.

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 unaudited Consolidated Condensed Financial Statements and Notes in this report. Additional information including the 2013 financial statements, notes, and MD&A is provided in FHN's 2013 Annual Report.

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") 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 ratio provides a meaningful base for comparability to other financial institutions as this ratio has 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 currently effective federal banking regulations, and other entities may use calculation methods that differ from those used by FHN. Tier 1 Capital is a regulatory term and is generally defined as the sum of core capital (including common equity and instruments that cannot be redeemed at the option of the holder) adjusted for certain items under risk-based capital regulations. Risk-weighted assets is a regulatory term which includes total assets adjusted for credit risk and is used to determine regulatory capital ratios. Refer to Table 23 for a reconciliation of non-GAAP to GAAP measures and presentation of the most comparable GAAP items.


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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; potential claims relating to participation in government programs, especially lending or other financial services programs; expectations of and actual timing and amount of interest rate movements, including the slope and shape 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 affecting FHN directly or affecting its customers or business counterparties; demand for FHN's product offerings; new products and services in the industries in which FHN operates; the increasing use of new technologies to interact with customers and others; 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; pending, threatened, or possible future regulatory, administrative, and judicial outcomes, actions, and proceedings; 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 Quarterly 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 other parts of and exhibits to this Quarterly Report on Form 10-Q for the period ended March 31, 2014, and in documents incorporated into this Quarterly Report.

FINANCIAL SUMMARY-First Quarter 2014 compared to First Quarter 2013

During first quarter 2014, FHN reported net income available to common shareholders of $44.9 million or $.19 per diluted share compared to net income of $41.0 million or $.17 per diluted share in first quarter 2013. The impact on net income available to common shareholders from preferred stock dividends was $1.6 million and $1.2 million, respectively, for the three months ended March 31, 2014 and 2013. The improvement in results compared to the prior year was driven by a decrease in expenses and the loan loss provision, which more than offset a decline in revenues.

In first quarter 2014, FHN recognized approximately $20 million of previously unrecognized servicing fees in conjunction with mortgage servicing sales, as well as recorded a $5.6 million gain related to the sale of a cost method investment. These increases were partially offset by a net $6.4 million loss on the collapse/deconsolidation of three previously consolidated on-balance sheet consumer loan securitizations and $5.7 million of restructuring-related charges.

Total revenue was $298.1 million in first quarter 2014 compared to $317.8 million in first quarter 2013. The decline in revenue was primarily driven by a reduction in capital markets income due to less favorable market conditions in first quarter 2014 relative to first quarter 2013, a decrease in net interest income ("NII"), and $4.4 million loss on the extinguishment of debt. These declines were partially mitigated by additional servicing fees received in conjunction with the servicing sales and securities gains in first quarter 2014.

Expenses in first quarter 2014 decreased 8 percent to $220.2 million from the prior year primarily due to lower personnel expenses, a net decline in losses from litigation and regulatory matters, and a decrease in contract employment expenses resulting from the sales of servicing. Personnel expense declined 14 percent during the first quarter of 2014 relative to the prior year largely driven by lower capital markets variable compensation as well as a 3 percent reduction in average headcount. These decreases were partially offset by increases in occupancy expense related to restructuring, repositioning, and efficiency initiatives, legal and professional fees driven by costs related to litigation matters in 2014, and advertising expense.


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On a consolidated basis, credit quality continued to improve from a year ago resulting in a $5.0 million decline in the loan loss provision to $10.0 million in first quarter 2014. The decline in provision expense associated with the consumer portfolios more than offset a reduction in provision credits associated with the commercial portfolios. Improvement from first quarter 2013 resulted in a 7 percent decline in the allowance for loan losses ("ALLL"), a 6 percent decline in non-performing loans, and a 38 percent decline in net charge-offs from a year ago.

Return on average common equity and return on average assets for first quarter 2014 were 8.48 percent and .83 percent, respectively, compared to 7.48 percent and .73 percent, respectively, in first quarter 2013. The Tier 1 capital ratio was 14.26 percent as of March 31, 2014, compared to 13.56 percent on March 31, 2013. Total period-end assets decreased to $23.9 billion on March 31, 2014, from $24.8 billion on March 31, 2013. Average loans declined 6 percent to $15.1 billion in first quarter 2014 relative to the same period in 2013. Average core deposits increased 1 percent to $16.0 billion in first quarter 2014 from $15.7 billion in first quarter 2013. Shareholders' equity declined to $2.5 billion on March 31, 2014 from $2.6 billion on March 31, 2013.

BUSINESS LINE REVIEW

Regional Banking

Pre-tax income within the regional banking segment was $36.1 million during first quarter 2014 compared to $49.5 million in first quarter 2013. The decline in pre-tax income was primarily driven by an increase in loan loss provision expense coupled with lower NII and an increase in expenses.

