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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________ ______________________________________
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172022
or
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☐ | 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.) |
| | |
TN165 Madison Avenue | | 62-0803242 |
(State or other jurisdiction
incorporation of organization) Memphis, | Tennessee | (IRS Employer
Identification No.)
| 38103 |
| |
165 MADISON AVENUE
MEMPHIS, TENNESSEE
| | 38103 |
(Address of principal executive office) | | (Zip Code) |
(Registrant’s telephone number, including area code) (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:
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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 |
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Depositary Shares, each representing a 1/400th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series B | FHN PR B | New York Stock Exchange LLC |
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Depositary Shares, each representing a 1/400th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series C | FHN PR C | New York Stock Exchange LLC |
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Depositary Shares, each representing a 1/400th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series D | FHN PR D | New York Stock Exchange LLC |
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Depositary Shares, each representing a 1/4,000th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series E | FHN PR E | New York Stock Exchange LLC |
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Depositary Shares, each representing a 1/4,000th interest in a share of Non-Cumulative Perpetual Preferred Stock, Series F | FHN PR F | New York Stock Exchange LLC |
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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.
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Large accelerated filerAccelerated Filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | | ☐ |
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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.
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Class | | Outstanding on September 30, 2017October 31, 2022 |
Common Stock, $.625 par value | | 234,230,515536,803,802 |
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| 10-Q REPORT TABLE OF CONTENTS |
Table of Contents
FIRST HORIZON NATIONAL CORPORATION
INDEX
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
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GLOSSARY OF ACRONYMS & TERMS |
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Glossary of Acronyms and Terms
The following is a list of common acronyms and terms used throughout this report:
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ACL | Allowance for credit losses |
AFS | Available for sale |
AIR | Accrued interest receivable |
ALCO | Asset/Liability Committee |
ALLL | Allowance for loan and lease losses |
ALM | Asset/liability management |
AMERIBOR | American Interbank Offered Rate |
AOCI | Accumulated other comprehensive income |
ARRC | Alternative Reference Rates Committee |
ASC | FASB Accounting Standards Codification |
Associate | Person employed by FHN |
ASU | Accounting Standards Update |
Bank | First Horizon Bank |
BOLI | Bank-owned life insurance |
BSBY | Bloomberg short-term bank yield index |
C&I | Commercial, financial, and industrial loan portfolio |
CARES Act | Coronavirus Aid, Relief, and Economic Security Act |
CBF | Capital Bank Financial |
CECL | Current expected credit loss |
CEO | Chief Executive Officer |
CMO | Collateralized mortgage obligations |
Company | First Horizon Corporation |
Corporation | First Horizon Corporation |
CRE | Commercial Real Estate loan portfolio |
CRMC | Credit Risk Management Committee |
DTA | Deferred tax asset |
DTL | Deferred tax liability |
EPS | Earnings per share |
Fannie Mae | Federal National Mortgage Association |
FASB | Financial Accounting Standards Board |
FDIC | Federal Deposit Insurance Corporation |
Federal Reserve | Federal Reserve Board |
FHA | Federal Housing Administration |
FHLB | Federal Home Loan Bank |
FHN | First Horizon Corporation |
FHNF | FHN Financial; FHN's fixed income division |
FICO | Fair Isaac Corporation |
First Horizon | First Horizon Corporation |
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FRB | Federal Reserve Bank or the Federal Reserve Board |
Freddie Mac | Federal Home Loan Mortgage Corporation |
FTE | Fully taxable equivalent |
FTRESC | FT Real Estate Securities Company, Inc. |
GAAP | Generally accepted accounting principles (U.S.) |
GNMA | Government National Mortgage Association or Ginnie Mae |
GSE | Government sponsored enterprises, in this report references Fannie Mae and Freddie Mac |
HELOC | Home equity line of credit |
HFS | Held for Sale |
HTM | Held to maturity |
IBKC | IBERIABANK Corporation |
IBKC merger | FHN's merger of equals with IBKC that closed July 2020 |
ISDA | International Swap and Derivatives Association |
IRS | Internal Revenue Service |
LGD | Loss given default |
LIBOR | London Inter-Bank Offered Rate |
LIHTC | Low Income Housing Tax Credit |
LLC | Limited Liability Company |
LMC | Loans to mortgage companies |
LOCOM | Lower of cost or market |
LRRD | Loan Rehab and Recovery Department |
LTV | Loan-to-value |
MBS | Mortgage-backed securities |
MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
NAICS | North American Industry Classification System |
NII | Net interest income |
NM | Not meaningful |
NMTC | New Market Tax Credit |
NPA | Nonperforming asset |
Non-PCD | Non-Purchased Credit Deteriorated Financial Assets |
NPL | Nonperforming loan |
OREO | Other Real Estate Owned |
PCAOB | Public Company Accounting Oversight Board |
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GLOSSARY OF ACRONYMS & TERMS |
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PCD | Purchased credit deteriorated financial assets |
PCI | Purchased credit impaired |
PD | Probability of default |
PM | Portfolio managers |
PPP | Paycheck Protection Program |
PSU | Performance Stock Unit |
RE | Real estate |
RM | Relationship managers |
ROA | Return on assets |
RPL | Reasonably Possible Loss |
SBA | Small Business Administration |
SEC | Securities and Exchange Commission |
SOFR | Secure Overnight Funding Rate |
SVaR | Stressed Value-at-Risk |
TD | The Toronto-Dominion Bank |
TDBNA | TD Bank, N.A. |
TD-US | TD Bank US Holding Company |
TD Merger Agreement | Merger agreement between FHN, TD, TD-US, and a TD-US subsidiary |
Pending TD Merger | The merger transactions contemplated by the TD Merger Agreement |
TDR | Troubled Debt Restructuring |
TRUP | Trust preferred loan |
UPB | Unpaid principal balance |
USDA | United States Department of Agriculture |
VaR | Value-at-Risk |
VIE | Variable Interest Entities |
we / us / our | First Horizon Corporation |
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FORWARD-LOOKING STATEMENTS AND NON-GAAP INFORMATION |
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Forward-Looking Statements
This report, including material incorporated into it, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements pertain to FHN's beliefs, plans, goals, expectations, and estimates. Forward-looking statements are not a representation of historical information, but instead pertain to future operations, strategies, financial results, or other developments. Forward-looking statements can be identified by the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “should,” “is likely,” “will,” “going forward,” and other expressions that indicate future events and trends.
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 and could cause FHN’s actual future results and outcomes to differ materially from those contemplated or implied by forward-looking statements or historical performance. Examples of uncertainties and contingencies include, among other important factors:
•the possibility that the anticipated benefits of the IBKC merger will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in any or all of FHN’s market areas;
•potential adverse reactions or changes to business or associate relationships resulting from the IBKC merger;
•global, general and local economic and business conditions, including economic recession or depression;
•the potential impacts on FHN’s businesses of the COVID-19 pandemic, including negative impacts from quarantines, market declines, and volatility, and changes in client behavior related to the COVID-19 pandemic;
•the stability or volatility of values and activity in the residential housing and commercial real estate markets;
•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;
•the financial condition of borrowers and other counterparties;
•competition within and outside the financial services industry;
•the occurrence of natural or man-made disasters, global pandemics, conflicts, or terrorist attacks, or other adverse external events;
•effectiveness and cost-efficiency of FHN’s hedging practices;
•fraud, theft, or other incursions through conventional, electronic, or other means directly or indirectly affecting FHN or its clients, business counterparties or competitors;
•the ability to adapt products and services to changing industry standards and client preferences;
•risks 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 client profiles;
•the changes in the regulation of the U.S. financial services industry;
•changes in laws, regulations, and administrative actions, including executive orders, whether or not specific to the financial services industry;
•changes in accounting policies, standards, and interpretations;
•evolving capital and liquidity standards under applicable regulatory rules;
•accounting policies and processes require management to make estimates about matters that are uncertain;
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FORWARD-LOOKING STATEMENTS AND NON-GAAP INFORMATION |
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•the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the TD Merger Agreement;
•the outcome of any legal proceedings that have been or may be instituted against FHN, TD, or TD-US, including potential litigation that has been or may be instituted against FHN or its directors or officers related to the Pending TD Merger or the TD Merger Agreement;
•the timing and completion of the Pending TD Merger, including the possibility that the Pending TD Merger will not close when expected or at all because required regulatory, shareholder, or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all, or are obtained subject to conditions that are not anticipated;
•the extent, timing, and results of governmental actions, examinations, reviews, reforms, regulations, and interpretations of the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Tennessee Department of Financial Institutions, and other regulators;
•the risk that any announcements relating to the Pending TD Merger could have adverse effects on the market price of the common stock of FHN;
•certain restrictions during the pendency of the Pending TD Merger that may impact FHN’s ability to pursue certain business opportunities or strategic transactions;
•the possibility that the Pending TD Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;
•the diversion of management’s attention from ongoing business operations and opportunities caused by the Pending TD Merger;
•reputational risk and potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement of the Pending TD Merger; and
•other factors that may affect the future results of FHN.
FHN cautions readers of this report that the list above is not exhaustive as of the date of this report. Further, FHN assumes no obligation to update or revise any forward-looking statements that are made in this report or in any other statement, release, report, or filing from time to time. Actual results could differ and FHN’s estimates and expectations could change, possibly materially, because of one or more factors, including those factors listed above or presented elsewhere in this report or those factors listed in material incorporated by reference into this report. In evaluating forward-looking statements and assessing FHN’s prospects, readers of this report should carefully consider the factors mentioned above along with the additional risk and uncertainty factors discussed in Item 1A of Part II of this report and in the forepart, and in Items 1, 1A, and 7, of FHN’s most recent Annual Report on Form 10-K, as amended, along with any additional factors which might materially affect future results and outcomes.
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FORWARD-LOOKING STATEMENTS AND NON-GAAP INFORMATION |
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Non-GAAP Information
Certain measures included in this report are “non-GAAP,” meaning they are not presented in accordance with U.S. GAAP 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 financial condition, capital position, and financial results of FHN and its business segments. Non-GAAP measures are reported to FHN’s management and Board of Directors through various internal reports.
The non-GAAP measures presented in this report are: pre-provision net revenue, return on average tangible common equity, tangible common equity to tangible assets, adjusted tangible common equity to risk-weighted assets, tangible book value per common share, and loans and leases excluding PPP loans. Table I.1.26 appearing in the MD&A (Item 2 of Part I) of this report provides a reconciliation of non-GAAP items presented in this report to the most comparable GAAP presentation.
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 report 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, which is a measure of total on- and off-balance sheet assets adjusted for credit and market risk, used to determine regulatory capital ratios.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
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PART I. FINANCIAL INFORMATION |
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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.
CONSOLIDATED CONDENSED STATEMENTS OF CONDITION
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| | 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 |
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Total cash and cash equivalents | | 1,087,755 |
| | 1,037,794 |
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Interest-bearing cash | | 604,326 |
| | 1,060,034 |
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Trading securities | | 1,469,402 |
| | 897,071 |
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Loans held-for-sale (a) | | 339,780 |
| | 111,248 |
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Securities available-for-sale (Note 3) | | 3,963,138 |
| | 3,943,499 |
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Securities held-to-maturity (Note 3) | | 10,000 |
| | 14,347 |
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Loans, net of unearned income (Note 4) (b) | | 20,166,091 |
| | 19,589,520 |
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Less: Allowance for loan losses (Note 5) | | 194,867 |
| | 202,068 |
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Total net loans | | 19,971,224 |
| | 19,387,452 |
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Goodwill (Note 6) | | 236,335 |
| | 191,371 |
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Other intangible assets, net (Note 6) | | 43,157 |
| | 21,017 |
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Fixed income receivables | | 68,750 |
| | 57,411 |
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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 |
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Other real estate owned (“OREO”) (c) | | 12,522 |
| | 16,237 |
|
Derivative assets (Note 14) | | 80,976 |
| | 121,654 |
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Other assets | | 1,441,878 |
| | 1,406,711 |
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Total assets | | $ | 29,622,636 |
| | $ | 28,555,231 |
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Liabilities and equity: | | | |
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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 |
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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 |
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Other short-term borrowings | | 1,637,419 |
| | 83,177 |
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Term borrowings | | 1,059,507 |
| | 1,040,656 |
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Fixed income payables | | 44,304 |
| | 21,002 |
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Derivative liabilities (Note 14) | | 83,146 |
| | 135,897 |
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Other liabilities | | 426,910 |
| | 467,944 |
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Total liabilities | | $ | 26,739,085 |
| | $ | 25,850,147 |
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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 |
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Capital surplus | | 1,401,359 |
| | 1,386,636 |
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Undivided profits | | 1,177,126 |
| | 1,029,032 |
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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 |
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Total equity | | 2,883,551 |
| | 2,705,084 |
|
Total liabilities and equity | | $ | 29,622,636 |
| | $ | 28,555,231 |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
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CONSOLIDATED BALANCE SHEETS
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| | (Unaudited) | | December 31, |
| | September 30, | |
(Dollars in millions, except per share amounts) | | 2022 | | 2021 |
Assets | | | | |
Cash and due from banks | | $ | 1,193 | | | $ | 1,147 | |
Interest-bearing deposits with banks | | 3,241 | | | 14,907 | |
Federal funds sold and securities purchased under agreements to resell | | 690 | | | 641 | |
Trading securities | | 1,421 | | | 1,601 | |
Securities available for sale at fair value | | 8,718 | | | 8,707 | |
Securities held to maturity (fair value of $1,222 and $705, respectively) | | 1,385 | | | 712 | |
Loans held for sale (including $89 and $258 at fair value, respectively) | | 680 | | | 1,172 | |
Loans and leases | | 57,354 | | | 54,859 | |
Allowance for loan and lease losses | | (664) | | | (670) | |
Net loans and leases | | 56,690 | | | 54,189 | |
Premises and equipment | | 622 | | | 665 | |
Goodwill | | 1,511 | | | 1,511 | |
Other intangible assets | | 246 | | | 298 | |
Other assets | | 3,902 | | | 3,542 | |
Total assets | | $ | 80,299 | | | $ | 89,092 | |
| | | | |
Liabilities | | | | |
Noninterest-bearing deposits | | $ | 25,813 | | | $ | 27,883 | |
Interest-bearing deposits | | 40,202 | | | 47,012 | |
Total deposits | | 66,015 | | | 74,895 | |
Trading liabilities | | 383 | | | 426 | |
Short-term borrowings | | 1,416 | | | 2,124 | |
Term borrowings | | 1,597 | | | 1,590 | |
Other liabilities | | 2,605 | | | 1,563 | |
Total liabilities | | 72,016 | | | 80,598 | |
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Equity | | | | |
Preferred stock, Non-cumulative perpetual, no par value; authorized 5,000,000 shares; issued 31,686 and 26,750 shares, respectively | | 1,014 | | | 520 | |
Common stock, $0.625 par value; authorized 700,000,000 shares; issued 536,736,705 and 533,576,766 shares, respectively | | 335 | | | 333 | |
Capital surplus | | 4,812 | | | 4,743 | |
Retained earnings | | 3,254 | | | 2,891 | |
Accumulated other comprehensive loss, net | | (1,427) | | | (288) | |
FHN shareholders' equity | | 7,988 | | | 8,199 | |
Noncontrolling interest | | 295 | | | 295 | |
Total equity | | 8,283 | | | 8,494 | |
Total liabilities and equity | | $ | 80,299 | | | $ | 89,092 | |
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See accompanying notes to consolidated condensed financial statements.
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(a) | September 30, 2017 and December 31, 2016 include $12.8 million and $19.3 million, respectively, of held-for-sale consumer mortgage loans secured by residential real estate in process of foreclosure.7 | 3Q22 FORM 10-Q REPORT |
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(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| September 30, 2017 and December 31, 2016 include $24.8 million and $28.5 million, respectively, of held-to-maturity consumer mortgage loans secured by residential real estate properties in process of foreclosure. | |
CONSOLIDATED STATEMENTS OF INCOME | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in millions, except per share data; shares in thousands) (Unaudited) | 2022 | | 2021 | | 2022 | | 2021 |
Interest income | | | | | | | |
Interest and fees on loans and leases | $ | 617 | | | $ | 482 | | | $ | 1,553 | | | $ | 1,485 | |
Interest and fees on loans held for sale | 9 | | | 8 | | | 30 | | | 22 |
Interest on investment securities | 46 | | | 31 | | | 123 | | | 88 |
Interest on trading securities | 15 | | | 6 | | | 39 | | | 20 |
Interest on other earning assets | 46 | | | 6 | | | 82 | | | 11 |
Total interest income | 733 | | | 533 | | | 1,827 | | | 1,626 | |
Interest expense | | | | | | | |
Interest on deposits | 43 | | | 20 | | | 72 | | | 67 |
Interest on trading liabilities | 3 | | | 1 | | | 9 | | | 4 |
Interest on short-term borrowings | 7 | | | 2 | | | 10 | | | 4 |
Interest on term borrowings | 18 | | | 18 | | | 53 | | | 55 |
Total interest expense | 71 | | | 41 | | | 144 | | | 130 |
Net interest income | 662 | | | 492 | | | 1,683 | | | 1,496 | |
Provision for credit losses | 60 | | | (85) | | | 50 | | | (245) | |
Net interest income after provision for credit losses | 602 | | | 577 | | | 1,633 | | | 1,741 | |
Noninterest income | | | | | | | |
Fixed income | 46 | | | 96 | | | 170 | | | 324 |
Deposit transactions and cash management | 43 | | | 44 | | | 129 | | | 130 |
Brokerage, management fees and commissions | 23 | | | 24 | | | 71 | | | 65 |
Mortgage banking and title income | 9 | | | 34 | | | 65 | | | 126 |
Card and digital banking fees | 21 | | | 21 | | | 64 | | | 59 |
Other service charges and fees | 13 | | | 12 | | | 41 | | | 32 | |
Trust services and investment management | 11 | | | 13 | | | 36 | | | 39 |
Securities gains (losses), net | 12 | | | 1 | | | 18 | | | 12 | |
Deferred compensation income | (3) | | | 3 | | | (24) | | | 12 | |
Loss on debt extinguishment | — | | | (23) | | | — | | | (23) | |
Other income | 38 | | | 22 | | | 72 | | | 53 |
Total noninterest income | 213 | | | 247 | | | 642 | | | 829 | |
Noninterest expense | | | | | | | |
Personnel expense | 275 | | | 296 | | | 820 | | | 920 |
Net occupancy expense | 32 | | | 33 | | | 96 | | | 103 |
Computer software | 28 | | | 30 | | | 85 | | | 87 |
Operations services | 22 | | | 24 | | | 65 | | | 59 |
Legal and professional fees | 10 | | | 21 | | | 50 | | | 52 |
Contract employment and outsourcing | 12 | | | 21 | | | 43 | | | 47 |
Amortization of intangible assets | 13 | | | 14 | | | 39 | | | 42 |
Advertising and public relations | 12 | | | 14 | | | 34 | | | 23 | |
Equipment expense | 11 | | | 12 | | | 34 | | | 35 |
Communications and delivery | 10 | | | 9 | | | 28 | | | 28 | |
Other expense | 44 | | | 52 | | | 156 | | | 171 |
Total noninterest expense | 469 | | | 526 | | | 1,450 | | | 1,567 | |
Income before income taxes | 346 | | | 298 | | | 825 | | | 1,003 | |
Income tax expense | 78 | | | 63 | | | 183 | | | 222 |
Net income | $ | 268 | | | $ | 235 | | | $ | 642 | | | $ | 781 | |
Net income attributable to noncontrolling interest | 3 | | | 3 | | | 8 | | | 9 |
Net income attributable to controlling interest | $ | 265 | | | $ | 232 | | | $ | 634 | | | $ | 772 | |
Preferred stock dividends | 8 | | | 8 | | | 24 | | | 29 |
Net income available to common shareholders | $ | 257 | | | $ | 224 | | | $ | 610 | | | $ | 743 | |
| | | | | | | |
| | | | | | | | |
(c) | September 30, 2017 and December 31, 2016 include $7.1 million and $8.1 million, respectively, of foreclosed residential real estate.8 | 3Q22 FORM 10-Q REPORT |
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| | |
Certain previously reported amounts have been reclassified to agree with current presentation. | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per common share | $ | 0.48 | | | $ | 0.41 | | | $ | 1.14 | | | $ | 1.35 | |
Diluted earnings per common share | $ | 0.45 | | | $ | 0.41 | | | $ | 1.08 | | | $ | 1.34 | |
Weighted average common shares | 535,986 | | | 545,818 | | | 534,613 | | | 549,434 | |
Diluted average common shares | 570,153 | | | 549,819 | | | 563,538 | | | 554,199 | |
| | | | | | | |
See accompanying notes to consolidated condensed financial statements.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| | |
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | | | | | | |
| | First Horizon National Corporation |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in thousands) (Unaudited) | | 2017 | | 2016 | | 2017 | | 2016 |
Net income/(loss) | | $ | 71,769 |
| | $ | 67,635 |
| | $ | 225,361 |
| | $ | 180,788 |
|
Other comprehensive income/(loss), net of tax: | | | | | | | | |
Net unrealized gains/(losses) on securities available-for-sale | | 3,917 |
| | (7,887 | ) | | 11,292 |
| | 47,310 |
|
Net unrealized gains/(losses) on cash flow hedges | | (734 | ) | | (1,570 | ) | | (493 | ) | | 3,121 |
|
Net unrealized gains/(losses) on pension and other postretirement plans | | 1,895 |
| | 963 |
| | 4,471 |
| | 2,933 |
|
Other comprehensive income/(loss) | | 5,078 |
| | (8,494 | ) | | 15,270 |
| | 53,364 |
|
Comprehensive income | | 76,847 |
| | 59,141 |
| | 240,631 |
| | 234,152 |
|
Comprehensive income attributable to noncontrolling interest | | 2,883 |
| | 2,883 |
| | 8,555 |
| | 8,586 |
|
Comprehensive income attributable to controlling interest | | $ | 73,964 |
| | $ | 56,258 |
| | $ | 232,076 |
| | $ | 225,566 |
|
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 |
|
Net unrealized gains/(losses) on cash flow hedges | | (455 | ) | | (975 | ) | | (306 | ) | | 1,940 |
|
Net unrealized gains/(losses) on pension and other postretirement plans | | 1,175 |
| | 598 |
| | 2,772 |
| | 1,823 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in millions) (Unaudited) | 2022 | | 2021 | | 2022 | | 2021 |
Net income | $ | 268 | | | $ | 235 | | | $ | 642 | | | $ | 781 | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Net unrealized gains (losses) on securities available for sale | (368) | | | (38) | | | (1,003) | | | (103) | |
Net unrealized gains (losses) on cash flow hedges | (99) | | | (1) | | | (142) | | | (5) | |
Net unrealized gains (losses) on pension and other postretirement plans | 3 | | | 1 | | | 6 | | | 7 | |
Other comprehensive income (loss) | (464) | | | (38) | | | (1,139) | | | (101) | |
Comprehensive income (loss) | (196) | | | 197 | | | (497) | | | 680 | |
Comprehensive income attributable to noncontrolling interest | 3 | | | 3 | | | 8 | | | 9 | |
Comprehensive income (loss) attributable to controlling interest | $ | (199) | | | $ | 194 | | | $ | (505) | | | $ | 671 | |
Income tax expense (benefit) of items included in other comprehensive income: | | | | | | | |
Net unrealized gains (losses) on securities available for sale | $ | (119) | | | $ | (12) | | | $ | (324) | | | $ | (33) | |
Net unrealized gains (losses) on cash flow hedges | (32) | | | — | | | (46) | | | (2) | |
Net unrealized gains (losses) on pension and other postretirement plans | 1 | | | 1 | | | 2 | | | 2 | |
| | | | | | | |
See accompanying notes to consolidated condensed financial statements.
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 |
|
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| | |
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
Nine Months Ended September 30, 2022 |
| | Preferred Stock | | Common Stock | | | | | | | | | | |
(Dollars in millions, except per share data; shares in thousands) (unaudited) | | Shares | | Amount | | Shares | | Amount | | Capital Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) (a) | | Noncontrolling Interest | | Total |
Balance, December 31, 2021 | | 26,750 | | | $ | 520 | | | 533,577 | | | $ | 333 | | | $ | 4,743 | | | $ | 2,891 | | | $ | (288) | | | $ | 295 | | | $ | 8,494 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Net income | | — | | | — | | | — | | | — | | | — | | | 195 | | | — | | | 3 | | | 198 | |
Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | (423) | | | — | | | (423) | |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | 195 | | | (423) | | | 3 | | | (225) | |
Cash dividends declared: | | | | | | | | | | | | | | | | | | |
Preferred stock | | — | | | — | | | — | | | — | | | — | | | (8) | | | — | | | — | | | (8) | |
Common stock ($0.15 per share) | | — | | | — | | | — | | | — | | | — | | | (82) | | | — | | | — | | | (82) | |
Preferred stock issuance (4,936 shares issued at $100,000 per share) | | 4,936 | | | 494 | | | — | | | — | | | — | | | — | | | — | | | — | | | 494 | |
Common stock repurchased | | — | | | — | | | (120) | | | — | | | (2) | | | — | | | — | | | — | | | (2) | |
Common stock issued for: | | | | | | | | | | | | | | | | | | |
Stock options exercised and restricted stock awards | | — | | | — | | | 1,130 | | | 1 | | | 14 | | | — | | | — | | | — | | | 15 | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | 14 | | | — | | | — | | | — | | | 14 | |
Dividends declared - noncontrolling interest of subsidiary preferred stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
| | | | | | | | | | | | | | | | | | |
Balance, March 31, 2022 | | 31,686 | | | 1,014 | | | 534,587 | | | 334 | | | 4,769 | | | 2,996 | | | (711) | | | 295 | | | 8,697 | |
| | | | | | | | | | | | | | | | | | |
Net income | | — | | | — | | | — | | | — | | | — | | | 174 | | | — | | | 3 | | | 177 | |
Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | (252) | | | — | | | (252) | |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | 174 | | | (252) | | | 3 | | | (75) | |
Cash dividends declared: | | | | | | | | | | | | | | | | | | |
Preferred stock | | — | | | — | | | — | | | — | | | — | | | (8) | | | — | | | — | | | (8) | |
Common stock ($0.15 per share) | | — | | | — | | | — | | | — | | | — | | | (83) | | | — | | | — | | | (83) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Common stock repurchased | | — | | | — | | | (334) | | | (1) | | | (7) | | | — | | | — | | | — | | | (8) | |
Common stock issued for: | | | | | | | | | | | | | | | | | | |
Stock options exercised and restricted stock awards | | — | | | — | | | 2,080 | | | 2 | | | 11 | | | — | | | — | | | — | | | 13 | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | 18 | | | — | | | — | | | — | | | 18 | |
Dividends declared - noncontrolling interest of subsidiary preferred stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
| | | | | | | | | | | | | | | | | | |
Balance, June 30, 2022 | | 31,686 | | | 1,014 | | | 536,333 | | | 335 | | | 4,791 | | | 3,079 | | | (963) | | | 295 | | | 8,551 | |
Net income | | — | | | — | | | — | | | — | | | — | | | 265 | | | — | | | 3 | | | 268 | |
Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | (464) | | | — | | | (464) | |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | 265 | | | (464) | | | 3 | | | (196) | |
Cash dividends declared: | | | | | | | | | | | | | | | | | | |
Preferred stock | | — | | | — | | | — | | | — | | | — | | | (8) | | | — | | | — | | | (8) | |
Common stock ($0.15 per share) | | — | | | — | | | — | | | — | | | — | | | (82) | | | — | | | — | | | (82) | |
| | | | | | | | | | | | | | | | | | |
Common stock repurchased | | — | | | — | | | (103) | | | — | | | (3) | | | — | | | — | | | — | | | (3) | |
Common stock issued for: | | | | | | | | | | | | | | | | | | |
Stock options exercised and restricted stock awards | | — | | | — | | | 507 | | | — | | | 3 | | | — | | | — | | | — | | | 3 | |
| | | | | | | | | | | | | | | | | | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | 21 | | | — | | | — | | | — | | | 21 | |
Dividends declared - noncontrolling interest of subsidiary preferred stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
Balance, September 30, 2022 | | 31,686 | | | $ | 1,014 | | | 536,737 | | | $ | 335 | | | $ | 4,812 | | | $ | 3,254 | | | $ | (1,427) | | | $ | 295 | | | $ | 8,283 | |
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(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.
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.11 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| 2016 includes $93.5 million repurchased under share repurchase programs. | |
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSCHANGES IN EQUITY (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2021 |
| | Preferred Stock | | Common Stock | | | | | | | | | | |
(Dollars in millions, except per share data; shares in thousands) (unaudited) | | Shares | | Amount | | Shares | | Amount | | Capital Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) (a) | | Noncontrolling Interest | | Total |
Balance, December 31, 2020 | | 26,250 | | | $ | 470 | | | 555,031 | | | $ | 347 | | | $ | 5,074 | | | $ | 2,261 | | | $ | (140) | | | $ | 295 | | | $ | 8,307 | |
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Net income | | — | | | — | | | — | | | — | | | — | | | 233 | | | — | | | 3 | | | 236 | |
Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | (101) | | | — | | | (101) | |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | 233 | | | (101) | | | 3 | | | 135 | |
Cash dividends declared: | | | | | | | | | | | | | | | | | | |
Preferred stock | | — | | | — | | | — | | | — | | | — | | | (8) | | | — | | | — | | | (8) | |
Common stock ($0.15 per share) | | — | | | — | | | — | | | — | | | — | | | (84) | | | — | | | — | | | (84) | |
Common stock repurchased (b) | | — | | | — | | | (3,864) | | | (2) | | | (60) | | | — | | | — | | | — | | | (62) | |
Common stock issued for: | | | | | | | | | | | | | | | | | | |
Stock options exercised and restricted stock awards | | — | | | — | | | 1,208 | | | — | | | 12 | | | — | | | — | | | — | | | 12 | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | 10 | | | — | | | — | | | — | | | 10 | |
Dividends declared - noncontrolling interest of subsidiary preferred stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
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Balance, March 31, 2021 | | 26,250 | | | 470 | | | 552,375 | | | 345 | | | 5,036 | | | 2,402 | | | (241) | | | 295 | | | 8,307 | |
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Net income | | — | | | — | | | — | | | — | | | — | | | 308 | | | — | | | 3 | | | 311 | |
Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | 38 | | | — | | | 38 | |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | 308 | | | 38 | | | 3 | | | 349 | |
Cash dividends declared: | | | | | | | | | | | | | | | | | | |
Preferred stock | | — | | | — | | | — | | | — | | | — | | | (8) | | | — | | | — | | | (8) | |
Common stock ($0.15 per share) | | — | | | — | | | — | | | — | | | — | | | (85) | | | — | | | — | | | (85) | |
Preferred stock issuance (1,500 shares issued at $100,000 per share net of offering costs) | | 1,500 | | | 145 | | | — | | | — | | | — | | | — | | | — | | | — | | | 145 | |
Call of preferred stock | | (1,000) | | | (95) | | | | | | | | | (5) | | | | | | | (100) | |
Common stock repurchased (b) | | — | | | — | | | (3,435) | | | (3) | | | (61) | | | — | | | — | | | — | | | (64) | |
Common stock issued for: | | | | | | | | | | | | | | | | | | |
Stock options exercised and restricted stock awards | | — | | | — | | | 1,925 | | | 2 | | | 11 | | | — | | | — | | | — | | | 13 | |
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Stock-based compensation expense | | — | | | — | | | — | | | — | | | 11 | | | — | | | — | | | — | | | 11 | |
Dividends declared - noncontrolling interest of subsidiary preferred stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
Balance, June 30, 2021 | | 26,750 | | | 520 | | | 550,865 | | | 344 | | | 4,997 | | | 2,612 | | | (203) | | | 295 | | | 8,565 | |
Net income | | — | | | — | | | — | | | — | | | — | | | 232 | | | — | | | 3 | | | 235 | |
Other comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | (38) | | | — | | | (38) | |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | 232 | | | (38) | | | 3 | | | 197 | |
Cash dividends declared: | | | | | | | | | | | | | | | | | | |
Preferred stock | | — | | | — | | | — | | | — | | | — | | | (8) | | | — | | | — | | | (8) | |
Common stock ($0.15 per share) | | — | | | — | | | — | | | — | | | — | | | (83) | | | — | | | — | | | (83) | |
Common stock repurchased (b) | | — | | | — | | | (9,235) | | | (5) | | | (141) | | | — | | | — | | | — | | | (146) | |
Common stock issued for: | | | | | | | | | | | | | | | | | | |
Stock options exercised and restricted stock awards | | — | | | — | | | 230 | | | — | | | — | | | — | | | — | | | — | | | — | |
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Stock-based compensation expense | | — | | | — | | | — | | | — | | | 10 | | | — | | | — | | | — | | | 10 | |
Dividends declared - noncontrolling interest of subsidiary preferred stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
Balance, September 30, 2021 | | 26,750 | | | $ | 520 | | | 541,860 | | | $ | 339 | | | $ | 4,866 | | | $ | 2,753 | | | $ | (241) | | | $ | 295 | | | $ | 8,532 | |
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| | First Horizon National Corporation |
| | Nine months ended September 30 |
(Dollars in thousands) (Unaudited) | | 2017 | | 2016 |
Operating Activities | | | | |
Net income/(loss) | | $ | 225,361 |
| | $ | 180,788 |
|
Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities: | | | | |
Provision/(provision credit) for loan losses | | (3,000 | ) | | 11,000 |
|
Provision/(benefit) for deferred income taxes | | (547 | ) | | 68,100 |
|
Depreciation and amortization of premises and equipment | | 25,052 |
| | 24,032 |
|
Amortization of intangible assets | | 5,160 |
| | 3,898 |
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Net other amortization and accretion | | 22,921 |
| | 19,536 |
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Net (increase)/decrease in derivatives | | (14,670 | ) | | 1,330 |
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Fair value adjustment on interest-only strips | | (107 | ) | | — |
|
Repurchase and foreclosure provision/(provision credit) | | (20,000 | ) | | (31,618 | ) |
(Gains)/losses and write-downs on OREO, net | | 44 |
| | (543 | ) |
Litigation and regulatory matters | | 7,409 |
| | 25,285 |
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Stock-based compensation expense | | 14,971 |
| | 12,378 |
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Equity securities (gains)/losses, net | | (5 | ) | | 181 |
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Debt securities (gains)/losses, net | | (450 | ) | | (1,654 | ) |
(Gain)/loss on extinguishment of debt | | 14,329 |
| | — |
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Net (gains)/losses on sale/disposal of fixed assets | | (13 | ) | | 2,519 |
|
Qualified pension plan contribution | | — |
| | (165,000 | ) |
Loans held-for-sale: | | | | |
Purchases and originations | | (1,252,300 | ) | | (73,404 | ) |
Gross proceeds from settlements and sales | | 1,252,477 |
| | 43,653 |
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(Gain)/loss due to fair value adjustments and other | | 2,485 |
| | 878 |
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Net (increase)/decrease in: | | | | |
Trading securities | | (433,897 | ) | | (441,205 | ) |
Fixed income receivables | | (11,339 | ) | | (28,337 | ) |
Interest receivable | | (7,171 | ) | | (2,014 | ) |
Other assets | | (49,225 | ) | | (69,855 | ) |
Net increase/(decrease) in: | | | | |
Trading liabilities | | 17,180 |
| | 136,207 |
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Fixed income payables | | (73,187 | ) | | 45,825 |
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Interest payable | | 8,869 |
| | 505 |
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Other liabilities | | (35,770 | ) | | (24,795 | ) |
Total adjustments | | (530,784 | ) | | (443,098 | ) |
Net cash provided/(used) by operating activities | | (305,423 | ) | | (262,310 | ) |
Investing Activities | | | | |
Available-for-sale securities: | | | | |
Sales | | 3,360 |
| | 1,543 |
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Maturities | | 420,136 |
| | 526,112 |
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Purchases | | (426,129 | ) | | (557,216 | ) |
Held-to-maturity securities: | | | | |
Prepayments and maturities | | 4,740 |
| | — |
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Premises and equipment: | | | | |
Sales | | 2,577 |
| | 9,636 |
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Purchases | | (30,395 | ) | | (41,304 | ) |
Proceeds from sales of OREO | | 9,235 |
| | 22,887 |
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Net (increase)/decrease in: | | | | |
Loans (a) | | (586,426 | ) | | (1,895,345 | ) |
Interests retained from securitizations classified as trading securities | | 648 |
| | 2,120 |
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Interest-bearing cash | | 459,840 |
| | 383,002 |
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Cash (paid)/received for acquisition, net | | (123,971 | ) | | — |
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Net cash provided/(used) by investing activities | | (266,385 | ) | | (1,548,565 | ) |
Financing Activities | | | | |
Common stock: | | | | |
Stock options exercised | | 5,173 |
| | 18,710 |
|
Cash dividends paid | | (58,850 | ) | | (47,144 | ) |
Repurchase of shares (b) | | (5,285 | ) | | (96,801 | ) |
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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 |
| | — |
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Net increase/(decrease) in: | | | | |
Deposits | | (572,621 | ) | | 1,607,412 |
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Short-term borrowings | | 1,261,395 |
| | 732,858 |
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Net cash provided/(used) by financing activities | | 621,769 |
| | 1,937,363 |
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Net increase/(decrease) in cash and cash equivalents | | 49,961 |
| | 126,488 |
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Cash and cash equivalents at beginning of period | | 1,037,794 |
| | 1,031,063 |
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Cash and cash equivalents at end of period | | $ | 1,087,755 |
| | $ | 1,157,551 |
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Supplemental Disclosures | | | | |
Total interest paid | | $ | 92,405 |
| | $ | 63,337 |
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Total taxes paid | | 38,151 |
| | 11,580 |
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Total taxes refunded | | 8,201 |
| | 3,854 |
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Transfer from loans to OREO | | 5,564 |
| | 8,226 |
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Certain previously reported amounts(a)Due to the nature of the preferred stock issued by FHN and its subsidiaries, all components of other comprehensive income (loss) have been reclassifiedattributed solely to agree with current presentation.FHN as the controlling interest holder.
(b)Includes $59 million, $57 million and $141 million repurchased under share repurchase programs for the three months ended March 31, 2021, June 30, 2021, and September 30, 2021, respectively.
See accompanying notes to consolidated condensed financial statements.
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(a) | 2016 includes $537.4 million UPB of loans acquired from GE Capital.12 | 3Q22 FORM 10-Q REPORT |
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(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| 2016 includes $93.5 million repurchased under share repurchase programs. | |
CONSOLIDATED STATEMENTS OF CASH FLOWS
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| | Nine months ended September 30, |
(Dollars in millions) (Unaudited) | | 2022 | | 2021 |
Operating Activities | | | | |
Net income | | $ | 642 | | | $ | 781 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | |
Provision for credit losses | | 50 | | | (245) | |
Deferred income tax expense (benefit) | | 167 | | | (28) | |
Depreciation and amortization of premises and equipment | | 45 | | | 46 | |
Amortization of intangible assets | | 39 | | | 42 | |
Net other amortization and accretion | | (3) | | | (50) | |
Net (increase) decrease in trading securities | | 1,728 | | | 1,347 | |
Net (increase) decrease in derivatives | | 822 | | | 309 | |
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Stock-based compensation expense | | 53 | | | 31 | |
Securities (gains) losses, net | | (18) | | | (12) | |
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(Gain) loss on BOLI | | (4) | | | (5) | |
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Net (gains) losses on sale/disposal of fixed assets | | (1) | | | 32 | |
Gain on sale of mortgage servicing rights | | (12) | | | — | |
Gain on sale of title services business | | (21) | | | — | |
Loans held for sale: | | | | |
Purchases and originations | | (3,184) | | | (4,682) | |
Gross proceeds from settlements and sales | | 2,050 | | | 3,288 | |
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(Gain) loss due to fair value adjustments and other | | 78 | | | (142) | |
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Other operating activities, net | | (145) | | | (144) | |
Total adjustments | | 1,644 | | | (213) | |
Net cash provided by (used in) operating activities | | 2,286 | | | 568 | |
Investing Activities | | | | |
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Proceeds from sales of securities available for sale | | — | | | 68 | |
Proceeds from maturities of securities available for sale | | 1,080 | | | 1,680 | |
Purchases of securities available for sale | | (2,457) | | | (2,343) | |
Purchases of securities held to maturity | | (712) | | | (304) | |
Proceeds from prepayments of securities held to maturity | | 40 | | | 10 | |
Proceeds from sales of premises and equipment | | 17 | | | 22 | |
Purchases of premises and equipment | | (22) | | | (46) | |
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Proceeds from BOLI | | 9 | | | 12 | |
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Net (increase) decrease in loans and leases | | (2,471) | | | 2,891 | |
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Net (increase) decrease in interest-bearing deposits with banks | | 11,666 | | | (6,478) | |
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Other investing activities, net | | 5 | | | 15 | |
Net cash provided by (used in) investing activities | | 7,155 | | | (4,473) | |
Financing Activities | | | | |
Common stock: | | | | |
Stock options exercised | | 30 | | | 25 | |
Cash dividends paid | | (243) | | | (252) | |
Repurchase of shares | | (12) | | | (272) | |
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Preferred stock: | | | | |
Preferred stock issuance | | 494 | | | 145 | |
| | | | |
Cash dividends paid - preferred stock - noncontrolling interest | | (9) | | | (9) | |
Cash dividends paid - preferred stock | | (24) | | | (24) | |
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Net increase (decrease) in deposits | | (8,880) | | | 4,287 | |
Net increase (decrease) in short-term borrowings | | (707) | | | 27 | |
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Increases (decreases) in term borrowings | | 5 | | | (112) | |
Net cash provided by (used in) financing activities | | (9,346) | | | 3,815 | |
Net increase (decrease) in cash and cash equivalents | | 95 | | | (90) | |
Cash and cash equivalents at beginning of period | | 1,788 | | | 1,648 | |
Cash and cash equivalents at end of period | | $ | 1,883 | | | $ | 1,558 | |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
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Supplemental Disclosures | | | | |
Total interest paid | | $ | 127 | | | $ | 128 | |
Total taxes paid | | 11 | | | 254 | |
Total taxes refunded | | 4 | | | 28 | |
Transfer from loans to OREO | | 3 | | | 3 | |
Transfer from loans HFS to trading securities | | 1,548 | | | 1,490 | |
Transfer from loans to loans HFS | | — | | | 31 | |
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See accompanying notes to consolidated financial statements.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 1—BASIS OF PRESENTATION & ACCOUNTING POLICIES | |
Notes to the Consolidated Condensed Financial Statements (Unaudited)
Note 1 – Financial Information
1—Basis of Accounting.Presentation and Accounting Policies
The accompanying unaudited interim consolidated condensed financial statements of First Horizon National Corporation (“FHN”), including its subsidiaries, have been prepared in conformityaccordance with accounting principles generally accepted inGAAP for interim financial information and with the United Statesinstructions to Form 10-Q and Article 10 of AmericaRegulation S-X. Accordingly, they do not include all information 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 thenotes necessary for complete 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 accordance with GAAP. In the opinion of management, the accompanying unaudited consolidated financial statements contain all significant adjustments, consisting of normal and recurring items, considered necessary adjustments have been made for a fair presentation ofpresentation. These interim financial positionstatements should be read in conjunction with FHN's audited consolidated financial statements and results of operations for the periods presented. These adjustments are of a normal recurring nature unless otherwise disclosednotes in this QuarterlyFHN's Annual Report on Form 10-Q. The operating10-K, as amended, for the year ended December 31, 2021. Operating results for the interim 2017 period are not necessarily indicative of the results that may be expected going forward. For further information, referfor the full year.
All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts reported in prior years have been reclassified to conform to the audited consolidated financial statementscurrent period presentation. See the Glossary of Acronyms and Terms included in Exhibit 13this Report for terms used herein.
Pending Merger
As previously disclosed, on February 27, 2022, FHN entered into an Agreement and Plan of Merger (the “TD Merger Agreement”) with The Toronto-Dominion Bank, a Canadian chartered bank (“TD”), TD Bank US Holding Company, a Delaware corporation and indirect, wholly owned subsidiary of TD (“TD-US”), and Falcon Holdings Acquisition Co., a Delaware corporation and wholly owned subsidiary of TD-US (“Merger Sub”).
Pursuant to FHN’s Annual Reportthe TD Merger Agreement, FHN and Merger Sub will merge (the “First Holding Company Merger”), with FHN continuing as the surviving entity in the merger. Following the First Holding Company Merger, at the election of TD, FHN and TD-US will merge (the “Second Holding Company Merger” and, together with the First Holding Company Merger, the “Holding Company Mergers”), with TD-US continuing as the surviving entity in the merger.
Upon the terms and subject to the conditions set forth in the TD Merger Agreement, each share of FHN common stock, par value $0.625 per share, (“Company Common Stock”), issued and outstanding immediately prior to the effective time of the First Holding Company Merger (the “First Effective Time”) will be converted into the right to receive $25.00 (USD) per share in cash, without interest. If the transaction does not close on Form 10-Kor before November 27, 2022, shareholders will receive an additional $0.65 per
share of Company Common Stock on an annualized basis (or approximately 5.4 cents per month) for the period from November 28, 2022 through the day immediately prior to the closing.
Each outstanding share of FHN’s preferred stock, series B, C, D, E and F, will remain issued and outstanding in connection with the First Holding Company Merger. If TD elects to effect the Second Holding Company Merger, at the effective time of the Second Holding Company Merger, each outstanding share of FHN’s preferred stock will be converted into a share of a newly created, corresponding series of preferred stock of TD-US having terms as described in the Merger Agreement.
Following the completion of the First Holding Company Merger, at such time as determined by TD, First Horizon Bank and TD Bank, N.A., a national banking association (“TDBNA”) will merge, with TDBNA surviving as a subsidiary of TD-US (the “Bank Merger” and together with the Holding Company Mergers, the “Pending TD Merger”).
The Pending TD Merger is expected to be completed in the first quarter of TD's 2023 fiscal year, and is subject to customary closing conditions, including approvals from U.S. and Canadian regulatory authorities. FHN's shareholders approved the merger on May 31, 2022. Merger and integration expenses related to the Pending TD Merger are recorded in FHN’s Corporate segment. Expenses recognized during the three and nine months ended September 30, 2022 were approximately $21 million and $55 million, respectively.
Accounting Changes With Extended Transition Periods
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 (or recognizing the effects of) reference rate reform on financial reporting. The provisions of ASU 2020-04 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, 2016.2022, except for hedging relationships existing as of
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 1—BASIS OF PRESENTATION & ACCOUNTING POLICIES | |
December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of Accounting Changes. Effective January 1, 2017, the hedging relationship.
FHN adoptedhas identified contracts affected by reference rate reform and developed modification plans for those contracts. FHN has elected to utilize the provisionsoptional expedients and exceptions provided by ASU 2020-04 for certain contract modifications that have already been implemented. For cash flow hedges that reference 1-Month USD LIBOR, FHN has applied expedients related to 1) the assumption of Accounting Standards Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which makes several revisions to equity compensation accounting. Under 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 calculation of diluted earnings per share. Excess tax benefits are also recognized at the time an award is exercised or vests compared to the previous requirement to delay recognition until the deduction reduces taxes payable. The presentation of excess tax benefits in the statementprobability of cash flows shiftedwhen reference rates are changed on hedged items 2) avoiding de-designation when critical terms (i.e., reference rates) change and 3) the allowed assumption of shared risk exposure for hedged items. For its 2022 cash flow hedges that reference 1-Month Term SOFR, FHN has applied expedients related to an operating activity from1) the prior classification as a financing activity.
ASU 2016-09 also provides anallowed assumption of shared risk exposure for hedged items and 2) multiple allowed assumptions of conformity between hedged items and the hedging instrument when assessing effectiveness. FHN anticipates that it will continue to utilize the expedients and exceptions for future modifications in situations where they mitigate potential accounting policy election to recognize forfeitures of awards as they occur when estimating stock-based compensation expense rather thanoutcomes that do not faithfully represent management’s intent or risk management activities, consistent with 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 classificationpurpose of the award. Under previous guidance, withholding of equity awards in excessstandard.
The FASB has proposed an extension of the minimum statutory requirement resultedtransition window for ASU 2020-04 until December 31, 2024, consistent with key USD LIBOR tenors continuing to be published through June 30, 2023.
In January 2021, the FASB issued ASU 2021-01, "Scope" to expand the scope of ASU 2020-04 to apply to certain contract modifications that were implemented in liability classificationOctober 2020 by derivative clearinghouses for the entire award. The related cash remittanceuse of Secure Overnight Funding Rate (SOFR) in discounting, margining and price alignment for centrally cleared derivatives, including derivatives utilized in hedging relationships. ASU 2021-01 also applies to derivative contracts affected by the employer for employee taxes is treated as a financing activitychange in the statementdiscounting convention regardless of cash flows. Transitionwhether they are centrally cleared (i.e., bi-lateral contracts can also be modified) and regardless of whether they reference LIBOR. ASU 2021-01 was effective immediately upon issuance with retroactive application permitted. FHN elected to the new guidance was accomplished through a combination of retrospective (cash flows), cumulative-effect adjustment to equity (forfeitures) and prospective methodologies (tax windfalls and shortfalls). The effects of adopting ASU 2016-09 have not been significant.
Effective January 1, 2017, FHN early adoptedretroactively apply the provisions of ASU 2016-16, “Intra-Entity Transfers2021-01 because FHN's centrally cleared derivatives were affected by the change in discounting convention and because FHN has other bi-lateral derivative contracts that may be modified to conform to the use of Assets Other Than Inventory” which requires recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Therefore, ASU 2016-16 reverses the previous requirement to delay recognition of the tax consequences of these transactions until the associated assets are sold to an outside party.SOFR for discounting. Adoption of ASU 2016-16 did not have a significant effect on FHN.FHN's reported financial condition or results of operations.
Accounting Changes Issued butBut Not Currently Effective
ASU 2022-01
In May 2014,March 2022, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 does not change revenue recognition for2022-01, "Fair Value Hedging - Portfolio Layer Method", which will expand FHN's ability to hedge the benchmark interest rate risk of portfolios of financial assets. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customersinterests (or beneficial interests) in an amount that reflects the consideration to which the entity expects to be entitled in exchange 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, FHN anticipates that it will elect to adopt the provisions of the revenue recognition standards through a cumulative effect to retained earnings with comparability disclosures provided throughout 2018. Based on reviews of its various revenues that are within the scope of ASU 2014-09, FHN has not identified a significant change 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 thehedge. The provisions of ASU 2014-09. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset, it is required2022-01 also permit FHN to measure any noncontrolling interest it receives (or retains) at fair value. ASU 2017-05 hasapply the same effective dateportfolio hedging method to both prepayable and transition provisionsnon-prepayable financial assets, namely by expanding the use of the "portfolio layer" method to non-prepayable financial assets. ASU 2022-01 also permits multiple hedged layers to be designated as a single closed portfolio to achieve hedge accounting. Additionally, the ASU 2014-09 and the two standardsrequires that basis adjustments must be adopted simultaneously althoughmaintained on the transition methods may be different. FHN is evaluating the effectsclosed portfolio of assets as a whole, and not allocated to individual assets for active portfolio layer method hedges.
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 the 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 investments that do not have readily determinable market values at cost minus impairment, if any, plus 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 impairment 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 2016-012022-01 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, 2019,2022, including interim periods within those fiscal years. Early adoption is permitted in fiscal years beginning after December 15, 2018.permitted. FHN continues to evaluateis evaluating 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 required2022-01 on its future hedging strategies.
ASU 2022-02
Also in the implementation of the new standard.
In August 2016,March 2022, the FASB issued ASU 2016-15, “Classification2022-02, “Troubled Debt Restructurings and Vintage Disclosures” that eliminates current TDR recognition and measurement guidance and instead requires the Company to evaluate whether the modification represents a new loan or a continuation of Certain Cash Receiptsan existing loan (which is consistent with the accounting for other loan modifications). The provisions of ASU 2022-02 also enhance existing disclosure requirements and Cash Payments,” which clarifies multiple cash flow presentation issues including providing guidance asintroduces new disclosures related to classification on the cash flow statement for certain cash receiptsmodifications made to borrowers experiencing financial difficulty. The provisions of this ASU also require FHN to disclose current period gross write-offs of loans and cash payments where diversity in practice exists. leases by year of origination.
ASU 2016-152022-02 is effective for fiscal years beginning after December 15, 2017,2022, including interim periods within those fiscal years. TheEarly adoption is permitted. For the transition method related to the recognition and measurement of TDRs, FHN has the option to apply a modified retrospective transition, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Otherwise, provisions ofin this 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 disclosure of the hedging results on the balance sheet. ASU 2017-12 is effective for fiscal years beginning after December 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.
prospectively. FHN is evaluating the effectsimpact of adopting ASU 2017-122022-02, and is not currently able to reasonably estimate the impact the adoption will have on its current and potential future hedging relationships. Currently, FHN anticipates early adoption in the first quarterconsolidated financial position, results of 2018. Upon adoption of ASU 2017-12, FHN will prospectively record components of hedging results for its fair value andoperations, or 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.flows.
Note 2 – Acquisitions and DivestituresOn May 4, 2017, FHN and Capital Bank Financial Corp. (“Capital Bank” or "CBF") announced that they had entered into an agreement and plan of merger. Under the agreement FHN will acquire Capital Bank, which is headquartered in Charlotte, North Carolina, and reported approximately $10 billion of assets at June 30, 2017. At 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 expected to close in fourth quarter 2017, subject to regulatory approval of the sale of two branches 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 leader in the trading, securitization, and analysis of Small Business Administration (“SBA”) loans, 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 Assets for additional information), and all of which is expected to be deductible for tax purposes. The goodwill is the result of adding an experienced workforce, establishing an additional major product sector for FTN Financial, expected synergies, and other factors. FHN's operating results for 2017
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 2—INVESTMENT SECURITIES | |
Note 2 – Acquisitions and Divestitures (Continued)
include the operating results of the acquired assets and assumed liabilities of Coastal subsequent to the acquisition on April 3, 2017.
For the three and nine months ended September 30, 2017, FHN recognized $8.2 million and $14.6 million, respectively, of acquisition and integration-related expenses primarily associated with the CBF and Coastal acquisitions. These expenses were primarily included in Professional fees, Legal fees, Employee compensation, incentives and benefits, and All other expense on the Consolidated Condensed Statements of Income.
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 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.
Note 3 – 2—Investment Securities
The following tables summarize FHN’s investment securities onas of September 30, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
INVESTMENT SECURITIES AT SEPTEMBER 30, 2022 |
| | September 30, 2022 |
(Dollars in millions) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities available for sale: | | | | | | | | |
| | | | | | | | |
Government agency issued MBS | | $ | 5,457 | | | $ | — | | | $ | (767) | | | $ | 4,690 | |
Government agency issued CMO | | 2,775 | | | — | | | (360) | | | 2,415 | |
Other U.S. government agencies | | 1,212 | | | — | | | (156) | | | 1,056 | |
| | | | | | | | |
States and municipalities | | 648 | | | — | | | (91) | | | 557 | |
Total securities available for sale (a) | | $ | 10,092 | | | $ | — | | | $ | (1,374) | | | $ | 8,718 | |
| | | | | | | | |
Securities held to maturity: | | | | | | | | |
Government agency issued MBS | | $ | 908 | | | $ | — | | | $ | (116) | | | $ | 792 | |
Government agency issued CMO | | 477 | | | — | | | (47) | | | 430 | |
Total securities held to maturity | | $ | 1,385 | | | $ | — | | | $ | (163) | | | $ | 1,222 | |
|
(a)Includes $6.4 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
INVESTMENT SECURITIES AT YE 2021 |
| | December 31, 2021 |
(Dollars in millions) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities available for sale: | | | | | | | | |
| | | | | | | | |
Government agency issued MBS | | $ | 5,062 | | | $ | 42 | | | $ | (49) | | | $ | 5,055 | |
Government agency issued CMO | | 2,296 | | | 8 | | | (47) | | | 2,257 | |
Other U.S. government agencies | | 861 | | | 4 | | | (15) | | | 850 | |
| | | | | | | | |
States and municipalities | | 535 | | | 11 | | | (1) | | | 545 | |
Total securities available for sale (a) | | $ | 8,754 | | | $ | 65 | | | $ | (112) | | | $ | 8,707 | |
| | | | | | | | |
Securities held to maturity: | | | | | | | | |
Government agency issued MBS | | $ | 509 | | | $ | — | | | $ | (5) | | | $ | 504 | |
Government agency issued CMO | | 203 | | | — | | | (2) | | | 201 | |
Total securities held to maturity | | $ | 712 | | | $ | — | | | $ | (7) | | | $ | 705 | |
|
(a)Includes $6.5 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes.
