Derivatives

6 Months Ended

Jun. 30, 2012

Derivatives [Abstract]

Derivatives

Note 14 – Derivatives

In the normal course of business, FHN utilizes various financial instruments (including derivative contracts and credit-related agreements) through its legacy mortgage servicing operations, capital markets, and risk management operations, as part of its risk management strategy and as a means to meet customers' needs. These instruments are subject to credit and market risks in excess of the amount recorded on the balance sheet as required by GAAP. The contractual or notional amounts of these financial instruments do not necessarily represent credit or market risk. However, they can be used to measure the extent of involvement in various types of financial instruments. Controls and monitoring procedures for these instruments have been established and are routinely re-evaluated. The Asset/Liability Committee (“ALCO”) monitors the usage and effectiveness of these financial instruments.

Credit risk represents the potential loss that may occur if a party to a transaction fails to perform according to the terms of the contract. The measure of credit exposure is the replacement cost of contracts with a positive fair value. FHN manages credit risk by entering into financial instrument transactions through national exchanges, primary dealers or approved counterparties, and using mutual margining and master netting agreements whenever possible to limit potential exposure. FHN also maintains collateral posting requirements with its counterparties to limit credit risk. With exchange-traded contracts, the credit risk is limited to the clearinghouse used. For non-exchange traded instruments, credit risk may occur when there is a gain in the fair value of the financial instrument and the counterparty fails to perform according to the terms of the contract and/or when the collateral proves to be of insufficient value. Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates, mortgage loan prepayment speeds, or the prices of debt instruments. FHN manages market risk by establishing and monitoring limits on the types and degree of risk that may be undertaken. FHN continually measures this risk through the use of models that measure value-at-risk and earnings-at-risk.

Derivative Instruments. FHN enters into various derivative contracts both in a dealer capacity, to facilitate customer transactions, and also as a risk management tool. Where contracts have been created for customers, FHN enters into transactions with dealers to offset its risk exposure. Derivatives are also used as a risk management tool to hedge FHN's exposure to changes in interest rates or other defined market risks. FHN has elected to present its derivative assets and liabilities gross within Other assets and Other liabilities, respectively. Amounts of collateral posted or received have not been netted with the related derivatives.

Derivative instruments are recorded on the Consolidated Condensed Statements of Condition as Other assets or Other liabilities measured at fair value. Fair value is defined as the price that would be received to sell a derivative asset or paid to transfer a derivative liability in an orderly transaction between market participants on the transaction date. Fair value is determined using available market information and appropriate valuation methodologies. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability are recognized currently in earnings. For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in accumulated other comprehensive income and subsequently reclassified to earnings as the hedged transaction impacts net income. Any ineffective portion of a cash flow hedge is recognized currently in earnings. For freestanding derivative instruments, changes in fair value are recognized currently in earnings. Cash flows from derivative contracts are reported as Operating activities on the Consolidated Condensed Statements of Cash Flows.

Forward contracts are over-the-counter contracts where two parties agree to purchase and sell a specific quantity of a financial instrument at a specified price, with delivery or settlement at a specified date. Futures contracts are exchange-traded contracts where two parties agree to purchase and sell a specific quantity of a financial instrument at a specified price, with delivery or settlement at a specified date. Interest rate option contracts give the purchaser the right, but not the obligation, to buy or sell a specified quantity of a financial instrument, at a specified price, during a specified period of time. Caps and floors are options that are linked to a notional principal amount and an underlying indexed interest rate. Interest rate swaps involve the exchange of interest payments at specified intervals between two parties without the exchange of any underlying principal. Swaptions are options on interest rate swaps that give the purchaser the right, but not the obligation, to enter into an interest rate swap agreement during a specified period of time.

On June 30, 2012 and 2011, respectively, FHN had $201.5million and $163.0 million of cash receivables and $148.4 million and $156.8million of cash payables related to collateral posting under master netting arrangements, inclusive of collateral posted related to contracts with adjustable collateral posting thresholds, with derivative counterparties. Certain of FHN's agreements with derivative counterparties contain provisions which require that FTBNA's debt maintain minimum credit ratings from specified credit rating agencies. If FTBNA's debt were to fall below these minimums, these provisions would be triggered, and the counterparties could terminate the agreements and request immediate settlement of all derivative contracts under the agreements. The net fair value, determined by individual counterparty, of all derivative instruments with credit-risk-related contingent accelerated termination provisions was $245.7 million of assets and $41.0 million of liabilities on June 30, 2012, and $198.1 million of assets and $38.3 million of liabilities on June 30, 2011. As of June 30, 2012 and 2011, FHN had received collateral of $279.5 million and $247.5 million and posted collateral of $44.1 million and $41.4 million, respectively, in the normal course of business related to these contracts.

