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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
|
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2020
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)
______________________________________ |
| | | |
TN | | 62-0803242 |
(State or other jurisdiction incorporation of organization) | | (IRS Employer Identification No.) |
| | |
165 MADISON AVENUE MEMPHIS, TENNESSEE Madison Avenue | | |
Memphis, | Tennessee | | 38103 |
(Address of principal executive office) | | (Zip Code) |
(Registrant’s telephone number, including area code) (901) (901) 523-4444
______________________________________
(Former name, former address and former fiscal year, if changed since last report)
______________________________________
Securities registered pursuant to Section 12(b) of the Act:
|
| | | |
| Title of Each Class | Trading Symbol(s) | Name of Exchange on which Registered |
| $.625 Par Value Common Capital Stock | FHN | New York Stock Exchange LLC |
| Depositary Shares, each representing a 1/4,000th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series A
| FHN PR A | New York Stock Exchange LLC |
|
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. ☒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). ☒Yes☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | |
Large accelerated filerAccelerated Filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | | ☐ |
| | | | | | | | |
Smaller reporting company | ☐ | | Emerging Growth Company | ☐ | | (Do not check if a smaller reporting company) | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ 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 September 30, 2017March 31, 2020 |
Common Stock, $.625 par value | | 234,230,515311,862,565 |
Table of Contents
FIRST HORIZON NATIONAL CORPORATION
INDEX
---------------------------
PART I.
1. FINANCIAL INFORMATION
---------------------------
Item 1. Financial Statements
This financial information reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of the financial condition and results of operations for the interim periods presented.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 1
CONSOLIDATED CONDENSED STATEMENTS OF CONDITION
|
| | | | | | | | |
| | First Horizon National Corporation |
| | (Unaudited) | | December 31 |
| | March 31 | |
(Dollars in thousands, except per share amounts) | | 2020 | | 2019 |
Assets: | | | | |
Cash and due from banks | | $ | 537,564 |
| | $ | 633,728 |
|
Federal funds sold | | 30,050 |
| | 46,536 |
|
Securities purchased under agreements to resell (Note 15) | | 562,435 |
| | 586,629 |
|
Total cash and cash equivalents | | 1,130,049 |
| | 1,266,893 |
|
Interest-bearing cash | | 670,525 |
| | 482,405 |
|
Trading securities | | 1,877,514 |
| | 1,346,207 |
|
Loans held-for-sale (a) | | 595,601 |
| | 593,790 |
|
Securities available-for-sale (Note 3) | | 4,544,907 |
| | 4,445,403 |
|
Securities held-to-maturity (Note 3) | | 10,000 |
| | 10,000 |
|
Loans, net of unearned income (Note 4) (b) | | 33,378,303 |
| | 31,061,111 |
|
Less: Allowance for loan losses (Note 5) | | 444,490 |
| | 200,307 |
|
Total net loans | | 32,933,813 |
| | 30,860,804 |
|
Goodwill (Note 6) | | 1,432,787 |
| | 1,432,787 |
|
Other intangible assets, net (Note 6) | | 124,892 |
| | 130,200 |
|
Fixed income receivables | | 180,569 |
| | 40,114 |
|
Premises and equipment, net (March 31, 2020 and December 31, 2019 include $7.5 million and $9.7 million, respectively, classified as held-for-sale) | | 447,812 |
| | 455,006 |
|
Other real estate owned (“OREO”) (c) | | 15,837 |
| | 17,838 |
|
Derivative assets (Note 14) | | 696,250 |
| | 183,115 |
|
Other assets | | 2,536,822 |
| | 2,046,338 |
|
Total assets | | $ | 47,197,378 |
| | $ | 43,310,900 |
|
Liabilities and equity: | | | | |
Deposits: | | | | |
Savings | | $ | 13,860,342 |
| | $ | 11,664,906 |
|
Time deposits, net | | 3,058,198 |
| | 3,618,337 |
|
Other interest-bearing deposits | | 8,561,302 |
| | 8,717,341 |
|
Interest-bearing | | 25,479,842 |
| | 24,000,584 |
|
Noninterest-bearing | | 8,939,808 |
| | 8,428,951 |
|
Total deposits | | 34,419,650 |
| | 32,429,535 |
|
Federal funds purchased | | 476,013 |
| | 548,344 |
|
Securities sold under agreements to repurchase (Note 15) | | 788,595 |
| | 716,925 |
|
Trading liabilities | | 452,611 |
| | 505,581 |
|
Other short-term borrowings | | 4,060,673 |
| | 2,253,045 |
|
Term borrowings | | 792,751 |
| | 791,368 |
|
Fixed income payables | | 91,274 |
| | 49,535 |
|
Derivative liabilities (Note 14) | | 234,984 |
| | 67,480 |
|
Other liabilities | | 825,247 |
| | 873,079 |
|
Total liabilities | | 42,141,798 |
| | 38,234,892 |
|
Equity: | | | | |
First Horizon National Corporation Shareholders’ Equity: | | | | |
Preferred stock - Series A, non-cumulative perpetual, no par value, liquidation preference of $100,000 per share - (shares authorized - 1,000; shares issued - 1,000 on March 31, 2020 and December 31, 2019) | | 95,624 |
| | 95,624 |
|
Common stock - $.625 par value (shares authorized - 400,000,000; shares issued - 311,862,565 on March 31, 2020 and 311,469,056 on December 31, 2019) | | 194,914 |
| | 194,668 |
|
Capital surplus | | 2,938,670 |
| | 2,931,451 |
|
Undivided profits | | 1,667,105 |
| | 1,798,442 |
|
Accumulated other comprehensive loss, net (Note 8) | | (136,164 | ) | | (239,608 | ) |
Total First Horizon National Corporation Shareholders’ Equity | | 4,760,149 |
| | 4,780,577 |
|
Noncontrolling interest | | 295,431 |
| | 295,431 |
|
Total equity | | 5,055,580 |
| | 5,076,008 |
|
Total liabilities and equity | | $ | 47,197,378 |
| | $ | 43,310,900 |
|
|
| | | | | | | | |
| | First Horizon National Corporation |
| | (Unaudited) | | December 31 |
| | September 30 | |
(Dollars in thousands, except per share amounts) | | 2017 | | 2016 |
Assets: | | | | |
Cash and due from banks | | $ | 347,802 |
| | $ | 373,274 |
|
Federal funds sold | | 76,316 |
| | 50,838 |
|
Securities purchased under agreements to resell (Note 15) | | 663,637 |
| | 613,682 |
|
Total cash and cash equivalents | | 1,087,755 |
| | 1,037,794 |
|
Interest-bearing cash | | 604,326 |
| | 1,060,034 |
|
Trading securities | | 1,469,402 |
| | 897,071 |
|
Loans held-for-sale (a) | | 339,780 |
| | 111,248 |
|
Securities available-for-sale (Note 3) | | 3,963,138 |
| | 3,943,499 |
|
Securities held-to-maturity (Note 3) | | 10,000 |
| | 14,347 |
|
Loans, net of unearned income (Note 4) (b) | | 20,166,091 |
| | 19,589,520 |
|
Less: Allowance for loan losses (Note 5) | | 194,867 |
| | 202,068 |
|
Total net loans | | 19,971,224 |
| | 19,387,452 |
|
Goodwill (Note 6) | | 236,335 |
| | 191,371 |
|
Other intangible assets, net (Note 6) | | 43,157 |
| | 21,017 |
|
Fixed income receivables | | 68,750 |
| | 57,411 |
|
Premises and equipment, net (September 30, 2017 and December 31, 2016 include $4.3 million and $5.8 million, respectively, classified as held-for-sale) | | 293,393 |
| | 289,385 |
|
Other real estate owned (“OREO”) (c) | | 12,522 |
| | 16,237 |
|
Derivative assets (Note 14) | | 80,976 |
| | 121,654 |
|
Other assets | | 1,441,878 |
| | 1,406,711 |
|
Total assets | | $ | 29,622,636 |
| | $ | 28,555,231 |
|
Liabilities and equity: | | | |
|
Deposits: | | | | |
Savings | | $ | 8,592,315 |
| | $ | 9,428,197 |
|
Time deposits | | 1,112,098 |
| | 1,355,133 |
|
Other interest-bearing deposits | | 5,909,596 |
| | 5,948,439 |
|
Interest-bearing | | 15,614,009 |
| | 16,731,769 |
|
Noninterest-bearing | | 6,485,245 |
| | 5,940,594 |
|
Total deposits | | 22,099,254 |
| | 22,672,363 |
|
Federal funds purchased | | 292,650 |
| | 414,207 |
|
Securities sold under agreements to repurchase (Note 15) | | 516,867 |
| | 453,053 |
|
Trading liabilities | | 579,028 |
| | 561,848 |
|
Other short-term borrowings | | 1,637,419 |
| | 83,177 |
|
Term borrowings | | 1,059,507 |
| | 1,040,656 |
|
Fixed income payables | | 44,304 |
| | 21,002 |
|
Derivative liabilities (Note 14) | | 83,146 |
| | 135,897 |
|
Other liabilities | | 426,910 |
| | 467,944 |
|
Total liabilities | | $ | 26,739,085 |
| | $ | 25,850,147 |
|
Equity: | | | | |
First Horizon National Corporation Shareholders’ Equity: | | | | |
Preferred stock - Series A, non-cumulative perpetual, no par value, liquidation preference of $100,000 per share - (shares authorized - 1,000; shares issued - 1,000 on September 30, 2017 and December 31, 2016) | | 95,624 |
| | 95,624 |
|
Common stock - $.625 par value (shares authorized - 400,000,000; shares issued - 234,230,515 on September 30, 2017 and 233,623,686 on December 31, 2016) | | 146,395 |
| | 146,015 |
|
Capital surplus | | 1,401,359 |
| | 1,386,636 |
|
Undivided profits | | 1,177,126 |
| | 1,029,032 |
|
Accumulated other comprehensive loss, net (Note 8) | | (232,384 | ) | | (247,654 | ) |
Total First Horizon National Corporation Shareholders’ Equity | | 2,588,120 |
| | 2,409,653 |
|
Noncontrolling interest | | 295,431 |
| | 295,431 |
|
Total equity | | 2,883,551 |
| | 2,705,084 |
|
Total liabilities and equity | | $ | 29,622,636 |
| | $ | 28,555,231 |
|
See accompanying notes to consolidated condensed financial statements.
| |
(a) | September 30, 2017March 31, 2020 and December 31, 20162019 include $12.8$4.7 million and $19.3$6.8 million, respectively, of held-for-sale consumer mortgage loans secured by residential real estate in process of foreclosure. |
| |
(b) | September 30, 2017March 31, 2020 and December 31, 20162019 include $24.8$20.8 million and $28.5$18.8 million, respectively, of held-to-maturity consumer mortgage loans secured by residential real estate properties in process of foreclosure. |
| |
(c) | September 30, 2017March 31, 2020 and December 31, 20162019 include $7.1$7.8 million and $8.1$9.2 million, respectively, of foreclosed residential real estate. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 2
CONSOLIDATED
CONSOLIDATED CONDENSED STATEMENTS OF INCOME |
| | | | | | | |
| First Horizon National Corporation |
| Three Months Ended March 31 |
(Dollars and shares in thousands except per share data, unless otherwise noted) (Unaudited) | 2020 | | 2019 |
Interest income: | | | |
Interest and fees on loans | $ | 326,599 |
| | $ | 331,938 |
|
Interest on investment securities available-for-sale | 27,756 |
| | 31,843 |
|
Interest on investment securities held-to-maturity | 131 |
| | 131 |
|
Interest on loans held-for-sale | 6,899 |
| | 9,877 |
|
Interest on trading securities | 13,117 |
| | 13,548 |
|
Interest on other earning assets | 3,866 |
| | 13,278 |
|
Total interest income | 378,368 |
| | 400,615 |
|
Interest expense: | | | |
Interest on deposits: | | | |
Savings | 26,333 |
| | 39,914 |
|
Time deposits | 13,943 |
| | 20,254 |
|
Other interest-bearing deposits | 14,213 |
| | 22,042 |
|
Interest on trading liabilities | 3,292 |
| | 2,816 |
|
Interest on short-term borrowings | 9,864 |
| | 6,744 |
|
Interest on term borrowings | 7,921 |
| | 14,337 |
|
Total interest expense | 75,566 |
| | 106,107 |
|
Net interest income | 302,802 |
| | 294,508 |
|
Provision/(provision credit) for loan losses | 145,000 |
| | 9,000 |
|
Net interest income after provision/(provision credit) for loan losses | 157,802 |
| | 285,508 |
|
Noninterest income: | | | |
Fixed income | 95,635 |
| | 53,749 |
|
Deposit transactions and cash management | 30,290 |
| | 31,621 |
|
Brokerage, management fees and commissions | 15,405 |
| | 12,633 |
|
Bankcard income | 7,253 |
| | 6,952 |
|
Trust services and investment management
| 7,195 |
| | 7,026 |
|
Bank-owned life insurance ("BOLI") | 4,589 |
| | 4,402 |
|
Equity securities gains/(losses), net (Note 3) | 25 |
| | 31 |
|
All other income and commissions (Note 7) | 14,364 |
| | 24,631 |
|
Total noninterest income | 174,756 |
| | 141,045 |
|
Adjusted gross income after provision/(provision credit) for loan losses | 332,558 |
| | 426,553 |
|
Noninterest expense: | | | |
Employee compensation, incentives, and benefits | 183,470 |
| | 177,925 |
|
Occupancy | 19,563 |
| | 20,693 |
|
Computer software | 16,027 |
| | 15,139 |
|
Operations services | 11,692 |
| | 11,488 |
|
Equipment rentals, depreciation, and maintenance | 8,552 |
| | 8,829 |
|
Advertising and public relations | 7,456 |
| | 7,242 |
|
Professional fees | 6,996 |
| | 12,299 |
|
FDIC premium expense | 6,742 |
| | 4,273 |
|
Communications and courier | 5,528 |
| | 6,453 |
|
Amortization of intangible assets | 5,308 |
| | 6,216 |
|
Contract employment and outsourcing | 4,936 |
| | 3,371 |
|
Legal fees | 1,823 |
| | 2,831 |
|
All other expense (Note 7) | 33,226 |
| | 19,331 |
|
Total noninterest expense | 311,319 |
| | 296,090 |
|
Income/(loss) before income taxes | 21,239 |
| | 130,463 |
|
Provision/(benefit) for income taxes | 4,767 |
| | 27,058 |
|
Net income/(loss) | $ | 16,472 |
| | $ | 103,405 |
|
Net income attributable to noncontrolling interest | 2,852 |
| | 2,820 |
|
Net income/(loss) attributable to controlling interest | $ | 13,620 |
| | $ | 100,585 |
|
Preferred stock dividends | 1,550 |
| | 1,550 |
|
Net income/(loss) available to common shareholders | $ | 12,070 |
| | $ | 99,035 |
|
Basic earnings/(loss) per share (Note 9) | $ | 0.04 |
| | $ | 0.31 |
|
Diluted earnings/(loss) per share (Note 9) | $ | 0.04 |
| | $ | 0.31 |
|
Weighted average common shares (Note 9) | 311,597 |
| | 317,435 |
|
Diluted average common shares (Note 9) | 313,170 |
| | 319,581 |
|
|
| | | | | | | | | | | | | | | | |
| | First Horizon National Corporation |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars and shares in thousands except per share data, unless otherwise noted) (Unaudited) | | 2017 | | 2016 | | 2017 | | 2016 |
Interest income: | | | | | | | | |
Interest and fees on loans | | $ | 205,220 |
| | $ | 174,039 |
| | $ | 578,264 |
| | $ | 495,516 |
|
Interest on investment securities available-for-sale | | 25,575 |
| | 23,655 |
| | 76,867 |
| | 72,082 |
|
Interest on investment securities held-to-maturity | | 131 |
| | 197 |
| | 460 |
| | 592 |
|
Interest on loans held-for-sale | | 6,123 |
| | 1,445 |
| | 10,916 |
| | 3,904 |
|
Interest on trading securities | | 8,262 |
| | 6,793 |
| | 24,033 |
| | 22,564 |
|
Interest on other earning assets | | 2,834 |
| | 843 |
| | 11,757 |
| | 3,354 |
|
Total interest income | | 248,145 |
| | 206,972 |
| | 702,297 |
| | 598,012 |
|
Interest expense: | | | | | | | | |
Interest on deposits: | | | | | | | | |
Savings | | 10,920 |
| | 4,939 |
| | 31,324 |
| | 13,275 |
|
Time deposits | | 2,591 |
| | 2,496 |
| | 8,342 |
| | 7,293 |
|
Other interest-bearing deposits | | 6,759 |
| | 2,592 |
| | 15,976 |
| | 7,422 |
|
Interest on trading liabilities | | 3,298 |
| | 3,331 |
| | 11,282 |
| | 11,152 |
|
Interest on short-term borrowings | | 4,998 |
| | 1,254 |
| | 9,293 |
| | 3,585 |
|
Interest on term borrowings | | 9,762 |
| | 7,165 |
| | 25,854 |
| | 21,752 |
|
Total interest expense | | 38,328 |
| | 21,777 |
| | 102,071 |
| | 64,479 |
|
Net interest income | | 209,817 |
| | 185,195 |
| | 600,226 |
| | 533,533 |
|
Provision/(provision credit) for loan losses | | — |
| | 4,000 |
| | (3,000 | ) | | 11,000 |
|
Net interest income after provision/(provision credit) for loan losses | | 209,817 |
| | 181,195 |
| | 603,226 |
| | 522,533 |
|
Noninterest income: | | | | | | | | |
Fixed income | | 55,758 |
| | 71,748 |
| | 161,546 |
| | 216,638 |
|
Deposit transactions and cash management | | 28,011 |
| | 27,221 |
| | 80,434 |
| | 81,049 |
|
Brokerage, management fees and commissions | | 11,937 |
| | 10,828 |
| | 35,872 |
| | 31,908 |
|
Trust services and investment management | | 6,953 |
| | 6,885 |
| | 21,304 |
| | 20,674 |
|
Bankcard income | | 6,170 |
| | 6,260 |
| | 17,230 |
| | 18,077 |
|
Bank-owned life insurance | | 3,539 |
| | 3,997 |
| | 11,137 |
| | 11,129 |
|
Debt securities gains/(losses), net (Note 3 and Note 8) | | 1 |
| | — |
| | 450 |
| | 1,654 |
|
Equity securities gains/(losses), net (Note 3) | | 5 |
| | (200 | ) | | 5 |
| | (181 | ) |
All other income and commissions (Note 7) | | 43 |
| | 21,806 |
| | 29,051 |
| | 47,416 |
|
Total noninterest income | | 112,417 |
| | 148,545 |
| | 357,029 |
| | 428,364 |
|
Adjusted gross income after provision/(provision credit) for loan losses | | 322,234 |
| | 329,740 |
| | 960,255 |
| | 950,897 |
|
Noninterest expense: | | | | | | | | |
Employee compensation, incentives, and benefits | | 137,798 |
| | 145,103 |
| | 411,818 |
| | 425,624 |
|
Occupancy | | 13,619 |
| | 12,722 |
| | 38,759 |
| | 38,062 |
|
Computer software | | 11,993 |
| | 10,400 |
| | 35,077 |
| | 33,213 |
|
Operations services | | 10,805 |
| | 10,518 |
| | 33,204 |
| | 30,939 |
|
Equipment rentals, depreciation, and maintenance | | 6,626 |
| | 6,085 |
| | 20,013 |
| | 19,426 |
|
Professional fees | | 6,566 |
| | 4,859 |
| | 20,971 |
| | 14,342 |
|
FDIC premium expense | | 6,062 |
| | 5,721 |
| | 17,728 |
| | 15,490 |
|
Advertising and public relations | | 5,205 |
| | 6,065 |
| | 13,901 |
| | 15,519 |
|
Communications and courier | | 4,328 |
| | 3,883 |
| | 12,245 |
| | 10,672 |
|
Contract employment and outsourcing | | 2,762 |
| | 2,443 |
| | 8,975 |
| | 7,365 |
|
Legal fees | | 2,052 |
| | 4,750 |
| | 10,831 |
| | 15,520 |
|
Amortization of intangible assets | | 1,964 |
| | 1,299 |
| | 5,160 |
| | 3,898 |
|
Repurchase and foreclosure provision/(provision credit) | | (609 | ) | | (218 | ) | | (22,580 | ) | | (31,618 | ) |
All other expense (Note 7) | | 27,698 |
| | 19,928 |
| | 70,889 |
| | 88,855 |
|
Total noninterest expense | | 236,869 |
| | 233,558 |
| | 676,991 |
| | 687,307 |
|
Income/(loss) before income taxes | | 85,365 |
| | 96,182 |
| | 283,264 |
| | 263,590 |
|
Provision/(benefit) for income taxes | | 13,596 |
| | 28,547 |
| | 57,903 |
| | 82,802 |
|
Net income/(loss) | | $ | 71,769 |
| | $ | 67,635 |
| | $ | 225,361 |
| | $ | 180,788 |
|
Net income attributable to noncontrolling interest | | 2,883 |
| | 2,883 |
| | 8,555 |
| | 8,586 |
|
Net income/(loss) attributable to controlling interest | | $ | 68,886 |
| | $ | 64,752 |
| | $ | 216,806 |
| | $ | 172,202 |
|
Preferred stock dividends | | 1,550 |
| | 1,550 |
| | 4,650 |
| | 4,650 |
|
Net income/(loss) available to common shareholders | | $ | 67,336 |
| | $ | 63,202 |
| | $ | 212,156 |
| | $ | 167,552 |
|
Basic earnings/(loss) per share (Note 9) | | $ | 0.29 |
| | $ | 0.27 |
| | $ | 0.91 |
| | $ | 0.72 |
|
Diluted earnings/(loss) per share (Note 9) | | $ | 0.28 |
| | $ | 0.27 |
| | $ | 0.90 |
| | $ | 0.71 |
|
Weighted average common shares (Note 9) | | 233,749 |
| | 231,856 |
| | 233,438 |
| | 232,690 |
|
Diluted average common shares (Note 9) | | 236,340 |
| | 234,092 |
| | 236,372 |
| | 234,775 |
|
Cash dividends declared per common share | | $ | 0.09 |
| | $ | 0.07 |
| | $ | 0.27 |
| | $ | 0.21 |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
See accompanying notes to consolidated condensed financial statements.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 3
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
| | | | First Horizon National Corporation | First Horizon National Corporation |
| | Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended March 31 |
(Dollars in thousands) (Unaudited) | | 2017 | | 2016 | | 2017 | | 2016 | 2020 | | 2019 |
Net income/(loss) | | $ | 71,769 |
| | $ | 67,635 |
| | $ | 225,361 |
| | $ | 180,788 |
| $ | 16,472 |
| | $ | 103,405 |
|
Other comprehensive income/(loss), net of tax: | | | | | | | | | | | |
Net unrealized gains/(losses) on securities available-for-sale | | 3,917 |
| | (7,887 | ) | | 11,292 |
| | 47,310 |
| 88,278 |
| | 48,615 |
|
Net unrealized gains/(losses) on cash flow hedges | | (734 | ) | | (1,570 | ) | | (493 | ) | | 3,121 |
| 13,061 |
| | 5,387 |
|
Net unrealized gains/(losses) on pension and other postretirement plans | | 1,895 |
| | 963 |
| | 4,471 |
| | 2,933 |
| 2,105 |
| | 1,463 |
|
Other comprehensive income/(loss) | | 5,078 |
| | (8,494 | ) | | 15,270 |
| | 53,364 |
| 103,444 |
| | 55,465 |
|
Comprehensive income | | 76,847 |
| | 59,141 |
| | 240,631 |
| | 234,152 |
| 119,916 |
| | 158,870 |
|
Comprehensive income attributable to noncontrolling interest | | 2,883 |
| | 2,883 |
| | 8,555 |
| | 8,586 |
| 2,852 |
| | 2,820 |
|
Comprehensive income attributable to controlling interest | | $ | 73,964 |
| | $ | 56,258 |
| | $ | 232,076 |
| | $ | 225,566 |
| $ | 117,064 |
| | $ | 156,050 |
|
Income tax expense/(benefit) of items included in Other comprehensive income: | | | | | | | | | | | |
Net unrealized gains/(losses) on securities available-for-sale | | $ | 2,430 |
| | $ | (4,902 | ) | | $ | 7,002 |
| | $ | 29,402 |
| $ | 28,787 |
| | $ | 15,958 |
|
Net unrealized gains/(losses) on cash flow hedges | | (455 | ) | | (975 | ) | | (306 | ) | | 1,940 |
| 4,260 |
| | 1,768 |
|
Net unrealized gains/(losses) on pension and other postretirement plans | | 1,175 |
| | 598 |
| | 2,772 |
| | 1,823 |
| 686 |
| | 480 |
|
See accompanying notes to consolidated condensed financial statements.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 4
CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | First Horizon National Corporation |
| | 2017 | | 2016 |
(Dollars in thousands except per share data) (Unaudited) | | Controlling Interest | | Noncontrolling Interest | | Total | | Controlling Interest | | Noncontrolling Interest | | Total |
Balance, January 1 | | $ | 2,409,653 |
| | $ | 295,431 |
| | $ | 2,705,084 |
| | $ | 2,344,155 |
| | $ | 295,431 |
| | $ | 2,639,586 |
|
Net income/(loss) | | 216,806 |
| | 8,555 |
| | 225,361 |
| | 172,202 |
| | 8,586 |
| | 180,788 |
|
Other comprehensive income/(loss) (a) | | 15,270 |
| | — |
| | 15,270 |
| | 53,364 |
| | — |
| | 53,364 |
|
Comprehensive income/(loss) | | 232,076 |
| | 8,555 |
| | 240,631 |
| | 225,566 |
| | 8,586 |
| | 234,152 |
|
Cash dividends declared: | | | | | | | | | | | | |
Preferred stock ($4,650 per share for the nine months ended September 30, 2017 and 2016) | | (4,650 | ) | | — |
| | (4,650 | ) | | (4,650 | ) | | — |
| | (4,650 | ) |
Common stock ($.27 and $.21 per share for the nine months ended September 30, 2017 and 2016, respectively) | | (63,777 | ) | | — |
| | (63,777 | ) | | (49,578 | ) | | — |
| | (49,578 | ) |
Common stock repurchased (b) | | (5,285 | ) | | — |
| | (5,285 | ) | | (96,801 | ) | | — |
| | (96,801 | ) |
Common stock issued for: | | | | | | | | | | | | |
Stock options and restricted stock - equity awards | | 5,132 |
| | — |
| | 5,132 |
| | 18,710 |
| | — |
| | 18,710 |
|
Stock-based compensation expense | | 14,971 |
| | — |
| | 14,971 |
| | 12,378 |
| | — |
| | 12,378 |
|
Dividends declared - noncontrolling interest of subsidiary preferred stock | | — |
| | (8,555 | ) | | (8,555 | ) | | — |
| | (8,586 | ) | | (8,586 | ) |
Tax benefit/(benefit reversal) - stock based compensation expense | | — |
| | — |
| | — |
| | (629 | ) | | — |
| | (629 | ) |
Balance, September 30 | | $ | 2,588,120 |
| | $ | 295,431 |
| | $ | 2,883,551 |
| | $ | 2,449,151 |
| | $ | 295,431 |
| | $ | 2,744,582 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
First Horizon National Corporation |
Three months ended March 31, 2020 |
(Dollars and shares in thousands, except per share data) (unaudited) | | Common Shares | | Total | | Preferred Stock | | Common Stock | | Capital Surplus | | Undivided Profits | | Accumulated Other Comprehensive Income/(Loss) (a) | | Noncontrolling Interest |
Balance, December 31, 2019 | | 311,469 |
| | $ | 5,076,008 |
| | $ | 95,624 |
| | $ | 194,668 |
| | $ | 2,931,451 |
| | $ | 1,798,442 |
| | $ | (239,608 | ) | | $ | 295,431 |
|
Adjustment to reflect adoption of ASU 2016-13 | | — |
| | (96,057 | ) | | — |
| | — |
| | — |
| | (96,057 | ) | | — |
| | — |
|
Beginning balance, as adjusted | | 311,469 |
| | 4,979,951 |
| | 95,624 |
| | 194,668 |
| | 2,931,451 |
| | 1,702,385 |
| | (239,608 | ) | | 295,431 |
|
Net income/(loss) | | — |
| | 16,472 |
| | — |
| | — |
| | — |
| | 13,620 |
| | — |
| | 2,852 |
|
Other comprehensive income/(loss) | | — |
| | 103,444 |
| | — |
| | — |
| | — |
| | — |
| | 103,444 |
| | — |
|
Comprehensive income/(loss) | | — |
| | 119,916 |
| | — |
| | — |
| | — |
| | 13,620 |
| | 103,444 |
| | 2,852 |
|
Cash dividends declared: | | | | | | | | | | | | | | | | |
Preferred stock ($1,550 per share) | | — |
| | (1,550 | ) | | — |
| | — |
| | — |
| | (1,550 | ) | | — |
| | — |
|
Common stock ($.15 per share) | | — |
| | (47,350 | ) | | — |
| | — |
| | — |
| | (47,350 | ) | | — |
| | — |
|
Common stock repurchased | | (141 | ) | | (2,064 | ) | | — |
| | (88 | ) | | (1,976 | ) | | — |
| | — |
| | — |
|
Common stock issued for: | | | | | | | | | | | | | | | | |
Stock options and restricted stock - equity awards | | 652 |
| | 4,140 |
| | — |
| | 407 |
| | 3,733 |
| | — |
| | — |
| | — |
|
Stock-based compensation expense | | — |
| | 7,281 |
| | — |
| | — |
| | 7,281 |
| | — |
| | — |
| | — |
|
Dividends declared - noncontrolling interest of subsidiary preferred stock | | — |
| | (2,852 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,852 | ) |
Other (b) | | (117 | ) | | (1,892 | ) | | — |
| | (73 | ) | | (1,819 | ) | | — |
| | — |
| | — |
|
Balance, March 31, 2020 | | 311,863 |
| | $ | 5,055,580 |
| | $ | 95,624 |
| | $ | 194,914 |
| | $ | 2,938,670 |
| | $ | 1,667,105 |
| | $ | (136,164 | ) | | $ | 295,431 |
|
See accompanying notes to consolidated condensed financial statements.
| |
(a) | Due to the nature of the preferred stock issued by FHN and its subsidiaries, all components of Other comprehensive income/(loss) have been attributed solely to FHN as the controlling interest holder. |
| |
(b) | 2016 includes $93.5Represents shares canceled in connection with the resolution of remaining Capital Bank Financial Corporation ("CBF") dissenters' appraisal process. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2019 |
(Dollars and shares in thousands, except per share data) (unaudited) | | Common Shares | | Total | | Preferred Stock | | Common Stock | | Capital Surplus | | Undivided Profits | | Accumulated Other Comprehensive Income/(Loss) (a) | | Noncontrolling Interest |
Balance, December 31, 2018 | | 318,573 |
| | $ | 4,785,380 |
| | $ | 95,624 |
| | $ | 199,108 |
| | $ | 3,029,425 |
| | $ | 1,542,408 |
| | $ | (376,616 | ) | | $ | 295,431 |
|
Adjustment to reflect adoption of ASU 2016-02 | | — |
| | (1,011 | ) | | — |
| | — |
| | — |
| | (1,011 | ) | | — |
| | — |
|
Beginning balance, as adjusted | | 318,573 |
| | 4,784,369 |
| | 95,624 |
| | 199,108 |
| | 3,029,425 |
| | 1,541,397 |
| | (376,616 | ) | | 295,431 |
|
Net income/(loss) | | — |
| | 103,405 |
| | — |
| | — |
| | — |
| | 100,585 |
| | — |
| | 2,820 |
|
Other comprehensive income/(loss) | | — |
| | 55,465 |
| | — |
| | — |
| | — |
| | — |
| | 55,465 |
| | — |
|
Comprehensive income/(loss) | | — |
| | 158,870 |
| | — |
| | — |
| | — |
| | 100,585 |
| | 55,465 |
| | 2,820 |
|
Cash dividends declared: | | | | | | | | | | | | | | | | |
Preferred stock ($1,550 per share) | | — |
| | (1,550 | ) | | — |
| | — |
| | — |
| | (1,550 | ) | | — |
| | — |
|
Common stock ($.14 per share) | | — |
| | (44,864 | ) | | — |
| | — |
| | — |
| | (44,864 | ) | | — |
| | — |
|
Common stock repurchased (b) | | (3,594 | ) | | (53,436 | ) | | — |
| | (2,246 | ) | | (51,190 | ) | | — |
| | — |
| | — |
|
Common stock issued for: | | | | | | | | | | | | | | | | |
Stock options and restricted stock - equity awards | | 382 |
| | 520 |
| | — |
| | 239 |
| | 281 |
| | — |
| | — |
| | — |
|
Stock-based compensation expense | | — |
| | 5,432 |
| | — |
| | — |
| | 5,432 |
| | — |
| | — |
| | — |
|
Dividends declared - noncontrolling interest of subsidiary preferred stock | | — |
| | (2,820 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,820 | ) |
Balance, March 31, 2019 | | 315,361 |
| | $ | 4,846,521 |
| | $ | 95,624 |
| | $ | 197,101 |
| | $ | 2,983,948 |
| | $ | 1,595,568 |
| | $ | (321,151 | ) | | $ | 295,431 |
|
See accompanying notes to consolidated condensed financial statements.
| |
(a) | Due to the nature of the preferred stock issued by FHN and its subsidiaries, all components of Other comprehensive income/(loss) have been attributed solely to FHN as the controlling interest holder. |
| |
(b) | Includes $51.5 million repurchased under share repurchase programs. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
| | | | First Horizon National Corporation | | First Horizon National Corporation |
| | Nine months ended September 30 | | Three months ended March 31 |
(Dollars in thousands) (Unaudited) | | 2017 | | 2016 | | 2020 | | 2019 |
Operating Activities | | | | | | | | |
Net income/(loss) | | $ | 225,361 |
| | $ | 180,788 |
| | $ | 16,472 |
| | $ | 103,405 |
|
Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities: | | | | | | | | |
Provision/(provision credit) for loan losses | | (3,000 | ) | | 11,000 |
| | 145,000 |
| | 9,000 |
|
Provision/(benefit) for deferred income taxes | | (547 | ) | | 68,100 |
| | (18,600 | ) | | 7,238 |
|
Depreciation and amortization of premises and equipment | | 25,052 |
| | 24,032 |
| | 10,516 |
| | 11,400 |
|
Amortization of intangible assets | | 5,160 |
| | 3,898 |
| | 5,308 |
| | 6,216 |
|
Net other amortization and accretion | | 22,921 |
| | 19,536 |
| | 3,664 |
| | 1,257 |
|
Net (increase)/decrease in derivatives | | (14,670 | ) | | 1,330 |
| | (323,845 | ) | | (51,821 | ) |
Fair value adjustment on interest-only strips | | (107 | ) | | — |
| | 1,295 |
| | 1,258 |
|
Repurchase and foreclosure provision/(provision credit) | | (20,000 | ) | | (31,618 | ) | |
(Gains)/losses and write-downs on OREO, net | | 44 |
| | (543 | ) | | (68 | ) | | (290 | ) |
Litigation and regulatory matters | | 7,409 |
| | 25,285 |
| |
Stock-based compensation expense | | 14,971 |
| | 12,378 |
| | 7,281 |
| | 5,432 |
|
Equity securities (gains)/losses, net | | (5 | ) | | 181 |
| | (25 | ) | | (31 | ) |
Debt securities (gains)/losses, net | | (450 | ) | | (1,654 | ) | |
(Gain)/loss on extinguishment of debt | | 14,329 |
| | — |
| |
Net (gains)/losses on sale/disposal of fixed assets | | (13 | ) | | 2,519 |
| | 458 |
| | (42 | ) |
Qualified pension plan contribution | | — |
| | (165,000 | ) | |
(Gain)/loss on BOLI | | | 366 |
| | (1,032 | ) |
Loans held-for-sale: | | | | | | | | |
Purchases and originations | | (1,252,300 | ) | | (73,404 | ) | | (587,593 | ) | | (513,788 | ) |
Gross proceeds from settlements and sales | | 1,252,477 |
| | 43,653 |
| | 180,810 |
| | 135,855 |
|
(Gain)/loss due to fair value adjustments and other | | 2,485 |
| | 878 |
| | (1,129 | ) | | 19,291 |
|
Net (increase)/decrease in: | | | | | | | | |
Trading securities | | (433,897 | ) | | (441,205 | ) | | (133,755 | ) | | 192,101 |
|
Fixed income receivables | | (11,339 | ) | | (28,337 | ) | | (140,455 | ) | | (7,921 | ) |
Interest receivable | | (7,171 | ) | | (2,014 | ) | | (1,089 | ) | | (5,970 | ) |
Other assets | | (49,225 | ) | | (69,855 | ) | | (477,645 | ) | | 56,985 |
|
Net increase/(decrease) in: | | | | | | | | |
Trading liabilities | | 17,180 |
| | 136,207 |
| | (52,970 | ) | | 94,289 |
|
Fixed income payables | | (73,187 | ) | | 45,825 |
| | 41,739 |
| | 90,718 |
|
Interest payable | | 8,869 |
| | 505 |
| | (8,882 | ) | | 16,570 |
|
Other liabilities | | (35,770 | ) | | (24,795 | ) | | (66,858 | ) | | (47,631 | ) |
Total adjustments | | (530,784 | ) | | (443,098 | ) | | (1,416,477 | ) | | 19,084 |
|
Net cash provided/(used) by operating activities | | (305,423 | ) | | (262,310 | ) | | (1,400,005 | ) | | 122,489 |
|
Investing Activities | | | | | | | | |
Available-for-sale securities: | | | | | | | | |
Sales | | 3,360 |
| | 1,543 |
| | 8,703 |
| | 13,012 |
|
Maturities | | 420,136 |
| | 526,112 |
| | 224,406 |
| | 157,502 |
|
Purchases | | (426,129 | ) | | (557,216 | ) | | (213,950 | ) | | (83,512 | ) |
Held-to-maturity securities: | | | | | |
Prepayments and maturities | | 4,740 |
| | — |
| |
Premises and equipment: | | | | | | | | |
Sales | | 2,577 |
| | 9,636 |
| | 2,185 |
| | 4,080 |
|
Purchases | | (30,395 | ) | | (41,304 | ) | | (7,603 | ) | | (6,995 | ) |
Proceeds from sales of OREO | | 9,235 |
| | 22,887 |
| | 3,185 |
| | 3,791 |
|
Proceeds from BOLI | | | 1,610 |
| | 3,208 |
|
Net (increase)/decrease in: | | | | | | | | |
Loans (a) | | (586,426 | ) | | (1,895,345 | ) | |
Loans | | | (2,312,423 | ) | | (448,321 | ) |
Interests retained from securitizations classified as trading securities | | 648 |
| | 2,120 |
| | 64 |
| | 148 |
|
Interest-bearing cash | | 459,840 |
| | 383,002 |
| | (188,120 | ) | | 264,357 |
|
Cash (paid)/received for acquisition, net | | (123,971 | ) | | — |
| |
Net cash provided/(used) by investing activities | | (266,385 | ) | | (1,548,565 | ) | | (2,481,943 | ) | | (92,730 | ) |
Financing Activities | | | | | | | | |
Common stock: | | | | | | | | |
Stock options exercised | | 5,173 |
| | 18,710 |
| | 4,144 |
| | 520 |
|
Cash dividends paid | | (58,850 | ) | | (47,144 | ) | | (44,077 | ) | | (38,759 | ) |
Repurchase of shares (b) | | (5,285 | ) | | (96,801 | ) | |
Repurchase of shares (a) | | | (2,064 | ) | | (53,436 | ) |
Cancellation of common shares (b) | | | (1,892 | ) | | — |
|
Cash dividends paid - preferred stock - noncontrolling interest | | | (2,883 | ) | | (2,883 | ) |
Cash dividends paid - Series A preferred stock | | | (1,550 | ) | | (1,550 | ) |
Term borrowings: | | | | | |
Payments/maturities | | | — |
| | (1,179 | ) |
Increases in restricted and secured term borrowings | | | (3,656 | ) | | 3,120 |
|
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 6
|
| | | | | | | | |
Cash dividends paid - preferred stock - noncontrolling interest | | (8,523 | ) | | (8,523 | ) |
Cash dividends paid - Series A preferred stock | | (4,650 | ) | | (4,650 | ) |
Term borrowings: | | | | |
Issuance | | 121,184 |
| | 100 |
|
Payments/maturities | | (145,285 | ) | | (264,599 | ) |
Increases in restricted and secured term borrowings | | 29,231 |
| | — |
|
Net increase/(decrease) in: | | | | |
Deposits | | (572,621 | ) | | 1,607,412 |
|
Short-term borrowings | | 1,261,395 |
| | 732,858 |
|
Net cash provided/(used) by financing activities | | 621,769 |
| | 1,937,363 |
|
Net increase/(decrease) in cash and cash equivalents | | 49,961 |
| | 126,488 |
|
Cash and cash equivalents at beginning of period | | 1,037,794 |
| | 1,031,063 |
|
Cash and cash equivalents at end of period | | $ | 1,087,755 |
| | $ | 1,157,551 |
|
Supplemental Disclosures | | | | |
Total interest paid | | $ | 92,405 |
| | $ | 63,337 |
|
Total taxes paid | | 38,151 |
| | 11,580 |
|
Total taxes refunded | | 8,201 |
| | 3,854 |
|
Transfer from loans to OREO | | 5,564 |
| | 8,226 |
|
Certain previously reported amounts have been reclassified to agree with current presentation. |
| | | | | | | | |
Net increase/(decrease) in: | | | | |
Deposits | | 1,990,115 |
| | (220,104 | ) |
Short-term borrowings | | 1,806,967 |
| | 92,057 |
|
Net cash provided/(used) by financing activities | | 3,745,104 |
| | (222,214 | ) |
Net increase/(decrease) in cash and cash equivalents | | (136,844 | ) | | (192,455 | ) |
Cash and cash equivalents at beginning of period | | 1,266,893 |
| | 1,405,325 |
|
Cash and cash equivalents at end of period | | $ | 1,130,049 |
| | $ | 1,212,870 |
|
Supplemental Disclosures | | | | |
Total interest paid | | $ | 83,866 |
| | $ | 88,774 |
|
Total taxes paid | | 5,240 |
| | 1,008 |
|
Total taxes refunded | | 2 |
| | 27,522 |
|
Transfer from loans to OREO | | 1,116 |
| | 1,607 |
|
Transfer from loans HFS to trading securities | | 397,616 |
| | 425,808 |
|
See accompanying notes to consolidated condensed financial statements.
(a) 2019 includes $51.5 million repurchased under share repurchase programs.
| |
(a) | 2016 includes $537.4 million UPB of loans acquired from GE Capital. |
| |
(b) | 2016 includes $93.5 million repurchased under share repurchase programs. |
(b) Represents shares canceled in connection with the resolution of remaining CBF dissenters' appraisal process.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 7
Notes to the Consolidated Condensed Financial Statements (Unaudited)
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 Quarterly Report on Form 10-Q. The operating results for the interim 20172020 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 Exhibit 13Item 8 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Revenues. Revenue is recognized when the performance obligations under the terms of a contract with a customer are satisfied in an amount that reflects the consideration FHN expects to be entitled. FHN derives a significant portion of its revenues from fee-based services. Noninterest income from transaction-based fees is generally recognized immediately upon completion of the transaction. Noninterest income from service-based fees is generally recognized over the period in which FHN provides the service. Any services performed over time generally require that FHN render services each period and therefore FHN measures progress in completing these services based upon the passage of time and recognizes revenue as invoiced.
See Note 1– Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements on Form 10-K for the year ended December 31, 2019, for a discussion of FHN's key revenues.
Contract Balances. As of March 31, 2020, accounts receivable related to products and services on non-interest income were $8.4 million. For the three months ended March 31, 2020, FHN had no material impairment losses on non-interest accounts receivable and there were no material contract assets, contract liabilities or deferred contract costs recorded on the Consolidated Condensed Statements of Condition as of March 31, 2020. Credit risk is assessed on these accounts receivable each reporting period and the amount of estimated uncollectible receivables is not significant.
Transaction Price Allocated to Remaining Performance Obligations. For the three months ended March 31, 2020, revenue recognized from performance obligations related to prior periods was not material.
Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less and contracts where revenue is recognized as invoiced, is not material.
Refer to Note 12– Business Segment Information for a reconciliation of disaggregated revenue by major product line and reportable segment.
Debt Investment Securities.Debt securities that may be sold prior to maturity are classified as available-for-sale (“AFS”) and are carried at fair value. The unrealized gains and losses on debt securities AFS, including securities for which no credit impairment exists, are excluded from earnings and are reported, net of tax, as a component of other comprehensive income within shareholders’ equity and the Consolidated Condensed Statements of Comprehensive Income. Debt securities which management has the intent and ability to hold to maturity (“HTM”) are reported at amortized cost. Interest-only strips that are classified as securities AFS are valued at elected fair value. See Note 16 - Fair Value of Assets and Liabilities for additional information. Realized gains and losses (i.e., from sales) for debt investment securities are determined by the specific identification method and reported in noninterest income.
In periods subsequent to 2019, the evaluation of credit risk for HTM debt securities mirrors the process described below for loans held-for-investment. AFS debt securities are reviewed for potential credit impairment at the individual security level. The evaluation of credit risk includes consideration of third-party and government guarantees (both explicit and implicit), senior or subordinated status, credit ratings of the issuer, the effects of interest rate changes since purchase and observable market information such as issuer-specific credit spreads. Credit losses for AFS debt securities are generally recognized through establishment of an allowance for credit losses that cannot exceed the amount by which amortized cost exceeds fair value. Charge offs are recorded as reductions of the security’s amortized cost and the credit allowance. Subsequent improvements in estimated credit losses result in reduction of the credit allowance, but not beyond zero. However, if FHN has the intent to sell or if it is more-likely-than-not that it will be compelled to sell a security with an unrecognized loss, the difference between the security's carrying value and fair value is recognized
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Note 1 – Financial Information (Continued)
through earnings and a new amortized cost basis is established for the security (i.e., no allowance for credit losses is recognized).
FHN has elected to exclude accrued interest receivable (“AIR”) from the fair value and amortized cost basis on AFS debt securities when assessing whether these securities have experienced credit impairment. Additionally, FHN has elected to not measure an allowance for credit losses on AIR for AFS debt securities based on its policy to write off uncollectible interest in a timely manner, which generally occurs when delinquency reaches no more than 90 days for all security types. Any such write offs are recognized as a reduction of interest income. AIR for AFS debt securities is included within Other assets in the Consolidated Condensed Statement of Condition.
In periods prior to 2020, both AFS and HTM securities were reviewed quarterly for possible other-than-temporary impairment (“OTTI”). The review included an analysis of the facts and circumstances of each individual investment such as the degree of loss, the length of time the fair value had been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and FHN’s intent and ability to hold the security.
Declines in value judged to be other-than-temporary (“OTTI”) based on FHN’s analysis of the facts and circumstances related to an individual investment, including securities that FHN had the intent to sell, were determined by the specific identification method. For HTM debt securities, OTTI recognized was typically credit-related and was reported in noninterest income. For impaired AFS debt securities that FHN did not intend to sell and was not required to sell prior to recovery but for which credit losses existed, the OTTI recognized was allocated between the total impairment related to credit losses which was reported in noninterest income, and the impairment related to all other factors which was excluded from earnings and reported, net of tax, as a component of other comprehensive income within shareholders’ equity and the Consolidated Condensed Statements of Comprehensive Income.
Fed Funds Sold and Purchased. Fed funds sold and purchased represent unsecured overnight funding arrangements between participants in the Federal Reserve system primarily to assist banks in meeting their regulatory cash reserve requirements. Fed Funds sold are evaluated for credit risk each reporting period. Due to the short duration of each transaction and the history of no credit losses, no credit loss has been recognized.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase.FHN purchases short-term securities under agreements to resell which are accounted for as collateralized financings except where FHN does not have an agreement to sell the same or substantially the same securities before maturity at a fixed
or determinable price. All of FHN’s securities purchased under agreements to resell are recognized as collateralized financings. Securities delivered under these transactions are delivered to either the dealer custody account at the FRB or to the applicable counterparty. Securities sold under agreements to repurchase are offered to cash management customers as an automated, collateralized investment account. Securities sold under agreements to repurchase are also used by the consumer/commercial bank to obtain favorable borrowing rates on its purchased funds. All of FHN's securities sold under agreements to repurchase are secured borrowings. Collateral is valued daily and FHN may require counterparties to deposit additional securities or cash as collateral, or FHN may return cash or securities previously pledged by counterparties, or FHN may be required to post additional securities or cash as collateral, based on the contractual requirements for these transactions.
FHN’s fixed income business utilizes securities borrowing arrangements as part of its trading operations. Securities borrowing transactions generally require FHN to deposit cash with the securities lender. The amount of cash advanced is recorded within Securities purchased under agreements to resell in the Consolidated Condensed Statements of Condition. These transactions are not considered purchases and the securities borrowed are not recognized by FHN. FHN does not conduct securities lending transactions.
Securities purchased under agreements to resell and securities borrowing arrangements are evaluated for credit risk each reporting period. As presented in Note 15 - Master Netting and Similar Agreements - Repurchase, Reverse Repurchase, and Securities Borrowing Transactions, these agreements are collateralized by the related securities and collateral maintenance provisions with counterparties, including replenishment and adjustment on a transaction specific basis. This collateral includes both the securities collateral for each transaction as well as offsetting securities sold under agreements to repurchase with the same counterparty. Given the history of no credit losses and collateralized nature of these transactions, no credit loss has been recognized.
Loans. Generally, loans are stated at principal amounts outstanding, net of unearned income. Interest on loans is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs as well as premiums and discounts are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs, premiums and discounts are recognized in interest income upon early repayment of the loans. Cash collections from loans that were fully charged off prior to acquisition are recognized in noninterest income. Loan commitment fees are generally deferred and amortized on a straight-line basis over the commitment period.
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Note 1 – Financial Information (Continued)
FHN has elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis on for its held-for-investment loan portfolio. FHN has also elected to not measure an allowance for credit losses on AIR for loans held-for-investment based on its policy to write off uncollectible interest in a timely manner, which occurs when a loan is placed on nonaccrual status. Such write offs are recognized as a reduction of interest income. AIR for held-for-investment loans is included within Other assets in the Consolidated Condensed Statements of Condition.
Purchased Credit-Deteriorated Loans. Subsequent to 2019, FHN evaluates all acquired loans to determine if they have experienced a more-than-insignificant deterioration in credit quality since origination (“PCD loans”). PCD loans can be identified on either an 1) individual or 2) pooled basis when the loans share similar risk characteristics. FHN evaluates various absolute factors to assist in the identification of PCD loans, including criteria such as, existing PCD status, risk rating of special mention or lower, nonaccrual or impaired status, identification of prior TDRs, and delinquency status. FHN also utilizes relative factors to identify PCD loans such as commercial loan grade migration, expansion of borrower credit spreads, declines in external risk ratings and changes in consumer loan characteristics (e.g., FICO decline or LTV increase). In addition, factors reflective of broad economic considerations are also considered in identifying PCD loans. These include industry, collateral type, and geographic location for the borrower’s operations. Internal factors for origination of new loans that are similar to the acquired loans are also evaluated to assess loans for PCD status, including increases in required yields, necessity of borrowers’ providing additional collateral and/or guarantees and changes in acceptable loan duration. Other indicators may also be used to evaluate loans for PCD status depending on borrower-specific communications and actions, such public statements, initiation of loan modification discussions and obtaining emergency funding from alternate sources.
Upon acquisition, the expected credit losses are allocated to the purchase price of individual PCD loans to determine each individual assets amortized cost basis, typically resulting in a reduction of the discount that is accreted prospectively to interest income. At the acquisition date and prospectively, only the unpaid principal balance is incorporated within the estimation of expected credit losses for PCD loans. Otherwise, the process for estimate of expected credit losses is consistent with that discussed below. As discussed below FHN applies undiscounted cash flow methodologies for the estimation of expected credit losses, which results in the calculated amount of credit losses at acquisition that is added to the amortized cost basis of the related PCD loans to exceed the discounted value of estimated credit losses included in the loan valuation.
Purchased Credit-Impaired Loans. Prior to 2020, ASC 310-30 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” established guidance for acquired loans that exhibited deterioration of credit quality between origination and the time of acquisition and for which the timely collection of the interest and principal was not reasonably assured (“PCI loans”). PCI loans were initially recorded at fair value which was estimated by discounting expected cash flows at acquisition date. The expected cash flows included all contractually expected amounts (including interest) and incorporated an estimate for future expected credit losses, pre-payment assumptions, and yield requirement for a market participant, among other things. To the extent possible, certain PCI loans were aggregated into pools with composite interest rate and cash flows expected to be collected for the pool. Aggregation into loan pools was based upon common risk characteristics that include similar credit risk or risk ratings, and one or more predominant risk characteristics. Each PCI pool was accounted for as a single unit.
Accretable yield was initially established at acquisition and is the excess of cash flows expected at acquisition over the initial investment in the loan and was recognized in interest income over the remaining life of the loan, or pool of loans. Nonaccretable difference was initially established at acquisition and was the difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition. FHN estimated expected cash flows for PCI loans on a quarterly basis. Increases in expected cash flows from the last measurement resulted in reversal of any nonaccretable difference (or allowance for loan losses to the extent any has previously been recorded) with a prospective positive impact on interest income. Decreases to the expected cash flows resulted in an increase in the allowance for loan losses through provision expense.
FHN did not report PCI loans as nonperforming loans due to the accretion of interest income. Additionally, PCI loans that have been pooled and subsequently modified were not reported as troubled debt restructurings since the pool was the unit of measurement.
Subsequent to 2019, PCI loans have transitioned to purchased-credit-deteriorated status and are accounted for as discussed above.
Allowance for Loan Losses. The nature of the process by which FHN determines the appropriate ALLL requires the exercise of considerable judgment. See Note 5 - Allowance for Loan Losses for a discussion of FHN’s ALLL methodology and a description of the models utilized in the estimation process for the commercial and consumer loan portfolios. The discussion herein reflects periods before and after implementation of a change in credit loss estimation processes that was effective January 1, 2020.
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Note 1 – Financial Information (Continued)
Future adjustments to the ALLL may be necessary if economic or other conditions differ substantially from the assumptions used in making the estimates or, if required by regulators, based upon information at the time of their examinations or upon future regulatory guidance. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels vary from previous estimates.
Subsequent to 2019
The ALLL is maintained at a level that management determines is sufficient to absorb current expected credit losses (“CECL”) in the loan portfolio. Management uses analytical models to estimate expected credit losses in the loan portfolio as of the balance sheet date. The models are carefully reviewed to identify trends that may not be captured in the modeled loss estimates. Management uses qualitative adjustments for those items not reflected in the modeled loss information such as recent changes from the macroeconomic forecasts utilized in model calculations, results of additional stressed modeling scenarios, observed and/or expected changes affecting borrowers in specific industries or geographic areas, exposure to large lending relationships and expected recoveries of prior charge offs.
The ALLL is increased by the provision for loan losses and is decreased by loan charge-offs. The ALLL is determined in accordance with ASC 326-20 "Financial Instruments - Credit Losses.” Credit loss estimation is based on the amortized cost of Loans, net, which includes the following:
1. Unpaid principal balance for originated assets or acquisition price for purchased assets
2. Accrued interest (see elections discussed previously)
3. Accretion or amortization of premium, discount, and net deferred fees or costs
4. Collection of cash
5. Charge-offs
6. Foreign exchange adjustments (none for FHN)
7. Fair value hedge accounting adjustments (none for FHN)
Premiums, discounts and net deferred origination costs/fees affect the calculated amount of expected credit losses but they are not considered when determining the amount of expected credit losses that are recorded.
Under CECL, loans must be pooled when they share similar risk characteristics with other loans. Loans that do not share similar risk characteristics are evaluated individually. Expected credit loss is estimated for the remaining life of loan(s), which is limited to the remaining contractual term(s), adjusted for prepayment estimates, which are included as separate inputs into modeled loss estimates. Renewals and extensions are not anticipated unless they are included in existing loan documentation
and are not unconditionally cancellable by the lender. However, losses are estimated over the estimated remaining life of reasonably expected TDRs which can extend beyond the current remaining contractual term.
Estimates of expected credit losses incorporate consideration of available information that is relevant to assessing the collectability of future cash flows. This includes internal and external information relating to past events, current conditions and reasonable and supportable forecasts of future conditions. FHN utilizes internal historical loss information as the initial point for estimating expected credit losses. Given the duration of historical information available, FHN considers its internal loss history to fully incorporate the effects of prior credit cycles. The historical loss information may be adjusted in situations where current loan characteristics (e.g., underwriting criteria) differ from those in existence at the time the historical losses occurred. Historical loss information is also adjusted for differences in economic conditions, macroeconomic forecasts and other factors management considers relevant over a period extending beyond the measurement date which is considered reasonable and supportable. This reasonable and supportable period is followed by a reversion period after which loss estimates are based on long-term historical loss averages.
FHN generally measures expected credit losses using undiscounted cash flow methodologies. Credit enhancements (e.g., guarantors) are considered in the estimation of uncollectible cash flows. Estimation of expected credit losses for loan agreements involving collateral maintenance provisions include consideration of the value of the collateral and replenishment requirements, with the maximum loss limited to the difference between the amortized cost of the loan and the fair value of the collateral. Expected credit losses for loans for which foreclosure is probable are measured at the fair value of collateral, less estimated costs to sell when disposition through sale is anticipated. Additionally, certain loans are valued at the fair value of collateral when repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty. Expected credit losses for TDRs are measured in accordance with ASC 310-40, which generally requires a discounted cash flow methodology, whereby the loans are measured based on the present value of expected future payments discounted at the loan’s original effective interest rate.
Expected recoveries of previously charged-off amounts are also included as a qualitative adjustment in the estimation of expected credit losses, which reduces the amount of the allowance recognized.Estimates of recoveries on previously charged-off assets included in the valuation account do not exceed the aggregate of amounts previously written off and expected to be written off.
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Note 1 – Financial Information (Continued)
Since CECL requires estimation of credit for the entire expected life of loans, loss estimates are highly sensitive to changes in macroeconomic forecasts, especially when those forecasts change dramatically in short time periods. Additionally, under CECL credit loss estimates are more likely to increase rapidly in periods of loan growth.
Expected credit losses for unfunded commitments are estimated for periods where the commitment is not unconditionally cancellable by FHN. The measurement of expected credit losses for unfunded commitments mirrors that of loans with the additional estimate of future draw rates (timing and amount).
Prior to 2020
The ALLL was maintained at a level that management determined was sufficient to absorb estimated probable incurred losses in the loan portfolio. The ALLL was increased by the provision for loan losses and loan recoveries and was decreased by loan charge-offs. The ALLL was determined in accordance with ASC 450-20-50 "Contingencies - Accruals for Loss Contingencies" and was composed of reserves for commercial loans evaluated based on pools of credit graded loans and reserves for pools of smaller-balance homogeneous consumer and commercial loans. The reserve factors applied to these pools were an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics. Additionally, the ALLL included specific reserves established in accordance with ASC 310-10-35 for loans determined by management to be individually impaired as well as reserves associated with PCI loans. Management used analytical models to estimate probable incurred losses in the loan portfolio as of the balance sheet date. The models, which were primarily driven by historical losses, were carefully reviewed to identify trends that may not have been captured in the historical loss factors used in the models. Management used qualitative adjustments for those items not yet captured in the models like then-current events, recent trends in the portfolio, current underwriting guidelines, and local and macroeconomic trends, among other things.
Key components of the estimation process were as follows: (1) commercial loans determined by management to be individually impaired loans were evaluated individually and specific reserves were determined based on the difference between the outstanding loan amount and the estimated net realizable value of the collateral (if collateral dependent), the present value of expected future cash flows or by observable market prices; (2) individual commercial loans not considered to be individually impaired were segmented based on similar credit risk characteristics and evaluated on a pool basis; (3) reserve rates for the commercial segment were calculated based on historical net charge-offs and were subject to adjustment by management to reflect current events, trends, and conditions (including economic considerations and trends);
(4) management’s estimate of probable incurred losses reflected the reserve rates applied against the balance of loans in the commercial segment of the loan portfolio; (5) consumer loans were generally segmented based on loan type; (6) reserve amounts for each consumer portfolio segment were calculated using analytical models based on delinquency trends and net loss experience and were subject to adjustment by management to reflect current events, trends, and conditions (including economic considerations and trends); and (7) the reserve amount for each consumer portfolio segment reflected management’s estimate of probable incurred losses in the consumer segment of the loan portfolio.
Impairment related to individually impaired loans was measured in accordance with ASC 310-10. All commercial portfolio segments, commercial TDRs and other individually impaired commercial loans were 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 net realizable value (collateral value less estimated costs to sell). Impaired loans also included consumer TDRs.
Summary of Accounting Changes. Effective January 1, 2017, FHN adoptedIn June 2016, the provisionsFASB issued ASU 2016-13, “Measurement of Accounting Standards Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting,Credit Losses on Financial Instruments,” which makes several revisionsrevises the measurement and recognition of credit losses for assets measured at amortized cost (e.g., HTM loans and debt securities) and AFS debt securities. Under ASU 2016-13, for assets measured at amortized cost, the current expected credit loss (“CECL”) is measured as the difference between amortized cost and the net amount expected to equity compensation accounting.be collected. This represents a departure from prior GAAP as the “incurred loss” methodology for recognizing credit losses delayed recognition until it was probable a loss had been incurred. Under CECL the new guidance all excess tax benefits and deficiencies that occur when an award vests, is exercised, or expires are recognized in income tax expense as discrete period items. Previously, these transactions were typically recorded directly within equity. Consistent with this change, excess tax benefits and deficiencies are no longer included within estimated proceeds when performing the treasury stock method for calculationfull amount of diluted earnings per share. Excess tax benefits are alsoexpected credit losses will be recognized at the time an awardof loan origination. The measurement of current expected credit losses is exercised or vests comparedbased on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Additionally, current disclosures of credit quality indicators in relation to the previous requirementamortized cost of financing receivables are further disaggregated by year of origination. ASU 2016-13 leaves the methodology for measuring credit losses on AFS debt securities largely unchanged, with the maximum credit loss representing the difference between amortized cost and fair value. However, such credit losses are recognized through an allowance for credit losses, which permits recovery of previously recognized credit losses if circumstances change.
ASU 2016-13 also revises the recognition of credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since
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Note 1 – Financial Information (Continued)
origination (“PCD assets”). For PCD assets, the initial allowance for credit losses is added to delay recognition until the deduction reduces taxes payable. The presentation of excess tax benefitspurchase price. Only subsequent changes in the statementallowance for credit losses are recorded as a credit loss expense for PCD assets. Interest income for PCD assets is recognized based on the effective interest rate, excluding the discount embedded in the purchase price that is attributable to the acquirer’s assessment of credit losses at acquisition. Previously, credit losses for purchased credit-impaired assets were included in the initial basis of the assets with subsequent declines in credit resulting in expense while subsequent improvements in credit were reflected as an increase in the future yield from the assets. For non-PCD assets, expected credit losses are recognized through earnings upon acquisition and the entire premium or discount accreted to interest income over the remaining life of the loan. Credit allowances for acquired non-PCD assets are established through immediate recognition of credit loss expense (similar to originated loans) and do not consider purchase discounts related to estimated credit losses.
The provisions of ASU 2016-13 were generally adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in the year of adoption. Prospective implementation is required for debt securities for which an other-than-temporary-impairment (“OTTI”) had been previously recognized. Amounts previously recognized in accumulated other comprehensive income (“AOCI”) as of the date of adoption that relate to improvements in cash flows shiftedexpected to be collected continue to be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption are recorded in earnings when received. A prospective transition approach was used for existing PCD assets where, upon adoption, the amortized cost basis was increased to offset the initial recognition of the allowance for credit losses. Thus, an operating activity fromentity was not be required to reassess its purchased financial assets that existed as of the prior classificationdate of adoption to determine whether they would have met at acquisition the new criteria of more-than-insignificant credit deterioration since origination. An entity accretes the remaining noncredit discount (based on the revised amortized cost basis) into interest income at the effective interest rate at the adoption date.
ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. FHN’s most significant implementation activities included review of loan portfolio segments and classes, identification and evaluation of collateral dependent loans and loans secured by collateral replenishment arrangements, selection of measurement methodologies and related model development, data accumulation and verification, development of loan life estimates, identification of reasonable and supportable forecast periods, selection of time lines and methods for
reversion to unadjusted historical information, multiple preliminary analysis including parallel runs against existing loan loss estimation processes, and design and evaluation of internal controls over the new estimation processes. FHN utilizes undiscounted cash flow methods for loans except for troubled debt restructurings, which require use of discounted cash flow methodologies.
A significant portion of the adoption impact for ASU 2016-13 relates to increased reserves within the consumer portfolios, given the longer contractual maturities associated with many of these products as well as increased reserves for acquired loans that previously considered purchase discounts. Based on its implementation efforts, FHN recorded the following adoption adjustments effective January 1, 2020.
|
| | | | | | |
(Dollars in thousands) | | January 1, 2020 |
|
Loans, net of unearned income (a) | | $ | 2,980 |
|
Allowance for loan losses | | (106,394 | ) |
Other assets (deferred taxes) | | 31,330 |
|
Total assets | | $ | (72,084 | ) |
| | | | |
Other liabilities (unfunded commitments) | | $ | 23,973 |
|
Undivided profits | | (96,057 | ) |
Total liabilities and equity | | $ | (72,084 | ) |
(a) The effect on loans represents the increase in amortized cost for recognition of the allowance for credit losses on PCD loans.
FHN also assessed several asset classes other than loans that are within the scope of CECL and determined that the adoption effects for the change in measurement of credit risk were minimal for these classes. This includes Fed funds sold which have no history of credit losses due to their short (typically overnight) duration and counterparty risk assessment processes. This also includes securities borrowed and securities purchased under agreements to resell which have collateral maintenance agreements that incorporate master netting provisions resulting in minimal uncollateralized positions as of any date as evidenced by the disclosures provided in Note 15 - Master Netting and Similar Agreements-Repurchase, Reverse Repurchase, and Securities Borrowing Transactions. Additionally, FHN also evaluated the composition of its AFS securities and determined that the changes in ASU 2016-13 did not have an effect on the current portfolio.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which provides an election to either 1) not measure or 2) measure separately an allowance for credit losses for accrued interest receivable (“AIR"). Entities electing to not measure an allowance for AIR must write off uncollectible
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Note 1 – Financial Information (Continued)
interest in a timely manner. Additionally, an election is provided for the write off of uncollectible interest to be recorded either as a financing activity.
ASU 2016-09 also provides an accounting policy election to recognize forfeituresreversal of awards as they occur when estimating stock-based compensation expense rather thaninterest income or a charge against the previous requirement to estimate forfeitures from inception. Further, ASU 2016-09 permits employers to use a net-settlement feature to withhold taxes on equity compensation awards up to the maximum statutory tax rate without affecting the equity classification of the award. Under previous guidance, withholding of equity awards in excess of the minimum statutory requirement resulted in liability classificationallowance for the entire award. The related cash remittance by the employer for employee taxes is treated as a financing activity in the statement of cash flows. Transition to the new guidance was accomplished throughcredit losses or a combination of retrospective (cash flows)both. Disclosures are required depending upon which elections are made.
ASU 2019-04 also clarifies that when loans and securities are transferred between balance sheet categories (e.g., cumulative-effect adjustmentloans from held-for-investment to equity (forfeitures)held-for-sale or securities from held-to-maturity to available-for-sale) the associated allowance for credit losses should be reversed to income and prospective methodologies (tax windfallsaccounting follows the requirements for the new classification. Further, ASU 2019-04 clarifies that recoveries should be incorporated within the estimation of the allowance for credit losses. Expected recoveries should not exceed the aggregate amount of prior write offs and shortfalls).expected future write offs. The inclusion of expected recoveries in the measurement of expected credit losses may result in a negative credit allowance in certain circumstances. Additionally, for collateral dependent financial assets, the allowance for credit losses that is added to the amortized cost basis should not exceed amounts previously written off.
ASU 2019-04 also makes several changes when a discounted cash flow approach is used to measure expected credit losses. ASU 2019-04 removes ASU 2016-03’s prohibition of using projections of future interest rate environments when using a discounted cash flow method to measure expected credit losses on variable-rate financial instruments. If an entity uses projections or expectations of future interest rate environments in estimating expected cash flows, the same assumptions should be used in determining the effective interest rate used to discount those expected cash flows. The effective interest rate should also be adjusted to consider the effects of adoptingexpected prepayments on the timing of expected future cash flows. ASU 2016-09 have2019-04 provides an election to adjust the effective interest rate used in discounting expected cash flows to isolate credit risk in measuring the allowance for credit losses. Further, the discount rate should not be adjusted for subsequent changes in expected prepayments if a financial asset is restructured in a troubled debt restructuring.
Related to collateral-dependent financial assets, ASU 2019-04 requires inclusion of estimated costs to sell in the measurement of expected credit losses in situations where the entity intends to sell rather than operate the collateral. Additionally, the estimated costs to sell should be undiscounted when the entity intends to sell rather than operate the collateral.
Finally, ASU 2019-04 specifies that contractual renewal or extension options, except those treated as derivatives, should be included in the determination of the contractual term for a financial asset when included in the original or
modified contract as of the reporting date if they are not unconditionally cancellable by the entity.
The effective date and transition requirements for these components of ASU 2019-04 are consistent with the requirements for ASU 2016-13 and FHN incorporated these changes and revisions within its implementation efforts. Based on its previous existing practices for the timely write off uncollectible AIR, FHN elected to not measure an allowance for credit losses for AIR and to continue recognition of related write offs as a reversal of interest income.
In May 2019, the FASB issued ASU 2019-05, “Financial Instruments - Credit Losses, Targeted Transition Relief,” which provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis that are in the scope of ASU 2016-13, applied on an instrument-by-instrument basis. The fair value option election does not apply to HTM debt securities. The effective date and transition requirements for ASU 2019-05 are consistent with the requirements for ASU 2016-13. FHN did not elect to apply the fair value option to any asset classes that are in scope for CECL.
In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses” which clarifies that expected recoveries should be included in the amortized cost basis previously written off or expected to be written off in the valuation allowance for PCD assets. ASU 2019-11 also clarifies that recoveries or expected recoveries of the unamortized noncredit discount or premium should not be included in the allowance for credit losses. ASU 2019-11 provides specific transition relief for existing troubled debt restructurings and extends the disclosure relief of ASU 2019-04 for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis. Related to the assessment of credit risk for collateralized assets, ASU 2019-11 indicates that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient of ASU 2016-13 while also requiring an estimation of expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset.
The effective date and transition requirements for ASU 2019-11 are consistent with the requirements for ASU 2016-13 and FHN incorporated these changes and revisions within its implementation efforts and the effects are embedded within the adoption effects of ASU 2016-13. Consistent with non-PCD assets, the effect of including recoveries and expected recoveries within the measurement of expected credit losses for PCD assets may result in a negative credit allowance in certain circumstances.
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Note 1 – Financial Information (Continued)
On March 22, 2020, The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau issued guidance (the “Interagency Guidance”) that interprets, but does not suspend, ASC 310-40 related to the identification of troubled debt restructurings (“TDRs”). Also on that day, the FASB issued a statement indicating that the Interagency Guidance had been significant.developed in consultation with the staff of the FASB who concurred in the approach.
Effective JanuaryThe Interagency Guidance indicates that a lender can conclude that a borrower is not experiencing financial difficulty if either 1) short-term (e.g., six months) modifications are made in response to the economic effects of the Coronavirus disease 2019 (“COVID-19”) pandemic, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented, or 2) the modification or deferral program is mandated by the federal government or a state government. Accordingly, any loan modification made in response to COVID-19 pandemic that meets either of these practical expedients would not be considered a TDR because the borrower is not experiencing financial difficulty. Consistent with this perspective, financial institutions are generally not expected to designate loans with deferrals granted due to COVID-19 as past due or nonaccrual because of a deferral.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides relief from certain requirements under U.S. GAAP. Section 4013 of the CARES Act provides entities optional temporary relief from the accounting and disclosure requirements for troubled debt restructurings (TDRs) under ASC 310-40 in certain situations. Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if 1) the borrower was not more than 30 days past due as of December 31, 2019, and 2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. The CARES provisions apply to loan modifications relating to COVID-19 that are made between March 1, 2017, FHN early adopted2020 and the earlier of December 31, 2020 or 60 days after the national emergency related to COVID-19 ends.
On April 3, 2020, the Chief Accountant of the SEC issued a statement indicating that the staff would not object to the conclusion that elective application of the provisions of ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” which requires recognitionCARES Act are in accordance with GAAP for the periods that such elections are available.
On April 7, 2020, revised Interagency Guidance was issued to reflect the interaction of the income tax consequences of an intra-entity transfer of an asset other than inventory whenCARES Act provisions and the transfer occurs. Therefore, ASU 2016-16 reversesInteragency Guidance, clarifying that the previous requirement to delay recognitionCARES Act guidance can be applied for regulatory purposes. Loan modifications outside the scope of the tax consequencesCARES Act and organizations that elect to not apply the CARES Act guidance should continue to apply ASC 310-40 as interpreted by the Interagency Guidance.
FHN has evaluated the provisions of these transactions until the associated assetsCARES Act and the Interagency Guidance related to loan modification programs instituted as a result of the COVID-19 pandemic. FHN’s programs involve the deferral of principal and interest payments, fee waivers and extensions for shorter terms (i.e., 6 months or less) or in response to government modification requirements which are sold to an outside party. Adoptionconsistent with the terms of ASU 2016-16 did not have a significant effect on FHN.the Interagency Guidance. Depending upon the duration and severity of the economic effects of the COVID-19 pandemic, additional loan modification programs may be implemented in the future which will be separately evaluated under the CARES Act and the Interagency Guidance.
Accounting Changes Issued but Not Currently Effective
In May 2014,March 2020, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 does not change revenue recognition2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which provides several optional expedients and exceptions to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial assets.reporting. The core principleprovisions of ASU 2014-09 is2020-04 primarily affect 1) contract modifications (e.g., loans, leases, debt, and derivatives) made in anticipation that a reference rate (e.g., LIBOR) will be discontinued and 2) the application of hedge accounting for existing relationships affected by those modifications. The provisions of ASU 2020-04 are effective upon release and apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by ASU 2020-04 do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity should recognize revenue to depicthas elected certain optional expedients for and that are retained through the transferend of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchangehedging relationship. FHN has been identifying contracts affected by reference rate reform and developing modification plans for those goods or services. This is accomplished through a five-step recognition framework involving 1) the identification of contracts with customers, 2) identification of performance obligations, 3) determination of the transaction price, 4) allocation of the transaction price to the performance obligations and 5) recognition of revenue as performance obligations are satisfied. Additionally, qualitative and quantitative information is required for disclosure regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In February 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations,” which provides additional guidance on whether an entity should recognize revenue on a gross or net basis, based on which party controls the specified good or service before that good or service is transferred to a customer. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which clarifies the original guidance included in ASU 2014-09 for identification of the goods or services provided to customers and enhances the implementation guidance for licensing arrangements. ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” was issued in May 2016 to provide additional guidance for the implementation and application of ASU 2014-09. “Technical Corrections and Improvements” ASU 2016-20 was issued in December 2016 and
Note 1 – Financial Information (Continued)
provides further guidance on certain issues. These ASUs are effective in annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Transition to the new requirements may be made by retroactively revising prior financial statements (with certain practical expedients permitted) or by a cumulative effect through retained earnings. If the latter option is selected, additional disclosures are required for comparability. FHN is evaluating their effects on its revenue recognition practices. Currently,contracts. FHN anticipates that it will elect to adoptutilize the provisions of the revenue recognition standards through a cumulative effect to retained earnings with comparability disclosuresoptional expedients and exceptions provided throughout 2018. Based on reviews of its various revenues that are within the scope ofby ASU 2014-09, FHN has not identified a significant change2020-04 in it's revenue recognition practices. However, FHN's implementation efforts are ongoing and additional information may change this assessment.
In February 2017, the FASB issued ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” which clarifies the meaning and application of the term in substance nonfinancial asset in transactions involving both financial and nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract are concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of revenue recognition guidance for nonfinancial assets. ASU 2017-05 also clarifies that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it with the amount of revenue recognized based on the allocation guidance provided in ASU 2014-09. ASU 2017-05 also requires an entity to derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when it 1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Topic 810 and 2) transfers control of the asset in accordance with the provisions of ASU 2014-09. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset, it is required to measure any noncontrolling interest it receives (or retains) at fair value. ASU 2017-05 has the same effective date and transition provisions as ASU 2014-09 and the two standards must be adopted simultaneously although the transition methods may be different. FHN is evaluating the effects of ASU 2017-05 on its revenue recognition practices. Currently, FHN anticipates that it will elect to adopt the provisions of ASU 2017-05 through a cumulative effect to retained earnings with comparability disclosures provided throughout 2018.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 makes several revisions to thesituations where they mitigate potential accounting presentation and disclosure for financial instruments. Equity investments (except those accounted for under the equity method, those that result in consolidation of the investee, and those held by entities subject to specialized industry accounting which already apply fair value through earnings) are required to be measured at fair value with changes in fair value recognized in net income. This excludes FRB and FHLB stock holdings which are specifically exempted from the provisions of ASU 2016-01. An entity may elect to measure equity investmentsoutcomes that do not have readily determinable market values at cost minus impairment, if any, plusfaithfully represent management’s intent or minus changes resulting from observable price changes in orderly transactions for the identical or similar instruments from the same issuer. ASU 2016-01 also requires a qualitative impairment review for equity investments without readily determinable fair values, with measurement at fair value required if impairmentrisk management activities which is determined to exist. For liabilities for which fair value has been elected, ASU 2016-01 revises current accounting to record the portion of fair value changes resulting from instrument-specific credit risk within other comprehensive income rather than earnings. FHN has not elected fair value accounting for any existing financial liabilities. Additionally, ASU 2016-01 clarifies that the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be assessed in combination with all other deferred tax assets rather than being assessed in isolation. ASU 2016-01 also makes several changes to existing fair value presentation and disclosure requirements, including a provision that all disclosures must use an exit price concept in the determination of fair value. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Transition will be through a cumulative effect adjustment to retained earnings for equity investments with readily determinable fair values. Equity investments without readily determinable fair values, for which the accounting election is made, will have any initial fair value marks recorded through earnings prospectively after adoption.
Upon adoption, FHN will reclassify all equity investments out of available-for-sale securities, leaving only debt securities within this classification. FHN has evaluated the nature of its current equity investments and determined that substantially all qualify for the election available to assets without readily determinable fair values, including its holdings of Visa Class B shares. Accordingly, FHN intends to apply this election and any fair value marks for these investments will be recognized through earnings on a prospective basis subsequent to adoption. FHN continues to evaluate the appropriate characteristics of “similar” instruments as well as related valuation inputs and methodologies for its equity investments without readily determinable fair values. The requirements of ASU 2016-01 related to assessment of deferred tax assets and disclosure of the fair value of financial instruments will not have a significant effect on FHN because its current accounting and disclosure practices conform to the requirements of ASU 2016-01. FHN also continues to evaluate the impact of ASU 2016-01 on other aspects of its current accounting and disclosure practices.
Note 1 – Financial Information (Continued)
In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires a lessee to recognize in its statement of condition a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 leaves lessor accounting largely unchanged from prior standards. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. All other leases must be classified as financing or operating leases which depends on the relationship of the lessee’s rights to the economic value of the leased asset. For finance leases, interest on the lease liability is recognized separately from amortization of the right-of-use asset in earnings, resulting in higher expense in the earlier portion of the lease term. For operating leases, a single lease cost is calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.
In transition to ASU 2016-02, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply, which would result in continuing to account for leases that commence before the effective date in accordance with previous requirements (unless the lease is modified) except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous requirements. ASU 2016-02 also requires expanded qualitative and quantitative disclosures to assess the amount, timing, and uncertainty of cash flows arising from lease arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. FHN is evaluating the impact of ASU 2016-02 on its current accounting and disclosure practices.
In March 2016, the FASB issued ASU 2016-04, “Recognition of Breakage of Certain Prepaid Stored-Value Products,” which indicates that liabilities related to the sale of prepaid stored-value products are considered financial liabilities and should have a breakage estimate applied for estimated unused funds. ASU 2016-04 does not apply to stored-value products that can only be redeemed for cash, are subject to escheatment or are linked to a segregated bank account. ASU 2016-04 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. FHN is evaluating the impact of ASU 2016-04 on its current accounting and disclosure practices.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which revises the measurement and recognition of credit losses for assets measured at amortized cost (e.g., held-to-maturity (“HTM”) loans and debt securities) and available-for-sale (“AFS”) debt securities. Under ASU 2016-13, for assets measured at amortized cost, the current expected credit loss (“CECL”) is measured as the difference between amortized cost and the net amount expected to be collected. This represents a departure from existing GAAP as the “incurred loss” methodology for recognizing credit losses delays recognition until it is probable a loss has been incurred. The measurement of current expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Additionally, current disclosures of credit quality indicators in relation to the amortized cost of financing receivables will be further disaggregated by year of origination. ASU 2016-13 leaves the methodology for measuring credit losses on AFS debt securities largely unchanged, with the maximum credit loss representing the difference between amortized cost and fair value. However, such credit losses will be recognized through an allowance for credit losses, which permits recovery of previously recognized credit losses if circumstances change.
ASU 2016-13 also revises the recognition of credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”). For PCD assets, the initial allowance for credit losses is added to the purchase price. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for PCD assets. Interest income for PCD assets will be recognized based on the effective interest rate, excluding the discount embedded in the purchase price that is attributable to the acquirer’s assessment of credit losses at acquisition. Currently, credit losses for purchased credit-impaired assets are included in the initial basis of the assets with subsequent declines in credit resulting in expense while subsequent improvements in credit are reflected as an increase in the future yield from the assets.
The provisions of ASU 2016-13 will be generally adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in the year of adoption. Prospective implementation is required for debt securities for which an other-than-temporary-impairment (“OTTI”) had been previously recognized. Amounts previously recognized in accumulated other comprehensive income (“AOCI”) as of the date of adoption that relate to improvements in cash flows expected to be collected will continue to be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption will be recorded in earnings when received. A prospective transition approach will be used for existing PCD assets where, upon adoption, the amortized cost basis
Note 1 – Financial Information (Continued)
will be adjusted to reflect the addition of the allowance for credit losses. Thus, an entity will not be required to reassess its purchased financial assets that exist as of the date of adoption to determine whether they would have met at acquisition the new criteria of more-than-insignificant credit deterioration since origination. An entity will accrete the remaining noncredit discount (based on the revised amortized cost basis) into interest income at the effective interest rate at the adoption date.
ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in fiscal years beginning after December 15, 2018. FHN continues to evaluate the impact of ASU 2016-13. FHN has met with industry experts, initiated training for key employees associated with the new standard, and defined an initial approach that it is currently testing. Once testing is completed, FHN will then begin to develop the formal models and processes that will be required in the implementation of the new standard.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies multiple cash flow presentation issues including providing guidance as to classification on the cash flow statement for certain cash receipts and cash payments where diversity in practice exists. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The provisions of ASU 2016-15 will be applied retroactively and will result in proceeds from bank-owned life insurance (“BOLI”) being classified as an investing activity rather than their prior classification as an operating activity.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” which requires the disaggregation of the service cost component from the other components of net benefit cost for pension and postretirement plans. Service cost must be included in the same income statement line item as other compensation-related expenses. All other components of net benefit cost are required to be presented in the income statement separately from the service cost component, with disclosure of the line items where these amounts are recorded. The presentation requirements of ASU 2017-07 must be applied retrospectively and adoption is required for annual periods beginning after December 15, 2017, including interim periods within those annual periods. FHN’s disclosures for pension and postretirement costs provide details of the service cost and all other components for expenses recognized for its applicable benefit plans. These amounts are currently included in Employee compensation, incentives, and benefits expense in the Consolidated Condensed Statements of Income. Upon adoption of ASU 2017-07 FHN will reclassify the expense components other than service cost into All other expense and revise its disclosures accordingly. The amounts to be reclassified are presented in Note 11—Pension, Savings, and Other Employee Benefits in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 and in Note 18—Pension, Savings, and Other Employee Benefits in Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.