Total revenue declined 2 percent from $206.3 million in first quarter 2013 to $202.0 million in first quarter 2014 driven by a decline in NII, which more than offset a slight increase in fee income. In first quarter 2014 NII was $142.0 million compared to $147.1 million in first quarter 2013. The decline in NII was driven by a decline in the balance of loans to mortgage companies. Fee income was $60.0 million in first quarter 2014 compared to $59.1 million in first quarter 2013. The slight increase in noninterest income was primarily driven by an increase in annuity and advisory fee income which contributed to a 31 percent increase in wealth management income in first quarter 2014, and a 7 percent increase in brokerage management fees and commissions largely due to FHN's strategic focus on growing these businesses with new products and offerings, an expanded sales force, and refined advisory team strategy. These increases were partially offset by lower non-sufficient funds ("NSF")/overdraft fees, which have been influenced by a refinement of sort order processes and overall changes in consumer behavior.

The loan loss provision in the regional bank was $13.0 million in first quarter 2014 compared to a provision credit of $2.5 million in first quarter 2013. The first quarter 2014 provision was affected by a number of factors including a slower pace of improvement that reduced the amount of provision credit from a year ago within the commercial portfolios, provision associated with purchased credit impaired commercial real estate loans, further refinement to the reserving process for the consumer credit card portfolio, and consideration of macro-economic factors.

Noninterest expense was $133.1 million in first quarter 2014 compared to $131.1 million in first quarter 2013. The increase in expense was largely attributable to an increase in advertising expense associated with FHN's 150 year anniversary celebration and an increase in professional fees related to consulting projects in first quarter 2014, partially offset by a reduction in allocated personnel expenses.

Capital Markets

Pre-tax income in the capital markets segment was $7.6 million during first quarter 2014 compared to $19.0 million in first quarter 2013. The decrease in pre-tax income in 2014 was driven by a $18.3 million decline in fixed income revenue to $49.6 million, as average daily revenue ("ADR") decreased from $1.1 million in 2013 to $.8 million in 2014. The decline in fixed income revenue reflects less favorable market conditions in first quarter 2014 relative to the prior year. Other product revenue decreased to $7.1 million from $8.7 million in 2013. Noninterest expense was $52.6 million and $61.5 million in first quarter 2014 and 2013, respectively. The decline in noninterest expense is due to lower variable compensation expenses as a result of lower fixed income revenues in 2014.

Corporate

The pre-tax loss for the corporate segment was $15.5 million in first quarter 2014 compared to $19.8 million in first quarter 2013, driven by an increase in revenue which more than offset higher expenses. Net interest income improved by $.9 million in 2014 primarily driven by an increase in the securities portfolio. Noninterest income (including securities gains/losses) increased $5.4 million to $13.2 million in first quarter 2014, driven by a $5.6 million gain associated with the sale of a cost method investment. An increase in BOLI income as a result of higher policy benefits received in 2014 relative to the prior year also positively impacted noninterest income in first quarter 2014, but was mitigated by a decline in deferred compensation income, which is primarily driven by changes in the market value of the underlying investments. Changes in deferred compensation income are mirrored by changes in deferred compensation expense which is included in personnel expense.


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Noninterest expense increased $2.0 million to $19.6 million in first quarter 2014. The increase in expense was primarily due to an efficiency-related lease abandonment expense of $4.6 million, an increase in the negative valuation adjustment associated with the derivatives related to prior sales of Visa Class B Shares, and elevated advertising costs related to FHN's 150th anniversary celebration campaign. These increases were partially offset by a decline in personnel expenses. The decline in personnel-related expenses primarily is associated with the first quarter 2014 receipt of BOLI deferred compensation benefits, a decrease in deferred compensation expense, which is directionally consistent with the decrease in deferred compensation income described above, and to a lesser extent a reduction in salary expense associated with favorable adjustments to equity performance awards.

Non-Strategic

The non-strategic segment had pre-tax income of $19.7 million in first quarter 2014, compared to a pre-tax loss of $14.6 million in first quarter 2013. The improvement in results from the prior year was the result of lower expenses and a reduction in the loan loss provision, which more than offset a decline in revenues.

Total revenue was $31.7 million and $33.2 million in first quarter 2014 and 2013, respectively, with NII declining 21 percent to $16.0 million in 2014 from $20.4 million in the prior year. The decline in NII is primarily due to an 18 percent reduction in average loans from first quarter 2013 as the legacy portfolios continue to run-off. Noninterest income (including securities gains/losses) was $15.8 million in first quarter 2014 compared to $12.8 million in first quarter 2013 due to an increase in mortgage banking income partially offset by a $4.4 million loss on the extinguishment of debt associated with the collapse of two HELOC securitization trusts and a $2.0 million loss on the deconsolidation of a securitization trust. The increase in mortgage banking income reflects the receipt of previously unrecognized servicing fees in conjunction with transfers of servicing in first quarter 2014. Mortgage banking income in first quarter 2013 was primarily comprised of $12.1 million of servicing fees, and $2.0 million of net hedging results, partially offset by a $5.4 million decline in the value of MSR due to run-off. Additionally, the mortgage warehouse valuation included $.3 million in fair value adjustments in first quarter 2013. Noninterest income in first quarter 2013 included $2.4 million of gains from the reversals of previously established lower of cost or market ("LOCOM") adjustments associated with trust preferred ("TRUP") sales and loan payoffs.