Additionally, certain of FHN's derivative agreements contain provisions whereby the collateral posting thresholds under the agreements adjust based on the credit ratings of both counterparties. If the credit rating of FHN and/or FTBNA is lowered, FHN would be required to post additional collateral with the counterparties. The net fair value, determined by individual counterparty, of all derivative instruments with adjustable collateral posting thresholds was $247.2 million of assets and $191.5 million of liabilities on June 30, 2012, and $200.2million of assets and $158.1million of liabilities on June 30, 2011. As of June 30, 2012and 2011, FHN had received collateral of $279.5 million and $247.5 million and posted collateral of $190.5 million and $158.8 million, respectively, in the normal course of business related to these agreements.

Legacy Mortgage Servicing Operations

Retained Interests

FHN revalues MSR to current fair value each month with changes in fair value included in servicing income in Mortgage banking noninterest income on the Consolidated Condensed Statements of Income. FHN hedges the MSR to minimize the effects of loss in value of MSR associated with increased prepayment activity that generally results from declining interest rates. In a rising interest rate environment, the value of the MSR generally will increase while the value of the hedge instruments will decline. FHN enters into interest rate contracts (potentially including swaps, swaptions, and mortgage forward purchase contracts) to hedge against the effects of changes in fair value of its MSR. Substantially all capitalized MSR are hedged for economic purposes.

FHN utilizes derivatives as an economic hedge (potentially including swaps, swaptions, and mortgage forward purchase contracts) to protect the value of its interest-only securities that change in value inversely to the movement of interest rates. Interest-only securities are included in Trading securities on the Consolidated Condensed Statements of Condition. Changes in the fair value of these derivatives and the hedged interest-only securities are recognized currently in earnings in Mortgage banking noninterest income as a component of servicing income on the Consolidated Condensed Statements of Income.

The following table summarizes FHN’s derivatives associated with legacy mortgage servicing activities for the three and six months ended June 30, 2012 and 2011:
										Gains/(Losses)			Gains/(Losses)
		June 30, 2012								Three Months Ended			Six Months Ended
(Dollars in thousands)		Notional		Assets			Liabilities			June 30, 2012			June 30, 2012
Retained Interests Hedging
Hedging Instruments:
	Forwards and Futures (a)(b)	$	1,961,000		$	18,712		$	1,091		$	10,943		$	9,632
	Interest Rate Swaps and Swaptions (a)(b)	$	2,136,600		$	4,859		$	18,330		$	(3,466)		$	918
Hedged Items:
	Mortgage Servicing Rights (b)(c)		N/A		$	126,164			N/A		$	(4,131)		$	900
	Other Retained Interests (b)(d)		N/A		$	20,567			N/A		$	(1,513)		$	(553)

										Gains/(Losses)			Gains/(Losses)
		June 30, 2011								Three Months Ended			Six Months Ended
(Dollars in thousands)		Notional		Assets			Liabilities			June 30, 2011			June 30, 2011
Retained Interests Hedging
Hedging Instruments:
	Forwards and Futures (a)(b)	$	2,925,000		$	5,654		$	6,311		$	10,391		$	6,348
	Interest Rate Swaps and Swaptions (a)(b)	$	6,221,000		$	39,785		$	26,934		$	14,885		$	22,224
Hedged Items:
	Mortgage Servicing Rights (b)(c)		N/A		$	183,364			N/A		$	(10,457)		$	(3,325)
	Other Retained Interests (b)(d)		N/A		$	31,623			N/A		$	597		$	2,641

• Assets included in the Other assets section of the Consolidated Condensed Statements of Condition. Liabilities included in the Other liabilities section of the Consolidated Condensed Statements of Condition.
• Gains/losses included in the Mortgage banking income section of the Consolidated Condensed Statements of Income.
• Assets included in the Mortgage servicing rights section of the Consolidated Condensed Statements of Condition.
• Assets included in the Trading securities section of the Consolidated Condensed Statements of Condition.