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities available-for-sale: | | | | | | | | |
U.S. treasuries | | $ | 100 |
| | $ | — |
| | $ | — |
| | $ | 100 |
|
Government agency issued mortgage-backed securities (“MBS”) | | 2,081,677 |
| | 15,993 |
| | (10,165 | ) | | 2,087,505 |
|
Government agency issued collateralized mortgage obligations (“CMO”) | | 1,701,467 |
| | 4,295 |
| | (19,767 | ) | | 1,685,995 |
|
Equity and other (a) | | 186,413 |
| | 2 |
| | — |
| | 186,415 |
|
| | $ | 3,969,657 |
| | $ | 20,290 |
| | $ | (29,932 | ) | | 3,960,015 |
|
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 |
|
Securities held-to-maturity: | | | | | | | | |
Corporate bonds | | $ | 10,000 |
| | $ | — |
| | $ | (15 | ) | | $ | 9,985 |
|
Total securities held-to-maturity | | $ | 10,000 |
| | $ | — |
| | $ | (15 | ) | | $ | 9,985 |
|
| | | | | | | | |
(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.17 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| SBA-interest only strips are recorded at elected fair value. See Note 16 - Fair Value for additional information. |
NOTE 2—INVESTMENT SECURITIES | |
(c) | Includes $3.3 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes. |
|
| | | | | | | | | | | | | | | | |
| | December 31, 2016 |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities available-for-sale: | | | | | | | | |
U.S. treasuries | | $ | 100 |
| | $ | — |
| | $ | — |
| | $ | 100 |
|
Government agency issued MBS | | 2,217,593 |
| | 14,960 |
| | (23,866 | ) | | 2,208,687 |
|
Government agency issued CMO | | 1,566,986 |
| | 4,909 |
| | (23,937 | ) | | 1,547,958 |
|
Equity and other (a) | | 186,756 |
| | — |
| | (2 | ) | | 186,754 |
|
Total securities available-for-sale (b) | | $ | 3,971,435 |
| | $ | 19,869 |
| | $ | (47,805 | ) | | $ | 3,943,499 |
|
Securities held-to-maturity: | | | | | | | | |
States and municipalities | | $ | 4,347 |
| | $ | 393 |
| | $ | — |
| | $ | 4,740 |
|
Corporate bonds | | 10,000 |
| | 33 |
| | — |
| | 10,033 |
|
Total securities held-to-maturity | | $ | 14,347 |
| | $ | 426 |
| | $ | — |
| | $ | 14,773 |
|
| |
(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) | Includes $3.3 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes. |
Note 3 – Investment Securities (Continued)
The amortized cost and fair value by contractual maturity for the available-for-sale and held-to-maturitydebt securities portfolios onportfolio as of September 30, 2017 are2022 is provided below:
| | | | | | | | | | | | | | | | | | | | | | | | |
DEBT SECURITIES PORTFOLIO MATURITIES | |
| Held to Maturity | | Available for Sale | |
(Dollars in millions) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | |
Within 1 year | $ | — | | | $ | — | | | $ | 45 | | | $ | 45 | | |
After 1 year through 5 years | — | | | — | | | 117 | | | 110 | | |
After 5 years through 10 years | — | | | — | | | 397 | | | 351 | | |
After 10 years | — | | | — | | | 1,301 | | | 1,107 | | |
Subtotal | — | | | — | | | 1,860 | | | 1,613 | | |
Government agency issued MBS and CMO (a) | 1,385 | | | 1,222 | | | 8,232 | | | 7,105 | | |
Total | $ | 1,385 | | | $ | 1,222 | | | $ | 10,092 | | | $ | 8,718 | | |
| | | | | | | | |
(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.
|
| | | | | | | | | | | | | | | | |
| | Held-to-Maturity | | Available-for-Sale |
(Dollars in thousands) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Within 1 year | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
After 1 year; within 5 years | | — |
| | — |
| | 100 |
| | 120 |
|
After 5 years; within 10 years | | 10,000 |
| | 9,985 |
| | — |
| | 1,464 |
|
After 10 years | | — |
| | — |
| | — |
| | 1,639 |
|
Subtotal | | 10,000 |
| | 9,985 |
| | 100 |
| | 3,223 |
|
Government agency issued MBS and CMO (a) | | — |
| | — |
| | 3,783,144 |
| | 3,773,500 |
|
Equity and other | | — |
| | — |
| | 186,413 |
| | 186,415 |
|
Total | | $ | 10,000 |
| | $ | 9,985 |
| | $ | 3,969,657 |
| | $ | 3,963,138 |
|
| |
(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 grossGross gains and gross losses from investmenton sales of AFS securities for the three and nine months ended September 30:
30, 2022 and 2021 were insignificant. Cash proceeds from sales of AFS securities were insignificant for the three and nine months ended September 30, 2022. Cash proceeds from sales of AFS securities for the three and nine months ended September 30, 2021 were $35 million and $68 million.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
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 |
|
| |
(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, 2016 were $1.5 million and included a $1.7 million gain from an exchange of approximately $294 million of AFS debt securities. |
| |
(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, 20172022 and December 31, 2016:2021:
AFS INVESTMENT SECURITIES WITH UNREALIZED LOSSES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2022 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in millions) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | | | | | | | | | | |
Government agency issued MBS | | $ | 3,168 | | | $ | (429) | | | $ | 1,517 | | | $ | (338) | | | $ | 4,685 | | | $ | (767) | |
Government agency issued CMO | | 1,398 | | | (155) | | | 992 | | | (205) | | | 2,390 | | | (360) | |
Other U.S. government agencies | | 669 | | | (71) | | | 386 | | | (85) | | | 1,055 | | | (156) | |
| | | | | | | | | | | | |
States and municipalities | | 507 | | | (74) | | | 48 | | | (17) | | | 555 | | | (91) | |
Total | | $ | 5,742 | | | $ | (729) | | | $ | 2,943 | | | $ | (645) | | | $ | 8,685 | | | $ | (1,374) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in millions) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | | | | | | | | | | |
Government agency issued MBS | | $ | 2,973 | | | $ | (41) | | | $ | 184 | | | $ | (8) | | | $ | 3,157 | | | $ | (49) | |
Government agency issued CMO | | 1,436 | | | (37) | | | 248 | | | (10) | | | 1,684 | | | (47) | |
Other U.S. government agencies | | 459 | | | (11) | | | 90 | | | (4) | | | 549 | | | (15) | |
| | | | | | | | | | | | |
States and municipalities | | 68 | | | (1) | | | — | | | — | | | 68 | | | (1) | |
Total | | $ | 4,936 | | | $ | (90) | | | $ | 522 | | | $ | (22) | | | $ | 5,458 | | | $ | (112) | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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)
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 2—INVESTMENT SECURITIES | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | ) |
FHN has reviewed investmentevaluated all AFS debt securities that were in unrealized loss positions in accordance with its accounting policy for OTTIrecognition of credit losses. No AFS debt securities were determined to have credit losses. Total AIR not included in the fair value or amortized cost basis of AFS debt securities was $27 million and does not consider them other-than-temporarily impaired. For$23 million as of September 30, 2022 and December 31, 2021. Consistent with FHN's 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-notmore likely than not that FHN will not be required to sell them prior to recovery. The decline inTherefore, no write downs of these investments to fair value occurred during the reporting period.
For HTM securities, an allowance for credit losses is primarily attributablerequired to changes in interest rates and notabsorb estimated lifetime credit losses. For equityTotal AIR not included in the fair value or amortized cost basis of HTM debt securities FHN has both the abilitywas $3 million and intent to hold these securities for the time necessary to recover the amortized cost.
Note 4 – Loans
The following table provides the balance of loans, net of unearned income, by portfolio segment$1 million as of September 30, 20172022 and December 31, 2016:2021. FHN has assessed the risk of credit loss and has determined that zero allowance for credit losses for HTM securities was necessary as of September 30, 2022 and December 31, 2021. 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.
The carrying amount of equity investments without a readily determinable fair value was $78 million and $70 million at September 30, 2022 and December 31, 2021, respectively. The year-to-date 2022 and 2021 gross amounts of upward and downward valuation adjustments were not significant.
Unrealized losses of $2 million and unrealized gains of $1 million were recognized in the three months ended September 30, 2022 and 2021, respectively, and unrealized losses of $15 million and unrealized gains $7 million were recognized for the nine months ended September 30, 2022 and 2021, respectively, for equity investments with readily determinable fair values.
|
| | | | | | | | |
| | 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 Entities for additional information.19 | 3Q22 FORM 10-Q REPORT |
COMPONENTS OF THE LOAN PORTFOLIO
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
Note 3—Loans and Leases
The loanloans and lease portfolio is disaggregated into portfolio 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 a disaggregation of a portfolio segment and 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. Commercialrisk and performance. FHN's loan and lease portfolio segments includeare commercial and consumer. The classes of loans and leases are: (1) commercial, financial, and industrial, (“C&I”)which
includes commercial and commercial real estate. Commercial classes within C&I include general C&I,industrial loans and leases and loans to mortgage companies, 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 to mortgage companies include(2) 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. Consumer loan portfolio segments includereal estate, (3) consumer real estate, permanent mortgage,which includes both real estate installment and the credit card and other portfolio. Consumer classes include home equity lines of credit, (“HELOCs”), real estate (“R/E”) installment and PCI loans within the consumer real estate segment, permanent mortgage (which is both a segment and a class), and(4) credit card and other.
Concentrations
FHN has a concentrationThe following table provides the amortized cost basis of residential real estate loans (24 percentand leases by portfolio segment and class as of total loans), the majoritySeptember 30, 2022 and December 31, 2021, excluding accrued interest of $180 million and $134 million, respectively, which is included in other assets in the consumer real estate segment (22 percentConsolidated Balance Sheets.
| | | | | | | | | | | | | | | | |
LOANS AND LEASES BY PORTFOLIO SEGMENT | | |
(Dollars in millions) | | September 30, 2022 | | December 31, 2021 | | |
Commercial: | | | | | | |
Commercial and industrial (a) (b) | | $ | 28,910 | | | $ | 26,550 | | | |
Loans to mortgage companies | | 2,710 | | | 4,518 | | | |
Total commercial, financial, and industrial | | 31,620 | | | 31,068 | | | |
Commercial real estate | | 13,021 | | | 12,109 | | | |
Consumer: | | | | | | |
HELOC | | 1,977 | | | 1,964 | | | |
Real estate installment loans | | 9,887 | | | 8,808 | | | |
Total consumer real estate | | 11,864 | | | 10,772 | | | |
Credit card and other | | 849 | | | 910 | | | |
Loans and leases | | $ | 57,354 | | | $ | 54,859 | | | |
Allowance for loan and lease losses | | (664) | | | (670) | | | |
Net loans and leases | | $ | 56,690 | | | $ | 54,189 | | | |
| | | | | | |
(a)Includes equipment financing leases of total loans). $962 million and $792 million as of September 30, 2022 and December 31, 2021, respectively.
(b)Includes PPP loans fully guaranteed by the SBA of $129 million and $1.0 billion as of September 30, 2022 and December 31, 2021, respectively.
Restrictions
Loans to finance and insurance companies total $2.8leases with carrying values of $37.4 billion (22 percentand $36.6 billion were pledged as collateral for borrowings at September 30, 2022 and December 31, 2021, respectively.
Concentrations of Credit Risk
Most of FHN’s business activity is with clients located in the C&I portfolio, or 14 percentsouthern United States. FHN’s lending activity is concentrated in its market areas within those states. As of the total loans).September 30, 2022, FHN had loans to mortgage companies totaling $2.0of $2.7 billion (15 percentand loans to finance and insurance companies of $4.1 billion. As a result, 22% of the C&I segment, or 10 percent of total loans) as of September 30, 2017. As a result, 37 percent of the C&I segmentportfolio is sensitive to impacts on the financial services industry.
Note 4 – Loans (Continued)
Purchased Credit-Impaired Loans
The following table presents a rollforward of the accretable yield for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine months ended September 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Balance, beginning of period | | $ | 4,045 |
| | $ | 6,171 |
| | $ | 6,871 |
| | $ | 8,542 |
|
Addition | | — |
| | 2,883 |
| | — |
| | 2,883 |
|
Accretion | | (642 | ) | | (837 | ) | | (2,412 | ) | | (2,984 | ) |
Adjustment for payoffs | | (198 | ) | | (179 | ) | | (1,232 | ) | | (4,408 | ) |
Adjustment for charge-offs | | — |
| | — |
| | — |
| | (674 | ) |
Adjustment for pool excess recovery (a) | | — |
| | — |
| | (222 | ) | | — |
|
Increase/(decrease) in accretable yield (b) | | (2 | ) | | 686 |
| | 112 |
| | 5,398 |
|
Other | | — |
| | — |
| | 86 |
| | (33 | ) |
Balance, end of period | | $ | 3,203 |
| | $ | 8,724 |
| | $ | 3,203 |
| | $ | 8,724 |
|
| |
(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, the ALLL related to PCI loans was $3.1 million compared to $.7 million at December 31, 2016. A loan loss provision expense 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. The loan loss provision expense related to PCI loans of $2.4 million was recognized during the nine months ended September 30, 2017. The loan loss provision related to PCI loans was not material during the nine months ended September 30, 2016.
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:
|
| | | | | | | | | | | | | | | | |
| | 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, 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 TRUPs valuation allowance have been excluded.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | 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 |
| | $ | — |
|
Income CRE | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | | $ | 2,055 |
| | $ | 10,769 |
| | $ | — |
| | $ | 10,419 |
| | $ | 16,636 |
| | $ | — |
|
Consumer: | | | | | | | | | | | | |
HELOC (a) | | $ | 10,513 |
| | $ | 20,372 |
| | $ | — |
| | $ | 11,383 |
| | $ | 21,662 |
| | $ | — |
|
R/E installment loans (a) | | 4,431 |
| | 5,135 |
| | — |
| | 3,957 |
| | 4,992 |
| | — |
|
Permanent mortgage (a) | | 5,481 |
| | 7,604 |
| | — |
| | 5,311 |
| | 7,899 |
| | — |
|
Total | | $ | 20,425 |
| | $ | 33,111 |
| | $ | — |
| | $ | 20,651 |
| | $ | 34,553 |
| | $ | — |
|
Impaired loans with related allowance recorded: | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
General C&I | | $ | 26,876 |
| | $ | 27,345 |
| | $ | 5,970 |
| | $ | 34,334 |
| | $ | 34,470 |
| | $ | 3,294 |
|
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 |
|
Consumer: | | | | | | | | | | | | |
HELOC | | $ | 74,009 |
| | $ | 76,587 |
| | $ | 14,174 |
| | $ | 84,711 |
| | $ | 87,126 |
| | $ | 15,927 |
|
R/E installment loans | | 46,905 |
| | 47,708 |
| | 9,762 |
| | 53,409 |
| | 54,559 |
| | 12,875 |
|
Permanent mortgage | | 78,600 |
| | 90,003 |
| | 12,601 |
| | 88,615 |
| | 100,983 |
| | 12,470 |
|
Credit card & other | | 544 |
| | 544 |
| | 246 |
| | 306 |
| | 306 |
| | 133 |
|
Total | | $ | 200,058 |
| | $ | 214,842 |
| | $ | 36,783 |
| | $ | 227,041 |
| | $ | 242,974 |
| | $ | 41,405 |
|
Total commercial | | $ | 34,348 |
| | $ | 44,602 |
| | $ | 7,021 |
| | $ | 51,086 |
| | $ | 58,776 |
| | $ | 4,413 |
|
Total consumer | | $ | 220,483 |
| | $ | 247,953 |
| | $ | 36,783 |
| | $ | 247,692 |
| | $ | 277,527 |
| | $ | 41,405 |
|
Total impaired loans | | $ | 254,831 |
| | $ | 292,555 |
| | $ | 43,804 |
| | $ | 298,778 |
| | $ | 336,303 |
| | $ | 45,818 |
|
| |
(a) | All discharged bankruptcy loans are charged down to an estimate of net realizable value and do not carry any allowance. |
Note 4 – Loans (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine months ended September 30 |
| | 2017 | | 2016 | | 2017 | | 2016 |
(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 |
Impaired loans with no related allowance recorded: | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
General C&I | | $ | 5,771 |
| | $ | — |
| | $ | 13,708 |
| | $ | — |
| | $ | 8,706 |
| | $ | — |
| | $ | 12,088 |
| | $ | — |
|
Income CRE | | — |
| | — |
| | 1,234 |
| | — |
| | — |
| | — |
| | 2,057 |
| | — |
|
Total | | $ | 5,771 |
| | $ | — |
| | $ | 14,942 |
| | $ | — |
| | $ | 8,706 |
| | $ | — |
| | $ | 14,145 |
| | $ | — |
|
Consumer: | | | | | | | | | | | | | | | | |
HELOC (a) | | $ | 10,225 |
| | $ | — |
| | $ | 11,273 |
| | $ | — |
| | $ | 10,536 |
| | $ | — |
| | $ | 11,100 |
| | $ | — |
|
R/E installment loans (a) | | 4,182 |
| | — |
| | 4,158 |
| | — |
| | 4,014 |
| | — |
| | 4,333 |
| | — |
|
Permanent mortgage (a) | | 5,693 |
| | — |
| | 4,280 |
| | — |
| | 5,701 |
| | — |
| | 4,292 |
| | — |
|
Total | | $ | 20,100 |
| | $ | — |
| | $ | 19,711 |
| | $ | — |
| | $ | 20,251 |
| | $ | — |
| | $ | 19,725 |
| | $ | — |
|
Impaired loans with related allowance recorded: | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
General C&I | | $ | 26,144 |
| | $ | 193 |
| | $ | 33,433 |
| | $ | 289 |
| | $ | 29,136 |
| | $ | 597 |
| | $ | 29,896 |
| | $ | 668 |
|
TRUPS | | 3,117 |
| | — |
| | 3,258 |
| | — |
| | 3,157 |
| | — |
| | 3,291 |
| | — |
|
Income CRE | | 1,628 |
| | 11 |
| | 3,211 |
| | 15 |
| | 1,737 |
| | 39 |
| | 4,376 |
| | 55 |
|
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 |
|
Consumer: | | | | | | | | | | | | | | | | |
HELOC | | $ | 74,894 |
| | $ | 554 |
| | $ | 87,919 |
| | $ | 546 |
| | $ | 78,859 |
| | $ | 1,695 |
| | $ | 88,266 |
| | $ | 1,527 |
|
R/E installment loans | | 47,628 |
| | 315 |
| | 57,775 |
| | 357 |
| | 49,634 |
| | 950 |
| | 58,890 |
| | 1,019 |
|
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 |
|
Total | | $ | 202,279 |
| | $ | 1,488 |
| | $ | 236,739 |
| | $ | 1,451 |
| | $ | 211,030 |
| | $ | 4,458 |
| | $ | 240,225 |
| | $ | 4,158 |
|
Total commercial | | $ | 37,704 |
| | $ | 204 |
| | $ | 56,199 |
| | $ | 309 |
| | $ | 43,946 |
| | $ | 646 |
| | $ | 53,084 |
| | $ | 740 |
|
Total consumer | | $ | 222,379 |
| | $ | 1,488 |
| | $ | 256,450 |
| | $ | 1,451 |
| | $ | 231,281 |
| | $ | 4,458 |
| | $ | 259,950 |
| | $ | 4,158 |
|
Total impaired loans | | $ | 260,083 |
| | $ | 1,692 |
| | $ | 312,649 |
| | $ | 1,760 |
| | $ | 275,227 |
| | $ | 5,104 |
| | $ | 313,034 |
| | $ | 4,898 |
|
| |
(a) | All discharged bankruptcy loans are charged down to an estimate of net realizable value and do not carry any allowance. |
AssetCredit 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 and lease 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 lossesALLL 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;percentage. PD grades are continually evaluated but require a PD 1 has the lowest expected default probability, and probabilities increase as grades progress down the scale. formal scorecard annually.
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 gradesSpecial mention loans and leases have potential weaknesses that, if left uncorrected, may result in deterioration of FHN's credit position at some future date. Substandard commercial loans and leases have well-defined weaknesses and are required to be reassessed annually or earlier whenever there has been a material change incharacterized by the financial conditiondistinct
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
possibility that FHN will sustain some loss if the deficiencies are not corrected. Doubtful commercial loans and leases have the same weaknesses as substandard loans and leases with the added characteristics that the probability of loss is high and collection 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 disciplinefull amount 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)improbable.
The following tables provide the balancesamortized cost basis of the commercial loan portfolio classes with associated allowance, disaggregated by PD gradeyear of origination and credit quality indicator as of September 30, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
C&I PORTFOLIO |
| | September 30, 2022 |
| | |
(Dollars in millions) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior to 2018 | | LMC (a) | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
Credit Quality Indicator: | | | | | | | | | | | | | | | | | | | | |
Pass (PD grades 1 through 12) (b) | | $ | 4,518 | | | $ | 4,415 | | | $ | 2,051 | | | $ | 2,357 | | | $ | 1,300 | | | $ | 3,947 | | | $ | 2,710 | | | $ | 9,006 | | | $ | 399 | | | $ | 30,703 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Special Mention (PD grade 13) | | 29 | | | 24 | | | 11 | | | 73 | | | 9 | | | 68 | | | — | | | 96 | | | 3 | | | 313 | |
Substandard, Doubtful, or Loss (PD grades 14,15, and 16) | | 36 | | | 32 | | | 71 | | | 34 | | | 78 | | | 130 | | | — | | | 126 | | | 97 | | | 604 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total C&I loans | | $ | 4,583 | | | $ | 4,471 | | | $ | 2,133 | | | $ | 2,464 | | | $ | 1,387 | | | $ | 4,145 | | | $ | 2,710 | | | $ | 9,228 | | | $ | 499 | | | $ | 31,620 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | |
(Dollars in millions) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior to 2017 | | LMC (a) | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
| | | | | | | | | | | | | | | | | | | | |
Credit Quality Indicator: | | | | | | | | | | | | | | | | | | | | |
Pass (PD grades 1 through 12) (b) | | $ | 7,372 | | | $ | 3,576 | | | $ | 3,439 | | | $ | 1,455 | | | $ | 1,193 | | | $ | 2,267 | | | $ | 4,518 | | | $ | 6,386 | | | $ | 13 | | | $ | 30,219 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Special Mention (PD grade 13) | | 25 | | | 39 | | | 50 | | | 48 | | | 36 | | | 43 | | | — | | | 100 | | | 4 | | | 345 | |
Substandard, Doubtful, or Loss (PD grades 14,15, and 16) | | 24 | | | 61 | | | 67 | | | 103 | | | 24 | | | 48 | | | — | | | 129 | | | 48 | | | 504 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total C&I loans | | $ | 7,421 | | | $ | 3,676 | | | $ | 3,556 | | | $ | 1,606 | | | $ | 1,253 | | | $ | 2,358 | | | $ | 4,518 | | | $ | 6,615 | | | $ | 65 | | | $ | 31,068 | |
| | | | | | | | | | | | | | | | | | | | |
(a) 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.
(b) Balances include PPP loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CRE PORTFOLIO |
| | September 30, 2022 |
| | |
(Dollars in millions) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior to 2018 | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
| | | | | | | | | | | | | | | | | | |
Credit Quality Indicator: | | | | | | | | | | | | | | | | | | |
Pass (PD grades 1 through 12) | | $ | 2,099 | | | $ | 3,260 | | | $ | 1,547 | | | $ | 1,969 | | | $ | 881 | | | $ | 2,687 | | | $ | 251 | | | $ | 20 | | | $ | 12,714 | |
Special Mention (PD grade 13) | | 1 | | | 1 | | | 2 | | | 45 | | | 98 | | | 9 | | | — | | | — | | | 156 | |
Substandard, Doubtful, or Loss (PD grades 14,15, and 16) | | — | | | 3 | | | 12 | | | 62 | | | 26 | | | 36 | | | 12 | | | — | | | 151 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total CRE loans | | $ | 2,100 | | | $ | 3,264 | | | $ | 1,561 | | | $ | 2,076 | | | $ | 1,005 | | | $ | 2,732 | | | $ | 263 | | | $ | 20 | | | $ | 13,021 | |
| | | | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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”.21 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | |
(Dollars in millions) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior to 2017 | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
| | | | | | | | | | | | | | | | | | |
Credit Quality Indicator: | | | | | | | | | | | | | | | | | | |
Pass (PD grades 1 through 12) | | $ | 3,441 | | | $ | 2,065 | | | $ | 2,514 | | | $ | 929 | | | $ | 691 | | | $ | 1,822 | | | $ | 204 | | | $ | — | | | $ | 11,666 | |
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Special Mention (PD grade 13) | | 4 | | | 26 | | | 52 | | | 125 | | | 20 | | | 65 | | | — | | | — | | | 292 | |
Substandard, Doubtful, or Loss (PD grades 14,15, and 16) | | 47 | | | — | | | 24 | | | 3 | | | 33 | | | 32 | | | 12 | | | — | | | 151 | |
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Total CRE loans | | $ | 3,492 | | | $ | 2,091 | | | $ | 2,590 | | | $ | 1,057 | | | $ | 744 | | | $ | 1,919 | | | $ | 216 | | | $ | — | | | $ | 12,109 | |
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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,loan types, FHN is able to utilize the Fair Isaac Corporation (“FICO”)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 percentageamortized cost basis by year of balances outstanding by average,origination and refreshed FICO scores for the HELOC,
consumer real estate installment, and permanent mortgage classes of loans as of September 30, 20172022 and December 31, 2016:2021. Within consumer real estate, classes include HELOC and real estate installment loans. 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 a revolving loan converted to a term loan. All loans classified in the following tables as revolving loans or revolving loans converted to term loans are HELOCs. Real estate installment loans are originated as fixed term loans and are classified below in their vintage year. All loans in the following tables classified in a vintage year are real estate installment loans.
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CONSUMER REAL ESTATE PORTFOLIO |
| | September 30, 2022 |
| | |
(Dollars in millions) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior to 2018 | | Revolving Loans | | Revolving Loans Converted to Term Loans (a) | | Total |
FICO score 740 or greater | | $ | 1,743 | | | $ | 1,873 | | | $ | 833 | | | $ | 541 | | | $ | 284 | | | $ | 1,354 | | | $ | 1,208 | | | $ | 68 | | | $ | 7,904 | |
FICO score 720-739 | | 235 | | | 254 | | | 118 | | | 100 | | | 35 | | | 247 | | | 174 | | | 19 | | | 1,182 | |
FICO score 700-719 | | 209 | | | 210 | | | 94 | | | 58 | | | 38 | | | 234 | | | 140 | | | 23 | | | 1,006 | |
FICO score 660-699 | | 175 | | | 138 | | | 91 | | | 57 | | | 63 | | | 296 | | | 195 | | | 25 | | | 1,040 | |
FICO score 620-659 | | 15 | | | 25 | | | 26 | | | 42 | | | 20 | | | 110 | | | 50 | | | 10 | | | 298 | |
FICO score less than 620 | | 15 | | | 18 | | | 31 | | | 12 | | | 24 | | | 269 | | | 49 | | | 16 | | | 434 | |
Total | | $ | 2,392 | | | $ | 2,518 | | | $ | 1,193 | | | $ | 810 | | | $ | 464 | | | $ | 2,510 | | | $ | 1,816 | | | $ | 161 | | | $ | 11,864 | |
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| | 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 | % | |
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(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.22 | 3Q22 FORM 10-Q REPORT |
Note 4 – Loans (Continued)
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | |
(Dollars in millions) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior to 2017 | | Revolving Loans | | Revolving Loans Converted to Term Loans (a) | | Total |
FICO score 740 or greater | | $ | 1,594 | | | $ | 1,156 | | | $ | 825 | | | $ | 473 | | | $ | 394 | | | $ | 1,335 | | | $ | 1,086 | | | $ | 115 | | | $ | 6,978 | |
FICO score 720-739 | | 236 | | | 171 | | | 109 | | | 61 | | | 44 | | | 209 | | | 162 | | | 21 | | | 1,013 | |
FICO score 700-719 | | 143 | | | 112 | | | 81 | | | 68 | | | 45 | | | 153 | | | 141 | | | 23 | | | 766 | |
FICO score 660-699 | | 164 | | | 131 | | | 120 | | | 106 | | | 44 | | | 246 | | | 204 | | | 44 | | | 1,059 | |
FICO score 620-659 | | 42 | | | 36 | | | 55 | | | 23 | | | 13 | | | 118 | | | 66 | | | 27 | | | 380 | |
FICO score less than 620 | | 26 | | | 84 | | | 42 | | | 32 | | | 45 | | | 272 | | | 42 | | | 33 | | | 576 | |
Total | | $ | 2,205 | | | $ | 1,690 | | | $ | 1,232 | | | $ | 763 | | | $ | 585 | | | $ | 2,333 | | | $ | 1,701 | | | $ | 263 | | | $ | 10,772 | |
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| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
The following tables reflect the amortized cost basis by year of origination and refreshed FICO scores for credit card and other loans as of September 30, 2022 and December 31, 2021.
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CREDIT CARD & OTHER PORTFOLIO |
| | September 30, 2022 |
| | |
(Dollars in millions) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior to 2018 | | Revolving Loans | | Revolving Loans Converted to Term Loans (a) | | Total |
FICO score 740 or greater | | $ | 25 | | | $ | 17 | | | $ | 12 | | | $ | 10 | | | $ | 4 | | | $ | 25 | | | $ | 290 | | | $ | 7 | | | $ | 390 | |
FICO score 720-739 | | 3 | | | 2 | | | 2 | | | 1 | | | 1 | | | 5 | | | 33 | | | 1 | | | 48 | |
FICO score 700-719 | | 2 | | | 4 | | | 1 | | | 1 | | | — | | | 4 | | | 37 | | | — | | | 49 | |
FICO score 660-699 | | 2 | | | 2 | | | 2 | | | 1 | | | 2 | | | 7 | | | 35 | | | 1 | | | 52 | |
FICO score 620-659 | | 1 | | | 2 | | | 1 | | | — | | | 1 | | | 3 | | | 21 | | | — | | | 29 | |
FICO score less than 620 | | 7 | | | 7 | | | 6 | | | 10 | | | 7 | | | 68 | | | 175 | | | 1 | | | 281 | |
Total | | $ | 40 | | | $ | 34 | | | $ | 24 | | | $ | 23 | | | $ | 15 | | | $ | 112 | | | $ | 591 | | | $ | 10 | | | $ | 849 | |
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| | December 31, 2021 |
| | |
(Dollars in millions) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior to 2017 | | Revolving Loans | | Revolving Loans Converted to Term Loans (a) | | Total |
FICO score 740 or greater | | $ | 56 | | | $ | 35 | | | $ | 29 | | | $ | 23 | | | $ | 13 | | | $ | 56 | | | $ | 200 | | | $ | 11 | | | $ | 423 | |
FICO score 720-739 | | 14 | | | 5 | | | 4 | | | 3 | | | 4 | | | 17 | | | 46 | | | 3 | | | 96 | |
FICO score 700-719 | | 8 | | | 5 | | | 4 | | | 4 | | | 3 | | | 17 | | | 42 | | | 1 | | | 84 | |
FICO score 660-699 | | 25 | | | 6 | | | 5 | | | 6 | | | 4 | | | 31 | | | 98 | | | 2 | | | 177 | |
FICO score 620-659 | | 4 | | | 3 | | | 2 | | | 4 | | | 3 | | | 18 | | | 22 | | | 1 | | | 57 | |
FICO score less than 620 | | 24 | | | 3 | | | 3 | | | 4 | | | 4 | | | 16 | | | 18 | | | 1 | | | 73 | |
Total | | $ | 131 | | | $ | 57 | | | $ | 47 | | | $ | 44 | | | $ | 31 | | | $ | 155 | | | $ | 426 | | | $ | 19 | | | $ | 910 | |
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Nonaccrual and Past Due Loans and Leases
Loans and leases are 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 nonaccrual are loans for which FHN continues to receive payments including residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy.
Past due loans are loans contractually past due as to interest or principal payments, but which have not yet been put on nonaccrual status. In accordance with revised Interagency Guidance issued in 2020, FHN was not required to designate loans with deferrals granted in response to COVID-19 as past due because of such deferrals. If a borrower defers payment, this may result in no contractual payments being past due, and as such, loans would not be considered past due during the period of deferral, and as a result, are excluded from loans past due 30-89 days and loans 90+ days past due in the tables below.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
The following table reflects accruing and non-accruing loans and leases by class on September 30, 2017:2022 and December 31, 2021:
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ACCRUING & NON-ACCRUING LOANS AND LEASES |
| | September 30, 2022 |
| | Accruing | | Non-Accruing | | |
(Dollars in millions) | | 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 and Leases |
Commercial, financial, and industrial: | | | | | | | | | | | | | | | | | | |
C&I (a) | | $ | 28,728 | | | $ | 65 | | | $ | 1 | | | $ | 28,794 | | | $ | 49 | | | $ | 21 | | | $ | 46 | | | $ | 116 | | | $ | 28,910 | |
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Loans to mortgage companies | | 2,710 | | | — | | | — | | | 2,710 | | | — | | | — | | | — | | | — | | | 2,710 | |
| | | | | | | | | | | | | | | | | | |
Total commercial, financial, and industrial | | 31,438 | | | 65 | | | 1 | | | 31,504 | | | 49 | | | 21 | | | 46 | | | 116 | | | 31,620 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
CRE (b) | | 13,006 | | | 5 | | | — | | | 13,011 | | | 7 | | | — | | | 3 | | | 10 | | | 13,021 | |
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Consumer real estate: | | | | | | | | | | | | | | | | | | |
HELOC (c) | | 1,917 | | | 10 | | | 5 | | | 1,932 | | | 35 | | | 2 | | | 8 | | | 45 | | | 1,977 | |
Real estate installment loans (d) | | 9,736 | | | 21 | | | 12 | | | 9,769 | | | 58 | | | 7 | | | 53 | | | 118 | | | 9,887 | |
Total consumer real estate | | 11,653 | | | 31 | | | 17 | | | 11,701 | | | 93 | | | 9 | | | 61 | | | 163 | | | 11,864 | |
Credit card and other: | | | | | | | | | | | | | | | | | | |
Credit card | | 256 | | | 5 | | | 6 | | | 267 | | | — | | | — | | | — | | | — | | | 267 | |
Other | | 577 | | | 2 | | | — | | | 579 | | | 1 | | | 1 | | | 1 | | | 3 | | | 582 | |
Total credit card and other | | 833 | | | 7 | | | 6 | | | 846 | | | 1 | | | 1 | | | 1 | | | 3 | | | 849 | |
Total loans and leases | | $ | 56,930 | | | $ | 108 | | | $ | 24 | | | $ | 57,062 | | | $ | 150 | | | $ | 31 | | | $ | 111 | | | $ | 292 | | | $ | 57,354 | |
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| | December 31, 2021 |
| | Accruing | | Non-Accruing | | |
(Dollars in millions) | | 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 and Leases |
Commercial, financial, and industrial: | | | | | | | | | | | | | | | | | | |
C&I (a) | | $ | 26,367 | | | $ | 53 | | | $ | 5 | | | $ | 26,425 | | | $ | 97 | | | $ | 1 | | | $ | 27 | | | $ | 125 | | | $ | 26,550 | |
| | | | | | | | | | | | | | | | | | |
Loans to mortgage companies | | 4,518 | | | — | | | — | | | 4,518 | | | — | | | — | | | — | | | — | | | 4,518 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total commercial, financial, and industrial | | 30,885 | | | 53 | | | 5 | | | 30,943 | | | 97 | | | 1 | | | 27 | | | 125 | | | 31,068 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
CRE (b) | | 12,087 | | | 13 | | | — | | | 12,100 | | | 6 | | | 1 | | | 2 | | | 9 | | | 12,109 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | |
Consumer real estate: | | | | | | | | | | | | | | | | | | |
HELOC (c) | | 1,906 | | | 7 | | | 6 | | | 1,919 | | | 34 | | | 2 | | | 9 | | | 45 | | | 1,964 | |
Real estate installment loans (d) | | 8,658 | | | 30 | | | 27 | | | 8,715 | | | 44 | | | 3 | | | 46 | | | 93 | | | 8,808 | |
| | | | | | | | | | | | | | | | | | |
Total consumer real estate | | 10,564 | | | 37 | | | 33 | | | 10,634 | | | 78 | | | 5 | | | 55 | | | 138 | | | 10,772 | |
Credit card and other: | | | | | | | | | | | | | | | | | | |
Credit card | | 292 | | | 2 | | | 2 | | | 296 | | | — | | | — | | | — | | | — | | | 296 | |
Other | | 608 | | | 3 | | | — | | | 611 | | | 1 | | | — | | | 2 | | | 3 | | | 614 | |
| | | | | | | | | | | | | | | | | | |
Total credit card and other | | 900 | | | 5 | | | 2 | | | 907 | | | 1 | | | — | | | 2 | | | 3 | | | 910 | |
Total loans and leases | | $ | 54,436 | | | $ | 108 | | | $ | 40 | | | $ | 54,584 | | | $ | 182 | | | $ | 7 | | | $ | 86 | | | $ | 275 | | | $ | 54,859 | |
| | | | | | | | | | | | | | | | | | |
(a) $113 million and $99 million of C&I loans are nonaccrual loans that have been specifically reviewed for impairment with no related allowance in 2022 and 2021, respectively.
(b) $5 million and $5 million of CRE loans are nonaccrual loans that have been specifically reviewed for impairment with no related allowance in 2022 and 2021, respectively.
(c) $5 million and $7 million of HELOC loans are nonaccrual loans that have been specifically reviewed for impairment with no related allowance in 2022 and 2021, respectively.
(d) $7 million and $50 million of real estate installment loans are nonaccrual loans that have been specifically reviewed for impairment with no related allowance in 2022 and 2021, respectively.
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| | 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 |
|
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
Collateral-Dependent Loans
(a) TRUPSCollateral-dependent loans are defined as loans for which repayment is presented netexpected to be derived substantially through the operation or sale of the valuation allowancecollateral and where the borrower is experiencing financial difficulty. At a minimum, the estimated value of $25.5 million.the collateral for each loan equals the current book value.
Note 4 – Loans (Continued)
The following table reflects accruingAs of September 30, 2022 and non-accruing loans by class on December 31, 2016:2021, FHN had commercial loans with amortized cost of approximately $116 million and $120 million, respectively, that were based on the value of underlying collateral. Collateral-dependent C&I and CRE loans totaled $108 million and $8 million, respectively, at September 30, 2022. The collateral for these loans generally consists of business assets including land, buildings, equipment and financial assets. During the three and nine months ended September 30, 2022, FHN recognized charge-offs of $5 million and $9 million, respectively, on these loans related to reductions in estimated collateral values.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 netConsumer HELOC and real estate installment loans with amortized cost based on the value of underlying real estate collateral were approximately $7 million and $28 million, respectively, as of September 30, 2022 and $7 million and $20 million, respectively, as of December 31, 2021. Charge-offs during the valuation allowance of $25.5 million.
Note 4 – Loans (Continued)
three and nine months ended September 30, 2022 were $2 million for collateral-dependent consumer loans and were not significant for the three and nine months ended September 30, 2021.
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.
In accordance with regulatory guidance, certain loan modifications that might ordinarily have qualified as TDRs were not accounted for as TDRs and have been excluded from the disclosures below. For all classes withinloan modifications that were made during the commercial portfolio segment,year ended December 31, 2021 that met the TDR relief provisions outlined in either the CARES Act, as extended by the CAA, or revised Interagency Guidance, FHN has excluded these modifications from consideration as 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 consumerand has excluded loans are generally structured using parameters of U.S. government-sponsored programs suchwith these qualifying modifications from designation as TDRs in the former Home Affordable Modification Program (“HAMP”). Within the HELOCinformation 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.discussion that follows.
On September 30, 20172022 and December 31, 2016,2021, FHN had $241.6$204 million and $285.2$206 million, respectively, of portfolio loans classified as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reservesTDRs. Additionally, $31 million and $35 million of $38.6 million, or 16 percentloans held for sale 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, 20172022 and December 31, 2016,2021, respectively, were classified as TDRs.
Note 4 – Loans (Continued)
The following tables reflect portfoliotable presents the end of period balance for loans that were classified as TDRsmodified in a TDR during the three and nine months ended September 30, 2017 and 2016:periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LOANS MODIFIED IN A TDR | | | | | | |
| | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | | |
(Dollars in millions) | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | | | | | |
| | | | | | | | | | | | | | | | | | |
C&I | | 3 | | | $ | 30 | | | $ | 24 | | | 5 | | | $ | 8 | | | $ | 7 | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
CRE | | — | | | — | | | — | | | — | | | — | | | — | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
HELOC | | 30 | | | 2 | | | 2 | | | 2 | | | — | | | — | | | | | | | |
Real estate installment loans | | — | | | — | | | — | | | 6 | | | — | | | — | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Credit card and other | | 51 | | | 10 | | | 10 | | | 8 | | | — | | | — | | | | | | | |
Total TDRs | | 84 | | | $ | 42 | | | $ | 36 | | | 21 | | | $ | 8 | | | $ | 7 | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 | | | | | | |
(Dollars in millions) | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | | | | | |
| | | | | | | | | | | | | | | | | | |
C&I | | 6 | | | $ | 30 | | | $ | 24 | | | 32 | | | $ | 37 | | | $ | 34 | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
CRE | | — | | | — | | | — | | | 1 | | | 12 | | | 10 | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
HELOC | | 86 | | | 6 | | | 6 | | | 21 | | | 2 | | | 2 | | | | | | | |
Real estate installment loans | | 181 | | | 41 | | | 41 | | | 41 | | | 8 | | | 8 | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Credit card and other | | 60 | | | 10 | | | 10 | | | 36 | | | — | | | — | | | | | | | |
Total TDRs | | 333 | | | $ | 87 | | | $ | 81 | | | 131 | | | $ | 59 | | | $ | 54 | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Note 4 – Loans (Continued)
The following tables presenttable presents TDRs which re-defaulted during the three and nine months ended September 30, 20172022 and 2016, and2021, 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LOANS MODIFIED IN A TDR THAT RE-DEFAULTED | | | | |
| | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 | | |
(Dollars in millions) | | Number | | Recorded Investment | | Number | | Recorded Investment | | | | |
| | | | | | | | | | | | |
C&I | | — | | | $ | — | | | 6 | | | $ | 3 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
CRE | | — | | | — | | | 4 | | | 10 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
HELOC | | 8 | | | — | | | — | | | — | | | | | |
Real estate installment loans | | 21 | | | 7 | | | 1 | | | 1 | | | | | |
| | | | | | | | | | | | |
Credit card and other | | 3 | | | — | | | 1 | | | — | | | | | |
Total TDRs | | 32 | | | $ | 7 | | | 12 | | | $ | 14 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 | | | | |
(Dollars in millions) | | Number | | Recorded Investment | | Number | | Recorded Investment | | | | |
| | | | | | | | | | | | |
C&I | | 5 | | | $ | — | | | 18 | | | $ | 5 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
CRE | | — | | | — | | | 6 | | | 19 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
HELOC | | 8 | | | — | | | 1 | | | — | | | | | |
Real estate installment loans | | 27 | | | 8 | | | 8 | | | 4 | | | | | |
| | | | | | | | | | | | |
Credit card and other | | 12 | | | — | | | 2 | | | — | | | | | |
Total TDRs | | 52 | | | $ | 8 | | | 35 | | | $ | 28 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 4—ALLOWANCE FOR CREDIT LOSSES | |
Note 5 – 4—Allowance for LoanCredit Losses
Management's estimate of expected credit losses in the loan and lease portfolios is recorded in the ALLL and the reserve for unfunded lending commitments, collectively referred to as the Allowance for Credit Losses, or the ACL. The ALLL includesand the following components: reservesreserve for unfunded lending commitments are reported on the Consolidated Balance Sheets in the allowance for loan and lease losses and in other liabilities, respectively. Provision for credit losses related to the loans and leases portfolio and the unfunded lending commitments are reported in the Consolidated Statements of Income as provision for credit losses.
The ACL is maintained at a level management believes to be appropriate to absorb expected lifetime credit losses over the contractual life of the loan and lease portfolio and unfunded lending commitments. The determination of the ACL is based on periodic evaluation of the loan and lease portfolios and unfunded lending commitments considering a number of relevant underlying factors, including key assumptions and evaluation of quantitative and qualitative information.
The expected loan losses are the product of multiplying FHN’s estimates of probability of default (PD), loss given default (LGD), and individual loan level exposure as default (EAD), including amortization and prepayment assumptions, on an undiscounted basis. FHN uses models or assumptions to develop the expected loss forecasts, which incorporate multiple macroeconomic forecasts over a four-year reasonable and supportable forecast period. After the reasonable and supportable forecast period, the Company immediately reverts to its historical loss averages, evaluated over the historical observation period, for the remaining estimated life of the loans. In order to capture the unique risks of the loan portfolio within the PD, LGD, and prepayment models, FHN segments the portfolio into pools, generally incorporating loan grades 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. The reserve factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics and are subject toloans. As there can be no certainty that actual economic performance will precisely follow any specific macroeconomic forecast, FHN uses qualitative adjustments by management to reflectadjust historical loss information in situations where current events, trends,loan characteristics differ from those in the historical loss information and conditions (including economic considerations and trends). The currentfor differences in economic conditions and trends, performanceother factors.
The evaluation of quantitative and qualitative information is performed through assessments of groups of assets that share similar risk characteristics and certain individual loans and leases that do not share similar risk characteristics with the collective group. As described in Note 3 - Loans and Leases, loans are grouped generally by product type and significant loan portfolios are assessed for credit losses using analytical or statistical models. The quantitative evaluation of the housing market, unemployment levels, labor participation rate, regulatory guidance,adequacy of the ACL utilizes a weighting approach for multiple economic forecast scenarios as its foundation, and both positive and negative portfolio segment-specific trends, are examples of additional factors considered by management in determining the ALLL. Additionally, management considers the inherent uncertainty of quantitativeis primarily based on
analytical models that are driven by historical loss data. Management evaluates the periods of historical losses that are the basis for the loss rates used in the quantitative models and selects historical loss periods that are believed to be the most reflective of losses inherent in the loan portfoliouse known or estimated data as of the balance sheet date. Managementdate and forecasted data over the reasonable and supportable period. The ACL may also periodically reviews analysisbe affected by a variety of qualitative factors that FHN considers to reflect current judgment of various events and risks that are not measured in the loss emergence periodquantitative calculations.
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. As of September 30, 2022 and December 31, 2021, FHN recognized less than $1 million in allowance for expected credit losses on COVID-19 deferrals that do not qualify for the election which is not reflected in the table below. AIR and the related allowance for expected credit losses is included as a component of other assets. The total amount of interest reversals from loans placed on nonaccrual status and the amount of time it takesincome recognized on nonaccrual loans during the three and nine months ended September 30, 2022 and 2021 were not material.
Expected credit losses for a loss to be confirmed (initial charge-off) after a loss event has occurred. FHN performs extensive studiesunfunded commitments are estimated for periods where the commitment is not unconditionally cancellable. The measurement of expected credit losses for unfunded commitments mirrors that of loans and leases with the additional estimate of future draw rates (timing and amount).
The ACL balance as it relates toof September 30, 2022 reflects the historical loss periods usedimpact of loan growth, deterioration in the modelmacroeconomic forecast and a preliminary estimate of potential losses related to Hurricane Ian. In developing credit loss estimates for its loan and lease portfolios, FHN utilized multiple Moody’s forecast scenarios for its macroeconomic inputs. During the three and nine months ended September 30, 2022, FHN's scenario selection process focused on key economic drivers such as unemployment and economic activity including recession risk. Risks considered include: rising interest rates, supply chain disruptions, labor/wage constraints, international conflict, and the loss emergence period and model assumptions are adjusted accordingly.ongoing impact of COVID-19. FHN selected one scenario as its base case, which was the Moody's baseline scenario. The ALLL also includes 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. See Note 1 – Summary of Significant Accounting Policies and Note 5 - Allowance for Loan Losses inheaviest weight was placed on the Notes to Consolidated Financial Statements on FHN’s Form 10-K forbase case forecast, which assumed positive real GDP growth over the forecast horizon.
During the year ended December 31, 2016, for additional information about2021, FHN considered stressed loan portfolios or industries that are most exposed to the policies and methodologies used in the aforementioned componentseffects of the ALLL.
Note 5 – AllowanceCOVID-19 pandemic, and added qualitative adjustments, where needed, to account for Loan Losses (Continued)the risks not captured in modeled results. Management also made qualitative adjustments to reflect estimated recoveries based on a review of prior charge off
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 4—ALLOWANCE FOR CREDIT LOSSES | |
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.
The following table provides a rollforward of the allowanceALLL and the reserve for loan lossesunfunded lending commitments by portfolio segmenttype for the three and nine months ended September 30, 20172022 and 2016:2021:
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ROLLFORWARD OF ALLL & RESERVE FOR UNFUNDED LENDING COMMITMENTS |
(Dollars in millions) | | Commercial, Financial, and Industrial (a) | | Commercial Real Estate | | Consumer Real Estate | | Credit Card and Other | | Total |
| | Three Months Ended September 30, 2022 |
Allowance for loan and lease losses: | | | | | | | | | | |
Balance as of July 1, 2022 | | $ | 274 | | | $ | 141 | | | $ | 183 | | | $ | 26 | | | $ | 624 | |
Charge-offs | | (13) | | | (1) | | | (1) | | | (6) | | | (21) | |
Recoveries | | 2 | | | — | | | 6 | | | 1 | | | 9 | |
| | | | | | | | | | |
Provision for loan and lease losses | | 32 | | | 8 | | | 5 | | | 7 | | | 52 | |
Balance as of September 30, 2022 | | $ | 295 | | | $ | 148 | | | $ | 193 | | | $ | 28 | | | $ | 664 | |
| | | | | | | | | | |
Reserve for remaining unfunded commitments: | | | | | | | | | | |
Balance as of July 1, 2022 | | 53 | | | 17 | | | 10 | | | — | | | 80 | |
| | | | | | | | | | |
Provision for remaining unfunded commitments | | 5 | | | 2 | | | 1 | | | — | | | 8 | |
Balance as of September 30, 2022 | | 58 | | | 19 | | | 11 | | | — | | | 88 | |
Allowance for credit losses as of September 30, 2022 | | $ | 353 | | | $ | 167 | | | $ | 204 | | | $ | 28 | | | $ | 752 | |
| | | | | | | | | | |
| | Three Months Ended September 30, 2021 |
Allowance for loan and lease losses: | | | | | | | | | | |
Balance as of July 1, 2021 | | $ | 385 | | | $ | 210 | | | $ | 203 | | | $ | 17 | | | $ | 815 | |
| | | | | | | | | | |
Charge-offs | | (11) | | | (2) | | | (1) | | | (5) | | | (19) | |
Recoveries | | 7 | | | 2 | | | 7 | | | — | | | 16 | |
Provision for loan losses | | (7) | | | (48) | | | (30) | | | 7 | | | (78) | |
Balance as of September 30, 2021 | | $ | 374 | | | $ | 162 | | | $ | 179 | | | $ | 19 | | | $ | 734 | |
| | | | | | | | | | |
Reserve for remaining unfunded commitments: | | | | | | | | | | |
Balance as of July 1, 2021 | | $ | 57 | | | $ | 9 | | | $ | 9 | | | $ | — | | | $ | 75 | |
| | | | | | | | | | |
Provision for remaining unfunded commitments | | (8) | | | 1 | | | — | | | — | | | (7) | |
Balance as of September 30, 2021 | | 49 | | | 10 | | | 9 | | | — | | | 68 | |
Allowance for credit losses as of September 30, 2021 | | $ | 423 | | | $ | 172 | | | $ | 188 | | | $ | 19 | | | $ | 802 | |
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(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 |
|
Note 6 – Intangible Assets
The following is a summary of other intangible assets included in the Consolidated Condensed Statements of Condition:
|
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| | 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 |
|
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(a) | 2017 increase associated with the Coastal acquisition.29 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| Balance primarily includes noncompete covenants, as well as $.3 million related to state banking licenses not subject to amortization.NOTE 4—ALLOWANCE FOR CREDIT LOSSES | |
Amortization expense was $2.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | Nine Months Ended September 30, 2022 |
Allowance for loan and lease losses: | | | | | | | | | | |
Balance as of January 1, 2022 | | $ | 334 | | | $ | 154 | | | $ | 163 | | | $ | 19 | | | $ | 670 | |
Charge-offs | | (38) | | | (1) | | | (4) | | | (18) | | | (61) | |
Recoveries | | 6 | | | 1 | | | 17 | | | 3 | | | 27 | |
| | | | | | | | | | |
Provision for loan and lease losses | | (7) | | | (6) | | | 17 | | | 24 | | | 28 | |
Balance as of September 30, 2022 | | $ | 295 | | | $ | 148 | | | $ | 193 | | | $ | 28 | | | $ | 664 | |
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Reserve for remaining unfunded commitments: | | | | | | | | | | |
Balance as of January 1, 2022 | | $ | 46 | | | $ | 12 | | | $ | 8 | | | $ | — | | | $ | 66 | |
| | | | | | | | | | |
Provision for remaining unfunded commitments | | 12 | | | 7 | | | 3 | | | — | | | 22 | |
Balance as of September 30, 2022 | | 58 | | | 19 | | | 11 | | | — | | | 88 | |
Allowance for credit losses as of September 30, 2022 | | $ | 353 | | | $ | 167 | | | $ | 204 | | | $ | 28 | | | $ | 752 | |
| | | | | | | | | | |
| | Nine Months Ended September 30, 2021 |
Allowance for loan and lease losses: | | | | | | | | | | |
Balance as of January 1, 2021 | | $ | 453 | | | $ | 242 | | | $ | 242 | | | $ | 26 | | | $ | 963 | |
| | | | | | | | | | |
Charge-offs | | (27) | | | (5) | | | (5) | | | (11) | | | (48) | |
Recoveries | | 18 | | | 5 | | | 21 | | | 3 | | | 47 | |
Provision for loan and lease losses | | (70) | | | (80) | | | (79) | | | 1 | | | (228) | |
Balance as of September 30, 2021 | | $ | 374 | | | $ | 162 | | | $ | 179 | | | $ | 19 | | | $ | 734 | |
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Reserve for remaining unfunded commitments: | | | | | | | | | | |
Balance as of January 1, 2021 | | $ | 65 | | | $ | 10 | | | $ | 10 | | | $ | — | | | $ | 85 | |
| | | | | | | | | | |
Provision for remaining unfunded commitments | | (16) | | | — | | | (1) | | | — | | | (17) | |
Balance as of September 30, 2021 | | 49 | | | 10 | | | 9 | | | — | | | 68 | |
Allowance for credit losses as of September 30, 2021 | | $ | 423 | | | $ | 172 | | | $ | 188 | | | $ | 19 | | | $ | 802 | |
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(a) C&I loans as of September 30, 2022 and 2021include $129 million and $1.3$2.0 billion in PPP loans, respectively, which due to the government guarantee and forgiveness provisions are considered to have no credit risk and therefore have no allowance for loan and lease losses.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 5—MORTGAGE BANKING ACTIVITY | |
Note 5—Mortgage Banking Activity
FHN originates mortgage loans for sale into the secondary market. These loans primarily consist of residential first lien mortgages that conform to standards established by GSEs that are major investors in U.S. home mortgages, but can also consist of junior lien and jumbo loans secured by residential property. These loans are primarily sold to private companies that are unaffiliated with the GSEs on a servicing-released basis. Gains and losses on these mortgage loans are included in mortgage banking and title income on the Consolidated Statements of Income.
Prior to the IBKC merger, FHN’s mortgage banking operations were not significant. At September 30, 2022,
FHN had approximately $40 million of loans that remained from pre-2009 mortgage business operations of legacy First Horizon. Activity related to the pre-2009 mortgage loans was primarily limited to payments and write-offs in 2022 and 2021, with no new originations or loan sales, and only an insignificant amount of repurchases. These loans are excluded from the disclosure below.
The following table summarizes activity relating to residential mortgage loans held for sale as of the nine months ended September 30, 2022 and the year ended December 31, 2021.
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MORTGAGE LOANS HELD FOR SALE |
(Dollars in millions) | | September 30, 2022 | | December 31, 2021 |
Balance at beginning of period | | $ | 250 | | | $ | 409 | |
| | | | |
Originations and purchases | | 1,158 | | | 2,836 | |
Sales, net of gains | | (1,326) | | | (3,025) | |
Mortgage loans transferred from (to) held for investment | | — | | | 30 | |
Balance at end of period | | $ | 82 | | | $ | 250 | |
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Mortgage Servicing Rights
FHN records mortgage servicing rights at the lower of cost or market value and amortizes them over the remaining servicing life of the loans, with consideration given to prepayment assumptions.
Mortgage servicing rights are included in other assets on the Consolidated Balance Sheets. Mortgage servicing rights had the following carrying values as of the periods indicated.
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MORTGAGE SERVICING RIGHTS |
| | September 30, 2022 | | December 31, 2021 | |
(Dollars in millions) | | Gross Carrying Amount | | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | | | | | |
Mortgage servicing rights | | $ | 19 | | | | $ | (4) | | | $ | 15 | | | $ | 39 | | | $ | (9) | | | $ | 30 | | | | | | | |
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In addition, there was an insignificant amount of non-mortgage and commercial servicing rights as of September 30, 2022 and December 31, 2021. Total mortgage servicing fees included in mortgage banking and title income were $1 million for the three months ended September 30, 20172022 and 2016, respectively,2021, respectively. Total mortgage servicing fees included in mortgage banking and $5.2title income were $4 million and $3.9$2 million for the nine months ended September 30, 20172022 and 2016,2021, respectively. AsMortgage servicing rights with a net carrying amount of $21 million were sold during the second quarter of 2022 resulting in a gain of $12 million for the nine months ended September 30, 20172022 which is included in mortgage banking and title income on the estimated aggregated amortization expense is expected to be:Consolidated Statements of Income.
|
| | | | |
(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 |
|
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 6—GOODWILL & OTHER INTANGIBLE ASSETS | |
Gross goodwill, accumulated impairments,Note 6—Goodwill and accumulated divestiture related write-offs were determined beginning January 1, 2012, 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, 2017 and December 31, 2016. The regional banking and fixed income segments do not have any accumulated impairments or divestiture related write-offs. Other Intangible Assets
Goodwill
The following is a summary of goodwill by reportable segment included in the Consolidated Condensed Statements of ConditionBalance Sheets as of September 30, 20172022 and December 31, 2016.2021.
