Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2017

or

 

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

For the transition period from              to             

Commission File Number 001-15185

 

 

First Horizon National Corporation

(Exact name of registrant as specified in its charter)

 

 

 

TN   62-0803242

(State or other jurisdiction

incorporation of organization)

 

(IRS Employer

Identification No.)

165 MADISON AVENUE

MEMPHIS, TENNESSEE

  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)

 

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

  

Non-accelerated filer

  

Smaller reporting company

 

  

Emerging Growth Company

 

  

(Do not check if a smaller reporting company)

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

 

Class

   Outstanding on June 30, 2017  

Common Stock, $.625 par value

     234,135,417  

 

 

 


Table of Contents

Table of Contents

FIRST HORIZON NATIONAL CORPORATION

INDEX

 

Part I. Financial Information

  

Item 1. Financial Statements

  

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

     82  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     137  

Item 4. Controls and Procedures

     137  

Part II. Other Information

     138  

Item 1. Legal Proceedings

     138  

Item 1A. Risk Factors

     138  

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

     138  

Item 3. Defaults Upon Senior Securities

     138  

Item 4. Mine Safety Disclosures

     138  

Item 5. Other Information

     138  

Item 6. Exhibits

     139  

Signatures

     141  

Exhibit Index

     142  

Exhibit 10.1R

  

Exhibit 10.2R

  

Exhibit 10.3R

  

Exhibit 10.4

  

Exhibit 31(a)

  

Exhibit 31(b)

  

Exhibit 32(a)

  

Exhibit 32(b)

  


Table of Contents

PART I.

FINANCIAL INFORMATION

 

Item 1. Financial Statements   

The Consolidated Condensed Statements of Condition (unaudited)

     2  

The Consolidated Condensed Statements of Income (unaudited)

     3  

The Consolidated Condensed Statements of Comprehensive Income (unaudited)

     4  

The Consolidated Condensed Statements of Equity (unaudited)

     5  

The Consolidated Condensed Statements of Cash Flows (unaudited)

     6  

The Notes to the Consolidated Condensed Financial Statements (unaudited)

     7  

Note 1 Financial Information

     7  

Note 2 Acquisitions and Divestitures

     12  

Note 3 Investment Securities

     14  

Note 4 Loans

     17  

Note 5 Allowance for Loan Losses

     28  

Note 6 Intangible Assets

     30  

Note 7 Other Income and Other Expense

     31  

Note 8 Components of Other Comprehensive Income/(loss)

     32  

Note 9 Earnings Per Share

     34  

Note 10 Contingencies and Other Disclosures

     35  

Note 11 Pension, Savings, and Other Employee Benefits

     43  

Note 12 Business Segment Information

     45  

Note 13 Variable Interest Entities

     47  

Note 14 Derivatives

     53  

Note 15 Master Netting and Similar Agreements—Repurchase, Reverse Repurchase, and Securities Borrowing Transactions

     62  

Note 16 Fair Value of Assets & Liabilities

     64  

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.


Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF CONDITION

 

     First Horizon National Corporation  
     (Unaudited)        
     June 30     December 31  

(Dollars in thousands, except per share amounts)

   2017     2016  

Assets:

    

Cash and due from banks

   $ 387,053     $ 373,274  

Federal funds sold

     34,036       50,838  

Securities purchased under agreements to resell (Note 15)

     657,991       613,682  
  

 

 

   

 

 

 

Total cash and cash equivalents

     1,079,080       1,037,794  
  

 

 

   

 

 

 

Interest-bearing cash

     573,666       1,060,034  

Trading securities

     1,315,891       897,071  

Loans held-for-sale (a)

     432,771       111,248  

Securities available-for-sale (Note 3)

     3,949,592       3,943,499  

Securities held-to-maturity (Note 3)

     10,000       14,347  

Loans, net of unearned income (Note 4) (b)

     19,989,319       19,589,520  

Less: Allowance for loan losses (Note 5)

     197,257       202,068  
  

 

 

   

 

 

 

Total net loans

     19,792,062       19,387,452  
  

 

 

   

 

 

 

Goodwill (Note 6)

     236,335       191,371  

Other intangible assets, net (Note 6)

     45,121       21,017  

Fixed income receivables

     127,724       57,411  

Premises and equipment, net (June 30, 2017 and December 31, 2016 include $5.0 million and $5.8 million, respectively, classified as held-for-sale)

     292,463       289,385  

Real estate acquired by foreclosure (c)

     11,901       16,237  

Derivative assets (Note 14)

     91,653       121,654  

Other assets

     1,411,697       1,406,711  
  

 

 

   

 

 

 

Total assets

   $ 29,369,956     $ 28,555,231  
  

 

 

   

 

 

 

Liabilities and equity:

    

Deposits:

    

Savings

   $ 8,607,801     $ 9,428,197  

Time deposits

     1,373,618       1,355,133  

Other interest-bearing deposits

     6,049,345       5,948,439  
  

 

 

   

 

 

 

Interest-bearing

     16,030,764       16,731,769  

Noninterest-bearing

     6,302,585       5,940,594  
  

 

 

   

 

 

 

Total deposits

     22,333,349       22,672,363  
  

 

 

   

 

 

 

Federal funds purchased

     314,892       414,207  

Securities sold under agreements to repurchase (Note 15)

     743,684       453,053  

Trading liabilities

     555,793       561,848  

Other short-term borrowings

     1,044,658       83,177  

Term borrowings

     1,033,329       1,040,656  

Fixed income payables

     28,571       21,002  

Derivative liabilities (Note 14)

     92,717       135,897  

Other liabilities

     396,075       467,944  
  

 

 

   

 

 

 

Total liabilities

     26,543,068       25,850,147  
  

 

 

   

 

 

 

Equity:

    

First Horizon National Corporation Shareholders’ Equity:

    

Preferred stock—Series A, non-cumulative perpetual, no par value, liquidation preference of $100,000 per share—(shares authorized—1,000; shares issued—1,000 on June 30, 2017 and December 31, 2016)

     95,624       95,624  

Common stock—$.625 par value (shares authorized—400,000,000; shares issued— 234,135,417 on June 30, 2017 and 233,623,686 on December 31, 2016)

     146,336       146,015  

Capital surplus

     1,395,797       1,386,636  

Undivided profits

     1,131,162       1,029,032  

Accumulated other comprehensive loss, net (Note 8)

     (237,462     (247,654
  

 

 

   

 

 

 

Total First Horizon National Corporation Shareholders’ Equity

     2,531,457       2,409,653  
  

 

 

   

 

 

 

Noncontrolling interest

     295,431       295,431  
  

 

 

   

 

 

 

Total equity

     2,826,888       2,705,084  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 29,369,956     $ 28,555,231  
  

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

(a) June 30, 2017 and December 31, 2016 include $15.1 million and $19.3 million, respectively, of held-for-sale consumer mortgage loans secured by residential real estate in process of foreclosure.
(b) June 30, 2017 and December 31, 2016 include $28.8 million and $28.5 million, respectively, of held-to-maturity consumer mortgage loans secured by residential real estate properties in process of foreclosure.
(c) June 30, 2017 and December 31, 2016 include $6.6 million and $8.1 million, respectively, of foreclosed residential real estate.

 

2


Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

 

     First Horizon National Corporation  
     Three Months Ended
June 30
    Six Months Ended
June 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

   $ 192,580     $ 163,054     $ 373,044     $ 321,477  

Interest on investment securities available-for-sale

     25,657       23,953       51,292       48,427  

Interest on investment securities held-to-maturity

     132       198       329       395  

Interest on loans held-for-sale

     3,510       1,198       4,793       2,459  

Interest on trading securities

     9,418       8,020       15,771       15,771  

Interest on other earning assets

     4,044       953       8,923       2,511  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     235,341       197,376       454,152       391,040  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Interest on deposits:

        

Savings

     11,194       4,146       20,404       8,336  

Time deposits

     2,918       2,474       5,751       4,797  

Other interest-bearing deposits

     5,074       2,526       9,217       4,830  

Interest on trading liabilities

     4,203       3,782       7,984       7,821  

Interest on short-term borrowings

     2,903       1,203       4,295       2,331  

Interest on term borrowings

     8,348       6,981       16,092       14,587  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     34,640       21,112       63,743       42,702  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     200,701       176,264       390,409       348,338  

Provision/(provision credit) for loan losses

     (2,000     4,000       (3,000     7,000  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision/(provision credit) for loan losses

     202,701       172,264       393,409       341,338  
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income:

        

Fixed income

     55,110       77,913       105,788       144,890  

Deposit transactions and cash management

     27,858       26,991       52,423       53,828  

Brokerage, management fees and commissions

     12,029       10,665       23,935       21,080  

Trust services and investment management

     7,698       7,224       14,351       13,789  

Bankcard income

     5,605       6,558       11,060       11,817  

Bank-owned life insurance

     4,351       3,743       7,598       7,132  

Debt securities gains/(losses), net (Note 3 and Note 8)

     405       —         449       1,654  

Equity securities gains/(losses), net (Note 3)

     —         99       —         19  

All other income and commissions (Note 7)

     14,617       12,321       29,008       25,610  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     127,673       145,514       244,612       279,819  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted gross income after provision/(provision credit) for loan losses

     330,374       317,778       638,021       621,157  
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense:

        

Employee compensation, incentives, and benefits

     139,088       143,370       274,020       280,521  

Occupancy

     12,800       12,736       25,140       25,340  

Computer software

     12,285       11,226       23,084       22,813  

Operations services

     11,524       10,521       22,399       20,421  

Professional fees

     9,659       4,284       14,405       9,483  

Equipment rentals, depreciation, and maintenance

     7,036       7,182       13,387       13,341  

FDIC premium expense

     5,927       4,848       11,666       9,769  

Communications and courier

     4,117       3,039       7,917       6,789  

Advertising and public relations

     4,095       4,481       8,696       9,454  

Legal fees

     3,496       5,891       8,779       10,770  

Contract employment and outsourcing

     3,255       2,497       6,213       4,922  

Amortization of intangible assets

     1,964       1,299       3,196       2,599  

Repurchase and foreclosure provision/(provision credit)

     (21,733     (31,400     (21,971     (31,400

All other expense (Note 7)

     24,404       46,848       43,191       68,927  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     217,917       226,822       440,122       453,749  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before income taxes

     112,457       90,956       197,899       167,408  
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision/(benefit) for income taxes

     17,253       30,016       44,307       54,255  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss)

   $ 95,204     $ 60,940     $ 153,592     $ 113,153  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to noncontrolling interest

     2,852       2,852       5,672       5,703  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss) attributable to controlling interest

   $ 92,352     $ 58,088     $ 147,920     $ 107,450  
  

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends

     1,550       1,550       3,100       3,100  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss) available to common shareholders

   $ 90,802     $ 56,538     $ 144,820     $ 104,350  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings/(loss) per share (Note 9)

   $ 0.39     $ 0.24     $ 0.62     $ 0.45  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings/(loss) per share (Note 9)

   $ 0.38     $ 0.24     $ 0.61     $ 0.44  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares (Note 9)

     233,482       231,573       233,280       233,112  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted average common shares (Note 9)

     236,263       233,576       236,225       235,121  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.09     $ 0.07     $ 0.18     $ 0.14  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

See accompanying notes to consolidated condensed financial statements.

 

3


Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

     First Horizon National Corporation  
     Three Months Ended
June 30
     Six Months Ended
June 30
 

(Dollars in thousands) (Unaudited)

   2017      2016      2017      2016  

Net income/(loss)

   $ 95,204      $ 60,940      $ 153,592      $ 113,153  

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

           

Net unrealized gains/(losses) on securities available-for-sale

     8,938        16,037        7,375        55,197  

Net unrealized gains/(losses) on cash flow hedges

     2,155        1,226        241        4,691  

Net unrealized gains/(losses) on pension and other postretirement plans

     1,403        844        2,576        1,970  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income/(loss)

     12,496        18,107        10,192        61,858  
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

     107,700        79,047        163,784        175,011  
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to noncontrolling interest

     2,852        2,852        5,672        5,703  
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to controlling interest

   $ 104,848      $ 76,195      $ 158,112      $ 169,308  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax expense/(benefit) of items included in Other comprehensive income:

           

Net unrealized gains/(losses) on securities available-for-sale

   $ 5,543      $ 9,967      $ 4,573      $ 34,304  

Net unrealized gains/(losses) on cash flow hedges

     1,336        762        149        2,915  

Net unrealized gains/(losses) on pension and other postretirement plans

     870        525        1,597        1,225  

See accompanying notes to consolidated condensed financial statements.

 

4


Table of Contents

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)

     147,920       5,672       153,592       107,450       5,703       113,153  

Other comprehensive income/(loss) (a)

     10,192       —         10,192       61,858       —         61,858  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     158,112       5,672       163,784       169,308       5,703       175,011  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared:

            

Preferred stock ($3,100 per share for the six months ended June 30, 2017 and 2016)

     (3,100     —         (3,100     (3,100     —         (3,100

Common stock ($.18 and $.14 per share for the six months ended June 30, 2017 and 2016, respectively)

     (42,404     —         (42,404     (32,991     —         (32,991

Common stock repurchased (b)

     (4,953     —         (4,953     (89,698     —         (89,698

Common stock issued for:

            

Stock options and restricted stock—equity awards

     4,309       —         4,309       1,509       —         1,509  

Stock-based compensation expense

     9,840       —         9,840       7,796       —         7,796  

Dividends declared—noncontrolling interest of subsidiary preferred stock

     —         (5,672     (5,672     —         (5,703     (5,703

Tax benefit/(benefit reversal)—stock based compensation expense

     —         —         —         (486     —         (486
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30

   $ 2,531,457     $ 295,431     $ 2,826,888     $ 2,396,493     $ 295,431     $ 2,691,924  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

(a) Due to the nature of the preferred stock issued by FHN and its subsidiaries, all components of Other comprehensive income/(loss) have been attributed solely to FHN as the controlling interest holder.
(b) 2016 includes $86.4 million repurchased under share repurchase programs.

 

5


Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

     First Horizon National Corporation  
     Six Months Ended June 30  

(Dollars in thousands) (Unaudited)

   2017     2016  

Operating Activities

    

Net income/(loss)

   $ 153,592     $ 113,153  

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

    

Provision/(provision credit) for loan losses

     (3,000     7,000  

Provision/(benefit) for deferred income taxes

     (16,862     34,366  

Depreciation and amortization of premises and equipment

     16,617       16,036  

Amortization of intangible assets

     3,196       2,599  

Net other amortization and accretion

     14,288       10,722  

Net (increase)/decrease in derivatives

     (13,683     564  

Repurchase and foreclosure provision/(provision credit)

     (20,000     (31,400

(Gains)/losses and write-downs on other real estate, net

     180       (788

Litigation and regulatory matters

     (753     25,652  

Stock-based compensation expense

     9,840       7,796  

Equity securities (gains)/losses, net

     —         (19

Debt securities (gains)/losses, net

     (449     (1,654

Net (gains)/losses on sale/disposal of fixed assets

     (71     4,155  

Loans held-for-sale:

    

Purchases and originations

     (549,331     (5,953

Gross proceeds from settlements and sales

     461,119       14,668  

(Gain)/loss due to fair value adjustments and other

     2,777       (349

Net (increase)/decrease in:

    

Trading securities

     (280,135     (283,283

Fixed income receivables

     (70,313     (156,279

Interest receivable

     (2,443     6,751  

Other assets

     1,324       (36,559

Net increase/(decrease) in:

    

Trading liabilities

     (6,055     223,521  

Fixed income payables

     (88,920     67,328  

Interest payable

     1,303       (5,025

Other liabilities

     (52,669     (36,422
  

 

 

   

 

 

 

Total adjustments

     (594,040     (136,573
  

 

 

   

 

 

 

Net cash provided/(used) by operating activities

     (440,448     (23,420
  

 

 

   

 

 

 

Investing Activities

    

Available-for-sale securities:

    

Sales

     63       1,543  

Maturities

     268,155       315,301  

Purchases

     (265,770     (311,592

Held-to-maturity securities:

    

Prepayments and maturities

     4,740       —    

Premises and equipment:

    

Sales

     2,103       2,786  

Purchases

     (20,498     (27,034

Proceeds from sales of other real estate

     7,340       18,095  

Net (increase)/decrease in:

    

Loans

     (404,379     (921,015

Interests retained from securitizations classified as trading securities

     397       1,774  

Interest-bearing cash

     490,500       281,093  

Cash (paid)/received for acquisition, net

     (123,971     —    
  

 

 

   

 

 

 

Net cash provided/(used) by investing activities

     (41,320     (639,049
  

 

 

   

 

 

 

Financing Activities

    

Common stock:

    

Stock options exercised

     2,823       807  

Cash dividends paid

     (37,809     (30,960

Repurchase of shares (a)

     (4,953     (89,698

Cash dividends paid—preferred stock—noncontrolling interest

     (5,672     (5,672

Cash dividends paid—Series A preferred stock

     (3,100     (3,100

Term borrowings:

    

Payments/maturities

     (7,239     (259,938

Net increase/(decrease) in:

    

Deposits

     (338,689     663,246  

Short-term borrowings

     917,693       562,671  
  

 

 

   

 

 

 

Net cash provided/(used) by financing activities

     523,054       837,356  
  

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

     41,286       174,887  
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

     1,037,794       1,031,063  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,079,080     $ 1,205,950  
  

 

 

   

 

 

 

Supplemental Disclosures

    

Total interest paid

   $ 61,908     $ 47,355  

Total taxes paid

     21,805       11,334  

Total taxes refunded

     8,200       2,425  

Transfer from loans to other real estate owned

     3,184       4,297  

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

See accompanying notes to consolidated condensed financial statements.

 

(a) 2016 includes $86.4 million repurchased under share repurchase programs.

 

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Notes to the Consolidated Condensed Financial Statements (Unaudited)

Note 1 – Financial Information

Basis of Accounting. The unaudited interim consolidated condensed financial statements of First Horizon National Corporation (“FHN”), including its subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which it operates. This preparation requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions are based on information available as of the date of the financial statements and could differ from actual results. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented. These adjustments are of a normal recurring nature unless otherwise disclosed in this Quarterly Report on Form 10-Q. The operating results for the interim 2017 period are not necessarily indicative of the results that may be expected going forward. For further information, refer to the audited consolidated financial statements in Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.

Summary of Accounting Changes. Effective January 1, 2017, FHN adopted the provisions 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 statement of cash flows shifted to an operating activity from the prior classification as a financing activity.

ASU 2016-09 also provides an accounting policy election to recognize forfeitures of awards as they occur when estimating stock-based compensation expense rather than the previous requirement to estimate forfeitures from inception. Further, ASU 2016-09 permits employers to use a net-settlement feature to withhold taxes on equity compensation awards up to the maximum statutory tax rate without affecting the equity classification of the award. Under previous guidance, withholding of equity awards in excess of the minimum statutory requirement resulted in liability classification for the entire award. The related cash remittance by the employer for employee taxes is treated as a financing activity in the statement of cash flows. Transition to the new guidance was accomplished through a combination of retrospective (cash flows), cumulative-effect adjustment to equity (forfeitures) and prospective methodologies (tax windfalls and shortfalls). FHN estimates, based on currently enacted tax rates, that adoption of ASU 2016-09 in 2017 will result in an incremental effect on tax provision ranging from $2.0 million of tax benefit to $1.0 million of additional tax provision. The actual effects of adoption in 2017 will primarily depend upon the share price of the FHN’s common stock, which affects the vesting of certain performance awards, probability of exercise of certain stock options and the magnitude of windfalls for all awards upon either vesting or exercise. The effects on earnings per share calculations and election to account for forfeitures as incurred have not been significant.

Effective January 1, 2017, FHN early adopted the provisions of ASU 2016-16, “Intra-Entity Transfers 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. Adoption of ASU 2016-16 did not have a significant effect on FHN.

Accounting Changes Issued but Not Currently Effective

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 does not change revenue recognition for 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 customers 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

 

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Note 1 – Financial Information (Continued)

 

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 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. Early application is permitted for annual reporting periods beginning after December 15, 2016, and associated interim periods. 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 will not early adopt these ASUs and 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.

In February 2017, the FASB issued ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” which clarifies the meaning and application of the term in substance nonfinancial asset in transactions involving both financial and nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract are concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of revenue recognition guidance for nonfinancial assets. ASU 2017-05 also clarifies that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it with the amount of revenue recognized based on the allocation guidance provided in ASU 2014-09. ASU 2017-05 also requires an entity to derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when it 1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Topic 810 and 2) transfers control of the asset in accordance with the provisions of ASU 2014-09. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset, it is required to measure any noncontrolling interest it receives (or retains) at fair value. ASU 2017-05 has the same effective date and transition provisions as ASU 2014-09 and the two standards must be adopted simultaneously although the transition methods may be different. FHN is evaluating the effects of ASU 2017-05 on its revenue recognition practices. Currently, FHN anticipates that it will elect to adopt the provisions of ASU 2017-05 through a cumulative effect to retained earnings with comparability disclosures provided throughout 2018.

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 makes several revisions to 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

 

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Note 1 – Financial Information (Continued)

 

assessed in combination with all other deferred tax assets rather than being assessed in isolation. ASU 2016-01 also makes several changes to existing fair value presentation and disclosure requirements, including a provision that all disclosures must use an exit price concept in the determination of fair value. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Transition will be through a cumulative effect adjustment to retained earnings for equity investments with readily determinable fair values. Equity investments without readily determinable fair values, for which the accounting election is made, will have any initial fair value marks recorded through earnings prospectively after adoption.

Upon adoption, FHN will reclassify all equity investments out of available-for-sale securities, leaving only debt securities within this classification. FHN has evaluated the nature of its current equity investments and determined that substantially all qualify for the election available to assets without readily determinable fair values, including its holdings of Visa Class B shares. Accordingly, FHN intends to apply this election and any fair value marks for these investments will be recognized through earnings on a prospective basis subsequent to adoption. FHN continues to evaluate the appropriate characteristics of “similar” instruments as well as related valuation inputs and methodologies for its equity investments without readily determinable fair values. The requirements of ASU 2016-01 related to assessment of deferred tax assets and disclosure of the fair value of financial instruments will not have a significant effect on FHN because its current accounting and disclosure practices conform to the requirements of ASU 2016-01. FHN also continues to evaluate the impact of ASU 2016-01 on other aspects of its current accounting and disclosure practices.

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

 

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Note 1 – Financial Information (Continued)

 

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 will be adjusted to reflect the addition of the allowance for credit losses. Thus, an entity will not be required to reassess its purchased financial assets that exist as of the date of adoption to determine whether they would have met at acquisition the new criteria of more-than-insignificant credit deterioration since origination. An entity will accrete the remaining noncredit discount (based on the revised amortized cost basis) into interest income at the effective interest rate at the adoption date.

ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in fiscal years beginning after December 15, 2018. FHN is still evaluating the impact of ASU 2016-13 on its current accounting and disclosure practices.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies multiple cash flow presentation issues including providing guidance as to classification on the cash flow statement for certain cash receipts and cash payments where diversity in practice exists. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The provisions of ASU 2016-15 will be applied retroactively and will result in proceeds from bank-owned life insurance (“BOLI”) being classified as an investing activity rather than their prior classification as an operating activity.

In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” which requires the disaggregation of the service cost component from the other components of net benefit cost for pension and postretirement plans. Service cost must be included in the same income statement line item as other compensation-related expenses. All other components of net benefit cost are required to be presented in the income statement separately from the service cost component, with disclosure of the line items where these amounts are recorded. The presentation requirements of ASU 2017-07 must be applied retrospectively and adoption is required for annual periods beginning after December 15, 2017, including interim periods within those annual periods. FHN’s disclosures for pension and postretirement costs provide details of the service cost and all other components for expenses recognized for its applicable benefit plans. These amounts are currently included in Employee compensation, incentives, and benefits expense in the Consolidated Condensed Statements of Income. Upon adoption of ASU 2017-07 FHN will reclassify the expense components

 

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Table of Contents

Note 1 – Financial Information (Continued)

 

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 June 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.

 

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Table of Contents

Note 2 – Acquisitions and Divestitures

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 the agreement FHN will acquire Capital Bank, which is headquartered in Charlotte, North Carolina, and reported approximately $10 billion of assets at March 31, 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 approvals, approval by shareholders of FHN and of Capital Bank, and other 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 preliminary adjustments to record the assets and liabilities at their estimated fair values as of April 3, 2017:

 

     Coastal Securities, Inc.  
     Purchase Accounting/  

(Dollars in thousands)

   As
Acquired
     Fair Value
Adjustments
     As recorded
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  
        

 

 

 

The valuation of other intangible assets, including customer relationships and noncompete agreements, are preliminary as management continues to review the valuation assumptions and methodologies for these assets. In relation to the acquisition,

 

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Note 2 – Acquisitions and Divestitures (Continued)

 

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 include the operating results of the acquired assets and assumed liabilities of Coastal subsequent to the acquisition on April 3, 2017.

In second quarter 2016, FHN recognized $6.4 million of acquisition-related expenses primarily associated with the CBF and Coastal acquisitions. These expenses were primarily included in Professional fees, Legal fees, and Employee compensation, incentives and benefits 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 combination or divestitures but are not material to FHN individually or in the aggregate.

 

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Table of Contents

Note 3 – Investment Securities

The following tables summarize FHN’s investment securities on June 30, 2017 and December 31, 2016:

 

     June 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”)

     2,130,894        13,160        (14,438      2,129,616  

Government agency issued collateralized mortgage obligations (“CMO”)

     1,646,533        4,754        (19,464      1,631,823  

Equity and other (a)

     186,892        —          (2      186,890  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,964,419      $ 17,914      $ (33,904      3,948,429  
  

 

 

    

 

 

    

 

 

    

AFS debt securities recorded at fair value through earnings:

           

SBA-interest only strips (b)

              1,163  
           

 

 

 

Total securities available-for-sale (c)

            $ 3,949,592  
           

 

 

 

Securities held-to-maturity:

           

Corporate bonds

   $ 10,000      $ —        $ (9    $ 9,991  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held-to-maturity

   $ 10,000      $ —        $ (9    $ 9,991  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $68.6 million. The remainder is money market, mutual funds, and cost method investments.
(b) SBA-interest only strips are recorded at elected fair value. See Note 16—Fair Value for additional information.
(c) Includes $3.5 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.

 

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Table of Contents

Note 3 – Investment Securities (Continued)

 

The amortized cost and fair value by contractual maturity for the available-for-sale and held-to-maturity securities portfolios on June 30, 2017 are provided below:

 

     Held-to-Maturity      Available-for-Sale  

(Dollars in thousands)

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Within 1 year

   $ —        $ —        $ 100      $ 100  

After 1 year; within 5 years

     —          —          —          9  

After 5 years; within 10 years

     10,000        9,991        —          582  

After 10 years

     —          —          —          572  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     10,000        9,991        100        1,263  
  

 

 

    

 

 

    

 

 

    

 

 

 

Government agency issued MBS and CMO (a)

     —          —          3,777,427        3,761,439  

Equity and other

     —          —          186,892        186,890  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,000      $ 9,991      $ 3,964,419      $ 3,949,592  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

The table below provides information on gross gains and gross losses from investment securities for the three and six months ended June 30:

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 

(Dollars in thousands)

   2017      2016      2017      2016  

Gross gains on sales of securities

   $ 405      $ 162      $ 449      $ 3,999  

Gross (losses) on sales of securities

     —          (63      —          (2,326
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 405      $ 99      $ 449      $ 1,673  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Cash proceeds from the sale of available for sale securities for the three and six months ended June 30, 2017 were $.1 million. Cash proceeds from the sale of available for sale securities for the three and six months ended June 30, 2016 were $.6 million and $1.5 million, respectively. Six months ended June 30, 2016 includes a $1.7 million gain from an exchange of approximately $294 million of AFS debt securities.
(b) Three and six months ended June 30, 2017 includes a $.4 million gain associated with the call of a $4.4 million held-to-maturity municipal bond.

The following tables provide information on investments within the available-for-sale portfolio that had unrealized losses as of June 30, 2017 and December 31, 2016:

 

     As of June 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

   $ 981,771      $ (14,899   $ 128,377      $ (4,565   $ 1,110,148      $ (19,464

Government agency issued MBS

     1,599,386        (14,438     —          —         1,599,386        (14,438
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities

     2,581,157        (29,337     128,377        (4,565     2,709,534        (33,902
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Equity

     7        (2     —          —         7        (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 2,581,164      $ (29,339   $ 128,377      $ (4,565   $ 2,709,541      $ (33,904
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

15


Table of Contents

Note 3 – Investment Securities (Continued)

 

     As of December 31, 2016  
     Less than 12 months     12 months or longer     Total  

(Dollars in thousands)

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

Government agency issued CMO

   $ 1,059,471      $ (19,052   $ 116,527      $ (4,885   $ 1,175,998      $ (23,937

Government agency issued MBS

     1,912,126        (23,866     —          —         1,912,126        (23,866
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities

     2,971,597        (42,918     116,527        (4,885     3,088,124        (47,803
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Equity

     7        (2     —          —         7        (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 2,971,604      $ (42,920   $ 116,527      $ (4,885   $ 3,088,131      $ (47,805
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

 

16


Table of Contents

Note 4 – Loans

The following table provides the balance of loans, net of unearned income, by portfolio segment as of June 30, 2017 and December 31, 2016:

 

     June 30      December 31  

(Dollars in thousands)

   2017      2016  

Commercial:

     

Commercial, financial, and industrial

   $ 12,598,219      $ 12,148,087  

Commercial real estate

     2,211,996        2,135,523  

Consumer:

     

Consumer real estate (a)

     4,417,459        4,523,752  

Permanent mortgage

     408,095        423,125  

Credit card & other

     353,550        359,033  
  

 

 

    

 

 

 

Loans, net of unearned income

   $ 19,989,319      $ 19,589,520  

Allowance for loan losses

     197,257        202,068  
  

 

 

    

 

 

 

Total net loans

   $ 19,792,062      $ 19,387,452  
  

 

 

    

 

 

 

 

(a) Balances as of June 30, 2017 and December 31, 2016, include $28.8 million and $35.9 million of restricted real estate loans, respectively. See Note 13—Variable Interest Entities for additional information.

COMPONENTS OF THE LOAN PORTFOLIO

The loan portfolio is disaggregated into segments and then further disaggregated into classes for certain disclosures. GAAP defines a portfolio segment as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. A class is generally determined based on the initial measurement attribute (i.e., amortized cost or purchased credit-impaired), risk characteristics of the loan, and FHN’s method for monitoring and assessing credit risk. Commercial loan portfolio segments include commercial, financial and industrial (“C&I”) and commercial real estate (“CRE”). Commercial classes within C&I include general C&I, 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 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 include consumer real estate, permanent mortgage, and the credit card and other portfolio. Consumer classes include home equity lines of credit (“HELOCs”), real estate (“R/E”) installment and PCI loans within the consumer real estate segment, permanent mortgage (which is both a segment and a class), and credit card and other.

Concentrations

FHN has a concentration of residential real estate loans (24 percent of total loans), the majority of which is in the consumer real estate segment (22 percent of total loans). Loans to finance and insurance companies total $2.7 billion (22 percent of the C&I portfolio, or 14 percent of the total loans). FHN had loans to mortgage companies totaling $2.1 billion (17 percent of the C&I segment, or 10 percent of total loans) as of June 30, 2017. As a result, 39 percent of the C&I segment is sensitive to impacts on the financial services industry.

 

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Table of Contents

Note 4 – Loans (Continued)

 

Purchased Credit-Impaired Loans

The following table presents a rollforward of the accretable yield for the three and six months ended June 30, 2017 and 2016:

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 

(Dollars in thousands)

   2017      2016      2017      2016  

Balance, beginning of period

   $ 5,198      $ 8,958      $ 6,871      $ 8,542  

Accretion

     (919      (996      (1,770      (2,147

Adjustment for payoffs

     (761      (2,452      (1,034      (4,229

Adjustment for charge-offs

     —          (11      —          (674

Adjustment for pool excess recovery (a)

     —          —          (222      —    

Increase/(decrease) in accretable yield (b)

     409        705        114        4,712  

Other

     118        (33      86        (33
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 4,045      $ 6,171      $ 4,045      $ 6,171  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 June 30, 2017, the ALLL related to PCI loans was $.5 million compared to $.7 million at December 31, 2016. A loan loss provision credit related to PCI loans of $.1 million was recognized during the three months ended June 30, 2017, as compared to $.4 million recognized during the three months ended June 30, 2016. The loan loss provision credit related to PCI loans of $.2 million was recognized during the six months ended June 30, 2017, as compared to $.3 million recognized during the six months ended June 30, 2016.

The following table reflects the outstanding principal balance and carrying amounts of the acquired PCI loans as of June 30, 2017 and December 31, 2016:

 

     June 30, 2017      December 31, 2016  

(Dollars in thousands)

   Carrying value      Unpaid balance      Carrying value      Unpaid balance  

Commercial, financial and industrial

   $ 21,143      $ 22,089      $ 40,368      $ 41,608  

Commercial real estate

     4,008        5,264        4,763        6,514  

Consumer real estate

     1,013        1,388        1,172        1,677  

Credit card and other

     55        63        52        64  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,219      $ 28,804      $ 46,355      $ 49,863  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

Note 4 – Loans (Continued)

 

Impaired Loans

The following tables provide information at June 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.

 

     June 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

   $ 9,487      $ 16,604      $ —        $ 10,419      $ 16,636      $ —    

Income CRE

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,487      $ 16,604      $ —        $ 10,419      $ 16,636      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer:

                 

HELOC (a)

   $ 9,937      $ 20,411      $ —        $ 11,383      $ 21,662      $ —    

R/E installment loans (a)

     3,933        4,960        —          3,957        4,992        —    

Permanent mortgage (a)

     5,904        8,739        —          5,311        7,899        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,774      $ 34,110      $ —        $ 20,651      $ 34,553      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with related allowance recorded:

                 

Commercial:

                 

General C&I

   $ 25,411      $ 25,880      $ 2,716      $ 34,334      $ 34,470      $ 3,294  

TRUPS

     3,136        3,700        925        3,209        3,700        925  

Income CRE

     1,731        1,731        57        1,831        2,209        62  

Residential CRE

     1,293        1,761        119        1,293        1,761        132  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 31,571      $ 33,072      $ 3,817      $ 40,667      $ 42,140      $ 4,413  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer:

                 

HELOC

   $ 75,778      $ 78,449      $ 16,061      $ 84,711      $ 87,126      $ 15,927  

R/E installment loans

     48,351        49,143        11,088        53,409        54,559        12,875  

Permanent mortgage

     80,009        91,744        11,858        88,615        100,983        12,470  

Credit card & other

     360        360        161        306        306        133  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 204,498      $ 219,696      $ 39,168      $ 227,041      $ 242,974      $ 41,405  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

   $ 41,058      $ 49,676      $ 3,817      $ 51,086      $ 58,776      $ 4,413  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

   $ 224,272      $ 253,806      $ 39,168      $ 247,692      $ 277,527      $ 41,405  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 265,330      $ 303,482      $ 42,985      $ 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.

 

19


Table of Contents

Note 4 – Loans (Continued)

 

     Three Months Ended June 30      Six Months Ended June 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

   $ 9,941      $ —        $ 13,333      $ —        $ 10,174      $ —        $ 11,278      $ —    

Income CRE

     —          —          2,468        —          —          —          2,468        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,941      $ —        $ 15,801      $ —        $ 10,174      $ —        $ 13,746      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer:

                       

HELOC (a)

   $ 10,331      $ —        $ 11,105      $ —        $ 10,692      $ —        $ 11,013      $ —    

R/E installment loans (a)

     3,925        —          4,407        —          3,931        —          4,420        —    

Permanent mortgage (a)

     5,854        —          4,161        —          5,705        —          4,298        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,110      $ —        $ 19,673      $ —        $ 20,328      $ —        $ 19,731      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with related allowance recorded:

                       

Commercial:

                       

General C&I

   $ 28,402      $ 189      $ 31,333      $ 292      $ 30,632      $ 403      $ 28,127      $ 379  

TRUPS

     3,160        —          3,291        —          3,178        —          3,307        —    

Income CRE

     1,767        14        4,780        20        1,792        28        4,959        40  

Residential CRE

     1,293        5        1,376        6        1,293        10        1,386        12  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,622      $ 208      $ 40,780      $ 318      $ 36,895      $ 441      $ 37,779      $ 431  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer:

                       

HELOC

   $ 78,608      $ 577      $ 88,299      $ 494      $ 80,841      $ 1,141      $ 88,439      $ 981  

R/E installment loans

     49,373        317        58,923        345        50,637        635        59,447        662  

Permanent mortgage

     81,475        574        92,218        541        83,626        1,189        93,725        1,058  

Credit card & other

     315        3        351        3        301        5        355        6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 209,771      $ 1,471      $ 239,791      $ 1,383      $ 215,405      $ 2,970      $ 241,966      $ 2,707  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

   $ 44,563      $ 208      $ 56,581      $ 318      $ 47,069      $ 441      $ 51,525      $ 431  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

   $ 229,881      $ 1,471      $ 259,464      $ 1,383      $ 235,733      $ 2,970      $ 261,697      $ 2,707  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 274,444      $ 1,679      $ 316,045      $ 1,701      $ 282,802      $ 3,411      $ 313,222      $ 3,138  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) All discharged bankruptcy loans are charged down to an estimate of net realizable value and do not carry any allowance.