In March 2017, the FASB issued ASU 2017-08, “Premium Amortization on Purchased Callable Debt Securities” which shortens the amortization period for securities that have explicit, noncontingent call features that are callable at fixed prices and on preset dates. In contrast to the current requirement for premium amortization to extend to the contractual maturity date, ASU 2017-08 requires the premium to be amortized to the earliest call date. ASU 2017-08 does not change the amortization of discounts, which will continue to be amortized to maturity. The new guidance does not apply to debt securities where the prepayment date is not preset or the price is not known in advance, which includes debt securities that qualify for amortization based on estimated prepayment rates. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted. Transition is accomplished through a cumulative-effect adjustment directly to retained earnings as of the beginning of the year of adoption. Based upon the current composition of its debt securities portfolios, FHN does not anticipate a significant effect upon adoption.
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities” which revises the financial reporting for hedging relationships through changes to both the designation and measurement requirements for qualifying hedge relationships and the presentation of hedge results. ASU 2017-12 expands permissible risk component hedging strategies, including the designation of a contractually specified interest rate (e.g., a bank’s prime rate) in hedges of cash flows from variable rate financial instruments. Additionally, ASU 2017-12 makes significant revisions to fair value hedging activities, including the ability to measure the fair value changes for a hedged item solely for changes in the benchmark interest rate, permitting partial-term hedges, limiting consideration of prepayment risk for hedged debt instruments solely to the effects of changes in the benchmark interest rate and allowing for certain hedging strategies to be applied to closed portfolios of prepayable debt instruments. ASU 2017-12 also provides elections for the exclusion of certain portions of a hedging instrument’s change in fair value from the assessment of hedge effectiveness. If elected, the fair value changes of these excluded components may be recognized immediately or recorded into other comprehensive income with recycling into earnings using a rational and systematic methodology over the life of the hedging instrument.
Note 1 – Financial Information (Continued)
Under ASU 2017-12 some of the documentation requirements for hedge accounting relationships are relaxed, but the highly effective threshold has been retained. Hedge designation documentation and a prospective qualitative assessment are still required at hedge inception, but the initial quantitative analysis may be delayed until the end of the quarter the hedge is commenced. If certain criteria are met, an election can be made to perform future effectiveness assessments using a purely qualitative methodology. ASU 2017-12 also revises the income statement presentation requirements for hedging activities. For fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of effectiveness is recorded to the same income statement line item used to present the earnings effect of the hedged item. For cash flow hedges, the entire fair value change of the hedging instrument that is included in the assessment of hedge effectiveness is initially recorded in other comprehensive income and later recycled into earnings as the hedged transaction(s) affect net income with the income statement effects recorded in the same financial statement line item used to present the earnings effect of the hedged item.
ASU 2017-12 also makes revisions to the current disclosure requirements for hedging activities to reflect the presentation of hedging results consistent with the changes to income statement classification and to improve the disclosurepurpose of the hedging results on the balance sheet. ASU 2017-12 is effective for fiscal years beginning after Decemberstandard.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 15 2018 with early adoption permitted in any period after issuance. Adoption for all existing hedging relationships is performed through a cumulative effect adjustment to the applicable balance sheet accounts with an offset to retained earnings as of the beginning of the fiscal year.
FHN is evaluating the effects of adopting ASU 2017-12 on its current and potential future hedging relationships. Currently, FHN anticipates early adoption in the first quarter of 2018. Upon adoption of ASU 2017-12, FHN will prospectively record components of hedging results for its fair value and cash flow hedges previously recognized in other expense within either interest income or interest expense. Additionally, FHN will make cumulative effect adjustments to the hedged items, accumulated other comprehensive income and retained earnings as of the beginning of 2018. The magnitude of the cumulative effect adjustments and prospective effects are expected to be insignificant for FHN’s existing hedge relationships.
Note 2 – Acquisitions and Divestitures
On MayNovember 4, 2017,2019, FHN and Capital Bank Financial Corp.IBERIABANK Corporation (“Capital Bank” or "CBF"IBKC”) announced that they had entered into an agreement and plan of merger.merger under which IBKC will merge with FHN in a merger-of-equals transaction. IBKC, headquartered in Lafayette, Louisiana, has 319 offices in 12 states, mostly in the southern and southeastern U.S., and has reported $32.2 billion of total assets, $24.5 billion in loans, and $25.5 billion in deposits, at March 31, 2020. IBKC‘s common stock is listed on The NASDAQ Stock Market, LLC under the symbol IBKC. Under the merger agreement, each share of IBKC common stock will be converted into 4.584 shares of FHN common
stock. After closing, FHN expects IBKC common shares will be converted into approximately 44 percent of the then-outstanding shares of FHN common stock. The merger agreement requires FHN to expand its board of directors to 17 persons; after closing, 8 board positions will be held by current IBKC directors, and 9 will be held by current FHN directors. FHN expects the transaction to close in second quarter 2020, subject to regulatory approvals and other customary conditions. Merger and integration expenses related to the pending merger of equals with IBKC are recorded in FHN’s Corporate segment.
Total merger expenses for the IBKC merger recognized for the three months ended March 31, 2020 are presented in the table below:
|
| | | | |
| | Three Months Ended March 31 |
(Dollars in thousands) | | 2020 |
Professional fees (a) | | $ | 662 |
|
Employee compensation, incentives and benefits (b) | | 689 |
|
Miscellaneous expense (c) | | 254 |
|
Total IBKC acquisition expense | | $ | 1,605 |
|
(a) Primarily comprised of fees for legal, accounting, and merger consultants.
(b) Primarily comprised of fees for severance and retention.
(c) Primarily comprised of fees for travel and entertainment, contract employment, and other miscellaneous expenses.
On November 8, 2019, FHN announced an agreement for First Horizon Bank to purchase 30 branches from SunTrust Bank in conjunction with SunTrust Banks, Inc.'s merger with BB&T Corporation, which created Truist Financial Corp. As part of the agreement, FHN will acquire Capital Bank, which is headquarteredassume approximately $2.4 billion of branch deposits for a 3.40 percent deposit premium and purchase approximately $410 million of branch loans. The branches are in Charlotte,communities in North Carolina (20 branches), Virginia (8 branches),
and reported approximately $10 billion of assets at June 30, 2017. AtGeorgia (2 branches). FHN expects the time of announcement Capital Bank operated 193 branches in North and South Carolina, Tennessee, Florida and Virginia. Collectively, Capital Bank shareholders will receive approximately $411 million in cash plus FHN common shares which are expected to represent approximately 29 percent of FHN’s outstanding common shares immediately after consummation of the merger. The total transaction value, measured at the time of announcement, was approximately $2.2 billion. The agreement calls for two members of Capital Bank’s board of directors to join FHN’s board after closing. The transaction is expectedpurchase to close in fourththird quarter 2017,2020, subject to regulatory approval of the sale of two branchescustomary closing conditions.
See Note 2- Acquisitions and customary conditions.
On April 3, 2017, FTN Financial acquired substantially all of the assets and assumed substantially all of the liabilities of Coastal Securities, Inc. (“Coastal”), a national leaderDivestitures in the trading, securitization, and analysis of Small Business Administration (“SBA”) loans,Notes to Consolidated Financial Statements on Form 10-K for approximately $131 million in cash. Coastal, which was based in Houston, TX, also traded United States Department of Agriculture (“USDA”) loans and fixed income products and provided municipal underwriting and advisory services to its clients. Coastal’s government-guaranteed loan products, combined with FTN Financial’s existing SBA trading activities, have established an additional major product sector for FTN Financial.
The following schedule details acquired assets and liabilities and consideration paid, as well as adjustments to record the assets and liabilities at their estimated fair values as of April 3, 2017:
|
| | | | | | | | | | | | |
| | Coastal Securities, Inc. |
| | Purchase Accounting/ |
| | As | | Fair Value | | As recorded |
(Dollars in thousands) | | Acquired | | Adjustments | | by FHN |
Assets: | | | | | | |
Cash and due from banks | | $ | 7,502 |
| | $ | — |
| | $ | 7,502 |
|
Interest-bearing cash | | 4,132 |
| | — |
| | 4,132 |
|
Trading securities | | 423,662 |
| | (284,580 | ) | | 139,082 |
|
Loans held-for-sale | | — |
| | 236,088 |
| | 236,088 |
|
Investment securities | | — |
| | 1,413 |
| | 1,413 |
|
Other intangible assets, net | | — |
| | 27,300 |
| | 27,300 |
|
Premises and equipment, net | | 1,229 |
| | — |
| | 1,229 |
|
Other assets | | 1,658 |
| | 14 |
| | 1,672 |
|
Total assets acquired | | $ | 438,183 |
| | $ | (19,765 | ) | | $ | 418,418 |
|
| | | | | | |
Liabilities: | | | | | | |
Securities sold under agreements to repurchase | | $ | 201,595 |
| | $ | — |
| | $ | 201,595 |
|
Other short-term borrowings | | 33,509 |
| | — |
| | 33,509 |
|
Fixed income payables | | 143,647 |
| | (47,158 | ) | | 96,489 |
|
Other liabilities | | 958 |
| | (642 | ) | | 316 |
|
Total liabilities assumed | | 379,709 |
| | (47,800 | ) | | 331,909 |
|
Net Assets Acquired | | $ | 58,474 |
| | $ | 28,035 |
| | 86,509 |
|
Consideration paid: | | | | | | |
Cash | | | | | | (131,473 | ) |
Goodwill | | | | | | $ | 44,964 |
|
In relation to the acquisition, FHN has recorded $45.0 million in goodwill, representing the excess of acquisition consideration over the estimated fair value of net assets acquired (refer to Note 6 - Intangible Assetsyear ended December 31, 2019, for additional information),information about FHN's other acquisitions.
Expenses related to FHN's merger and allintegration activities are recorded in FHN's Corporate segment.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 16
Note 2 – Acquisitions and Divestitures (Continued)
include the operating results of the acquired assetsTotal other merger and assumed liabilities of Coastal subsequent to the acquisition on April 3, 2017.
Forintegration expense recognized for the three and nine months ended September 30, 2017, FHN recognized $8.2 millionMarch 31, 2020 and $14.6 million, respectively,2019 are presented in the table below:
|
| | | | | | | | |
| | Three Months Ended March 31 |
(Dollars in thousands) | | 2020 | | 2019 |
Professional fees (a) | | $ | 799 |
| | $ | 1,867 |
|
Employee compensation, incentives and benefits (b) | | 396 |
| | 1,517 |
|
Contract employment and outsourcing (c) | | 306 |
| | — |
|
Occupancy (d) | | (25 | ) | | 118 |
|
Miscellaneous expense (e) | | 822 |
| | 1,069 |
|
All other expense (f) | | 1,874 |
| | 1,089 |
|
Total | | $ | 4,172 |
| | $ | 5,660 |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
(a) Primarily comprised of acquisitionfees for legal, accounting, and integration-relatedmerger consultants.
(b) Primarily comprised of fees for severance and retention.
(c) Primarily relates to fees for temporary assistance for merger and integration activities.
(d) Primarily relates to expenses primarily associated with the CBFlease exits.
(e) Consists of fees for operations services, communications and Coastal acquisitions. These expenses were primarily included in Professional fees, Legal fees, Employee compensation, incentivescourier, equipment rentals, deprecation and benefits,maintenance, supplies, travel and Allentertainment, computer software, and advertising and public relations.
(f) Primarily relates to contract termination charges, internal technology development costs, costs of shareholder matters and asset impairments, as well as other expense on the Consolidated Condensed Statements of Income.miscellaneous expenses.
On September 16, 2016, FTBNA acquired $537.4 million in unpaid principal balance (“UPB”) of restaurant franchise loans from GE Capital’s Southeast and Southwest regional portfolios. Subsequent to the acquisition the acquired loans were combined with existing FTBNA relationships to establish a franchise finance specialty banking business.
In addition to the transactions 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. The most recent transaction of that type closed in October 2017, when FTBNAIn April 2019, FHN sold a subsidiary acquired the operations and certain assets of Professional Mortgage Company, Inc. ("PMC"). PMC is a provider of institutional debt capital and commercial mortgage loan servicing. Eleven professionals joined FTBNA's commercial real estate ("CRE") team
as a resultpart of the transaction, expandingCBF merger in 2017 that did not fit within FHN's risk profile. The sale resulted in the capabilitiesremoval of its CRE platform.approximately $25 million UPB of subprime consumer loans from Loans held-for-sale on FHN's Consolidated Condensed Statements of Condition.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 17
Note 3 – Investment Securities
The following tables summarize FHN’s investment securities on September 30, 2017March 31, 2020 and December 31, 2016:
| | | | September 30, 2017 | | March 31, 2020 |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities available-for-sale: | | | | | | | | | | | | | | | | |
U.S. treasuries | | $ | 100 |
| | $ | — |
| | $ | — |
| | $ | 100 |
| | $ | 100 |
| | $ | — |
| | $ | — |
| | $ | 100 |
|
Government agency issued mortgage-backed securities (“MBS”) | | 2,081,677 |
| | 15,993 |
| | (10,165 | ) | | 2,087,505 |
| | 2,303,720 |
| | 98,797 |
| | — |
| | 2,402,517 |
|
Government agency issued collateralized mortgage obligations (“CMO”) | | 1,701,467 |
| | 4,295 |
| | (19,767 | ) | | 1,685,995 |
| | 1,578,623 |
| | 48,320 |
| | — |
| | 1,626,943 |
|
Equity and other (a) | | 186,413 |
| | 2 |
| | — |
| | 186,415 |
| |
Other U.S. government agencies | | | 366,453 |
| | 7,268 |
| | (1,224 | ) | | 372,497 |
|
Corporates and other debt | | | 40,000 |
| | 621 |
| | — |
| | 40,621 |
|
States and municipalities | | | 74,578 |
| | 4,572 |
| | (25 | ) | | 79,125 |
|
| | $ | 3,969,657 |
| | $ | 20,290 |
| | $ | (29,932 | ) | | 3,960,015 |
| | $ | 4,363,474 |
| | $ | 159,578 |
| | $ | (1,249 | ) | | 4,521,803 |
|
AFS debt securities recorded at fair value through earnings:
| | | | | | | | | | | | | | | | |
SBA-interest only strips (b) | | | | | | | | 3,123 |
| |
Total securities available-for-sale (c) | | | | | | | | $ | 3,963,138 |
| |
SBA-interest only strips (a) | | | | | | | | | 23,104 |
|
Total securities available-for-sale (b) | | | | | | | | | $ | 4,544,907 |
|
Securities held-to-maturity: | | | | | | | | | | | | | | | | |
Corporate bonds | | $ | 10,000 |
| | $ | — |
| | $ | (15 | ) | | $ | 9,985 |
| |
Corporates and other debt | | | $ | 10,000 |
| | $ | — |
| | $ | (176 | ) | | $ | 9,824 |
|
Total securities held-to-maturity | | $ | 10,000 |
| | $ | — |
| | $ | (15 | ) | | $ | 9,985 |
| | $ | 10,000 |
| | $ | — |
| | $ | (176 | ) | | $ | 9,824 |
|
| |
(a) | Includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $68.6 million. The remainder is money market, mutual funds, and cost method investments. |
| |
(b) | SBA-interest only strips are recorded at elected fair value. See Note 16 - Fair Value for additional information. |
| |
(c)(b) | Includes $3.3$4.0 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes. |
| | | | December 31, 2016 | | December 31, 2019 |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities available-for-sale: | | | | | | | | | | | | | | | | |
U.S. treasuries | | $ | 100 |
| | $ | — |
| | $ | — |
| | $ | 100 |
| | $ | 100 |
| | $ | — |
| | $ | — |
| | $ | 100 |
|
Government agency issued MBS | | 2,217,593 |
| | 14,960 |
| | (23,866 | ) | | 2,208,687 |
| | 2,316,381 |
| | 34,692 |
| | (2,556 | ) | | 2,348,517 |
|
Government agency issued CMO | | 1,566,986 |
| | 4,909 |
| | (23,937 | ) | | 1,547,958 |
| | 1,667,773 |
| | 9,916 |
| | (7,197 | ) | | 1,670,492 |
|
Equity and other (a) | | 186,756 |
| | — |
| | (2 | ) | | 186,754 |
| |
Other U.S. government agencies | | | 303,463 |
| | 3,750 |
| | (1,121 | ) | | 306,092 |
|
Corporates and other debt | | | 40,054 |
| | 486 |
| | — |
| | 40,540 |
|
States and municipalities | | | 57,232 |
| | 3,324 |
| | (30 | ) | | 60,526 |
|
| | | $ | 4,385,003 |
| | $ | 52,168 |
| | $ | (10,904 | ) | | 4,426,267 |
|
AFS debt securities recorded at fair value through earnings:
| | | | | | | | | |
SBA-interest only strips (a) | | | | | | | | | 19,136 |
|
Total securities available-for-sale (b) | | $ | 3,971,435 |
| | $ | 19,869 |
| | $ | (47,805 | ) | | $ | 3,943,499 |
| | | | | | | | $ | 4,445,403 |
|
Securities held-to-maturity: | | | | | | | | | | | | | | | | |
States and municipalities | | $ | 4,347 |
| | $ | 393 |
| | $ | — |
| | $ | 4,740 |
| |
Corporate bonds | | 10,000 |
| | 33 |
| | — |
| | 10,033 |
| |
Corporates and other debt | | | $ | 10,000 |
| | $ | 1 |
| | $ | — |
| | $ | 10,001 |
|
Total securities held-to-maturity | | $ | 14,347 |
| | $ | 426 |
| | $ | — |
| | $ | 14,773 |
| | $ | 10,000 |
| | $ | 1 |
| | $ | — |
| | $ | 10,001 |
|
| |
(a) | Includes restricted investments in FHLB-Cincinnati stockSBA-interest only strips are recorded at elected fair value. See Note 16 - Fair Value of $87.9 millionAssets and FRB stock of $68.6 million. The remainder is money market, mutual funds, and cost method investments.Liabilities for additional information. |
| |
(b) | Includes $3.3$3.8 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 18
Note 3 – Investment Securities (Continued)
The amortized cost and fair value by contractual maturity for the available-for-sale and held-to-maturity debt securities portfolios on September 30, 2017March 31, 2020 are provided below:
| | | | Held-to-Maturity | | Available-for-Sale | | Held-to-Maturity | | Available-for-Sale |
(Dollars in thousands) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Within 1 year | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 54,958 |
| | $ | 55,730 |
|
After 1 year; within 5 years | | — |
| | — |
| | 100 |
| | 120 |
| | — |
| | — |
| | 189,021 |
| | 195,624 |
|
After 5 years; within 10 years | | 10,000 |
| | 9,985 |
| | — |
| | 1,464 |
| | 10,000 |
| | 9,824 |
| | 3,581 |
| | 8,480 |
|
After 10 years | | — |
| | — |
| | — |
| | 1,639 |
| | — |
| | — |
| | 233,571 |
| | 255,613 |
|
Subtotal | | 10,000 |
| | 9,985 |
| | 100 |
| | 3,223 |
| | 10,000 |
| | 9,824 |
| | 481,131 |
| | 515,447 |
|
Government agency issued MBS and CMO (a) | | — |
| | — |
| | 3,783,144 |
| | 3,773,500 |
| | — |
| | — |
| | 3,882,343 |
| | 4,029,460 |
|
Equity and other | | — |
| | — |
| | 186,413 |
| | 186,415 |
| |
Total | | $ | 10,000 |
| | $ | 9,985 |
| | $ | 3,969,657 |
| | $ | 3,963,138 |
| | $ | 10,000 |
| | $ | 9,824 |
| | $ | 4,363,474 |
| | $ | 4,544,907 |
|
| |
(a) | 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 gains and gross losses from debt investment securities for the three and nine months ended September 30:March 31, 2020 and 2019.
| | | Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended March 31 |
(Dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 | 2020 | | 2019 |
Gross gains on sales of securities | $ | 6 |
| | $ | — |
| | $ | 455 |
| | $ | 3,999 |
| $ | — |
| | $ | — |
|
Gross (losses) on sales of securities | — |
| | — |
| | — |
| | (2,326 | ) | — |
| | — |
|
Net gain/(loss) on sales of securities (a) (b) | 6 |
| | — |
| | 455 |
| | 1,673 |
| |
Net OTTI recorded (c) | — |
| | (200 | ) | | — |
| | (200 | ) | |
Total securities gain/(loss) | $ | 6 |
| | $ | (200 | ) | | $ | 455 |
| | $ | 1,473 |
| |
Net gain/(loss) on sales of securities (a) | | $ | — |
| | $ | — |
|
| |
(a) | Cash proceeds from the sale of available-for-sale securities for the three and nine months ended September 30, 2017 were not material. There were no cash proceeds from the sale of available-for-sale securities for the three months ended September 30, 2016. Cash proceeds from the sale of available-for-sale securities for the nine months ended September 30, 2016March 31, 2020 and 2019 were $1.5 million and included a $1.7 million gain from an exchange of approximately $294 million of AFS debt securities.not material. |
| |
(b) | Nine months ended September 30, 2017 includes a $.4 million gain associated with the call of a $4.4 million held-to-maturity municipal bond. |
| |
(c) | OTTI recorded is related to equity securities. |
The following tables provide information on investments within the available-for-sale portfolio that had unrealized losses as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2020 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Other U.S. government agencies | | $ | 88,334 |
| | $ | (1,224 | ) | | $ | — |
| | $ | — |
| | $ | 88,334 |
| | $ | (1,224 | ) |
States and municipalities | | 1,466 |
| | (25 | ) | | — |
| | — |
| | 1,466 |
| | (25 | ) |
Total temporarily impaired securities | | $ | 89,800 |
| | $ | (1,249 | ) | | $ | — |
| | $ | — |
| | $ | 89,800 |
| | $ | (1,249 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| | 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 | | $ | 174,983 |
| | $ | (495 | ) | | $ | 192,755 |
| | $ | (2,061 | ) | | $ | 367,738 |
| | $ | (2,556 | ) |
Government agency issued CMO | | 378,815 |
| | (1,970 | ) | | 361,124 |
| | (5,227 | ) | | 739,939 |
| | (7,197 | ) |
Other U.S. government agencies | | 98,471 |
| | (1,121 | ) | | — |
| | — |
| | 98,471 |
| | (1,121 | ) |
States and municipalities | | 3,551 |
| | (30 | ) | | — |
| | — |
| | 3,551 |
| | (30 | ) |
Total temporarily impaired securities | | $ | 655,820 |
| | $ | (3,616 | ) | | $ | 553,979 |
| | $ | (7,288 | ) | | $ | 1,209,799 |
| | $ | (10,904 | ) |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 19
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 |
| | 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 CMO | | $ | 885,926 |
| | $ | (10,936 | ) | | $ | 311,471 |
| | $ | (8,831 | ) | | $ | 1,197,397 |
| | $ | (19,767 | ) |
Government agency issued MBS | | 875,307 |
| | (8,770 | ) | | 34,184 |
| | (1,395 | ) | | 909,491 |
| | (10,165 | ) |
Total temporarily impaired securities | | 1,761,233 |
| | (19,706 | ) | | 345,655 |
| | (10,226 | ) | | 2,106,888 |
| | (29,932 | ) |
Note 3 – Investment Securities (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | 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 CMO | | $ | 1,059,471 |
| | $ | (19,052 | ) | | $ | 116,527 |
| | $ | (4,885 | ) | | $ | 1,175,998 |
| | $ | (23,937 | ) |
Government agency issued MBS | | 1,912,126 |
| | (23,866 | ) | | — |
| | — |
| | 1,912,126 |
| | (23,866 | ) |
Total debt securities | | 2,971,597 |
| | (42,918 | ) | | 116,527 |
| | (4,885 | ) | | 3,088,124 |
| | (47,803 | ) |
Equity | | 7 |
| | (2 | ) | | — |
| | — |
| | 7 |
| | (2 | ) |
Total temporarily impaired securities | | $ | 2,971,604 |
| | $ | (42,920 | ) | | $ | 116,527 |
| | $ | (4,885 | ) | | $ | 3,088,131 |
| | $ | (47,805 | ) |
For periods subsequent to 2019, FHN has reviewed investmentevaluated all AFS debt securities that were in unrealized loss positions in accordance with its accounting policy for OTTI and doesrecognition of credit losses. No AFS debt securities were determined to have credit losses because the primary cause of the decline in value was attributable to changes in interest rates. Total AIR not consider them other-than-temporarily impaired. Forincluded in the fair value or amortized cost basis of AFS debt securities was $12.3 million as of March 31, 2020. Consistent with its review of the related securities, there were no credit-related write downs of AIR for AFS debt securities during the reporting period. Additionally, for AFS 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. Therefore, no write downs of these investments to fair value occurred during the reporting period.
For periods prior to 2020, FHN reviewed debt investment securities that were in unrealized loss positions in accordance with its accounting policy for OTTI and did not consider them other-than-temporarily impaired.
For debt securities with unrealized losses, FHN did not intend to sell them and it is more-likely-than-not that FHN would not be required to sell them prior to recovery. The decline in value iswas primarily attributable to changes in interest rates and not credit losses. For
The carrying amount of equity securities, FHN has bothinvestments without a readily determinable fair value was $25.9 million and $25.6 million at March 31, 2020 and December 31, 2019, respectively. The year-to-date 2020 and 2019 gross amounts of upward and downward valuation adjustments were not significant.
Unrealized losses of $5.7 million and unrealized gains of $3.4 million were recognized in the abilitythree months ended March 31, 2020 and intent to hold these securities2019, respectively, for the time necessary to recover the amortized cost.equity investments with readily determinable fair values.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 20
The following table provides the balance (amortized cost basis) of loans, net of unearned income, by portfolio segment as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | |
| | March 31 | | December 31 |
(Dollars in thousands) | | 2020 | | 2019 |
Commercial: | | | | |
Commercial, financial, and industrial | | $ | 22,124,430 |
| | $ | 20,051,091 |
|
Commercial real estate | | 4,639,692 |
| | 4,337,017 |
|
Consumer: | | | | |
Consumer real estate (a) | | 6,119,383 |
| | 6,177,139 |
|
Credit card & other | | 494,798 |
| | 495,864 |
|
Loans, net of unearned income | | $ | 33,378,303 |
| | $ | 31,061,111 |
|
Allowance for loan losses | | 444,490 |
| | 200,307 |
|
Total net loans | | $ | 32,933,813 |
| | $ | 30,860,804 |
|
|
| | | | | | | | |
| | September 30 | | December 31 |
(Dollars in thousands) | | 2017 | | 2016 |
Commercial: | | | | |
Commercial, financial, and industrial | | $ | 12,791,844 |
| | $ | 12,148,087 |
|
Commercial real estate | | 2,251,015 |
| | 2,135,523 |
|
Consumer: | | | | |
Consumer real estate (a) | | 4,369,717 |
| | 4,523,752 |
|
Permanent mortgage | | 403,082 |
| | 423,125 |
|
Credit card & other | | 350,433 |
| | 359,033 |
|
Loans, net of unearned income | | $ | 20,166,091 |
| | $ | 19,589,520 |
|
Allowance for loan losses | | 194,867 |
| | 202,068 |
|
Total net loans | | $ | 19,971,224 |
| | $ | 19,387,452 |
|
| |
(a) | Balances as of September 30, 2017 and December 31, 2016, include $26.2 million and $35.9 million of restricted real estate loans, respectively. See Note 13—Variable Interest EntitiesIn first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for additional information.comparability. |
COMPONENTS OF THE LOAN PORTFOLIO
The loan portfolio is disaggregated into segments and then further disaggregated into classes for certain disclosures. GAAP defines a portfolio segment 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 FHN’s method for monitoring and assessing credit risk. Commercial loan portfolio segments include commercial, financial and industrial (“C&I”) and commercial real estate.estate ("CRE"). Commercial classes within C&I include general C&I, loans to mortgage companies ("LMC"), the trust preferred loans (“TRUPS”) (i.e. long-term unsecured loans to bank and insurance-related businesses) portfolio and purchased credit-impaired (“PCI”) loans.loans (for periods prior to 2020). Loans to mortgage companies include commercial lines of credit to qualified mortgage companies primarily 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 CRE include income CRE, residential CRE and PCI loans.loans (for periods prior to 2020). Consumer loan portfolio segments include consumer real estate, permanent mortgage, and the credit card and other portfolio. Consumer classes include home equity lines of credit (“HELOCs”), real estate (“R/E”) installment and PCI loans (for periods prior to 2020) within the consumer real estate segment permanent mortgage (which is both a segment and a class), and credit card and other.
Credit Risk Characteristics Inherent in the Loan Portfolio
Credit risk is the risk of loss due to adverse changes in a borrower’s or counterparty’s ability to meet its financial obligations under agreed upon terms. FHN is subject to credit risk in lending, trading, investing, liquidity/funding, and asset management activities although lending activities have the most exposure to credit risk. The nature and
amount of credit risk depends on the types of transaction, the structure of those transactions, collateral received, the use of guarantors and the parties involved.
FHN assesses and manages credit risk through a series of policies, processes, measurement systems, and controls. FHN’s credit risk function ensures subject matter experts are providing oversight, support and credit approvals, particularly in the specialty lending areas where industry-specific knowledge is required. Management emphasizes general portfolio servicing such that emerging risks are able to be identified early enough to correct potential deficiencies, prevent further credit deterioration, and mitigate credit losses.
Commercial Loans
The C&I portfolio is comprised of loans used for general business purposes. Typical products including working capital lines of credit, term loan financing of owner-occupied real estate and fixed assets, and trade credit enhancement through letters of credit. FHN utilizes deal teams comprised of relationship managers (RMs), portfolio managers (PMs), credit analysts and other specialists to identify, mitigate, document, and manage ongoing risk. Their function includes enhanced analytical support during loan origination and servicing, monitoring the financial condition of the borrower, and tracking compliance with loan agreements. FHN strives to identify problem assets early through comprehensive policies and guidelines, targeted portfolio reviews, more frequent servicing on lower rated borrowers, and an emphasis on frequent grading.
To the extent a guarantor/sponsor is used to support a commercial lending decision, FHN analyzes capability to pay, factoring in, among other things, liquidity and direct/indirect cash flows. A strong, legally enforceable guaranty 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.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 21
Note 4 – Loans (Continued)
Loans to mortgage companies include commercial lines of credit to qualified mortgage companies primarily for the temporary warehousing of eligible mortgage loans prior to the borrower’s sale of those mortgage loans to third party investors. Approximately 90 percent of the loans to mortgage companies are collateralized with government guaranteed loans. The loans are of short duration with maturities less than one year.
TRUPS loans are long-term unsecured loans to bank and insurance-related businesses. TRUPS lending was originally extended as a form of “bridge” financing to participants in the pooled trust preferred securitization program offered primarily to smaller banking (generally less than $15 billion in total assets) and insurance institutions through FHN’s fixed income business. Origination of TRUPS lending ceased in early 2008. Individual TRUPS are regraded at least quarterly as part of FHN’s commercial loan review process.
Commercial Real Estate loans include financings for commercial construction and nonconstruction loans. The income-producing CRE class contains loans and draws on lines and letters of credit to commercial real estate developers for the construction and mini-permanent financing of income-producing real estate. The residential CRE class includes loans to residential builders and developers for the purpose of constructing single-family homes, condominiums, and town homes and on a limited basis, for developing residential subdivisions. Active residential CRE lending is primarily focused in certain core markets with nearly all new originations made to “strategic” clients. FHN considers a “strategic” residential CRE borrower as a homebuilder who demonstrates the ability to withstand cyclical downturns, maintains active development and investment activities providing for regular financing opportunities, and is fundamentally sound as evidenced by a prudent loan structure, appropriate covenants and recourse, and capable and willing sponsors in markets with positive homebuilding and economic dynamics. The credit administration and ongoing monitoring of these portfolios consists of multiple internal control processes including stressing a borrower’s or project’s financial capacity utilizing numerous attributes such as interest rates, vacancy, and discount rates. Key information captured from the various portfolios is aggregated and utilized to assist with the assessment and adequacy of the ALLL and to steer portfolio management strategies.
Consumer Loans
The consumer real estate portfolio is primarily comprised of home equity lines and installment loans within FHN’s regional banking segment and jumbo mortgages and one-time-close (“OTC”) completed construction loans in FHN’s non-strategic segment that were originated through pre-2009 mortgage businesses. The corporate segment also includes loans that were previously included in off-balance sheet proprietary securitization trusts that were brought back into the loan portfolios at fair value through the
execution of cleanup calls due to the relatively small balances left in the securitization and should continue to run-off. Generally performance of this portfolio is affected by life events that affect borrowers’ finances, the level of unemployment, and home prices. FHN obtains first lien performance information from third parties and through loss mitigation activities, and places a stand-alone second lien loan on nonaccrual if performance issues with the first lien are discovered.
FHN performs continuous HELOC account review processes in order to identify higher-risk home equity lines and initiate preventative and corrective actions. The reviews consider a number of account activity patterns and characteristics such as the number of times delinquent within recent periods, changes in credit bureaus score since origination, scored degradation, performance of the first lien, and account utilization. In accordance with FHN’s interpretation of regulatory guidance, FHN may block future draws on accounts in order to mitigate risk of loss to FHN.
The credit card and other portfolio is primarily comprised of automobile loans, credit card receivables, and other consumer-related credits.
As discussed in Note 1 - Summary of Significant Accounting Policies, the ALLL estimation process was revised on January 1, 2020 to reflect the adoption of ASU 2016-13. All information contained in the following disclosures reflects the application of requirements from the adoption of ASU 2016-13 for periods after 2019. Information for periods prior to 2020 has been retained with the content consistent with prior disclosures.
Concentrations
FHN has a concentration of residential real estate loans (24 percent of total loans), the majority of which is in the consumer real estate segment (22(19 percent of total loans). Loans to finance and insurance companies total $2.8 billion (22(13 percent of the C&I portfolio, or 148 percent of the total loans). FHN had loans to mortgage companies totaling $2.0$5.7 billion (15(26 percent of the C&I segment, or 1017 percent of total loans) as of September 30, 2017.March 31, 2020. As a result, 3739 percent of the C&I segment is sensitive to impacts on the financial services industry.
Asset Quality Indicators
FHN employs a dual grade commercial risk grading methodology to assign an estimate for the probability of default (“PD”) and the loss given default (“LGD”) for each commercial loan using 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. 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. PD grades assigned through FHN’s risk rating process are used as a loan level input to inform probability of default forecasts under certain macroeconomic scenarios. Each PD grade corresponds to an estimated one-year default probability percentage; a PD 1 has the lowest expected default
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 22
Note 4 – Loans (Continued)
probability, and probabilities increase as grades progress down the scale. PD 1 through PD 12 are “pass” grades. 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 annually or earlier 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. Loan grading discipline is regularly reviewed internally by Credit
Assurance Services 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. 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. See Note 5 – Allowance for Loan Losses for further discussion on the credit grading system.
The following tables provide the amortized cost basis of the commercial loan portfolio by year of origination and credit quality indicator as of March 31, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | C&I | | |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | prior to 2016 (a) | | LMC (b) | | Revolving Loans | | Revolving Loans converted to term loans (c) | | Total |
PD Grade: | | | | | | | | | | | | | | | | | | | | |
1 | | $ | 27,293 |
| | $ | 100,359 |
| | $ | 125,095 |
| | $ | 81,397 |
| | $ | 112,175 |
| | $ | 117,965 |
| | $ | — |
| | $ | 156,041 |
| | $ | 223 |
| | $ | 720,548 |
|
2 | | 33,244 |
| | 239,750 |
| | 95,269 |
| | 81,542 |
| | 176,068 |
| | 112,586 |
| | — |
| | 108,408 |
| | 51 |
| | 846,918 |
|
3 | | 15,083 |
| | 165,433 |
| | 52,645 |
| | 96,725 |
| | 65,932 |
| | 119,415 |
| | 1,028,798 |
| | 219,037 |
| | 14,042 |
| | 1,777,110 |
|
4 | | 144,129 |
| | 318,374 |
| | 155,173 |
| | 140,516 |
| | 158,705 |
| | 149,248 |
| | 958,145 |
| | 372,890 |
| | 277 |
| | 2,397,457 |
|
5 | | 149,048 |
| | 604,067 |
| | 306,849 |
| | 161,921 |
| | 127,011 |
| | 228,347 |
| | 927,946 |
| | 507,991 |
| | 14,230 |
| | 3,027,410 |
|
6 | | 187,540 |
| | 713,579 |
| | 244,128 |
| | 241,828 |
| | 107,498 |
| | 201,660 |
| | 1,740,304 |
| | 801,860 |
| | 16,485 |
| | 4,254,882 |
|
7 | | 270,190 |
| | 903,326 |
| | 395,680 |
| | 167,749 |
| | 91,881 |
| | 156,238 |
| | 806,853 |
| | 794,174 |
| | 447 |
| | 3,586,538 |
|
8 | | 224,670 |
| | 626,348 |
| | 217,091 |
| | 178,183 |
| | 33,476 |
| | 115,727 |
| | 140,372 |
| | 495,002 |
| | 7,096 |
| | 2,037,965 |
|
9 | | 128,773 |
| | 332,262 |
| | 92,720 |
| | 91,648 |
| | 60,522 |
| | 93,750 |
| | 68,707 |
| | 419,388 |
| | 2,055 |
| | 1,289,825 |
|
10 | | 65,206 |
| | 128,169 |
| | 113,744 |
| | 56,088 |
| | 60,659 |
| | 53,920 |
| | 25,023 |
| | 191,883 |
| | 996 |
| | 695,688 |
|
11 | | 29,742 |
| | 95,269 |
| | 65,404 |
| | 64,494 |
| | 75,508 |
| | 52,240 |
| | — |
| | 109,709 |
| | 3,618 |
| | 495,984 |
|
12 | | 25,376 |
| | 36,918 |
| | 46,792 |
| | 41,370 |
| | 19,248 |
| | 28,881 |
| | 17,766 |
| | 114,052 |
| | 1,112 |
| | 331,515 |
|
13 | | 18,233 |
| | 32,564 |
| | 12,153 |
| | 11,247 |
| | 84,321 |
| | 39,710 |
| | — |
| | 63,993 |
| | 383 |
| | 262,604 |
|
14,15,16 | | 35,268 |
| | 22,351 |
| | 51,983 |
| | 26,586 |
| | 17,414 |
| | 14,493 |
| | — |
| | 124,557 |
| | 7,242 |
| | 299,894 |
|
Collectively evaluated for impairment | | 1,353,795 |
| | 4,318,769 |
| | 1,974,726 |
| | 1,441,294 |
| | 1,190,418 |
| | 1,484,180 |
| | 5,713,914 |
| | 4,478,985 |
| | 68,257 |
| | 22,024,338 |
|
Individually evaluated for impairment | | — |
| | 12,771 |
| | 12,642 |
| | 14,552 |
| | 1,827 |
| | 24,145 |
| | — |
| | 33,988 |
| | 167 |
| | 100,092 |
|
Total C&I loans | | $ | 1,353,795 |
| | $ | 4,331,540 |
| | $ | 1,987,368 |
| | $ | 1,455,846 |
| | $ | 1,192,245 |
| | $ | 1,508,325 |
| | $ | 5,713,914 |
| | $ | 4,512,973 |
| | $ | 68,424 |
| | $ | 22,124,430 |
|
| |
(a) | TRUPS loans were originated prior to 2016. Total balance of TRUPS as of March 31, 2020 is $215.4 million, with $3.3 million in PD 3, $42.4 million in PD 4, $84.5 million in PD 5, $27.3 million in PD 6, $7.4 million in PD 7, $31.9 million in PD 9, and $18.6 million in PD 10. |
| |
(b) | LMC includes non-revolving commercial lines of credit to qualified mortgage companies primarily for the temporary warehousing of eligible mortgage loans prior to the borrower's sale of those mortgage loans to third party investors. The loans are of short duration with maturities less than one year. |
| |
(c) | $14.1 million of C&I loans were converted from revolving to term in first quarter 2020. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 23
Note 4 – Loans (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Income CRE | | |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | prior to 2016 | | Revolving Loans | | Revolving Loans converted to term loans | | Total |
PD Grade: | | | | | | | | | | | | | | | | | | |
1 | | $ | 22,307 |
| | $ | — |
| | $ | 398 |
| | $ | — |
| | $ | 130 |
| | $ | 1,102 |
| | $ | — |
| | $ | — |
| | $ | 23,937 |
|
2 | | 445 |
| | 30,859 |
| | 651 |
| | 333 |
| | 1,211 |
| | 2,410 |
| | — |
| | — |
| | 35,909 |
|
3 | | 62,707 |
| | 207,828 |
| | 78,203 |
| | 75,629 |
| | 65,898 |
| | 29,466 |
| | 68,770 |
| | 188 |
| | 588,689 |
|
4 | | 65,474 |
| | 287,116 |
| | 98,370 |
| | 122,518 |
| | 75,032 |
| | 63,680 |
| | 934 |
| | 3,234 |
| | 716,358 |
|
5 | | 192,596 |
| | 296,099 |
| | 160,253 |
| | 233,104 |
| | 114,572 |
| | 35,705 |
| | 36,944 |
| | 10,729 |
| | 1,080,002 |
|
6 | | 81,162 |
| | 215,741 |
| | 143,419 |
| | 143,142 |
| | 34,758 |
| | 133,573 |
| | 33,021 |
| | 195 |
| | 785,011 |
|
7 | | 122,282 |
| | 224,637 |
| | 140,601 |
| | 85,853 |
| | 19,369 |
| | 35,968 |
| | 36,633 |
| | 2,432 |
| | 667,775 |
|
8 | | 15,635 |
| | 76,102 |
| | 54,998 |
| | 15,421 |
| | 29,382 |
| | 50,736 |
| | 6,239 |
| | 132 |
| | 248,645 |
|
9 | | 25,288 |
| | 29,485 |
| | 23,192 |
| | 27,916 |
| | 4,169 |
| | 39,457 |
| | 38 |
| | — |
| | 149,545 |
|
10 | | 15,437 |
| | 15,563 |
| | 7,260 |
| | 3,805 |
| | 8,973 |
| | 17,006 |
| | — |
| | 150 |
| | 68,194 |
|
11 | | 1,696 |
| | 19,007 |
| | 11,372 |
| | 22,561 |
| | 3,931 |
| | 16,481 |
| | 128 |
| | — |
| | 75,176 |
|
12 | | — |
| | 15,050 |
| | 2,445 |
| | 697 |
| | 554 |
| | 10,877 |
| | 71 |
| | 232 |
| | 29,926 |
|
13 | | 418 |
| | 9,672 |
| | 913 |
| | 2,185 |
| | 223 |
| | 1,325 |
| | 138 |
| | — |
| | 14,874 |
|
14,15,16 | | 7,021 |
| | 19,536 |
| | 45 |
| | 30,449 |
| | 129 |
| | 3,635 |
| | 20,384 |
| | — |
| | 81,199 |
|
Collectively evaluated for impairment | | 612,468 |
| | 1,446,695 |
| | 722,120 |
| | 763,613 |
| | 358,331 |
| | 441,421 |
| | 203,300 |
| | 17,292 |
| | 4,565,240 |
|
Individually evaluated for impairment | | — |
| | — |
| | — |
| | — |
| | — |
| | 163 |
| | — |
| | — |
| | 163 |
|
Total CRE-IP | | $ | 612,468 |
| | $ | 1,446,695 |
| | $ | 722,120 |
| | $ | 763,613 |
| | $ | 358,331 |
| | $ | 441,584 |
| | $ | 203,300 |
| | $ | 17,292 |
| | $ | 4,565,403 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Residential CRE | | |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | prior to 2016 | | Revolving Loans | | Revolving Loans converted to term loans | | Total |
PD Grade: | | | | | | | | | | | | | | | | | | |
1 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 23 |
| | $ | — |
| | $ | — |
| | $ | 23 |
|
2 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
3 | | — |
| | — |
| | 272 |
| | 175 |
| | — |
| | 106 |
| | — |
| | — |
| | 553 |
|
4 | | 95 |
| | 886 |
| | — |
| | 313 |
| | — |
| | 124 |
| | — |
| | — |
| | 1,418 |
|
5 | | — |
| | — |
| | — |
| | — |
| | 79 |
| | — |
| | — |
| | — |
| | 79 |
|
6 | | 5,568 |
| | 6,252 |
| | 42 |
| | 338 |
| | 44 |
| | 349 |
| | — |
| | — |
| | 12,593 |
|
7 | | — |
| | 527 |
| | 2,904 |
| | 1,795 |
| | — |
| | 190 |
| | 21,382 |
| | — |
| | 26,798 |
|
8 | | 150 |
| | 312 |
| | 463 |
| | — |
| | — |
| | 153 |
| | 100 |
| | — |
| | 1,178 |
|
9 | | — |
| | — |
| | 263 |
| | — |
| | 498 |
| | 79 |
| | — |
| | — |
| | 840 |
|
10 | | — |
| | 735 |
| | 266 |
| | — |
| | — |
| | 77 |
| | — |
| | — |
| | 1,078 |
|
11 | | 3,517 |
| | 20,693 |
| | 3,471 |
| | 161 |
| | — |
| | 477 |
| | — |
| | — |
| | 28,319 |
|
12 | | — |
| | — |
| | — |
| | — |
| | — |
| | 161 |
| | — |
| | — |
| | 161 |
|
13 | | 1,006 |
| | — |
| | 45 |
| | — |
| | — |
| | 9 |
| | — |
| | — |
| | 1,060 |
|
14,15,16 | | 15 |
| | 28 |
| | — |
| | — |
| | — |
| | 146 |
| | — |
| | — |
| | 189 |
|
Collectively evaluated for impairment | | 10,351 |
| | 29,433 |
| | 7,726 |
| | 2,782 |
| | 621 |
| | 1,894 |
| | 21,482 |
| | — |
| | 74,289 |
|
Individually evaluated for impairment | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total CRE-RES | | $ | 10,351 |
| | $ | 29,433 |
| | $ | 7,726 |
| | $ | 2,782 |
| | $ | 621 |
| | $ | 1,894 |
| | $ | 21,482 |
| | $ | — |
| | $ | 74,289 |
|
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 24
Note 4 – Loans (Continued)
The following table provides the balances of commercial loan portfolio classes with associated allowance, disaggregated by PD grade as of December 31, 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | General C&I | | Loans to Mortgage Companies | | TRUPS (a) | | Income CRE | | Residential CRE | | Total | | Percentage of Total | | Allowance for Loan Losses |
PD Grade: | | | | | | | | | | | | | | | | |
1 | | $ | 696,040 |
| | $ | — |
| | $ | — |
| | $ | 1,848 |
| | $ | — |
| | $ | 697,888 |
| | 3 | % | | $ | 69 |
|
2 | | 767,048 |
| | — |
| | — |
| | 48,906 |
| | 38 |
| | 815,992 |
| | 4 |
| | 165 |
|
3 | | 743,123 |
| | 877,210 |
| | 3,314 |
| | 474,067 |
| | 806 |
| | 2,098,520 |
| | 9 |
| | 274 |
|
4 | | 1,237,772 |
| | 692,971 |
| | 46,375 |
| | 680,223 |
| | 477 |
| | 2,657,818 |
| | 11 |
| | 738 |
|
5 | | 1,986,761 |
| | 670,402 |
| | 72,512 |
| | 993,628 |
| | 1,700 |
| | 3,725,003 |
| | 15 |
| | 8,265 |
|
6 | | 2,511,290 |
| | 1,410,387 |
| | 27,263 |
| | 717,062 |
| | 17,027 |
| | 4,683,029 |
| | 19 |
| | 12,054 |
|
7 | | 2,708,707 |
| | 509,616 |
| | 18,378 |
| | 641,345 |
| | 30,925 |
| | 3,908,971 |
| | 16 |
| | 20,409 |
|
8 | | 1,743,364 |
| | 136,771 |
| | — |
| | 269,407 |
| | 16,699 |
| | 2,166,241 |
| | 9 |
| | 22,514 |
|
9 | | 1,101,873 |
| | 77,139 |
| | 31,909 |
| | 169,586 |
| | 13,007 |
| | 1,393,514 |
| | 6 |
| | 17,484 |
|
10 | | 563,635 |
| | 21,229 |
| | 18,536 |
| | 59,592 |
| | 2,153 |
| | 665,145 |
| | 3 |
| | 10,197 |
|
11 | | 495,140 |
| | — |
| | — |
| | 81,682 |
| | 2,302 |
| | 579,124 |
| | 2 |
| | 13,454 |
|
12 | | 262,906 |
| | 15,158 |
| | — |
| | 28,807 |
| | 1,074 |
| | 307,945 |
| | 1 |
| | 8,471 |
|
13 | | 232,823 |
| | — |
| | — |
| | 32,966 |
| | 1,126 |
| | 266,915 |
| | 1 |
| | 8,142 |
|
14,15,16 | | 263,076 |
| | — |
| | — |
| | 43,400 |
| | 626 |
| | 307,102 |
| | 1 |
| | 29,318 |
|
Collectively evaluated for impairment | | 15,313,558 |
| | 4,410,883 |
| | 218,287 |
| | 4,242,519 |
| | 87,960 |
| | 24,273,207 |
| | 100 |
| | 151,554 |
|
Individually evaluated for impairment | | 82,438 |
| | — |
| | — |
| | 1,563 |
| | — |
| | 84,001 |
| | — |
| | 6,196 |
|
Purchased credit-impaired loans | | 25,925 |
| | — |
| | — |
| | 4,155 |
| | 820 |
| | 30,900 |
| | — |
| | 848 |
|
Total commercial loans | | $ | 15,421,921 |
| | $ | 4,410,883 |
| | $ | 218,287 |
| | $ | 4,248,237 |
| | $ | 88,780 |
| | $ | 24,388,108 |
| | 100 | % | | $ | 158,598 |
|
(a) Balances presented net of a $19.1 million valuation allowance.
The consumer 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 consumer loan-types, FHN is able to utilize the Fair Isaac Corporation (“FICO”) score, among other attributes, to assess the credit 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 indicators of asset quality within the credit card and other consumer portfolio.
The following table reflects the amortized cost basis by year of origination and refreshed FICO scores for consumer real estate as of March 31, 2020. Within consumer real estate, classes include home equity line of credit ("HELOC") and real estate installment. HELOCs are loans which during their draw period are classified as revolving loans. Once the draw period ends and the loan enters its repayment period, the loan converts to a term loan and is classified as revolving loans converted to term loans. All loans classified in the following table as revolving loans or revolving loans converted to term loans are HELOCs. Real estate installment loans are originated as a fixed term loan and are classified below in their vintage year from prior to 2016 to 2020. All loans in the following table classified in a vintage year are real estate installment loans.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 25
Note 4 – Loans (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Consumer Real Estate |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior to 2016 | | Revolving Loans | | Revolving Loans converted to term loans (a) | | Total |
FICO score 740 or greater | | $ | 134,032 |
| | $ | 586,720 |
| | $ | 451,497 |
| | $ | 438,007 |
| | $ | 541,683 |
| | $ | 1,346,587 |
| | $ | 646,462 |
| | $ | 142,848 |
| | $ | 4,287,836 |
|
FICO score 720-739 | | 25,129 |
| | 80,851 |
| | 50,344 |
| | 42,134 |
| | 78,632 |
| | 135,173 |
| | 75,392 |
| | 31,629 |
| | 519,284 |
|
FICO score 700-719 | | 10,325 |
| | 63,306 |
| | 32,469 |
| | 36,606 |
| | 35,111 |
| | 130,881 |
| | 58,913 |
| | 29,201 |
| | 396,812 |
|
FICO score 660-699 | | 27,489 |
| | 54,870 |
| | 38,198 |
| | 33,127 |
| | 45,329 |
| | 175,873 |
| | 80,018 |
| | 54,440 |
| | 509,344 |
|
FICO score 620-659 | | 1,026 |
| | 21,260 |
| | 9,708 |
| | 11,482 |
| | 16,651 |
| | 72,843 |
| | 28,433 |
| | 31,527 |
| | 192,930 |
|
FICO score less than 620 | | 339 |
| | 12,792 |
| | 9,706 |
| | 11,477 |
| | 12,671 |
| | 91,003 |
| | 26,318 |
| | 48,871 |
| | 213,177 |
|
Total | | $ | 198,340 |
| | $ | 819,799 |
| | $ | 591,922 |
| | $ | 572,833 |
| | $ | 730,077 |
| | $ | 1,952,360 |
| | $ | 915,536 |
| | $ | 338,516 |
| | $ | 6,119,383 |
|
(a) $9.0 million of HELOC loans were converted from revolving to term in first quarter 2020.
The following table reflects the amortized cost basis by year of origination and refreshed FICO scores for other consumer loans as of March 31, 2020.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Other Consumer |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior to 2016 | | Revolving Loans | | Revolving Loans converted to term loans (a) | | Total |
FICO score 740 or greater | | $ | 9,410 |
| | $ | 41,336 |
| | $ | 24,423 |
| | $ | 12,035 |
| | $ | 5,338 |
| | $ | 21,272 |
| | $ | 176,917 |
| | $ | 3,293 |
| | $ | 294,024 |
|
FICO score 720-739 | | 1,509 |
| | 6,235 |
| | 3,799 |
| | 1,911 |
| | 1,054 |
| | 2,954 |
| | 36,173 |
| | 709 |
| | 54,344 |
|
FICO score 700-719 | | 2,236 |
| | 5,986 |
| | 2,551 |
| | 2,103 |
| | 924 |
| | 2,674 |
| | 23,185 |
| | 934 |
| | 40,593 |
|
FICO score 660-699 | | 3,219 |
| | 8,803 |
| | 4,355 |
| | 3,221 |
| | 1,524 |
| | 4,041 |
| | 32,282 |
| | 1,700 |
| | 59,145 |
|
FICO score 620-659 | | 449 |
| | 2,760 |
| | 1,945 |
| | 912 |
| | 1,196 |
| | 2,213 |
| | 13,020 |
| | 632 |
| | 23,127 |
|
FICO score less than 620 | | 279 |
| | 1,458 |
| | 1,190 |
| | 752 |
| | 3,034 |
| | 4,573 |
| | 10,781 |
| | 1,498 |
| | 23,565 |
|
Total | | $ | 17,102 |
| | $ | 66,578 |
| | $ | 38,263 |
| | $ | 20,934 |
| | $ | 13,070 |
| | $ | 37,727 |
| | $ | 292,358 |
| | $ | 8,766 |
| | $ | 494,798 |
|
(a) $1.5 million of other consumer loans were converted from revolving to term in first quarter 2020.
The following table reflects the percentage of balances outstanding by average, refreshed FICO scores for the HELOC and real estate installment classes of loans as of December 31, 2019. |
| | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | HELOC | | R/E Installment Loans (b) |
FICO score 740 or greater | | 62.0 | % | | 71.9 | % |
FICO score 720-739 | | 8.6 |
| | 8.3 |
|
FICO score 700-719 | | 7.6 |
| | 6.3 |
|
FICO score 660-699 | | 10.8 |
| | 8.1 |
|
FICO score 620-659 | | 4.7 |
| | 2.8 |
|
FICO score less than 620 (a) | | 6.3 |
| | 2.6 |
|
Total | | 100.0 | % | | 100.0 | % |
| |
(a) | For this group, a majority of the loan balances had FICO scores at the time of the origination that exceeded 620 but have since deteriorated as the loan have seasoned. |
| |
(b) | In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 26
Note 4 – Loans (Continued)
Nonaccrual and Past Due Loans
Nonperforming loans are loans placed on nonaccrual 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 due to insufficient collateral value and past due status, or on a case-by-case basis if FHN continues to receive payments but there are other borrower-specific issues. Included in nonaccruals are loans that FHN continues to receive payments including residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy, and second liens, regardless of delinquency status, behind first liens that are 90 or more days past due, are bankruptcies, or are TDRs. Past due loans are loans contractually past due as to interest or principal payments, but which have not yet been put on nonaccrual status.
The following table reflects accruing and non-accruing loans by class on March 31, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 (a) | | $ | 16,081,865 |
| | $ | 17,049 |
| | $ | 166 |
| | $ | 16,099,080 |
| | $ | 60,387 |
| | $ | 2,505 |
| | $ | 33,189 |
| | $ | 96,081 |
| | $ | 16,195,161 |
|
Loans to mortgage companies | | 5,713,914 |
| | — |
| | — |
| | 5,713,914 |
| | — |
| | — |
| | — |
| | — |
| | 5,713,914 |
|
TRUPS (b) | | 215,355 |
| | — |
| | — |
| | 215,355 |
| | — |
| | — |
| | — |
| | — |
| | 215,355 |
|
Total commercial (C&I) | | 22,011,134 |
| | 17,049 |
| | 166 |
| | 22,028,349 |
| | 60,387 |
| | 2,505 |
| | 33,189 |
| | 96,081 |
| | 22,124,430 |
|
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Income CRE | | 4,562,822 |
| | 419 |
| | — |
| | 4,563,241 |
| | 29 |
| | 816 |
| | 1,317 |
| | 2,162 |
| | 4,565,403 |
|
Residential CRE | | 74,222 |
| | 39 |
| | — |
| | 74,261 |
| | — |
| | 28 |
| | — |
| | 28 |
| | 74,289 |
|
Total commercial real estate | | 4,637,044 |
| | 458 |
| | — |
| | 4,637,502 |
| | 29 |
| | 844 |
| | 1,317 |
| | 2,190 |
| | 4,639,692 |
|
Consumer real estate: | | | | | | | | | | | | | | | | | | |
HELOC | | 1,186,834 |
| | 10,213 |
| | 5,828 |
| | 1,202,875 |
| | 41,506 |
| | 3,547 |
| | 6,124 |
| | 51,177 |
| | 1,254,052 |
|
R/E installment loans | | 4,801,281 |
| | 17,741 |
| | 6,304 |
| | 4,825,326 |
| | 24,162 |
| | 2,420 |
| | 13,423 |
| | 40,005 |
| | 4,865,331 |
|
Total consumer real estate | | 5,988,115 |
| | 27,954 |
| | 12,132 |
| | 6,028,201 |
| | 65,668 |
| | 5,967 |
| | 19,547 |
| | 91,182 |
| | 6,119,383 |
|
Credit card & other: | | | | | | | | | | | | | | | | | | |
Credit card | | 189,247 |
| | 1,893 |
| | 1,715 |
| | 192,855 |
| | — |
| | — |
| | — |
| | — |
| | 192,855 |
|
Other | | 300,308 |
| | 1,144 |
| | 131 |
| | 301,583 |
| | 153 |
| | 38 |
| | 169 |
| | 360 |
| | 301,943 |
|
Total credit card & other | | 489,555 |
| | 3,037 |
| | 1,846 |
| | 494,438 |
| | 153 |
| | 38 |
| | 169 |
| | 360 |
| | 494,798 |
|
Total loans, net of unearned income | | $ | 33,125,848 |
| | $ | 48,498 |
| | $ | 14,144 |
| | $ | 33,188,490 |
| | $ | 126,237 |
| | $ | 9,354 |
| | $ | 54,222 |
| | $ | 189,813 |
| | $ | 33,378,303 |
|
(a) $36.1 million of general C&I loans are nonaccrual loans with no related allowance.
(b) TRUPS is presented net of the valuation allowance of $18.9 million.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 27
Note 4 – Loans (Continued)
The following table reflects accruing and non-accruing loans by class on December 31, 2019: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | $ | 15,314,292 |
| | $ | 7,155 |
| | $ | 237 |
| | $ | 15,321,684 |
| | $ | 36,564 |
| | $ | 14,385 |
| | $ | 23,363 |
| | $ | 74,312 |
| | $ | 15,395,996 |
|
Loans to mortgage companies | | 4,410,883 |
| | — |
| | — |
| | 4,410,883 |
| | — |
| | — |
| | — |
| | — |
| | 4,410,883 |
|
TRUPS (a) | | 218,287 |
| | — |
| | — |
| | 218,287 |
| | — |
| | — |
| | — |
| | — |
| | 218,287 |
|
Purchased credit-impaired loans | | 23,840 |
| | 287 |
| | 1,798 |
| | 25,925 |
| | — |
| | — |
| | — |
| | — |
| | 25,925 |
|
Total commercial (C&I) | | 19,967,302 |
| | 7,442 |
| | 2,035 |
| | 19,976,779 |
| | 36,564 |
| | 14,385 |
| | 23,363 |
| | 74,312 |
| | 20,051,091 |
|
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Income CRE | | 4,242,044 |
| | 679 |
| | — |
| | 4,242,723 |
| | — |
| | 19 |
| | 1,340 |
| | 1,359 |
| | 4,244,082 |
|
Residential CRE | | 87,487 |
| | 7 |
| | — |
| | 87,494 |
| | — |
| | 466 |
| | — |
| | 466 |
| | 87,960 |
|
Purchased credit-impaired loans | | 4,752 |
| | 128 |
| | 95 |
| | 4,975 |
| | — |
| | — |
| | — |
| | — |
| | 4,975 |
|
Total commercial real estate | | 4,334,283 |
| | 814 |
| | 95 |
| | 4,335,192 |
| | — |
| | 485 |
| | 1,340 |
| | 1,825 |
| | 4,337,017 |
|
Consumer real estate: | | | | | | | | | | | | | | | | | | |
HELOC | | 1,217,344 |
| | 9,156 |
| | 5,669 |
| | 1,232,169 |
| | 43,007 |
| | 4,227 |
| | 7,472 |
| | 54,706 |
| | 1,286,875 |
|
R/E installment loans (b) | | 4,812,446 |
| | 12,894 |
| | 9,170 |
| | 4,834,510 |
| | 20,710 |
| | 1,076 |
| | 9,202 |
| | 30,988 |
| | 4,865,498 |
|
Purchased credit-impaired loans | | 18,720 |
| | 2,770 |
| | 3,276 |
| | 24,766 |
| | — |
| | — |
| | — |
| | — |
| | 24,766 |
|
Total consumer real estate | | 6,048,510 |
| | 24,820 |
| | 18,115 |
| | 6,091,445 |
| | 63,717 |
| | 5,303 |
| | 16,674 |
| | 85,694 |
| | 6,177,139 |
|
Credit card & other: | | | | | | | | | | | | | | | | | | |
Credit card | | 198,917 |
| | 1,076 |
| | 1,178 |
| | 201,171 |
| | — |
| | — |
| | — |
| | — |
| | 201,171 |
|
Other | | 291,700 |
| | 1,802 |
| | 337 |
| | 293,839 |
| | 101 |
| | 44 |
| | 189 |
| | 334 |
| | 294,173 |
|
Purchased credit-impaired loans | | 323 |
| | 98 |
| | 99 |
| | 520 |
| | — |
| | — |
| | — |
| | — |
| | 520 |
|
Total credit card & other | | 490,940 |
| | 2,976 |
| | 1,614 |
| | 495,530 |
| | 101 |
| | 44 |
| | 189 |
| | 334 |
| | 495,864 |
|
Total loans, net of unearned income | | $ | 30,841,035 |
| | $ | 36,052 |
| | $ | 21,859 |
| | $ | 30,898,946 |
| | $ | 100,382 |
| | $ | 20,217 |
| | $ | 41,566 |
| | $ | 162,165 |
| | $ | 31,061,111 |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
| |
(a) | TRUPS is presented net of the valuation allowance of $19.1 million. |
| |
(b) | In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability. |
Troubled Debt Restructurings
As part of FHN’s ongoing risk management practices, FHN attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately.
A modification is classified as a TDR if the borrower is experiencing financial difficulty and it is determined that FHN has granted a concession to the borrower. FHN may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that a borrower may default in the foreseeable future. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty. Concessions could include extension of the maturity date, reductions of the interest rate (which may make the rate lower than current market
for a new loan with similar risk), reduction or forgiveness of accrued interest, or principal forgiveness. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty, and whether a concession has been granted, are subjective in nature and management’s judgment is required when determining whether a modification is classified as a TDR.
For all classes within the commercial portfolio segment, TDRs are typically modified through forbearance agreements (generally 6 to 12 months). Forbearance agreements could include reduced interest rates, reduced payments, release of guarantor, or entering into short sale agreements. FHN’s proprietary modification programs for consumer loans are generally structured using parameters of U.S. government-sponsored programs such as the former Home Affordable Modification Program (“HAMP”). Within the HELOC and R/E installment loans classes of the consumer portfolio segment, TDRs are typically modified by reducing the interest rate (in increments of 25 basis
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 28
Note 4 – Loans (Continued)
points to a minimum of 1 percent for up to 5 years) and a possible maturity date extension to reach an affordable housing debt-to-income ratio. After 5 years, the interest rate generally returns to the original interest rate prior to modification; for certain modifications, the modified interest rate increases 2 percent per year until the original interest rate prior to modification is achieved. Prior to 2020, Consumer real estate mortgage TDRs (previously classified as permanent mortgage) were typically modified by reducing the interest rate (in increments of 25 basis points to a minimum of 2 percent for up to 5 years) and a possible maturity date extension to reach an affordable housing debt-to-income ratio. After 5 years, the interest rate stepped up 1 percent every year until it reached the Federal Home Loan Mortgage Corporation Weekly Survey Rate cap. Contractual maturities may be extended to 40 years for consumer real estate loans. Within the credit card class of the consumer portfolio segment, TDRs are typically modified through either a short-term credit card hardship program or a longer-term credit card workout program. In the credit card hardship program, borrowers may be granted
rate and payment reductions for 6 months to 1 year. In the credit card workout program, customers are granted a rate reduction to 0 percent and term extensions for up to 5 years to pay off the remaining balance.
Despite the absence of a loan modification, the discharge of personal liability through bankruptcy proceedings is considered a concession. As a result, FHN classifies all non-reaffirmed residential real estate loans discharged in Chapter 7 bankruptcy as nonaccruing TDRs.
On March 31, 2020 and December 31, 2019, FHN had $194.7 million and $206.3 million of portfolio loans classified as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reserves of $13.9 million, or 7 percent as of March 31, 2020, and $19.7 million, or 10 percent as of December 31, 2019. Additionally, $50.5 million and $51.1 million of loans held-for-sale as of March 31, 2020 and December 31, 2019, respectively, were classified as TDRs.
The following tables reflect portfolio loans that were classified as TDRs during the three months ended March 31, 2020 and 2019:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | March 31, 2019 |
(Dollars in thousands) | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Commercial (C&I): | | | | | | | | | | | | |
General C&I | | 3 |
| | $ | 5,927 |
| | $ | 4,433 |
| | 2 |
| | $ | 13,895 |
| | $ | 13,820 |
|
Total commercial (C&I) | | 3 |
| | 5,927 |
| | 4,433 |
| | 2 |
| | 13,895 |
| | 13,820 |
|
Consumer real estate: | | | | | | | | | | | | |
HELOC | | 8 |
| | 912 |
| | 891 |
| | 19 |
| | 2,104 |
| | 2,084 |
|
R/E installment loans | | 10 |
| | 1,511 |
| | 1,497 |
| | 47 |
| | 7,425 |
| | 7,413 |
|
Total consumer real estate | | 18 |
| | 2,423 |
| | 2,388 |
| | 66 |
| | 9,529 |
| | 9,497 |
|
Credit card & other | | 24 |
| | 158 |
| | 146 |
| | 15 |
| | 74 |
| | 71 |
|
Total troubled debt restructurings | | 45 |
| | $ | 8,508 |
| | $ | 6,967 |
| | 83 |
| | $ | 23,498 |
| | $ | 23,388 |
|
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 29
Note 4 – Loans (Continued)
The following tables present TDRs which re-defaulted during the three months ended March 31, 2020 and 2019, and as to which the modification occurred 12 months or less prior to the re-default. For purposes of this disclosure, FHN generally defines payment default as 30 or more days past due.
|
| | | | | | | | | | | | | | |
| | March 31, 2020 | | March 31, 2019 |
(Dollars in thousands) | | Number | | Recorded Investment | | Number | | Recorded Investment |
Commercial (C&I): | | | | | | | | |
General C&I | | — |
| | $ | — |
| | — |
| | $ | — |
|
Total commercial (C&I) | | — |
| | — |
| | — |
| | — |
|
Consumer real estate: | | | | | | | | |
HELOC | | 4 |
| | 960 |
| | 1 |
| | 33 |
|
R/E installment loans | | 5 |
| | 344 |
| | — |
| | — |
|
Total consumer real estate | | 9 |
| | 1,304 |
| | 1 |
| | 33 |
|
Credit card & other | | 7 |
| | 31 |
| | 8 |
| | 18 |
|
Total troubled debt restructurings | | 16 |
| | $ | 1,335 |
| | 9 |
| | $ | 51 |
|
Accrued Interest
In accordance with its accounting policy elections, FHN has excluded AIR from the amortized cost basis of Loans, net of unearned income. AIR is included within Other assets in the Consolidated Condensed Statements of Condition and the amounts by portfolio segment are presented in the following table.
|
| | | | |
| | March 31 |
(Dollars in thousands) | | 2020 |
Commercial: | | |
Commercial, financial, and industrial | | $ | 55,215 |
|
Commercial real estate | | 11,233 |
|
Consumer: | | |
Consumer real estate | | 16,154 |
|
Credit card & other | | 1,672 |
|
Total accrued interest | | $ | 84,274 |
|
Purchased Credit-Impaired Loans
The following table presents a rollforward of the accretable yield for the three and nine monthsyear ended September 30, 2017 and 2016:
| | | | Three Months Ended September 30 | | Nine months ended September 30 | | Year Ended |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2019 |
Balance, beginning of period | | $ | 4,045 |
| | $ | 6,171 |
| | $ | 6,871 |
| | $ | 8,542 |
| | $ | 13,375 |
|
Addition | | — |
| | 2,883 |
| | — |
| | 2,883 |
| |
Accretion | | (642 | ) | | (837 | ) | | (2,412 | ) | | (2,984 | ) | | (5,792 | ) |
Adjustment for payoffs | | (198 | ) | | (179 | ) | | (1,232 | ) | | (4,408 | ) | | (2,438 | ) |
Adjustment for charge-offs | | — |
| | — |
| | — |
| | (674 | ) | | (479 | ) |
Adjustment for pool excess recovery (a) | | — |
| | — |
| | (222 | ) | | — |
| | — |
|
Increase/(decrease) in accretable yield (b) | | (2 | ) | | 686 |
| | 112 |
| | 5,398 |
| |
Increase in accretable yield (b) | | | 5,513 |
|
Disposals | | | (4 | ) |
Other | | — |
| | — |
| | 86 |
| | (33 | ) | | (367 | ) |
Balance, end of period | | $ | 3,203 |
| | $ | 8,724 |
| | $ | 3,203 |
| | $ | 8,724 |
| | $ | 9,808 |
|
| |
(a) | Represents the removal of accretable difference for the remaining loans in a pool which is now in a recovery state. |
| |
(b) | Includes changes in the accretable yield due to both transfers from the nonaccretable difference and the impact of changes in the expected timing of the cash flows. |
At September 30, 2017,December 31, 2019, the ALLL related to PCI loans was $3.1 million compared to $.7 million at December 31, 2016. A loan loss provision expense$2.0 million. Net charge-offs related to PCI loans of $2.6 million was recognized during the three months ended September 30, 2017, as compared to $.3 million recognized during the three months ended September 30, 2016.2019 were $5.8 million. The loan loss provision expense related to PCI loans during 2019 was $1.3 million.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 30
Note 4 – Loans (Continued)
The following table reflects the outstanding principal balance and carrying amounts of the acquired PCI loans as of September 30, 2017 and December 31, 2016:2019:
|
| | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Carrying value | | Unpaid balance |
Commercial, financial and industrial | | $ | 24,973 |
| | $ | 25,938 |
|
Commercial real estate | | 5,078 |
| | 5,466 |
|
Consumer real estate | | 23,681 |
| | 26,245 |
|
Credit card and other | | 489 |
| | 567 |
|
Total | | $ | 54,221 |
| | $ | 58,216 |
|
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Carrying value | | Unpaid balance | | Carrying value | | Unpaid balance |
Commercial, financial and industrial | | $ | 17,903 |
| | $ | 21,239 |
| | $ | 40,368 |
| | $ | 41,608 |
|
Commercial real estate | | 3,842 |
| | 4,933 |
| | 4,763 |
| | 6,514 |
|
Consumer real estate | | 940 |
| | 1,259 |
| | 1,172 |
| | 1,677 |
|
Credit card and other | | — |
| | — |
| | 52 |
| | 64 |
|
Total | | $ | 22,685 |
| | $ | 27,431 |
| | $ | 46,355 |
| | $ | 49,863 |
|
Note 4 – Loans (Continued)
Impaired Loans
The following tables provide information at September 30, 2017 and December 31, 2016,2019 by class related to individually impaired loans and consumer TDRs, regardless of accrual status. Recorded investment is defined as the amount of the investment in a loan, excluding any valuation allowance but including any direct write-down of the investment. For purposes of this disclosure, PCI loans and the TRUPsTRUPS valuation allowance havehas been excluded.
| | | | September 30, 2017 | | December 31, 2016 | | December 31, 2019 |
(Dollars in thousands) | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
Impaired loans with no related allowance recorded: | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | |
General C&I | | $ | 2,055 |
| | $ | 10,769 |
| | $ | — |
| | $ | 10,419 |
| | $ | 16,636 |
| | $ | — |
| | $ | 52,672 |
| | $ | 63,602 |
| | $ | — |
|
Income CRE | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,563 |
| | 1,563 |
| | — |
|
Total | | $ | 2,055 |
| | $ | 10,769 |
| | $ | — |
| | $ | 10,419 |
| | $ | 16,636 |
| | $ | — |
| | $ | 54,235 |
| | $ | 65,165 |
| | $ | — |
|
Consumer: | | | | | | | | | | | | | | | | | | |
HELOC (a) | | $ | 10,513 |
| | $ | 20,372 |
| | $ | — |
| | $ | 11,383 |
| | $ | 21,662 |
| | $ | — |
| | $ | 4,940 |
| | $ | 10,438 |
| | $ | — |
|
R/E installment loans (a) | | 4,431 |
| | 5,135 |
| | — |
| | 3,957 |
| | 4,992 |
| | — |
| | 7,593 |
| | 10,054 |
| | — |
|
Permanent mortgage (a) | | 5,481 |
| | 7,604 |
| | — |
| | 5,311 |
| | 7,899 |
| | — |
| |
Total | | $ | 20,425 |
| | $ | 33,111 |
| | $ | — |
| | $ | 20,651 |
| | $ | 34,553 |
| | $ | — |
| | $ | 12,533 |
| | $ | 20,492 |
| | $ | — |
|
Impaired loans with related allowance recorded: | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | |
General C&I | | $ | 26,876 |
| | $ | 27,345 |
| | $ | 5,970 |
| | $ | 34,334 |
| | $ | 34,470 |
| | $ | 3,294 |
| | $ | 29,766 |
| | $ | 31,536 |
| | $ | 6,196 |
|
TRUPS | | 3,097 |
| | 3,700 |
| | 925 |
| | 3,209 |
| | 3,700 |
| | 925 |
| | — |
| | — |
| | — |
|
Income CRE | | 1,525 |
| | 1,525 |
| | 43 |
| | 1,831 |
| | 2,209 |
| | 62 |
| | — |
| | — |
| | — |
|
Residential CRE | | 795 |
| | 1,263 |
| | 83 |
| | 1,293 |
| | 1,761 |
| | 132 |
| |
Total | | $ | 32,293 |
| | $ | 33,833 |
| | $ | 7,021 |
| | $ | 40,667 |
| | $ | 42,140 |
| | $ | 4,413 |
| | $ | 29,766 |
| | $ | 31,536 |
| | $ | 6,196 |
|
Consumer: | | | | | | | | | | | | | | | | | | |
HELOC | | $ | 74,009 |
| | $ | 76,587 |
| | $ | 14,174 |
| | $ | 84,711 |
| | $ | 87,126 |
| | $ | 15,927 |
| | $ | 55,522 |
| | $ | 59,122 |
| | $ | 7,016 |
|
R/E installment loans | | 46,905 |
| | 47,708 |
| | 9,762 |
| | 53,409 |
| | 54,559 |
| | 12,875 |
| | 94,191 |
| | 104,121 |
| | 12,282 |
|
Permanent mortgage | | 78,600 |
| | 90,003 |
| | 12,601 |
| | 88,615 |
| | 100,983 |
| | 12,470 |
| |
Credit card & other | | 544 |
| | 544 |
| | 246 |
| | 306 |
| | 306 |
| | 133 |
| | 653 |
| | 653 |
| | 422 |
|
Total | | $ | 200,058 |
| | $ | 214,842 |
| | $ | 36,783 |
| | $ | 227,041 |
| | $ | 242,974 |
| | $ | 41,405 |
| | $ | 150,366 |
| | $ | 163,896 |
| | $ | 19,720 |
|
Total commercial | | $ | 34,348 |
| | $ | 44,602 |
| | $ | 7,021 |
| | $ | 51,086 |
| | $ | 58,776 |
| | $ | 4,413 |
| | $ | 84,001 |
| | $ | 96,701 |
| | $ | 6,196 |
|
Total consumer | | $ | 220,483 |
| | $ | 247,953 |
| | $ | 36,783 |
| | $ | 247,692 |
| | $ | 277,527 |
| | $ | 41,405 |
| | $ | 162,899 |
| | $ | 184,388 |
| | $ | 19,720 |
|
Total impaired loans | | $ | 254,831 |
| | $ | 292,555 |
| | $ | 43,804 |
| | $ | 298,778 |
| | $ | 336,303 |
| | $ | 45,818 |
| | $ | 246,900 |
| | $ | 281,089 |
| | $ | 25,916 |
|
| |
(a) | All discharged bankruptcy loans are charged down to an estimate of net realizable value and do not carry any allowance. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 31
Note 4 – Loans (Continued)
| | | | Three Months Ended September 30 | | Nine months ended September 30 | Three Months Ended March 31 |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2019 |
(Dollars in thousands) | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
Impaired loans with no related allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
General C&I | | $ | 5,771 |
| | $ | — |
| | $ | 13,708 |
| | $ | — |
| | $ | 8,706 |
| | $ | — |
| | $ | 12,088 |
| | $ | — |
| | $ | 55,765 |
| | $ | 180 |
|
Loans to mortgage companies | | | — |
| | — |
|
Income CRE | | — |
| | — |
| | 1,234 |
| | — |
| | — |
| | — |
| | 2,057 |
| | — |
| | 1,556 |
| | 13 |
|
Residential CRE | | | — |
| | — |
|
Total | | $ | 5,771 |
| | $ | — |
| | $ | 14,942 |
| | $ | — |
| | $ | 8,706 |
| | $ | — |
| | $ | 14,145 |
| | $ | — |
| | $ | 57,321 |
| | $ | 193 |
|
Consumer: | | | | | | | | | | | | | | | | | | | | |
HELOC (a) | | $ | 10,225 |
| | $ | — |
| | $ | 11,273 |
| | $ | — |
| | $ | 10,536 |
| | $ | — |
| | $ | 11,100 |
| | $ | — |
| | $ | 7,597 |
| | $ | — |
|
R/E installment loans (a) | | 4,182 |
| | — |
| | 4,158 |
| | — |
| | 4,014 |
| | — |
| | 4,333 |
| | — |
| | 8,637 |
| | — |
|
Permanent mortgage (a) | | 5,693 |
| | — |
| | 4,280 |
| | — |
| | 5,701 |
| | — |
| | 4,292 |
| | — |
| |
Total | | $ | 20,100 |
| | $ | — |
| | $ | 19,711 |
| | $ | — |
| | $ | 20,251 |
| | $ | — |
| | $ | 19,725 |
| | $ | — |
| | $ | 16,234 |
| | $ | — |
|
Impaired loans with related allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
General C&I | | $ | 26,144 |
| | $ | 193 |
| | $ | 33,433 |
| | $ | 289 |
| | $ | 29,136 |
| | $ | 597 |
| | $ | 29,896 |
| | $ | 668 |
| | $ | 7,294 |
| | $ | — |
|
TRUPS | | 3,117 |
| | — |
| | 3,258 |
| | — |
| | 3,157 |
| | — |
| | 3,291 |
| | — |
| | 2,863 |
| | — |
|
Income CRE | | 1,628 |
| | 11 |
| | 3,211 |
| | 15 |
| | 1,737 |
| | 39 |
| | 4,376 |
| | 55 |
| | 367 |
| | 4 |
|
Residential CRE | | 1,044 |
| | — |
| | 1,355 |
| | 5 |
| | 1,210 |
| | 10 |
| | 1,376 |
| | 17 |
| | — |
| | — |
|
Total | | $ | 31,933 |
| | $ | 204 |
| | $ | 41,257 |
| | $ | 309 |
| | $ | 35,240 |
| | $ | 646 |
| | $ | 38,939 |
| | $ | 740 |
| | $ | 10,524 |
| | $ | 4 |
|
Consumer: | | | | | | | | | | | | | | | | | | | | |
HELOC | | $ | 74,894 |
| | $ | 554 |
| | $ | 87,919 |
| | $ | 546 |
| | $ | 78,859 |
| | $ | 1,695 |
| | $ | 88,266 |
| | $ | 1,527 |
| | $ | 65,013 |
| | $ | 522 |
|
R/E installment loans | | 47,628 |
| | 315 |
| | 57,775 |
| | 357 |
| | 49,634 |
| | 950 |
| | 58,890 |
| | 1,019 |
| | 108,059 |
| | 822 |
|
Permanent mortgage | | 79,305 |
| | 616 |
| | 90,697 |
| | 544 |
| | 82,186 |
| | 1,805 |
| | 92,716 |
| | 1,602 |
| |
Credit card & other | | 452 |
| | 3 |
| | 348 |
| | 4 |
| | 351 |
| | 8 |
| | 353 |
| | 10 |
| | 690 |
| | 5 |
|
Total | | $ | 202,279 |
| | $ | 1,488 |
| | $ | 236,739 |
| | $ | 1,451 |
| | $ | 211,030 |
| | $ | 4,458 |
| | $ | 240,225 |
| | $ | 4,158 |
| | $ | 173,762 |
| | $ | 1,349 |
|
Total commercial | | $ | 37,704 |
| | $ | 204 |
| | $ | 56,199 |
| | $ | 309 |
| | $ | 43,946 |
| | $ | 646 |
| | $ | 53,084 |
| | $ | 740 |
| | $ | 67,845 |
| | $ | 197 |
|
Total consumer | | $ | 222,379 |
| | $ | 1,488 |
| | $ | 256,450 |
| | $ | 1,451 |
| | $ | 231,281 |
| | $ | 4,458 |
| | $ | 259,950 |
| | $ | 4,158 |
| | $ | 189,996 |
| | $ | 1,349 |
|
Total impaired loans | | $ | 260,083 |
| | $ | 1,692 |
| | $ | 312,649 |
| | $ | 1,760 |
| | $ | 275,227 |
| | $ | 5,104 |
| | $ | 313,034 |
| | $ | 4,898 |
| | $ | 257,841 |
| | $ | 1,546 |
|
| |
(a) | All discharged bankruptcy loans are charged down to an estimate of net realizable value and do not carry any allowance. |
Asset Quality Indicators
FHN employs a dual grade commercial risk grading methodology to assign an estimate for the probability of default (“PD”) and the loss given default (“LGD”) for each commercial loan using 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. 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. 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. 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 annually or earlier 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. Loan grading discipline is regularly reviewed internally by Credit Assurance Services 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. 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. See Note 5 – Allowance for Loan Losses for further discussion on the credit grading system.