The provision for loan losses within the non-strategic segment was a provision credit of $3.0 million in first quarter 2014 compared to provision expense of $17.5 million in the prior year. In first quarter 2014, FHN disposed of 3 TRUP loans which favorably affected provision within the C&I portfolio by $5.3 million. The consumer real estate and permanent mortgage portfolios contributed to a combined $16.0 million decline in provision expense reflecting steady improvement within those portfolios from a year ago. Both portfolios however had an increased percentage of non-performing loans between the periods which was attributable to placing current second liens on nonaccrual if behind a first lien with performance issues after obtaining third party data in second quarter 2013 along with diminishing loan balances.

Noninterest expense declined 51 percent to $15.0 million in first quarter 2014 from $30.3 million in first quarter 2013. The decrease in expense was driven by a decreases in contract employment expenses and loss accruals related to litigation matters in 2013. Contract employment expenses declined $6.0 million from $7.5 million in first quarter 2013 to $1.5 million in first quarter 2014 due to lower mortgage sub-servicing costs associated with the sales of servicing. Generally, most expense categories declined given the continued wind-down of the legacy businesses.

INCOME STATEMENT REVIEW-First Quarter 2014 compared to First Quarter 2013

Total consolidated revenue was $298.1 million in first quarter 2014, down 6 percent from first quarter 2013, largely driven by lower fixed income sales revenue within capital markets and a decline in net interest income.

NET INTEREST INCOME

Net interest income was $152.4 million in first quarter 2014, a 6 percent decline from $161.4 million in first quarter 2013. The decrease in NII was primarily attributable to run-off of the non-strategic loan portfolio and a decline in loans to mortgage companies, somewhat mitigated by improved deposit pricing and an increase in the investment securities portfolios. Average earning assets were $21.6 billion and $22.3 billion in first quarters 2014 and 2013, respectively. The decline was due to run-off in the non-strategic loan portfolios and a decline in loans to mortgage companies, but somewhat mitigated by loan growth within commercial and business banking lending and consumer real estate installment loans from new originations within the regional bank. The average investment securities portfolio also increased 13 percent from first quarter 2013 offsetting a portion of the decline from lower loan balances.

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


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consolidated net interest margin decreased to 2.88 percent in first quarter 2014 from 2.95 percent in first quarter 2013. The net interest spread was 2.74 percent in first quarter 2014, down 7 basis points from 2.81 percent in first quarter 2013 and the impact of free funding was 14 basis points in both 2014 and 2013. The decline in net interest margin in first quarter 2014 was primarily driven by run-off of the non-strategic loan portfolios, a decline in loans to mortgage companies, and lower yielding commercial loans, partially offset by improved pricing on deposits.

Table 1-Net Interest Margin



                                                                   Three Months Ended
                                                                        March 31
                                                                  2014            2013
Assets:
Earning assets:
Loans, net of unearned income:
Commercial loans                                                    3.60  %        3.70  %
Retail loans                                                         4.01           4.16

Total loans, net of unearned income                                  3.77           3.89

Loans held-for-sale                                                  3.50           3.57
Investment securities:
U.S. treasuries                                                      0.05           0.07
U.S. government agencies                                             2.59           2.63
States and municipalities (a)                                        2.41           0.59
Other                                                                4.31           4.30

Total investment securities                                          2.66           2.70

Capital markets securities inventory                                 2.93           2.41
Mortgage banking trading securities                                  9.16          11.19
Other earning assets:
Federal funds sold                                                   0.99           1.02
Securities purchased under agreements to resell (b)                 (0.13 )         0.02
Interest bearing cash                                                0.23           0.23

Total other earning assets                                           0.10           0.13

Interest income / total earning assets                              3.27  %        3.40  %

Liabilities:
Interest-bearing liabilities:
Interest-bearing deposits:
Savings                                                             0.19  %        0.27  %
Other interest-bearing deposits                                      0.09           0.13
Time deposits                                                        1.34           1.70

Total interest-bearing core deposits                                 0.25           0.35
Certificates of deposit $100,000 and more (c)                        0.76           1.23
Federal funds purchased                                              0.25           0.26
Securities sold under agreements to repurchase                       0.11           0.19
Capital markets trading liabilities                                  2.39           1.66
Other short-term borrowings                                          0.57           0.21
Term borrowings                                                      2.01           1.66
. . .
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