Asset Quality Indicators

FHN employs a dual grade commercial risk grading methodology to assign an estimate for the probability of default (“PD”) and the loss given default (“LGD”) for each commercial loan using factors specific to various industry, portfolio, or product segments that result in a rank ordering of risk and the assignment of grades PD 1 to PD 16. This credit grading system is intended to identify and measure the credit quality of the loan portfolio by analyzing the migration of loans between grading categories. It is also integral to the estimation methodology utilized in determining the allowance for loan losses since an allowance is established for pools of commercial loans based on the credit grade assigned. Each PD grade corresponds to an estimated one-year default probability percentage; a PD 1 has the lowest expected default probability, and probabilities increase as grades progress down the scale. PD 1 through PD 12 are “pass” grades. PD grades 13-16 correspond to the regulatory-defined categories of special mention (13), substandard (14), doubtful (15), and loss (16). Pass loan grades are required to be reassessed annually or earlier whenever there has been a material change in the financial condition of the borrower or risk characteristics of the relationship. All commercial loans over $1 million and certain commercial loans over $500,000 that are graded 13 or worse are reassessed on a quarterly basis. Loan grading discipline is regularly reviewed internally by Credit Assurance Services to determine if the process continues to result in accurate loan grading across the portfolio. FHN may utilize availability of guarantors/sponsors to support lending decisions during the credit underwriting process and when determining the assignment of internal loan grades. LGD grades are assigned based on a scale of 1-12 and represent FHN’s

 

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Note 4 – Loans (Continued)

 

expected recovery based on collateral type in the event a loan defaults. See Note 5 – Allowance for Loan Losses for further discussion on the credit grading system.

The following tables provide the balances of commercial loan portfolio classes with associated allowance, disaggregated by PD grade as of June 30, 2017 and December 31, 2016:

 

     June 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

   $ 599,112      $ —        $ —        $ 1,342      $ —        $ 600,454        4   $ 93  

2

     912,224        —          —          11,375        77        923,676        6       432  

3

     482,603        615,227        —          154,399        41        1,252,270        8       294  

4

     952,746        455,459        —          250,107        217        1,658,529        11       941  

5

     1,431,131        209,681        —          462,468        248        2,103,528        14       8,023  

6

     1,575,587        464,550        —          392,030        6,480        2,438,647        17       10,258  

7

     1,559,070        170,351        —          412,035        3,312        2,144,768        15       13,480  

8

     1,061,919        89,754        —          298,308        5,432        1,455,413        10       23,210  

9

     491,733        62,426        —          66,838        5,013        626,010        4       10,802  

10

     363,620        3,583        —          47,567        8,123        422,893        3       9,243  

11

     214,592        —          —          44,301        3,183        262,076        2       7,522  

12

     180,210        21,691        —          13,000        2,742        217,643        1       7,684  

13

     107,024        —          304,236        6,688        111        418,059        3       3,821  

14,15,16

     210,344        40        —          8,531        979        219,894        1       23,083  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Collectively evaluated for impairment

     10,141,915        2,092,762        304,236        2,168,989        35,958        14,743,860        99       118,886  

Individually evaluated for impairment

     34,897        —          3,137        1,731        1,293        41,058        1       3,817  

Purchased credit-impaired loans

     21,272        —          —          3,974        51        25,297        —         146  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans

   $ 10,198,084      $ 2,092,762      $ 307,373      $ 2,174,694      $ 37,302      $ 14,810,215        100   $ 122,849  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

21


Table of Contents

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 June 30, 2017 and December 31, 2016, presented net of a $25.5 million valuation allowance. Based on the underlying structure of the notes, the highest possible internal grade is “13”.

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

The following table reflects the percentage of balances outstanding by average, refreshed FICO scores for the HELOC, real estate installment, and permanent mortgage classes of loans as of June 30, 2017 and December 31, 2016:

 

     June 30, 2017     December 31, 2016  
     HELOC     R/E Installment
Loans
    Permanent
Mortgage
    HELOC     R/E Installment
Loans
    Permanent
Mortgage
 

FICO score 740 or greater

     57.9     71.2     44.5     56.9     70.3     45.0

FICO score 720-739

     8.8       7.8       11.2       8.8       8.3       9.5  

FICO score 700-719

     8.3       6.8       11.5       8.6       6.8       9.2  

FICO score 660-699

     12.7       8.7       15.4       13.2       8.4       17.1  

FICO score 620-659

     5.2       3.0       8.2       5.6       3.5       9.1  

FICO score less than 620 (a)

     7.1       2.5       9.2       6.9       2.7       10.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) For this group, a majority of the loan balances had FICO scores at the time of the origination that exceeded 620 but have since deteriorated as the loans have seasoned.

 

22


Table of Contents

Note 4 – Loans (Continued)

 

Nonaccrual and Past Due Loans

The following table reflects accruing and non-accruing loans by class on June 30, 2017:

 

     Accruing      Non-Accruing  

(Dollars in thousands)

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

Commercial (C&I):

                          

General C&I

   $ 10,151,612      $ 3,277      $ 69      $ 10,154,958      $ 8,864      $ 1,925      $ 11,065      $ 21,854      $ 10,176,812  

Loans to mortgage companies

     2,092,722        —          —          2,092,722        —          —          40        40        2,092,762  

TRUPS (a)

     304,236        —          —          304,236        —          —          3,137        3,137        307,373  

Purchased credit-impaired loans

     21,046        15        211        21,272        —          —          —          —          21,272  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial (C&I)

     12,569,616        3,292        280        12,573,188        8,864        1,925        14,242        25,031        12,598,219  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate:

                          

Income CRE

     2,169,748        117        —          2,169,865        111        —          744        855        2,170,720  

Residential CRE

     36,456        —          —          36,456        —          —          795        795        37,251  

Purchased credit-impaired loans

     3,997        28        —          4,025        —          —          —          —          4,025  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     2,210,201        145        —          2,210,346        111        —          1,539        1,650        2,211,996  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer real estate:

                          

HELOC

     1,449,129        14,514        9,440        1,473,083        42,500        3,926        8,302        54,728        1,527,811  

R/E installment loans

     2,856,164        7,465        4,175        2,867,804        16,436        1,547        2,464        20,447        2,888,251  

Purchased credit-impaired loans

     1,168        133        96        1,397        —          —          —          —          1,397  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate

     4,306,461        22,112        13,711        4,342,284        58,936        5,473        10,766        75,175        4,417,459  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Permanent mortgage

     369,803        3,334        7,154        380,291        13,241        1,522        13,041        27,804        408,095  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit card & other:

                          

Credit card

     182,539        1,316        1,173        185,028        —          —          —          —          185,028  

Other

     167,580        672        85        168,337        —          —          130        130        168,467  

Purchased credit-impaired loans

     55        —          —          55        —          —          —          —          55  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit card & other

     350,174        1,988        1,258        353,420        —          —          130        130        353,550  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned income

   $ 19,806,255      $ 30,871      $ 22,403      $ 19,859,529      $ 81,152      $ 8,920      $ 39,718      $ 129,790      $ 19,989,319  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) TRUPS is presented net of the valuation allowance of $25.5 million.

 

23


Table of Contents

Note 4 – Loans (Continued)

 

The following table reflects accruing and non-accruing loans by class on December 31, 2016:

 

     Accruing      Non-Accruing  

(Dollars in thousands)

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

Commercial (C&I):

                          

General C&I

   $ 9,720,231      $ 5,199      $ 23      $ 9,725,453      $ 16,106      $ 374      $ 12,988      $ 29,468      $ 9,754,921  

Loans to mortgage companies

     2,041,408        3,722        —          2,045,130        —          —          59        59        2,045,189  

TRUPS (a)

     304,236        —          —          304,236        —          —          3,209        3,209        307,445  

Purchased credit-impaired loans

     40,113        185        234        40,532        —          —          —          —          40,532  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial (C&I)

     12,105,988        9,106        257        12,115,351        16,106        374        16,256        32,736        12,148,087  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate:

                          

Income CRE

     2,085,455        14        —          2,085,469        232        460        1,289        1,981        2,087,450  

Residential CRE

     42,182        178        —          42,360        —          —          795        795        43,155  

Purchased credit-impaired loans

     4,809        109        —          4,918        —          —          —          —          4,918  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     2,132,446        301        —          2,132,747        232        460        2,084        2,776        2,135,523  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer real estate:

                          

HELOC

     1,602,640        17,997        10,859        1,631,496        46,964        4,201        8,922        60,087        1,691,583  

R/E installment loans

     2,794,866        7,844        5,158        2,807,868        17,989        2,383        2,353        22,725        2,830,593  

Purchased credit-impaired loans

     1,319        164        93        1,576        —          —          —          —          1,576  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate

     4,398,825        26,005        16,110        4,440,940        64,953        6,584        11,275        82,812        4,523,752  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Permanent mortgage

     385,972        4,544        5,428        395,944        11,867        2,194        13,120        27,181        423,125  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit card & other:

                          

Credit card

     188,573        1,622        1,456        191,651        —          —          —          —          191,651  

Other

     166,062        992        134        167,188        —          —          142        142        167,330  

Purchased credit-impaired loans

     52        —          —          52        —          —          —          —          52  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit card & other

     354,687        2,614        1,590        358,891        —          —          142        142        359,033  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned income

   $ 19,377,918      $ 42,570      $ 23,385      $ 19,443,873      $ 93,158      $ 9,612      $ 42,877      $ 145,647      $ 19,589,520  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) TRUPS is presented net of the valuation allowance of $25.5 million.

 

24


Table of Contents

Note 4 – Loans (Continued)

 

Troubled Debt Restructurings

As part of FHN’s ongoing risk management practices, FHN attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately.

A modification is classified as a TDR if the borrower is experiencing financial difficulty and it is determined that FHN has granted a concession to the borrower. FHN may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that a borrower may default in the foreseeable future. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty. Concessions could include extension of the maturity date, reductions of the interest rate (which may make the rate lower than current market for a new loan with similar risk), reduction or forgiveness of accrued interest, or principal forgiveness. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty, and whether a concession has been granted, are subjective in nature and management’s judgment is required when determining whether a modification is classified as a TDR.

For all classes within the commercial portfolio segment, TDRs are typically modified through forbearance agreements (generally 6 to 12 months). Forbearance agreements could include reduced interest rates, reduced payments, release of guarantor, or entering into short sale agreements. FHN’s proprietary modification programs for consumer loans are generally structured using parameters of U.S. government-sponsored programs such as the former Home Affordable Modification Program (“HAMP”). Within the HELOC and R/E installment loans classes of the consumer portfolio segment, TDRs are typically modified by reducing the interest rate (in increments of 25 basis points to a minimum of 1 percent for up to 5 years) and a possible maturity date extension to reach an affordable housing debt-to-income ratio. After 5 years, the interest rate generally returns to the original interest rate prior to modification; for certain modifications, the modified interest rate increases 2 percent per year until the original interest rate prior to modification is achieved. Permanent mortgage TDRs are typically modified by reducing the interest rate (in increments of 25 basis points to a minimum of 2 percent for up to 5 years) and a possible maturity date extension to reach an affordable housing debt-to-income ratio. After 5 years, the interest rate steps up 1 percent every year until it reaches the Federal Home Loan Mortgage Corporation Weekly Survey Rate cap. Contractual maturities may be extended to 40 years on permanent mortgages and to 30 years for consumer real estate loans. Within the credit card class of the consumer portfolio segment, TDRs are typically modified through either a short-term credit card hardship program or a longer-term credit card workout program. In the credit card hardship program, borrowers may be granted rate and payment reductions for 6 months to 1 year. In the credit card workout program, customers are granted a rate reduction to 0 percent and term extensions for up to 5 years to pay off the remaining balance.

Despite the absence of a loan modification, the discharge of personal liability through bankruptcy proceedings is considered a concession. As a result, FHN classifies all non-reaffirmed residential real estate loans discharged in Chapter 7 bankruptcy as nonaccruing TDRs.

On June 30, 2017 and December 31, 2016, FHN had $252.7 million and $285.2 million of portfolio loans classified as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reserves of $42.1 million, or 17 percent as of June 30, 2017, and $44.9 million, or 16 percent as of December 31, 2016. Additionally, $66.1 million and $69.3 million of loans held-for-sale as of June 30, 2017 and December 31, 2016, respectively, were classified as TDRs.

 

25


Table of Contents

Note 4 – Loans (Continued)

 

The following tables reflect portfolio loans that were classified as TDRs during the three and six months ended June 30, 2017 and 2016:

 

     Three Months Ended June 30, 2017      Six Months Ended June 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

     1      $ 815      $ 799        2      $ 842      $ 836  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial (C&I)

     1        815        799        2        842        836  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer real estate:

                 

HELOC

     27        2,293        2,270        62        4,882        4,743  

R/E installment loans

     14        799        782        28        1,756        1,684  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate

     41        3,092        3,052        90        6,638        6,427  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Permanent mortgage

     4        699        693        9        2,009        1,996  

Credit card & other

     23        144        140        29        165        160  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructurings

     69      $ 4,750      $ 4,684        130      $ 9,654      $ 9,419  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended June 30, 2016      Six Months Ended June 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

     4      $ 19,175      $ 18,067        5      $ 19,883      $ 18,775  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial (C&I)

     4        19,175        18,067        5        19,883        18,775  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer real estate:

                 

HELOC

     53        5,258        5,246        152        12,698        12,616  

R/E installment loans

     19        3,326        3,614        34        4,224        4,509  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate

     72        8,584        8,860        186        16,922        17,125  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Permanent mortgage

     4        841        840        4        841        840  

Credit card & other

     1        2        2        5        21        20  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructurings

     81      $ 28,602      $ 27,769        200      $ 37,667      $ 36,760  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

Note 4 – Loans (Continued)

 

The following tables present TDRs which re-defaulted during the three and six months ended June 30, 2017 and 2016, and as to which the modification occurred 12 months or less prior to the re-default. For purposes of this disclosure, FHN generally defines payment default as 30 or more days past due.

 

     Three Months Ended
June 30, 2017
     Six Months Ended
June 30, 2017
 

(Dollars in thousands)

   Number      Recorded
Investment
     Number      Recorded
Investment
 

Commercial (C&I):

           

General C&I

     2      $ 2,228        3      $ 8,007  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial (C&I)

     2        2,228        3        8,007  
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer real estate:

           

HELOC

     —          —          4        685  

R/E installment loans

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate

     —          —          4        685  
  

 

 

    

 

 

    

 

 

    

 

 

 

Permanent mortgage

     1        538        1        538  

Credit card & other

     1        11        3        18  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructurings

     4      $ 2,777        11      $ 9,248  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended
June 30, 2016
     Six Months Ended
June 30, 2016
 

(Dollars in thousands)

   Number      Recorded
Investment
     Number      Recorded
Investment
 

Commercial (C&I):

           

General C&I

     —        $ —          —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial (C&I)

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer real estate:

           

HELOC

     1        102        2        138  

R/E installment loans

     1        180        1        180  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate

     2        282        3        318  
  

 

 

    

 

 

    

 

 

    

 

 

 

Permanent mortgage

     —          —          —          —    

Credit card & other

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructurings

     2      $ 282        3      $ 318  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

Note 5 – Allowance for Loan Losses

The ALLL includes the following components: reserves for commercial loans evaluated based on pools of credit graded loans and reserves for pools of smaller-balance homogeneous 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 to qualitative adjustments by management to reflect current events, trends, and conditions (including economic considerations and trends). The current economic conditions and trends, performance of the housing market, unemployment levels, labor participation rate, regulatory guidance, 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 quantitative 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 portfolio as of the balance sheet date. Management also periodically reviews analysis of the loss emergence period which is the amount of time it takes for a loss to be confirmed (initial charge-off) after a loss event has occurred. FHN performs extensive studies as it relates to the historical loss periods used in the model and the loss emergence period and model assumptions are adjusted accordingly. 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 in the Notes to Consolidated Financial Statements on FHN’s Form 10-K for the year ended December 31, 2016, for additional information about the policies and methodologies used in the aforementioned components of the ALLL.

 

28


Table of Contents

Note 5 – Allowance for Loan Losses (Continued)

 

The following table provides a rollforward of the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2017 and 2016:

 

(Dollars in thousands)

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

Balance as of April 1, 2017

   $ 93,107     $ 30,888     $ 49,680     $ 15,893     $ 12,400     $ 201,968  

Charge-offs

     (1,865     (20     (3,951     (843     (3,151     (9,830

Recoveries

     600       140       5,143       488       748       7,119  

Provision/(provision credit) for loan losses

     537       (538     (4,803     860       1,944       (2,000
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2017

     92,379       30,470       46,069       16,398       11,941       197,257  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of January 1, 2017

   $ 89,398     $ 33,852     $ 50,357     $ 16,289     $ 12,172     $ 202,068  

Charge-offs

     (2,465     (20     (7,800     (1,326     (6,632     (18,243

Recoveries

     2,276       361       10,819       1,391       1,585       16,432  

Provision/(provision credit) for loan losses

     3,170       (3,723     (7,307     44       4,816       (3,000
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2017

     92,379       30,470       46,069       16,398       11,941       197,257  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance—individually evaluated for impairment

     3,641       176       27,149       11,858       161       42,985  

Allowance—collectively evaluated for impairment

     88,609       30,277       18,536       4,540       11,780       153,742  

Allowance—purchased credit-impaired loans

     129       17       384       —         —         530  

Loans, net of unearned as of June 30, 2017:

            

Individually evaluated for impairment

     38,034       3,024       137,999       85,913       360       265,330  

Collectively evaluated for impairment

     12,538,913       2,204,947       4,278,063       322,182       353,135       19,697,240  

Purchased credit-impaired loans

     21,272       4,025       1,397       —         55       26,749  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unearned income

   $ 12,598,219     $ 2,211,996     $ 4,417,459     $ 408,095     $ 353,550     $ 19,989,319  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of April 1, 2016

   $ 80,887     $ 25,626     $ 67,321     $ 18,754     $ 11,446     $ 204,034  

Charge-offs

     (7,869     (51     (6,582     (349     (3,445     (18,296

Recoveries

     1,602       909       6,082       484       992       10,069  

Provision/(provision credit) for loan losses

     6,352       3,780       (7,740     (1,289     2,897       4,000  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2016

     80,972       30,264       59,081       17,600       11,890       199,807  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of January 1, 2016

   $ 73,637     $ 25,159     $ 80,614     $ 18,947     $ 11,885     $ 210,242  

Charge-offs

     (14,394     (693     (13,508     (461     (6,852     (35,908

Recoveries

     2,382       1,131       11,817       1,263       1,880       18,473  

Provision/(provision credit) for loan losses

     19,347       4,667       (19,842     (2,149     4,977       7,000  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2016

     80,972       30,264       59,081       17,600       11,890       199,807  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance—individually evaluated for impairment

     4,076       434       31,911       15,583       147       52,151  

Allowance—collectively evaluated for impairment

     76,786       29,449       26,834       2,017       11,743       146,829  

Allowance—purchased credit-impaired loans

     110       381       336       —         —         827  

Loans, net of unearned as of June 30, 2016:

            

Individually evaluated for impairment

     51,447       8,298       163,339       95,882       356       319,322  

Collectively evaluated for impairment

     11,117,452       1,951,306       4,475,856       343,132       360,275       18,248,021  

Purchased credit-impaired loans

     10,546       9,808       1,584       —         56       21,994  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unearned income

   $ 11,179,445     $ 1,969,412     $ 4,640,779     $ 439,014     $ 360,687     $ 18,589,337  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

Note 6 – Intangible Assets

The following is a summary of other intangible assets included in the Consolidated Condensed Statements of Condition:

 

     June 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      $ (5,677   $ 11,173      $ 16,850      $ (4,721   $ 12,129  

Customer relationships (a)

     76,865        (48,274     28,591        54,865        (46,302     8,563  

Other (a) (b)

     5,622        (265     5,357        555        (230     325  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 99,337      $ (54,216   $ 45,121      $ 72,270      $ (51,253   $ 21,017  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) 2017 increase associated with the Coastal acquisition.
(b) Balance primarily includes noncompete covenants, as well as $322 thousand related to state banking licenses not subject to amortization.

Amortization expense was $2.0 million and $1.3 million for the three months ended June 30, 2017 and 2016, respectively, and $3.2 million and $2.6 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017 the estimated aggregated amortization expense is expected to be:

 

(Dollars in thousands)

      
Year    Amortization  

Remainder of 2017

   $ 3,929  

2018

     7,483  

2019

     7,179  

2020

     4,303  

2021

     4,123  

2022

     3,356  

Gross goodwill, accumulated impairments, and accumulated divestiture related write-offs were determined beginning January 1, 2012, 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 June 30, 2017 and December 31, 2016. The regional banking and fixed income segments do not have any accumulated impairments or divestiture related write-offs. The following is a summary of goodwill by reportable segment included in the Consolidated Condensed Statements of Condition as of June 30, 2017 and December 31, 2016.

 

(Dollars in thousands)

   Regional
Banking
     Fixed
Income
     Total  

December 31, 2015

   $ 93,303      $ 98,004      $ 191,307  
  

 

 

    

 

 

    

 

 

 

Additions

     —          —          —    
  

 

 

    

 

 

    

 

 

 

June 30, 2016

   $ 93,303      $ 98,004      $ 191,307  
  

 

 

    

 

 

    

 

 

 

December 31, 2016

   $ 93,367      $ 98,004      $ 191,371  
  

 

 

    

 

 

    

 

 

 

Additions (a)

     —          44,964        44,964  
  

 

 

    

 

 

    

 

 

 

June 30, 2017

   $ 93,367      $ 142,968      $ 236,335  
  

 

 

    

 

 

    

 

 

 

(a) See Note 2—Acquisitions and Divestitures for further details regarding goodwill related to acquisitions.

 

30


Table of Contents

Note 7 – Other Income and Other Expense

Following is detail of All other income and commissions and All other expense as presented in the Consolidated Condensed Statements of Income:

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 

(Dollars in thousands)

   2017      2016      2017      2016  

All other income and commissions:

           

Other service charges

   $ 3,109      $ 2,996      $ 6,093      $ 5,709  

ATM interchange fees

     3,083        2,879        5,861        5,837  

Deferred compensation

     1,491        795        3,318        1,124  

Electronic banking fees

     1,306        1,381        2,629        2,778  

Mortgage banking

     1,268        598        2,529        1,871  

Letter of credit fees

     1,122        1,115        2,158        2,176  

Insurance commissions

     592        552        1,475        1,039  

Other

     2,646        2,005        4,945        5,076  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,617      $ 12,321      $ 29,008      $ 25,610  
  

 

 

    

 

 

    

 

 

    

 

 

 

All other expense:

           

Travel and entertainment

   $ 3,162      $ 2,495      $ 5,510      $ 4,557  

Other insurance and taxes

     2,443        3,014        4,833        6,327  

Customer relations

     1,543        1,483        2,879        3,362  

Employee training and dues

     1,453        1,338        2,996        2,728  

Supplies

     1,093        930        1,956        1,956  

Tax credit investments

     942        831        1,884        1,537  

Miscellaneous loan costs

     699        565        1,321        1,282  

Litigation and regulatory matters

     533        26,000        241        25,525  

Foreclosed real estate

     446        (432      650        (690

Other

     12,090        10,624        20,921        22,343  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,404      $ 46,848      $ 43,191      $ 68,927  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

31


Table of Contents

Note 8 – Components of Other Comprehensive Income/(loss)

The following table provides the changes in accumulated other comprehensive income/(loss) by component, net of tax, for the three and six months ended June 30, 2017 and 2016:

 

(Dollars in thousands)

   Securities AFS      Cash Flow
Hedges
     Pension and
Post-retirement
Plans
     Total  

Balance as of April 1, 2017

   $ (18,795    $ (3,179    $ (227,984    $ (249,958

Net unrealized gains/(losses)

     9,188        3,059        —          12,247  

Amounts reclassified from AOCI

     (250      (904      1,403        249  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income/(loss)

     8,938        2,155        1,403        12,496  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2017

   $ (9,857    $ (1,024    $ (226,581    $ (237,462
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of January 1, 2017

   $ (17,232    $ (1,265    $ (229,157    $ (247,654

Net unrealized gains/(losses)

     7,652        1,997        —          9,649  

Amounts reclassified from AOCI

     (277      (1,756      2,576        543  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income/(loss)

     7,375        241        2,576        10,192  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2017

   $ (9,857    $ (1,024    $ (226,581    $ (237,462
  

 

 

    

 

 

    

 

 

    

 

 

 

(Dollars in thousands)

   Securities AFS      Cash Flow
Hedges
     Pension and
Post-retirement
Plans
     Total  

Balance as of April 1, 2016

   $ 42,554      $ 3,465      $ (216,460    $ (170,441

Net unrealized gains/(losses)

     16,037        1,600        —          17,637  

Amounts reclassified from AOCI

     —          (374      844        470  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income/(loss)

     16,037        1,226        844        18,107  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2016

   $ 58,591      $ 4,691      $ (215,616    $ (152,334
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of January 1, 2016

   $ 3,394      $ —        $ (217,586    $ (214,192

Net unrealized gains/(losses)

     56,217        5,439        —          61,656  

Amounts reclassified from AOCI

     (1,020      (748      1,970        202  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income/(loss)

     55,197        4,691        1,970        61,858  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2016

   $ 58,591      $ 4,691      $ (215,616    $ (152,334
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 8 – Components of Other Comprehensive Income/(loss) (Continued)

 

Reclassifications from AOCI, and related tax effects, were as follows:

 

(Dollars in thousands)

   Three Months Ended
June 30
    Six Months Ended
June 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

   $ (405   $ —       $ (449   $ (1,654   Debt securities gains/(losses), net

Tax expense/(benefit)

     155       —         172       634     Provision/(benefit) for income taxes
  

 

 

   

 

 

   

 

 

   

 

 

   
     (250     —         (277     (1,020  
  

 

 

   

 

 

   

 

 

   

 

 

   

Cash flow hedges:

          

Realized (gains)/losses on cash flow hedges

     (1,465     (607     (2,845     (1,213   Interest and fees on loans

Tax expense/(benefit)

     561       233       1,089       465     Provision/(benefit) for income taxes
  

 

 

   

 

 

   

 

 

   

 

 

   
     (904     (374     (1,756     (748  
  

 

 

   

 

 

   

 

 

   

 

 

   

Pension and Postretirement Plans:

          

Amortization of prior service cost and net actuarial gain/(loss)

     2,273       1,369       4,173       3,195     Employee compensation, incentives, and benefits

Tax expense/(benefit)

     (870     (525     (1,597     (1,225   Provision/(benefit) for income taxes
  

 

 

   

 

 

   

 

 

   

 

 

   
     1,403     844     2,576     1,970      
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassification from AOCI

   $ 249     $ 470     $ 543     $ 202    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

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Note 9 – Earnings Per Share

The following table provides reconciliations of net income to net income available to common shareholders and the difference between average basic common shares outstanding and average diluted common shares outstanding:

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 

(Dollars and shares in thousands, except per share data)

   2017      2016      2017      2016  

Net income/(loss)

   $ 95,204      $ 60,940      $ 153,592      $ 113,153  

Net income attributable to noncontrolling interest

     2,852        2,852        5,672        5,703  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income/(loss) attributable to controlling interest

     92,352        58,088        147,920        107,450  

Preferred stock dividends

     1,550        1,550        3,100        3,100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income/(loss) available to common shareholders

   $ 90,802      $ 56,538      $ 144,820      $ 104,350  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding—basic

     233,482        231,573        233,280        233,112  

Effect of dilutive securities

     2,781        2,003        2,945        2,009  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding—diluted

     236,263        233,576        236,225        235,121  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income/(loss) per share available to common shareholders

   $ 0.39      $ 0.24      $ 0.62      $ 0.45  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted income/(loss) per share available to common shareholders

   $ 0.38      $ 0.24      $ 0.61      $ 0.44  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents outstanding options and other equity awards that were excluded from the calculation of diluted earnings per share because they were either anti-dilutive (the exercise price was higher than the weighted-average market price for the period) or the performance conditions have not been met:

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 

(Shares in thousands)

   2017      2016      2017      2016  

Stock options excluded from the calculation of diluted EPS

     2,721        3,842        2,512        3,804  

Weighted average exercise price of stock options excluded from the calculation of diluted EPS

   $ 25.24      $ 22.68      $ 25.85      $ 23.06  

Other equity awards excluded from the calculation of diluted EPS

     482        959        247        867  

 

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Note 10 – Contingencies and Other Disclosures

CONTINGENCIES

Contingent Liabilities Overview

Contingent liabilities arise in the ordinary course of business. Often they are related to lawsuits, arbitration, mediation, and other forms of litigation. Various litigation matters are threatened or pending against FHN and its subsidiaries. Also, FHN at times receives requests for information, subpoenas, or other inquiries from federal, state, and local regulators, from other government authorities, and from other parties concerning various matters relating to FHN’s current or former lines of business. Certain matters of that sort are pending at this time, and FHN is cooperating in those matters. Pending and threatened litigation matters sometimes are resolved in court or before an arbitrator, and sometimes are settled by the parties. 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, “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; (ii) FHN has determined material loss to be probable but is not reasonably able to estimate an amount or range of material loss liability; or (iii) FHN has determined that material loss is not probable but is reasonably possible, and that the amount or range of that reasonably possible material loss is estimable. As defined in applicable accounting guidance, loss is reasonably possible if there is more than a remote chance of a material loss outcome for FHN. Set forth below are disclosures for certain pending or threatened litigation matters, including all matters mentioned in (i) or (ii) and certain matters mentioned in (iii). In addition, certain other matters, or groups of matters, are discussed relating to FHN’s former mortgage origination and servicing businesses. In all litigation matters discussed, unless settled or otherwise resolved, FHN believes it has meritorious defenses and intends to pursue those defenses vigorously.

FHN reassesses the liability for litigation matters each quarter as the matters progress. At June 30, 2017, the aggregate amount of liabilities established for all such loss contingency matters was $1.1 million. These liabilities are separate from those discussed under the heading “Repurchase and Foreclosure Liability” below.

In each material loss contingency matter, except as otherwise noted, there is more than a remote chance that any of the following outcomes will occur: the plaintiff will substantially prevail; the defense will substantially prevail; the plaintiff will prevail in part; or the matter will be settled by the parties. At June 30, 2017, 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 $52 million.

 

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Note 10 – Contingencies and Other Disclosures (Continued)

 

As a result of the general uncertainties discussed above and the specific uncertainties discussed for each matter mentioned below, it is possible that the ultimate future loss experienced by FHN for any particular matter may materially exceed the amount, if any, of currently established liability for that matter. That possibility exists both for matters included in the estimated reasonably possible loss (“RPL”) range mentioned above and for matters not included in that range.

Material Matters

FHN, along with multiple co-defendants, is defending lawsuits brought by investors which claim that the offering documents under which certificates relating to First Horizon branded securitizations were sold to them were materially deficient. One of those matters is viewed as material currently: Federal Deposit Insurance Corporation (“FDIC”) as receiver for Colonial Bank, in the U.S. District Court for the Southern District of New York (Case No. 12 Civ. 6166 (LLS)(MHD)). The plaintiff in that suit claims to have purchased (and later sold) certificates totaling $83.4 million, relating to a number of separate securitizations. Plaintiff demands damages and prejudgment interest, among several remedies sought. The current RPL estimate for this matter 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 FHN is unable to estimate an RPL range due to significant uncertainties regarding: claims as to which the claimant specifies no dollar amount; the potential remedies that might be available or awarded; the availability of significantly dispositive defenses such as statutes of limitations 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 pending indemnification claims, excluding the FDIC-New York matter, total $409.9 million.

FHN has additional potential exposures related to its former 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, including indemnity payments, discussed below, and some might eventually result in damages or other litigation-oriented liability, 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

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. The complaint alleges, among other things, that the FHN director defendants breached their fiduciary duties by approving the merger, that Capital Bank Financial aided and abetted such breaches, and that FHN, its directors, and Capital Bank Financial failed to disclose material information in connection with the merger. The complaint seeks, among other things, an order enjoining the merger, as well as other equitable relief and/or money damages, interest, costs, fees (including attorneys’ fees), and expenses.

 

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Note 10 – Contingencies and Other Disclosures (Continued)

 

In addition, Capital Bank Financial and the individual members of the Capital Bank Financial board of directors have been named as defendants in three substantially similar putative derivative and class action lawsuits filed by alleged shareholders of Capital Bank Financial. These actions are captioned: (1) Bushansky v. Capital Bank Financial Corp., et al., No. 3:17-cv-00422 (W.D. North Carolina filed July 17, 2017); (2) Parshall v. Capital Bank Financial Corp., et al., No. 3:17-cv-00428 (W.D. North Carolina filed July 19, 2017); and (3) Catherine 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 names FHN as a defendant. The three complaints allege that the registration statement on Form S-4 which FHN filed on June 29, 2017 omits and/or misrepresents material information which renders it false and misleading. Specifically, the complaints allege that the registration statement omits material information regarding (i) the financial projections of Capital Bank Financial, FHN, and the pro forma combined company; (ii) material information regarding the engagement of an investment banker; (iii) the holdings of certain investment bankers in Capital Bank Financial and FHN; and (iv) certain provisions of non-disclosure agreements between Capital Bank Financial and prospective bidders, which included FHN. The complaints further allege that an investment banker’s valuation analyses and fairness opinion were misleading. The complaints seek, among other things, an order enjoining the merger, as well as other equitable relief and/or money damages, interest, costs, fees (including attorneys’ fees) and expenses.

The outcome of these pending matters, and any additional future litigation concerning FHN’s transaction with Capital Bank Financial, is uncertain. Any of these suits, if fully or partially successful, could prevent or delay completion of the transaction and could result in substantial costs to FHN, including any costs associated with the indemnification of FHN’s directors and officers and, after the transaction closes, indemnification of Capital Bank Financial’s directors and officers.

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

 

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Note 10 – Contingencies and Other Disclosures (Continued)

 

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

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 at once 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.

 

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Note 10 – Contingencies and Other Disclosures (Continued)

 

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 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.

 

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Note 10 – Contingencies and Other Disclosures (Continued)

 

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

Repurchase and Foreclosure Liability

The repurchase and foreclosure liability is comprised of reserves to cover estimated loss content in the active pipeline, estimated future inflows, as well as 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, and certain related exposures and has accrued for losses of $35.3 million and $66.0 million as of June 30, 2017 and December 31, 2016, 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 Other liabilities on the Consolidated Condensed Statements of Condition. Charges/expense reversals to increase/decrease the liability are included within Repurchase and foreclosure provision/(provision credit) on the Consolidated Condensed Statements of Income. The decline in the repurchase and 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 the balance sheet dates 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 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 June 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.

 

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Note 10 – Contingencies and Other Disclosures (Continued)

 

At June 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 June 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.

 

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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 June 30, 2017 and December 31, 2016, the derivative liabilities were $5.7 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 now 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 June 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 June 30, 2017, assuming conversion into Class A shares at the current conversion ratio, FHN’s Visa holdings would have a value of approximately $172 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 with such agreements.

 

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Note 11 – Pension, Savings, and Other Employee Benefits

Pension plan. FHN sponsors a noncontributory, qualified defined benefit pension plan to employees hired or re-hired on or before September 1, 2007. Pension benefits are based on years of service, average compensation near retirement or other termination, and estimated social security benefits at age 65. Benefits under the plan are “frozen” so that years of service and compensation changes after 2012 do not affect the benefit owed. Minimum contributions are based upon actuarially determined amounts necessary to fund the total benefit obligation. Decisions to contribute to the plan are based upon pension funding requirements under the Pension Protection Act, the maximum amount deductible under the Internal Revenue Code, the actual performance of plan assets, and trends in the regulatory environment. FHN contributed $165 million to the qualified pension plan in third quarter 2016. The contribution had no effect on FHN’s 2016 Consolidated Statements of Income. FHN did not make any contributions to the qualified pension plan in the first half of 2017. Management does not currently anticipate that FHN will make a contribution to the qualified pension plan for the remainder of 2017.

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 million for 2016. FHN anticipates making benefit payments under the non-qualified plans of $5.0 million in 2017.

Savings plan. FHN provides all qualifying full-time employees with the opportunity to participate in FHN’s tax qualified 401(k) savings plan. The qualified plan allows employees to defer receipt of earned salary, up to tax law limits, on a tax-advantaged basis. Accounts, which are held in trust, may be invested in a wide range of mutual funds and in FHN common stock. Up to tax law limits, FHN provides a 100 percent match for the first 6 percent of salary deferred, with company matching contributions invested according to a participant’s current investment elections. 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.