Capital Markets

Capital markets trades U.S. Treasury, U.S. Agency, mortgage-backed, corporate and municipal fixed income securities, and other securities principally for distribution to customers. When these securities settle on a delayed basis, they are considered forward contracts. Capital markets also enters into interest rate contracts, including caps, swaps, and floors, for its customers. In addition, capital markets enters into futures and option contracts to economically hedge interest rate risk associated with a portion of its securities inventory. These transactions are measured at fair value, with changes in fair value recognized currently in Capital markets noninterest income. Related assets and liabilities are recorded on the Consolidated Condensed Statements of Condition as Other assets and Other liabilities. The FTN Financial Risk Committee and the Credit Risk Management Committee collaborate to mitigate credit risk related to these transactions. Credit risk is controlled through credit approvals, risk control limits, and ongoing monitoring procedures. Total trading revenues were $68.2 million and $71.2 million for the three months ended June 30, 2012 and 2011, respectively, and $166.7 million and $154.4 million for the six months ended June 30, 2012 and 2011, respectively. Total revenues are inclusive of both derivative and non-derivative financial instruments, and are included in Capital markets noninterest income.

The following table summarizes FHN’s derivatives associated with capital markets trading activities as of June 30, 2012 and 2011:
	June 30, 2012
(Dollars in thousands)	Notional		Assets			Liabilities
Customer Interest Rate Contracts	$	1,502,164		$	130,705		$	1,498
Offsetting Upstream Interest Rate Contracts		1,502,164			1,498			130,705
Forwards and Futures Purchased		3,085,323			1,001			2,553
Forwards and Futures Sold		3,444,049			2,810			3,786

	June 30, 2011
(Dollars in thousands)	Notional		Assets			Liabilities
Customer Interest Rate Contracts	$	1,458,306		$	72,576		$	1,537
Offsetting Upstream Interest Rate Contracts		1,458,306			1,537			72,576
Forwards and Futures Purchased		3,397,605			5,318			1,785
Forwards and Futures Sold		3,771,659			1,228			8,413

Interest Rate Risk Management

FHN's ALCO focuses on managing market risk by controlling and limiting earnings volatility attributable to changes in interest rates. Interest rate risk exists to the extent that interest-earning assets and interest-bearing liabilities have different maturity or repricing characteristics. FHN uses derivatives, including swaps, caps, options, and collars, that are designed to moderate the impact on earnings as interest rates change. FHN's interest rate risk management policy is to use derivatives to hedge interest rate risk or market value of assets or liabilities, not to speculate. In addition, FHN has entered into certain interest rate swaps and caps as a part of a product offering to commercial customers that includes customer derivatives paired with offsetting market instruments that, when completed, are designed to mitigate interest rate risk. These contracts do not qualify for hedge accounting and are measured at fair value with gains or losses included in current earnings in Noninterest expense on the Consolidated Condensed Statements of Income.

FHN has entered into pay floating, receive fixed interest rate swaps to hedge the interest rate risk of certain term borrowings totaling $904.0million on both June 30, 2012 and 2011. These swaps have been accounted for as fair value hedges under the shortcut method. The balance sheet impact of these swaps was $86.9 million and $101.7 million in Other assets on June 30, 2012and 2011, respectively. Interest paid or received for these swaps was recognized as an adjustment of the interest expense of the liabilities whose risk is being managed.

FHN has designated a derivative transaction in a hedging strategy to manage interest rate risk on its $500 million noncallable senior debt maturing in December 2015. This derivative qualifies for hedge accounting under ASC 815-20 using the long-haul method. FHN entered into a pay floating, receive fixed interest rate swap to hedge the interest rate risk on this debt. The balance sheet impact of this swap was $27.9 million and $11.4 million in Other assets as of June 30, 2012 and 2011, respectively. There was no ineffectiveness related to this hedge. Interest paid or received for this swap was recognized as an adjustment of the interest expense of the liability whose risk is being managed.

FHN designates derivative transactions in hedging strategies to manage interest rate risk on subordinated debt related to its trust preferred securities. These qualify for hedge accounting under ASC 815-20 using the long-haul method. FHN entered into pay floating, receive fixed interest rate swaps to hedge the interest rate risk of certain subordinated debt totaling $200 million on both June 30, 2012 and 2011. The balance sheet impact of these swaps was $1.1 million and $12.0 million in Other liabilities on June 30, 2012 and 2011, respectively. There was no ineffectiveness related to these hedges. Interest paid or received for these swaps was recognized as an adjustment of the interest expense of the liabilities whose risk is being managed. In April 2012, the counterparty called the swap associated with the $200 million of subordinated debt. FHN discontinued hedge accounting and the cumulative basis adjustments to the associated subordinated debt are being amortized as an adjustment to interest expense over its remaining term. FHN entered into a new interest rate swap to hedge the interest rate risk associated with this debt. The swap qualifies for hedge accounting using the long-haul method.