Note 4 – Loans (Continued)FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 32
The following tables provide the balances of commercial loan portfolio classes with associated allowance, disaggregated by PD grade as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
(Dollars in thousands) | | General C&I | | Loans to Mortgage Companies | | TRUPS (a) | | Income CRE | | Residential CRE | | Total | | Percentage of Total | | Allowance for Loan Losses |
PD Grade: | | | | | | | | | | | | | | | | |
1 | | $ | 583,818 |
| | $ | — |
| | $ | — |
| | $ | 1,832 |
| | $ | — |
| | $ | 585,650 |
| | 4 | % | | $ | 81 |
|
2 | | 905,992 |
| | — |
| | — |
| | 3,777 |
| | 112 |
| | 909,881 |
| | 6 |
| | 385 |
|
3 | | 500,056 |
| | 643,772 |
| | — |
| | 156,694 |
| | — |
| | 1,300,522 |
| | 9 |
| | 277 |
|
4 | | 1,026,592 |
| | 578,566 |
| | — |
| | 295,781 |
| | 212 |
| | 1,901,151 |
| | 13 |
| | 955 |
|
5 | | 1,460,107 |
| | 211,846 |
| | — |
| | 443,751 |
| | 2,053 |
| | 2,117,757 |
| | 14 |
| | 7,697 |
|
6 | | 1,519,911 |
| | 362,685 |
| | — |
| | 413,342 |
| | 6,114 |
| | 2,302,052 |
| | 14 |
| | 9,857 |
|
7 | | 1,705,394 |
| | 60,135 |
| | — |
| | 446,493 |
| | 8,372 |
| | 2,220,394 |
| | 14 |
| | 13,297 |
|
8 | | 1,042,209 |
| | 34,623 |
| | — |
| | 259,813 |
| | 4,908 |
| | 1,341,553 |
| | 9 |
| | 20,963 |
|
9 | | 556,662 |
| | 60,954 |
| | — |
| | 66,082 |
| | 4,276 |
| | 687,974 |
| | 5 |
| | 11,376 |
|
10 | | 395,187 |
| | — |
| | — |
| | 31,570 |
| | 6,558 |
| | 433,315 |
| | 3 |
| | 8,502 |
|
11 | | 217,190 |
| | 13,548 |
| | — |
| | 24,878 |
| | 4,819 |
| | 260,435 |
| | 2 |
| | 6,730 |
|
12 | | 185,929 |
| | — |
| | — |
| | 10,798 |
| | 2,709 |
| | 199,436 |
| | 1 |
| | 7,065 |
|
13 | | 142,729 |
| | — |
| | 304,236 |
| | 38,979 |
| | 91 |
| | 486,035 |
| | 3 |
| | 6,927 |
|
14,15,16 | | 226,924 |
| | 26 |
| | — |
| | 10,062 |
| | 819 |
| | 237,831 |
| | 2 |
| | 23,974 |
|
Collectively evaluated for impairment | | 10,468,700 |
| | 1,966,155 |
| | 304,236 |
| | 2,203,852 |
| | 41,043 |
| | 14,983,986 |
| | 99 |
| | 118,086 |
|
Individually evaluated for impairment | | 28,931 |
| | — |
| | 3,097 |
| | 1,525 |
| | 795 |
| | 34,348 |
| | 1 |
| | 7,021 |
|
Purchased credit-impaired loans | | 20,725 |
| | — |
| | — |
| | 3,792 |
| | 8 |
| | 24,525 |
| | — |
| | 2,781 |
|
Total commercial loans | | $ | 10,518,356 |
| | $ | 1,966,155 |
| | $ | 307,333 |
| | $ | 2,209,169 |
| | $ | 41,846 |
| | $ | 15,042,859 |
| | 100 | % | | $ | 127,888 |
|
Note 4 – Loans (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
(Dollars in thousands) | | General C&I | | Loans to Mortgage Companies | | TRUPS (a) | | Income CRE | | Residential CRE | | Total | | Percentage of Total | | Allowance for Loan Losses |
PD Grade: | | | | | | | | | | | | | | | | |
1 | | $ | 465,179 |
| | $ | — |
| | $ | — |
| | $ | 1,078 |
| | $ | — |
| | $ | 466,257 |
| | 3 | % | | $ | 77 |
|
2 | | 791,183 |
| | — |
| | — |
| | 11,742 |
| | 87 |
| | 803,012 |
| | 6 |
| | 403 |
|
3 | | 491,386 |
| | 462,486 |
| | — |
| | 153,670 |
| | — |
| | 1,107,542 |
| | 8 |
| | 304 |
|
4 | | 978,282 |
| | 332,107 |
| | — |
| | 222,422 |
| | — |
| | 1,532,811 |
| | 11 |
| | 953 |
|
5 | | 1,232,401 |
| | 275,209 |
| | — |
| | 365,653 |
| | 702 |
| | 1,873,965 |
| | 13 |
| | 6,670 |
|
6 | | 1,540,519 |
| | 614,109 |
| | — |
| | 338,344 |
| | 9,338 |
| | 2,502,310 |
| | 17 |
| | 10,403 |
|
7 | | 1,556,117 |
| | 317,283 |
| | — |
| | 352,390 |
| | 2,579 |
| | 2,228,369 |
| | 16 |
| | 14,010 |
|
8 | | 963,359 |
| | 30,974 |
| | — |
| | 425,503 |
| | 2,950 |
| | 1,422,786 |
| | 10 |
| | 25,986 |
|
9 | | 611,774 |
| | 4,299 |
| | — |
| | 105,277 |
| | 4,417 |
| | 725,767 |
| | 5 |
| | 13,857 |
|
10 | | 355,359 |
| | 8,663 |
| | — |
| | 50,484 |
| | 9,110 |
| | 423,616 |
| | 3 |
| | 8,400 |
|
11 | | 238,230 |
| | — |
| | — |
| | 20,600 |
| | 6,541 |
| | 265,371 |
| | 2 |
| | 6,556 |
|
12 | | 170,531 |
| | — |
| | — |
| | 15,395 |
| | 4,168 |
| | 190,094 |
| | 1 |
| | 6,377 |
|
13 | | 121,276 |
| | — |
| | 304,236 |
| | 6,748 |
| | 311 |
| | 432,571 |
| | 3 |
| | 4,225 |
|
14,15,16 | | 194,572 |
| | 59 |
| | — |
| | 16,313 |
| | 1,659 |
| | 212,603 |
| | 1 |
| | 20,297 |
|
Collectively evaluated for impairment | | 9,710,168 |
| | 2,045,189 |
| | 304,236 |
| | 2,085,619 |
| | 41,862 |
| | 14,187,074 |
| | 99 |
| | 118,518 |
|
Individually evaluated for impairment | | 44,753 |
| | — |
| | 3,209 |
| | 1,831 |
| | 1,293 |
| | 51,086 |
| | 1 |
| | 4,413 |
|
Purchased credit-impaired loans | | 40,532 |
| | — |
| | — |
| | 4,583 |
| | 335 |
| | 45,450 |
| | — |
| | 319 |
|
Total commercial loans | | $ | 9,795,453 |
| | $ | 2,045,189 |
| | $ | 307,445 |
| | $ | 2,092,033 |
| | $ | 43,490 |
| | $ | 14,283,610 |
| | 100 | % | | $ | 123,250 |
|
| |
(a) | Balances as of September 30, 2017 and December 31, 2016, presented net of a $25.5 million valuation allowance. Based on the underlying structure of the notes, the highest possible internal grade is “13”. |
The consumer 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 consumer loan-types, FHN is able to utilize the Fair Isaac Corporation (“FICO”) score, among other attributes, to assess the credit 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 indicators of asset quality within the credit card and other consumer portfolio.
The following table reflects the percentage of balances outstanding by average, refreshed FICO scores for the HELOC, real estate installment, and permanent mortgage classes of loans as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | HELOC | | R/E Installment Loans | | Permanent Mortgage | | HELOC | | R/E Installment Loans | | Permanent Mortgage |
FICO score 740 or greater | | 58.5 | % | | | 71.8 | % | | | 45.1 | % | | | 56.9 | % | | | 70.3 | % | | | 45.0 | % | |
FICO score 720-739 | | 8.8 |
| | | 8.1 |
| | | 12.8 |
| | | 8.8 |
| | | 8.3 |
| | | 9.5 |
| |
FICO score 700-719 | | 8.2 |
| | | 6.6 |
| | | 11.0 |
| | | 8.6 |
| | | 6.8 |
| | | 9.2 |
| |
FICO score 660-699 | | 12.1 |
| | | 8.4 |
| | | 15.3 |
| | | 13.2 |
| | | 8.4 |
| | | 17.1 |
| |
FICO score 620-659 | | 5.6 |
| | | 2.7 |
| | | 7.0 |
| | | 5.6 |
| | | 3.5 |
| | | 9.1 |
| |
FICO score less than 620 (a) | | 6.8 |
| | | 2.4 |
| | | 8.8 |
| | | 6.9 |
| | | 2.7 |
| | | 10.1 |
| |
Total | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | |
| |
(a) | For this group, a majority of the loan balances had FICO scores at the time of the origination that exceeded 620 but have since deteriorated as the loans have seasoned. |
Note 4 – Loans (Continued)
Nonaccrual and Past Due Loans
The following table reflects accruing and non-accruing loans by class on September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | $ | 10,462,376 |
| | $ | 19,324 |
| | $ | 129 |
| | $ | 10,481,829 |
| | $ | 5,260 |
| | $ | 1,252 |
| | $ | 9,290 |
| | $ | 15,802 |
| | $ | 10,497,631 |
|
Loans to mortgage companies | | 1,966,129 |
| | — |
| | — |
| | 1,966,129 |
| | — |
| | — |
| | 26 |
| | 26 |
| | 1,966,155 |
|
TRUPS (a) | | 304,236 |
| | — |
| | — |
| | 304,236 |
| | — |
| | — |
| | 3,097 |
| | 3,097 |
| | 307,333 |
|
Purchased credit-impaired loans | | 6,080 |
| | 70 |
| | 14,575 |
| | 20,725 |
| | — |
| | — |
| | — |
| | — |
| | 20,725 |
|
Total commercial (C&I) | | 12,738,821 |
| | 19,394 |
| | 14,704 |
| | 12,772,919 |
| | 5,260 |
| | 1,252 |
| | 12,413 |
| | 18,925 |
| | 12,791,844 |
|
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Income CRE | | 2,204,042 |
| | 490 |
| | — |
| | 2,204,532 |
| | 105 |
| | — |
| | 740 |
| | 845 |
| | 2,205,377 |
|
Residential CRE | | 41,043 |
| | — |
| | — |
| | 41,043 |
| | — |
| | — |
| | 795 |
| | 795 |
| | 41,838 |
|
Purchased credit-impaired loans | | 3,800 |
| | — |
| | — |
| | 3,800 |
| | — |
| | — |
| | — |
| | — |
| | 3,800 |
|
Total commercial real estate | | 2,248,885 |
| | 490 |
| | — |
| | 2,249,375 |
| | 105 |
| | — |
| | 1,535 |
| | 1,640 |
| | 2,251,015 |
|
Consumer real estate: | | | | | | | | | | | | | | | | | | |
HELOC | | 1,375,690 |
| | 14,312 |
| | 8,518 |
| | 1,398,520 |
| | 43,188 |
| | 3,217 |
| | 9,020 |
| | 55,425 |
| | 1,453,945 |
|
R/E installment loans | | 2,883,593 |
| | 5,855 |
| | 3,609 |
| | 2,893,057 |
| | 15,510 |
| | 2,875 |
| | 3,035 |
| | 21,420 |
| | 2,914,477 |
|
Purchased credit-impaired loans | | 1,198 |
| | — |
| | 97 |
| | 1,295 |
| | — |
| | — |
| | — |
| | — |
| | 1,295 |
|
Total consumer real estate | | 4,260,481 |
| | 20,167 |
| | 12,224 |
| | 4,292,872 |
| | 58,698 |
| | 6,092 |
| | 12,055 |
| | 76,845 |
| | 4,369,717 |
|
Permanent mortgage | | 369,546 |
| | 3,333 |
| | 2,753 |
| | 375,632 |
| | 12,557 |
| | 577 |
| | 14,316 |
| | 27,450 |
| | 403,082 |
|
Credit card & other: | | | | | | | | | | | | | | | | | | |
Credit card | | 191,714 |
| | 1,254 |
| | 1,081 |
| | 194,049 |
| | — |
| | — |
| | — |
| | — |
| | 194,049 |
|
Other | | 155,460 |
| | 610 |
| | 188 |
| | 156,258 |
| | — |
| | — |
| | 126 |
| | 126 |
| | 156,384 |
|
Purchased credit-impaired loans | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total credit card & other | | 347,174 |
| | 1,864 |
| | 1,269 |
| | 350,307 |
| | — |
| | — |
| | 126 |
| | 126 |
| | 350,433 |
|
Total loans, net of unearned income | | $ | 19,964,907 |
| | $ | 45,248 |
| | $ | 30,950 |
| | $ | 20,041,105 |
| | $ | 76,620 |
| | $ | 7,921 |
| | $ | 40,445 |
| | $ | 124,986 |
| | $ | 20,166,091 |
|
(a) TRUPS is presented net of the valuation allowance of $25.5 million.
Note 4 – Loans (Continued)
The following table reflects accruing and non-accruing loans by class on December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | $ | 9,720,231 |
| | $ | 5,199 |
| | $ | 23 |
| | $ | 9,725,453 |
| | $ | 16,106 |
| | $ | 374 |
| | $ | 12,988 |
| | $ | 29,468 |
| | $ | 9,754,921 |
|
Loans to mortgage companies | | 2,041,408 |
| | 3,722 |
| | — |
| | 2,045,130 |
| | — |
| | — |
| | 59 |
| | 59 |
| | 2,045,189 |
|
TRUPS (a) | | 304,236 |
| | — |
| | — |
| | 304,236 |
| | — |
| | — |
| | 3,209 |
| | 3,209 |
| | 307,445 |
|
Purchased credit-impaired loans | | 40,113 |
| | 185 |
| | 234 |
| | 40,532 |
| | — |
| | — |
| | — |
| | — |
| | 40,532 |
|
Total commercial (C&I) | | 12,105,988 |
| | 9,106 |
| | 257 |
| | 12,115,351 |
| | 16,106 |
| | 374 |
| | 16,256 |
| | 32,736 |
| | 12,148,087 |
|
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Income CRE | | 2,085,455 |
| | 14 |
| | — |
| | 2,085,469 |
| | 232 |
| | 460 |
| | 1,289 |
| | 1,981 |
| | 2,087,450 |
|
Residential CRE | | 42,182 |
| | 178 |
| | — |
| | 42,360 |
| | — |
| | — |
| | 795 |
| | 795 |
| | 43,155 |
|
Purchased credit-impaired loans | | 4,809 |
| | 109 |
| | — |
| | 4,918 |
| | — |
| | — |
| | — |
| | — |
| | 4,918 |
|
Total commercial real estate | | 2,132,446 |
| | 301 |
| | — |
| | 2,132,747 |
| | 232 |
| | 460 |
| | 2,084 |
| | 2,776 |
| | 2,135,523 |
|
Consumer real estate: | | | | | | | | | | | | | | | | | | |
HELOC | | 1,602,640 |
| | 17,997 |
| | 10,859 |
| | 1,631,496 |
| | 46,964 |
| | 4,201 |
| | 8,922 |
| | 60,087 |
| | 1,691,583 |
|
R/E installment loans | | 2,794,866 |
| | 7,844 |
| | 5,158 |
| | 2,807,868 |
| | 17,989 |
| | 2,383 |
| | 2,353 |
| | 22,725 |
| | 2,830,593 |
|
Purchased credit-impaired loans | | 1,319 |
| | 164 |
| | 93 |
| | 1,576 |
| | — |
| | — |
| | — |
| | — |
| | 1,576 |
|
Total consumer real estate | | 4,398,825 |
| | 26,005 |
| | 16,110 |
| | 4,440,940 |
| | 64,953 |
| | 6,584 |
| | 11,275 |
| | 82,812 |
| | 4,523,752 |
|
Permanent mortgage | | 385,972 |
| | 4,544 |
| | 5,428 |
| | 395,944 |
| | 11,867 |
| | 2,194 |
| | 13,120 |
| | 27,181 |
| | 423,125 |
|
Credit card & other: | | | | | | | | | | | | | | | | | | |
Credit card | | 188,573 |
| | 1,622 |
| | 1,456 |
| | 191,651 |
| | — |
| | — |
| | — |
| | — |
| | 191,651 |
|
Other | | 166,062 |
| | 992 |
| | 134 |
| | 167,188 |
| | — |
| | — |
| | 142 |
| | 142 |
| | 167,330 |
|
Purchased credit-impaired loans | | 52 |
| | — |
| | — |
| | 52 |
| | — |
| | — |
| | — |
| | — |
| | 52 |
|
Total credit card & other | | 354,687 |
| | 2,614 |
| | 1,590 |
| | 358,891 |
| | — |
| | — |
| | 142 |
| | 142 |
| | 359,033 |
|
Total loans, net of unearned income | | $ | 19,377,918 |
| | $ | 42,570 |
| | $ | 23,385 |
| | $ | 19,443,873 |
| | $ | 93,158 |
| | $ | 9,612 |
| | $ | 42,877 |
| | $ | 145,647 |
| | $ | 19,589,520 |
|
(a) TRUPS is presented net of the valuation allowance of $25.5 million.
Note 4 – Loans (Continued)
Troubled Debt Restructurings
As part of FHN’s ongoing risk management practices, FHN attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately.
A modification is classified as a TDR if the borrower is experiencing financial difficulty and it is determined that FHN has granted a concession to the borrower. FHN may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that a borrower may default in the foreseeable future. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty. Concessions could include extension of the maturity date, reductions of the interest rate (which may make the rate lower than current market for a new loan with similar risk), reduction or forgiveness of accrued interest, or principal forgiveness. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty, and whether a concession has been granted, are subjective in nature and management’s judgment is required when determining whether a modification is classified as a TDR.
For all classes within the commercial portfolio segment, TDRs are typically modified through forbearance agreements (generally 6 to 12 months). Forbearance agreements could include reduced interest rates, reduced payments, release of guarantor, or entering into short sale agreements. FHN’s proprietary modification programs for consumer loans are generally structured using parameters of U.S. government-sponsored programs such as the former Home Affordable Modification Program (“HAMP”). Within the HELOC and R/E installment loans classes of the consumer portfolio segment, TDRs are typically modified by reducing the interest rate (in increments of 25 basis points to a minimum of 1 percent for up to 5 years) and a possible maturity date extension to reach an affordable housing debt-to-income ratio. After 5 years, the interest rate generally returns to the original interest rate prior to modification; for certain modifications, the modified interest rate increases 2 percent per year until the original interest rate prior to modification is achieved. Permanent mortgage TDRs are typically modified by reducing the interest rate (in increments of 25 basis points to a minimum of 2 percent for up to 5 years) and a possible maturity date extension to reach an affordable housing debt-to-income ratio. After 5 years, the interest rate steps up 1 percent every year until it reaches the Federal Home Loan Mortgage Corporation Weekly Survey Rate cap. Contractual maturities may be extended to 40 years on permanent mortgages and to 30 years for consumer real estate loans. Within the credit card class of the consumer portfolio segment, TDRs are typically modified through either a short-term credit card hardship program or a longer-term credit card workout program. In the credit card hardship program, borrowers may be granted rate and payment reductions for 6 months to 1 year. In the credit card workout program, customers are granted a rate reduction to 0 percent and term extensions for up to 5 years to pay off the remaining balance.
Despite the absence of a loan modification, the discharge of personal liability through bankruptcy proceedings is considered a concession. As a result, FHN classifies all non-reaffirmed residential real estate loans discharged in Chapter 7 bankruptcy as nonaccruing TDRs.
On September 30, 2017 and December 31, 2016, FHN had $241.6 million and $285.2 million of portfolio loans classified as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reserves of $38.6 million, or 16 percent as of September 30, 2017, and $44.9 million, or 16 percent as of December 31, 2016. Additionally, $63.2 million and $69.3 million of loans held-for-sale as of September 30, 2017 and December 31, 2016, respectively, were classified as TDRs.
Note 4 – Loans (Continued)
The following tables reflect portfolio loans that were classified as TDRs during the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
(Dollars in thousands) | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Commercial (C&I): | | | | | | | | | | | | |
General C&I | | — |
| | $ | — |
| | $ | — |
| | 2 |
| | $ | 842 |
| | $ | 836 |
|
Total commercial (C&I) | | — |
| | — |
| | — |
| | 2 |
| | 842 |
| | 836 |
|
Consumer real estate: | | | | | | | | | | | | |
HELOC | | 45 |
| | 4,451 |
| | 4,396 |
| | 107 |
| | 9,333 |
| | 9,139 |
|
R/E installment loans | | 15 |
| | 1,630 |
| | 1,622 |
| | 43 |
| | 3,386 |
| | 3,306 |
|
Total consumer real estate | | 60 |
| | 6,081 |
| | 6,018 |
| | 150 |
| | 12,719 |
| | 12,445 |
|
Permanent mortgage | | 2 |
| | 34 |
| | 32 |
| | 11 |
| | 2,043 |
| | 2,028 |
|
Credit card & other | | 37 |
| | 261 |
| | 251 |
| | 66 |
| | 426 |
| | 411 |
|
Total troubled debt restructurings | | 99 |
| | $ | 6,376 |
| | $ | 6,301 |
| | 229 |
| | $ | 16,030 |
| | $ | 15,720 |
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 |
(Dollars in thousands) | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Commercial (C&I): | | | | | | | | | | | | |
General C&I | | 2 |
| | $ | 419 |
| | $ | 419 |
| | 7 |
| | $ | 20,302 |
| | $ | 19,194 |
|
Total commercial (C&I) | | 2 |
| | 419 |
| | 419 |
| | 7 |
| | 20,302 |
| | 19,194 |
|
Commercial real estate: | | | | | | | | | | | | |
Income CRE | | 1 |
| | 100 |
| | 99 |
| | 1 |
| | 100 |
| | 99 |
|
Total commercial real estate | | 1 |
| | 100 |
| | 99 |
| | 1 |
| | 100 |
| | 99 |
|
Consumer real estate: | | | | | | | | | | | | |
HELOC | | 48 |
| | 5,720 |
| | 5,573 |
| | 200 |
| | 18,418 |
| | 18,189 |
|
R/E installment loans | | 10 |
| | 345 |
| | 337 |
| | 44 |
| | 4,569 |
| | 4,846 |
|
Total consumer real estate | | 58 |
| | 6,065 |
| | 5,910 |
| | 244 |
| | 22,987 |
| | 23,035 |
|
Permanent mortgage | | 2 |
| | 710 |
| | 704 |
| | 6 |
| | 1,551 |
| | 1,544 |
|
Credit card & other | | 10 |
| | 45 |
| | 44 |
| | 15 |
| | 66 |
| | 64 |
|
Total troubled debt restructurings | | 73 |
| | $ | 7,339 |
| | $ | 7,176 |
| | 273 |
| | $ | 45,006 |
| | $ | 43,936 |
|
Note 4 – Loans (Continued)
The following tables present TDRs which re-defaulted during the three and nine months ended September 30, 2017 and 2016, and as to which the modification occurred 12 months or less prior to the re-default. For purposes of this disclosure, FHN generally defines payment default as 30 or more days past due.
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
(Dollars in thousands) | | Number | | Recorded Investment | | Number | | Recorded Investment |
Commercial (C&I): | | | | | | | | |
General C&I | | 1 |
| | $ | 1,763 |
| | 4 |
| | $ | 9,770 |
|
Total commercial (C&I) | | 1 |
| | 1,763 |
| | 4 |
| | 9,770 |
|
Commercial real estate: | | | | | | | | |
Income CRE | | 1 |
| | 88 |
| | 1 |
| | 88 |
|
Total commercial real estate | | 1 |
| | 88 |
| | 1 |
| | 88 |
|
Consumer real estate: | | | | | | | | |
HELOC | | — |
| | — |
| | 4 |
| | 685 |
|
Total consumer real estate | | — |
| | — |
| | 4 |
| | 685 |
|
Permanent mortgage | | 1 |
| | 89 |
| | 2 |
| | 627 |
|
Credit card & other | | 2 |
| | 12 |
| | 5 |
| | 30 |
|
Total troubled debt restructurings | | 5 |
| | $ | 1,952 |
| | 16 |
| | $ | 11,200 |
|
| | | | | | | | |
| | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 |
(Dollars in thousands) | | Number | | Recorded Investment | | Number | | Recorded Investment |
Consumer real estate: | | | | | | | | |
HELOC | | — |
| | $ | — |
| | 2 |
| | $ | 138 |
|
R/E installment loans | | — |
| | — |
| | 1 |
| | 180 |
|
Total consumer real estate | | — |
| | — |
| | 3 |
| | 318 |
|
Total troubled debt restructurings | | — |
| | $ | — |
| | 3 |
| | $ | 318 |
|
Note 5 – Allowance for Loan Losses
As discussed in Note 1 - Summary of Significant Accounting Policies, the ALLL estimation process was revised on January 1, 2020 to reflect the adoption of ASU 2016-13. All information contained in the following disclosures reflects the application of requirements from the adoption of ASU 2016-13 for periods after 2019. Information for periods prior to 2020 has been retained with the content consistent with prior disclosures.
Periods after 2019
The ALLL includeshas been determined in accordance with ASC 326-20, which requires a recognition of current expected credit losses on the amortized cost basis of loans. During the first quarter of 2020, expected credit loss estimates were adversely affected across all portfolio segments due to the sudden, steep decline in macroeconomic forecasts due to the actual and projected effects of the COVID-19 pandemic. To a lesser extent, loan growth also resulted in a higher ALLL as those increased balances received a full life-of-loan allowance based on current macroeconomic projections.
For all portfolio segments, FHN has selected a 4-year reasonable and supportable forecast period which reflects a 3-year period during which macroeconomic variables are used to estimate expected credit losses. This is followed by a 1-year, time-weighted reversion to historical loss factors with weights assigned to macroeconomic variables diminishing, and weights assigned to historical loss averages increasing, pro rata as months lapse during the 1-year period. Thereafter, FHN immediately reverts to historical loss averages over the remaining estimated life of loans.
In developing credit loss estimates for its loan portfolio, FHN evaluated multiple macroeconomic forecasts provided by Moody’s. FHN selected Moody’s baseline forecast as the primary source for its macroeconomic inputs which are inclusive of the following assumptions related to the economic effects of the COVID-19 pandemic:
Passage and implementation of the CARES Act
Federal Reserve stimulus including open-ended quantitative easing and announced programs
Assumes passage of a fourth stimulus package in in fourth quarter 2020
Recession starts in the first 6 months of 2020
Unemployment peaks at 9 percent in second quarter 2020
The economy experiences a partial bounce back in third quarter 2020, which is followed by slow growth
GDP growth accelerates later in 2021
Return to full employment by 2023
FHN also utilized more stressed economic scenarios in evaluating certain components of its loan portfolio (industries) that are most exposed to the effects of the COVID-19 pandemic, including Franchise Finance, Energy and Hospitality within the C&I segment and CRE-Hospitality within the Commercial Real Estate segment. This analysis was utilized in developing qualitative adjustments to increase the recorded ALLL attributable to these components beyond the modeled results. Management also made qualitative adjustments to reflect estimated recoveries based on a review of prior charge off and recovery levels, for default risk associated with large balances with individual borrowers, for estimated loss amounts not reflected in historical factors due to specific portfolio risk and for instances where limited data for acquired loans is considered to affect modeled results.
Typically commercial loans in C&I and CRE have shorter expected lives, based on the contractual term of loan agreements, prepayment estimates and a limited amount of renewal or extension options that are not unconditionally cancellable by FHN. Estimated weighted average lives are normally under 3 years. TRUPs loans are an exception due to longer contractual lives, beneficial borrower terms and balloon payoff structure. Consumer HELOC and installment loans tend to have significantly longer lives based on their contractual terms which is reduced somewhat by estimated prepayments with estimated weighted average lives normally 5 years or less. Credit card loans have shorter estimated lives approximating 1 year based on customer payment trends and because the revolving lines are unconditionally cancellable by FHN.
As of March 31, 2020, FHN had General C&I loans with amortized cost of approximately $32 million that was based on the value of underlying collateral. At a minimum, the estimated value of the collateral for each loan equals the current book value. The collateral for these loans generally consists of business assets including land, buildings, equipment and financial assets. During the three months ended March 31, 2020, FHN recognized charge-offs of approximately $6 million on these loans related to reductions in estimated collateral values.
Consumer HELOC and installment loans with amortized cost based on the value of underlying real estate collateral were approximately $10 million and $23 million, respectively, as of March 31, 2020. At a minimum, the estimated value of the collateral for each loan equals the current book value. Charge offs during the three months
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 33
Note 5 – Allowance for Loan Losses (Continued)
ended March 31, 2020 were not significant for either portfolio segment.
Unfunded Commitments
The measurement of expected credit losses for unfunded commitments mirrors that of loans with the additional estimate of future draw rates (timing and amount). Consistent with the ALLL, the decline in macroeconomic forecasts during March resulted in higher credit expense for unfunded commitments. However, this effect of higher loss forecasts was offset somewhat because many borrowers drew on available lines prior to the end of the quarter which resulted in higher loan balances (and ALLL). Total credit loss expense for unfunded commitments was $9.2 million for the three months ended March 31, 2020.
Periods prior to 2020
The ALLL included the following components: reserves for commercial loans evaluated based on pools of credit graded loans and reserves for pools of smaller-balance homogeneous consumer loans, both determined in accordance with ASC 450-20-50.450-20-50, and to a lesser extent, reserves determined in accordance with ASC 310-10-35 for loans determined by management to be individually impaired and an allowance associated with PCI loans.
For commercial loans, ASC 450-20-50 reserves were established using historical net loss factors by grade level, loan product, and business segment. The reserve factors applied to these pools are an estimate of probable incurred lossesALLL for smaller-balance homogeneous consumer loans was determined based on management’s evaluationpools of similar loan types that have similar credit risk characteristics. ASC 450-20-50 reserves for the consumer portfolio were determined using segmented roll-rate models that incorporated various factors including historical delinquency trends, experienced loss frequencies, and experienced loss severities. Generally, reserves for consumer loans reflected inherent losses in the portfolio that were expected to be recognized over the following twelve months. The historical net losses from loans with similar characteristicsloss factors for both commercial and areconsumer ASC 450-20-50 reserve models were subject to qualitative adjustments by management to reflect current events, trends, and conditions (including economic considerations and trends)., which were not fully captured in the historical net loss factors. The currentpace of the economic conditions and trends,recovery, performance of the housing market,
unemployment levels, labor participation rate, the regulatory environment, regulatory guidance, and both positive and negative portfolio segment-specific trends, arewere examples of additional factors considered by management in determining the ALLL. Additionally, management considersconsidered the inherent uncertainty of quantitative models that arewere driven by historical loss data. Management evaluatesevaluated the periods of historical losses that arewere the basis for the loss rates used in the quantitative models and selectsselected historical loss periods that arewere believed to be the most reflective of losses inherent in the loan portfolio as of the balance sheet date. Management also periodically reviewsreviewed an analysis of the loss emergence period which iswas the amount of time it takesrequired for a loss to be confirmed (initial charge-off) after a loss event hashad occurred. FHN performsperformed extensive studies as it relatesrelated to the historical loss periods used in the model and the loss emergence period and model assumptions arewere adjusted accordingly. The ALLL also includes reserves determined
Impairment related to individually impaired loans was measured in accordance with ASC 310-10-35310-10. For all commercial portfolio segments, commercial TDRs and other individually impaired commercial loans were 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 net realizable value (collateral value less estimated costs to sell). Impaired loans also included consumer TDRs. Generally, the allowance for TDRs in all consumer portfolio segments was determined by managementestimating the expected future cash flows using the modified interest rate (if an interest rate concession), incorporating payoff and net charge-off rates specific to be individually impairedthe TDRs within the portfolio segment being assessed, and an allowance associated with PCI loans. See Note 1 – Summarydiscounted using the pre-modification interest rate. The discount rates of Significant Accounting Policies and Note 5 - Allowance for Loan Lossesvariable rate TDRs were adjusted to reflect changes in the Notesinterest rate index to Consolidated Financial Statements on FHN’s Form 10-K forwhich the year ended December 31, 2016, for additional information aboutrates are tied. The discounted cash flows were then compared to the policiesoutstanding principal balance in order to determine required reserves. Residential real estate loans discharged through bankruptcy were considered collateral-dependent and methodologies used in the aforementioned componentswere charged down to net realizable value (collateral value less estimated costs to sell).
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 34
Note 5 – Allowance for Loan Losses (Continued)
The following table provides a rollforward of the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | C&I | | Commercial Real Estate | | Consumer Real Estate (a) | | Credit Card and Other | | Total |
Balance as of January 1, 2020 | | $ | 122,486 |
| | $ | 36,112 |
| | $ | 28,443 |
| | $ | 13,266 |
| | $ | 200,307 |
|
Adoption of ASU 2016-13 | | 18,782 |
| | (7,348 | ) | | 92,992 |
| | 1,968 |
| | 106,394 |
|
Charge-offs | | (6,751 | ) | | (581 | ) | | (2,310 | ) | | (3,811 | ) | | (13,453 | ) |
Recoveries | | 935 |
| | 573 |
| | 3,555 |
| | 1,179 |
| | 6,242 |
|
Provision for loan losses | | 119,064 |
| | 18,869 |
| | 342 |
| | 6,725 |
| | 145,000 |
|
Balance as of March 31, 2020 | | 254,516 |
| | 47,625 |
| | 123,022 |
| | 19,327 |
| | 444,490 |
|
Allowance - individually evaluated for impairment | | 11,401 |
| | — |
| | 13,394 |
| | 468 |
| | 25,263 |
|
Allowance - collectively evaluated for impairment | | 243,115 |
| | 47,625 |
| | 109,628 |
| | 18,859 |
| | 419,227 |
|
Loans, net of unearned as of March 31, 2020: | | | | | | | | | | |
Individually evaluated for impairment | | 100,092 |
| | 163 |
| | 152,393 |
| | 699 |
| | 253,347 |
|
Collectively evaluated for impairment | | 22,024,338 |
| | 4,639,529 |
| | 5,966,990 |
| | 494,099 |
| | 33,124,956 |
|
Total loans, net of unearned income | | $ | 22,124,430 |
| | $ | 4,639,692 |
| | $ | 6,119,383 |
| | $ | 494,798 |
| | $ | 33,378,303 |
|
Balance as of January 1, 2019 | | $ | 98,947 |
| | $ | 31,311 |
| | $ | 37,439 |
| | $ | 12,727 |
| | $ | 180,424 |
|
Charge-offs | | (3,101 | ) | | (434 | ) | | (2,804 | ) | | (4,188 | ) | | (10,527 | ) |
Recoveries | | 829 |
| | 57 |
| | 4,041 |
| | 1,087 |
| | 6,014 |
|
Provision/(provision credit) for loan losses | | 7,038 |
| | 3,448 |
| | (4,522 | ) | | 3,036 |
| | 9,000 |
|
Balance as of March 31, 2019 | | 103,713 |
| | 34,382 |
| | 34,154 |
| | 12,662 |
| | 184,911 |
|
Allowance - individually evaluated for impairment | | 3,437 |
| | — |
| | 23,923 |
| | 446 |
| | 27,806 |
|
Allowance - collectively evaluated for impairment | | 98,135 |
| | 34,382 |
| | 9,108 |
| | 12,067 |
| | 153,692 |
|
Allowance - purchased credit-impaired loans | | 2,141 |
| | — |
| | 1,123 |
| | 149 |
| | 3,413 |
|
Loans, net of unearned as of March 31, 2019: | | | | | | | | | | |
Individually evaluated for impairment | | 83,253 |
| | 1,879 |
| | 189,332 |
| | 684 |
| | 275,148 |
|
Collectively evaluated for impairment | | 17,056,034 |
| | 3,936,727 |
| | 6,141,585 |
| | 504,271 |
| | 27,638,617 |
|
Purchased credit-impaired loans | | 36,825 |
| | 8,337 |
| | 29,846 |
| | 1,275 |
| | 76,283 |
|
Total loans, net of unearned income | | $ | 17,176,112 |
| | $ | 3,946,943 |
| | $ | 6,360,763 |
| | $ | 506,230 |
| | $ | 27,990,048 |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
a) In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability.
In accordance with its accounting policy elections, FHN does not recognize a separate allowance for expected credit losses for AIR and records reversals of AIR as reductions of interest income. FHN reverses previously accrued but uncollected interest when an asset is placed on nonaccrual status.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | C&I | | Commercial Real Estate | | Consumer Real Estate | | Permanent Mortgage | | Credit Card and Other | | Total |
Balance as of July 1, 2017 | | $ | 92,379 |
| | $ | 30,470 |
| | $ | 46,069 |
| | $ | 16,398 |
| | $ | 11,941 |
| | $ | 197,257 |
|
Charge-offs | | (3,723 | ) | | — |
| | (3,601 | ) | | (173 | ) | | (3,173 | ) | | (10,670 | ) |
Recoveries | | 601 |
| | 278 |
| | 6,188 |
| | 542 |
| | 671 |
| | 8,280 |
|
Provision/(provision credit) for loan losses | | 8,948 |
| | (1,065 | ) | | (7,717 | ) | | (1,048 | ) | | 882 |
| | — |
|
Balance as of September 30, 2017 | | 98,205 |
| | 29,683 |
| | 40,939 |
| | 15,719 |
| | 10,321 |
| | 194,867 |
|
Balance as of January 1, 2017 | | $ | 89,398 |
| | $ | 33,852 |
| | $ | 50,357 |
| | $ | 16,289 |
| | $ | 12,172 |
| | $ | 202,068 |
|
Charge-offs | | (6,188 | ) | | (20 | ) | | (11,401 | ) | | (1,499 | ) | | (9,805 | ) | | (28,913 | ) |
Recoveries | | 2,877 |
| | 639 |
| | 17,007 |
| | 1,933 |
| | 2,256 |
| | 24,712 |
|
Provision/(provision credit) for loan losses | | 12,118 |
| | (4,788 | ) | | (15,024 | ) | | (1,004 | ) | | 5,698 |
| | (3,000 | ) |
Balance as of September 30, 2017 | | 98,205 |
| | 29,683 |
| | 40,939 |
| | 15,719 |
| | 10,321 |
| | 194,867 |
|
Allowance - individually evaluated for impairment | | 6,895 |
| | 126 |
| | 23,936 |
| | 12,601 |
| | 246 |
| | 43,804 |
|
Allowance - collectively evaluated for impairment | | 88,529 |
| | 29,557 |
| | 16,649 |
| | 3,118 |
| | 10,075 |
| | 147,928 |
|
Allowance - purchased credit-impaired loans | | 2,781 |
| | — |
| | 354 |
| | — |
| | — |
| | 3,135 |
|
Loans, net of unearned as of September 30, 2017: | | | | | | | | | | | | |
Individually evaluated for impairment | | 32,028 |
| | 2,320 |
| | 135,858 |
| | 84,081 |
| | 544 |
| | 254,831 |
|
Collectively evaluated for impairment | | 12,739,091 |
| | 2,244,895 |
| | 4,232,564 |
| | 319,001 |
| | 349,889 |
| | 19,885,440 |
|
Purchased credit-impaired loans | | 20,725 |
| | 3,800 |
| | 1,295 |
| | — |
| | — |
| | 25,820 |
|
Total loans, net of unearned income | | $ | 12,791,844 |
| | $ | 2,251,015 |
| | $ | 4,369,717 |
| | $ | 403,082 |
| | $ | 350,433 |
| | $ | 20,166,091 |
|
Balance as of July 1, 2016 | | $ | 80,972 |
| | $ | 30,264 |
| | $ | 59,081 |
| | $ | 17,600 |
| | $ | 11,890 |
| | $ | 199,807 |
|
Charge-offs | | (1,992 | ) | | (49 | ) | | (4,359 | ) | | (373 | ) | | (3,589 | ) | | (10,362 | ) |
Recoveries | | 725 |
| | 651 |
| | 5,591 |
| | 239 |
| | 906 |
| | 8,112 |
|
Provision/(provision credit) for loan losses | | 7,161 |
| | 1,554 |
| | (7,078 | ) | | (877 | ) | | 3,240 |
| | 4,000 |
|
Balance as of September 30, 2016 | | 86,866 |
| | 32,420 |
| | 53,235 |
| | 16,589 |
| | 12,447 |
| | 201,557 |
|
Balance as of January 1, 2016 | | $ | 73,637 |
| | $ | 25,159 |
| | $ | 80,614 |
| | $ | 18,947 |
| | $ | 11,885 |
| | $ | 210,242 |
|
Charge-offs | | (16,386 | ) | | (742 | ) | | (17,867 | ) | | (834 | ) | | (10,441 | ) | | (46,270 | ) |
Recoveries | | 3,107 |
| | 1,782 |
| | 17,408 |
| | 1,502 |
| | 2,786 |
| | 26,585 |
|
Provision/(provision credit) for loan losses | | 26,508 |
| | 6,221 |
| | (26,920 | ) | | (3,026 | ) | | 8,217 |
| | 11,000 |
|
Balance as of September 30, 2016 | | 86,866 |
| | 32,420 |
| | 53,235 |
| | 16,589 |
| | 12,447 |
| | 201,557 |
|
Allowance - individually evaluated for impairment | | 5,187 |
| | 216 |
| | 29,461 |
| | 14,611 |
| | 139 |
| | 49,614 |
|
Allowance - collectively evaluated for impairment | | 81,376 |
| | 31,674 |
| | 23,441 |
| | 1,978 |
| | 12,308 |
| | 150,777 |
|
Allowance - purchased credit-impaired loans | | 303 |
| | 530 |
| | 333 |
| | — |
| | — |
| | 1,166 |
|
Loans, net of unearned as of September 30, 2016: | | | | | | | | | | | | |
Individually evaluated for impairment | | 49,351 |
| | 3,302 |
| | 158,909 |
| | 94,071 |
| | 340 |
| | 305,973 |
|
Collectively evaluated for impairment | | 12,022,457 |
| | 2,053,101 |
| | 4,417,896 |
| | 342,029 |
| | 357,032 |
| | 19,192,515 |
|
Purchased credit-impaired loans | | 46,490 |
| | 9,192 |
| | 1,566 |
| | — |
| | 51 |
| | 57,299 |
|
Total loans, net of unearned income | | $ | 12,118,298 |
| | $ | 2,065,595 |
| | $ | 4,578,371 |
| | $ | 436,100 |
| | $ | 357,423 |
| | $ | 19,555,787 |
|
The total amount of interest reversals from loans placed on nonaccrual status during the three months ended March 31, 2020 was not material. In addition, the amount of income recognized on nonaccrual loans for the three months ended in March 31, 2020 was not material.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 35
Note 6 – Intangible Assets
The following is a summary of other intangible assets included in the Consolidated Condensed Statements of Condition:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
Core deposit intangibles | | $ | 157,150 |
| | $ | (51,966 | ) | | $ | 105,184 |
| | $ | 157,150 |
| | $ | (47,372 | ) | | $ | 109,778 |
|
Customer relationships (a) | | 23,000 |
| | (5,734 | ) | | 17,266 |
| | 77,865 |
| | (60,150 | ) | | 17,715 |
|
Other (b) | | 5,622 |
| | (3,180 | ) | | 2,442 |
| | 5,622 |
| | (2,915 | ) | | 2,707 |
|
Total | | $ | 185,772 |
| | $ | (60,880 | ) | | $ | 124,892 |
| | $ | 240,637 |
| | $ | (110,437 | ) | | $ | 130,200 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
Core deposit intangibles | | $ | 16,850 |
| | $ | (6,154 | ) | | $ | 10,696 |
| | $ | 16,850 |
| | $ | (4,721 | ) | | $ | 12,129 |
|
Customer relationships (a) | | 76,865 |
| | (49,496 | ) | | 27,369 |
| | 54,865 |
| | (46,302 | ) | | 8,563 |
|
Other (a) (b) | | 5,622 |
| | (530 | ) | | 5,092 |
| | 555 |
| | (230 | ) | | 325 |
|
Total | | $ | 99,337 |
| | $ | (56,180 | ) | | $ | 43,157 |
| | $ | 72,270 |
| | $ | (51,253 | ) | | $ | 21,017 |
|
| |
(a) | 2017 increase2020 decrease in gross carrying amounts and accumulated amortization associated with the Coastal acquisition.$54.9 million of customer relationships fully amortized at December 31, 2019. |
| |
(b) | Balance primarily includes noncompete covenants, as well as $.3 million related to state banking licenses not subject to amortization. |
Amortization expense was $2.0$5.3 million and $1.3$6.2 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, and $5.2 million and $3.9 million for the nine months ended September 30, 2017 and 2016,2019, respectively. As of September 30, 2017March 31, 2020 the estimated aggregated amortization expense is expected to be:
|
| | | | |
(Dollars in thousands) | | |
Year | | Amortization |
Remainder of 2020 | | $ | 15,852 |
|
2021 | | 19,547 |
|
2022 | | 17,412 |
|
2023 | | 16,117 |
|
2024 | | 14,679 |
|
2025 | | 12,580 |
|
|
| | | | |
(Dollars in thousands) | | |
Year | | Amortization |
Remainder of 2017 | | $ | 1,964 |
|
2018 | | 7,483 |
|
2019 | | 7,179 |
|
2020 | | 4,303 |
|
2021 | | 4,123 |
|
2022 | | 3,356 |
|
Gross goodwill, accumulated impairments, and accumulated divestiture related write-offs were determined beginning January 1, 2012,2002, when a change in accounting requirements resulted in goodwill being assessed for impairment rather than being amortized. Gross goodwill of $200.0 million with accumulated impairments and accumulated divestiture-related write-offs of $114.1 million and $85.9 million, respectively, were previously allocated to the non-strategic segment, resulting in $0 net goodwill allocated to the non-strategic segment as of September 30, 2017March 31, 2020 and December 31, 2016.2019. The regional banking and fixed income segments do not have any accumulated impairments or divestiture related write-offs. The following is a summary of goodwill by reportable segment included in the Consolidated Condensed Statements of Condition as of September 30, 2017March 31, 2020 and December 31, 2016.2019.
|
| | | | | | | | | | | | |
(Dollars in thousands) | | Regional Banking | | Fixed Income | | Total |
December 31, 2018 | | $ | 1,289,819 |
| | $ | 142,968 |
| | $ | 1,432,787 |
|
Additions | | — |
| | — |
| | — |
|
March 31, 2019 | | $ | 1,289,819 |
| | $ | 142,968 |
| | $ | 1,432,787 |
|
| | | | | | |
December 31, 2019 | | $ | 1,289,819 |
| | $ | 142,968 |
| | $ | 1,432,787 |
|
Additions | | — |
| | — |
| | — |
|
March 31, 2020 | | $ | 1,289,819 |
| | $ | 142,968 |
| | $ | 1,432,787 |
|
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 36
|
| | | | | | | | | | | | |
(Dollars in thousands) | | Regional Banking | | Fixed Income | | Total |
December 31, 2015 | | $ | 93,303 |
| | $ | 98,004 |
| | $ | 191,307 |
|
Additions | | 64 |
| | — |
| | 64 |
|
September 30, 2016 | | $ | 93,367 |
| | $ | 98,004 |
| | $ | 191,371 |
|
December 31, 2016 | | $ | 93,367 |
| | $ | 98,004 |
| | $ | 191,371 |
|
Additions (a) | | — |
| | 44,964 |
| | 44,964 |
|
September 30, 2017 | | $ | 93,367 |
| | $ | 142,968 |
| | $ | 236,335 |
|
(a) See Note 2 - Acquisitions and Divestitures for further details regarding goodwill related to acquisitions.
Note 7 – Other Income and Other Expense
Following is detail of All other income and commissions and All other expense as presented in the Consolidated Condensed Statements of Income:
|
| | | | | | | |
| Three Months Ended March 31 |
(Dollars in thousands) | 2020 | | 2019 |
All other income and commissions: | | | |
Other service charges | $ | 5,219 |
| | $ | 3,869 |
|
ATM and interchange fees | 4,212 |
| | 3,241 |
|
Mortgage banking | 2,431 |
| | 1,886 |
|
Letter of credit fees | 1,462 |
| | 1,368 |
|
Dividend income | 1,130 |
| | 2,313 |
|
Electronic banking fees | 1,030 |
| | 1,271 |
|
Insurance commissions | 789 |
| | 624 |
|
Gain/(loss) on extinguishment of debt | — |
| | (1 | ) |
Deferred compensation (a) | (9,507 | ) | | 5,474 |
|
Other | 7,598 |
| | 4,586 |
|
Total | $ | 14,364 |
| | $ | 24,631 |
|
All other expense: | | | |
Credit expense on unfunded commitments (b) | $ | 9,230 |
| | $ | 396 |
|
Travel and entertainment | 2,709 |
| | 2,712 |
|
Other insurance and taxes | 2,679 |
| | 2,694 |
|
Non-service components of net periodic pension and post-retirement cost | 2,508 |
| | 432 |
|
Supplies | 2,411 |
| | 1,804 |
|
Customer relations | 2,004 |
| | 1,599 |
|
Employee training and dues | 1,341 |
| | 1,457 |
|
Miscellaneous loan costs | 1,094 |
| | 1,027 |
|
Tax credit investments | 346 |
| | 675 |
|
Litigation and regulatory matters | 13 |
| | 13 |
|
OREO | (184 | ) | | (366 | ) |
Other | 9,075 |
| | 6,888 |
|
Total | $ | 33,226 |
| | $ | 19,331 |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
| |
(a) | Amounts are driven by market conditions and are mirrored by changes in deferred compensation expense which is included in employee compensation expense. First quarter 2020 decrease was driven by negative equity market valuations. |
| |
(b) | First quarter 2020 increase largely associated with a sudden, steep decline in economic forecast attributable to the COVID-19 pandemic. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 37
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
All other income and commissions: | | | | | | | | |
ATM interchange fees
| | $ | 3,137 |
| | $ | 3,081 |
| | $ | 8,998 |
| | $ | 8,918 |
|
Other service charges | | 2,954 |
| | 3,004 |
| | 9,047 |
| | 8,713 |
|
Mortgage banking
| | 1,354 |
| | 5,524 |
| | 3,883 |
| | 7,395 |
|
Electronic banking fees | | 1,282 |
| | 1,398 |
| | 3,911 |
| | 4,176 |
|
Letter of credit fees
| | 1,211 |
| | 981 |
| | 3,369 |
| | 3,157 |
|
Deferred compensation | | 1,128 |
| | 1,038 |
| | 4,446 |
| | 2,162 |
|
Insurance commissions | | 567 |
| | 1,262 |
| | 2,042 |
| | 2,301 |
|
Gain/(loss) on extinguishment of debt (a) | | (14,329 | ) | | — |
| | (14,329 | ) | | — |
|
Other | | 2,739 |
| | 5,518 |
| | 7,684 |
| | 10,594 |
|
Total | | $ | 43 |
| | $ | 21,806 |
| | $ | 29,051 |
| | $ | 47,416 |
|
All other expense: | | | | | | | | |
Litigation and regulatory matters | | $ | 8,162 |
| | $ | 260 |
| | $ | 8,403 |
| | $ | 25,785 |
|
Travel and entertainment | | 2,798 |
| | 2,478 |
| | 8,308 |
| | 7,035 |
|
Other insurance and taxes | | 2,396 |
| | 2,625 |
| | 7,229 |
| | 8,952 |
|
Customer relations | | 1,361 |
| | 1,442 |
| | 4,240 |
| | 4,804 |
|
Employee training and dues | | 1,198 |
| | 1,360 |
| | 4,194 |
| | 4,088 |
|
Supplies | | 928 |
| | 1,158 |
| | 2,884 |
| | 3,114 |
|
Tax credit investments | | 762 |
| | 788 |
| | 2,646 |
| | 2,325 |
|
Miscellaneous loan costs | | 757 |
| | 676 |
| | 2,078 |
| | 1,958 |
|
OREO | | 303 |
| | 815 |
| | 953 |
| | 125 |
|
Other | | 9,033 |
| | 8,326 |
| | 29,954 |
| | 30,669 |
|
Total | | $ | 27,698 |
| | $ | 19,928 |
| | $ | 70,889 |
| | $ | 88,855 |
|
(a) Loss on extinguishment of debt for the three and nine months ended September 30, 2017 relates to the repurchase of equity securities previously included in a financing transaction.
Note 8 – Components of Other Comprehensive Income/(loss)
The following table provides the changes in accumulated other comprehensive income/(loss) by component, net of tax, for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total |
Balance as of January 1, 2020 | | $ | 31,079 |
| | $ | 3,227 |
| | $ | (273,914 | ) | | $ | (239,608 | ) |
Net unrealized gains/(losses) | | 88,278 |
| | 13,155 |
| | — |
| | 101,433 |
|
Amounts reclassified from AOCI | | — |
| | (94 | ) | | 2,105 |
| | 2,011 |
|
Other comprehensive income/(loss) | | 88,278 |
| | 13,061 |
| | 2,105 |
| | 103,444 |
|
Balance as of March 31, 2020 | | $ | 119,357 |
| | $ | 16,288 |
| | $ | (271,809 | ) | | $ | (136,164 | ) |
| | | | | | | | |
Balance as of January 1, 2019 | | $ | (75,736 | ) | | $ | (12,112 | ) | | $ | (288,768 | ) | | $ | (376,616 | ) |
Net unrealized gains/(losses) | | 48,615 |
| | 3,936 |
| | — |
| | 52,551 |
|
Amounts reclassified from AOCI | | — |
| | 1,451 |
| | 1,463 |
| | 2,914 |
|
Other comprehensive income/(loss) | | 48,615 |
| | 5,387 |
| | 1,463 |
| | 55,465 |
|
Balance as of March 31, 2019 | | $ | (27,121 | ) | | $ | (6,725 | ) | | $ | (287,305 | ) | | $ | (321,151 | ) |
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total |
Balance as of July 1, 2017 | | $ | (9,857 | ) | | $ | (1,024 | ) | | $ | (226,581 | ) | | $ | (237,462 | ) |
Net unrealized gains/(losses) | | 3,918 |
| | (91 | ) | | 490 |
| | 4,317 |
|
Amounts reclassified from AOCI | | (1 | ) | | (643 | ) | | 1,405 |
| | 761 |
|
Other comprehensive income/(loss) | | 3,917 |
| | (734 | ) | | 1,895 |
| | 5,078 |
|
Balance as of September 30, 2017 | | $ | (5,940 | ) | | $ | (1,758 | ) | | $ | (224,686 | ) | | $ | (232,384 | ) |
| | | | | | | | |
Balance as of January 1, 2017 | | $ | (17,232 | ) | | $ | (1,265 | ) | | $ | (229,157 | ) | | $ | (247,654 | ) |
Net unrealized gains/(losses) | | 11,570 |
| | 1,906 |
| | 490 |
| | 13,966 |
|
Amounts reclassified from AOCI | | (278 | ) | | (2,399 | ) | | 3,981 |
| | 1,304 |
|
Other comprehensive income/(loss) | | 11,292 |
| | (493 | ) | | 4,471 |
| | 15,270 |
|
Balance as of September 30, 2017 | | $ | (5,940 | ) | | $ | (1,758 | ) | | $ | (224,686 | ) | | $ | (232,384 | ) |
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total |
Balance as of July 1, 2016 | | $ | 58,591 |
| | $ | 4,691 |
| | $ | (215,616 | ) | | $ | (152,334 | ) |
Net unrealized gains/(losses) | | (7,887 | ) | | (1,211 | ) | | — |
| | (9,098 | ) |
Amounts reclassified from AOCI | | — |
| | (359 | ) | | 963 |
| | 604 |
|
Other comprehensive income/(loss) | | (7,887 | ) | | (1,570 | ) | | 963 |
| | (8,494 | ) |
Balance as of September 30, 2016 | | $ | 50,704 |
| | $ | 3,121 |
| | $ | (214,653 | ) | | $ | (160,828 | ) |
| | | | | | | | |
Balance as of January 1, 2016 | | $ | 3,394 |
| | $ | — |
| | $ | (217,586 | ) | | $ | (214,192 | ) |
Net unrealized gains/(losses) | | 48,330 |
| | 4,228 |
| | — |
| | 52,558 |
|
Amounts reclassified from AOCI | | (1,020 | ) | | (1,107 | ) | | 2,933 |
| | 806 |
|
Other comprehensive income/(loss) | | 47,310 |
| | 3,121 |
| | 2,933 |
| | 53,364 |
|
Balance as of September 30, 2016 | | $ | 50,704 |
| | $ | 3,121 |
| | $ | (214,653 | ) | | $ | (160,828 | ) |
Note 8 – Components of Other Comprehensive Income/(loss) (Continued)
Reclassifications from AOCI, and related tax effects, were as follows:
|
| | | | | | | | | | |
(Dollars in thousands) | | Three Months Ended March 31 | | |
Details about AOCI | | 2020 | | 2019 | | Affected line item in the statement where net income is presented |
Cash flow hedges: | | | | | | |
Realized (gains)/losses on cash flow hedges | | (124 | ) | | 1,927 |
| | Interest and fees on loans |
Tax expense/(benefit) | | 30 |
| | (476 | ) | | Provision/(benefit) for income taxes |
| | (94 | ) | | 1,451 |
| | |
Pension and Postretirement Plans: | | | | | | |
Amortization of prior service cost and net actuarial gain/(loss) | | 2,791 |
| | 1,943 |
| | All other expense |
Tax expense/(benefit) | | (686 | ) | | (480 | ) | | Provision/(benefit) for income taxes |
| | 2,105 |
| | 1,463 |
| | |
Total reclassification from AOCI | | $ | 2,011 |
| | $ | 2,914 |
| | |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 38
|
| | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Three Months Ended September 30 | | Nine Months Ended September 30 | | |
Details about AOCI | | 2017 | | 2016 | | 2017 | | 2016 | | Affected line item in the statement where net income is presented |
Securities AFS: | | | | | | | | | | |
Realized (gains)/losses on securities AFS | | $ | (1 | ) | | $ | — |
| | $ | (450 | ) | | $ | (1,654 | ) | | Debt securities gains/(losses), net |
Tax expense/(benefit) | | — |
| | — |
| | 172 |
| | 634 |
| | Provision/(benefit) for income taxes |
| | (1 | ) | | — |
| | (278 | ) | | (1,020 | ) | | |
Cash flow hedges: | | | | | | | | | | |
Realized (gains)/losses on cash flow hedges | | (1,041 | ) | | (582 | ) | | (3,886 | ) | | (1,795 | ) | | Interest and fees on loans |
Tax expense/(benefit) | | 398 |
| | 223 |
| | 1,487 |
| | 688 |
| | Provision/(benefit) for income taxes |
| | (643 | ) | | (359 | ) | | (2,399 | ) | | (1,107 | ) | | |
Pension and Postretirement Plans: | | | | | | | | | | |
Amortization of prior service cost and net actuarial gain/(loss) | | 2,277 |
| | 1,561 |
| | 6,450 |
| | 4,756 |
| | Employee compensation, incentives, and benefits |
Tax expense/(benefit) | | (872 | ) | | (598 | ) | | (2,469 | ) | | (1,823 | ) | | Provision/(benefit) for income taxes |
| | 1,405 |
| | 963 |
| | 3,981 |
| | 2,933 |
| | |
Total reclassification from AOCI | | $ | 761 |
| | $ | 604 |
| | $ | 1,304 |
| | $ | 806 |
| | |
Note 9 – Earnings Per Share
The following table provides reconciliations of net income to net income available to common shareholders and the difference between average basic common shares outstanding and average diluted common shares outstanding:
|
| | | | | | | |
| Three Months Ended March 31 |
(Dollars and shares in thousands, except per share data) | 2020 | | 2019 |
Net income/(loss) | $ | 16,472 |
| | $ | 103,405 |
|
Net income attributable to noncontrolling interest | 2,852 |
| | 2,820 |
|
Net income/(loss) attributable to controlling interest | 13,620 |
| | 100,585 |
|
Preferred stock dividends | 1,550 |
| | 1,550 |
|
Net income/(loss) available to common shareholders | $ | 12,070 |
| | $ | 99,035 |
|
| | | |
Weighted average common shares outstanding—basic | 311,597 |
| | 317,435 |
|
Effect of dilutive securities | 1,573 |
| | 2,146 |
|
Weighted average common shares outstanding—diluted | 313,170 |
| | 319,581 |
|
| | | |
Net income/(loss) per share available to common shareholders | $ | 0.04 |
| | $ | 0.31 |
|
Diluted income/(loss) per share available to common shareholders | $ | 0.04 |
| | $ | 0.31 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars and shares in thousands, except per share data) | | 2017 | | 2016 | | 2017 | | 2016 |
Net income/(loss) | | $ | 71,769 |
| | $ | 67,635 |
| | $ | 225,361 |
| | $ | 180,788 |
|
Net income attributable to noncontrolling interest | | 2,883 |
| | 2,883 |
| | 8,555 |
| | 8,586 |
|
Net income/(loss) attributable to controlling interest | | 68,886 |
| | 64,752 |
| | 216,806 |
| | 172,202 |
|
Preferred stock dividends | | 1,550 |
| | 1,550 |
| | 4,650 |
| | 4,650 |
|
Net income/(loss) available to common shareholders | | $ | 67,336 |
| | $ | 63,202 |
| | $ | 212,156 |
| | $ | 167,552 |
|
| | | | | | | | |
Weighted average common shares outstanding—basic | | 233,749 |
| | 231,856 |
| | 233,438 |
| | 232,690 |
|
Effect of dilutive securities | | 2,591 |
| | 2,236 |
| | 2,934 |
| | 2,085 |
|
Weighted average common shares outstanding—diluted | | 236,340 |
| | 234,092 |
| | 236,372 |
| | 234,775 |
|
| | | | | | | | |
Net income/(loss) per share available to common shareholders | | $ | 0.29 |
| | $ | 0.27 |
| | $ | 0.91 |
| | $ | 0.72 |
|
Diluted income/(loss) per share available to common shareholders | | $ | 0.28 |
| | $ | 0.27 |
| | $ | 0.90 |
| | $ | 0.71 |
|
The following table presents outstanding options and other equity awards that were excluded from the calculation of diluted earnings per share because they were either anti-dilutive (the exercise price was higher than the weighted-average market price for the period) or the performance conditions have not been met:
|
| | | | | | | | |
| | Three Months Ended March 31 |
(Shares in thousands) | | 2020 | | 2019 |
Stock options excluded from the calculation of diluted EPS | | 3,031 |
| | 2,613 |
|
Weighted average exercise price of stock options excluded from the calculation of diluted EPS | | $ | 18.73 |
| | $ | 21.77 |
|
Other equity awards excluded from the calculation of diluted EPS | | 4,264 |
| | 1,922 |
|
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 39
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Shares in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Stock options excluded from the calculation of diluted EPS | | 2,595 |
| | 2,793 |
| | 2,490 |
| | 2,996 |
|
Weighted average exercise price of stock options excluded from the calculation of diluted EPS | | $ | 25.00 |
| | $ | 24.95 |
| | $ | 25.70 |
| | $ | 25.21 |
|
Other equity awards excluded from the calculation of diluted EPS | | 1,002 |
| | 371 |
| | 325 |
| | 51 |
|
Note 10 – Contingencies and Other Disclosures
Contingent Liabilities Overview
Contingent liabilities arise in the ordinary course of business. Often they are related to lawsuits, arbitration, mediation, and other forms of litigation. Various litigation matters are threatened or pending against FHN and its subsidiaries. Also, FHN at times receives requests for information, subpoenas, or other inquiries from federal, state, and local regulators, from other government authorities, and from other parties concerning various matters relating to FHN’s current or former lines of business.businesses. Certain matters of that sort are pending at this time, and FHN is cooperating in those matters. Pending and threatened litigation matters sometimes are settled by the parties, and sometimes pending matters are resolved in court or before an arbitrator, and sometimes are settled by the parties.arbitrator. Regardless of the manner of resolution, frequently the most significant changes in status of a matter occur over a short time period, often following a lengthy period of little substantive activity. In view of the inherent difficulty of predicting the outcome of these matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories or involve a large number of parties, or where claims or other actions may be possible but have not been brought, FHN cannot reasonably determine what the eventual outcome of the matters will be, what the timing of the ultimate resolution of these matters may be, or what the eventual loss or impact related to each matter may be. FHN establishes a loss contingency liability for a litigation matter when loss is both probable and reasonably estimable as prescribed by applicable financial accounting guidance. If loss for a matter is probable and a range of possible loss outcomes is the best estimate available, accounting guidance requires a liability to be established at the low end of the range.
Based on current knowledge, and after consultation with counsel, management is of the opinion that loss contingencies related to threatened or pending litigation matters should not have a material adverse effect on the consolidated financial condition of FHN, but may be material to FHN’s operating results for any particular reporting period depending, in part, on the results from that period.
Material Loss Contingency Matters
Summary
As used in this Note, except for matters that are reported as having been substantially settled or otherwise substantially resolved, FHN's “material loss contingency matters” generally fall into at least one of the following categories: (i) FHN has determined material loss to be probable and has established a material loss liability in accordance with
applicable financial accounting guidance, other than certain matters reported as having been substantially settled or otherwise substantially resolved;guidance; (ii) FHN has determined material loss to be probable but is not reasonably able to estimate an amount or range of material loss liability; or (iii) FHN has determined that material loss is not probable but is reasonably possible, and that the amount or range of that reasonably possible material loss is estimable. As defined in applicable accounting guidance, loss is reasonably possible if there is more than a remote chance of a material loss outcome for FHN. Set forth below are disclosures for certain pending or threatened litigation matters, including all matters mentioned in (i) or (ii) and certain matters mentioned in (iii). In addition, certain other matters, or groups of matters are discussed relating to FHN’s formerpre-2009 mortgage origination and servicing businesses. In all litigation matters discussed, unless settled or otherwise resolved, FHN believes it has meritorious defenses and intends to pursue those defenses vigorously.
FHN reassesses the liability for litigation matters each quarter as the matters progress. At September 30, 2017,March 31, 2020, the aggregate amount of liabilities established for all such loss contingency matters was $8.8$.6 million. These liabilities are separate from those discussed under the heading “Repurchase“Loan Repurchase and Foreclosure Liability” below.
In each material loss contingency matter, except as otherwise noted, there is more than a remote chance that any of the following outcomes will occur: the plaintiff will substantially prevail; the defense will substantially prevail; the plaintiff will prevail in part; or the matter will be settled by the parties. At September 30, 2017,March 31, 2020, FHN estimates that for allis unable to estimate any material loss contingency matters, estimable reasonably possible lossesloss ("RPLs") for contingency matters in future periods in excess of currently established liabilities could aggregate in a range from zero to approximately $52 million.liabilities.
As a result of the general uncertainties discussed above and the specific uncertainties discussed for each matter mentioned below, it is possible that the ultimate future loss experienced by FHN for any particular matter may materially exceed the amount, if any, of currently established liability for that matter. That possibility exists both for matters included
Material Matters
FHN was one of multiple defendants in a consolidated putative class action suit: In re GSE Bonds Antitrust Litigation, No. 1:19-cv-01704-JSR (U.S. District Court S.D.N.Y.). The plaintiffs claim that defendants conspired to fix secondary market prices of government-sponsored enterprise (“GSE”) bonds from 2009 through 2015. During the estimated reasonably possible loss (“RPL”) range mentioned above and for matters not included in that range.third quarter of 2019, FHN reached a class settlement with the plaintiffs, subject to court approval, without
37
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 40
Note 10 – Contingencies and Other Disclosures (Continued)
Material Matters
FHN, along with multiple co-defendants, is defending lawsuits brought by investors which claim that the offering documents under which certificates relating to First Horizon branded securitizations were sold to them were materially deficient. One of those matters is viewed as material currently: Federal Deposit Insurance Corporation (“FDIC”) as receiver for Colonial Bank, in the U.S. District Court for the Southern District of New York (Case No. 12 Civ. 6166 (LLS)(MHD)). The plaintiff in that suit claims to have purchased (and later sold) certificates totaling $83.4 million, relating to a number of separate securitizations. Plaintiff demands damages and prejudgment interest, among several remedies sought. The current RPL estimate for this matter isadmitting liability. Though still subject to significant uncertainties regarding:court approval, the dollar amounts claimed;settlement has been paid and therefore is not reflected in established liabilities.
In the potential remediesfirst quarter of 2020, a former shareholder of Capital Bank Financial Corp. ("CBF") filed a putative class action suit, Searles v. DeMartini et al, No. 2020-0136 (Del. Chancery), against certain former directors, officers, and shareholders of CBF, alleging, among other things, that might be available or awarded;defendants breached certain fiduciary duties in connection with CBF's merger with FHN in 2017. Plaintiff claims unspecified damages related to the outcome of any settlement discussions; the availability of significantly dispositive defenses;merger consideration and the incomplete status of the discovery process. Additional information concerning FHN’s former mortgage businesses is provided below in “Obligations from Legacy Mortgage Businesses.”
Underwriters are co-defendants in the FDIC-New York matter and have demanded, under provisions in the applicable underwriting agreements, that FHN indemnify them for their expenses and any losses they may incur. In addition, FHN has received indemnity demands from underwriters in certain other suits as to which investors claim to have purchased certificates in FH proprietary securitizations but as to which FHN has not been named a defendant.
For most pending indemnity claims involving FH proprietary securitizationsopportunity loss. FHN is unable to estimate an RPL range for this matter due to significant uncertainties regarding: claims as to whichwhether a class will be certified and, if so, the claimant specifies no dollar amount;composition of the class; the amount of potential remediesdamages that might be available or awarded;awarded, if any; of any such damages amount, the amount that FHN would be obliged to indemnify; the availability of significantly dispositive defenses such as statutes of limitations or repose;applicable insurance; and the outcome of potentially dispositive early-stage motions such as motionsdiscovery, which has not yet begun.
Exposures from pre-2009 Mortgage Business
FHN is contending with indemnification claims related to dismiss;"other whole loans sold," which were mortgage loans originated by FHN before 2009 and sold outside of an FHN securitization. These claims generally assert that FHN-originated loans contributed to losses in connection with mortgage loans securitized by the incomplete statusbuyer of the discovery process;loans. The claims generally do not include specific deficiencies for specific loans sold by FHN. Instead, the lack ofclaims generally assert that FHN is liable for a precise statement of damages; and lack of precedent claims. The alleged purchase pricesshare of the certificates subjectclaimant's loss estimated by assessing the totality of the other whole loans sold by FHN to pendingclaimant in relation to the totality of the larger number of loans securitized by claimant. FHN is unable to estimate an RPL range for these matters due to significant uncertainties regarding: the number of, and the facts underlying, the loan originations which claimants assert are indemnifiable; the applicability of FHN’s contractual indemnity covenants to those facts and originations; and, in those cases where an indemnity claim may be supported, whether any legal defenses, counterclaims, other counter-positions, or third-party claims might eliminate or reduce claims against FHN or their impact on FHN.
FHN also is contending with indemnification claims excluding the FDIC-New York matter, total $409.9 million.
In late October, 2017, FHN received a notice of indemnification claimsrelated to servicing obligations. The most significant is from Nationstar Mortgage LLC, currently doing business as “Mr. Cooper.” Nationstar was the purchaser of FHN’s mortgage servicing obligations and assets in 2013 and 2014 and, starting in 2011, was FHN’s subservicer. The noticeNationstar asserts several categories of indemnity obligations by FHN to Nationstar in connection with mortgage loans under the subservicing arrangement and under the purchase transaction. This matter currently is not in formal litigation, but litigation in the future is possible. FHN is unable to
estimate an RPL range for this matter due to significant uncertainties regarding: the exact nature of each of Nationstar’s claims and its position in respect of each; the number of, and the facts underlying, the claimed instances of indemnifiable events; the applicability of FHN’s contractual indemnity covenants to those facts and events; and, in those cases where the facts and events might support an indemnity claim, whether any legal defenses, counterclaims, other counter-positions, or third-party claims might eliminate or reduce claims against FHN or their impact on FHN.
FHN has additional potential exposures related to its formerpre-2009 mortgage businesses. A few of those matters have become litigation which FHN currently estimates are immaterial, some are non-litigation claims or threats, some are mere subpoenas or other requests for information, and in some areas FHN has no indication of any active or threatened dispute. Some of those matters might eventually result in loan repurchases or make-whole payments and could be included in the repurchase liability discussed below,settlements, and some might eventually result in damages or other litigation-oriented liability, including indemnity payments,adverse litigation outcomes, but none are included in the material loss contingency liabilities mentioned above or in the RPL range mentioned above. Additional information concerning such exposures is provided below in “Obligations from Legacy
Mortgage Businesses.”
Matters Related to Capital Bank Financial Transaction Settled
As mentioned in Note 10 within Item 1 of FHN’s Quarterly Report on Form 10-Q for the period ended June 30, 2017, (1) on July 14, 2017, a complaint captioned Robert Garfield v. First Horizon National Corporation, et al., No. CH-17-1022, was filed on behalf of a putative class of FHN shareholders against FHN, its directors, and Capital Bank Financial Corp. (“Capital Bank Financial”) in the Court of Chancery of Shelby County, Tennessee (30th Judicial District), in connection with FHN’s agreement to acquire Capital Bank Financial by merger. In addition, Capital Bank Financial and the individual members of the Capital Bank Financial board of directors were named as defendants in three substantially similar putative derivative and class action lawsuits filed by alleged shareholders of Capital Bank Financial; (2) Bushansky v. Capital Bank Financial Corp., et al., No. 3:17-cv-00422 (W.D. North Carolina filed July 17, 2017); (3) Parshall v. Capital Bank Financial Corp., et al., No. 3:17-cv-00428 (W.D. North Carolina filed July 19, 2017); and (4) McNamara v. Capital Bank Financial Corp., et al., No. 3:17-cv-00439 (W.D. North Carolina filed July 25, 2017). The Parshall complaint also named FHN as a defendant. During the third quarter of 2017, those four matters were settled and dismissed. Amounts expended by FHN were not material.
Note 10 – Contingencies and Other Disclosures (Continued)
Material Gain Contingency Matter
In second quarter 2015 FHN reached an agreement with DOJ and HUD to settle potential claims related to FHN’s underwriting and origination of loans insured by FHA. Under that agreement FHN paid $212.5 million. FHN believes that certain insurance policies, having an aggregate policy limit of $75 million, provide coverage for FHN’s losses and related costs. The insurers have denied and/or reserved rights to deny coverage. FHN sued the insurers to enforce the policies under Tennessee law. The trial court granted summary judgment to the defendants, and FHN has appealed. In connection with this litigation FHN seeks to partly recoup previously recognized expenses associated with the settled matter. Under applicable financial accounting guidance FHN has determined that although material gain from this litigation is not probable, there is a reasonably possible (more than remote) chance of a material gain outcome for FHN. FHN cannot determine a probable outcome that may result from this matter because of the uncertainty of the potential outcomes of the legal proceedings and also due to significant uncertainties regarding: legal interpretation of the relevant contracts; potential remedies that might be available or awarded; and the ultimate effect of counterclaims asserted by the defendants. Additional information concerning FHN’s former mortgage businesses is provided below in “Obligations from Legacy Mortgage Businesses.”
Obligations from Legacy Mortgage Businesses
Loss contingencies mentioned above under “Material Matters” stem from FHN’s former mortgage origination and servicing businesses. FHN retains potential for further exposure, in addition to the matters mentioned, from those former businesses. The following discussion provides context and other information to enhance an understanding of those matters and exposures.
Overview
Prior to September 2008 FHN originated loans through its legacy mortgage business, primarily first lien home loans, with the intention of selling them. Sales typically were effected either as non-recourse whole-loan sales or through non-recourse proprietary securitizations. Conventional conforming single-family residential mortgage loans were sold predominately to two GSEs: Fannie Mae and Freddie Mac. Also, federally insured or guaranteed whole loans were pooled, and payments to investors were guaranteed through Ginnie Mae. Many mortgage loan originations, especially nonconforming mortgage loans, were sold to investors, or certificate-holders, predominantly through FH proprietary securitizations but also, to a lesser extent, through other whole loans sold to private non-Agency purchasers. FHN used only one trustee for all of its FH proprietary securitizations. FHN also originated mortgage loans eligible for FHA insurance or VA guaranty. In addition, FHN originated and sold HELOCs and second lien mortgages through other whole loans sold to private purchasers and, to a lesser extent, through FH proprietary securitizations. Currently, only one FH securitization of HELOCs remains outstanding.
For non-recourse loan sales, FHN has exposure for repurchase of loans, make-whole damages, or other related damages, arising from claims that FHN breached its representations and warranties made at closing to the purchasers, including GSEs, other whole loan purchasers, and the trustee of FH proprietary securitizations.
During the time these legacy activities were conducted, FHN frequently sold mortgage loans “with servicing retained.” As a result, FHN accumulated substantial amounts of MSR on its consolidated balance sheet, as well as contractual servicing obligations and related deposits and receivables. FHN conducted a significant servicing business under its First Horizon Home Loans brand.
MI was required by GSE rules for certain of the loans sold to GSEs and was also provided for certain of the loans that were securitized. MI generally was provided for first lien loans sold or securitized having an LTV ratio at origination of greater than 80 percent.
In 2007, market conditions deteriorated to the point where mortgage-backed securitizations no longer could be sold economically; FHN’s last securitization occurred that year. FHN continued selling mortgage loans to GSEs until August 31, 2008, when FHN sold its national mortgage origination and servicing platforms along with a portion of its servicing assets and obligations. FHN contracted to have its remaining servicing obligations sub-serviced. Since the platform sale FHN has sold substantially all remaining servicing assets and obligations.
Certain mortgage-related terms used in this “Contingencies” section are defined in “Mortgage-Related Glossary” at the end of this Overview.
Repurchase and Make-Whole Obligations
Note 10 – Contingencies and Other Disclosures (Continued)
Starting in 2009, FHN received a high number of claims either to repurchase loans from the purchaser or to pay the purchaser to “make them whole” for economic losses incurred. These claims have been driven primarily by loan delinquencies. In repurchase or make-whole claims a loan purchaser typically asserts that specified loans violated representations and warranties FHN made when the loans were sold. A significant majority of claims received overall have come from GSEs, and the remainder are from purchasers of other whole loan sales. FHN has not received a loan repurchase or make-whole claim from the FH proprietary securitization trustee.
Generally, FHN reviews each claim and MI cancellation notice individually. FHN’s responses include appeal, provide additional information, deny the claim (rescission), repurchase the loan or remit a make-whole payment, or reflect cancellation of MI.
After several years resolving repurchase and make-whole claims with each GSE on a loan-by-loan basis, in 2013 and 2014 FHN entered into DRAs with the GSEs, resolving a large fraction of potential claims. Starting in 2014, the overall number of such claims diminished substantially, primarily as a result of the DRAs. Each DRA resolved obligations associated with loans originated from 2000 to 2008, but certain obligations and loans were excluded. Under each DRA, FHN remains responsible for repurchase obligations related to certain excluded defects (such as title defects and violations of the GSE’s Charter Act) and FHN continues to have loan repurchase or monetary compensation obligations under the DRAs related to private mortgage insurance rescissions, cancellations, and denials (with certain exceptions). FHN also has exposure related to loans where there has been a prior bulk sale of servicing, as well as certain other whole-loan sales. With respect to loans where there has been a prior bulk sale of servicing, FHN is not responsible for MI cancellations and denials to the extent attributable to the acts of the current servicer.
While large portions of repurchase claims from the GSEs were settled with the DRAs, comprehensive settlement of repurchase, make-whole, and indemnity claims with non-Agency claimants is not practical. Such claims that are not resolved by the parties can, and sometimes have, become litigation.
FH Proprietary Securitization Actions
FHN has potential financial exposure from FH proprietary securitizations outside of the repurchase/make-whole process. Several investors in certificates sued FHN and others starting in 2009, and several underwriters or other counterparties have demanded that FHN indemnify and defend them in securitization lawsuits. The pending suits generally assert that disclosures made to investors in the offering and sale of certificates were legally deficient.
Servicing Obligations
FHN’s national servicing business was sold as part of the platform sale in 2008. A significant amount of MSR was sold at that time, and a significant amount was retained. The related servicing activities, including foreclosure and loss mitigation practices, not sold in 2008 were outsourced through a three-year subservicing arrangement (the “2008 subservicing agreement”) with the platform buyer (the “2008 subservicer”). The 2008 subservicing agreement expired in 2011 when FHN entered into a replacement agreement with a new subservicer (the “2011 subservicer”). In fourth quarter 2013, FHN contracted to sell a substantial majority of its remaining servicing obligations and servicing assets (including advances) to the 2011 subservicer. The servicing was transferred to the buyer in stages, and was substantially completed in first quarter 2014. The servicing still retained by FHN continues to be subserviced.
As servicer, FHN had contractual obligations to the owners of the loans (primarily GSEs) and securitization trustees, to handle billing, custodial, and other tasks related to each loan. Each subservicer undertook to perform those obligations on FHN’s behalf during the applicable subservicing period, although FHN legally remained the servicer of record for those loans that were subserviced.
The 2008 subservicer has been subject to a consent decree, and entered into a settlement agreement with regulators related to alleged deficiencies in servicing and foreclosure practices. The 2008 subservicer has made demands of FHN, under the 2008 subservicing agreement, to pay certain resulting costs and damages totaling $43.5 million. FHN disagrees with those demands and has made no payments. This disagreement has the potential to result in litigation and, in any such future litigation, the claim against FHN may be substantial.
A certificate holder has contacted FHN, claiming that it has been damaged from alleged deficiencies in servicing loans held in certain FH proprietary securitization trusts. The holder has sued the FH securitization trustee on related grounds, but has not yet
Note 10 – Contingencies and Other Disclosures (Continued)
sued FHN. FHN cannot predict how this matter will proceed nor can FHN predict whether this matter ultimately will be material to FHN.
Origination Data
From 2005 through 2008, FHN originated and sold $69.5 billion of mortgage loans to the Agencies. This includes $57.6 billion of loans sold to GSEs and $11.9 billion of loans guaranteed by Ginnie Mae. Although FHN conducted these businesses before 2005, GSE loans originated in 2005 through 2008 account for a substantial majority of all repurchase requests/make-whole claims received since the 2008 platform sale.
From 2005 through 2007, $26.7 billion of mortgage loans were included in FH proprietary securitizations. The last FH securitization occurred in 2007.
Mortgage-Related Glossary
|
| | | | | | |
| | | | | | |
Agencies | | the two GSEs and Ginnie Mae | | HELOC | | home equity line of credit |
certificates | | securities sold to investors representing interests in mortgage loan securitizations | | HUD | | Dept. of Housing and Urban Development |
| | | |
DOJ | | U.S. Department of Justice | | LTV | | loan-to-value, a ratio of the loan amount divided by the home value |
| | | |
DRA | | definitive resolution agreement with a GSE | | MI | | private mortgage insurance, insuring against borrower payment default |
| | | |
Fannie Mae, Fannie,
FNMA
| | Federal National Mortgage Association | | MSR | | mortgage servicing rights |
| | | |
FH proprietary
securitization
| | securitization of mortgages sponsored by FHN under its First Horizon brand | | nonconforming loans | | loans that did not conform to Agency program requirements |
| | | |
FHA | | Federal Housing Administration | | other whole loans sold | | mortgage loans sold to private, non-Agency purchasers |
| | | |
Freddie Mac, Freddie, FHLMC | | Federal Home Loan Mortgage Corporation | | 2008 platform sale, 2008 sale,
platform sale
| | FHN’s sale of its national mortgage origination and servicing platforms in 2008 |
| | | |
Ginnie Mae, Ginnie,
GNMA
| | Government National Mortgage Association | | pipeline or active pipeline | | pipeline of mortgage repurchase, make-whole, & certain related claims against FHN |
| | | |
GSEs | | Fannie Mae and Freddie Mac | | VA | | Veterans Administration |
Repurchase and Foreclosure Liability
TheFHN’s repurchase and foreclosure liability, primarily related to its pre-2009 mortgage businesses, is comprised of reservesaccruals to cover estimated loss content in the active pipeline (consisting of mortgage loan repurchase, make-whole, foreclosure/servicing demands and certain related exposures), estimated future inflows, as well asand estimated loss content related to certain known claims not currently included in the active pipeline. FHN compares the estimated probable incurred losses determined under the applicable loss estimation approaches for the respective periods with current reserve levels. Changes in the estimated required liability levels are recorded as necessary through the repurchase and foreclosure provision.
Based on currently available information and experience to date, FHN has evaluated its loan repurchase, make-whole, foreclosure, and certain related exposures and has accrued for losses of $34.6$13.5 million and $66.0$14.5 million as of September 30, 2017March 31, 2020 and December 31, 2016, respectively, including a smaller amount related to equity-lending junior lien loan sales.2019, respectively. Accrued liabilities for FHN’s estimate of these obligations are reflected in Other liabilities on the Consolidated Condensed Statements of Condition. Charges/expense reversals to increase/decrease the liability are included within Repurchase and foreclosure provision/(provision credit) on the Consolidated Condensed Statements of Income. The decline in the repurchase and
Note 10 – Contingencies and Other Disclosures (Continued)
foreclosure liability since year-end is the result of the settlement of certain repurchase claims. The estimates are based upon currently available information and fact patterns that exist as of theeach balance sheet datesdate and could be subject to future changes. Changes to any one of these factors could significantly impact the estimate of FHN’s liability.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 41
Note 10 – Contingencies and Other FHN Mortgage ExposuresDisclosures (Continued)
FHN’s FHA and VA program lending was substantial prior to the 2008 platform sale, and has continued at a much lower level since then. As lender, FHN made certain representations and warranties as to the compliance of the loans with program requirements. Over the past several years, most recently in first quarter 2015, FHN occasionally has recognized significant losses associated with settling claims and potential claims by government agencies, and by private parties asserting claims on behalf of agencies, related to these origination activities. At September 30, 2017, FHN had not accrued a liability for any matter related to these government lending programs, and no pending or known threatened matter related to these programs represented a material loss contingency described above.