The components of net periodic benefit cost for the three months ended June 30 are as follows:

 

     Pension Benefits      Other Benefits  

(Dollars in thousands)

   2017      2016      2017      2016  

Components of net periodic benefit cost

           

Service cost

   $ 10      $ 10      $ 27      $ 27  

Interest cost

     7,380        7,882        325        317  

Expected return on plan assets

     (8,890      (9,772      (237      (229

Amortization of unrecognized:

           

Prior service cost/(credit)

     13        50        24        42  

Actuarial (gain)/loss

     2,380        2,067        (143      (232
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost/(credit)

   $ 893      $ 237      $ (4    $ (75
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 11 – Pension, Savings, and Other Employee Benefits (Continued)

 

The components of net periodic benefit cost for the six months ended June 30 are as follows:

 

     Pension Benefits      Other Benefits  

(Dollars in thousands)

   2017      2016      2017      2016  

Components of net periodic benefit cost

           

Service cost

   $ 19      $ 20      $ 54      $ 55  

Interest cost

     14,759        15,764        651        634  

Expected return on plan assets

     (17,781      (19,545      (474      (458

Amortization of unrecognized:

           

Prior service cost/(credit)

     26        99        48        85  

Actuarial (gain)/loss

     4,760        4,135        (285      (465
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost/(credit)

   $ 1,783      $ 473      $ (6    $ (149
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 12 – Business Segment Information

FHN has four business segments: regional banking, fixed income, corporate, and non-strategic. The regional banking segment offers financial products and services, including traditional lending and deposit taking, to consumer and commercial customers in 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. The fixed income segment consists of fixed income securities sales, trading, and strategies for institutional clients in the U.S. and abroad, as well as loan sales, portfolio advisory services, and derivative sales. The corporate segment consists of unallocated corporate expenses, expense on subordinated debt issuances, bank-owned life insurance, unallocated interest income associated with excess equity, net impact of raising incremental capital, revenue and expense associated with deferred compensation plans, funds management, tax credit investment activities, derivative valuation adjustments related to prior sales of Visa Class B shares, and acquisition-related costs. The 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.

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 six months ended June 30:

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 

(Dollars in thousands)

   2017     2016      2017     2016  

Consolidated

         

Net interest income

   $ 200,701     $ 176,264      $ 390,409     $ 348,338  

Provision/(provision credit) for loan losses

     (2,000     4,000        (3,000     7,000  

Noninterest income

     127,673       145,514        244,612       279,819  

Noninterest expense

     217,917       226,822        440,122       453,749  
  

 

 

   

 

 

    

 

 

   

 

 

 

Income/(loss) before income taxes

     112,457       90,956        197,899       167,408  

Provision/(benefit) for income taxes (a)

     17,253       30,016        44,307       54,255  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income/(loss)

   $ 95,204     $ 60,940      $ 153,592     $ 113,153  
  

 

 

   

 

 

    

 

 

   

 

 

 

Average assets

   $ 28,876,350     $ 26,828,548      $ 28,841,422     $ 26,723,621  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Note 12 – Business Segment Information (Continued)

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 

(Dollars in thousands)

   2017      2016      2017      2016  

Regional Banking

           

Net interest income

   $ 201,997      $ 178,318      $ 395,386      $ 350,627  

Provision/(provision credit) for loan losses

     260        10,883        3,358        25,651  

Noninterest income

     64,737        61,275        123,713        120,551  

Noninterest expense

     152,659        164,524        300,723        309,920  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income/(loss) before income taxes

     113,815        64,186        215,018        135,607  

Provision/(benefit) for income taxes

     41,136        22,333        77,724        47,709  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income/(loss)

   $ 72,679      $ 41,853      $ 137,294      $ 87,898  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 18,431,757      $ 16,575,643      $ 18,194,854      $ 16,260,417  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed Income

           

Net interest income

   $ 4,979      $ 3,146      $ 6,130      $ 5,813  

Noninterest income

     55,205        78,083        106,027        145,205  

Noninterest expense

     54,001        62,802        102,686        121,427  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income/(loss) before income taxes

     6,183        18,427        9,471        29,591  

Provision/(benefit) for income taxes

     1,946        6,785        2,970        10,677  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income/(loss)

   $ 4,237      $ 11,642      $ 6,501      $ 18,914  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 2,696,430      $ 2,470,724      $ 2,288,336      $ 2,370,201  
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate

           

Net interest income/(expense)

   $ (14,995    $ (15,847    $ (29,095    $ (30,208

Noninterest income

     6,218        4,909        11,694        10,632  

Noninterest expense

     24,563        15,930        41,443        29,391  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income/(loss) before income taxes

     (33,340      (26,868      (58,844      (48,967

Provision/(benefit) for income taxes (a)

     (35,711      (12,744      (48,769      (23,959
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income/(loss)

   $ 2,371      $ (14,124    $ (10,075    $ (25,008
  

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 6,226,743      $ 5,833,303      $ 6,789,751      $ 6,097,764  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Strategic

           

Net interest income

   $ 8,720      $ 10,647      $ 17,988      $ 22,106  

Provision/(provision credit) for loan losses

     (2,260      (6,883      (6,358      (18,651

Noninterest income

     1,513        1,247        3,178        3,431  

Noninterest expense

     (13,306      (16,434      (4,730      (6,989
  

 

 

    

 

 

    

 

 

    

 

 

 

Income/(loss) before income taxes

     25,799        35,211        32,254        51,177  

Provision/(benefit) for income taxes

     9,882        13,642        12,382        19,828  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income/(loss)

   $ 15,917      $ 21,569      $ 19,872      $ 31,349  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average assets

   $ 1,521,420      $ 1,948,878      $ 1,568,481      $ 1,995,239  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

a) Provision/(benefit) for income taxes for consolidated results and the Corporate segment for the three and six months ended June 30, 2017, relative to the prior year periods, was affected by a decline in the effective tax rate in 2017 primarily related to the reversal of the valuation allowance for the deferred tax asset related to its 2012 federal capital loss carryforward based on capital gain transactions initiated in second quarter 2017. See Note 15 – Income Taxes in the Notes to Consolidated Financial Statements on FHN’s Form 10-K for the year ended December 31, 2016, for additional information.

 

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Note 13 – Variable Interest Entities

ASC 810 defines a VIE as a legal entity where (a) the equity investors, as a group, lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, (b) the equity investors, as a group, lack either, (1) the power through voting rights, or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance, (2) the obligation to absorb the expected losses of the entity, or (3) the right to receive the expected residual returns of the entity, or (c) the entity is structured with non-substantive voting rights. A variable interest is a contractual ownership or other interest that fluctuates with changes in the fair value of the VIE’s net assets exclusive of variable interests. Under ASC 810, as amended, a primary beneficiary is required to consolidate a VIE when it has a variable interest in a VIE that provides it with a controlling financial interest. For such purposes, the determination of whether a controlling financial interest exists is based on whether a single party has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant.

Consolidated Variable Interest Entities

FHN holds variable interests in a proprietary HELOC securitization trust it established as a source of liquidity for consumer lending operations. Based on its restrictive nature, the trust is considered a VIE as the holders of equity at risk do not have the power through voting rights or similar rights to direct the activities that most significantly impact the trust’s economic performance. The retention of 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.

 

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Note 13 – Variable Interest Entities (Continued)

 

The following table summarizes VIEs consolidated by FHN as of June 30, 2017 and December 31, 2016:

 

     June 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

     28,765        N/A        35,873        N/A  

Less: Allowance for loan losses

     52        N/A        587        N/A  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net loans

     28,713        N/A        35,286        N/A  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other assets

     72      $ 77,760        283      $ 74,160  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 28,785      $ 77,760      $ 35,569      $ 74,160  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Term borrowings

   $ 15,886        N/A      $ 23,126        N/A  

Other liabilities

     3      $ 58,088        3      $ 54,746  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 15,889      $ 58,088      $ 23,129      $ 54,746  
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonconsolidated Variable Interest Entities

Low Income Housing Partnerships. First Tennessee Housing Corporation (“FTHC”), a wholly-owned subsidiary of FTBNA, makes equity investments as a limited partner in various partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital and to support FHN’s community reinvestment initiatives. The activities of the limited partnerships include the identification, development, and operation of multi-family housing units that are leased to qualifying residential tenants generally within FHN’s primary geographic region. LIHTC partnerships are considered VIEs as FTHC, 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 LIHTC partnerships as it has a risk of loss for its capital contributions and funding commitments to each partnership. The general partners are considered the primary beneficiaries as managerial functions give them the power to direct the activities that most significantly impact the entities’ economic performance and the managing members are exposed to all losses beyond FTHC’s initial capital contributions and funding commitments.

FHN accounts for all qualifying LIHTC investments under the proportional amortization method. Under this method an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense/(benefit). LIHTC investments that do not qualify for the proportional amortization method are accounted for using the equity method. Expenses associated with these investments were not significant for the three and six months ended June 30, 2017 and 2016. The following table summarizes the impact to the Provision/(benefit) for income taxes on the Consolidated Condensed Statements of Income for the three and six months ended June 30, 2017, and 2016 for LIHTC investments accounted for under the proportional amortization method.

 

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Note 13 – Variable Interest Entities (Continued)

 

     Three Months Ended
June 30
     Six Months Ended
June 30,
 

(Dollars in thousands)

   2017      2016      2017      2016  

Provision/(benefit) for income taxes:

           

Amortization of qualifying LIHTC investments

   $ 2,362      $ 2,330      $ 4,640      $ 4,628  

Low income housing tax credits

     (2,598      (2,534      (4,998      (5,057

Other tax benefits related to qualifying LIHTC investments

     (910      (1,069      (1,829      (2,179

 

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Note 13 – Variable Interest Entities (Continued)

 

Other Tax Credit Investments. First Tennessee New Markets Corporation (“FTNMC”), a wholly-owned subsidiary of FTBNA, makes equity investments through wholly-owned subsidiaries as a non-managing member in various limited liability companies (“LLCs”) that sponsor community development projects utilizing the New Market Tax Credit (“NMTC”) pursuant to Section 45 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital and to support FHN’s community reinvestment initiatives. The activities of the LLCs include providing investment capital for low-income communities within FHN’s primary geographic region. A portion of the funding of FTNMC’s investment in a NMTC LLC is obtained via a loan from an unrelated third-party that is typically a community development enterprise. The NMTC LLCs are considered VIEs as FTNMC, the holder of the equity investment at risk, does not have the ability to direct the activities that most significantly affect the performance of the entity through voting rights or similar rights. While FTNMC could absorb losses that are significant to the NMTC LLCs as it has a risk of loss for its initial capital contributions, the managing members are considered the primary beneficiaries as managerial functions give them the power to direct the activities that most significantly impact the NMTC LLCs’ economic performance and the managing members are exposed to all losses beyond FTNMC’s initial capital contributions.

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 holds variable interests in trusts which have issued mandatorily redeemable preferred capital securities (“trust preferreds”) for smaller banking and insurance enterprises. FTBNA 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 FTBNA 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. FTBNA has no contractual requirements to provide financial support to the trusts.

On-Balance Sheet Trust Preferred Securitization. In 2007, FTBNA 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 FTBNA did not retain servicing or other decision making rights, FTBNA 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, FTBNA has accounted for the funds received through the securitization as a term borrowing in its Consolidated Condensed Statements of Condition. FTBNA 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

 

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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.

Holdings in Agency Mortgage-Backed Securities. FHN holds securities issued by various Agency securitization trusts. Based on their restrictive nature, the trusts meet the definition of a VIE since the holders of the equity investments at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entities’ economic performance. FHN could potentially receive benefits or absorb losses that are significant to the trusts based on the nature of the trusts’ activities and the size of FHN’s holdings. However, FHN is solely a holder of the trusts’ securities and does not have the power to direct the activities that most significantly impact the trusts’ economic performance, and is not considered the primary beneficiary of the trusts. FHN has no contractual requirements to provide financial support to the trusts.

Commercial Loan Troubled Debt Restructurings. For certain troubled commercial loans, FTBNA 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 FTBNA 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, FTBNA is exposed to potentially significant benefits and losses of the borrowing entity. FTBNA 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. In conjunction with this transaction, FTB loaned funds to a related party of the buyer that were used for the purchase price 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 at risk since FTB is providing the funding for the purchase and renovation. A related party of the buyer-lessor has the power to direct the activities that most significantly impact the operations and could potentially receive benefits or absorb losses that are significant to the transactions, making it the primary beneficiary. Therefore, FTB does not consolidate the leasing entity.

The following table summarizes FHN’s nonconsolidated VIEs as of June 30, 2017:

 

(Dollars in thousands)

   Maximum
Loss Exposure
     Liability
Recognized
     Classification

Type

        

Low income housing partnerships

   $ 73,890      $ 19,479      (a)

Other tax credit investments (b) (c)

     20,951        —        Other assets

Small issuer trust preferred holdings (d)

     332,913        —        Loans, net of unearned income

On-balance sheet trust preferred securitization

     49,361        64,812      (e)

Proprietary residential mortgage securitizations

     2,459        —        Trading securities

Holdings of agency mortgage-backed securities (d)

     4,346,895        —        (f)

Commercial loan troubled debt restructurings (g)

     33,673        —        Loans, net of unearned income

Sale-leaseback transaction

     14,827        —        (h)

 

(a) Maximum loss exposure represents $54.4 million of current investments and $19.5 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.
(b) A liability is not recognized as investments are written down over the life of the related tax credit.

 

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(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 $.6 billion classified as Trading securities and $3.8 billion classified as Securities available-for-sale.
(g) Maximum loss exposure represents $28.4 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.

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.

 

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Note 14 – Derivatives

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

Credit risk represents the potential loss that may occur if a party to a transaction fails to perform according to the terms of the contract. The measure of credit exposure is the replacement cost of contracts with a positive fair value. FHN manages credit risk by entering into financial instrument transactions through national exchanges, primary dealers or approved counterparties, and by using mutual margining and master netting agreements whenever possible to limit potential exposure. FHN also maintains collateral posting requirements with certain counterparties to limit credit risk. Commencing in first quarter 2017, a central clearinghouse revised the treatment of daily margin posted or received from collateral to legal settlements of the related derivative contracts. This change resulted in a reduction in derivative assets and liabilities and corresponding reductions in collateral posted and received as these amounts are now presented net by contract in the Consolidated Condensed Statements of Condition. This change has no effect on hedge accounting or gains/losses for the applicable derivative contracts. On June 30, 2017 and December 31, 2016, respectively, FHN had $40.4 million and $47.8 million of cash receivables and $30.0 million and $32.8 million of cash payables related to collateral posting under master netting arrangements, inclusive of collateral posted related to contracts with adjustable collateral posting thresholds and over-collateralized positions, with derivative counterparties. With exchange-traded contracts, the credit risk is limited to the clearinghouse used. For non-exchange traded instruments, credit risk may occur when there is a gain in the fair value of the financial instrument and the counterparty fails to perform according to the terms of the contract and/or when the collateral proves to be of insufficient value. See additional discussion regarding master netting agreements and collateral posting requirements later in this note under the heading “Master Netting and Similar Agreements.” Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates or the prices of debt instruments. FHN manages market risk by establishing and monitoring limits on the types and degree of risk that may be undertaken. FHN continually measures this risk through the use of models that measure value-at-risk and earnings-at-risk.

Derivative Instruments. FHN enters into various derivative contracts both in a dealer capacity to facilitate customer transactions and as a risk management tool. Where contracts have been created for customers, FHN enters into upstream transactions with dealers to offset its risk exposure. Contracts with dealers that require central clearing are novated to a clearing agent who becomes FHN’s counterparty. Derivatives are also used as a risk management tool to hedge FHN’s exposure to changes in interest rates or other defined market risks.

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

 

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Trading Activities

FHN’s fixed income segment trades U.S. Treasury, U.S. Agency, government-guaranteed loan, mortgage-backed, corporate and municipal fixed income securities, and other securities for distribution to customers. When these securities settle on a delayed basis, they are considered forward contracts. Fixed income also enters into interest rate contracts, including caps, swaps, and floors, for its customers. In addition, fixed income enters into futures and option contracts to economically hedge interest rate risk associated with a portion of its securities inventory. These transactions are measured at fair value, with changes in fair value recognized currently in fixed income noninterest income. Related assets and liabilities are recorded on the Consolidated Condensed Statements of Condition as Derivative assets and Derivative liabilities. The FTN Financial Risk Committee and the Credit Risk Management Committee collaborate to mitigate credit risk related to these transactions. Credit risk is controlled through credit approvals, risk control limits, and ongoing monitoring procedures. Total trading revenues were $45.6 million and $69.3 million for the three months ended June 30, 2017 and 2016, respectively, and $88.3 million and $126.9 million for the six months ended June 30, 2017 and 2016, respectively. Trading revenues are inclusive of both derivative and non-derivative financial instruments, and are included in fixed income noninterest income.

The following tables summarize FHN’s derivatives associated with fixed income trading activities as of June 30, 2017 and December 31, 2016:

 

     June 30, 2017  

(Dollars in thousands)

   Notional      Assets      Liabilities  

Customer Interest Rate Contracts

   $ 1,903,647      $ 34,224      $ 12,508  

Offsetting Upstream Interest Rate Contracts

     1,903,647        12,368        31,374  

Option Contracts Purchased

     25,000        78        —    

Forwards and Futures Purchased

     4,245,499        3,403        10,366  

Forwards and Futures Sold

     4,562,708        12,646        2,212  

 

     December 31, 2016  

(Dollars in thousands)

   Notional      Assets      Liabilities  

Customer Interest Rate Contracts

   $ 1,697,992      $ 39,495      $ 14,996  

Offsetting Upstream Interest Rate Contracts

     1,697,992        14,996        39,495  

Option Contracts Purchased

     17,500        63        —    

Option Contracts Written

     5,000        —          8  

Forwards and Futures Purchased

     2,916,750        6,257        26,659  

Forwards and Futures Sold

     3,085,396        27,330        6,615  

Interest Rate Risk Management

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

FHN has designated a derivative transaction in a hedging strategy to manage interest rate risk on $400.0 million of senior debt issued by FTBNA which 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.

 

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The balance sheet impact of this swap was $.2 million in Derivative liabilities as of June 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 June 30, 2017 and December 31, 2016, respectively. There was an insignificant level of ineffectiveness related to this hedge.

 

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Note 14 – Derivatives (Continued)

 

The following tables summarize FHN’s derivatives associated with interest rate risk management activities as of June 30, 2017 and December 31, 2016:

 

     June 30, 2017  

(Dollars in thousands)

   Notional      Assets      Liabilities  

Customer Interest Rate Contracts Hedging

        

Hedging Instruments and Hedged Items:

        

Customer Interest Rate Contracts

   $ 1,513,114      $ 17,056      $ 12,944  

Offsetting Upstream Interest Rate Contracts

     1,513,114        11,878        15,630  

Debt Hedging

        

Hedging Instruments:

        

Interest Rate Swaps

   $ 900,000        N/A      $ 796  

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.

The following table summarizes gains/(losses) on FHN’s derivatives associated with interest rate risk management activities for the three and six months ended June 30, 2017 and 2016:

 

     Three Months Ended
June 30
     Six Months Ended
June 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)

   $ 4,099      $ 8,154        823        20,713  

Offsetting Upstream Interest Rate Contracts (a)

     (4,099      (8,154      (823      (20,713

Debt Hedging

           

Hedging Instruments:

           

Interest Rate Swaps (a)

   $ 1,808      $ 6,660      $ (992    $ 26,606  

Hedged Items:

           

Term Borrowings (a) (b)

     (1,804      (6,557      929        (26,211

 

(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.

 

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Note 14 – Derivatives (Continued)

 

In first quarter 2016, FHN entered into a pay floating, receive fixed interest rate swap in a hedging strategy to manage its exposure to the variability in cash flows related to the interest payments for the following five years on $250 million principal of debt instruments, which primarily consist of held-to-maturity trust preferred loans that have variable interest payments based on 3-month LIBOR. In first quarter 2017, FHN initiated cash flow hedges of $650 million notional amount that have durations between three and seven years. The debt instruments primarily consist of held-to-maturity commercial loans that have variable interest payments based on 1-month LIBOR. These qualify for hedge accounting as cash flow hedges under ASC 815-20. Changes in 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 cumulative change in the fair value of the hypothetical derivative instruments. To the extent that any ineffectiveness exists in the hedge relationships, the amounts are recorded in current period earnings. Interest paid or received for these swaps is recognized as an adjustment to interest income of the assets whose cash flows are being hedged.

The following tables summarize FHN’s derivative activities associated with cash flow hedges as of June 30, 2017 and December 31, 2016:

 

     June 30, 2017  

(Dollars in thousands)

   Notional      Assets      Liabilities  

Cash Flow Hedges

        

Hedging Instruments:

        

Interest Rate Swaps

   $ 900,000        N/A      $ 1,058  

Hedged Items:

        

Variability in Cash Flows Related to Debt Instruments (Primarily Loans)

     N/A      $ 900,000        N/A  
     December 31, 2016  

(Dollars in thousands)

   Notional      Assets      Liabilities  

Cash Flow Hedges

        

Hedging Instruments:

        

Interest Rate Swaps

   $ 250,000        N/A      $ 2,045  

Hedged Items:

        

Variability in Cash Flows Related to Debt Instruments (Primarily Loans)

     N/A      $ 250,000        N/A  

The following table summarizes gains/(losses) on FHN’s derivatives associated with cash flow hedges for the three and six months ended June 30, 2017 and 2016:

 

     Three Months Ended
June 30
     Six Months Ended
June 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)

   $ 3,491      $ 1,988      $ 390      $ 7,606  

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.
(b) Includes approximately $0.8 million of losses expected to be reclassified into earnings in the next twelve months.

 

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FHN hedges held-to-maturity trust preferred loans which have an initial fixed rate term before conversion to a floating rate. FHN has entered into pay fixed, receive floating interest rate swaps to hedge the interest rate risk associated with this initial term. Interest paid or received for these swaps is recognized as an adjustment of the interest income of the assets whose risk is being hedged. Basis adjustments remaining at the end of the hedge term are being amortized as an adjustment to interest income over the remaining life of the loans. Gains or losses are included in Other income and commissions on the Consolidated Condensed Statements of Income. These hedges expire in third quarter 2017.

The following tables summarize FHN’s derivative activities associated with held-to-maturity trust preferred loans as of June 30, 2017 and December 31, 2016:

 

     June 30, 2017  

(Dollars in thousands)

   Notional      Assets     Liabilities  

Loan Portfolio Hedging

       

Hedging Instruments:

       

Interest Rate Swaps

   $ 6,500        N/A     $ 79  

Hedged Items:

       

Trust Preferred Loans (a)

     N/A      $ 6,500 (b)      N/A  
     December 31, 2016  

(Dollars in thousands)

   Notional      Assets     Liabilities  

Loan Portfolio Hedging

       

Hedging Instruments:

       

Interest Rate Swaps

   $ 6,500        N/A     $ 208  

Hedged Items:

       

Trust Preferred Loans (a)

     N/A      $ 6,500 (b)      N/A  

 

(a) Assets included in the Loans, net of unearned income section of the Consolidated Condensed Statements of Condition.
(b) Represents principal balance being hedged.

The following table summarizes gains/(losses) on FHN’s derivatives associated with held-to-maturity trust preferred loans for the three and six months ended June 30, 2017 and 2016:

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 
     2017      2016      2017      2016  

(Dollars in thousands)

   Gains/(Losses)      Gains/(Losses)      Gains/(Losses)      Gains/(Losses)  

Loan Portfolio Hedging

 

Hedging Instruments:

           

Interest Rate Swaps

   $ 68      $ 66      $ 142      $ 109  

Hedged Items:

           

Trust Preferred Loans (a)

   $ (67    $ (65    $ (141    $ 106  

 

(a) Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships.

 

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Note 14 – Derivatives (Continued)

 

Other Derivatives

In conjunction with the sales of a portion of its Visa Class B shares, FHN and the purchaser entered into derivative transactions whereby FHN will make or receive cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. As of June 30, 2017 and December 31, 2016, the derivative liabilities associated with the sales of Visa Class B shares were $5.7 million and $6.2 million, respectively. See the Visa Matters section of Note 10 – Contingencies and Other Disclosures for more information regarding FHN’s Visa shares.

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 June 30, 2017 and December 31, 2016, these loans were valued at $1.3 million and $3.8 million, respectively. The balance sheet amount and the gains/losses associated with these derivatives were not significant.

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 following discussion provides an overview of these arrangements which may vary due to the derivative type and market in which a derivative transaction is executed.

Interest rate derivatives are subject to agreements consistent with standard agreement forms of the International Swap and Derivatives Association (“ISDA”). Currently, all interest rate derivative contracts are entered into as over-the-counter transactions and collateral posting requirements are based on the net asset or liability position with each respective counterparty. For contracts that require central clearing, novation to a counterparty with access to a clearinghouse occurs and margin is posted. Cash margin received (posted) that is considered settlements for the derivative contracts is included in the respective derivative asset (liability) value. Cash margin that is considered collateral received (posted) for interest rate derivatives is recognized as a liability (asset) on FHN’s Consolidated Condensed Statements of Condition.

Interest rate derivatives with customers that are smaller financial institutions typically require posting of collateral by the counterparty to FHN. This collateral is subject to a threshold with daily adjustments based upon changes in the level or fair value of the derivative position. Positions and related collateral can be netted in the event of default. Collateral pledged by a counterparty is typically cash or securities. The securities pledged as collateral are not recognized within FHN’s Consolidated Condensed Statements of Condition. Interest rate derivatives associated with lending arrangements share the collateral with the related loan(s). The derivative and loan positions may be netted in the event of default. For disclosure purposes, the entire collateral amount is allocated to the loan.

Interest rate derivatives with larger financial institutions entered into prior to required central clearing typically contain provisions whereby the collateral posting thresholds under the agreements adjust based on the credit ratings of both counterparties. If the credit rating of FHN and/or FTBNA is lowered, FHN could be required to post additional collateral with the counterparties. Conversely, if the credit rating of FHN and/or FTBNA 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 FTBNA 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 $31.0 million of assets and $39.3 million of liabilities on June 30, 2017, and $35.9 million of assets and $49.0 million of liabilities on December 31, 2016. As of June 30, 2017 and December 31, 2016, FHN had received collateral of $110.9 million and $137.6 million and posted collateral of $32.0 million and $39.3 million, respectively, in the normal course of business related to these agreements.

 

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Note 14 – Derivatives (Continued)

 

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) were to fall below these minimums, these provisions would be triggered, and the counterparties could terminate the agreements and require immediate settlement of all derivative contracts under the agreements. The net fair value, determined by individual counterparty, of all derivative instruments with credit-risk-related contingent accelerated termination provisions was $30.9 million of assets and $16.8 million of liabilities on June 30, 2017, and $35.9 million of assets and $19.6 million of liabilities on December 31, 2016. As of June 30, 2017 and December 31, 2016, FHN had received collateral of $110.9 million and $137.5 million and posted collateral of $11.2 million and $12.9 million, respectively, in the normal course of business related to these contracts.

FHN’s fixed income segment buys and sells various types of securities for its customers. When these securities settle on a delayed basis, they are considered forward contracts, and are generally not subject to master netting agreements. For futures and options, FHN transacts through a third party, and the transactions are subject to margin and collateral maintenance requirements. In the event of default, open positions can be offset along with the associated collateral.

For this disclosure, FHN considers the impact of master netting and other similar agreements which allow FHN to settle all contracts with a single counterparty on a net basis and to offset the net derivative asset or liability position with the related securities and cash collateral. The application of the collateral cannot reduce the net derivative asset or liability position below zero, and therefore any excess collateral is not reflected in the following tables.

The following table provides details of derivative assets and collateral received as presented on the Consolidated Condensed Statements of Condition as of June 30, 2017 and December 31, 2016:

 

                          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:

               

June 30, 2017 (b)

   $ 75,526      $ —        $ 75,526      $ (22,842   $ (47,292   $ 5,392  

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 June 30, 2017 and December 31, 2016, $16.1 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 Condition as of June 30, 2017 and December 31, 2016:

 

                          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:

               

June 30, 2017 (b)

   $ 74,389      $ —        $ 74,389      $ (22,842   $ (47,615   $ 3,932  

December 31, 2016 (b)

     96,363        —          96,363        (25,953     (60,746     9,664  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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Note 14 – Derivatives (Continued)

 

(a) Included in Derivative liabilities on the Consolidated Condensed Statements of Condition. As of June 30, 2017 and December 31, 2016, $18.3 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.
(b) Amounts are comprised entirely of interest rate derivative contracts.

 

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Note 15 – Master Netting and Similar Agreements—Repurchase, Reverse Repurchase, and Securities Borrowing Transactions

For repurchase, reverse repurchase and securities borrowing transactions, FHN and each counterparty have the ability to offset all open positions and related collateral in the event of default. Due to the nature of these transactions, the value of the collateral for each transaction approximates the value of the corresponding receivable or payable. For repurchase agreements through FHN’s fixed income business (Securities purchased under agreements to resell and Securities sold under agreements to repurchase), transactions are collateralized by securities and/or government guaranteed loans which are delivered on the settlement date and are maintained throughout the term of the transaction. For FHN’s repurchase agreements through banking activities (Securities sold under agreements to repurchase), securities are typically pledged at settlement and not released until maturity. For asset positions, the collateral is not included on FHN’s Consolidated Condensed Statements of Condition. For liability positions, securities collateral pledged by FHN is generally represented within FHN’s trading or available-for-sale securities portfolios.

For this disclosure, FHN considers the impact of master netting and other similar agreements that allow FHN to settle all contracts with a single counterparty on a net basis and to offset the net asset or liability position with the related securities collateral. The application of the collateral cannot reduce the net asset or liability position below zero, and therefore any excess collateral is not reflected in the tables below.

The following table provides details of Securities purchased under agreements to resell as presented on the Consolidated Condensed Statements of Condition and collateral pledged by counterparties as of June 30, 2017 and December 31, 2016:

 

                          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:

               

June 30, 2017

   $ 657,991      $ —        $ 657,991      $ (804   $ (650,369   $ 6,818  

December 31, 2016

     613,682        —          613,682        (1,628     (603,813     8,241  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The following table provides details of Securities sold under agreements to repurchase as presented on the Consolidated Condensed Statements of Condition and collateral pledged by FHN as of June 30, 2017 and December 31, 2016:

 

                          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:

               

June 30, 2017

   $ 743,684      $ —        $ 743,684      $ (804   $ (742,727   $ 153  

December 31, 2016

     453,053        —          453,053        (1,628     (451,414     11  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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Note 15 – Master Netting and Similar Agreements—Repurchase, Reverse Repurchase, and Securities Borrowing Transactions (Continued)

 

Due to the short duration of Securities sold under agreements to repurchase and the nature of collateral involved, the risks associated with these transactions are considered minimal. The following tables provide details, by collateral type, of the remaining contractual maturity of Securities sold under agreements to repurchase as of June 30, 2017 and December 31, 2016:

 

     June 30, 2017  

(Dollars in thousands)

   Overnight and
Continuous
     Up to 30 Days      Total  

Securities sold under agreements to repurchase:

        

U.S. treasuries

   $ 31,598      $ —        $ 31,598  

Government agency issued MBS

     427,561        —          427,561  

Government agency issued CMO

               13,867        13,867  

Government guaranteed loans (SBA and USDA)

     270,658                  270,658  
  

 

 

    

 

 

    

 

 

 

Total Securities sold under agreements to repurchase

   $ 729,817      $ 13,867      $ 743,684  
  

 

 

    

 

 

    

 

 

 
     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  
  

 

 

    

 

 

    

 

 

 

 

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Note 16 – Fair Value of Assets & Liabilities

FHN groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. This hierarchy requires FHN to maximize the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Each fair value measurement is placed into the proper level based on the lowest level of significant input. These levels are:

 

    Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.

 

    Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

    Level 3—Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.

Transfers between fair value levels are recognized at the end of the fiscal quarter in which the associated change in inputs occurs.

 

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Note 16 – Fair Value of Assets & Liabilities (Continued)

 

Recurring Fair Value Measurements

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of June 30, 2017:

 

     June 30, 2017  

(Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Trading securities—fixed income:

           

U.S. treasuries

   $ —        $ 112,602      $ —        $ 112,602  

Government agency issued MBS

     —          344,218        —          344,218  

Government agency issued CMO

     —          241,237        —          241,237  

Other U.S. government agencies

     —          142,596        —          142,596  

States and municipalities

     —          56,321        —          56,321  

Trading loans

     —          38,716        —          38,716  

Corporate and other debt

     —          376,261        5        376,266  

Equity, mutual funds, and other

     —          1,476        —          1,476  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading securities—fixed income

     —          1,313,427        5        1,313,432  
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading securities—mortgage banking

     —          —          2,459        2,459  

Loans held-for-sale

     —          1,633        20,587        22,220  

Securities available-for-sale:

           

U.S. treasuries

     —          100        —          100  

Government agency issued MBS

     —          2,129,616        —          2,129,616  

Government agency issued CMO

     —          1,631,823        —          1,631,823  

Interest-only strips

     —          —          1,163        1,163  

Equity, mutual funds, and other

     25,182        —          —          25,182  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available-for-sale

     25,182        3,761,539        1,163        3,787,884  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other assets:

           

Deferred compensation assets

     35,064        —          —          35,064  

Derivatives, forwards and futures

     16,049        —          —          16,049  

Derivatives, interest rate contracts

     —          75,604        —          75,604  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other assets

     51,113        75,604        —          126,717  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 76,295      $ 5,152,203      $ 24,214      $ 5,252,712  
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading liabilities—fixed income:

           

U.S. treasuries

   $ —        $ 380,102      $ —        $ 380,102  

Government agency issued MBS

     —          212        —          212  

Government agency issued CMO

     —          2,124        —          2,124  

States and municipalities

     —          1,178        —          1,178  

Other U.S. government agencies

     —          998        —          998  

Corporate and other debt

     —          171,179        —          171,179  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading liabilities—fixed income

     —          555,793        —          555,793  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other liabilities:

           

Derivatives, forwards and futures

     12,578        —          —          12,578  

Derivatives, interest rate contracts

     —          74,389        —          74,389  

Derivatives, other

     —          50        5,700        5,750  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other liabilities

     12,578        74,439        5,700        92,717  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 12,578      $ 630,232      $ 5,700      $ 648,510  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 16 – Fair Value of Assets & Liabilities (Continued)

 

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of December 31, 2016:

 

     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  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 16 – Fair Value of Assets & Liabilities (Continued)

 

Changes in Recurring Level 3 Fair Value Measurements

The changes in Level 3 assets and liabilities measured at fair value for the three months ended June 30, 2017 and 2016, on a recurring basis are summarized as follows:

 

     Three Months Ended June 30, 2017  

(Dollars in thousands)

   Trading
securities
    Interest-
only strips-
AFS
    Loans held-
for-sale
    Net
derivative
liabilities
 

Balance on April 1, 2017

   $ 2,335     $ —       $ 21,221     $ (5,950

Total net gains/(losses) included in:

        

Net income

     271       280       410       (49

Purchases

     —         1,413       43       —    

Settlements

     (142     (3,317     (827     299  

Net transfers into/(out of) Level 3

     —         2,787       (260 )(c)      —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance on June 30, 2017

   $ 2,464     $ 1,163     $ 20,587     $ (5,700
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains/(losses) included in net income

   $ 229 (a)    $ (53 )(b)    $ 410 (a)    $ (49 )(d) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended June 30, 2016  

(Dollars in thousands)

   Trading
securities
    Loans
held-for-sale
    Securities
available-
for-sale
     Mortgage
servicing
rights, net
    Net derivative
liabilities
 

Balance on April 1, 2016

   $ 3,057     $ 26,287     $ 1,500      $ 1,725     $ (4,620

Total net gains/(losses) included in:

           

Net income

     55       429       —          31       (2,514

Purchases

     —         327       —          —         —    

Sales

     —         —         —          (205     —    

Settlements

     (286     (1,132     —          (145     299  

Net transfers into/(out of) Level 3

     —         (173 )(c)      —          —         —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance on June 30, 2016

   $ 2,826     $ 25,738     $ 1,500      $ 1,406     $ (6,835
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net unrealized gains/(losses) included in net income

   $ (5 )(a)    $ 429 (a)    $ —        $ —       $ (2,514 )(d) 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income.
(b) Primarily included in fixed income on the Consolidated Condensed Statements of Income.
(c) Transfers out of loans held-for-sale level 3 measured on a recurring basis generally reflect movements into real estate acquired by foreclosure (level 3 nonrecurring).
(d) Included in Other expense.

 

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Changes in Recurring Level 3 Fair Value Measurements

The changes in Level 3 assets and liabilities measured at fair value for the six months ended June 30, 2017 and 2016, on a recurring basis are summarized as follows:

 

     Six Months Ended June 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

     288       280       1,332       (50

Purchases

     —         1,413       75       —    

Settlements

     (397     (3,317     (2,401     595  

Net transfers into/(out of) Level 3

     —         2,787       (343 )(c)      —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance on June 30, 2017

   $ 2,464     $ 1,163     $ 20,587     $ (5,700
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains/(losses) included in net income

   $ 202 (a)    $ (53 )(b)    $ 1,332 (a)    $ (50 )(d) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months Ended June 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

     202       771       —          31       (2,623

Purchases

     —         475       —          —         —    

Sales

     —         —         —          (205     —    

Settlements

     (1,753     (2,497     —          (261     598  

Net transfers into/(out of) Level 3

     —         (429 )(c)      —          —         —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance on June 30, 2016

   $ 2,826     $ 25,738     $ 1,500      $ 1,406     $ (6,835
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net unrealized gains/(losses) included in net income

   $ 79 (a)    $ 771 (a)    $ —        $ —       $ (2,623 )(d) 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income.
(b) Primarily included in fixed income on the Consolidated Condensed Statements of Income.
(c) Transfers out of loans held-for-sale level 3 measured on a recurring basis generally reflect movements into real estate acquired by foreclosure (level 3 nonrecurring).
(d) 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”) accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis which were still held on the balance sheet at June 30, 2017, and December 31, 2016, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the related carrying value.