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GOODWILL |
(Dollars in millions) | | Regional Banking | | Specialty Banking | | Total |
December 31, 2020 | | $ | 880 | | | $ | 631 | | | $ | 1,511 | |
Additions | | — | | | — | | | — | |
December 31, 2021 | | $ | 880 | | | $ | 631 | | | $ | 1,511 | |
| | | | | | |
| | | | | | |
Additions | | — | | | — | | | — | |
September 30, 2022 | | $ | 880 | | | $ | 631 | | | $ | 1,511 | |
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FHN performed the required annual goodwill impairment test as of October 1, 2021. The annual impairment test did not indicate impairment in any of FHN’s reporting units as of the testing date. Following the testing date, management evaluated the events and circumstances that could indicate that goodwill might be impaired and concluded that a subsequent interim test was not necessary. FHN is currently in the process of performing its annual impairment test as of October 1, 2022.
Accounting estimates and assumptions were made about FHN's future performance and cash flows, as well as other prevailing market factors (e.g., interest rates, economic trends, etc.) when determining fair value as part of the
|
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(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 |
|
goodwill impairment test. While management used the best information available to estimate future performance for each reporting unit, future adjustments to management's projections may be necessary if conditions differ substantially from the assumptions used in making the estimates.
(a) See Note 2 - Acquisitions and Divestitures for further details regarding goodwill related to acquisitions.
Other intangible assets
Note 7 – Other Income and Other Expense
Following is detail of AllThe following table, which excludes fully amortized intangibles, presents other income and commissions and All other expense as presentedintangible assets included in the Consolidated Condensed Statements of Income:Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
OTHER INTANGIBLE ASSETS |
| | September 30, 2022 | | December 31, 2021 |
(Dollars in millions) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
Core deposit intangibles | | $ | 371 | | | $ | (161) | | | $ | 210 | | | $ | 371 | | | $ | (128) | | | $ | 243 | |
Client relationships | | 32 | | | (12) | | | 20 | | | 37 | | | (11) | | | 26 | |
Other (a) | | 27 | | | (11) | | | 16 | | | 41 | | | (12) | | | 29 | |
Total | | $ | 430 | | | $ | (184) | | | $ | 246 | | | $ | 449 | | | $ | (151) | | | $ | 298 | |
| | | | | | | | | | | | |
(a)Includes non-compete covenants and purchased credit card intangible assets. Also includes title plant intangible assets and state banking licenses which are not subject to amortization.
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 7—PREFERRED STOCK | |
Note 7—Preferred Stock
The following table presents a summary of FHN's non-cumulative perpetual preferred stock:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PREFERRED STOCK |
(Dollars in millions) | | | | | | | | | | | | | | | | September 30, 2022 | | December 31, 2021 |
| | Issuance Date | | Earliest Redemption Date (a) | | | | | | Annual Dividend Rate | | Dividend Payments | | Shares Outstanding | | Liquidation Amount | | Carrying Amount | | Carrying Amount |
| | | | | | | | | | | | | | | | | | | | |
Series B | | 7/2/2020 | | 8/1/2025 | | | | | | 6.625% | (b) | Semi-annually | | 8,000 | | | $ | 80 | | | $ | 77 | | | $ | 77 | |
Series C | | 7/2/2020 | | 5/1/2026 | | | | | | 6.600% | (c) | Quarterly | | 5,750 | | | 58 | | | 59 | | | 59 | |
Series D | | 7/2/2020 | | 5/1/2024 | | | | | | 6.100% | (d) | Semi-annually | | 10,000 | | | 100 | | | 94 | | | 94 | |
Series E | | 5/28/2020 | | 10/10/2025 | | | | | | 6.500% | | Quarterly | | 1,500 | | | 150 | | | 145 | | | 145 | |
Series F | | 5/3/2021 | | 7/10/2026 | | | | | | 4.700% | | Quarterly | | 1,500 | | | 150 | | | 145 | | | 145 | |
Series G | | 2/28/2022 | | 2/28/2027 | | | | | | N/A | | N/A | | 4,936 | | | 494 | | | 494 | | | — | |
| | | | | | | | | | | | | | 31,686 | | | $ | 1,032 | | | $ | 1,014 | | | $ | 520 | |
| | | | | | | | | | | | | | | | | | | | |
N/A - not applicable
(a) LossDenotes earliest optional redemption date. Earlier redemption is possible, at FHN's election, if certain regulatory capital events occur.
(b) Fixed dividend rate will reset on extinguishmentAugust 1, 2025 to three-month LIBOR plus 4.262%.
(c) Fixed dividend rate will reset on May 1, 2026 to three-month LIBOR plus 4.920%.
(d) Fixed dividend rate will reset on May 1, 2024 to three-month LIBOR plus 3.859%.
On February 28, 2022, in connection with the execution of debtthe TD Merger Agreement, FHN issued $494 million of Series G Perpetual Convertible Preferred Stock (the Series G Convertible Preferred Stock). The Series G Convertible Preferred Stock is convertible into up to 4.9% of the outstanding shares of FHN common stock in certain circumstances, including closing of the Pending TD Merger or termination of the TD Merger Agreement. Conversion occurs at a fixed rate of 5,574.136 shares of common stock for each share of Series G Convertible Preferred Stock, or 4,000 shares of common stock if regulatory approval of the Pending TD Merger is not obtained. For more information on the impact of the convertible features on diluted earnings per share, see Note 9 - Earnings Per Share.
The Series G Convertible Preferred Stock is redeemable at FHN's option, in whole or in part, on or after February 28, 2027. Earlier redemption is possible, at FHN's election, if certain regulatory capital events occur. The $494 million
carrying value of the Series G Convertible Preferred Stock currently qualifies as Tier 1 Capital. Dividends are payable only in certain circumstances if the TD Merger Agreement is terminated before the shares are converted into common stock.
Subsidiary Preferred Stock
First Horizon Bank has issued 300,000 shares of Class A Non-Cumulative Perpetual Preferred Stock (Class A Preferred Stock) with a liquidation preference of $1,000 per share. Dividends on the Class A Preferred Stock, if declared, accrue and are payable each quarter, in arrears, at a floating rate equal to the greater of the three month LIBOR plus 0.85% or 3.75% per annum. These securities qualify fully as Tier 1 capital for both First Horizon Bank and nine months endedFHN. On September 30, 2017 relates to2022 and December 31, 2021, $295 million of Class A Preferred Stock was recognized as noncontrolling interest on the repurchase of equity securities previously included in a financing transaction.Consolidated Balance Sheets.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 8—COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS) | |
Note 8 – 8—Components of Other Comprehensive Income/(loss)Income (Loss)
The following table provides the changes in accumulated other comprehensive income/income (loss) by component, net of tax, for the three and nine months ended September 30, 20172022 and 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
ACCUMULATED OTHER COMPREHENSIVE INCOME |
(Dollars in millions) | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total |
Balance as of July 1, 2022 | | $ | (671) | | | $ | (40) | | | $ | (252) | | | $ | (963) | |
Net unrealized gains (losses) | | (368) | | | (103) | | | — | | | (471) | |
Amounts reclassified from AOCI | | — | | | 4 | | | 3 | | | 7 | |
Other comprehensive income (loss) | | (368) | | | (99) | | | 3 | | | (464) | |
Balance as of September 30, 2022 | | $ | (1,039) | | | $ | (139) | | | $ | (249) | | | $ | (1,427) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total |
Balance as of January 1, 2022 | | $ | (36) | | | $ | 3 | | | $ | (255) | | | $ | (288) | |
Net unrealized gains (losses) | | (1,003) | | | (149) | | | — | | | (1,152) | |
Amounts reclassified from AOCI | | — | | | 7 | | | 6 | | | 13 | |
Other comprehensive income (loss) | | (1,003) | | | (142) | | | 6 | | | (1,139) | |
Balance as of September 30, 2022 | | $ | (1,039) | | | $ | (139) | | | $ | (249) | | | $ | (1,427) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total |
Balance as of July 1, 2021 | | $ | 43 | | | $ | 8 | | | $ | (254) | | | $ | (203) | |
Net unrealized gains (losses) | | (38) | | | — | | | (1) | | | (39) | |
Amounts reclassified from AOCI | | — | | | (1) | | | 2 | | | 1 | |
Other comprehensive income (loss) | | (38) | | | (1) | | | 1 | | | (38) | |
Balance as of September 30, 2021 | | $ | 5 | | | $ | 7 | | | $ | (253) | | | $ | (241) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total |
Balance as of January 1, 2021 | | $ | 108 | | | $ | 12 | | | $ | (260) | | | $ | (140) | |
Net unrealized gains (losses) | | (103) | | | (1) | | | 1 | | | (103) | |
Amounts reclassified from AOCI | | — | | | (4) | | | 6 | | | 2 | |
Other comprehensive income (loss) | | (103) | | | (5) | | | 7 | | | (101) | |
Balance as of September 30, 2021 | | $ | 5 | | | $ | 7 | | | $ | (253) | | | $ | (241) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
(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 | ) |
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 8—COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS) | |
|
| | | | | | | | | | | | | | | | |
(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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
RECLASSIFICATIONS FROM AOCI |
(Dollars in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | |
Details about AOCI | | 2022 | | 2021 | | 2022 | | 2021 | | Affected line item in the statement where net income is presented |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Cash Flow Hedges: | | | | | | | | | | |
Realized (gains) losses on cash flow hedges | | $ | 5 | | | $ | (2) | | | $ | 9 | | | $ | (6) | | | Interest and fees on loans and leases |
Tax expense (benefit) | | (1) | | | 1 | | | (2) | | | 2 | | | Income tax expense |
| | 4 | | | (1) | | | 7 | | | (4) | | | |
Pension and Postretirement Plans: | | | | | | | | | | |
Amortization of prior service cost and net actuarial (gain) loss | | 4 | | | 3 | | | 8 | | | 8 | | | Other expense |
Tax expense (benefit) | | (1) | | | (1) | | | (2) | | | (2) | | | Income tax expense |
| | 3 | | | 2 | | | 6 | | | 6 | | | |
Total reclassification from AOCI | | $ | 7 | | | $ | 1 | | | $ | 13 | | | $ | 2 | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
(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 |
| | |
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 9—EARNINGS PER SHARE | |
Note 9 – 9—Earnings Per Share
The following table provides reconciliationscomputations of net income to net income available tobasic and diluted earnings per common shareholders andshare were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
EARNINGS PER SHARE COMPUTATIONS |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in millions, except per share data; shares in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Net income | $ | 268 | | | $ | 235 | | | $ | 642 | | | $ | 781 | |
Net income attributable to noncontrolling interest | 3 | | | 3 | | | 8 | | | 9 | |
Net income attributable to controlling interest | 265 | | 232 | | 634 | | 772 | |
Preferred stock dividends | 8 | | 8 | | 24 | | | 29 | |
Net income available to common shareholders | $ | 257 | | | $ | 224 | | | $ | 610 | | | $ | 743 | |
| | | | | | | |
Weighted average common shares outstanding—basic | 535,986 | | | 545,818 | | | 534,613 | | | 549,434 | |
Effect of dilutive restricted stock, performance equity awards and options | 6,655 | | | 4,001 | | | 7,258 | | | 4,765 | |
Effect of dilutive convertible preferred stock (a) | 27,512 | | | — | | | 21,667 | | | — | |
Weighted average common shares outstanding—diluted | 570,153 | | | 549,819 | | | 563,538 | | | 554,199 | |
| | | | | | | |
Basic earnings per common share | $ | 0.48 | | | $ | 0.41 | | | $ | 1.14 | | | $ | 1.35 | |
Diluted earnings per common share | $ | 0.45 | | | $ | 0.41 | | | $ | 1.08 | | | $ | 1.34 | |
| | | | | | | |
(a) During the difference between average basicfirst quarter of 2022, FHN issued $494 million of Series G Convertible Preferred Stock, which is convertible into common shares outstanding and average diluted common shares outstanding:stock upon completion of the Pending TD Merger or the termination of the TD Merger Agreement. For more information on the convertible features, including the conversion rate, see Note 7 - Preferred Stock.
|
| | | | | | | | | | | | | | | | |
| | 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 average 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
ANTI-DILUTIVE EQUITY AWARDS |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Shares in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Stock options excluded from the calculation of diluted EPS | | 11 | | | 2,901 | | | 35 | | | 1,431 | |
Weighted average exercise price of stock options excluded from the calculation of diluted EPS | | $ | 26.03 | | | $ | 17.75 | | | $ | 25.65 | | | $ | 20.64 | |
Other equity awards excluded from the calculation of diluted EPS | | 493 | | | 2,464 | | | 199 | | | 1,394 | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 10—CONTINGENCIES & OTHER DISCLOSURES | |
Note 10 – 10—Contingencies and Other Disclosures
CONTINGENCIESContingencies
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 currently 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,most times, and FHN is cooperating ingenerally cooperates when those matters.matters arise. Pending and threatened litigation matters sometimes are settled by the parties, and sometimes pending matters are resolved in court or before an arbitrator, and sometimesor are settled by the parties.withdrawn. 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 areFHN provides contingencies note disclosures for certain pending or threatened litigation matters each quarter, including all matters mentioned in categories (i) or (ii) and, occasionally, certain matters mentioned in category (iii). In addition, in this Note, 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 in this Note, 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, 2017,2022, the aggregate amount of liabilities established for all such loss contingency matters was $8.8$2 million. These liabilities are separate from those discussed under the heading “RepurchaseMortgage Loan Repurchase and Foreclosure Liability”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, 2017,2022, FHN estimates that for all material loss contingency matters, estimable reasonably possible losses in future periods in excess of currently established liabilities could aggregate in a range from zero to approximately $52less than $1 million.
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
Exposures from pre-2009 Mortgage Business
FHN is contending with indemnification claims related to "other whole loans sold," which were mortgage loans originated by FHN before 2009 and sold outside of a securitization organized by FHN. These claims generally assert that FHN-originated loans contributed to losses in connection with mortgage loans securitized by the buyer of the loans. The claims generally do not include specific deficiencies for matters included inspecific loans sold by FHN. Instead, the claims generally assert that FHN is liable for a share of the claimant's loss estimated reasonably possible loss (“RPL”) range mentioned above and for matters not included in that range.by assessing the totality of the
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 10—CONTINGENCIES & OTHER DISCLOSURES | |
other whole loans sold by FHN to claimant in relation to the totality of Headers
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 alarger number of separate securitizations. Plaintiff demands damages and prejudgment interest, among several remedies sought. The current RPL estimate for this matter is subject to significant uncertainties regarding: the dollar amounts claimed; the potential remedies that might be available or awarded; the outcome of any settlement discussions; the availability of significantly dispositive defenses; 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 securitizationsloans 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 as to which the claimant specifies no dollar amount; the potential remedies that might be availableeliminate or awarded; the availability of significantly dispositive defenses such as statutes of limitationsreduce claims against FHN or repose; the outcome of potentially dispositive early-stage motions such as motions to dismiss; the incomplete status of the discovery process; the lack of a precise statement of damages; and lack of precedent claims. The alleged purchase prices of the certificates subject to pendingtheir impact on FHN.
FHN also has 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
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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 |
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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, 2008 sale,
platform 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 |
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$16 million and $66.0$17 million as of September 30, 20172022 and December 31, 2016, 2021, respectively including a smaller amount related to equity-lending junior lien loan sales.. Accrued liabilities for FHN’s estimate of these obligations are reflected in Otherother liabilities on the Consolidated Condensed Statements of Condition.Balance Sheets. Charges/expense reversals to increase/decrease the liability are included within Repurchase and foreclosure provision/(provision credit)other income 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.
Other FHN Mortgage ExposuresDisclosures
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.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 11—RETIREMENT PLANS | |
Note 11 – Pension, Savings, and Other Employee Benefits11—Retirement Plans
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 $165made a contribution of $6 million to the qualified pension plan in third quarter 2016. The contribution had 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, 2017.2021. Management does not currently anticipate that FHN will make a contribution to the qualified pension plan for the remainder of 2017.in 2022.
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 million for 2016.2021. FHN anticipates making benefit payments under the non-qualified plans of $5.0$5 million in 2017.2022.
Savings plan. FHN provides all qualifying full-time employees withService cost is included in personnel expense in the opportunity to participateConsolidated Statements of Income. All other components of net periodic benefit cost are included in other expense.
For more information on FHN's pension plan and other postretirement benefit plans, see Note 18 - Retirement Plans and Other Employee Benefits 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,2021 Annual Report 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. 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.Form 10-K, as amended.
The components of net periodic benefit cost for the three months ended September 30 are as follows:
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| | 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 arewere as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
COMPONENTS OF NET PERIODIC BENEFIT COST |
| | | | | | | | |
| | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Components of net periodic benefit cost | | | | | | | | |
| | | | | | | | |
Interest cost | | $ | 5 | | | $ | 4 | | | $ | 15 | | | $ | 12 | |
Expected return on plan assets | | (6) | | | (7) | | | (18) | | | (15) | |
Amortization of unrecognized: | | | | | | | | |
| | | | | | | | |
Actuarial (gain) loss | | 4 | | | 2 | | | 8 | | | 6 | |
Other | | — | | | — | | | — | | | 2 | |
Net periodic benefit cost | | $ | 3 | | | $ | (1) | | | $ | 5 | | | $ | 5 | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | 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 | ) |
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 12—BUSINESS SEGMENT INFORMATION | |
Note 12 – 12—Business Segment Information
FHN has four business segments: regional banking, fixed income, corporate, and non-strategic. The regional bankingFHN's operating segments are composed of the following:
•Regional Banking segment offers financial products and services, including traditional lending and deposit taking, to consumer and commercial customersclients primarily in Tennesseethe southern U.S. and other selected markets. Regional bankingBanking also provides investments,investment, wealth management, financial planning, trust services and asset management credit card,services for consumer clients.
•Specialty Banking segment consists of lines of business that deliver product offerings and cash management. Additionally, the regional banking segment includesservices with specialized industry knowledge.Specialty Banking’s lines of business include asset-based lending, mortgage warehouse lending, commercial real estate, franchise finance, correspondent banking, which provides credit, depository,equipment finance, mortgage, and other banking related servicestitle insurance.In addition to other financial institutions nationally. The fixed income segment consiststraditional lending and deposit taking, Specialty Banking also delivers treasury management solutions, loan syndications, and international banking. Additionally, Specialty Banking has a line of business focused on 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
•Corporate segment consists primarily of unallocated corporate expenses, expense on subordinated debt issuances, bank-owned life insurance, unallocated interest income associated with excess equity, net impactsupport functions including risk management, audit, accounting, finance, executive office, and corporate
communications. Shared support services such as human resources, properties, technology, credit risk and bank operations are allocated to the activities of raising incrementalRegional Banking, Specialty Banking and Corporate. Additionally, the Corporate segment includes centralized management of capital and funding to support the business activities of the company including management of wholesale funding, liquidity, and capital management and allocation. The Corporate segment also includes the 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, loss on extinguishment of debt, and acquisition- and integration-related costs. The non-strategic segment consists of the wind-down national consumer lending activities, legacyrun-off businesses such as pre-2009 mortgage banking elements, including servicing fees,run-off consumer and the associated ancillary revenues and expenses related to these businesses. Non-strategic also includes the wind-down trust preferred loan portfolioportfolios, and other 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:
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 12—BUSINESS SEGMENT INFORMATION | |
Note 12 – Business Segment Information (Continued)
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
(a) Provision/(benefit)The following tables present financial information for income taxes for consolidated results and the Corporateeach reportable business segment for the three and nine months ended September 30, 2017, relative to the prior year periods, was affected by2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
SEGMENT FINANCIAL INFORMATION |
| Three Months Ended September 30, 2022 |
(Dollars in millions) | Regional Banking | | Specialty Banking | | Corporate | | Consolidated |
Net interest income (expense) | $ | 517 | | | $ | 138 | | | $ | 7 | | | $ | 662 | |
Provision for credit losses | 43 | | | 17 | | | — | | | 60 | |
Noninterest income (a) | 110 | | | 64 | | | 39 | | | 213 | |
Noninterest expense (b) | 304 | | | 104 | | | 61 | | | 469 | |
Income (loss) before income taxes | 280 | | | 81 | | | (15) | | | 346 | |
Income tax expense (benefit) | 65 | | | 20 | | | (7) | | | 78 | |
Net income (loss) | $ | 215 | | | $ | 61 | | | $ | (8) | | | $ | 268 | |
Average assets | $ | 42,815 | | | $ | 19,749 | | | $ | 19,986 | | | $ | 82,550 | |
| | | | | | | |
| | | | | | | |
| Three Months Ended September 30, 2021 |
(Dollars in millions) | Regional Banking | | Specialty Banking | | Corporate | | Consolidated |
Net interest income (expense) | $ | 444 | | | $ | 154 | | | $ | (106) | | | $ | 492 | |
Provision for credit losses | (52) | | | (33) | | | — | | | (85) | |
Noninterest income | 113 | | | 142 | | | (8) | | | 247 | |
Noninterest expense (b) | 292 | | | 139 | | | 95 | | | 526 | |
Income (loss) before income taxes | 317 | | | 190 | | | (209) | | | 298 | |
Income tax expense (benefit) | 74 | | | 46 | | | (57) | | | 63 | |
Net income (loss) | $ | 243 | | | $ | 144 | | | $ | (152) | | | $ | 235 | |
Average assets | $ | 40,908 | | | $ | 20,505 | | | $ | 26,988 | | | $ | 88,401 | |
| | | | | | | |
(a) 2022 includes a decline in the effective tax rate in 2017 primarily$21 million gain related to the reversalsale of the valuation allowancetitle insurance business in the Corporate segment.
(b) 2022 and 2021 includes $24 million and $46 million, respectively, in merger and integration expenses related to the IBKC merger and Pending TD Merger in the Corporate segment.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine Months Ended September 30, 2022 |
(Dollars in millions) | Regional Banking | | Specialty Banking | | Corporate | | Consolidated |
Net interest income (expense) | $ | 1,410 | | | $ | 424 | | | $ | (151) | | | $ | 1,683 | |
Provision for credit losses | 64 | | | (4) | | | (10) | | | 50 | |
Noninterest income (a) | 337 | | | 265 | | | 40 | | | 642 | |
Noninterest expense (b) | 911 | | | 349 | | | 190 | | | 1,450 | |
Income (loss) before income taxes | 772 | | | 344 | | | (291) | | | 825 | |
Income tax expense (benefit) | 181 | | | 84 | | | (82) | | | 183 | |
Net income (loss) | $ | 591 | | | $ | 260 | | | $ | (209) | | | $ | 642 | |
Average assets | $ | 41,779 | | | $ | 20,071 | | | $ | 23,949 | | | $ | 85,799 | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 12—BUSINESS SEGMENT INFORMATION | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine Months Ended September 30, 2021 |
(Dollars in millions) | Regional Banking | | Specialty Banking | | Corporate | | Consolidated |
Net interest income (expense) | $ | 1,319 | | | $ | 466 | | | $ | (289) | | | $ | 1,496 | |
Provision for credit losses | (169) | | | (60) | | | (16) | | | (245) | |
Noninterest income | 323 | | | 477 | | | 29 | | | 829 | |
Noninterest expense (b) | 837 | | | 441 | | | 289 | | | 1,567 | |
Income (loss) before income taxes | 974 | | | 562 | | | (533) | | | 1,003 | |
Income tax expense (benefit) | 228 | | | 136 | | | (142) | | | 222 | |
Net income (loss) | $ | 746 | | | $ | 426 | | | $ | (391) | | | $ | 781 | |
Average assets | $ | 41,931 | | | $ | 20,717 | | | $ | 24,483 | | | $ | 87,131 | |
| | | | | | | |
| | | | | | | |
(a) 2022 includes a $21 million gain related to the sale of the title insurance business in the Corporate segment.
(b) 2022 and 2021 includes $99 million and $148 million, respectively, in merger and integration expenses related to the IBKC merger and Pending TD Merger in the Corporate segment.
The following tables reflect a disaggregation of FHN’s noninterest income by major product line and reportable segment 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.
(b) Threethree and nine months ended September 30, 20172022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
NONINTEREST INCOME DETAIL BY SEGMENT |
| Three months ended September 30, 2022 |
(Dollars in millions) | Regional Banking | | Specialty Banking | | Corporate | | Consolidated |
Noninterest income: | | | | | | | |
Fixed income (a) | $ | — | | | $ | 46 | | | $ | — | | | $ | 46 | |
Deposit transactions and cash management | 39 | | | 2 | | | 2 | | | 43 | |
Brokerage, management fees and commissions | 23 | | | — | | | — | | | 23 | |
Mortgage banking and title income | — | | | 9 | | | — | | | 9 | |
Card and digital banking fees | 19 | | | — | | | 2 | | | 21 | |
Other service charges and fees | 8 | | | 5 | | | — | | | 13 | |
Trust services and investment management | 11 | | | — | | | — | | | 11 | |
Securities gains (losses), net (b) | — | | | — | | | 12 | | | 12 | |
Deferred compensation income | — | | | — | | | (3) | | | (3) | |
Other income (c) | 10 | | | 2 | | | 26 | | | 38 | |
Total noninterest income | $ | 110 | | | $ | 64 | | | $ | 39 | | | $ | 213 | |
| | | | | | | |
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 12—BUSINESS SEGMENT INFORMATION | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Three months ended September 30, 2021 |
(Dollars in millions) | Regional Banking | | Specialty Banking | | Corporate | | Consolidated |
Noninterest income: | | | | | | | |
Fixed income (a) | $ | — | | | $ | 96 | | | $ | — | | | $ | 96 | |
Deposit transactions and cash management | 40 | | | 3 | | | 1 | | | 44 | |
Brokerage, management fees and commissions | 24 | | | — | | | — | | | 24 | |
Mortgage banking and title income | — | | | 34 | | | — | | | 34 | |
Card and digital banking fees | 18 | | | 1 | | | 2 | | | 21 | |
Other service charges and fees | 6 | | | 5 | | | 1 | | | 12 | |
Trust services and investment management | 13 | | | — | | | — | | | 13 | |
Securities gains (losses), net (b) | — | | | — | | | 1 | | | 1 | |
Deferred compensation income | — | | | — | | | 3 | | | 3 | |
Loss on debt extinguishment | — | | | — | | | (23) | | | (23) | |
Other income (c) | 12 | | | 3 | | | 7 | | | 22 | |
Total noninterest income | $ | 113 | | | $ | 142 | | | $ | (8) | | | $ | 247 | |
| | | | | | | |
(a)2022 and 2021 includes a $14.3$13 million pre-tax lossand $12 million, respectively, of underwriting, portfolio advisory, and other noninterest income in scope of ASC 606, "Revenue From Contracts With Customers."
(b)Represents noninterest income excluded from the repurchasescope of equity securities previously includedASC 606. Amount is presented for informational purposes to reconcile total noninterest income.
(c)Includes letter of credit fees and insurance commissions in a financing transaction.scope of ASC 606.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine Months Ended September 30, 2022 |
(Dollars in millions) | Regional Banking | | Specialty Banking | | Corporate | | Consolidated |
Noninterest income: | | | | | | | |
Fixed income (a) | $ | — | | | $ | 170 | | | $ | — | | | $ | 170 | |
Deposit transactions and cash management | 115 | | | 7 | | | 7 | | | 129 | |
Brokerage, management fees and commissions | 71 | | | — | | | — | | | 71 | |
Mortgage banking and title income | — | | | 65 | | | — | | | 65 | |
Card and digital banking fees | 57 | | | 2 | | | 5 | | | 64 | |
Other service charges and fees | 24 | | | 17 | | | — | | | 41 | |
Trust services and investment management | 36 | | | — | | | — | | | 36 | |
Securities gains (losses), net (b) | — | | | — | | | 18 | | | 18 | |
Deferred compensation income | — | | | — | | | (24) | | | (24) | |
Other income (c) | 34 | | | 4 | | | 34 | | | 72 | |
Total noninterest income | $ | 337 | | | $ | 265 | | | $ | 40 | | | $ | 642 | |
| | | | | | | |
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 12—BUSINESS SEGMENT INFORMATION | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine Months Ended September 30, 2021 |
(Dollars in millions) | Regional Banking | | Specialty Banking | | Corporate | | Consolidated |
Noninterest income: | | | | | | | |
Fixed income (a) | $ | 1 | | | $ | 323 | | | $ | — | | | $ | 324 | |
Deposit transactions and cash management | 117 | | | 8 | | | 5 | | | 130 | |
Brokerage, management fees and commissions | 65 | | | — | | | — | | | 65 | |
Mortgage banking and title income | — | | | 124 | | | 2 | | | 126 | |
Card and digital banking fees | 51 | | | 2 | | | 6 | | | 59 | |
Other service charges and fees | 18 | | | 12 | | | 2 | | | 32 | |
Trust services and investment management | 39 | | | — | | | — | | | 39 | |
Securities gains (losses), net (b) | — | | | — | | | 12 | | | 12 | |
Deferred compensation income | — | | | — | | | 12 | | | 12 | |
Loss on debt extinguishment | — | | | — | | | (23) | | | (23) | |
Other income (c) | 32 | | | 8 | | | 13 | | | 53 | |
Total noninterest income | $ | 323 | | | $ | 477 | | | $ | 29 | | | $ | 829 | |
| | | | | | | |
(a)2022 and 2021 includes $33 million and $35 million for 2022 and 2021, respectively, of underwriting, portfolio advisory, and other noninterest income in scope of 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 noninterest income.
(c)Includes letter of credit fees and insurance commissions in scope of ASC 606.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 13—VARIABLE INTEREST ENTITIES | |
Note 13 – 13—Variable Interest Entities
ASC 810 defines aFHN makes equity investments in various entities that are considered VIEs, as defined by GAAP. A VIE as a legal entity where (a) the equity investors, as a group, lacktypically does not have 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. Afrom other parties. The Company’s variable interest is aarises from contractual, ownership or other interest that fluctuatesmonetary interests in the entity, which change with changesfluctuations in the fair value of the VIE’sentity's net assets exclusive of variable interests. Under ASC 810, as amended,assets. FHN consolidates a VIE if FHN is the primary beneficiary of the entity. FHN is required to consolidatethe primary beneficiary of a VIE when it has aif FHN's 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 performanceVIE and the obligation to absorb losses of the VIE or the right to receive benefits from(or the VIEobligation to absorb losses) that could potentially be significant.significant to the VIE. To determine whether or not a variable interest held could potentially be significant to the VIE, FHN considers both qualitative and quantitative factors regarding the nature, size and form of its involvement with the VIE. FHN assesses whether or not it is the primary beneficiary of a VIE on an ongoing basis.
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, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | | | | | | | | |
CONSOLIDATED VIEs |
(Dollars in millions) | | | | September 30, 2022 | | | | December 31, 2021 |
Assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other assets | | | | $ | 173 | | | | | $ | 205 | |
| | | | | | | | |
| | | | | | | | |
Liabilities: | | | | | | | | |
| | | | | | | | |
Other liabilities | | | | $ | 146 | | | | | $ | 179 | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | 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.Tax Credit Partnerships
Through designated wholly-owned subsidiaries, First Tennessee Housing Corporation (“FTHC”), a wholly-owned subsidiary of FTBNA,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.LIHTC. 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, the holder of the equity investment at risk, does notmanaged by unrelated general partners that have the abilitypower to direct the activities thatwhich most significantly affect the performance of the entity through voting rights or similar rights. FTHC 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 consideredpartnerships. FHN is therefore not the primary beneficiaries as managerial functions give thembeneficiary of any LIHTC partnerships. Accordingly, FHN does not
consolidate these VIEs and accounts for these investments in other assets on 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’s initial capital contributions and funding commitments.Consolidated Balance Sheets.
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/(benefit).expense. LIHTC investments that do not qualify for the proportional amortization method are accounted for using the equity method. Expenses associated with thesenon-qualifying LIHTC investments were not significantmaterial for the three and nine months ended September 30, 20172022 and 2016. 2021.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 13—VARIABLE INTEREST ENTITIES | |
The following table summarizes the impact to the Provision/(benefit) for income taxestax expense on the Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2017,2022 and 20162021 for LIHTC investments accounted for under the proportional amortization method.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
LIHTC IMPACTS ON TAX EXPENSE |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Income tax expense (benefit): | | | | | | | | |
Amortization of qualifying LIHTC investments | | $ | 11 | | | $ | 9 | | | $ | 33 | | | $ | 26 | |
Low income housing tax credits | | (11) | | | (8) | | | (35) | | | (25) | |
Other tax benefits related to qualifying LIHTC investments | | (3) | | | (2) | | | (9) | | | (7) | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | 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.Investments
Through designated subsidiaries, First Tennessee New Markets Corporation (“FTNMC”), a wholly-owned subsidiary of FTBNA,Horizon Bank periodically makes equity investments through wholly-owned subsidiaries as a non-managing member in various limited liability companies (“LLCs”)LLCs that sponsor community development projects utilizing the New Market Tax Credit (“NMTC”) pursuant to Section 45 of the Internal Revenue Code.NMTC. First Horizon Bank also makes equity investments as a limited partner or non-managing member in entities that receive solar and historic tax credits. The purposepurposes of these investments isare 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 LLCsThese entities are considered VIEs as FTNMC,First Horizon Bank's subsidiaries represent the holderholders of the equity investment at risk, doesbut do 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.entities.
FTHC 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. 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, 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. FTHC 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’s initial capital contributions and funding commitments.
Small Issuer Trust Preferred Holdings. FTBNA
First 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. 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’s holdings, FTBNA 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. However, since FTBNAFirst Horizon Bank. Since First 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.Securitization
In 2007, FTBNAFirst Horizon Bank executed a securitization of certain small issuer trust preferreds for which the 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. FTBNA 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 FTBNASince First Horizon Bank did not retain servicing or other decision makingdecision-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. FTBNABalance Sheets. First 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, 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.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.Restructurings
For certain troubled commercial loans, FTBNAFirst 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
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 13—VARIABLE INTEREST ENTITIES | |
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. FTB has entered into an agreement with a single asset leasing entity for the sale and leaseback of an office building. Proprietary Trust Preferred Issuances
In conjunction with this transaction, FTB loaned funds to a related partyits acquisitions, FHN acquired junior subordinated debt underlying multiple issuances of trust preferred debt. All of the buyer that were used fortrusts are considered VIEs because the purchase priceownership interests from the capital
contributions to these trusts are not considered “at risk” in evaluating whether the holders of the building. FTB 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, it is being accounted for using the deposit method which creates a net asset or liability for all cash flows between FTB and the buyer. The buyer-lessor in this transaction meets the definition of a VIE as it does not have sufficient equity investments at risk since FTB is providingin the funding fortrusts have the purchase and renovation. A related party of the buyer-lessor has the powerability to direct the activities that most significantly impact the operations and could potentially receive benefits or absorb losses thatentities’ economic performance. Thus, FHN cannot be the trusts’ primary beneficiary because its ownership interests in the trusts are significant tonot considered variable interests as they are not considered “at risk”. Consequently, none of the transactions, making it the primary beneficiary. Therefore, FTB does not consolidate the leasing entity.
Note 13 – Variable Interest Entities (Continued)
trusts are consolidated by FHN. The following table summarizestables summarize FHN’s nonconsolidated VIEs as of September 30, 2017:2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
NONCONSOLIDATED VIEs AT SEPTEMBER 30, 2022 |
(Dollars in millions) | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | |
Low income housing partnerships | | $ | 445 | | | $ | 160 | | | (a) |
Other tax credit investments (b) | | 87 | | | 67 | | | Other assets |
Small issuer trust preferred holdings (c) | | 172 | | | — | | | Loans and leases |
On-balance sheet trust preferred securitization | | 27 | | | 87 | | | (d) |
| | | | | | |
Holdings of agency mortgage-backed securities (c) | | 8,785 | | | — | | | (e) |
Commercial loan troubled debt restructurings (f) | | 55 | | | — | | | Loans and leases |
| | | | | | |
Proprietary trust preferred issuances (g) | | — | | | 167 | | | Term borrowings |
| | | | | | |
(a)Maximum loss exposure represents $285 million of current investments and $160 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 2024.
(b)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 million classified as loans and leases and $2 million classified as trading securities, which are offset by $87 million classified as term borrowings.
(e)Includes $296 million classified as trading securities, $1.4 billion classified as held to maturity and $7.1 billion classified as securities available for sale.
(f)Maximum loss exposure represents $55 million of current receivables with no additional contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring.
(g)No exposure to loss due to nature of FHN's involvement.
| | | | | | | | | | | | | | | | | | | | |
NONCONSOLIDATED VIEs AT DECEMBER 31, 2021 |
(Dollars in millions) | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | |
Low income housing partnerships | | $ | 382 | | | $ | 129 | | | (a) |
Other tax credit investments (b) | | 77 | | | 56 | | | Other assets |
Small issuer trust preferred holdings (c) | | 195 | | | — | | | Loans and leases |
On-balance sheet trust preferred securitization | | 27 | | | 87 | | | (d) |
| | | | | | |
Holdings of agency mortgage-backed securities (c) | | 8,550 | | | — | | | (e) |
Commercial loan troubled debt restructurings (f) | | 98 | | | — | | | Loans and leases |
| | | | | | |
Proprietary trust preferred issuances (g) | | — | | | 167 | | | Term borrowings |
| | | | | | |
(a)Maximum loss exposure represents $253 million of current investments and $129 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 2024.
(b)Maximum loss exposure represents 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 million classified as loans and leases and $2 million classified as trading securities, which are offset by $87 million classified as term borrowings.
(e)Includes $526 million classified as trading securities, $712 million classified as held to maturity and $7.3 billion classified as securities available for sale.
(f)Maximum loss exposure represents $94 million of current receivables and $4 million of contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring.
(g)No exposure to loss due to nature of FHN's involvement.
|
| | | | | | | | | | |
(Dollars in thousands) | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | |
Low income housing partnerships | | $ | 96,007 |
| | $ | 34,236 |
| | (a) |
Other tax credit investments (b) (c) | | 20,444 |
| | — |
| | Other assets |
Small issuer trust preferred holdings (d) | | 332,873 |
| | — |
| | Loans, net of unearned income |
On-balance sheet trust preferred securitization | | 48,902 |
| | 65,272 |
| | (e) |
Proprietary residential mortgage securitizations | | 2,300 |
| | — |
| | Trading securities |
Holdings of agency mortgage-backed securities (d) | | 4,173,080 |
| | — |
| | (f) |
Commercial loan troubled debt restructurings (g) | | 21,763 |
| | — |
| | Loans, net of unearned income |
Sale-leaseback transaction | | 14,827 |
| | — |
| | (h) |
| | | | | | | | |
(a) | Maximum loss exposure represents $61.8 million of current investments and $34.2 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 2020.47 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| A liability is not recognized as investments are written down over the life of the related tax credit. |
NOTE 14—DERIVATIVES | |
(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 $65.3 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 $21.1 million of current receivables and $.6 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) | Maximum loss exposure represents $56.2 million 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. |
| |
(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. |
Note 14 – 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’clients’ 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”)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 StatementsBalance Sheets. Treatment of Condition. This changedaily margin as a settlement has no effect on hedge accounting or gains/losses for the applicable derivative contracts. On September 30, 20172022 and December 31, 2016,2021, respectively, FHN had $34.5$220 million and $47.8$181 million of cash receivables and $28.2$39 million and $32.8$102 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.Instruments
FHN enters into various derivative contracts both in a dealer capacity to facilitate customerclient transactions and as a risk management tool. Where contracts have been created for customers,clients, 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 segmentFHNF 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.clients. When these securities settle on a delayed basis, they are considered forward contracts. Fixed incomeFHNF also enters into interest rate contracts, including caps, swaps, and floors, for its customers.clients. In addition, fixed incomeFHNF 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 ConditionBalance Sheets as Derivativederivative assets and Derivativederivative liabilities within other assets and other liabilities. The FTN FinancialFHNF 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$34 million and $59.0$85 million for the three months ended September 30, 20172022 and 2016, respectively, 2021, $133 million
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 14—DERIVATIVES | |
and $133.3 million and $185.9$291 million for the nine months ended September 30, 20172022 and 2016,2021, respectively. Trading revenues are inclusive of both derivative and non-derivative financial instruments, and are included in fixed income noninterest income.on the Consolidated Statements of Income.
The following tables summarize FHN’s derivatives associated with fixed incomeFHNF's trading activities as of September 30, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | | | | | | | | | | |
DERIVATIVES ASSOCIATED WITH TRADING |
| | September 30, 2022 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Customer interest rate contracts | | $ | 3,112 | | | $ | 3 | | | $ | 291 | |
Offsetting upstream interest rate contracts | | 3,112 | | | 80 | | | 3 | |
Option contracts purchased | | 10 | | | — | | | — | |
Forwards and futures purchased | | 2,089 | | | 4 | | | 36 | |
Forwards and futures sold | | 2,204 | | | 40 | | | 3 | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Customer interest rate contracts | | $ | 3,587 | | | $ | 84 | | | $ | 41 | |
Offsetting upstream interest rate contracts | | 3,587 | | | 4 | | | 8 | |
Option contracts purchased | | 13 | | | — | | | — | |
Forwards and futures purchased | | 4,430 | | | 2 | | | 9 | |
Forwards and futures sold | | 5,044 | | | 10 | | | 2 | |
| | | | | | |
|
| | | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | | |
| | 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 customersclients 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 Noninterestnoninterest 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 matures in December 2019. 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 $.2 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.
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.
Note 14 – Derivatives (Continued)
The following tables summarize FHN’s derivatives associated with interest rate risk management activities as of September 30, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | | | | | | | | | | |
DERIVATIVES ASSOCIATED WITH INTEREST RATE RISK MANAGEMENT |
| | September 30, 2022 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | |
Customer interest rate contracts | | $ | 8,315 | | | $ | — | | | $ | 611 | |
Offsetting upstream interest rate contracts | | 8,315 | | | 184 | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | | | |
| | September 30, 2017 | | |
(Dollars in thousands) | | 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 |
| | |
Debt Hedging | | | | | | | | |
Hedging Instruments: | | | | | | | | |
Interest Rate Swaps | | $ | 900,000 |
| | N/A |
| | $ | 779 |
| | |
Hedged Items: | | | | | | | | |
Term Borrowings | | N/A |
| | N/A |
| | $ | 900,000 |
| | (a) |
|
| | | | | | | | | | | | | | |
| | 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.49 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 14—DERIVATIVES | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | |
Customer interest rate contracts | | $ | 8,037 | | | $ | 202 | | | $ | 29 | |
Offsetting upstream interest rate contracts | | 8,037 | | | 4 | | | 15 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The following table summarizes gains/gains (losses) on FHN’s derivatives associated with interest rate risk management activities for the three and nine months ended September 30, 20172022 and 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
DERIVATIVE GAINS (LOSSES) ASSOCIATED WITH INTEREST RATE RISK MANAGEMENT |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
(Dollars in millions) | | Gains (Losses) | | Gains (Losses) | | Gains (Losses) | | Gains (Losses) |
Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | | | |
Customer interest rate contracts (a) | | $ | 271 | | | $ | (29) | | | $ | 788 | | | $ | (197) | |
Offsetting upstream interest rate contracts (a) | | (271) | | | 29 | | | (788) | | | 197 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(a)Gains (losses) included in other expense within the Consolidated Statements of Income.
Cash Flow Hedges
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
| | 2017 | | 2016 | | 2017 | | 2016 |
(Dollars in thousands) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) |
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 | ) |
Debt Hedging | | | | | | | | |
Hedging Instruments: | | | | | | | | |
Interest Rate Swaps (a) | | $ | (966 | ) | | $ | (7,254 | ) | | $ | (1,958 | ) | | $ | 19,352 |
|
Hedged Items: | | | | | | | | |
Term Borrowings (a) (b) | | 941 |
| | 7,152 |
| | 1,870 |
| | (19,059 | ) |
| |
(a) | Gains/losses included in the All other expense section of the Consolidated Condensed Statements of Income. |
| |
(b) | 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,Prior to 2021, FHN entered into a pay floating, receive fixed interest rate swap in a hedging strategyswaps designed to manage its exposure to the variability in cash flows related to the interest payments foron debt instruments. In conjunction with the following five years on $250 million principal of debt instruments,IBKC merger, FHN acquired interest rate contracts (floors and collars) 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 initiatedbeen re-designated as cash flow hedges of $650 million notional amount that have durations between three and seven years.hedges. The debt instruments primarily consist of held-to-maturity commercial loans that have variable interest payments based on 1-month LIBOR.
In 2022, FHN entered into interest rate contracts (floors and swaps) which have been designated as cash flow hedges. These qualifyhedges reference 1-month Term SOFR and FHN has made certain elections under ASU 2020-04 to
facilitate qualification for hedge accounting asduring the time that hedged items transition away from 1-Month LIBOR.
In a cash flow hedges under ASC 815-20. Changes inhedge, the fair value of these derivatives are recorded as a component of AOCI, to the extent that the hedging relationships are effective. 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 cumulativeentire change in the fair value of the hypothetical derivative instruments. To the extent that any ineffectiveness existsinterest rate derivatives included in the assessment of hedge relationships, the amounts areeffectiveness is initially recorded in OCI and is subsequently reclassified from OCI to current period earnings. Interest paidearnings (interest income or received for these swaps is recognized as an adjustment to interest income ofexpense) in the assets whose cash flows are being hedged.same period that the hedged item affects earnings.
The following tables summarize FHN’s derivative activities associated with cash flow hedges as of September 30, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | | | | | | | | | | |
DERIVATIVES ASSOCIATED WITH CASH FLOW HEDGES |
| | September 30, 2022 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate contracts | | $ | 5,525 | | | $ | — | | | $ | 82 | |
Hedged Items: | | | | | | |
Variability in cash flows related to debt instruments (primarily loans) | | N/A | | $ | 5,525 | | | N/A |
| | | | | | |
|
| | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 14—DERIVATIVES | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | December 31, 2021 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate contracts | | $ | 1,100 | | | $ | 13 | | | $ | — | |
Hedged Items: | | | | | | |
Variability in cash flows related to debt instruments (primarily loans) | | N/A | | $ | 1,100 | | | N/A |
| | | | | | |
The following table summarizes gains/gains (losses) on FHN’s derivatives associated with cash flow hedges for the three and nine months ended September 30, 20172022 and 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
DERIVATIVE GAINS (LOSSES) ASSOCIATED WITH CASH FLOW HEDGES |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
(Dollars in millions) | | Gains (Losses) | | Gains (Losses) | | Gains (Losses) | | Gains (Losses) |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | | | |
Interest rate contracts (a) | | $ | (138) | | | $ | (6) | | | $ | (105) | | | $ | (20) | |
Gain (loss) recognized in other comprehensive income (loss) | | (103) | | | — | | | (149) | | | (1) | |
Gain (loss) reclassified from AOCI into interest income | | 4 | | | (1) | | | 7 | | | (4) | |
| | | | | | | | |
(a)Approximately $20 million of pre-tax losses are expected to be reclassified into earnings in the next twelve months.
Other Derivatives
FHN has mortgage banking operations that include the origination and sale of loans into the secondary market. As part of the origination of loans, FHN enters into interest rate lock commitments with borrowers. Additionally, FHN
enters into forward sales contracts with buyers for delivery of loans at a future date. Both of these contracts qualify as freestanding derivatives and are recognized at fair value through earnings. The notional and fair values of these contracts are presented in the table below.
| | | | | | | | | | | | | | | | | | | | |
DERIVATIVES ASSOCIATED WITH MORTGAGE BANKING HEDGES |
| | September 30, 2022 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Mortgage Banking Hedges | | | | | | |
| | | | | | |
Option contracts written | | $ | 92 | | | $ | — | | | $ | 1 | |
Forward contracts written | | 136 | | | 5 | | | — | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Mortgage Banking Hedges | | | | | | |
| | | | | | |
Option contracts written | | $ | 241 | | | $ | 4 | | | $ | — | |
| | | | | | |
Forward contracts written | | 404 | | | — | | | — | |
| | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
| | 2017 | | 2016 | | 2017 | | 2016 |
(Dollars in thousands) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) |
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 |
|
| | | | | | | | |
(a) | Amount represents the pre-tax gains/(losses) included within AOCI.51 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| Includes approximately $1.2 million of losses expected to be reclassified into earnings in the next twelve months.NOTE 14—DERIVATIVES | |
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/gains (losses) on FHN’sFHN's derivatives associated with held-to-maturity trust preferred loansmortgage banking activities for the three and nine months ended September 30, 2016:2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
DERIVATIVE GAINS (LOSSES) ASSOCIATED WITH MORTGAGE BANKING HEDGES |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
(Dollars in millions) | | Gains (Losses) | | Gains (Losses) | | Gains (Losses) | | Gains (Losses) |
Mortgage Banking Hedges | | | | | | | | |
| | | | | | | | |
Option contracts written | | $ | 4 | | | $ | (3) | | | $ | 5 | | | $ | (12) | |
Forward contracts written | | 6 | | | — | | | 33 | | | — | |
Forward contracts purchased | | — | | | (2) | | | — | | | 10 | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | |
| | 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 thepre-2020 sales of a portion of its Visa Class B shares, FHN and the purchaser entered into derivative transactions whereby FHN will make or receive cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. As of September 30, 20172022 and December 31, 2016,2021, the derivative liabilities associated with the sales of Visa Class B shares were $5.5$20 million and $6.2$23 million, respectively. FHN recognized $12 million in derivative valuation adjustments related to prior sales of Visa Class B shares for the nine months ended September 30, 2022 and $19 million for the year ended December 31, 2021. See Note 16 - Fair Value of Assets and 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, 20172022 and December 31, 2016,2021, these loans were valued at $1.3$11 million and $3.8$7 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 September 30, 2022 and December 31, 2021, the notional values of FHN’s risk participations were $217 million and $257 million of derivative assets and $738 million and $500 million of derivative liabilities, respectively. 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. Assuming all underlying third party customers referenced in the swap contracts defaulted at September 30, 2022 and December 31, 2021, the exposure from these agreements would not be material based on the fair value of the underlying swaps.
FHN holds certain certificates of deposit with the rate of return based on an equity index which is considered an embedded derivative as a written option that must be separately recognized. The risks of the written option are offset by purchasing an option with terms that mirror the written option, which is also carried at fair value on the Company’s Consolidated Balance Sheets. As of September 30, 2022 and December 31, 2021, FHN recognized an insignificant amount of assets and liabilities associated with these contracts.
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.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 14—DERIVATIVES | |
Interest rate derivatives are subject to agreements consistent with standard agreement forms of the International Swap and Derivatives Association (“ISDA”).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 initial 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.Balance Sheets.
Interest rate derivatives with customersclients 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.Balance Sheets. 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$5 million of assets and $34.6$290 million of liabilities on September 30, 2017,2022, and $35.9$67 million of assets and $49.0$26 million of liabilities on December 31, 2016.2021. As of September 30, 20172022 and December 31, 2016,2021, FHN had received collateral of $113.6$110 million and $137.6$205 million and posted collateral of $26.2$61 million and $39.3$14 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 interest rate derivative instruments with credit-risk-related contingent accelerated termination provisions was $27.4$194 million of assets and $14.9$290 million of liabilities on September 30, 2017,2022, and $35.9$74 million of assets and $19.6$30 million of liabilities on December 31, 2016.2021. As of September 30, 20172022 and December 31, 2016,2021, FHN had received collateral of $113.6$302 million and $137.5$213 million and posted collateral of $9.0$61 million and $12.9$18 million, respectively, in the normal course of business related to these contracts.
FHN’s fixed income segmentFHNF buys and sells various types of securities for its customers.clients. 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.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 14—DERIVATIVES | |
The following table provides details of derivative assets and collateral received as presented on the Consolidated Condensed Statements of ConditionBalance Sheets as of September 30, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
DERIVATIVE ASSETS & COLLATERAL RECEIVED |
| | | | | | | | Gross amounts not offset in the Balance Sheets | | |
(Dollars in millions) | | Gross amounts of recognized assets | | Gross amounts offset in the Balance Sheets | | Net amounts of assets presented in the Balance Sheets (a) | | Derivative liabilities available for offset | | Collateral received | | Net amount |
Derivative assets: | | | | | | | | | | | | |
September 30, 2022 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 267 | | | $ | — | | | $ | 267 | | | $ | (54) | | | $ | (196) | | | $ | 17 | |
Forward contracts | | 44 | | | — | | | 44 | | | (11) | | | (28) | | | 5 | |
| | $ | 311 | | | $ | — | | | $ | 311 | | | $ | (65) | | | $ | (224) | | | $ | 22 | |
| | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 311 | | | $ | — | | | $ | 311 | | | $ | (32) | | | $ | (181) | | | $ | 98 | |
Forward contracts | | 12 | | | — | | | 12 | | | (4) | | | (3) | | | 5 | |
| | $ | 323 | | | $ | — | | | $ | 323 | | | $ | (36) | | | $ | (184) | | | $ | 103 | |
| | | | | | | | | | | | |
Note 14 – Derivatives (Continued)(a)Included in other assets on the Consolidated Balance Sheets. As of September 30, 2022 and December 31, 2021, $7 million and $2 million, respectively, of derivative assets have been excluded from these tables because they are generally not subject to master netting or similar agreements.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 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 |
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 |
|
| |
(a) | Included in Derivative assets on the Consolidated Condensed Statements of Condition. As of September 30, 2017 and December 31, 2016, $10.1 million and $33.7 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 ConditionBalance Sheets as of September 30, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
DERIVATIVE LIABILITIES & COLLATERAL PLEDGED |
| | | | | | | | Gross amounts not offset in the Balance Sheets | | |
(Dollars in millions) | | Gross amounts of recognized liabilities | | Gross amounts offset in the Balance Sheets | | Net amounts of liabilities presented in the Balance Sheets (a) | | Derivative assets available for offset | | Collateral pledged | | Net amount |
Derivative liabilities: | | | | | | | | | | | | |
September 30, 2022 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 988 | | | $ | — | | | $ | 988 | | | $ | (54) | | | $ | (180) | | | $ | 754 | |
Forward contracts | | 39 | | | — | | | 39 | | | (11) | | | (10) | | | 18 | |
| | $ | 1,027 | | | $ | — | | | $ | 1,027 | | | $ | (65) | | | $ | (190) | | | $ | 772 | |
December 31, 2021 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 93 | | | $ | — | | | $ | 93 | | | $ | (32) | | | $ | (38) | | | $ | 23 | |
Forward contracts | | 10 | | | — | | | 10 | | | (4) | | | (1) | | | 5 | |
| | $ | 103 | | | $ | — | | | $ | 103 | | | $ | (36) | | | $ | (39) | | | $ | 28 | |
| | | | | | | | | | | | |
(a)Included in other liabilities on the Consolidated Balance Sheets. As of September 30, 2022 and December 31, 2021, $21 million and $24 million, respectively, of derivative liabilities (primarily Visa-related derivatives) have been excluded from these tables because they are generally not subject to master netting or similar agreements.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 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, 2017 and December 31, 2016, $13.2 million and $39.5 million, respectively, of derivative liabilities (primarily fixed income forward contracts) have been excluded from these tables because they are generally not subject to master netting or similar agreements.54 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| Amounts are comprised entirely of interest rate derivative contracts.NOTE 15—MASTER NETTING & SIMILAR AGREEMENTS | |
Note 15 – 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(securities purchased under agreements to resell and Securitiessecurities 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(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.Balance Sheets. 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.
Securities purchased under agreements to resell is included in federal funds sold and securities purchased under agreements to resell in the Consolidated Balance Sheets. Securities sold under agreements to repurchase is included in short-term borrowings.
The following table provides details of Securitiessecurities purchased under agreements to resell as presented on the Consolidated Condensed Statements of Condition and collateral pledged by counterparties as of September 30, 20172022 and December 31, 2016:2021:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL |
| | | | | | | | Gross amounts not offset in the Balance Sheets | | |
(Dollars in millions) | | Gross amounts of recognized assets | | Gross amounts offset in the Balance Sheets | | Net amounts of assets presented in the Balance Sheets | | Offsetting securities sold under agreements to repurchase | | Securities collateral (not recognized on FHN’s Balance Sheets) | | Net amount |
Securities purchased under agreements to resell: | | | | | | | | | | | | |
September 30, 2022 | | $ | 492 | | | $ | — | | | $ | 492 | | | $ | (11) | | | $ | (479) | | | $ | 2 | |
December 31, 2021 | | 488 | | | — | | | 488 | | | (10) | | | (476) | | | 2 | |
| | | | | | | | | | | | |
The following table provides details of Securitiessecurities sold under agreements to repurchase as presented on the Consolidated Condensed Statements of Condition and collateral pledged by FHN as of September 30, 20172022 and December 31, 2016:2021:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 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)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE |
| | | | | | | | Gross amounts not offset in the Balance Sheets | | |
(Dollars in millions) | | Gross amounts of recognized liabilities | | Gross amounts offset in the Balance Sheets | | Net amounts of liabilities presented in the Balance Sheets | | Offsetting securities purchased under agreements to resell | | Securities/ government guaranteed loans collateral | | Net amount |
Securities sold under agreements to repurchase: | | | | | | | | | | | | |
September 30, 2022 | | $ | 658 | | | $ | — | | | $ | 658 | | | $ | (11) | | | $ | (647) | | | $ | — | |
December 31, 2021 | | 1,247 | | | — | | | 1,247 | | | (10) | | | (1,237) | | | — | |
| | | | | | | | | | | | |
Due to the short duration of Securitiessecurities sold under agreements to repurchase and the nature of collateral involved, the risks associated with these transactions are considered minimal.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 15—MASTER NETTING & SIMILAR AGREEMENTS | |
The following tables provide details, by collateral type, of the remaining contractual maturity of Securitiessecurities sold under agreements to repurchase as of September 30, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | | | | | | | | | | |
MATURITIES OF SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE |
| | September 30, 2022 |
(Dollars in millions) | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | |
U.S. treasuries | | $ | 11 | | | $ | — | | | $ | 11 | |
Government agency issued MBS | | 558 | | | — | | | 558 | |
Government agency issued CMO | | 89 | | | — | | | 89 | |
| | | | | | |
| | | | | | |
Total securities sold under agreements to repurchase | | $ | 658 | | | $ | — | | | $ | 658 | |
| | | | | | |
| | December 31, 2021 |
(Dollars in millions) | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | |
U.S. treasuries | | $ | 33 | | | $ | — | | | $ | 33 | |
Government agency issued MBS | | 1,068 | | | — | | | 1,068 | |
| | | | | | |
Other U.S. government agencies | | 31 | | | — | | | 31 | |
Government guaranteed loans (SBA and USDA) | | 115 | | | — | | | 115 | |
Total securities sold under agreements to repurchase | | $ | 1,247 | | | $ | — | | | $ | 1,247 | |
| | | | | | |
|
| | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
Note 16 – 16—Fair Value of Assets &and 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—1—Valuation is based upon quoted prices for identical instruments traded in active markets.