At September 30, 2017, FHN had not accrued a liability for exposure for repurchase of first-lien loans related to FH proprietary securitizations arising from claims from the trustee that FHN breached its representations and warranties in FH proprietary securitizations at closing. FHN’s trustee is a defendant in lawsuits in which the plaintiffs have asserted that the trustee has duties to review loans and otherwise to act against FHN outside of the duties specified in the applicable trust documents; FHN is not a defendant and is not able to assess what, if any, exposure FHN may have as a result of them.
FHN is defending, directly or as indemnitor, certain pending lawsuits brought by purchasers of certificates in FH proprietary securitizations or their assignees. FHN believes a new lawsuit based on federal securities claims that offering disclosures were deficient cannot be brought at this time due to the running of applicable limitation periods, but other investor claims, based on other legal theories, might still be possible. Due to sales of MSR starting in 2008, FHN has limited visibility into current loan information such as principal payoffs, refinance activity, delinquency trends, and loan modification activity.
Many non-GSE purchasers of whole loans from FHN included those loans in their own securitizations. Regarding such other whole loans sold, FHN made representations and warranties concerning the loans and provided indemnity covenants to the purchaser/securitizer. Typically the purchaser/securitizer assigned key contractual rights against FHN to the securitization trustee. As mentioned above, repurchase, make-whole, indemnity, and other monetary claims related to specific loans are included in the active pipeline and repurchase reserve. In addition, currently the following categories of actions are pending which involve FHN and other whole loans sold: (i) FHN has received indemnification requests from purchasers of loans or their assignees in cases where FHN is not a defendant; (ii) FHN has received subpoenas seeking loan reviews in cases where FHN is not a defendant; (iii) FHN has received repurchase, indemnity, and other demands from purchasers or their assignees; and (iv) FHN is a defendant in legal actions involving FHN-originated other whole loans sold, including one of the material matters mentioned above. At September 30, 2017, FHN’s repurchase and foreclosure liability considered certain known exposures from other whole loans sold.
Certain government entities have subpoenaed information from FHN and others. These entities include the FDIC (on behalf of certain failed banks) and the FHLBs of San Francisco, Atlanta, and Seattle, among others. These entities purport to act on behalf of several purchasers of FH proprietary securitizations, and of non-FH securitizations which included other whole loans sold. Collectively, the subpoenas seek information concerning: a number of FH proprietary securitizations and/or underlying loan originations; and originations of certain other whole loans sold which, in many cases, were included by the purchaser in its own securitizations. Some subpoenas fail to identify the specific investments made or loans at issue. Moreover, FHN has limited information regarding at least some of the loans under review. Unless and until a review (if related to specific loans) becomes an identifiable repurchase claim, the associated loans are not considered part of the active pipeline.
OTHER DISCLOSURES
Visa Matters
FHN is a member of the Visa USA network. In October 2007, the Visa organization of affiliated entities completed a series of global restructuring transactions to combine its affiliated operating companies, including Visa USA, under a single holding company, Visa Inc. (“Visa”). Upon completion of the reorganization, the members of the Visa USA network remained contingently liable for certain Visa litigation matters (the “Covered Litigation”). Based on its proportionate membership share of Visa USA, FHN recognized a contingent liability in fourth quarter 2007 related to this contingent obligation. In March 2008, Visa completed its initial public offering (“IPO”) and funded an escrow account from its IPO proceeds to be used to make payments related to the Visa litigation matters. FHN received approximately 2.4 million Class B shares in conjunction with Visa’s IPO.
Note 10 – Contingencies and Other Disclosures (Continued)
Conversion of these shares into Class A shares of Visa is prohibited until the final resolution of the covered litigation. In conjunction with the prior sales of Visa Class B shares in December 2010 and September 2011, FHN and the purchasers 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. The conversion ratio is adjusted when Visa deposits funds into the escrow account to cover certain litigation. As of September 30, 2017 and December 31, 2016, the derivative liabilities were $5.5 million and $6.2 million, respectively.
In July 2012, Visa and MasterCard announced a joint settlement (the “Settlement”) related to the Payment Card Interchange matter, one of the Covered Litigation matters. Based on the amount of the Settlement attributable to Visa and an assessment of FHN’s contingent liability accrued for Visa litigation matters, the Settlement did not have a material impact on FHN. The Settlement was vacated upon appeal in June 2016 and the Supreme Court declined to hear the case in March 2017. Accordingly, the outcome of this matter remains uncertain. Additionally, other Covered Litigation matters are also pending judicial resolution. So long as any Covered Litigation matter remains pending, FHN’s ability to transfer its Visa holdings is restricted, with limited exceptions.
FHN holds approximately 1.1 million Visa Class B shares. FHN’s Visa shares are not considered to be marketable and therefore are included in the Consolidated Condensed Statements of Condition at their historical cost of $0. As of September 30, 2017, the conversion ratio is 165 percent reflecting a Visa stock split in March 2015, and the contingent liability is $.8 million. Future funding of the escrow would dilute this conversion ratio by an amount that is not determinable at present. Based on the closing price on September 30, 2017, assuming conversion into Class A shares at the current conversion ratio, FHN’s Visa holdings would have a value of approximately $193 million. Recognition of this value is dependent upon the final resolution of the remainder of Visa’s Covered Litigation matters without further reduction of the conversion ratio.
Indemnification Agreements and Guarantees
In the ordinary course of business, FHN enters into indemnification agreements for legal proceedings against its directors and officers and standard representations and warranties for underwriting agreements, merger and acquisition agreements, loan sales, contractual commitments, and various other business transactions or arrangements.
The extent of FHN’s obligations under these agreements depends upon the occurrence of future events; therefore, it is not possible to estimate a maximum potential amount of payouts that could be required by such agreements.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 42
Note 11 – Pension, Savings, and Other Employee Benefits
Pension plan. FHN sponsors a noncontributory, qualified defined benefit pension plan to employees hired or re-hired on or before September 1, 2007. Pension benefits are based on years of service, average compensation near retirement or other termination, and estimated social security benefits at age 65. Benefits under the plan are “frozen” so that years of service and compensation changes after 2012 do not affect the benefit owed. Minimum contributions are based upon actuarially determined amounts necessary to fund the total benefit obligation. Decisions to contribute to the plan are based upon pension funding requirements under the Pension Protection Act, the maximum amount deductible under the Internal Revenue Code, the actual performance of plan assets, and trends in the regulatory environment. FHN contributed $165 million to the qualified pension plan in third quarter 2016. The contribution hadmade no effect on FHN’s 2016 Consolidated Statements of Income. FHN did not make any contributions to the qualified pension plan
in the nine months ended September 30, 2017.2019. Management does not currently anticipate that FHN will make a contribution to the qualified pension plan for the remainderremainder of 2017.2020.
FHN also maintains non-qualified plans including a supplemental retirement plan that covers certain employees whose benefits under the qualified pension plan have been limited by tax rules. These other non-qualified plans are unfunded, and contributions to these plans cover all benefits paid under the non-qualified plans.
Payments made under the non-qualified plans were $5.1$5.2 million for 2016.2019. FHN anticipates making benefit payments under the non-qualified plans of $5.0$5.2 million in 2017.2020.
Savings plan. FHN provides all qualifying full-time employees with the opportunity to participate in FHN's tax qualified 401(k) savings plan. The qualified plan allows employees to defer receipt of earned salary, up to tax law limits, on a tax-advantaged basis. Accounts, which are held in trust, may be invested in a wide range of mutual funds and in FHN common stock. Up to tax law limits, FHN provides a 100 percent match for the first 6 percent of salary deferred, with company matching contributions invested according to a participant’s current investment elections.election. Through a non-qualified savings restoration plan, FHN provides a restorative benefit to certain highly-compensated employees who participate in the savings plan and whose contribution elections are capped by tax limitations.
Other employee benefits. FHN provides postretirement life insurance benefits to certain employees and also provides postretirement medical insurance benefits to retirement-eligible employees. The postretirement medical plan is contributory with FHN contributing a fixed amount for certain participants. FHN’s postretirement benefits include certain prescription drug benefits.
Service cost is included in Employee compensation, incentives, and benefits in the Consolidated Condensed Statements of Income. All other components of net periodic benefit cost are included in All other expense.
The components of net periodic benefit cost for the three months ended September 30March 31 are as follows:
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Components of net periodic benefit cost | | | | | | | | |
Service cost | | $ | 8 |
| | $ | 8 |
| | $ | 25 |
| | $ | 24 |
|
Interest cost | | 5,909 |
| | 7,575 |
| | 304 |
| | 351 |
|
Expected return on plan assets | | (6,168 | ) | | (9,173 | ) | | (311 | ) | | (269 | ) |
Amortization of unrecognized: | | | | | | | | |
Prior service cost/(credit) | | — |
| | — |
| | 8 |
| | — |
|
Actuarial (gain)/loss | | 3,224 |
| | 2,435 |
| | (75 | ) | | (117 | ) |
Net periodic benefit cost/(credit) | | $ | 2,973 |
| | $ | 845 |
| | $ | (49 | ) | | $ | (11 | ) |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 43
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Components of net periodic benefit cost | | | | | | | | |
Service cost | | $ | 9 |
| | $ | 10 |
| | $ | 26 |
| | $ | 28 |
|
Interest cost | | 7,276 |
| | 7,648 |
| | 328 |
| | 335 |
|
Expected return on plan assets | | (9,230 | ) | | (9,797 | ) | | (236 | ) | | (227 | ) |
Amortization of unrecognized: | | | | | | | | |
Prior service cost/(credit) | | 13 |
| | 48 |
| | 23 |
| | 43 |
|
Actuarial (gain)/loss | | 2,380 |
| | 1,971 |
| | (140 | ) | | (143 | ) |
Net periodic benefit cost/(credit) | | $ | 448 |
| | $ | (120 | ) | | $ | 1 |
| | $ | 36 |
|
Note 11 – Pension, Savings, and Other Employee Benefits (Continued)
The components of net periodic benefit cost for the nine months ended September 30 are as follows:
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Components of net periodic benefit cost | | | | | | | | |
Service cost | | $ | 28 |
| | $ | 30 |
| | $ | 80 |
| | $ | 83 |
|
Interest cost | | 22,035 |
| | 23,412 |
| | 979 |
| | 969 |
|
Expected return on plan assets | | (27,011 | ) | | (29,342 | ) | | (710 | ) | | (685 | ) |
Amortization of unrecognized: | | | | | | | | |
Prior service cost/(credit) | | 39 |
| | 147 |
| | 71 |
| | 128 |
|
Actuarial (gain)/loss | | 7,140 |
| | 6,106 |
| | (425 | ) | | (608 | ) |
Net periodic benefit cost/(credit) | | $ | 2,231 |
| | $ | 353 |
| | $ | (5 | ) | | $ | (113 | ) |
Note 12 – Business Segment Information
FHN has four4 business segments: regional banking, fixed income, corporate, and non-strategic. The regional banking segment offers financial products and services, including traditional lending and deposit taking, to consumer and commercial customers in Tennesseethe southeast U.S. and other selected markets. Regional banking also provides investments, wealth management, financial planning, trust services and asset management, mortgage banking, 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. The fixed income segment consists of fixed income securities sales, trading, underwriting, and strategies for institutional clients in the U.S. and abroad, as well as loan sales, portfolio advisory services, and derivative sales. The corporate segment consists of unallocated corporate expenses, expense on subordinated debt issuances, bank-owned life insurance, 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, derivative valuation adjustments
related to prior sales of Visa Class B shares, lossgain/(loss) on extinguishment of debt, and acquisition- and integration-related costs.costs, expenses associated with rebranding initiatives, and various charges related to restructuring, repositioning, and efficiency efforts. The non-strategic segment consists of the wind-down nationalrun-off consumer lending activities, legacypre-2009 mortgage banking elements, including servicing fees, and the associated ancillary revenues and expenses related to these businesses. Non-strategic also includes the wind-down trust preferred loan portfolio and exited businesses.
Periodically, FHN adapts its segments to reflect managerial or strategic changes. FHN may also modify its methodology of allocating expenses and equity among segments which could change historical segment results. Business segment revenue, expense, asset, and equity levels reflect those which are specifically identifiable or which are allocated based on an internal allocation method. Because the allocations are based on internally developed assignments and allocations, to an extent they are subjective. Generally, all assignments and allocations have been consistently applied for all periods presented.
The following table reflects the amounts of consolidated revenue, expense, tax, and average assets for each segment for the three and nine months ended September 30:March 31:
|
| | | | | | | | |
| | Three Months Ended March 31 |
(Dollars in thousands) | | 2020 | | 2019 |
Consolidated | | | | |
Net interest income | | $ | 302,802 |
| | $ | 294,508 |
|
Provision/(provision credit) for loan losses (a) | | 145,000 |
| | 9,000 |
|
Noninterest income | | 174,756 |
| | 141,045 |
|
Noninterest expense | | 311,319 |
| | 296,090 |
|
Income/(loss) before income taxes | | 21,239 |
| | 130,463 |
|
Provision/(benefit) for income taxes | | 4,767 |
| | 27,058 |
|
Net income/(loss) | | $ | 16,472 |
| | $ | 103,405 |
|
Average assets | | $ | 43,551,912 |
| | $ | 40,883,192 |
|
| |
(a) | First quarter 2020 increase in provision expense primarily associated with a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic. |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Consolidated | | | | | | | | |
Net interest income | | $ | 209,817 |
| | $ | 185,195 |
| | $ | 600,226 |
| | $ | 533,533 |
|
Provision/(provision credit) for loan losses | | — |
| | 4,000 |
| | (3,000 | ) | | 11,000 |
|
Noninterest income | | 112,417 |
| | 148,545 |
| | 357,029 |
| | 428,364 |
|
Noninterest expense | | 236,869 |
| | 233,558 |
| | 676,991 |
| | 687,307 |
|
Income/(loss) before income taxes | | 85,365 |
| | 96,182 |
| | 283,264 |
| | 263,590 |
|
Provision/(benefit) for income taxes (a) | | 13,596 |
| | 28,547 |
| | 57,903 |
| | 82,802 |
|
Net income/(loss) | | $ | 71,769 |
| | $ | 67,635 |
| | $ | 225,361 |
| | $ | 180,788 |
|
Average assets | | $ | 28,874,827 |
| | $ | 27,609,702 |
| | $ | 28,852,679 |
| | $ | 27,021,137 |
|
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 44
Note 12 – Business Segment Information (Continued)
|
| | | | | | | | |
| | Three Months Ended March 31 |
(Dollars in thousands) | | 2020 | | 2019 |
Regional Banking | | | | |
Net interest income | | $ | 300,128 |
| | $ | 286,023 |
|
Provision/(provision credit) for loan losses (a) | | 145,435 |
| | 13,442 |
|
Noninterest income | | 81,871 |
| | 73,029 |
|
Noninterest expense | | 211,013 |
| | 198,569 |
|
Income/(loss) before income taxes | | 25,551 |
| | 147,041 |
|
Provision/(benefit) for income taxes | | 4,388 |
| | 34,109 |
|
Net income/(loss) | | $ | 21,163 |
| | $ | 112,932 |
|
Average assets | | $ | 32,164,347 |
| | $ | 28,801,849 |
|
Fixed Income | | | | |
Net interest income | | $ | 10,914 |
| | $ | 7,332 |
|
Noninterest income | | 95,723 |
| | 53,807 |
|
Noninterest expense | | 81,063 |
| | 50,533 |
|
Income/(loss) before income taxes | | 25,574 |
| | 10,606 |
|
Provision/(benefit) for income taxes | | 6,099 |
| | 2,457 |
|
Net income/(loss) | | $ | 19,475 |
| | $ | 8,149 |
|
Average assets | | $ | 3,764,192 |
| | $ | 2,848,249 |
|
Corporate | | | | |
Net interest income/(expense) | | $ | (13,359 | ) | | $ | (7,914 | ) |
Noninterest income (b) | | (3,718 | ) | | 13,353 |
|
Noninterest expense (b) (c) | | 15,449 |
| | 41,779 |
|
Income/(loss) before income taxes | | (32,526 | ) | | (36,340 | ) |
Provision/(benefit) for income taxes | | (6,372 | ) | | (11,771 | ) |
Net income/(loss) | | $ | (26,154 | ) | | $ | (24,569 | ) |
Average assets | | $ | 6,784,190 |
| | $ | 8,058,041 |
|
Non-Strategic | | | | |
Net interest income | | $ | 5,119 |
| | $ | 9,067 |
|
Provision/(provision credit) for loan losses (a) | | (435 | ) | | (4,442 | ) |
Noninterest income | | 880 |
| | 856 |
|
Noninterest expense | | 3,794 |
| | 5,209 |
|
Income/(loss) before income taxes | | 2,640 |
| | 9,156 |
|
Provision/(benefit) for income taxes | | 652 |
| | 2,263 |
|
Net income/(loss) | | $ | 1,988 |
| | $ | 6,893 |
|
Average assets | | $ | 839,183 |
| | $ | 1,175,053 |
|
Certain previously reported amounts have been reclassified to agree with current presentation. | |
(a) | First quarter 2020 increase in provision expense primarily associated with a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic. |
| |
(b) | First quarter 2020 decrease due to fluctuations in deferred compensation income driven by equity market valuations and mirrored by changes in deferred compensation expense, which is included in employee compensation expense. |
| |
(c) | 2020 and 2019 include restructuring-related costs associated with efficiency initiatives; refer to Note 17 - Restructuring, Repositioning, and Efficiency for additional information. 2020 and 2019 include acquisition-related expenses; refer to Note 2 - Acquisitions and Divestitures for additional information. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 45
Note 12 – Business Segment Information (Continued)
The following tables reflect a disaggregation of FHN’s noninterest income by major product line and reportable segment for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Regional Banking | | | | | | | | |
Net interest income | | $ | 209,319 |
| | $ | 190,508 |
| | $ | 604,680 |
| | $ | 541,135 |
|
Provision/(provision credit) for loan losses | | 8,552 |
| | 8,544 |
| | 11,910 |
| | 34,195 |
|
Noninterest income | | 64,369 |
| | 65,128 |
| | 188,082 |
| | 185,679 |
|
Noninterest expense | | 150,464 |
| | 145,050 |
| | 451,175 |
| | 454,970 |
|
Income/(loss) before income taxes | | 114,672 |
| | 102,042 |
| | 329,677 |
| | 237,649 |
|
Provision/(benefit) for income taxes | | 41,267 |
| | 37,027 |
| | 118,986 |
| | 84,736 |
|
Net income/(loss) | | $ | 73,405 |
| | $ | 65,015 |
| | $ | 210,691 |
| | $ | 152,913 |
|
Average assets | | $ | 19,158,458 |
| | $ | 17,582,899 |
| | $ | 18,519,584 |
| | $ | 16,704,462 |
|
Fixed Income | | | | | | | | |
Net interest income | | $ | 5,979 |
| | $ | 2,411 |
| | $ | 12,109 |
| | $ | 8,224 |
|
Noninterest income | | 55,802 |
| | 72,073 |
| | 161,829 |
| | 217,278 |
|
Noninterest expense | | 53,105 |
| | 59,423 |
| | 155,791 |
| | 180,850 |
|
Income/(loss) before income taxes | | 8,676 |
| | 15,061 |
| | 18,147 |
| | 44,652 |
|
Provision/(benefit) for income taxes | | 2,979 |
| | 5,518 |
| | 5,949 |
| | 16,195 |
|
Net income/(loss) | | $ | 5,697 |
| | $ | 9,543 |
| | $ | 12,198 |
| | $ | 28,457 |
|
Average assets | | $ | 2,586,997 |
| | $ | 2,305,986 |
| | $ | 2,388,984 |
| | $ | 2,348,640 |
|
Corporate | | | | | | | | |
Net interest income/(expense) | | $ | (13,990 | ) | | $ | (18,193 | ) | | $ | (43,060 | ) | | $ | (48,401 | ) |
Noninterest income (b) | | (9,477 | ) | | 5,134 |
| | 2,217 |
| | 15,766 |
|
Noninterest expense | | 23,935 |
| | 14,929 |
| | 65,390 |
| | 44,320 |
|
Income/(loss) before income taxes | | (47,402 | ) | | (27,988 | ) | | (106,233 | ) | | (76,955 | ) |
Provision/(benefit) for income taxes (a) | | (34,255 | ) | | (16,736 | ) | | (83,019 | ) | | (40,695 | ) |
Net income/(loss) | | $ | (13,147 | ) | | $ | (11,252 | ) | | $ | (23,214 | ) | | $ | (36,260 | ) |
Average assets | | $ | 5,698,161 |
| | $ | 5,880,268 |
| | $ | 6,421,890 |
| | $ | 6,024,736 |
|
Non-Strategic | | | | | | | | |
Net interest income | | $ | 8,509 |
| | $ | 10,469 |
| | $ | 26,497 |
| | $ | 32,575 |
|
Provision/(provision credit) for loan losses | | (8,552 | ) | | (4,544 | ) | | (14,910 | ) | | (23,195 | ) |
Noninterest income | | 1,723 |
| | 6,210 |
| | 4,901 |
| | 9,641 |
|
Noninterest expense | | 9,365 |
| | 14,156 |
| | 4,635 |
| | 7,167 |
|
Income/(loss) before income taxes | | 9,419 |
| | 7,067 |
| | 41,673 |
| | 58,244 |
|
Provision/(benefit) for income taxes | | 3,605 |
| | 2,738 |
| | 15,987 |
| | 22,566 |
|
Net income/(loss) | | $ | 5,814 |
| | $ | 4,329 |
| | $ | 25,686 |
| | $ | 35,678 |
|
Average assets | | $ | 1,431,211 |
| | $ | 1,840,549 |
| | $ | 1,522,221 |
| | $ | 1,943,299 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 |
(Dollars in thousands) | Regional Banking | | Fixed Income | | Corporate | | Non-Strategic | | Consolidated |
Noninterest income: | | | | | | | | | |
Fixed income (a) | $ | 121 |
| | $ | 95,514 |
| | $ | — |
| | $ | — |
| | $ | 95,635 |
|
Deposit transactions and cash management | 28,812 |
| | — |
| | 1,435 |
| | 43 |
| | 30,290 |
|
Brokerage, management fees and commissions | 15,405 |
| | — |
| | — |
| | — |
| | 15,405 |
|
Bankcard income | 7,150 |
| | — |
| | 70 |
| | 33 |
| | 7,253 |
|
Trust services and investment management | 7,213 |
| | — |
| | (18 | ) | | — |
| | 7,195 |
|
BOLI (b) | — |
| | — |
| | 4,589 |
| | — |
| | 4,589 |
|
Equity securities gains/(losses), net (b) | — |
| | — |
| | 25 |
| | — |
| | 25 |
|
All other income and commissions (c) (d) | 23,170 |
| | 209 |
| | (9,819 | ) | | 804 |
| | 14,364 |
|
Total noninterest income | $ | 81,871 |
| | $ | 95,723 |
| | $ | (3,718 | ) | | $ | 880 |
| | $ | 174,756 |
|
| |
(a) | Includes $9.3 million of underwriting, portfolio advisory, and other noninterest income in scope of Accounting Standards Codification ("ASC") 606, "Revenue From Contracts With Customers." |
| |
(b) | Represents noninterest income excluded from the scope of ASC 606. Amount is presented for informational purposes to reconcile total non-interest income. |
| |
(c) | Includes other service charges, ATM and interchange fees, electronic banking fees, and insurance commission in scope of ASC 606. |
| |
(d) | First quarter 2020 Corporate balance includes negative deferred compensation income driven by equity market valuations. |
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 |
(Dollars in thousands) | Regional Banking | | Fixed Income | | Corporate | | Non- Strategic | | Consolidated |
Noninterest income: | | | | | | | | | |
Fixed income (a) | $ | 17 |
| | $ | 53,732 |
| | $ | — |
| | $ | — |
| | $ | 53,749 |
|
Deposit transactions and cash management | 30,003 |
| | 3 |
| | 1,563 |
| | 52 |
| | 31,621 |
|
Brokerage, management fees and commissions | 12,630 |
| | — |
| | — |
| | 3 |
| | 12,633 |
|
Bankcard income | 7,039 |
| | — |
| | 62 |
| | (149 | ) | | 6,952 |
|
Trust services and investment management | 7,056 |
| | — |
| | (30 | ) | | — |
| | 7,026 |
|
BOLI (b) | — |
| | — |
| | 4,402 |
| | — |
| | 4,402 |
|
Equity securities gains/(losses), net (b) | — |
| | — |
| | 31 |
| | — |
| | 31 |
|
All other income and commissions (c) | 16,284 |
| | 72 |
| | 7,325 |
| | 950 |
| | 24,631 |
|
Total noninterest income | $ | 73,029 |
| | $ | 53,807 |
| | $ | 13,353 |
| | $ | 856 |
| | $ | 141,045 |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
| |
(a) | Includes $7.3 million of underwriting, portfolio advisory, and other noninterest income in scope of Accounting Standards |
(a) Provision/(benefit) for income taxes for consolidated results and the Corporate segment for the three and nine months ended September 30, 2017, relative to the prior year periods, was affected by a decline in the effective tax rate in 2017 primarily related to the reversal of the valuation allowance for the deferred tax asset related to its 2012 federal capital loss carryforward based on capital gain transactions initiated in second quarter 2017. See Note 15 – Income Taxes in the Notes to Consolidated Financial Statements on FHN’s Form 10-K for the year ended December 31, 2016, for additional information related to FHN's valuation allowance related to its capital loss carryforward.Codification ("ASC") 606, "Revenue From Contracts With Customers."
| |
(b) | Represents noninterest income excluded from the scope of ASC 606. Amount is presented for informational purposes to reconcile |
total non-interest income.
| |
(c) | Includes other service charges, ATM and interchange fees, electronic banking fees, and insurance commission in scope of ASC |
606.
(b) Three and nine months ended September 30, 2017 includes a $14.3 million pre-tax loss from the repurchase of equity securities previously included in a financing transaction.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 46
Note 13 – Variable Interest Entities
ASC 810 defines a VIE as a legal entity where (a) the equity investors, as a group, lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, (b) the equity investors, as a group, lack either, (1) the power through voting rights, or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance, (2) the obligation to absorb the expected losses of the entity, or (3) the right to receive the expected residual returns of the entity, or (c) the entity is structured with non-substantive voting rights. A variable interest is a contractual ownership or other interest that fluctuates with changes in the fair value of the VIE’s net assets exclusive of variable interests. Under ASC 810, as amended, a primary beneficiary is required to consolidate a VIE when it has a variable interest in a VIE that provides it with a controlling financial interest. For such purposes, the determination of whether a controlling financial interest exists is based on whether a single party has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant.
Consolidated Variable Interest Entities
FHN holds variable interests in a proprietary HELOC securitization trust it established as a source of liquidity for consumer lending operations. Based on its restrictive nature, the trust is considered a VIE as the holders of equity at risk do not have the power through voting rights or similar rights to direct the activities that most significantly impact the trust’s economic performance. The retention of mortgage service rights ("MSR") and a residual interest results in FHN potentially absorbing losses or receiving benefits that are significant to the trust. FHN is considered the primary beneficiary, as it is assumed to have the power, as Master Servicer, to most significantly impact the activities of the VIE. Consolidation of the trust results in the recognition of the trust proceeds as restricted borrowings since the cash flows on the securitized loans can only be used to settle the obligations due to the holders of trust securities. Through first quarter 2016 the trust experienced a rapid amortization period and FHN was obligated to provide subordinated funding. During the period, cash payments from borrowers were accumulated to repay outstanding debt securities while FHN continued to make advances to borrowers when they drew on their lines of credit. FHN then transferred the newly generated receivables into the securitization trust. FHN is reimbursed for these advances only after other parties in the securitization have received all of the cash flows to which they are entitled. If loan losses requiring draws on the related monoline insurers’ policies (which protect bondholders in the securitization) exceed a certain level, FHN may not receive reimbursement for all of the funds advanced to borrowers, as the senior bondholders and the monoline insurers typically have priority for repayment. Amounts funded from monoline insurance policies are considered restricted term borrowings in FHN’s Consolidated Condensed Statements of Condition. Except for recourse due to breaches of representations and warranties made by FHN in connection with the sale of the loans to the trust, the creditors of the trust hold no recourse to the assets of FHN.
FHN has established certain rabbi trusts related to deferred compensation plans offered to its employees. FHN contributes employee cash compensation deferrals to the trusts and directs the underlying investments made by the trusts. The assets of these trusts are available to FHN’s creditors only in the event that FHN becomes insolvent. These trusts are considered VIEs as there is no equity at risk in the trusts since FHN provided the equity interest to its employees in exchange for services rendered. FHN is considered the primary beneficiary of the rabbi trusts as it has the power to direct the activities that most significantly impact the economic performance of the rabbi trusts through its ability to direct the underlying investments made by the trusts. Additionally, FHN could potentially receive benefits or absorb losses that are significant to the trusts due to its right to receive any asset values in excess of liability payoffs and its obligation to fund any liabilities to employees that are in excess of a rabbi trust’s assets.
Note 13 – Variable Interest Entities (Continued)
The following table summarizes VIEsthe carrying value of assets and liabilities associated with rabbi trusts used for deferred compensation plans which are consolidated by FHN as of September 30, 2017March 31, 2020 and December 31, 2016:
2019:
|
| | | | | | | | | | |
| | | | | | |
(Dollars in thousands) | | | March 31, 2020 | | | December 31, 2019 |
Assets: | | | | | | |
Other assets | | | $ | 82,904 |
| | | $ | 91,873 |
|
Total assets | | | $ | 82,904 |
| | | $ | 91,873 |
|
Liabilities: | | | | | | |
Other liabilities | | | $ | 61,517 |
| | | $ | 70,830 |
|
Total liabilities | | | $ | 61,517 |
| | | $ | 70,830 |
|
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | On-Balance Sheet Consumer Loan Securitization | | Rabbi Trusts Used for Deferred Compensation Plans | | On-Balance Sheet Consumer Loan Securitization | | Rabbi Trusts Used for Deferred Compensation Plans |
(Dollars in thousands) | | Carrying Value | | Carrying Value | | Carrying Value | | Carrying Value |
Assets: | | | | | | | | |
Cash and due from banks | | $ | — |
| | N/A |
| | $ | — |
| | N/A |
|
Loans, net of unearned income | | 26,210 |
| | N/A |
| | 35,873 |
| | N/A |
|
Less: Allowance for loan losses | | — |
| | N/A |
| | 587 |
| | N/A |
|
Total net loans | | 26,210 |
| | N/A |
| | 35,286 |
| | N/A |
|
Other assets | | 47 |
| | $ | 77,997 |
| | 283 |
| | $ | 74,160 |
|
Total assets | | $ | 26,257 |
| | $ | 77,997 |
| | $ | 35,569 |
| | $ | 74,160 |
|
Liabilities: | | | | | | | | |
Term borrowings | | $ | 13,354 |
| | N/A |
| | $ | 23,126 |
| | N/A |
|
Other liabilities | | 3 |
| | $ | 58,785 |
| | 3 |
| | $ | 54,746 |
|
Total liabilities | | $ | 13,357 |
| | $ | 58,785 |
| | $ | 23,129 |
| | $ | 54,746 |
|
Nonconsolidated Variable Interest Entities
Low Income Housing Partnerships. First Tennessee Housing Corporation (“FTHC”Horizon Community Investment Group, Inc. ("FHCIG"), a wholly-owned subsidiary of FTBNA,First Horizon Bank, makes equity investments as a limited partner in various partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital and to support FHN’s community reinvestment initiatives. The activities of the limited partnerships include the identification, development, and operation of multi-family housing units that are leased to qualifying residential tenants generally within FHN’s primary geographic region. LIHTC partnerships are considered VIEs as FTHC,FHCIG, the holder of the equity investment at risk, does not have the ability to direct the activities that most significantly affect the performance of the entity through
voting rights or similar rights. FTHCFHCIG could absorb losses that are significant to the LIHTC partnerships as it has a risk of loss for its capital contributions and funding commitments to each partnership. The general partners are considered the primary beneficiaries as managerial functions give them the power to direct the activities that most significantly impact the entities’ economic performance and the managing members are exposed to all losses beyond FTHC’sFHCIG’s initial capital contributions and funding commitments.
FHN accounts for all qualifying LIHTC investments under the proportional amortization method. Under this method an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense/
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 47
Note 13 – Variable Interest Entities (Continued)
(benefit). LIHTC investments that do not qualify for the proportional amortization method are accounted for using the equity method. Expenses associated with these
investments were not significant$.2 million and $.5 million for the three and nine months ended September 30, 2017March 31, 2020 and 2016. 2019, respectively.
The following table summarizes the impact to the Provision/(benefit) for income taxes on the Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2017,March 31, 2020, and 20162019 for LIHTC investments accounted for under the proportional amortization method.
|
| | | | | | | | |
| | Three Months Ended March 31 |
(Dollars in thousands)
| | 2020 | | 2019 |
Provision/(benefit) for income taxes: | | | | |
Amortization of qualifying LIHTC investments | | $ | 5,561 |
| | $ | 3,998 |
|
Low income housing tax credits | | (4,598 | ) | | (3,629 | ) |
Other tax benefits related to qualifying LIHTC investments | | (2,555 | ) | | (1,610 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in thousands)
| | 2017 | | 2016 | | 2017 | | 2016 |
Provision/(benefit) for income taxes: | | | | | | | | |
Amortization of qualifying LIHTC investments | | $ | 3,774 |
| | $ | 5,445 |
| | $ | 8,414 |
| | $ | 10,073 |
|
Low income housing tax credits | | (3,103 | ) | | (2,615 | ) | | (8,101 | ) | | (7,672 | ) |
Other tax benefits related to qualifying LIHTC investments | | (2,478 | ) | | (6,131 | ) | | (4,307 | ) | | (8,310 | ) |
Note 13 – Variable Interest Entities (Continued)
Other Tax Credit Investments. First Tennessee New Markets Corporation (“FTNMC”), a wholly-owned subsidiary of FTBNA,First Horizon Bank, periodically makes equity investments through wholly-owned subsidiaries as a non-managing member in various limited liability companies (“LLCs”) that sponsor community development projects utilizing the New Market Tax Credit (“NMTC”) pursuant to Section 45 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital and to support FHN’s community reinvestment initiatives. The activities of the LLCs include providing investment capital for low-income communities within FHN’s primary geographic region. A portion of the funding of FTNMC’s investment in a NMTC LLC is obtained via a loan from an unrelated third-party that is typically a community development enterprise. The NMTC LLCs are considered VIEs as FTNMC, the holder of the equity investment at risk, does not have the ability to direct the activities that most significantly affect the performance of the entity through voting rights or similar rights. While FTNMC could absorb losses that are significant to the NMTC LLCs as it has a risk of loss for its initial capital contributions, the managing members are considered the primary beneficiaries as managerial functions give them the power to direct the activities that most significantly impact the NMTC LLCs’ economic performance and the managing members are exposed to all losses beyond FTNMC’s initial capital contributions.
FTHCFHCIG also makes equity investments as a limited partner or non-managing member in entities that receive Historic Tax Credits pursuant to Section 47 of the Internal Revenue Code. As of March 31, 2020 and December 31, 2019, there were no investments funded through loans from community development enterprises. The purpose of these entities is the rehabilitation of historic buildings with the tax credits provided to incent private investment in the historic cores of cities and towns. These entities are considered VIEs as FTHC,FHCIG, the holder of the equity investment at risk, does
not have the ability to direct the activities that most significantly affect the performance of the entity through voting rights or similar rights. FTHCFHCIG could absorb losses that are significant to the entities as it has a risk of loss for its capital contributions and funding commitments to each partnership. The managing members are considered the primary beneficiaries as managerial functions give them the power to direct the activities that most significantly impact the entities’ economic performance and the managing members are exposed to all losses beyond FTHC’sFHCIG’s initial capital contributions and funding commitments.
Small Issuer Trust Preferred Holdings. FTBNAFirst Horizon Bank holds variable interests in trusts which have issued mandatorily redeemable preferred capital securities (“trust preferreds”) for smaller banking and insurance enterprises. FTBNAFirst Horizon Bank has no voting rights for the trusts’ activities. The trusts’ only assets are junior subordinated debentures of the issuing enterprises. The creditors of the trusts hold no recourse to the assets of FTBNA.First Horizon Bank. These trusts meet the definition of a VIE as the holders of the equity investment at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the trusts’ economic performance. Based on the nature of the trusts’ activities and the size of FTBNA’sFirst Horizon Bank’s holdings, FTBNAFirst Horizon Bank could potentially receive benefits or absorb losses that are significant to the trusts regardless of whether a majority of a trust’s securities are held by FTBNA.First Horizon Bank. However, since FTBNAFirst Horizon Bank is solely a holder of the trusts’ securities, it has no rights which would give it the power to direct the activities that most significantly impact the trusts’ economic performance and thus it is not considered the primary beneficiary of the trusts. FTBNAFirst Horizon Bank has no contractual requirements to provide financial support to the trusts.
On-Balance Sheet Trust Preferred Securitization. In 2007, FTBNAFirst Horizon Bank executed a securitization of certain small issuer trust preferreds for which the
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 48
Note 13 – Variable Interest Entities (Continued)
underlying trust meets the definition of a VIE as the holders of the equity investment at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entity’s economic performance. FTBNAFirst Horizon Bank could potentially receive benefits or absorb losses that are significant to the trust based on the size and priority of the interests it retained in the securities issued by the trust. However, since FTBNAFirst Horizon Bank did not retain servicing or other decision making rights, FTBNAFirst Horizon Bank is not the primary beneficiary as it does not have the power to direct the activities that most significantly impact the trust’s economic performance. Accordingly, FTBNAFirst Horizon Bank has accounted for the funds received through the securitization as a term borrowing in its Consolidated Condensed Statements of Condition. FTBNAFirst Horizon Bank has no contractual requirements to provide financial support to the trust.
Proprietary Residential Mortgage Securitizations. FHN holds variable interests (primarily principal-only strips) in proprietary residential mortgage securitization trusts it established prior to 2008 as a source of liquidity for its mortgage banking operations. Prior to fourth quarter 2016 these interests included MSR and interest-only strips. Except for recourse due to breaches of representations and warranties made by FHN in connection with the sale of the loans to the trusts, the creditors of the trusts hold no recourse to the assets of FHN. Additionally, FHN has no contractual requirements to provide financial support to the trusts. Based on their restrictive nature, the trusts are considered VIEs as the holders of equity at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the trusts’ economic performance. While it held MSR, FHN was assumed to have the power as servicer to most significantly impact the activities of such VIEs. However, in situations where FHN did not have the ability to participate in significant portions of a securitization trust’s cash flows and FHN was not considered the primary beneficiary of the trust. Therefore, these trusts were not consolidated by FHN.
Note 13 – Variable Interest Entities (Continued)
Holdings in Agency Mortgage-Backed Securities. FHN holds securities issued by various Agency securitization trusts. Based on their restrictive nature, the trusts meet the definition of a VIE since the holders of the equity investments at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entities’ economic performance. FHN could potentially receive benefits or absorb losses that are significant to the trusts based on the nature of the trusts’ activities and the size of FHN’s holdings. However, FHN is solely a holder of the trusts’ securities and does not have the power to direct the activities that most significantly impact the trusts’ economic performance, and is not considered the primary beneficiary of the trusts. FHN has no contractual requirements to provide financial support to the trusts.
Commercial Loan Troubled Debt Restructurings. For certain troubled commercial loans, FTBNA First Horizon Bank
restructures the terms of the borrower’s debt in an effort to increase the probability of receipt of amounts contractually due. Following a troubled debt restructuring, the borrower entity typically meets the definition of a VIE as the initial determination of whether an entity is a VIE must be reconsidered as events have proven that the entity’s equity is not sufficient to permit it to finance its activities without additional subordinated financial support or a restructuring of the terms of its financing.
As FTBNAFirst Horizon Bank does not have the power to direct the activities that most significantly impact such troubled commercial borrowers’ operations, it is not considered the primary beneficiary even in situations where, based on the size of the financing provided, FTBNAFirst Horizon Bank is exposed to potentially significant benefits and losses of the borrowing entity. FTBNAFirst Horizon Bank has no contractual requirements to provide financial support to the borrowing entities beyond certain funding commitments established upon restructuring of the terms of the debt that allows for preparation of the underlying collateral for sale.
Sale Leaseback Transaction. FTBFirst Horizon Bank has entered into an agreement with a single asset leasing entity for the sale and leaseback of an office building. In conjunction with this transaction, FTBFirst Horizon Bank loaned funds to a related party of the buyer that were used for the purchase price of the building. FTBFirst Horizon Bank also entered into a construction loan agreement with the single asset entity for renovation of the building. Since this transaction did not qualify as a sale prior to 2019, it is beingwas accounted for using the deposit method which createscreated a net asset or liability for all cash flows between FTBFirst Horizon Bank and the buyer. Upon adoption of ASU 2016-02 the transaction qualified as a seller-financed sale-leaseback. The buyer-lessor in this transaction meets the definition of a VIE as it does not have sufficient equity at risk since FTBFirst Horizon Bank is providing the funding for the purchase and renovation. A related party of the buyer-lessor has the power to direct the activities that most significantly impact the operations and could potentially receive benefits or absorb losses that are significant to the transactions, making it the primary beneficiary. Therefore, FTBFirst Horizon Bank does not consolidate the leasing entity.
Proprietary Trust Preferred Issuances. In conjunction with the acquisition of CBF, FHN acquired junior subordinated debt underlying multiple issuances of trust preferred debt by institutions previously acquired by CBF. All of the remaining trusts are considered VIEs because the ownership interests from the capital contributions to these trusts are not considered “at risk” in evaluating whether the holders of the equity investments at risk in the trusts have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entities’ economic performance. Thus, FHN cannot be the trusts’ primary beneficiary because its ownership interests in the trusts are not considered variable interests as they are not
51
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 49
Note 13 – Variable Interest Entities (Continued)
considered “at risk”. Consequently, none of the trusts are consolidated by FHN.
The following table summarizes FHN’s nonconsolidated VIEs as of September 30, 2017:
March 31, 2020:
| | (Dollars in thousands) | | Maximum Loss Exposure | | Liability Recognized | | Classification | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | | | | | |
Low income housing partnerships | | $ | 96,007 |
| | $ | 34,236 |
| | (a) | | $ | 241,435 |
| | $ | 123,720 |
| | (a) |
Other tax credit investments (b) (c) | | 20,444 |
| | — |
| | Other assets | |
Other tax credit investments (b) | | | 6,161 |
| | — |
| | Other assets |
Small issuer trust preferred holdings (d)(c) | | 332,873 |
| | — |
| | Loans, net of unearned income | | 234,214 |
| | — |
| | Loans, net of unearned income |
On-balance sheet trust preferred securitization | | 48,902 |
| | 65,272 |
| | (e) | | 32,261 |
| | 81,912 |
| | (d) |
Proprietary residential mortgage securitizations | | 2,300 |
| | — |
| | Trading securities | | 785 |
| | — |
| | Trading securities |
Holdings of agency mortgage-backed securities (d)(c) | | 4,173,080 |
| | — |
| | (f) | | 5,126,372 |
| | — |
| | (e) |
Commercial loan troubled debt restructurings (g)(f) | | 21,763 |
| | — |
| | Loans, net of unearned income | | 42,109 |
| | — |
| | Loans, net of unearned income |
Sale-leaseback transaction | | 14,827 |
| | — |
| | (h) | | 18,052 |
| | — |
| | (g) |
Proprietary trust preferred issuances (h)
| | | — |
| | 167,014 |
| | Term borrowings |
| |
(a) | Maximum loss exposure represents $61.8$117.7 million of current investments and $34.2$123.7 million of accrued contractual funding commitments. Accrued funding commitments represent unconditional contractual obligations for future funding events, and are also recognized in Other liabilities. FHN currently expects to be required to fund these accrued commitments by the end of 2020.2023. |
| |
(b) | A liability is not recognized as investments are written down over the life of the related tax credit. Maximum loss exposure represents the value of current investments. |
| |
(c) | Maximum loss exposure represents the value of current investments. A liability is not recognized as FHN is solely a holder of the trusts’ securities. |
| |
(d) | Includes $112.5 million classified as Loans, net of unearned income, and $1.7 million classified as Trading securities which are offset by $81.9 million classified as Term borrowings. |
| |
(e) | Includes $1.1 billion classified as Trading securities and $4.0 billion classified as Securities available-for-sale. |
| |
(f) | Maximum loss exposure represents $41.6 million of current receivables and $.5 million of contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring. |
| |
(g) | Maximum loss exposure represents the current loan balance plus additional funding commitments. |
| |
(h) | No exposure to loss due to nature of FHN's involvement. |
The following table summarizes FHN’s nonconsolidated VIEs as of December 31, 2019:
|
| | | | | | | | | | |
(Dollars in thousands) | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | |
Low income housing partnerships | | $ | 237,668 |
| | $ | 136,404 |
| | (a) |
Other tax credit investments (b) (c) | | 6,282 |
| | — |
| | Other assets |
Small issuer trust preferred holdings (d) | | 238,397 |
| | — |
| | Loans, net of unearned income |
On-balance sheet trust preferred securitization | | 33,265 |
| | 80,908 |
| | (e) |
Proprietary residential mortgage securitizations | | 941 |
| | — |
| | Trading securities |
Holdings of agency mortgage-backed securities (d) | | 4,537,685 |
| | — |
| | (f) |
Commercial loan troubled debt restructurings (g) | | 45,169 |
| | — |
| | Loans, net of unearned income |
Sale-leaseback transaction | | 18,111 |
| | — |
| | (h) |
Proprietary trust preferred issuances (i) | | — |
| | 167,014 |
| | Term borrowings |
| |
(a) | Maximum loss exposure represents $101.3 million of current investments and $136.4 million of accrued contractual funding commitments. Accrued funding commitments represent unconditional contractual obligations for future funding events, and are also recognized in Other liabilities. FHN currently expects to be required to fund these accrued commitments by the end of 2023. |
| |
(b) | A liability is not recognized as investments are written down over the life of the related tax credit. |
| |
(c) | Maximum loss exposure represents current investment balance. Of the initial investment, $18.0 million wasAs of December 31, 2019, there were no investments funded through loans from community development enterprises. |
| |
(d) | Maximum loss exposure represents the value of current investments. A liability is not recognized as FHN is solely a holder of the trusts’ securities. |
| |
(e) | Includes $112.5 million classified as Loans, net of unearned income, and $1.7 million classified as Trading securities which are offset by $65.3$80.9 million classified as Term borrowings. |
| |
(f) | Includes $.4$.5 billion classified as Trading securities and $3.8$4.0 billion classified as Securities available-for-sale. |
| |
(g) | Maximum loss exposure represents $21.1$43.4 million of current receivables and $.6$1.8 million of contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring. |
| |
(h) | Maximum loss exposure represents the current loan balance plus additional funding commitments less amounts received from the buyer-lessor. |
The following table summarizes FHN’s nonconsolidated VIEs as of December 31, 2016:
|
| | | | | | | | | | |
(Dollars in thousands) | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | |
Low income housing partnerships | | $ | 73,582 |
| | $ | 17,398 |
| | (a) |
Other tax credit investments (b) (c) | | 21,898 |
| | — |
| | Other assets |
Small issuer trust preferred holdings (d) | | 332,985 |
| | — |
| | Loans, net of unearned income |
On-balance sheet trust preferred securitization | | 49,361 |
| | 64,812 |
| | (e) |
Proprietary residential mortgage securitizations | | 2,568 |
| | — |
| | Trading securities |
Holdings of agency mortgage-backed securities (d) | | 4,163,313 |
| | — |
| | (f) |
Commercial loan troubled debt restructurings (g) | | 42,696 |
| | — |
| | Loans, net of unearned income |
Sale-leaseback transaction | | 11,827 |
| | — |
| | (h) |
| |
(a)(i) | MaximumNo exposure to loss exposure represents $56.2 milliondue to nature of current investments and $17.4 million of accrued contractual funding commitments. Accrued funding commitments represent unconditional contractual obligations for future funding events, and are also recognized in Other liabilities. FHN currently expects to be required to fund these accrued commitments by the end of 2017.FHN's involvement. |
| |
(b) | A liability is not recognized as investments are written down over the life of the related tax credit. |
| |
(c) | Maximum loss exposure represents current investment balance. Of the initial investment, $18.0 million was funded through loans from community development enterprises. |
| |
(d) | Maximum loss exposure represents the value of current investments. A liability is not recognized as FHN is solely a holder of the trusts’ securities. |
| |
(e) | Includes $112.5 million classified as Loans, net of unearned income, and $1.7 million classified as Trading securities which are offset by $64.8 million classified as Term borrowings. |
| |
(f) | Includes $.4 billion classified as Trading securities and $3.8 billion classified as Securities available-for-sale. |
| |
(g) | Maximum loss exposure represents $37.5 million of current receivables and $5.2 million of contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring. |
| |
(h) | Maximum loss exposure represents the current loan balance plus additional funding commitments less amounts received from the buyer-lessor. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 50
Note 14 – Derivatives
In the normal course of business, FHN utilizes various financial instruments (including derivative contracts and credit-related agreements) through its fixed income and risk management operations, as part of its risk management strategy and as a means to meet customers’ needs. Derivative 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 the amount of 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 reevaluated. The Asset/Liability Committee (“ALCO”) controls, coordinates, and 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 by using mutual margining and master netting agreements whenever possible to limit potential exposure. FHN also maintains collateral posting requirements with certain counterparties to limit credit risk. Commencing in first quarter 2017, a central clearinghouse revised the treatment of dailyDaily margin posted or received from collateral towith central clearinghouses is considered a legal settlementssettlement of the related derivative contracts. This change resultedcontracts which results in a reduction in derivative assets and liabilities and corresponding reductions in collateral posted and received as these amounts are now presented net bypresentation for each contract in the Consolidated Condensed Statements of Condition. This changeTreatment of daily margin as a settlement has no effect on hedge accounting or gains/losses for the applicable derivative contracts. On September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively, FHN had $34.5$214.4 million and $47.8$136.6 million of cash receivables and $28.2$160.7 million and $32.8$53.0 million of cash payables related to collateral posting under master netting arrangements, inclusive of collateral posted related to contracts with adjustable collateral posting thresholds and over-collateralized positions, with derivative counterparties. 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. See additional discussion regarding master netting agreements and collateral posting requirements later in this note under the heading “Master Netting and Similar Agreements.” Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates 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 as a risk management tool. Where contracts have been created for customers, FHN enters into upstream transactions with dealers to offset its risk exposure. Contracts with dealers that require central clearing are novated to a clearing agent who becomes FHN’s counterparty. Derivatives are also used as a risk management tool to hedge FHN’s exposure to changes in interest rates or other defined market risks.
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.
Trading Activities
FHN’s fixed income segment trades U.S. Treasury, U.S. Agency, government-guaranteed loan, mortgage-backed, corporate and municipal fixed income securities, and other securities for distribution to customers. When these securities settle on a delayed basis, they are considered forward contracts. Fixed income also enters into interest rate contracts, including caps, swaps, and floors, for its customers. In addition, fixed income 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 fixed income noninterest income. Related assets and liabilities are recorded on the Consolidated Condensed Statements of Condition as Derivative assets and Derivative liabilities. The FTNFHN Financial Risk Committee and the Credit Risk Management Committee collaborate to mitigate credit risk related to these transactions. Credit risk is controlled
Note 14 – Derivatives (Continued)
through credit approvals, risk control limits, and ongoing monitoring procedures. Total trading revenues were $45.0$78.4 million and $59.0$44.5 million for the three months ended September 30, 2017
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 51
Note 14 – Derivatives (Continued)
March 31, 2020 and 2016, respectively, and $133.3 million and $185.9 million for the nine months ended September 30, 2017 and 2016,2019, respectively. Trading revenues are inclusive of both derivative and non-derivative financial instruments, and are included in fixedFixed income
noninterest income.income on the Consolidated Condensed Statements of Income.
The following tables summarize FHN’s derivatives associated with fixed income trading activities as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | | | |
| | September 30, 2017 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts | | $ | 1,954,439 |
| | $ | 30,564 |
| | $ | 12,256 |
|
Offsetting Upstream Interest Rate Contracts | | 1,954,439 |
| | 12,119 |
| | 28,012 |
|
Option Contracts Purchased | | 40,000 |
| | 69 |
| | — |
|
Forwards and Futures Purchased | | 4,506,883 |
| | 3,648 |
| | 5,296 |
|
Forwards and Futures Sold | | 4,499,160 |
| | 6,355 |
| | 2,331 |
|
|
| | | | | | | | | | | | |
| | March 31, 2020 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer interest rate contracts | | $ | 3,395,932 |
| | $ | 232,886 |
| | $ | 1,509 |
|
Offsetting upstream interest rate contracts | | 3,395,932 |
| | 8,822 |
| | 16,735 |
|
Forwards and futures purchased | | 8,641,017 |
| | 156,687 |
| | 8,508 |
|
Forwards and futures sold | | 9,435,099 |
| | 8,829 |
| | 163,096 |
|
|
| | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer interest rate contracts | | $ | 2,697,522 |
| | $ | 65,768 |
| | $ | 6,858 |
|
Offsetting upstream interest rate contracts | | 2,697,522 |
| | 2,583 |
| | 3,994 |
|
Option contracts purchased | | 40,000 |
| | 131 |
| | — |
|
Forwards and futures purchased | | 9,217,350 |
| | 17,029 |
| | 3,187 |
|
Forwards and futures sold | | 9,403,112 |
| | 3,611 |
| | 16,620 |
|
|
| | | | | | | | | | | | |
| | December 31, 2016 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts | | $ | 1,697,992 |
| | $ | 39,495 |
| | $ | 14,996 |
|
Offsetting Upstream Interest Rate Contracts | | 1,697,992 |
| | 14,996 |
| | 39,495 |
|
Option Contracts Purchased | | 17,500 |
| | 63 |
| | — |
|
Option Contracts Written | | 5,000 |
| | — |
| | 8 |
|
Forwards and Futures Purchased | | 2,916,750 |
| | 6,257 |
| | 26,659 |
|
Forwards and Futures Sold | | 3,085,396 |
| | 27,330 |
| | 6,615 |
|
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, primarily swaps, that are designed to moderate the impact on earnings as interest rates change. Interest paid or received for swaps utilized by FHN to hedge the fair value of long term debt is recognized as an adjustment of the interest expense of the liabilities whose risk is being managed. 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 upstream 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 designated a derivative transaction in a hedging strategy to manage interest rate risk on $400.0 million of senior debt issued by FTBNA which maturesFirst Horizon Bank prior to its maturity in December 2019. This qualifiesqualified 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 of the senior debt. The balance sheet impact of this swap was $.2First Horizon Bank early redeemed the $400.0 million in Derivative liabilities as of September 30, 2017 and $1.6 million in Derivative assets as of December 31, 2016. There was an insignificant level of ineffectiveness related to this hedge.senior debt on November 1, 2019.
FHN has designated a derivative transaction in a hedging strategy to manage interest rate risk on $500.0 million of senior debt which matures in December 2020. This 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 of the senior debt. The balance sheet impact of this swap was $.6 million and $7.3 million in Derivative liabilities as of September 30, 2017 and December 31, 2016, respectively. There was an insignificant level of ineffectiveness related to this hedge.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 52
Note 14 – Derivatives (Continued)
The following tables summarize FHN’s derivatives associated with interest rate risk management activities as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
| | | | September 30, 2017 | | | | March 31, 2020 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities | | | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts Hedging | | | | | | | | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | | | | | | | | |
Customer Interest Rate Contracts | | $ | 1,540,036 |
| | $ | 16,607 |
| | $ | 12,675 |
| | | |
Offsetting Upstream Interest Rate Contracts | | 1,540,036 |
| | 11,612 |
| | 15,350 |
| | | |
Customer interest rate contracts | | | $ | 3,433,278 |
| | $ | 282,434 |
| | $ | 503 |
|
Offsetting upstream interest rate contracts | | | 3,433,278 |
| | 5,750 |
| | 23,066 |
|
Debt Hedging | | | | | | | | | | | | | |
Hedging Instruments: | | | | | | | | | | | | | |
Interest Rate Swaps | | $ | 900,000 |
| | N/A |
| | $ | 779 |
| | | |
Interest rate swaps | | | $ | 500,000 |
| | $ | 61 |
| | N/A |
|
Hedged Items: | | | | | | | | | | | | | |
Term Borrowings | | N/A |
| | N/A |
| | $ | 900,000 |
| | (a) | |
Term borrowings: | | | | | | | |
Par | | | N/A |
| | N/A |
| | $ | 500,000 |
|
Cumulative fair value hedging adjustments | | | N/A |
| | N/A |
| | 2,862 |
|
Unamortized premium/(discount) and issuance costs | | | N/A |
| | N/A |
| | (519 | ) |
Total carrying value | | | N/A |
| | N/A |
| | $ | 502,343 |
|
|
| | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | |
Customer interest rate contracts | | $ | 3,044,067 |
| | $ | 90,394 |
| | $ | 3,515 |
|
Offsetting upstream interest rate contracts | | 3,044,067 |
| | 3,537 |
| | 9,735 |
|
Debt Hedging | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate swaps | | $ | 500,000 |
| | N/A |
| | $ | 69 |
|
Hedged Items: | | | | | | |
Term borrowings: | | | | | | |
Par | | N/A |
| | N/A |
| | $ | 500,000 |
|
Cumulative fair value hedging adjustments | | N/A |
| | N/A |
| | (1,604 | ) |
Unamortized premium/(discount) and issuance costs | | N/A |
| | N/A |
| | (740 | ) |
Total carrying value | | N/A |
| | N/A |
| | $ | 497,656 |
|
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 53
Note 14 – Derivatives (Continued)
|
| | | | | | | | | | | | | | |
| | December 31, 2016 | | |
(Dollars in thousands) | | Notional | | Assets | | Liabilities | | |
Customer Interest Rate Contracts Hedging | | | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | | | |
Customer Interest Rate Contracts | | $ | 1,357,920 |
| | $ | 17,566 |
| | $ | 14,277 |
| | |
Offsetting Upstream Interest Rate Contracts | | 1,357,920 |
| | 14,277 |
| | 18,066 |
| | |
Debt Hedging | | | | | | | | |
Hedging Instruments: | | | | | | | | |
Interest Rate Swaps | | $ | 900,000 |
| | $ | 1,628 |
| | $ | 7,276 |
| | |
Hedged Items: | | | | | | | | |
Term Borrowings | | N/A |
| | N/A |
| | $ | 900,000 |
| | (a) |
| |
(a) | Represents par value of term borrowings being hedged. |
The following table summarizes gains/(losses) on FHN’s derivatives associated with interest rate risk management activities for the three and nine months ended September 30, 2017March 31, 2020 and 2016:
2019:
| | | | Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended March 31 |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 |
(Dollars in thousands) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) |
Customer Interest Rate Contracts Hedging | Customer Interest Rate Contracts Hedging | | | | | | | Customer Interest Rate Contracts Hedging | | |
Hedging Instruments and Hedged Items: | | | | | | | | | | | | |
Customer Interest Rate Contracts (a) | | $ | (180 | ) | | $ | (1,964 | ) | | 643 |
| | 18,749 |
| |
Offsetting Upstream Interest Rate Contracts (a) | | 180 |
| | 1,964 |
| | (643 | ) | | (18,749 | ) | |
Customer interest rate contracts (a) | | | $ | 195,552 |
| | $ | 29,112 |
|
Offsetting upstream interest rate contracts (a) | | | (195,552 | ) | | (29,112 | ) |
Debt Hedging | | | | | | | | | | | | |
Hedging Instruments: | | | | | | | | | | | | |
Interest Rate Swaps (a) | | $ | (966 | ) | | $ | (7,254 | ) | | $ | (1,958 | ) | | $ | 19,352 |
| |
Interest rate swaps (b) | | | $ | 4,934 |
| | $ | 4,279 |
|
Hedged Items: | | | | | | | | | | | | |
Term Borrowings (a) (b) | | 941 |
| | 7,152 |
| | 1,870 |
| | (19,059 | ) | |
Term borrowings (a) (c) | | | (4,465 | ) | | (4,266 | ) |
| |
(a) | Gains/losses included in the All other expense section ofwithin the Consolidated Condensed Statements of Income. |
| |
(b) | Gains/losses included in the Interest expense. |
| |
(c) | Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships. |
Note 14 – Derivatives (Continued)
In first quarter 2016, FHN entered into a pay floating, receive fixed interest rate swap in a hedging strategy to manage its exposure to the variability in cash flows related to the interest payments for the following five years on $250 million principal of debt instruments, which primarily consist of held-to-maturity trust preferred loans that have variable interest payments based on 3-month LIBOR. In first quarter 2017, FHN initiated cash flow hedges of $650 million notional amount that havehad initial durations between three years and seven years. The debt instruments primarily
consist of held-to-maturity commercial loans that have variable interest payments based on 1-month LIBOR. $200 million of these swaps expired in first quarter 2020. These qualify for hedge accounting as cash flow hedges under ASC 815-20. ChangesAll changes in the fair value of these derivatives are recorded as a component of AOCI, to the extent that the hedging relationships are effective.AOCI. Amounts are reclassified from AOCI to earnings as the hedged cash flows affect earnings. FTB measures the ineffectiveness using the Hypothetical Derivative Method. AOCI is adjusted to an amount that reflects the lesser of either the cumulative change in fair value of the swaps or the cumulative change in the fair value of the hypothetical derivative instruments. To the extent that any ineffectiveness exists in the hedge relationships, the amounts are recorded in current period earnings. Interest paid or received for these swaps is recognized as an adjustment to interest income of the assets whose cash flows are being hedged.
The following tables summarize FHN’s derivative activities associated with cash flow hedges as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | |
| | March 31, 2020 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate swaps | | $ | 700,000 |
| | $ | 187 |
| | N/A |
Hedged Items: | | | | | | |
Variability in cash flows related to debt instruments (primarily loans) | | N/A |
| | $ | 700,000 |
| | N/A |
|
| | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate swaps | | $ | 900,000 |
| | N/A |
| | $ | 241 |
|
Hedged Items: | | | | | | |
Variability in cash flows related to debt instruments (primarily loans) | | N/A |
| | $ | 900,000 |
| | N/A |
|
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 54
Note 14 – Derivatives (Continued)
|
| | | | | | | | | | | | |
| | September 30, 2017 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | |
Interest Rate Swaps | | $ | 900,000 |
| | N/A |
| | $ | 916 |
|
Hedged Items: | | | | | | |
Variability in Cash Flows Related to Debt Instruments (Primarily Loans) | | N/A |
| | $ | 900,000 |
| | N/A |
|
|
| | | | | | | | | | | | |
| | December 31, 2016 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | |
Interest Rate Swaps | | $ | 250,000 |
| | N/A |
| | $ | 2,045 |
|
Hedged Items: | | | | | | |
Variability in Cash Flows Related to Debt Instruments (Primarily Loans) | | N/A |
| | $ | 250,000 |
| | N/A |
|
The following table summarizes gains/(losses) on FHN’s derivatives associated with cash flow hedges for the three and nine months ended September 30, 2017March 31, 2020 and 2016:
2019:
| | | | Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended March 31 |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 |
(Dollars in thousands) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) |
Cash Flow Hedges | Cash Flow Hedges | | | | | | | Cash Flow Hedges | | |
Hedging Instruments: | | | | | | | | | | | | |
Interest Rate Swaps (a) (b) | | $ | (1,190 | ) | | $ | (2,545 | ) | | $ | (800 | ) | | $ | 5,061 |
| |
Hedged Items: | | | | | | | | | |
Variability in Cash Flows Related to Debt Instruments (Primarily Loans) | | N/A |
| | N/A |
| | N/A |
| | N/A |
| |
Interest rate swaps (a) | | | $ | 17,374 |
| | $ | 7,218 |
|
Gain/(loss) recognized in Other comprehensive income/(loss) | | | 13,155 |
| | 3,936 |
|
Gain/(loss) reclassified from AOCI into Interest income | | | (94 | ) | | 1,451 |
|
| |
(a) | Amount represents the pre-tax gains/(losses) included within AOCI. |
| |
(b) | Includes approximately $1.2Approximately $9.1 million of lossespre-tax gains are expected to be reclassified into earnings in the next twelve months. |
Note 14 – Derivatives (Continued)
Prior to third quarter 2017, FHN hedged held-to-maturity trust preferred loans which had an initial fixed rate term before conversion to a floating rate. FHN had entered into pay fixed, receive floating interest rate swaps to hedge the interest rate risk associated with the initial term. Interest paid or received for these swaps was recognized as an adjustment of the interest income of the assets whose risk was being hedged. Basis adjustments remaining at the end of the hedge term were amortized as an adjustment to interest income over the remaining life of the loans.Gains or losses were included in Other income and commissions on the Consolidated Condensed Statements of Income. These hedges expired in third quarter 2017.
The following table summarizes FHN’s derivative activities associated with held-to-maturity trust preferred loans as of December 31, 2016:
|
| | | | | | | | | | | | | | |
| | December 31, 2016 |
(Dollars in thousands) | | Notional | | Assets | | | | Liabilities |
Loan Portfolio Hedging | | | | | | | | |
Hedging Instruments: | | | | | | | | |
Interest Rate Swaps | | $ | 6,500 |
| | N/A |
| | | | $ | 208 |
|
Hedged Items: | | | | | | | | |
Trust Preferred Loans (a) | | N/A |
| | $ | 6,500 |
| | (b) | | N/A |
|
| |
(a) | Assets included in the Loans, net of unearned income section of the Consolidated Condensed Statements of Condition. |
| |
(b) | Represents principal balance being hedged. |
The following table summarizes gains/(losses) on FHN’s derivatives associated with held-to-maturity trust preferred loans for the three and nine months ended September 30, 2016:
|
| | | | | | | | |
| | September 30, 2016 |
| | Three Months Ended | | Nine Months Ended |
(Dollars in thousands) | | Gains/(Losses) | | Gains/(Losses) |
Loan Portfolio Hedging | | | | |
Hedging Instruments: | | | | |
Interest Rate Swaps | | $ | 93 |
| | $ | 201 |
|
Hedged Items: | | | | |
Trust Preferred Loans (a) | | $ | (92 | ) | | $ | (199 | ) |
| |
(a) | 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 in 2010 and 2011, 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. FHN is also required to make periodic financing payments to the purchasers until all of Visa's covered litigation matters are resolved. In third quarter 2018, FHN sold the remainder of its Visa Class B shares, entering into a similar derivative arrangement with the counterparty. All of these derivatives extend until the end of Visa’s Covered Litigation matters. In September 2018, Visa reached a preliminary settlement for one class of plaintiffs in its Payment Card Interchange matter which later received final court approval in December 2019. In accordance with the agreement terms, several individual plaintiffs opted out of the settlement and have the opportunity to separately pursue resolution with Visa. Settlement has not been reached with the second class of plaintiffs in this matter and other covered litigation matters are also pending judicial resolution. Accordingly, the value and timing for completion of Visa’s Covered Litigation matters are uncertain.
The derivative transaction executed in third quarter 2018 includes a contingent accelerated termination clause based on the credit ratings of FHN and First Horizon Bank. FHN has not received or paid collateral related to this contract.
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, the derivative liabilities associated with the sales of Visa Class B shares were $5.5$20.4 million and $6.2$22.8 million, respectively. See Note 17 - Fair Value of Assets & Liabilities for discussion of the Visa Matters section of Note 10 – Contingenciesvaluation inputs and Other Disclosuresprocesses for more information regarding FHN’s Visa shares.these Visa-related derivatives.
FHN utilizes cross currency swaps and cross currency interest rate swaps to economically hedge its exposure to foreign currency risk and interest rate risk associated with
non-U.S. dollar denominated loans. As of September 30, 2017 March 31, 2020
and December 31, 2016,2019, these loans were valued at $1.3$16.2 million and $3.8$18.4 million, respectively. The balance sheet amount and the gains/losses associated with these derivatives were not significant.
Related to its loan participation/syndication activities, FHN enters into risk participation agreements, under which it assumes exposure for, or receives indemnification for, borrowers’ performance on underlying interest rate derivative contracts. FHN’s counterparties in these contracts are other lending institutions involved in the loan participation/syndication arrangements for which the underlying interest rate derivative contract is intended to hedge interest rate risk for the borrower. FHN will make (other institution is the lead bank) or receive (FHN is the lead bank) payments for risk participations if the borrower defaults on its obligation to perform under the terms of its interest rate derivative agreement with the lead bank in the participation. As of March 31, 2020 the notional values of FHN’s risk participations were $120.8 million of derivative assets and $226.7 million of derivative liabilities. The notional value for risk participation/syndication agreements is consistent with the percentage of participation in the lending arrangement. FHN’s maximum exposure or benefit in the risk participation agreements is contingent on the fair value of the underlying interest rate derivative contracts for which the borrower is in a liability position at the time of default. FHN monitors the credit risk associated with the borrowers to which the risk participations relate through the same credit risk assessment process utilized for establishing credit loss estimates for its loan portfolio. These credit risk estimates are included in the determination of fair value for the risk participations. As of March 31, 2020, FHN had recognized $280 thousand of derivative assets and $780 thousand of derivative liabilities associated with risk participation agreements.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 55
Note 14 – Derivatives (Continued)
Master Netting and Similar Agreements
As previously discussed, FHN uses master netting agreements, mutual margining agreements and collateral posting requirements to minimize credit risk on derivative contracts. Master netting and similar agreements are used when counterparties have multiple derivatives contracts that allow for a “right of setoff,” meaning that a counterparty may net offsetting positions and collateral with the same counterparty under the contract to determine a net receivable or payable. The
Note 14 – Derivatives (Continued)
following discussion provides an overview of these arrangements which may vary due to the derivative type and market in which a derivative transaction is executed.
Interest rate derivatives are subject to agreements consistent with standard agreement forms of the International Swap and Derivatives Association (“ISDA”). Currently, all interest rate derivative contracts are entered into as over-the-counter transactions and collateral posting requirements are based on the net asset or liability position with each respective counterparty. For contracts that require central clearing, novation to a counterparty with access to a clearinghouse occurs and margin is posted. Cash margin received (posted) that is considered settlements for the derivative contracts is included in the respective derivative asset (liability) value. Cash margin that is considered collateral received (posted) for interest rate derivatives is recognized as a liability (asset) on FHN’s Consolidated Condensed Statements of Condition.
Interest rate derivatives with customers that are smaller financial institutions typically require posting of collateral by the counterparty to FHN. This collateral is subject to a threshold with daily adjustments based upon changes in the level or fair value of the derivative position. Positions and related collateral can be netted in the event of default. Collateral pledged by a counterparty is typically cash or securities. The securities pledged as collateral are not recognized within FHN’s Consolidated Condensed Statements of Condition. Interest rate derivatives associated with lending arrangements share the collateral with the related loan(s). The derivative and loan positions may be netted in the event of default. For disclosure purposes, the entire collateral amount is allocated to the loan.
Interest rate derivatives with larger financial institutions entered into prior to required central clearing typically 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 FTBNAFirst Horizon Bank is lowered, FHN could be required to post additional collateral with the counterparties. Conversely, if the credit rating of FHN and/or FTBNAFirst Horizon Bank is increased, FHN could have collateral released and be required to post less collateral in the future. Also, if a counterparty’s credit ratings were to
decrease, FHN and/or FTBNAFirst Horizon Bank could require the posting of additional collateral; whereas if a counterparty’s credit ratings were to increase, the counterparty could require the release of excess collateral. Collateral for these arrangements is adjusted daily based on changes in the net fair value position with each counterparty.
The net fair value, determined by individual counterparty, of all derivative instruments with adjustable collateral posting thresholds was $27.4$232.5 million of assets and $34.6$4.4 million of liabilities on September 30, 2017,March 31, 2020, and $35.9$63.1 million of assets and $49.0$6.4 million of liabilities on December 31, 2016.2019. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, FHN had received collateral of $113.6$291.3 million and $137.6$148.5 million and posted collateral of $26.2$41.4 million and $39.3$18.4 million, respectively, in the normal course of business related to these agreements.
Certain agreements entered into prior to required central clearing also contain accelerated termination provisions, inclusive of the right of offset, if a counterparty’s credit rating falls below a specified level. If a counterparty’s debt rating (including FHN’s and FTBNA’s)First Horizon Bank’s) were to fall below these minimums, these provisions would be triggered, and the counterparties could terminate the agreements and require 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 $27.4$232.3 million of assets and $14.9$24.2 million of liabilities on September 30, 2017,March 31, 2020, and $35.9$63.1 million of assets and $19.6$10.3 million of liabilities on December 31, 2016.2019. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, FHN had received collateral of $113.6$291.4 million and $137.5$148.5 million and posted collateral of $9.0$62.5 million and $12.9$22.7 million, respectively, in the normal course of business related to these contracts.
FHN’s fixed income segment buys and sells various types of securities for its customers. When these securities settle on a delayed basis, they are considered forward contracts, and are generally not subject to master netting agreements. For futures and options, FHN transacts through a third party, and the transactions are subject to margin and collateral maintenance requirements. In the event of default, open positions can be offset along with the associated collateral.
For this disclosure, FHN considers the impact of master netting and other similar agreements which allow FHN to settle all contracts with a single counterparty on a net basis and to offset the net derivative asset or liability position with the related securities and cash collateral. The application of the collateral cannot reduce the net derivative asset or liability position below zero, and therefore any excess collateral is not reflected in the following tables.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 56
Note 14 – Derivatives (Continued)
The following table provides details of derivative assets and collateral received as presented on the Consolidated Condensed Statements of Condition as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
Note 14 – Derivatives (Continued)
| | | | | | | | | | Gross amounts not offset in the Statements of Condition | | | | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized assets | | Gross amounts offset in the Statements of Condition | | Net amounts of assets presented in the Statements of Condition (a) | | Derivative liabilities available for offset | | Collateral Received | | Net amount | | Gross amounts of recognized assets | | Gross amounts offset in the Statements of Condition | | Net amounts of assets presented in the Statements of Condition (a) | | Derivative liabilities available for offset | | Collateral received | | Net amount |
Derivative assets: | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2017 (b) | | $ | 70,902 |
| | $ | — |
| | $ | 70,902 |
| | $ | (23,283 | ) | | $ | (43,379 | ) | | $ | 4,240 |
| |
December 31, 2016 (b) | | 87,962 |
| | — |
| | 87,962 |
| | (25,953 | ) | | (52,888 | ) | | 9,121 |
| |
March 31, 2020 | | | | | | | | | | | | | |
Interest rate derivative contracts | | | $ | 530,337 |
| | $ | — |
| | $ | 530,337 |
| | $ | (1,974 | ) | | $ | (303,798 | ) | | $ | 224,565 |
|
Forward contracts | | | 165,516 |
| | — |
| | 165,516 |
| | (89,790 | ) | | (54,018 | ) | | 21,708 |
|
| | | $ | 695,853 |
| | $ | — |
| | $ | 695,853 |
| | $ | (91,764 | ) | | $ | (357,816 | ) | | $ | 246,273 |
|
| | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | | |
Interest rate derivative contracts | | | $ | 162,344 |
| | $ | — |
| | $ | 162,344 |
| | $ | (5,604 | ) | | $ | (143,334 | ) | | $ | 13,406 |
|
Forward contracts | | | 20,640 |
| | — |
| | 20,640 |
| | (13,292 | ) | | (2,000 | ) | | 5,348 |
|
| | | $ | 182,984 |
| | $ | — |
| | $ | 182,984 |
| | $ | (18,896 | ) | | $ | (145,334 | ) | | $ | 18,754 |
|
| |
(a) | Included in Derivative assets on the Consolidated Condensed Statements of Condition. As of September 30, 2017March 31, 2020 and December 31, 2016, $10.12019, $.4 million and $33.7$.1 million, respectively, of derivative assets (primarily fixed income forward contracts) have been excluded from these tables because they are generally not subject to master netting or similar agreements. |
| |
(b) | Amounts are comprised entirely of interest rate derivative contracts. |
The following table provides details of derivative liabilities and collateral pledged as presented on the Consolidated Condensed Statements of Condition as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized liabilities | | Gross amounts offset in the Statements of Condition | | Net amounts of liabilities presented in the Statements of Condition (a) | | Derivative assets available for offset | | Collateral pledged | | Net amount |
Derivative liabilities: | | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 41,980 |
| | $ | — |
| | $ | 41,980 |
| | $ | (1,974 | ) | | $ | (36,129 | ) | | $ | 3,877 |
|
Forward contracts | | 171,604 |
| | — |
| | 171,604 |
| | (89,790 | ) | | (81,814 | ) | | — |
|
| | $ | 213,584 |
| | $ | — |
| | $ | 213,584 |
| | $ | (91,764 | ) | | $ | (117,943 | ) | | $ | 3,877 |
|
December 31, 2019 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 24,431 |
| | $ | — |
| | $ | 24,431 |
| | $ | (5,604 | ) | | $ | (18,689 | ) | | $ | 138 |
|
Forward contracts | | 19,807 |
| | — |
| | 19,807 |
| | (13,292 | ) | | (6,515 | ) | | — |
|
| | $ | 44,238 |
| | $ | — |
| | $ | 44,238 |
| | $ | (18,896 | ) | | $ | (25,204 | ) | | $ | 138 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized liabilities | | Gross amounts offset in the Statements of Condition | | Net amounts of liabilities presented in the Statements of Condition (a) | | Derivative assets available for offset | | Collateral pledged | | Net amount |
Derivative liabilities: | | | | | | | | | | | | |
September 30, 2017 (b) | | $ | 69,988 |
| | $ | — |
| | $ | 69,988 |
| | $ | (23,283 | ) | | $ | (42,686 | ) | | $ | 4,019 |
|
December 31, 2016 (b) | | 96,363 |
| | — |
| | 96,363 |
| | (25,953 | ) | | (60,746 | ) | | 9,664 |
|
| |
(a) | Included in Derivative liabilities on the Consolidated Condensed Statements of Condition. As of September 30, 2017March 31, 2020 and December 31, 2016, $13.22019, $21.4 million and $39.5$23.2 million, respectively, of derivative liabilities (primarily fixed income forward contracts)Visa-related derivatives) have been excluded from these tables because they are generally not subject to master netting or similar agreements. |
| |
(b) | Amounts are comprised entirely of interest rate derivative contracts. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 57
Note 15 – Master Netting and Similar Agreements—Repurchase, Reverse Repurchase, and Securities Borrowing Transactions
For repurchase, reverse repurchase and securities borrowing transactions, FHN and each counterparty have the ability to offset all open positions and related collateral in the event of default. Due to the nature of these transactions, the value of the collateral for each transaction approximates the value of the corresponding receivable or payable. For repurchase agreements through FHN’s fixed income business (Securities purchased under agreements to resell and Securities sold under agreements to repurchase), transactions are collateralized by securities and/or government guaranteed loans which are delivered on the settlement date and are maintained throughout the term of the transaction. For FHN’s repurchase agreements through banking activities (Securities sold under agreements to repurchase), securities are typically pledged at settlement
and not released until maturity. For asset positions, the collateral is not included on FHN’s Consolidated Condensed Statements of Condition. For liability positions, securities collateral pledged by FHN is generally represented within FHN’s trading or available-for-sale securities portfolios.
For this disclosure, FHN considers the impact of master netting and other similar agreements that allow FHN to settle all contracts with a single counterparty on a net basis and to offset the net asset or liability position with the related securities collateral. The application of the collateral cannot reduce the net asset or liability position below zero, and therefore any excess collateral is not reflected in the tables below.
The following table provides details of Securities purchased under agreements to resell as presented on the Consolidated Condensed Statements of Condition and collateral pledged by counterparties as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized assets | | Gross amounts offset in the Statements of Condition | | Net amounts of assets presented in the Statements of Condition | | Offsetting securities sold under agreements to repurchase | | Securities collateral (not recognized on FHN’s Statements of Condition) | | Net amount |
Securities purchased under agreements to resell: | | | | | | | | | | | | |
March 31, 2020 | | $ | 562,435 |
| | $ | — |
| | $ | 562,435 |
| | $ | (6,290 | ) | | $ | (553,688 | ) | | $ | 2,457 |
|
December 31, 2019 | | 586,629 |
| | — |
| | 586,629 |
| | (21,004 | ) | | (562,702 | ) | | 2,923 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized assets | | Gross amounts offset in the Statements of Condition | | Net amounts of assets presented in the Statements of Condition | | Offsetting securities sold under agreements to repurchase | | Securities collateral (not recognized on FHN’s Statements of Condition) | | Net amount |
Securities purchased under agreements to resell: | | | | | | | | | | | | |
September 30, 2017 | | $ | 663,637 |
| | $ | — |
| | $ | 663,637 |
| | $ | (1,044 | ) | | $ | (655,136 | ) | | $ | 7,457 |
|
December 31, 2016 | | 613,682 |
| | — |
| | 613,682 |
| | (1,628 | ) | | (603,813 | ) | | 8,241 |
|
The following table provides details of Securities sold under agreements to repurchase as presented on the Consolidated Condensed Statements of Condition and collateral pledged by FHN as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized liabilities | | Gross amounts offset in the Statements of Condition | | Net amounts of liabilities presented in the Statements of Condition | | Offsetting securities purchased under agreements to resell | | Securities/ government guaranteed loans collateral | | Net amount |
Securities sold under agreements to repurchase: | | | | | | | | | | | | |
March 31, 2020 | | $ | 788,595 |
| | $ | — |
| | $ | 788,595 |
| | $ | (6,290 | ) | | $ | (782,305 | ) | | $ | — |
|
December 31, 2019 | | 716,925 |
| | — |
| | 716,925 |
| | (21,004 | ) | | (695,879 | ) | | 42 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized liabilities | | Gross amounts offset in the Statements of Condition | | Net amounts of liabilities presented in the Statements of Condition | | Offsetting securities purchased under agreements to resell | | Securities/ government guaranteed loans collateral | | Net amount |
Securities sold under agreements to repurchase: | | | | | | | | | | | | |
September 30, 2017 | | $ | 516,867 |
| | $ | — |
| | $ | 516,867 |
| | $ | (1,044 | ) | | $ | (515,673 | ) | | $ | 150 |
|
December 31, 2016 | | 453,053 |
| | — |
| | 453,053 |
| | (1,628 | ) | | (451,414 | ) | | 11 |
|
Note 15 – Master Netting and Similar Agreements—Repurchase, Reverse Repurchase, and Securities Borrowing Transactions (Continued)
Due to the short duration of Securities sold under agreements to repurchase and the nature of collateral involved, the risks associated with these transactions are considered minimal.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 58
Note 15 – Master Netting and Similar Agreements—Repurchase, Reverse Repurchase, and Securities Borrowing Transactions (Continued)
The following tables provide details, by collateral type, of the remaining contractual maturity of Securities sold under agreements to repurchase as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | | | |
| | March 31, 2020 |
(Dollars in thousands) | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | |
U.S. treasuries | | $ | 18,955 |
| | $ | — |
| | $ | 18,955 |
|
Government agency issued MBS | | 399,353 |
| | 10,397 |
| | 409,750 |
|
Government agency issued CMO | | — |
| | 5,498 |
| | 5,498 |
|
Other U.S. government agencies | | 83,214 |
| | — |
| | 83,214 |
|
Government guaranteed loans (SBA and USDA) | | 271,178 |
| | — |
| | 271,178 |
|
Total Securities sold under agreements to repurchase | | $ | 772,700 |
| | $ | 15,895 |
| | $ | 788,595 |
|
| | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | |
U.S. treasuries | | $ | 41,364 |
| | $ | — |
| | $ | 41,364 |
|
Government agency issued MBS | | 341,173 |
| | 4,545 |
| | 345,718 |
|
Other U.S. government agencies | | 54,924 |
| | — |
| | 54,924 |
|
Government guaranteed loans (SBA and USDA) | | 274,919 |
| | — |
| | 274,919 |
|
Total Securities sold under agreements to repurchase | | $ | 712,380 |
| | $ | 4,545 |
| | $ | 716,925 |
|
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 59
|
| | | | | | | | | | | | |
| | September 30, 2017 |
(Dollars in thousands) | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | |
U.S. treasuries | | $ | 18,970 |
| | $ | — |
| | $ | 18,970 |
|
Government agency issued MBS | | 276,903 |
| | 5,521 |
| | 282,424 |
|
Government agency issued CMO | | 50,554 |
| | 5,749 |
| | 56,303 |
|
Government guaranteed loans (SBA and USDA) | | 159,170 |
| | — |
| | 159,170 |
|
Total Securities sold under agreements to repurchase | | $ | 505,597 |
| | $ | 11,270 |
| | $ | 516,867 |
|
| | | | | | |
| | December 31, 2016 |
(Dollars in thousands) | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | |
U.S. treasuries | | $ | 14,864 |
| | $ | — |
| | $ | 14,864 |
|
Government agency issued MBS | | 421,771 |
| | — |
| | 421,771 |
|
Government agency issued CMO | | — |
| | 16,418 |
| | 16,418 |
|
Total Securities sold under agreements to repurchase | | $ | 436,635 |
| | $ | 16,418 |
| | $ | 453,053 |
|
Note 16 – Fair Value of Assets & Liabilities
FHN groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. This hierarchy requires FHN to maximize the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Each fair value measurement is placed into the proper level based on the lowest level of significant input. These levels are:
Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3—Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.