 

     Carrying value at June 30, 2017  

(Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Loans held-for-sale—SBAs and USDA

   $ —        $ 331,754      $ 1,577      $ 333,331  

Loans held-for-sale—first mortgages

     —          —          613        613  

Loans, net of unearned income (a)

     —          —          29,260        29,260  

Real estate acquired by foreclosure (b)

     —          —          7,038        7,038  

Other assets (c)

     —          —          28,156        28,156  

 

     Carrying value at December 31, 2016  

(Dollars in thousands)

   Level 1      Level 2      Level 3      Total  

Loans held-for-sale—SBAs

   $ —        $ 4,286      $ —        $ 4,286  

Loans held-for-sale—first mortgages

     —          —          638        638  

Loans, net of unearned income (a)

     —          —          31,070        31,070  

Real estate acquired by foreclosure (b)

     —          —          11,235        11,235  

Other assets (c)

     —          —          29,609        29,609  

 

(a) Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell.
(b) Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as foreclosed assets. Balance excludes foreclosed real estate related to government insured mortgages.
(c) Represents tax credit investments accounted for under the equity method.

 

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Note 16 – Fair Value of Assets & Liabilities (Continued)

 

For assets measured on a nonrecurring basis which were still held on the consolidated balance sheet at period end, the following table provides information about the fair value adjustments recorded during the three and six months ended June 30, 2017 and 2016:

 

     Net gains/(losses)
Three months ended June 30,
     Net gains/(losses)
Six Months Ended June 30,
 

(Dollars in thousands)

   2017      2016      2017      2016  

Loans held-for-sale—SBAs and USDA

   $ (1,140    $ —        $ (1,173    $ —    

Loans held-for-sale—first mortgages

     13        2        16        7  

Loans, net of unearned income (a)

     (452      353        32        (4,319

Real estate acquired by foreclosure (b)

     (176      (314      (621      (850

Other assets (c)

     (942      (831      (1,884      (1,537
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ (2,697    $ (790    $ (3,630    $ (6,699
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Write-downs on these loans are recognized as part of provision for loan losses.
(b) Represents losses of foreclosed properties that were measured subsequent to their initial classification as foreclosed assets. Balance excludes foreclosed real estate related to government insured mortgages.
(c) Represents tax credit investments accounted for under the equity method.

In first quarter 2016, FHN’s Regional Banking segment recognized $3.7 million of impairments on long-lived assets associated with efforts to more efficiently utilize its bank branch locations. The affected branch locations represented a mixture of owned and leased sites. The fair values of owned sites were determined using estimated sales prices from appraisals less estimated costs to sell. The fair values of leased sites 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.

 

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Level 3 Measurements

The following tables provide information regarding the unobservable inputs utilized in determining the fair value of level 3 recurring and non-recurring measurements as of June 30, 2017 and December 31, 2016:

 

(Dollars in Thousands)

Level 3 Class

   Fair Value at
June 30, 2017
    

Valuation Techniques

  

Unobservable Input

  

Values Utilized

Available-for-sale- securities SBA-interest only strips

   $ 1,163      Discounted cash flow    Constant prepayment rate    9% - 11%
         Bond equivalent yield    15% -  19%

Loans held-for-sale - residential real estate

     21,200      Discounted cash flow    Prepayment speeds - First mortgage    2% -  12%
                 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

Loans held-for-sale- unguaranteed interest in SBA loans

     1,577      Discounted cash flow    Constant prepayment rate    8% - 12%
         Bond equivalent yield    9% - 10%

Derivative liabilities, other

     5,700      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)

     29,260      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

Real estate acquired by foreclosure (b)

     7,038      Appraisals from comparable properties    Adjustment for value changes since appraisal    0% -  10% of appraisal
           

Other assets (c)

     28,156      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

 

(a) Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for loan losses.
(b) Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as foreclosed assets. Balance excludes foreclosed real estate related to government insured mortgages.
(c) Represents tax credit investments accounted for under the equity method.

 

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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

Real estate acquired by foreclosure (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

 

(a) Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for loan losses.
(b) Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as foreclosed assets. Balance excludes foreclosed real estate related to government insured mortgages.
(c) Represents tax credit investments accounted for under the equity method.

Securities AFS . Increases (decreases) in estimated prepayment rates and bond equivalent yields negatively (positively) affect the value of SBA interest only strips. Management additionally considers whether loans on the related SBA-interest only strips are delinquent, in default or prepaying, and adjusts the fair value down 20—100% depending on the length of time in default.

Loans held-for-sale. Foreclosure losses and prepayment rates are significant unobservable inputs used in the fair value measurement of FHN’s residential real estate loans held-for-sale. Loss severity trends are also assessed to evaluate the reasonableness of fair value estimates resulting from discounted cash flows methodologies as well as to estimate fair value for newly repurchased loans and loans that are near foreclosure. Significant increases (decreases) in any of these inputs in isolation would result in significantly lower (higher) fair value measurements. All observable and unobservable inputs are re-assessed quarterly. Fair value measurements are reviewed at least quarterly by FHN’s Corporate Accounting Department.

Increases (decreases) in estimated prepayment rates and bond equivalent yields negatively (positively) affect the value of unguaranteed interests in SBA loans. Unguaranteed interest in SBA loans held-for-sale are carried at less than the outstanding balance due to credit risk estimates. Credit risk adjustments may be reduced if prepayment is likely or as consistent payment history is realized. Management also considers other factors such as delinquency or default and adjusts the fair value accordingly.

 

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Derivative liabilities. In conjunction with the sales of portions 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. FHN uses a discounted cash flow methodology in order to estimate the fair value of FHN’s derivative liabilities associated with its prior sales of Visa Class B shares. The methodology includes estimation of both the resolution amount for Visa’s Covered Litigation matters as well as the length of time until the resolution occurs. Significant increases (decreases) in either of these inputs in isolation would result in significantly higher (lower) fair value measurements for the derivative liabilities. Additionally, FHN performs a probability weighted multiple resolution scenario to calculate the estimated fair value of these derivative liabilities. Assignment of higher (lower) probabilities to the larger potential resolution scenarios would result in an increase (decrease) in the estimated fair value of the derivative liabilities. Since this estimation process requires application of judgment in developing significant unobservable inputs used to determine the possible outcomes and the probability weighting assigned to each scenario, these derivatives have been classified within Level 3 in fair value measurements disclosures. The valuation inputs and process are discussed with senior and executive management when significant events affecting the estimate of fair value occur. Inputs are compared to information obtained from the public issuances and filings of Visa, Inc. as well as public information released by other participants in the applicable litigation matters.

Loans, net of unearned income and Real estate acquired by foreclosure. Collateral-dependent loans and Real estate acquired by foreclosure 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 foreclosed assets annually. Back testing is performed during the year through comparison to ultimate disposition values. Other collateral (receivables, inventory, equipment, etc.) is valued through borrowing base certificates, financial statements and/or auction valuations. These valuations are discounted based on the quality of reporting, knowledge of the marketability/collectability of the collateral and historical disposition rates.

Other assets – tax credit investments. The estimated fair value of tax credit investments accounted for under the equity method is generally determined in relation to the yield (i.e., future tax credits to be received) an acquirer of these investments would expect in relation to the yields experienced on current new issue and/or secondary market transactions. Thus, as tax credits are recognized, the future yield to a market participant is reduced, resulting in consistent impairment of the individual investments. Individual investments are reviewed for impairment quarterly, which may include the consideration of additional marketability discounts related to specific investments which typically includes consideration of the underlying property’s appraised value. Unusual valuation adjustments and the associated triggering events are discussed with senior and executive management when appropriate. A portfolio review is conducted annually, with the assistance of a third party, to assess the reasonableness of current valuations.

Fair Value Option

FHN has elected the fair value option on a prospective basis for almost all types of mortgage loans originated for sale purposes under the Financial Instruments Topic (“ASC 825”). FHN determined that the election reduces certain timing differences and better matches changes in the value of such loans with changes in the value of derivatives and forward delivery commitments used as economic hedges for these assets at the time of election.

Repurchased loans are recognized within loans held-for-sale at fair value at the time of repurchase, which includes consideration of the credit status of the loans and the estimated liquidation value. FHN has elected to continue recognition of these loans at fair value in periods subsequent to reacquisition. Due to the credit-distressed nature of the vast majority of repurchased loans and the related loss severities experienced upon repurchase, FHN believes that the fair value election provides a more timely recognition of changes in value for these loans that occur subsequent to repurchase. Absent the fair

 

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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.

The following tables reflect the differences between the fair value carrying amount of residential real estate loans held-for-sale measured at fair value in accordance with management’s election and the aggregate unpaid principal amount FHN is contractually entitled to receive at maturity.

 

     June 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

   $ 22,220      $ 31,580      $ (9,360

Nonaccrual loans

     6,419        11,736        (5,317

Loans 90 days or more past due and still accruing

     35        43        (8
     December 31, 2016  

(Dollars in thousands)

   Fair value
carrying
amount
     Aggregate
unpaid
principal
     Fair value carrying amount
less aggregate unpaid
principal
 

Residential real estate loans held-for-sale reported at fair value:

        

Total loans

   $ 24,269      $ 35,262      $ (10,993

Nonaccrual loans

     6,775        12,910        (6,135

Loans 90 days or more past due and still accruing

     211        331        (120

Assets and liabilities accounted for under the fair value election are initially measured at fair value with subsequent changes in fair value recognized in earnings. Such changes in the fair value of assets and liabilities for which FHN elected the fair value option are included in current period earnings with classification in the income statement line item reflected in the following table:

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 

(Dollars in thousands)

   2017      2016      2017      2016  

Changes in fair value included in net income:

           

Mortgage banking noninterest income Loans held-for-sale

   $ 410      $ 429      $ 1,332      $ 771  

For the three months ended June 30, 2017, and 2016, the amounts for residential real estate loans held-for-sale include gains of $.2 million in pretax earnings that are attributable to changes in instruments-specific credit risk. For the six months ended June 30, 2017, and 2016, the amounts for residential real estate loans held-for-sale included gains of $.3 million 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-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.

 

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Note 16 – Fair Value of Assets & Liabilities (Continued)

 

FHN has elected to account for retained interest-only strips from guaranteed SBA loans recorded in available-for-sale securities at fair value through earnings. Since these securities are subject to the risk that prepayments may result in FHN not recovering all or a portion of its recorded investment, the fair value election results in a more timely recognition of the effects of estimated prepayments through earnings rather than being recognized through other comprehensive income with periodic review for other-than-temporary impairment. Gains or losses are recognized through fixed income revenues and are presented in the recurring measurements table.

Determination of Fair Value

In accordance with ASC 820-10-35, fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following describes the assumptions and methodologies used to estimate the fair value of financial instruments recorded at fair value in the Consolidated Condensed Statements of Condition and for estimating the fair value of financial instruments for which fair value is disclosed under ASC 825-10-50.

Short-term financial assets. Federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with other financial institutions and the Federal Reserve are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Trading securities and trading liabilities. Trading securities and trading liabilities are recognized at fair value through current earnings. Trading inventory held for broker-dealer operations is included in trading securities and trading liabilities. Broker-dealer long positions are valued at bid price in the bid-ask spread. Short positions are valued at the ask price. Inventory positions are valued using observable inputs including current market transactions, LIBOR and U.S. treasury curves, credit spreads, and consensus prepayment speeds. Trading loans are valued using observable inputs including current market transactions, swap rates, mortgage rates, and consensus prepayment speeds.

Trading securities also include retained interests in prior mortgage securitizations that qualify as financial assets, which include primarily principal-only strips. FHN uses inputs including yield curves, credit spreads, and prepayment speeds to determine the fair value of principal-only strips.

Securities available-for-sale. Securities available-for-sale includes the investment portfolio accounted for as available-for-sale under ASC 320-10-25, federal bank stock holdings, and short-term investments in mutual funds. Valuations of available-for-sale securities are performed using observable inputs obtained from market transactions in similar securities. Typical inputs include LIBOR and U.S. treasury curves, consensus prepayment estimates, and credit spreads. When available, broker quotes are used to support these valuations.

Investments in the stock of the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical cost in the Consolidated Condensed Statements of Condition which is considered to approximate fair value. Short-term investments in mutual funds are measured at the funds’ reported closing net asset values. Investments in equity securities are valued using quoted market prices when available. Cost method investments are valued at historical cost less any recorded impairment due to the illiquid nature of these investments.

Interest only strips are valued at elected fair value based on an income approach using an internal valuation model. The internal valuation model includes assumptions regarding projections of future cash flows, prepayment rates, default rates and interest only strip terms. These securities bear the risk of loan prepayment or default that may result in the Company not recovering all or a portion of its recorded investment. When appropriate, valuations are adjusted for various factors including default or prepayment status of the underlying SBA loans. Because of the inherent uncertainty of valuation, those estimated values may be higher or lower than the values that would have been used had a ready market for the securities existed, and may change in the near term.

 

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Securities held-to-maturity. Securities held-to-maturity reflects debt securities for which management has the positive intent and ability to hold to maturity. To the extent possible, valuations of held-to-maturity securities are performed using observable inputs obtained from market transactions in similar securities. Typical inputs include LIBOR and U.S. treasury curves and credit spreads. Debt securities with limited trading activity are valued using a discounted cash flow model that incorporates a combination of observable and unobservable inputs. Primary observable inputs include contractual cash flows, the treasury curve and credit spreads from similar instruments. Significant unobservable inputs include estimated credit spreads for individual issuers and instruments as well as prepayment speeds, as applicable.

Loans held-for-sale. Residential real estate loans held-for-sale are valued using current transaction prices and/or values on similar assets when available, including committed bids for specific loans or loan portfolios. Uncommitted bids may be adjusted based on other available market information. For all other loans FHN determines the fair value of residential real estate loans held-for-sale using a discounted cash flow model which incorporates both observable and unobservable inputs. Inputs include current mortgage rates for similar products, estimated prepayment rates, foreclosure losses, and various loan performance measures (delinquency, LTV, credit score). Adjustments for delinquency and other differences in loan characteristics are typically reflected in the model’s discount rates. Loss severity trends and the value of underlying collateral are also considered in assessing the appropriate fair value for severely delinquent loans and loans in foreclosure. The valuation of HELOCs also incorporates estimated cancellation rates for loans expected to become delinquent.

The Company utilizes quoted market prices of similar instruments or broker and dealer quotations to value the SBA and USDA guaranteed loans. The Company values SBA-unguaranteed interests in loans held-for-sale based on individual loan characteristics, such as industry type and pay history which generally follows an income approach. Furthermore, these valuations are adjusted for changes in prepayment estimates and are reduced due to restrictions on trading. The fair value of other non-residential real estate loans held-for-sale is approximated by their carrying values based on current transaction values.

Loans, net of unearned income. Loans, net of unearned income are recognized at the amount of funds advanced, less charge-offs and an estimation of credit risk represented by the allowance for loan losses. The fair value estimates for disclosure purposes differentiate loans based on their financial characteristics, such as product classification, vintage, loan category, pricing features, and remaining maturity.

The fair value of floating rate loans is estimated through comparison to recent market activity in loans of similar product types, with adjustments made for differences in loan characteristics. In situations where market pricing inputs are not available, fair value is considered to approximate book value due to the monthly repricing for commercial and consumer loans, with the exception of floating rate 1-4 family residential mortgage loans which reprice annually and will lag movements in market rates. The fair value for floating rate 1-4 family mortgage loans is calculated by discounting future cash flows to their present value. Future cash flows are discounted to their present value by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same time period. Prepayment assumptions based on historical prepayment speeds and industry speeds for similar loans have been applied to the floating rate 1-4 family residential mortgage portfolio.

The fair value of fixed rate loans is estimated through comparison to recent market activity in loans of similar product types, with adjustments made for differences in loan characteristics. In situations where market pricing inputs are not available, fair value is estimated by discounting future cash flows to their present value. Future cash flows are discounted to their present value by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same time period. Prepayment assumptions based on historical prepayment speeds and industry speeds for similar loans have been applied to the fixed rate mortgage and installment loan portfolios.

For all loan portfolio classes, adjustments are made to reflect liquidity or illiquidity of the market. Such adjustments reflect discounts that FHN believes are consistent with what a market participant would consider in determining fair value given current market conditions.

 

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Note 16 – Fair Value of Assets & Liabilities (Continued)

 

Individually impaired loans are measured using either a discounted cash flow methodology or the estimated fair value of the underlying collateral less costs to sell, if the loan is considered collateral-dependent. In accordance with accounting standards, the discounted cash flow analysis utilizes the loan’s effective interest rate for discounting expected cash flow amounts. Thus, this analysis is not considered a fair value measurement in accordance with ASC 820. However, the results of this methodology are considered to approximate fair value for the applicable loans. Expected cash flows are derived from internally-developed inputs primarily reflecting expected default rates on contractual cash flows. For loans measured using the estimated fair value of collateral less costs to sell, fair value is estimated using appraisals of the collateral. Collateral values are monitored and additional write-downs are recognized if it is determined that the estimated collateral values have declined further. Estimated costs to sell are based on current amounts of disposal costs for similar assets. Carrying value is considered to reflect fair value for these loans.

Derivative assets and liabilities . The fair value for forwards and futures contracts is based on current transactions involving identical securities. Futures contracts are exchange-traded and thus have no credit risk factor assigned as the risk of non-performance is limited to the clearinghouse used.

Valuations of other derivatives (primarily interest rate related swaps) are based on inputs observed in active markets for similar instruments. Typical inputs include the LIBOR curve, Overnight Indexed Swap (“OIS”) curve, option volatility, and option skew. In measuring the fair value of these derivative assets and liabilities, FHN has elected to consider credit risk based on the net exposure to individual counterparties. Credit risk is mitigated for these instruments through the use of mutual margining and master netting agreements as well as collateral posting requirements. For derivative contracts with daily cash margin requirements that are considered settlements, the daily margin amount is netted within derivative assets or liabilities. Any remaining credit risk related to interest rate derivatives is considered in determining fair value through evaluation of additional factors such as customer loan grades and debt ratings. Foreign currency related derivatives also utilize observable exchange rates in the determination of fair value. The determination of fair value for FHN’s derivative liabilities associated with its prior sales of Visa Class B shares are classified within Level 3 in the fair value measurements disclosure as previously discussed in the unobservable inputs discussion.

Real estate acquired by foreclosure. Real estate acquired by foreclosure 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 is determined using appraised values with subsequent adjustments for deterioration in values that are not reflected in the most recent appraisal.

Nonearning assets. For disclosure purposes, nonearning financial assets include cash and due from banks, accrued interest receivable, and fixed income receivables. Due to the short-term nature of cash and due from banks, accrued interest receivable, and fixed income receivables, the fair value is approximated by the book value.

Other assets. For disclosure purposes, other assets consist of tax credit investments and deferred compensation assets that are considered financial assets. 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 assets are recognized at fair value, which is based on quoted prices in active markets.

Defined maturity deposits. The fair value of these deposits is estimated by discounting future cash flows to their present value. Future cash flows are discounted by using the current market rates of similar instruments applicable to the remaining maturity. For disclosure purposes, defined maturity deposits include all time deposits.

Undefined maturity deposits. In accordance with ASC 825, the fair value of these deposits is approximated by the book value. For the purpose of this disclosure, undefined maturity deposits include demand deposits, checking interest accounts, savings accounts, and money market accounts.

 

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Note 16 – Fair Value of Assets & Liabilities (Continued)

 

Short-term financial liabilities. The fair value of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings are approximated by the book value. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Term borrowings. The fair value of term borrowings is based on quoted market prices or dealer quotes for the identical liability when traded as an asset. When pricing information for the identical liability is not available, relevant prices for similar debt instruments are used with adjustments being made to the prices obtained for differences in characteristics of the debt instruments. If no relevant pricing information is available, the fair value is approximated by the present value of the contractual cash flows discounted by the investor’s yield which considers FHN’s and FTBNA’s debt ratings.

Other noninterest-bearing liabilities. For disclosure purposes, other noninterest-bearing financial liabilities include accrued interest payable and fixed income payables. Due to the short-term nature of these liabilities, the book value is considered to approximate fair value.

Loan commitments. Fair values of these commitments are based on fees charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Other commitments. Fair values of these commitments are based on fees charged to enter into similar agreements.

The following fair value estimates are determined as of a specific point in time utilizing various assumptions and estimates. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, reduces the comparability of fair value disclosures between financial institutions. Due to market illiquidity, the fair values for loans, net of unearned income, loans held-for-sale, and term borrowings as of June 30, 2017 and December 31, 2016, involve the use of significant internally-developed pricing assumptions for certain components of these line items. The assumptions and valuations utilized for this disclosure are considered to reflect inputs that market participants would use in transactions involving these instruments as of the measurement date. The valuations of legacy assets, particularly consumer loans within the non-strategic 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, 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.

 

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Note 16 – Fair Value of Assets & Liabilities (Continued)

 

The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Condensed Statements of Condition as of June 30, 2017:

 

     June 30, 2017  
     Book      Fair Value  

(Dollars in thousands)

   Value      Level 1      Level 2      Level 3      Total  

Assets:

              

Loans, net of unearned income and allowance for loan losses

              

Commercial:

              

Commercial, financial and industrial

   $ 12,505,840      $ —        $ —        $ 12,424,202      $ 12,424,202  

Commercial real estate

     2,181,526        —          —          2,155,023        2,155,023  

Consumer:

              

Consumer real estate

     4,371,390        —          —          4,319,728        4,319,728  

Permanent mortgage

     391,697        —          —          394,561        394,561  

Credit card & other

     341,609        —          —          341,647        341,647  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned income and allowance for loan losses

     19,792,062        —          —          19,635,161        19,635,161  

Short-term financial assets:

              

Interest-bearing cash

     573,666        573,666        —          —          573,666  

Federal funds sold

     34,036        —          34,036        —          34,036  

Securities purchased under agreements to resell

     657,991        —          657,991        —          657,991  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term financial assets

     1,265,693        573,666        692,027        —          1,265,693  

Trading securities (a)

     1,315,891        —          1,313,427        2,464        1,315,891  

Loans held-for-sale (a)

     432,771        —          335,193        99,415        434,608  

Securities available-for-sale (a) (b)

     3,949,592        25,182        3,761,539        162,871        3,949,592  

Securities held-to-maturity

     10,000        —          —          9,991        9,991  

Derivative assets (a)

     91,653        16,049        75,604        —          91,653  

Other assets:

              

Tax credit investments

     99,217        —          —          98,983        98,983  

Deferred compensation assets

     35,064        35,064        —          —          35,064  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other assets

     134,281        35,064        —          98,983        134,047  

Nonearning assets:

              

Cash & due from banks

     387,053        387,053        —          —          387,053  

Fixed income receivables

     127,724        —          127,724        —          127,724  

Accrued interest receivable

     65,330        —          65,330        —          65,330  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonearning assets

     580,107        387,053        193,054        —          580,107  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 27,572,050      $ 1,037,014      $ 6,370,844      $ 20,008,885      $ 27,416,743  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Deposits:

              

Defined maturity

   $ 1,373,618      $ —        $ 1,380,279      $ —        $ 1,380,279  

Undefined maturity

     20,959,731        —          20,959,731        —          20,959,731  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total deposits

     22,333,349        —          22,340,010        —          22,340,010  

Trading liabilities (a)

     555,793        —          555,793        —          555,793  

Short-term financial liabilities:

              

Federal funds purchased

     314,892        —          314,892        —          314,892  

Securities sold under agreements to repurchase

     743,684        —          743,684        —          743,684  

Other short-term borrowings

     1,044,658        —          1,044,658        —          1,044,658  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term financial liabilities

     2,103,234        —          2,103,234        —          2,103,234  

Term borrowings:

              

Real estate investment trust-preferred

     46,066        —          —          49,350        49,350  

Term borrowings—new market tax credit investment

     18,000        —          —          17,961        17,961  

Borrowings secured by residential real estate

     15,887        —          —          15,093        15,093  

Other long term borrowings

     953,376        —          966,541        —          966,541  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total term borrowings

     1,033,329        —          966,541        82,404        1,048,945  

Derivative liabilities (a)

     92,717        12,578        74,439        5,700        92,717  

Other noninterest-bearing liabilities:

              

Fixed income payables

     28,571        —          28,571        —          28,571  

Accrued interest payable

     11,639        —          11,639        —          11,639  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other noninterest-bearing liabilities

     40,210        —          40,210        —          40,210  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 26,158,632      $ 12,578      $ 26,080,227      $ 88,104      $ 26,180,909  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Classes are detailed in the recurring and nonrecurring measurement tables.
(b) Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $68.6 million.

 

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Note 16 – Fair Value of Assets & Liabilities (Continued)

 

The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Statements of Condition as of December 31, 2016:

 

     December 31, 2016  
     Book      Fair Value  

(Dollars in thousands)

   Value      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

     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.
(b) Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $68.6 million.

 

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Note 16 – Fair Value of Assets & Liabilities (Continued)

 

The following table presents the contractual amount and fair value of unfunded loan commitments and standby and other commitments as of June 30, 2017 and December 31, 2016:

 

     Contractual Amount      Fair Value  

(Dollars in thousands)

   June 30, 2017      December 31, 2016      June 30, 2017      December 31, 2016  

Unfunded Commitments:

           

Loan commitments

   $ 8,871,103      $ 8,744,649      $ 2,582      $ 2,924  

Standby and other commitments

     305,330        277,549        3,991        4,037  

 

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

 

General Information

     83  

Forward-Looking Statements

     84  

Financial Summary

     85  

Statement of Condition Review

     97  

Capital

     101  

Asset Quality

     105  

Risk Management

     121  

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

     126  

Market Uncertainties and Prospective Trends

     133  

Critical Accounting Policies

     134  

Non-GAAP Information

     136  

 

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FIRST HORIZON NATIONAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

GENERAL INFORMATION

First Horizon National Corporation (“FHN”) began as a community bank chartered in 1864 and as of June 30, 2017, was one of the 40 largest publicly traded banking organizations 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”) 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 offers financial products and services including traditional lending and deposit-taking to consumer and commercial customers in Tennessee and other selected markets. Regional banking provides investments, financial planning, trust services and asset management, along with credit card and cash management services. Additionally, the regional banking segment includes correspondent banking which provides credit, depository, and other banking-related services to other financial institutions nationally.

 

    Fixed income provides financial services for depository and non-depository institutions through the sale and distribution of fixed income securities, loan sales, portfolio advisory services, and derivative sales.

 

    Corporate consists of unallocated corporate expenses, expense on subordinated debt issuances, bank-owned life insurance (“BOLI”), unallocated interest income associated with excess equity, net impact of raising incremental capital, revenue and expense associated with deferred compensation plans, funds management, tax credit investment activities, derivative valuation adjustments related to prior sales of Visa Class B shares, and acquisition-related costs.

 

    Non-strategic includes exited businesses and wind-down national consumer lending activities, other discontinued products, and loan portfolios and service lines.

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 March 31, 2017. The transaction is expected to close in fourth quarter 2017, subject to regulatory approvals, approval by shareholders of FHN and of Capital Bank, and other 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 Divestitures in this report and in Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016 for additional information.

For the purpose of this management’s discussion and analysis (“MD&A”), earning assets have been expressed as averages, unless otherwise noted, and loans have been disclosed net of unearned income. The following financial discussion should be read with the accompanying audited Consolidated Condensed Financial Statements and Notes in this report. Additional information including the 2016 financial statements, notes, and MD&A is provided in Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

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Non-GAAP Measures

Certain measures are included in the narrative and tables in this MD&A that are “non-GAAP”, meaning (under U.S. financial reporting rules) they are not presented in accordance with generally accepted accounting principles (“GAAP”) in the U.S. and also are not codified in U.S. banking regulations currently applicable to FHN. Although other entities may use calculation methods that differ from those used by FHN for non-GAAP measures, FHN’s management believes such measures are relevant to understanding the capital position or financial results of FHN. Non-GAAP measures are reported to FHN’s management and Board of Directors through various internal reports.

Presentation of regulatory measures, even those which are not GAAP, provide a meaningful base for comparability to other financial institutions subject to the same regulations as FHN, as demonstrated by their use by banking regulators in reviewing capital adequacy of financial institutions. Although not GAAP terms, these regulatory measures are not considered “non-GAAP” under U.S. financial reporting rules as long as their presentation conforms to regulatory standards. Regulatory measures used in this MD&A include: common equity tier 1 capital, generally defined as common equity less goodwill, other intangibles, and certain other required regulatory deductions; tier 1 capital, generally defined as the sum of core capital (including common equity and instruments that cannot be redeemed at the option of the holder) adjusted for certain items under risk based capital regulations; and risk-weighted assets (“RWA”), which is a measure of total on- and off-balance sheet assets adjusted for credit and market risk, used to determine regulatory capital ratios.

The non-GAAP measure presented in this filing is return on average tangible common equity (“ROTCE”). Refer to table 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 class basis, or as master servicer of securitized loans; potential claims relating to participation in government programs, especially lending or other financial services programs; expectations of and actual timing and amount of interest rate movements, including the slope and shape of the yield curve, which can have a significant impact on a financial services institution; market and monetary fluctuations, including fluctuations in mortgage markets; inflation or deflation; customer, investor, competitor, regulatory, and legislative responses to any or all of these conditions; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geopolitical developments including possible terrorist activity; natural disasters; effectiveness and cost-efficiency of FHN’s hedging practices; technological changes; fraud, theft, or other incursions through conventional, electronic, or other means 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

 

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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 for the period ended June  30, 2017, and in documents incorporated into this Quarterly Report.

FINANCIAL SUMMARY

In second quarter 2017, FHN reported net income available to common shareholders of $90.8 million, or $.38 per diluted share, compared to net income of $56.5 million, or $.24 per diluted share in second quarter 2016. For the six months ended June 30, 2017, FHN reported net income available to common shareholders of $144.8 million, or $.61 per diluted share, compared to net income available to common shareholders of $104.4 million, or $.44 per diluted share, for the six months ended June 30, 2016. Results improved in both periods relative to 2016 driven by an increase in net interest income (“NII”), a decline in expenses, and a decrease in the provision for income taxes, somewhat offset by lower noninterest income. The decline in provision for income taxes was due to a favorable effective tax rate adjustment associated with a $40.1 million reversal of a capital loss deferred tax valuation allowance in second quarter 2017.

Total revenue increased $6.6 million and $6.9 million, respectively, for the three and six months ended June 30, 2017 to $328.4 million and $635.0 million, as an increase in NII was largely offset by lower fixed income product revenue in both periods.

Noninterest expense decreased 4 percent and 3 percent, respectively to $217.9 million and $440.1 million for the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016. The expense decrease in both periods was the result of a decline in accruals related to loss contingencies and litigation matters, lower fixed income variable compensation expense, and lower legal fees. In second quarter 2017 FHN recognized a smaller expense reversal to the mortgage repurchase and foreclosure provision compared to second quarter 2016, resulting in higher mortgage repurchase expenses during the three and six months ended June 30, 2017 relative to the comparative periods of 2016. Additionally, higher personnel-related expenses within the regional banking segment and $6.4 million of acquisition-related expenses primarily associated with the CBF and Coastal acquisitions recognized in second quarter 2017 also offset a portion of the expense decline for the three and six months ended June 30, 2017.

On a consolidated basis, credit quality was strong in the first half of 2017, with non-performing loans, net charge-offs, delinquencies, and the allowance for loan losses all decreasing relative to the comparative periods of the prior year. The provision for loan losses was a provision credit of $2.0 million in second quarter 2017 compared to provision expense of $4.0 million in second quarter 2016. For the six months ended June 30, 2017 the provision for loan losses was a provision credit of $3.0 million compared to provision expense of $7.0 million for the six months ended June 30, 2016.

Return on average common equity (“ROE”) and ROTCE improved in second quarter 2017 to 15.26 percent and 17.30 percent, respectively from 10.04 percent and 11.10 percent, respectively in second quarter 2016. Return on average assets (“ROA”) was 1.32 percent in second quarter 2017 compared to .91 percent in second quarter 2016. For the six months ended June 30, 2017 ROE, ROTCE, and ROA improved to 12.38 percent, 13.82 percent, and 1.07 percent, respectively from 9.29 percent, 10.27 percent, and .85 percent, respectively, for the six months ended June 30, 2016. Common equity tier 1, Tier 1, Total capital, and Leverage ratios were 9.85 percent, 10.99 percent, 11.98 percent, and 9.38 percent, respectively, in second quarter 2017 compared to 10.05 percent, 11.28 percent, 12.39 percent and 9.50 percent, respectively, in second quarter 2016. Average assets

 

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increased 8 percent for both the three and six months ended June 30, 2017 to $28.9 billion and $28.8 billion from $26.8 billion and $26.7 billion for the three and six months ended June 30, 2016. Average loans also increased 8 percent for both the three and six months ended June 30, 2017 relative to the same periods in 2016 to $19.2 billion and $19.0 billion. Period-end and average Shareholders’ equity increased to $2.8 billion in second quarter 2017 from $2.7 billion in second quarter 2016.

BUSINESS LINE REVIEW

Regional Banking

Pre-tax income within the regional banking segment increased 77 percent to $113.8 million in second quarter from $64.2 million in second quarter 2016. The increase in pre-tax income was primarily driven by higher net interest income coupled with a decline in expenses and lower loan loss provisioning. For the six months ended June 30, 2017, regional banking pre-tax income was $215.0 million compared to $135.6 million for the six months ended June 30, 2016. The increase in pre-tax income for the first half of 2017 was largely driven by an increase in net interest income, a decline in loan loss provision expense, and lower noninterest expense relative to the first half of 2016.

Total revenue increased 11 percent, or $27.1 million, to $266.7 million in second quarter 2017, from $239.6 million in second 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, an increase in commercial loans and noninterest-bearing deposits, as well as lower deposit costs relative to second quarter 2016. Noninterest income was $64.7 million and $61.3 million in second quarter 2017 and 2016, respectively. The increase in noninterest income was largely driven by an increase in brokerage, management fees, and commission income from the Bank’s wealth management group and an increase in fees from deposit transactions and cash management, somewhat offset by a decline in bankcard income as a result of the absence of volume incentives received in second quarter 2016. The increase in brokerage, management fees and commissions was the result of increases in recurring revenue driven primarily by growth in FHN’s advisory business and favorable market conditions. The increase in fees from deposit transactions and cash management activities was largely driven by higher fee income associated with cash management activities. In second quarter 2017, FHN recognized $.4 million in securities gains resulting from the call of a $4.4 million held-to-maturity municipal bond, which also positively impacted revenues.

Provision expense was $.3 million in second quarter 2017 compared to $10.9 million in second quarter 2016. The net decrease in provision in second quarter 2017 compared to the prior year reflects continued strong performance in both the commercial and consumer portfolios relative to a year ago and historically low net charge-offs which continued to drive lower loss rates. Second quarter 2017 net charge-offs were $3.0 million compared to $7.6 million a year ago.

Noninterest expense was $152.7 million in second quarter 2017, down 7 percent from $164.5 million in second quarter 2016. The decrease in noninterest expense was largely driven by a $22.0 million decline in accruals related to loss contingencies and litigation matters associated with the resolution of legal matters in second quarter 2016, somewhat offset by increases in personnel-related expenses, operations services, FDIC premium expense and foreclosure related losses in second quarter 2017, relative to the prior year. 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. The increase in foreclosure-related losses relative to the prior year was primarily the result of gains on sales recognized in second quarter 2016. Additionally, a $.9 million charge recognized in second quarter 2016 related to fixed asset impairments and lease abandonment charges associated with efforts to more efficiently utilize bank branch locations contributed to the expense decline in second quarter 2017.

Total revenue increased 10 percent to $519.1 million for the six months ended June 30, 2017, from $471.2 million for the six months ended June 30, 2016, driven by an increase in NII. The increase in NII for the year-to-date period was also driven by the favorable impact of higher interest rates on loans, higher average balances of commercial loans and noninterest-bearing deposits, and lower deposit costs relative to 2016. For the six months ended June 30, 2017 and 2016, noninterest income was $123.7 million and $120.6 million, respectively. The increase in noninterest income was largely driven by an increase in

 

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brokerage, management fees, and commission income from the Bank’s wealth management group and the increase in net securities gains previously mentioned. These increases were somewhat offset by declines in fees from deposit transactions and cash management and bankcard income. 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 the first half of 2016 driven by a significant new relationship, as previously mentioned.

Provision expense was $3.4 million for the six months ended June 30, 2017 compared to $25.7 million for the six months ended June 30, 2016. The net decrease in provision in the first half of 2017 compared to the first half of 2016 was driven by the same factors that impacted the quarterly period.