•Level 2—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—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.
Note 16 – Fair Value of Assets & Liabilities (Continued)
Recurring Fair Value Measurements
The following table presentstables present the balancebalances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2017:2022 and December 31, 2021:
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Trading securities—fixed income: | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 157,483 |
| | $ | — |
| | $ | 157,483 |
|
Government agency issued MBS | | — |
| | 155,260 |
| | — |
| | 155,260 |
|
Government agency issued CMO | | — |
| | 244,321 |
| | — |
| | 244,321 |
|
Other U.S. government agencies | | — |
| | 186,573 |
| | — |
| | 186,573 |
|
States and municipalities | | — |
| | 61,290 |
| | — |
| | 61,290 |
|
Corporate and other debt | | — |
| | 655,976 |
| | 5 |
| | 655,981 |
|
Equity, mutual funds, and other | | — |
| | 6,194 |
| | — |
| | 6,194 |
|
Total trading securities—fixed income | | — |
| | 1,467,097 |
| | 5 |
| | 1,467,102 |
|
Trading securities—mortgage banking | | — |
| | — |
| | 2,300 |
| | 2,300 |
|
Loans held-for-sale | | — |
| | 1,727 |
| | 20,081 |
| | 21,808 |
|
Securities available-for-sale: | | | | | | | | |
U.S. treasuries | | — |
| | 100 |
| | — |
| | 100 |
|
Government agency issued MBS | | — |
| | 2,087,505 |
| | — |
| | 2,087,505 |
|
Government agency issued CMO | | — |
| | 1,685,995 |
| | — |
| | 1,685,995 |
|
Interest-only strips | | — |
| | — |
| | 3,123 |
| | 3,123 |
|
Equity, mutual funds, and other | | 24,756 |
| | — |
| | — |
| | 24,756 |
|
Total securities available-for-sale | | 24,756 |
| | 3,773,600 |
| | 3,123 |
| | 3,801,479 |
|
Other assets: | | | | | | | | |
Deferred compensation assets | | 34,951 |
| | — |
| | — |
| | 34,951 |
|
Derivatives, forwards and futures | | 10,003 |
| | — |
| | — |
| | 10,003 |
|
Derivatives, interest rate contracts | | — |
| | 70,971 |
| | — |
| | 70,971 |
|
Derivatives, other | | — |
| | 2 |
| | — |
| | 2 |
|
Total other assets | | 44,954 |
| | 70,973 |
| | — |
| | 115,927 |
|
Total assets | | $ | 69,710 |
| | $ | 5,313,397 |
| | $ | 25,509 |
| | $ | 5,408,616 |
|
Trading liabilities—fixed income: | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 424,461 |
| | $ | — |
| | $ | 424,461 |
|
Government agency issued CMO | | — |
| | 1,372 |
| | — |
| | 1,372 |
|
Other U.S. government agencies | | — |
| | 998 |
| | — |
| | 998 |
|
Corporate and other debt | | — |
| | 152,197 |
| | — |
| | 152,197 |
|
Total trading liabilities—fixed income | | — |
| | 579,028 |
| | — |
| | 579,028 |
|
Other liabilities: | | | | | | | | |
Derivatives, forwards and futures | | 7,627 |
| | — |
| | — |
| | 7,627 |
|
Derivatives, interest rate contracts | | — |
| | 69,988 |
| | — |
| | 69,988 |
|
Derivatives, other | | — |
| | 1 |
| | 5,530 |
| | 5,531 |
|
Total other liabilities | | 7,627 |
| | 69,989 |
| | 5,530 |
| | 83,146 |
|
Total liabilities | | $ | 7,627 |
| | $ | 649,017 |
| | $ | 5,530 |
| | $ | 662,174 |
|
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCES OF ASSETS & LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS | | |
| | September 30, 2022 | | |
(Dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | |
Trading securities: | | | | | | | | | | |
U.S. treasuries | | $ | — | | | $ | 53 | | | $ | — | | | $ | 53 | | | |
Government agency issued MBS | | — | | | 60 | | | — | | | 60 | | | |
Government agency issued CMO | | — | | | 236 | | | — | | | 236 | | | |
Other U.S. government agencies | | — | | | 147 | | | — | | | 147 | | | |
States and municipalities | | — | | | 31 | | | — | | | 31 | | | |
Corporate and other debt | | — | | | 871 | | | — | | | 871 | | | |
Interest-only strips (elected fair value) | | — | | | — | | | 23 | | | 23 | | | |
Total trading securities | | — | | | 1,398 | | | 23 | | | 1,421 | | | |
| | | | | | | | | | |
Loans held for sale (elected fair value) | | — | | | 69 | | | 20 | | | 89 | | | |
| | | | | | | | | | |
Securities available for sale: | | | | | | | | | | |
| | | | | | | | | | |
Government agency issued MBS | | — | | | 4,690 | | | — | | | 4,690 | | | |
Government agency issued CMO | | — | | | 2,415 | | | — | | | 2,415 | | | |
Other U.S. government agencies | | — | | | 1,056 | | | — | | | 1,056 | | | |
States and municipalities | | — | | | 557 | | | — | | | 557 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total securities available for sale | | — | | | 8,718 | | | — | | | 8,718 | | | |
Other assets: | | | | | | | | | | |
Deferred compensation mutual funds | | 106 | | | — | | | — | | | 106 | | | |
Equity, mutual funds, and other | | 22 | | | — | | | — | | | 22 | | | |
Derivatives, forwards and futures | | 49 | | | — | | | — | | | 49 | | | |
Derivatives, interest rate contracts | | — | | | 267 | | | — | | | 267 | | | |
Derivatives, other | | — | | | 2 | | | — | | | 2 | | | |
Total other assets | | 177 | | | 269 | | | — | | | 446 | | | |
Total assets | | $ | 177 | | | $ | 10,454 | | | $ | 43 | | | $ | 10,674 | | | |
Trading liabilities: | | | | | | | | | | |
U.S. treasuries | | $ | — | | | $ | 326 | | | $ | — | | | $ | 326 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Corporate and other debt | | — | | | 57 | | | — | | | 57 | | | |
| | | | | | | | | | |
Total trading liabilities | | — | | | 383 | | | — | | | 383 | | | |
Other liabilities: | | | | | | | | | | |
Derivatives, forwards and futures | | 39 | | | — | | | — | | | 39 | | | |
Derivatives, interest rate contracts | | — | | | 988 | | | — | | | 988 | | | |
Derivatives, other | | — | | | 2 | | | 20 | | | 22 | | | |
Total other liabilities | | 39 | | | 990 | | | 20 | | | 1,049 | | | |
Total liabilities | | $ | 39 | | | $ | 1,373 | | | $ | 20 | | | $ | 1,432 | | | |
| | | | | | | | | | |
Note 16 – Fair Value of Assets & Liabilities (Continued)
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of December 31, 2016: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(Dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Trading securities: | | | | | | | | |
U.S. treasuries | | $ | — | | | $ | 85 | | | $ | — | | | $ | 85 | |
Government agency issued MBS | | — | | | 464 | | | — | | | 464 | |
Government agency issued CMO | | — | | | 62 | | | — | | | 62 | |
Other U.S. government agencies | | — | | | 276 | | | — | | | 276 | |
States and municipalities | | — | | | 34 | | | — | | | 34 | |
Corporate and other debt | | — | | | 642 | | | — | | | 642 | |
Interest-only strips (elected fair value) | | — | | | — | | | 38 | | | 38 | |
Total trading securities | | — | | | 1,563 | | | 38 | | | 1,601 | |
| | | | | | | | |
Loans held for sale (elected fair value) | | — | | | 230 | | | 28 | | | 258 | |
| | | | | | | | |
Securities available for sale: | | | | | | | | |
| | | | | | | | |
Government agency issued MBS | | — | | | 5,055 | | | — | | | 5,055 | |
Government agency issued CMO | | — | | | 2,257 | | | — | | | 2,257 | |
Other U.S. government agencies | | — | | | 850 | | | — | | | 850 | |
States and municipalities | | — | | | 545 | | | — | | | 545 | |
| | | | | | | | |
Total securities available for sale | | — | | | 8,707 | | | — | | | 8,707 | |
Other assets: | | | | | | | | |
Deferred compensation mutual funds | | 125 | | | — | | | — | | | 125 | |
Equity, mutual funds, and other | | 25 | | | — | | | — | | | 25 | |
Derivatives, forwards and futures | | 12 | | | — | | | — | | | 12 | |
Derivatives, interest rate contracts | | — | | | 311 | | | — | | | 311 | |
Derivatives, other | | — | | | 1 | | | — | | | 1 | |
Total other assets | | 162 | | | 312 | | | — | | | 474 | |
Total assets | | $ | 162 | | | $ | 10,812 | | | $ | 66 | | | $ | 11,040 | |
Trading liabilities: | | | | | | | | |
U.S. treasuries | | $ | — | | | $ | 334 | | | $ | — | | | $ | 334 | |
| | | | | | | | |
Government agency issued MBS | | — | | | 1 | | | — | | | 1 | |
Corporate and other debt | | — | | | 91 | | | — | | | 91 | |
Total trading liabilities | | — | | | 426 | | | — | | | 426 | |
Other liabilities: | | | | | | | | |
Derivatives, forwards and futures | | 11 | | | — | | | — | | | 11 | |
Derivatives, interest rate contracts | | — | | | 93 | | | — | | | 93 | |
Derivatives, other | | — | | | 1 | | | 23 | | | 24 | |
Total other liabilities | | 11 | | | 94 | | | 23 | | | 128 | |
Total liabilities | | $ | 11 | | | $ | 520 | | | $ | 23 | | | $ | 554 | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
Note 16 – Fair Value of Assets & Liabilities (Continued)
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
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, 20172022 and 2016,2021 on a recurring basis are summarized as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | |
(Dollars in thousands) | | 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 | ) | | |
Total net gains/(losses) included in: | | | | | | | | | | | | | | | | |
Net income | | 92 |
| | | | (160 | ) | | | | 390 |
| | | | (129 | ) | | |
Purchases | | — |
| | | | — |
| | | | 43 |
| | | | — |
| | |
Settlements | | (251 | ) | | | | — |
| | | | (939 | ) | | | | 299 |
| | |
Net transfers into/(out of) Level 3 | | — |
| | | | 2,120 |
| | (b) | | — |
| | (d) | | — |
| | |
Balance on September 30, 2017 | | $ | 2,305 |
| | | | $ | 3,123 |
| | | | $ | 20,081 |
| | | | $ | (5,530 | ) | | |
Net unrealized gains/(losses) included in net income | | $ | 62 |
| | (a) | | $ | (72 | ) | | (c) | | $ | 390 |
| | (a) | | $ | (129 | ) | | (e) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CHANGES IN LEVEL 3 ASSETS & LIABILITIES MEASURED AT FAIR VALUE |
| | | | | | Three Months Ended September 30, 2022 | | |
(Dollars in millions) | | | | | | Interest-only strips | | | | Loans held for sale | | | | | | Net derivative liabilities | | |
Balance on July 1, 2022 | | | | | | $ | 26 | | | | | $ | 34 | | | | | | | $ | (28) | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total net gains (losses) included in net income | | | | | | (2) | | | | | — | | | | | | | (1) | | | |
| | | | | | | | | | | | | | | | | | |
Sales | | | | | | (23) | | | | | (14) | | | | | | | — | | | |
Settlements | | | | | | — | | | | | — | | | | | | | 9 | | | |
Repayments | | | | | | — | | | | | (1) | | | | | | | — | | | |
Net transfers into (out of) Level 3 | | | | | | 22 | | | (b) | | 1 | | | | | | | — | | | |
Balance on September 30, 2022 | | | | | | $ | 23 | | | | | $ | 20 | | | | | | | $ | (20) | | | |
Net unrealized gains (losses) included in net income | | | | | | $ | (1) | | | (c) | | $ | — | | | (a) | | | | $ | (1) | | | (d) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended September 30, 2021 | | |
(Dollars in millions) | | | | | | Interest-only strips-AFS | | | | Loans held for sale | | | | | Net derivative liabilities | | |
Balance on July 1, 2021 | | | | | | $ | 30 | | | | | $ | 25 | | | | | | $ | (18) | | | |
| | | | | | | | | | | | | | | | | |
Total net gains (losses) included in net income | | | | | | 1 | | | | | — | | | | | | — | | | |
Purchases | | | | | | — | | | | | 3 | | | | | | — | | | |
Sales | | | | | | (35) | | | | | (8) | | | | | | — | | | |
Settlements | | | | | | — | | | | | — | | | | | | 2 | | | |
Net transfers into (out of) Level 3 | | | | | | 20 | | | (b) | | 4 | | | | | | — | | | |
Balance on September 30, 2021 | | | | | | $ | 16 | | | | | $ | 24 | | | | | | $ | (16) | | | |
Net unrealized gains (losses) included in net income | | | | | | $ | — | | | (c) | | $ | — | | | (a) | | | $ | — | | | (d) |
| | | | | | | | | | | | | | | | | |
(a)Primarily included in mortgage banking and title income on the Consolidated Statements of Income.
(b)Transfers into interest-only strips 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 Statements of Income.
(d)Included in other expense.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three 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 July 1, 2016 | | $ | 2,826 |
| | | | $ | 25,738 |
| | | | $ | 1,500 |
| | | | $ | 1,406 |
| | | $ | (6,835 | ) | | |
Total net gains/(losses) included in: | | | | | | | | | | | | | | | | | | | |
Net income | | 304 |
| | | | 1,604 |
| | | | — |
| | | | — |
| | | (4 | ) | | |
Purchases | | — |
| | | | 198 |
| | | | — |
| | | | — |
| | | — |
| | |
Settlements | | (346 | ) | | | | (2,146 | ) | | | | (1,500 | ) | | | | (160 | ) | | | 299 |
| | |
Net transfers into/(out of) Level 3 | | — |
| | | | (2,858 | ) | | (d) | | — |
| | | | — |
| | | — |
| | |
Balance on September 30, 2016 | | $ | 2,784 |
| | | | $ | 22,536 |
| | | | $ | — |
| | | | $ | 1,246 |
| | | $ | (6,540 | ) | | |
Net unrealized gains/(losses) included in net income | | $ | 244 |
| | (a) | | $ | 1,604 |
| | (a) | | $ | — |
| | | | $ | — |
| | | $ | (4 | ) | | (e) |
| | | | | | | | |
(a) | Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income.60 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| Transfers into interest-only strips - AFS level 3 measured on a recurring basis reflect movements from loans held-for-sale (Level 2 nonrecurring). |
NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
(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)
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, 20172022 and 2016,2021, 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) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CHANGES IN LEVEL 3 ASSETS & LIABILITIES MEASURED AT FAIR VALUE | | | | | | | | | | | | | | | | | |
| | | | | | Nine Months Ended September 30, 2022 | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | Interest-only strips | | | | Loans held for sale | | | | | | Net derivative liabilities | | | | | | | | | | | | | | | | | | | |
Balance on January 1, 2022 | | | | | | $ | 38 | | | | | $ | 28 | | | | | | | $ | (23) | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total net gains (losses) included in net income | | | | | | (5) | | | | | — | | | | | | | (13) | | | | | | | | | | | | | | | | | | | | |
Purchases | | | | | | — | | | | | 1 | | | | | | | — | | | | | | | | | | | | | | | | | | | | |
Sales | | | | | | (61) | | | | | (14) | | | | | | | — | | | | | | | | | | | | | | | | | | | | |
Settlements | | | | | | — | | | | | (1) | | | | | | | 16 | | | | | | | | | | | | | | | | | | | | |
Repayments | | | | | | — | | | | | (1) | | | | | | | — | | | | | | | | | | | | | | | | | | | | |
Net transfers into (out of) Level 3 | | | | | | 51 | | | (b) | | 7 | | | | | | | — | | | | | | | | | | | | | | | | | | | | |
Balance on September 30, 2022 | | | | | | $ | 23 | | | | | $ | 20 | | | | | | | $ | (20) | | | | | | | | | | | | | | | | | | | | |
Net unrealized gains (losses) included in net income | | | | | | $ | (2) | | | (c) | | $ | — | | | (a) | | | | $ | (13) | | | (d) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Nine Months Ended September 30, 2021 | | | |
(Dollars in millions) | | | | | | Interest-only strips-AFS | | | | Loans held for sale | | | Loans held for investment | | | | Net derivative liabilities | | | |
Balance on January 1, 2021 | | | | | | $ | 32 | | | | | $ | 12 | | | | $ | 16 | | | | | $ | (14) | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total net gains (losses) included in net income | | | | | | 5 | | | | | 2 | | | | — | | | | | (9) | | | | |
Purchases | | | | | | — | | | | | 8 | | | | — | | | | | — | | | | |
Sales | | | | | | (68) | | | | | (18) | | | | — | | | | | — | | | | |
Settlements | | | | | | — | | | | | (2) | | | | (2) | | | | | 7 | | | | |
Net transfers into (out of) Level 3 | | | | | | 47 | | | (b) | | 22 | | | (e) | (14) | | | (e) | | — | | | | |
Balance on September 30, 2021 | | | | | | $ | 16 | | | | | $ | 24 | | | | $ | — | | | | | $ | (16) | | | | |
Net unrealized gains (losses) included in net income | | | | | | $ | — | | | (c) | | $ | 2 | | | (a) | $ | — | | | | | $ | (9) | | | (d) | |
| | | | | | | | | | | | | | | | | | | | |
(a)Primarily included in mortgage banking and title income on the Consolidated Statements of Income.
(b)Transfers into interest-only strips 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 Statements of Income.
(d)Included in other expense.
(e)The loans held for investment at fair value option portfolio was transferred to the loans held for sale portfolio on April 1, 2021.
There were no net unrealized gains (losses) for Level 3 assets and liabilities included in other comprehensive income as of September 30, 2022 and 2021.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| | | | — |
| | | — |
| | | — |
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Sales | | — |
| | |
| — |
| | |
| — |
| | | (205 | ) | | | — |
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Settlements | | (2,099 | ) | | | | (4,643 | ) | | | | (1,500 | ) | | | (421 | ) | | | 897 |
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Net transfers into/(out of) Level 3 | | — |
| | | | (3,287 | ) | | (d) | | — |
| | | — |
| | | — |
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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) |
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(a) | Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income.61 | 3Q22 FORM 10-Q REPORT |
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(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| Transfers into interest-only strips - AFS level 3 measured on a recurring basis reflect movements from loans held-for-sale (Level 2 nonrecurring).NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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(c) | Primarily included in fixed income on the Consolidated Condensed Statements of Income. |
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(d) | Transfers out of loans held-for-sale level 3 measured on a recurring basis generally reflect movements into OREO (level 3 nonrecurring). |
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(e) | Included in Other expense. | | | | | | | | | | | | | | | | | |
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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”)(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 Balance Sheets at September 30, 2017,2022, and December 31, 2016,2021, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the related carrying value.
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| | | | | | | | | | | | | | | | |
| | Carrying value at September 30, 2017 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Loans held-for-sale—SBAs and USDA | | $ | — |
| | $ | 244,089 |
| | $ | 1,484 |
| | $ | 245,573 |
|
Loans held-for-sale—first mortgages | | — |
| | — |
| | 611 |
| | 611 |
|
Loans, net of unearned income (a) | | — |
| | — |
| | 23,210 |
| | 23,210 |
|
OREO (b) | | — |
| | — |
| | 7,877 |
| | 7,877 |
|
Other assets (c) | | — |
| | — |
| | 27,394 |
| | 27,394 |
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LEVEL OF VALUATION ASSUMPTIONS FOR ASSETS MEASURED AT FAIR VALUE ON A NON-RECURRING BASIS |
| | Carrying value at September 30, 2022 |
(Dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
Loans held for sale—SBAs and USDA | | $ | — | | | $ | 556 | | | $ | — | | | $ | 556 | |
| | | | | | | | |
Loans and leases (a) | | — | | | — | | | 122 | | | 122 | |
OREO (b) | | — | | | — | | | 3 | | | 3 | |
Other assets (c) | | — | | | — | | | 40 | | | 40 | |
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| | Carrying value at December 31, 2021 |
(Dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
Loans held for sale—SBAs and USDA | | $ | — | | | $ | 852 | | | $ | 1 | | | $ | 853 | |
Loans held for sale—first mortgages | | — | | | — | | | 1 | | | 1 | |
Loans and leases (a) | | — | | | — | | | 84 | | | 84 | |
OREO (b) | | — | | | — | | | 3 | | | 3 | |
Other assets (c) | | — | | | — | | | 30 | | | 30 | |
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| | 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 |
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Loans, net of unearned income (a) | | — |
| | — |
| | 31,070 |
| | 31,070 |
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OREO (b) | | — |
| | — |
| | 11,235 |
| | 11,235 |
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Other assets (c) | | — |
| | — |
| | 29,609 |
| | 29,609 |
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(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 credit 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.
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(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. |
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(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. |
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(c) | Represents tax credit investments accounted for under the equity method. |
(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 Balance Sheets at period end, the following table provides information about the fair value adjustments recorded during the three and nine months ended September 30, 20172022 and 2016:2021:
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FAIR VALUE ADJUSTMENTS ON ASSETS MEASURED ON A NONRECURRING BASIS |
| Net gains (losses) Three Months Ended September 30, | | Net gains (losses) Nine Months Ended September 30, |
(Dollars in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Loans held for sale—SBAs and USDA | $ | (2) | | | $ | (2) | | | $ | (4) | | | $ | (3) | |
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Loans and leases (a) | (6) | | | (9) | | | (7) | | | (12) | |
OREO (b) | — | | | — | | | — | | | (1) | |
Other assets (c) | (3) | | | (2) | | | (5) | | | (2) | |
| $ | (11) | | | $ | (13) | | | $ | (16) | | | $ | (18) | |
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(a)Write-downs on these loans are recognized as part of provision for credit 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.
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| | Net gains/(losses) Three Months Ended September 30 | | Net gains/(losses) Nine months ended September 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Loans held-for-sale—SBAs and USDA | | $ | (86 | ) | | $ | — |
| | $ | (1,259 | ) | | $ | — |
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Loans held-for-sale—first mortgages | | 6 |
| | 10 |
| | 22 |
| | 17 |
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Loans, net of unearned income (a) | | (2,388 | ) | | 461 |
| | (1,456 | ) | | (3,249 | ) |
OREO (b) | | (41 | ) | | (711 | ) | | (662 | ) | | (1,561 | ) |
Other assets (c) | | (762 | ) | | (788 | ) | | (2,646 | ) | | (2,325 | ) |
| | $ | (3,271 | ) | | $ | (1,028 | ) | | $ | (6,001 | ) | | $ | (7,118 | ) |
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(a) | Write-downs on these loans are recognized as part of provision for loan losses.62 | 3Q22 FORM 10-Q REPORT |
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(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| Represents losses of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages. |
NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
(c) | Represents tax credit investments accounted for under the equity method. | |
Note 16 – Fair Value of Assets & Liabilities (Continued)
In third quarter 2017, FHN’s Corporate segmentFor the three and nine months ended September 30, 2022, FHN recognized $2.0less than $1 million of fixed asset and leased asset impairments on long-lived technologyand less than $1 million of fixed asset recoveries for both periods. These amounts were primarily recognized in the Corporate segment.
For the three and nine months ended September 30, 2021, FHN recognized less than $1 million of fixed asset recoveries and $33 million of fixed asset impairments, respectively, and less than $1 million of leased asset recoveries and $3 million of leased asset impairments, respectively, primarily related to continuing acquisition integration efforts associated with reduction of leased office space and banking center optimization. These amounts were primarily recognized in the Corporate segment.
Lease asset impairments recognized 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.
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, 20172022 and December 31, 2016:2021:
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(Dollars in thousands) |
Level 3 Class | | Fair Value at September 30, 2017 | | Valuation Techniques | | Unobservable Input | | Values Utilized |
Available-for-sale- securities SBA-interest only strips | | $ | 3,123 |
| | Discounted cash flow | | Constant prepayment rate | | 9% - 10% |
| | | | | | Bond equivalent yield | | 14%- 19% |
Loans held-for-sale - residential real estate | | 20,692 |
| | Discounted cash flow | | Prepayment speeds - First mortgage | | 2% - 12% |
| | | | | | Prepayment speeds - HELOC | | 3% - 12% |
| | | | | | Foreclosure losses | | 50% - 70% |
| | | | | | Loss severity trends - First mortgage | | 5% - 50% of UPB |
| | | | | | Loss severity trends - HELOC | | 15% - 100% of UPB |
Loans held-for-sale- unguaranteed interest in SBA loans | | 1,484 |
| | Discounted cash flow | | Constant prepayment rate | | 8% - 12% |
| | | | | | Bond equivalent yield | | 9% - 10% |
Derivative liabilities, other | | 5,530 |
| | Discounted cash flow | | Visa covered litigation resolution amount | | $4.4 billion - $5.2 billion |
| | | | | | Probability of resolution scenarios | | 10% - 30% |
| | | | | | Time until resolution | | 18 - 48 months |
Loans, net of unearned income (a) | | 23,210 |
| | 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) | | 7,877 |
| | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal |
Other assets (c) | | 27,394 |
| | 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 |
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(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.63 | 3Q22 FORM 10-Q REPORT |
Note 16 – Fair Value of Assets & Liabilities (Continued)
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(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| 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.NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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UNOBSERVABLE INPUTS USED IN LEVEL 3 FAIR VALUE MEASUREMENTS |
(Dollars in millions) | | | | | | | | Values Utilized |
Level 3 Class | | Fair Value at September 30, 2022 | | Valuation Techniques | | Unobservable Input | | Range | | Weighted Average (d) |
Trading securities - SBA interest-only strips | | $ | 23 | | | Discounted cash flow | | Constant prepayment rate | | 12% - 13% | | 12% |
| | | | | | Bond equivalent yield | | 15% - 17% | | 15% |
Loans held for sale - residential real estate | | $ | 20 | | | Discounted cash flow | | Prepayment speeds - First mortgage | | 2% - 9% | | 3% |
| | | | | | Foreclosure losses | | 63% - 77% | | 65% |
| | | | | | Loss severity trends - First mortgage | | 0% - 10% of UPB | | 6% |
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Derivative liabilities, other | | $ | 20 | | | Discounted cash flow | | Visa covered litigation resolution amount | | $5.4 billion - $6.2 billion | | $5.9 billion |
| | | | | | Probability of resolution scenarios | | 10% - 30% | | 24% |
| | | | | | Time until resolution | | 3 - 33 months | | 22 months |
Loans and leases (a) | | $ | 122 | | | 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) | | $ | 3 | | | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | NM |
Other assets (c) | | $ | 40 | | | 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 |
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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 credit 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.
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(c) | Represents tax credit investments accounted for under the equity method.64 | 3Q22 FORM 10-Q REPORT |
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(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 |
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(a)PART I, ITEM 1. FINANCIAL STATEMENTS |
| 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 | |
(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. |
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(c) | Represents tax credit investments accounted for under the equity method. |
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(Dollars in millions) | | | | | | | | Values Utilized |
Level 3 Class | | Fair Value at December 31, 2021 | | Valuation Techniques | | Unobservable Input | | Range | | Weighted Average (d) |
Trading securities - SBA interest-only strips | | $ | 38 | | | Discounted cash flow | | Constant prepayment rate | | 11% - 12% | | 11% |
| | | | | | Bond equivalent yield | | 11% - 14% | | 11% |
Loans held for sale - residential real estate | | $ | 29 | | | Discounted cash flow | | Prepayment speeds - First mortgage | | 4% - 12% | | 5% |
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| | | | | | Foreclosure losses | | 54% - 66% | | 65% |
| | | | | | Loss severity trends - First mortgage | | 1% - 14% of UPB | | 8% |
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Loans held for sale - unguaranteed interest in SBA loans | | $ | 1 | | | Discounted cash flow | | Constant prepayment rate | | 8% - 12% | | 10% |
| | | | | | Bond equivalent yield | | 11% | | 11% |
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Derivative liabilities, other | | $ | 23 | | | Discounted cash flow | | Visa covered litigation resolution amount | | $5.8 billion - $6.2 billion | | $6.0 billion |
| | | | | | Probability of resolution scenarios | | 15% - 35% | | 24% |
| | | | | | Time until resolution | | 12 - 36 months | | 25 months |
Loans and leases (a) | | $ | 84 | | | 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) | | $ | 3 | | | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | NM |
Other assets (c) | | $ | 30 | | | 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 |
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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 credit 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.
Trading Securities AFS. - SBA interest-only strips
Increases (decreases) in estimated prepayment rates and bond equivalent yields negatively (positively) affect the value of SBA interest onlyinterest-only strips. Management additionally considers whether the loans underlying related SBA-interest onlySBA 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. SBA interest-only strips were transferred from AFS to trading securities on October 1, 2021.
Loans held-for-sale.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.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
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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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-saleheld 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.
Loans held for investment
Constant prepayment rate, constant default rate and loss severity trends are significant unobservable inputs used in the fair value measurement of loans held for investment. Increases (decreases) in each of these inputs in isolation result in negative (positive) effects on the valuation of the associated loans.
Derivative liabilities.liabilities
In conjunction with thepre-2020 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
Loans 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 incomeleases and Other Real Estate Owned.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.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 almostsubstantially all types of mortgage loans originated for sale purposes underexcept for mortgage origination operations which utilize the Financial Instruments Topic (“ASC 825”).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 relating to mortgage banking operations conducted prior to the IBKC merger are recognized within loans held-for-saleheld 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.
FHN also had a portion of mortgage loans held for investment for which the fair value option was elected upon origination and which were accounted for at fair value. This portion of mortgage loans held for investment at fair value option was transferred to the loans held for sale portfolio on April 1, 2021.
Note 16 – Fair Value of Assets & Liabilities (Continued)
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
The following tables reflect the differences between the fair value carrying amount of residential real estate loans held-for-saleheld for sale and held for investment measured at fair value in accordance with management’s election and the aggregate unpaid principal amount FHN is contractually entitled to receive at maturity.
| | | | | | | | | | | | | | | | | | | | |
DIFFERENCES BETWEEN FAIR VALUE CARRYING AMOUNTS AND CONTRACTUAL AMOUNTS OF RESIDENTIAL REAL ESTATE LOANS REPORTED AT FAIR VALUE |
| | September 30, 2022 |
(Dollars in millions) | | 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 | | $ | 89 | | | $ | 96 | | | $ | (7) | |
Nonaccrual loans | | 4 | | | 8 | | | (4) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | December 31, 2021 |
(Dollars in millions) | | 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 | | $ | 258 | | | $ | 264 | | | $ | (6) | |
Nonaccrual loans | | 4 | | | 7 | | | (3) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | |
| | 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:
| | | | | | | | | | | | | | | | | | | | | | | |
CHANGES IN FAIR VALUE RECOGNIZED IN NET INCOME |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Changes in fair value included in net income: | | | | | | | |
Mortgage banking and title noninterest income | | | | | | | |
Loans held for sale | $ | (4) | | | $ | (3) | | | $ | (10) | | | $ | (8) | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| 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 and nine months ended September 30, 2017,2022 and 2016,2021, the amountsamount for residential real estate loans held-for-sale includeheld for sale included an insignificant amount of 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 amounts for residential real estate loans held-for-sale included gains of $.5 million and $.7 million, respectively, in pretax earnings that are attributable to changes in instrument-specific credit risk. 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-saleheld 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 accountheld 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.sale.
Determination of Fair Value
In accordance with ASC 820-10-35, fairFair 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 ConditionBalance Sheets and for estimating the fair value of financial instruments for which fair value is disclosed under ASC 825-10-50.disclosed.
Short-term financial assets.assets
Federal funds sold, securities purchased under agreements to resell, and interest bearinginterest-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.
Trading securities and trading liabilities.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
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
positions are valued using observable inputs including current market transactions, LIBOR and U.S. treasury curves,benchmark yields, 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 - SBA interest-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. 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 onlyInterest-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 onlyinterest-only strip terms. These securities bear the risk of loan prepayment or default that may result in the CompanyFHN 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. SBA interest-only strips were transferred from AFS to trading on October 1, 2021.
Securities held-to-maturity. Securities held-to-maturity reflectsavailable for sale and held to maturity
Valuations of 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 curvesbenchmark yields, consensus prepayment speeds, and credit spreads. DebtTrades from similar securities with limited trading activityand broker quotes are valuedused to support these valuations.
Loans held for sale
FHN determines the fair value of loans held for sale using aeither current transaction prices or 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-salemodels. Fair values are valueddetermined 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
Fair value of residential real estate loans held-for-saleheld for sale determined using a discounted cash flow model which incorporates both observable and unobservable inputs. Inputs in the discounted cash flow model 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.
The Company
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.
FHN utilizes quoted market prices of similar instruments or broker and dealer quotations to value the SBA and USDA guaranteed loans. The CompanyFHN values SBA-unguaranteed interests in loans held-for-saleheld 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-saleheld for sale is approximated by their carrying values based on current transaction values.
Loans, net of unearned income. Loans, net of unearned income are recognizedMortgage loans held for investment 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.option
The fair value of floating ratemortgage loans is estimated through comparison to recent market activity in loans of similar product types, with adjustments madeheld for differences in loan characteristics. In situations where market pricing inputs are not available,investment at fair value option 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 calculateddetermined by discounting future cash flows to their present value. Future cash flows are discounted to their present value bya third party 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 model using various assumptions about future loan performance (constant prepayment rate, constant default rate and loss severity trends) and market discount rates.
Loans held for investment
The fair values of mortgage loans are estimated using an exit price methodology orthat is based on present values using the interest rate that would be charged for a similar loan to a borrower with similar risk, weighted for varying maturity dates and adjusted for a liquidity discount based on the estimated fair value oftime period to complete a sale transaction with a market participant.
Other loans and leases are valued based on present values using 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 that would be charged for discounting expected cash flow amounts. Thus, this analysis is not considered a fair value measurement in accordancesimilar instrument to a borrower with ASC 820. However,similar risk, applicable to each category of instruments, and adjusted for a liquidity discount based on the results of this methodology are consideredestimated time period to approximate fair value for the applicable loans. Expected cash flows are derived from internally-developed inputs primarily reflecting expected default rates on contractual cash flows. complete a sale transaction with a market participant.
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.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
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)contracts) are based on inputs observed in active markets for similar instruments. Typical inputs include the LIBOR curve, Overnight Indexed Swap (“OIS”) curve,benchmark yields, option volatility and option skew. Starting in October 2020, centrally cleared derivatives are discounted using SOFR as required by clearinghouses. 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 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 customerclient 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.
OREO.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 financialOther 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 Balance Sheets 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.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.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.Loan commitments
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.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,and leases, loans held-for-sale,held for sale, and term borrowings as of September 30, 20172022 and December 31, 2016,2021, 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,
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
particularly consumer loans and TRUPS loans within the non-strategicCorporate segment, and TRUP 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,clients, 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.
Note 16 – Fair Value of Assets & Liabilities (Continued)
The following table summarizestables summarize the book value and estimated fair value of financial instruments recorded in the Consolidated Condensed Statements of ConditionBalance Sheets as of September 30, 2017:2022 and December 31, 2021:
|
| | | | | | | | | | | | | | | | | | | | |
| | 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) | Classes are detailed in the recurring and nonrecurring measurement tables.70 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $68.6 million.NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
Table of Contents | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BOOK VALUE AND ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS |
| | September 30, 2022 |
| | Book Value | | Fair Value |
(Dollars in millions) | | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | |
Loans and leases, net of allowance for loan and lease losses | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial, financial and industrial | | $ | 31,325 | | | $ | — | | | $ | — | | | $ | 31,084 | | | $ | 31,084 | |
Commercial real estate | | 12,873 | | | — | | | — | | | 12,735 | | | 12,735 | |
Consumer: | | | | | | | | | | |
Consumer real estate | | 11,671 | | | — | | | — | | | 11,550 | | | 11,550 | |
| | | | | | | | | | |
Credit card and other | | 821 | | | — | | | — | | | 825 | | | 825 | |
Total loans and leases, net of allowance for loan and lease losses | | 56,690 | | | — | | | — | | | 56,194 | | | 56,194 | |
Short-term financial assets: | | | | | | | | | | |
Interest-bearing deposits with banks | | 3,241 | | | 3,241 | | | — | | | — | | | 3,241 | |
Federal funds sold | | 198 | | | — | | | 198 | | | — | | | 198 | |
Securities purchased under agreements to resell | | 492 | | | — | | | 492 | | | — | | | 492 | |
Total short-term financial assets | | 3,931 | | | 3,241 | | | 690 | | | — | | | 3,931 | |
Trading securities (a) | | 1,421 | | | — | | | 1,398 | | | 23 | | | 1,421 | |
Loans held for sale: | | | | | | | | | | |
Mortgage loans (elected fair value) (a) | | 89 | | | — | | | 69 | | | 20 | | | 89 | |
USDA & SBA loans - LOCOM | | 557 | | | — | | | 559 | | | — | | | 559 | |
| | | | | | | | | | |
Mortgage loans - LOCOM | | 34 | | | — | | | — | | | 34 | | | 34 | |
Total loans held for sale | | 680 | | | — | | | 628 | | | 54 | | | 682 | |
Securities available for sale (a) | | 8,718 | | | — | | | 8,718 | | | — | | | 8,718 | |
Securities held to maturity | | 1,385 | | | — | | | 1,222 | | | — | | | 1,222 | |
Derivative assets (a) | | 318 | | | 49 | | | 269 | | | — | | | 318 | |
Other assets: | | | | | | | | | | |
Tax credit investments | | 530 | | | — | | | — | | | 530 | | | 530 | |
Deferred compensation mutual funds | | 106 | | | 106 | | | — | | | — | | | 106 | |
Equity, mutual funds, and other (b) | | 251 | | | 22 | | | — | | | 229 | | | 251 | |
Total other assets | | 887 | | | 128 | | | — | | | 759 | | | 887 | |
Total assets | | $ | 74,030 | | | $ | 3,418 | | | $ | 12,925 | | | $ | 57,030 | | | $ | 73,373 | |
Liabilities: | | | | | | | | | | |
Defined maturity deposits | | $ | 2,671 | | | $ | — | | | $ | 2,668 | | | $ | — | | | $ | 2,668 | |
Trading liabilities (a) | | 383 | | | — | | | 383 | | | — | | | 383 | |
Short-term financial liabilities: | | | | | | | | | | |
Federal funds purchased | | 496 | | | — | | | 496 | | | — | | | 496 | |
Securities sold under agreements to repurchase | | 657 | | | — | | | 657 | | | — | | | 657 | |
Other short-term borrowings | | 263 | | | — | | | 263 | | | — | | | 263 | |
Total short-term financial liabilities | | 1,416 | | | — | | | 1,416 | | | — | | | 1,416 | |
Term borrowings: | | | | | | | | | | |
Real estate investment trust-preferred | | 46 | | | — | | | — | | | 47 | | | 47 | |
Term borrowings—new market tax credit investment | | 66 | | | — | | | — | | | 59 | | | 59 | |
Secured borrowings | | 4 | | | — | | | — | | | 4 | | | 4 | |
Junior subordinated debentures | | 148 | | | — | | | — | | | 150 | | | 150 | |
Other long term borrowings | | 1,333 | | | — | | | 1,331 | | | — | | | 1,331 | |
Total term borrowings | | 1,597 | | | — | | | 1,331 | | | 260 | | | 1,591 | |
Derivative liabilities (a) | | 1,049 | | | 39 | | | 990 | | | 20 | | | 1,049 | |
Total liabilities | | $ | 7,116 | | | $ | 39 | | | $ | 6,788 | | | $ | 280 | | | $ | 7,107 | |
| | | | | | | | | | |
Note 16 – Fair Value of Assets & Liabilities (Continued)
The following table summarizes the book value and estimated fair value of financial instruments recorded(a)Classes are detailed in the Consolidated Statementsrecurring and nonrecurring measurement tables.
(b)Level 1 primarily consists of Condition asmutual funds with readily determinable fair values. Level 3 includes restricted investments in FHLB-Cincinnati stock of December 31, 2016:$26 million and FRB stock of $203 million.
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | 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 | | $ | 12,058,689 |
| | $ | — |
| | $ | — |
| | $ | 11,918,374 |
| | $ | 11,918,374 |
|
Commercial real estate | | 2,101,671 |
| | — |
| | — |
| | 2,078,306 |
| | 2,078,306 |
|
Consumer: | | | | | | | | | | |
Consumer real estate | | 4,473,395 |
| | — |
| | — |
| | 4,385,669 |
| | 4,385,669 |
|
Permanent mortgage | | 406,836 |
| | — |
| | — |
| | 404,930 |
| | 404,930 |
|
Credit card & other | | 346,861 |
| | — |
| | — |
| | 347,577 |
| | 347,577 |
|
Total loans, net of unearned income and allowance for loan losses | | 19,387,452 |
| | — |
| | — |
| | 19,134,856 |
| | 19,134,856 |
|
Short-term financial assets: | | | | | | | | | | |
Interest-bearing cash | | 1,060,034 |
| | 1,060,034 |
| | — |
| | — |
| | 1,060,034 |
|
Federal funds sold | | 50,838 |
| | — |
| | 50,838 |
| | — |
| | 50,838 |
|
Securities purchased under agreements to resell | | 613,682 |
| | — |
| | 613,682 |
| | — |
| | 613,682 |
|
Total short-term financial assets | | 1,724,554 |
| | 1,060,034 |
| | 664,520 |
| | — |
| | 1,724,554 |
|
Trading securities (a) | | 897,071 |
| | — |
| | 894,498 |
| | 2,573 |
| | 897,071 |
|
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 |
|
Securities held-to-maturity | | 14,347 |
| | — |
| | — |
| | 14,773 |
| | 14,773 |
|
Derivative assets (a) | | 121,654 |
| | 33,587 |
| | 88,067 |
| | — |
| | 121,654 |
|
Other assets: | | | | | | | | | | |
Tax credit investments | | 100,105 |
| | — |
| | — |
| | 98,400 |
| | 98,400 |
|
Deferred compensation assets | | 32,840 |
| | 32,840 |
| | — |
| | — |
| | 32,840 |
|
Total other assets | | 132,945 |
| | 32,840 |
| | — |
| | 98,400 |
| | 131,240 |
|
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 |
|
Liabilities: | | | | | | | | | | |
Deposits: | | | | | | | | | | |
Defined maturity | | $ | 1,355,133 |
| | $ | — |
| | $ | 1,361,104 |
| | $ | — |
| | $ | 1,361,104 |
|
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 |
|
Short-term financial liabilities: | | | | | | | | | | |
Federal funds purchased | | 414,207 |
| | — |
| | 414,207 |
| | — |
| | 414,207 |
|
Securities sold under agreements to repurchase | | 453,053 |
| | — |
| | 453,053 |
| | — |
| | 453,053 |
|
Other short-term borrowings | | 83,177 |
| | — |
| | 83,177 |
| | — |
| | 83,177 |
|
Total short-term financial liabilities | | 950,437 |
| | — |
| | 950,437 |
| | — |
| | 950,437 |
|
Term borrowings: | | | | | | | | | | |
Real estate investment trust-preferred | | 46,032 |
| | — |
| | — |
| | 49,350 |
| | 49,350 |
|
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 |
|
Other long term borrowings | | 953,498 |
| | — |
| | 965,066 |
| | — |
| | 965,066 |
|
Total term borrowings | | 1,040,656 |
| | — |
| | 965,066 |
| | 89,237 |
| | 1,054,303 |
|
Derivative liabilities (a) | | 135,897 |
| | 33,274 |
| | 96,378 |
| | 6,245 |
| | 135,897 |
|
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 |
|
| | | | | | | | |
(a) | Classes are detailed in the recurring and nonrecurring measurement tables.71 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
(b)PART I, ITEM 1. FINANCIAL STATEMENTS |
| Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $68.6 million.NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Book Value | | Fair Value |
(Dollars in millions) | | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | |
Loans and leases and allowance for loan and lease losses | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial, financial and industrial | | $ | 30,734 | | | $ | — | | | $ | — | | | $ | 31,020 | | | $ | 31,020 | |
Commercial real estate | | 11,955 | | | — | | | — | | | 11,986 | | | 11,986 | |
Consumer: | | | | | | | | | | |
Consumer real estate | | 10,609 | | | — | | | — | | | 11,111 | | | 11,111 | |
Credit card and other | | 891 | | | — | | | — | | | 906 | | | 906 | |
Total loans and leases, net of allowance for loan and lease losses | | 54,189 | | | — | | | — | | | 55,023 | | | 55,023 | |
Short-term financial assets: | | | | | | | | | | |
Interest-bearing deposits with banks | | 14,907 | | | 14,907 | | | — | | | — | | | 14,907 | |
Federal funds sold | | 153 | | | — | | | 153 | | | — | | | 153 | |
Securities purchased under agreements to resell | | 488 | | | — | | | 488 | | | — | | | 488 | |
Total short-term financial assets | | 15,548 | | | 14,907 | | | 641 | | | — | | | 15,548 | |
Trading securities (a) | | 1,601 | | | — | | | 1,563 | | | 38 | | | 1,601 | |
Loans held for sale: | | | | | | | | | | |
Mortgage loans (elected fair value) (a) | | 258 | | | — | | | 230 | | | 28 | | | 258 | |
USDA & SBA loans - LOCOM | | 853 | | | — | | | 855 | | | 1 | | | 856 | |
Other loans - LOCOM | | 24 | | | — | | | 24 | | | — | | | 24 | |
Mortgage loans - LOCOM | | 37 | | | — | | | — | | | 37 | | | 37 | |
Total loans held for sale | | 1,172 | | | — | | | 1,109 | | | 66 | | | 1,175 | |
Securities available for sale (a) | | 8,707 | | | — | | | 8,707 | | | — | | | 8,707 | |
Securities held to maturity | | 712 | | | — | | | 705 | | | — | | | 705 | |
Derivative assets (a) | | 324 | | | 12 | | | 312 | | | — | | | 324 | |
Other assets: | | | | | | | | | | |
Tax credit investments | | 456 | | | — | | | — | | | 450 | | | 450 | |
Deferred compensation mutual funds | | 125 | | | 125 | | | — | | | — | | | 125 | |
Equity, mutual funds, and other (b) | | 257 | | | 25 | | | — | | | 232 | | | 257 | |
Total other assets | | 838 | | | 150 | | | — | | | 682 | | | 832 | |
Total assets | | $ | 83,091 | | | $ | 15,069 | | | $ | 13,037 | | | $ | 55,809 | | | $ | 83,915 | |
Liabilities: | | | | | | | | | | |
Defined maturity deposits | | $ | 3,500 | | | $ | — | | | $ | 3,524 | | | $ | — | | | $ | 3,524 | |
Trading liabilities (a) | | 426 | | | — | | | 426 | | | — | | | 426 | |
Short-term financial liabilities: | | | | | | | | | | |
Federal funds purchased | | 775 | | | — | | | 775 | | | — | | | 775 | |
Securities sold under agreements to repurchase | | 1,247 | | | — | | | 1,247 | | | — | | | 1,247 | |
Other short-term borrowings | | 102 | | | — | | | 102 | | | — | | | 102 | |
Total short-term financial liabilities | | 2,124 | | | — | | | 2,124 | | | — | | | 2,124 | |
Term borrowings: | | | | | | | | | | |
Real estate investment trust-preferred | | 46 | | | — | | | — | | | 47 | | | 47 | |
Term borrowings—new market tax credit investment | | 59 | | | — | | | — | | | 58 | | | 58 | |
Secured borrowings | | 6 | | | — | | | — | | | 6 | | | 6 | |
Junior subordinated debentures | | 148 | | | — | | | — | | | 150 | | | 150 | |
Other long term borrowings | | 1,331 | | | — | | | 1,452 | | | — | | | 1,452 | |
Total term borrowings | | 1,590 | | | — | | | 1,452 | | | 261 | | | 1,713 | |
Derivative liabilities (a) | | 128 | | | 11 | | | 94 | | | 23 | | | 128 | |
Total liabilities | | $ | 7,768 | | | $ | 11 | | | $ | 7,620 | | | $ | 284 | | | $ | 7,915 | |
| | | | | | | | | | |
(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 $29 million and FRB stock of $203 million.
Note 16 – Fair Value of Assets & Liabilities (Continued)
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
The following table presents the contractual amount and fair value of unfunded loan commitments and standby and other commitments as of September 30, 20172022 and December 31, 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
UNFUNDED COMMITMENTS |
| | Contractual Amount | | Fair Value |
(Dollars in millions) | | September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
Unfunded Commitments: | | | | | | | | |
Loan commitments | | $ | 26,747 | | | $ | 24,229 | | | $ | 1 | | | $ | 1 | |
Standby and other commitments | | 716 | | | 810 | | | 7 | | | 6 | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
| | | | | | | | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations73 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| | |
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations
TABLE OF ITEM 2 TOPICS
FIRST HORIZON NATIONAL CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS | | | | | | | | |
PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| | |
GENERAL INFORMATIONIntroduction
First Horizon National Corporation (“FHN”(NYSE common stock trading symbol “FHN”) began asis a community bank charteredfinancial holding company headquartered in 1864Memphis, Tennessee. FHN’s principal subsidiary, and as ofonly banking subsidiary, is First Horizon Bank. Through the Bank and other subsidiaries, FHN offers regional banking, mortgage lending, specialized commercial lending, commercial leasing and equipment financing, brokerage, wealth management, capital markets, and other financial services to commercial, consumer, and governmental clients throughout the U.S.
At September 30, 2017, was one of2022, FHN had over 500 business locations in 22 states, including over 400 banking centers in 12 states, and employed more than 7,500 associates.
This MD&A should be read in conjunction with the 40 largest publicly traded banking organizationsaccompanying unaudited Consolidated Financial Statements and Notes to Consolidated Financial Statements in the United States in terms of asset size.
FHN’s two major brands—First Tennessee and FTN Financial—provide customers with a broad range of products and services. First Tennessee ("FTBNA" or the "Bank") provides consumer and commercial banking services throughout Tennessee and other selected markets and is the largest bank headquartered in the state of Tennessee. FTN Financial (“FTNF”) is an industry leader in fixed income sales, trading, and strategies for institutional clients in the U.S. and abroad.
FHN is composed of the following operating segments:
Regional banking segment offers financial products and services, including traditional lending and deposit taking, to consumer and commercial customers in Tennessee and other selected markets. Regional banking also provides investments, financial planning, trust services and asset management, credit card, and cash management. Additionally, the regional banking segment includes correspondent banking which provides credit, depository, and other banking related services to other financial institutions nationally.
Fixed income segment consists of fixed income securities sales, trading, and strategies for institutional clients in the U.S. and abroad,Part I, Item 1, 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, loss on extinguishment of debt, and acquisition and integration-related costs.
Non-strategic segment consists of the wind-down national consumer lending activities, legacy 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.
On May 4, 2017, FHN and Capital Bank Financial Corp. (“Capital Bank" or "CBF”) announced that they had entered into an agreement and plan of merger under which FHN will acquire Capital Bank, which is headquartered in Charlotte, North Carolina. Capital Bank reported approximately $10 billion of assets at June 30, 2017. The transaction is expected to close in fourth quarter 2017, subject to regulatory approval of the sale of two branches and customary conditions.
On April 3, 2017, FTNF acquired substantially all of the assets and assumed substantially all of the liabilities of Coastal Securities, Inc. (“Coastal”), a national leader in the trading, securitization, and analysis of Small Business Administration (“SBA”) loans, 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 were combined with FTNF's existing SBA trading activities to establish an additional major product sector for FTNF. FHN's operating results include the operating results of the acquired assets and 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 Divestituresother information contained in this reportdocument and in Exhibit 13 to FHN’sFHN's 2021 Annual Report on Form 10-K, foras amended.
Executive Overview
Merger Agreement with Toronto-Dominion Bank
On February 27, 2022, FHN entered into an Agreement and Plan of Merger (the “TD Merger Agreement”) with The Toronto-Dominion Bank, a Canadian chartered bank (“TD”), TD Bank US Holding Company, a Delaware corporation and indirect, wholly owned subsidiary of TD (“TD-US”), and Falcon Holdings Acquisition Co., a Delaware corporation and wholly owned subsidiary of TD-US (“Merger Sub”).
Pursuant to the year ended December 31, 2016 for additional information.
ForTD Merger Agreement, FHN and Merger Sub will merge (the “First Holding Company Merger”), with FHN continuing as the purposesurviving entity in the merger. Following the First Holding Company Merger, at the election of this management’s discussionTD, FHN and analysis (“MD&A”), earning assets have been expressed as averages, unless otherwise noted,TD-US will merge (the “Second Holding Company Merger” and, loans have been disclosed net of unearned income. The following financial discussion should be readtogether with the accompanying audited Consolidated Condensed Financial Statements and Notes in this report. Additional information includingFirst Holding Company Merger, the 2016 financial statements, notes, and MD&A is provided in Exhibit 13 to FHN’s Annual Report on Form 10-K for“Holding Company Mergers”), with TD-US continuing as the year ended December 31, 2016.
Non-GAAP Measures
Certain measures are includedsurviving entity in the narrativemerger.
Upon the terms 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 asconditions set forth in the TD Merger Agreement, each share of 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 conformscommon stock, par value $0.625 per share, (“Company Common Stock”), issued and outstanding immediately prior 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 optioneffective time of the holder) adjusted for certain items under risk based capital regulations; and risk-weighted assets (“RWA”First Holding Company Merger (the “First Effective Time”), which is a measure will be converted into the right to receive $25.00 (USD) per share in cash, without interest. If the transaction does not close on or before November 27, 2022, shareholders will receive an additional $0.65 per share 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 returnCompany Common Stock on average tangible common equity (“ROTCE”). Refer to table 25 for a reconciliation of the non-GAAP to GAAP measure and presentation of the most comparable GAAP item.
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements with respect to FHN’s beliefs, plans, goals, expectations, and estimates. Forward-looking statements are statements that are not a representation of historical information but 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 business conditions, including economic recession or depression; the stability or volatility of values and activity in the residential housing and commercial real estate markets; 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 classan annualized 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 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 Office of the Comptroller of the Currency (“OCC”), 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 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(or approximately 5.4 cents per month) for the period ended September 30, 2017,from November 27, 2022 through the day immediately prior to the closing. Each outstanding share of FHN’s preferred stock, series B, C, D, E and F, will remain issued outstanding in documents incorporatedconnection with the First Holding Company Merger. If TD elects to effect the Second Holding Company Merger, at the effective time of the Second Holding Company Merger, each outstanding share of FHN’s preferred stock will be converted into this Quarterly Report.a share of a newly created, corresponding series of TD-US having terms as described in the Merger Agreement.
FINANCIAL SUMMARYFollowing the completion of the First Holding Company Merger, at such time as determined by TD, First Horizon Bank and TD Bank, N.A., a national banking association (“TDBNA”) will merge, with TDBNA surviving as a subsidiary of TD-US (the “Bank Merger” and together with the Holding Company Mergers, the “Pending TD Merger”).
In connection with the TD Merger Agreement, TD purchased from FHN shares of non-voting Perpetual Convertible Preferred Stock, Series G, a new series of preferred stock of FHN (the “Series G Convertible Preferred Stock”) in a private placement transaction having an aggregate liquidation preference and purchase price of approximately $494 million, pursuant to a securities purchase agreement between FHN and TD entered into concurrently with the execution and delivery of the TD Merger Agreement. The Series G Convertible Preferred Stock is convertible into up to 4.9% of the outstanding shares of Company Common Stock in certain circumstances, including the closing of the Pending TD Merger or the termination of the TD Merger Agreement.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Financial Performance Summary
Third Quarter 2022 Highlights
FHN reported third quarter 2017, FHN reported2022 net income available to common shareholders of $67.3$257 million, or $.28$0.45 per diluted share, compared to net income of $63.2$166 million, or $.27$0.29 per diluted share, in second quarter 2022 and $224 million, or $0.41 per diluted share, in third quarter 2016. 2021.
Net interest income of $662 million increased $120 million from second quarter 2022 reflecting the benefit of higher rates, loan growth, and higher investment portfolio income, partially offset by higher funding costs. Compared to third quarter 2021, net interest income increased $170 million, driven by higher earning asset yields and higher average investment portfolio balances.
Provision for credit losses was $60 million in third quarter 2022 compared to $30 million in second quarter 2022 largely reflecting the impact of loan growth, deterioration in the macroeconomic forecast and a preliminary estimate for potential losses related to Hurricane Ian. The provision for credit losses increased $145 million compared to a benefit of $85 million in third quarter 2021, as the benefit in the prior year reflected an improved macroeconomic outlook and positive credit grade migration.