Transfers between fair value levels are recognized at the end of the fiscal quarter in which the associated change in inputs occurs.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 60
Note 16 – Fair Value of Assets & Liabilities (Continued)
Recurring Fair Value Measurements
The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of September 30, 2017:March 31, 2020:
| | | | September 30, 2017 | | March 31, 2020 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Trading securities—fixed income: | | | | | | | | | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 157,483 |
| | $ | — |
| | $ | 157,483 |
| | $ | — |
| | $ | 243,315 |
| | $ | — |
| | $ | 243,315 |
|
Government agency issued MBS | | — |
| | 155,260 |
| | — |
| | 155,260 |
| | — |
| | 661,174 |
| | — |
| | 661,174 |
|
Government agency issued CMO | | — |
| | 244,321 |
| | — |
| | 244,321 |
| | — |
| | 435,738 |
| | — |
| | 435,738 |
|
Other U.S. government agencies | | — |
| | 186,573 |
| | — |
| | 186,573 |
| | — |
| | 57,993 |
| | — |
| | 57,993 |
|
States and municipalities | | — |
| | 61,290 |
| | — |
| | 61,290 |
| | — |
| | 75,288 |
| | — |
| | 75,288 |
|
Corporate and other debt | | — |
| | 655,976 |
| | 5 |
| | 655,981 |
| | — |
| | 403,019 |
| | — |
| | 403,019 |
|
Equity, mutual funds, and other | | — |
| | 6,194 |
| | — |
| | 6,194 |
| | — |
| | 202 |
| | — |
| | 202 |
|
Total trading securities—fixed income | | — |
| | 1,467,097 |
| | 5 |
| | 1,467,102 |
| | — |
| | 1,876,729 |
| | — |
| | 1,876,729 |
|
Trading securities—mortgage banking | | — |
| | — |
| | 2,300 |
| | 2,300 |
| | — |
| | — |
| | 785 |
| | 785 |
|
Loans held-for-sale | | — |
| | 1,727 |
| | 20,081 |
| | 21,808 |
| |
Loans held-for-sale (elected fair value) | | | — |
| | — |
| | 13,584 |
| | 13,584 |
|
Securities available-for-sale: | | | | | | | | | | | | | | | | |
U.S. treasuries | | — |
| | 100 |
| | — |
| | 100 |
| | — |
| | 100 |
| | — |
| | 100 |
|
Government agency issued MBS | | — |
| | 2,087,505 |
| | — |
| | 2,087,505 |
| | — |
| | 2,402,517 |
| | — |
| | 2,402,517 |
|
Government agency issued CMO | | — |
| | 1,685,995 |
| | — |
| | 1,685,995 |
| | — |
| | 1,626,943 |
| | — |
| | 1,626,943 |
|
Interest-only strips | | — |
| | — |
| | 3,123 |
| | 3,123 |
| |
Equity, mutual funds, and other | | 24,756 |
| | — |
| | — |
| | 24,756 |
| |
Other U.S. government agencies | | | — |
| | 372,497 |
| | — |
| | 372,497 |
|
States and municipalities | | | — |
| | 79,125 |
| | — |
| | 79,125 |
|
Corporate and other debt | | | — |
| | 40,621 |
| | — |
| | 40,621 |
|
Interest-Only Strip (elected fair value) | | | — |
| | — |
| | 23,104 |
| | 23,104 |
|
Total securities available-for-sale | | 24,756 |
| | 3,773,600 |
| | 3,123 |
| | 3,801,479 |
| | — |
| | 4,521,803 |
| | 23,104 |
| | 4,544,907 |
|
Other assets: | | | | | | | | | | | | | | | | |
Deferred compensation assets | | 34,951 |
| | — |
| | — |
| | 34,951 |
| |
Deferred compensation mutual funds | | | 41,666 |
| | — |
| | — |
| | 41,666 |
|
Equity, mutual funds, and other | | | 22,833 |
| | — |
| | — |
| | 22,833 |
|
Derivatives, forwards and futures | | 10,003 |
| | — |
| | — |
| | 10,003 |
| | 165,516 |
| | — |
| | — |
| | 165,516 |
|
Derivatives, interest rate contracts | | — |
| | 70,971 |
| | — |
| | 70,971 |
| | — |
| | 530,140 |
| | — |
| | 530,140 |
|
Derivatives, other | | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 314 |
| | 280 |
| | 594 |
|
Total other assets | | 44,954 |
| | 70,973 |
| | — |
| | 115,927 |
| | 230,015 |
| | 530,454 |
| | 280 |
| | 760,749 |
|
Total assets | | $ | 69,710 |
| | $ | 5,313,397 |
| | $ | 25,509 |
| | $ | 5,408,616 |
| | $ | 230,015 |
| | $ | 6,928,986 |
| | $ | 37,753 |
| | $ | 7,196,754 |
|
Trading liabilities—fixed income: | | | | | | | | | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 424,461 |
| | $ | — |
| | $ | 424,461 |
| | $ | — |
| | $ | 387,498 |
| | $ | — |
| | $ | 387,498 |
|
Government agency issued CMO | | — |
| | 1,372 |
| | — |
| | 1,372 |
| |
Other U.S. government agencies | | — |
| | 998 |
| | — |
| | 998 |
| |
Government issued agency CMO | | | — |
| | 1,746 |
| | — |
| | 1,746 |
|
Corporate and other debt | | — |
| | 152,197 |
| | — |
| | 152,197 |
| | — |
| | 63,367 |
| | — |
| | 63,367 |
|
Total trading liabilities—fixed income | | — |
| | 579,028 |
| | — |
| | 579,028 |
| | — |
| | 452,611 |
| | — |
| | 452,611 |
|
Other liabilities: | | | | | | | | | | | | | | | | |
Derivatives, forwards and futures | | 7,627 |
| | — |
| | — |
| | 7,627 |
| | 171,604 |
| | — |
| | — |
| | 171,604 |
|
Derivatives, interest rate contracts | | — |
| | 69,988 |
| | — |
| | 69,988 |
| | — |
| | 41,813 |
| | — |
| | 41,813 |
|
Derivatives, other | | — |
| | 1 |
| | 5,530 |
| | 5,531 |
| | — |
| | 397 |
| | 21,170 |
| | 21,567 |
|
Total other liabilities | | 7,627 |
| | 69,989 |
| | 5,530 |
| | 83,146 |
| | 171,604 |
| | 42,210 |
| | 21,170 |
| | 234,984 |
|
Total liabilities | | $ | 7,627 |
| | $ | 649,017 |
| | $ | 5,530 |
| | $ | 662,174 |
| | $ | 171,604 |
| | $ | 494,821 |
| | $ | 21,170 |
| | $ | 687,595 |
|
63
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 61
Note 16 – Fair Value of Assets & Liabilities (Continued)
The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of December 31, 2016:2019: |
| | | | | | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Trading securities—fixed income: | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 134,844 |
| | $ | — |
| | $ | 134,844 |
|
Government agency issued MBS | | — |
| | 268,024 |
| | — |
| | 268,024 |
|
Government agency issued CMO | | — |
| | 250,652 |
| | — |
| | 250,652 |
|
Other U.S. government agencies | | — |
| | 124,972 |
| | — |
| | 124,972 |
|
States and municipalities | | — |
| | 120,744 |
| | — |
| | 120,744 |
|
Corporate and other debt | | — |
| | 445,253 |
| | — |
| | 445,253 |
|
Equity, mutual funds, and other | | — |
| | 777 |
| | — |
| | 777 |
|
Total trading securities—fixed income | | — |
| | 1,345,266 |
| | — |
| | 1,345,266 |
|
Trading securities—mortgage banking | | — |
| | — |
| | 941 |
| | 941 |
|
Loans held-for-sale (elected fair value) | | — |
| | — |
| | 14,033 |
| | 14,033 |
|
Securities available-for-sale: | | | | | | | | |
U.S. treasuries | | — |
| | 100 |
| | — |
| | 100 |
|
Government agency issued MBS | | — |
| | 2,348,517 |
| | — |
| | 2,348,517 |
|
Government agency issued CMO | | — |
| | 1,670,492 |
| | — |
| | 1,670,492 |
|
Other U.S. government agencies | | — |
| | 306,092 |
| | — |
| | 306,092 |
|
States and municipalities | | — |
| | 60,526 |
| | — |
| | 60,526 |
|
Corporate and other debt | | — |
| | 40,540 |
| | — |
| | 40,540 |
|
Interest-Only Strip (elected fair value) | | — |
| | — |
| | 19,136 |
| | 19,136 |
|
Total securities available-for-sale | | — |
| | 4,426,267 |
| | 19,136 |
| | 4,445,403 |
|
Other assets: | | | | | | | | |
Deferred compensation mutual funds | | 46,815 |
| | — |
| | — |
| | 46,815 |
|
Equity, mutual funds, and other | | 22,643 |
| | — |
| | — |
| | 22,643 |
|
Derivatives, forwards and futures | | 20,640 |
| | — |
| | — |
| | 20,640 |
|
Derivatives, interest rate contracts | | — |
| | 162,413 |
| | — |
| | 162,413 |
|
Derivatives, other | | — |
| | 62 |
| | — |
| | 62 |
|
Total other assets | | 90,098 |
| | 162,475 |
| | — |
| | 252,573 |
|
Total assets | | $ | 90,098 |
| | $ | 5,934,008 |
| | $ | 34,110 |
| | $ | 6,058,216 |
|
Trading liabilities—fixed income: | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 406,380 |
| | $ | — |
| | $ | 406,380 |
|
Other U.S. government agencies | | — |
| | 88 |
| | — |
| | 88 |
|
Government agency issued MBS | | — |
| | 33 |
| | — |
| | 33 |
|
Corporate and other debt | | — |
| | 99,080 |
| | — |
| | 99,080 |
|
Total trading liabilities—fixed income | | — |
| | 505,581 |
| | — |
| | 505,581 |
|
Other liabilities: | | | | | | | | |
Derivatives, forwards and futures | | 19,807 |
| | — |
| | — |
| | 19,807 |
|
Derivatives, interest rate contracts | | — |
| | 24,412 |
| | — |
| | 24,412 |
|
Derivatives, other | | — |
| | 466 |
| | 22,795 |
| | 23,261 |
|
Total other liabilities | | 19,807 |
| | 24,878 |
| | 22,795 |
| | 67,480 |
|
Total liabilities | | $ | 19,807 |
| | $ | 530,459 |
| | $ | 22,795 |
| | $ | 573,061 |
|
|
| | | | | | | | | | | | | | | | |
| | December 31, 2016 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Trading securities—fixed income: | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 146,988 |
| | $ | — |
| | $ | 146,988 |
|
Government agency issued MBS | | — |
| | 256,611 |
| | — |
| | 256,611 |
|
Government agency issued CMO | | — |
| | 150,058 |
| | — |
| | 150,058 |
|
Other U.S. government agencies | | — |
| | 52,314 |
| | — |
| | 52,314 |
|
States and municipalities | | — |
| | 60,351 |
| | — |
| | 60,351 |
|
Corporate and other debt | | — |
| | 227,934 |
| | 5 |
| | 227,939 |
|
Equity, mutual funds, and other | | — |
| | 242 |
| | — |
| | 242 |
|
Total trading securities—fixed income | | — |
| | 894,498 |
| | 5 |
| | 894,503 |
|
Trading securities—mortgage banking | | — |
| | — |
| | 2,568 |
| | 2,568 |
|
Loans held-for-sale | | — |
| | 2,345 |
| | 21,924 |
| | 24,269 |
|
Securities available-for-sale: | | | | | | | | |
U.S. treasuries | | — |
| | 100 |
| | — |
| | 100 |
|
Government agency issued MBS | | — |
| | 2,208,687 |
| | — |
| | 2,208,687 |
|
Government agency issued CMO | | — |
| | 1,547,958 |
| | — |
| | 1,547,958 |
|
Equity, mutual funds, and other | | 25,249 |
| | — |
| | — |
| | 25,249 |
|
Total securities available-for-sale | | 25,249 |
| | 3,756,745 |
| | — |
| | 3,781,994 |
|
Other assets: | | | | | | | | |
Mortgage servicing rights | | — |
| | — |
| | 985 |
| | 985 |
|
Deferred compensation assets | | 32,840 |
| | — |
| | — |
| | 32,840 |
|
Derivatives, forwards and futures | | 33,587 |
| | — |
| | — |
| | 33,587 |
|
Derivatives, interest rate contracts | | — |
| | 88,025 |
| | — |
| | 88,025 |
|
Derivatives, other | | — |
| | 42 |
| | — |
| | 42 |
|
Total other assets | | 66,427 |
| | 88,067 |
| | 985 |
| | 155,479 |
|
Total assets | | $ | 91,676 |
| | $ | 4,741,655 |
| | $ | 25,482 |
| | $ | 4,858,813 |
|
Trading liabilities—fixed income: | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 381,229 |
| | $ | — |
| | $ | 381,229 |
|
Other U.S. government agencies | | — |
| | 844 |
| | — |
| | 844 |
|
Corporate and other debt | | — |
| | 179,775 |
| | — |
| | 179,775 |
|
Total trading liabilities—fixed income | | — |
| | 561,848 |
| | — |
| | 561,848 |
|
Other liabilities: | | | | | | | | |
Derivatives, forwards and futures | | 33,274 |
| | — |
| | — |
| | 33,274 |
|
Derivatives, interest rate contracts | | — |
| | 96,371 |
| | — |
| | 96,371 |
|
Derivatives, other | | — |
| | 7 |
| | 6,245 |
| | 6,252 |
|
Total other liabilities | | 33,274 |
| | 96,378 |
| | 6,245 |
| | 135,897 |
|
Total liabilities | | $ | 33,274 |
| | $ | 658,226 |
| | $ | 6,245 |
| | $ | 697,745 |
|
64
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 62
Note 16 – Fair Value of Assets & Liabilities (Continued)
Changes in Recurring Level 3 Fair Value Measurements
The changes in Level 3 assets and liabilities measured at fair value for the three months ended September 30, 2017March 31, 2020 and 2016,2019, on a recurring basis are summarized as follows:
| | | | Three Months Ended September 30, 2017 | | | | Three Months Ended March 31, 2020 | | |
(Dollars in thousands) | | Trading securities | | | Interest- only strips- AFS | | | Loans held- for-sale | | Net derivative liabilities | | | Trading securities | | | Interest- only strips- AFS | | | Loans held- for-sale | | Net derivative liabilities | |
Balance on July 1, 2017 | | $ | 2,464 |
| | $ | 1,163 |
| | $ | 20,587 |
| | $ | (5,700 | ) | | |
Balance on January 1, 2020 | | | $ | 941 |
| | $ | 19,136 |
| | $ | 14,033 |
| | $ | (22,795 | ) | |
Total net gains/(losses) included in: | | | | | | | | | | | | | | | | | | |
Net income | | 92 |
| | (160 | ) | | 390 |
| | (129 | ) | | | (156 | ) | | (1,295 | ) | | 329 |
| | (511 | ) | |
Purchases | | — |
| | — |
| | 43 |
| | — |
| | | — |
| | 5,481 |
| | — |
| | — |
| |
Sales | | | — |
| | (8,703 | ) | | — |
| | — |
| |
Settlements | | (251 | ) | | — |
| | (939 | ) | | 299 |
| | | — |
| | — |
| | (778 | ) | | 2,416 |
| |
Net transfers into/(out of) Level 3 | | — |
| | 2,120 |
| | (b) | | — |
| | (d) | | — |
| | | — |
| | 8,485 |
| | (b) | | — |
| | — |
| |
Balance on September 30, 2017 | | $ | 2,305 |
| | $ | 3,123 |
| | $ | 20,081 |
| | $ | (5,530 | ) | | |
Balance on March 31, 2020 | | | $ | 785 |
| | $ | 23,104 |
| | $ | 13,584 |
| | $ | (20,890 | ) | |
Net unrealized gains/(losses) included in net income | | $ | 62 |
| | (a) | | $ | (72 | ) | | (c) | | $ | 390 |
| | (a) | | $ | (129 | ) | | (e) | | $ | — |
| | (a) | | $ | (865 | ) | | (c) | | $ | 329 |
| | (a) | | $ | (511 | ) | | (d) |
| | | | Three Months Ended September 30, 2016 | | | | Three Months Ended March 31, 2019 | | |
(Dollars in thousands) | | Trading securities | | Loans held-for-sale | | Securities available- for-sale | | | Mortgage servicing rights, net | | | Net derivative liabilities | | | Trading securities | | | Interest-only-strips-AFS | | | Loans held-for-sale | | Net derivative liabilities | |
Balance on July 1, 2016 | | $ | 2,826 |
| | $ | 25,738 |
| | $ | 1,500 |
| | | $ | 1,406 |
| | | $ | (6,835 | ) | | |
Balance on January 1, 2019 | | | $ | 1,524 |
| | $ | 9,902 |
| | | | $ | 16,273 |
| | $ | (31,540 | ) | |
Total net gains/(losses) included in: | | | | | | | | | | | | | | | | | | | | |
Net income | | 304 |
| | 1,604 |
| | — |
| | — |
| | (4 | ) | | | 21 |
| | (1,258 | ) | | | | 495 |
| | 135 |
| |
Purchases | | — |
| | 198 |
| | — |
| | — |
| | — |
| | | — |
| | 86 |
| | — |
| | — |
| |
|
Sales | | | — |
| | (13,012 | ) | | — |
| | — |
| |
Settlements | | (346 | ) | | (2,146 | ) | | (1,500 | ) | | (160 | ) | | 299 |
| | | (148 | ) | | — |
| | (1,017 | ) | | 2,435 |
| |
Net transfers into/(out of) Level 3 | | — |
| | (2,858 | ) | | (d) | | — |
| | | — |
| | — |
| | | — |
| | 17,477 |
| | (b) | | — |
| | — |
| |
Balance on September 30, 2016 | | $ | 2,784 |
| | $ | 22,536 |
| | $ | — |
| | | $ | 1,246 |
| | $ | (6,540 | ) | | |
Balance on March 31, 2019 | | | $ | 1,397 |
| | $ | 13,195 |
| | | | $ | 15,751 |
| | $ | (28,970 | ) | |
Net unrealized gains/(losses) included in net income | | $ | 244 |
| | (a) | | $ | 1,604 |
| | (a) | | $ | — |
| | | $ | — |
| | $ | (4 | ) | | (e) | | $ | (30 | ) | | (a) | | $ | (894 | ) | | (c) | | $ | 495 |
| | (a) | | $ | 135 |
| | (d) |
| |
(a) | Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income. |
| |
(b) | Transfers into interest-only strips - AFS level 3 measured on a recurring basis reflect movements from loans held-for-sale (Level 2 nonrecurring). |
| |
(c) | Primarily included in fixed income on the Consolidated Condensed Statements of Income. |
| |
(d) | Transfers out of loans held-for-sale level 3 measured on a recurring basis generally reflect movements into OREO (level 3 nonrecurring). |
| |
(e) | Included in Other expense. |
There were no net unrealized gains/(losses) for Level 3 assets and liabilities included in other comprehensive income as of March 31, 2020 and 2019.
65
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 63
Note 16 – Fair Value of Assets & Liabilities (Continued)
Changes in Recurring Level 3 Fair Value Measurements
The changes in Level 3 assets and liabilities measured at fair value for the nine months ended September 30, 2017 and 2016, on a recurring basis are summarized as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 | | |
(Dollars in thousands) | | Trading securities | | | | Interest-only strips- AFS | | | Loans held- for-sale | | | | Net derivative liabilities | | |
Balance on January 1, 2017 | | $ | 2,573 |
| | | | $ | — |
| | | $ | 21,924 |
| | | | $ | (6,245 | ) | | |
Total net gains/(losses) included in: | | | | | |
| | | | | | | | | |
Net income | | 380 |
| | | | 107 |
| | | 1,722 |
| | | | (179 | ) | | |
Purchases | | — |
| | | | 1,413 |
| | | 118 |
| | | | — |
| | |
Sales | | — |
| | | | (3,291 | ) | | | — |
| | | | — |
| | |
Settlements | | (648 | ) | | | | — |
| | | (3,340 | ) | | | | 894 |
| | |
Net transfers into/(out of) Level 3 | | — |
| | | | 4,894 |
| | (b) | (343 | ) | | (d) | | — |
| | |
Balance on September 30, 2017 | | $ | 2,305 |
| | | | $ | 3,123 |
| | | $ | 20,081 |
| | | | $ | (5,530 | ) | | |
Net unrealized gains/(losses) included in net income | | $ | 264 |
| | (a) | | $ | (122 | ) | | (c) | $ | 1,722 |
| | (a) | | $ | (179 | ) | | (e) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2016 | | |
(Dollars in thousands) | | Trading securities | | | | Loans held-for-sale | | | | Securities available- for-sale | | | Mortgage servicing rights, net | | | Net derivative liabilities | | |
Balance on January 1, 2016 | | $ | 4,377 |
| | | | $ | 27,418 |
| | | | $ | 1,500 |
| | | $ | 1,841 |
| | | $ | (4,810 | ) | | |
Total net gains/(losses) included in: | | | | | | | | | | | | | | | | | | |
Net income | | 506 |
| | | | 2,375 |
| | | | — |
| | | 31 |
| | | (2,627 | ) | | |
Purchases | | — |
| | | | 673 |
| | | | — |
| | | — |
| | | — |
| | |
Sales | | — |
| | |
| — |
| | |
| — |
| | | (205 | ) | | | — |
| | |
Settlements | | (2,099 | ) | | | | (4,643 | ) | | | | (1,500 | ) | | | (421 | ) | | | 897 |
| | |
Net transfers into/(out of) Level 3 | | — |
| | | | (3,287 | ) | | (d) | | — |
| | | — |
| | | — |
| | |
Balance on September 30, 2016 | | $ | 2,784 |
| | | | $ | 22,536 |
| | | | $ | — |
| | | $ | 1,246 |
| | | $ | (6,540 | ) | | |
Net unrealized gains/(losses) included in net income | | $ | 324 |
| | (a) | | $ | 2,375 |
| | (a) | | $ | — |
| | | $ | — |
| | | $ | (2,627 | ) | | (e) |
| |
(a) | Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income. |
| |
(b) | Transfers into interest-only strips - AFS level 3 measured on a recurring basis reflect movements from loans held-for-sale (Level 2 nonrecurring). |
| |
(c) | Primarily included in fixed income on the Consolidated Condensed Statements of Income. |
| |
(d) | Transfers out of loans held-for-sale level 3 measured on a recurring basis generally reflect movements into OREO (level 3 nonrecurring). |
| |
(e) | Included in Other expense. |
Note 16 – Fair Value of Assets & Liabilities (Continued)
Nonrecurring Fair Value Measurements
From time to time, FHN may be required to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market (“LOCOM”) accounting or write-downs of individual assets. For assets measured at fair value on a
nonrecurring basis which were still held on the balance sheetConsolidated Condensed Statements of Condition at September 30, 2017,March 31, 2020, and December 31, 2016,2019, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the related carrying value.
| | | | Carrying value at September 30, 2017 | | Carrying value at March 31, 2020 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Loans held-for-sale—SBAs and USDA | | $ | — |
| | $ | 244,089 |
| | $ | 1,484 |
| | $ | 245,573 |
| | $ | — |
| | $ | 493,876 |
| | $ | 890 |
| | $ | 494,766 |
|
Loans held-for-sale—first mortgages | | — |
| | — |
| | 611 |
| | 611 |
| | — |
| | — |
| | 515 |
| | 515 |
|
Loans, net of unearned income (a) | | — |
| | — |
| | 23,210 |
| | 23,210 |
| | — |
| | — |
| | 31,535 |
| | 31,535 |
|
OREO (b) | | — |
| | — |
| | 7,877 |
| | 7,877 |
| | — |
| | — |
| | 13,881 |
| | 13,881 |
|
Other assets (c) | | — |
| | — |
| | 27,394 |
| | 27,394 |
| | — |
| | — |
| | 10,262 |
| | 10,262 |
|
|
| | | | | | | | | | | | | | | | |
| | Carrying value at December 31, 2019 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Loans held-for-sale—SBAs and USDA | | $ | — |
| | $ | 492,595 |
| | $ | 929 |
| | $ | 493,524 |
|
Loans held-for-sale—first mortgages | | — |
| | — |
| | 516 |
| | 516 |
|
Loans, net of unearned income (a) | | — |
| | — |
| | 42,208 |
| | 42,208 |
|
OREO (b) | | — |
| | — |
| | 15,660 |
| | 15,660 |
|
Other assets (c) | | — |
| | — |
| | 10,608 |
| | 10,608 |
|
|
| | | | | | | | | | | | | | | | |
| | Carrying value at December 31, 2016 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Loans held-for-sale—SBAs | | $ | — |
| | $ | 4,286 |
| | $ | — |
| | $ | 4,286 |
|
Loans held-for-sale—first mortgages | | — |
| | — |
| | 638 |
| | 638 |
|
Loans, net of unearned income (a) | | — |
| | — |
| | 31,070 |
| | 31,070 |
|
OREO (b) | | — |
| | — |
| | 11,235 |
| | 11,235 |
|
Other assets (c) | | — |
| | — |
| | 29,609 |
| | 29,609 |
|
| |
(a) | Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for loan losses. |
| |
(b) | Represents the fair value and related losses of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages. |
| |
(c) | Represents tax credit investments accounted for under the equity method. |
For assets measured on a nonrecurring basis which were still held on the consolidated balance sheetConsolidated Condensed Statements of Condition at period end, the following table provides information about the fair value adjustments recorded during the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
| | | | Net gains/(losses) Three Months Ended September 30 | | Net gains/(losses) Nine months ended September 30 | | Net gains/(losses) Three Months Ended March 31 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 |
Loans held-for-sale—other consumer | | | $ | — |
| | $ | (200 | ) |
Loans held-for-sale—SBAs and USDA | | $ | (86 | ) | | $ | — |
| | $ | (1,259 | ) | | $ | — |
| | (1,391 | ) | | (683 | ) |
Loans held-for-sale—first mortgages | | 6 |
| | 10 |
| | 22 |
| | 17 |
| | 5 |
| | 15 |
|
Loans, net of unearned income (a) | | (2,388 | ) | | 461 |
| | (1,456 | ) | | (3,249 | ) | | (4,839 | ) | | 200 |
|
OREO (b) | | (41 | ) | | (711 | ) | | (662 | ) | | (1,561 | ) | | (27 | ) | | 35 |
|
Other assets (c) | | (762 | ) | | (788 | ) | | (2,646 | ) | | (2,325 | ) | | (346 | ) | | (675 | ) |
| | $ | (3,271 | ) | | $ | (1,028 | ) | | $ | (6,001 | ) | | $ | (7,118 | ) | | $ | (6,598 | ) | | $ | (1,308 | ) |
| |
(a) | Write-downs on these loans are recognized as part of provision for loan losses. |
| |
(b) | Represents losses of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages. |
| |
(c) | Represents tax credit investments accounted for under the equity method. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 64
Note 16 – Fair Value of Assets & Liabilities (Continued)
In third quarter 2017, FHN’s Corporate segment2019, FHN recognized $2.0$4.6 million of impairments onand $.7 million of impairment reversals, respectively, related to dispositions of acquired properties and $1.5 million of impairments for lease assets related to continuing acquisition integration efforts associated with reduction of leased office space and branch optimization. Related to its restructuring, repositioning, and efficiency efforts, FHN recognized $14.0 million of impairments and $1.4 million of impairment reversals, respectively, for tangible long-lived technologyassets and lease assets. Related to the Company's rebranding initiative, FHN recognized $7.1 million of impairments within the Corporate segment for long-lived tangible assets, primarily signage, related to the company's rebranding initiative. These amounts were recognized in the Corporate segment.
Lease asset impairments recognized in 2019 represent the reduction in value of the right-of-use assets associated with an expansion of processing capacityleases that will be required upon completionare being exited in advance of the merger with CBF. The fair values of the assets impaired were determinedcontractual lease expiration.
Impairments are measured using a discounted cash flow approachmethodology, which reflected short estimated remaining lives andis considered estimated salvage values. The measurement methodologies are considereda Level 3 valuations. In first quarter 2016, FHN’s Regional Banking segment recognized $3.7 millionvaluation.
Impairments of impairments on long-lived tangible assets reflect locations where the associated with efforts to more efficiently utilize its bank branch locations. The affected branch locations represented a mixture ofland and building are either owned and leased sites.or leased. The fair values of owned sites were determined using estimated sales prices from appraisals and broker opinions less estimated costs to sell.sell with adjustments upon final disposition. The fair values of owned assets in leased sites (e.g., leasehold improvements) were determined using a discounted cash flow approach, based on the revised estimated useful lives of the related assets. Both measurement methodologies are considered Level 3 valuations. Impairment adjustments recognized upon disposition of a location are considered Level 2 valuations.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 65
Note 16 – Fair Value of Assets & Liabilities (Continued)
Level 3 Measurements
The following tables provide information regarding the unobservable inputs utilized in determining the fair value of levelLevel 3 recurring and non-recurring measurements as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
| | (Dollars in thousands) | (Dollars in thousands) | (Dollars in thousands) | |
| | | | | Values Utilized |
Level 3 Class | | Fair Value at September 30, 2017 | | Valuation Techniques | | Unobservable Input | | Values Utilized | | Fair Value at March 31, 2020 | | Valuation Techniques | | Unobservable Input | | Range | | Weighted Average (d) |
Available-for-sale- securities SBA-interest only strips | | $ | 3,123 |
| | Discounted cash flow | | Constant prepayment rate | | 9% - 10% | | $ | 23,104 |
| | Discounted cash flow | | Constant prepayment rate | | 12% | | 12% |
| | | | | | Bond equivalent yield | | 14%- 19% | | | | | | Bond equivalent yield | | 14% - 18% | | 14% |
Loans held-for-sale - residential real estate | | 20,692 |
| | Discounted cash flow | | Prepayment speeds - First mortgage | | 2% - 12% | | 14,099 |
| | Discounted cash flow | | Prepayment speeds - First mortgage | | 3% - 15% | | 4.6% |
| | | | Prepayment speeds - HELOC | | 3% - 12% | |
| | | | Foreclosure losses | | 50% - 70% | |
| | | | Loss severity trends - First mortgage | | 5% - 50% of UPB | | | | Foreclosure losses | | 50% - 66% | | 64% |
| | | | | | Loss severity trends - HELOC | | 15% - 100% of UPB | | | | Loss severity trends - First mortgage | | 2% - 20% of UPB | | 14.2% |
Loans held-for-sale- unguaranteed interest in SBA loans | | 1,484 |
| | Discounted cash flow | | Constant prepayment rate | | 8% - 12% | | 890 |
| | Discounted cash flow | | Constant prepayment rate | | 8% - 12% | | 10% |
| | | | Bond equivalent yield | | 9% - 10% | | | | Bond equivalent yield | | 8% | | 8% |
Derivative liabilities, other | | 5,530 |
| | Discounted cash flow | | Visa covered litigation resolution amount | | $4.4 billion - $5.2 billion | | 20,890 |
| | Discounted cash flow | | Visa covered litigation resolution amount | | $5.4 billion - $6.0 billion | | $5.8 billion |
| | | | Probability of resolution scenarios | | 10% - 30% | | | | Probability of resolution scenarios | | 10% - 50% | | 16% |
| | | | | | Time until resolution | | 18 - 48 months | | | | | | Time until resolution | | 12 - 36 months | | 26 months |
Loans, net of unearned income (a) | | 23,210 |
| | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 10% of appraisal | | 31,535 |
| | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 10% of appraisal | | NM |
| | | | Other collateral valuations | | Borrowing base certificates adjustment | | 20% - 50% of gross value | | | | Other collateral valuations | | Borrowing base certificates adjustment | | 20% - 50% of gross value | | NM |
| | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value | | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value | | NM |
OREO (b) | | 7,877 |
| | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | 13,881 |
| | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | NM |
Other assets (c) | | 27,394 |
| | Discounted cash flow | | Adjustments to current sales yields for specific properties | | 0% - 15% adjustment to yield | | 10,262 |
| | Discounted cash flow | | Adjustments to current sales yields for specific properties | | 0% - 15% adjustment to yield | | NM |
| | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 25% of appraisal | | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 25% of appraisal | | NM |
| |
(a) | Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for loan losses. |
Note 16 – Fair Value of Assets & Liabilities (Continued)
| |
(b) | Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages. |
| |
(c) | Represents tax credit investments accounted for under the equity method. |
|
| | | | | | | | | | |
(Dollars in thousands) | | | | | | | | |
Level 3 Class | | Fair Value at December 31, 2016 | | Valuation Techniques | | Unobservable Input | | Values Utilized |
Loans held-for-sale - residential real estate | | $ | 22,562 |
| | Discounted cash flow | | Prepayment speeds - First mortgage | | 2% - 13% |
| | | | | | Prepayment speeds - HELOC | | 3% - 15% |
| | | | | | Foreclosure Losses | | 50% - 70% |
| | | | | | Loss severity trends - First mortgage | | 5% - 50% of UPB |
| | | | | | Loss severity trends - HELOC | | 15% - 100% of UPB |
Derivative liabilities, other | | 6,245 |
| | Discounted cash flow | | Visa covered litigation resolution amount | | $4.4 billion - $5.2 billion |
| | | | | | Probability of resolution scenarios | | 10% - 30% |
| | | | | | Time until resolution | | 24 - 54 months |
Loans, net of unearned income (a) | | 31,070 |
| | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 10% of appraisal |
| | | | Other collateral valuations | | Borrowing base certificates adjustment | | 20% - 50% of gross value |
| | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value |
OREO (b) | | 11,235 |
| | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal |
Other assets (c) | | 29,609 |
| | Discounted cash flow | | Adjustments to current sales yields for specific properties | | 0% - 15% adjustment to yield |
| | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 25% of appraisal |
NM - Not meaningful.
| |
(a) | Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for loan losses. |
| |
(b) | Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages. |
| |
(c) | Represents tax credit investments accounted for under the equity method. |
| |
(d) | Weighted averages are determined by the relative fair value of the instruments or the relative contribution to an instrument's fair value. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 66
Note 16 – Fair Value of Assets & Liabilities (Continued)
|
| | | | | | | | | | | | |
(Dollars in thousands) | | |
| | | | | | | | Values Utilized |
Level 3 Class | | Fair Value at December 31, 2019 | | Valuation Techniques | | Unobservable Input | | Range | | Weighted Average (d) |
Available-for-sale- securities SBA-interest only strips | | $ | 19,136 |
| | Discounted cash flow | | Constant prepayment rate | | 12% | | 12% |
| | | | | | Bond equivalent yield | | 16% - 17% | | 16% |
Loans held-for-sale - residential real estate | | 14,549 |
| | Discounted cash flow | | Prepayment speeds - First mortgage | | 3% - 14% | | 4.1% |
| | | | | | Prepayment speeds - HELOC | | 0% - 12% | | 7.6% |
| | | | | | Foreclosure losses | | 50% - 66% | | 64% |
| | | | | | Loss severity trends - First mortgage | | 3% - 24% of UPB | | 14.3% |
| | | | | | Loss severity trends - HELOC | | 0% - 72% of UPB | | 50% |
Loans held-for-sale- unguaranteed interest in SBA loans | | 929 |
| | Discounted cash flow | | Constant prepayment rate | | 8% - 12% | | 10% |
| | | | | | Bond equivalent yield | | 9% | | 9% |
Derivative liabilities, other | | 22,795 |
| | Discounted cash flow | | Visa covered litigation resolution amount | | $5.4 billion - $6.0 billion | | $5.8 billion |
| | | | | | Probability of resolution scenarios | | 10% - 50% | | 16% |
| | | | | | Time until resolution | | 15 - 39 months | | 29 months |
Loans, net of unearned income (a) | | 42,208 |
| | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 10% of appraisal | | NM |
| | | | Other collateral valuations | | Borrowing base certificates adjustment | | 20% - 50% of gross value | | NM |
| | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value | | NM |
OREO (b) | | 15,660 |
| | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | NM |
Other assets (c) | | 10,608 |
| | Discounted cash flow | | Adjustments to current sales yields for specific properties | | 0% - 15% adjustment to yield | | NM |
| | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 25% of appraisal | | NM |
NM - Not meaningful. | |
(a) | Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for loan losses. |
| |
(b) | Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages. |
| |
(c) | Represents tax credit investments accounted for under the equity method. |
| |
(d) | Weighted averages are determined by the relative fair value of the instruments or the relative contribution to an instrument's fair value |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 67
Note 16 – Fair Value of Assets & Liabilities (Continued)
Securities AFS. Increases (decreases) in estimated prepayment rates and bond equivalent yields negatively (positively) affect the value of SBA interest only strips. Management additionally considers whether the loans underlying related SBA-interest only strips are delinquent, in default or prepaying, and adjusts the fair value down 20 - 100% depending on the length of time in default.
Loans held-for-sale. Foreclosure losses and prepayment rates are significant unobservable inputs used in the fair value measurement of FHN’s residential real estate loans held-for-sale. Loss severity trends are also assessed to evaluate the reasonableness of fair value estimates resulting from discounted cash flows methodologies as well as to estimate fair value for newly repurchased loans and loans that are near foreclosure. Significant increases (decreases) in any of these inputs in isolation would result in significantly lower (higher) fair value measurements. All observable and unobservable inputs are re-assessed quarterly. Fair value measurements are reviewed at least quarterly by FHN’s Corporate Accounting Department.
Increases (decreases) in estimated prepayment rates and bond equivalent yields negatively (positively) affect the value of unguaranteed interests in SBA loans. Unguaranteed interest in SBA loans held-for-sale are carried at less than the outstanding balance due to credit risk estimates. Credit risk adjustments may be reduced if prepayment is likely or as consistent payment
Note 16 – Fair Value of Assets & Liabilities (Continued)
history is realized. Management also considers other factors such as delinquency or default and adjusts the fair value accordingly.
Derivative liabilities. In conjunction with the sales of portions of its Visa Class B shares, FHN and the purchaserpurchasers 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. FHN uses a discounted cash flow methodology in order to estimate the fair value of FHN’s derivative liabilities associated with its prior sales of Visa Class B shares. The methodology includes estimation of both the resolution amount for Visa’s Covered Litigation matters as well as the length of time until the resolution occurs. Significant increases (decreases) in either of these inputs in isolation would result in significantly higher (lower) fair value measurements for the derivative liabilities. Additionally, FHN performs a probability weighted multiple resolution scenario to calculate the estimated fair value of these derivative liabilities. Assignment of higher (lower) probabilities to the larger potential resolution scenarios would result in an increase (decrease) in the estimated fair value of the derivative liabilities. Since this estimation process requires application of judgment in developing significant unobservable inputs used to determine the possible outcomes and the probability weighting assigned to each scenario, these derivatives have been classified within Level 3 in fair value measurements disclosures. The valuation inputs and process are discussed with senior and executive management when significant events affecting the estimate of fair value occur. Inputs are compared to information obtained from the public issuances and filings of Visa, Inc. as well as public information released by other participants in the applicable litigation matters.
Loans, net of unearned income and Other Real Estate Owned. Collateral-dependent loans and OREO are primarily valued using appraisals based on sales of comparable properties in the same or similar markets. Multiple appraisal firms are utilized to ensure that estimated values are consistent between firms. This process occurs within FHN’s Credit Risk Management (commercial) and Default Servicing functions (primarily consumer). The Credit Risk Management Committee reviews dispositions and additions of OREO annually. Back testing is performed during the year through comparison to ultimate disposition values. Other collateral (receivables, inventory, equipment, etc.) is valued through borrowing base certificates, financial statements and/or auction valuations. These valuations are discounted based on the quality of reporting, knowledge of the marketability/collectability of the collateral and historical disposition rates.
Other assets – tax credit investments. The estimated fair value of tax credit investments accounted for under the equity method is generally determined in relation to the yield (i.e., future tax credits to be received) an acquirer of these investments would expect in relation to the yields experienced on current new issue and/or secondary market transactions. Thus, as tax credits are recognized, the future yield to a market participant is reduced, resulting in consistent impairment of the individual investments. Individual investments are reviewed for impairment quarterly, which may include the consideration of additional marketability discounts related to specific investments which typically includes consideration of the underlying property’s appraised value. Unusual valuation adjustments and the associated triggering events are discussed with senior and executive management when appropriate. A portfolio review is conducted annually, with the assistance of a third party, to assess the reasonableness of current valuations.
Fair Value Option
FHN has elected the fair value option on a prospective basis for almost all types of mortgage loans originated for sale purposes under the Financial Instruments Topic (“ASC 825”). except for mortgage origination operations which utilize the platform acquired from CBF. FHN determined that the election reduces certain timing differences and better matches changes in the value of such loans with changes in the value of derivatives and forward delivery commitments used as economic hedges for these assets at the time of election.
Repurchased loans are recognized within loans held-for-sale at fair value at the time of repurchase, which includes consideration of the credit status of the loans and the estimated liquidation value. FHN has elected to continue recognition of these loans at fair value in periods subsequent to reacquisition. Due to the credit-distressed nature of the vast majority of repurchased loans and the related loss severities experienced upon repurchase, FHN believes that the fair value election provides a more timely recognition of changes in value for these loans that occur subsequent to repurchase. Absent the fair value election, these loans would be subject to valuation at the LOCOM value, which would prevent subsequent values from exceeding the initial fair value, determined at the time of repurchase, but would require recognition of subsequent declines in value. Thus, the fair value election provides for a more timely recognition of any potential future recoveries in asset values while not affecting the requirement to recognize subsequent declines in value.
70
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 68
Note 16 – Fair Value of Assets & Liabilities (Continued)
The following tables reflect the differences between the fair value carrying amount of residential real estate loans held-for-sale measured at fair value in accordance with management’s election and the aggregate unpaid principal amount FHN is contractually entitled to receive at maturity.
|
| | | | | | | | | | | | |
| | March 31, 2020 |
(Dollars in thousands) | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal |
Residential real estate loans held-for-sale reported at fair value: | | | | | | |
Total loans | | $ | 13,584 |
| | $ | 18,546 |
| | $ | (4,962 | ) |
Nonaccrual loans | | 3,181 |
| | 6,069 |
| | (2,888 | ) |
Loans 90 days or more past due and still accruing | | 190 |
| | 268 |
| | (78 | ) |
| | December 31, 2019 |
(Dollars in thousands) | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal |
Residential real estate loans held-for-sale reported at fair value: | | | | | | |
Total loans | | $ | 14,033 |
| | $ | 19,278 |
| | $ | (5,245 | ) |
Nonaccrual loans | | 3,532 |
| | 6,646 |
| | (3,114 | ) |
Loans 90 days or more past due and still accruing | | 163 |
| | 268 |
| | (105 | ) |
|
| | | | | | | | | | | | |
| | September 30, 2017 |
(Dollars in thousands) | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal |
Residential real estate loans held-for-sale reported at fair value: | | | | | | |
Total loans | | $ | 21,808 |
| | $ | 30,686 |
| | $ | (8,878 | ) |
Nonaccrual loans | | 6,428 |
| | 11,551 |
| | (5,123 | ) |
Loans 90 days or more past due and still accruing | | 44 |
| | 175 |
| | (131 | ) |
| | December 31, 2016 |
(Dollars in thousands) | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal |
Residential real estate loans held-for-sale reported at fair value: | | | | | | |
Total loans | | $ | 24,269 |
| | $ | 35,262 |
| | $ | (10,993 | ) |
Nonaccrual loans | | 6,775 |
| | 12,910 |
| | (6,135 | ) |
Loans 90 days or more past due and still accruing | | 211 |
| | 331 |
| | (120 | ) |
Assets and liabilities accounted for under the fair value election are initially measured at fair value with subsequent changes in fair value recognized in earnings. Such changes in the fair value of assets and liabilities for which FHN elected the fair value option are included in current period earnings with classification in the income statement line item reflected in the following table:
|
| | | | | | | |
| Three Months Ended March 31 |
(Dollars in thousands) | 2020 | | 2019 |
Changes in fair value included in net income: | | | |
Mortgage banking noninterest income | | | |
Loans held-for-sale | $ | 329 |
| | $ | 495 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Changes in fair value included in net income: | | | | | | | |
Mortgage banking noninterest income | | | | | | | |
Loans held-for-sale | $ | 390 |
| | $ | 1,604 |
| | $ | 1,722 |
| | $ | 2,375 |
|
For the three months ended September 30, 2017, and 2016,March 31, 2019, the amounts for residential real estate loans held-for-sale include gains of $.1 million and $.5 million, respectively, in pretax earnings that are attributable to changes in instruments-specific credit risk. For the nine months ended September 30, 2017, and 2016, the amountsamount for residential real estate loans held-for-sale included gainsa gain of $.5$.3 million and $.7 million, respectively, in pretax earnings that areis attributable to changes in instrument-specific credit risk. For the three months ended March 31, 2020 this amount was not material. The portion of the fair value adjustments related to credit risk was determined based on estimated default rates and estimated loss severities. Interest income on residential real estate loans held-for-sale measured at fair value is calculated based on the note rate of the loan and is recorded in the interest income section of the Consolidated Condensed Statements of Income as interest on loans held-for-sale.
FHN has elected to account for retained interest-only strips from guaranteed SBA loans recorded in available-for-sale securities at fair value through earnings. Since these securities are subject to the risk that prepayments may result in FHN not recovering all or a portion of its recorded investment, the fair value election results in a more timely recognition of the effects of estimated prepayments
through earnings rather than being recognized through other comprehensive income with periodic review for
other-than-temporary impairment. Gains or losses are recognized through fixed income revenues and are presented in the recurring measurements table.
Determination of Fair Value
In accordance with ASC 820-10-35, fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following describes the
Note 16 – Fair Value of Assets & Liabilities (Continued)
assumptions and methodologies used to estimate the fair value of financial instruments recorded at fair value in the Consolidated Condensed Statements of Condition and for estimating the fair value of financial instruments for which fair value is disclosed under ASC 825-10-50.
Short-term financial assets. Federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with other financial institutions and the Federal Reserve are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 69
Note 16 – Fair Value of Assets & Liabilities (Continued)
Trading securities and trading liabilities. Trading securities and trading liabilities are recognized at fair value through current earnings. Trading inventory held for broker-dealer operations is included in trading securities and trading liabilities. Broker-dealer long positions are valued at bid price in the bid-ask spread. Short positions are valued at the ask price. Inventory positions are valued using observable inputs including current market transactions, LIBOR and U.S. treasury curves, credit spreads, and consensus prepayment speeds. Trading loans are valued using observable inputs including current market transactions, swap rates, mortgage rates, and consensus prepayment speeds.
Trading securities also include retained interests in prior mortgage securitizations that qualify as financial assets, which include primarily principal-only strips. FHN uses inputs including yield curves, credit spreads, and prepayment speeds to determine the fair value of principal-only strips.
Securities available-for-sale. Securities available-for-sale includes the investment portfolio accounted for as available-for-sale under ASC 320-10-25, federal bank stock holdings, and short-term investments in mutual funds.320-10-25. Valuations of available-for-sale securities are performed using observable inputs obtained from market transactions in similar securities. Typical inputs include LIBOR and U.S. treasury curves, consensus prepayment estimates, and credit spreads. When available, broker quotes are used to support these valuations.
Investments in the stock of the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical cost in the Consolidated Condensed Statements of Condition which is considered to approximate fair value. Short-term investments in mutual funds are measured at the funds’ reported closing net asset values. Investments in equity securities are valued using quoted market prices when available. Cost method investments are valued at historical cost less any recorded impairment due to the illiquid nature of these investments.
Interest only strips are valued at elected fair value based on an income approach using an internal valuation model. The internal valuation model includes assumptions regarding projections of future cash flows, prepayment rates, default rates and interest only strip terms. These securities bear the risk of loan prepayment or default that may result in the Company not recovering all or a portion of its recorded investment. When appropriate, valuations are adjusted for various factors including default or prepayment status of the underlying SBA loans. Because of the inherent uncertainty of valuation, those estimated values may be higher or lower than the values that would have been used had a ready market for the securities existed, and may change in the near term.
Securities held-to-maturity. Securities held-to-maturity reflects debt securities for which management has the positive intent and ability to hold to maturity. To the extent possible, valuations of held-to-maturity securities are performed using observable inputs obtained from market transactions in similar securities. Typical inputs include LIBOR and U.S. treasury curves and credit spreads. Debt securities with limited trading activity are valued using a discounted cash flow model that incorporates a combination of observable and unobservable inputs. Primary observable inputs include contractual cash flows, the treasury curve and credit spreads from similar instruments. Significant unobservable inputs include estimated credit spreads for individual issuers and instruments as well as prepayment speeds, as applicable.
Loans held-for-sale. Residential real estate loans held-for-sale are valued using current transaction prices and/or values on similar assets when available, including committed bids for specific loans or loan portfolios. Uncommitted bids may be adjusted based on other available market information. For all other loans FHN determines the fair value of residential real estate loans held-for-sale using a discounted cash flow model which incorporates both observable and unobservable inputs. Inputs include current mortgage rates for similar products, estimated prepayment rates, foreclosure losses, and various loan performance measures (delinquency, LTV, credit score). Adjustments for delinquency and other differences
in loan characteristics are typically reflected in the model’s discount rates. Loss severity trends and the value of underlying collateral are also considered in assessing the appropriate fair value for severely delinquent loans and loans in foreclosure. The valuation of HELOCs also incorporates estimated cancellation rates for loans expected to become delinquent.
Non-mortgage consumer loans held-for-sale are valued using committed bids for specific loans or loan portfolios or current market pricing for similar assets with adjustments for differences in credit standing (delinquency, historical default rates for similar loans), yield, collateral values and prepayment rates. If pricing for similar assets is not available, a discounted cash flow methodology is utilized, which incorporates all of these factors into an estimate of investor required yield for the discount rate.
The Company utilizes quoted market prices of similar instruments or broker and dealer quotations to value the SBA and USDA guaranteed loans. The Company values SBA-unguaranteed interests in loans held-for-sale based on individual loan
Note 16 – Fair Value of Assets & Liabilities (Continued)
characteristics, such as industry type and pay history which generally follows an income approach. Furthermore, these valuations are adjusted for changes in prepayment estimates and are reduced due to restrictions on trading. The fair value of other non-residential real estate loans held-for-sale is approximated by their carrying values based on current transaction values.
Loans, net of unearned income. Loans, net of unearned income are recognized at the amount of funds advanced, less charge-offs and an estimation of credit risk represented by the allowance for loan losses. The fair value estimates for disclosure purposes differentiate loans based on their financial characteristics, such as product classification, vintage, loan category, pricing features, and remaining maturity.
The fair value of floating rate loans is estimated through comparison to recent market activity in loans of similar product types, with adjustments made for differences in loan characteristics. In situations where market pricing inputs are not available, fair value is considered to approximate book value due to the monthly repricing for commercial and consumer loans, with the exception of floating rate 1-4 family residential mortgage loans which reprice annually and will lag movements in market rates. The fair value for floating rate 1-4 family mortgage loans is calculated by discounting future cash flows to their present value. Future cash flows are discounted to their present value by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same time period. Prepayment assumptions based on historical prepayment speeds and industry speeds for similar loans have been applied to the floating rate 1-4 family residential mortgage portfolio.
The fair value of fixed rate loans is estimated through comparison to recent market activity in loans of similar product types, with adjustments made for differences in loan characteristics. In situations where market pricing inputs are not available, fair value is estimated by discounting future cash flows to their present value. Future cash flows are discounted to their present value by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same time period. Prepayment assumptions based on historical prepayment speeds and industry speeds for similar loans have been applied to the fixed rate mortgage and installment loan portfolios.
For all loan portfolio classes, adjustments are made to reflect liquidity or illiquidity of the market. Such adjustments reflect discounts that FHN believes are consistent with what a market participant would consider in determining fair value given current market conditions.
Individually impaired loans are measured using either a discounted cash flow methodology or the estimated fair value of the underlying collateral less costs to sell, if the loan is considered collateral-dependent. In accordance with accounting standards, the discounted cash flow analysis utilizes the loan’s effective interest rate for discounting expected cash flow amounts. Thus, this analysis is not considered a fair value measurement in accordance with ASC 820. However, the results of this methodology are considered to approximate fair value for the applicableCollateral-Dependent loans. Expected cash flows are derived from internally-developed inputs primarily reflecting expected default rates on contractual cash flows. For loans measured using the estimated fair value of collateral less costs to sell, fair value is estimated using appraisals of the collateral. Collateral values are monitored and additional write-downs are recognized if it is determined that the estimated collateral values have declined further. Estimated costs to sell are based on current amounts of disposal costs for similar assets. Carrying value is considered to reflect fair value for these loans.
Derivative assets and liabilities. The fair value for forwards and futures contracts is based on current transactions involving identical securities. Futures contracts are exchange-traded and thus have no credit risk factor assigned as the risk of non-performance is limited to the clearinghouse used.
Valuations of other derivatives (primarily interest rate related swaps) are based on inputs observed in active markets for similar instruments. Typical inputs include the LIBOR curve, Overnight Indexed Swap (“OIS”) curve, option volatility, and option skew. In measuring the fair value of these derivative assets and liabilities, FHN has elected to consider credit risk based on the net exposure to individual counterparties. Credit risk is mitigated for these instruments through the use of mutual margining and master netting agreements as well as collateral posting requirements. For derivative contracts with daily cash margin requirements that are considered settlements, the
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 70
Note 16 – Fair Value of Assets & Liabilities (Continued)
daily margin amount is netted within derivative assets or liabilities. Any remaining credit risk related to interest rate derivatives is considered in determining fair value through evaluation of additional factors such as customer loan grades and debt ratings. Foreign currency related derivatives also utilize observable exchange rates in the determination of fair value. The determination of fair value for FHN’s derivative liabilities associated with its prior sales of Visa Class B shares are classified within Level 3 in the fair value measurements disclosure as previously discussed in the unobservable inputs discussion.
The fair value of risk participations is determined in reference to the fair value of the related derivative contract between the borrower and the lead bank in the participation structure, which is determined consistent with the valuation process discussed above. This value is adjusted for the pro rata portion of the reference derivative’s notional value and an assessment of credit risk for the referenced borrower.
OREO. OREO primarily consists of properties that have been acquired in satisfaction of debt. These properties are carried at the lower of the outstanding loan amount or estimated fair value less estimated costs to sell the real estate. Estimated fair value
Note 16 – Fair Value of Assets & Liabilities (Continued)
is determined using appraised values with subsequent adjustments for deterioration in values that are not reflected in the most recent appraisal.
Nonearning assets. For disclosure purposes, nonearning financial assets include cash and due from banks, accrued interest receivable, and fixed income receivables. Due to the short-term nature of cash and due from banks, accrued interest receivable, and fixed income receivables, the fair value is approximated by the book value.
Other assets. For disclosure purposes, other assets consist of tax credit investments, FRB and FHLB Stock, deferred compensation assets that are considered financial assets.mutual funds and equity investments (including other mutual funds) with readily determinable fair values. Tax credit investments accounted for under the equity method are written down to estimated fair value quarterly based on the estimated value of the associated tax credits which incorporates estimates of required yield for hypothetical investors. The fair value of all other tax credit investments is estimated using recent transaction information with adjustments for differences in individual investments. Deferred compensation assetsmutual funds are recognized at fair value, which is based on quoted prices in active markets.
Investments in the stock of the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical cost in the Consolidated Condensed Statements of Condition which is considered to approximate fair value. Investments in mutual funds are measured at the funds’ reported closing net asset values. Investments in equity securities are valued using quoted market prices when available.
Defined maturity deposits. The fair value of these deposits is estimated by discounting future cash flows to their present value. Future cash flows are discounted by using the current market rates of similar instruments applicable to the remaining maturity. For disclosure purposes, defined maturity deposits include all time deposits.
Undefined maturity deposits. In accordance with ASC 825, the fair value of these deposits is approximated by the book value. For the purpose of this disclosure, undefined maturity deposits include demand deposits, checking interest accounts, savings accounts, and money market accounts.
Short-term financial liabilities. The fair value of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings are approximated by the book value. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Term borrowings. The fair value of term borrowings is based on quoted market prices or dealer quotes for the identical liability when traded as an asset. When pricing information for the identical liability is not available, relevant prices for similar debt instruments are used with adjustments being made to the prices obtained for differences in characteristics of the debt instruments. If no relevant pricing information is available, the fair value is approximated by the present value of the contractual cash flows discounted by the investor’s yield which considers FHN’s and FTBNA’s debt ratings. Secured borrowings also consider the values of the associated assets and whether overcollateralization exists.
Other noninterest-bearing liabilities. For disclosure purposes, other noninterest-bearing financial liabilities include accrued interest payable and fixed income payables. Due to the short-term nature of these liabilities, the book value is considered to approximate fair value.
Loan commitments. Fair values of these commitments are based on fees charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Other commitments. Fair values of these commitments are based on fees charged to enter into similar agreements.
The following fair value estimates are determined as of a specific point in time utilizing various assumptions and estimates. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, reduces the comparability of fair value disclosures between financial institutions. Due to market illiquidity, the fair values for loans, net of unearned income, loans held-for-sale, and term borrowings as of September 30, 2017March 31, 2020 and December 31, 2016,2019, involve the use of significant internally-developed pricing assumptions for certain components of these line items. The assumptions and valuations utilized for this disclosure are considered to reflect inputs that market participants would use in transactions involving these instruments as of the measurement date. The valuations of legacy assets, particularly consumer loans within the non-strategicNon-Strategic segment and TRUPTRUPS loans, are influenced by changes in economic conditions since origination and risk perceptions of the financial sector. These considerations affect the estimate of a potential acquirer’s cost of capital and cash flow volatility assumptions from these assets and the resulting fair value measurements may depart significantly from FHN’s internal estimates of the intrinsic value of these assets.
Assets and liabilities that are not financial instruments have not been included in the following table such as the value of long-term relationships with deposit and trust customers, premises and equipment, goodwill and other intangibles, deferred taxes, and certain other assets and other liabilities. Additionally, these measurements are solely for financial instruments as of the measurement date and do not consider the earnings potential of our various business lines. Accordingly, the total of the fair value amounts does not represent, and should not be construed to represent, the underlying value of FHN.
74
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 71
Note 16 – Fair Value of Assets & Liabilities (Continued)
The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Condensed Statements of Condition as of September 30, 2017:March 31, 2020: |
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 |
| | Book Value | | Fair Value |
(Dollars in thousands) | | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | |
Loans, net of unearned income and allowance for loan losses | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial, financial and industrial | | $ | 21,869,914 |
| | $ | — |
| | $ | — |
| | $ | 22,072,783 |
| | $ | 22,072,783 |
|
Commercial real estate | | 4,592,067 |
| | — |
| | — |
| | 4,624,811 |
| | 4,624,811 |
|
Consumer: | | | | | | | | | | |
Consumer real estate (a) | | 5,996,361 |
| | — |
| | — |
| | 6,141,872 |
| | 6,141,872 |
|
Credit card & other | | 475,471 |
| | — |
| | — |
| | 481,763 |
| | 481,763 |
|
Total loans, net of unearned income and allowance for loan losses | | 32,933,813 |
| | — |
| | — |
| | 33,321,229 |
| | 33,321,229 |
|
Short-term financial assets: | | | | | | | | | | |
Interest-bearing cash | | 670,525 |
| | 670,525 |
| | — |
| | — |
| | 670,525 |
|
Federal funds sold | | 30,050 |
| | — |
| | 30,050 |
| | — |
| | 30,050 |
|
Securities purchased under agreements to resell | | 562,435 |
| | — |
| | 562,435 |
| | — |
| | 562,435 |
|
Total short-term financial assets | | 1,263,010 |
| | 670,525 |
| | 592,485 |
| | — |
| | 1,263,010 |
|
Trading securities (b) | | 1,877,514 |
| | — |
| | 1,876,729 |
| | 785 |
| | 1,877,514 |
|
Loans held-for-sale | | | | | | | | | | |
Mortgage loans (elected fair value) (b) | | 13,584 |
| | — |
| | — |
| | 13,584 |
| | 13,584 |
|
USDA & SBA loans- LOCOM | | 494,766 |
| | — |
| | 497,071 |
| | 905 |
| | 497,976 |
|
Other consumer loans- LOCOM | | 4,940 |
| | — |
| | 4,940 |
| | — |
| | 4,940 |
|
Mortgage loans- LOCOM | | 82,311 |
| | — |
| | — |
| | 82,311 |
| | 82,311 |
|
Total loans held-for-sale | | 595,601 |
| | — |
| | 502,011 |
| | 96,800 |
| | 598,811 |
|
Securities available-for-sale (b) | | 4,544,907 |
| | — |
| | 4,521,803 |
| | 23,104 |
| | 4,544,907 |
|
Securities held-to-maturity | | 10,000 |
| | — |
| | — |
| | 9,824 |
| | 9,824 |
|
Derivative assets (b) | | 696,250 |
| | 165,516 |
| | 530,454 |
| | 280 |
| | 696,250 |
|
Other assets: | | | | | | | | | | |
Tax credit investments | | 250,596 |
| | — |
| | — |
| | 249,450 |
| | 249,450 |
|
Deferred compensation mutual funds | | 41,666 |
| | 41,666 |
| | — |
| | — |
| | 41,666 |
|
Equity, mutual funds, and other (c) | | 715,549 |
| | 22,833 |
| | — |
| | 692,716 |
| | 715,549 |
|
Total other assets | | 1,007,811 |
| | 64,499 |
| | — |
| | 942,166 |
| | 1,006,665 |
|
Total assets | | $ | 42,928,906 |
| | $ | 900,540 |
| | $ | 8,023,482 |
| | $ | 34,394,188 |
| | $ | 43,318,210 |
|
Liabilities: | | | | | | | | | | |
Defined maturity deposits | | $ | 3,058,198 |
| | $ | — |
| | $ | 3,105,082 |
| | $ | — |
| | $ | 3,105,082 |
|
Trading liabilities (b) | | 452,611 |
| | — |
| | 452,611 |
| | — |
| | 452,611 |
|
Short-term financial liabilities: | | | | | | | | | | |
Federal funds purchased | | 476,013 |
| | — |
| | 476,013 |
| | — |
| | 476,013 |
|
Securities sold under agreements to repurchase | | 788,595 |
| | — |
| | 788,595 |
| | — |
| | 788,595 |
|
Other short-term borrowings | | 4,060,673 |
| | — |
| | 4,060,673 |
| | — |
| | 4,060,673 |
|
Total short-term financial liabilities | | 5,325,281 |
| | — |
| | 5,325,281 |
| | — |
| | 5,325,281 |
|
Term borrowings: | | | | | | | | | | |
Real estate investment trust-preferred | | 46,253 |
| | — |
| | — |
| | 47,000 |
| | 47,000 |
|
Secured borrowings | | 17,315 |
| | — |
| | — |
| | 17,315 |
| | 17,315 |
|
Junior subordinated debentures | | 144,928 |
| | — |
| | — |
| | 129,200 |
| | 129,200 |
|
Other long term borrowings | | 584,255 |
| | — |
| | 560,530 |
| | — |
| | 560,530 |
|
Total term borrowings | | 792,751 |
| | — |
| | 560,530 |
| | 193,515 |
| | 754,045 |
|
Derivative liabilities (b) | | 234,984 |
| | 171,604 |
| | 42,210 |
| | 21,170 |
| | 234,984 |
|
Total liabilities | | $ | 9,863,825 |
| | $ | 171,604 |
| | $ | 9,485,714 |
| | $ | 214,685 |
| | $ | 9,872,003 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Book Value | | Fair Value |
(Dollars in thousands) | | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | |
Loans, net of unearned income and allowance for loan losses | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial, financial and industrial | | $ | 12,693,639 |
| | $ | — |
| | $ | — |
| | $ | 12,658,237 |
| | $ | 12,658,237 |
|
Commercial real estate | | 2,221,332 |
| | — |
| | — |
| | 2,208,208 |
| | 2,208,208 |
|
Consumer: | | | | | | | | | | |
Consumer real estate | | 4,328,778 |
| | — |
| | — |
| | 4,252,704 |
| | 4,252,704 |
|
Permanent mortgage | | 387,363 |
| | — |
| | — |
| | 392,407 |
| | 392,407 |
|
Credit card & other | | 340,112 |
| | — |
| | — |
| | 340,168 |
| | 340,168 |
|
Total loans, net of unearned income and allowance for loan losses | | 19,971,224 |
| | — |
| | — |
| | 19,851,724 |
| | 19,851,724 |
|
Short-term financial assets: | | | | | | | | | | |
Interest-bearing cash | | 604,326 |
| | 604,326 |
| | — |
| | — |
| | 604,326 |
|
Federal funds sold | | 76,316 |
| | — |
| | 76,316 |
| | — |
| | 76,316 |
|
Securities purchased under agreements to resell | | 663,637 |
| | — |
| | 663,637 |
| | — |
| | 663,637 |
|
Total short-term financial assets | | 1,344,279 |
| | 604,326 |
| | 739,953 |
| | — |
| | 1,344,279 |
|
Trading securities (a) | | 1,469,402 |
| | — |
| | 1,467,097 |
| | 2,305 |
| | 1,469,402 |
|
Loans held-for-sale (a) | | 339,780 |
| | — |
| | 246,441 |
| | 94,000 |
| | 340,441 |
|
Securities available-for-sale (a) (b) | | 3,963,138 |
| | 24,756 |
| | 3,773,600 |
| | 164,782 |
| | 3,963,138 |
|
Securities held-to-maturity | | 10,000 |
| | — |
| | — |
| | 9,985 |
| | 9,985 |
|
Derivative assets (a) | | 80,976 |
| | 10,003 |
| | 70,973 |
| | — |
| | 80,976 |
|
Other assets: | | | | | | | | | | |
Tax credit investments | | 120,701 |
| | — |
| | — |
| | 121,435 |
| | 121,435 |
|
Deferred compensation assets | | 34,951 |
| | 34,951 |
| | — |
| | — |
| | 34,951 |
|
Total other assets | | 155,652 |
| | 34,951 |
| | — |
| | 121,435 |
| | 156,386 |
|
Nonearning assets: | | | | | | | | | | |
Cash & due from banks | | 347,802 |
| | 347,802 |
| | — |
| | — |
| | 347,802 |
|
Fixed income receivables | | 68,750 |
| | — |
| | 68,750 |
| | — |
| | 68,750 |
|
Accrued interest receivable | | 70,058 |
| | — |
| | 70,058 |
| | — |
| | 70,058 |
|
Total nonearning assets | | 486,610 |
| | 347,802 |
| | 138,808 |
| | — |
| | 486,610 |
|
Total assets | | $ | 27,821,061 |
| | $ | 1,021,838 |
| | $ | 6,436,872 |
| | $ | 20,244,231 |
| | $ | 27,702,941 |
|
Liabilities: | | | | | | | | | | |
Deposits: | | | | | | | | | | |
Defined maturity | | $ | 1,112,098 |
| | $ | — |
| | $ | 1,108,919 |
| | $ | — |
| | $ | 1,108,919 |
|
Undefined maturity | | 20,987,156 |
| | — |
| | 20,987,156 |
| | — |
| | 20,987,156 |
|
Total deposits | | 22,099,254 |
| | — |
| | 22,096,075 |
| | — |
| | 22,096,075 |
|
Trading liabilities (a) | | 579,028 |
| | — |
| | 579,028 |
| | — |
| | 579,028 |
|
Short-term financial liabilities: | | | | | | | | | | |
Federal funds purchased | | 292,650 |
| | — |
| | 292,650 |
| | — |
| | 292,650 |
|
Securities sold under agreements to repurchase | | 516,867 |
| | — |
| | 516,867 |
| | — |
| | 516,867 |
|
Other short-term borrowings | | 1,637,419 |
| | — |
| | 1,637,419 |
| | — |
| | 1,637,419 |
|
Total short-term financial liabilities | | 2,446,936 |
| | — |
| | 2,446,936 |
| | — |
| | 2,446,936 |
|
Term borrowings: | | | | | | | | | | |
Real estate investment trust-preferred | | 46,083 |
| | — |
| | — |
| | 49,350 |
| | 49,350 |
|
Term borrowings—new market tax credit investment | | 18,000 |
| | — |
| | — |
| | 17,959 |
| | 17,959 |
|
Secured borrowings | | 42,585 |
| | — |
| | — |
| | 42,184 |
| | 42,184 |
|
Other long term borrowings | | 952,839 |
| | — |
| | 968,297 |
| | — |
| | 968,297 |
|
Total term borrowings | | 1,059,507 |
| | — |
| | 968,297 |
| | 109,493 |
| | 1,077,790 |
|
Derivative liabilities (a) | | 83,146 |
| | 7,627 |
| | 69,989 |
| | 5,530 |
| | 83,146 |
|
Other noninterest-bearing liabilities: | | | | | | | | | | |
Fixed income payables | | 44,304 |
| | — |
| | 44,304 |
| | — |
| | 44,304 |
|
Accrued interest payable | | 19,205 |
| | — |
| | 19,205 |
| | — |
| | 19,205 |
|
Total other noninterest-bearing liabilities | | 63,509 |
| | — |
| | 63,509 |
| | — |
| | 63,509 |
|
Total liabilities | | $ | 26,331,380 |
| | $ | 7,627 |
| | $ | 26,223,834 |
| | $ | 115,023 |
| | $ | 26,346,484 |
|
| |
(a) | In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability. |
| |
(b) | Classes are detailed in the recurring and nonrecurring measurement tables. |
| |
(b)(c) | Level 1 primarily consists of mutual funds with readily determinable fair values. Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9$562.0 million and FRB stock of $68.6$130.7 million. |
75
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 72
Note 16 – Fair Value of Assets & Liabilities (Continued)
The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Statements of Condition as of December 31, 2016:2019:
| | | | December 31, 2016 | | December 31, 2019 |
| | Book Value | | Fair Value | | Book Value | | Fair Value |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | | | | | | |
Loans, net of unearned income and allowance for loan losses | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
Commercial, financial and industrial | | $ | 12,058,689 |
| | $ | — |
| | $ | — |
| | $ | 11,918,374 |
| | $ | 11,918,374 |
| | $ | 19,928,605 |
| | $ | — |
| | $ | — |
| | $ | 20,096,397 |
| | $ | 20,096,397 |
|
Commercial real estate | | 2,101,671 |
| | — |
| | — |
| | 2,078,306 |
| | 2,078,306 |
| | 4,300,905 |
| | — |
| | — |
| | 4,300,489 |
| | 4,300,489 |
|
Consumer: | | | | | | | | | | | | | | | | | | | | |
Consumer real estate | | 4,473,395 |
| | — |
| | — |
| | 4,385,669 |
| | 4,385,669 |
| | 6,148,696 |
| | — |
| | — |
| | 6,334,187 |
| | 6,334,187 |
|
Permanent mortgage | | 406,836 |
| | — |
| | — |
| | 404,930 |
| | 404,930 |
| |
Credit card & other | | 346,861 |
| | — |
| | — |
| | 347,577 |
| | 347,577 |
| | 482,598 |
| | — |
| | — |
| | 487,079 |
| | 487,079 |
|
Total loans, net of unearned income and allowance for loan losses | | 19,387,452 |
| | — |
| | — |
| | 19,134,856 |
| | 19,134,856 |
| | 30,860,804 |
| | — |
| | — |
| | 31,218,152 |
| | 31,218,152 |
|
Short-term financial assets: | | | | | | | | | | | | | | | | | | | | |
Interest-bearing cash | | 1,060,034 |
| | 1,060,034 |
| | — |
| | — |
| | 1,060,034 |
| | 482,405 |
| | 482,405 |
| | — |
| | — |
| | 482,405 |
|
Federal funds sold | | 50,838 |
| | — |
| | 50,838 |
| | — |
| | 50,838 |
| | 46,536 |
| | — |
| | 46,536 |
| | — |
| | 46,536 |
|
Securities purchased under agreements to resell | | 613,682 |
| | — |
| | 613,682 |
| | — |
| | 613,682 |
| | 586,629 |
| | — |
| | 586,629 |
| | — |
| | 586,629 |
|
Total short-term financial assets | | 1,724,554 |
| | 1,060,034 |
| | 664,520 |
| | — |
| | 1,724,554 |
| | 1,115,570 |
| | 482,405 |
| | 633,165 |
| | — |
| | 1,115,570 |
|
Trading securities (a) | | 897,071 |
| | — |
| | 894,498 |
| | 2,573 |
| | 897,071 |
| | 1,346,207 |
| | — |
| | 1,345,266 |
| | 941 |
| | 1,346,207 |
|
Loans held-for-sale (a) | | 111,248 |
| | — |
| | 6,631 |
| | 104,617 |
| | 111,248 |
| |
Securities available-for-sale (a) (b) | | 3,943,499 |
| | 25,249 |
| | 3,756,745 |
| | 161,505 |
| | 3,943,499 |
| |
Loans held-for-sale | | | | | | | | | | | |
Mortgage loans (elected fair value) (a) | | | 14,033 |
| | — |
| | — |
| | 14,033 |
| | 14,033 |
|
USDA & SBA loans- LOCOM | | | 493,525 |
| | — |
| | 495,323 |
| | 947 |
| | 496,270 |
|
Other consumer loans- LOCOM | | | 5,197 |
| | — |
| | 5,197 |
| | — |
| | 5,197 |
|
Mortgage loans- LOCOM | | | 81,035 |
| | — |
| | — |
| | 81,035 |
| | 81,035 |
|
Total loans held-for-sale | | | 593,790 |
| | — |
| | 500,520 |
| | 96,015 |
| | 596,535 |
|
Securities available-for-sale (a) | | | 4,445,403 |
| | — |
| | 4,426,267 |
| | 19,136 |
| | 4,445,403 |
|
Securities held-to-maturity | | 14,347 |
| | — |
| | — |
| | 14,773 |
| | 14,773 |
| | 10,000 |
| | — |
| | — |
| | 10,001 |
| | 10,001 |
|
Derivative assets (a) | | 121,654 |
| | 33,587 |
| | 88,067 |
| | — |
| | 121,654 |
| | 183,115 |
| | 20,640 |
| | 162,475 |
| | — |
| | 183,115 |
|
Other assets: | | | | | | | | | | | | | | | | | | | | |
Tax credit investments | | 100,105 |
| | — |
| | — |
| | 98,400 |
| | 98,400 |
| | 247,075 |
| | — |
| | — |
| | 244,755 |
| | 244,755 |
|
Deferred compensation assets | | 32,840 |
| | 32,840 |
| | — |
| | — |
| | 32,840 |
| | 46,815 |
| | 46,815 |
| | — |
| | — |
| | 46,815 |
|
Equity, mutual funds, and other (b) | | | 229,352 |
| | 22,643 |
| | — |
| | 206,709 |
| | 229,352 |
|
Total other assets | | 132,945 |
| | 32,840 |
| | — |
| | 98,400 |
| | 131,240 |
| | 523,242 |
| | 69,458 |
| | — |
| | 451,464 |
| | 520,922 |
|
Nonearning assets: | | | | | | | | | | | |
Cash & due from banks | | 373,274 |
| | 373,274 |
| | — |
| | — |
| | 373,274 |
| |
Fixed income receivables | | 57,411 |
| | — |
| | 57,411 |
| | — |
| | 57,411 |
| |
Accrued interest receivable | | 62,887 |
| | — |
| | 62,887 |
| | — |
| | 62,887 |
| |
Total nonearning assets | | 493,572 |
| | 373,274 |
| | 120,298 |
| | — |
| | 493,572 |
| |
Total assets | | $ | 26,826,342 |
| | $ | 1,524,984 |
| | $ | 5,530,759 |
| | $ | 19,516,724 |
| | $ | 26,572,467 |
| | $ | 39,078,131 |
| | $ | 572,503 |
| | $ | 7,067,693 |
| | $ | 31,795,709 |
| | $ | 39,435,905 |
|
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | |
Defined maturity | | $ | 1,355,133 |
| | $ | — |
| | $ | 1,361,104 |
| | $ | — |
| | $ | 1,361,104 |
| | $ | 3,618,337 |
| | $ | — |
| | $ | 3,631,090 |
| | $ | — |
| | $ | 3,631,090 |
|
Undefined maturity | | 21,317,230 |
| | — |
| | 21,317,230 |
| | — |
| | 21,317,230 |
| |
Total deposits | | 22,672,363 |
| | — |
| | 22,678,334 |
| | — |
| | 22,678,334 |
| |
Trading liabilities (a) | | 561,848 |
| | — |
| | 561,848 |
| | — |
| | 561,848 |
| | 505,581 |
| | — |
| | 505,581 |
| | — |
| | 505,581 |
|
Short-term financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Federal funds purchased | | 414,207 |
| | — |
| | 414,207 |
| | — |
| | 414,207 |
| | 548,344 |
| | — |
| | 548,344 |
| | — |
| | 548,344 |
|
Securities sold under agreements to repurchase | | 453,053 |
| | — |
| | 453,053 |
| | — |
| | 453,053 |
| | 716,925 |
| | — |
| | 716,925 |
| | — |
| | 716,925 |
|
Other short-term borrowings | | 83,177 |
| | — |
| | 83,177 |
| | — |
| | 83,177 |
| | 2,253,045 |
| | — |
| | 2,253,045 |
| | — |
| | 2,253,045 |
|
Total short-term financial liabilities | | 950,437 |
| | — |
| | 950,437 |
| | — |
| | 950,437 |
| | 3,518,314 |
| | — |
| | 3,518,314 |
| | — |
| | 3,518,314 |
|
Term borrowings: | | | | | | | | | | | | | | | | | | | | |
Real estate investment trust-preferred | | 46,032 |
| | — |
| | — |
| | 49,350 |
| | 49,350 |
| | 46,236 |
| | — |
| | — |
| | 47,000 |
| | 47,000 |
|
Term borrowings—new market tax credit investment | | 18,000 |
| | — |
| | — |
| | 17,918 |
| | 17,918 |
| |
Borrowings secured by residential real estate | | 23,126 |
| | — |
| | — |
| | 21,969 |
| | 21,969 |
| |
Secured Borrowings | | | 21,975 |
| | — |
| | — |
| | 21,975 |
| | 21,975 |
|
Junior subordinated debentures | | | 144,593 |
| | — |
| | — |
| | 142,375 |
| | 142,375 |
|
Other long term borrowings | | 953,498 |
| | — |
| | 965,066 |
| | — |
| | 965,066 |
| | 578,564 |
| | — |
| | 574,287 |
| | — |
| | 574,287 |
|
Total term borrowings | | 1,040,656 |
| | — |
| | 965,066 |
| | 89,237 |
| | 1,054,303 |
| | 791,368 |
| | — |
| | 574,287 |
| | 211,350 |
| | 785,637 |
|
Derivative liabilities (a) | | 135,897 |
| | 33,274 |
| | 96,378 |
| | 6,245 |
| | 135,897 |
| | 67,480 |
| | 19,807 |
| | 24,878 |
| | 22,795 |
| | 67,480 |
|
Other noninterest-bearing liabilities: | | | | | | | | | | | |
Fixed income payables | | 21,002 |
| | — |
| | 21,002 |
| | — |
| | 21,002 |
| |
Accrued interest payable | | 10,336 |
| | — |
| | 10,336 |
| | — |
| | 10,336 |
| |
Total other noninterest-bearing liabilities | | 31,338 |
| | — |
| | 31,338 |
| | — |
| | 31,338 |
| |
Total liabilities | | $ | 25,392,539 |
| | $ | 33,274 |
| | $ | 25,283,401 |
| | $ | 95,482 |
| | $ | 25,412,157 |
| | $ | 8,501,080 |
| | $ | 19,807 |
| | $ | 8,254,150 |
| | $ | 234,145 |
| | $ | 8,508,102 |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
| |
(a) | Classes are detailed in the recurring and nonrecurring measurement tables. |
| |
(b) | Level 1 primarily consists of mutual funds with readily determinable fair values. Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9$76.0 million and FRB stock of $68.6$130.7 million. |
76
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 73
Note 16 – Fair Value of Assets & Liabilities (Continued)
The following table presents the contractual amount and fair value of unfunded loan commitments and standby and other commitments as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | |
| | Contractual Amount | | Fair Value |
(Dollars in thousands) | | March 31, 2020 | | December 31, 2019 | | March 31, 2020 | | December 31, 2019 |
Unfunded Commitments: | | | | | | | | |
Loan commitments | | $ | 10,966,768 |
| | $ | 12,355,220 |
| | $ | 2,909 |
| | $ | 3,656 |
|
Standby and other commitments | | 455,028 |
| | 459,268 |
| | 6,211 |
| | 5,513 |
|
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 74
Note 17 – Restructuring, Repositioning, and Efficiency
Beginning in 2019, FHN initiated a company-wide review of business practices with the goal of optimizing its expense base to improve profitability and create capacity to reinvest savings into technology and revenue production activities. Restructuring, repositioning, and efficiency charges related to these corporate-driven actions were not significant in first quarter 2020 and were $12.2 million in first quarter 2019 and are included in the Corporate segment. Significant expenses resulted from the following actions:
Severance and other employee costs primarily related to efficiency initiatives within corporate and bank services functions which are classified as Employee compensation, incentives and benefits within noninterest expense.
Expense largely related to the identification of efficiency opportunities within the organization which is reflected in Professional fees.
Settlement of the obligations arising from current initiatives will be funded from operating cash flows.
|
| | | | | | | | | | | | | | | | |
| | Contractual Amount | | Fair Value |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 |
Unfunded Commitments: | | | | | | | | |
Loan commitments | | $ | 8,868,115 |
| | $ | 8,744,649 |
| | $ | 2,388 |
| | $ | 2,924 |
|
Standby and other commitments | | 336,953 |
| | 277,549 |
| | 4,139 |
| | 4,037 |
|
Total expense recognized for the three months ended March 31, 2020 and 2019 is presented in the table below:
|
| | | | | | | | |
| | Three Months Ended March 31 |
Dollars in thousands | | 2020 | | 2019 |
Employee compensation, incentives and benefits | | $ | 57 |
| | $ | 6,505 |
|
Professional fees | | 7 |
| | 4,295 |
|
Occupancy | | 2 |
| | 817 |
|
Other | | (103 | ) | | 535 |
|
Total restructuring and repositioning charges | | $ | (37 | ) | | $ | 12,152 |
|
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 75
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Note 18 – Other Events
In April 2020, First Horizon Bank issued $450 million of 5.750% Subordinated Notes due May 1, 2030. Interest payments are due semi-annually on May 1 and November 1, commencing November 1, 2020. The sale of the Notes resulted in net proceeds to the Company of approximately $446 million.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 76
---------------------------
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
---------------------------
TABLE OF ITEM 2 TOPICS
FIRST HORIZON NATIONAL CORPORATIONCORP. 1Q20 FORM 10-Q REPORT 77
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 18641864. FHN's sole class of common stock, $.625 par value, is listed and astrades on the New York Stock Exchange LLC under the symbol FHN.
FHN is the parent company of September 30, 2017, was oneFirst Horizon Bank. First Horizon Bank's principal divisions and subsidiaries operate under the brands of First Horizon Bank, First Horizon Advisors, and FHN Financial. FHN offers regional banking, wealth management and capital market services through the 40 largest publicly traded banking organizations in the United States in termsFirst Horizon family of asset size.