Noninterest expense was $300.7 million and $309.9 million for the six months ended June 30, 2017 and 2016, respectively. The decrease in noninterest expense was largely attributable to the same drivers affecting the quarterly decrease in expenses discussed above. For the year-to-date period the expense decrease associated with fixed asset impairment charges recognized in the first half of 2016 was $4.2 million. Additionally, a recovery from a vendor recognized in first quarter 2017 related to previous overbillings also contributed to the expense decrease for the six months ended June 30, 2017.

Fixed Income

Pre-tax income in the fixed income segment was $6.2 million in second quarter 2017 compared to $18.4 million in second quarter 2016. For the six months ended June 30, 2017, fixed income’s pre-tax income was $9.5 million compared to $29.6 million for the six months ended June 30, 2016. The decline in results was driven by lower revenues, somewhat offset by a decline in expenses.

NII increased from $3.1 million in second quarter 2016 to $5.0 million in second quarter 2017, primarily driven by an increase in loans held-for-sale and higher net inventory positions as a result of the Coastal acquisition. Fixed income product revenue decreased 34 percent to $45.6 million in second quarter 2017 from $69.3 million in second quarter 2016, as average daily revenue (“ADR”) declined to $723 thousand in second quarter 2017 from $1.1 million in second quarter 2016. This decline reflects lower activity due to rate increases, a flattening yield curve, and relatively low levels of market volatility. Other product revenue increased to $9.7 million in second quarter 2017 from $8.8 million in the prior year, primarily driven by an increase in fees from loan sales. Noninterest expense decreased 14 percent, or $8.8 million, to $54.0 million in second quarter 2017 from $62.8 million in second quarter 2016, due to lower variable compensation associated with the decrease in fixed income product revenue in second quarter 2017.

For the six months ended June 30, 2017 and 2016, NII was $6.1 million and $5.8 million, respectively, as lower net inventory positions driven by reduced customer activity in first quarter 2017 partially offset the second quarter 2017 increase driven by the Coastal acquisition previously mentioned. Fixed income product revenue was $88.3 million for the first half of 2017, down from $126.9 million in the prior year reflecting lower activity due to rate increases, a flattening yield curve, and relatively low levels of market volatility. Other product revenue was $17.7 million and $18.3 million for the six months ended June 30, 2017 and 2016, respectively. Noninterest expense decreased 15 percent, or $18.7 million, to $102.7 million for the six months ended June 30, 2017 from $121.4 million for the six months ended June 30, 2016. The expense decline during the first half of 2017 was primarily the result of lower variable compensation associated with the decrease in fixed income product revenue in the first half of 2017, somewhat offset by an increase in legal fees.

Corporate

The pre-tax loss for the corporate segment was $33.3 million and $26.9 million for the quarters ended June 30, 2017 and 2016, respectively and $58.8 million and $49.0 million for the six months ended June 30, 2017 and 2016, respectively.

Net interest expense was $15.0 million and $15.8 million, respectively in second quarter 2017 and 2016. Noninterest income (including securities gain/losses) was $6.2 million in second quarter 2017, up from $4.9 million in second quarter 2016. The

 

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increase in noninterest income was largely due to higher deferred compensation income and BOLI gains recognized in second quarter 2017 relative to the prior year. 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 $24.6 million in second quarter 2017 compared to $15.9 million in second quarter 2016. The increase in expense for second quarter 2017 was largely driven by $6.4 million of acquisition-related expenses primarily associated with the CBF and Coastal acquisitions 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, but was somewhat offset by $2.2 million of deferred compensation BOLI gains recognized in second quarter 2017. Additionally, a $2.5 million decrease of negative valuation adjustments associated with derivatives related to prior sales of Visa Class B shares also offset a portion of the expense increase in second quarter 2017.

Net interest expense was $29.1 million and $30.2 million, respectively for the six months ended June 30, 2017 and 2016, respectively. Noninterest income (including securities gain/losses) increased to $11.7 million for the six months ended June 30, 2017 from $10.6 million in the prior year. The increase was driven by an increase in deferred compensation income and higher BOLI gains recognized in the first half of 2017, somewhat offset by a decline in net security gains. The decline in net securities gains was 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.

Noninterest expense was $41.4 million and $29.4 million for the six months ended June 30, 2017 and 2016, respectively. The increase in noninterest expense in the first half of 2017 was due to the same factors effecting the quarterly expense increase noted above. For the year-to-date period, the increase in deferred compensation expense was greater than the second quarter impact. Additionally, a loss related to certain derivative contracts recognized in first quarter 2017 also contributed to the expense increase for the six months ended June 30, 2017, but was offset by a $2.6 million decrease of negative valuation adjustments associated with derivatives related to prior sales of Visa Class B shares.

Non-Strategic

The non-strategic segment had pre-tax income of $25.8 million in second quarter 2017 compared to $35.2 million in second quarter 2016. For the six months ended June 30, 2017, the non-strategic segment had pre-tax income of $32.3 million compared to $51.2 million for the six months ended June 30, 2016. The decline in results for the quarterly period was driven by a lower loan loss provision credit in second quarter 2017 relative to the prior year, coupled with a smaller net expense reversal primarily associated with the settlements of certain mortgage repurchase claims in second quarter 2017 relative to the prior year. The decline in results for the year-to-date period was primarily driven by a lower loan loss provision credit in the first half of 2017 relative to the prior year, a decline in revenues, and a smaller net expense reversal primarily associated with mortgage repurchase settlements.

Total revenue was $10.2 million in second quarter 2017 down from $11.9 million in second quarter 2016. NII declined 18 percent to $8.7 million in second quarter 2017, consistent with the run-off of the non-strategic loan portfolios. Noninterest income (including securities gains/losses) increased to $1.5 million in second quarter 2017 from $1.2 million in second quarter 2016.

The provision for loan losses within the non-strategic segment was a provision credit of $2.3 million in second quarter 2017 compared to a provision credit of $6.9 million in the prior year. Overall, the non-strategic segment continued to reflect stable performance combined with lower loan balances as reserves declined by $3.9 million from December 31, 2016, to $44.0 million as of June 30, 2017. Losses remain historically low as the non-strategic segment had net recoveries of $.3 million in second quarter 2017 versus net charge-offs of $.6 million a year ago.

Noninterest expense was a net expense reversal of $13.3 million in second quarter 2017 compared to a net expense reversal of $16.4 million in second quarter 2016. In both periods FHN recognized favorable expense reversals of repurchase and foreclosure provision primarily as a result of the settlements of certain repurchase claims; however, the reversal in second quarter 2017 was $21.7 million, compared to $31.4 million in second quarter 2016, resulting in a net increase in expenses in second quarter 2017 compared to the prior year. Offsetting a portion of this increase, accruals related to loss contingencies and litigation matters and legal expenses both declined in second quarter 2017 relative to second quarter 2016.

 

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For the six months ended June 30, 2017, total revenue was $21.2 million, down from $25.5 million for the six months ended June 30, 2016. NII declined 19 percent to $18.0 million during the first six months of 2017, consistent with the run-off of the non-strategic loan portfolios. Noninterest income (including securities gains/losses) decreased to $3.2 million in the first half of 2017 from $3.4 million in the first half of 2016.

The provision for loan losses within the non-strategic segment was a provision credit of $6.4 million for the six months ended June 30, 2017 compared to a provision credit of $18.7 million for the six months ended June 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 six months ended June 30, 2017, noninterest expense was a net expense reversal of $4.7 million compared to a net expense reversal of $7.0 million for the six months ended June 30, 2016. The net increase in expense during the first half of 2017 relative to the prior year was driven by the same factors that impacted the quarterly results.

INCOME STATEMENT REVIEW

Total consolidated revenue increased 2 percent to $328.4 million in second quarter 2017 from $321.8 million in second quarter 2016, as an increase in NII was partially offset by a decrease in fixed income product revenue. Total expenses decreased 4 percent to $217.9 million in second quarter 2017 from $226.8 million in second quarter 2016. The decrease in noninterest expense was due in large part to a decline in accruals related to loss contingencies and litigation matters, lower personnel-related expenses, and lower legal fees relative to second quarter 2016. A smaller expense reversal to the mortgage repurchase and foreclosure provision in second quarter 2017 compared to second quarter 2016, and higher acquisition-related expenses recognized in second quarter 2017 primarily associated with the CBF and Coastal acquisitions, offset a portion of the expense decline.

Total consolidated revenue for the six months ended June 30, 2017 was $635.0 million, up 1 percent from $628.2 million for the six months ended June 30, 2016. The increase in revenue for the first half of 2017 relative to the first half of 2016 was also driven by an increase in NII, somewhat offset by lower fixed income product revenue. Total expenses were $440.1 million for the six months ended June 30, 2017, down 3 percent from $453.7 million for the six months ended June 30, 2016. The decrease in expenses for the year-to-date period was driven by the same factors impacting the second quarter 2017 decline.

NET INTEREST INCOME

Net interest income increased 14 percent, or $24.4 million, to $200.7 million in second quarter 2017 from $176.3 million in second quarter 2016. The increase in NII in second 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, an increase in loan fees relative to second quarter 2016, as well as higher average balances of loans held-for-sale and trading securities also positively impacted NII. These increases were partially offset by the continued run-off the non-strategic loan portfolios and a decrease in interest income associated with payments received on non-performing loans recognized on a cash basis. For the six months ended June 30, 2017, NII increased 12 percent to $390.4 million from $348.4 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 $24.6 billion in second quarter 2017 and 2016, respectively, and $26.6 billion and $24.5 billion for the six months ended June 30, 2017 and 2016, respectively. The increase in both periods relative to 2016 was primarily driven by loan growth within regional banking, higher average balances of excess cash held at the Federal Reserve (“Fed”), 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 six months ended June 30, 2017 the increase was also somewhat offset by a decline in average fixed income trading securities.

 

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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 3.07 percent in second quarter 2017 from 2.92 percent in second quarter 2016. The net interest spread was 2.87 percent in second quarter 2017, up 8 basis points from 2.79 percent in second quarter 2016. For the six months ended June 30, 2017, the net interest margin was 3.00 percent, up 10 basis points from 2.90 percent for the six months ended June 30, 2016. The favorable impact of higher interest rates on loans, higher average core deposit balances with a corresponding drop in more-costly, market-indexed deposits, an increase in loan fees relative to the comparable periods of 2016, and lower average balances of trading securities all contributed to the increase in NIM in both periods, but were somewhat offset by an increase in average excess cash held at the Fed for both the three and six months ended June 30, 2017 relative to the prior year.

 

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Table 1—Net Interest Margin

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 
     2017     2016     2017     2016  

Assets:

        

Earning assets:

        

Loans, net of unearned income:

        

Commercial loans

     4.03     3.58     3.95     3.58

Consumer loans

     4.21       4.08       4.17       4.08  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unearned income

     4.08       3.74       4.01       3.73  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-for-sale

     4.38       4.17       4.43       4.15  

Investment securities:

        

U.S. treasuries

     0.99       0.98       0.98       0.98  

U.S. government agencies

     2.57       2.39       2.58       2.42  

States and municipalities

     —         7.27       9.38       6.98  

Corporate bonds

     5.25       5.25       5.25       5.25  

Other

     3.10       2.47       3.12       2.66  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities

     2.61       2.41       2.62       2.44  
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

     3.07       2.64       2.97       2.75  

Other earning assets:

        

Federal funds sold

     1.58       1.11       1.49       1.20  

Securities purchased under agreements to resell

     0.69       0.15       0.54       0.13  

Interest bearing cash

     1.02       0.48       0.88       0.49  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other earning assets

     0.88       0.28       0.77       0.31  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income / total earning assets

     3.59     3.27     3.48     3.25
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Interest-bearing liabilities:

        

Interest-bearing deposits:

        

Savings

     0.49     0.21     0.44     0.21

Other interest-bearing deposits

     0.35       0.19       0.32       0.18  

Time deposits

     0.95       0.83       0.93       0.81  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     0.47       0.25       0.43       0.25  

Federal funds purchased

     1.02       0.51       0.88       0.51  

Securities sold under agreements to repurchase

     0.70       0.11       0.45       0.08  

Fixed income trading liabilities

     2.21       1.84       2.29       1.98  

Other short-term borrowings

     1.30       0.66       1.28       0.78  

Term borrowings

     3.23       2.60       3.10       2.45  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense / total interest-bearing liabilities

     0.72       0.48       0.66       0.48  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest spread

     2.87     2.79     2.82     2.77

Effect of interest-free sources used to fund earning assets

     0.20       0.13       0.18       0.13  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin (a)

     3.07     2.92     3.00     2.90
  

 

 

   

 

 

   

 

 

   

 

 

 

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, 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 second half 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.

 

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PROVISION FOR LOAN LOSSES

The provision for loan losses is the charge to or the release of 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. The provision for loan losses was a credit of $2.0 million and a credit of $3.0 million for the three and six months ended June 30, 2017, respectively, compared to a provision expense of $4.0 million and a provision expense of $7.0 million for the three and six months ended June 30, 2016, respectively. For the three and six months ended June 30 2017, FHN experienced continued overall improvement in the loan portfolio as evidenced by a 67 percent and 90 percent decline in net charge-offs relative to the comparative periods of 2016. The ALLL decreased $4.8 million from year-end to $197.3 million as of June 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 $127.7 million in second quarter 2017 and represented 39 percent of total revenue compared to $145.5 million in second quarter 2016 and 45 percent. For the six months ended June 30, 2017 and 2016 noninterest income was $244.6 million and $279.8 million, respectively, representing 39 percent and 45 percent of total revenue. The decrease in noninterest income for both periods was primarily driven by lower fixed income product revenue.

Fixed Income Noninterest Income

Fixed income noninterest income was $55.1 million and $105.8 million for the three and six months ended June 30, 2017, down 29 percent and 27 percent, respectively, from $77.9 million and $144.9 million for the three and six months ended June 30, 2016. The decline in both periods reflects lower activity due to rate increases, a flattening yield curve, and relatively low levels of market volatility. Revenue from other products increased 11 percent to $9.6 million in second quarter 2017 from $8.6 million in second quarter 2016, largely driven by an increase in fees from loan sales. For the six months ended June 30, 2017, revenue from other products decreased to $17.5 million from $18.0 million for the six months ended June 30, 2016. The following table summarizes FHN’s fixed income noninterest income for the three and six months ended June 30, 2017 and 2016.

Table 2—Fixed Income Noninterest Income

 

     Three Months Ended
June 30
     Percent
Change
    Six Months Ended
June 30
     Percent
Change
 

(Dollars in thousands)

   2017      2016        2017      2016     

Noninterest income:

                

Fixed income

   $ 45,555      $ 69,279        (34 %)    $ 88,282      $ 126,862        (30 )% 

Other product revenue

     9,555        8,634        11     17,506        18,028        (3 )% 
  

 

 

    

 

 

      

 

 

    

 

 

    

Total fixed income noninterest income

   $ 55,110      $ 77,913        (29 %)    $ 105,788      $ 144,890        (27 )% 
  

 

 

    

 

 

      

 

 

    

 

 

    

Deposit Transactions and Cash Management

Fees from deposit transactions and cash management activities increased to $27.9 million in second quarter 2017 from $27.0 million in second quarter 2016 largely driven by higher fee income associated with cash management activities. For the six months ended June 30, 2017 and 2016 fees from deposit transactions and cash management activities were $52.4 million and $53.8 million respectively. The decrease for the six months ended June 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.

 

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Brokerage, Management Fees and Commissions

Noninterest income from brokerage, management fees and commissions increased 13 percent to $12.0 million in second quarter 2017 from $10.7 million in second quarter 2016. For the six months ended June 30, 2017 noninterest income from brokerage, management fees and commissions increased 14 percent to $23.9 million from $21.1 million for the six months ended June 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 $5.6 million and $11.1 million for the three and six months ended June 30, 2017 compared to $6.6 million and $11.8 million for the three and six months ended June 30, 2016. The decrease in bankcard income in 2017 relative to the comparative periods of 2016 was primarily the result of volume incentives received in 2016 driven by a significant new relationship.

Securities Gains/(Losses)

Net securities gains were $.4 million for the three and six months ended June 30, 2017, and were primarily the result of the call of a $4.4 million held-to-maturity municipal bond within the regional banking segment. Net securities gains were not material for the three months ended June 30, 2016. For the six months ended June 30, 2016, FHN recognized net securities gains of $1.7 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 other service charges, ATM and interchange fees, revenue related to deferred compensation plans (which are mirrored by changes in noninterest expense), electronic banking fees, mortgage banking (primarily within the non-strategic and regional banking segments), letter of credit fees, insurance commissions, and various other fees.

Revenue from all other income and commissions increased 19 percent to $14.6 million in second quarter 2017 from $12.3 million in second quarter 2016. For the six months ended June 30, 2017 revenue from all other income and commissions was $29.0 million, up 13 percent from $25.6 million for the six months ended June 30, 2016. The increase in all other income and commissions in both periods was primarily due to higher deferred compensation income and an increase in mortgage banking income driven by loan sales within the regional banking segment. 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. The following table provides detail regarding FHN’s other income.

 

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Table 3—Other Income

 

     Three Months Ended
June 30
     Percent
Change
    Six Months Ended
June 30
     Percent
Change
 

(Dollars in thousands)

   2017      2016        2017      2016     

Other income:

                

Other service charges

   $ 3,109      $ 2,996        4   $ 6,093      $ 5,709        7

ATM interchange fees

     3,083        2,879        7     5,861        5,837        *  

Deferred compensation (a)

     1,491        795        88     3,318        1,124        NM  

Electronic banking fees

     1,306        1,381        (5 )%      2,629        2,778        (5 )% 

Mortgage banking

     1,268        598        NM       2,529        1,871        35

Letter of credit fees

     1,122        1,115        1     2,158        2,176        (1 )% 

Insurance commissions

     592        552        7     1,475        1,039        42

Other

     2,646        2,005        32     4,945        5,076        (3 )% 
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 14,617      $ 12,321        19   $ 29,008      $ 25,610        13
  

 

 

    

 

 

      

 

 

    

 

 

    

 

* Amount is less than one percent
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.

NONINTEREST EXPENSE

Total noninterest expense decreased 4 percent, or $8.9 million, to $217.9 million in second quarter 2017 from $226.8 million in second quarter 2016. The decrease in noninterest expense was due in large part to a decline in accruals related to loss contingencies and litigation matters, lower personnel-related expenses, and lower legal fees relative to second quarter 2016. A smaller expense reversal to the mortgage repurchase provision in second quarter 2017 compared to second quarter 2016, and higher acquisition expenses associated with the CBF and Coastal acquisitions, offset a portion of the expense decline. For the six months ended June 30, 2017, total noninterest expense decreased 3 percent, or $13.6 million to $440.1 million, largely driven by the same factors that contributed to the quarterly expense decline.

Employee Compensation, Incentives, and Benefits

Employee compensation, incentives, and benefits (personnel expense), the largest component of noninterest expense, decreased 3 percent, or $4.3 million, to $139.1 million in second quarter 2017 from $143.4 million in second quarter 2016. For the six months ended June 30, 2017, personnel expense decreased 2 percent, or $6.5 million, to $274.0 million. The decrease in personnel expense for both the quarterly and year-to-date periods was 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. This decrease was partially offset by 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, deferred compensation expense increased in 2017 relative to 2016, further offsetting the decline in personnel expense, but was somewhat offset by $2.2 million of deferred compensation BOLI gains recognized in second quarter 2017.

Operations Services

Operations services expense increased 10 percent for the three and six months ended June 30, 2017 to $11.5 million and $22.4 million, respectively from $10.5 million and $20.4 million for the three and six months ended June 30, 2016, primarily related to an increase in third party fees associated with FHN’s online digital banking platform.

Professional Fees

Professional fees were $9.7 million in second quarter 2017 compared to $4.3 million in second quarter 2016. For the six months ended June 30, 2017 professional fees increased to $14.4 million from $9.5 million for the six months ended June 30, 2016. The increase in professional fees for both periods was primarily driven by acquisition-related expenses primarily associated with the CBF and Coastal acquisitions.

 

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FDIC Premium Expense

FDIC premium expense was $5.9 million in second quarter 2017, compared to $4.8 million in second quarter 2016. For the six months ended June 30, 2017 FDIC premium expense was $11.7 million compared to $9.8 million for the six months ended June 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 $2.4 million and $2.0 million during the three and six months ended June 30, 2017 to $3.5 million and $5.9 million, respectively, from $8.8 million and $10.8 million for the three and six months ended June 30, 2016. Legal fees fluctuate primarily based on the status, timing, type, and composition of cases or other projects.

Repurchase and Foreclosure Provision

During second quarter 2017, FHN recognized a $21.7 million pre-tax reversal of mortgage repurchase and foreclosure provision primarily as a result of the settlement of certain repurchase claims, which favorably impacted expenses for both the quarter and year-to-date period. Similarly, during second quarter 2016, FHN recognized a $31.4 million pre-tax 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 for both the quarter and year-to-date period.

 

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Other Noninterest Expense

Other expense includes 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, losses from litigation and regulatory matters, expenses associated with foreclosed properties, and various other expenses.

All other expenses were $24.4 million in second quarter 2017, a 48 percent decrease from $46.8 million in second quarter 2016. The decrease was primarily driven by a $25.3 million decline in accruals related to loss contingencies and litigation matters associated with the resolution of legal matters in second quarter 2016. Additionally, a $2.5 million decrease in negative valuation adjustments associated with derivatives related to prior sales of Visa Class B shares and a $1.3 million charge recognized in second quarter 2016 related to fixed asset impairments and lease abandonment charges associated with efforts to more efficiently utilize bank branch locations contributed to the expense decline. These decreases were partially offset by a $3.2 million charitable contribution to the First Tennessee Foundation and a $2.0 million vendor payment adjustment, both recognized in second quarter 2017.

All other expenses were $43.2 million for the six months ended June 30, 2017 compared to $68.9 million for the six months ended June 30, 2016. The decline in all other expenses for the year-to-date period was primarily driven by a decline in accruals related to loss contingencies and litigation matters associated with matters settled in 2016. During the six months ended June 30, 2017, FHN recognized a $5.0 million decrease in fixed asset impairments and lease abandonment charges and a $2.6 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 the first half of 2017. Additionally, other insurance and taxes decreased to $4.8 million for the six months ended June 30, 2017 from $6.3 million for the comparable period of 2016 largely driven by favorable adjustments to franchise taxes related to community reinvestment efforts. A recovery from a vendor recognized in first quarter 2017 related to previous overbillings also favorably impacted expense for the six months ended June 30, 2017, but was offset by a loss related to certain derivative contracts also recognized in first quarter 2017. The $3.2 million charitable contribution to the First Tennessee Foundation and the $2.0 million vendor payment adjustment previously mentioned negatively impacted expenses for the six months ended June 30, 2017 also offsetting a portion of the expense decline.

Table 4—Other Expense

 

     Three Months Ended
June 30
    Percent
Change
    Six Months Ended
June 30
    Percent
Change
 

(Dollars in thousands)

   2017      2016       2017      2016    

Other expense:

              

Travel and entertainment

   $ 3,162      $ 2,495       27   $ 5,510      $ 4,557       21

Other insurance and taxes

     2,443        3,014       (19 )%      4,833        6,327       (24 )% 

Customer relations

     1,543        1,483       4     2,879        3,362       (14 )% 

Employee training and dues

     1,453        1,338       9     2,996        2,728       10

Supplies

     1,093        930       18     1,956        1,956       *  

Tax credit investments

     942        831       13     1,884        1,537       23

Miscellaneous loan costs

     699        565       24     1,321        1,282       3

Litigation and regulatory matters

     533        26,000       (98 )%      241        25,525       (99 )% 

Foreclosed real estate

     446        (432     NM       650        (690     NM  

Other

     12,090        10,624       14     20,921        22,343       (6 )% 
  

 

 

    

 

 

     

 

 

    

 

 

   

Total

   $ 24,404      $ 46,848       (48 )%    $ 43,191      $ 68,927       (37 )% 
  

 

 

    

 

 

     

 

 

    

 

 

   

 

* Amount is less than one percent
NM – Not meaningful

 

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INCOME TAXES

FHN recorded an income tax provision of $17.3 million in second quarter 2017, compared to $30.0 million in second quarter 2016. For the six months ended June 30, 2017 and 2016, FHN recorded an income tax provision of $44.3 million and $54.3 million, respectively. The effective tax rate for the three and six months ended June 30, 2017 were approximately 15 percent and 22 percent compared to 33 percent and 32 percent for the three and six months ended June 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 in second quarter 2017 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.

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 existing assets and liabilities. The tax consequence is calculated by applying enacted statutory tax rates, applicable to future years, to these temporary differences. As of June 30, 2017, FHN’s gross DTA (net of a valuation allowance) and gross DTL were $299.4 million and $89.2 million, respectively, resulting in a net DTA of $210.2 million at June 30, 2017, compared with a net DTA of $186.1 million at June 30, 2016. The increase in the DTA since the second quarter of 2016 is primarily the result of the reversal of a capital loss deferred tax asset valuation allowance. As of June 30, 2017, FHN gross had deferred tax asset balances related to federal and state income tax carryforwards of $63.9 million and $16.0 million, respectively, which will expire at various dates.

As of June 30, 2017 and 2016, FHN established a valuation allowance of $.3 million and $40.5 million, respectively, against its federal capital loss carryforwards. FHN’s gross DTA after valuation allowance was $299.4 million and $318.2 million as of June 30, 2017 and 2016, respectively. Based on current analysis, FHN believes that its ability 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 $29.4 billion on June 30, 2017, up 3 percent from $28.6 billion on December 31, 2016. Average assets increased to $28.9 billion in second quarter 2017 from $28.6 billion in fourth quarter 2016. The increase in average assets compared to fourth quarter 2016 was largely attributable to higher balances of interest bearing cash and loans held-for-sale, somewhat offset by a net decrease in the loan portfolios. The increase in period-end assets relative to December 31, 2016 was primarily driven by higher balances of trading securities, net increases in loan balances, and higher balances of loans held-for-sale, but was somewhat offset by a decrease in interest bearing cash.

Total period-end liabilities were $26.5 billion on June 30, 2017, a 3 percent increase from $25.9 billion on December 31, 2016. Average liabilities increased 1 percent to $26.1 billion first quarter 2017, from $25.9 billion in fourth quarter 2016. The increase in average liabilities was largely due to increases in securities sold under agreements to repurchase, other short-term borrowings, and deposits, somewhat offset by lower federal funds purchased and other liabilities relative to fourth quarter 2016. The increase in period-end liabilities relative to fourth quarter 2016 was primarily due to increases in other short-term borrowings and securities sold under agreements to repurchase, partially offset by a decrease in deposits.

 

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EARNING ASSETS

Earning assets consist of loans, investment securities, other earning assets such as trading securities, interest-bearing cash, and loans HFS. Average earning assets increased to $26.6 billion in second quarter 2017 from $26.4 billion in fourth quarter 2016. A more detailed discussion of the major line items follows.

Loans

Period-end loans increased 2 percent to $20.0 billion as of June 30, 2017 from $19.6 billion on December 31, 2016, and were up 8 percent from $18.6 billion as of June 30, 2016. Average loans for second quarter 2017 were $19.2 billion compared to $19.4 billion for fourth quarter 2016 and $17.8 billion for second quarter 2016. The increase in period-end loan balances from fourth quarter 2016 was primarily due to increases in other commercial loan portfolios within the regional banking segment, somewhat offset by run-off of the non-strategic loan portfolios. The decrease in average loans from fourth quarter 2016 was primarily due to a decrease in loans to mortgage companies, somewhat offset by increases in other commercial loan portfolios within the regional banking segment. To a much smaller extent, run-off of consumer loan portfolios within the non-strategic segment also contributed to the decline in average loans relative to fourth quarter 2016. The increase in average and period-end loan balances from second quarter 2016 was primarily driven by organic growth within the regional bank’s commercial portfolios and loans added through the purchase of franchise finance loans in third quarter 2016, partially offset by run-off of consumer loan portfolios within the non-strategic segment.

Table 5—Average Loans

 

     Quarter Ended
June 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

   $ 11,830,942        62%      $ 11,987,561        62%        (1)%  

Commercial real estate

     2,175,733        11            2,089,314        11            4%  
  

 

 

    

 

 

    

 

 

    

 

 

    

Total commercial

     14,006,675        73            14,076,875        73            *      
  

 

 

    

 

 

    

 

 

    

 

 

    

Consumer:

              

Consumer real estate (a)

     4,431,591        23            4,545,647        23            (3)%  

Permanent mortgage

     408,202        2            429,914        2            (5)%  

Credit card, OTC and other

     355,123        2            361,311        2            (2)%  
  

 

 

    

 

 

    

 

 

    

 

 

    

Total consumer

     5,194,916        27            5,336,872        27            (3)%  
  

 

 

    

 

 

    

 

 

    

 

 

    

Total loans, net of unearned income

   $ 19,201,591        100%      $ 19,413,747        100%        (1)%  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

* Amount is less than one percent.
(a) Balance as of June 30, 2017 and December 31, 2016, includes $30.5 million and $37.2 million of restricted and secured real estate loans, respectively.

C&I loans are the largest component of the commercial portfolio comprising 84 percent and 85 percent of average commercial loans in second quarter 2017 and fourth quarter 2016, respectively. C&I loans decreased 1 percent, or $.2 billion, from fourth quarter 2016 due to lower balances of loans to mortgage companies, partially offset by net loan growth within several of the regional bank’s portfolios including franchise finance, international, and private client. Commercial real estate loans increased 4 percent to $2.2 billion in second quarter 2017 because of growth in expansion markets, increased funding under existing commitments, and an increased focus on funded term debt products.

Average consumer loans declined 3 percent, or $.1 billion, from fourth quarter 2016 to $5.2 billion in second quarter 2017. The consumer real estate portfolio (home equity lines and installment loans) declined $114.1 million, to $4.4 billion, as the continued wind-down of portfolios within the non-strategic segment outpaced a $93.5 million increase in real estate installment loans from new originations within the regional banking segment. The permanent mortgage portfolio declined $21.7 million to $408.2 million in second quarter 2017 driven by run-off of legacy assets within the non-strategic segment offset by some growth in mortgage loans within regional banking, primarily related to FHN’s Community Reinvestment Act (“CRA”) initiatives. Credit Card and Other decreased $6.2 million to $355.1 million in second quarter 2017.

 

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Investment Securities

FHN’s investment portfolio consists principally of debt securities including government agency issued mortgage-backed securities (“MBS”) and government agency issued collateralized mortgage obligations (“CMO”), substantially all of which are classified as available-for-sale (“AFS”). FHN utilizes the securities portfolio as a source of income, liquidity and collateral for repurchase agreements, for public funds, and as a tool for managing risk of interest rate movements. Investment securities were $4.0 billion on June 30, 2017 and December 31, 2016 and averaged $4.0 billion in first quarter 2017 and fourth quarter 2016, representing 15 percent of average earning assets.

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 June 30, 2017 loans HFS were $432.8 million compared to $111.2 million on December 31, 2016. The average balance of loans HFS increased to $320.7 million in second 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 $3.1 billion in second quarter 2017, up from $2.8 billion in fourth quarter 2016. The increase in other earning assets was primarily driven by higher levels of interest bearing cash driven by an inflow of customer deposits. Other earning assets were $2.6 billion on June 30, 2017 and December 31, 2016 as increases in trading inventory and securities purchased under agreements to resell (“asset repos”) were offset by a decline in interest-bearing cash. 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.

Non-earning assets

Period-end non-earning assets were $2.4 billion on June 30, 2017 compared to $2.3 billion on December 31, 2016. The increase in non-earning assets was primarily due to increases in Fixed income receivables, goodwill and intangible assets associated with the Coastal acquisition.

Deposits

Average deposits were $22.5 billion during second quarter 2017, up 1 percent from $22.3 billion during fourth quarter 2016 and 11 percent from $20.3 billion in second quarter 2016. The increase in average deposits from fourth quarter 2016 was primarily driven by increases in priority savings, non-interest bearing deposits and commercial customer deposits, somewhat offset by FHN’s decision to decrease insured network deposit balances and use alternate sources of wholesale funding to support loan growth. The increase in average deposits from second quarter 2016 was also driven by increases in priority savings, non-interest bearing deposits and commercial customer deposits, and was also impacted by an increase in insured network deposits. Insured network deposit sweep program is an FDIC-insured deposit sweep program where financial institutions can receive unsecured deposits for the long-term (several years) and in larger-dollar increments and is used to support loan growth. Period-end deposits were $22.3 billion on June 30, 2017, down 1 percent from $22.7 billion on December 31, 2016, and up 8 percent from $20.6 billion on June 30, 2016. FHN experienced deposit growth within consumer interest, commercial interest and non-interest bearing deposits from June 30, 2016 and December 31, 2016 to June 30, 2017. Insured network deposits decreased from June 30, 2016 and December 31, 2016 to June 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.

 

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Table 6—Average Deposits

 

     Quarter Ended
June 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

   $ 9,330,990        41%      $ 8,641,507        39%        8 %   

Commercial interest

     3,086,139        14            2,819,980        13            9 %   

Market-indexed (a)

     3,809,281        17            4,787,912        21            (20)%  
  

 

 

    

 

 

    

 

 

    

 

 

    

Total interest-bearing deposits

     16,226,410        72            16,249,399        73            *       

Noninterest-bearing deposits

     6,280,472        28            6,039,025        27            4 %   
  

 

 

    

 

 

    

 

 

    

 

 

    

Total deposits

   $ 22,506,882        100%      $ 22,288,424        100%        1 %   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

* Amount is less than one percent.
(a) Market-indexed deposits are tied to an index not administered by FHN and are comprised of insured network deposits, correspondent banking deposits, and trust/sweep deposits.

 

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Short-Term Borrowings

Short-term borrowings (federal funds purchased (“FFP”), securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings) averaged $2.0 billion in second quarter 2017, up from $1.9 billion in fourth quarter 2016. The increase between second quarter 2017 and fourth quarter 2016 was primarily due to an increase in securities sold under agreements to repurchase, partially offset by a decline in FFP. Average securities sold under agreements to repurchase increased in second quarter 2017, primarily due to the Coastal acquisition. Average FFP fluctuates depending on the amount of excess funding of FHN’s correspondent bank customers. Period-end short-term borrowings increased to $2.7 billion on June 30, 2017 from $1.5 billion on December 31, 2016. The increase in short-term borrowings on a period-end basis was primarily driven by an increase in other short-term funds (primarily FHLB advances) which management uses as an additional source of wholesale funding to support loan growth. The other factors impacting the increase in average balances previously mentioned also impacted balances on a period-end basis as of June 30, 2017.

Table 7—Average Short-Term Borrowings

 

     Quarter Ended
June 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

   $ 435,854        21%      $ 528,266        28%        (17)%  

Securities sold under agreements to repurchase

     616,837        30            378,837        20            63 %  

Trading liabilities

     762,667        37            745,011        39            2 %  

Other short-term borrowings

     221,472        12            243,527        13            (9)%  
  

 

 

    

 

 

    

 

 

    

 

 

    

Total short-term borrowings

   $ 2,036,830        100%      $ 1,895,641        100%        7 %  
  

 

 

    

 

 

    

 

 

    

 

 

    

Term Borrowings

Term borrowings include senior and subordinated borrowings with original maturities greater than one year. Term borrowings were $1.0 billion on June 30, 2017 and December 31, 2016. Average term borrowings decreased $30.2 million from fourth quarter 2016 to $1.0 billion in second quarter 2017.

Other Liabilities

Period-end other liabilities decreased to $.5 billion on June 30, 2017 from $.6 billion on December 31, 2016.

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. Period-end equity increased to $2.8 billion on June 30, 2017 from $2.7 billion on December 31, 2016 primarily due to net income recognized in first and second quarter 2017, partially offset by common and preferred dividends paid. Average equity increased $31.3 million to $2.8 billion in second quarter 2017 from fourth quarter 2016, as a decrease attributable to accumulated other comprehensive income was more than offset by the impact of net income less dividends paid on equity recognized in the first half of 2017 on an average basis. The decline attributable to average accumulated other comprehensive income was largely the result of unrealized losses recognized on the AFS securities portfolio, as well as an increase of net actuarial losses for pension and post retirement plans.

In January 2014, FHN’s board of directors approved a share repurchase program which enables FHN to repurchase its common stock in the open market or in privately negotiated transactions, subject to certain conditions. In July 2015 and April 2016 the board increased and extended that program. The current program authorizes total purchases of up to $350 million and expires on January 31, 2018. During second quarter 2017, FHN did not repurchase any common shares under the program. In second quarter 2016 FHN repurchased $11.4 million of common shares under the program. Total purchases under this program through June 30, 2017 were $160.3 million. FHN does not anticipate repurchasing any shares under this authorization through the closing of the Capital Bank acquisition.