Noninterest income of $213 million increased $12 million compared to second quarter 2022 largely driven by a gain of $21 million on the sale of FHN's title services business. Results also reflect higher deferred compensation income and securities gains offset by decreases in mortgage banking and title income and fixed income. Noninterest income decreased $34 million compared to third quarter 2021 primarily reflecting lower fixed income and mortgage banking and title income. Results also reflect the impact of a $23 million loss on the retirement of legacy IBKC trust preferred securities in third quarter 2021 and higher securities gains in third quarter 2022
Noninterest expense of $469 million decreased $19 million from second quarter 2022, largely reflecting the impact of $12 million in derivative valuation adjustments on prior Visa Class-B share sales in second quarter 2022. Compared with third quarter 2021, noninterest expense decreased $57 million largely reflecting decreases in personnel expense, legal and professional fees and contract employment and outsourcing. Merger and integration expenses related to the IBKC and Pending TD Mergers totaled $24 million for the third quarter of 2022 compared to $38 million in second quarter 2022 and $46 million in third quarter 2021.
Year-to-Date and Period End Highlights
For the nine months ended September 30, 2017, FHN reported2022, net income available to common shareholders of $212.2was $610 million, or $.90$1.08 per diluted share, compared to net income available to common shareholders of $167.6$743 million, or $.71$1.34 per diluted share, for the nine months ended September 30, 2016. Results improved2021. The decrease was the result of a $295 million increase in the provision for both periods primarily drivencredit losses and a $187 million decrease in noninterest income, offset by ana $187 million increase in net interest income ("NII") and a $117 million decrease in noninterest expense.
Period-end loans and leases of $57.4 billion increased $2.5 billion from December 31, 2021 despite a decrease of $909 million in PPP loans. Average loans and leases of $56.5 billion in third quarter 2022 increased $1.0 billion from $55.5 billion in third quarter 2021 driven by consumer loan growth of $730 million and commercial loan growth of $305 million.
Period-end deposits of $66.0 billion decreased $8.9 billion, or 12%, from December 31, 2021 driven by a $6.8 billion decrease in interest-bearing deposits and a $2.1 billion decrease in noninterest-bearing deposits. Average deposits decreased $5.6 billion from third quarter 2021 from higher deposit balances in the prior year associated with elevated liquidity related to the COVID-19 pandemic.
Tier 1 risk-based capital and total risk-based capital ratios at September 30, 2022 were 11.71% and 13.10%, an improvement from 11.04% and 12.34% at December 31, 2021, respectively. The CET1 ratio was 9.94% at September 30, 2022 compared to 9.92% at December 31, 2021.
The following portions of this MD&A focus in more detail on the results of operations for the three and nine months ended September 30, 2022, the three months ended June 30, 2022, and the three and nine months ended September 30, 2021 and on information about FHN's financial condition, loan and lease portfolio, liquidity, funding sources, capital and other matters.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Table I.2.1
KEY PERFORMANCE INDICATORS
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| As of or for the three months ended | | As of or for the nine months ended |
(Dollars in millions, except per share data) | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
Pre-provision net revenue (a) | $ | 406 | | | $ | 255 | | | $ | 213 | | | $ | 875 | | | $ | 758 | |
Diluted earnings per common share | $ | 0.45 | | | $ | 0.29 | | | $ | 0.41 | | | $ | 1.08 | | | $ | 1.34 | |
Return on average assets (b) | 1.29 | % | | 0.82 | % | | 1.05 | % | | 1.00 | % | | 1.20 | % |
Return on average common equity (c) | 13.85 | % | | 9.12 | % | | 11.43 | % | | 10.97 | % | | 12.96 | % |
Return on average tangible common equity (a) (d) | 18.23 | % | | 12.07 | % | | 14.95 | % | | 14.44 | % | | 17.06 | % |
Net interest margin (e) | 3.49 | % | | 2.74 | % | | 2.41 | % | | 2.85 | % | | 2.50 | % |
Noninterest income to total revenue (f) | 23.27 | % | | 27.06 | % | | 33.34 | % | | 27.07 | % | | 35.33 | % |
Efficiency ratio (g) | 54.29 | % | | 65.76 | % | | 71.27 | % | | 62.83 | % | | 67.75 | % |
Allowance for loan and lease losses to total loans and leases | 1.16 | % | | 1.10 | % | | 1.32 | % | | 1.16 | % | | 1.32 | % |
Net charge-offs (recoveries) to average loans and leases (annualized) | 0.08 | % | | 0.09 | % | | 0.02 | % | | 0.08 | % | | — | % |
Total period-end equity to period-end assets | 10.32 | % | | 10.04 | % | | 9.64 | % | | 10.32 | % | | 9.64 | % |
Tangible common equity to tangible assets (a) | 6.64 | % | | 6.55 | % | | 6.80 | % | | 6.64 | % | | 6.80 | % |
Cash dividends declared per common share | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.45 | | | $ | 0.45 | |
Book value per common share | $ | 12.99 | | | $ | 13.50 | | | $ | 14.24 | | | $ | 12.99 | | | $ | 14.24 | |
Tangible book value per common share (a) | $ | 9.72 | | | $ | 10.18 | | | $ | 10.88 | | | $ | 9.72 | | | $ | 10.88 | |
Common equity Tier 1 | 9.94 | % | | 9.81 | % | | 10.09 | % | | 9.94 | % | | 10.09 | % |
Market capitalization | $ | 12,291 | | | $ | 11,724 | | | $ | 8,827 | | | $ | 12,291 | | | $ | 8,827 | |
(a) Represents a non-GAAP measure which is reconciled in the non-GAAP to GAAP reconciliation in Table I.2.26.
(b) Calculated using annualized net income divided by average assets.
(c) Calculated using annualized net income available to common shareholders divided by average common equity.
(d) Calculated using annualized net income available to common shareholders divided by average tangible common equity.
(e) Net interest margin is computed using total net interest income adjusted to an FTE basis assuming a statutory federal income tax rate of 21% and, where applicable, state income taxes.
(f) Ratio is noninterest income excluding securities gains (losses) to total revenue excluding securities gains (losses).
(g) Ratio is noninterest expense to total revenue excluding securities gains (losses).
Results of Operations
Net Interest Income
Net interest income is FHN's largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans, leases and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). The level of net interest income is primarily a function of the difference between the effective yield on average interest-earning assets and the effective cost of interest-bearing liabilities. These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates.
The following tables present the major components of net interest income and net interest margin:
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Table I.2.2
QUARTER-TO-DATE AVERAGE BALANCES, NET INTEREST INCOME & YIELDS/RATES
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| | Three Months Ended |
(Dollars in millions) | | September 30, 2022 | | June 30, 2022 | | September 30, 2021 |
| | Average Balance | | Interest Income/Expense | | Yield/Rate | | Average Balance | | Interest Income/Expense | | Yield/Rate | | Average Balance | | Interest Income/Expense | | Yield/Rate |
Assets: | | | | | | | | | | | | | | | | | | |
Loans and leases: | | | | | | | | | | | | | | | | | | |
Commercial loans and leases | | $ | 44,046 | | | $ | 496 | | | 4.47 | % | | $ | 43,589 | | | $ | 382 | | | 3.52 | % | | $ | 43,741 | | | $ | 372 | | | 3.37 | % |
Consumer loans | | 12,497 | | | 124 | | | 3.94 | | | 11,987 | | | 112 | | | 3.74 | | | 11,767 | | | 112 | | | 3.81 | |
Total loans and leases | | 56,543 | | | 620 | | | 4.35 | | | 55,576 | | | 494 | | | 3.57 | | | 55,508 | | | 484 | | | 3.47 | |
Loans held for sale | | 761 | | | 9 | | | 4.91 | | | 1,027 | | | 10 | | | 3.89 | | | 992 | | | 8 | | | 3.25 | |
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Investment securities | | 10,315 | | | 55 | | | 2.14 | | | 9,781 | | | 46 | | | 1.87 | | | 8,494 | | | 31 | | | 1.48 | |
Trading securities | | 1,342 | | | 15 | | | 4.54 | | | 1,509 | | | 13 | | | 3.43 | | | 1,171 | | | 6 | | | 2.07 | |
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Federal funds sold | | 259 | | | 1 | | | 2.28 | | | 228 | | | 1 | | | 1.11 | | | 13 | | | — | | | 0.18 | |
Securities purchased under agreements to resell (a) | | 402 | | | 2 | | | 1.89 | | | 629 | | | 1 | | | 0.49 | | | 574 | | | — | | | (0.04) | |
Interest-bearing deposits with banks | | 6,341 | | | 35 | | | 2.15 | | | 10,989 | | | 21 | | | 0.79 | | | 15,023 | | | 6 | | | 0.16 | |
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Total earning assets / Total interest income | | $ | 75,963 | | | $ | 737 | | | 3.86 | % | | $ | 79,739 | | | $ | 586 | | | 2.95 | % | | $ | 81,775 | | | $ | 535 | | | 2.61 | % |
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Cash and due from banks | | 1,246 | | | | | | | 1,281 | | | | | | | 1,263 | | | | | |
Goodwill and other intangible assets, net | | 1,767 | | | | | | | 1,789 | | | | | | | 1,829 | | | | | |
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Allowance for loan and lease losses | | (639) | | | | | | | (621) | | | | | | | (793) | | | | | |
Other assets | | 4,214 | | | | | | | 4,138 | | | | | | | 4,327 | | | | | |
Total assets | | $ | 82,551 | | | | | | | $ | 86,326 | | | | | | | $ | 88,401 | | | | | |
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Liabilities and Shareholders' Equity: | | | | | | | | | | | | | | | | | | |
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Interest-bearing deposits: | | | | | | | | | | | | | | | | | | |
Savings | | $ | 23,569 | | | $ | 19 | | | 0.31 | % | | $ | 24,841 | | | $ | 5 | | | 0.08 | % | | $ | 27,793 | | | $ | 9 | | | 0.12 | % |
Other interest-bearing deposits | | 15,103 | | | 21 | | | 0.56 | | | 16,273 | | | 9 | | | 0.22 | | | 15,333 | | | 5 | | | 0.12 | |
Time deposits | | 2,759 | | | 3 | | | 0.50 | | | 3,040 | | | 4 | | | 0.50 | | | 4,122 | | | 6 | | | 0.62 | |
Total interest-bearing deposits | | 41,431 | | | 43 | | | 0.41 | | | 44,154 | | | 18 | | | 0.16 | | | 47,248 | | | 20 | | | 0.17 | |
Federal funds purchased | | 596 | | | 3 | | | 2.28 | | | 733 | | | 1 | | | 0.80 | | | 906 | | | — | | | 0.14 | |
Securities sold under agreements to repurchase | | 877 | | | 2 | | | 0.82 | | | 770 | | | 1 | | | 0.32 | | | 1,422 | | | 1 | | | 0.32 | |
Trading liabilities | | 372 | | | 3 | | | 3.03 | | | 585 | | | 4 | | | 2.52 | | | 527 | | | 1 | | | 1.11 | |
Other short-term borrowings | | 238 | | | 2 | | | 2.22 | | | 207 | | | — | | | 0.81 | | | 124 | | | 1 | | | 0.09 | |
Term borrowings | | 1,598 | | | 18 | | | 4.57 | | | 1,597 | | | 17 | | | 4.38 | | | 1,665 | | | 18 | | | 4.39 | |
Total interest-bearing liabilities / Total interest expense | | $ | 45,112 | | | $ | 71 | | | 0.63 | % | | $ | 48,046 | | | $ | 41 | | | 0.34 | % | | $ | 51,892 | | | $ | 41 | | | 0.31 | % |
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Noninterest-bearing liabilities: | | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | | 26,701 | | | | | | | 27,791 | | | | | | | 26,485 | | | | | |
Other liabilities | | 2,069 | | | | | | | 1,875 | | | | | | | 1,447 | | | | | |
Total liabilities | | 73,882 | | | | | | | 77,712 | | | | | | | 79,824 | | | | | |
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Shareholders' equity | | 8,374 | | | | | | | 8,319 | | | | | | | 8,282 | | | | | |
Noncontrolling interest | | 295 | | | | | | | 295 | | | | | | | 295 | | | | | |
Total shareholders' equity | | 8,669 | | | | | | | 8,614 | | | | | | | 8,577 | | | | | |
Total liabilities and shareholders' equity | | $ | 82,551 | | | | | | | $ | 86,326 | | | | | | | $ | 88,401 | | | | | |
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Net earnings assets / Net interest income (TE) / Net interest spread | | $ | 30,851 | | | $ | 666 | | | 3.23 | % | | $ | 31,693 | | | $ | 545 | | | 2.61 | % | | $ | 29,883 | | | $ | 494 | | | 2.30 | % |
Taxable equivalent adjustment | | | | (4) | | | 0.26 | | | | | (3) | | | 0.13 | | | | | (2) | | | 0.11 | |
Net interest income / Net interest margin (b) | | | | $ | 662 | | | 3.49 | % | | | | $ | 542 | | | 2.74 | % | | | | $ | 492 | | | 2.41 | % |
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(a) Negative yield is driven by negative market rates on reverse repurchase agreements.
(b) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 21% and, where applicable, state income taxes.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Third Quarter 2022 versus Second Quarter 2022
Net interest income of $662 million in third quarter 2022 increased $120 million from second quarter 2022 driven by higher interest rates, greater average loan balances, and additional investment portfolio income, partially offset by higher funding costs.
The net interest margin of 3.49% in third quarter 2022 improved 75 basis points from second quarter 2022 primarily due to the benefit of higher interest rates as well as loan and securities portfolio growth and lower excess cash balances, partially offset by an increase in funding costs.
Average earning assets of $76.0 billion in third quarter 2022 decreased $3.8 billion from second quarter 2022 largely due to a $4.6 billion decrease in interest-bearing cash, offset by a $1.0 billion increase in loans and leases, driven by a $457 million increase in commercial loans and a $510 million increase in consumer loans.
Third Quarter 2022 versus Third Quarter 2021
Net interest income increased $170 million from third quarter 2021 driven by both higher earning asset yields and higher investment portfolio balances.
Third quarter 2022 net interest margin increased 108 basis points from 2.41% in third quarter 2021, driven by the impact of higher yields on earning assets, partially offset by higher funding costs.
Average earning assets decreased $5.8 billion from third quarter 2021 largely driven by a $8.7 billion decrease in average interest-bearing deposits with banks, offset by a $1.0 billion increase in loans and leases and a $1.8 billion increase in investment securities.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Table I.2.3
YEAR-TO-DATE AVERAGE BALANCES, NET INTEREST INCOME & YIELDS/RATES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2022 | | September 30, 2021 | | | | | | |
(Dollars in millions) | | Average Balance | | Interest Income/Expense | | Yield/Rate | | Average Balance | | Interest Income/Expense | | Yield/Rate | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | |
Loans and leases: | | | | | | | | | | | | | | | | | | |
Commercial loans and leases | | $ | 43,366 | | | $ | 1,217 | | | 3.75 | % | | $ | 44,771 | | | $ | 1,135 | | | 3.38 | % | | | | | | |
Consumer loans | | 12,043 | | | 344 | | | 3.80 | | | 12,072 | | | 357 | | | 3.98 | | | | | | | |
Total loans and leases | | 55,409 | | | 1,561 | | | 3.76 | | | 56,843 | | | 1,492 | | | 3.51 | | | | | | | |
Loans held for sale | | 980 | | | 30 | | | 4.01 | | | 856 | | | 22 | | | 3.41 | | | | | | | |
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Investment securities | | 9,923 | | | 139 | | | 1.87 | | | 8,406 | | | 88 | | | 1.43 | | | | | | | |
Trading securities | | 1,481 | | | 39 | | | 3.52 | | | 1,303 | | | 20 | | | 2.02 | | | | | | | |
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Federal funds sold | | 190 | | | 1 | | | 1.52 | | | 32 | | | — | | | 0.13 | | | | | | | |
Securities purchased under agreements to resell (a) | | 567 | | | 2 | | | 0.61 | | | 580 | | | — | | | (0.08) | | | | | | | |
Interest-bearing deposits with banks | | 10,713 | | | 63 | | | 0.79 | | | 12,468 | | | 11 | | | 0.12 | | | | | | | |
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Total earning assets / Total interest income | | $ | 79,263 | | | $ | 1,835 | | | 3.09 | % | | $ | 80,488 | | | $ | 1,633 | | | 2.72 | % | | | | | | |
| | | | | | | | | | | | | | | | | | |
Cash and due from banks | | 1,251 | | | | | | | 1,260 | | | | | | | | | | | |
Goodwill and other intangible assets, net | | 1,786 | | | | | | | 1,843 | | | | | | | | | | | |
Premises and equipment, net | | 643 | | | | | | | 724 | | | | | | | | | | | |
Allowance for loan and lease losses | | (639) | | | | | | | (875) | | | | | | | | | | | |
Other assets | | 3,495 | | | | | | | 3,691 | | | | | | | | | | | |
Total assets | | $ | 85,799 | | | | | | | $ | 87,131 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders' Equity: | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | | |
Savings | | $ | 24,903 | | | $ | 27 | | | 0.14 | % | | $ | 27,468 | | | $ | 31 | | | 0.15 | % | | | | | | |
Other interest-bearing deposits | | 15,972 | | | 34 | | | 0.28 | | | 15,617 | | | 17 | | | 0.14 | | | | | | | |
Time deposits | | 3,046 | | | 11 | | | 0.51 | | | 4,479 | | | 19 | | | 0.58 | | | | | | | |
Total interest-bearing deposits | | 43,921 | | | 72 | | | 0.22 | | | 47,564 | | | 67 | | | 0.19 | | | | | | | |
Federal funds purchased | | 737 | | | 5 | | | 0.96 | | | 969 | | | 1 | | | 0.11 | | | | | | | |
Securities sold under agreements to repurchase | | 882 | | | 3 | | | 0.40 | | | 1,229 | | | 2 | | | 0.33 | | | | | | | |
Trading liabilities | | 523 | | | 9 | | | 2.32 | | | 535 | | | 4 | | | 1.01 | | | | | | | |
Other short-term borrowings | | 185 | | | 2 | | | 1.29 | | | 130 | | | 1 | | | 0.08 | | | | | | | |
Term borrowings | | 1,595 | | | 53 | | | 4.41 | | | 1,669 | | | 55 | | | 4.39 | | | | | | | |
Total interest-bearing liabilities / Total interest expense | | $ | 47,843 | | | $ | 144 | | | 0.40 | % | | $ | 52,096 | | | $ | 130 | | | 0.33 | % | | | | | | |
| | | | | | | | | | | | | | | | | | |
Noninterest-bearing liabilities: | | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | | 27,468 | | | | | | | 25,070 | | | | | | | | | | | |
Other liabilities | | 1,854 | | | | | | | 1,503 | | | | | | | | | | | |
Total liabilities | | 77,165 | | | | | | | 78,669 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Shareholders' equity | | 8,339 | | | | | | | 8,167 | | | | | | | | | | | |
Noncontrolling interest | | 295 | | | | | | | 295 | | | | | | | | | | | |
Total shareholders' equity | | 8,634 | | | | | | | 8,462 | | | | | | | | | | | |
Total liabilities and shareholders' equity | | $ | 85,799 | | | | | | | $ | 87,131 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Net earnings assets / Net interest income (TE) / Net interest spread | | $ | 31,420 | | | $ | 1,691 | | | 2.69 | % | | $ | 28,392 | | | $ | 1,503 | | | 2.39 | % | | | | | | |
Taxable equivalent adjustment | | | | (8) | | | 0.16 | | | | | (7) | | | 0.11 | | | | | | | |
Net interest income / Net interest margin (b) | | | | $ | 1,683 | | | 2.85 | % | | | | $ | 1,496 | | | 2.50 | % | | | | | | |
| | | | | | | | | | | | | | | | | | |
(a) Yield is driven by negative market rates on reverse repurchase agreements.
(b) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 21% and, where applicable, state income taxes.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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For the nine months ended September 30, 2022, net interest income of $1.7 billion increased $187 million from the same period one year ago largely driven by higher earning asset yields.
Total average earning assets decreased $1.2 billion in the first nine months of 2022 largely from decreases in average loans and leases and interest-bearing cash partially offset by growth in investment securities.
The year-to-date net interest margin of 2.85% increased 35 basis points compared to the same period of 2021 as the increase in earning asset yields was partially offset by an increase in the cost of interest-bearing liabilities.
Provision for Credit Losses
The provision for credit losses includes the provision for loan and lease losses and the provision for unfunded lending commitments. The provision for credit losses is the expense necessary to maintain the ALLL and the accrual for unfunded lending commitments at levels appropriate to absorb management’s estimate of credit losses expected over the life of the loan and lease portfolio and the portfolio of unfunded loan commitments.
For the third quarter 2022, provision for credit losses was $60 million compared to $30 million in second quarter 2022, largely reflecting the impact of loan growth, deterioration in the macroeconomic forecast, and a
preliminary estimate for potential losses related to Hurricane Ian. The third quarter 2022 provision increased $145 million from third quarter 2021 and increased $295 million on a year-to-date basis. The increase in provision during 2022 was reflective of non-PPP loan growth, deterioration in the macroeconomic forecast and a preliminary estimate of potential losses related to Hurricane Ian. The provision benefit in 2021 reflected an improved macroeconomic outlook and positive credit grade migration.
For additional information about general asset quality trends, refer to the Asset Quality section in this MD&A.
Noninterest Income
The following table presents the significant components of noninterest income taxes, somewhatfor each of the periods presented:
Table I.2.4
NONINTEREST INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | 3Q22 vs. 2Q22 | | 3Q22 vs. 3Q21 | |
(Dollars in millions) | | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | $ Change | | % Change | | $ Change | | % Change | |
Noninterest income: | | | | | | | | | | | | | | | |
Fixed income | $ | 46 | | | $ | 51 | | | $ | 96 | | | $ | (5) | | | (10) | % | | $ | (50) | | | (52) | % | |
Deposit transactions and cash management | 43 | | | 42 | | | 44 | | | 1 | | | 2 | | | (1) | | | (2) | | |
Brokerage, management fees and commissions | | 23 | | | 24 | | | 24 | | | (1) | | | (4) | | | (1) | | | (4) | | |
Card and digital banking fees | | 21 | | | 23 | | | 21 | | | (2) | | | (9) | | | — | | | — | | |
Other service charges and fees | | 13 | | | 15 | | | 12 | | | (2) | | | (13) | | | 1 | | | 8 | | |
Trust services and investment management | | 11 | | | 12 | | | 13 | | | (1) | | | (8) | | | (2) | | | (15) | | |
Securities gains (losses), net | | 12 | | | — | | | 1 | | | 12 | | | 100 | | | 11 | | | NM | |
Mortgage banking and title income | | 9 | | | 34 | | | 34 | | | (25) | | | (74) | | | (25) | | | (74) | | |
Deferred compensation income | | (3) | | | (17) | | | 3 | | | 14 | | | 82 | | | (6) | | | (200) | | |
Loss on debt extinguishment | | — | | | — | | | (23) | | | — | | | — | | | 23 | | | 100 | | |
Other income | | 38 | | | 17 | | | 22 | | | 21 | | | 124 | | | 16 | | | 73 | | |
Total noninterest income | | $ | 213 | | | $ | 201 | | | $ | 247 | | | $ | 12 | | | 6 | % | | $ | (34) | | | (14) | % | |
| | | | | | | | | | | | | | | |
NM – Not meaningful
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Third Quarter 2022 versus Second Quarter 2022
Noninterest income of $213 million increased $12 million, or 6%, from second quarter 2022. During third quarter 2022, FHN sold its title services business for a gain of $21 million. Noninterest income results were also impacted by higher deferred compensation income and securities gains offset by decreases in mortgage banking and title income and fixed income.
Fixed income of $46 million decreased $5 million reflecting the impact of higher long-term rates, macroeconomic uncertainty and market volatility. Fixed income average daily revenue of $0.5 million compared with $0.6 million in second quarter 2022.
Mortgage banking and title income of $9 million decreased $25 million largely driven by declines in mortgage sales volume and margin compression as well as the divestiture of the title services business.
The increase in securities gains was largely attributable to a $10 million gain on an equity securities investment.
Deferred compensation income increased $14 million reflecting fluctuations in equity market valuations.
Third Quarter 2022 versus Third Quarter 2021
Noninterest income of $213 million for third quarter 2022 decreased $34 million, or 14%, compared to third quarter 2021, primarily reflecting lower fixed income and mortgage banking and title income. Results also reflect the impact of a $23 million loss on the retirement of legacy IBKC trust preferred securities in third quarter 2021 and higher securities gains in third quarter 2022.
Fixed income of $46 million decreased $50 million from third quarter 2021. Fixed income product revenue decreased $51 million, reflecting less favorable market conditions, while revenue from other products increased $1 million, largely driven by higher loans sales partially offset by lower derivative fees.
Mortgage banking and title income decreased $25 million largely driven by declines in mortgage sales volume and margin compression as well as the divestiture of the title services business.
Deferred compensation income decreased $6 million reflecting fluctuations in equity market valuations relative to the prior year.
Table I.2.5
NONINTEREST INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | |
(Dollars in millions) | | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Noninterest income: | | | | | | | | |
Fixed income | | $ | 170 | | $ | 324 | | $ | (154) | | (48) | % |
Deposit transactions and cash management | | 129 | | 130 | | (1) | | (1) | |
Brokerage, management fees and commissions | | 71 | | 65 | | 6 | | 9 | |
Mortgage banking and title income | | 65 | | 126 | | (61) | | (48) | |
Card and digital banking fees | | 64 | | 59 | | 5 | | 8 | |
Other service charges and fees | | 41 | | 32 | | 9 | | 28 | |
Trust services and investment management | | 36 | | 39 | | (3) | | (8) | |
Securities gains (losses), net | | 18 | | 12 | | 6 | | 50 | |
Deferred compensation income | | (24) | | 12 | | (36) | | NM |
Loss on debt extinguishment | | — | | (23) | | 23 | | | 100 | |
Other income | | 72 | | 53 | | 19 | | 36 | |
Total noninterest income | | $ | 642 | | | $ | 829 | | | $ | (187) | | | (23) | % |
| | | | | | | | |
NM – Not meaningful
For the nine months ended September 30, 2022, noninterest income relativeof $642 million decreased $187 million, or 23%, compared to 2016. Total expenses includingthe same period in 2021, primarily due to lower fixed income, mortgage banking and title income and deferred compensation income.
Fixed income product revenue of $133 million decreased $158 million largely driven by less favorable market conditions. Revenue from other products of $38 million
increased $5 million primarily driven by higher fees from loan loss provision were flat forsales.
Mortgage banking and title income of $65 million decreased $61 million driven by lower origination volume given the quarterly period, but declinedimpact of higher long-term rates as well as a continued mix shift toward portfolio loans, partially offset by a $12 million gain on sale of mortgage servicing rights.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Deferred compensation income decreased $36 million for the year-to-date period which also contributedof 2022 largely driven by equity market valuations relative to the improvementprior year.
Noninterest Expense
The following tables present the significant components of noninterest expense for each of the periods presented:
Table I.2.6
NONINTEREST EXPENSE
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | 3Q22 vs. 2Q22 | | 3Q22 vs. 3Q21 |
(Dollars in millions) | | September 30, 2022 | | June 30, 2022 | | September 30, 2021 | | $ Change | | % Change | | $ Change | | % Change |
Noninterest expense: | | | | | | | | | | | | | | |
Personnel expense | | $ | 275 | | | $ | 265 | | | $ | 296 | | | $ | 10 | | | 4 | % | | $ | (21) | | | (7) | % |
Net occupancy expense | | 32 | | | 33 | | | 33 | | | (1) | | | (3) | | | (1) | | | (3) | |
Computer software | | 28 | | | 29 | | | 30 | | | (1) | | | (3) | | | (2) | | | (7) | |
Operations services | | 22 | | | 23 | | | 24 | | | (1) | | | (4) | | | (2) | | | (8) | |
| | | | | | | | | | | | | | |
Amortization of intangible assets | | 13 | | | 13 | | | 14 | | | — | | | — | | | (1) | | | (7) | |
Contract employment and outsourcing | | 12 | | | 12 | | | 21 | | | — | | | — | | | (9) | | | (43) | |
Advertising and public relations | | 12 | | | 10 | | | 14 | | | 2 | | | 20 | | | (2) | | | (14) | |
Equipment expense | | 11 | | | 11 | | | 12 | | | — | | | — | | | (1) | | | (8) | |
Legal and professional fees | | 10 | | | 17 | | | 21 | | | (7) | | | (41) | | | (11) | | | (52) | |
Communications and delivery | | 10 | | | 9 | | | 9 | | | 1 | | | 11 | | | 1 | | | 11 | |
Other expense | | 44 | | | 66 | | | 52 | | | (22) | | | (33) | | | (8) | | | (15) | |
Total noninterest expense | | $ | 469 | | | $ | 488 | | | $ | 526 | | | $ | (19) | | | (4) | % | | $ | (57) | | | (11) | % |
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Third Quarter 2022 versus Second Quarter 2022
Noninterest expense of $469 million decreased $19 million, or 4%, compared with second quarter 2022. Other noninterest expense decreased $22 million, primarily from $12 million in derivative valuation adjustments on prior Visa Class-B share sales in second quarter 2022, as well as a decline in other losses. Results also reflect a $7 million decrease in legal and professional fees largely attributable to lower merger and integration related costs. Personnel expense increased $10 million largely reflecting higher deferred compensation expense.
Third Quarter 2022 versus Third Quarter 2021
Noninterest expense of $469 million decreased $57 million, or 11%, from third quarter 2021. Personnel
expense decreased $21 million largely attributable to lower incentive-based compensation and deferred compensation costs. Legal and professional fees decreased $11 million and contract employment and outsourcing expense decreased $9 million from third quarter 2021 largely attributable to lower merger and integration related costs.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Table I.2.7
NONINTEREST EXPENSE
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | |
(Dollars in millions) | | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Noninterest expense: | | | | | | | | |
Personnel expense | | $ | 820 | | | $ | 920 | | | $ | (100) | | | (11) | % |
Net occupancy expense | | 96 | | | 103 | | | (7) | | | (7) | |
Computer software | | 85 | | | 87 | | | (2) | | | (2) | |
Operations services | | 65 | | | 59 | | | 6 | | | 10 | |
Legal and professional fees | | 50 | | | 52 | | | (2) | | | (4) | |
Contract employment and outsourcing | | 43 | | | 47 | | | (4) | | | (9) | |
Amortization of intangible assets | | 39 | | | 42 | | | (3) | | | (7) | |
Equipment expense | | 34 | | | 35 | | | (1) | | | (3) | |
Advertising and public relations | | 34 | | | 23 | | | 11 | | | 48 | |
Communications and delivery | | 28 | | | 28 | | | — | | | — | |
| | | | | | | | |
Other expense | | 156 | | | 171 | | | (15) | | | (9) | |
Total noninterest expense | | $ | 1,450 | | | $ | 1,567 | | | $ | (117) | | | (7) | % |
For the nine months ended September 30, 2022, noninterest expense decreased $117 million, or 7%, largely attributable to a $100 million decrease in personnel expense reflecting lower revenue-based incentives and commissions and deferred compensation expense. Occupancy expense decreased $7 million largely reflecting lower merger and integration expenses as well as the benefit of IBKC merger cost savings.
Year-to-date results also reflect increases in advertising and public relations and operations services.
Total merger and integration expense was $99 million for the first nine months of 2022 compared to $148 million for the same period of 2021.
Income Taxes
FHN recorded income tax expense of $78 million in third quarter 2022 compared to $48 million in second quarter 2022 and $63 million in third quarter 2021. For the nine months ended September 30, 2022 and 2021, FHN recorded income tax expense of $183 million and $222 million, respectively.
The effective tax rate was approximately 22.6%, 21.3%, and 21.1% for the three months ended September 30, 2022, June 30, 2022 and September 30, 2021, respectively. The effective tax rate was approximately 22.2% and 22.1% for the nine months ended September 30, 2017.2022 and 2021, respectively.
FHN’s effective tax rate is favorably affected by recurring items such as bank-owned life insurance, tax-exempt income, and tax credits and other tax benefits from tax credit investments. The decline in provision for income taxes for botheffective rate is unfavorably affected by the threenon-deductibility of portions of: FDIC premium, executive compensation and nine months ended September 30, 2017 was due to favorablemerger expenses. FHN’s effective tax rate adjustments primarily associated with the reversal of a capital lossalso may be affected by items that may occur in any given period but are not consistent from period to period, such as changes in unrecognized tax benefits. The rate also may be affected by items resulting from business combinations.
A deferred tax asset or deferred tax liability is recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax consequence is calculated by applying current enacted statutory tax rates to these temporary differences in future years. As of September 30, 2022, FHN’s gross DTA and gross DTL were $675 million and $421 million, respectively, resulting in a net DTA of $254 million at September 30, 2022, compared with a net DTA of $52 million at December 31, 2021.
As of September 30, 2022, FHN had deferred tax asset balances related to federal and state income tax carryforwards of $61 million and $5 million, respectively, which will expire at various dates.
Based on current analysis, FHN believes that its ability to realize the DTA is more likely than not. FHN monitors its DTA and the need for a valuation allowance on a quarterly basis. A significant adverse change in 2017.FHN’s taxable earnings outlook could result in the need for a valuation allowance.
Total revenue was $322.2 million
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Business Segment Results
FHN's reportable segments include Regional Banking, Specialty Banking and $957.3 million, respectively,Corporate. See Note 12 - Business Segment Information 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 accrualsadditional disclosures 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.FHN's segments.
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.
Return on average common equity (“ROE”) and ROTCE were 10.79 percent and 12.17 percent, respectively, in third quarter 2017 compared to 10.80 percent and 11.90 percent, respectively in third quarter 2016. Return on average assets (“ROA”) improved to .99 percent in third quarter 2017 from .97 percent in third quarter 2016. For 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. Common equity tier 1, Tier 1, Total capital, and Leverage ratios were 10.04 percent, 11.20 percent, 12.18 percent, and 9.60 percent, respectively, in third quarter 2017 compared to 9.81 percent, 11.03 percent, 12.09 percent and 9.52 percent, respectively, in third quarter 2016. Average assets increased 5 percent and 7 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. Period-end and average Shareholders’ equity increased to $2.9 billion in third quarter 2017 from $2.7 billion in third quarter 2016.
BUSINESS LINE REVIEW
Regional Banking
The Regional Banking segment generated pre-tax income of $280 million for third quarter 2022, an increase of $51 million compared to second quarter 2022, driven by a $49 million increase in revenue and a $9 million decrease in provision for credit losses partially offset by a $7 million increase in noninterest expense. Net interest income of $517 million increased $52 million reflecting the benefit of higher interest rates and average loan balances, partially offset by higher funding costs.
Pre-tax income within the regional banking segment increased 12 percent to $114.7 million infor third quarter 2017 from $102.02022 decreased $37 million incompared to $317 million for third quarter 2016.2021. The increaseprovision for credit losses increased $95 million largely reflecting the impact of non-PPP loan growth, deterioration in pre-taxthe macroeconomic forecast and a preliminary estimate of potential losses related to Hurricane Ian. Net interest income was primarilyincreased $73 million from third quarter 2021 driven by higher revenue somewhat offset by an increase in expenses. For the nine months ended September 30, 2017, regional banking pre-tax income was $329.7earning asset yields. Noninterest expense increased $12 million compared to $237.6third quarter 2021.
Pre-tax income of $772 million for the nine months ended September 30, 2016.2022 decreased $202 million compared to the same period of 2021, largely from a $233 million increase in provision for credit losses. The increase in pre-tax income forprovision during 2022 was the nine months ended September 30, 2017 was driven by anresult of loan growth, deterioration in the macroeconomic forecast and a preliminary estimate of potential losses related to Hurricane Ian. Results also reflect a $105 million increase in revenue, coupled withlargely from higher net interest income, and a $74 million increase in noninterest expense, largely tied to higher personnel expense and fraud losses.
Specialty Banking
Pre-tax income in the Specialty Banking segment of $81 million for third quarter 2022 decreased $58 million compared to second quarter 2022, driven by a $36 million increase in provision for credit losses and a $35 million decline in revenue, offset by a $12 million decline in noninterest expense. Fixed income of $46 million decreased $5 million, reflecting the impact of higher long-term rates, macroeconomic uncertainty and market volatility. Mortgage banking and title income of $9 million decreased $25 million largely driven by a decline in expenses.
Total revenue increased 7 percent, or $18.1 million, to $273.7 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 loansmortgage sales volume and noninterest-bearing deposits,margin compression as well as the divestiture of the title services business. The decline in noninterest expense was largely reflective of lower deposit costs relativepersonnel expense of $12 million tied to third quarter 2016. Noninterest income was $64.4 million and $65.1 milliona decrease 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. Noninterestincentive-based compensation.
Pre-tax income in third quarter 2016 was favorably impacted by a $1.8the Specialty Banking segment decreased $109 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.2021
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
largely driven by the C&I portfolio,lower revenue and higher provision for credit losses, partially offset by reserve decreaseslower noninterest expense. The decline 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 expenserevenue was primarily driven by an $8.7 million net increase in loss accruals relatedattributable to legal matters as a resultlower fixed income and mortgage banking and title income.
Pre-tax income 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$344 million for the nine months ended September 30, 2017,2022 decreased $218 million from $726.8the same period of 2021 largely reflecting a $211 million decrease in noninterest income tied to lower fixed income and mortgage banking and title fees.
Corporate
Pre-tax loss for the Corporate segment was $15 million for third quarter 2022 compared to $144 million for second quarter 2022, largely reflecting a $71 million increase in net interest income and a $47 million increase in noninterest income. Merger and integration expenses were $24 million compared to $38 million in the prior quarter.
Pre-tax income in the Corporate segment increased $194 million compared to third quarter 2021. Net interest income increased $112 million from the impact of funds transfer pricing. Noninterest income increased $47 million compared to third quarter 2021, largely the result of the gain on the sale of the title services business, a loss on the retirement of legacy IBKC trust preferred securities in third quarter 2021 and higher securities gains in the current quarter. Noninterest expense decreased $35 million from the third quarter 2021, largely reflecting lower merger and integration expenses. Merger and integration expenses were $24 million compared to $46 million in third quarter 2021.
Pre-tax loss of $291 million for the nine months ended September 30, 2016, driven by an increase in NII. The increase in NII for2022 improved $242 million compared to the year-to-datesame period was also driven byof 2021. Net interest expense decreased $138 million reflecting the favorable impact of higher interest rates on loans, higher average balancesfunds transfer pricing. Noninterest income of commercial loans and noninterest-bearing deposits, and lower deposit costs relative$40 million increased $11 million compared to 2016. For the nine months ended September 30, 2017 and 2016, noninterestprior year. 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 fromresults reflect 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 callimpact of a $4.4$23 million held-to-maturity municipal bondloss on retirement of legacy IBKC trust preferred securities in secondthird quarter 2017. Gains2021, the $21 million gain on the sale of fixed assets decreased $2.0the title services business in third quarter 2022, and higher securities gains. These increases were partially offset by lower deferred compensation income of $36 million.
Noninterest expense of $190 million for the nine months ended September 30, 2017 and fees from derivative transactions2022 decreased $.9$99 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 $11.9 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 average daily revenue (“ADR”) declined to $715 thousand in third quarter 2017 from $922 thousand in third quarter 2016. This decline reflects lower activity due to challenging market conditions (interest rate increases, a flattening yield curve, and low levels of market volatility). Other product revenue was $10.8 million in third quarter 2017 down from $13.1 million in the prior year, primarily driven by lower fees from derivative and loan sales. Noninterest expense decreased 11 percent, or $6.3 million, to $53.1 million in third quarter 2017 from $59.4 million in third quarter 2016, 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.
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 million and $28.0 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.
Net interest expense was $14.0 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 million in third 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- and integration-related expenses primarily associated with the CBF and Coastal acquisitions.
Net interest expense was $43.1 million and $48.4 million, respectively for the nine months ended September 30, 2017 and 2016, respectively. The improvement 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 decrease 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 changes in deferred compensation expense which is included in personnel expense.
Noninterest expense was $65.4 million and $44.3 million for the nine months ended September 30, 2017 and 2016, respectively. The 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.
Non-Strategic
The non-strategic segment had pre-tax income of $9.4 million in third quarter 2017 compared to $7.1 million in third 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. The increase in results for the quarterly period 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 loss provision credit in 2017 relative to the prior year and a decline in revenues, somewhat offset by lower expenses.
Total revenue was $10.2 million in third quarter 2017 down from $16.7 million in third quarter 2016. NII declined 19 percent to $8.5 million in third quarter 2017, consistent with the run-off of the non-strategic loan portfolios. Noninterest income (including securities gains/losses) was $1.7 million in third 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 fees 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.
The provision for loan losses within the non-strategic segment was a provision credit of $14.9 million for the nine months ended September 30, 2017 compared to a provision credit of $23.2 million for the nine months ended September 30, 2016. The same factors impacting the quarterly change in loan loss provisioning levels also drove the change for the year-to-date period.
For the nine months ended September 30, 2017, noninterest expense was $4.6 million compared to $7.2 million for the nine months ended September 30, 2016. The net decrease in expense during 2017 relative to the prior year was driven by a decline in legal fees and by lower loss accruals related to legal matters which were $3.7 million in 2017 compared to $8.0 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 third quarter 2017 from $333.7 million in third quarter 2016, as an increase in NII was more than 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 million 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 third 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. Average earning assets were $26.6 billion and $25.3 billion in third quarter 2017 and 2016, respectively, and $26.6 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. 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 were somewhat offset by a decline in average fixed income trading securities.
For purposes of computing yields and the net interest margin, FHN adjusts net interest income to reflect tax exempt income on an equivalent pre-tax basis which provides comparability of net interest income arising from both taxable and tax-exempt sources. The consolidated net interest margin improved to 3.19 percent in third quarter 2017 from 2.96 percent in third quarter 2016. The net interest spread was 2.96 percent in third 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 14 basis points from 2.92 percent for the nine months ended September 30, 2016. The net interest spread increased to 2.86 percent for the nine months ended September 30, 2017 from 2.79 percent in 2016. The increase in NIM in both periods was primarily the result of the favorable impact of higher interest rates on loans. For the year-to-date period in 2017 NIM was negatively impacted by an increase in average excess cash held at the Fed.
Table 1—Net Interest Margin
|
| | | | | | | | | | | |
| Three Months Ended September 30 | | Nine Months Ended September 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
Assets: | | | | | | | |
Earning assets: | | | | | | | |
Loans, net of unearned income: | | | | | | | |
Commercial loans | 4.13 | % | | 3.63 | % | | 4.01 | % | | 3.60 | % |
Consumer loans | 4.23 |
| | 4.08 |
| | 4.19 |
| | 4.08 |
|
Total loans, net of unearned income | 4.16 |
| | 3.76 |
| | 4.06 |
| | 3.74 |
|
Loans held-for-sale | 4.53 |
| | 4.36 |
| | 4.47 |
| | 4.23 |
|
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 |
|
States and municipalities | — |
| | 9.01 |
| | 9.43 |
| | 7.55 |
|
Corporate bonds | 5.25 |
| | 5.25 |
| | 5.25 |
| | 5.25 |
|
Other | 3.67 |
| | 2.44 |
| | 3.32 |
| | 2.50 |
|
Total investment securities | 2.60 |
| | 2.36 |
| | 2.61 |
| | 2.42 |
|
Trading securities | 3.06 |
| | 2.46 |
| | 3.00 |
| | 2.65 |
|
Other earning assets: | | | | | | | |
Federal funds sold | 1.75 |
| | 0.99 |
| | 1.58 |
| | 1.12 |
|
Securities purchased under agreements to resell | 0.88 |
| | 0.08 |
| | 0.64 |
| | 0.11 |
|
Interest bearing cash | 1.24 |
| | 0.49 |
| | 0.92 |
| | 0.49 |
|
Total other earning assets | 1.03 |
| | 0.25 |
| | 0.82 |
| | 0.29 |
|
Interest income / total earning assets | 3.76 | % | | 3.30 | % | | 3.57 | % | | 3.27 | % |
Liabilities: | | | | | | | |
Interest-bearing liabilities: | | | | | | | |
Interest-bearing deposits: | | | | | | | |
Savings | 0.50 | % | | 0.23 | % | | 0.46 | % | | 0.22 | % |
Other interest-bearing deposits | 0.46 |
| | 0.19 |
| | 0.37 |
| | 0.18 |
|
Time deposits | 0.97 |
| | 0.86 |
| | 0.94 |
| | 0.83 |
|
Total interest-bearing deposits | 0.51 |
| | 0.26 |
| | 0.46 |
| | 0.25 |
|
Federal funds purchased | 1.24 |
| | 0.52 |
| | 0.98 |
| | 0.51 |
|
Securities sold under agreements to repurchase | 1.06 |
| | 0.09 |
| | 0.70 |
| | 0.09 |
|
Fixed income trading liabilities | 2.19 |
| | 1.76 |
| | 2.26 |
| | 1.91 |
|
Other short-term borrowings | 1.22 |
| | 0.61 |
| | 1.24 |
| | 0.70 |
|
Term borrowings | 3.51 |
| | 2.67 |
| | 3.24 |
| | 2.52 |
|
Interest expense / total interest-bearing liabilities | 0.80 |
| | 0.47 |
| | 0.71 |
| | 0.48 |
|
Net interest spread | 2.96 | % | | 2.83 | % | | 2.86 | % | | 2.79 | % |
Effect of interest-free sources used to fund earning assets | 0.23 |
| | 0.13 |
| | 0.20 |
| | 0.13 |
|
Net interest margin (a) | 3.19 | % | | 2.96 | % | | 3.06 | % | | 2.92 | % |
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 35 percent and, where applicable, state income taxes. |
FHN’s net interest margin is primarily impacted by balance sheet factors such as interest-bearing cash levels, deposit balances, trading inventory levels, and commercial loan volume, as well as loan fees, 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. For the remainder of 2017, NIM will depend on the levels of interest-bearing cash; extent of Fed interest rate increases; commercial loan
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 incurred losses in the loan portfolio. There was no provision for loan losses recognized for the three months ended September 30, 2017 compared to a provision expense of $4.0 million for the three months ended September 30, 2016. For the nine months ended September 30, 2017 and 2016, the provision for 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. 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 million in third quarter 2017 and represented 35 percent of total revenue compared to $148.5 million in third quarter 2016 and 45 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 decrease in noninterest income for both 2017 periods was largely driven by lower fixed income product revenue and a $14.3 million loss from the repurchase of equity securities previously included in a financing transaction.
Fixed Income Noninterest Income
Fixed income noninterest income was $55.8 million and $161.5 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. The decline in both periods reflects lower activity due to challenging market conditions (interest rate increases, a flattening yield curve, and low levels of market volatility). Revenue from other products decreased 16 percent to $10.7 million in third quarter 2017 from $12.7 million in third quarter 2016, largely driven by lower fees from 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 following table summarizes FHN’s fixed income noninterest income for2021 largely reflecting lower deferred compensation expense in the three and nine months ended September 30, 2017 and 2016.current year, as well as the impact of impairments on long-lived assets related to acquisition integration efforts in 2021.
Table 2—Fixed Income Noninterest Income
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Percent Change | | Nine Months Ended September 30 | | Percent Change |
(Dollars in thousands) | | 2017 | | 2016 | | | 2017 | | 2016 | |
Noninterest income: | | | | | | | | | | | | |
Fixed income | | $ | 45,020 |
| | $ | 59,003 |
| | (24 | )% | | $ | 133,302 |
| | $ | 185,865 |
| | (28 | )% |
Other product revenue | | 10,738 |
| | 12,745 |
| | (16 | )% | | 28,244 |
| | 30,773 |
| | (8 | )% |
Total fixed income noninterest income | | $ | 55,758 |
| | $ | 71,748 |
| | (22 | )% | | $ | 161,546 |
| | $ | 216,638 |
| | (25 | )% |
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 10 percent to $11.9 million in third quarter 2017 from $10.8 million in third 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. 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 year was primarily the result of volume incentives received in 2016 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 segment in second 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 on an exchange of approximately $294 million of AFS debt securities.
Other Noninterest Income
Other income includes revenues from ATM and interchange fees, other service charges, mortgage banking (primarily within the non-strategic and regional banking segments), electronic banking fees, letter of credit fees, revenue related to 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 million in third quarter 2016. For the nine months ended September 30, 2017 revenue from all other income and commissions was $29.1 million, down 39 percent from $47.4 million for the nine months ended September 30, 2016. The decrease in all other income and commissions in both periods was primarily due to a $14.3 million loss from the repurchase of equity securities previously included in 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 on the sales of property recognized in third quarter 2016 also contributed to the decline in other noninterest income for the three and nine months ended September 30, 2017 relative to the comparative periods of 2016. The following table provides detail regarding FHN’s other income.
Table 3—Other Income
|
| | | | | | | | | | | | | | | | | | | | | | |
| | 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 | )% |
NM – Not meaningful
| | | | | | | | |
(a) | Deferred compensation market value adjustments are mirrored by changes in deferred compensation expense which is included in employee compensation, incentives, and benefits expense.85 | 3Q22 FORM 10-Q REPORT |
(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 million in third quarter 2017 from $233.6 million in third quarter 2016. The increase in noninterest expense in third quarter 2017 was primarily driven by higher acquisition- and integration-related expenses primarily associated with the CBF and Coastal acquisitions and a net increase in loss accruals related to legal matters compared to third 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.
Employee Compensation, Incentives, and Benefits
Employee compensation, incentives, and benefits (personnel expense), the largest component of noninterest expense, decreased 5 percent and 3 percent for the three and nine months ended September 30, 2017 to $137.8 million and $411.8 million, respectively, from $145.1 million and $425.6 million for the three and nine months ended September 30, 2016. The decrease in personnel expense for both the quarterly and year-to-date periods was primarily driven by a decrease in variable compensation associated with lower fixed income product sales revenue within FHN’s fixed income operating segment relative to the comparative periods of 2016. For the quarterly period FHN recognized $1.5 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 increase in deferred compensation expense relative to 2016, which somewhat offset the decline in personnel expenses for the year-to-date period. Personnel expense for the nine months ended September 30, 2017 was favorably impacted by $2.2 million of deferred compensation BOLI gains recognized 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 fees associated with FHN’s online digital banking platform.
Professional Fees
Professional fees were $6.6 million in third quarter 2017 compared to $4.9 million in third quarter 2016. For the nine months ended September 30, 2017, professional fees increased to $21.0 million from $14.3 million for the nine months ended September 30, 2016. The increase in professional fees for both periods was primarily driven by acquisition- 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 other 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, travel and entertainment expenses, other insurance and tax expense, customer relations expenses, costs associated with employee training and dues, supplies, tax credit investments expenses, miscellaneous loan costs, expenses associated with OREO, and various other expenses.
All other expenses increased to $27.7 million in third quarter 2017 from $19.9 million in third quarter 2016, primarily driven by a $7.9 million net increase in loss accruals related to legal matters. Additionally, all other expenses in third 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 derivatives related to prior sales of Visa Class B shares, which also contributed to the expense decline during 2017. Additionally, 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.
Table 4—Other Expense
|
| | | | | | | | | | | | | | | | | | | | | | |
| | 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 | )% |
| | | | | | | | |
PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| | |
Analysis of Financial Condition
NM – Not meaningful
INCOME TAXES
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 recorded an income tax provision of $57.9 million and $82.8 million, respectively. The effective tax rate for thethree and nine months ended September 30, 2017 were approximately 16 percent and 20 percent compared to 30 percent and 31 percent for the three and nine months ended September 30, 2016. FHN’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’s effective tax rate also may be affected by items that may occur in any given period 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 amounts and the tax bases of existingTotal period-end 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, FHN’s gross DTA (net of a valuation allowance) and gross DTL were $282.3 million and $91.6 million, respectively, resulting in a net DTA of $190.7 million at September 30, 2017, compared with a net DTA of $157.2 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. As of September 30, 2017, FHN had gross deferred tax asset balances related to federal and state income tax carryforwards of $57.3 million and $14.1 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 millionwere $80.3 billion as of September 30, 2017 and 2016, respectively. Based on current analysis, FHN believes that its ability2022 compared to realize the remaining DTA is more likely than not. FHN monitors its DTA and the need for a valuation allowance on a quarterly basis. A significant adverse change in FHN’s taxable earnings outlook could result in the need for further valuation allowances. In the event FHN determines that the deferred tax assets are realizable in the future in excess of their net recorded amount, FHN makes an adjustment to the valuation allowance, which reduces the effective tax rate and provision for income taxes.
Tax reform, including the reduction of the corporate tax rate, is expected to be on 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, and to what extent, rate reductions or broader tax reform can actually be executed and, if executed, the timing.
STATEMENT OF CONDITION REVIEW
Total period-end assets were $29.6$89.1 billion on September 30, 2017, up 4 percent from $28.6 billion onat December 31, 2016. Average assets increased to $28.9 billion in third quarter 2017 from $28.6 billion in fourth quarter 2016. A net increase in the loan portfolios and higher balances of loans held-for-sale significantly contributed to the increase2021. The decrease in total assets onduring 2022 was driven by a period-end and average basis, but were somewhat$11.7 billion decrease in interest-bearing deposits with banks from lower customer deposits, 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$2.5 billion increase in Fixed income trading inventory on September 30, 2017 also contributed to theloans and leases and a $684 million increase in total assets on a period-end basis.investment securities.
Total period-end liabilities were $26.7 billion on September 30, 2017, a 3 percent increase from $25.9 billion on December 31, 2016. Average liabilities increased to $26.0 billion in third quarter 2017, from $25.9 billion in fourth quarter 2016. The net increase in period-end and average liabilities relative to fourth quarter 2016 was primarily due to increases in short-term borrowings. Deposits decreased relative to fourth quarter 2016 on both a period-end and average basis.
EARNING ASSETS
Earning assets consist of loans and leases, loans held for sale, investment securities, and other earning assets, such as trading securities and interest-bearing cash, and loans HFS. Average earning assets increased 1 percent to $26.6 billion in third quarter 2017 from $26.4 billion in fourth quarter 2016.deposits with banks. A more detailed discussion of the major line items follows.components of earning assets is provided in the following sections.
Loans and Leases
Period-end loans and leases of $57.4 billion increased 3 percent to $20.2$2.5 billion as of September 30, 2017 from $19.6 billion on2022 compared to December 31, 20162021. Year-to-date loan growth included a $1.5 billion increase in commercial loans and leases primarily from CRE growth and a $1.0 billion increase in consumer loans. Total loan growth was tempered by a $909 million decrease in PPP loans. Average loans and leases of $56.5 billion increased $1.0 billion from second quarter 2022 from a $510 million increase in consumer loans and a $457 million increase in commercial loans.
Compared to third quarter 2021, average loans and leases increased $1.0 billion, reflecting consumer loan growth of $730 million and commercial loan growth of $305 million. Average commercial loan growth was tempered by a $2.7 billion decrease in average PPP loans compared to third quarter 2021.
The following table provides detail regarding FHN's loans and leases as of September 30, 2016. Average loans for third quarter 2017 were $19.8 billion compared to $19.4 billion for fourth quarter 20162022 and $18.7 billion for third quarter 2016. The increase in period-end and average loan balances from fourth and third quarters 2016 was primarily due to organic growth in several of the commercial loan portfolios within the regional banking segment, somewhat offset by lower balances of loans to mortgage companies and the continued run-off of consumer loan portfolios within the non-strategic segment. The increase in average loan balances from third quarter 2016 was also impacted by the purchase of franchise finance loans in third quarter 2016.December 31, 2021.
Table 5—Average LoansI.2.8
LOANS & LEASES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2022 | | As of December 31, 2021 | | |
(Dollars in millions) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Commercial: | | | | | | | | | | |
Commercial, financial, and industrial (a) | | $ | 31,620 | | | 55 | % | | $ | 31,068 | | | 57 | % | | 2 | % |
Commercial real estate | | 13,021 | | | 23 | | | 12,109 | | | 22 | | | 8 | |
Total commercial | | 44,641 | | | 78 | | | 43,177 | | | 79 | | | 3 | |
Consumer: | | | | | | | | | | |
Consumer real estate | | 11,864 | | | 21 | | | 10,772 | | | 20 | | | 10 | |
Credit card and other | | 849 | | | 1 | | | 910 | | | 1 | | | (7) | |
Total consumer | | 12,713 | | | 22 | | | 11,682 | | | 21 | | | 9 | |
Total loans and leases | | $ | 57,354 | | | 100 | % | | $ | 54,859 | | | 100 | % | | 5 | % |
| | | | | | | | | | |
(a)Includes equipment financing loans and leases.
|
| | | | | | | | | | | | | | | | | |
| | 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 | % |
(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 85 percent55% of average commercialtotal loans in bothat the end of the third quarter 20172022 and fourth quarter 2016.57% at year-end 2021. C&I loans increased 4 percent, or $.5 billion,2% from fourth quarter 2016 due to net loanDecember 31, 2021, largely driven by Regional Banking growth within several of the regional bank’s portfolios including commercial, asset-based lending ("ABL"), and franchise
finance, somewhatpartially offset by lower balancesPPP loan run-off of loans to mortgage companies.$909 million. Commercial real estate loans increased 6 percent to $2.2 billion$912 million in third quarter 2017 because of2022 largely driven by growth in expansion markets andthe Specialty Banking segment.
Consumer loans of $12.7 billion increased funding under existing commitments.
Average consumer loans declined 3 percent, or $.2$1 billion from fourth quarter 2016 to $5.2 billion in third quarter 2017. The consumer real estate portfolio (home equity lines and installment loans) declined $147.1 million, to $4.4 billion, as the continued wind-down of portfolios within the non-strategic segment outpaced a $148.6 million increaseyear-end 2021, largely driven by growth in real estate installment loans, from new originationsprimarily within the regionalRegional Banking segment.
Loans Held for Sale
In 2020, FHN obtained IBKC's mortgage banking segment. operations which includes origination and servicing of residential first lien mortgages that conform to standards established by GSEs that are major investors in U.S. home mortgages but can also consist of junior lien and jumbo loans secured by residential property. These loans are primarily sold to private companies that are unaffiliated with the GSEs on a servicing-released basis. For further detail, see Note 5 - Mortgage Banking Activity.