FHN’s two major brands—companies. First TennesseeHorizon Bank and FTN Financial—provide customers with a broad range of products and services. First Tennessee ("FTBNA" or the "Bank") providesHorizon Advisors provide consumer and commercial banking services throughout Tennessee and other selected marketswealth management services. FHN Financial, which operates partly through a division of First Horizon Bank and is the largest bank headquartered in the state of Tennessee. FTN Financial (“FTNF”)partly through subsidiaries, is an industry leader in fixed income sales, trading, and strategies for institutional clients in the U.S. and abroad. First Horizon Bank has over 270 banking offices in seven southeastern U.S. states, and FHN Financial has 29 offices in 18 states across the U.S.
Segments
FHN is composed of the following operating segments:
Regional banking segment offers financial products and services, including traditional lending and deposit taking, to consumer and commercial customers primarily in Tennesseethe southeast U.S. and other selected markets. Regional banking also provides investments, wealth management, financial planning, trust services and asset management, mortgage banking, 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.
Fixed income segment consists of fixed income securities sales, trading, underwriting, and strategies for institutional clients in the U.S. and abroad, as well as loan sales, portfolio advisory services, and derivative sales.
Corporate segment consists of unallocated corporate expenses, expense on subordinated debt issuances, bank-owned life insurance, 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, derivative valuation adjustments related to prior sales of Visa Class B shares, lossgain/(loss) on extinguishment of debt, and acquisitionacquisition- and integration-related costs.costs, expenses associated with
rebranding initiatives, and various charges related to restructuring, repositioning, and efficiency efforts.
Non-strategic segment consists of the wind-down nationalrun-off consumer lending activities, legacypre-2009 mortgage banking elements, including servicing fees, and the associated ancillary revenues and expenses related to these businesses. Non-strategic also includes the wind-down trust preferred loan portfolio and exited businesses.
In October 2017, FTBNA acquired the operations and certain assets of Professional Mortgage Company, Inc. ("PMC"). PMC is a provider of institutional debt capital and commercial mortgage loan servicing. Eleven professionals joined FTBNA's commercial real estate ("CRE") team as a result of the transaction, expanding the capabilities of its CRE platform.
Significant Pending Transactions
On MayNovember 4, 2017,2019, FHN and Capital Bank Financial Corp. (“Capital Bank" or "CBF”IBERIABANK Corporation ("IBKC") announced that they had entered into an agreement and plan of merger under which IBKC will merge with FHN will acquire Capital Bank, which isin a merger-of-equals transaction. IBKC, headquartered in Charlotte, North Carolina. Capital BankLafayette, Louisiana, has 319 offices in 12 states, mostly in the southern and southeastern U.S., and has reported approximately $10$32.2 billion of total assets, $24.5 billion in loans, and $25.5 billion in deposits, at June 30, 2017.March 31, 2020. IBKC's common stock is listed on The NASDAQ Stock Market, LLC under the symbol IBKC. Under the merger agreement, each share of IBKC common stock will be converted into 4.584 shares of FHN common stock. After closing, FHN expects IBKC common shares will be converted into approximately 44 percent of the then-outstanding shares of FHN common stock. The merger agreement requires FHN to expand its board of directors to seventeen persons; after closing, eight board positions will be held by current IBKC directors, and nine will be held by current FHN directors. FHN expects the transaction is expected to close in fourthsecond quarter, 2017, subject to regulatory approvalapprovals and other customary closing conditions.
On November 8, 2019, FHN announced an agreement for First Horizon Bank to purchase 30 branches from SunTrust Bank in conjunction with SunTrust Banks, Inc.'s merger with BB&T Corporation, which created Truist Financial Corp. As part of the saleagreement, FHN will assume approximately $2.4 billion of twobranch deposits for a 3.40 percent deposit premium and purchase approximately $410 million of branch loans. The branches are in communities in North Carolina (20 branches), Virginia (8 branches), and Georgia (2 branches). FHN expects the purchase to close in third quarter 2020, subject to customary closing conditions.
On April 3, 2017, FTNFIn second quarter 2019, FHN sold a subsidiary acquired substantially allas part of the assets and assumed substantially all of the liabilities of Coastal Securities, Inc. (“Coastal”Capital Bank Financial Corporation ("CBF") merger (in 2017), a national leaderthat did not fit within FHN's risk profile. The sale resulted in the trading, securitization, and analysisremoval of Small Business Administration (“SBA”)approximately $25 million UPB of subprime consumer loans for approximately $131 million in cash. Coastal, which was based in Houston, TX, also traded United States Departmentfrom Loans held-for-sale on FHN's Consolidated Condensed Statements of Agriculture (“USDA”) loans and fixed income products and provided municipal underwriting and advisory servicesCondition.
In relation to its clients. Coastal’s government-guaranteed loan products were combined with FTNF's existing SBA trading activities to establish an additional major product sector for FTNF.all acquisitions, FHN's operating results include the operating results of the acquired assets and
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 78
assumed liabilities subsequent to the acquisition date.
On September 16, 2016, FTBNA acquired $537.4 million of UPB in restaurant franchise loans from GE Capital. The acquired loans were combined with existing FTBNA relationships to establish a franchise finance specialty banking business.
Refer to Note 2 – Acquisitions and Divestitures in this report and in Exhibit 13Item 7 to FHN’s Annual Report on Form 10-K for the year ended December 31, 20162019 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 auditedunaudited Consolidated Condensed Financial Statements and Notes in this report. Additional information including the 20162019 financial statements, notes, and MD&A is provided in Exhibit 13Item 7 and 8 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
ADOPTION OF ACCOUNTING UPDATES
Effective January 1, 2020 FHN adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," (CECL); which resulted in a $106.4 million increase to the allowance for loan losses ("ALLL") and a $24.0 million increase to the reserve for unfunded commitments, resulting in a $96.1 million decrease of retained earnings (net of taxes). See Note 1– Financial Information for additional information.
Non-GAAP Measures
Certain measures are included in the narrative and tables in this MD&A that are “non-GAAP”, meaning (under U.S. financial reporting rules) they are not presented in accordance with generally accepted accounting principles (“GAAP”) in the U.S. and also are not codified in U.S. banking regulations currently applicable to FHN.
Although other entities may use calculation methods that differ from those used by FHN for non-GAAP measures, FHN’s management believes such measures are relevant to understanding the capital position or financial results of FHN. Non-GAAP measures are reported to FHN’s management and Board of Directors through various internal reports.
Presentation of regulatory measures, even those which are not GAAP, provide a meaningful base for comparability to other financial institutions subject to the same regulations as FHN, as demonstrated by their use by banking regulators in reviewing capital adequacy of financial institutions. Although not GAAP terms, these regulatory measures are not considered “non-GAAP” under U.S. financial reporting rules as long as their presentation conforms to regulatory standards.
Regulatory measures used in this MD&A include: common equity tier 1 capital, generally defined as common equity less goodwill, other intangibles, and certain other required regulatory deductions; tier 1 capital, 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; and risk-weighted assets (“RWA”), which is a measure of total on- and off-balance sheet assets adjusted for credit and market risk, used to determine regulatory capital ratios.
The non-GAAP measure presented in this filing is return on average tangible common equity (“ROTCE”). Refer to table 2523 for a reconciliation of the non-GAAP to GAAP measure and presentation of the most comparable GAAP item.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 79
FORWARD-LOOKING STATEMENTS
|
| | | | |
Forward-Looking Statements |
This MD&A contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 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 instead pertain 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 businessfinancial market conditions, including economic recession or depression;expectations of and actual timing and amount of interest rate movements including the stability orslope of the yield curve, competition, customer and investor responses to these conditions, ability to execute business plans, geopolitical developments, recent and future legislative and regulatory developments, natural disasters, the potential impacts on FHN’s businesses of the coronavirus COVID-19 pandemic, including negative impacts from quarantines, market declines and volatility, of values and activitychanges in the residential housing and commercial real estate markets;customer behavior related to COVID-19, potential requirements for FHN to repurchase, or compensate for losses from, previously sold or securitized mortgages or securities based on such mortgages; potential claims alleging mortgage servicing failures, individually, on a class basis, or as master servicer of securitized loans; 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, competitor, 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 directly or indirectly affecting FHN directly or affecting its customers, business counterparties or competitors; 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 OfficeTennessee Department of the Comptroller of the Currency (“OCC”Financial Institutions ("TDFI"), and its Commissioner, the Board of Governors of the Federal Reserve System (“Federal Reserve” or “Fed”), the Federal Deposit Insurance Corporation (“FDIC”), the Financial Industry Regulatory Authority (“FINRA”), the U.S. Department of the Treasury (“U.S. Treasury”), the Municipal Securities Rulemaking Board (“MSRB”), the Consumer Financial Protection Bureau (“CFPB”), the Office of the Comptroller of the Currency ("OCC"), the Financial Stability Oversight Council (“Council”), the Public Company Accounting Oversight Board (“PCAOB”), and other regulators and agencies; pending, threatened, or possible future regulatory, administrative, and judicial outcomes, actions, and proceedings; current or future Executive orders; 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 any forward-looking statements that are made in this Quarterly Report of which this MD&A is a part 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 September 30, 2017,March 31, 2020, and in documents incorporated into this Quarterly Report.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 80
As previously mentioned, effective January 1, 2020, FHN adopted ASU 2016-13, (CECL). Application of CECL methodology creates larger immediate impacts on credit loss estimates in unanticipated rapid declines in economic projections when compared to the prior incurred loss estimation methodology. The sudden, steep decline in the economic forecast associated with the Coronavirus Disease 2019 (“COVID-19”) pandemic late in first quarter 2020 resulted in a significant increase in loan loss provision expense and the reserve for unfunded commitments, negatively impacting FHN’s operating results in first quarter 2020.
In thirdfirst quarter 2017,2020, FHN reported net income available to common shareholders of $67.3$12.1 million, or $.28 per diluted share, compared to net income of $63.2 million, or $.27 per diluted share in third quarter 2016. For the nine months ended September 30, 2017, FHN reported net income available to common shareholders of $212.2 million, or $.90$.04 per diluted share, compared to net income available to common shareholders of $167.6$99.0 million, or $.71$.31 per diluted share forin first quarter 2019. The decline in results in first quarter 2020 relative to the nine months ended September 30, 2016. Results improved for both periods primarilyprior year was driven by a significant increase in loan loss provision expense and an increase in net interestthe reserve for unfunded commitments, somewhat offset by higher revenue.
Total revenue increased 10 percent to $477.6 million in first quarter 2020 from $435.6 million in first quarter 2019. NII increased to $302.8 million in first quarter 2020 from $294.5 million in first quarter 2019 primarily due to strong loan and deposit growth, favorable deposit costs, and the maturity of $400 million of senior debt in fourth quarter 2019. Lower loan yields compared to first quarter 2019 negatively impacted NII in first quarter 2020, offsetting a portion of the overall increase in NII. Noninterest income ("NII") andincreased 24 percent, or $33.7 million, in first quarter 2020 driven by higher fixed income revenue, somewhat offset by a decrease in deferred compensation income relative to first quarter 2019.
Noninterest expense increased 5 percent to $311.9 million in first quarter 2020 from $296.1 million in first quarter 2019. The expense increase in first quarter 2020, was due in large part to an increase in credit expense on unfunded
commitments associated with economic uncertainty attributable to the provision for income taxes,COVID-19 pandemic, as well as higher personnel-related expenses, somewhat offset by lower noninterest income relativerestructuring and rebranding related expenses.
Asset quality trends in first quarter 2020 were relatively consistent with trends in first quarter 2019. The NPL ratio and 30+ delinquencies improved from .65 percent and .23 percent, respectively in first quarter 2019 to 2016. Total expenses including loan loss provision were flat for the quarterly period, but declined for the year-to-date period which also contributed.57 percent and .19 percent, respectively in first quarter 2020. Net charge offs increased from .07 percent in first quarter 2019 to the improvement.10 percent in results for the nine months ended September 30, 2017. The decline in provision for income taxes for both the three and nine months ended September 30, 2017 was due to favorable effective tax rate adjustmentsfirst quarter 2020 primarily associated with the reversal of a capital loss deferred tax valuation allowance in 2017.
Total revenue was $322.2 million and $957.3 million, respectively, for the three and nine months ended September 30, 2017 compared to $333.7 million and $961.9 million for the three and nine months ended September 30, 2016. NII increased 13 percent for both periods, largely driven by the impact of higher short-term market rates and net loan growth. Noninterest income declined 24 percent and 17 percent, respectively, for the three and nine months ended September 30, 2017 due to lower fixed income revenue and a loss from the repurchase of equity securities previously included in a financing transaction.
Noninterest expense increased 1 percent to $236.9 million for the three months ended September 30, 2017 and decreased 2 percent to $677.0 million for the nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016. Expenses increased in third quarter 2017 largely driven by higher acquisition- and integration-related expenses primarily associated with the CBF and Coastal acquisitions and an increase in net loss accruals related to legal matters, but were favorably impacted by lower variable compensation expense within the fixed income segment and a decline in legal fees relative to third quarter 2016. For the nine months ended September 30, 2017, expense decreased primarily due to a net decline in the loss accruals related to legal matters, as well as lower personnel-related expenses and legal fees. A net increase in acquisition- and integration-related costs and a smaller expense reversal to the mortgage repurchase provision for the nine months ended 2017 compared to the nine months ended September 30, 2016, offset a portion of the expense decline for the year-to-date period.
On a consolidated basis, credit quality remained strong in 2017, with non-performing loans and the allowance for loan losses decreasing relative to the comparative periods of the prior year. There was no provision for loan losses in third quarter 2017 compared to provision expense of $4.0 million in third quarter 2016. For the nine months ended September 30, 2017 the provision for loan losses was a provision credit of $3.0 million compared to provision expense of $11.0 million for the nine months ended September 30, 2016.two credits.
Return on average common equity (“ROE”ROCE”) and ROTCE were 10.791.05 percent and 12.171.59 percent, respectively, in thirdfirst quarter 20172020 compared to 10.809.09 percent and 11.9014.17 percent, respectively, in thirdfirst quarter 2016.2019. Return on average assets (“ROA”) improveddeclined to .99.15 percent in thirdfirst quarter 20172020 from .971.03 percent in thirdfirst quarter 2016. For2019. Key financial ratios were negatively impacted in first quarter 2020 by the nine months ended September 30, 2017 ROE, ROTCE, and ROA improved to 11.83 percent, 13.25 percent, and 1.04 percent, respectively from 9.81 percent, 10.83 percent, and .89 percent, respectively, for the nine months ended September 30, 2016.large increase in loan loss provision expense. Common equity tierEquity Tier 1, Tier 1, Total capital,Capital, and Leverage ratios were 10.048.54 percent, 11.209.52 percent, 12.1810.78 percent, and 9.609.00 percent, respectively, in thirdfirst quarter 2017 compared to 9.812020 down from 9.62 percent, 11.0310.65 percent, 12.0911.78 percent, and 9.529.02 percent, respectively, in thirdfirst quarter 2016.2019 driven by an increase in risk-weighted assets due to higher loan balances and an increase in fixed income market risk assets. Average assets increased 5to $43.6 billion in first quarter 2020 from $40.9 billion in first quarter 2019. Average loans and average deposits increased to $30.5 billion and $32.9 billion, respectively, in first quarter 2020, up 12 percent and 71 percent respectively, for the three and nine months ended September 30, 2017 to $28.9 billion from $27.6 billion and $27.0 billion, respectively, for the three and nine months ended September 30, 2016. Average loans were $19.8 billion and $19.3 billion, respectively, for the three and nine months ended September 30, 2017, a 6 percent and 8 percent increase relative to the same periods in 2016.first quarter 2019. Period-end and average Shareholders’ equity increased to $2.9$5.1 billion in thirdfirst quarter 20172020 from $2.7$4.8 billion in thirdfirst quarter 2016.2019. Average Shareholders’ equity increased to $5.0 billion in first quarter 2020 from $4.8 billion in first quarter 2019.
BUSINESS LINE REVIEW
Regional Banking
Pre-tax income within the regional banking segment was $25.6 million in first quarter 2020, down from $147.0 million in first quarter 2019. The decrease in pre-tax income was primarily driven by an increase in loan loss provision expense, and higher credit expense on unfunded commitments somewhat offset by increase in revenue.
Total revenue increased 6 percent to $382.0 million in first quarter 2020 from $359.1 million in first quarter 2019, driven by increases in NII and noninterest income. The
increase in NII was primarily due to strong loan and deposit growth and favorable deposit costs, which more than offset lower loan yields compared to first quarter 2019. Noninterest income increased 12 percent or $8.8 million to $114.7$81.9 million in thirdfirst quarter 20172020 from $102.0$73.0 million in thirdthe prior year. The increase in noninterest income was primarily driven by an increase in fees from derivative sales, higher brokerage, management fees and commissions, and an increase in other service charges revenue, partially offset by lower fees from deposit transactions and cash management activities relative to first quarter 2016.2019.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 81
Provision expense increased to $145.4 million in first quarter 2020 from $13.4 million in first quarter 2019, primarily driven by the application of CECL methodology and a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic.
Noninterest expense was $211.0 million in first quarter 2020, up from $198.6 million in first quarter 2019. The increase in expense was primarily driven by a $8.8 million increase in the credit expense on unfunded commitments largely associated with the application of CECL methodology with a sudden, steep decline in economic forecast attributable to the COVID-19 pandemic. An increase in FDIC premium expense due to balance sheet growth and expected loss severity ratios as well as $1.0 million of additional credit risk adjustments related to Regional Banking interest rate derivatives and swap participations also contributed to the overall increase in expenses in first quarter 2020 compared to the prior year.
Fixed Income
Pre-tax income in the fixed income segment more than doubled to $25.6 million in first quarter 2020 from $10.6 million in first quarter 2019. The increase in pre-tax income in first quarter 2020 was primarily driven by higher revenue, somewhat offset by an increase in expenses. For the nine months ended September 30, 2017, regional banking pre-tax
Noninterest income was $329.7 million compared to $237.6 million for the nine months ended September 30, 2016. The increase in pre-tax income for the nine months ended September 30, 2017 was driven by an increase in revenue coupled with a decline in expenses.
Total revenue increased 778 percent, or $18.1$41.9 million to $273.7$95.7 million in third quarter 2017, from $255.6 million in third quarter 2016, driven by an increase in NII. The increase in NII was largely due to the favorable impact of higher interest rates on loans, higher average balances of commercial loans and noninterest-bearing deposits, as well as lower deposit costs relative to third quarter 2016. Noninterest income was $64.4 million and $65.1 million in third quarter 2017 and 2016, respectively. In third quarter 2017, fees from brokerage, management fees, and commissions increased as a result of increases in recurring revenue driven primarily by growth in FHN’s advisory business and favorable market conditions. Deposit transactions and cash management fee income also increased in third quarter 2017, largely driven by higher fee income associated with cash management activities. Noninterest income in third quarter 2016 was favorably impacted by a $1.8 million gain on the sale of property and higher fee income associated with derivative sales compared to third quarter 2017, resulting in a decline in noninterest income in third quarter 2017 relative to the prior year.
Provision expense was $8.6 million and $8.5 million in third quarter 2017 and 2016, respectively, reflecting continued strong performance in both the commercial and consumer portfolios. In third quarter 2017, reserves increased $2.8 million from second quarter driven by the C&I portfolio, partially offset by reserve decreases in both the consumer and commercial real estate portfolios. Net charge-offs were $5.7 million in third quarter 2017 compared to $3.5 million a year ago and the loan portfolio grew nearly $1.0 billion from third quarter 2016 driven by the C&I portfolio.
Noninterest expense was $150.5 million in third quarter 2017, up 4 percent from $145.1 million in third quarter 2016. The increase in expense was primarily driven by an $8.7 million net increase in loss accruals related to legal matters as a result of $4.4 million of loss accruals associated with trust services recognized in third quarter 2017 and a favorable $4.3 million reversal of loss accruals related to legal matters recognized in third quarter 2016. Expenses associated with advertising and public relations decreased from $5.0 million in third quarter 2016 to $4.0 million in third quarter 2017 due in large part to a promotional branding campaign in third quarter 2016.
Total revenue increased 9 percent to $792.8 million for the nine months ended September 30, 2017, from $726.8 million for the nine months ended September 30, 2016, driven by an increase in NII. The increase in NII for the year-to-date period was also driven by the favorable impact of higher interest rates on loans, higher average balances of commercial loans and noninterest-bearing deposits, and lower deposit costs relative to 2016. For the nine months ended September 30, 2017 and 2016, noninterest income was $188.1 million and $185.7 million, respectively. The increase in noninterest income was largely driven by an increase in brokerage, management fees, and commission income from the Bank's wealth management group and a $1.2 million increase in mortgage banking income, primarily related to FHN’s Community Reinvestment Act ("CRA") initiatives. Additionally, FHN recognized $.4 million in net securities gains for the nine months ended September 30, 2017 primarily the resulting from the call of a $4.4 million held-to-maturity municipal bond in second quarter 2017. Gains on the sale of fixed assets decreased $2.0 million for the nine months ended September 30, 2017 and fees from derivative transactions decreased $.9 million both reducing noninterest income in 2017 compared to 2016. Additionally, declines in fees from deposit transactions and cash management and bankcard income also negatively impacted noninterest income for the nine months ended September 30, 2017 relative to the prior year. The decrease in fees from deposit transactions and cash management was primarily due to lower non-sufficient funds (“NSF”)/overdraft fees in first quarter 2017 driven by changes in consumer behavior and a modification of billing practices, somewhat mitigated by an increase in fee income associated with cash management activities. The decrease in bankcard income was the result of volume incentives received in 2016 driven by a significant new relationship.
Provision expense was $11.92020 from $53.8 million for the nine months ended September 30, 2017 compared to $34.2 million for the nine months ended September 30, 2016. The net decrease in provision in 2017 reflects continued strong performance in both the commercial and consumer portfolios and historically low net charge-offs which continued to drive lower loss rates. Net charge-offs for the nine months ended September 30, 2017 decreased to $10.0 million from $20.4 million for the nine months ended September 30, 2016.
Noninterest expense decreased to $451.2 million for the nine months ended September 30, 2017 from $455.0 million for the nine months ended September 30, 2016. The decrease in noninterest expense was largely attributable to a $13.3 million net decline in loss accruals related to legal matters and a $4.3 million net decrease associated with fixed asset impairment charges.
Additionally, a recovery from a vendor recognized in first quarter 2017 related to previous overbillings also contributed to the expense decrease for the nine months ended September 30, 2017. During the nine months ended September 30, 2017 personnel expenses, operations services expenses and FDIC premium expense all increased relative to 2016, negatively impacting regional banking expenses. The increase in personnel expense was largely driven by expenses associated with strategic hires in expansion markets and specialty areas, as well as higher incentive expense associated with loan/deposit growth and retention initiatives. The increase in operations services expense was primarily related to an increase in third party fees associated with FHN’s online digital banking platform and the increase in FDIC premium expense was due in large part to balance sheet growth.
Fixed Income
Pre-tax income in the fixed income segment was $8.7 million in third quarter 2017 compared to $15.1 million in third quarter 2016. For the nine months ended September 30, 2017, fixed income's pre-tax income was $18.1 million compared to $44.7 million for the nine months ended September 30, 2016. The decline in results in both periods was driven by lower revenues, somewhat offset by a decline in expenses.
NII increased from $2.4 million in third quarter 2016 to $6.0 million in third quarter 2017, primarily driven by an increase in loans held-for-sale as a result of the Coastal acquisition. Fixed income product revenue decreased 24 percent to $45.0 million in third quarter 2017 from $59.0 million in third quarter 2016, as average2019. Average daily revenue (“ADR”) declinedincreased to $715$1.3 million in first quarter 2019 from $729 thousand in thirdfirst quarter 2017 from $922 thousand in third quarter 2016. This decline reflects lower activity2019, due to challenging market conditions (interest rate increases, a flattening yield curve, and lowelevated levels of commissionable revenues, partially offset by elevated levels of trading losses driven by extreme market volatility).volatility as compared to first quarter 2019. Other product revenue was $10.8$17.4 million in thirdfirst quarter 2017 down2020, up from $13.1$9.3 million in the prior year, primarily driven by lowerincreases in fees from derivative and loan sales. NII was $10.9 million in first quarter 2020, up from $7.3 million in first quarter 2019, primarily due to higher spreads on inventory positions in addition to higher inventory balances compared to prior year.
Noninterest expense decreased 11 percent, or $6.3 million, to $53.1was $81.1 million in thirdfirst quarter 2017 from $59.42020 compared to $50.5 million in thirdfirst quarter 2016,2019, primarily driven by higher variable compensation due to lower variable compensation associated with the decrease in fixed income product revenue in third quarter 2017, somewhat offset by increased expenses due to the Coastal acquisition.commissionable revenues.
For the nine months ended September 30, 2017 and 2016, NII was $12.1 million and $8.2 million, respectively, also driven by an increase in loans held-for-sale. Fixed income product revenue was $133.3 million for the nine months ended September 30, 2017, down from $185.9 million in the prior year reflecting lower activity due to challenging market conditions (interest rate increases, a flattening yield curve, and low levels of market volatility). Other product revenue was $28.5 million and $31.4 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease in other product revenue was largely due to lower fees from portfolio advisory services and derivative sales relative to the prior year. Noninterest expense decreased 14 percent, or $25.1 million, to $155.8 million for the nine months ended September 30, 2017 from $180.9 million for the nine months ended September 30, 2016. The expense decline during 2017 was primarily the result of lower variable compensation associated with the decrease in fixed income product revenue in 2017, somewhat offset by an increase in legal fees and increased expenses due to the Coastal acquisition.
Corporate
The pre-tax loss for the corporate segment was $47.4$32.5 million and $28.0in first quarter 2020 compared to $36.3 million for the quarters ended September 30, 2017 and 2016, respectively and $106.2 million and $77.0 million for the nine months ended September 30, 2017 and 2016, respectively.in first quarter 2019.
Net interest expense was $14.0$13.4 million and $18.2 million, respectively in third quarter 2017 and 2016. The decline in net interest expense was the result of a higher yielding securities portfolio in 2017. Noninterest income (including securities gain/losses) was negative $9.5$7.9 million in thirdfirst quarter 2017, compared to $5.1 million in third quarter 2016. The decrease in noninterest income was due to a $14.3 million loss from the repurchase of equity securities previously included in a financing transaction recognized in third quarter 2017.
Noninterest expense was $23.9 million in third quarter 2017 up from $14.9 million in third quarter 2016. The increase in expense for third quarter 2017 was largely driven by $8.2 million of acquisition-2020 and integration-related expenses primarily associated with the CBF and Coastal acquisitions.
2019, respectively. Net interest expense was $43.1negatively impacted by lower average balances of excess cash at the Federal reserve (“Fed”) and AFS securities, somewhat offset by the maturity of $400 million and $48.4of senior debt in fourth quarter 2019. Noninterest income/(loss)(including securities gain/losses) in first quarter 2020 was negative $3.7 million respectively forcompared to $13.4 million in first quarter 2019, primarily due to a $15.0 million decrease in deferred compensation income driven by negative equity market valuations relative to the nine months ended September 30, 2017 and 2016, respectively.prior year.
Noninterest expense decreased 63 percent or $26.3 million from $41.8 million in first quarter 2019 to $15.5 million in first quarter 2020. The improvementdecrease in net interest expense for the year-to-date period of 2017 was also driven by a higher yielding securities portfolio. Noninterest income (including securities gain/losses) decreased to $2.2 million for the nine months ended September 30, 2017 from $15.8 million in the prior year. The decreasefirst quarter 2020 was primarily driven by a $14.3 million loss from the repurchase of equity securities previously included in a financing transaction and a decline in net security gains. The decline in net securities gains was largely the result of a $1.7 million gain from an exchange of approximately $294 million of
available-for-sale (“AFS”) debt securities recognized in 2016. For the nine months ended September 30, 2017, deferred compensation income increased $2.3 million, offsetting a portion of the decline in noninterest income. Deferred compensation income fluctuates with changes in the market value of the underlying investments and is mirrored by changesdecreases in deferred compensation expense, which is included in personnel expense.
Noninterestrestructuring costs associated with efficiency initiatives and rebranding expenses relative to first quarter 2019. This expense decrease was $65.4 million and $44.3 million for the nine months ended September 30, 2017 and 2016, respectively. Thesomewhat offset by an increase in noninterest expense in 2017 was largely due to a $13.7 million increase in acquisition- and integration-related expenses primarily associated with the CBF and Coastal acquisitions, a $3.7 million increase in salary expenses, and a $3.2 million charitable contribution to the First Tennessee Foundation made in second quarter 2017. To a lesser extent, higher deferred compensation expense also contributed to the expense increase for the nine months ended September 30, 2017, but was offset by $2.2 million of deferred compensation BOLI gains recognized in second quarter 2017. Additionally, a $2.4 million decrease of negative valuation adjustments associated with derivatives related to prior sales of Visa Class B shares offset a portion of the overall expense increase for the year-to-date period.pension expense.
Non-Strategic
The non-strategic segment had pre-tax income of $9.4$2.6 million in thirdfirst quarter 20172020 compared to $7.1$9.2 million in thirdfirst quarter 2016. For the nine months ended September 30, 2017, the non-strategic segment had pre-tax income of $41.7 million compared to $58.2 million for the nine months ended September 30, 2016.2019. The increasedecrease in results for the quarterly periodfirst quarter 2020 was driven by lower expenses in 2017 relative to the prior year which more than offset a decline in revenue. The decline in results for the year-to-date period was primarily driven by a lower loan losssmaller provision credit in 2017 relative to the prior year and a decline in revenues,NII relative to first quarter 2019 somewhat offset by lowera decrease in expenses.
Total revenue was $10.2$6.0 million in thirdfirst quarter 20172020 down from $16.7$9.9 million in thirdfirst quarter 2016.2019. NII declined 19 percentdecreased to $8.5$5.1 million in thirdfirst quarter 2017, consistent with the2020 from $9.1 million in first quarter 2019, primarily due to continued run-off of the non-strategic loan portfolios. Noninterest income (including securities gains/losses) was $1.7$.9 million in thirdfirst quarter 2017 down from $6.2 million in third quarter 2016. The decrease in noninterest income was largely attributable to a $4.4 million gain recognized in third quarter 2016 primarily related to recoveries associated with prior legacy mortgage servicing sales.
The provision for loan losses within the non-strategic segment was a provision credit of $8.6 million in third quarter 2017 compared to a provision credit of $4.5 million in the prior year. Overall, the non-strategic segment continued to reflect stable performance combined with lower loan balances as reserves declined by $9.1 million from December 31, 2016, to $38.8 million as of September 30, 2017. Losses remain historically low as the non-strategic segment had net recoveries of $3.3 million in third quarter 2017 compared to net recoveries of $1.2 million a year ago.
Noninterest expense was $9.4 million in third quarter 2017 compared to $14.2 million in third quarter 2016. The decrease in expense was primarily driven by lower legal fees2020 and by loss accruals related to legal matters which decreased from $4.5 million in third quarter 2016 to $3.6 million in third quarter 2017.
For the nine months ended September 30, 2017, total revenue was $31.4 million, down from $42.2 million for the nine months ended September 30, 2016. NII declined 19 percent to $26.5 million during 2017, consistent with the run-off of the non-strategic loan portfolios. Noninterest income (including securities gains/losses) decreased to $4.9 million in 2017 from $9.6 million in 2016. The decrease in noninterest income was largely attributable to the $4.4 million gain recognized in third quarter 2016 primarily related to recoveries associated with prior legacy mortgage servicing sales mentioned above.2019.
The provision for loan losses within the non-strategic segment was a provision credit of $14.9$.4 million for the nine months ended September 30, 2017in first quarter 2020 compared to a provision credit of $23.2$4.4 million forin the nine months ended September 30, 2016.prior year. The same factors impacting the quarterly changereduction in loan loss provisioning levels also drove the change for the year-to-date period.
For the nine months ended September 30, 2017, noninterest expenseprovision credit in first quarter 2020 was $4.6 million compareddue to $7.2 million for the nine months ended September 30, 2016. The net decreaseadditional consumer reserves associated with a sudden, steep decline in expense during 2017 relativeeconomic forecast attributable to the prior yearCOVID-19 pandemic.
Noninterest expense decreased 27 percent to $3.8 million in first quarter 2020 from $5.2 million in first quarter 2019.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 82
Total consolidated revenue was $477.6 million in first quarter 2020, up 10 percent from $435.6 million in first quarter 2019 driven by a 24 percent increase in noninterest income and a 3 percent increase in NII. Provision expense increased significantly from $9.0 million in first quarter 2019 to $145.0 million in first quarter 2020 primarily driven by a sudden, steep decline in legal feesthe economic forecast attributable to the COVID-19 pandemic. Total consolidated expenses increased 5 percent to $311.3 million in first quarter 2020 from $296.1 million in first quarter 2019, driven by an increase in expense on unfunded commitments and higher personnel-related expenses, somewhat offset by lower loss accrualsrestructuring and rebranding related to legal matters which were $3.7expenses.
Net Interest Income
Net interest income was $302.8 million in 2017 compared to $8.0first quarter 2020, up from $294.5 million in 2016. A smaller expense reversal to the mortgage repurchase provision for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, offset a portion of the expense decline.
INCOME STATEMENT REVIEW
Total consolidated revenue decreased 3 percent to $322.2 million in thirdfirst quarter 2017 from $333.7 million in third quarter 2016, as an2019. The increase in NII was more thanprimarily attributable to strong loan and deposit growth, favorable deposit costs, and the maturity of $400 million of senior debt in fourth quarter 2019, somewhat offset by lower noninterest income. Total expenses increased to $236.9 million in third quarter 2017 from $233.6 million in third quarter 2016.
Total consolidated revenue for the nine months ended September 30, 2017 was $957.3 millionloan yields compared to $961.9 million for the nine months ended September 30, 2016. The decrease in revenue for the 2017 relative to 2016 was the result of lower noninterest income (largely associated with a decline in fixed income product revenue) which more than offset an increase in NII. Total expenses decreased 2 percent to $677.0 million for the nine months ended September 30, 2017, from $687.3 million for the nine months ended September 30, 2016.
NET INTEREST INCOME
Net interest income increased 13 percent, or $24.6 million, to $209.8 million in thirdfirst quarter 2017 from $185.2 million in third quarter 2016. The increase in NII in third quarter 2017 was primarily the result of the favorable impact of higher interest rates on loans and loan growth within regional banking. To a lesser extent, higher average balances of loans held-for-sale positively impacted NII in third quarter 2017. These increases were partially offset by the continued run-off the non-strategic loan portfolios. For the nine months ended September 30, 2017, NII increased 13 percent to $600.2 million from $533.5 million. The increase in NII for the year-to-date period was primarily driven by loan growth within regional banking and the favorable impact of higher interest rates on loans, somewhat offset by the continued run-off of the non-strategic loan portfolios.2019. Average earning assets were $26.6 billion and $25.3increased to $38.8 billion in thirdfirst quarter 2017 and 2016, respectively, and $26.62020 from $36.3 billion and $24.8 billion for the nine months ended September 30, 2017 and 2016, respectively. The increase in both periods relative to 2016 was primarily driven by loan growth within regional banking and an increase in loans held-for-sale ("HFS") associated with the Coastal acquisition. These increases were somewhat offset by continued run-off of the non-strategic loan portfolios, a decrease in securities purchased under agreements to resell and a smaller investment securities portfolio relative to the prior year. first quarter 2019.
The increase in loans HFS was less for the year-to-date period, due to the timing of the Coastal acquisition. Additionally, for the nine months ended September 30, 2017 higher average balances of excess cash held at the Federal Reserve (“Fed”) contributed to the increase in average earning assets but werewas primarily driven by increases in loans, securities purchased under agreement to resell ("asset repos"), and fixed income inventory, somewhat offset by a declinedecreases in average fixed income trading securities.interest-bearing cash.
For purposes of computing yields and the net interest margin, FHN adjusts net interest income to reflect tax exempttax-exempt income on an equivalent pre-tax basis which provides comparability of net interest income arising from both taxable and tax-exempt sources.
The consolidated net interest margin improved to 3.19was 3.16 percent in thirdfirst quarter 20172020 down 15 basis points from 2.963.31 percent in thirdfirst quarter 2016.2019. The net interest spread was 2.962.89 percent in thirdfirst quarter 2017, up 13 basis points from 2.83 percent in third quarter 2016. For the nine months ended September 30, 2017, the net interest margin was 3.06 percent, up 142020, down 3 basis points from 2.92 percent for the nine months ended September 30, 2016.in first quarter 2019. The net interest spread increased to 2.86 percent for the nine months ended September 30, 2017 from 2.79 percent in 2016. The increasedecrease in NIM in both periodsfirst quarter 2020 was primarily the result of the favorablenegative impact of higher interest rates on loans. For the year-to-date period in 2017 NIM was(including LIBOR and Prime) relative to first quarter 2019. Additionally, higher balances of trading securities negatively impacted NIM in first quarter 2020, but was somewhat mitigated by an increase in average excessloan and deposit growth, lower balances of cash held at the Fed.Fed, and the maturity of $400 million of senior debt in fourth quarter 2019.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 83
Table 1—Net Interest Margin
| | | Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended March 31 |
| 2017 | | 2016 | | 2017 | | 2016 | 2020 | | 2019 |
Assets: | | | | | | | | | | |
Earning assets: | | | | | | | | | | |
Loans, net of unearned income: | | | | | | | | | | |
Commercial loans | 4.13 | % | | 3.63 | % | | 4.01 | % | | 3.60 | % | 4.33 | % | | 5.08 | % |
Consumer loans | 4.23 |
| | 4.08 |
| | 4.19 |
| | 4.08 |
| 4.33 |
| | 4.59 |
|
Total loans, net of unearned income | 4.16 |
| | 3.76 |
| | 4.06 |
| | 3.74 |
| 4.33 |
| | 4.96 |
|
Loans held-for-sale | 4.53 |
| | 4.36 |
| | 4.47 |
| | 4.23 |
| 4.67 |
| | 5.89 |
|
Investment securities: | | | | | | | | | | |
U.S. treasuries | 1.26 |
| | 0.97 |
| | 1.08 |
| | 0.98 |
| |
U.S. government agencies | 2.54 |
| | 2.34 |
| | 2.57 |
| | 2.40 |
| 2.32 |
| | 2.68 |
|
States and municipalities | — |
| | 9.01 |
| | 9.43 |
| | 7.55 |
| 3.35 |
| | 4.33 |
|
Corporate bonds | 5.25 |
| | 5.25 |
| | 5.25 |
| | 5.25 |
| |
Corporates and other debt | | 4.67 |
| | 4.37 |
|
Other | 3.67 |
| | 2.44 |
| | 3.32 |
| | 2.50 |
| 33.76 |
| | 34.56 |
|
Total investment securities | 2.60 |
| | 2.36 |
| | 2.61 |
| | 2.42 |
| 2.51 |
| | 2.79 |
|
Trading securities | 3.06 |
| | 2.46 |
| | 3.00 |
| | 2.65 |
| 2.91 |
| | 3.80 |
|
Other earning assets: | | | | | | | | | | |
Federal funds sold | 1.75 |
| | 0.99 |
| | 1.58 |
| | 1.12 |
| 1.05 |
| | 2.63 |
|
Securities purchased under agreements to resell | 0.88 |
| | 0.08 |
| | 0.64 |
| | 0.11 |
| 1.13 |
| | 2.21 |
|
Interest bearing cash | 1.24 |
| | 0.49 |
| | 0.92 |
| | 0.49 |
| |
Interest-bearing cash | | 1.13 |
| | 2.41 |
|
Total other earning assets | 1.03 |
| | 0.25 |
| | 0.82 |
| | 0.29 |
| 1.13 |
| | 2.38 |
|
Interest income / total earning assets | 3.76 | % | | 3.30 | % | | 3.57 | % | | 3.27 | % | 3.94 | % | | 4.49 | % |
Liabilities: | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | |
Savings | 0.50 | % | | 0.23 | % | | 0.46 | % | | 0.22 | % | 0.87 | % | | 1.36 | % |
Other interest-bearing deposits | 0.46 |
| | 0.19 |
| | 0.37 |
| | 0.18 |
| 0.65 |
| | 1.05 |
|
Time deposits | 0.97 |
| | 0.86 |
| | 0.94 |
| | 0.83 |
| 1.67 |
| | 1.91 |
|
Total interest-bearing deposits | 0.51 |
| | 0.26 |
| | 0.46 |
| | 0.25 |
| 0.90 |
| | 1.35 |
|
Federal funds purchased | 1.24 |
| | 0.52 |
| | 0.98 |
| | 0.51 |
| 1.19 |
| | 2.50 |
|
Securities sold under agreements to repurchase | 1.06 |
| | 0.09 |
| | 0.70 |
| | 0.09 |
| 1.36 |
| | 2.06 |
|
Fixed income trading liabilities | 2.19 |
| | 1.76 |
| | 2.26 |
| | 1.91 |
| 1.76 |
| | 3.04 |
|
Other short-term borrowings | 1.22 |
| | 0.61 |
| | 1.24 |
| | 0.70 |
| 1.20 |
| | 3.40 |
|
Term borrowings | 3.51 |
| | 2.67 |
| | 3.24 |
| | 2.52 |
| 4.01 |
| | 4.89 |
|
Interest expense / total interest-bearing liabilities | 0.80 |
| | 0.47 |
| | 0.71 |
| | 0.48 |
| 1.05 |
| | 1.57 |
|
Net interest spread | 2.96 | % | | 2.83 | % | | 2.86 | % | | 2.79 | % | 2.89 | % | | 2.92 | % |
Effect of interest-free sources used to fund earning assets | 0.23 |
| | 0.13 |
| | 0.20 |
| | 0.13 |
| 0.27 |
| | 0.39 |
|
Net interest margin (a) | 3.19 | % | | 2.96 | % | | 3.06 | % | | 2.92 | % | 3.16 | % | | 3.31 | % |
Certain previously reported amounts have been reclassified to agree with current presentation.(a) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 21 percent and, where applicable, state income taxes.
| |
(a) | Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 35 percent and, where applicable, state income taxes. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 84
FHN’s net interest margin is primarily impacted by its balance sheet factors such as interest-bearingmix including the levels of fixed and floating rate loans, rate sensitive and non-rate sensitive liabilities, cash levels, deposit balances, trading inventory levels and commercial loan volume, as well as loan fees and cash basis income, and changes in short-term interest rates. FHN’s balance sheet is positioned to benefit primarily from a rise in short-term interest rates.income. For the remainder of 2017,2020, NIM will also depend on potentially modest loan growth, rate impact from the levelselevated spread of interest-bearing cash;LIBOR to Fed Funds, widening credit spreads, PPP fees, Fixed Income trading inventory and the extent of Fed interest rate increases; commercial loanassets moving to nonaccrual status.
balances, particularly in specialty loan portfolios; and, levels of trading inventory balances. With interest-bearing cash and trading inventory levels, higher balances typically compress margin.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the charge to or credit to earnings that management determines to be necessary to maintain the ALLL at a sufficient level reflecting management’s estimate of probable incurredexpected credit losses in the loan portfolio. ThereProvision expense was no provision for loan losses recognized for$145.0 million in first quarter 2020 calculated under the three months ended September 30, 2017CECL methodology adopted January 1, 2020, compared to a$9.0 million in first quarter 2019 calculated under the “incurred loss” methodology. The increase in provision expense was primarily the result of $4.0 million fora sudden, steep decline in the three months ended September 30, 2016. Foreconomic forecast attributable to the nine months ended September 30, 2017COVID-19 pandemic, and 2016, the provision forto a much less extent associated with loan losses was a credit of $3.0 million and an expense of $11.0 million, respectively. For the three and nine months ended September 30 2017, FHN’s asset quality metrics remained strong. In both third quarter 2017 and 2016, net charge-offs as a percentage of loans was .05 percent. Net charge-offs as a percentage of loans declined to .03 percent for the nine months ended September 30, 2017 from .15 percent for the nine months ended September 30, 2016. The ALLL decreased $7.2 million from year-end to $194.9 million as of September 30, 2017.growth. For additional information about the provision for loan losses refer to the Regional Banking and Non-Strategic sections of the Business Line Review section in this MD&A. For additional information about general asset quality trends refer to the Asset Quality section in this MD&A.
NONINTEREST INCOME
Noninterest income (including securities gains/(losses)) was $112.4$174.8 million in thirdfirst quarter 20172020 and represented 3537 percent of total revenue compared to $148.5$141.0 million in thirdfirst quarter 20162019 and 4532 percent. For the nine months ended September 30, 2017 and 2016 noninterest income was $357.0 million and $428.4 million, respectively, representing 37 percent and 45 percent of total revenue. The decreaseincrease in noninterest income for both 2017 periodsin first quarter 2020 was largelyprimarily driven by lowerhigher fixed income product revenue, andsomewhat offset by a $14.3 million loss from the repurchase of equity securities previously includeddecrease in a financing transaction.deferred compensation income relative to first quarter 2019.
Fixed Income Noninterest Income
Fixed income noninterest income was $55.8$95.6 million and $161.5in first quarter 2020, a 78 percent increase from $53.7 million for the three and nine months ended September 30, 2017, down 22 percent and 25 percent, respectively, from $71.7 million and $216.6 million for the three and nine months ended September 30, 2016.in first quarter 2019. The declineincrease in both periods reflects lower activity due to challenging market conditions (interest rate increases, a flattening yield curve, and lowfirst quarter 2020 was largely driven by elevated levels of commissionable revenues, partially offset by elevated levels of trading losses driven by extreme market volatility).volatility in March 2020. Revenue from other products decreased 16increased 86 percent to $10.7$17.3 million in thirdfirst quarter 20172020 from $12.7$9.3 million in thirdfirst quarter 2016, largely2019, primarily driven by lower fees fromincreases in derivative and loan sales. For the nine months ended September 30, 2017, revenue from other products decreased to $28.2 million from $30.8 million for the nine months ended September 30, 2016. The decline in other product revenue for the year-to-date period of 2017 was largely due to lower fees from portfolio advisory services and derivative sales relative to the same period of 2016. The
The following table summarizes FHN’s fixed income noninterest income for the three and nine months ended September 30, 2017March 31, 2020 and 2016.
Table 2—Fixed Income Noninterest Income
| | | | Three Months Ended September 30 | | Percent Change | | Nine Months Ended September 30 | | Percent Change | | Three Months Ended March 31 | | Percent Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | | 2020 | | 2019 | |
Noninterest income: | | | | | | | | | | | | | | | | | | |
Fixed income | | $ | 45,020 |
| | $ | 59,003 |
| | (24 | )% | | $ | 133,302 |
| | $ | 185,865 |
| | (28 | )% | | $ | 78,354 |
| | $ | 44,472 |
| | 76 | % |
Other product revenue | | 10,738 |
| | 12,745 |
| | (16 | )% | | 28,244 |
| | 30,773 |
| | (8 | )% | | 17,281 |
| | 9,277 |
| | 86 | % |
Total fixed income noninterest income | | $ | 55,758 |
| | $ | 71,748 |
| | (22 | )% | | $ | 161,546 |
| | $ | 216,638 |
| | (25 | )% | | $ | 95,635 |
| | $ | 53,749 |
| | 78 | % |
Deposit Transactions and Cash Management
Fees from deposit transactions and cash management activities increased to $28.0 million in third quarter 2017 from $27.2 million in third quarter 2016 largely driven by higher fee income associated with cash management activities. For the nine months ended September 30, 2017 and 2016 fees from deposit transactions and cash management activities were $80.4 million and $81.0 million respectively. The decrease for the nine months ended September 30, 2017 was primarily the result of lower NSF/overdraft fees in 2017 driven by changes in consumer behavior and a modification of billing practices, but was partially mitigated by an increase in fee income associated with cash management activities.
Brokerage, Management Fees and Commissions
Noninterest income from brokerage, management fees and commissions increased 1022 percent to $11.9or $2.8 million from $12.6 million in thirdfirst quarter 2017 from $10.82019 to $15.4 million in thirdfirst quarter 2016. For the nine months ended September 30, 2017 noninterest income from brokerage, management fees and commissions increased 12 percent to $35.9 million from $31.9 million for the nine months ended September 30, 2016.2020. The increase in both periods was due in large part to increases in recurring revenue driven primarily by growth in FHN's advisory business and favorable market conditions.
Bankcard Income
Bankcard income was $6.2 million and $17.2 million for the three and nine months ended September 30, 2017 compared to $6.3 million and $18.1 million for the three and nine months ended September 30, 2016. The decline in bankcard income for the nine months ended September 30, 2017 relative to the prior yearfirst quarter 2020 was primarily thedriven by higher advisory revenue and annuity income as a result of increased transaction volume.
Deposit Transactions and Cash Management
Fees from deposit transactions and cash management activities were $30.3 million in first quarter 2020, down 4 percent from $31.6 million in first quarter 2019. The decrease in first quarter 2020 is largely due to lower debit
card transaction fees as a result of volume incentives received in 20162019 and lower NSF/overdraft fee income driven by a significant new relationship.
Securities Gains/(Losses)
Net securities gains for the three months ended September 30, 2017 and 2016 were not material. Net securities gains for the nine months ended September 30, 2017 were $.5 million and were primarily the result of the call of a $4.4 million held-to-maturity municipal bond within the regional banking segmentchanges in secondconsumer behavior relative to first quarter 2017. For the nine months ended September 30, 2016, FHN recognized net securities gains of $1.5 million, which was primarily the result of a $1.7 million gain on2019, somewhat offset by an exchange of approximately $294 million of AFS debt securities.increase in fees from cash management activities.
Other Noninterest Income
Other income includes revenues fromrelated to other service charges, ATM and interchange fees, other service charges, mortgage banking (primarily within the non-strategic and regional banking segments), letters of credit fees, dividend income, electronic banking fees, letterinsurance commissions, gain/(loss)
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 85
on the extinguishment of credit fees, revenue related todebt, deferred compensation plans (which are mirrored by changes in noninterest expense), insurance commissions, gains/(losses) on the extinguishment of debt, and various other fees.
Revenue from all other income and commissions decreased to $43 thousand in third quarter 2017 from $21.8$14.4 million in thirdfirst quarter 2016. For the nine months ended September 30, 2017 revenue2020 from all other income and commissions was $29.1$24.6 million down 39 percent from $47.4 million for the nine months ended September 30, 2016.in first quarter 2019. The decrease in all other income and commissions in both periodsfirst quarter 2020 was primarilylargely due to a $14.3$15.0 million loss fromdecrease in deferred compensation income driven by negative equity market valuations. Deferred compensation income fluctuates with changes in the repurchasemarket value of equity securities previouslythe underlying investments and is mirrored
by changes in deferred compensation expense which is included in personnel expense. An increase in other service charges and higher fees from derivative sales relative to first quarter 2019 offset a financing transaction. Additionally, a decrease in mortgage banking income associated with a $4.4 million gain recognized in third quarter 2016 primarily related to recoveries associated with prior legacy mortgage servicing sales and a $1.8 million gain onportion of the sales of property recognized in third quarter 2016 also contributed to theoverall decline in other noninterest income for the three and nine months ended September 30, 2017 relative to the comparative periods of 2016. income.
The following tabletable provides detail regarding FHN’s other income.
Table 3—Other Income
|
| | | | | | | | | | | |
| | Three Months Ended March 31 | | Percent Change |
(Dollars in thousands) | | 2020 | | 2019 | |
Other income: | | | | | | |
Other service charges
| | $ | 5,219 |
| | $ | 3,869 |
| | 35 | % |
ATM and interchange fees | | 4,212 |
| | 3,241 |
| | 30 | % |
Mortgage banking | | 2,431 |
| | 1,886 |
| | 29 | % |
Letter of credit fees | | 1,462 |
| | 1,368 |
| | 7 | % |
Dividend income (a) | | 1,130 |
| | 2,313 |
| | (51 | )% |
Electronic banking fees | | 1,030 |
| | 1,271 |
| | (19 | )% |
Insurance commissions | | 789 |
| | 624 |
| | 26 | % |
Gain/(loss) on extinguishment of debt | | — |
| | (1 | ) | | NM |
|
Deferred compensation (b) | | (9,507 | ) | | 5,474 |
| | NM |
|
Other | | 7,598 |
| | 4,586 |
| | 66 | % |
Total | | $ | 14,364 |
| | $ | 24,631 |
| | (42 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Percent Change | | Nine Months Ended September 30 | | Percent Change |
(Dollars in thousands) | | 2017 | | 2016 | | | 2017 | | 2016 | |
Other income: | | | | | | | | | | | | |
ATM interchange fees | | $ | 3,137 |
| | $ | 3,081 |
| | 2 | % | | $ | 8,998 |
| | $ | 8,918 |
| | 1 | % |
Other service charges | | 2,954 |
| | 3,004 |
| | (2 | )% | | 9,047 |
| | 8,713 |
| | 4 | % |
Mortgage banking | | 1,354 |
| | 5,524 |
| | (75 | )% | | 3,883 |
| | 7,395 |
| | (47 | )% |
Electronic banking fees | | 1,282 |
| | 1,398 |
| | (8 | )% | | 3,911 |
| | 4,176 |
| | (6 | )% |
Letter of credit fees | | 1,211 |
| | 981 |
| | 23 | % | | 3,369 |
| | 3,157 |
| | 7 | % |
Deferred compensation (a) | | 1,128 |
| | 1,038 |
| | 9 | % | | 4,446 |
| | 2,162 |
| | NM |
|
Insurance commissions | | 567 |
| | 1,262 |
| | (55 | )% | | 2,042 |
| | 2,301 |
| | (11 | )% |
Gain/(loss) on extinguishment of debt (b) | | (14,329 | ) | | — |
| | NM |
| | (14,329 | ) | | — |
| | NM |
|
Other | | 2,739 |
| | 5,518 |
| | (50 | )% | | 7,684 |
| | 10,594 |
| | (27 | )% |
Total | | $ | 43 |
|
| $ | 21,806 |
| | NM |
| | $ | 29,051 |
| | $ | 47,416 |
| | (39 | )% |
Certain previously reported amounts have been reclassified to agree with current presentation.
NM – Not meaningful
| |
(a) | Deferred compensationRepresents dividend income from Federal Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB") holdings. Variability largely driven by dividend rate. |
| |
(b) | Amounts are driven by market value adjustmentsconditions and are mirrored by changes in deferred compensation expense which is included in employee compensation incentives, and benefits expense. First quarter 2020 decrease was driven by negative equity market valuations. |
(b) Loss on extinguishment of debt for the three and nine months ended September 30, 2017 relates to the repurchase of equity securities previously included in a financing transaction.
NONINTEREST EXPENSE
Total noninterest expense increased to $236.9$311.3 million in thirdfirst quarter 20172020 from $233.6$296.1 million in thirdfirst quarter 2016.2019. The increase in noninterest expense in thirdfirst quarter 20172020 was primarily driven by an increase in credit expense on unfunded commitments associated with a sudden, steep decline in economic forecast attributable to the COVID-19 pandemic.
To a lesser extent, higher acquisition- and integration-related expenses primarilypersonnel-related expense also contributed to the increase in noninterest expense, somewhat offset by restructuring costs associated with the CBFidentification of efficiency opportunities within the organization, strategic initiatives and Coastal acquisitions and a net increaserebranding expenses recognized in loss accruals related to legal matters compared to thirdfirst quarter 2016. Lower personnel-related expenses and legal fees relative to third quarter 2016 favorably impacted expense in third quarter 2017, offsetting a portion of the net increase in expenses. For the nine months ended September 30, 2017, total noninterest expense decreased 2 percent, or $10.3 million, to $677.0 million from $687.3 million. The decrease in noninterest expense for the year-to-date period was primarily the result of a reduction of loss accruals related to legal matters, lower personnel expenses, and lower legal fees. A net increase in acquisition- and integration-related costs and a smaller expense reversal to the mortgage repurchase provision for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, offset a portion of the expense decline.2019.
Employee Compensation, Incentives, and Benefits
Employee compensation, incentives, and benefits (personnel expense), the largest component of noninterest expense, decreased 5 percent andincreased 3 percent for the three and nine months ended September 30, 2017in first quarter 2020 to $137.8$183.5 million and $411.8from $177.9 million respectively, from $145.1 million and $425.6 million for the three and nine months ended September 30, 2016.in first quarter 2019. The decreaseincrease in personnel expense for both the quarterly and year-to-date periodsin first quarter 2020 was primarily driven by a decrease inhigher variable compensation associated with lower fixed income product sales revenuedue to increased commissionable revenues within FHN’s fixed income operating segment relative to the comparative periods of 2016. For the quarterly period FHN recognized $1.5Fixed Income.
These expense increases were somewhat offset by a $16.6 million of personnel expense related to acquisition- and integration-related expenses, offsetting a portion of the decline in personnel expense. For the nine months ended September 30, 2017, FHN recognized an increase in personnel expenses associated with strategic hires in expansion markets and specialty areas, as well as higher incentive expense associated with loan/deposit growth and retention initiatives within the regional banking segment in 2017. Additionally, FHN recognized $2.9 million of personnel expense related to acquisition- and integration-related expenses during the nine months ended September 30, 2017 and an increasedecrease in deferred compensation expense relative to 2016, which somewhat offset the declinedriven by negative equity market valuations in personnel expenses for the year-to-date period. Personnel expense for the nine months ended September 30, 2017 was favorably impacted by $2.2first quarter 2020 and a $6.4 million of deferred compensation BOLI gains recognizeddecrease in second quarter 2017.
Operations Services
Operations services expense was $10.8 million and $10.5 million for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 operation services expense increased 7 percent to $33.2 million from $30.9 million for the nine months ended September 30, 2016, primarily related to an increase in third party feesrestructuring costs associated with FHN’s online digital banking platform.the identification of efficiency opportunities within the organization.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 86
Professional Fees
Professional fees were $6.6decreased 43 percent or $5.3 million from $12.3 million in thirdfirst quarter 2017 compared2019 to $7.0 million in first quarter 2020. The decrease in professional fees was primarily driven by lower restructuring costs associated with the identification of efficiency opportunities within the organization. Additionally, strategic investments recognized in first quarter 2019 to analyze growth potential and product mix for new markets also contributed to the year-over-year decline in professional fees.
FDIC premium expense
FDIC premium expense increased 58 percent from $4.3 million in first quarter 2019 to $6.7 million in first quarter 2020 driven by balance sheet growth and expected loss severity ratios.
Contract employment and outsourcing
Expenses associated with contract employment and outsourcing increased 46 percent or $1.6 million to $4.9 million in thirdfirst quarter 2016. For the nine months ended September 30, 2017, professional fees increased2020 compared to $21.0$3.4 million from $14.3 million for the nine months ended September 30, 2016. The increase in professional fees for both periods wasfirst quarter 2019, primarily driven by acquisition-merger and integration-related expenses primarily associated with the CBF and Coastal acquisitions.
FDIC Premium Expense
FDIC premium expense was $6.1 million in third quarter 2017, compared to $5.7 million in third quarter 2016. For the nine months ended September 30, 2017 FDIC premium expense was $17.7 million, up from $15.5 million for the nine months ended September 30, 2016. The increase in FDIC premium expense for both periods was due in large part to balance sheet growth.
Legal Fees
Legal fees decreased $2.7 million and $4.7 million during the three and nine months ended September 30, 2017 to $2.1 million and $10.8 million, respectively, from $4.8 million and $15.5 million for the three and nine months ended September 30, 2016. Legal fees fluctuate primarily based on the status, timing, type, and composition of cases or otheracquisition related projects.
Repurchase and Foreclosure Provision
For the three months ended September 30, 2017 and 2016, the mortgage repurchase and foreclosure provision was not material. For the nine months ended September 30, 2017 FHN recognized a $22.6 million reversal of mortgage repurchase and foreclosure provision primarily as a result of the settlement of certain repurchase claims in second quarter 2017, which favorably impacted expenses in 2017. Similarly, during the nine months ended September 30, 2016, FHN recognized a $31.6 million reversal of mortgage repurchase and foreclosure provision as a result of the settlement of certain repurchase claims, which also resulted in a favorable impact on expenses in 2016.
Other Noninterest Expense
Other expense includes losses from litigation and regulatory matters,expenses associated with unfunded commitments, travel and entertainment, expenses, other insurance and tax expense,expenses, expenses associated with the non-service components of net periodic pension and post-retirement cost, supplies, customer relationsrelation expenses, costs associated with employee training and dues, supplies,miscellaneous loan costs, tax credit investments expenses, miscellaneous loan costs,losses from litigation and regulatory matters, expenses associated with OREO, and various other expenses.
All other expenses increased 72 percent to $27.7$33.2 million in thirdfirst quarter 20172020 from $19.9$19.3 million in thirdfirst quarter 2016,2019. The increase was primarily driven by a $7.9an $8.8 million net increase in loss accruals relatedcredit expense on unfunded commitments largely associated with the application of CECL methodology with a sudden, steep decline in economic forecast attributable to legal matters.the COVID-19 pandemic. Additionally, a $2.1 million increase in pension-related costs and $1.0 million of additional credit risk adjustments on Regional Banking interest rate derivatives and swap participations also contributed to the overall increase in all other expenses in thirdfirst quarter 2017 included $2.2 million of acquisition- and integration-related expenses. For the nine months ended September 30, 2017 all other expenses were $70.9 million compared to $88.9 million for the nine months ended September 30, 2016. The decline in all other expenses for the year-to-date period was primarily driven by a decline in loss accruals related to legal matters. In the nine months ended September 30, 2017, FHN experienced a $4.6 million net decrease in fixed asset impairments and lease abandonment charges and a $2.4 million decrease in negative valuation adjustments associated with derivatives2020 related to prior sales of Visa Class B shares, which also contributed to the expense decline during 2017. Additionally,year.
The following table provides detail regarding FHN’s other insurance and taxes decreased to $7.2 million for the nine months ended September 30, 2017 from $9.0 million for the comparable period of 2016 largely driven by favorable adjustments to franchise taxes related to community reinvestment efforts. For the nine months ended September 30, 2017 FHN recognized a $3.2 million charitable contribution to the First Tennessee Foundation, $2.2 million of acquisition- and integration-related expenses previously mentioned, and a $2.0 million vendor payment adjustment, all of which negatively impacted expense for the year-to-date period of 2017 relative to 2016.expense.
Table 4—Other Expense
|
| | | | | | | | | | | |
| | Three Months Ended March 31 | | Percent Change |
(Dollars in thousands) | | 2020 | | 2019 | |
Other expense: | | | | | | |
Credit expense on unfunded commitments (a) | | $ | 9,230 |
| | $ | 396 |
| | NM |
|
Travel and entertainment | | 2,709 |
| | 2,712 |
| | * |
|
Other insurance and taxes | | 2,679 |
| | 2,694 |
| | (1 | )% |
Non-service components of net periodic pension and post-retirement cost | | 2,508 |
| | 432 |
| | NM |
|
Supplies | | 2,411 |
| | 1,804 |
| | 34 | % |
Customer relations | | 2,004 |
| | 1,599 |
| | 25 | % |
Employee training and dues | | 1,341 |
| | 1,457 |
| | (8 | )% |
Miscellaneous loan costs | | 1,094 |
| | 1,027 |
| | 7 | % |
Tax credit investments | | 346 |
| | 675 |
| | (49 | )% |
Litigation and regulatory matters | | 13 |
| | 13 |
| | * |
|
OREO | | (184 | ) | | (366 | ) | | 50 | % |
Other | | 9,075 |
| | 6,888 |
| | 32 | % |
Total | | $ | 33,226 |
| | $ | 19,331 |
| | 72 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Percent Change | | Nine Months Ended September 30 | | Percent Change |
(Dollars in thousands) | | 2017 | | 2016 | | | 2017 | | 2016 | |
Other expense: | | | | | |
|
| | | | | | |
Litigation and regulatory matters | | $ | 8,162 |
| | $ | 260 |
| | NM |
| | $ | 8,403 |
| | $ | 25,785 |
| | (67 | )% |
Travel and entertainment | | 2,798 |
| | 2,478 |
| | 13 | % | | 8,308 |
| | 7,035 |
| | 18 | % |
Other insurance and taxes | | 2,396 |
| | 2,625 |
| | (9 | )% | | 7,229 |
| | 8,952 |
| | (19 | )% |
Customer relations | | 1,361 |
| | 1,442 |
| | (6 | )% | | 4,240 |
| | 4,804 |
| | (12 | )% |
Employee training and dues | | 1,198 |
| | 1,360 |
| | (12 | )% | | 4,194 |
| | 4,088 |
| | 3 | % |
Supplies | | 928 |
| | 1,158 |
| | (20 | )% | | 2,884 |
| | 3,114 |
| | (7 | )% |
Tax credit investments | | 762 |
| | 788 |
| | (3 | )% | | 2,646 |
| | 2,325 |
| | 14 | % |
Miscellaneous loan costs | | 757 |
| | 676 |
| | 12 | % | | 2,078 |
| | 1,958 |
| | 6 | % |
OREO | | 303 |
| | 815 |
| | (63 | )% | | 953 |
| | 125 |
| | NM |
|
Other | | 9,033 |
| | 8,326 |
| | 8 | % | | 29,954 |
| | 30,669 |
| | (2 | )% |
Total | | $ | 27,698 |
|
| $ | 19,928 |
| | 39 | % | | $ | 70,889 |
|
| $ | 88,855 |
| | (20 | )% |
Certain previously reported amounts have been reclassified to agree with current presentation.
NM – Not meaningful
* Amount is less than one percent.
| |
(a) | First quarter 2020 increase largely associated with a sudden, steep decline in economic forecast attributable to the COVID-19 pandemic. |
FHN recorded an income tax provision of $13.6 million in third quarter 2017, compared to $28.5 million in third quarter 2016. For the nine months ended September 30, 2017 and 2016, FHN
FHN recorded an income tax provision of $57.9 $4.8 million and $82.8in first quarter 2020, compared to $27.1 million respectively.in first
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 87
quarter 2019. The effective tax rate for thethree and nine months ended September 30, 2017 wereMarch 31, 2020 was approximately 1622 percent and 20 percent compared to 30 percent and 3121 percent for the three and nine months ended September 30, 2016. FHN’sended March 31, 2019.
The Company’s effective tax rate is favorably affected by recurring items such as bank-owned life insurance, tax-exempt income, and credits and other tax benefits from affordable housing investments. The company’seffective rate is unfavorably affected by the non-deductibility of a portion of the Company's FDIC premium and executive compensation expenses. The Company’s effective tax rate also may be affected by items that may occur in any given periodperiod but are not consistent from period to period, such as changes in the deferred tax asset valuation allowance and changes in unrecognized tax benefits. The decrease in the effective tax rate for the three and nine months ended September 30, 2017 relative to the prior year was primarily related to the reversal of the valuation allowance for the deferred tax asset related to its 2012 federal capital loss carryforward based on capital gain transactions initiated in second quarter 2017. See Note 15 – Income Taxes in the Notes to Consolidated Financial Statements on FHN’s Form 10-K for the year ended December 31, 2016, for additional information related to FHN's valuation allowance related to its capital loss carryforward.
A deferred tax asset (“DTA”) or deferred tax liability (“DTL”) is recognized for the tax consequences of temporary differences between the financial statement carrying amountsamounts and the tax bases of existing assets and liabilities. The tax consequence is calculated by applying enacted statutory tax rates, applicable to future years, to these temporary differences. As of September 30, 2017,March 31, 2020, FHN’s gross DTA (net of a valuation allowance) and gross DTL were $282.3$292.8 million and $91.6$207.6 million, respectively, resulting in a net DTA of $190.7$85.2 million at September 30, 2017,at March 31, 2020, compared with a net DTA of $157.2$69.0 million at September 30, 2016. The increase in the DTA since the third quarter of 2016 is primarily the result of the reversal of a capital loss deferred tax asset valuation allowance. December 31, 2019.
As of September 30, 2017,March 31, 2020, FHN had gross deferred tax asset balances related to federal and state income tax carryforwards of $57.3$37.5 million and $14.1$1.2 million, respectively, which will expire at various dates.
As of September 30, 2017 FHN did not have a valuation allowance against its federal capital loss carryforwards. As of September 30, 2016, FHN's valuation allowance against its federal capital loss carryforwards was $40.3 million. FHN’s gross DTA after valuation allowance was $ 282.3 million and $289.2 million as of September 30, 2017 and 2016, respectively. Based on current analysis, FHN believes that its abilityit will be able to realize the remainingvalue of its DTA and that no valuation allowance is more likely than not.needed. FHN monitors its DTA and the need for a valuation allowance on a quarterly basis. A significant adverse change
RESTRUCTURING, REPOSITIONING, AND EFFICIENCY INITIATIVES
Beginning in FHN’s taxable earnings outlook could result2019, FHN initiated a company-wide review of business practices with the goal of optimizing its expense base to improve profitability and create capacity to reinvest savings into technology and revenue production activities. The net charges for restructuring, repositioning, and efficiency initiatives were immaterial in the need for further valuation allowances. In the event FHN determines that the deferred tax assetsfirst quarter 2020 compared to $12.2 million in first quarter 2019. These expenses are realizable in the future in excess of their net recorded amount, FHN makes an adjustmentprimarily associated with severance and other employee costs and professional fees. Due to the valuation allowance, which reduces the effective tax rate and provision for income taxes.
Tax reform, including the reductionbroad nature of the corporate tax rate, isactions being taken, many components of expense are expected to be onbenefit from the legislative agenda this year. A rate reduction, if enacted, will have a net beneficial effect to FHN over the long-term; however, certain deductions may be eliminated or reduced as a part of tax reform which could reduce the beneficial effect of the rate reduction. Additionally, a rate
reduction would result in the impairment of a portion of the deferred tax asset in the quarter that it is signed into law by the President. The actual impacts are subject to significant uncertainties including whether,current efficiency initiatives. See Note 17 - Restructuring, Repositioning, and to what extent, rate reductions or broader tax reform can actually be executed and, if executed, the timing.Efficiency for additional information.
STATEMENT OF CONDITION REVIEW |
| | | | |
Statement of Condition Review |
Total period-end assets were $29.6$47.2 billion on September 30, 2017,on March 31, 2020, up 49 percent from $28.6$43.3 billion on December 31, 2016. Average2019. The increase in period-end assets increased to $28.9 billion in third quarter 2017 from $28.6 billion in fourth quarter 2016. Awas primarily driven by strong loan growth. Additionally, a net increase in the loan portfoliosother earning assets (primarily trading securities), derivative assets and higher balances of loans held-for-sale significantly contributed to the increase in total assets on a period-end and average basis, but were somewhat offset by a decline in the levels of interest bearing cash on hand during the quarter and at September 30, 2017 relative to December 31, 2016. Additionally, an increase in Fixed income trading inventory on September 30, 2017FHLB stock also contributed to the increase in totalperiod-end assets. These increases were somewhat offset by an increase in the allowance for loan losses due to the Adoption of ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” or (“CECL”) and all related ASUs on January 1, 2020 and additional reserves recognized in first quarter 2020 due to a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic. Average assets on a period-end basis.increased 2 percent to $43.6 billion in first quarter 2020 from $42.9 billion in fourth quarter 2019. The increase in average assets was driven by higher balances of trading securities and securities purchased under agreements to resell (“asset repos”), somewhat offset by lower average loan balances and an increase in the ALLL due to the adoption of CECL.
Total period-end liabilities were $26.7$42.1 billion on September 30, 2017,March 31, 2020, a 310 percent increase from $25.9$38.2 billion on DecemberDecember 31, 2016. Average liabilities increased to $26.0 billion in third quarter 2017, from $25.9 billion in fourth quarter 2016.2019. The net increase in period-end and average liabilities relative to fourth quarter 2016 was primarily due to increases in deposits and
higher balances of short-term borrowings. Deposits decreasedIn first quarter 2020, average liabilities increased to $38.5 billion from $37.8 billion in fourth quarter 2019. The increase in
average liabilities was largely driven by higher balances of short-term borrowings somewhat offset by a decrease in federal funds purchased (“FFP”) relative to fourth quarter 2016 on both a period-end and average basis.2019.
EARNING ASSETS
Earning assets consist of loans, investment securities, loans HFS, and other earning assets such as trading securities and interest-bearing cash, and loans HFS.cash. Average earning assets increased 1 percent and 7 percent to $26.6$38.8 billion in thirdfirst quarter 20172020 from $26.4$38.2 billion and $36.3 billion, respectively, in fourth quarter 2016.2019 and first quarter 2019. A more detailed discussion of the major line items follows.
Loans
Period-end loans increased 37 percent and 19 percent to $20.2$33.4 billion as of September 30, 2017March 31, 2020 from $19.6$31.1 billion on December 31, 20162019 and September 30, 2016. Average loans for third quarter 2017 were $19.8$28.0 billion as of March 31, 2019. The increase is period-end loan balances compared to $19.4 billion for fourth quarter 2016 and $18.7 billion for third quarter 2016. The increase in period-end and average loan balances from fourth and third quarters 2016December 31, 2019 was primarily due to organic growthan increase in several of the commercial loan portfolios within the regional banking segment, somewhat offset by lower balances of
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 88
loans to mortgage companies during the end of March and the continued run-off of consumer loan portfolios within the non-strategic segment. The increase additional commercial line draws. Average loans for first quarter 2020 were $30.5 billion compared to $30.7 billion
in average loan balances from thirdfourth quarter 2016 was also impacted by the purchase of franchise finance loans2019 and $27.3 billion in thirdfirst quarter 2016.2019.
The following table summarizes FHN's average deposits for quarters-ended March 31, 2020 and December 31, 2019.
Table 5—Average Loans
|
| | | | | | | | | | | | | | | | | |
| | Quarter Ended March 31, 2020 | | Quarter Ended December 31, 2019 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Commercial: | | | | | | | | | | |
Commercial, financial, and industrial | | $ | 19,469,572 |
| | 64 | % | | $ | 19,739,937 |
| | 64 | % | | (1 | )% |
Commercial real estate | | 4,421,913 |
| | 14 |
| | 4,263,597 |
| | 14 |
| | 4 |
|
Total commercial | | 23,891,485 |
| | 78 |
| | 24,003,534 |
| | 78 |
| | * |
|
Consumer: | | | | | | | | | | |
Consumer real estate (a) (b) | | 6,134,390 |
| | 20 |
| | 6,194,134 |
| | 20 |
| | (1 | ) |
Credit card, OTC and other | | 498,290 |
| | 2 |
| | 508,651 |
| | 2 |
| | (2 | ) |
Total consumer | | 6,632,680 |
| | 22 |
| | 6,702,785 |
| | 22 |
| | (1 | ) |
Total loans, net of unearned income | | $ | 30,524,165 |
| | 100 | % | | $ | 30,706,319 |
| | 100 | % | | (1 | )% |
|
| | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2017 | | Quarter Ended December 31, 2016 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Commercial: | | | | | | | | | | |
Commercial, financial, and industrial | | $ | 12,474,188 |
| | 63 | % | | $ | 11,987,561 |
| | 62 | % | | 4 | % |
Commercial real estate | | 2,211,831 |
| | 11 |
| | 2,089,314 |
| | 11 |
| | 6 | % |
Total commercial | | 14,686,019 |
| | 74 |
| | 14,076,875 |
| | 73 |
| | 4 | % |
Consumer: | | | | | | | | | | |
Consumer real estate (a) | | 4,398,550 |
| | 22 |
| | 4,545,647 |
| | 23 |
| | (3 | )% |
Permanent mortgage | | 405,287 |
| | 2 |
| | 429,914 |
| | 2 |
| | (6 | )% |
Credit card, OTC and other | | 354,807 |
| | 2 |
| | 361,311 |
| | 2 |
| | (2 | )% |
Total consumer | | 5,158,644 |
| | 26 |
| | 5,336,872 |
| | 27 |
| | (3 | )% |
Total loans, net of unearned income | | $ | 19,844,663 |
| | 100 | % | | $ | 19,413,747 |
| | 100 | % | | 2 | % |
* Amount is less than one percent. | |
(a) | Balance as December 31, 2019 includes $7.1 million of restricted and secured real estate loans. |
| |
(b) | In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability. |
(a) Balance as of September 30, 2017 and December 31, 2016, includes $27.3 million and $37.2 million of restricted and secured real estate loans, respectively.
C&I loans are the largest component of the commercialloan portfolio comprising 8564 percent of average commercialtotal loans in both thirdfirst quarter 20172020 and fourth quarter 2016.2019. C&I loans increased 4declined 1 percent, or $.5 billion, from fourth quarter 2016 due to net2019 largely driven by lower balances within mortgage warehouse lending, partially mitigated by strong loan growth within severalother commercial portfolios of Regional Banking. Growth in other specialty lending areas, such as franchise finance, private client, asset based lending, and healthcare also offset a portion of the regional bank’s portfolios including commercial, asset-based lending ("ABL"), and franchise
finance, somewhat offset by lower balances ofoverall decline in average C&I loans in first quarter 2020 compared to mortgage companies. Commercialfourth quarter 2019.Commercial real estate loans increased 6experienced a net increase of 4 percent to $2.2$4.4 billion in thirdfirst quarter 2017 because of growth in expansion markets and increased funding under existing commitments.2020.
Average consumer loans declined 31 percent or $.2 billion, from fourth quarter 20162019 to $5.2$6.6 billion in thirdfirst quarter 2017. The consumer real estate portfolio (home equity lines and installment loans) declined $147.1 million, to $4.4 billion, as2020, largely driven by the continued wind-down of portfolios within the non-strategicNon-strategic segment outpaced a $148.6 million increaseand declines in real estate installment loans from new originationshome equity lines of credit within the regional bankingRegional Banking segment.The permanent mortgage portfolio declined $24.6 million to $405.3 million in third quarter 2017 driven by run-off of legacy assets within the non-strategic segment offset by some growth in mortgage loans within regional banking, primarily related to FHN’s CRA initiatives. Credit Card and Other decreased $6.5 million to $354.8 million in third quarter 2017.
Investment Securities
FHN’s investment portfolio consists principally of debt securities including government agency issued mortgage-backed securities (“MBS”) and government agency issued collateralized mortgage obligations (“CMO”), substantially all of which are classified as available-for-sale (“AFS”). FHN utilizes the securities portfolio as a source of income, liquidity and collateral for repurchase agreements, for public funds, and as a tool for managingmanaging risk of interest rate movements. InvestmentPeriod-end investment securities were $4.0were $4.6 billion on March 31, 2020 compared to $4.5 billion on September 30, 2017 and December 31, 20162019.
Average investment securities were $4.5 billion in first quarter 2020 and averaged $4.0$4.4 billion in third quarter 2017 and fourth quarter 2016,2019, representing 1512 percent of average earning assets in both periods.first quarter 2020 and fourth quarter 2019. The increase in period-end and average investment securities was driven by FHN's reinvestment strategy in 2020. FHN manages the size and mix of the investment portfolio to assist in asset
liability management, provide liquidity, and optimize risk adjusted returns.
Loans Held-for-Sale
Loans HFS consists of small business, other consumer loans, the mortgage warehouse, (primarily repurchased government-guaranteed loans), USDA, student, and home equity loans. On September 30, 2017March 31, 2020, loans HFSHFS were $339.8$595.6 million compared to $111.2and $593.8 million, on December 31, 2016.respectively. The average balance of loans HFS increased to $540.1$590.5 million in thirdfirst quarter 20172020 from $127.5$581.8 million in fourth quarter 2016.2019. The increase in period-end and average loans HFS was primarily driven by the Coastal acquisition, which resulted in an increase in small business loans, and the addition ofsomewhat offset by a decrease in USDA loans.
Other Earning Assets
Other earning assets include trading securities, securities purchased under agreements to resell ("asset repos"), federal funds sold (“FFS”), and interest-bearing deposits with the Fed and other financial institutions. Other earning assetsassets averaged $2.2$3.2 billion in thirdfirst quarter 2017, down2020, a 28 percent increase from $2.8$2.5 billion in fourth quarter 2016.2019. The decreaseincrease in average other earning assets was primarily driven by lower levels of interest bearing cash as a result of loan growth and the Coastal acquisition. Additionally,increases in fixed income trading securitiesinventory and securities purchased under agreementsasset repos relative to resell ("asset repos") decreased from fourth quarter 2016.2019. Fixed income's trading inventory fluctuates daily based on customer demand. Asset repos are used in fixed income trading activity and generally fluctuate with the level of fixed income trading liabilities (short-positions) as securities collateral from asset repo transactions are used to fulfill trades. Other earning assets were $2.8$3.1 billion on September 30, 2017, a 7 percent increaseMarch 31, 2020, up from $2.6$2.5 billion on December 31, 2016. The increase in other earning assets on a period-end basis were2019, primarily driven by an increaseincreases in fixed income trading securities, offset by a decline ininventory and interest-bearing cash.
The following table summarizes FHN's average other earning assets for quarters-ended March 31, 2020 and December 31, 2019.
Table 6—Average Other Earning Assets
|
| | | | | | | | | | | | | | | | | |
| | Quarter Ended March 31, 2020 | | Quarter Ended December 31, 2019 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Other earning assets | | | | | | | | | | |
Trading securities | | $ | 1,831,492 |
| | 57 | % | | $ | 1,263,633 |
| | 50 | % | | 45 | % |
Securities purchased under agreements to resell | | 816,794 |
| | 25 |
| | 645,979 |
| | 26 |
| | 26 |
|
Interest-bearing cash | | 548,036 |
| | 17 |
| | 586,495 |
| | 23 |
| | (7 | ) |
Federal funds sold | | 10,192 |
| | 1 |
| | 9,700 |
| | 1 |
| | 5 |
|
Total other earning assets | | $ | 3,206,514 |
| | 100 | % | | $ | 2,505,807 |
| | 100 | % | | 28 | % |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 89
Non-earning assets
Period-end non-earning assets increased $55.0 million to $2.3were $5.5 billion and $4.7 billion on September 30, 2017.March 31, 2020 and December 31, 2019, respectively, driven largely by increases in derivative assets, equity investments (primarily FHLB stock), and fixed income receivables, partially offset by an increase in the ALLL and a decrease in cash balances. Derivative assets and fixed income receivable balances were higher as a result of extreme market volatility during first quarter 2020 and an increase in required margin posting. The increase in non-earning assetsthe ALLL was primarily due to increases in Fixed income receivables, goodwillthe adoption of ASU 2016-13 (CECL) on January 1, 2020 and intangible assetsadditional reserves established during first quarter 2020 associated with the Coastal acquisition, as well as the addition of LIHTC investments in third quarter 2017, but was somewhat offset by a sudden, steep decline in derivative assets and lower cash balances.the economic forecast attributable to the COVID-19 pandemic.
Deposits
Average deposits were $22.1increased to $32.9 billion during thirdfirst quarter 2017, down 1 percent2020 from $22.3$32.8 billion duringin fourth quarter 20162019 and up 5 percent from $21.1$32.5 billion in thirdfirst quarter 2016.2019. The decreaseincrease in average deposits from fourth quarter 20162019 was primarily driven by FHN's decision to decreasea seasonal influx of consumer deposits (both non-interest bearing and interest bearing), coupled with an increase in market-indexed deposit balances and use alternate sources of wholesale funding to support loan growth; however, this decline was somewhatdeposits, partially offset by increases in consumerlower commercial interest (largely priority and other consumer savings), non-interest bearing deposits and commercial customer deposits. The increase in average deposits from thirdfirst quarter 20162020 relative to first quarter 2019 was largely due todriven by increases in non-interest
bearing and consumer interest non-interest bearingdeposits as a result of FHN’s strategic focus on growing deposits during 2019, partially offset by decreases in commercial interest and market-indexed deposits. FHN's mix of interest-bearing deposits and commercial customernoninterest-bearing deposits somewhat offset by a decrease in market-indexed deposits. remained relatively consistent between periods.
Period-end deposits were $22.1increased 6 percent to $34.4 billion on September 30, 2017, down 3 percentMarch 31, 2020, from $22.7$32.4 billion on December 31, 2016,2019 and up 2 percent from $21.6$32.5 billion on September 30, 2016.
FHN experienced deposit growth within consumer interest, commercial interest and non-interest bearing deposits from September 30, 2016 and DecemberMarch 31, 2016 to September 30, 2017. Market-indexed deposits decreased from September 30, 2016 and December 31, 2016 to September 30, 2017; however the decrease from year-end was much more significant, more than offsetting other deposit growth and resulting2019. The increase in the net decrease in total deposits from December 31, 2016 on a period-end basis.2019 and March 31, 2019 was largely the result of management’s decision to increase market-indexed deposits (given the favorable benefits of this funding source in lower interest-rate environments) to fund loan growth, as well as significant deposit inflows in March 2020 as brokerage customers exited equity markets to move in cash positions given the market volatility associated with the COVID-19 pandemic.