 

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The following tables provide a reconciliation of Shareholders’ equity from the Consolidated Condensed Statements of Condition to Common Equity Tier 1, Tier 1 and Total Regulatory Capital as well as certain selected capital ratios:

Table 8—Regulatory Capital and Ratios

 

(Dollars in thousands)

   June 30, 2017      December 31, 2016  

Shareholders’ equity

   $ 2,531,457      $ 2,409,653  

FHN non-cumulative perpetual preferred

     (95,624      (95,624
  

 

 

    

 

 

 

Common equity

   $ 2,435,833      $ 2,314,029  

Regulatory adjustments:

     

Disallowed goodwill and other intangibles

     (232,086      (165,292

Net unrealized (gains)/losses on securities available-for-sale

     9,857        17,232  

Net unrealized (gains)/losses on pension and other postretirement plans

     226,581        229,157  

Net unrealized (gains)/losses on cash flow hedges

     1,024        1,265  

Disallowed deferred tax assets

     (22,153      (18,027

Other deductions from common equity tier 1

     (478      (377
  

 

 

    

 

 

 

Common equity tier 1

   $ 2,418,578      $ 2,377,987  

FHN non-cumulative perpetual preferred

     95,624        95,624  

Qualifying noncontrolling interest—FTBNA preferred stock

     249,662        256,811  

Other deductions from tier 1

     (64,166      (58,551
  

 

 

    

 

 

 

Tier 1 capital

   $ 2,699,698      $ 2,671,871  

Tier 2 capital

     243,250        254,139  
  

 

 

    

 

 

 

Total regulatory capital

   $ 2,942,948      $ 2,926,010  
  

 

 

    

 

 

 

Risk-Weighted Assets

     

First Horizon National Corporation

   $ 24,566,487      $ 23,914,158  

First Tennessee Bank National Association

     24,027,476        23,447,251  

Average Assets for Leverage

     

First Horizon National Corporation

     28,793,889        28,581,251  

First Tennessee Bank National Association

     27,925,008        27,710,158  

 

     June 30, 2017      December 31, 2016  
         Ratio          Amount          Ratio          Amount  

Common Equity Tier 1

           

First Horizon National Corporation

     9.85%      $ 2,418,578        9.94%      $ 2,377,987  

First Tennessee Bank National Association

     9.57            2,299,275        9.80           2,298,080  

Tier 1

           

First Horizon National Corporation

     10.99            2,699,698        11.17           2,671,871  

First Tennessee Bank National Association

     10.51            2,525,919        10.83           2,538,382  

Total

           

First Horizon National Corporation

     11.98            2,942,948        12.24           2,926,010  

First Tennessee Bank National Association

     11.38            2,735,182        11.78           2,762,271  

Tier 1 Leverage

           

First Horizon National Corporation

     9.38            2,699,698        9.35           2,671,871  

First Tennessee Bank National Association

     9.05            2,525,919        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

 

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Capital, and Leverage capital ratios must be at least 6.5 percent, 8 percent, 10 percent, and 5 percent, respectively. As of June 30, 2017, FHN and FTBNA had sufficient capital to qualify as a well-capitalized institution. Regulatory capital ratios generally decreased in the second quarter of 2017 relative to fourth quarter 2016 due primarily to the impact of increased disallowed intangible assets due to the Coastal acquisition and the continued phased-in implementation of the Basel III regulations as well as, increases in risk-weighted assets primarily as a result of a net increase in period end loans. These decreases were partially offset by net income less dividends. During 2017, capital ratios are expected to remain above well-capitalized standards.

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. The following tables provide information related to securities repurchased by FHN during second quarter 2017:

Table 9—Issuer Purchases 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

           

April 1 April 30

     12      $ 18.97        12        25,628  

May 1 to May 31

     149      $ 17.99        149        25,479  

June 1 to June 30

     2      $ 17.14        2        25,477  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     163      $ 18.06        163     
  

 

 

    

 

 

    

 

 

    

Compensation Plan Programs:

 

    A consolidated compensation plan share purchase program was announced on August 6, 2004. This program consolidated into a single share purchase program all of the previously authorized compensation plan share programs as well as the renewal of the authorization to purchase shares for use in connection with two compensation plans for which the share purchase authority had expired. The total amount authorized under this consolidated compensation plan share purchase program, inclusive of a program amendment on April 24, 2006, is 29.6 million shares calculated before adjusting for stock dividends distributed through January 1, 2011. The authorization has been reduced for that portion which relates to compensation plans for which no options remain outstanding. The shares may be purchased over the option exercise period of the various compensation plans on or before December 31, 2023. On June 30, 2017, the maximum number of shares that may be purchased under the program was 25.4 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 2017.

Other Repurchase Authority:

 

(Dollar values and volume in thousands, except per share data)

   Total number
of shares
purchased
     Average price
paid per share
     Total number of
shares purchased
as part of publicly
announced programs
     Maximum approximate
dollar value that may
yet be purchased under
the programs
 

2017

           

April 1 April 30

     —          N/A        —        $ 189,690  

May 1 to May 31

     —          N/A        —        $ 189,690  

June 1 to June 30

     —          N/A        —        $ 189,690  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —          N/A        —       
  

 

 

    

 

 

    

 

 

    

N/A—Not applicable

 

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Other Programs:

 

    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 date to January 31, 2017, and on April 26, 2016, FHN announced a $150 million increase and further extension to January 31, 2018. As of June 30, 2017, $160.3 million in purchases had been made under this authority at an average price per share of $12.86, $12.84 excluding commissions. 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.

 

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ASSET QUALITY

Loan Portfolio Composition

FHN groups its loans into portfolio segments based on internal classifications reflecting the manner in which the ALLL is established and how credit risk is measured, monitored, and reported. From time to time, and if conditions are such that certain subsegments are uniquely affected by economic or market conditions or are experiencing greater deterioration than other components of the loan portfolio, management may determine the ALLL at a more granular level. Commercial loans are composed of commercial, financial, and industrial (“C&I”) and commercial real estate (“CRE”). Consumer loans are composed of consumer real estate; permanent mortgage; and credit card and other. FHN has a concentration of residential real estate loans (24 percent of total loans), the majority of which is in the consumer real estate portfolio (22 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 13 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 offerings as of June 30, 2017, are generally consistent with those reported and disclosed in the Company’s Form 10-K for the year ended December 31, 2016.

COMMERCIAL LOAN PORTFOLIOS

C&I

The C&I portfolio was $12.6 billion on June 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.

The following table provides the composition of the C&I portfolio by industry as of June 30, 2017, and December 31, 2016. For purposes of this disclosure, industries are determined based on the North American Industry Classification System (“NAICS”) industry codes used by Federal statistical agencies in classifying business establishments for the collection, analysis, and publication of statistical data related to the U.S. business economy.

Table 10—C&I Loan Portfolio by Industry

 

     June 30, 2017     December 31, 2016  

(Dollars in thousands)

   Amount      Percent     Amount      Percent  

Industry:

          

Finance & insurance

   $ 2,724,227        22   $ 2,573,713        21

Loans to mortgage companies

     2,092,762        17       2,045,189        17  

Health care & social assistance

     913,252        7       893,629        7  

Wholesale trade

     900,507        7       826,226        7  

Accommodation & food service

     882,551        7       987,973        8  

Real estate rental & leasing (a)

     868,023        7       769,457        6  

Manufacturing

     847,640        7       762,947        6  

Transportation & warehousing

     581,929        5       578,586        5  

Public administration

     577,808        5       565,119        5  

Other (education, arts, entertainment, etc) (b)

     2,209,520        16       2,145,248        18  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total C&I loan portfolio

   $ 12,598,219        100   $ 12,148,087        100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(a) Leasing, rental of real estate, equipment, and goods.
(b) Industries in this category each comprise less than 5 percent for 2017.

 

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Industry Concentrations

Loan concentrations are considered to exist for a financial institution when there are loans to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. 39 percent of FHN’s C&I portfolio (Finance and insurance plus Loans to mortgage companies) could be affected by items that uniquely impact the financial services industry. Except “Finance and Insurance” and “Loans to Mortgage Companies”, as discussed below, on June 30, 2017, FHN did not have any other concentrations of C&I loans in any single industry of 10 percent or more of total loans.

Finance and Insurance

The finance and insurance component represents 22 percent of the C&I portfolio 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 June 30, 2017, asset-based lending to consumer finance companies represents approximately $1.1 billion of the finance and insurance component.

TRUPS lending was originally extended as a form of “bridge” financing to participants in the pooled trust preferred securitization program offered primarily to smaller banking (generally less than $15 billion in total assets) and insurance institutions through FHN’s fixed income business. Origination of TRUPS lending ceased in early 2008. Individual TRUPS are re-graded at least quarterly as part of FHN’s commercial loan review process. The terms of these loans generally include a scheduled 30 year balloon payoff and include an option to defer interest for up to 20 consecutive quarters. As of June 30, 2017, and December 31, 2016, one TRUP relationship was on interest deferral.

As of June 30, 2017, the unpaid principal balance (“UPB”) of trust preferred loans totaled $333.0 million ($206.7 million of bank TRUPS and $126.3 million of insurance TRUPS) with the UPB of other bank-related loans totaling $331.9 million. Inclusive of a valuation allowance on TRUPS of $25.5 million, total reserves (ALLL plus the valuation allowance) for TRUPS and other bank-related loans were $26.7 million or 4 percent of outstanding UPB.

Loans to Mortgage Companies

The balance of loans to mortgage companies was 17 percent of the C&I portfolio as of June 30, 2017 and December 31, 2016, and 20 percent of the C&I portfolio as of June 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 $3.0 million from December 31, 2016, to $92.4 million as of June 30, 2017. The allowance as a percentage of period-end loans decreased slightly to .73 percent as of June 30, 2017, from .74 percent as of December 31, 2016. Nonperforming C&I loans decreased $7.7 million from December 31, 2016, to $25.0 million on June 30, 2017. The nonperforming loan (“NPL”) ratio decreased 7 basis points from December 31, 2016, to .20 percent of C&I loans as of June 30, 2017. The 30+ delinquency ratio decreased to .03 percent as of June 30, 2017, from .08 percent as of December 31, 2016. Second quarter 2017 experienced net charge-offs of $1.3 million compared to $1.6 million of net recoveries in fourth quarter 2016 and $6.3 million of net charge-offs in second quarter 2016. The following table shows C&I asset quality trends by segment.

 

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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 April 1

   $ 91,625     $ 1,482     $ 93,107  

Charge-offs

     (1,865     —         (1,865

Recoveries

     594       6       600  

Provision/(provision credit) for loan losses

     604       (67     537  
  

 

 

   

 

 

   

 

 

 

Allowance for loan losses as of June 30

   $ 90,958     $ 1,421     $ 92,379  
  

 

 

   

 

 

   

 

 

 

Net charge-offs % (qtr. annualized)

     0.04     NM       0.04

Allowance / charge-offs

     17.85x       NM       18.21x  
  

 

 

   

 

 

   

 

 

 
     As of June 30  

Period-end loans

   $ 12,178,619     $ 419,600     $ 12,598,219  

Nonperforming loans

     21,030       4,001       25,031  

Troubled debt restructurings

     25,411       —         25,411  
  

 

 

   

 

 

   

 

 

 

30+ Delinq. % (a)

     0.03     —       0.03

NPL %

     0.17       0.95       0.20  

Allowance / loans %

     0.75       0.34       0.73  
  

 

 

   

 

 

   

 

 

 
     2016  
     Three months ended  

(Dollars in thousands)

   Regional Bank     Non-Strategic     Consolidated  

Allowance for loan losses as of April 1

   $ 79,471     $ 1,416     $ 80,887  

Charge-offs

     (7,688     (181     (7,869

Recoveries

     1,569       33       1,602  

Provision/(provision credit) for loan losses

     6,245       107       6,352  
  

 

 

   

 

 

   

 

 

 

Allowance for loan losses as of June 30

   $ 79,597     $ 1,375     $ 80,972  
  

 

 

   

 

 

   

 

 

 

Net charge-offs % (qtr. annualized)

     0.25     0.14     0.24

Allowance / charge-offs

     3.23x       2.31x       3.21x  
  

 

 

   

 

 

   

 

 

 
     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 meaningful

Loans are expressed net of unearned income.

(a) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.

 

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Commercial Real Estate

The CRE portfolio was $2.2 billion on June 30, 2017. The CRE portfolio includes both financings for commercial construction and nonconstruction loans. This portfolio is segregated between the income-producing CRE class which contains loans, draws on lines and letters of credit to commercial real estate developers for the construction and mini-permanent financing of income-producing real estate, and the residential CRE class. Subcategories of income CRE consist of multi-family (31 percent), retail (23 percent), office (17 percent), hospitality (13 percent), industrial (12 percent), and other (4 percent).

The residential CRE class includes loans to residential builders 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 as of June 30, 2017, with nonperforming loans down $1.1 million from December 31, 2016, net recoveries in second quarter 2017, and minimal past due activity. The allowance decreased $3.4 million from December 31, 2016, to $30.5 million as of June 30, 2017. Allowance as a percentage of loans decreased 21 basis points from December 31, 2016, to 1.38 percent as of June 30, 2017. Nonperforming loans as a percentage of total CRE loans improved 6 basis points from year-end to .07 percent as of June 30, 2017. Accruing delinquencies as a percentage of period-end loans remained flat compared to year-end at .01 percent as of June 30, 2017. FHN recognized net recoveries of $.1 million in second quarter 2017 compared to $.9 million in second quarter 2016. The following table shows commercial real estate asset quality trends by segment.

 

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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 April 1

   $ 30,888     $ —       $ 30,888  

Charge-offs

     (20     —         (20

Recoveries

     126       14       140  

Provision/(provision credit) for loan losses

     (524     (14     (538
  

 

 

   

 

 

   

 

 

 

Allowance for loan losses as of June 30

   $ 30,470     $ —       $ 30,470  
  

 

 

   

 

 

   

 

 

 

Net charge-offs % (qtr. annualized)

     NM       NM       NM  

Allowance / charge-offs

     NM       NM       NM  
  

 

 

   

 

 

   

 

 

 
     As of June 30  

Period-end loans

   $ 2,211,996     $ —       $ 2,211,996  

Nonperforming loans

     1,650       —         1,650  

Troubled debt restructurings

     3,023       —         3,023  
  

 

 

   

 

 

   

 

 

 

30+ Delinq. % (a)

     0.01     —       0.01

NPL %

     0.07       —         0.07  

Allowance / loans %

     1.38       —         1.38  
  

 

 

   

 

 

   

 

 

 
     2016  
     Three months ended  

(Dollars in thousands)

   Regional Bank     Non-Strategic     Consolidated  

Allowance for loan losses as of April 1

   $ 25,626     $ —       $ 25,626  

Charge-offs

     (51     —         (51

Recoveries

     764       145       909  

Provision/(provision credit) for loan losses

     3,925       (145     3,780  
  

 

 

   

 

 

   

 

 

 

Allowance for loan losses as of June 30

   $ 30,264     $ —       $ 30,264  
  

 

 

   

 

 

   

 

 

 

Net charge-offs % (qtr. annualized)

     NM       NM       NM  

Allowance / 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.

 

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CONSUMER LOAN PORTFOLIOS

Consumer Real Estate

The consumer real estate portfolio was $4.4 billion on June 30, 2017, and is primarily composed of home equity lines and installment loans including restricted balances (loans consolidated under ASC 810). The largest geographical concentrations of balances as of June 30, 2017, are in Tennessee (71 percent), California (4 percent), and North Carolina (4 percent) with no other state representing more than 3 percent of the portfolio. As of June 30, 2017, approximately 73 percent of the consumer real estate portfolio was in a first lien position. At origination, weighted average FICO score of this portfolio was 751 and refreshed FICO scores averaged 749 as of June 30, 2017, as compared to 750 and 747, respectively, as of December 31, 2016. Generally, performance of this portfolio is affected by life events that affect borrowers’ finances, the level of unemployment, and home prices.

Home equity lines of credit (“HELOCs”) comprise $1.5 billion of the consumer real estate portfolio as of June 30, 2017. FHN’s HELOCs typically have a 5 or 10 year draw period followed by a 10 or 20 year repayment period, respectively. During the draw period, a borrower is able to draw on the line and is only required to make interest payments. The line is automatically frozen if a borrower becomes 45 days or more past due on payments. Once the draw period has concluded, the line is closed and the borrower is required to make both principal and interest payments monthly until the loan matures. The principal payment generally is fully amortizing, but payment amounts will adjust when variable rates reset to reflect changes in the prime rate.

As of June 30, 2017, and December 31, 2016, approximately 62 percent of FHN’s HELOCs are in the draw period. Based on when draw periods are scheduled to end per the line agreement, it is expected that $437.4 million, or 46 percent of HELOCs currently in the draw period, will enter the repayment period during the next 60 months. Delinquencies and charge-off rates for HELOCs that have entered the repayment period are initially higher than HELOCs still in the draw period because of the increased minimum payment requirement; however, after some seasoning, performance of these loans usually begins to stabilize. The home equity lines of the consumer real estate portfolio are being monitored closely for those nearing the end of the draw period and borrowers are initially being contacted at least 24 months before the repayment period begins to remind the customer of the terms of their agreement and to inform them of options. The following table shows the HELOCs currently in the draw period and expected timing of conversion to the repayment period.

Table 13—HELOC Draw To Repayment Schedule

 

     June 30, 2017     December 31, 2016  
(Dollars in thousands)    Repayment
Amount
     Percent     Repayment
Amount
     Percent  

Months remaining in draw period:

          

0-12

   $ 169,157        18   $ 212,665        20

13-24

     78,637        8       127,662        12  

25-36

     54,758        6       73,331        7  

37-48

     64,116        7       68,768        6  

49-60

     70,760        7       68,792        7  

>60

     507,933        54       514,126        48  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 945,361        100   $ 1,065,344        100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Consumer Real Estate Asset Quality Trends

Overall, performance of the consumer real estate portfolio remained strong in second 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 2 basis points from year-end to .54 percent as of June 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 $4.3 million from December 31, 2016, to $46.1 million as of June 30, 2017, with the majority of the decline attributable to the non-strategic segment. The allowance as a percentage of loans declined 7 basis points to 1.04 percent as of June 30, 2017, compared to year-end. The balance of nonperforming loans declined $7.6 million to $75.2 million on June 30, 2017. Loans delinquent 30 or more days and still accruing declined from $42.1 million as of December 31, 2016, to $35.8 million as of June 30, 2017. The portfolio realized net recoveries of $1.2 million in second quarter 2017 compared to net recoveries of $2.2 million in fourth quarter 2016 and net charge-offs of $.5 million in second quarter 2016. The following table shows consumer real estate asset quality trends by segment.

 

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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 April 1

   $ 19,204     $ 30,476     $ 49,680  

Charge-offs

     (793     (3,158     (3,951

Recoveries

     1,343       3,800       5,143  

Provision/(provision credit) for loan losses

     (1,873     (2,930     (4,803
  

 

 

   

 

 

   

 

 

 

Allowance for loan losses as of June 30

   $ 17,881     $ 28,188     $ 46,069  
  

 

 

   

 

 

   

 

 

 

Net charge-offs % (qtr. annualized)

     NM       NM       NM  

Allowance / charge-offs

     NM       NM       NM  
  

 

 

   

 

 

   

 

 

 
     As of June 30  

Period-end loans

   $ 3,694,736     $ 722,723     $ 4,417,459  

Nonperforming loans

     19,951       55,224       75,175  

Troubled debt restructurings

     45,559       92,440       137,999  
  

 

 

   

 

 

   

 

 

 

30+ Delinq. % (a)

     0.46     2.62     0.81

NPL %

     0.54       7.64       1.70  

Allowance / loans %

     0.48       3.90       1.04  
  

 

 

   

 

 

   

 

 

 
     2016  
     Three months ended  

(Dollars in thousands)

   Regional Bank     Non-Strategic     Consolidated  

Allowance for loan losses as of April 1

   $ 26,602     $ 40,719     $ 67,321  

Charge-offs

     (1,487     (5,095     (6,582

Recoveries

     1,700       4,382       6,082  

Provision/(provision credit) for loan losses

     (2,537     (5,203     (7,740
  

 

 

   

 

 

   

 

 

 

Allowance for loan losses as of June 30

   $ 24,278     $ 34,803     $ 59,081  
  

 

 

   

 

 

   

 

 

 

Net charge-offs % (qtr. annualized)

     NM       0.26     0.04

Allowance / charge-offs

     NM       12.14x       29.40x  
  

 

 

   

 

 

   

 

 

 
     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 meaningful

Loans are expressed net of unearned income.

(a) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.

 

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Permanent Mortgage

The permanent mortgage portfolio was $.4 billion on June 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 20 percent of loan balances as of June 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 $15.0 million net decrease in permanent mortgage period-end balances from December 31, 2016, to June 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 increased $.1 million as of June 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 72 percent of the ALLL for the permanent mortgage portfolio as of June 30, 2017. Consolidated accruing delinquencies as a percentage of total loans increased 21 basis points from year-end to 2.57 percent as of June 30, 2017. Nonperforming loans increased slightly from December 31, 2016, to $27.8 million as of June 30, 2017. The portfolio experienced net charge-offs of $.4 million in second quarter 2017 compared to net recoveries of $.1 million in second quarter 2016. The following table shows permanent mortgage asset quality trends by segment.

 

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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 April 1

   $ 1,857       N/A     $ 14,036     $ 15,893  

Charge-offs

     —         N/A       (843     (843

Recoveries

     —         N/A       488       488  

Provision/(provision credit) for loan losses

     124       N/A       736       860  
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses as of June 30

   $ 1,981       N/A     $ 14,417     $ 16,398  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs % (qtr. annualized)

     —       N/A       0.56     0.35

Allowance / charge-offs

     NM       N/A       10.13x       11.52x  
  

 

 

   

 

 

   

 

 

   

 

 

 
     As of June 30  

Period-end loans

   $ 96,769     $ 62,708     $ 248,618     $ 408,095  

Nonperforming loans

     381       1,819       25,604       27,804  

Troubled debt restructurings

     937       4,251       80,725       85,913  
  

 

 

   

 

 

   

 

 

   

 

 

 

30+ Delinq. % (b)

     0.49     6.52     2.38     2.57

NPL %

     0.39       2.90       10.30       6.81  

Allowance / loans %

     2.05       N/A       5.80       4.02  
  

 

 

   

 

 

   

 

 

   

 

 

 
     2016  
     Three months ended  

(Dollars in thousands)

   Regional Bank     Corporate (a)     Non-Strategic     Consolidated  

Allowance for loan losses as of April 1

   $ 383       N/A     $ 18,371     $ 18,754  

Charge-offs

     —         N/A       (349     (349

Recoveries

     —         N/A       484       484  

Provision/(provision credit) for loan losses

     196       N/A       (1,485     (1,289
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses as of June 30

   $ 579       N/A     $ 17,021     $ 17,600  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs % (qtr. annualized)

     —       N/A       NM       NM  

Allowance / charge-offs

     NM       N/A       NM       NM  
  

 

 

   

 

 

   

 

 

   

 

 

 
     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 meaningful

Loans are expressed net of unearned income.

(a) An allowance has not been established for these loans as the valuation adjustment taken upon exercise of clean-up calls included expected losses.
(b) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.

 

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Credit Card and Other

The credit card and other portfolio, which is primarily within the regional banking segment, was $.4 billion as of June 30, 2017, and primarily includes credit card receivables, other consumer-related credits, and automobile loans. The allowance decreased to $11.9 million as of June 30, 2017, from $12.2 million as of December 31, 2016. Loans 30 days or more delinquent and accruing as a percentage of loans decreased 25 basis points from December 31, 2016, to .92 percent as of June 30, 2017. In second quarter 2017, FHN recognized $2.4 million of net charge-offs in the credit card and other portfolio, compared to $2.5 million in second quarter 2016. The following table shows credit card and other asset quality trends by segment.

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 April 1

   $ 12,394     $ 6     $ 12,400  

Charge-offs

     (3,084     (67     (3,151

Recoveries

     678       70       748  

Provision/(provision credit) for loan losses

     1,929       15       1,944  
  

 

 

   

 

 

   

 

 

 

Allowance for loan losses as of June 30

   $ 11,917     $ 24     $ 11,941  
  

 

 

   

 

 

   

 

 

 

Net charge-offs % (qtr. annualized)

     2.77     NM       2.71

Allowance / charge-offs

     1.24x       NM       1.24x  
  

 

 

   

 

 

   

 

 

 
     As of June 30  

Period-end loans

   $ 346,791     $ 6,759     $ 353,550  

Nonperforming loans

     —         130       130  

Troubled debt restructurings

     329       31       360  
  

 

 

   

 

 

   

 

 

 

30+ Delinq. % (a)

     0.90     1.95     0.92

NPL %

     —         1.93       0.04  

Allowance / loans %

     3.44       0.35       3.38  
  

 

 

   

 

 

   

 

 

 
     2016  
     Three months ended  

(Dollars in thousands)

   Regional Bank     Non-Strategic     Consolidated  

Allowance for loan losses as of April 1

   $ 11,005     $ 441     $ 11,446  

Charge-offs

     (3,355     (90     (3,445

Recoveries

     929       63       992  

Provision/(provision credit) for loan losses

     3,054       (157     2,897  
  

 

 

   

 

 

   

 

 

 

Allowance for loan losses as of June 30

   $ 11,633     $ 257     $ 11,890  
  

 

 

   

 

 

   

 

 

 

Net charge-offs % (qtr. annualized)

     2.77     1.15     2.73

Allowance / charge-offs

     1.19x       2.41x       1.21x  
  

 

 

   

 

 

   

 

 

 
     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 meaningful

Loans are expressed net of unearned income.

(a) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.

 

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The following table provides additional asset quality data by loan portfolio:

Table 17—Asset Quality by Portfolio

 

     June 30     December 31  
     2017     2016  

Key Portfolio Details

    

C&I

    

Period-end loans ($ millions)

   $ 12,598     $ 12,148  

30+ Delinq. % (a)

     0.03     0.08

NPL %

     0.20       0.27  

Charge-offs % (qtr. annualized)

     0.04       NM  

Allowance / loans %

     0.73     0.74

Allowance / charge-offs

     18.21x       NM  

Commercial Real Estate

    

Period-end loans ($ millions)

   $ 2,212     $ 2,136  

30+ Delinq. % (a)

     0.01     0.01

NPL %

     0.07       0.13  

Charge-offs % (qtr. annualized)

     NM       0.09  

Allowance / loans %

     1.38     1.59

Allowance / charge-offs

     NM       17.56x  

Consumer Real Estate

    

Period-end loans ($ millions)

   $ 4,417     $ 4,524  

30+ Delinq. % (a)

     0.81     0.93

NPL %

     1.70       1.83  

Charge-offs % (qtr. annualized)

     NM       NM  

Allowance / loans %

     1.04     1.11

Allowance / charge-offs

     NM       NM  

Permanent Mortgage

    

Period-end loans ($ millions)

   $ 408     $ 423  

30+ Delinq. % (a)

     2.57     2.36

NPL %

     6.81       6.42  

Charge-offs % (qtr. annualized)

     0.35       NM  

Allowance / loans %

     4.02     3.85

Allowance / charge-offs

     11.52x       NM  

Credit Card and Other

    

Period-end loans ($ millions)

   $ 354     $ 359  

30+ Delinq. % (a)

     0.92     1.17

NPL %

     0.04       0.04  

Charge-offs % (qtr. annualized)

     2.71       3.25  

Allowance / loans %

     3.38     3.39

Allowance / charge-offs

     1.24x       1.04x  

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.

 

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Allowance for Loan Losses

Management’s policy is to maintain the ALLL at a level sufficient to absorb estimated probable incurred losses in the loan portfolio. The total allowance for loan losses decreased to $197.3 million on June 30, 2017, from $202.1 million on December 31, 2016. The ALLL as of June 30, 2017, reflects strong asset quality with the consumer real estate portfolio continuing to stabilize, historically low levels of net charge-offs, and declining non-strategic balances. The ratio of allowance for loan losses to total loans, net of unearned income, decreased to .99 percent on June 30, 2017, from 1.03 percent on December 31, 2016.

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. The provision for loan losses was a credit of $2.0 million in second quarter 2017 compared to expense of $4.0 million in second 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. Second quarter 2017 experienced net charge-offs of $2.7 million compared to $8.2 million of net charge-offs in second quarter 2016.

The commercial portfolio experienced $1.1 million of net charge-offs in second quarter 2017 compared to $5.4 million in second quarter 2016. In addition, the consumer real estate portfolio experienced net recoveries of $1.2 million in second quarter 2017 compared to $.5 million in net charge-offs during second quarter 2016. Permanent mortgage and credit card and other remained relatively flat compared to a year ago.

Nonperforming Assets

Nonperforming loans are loans placed on nonaccrual if it becomes evident that full collection of principal and interest is at risk, impairment has been recognized as a partial charge-off of principal balance due to insufficient collateral value and past due status, or on a case-by-case basis if FHN continues to receive payments, but there are other borrower-specific issues. Included in nonaccruals are loans in which FHN continues to receive payments, including residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy and second liens, regardless of delinquency status, behind first liens that are 90 or more days past due, are bankruptcies, or are TDRs. These, along with foreclosed real estate, excluding foreclosed real estate from government insured mortgages, represent nonperforming assets (“NPAs”).

Total nonperforming assets (including NPLs HFS) decreased to $144.1 million on June 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 foreclosed real estate and other assets) decreased to .68 percent as of June 30, 2017, compared to .80 percent as of December 31, 2016. Portfolio nonperforming loans declined $15.9 million from December 31, 2016, to $129.8 million on June 30, 2017. The decline in nonperforming loans was primarily driven by decreases within the C&I and consumer real estate portfolios. This decrease in the C&I portfolio was largely driven by payoffs.

The ratio of the ALLL to NPLs in the loan portfolio was 1.52 times as of June 30, 2017, compared to 1.39 times as of December 31, 2016. Certain nonperforming loans in both the commercial and consumer portfolios are deemed collateral-

 

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dependent and are charged down to an estimate of collateral value less costs to sell. Because loss content has been recognized through a partial charge-off, typically reserves are not recorded.

Table 18 provides an activity rollforward of foreclosed real estate balances for June 30, 2017 and 2016. The balance of foreclosed real estate, exclusive of inventory from government insured mortgages, decreased to $7.0 million as of June 30, 2017, from $14.2 million as of June 30, 2016, as FHN has executed sales of existing foreclosed assets and continued efforts to avoid foreclosures by restructuring loans and working with borrowers. Additionally, property values have stabilized which also affect the balance of foreclosed real estate.

Table 18—Rollforward of Foreclosed Real Estate

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 

(Dollars in thousands)

   2017      2016      2017      2016  

Beginning balance

   $ 10,259      $ 17,460      $ 11,235      $ 24,977  

Valuation adjustments

     (176      (314      (621      (850

New foreclosed property

     1,741        2,814        2,846        3,546  

Disposals:

           

Single transactions

     (4,786      (5,810      (6,422      (13,523
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance, June 30 (a)

   $ 7,038      $ 14,150      $ 7,038      $ 14,150  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Excludes foreclosed real estate and receivables related to government insured mortgages of $6.4 million and $7.1 million as of June 30, 2017 and 2016, respectively.

 

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The following table provides consolidated asset quality information for the three months ended June 30, 2017 and 2016, and as of June 30, 2017, and December 31, 2016:

Table 19—Asset Quality Information

 

     Three Months Ended
June 30
 

(Dollars in thousands)

   2017      2016  

Allowance for loan losses:

         

Beginning balance on April 1

   $ 201,968        $ 204,034    

Provision/(provision credit) for loan losses

     (2,000        4,000    

Charge-offs

     (9,830        (18,296  

Recoveries

     7,119          10,069    
  

 

 

      

 

 

   

Ending balance on June 30

   $ 197,257        $ 199,807    
  

 

 

      

 

 

   

Reserve for remaining unfunded commitments

     5,554          5,351    

Total allowance for loan losses and reserve for unfunded commitments

   $ 202,811        $ 205,158    
  

 

 

      

 

 

   

Key ratios

         

Allowance / net charge-offs (a)

     18.14x          6.04x    

Net charge-offs % (b)

     0.06        0.19  
     As of June 30      As of December 31  
     2017      2016  

Nonperforming Assets by Segment

Regional Banking:

         

Nonperforming loans (c)

   $ 43,012        $ 50,653    

Foreclosed real estate (d)

     3,266          5,081    
  

 

 

      

 

 

   

Total Regional Banking

     46,278          55,734    
  

 

 

      

 

 

   

Non-Strategic:

         

Nonperforming loans (c)

     84,959          93,808    

Nonperforming loans held-for-sale net of fair value adjustment (c)

     7,321          7,741    

Foreclosed real estate (d)

     3,772          6,154    
  

 

 

      

 

 

   

Total Non-Strategic

     96,052          107,703    
  

 

 

      

 

 

   

Corporate:

         

Nonperforming loans (c)

     1,819          1,186    
  

 

 

      

 

 

   

Total Corporate

     1,819          1,186    
  

 

 

      

 

 

   

Total nonperforming assets (c) (d)

   $ 144,149        $ 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 foreclosed real estate from government-insured mortgages.

 

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     As of June 30     As of December 31  
     2017     2016  

Loans and commitments:

    

Total period-end loans, net of unearned income

   $ 19,989,319     $ 19,589,520  

Potential problem assets (a)

     285,395       290,354  

Loans 30 to 89 days past due

     30,871       42,570  

Loans 90 days past due (b) (c)

     22,403       23,385  

Loans held-for-sale 30 to 89 days past due (d)

     25,571       6,462  

Loans held-for-sale 30 to 89 days past due—guaranteed portion (d) (e)

     25,489       6,248  

Loans held-for-sale 90 days past due (c) (d)

     15,406       14,868  

Loans held-for-sale 90 days past due—guaranteed portion (c) (d) (e)

     15,271       14,657  

Remaining unfunded commitments

   $ 8,871,103     $ 8,744,649  

Key ratios

    

Allowance / loans %

     0.99     1.03

Allowance / NPL

     1.52x       1.39x  

NPA % (f)

     0.68     0.80

NPL %

     0.65     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, and GNMA loans repurchased through the GNMA buyout program.
(f) Ratio is non-performing assets related to the loan portfolio to total loans plus foreclosed real estate and other assets.

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. Loans in the portfolio that are 90 days or more past due and still accruing were $22.4 million on June 30, 2017, compared to $23.4 million on December 31, 2016. Loans 30 to 89 days past due decreased to $30.9 million on June 30, 2017, from $42.6 million on December 31, 2016.

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 OCC for loans classified as substandard. Potential problem assets in the loan portfolio were $285.4 million on June 30, 2017, $290.4 million on December 31, 2016, and $234.3 million on June 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. 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 losses.

Troubled Debt Restructuring and Loan Modifications

As part of FHN’s ongoing risk management practices, FHN attempts to work with borrowers when appropriate to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. In a situation where an economic concession has been granted to a borrower that is experiencing financial difficulty, FHN identifies and reports that loan as a Troubled Debt Restructuring (“TDR”). See Note 4 – Loans for further discussion regarding TDRs and loan modifications.

On June 30, 2017 and December 31, 2016, FHN had $252.7 million and $285.2 million portfolio loans classified as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reserves of $42.1 million and $44.9 million, or 17 percent and

 

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16 percent of TDR balances, as of June 30, 2017 and December 31, 2016, respectively. Additionally, FHN had $66.1 million and $69.3 million of HFS loans classified as TDRs as of June 30, 2017 and December 31, 2016, respectively. Total held-to-maturity TDRs decreased by $32.4 million with the majority of the decline attributable to consumer real estate 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 June 30, 2017 and December 31, 2016:

Table 20—Troubled Debt Restructurings

 

(Dollars in thousands)    As of
June 30, 2017
     As of
December 31, 2016
 

Held-to-maturity:

     

Permanent mortgage:

     

Current

   $ 64,591      $ 73,500  

Delinquent

     2,413        2,751  

Non-accrual (a)

     18,909        17,675  
  

 

 

    

 

 

 

Total permanent mortgage

     85,913        93,926  
  

 

 

    

 

 

 

Consumer real estate:

     

Current

     92,303        100,383  

Delinquent

     3,066        4,618  

Non-accrual (b)

     42,630        48,459  
  

 

 

    

 

 

 

Total consumer real estate

     137,999        153,460  
  

 

 

    

 

 

 

Credit card and other:

     

Current

     336        288  

Delinquent

     24        18  

Non-accrual

     —          —    
  

 

 

    

 

 

 

Total credit card and other

     360        306  
  

 

 

    

 

 

 

Commercial loans:

     

Current

     17,055        21,887  

Delinquent

     303        —    

Non-accrual

     11,076        15,571  
  

 

 

    

 

 

 

Total commercial loans

     28,434        37,458  
  

 

 

    

 

 

 

Total held-to-maturity

   $ 252,706      $ 285,150  
  

 

 

    

 

 

 

Held-for-sale:

     

Current

   $ 47,877      $ 46,625  

Delinquent

     12,671        16,436  

Non-accrual

     5,586        6,283  
  

 

 

    

 

 

 

Total held-for-sale

     66,134        69,344  
  

 

 

    

 

 

 

Total troubled debt restructurings

   $ 318,840      $ 354,494  
  

 

 

    

 

 

 

 

(a) Balances as of June 30, 2017 and December 31, 2016, include $5.9 million and $5.3 million, respectively, of discharged bankruptcies.
(b) Balances as of June 30, 2017 and December 31, 2016, include $13.9 million and $15.3 million, respectively, of discharged bankruptcies.