The permanentlegacy FHN loans HFS portfolio consists of small business, other consumer loans, mortgage warehouse, USDA and home equity loans.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| | |
On September 30, 2022 and December 31, 2021, loans HFS were $680 million and $1.2 billion, respectively. Held-for-sale consumer mortgage loans secured by residential
real estate in process of foreclosure totaled $4 million at September 30, 2022 and $3 million at December 31, 2021.
Asset Quality
Loan and Lease Portfolio Composition
FHN groups its loans into portfolio declined $24.6segments 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 and leases are composed of C&I loans and leases and CRE loans. Consumer loans are composed of consumer real estate loans and credit card and other loans. FHN has a concentration of residential real estate loans (21% and 20% of total loans at September 30, 2022
and December 31, 2021, respectively). Industry concentrations are discussed under the C&I heading below.
Credit underwriting guidelines are outlined in Item 7 of FHN’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2021 in the Asset Quality Section within the Analysis of Financial Condition discussion. FHN’s credit underwriting guidelines and loan product offerings as of September 30, 2022 are generally consistent with those reported and disclosed in FHN’s Form 10-K, as amended, for the year ended December 31, 2021.
Commercial Loan and Lease Portfolios
C&I
The C&I portfolio totaled $31.6 billion as of September 30, 2022 and $31.1 billion as of December 31, 2021 and is comprised of loans and leases used for general business purposes. Products offered in the C&I portfolio include term loan financing of owner-occupied real estate and fixed assets, PPP loans, direct financing and sales-type leases, working capital lines of credit, and trade credit enhancement through letters of credit.
The increase in C&I loans from December 31, 2021 was driven by growth in the Regional Banking segment which exceeded a $909 million decrease in PPP loans. Excluding PPP loans, C&I loan growth was $1.5 billion. The largest
geographical concentrations of balances in the C&I portfolio as of September 30, 2022 were in Tennessee (21%), Florida (13%), Texas (11%), North Carolina (7%), Louisiana (7%), California (5%), and Georgia (5%). No other state represented more than 5% of the portfolio.
The following table provides the composition of the C&I portfolio by industry as of September 30, 2022, and December 31, 2021. 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.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| | |
Table I.2.9
C&I PORTFOLIO BY INDUSTRY
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
(Dollars in millions) | | Amount | | Percent | | Amount | | Percent |
Industry: | | | | | | | | |
Finance and insurance | | $ | 4,089 | | | 13 | % | | $ | 3,483 | | | 11 | % |
Real estate rental and leasing (a) | | 3,195 | | | 10 | | | 2,771 | | | 9 | |
Loans to mortgage companies | | 2,710 | | | 9 | | | 4,518 | | | 15 | |
| | | | | | | | |
Health care and social assistance | | 2,635 | | | 8 | | | 2,413 | | | 8 | |
| | | | | | | | |
Accommodation and food service | | 2,231 | | | 7 | | | 2,221 | | | 7 | |
| | | | | | | | |
Manufacturing | | 2,149 | | | 7 | | | 1,950 | | | 6 | |
Wholesale trade | | 2,073 | | | 7 | | | 1,845 | | | 6 | |
| | | | | | | | |
Retail trade | | 1,693 | | | 5 | | | 1,532 | | | 5 | |
Energy | | 1,351 | | | 4 | | | 1,325 | | | 4 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other (professional, construction, transportation, etc.) (b) | | 9,494 | | | 30 | | | 9,010 | | | 29 | |
Total C&I loan portfolio | | $ | 31,620 | | | 100 | % | | $ | 31,068 | | | 100 | % |
| | | | | | | | |
(a)Leasing, rental of real estate, equipment, and goods.
(b)Industries in this category each comprise less than 5% as of September 30, 2022.
Industry Concentrations
Loan concentrations exist when there are loans to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Loans to mortgage companies and borrowers in the finance and insurance industry were 22% and 26% of FHN’s C&I loan portfolio as of September 30, 2022 and December 31, 2021, respectively, and as a result could be affected by items that uniquely impact the financial services industry. As of September 30, 2022, FHN did not have any other concentrations of C&I loans in any single industry of 10% or more of total loans.
Loans to Mortgage Companies
Loans to mortgage companies were 9% of the C&I portfolio as of September 30, 2022 and 15% as of December 31, 2021. This portfolio generally fluctuates with mortgage rates and seasonal factors and 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, new loan originations to mortgage lenders increase when there is a decline in mortgage rates and decrease when rates rise; in the third quarter 2022, rates rose. In periods of economic uncertainty, this trend may not occur even if interest rates are declining. In third quarter 2022, 82% of the loan originations were home purchases and 18% were refinance transactions. On a year-to-date basis, home purchases were approximately 71% of total loan originations.
Finance and Insurance
The finance and insurance component represented 13% of the C&I portfolio as of September 30, 2022 and 11% as of December 31, 2021, 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, 2022, asset-based lending to consumer finance companies represented approximately $1.9 billion of the finance and insurance component.
Paycheck Protection Program
In 2020, Congress created the Paycheck Protection Program (PPP) in response to the economic disruption associated with the COVID-19 pandemic. Under the PPP, qualifying businesses could receive loans from private lenders, such as FHN, that are fully guaranteed by the Small Business Administration. These loans potentially are partly or fully forgivable, depending upon the borrower’s use of the funds and maintenance of employment levels. To the extent forgiven, the borrower is relieved from payment while the lender is still paid from the program.
The C&I portfolio as of September 30, 2022 includes 924 loans made under the PPP with an aggregate principal balance of $129 million, which are fully government guaranteed with the SBA. Due to the government guarantee and forgiveness provisions, PPP loans are considered to have no credit risk and do not affect the amount of provision and ALLL recorded. As a result, no ALLL is recorded for PPP loans as of September 30, 2022, and FHN has assigned a risk weight of zero to PPP loans for regulatory capital purposes.
For these loans, there are remaining net lender fees of less than $1 million to $405.3be paid to FHN as of September 30, 2022. During 2022, FHN continues to work with its clients that have applied for and received PPP loan forgiveness. Through September 30, 2022, over $5 billion of the original $6 billion in PPP loans originated by FHN and
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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IBERIABANK prior to acquisition have been forgiven by the SBA.
Commercial Real Estate
The CRE portfolio totaled $13.0 billion as of September 30, 2022 and $12.1 billion as of December 31, 2021. The CRE portfolio reflects financings for both commercial construction and nonconstruction loans. The largest geographical concentrations of CRE loan balances as of September 30, 2022 were in Florida (26%), Texas (12%),
North Carolina (11%), Georgia (10%), Louisiana (9%), and Tennessee (9%). No other state represented more than 5% of the portfolio. This portfolio 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. Subcategories of the CRE portfolio consist of multi-family (27%), office (22%), retail (18%), industrial (15%), hospitality (11%), land/land development (2%), and other (5%).
Consumer Loan Portfolios
Consumer Real Estate
The consumer real estate portfolio totaled $11.9 billion and $10.8 billion as of September 30, 2022 and December 31, 2021, respectively, and is primarily composed of home equity lines and installment loans. The largest geographical concentrations of balances as of September 30, 2022 were in Florida (30%), Tennessee (23%), Louisiana (9%), Texas (9%), North Carolina (7%), and New York (5%). No other state represented more than 5% of the portfolio.
As of September 30, 2022, approximately 88% of the consumer real estate portfolio was in a first lien position. At origination, the weighted average FICO score of this portfolio was 756 and the refreshed FICO scores averaged 754 as of September 30, 2022, no significant change from FICO scores of 755 and 754, respectively, as of December 31, 2021. Generally, performance of this portfolio is affected by life events that affect borrowers’ finances, the level of unemployment, and home prices.
As of September 30, 2022 and December 31, 2021, FHN had held-for-investment consumer mortgage loans secured by real estate that were in the process of foreclosure totaling $32 million and $20 million, respectively.
HELOCs comprised $2.0 billion of the consumer real estate portfolio as of both September 30, 2022 and December 31, 2021, respectively. 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 frozen if a borrower becomes past due on payments. Once the draw period has ended, 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, 2022, approximately 91% of FHN's HELOCs were in the draw period compared to 88% at December 31, 2021. It is expected that $499 million, or 28%, of HELOCs currently in the draw period will enter the repayment period during the next 60 months, based on current terms. Generally, delinquencies 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, over time, performance of these loans usually begins to stabilize. HELOCs nearing the end of the draw period are closely monitored.
The following table presents HELOCs currently in the draw period, broken down by months remaining in the draw period.
Table I.2.10
HELOC DRAW TO REPAYMENT SCHEDULE
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
(Dollars in millions) | | Repayment Amount | | Percent | | Repayment Amount | | Percent |
Months remaining in draw period: | | | | | | | | |
0-12 | | $ | 36 | | | 2 | % | | $ | 43 | | | 2 | % |
13-24 | | 41 | | | 2 | | | 42 | | | 2 | |
25-36 | | 100 | | | 6 | | | 50 | | | 3 | |
37-48 | | 125 | | | 7 | | | 136 | | | 8 | |
49-60 | | 197 | | | 11 | | | 160 | | | 9 | |
>60 | | 1,313 | | | 72 | | | 1,324 | | | 76 | |
Total | | $ | 1,812 | | | 100 | % | | $ | 1,755 | | | 100 | % |
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Credit Card and Other
The credit card and other portfolio, which is primarily within the Regional Banking segment, totaled $849 million as of September 30, 2022 and $910 million as of December 31, 2021. This portfolio primarily consists of
consumer-related credits, including home equity and other personal consumer loans, credit card receivables, and automobile loans. The $61 million decrease was driven by net repayments.
Allowance for Credit Losses
The ACL is maintained at a level sufficient to provide appropriate reserves to absorb estimated future credit losses in accordance with GAAP. For additional information regarding the ACL, see Note 4 of this Report and "Critical Accounting Policies and Estimates" and Note 5 in FHN's 2021 Form 10-K, as amended.
The ALLL decreased to $664 million as of September 30, 2022 from $670 million as of December 31, 2021. The ALLL balance as of September 30, 2022 reflects the impact of
loan growth, deterioration in the macroeconomic forecast and a preliminary estimate of potential losses related to Hurricane Ian. The ALLL to total loans and leases ratio decreased 6 basis points to 1.16%. The ACL to total loans and leases ratio decreased to 1.31% as of September 30, 2022 from 1.34% as of December 31, 2021.
Consolidated Net Charge-offs
Net charge-offs in third quarter 2022 were $12 million, or an annualized 8 basis points of total loans and leases, compared to net charge-offs of $3 million, or 2 basis points of total loans and leases, in third quarter 2021.
Net charge-offs in the commercial portfolio in third quarter 2022 were $12 million compared to $4 million in
third quarter 2021, primarily the result of lower gross recoveries compared to the prior year. Net charge-offs in the consumer portfolio were less than $1 million in third quarter 2017 driven by run-off2022 compared to net recoveries 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$1 million in third quarter 2017.2021.
Table I.2.11
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES AND CHARGE-OFFS
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(Dollars in millions) | | September 30, 2022 | | | | December 31, 2021 | | September 30, 2021 | |
Allowance for loan and lease losses | | | | | | | | | |
| C&I | | $ | 295 | | | | | $ | 334 | | | $ | 374 | | |
| CRE | | 148 | | | | | 154 | | | 162 | | |
| Consumer real estate | | 193 | | | | | 163 | | | 179 | | |
| Credit card and other | | 28 | | | | | 19 | | | 19 | | |
| Total allowance for loan and lease losses | | $ | 664 | | | | | $ | 670 | | | $ | 734 | | |
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Reserve for remaining unfunded commitments | | | | | | | | | |
| C&I | | $ | 58 | | | | | $ | 46 | | | $ | 49 | | |
| CRE | | 19 | | | | | 12 | | | 10 | | |
| Consumer real estate | | 11 | | | | | 8 | | | 9 | | |
| Credit card and other | | — | | | | | — | | | — | | |
| Total reserve for remaining unfunded commitments | | $ | 88 | | | | | $ | 66 | | | $ | 68 | | |
| | | | | | | | | | |
Allowance for credit losses | | | | | | | | | |
| C&I | | $ | 353 | | | | | $ | 380 | | | $ | 423 | | |
| CRE | | 167 | | | | | 166 | | | 172 | | |
| Consumer real estate | | 204 | | | | | 171 | | | 188 | | |
| Credit card and other | | 28 | | | | | 19 | | | 19 | | |
| Total allowance for credit losses | | $ | 752 | | | | | $ | 736 | | | $ | 802 | | |
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Period-end loans and leases | | | | | | | | | |
| C&I | | $ | 31,620 | | | | | $ | 31,068 | | | $ | 31,516 | | |
| CRE | | 13,021 | | | | | 12,109 | | | 12,194 | | |
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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| Consumer real estate | | 11,864 | | | | | 10,772 | | | 10,787 | | |
| Credit card and other | | 849 | | | | | 910 | | | 938 | | |
| Total period-end loans and leases | | $ | 57,354 | | | | | $ | 54,859 | | | $ | 55,435 | | |
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ALLL / loans and leases % | | | | | | | | | |
| C&I | | 0.93 | % | | | | 1.07 | % | | 1.19 | % | |
| CRE | | 1.14 | | | | | 1.27 | | | 1.33 | | |
| Consumer real estate | | 1.63 | | | | | 1.51 | | | 1.65 | | |
| Credit card and other | | 3.32 | | | | | 2.14 | | | 2.03 | | |
| Total ALLL / loans and leases % | | 1.16 | % | | | | 1.22 | % | | 1.32 | % | |
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ACL / loans and leases % | | | | | | | | | |
| C&I | | 1.11 | % | | | | 1.22 | % | | 1.34 | % | |
| CRE | | 1.28 | | | | | 1.37 | | | 1.41 | | |
| Consumer real estate | | 1.72 | | | | | 1.59 | | | 1.74 | |
| Credit card and other | | 3.32 | | | | | 2.09 | | | 2.04 | | |
| Total ACL / loans and leases % | | 1.31 | % | | | | 1.34 | % | | 1.45 | % | |
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Quarter-to-date net charge-offs (recoveries) | | | | | | | | | |
| C&I | | $ | 11 | | | | | $ | 1 | | | $ | 4 | | |
| CRE | | 1 | | | | | — | | | — | | |
| Consumer real estate | | (5) | | | | | (3) | | | (6) | | |
| Credit card and other | | 5 | | | | | 3 | | | 5 | | |
| Total net charge-offs (recoveries) | | $ | 12 | | | | | $ | 1 | | | $ | 3 | | |
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Average loans and leases | | | | | | | | | |
| C&I | | $ | 31,120 | | | | | $ | 30,780 | | | $ | 31,477 | | |
| CRE | | 12,926 | | | | | 12,221 | | | 12,264 | | |
| Consumer real estate | | 11,633 | | | | | 10,738 | | | 10,819 | | |
| Credit card and other | | 864 | | | | | 943 | | | 948 | | |
| Total average loans and leases | | $ | 56,543 | | | | | $ | 54,682 | | | $ | 55,508 | | |
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Charge-off % (annualized) | | | | | | | | | |
| C&I | | 0.14 | % | | | | 0.01 | % | | 0.06 | % | |
| CRE | | 0.01 | | | | | (0.01) | | | 0.01 | | |
| Consumer real estate | | (0.17) | | | | | (0.10) | | | (0.24) | | |
| Credit card and other | | 2.46 | | | | | 1.26 | | | 1.86 | | |
| Total charge-off % | | 0.08 | % | | | | 0.01 | % | | 0.02 | % | |
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ALLL / annualized net charge-offs | | | | | | | | | |
| C&I | | 676 | % | | | | 7,238 | % | | 2,169 | % | |
| CRE | | 6,931 | | | | | NM | | 11,982 | | |
| Consumer real estate | | NM | | | | NM | | NM | |
| Credit card and other | | 133 | | | | | 164 | | | 104 | | |
| Total ALLL / net charge-offs | | 1,428 | % | | | | 17,374 | % | | 6,855 | % | |
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NM - not meaningful
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Nonperforming Assets
Nonperforming loans are loans placed on nonaccrual if it becomes evident that full collection of principal and interest is at risk, if 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 for which FHN continues to receive payments, including residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy. NPAs consist of nonperforming loans and OREO (excluding OREO from government insured mortgages).
Total NPAs (including NPLs HFS) increased to $301 million as of September 30, 2022 from $285 million as of December 31, 2021, largely driven by higher nonaccrual loans in the consumer real estate portfolio. The nonperforming loans and leases ratio increased one basis point to 0.51% as of September 30, 2022.
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 the estimated loss has been recognized through a partial charge-off, typically an ALLL is not recorded.
Table I.2.12
NONACCRUAL/NONPERFORMING LOANS, FORECLOSED ASSETS, & OTHER DISCLOSURES
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(Dollars in millions) | | | | | | |
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Nonperforming loans and leases | | September 30, 2022 | | | | December 31, 2021 |
| C&I | | $ | 116 | | | | | $ | 125 | |
| CRE | | 10 | | | | | 9 | |
| Consumer real estate | | 163 | | | | | 138 | |
| Credit card and other | | 3 | | | | | 3 | |
| Total nonperforming loans and leases (a) | | $ | 292 | | | | | $ | 275 | |
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Nonperforming loans held for sale (a) | | $ | 6 | | | | | $ | 7 | |
Foreclosed real estate and other assets (b) | | 3 | | | | | 3 | |
| Total nonperforming assets (a) (b) | | $ | 301 | | | | | $ | 285 | |
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Nonperforming loans and leases to total loans and leases | | | | | | |
| C&I | | 0.37 | % | | | | 0.40 | % |
| CRE | | 0.08 | | | | | 0.08 | |
| Consumer real estate | | 1.37 | | | | | 1.29 | |
| Credit card and other | | 0.31 | | | | | 0.31 | |
| Total NPL % | | 0.51 | % | | | | 0.50 | % |
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ALLL / NPLs | | | | | | |
| C&I | | 253 | % | | | | 268 | % |
| CRE | | 1,422 | | | | | 1,671 | |
| Consumer real estate | | 119 | | | | | 118 | |
| Credit card and other | | 1,070 | | | | | 699 | |
| Total ALLL / NPLs | | 228 | % | | | | 244 | % |
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(a)Excludes loans and leases that are 90 or more days past due and still accruing interest.
(b)Balances do not include government-insured foreclosed real estate. Foreclosed real estate from GNMA loans totaled $1 million as of both September 30, 2022 and December 31, 2021.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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The following table provides nonperforming assets by business segment:
Table I.2.13
NONPERFORMING ASSETS BY SEGMENT
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(Dollars in millions) | | | | | | |
Nonperforming loans and leases (a) (b) | | September 30, 2022 | | | | December 31, 2021 |
| Regional Banking | | $ | 204 | | | | | $ | 163 | |
| Specialty Banking | | 56 | | | | | 78 | |
| Corporate | | 32 | | | | | 34 | |
| Consolidated | | $ | 292 | | | | | $ | 275 | |
Foreclosed real estate (c) | | | | | | |
| Regional Banking | | $ | — | | | | | $ | 2 | |
| Specialty Banking | | 2 | | | | | — | |
| Corporate | | 1 | | | | | 1 | |
| Consolidated | | $ | 3 | | | | | $ | 3 | |
Nonperforming Assets (a) (b) (c) | | | | | | |
| Regional Banking | | $ | 204 | | | | | $ | 165 | |
| Specialty Banking | | 58 | | | | | 78 | |
| Corporate | | 33 | | | | | 35 | |
| Consolidated | | $ | 295 | | | | | $ | 278 | |
Nonperforming loans and leases to loans and leases | | | | | | |
| Regional Banking | | 0.50 | % | | | | 0.43 | % |
| Specialty Banking | | 0.34 | | | | | 0.48 | |
| Corporate | | 6.19 | | | | | 5.39 | |
| Consolidated | | 0.51 | % | | | | 0.50 | % |
NPA % (d) | | | | | | |
| Regional Banking | | 0.50 | % | | | | 0.44 | % |
| Specialty Banking | | 0.36 | | | | | 0.48 | |
| Corporate | | 6.48 | | | | | 5.51 | |
| Consolidated | | 0.51 | % | | | | 0.51 | % |
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(a)Excludes loans and leases that are 90 or more days past due and still accruing interest.
(b)Excludes loans classified as held for sale.
(c)Excludes foreclosed real estate and receivables related to government insured mortgages of $1 million as of both September 30, 2022 and December 31, 2021.
(d)Ratio is non-performing assets to total loans and leases plus foreclosed real estate.
Past Due Loans and Potential Problem Assets
Past due loans are loans contractually past due as to interest or principal payments, but which have not yet been put on nonaccrual status.
In addition to PPP loans, other customer support initiatives in response to the COVID-19 pandemic include incremental lending assistance for borrowers through delayed payment programs and fee waivers. Customer deferrals were not material at September 30, 2022 and December 31, 2021. To the extent that loans were past due as of September 30, 2022 or December 31, 2021 and had been granted a deferral, they were excluded from
loans past due 30 to 89 days and loans past due 90 days or more in the table and discussion below.
Loans 90 days or more past due and still accruing were $24 million as of September 30, 2022 compared to $40 million as of December 31, 2021. Loans 30 to 89 days past due were $108 million as of both September 30, 2022 and December 31, 2021. C&I loans past due 30 to 89 days increased $12 million while past due CRE loans decreased $8 million and past due consumer real estate loans decreased $6 million.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Table I.2.14
ACCRUING DELINQUENCIES & OTHER CREDIT DISCLOSURES
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(Dollars in millions) | | | | | | |
Accruing loans and leases 30+ days past due | September 30, 2022 | | | | December 31, 2021 | |
| C&I | $ | 66 | | | | | $ | 58 | | |
| CRE | 5 | | | | | 13 | | |
| Consumer real estate | 48 | | | | | 70 | | |
| Credit card and other | 12 | | | | | 7 | | |
| Total accruing loans and leases 30+ days past due | $ | 131 | | | | | $ | 148 | | |
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Accruing loans and leases 30+ days past due % | | | | | | |
| C&I | 0.21 | % | | | | 0.19 | % | |
| CRE | 0.04 | | | | | 0.11 | | |
| Consumer real estate | 0.40 | | | | | 0.65 | | |
| Credit card and other | 1.43 | | | | | 0.76 | | |
| Total accruing loans and leases 30+ days past due % | 0.23 | % | | | | 0.27 | % | |
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Accruing loans and leases 90+ days past due (a) (b) (c): | | | | | | |
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| C&I | $ | 1 | | | | | $ | 5 | | |
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| Consumer real Estate | 17 | | | | | 33 | | |
| Credit card and other | 6 | | | | | 2 | | |
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| Total accruing loans and leases 90+ days past due | $ | 24 | | | | | $ | 40 | | |
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Loans held for sale | | | | | | |
30 to 89 days past due | $ | 4 | | | | | $ | 7 | | |
30 to 89 days past due - guaranteed portion (d) | 2 | | | | | 2 | | |
90+ days past due | 14 | | | | | 24 | | |
90+ days past due - guaranteed portion (d) | 6 | | | | | 12 | | |
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(a)Excludes loans classified as held for sale.
(b)Amounts are not included in nonperforming/nonaccrual loans.
(c)Amounts are also included in accruing loans and leases 30+ days past due.
(d)Guaranteed loans include FHA, VA, and GNMA loans repurchased through the GNMA buyout program.
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 Federal
banking regulators for loans classified as substandard. Potential problem assets in the loan portfolio were $540 million on September 30, 2022 and $597 million on December 31, 2021. The current expectation of losses from potential problem assets has been included in management’s analysis for assessing the adequacy of the allowance for loan and lease losses.
Troubled Debt Restructurings 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 TDR.
For loan modifications that met the TDR relief provisions outlined in either the CARES Act, as extended by the CAA, or revised Interagency Guidance, FHN has excluded these
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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modifications from consideration as a TDR and has excluded loans with these qualifying modifications from designation as a TDR in the information and discussion that follows. See Note 3 – Loans and Leases for further discussion regarding TDRs and loan modifications.
On September 30, 2022 and December 31, 2021, FHN had $204 million and $206 million portfolio loans classified as held-for-investment TDRs, respectively. For these TDRs, including specific reserves, FHN had an allowance for loan
and lease losses of $13 million, or 7% of TDR balances as of September 30, 2022, and $12 million, or 6% of TDR balances, as of December 31, 2021. Additionally, FHN had $31 million and $35 million of HFS loans classified as TDRs as of September 30, 2022 and December 31, 2021, respectively.
The following table provides a summary of TDRs for the periods ended September 30, 2022 and December 31, 2021:
Table I.2.15
TROUBLED DEBT RESTRUCTURINGS
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(Dollars in millions) | | September 30, 2022 | | | | December 31, 2021 |
Held for investment: | | | | | | |
Commercial loans: | | | | | | |
Current | | $ | 15 | | | | | $ | 53 | |
Delinquent | | — | | | | | — | |
Non-accrual | | 40 | | | | | 35 | |
Total commercial loans | | $ | 55 | | | | | $ | 88 | |
Consumer real estate: | | | | | | |
Current | | $ | 76 | | | | | $ | 60 | |
Delinquent | | 9 | | | | | 4 | |
Non-accrual (a) | | 64 | | | | | 53 | |
Total consumer real estate | | $ | 149 | | | | | $ | 117 | |
Credit card and other: | | | | | | |
Current | | $ | — | | | | | $ | 1 | |
Delinquent | | — | | | | | — | |
Non-accrual | | — | | | | | — | |
Total credit card and other | | — | | | | | 1 | |
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Total held for investment | | $ | 204 | | | | | $ | 206 | |
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Held for sale: | | | | | | |
Current | | $ | 24 | | | | | $ | 27 | |
Delinquent | | 6 | | | | | 7 | |
Non-accrual | | 1 | | | | | 1 | |
Total held for sale | | 31 | | | | | 35 | |
Total troubled debt restructurings | | $ | 235 | | | | | $ | 241 | |
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(a) Balances as of September 30, 2022 and December 31, 2021 include $11 million and $12 million, respectively, of discharged bankruptcies.
Investment Securities
FHN’s investment securities portfolio consists principally of debt securities includingavailable for sale. FHN maintains a highly-rated securities portfolio consisting primarily of 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 theThe securities portfolio asprovides a source of income and liquidity and collateral for repurchase agreements, for public funds,is an important tool used to balance the interest rate risk of the loan and as a tool for managing riskdeposit portfolios. The securities portfolio is periodically evaluated in light of established ALM
objectives, changing market conditions that could affect the profitability of the portfolio, the regulatory environment, and the level of interest rate movements. risk to which FHN is exposed. These evaluations may result in steps taken to adjust the overall balance sheet positioning.
Investment securities were $4.0were $10.1 billion and $9.4 billion on September 30, 20172022 and December 31, 2021, respectively, representing approximately 13% and 11% of total assets, respectively. See Note 2 - Investment
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Securities for more information about the securities portfolio.
Deposits
Total deposits of $66.0 billion as of September 30, 2022 decreased $8.9 billion from December 31, 2021 reflecting a continued downward trend from mid-2021 highs driven by excess liquidity associated with the COVID-19 pandemic. Interest-bearing deposits decreased $6.8 billion and noninterest-bearing deposits decreased $2.1 billion.
See Tables I.2.2 and I.2.3 - Average Balances, Net Interest Income and Yields/Rates in this Report for information on average deposits including average rates paid. The following table summarizes the major components of deposits as of September 30, 2022 and December 31, 2016 and averaged $4.0 billion in third quarter 2017 and fourth quarter 2016, representing 15 percent of average earning assets in both periods.2021.
Loans Held-for-Sale
Loans HFS consists of small business, the mortgage warehouse (primarily repurchased government-guaranteed loans), USDA, student, and home equity loans. On September 30, 2017 loans HFS were $339.8 million compared to $111.2 million on December 31, 2016. The average balance of loans HFS increased to $540.1 million in third quarter 2017 from $127.5 million in fourth quarter 2016. The increase in period-end and average loans HFS was driven by the Coastal acquisition, which resulted in an increase in small business loans and the addition of USDA loans.
Other Earning Assets
Other earning assets include trading securities, securities purchased under agreements to resell, federal funds sold (“FFS”), and interest-bearing deposits with the Fed and other financial institutions. Other earning assets averaged $2.2 billion in third quarter 2017, down from $2.8 billion in fourth quarter 2016. The decrease in other earning assets was primarily driven by lower levels of interest bearing cash as a result of loan growth and the Coastal acquisition. Additionally, fixed income trading securities and securities purchased under agreements to resell ("asset repos") decreased from fourth quarter 2016. 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 billion on September 30, 2017, a 7 percent increase from $2.6 billion on December 31, 2016. The increase in other earning assets on a period-end basis were driven by an increase in fixed income trading securities, offset by a decline in interest-bearing cash.
Non-earning assets
Period-end non-earning assets increased $55.0 million to $2.3 billion on September 30, 2017. The increase in non-earning assets was primarily due to increases in Fixed income receivables, goodwill and intangible assets associated with the Coastal acquisition, as well as the addition of LIHTC investments in third quarter 2017, but was somewhat offset by a decline in derivative assets and lower cash balances.
Deposits
Average deposits were $22.1 billion during third quarter 2017, down 1 percent from $22.3 billion during fourth quarter 2016 and up 5 percent from $21.1 billion in third quarter 2016. The decrease in average deposits from fourth quarter 2016 was primarily driven by FHN's decision to decrease market-indexed deposit balances and use alternate sources of wholesale funding to support loan growth; however, this decline was somewhat offset by increases in consumer interest (largely priority and other consumer savings), non-interest bearing deposits and commercial customer deposits. The increase in average deposits from third quarter 2016 was largely due to increases in consumer interest, non-interest bearing deposits and commercial customer deposits, somewhat offset by a decrease in market-indexed deposits. Period-end deposits were $22.1 billion on September 30, 2017, down 3 percent from $22.7 billion on December 31, 2016, and up 2 percent from $21.6 billion on September 30, 2016.
FHN experienced deposit growth within consumer interest, commercial interest and non-interest bearing deposits from September 30, 2016 and December 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 resulting in the net decrease in total deposits from December 31, 2016 on a period-end basis.
Table 6—Average DepositsI.2.16
DEPOSITS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 | | | | |
(Dollars in millions) | | Amount | | Percent of total | | Amount | | Percent of total | | Change | | Percent |
Savings | | $ | 22,800 | | | 35 | % | | $ | 26,457 | | | 35 | % | | $ | (3,657) | | | (14) | % |
Time deposits | | 2,671 | | | 4 | | | 3,500 | | | 5 | | | (829) | | | (24) | |
Other interest-bearing deposits | | 14,731 | | | 22 | | | 17,055 | | | 23 | | | (2,324) | | | (14) | |
| | | | | | | | | | | | |
Total interest-bearing deposits | | 40,202 | | | 61 | | | 47,012 | | | 63 | | | (6,810) | | | (14) | |
Noninterest-bearing deposits | | 25,813 | | | 39 | | | 27,883 | | | 37 | | | (2,070) | | | (7) | |
Total deposits | | $ | 66,015 | | | 100 | % | | $ | 74,895 | | | 100 | % | | $ | (8,880) | | | (12) | % |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2017 | | Quarter Ended December 31, 2016 | | |
(Dollars in thousands) | | 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 | % |
Market-indexed (a) | | 3,523,450 |
| | 16 |
| | 4,787,912 |
| | 21 |
| | (26 | )% |
Total interest-bearing deposits | | 15,643,869 |
| | 71 |
| | 16,249,399 |
| | 73 |
| | (4 | )% |
Noninterest-bearing deposits | | 6,411,160 |
| | 29 |
| | 6,039,025 |
| | 27 |
| | 6 | % |
Total deposits | | $ | 22,055,029 |
| | 100 | % | | $ | 22,288,424 |
| | 100 | % | | (1 | )% |
(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 (federalinclude federal funds purchased, (“FFP”), securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings) averaged $2.3borrowings. Total short-term borrowings were $1.8 billion in third quarter 2017, up 22 percent from $1.9and $2.6 billion in fourth quarter 2016. The increase in short-term borrowings between third quarter 2017as of September 30, 2022 and fourth quarter 2016 was primarily due to increases in other short-term borrowings and securities sold under agreements to repurchase, partially offset by lower levels of FFP and trading liabilities. Other short-termDecember 31, 2021, respectively.
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
Trading liabilities fluctuate based on various factors, including levels of trading securities sold under agreements to repurchase increased in third quarter 2017, primarily due to the Coastal acquisition. Average FFPand hedging strategies. Federal funds purchased fluctuates depending on the amount of excess funding of FHN’s correspondent bank customers and average trading liabilities fluctuatescustomers. Balances of securities sold under agreements to repurchase fluctuate based on expectations of customer demand. Period-end short-term borrowings increasedcost attractiveness relative to $3.0 billion on September 30, 2017 from $1.5 billion on December 31, 2016. The increase in short-term borrowings on a period-end basis was driven by an increase in other short-term borrowings (primarily FHLB advances) which management uses as an additional source of wholesale fundingborrowing levels and the ability to support loan growth.pledge securities toward such transactions.
Table 7—Average Short-Term Borrowings
|
| | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2017 | | Quarter Ended December 31, 2016 | | |
(Dollars in thousands) | | 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 | % |
Trading liabilities | | 597,269 |
| | 26 |
| | 745,011 |
| | 39 |
| | (20 | )% |
Other short-term borrowings | | 655,599 |
| | 28 |
| | 243,527 |
| | 13 |
| | NM |
|
Total short-term borrowings | | $ | 2,309,384 |
| | 100 | % | | $ | 1,895,641 |
| | 100 | % | | 22 | % |
NM - Not meaningful | | | | | | | | | | |
Term Borrowings
Term borrowings include senior and subordinated borrowings with original maturities greater than one year. TermTotal term borrowings were $1.1$1.6 billion and $1.0 billion onas of September 30, 20172022 and December 31, 2016, respectively. Average term borrowings2021.
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.Period-end other liabilities were $.6 billion on September 30, 2017 and December 31, 2016.
| | | | | | | | |
PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| | |
CAPITALCapital
Management’s objectives are to provide capital sufficient to cover the risks inherent in FHN’s businesses, to maintain excess capital to well-capitalizedwell-capitalized standards, and to assure ready accessaccess to the capitalcapital markets. Period-endTotal equity increased to $ 2.9was $8.3 billion onat September 30, 2017 from $2.72022 and $8.5 billion onat December 31, 2016 primarily due to2021. Significant changes included net income recognized since fourth quarter 2016, partiallyof $642 million and the issuance of $494 million in Series G preferred stock, which were offset by $271
million in common and preferred dividends paid. Average equity increased $119.9 million to $2.9 billion 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 byand a decrease attributable to average accumulated other comprehensive income. The decline attributable to average accumulated other comprehensive income was largely the resultin AOCI of unrealized losses recognized on the AFS securities portfolio, as well as an increase of net actuarial losses for pension and post retirement plans.$1.1 billion.
The following tables provide a reconciliation of Shareholders’shareholders’ equity from the Consolidated Condensed Statements of ConditionBalance Sheets to Common Equity Tier 1, Tier 1 and Total Regulatory Capital as well as certain selected capital ratios:
Table 8—Regulatory Capital and RatiosI.2.17
REGULATORY CAPITAL DATA
| | | | | | | | | | | | | | |
(Dollars in millions) | | September 30, 2022 | | December 31, 2021 |
Shareholders’ equity | | $ | 7,988 | | | $ | 8,199 | |
Modified CECL transitional amount (a) | | 85 | | | 114 | |
FHN non-cumulative perpetual preferred stock | | (1,014) | | | (520) | |
Common equity tier 1 before regulatory adjustments | | $ | 7,059 | | | $ | 7,793 | |
Regulatory adjustments: | | | | |
Disallowed goodwill and other intangibles | | (1,669) | | | (1,711) | |
Net unrealized (gains) losses on securities available for sale | | 1,039 | | | 36 | |
Net unrealized (gains) losses on pension and other postretirement plans | | 249 | | | 255 | |
Net unrealized (gains) losses on cash flow hedges | | 139 | | | (3) | |
Disallowed deferred tax assets | | — | | | (2) | |
Other deductions from common equity tier 1 | | (1) | | | (1) | |
Common equity tier 1 | | $ | 6,816 | | | $ | 6,367 | |
FHN non-cumulative perpetual preferred stock (b) | | 920 | | | 426 | |
Qualifying noncontrolling interest— First Horizon Bank preferred stock | | 295 | | | 295 | |
| | | | |
Tier 1 capital | | $ | 8,031 | | | $ | 7,088 | |
Tier 2 capital | | 956 | | | 830 | |
Total regulatory capital | | $ | 8,987 | | | $ | 7,918 | |
Risk-Weighted Assets | | | | |
First Horizon Corporation | | $ | 68,580 | | | $ | 64,183 | |
First Horizon Bank | | 68,065 | | | 63,601 | |
Average Assets for Leverage | | | | |
First Horizon Corporation | | 82,059 | | | 87,683 | |
First Horizon Bank | | 81,368 | | | 86,953 | |
|
| | | | | | | | |
(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 |
|
| | | | | | | | |
PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| | |
Table I.2.18
REGULATORY RATIOS & AMOUNTS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| | Ratio | | Amount | | Ratio | | Amount |
Common Equity Tier 1 | | | | | | | | |
First Horizon Corporation | | 9.94 | % | | $ | 6,816 | | | 9.92 | % | | $ | 6,367 | |
First Horizon Bank | | 10.55 | | | 7,182 | | | 10.75 | | | 6,838 | |
Tier 1 | | | | | | | | |
First Horizon Corporation | | 11.71 | | | 8,031 | | | 11.04 | | | 7,088 | |
First Horizon Bank | | 10.98 | | | 7,477 | | | 11.22 | | | 7,133 | |
Total | | | | | | | | |
First Horizon Corporation | | 13.10 | | | 8,987 | | | 12.34 | | | 7,918 | |
First Horizon Bank | | 12.18 | | | 8,289 | | | 12.41 | | | 7,893 | |
Tier 1 Leverage | | | | | | | | |
First Horizon Corporation | | 9.79 | | | 8,031 | | | 8.08 | | | 7,088 | |
First Horizon Bank | | 9.19 | | | 7,477 | | | 8.20 | | | 7,133 | |
Other Capital Ratios | | | | | | | | |
Total period-end equity to period-end assets | | 10.32 | | | | | 9.53 | | | |
Tangible common equity to tangible assets (c) | | 6.64 | | | | | 6.73 | | | |
Adjusted tangible common equity to risk-weighted assets (c) | | 9.12 | | | | | 9.20 | | | |
(a)The modified CECL transitional amount includes the impact to retained earnings from the initial adoption of CECL plus 25% of the change in the adjusted allowance for credit losses since FHN’s initial adoption of CECL through December 31, 2021. For September 30, 2022, 25% of the full amount at December 31, 2021 is phased out and not included in Common Equity Tier 1 capital.
(b)The $94 million carrying value of the Series D preferred stock does not qualify as Tier 1 capital because the earliest redemption date is less than five years from the issuance date, which was re-set to July 1, 2020 when the IBKC merger closed.
(c)Tangible common equity to tangible assets and adjusted tangible common equity to risk-weighted assets are non-GAAP measures and are reconciled to total equity to total assets (GAAP) in the Non-GAAP to GAAP Reconciliation - Table I.2.26.
|
| | | | | | | | | | | | | | |
| | 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,6.50%, 8.00%, 10.00%, and 5 percent, respectively. 5.00%, respectively. Furthermore, a capital conservation buffer of 50 basis points above these levels 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, 2017,2022, each of FHN and FTBNAFirst Horizon Bank had sufficientsufficient capital to qualify as well-capitalized institutions and to meet the capital conservation buffer
requirement. Capital ratios for both FHN and First Horizon Bank are calculated under the final rule issued by the banking regulators in 2020 to delay the effects of CECL on regulatory capital for two years, followed by a well-capitalized institution. three-year transition period.
For FHN, the Tier 1 and Total risk-based regulatory capital ratios remained consistentincreased in the third quarter of 20172022 relative to fourth quarter 2016 asyear-end 2021 primarily from the capital generated fromimpact of net income less dividends offsetduring the impactfirst nine months of increased disallowed intangible assets related to2022. FHN's Tier 1 Capital and Tier 1 Leverage ratios as of September 30, 2022 further benefited from the Coastal acquisition, the continued phased-in implementationissuance of the Basel III regulations,its Series G preferred stock in February 2022. FHN and First Horizon Bank's risk-based regulatory capital ratios were negatively impacted in 2022 from an increase in risk-weighted assets primarily as a result of increased period end loans. Over the same period, the regulatory capital ratios for FTBNA declined 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,from December 31, 2021.
During 2022, capital ratios are expected to remain above well-capitalized standards.standards plus the required capital conservation buffer.
Common Stock Purchase ProgramsFinance and Insurance
Pursuant to board authority, FHN may repurchase shares of its common stock from time to timeThe finance and will evaluate the level of capital and take action designed to generate or use capital, as appropriate, for the interestsinsurance component represented 13% of the shareholders, subjectC&I portfolio as of September 30, 2022 and 11% as of December 31, 2021, and includes TRUPs (i.e., long-term
unsecured loans to legalbank 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. On January 22, 2014, FHN announced a $100 million share purchase authority with an expiration date of January 31, 2016. On July 21, 2015, FHN announced a $100 million increase in that authority along with an extension of the expiration dateinsurance-related businesses), loans to January 31, 2017,bank holding companies, and on April 26, 2016, FHN announced a $150 million increase and further extensionasset-based lending to January 31, 2018. The program currently authorizes total purchases of up to $350 million and expires on January 31, 2018.consumer finance companies. As of September 30, 2017, $160.3 million2022, asset-based lending to consumer finance companies represented approximately $1.9 billion of the finance and insurance component.
Paycheck Protection Program
In 2020, Congress created the Paycheck Protection Program (PPP) in purchases had beenresponse to the economic disruption associated with the COVID-19 pandemic. Under the PPP, qualifying businesses could receive loans from private lenders, such as FHN, that are fully guaranteed by the Small Business Administration. These loans potentially are partly or fully forgivable, depending upon the borrower’s use of the funds and maintenance of employment levels. To the extent forgiven, the borrower is relieved from payment while the lender is still paid from the program.
The C&I portfolio as of September 30, 2022 includes 924 loans made under this authority atthe PPP with an average price per shareaggregate principal balance of $12.86, $12.84 excluding commissions. Purchases may$129 million, which are fully government guaranteed with the SBA. Due to the government guarantee and forgiveness provisions, PPP loans are considered to have no credit risk and do not affect the amount of provision and ALLL recorded. As a result, no ALLL is recorded for PPP loans as of September 30, 2022, and FHN has assigned a risk weight of zero to PPP loans for regulatory capital purposes.
For these loans, there are remaining net lender fees of less than $1 million to be made in the open market or through privately negotiated transactionspaid to FHN as of September 30, 2022. During 2022, FHN continues to work with its clients that have applied for 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 shares under the program. In third quarter 2016 FHN repurchased $7.1 million of common shares under the program. FHN does not anticipate repurchasing any shares under this authorization through the closingreceived PPP loan forgiveness. Through September 30, 2022, over $5 billion of the CBF Bank acquisition.
The following tables provide information related to securities repurchasedoriginal $6 billion in PPP loans originated by FHN during third quarter 2017:and
Table 9a—Issuer Purchases of Common Stock
General Repurchase Authority:
|
| | | | | | | | | | | | |
(Dollar values and volume in thousands, except per share data) | 88 | Total number
of shares
purchased3Q22 FORM 10-Q REPORT |
| | 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 | | | | | | | | PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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 | | — |
| | |
N/A—Not applicableIBERIABANK prior to acquisition have been forgiven by the SBA.
Compensation Plan Program. A consolidated compensation plan share purchase program was announced on August 6, 2004. This program consolidated into a single share purchase program all
Commercial Real Estate
The CRE portfolio totaled $13.0 billion as of September 30, 2022 and $12.1 billion as of December 31, 2021. The CRE portfolio reflects financings for both commercial construction and nonconstruction loans. The largest geographical concentrations of CRE loan balances as of September 30, 2022 were in Florida (26%), Texas (12%),
North Carolina (11%), Georgia (10%), Louisiana (9%), and Tennessee (9%). No other state represented more than 5% of the previously authorized compensation plan share programs as well as the renewalportfolio. This portfolio contains loans, draws on lines, and letters of the authorizationcredit 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 open market or through privately negotiated transactions and are subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions. Management currently does not anticipate purchasing a material number of shares under this authority during the fourth quarter 2017 or through 2018.
Table 9b—Issuer Purchase of Common Stock
Compensation Plan-Related Repurchase 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
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”developers for the construction and mini-permanent financing of income-producing real estate. Subcategories of the CRE portfolio consist of multi-family (27%), office (22%), retail (18%), industrial (15%), hospitality (11%), land/land development (2%), and other (5%).
Consumer loans areLoan Portfolios
Consumer Real Estate
The consumer real estate portfolio totaled $11.9 billion and $10.8 billion as of September 30, 2022 and December 31, 2021, respectively, and is primarily composed of home equity lines and installment loans. The largest geographical concentrations of balances as of September 30, 2022 were in Florida (30%), Tennessee (23%), Louisiana (9%), Texas (9%), North Carolina (7%), and New York (5%). No other state represented more than 5% of the portfolio.
As of September 30, 2022, approximately 88% of the consumer real estate; permanent mortgage;estate portfolio was in a first lien position. At origination, the weighted average FICO score of this portfolio was 756 and the refreshed FICO scores averaged 754 as of September 30, 2022, no significant change from FICO scores of 755 and 754, respectively, as of December 31, 2021. Generally, performance of this portfolio is affected by life events that affect borrowers’ finances, the level of unemployment, and home prices.
As of September 30, 2022 and December 31, 2021, FHN had held-for-investment consumer mortgage loans secured by real estate that were in the process of foreclosure totaling $32 million and $20 million, respectively.
HELOCs comprised $2.0 billion of the consumer real estate portfolio as of both September 30, 2022 and December 31, 2021, respectively. 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 frozen if a borrower becomes past due on payments. Once the draw period has ended, 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, 2022, approximately 91% of FHN's HELOCs were in the draw period compared to 88% at December 31, 2021. It is expected that $499 million, or 28%, of HELOCs currently in the draw period will enter the repayment period during the next 60 months, based on current terms. Generally, delinquencies 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, over time, performance of these loans usually begins to stabilize. HELOCs nearing the end of the draw period are closely monitored.
The following table presents HELOCs currently in the draw period, broken down by months remaining in the draw period.
Table I.2.10
HELOC DRAW TO REPAYMENT SCHEDULE
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
(Dollars in millions) | | Repayment Amount | | Percent | | Repayment Amount | | Percent |
Months remaining in draw period: | | | | | | | | |
0-12 | | $ | 36 | | | 2 | % | | $ | 43 | | | 2 | % |
13-24 | | 41 | | | 2 | | | 42 | | | 2 | |
25-36 | | 100 | | | 6 | | | 50 | | | 3 | |
37-48 | | 125 | | | 7 | | | 136 | | | 8 | |
49-60 | | 197 | | | 11 | | | 160 | | | 9 | |
>60 | | 1,313 | | | 72 | | | 1,324 | | | 76 | |
Total | | $ | 1,812 | | | 100 | % | | $ | 1,755 | | | 100 | % |
| | | | | | | | |
| | | | | | | | |
PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| | |
Credit Card and Other
The credit card and other.other portfolio, which is primarily within the Regional Banking segment, totaled $849 million as of September 30, 2022 and $910 million as of December 31, 2021. This portfolio primarily consists of
consumer-related credits, including home equity and other personal consumer loans, credit card receivables, and automobile loans. The $61 million decrease was driven by net repayments.
Allowance for Credit Losses
The ACL is maintained at a level sufficient to provide appropriate reserves to absorb estimated future credit losses in accordance with GAAP. For additional information regarding the ACL, see Note 4 of this Report and "Critical Accounting Policies and Estimates" and Note 5 in FHN's 2021 Form 10-K, as amended.
The ALLL decreased to $664 million as of September 30, 2022 from $670 million as of December 31, 2021. The ALLL balance as of September 30, 2022 reflects the impact of
loan growth, deterioration in the macroeconomic forecast and a preliminary estimate of potential losses related to Hurricane Ian. The ALLL to total loans and leases ratio decreased 6 basis points to 1.16%. The ACL to total loans and leases ratio decreased to 1.31% as of September 30, 2022 from 1.34% as of December 31, 2021.
Consolidated Net Charge-offs
Net charge-offs in third quarter 2022 were $12 million, or an annualized 8 basis points of total loans and leases, compared to net charge-offs of $3 million, or 2 basis points of total loans and leases, in third quarter 2021.
Net charge-offs in the commercial portfolio in third quarter 2022 were $12 million compared to $4 million in
third quarter 2021, primarily the result of lower gross recoveries compared to the prior year. Net charge-offs in the consumer portfolio were less than $1 million in third quarter 2022 compared to net recoveries of $1 million in third quarter 2021.
Table I.2.11
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES AND CHARGE-OFFS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | September 30, 2022 | | | | December 31, 2021 | | September 30, 2021 | |
Allowance for loan and lease losses | | | | | | | | | |
| C&I | | $ | 295 | | | | | $ | 334 | | | $ | 374 | | |
| CRE | | 148 | | | | | 154 | | | 162 | | |
| Consumer real estate | | 193 | | | | | 163 | | | 179 | | |
| Credit card and other | | 28 | | | | | 19 | | | 19 | | |
| Total allowance for loan and lease losses | | $ | 664 | | | | | $ | 670 | | | $ | 734 | | |
| | | | | | | | | | |
| | | | | | | | | | |
Reserve for remaining unfunded commitments | | | | | | | | | |
| C&I | | $ | 58 | | | | | $ | 46 | | | $ | 49 | | |
| CRE | | 19 | | | | | 12 | | | 10 | | |
| Consumer real estate | | 11 | | | | | 8 | | | 9 | | |
| Credit card and other | | — | | | | | — | | | — | | |
| Total reserve for remaining unfunded commitments | | $ | 88 | | | | | $ | 66 | | | $ | 68 | | |
| | | | | | | | | | |
Allowance for credit losses | | | | | | | | | |
| C&I | | $ | 353 | | | | | $ | 380 | | | $ | 423 | | |
| CRE | | 167 | | | | | 166 | | | 172 | | |
| Consumer real estate | | 204 | | | | | 171 | | | 188 | | |
| Credit card and other | | 28 | | | | | 19 | | | 19 | | |
| Total allowance for credit losses | | $ | 752 | | | | | $ | 736 | | | $ | 802 | | |
| | | | | | | | | | |
Period-end loans and leases | | | | | | | | | |
| C&I | | $ | 31,620 | | | | | $ | 31,068 | | | $ | 31,516 | | |
| CRE | | 13,021 | | | | | 12,109 | | | 12,194 | | |
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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| Consumer real estate | | 11,864 | | | | | 10,772 | | | 10,787 | | |
| Credit card and other | | 849 | | | | | 910 | | | 938 | | |
| Total period-end loans and leases | | $ | 57,354 | | | | | $ | 54,859 | | | $ | 55,435 | | |
| | | | | | | | | | |
ALLL / loans and leases % | | | | | | | | | |
| C&I | | 0.93 | % | | | | 1.07 | % | | 1.19 | % | |
| CRE | | 1.14 | | | | | 1.27 | | | 1.33 | | |
| Consumer real estate | | 1.63 | | | | | 1.51 | | | 1.65 | | |
| Credit card and other | | 3.32 | | | | | 2.14 | | | 2.03 | | |
| Total ALLL / loans and leases % | | 1.16 | % | | | | 1.22 | % | | 1.32 | % | |
| | | | | | | | | | |
ACL / loans and leases % | | | | | | | | | |
| C&I | | 1.11 | % | | | | 1.22 | % | | 1.34 | % | |
| CRE | | 1.28 | | | | | 1.37 | | | 1.41 | | |
| Consumer real estate | | 1.72 | | | | | 1.59 | | | 1.74 | |
| Credit card and other | | 3.32 | | | | | 2.09 | | | 2.04 | | |
| Total ACL / loans and leases % | | 1.31 | % | | | | 1.34 | % | | 1.45 | % | |
| | | | | | | | | | |
Quarter-to-date net charge-offs (recoveries) | | | | | | | | | |
| C&I | | $ | 11 | | | | | $ | 1 | | | $ | 4 | | |
| CRE | | 1 | | | | | — | | | — | | |
| Consumer real estate | | (5) | | | | | (3) | | | (6) | | |
| Credit card and other | | 5 | | | | | 3 | | | 5 | | |
| Total net charge-offs (recoveries) | | $ | 12 | | | | | $ | 1 | | | $ | 3 | | |
| | | | | | | | | | |
Average loans and leases | | | | | | | | | |
| C&I | | $ | 31,120 | | | | | $ | 30,780 | | | $ | 31,477 | | |
| CRE | | 12,926 | | | | | 12,221 | | | 12,264 | | |
| Consumer real estate | | 11,633 | | | | | 10,738 | | | 10,819 | | |
| Credit card and other | | 864 | | | | | 943 | | | 948 | | |
| Total average loans and leases | | $ | 56,543 | | | | | $ | 54,682 | | | $ | 55,508 | | |
| | | | | | | | | | |
Charge-off % (annualized) | | | | | | | | | |
| C&I | | 0.14 | % | | | | 0.01 | % | | 0.06 | % | |
| CRE | | 0.01 | | | | | (0.01) | | | 0.01 | | |
| Consumer real estate | | (0.17) | | | | | (0.10) | | | (0.24) | | |
| Credit card and other | | 2.46 | | | | | 1.26 | | | 1.86 | | |
| Total charge-off % | | 0.08 | % | | | | 0.01 | % | | 0.02 | % | |
| | | | | | | | | | |
ALLL / annualized net charge-offs | | | | | | | | | |
| C&I | | 676 | % | | | | 7,238 | % | | 2,169 | % | |
| CRE | | 6,931 | | | | | NM | | 11,982 | | |
| Consumer real estate | | NM | | | | NM | | NM | |
| Credit card and other | | 133 | | | | | 164 | | | 104 | | |
| Total ALLL / net charge-offs | | 1,428 | % | | | | 17,374 | % | | 6,855 | % | |
| | | | | | | | | | |
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| | | | | | | | | | |
| | | | | | | | | | |
NM - not meaningful
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Nonperforming Assets
Nonperforming loans are loans placed on nonaccrual if it becomes evident that full collection of principal and interest is at risk, if 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 has a concentration ofcontinues to receive payments but there are other borrower-specific issues. Included in nonaccruals are loans for which FHN continues to receive payments, including residential real estate loans (24 percentwhere the borrower has been discharged of total loans), the majoritypersonal obligation through bankruptcy. NPAs consist of which isnonperforming loans and OREO (excluding OREO from government insured mortgages).
Total NPAs (including NPLs HFS) increased to $301 million as of September 30, 2022 from $285 million as of December 31, 2021, largely driven by higher nonaccrual loans in the consumer real estate portfolio (22 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 found in Table 17 – Asset Quality by Portfolio. Credit underwriting guidelines are outlined in Exhibit 13portfolio. The nonperforming loans and leases ratio increased one basis point to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016, in the Loan Portfolio Composition discussion in the Asset Quality Section beginning on page 26 and continuing to page 46. FHN’s credit underwriting guidelines and loan product offerings0.51% as of September 30, 2017,2022.
Certain nonperforming loans in both the commercial and consumer portfolios are generally consistent with those reporteddeemed collateral-dependent and disclosed inare charged down to an estimate of collateral value less costs to sell. Because the Company’s Form 10-K for the year endedestimated loss has been recognized through a partial charge-off, typically an ALLL is not recorded.
Table I.2.12
NONACCRUAL/NONPERFORMING LOANS, FORECLOSED ASSETS, & OTHER DISCLOSURES
| | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | |
| | | | | | |
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Nonperforming loans and leases | | September 30, 2022 | | | | December 31, 2021 |
| C&I | | $ | 116 | | | | | $ | 125 | |
| CRE | | 10 | | | | | 9 | |
| Consumer real estate | | 163 | | | | | 138 | |
| Credit card and other | | 3 | | | | | 3 | |
| Total nonperforming loans and leases (a) | | $ | 292 | | | | | $ | 275 | |
| | | | | | | |
Nonperforming loans held for sale (a) | | $ | 6 | | | | | $ | 7 | |
Foreclosed real estate and other assets (b) | | 3 | | | | | 3 | |
| Total nonperforming assets (a) (b) | | $ | 301 | | | | | $ | 285 | |
| | | | | | | |
Nonperforming loans and leases to total loans and leases | | | | | | |
| C&I | | 0.37 | % | | | | 0.40 | % |
| CRE | | 0.08 | | | | | 0.08 | |
| Consumer real estate | | 1.37 | | | | | 1.29 | |
| Credit card and other | | 0.31 | | | | | 0.31 | |
| Total NPL % | | 0.51 | % | | | | 0.50 | % |
| | | | | | | |
ALLL / NPLs | | | | | | |
| C&I | | 253 | % | | | | 268 | % |
| CRE | | 1,422 | | | | | 1,671 | |
| Consumer real estate | | 119 | | | | | 118 | |
| Credit card and other | | 1,070 | | | | | 699 | |
| Total ALLL / NPLs | | 228 | % | | | | 244 | % |
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(a)Excludes loans and leases that are 90 or more days past due and still accruing interest.
(b)Balances do not include government-insured foreclosed real estate. Foreclosed real estate from GNMA loans totaled $1 million as of both September 30, 2022 and December 31, 2016.2021.