The following tables summarize FHN’s derivatives associated with interest rate risk management activities for the three and six months ended June 30, 2012 and 2011:
										Gains/(Losses)				Gains/(Losses)
		June 30, 2012								Three Months Ended				Six Months Ended
(Dollars in thousands)		Notional		Assets			Liabilities			June 30, 2012				June 30, 2012
Customer Interest Rate Contracts Hedging
Hedging Instruments and Hedged Items:
	Customer Interest Rate Contracts (a)	$	994,512		$	65,982	$	389			$	2,206			$	(3,583)
	Offsetting Upstream Interest Rate Contracts (a)	$	994,512		$	389	$	67,482			$	(2,006)			$	4,183
Debt Hedging
Hedging Instruments:
	Interest Rate Swaps (b)	$	1,604,000		$	114,854	$	1,104			$	(2,931)			$	(13,161)
Hedged Items:
	Term Borrowings (b)		N/A			N/A	$	1,604,000	(c)		$	2,931	(d)		$	13,161	(d)

										Gains/(Losses)				Gains/(Losses)
		June 30, 2011								Three Months Ended				Six Months Ended
(Dollars in thousands)		Notional		Assets			Liabilities			June 30, 2011				June 30, 2011
Customer Interest Rate Contracts Hedging
Hedging Instruments and Hedged Items:
	Customer Interest Rate Contracts (a)	$	980,417		$	65,074	$	414			$	3,996			$	(6,894)
	Offsetting Upstream Interest Rate Contracts (a)	$	980,417		$	414	$	67,774			$	(4,596)			$	6,994
Debt Hedging
Hedging Instruments:
	Interest Rate Swaps (b)	$	1,604,000		$	113,090	$	12,023			$	22,789			$	3,362
Hedged Items:
	Term Borrowings (b)		N/A			N/A	$	1,604,000	(c)		$	(22,789)	(d)		$	(3,362)	(d)

• Gains/losses included in the Other expense section of the Consolidated Condensed Statements of Income.
• Gains/losses included in the All other income and commissions section of the Consolidated Condensed Statements of Income.
• Represents par value of term borrowings being hedged.
• Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships.

FHN hedges held-to-maturity trust preferred loans with a principal balance of $166.8 million and $201.6 million as of June 30, 2012 and 2011, respectively, which have an initial fixed rate term of five years before conversion to a floating rate. FHN has entered into pay fixed, receive floating interest rate swaps to hedge the interest rate risk associated with this initial five-year term. These hedge relationships qualify as fair value hedges under ASC 815-20. The impact of these swaps was $5.0 million and $13.2 million in Other liabilities on the Consolidated Condensed Statements of Condition as of June 30, 2012 and 2011, respectively. Interest paid or received for these swaps was recognized as an adjustment of the interest income of the assets whose risk is being hedged. Gains or losses are included in Other income and commissions on the Consolidated Condensed Statements of Income.

The following tables summarize FHN’s derivative activities associated with held-to-maturity trust preferred loans for the three and six months ended June 30, 2012 and 2011:

Gains/(Losses)

June 30, 2012

Three Months Ended

Six Months Ended

(Dollars in thousands)

Notional

Assets

Liabilities

June 30, 2012

June 30, 2012

Loan Portfolio Hedging

Hedging Instruments:

Interest Rate Swaps

$

166,750

N/A

$

5,036

$

1,980

$

3,772

Hedged Items:

Trust Preferred Loans (a)

N/A

$

166,750

(b)

N/A

$

(1,965)

(c)

$

(3,755)

(c)

												Gains/(Losses)
		June 30, 2011										Three Months Ended				Six Months Ended
(Dollars in thousands)		Notional			Assets				Liabilities			June 30, 2011				June 30, 2011
Loan Portfolio Hedging
Hedging Instruments:
	Interest Rate Swaps		$	201,583			N/A			$	13,246		$	856			$	3,952
Hedged Items:
	Trust Preferred Loans(a)			N/A		$	201,583	(b)			N/A		$	(842)	(c)		$	(3,943)	(c)

• Assets included in the Loans, net of unearned income section of the Consolidated Condensed Statements of Condition.
• Represents principal balance being hedged.
• Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships.

Other Derivatives

In conjunction with the sales of a portion of its Visa Class B shares, FHN and the purchaser entered into derivative transactions whereby FHN will make, or receive, cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. As of June 30, 2012, the derivative liabilities associated with the sales of Visa Class B shares were $3.5 million compared to $1.3 million as of June 30, 2011. See the Visa Matters section of Note 9 – Contingencies and Other Disclosures for more information regarding FHN's Visa shares.

In 2011, FHN began using cross currency swaps and cross currency interest rate swaps to economically hedge its exposure to foreign currency risk and interest rate risk associated with $.7 million of non-U.S dollar denominated loans. As of June 30, 2012, the balance sheet impact and the gains/losses associated with these derivatives were not material.