RISK MANAGEMENT

Except as discussed below, there have been no significant changes to FHN’s risk management practices as described under “Risk Management” beginning on page 47 of Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

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MARKET 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 percent confidence level and 1-day and 10-day time horizons. Additionally, FHN computes a Stressed VaR (“SVaR”) measure. The SVaR computation uses the same model but with model inputs reflecting historical data from a continuous 12-month period that reflects a period of significant financial stress appropriate for our trading securities portfolio.

A summary of FHN’s VaR and SVaR measures for 1-day and 10-day time horizons is as follows:

Table 21—VaR and SVaR Measures

A summary of FHN’s VaR and SVaR measures for 1-day and 10-day time horizons is as follows:

 

     Three Months Ended
June 30, 2017
     Six Months Ended
June 30, 2017
     As of
June 30, 2017
 

(Dollars in thousands)

   Mean      High      Low      Mean      High      Low         

1-day

                    

VaR

   $ 1,668      $ 2,394      $ 1,210      $ 1,365      $ 2,394      $ 779      $ 1,605  

SVaR

     4,436        6,284        3,217        3,745        6,284        1,775        3,217  

10-day

                    

VaR

     3,644        5,251        2,503        3,249        5,712        1,759        4,009  

SVaR

     15,686        24,550        11,176        12,568        24,550        4,916        11,176  
     Three Months Ended
June 30, 2016
     Six Months Ended
June 30, 2016
     As of
June 30, 2016
 

(Dollars in thousands)

   Mean      High      Low      Mean      High      Low         

1-day

                    

VaR

   $ 767      $ 1,248      $ 446      $ 746      $ 1,411      $ 393      $ 846  

SVaR

     3,983        5,298        2,398        3,496        5,789        1,748        3,469  

10-day

                    

VaR

     1,892        3,954        898        1,813        4,058        751        1,866  

SVaR

     12,826        17,987        8,026        11,326        17,987        3,263        10,376  
                          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  

FHN’s overall VaR measure includes both interest rate risk and credit spread risk. Separate measures of these component risks are as follows:

 

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Table 22—Schedule of Risks Included in VaR

 

     As of June 30, 2017      As of June 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

   $ 1,194      $ 4,664      $ 744      $ 975      $ 917      $ 1,771  

Credit spread risk

     433        570        754        1,666        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 division procures fixed income securities for purposes of distribution to customers, its trading securities inventory turns over multiple times daily, on average. Additionally, Fixed Income traders actively manage the trading securities inventory continuously throughout each trading day. Accordingly, FHN’s trading securities inventory is highly dynamic, rather than static. As a result, it would be rare for Fixed Income to incur a negative revenue day in its fixed income activities of the level indicated by its VaR measurements.

In addition to being used in FHN’s daily market risk management process, the VaR and SVaR measures are also used by FHN in computing its regulatory market risk capital requirements in accordance with the Market Risk Capital rules. For additional information regarding FHN’s capital adequacy refer to the “Capital” section of this MD&A.

FHN also performs stress tests on its trading securities portfolio to calculate the potential loss under various assumed market scenarios. Key assumed stresses used in those tests are:

Down 25 bps —assumes an instantaneous downward move in interest rates of 25 basis points at all points on the interest rate yield curve.

Up 25 bps —assumes an instantaneous upward move in interest rates of 25 basis points at all points on the interest rate yield curve.

Curve flattening —assumes an instantaneous flattening of the interest rate yield curve through an increase in short-term rates and a decrease in long-term rates. The 2-year point on the Treasury yield curve is assumed to increase 15 basis points and the 10-year point on the Treasury yield curve is assumed to decrease 15 basis points. Shifts in other points on the yield curve are predicted based on their correlation to the 2-year and 10-year points.

Curve steepening —assumes an instantaneous steepening of the interest rate yield curve through a decrease in short-term rates and an increase in long-term rates. The 2-year point on the Treasury yield curve is assumed to decrease 15 basis points and the 10-year point on the Treasury yield curve is assumed to increase 15 basis points. Shifts in other points on the yield curve are predicted based on their correlation to the 2-year and 10-year points.

Credit spread widening —assumes an instantaneous increase in credit spreads (the difference between yields on Treasury securities and non-Treasury securities) of 25 basis points.

Model Validation

Trading risk management personnel within Fixed Income have primary responsibility for model risk management with respect to the model used by FHN to compute its VaR measures and perform stress testing on the trading inventory. Among other procedures, these personnel monitor model results and perform periodic backtesting as part of an ongoing process of validating the accuracy of the model. These model risk management activities are subject to annual review by FHN’s Model Validation Group, an independent assurance group charged with oversight responsibility for FHN’s model risk management.

INTEREST RATE RISK MANAGEMENT

Except as disclosed below, there have been no significant changes to FHN’s interest rate risk management practices as described under “Interest 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.

 

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Net Interest Income Simulation Analysis

The information provided in this section, including the discussion regarding the outcomes of simulation analysis and rate shock analysis, is forward-looking. Actual results, if the assumed scenarios were to occur, could differ because of interest rate movements, the ability of management to execute its business plans, and other factors, including those presented in the Forward-Looking Statements section of this MD&A.

Management uses a simulation model to measure interest rate risk and to formulate strategies to improve balance sheet positioning, earnings, or both, within FHN’s interest rate risk, liquidity, and capital guidelines. Interest rate exposure is measured by forecasting 12 months of NII under various interest rate scenarios and comparing the percentage change in NII for each scenario to a base case scenario where interest rates remain unchanged. Assumptions are made regarding future balance sheet composition, interest rate movements, and loan and deposit pricing. In addition, assumptions are made about the magnitude of asset prepayments and earlier than anticipated deposit withdrawals. The results of these scenarios help FHN develop strategies for managing exposure to interest rate risk. While management believes the assumptions used and scenarios selected in its simulations are reasonable, simulation modeling provides only an estimate, not a precise calculation, of exposure to any given change in interest rates.

Based on a static balance sheet as of June 30, 2017, net interest income exposure over the next 12 months assuming a rate shock of plus 25 basis points, 50 basis points, 100 basis points, and 200 basis points is estimated to have a favorable variance of 1.3 percent, 2.6 percent, 4.0 percent, and 7.7 percent, respectively of base net interest income. A steepening yield curve scenario where long-term rates increase by 50 basis points and short-term rates are static, results in a favorable variance in net interest income of 1.1 percent of base net interest income. A flattening yield curve scenario where long-term rates decrease by 50 basis points and short-term rates are static, results in an unfavorable 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 1.6 percent and 3.8 percent, respectively, of base net interest income. 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. As of June 30, 2017, any scenarios that indicated a change in net interest income of 3 percent or more from base net interest income were reported to the Board quarterly.

CAPITAL MANAGEMENT AND ADEQUACY

There have been no significant changes 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.

In second quarter 2017, FHN established a Merger Project Office to manage the execution risk in connection with FHN’s proposed Capital Bank merger. The Office has been staffed and an external consultant hired to assist FHN. In addition, the focus of the Investment Rationalization Board has shifted to this project and any other high priority projects.

COMPLIANCE RISK MANAGEMENT

There have been no significant changes to FHN’s compliance risk management practices as described under “Compliance Risk Management” on page 52 of Exhibit 13 to FHN’s Annual Report on Form 10-K 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. 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

 

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ability to meet both expected and unexpected cash and collateral needs. Key liquidity ratios, asset liquidity levels and the amount available from funding sources are reported to ALCO on a regular basis. FHN’s Liquidity Policy establishes liquidity limits that are deemed appropriate for FHN’s risk profile.

In accordance with the Liquidity Policy, ALCO manages FHN’s exposure to liquidity risk through a dynamic, real time forecasting methodology. Base liquidity forecasts are reviewed by ALCO and are updated as financial conditions dictate. In addition to the baseline liquidity reports, robust stress testing of assumptions and funds availability are periodically reviewed. FHN maintains a contingency funding plan that may be executed, should unexpected difficulties arise in accessing funding that affects FHN, the industry as a whole, or both. Subject to market conditions and compliance with applicable regulatory requirements from time to time, funds are available from a number of sources including the available-for-sale securities portfolio, dealer and commercial customer repurchase agreements, access to the overnight and term Federal Funds markets, incremental borrowing capacity at the FHLB ($2.2 billion was available at June 30, 2017), brokered deposits, loan sales, syndications, and access to the Federal Reserve Banks.

Core deposits are a significant source of funding and have historically been a stable source of liquidity for banks. Generally, core deposits represent funding from a financial institution’s customer base which provide inexpensive, predictable pricing. The Federal Deposit Insurance Corporation insures these deposits to the extent authorized by law. Generally, these limits are $250 thousand per account owner for interest bearing and non-interest bearing accounts. The ratio of total loans, excluding loans HFS and restricted real estate loans, to core deposits was 102 percent on June 30, 2017 compared to 105 percent on December 31, 2016.

FHN also may use unsecured short-term borrowings as a source of liquidity. Currently, the largest concentration of unsecured borrowings is federal funds purchased from bank correspondent customers. These funds are considered to be substantially more stable than funds purchased in the national broker markets for federal funds due to the long, historical, and reciprocal nature of banking services provided by FHN to these correspondent banks. The remainder of FHN’s wholesale short-term borrowings is securities sold under agreements to repurchase transactions accounted for as secured borrowings with Regional Banking’s business customers or Fixed Income’s broker dealer counterparties.

Both FHN and 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 FTBNA have the ability to generate liquidity by issuing preferred equity, and (for FHN) by issuing common equity, subject to market conditions and compliance with applicable regulatory requirements. In January 2013, FHN issued $100 million of Non-Cumulative Perpetual Preferred Stock, Series A. As of June 30, 2017, FTBNA and subsidiaries had outstanding preferred shares of $295.4 million, which are reflected as noncontrolling interest on the Consolidated Condensed Statements of Condition.

Parent company liquidity is primarily provided by cash flows stemming from dividends and interest payments collected from subsidiaries. These sources of cash represent the primary sources of funds to pay cash dividends to shareholders and principal and interest to debt holders of FHN. The amount paid to the parent company through 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 applicable rules, FTBNA’s total amount available for dividends was negative $61.3 million as of June 30, 2017 compared to negative $132.5 million as of December 31, 2016. Consequently, FTBNA could not pay common dividends to its sole common stockholder, FHN, or to its preferred shareholders without prior regulatory approval. FTBNA applied for and received approval from the OCC to declare and pay common dividends to FHN in first, second and third quarter 2017 in the amounts of $40 million, $50 million, and $80 million, respectively, and in the amount of $250 million in 2016. FTBNA

 

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declared and paid preferred dividends in first and second quarter 2017 and each quarter of 2016, with OCC approval as necessary. Additionally, FTBNA declared preferred dividends in third quarter 2017, with OCC approval.

Payment of a dividend to shareholders of FHN is dependent on several factors which are considered by the Board. These factors include FHN’s current and prospective capital, liquidity, and other needs, applicable regulatory restrictions, and also availability of funds to FHN through a dividend from FTBNA. Additionally, the Federal Reserve and the OCC 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 per common share on July 3, 2017, and in July 2017 the Board approved a $.09 per common share cash dividend payable on October 2, 2017, to shareholders of record on September 8, 2017. FHN paid a cash dividend of $1,550.00 per preferred share on July 10, 2017, and in July 2017 the Board approved a $1,550.00 per preferred share cash dividend payable on October 10, 2017, to shareholders of record on September 22, 2017.

CASH FLOWS

The Consolidated Condensed Statements of Cash Flows provide information on cash flows from operating, investing, and financing activities for the six months ended June 30, 2017 and 2016. The level of cash and cash equivalents increased $41.3 million during the first half of 2017 compared to an increase of $174.9 million in the second half of 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 $523.1 million in the first half of 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 $41.3 million in the first half of 2017, as loan growth and cash paid to acquire Coastal, was partially offset by a $490.5 million decrease in interest bearing cash. Net cash used by operating activities was $440.4 million in the first half of 2017. Operating cash decreased in the first half of 2017 primarily due to net cash outflows of $445.4 million related to fixed income trading activities, a $85.4 million increase in loans held-for-sale, and cash outflows of $51.3 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 $837.4 million in the first half of 2016. Financing cash inflows in 2016 were positively affected by a $663.2 million increase in deposits and a $562.7 million increase in short-term borrowings, but were partially offset by $259.9 million of long-term borrowings, which included the maturity of of $250 million of subordinated notes. Net cash used by investing activities was $639.0 million in the second half of 2016. In 2016, a $921.0 million increase in loans were partially offset by a $281.1 million decrease in interest-bearing cash. Net cash used by operating activities was $23.4 million in the first half of 2016. Operating cash decreased in the first half of 2016 primarily driven by net cash outflows of net fixed income trading activities of $148.7 million and net changes in operating assets and liabilities of $73.0 million.

REPURCHASE OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS, AND OTHER CONTRACTUAL OBLIGATIONS

Obligations from Legacy Mortgage Businesses

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

 

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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 obligations in several transactions, concluding in 2014.

Certain mortgage-related terms used in this section are defined in “Mortgage-Related Glossary” below.

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.

 

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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 for a discussion of certain actions pending against FHN in relation 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 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 is not significant and continues to be subserviced.

As servicer, FHN had contractual obligations to the owners of the loans (primarily GSEs) and securitization trustees to handle billing, custodial, and other tasks related to each loan. Each subservicer undertook to perform those obligations on FHN’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.

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 June 30, 2017, the remaining UPB of loans held in FH proprietary securitizations was $3.4 billion, comprised of $2.5 billion of Alt-A loans and $1.0 billion of Jumbo loans.

 

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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. During the last several years the active pipeline has steadily decreased, due in part to settlements and other resolutions, but also due to significant reductions in inflows. On June 30, 2017, the active pipeline was $51.4 million, relatively flat compared to $51.7 million on December 31, 2016.

 

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The following table provides a detail of the active pipeline as of June 30, 2017 and 2016:

Table 23—Active Pipeline

 

     June 30, 2017      December 31, 2016  

(Dollars in thousands)

   Number      Amount      Number      Amount  

Repurchase/make whole requests:

           

Agencies

     33      $ 5,706        23      $ 4,196  

Non-Agency whole loan-related

     121        18,442        126        19,214  

MI

     141        22,595        147        23,171  

Other requests (a)

     34        4,731        37        5,122  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     329      $ 51,474        333      $ 51,703  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Other requests typically include requests for additional information from both GSE and non-GSE purchasers.

On June 30, 2017, Agencies accounted for approximately 61 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 June 30, 2017, the active pipeline contained no loan repurchase or make-whole requests from the FH proprietary securitization trustee related to first lien mortgage loans based on claims related to breaches of representations and warranties related to origination.

Repurchase Accrual Methodology

Over the past several years FHN’s approach for determining the adequacy of the repurchase and foreclosure reserve has evolved, sometimes substantially, based on changes in information available. Repurchase/make-whole rates vary based on purchaser, vintage, and claim type. For those loans repurchased or covered by a make-whole payment, cumulative average loss severities range between 50 and 60 percent of the UPB.

Repurchase Accrual Approach

Repurchase/Make-whole and Damages obligations and estimates for probable incurred losses associated with loan populations excluded from the DRAs are significant components of FHN’s remaining repurchase liability as of June 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 the loss content of GSE loans subject to repurchase requests excluded from the DRAs (primarily loans included in bulk sales), 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, and 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 to the current UPB in the active pipeline to calculate estimated losses attributable to the current pipeline. FHN then uses an internal model to calculate loss content by applying historical average repurchase and loss severity rates to historical average inflows. For purposes of estimating loss content, FHN also considers MI cancellations. When assessing loss content related to loans where MI has been cancelled, FHN applies historical loss factors (including repurchase rates and loss severity ratios) to the total unresolved MI cancellations in the active pipeline, as well as applying these factors to historical average inflows to estimate loss content. Additionally, FHN identifies estimated losses related to MI curtailment requests. Management also evaluates the nature of claims from purchasers and/or servicers of loans sold to determine if qualitative adjustments are appropriate.

 

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Repurchase and Foreclosure Liability

The repurchase and foreclosure liability is comprised of reserves to cover estimated loss content in the active pipeline, as well as 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 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.

 

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The following table provides a rollforward of the legacy mortgage repurchase liability for the three and six months ended June 30, 2017 and 2016:

Table 24—Reserves for Repurchase and Foreclosure Losses

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 

(Dollars in thousands)

   2017      2016      2017      2016  

Legacy Mortgage

           

Beginning balance

   $ 64,777      $ 114,320      $ 65,309      $ 114,947  

Provision/(provision credit) for repurchase and foreclosure losses (a)

     (21,733      (31,400      (21,971      (31,400

Net realized losses

     (8,445      (15,537      (8,739      (16,164
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance on June 30

   $ 34,599      $ 67,383      $ 34,599      $ 67,383  
  

 

 

    

 

 

    

 

 

    

 

 

 

(a) Three and six months ended June 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 June 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 June 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 June 30, 2017, FHN’s repurchase and foreclosure liability included certain known exposures from other whole loans sold.

 

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Certain government entities have subpoenaed information from FHN and others. These entities include the FDIC (on behalf of certain failed banks) and the FHLBs of San Francisco, Atlanta, and Seattle, among others. These entities purport to act on behalf of several purchasers of FH proprietary securitizations, and of non-FH securitizations which included other whole loans sold. Collectively, the subpoenas seek information concerning: a number of FH proprietary securitizations and/or underlying loan originations; and originations of certain other whole loans sold which, in many cases, were included by the purchaser in its own securitizations. Some subpoenas fail to identify the specific investments made or loans at issue. Moreover, FHN has limited information regarding at least some of the loans under review. Unless and until a review (if related to specific loans) becomes an identifiable repurchase claim, the associated loans are not considered part of the active pipeline.

MARKET UNCERTAINTIES AND PROSPECTIVE TRENDS

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. economy and outlook, government actions affecting interest rates, and potential changes in federal policies. In addition, legacy matters in the non-strategic segment are likely to continue to impact FHN’s quarterly results in ways which are both difficult to predict and unrelated to current operations.

FHN has prioritized expense discipline to include reducing or controlling certain expenses and investing in revenue-producing activities and critical infrastructure. FHN has actively pursued acquisition opportunities while maintaining a disciplined approach to valuations; to date all which closed have been moderate in size. FHN has been and remains amenable to a much more impactful acquisition, including the recently announced acquisition of Capital Bank which will increase FHN’s proforma size to approximately $40 billion in assets. FHN remains committed to organic growth through customer retention, key hires, targeted incentives, and other traditional means.

Performance by FHN, and the entire U.S. financial services industry, is affected considerably by the overall health of the U.S. economy. The most recent recession ended in 2009. Growth during the economic expansion since 2009 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.

The Federal Reserve has raised short-term interest rates by 25 basis point during each of the last three quarters and has signaled a willingness to continue to raise rates in a measured fashion depending on economic data and trends. If the Fed continues to raise rates, FHN’s net interest margin in the future is likely to continue an improving trend. A steeper yield curve should also bolster activity within FHN’s Fixed Income business. However, if future economic data shows a risk of lower growth or recession, interest rates may stall or even fall, which likely would adversely impact FHN’s net interest margin. Falling and/or moderately volatile interest rates, however, should enhance activity within FHN’s Fixed Income business. Also, if Fed actions cause long-term rates to rise slower than short-term rates, then 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 legislative actions which currently seem the most likely to be impactful to FHN include corporate tax reform, general regulatory reform, and financial regulatory reform, all of which can affect the overall economy and FHN customers.

Lastly, while 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.

 

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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’s critical accounting policies as described in “Critical Accounting Policies” beginning on page 64 of Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

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ACCOUNTING CHANGES ISSUED BUT NOT CURRENTLY EFFECTIVE

Refer to Note 1 – Financial Information for a detail of accounting standards that have been issued but are not currently effective, which section is incorporated into MD&A by this reference.

 

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NON-GAAP INFORMATION

The following table provides a reconciliation of non-GAAP items presented in this MD&A to the most comparable GAAP presentation:

Table 25—Non-GAAP to GAAP Reconciliation

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 

(Dollars in thousands)

   2017     2016     2017     2016  

Average Tangible Common Equity (Non-GAAP)

        

Average total equity (GAAP)

   $ 2,778,169     $ 2,655,488     $ 2,750,571     $ 2,649,931  

Less: Average noncontrolling interest (a)

     295,431       295,431       295,431       295,431  

Less: Average preferred stock (a)

     95,624       95,624       95,624       95,624  
  

 

 

   

 

 

   

 

 

   

 

 

 

(A) Total average common equity

   $ 2,387,114     $ 2,264,433     $ 2,359,516     $ 2,258,876  

Less: Average intangible assets (GAAP) (b)

     281,326       215,556       246,734       216,205  
  

 

 

   

 

 

   

 

 

   

 

 

 

(B) Average Tangible Common Equity (Non-GAAP)

   $ 2,105,788     $ 2,048,877     $ 2,112,782     $ 2,042,671  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Available to Common Shareholders

        

(C) Net income available to common shareholders (annualized) (GAAP)

   $ 364,206     $ 227,395     $ 292,040     $ 209,847  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratios

        

(C)/(A) Return on average common equity (“ROE”) (GAAP) (c)

     15.26     10.04     12.38     9.29

(C)/(B) Return on average tangible common equity (“ROTCE”) (Non-GAAP) (d)

     17.30       11.10       13.82       10.27  

 

(a) Included in Total equity on the Consolidated Condensed Statements of Condition.

 

(b) Includes Goodwill and other intangible assets, net of amortization.

 

(c) Ratio is annualized net income available to common shareholders to average common equity.

 

(d) Ratio is annualized net income available to common shareholders to average tangible common equity.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The information called for by this item is contained in

 

  (a) Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 2 of Part I of this report, including in particular the section entitled “Risk Management” beginning on page 121 of this report and the subsections entitled “Market Risk Management” beginning on page 122 and “Interest Rate Risk Management” beginning on page 123 of this report, and

 

  (b) Note 14 to the Consolidated Condensed Financial Statements appearing on pages 53-61 of this report,

all of which materials are incorporated herein by reference. For additional information concerning market risk and our management of it, refer to: Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016, including in particular the section entitled “Risk Management” beginning on page 47 of that Report and the subsections entitled “Market Risk Management” beginning on page 48 and “Interest Rate Risk Management” appearing on pages 50-51 of that Report; and Note 22 to the Consolidated Financial Statements appearing on pages 153-158 of Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Item 4. Controls and Procedures

 

  (a) Evaluation of Disclosure Controls and Procedures. FHN’s management, with the participation of FHN’s chief executive officer and chief financial officer, has evaluated the effectiveness of FHN’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and the chief financial officer have concluded that FHN’s disclosure controls and procedures were effective as of the end of the period covered by this report.

 

  (b) Changes in Internal Control over Financial Reporting. There have not been any changes in FHN’s internal control over financial reporting during FHN’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, FHN’s internal control over financial reporting.

 

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Part II.

OTHER INFORMATION

 

Item 1 Legal Proceedings

The “Contingencies” section of Note 10 to the Consolidated Condensed Financial Statements beginning on page 35 of this Report is incorporated into this Item by reference.

 

Item 1A Risk Factors

Not applicable

 

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

 

  (a) & (b) Not Applicable

 

  (c) Table 9 captioned “Issuer Purchases of Common Stock,” including the explanatory notes, which material is 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 103 of this report, is incorporated herein by reference.

Items 3 and 4

Not applicable

 

Item 5. Other Information

(a) Determination of Frequency of Advisory Vote on Executive Compensation

On April 25, 2017, FHN held its annual meeting of shareholders. Vote item #3 was an advisory proposal regarding the frequency of conducting an advisory vote on executive compensation at FHN’s annual meeting of shareholders. The choices were “every year,” “every two years,” and “every three years.” FHN’s Board of Directors recommended “every year.” As reported in FHN’s Current Report on Form 8-K dated April 25, 2017, the “every year” choice received a substantial majority of the votes cast by FHN’s shareholders.

On July 25, 2017, the Board determined that an advisory vote on executive compensation will be conducted every year.

(b) Certain Changes in Director Nomination Process

None.

 

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Item 6. Exhibits

(a) Exhibits

Exhibits marked * represent management contracts or compensatory plans or arrangements required to be identified as such and filed as exhibits. Exhibits marked *R were filed previously in ASCII text format, and are re-filed with this report in html format.

Exhibits marked ** are “furnished” pursuant to 18 U.S.C. Section 1350 and are 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. 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.

 

Exhibit

 

Description

2.1   Agreement and Plan of Merger, dated as of May 3, 2017, by and among First Horizon National Corporation, Capital Bank Financial Corp., and Firestone Sub, Inc., incorporated by reference to Exhibit 2.1 to First Horizon’s Current Report on Form 8-K filed May 5, 2017.
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.
10.1*R   Form of Agreement to Defer Receipt of Shares Following Option Exercise [originally filed as Exh 10.5(c) to FHN’s Annual Report on Form10-K for 2004]
10.2*R   Description of long-term disability program [originally filed as Exh 10(v) to FHN’s Annual Report on Form 10-K for 2003]
10.3*R   Form of Indemnity Agreement with executive officers [2004 form] [originally filed as Exh 10.13 to FHN’s Annual Report on Form 10-K for 2004]
10.4*   Directors and Executives Deferred Compensation Plan [originally adopted 1985], as amended and restated [2017], with forms of deferral agreement and 2007 addendum to deferral agreement.
10.5   Form of Company Support Agreement, incorporated by reference to Exhibit 10.1 to FHN’s Current Report on Form 8-K filed May 5, 2017.
31(a)   Rule 13a-14(a) Certifications of CEO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
31(b)   Rule 13a-14(a) Certifications of CFO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
32(a)**   18 USC 1350 Certifications of CEO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

 

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32(b)**  

18 USC 1350 Certifications of CFO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

101***   The following financial information from First Horizon National Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL: (i) Consolidated Condensed Statements of Condition at June 30, 2017 and December 31, 2016; (ii) Consolidated Condensed Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016; (iii) Consolidated Condensed Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016; (iv) Consolidated Condensed Statements of Equity for the Six Months Ended June 30, 2017 and 2016; (v) Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016; (vi) Notes to Consolidated Condensed Financial Statements.
101.INS***   XBRL Instance Document
101.SCH***   XBRL Taxonomy Extension Schema
101.CAL***   XBRL Taxonomy Extension Calculation Linkbase
101.LAB***   XBRL Taxonomy Extension Label Linkbase
101.PRE***   XBRL Taxonomy Extension Presentation Linkbase
101.DEF***   XBRL Taxonomy Extension Definition Linkbase

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

FIRST HORIZON NATIONAL CORPORATION

                             (Registrant)

DATE: August 8, 2017     By:   /s/ William C. Losch III
    Name:   William C. Losch III
    Title:   Executive Vice President and Chief Financial Officer
      (Duly Authorized Officer and Principal Financial Officer)

 

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EXHIBIT INDEX

Exhibits marked * represent management contracts or compensatory plans or arrangements required to be identified as such and filed as exhibits. Exhibits marked *R were filed previously in ASCII text format, and are re-filed with this report in html format.

Exhibits marked ** are “furnished” pursuant to 18 U.S.C. Section 1350 and are 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. 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.

 

Exhibit

 

Description

2.1   Agreement and Plan of Merger, dated as of May 3, 2017, by and among First Horizon National Corporation, Capital Bank Financial Corp., and Firestone Sub, Inc., incorporated by reference to Exhibit 2.1 to First Horizon’s Current Report on Form 8-K filed May 5, 2017.
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.
10.1*R   Form of Agreement to Defer Receipt of Shares Following Option Exercise [originally filed as Exh 10.5(c) to FHN’s Annual Report on Form10-K for 2004]
10.2*R   Description of long-term disability program [originally filed as Exh 10(v) to FHN’s Annual Report on Form 10-K for 2003]
10.3*R   Form of Indemnity Agreement with executive officers [2004 form] [originally filed as Exh 10.13 to FHN’s Annual Report on Form 10-K for 2004]
10.4*   Directors and Executives Deferred Compensation Plan [originally adopted 1985], as amended and restated [2017], with forms of deferral agreement and 2007 addendum to deferral agreement.
10.5   Form of Company Support Agreement, incorporated by reference to Exhibit 10.1 to FHN’s Current Report on Form 8-K filed May 5, 2017.
31(a)   Rule 13a-14(a) Certifications of CEO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
31(b)   Rule 13a-14(a) Certifications of CFO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
32(a)**   18 USC 1350 Certifications of CEO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
32(b)**   18 USC 1350 Certifications of CFO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

 

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Table of Contents
101***   The following financial information from First Horizon National Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL: (i) Consolidated Condensed Statements of Condition at June 30, 2017 and December 31, 2016; (ii) Consolidated Condensed Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016; (iii) Consolidated Condensed Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016; (iv) Consolidated Condensed Statements of Equity for the Six Months Ended June 30, 2017 and 2016; (v) Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016; (vi) Notes to Consolidated Condensed Financial Statements.
101.INS***   XBRL Instance Document
101.SCH***   XBRL Taxonomy Extension Schema
101.CAL***   XBRL Taxonomy Extension Calculation Linkbase
101.LAB***   XBRL Taxonomy Extension Label Linkbase
101.PRE***   XBRL Taxonomy Extension Presentation Linkbase
101.DEF***   XBRL Taxonomy Extension Definition Linkbase

 

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Exhibit 10.1R

AGREEMENT TO DEFER RECEIPT OF SHARES

FOLLOWING OPTION EXERCISE

Fill in all of the following blanks with respect to your election to defer receipt of shares following an option exercise. Please print. Complete a separate Agreement to Defer for each option grant for which you elect to defer.

Date:                         

Name:                         

Date of Option Grant:                         

Option Grant Number (e.g. 001462):                         

Name of Option Plan

(e.g., 1990 Stock Option Plan):                         

Number of Shares Remaining to be Exercised in Option:                         

Number of Shares Covered by this Deferral Election:                         

Date of Distribution:                                                                              

(See Paragraph 7 below for instructions.)

Beneficiary designation:                                                                          

(See Paragraph 12 and 13 below.)

This Agreement is made and entered into as of the date stated above by and between the individual named above (the “Participant”) and First Tennessee National Corporation (the “Corporation”).

WITNESSETH

WHEREAS, the Corporation has established a stock option enhancement program (the “Program”) for certain employees of the Corporation and its subsidiaries pursuant to which the grantee of a stock option who complies with the terms and conditions of the Program is permitted to elect to defer receipt of shares covered by an option and thereby defer recognition of income for federal income tax purposes at the time of the option exercise; and

WHEREAS, Participant has been selected to participate in the Program, subject to the right of the Human Resources Committee of the Board of Directors to cancel the Program as to any unexercised options;

NOW, THEREFORE, in consideration of the promises made herein, Participant and the Corporation do agree as follows:

1. Subject to the terms and conditions of the Program described below, Participant hereby irrevocably elects to defer receipt of the shares specified following the exercise of the option, or portion thereof, specified for the period of time specified, and the Corporation agrees to deliver to Participant at the time specified the shares whose receipt has been deferred (adjusted to reflect any stock splits and stock dividends as described below) and an amount of cash equivalent to the dividends that would have been paid

 

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had Participant received the shares immediately following the exercise of the option plus interest on such dividend equivalents at a 10-year Treasury rate of interest, all as described below.

2. Participant is permitted to exercise the option covered by this Agreement at any time beginning at least 6 months after the date of this deferral agreement and ending on the last day of the term of the option.

3. If Participant has elected to defer receipt of a number of shares that is less than the number of shares that is exercisable under the option, then the receipt of shares will be deferred as follows: on the first (and, if necessary, subsequent) exercise of the option occurring at least 6 months following the date of this deferral agreement, receipt of shares will be deferred until the number of shares elected for deferral has been reached.

4. The option cannot be exercised by tendering cash in payment of the exercise price. Participant must pay the exercise price with Corporation common stock. Participant must use the “attestation” method of exercising the option. Under the attestation method, Participant (and, if applicable, Participant’s broker or bank or other party) must sign an attestation form, which must be submitted at the time of the option exercise, certifying ownership of a sufficient number of shares of Corporation common stock to pay the exercise price. Actual share certificates are not to be delivered to the Corporation.

5. The shares attested to must be “mature” shares; that is, the shares must either have been purchased on the open market by Participant or if the shares were acquired directly from the Corporation pursuant to an employee benefit plan, the shares must have been owned without any restrictions on transfer for at least six months prior to the option exercise.

6. Participant must be a current employee of the Corporation or one of its subsidiaries both at the time of execution of this Agreement and at the time of the exercise of the option. If Participant’s employment terminates for any reason prior to the exercise of the option, then this Agreement is canceled.

7. Participant must select a deferral period, at the end of which shares whose receipt has been deferred and earnings thereon will be paid to Participant, subject to Paragraph 12 herein. The payment date is referred to herein as the “Date of Distribution.” Participant may specify any future date, not to exceed actual retirement plus five years, as the Date of Distribution. Alternatively, Participant may specify payment to be made “on retirement” or “on retirement plus ________ years and _______ months.” Under this alternative, the payment date may not exceed actual retirement plus five years. For all purposes hereof, the term “retirement” includes any retirement, whether it is a normal or an early retirement. If the Date of Distribution is not a business day, payment will be made on the next day that is a business day.

8. When Participant decides to exercise the option, Participant must exercise the option for all of the shares covered by this deferral election. Upon the exercise of the option, no shares will be transferred to Participant and a deferral account will be established by the Corporation, consisting of a subaccount reflecting phantom stock units and a subaccount representing cash equal to the earnings credited to the account with respect to dividend equivalents and interest thereon. Participant’s phantom stock subaccount will

 

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be credited with phantom stock units, based on the number of shares covered by this deferral election with respect to which the option was exercised by Participant, net of the number of shares attested to in payment of the exercise price, with each phantom stock unit being equivalent to one share of the Corporation’s common stock. (NOTE: The number of phantom stock units credited to Participant’s account is equal to the number of shares covered by the deferral election minus the number of shares attested to in payment of the option exercise price.)

9. Any stock split and stock dividend that is declared with respect to the Corporation’s common stock having a payment date that occurs after exercise of the option and before the deferral period has terminated will result in a corresponding stock split or stock dividend being made with respect to the phantom shares of the Corporation’s common stock in Participant’s deferral account. In other words, Participant will be issued that number of shares of the Corporation’s common stock at the termination of the deferral period that Participant would have owned had he or she exercised the option without deferring receipt of the shares and then maintained ownership of such common stock through the payment date of the stock dividend or stock split.

10. Earnings will be credited to Participant’s cash subaccount and accrued on the phantom stock units as follows: on each date on which the Corporation pays a dividend on its shares of common stock, an amount equal to such dividend will be credited to Participant’s account with respect to each phantom stock unit. Then, as of January 1st of each year, an additional amount will be credited to Participant’s account to reflect earnings on the dividend equivalents from the time they were credited to the account for the prior plan year. The rate of earnings credited for the year will be the rate disclosed under the caption “Annualized Ten Year Treasury Rate” in the Federal Reserve Statistical Release in January of the year following the year with respect to which earnings are to be credited, and the amount will be computed by multiplying the dividend equivalent by the rate by a factor representing the fraction of the year (100% for a January 1 dividend equivalent, 75% for an April 1 dividend equivalent, 50% for a July 1 dividend equivalent, and 25% for a October 1 dividend equivalent) remaining after the dividend equivalent was credited to Participant’s account. Interest will compound as follows: for any cash credited to the account that existed on the first day of the prior plan year (excluding any dividend equivalent that is credited to the account on such day), earnings will be credited in an amount equal to the amount of such cash multiplied by the applicable ten year treasury rate factor. For the portion of the Plan year in which the Date of Distribution occurs, earnings will be credited on any cash credited to the account during such year from the time such cash is credited through the Date of Distribution at the rate employed for the previous year.

11. Payment from Participant’s deferral account will be made in a single lump sum, computed as follows: with respect to Participant’s phantom stock subaccount, one share of the Corporation’s common stock will be paid to Participant for each phantom stock unit credited to such subaccount, and with respect to Participant’s cash subaccount, cash in the amount credited to the subaccount will be paid to Participant.

12. Payment from Participant’s deferral account will be made to Participant (or, in the event of Participant’s death, his or her beneficiary) on the earliest of the date selected by Participant as the Date of Distribution, the date of a change in control as defined in the Plan

 

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specified above or a date selected by the Corporation following Participant’s death, disability, or termination of employment for any reason other than normal or early retirement that is no later than the last day of the month following the month in which there occurs the death, disability, or termination of employment of Participant for any reason other than normal or early retirement.

13. For any and all purposes of this deferral agreement and the Plan specified above, Participant designates the person specified above as his/her beneficiary under the Plan.

14. Participant is limited to one deferral agreement per option grant outstanding at any one time.

15. The Human Resources Committee of the Board of Directors retains the right to cancel the Program and prohibit deferral of receipt of shares following an option exercise with respect to any unexercised options then held by Participant upon notice to Participant.

16. The Human Resources Committee is authorized to interpret and administer the Program and the terms and provisions of this Agreement.

IN WITNESS WHEREOF, Participant has executed and the Corporation has caused its duly authorized officer to execute this Agreement, each as of the day and year first above written.