COMMERCIAL LOAN PORTFOLIOS
The C&I portfolio was $12.8 billion on September 30, 2017, and is comprised of loans used for general business purposes and primarily composed of relationship customers in Tennessee and other selected markets. 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.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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The following table provides nonperforming assets by business segment:
Table I.2.13
NONPERFORMING ASSETS BY SEGMENT
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
(Dollars in millions) | | | | | | |
Nonperforming loans and leases (a) (b) | | September 30, 2022 | | | | December 31, 2021 |
| Regional Banking | | $ | 204 | | | | | $ | 163 | |
| Specialty Banking | | 56 | | | | | 78 | |
| Corporate | | 32 | | | | | 34 | |
| Consolidated | | $ | 292 | | | | | $ | 275 | |
Foreclosed real estate (c) | | | | | | |
| Regional Banking | | $ | — | | | | | $ | 2 | |
| Specialty Banking | | 2 | | | | | — | |
| Corporate | | 1 | | | | | 1 | |
| Consolidated | | $ | 3 | | | | | $ | 3 | |
Nonperforming Assets (a) (b) (c) | | | | | | |
| Regional Banking | | $ | 204 | | | | | $ | 165 | |
| Specialty Banking | | 58 | | | | | 78 | |
| Corporate | | 33 | | | | | 35 | |
| Consolidated | | $ | 295 | | | | | $ | 278 | |
Nonperforming loans and leases to loans and leases | | | | | | |
| Regional Banking | | 0.50 | % | | | | 0.43 | % |
| Specialty Banking | | 0.34 | | | | | 0.48 | |
| Corporate | | 6.19 | | | | | 5.39 | |
| Consolidated | | 0.51 | % | | | | 0.50 | % |
NPA % (d) | | | | | | |
| Regional Banking | | 0.50 | % | | | | 0.44 | % |
| Specialty Banking | | 0.36 | | | | | 0.48 | |
| Corporate | | 6.48 | | | | | 5.51 | |
| Consolidated | | 0.51 | % | | | | 0.51 | % |
| | | | | | | |
(a)Excludes loans and leases that are 90 or more days past due and still accruing interest.
(b)Excludes loans classified as held for sale.
(c)Excludes foreclosed real estate and receivables related to government insured mortgages of $1 million as of both September 30, 2022 and December 31, 2021.
(d)Ratio is non-performing assets to total loans and leases plus foreclosed real estate.
Past Due Loans and Potential Problem Assets
Past due loans are loans contractually past due as to interest or principal payments, but which have not yet been put on nonaccrual status.
In addition to PPP loans, other customer support initiatives in response to the composition ofCOVID-19 pandemic include incremental lending assistance for borrowers through delayed payment programs and fee waivers. Customer deferrals were not material at September 30, 2022 and December 31, 2021. To the C&I portfolio by industryextent that loans were past due as of September 30, 2017,2022 or December 31, 2021 and had been granted a deferral, they were excluded from
loans past due 30 to 89 days and loans past due 90 days or more in the table and discussion below.
Loans 90 days or more past due and still accruing were $24 million as of September 30, 2022 compared to $40 million as of December 31, 2021. Loans 30 to 89 days past due were $108 million as of both September 30, 2022 and December 31, 2016. 2021. C&I loans past due 30 to 89 days increased $12 million while past due CRE loans decreased $8 million and past due consumer real estate loans decreased $6 million.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Table I.2.14
ACCRUING DELINQUENCIES & OTHER CREDIT DISCLOSURES
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(Dollars in millions) | | | | | | |
Accruing loans and leases 30+ days past due | September 30, 2022 | | | | December 31, 2021 | |
| C&I | $ | 66 | | | | | $ | 58 | | |
| CRE | 5 | | | | | 13 | | |
| Consumer real estate | 48 | | | | | 70 | | |
| Credit card and other | 12 | | | | | 7 | | |
| Total accruing loans and leases 30+ days past due | $ | 131 | | | | | $ | 148 | | |
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Accruing loans and leases 30+ days past due % | | | | | | |
| C&I | 0.21 | % | | | | 0.19 | % | |
| CRE | 0.04 | | | | | 0.11 | | |
| Consumer real estate | 0.40 | | | | | 0.65 | | |
| Credit card and other | 1.43 | | | | | 0.76 | | |
| Total accruing loans and leases 30+ days past due % | 0.23 | % | | | | 0.27 | % | |
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Accruing loans and leases 90+ days past due (a) (b) (c): | | | | | | |
| | | | | | |
| C&I | $ | 1 | | | | | $ | 5 | | |
| | | | | | | |
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| Consumer real Estate | 17 | | | | | 33 | | |
| Credit card and other | 6 | | | | | 2 | | |
| | | | | | |
| Total accruing loans and leases 90+ days past due | $ | 24 | | | | | $ | 40 | | |
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Loans held for sale | | | | | | |
30 to 89 days past due | $ | 4 | | | | | $ | 7 | | |
30 to 89 days past due - guaranteed portion (d) | 2 | | | | | 2 | | |
90+ days past due | 14 | | | | | 24 | | |
90+ days past due - guaranteed portion (d) | 6 | | | | | 12 | | |
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(a)Excludes loans classified as held for sale.
(b)Amounts are not included in nonperforming/nonaccrual loans.
(c)Amounts are also included in accruing loans and leases 30+ days past due.
(d)Guaranteed loans include FHA, VA, and GNMA loans repurchased through the GNMA buyout program.
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 Federal
banking regulators for loans classified as substandard. Potential problem assets in the loan portfolio were $540 million on September 30, 2022 and $597 million on December 31, 2021. The current expectation of losses from potential problem assets has been included in management’s analysis for assessing the adequacy of the allowance for loan and lease losses.
Troubled Debt Restructurings 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 TDR.
For purposesloan modifications that met the TDR relief provisions outlined in either the CARES Act, as extended by the CAA, or revised Interagency Guidance, FHN has excluded these
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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modifications from consideration as a TDR and has excluded loans with these qualifying modifications from designation as a TDR in the information and discussion that follows. See Note 3 – Loans and Leases for further discussion regarding TDRs and loan modifications.
On September 30, 2022 and December 31, 2021, FHN had $204 million and $206 million portfolio loans classified as held-for-investment TDRs, respectively. For these TDRs, including specific reserves, FHN had an allowance for loan
and lease losses of $13 million, or 7% of TDR balances as of September 30, 2022, and $12 million, or 6% of TDR balances, as of December 31, 2021. Additionally, FHN had $31 million and $35 million of HFS loans classified as TDRs as of September 30, 2022 and December 31, 2021, respectively.
The following table provides a summary of TDRs for the periods ended September 30, 2022 and December 31, 2021:
Table I.2.15
TROUBLED DEBT RESTRUCTURINGS
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(Dollars in millions) | | September 30, 2022 | | | | December 31, 2021 |
Held for investment: | | | | | | |
Commercial loans: | | | | | | |
Current | | $ | 15 | | | | | $ | 53 | |
Delinquent | | — | | | | | — | |
Non-accrual | | 40 | | | | | 35 | |
Total commercial loans | | $ | 55 | | | | | $ | 88 | |
Consumer real estate: | | | | | | |
Current | | $ | 76 | | | | | $ | 60 | |
Delinquent | | 9 | | | | | 4 | |
Non-accrual (a) | | 64 | | | | | 53 | |
Total consumer real estate | | $ | 149 | | | | | $ | 117 | |
Credit card and other: | | | | | | |
Current | | $ | — | | | | | $ | 1 | |
Delinquent | | — | | | | | — | |
Non-accrual | | — | | | | | — | |
Total credit card and other | | — | | | | | 1 | |
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Total held for investment | | $ | 204 | | | | | $ | 206 | |
| | | | | | |
Held for sale: | | | | | | |
Current | | $ | 24 | | | | | $ | 27 | |
Delinquent | | 6 | | | | | 7 | |
Non-accrual | | 1 | | | | | 1 | |
Total held for sale | | 31 | | | | | 35 | |
Total troubled debt restructurings | | $ | 235 | | | | | $ | 241 | |
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(a) Balances as of September 30, 2022 and December 31, 2021 include $11 million and $12 million, respectively, of discharged bankruptcies.
Investment Securities
FHN’s investment securities portfolio consists principally of debt securities available for sale. FHN maintains a highly-rated securities portfolio consisting primarily of government agency issued mortgage-backed securities and collateralized mortgage obligations. The securities portfolio provides a source of income and liquidity and is an important tool used to balance the interest rate risk of the loan and deposit portfolios. The securities portfolio is periodically evaluated in light of established ALM
objectives, changing market conditions that could affect the profitability of the portfolio, the regulatory environment, and the level of interest rate risk to which FHN is exposed. These evaluations may result in steps taken to adjust the overall balance sheet positioning.
Investment securities were $10.1 billion and $9.4 billion on September 30, 2022 and December 31, 2021, respectively, representing approximately 13% and 11% of total assets, respectively. See Note 2 - Investment
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Securities for more information about the securities portfolio.
Deposits
Total deposits of $66.0 billion as of September 30, 2022 decreased $8.9 billion from December 31, 2021 reflecting a continued downward trend from mid-2021 highs driven by excess liquidity associated with the COVID-19 pandemic. Interest-bearing deposits decreased $6.8 billion and noninterest-bearing deposits decreased $2.1 billion.
See Tables I.2.2 and I.2.3 - Average Balances, Net Interest Income and Yields/Rates in this disclosure, industries are determinedReport for information on average deposits including average rates paid. The following table summarizes the major components of deposits as of September 30, 2022 and December 31, 2021.
Table I.2.16
DEPOSITS
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| | September 30, 2022 | | December 31, 2021 | | | | |
(Dollars in millions) | | Amount | | Percent of total | | Amount | | Percent of total | | Change | | Percent |
Savings | | $ | 22,800 | | | 35 | % | | $ | 26,457 | | | 35 | % | | $ | (3,657) | | | (14) | % |
Time deposits | | 2,671 | | | 4 | | | 3,500 | | | 5 | | | (829) | | | (24) | |
Other interest-bearing deposits | | 14,731 | | | 22 | | | 17,055 | | | 23 | | | (2,324) | | | (14) | |
| | | | | | | | | | | | |
Total interest-bearing deposits | | 40,202 | | | 61 | | | 47,012 | | | 63 | | | (6,810) | | | (14) | |
Noninterest-bearing deposits | | 25,813 | | | 39 | | | 27,883 | | | 37 | | | (2,070) | | | (7) | |
Total deposits | | $ | 66,015 | | | 100 | % | | $ | 74,895 | | | 100 | % | | $ | (8,880) | | | (12) | % |
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Short-Term Borrowings
Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings. Total short-term borrowings were $1.8 billion and $2.6 billion as of September 30, 2022 and December 31, 2021, respectively.
Short-term borrowings balances fluctuate largely based on the North American Industry Classification System (“NAICS”) industry codes used bylevel of FHLB borrowing as a result of loan demand, deposit levels and balance sheet funding strategies.
Trading liabilities fluctuate based on various factors, including levels of trading securities and hedging strategies. Federal statistical agencies in classifying business establishments forfunds purchased fluctuates depending on the collection, analysis,amount of excess funding of FHN’s correspondent bank customers. Balances of securities sold under agreements to repurchase fluctuate based on cost attractiveness relative to FHLB borrowing levels and publication of statistical data relatedthe ability to the U.S. business economy.pledge securities toward such transactions.
Table 10—C&I Loan Portfolio by Industry
Term Borrowings
|
| | | | | | | | | | | | | | |
| | 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 | % |
Term borrowings include senior and subordinated borrowings with original maturities greater than one year. Total term borrowings were $1.6 billion as of September 30, 2022 and December 31, 2021.
| | | | | | | | |
(a) | Leasing, rental of real estate, equipment, and goods.96 | 3Q22 FORM 10-Q REPORT |
| | | | | | | | |
(b)PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| Industries in this category each comprise less than 5 percent for 2017. | |
Capital
Industry Concentrations
Loan concentrationsManagement’s objectives are considered to exist for a financial institution when there are loansprovide capital sufficient to numerous borrowers engagedcover the risks inherent in similar activities that would cause themFHN’s businesses, to be similarly impacted by economic or other conditions. 37 percent of FHN’s C&I portfolio (Financemaintain excess capital to well-capitalized standards, and insurance plus Loans to mortgage companies) could be affected by items that uniquely impactassure ready access to the financial services industry. Except “Finance and Insurance” and “Loans to Mortgage Companies”, as discussed below, oncapital markets. Total equity was $8.3 billion at September 30, 2017,2022 and $8.5 billion at December 31, 2021. Significant changes included net income of $642 million and the issuance of $494 million in Series G preferred stock, which were offset by $271
million in common and preferred dividends and a decrease in AOCI of $1.1 billion.
The following tables provide a reconciliation of shareholders’ equity from the Consolidated Balance Sheets to Common Equity Tier 1, Tier 1 and Total Regulatory Capital as well as certain selected capital ratios:
Table I.2.17
REGULATORY CAPITAL DATA
| | | | | | | | | | | | | | |
(Dollars in millions) | | September 30, 2022 | | December 31, 2021 |
Shareholders’ equity | | $ | 7,988 | | | $ | 8,199 | |
Modified CECL transitional amount (a) | | 85 | | | 114 | |
FHN non-cumulative perpetual preferred stock | | (1,014) | | | (520) | |
Common equity tier 1 before regulatory adjustments | | $ | 7,059 | | | $ | 7,793 | |
Regulatory adjustments: | | | | |
Disallowed goodwill and other intangibles | | (1,669) | | | (1,711) | |
Net unrealized (gains) losses on securities available for sale | | 1,039 | | | 36 | |
Net unrealized (gains) losses on pension and other postretirement plans | | 249 | | | 255 | |
Net unrealized (gains) losses on cash flow hedges | | 139 | | | (3) | |
Disallowed deferred tax assets | | — | | | (2) | |
Other deductions from common equity tier 1 | | (1) | | | (1) | |
Common equity tier 1 | | $ | 6,816 | | | $ | 6,367 | |
FHN non-cumulative perpetual preferred stock (b) | | 920 | | | 426 | |
Qualifying noncontrolling interest— First Horizon Bank preferred stock | | 295 | | | 295 | |
| | | | |
Tier 1 capital | | $ | 8,031 | | | $ | 7,088 | |
Tier 2 capital | | 956 | | | 830 | |
Total regulatory capital | | $ | 8,987 | | | $ | 7,918 | |
Risk-Weighted Assets | | | | |
First Horizon Corporation | | $ | 68,580 | | | $ | 64,183 | |
First Horizon Bank | | 68,065 | | | 63,601 | |
Average Assets for Leverage | | | | |
First Horizon Corporation | | 82,059 | | | 87,683 | |
First Horizon Bank | | 81,368 | | | 86,953 | |
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| | |
Table I.2.18
REGULATORY RATIOS & AMOUNTS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| | Ratio | | Amount | | Ratio | | Amount |
Common Equity Tier 1 | | | | | | | | |
First Horizon Corporation | | 9.94 | % | | $ | 6,816 | | | 9.92 | % | | $ | 6,367 | |
First Horizon Bank | | 10.55 | | | 7,182 | | | 10.75 | | | 6,838 | |
Tier 1 | | | | | | | | |
First Horizon Corporation | | 11.71 | | | 8,031 | | | 11.04 | | | 7,088 | |
First Horizon Bank | | 10.98 | | | 7,477 | | | 11.22 | | | 7,133 | |
Total | | | | | | | | |
First Horizon Corporation | | 13.10 | | | 8,987 | | | 12.34 | | | 7,918 | |
First Horizon Bank | | 12.18 | | | 8,289 | | | 12.41 | | | 7,893 | |
Tier 1 Leverage | | | | | | | | |
First Horizon Corporation | | 9.79 | | | 8,031 | | | 8.08 | | | 7,088 | |
First Horizon Bank | | 9.19 | | | 7,477 | | | 8.20 | | | 7,133 | |
Other Capital Ratios | | | | | | | | |
Total period-end equity to period-end assets | | 10.32 | | | | | 9.53 | | | |
Tangible common equity to tangible assets (c) | | 6.64 | | | | | 6.73 | | | |
Adjusted tangible common equity to risk-weighted assets (c) | | 9.12 | | | | | 9.20 | | | |
(a)The modified CECL transitional amount includes the impact to retained earnings from the initial adoption of CECL plus 25% of the change in the adjusted allowance for credit losses since FHN’s initial adoption of CECL through December 31, 2021. For September 30, 2022, 25% of the full amount at December 31, 2021 is phased out and not included in Common Equity Tier 1 capital.
(b)The $94 million carrying value of the Series D preferred stock does not qualify as Tier 1 capital because the earliest redemption date is less than five years from the issuance date, which was re-set to July 1, 2020 when the IBKC merger closed.
(c)Tangible common equity to tangible assets and adjusted tangible common equity to risk-weighted assets are non-GAAP measures and are reconciled to total equity to total assets (GAAP) in the Non-GAAP to GAAP Reconciliation - Table I.2.26.
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 did not have any other concentrationsto qualify as well-capitalized, Common Equity Tier 1, Tier 1 Capital, Total Capital, and Leverage capital ratios must be at least 6.50%, 8.00%, 10.00%, and 5.00%, respectively. Furthermore, a capital conservation buffer of C&I loans50 basis points above these levels 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, 2022, each of FHN and First Horizon Bank had sufficient capital to qualify as well-capitalized institutions and to meet the capital conservation buffer
requirement. Capital ratios for both FHN and First Horizon Bank are calculated under the final rule issued by the banking regulators in any single industry2020 to delay the effects of 10 percent or moreCECL on regulatory capital for two years, followed by a three-year transition period.
For FHN, the Tier 1 and Total risk-based regulatory capital ratios increased in third quarter 2022 relative to year-end 2021 primarily from the impact of total loans.net income less dividends during the first nine months of 2022. FHN's Tier 1 Capital and Tier 1 Leverage ratios as of September 30, 2022 further benefited from the issuance of its Series G preferred stock in February 2022. FHN and First Horizon Bank's risk-based regulatory capital ratios were negatively impacted in 2022 from an increase in risk-weighted assets from December 31, 2021.
During 2022, capital ratios are expected to remain above well-capitalized standards plus the required capital conservation buffer.
Finance and Insurance
The finance and insurance component represents 22 percentrepresented 13% of the C&I portfolio as of September 30, 2022 and 11% as of December 31, 2021, and includes TRUPSTRUPs (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, 2017,2022, asset-based lending to consumer finance companies representsrepresented approximately $1.2$1.9 billion of the finance and insurance component.
TRUPS lending was originally extended as a form of “bridge” financingPaycheck Protection Program
In 2020, Congress created the Paycheck Protection Program (PPP) in response 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 December 31, 2016, one TRUP relationship was on interest deferral.
As of September 30, 2017, the unpaid principal balance (“UPB”) of trust preferred loans totaled $332.9 million ($206.6 million of bank TRUPS and $126.3 million of insurance TRUPS)economic disruption associated with the UPBCOVID-19 pandemic. Under the PPP, qualifying businesses could receive loans from private lenders, such as FHN, that are fully guaranteed by the Small Business Administration. These loans potentially are partly or fully forgivable, depending upon the borrower’s use of other bank-related loans totaling $345.8 million. Inclusivethe funds and maintenance of a valuation allowance on TRUPS of $25.5 million, total reserves (ALLL plusemployment levels. To the valuation allowance) for TRUPS and other bank-related loans were $26.8 million or 4 percent of outstanding UPB.extent forgiven, the borrower is relieved from payment while the lender is still paid from the program.
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 percent2022 includes 924 loans made under the PPP with an aggregate principal balance of $129 million, which are fully government guaranteed with the SBA. Due to the government guarantee and forgiveness provisions, PPP loans are considered to have no credit risk and do not affect the amount of provision and ALLL recorded. As a result, no ALLL is recorded for PPP loans as of September 30, 2022, and FHN has assigned a risk weight of zero to PPP loans for regulatory capital purposes.
For these loans, there are remaining net lender fees of less than $1 million to be paid to FHN as of September 30, 2022. During 2022, FHN continues to work with its clients that have applied for and received PPP loan forgiveness. Through September 30, 2022, over $5 billion of the C&Ioriginal $6 billion in PPP loans originated by FHN and
| | | | | | | | |
PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| | |
IBERIABANK prior to acquisition have been forgiven by the SBA.
Commercial Real Estate
The CRE portfolio totaled $13.0 billion as of September 30, 2022 and $12.1 billion 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, the C&I portfolio trends remain strong in 2017, continuing in line with recent historical performance. The C&I ALLL increased $8.8 million from December 31, 2016, to $98.2 million as of September 30, 2017. The allowance as a percentage of period-end loans increased to .77 percent as of September 30, 2017, from .74 percent as of December 31, 2016. Nonperforming C&I loans decreased $13.8 million from December 31, 2016, to $18.9 million on September 30, 2017. The nonperforming loan (“NPL”) ratio decreased 12 basis points from December 31, 2016, to .15 percent of C&I loans as of September 30, 2017. The 30+ delinquency ratio increased to .27 percent as of September 30, 2017, from .08 percent as of December 31, 2016, driven by two larger relationships, one of which is a purchased credit-impaired loan. Third quarter 2017 experienced net charge-offs of $3.1 million compared to $1.6 million of net recoveries in fourth quarter 2016 and $1.3 million of net charge-offs in third quarter 2016. The following table shows C&I asset quality trends by segment.
Table 11—C&I 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 | | $ | 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. |
Commercial Real Estate
2021. The CRE portfolio was $2.3 billion on September 30, 2017. The CRE portfolio includes bothreflects financings for both commercial construction and nonconstruction loans. The largest geographical concentrations of CRE loan balances as of September 30, 2022 were in Florida (26%), Texas (12%),
North Carolina (11%), Georgia (10%), Louisiana (9%), and Tennessee (9%). No other state represented more than 5% of the portfolio. This portfolio is segregated between the income-producing CRE class whichportfolio contains loans, draws on lines, and letters of credit to commercial real estate developers for the construction and mini-permanentmini-permanent financing of income-producing real estate, and the residential CRE class.estate. Subcategories of incomethe CRE portfolio consist of multi-family (31 percent)(27%), office (22%), retail (22 percent)(18%), office (18 percent)industrial (15%), hospitality (12 percent), industrial (12 percent)(11%), land/land development (1 percent)(2%), and other (4 percent)(5%).
Consumer Loan Portfolios
Consumer Real Estate
The residential CRE class includes loans to residential buildersconsumer real estate portfolio totaled $11.9 billion and developers for the purpose of constructing single-family homes, condominiums, and town homes. Active residential CRE lending has been minimal with nearly all new originations limited to tactical advances to facilitate workout strategies with existing clients and selected new transactions with “strategic” clients. FHN considers a “strategic” residential CRE borrower as a homebuilder within the regional banking footprint who remained profitable during the most recent down cycle.
CRE Asset Quality Trends
The CRE portfolio had continued stable performance$10.8 billion as of September 30, 2017, with nonperforming loans down $1.1 million from2022 and December 31, 2016, net recoveries in third quarter 2017, and minimal past due activity. The allowance decreased $4.2 million from December 31, 2016, to $29.7 million as of September 30, 2017. Allowance as a percentage of loans decreased 27 basis points from December 31, 2016, to 1.32 percent as of September 30, 2017. Nonperforming loans as a percentage of total CRE loans improved 6 basis points from year-end to .07 percent as of September 30, 2017. Accruing delinquencies as a percentage of period-end loans increased to .02 percent as of September 30, 2017 from .01 percent as of year-end 2016. FHN recognized net recoveries of $.3 million in third quarter 2017 compared to $.6 million in third quarter 2016. The following table shows commercial real estate asset quality trends by segment.
Table 12—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.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. |
CONSUMER LOAN PORTFOLIOS
Consumer Real Estate
The consumer real estate portfolio was $4.4 billion on September 30, 2017,2021, respectively, and is primarilyprimarily composed of home equity lines and installment loans including restricted balances (loans consolidated under ASC 810).loans. The largest geographical concentrationsconcentrations of balances as of September 30, 2017, are2022 were in Florida (30%), Tennessee (72 percent)(23%), California (4 percent)Louisiana (9%), Texas (9%), North Carolina (7%), and North Carolina (4 percent) with noNew York (5%). No other state representingrepresented more than 3 percent5% of the portfolio.
As of September 30, 2017,2022, approximately 74 percent88% of the consumer real estate portfolio was in a first lien position. At origination, the weighted average FICO score of this portfolio was 751756 and the refreshed FICO scores averaged 749754 as of September 30, 2017, as compared to 7502022, no significant change from FICO scores of 755 and 747,754, respectively, as of December 31, 2016.2021. Generally, performance of this portfolio is affected by life events that affect borrowers’ finances, the level of unemployment, and home prices.
Home equity linesAs of credit (“HELOCs”) comprise $1.5September 30, 2022 and December 31, 2021, FHN had held-for-investment consumer mortgage loans secured by real estate that were in the process of foreclosure totaling $32 million and $20 million, respectively.
HELOCs comprised $2.0 billion of the consumer real estate portfolio as of both September 30, 2017.2022 and December 31, 2021, respectively. 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,ended, 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, approximately 60 percent2022, approximately 91% of FHN's HELOCs arewere in the draw period compared to approximately 62 percent as of88% at December 31, 2016. Based on when draw periods are scheduled to end per the line agreement, it2021. It is expected that $362.6$499 million, or 42 percent28%, of HELOCs currently in the draw period will enter the repayment period during the next 60 months. Delinquencies and charge-off ratesmonths, based on current terms. Generally, delinquencies 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,requirement. However, over time, performance of these loans usually begins to stabilize. The home equity lines of the consumer real estate portfolio are being monitored closely for thoseHELOCs nearing the end of the draw period and borrowersperiod 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. closely monitored.
The following table shows thepresents HELOCs currently in the draw period, and expected timing of conversion tobroken down by months remaining in the repaymentdraw period.
Table 13—HELOC Draw To Repayment ScheduleI.2.10
HELOC DRAW TO REPAYMENT SCHEDULE
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
(Dollars in millions) | | Repayment Amount | | Percent | | Repayment Amount | | Percent |
Months remaining in draw period: | | | | | | | | |
0-12 | | $ | 36 | | | 2 | % | | $ | 43 | | | 2 | % |
13-24 | | 41 | | | 2 | | | 42 | | | 2 | |
25-36 | | 100 | | | 6 | | | 50 | | | 3 | |
37-48 | | 125 | | | 7 | | | 136 | | | 8 | |
49-60 | | 197 | | | 11 | | | 160 | | | 9 | |
>60 | | 1,313 | | | 72 | | | 1,324 | | | 76 | |
Total | | $ | 1,812 | | | 100 | % | | $ | 1,755 | | | 100 | % |
| | | | | | | | |
|
| | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Repayment Amount | | Percent | | Repayment Amount | | Percent |
Months remaining in draw period: | | | | | | | | |
0-12 | | $ | 112,207 |
| | 13 | % | | $ | 212,665 |
| | 20 | % |
13-24 | | 69,367 |
| | 8 |
| | 127,662 |
| | 12 |
|
25-36 | | 56,098 |
| | 6 |
| | 73,331 |
| | 7 |
|
37-48 | | 57,254 |
| | 7 |
| | 68,768 |
| | 6 |
|
49-60 | | 67,625 |
| | 8 |
| | 68,792 |
| | 7 |
|
>60 | | 510,670 |
| | 58 |
| | 514,126 |
| | 48 |
|
Total | | $ | 873,221 |
| | 100 | % | | $ | 1,065,344 |
| | 100 | % |
Consumer Real Estate Asset Quality Trends
Overall, performance of the consumer real estate portfolio remained strong in third 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-end to .61 percent as of September 30, 2017. 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 deteriorated and may become more skewed as the portfolio shrinks and some of the stronger borrowers payoff or refinance elsewhere. The ALLL decreased $9.4 million from December 31, 2016, to $40.9 million as of September 30, 2017, with the majority of the decline attributable to the non-strategic segment. The allowance as a percentage of loans declined 17 basis points to .94 percent as of September 30, 2017, compared to year-end. The balance of nonperforming loans declined $6.0 million to $76.8 million on September 30, 2017. Loans delinquent 30 or more days and still accruing declined from $42.1 million as of December 31, 2016, to $32.4 million as of September 30, 2017. The portfolio realized net recoveries of $2.6 million in third quarter 2017 compared to net recoveries of $2.2 million in fourth quarter 2016 and net recoveries of $1.2 million in third quarter 2016. The following table shows consumer real estate asset quality trends by segment.
Table 14—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 |
| |
NM—Not meaningfulLoans are expressed net of unearned income.
| | | | | | | | |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.89 | 3Q22 FORM 10-Q REPORT |
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)PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
An allowance has not been established for these loans as the valuation adjustment taken upon exercise |
| |
(b) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
Credit Card and Other
The credit card and other portfolio, which isis primarily within the regional bankingRegional Banking segment, was $.4 billion as of September 30, 2017, and primarily includes credit card receivables, other consumer-related credits, and automobile loans. The allowance decreased to $10.3totaled $849 million as of September 30, 2017, from $12.22022 and $910 million as of December 31, 2016. Loans 30 days or more delinquent2021. This portfolio primarily consists of
consumer-related credits, including home equity and accruing as a percentage ofother personal consumer loans, decreased 28 basis points from December 31, 2016, to .89 percent as of September 30, 2017. In third quarter 2017, FHN recognized $2.5 million of net charge-offs in the credit card receivables, and other portfolio, compared to $2.7automobile loans. The $61 million in third quarter 2016. The following table shows credit card and other asset quality trendsdecrease was driven by segment.net repayments.
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 |
| |
NM—Not meaningfulLoans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
The following table provides additional asset quality data by loan portfolio:
Table 17—Asset Quality by Portfolio
|
| | | | | | | | | |
| | September 30 | | December 31 | |
| | 2017 | | 2016 | |
Key Portfolio Details | | | | | |
C&I | | | | | |
Period-end loans ($ millions) | | $ | 12,792 |
| | $ | 12,148 |
| |
30+ Delinq. % (a) | | 0.27 | % | | 0.08 | % | |
NPL % | | 0.15 |
| | 0.27 |
| |
Charge-offs % (qtr. annualized) | | 0.10 |
| | NM |
| |
Allowance / loans % | | 0.77 | % | | 0.74 | % | |
Allowance / net charge-offs | | 7.97 | x | | NM |
| |
Commercial Real Estate | | | | | |
Period-end loans ($ millions) | | $ | 2,251 |
| | $ | 2,136 |
| |
30+ Delinq. % (a) | | 0.02 | % | | 0.01 | % | |
NPL % | | 0.07 |
| | 0.13 |
| |
Charge-offs % (qtr. annualized) | | NM |
| | 0.09 |
| |
Allowance / loans % | | 1.32 | % | | 1.59 | % | |
Allowance / net charge-offs | | NM |
| | 17.56 | x | |
Consumer Real Estate | | | | | |
Period-end loans ($ millions) | | $ | 4,370 |
| | $ | 4,524 |
| |
30+ Delinq. % (a) | | 0.74 | % | | 0.93 | % | |
NPL % | | 1.76 |
| | 1.83 |
| |
Charge-offs % (qtr. annualized) | | NM |
| | NM |
| |
Allowance / loans % | | 0.94 | % | | 1.11 | % | |
Allowance / net charge-offs | | 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 |
| |
30+ Delinq. % (a) | | 0.89 | % | | 1.17 | % | |
NPL % | | 0.04 |
| | 0.04 |
| |
Charge-offs % (qtr. annualized) | | 2.80 |
| | 3.25 |
| |
Allowance / loans % | | 2.95 | % | | 3.39 | % | |
Allowance / net charge-offs | | 1.04 | x | | 1.04 | 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. |
Allowance for LoanCredit Losses
Management’s policyThe ACL is to maintain the ALLLmaintained at a level sufficient to provide appropriate reserves to absorb estimated probable incurredfuture credit losses in accordance with GAAP. For additional information regarding the loan portfolio. ACL, see Note 4 of this Report and "Critical Accounting Policies and Estimates" and Note 5 in FHN's 2021 Form 10-K, as amended.
The total allowance for loan lossesALLL decreased to $194.9$664 million on September 30, 2017, from $202.1 million on December 31, 2016. The ALLL as of September 30, 2017,2022 from $670 million as of December 31, 2021. The ALLL balance as of September 30, 2022 reflects strong asset quality with the consumer real estate portfolio continuingimpact of
loan growth, deterioration in the macroeconomic forecast and a preliminary estimate of potential losses related to stabilize, historically low levels of net charge-offs, and declining non-strategic balances.Hurricane Ian. The ratio of allowance for loan lossesALLL to total loans net of unearned income,and leases ratio decreased 6 basis points to 1.16%. The ACL to total loans and leases ratio decreased to .97 percent on1.31% as of September 30, 2017,2022 from 1.03 percent on1.34% as of December 31, 2016.2021.
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 incurred losses in the loan portfolio. There was no provision expense recorded
Consolidated Net Charge-offs
Net charge-offs in third quarter 20172022 were $12 million, or an annualized 8 basis points of total loans and leases, compared to a provision expensenet charge-offs of $4.0$3 million, or 2 basis points of total loans and leases, in third quarter 2021.
Net charge-offs in the commercial portfolio in third quarter 2022 were $12 million compared to $4 million in
third quarter 2021, primarily the result of lower gross recoveries compared to the prior year. Net charge-offs in the consumer portfolio were less than $1 million in third quarter 2016.
FHN expects asset quality trends to remain relatively stable for the near term if the slow growth of the economy continues. The C&I portfolio is expected 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. The CRE portfolio metrics should be relatively consistent as FHN expects stable property values over the near term; 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). The remaining non-strategic consumer real estate and permanent mortgage portfolios should continue to steadily wind down. Asset quality metrics within non-strategic may 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. Third quarter 2017 experienced net charge-offs of $2.4 million2022 compared to $2.3 millionnet recoveries of net charge-offs in third quarter 2016.
The commercial portfolio experienced $2.8 million of net charge-offs in third quarter 2017 compared to $.7$1 million in third quarter 2016. In addition, the consumer real estate portfolio experienced net recoveries of $2.6 million in third quarter 2017 compared to $1.2 million in net recoveries during third quarter 2016. Permanent mortgage and credit card and other remained relatively flat compared to a year ago.2021.
Table I.2.11
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES AND CHARGE-OFFS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | September 30, 2022 | | | | December 31, 2021 | | September 30, 2021 | |
Allowance for loan and lease losses | | | | | | | | | |
| C&I | | $ | 295 | | | | | $ | 334 | | | $ | 374 | | |
| CRE | | 148 | | | | | 154 | | | 162 | | |
| Consumer real estate | | 193 | | | | | 163 | | | 179 | | |
| Credit card and other | | 28 | | | | | 19 | | | 19 | | |
| Total allowance for loan and lease losses | | $ | 664 | | | | | $ | 670 | | | $ | 734 | | |
| | | | | | | | | | |
| | | | | | | | | | |
Reserve for remaining unfunded commitments | | | | | | | | | |
| C&I | | $ | 58 | | | | | $ | 46 | | | $ | 49 | | |
| CRE | | 19 | | | | | 12 | | | 10 | | |
| Consumer real estate | | 11 | | | | | 8 | | | 9 | | |
| Credit card and other | | — | | | | | — | | | — | | |
| Total reserve for remaining unfunded commitments | | $ | 88 | | | | | $ | 66 | | | $ | 68 | | |
| | | | | | | | | | |
Allowance for credit losses | | | | | | | | | |
| C&I | | $ | 353 | | | | | $ | 380 | | | $ | 423 | | |
| CRE | | 167 | | | | | 166 | | | 172 | | |
| Consumer real estate | | 204 | | | | | 171 | | | 188 | | |
| Credit card and other | | 28 | | | | | 19 | | | 19 | | |
| Total allowance for credit losses | | $ | 752 | | | | | $ | 736 | | | $ | 802 | | |
| | | | | | | | | | |
Period-end loans and leases | | | | | | | | | |
| C&I | | $ | 31,620 | | | | | $ | 31,068 | | | $ | 31,516 | | |
| CRE | | 13,021 | | | | | 12,109 | | | 12,194 | | |
| | | | | | | | |
PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer real estate | | 11,864 | | | | | 10,772 | | | 10,787 | | |
| Credit card and other | | 849 | | | | | 910 | | | 938 | | |
| Total period-end loans and leases | | $ | 57,354 | | | | | $ | 54,859 | | | $ | 55,435 | | |
| | | | | | | | | | |
ALLL / loans and leases % | | | | | | | | | |
| C&I | | 0.93 | % | | | | 1.07 | % | | 1.19 | % | |
| CRE | | 1.14 | | | | | 1.27 | | | 1.33 | | |
| Consumer real estate | | 1.63 | | | | | 1.51 | | | 1.65 | | |
| Credit card and other | | 3.32 | | | | | 2.14 | | | 2.03 | | |
| Total ALLL / loans and leases % | | 1.16 | % | | | | 1.22 | % | | 1.32 | % | |
| | | | | | | | | | |
ACL / loans and leases % | | | | | | | | | |
| C&I | | 1.11 | % | | | | 1.22 | % | | 1.34 | % | |
| CRE | | 1.28 | | | | | 1.37 | | | 1.41 | | |
| Consumer real estate | | 1.72 | | | | | 1.59 | | | 1.74 | |
| Credit card and other | | 3.32 | | | | | 2.09 | | | 2.04 | | |
| Total ACL / loans and leases % | | 1.31 | % | | | | 1.34 | % | | 1.45 | % | |
| | | | | | | | | | |
Quarter-to-date net charge-offs (recoveries) | | | | | | | | | |
| C&I | | $ | 11 | | | | | $ | 1 | | | $ | 4 | | |
| CRE | | 1 | | | | | — | | | — | | |
| Consumer real estate | | (5) | | | | | (3) | | | (6) | | |
| Credit card and other | | 5 | | | | | 3 | | | 5 | | |
| Total net charge-offs (recoveries) | | $ | 12 | | | | | $ | 1 | | | $ | 3 | | |
| | | | | | | | | | |
Average loans and leases | | | | | | | | | |
| C&I | | $ | 31,120 | | | | | $ | 30,780 | | | $ | 31,477 | | |
| CRE | | 12,926 | | | | | 12,221 | | | 12,264 | | |
| Consumer real estate | | 11,633 | | | | | 10,738 | | | 10,819 | | |
| Credit card and other | | 864 | | | | | 943 | | | 948 | | |
| Total average loans and leases | | $ | 56,543 | | | | | $ | 54,682 | | | $ | 55,508 | | |
| | | | | | | | | | |
Charge-off % (annualized) | | | | | | | | | |
| C&I | | 0.14 | % | | | | 0.01 | % | | 0.06 | % | |
| CRE | | 0.01 | | | | | (0.01) | | | 0.01 | | |
| Consumer real estate | | (0.17) | | | | | (0.10) | | | (0.24) | | |
| Credit card and other | | 2.46 | | | | | 1.26 | | | 1.86 | | |
| Total charge-off % | | 0.08 | % | | | | 0.01 | % | | 0.02 | % | |
| | | | | | | | | | |
ALLL / annualized net charge-offs | | | | | | | | | |
| C&I | | 676 | % | | | | 7,238 | % | | 2,169 | % | |
| CRE | | 6,931 | | | | | NM | | 11,982 | | |
| Consumer real estate | | NM | | | | NM | | NM | |
| Credit card and other | | 133 | | | | | 164 | | | 104 | | |
| Total ALLL / net charge-offs | | 1,428 | % | | | | 17,374 | % | | 6,855 | % | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
NM - not meaningful
| | | | | | | | |
PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| | |
Nonperforming Assets
Nonperforming loans are loans placed on nonaccrual if it becomes evident that full collection of principal and interest is at risk, if impairment has been recognized as a partial charge-off of principal balance due to insufficient collateral value and past due status, or on(on a case-by-case basisbasis) if FHN continues to receive payments but there are other borrower-specific issues. Included in nonaccruals are loans infor which FHN continues to receive payments, including residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy,bankruptcy. NPAs consist of nonperforming loans 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(excluding OREO from government insured mortgages, represent nonperforming assets (“NPAs”)mortgages).
Total nonperforming assetsNPAs (including NPLs HFS) decreasedincreased to $140.2$301 million on September 30, 2017, from $164.6 million on December 31, 2016. The nonperforming assets ratio (nonperforming assets excluding NPLs HFS to total period-end loans plus OREO and other assets) decreased to .66 percent as of September 30, 2017, compared to .80 percent2022 from $285 million as of December 31, 2016. Portfolio nonperforming loans declined $20.7 million from December 31, 2016, to $125.0 million on September 30, 2017. The decline in nonperforming loans was primarily2021, largely driven by decreases withinhigher nonaccrual loans in the C&I and consumer real estate portfolios. This decrease in the C&I portfolio was largely driven by payoffs.
portfolio. The nonperforming loans and leases ratio of the ALLLincreased one basis point to NPLs in the loan portfolio was 1.56 times0.51% as of September 30, 2017, compared to 1.39 times as of December 31, 2016. 2022.
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 the estimated loss content has been recognized through a partial charge-off, typically reserves arean ALLL is not recorded.
Table 18 provides an activity rollforward of OREO balances for September 30, 2017I.2.12
NONACCRUAL/NONPERFORMING LOANS, FORECLOSED ASSETS, & OTHER DISCLOSURES
| | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | |
Nonperforming loans and leases | | September 30, 2022 | | | | December 31, 2021 |
| C&I | | $ | 116 | | | | | $ | 125 | |
| CRE | | 10 | | | | | 9 | |
| Consumer real estate | | 163 | | | | | 138 | |
| Credit card and other | | 3 | | | | | 3 | |
| Total nonperforming loans and leases (a) | | $ | 292 | | | | | $ | 275 | |
| | | | | | | |
Nonperforming loans held for sale (a) | | $ | 6 | | | | | $ | 7 | |
Foreclosed real estate and other assets (b) | | 3 | | | | | 3 | |
| Total nonperforming assets (a) (b) | | $ | 301 | | | | | $ | 285 | |
| | | | | | | |
Nonperforming loans and leases to total loans and leases | | | | | | |
| C&I | | 0.37 | % | | | | 0.40 | % |
| CRE | | 0.08 | | | | | 0.08 | |
| Consumer real estate | | 1.37 | | | | | 1.29 | |
| Credit card and other | | 0.31 | | | | | 0.31 | |
| Total NPL % | | 0.51 | % | | | | 0.50 | % |
| | | | | | | |
ALLL / NPLs | | | | | | |
| C&I | | 253 | % | | | | 268 | % |
| CRE | | 1,422 | | | | | 1,671 | |
| Consumer real estate | | 119 | | | | | 118 | |
| Credit card and other | | 1,070 | | | | | 699 | |
| Total ALLL / NPLs | | 228 | % | | | | 244 | % |
| | | | | | | |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(a)Excludes loans and 2016. The balance of OREO, exclusive of inventoryleases that are 90 or more days past due and still accruing interest.
(b)Balances do not include government-insured foreclosed real estate. Foreclosed real estate from government insured mortgages, decreased to $7.9GNMA loans totaled $1 million as of both September 30, 2017, from $13.7 million as of September 30, 2016, as FHN has executed sales of existing OREO2022 and continued efforts to avoid foreclosures byDecember 31, 2021.
restructuring loans and working with borrowers. Additionally, property values have stabilized which also affects the balance of OREO.
Table 18—Rollforward of OREO
|
| | | | | | | | | | | | | | | | |
| | 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 million and $6.4 million as of September 30, 2017 and 2016, respectively.92 | 3Q22 FORM 10-Q REPORT |
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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The following table provides consolidated asset quality informationnonperforming assets by business segment:
Table I.2.13
NONPERFORMING ASSETS BY SEGMENT
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
(Dollars in millions) | | | | | | |
Nonperforming loans and leases (a) (b) | | September 30, 2022 | | | | December 31, 2021 |
| Regional Banking | | $ | 204 | | | | | $ | 163 | |
| Specialty Banking | | 56 | | | | | 78 | |
| Corporate | | 32 | | | | | 34 | |
| Consolidated | | $ | 292 | | | | | $ | 275 | |
Foreclosed real estate (c) | | | | | | |
| Regional Banking | | $ | — | | | | | $ | 2 | |
| Specialty Banking | | 2 | | | | | — | |
| Corporate | | 1 | | | | | 1 | |
| Consolidated | | $ | 3 | | | | | $ | 3 | |
Nonperforming Assets (a) (b) (c) | | | | | | |
| Regional Banking | | $ | 204 | | | | | $ | 165 | |
| Specialty Banking | | 58 | | | | | 78 | |
| Corporate | | 33 | | | | | 35 | |
| Consolidated | | $ | 295 | | | | | $ | 278 | |
Nonperforming loans and leases to loans and leases | | | | | | |
| Regional Banking | | 0.50 | % | | | | 0.43 | % |
| Specialty Banking | | 0.34 | | | | | 0.48 | |
| Corporate | | 6.19 | | | | | 5.39 | |
| Consolidated | | 0.51 | % | | | | 0.50 | % |
NPA % (d) | | | | | | |
| Regional Banking | | 0.50 | % | | | | 0.44 | % |
| Specialty Banking | | 0.36 | | | | | 0.48 | |
| Corporate | | 6.48 | | | | | 5.51 | |
| Consolidated | | 0.51 | % | | | | 0.51 | % |
| | | | | | | |
(a)Excludes loans and leases that are 90 or more days past due and still accruing interest.
(b)Excludes loans classified as held for the three months endedsale.
(c)Excludes foreclosed real estate and receivables related to government insured mortgages of $1 million as of both September 30, 2017 and 2016, and as of September 30, 2017,2022 and December 31, 2016:2021.
Table 19—Asset Quality Information(d)Ratio is non-performing assets to total loans and leases plus foreclosed real estate.
|
| | | | | | | | | |
| | Three Months Ended September 30 | |
(Dollars in thousands) | | 2017 | | 2016 | |
Allowance for loan losses: | | | | | |
Beginning balance on July 1 | | $ | 197,257 |
| | $ | 199,807 |
| |
Provision/(provision credit) for loan losses | | — |
| | 4,000 |
| |
Charge-offs | | (10,670 | ) | | (10,362 | ) | |
Recoveries | | 8,280 |
| | 8,112 |
| |
Ending balance on September 30 | | $ | 194,867 |
| | $ | 201,557 |
| |
Reserve for remaining unfunded commitments | | 4,372 |
| | 4,802 |
| |
Total allowance for loan losses and reserve for unfunded commitments | | $ | 199,239 |
| | $ | 206,359 |
| |
Key ratios | | | | | |
Allowance / net charge-offs (a) | | 20.55 | x | | 22.51 | x | |
Net charge-offs % (b) | | 0.05 | % | | 0.05 | % | |
| | | | | |
| | As of September 30 | | As of December 31 | |
Nonperforming Assets by Segment | | 2017 | | 2016 | |
Regional Banking: | | | | | |
Nonperforming loans (c) | | $ | 40,610 |
| | $ | 50,653 |
| |
OREO (d) | | 2,848 |
| | 5,081 |
| |
Total Regional Banking | | 43,458 |
| | 55,734 |
| |
Non-Strategic: | | | | | |
Nonperforming loans (c) | | 82,203 |
| | 93,808 |
| |
Nonperforming loans held-for-sale net of fair value adjustment (c) | | 7,314 |
| | 7,741 |
| |
OREO (d) | | 5,029 |
| | 6,154 |
| |
Total Non-Strategic | | 94,546 |
| | 107,703 |
| |
Corporate: | | | | | |
Nonperforming loans (c) | | 2,173 |
| | 1,186 |
| |
Total Corporate | | 2,173 |
| | 1,186 |
| |
Total nonperforming assets (c) (d) | | $ | 140,177 |
| | $ | 164,623 |
| |
| |
(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. |
| |
(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 | |
| | 2017 | | 2016 | |
Loans and commitments: | | | | | |
Total period-end loans, net of unearned income | | $ | 20,166,091 |
| | $ | 19,589,520 |
| |
Potential problem assets (a) | | 280,358 |
| | 290,354 |
| |
Loans 30 to 89 days past due | | 45,248 |
| | 42,570 |
| |
Loans 90 days past due (b) (c) | | 30,950 |
| | 23,385 |
| |
Loans held-for-sale 30 to 89 days past due (d) | | 34,325 |
| | 6,462 |
| |
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 |
| |
Remaining unfunded commitments | | $ | 8,868,115 |
| | $ | 8,744,649 |
| |
Key ratios | | | | | |
Allowance / loans % | | 0.97 | % | | 1.03 | % | |
Allowance / NPL | | 1.56 | x | | 1.39 | x | |
NPA % (f) | | 0.66 | % | | 0.80 | % | |
NPL % | | 0.62 | % | | 0.74 | % | |
| |
(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) | 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 addition to PPP loans, other customer support initiatives in response to the COVID-19 pandemic include incremental lending assistance for borrowers through delayed payment programs and fee waivers. Customer deferrals were not material at September 30, 2022 and December 31, 2021. To the extent that loans were past due as of September 30, 2022 or December 31, 2021 and had been granted a deferral, they were excluded from
loans past due 30 to 89 days and loans past due 90 days or more in the portfolio that aretable and discussion below.
Loans 90 days or more past due and still accruing were $31.0$24 million onas of September 30, 2017,2022 compared to $23.4$40 million onas of December 31, 2016. The increase was due in large part to one relationship, which is a purchased credit-impaired loan.2021. Loans 30 to 89 days past due increased to $45.2were $108 million onas of both September 30, 2017, from $42.6 million on2022 and December 31, 2016.2021. C&I loans past due 30 to 89 days increased $12 million while past due CRE loans decreased $8 million and past due consumer real estate loans decreased $6 million.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Table I.2.14
ACCRUING DELINQUENCIES & OTHER CREDIT DISCLOSURES
| | | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | |
Accruing loans and leases 30+ days past due | September 30, 2022 | | | | December 31, 2021 | |
| C&I | $ | 66 | | | | | $ | 58 | | |
| CRE | 5 | | | | | 13 | | |
| Consumer real estate | 48 | | | | | 70 | | |
| Credit card and other | 12 | | | | | 7 | | |
| Total accruing loans and leases 30+ days past due | $ | 131 | | | | | $ | 148 | | |
| | | | | | | |
Accruing loans and leases 30+ days past due % | | | | | | |
| C&I | 0.21 | % | | | | 0.19 | % | |
| CRE | 0.04 | | | | | 0.11 | | |
| Consumer real estate | 0.40 | | | | | 0.65 | | |
| Credit card and other | 1.43 | | | | | 0.76 | | |
| Total accruing loans and leases 30+ days past due % | 0.23 | % | | | | 0.27 | % | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Accruing loans and leases 90+ days past due (a) (b) (c): | | | | | | |
| | | | | | |
| C&I | $ | 1 | | | | | $ | 5 | | |
| | | | | | | |
| | | | | | |
| | | | | | |
| Consumer real Estate | 17 | | | | | 33 | | |
| Credit card and other | 6 | | | | | 2 | | |
| | | | | | |
| Total accruing loans and leases 90+ days past due | $ | 24 | | | | | $ | 40 | | |
| | | | | | | |
| | | | | | |
| | | | | | |
Loans held for sale | | | | | | |
30 to 89 days past due | $ | 4 | | | | | $ | 7 | | |
30 to 89 days past due - guaranteed portion (d) | 2 | | | | | 2 | | |
90+ days past due | 14 | | | | | 24 | | |
90+ days past due - guaranteed portion (d) | 6 | | | | | 12 | | |
| | | | | | |
(a)Excludes loans classified as held for sale.
(b)Amounts are not included in nonperforming/nonaccrual loans.
(c)Amounts are also included in accruing loans and leases 30+ days past due.
(d)Guaranteed loans include FHA, VA, and GNMA loans repurchased through the GNMA buyout program.
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 portfolio were $280.4$540 million on September 30, 2017, $290.42022 and $597 million on December 31, 2016, and $255.4 million on September 30, 2016. The decline from year-end in potential problem assets was due to a net decrease in classified commercial loans driven by the payoff of a few credits.2021. 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 and lease losses.
Troubled Debt RestructuringRestructurings 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”).TDR.
For loan modifications that met the TDR relief provisions outlined in either the CARES Act, as extended by the CAA, or revised Interagency Guidance, FHN has excluded these
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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modifications from consideration as a TDR and has excluded loans with these qualifying modifications from designation as a TDR in the information and discussion that follows. See Note 43 – Loans and Leases for further discussion regarding TDRs and loan modifications.
On September 30, 20172022 and December 31, 2016,2021, FHN had $241.6$204 million and $285.2$206 million portfolio loans classified as held-for-investment TDRs, respectively. For these TDRs, in the loan portfolio,including specific reserves, FHN had an allowance for loan loss reserves
and lease losses of $38.6 million and $44.9$13 million, or 16 percent7% of TDR balances as of September 30, 20172022, and $12 million, or 6% of TDR balances, as of December 31, 2016.2021. Additionally, FHN had $63.2$31 million and $69.3$35 million of HFS loans classified as TDRs as of September 30, 20172022 and December 31, 2016,2021, 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.
The following table provides a summary of TDRs for the periods ended September 30, 20172022 and December 31, 2016:2021:
Table 20—Troubled Debt RestructuringsI.2.15
TROUBLED DEBT RESTRUCTURINGS
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | September 30, 2022 | | | | December 31, 2021 |
Held for investment: | | | | | | |
Commercial loans: | | | | | | |
Current | | $ | 15 | | | | | $ | 53 | |
Delinquent | | — | | | | | — | |
Non-accrual | | 40 | | | | | 35 | |
Total commercial loans | | $ | 55 | | | | | $ | 88 | |
Consumer real estate: | | | | | | |
Current | | $ | 76 | | | | | $ | 60 | |
Delinquent | | 9 | | | | | 4 | |
Non-accrual (a) | | 64 | | | | | 53 | |
Total consumer real estate | | $ | 149 | | | | | $ | 117 | |
Credit card and other: | | | | | | |
Current | | $ | — | | | | | $ | 1 | |
Delinquent | | — | | | | | — | |
Non-accrual | | — | | | | | — | |
Total credit card and other | | — | | | | | 1 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Total held for investment | | $ | 204 | | | | | $ | 206 | |
| | | | | | |
Held for sale: | | | | | | |
Current | | $ | 24 | | | | | $ | 27 | |
Delinquent | | 6 | | | | | 7 | |
Non-accrual | | 1 | | | | | 1 | |
Total held for sale | | 31 | | | | | 35 | |
Total troubled debt restructurings | | $ | 235 | | | | | $ | 241 | |
| | | | | | |
(a) Balances as of September 30, 2022 and December 31, 2021 include $11 million and $12 million, respectively, of discharged bankruptcies.
Investment Securities
|
| | | | | | | | |
(Dollars in thousands) | | As of September 30, 2017 | | As of December 31, 2016 |
Held-to-maturity: | | | | |
Permanent mortgage: | | | | |
Current | | $ | 65,215 |
| | $ | 73,500 |
|
Delinquent | | 1,657 |
| | 2,751 |
|
Non-accrual (a) | | 17,209 |
| | 17,675 |
|
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 |
|
Credit card and other: | | | | |
Current | | 512 |
| | 288 |
|
Delinquent | | 32 |
| | 18 |
|
Non-accrual | | — |
| | — |
|
Total credit card and other | | 544 |
| | 306 |
|
Commercial loans: | | | | |
Current | | 16,412 |
| | 21,887 |
|
Delinquent | | 88 |
| | — |
|
Non-accrual | | 4,616 |
| | 15,571 |
|
Total commercial loans | | 21,116 |
| | 37,458 |
|
Total held-to-maturity | | $ | 241,599 |
| | $ | 285,150 |
|
Held-for-sale: | | | | |
Current | | $ | 43,864 |
| | $ | 46,625 |
|
Delinquent | | 13,956 |
| | 16,436 |
|
Non-accrual | | 5,347 |
| | 6,283 |
|
Total held-for-sale | | 63,167 |
| | 69,344 |
|
Total troubled debt restructurings | | $ | 304,766 |
| | $ | 354,494 |
|
FHN’s investment securities portfolio consists principally of debt securities available for sale. FHN maintains a highly-rated securities portfolio consisting primarily of government agency issued mortgage-backed securities and collateralized mortgage obligations. The securities portfolio provides a source of income and liquidity and is an important tool used to balance the interest rate risk of the loan and deposit portfolios. The securities portfolio is periodically evaluated in light of established ALM
objectives, changing market conditions that could affect the profitability of the portfolio, the regulatory environment, and the level of interest rate risk to which FHN is exposed. These evaluations may result in steps taken to adjust the overall balance sheet positioning.
Investment securities were $10.1 billion and $9.4 billion on September 30, 2022 and December 31, 2021, respectively, representing approximately 13% and 11% of total assets, respectively. See Note 2 - Investment
| | | | | | | | |
(a) | Balances as of September 30, 2017 and December 31, 2016, include $5.5 million and $5.3 million, respectively, of discharged bankruptcies.95 | 3Q22 FORM 10-Q REPORT |
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(b)PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
| Balances | |
Securities for more information about the securities portfolio.
Deposits
Total deposits of $66.0 billion as of September 30, 2022 decreased $8.9 billion from December 31, 2021 reflecting a continued downward trend from mid-2021 highs driven by excess liquidity associated with the COVID-19 pandemic. Interest-bearing deposits decreased $6.8 billion and noninterest-bearing deposits decreased $2.1 billion.
See Tables I.2.2 and I.2.3 - Average Balances, Net Interest Income and Yields/Rates in this Report for information on average deposits including average rates paid. The following table summarizes the major components of deposits as of September 30, 2022 and December 31, 2021.