The following table summarizes FHN's average deposits for quarters-ended March 31, 2020 and December 31, 2019.
Table 6—7—Average Deposits
| | | | Quarter Ended September 30, 2017 | | Quarter Ended December 31, 2016 | | | | Quarter Ended March 31, 2020 | | Quarter Ended December 31, 2019 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | |
Consumer interest | | $ | 9,244,021 |
| | 42 | % | | $ | 8,641,507 |
| | 39 | % | | 7 | % | |
Commercial interest | | 2,876,398 |
| | 13 |
| | 2,819,980 |
| | 13 |
| | 2 | % | |
Consumer | | | $ | 13,760,968 |
| | 42 | % | | $ | 13,718,820 |
| | 42 | % | | * |
|
Commercial | | | 6,006,364 |
| | 18 |
| | 6,145,681 |
| | 19 |
| | (2 | ) |
Market-indexed (a) | | 3,523,450 |
| | 16 |
| | 4,787,912 |
| | 21 |
| | (26 | )% | | 4,448,587 |
| | 14 |
| | 4,370,025 |
| | 13 |
| | 2 |
|
Total interest-bearing deposits | | 15,643,869 |
| | 71 |
| | 16,249,399 |
| | 73 |
| | (4 | )% | | 24,215,919 |
| | 74 |
| | 24,234,526 |
| | 74 |
| | * |
|
Noninterest-bearing deposits | | 6,411,160 |
| | 29 |
| | 6,039,025 |
| | 27 |
| | 6 | % | | 8,666,087 |
| | 26 |
| | 8,542,521 |
| | 26 |
| | 1 |
|
Total deposits | | $ | 22,055,029 |
| | 100 | % | | $ | 22,288,424 |
| | 100 | % | | (1 | )% | | $ | 32,882,006 |
| | 100 | % | | $ | 32,777,047 |
| | 100 | % | | * |
|
(a) Market-indexed deposits are tied to an index not administered by FHN and are comprised of insured network deposits, correspondent banking deposits, and trust/sweep deposits.* Amount is less than one percent.
| |
(a) | Market-indexed deposits are tied to an index not administered by FHN and are comprised of insured network deposits, correspondent banking deposits, and trust/sweep deposits. |
Short-Term Borrowings
Short-term borrowings (federal funds purchased (“FFP”), securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings) averaged $2.3$4.0 billion in thirdfirst quarter 2017,2020, up 2220 percent from $1.9$3.3 billion in fourth quarter 2016. The2019. As noted in the table below, the increase in short-term borrowings between thirdfirst quarter 20172020 and fourth quarter 20162019 was primarily due todriven by increases in other short-termshort-term borrowings and securities sold under agreements to repurchase,trading liabilities, partially offset by lower levels of FFP and trading liabilities.a decrease in FFP. Other short-term borrowings balances fluctuate largely based on
the level of FHLB borrowing as a result of loan demand, deposit levels and balance sheet funding strategies. Average securities sold under agreements to repurchase increased in third quarter 2017, primarily due to the Coastal acquisition. AverageTrading liabilities fluctuates based on expectations of customer demand. FFP fluctuates depending on the amount of excess funding of FHN’s correspondent bank customers and average trading liabilities fluctuates based on expectations of customer demand.customers. Period-end short-term borrowings increased 44 percent to $3.0$5.8 billion on September 30, 2017March 31, 2020 from $1.5$4.0 billion on December 31, 2016. The increase in short-term borrowings on a period-end basis was2019, primarily driven by an increase in other short-term borrowings, (primarily FHLB advances) which management uses assomewhat offset by a decreases in FFP. The increase in short-term borrowings was used to fund commercial loan growth including an additional sourceuptick in loans to mortgage companies in the latter part of wholesale funding to support loan growth.the quarter.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 90
Table 7—8—Average Short-Term Borrowings
| | | | Quarter Ended September 30, 2017 | | Quarter Ended December 31, 2016 | | | | Quarter Ended March 31, 2020 | | Quarter Ended December 31, 2019 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Short-term borrowings: | | | | | | | | | | | | | | | | | | | | |
Federal funds purchased | | $ | 376,150 |
| | 16 | % | | $ | 528,266 |
| | 28 | % | | (29 | )% | |
Securities sold under agreements to repurchase | | 680,366 |
| | 30 |
| | 378,837 |
| | 20 |
| | 80 | % | | $ | 777,692 |
| | 20 | % | | $ | 701,213 |
| | 21 | % | | 11 | % |
Trading liabilities | | 597,269 |
| | 26 |
| | 745,011 |
| | 39 |
| | (20 | )% | | 750,520 |
| | 19 |
| | 585,889 |
| | 18 |
| | 28 |
|
Federal funds purchased | | | 746,686 |
| | 19 |
| | 1,163,701 |
| | 35 |
| | (36 | ) |
Other short-term borrowings | | 655,599 |
| | 28 |
| | 243,527 |
| | 13 |
| | NM |
| | 1,686,690 |
| | 42 |
| | 844,558 |
| | 26 |
| | NM |
|
Total short-term borrowings | | $ | 2,309,384 |
| | 100 | % | | $ | 1,895,641 |
| | 100 | % | | 22 | % | | $ | 3,961,588 |
| | 100 | % | | $ | 3,295,361 |
| | 100 | % | | 20 | % |
NM - Not meaningful | | | | | | | | | | | |
NM – Not meaningful
Term Borrowings
Term borrowings include senior and subordinated borrowings with original maturities greater than one year. TermAverage term borrowings were $1.1$.8 billion in first quarter 2020 and $1.0$.9 billion in fourth quarter 2019. Period-end term borrowings were $.8 billion on September 30, 2017March 31, 2020 and December 31, 2016, respectively. Average term borrowings2019. In April 2020, First Horizon Bank issued $450 million of subordinated notes.
increased $48.5 million from fourth quarter 2016 to $1.1 billion in third quarter 2017 primarily driven by a temporary increase in secured borrowings associated with a financing transaction.
Other Liabilities
Period-end other liabilitiesliabilities were $.6$1.2 billion on March 31, 2020, up from $1.0 billion on September 30, 2017 and December 31, 2016.2019, primarily driven by increases in derivative liabilities and fixed income payables.
Management’s objectives are to provide capital sufficient to cover the risks inherent in FHN’s businesses, to maintain excess capital to well-capitalized standards, and to assure ready access to the capitalcapital markets. Period-end equity increased to $ 2.9 billion on September 30, 2017decreased $20.4 million from $2.7$5.1 billion on December 31, 2016 primarily due2019 to $5.1 billion on March 31, 2020. Average equity decreased $37.5 million to $5.0 billion in first quarter 2020 from $5.0 billion in fourth quarter 2019. The decrease in period-end and average equity was largely attributable to the adoption impact of ASU 2016-13 (CECL) which
resulted in a net decrease to retained earnings of $96.1 million on January 1, 2020, coupled with common and preferred dividends paid, somewhat offset by net income recognized since fourth quarter 2016, partially offset by common and preferred dividends paid. Average equity increased $119.9 million to $2.9 billion2019. A decrease in third quarter 2017 from fourth quarter 2016, as the impact of net income less dividends paid on equity recognized in the nine months ended September 30, 2017 on an average basis was somewhat offset by a decrease attributable to average accumulated other comprehensive income. The decline attributable to average accumulated other comprehensive income was("AOCI"), largely the result of unrealized losses recognized on the AFS securities portfolio, as well as an increase of net actuarial losses for pensionin unrealized gains associated with AFS debt securities partially mitigated the decrease in period-end and post retirement plans.average equity.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 91
The following tables provide a reconciliation of Shareholders’ equity from the Consolidated Condensed Statements of Condition to Common Equity Tier 1, Tier 1 and Total Regulatory Capital as well as certain selected capital ratios:
Table 8—9—Regulatory Capital and Ratios
|
| | | | | | | | |
(Dollars in thousands) | | March 31, 2020 | | December 31, 2019 |
Shareholders’ equity | | $ | 4,760,149 |
| | $ | 4,780,577 |
|
Modified CECL transitional amount (a) | | 132,811 |
| | — |
|
FHN non-cumulative perpetual preferred | | (95,624 | ) | | (95,624 | ) |
Common equity | | $ | 4,797,336 |
| | $ | 4,684,953 |
|
Regulatory adjustments: | | | | |
Disallowed goodwill and other intangibles | | (1,501,286 | ) | | (1,505,971 | ) |
Net unrealized (gains)/losses on securities available-for-sale | | (119,357 | ) | | (31,079 | ) |
Net unrealized (gains)/losses on pension and other postretirement plans | | 271,809 |
| | 273,914 |
|
Net unrealized (gains)/losses on cash flow hedges | | (16,288 | ) | | (3,227 | ) |
Disallowed deferred tax assets | | (9,502 | ) | | (8,610 | ) |
Other deductions from common equity tier 1 | | (949 | ) | | (1,044 | ) |
Common equity tier 1 | | $ | 3,421,763 |
| | $ | 3,408,936 |
|
FHN non-cumulative perpetual preferred | | 95,624 |
| | 95,624 |
|
Qualifying noncontrolling interest—First Horizon Bank preferred stock | | 294,816 |
| | 255,890 |
|
Tier 1 capital | | $ | 3,812,203 |
| | $ | 3,760,450 |
|
Tier 2 capital | | 507,181 |
| | 394,435 |
|
Total regulatory capital | | $ | 4,319,384 |
| | $ | 4,154,885 |
|
Risk-Weighted Assets | | | | |
First Horizon National Corporation | | $ | 40,055,114 |
| | $ | 37,045,782 |
|
First Horizon Bank | | 39,670,943 |
| | 36,626,993 |
|
Average Assets for Leverage | | | | |
First Horizon National Corporation | | 42,348,418 |
| | 41,583,446 |
|
First Horizon Bank | | 41,632,972 |
| | 40,867,365 |
|
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 |
Shareholders’ equity | | $ | 2,588,120 |
| | $ | 2,409,653 |
|
FHN non-cumulative perpetual preferred | | (95,624 | ) | | (95,624 | ) |
Common equity | | $ | 2,492,496 |
| | $ | 2,314,029 |
|
Regulatory adjustments: | | | | |
Disallowed goodwill and other intangibles | | (229,555 | ) | | (165,292 | ) |
Net unrealized (gains)/losses on securities available-for-sale | | 5,940 |
| | 17,232 |
|
Net unrealized (gains)/losses on pension and other postretirement plans | | 224,686 |
| | 229,157 |
|
Net unrealized (gains)/losses on cash flow hedges | | 1,758 |
| | 1,265 |
|
Disallowed deferred tax assets | | (17,637 | ) | | (18,027 | ) |
Other deductions from common equity tier 1 | | (478 | ) | | (377 | ) |
Common equity tier 1 | | $ | 2,477,210 |
| | $ | 2,377,987 |
|
FHN non-cumulative perpetual preferred | | 95,624 |
| | 95,624 |
|
Qualifying noncontrolling interest—FTBNA preferred stock | | 250,409 |
| | 256,811 |
|
Other deductions from tier 1 | | (58,463 | ) | | (58,551 | ) |
Tier 1 capital | | $ | 2,764,780 |
| | $ | 2,671,871 |
|
Tier 2 capital | | 240,418 |
| | 254,139 |
|
Total regulatory capital | | $ | 3,005,198 |
| | $ | 2,926,010 |
|
Risk-Weighted Assets | | | | |
First Horizon National Corporation | | $ | 24,678,030 |
| | $ | 23,914,158 |
|
First Tennessee Bank National Association | | 24,186,100 |
| | 23,447,251 |
|
Average Assets for Leverage | | | | |
First Horizon National Corporation | | 28,793,816 |
| | 28,581,251 |
|
First Tennessee Bank National Association | | 27,962,251 |
| | 27,710,158 |
|
|
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| | Ratio | | Amount | | Ratio | | Amount |
Common Equity Tier 1 | | | | | | | | |
First Horizon National Corporation | | 8.54 | % | | $ | 3,421,763 |
| | 9.20 | % | | $ | 3,408,936 |
|
First Horizon Bank | | 8.70 |
| | 3,450,974 |
| | 9.38 |
| | 3,433,867 |
|
Tier 1 | | | | | | | | |
First Horizon National Corporation | | 9.52 |
| | 3,812,203 |
| | 10.15 |
| | 3,760,450 |
|
First Horizon Bank | | 9.44 |
| | 3,745,790 |
| | 10.18 |
| | 3,728,683 |
|
Total | | | | | | | | |
First Horizon National Corporation | | 10.78 |
| | 4,319,384 |
| | 11.22 |
| | 4,154,885 |
|
First Horizon Bank | | 10.37 |
| | 4,113,057 |
| | 10.77 |
| | 3,944,613 |
|
Tier 1 Leverage | | | | | | | | |
First Horizon National Corporation | | 9.00 |
| | 3,812,203 |
| | 9.04 |
| | 3,760,450 |
|
First Horizon Bank | | 9.00 |
| | 3,745,790 |
| | 9.12 |
| | 3,728,683 |
|
| |
(a) | The modified CECL transitional amount is calculated as defined in the CECL interim final rule issued by the banking regulators on March 27, 2020 and includes the full amount of the impact to retained earnings from the initial adoption of CECL plus 25 percent of the change in the adjusted allowance for credit losses (“AACL”) since FHN’s initial adoption of CECL through March 31, 2020. |
|
| | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Ratio | | Amount | | Ratio | | Amount |
Common Equity Tier 1 | | | | | | | | |
First Horizon National Corporation | | 10.04 | % | | $ | 2,477,210 |
| | 9.94 | % | | $ | 2,377,987 |
|
First Tennessee Bank National Association | | 9.53 |
| | 2,304,244 |
| | 9.80 |
| | 2,298,080 |
|
Tier 1 | | | | | | | | |
First Horizon National Corporation | | 11.20 |
| | 2,764,780 |
| | 11.17 |
| | 2,671,871 |
|
First Tennessee Bank National Association | | 10.47 |
| | 2,532,669 |
| | 10.83 |
| | 2,538,382 |
|
Total | | | | | | | | |
First Horizon National Corporation | | 12.18 |
| | 3,005,198 |
| | 12.24 |
| | 2,926,010 |
|
First Tennessee Bank National Association | | 11.32 |
| | 2,738,372 |
| | 11.78 |
| | 2,762,271 |
|
Tier 1 Leverage | | | | | | | | |
First Horizon National Corporation | | 9.60 |
| | 2,764,780 |
| | 9.35 |
| | 2,671,871 |
|
First Tennessee Bank National Association | | 9.06 |
| | 2,532,669 |
| | 9.16 |
| | 2,538,382 |
|
Banking regulators define minimum capital ratios for bank holding companies and their bank subsidiaries. Based on the capital rules and definitions prescribed by the banking regulators, should any depository institution’s capital ratios decline below predetermined levels, it would become subject to a series of increasingly restrictive regulatory actions. The system categorizes a depository institution’s
capital position into one of five categories ranging from well-capitalized to critically under-capitalized. For an
institution the size of FHN to qualify as well-capitalized, Common Equity Tier 1, Tier 1 Capital, Total Capital, and Leverage capital ratios must be at least 6.5 percent, 8 percent, 10 percent, and 5 percent, respectively. respectively. Furthermore, beginning January 1, 2019, a capital conservation buffer of 50 basis points above these levels
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 92
must be maintained on the Common Equity Tier 1, Tier 1 Capital and Total Capital ratios to avoid restrictions on dividends, share repurchases and certain discretionary bonuses.
As of September 30, 2017,March 31, 2020, each of FHN and FTBNAFirst Horizon Bank had sufficient capital to qualify as well-capitalized institutions. FHN also had sufficient capital to meet the capital conservation buffer requirement while First Horizon Bank fell slightly below based on its Total Capital Ratio. (See discussion on dividend limitations for First Horizon Bank in the “Liquidity Risk Management” section of this MD&A.) In April 2020, First Horizon Bank generated additional Tier 2 capital through the issuance of $450 million of subordinated notes. The first quarter 2020 capital ratios for both FHN and First Horizon Bank are calculated under the interim final rule issued by the banking regulators in late March 2020 to delay the effects of CECL on regulatory capital for two years, followed by a well-capitalized institution.three-year transition period. For both FHN and First Horizon Bank, the risk-based regulatory capital ratios remained consistentdecreased in the thirdfirst quarter of 20172020 relative to fourth quarter 2016 as the capital generated from net income less dividends offset the impact of2019 primarily due to increased disallowed intangiblerisk-weighted assets relateddue to the Coastal acquisition, the continued phased-in implementation of the Basel III regulations,period-end commercial loan growth (primarily loans to mortgage companies) and higher draw activity in March, coupled with an increase in risk-weightedmarket risk assets primarily asdriven by a result of increased period end loans. Over the same period, the regulatory capital ratios for FTBNA declinedspike in VaR due primarily to common dividends paid to the parent company to provide additional liquidity for the CBF acquisition. For fourth quarter 2017 and through 2018,extreme volatility in March. During 2020, capital ratios are expected to remain above well-capitalized standards.
Common Stock Purchase Programs
Pursuant to board authority, FHN may repurchase shares of its common stock from time to time and will evaluate the level of capital and take action designed to generate or use capital, as appropriate, for the interests of the shareholders, subject to legal and regulatory restrictions. Two common stock purchase programs currently authorized are discussed below. FHN’s board has not authorized a preferred stock purchase program.
General Program. Authority
On January 22, 2014,23, 2018, FHN announced a $100$250 million share purchase authority with an expiration date of January 31, 2016.2020. On July 21, 2015,January 29, 2019, FHN announced a $100$250 million increase in that authority along with an extension of the expiration date to January 31, 2017, and on April 26, 2016, FHN announced a $150 million increase and further extension to January 31, 2018. The program currently authorizes total purchases of up to $350 million and expires on January 31, 2018. As of September 30, 2017, $160.3 million in purchases had been made under this authority at an average price per share of $12.86, $12.84 excluding commissions.2021. Purchases may be made in the open market or through privately negotiated transactions and are subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions. During third quarter 2017, FHN did not repurchase any common sharesAs of March 31, 2020, $229.3 million in purchases had been made under the program. In third quarter 2016 FHN repurchased $7.1 millionthis authority at an average price per share of common shares under the program. FHN$15.09, $15.07 excluding commissions. Management currently does not anticipate repurchasing anypurchasing a material number of shares under this authorization throughauthority during the closingfirst half of 2020 due to the CBF Bank acquisition.pending merger of equals with IBKC.
The following tables provide information related to securities repurchased by FHN during third quarter 2017:
Table 9a—10a—Issuer Purchases of Common Stock
- General Repurchase Authority:
Authority
|
| | | | | | | | | | | | |
(Dollar values and volume in thousands, except per share data) | | Total number
of shares
purchased | | Average price
paid per share | | Total number of
shares purchased
as part of publicly
announced programs | | Maximum approximate dollar value that may yet be purchased under the programs |
2017 | | | | | | | | |
July 1 to July 31 | | — |
| | N/A | | — |
| | $ | 189,690 |
|
August 1 to August 31 | | — |
| | N/A | | — |
| | $ | 189,690 |
|
September 1 to September 30 | | — |
| | N/A | | — |
| | $ | 189,690 |
|
Total | | — |
| | N/A | | — |
| | |
|
| | | | | | | | | | | | |
(Dollar values and volume in thousands, except per share data) | | Total number of shares purchased | | Average price paid per share (a) | | Total number of shares purchased as part of publicly announced programs | | Maximum approximate dollar value that may yet be purchased under the programs |
2020 | | | | | | | | |
January 1 to January 31 | | — |
| | NA | | — |
| | $ | 270,654 |
|
February 1 to February 29 | | — |
| | NA | | — |
| | 270,654 |
|
March 1 to March 31 | | — |
| | NA | | — |
| | 270,654 |
|
Total | | — |
| | N/A | | — |
| | |
N/A—Not applicable(a) Represents total costs including commissions paid.
Compensation Plan Program.Authority
A consolidated compensation plan share purchase program was announced on August 6, 2004. This program consolidated into a single share purchase program all of the previously authorized compensation plan share programs as well as the renewal of the authorization to purchase shares for use in connection with two compensation plans for which the share purchase authority had expired.
The total amount authorized under this consolidated compensation plan share purchase program, inclusive of a program amendment on April 24, 2006, is 29.6 million shares calculated before adjusting for stock dividends distributed through January 1, 2011. The authorization has been reduced for that portion which relates to compensation plans for which no options remain outstanding. The shares may be purchased over the option exercise period of the various compensation plans on or before December 31, 2023. On September 30, 2017, the maximum number of shares that may be purchased under the program was 25.5 million shares. Purchases may be made in the
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 93
open market or through privately negotiated transactions and are subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions. As of March 31, 2020, the
maximum number of shares that may be purchased under the program was 24.3 million shares. Management currently does not anticipate purchasing a material number of shares under this authority during the fourth quarter 2017 or through 2018.2020.
Table 9b—10b—Issuer Purchase of Common Stock
- Compensation Plan-Related Repurchase Authority:
Authority
|
| | | | | | | | | | | | | |
(Volume in thousands, except per share data) | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced programs | | Maximum number of shares that may yet be purchased under the programs |
2017 | | | | | | | | |
July 1 to July 31 | | 2 |
| | $ | 17.50 |
| | 2 |
| | 25,475 |
|
August 1 to August 31 | | 16 |
| | $ | 17.70 |
| | 16 |
| | 25,459 |
|
September 1 to September 30 | | * |
| | $ | 17.82 |
| | * |
| | 25,458 |
|
Total | | 18 |
| | $ | 17.68 |
| | 18 |
| | |
* - Amount less than 500 shares
|
| | | | | | | | | | | | | |
(Volume in thousands, except per share data) | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced programs | | Maximum number of shares that may yet be purchased under the programs |
2020 | | | | | | | | |
January 1 to January 31 | | 26 |
| | $ | 16.81 |
| | 26 |
| | 24,431 |
|
February 1 to February 29 | | 7 |
| | 16.30 |
| | 7 |
| | 24,424 |
|
March 1 to March 31 | | 108 |
| | 14.05 |
| | 108 |
| | 24,316 |
|
Total | | 141 |
| | $ | 14.67 |
| | 141 |
| | |
ASSET QUALITY
Loan Portfolio Composition
FHN groups its loans into portfolio segments based on internal classifications reflecting the manner in which the ALLL is established and how credit risk is measured, monitored, and reported. From time to time, and if conditions are such that certain subsegments are uniquely affected by economic or market conditions or are experiencing greater deterioration than other components of the loan portfolio, management may determine the ALLL at a more granular level. Commercial loans are composed of commercial, financial, and industrial (“C&I”) and commercial real estate (“CRE”). Consumer loans are composed of consumer real estate; permanent mortgage; and credit card and other. In first quarter 2020, FHN consolidated its permanent mortgage portfolio into consumer real estate. Loans previously classified in permanent mortgage included primarily jumbo mortgages and one-time-close (“OTC”) completed construction loans in the non-strategic segment that were originated through pre-2009 mortgage businesses. FHN has a concentration of residential real estate loans (24 percent of total loans), the majority of which is in the consumer real estate portfolio (22 (19 percent of total loans). Industry concentrations are discussed under the heading C&I below.
Consolidated key asset quality metrics for each of these portfolios can be foundfound in Table 17 – Asset QualityQuality by Portfolio. Credit underwriting guidelines are outlined in Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016,2019, in the Loan Portfolio Composition discussion in the Asset Quality Section
beginning on page 2667 and continuing to page 46.87. FHN’s credit underwriting guidelines and loan product offerings as of September 30, 2017,March 31, 2020, are generally consistent with those reported and disclosed in the Company’s Form 10-K for the year ended December 31, 2016.2019.
COMMERCIAL LOAN PORTFOLIOS
C&I
The C&I portfolio was $12.8$22.1 billion on September 30, 2017,March 31, 2020, and is comprised of loans used for general business purposes and primarily composed of relationship customers in Tennessee and other selected markets.purposes. Typical products include working capital lines of credit, term loan financing of owner-occupied real estate and fixed assets, and trade credit enhancement through letters of credit.credit. The largest geographical concentrations of balances as of March 31, 2020, are in Tennessee (29 percent), North Carolina (10 percent), California (9 percent), Texas (6 percent), Florida (6 percent), Georgia (4 percent), South Carolina (3 percent), and Virginia (3 percent), with no other state representing more than 3 percent of the portfolio.
The following table provides the composition of the C&I portfolio by industry as of September 30, 2017,March 31, 2020, and December 31, 2016.2019. For purposes of this disclosure, industries are determined based on the North American Industry Classification System (“NAICS”) industry codes used by Federal statistical agencies in classifying business establishments for the collection, analysis, and publication of statistical data related to the U.S. business economy.
Table 10—11—C&I Loan Portfolio by Industry
|
| | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent |
Industry: | | | | | | | | |
Finance & insurance | | $ | 2,844,411 |
| | 22 | % | | $ | 2,573,713 |
| | 21 | % |
Loans to mortgage companies | | 1,966,155 |
| | 15 |
| | 2,045,189 |
| | 17 |
|
Health care & social assistance | | 966,706 |
| | 8 |
| | 893,629 |
| | 7 |
|
Real estate rental & leasing (a) | | 943,496 |
| | 7 |
| | 769,457 |
| | 6 |
|
Wholesale trade | | 938,663 |
| | 7 |
| | 826,226 |
| | 7 |
|
Accommodation & food service | | 913,774 |
| | 7 |
| | 987,973 |
| | 8 |
|
Manufacturing | | 870,324 |
| | 7 |
| | 762,947 |
| | 6 |
|
Public administration | | 583,834 |
| | 5 |
| | 565,119 |
| | 5 |
|
Transportation & warehousing | | 583,432 |
| | 5 |
| | 578,586 |
| | 5 |
|
Other (education, arts, entertainment, etc) (b) | | 2,181,049 |
| | 17 |
| | 2,145,248 |
| | 18 |
|
Total C&I loan portfolio | | $ | 12,791,844 |
| | 100 | % | | $ | 12,148,087 |
| | 100 | % |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 94
|
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent |
Industry: | | | | | | | | |
Loans to mortgage companies | | $ | 5,713,914 |
| | 26 | % | | $ | 4,410,883 |
| | 22 | % |
Finance & insurance | | 2,797,370 |
| | 13 |
| | 2,778,411 |
| | 14 |
|
Real estate rental & leasing (a) | | 1,584,095 |
| | 7 |
| | 1,454,336 |
| | 7 |
|
Health care & social assistance | | 1,527,531 |
| | 7 |
| | 1,499,178 |
| | 8 |
|
Accommodation & food service | | 1,504,690 |
| | 7 |
| | 1,364,833 |
| | 7 |
|
Wholesale trade | | 1,464,847 |
| | 6 |
| | 1,372,147 |
| | 7 |
|
Manufacturing | | 1,343,586 |
| | 6 |
| | 1,150,701 |
| | 6 |
|
Other (education, arts, entertainment, etc) (b) | | 6,188,397 |
| | 28 |
| | 6,020,602 |
| | 29 |
|
Total C&I loan portfolio | | $ | 22,124,430 |
| | 100 | % | | $ | 20,051,091 |
| | 100 | % |
| |
(a) | Leasing, rental of real estate, equipment, and goods. |
| |
(b) | Industries in this category each comprise less than 5 percent for 2017.2020. |
Industry Concentrations
Loan concentrations are considered to exist for a financial institution when there are loans to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. 3739 percent of FHN’s C&I portfolio (Finance and insurance plus Loans to mortgage companies) could be affected by items that uniquely impact the financial services industry.industry. Except “Finance and Insurance” and “Loans to Mortgage Companies”, as discussed below, onSeptember 30, 2017, March 31, 2020, FHN did not have any other concentrations of C&I loans in any single industry of 10 percent or more of total loans.
Loans to Mortgage Companies
The balance of loans to mortgage companies was 26 percent of the C&I portfolio as of March 31, 2020, 22 percent as of December 31, 2019 and 13 percent as of March 31, 2019, and includes balances related to both home purchase and refinance activity. This portfolio class, which generally fluctuates with mortgage rates and seasonal factors, includes commercial lines of credit to qualified mortgage companies primarily for the temporary warehousing of eligible mortgage loans prior to the borrower’s sale of those mortgage loans to third party investors. Generally, lending to mortgage lenders increases when there is a decline in mortgage rates and decreases when rates rise. In periods of economic uncertainty, this trend may not occur even if interest rates are declining. In first quarter 2020, 46 percent of the loans funded were home purchases and 54 percent were refinance transactions.
Finance and Insurance
The finance and insurance component represents 22 percentrepresents 13 percent of the C&I portfolio as of March 31, 2020 compared to 14 percent as of December 31, 2019, and includes TRUPS (i.e., long-term unsecured loans to bank
and insurance-related businesses), loans to bank holding companies, and asset-based lending to consumer finance companies. As of September 30, 2017,March 31, 2020, asset-based lending to consumer finance companies represents approximatelyapproximately $1.2 billion ofof the finance and insurance component.
TRUPS lending was originally extended as a form of “bridge” financing to participants in the pooled trust preferred securitization program offered primarily to smaller banking (generally less than $15 billion in total assets) and insurance institutions through FHN’s fixed income business. Origination of TRUPS lending ceased in early 2008. Individual TRUPS are re-graded at least quarterly as part of FHN’s commercial loan review process. The terms of these loans generally include a scheduled 30 year balloon payoff and include an option to defer interest for up to 20 consecutive quarters. As of September 30, 2017, and DecemberMarch 31, 2016, one2020, no TRUP relationship was on interest deferral.
As of September 30, 2017,March 31, 2020, the unpaid principal balance (“UPB”) of trust preferred loans totaled $332.9$234.2 million ($206.6173.6 million of bank TRUPS and $126.3$60.7 million of insurance TRUPS) with the UPB of other bank-related loans totaling $345.8$282.3 million. Inclusive of a valuation allowance on TRUPS of $25.5$18.9 million, total reserves (ALLL plus the valuation allowance) for TRUPS and other bank-related loans were $26.8$29.9 million or 46 percent of outstanding UPB.
Loans to Mortgage Companies
The balance of loans to mortgage companies was 15 percent of the C&I portfolio as of September 30, 2017, 17 percent of the C&I portfolio as of December 31, 2016, and 20 percent of the C&I portfolio as of September 30, 2016, and includes balances related to both home purchase and refinance activity. This portfolio class, which generally fluctuates with mortgage rates and seasonal factors, includes commercial lines of credit to qualified mortgage companies primarily for the temporary warehousing of eligible mortgage loans prior to the borrower’s sale of those mortgage loans to third party investors. Generally, lending to mortgage lenders increases when there is a decline in mortgage rates and decreases when rates rise.
C&I Asset Quality Trends
Overall, theThe C&I portfolio trends remain strongremained stable in 2017, continuing in line with recent historical performance. first quarter 2020; however, the impact of economic uncertainty attributable to the COVID-19 pandemic could negatively impact future trends. The C&I ALLL increased $8.8$132.0 million from December 31, 2016,2019, to $98.2$254.5 million as of September 30, 2017. March 31, 2020, primarily due to the sudden, steep decline
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 95
in the economic forecast attributable to the COVID-19 pandemic and the adoption of ASU 2016-13.
The allowance as a percentage of period-end loans increased 54 basis points to .771.15 percent as of September 30, 2017, from .74March 31, 2020, compared to .61 percent as of December 31, 2016.year-end 2019. Nonperforming C&I loans decreased $13.8increased $21.8 million from December 31, 2016,2019, to $18.9$96.1 million on September 30, 2017.March 31, 2020. The nonperforming loan (“NPL”) ratio decreased 12 basis points from December 31, 2016,increased to .15.43 percent of C&I loans as of September 30, 2017. The 30+ delinquency ratio increased to .27 percent as of September 30, 2017,March 31, 2020, from .08.37 percent as of December 31, 2016,2019. The increase in NPLs was primarily driven by two larger relationships, one credit.
The 30+ delinquency ratio increased 3 basis points to .08 percent as of which is a purchased credit-impaired loan. Third March 31, 2020. First quarter 20172020 experienced net charge-offs of $3.1$5.8 million compared to $1.6$3.3 million of net recoveries in fourth quarter 2016 and $1.3$2.3 million of net charge-offs in thirdfourth quarter 2016. 2019 and first quarter 2019, respectively. First quarter 2020 net charge-offs were primarily driven by one credit.
The following table shows C&I asset quality trends by segment.
Table 11—12—C&I Asset Quality Trends by Segment
|
| | | | | | | | | | | | |
| | 2020 |
| | Three months ended |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated |
Allowance for loan losses as of January 1 | | $ | 122,426 |
| | $ | 60 |
| | $ | 122,486 |
|
ASU Adoption 2016-13 | | 9,086 |
| | 9,696 |
| | 18,782 |
|
Charge-offs | | (6,751 | ) | | — |
| | (6,751 | ) |
Recoveries | | 931 |
| | 4 |
| | 935 |
|
Provision/(provision credit) for loan losses | | 118,970 |
| | 94 |
| | 119,064 |
|
Allowance for loan losses as of March 31 | | $ | 244,662 |
| | $ | 9,854 |
| | $ | 254,516 |
|
Net charge-offs % (qtr. annualized) | | 0.12 | % | | NM |
| | 0.12 | % |
Allowance / net charge-offs | | 10.45 | x | | NM |
| | 10.88 | x |
| | | | | | |
| | As of March 31 |
Period-end loans | | $ | 21,798,168 |
| | $ | 326,262 |
| | $ | 22,124,430 |
|
Nonperforming loans | | 96,081 |
| | — |
| | 96,081 |
|
Troubled debt restructurings | | 40,439 |
| | — |
| | 40,439 |
|
30+ Delinq. % (a) | | 0.07 | % | | 0.50 | % | | 0.08 | % |
NPL % | | 0.44 |
| | — |
| | 0.43 |
|
Allowance / loans % | | 1.12 |
| | 3.02 |
| | 1.15 |
|
| | | | | | |
| | 2019 |
| | Three months ended |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated |
Allowance for loan losses as of January 1 | | $ | 97,617 |
| | $ | 1,330 |
| | $ | 98,947 |
|
Charge-offs | | (3,101 | ) | | — |
| | (3,101 | ) |
Recoveries | | 801 |
| | 28 |
| | 829 |
|
Provision/(provision credit) for loan losses | | 7,076 |
| | (38 | ) | | 7,038 |
|
Allowance for loan losses as of March 31 | | $ | 102,393 |
| | $ | 1,320 |
| | $ | 103,713 |
|
Net charge-offs % (qtr. annualized) | | 0.06 | % | | NM |
| | 0.06 | % |
Allowance / net charge-offs | | 10.98 | x | | NM |
| | 11.26 | x |
| | | | | | |
| | As of December 31 |
Period-end loans | | $ | 19,721,457 |
| | $ | 329,634 |
| | $ | 20,051,091 |
|
Nonperforming loans | | 74,312 |
| | — |
| | 74,312 |
|
Troubled debt restructurings | | 42,199 |
| | — |
| | 42,199 |
|
30+ Delinq. % (a) | | 0.05 | % | | — | % | | 0.05 | % |
NPL % | | 0.38 |
| | — |
| | 0.37 |
|
Allowance / loans % | | 0.62 |
| | 0.02 |
| | 0.61 |
|
|
| | | | | | | | | | | | | |
| | 2017 | |
| | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 90,958 |
| | $ | 1,421 |
| | $ | 92,379 |
| |
Charge-offs | | (3,723 | ) | | — |
| | (3,723 | ) | |
Recoveries | | 586 |
| | 15 |
| | 601 |
| |
Provision/(provision credit) for loan losses | | 9,039 |
| | (91 | ) | | 8,948 |
| |
Allowance for loan losses as of September 30 | | $ | 96,860 |
| | $ | 1,345 |
| | $ | 98,205 |
| |
Net charge-offs % (qtr. annualized) | | 0.10 | % | | NM | | 0.10 | % | |
Allowance / net charge-offs | | 7.83 | x | | NM | | 7.97 | x | |
| | | | | | | |
| | As of September 30 | |
Period-end loans | | $ | 12,373,245 |
| | $ | 418,599 |
| | $ | 12,791,844 |
| |
Nonperforming loans | | 15,828 |
| | 3,097 |
| | 18,925 |
| |
Troubled debt restructurings | | 16,336 |
| | — |
| | 16,336 |
| |
30+ Delinq. % (a) | | 0.28 | % | | — | % | | 0.27 | % | |
NPL % | | 0.13 |
| | 0.74 |
| | 0.15 |
| |
Allowance / loans % | | 0.78 |
| | 0.32 |
| | 0.77 |
| |
| | | | | | | |
| | 2016 | |
| | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 79,597 |
| | $ | 1,375 |
| | $ | 80,972 |
| |
Charge-offs | | (1,992 | ) | | — |
| | (1,992 | ) | |
Recoveries | | 711 |
| | 14 |
| | 725 |
| |
Provision/(provision credit) for loan losses | | 7,151 |
| | 10 |
| | 7,161 |
| |
Allowance for loan losses as of September 30 | | $ | 85,467 |
| | $ | 1,399 |
| | $ | 86,866 |
| |
Net charge-offs % (qtr. annualized) | | 0.05 | % | | NM | | 0.04 | % | |
Allowance / net charge-offs | | 16.76 | x | | NM | | 17.23 | x | |
| | | | | | | |
| | As of December 31 | |
Period-end loans | | $ | 11,728,160 |
| | $ | 419,927 |
| | $ | 12,148,087 |
| |
Nonperforming loans | | 28,619 |
| | 4,117 |
| | 32,736 |
| |
Troubled debt restructurings | | 34,334 |
| | — |
| | 34,334 |
| |
30+ Delinq. % (a) | | 0.08 | % | | — | % | | 0.08 | % | |
NPL % | | 0.24 |
| | 0.98 |
| | 0.27 |
| |
Allowance / loans % | | 0.75 |
| | 0.33 |
| | 0.74 |
| |
NM—Not meaningfulLoans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 96
Commercial Real Estate
The CRE portfolio was $2.3$4.6 billion on September 30, 2017.March 31, 2020. The CRE portfolio includes both financings for commercial construction and nonconstruction loans. The largest geographical concentrations of balances as of March 31, 2020 are in North Carolina (28 percent), Tennessee (20 percent), Florida (13 percent), South Carolina (8 percent), Texas (8 percent), Georgia (6 percent), and Kentucky (3 percent), with no other state representing more than 3 percent of the portfolio. This portfolio is segregated between the income-producing CRE class which contains loans, draws on lines and letters of credit to commercial real estate developers for the construction and mini-permanent financing of income-producing real estate, and the residential CRE class. Subcategories of income CRE consist of office (27 percent), multi-family (31(22 percent), retail (22(19 percent), office (18industrial (13 percent), hospitality (12 percent), industrial (12 percent), land/land development (1 percent), and other (4(6 percent).
The residential CRE class includes loans to residential builders and developers for the purpose of constructing single-family homes, condominiums, and town homes. Activehomes, and on a limited basis, for developing residential subdivisions. After the fulfillment of existing commitments over the near term, the residential CRE lending has been minimalclass will be in a wind-down state with nearly all new originations limited to tactical advances to facilitate workout strategies with existing clients and selected new transactions with “strategic” clients. FHN considers a “strategic” residential CRE borrower as a homebuilder within the regional banking footprint who remained profitable duringexpectation of full runoff in the most recent down cycle.foreseeable future.
CRE Asset Quality Trends
The CRE portfolio had continued stable performance as of September 30, 2017,March 31, 2020 was not significantly affected by the global COVID-19 pandemic, with nonperforming loans down $1.1up $.4 million fromfrom December 31, 2016, net recoveries in third quarter 2017, and minimal past due activity.2019. However, economic uncertainty attributable to COVID-19 could impact future CRE portfolio trends. The allowance decreased $4.2 million from December 31, 2016,increased to $29.7$47.6 million as of September 30, 2017.March 31, 2020, from $36.1 million as of December 31, 2019 primarily due to COVID-19. Allowance as a percentage of loans decreased 27increased 20 basis points from December 31, 2016, to 1.32.83 percent as of September 30, 2017.December 31, 2019, to 1.03 percent as of March 31, 2020. Nonperforming loans as a percentage of total CRE loans improved 6increased 1 basis pointspoint from year-endDecember 31, 2019, to .07.05 percent as of September 30, 2017. March 31, 2020.
Accruing delinquencies as a percentage of period-end loans increaseddecreased to .01 percent as of March 31, 2020, from .02 percent as of September 30, 2017 from .01 percent as of year-end 2016. FHN recognized net recoveries of $.3 millionDecember 31, 2019. Net charge-offs were not significant in thirdfirst quarter 2017 compared to $.6 million2020 and were $377 thousand in thirdfirst quarter 2016. 2019.
The following table shows commercial real estate asset quality trends by segment.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 97
Table 12—13—Commercial Real Estate Asset Quality Trends by Segment
|
| | | | | | | | | | | | | |
| | 2017 | |
| | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 30,470 |
| | $ | — |
| | $ | 30,470 |
| |
Charge-offs | | — |
| | — |
| | — |
| |
Recoveries | | 267 |
| | 11 |
| | 278 |
| |
Provision/(provision credit) for loan losses | | (1,054 | ) | | (11 | ) | | (1,065 | ) | |
Allowance for loan losses as of September 30 | | $ | 29,683 |
| | $ | — |
| | $ | 29,683 |
| |
Net charge-offs % (qtr. annualized) | | NM | | NM | | NM | |
Allowance / net charge-offs | | NM | | NM | | NM | |
| | | | | | | |
| | As of September 30 | |
Period-end loans | | $ | 2,251,015 |
| | $ | — |
| | $ | 2,251,015 |
| |
Nonperforming loans | | 1,640 |
| | — |
| | 1,640 |
| |
Troubled debt restructurings | | 4,780 |
| | — |
| | 4,780 |
| |
30+ Delinq. % (a) | | 0.02 | % | | — | % | | 0.02 | % | |
NPL % | | 0.07 |
| | — |
| | 0.07 |
| |
Allowance / loans % | | 1.32 |
| | — |
| | 1.32 |
| |
| | | | | | | |
| | 2016 | |
| | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 30,264 |
| | $ | — |
| | $ | 30,264 |
| |
Charge-offs | | (49 | ) | | — |
| | (49 | ) | |
Recoveries | | 636 |
| | 15 |
| | 651 |
| |
Provision/(provision credit) for loan losses | | 1,569 |
| | (15 | ) | | 1,554 |
| |
Allowance for loan losses as of September 30 | | $ | 32,420 |
| | $ | — |
| | $ | 32,420 |
| |
Net charge-offs % (qtr. annualized) | | NM | | NM | | NM | |
Allowance / net charge-offs | | NM | | NM | | NM | |
| | | | | | | |
| | As of December 31 | |
Period-end loans | | $ | 2,135,523 |
| | $ | — |
| | $ | 2,135,523 |
| |
Nonperforming loans | | 2,776 |
| | — |
| | 2,776 |
| |
Troubled debt restructurings | | 3,124 |
| | — |
| | 3,124 |
| |
30+ Delinq. % (a) | | 0.01 | % | | — | % | | 0.01 | % | |
NPL % | | 0.13 |
| | — |
| | 0.13 |
| |
Allowance / loans % | | 1.59 |
| | — |
| | 1.59 |
| |
Certain previously reported amounts have been reclassified to agree with current presentation. |
| | | | | | | | | | | | |
| | 2020 |
| | Three months ended |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated |
Allowance for loan losses as of January 1 | | $ | 33,729 |
| | $ | 2,383 |
| | $ | 36,112 |
|
ASU Adoption 2016-13 | | (5,191 | ) | | (2,157 | ) | | (7,348 | ) |
Charge-offs | | (581 | ) | | — |
| | (581 | ) |
Recoveries | | 573 |
| | — |
| | 573 |
|
Provision/(provision credit) for loan losses | | 18,399 |
| | 470 |
| | 18,869 |
|
Allowance for loan losses as of March 31 | | $ | 46,929 |
| | $ | 696 |
| | $ | 47,625 |
|
Net charge-offs % (qtr. annualized) | | — | % | | — |
| | — | % |
Allowance / net charge-offs | | NM |
| | NM |
| | NM |
|
| | | | | | |
| | As of March 31 |
Period-end loans | | $ | 4,608,103 |
| | $ | 31,589 |
| | $ | 4,639,692 |
|
Nonperforming loans | | 2,190 |
| | — |
| | 2,190 |
|
Troubled debt restructurings | | 1,153 |
| | — |
| | 1,153 |
|
30+ Delinq. % (a) | | 0.01 | % | | — | % | | 0.01 | % |
NPL % | | 0.05 |
| | — |
| | 0.05 |
|
Allowance / loans % | | 1.02 |
| | 2.20 |
| | 1.03 |
|
| | | | | | |
| | 2019 |
| | Three months ended |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated |
Allowance for loan losses as of January 1 | | $ | 31,311 |
| | $ | — |
| | $ | 31,311 |
|
Charge-offs | | (434 | ) | | — |
| | (434 | ) |
Recoveries | | 57 |
| | — |
| | 57 |
|
Provision/(provision credit) for loan losses | | 3,448 |
| | — |
| | 3,448 |
|
Allowance for loan losses as of March 31 | | $ | 34,382 |
| | $ | — |
| | $ | 34,382 |
|
Net charge-offs % (qtr. annualized) | | 0.04 | % | | NM |
| | 0.04 | % |
Allowance / net charge-offs | | 22.50 | x | | NM |
| | 22.50 | x |
| | | | | | |
| | As of December 31 |
Period-end loans | | $ | 4,292,199 |
| | $ | 44,818 |
| | $ | 4,337,017 |
|
Nonperforming loans | | 1,825 |
| | — |
| | 1,825 |
|
Troubled debt restructurings | | 1,200 |
| | — |
| | 1,200 |
|
30+ Delinq. % (a) | | 0.02 | % | | — | % | | 0.02 | % |
NPL % | | 0.04 |
| | — |
| | 0.04 |
|
Allowance / loans % | | 0.79 |
| | 5.32 |
| | 0.83 |
|
NM—Not meaningful
Loans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 98
CONSUMER LOAN PORTFOLIOS
Consumer Real Estate
The consumer real estate portfolio was $4.4$6.1 billion on September 30, 2017,March 31, 2020, and is primarily composed of home equity lines and installment loans including restricted balances (loans consolidated under ASC 810). The largest geographical concentrations of balances as of September 30, 2017,March 31, 2020, are inin Tennessee (72(55 percent), California (4North Carolina (15 percent), Florida (14 percent), and North Carolina (4California (3 percent), with no other state representingrepresenting more than 3 percent of the portfolio.portfolio. As of September 30, 2017,March 31, 2020, approximately 74 percent85 percent of the consumer real estate portfolio was in a first lien position. At origination, weighted average FICO score of this portfolio was 751755 and refreshed FICO scores averaged 749 as of September 30, 2017, as compared to 750 and 747, respectively, as of December754 on March 31, 2016.2020. Generally, performanceperformance of this portfolio is affected by life events that affect borrowers’ finances, the level of unemployment, and home prices.
Home equity lines of credit (“HELOCs”) comprise $1.5$1.3 billion of the consumer real estate portfolio as of September 30, 2017.March 31, 2020. FHN’s HELOCs typically have a 5 or 10 year draw period followed by a 10 or 20 year repayment period, respectively. During the draw period, a borrower is able to draw on the line and is only required to make interest payments. The line is automatically frozen if a borrower becomes 45 days or more past due on payments. Once the draw period has concluded, the line is closed and the borrower is required to make both principal and interest
payments monthly until the loan matures. The principal payment generally is fully amortizing, but payment amounts will adjust when variable rates reset to reflect changes in the prime rate.
As of September 30, 2017,March 31, 2020, approximately 60 percent 78 percent of FHN's HELOCs are in the draw period compared to approximately 6276 percent as of December 31, 2016.2019. Based on when draw periods are scheduled to end per the line agreement, it is expected that $362.6 $306.7 million, or 4232 percent ofof HELOCs currently in the draw period, will enter the repayment period during the next 60 months. Delinquencies and charge-off rates for HELOCs that have entered the repayment period are initially higher than HELOCs still in the draw period because of the increased minimum payment requirement; however, after some seasoning, performance of these loans usually begins to stabilize. The home equity lines of the consumer real estate portfolio are being monitored closely for those nearing the end of the draw period and borrowers are initially being contacted at least 24 months before the repayment period begins to remind the customer of the terms of their agreement and to inform them of options.
The following table shows the HELOCs currently in the draw period and expected timing of conversion to the repayment period.
Table 13—14—HELOC Draw To Repayment Schedule
| | | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Repayment Amount | | Percent | | Repayment Amount | | Percent | | Repayment Amount | | Percent | | Repayment Amount | | Percent |
Months remaining in draw period: | | | | | | | | | | | | | | | | |
0-12 | | $ | 112,207 |
| | 13 | % | | $ | 212,665 |
| | 20 | % | | $ | 46,788 |
| | 5 | % | | $ | 47,455 |
| | 5 | % |
13-24 | | 69,367 |
| | 8 |
| | 127,662 |
| | 12 |
| | 59,132 |
| | 6 |
| | 58,843 |
| | 6 |
|
25-36 | | 56,098 |
| | 6 |
| | 73,331 |
| | 7 |
| | 64,613 |
| | 7 |
| | 65,833 |
| | 7 |
|
37-48 | | 57,254 |
| | 7 |
| | 68,768 |
| | 6 |
| | 60,114 |
| | 6 |
| | 67,692 |
| | 7 |
|
49-60 | | 67,625 |
| | 8 |
| | 68,792 |
| | 7 |
| | 76,089 |
| | 8 |
| | 75,246 |
| | 7 |
|
>60 | | 510,670 |
| | 58 |
| | 514,126 |
| | 48 |
| | 665,293 |
| | 68 |
| | 666,001 |
| | 68 |
|
Total | | $ | 873,221 |
| | 100 | % | | $ | 1,065,344 |
| | 100 | % | | $ | 972,029 |
| | 100 | % | | $ | 981,070 |
| | 100 | % |
Consumer Real Estate Asset Quality Trends
Overall, performance of the consumer real estate portfolio remained strongstable in thirdfirst quarter 2017. Specifically, the regional bank’s asset quality metrics were relatively stable from a year ago, with the exception of NPLs as a percentage of loans which increased 9 basis points from year-end2020. Economic uncertainty attributable to .61 percent as of September 30, 2017.COVID-19 could impact future trends. The non-strategic segment is a run-off portfolio and while the absolute dollars of delinquencies and nonaccruals as well as the 30+ accruing delinquencies ratio improved from year-end, nonperforming loans ratios deteriorateddeteriorated. That trend of increasing deterioration of ratios in the non-strategic
segment is likely to continue and may become more skewed as the portfolio shrinks and some of the stronger borrowers payoff or refinance elsewhere. NPLs as a percentage of loans increased 10 basis point from year-end to 1.49 percent as of March 31, 2020. The ALLL decreased $9.4increased $94.6 million from December 31, 2016,2019, to $40.9$123.0 million as of September 30, 2017, with the majority of the decline attributableMarch 31, 2020, primarily due to the non-strategic segment.adoption of ASU 2016-13. The allowance as a percentage of loans declined 17increased 155 basis points to .942.01 percent as of September 30, 2017,March 31, 2020, compared to year-end. The balance of nonperforming loans declined $6.0increased $5.5 million to $76.8 $91.2
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 99
million on September 30, 2017.as of March 31, 2020. Loans delinquent 30 or more days and still accruing declined from $42.1$42.9 million as of December 31, 2016,2019, to $32.4$40.1 million as of September 30, 2017.March 31, 2020. The portfolio realized net recoveries of $2.6$1.2 million in thirdfirst quarter 20172020 compared to net recoveries of $2.2$3.3 million in
fourth quarter 20162019 and net recoveries of $1.2 million in thirdfirst quarter 2016. 2019.
The following table shows consumer real estate asset quality trends by segment.
Table 14—15—Consumer Real Estate Asset Quality Trends by Segment
|
| | | | | | | | | | | | | |
| | 2017 | |
| | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 17,881 |
| | $ | 28,188 |
| | $ | 46,069 |
| |
Charge-offs | | (1,492 | ) | | (2,109 | ) | | (3,601 | ) | |
Recoveries | | 1,105 |
| | 5,083 |
| | 6,188 |
| |
Provision/(provision credit) for loan losses | | (562 | ) | | (7,155 | ) | | (7,717 | ) | |
Allowance for loan losses as of September 30 | | $ | 16,932 |
| | $ | 24,007 |
| | $ | 40,939 |
| |
Net charge-offs % (qtr. annualized) | | 0.04 | % | | NM | | NM | |
Allowance / net charge-offs | | 11.04 | x | | NM | | NM | |
| | | | | | | |
| | As of September 30 | |
Period-end loans | | $ | 3,713,951 |
| | $ | 655,766 |
| | $ | 4,369,717 |
| |
Nonperforming loans | | 22,707 |
| | 54,138 |
| | 76,845 |
| |
Troubled debt restructurings | | 46,292 |
| | 89,566 |
| | 135,858 |
| |
30+ Delinq. % (a) | | 0.38 | % | | 2.80 | % | | 0.74 | % | |
NPL % | | 0.61 |
| | 8.26 |
| | 1.76 |
| |
Allowance / loans % | | 0.46 |
| | 3.66 |
| | 0.94 |
| |
| | | | | | | |
| | 2016 | |
| | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 24,278 |
| | $ | 34,803 |
| | $ | 59,081 |
| |
Charge-offs | | (1,074 | ) | | (3,285 | ) | | (4,359 | ) | |
Recoveries | | 985 |
| | 4,606 |
| | 5,591 |
| |
Provision/(provision credit) for loan losses | | (3,965 | ) | | (3,113 | ) | | (7,078 | ) | |
Allowance for loan losses as of September 30 | | $ | 20,224 |
| | $ | 33,011 |
| | $ | 53,235 |
| |
Net charge-offs % (qtr. annualized) | | 0.01 | % | | NM | | NM | |
Allowance / net charge-offs | | 57.14 | x | | NM | | NM | |
| | | | | | | |
| | As of December 31 | |
Period-end loans | | $ | 3,642,894 |
| | $ | 880,858 |
| | $ | 4,523,752 |
| |
Nonperforming loans | | 18,865 |
| | 63,947 |
| | 82,812 |
| |
Troubled debt restructurings | | 47,478 |
| | 105,982 |
| | 153,460 |
| |
30+ Delinq. % (a) | | 0.49 | % | | 2.76 | % | | 0.93 | % | |
NPL % | | 0.52 |
| | 7.26 |
| | 1.83 |
| |
Allowance / loans % | | 0.52 |
| | 3.56 |
| | 1.11 |
| |
|
| | | | | | | | | | | | | | | | |
| | 2020 |
| | Three months ended |
(Dollars in thousands) | | Regional Bank | | Corporate | | Non-Strategic | | Consolidated |
Allowance for loan losses as of January 1 | | $ | 13,340 |
| | N/A |
| | $ | 15,103 |
| | $ | 28,443 |
|
ASU Adoption 2016-13 | | 88,004 |
| | N/A |
| | 4,988 |
| | 92,992 |
|
Charge-offs | | (488 | ) | | N/A |
| | (1,822 | ) | | (2,310 | ) |
Recoveries | | 690 |
| | N/A |
| | 2,865 |
| | 3,555 |
|
Provision/(provision credit) for loan losses | | 1,412 |
| | N/A |
| | (1,070 | ) | | 342 |
|
Allowance for loan losses as of March 31 | | $ | 102,958 |
| | N/A |
| | $ | 20,064 |
| | $ | 123,022 |
|
Net charge-offs % (qtr. annualized) | | NM |
| | N/A |
| | NM |
| | NM |
|
Allowance / net charge-offs | | NM |
| | N/A |
| | NM |
| | NM |
|
| | | | | | | | |
| | As of March 31 |
Period-end loans | | $ | 5,716,888 |
| | $ | 30,613 |
| | $ | 371,882 |
| | $ | 6,119,383 |
|
Nonperforming loans | | 44,536 |
| | 1,302 |
| | 45,344 |
| | 91,182 |
|
Troubled debt restructurings | | 43,360 |
| | 2,041 |
| | 106,992 |
| | 152,393 |
|
30+ Delinq. % (a) | | 0.51 | % | | 5.39 | % | | 2.56 | % | | 0.66 | % |
NPL % | | 0.78 |
| | 4.25 |
| | 12.19 |
| | 1.49 |
|
Allowance / loans % | | 1.80 |
| | N/A |
| | 5.40 |
| | 2.01 |
|
| | | | | | | | |
| | 2019 |
| | Three months ended (a) |
(Dollars in thousands) | | Regional Bank | | Corporate | | Non-Strategic | | Consolidated |
Allowance for loan losses as of January 1 | | $ | 14,555 |
| | N/A |
| | $ | 22,884 |
| | $ | 37,439 |
|
Charge-offs | | (1,641 | ) | | N/A |
| | (1,163 | ) | | (2,804 | ) |
Recoveries | | 1,036 |
| | N/A |
| | 3,005 |
| | 4,041 |
|
Provision/(provision credit) for loan losses | | 1,253 |
| | N/A |
| | (5,775 | ) | | (4,522 | ) |
Allowance for loan losses as of March 31 | | $ | 15,203 |
| | N/A |
| | $ | 18,951 |
| | $ | 34,154 |
|
Net charge-offs % (qtr. annualized) | | 0.04 | % | | N/A |
| | NM |
| | NM |
|
Allowance / net charge-offs | | 6.20 | x | | N/A |
| | NM |
| | NM |
|
| | | | | | | | |
| | As of December 31 (a) |
Period-end loans | | $ | 5,738,455 |
| | $ | 31,473 |
| | $ | 407,211 |
| | $ | 6,177,139 |
|
Nonperforming loans | | 37,014 |
| | 1,327 |
| | 47,353 |
| | 85,694 |
|
Troubled debt restructurings | | 46,031 |
| | 2,457 |
| | 113,758 |
| | 162,246 |
|
30+ Delinq. % (b) | | 0.50 | % | | 5.29 | % | | 3.10 | % | | 0.70 | % |
NPL % | | 0.65 |
| | 4.22 |
| | 11.63 |
| | 1.39 |
|
Allowance / loans % | | 0.23 |
| | N/A |
| | 3.71 |
| | 0.46 |
|
NM—Not meaningful
Loans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includesIn first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all accounts delinquent more than one month and still accruing interest. |
Permanent Mortgage
The permanent mortgage portfolio was $.4 billion on September 30, 2017. This portfolio is primarily composed of jumbo mortgages and one-time-close (“OTC”) completed construction loans in the non-strategic segment that were originated through legacy businesses. The regional banking segment primarily includes recently acquired mortgage loans associated with FHN’s CRA initiatives. The corporate segment includes loans that were previously included in off-balance sheet proprietary securitization trusts. These loans were brought back into the loan portfolios at fair value through the execution of cleanup calls due to the relatively small balances left in the securitization and should continue to run-off. Approximately 19 percent of loan balances as of September 30, 2017, are in California, but the remainder of the portfolio is somewhat geographically diverse. Non-strategic and corporate segment run-off contributed to a majority of the $20.0 million net decrease in permanent mortgage period-end balances from December 31, 2016, to September 30, 2017.
The permanent mortgage portfolios within the non-strategic and corporate segments are run-off portfolios. As a result, asset quality metrics may become skewed as the portfolio shrinks and some of the stronger borrowers payoff or refinance elsewhere. The ALLL decreased $.6 million as of September 30, 2017, from $16.3 million as of December 31, 2016. TDR reserves (which are estimates of losses for the expected life of the loan) comprise 80 percent of the ALLL for the permanent mortgage portfolio as of September 30, 2017. Consolidated accruing delinquencies as a percentage of total loans decreased 85 basis points from year-end to 1.51 percent as of September 30, 2017. Nonperforming loans increased slightly from December 31, 2016, to $27.4 million as of September 30, 2017. The portfolio experienced net recoveries of $.4 million in third quarter 2017 compared to net charge-offs of $.1 million in third quarter 2016. The following table shows permanent mortgage asset quality trends by segment.
Table 15—Permanent Mortgage Asset Quality Trends by Segment
|
| | | | | | | | | | | | | | | | |
| | 2017 |
| | Three months ended |
(Dollars in thousands) | | Regional Bank | | Corporate (a) | | Non-Strategic | | Consolidated |
Allowance for loan losses as of July 1 | | $ | 1,981 |
| | N/A | | $ | 14,417 |
| | $ | 16,398 |
|
Charge-offs | | — |
| | N/A | | (173 | ) | | (173 | ) |
Recoveries | | — |
| | N/A | | 542 |
| | 542 |
|
Provision/(provision credit) for loan losses | | 287 |
| | N/A | | (1,335 | ) | | (1,048 | ) |
Allowance for loan losses as of September 30 | | $ | 2,268 |
| | N/A | | $ | 13,451 |
| | $ | 15,719 |
|
Net charge-offs % (qtr. annualized) | | — | % | | N/A | | NM | | NM |
Allowance / net charge-offs | | NM | | N/A | | NM | | NM |
| | | | | | | | |
| | As of September 30 |
Period-end loans | | $ | 106,002 |
| | $ | 57,891 |
| | $ | 239,189 |
| | $ | 403,082 |
|
Nonperforming loans | | 435 |
| | 2,173 |
| | 24,842 |
| | 27,450 |
|
Troubled debt restructurings | | 955 |
| | 3,676 |
| | 79,450 |
| | 84,081 |
|
30+ Delinq. % (b) | | 0.72 | % | | 4.22 | % | | 1.20 | % | | 1.51 | % |
NPL % | | 0.41 |
| | 3.75 |
| | 10.39 |
| | 6.81 |
|
Allowance / loans % | | 2.14 |
| | N/A | | 5.62 |
| | 3.90 |
|
| | | | | | | | |
| | 2016 |
| | Three months ended |
(Dollars in thousands) | | Regional Bank | | Corporate (a) | | Non-Strategic | | Consolidated |
Allowance for loan losses as of July 1 | | $ | 579 |
| | N/A | | $ | 17,021 |
| | $ | 17,600 |
|
Charge-offs | | — |
| | N/A | | (373 | ) | | (373 | ) |
Recoveries | | — |
| | N/A | | 239 |
| | 239 |
|
Provision/(provision credit) for loan losses | | 461 |
| | N/A | | (1,338 | ) | | (877 | ) |
Allowance for loan losses as of September 30 | | $ | 1,040 |
| | N/A | | $ | 15,549 |
| | $ | 16,589 |
|
Net charge-offs % (qtr. annualized) | | — | % | | N/A | | 0.18 | % | | 0.12 | % |
Allowance / net charge-offs | | NM | | N/A | | 29.16 | x | | 31.11 | x |
| | | | | | | | |
| | As of December 31 |
Period-end loans | | $ | 76,973 |
| | $ | 71,380 |
| | $ | 274,772 |
| | $ | 423,125 |
|
Nonperforming loans | | 393 |
| | 1,186 |
| | 25,602 |
| | 27,181 |
|
Troubled debt restructurings | | 878 |
| | 3,792 |
| | 89,256 |
| | 93,926 |
|
30+ Delinq. % (b) | | 0.72 | % | | 4.37 | % | | 2.29 | % | | 2.36 | % |
NPL % | | 0.51 |
| | 1.66 |
| | 9.32 |
| | 6.42 |
|
Allowance / loans % | | 1.58 |
| | N/A | | 5.49 |
| | 3.85 |
|
NM—Not meaningfulLoans are expressed net of unearned income.
| |
(a) | An allowance has not been establishedprior periods were revised for these loans as the valuation adjustment taken upon exercise of clean-up calls included expected losses.comparability. |
| |
(b) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 100
Credit Card and Other
The credit card and other portfolio, which is primarily within the regional banking segment, was $.4$.5 billion as of September 30, 2017,March 31, 2020, and primarily includes credit card receivables, other consumer-related credits, and automobile loans. The allowance decreasedincreased to $10.3$19.3 million as of September 30, 2017,March 31, 2020, from $12.2$13.3 million as of December 31, 2016.2019, primarily driven by the sudden, steep decline in the
economic forecast attributable to the COVID-19 pandemic and the adoption of ASU 2016-13. Loans 30 days or more delinquent and accruing as a percentage of loans decreased 28increased 6 basis points from December 31, 2016,2019, to .89.99 percent as of September 30, 2017. In thirdMarch 31, 2020. Net charge-offs were $2.6 million in first quarter 2017, FHN recognized $2.5 million of net charge-offs in the credit card and other portfolio,2020 compared to $2.7$3.1 million in thirdfirst quarter 2016. The following table shows credit card and other asset quality trends by segment.2019.
Table 16—Credit Card and Other Asset Quality Trends by Segment
|
| | | | | | | | | | | | | |
| | 2017 | |
| | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 11,917 |
| | $ | 24 |
| | $ | 11,941 |
| |
Charge-offs | | (3,100 | ) | | (73 | ) | | (3,173 | ) | |
Recoveries | | 617 |
| | 54 |
| | 671 |
| |
Provision/(provision credit) for loan losses | | 842 |
| | 40 |
| | 882 |
| |
Allowance for loan losses as of September 30 | | $ | 10,276 |
| | $ | 45 |
| | $ | 10,321 |
| |
Net charge-offs % (qtr. annualized) | | 2.83 | % | | 1.14 | % | | 2.80 | % | |
Allowance / net charge-offs | | 1.04 | x | | 0.60 | x | | 1.04 | x | |
| | | | | | | |
| | As of September 30 | |
Period-end loans | | $ | 343,864 |
| | $ | 6,569 |
| | $ | 350,433 |
| |
Nonperforming loans | | — |
| | 126 |
| | 126 |
| |
Troubled debt restructurings | | 500 |
| | 44 |
| | 544 |
| |
30+ Delinq. % (a) | | 0.88 | % | | 1.44 | % | | 0.89 | % | |
NPL % | | — |
| | 1.92 |
| | 0.04 |
| |
Allowance / loans % | | 2.99 |
| | 0.69 |
| | 2.95 |
| |
| | | | | | | |
| | 2016 | |
| | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 11,633 |
| | $ | 257 |
| | $ | 11,890 |
| |
Charge-offs | | (3,550 | ) | | (39 | ) | | (3,589 | ) | |
Recoveries | | 835 |
| | 71 |
| | 906 |
| |
Provision/(provision credit) for loan losses | | 3,328 |
| | (88 | ) | | 3,240 |
| |
Allowance for loan losses as of September 30 | | $ | 12,246 |
| | $ | 201 |
| | $ | 12,447 |
| |
Net charge-offs % (qtr. annualized) | | 3.06 | % | | NM | | 2.95 | % | |
Allowance / net charge-offs | | 1.13 | x | | NM | | 1.17 | x | |
| | | | | | | |
| | As of December 31 | |
Period-end loans | | $ | 351,198 |
| | $ | 7,835 |
| | $ | 359,033 |
| |
Nonperforming loans | | — |
| | 142 |
| | 142 |
| |
Troubled debt restructurings | | 274 |
| | 32 |
| | 306 |
| |
30+ Delinq. % (a) | | 1.16 | % | | 1.73 | % | | 1.17 | % | |
NPL % | | — |
| | 1.82 |
| | 0.04 |
| |
Allowance / loans % | | 3.42 |
| | 2.26 |
| | 3.39 |
| |
|
| | | | | | | | | | | | |
| | 2020 |
| | Three months ended |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated |
Allowance for loan losses as of January 1 | | $ | 13,235 |
| | $ | 31 |
| | $ | 13,266 |
|
ASU Adoption 2016-13 | | 1,607 |
| | 361 |
| | 1,968 |
|
Charge-offs | | (3,408 | ) | | (403 | ) | | (3,811 | ) |
Recoveries | | 915 |
| | 264 |
| | 1,179 |
|
Provision/(provision credit) for loan losses | | 6,654 |
| | 71 |
| | 6,725 |
|
Allowance for loan losses as of March 31 | | $ | 19,003 |
| | $ | 324 |
| | $ | 19,327 |
|
Net charge-offs % (qtr. annualized) | | 2.14 | % | | 1.82 | % | | 2.12 | % |
Allowance / net charge-offs | | 1.89 | x | | 0.58 | x | | 1.83 | x |
| | | | | | |
| | As of March 31 |
Period-end loans | | $ | 468,183 |
| | $ | 26,615 |
| | $ | 494,798 |
|
Nonperforming loans | | 109 |
| | 251 |
| | 360 |
|
Troubled debt restructurings | | 667 |
| | 32 |
| | 699 |
|
30+ Delinq. % (a) | | 0.90 | % | | 2.60 | % | | 0.99 | % |
NPL % | | 0.02 |
| | 0.94 |
| | 0.07 |
|
Allowance / loans % | | 4.06 |
| | 1.21 |
| | 3.91 |
|
| | | | | | |
| | 2019 |
| | Three months ended |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated |
Allowance for loan losses as of January 1 | | $ | 12,595 |
| | $ | 132 |
| | $ | 12,727 |
|
Charge-offs | | (3,002 | ) | | (1,186 | ) | | (4,188 | ) |
Recoveries | | 745 |
| | 342 |
| | 1,087 |
|
Provision/(provision credit) for loan losses | | 2,179 |
| | 857 |
| | 3,036 |
|
Allowance for loan losses as of March 31 | | $ | 12,517 |
| | $ | 145 |
| | $ | 12,662 |
|
Net charge-offs % (qtr. annualized) | | 2.10 | % | | 4.35 | % | | 2.44 | % |
Allowance / net charge-offs | | 1.37 | x | | 0.04 | x | | 1.01 | x |
| | | | | | |
| | As of December 31 |
Period-end loans | | $ | 460,742 |
| | $ | 35,122 |
| | $ | 495,864 |
|
Nonperforming loans | | 36 |
| | 298 |
| | 334 |
|
Troubled debt restructurings | | 615 |
| | 38 |
| | 653 |
|
30+ Delinq. % (a) | | 0.69 | % | | 4.05 | % | | 0.93 | % |
NPL % | | 0.01 |
| | 0.85 |
| | 0.07 |
|
Allowance / loans % | | 2.87 |
| | 0.09 |
| | 2.68 |
|
NM—Not meaningful
Loans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 101
The following table provides additional asset quality data by loan portfolio:
Table 17—Asset Quality by Portfolio
| | | | September 30 | | December 31 | | | March 31 | | December 31 |
| | 2017 | | 2016 | | | 2020 | | 2019 |
Key Portfolio Details | | | | | | | | | |
C&I | | | | | | | | | |
Period-end loans ($ millions) | | $ | 12,792 |
| | $ | 12,148 |
| | | $ | 22,124 |
| | $ | 20,051 |
|
30+ Delinq. % (a) | | 0.27 | % | | 0.08 | % | | | 0.08 | % | | 0.05 | % |
NPL % | | 0.15 |
| | 0.27 |
| | | 0.43 |
| | 0.37 |
|
Charge-offs % (qtr. annualized) | | 0.10 |
| | NM |
| | | 0.12 |
| | 0.07 |
|
Allowance / loans % | | 0.77 | % | | 0.74 | % | | | 1.15 | % | | 0.61 | % |
Allowance / net charge-offs | | 7.97 | x | | NM |
| | | 10.88 | x | | 9.25 | x |
Commercial Real Estate | | | | | | | | | |
Period-end loans ($ millions) | | $ | 2,251 |
| | $ | 2,136 |
| | | $ | 4,640 |
| | $ | 4,337 |
|
30+ Delinq. % (a) | | 0.02 | % | | 0.01 | % | | | 0.01 | % | | 0.02 | % |
NPL % | | 0.07 |
| | 0.13 |
| | | 0.05 |
| | 0.04 |
|
Charge-offs % (qtr. annualized) | | NM |
| | 0.09 |
| | | — |
| | NM |
Allowance / loans % | | 1.32 | % | | 1.59 | % | | | 1.03 | % | | 0.83 | % |
Allowance / net charge-offs | | NM |
| | 17.56 | x | | | NM |
| | NM |
|
Consumer Real Estate(b) | | | | | | | | | |
Period-end loans ($ millions) | | $ | 4,370 |
| | $ | 4,524 |
| | | $ | 6,119 |
| | $ | 6,177 |
|
30+ Delinq. % (a) | | 0.74 | % | | 0.93 | % | | | 0.66 | % | | 0.70 | % |
NPL % | | 1.76 |
| | 1.83 |
| | | 1.49 |
| | 1.39 |
|
Charge-offs % (qtr. annualized) | | NM |
| | NM |
| | | NM |
| | NM |
|
Allowance / loans % | | 0.94 | % | | 1.11 | % | | | 2.01 | % | | 0.46 | % |
Allowance / net charge-offs | | NM |
| | NM |
| | | NM |
| | NM |
|
Permanent Mortgage | | | | | | |
Period-end loans ($ millions) | | $ | 403 |
| | $ | 423 |
| | |
30+ Delinq. % (a) | | 1.51 | % | | 2.36 | % | | |
NPL % | | 6.81 |
| | 6.42 |
| | |
Charge-offs % (qtr. annualized) | | NM |
| | NM |
| | |
Allowance / loans % | | 3.90 | % | | 3.85 | % | | |
Allowance / net charge-offs | | NM |
| | NM |
| | |
Credit Card and Other | | | | | | | | | |
Period-end loans ($ millions) | | $ | 350 |
| | $ | 359 |
| | | $ | 495 |
| | $ | 496 |
|
30+ Delinq. % (a) | | 0.89 | % | | 1.17 | % | | | 0.99 | % | | 0.93 | % |
NPL % | | 0.04 |
| | 0.04 |
| | | 0.07 |
| | 0.07 |
|
Charge-offs % (qtr. annualized) | | 2.80 |
| | 3.25 |
| | | 2.12 |
| | 2.29 |
|
Allowance / loans % | | 2.95 | % | | 3.39 | % | | | 3.91 | % | | 2.68 | % |
Allowance / net charge-offs | | 1.04 | x | | 1.04 | x | | | 1.83 | x | | 1.14 | x |
NM – Not meaningfulLoans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
| |
(b) | In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 102
Allowance for Loan Losses
Management’s policy is to maintain the ALLL at a level sufficient to absorb estimated probable incurredrecognize current expected credit losses inon the amortized cost basis of the loan portfolio. The total allowance for loan losses decreasedincreased to $194.9$444.5 million on September 30, 2017,March 31, 2020, from $202.1$200.3 million on December 31, 2016.2019. The ALLL as of September 30, 2017,March 31, 2020, reflects strong asset quality with the consumer real estate portfolio continuingadoption of ASU 2016-13 on January 1, 2020 and the sudden, steep decline in the economic forecast attributable to stabilize, historically low levels of net charge-offs, and declining non-strategic balances.the COVID-19 pandemic. The ratio of allowance for loancredit losses to total loans, net of unearned income, decreasedincrease 69 basis points to .971.33 percent on September 30, 2017, from 1.03March 31, 2020, compared to .64 percent on December 31, 2016.2019.
The provision for loan losses is the charge to or release of earnings necessary to maintain the ALLL at a sufficient level reflecting management’s estimate of probable incurredcurrent expected losses inon the amortized cost basis of the loan portfolio. ThereProvision expense was no$145.0 million in first quarter 2020, compared to $9.0 million provision expense recorded in thirdfirst quarter 2017 compared2019. The increase is primarily attributable to a provision expense of $4.0 million in third quarter 2016.the declining economic forecast attributable to the COVID-19 pandemic.
FHN expects asset quality trends to remain relatively stable forbe impacted by the near term ifeconomic uncertainty attributable to the slow growth of the economy continues.COVID-19 pandemic. The C&I portfolio is expectedreflects a broad mix of categories with the heaviest concentration in loans to continue to show stable trends but short-term variability (both positive and negative) is possible primarily due to the size of the credits within this portfolio.mortgage companies which carry minimal credit risk. The CRE portfolio metrics shouldcould be relatively consistent as FHN expects stable property values overimpacted by the near term;COVID-19 pandemic due to travel and occupancy restrictions set by state and local governments affecting CRE- Hospitality and CRE-Retail. The consumer portfolio could be impacted by the COVID-19 pandemic if consumer unemployment continues to rise and customers are unable to continue making loan payments. The consumer portfolio however oversupply of any CRE product type, changes in the lending environment, or economic uncertainty could result in decreased property values (which could happen abruptly).is high quality with no subprime and minimal exposure to high risk lending. The remaining non-strategic consumer real estate and permanent mortgage portfolios should continue to steadily wind down.down; however, it could be impacted if unemployment continues to rise and borrowers have difficulty making loan payments. Asset quality metrics within non-strategic mayhave become skewed as the portfolio continues to shrink. Continued stabilization in performance of the consumer real estate portfolio assumes an ongoing economic recovery as consumer delinquency and loss rates are correlated with life events that affect borrowers' finances, unemployment trends, and strength of the housing market.
Consolidated Net Charge-offs
Overall, net charge-offs continue to be at historical lows. ThirdIn first quarter 20172020, FHN experienced net charge-offs of $2.4$7.2 million compared to $2.3$4.5 million of net charge-offs in thirdfirst quarter 2016.2019.
The commercial portfolio experienced $2.8$5.8 million of net charge-offs in thirdfirst quarter 20172020 compared to $.7$2.6 million in thirdnet charge-offs in first quarter 2016.2019. In addition, the consumer real estate portfolio experienced net recoveries of $1.2 million in both first quarter 2020 and first quarter 2019. Credit card and other consumer experienced net charge-offs of $2.6 million in thirdfirst quarter 20172020 compared to $1.2$3.1 million in net recoveries during third quarter 2016. Permanent mortgage and credit card and other remained relatively flat compared to a year ago.
Nonperforming Assets
Nonperforming loans are loans placed on nonaccrual 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 due to insufficient collateral value and past due status, or on a case-by-case basis if FHN continues to receive payments but there are other borrower-specific issues. Included in nonaccruals are loans in which FHN continues to receive payments including residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy, and second liens, regardless of delinquency status, behind first liens that are 90 or more days past due, are bankruptcies, or are TDRs. These, along with OREO, excluding OREO from government insured mortgages, represent nonperforming assets (“NPAs”).
Total nonperforming assets (including NPLs HFS) decreasedincreased to $140.2$207.3 million on September 30, 2017,March 31, 2020, from $164.6$181.9 million on December 31, 2016.2019. The nonperforming assets ratio (nonperforming assets excluding NPLs HFS to total period-end loans plus OREO and other assets) decreasedincreased to .66.61 percent as of September 30, 2017, compared to .80March 31, 2020, from .57 percent as of December 31, 2016.2019. Portfolio nonperforming loans declined $20.7increased to $189.8 million as of March 31, 2020, from $162.2 million as of December 31, 2016, to $125.0 million on September 30, 2017.2019. The declineincrease in nonperforming loans was primarily driven by decreases within the C&I and consumer real estate portfolios. This decrease in the C&I portfolio was largely driven by payoffs.portfolio.
The ratio of the ALLL to NPLs in the loan portfolio was 1.562.34 times as of September 30, 2017,March 31, 2020, compared to 1.391.24 times as of December 31, 2016.2019. Certain nonperforming loans in both the commercial and consumer portfolios are deemed collateral-dependent and are charged down to an estimate of collateral value less costs to sell. Because loss content has been recognized through a partial charge-off, typically reserves are not recorded.
Table 1819 provides an activity rollforward of OREO balances for September 30, 2017March 31, 2020 and 2016.2019. The balance of OREO, exclusive of inventory from government insured mortgages, decreased to $7.9$13.9 million as of September 30, 2017, from $13.7 millionMarch 31, 2020, from $20.7 million as of September 30, 2016, as FHN has executed salesMarch 31, 2019, driven by the sale of existing OREO and continued efforts to avoid foreclosures by
restructuring loans and working with borrowers. Additionally,OREO. Moreover, property values have stabilized which also affects the balance of OREO.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 103
Table 18—Rollforward of OREO
|
| | | | | | | | |
| | Three Months Ended March 31 |
(Dollars in thousands) | | 2020 | | 2019 |
Beginning balance | | $ | 15,660 |
| | $ | 22,387 |
|
Valuation adjustments | | (27 | ) | | 35 |
|
New foreclosed property | | 928 |
| | 1,607 |
|
Disposal | | (2,680 | ) | | (3,353 | ) |
Ending balance, March 31 (a) | | $ | 13,881 |
| | $ | 20,676 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Beginning balance | | $ | 7,038 |
| | $ | 14,150 |
| | $ | 11,235 |
| | $ | 24,977 |
|
Valuation adjustments | | (41 | ) | | (711 | ) | | (662 | ) | | (1,561 | ) |
New foreclosed property | | 2,434 |
| | 3,745 |
| | 5,280 |
| | 7,291 |
|
Disposals: | | | | | | | | |
Single transactions | | (1,554 | ) | | (3,506 | ) | | (7,976 | ) | | (17,029 | ) |
Ending balance, September 30 (a) | | $ | 7,877 |
| | $ | 13,678 |
| | $ | 7,877 |
| | $ | 13,678 |
|
| |
(a) | Excludes OREO and receivables related to government insured mortgages of $6.5$7.8 million and $6.4$3.4 million as of September 30, 2017March 31, 2020 and 2016,2019, respectively. |
The following table provides consolidated asset quality information for the three months ended September 30, 2017March 31, 2020 and 2016,2019, and as of September 30, 2017,March 31, 2020, and December 31, 2016:2019:
Table 19—Asset Quality Information
| | | | Three Months Ended September 30 | | | Three Months Ended March 31 |
(Dollars in thousands) | | 2017 | | 2016 | | | 2020 | | 2019 |
Allowance for loan losses: | | | | | | | | | |
Beginning balance on July 1 | | $ | 197,257 |
| | $ | 199,807 |
| | |
Beginning balance on January 1 | | | $ | 200,307 |
| | $ | 180,424 |
|
ASU Adoption 2016-13 | | | 106,394 |
| | — |
|
Provision/(provision credit) for loan losses | | — |
| | 4,000 |
| | | 145,000 |
| | 9,000 |
|
Charge-offs | | (10,670 | ) | | (10,362 | ) | | | (13,453 | ) | | (10,527 | ) |
Recoveries | | 8,280 |
| | 8,112 |
| | | 6,242 |
| | 6,014 |
|
Ending balance on September 30 | | $ | 194,867 |
| | $ | 201,557 |
| | |
Ending balance on March 31 | | | $ | 444,490 |
| | $ | 184,911 |
|
Reserve for remaining unfunded commitments | | 4,372 |
| | 4,802 |
| | | 39,303 |
| | 8,014 |
|
Total allowance for loan losses and reserve for unfunded commitments | | $ | 199,239 |
| | $ | 206,359 |
| | | $ | 483,793 |
| | $ | 192,925 |
|
Key ratios | | | | | | | | | |
Allowance / net charge-offs (a) | | 20.55 | x | | 22.51 | x | | | 15.33 | x | | 10.10 | x |
Net charge-offs % (b) | | 0.05 | % | | 0.05 | % | | | 0.10 | % | | 0.07 | % |
| | | | | | | | | |
| | As of September 30 | | As of December 31 | | | As of March 31 | | As of December 31 |
Nonperforming Assets by Segment | | 2017 | | 2016 | | | 2020 | | 2019 |
Regional Banking: | | | | | | | | | |
Nonperforming loans (c) | | $ | 40,610 |
| | $ | 50,653 |
| | | $ | 142,916 |
| | $ | 113,187 |
|
OREO (d) | | 2,848 |
| | 5,081 |
| | |
OREO (e) | | | 10,278 |
| | 12,347 |
|
Total Regional Banking | | 43,458 |
| | 55,734 |
| | | 153,194 |
| | 125,534 |
|
Non-Strategic: | | | | | | | | | |
Nonperforming loans (c) | | 82,203 |
| | 93,808 |
| | | 45,595 |
| | 47,651 |
|
Nonperforming loans held-for-sale net of fair value adjustment (c) | | 7,314 |
| | 7,741 |
| | | 3,611 |
| | 4,047 |
|
OREO (d) | | 5,029 |
| | 6,154 |
| | |
OREO (e) | | | 3,603 |
| | 3,313 |
|
Total Non-Strategic | | 94,546 |
| | 107,703 |
| | | 52,809 |
| | 55,011 |
|
Corporate: | | | | | | | | | |
Nonperforming loans (c) | | 2,173 |
| | 1,186 |
| | | 1,302 |
| | 1,327 |
|
Total Corporate | | 2,173 |
| | 1,186 |
| | | 1,302 |
| | 1,327 |
|
Total nonperforming assets (c) (d) | | $ | 140,177 |
| | $ | 164,623 |
| | | $ | 207,305 |
| | $ | 181,872 |
|
NM - Not meaningful.
| |
(a) | Ratio is total allowance divided by annualized net charge-offs. |
| |
(b) | Ratio is annualized net charge-offs divided by quarterly average loans, net of unearned income. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 104
| |
(c) | Excludes loans that are 90 or more days past due and still accruing interest. |
| |
(d) | Excludes OREO from government-insured mortgages. |
| | | | As of September 30 | | As of December 31 | | | As of March 31 | | As of December 31 |
| | 2017 | | 2016 | | | 2020 | | 2019 |
Loans and commitments: | | | | | | | | | |
Total period-end loans, net of unearned income | | $ | 20,166,091 |
| | $ | 19,589,520 |
| | | $ | 33,378,303 |
| | $ | 31,061,111 |
|
Potential problem assets (a) | | 280,358 |
| | 290,354 |
| | | 411,122 |
| | 346,896 |
|
Loans 30 to 89 days past due | | 45,248 |
| | 42,570 |
| | | 48,498 |
| | 36,052 |
|
Loans 90 days past due (b) (c) | | 30,950 |
| | 23,385 |
| | | 14,144 |
| | 21,859 |
|
Loans held-for-sale 30 to 89 days past due (d)(c) | | 34,325 |
| | 6,462 |
| | | 4,164 |
| | 3,732 |
|
Loans held-for-sale 30 to 89 days past due—guaranteed portion (d) (e) | | 33,877 |
| | 6,248 |
| | |
Loans held-for-sale 90 days past due (c) (d) | | 10,075 |
| | 14,868 |
| | |
Loans held-for-sale 90 days past due—guaranteed portion (c) (d) (e) | | 9,932 |
| | 14,657 |
| | |
Loans held-for-sale 30 to 89 days past due—guaranteed portion (c) (d) | | | 4,049 |
| | 3,424 |
|
Loans held-for-sale 90 days past due (c) | | | 5,397 |
| | 6,484 |
|
Loans held-for-sale 90 days past due—guaranteed portion (c) (d) | | | 5,165 |
| | 6,417 |
|
Remaining unfunded commitments | | $ | 8,868,115 |
| | $ | 8,744,649 |
| | | $ | 10,966,768 |
| | $ | 12,355,220 |
|
Key ratios | | | | | | | | | |
Allowance / loans % | | 0.97 | % | | 1.03 | % | | | 1.33 | % | | 0.64 | % |
Allowance / NPL | | 1.56 | x | | 1.39 | x | | | 2.34 | x | | 1.24 | x |
NPA % (f)(e) | | 0.66 | % | | 0.80 | % | | | 0.61 | % | | 0.57 | % |
NPL % | | 0.62 | % | | 0.74 | % | | | 0.57 | % | | 0.52 | % |
| |
(a) | Includes past due loans. |
| |
(b) | Excludes loans classified as held-for-sale. |
| |
(c) | Amounts are not included in nonperforming/nonaccrual loans. |
| |
(d) | 2017 includes loans related to the Coastal acquisition. |
| |
(e) | Guaranteed loans include FHA, VA, SBA, USDA, and GNMA loans repurchased through the GNMA buyout program. |
| |
(f)(e) | Ratio is non-performing assets related to the loan portfolio to total loans plus OREO and other assets. |
Past Due Loans and Potential Problem Assets
Past due loans are loans contractuallycontractually past due as to interest or principal payments, but which have not yet been put on nonaccrual status. Loans in the portfolio that are 90 days or more past due and still accruing were $31.0$14.1 million on September 30, 2017,March 31, 2020, compared to $23.4$21.9 million on December 31, 2016. The increase was due in large part to one relationship, which is a purchased credit-impaired loan.2019. Loans 30 to 89 days past due increased to $45.2were $48.5 million on September 30, 2017, from $42.6March 31, 2020, compared to $36.1 million on December 31, 2016.2019. The increase was primarily driven by the C&I portfolio.