Table I.2.16
DEPOSITS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 | | | | |
(Dollars in millions) | | Amount | | Percent of total | | Amount | | Percent of total | | Change | | Percent |
Savings | | $ | 22,800 | | | 35 | % | | $ | 26,457 | | | 35 | % | | $ | (3,657) | | | (14) | % |
Time deposits | | 2,671 | | | 4 | | | 3,500 | | | 5 | | | (829) | | | (24) | |
Other interest-bearing deposits | | 14,731 | | | 22 | | | 17,055 | | | 23 | | | (2,324) | | | (14) | |
| | | | | | | | | | | | |
Total interest-bearing deposits | | 40,202 | | | 61 | | | 47,012 | | | 63 | | | (6,810) | | | (14) | |
Noninterest-bearing deposits | | 25,813 | | | 39 | | | 27,883 | | | 37 | | | (2,070) | | | (7) | |
Total deposits | | $ | 66,015 | | | 100 | % | | $ | 74,895 | | | 100 | % | | $ | (8,880) | | | (12) | % |
| | | | | | | | | | | | |
Short-Term Borrowings
Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings. Total short-term borrowings were $1.8 billion and $2.6 billion as of September 30, 2022 and December 31, 2021, respectively.
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.
Trading liabilities fluctuate based on various factors, including levels of trading securities and hedging strategies. Federal funds purchased fluctuates depending on the amount of excess funding of FHN’s correspondent bank customers. Balances of securities sold under agreements to repurchase fluctuate based on cost attractiveness relative to FHLB borrowing levels and the ability to pledge securities toward such transactions.
Term Borrowings
Term borrowings include senior and subordinated borrowings with original maturities greater than one year. Total term borrowings were $1.6 billion as of September 30, 2022 and December 31, 2021.
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Capital
Management’s objectives are to provide capital sufficient to cover the risks inherent in FHN’s businesses, to maintain excess capital to well-capitalized standards, and to assure ready access to the capital markets. Total equity was $8.3 billion at September 30, 2022 and $8.5 billion at December 31, 2021. Significant changes included net income of $642 million and the issuance of $494 million in Series G preferred stock, which were offset by $271
million in common and preferred dividends and a decrease in AOCI of $1.1 billion.
The following tables provide a reconciliation of shareholders’ equity from the Consolidated Balance Sheets to Common Equity Tier 1, Tier 1 and Total Regulatory Capital as well as certain selected capital ratios:
Table I.2.17
REGULATORY CAPITAL DATA
| | | | | | | | | | | | | | |
(Dollars in millions) | | September 30, 2022 | | December 31, 2021 |
Shareholders’ equity | | $ | 7,988 | | | $ | 8,199 | |
Modified CECL transitional amount (a) | | 85 | | | 114 | |
FHN non-cumulative perpetual preferred stock | | (1,014) | | | (520) | |
Common equity tier 1 before regulatory adjustments | | $ | 7,059 | | | $ | 7,793 | |
Regulatory adjustments: | | | | |
Disallowed goodwill and other intangibles | | (1,669) | | | (1,711) | |
Net unrealized (gains) losses on securities available for sale | | 1,039 | | | 36 | |
Net unrealized (gains) losses on pension and other postretirement plans | | 249 | | | 255 | |
Net unrealized (gains) losses on cash flow hedges | | 139 | | | (3) | |
Disallowed deferred tax assets | | — | | | (2) | |
Other deductions from common equity tier 1 | | (1) | | | (1) | |
Common equity tier 1 | | $ | 6,816 | | | $ | 6,367 | |
FHN non-cumulative perpetual preferred stock (b) | | 920 | | | 426 | |
Qualifying noncontrolling interest— First Horizon Bank preferred stock | | 295 | | | 295 | |
| | | | |
Tier 1 capital | | $ | 8,031 | | | $ | 7,088 | |
Tier 2 capital | | 956 | | | 830 | |
Total regulatory capital | | $ | 8,987 | | | $ | 7,918 | |
Risk-Weighted Assets | | | | |
First Horizon Corporation | | $ | 68,580 | | | $ | 64,183 | |
First Horizon Bank | | 68,065 | | | 63,601 | |
Average Assets for Leverage | | | | |
First Horizon Corporation | | 82,059 | | | 87,683 | |
First Horizon Bank | | 81,368 | | | 86,953 | |
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Table I.2.18
REGULATORY RATIOS & AMOUNTS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| | Ratio | | Amount | | Ratio | | Amount |
Common Equity Tier 1 | | | | | | | | |
First Horizon Corporation | | 9.94 | % | | $ | 6,816 | | | 9.92 | % | | $ | 6,367 | |
First Horizon Bank | | 10.55 | | | 7,182 | | | 10.75 | | | 6,838 | |
Tier 1 | | | | | | | | |
First Horizon Corporation | | 11.71 | | | 8,031 | | | 11.04 | | | 7,088 | |
First Horizon Bank | | 10.98 | | | 7,477 | | | 11.22 | | | 7,133 | |
Total | | | | | | | | |
First Horizon Corporation | | 13.10 | | | 8,987 | | | 12.34 | | | 7,918 | |
First Horizon Bank | | 12.18 | | | 8,289 | | | 12.41 | | | 7,893 | |
Tier 1 Leverage | | | | | | | | |
First Horizon Corporation | | 9.79 | | | 8,031 | | | 8.08 | | | 7,088 | |
First Horizon Bank | | 9.19 | | | 7,477 | | | 8.20 | | | 7,133 | |
Other Capital Ratios | | | | | | | | |
Total period-end equity to period-end assets | | 10.32 | | | | | 9.53 | | | |
Tangible common equity to tangible assets (c) | | 6.64 | | | | | 6.73 | | | |
Adjusted tangible common equity to risk-weighted assets (c) | | 9.12 | | | | | 9.20 | | | |
(a)The modified CECL transitional amount includes the impact to retained earnings from the initial adoption of CECL plus 25% of the change in the adjusted allowance for credit losses since FHN’s initial adoption of CECL through December 31, 2021. For September 30, 2022, 25% of the full amount at December 31, 2021 is phased out and not included in Common Equity Tier 1 capital.
(b)The $94 million carrying value of the Series D preferred stock does not qualify as Tier 1 capital because the earliest redemption date is less than five years from the issuance date, which was re-set to July 1, 2020 when the IBKC merger closed.
(c)Tangible common equity to tangible assets and adjusted tangible common equity to risk-weighted assets are non-GAAP measures and are reconciled to total equity to total assets (GAAP) in the Non-GAAP to GAAP Reconciliation - Table I.2.26.
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 6.50%, 8.00%, 10.00%, and 5.00%, respectively. Furthermore, a capital conservation buffer of 50 basis points above these levels 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, 2022, each of FHN and First Horizon Bank had sufficient capital to qualify as well-capitalized institutions and to meet the capital conservation buffer
requirement. Capital ratios for both FHN and First Horizon Bank are calculated under the final rule issued by the banking regulators in 2020 to delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period.
For FHN, the Tier 1 and Total risk-based regulatory capital ratios increased in third quarter 2022 relative to year-end 2021 primarily from the impact of net income less dividends during the first nine months of 2022. FHN's Tier 1 Capital and Tier 1 Leverage ratios as of September 30, 2022 further benefited from the issuance of its Series G preferred stock in February 2022. FHN and First Horizon Bank's risk-based regulatory capital ratios were negatively impacted in 2022 from an increase in risk-weighted assets from December 31, 2021.
During 2022, capital ratios are expected to remain above well-capitalized standards plus the required capital conservation buffer.
Common Stock Purchase Programs
General Purchase Program
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.
FHN’s Board has not authorized a preferred stock purchase program.
On January 27, 2021, FHN announced that its Board of Directors approved a new $500 million common share purchase program that was to expire on January 31, 2023, replacing the 2018 program, which was terminated. On
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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October 26, 2021, FHN announced that the 2021 program had been increased by $500 million and extended to October 31, 2023. Like the 2018 program, the 2021 program is not tied to any compensation plan. Purchases may be made in the open market or through privately negotiated transactions, including under Rule 10b5-1 plans as well as accelerated share repurchase and other structured transactions. The timing and exact amount of common share repurchases will be subject to various factors, including FHN's capital position, financial
performance, capital impacts of strategic initiatives, market conditions and regulatory considerations.
As of September 30, 2022, $401 million in purchases had been made life-to-date under the 2021 program at an average price per share of $16.60, or $16.58 excluding commissions. At current price levels, which have been impacted by the Pending TD Merger since it was announced, management does not currently anticipate purchasing additional shares under this authority.
Table I.2.19
COMMON STOCK PURCHASES—GENERAL PROGRAM
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 |
2022 | | | | | | | | |
July 1 to July 31 | | — | | | N/A | | — | | | $ | 598,646 | |
August 1 to August 31 | | — | | | N/A | | — | | | 598,646 | |
September 1 to September 30 2017 and December 31, 2016, include $14.9 million and $15.3 million, respectively, | | — | | | N/A | | — | | | 598,646 | |
Total | | — | | | N/A | | — | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(a) Represents total costs including commissions paid.
Compensation Plans Purchase Program
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 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 stock option awards remain outstanding. The shares may be purchased over the option exercise periods of the various compensation plans on or before December 31, 2023. Purchases may be made in the open market or through privately negotiated transactions and are subject to various factors including FHN's capital position, financial performance, capital impacts of strategic initiatives, market conditions and regulatory restrictions. As of September 30, 2022, the maximum number of shares that may be purchased under the program was 22.5 million shares. Management currently does not anticipate purchasing a material number of shares under this authority during 2022.
Table I.2.20
COMMON STOCK PURCHASES—COMPENSATION PLANS PROGRAM
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 |
2022 | | | | | | | | |
July 1 to July 31 | | 31 | | | $ | 21.98 | | | 31 | | | 22,598 | |
August 1 to August 31 | | 71 | | | 22.07 | | | 71 | | | 22,527 | |
September 1 to September 30 | | 1 | | | 22.89 | | | 1 | | | 22,526 | |
Total | | 103 | | | $ | 22.05 | | | 103 | | | |
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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RISK MANAGEMENTRisk Management
Except as discussed below, there
There have been no significant changes to FHN’s risk management practices as described under “Risk Management” beginning on page 47included in Item 7 of Exhibit 13 to FHN’s 2021 Annual Report on Form 10-K, for the year ended December 31, 2016.as amended.
MARKET RISK MANAGEMENTMarket Risk Management
Except as discussed below, there have been no significant changes to FHN’s market risk management practices as described under “Market Risk Management” beginning on page 48 of Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.
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 percent99% confidence level andwith 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 ourthe trading securities portfolio.
A summary of FHN’s VaR and SVaR measures for 1-day and 10-day time horizons is as follows:presented in the following table:
Table 21—I.2.21
VaR and& SVaR MeasuresMEASURES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 | | As of September 30, 2022 |
(Dollars in millions) | | Mean | | High | | Low | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | |
VaR | | $ | 2 | | | $ | 3 | | | $ | 2 | | | $ | 2 | | | $ | 3 | | | $ | 2 | | | $ | 3 | |
SVaR | | 5 | | | 6 | | | 4 | | | 5 | | | 7 | | | 4 | | | 5 | |
10-day | | | | | | | | | | | | | | |
VaR | | 9 | | | 10 | | | 8 | | | 7 | | | 11 | | | 3 | | | 10 | |
SVaR | | 24 | | | 27 | | | 18 | | | 24 | | | 34 | | | 18 | | | 25 | |
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 | | As of September 30, 2021 |
(Dollars in millions) | | Mean | | High | | Low | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | |
VaR | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 4 | | | $ | 1 | | | $ | 1 | |
SVaR | | 5 | | | 6 | | | 4 | | | 4 | | | 6 | | | 2 | | | 5 | |
10-day | | | | | | | | | | | | | | |
VaR | | 3 | | | 5 | | | 2 | | | 6 | | | 21 | | | 1 | | | 4 | |
SVaR | | 19 | | | 24 | | | 14 | | | 17 | | | 24 | | | 11 | | | 21 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 | | As of December 31, 2021 |
(Dollars in millions) | | Mean | | High | | Low | | |
1-day | | | | | | | | |
VaR | | $ | 1 | | | $ | 4 | | | $ | 1 | | | $ | 2 | |
SVaR | | 4 | | | 7 | | | 2 | | | 5 | |
10-day | | | | | | | | |
VaR | | 5 | | | 21 | | | 1 | | | 5 | |
SVaR | | 18 | | | 27 | | | 11 | | | 22 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 | | As of September 30, 2017 |
(Dollars in thousands) | | Mean | | High | | Low | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | |
VaR | | $ | 1,620 |
| | $ | 3,310 |
| | $ | 521 |
| | $ | 1,450 |
| | $ | 3,310 |
| | $ | 521 |
| | $ | 3,174 |
|
SVaR | | 4,575 |
| | 7,781 |
| | 2,150 |
| | 4,023 |
| | 7,781 |
| | 1,775 |
| | 6,805 |
|
10-day | | | | | | | | | | | | | | |
VaR | | 4,112 |
| | 8,039 |
| | 870 |
| | 3,538 |
| | 8,039 |
| | 870 |
| | 6,302 |
|
SVaR | | 15,021 |
| | 22,511 |
| | 7,833 |
| | 13,390 |
| | 24,550 |
| | 4,916 |
| | 18,602 |
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 | | As of September 30, 2016 |
(Dollars in thousands) | | Mean | | High | | Low | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | |
VaR | | $ | 814 |
| | $ | 1,040 |
| | $ | 606 |
| | $ | 769 |
| | $ | 1,411 |
| | $ | 393 |
| | $ | 880 |
|
SVaR | | 3,823 |
| | 5,641 |
| | 2,253 |
| | 3,607 |
| | 5,789 |
| | 1,748 |
| | 4,017 |
|
10-day | | | | | | | | | | | | | | |
VaR | | 1,917 |
| | 3,167 |
| | 1,170 |
| | 1,848 |
| | 4,058 |
| | 751 |
| | 2,998 |
|
SVaR | | 12,439 |
| | 18,221 |
| | 7,105 |
| | 11,703 |
| | 18,221 |
| | 3,263 |
| | 12,055 |
|
| | | | | | | | | | | | | | |
| | | | Year Ended December 31, 2016 | | As of December 31, 2016 |
(Dollars in thousands) | | | | | | | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | |
VaR | | | | | | | | $ | 821 |
| | $ | 1,745 |
| | $ | 393 |
| | $ | 932 |
|
SVaR | | | | | | | | 3,643 |
| | 5,789 |
| | 1,748 |
| | 2,830 |
|
10-day | | | | | | | | | | | | | | |
VaR | | | | | | | | 2,088 |
| | 5,852 |
| | 751 |
| | 2,136 |
|
SVaR | | | | | | | | 11,671 |
| | 18,483 |
| | 3,263 |
| | 6,443 |
|
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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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 inI.2.22
SCHEDULE OF RISKS INCLUDED IN VaR
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2022 | | As of September 30, 2021 | | As of December 31, 2021 |
(Dollars in millions) | | 1-day | | 10-day | | 1-day | | 10-day | | 1-day | | 10-day |
Interest rate risk | | $ | 1 | | | $ | 3 | | | $ | 1 | | | $ | 3 | | | $ | 1 | | | $ | 1 | |
Credit spread risk | | 1 | | | 1 | | | — | | | 1 | | | 1 | | | 1 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of September 30, 2016 | | As of December 31, 2016 |
(Dollars in thousands) | | 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 |
|
Credit spread risk | | 370 |
| | 701 |
| | 785 |
| | 2,710 |
| | 537 |
| | 1,391 |
|
The potential risk of loss reflected by FHN’s VaR measures assumes the trading securities inventory is static. Because FHN’s Fixed Income divisionFHN Financial procures fixed income securities for purposes of distribution to customers,clients, its trading securities inventory turns over multiple times daily, on average.regularly. Additionally, Fixed IncomeFHNF traders actively manage the trading securities
inventory continuously throughout each trading day. Accordingly, FHN’sFHNF’s trading securities inventory is highly dynamic, rather than static. As a result, it would be rare for Fixed IncomeFHNF to incur a negative revenue day in its fixed income activities ofat the levellevels indicated by its VaR measurements.
measures.
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"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 IncomeFHN Financial 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, there have been no significant changes to FHN's interest rate risk management practices as described under "InterestInterest Rate Risk Management" beginning on page 50 of Exhibit 13 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.Management
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.Report.
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
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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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 exposure2022, NII exposures over the next 12 months assuming a rate shockshocks of plusplus/minus 25 basis points, plus/minus 50 basis points, plus/minus 100 basis points, and plus 200 basis points isare estimated to have a favorable variance of 1.0 percent, 2.1 percent, 4.1 percent, and 7.7 percent, respectively of base net interest income. variances as shown in the table below.
Table I.2.23
INTEREST RATE SENSITIVITY
| | | | | | | | |
Shifts in Interest Rates (in bps) | | % Change in Projected Net Interest Income |
-100 | | -9.1% |
-50 | | -4.4% |
-25 | | -2.2% |
+25 | | +2.1% |
+50 | | +4.2% |
+100 | | +8.3% |
+200 | | +13.9% |
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.0.3%. 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 shock of minus 25 basis points and minus 50 basis points results in an unfavorable variance in net interest income of 1.5 percent and 4.4 percent, respectively, of base net interest income.0.3%. 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
FHN’s net interest income had been impacted by the disruption from the COVID-19 pandemic and its variants as well as the low-rate environment. The impact of government stimulus programs and other developments continue to influence net interest rate risk profile toincome results, although the Board quarterly.impacts from these programs have abated.
CAPITAL MANAGEMENT AND ADEQUACY
ThereInterest rates have been no significant changesincreasing over the past three quarters as the Federal Reserve has pivoted its monetary policy actions to FHN's capital management practices as described under "Capital Management and Adequacy" on page 51 of Exhibit 13 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.
OPERATIONAL RISK MANAGEMENT
Except as discussed below, there have been no significant changes to FHN's operational risk management practices as described under "Operational Risk Management" on page 52 of Exhibit 13 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 connectioncurb inflation, with the Capital Bank merger.expectation that rates will increase further in the future. FHN continues to monitor current economic trends and potential exposures closely.
COMPLIANCE RISK MANAGEMENT
There have been no significant changes to FHN's compliance risk management practices as described under "ComplianceLiquidity Risk Management" on page 52 of Exhibit 13 to FHN's Annual Report on Form 10-KManagement
Among other things, ALCO is responsible for the year ended December 31, 2016.
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 52 of Exhibit 13 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.
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. ThePolicy of which 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 FundsFunds markets, incremental borrowing capacitycapacity at the FHLBFHLB ($1.414.3 billion waswas available atas of September 30, 2017)2022), 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 customerclient base which provideprovides 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 totalaverage loans, excludingexcluding loans HFS andand restricted real estate loans, to average core deposits was 104 percent on79% for September 30, 2017 compared to 105 percent on2022 and 80% for December 31, 2016.
2021.
FHN may also may use unsecured short-term borrowings as a source of liquidity. Currently, the largest concentration of unsecured borrowings is federalFederal funds purchased from correspondent bank correspondent customers. These fundsclients are considered to be substantially more stable than funds purchased in the national broker markets for federal funds due to the long,
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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historical, and reciprocal nature of banking services provided by FHN to these correspondent banks. The remainder of FHN’s wholesale short-term borrowings isconsists of securities sold under agreements to repurchase transactions accounted for as secured borrowings with Regional Banking’s business customersclients or Fixed Income’s broker dealer counterparties.
Both FHN and FTBNA 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, FTBNA issued $400 million of fixed rate senior notes due in December 2019. In October 2015, FHN issued $500 million of fixed rate senior notes due in December 2020.
Both FHN and FTBNAFirst Horizon Bank have the ability to generate liquidity by issuing senior or subordinated unsecured debt, preferred equity, and (for FHN) by issuing common equity, subject to market conditions and compliance with applicable regulatory requirements. In January 2013,February 2022, FHN issued $100 millionand sold to TD 4,936 shares of Non-CumulativeSeries G Perpetual Convertible Preferred Stock Series A.in a private placement transaction for $494 million. As of September 30, 2022, FHN had outstanding $1.3 billion in senior and subordinated unsecured debt and $1.0 billion in non-cumulative perpetual preferred stock. As of September 30, 2017, FTBNA2022, First Horizon Bank and subsidiaries had outstanding preferred shares of $295.4$295 million, which are reflected as noncontrolling interest on the Consolidated Condensed Statements of Condition.Balance Sheets.
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 FTBNA 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 FTBNA 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 FTBNA to declare preferred or common dividends without prior regulatory approval in an aggregate amount equal to FTBNA’s retained net income for the two most recent completed years plus the current year to date. For any period, FTBNA’s ‘retained net income’ generally is equal to FTBNA’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. 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 million$1.4 billion as of September 30, 2017 comparedOctober 1, 2022.
In March 2022, FHN agreed to negative $132.5 million assuspend the Dividend Reinvestment Plan in connection with the Pending TD Merger. As a result of December 31, 2016. Consequently, FTBNA couldthe suspension of the Plan, participants in the Plan received their first quarter 2022 FHN dividend, paid on April 1, 2022, in cash. During the suspension period, dividend payments of FHN will not pay common dividendsbe automatically reinvested in additional shares of FHN common stock and participants in the Plan will be unable to its solepurchase shares of FHN common stockholder, FHN, or to its preferred shareholders without prior regulatory approval. FTBNA applied forstock through optional cash investments under the Plan.
First Horizon Bank declared and received approval from the OCC to declare and paypaid common dividends to FHNthe parent company in the amounts of $180 million in first quarter 2022, $85 million in second, third, and fourth quarter 2017 in the amounts of $40 million, $50 million, $80 million, 2022, and $80 million, respectively, and in the amount of $250$770 million in 2016. FTBNA2021. First Horizon Bank declared and paid preferred dividends in each quarter to date of 20172022 and each quarter of 2016, with OCC approval as necessary.2021. Additionally, FTBNAFirst Horizon Bank declared preferred dividends in fourth quarter 2017, with OCC approval.2022, payable in January 2023.
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 (including capital conservation buffer requirements) and also availability of funds to FHN through a dividend from FTBNA.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$0.15 per common share on October 2, 2017, and in October 2017 the Board approved a $.09 per common share cash dividend payable on January 2, 2018, to shareholders of record on November 3, 2017.2022. FHN paid a cash dividenddividends of $1,550.00$1,625 per Series E preferred share and $1,175 per Series F preferred share on October 10, 2017,11, 2022 and $305 per Series D preferred share and $165 per Series C preferred share on November 1, 2022. In addition, in October 20172022, the Board approved a $1,550.00cash dividends per preferred share cash dividend payable on January 10, 2018, to shareholders of record on December 22, 2017.in the following amounts:
Table I.2.24
CASH FLOWSDIVIDENDS
APPROVED BUT NOT PAID
| | | | | | | | | | | | | | | | | | | | |
| | Dividend/Share | | Record Date | | Payment Date |
Common Stock | | $ | 0.15 | | | 12/16/2022 | | 01/03/2023 |
Preferred Stock | | | | | | |
| | | | | | |
| | | | | | |
Series B | | $ | 331.25 | | | 01/17/2023 | | 02/01/2023 |
Series C | | $ | 165.00 | | | 01/17/2023 | | 02/01/2023 |
| | | | | | |
Series E | | $ | 1,625.00 | | | 12/23/2022 | | 01/10/2023 |
Series F | | $ | 1,175.00 | | | 12/23/2022 | | 01/10/2023 |
| | | | | | |
If the Pending TD Merger is completed before December 16, 2022 (the common stock record date), the common stock dividend described above will not be paid.
The Consolidated Condensed StatementsFHN preferred stock and the First Horizon Bank Class A preferred stock will remain outstanding after the closing of Cash Flows provide information on cash flows from operating, investing,the Pending TD Merger. If, following the closing of the Pending TD Merger, TD elects to effect the merger of FHN into TD Bank US Holding Company, at the effective time of such merger, each share of FHN preferred stock described above will be automatically converted into a share of a newly created, corresponding series of preferred stock of TD Bank US Holding Company having terms that are not materially less favorable than those of the existing series of FHN preferred stock. In addition, following the closing of the Pending TD Merger, at the effective time of the merger of First Horizon Bank into TDBNA, each share of First Horizon Bank Class A preferred stock will be automatically converted into a share of a newly created, corresponding series of preferred stock of TDBNA having terms that are not materially less favorable than those of the existing First Horizon Bank Class A preferred stock. The payment and financingtiming of the dividends will not be impacted by any such conversion of the FHN preferred stock into TD Bank US Holding Company preferred stock or the First Horizon Bank Class A preferred stock into TDBNA preferred stock.
Off-Balance Sheet Arrangements
In the normal course of business, FHN is a party to a number of activities for the nine months ended September 30, 2017that contain credit, market and 2016. The level of cash and cash equivalents increased $50.0 million during 2017 compared to an increase of $126.5 millionoperational risk that are not reflected in 2016, as cash provided by financing activities more than offset cash used by operating and investing activities during both periods.
Net cash provided by financing activities was $621.8 millionwhole or in 2017, largely driven by an increase in short-term borrowings (primarily FHLB borrowings) used to fund loan growth, somewhat offset by a decline in market-indexed deposits. Net cash used by investing activities was $266.4 million in 2017, as 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 decreasedpart in the 2017 primarily dueconsolidated financial statements. Such activities include traditional off-balance sheet credit-related
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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financial instruments. FHN enters into commitments to netextend credit to borrowers, including loan commitments, lines of credit, standby letters of credit, and commercial letters of credit. Many of the commitments are expected to expire unused or be only partially used; therefore, the
total amount of commitments does not necessarily represent future cash outflows of $501.2 million relatedrequirements. Based on its available liquidity and available borrowing capacity, FHN anticipates it will continue to fixed income trading activities andhave sufficient funds to meet its current commitments.
Repurchase Obligations
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 billion 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 in 2016. Operating cash decreased in 2016 primarily driven by net cash outflows of net fixed income trading activities of $287.5 million, a $165 million cash contribution to the qualified pension plan and net changes in operating assets and liabilities of $94.7 million.
REPURCHASE OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS, AND OTHER CONTRACTUAL OBLIGATIONS
Obligations from Legacy Mortgage Businesses
[Certain mortgage-related terms used in this section are defined in “Mortgage-Related Glossary” below.]
Overview
Prior to September 2008, FHNlegacy First Horizon 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: 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 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 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 sale FHN has sold substantially all remaining servicing assets and obligationsdiscussed 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 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. 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 discussion of certain actions pending against FHN in relationthose activities relate to FH proprietary securitizations.
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(i) indemnification claims by underwriters, loan purchasers, and other parties which assert 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 contractedFHN-originated loans caused or contributed 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 bylosses which FHN is not significantlegally obliged to indemnify, 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(ii) indemnification or 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 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—Contingencies and Other Disclosures—FHN has received a notice of indemnification claims from its 2011 subservicer, Nationstar Mortgage LLC, currently doing business as “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
|
| | | | | | |
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, platform sale, 2008 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 |
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
|
| | | | | | | | | | | | | | |
| | 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 breachesFHN's servicing of representations and warranties related to origination.pre-2009 mortgage loans.
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 UPBclaims 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 cancellations 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
FHN’s repurchase and foreclosure liability, primarily related to its pre-2009 mortgage business, 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 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 cancellation 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
|
| | | | | | | | | | | | | | | | |
| | 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 exposures from other whole loans sold.was $16 million and $17 million as of September 30, 2022 and December 31, 2021, respectively.
Certain government entities have subpoenaed information from FHN
Market Uncertainties 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 onProspective Trends
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
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, and potentialgovernment actions and proposals which could have positive or negative impacts on the economy at large or on certain businesses, industries, or sectors.
Additional risks relate to how the COVID-19 pandemic continues to affect FHN’s clients, political uncertainty, changes in federal policies. policies (including those publicly
discussed, formally proposed, or recently implemented) and the potential impacts of those changes on our businesses and clients, and whether FHN’s strategic initiatives will succeed.
In addition, legacy matterslate September, Hurricane Ian caused substantial damage and disruption in Florida, Georgia, and South Carolina, affecting FHN's operations in those states and impacting many of FHN's clients and communities. The financial impacts of Ian on FHN, especially indirect impacts through FHN's clients, have been estimated for purposes
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of this report but only on a preliminary basis; they may not be fully known for some time.
Inflation, Recession, and Federal Reserve Policy
Economic Overview
The year 2022 to date has been marked by: strong inflation (which began in 2021); the Federal Reserve implementing a "tightening" policy to contain inflation by increasing short-term interest rates and ending asset purchases; many indicators suggesting near-term recession; continuing supply-chain difficulties impacting many industries; and low unemployment rates. Historically, while it is common for unemployment to rise only after a recession has begun, it is unusual for unemployment to remain low in the non-strategic segment arecontext of the events in 2022 so far. The delayed reaction is likely to be temporary, however: if recessionary pressures continue to impact FHN’s quarterly resultsgrow, demand for labor eventually will abate.
Amplifying inflationary pressures and general uncertainties this year, the Russian military invaded Ukraine in ways which areFebruary. Much of Europe and the rest of the world, including the U.S., has imposed economic sanctions on Russia for its attack, its ongoing military campaign resulting in substantial civilian casualties, and the manner in which it has prosecuted the war which, reportedly, has significantly violated several international conventions and treaties. The war and sanctions resulted in global oil and gas prices rising precipitously in early 2022, along with the prices of several other commodities exported by Russia, Ukraine, or both, difficultincluding certain grains and vegetable oils. The onset of winter in Europe is expected 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,exacerbate shortages of oil, natural gas, and other traditional means.heating fuels.
Performance by FHN,Federal Reserve and the entire U.S. financial services industry, is affected considerably by the overall health of the U.S. economy. The most recent recession ended in 2009. Growth during the economic expansion since 2009 largely has been muted, compared to earlier recoveries, 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 loan and other financial activity growth by our customers.Rates
The Federal Reserve has raised short-term interest rates by 25several times already this year, and recent public comments indicate that further raises will continue until inflation is judged to be adequately controlled. The last four raises have been 75 basis points threeeach, which is aggressive by historical standards. Moreover, the Federal Reserve has expressed its intent to bring inflation under control even at the risk of creating, or deepening, an economic recession. By raising rates, the Federal Reserve intends to curb demand in the U.S. for goods and services by making credit more expensive and reducing the amount of borrowed dollars generally. If supplies remain constant, curbing demand should curb inflation eventually.
FHN cannot predict exactly when or how much short-term rates will be raised, nor how market-driven long-term rates will behave, nor how those actions may affect financial markets, during the remainder of 2022 and continuing into 2023. However, currently FHN expects the Federal Reserve to adhere to its guidance and continue raising short-term rates.
Yield Curve
During 2022, the yield curve flattened and modestly inverted at times in the past fourfirst two quarters, and has signaledwas inverted most of the third quarter. Unusual yield curve effects, including inversion, may continue. A traditional measure of inversion occurs when the two-year U.S. Treasury rate is higher than the ten-year rate. Traditional inversion was sustained for most of the third quarter, continuing into the fourth. Sustained traditional yield curve inversion is viewed, with statistical support, as a willingnessharbinger of economic recession.
Recession
The U.S. economy contracted (experienced negative growth) during the first and second quarters this year. Those first two contractions were modest but, in each case, contrary 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 marginofficial expectations. The U.S. economy grew modestly in the futurethird quarter, buoyed in part by a disproportionate fall-off in demand for imported goods versus domestic goods. Although third-quarter U.S. growth was a positive development, and the inflation rate no longer is rising, inflation in the U.S. remains persistently high and, therefore, recessionary expectations in the U.S. remain high as well.
Traditionally, though not officially, two consecutive quarters of contraction indicates the start of a recession. Official designations of the beginning and end of a recessionary period are based on extensive data analysis and take many months to be announced. Currently, no recession has been officially declared. However, recession expectations in the U.S. have been growing all year. When people and businesses expect a recession, they often change their behaviors in ways that make recession more likely: they borrow less, spend less, and invest less.
Market Volatility
As a result of the prospects for recession, coupled with the uncertainties associated with the war in eastern Europe, financial markets world-wide have been volatile in 2022. Financial asset values broadly fell this year, especially during the second and third quarters. In the U.S., several major stock indices have fallen more than 20% from their most recent high levels, which conventionally means those indices entered a "bear" market.
Impacts on FHN
In several respects FHN has benefited significantly from rising rates. FHN is likely to continue an improving trend. A steeper yield curve should also bolster activity within FHN’s Fixed Income business. to benefit as long as the rise in lending rates outpaces the rise in deposit and other funding rates.
However, if future economic data shows a risksome of lower growth or recession,FHN's businesses have been negatively impacted. The general increase in interest rates may stall or eventhis year
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has pushed home mortgage rates in the U.S. higher. FHN's direct mortgage lending and lending to mortgage companies have seen business decline significantly in 2022. If mortgage rates continue to rise, FHN's revenues and earnings from those areas likely will continue to fall whichsubstantially compared with 2021. Moreover, FHN's revenues from bond trading and related activities have fallen significantly in 2022 due to rising rates coupled with elevated market volatility.
More generally, a recession with still-rising rates likely would adverselyhave a significant negative impact FHN’s net interest margin. Falling and/or moderately volatile interest rates, however, should enhance activity within FHN’s Fixed Income business. Also,on FHN's businesses overall. Even if Fed actions cause long-term ratesloan spreads continue to widen, demand for loans is likely to fall, reserves for loan losses are likely to rise, slower than short-term rates, thenmany commercial activities that generate fee income are likely to decline, and competition for clients is likely to sharpen. FHN already has experienced some of these impacts. The deeper or longer a recession lasts, the yield curve would flatten, which would adversely impact FHN’s net interest margin.
FHN cannot predict the timing, resolution and effects of potential new legislation. The potential legislative actions which currently seem the mostmore significant these negative impacts are likely to be impactfulfor FHN.
Complicating the economic situation in the U.S. this year is the impact that Federal Reserve policy has had on the value of the U.S. dollar versus many other major currencies. The dollar has risen substantially in 2022, resulting in: pressure on U.S. exports, which are relatively more expensive; a windfall for imports into the U.S., which are relatively cheaper; and pressure on non-U.S. borrowers of U.S. dollars and international buyers of goods traded mainly using U.S. dollars. Although FHN is not directly and significantly impacted by those effects, some clients have been and will continue to be. Moreover, other central banks have been pressured to follow the lead of the Federal Reserve to support their respective currencies. As in the U.S., those tightening actions dampen economic activity and increase the risk of recession in those countries.
LIBOR & Reference Rate Reform
LIBOR
The London Inter-Bank Offered Rate ("LIBOR") for many years was the most widely used reference rate in the world. A large but declining portion of FHN's floating rate loans use LIBOR, denominated in U.S. Dollars ("USD"), as the reference rate to determine the interest rate paid by the client/borrower. In addition, certain floating-rate securities issued by FHN use USD LIBOR as the reference rate.
LIBOR is based on a mix of transaction-based data and expert judgment about market conditions. It is published in different tenors, which are time periods such as 1-week, 1-month, 12-month, etc.
LIBOR Discontinuance
About a decade ago, evidence emerged that some members of the panel that set LIBOR may have manipulated the published LIBOR rates rather than using strictly good-faith judgments. Several banks were fined.
In 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (the “FCA”)—the governmental regulator of LIBOR—announced that it intended to halt persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. In 2021, the FCA announced that tenors of USD LIBOR would no longer be published as follows:
•One week and 2-month USD LIBOR would not be published after December 31, 2021; and
•All other USD LIBOR tenors (e.g., overnight, 1-month, 3-month, 6-month and 12-month tenors) would not be published after June 30, 2023.
U.S. Regulatory Position
In 2020, the Federal Reserve, the OCC, and the FDIC jointly encouraged U.S. banks to transition away from LIBOR for new contracts as soon as practicable and, in any event, by December 31, 2021. They noted that entering into new contracts that use LIBOR as a reference rate after December 31, 2021 would create safety and soundness risks.
U.S. Federal Legislation
In March 2022, Congress passed the Adjustable Interest Rate (LIBOR) Act. The legislation addresses loans that will remain on LIBOR as of the June 30, 2023 cessation date, and that either have no fallback provisions or that contain fallback provisions that do not identify a specific benchmark replacement. Per the legislation, at the final cessation of USD LIBOR, banks may cause such loans to fall back to a SOFR-based benchmark rate, with such rate to be selected by the Federal Reserve Board. The LIBOR Act also provides safe harbor from liability for banks that select the Board-selected replacement benchmark rate at the cessation of LIBOR.
Alternatives to LIBOR
LIBOR became the market-preferred reference rate because it was perceived by lenders and borrowers as being superior to alternatives in a wide range of circumstances. Now that the origination of LIBOR-indexed loans has ended, no single alternative reference rate has replaced LIBOR for USD transactions. Instead, a number of different reference rates are being used in different circumstances. These include corporate tax reform, general regulatory reform, :
•Daily SOFR. The Alternative Reference Rates Committee (“ARRC”) is a group of private-market
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and financial regulator participants convened by the Federal Reserve and the New York Federal Reserve Bank to help ensure a successful transition from USD LIBOR to a more robust reference rate. The ARRC has recommended the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative. SOFR resets daily and is based on actual transaction data for the U.S. Treasury repurchase market. Accordingly, SOFR represents a nearly risk-free secured overnight rate.
•CME Term SOFR. Published by CME Group, Term SOFR is a forward-looking rate, with 1-month, 3-month, 6-month and 12-month tenors, and is based on SOFR futures contracts. The ARRC recommended conventions for Term SOFR rates, recommended CME Group as the administrator for Term SOFR, and in July 2021 formally recommended CME Group's Term SOFR rates.
•AMERIBOR.The American Interbank Offered Rate (“AMERIBOR”) Index is produced by the American Financial Exchange. AMERIBOR is based on actual transaction data involving credit decisions by many financial institutions, on an unsecured basis.
•BSBY. The Bloomberg short-term bank yield index ("BSBY") is a proprietary rate index calculated and published by Bloomberg Index Services Limited. BSBY is based on actual transaction data involving unsecured credit.
•Prime. Although traditional prime rates (with each bank setting its own) are not likely to regain the prominence they had decades ago when U.S. banks were much smaller and the industry was more fragmented, for some clients and products banks may increase their usage of prime rates.
The alternatives listed above were made available to the majority of FHN’s commercial clients starting in November 2021. In accordance with the U.S. regulatory reform,position, FHN ceased entering into new LIBOR based contracts as of December 31, 2021.
Each alternative reference rate has advantages and disadvantages compared with other alternatives in various circumstances. Despite being supported by the ARRC, Daily SOFR has not gained significant traction among middle market commercial borrowers. When assessing Daily SOFR, some borrowers have observed that the adoption of a rate with a daily reset introduces operational complexities, including changes to the loan's interest calculation and billing cycle. By contrast, CME Term SOFR is a rate that: 1) like LIBOR, has rate reset tenors of monthly or longer and 2) like Daily SOFR, carries the endorsement of the ARRC. For these reasons, CME Term SOFR has gained traction among many middle market commercial borrowers.
All of the alternative reference rates selected by FHN to date meet the International Organization of Securities Commissions ("IOSCO") Principles for Financial
Benchmarks, as affirmed by the rate administrator and/or an independent auditor. While banking regulators have stated that banks are free to choose the index rates they offer clients, some public sector officials have urged caution in using the new credit sensitive alternative reference rates (a category that includes BSBY and AMERIBOR), primarily due to the robustness of underlying data used to derive the rates. More specifically, there is concern of an “inverted pyramid” effect where a large number of financial contracts could be priced using an index derived from a relatively low volume of transactions. In an interagency statement on October 20, 2021, U.S. banking regulatory agencies noted that “supervised institutions should understand how their chosen reference rate is constructed and be aware of any fragilities associated with that rate and the markets that underlie it”. IOSCO has also warned of the potential for the “inverted pyramid” problem and will monitor how the IOSCO label is used by administrators.
FHN is monitoring the credit sensitive reference rates and regulatory guidance around use of such rates. FHN plans to limit use of credit sensitive rates to commercial loans (approximately 2% of global USD LIBOR market) and related customer swaps (pending development of derivatives markets for these rates). Additionally, FHN expects that each financial contract will contain fallback language to guide transition from a credit sensitive rate to an alternative should that action be deemed necessary in the future.
FHN's Actions to Date & Transition Plans
Starting in 2019, FHN modernized the fallback language used in its loan documentation to better handle how floating rate loans would be re-set if LIBOR ceased to be published during the loan term.
In the fourth quarter of 2021, FHN ceased using USD LIBOR for new lending and renegotiated terms with clients whose loans are based on 1-week or 2-month USD LIBOR, which ceased publication at the end of 2021. Only a small portion of FHN's clients had such loans.
On the consumer side, FHN began transitioning from LIBOR-based adjustable rate mortgages ("ARMs") to SOFR-based ARMs in November 2021, and no longer offers LIBOR-based ARMs. SOFR has emerged as a market standard for ARMs in the U.S. and is the conforming convention for Fannie Mae and Freddie Mac.
For all products, FHN developed a go-to-market strategy which included pricing considerations, associate training, and client communications. All required systems, processes, and reporting were updated to accommodate the transition. FHN ceased origination of new contracts tied to LIBOR on December 31, 2021
In addition, FHN has established a LIBOR Transition Office to assist associates in working with their clients to re-negotiate terms of loan and derivative contracts that extend past the June 30, 2023 cessation date for the
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remaining USD LIBOR tenors noted above. FHN bankers have begun amending the pricing of existing LIBOR-based commercial loans via a rate change at the time of loan renewal or via amendments to the loan documents to change the benchmark rate. Additionally, FHN bankers have begun amending interest rate derivative contracts whose tenors extend beyond the June 30, 2023 final cessation date of LIBOR.
While FHN has exposure to LIBOR in various contracts (e.g. securities, derivatives), FHN's primary exposure to LIBOR is in floating rate loans to customers and derivative contracts issued to customers through FHN Financial. Below is a summary of these exposures as of September 30, 2022:
Table I.2.25
LIBOR EXPOSURES
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(Dollars in billions) | As of September 30, 2022 | Mature after June 2023 | |
Commercial loans (a) | $ | 15 | | $ | 12 | | |
Consumer loans (a) | 3 | | 3 | | |
Customer swaps (b) | 8 | | 7 | | |
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(a) Amounts represent outstanding loan balances as of September 30, 2022.
(b) FHN has entered into offsetting upstream transactions with dealers to offset its market risk exposure.
Financial Accounting Aspects
In 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which can affectprovides several optional expedients and exceptions to ease the overall economypotential burden in accounting for reference rate reform. The scope of ASU 2020-04 was expanded in 2021 with ASU 2021-01, "Scope". Refer to the Accounting Changes With Extended Transition Periods section of Note 1 - Basis of Presentation and Accounting Policies for additional information.
In April 2022, the FASB proposed to extend the relief under Topic 848 (Reference Rate Reform) by two years, from December 31, 2022 to December 31, 2024.
U.S. Tax Accommodation
On December 30, 2021, the IRS released final guidance 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 guidance specifies what must be met in order to qualify for the beneficial transition approach and FHN customers.is considering this guidance in its transition plans.
Lastly, while
Critical Accounting Policies and Estimates
FHN has made significant progress in resolving matters from the legacy mortgage business, several matters 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 to occasionally and unexpectedly impact FHN’s overall quarterly results negatively or positively with reserve accruals or releases. Also, although new legacy 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 legacy 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 legacy servicing business and subservicing arrangements. Further details regarding these legacy matters are provided in “Obligations from Legacy Mortgage Businesses – Overview – Servicing Obligations” under “Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations.”
CRITICAL ACCOUNTING POLICIES
There have been no significant changes to FHN’sin its critical accounting policies as describedand estimates from those disclosed in “Critical Accounting Policies” beginning on page 64 of Exhibit 13 to FHN’sits 2021 Annual Report on Form 10-K, for the year ended December 31, 2016.as amended.
ACCOUNTING CHANGES ISSUED BUT NOT CURRENTLY EFFECTIVE
Accounting Changes
Refer to Note 1 – Financial Information forBasis of Presentation and Accounting Policies for a detail of accounting standards that have beenchanges with extended transition periods and accounting changes issued but are not currently effective, which section is incorporated into MD&A by this reference.
NON-GAAP INFORMATION
The following table provides a reconciliation of non-GAAP items presented in this MD&A to the most comparable GAAP presentation:
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Non-GAAP Information
Table 25—Non-GAAP toI.2.26
NON-GAAP TO GAAP Reconciliation
RECONCILIATION | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | |
(Dollars in millions; shares in thousands) | | September 30, 2022 | | June 30, 2022 | | | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 | | | | |
Pre-provision Net Revenue (Non-GAAP) | | | | | | | | | | | | | | | | |
Net interest income (GAAP) | | $ | 662 | | | $ | 542 | | | | | $ | 492 | | | $ | 1,683 | | | $ | 1,496 | | | | | |
Plus: Noninterest income (GAAP) | | 213 | | | 201 | | | | | 247 | | | 642 | | | 829 | | | | | |
Total revenues (GAAP) | | 875 | | | 743 | | | | | 739 | | | 2,325 | | | 2,325 | | | | | |
Less: Noninterest expense (GAAP) | | 469 | | | 488 | | | | | 526 | | | 1,450 | | | 1,567 | | | | | |
Pre-provision net revenue (Non-GAAP) | | $ | 406 | | | $ | 255 | | | | | $ | 213 | | | $ | 875 | | | $ | 758 | | | | | |
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Average Tangible Common Equity (Non-GAAP) | | | | | | | | | | | | | | | | |
Average total equity (GAAP) | | $ | 8,669 | | | $ | 8,614 | | | | | $ | 8,577 | | | $ | 8,634 | | | $ | 8,462 | | | | | |
Less: Average noncontrolling interest (a) | | 295 | | | 295 | | | | | 295 | | | 295 | | | 295 | | | | | |
Less: Average preferred stock (a) | | 1,014 | | | 1,014 | | | | | 520 | | | 909 | | | 501 | | | | | |
(A) Total average common equity | | $ | 7,360 | | | $ | 7,305 | | | | | $ | 7,762 | | | $ | 7,430 | | | $ | 7,666 | | | | | |
Less: Average goodwill and other intangible assets (GAAP)(b) | | 1,767 | | | 1,789 | | | | | 1,829 | | | 1,786 | | | 1,843 | | | | | |
(B) Average tangible common equity (Non-GAAP) | | $ | 5,593 | | | $ | 5,516 | | | | | $ | 5,933 | | | $ | 5,644 | | | $ | 5,823 | | | | | |
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Net Income Available to Common Shareholders | | | | | | | | | | | | | | | | |
(C) Net income available to common shareholders (annualized) (GAAP) | | $ | 1,020 | | | $ | 666 | | | | | $ | 887 | | | $ | 815 | | | $ | 993 | | | | | |
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Tangible Common Equity (Non-GAAP) | | | | | | | | | | | | | | | | |
(D) Total equity (GAAP) | | $ | 8,283 | | | $ | 8,551 | | | | | $ | 8,532 | | | $ | 8,283 | | | $ | 8,532 | | | | | |
Less: Noncontrolling interest (a) | | 295 | | | 295 | | | | | 295 | | | 295 | | | 295 | | | | | |
Less: Preferred stock (a) | | 1,014 | | | 1,014 | | | | | 520 | | | 1,014 | | | 520 | | | | | |
(E) Total common equity | | $ | 6,974 | | | $ | 7,242 | | | | | $ | 7,717 | | | $ | 6,974 | | | $ | 7,717 | | | | | |
Less: Goodwill and other intangible assets (GAAP)(b) | | 1,757 | | | 1,783 | | | | | 1,822 | | | 1,757 | | | 1,822 | | | | | |
(F) Tangible common equity (Non-GAAP) | | 5,217 | | | 5,459 | | | | | 5,895 | | | 5,217 | | | 5,895 | | | | | |
Less: Unrealized gains (losses) on AFS securities, net of tax | | (1,039) | | | (671) | | | | | 5 | | | (1,039) | | | 5 | | | | | |
(G) Adjusted tangible common equity (Non-GAAP) | | $ | 6,256 | | | $ | 6,130 | | | | | $ | 5,890 | | | $ | 6,256 | | | $ | 5,890 | | | | | |
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Tangible Assets (Non-GAAP) | | | | | | | | | | | | | | | | |
(H) Total assets (GAAP) | | $ | 80,299 | | | $ | 85,132 | | | | | $ | 88,537 | | | $ | 80,299 | | | $ | 88,537 | | | | | |
Less: Goodwill and other intangible assets (GAAP) (b) | | 1,757 | | | 1,783 | | | | | 1,822 | | | 1,757 | | | 1,822 | | | | | |
(I) Tangible assets (Non-GAAP) | | $ | 78,542 | | | $ | 83,349 | | | | | $ | 86,715 | | | $ | 78,542 | | | $ | 86,715 | | | | | |
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Risk-Weighted Assets | | | | | | | | | | | | | | | | |
(J) Risk-weighted assets (c) | | $ | 68,580 | | | $ | 67,294 | | | | | $ | 63,013 | | | $ | 68,580 | | | $ | 63,013 | | | | | |
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Period-end Shares Outstanding | | | | | | | | | | | | | | | | |
(K) Period-end shares outstanding | | 536,737 | | | 536,333 | | | | | 541,860 | | | 536,737 | | | 541,860 | | | | | |
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Ratios | | | | | | | | | | | | | | | | |
(C)/(A) Return on average common equity (GAAP) | | 13.85 | % | | 9.12 | % | | | | 11.43 | % | | 10.97 | % | | 12.96 | % | | | | |
(C)/(B) Return on average tangible common equity (Non-GAAP) | | 18.23 | | | 12.07 | | | | | 14.95 | | | 14.44 | | | 17.06 | | | | | |
(D)/(H) Total period-end equity to period-end assets (GAAP) | | 10.32 | | | 10.04 | | | | | 9.64 | | | 10.32 | | | 9.64 | | | | | |
(F)/(I) Tangible common equity to tangible assets (Non-GAAP) | | 6.64 | | | 6.55 | | | | | 6.80 | | | 6.64 | | | 6.80 | | | | | |
(G)/(J) Adjusted tangible common equity to risk-weighted assets (Non-GAAP) | | 9.12 | | | 9.11 | | | | | 9.35 | | | 9.12 | | | 9.35 | | | | | |
(E)/(K) Book value per common share (GAAP) | | $ | 12.99 | | | $ | 13.50 | | | | | $ | 14.24 | | | $ | 12.99 | | | $ | 14.24 | | | | | |
(F)/(K) Tangible book value per common share (Non-GAAP) | | $ | 9.72 | | | $ | 10.18 | | | | | $ | 10.88 | | | $ | 9.72 | | | $ | 10.88 | | | | | |
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| 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 |
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Less: Average noncontrolling interest (a) | 295,431 |
| | 295,431 |
| | 295,431 |
| | 295,431 |
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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 |
|
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PART I, ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A) |
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Loans and leases excluding PPP loans (Non-GAAP) | | | | | | | | | | | | | | | | |
Commercial loans and leases excluding PPP loans | | $ | 44,512 | | | $ | 43,843 | | | | | $ | 41,693 | | | $ | 44,512 | | | $ | 41,693 | | | | | |
PPP loans | | 129 | | | 375 | | | | | 2,017 | | | 129 | | | 2,017 | | | | | |
Total commercial loans and leases | | 44,641 | | | 44,218 | | | | | 43,710 | | | 44,641 | | | 43,710 | | | | | |
Total consumer loans | | 12,713 | | | 12,311 | | | | | 11,725 | | | 12,713 | | | 11,725 | | | | | |
Total loans and leases | | $ | 57,354 | | | $ | 56,529 | | | | | $ | 55,435 | | | $ | 57,354 | | | $ | 55,435 | | | | | |
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(a)Included in Totaltotal equity on the Consolidated Condensed Statements of Condition.Balance Sheets.
(b)Includes Goodwillgoodwill and other intangible assets, net of amortization.
(c)Ratio is annualized net income available Defined by and calculated in conformity with bank regulations applicable to common shareholders to average common equity.FHN.
(d)Ratio is annualized net income available to common shareholders to average tangible common equity.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk110 | 3Q22 FORM 10-Q REPORT |
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PART I, ITEM 3. DISCLOSURES ABOUT MARKET RISK AND ITEM 4. CONTROLS & PROCEDURES |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information called for by this item is contained in
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(a) | (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 99 of this report and the subsections entitled “Market Risk Management” beginning on page 99 and “Interest Rate Risk Management” beginning on page 101 of this report, and(b) Note 14 to the Consolidated Financial Statements appearing on pages 48-54 of this report, including in particular the section entitled “Risk Management” beginning on page 114 of this report and the subsections entitled “Market Risk Management” beginning on page 114 and “Interest Rate Risk Management” beginning on page 116 of this report, and |
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(b) | Note 14 to the Consolidated Condensed Financial Statements appearing on pages 53-59 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 13Item 7 to FHN’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2016,2021, including in particular the section entitled “Risk Management” beginning on page 4790 of that Report and the subsections entitled “Market Risk Management” beginning on page 4891 and “Interest Rate Risk Management” appearingbeginning on pages 50-51page 93 of that Report;Report; and Note 22 to the Consolidated Financial Statements appearing on pages 153-158184-190 of Exhibit 13Item 8 to FHN’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2016.2021.
Item 4. Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our 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 our 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 our internal control over financial reporting during the third fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 4. | Controls and Procedures111 | 3Q22 FORM 10-Q REPORT |
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(a)PART II—OTHER INFORMATION, ITEMS 1. THROUGH 5. |
| 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. | |
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(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. |
Part II.
OTHER INFORMATION
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Item 1PART II. OTHER INFORMATION |
Legal Proceedings |
Item 1. Legal Proceedings
The “Contingencies” section of Note 10 to the Consolidated Condensed Financial Statements beginning on page 37 of this Report is incorporated into this Item by reference.
Item 1A. Risk Factors
Material changes from risk factor disclosures in FHN's Annual Report on Form 10-K, as amended, for the year ended December 31, 2021:
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Equity Securities Sold
During the third quarter of 2022, FHN sold no common or preferred equity securities which were not registered under the Securities Act of 1933, as amended.
(b) Use of Proceeds If Rule 463 is Applicable
Not applicable
(c) Equity Repurchases
The "Common Stock Purchase Programs” section including tables I.2.19 and I.2.20 and explanatory discussions included in Item 2 of Part I of this report under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 98 of this report, is incorporated herein by reference.
Items 3., 4., and 5.
Not applicable
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Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds |
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| (a) & (b)112 | Not Applicable | | |
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| (c) | The "Common Stock Purchase Programs” section including tables 9(a) and 9(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 96 of this report, is incorporated herein by reference. |
| 3Q22 FORM 10-Q REPORT |
Items 3, 4, and 5
Not applicable
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ItemPART II—OTHER INFORMATION, ITEM 6. EXHIBITS |
| Exhibits | |
(a)Item 6. Exhibits
Exhibits marked * represent10-Q EXHIBIT TABLE
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Exh. No. | Description of Exhibit to this Report | Filed Here | Mngt Exh | Furnished | Incorporated by Reference to |
Form | Exh. No. | Filing Date |
2.1 | | | | | 10-K | 2.1 | 3/01/2022 |
3.1 | | | | | 8-K | 3.1 | 7/30/2021 |
3.2 | | | | | 8-K | 3.1 | 3/03/2022 |
3.3 | | | | | 8-K | 3.1 | 7/27/2022 |
4.1 | 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 | | | | | | |
10.1 | | X | X | | | | |
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31(a) | | X | | | | | |
31(b) | | X | | | | | |
32(a) | | X | | X | | | |
32(b) | | X | | X | | | |
| XBRL Exhibits | | | | | | |
101 | The following financial information from First Horizon Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL: (i) Consolidated Balance Sheets at September 30, 2022 and December 31, 2021; (ii) Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021; (iii) Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021; (iv) Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2022 and 2021; (v) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021; (vi) Notes to Consolidated Financial Statements. | X | | | | | |
101. INS | XBRL Instance Document -- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | |
101. SCH | Inline XBRL Taxonomy Extension Schema | X | | | | | |
101. CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | X | | | | | |
101. LAB | Inline XBRL Taxonomy Extension Label Linkbase | X | | | | | |
101. PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | X | | | | | |
101. DEF | Inline XBRL Taxonomy Extension Definition Linkbase | X | | | | | |
104 | Cover Page Interactive Data File, formatted in Inline XBRL (included in Exhibit 101) | X | | | | | |
In the Exhibit Table: 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 plans plan
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PART II—OTHER INFORMATION, ITEM 6. EXHIBITS |
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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 | DescriptionSIGNATURES |
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4 | 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* | |
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10.2* | |
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31(a) | |
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31(b) | |
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32(a)** | |
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32(b)** | |
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101*** | The following financial information from First Horizon National Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL: (i) Consolidated Condensed Statements of Condition at September 30, 2017 and December 31, 2016; (ii) Consolidated Condensed Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016; (iii) Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016; (iv) Consolidated Condensed Statements of Equity for the Nine Months Ended September 30, 2017 and 2016; (v) Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016; (vi) Notes to Consolidated Condensed Financial Statements. |
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101.INS*** | XBRL Instance Document |
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101.SCH*** | XBRL Taxonomy Extension Schema |
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101.CAL*** | XBRL Taxonomy Extension Calculation Linkbase |
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101.LAB*** | XBRL Taxonomy Extension Label Linkbase |
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101.PRE*** | XBRL Taxonomy Extension Presentation Linkbase |
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101.DEF*** | XBRL Taxonomy Extension Definition Linkbase |
SIGNATURESSignatures
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, 20172022 | | By: | | /s/ William C. Losch IIIHope Dmuchowski |
| | Name: | | William C. Losch IIIHope Dmuchowski |
| | Title: | | Senior Executive Vice President and Chief Financial Officer |
| | | | (Duly Authorized Officer and Principal Financial Officer) |