Potential problem assets represent those assets where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms and includes loans past due 90 days or more and still accruing. This definition is believed to be substantially consistent with the standards established by the OCCFederal banking regulators for loans classified as substandard. Potential problem assets in the loan portfolioportfolio were $280.4$411.1 million on September 30, 2017, $290.4March 31, 2020, $346.9 million on December 31, 2016,2019, and $255.4$270.4 million on September 30, 2016.March 31, 2019. The decline from year-endincrease in potential problem assets compared to December 31, 2019 was due to a net decreaseincrease in classified commercial loans driven bywithin the payoff of a few credits.C&I portfolio. The current expectation of losses from potential problem assets has been included in management’s analysis for assessing the adequacyadequacy of the allowance for loan losses.
Troubled Debt Restructuring and Loan Modifications
As part of FHN’s ongoing risk management practices, FHN attempts to work with borrowers when appropriate to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. In a situation where an economic concession has been granted to a borrower that is experiencing financial difficulty, FHN identifies and reports that loan as a Troubled Debt Restructuring (“TDR”). See Note 4 – Loans for further discussion regarding TDRs and loan modifications.
On September 30, 2017March 31, 2020 and December 31, 2016,2019, FHN had $241.6$194.7 million and $285.2$206.3 million portfolio loans classified as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reserves of $38.6$13.9 million and $44.9$19.7 million, or 167 percent and 10 percent of TDR balances, as of September 30, 2017March 31, 2020 and December 31, 2016.2019, respectively. Additionally, FHN had $63.2$50.5 million and $69.3$51.1 million of HFS loans classified as TDRs as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. Total held-to-maturity TDRs decreased by $43.6 million with the majority of the decline attributable to consumer real estate, commercial and
permanent mortgage loans. Generally, the volume of new TDRs, particularly within the consumer real estate and permanent mortgage portfolios, has substantially declined.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 105
The following table provides a summary of TDRs for the periods ended September 30, 2017March 31, 2020 and December 31, 2016:2019:
Table 20—Troubled Debt Restructurings
| | (Dollars in thousands) | | As of September 30, 2017 | | As of December 31, 2016 | | As of March 31, 2020 | | As of December 31, 2019 |
Held-to-maturity: | | | | | | | | |
Permanent mortgage: | | | | | |
Consumer real estate (a): | | | | | |
Current | | $ | 65,215 |
| | $ | 73,500 |
| | 98,965 |
| | 105,525 |
|
Delinquent | | 1,657 |
| | 2,751 |
| | 4,871 |
| | 4,634 |
|
Non-accrual (a)(b) | | 17,209 |
| | 17,675 |
| | 48,557 |
| | 52,087 |
|
Total permanent mortgage | | 84,081 |
| | 93,926 |
| |
Consumer real estate: | | | | | |
Current | | 87,732 |
| | 100,383 |
| |
Delinquent | | 3,889 |
| | 4,618 |
| |
Non-accrual (b) | | 44,237 |
| | 48,459 |
| |
Total consumer real estate | | 135,858 |
| | 153,460 |
| | 152,393 |
| | 162,246 |
|
Credit card and other: | | | | | | | | |
Current | | 512 |
| | 288 |
| | 654 |
| | 615 |
|
Delinquent | | 32 |
| | 18 |
| | 45 |
| | 38 |
|
Non-accrual | | — |
| | — |
| |
Non-accrual (b) | | | — |
| | — |
|
Total credit card and other | | 544 |
| | 306 |
| | 699 |
| | 653 |
|
Commercial loans: | | | | | | | | |
Current | | 16,412 |
| | 21,887 |
| | 10,401 |
| | 10,558 |
|
Delinquent | | 88 |
| | — |
| | — |
| | — |
|
Non-accrual | | 4,616 |
| | 15,571 |
| | 31,191 |
| | 32,841 |
|
Total commercial loans | | 21,116 |
| | 37,458 |
| | 41,592 |
| | 43,399 |
|
Total held-to-maturity | | $ | 241,599 |
| | $ | 285,150 |
| | $ | 194,684 |
| | $ | 206,298 |
|
Held-for-sale: | | | | | | | | |
Current | | $ | 43,864 |
| | $ | 46,625 |
| | $ | 38,914 |
| | $ | 39,014 |
|
Delinquent | | 13,956 |
| | 16,436 |
| | 7,555 |
| | 8,008 |
|
Non-accrual | | 5,347 |
| | 6,283 |
| | 4,042 |
| | 4,106 |
|
Total held-for-sale | | 63,167 |
| | 69,344 |
| | 50,511 |
| | 51,128 |
|
Total troubled debt restructurings | | $ | 304,766 |
| | $ | 354,494 |
| | $ | 245,195 |
| | $ | 257,426 |
|
| |
(a) | Balances as of September 30, 2017 and December 31, 2016, include $5.5 million and $5.3 million, respectively, of discharged bankruptcies.In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability. |
| |
(b) | Balances as of September 30, 2017March 31, 2020 and December 31, 2016,2019, include $14.9$12.1 million and $15.3$12.6 million, respectively, of discharged bankruptcies. |
Except as discussed below, thereThere have been no significant changes to FHN’s risk management practices as described under “Risk Management” beginning on page 4788 of Exhibit 13Item 7 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
MARKET RISK MANAGEMENT
Except as discussed below, thereThere have been no significant changes to FHN’s market risk management practices as described under “Market Risk Management” beginning onon page 4889 of Exhibit 13Item 7 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Value-at-Risk (“VaR”) and Stress Testing
VaR is a statistical risk measure used to estimate the potential loss in value from adverse market movements over an assumed fixed holding period within a stated confidence level. FHN employs a model to compute daily VaR measures for its trading securities inventory. FHN computes VaR using historical simulation with a 1-year lookback period at a 99 percent confidence level and 1-day and 10-day time horizons. Additionally, FHN computes a Stressed VaR (“SVaR”) measure. The SVaR computation uses the same model but with model inputs reflecting historical data from a continuous 12-month period that reflects a period of significant financial stress appropriate for our trading securities portfolio.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 106
A summary of FHN’s VaR and SVaR measures for 1-day and 10-day time horizons is as follows:
Table 21—VaR and SVaR Measures
| | | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 | | As of September 30, 2017 | | Three Months Ended March 31, 2020 | | As of March 31, 2020 |
(Dollars in thousands) | | Mean | | High | | Low | | Mean | | High | | Low | | | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | | | | | | | | | |
VaR | | $ | 1,620 |
| | $ | 3,310 |
| | $ | 521 |
| | $ | 1,450 |
| | $ | 3,310 |
| | $ | 521 |
| | $ | 3,174 |
| | $ | 2,291 |
| | $ | 6,783 |
| | $ | 1,023 |
| | $ | 4,970 |
|
SVaR | | 4,575 |
| | 7,781 |
| | 2,150 |
| | 4,023 |
| | 7,781 |
| | 1,775 |
| | 6,805 |
| | 8,526 |
| | 17,727 |
| | 4,592 |
| | 4,970 |
|
10-day | | | | | | | | | | | | | | | | | | | | | | |
VaR | | 4,112 |
| | 8,039 |
| | 870 |
| | 3,538 |
| | 8,039 |
| | 870 |
| | 6,302 |
| | 6,940 |
| | 24,880 |
| | 1,807 |
| | 18,568 |
|
SVaR | | 15,021 |
| | 22,511 |
| | 7,833 |
| | 13,390 |
| | 24,550 |
| | 4,916 |
| | 18,602 |
| | 26,510 |
| | 43,221 |
| | 15,887 |
| | 18,568 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 | | As of September 30, 2016 | | Three Months Ended March 31, 2019 | | As of March 31, 2019 |
(Dollars in thousands) | | Mean | | High | | Low | | Mean | | High | | Low | | | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | | | | | | | | | |
VaR | | $ | 814 |
| | $ | 1,040 |
| | $ | 606 |
| | $ | 769 |
| | $ | 1,411 |
| | $ | 393 |
| | $ | 880 |
| | $ | 1,433 |
| | $ | 1,907 |
| | $ | 1,018 |
| | $ | 1,307 |
|
SVaR | | 3,823 |
| | 5,641 |
| | 2,253 |
| | 3,607 |
| | 5,789 |
| | 1,748 |
| | 4,017 |
| | 8,243 |
| | 9,629 |
| | 6,242 |
| | 8,144 |
|
10-day | | | | | | | | | | | | | | | | | | | | | | |
VaR | | 1,917 |
| | 3,167 |
| | 1,170 |
| | 1,848 |
| | 4,058 |
| | 751 |
| | 2,998 |
| | 3,390 |
| | 4,280 |
| | 2,592 |
| | 3,046 |
|
SVaR | | 12,439 |
| | 18,221 |
| | 7,105 |
| | 11,703 |
| | 18,221 |
| | 3,263 |
| | 12,055 |
| | 21,757 |
| | 28,086 |
| | 16,032 |
| | 21,812 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, 2016 | | As of December 31, 2016 | | Year Ended December 31, 2019 | | As of December 31, 2019 |
(Dollars in thousands) | | | | | | | | Mean | | High | | Low | | | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | | | | | | | | | |
VaR | | | | | | | | $ | 821 |
| | $ | 1,745 |
| | $ | 393 |
| | $ | 932 |
| | $ | 1,068 |
| | $ | 1,907 |
| | $ | 503 |
| | $ | 1,325 |
|
SVaR | | | | | | | | 3,643 |
| | 5,789 |
| | 1,748 |
| | 2,830 |
| | 6,198 |
| | 9,629 |
| | 3,157 |
| | 4,579 |
|
10-day | | | | | | | | | | | | | | | | | | | | | | |
VaR | | | | | | | | 2,088 |
| | 5,852 |
| | 751 |
| | 2,136 |
| | 2,824 |
| | 7,000 |
| | 1,499 |
| | 2,233 |
|
SVaR | | | | | | | | 11,671 |
| | 18,483 |
| | 3,263 |
| | 6,443 |
| | 17,367 |
| | 28,086 |
| | 8,803 |
| | 14,975 |
|
First quarter 2020 VaR and SVaR increased due to extreme volatility as a result of economic uncertainty associated with the COVID-19 pandemic.
FHN’s overall VaR measure includes both interest rate risk and credit spread risk. Separate measures of these component risks are as follows:
Table 22—Schedule of Risks Included in VaR
| | | | As of September 30, 2017 | | As of September 30, 2016 | | As of December 31, 2016 | | As of March 31, 2020 | | As of March 31, 2019 | | As of December 31, 2019 |
(Dollars in thousands) | | 1-day | | 10-day | | 1-day | | 10-day | | 1-day | | 10-day | | 1-day | | 10-day | | 1-day | | 10-day | | 1-day | | 10-day |
Interest rate risk | | $ | 2,055 |
| | $ | 8,334 |
| | $ | 683 |
| | $ | 1,436 |
| | $ | 917 |
| | $ | 1,771 |
| | $ | 1,255 |
| | $ | 2,628 |
| | $ | 560 |
| | $ | 1,412 |
| | $ | 693 |
| | $ | 3,929 |
|
Credit spread risk | | 370 |
| | 701 |
| | 785 |
| | 2,710 |
| | 537 |
| | 1,391 |
| | 2,301 |
| | 11,758 |
| | 398 |
| | 726 |
| | 417 |
| | 828 |
|
First quarter 2020 VaR and SVaR increased due to extreme volatility as a result of economic uncertainty associated with the COVID-19 pandemic.
The potential risk of loss reflected by FHN’s VaR measures assumes the trading securities inventory is static. Because FHN’s Fixed Income division procures fixed income securities for purposes of distribution to customers, its trading securities inventory turns over multiple times daily, on average. regularly.
Additionally, Fixed Income traders actively manage the trading securities
inventory continuously throughout each trading day. Accordingly, FHN’s trading securities inventory is highly dynamic, rather than static. As a result, it would be rare for Fixed Income to incur a negative
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 107
revenue day in its fixed income activities of the level indicated by its VaR measurements.
In addition to being used in FHN’s daily market risk management process, the VaR and SVaR measures are also used by FHN in computing its regulatory market risk capital requirements in accordance with the Market Risk Capital rules. For additional information regarding FHN's capital adequacy refer to the "Capital" section of this MD&A.
FHN also performs stress tests on its trading securities portfolio to calculate the potential loss under various assumed market scenarios. Key assumed stresses used in those tests are:
Down 25 bps - assumes an instantaneous downward move in interest rates of 25 basis points at all points on the interest rate yield curve.
Up 25 bps - assumes an instantaneous upward move in interest rates of 25 basis points at all points on the interest rate yield curve.
Curve flattening - assumes an instantaneous flattening of the interest rate yield curve through an increase in short-term rates and a decrease in long-term rates. The 2-year point on the Treasury yield curve is assumed to increase 15 basis points and the 10-year point on the Treasury yield curve is assumed to decrease 15 basis points. Shifts in other points on the yield curve are predicted based on their correlation to the 2-year and 10-year points.
Curve steepening - assumes an instantaneous steepening of the interest rate yield curve through a decrease in short-term rates and an increase in long-term rates. The 2-year point on the Treasury yield curve is assumed to decrease 15 basis points and the 10-year point on the Treasury yield curve is assumed to increase 15 basis points. Shifts in other points on the yield curve are predicted based on their correlation to the 2-year and 10-year points.
Credit spread widening - assumes an instantaneous increase in credit spreads (the difference between yields on Treasury securities and non-Treasury securities) of 25 basis points.
Model Validation
Trading risk management personnel within Fixed Income have primary responsibility for model risk management with respect to the model used by FHN to compute its VaR measures and perform stress testing on the trading inventory. Among other procedures, these personnel monitor model results and perform periodic backtesting as part of an ongoing process of validating the accuracy of the model. These model risk management activities are subject to annual review by FHN’s Model Validation Group, an independent assurance group charged with oversight responsibility for FHN’s model risk management.
INTEREST RATE RISK MANAGEMENT
Except as disclosed below, thereThere have been no significant changes to FHN's interest rate risk management practices as described under "Interest Rate Risk Management" beginning onon page 50 of Exhibit 1390 of Item 7 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.
2019.
Net Interest Income Simulation Analysis
The information provided in this section, including the discussion regarding the outcomes of simulation analysis and rate shock analysis, is forward-looking. Actual results, if the assumed scenarios were to occur, could differ because of interest rate movements, the ability of management to execute its business plans, and other factors, including those presented in the Forward-Looking Statements section of this MD&A.
Management uses a simulation model to measure interest rate risk and to formulate strategies to improve balance sheet positioning, earnings, or both, within FHN’s interest rate risk, liquidity, and capital guidelines. Interest rate exposure is measured by forecasting 12 months of NII under various interest rate scenarios and comparing the percentage change in NII for each scenario to a base case scenario where interest rates remain unchanged. Assumptions are made regarding future balance sheet composition, interest rate movements, and loan and deposit pricing. In addition, assumptions are made about the magnitude of asset prepayments and earlier than anticipated deposit withdrawals. The results of these scenarios help FHN develop strategies for managing exposure to interest rate risk. While management believes the assumptions used and scenarios selected in its simulations are reasonable, simulation modeling provides only an estimate, not a precise calculation, of exposure to any given change in interest rates.
Based on a static balance sheet as of September 30, 2017, net interest income exposureMarch 31, 2020, NII exposures over the next 12 months assuming a rate shockshocks of plus 25 basis points, 50 basis points, 100 basis points, and 200 basis points isare estimated to have a favorable variancevariances of 1.02.2 percent, 2.13.5 percent, 4.15.1 percent, and 7.76.5 percent, respectively ofcompared to base net interest income.NII. A steepening yield curve scenario where long-term rates increase by 50 basis points and short-term rates are static, results in a favorable NII variance in net interest income of 0.6 percent of base net interest income.1.7 percent. A flattening yield curve scenario where long-term rates decrease by 50 basis points and short-term rates are static, results in an unfavorable NII variance in net interest income of 1.2 percent of base net interest income. A rate shock1.9 percent. Rate shocks of minus 25 basis points and minus 50 basis points resultsresult in an unfavorable variance in net interest incomeNII variances of 1.54.1 percent and 4.4 percent, respectively, of base net interest income.8.7 percent. These hypothetical scenarios are used to create a risk measurement framework, and do not necessarily represent management’s current view of future interest rates or market developments. FHN reports its interest rate risk profile
During March 2020, the Federal Reserve lowered the Fed Funds range to 0.00% - 0.25%. However, due to
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 108
dislocation in the short end of the curve, LIBOR has remained elevated compared to the Board quarterly.Fed Funds rate. As most of FHN’s assets are indexed to LIBOR while most of FHN’s floating liabilities are indexed to Fed Funds, this has a material impact on the shock scenarios.
FHN’s net interest income may be impacted by the disruption from the recent COVID-19 crisis. The increase in the unemployment rate, customer loan deferral requests, the impact of government assistance programs, and other developments could influence net interest income results. FHN is monitoring the current economic situation and potential exposures closely.
CAPITAL RISK MANAGEMENT AND ADEQUACY
There have been no significant changes to FHN's capital management practices as described under "Capital Risk Management and Adequacy" on page 51page 91 of Exhibit 13 Item 7 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.2019.
OPERATIONAL RISK MANAGEMENT
Except as discussed below, thereThere have been no significant changes to FHN's operational risk management practices as described under "Operational Risk Management" beginning on page 52page 91 of Exhibit 13 Item 7 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.
FHN operates a Merger Project Office to manage the execution risk in connection with the Capital Bank merger.2019.
COMPLIANCE RISK MANAGEMENT
There have been no significant changes to FHN's compliance risk management practices as described under "Compliance Risk Management" on page 5292 of Exhibit 13 Item 7 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.2019.
CREDIT RISK MANAGEMENT
There have been no significant changes to FHN's credit risk management practices as described under "Credit Risk Management" beginning on page 5292 of Exhibit 13 Item 7 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.2019.
LIQUIDITY RISK MANAGEMENT
ALCO also focuses on liquidity management: the funding of assets with liabilities of appropriate duration, while mitigating the risk of unexpected cash needs. ALCO and the Board of Directors have adopted a Liquidity Policy. The objective of the Liquidity Policy is to ensure that FHN meets its cash and collateral obligations promptly, in a cost-effective manner and with the highest degree of reliability. The maintenance of adequate levels of asset and liability liquidity should provide FHN with the ability to meet both expected and unexpected cash and collateral needs. Key liquidity ratios, asset liquidity levels and the amount available from funding sources are reported to ALCO on a regular basis. FHN’s Liquidity Policy
establishes liquidity limits that are deemed appropriate for FHN’s risk profile.
In accordance with the Liquidity Policy, ALCO manages FHN’s exposure to liquidity risk through a dynamic, real time forecasting methodology. Base liquidity forecasts are reviewed by ALCO and are updated as financial conditions dictate. In addition to the baseline liquidity reports, robust stress testing of assumptions and funds availability are periodically reviewed. FHN maintains a contingency funding plan that may be executed, should unexpected difficulties arise in accessing funding that affects FHN, the industry as a whole, or both. Subject to market conditions and compliance with applicable regulatory requirements from time to time, funds are available from a number of sources including the available-for-sale securities portfolio, dealer and commercial customer repurchase agreements, access to the overnight and term Federal Funds markets, incremental borrowing capacity at the FHLBFHLB ($1.42.1 billion was available at September 30, 2017)March 31, 2020), brokered deposits, loan sales, syndications, and access to the Federal Reserve Banks.Bank.
Core deposits are a significant source of funding and have historically been a stable source of liquidity for banks. Generally, core deposits represent funding from a financial institution's customer base which provide inexpensive, predictable pricing. The Federal Deposit Insurance Corporation insures these deposits to the extent authorized by law. Generally, these limits are $250 thousand per account owner for interest bearing and non-interest bearing accounts. The ratio of total loans, excluding loans HFS and restricted real estate loans, to core deposits was 104100 percent on September 30, 2017 comparedMarch 31, 2020 compared to 10598 percent on December 31, 2016.
2019.
FHN also may use unsecured short-term borrowings as a source of liquidity. Currently, the largest concentration of unsecured borrowings is federal funds purchased from correspondent bank correspondent customers. These funds are considered to be substantially more stable than funds purchased in the national broker markets for federal funds due to the long, historical, and reciprocal nature of banking services provided by FHN to these correspondent banks. The remainder of FHN’s wholesale short-term borrowings is securities sold under agreements to repurchase transactions accounted for as secured borrowings with Regional Banking’s business customers or Fixed Income’s broker dealer counterparties.
Both FHN and FTBNAFirst Horizon Bank may access the debt markets in order to provide funding through the issuance of senior or subordinated unsecured debt subject to market conditions and compliance with applicable regulatory requirements. In 2014, FTBNAApril 2020, First Horizon Bank issued $400$450 million of fixed rate seniorsubordinated notes. These subordinated notes due in December 2019. In October 2015,qualify as Tier 2 capital for First Horizon Bank as well as FHN, issued $500 million of fixed rate senior notes due in December 2020.up to certain regulatory limits for minority interest capital instruments.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 109
Both FHN and FTBNAFirst Horizon Bank have the ability to generate liquidity by issuing preferred equity, and (for FHN) by issuing common equity, subject to market conditions and compliance with applicable regulatory requirements. In January 2013, FHN issued $100 million of Non-Cumulative Perpetual Preferred Stock, Series A. As of September 30, 2017, FTBNAMarch 31, 2020, First Horizon Bank and subsidiaries had outstanding preferred shares of $295.4 million, which are reflected as noncontrolling interest on the Consolidated Condensed Statements of Condition.
Parent company liquidity is primarily provided by cash flows stemming from dividends and interest payments collected from subsidiaries. These sources of cash represent the primary sources of funds to pay cash dividends to shareholders and principal and interest to debt holders of FHN. The amount paid to the parent company through FTBNAFirst Horizon Bank common dividends is managed as part of FHN’s overall cash management process, subject to applicable regulatory restrictions.Certain regulatory restrictions exist regarding the ability of FTBNAFirst Horizon Bank to transfer funds to FHN in the form of cash, common dividends, loans, or advances. At any given time, the pertinent portions of those regulatory restrictions allow FTBNAFirst Horizon Bank to declare preferred or common dividends without prior regulatory approval in an aggregate amount equal to FTBNA’sFirst Horizon Bank’s retained net income for the two most recent completed years plus the current year to date. For any period, FTBNA’sFirst Horizon Bank’s ‘retained net income’ generally is equal to FTBNA’sFirst Horizon Bank’s regulatory net income reduced by the preferred and common dividends declared by FTBNA. Excess dividends in either of the two most recent completed years may be offset with available retained net income in the two years immediately preceding it.First Horizon Bank. Applying the dividend restrictions imposed under applicable federal and state rules FTBNA’sas outlined above, the Bank’s total amount available for dividends was negative $64.7$294.7 million as of September 30, 2017 comparedApril 1, 2020. Additionally, a capital conservation buffer of 50 basis points above well-capitalized levels (equal to negative $132.5 millionan extra 2.5 percent above minimum levels) must be maintained on the Common Equity Tier 1, Tier 1 Capital and Total Capital ratios to avoid restrictions on dividends. Since the Total Capital ratio for First Horizon Bank fell slightly below the required buffer as of DecemberMarch 31, 2016. Consequently, FTBNA could not pay common2020, these capital conservation buffer rules limit the amount of dividends that the Bank can declare in second quarter 2020 to its sole common stockholder, FHN, or to its preferred shareholders without prior regulatory approval. FTBNA applied forapproval at $70.9 million. First Horizon Bank declared and received approval from the OCC to declare and paypaid common dividends to FHN in first, second, third and fourth quarter 2017 in the amounts of $40 million, $50 million, $80 million, and $80 million, respectively, andparent company in the amount of $250$65 million in 2016. FTBNAfirst quarter 2020 and $345.0 million in 2019. First Horizon Bank declared and paid preferred dividends in eachfirst quarter to date of 20172020 and each quarter of 2016, with OCC approval as necessary.2019. Additionally, FTBNAFirst Horizon Bank declared preferred dividends in fourthsecond quarter 2017, with OCC approval.2020, payable in July 2020.
Payment of a dividend to shareholders of FHN is dependent on several factors which are considered by the Board. These factors include FHN’s current and
prospective capital, liquidity, and other needs, applicable regulatory restrictions, and also availability of funds to FHN through a dividend from FTBNA.First Horizon Bank. FHN is subject to the capital conservation buffer requirements as described in the above paragraph for First Horizon Bank. Additionally, the Federal Reserve and the OCCbanking regulators generally require insured banks and bank holding companies to pay cash dividends only out of current operating earnings. Consequently, the decision of whether FHN will pay future dividends and the amount of dividends will be affected by current operating results. FHN paid a cash dividend of $.09$.15 per common share on October 2, 2017, April 1, 2020, and in October 2017April 2020 the Board approved a $.09$.15 per common share cash dividend payable on January 2, 2018,July 1, 2020, to shareholders of record on November 3, 2017.June 12, 2020. FHN paid a cash dividend of $1,550.00 per preferred share on OctoberApril 10, 2017,2020, and in October 2017April 2020 the Board approved a $1,550.00 per preferred share cash dividend payable on JanuaryJuly 10, 2018,2020, to shareholders of record on December 22, 2017.June 25, 2020.
CASH FLOWS
The Consolidated Condensed Statements of Cash Flows provide information on cash flows from operating, investing, and financing activities for the ninethree months ended September 30, 2017March 31, 2020 and 2016.2019. The level of cash and cash equivalents increased $50.0decreased $136.8 million during 2017 compared to an increase of $126.5first quarter 2020 and $192.5 million in 2016, as cash provided by financing activities more than offset cash used by operating and investing activities during both periods.first quarter 2019.
Net cash provided byin financing activities was $621.8 million$3.7 billion in 2017,first quarter 2020, largely driven by an increase ininflow of deposits and higher short-term borrowings (primarily FHLB borrowings) used to fund loan growth, somewhat offset by a decline in market-indexed deposits.stock). Net cash used by investing activities was $266.4 million$2.5 billion in 2017, asfirst quarter 2020, driven by strong loan growth and cash paid to acquire Coastal, was partially offset by a $459.8 million decrease in interest bearing cash. Net cash used by operating activities was $305.4 million in 2017. Operating cash decreased in the 2017 primarily due to net cash outflows of $501.2 million related to fixed income trading activities and
cash outflows of $85.0 million related to operating assets and liabilities, but were somewhat offset by favorably driven cash-related net income items.
Net cash provided by financing activities was $1.9 billion in 2016. Financing cash inflows in 2016 were positively affected by a $1.6 billionan increase in deposits and a $732.9 million increase in short-term borrowings, but were partially offset by $264.6 million in payments of long-term borrowings, which included the maturity of $250 million of subordinated notes. Net cash used by investing activities was $1.6 billion in 2016 and was primarily due to a $1.9 billion increase in loans, which included $537.4 million UPB of loans acquired from GE Capital. Cash outflows were partially offset by a $383.0 million decrease in interest-bearing cash. Net cash used by operating activities was $262.3 million$1.4 billion in 2016. Operating cash decreased in 2016first quarter 2020 primarily driven bydue to net cash outflows of net$407.9 million related to loans held-for-sale as purchases and originations outpaced proceeds from sales and settlements, $285.4 million related to fixed income trading activities and $323.8 million related to an increase in derivatives.
Net cash used in financing activities was $222.2 million in first quarter 2019, largely driven by a decrease in deposits, share repurchases and cash dividends paid during first quarter 2019, somewhat offset by an increase in other short-term borrowings, primarily FFP. Net cash used by investing activities was $92.7 million in first quarter 2019, largely driven by increases in loan balances somewhat offset by a decrease in interest-bearing cash and a net decrease in AFS debt securities, as maturities and sales outpaced purchases. Net cash provided by operating activities was $122.5 million in first quarter 2019 primarily due to net cash inflows of $287.5$369.2 million a $165related to fixed income trading activities and favorably driven cash-related
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 110
net income items, somewhat offset by outflows of $358.6 million cash contributionrelated to the qualified pension plan and net changes in operating assets and liabilities of $94.7 million.loans held-for-sale.
REPURCHASE OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS, AND OTHER CONTRACTUAL OBLIGATIONS |
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Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations |
Obligations from LegacyPre-2009 Mortgage Businesses
[Certain mortgage-related terms used in this section are defined in “Mortgage-Related Glossary” below.]
Overview
Prior to September 2008 FHN originated loans through its legacy mortgagepre-2009 mortgage business, primarily first lien home loans, with the intention of selling them. Sales typically were effected either as non-recourse whole loan sales or through non-recourse proprietary securitizations. Conventional conforming single-family residential mortgage loans were sold predominately to two GSEs:government-sponsored entities, or "GSEs": Fannie Mae and Freddie Mac. Also, federally insured or guaranteed whole loans were pooled, and payments to investors were guaranteed through Ginnie Mae. Many mortgage loan originations, especially nonconforming mortgage loans, were sold to investors, or certificate-holders, predominantly through FHFirst Horizon proprietary securitizations but also, to a lesser extent, through other whole loans sold to private non-Agency purchasers. FHN used only one trustee for all of its FHFirst Horizon proprietary securitizations. In addition to First Horizon proprietary securitization and other whole loan sales activities, FHN also originated mortgage loans eligible for FHA insurance or VA guaranty. In addition, FHN originated and sold HELOCs and second lien mortgages through other whole loans sold to private purchasers and, to a lesser extent, through FH proprietary securitizations. Currently, only one FH securitization of HELOCs remains outstanding.
For non-recourse loan sales, FHN has exposure for repurchase of loans, make-whole damages, or other related damages, arising from claims that FHN breached its representations and warranties made at closing to the purchasers, including GSEs, other whole loan purchasers, and the trustee of FH proprietary securitizations.
During the time these legacy activities were conducted, FHN frequently sold mortgage loans “with servicing retained.” As a result, FHN accumulated substantial amounts of MSR on its balance sheet, as well as contractual servicing obligations and related deposits and receivables. FHN conducted a significant servicing business under its First Horizon Home Loans brand.
MI was required by GSE rules for certain of the loans sold to GSEs and was also provided for certain of the loans that were securitized. MI generally was provided for first lien loanssometimes sold or securitized having an LTV ratio at originationsecond-lien, line of greater than 80 percent.credit, and government-insured mortgage loans.
In 2007, market conditions deteriorated to the point where mortgage-backed securitizations could no longer be sold economically; FHN’s last securitization occurred that year. FHN continued selling mortgage loans to GSEs until August 31, 2008, when FHN sold its national mortgage origination and servicing platforms along with a portion of its servicing assets and obligations. FHN then contracted to have its remaining servicing obligations sub-serviced. Since the platform saleFrom these pre-2009 activities, FHN has sold substantially all remaining servicing assets andincurred substantial losses stemming from obligations in several transactions, concluding in 2014.
Repurchase and Make-Whole Obligations
Starting in 2009 FHN received a high number of claims either to repurchase loans, from the purchaserpay make-whole amounts, or to pay the purchaser to “make them whole” for economic losses incurred. Theseotherwise resolve claims have been driven primarily by loan delinquencies. In repurchasethat loans which FHN originated, or make-whole claims a loan purchaser typically asserts that specified loans violated representations and warranties FHN made when theFHN's servicing of those loans, were sold. A significant majority ofdeficient in a manner for which FHN was liable. Many years ago, FHN established a repurchase and foreclosure liability, or reserve, in connection with those claims. FHN has settled many claims, received overall have come from GSEs, and the remainder are from purchasers of other whole loan sales. FHN has not receivedreserve is reduced each time a loan repurchase or make-whole claim from the FH proprietary securitization trustee.
Generally, FHN reviews each claim and MI cancellation notice individually. FHN’s responses include appeal, provide additional information, deny the claim (rescission), repurchase the loan or remit a make-whole payment, or reflect cancellation of MI.
After several years resolving repurchase and make-whole claims with each GSE on a loan-by-loan basis,is settled. As discussed in 2013 and 2014 FHN entered into DRAs with the GSEs, resolving a large fraction of potential claims. Starting in 2014 the overall number of such claims diminished substantially, primarily as a result of the DRAs. Each DRA resolved obligations associated with loans originated from 2000 to 2008, but certain obligations and loans were excluded. Under each DRA, FHN remains responsible for repurchase obligations related to certain excluded defects (such as title defects and violations of the GSE’s Charter Act) and FHN continues to have loan repurchase or monetary compensation obligations under the DRAs related to private mortgage insurance rescissions, cancellations, and denials (with certain exceptions). FHN also has exposure related to loans where there has been a prior bulk sale of servicing, as well as certain other whole-loan sales. With respect to loans where there has been a prior bulk sale of servicing, FHN is not responsible for MI cancellations and denials to the extent attributable to the acts of the current servicer.
While large portions of repurchase claims from the GSEs were settled with the DRAs, comprehensive settlement of repurchase, make-whole, and indemnity claims with non-Agency claimants is not practical. Such claims that are not resolved by the parties can, and sometimes have, become litigation.
FH Proprietary Securitization Actions
FHN has potential financial exposure from FH proprietary securitizations outside of the repurchase/make-whole process. Several investors in certificates sued FHN and others starting in 2009, and several underwriters or other counterparties have demanded that FHN indemnify and defend them in securitization lawsuits. The pending suits generally assert that disclosures made to investors in the offering and sale of certificates were legally deficient. A number of those matters have settled or otherwise been resolved. See Note 10 –- Contingencies and Other Disclosures, FHN's principal remaining exposures for a discussionthose activities relate to (i) indemnification claims by underwriters, loan purchasers, and other parties which assert that FHN-originated loans caused or contributed to losses which FHN is legally obliged to indemnify, and (ii) indemnification or other claims related to FHN's servicing of certain actions pending against FHN in relation to FH proprietary securitizations.pre-2009 mortgage loans.
Servicing Obligations
FHN’sFHN's national servicing business was sold as part of the platform sale in 2008. A significant amount of MSRmortgage servicing rights ("MSR") was sold at that time, and a significant amount was retained. The related servicing activities, including foreclosure and loss mitigation practices, not sold in 2008 were outsourced throughincluding a three-year subservicing arrangement (the “2008 subservicing agreement”) with the platform buyer (the “2008 subservicer”). The 2008 subservicing agreement expiredinitiated in 2011 when FHN entered into a replacement agreement with a new subservicer (the “2011 subservicer”"2011 subservicer"). In fourth quarter 2013 and first quarter 2014, FHN contracted to sellsold and transferred a substantial majority of its
remaining servicing obligations and servicing assets (including advances) to the 2011 subservicer. The servicing was transferred to the buyer in stages, and was substantially completed in first quarter 2014. The servicing still retained by FHN is not significant and continues to be subserviced.
As servicer, FHN had contractual obligations to the owners of the loans (primarily GSEs) and securitization trustees to handle billing, custodial, and other tasks related to each loan. Each subservicer undertook to perform those obligations on FHN’sFHN's behalf during the applicable subservicing period, although FHN legally remained the servicer of record for those loans that were subserviced.
The 2008 subservicer has been subject to a consent decree, and entered into a settlement agreement, with regulators related to alleged deficiencies in servicing and foreclosure practices. The 2008 subservicer has made demands of FHN, under the 2008 subservicing agreement, to pay certain resulting costs and damages totaling $43.5 million. FHN disagrees with those demands and has made no payments. This disagreement has the potential to result in litigation and, in any such future litigation, the claim against FHN may be substantial.
A certificate holder has contacted FHN, claiming that it has been damaged from alleged deficiencies in servicing loans held in certain FH proprietary securitization trusts. The holder has sued the FH securitization trustee on related grounds, but has not yet sued FHN. FHN cannot predict how this matter will proceed nor can FHN predict whether this matter ultimately will be material to FHN.
As mentioned in Note 10—10 - Contingencies and Other Disclosures—Disclosures - FHN has received a notice of indemnification claims from its 2011 subservicer, Nationstar Mortgage LLC, currently doing business as “Mr."Mr. Cooper.”" The notice asserts several categories of indemnity obligations by FHN to Nationstar in connection with mortgage loans under the subservicing arrangement and under the purchase transaction. This matter currently is not in formal litigation, but litigation in the future is possible.
Origination Data
From 2005 through 2008, FHN originated and sold $69.5 billion of mortgage loans to the Agencies. This includes $57.6 billion of loans sold to GSEs and $11.9 billion of loans guaranteed by Ginnie Mae. Although FHN conducted these businesses before 2005, GSE loans originated in 2005 through 2008 account for a substantial majority of all repurchase requests/make-whole claims received since the 2008 platform sale.
From 2005 through 2007, $26.7 billion of mortgage loans were included in FH proprietary securitizations. The last FH securitization occurred in 2007. On September 30, 2017, the remaining UPB of loans held in FH proprietary securitizations was $3.2 billion, comprised of $2.3 billion of Alt-A loans and $0.9 billion of Jumbo loans.
Mortgage-Related Glossary
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Agencies | | the two GSEs and Ginnie Mae | | HELOC | | home equity line of credit |
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certificates | | securities sold to investors representing interests in mortgage loan securitizations | | HUD | | Dept. of Housing and Urban Development |
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DOJ | | U.S. Department of Justice | | LTV | | loan-to-value, a ratio of the loan amount divided by the home value |
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DRA | | definitive resolution agreement with a GSE | | MI | | private mortgage insurance, insuring against borrower payment default |
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Fannie Mae, Fannie, FNMA | | Federal National Mortgage Association | | MSR | | mortgage servicing rights |
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FH proprietary securitization | | securitization of mortgages sponsored by FHN under its First Horizon brand | | nonconforming loans | | loans that did not conform to Agency program requirements |
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FHA | | Federal Housing Administration | | other whole loans sold | | mortgage loans sold to private, non-Agency purchasers |
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Freddie Mac, Freddie, FHLMC | | Federal Home Loan Mortgage Corporation | | 2008 platform sale, platform sale, 2008 sale | | FHN’s sale of its national mortgage origination and servicing platforms in 2008 |
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Ginnie Mae, Ginnie, GNMA | | Government National Mortgage Association | | pipeline or active pipeline | | pipeline of mortgage repurchase, make-whole, & certain related claims against FHN |
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GSEs | | Fannie Mae and Freddie Mac | | VA | | Veterans Administration |
Active Pipeline
FHN accumulates the amount of repurchase requests, make-whole claims, and certain other related claims into the “active pipeline.” The active pipeline includes the amount of claims for loan repurchase, make-whole payments, loans as to which MI has been canceled, and information requests from purchasers of loans originated and sold through FHN’s legacy mortgage banking business. MI was required for certain of the loans sold to GSEs or that were securitized. Although unresolved MI cancellation notices are not formal repurchase requests, FHN includes those loans in the active pipeline. Additionally, FHN is responsible for covering losses for purchasers to the extent there is a shortfall in MI insurance coverage (MI curtailment). Generally, the amount of a loan subject to a repurchase/make-whole claim, or with open MI issues, remains in the active pipeline throughout the resolution process with a claimant. Through June 2016 the active pipeline decreased, due in part to settlements and other resolutions, but also due to significant reductions in inflows. The pipeline is now relatively flat at a much
lower level due to a slower pace of inflows and resolutions. On September 30, 2017, the active pipeline was $52.9 million, slightly higher than $51.7 million on December 31, 2016.
The following table provides a detail of the active pipeline as of September 30, 2017 and December 31, 2016:
Table 23—Active Pipeline
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| | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Number | | Amount | | Number | | Amount |
Repurchase/make whole requests: | | | | | | | | |
Agencies | | 34 |
| | $ | 4,979 |
| | 23 |
| | $ | 4,196 |
|
Non-Agency whole loan-related | | 119 |
| | 18,126 |
| | 126 |
| | 19,214 |
|
MI | | 156 |
| | 25,307 |
| | 147 |
| | 23,171 |
|
Other requests (a) | | 33 |
| | 4,488 |
| | 37 |
| | 5,122 |
|
Total | | 342 |
| | $ | 52,900 |
| | 333 |
| | $ | 51,703 |
|
| |
(a) | Other requests typically include requests for additional information from both GSE and non-GSE purchasers. |
On September 30, 2017, Agencies accounted for approximately 63 percent of the total active pipeline, inclusive of MI cancellation notices, MI curtailments, and all other claims. MI curtailment requests, the largest portion of the active pipeline, are intended only to cover the shortfall in MI insurance proceeds. As a result, FHN’s loss from MI curtailments as a percentage of UPB generally is significantly lower than that of a repurchase or make-whole claim. At September 30, 2017, the active pipeline contained no loan repurchase or make-whole requests from the FH proprietary securitization trustee related to first lien mortgage loans based on claims related to breaches of representations and warranties related to origination.
Repurchase Accrual Methodology
Over the past several years FHN’s approach for determining the adequacy of the repurchase and foreclosure reserve has evolved, sometimes substantially, based on changes in information available. Repurchase/make-whole rates vary based on purchaser, vintage, and claim type. For those loans repurchased or covered by a make-whole payment, cumulative average loss severities range between 50 and 60 percent of the UPB.
Repurchase Accrual Approach
Repurchase/Make-whole and Damages obligations and estimates for probable incurred losses associated with loan populations excluded from the DRAs are significant components of FHN’s remaining repurchase liability as of September 30, 2017. Other components of that liability primarily relate to other whole loans sold, MI rescissions, and loans included in bulk servicing sales effected prior to the DRAs.
In determining thepotential loss content, of GSE loans subject to repurchase requests excluded from the DRAs (primarily loans included in bulk sales),claims are analyzed by purchaser, vintage, and claim type. FHN applies a vintage level estimate of loss to all loans sold to the GSEs that were not included in the settlements and which have not had a prior repurchase resolution. First, pre-payment, default, andconsiders various inputs including claim rate estimates, are applied by vintage to estimate the aggregate claims expected but not yet resolved. Historical loss factors for each sale vintage and repurchase rates are then applied to estimate total loss content. Loss content related to other whole loan sales is estimated by applying the historical average repurchase and loss severity rates, mortgage insurance cancellations, and mortgage insurance curtailment requests. Inputs are applied to the current UPB in the active pipeline to calculate estimated losses attributable to the current pipeline. FHN then uses an internal model to calculate loss content by applying historical average repurchase and loss severity rates to historical average inflows. For purposes of estimating loss content, FHN also considers MI cancellations. When assessing loss content related to loans where MI has been cancelled, FHN applies historical loss factors (including repurchase rates and loss severity ratios) to the total unresolved MI cancellationsclaims in the active pipeline, as well as applying these factors to historical average inflows to estimate loss content. Additionally, FHN identifies estimated lossescontent related to MI curtailment requests.potential future inflows. Management also evaluates the nature of claims from purchasers and/or servicers of loans sold to determine if qualitative adjustments are appropriate.
Repurchase and Foreclosure Liability
The repurchase and foreclosure liability is comprised of reservesaccruals to cover estimated loss content in the active pipeline as well as(consisting of mortgage loan repurchase, make-whole, foreclosure/servicing demands and certain related exposures), estimated future inflows, and estimated loss content related to certain known claims not currently
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 111
included in the active pipeline. The liability contemplates repurchase/make-whole and damages obligations and estimates for probable incurred losses associated with loan populations excluded from the settlements with the GSEs, as well as other whole loans sold, mortgage insurance cancellations rescissions, and loans included in bulk servicing sales effected prior to the settlements with the GSEs. FHN compares the
estimated probable incurred losses determined under the applicable loss estimation
approaches described above for the respective periods with current reserve levels. Changes in the estimated required liability levels are recorded as necessary through the repurchase and foreclosure provision.
The following table provides a rollforward of the legacy mortgage repurchase liability for the three and nine months ended September 30, 2017 and 2016:
Table 24—Reserves for Repurchase and Foreclosure Losses
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| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Legacy Mortgage | | | | | | | | |
Beginning balance | | $ | 34,599 |
| | $ | 67,383 |
| | $ | 65,309 |
| | $ | 114,947 |
|
Provision/(provision credit) for repurchase and foreclosure losses (a) | | (609 | ) | | (218 | ) | | (22,580 | ) | | (31,618 | ) |
Net realized losses | | (124 | ) | | (203 | ) | | (8,863 | ) | | (16,367 | ) |
Balance on September 30 | | $ | 33,866 |
| | $ | 66,962 |
| | $ | 33,866 |
| | $ | 66,962 |
|
(a) Nine months ended September 30, 2017 and 2016 include $20.0 million and $31.4 million, respectively, related to the settlement of certain repurchase claims.
Other FHN Mortgage Exposures
FHN’s FHA and VA program lending was substantial prior to the 2008 platform sale, and has continued at a much lower level since then. As lender, FHN made certain representations and warranties as to the compliance of the loans with program requirements. Over the past several years, most recently in first quarter 2015, FHN occasionally has recognized significant losses associated with settling claims and potential claims by government agencies, and by private parties asserting claims on behalf of agencies, related to these origination activities. At September 30, 2017, FHN had not accrued a liability for any matter related to these government lending programs, and no pending or known threatened matter related to these programs represented a material loss contingency described in Note 10 – Contingencies and Other Disclosures.
At September 30, 2017, FHN had not accrued a liability for exposure for repurchase of first-lien loans related to FH proprietary securitizations arising from claims from the trustee that FHN breached its representations and warranties in FH proprietary securitizations at closing. FHN’s trustee is a defendant in lawsuits in which the plaintiffs have asserted that the trustee has duties to review loans and otherwise to act against loan originators and loan servicers, including FHN, outside of the duties specified in the applicable trust documents; FHN is not a defendant and is not able to assess what, if any, exposure FHN may have as a result of them.
FHN is defending, directly or as indemnitor, certain pending lawsuits brought by purchasers of certificates in FH proprietary securitizations or their assignees. FHN believes a new lawsuit based on federal securities claims that offering disclosures were deficient cannot be brought at this time due to the running of applicable limitation periods, but other investor claims, based on other legal theories, might still be possible. Due to the sales of MSR from 2008 through 2014, FHN has limited visibility into current loan information such as principal payoffs, refinance activity, delinquency trends, and loan modification activity.
Many non-GSE purchasers of whole loans from FHN included those loans in their own securitizations. Regarding such other whole loans sold, FHN made representations and warranties concerning the loans and provided indemnity covenants to the purchaser/securitizer. Typically the purchaser/securitizer assigned key contractual rights against FHN to the securitization trustee. As mentioned above, repurchase, make-whole, indemnity, and other monetary claims related to specific loans are included in the active pipeline and repurchase reserve. In addition, currently the following categories of actions are pending which involve FHN and other whole loans sold: (i) FHN has received indemnification requests from purchasers of loans or their assignees in cases where FHN is not a defendant; (ii) FHN has received subpoenas seeking loan reviews in cases where FHN is not a defendant; (iii) FHN has received repurchase, indemnity, and other demands from purchasers or their assignees; and (iv) FHN is a defendant in legal actions involving FHN-originated other whole loans sold. At September 30, 2017, FHN’s repurchase and foreclosure liability included certain known exposuresdecreased to $13.5 million on March 31, 2019 from other whole loans sold.$14.5 million on December 31, 2019.
Certain government entities have subpoenaed information from FHN and others. These entities include the FDIC (on behalf of certain failed banks) and the FHLBs of San Francisco, Atlanta, and Seattle, among others. These entities purport to act on
behalf of several purchasers of FH proprietary securitizations, and of non-FH securitizations which included other whole loans sold. Collectively, the subpoenas seek information concerning: a number of FH proprietary securitizations and/or underlying loan originations; and originations of certain other whole loans sold which, in many cases, were included by the purchaser in its own securitizations. Some subpoenas fail to identify the specific investments made or loans at issue. Moreover, FHN has limited information regarding at least some of the loans under review. Unless and until a review (if related to specific loans) becomes an identifiable repurchase claim, the associated loans are not considered part of the active pipeline.
MARKET UNCERTAINTIES AND PROSPECTIVE TRENDS
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Market Uncertainties and Prospective Trends |
FHN’s future results could be affected both positively and negatively by several known trends. Key among those are FHN’s strategic initiatives, changes in the U.S. and global economy and outlook, government actions affecting interest rates, availability and the administration of stimulus relief for the economy and FHN’s customers related to the recent global COVID-19 pandemic, political uncertainty, potential changes in federal policies.policies and the potential impact to our customers, and FHN’s strategic initiatives. In addition, legacypre-2009 mortgage business matters in the non-strategicNon-strategic segment are likely tocould continue to impact FHN’s quarterly results in ways whichwhich are both difficult to predict and unrelated to current operations.
FHN has prioritized expense discipline to include reducing or controlling certain expenses and investing in revenue-producing activities and critical infrastructure. FHN has actively pursued acquisition opportunities while maintaining a disciplined approach to valuations; to date all which closed have been moderate in size. FHN has been and remains amenable to a much more impactful acquisition, including FHN's agreement to acquire Capital Bank which will increase FHN's proforma size to approximately $40 billion in assets. FHN remains committed to organic growth through customer retention, key hires, targeted incentives, and other traditional means.
Performance by FHN, and the entire U.S. financial services industry, is affected considerably by the overall health of the U.S. economy.and global economy and outlook. Furthermore, FHN may be directly or indirectly impacted by global events that impact our customers and their businesses. The most recent recession endedglobal COVID-19 pandemic has led to periods of significant volatility in 2009. Growth during the economic expansion since 2009 largely has been muted, compared to earlier recoveries,financial commodities (including oil and somewhat inconsistent from one quarter to the next. Though the economic expansion is 8 years old, currently the U.S. economy does not appear to be weakening or falling back into recession. A continuation of the current expansion would support, rather than hinder, future loangas) and other financial activity growth by our customers.markets, has adversely affected FHN’s ability to conduct normal business, has adversely affected FHN customers, and is likely to harm FHN’s business and future results of operations.
TheIn March 2020 the Federal Reserve has raisedlowered short-term interest rates by 25 basis points three timestwice and started a “quantitative easing” program intended to lower longer-term interest rates and foster access to credit. The effective yields of 10-year and 30-year U.S. Treasury securities achieved record low rates and the U.S. Congress enacted relief legislation which, among other things, is intended to provide emergency credit to businesses at risk for failure from government and public actions related to the COVID-19 pandemic, and to mitigate an economic recession. These changes in interest rates and the volatility in the past four quarters and has signaled a willingness to continue to raise rates in a measured fashion depending on economic data and trends. Although another increase is expected late in 2017, increases after that may be less frequent than in 2017. If the Fed continues to raise rates, FHN’s net interest margin in the future ismarket are likely to continue an improving trend. A steeper yield curve should also bolster activity within FHN’s Fixed Income business. However, if future economic data shows a risk of lower growth or recession, interest rates may stall or even fall, which likely would adverselynegatively impact FHN’s net interest margin. Falling and/or moderately volatile interest rates, however, should enhance activity within FHN’s Fixed Income business. Also, if Fed actions cause long-term ratesIn the near term, amortization of net processing fees related to rise slower than short-term rates, thengovernment relief programs, including the yield curve would flatten, which would adversely impact FHN’sPaycheck Protection Program ("PPP"), may offset a portion of the net interest margin.margin decline. In addition, credit spreads have widened. For new loans, wider spreads should help mitigate net interest margin compression. However, FHN will not be able to capture the widened spreads quickly for outstanding floating-rate loans.
The economic effects of the COVID-19 pandemic have significantly altered business in the U.S. and globally leading to partial or full business closures, individuals being furloughed or laid off, significant increases in unemployment, and workers being partially or wholly ordered to work from home. Disruption to FHN’s customers due to governmental and societal responses to COVID-19 are likely to adversely affect FHN’s loan and deposit fee income as well as create downward loan migration and a corresponding increase in loan loss expense and reserves. In addition, loan charge-offs likely will increase over time, especially if economic disruption related to COVID-19 continues for more than a few months. Furthermore, government programs under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and other guidance intended to provide relief to customers through temporary modifications and deferrals, may in some instances mask or postpone reporting of credit problems and potential defaults. In these circumstances, current credit quality indicators may not be reflective of the underlying health of FHN's portfolios.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on the businesses of FHN for the remainder of 2020 or afterward.
In 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates the London InterBank Offered Rate (“LIBOR”), announced that it intends to halt persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, LIBOR as currently operated may not continue after 2021. FHN is not currently able to predict the impact that the transition from LIBOR will have on the Company; however, because FHN has instruments with floating rate terms based on LIBOR, FHN may experience increases in interest, dividends, and other costs relative to these instruments subsequent to 2021. Additionally, the transition from LIBOR could impact or change FHN’s hedge accounting practices. FHN has initiated efforts to 1) develop an inventory of affected loans, securities, and derivatives, 2) evaluate and draft modifications as needed to address loans outstanding at the time of LIBOR retirement, 3) obtain an understanding of the potential
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 112
effects for applicable securities and derivatives and 4) assess revisions to product pricing structures based on alternative reference rates. In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides several optional expedients and exceptions to ease the potential burden in accounting for reference rate reform. Refer to the Accounting Changes Issued but Not Currently Effective section of Note 1 - Financial Information for additional information. Additionally, the IRS has released a proposal that is intended to facilitate the transition of existing contracts from LIBOR to new reference rates without triggering modification accounting or taxable exchange treatment for those contracts. This proposal contains specific guidance that must be met in order to qualify for the beneficial transition approach and FHN is considering this guidance in its transition plans.
FHN cannot predicthas prioritized expense discipline to include reducing or controlling certain expenses including realization of expense efficiencies from its 2017 merger with CBF and investing in revenue-producing activities, customer-facing technology, and critical infrastructure. FHN remains committed to organic growth through customer retention, key hires, targeted incentives, and other traditional means.
When FHN closes its proposed merger with IBKC, under applicable accounting guidance FHN will be required to record IBKC's loans at estimated fair value as of the timing, resolutionclosing date. In addition, FHN will be required to assess the current (at that time) expected credit losses associated with IBKC loans. That credit loss assessment will be separate from the fair value estimation, and effects of potential new legislation. The potential legislative actionswill result in a charge to FHN's income for certain loans for the period in which currently seemclosing occurs. FHN is not able make that assessment at this time, but believes that the most likelyassociated charge to income will be impactfulsubstantial to FHN include corporate tax reform, general regulatory reform, and financial regulatory reform, all of which can affect the overall economy and FHN customers.quarterly income.
Lastly, while FHN has made significant progress in resolvingresolved most matters from the legacypre-2009 mortgage business, several matterssome remain unresolved. The timing or financial impact of resolution of these matters most of which are in litigation, cannot be predicted with accuracy. Accordingly, the non-strategic segment is expected tomay occasionally and unexpectedly impact FHN’s overall quarterly results negatively or positively with reserve accruals or releases. Also, although new legacypre-2009 mortgage business matters of significance arise at a much slower pace than in years past and some formerly common legal claims no longer can be made due to the passage of time, potential for new legacypre-2009 mortgage business matters remains.
Foreclosure Practices
All lenders are affected by the heightened regulation of servicing, foreclosure, and loss mitigation practices, at both federal and state levels, implemented since 2009. In addition, FHN retains exposure for potential deficiencies in servicing related to its legacypre-2009 mortgage servicing business and subservicing arrangements. Further details regarding these legacy matters are provided in “Obligations
"Obligations from LegacyPre-2009 Mortgage Businesses – Overview –- Servicing Obligations”Obligations" under “Repurchase"Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations.”"
FHN response to the COVID-19 pandemic
CRITICAL ACCOUNTING POLICIESAs previously mentioned, the COVID-19 pandemic has, and will continue, to directly and indirectly impact FHN and our customers. FHN has adapted many operations to help ensure the health and safety of employees and customers during these uncertain times. Among other things, FHN has implemented remote work policies, branch activities handled by appointment or via drive-through only, as well as additional sick time and child care assistance for employees. Additionally, FHN’s foundation has donated $2.5 million to support community relief efforts.
ThereLoans
FHN is actively monitoring the COVID-19 pandemic and its impact on customers and FHN’s credit quality. In response, FHN is proactively reaching out to customers to discuss challenges and solutions, is providing line draws and new extensions to existing customers, is providing support for small businesses through the PPP (discussed in more detail below) and other stimulus programs, as well as providing lending and deposit assistance through deferrals and waived fees. Additionally, in certain sectors, FHN has reduced or stopped new lending.
Paycheck Protection Program
On March 27, 2020, the CARES Act was signed into law. Sections 1102 and 1106 of the CARES Act include a PPP that made $349 billion of funds available for qualifying businesses to receive fully-guaranteed loans via the Small Business Administration’s Section 7(a) lending program. These loans are potentially fully forgivable, depending upon the borrower’s use of the funds and maintenance of employment levels.
PPP loans are intended to provide cash-flow assistance to nonprofit and small business employers for expenses incurred between February 15, 2020, and June 30, 2020. Generally, the maximum loan amount per qualified borrower is the lesser of 1) 250 percent of average monthly payroll costs (e.g., salaries and wages up to $100,000 and benefits) during the previous one-year period plus the outstanding amount of any existing SBA Economic Injury Disaster Loan made from January 1, 2020 through April 3, 2020, that is being refinanced under the PPP and 2) $10 million. Eligible borrowers include any of the following that were in operation on February 15, 2020:
Businesses, including nonprofit organizations under Internal Revenue Code (“IRC”) Section 501(c)(3), veterans’ organizations under IRC Section 501(c)(19), and tribal organizations, that
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 113
have 500 or fewer employees (or the Small Business Administration’s employee-based or revenue-based industry size standard, if higher).
Businesses in the food and accommodations industry (as defined in NAICS 724) with 500 or fewer employees per location.
Sole proprietors, independent contractors, and self-employed individuals.
All PPP loans carry the same terms which are as follows:
Fixed interest rate of 1 percent per annum
Maturity date of two years, with the ability to prepay earlier with no fees
First payment deferred for six months
Waiver of “credit elsewhere” SBA 7(a) requirement
No collateral or personal guarantees required
No borrower fees charged to obtain such loans
Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on PPP loans to the extent that the proceeds are used to cover eligible payroll, interest, rent, and utility costs over the eight-week period after the loan is made as long as the borrower retains its employees and their compensation levels. However, no more than 25 percent of loan forgiveness may be attributable to eligible rent, utilities and interest. In addition, loans qualifying for forgiveness will not be included in the borrower’s taxable income.
Lenders making these PPP loans are paid a fee by the Small Business Administration on the date the loans are made. Lender fees are based on the following sliding scale.
Loans $350,000 and under: 5.00%
Loans greater than $350,000 to $2 million: 3.00%
Loans greater than $2 million: 1.00%
Borrowers can use agents to assist in the preparation of their PPP applications. Those agents are paid from the SBA fees received from the originating bank. Additionally, originating banks have certain internal costs of originating PPP loans. For applicable loans, agent fees are paid by originating banks based on the following scale.
Loans $350,000 and under: 1.00%
Loans greater than $350,000 to $2 million: 0.50%
Loans greater than $2 million: 0.25%
The SBA provides a 100 percent guarantee on PPP loans, which is an increase to the existing guarantee percentages under current SBA loan programs. In the event that a lender sells a PPP loan on the secondary market, the guarantee will transfer with the loan. Lenders are not required to conduct any verification regarding loan forgiveness provided that a borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the eligibility of the expenditures made. Lenders will be held harmless if they rely on such documentation. Lenders must make a decision on the forgiveness within 60 days. Section 1106 of the CARES Act indicates that any lender or purchaser of PPP loans may report to the SBA an expected forgiveness amount, and the SBA will purchase the expected forgiveness amounts, plus any interest accrued to date, within 15 days after such requests are received. Requests for forgiveness may occur as early as seven weeks after the loan is originated.
As part of FHN’s efforts to support customers through various stimulus programs, FHN originated 6,761 of PPP loans with an aggregate principal of $1.7 billion in April 2020. For these loans, FHN anticipates recognizing net origination fees of approximately $45 to $50 million. Additional lower origination volumes are anticipated in May. FHN has decided to hold its PPP loans for investment. Therefore, the net amount of SBA fees and total direct origination costs are deferred as a discount to the recorded carrying value of the PPP loans. This discount is being amortized prospectively to interest income. SBA loan forgiveness payments are considered prepayments of the related loans. Under existing accounting principles, amortization of net origination fees can reflect expected prepayment activity if prepayments are determined to be probable and both the timing and volume can be reasonably estimated. Based on the terms of the PPP loans, including the expected end of the payment deferral period, FHN estimates that substantially all of the prepayment-eligible portions of PPP loans will be prepaid in 2020 as these loans are forgiven. These estimated prepayments will result in a similar amount of the net fees being recognized in interest income in 2020.
Since PPP loans carry a full SBA guarantee, they do not have any credit risk and will not affect the amount of provision and ALLL recorded. Consistent with this view, the CARES Act indicates that investors should assign a risk weight of zero to PPP loans for regulatory capital purposes.
The initial funding for the $359 billion PPP loans was exhausted by April 16, 2020. However, on April 24, 2020, an additional $320 billion of funding was approved for the PPP. These funds will likely be exhausted in early May.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 114
Lending Assistance for Borrowers
Other customer support initiatives include incremental lending assistance for borrowers through delayed payment programs and fee waivers. The following table provides the UPB of loans related to deferrals granted to FHN’s customers that have been processed through April 30, 2020.
|
| | | | |
(Dollars in thousands) | | As of April 30, 2020 |
Commercial: | | |
General C&I | | $ | 1,582,903 |
|
Loans to mortgage companies | | — |
|
TRUPS | | — |
|
Income CRE | | 1,061,452 |
|
Residential CRE | | 1,715 |
|
Total Commercial | | $ | 2,646,070 |
|
Consumer: | | |
HELOC | | $ | 69,531 |
|
R/E installment loans | | 494,205 |
|
Credit Card & Other | | 3,279 |
|
Total Consumer | | 567,015 |
|
Total | | $ | 3,213,085 |
|
Commercial deferrals processed are comprised primarily of general commercial (39 percent or $1.0 billion), commercial real estate (28 percent or $731.3 million - primarily within our Mid-Atlantic, Southeast Tennessee,
and Middle Tennessee markets), franchise finance (13 percent or $334.9 million), business banking (8 percent or $208.9 million), and private client (6 percent - $152.0 million).
Deposits
Deposit levels were also significantly impacted in April due to the impacts of COVID-19 pandemic which resulted in an increase in period-end deposits of $3.7 billion, or 11 percent, from March 31, 2020 levels. This increase was due to an increase in commercial deposits as FHN saw many firms deposit funds (from lines of credit, PPP loans, operational revenues, etc.) into non-interest bearing operating accounts in order to increase their liquidity positions. Additionally, as various government stimulus programs were rolled out FHN saw increases in deposits from the Healthcare industry as Medicare reimbursements related to COVID-19 became available and a jump in deposits in Correspondent banking due to stimulus and PPP funds deposited into client banks. Consumer deposit inflows were also impacted by approximately $300 million in initial stimulus payments in mid-April.
|
| | | | |
Critical Accounting Policies |
Except for the changes to the following Allowance for Loan Losses section, there have been no significant changes to FHN’s critical accounting policies as described in “Critical Accounting Policies” beginning on page 64 99 of Exhibit 13Item 7 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
ALLOWANCE FOR LOAN LOSSES
Management’s policy is to maintain the ALLL at a level sufficient to absorb expected credit losses in the loan portfolio. Management performs periodic and systematic detailed reviews of its loan portfolio to identify trends and to assess the overall collectability of the loan portfolio. Management believes the accounting estimate related to the ALLL is a “critical accounting estimate” as: (1) changes in it can materially affect the provision for loan losses and net income, (2) it requires management to predict borrowers’ likelihood or capacity to repay, including evaluation of inherently uncertain future economic conditions, (3) prepayment activity must be projected to estimate of the life of loans that often are shorter than contractual terms, (4) it requires estimation of a reasonable and supportable forecast period for credit losses for loan portfolio segments before reversion to historical loss levels over the remaining life of a loan and (5) expected future recoveries of amounts previously charged off must be estimated. Accordingly, this is a highly subjective process and requires significant judgment since it is difficult to evaluate current and future economic conditions in relation to an overall credit cycle and estimate the timing and extent of loss events that are expected to occur prior to end of a loan’s estimated life. The ALLL is increased by the provision for loan losses and recoveries and is decreased by charged-off loans. Principal loan amounts are charged off against the ALLL in the period in which the loan or any portion of the loan is deemed to be uncollectible. This critical accounting estimate applies to the regional banking, non-strategic, and corporate segments. A management committee comprised of representatives from Risk Management, Finance, Credit, and Treasury performs a quarterly review of the assumptions used in FHN’s ALLL analytical models, makes qualitative assessments of the loan portfolio, and determines if qualitative adjustments should be recommended to the modeled results. On a quarterly basis, as a part of Enterprise Risk reporting and discussion, management addresses credit reserve adequacy and credit losses with the Executive and Risk Committee of FHN’s Board of Directors.
FHN believes that the critical assumptions underlying the accounting estimates made by management include: (1) the commercial loan portfolio has been properly risk graded based on information about borrowers in specific industries and specific issues with respect to single borrowers; (2) borrower specific information made available to FHN is current and accurate; (3) the loan portfolio has been segmented properly and individual loans have similar credit risk characteristics and will behave similarly; (4) the lives for loan portfolio pools have been estimated properly, including consideration of expected prepayments; (5) the economic forecasts utilized in the modeling of expected credit losses are reflective of future economic conditions; (6) entity-specific historical loss information has been properly assessed for all loan portfolio segments as the
initial basis for estimating expected credit losses; (7) the reasonable and supportable periods for loan portfolio segments have been properly determined; (8) the reversion methodologies and timeframes for migration from the reasonable and supportable period to the use of historical loss rates are reasonable; (9) expected recoveries of prior charge off amounts have been properly estimated; and (10) qualitative adjustments to modeled loss results reasonably reflect expected future credit losses as of the date of the financial statements.
While management uses the best information available to establish the ALLL, future adjustments to the ALLL and methodology may be necessary if economic or other conditions differ substantially from the assumptions used in making the estimates. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels vary from previous estimates.
See Note 1 - Summary of Significant Accounting Policies and Note 5 - Allowance for Loan Losses for detail regarding FHN’s processes, models, and methodology for determining the ALLL.
ACCOUNTING CHANGES ISSUED BUT NOT CURRENTLY EFFECTIVE
Refer to Note 1 – Financial Information for a detail of accounting standards that have been issued but are not currently effective, which section is incorporated into MD&A by this reference.
The following table provides a reconciliation of non-GAAP items presented in this MD&A to the most comparable GAAP presentation:
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 115
Table 25—23—Non-GAAP to GAAP Reconciliation
|
| | | | | | | | |
| | Three Months Ended March 31 |
(Dollars in thousands) | | 2020 | | 2019 |
Average Tangible Common Equity (Non-GAAP) | | | | |
Average total equity (GAAP) | | $ | 5,002,394 |
| | $ | 4,809,235 |
|
Less: Average noncontrolling interest (a) | | 295,431 |
| | 295,431 |
|
Less: Average preferred stock (a) | | 95,624 |
| | 95,624 |
|
(A) Total average common equity | | $ | 4,611,339 |
| | $ | 4,418,180 |
|
Less: Average intangible assets (GAAP) (b) | | 1,560,340 |
| | 1,584,694 |
|
(B) Average Tangible Common Equity (Non-GAAP) | | $ | 3,050,999 |
| | $ | 2,833,486 |
|
Net Income Available to Common Shareholders | | | | |
(C) Net income available to common shareholders (annualized) (GAAP) | | $ | 48,545 |
| | $ | 401,642 |
|
Ratios | | | | |
(C)/(A) Return on average common equity (“ROCE”) (GAAP) (c) | | 1.05 | % | | 9.09 | % |
(C)/(B) Return on average tangible common equity (“ROTCE”) (Non-GAAP) (d) | | 1.59 |
| | 14.17 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Average Tangible Common Equity (Non-GAAP) | | | | | | | |
Average total equity (GAAP) | $ | 2,866,757 |
| | $ | 2,718,319 |
| | $ | 2,789,726 |
| | $ | 2,672,894 |
|
Less: Average noncontrolling interest (a) | 295,431 |
| | 295,431 |
| | 295,431 |
| | 295,431 |
|
Less: Average preferred stock (a) | 95,624 |
| | 95,624 |
| | 95,624 |
| | 95,624 |
|
(A) Total average common equity | $ | 2,475,702 |
| | $ | 2,327,264 |
| | $ | 2,398,671 |
| | $ | 2,281,839 |
|
Less: Average intangible assets (GAAP) (b) | 280,575 |
| | 214,260 |
| | 258,138 |
| | 215,552 |
|
(B) Average Tangible Common Equity (Non-GAAP) | $ | 2,195,127 |
| | $ | 2,113,004 |
| | $ | 2,140,533 |
| | $ | 2,066,287 |
|
Net Income Available to Common Shareholders | | | | | | | |
(C) Net income available to common shareholders (annualized) (GAAP) | $ | 267,148 |
| | $ | 251,434 |
| | $ | 283,652 |
| | $ | 223,810 |
|
Ratios | | | | | | | |
(C)/(A) Return on average common equity (“ROE”) (GAAP) (c) | 10.79 | % | | 10.80 | % | | 11.83 | % | | 9.81 | % |
(C)/(B) Return on average tangible common equity (“ROTCE”) (Non-GAAP) (d) | 12.17 |
| | 11.90 |
| | 13.25 |
| | 10.83 |
|
(a)Included in Total equity on the Consolidated Condensed Statements of Condition.
(b)Includes Goodwill and other intangible assets, net of amortization.
(c)Ratio is annualized net income available to common shareholders to average common equity.
(d)Ratio is annualized net income available to common shareholders to average tangible common equity.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 116
| |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information called for by this item is contained in
|
| | | | |
(a) | Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 2 of Part I of this report, including in particular the section entitled “Risk Management” beginning on page 114106 of this report and the subsections entitled “Market Risk Management” beginning on page 114106 and “Interest Rate Risk Management” beginning on page 116108 of this report, and |
| |
(b) | Note 14 to the Consolidated Condensed Financial Statements appearing on pages 53-5951-57 of this report, |
all of which materials are incorporated herein by reference. For additional information concerning market risk and our management of it, refer to: Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in Exhibit 13 Item 7 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016,2019, including in particular the section entitled “Risk Management” beginning on page 4788 of that Report and the subsections entitled “Market Risk Management” beginning on page 4889 and “Interest Rate Risk Management” appearingbeginning on pages 50-51page 90 of that Report;Report; and Note 22 to the Consolidated Financial Statements appearing on pages 153-158194-200 of Exhibit 13Item 8 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
| |
Item 4. | Controls and Procedures |
Item 4. Controls and Procedures
| |
(a) | Evaluation of Disclosure Controls and Procedures. FHN’s management, with the participation of FHN’s chief executive officer and chief financial officer, has evaluated the effectiveness of FHN’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and the chief financial officer have concluded that FHN’s disclosure controls and procedures were effective as of the end of the period covered by this report. |
| |
(b) | Changes in Internal Control over Financial Reporting. There have not been any changes in FHN’s internal control over financial reporting during FHN’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, FHN’s internal control over financial reporting. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 117
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Part II.
OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
The “Contingencies” section of Note 10 to the Consolidated Condensed Financial Statements beginning on page 3740 of this Report is incorporated into this Item by reference.
NotItem 1A. Risk Factors
The following supplements Item 1A of our annual report on Form 10-K for the year ended December 31, 2019. It relates to most discussions within that Item, particularly discussions under the captions: “Operational Risks,” “Risks Associated with Economic Downturns and Changes,” “Risks Associated with Monetary Events,” “Reputation Risks,” “Credit Risks,” “Service Risks,” “Regulatory, Legislative, and Legal Risks,” “Risks of Expense Control,” “Insurance,” “Liquidity and Funding Risks,” “Credit Ratings,” “Interest Rate and Yield Curve Risks,” “Asset Inventories and Market Risks,” and “Stockholding and Governance Risks.”
Supplemental Risk Factor Disclosures related to COVID-19
The recent global COVID-19 pandemic has led to periods of significant volatility in financial, commodities (including oil and gas) and other markets, has adversely affected FHN’s ability to conduct normal business, has adversely affected FHN customers, and is likely to harm FHN’s businesses and future results of operations.
In December 2019, a coronavirus (COVID-19) was reported in China, and has since spread to most countries in the world, including the United States. Starting in late February 2020, financial market volatility increased dramatically based on concerns that COVID-19, and the steps being undertaken in many countries to mitigate its spread, would significantly disrupt economic activity.
In March 2020, financial market volatility increased further, with several one-day stock market swings that resulted in significant market declines. Additionally, in March: market pricing deteriorated in virtually all sectors and asset classes except U.S. Treasury securities; the World Health Organization declared COVID-19 to be a pandemic; the U.S. President declared the COVID-19 pandemic to be a national emergency, allowing several federal disaster programs to be accessed by states and cities; many states and cities in the U.S. declared health emergencies, lockdowns, travel restrictions, and quarantines, prohibiting gatherings of more than a small number of people and ordering or urging most businesses and workplaces to close or operate on a very restricted basis; the Federal Reserve lowered short-term interest rates twice and started a “quantitative easing” program intended to lower longer-term interest rates and foster access to credit; the effective yields of 10-year and 30-year U.S. Treasury securities achieved record low rates; and the U.S. Congress enacted relief legislation which, among other things, is intended to provide emergency credit to businesses at risk for failure
from government and public actions related to the COVID-19 pandemic, and to mitigate an economic recession which has not been officially declared but is widely believed to have begun in March. Government programs instituted recently include loan programs administered by banks and other private-sector lenders, liquidity programs administered by the U.S. Treasury, and favorable accounting and regulatory treatment (for lenders) of certain loan payment deferrals.
The economic effects of these and related actions and events in the U.S. have included: large numbers of partial or full business closures; large numbers of people being furloughed or laid off; large increases in unemployment; large numbers of workers being partially or wholly ordered to work from home; large numbers of businesses at risk of insolvency as revenues drop off precipitously, especially in businesses related to travel, leisure, and physical personal services; large numbers of investors realizing substantial losses in their portfolios and retirement funds; and large numbers of consumers being unwilling to undertake significant discretionary spending. In addition, worldwide demand for oil has fallen sharply in conjunction with the pandemic resulting in sharp drops in oil prices and sharp drops in the values of oil-related assets. Further, certain banking organizations globally have limited share buybacks and other capital actions. The most significant effects already experienced by FHN, and actions already taken by FHN, are mentioned in Part I, Item 2 of this report under the captions “Financial Summary,” “Income Statement Review,” “Asset Quality,” and “Market Uncertainties and Prospective Trends,” beginning on pages 81, 83, 94, and 112 of this report, respectively.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on the businesses of FHN for the remainder of 2020 or afterward. FHN’s efforts to mitigate
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 118
the adverse impacts of COVID-19 may not be effective, and in any case are likely to be only a partial mitigate. The full extent of impacts resulting from the COVID-19 pandemic and other events beyond the control of FHN will depend on future developments, which are highly uncertain and unpredictable, including new information which may emerge concerning the severity of the pandemic and further actions taken to prevent, treat, or mitigate the spread of COVID-19, among others. Moreover, global markets for oil and gas have been, and may continue to be, severely impacted by events beyond the control of FHN. The current low commodity prices, especially if sustained, could have a negative impact on the economies of several states in which FHN conducts business, as well as FHN’s customers, businesses, and assets in those states.
In addition, the COVID-19 pandemic could result in business disruption to FHN, and if unable to recover from such a business disruption on a timely basis, FHN’s businesses, financial condition, and results of operations would be adversely affected. The efforts to integrate the businesses of IBKC and those of FHN may also be delayed and adversely affected by the COVID-19 pandemic, and become more costly. FHN may also incur additional costs to remedy damages caused by such disruptions, which could adversely affect FHN’s financial condition and results of operations.
Changes in interest rates due to Federal Reserve actions and market forces, mentioned above, are likely to negatively impact FHN’s net interest margin (a measure of the average profit margin applicable to
lending). In addition, “spreads” (the difference between U.S. Treasury borrowing rates and private sector borrowing rates) have widened. For new loans, wider spreads should help mitigate net interest margin compression. However, FHN will not be able to capture the widened spreads quickly for outstanding floating-rate loans: for loans pre-dating the COVID-19 crisis, spreads are fixed by the loan contracts based on pre-COVID pricing.
FHN’s customers have been adversely impacted by governmental and societal responses to COVID-19; those impacts are likely to adversely affect FHN’s noninterest income from loans and deposits as well as create downward loan migration (a reduction in loan-grading) and a corresponding increase in loan loss provision expense and reserves. In addition, loan charge-offs likely will increase over time, especially if economic disruption related to COVID-19 continues for more than a few months.
In the U.S., initial government responses to the COVID-19 pandemic were intended mainly to slow the spread of illness, regardless of the impact on economic activity. As governments relax restrictions in an effort re-invigorate the economy, it is not clear how well or how quickly the economy will recover. Substantial uncertainty regarding COVID-19, and the resulting economic damage, likely will continue until a substantial percentage of the population no longer fears contracting it.
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Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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| (a) & (b) | Not Applicable | | |
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| (c) | The "Common Stock Purchase Programs” section including tables 9(a)10(a) and 9(b)10(b) and explanatory discussions included in Item 2 of Part I of this report under the heading “First Horizon National Corporation Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 9693 of this report, is incorporated herein by reference. |
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Items 3, 4,3., 4., and 55.
Not applicable
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 119
Item 6. Exhibits
(a) Exhibits
Exhibits marked * representIn the Exhibit Table below: the “Filed Here” column denotes each exhibit which is filed or furnished (as applicable) with this report; the “Mngt Exh” column denotes each exhibit that represents a management contractscontract or compensatory plansplan or arrangementsarrangement required to be identified as suchsuch; and filed as exhibits.
Exhibits marked ** arethe “Furnished” column denotes each exhibit that is “furnished” pursuant to 18 U.S.C. Section 1350 or otherwise, and areis not “filed” as part of this Report or as a separate disclosure document.
Exhibits marked *** contain or consist of interactive data file information which is unaudited and unreviewed.
In many agreements filed as exhibits, each party makes representations and warranties to other parties. Those representations and warranties are made only to and for the benefit of those other parties in the context of a business contract. SuchExceptions to such representations and warranties may be partially or fully waived by such parties, or not enforced by such parties, in their discretion. No such representation or warranty may be relied upon by any other person for any purpose.
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Exhibit | Description | | | | |
Exh No | Description of Exhibit to this Report | Filed Here | Mngt Exh | Furn-ished | Incorporated by Reference to |
4Form | Exh No | Filing Date |
4.2 | FHN agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument defining the rights of the holders of the senior and subordinated long-term debt of FHN and its consolidated subsidiaries. |
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10.1*10.1 | |
X | X | | | | |
10.2*10.2 | | X | X | | | | |
10.3 | | X | X | | | | |
10.4 | |
X | X | | | | |
31(a) | |
X | | | | | |
31(b) | |
X | | | | | |
32(a)** | |
X | | X | | | |
32(b)** | |
X | | X | | | |
101*** | XBRL Exhibits | | | | | | |
101 | The following financial information from First Horizon National Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,March 31, 2020, formatted in Inline XBRL: (i) Consolidated Condensed Statements of Condition at September 30, 2017March 31, 2020 and December 31, 2016;2019; (ii) Consolidated Condensed Statements of Income for the Three and Nine Months Ended September 30, 2017March 31, 2020 and 2016;2019; (iii) Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017March 31, 2020 and 2016;2019; (iv) Consolidated Condensed Statements of Equity for the NineThree Months Ended September 30, 2017March 31, 2020 and 2016;2019; (v) Consolidated Condensed Statements of Cash Flows for the NineThree Months Ended September 30, 2017March 31, 2020 and 2016;2019; (vi) Notes to Consolidated Condensed Financial Statements. |
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101.INS***101. INS | XBRL Instance DocumentDocument- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH***101. SCH | Inline XBRL Taxonomy Extension Schema |
X | | | | | |
101.CAL***101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase |
X | | | | | |
101.LAB***101.LAB | Inline XBRL Taxonomy Extension Label Linkbase |
X | | | | | |
101.PRE***101. PRE | Inline XBRL Taxonomy Extension Presentation Linkbase |
X | | | | | |
101.DEF***101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | X | | | | | |
104 | Cover Page Interactive Data File, formatted in Inline XBRL (included in Exhibit 101) | X | | | | | |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 120
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | FIRST HORIZON NATIONAL CORPORATION (Registrant) |
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Date: November 7, 2017May 8, 2020 | | By: | | /s/ William C. Losch III |
| | Name: | | William C. Losch III |
| | Title: | | Executive Vice President and Chief Financial Officer |
| | | | (Duly Authorized Officer and Principal Financial Officer) |
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FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 121