 

FIRST TENNESSEE NATIONAL CORPORATION

     
By:   

 

     

 

  

Executive Vice President,

      Participant
  

Division Manager Personnel,

or other authorized signatory

     

Risk Statement:

If the fair market value of Corporation common stock drops below the fair market value on the date of exercise of the option (with respect to which receipt of shares is deferred) and does not recover before the end of the deferral period, a portion of the value of such shares will be lost. Thereafter, the value of such shares may increase or decrease further.

If Participant does not exercise the option covered by this Agreement in accordance with all of the terms of this Agreement, the option will be forfeited by Participant and canceled by the Corporation.

 

4

Exhibit 10.2R

The Company offers a fully-insured long-term disability program for all employees that provides a benefit of up to 60 percent of salary, bonus and incentive compensation (“covered compensation”). Monthly benefits for executive officers are capped at $25,000. Executive officers are permitted to purchase up to $5,000 per month in additional coverage, so long as the total monthly benefit does not exceed 75 percent of monthly covered compensation. Monthly benefits for other employees are capped at $10,000.

Exhibit 10.3R

INDEMNITY AGREEMENT

This Agreement, effective as of January 20, 2004, is made and entered into between First Horizon National Corporation, a Tennessee corporation (“Corporation”), and                  , a director or officer of Corporation or one of its subsidiaries (“Indemnitee”).

WHEREAS, Corporation desires to attract and retain outstanding persons as directors and officers of it and its subsidiaries; and

WHEREAS, Corporation and Indemnitee recognize the increased risk of litigation and claims being asserted against directors and certain officers of public companies and their subsidiaries and the need for Corporation to provide protection against personal liability to enhance Indemnitee’s effective service to Corporation; and

WHEREAS, Corporation desires to provide in this Agreement for the indemnification of and advancing of expenses to Indemnitee to the maximum extent permitted (or not prohibited) by law and as set forth in this Agreement and, to the extent such insurance is maintained by Corporation, for the continued coverage of Indemnitee under Corporation’s directors and officers liability insurance policies;

NOW, THEREFORE, in consideration of the factors stated above, the promises contained herein, and Indemnitee’s continuing to serve Corporation directly or, at its request, indirectly through a subsidiary, and intending to be legally bound hereby, the parties agree as follows:

1. Definitions.

(a) “Change in Control” means the occurrence of any one of the following events:

(i) individuals who, on January 21, 1997, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 21, 1997, whose election or nomination for election was approved by a vote of at least three-fourths (3/4) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;

(ii) any “Person” (as defined under Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and as used in Section 13(d) or Section 14(d) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company

 

1


Voting Securities”); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a change in control by virtue of any of the following acquisitions: (A) by the Company or any entity in which the Company directly or indirectly beneficially owns more than 50% of the voting securities or interests (a “Subsidiary”), (B) by an employee stock ownership or employee benefit plan or trust sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, or (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii));

(iii) the consummation of a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company’s shareholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more than 60% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by Company Voting Securities that were outstanding immediately prior to the consummation of such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least two-thirds (2/3) of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”); or

(iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company’s assets.

Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.

 

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(b) “Claim” is defined as any threatened, pending or contemplated action, suit or proceeding, or any inquiry or investigation, whether conducted by Corporation or any other party, that Indemnitee believes might lead to the institution of any action, suit or proceeding, whether civil, criminal, administrative, investigative, or other, in any way arising out of or in connection with or related to any event or occurrence related to the fact that Indemnitee is or was a director or officer of Corporation or any of its subsidiaries, or is or was serving at the request of Corporation or any of its subsidiaries as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, political action committee, trust or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity. As used herein, Claim shall include, but is not limited to, any threatened, pending or contemplated action, suit or proceeding, or any inquiry or investigation, in any way arising out of or alleging any act, error or omission by the Indemnitee in the rendering or failure to render professional services, including legal and accounting services, for or at the request of the Corporation or any of its subsidiaries; provided such professional services are within the reasonably anticipated scope of the Indemnitee’s duties. Additionally, as used herein, “Claim” shall include, but is not limited to, any threatened, pending or contemplated action, suit or proceeding arising out of or alleging negligence on the part of the Indemnitee.

(c) “Expenses” is defined as attorney’s fees and all other costs, expenses and obligations paid or incurred in connection with investigating, defending, being a witness in or participating in (including any appeals) or preparing to defend, be a witness in or participate in any Claim.

(d) “Losses” is defined as any judgments, fines, penalties and amounts paid in settlement or discharge, including all interest assessments and other charges paid or payable in connection therewith, of a Claim and for which Indemnitee has not been otherwise reimbursed.

(e) “Reviewing Party” is defined as (i) the directors of Corporation that are not parties to or interested in the Claim (provided that there shall be at least two such independent directors) or (ii) in the event that there are not at least two independent directors or there has been a Change in Control, special, independent counsel, selected in the manner provided in Section 6.

2. Basic Indemnification.

Subject to the limitations provided in the following sentence and Section 3 herein, Corporation shall indemnify and hold harmless Indemnitee in connection with any Claim against any and all Expenses and Losses to the maximum extent permitted (or not prohibited) by law and, if requested by Indemnitee, shall advance Expenses as soon as practicable but in any event no later than 30 days after written demand is presented to Corporation. Except as set forth in Section 4 herein, Indemnitee will not be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee against Corporation or any of its subsidiaries or any director or officer of it or of any of its subsidiaries except for a Claim in which Corporation has joined or the initiation of which the Corporation has consented to. In connection with any determination by Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified under any provision of this Agreement, the burden of proof shall be on Corporation to establish that Indemnitee is not so entitled.

 

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3. Limitations on Indemnification.

Notwithstanding anything herein to the contrary (except for any additional rights contemplated by Section 10(b) herein), the obligations of Corporation to indemnify Indemnitee under Section 2 shall be subject to the condition that Reviewing Party shall not have determined that Indemnitee would not be permitted to be indemnified under applicable law. Corporation is obligated to advance Expenses within the time period specified in Section 2 herein unless, during such time period and prior to Expense advancement, Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law. If Expenses are advanced and Reviewing Party subsequently determines that Indemnitee would not be permitted to be so indemnified under applicable law, Corporation shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse Corporation) for all such amounts theretofore paid; provided, if Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding, and Indemnitee shall not be required to reimburse Corporation for any Expenses advanced until a final judicial determination is made with respect thereto as to which all rights of appeal therefrom have been exhausted or lapsed. If there has been no determination by Reviewing Party or Expenses are not advanced within the time frame provided in Section 2 or if Reviewing Party determines that Indemnitee would not be permitted to be indemnified in whole under applicable law, Indemnitee shall have the right to commence litigation in any court in the state of Tennessee having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such determination by Reviewing Party or any aspect thereof, and Corporation hereby consents to service of process and to appear in any such proceeding. Any determination by Reviewing Party otherwise shall be conclusive and binding on Corporation and Indemnitee. Corporation shall have the burden of proving that Indemnitee is not entitled to indemnification in any such legal proceeding.

4. Indemnification for Additional Expenses.

Corporation shall indemnify Indemnitee against any and all expenses (including attorneys’ fees and all other costs, expenses, and obligations of the same sort as contemplated by Section 1(c)) and, if requested by Indemnitee, shall advance such expenses to Indemnitee within 30 days after written demand is presented to Corporation, which expenses are incurred by Indemnitee in connection with any claim asserted against or claim or action brought by Indemnitee for indemnification or advance payment of Expenses by Corporation under this Agreement or for recovery under any directors and officers liability insurance policies maintained by Corporation, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, expense advance or insurance recovery. [Note: The expenses provided in Section 4, which are not repayable to Corporation, are different from the Expenses permitted in Section 2, which must be repaid to Corporation in the situation described in Section 3.]

5. Insurance.

To the extent Corporation maintains insurance policies providing directors and officers liability insurance, Indemnitee shall be covered by such policies, in accordance with their terms, to the maximum extent of the coverage available for any Corporation director or officer.

 

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6. Change in Control.

Corporation agrees that if there is a Change in Control, then with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and Expense advances under this Agreement or any other agreement or Corporation Charter or Bylaw provision now in effect or hereafter adopted relating to Claims, Corporation shall seek legal advice only from special, independent counsel selected by Indemnitee and approved by Corporation (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to Corporation and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. Corporation agrees to pay the fees of the special, independent counsel referred to above and fully to indemnify such counsel against any and all expenses and losses of the same sort as contemplated by Sections 1(c) and 1(d) arising out of or relating to this Agreement or its engagement pursuant hereto.

7. Creation of Trust.

In the event of a Change in Control or if the Board determines that a Change in Control is imminent, Corporation shall (and the appropriate officers of Corporation are hereby authorized and directed to take all action deemed necessary or desirable in connection herewith) upon the written request of Indemnitee, create a trust or appropriately amend an existing trust for the benefit of Indemnitee and from time to time upon written request of Indemnitee shall fund such trust in an amount sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request and any and all Losses from time to time actually paid or claimed, reasonably anticipated or proposed to be paid. The amount or amounts to be deposited in the trust pursuant to the foregoing shall be determined by Reviewing Party. The trustee shall be chosen by Corporation, but the trustee may not be a party to or interested in a Claim nor may the trustee be any person or entity (or an affiliate thereof) whose direct or indirect ownership of Corporation stock has triggered a Change in Control. Any trust established or amended pursuant hereto shall provide, with respect to the rights and obligations created under this Agreement, that upon a Change in Control (i) the trust shall not be revoked or the principal thereof invaded without the written consent of Indemnitee, (ii) the trustee shall advance any and all Expenses to Indemnitee within thirty days after written demand is presented to the trustee (and Indemnitee hereby agrees to reimburse the trust under the circumstances under which Indemnitee would be required to do so under Section 3 herein), (iii) the trust shall continue to be funded by Corporation in accordance with the funding obligations set forth above, (iv) the trustee shall promptly pay to Indemnitee all amounts for which Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (v) all unexpended funds in such trust attributable to a Claim, Expense or Loss of Indemnitee shall revert to Corporation upon a final determination by Reviewing Party or a court of competent jurisdiction that Indemnitee has been fully indemnified under this Agreement. If Section 7(v) would otherwise be applicable, then notwithstanding anything in Section 7(v) to the contrary, at any time a Claim is still pending against a director or officer of Corporation or any of its subsidiaries who has entered into an agreement with Corporation substantially similar to this Agreement, any funds held by the trustee under this Section 7 shall be retained by the trustee until a final

 

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determination is made with respect to such Claim and such funds may be used to pay such Claim. Nothing in this Section shall relieve Corporation of any of its obligations under this Agreement.

8. Partial Indemnity.

If Indemnitee is entitled under any provision of this Agreement to indemnification by Corporation for some or a portion of the Expenses or Losses but not for the total amount thereof, Corporation shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.

9. Notification.

Promptly after receipt by Indemnitee of notice of the commencement of any Claim with respect to which Indemnitee may seek indemnification under this Agreement, Indemnitee will notify Corporation of the commencement thereof. The failure of Indemnitee promptly to notify Corporation hereunder shall not, however, relieve Corporation of its obligations hereunder unless and to the extent that Corporation was materially prejudiced by such failure to notify promptly. Corporation will be entitled to participate in a Claim at its own expense and to assume the defense thereof, with counsel satisfactory to Indemnitee, unless Indemnitee shall have reasonably concluded that there may be a conflict of interest between Corporation and Indemnitee in the conduct of the defense of such action. Even if Indemnitee concludes that no conflict of interest exists, Indemnitee shall retain the right to employ his or her own counsel and participate in such action, suit or proceeding, but the fees and expenses of such counsel incurred after notice from Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless

(i) the employment of counsel by Indemnitee has been authorized or the defense of the Claim is not permitted to be undertaken by Corporation, or (ii) Corporation shall not in fact have employed counsel to assume such defense. Corporation shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Claim effected without its written consent. Corporation shall not settle any Claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee’s written consent. Neither Corporation nor Indemnitee will unreasonably withhold consent to any proposed settlement.

10. Miscellaneous.

(a) Presumptions. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order or settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law.

(b) Nonexclusive Rights. The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under Corporation’s Charter and Bylaws and the Tennessee Business Corporation Act or otherwise. To the extent that a change in the Tennessee Business Corporation Act (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under Corporation’s Charter and Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by virtue of this Agreement the greater benefits so afforded by such change.

 

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(c) Amendment. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

(d) Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including execution of such documents as may be necessary to enable Corporation effectively to bring suit to enforce such rights.

(e) Duplicate Payment. Corporation shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Charter provision, Bylaw, or otherwise) of the amounts otherwise indemnifiable hereunder. Binding Effect. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor or assign by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of Corporation), spouses, heirs, and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director or officer of Corporation or any of its subsidiaries or of any other entity at Corporation’s request.

(f) Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the maximum extent permitted by law.

(g) Headings of Sections. Section and subsection headings are for convenience only and shall not affect the construction of this Agreement.

(h) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee.

IN WITNESS WHEREOF, Corporation has caused this Agreement to be executed by its duly authorized officers and Indemnitee has duly executed this Agreement, each as of the day first above written.

 

ATTEST:

   

FIRST HORIZON NATIONAL CORPORATION

      By:    

Corporate Secretary

   

Name: [authorized officer]

   

Title:

 

 

(Indemnitee)

 

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Exhibit 10.4

FIRST HORIZON NATIONAL CORPORATION

DIRECTORS AND EXECUTIVES DEFERRED COMPENSATION PLAN

(Amended and Restated July 25, 2017)

I. PURPOSE

The purpose of the First Horizon National Corporation Directors and Executives Deferred Compensation Plan (hereinafter referred to as the “Plan”) is to advance the interests of First Horizon National Corporation, and any successor thereto, and its subsidiaries (hereinafter collectively referred to as the “Company”) by encouraging and enabling the Company to attract, motivate and retain executives and nonemployee members of the Board of Directors.

II. EFFECTIVE DATE

The effective date of the Plan is July 1, 1985.

III. DEFINITIONS

A. “Accrual Account” means a bookkeeping account maintained for each Participant which will reflect the sum of each deferral plus interest payable at the Applicable Rate, compounded annually, on the original amount of deferral less Interim Distributions, if any.

B. “Addendum” means an addendum to a Participant’s Deferral and Acknowledgment Agreement offered to all Participants in 2007, in response to Section 409A of the Code, substantially in the form of Exhibit B hereto.

C. “Administrator,” for the purpose of this Plan, means the Senior Vice President in charge of executive compensation matters or, absent such a person, the Executive Vice President in charge of human resources.

D. “Applicable Rate” means that rate approved annually by the Committee, to be not less than the Guaranteed Rate nor more than the Projected Rate, which is credited on the Total Compensation deferred.

E. “Board” means the Board of Directors of First Horizon National Corporation.

F. “Base Salary” means the gross monthly salary paid to the Participants, not including Nonemployee Directors.

G. “Cause.” Termination by the Company of a Participant’s employment for “Cause” shall mean termination upon (a) the willful and continued failure by a Participant to perform substantially his or her duties with the Company (other than any such failure resulting from his or her incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Participant by the Chairman of the Board or President of the Company which specifically identities the manner in which such executive believes that the Participant has not substantially performed his or her duties, or (b) the willful engaging by a Participant in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this subsection (F), no act, or failure to act, on a Participant’s part shall be considered “willful” unless done, or omitted to be done, by the Participant in bad faith and without reasonable belief that the Participant’s action or omission was in, or not opposed to, the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by a Participant in good faith and in the best interests of the Company. It is also expressly understood that a Participant’s attention to matters not directly related to the business of the

 

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Company shall not provide a basis for termination for Cause so long as the Board has approved the Participant’s engagement in such activities. Notwithstanding the foregoing, a Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Participant and an opportunity for Participant, together with his or her counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Participant was guilty of the conduct set forth above in (a) or (b) of this subsection (F) and specifying the particulars thereof in detail.

H. “Change in Control” means the occurrence of any one of the following events:

(i) individuals who, on January 21, 1997, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 21, 1997, whose election or nomination for election was approved by a vote of at least three-fourths (3/4) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided , however , that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;

(ii) any “Person” (as defined under Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and as used in Section 13(d) or Section 14(d) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”); provided , however , that the event described in this paragraph (ii) shall not be deemed to be a change in control by virtue of any of the following acquisitions: (A) by the Company or any entity in which the Company directly or indirectly beneficially owns more than 50% of the voting securities or interests (a “Subsidiary”), (B) by an employee stock ownership or employee benefit plan or trust sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, or (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii));

(iii) the consummation of a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company’s shareholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by Company Voting Securities that were outstanding immediately prior to the consummation of such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent

 

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Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”); or

(iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company’s assets.

Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided , that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.

I. “Code” means the Internal Revenue Code of 1986, as amended.

J. “Committee,” for the purpose of this Plan, means the Compensation Committee of the Board.

K. “Director’s Compensation” means the total sum of fees and retainer earned by a Nonemployee Director.

L. “Deferral and Acknowledgment Agreement” means an agreement substantially in the form of Exhibit A attached hereto.

M. “Guaranteed Rate” means the annualized rate on ten (10) year United States Treasury obligations during each Plan Year as published by Data Resources, Inc.

N. “Incentive Compensation” means the gross amount earned by a Participant during the Plan Year under the Company’s Management Incentive Plan, Annual Bonus Plan or the Bond Division Management Bonus Plan.

O. “Nonemployee Director” means a member of the Board of Directors of the Company who is not concurrently a common law employee of the Company.

P. “Normal Retirement” means any termination by a Participant after attaining the age of 65.

Q. “Participant” means an individual who is authorized by the Committee to participate in this Plan and who has executed a Deferral and Acknowledgment Agreement.

R. “Plan Year” means (i) July 1, 1985 through December 31, 1985 and (ii) each and every calendar year thereafter.

S. “Projected Rate” means that rate applicable to each Participant group as set forth below which will be credited on each date for which interest is to be credited under the Plan:

 

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Attained Age At End of
Year of Deferral Election

   Projected Rate  

39 & Under

     19

40 - 44

     20

45 - 49

     21

50 - 54

     22

55 - 59

     23

60 & Over

     24

T. “Total Compensation” means the sum of Base Salary and Incentive Compensation, or, in the case of a Nonemployee Director, the sum of the Director’s retainer and fees.

IV. TERM

This Plan is effective on the date hereof and shall be effective until terminated by the Board; however, this Plan provides only for a deferral and corresponding interest rate for the first Plan Year with subsequent deferrals and corresponding interest rates to be approved by the Committee for each separate Plan Year. This Plan may be amended, renewed, restated or extended for additional Plan Years by the Committee and the Committee may in its sole discretion, on the basis of financial or other considerations, not authorize the execution of Deferral and Acknowledgment Agreements by Participants prospectively deferring compensation for additional years. Notwithstanding the foregoing, neither the termination nor any amendment of the Plan or any Deferral and Acknowledgment Agreement shall, without the consent of the Participant, affect the Participant’s rights under any Deferral and Acknowledgment Agreement in existence on the date of such termination or amendment.

V. DEFERRAL AND ACKNOWLEDGMENT AGREEMENT

A. Election to Defer . As hereinafter provided and subject to acceptance by the Company, a Participant may elect to reduce the amount of Total Compensation which will be paid to him or her during the Plan Year by executing and delivering to the Company in a timely fashion a Deferral and Acknowledgment Agreement. Notwithstanding anything herein to the contrary, during the ten consecutive Plan Years commencing with the Plan Year with respect to which a Participant is first authorized to participate in the Plan, such Participant may elect to make no more than five deferrals. The preceding sentence does not confer upon any Participant the right to make a deferral with respect to any Plan Year; it merely places a limitation upon the total number of deferrals a Participant may make if otherwise authorized to participate in the Plan, except for Participants who are Nonemployee Directors who may elect to make no more than six deferrals. Notwithstanding the 10-year limitation in this Section V(A), employee Participants may make salary deferrals for the 1995 Plan Year unless such a deferral would cause the Participant to exceed the five deferral limitation.

B. Creation of Contractual Obligation . The Company, by acceptance of a properly executed and timely delivered Deferral and Acknowledgment Agreement agrees to pay to the Participant or his or her Designated Beneficiary, as defined in Section VII, the benefits described in Section VI, which shall be calculated based upon (i) the amount of the Total Compensation deferred by each Participant, (ii) the interest rate established for the Plan Year by the Committee applied to the amount deferred, (iii) the time which elapses between the date of deferral and the date of the benefit payments, and (iv) other factors established in this Plan and by the Committee.

 

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C Acceptance . The Administrator is authorized to accept and approve a properly executed Deferral and Acknowledgment Agreement on behalf of the Company.

D. Timing of Election . A Participant may execute and deliver to the Company a Deferral and Acknowledgment Agreement:

1. on or before December 15 of any calendar year, however, such a Deferral and Acknowledgment Agreement shall be effective to reduce a Participant’s Total Compensation only for the next subsequent Plan Year;

2. in the first Plan Year only, on or before July 31, 1985, however, such a Deferral and Acknowledgment Agreement may be executed and delivered only by a Participant who is employed as an employee or is a Nonemployee Director on June 1, 1985 and is only effective to reduce a Participant’s Total Compensation earned during the period from the date of the execution and delivery of the Deferral and Acknowledgment Agreement until the end of the first Plan Year of this Plan;

3. notwithstanding any other provision of this Plan or any Deferral and Acknowledgment Agreement, no Deferral and Acknowledgment Agreement shall be effective to defer compensation which is earned by any Participant on or before the date upon which the Deferral and Acknowledgment Agreement is properly executed and timely delivered to the Company.

E. Amount of Deferral . A Participant who is not a Nonemployee Director may elect to defer during any Plan Year any dollar amount which is less than or equal to thirty-five percent (35%) of a Participant’s Total Compensation applicable to the Plan Year. However, a Nonemployee Director may defer any dollar amount which is less than or equal to one hundred percent (100%) of his or her Director’s Compensation. Notwithstanding any provision of any Deferral and Acknowledgment Agreement or this Plan to the contrary, the Deferral and Acknowledgment Agreement of a Participant shall be modified automatically if necessary such that all actual reductions pursuant to his or her Deferral and Acknowledgment Agreement are made from his or her Base Salary or Incentive Compensation or, in the case of a Nonemployee Director, from his or her Director’s Compensation.

F. Accrual of Interest . Where applicable under the terms of this Plan, interest on the amounts in an Accrual Account shall accrue interest at the Applicable Rate, commencing on the date on which the Total Compensation deferred under the Deferral and Acknowledgment Agreement would have been paid. The Applicable Rate may be adjustable only on an annual basis, effective January 1 of each Plan Year; provided, however, that no adjustment to the Applicable Rate may affect amounts previously accrued. Notwithstanding the provisions of the prior sentence, the Applicable Rate will be replaced by the Guaranteed Rate if the Plan otherwise requires a recalculation of interest at the Guaranteed Rate. The Applicable Rate for the first Plan Year shall be the Projected Rate and shall remain so unless adjusted by the Committee as set forth herein. Notwithstanding any provisions of the Plan to the contrary, the Applicable Rates for (i) Participants who terminated employment on or before December 31, 2002 and were entitled to a Retirement Benefit under Section VI.A or an Early Retirement Benefit under Section VI.G and (ii) any other Participants designated by the Committee (the Participants referred to in clauses (i) and (ii) are hereinafter referred to collectively as the “2002 Retired Participants”) shall in no event be less than the Applicable Rates in effect as of December 31, 2002 with respect to the 2002 Retired Participants (subject to the provisions of Section VI.B).

G. Addendum . Each Participant who executes an Addendum to his or her Deferral and Acknowledgement Agreement substantially in the form of Exhibit B to this Plan shall become subject to all of the terms and conditions of Section IX notwithstanding any provision of his or her Deferral and Acknowledgement Agreement, or the other portions of this Plan, to the contrary.

 

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VI. PAYMENT OF BENEFITS

A. Retirement Benefit . If a Participant terminates employment with the Company and such termination constitutes a Normal Retirement, then the Company shall pay to the Participant the monthly benefit defined in Paragraph 2 of each of his or her Deferral and Acknowledgment Agreements on those dates specified in this paragraph. The first benefit payable under Paragraph 2 of a Deferral and Acknowledgment Agreement shall be paid on the thirty-first (31st) day of January following the calendar year in which the Participant attains Normal Retirement. Notwithstanding the foregoing, any Deferral and Acknowledgment Agreement executed by a Participant which defers compensation which would otherwise be payable to the Participant in or after the Plan Year in which he or she attains Normal Retirement shall provide that the first benefit payable shall be paid on the thirty-first (31st) day of January following the later of (i) the fifth (5th) anniversary of the date upon which the Deferral and Acknowledgment Agreement is accepted by the Company or (ii) his or her Normal Retirement.

B. Alternative Retirement Benefit . If a Participant, prior to a Change in Control, is, on the date of Normal Retirement, or becomes thereafter, but prior to a Change in Control, a proprietor, officer, partner, or employee of, or otherwise is or becomes, prior to a Change in Control, affiliated with any business that is in competition with the Company, then, upon that date, no further benefit payments shall be made to the Participant or any other person under any provision of this Plan, except that, the Participant shall be paid in lump sum on the thirty-first (31st) day of January following that date, an amount equal to the value of the Accrual Account recalculated over the entire period of deferral at an interest rate equal to the Guaranteed Rate, compounded annually, from the date on which the deferred compensation would have been paid to the date on which the act occurs or status is first attained. In the event Interim Distributions are made to the Participant, said payments shall reduce the amount to which the Guaranteed Rate is applied. If the above calculation results in a negative amount, such amount shall not be collected from, or enforced against the Participant as a claim by the Company.

C. Interim Distributions . A Participant shall be paid the benefits defined in Paragraph 3 of his or her Deferral and Acknowledgment Agreement on those dates stated in that paragraph of each Deferral and Acknowledgment Agreement (hereinafter referred to as “Interim Distributions”). However, no Interim Distribution shall be paid to any Participant as a result of the Deferral and Acknowledgment Agreement if the Participant is age fifty-eight (58) or older on any day during the Plan Year in which a Deferral and Acknowledgment Agreement is executed. No Interim Distribution shall be paid to a Participant on or after the date upon which the Participant or his or her Designated Beneficiary receives any benefit or payment under any other Section of this Plan or any other paragraph of his or her Deferral and Acknowledgment Agreement.

D. Pre-Retirement, Pre-Disability Death Benefit . If a Participant dies on or before the date upon which he or she is first entitled to receive a benefit under this Section, then his or her Designated Beneficiary, as defined in Section VII, shall be paid in lump sum or, at the discretion of the Administrator, in five (5) annual installments with interest paid on the unpaid balance at the Applicable Rate, an amount equal to the value of the Accrual Account. In the event Interim Distributions are made to the participant, said payments shall reduce the amount to which the Applicable Rate is applied. If the above calculation results in a negative amount, such amount shall not be collected from or enforced against the Designated Beneficiary or the Participant’s estate as a claim by the Company. If the Participant’s Designated Beneficiary receives or is entitled to receive a benefit hereunder, then no person or persons shall receive or be entitled to receive any benefit or payment under any other Section of this Plan or under any Deferral and Acknowledgment Agreement, notwithstanding any other provision of this Plan or any Deferral and Acknowledgment Agreement. The benefit payable under this Section, if lump sum, shall be paid on the thirty-first day of January following the Participant’s date of death (including interest thereon at the Applicable Rate). In the event installment payments are elected, said payments shall commence on the thirty-first day of January following the Participant’s death and continue thereafter on January 31st of each successive year.

 

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E. Pre-Retirement Disability Benefit . If a Participant suffers a Disability or becomes Disabled, as those terms are defined in the First Horizon National Corporation Long Term Disability Income Plan, as amended from time to time, prior to that date upon which he or she receives or is entitled to receive a benefit under this Section, then he or she shall be paid by the Company in lump sum, or at the discretion of the Administrator, in five (5) annual installments with interest paid on the unpaid balance at the Applicable Rate, an amount equal to the value of the Accrual Account. In the event Interim Distributions are made to a Participant, said payments shall reduce the amount to which the Applicable Rate is applied. If the above calculation results in a negative amount, such amount shall not be collected from, or enforced against the Participant as a claim by the Company. If the Participant receives or is entitled to receive a benefit hereunder, then no person or persons shall receive or be entitled to receive any benefit or payment under any other Section of this Plan or under any Deferral and Acknowledgment Agreement, notwithstanding any other provisions of this Plan or any Deferral and Acknowledgment Agreement. The benefit payable under this Section, if lump sum, shall be paid on the thirty-first (31st) day of January following the Participant’s date of Disability (including interest thereon at the Applicable Rate). In the event installments payments are elected, said payments shall commence on the thirty-first day of January following the Participant’s Disability and continue thereafter on January 31st of each successive year.

F. Termination of Employment Prior to Retirement . If a Participant, prior to a Change in Control, terminates employment with the Company or is terminated by the Company for Cause and if such termination is prior to death, disability and Normal Retirement (and is not pursuant to Section VI. G.), then he or she shall be paid in lump sum on the thirty-first (31st) day of January following his or her date of termination an amount equal to the value of the Accrual Account recalculated over the entire period of deferral at an interest rate equal to the Guaranteed Rate, compounded annually, from the date on which the deferred compensation would have been paid to the date on which the benefit herein is paid. In the event Interim Distributions are made, said payments shall reduce the amount to which the Guaranteed Rate is applied. If the above calculation results in a negative amount, such amount shall not be collected from, or enforced against the Participant as a claim by the Company. If the Participant receives or is entitled to receive a benefit hereunder, then no person or persons shall then or thereafter receive any benefit or payment under any other Section of this Plan or any Deferral and Acknowledgment Agreement, notwithstanding any other provision of this Plan or any Deferral and Acknowledgment Agreement. Notwithstanding the foregoing, if the Participant’s termination occurs prior to a Change in Control and prior to death, disability and Normal Retirement and is as the result of any reason other than voluntary termination, or a termination by the Company for Cause, then the value of the Accrual Account distributed to such Participant shall be calculated over the entire period of deferral at the Applicable Rate.

G. Early Retirement Benefit . If a Participant other than a Nonemployee Director terminates employment with the Company after the date on which he or she qualifies for early retirement (as such term is defined in the First Horizon National Corporation Pension Plan or upon satisfaction of a “Rule of 75,” where the sum of a Participant’s age and years of service with the Company equals at least 75), or if a Participant who is a Nonemployee Director terminates as a director of the Company after at least 10 years of service as a director of the Company, then the Participant shall be entitled to receive a monthly benefit as described in paragraph 2 of each of his or her Deferral and Acknowledgment Agreements (or at the discretion of the Committee, a lump sum payment equal to the value of the Accrual Account), however, the Accrual Account shall be recalculated over the entire period of deferral using an interest rate equal to the Guaranteed Rate (unless a higher rate is approved by the Committee). In addition, said benefit shall commence on the later of (i) the thirty-first (31st) day of January following the calendar year in which the Participant commences early retirement, or (ii) the January 31 of the year immediately following the fifth anniversary of the execution date of the Deferral and Acknowledgment Agreement (unless an earlier or later date, which is prior to or coincident with the Participant’s attainment of the age of 65, is approved by the Committee). In the event Interim Distributions are made, said payments shall reduce the amount to which the Guaranteed Rate is applied. If the above calculation results in a negative amount, such amount shall not be collected from, or enforced against the Participant as a claim by the

 

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Company. If the Participant receives or is entitled to receive a benefit hereunder, then no person or persons shall then or thereafter receive any benefit or payment under any other Section of this Plan or any Deferral and Acknowledgment Agreement, notwithstanding any other provision of this Plan or any Deferral and Acknowledgment Agreement.

H. Change in Control .

(i) This Section VI.H(i) applies solely to Participants who are current or former Nonemployee Directors. After a Change in Control, the value of the Accrual Account distributed to a Participant or to the trustee of a trust for the benefit of one or more Participants shall be calculated over the entire period of deferral through the date of the Change in Control at the Applicable Rate. Thereafter, interest shall accrue at the Applicable Rate unless the Participant voluntarily terminates or is terminate by the Company for Cause, in which case interest shall accrue from the date of the Change in Control at the Guaranteed Rate. Thus, if a Participant’s termination occurs on or after a Change in Control and is the result of any reason other than a voluntary termination or a termination by the Company for Cause, then the value of the Accrual Account distributed to such Participant shall be calculated over the entire period of deferral at the Applicable Rate.

(ii) Notwithstanding any provision of this Plan to the contrary, in the event a Change in Control or “Pre-Change in Control Date” (as defined below) occurs, the Company shall make a lump sum payment (a “Payment”) to each Participant other than current or former Nonemployee Directors (except as provided below) on a date (the “Payment Date”) no later than 2 business days after the Change in Control has occurred (or, if an agreement to effectuate a Change in Control pursuant to a Business Combination has been executed, on the date (the “Pre-Change in Control Date”) that is the third business day prior to the date the Chief Executive Officer of the Company believes in good faith will be the effective date of the Change in Control, but in any event prior to the effective date of such Change in Control). For purposes of this Section VI.H (ii), “Determination Date” shall mean the date of the Change in Control (or, if an agreement to effectuate a Change in Control pursuant to a Business Combination has been executed, the date one month prior to the date such agreement was executed). If a Payment is to be made, the amount of the Payment shall be determined as follows:

(1) (a) If on the Payment Date a Participant is (I) employed by the Company or any Subsidiary (provided that any Participant whose employment is terminated by the Company other than for Cause (as defined below) on or after the Determination Date shall be deemed solely for purposes of this Section VI.H(ii)(1)(a) to be employed on the Payment Date by the Company or any Subsidiary), (II) receiving or entitled to receive benefits under Section VI.A, or (III) otherwise designated by the Committee as eligible to receive benefits under this Section VI.H(ii)(1)(a), the Company shall pay on the Payment Date to such Participant a Payment in an amount equal to the present value as of the Payment Date of the remaining scheduled Interim Distributions and retirement distributions to be made to such Participant as of December 31, 1996 (based upon assumed continued accruals at an interest rate equal to the Applicable Rate effect on December 31, 1996, as disclosed to such Participant by the Company in its statement of benefits under this Plan), to the extent such distributions have not been made; provided, that in the event a Participant eligible for a Payment under this Section VI.H(ii)(1)(a) has already received prior to the Payment Date a lump sum benefit under Section VI.F, the amount of Payment to such Participant shall be an amount equal to the excess, if any, of (x) the amount of the Payment determined under this Section VI.H(ii)(1)(a) (without regard to this proviso), over (y) the amount of the lump sum benefit already received pursuant to Section VI.F. For purposes of this Section VI.H(ii)(1)(a), the “present value” shall be determined on an interest-only basis (i.e., without discount for mortality) using a discount rate of 4.2%, compounded annually (see Exhibit B for an illustration of such present value calculation).

 

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(b) For purposes of Section VI.H(ii), termination by the Company of a Participant’s employment for “Cause” shall mean termination upon (I) the willful and continued failure by such Participant to perform substantially such Participant’s duties with the Company (other than any such failure resulting from such Participant’s incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to such Participant by the Chairman of the Board, Chief Executive Officer or President of the Company which specifically identifies the manner in which such person believes that such Participant has not substantially performed such Participant’s duties, which failure to perform causes material and demonstrable economic harm to the Company or its Affiliates (as defined below), (II) the willful engaging by such Participant in illegal conduct which is materially and demonstrably injurious to the Company, or (III) the conviction of such Participant of, or a plea of guilty or nolo contendere by such Participant to, a felony. For purposes of this Section VI.H(ii)(1)(b), no act, or failure to act, on such Participant’s part shall be considered “willful” unless done, or omitted to be done, by such Participant in bad faith and without reasonable belief that such Participant’s action or omission was in, or not opposed to, the best interests of the Company or its Affiliates. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company or upon the instructions of the Chief Executive Officer or other senior executive officer of the Company shall be conclusively presumed to be done, or omitted to be done, by such Participant in good faith and in the best interests of the Company and its Affiliates. For purposes of this Section VI.H(ii)(1)(b), “Affiliate” means any person directly or indirectly controlling, controlled by, or under common control with the Company. It is also expressly understood that such Participant’s attention to matters or such Participant’s engagement in activities not directly related to the business of the Company shall not provide a basis for termination for Cause so long as the Board has approved such Participant’s engagement in such activities prior to or following a Change in Control. Notwithstanding the foregoing, in the case of clause (I) or (II) of this Section VI.H(ii)(1)(b), such Participant shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to such Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths (  3 4 ) of the entire membership of the Board (excluding such Participant if such Participant is a Board member) at a meeting of the Board called and held for such purpose (after reasonable notice to such Participant and an opportunity for such Participant, together with such Participant’s counsel, to be heard before the Board), finding that in the good faith opinion of the Board such Participant was guilty of the conduct set forth above in clause (I) or (II) of this Section VI.H(ii)(1)(b) and specifying the particulars thereof in detail. The Company must notify such Participant of any event constituting Cause within ninety (90) days following the Company’s knowledge of its existence or such event shall not constitute Cause under this Section VI.H(ii)(1)(b).

(2) If on the Payment Date a Participant is (a) entitled to receive a lump sum benefit under Section VI.B or (b) entitled to receive a lump sum benefit under Section VI.F (other than any Participant eligible to receive a Payment pursuant to the proviso in clause (I) of Section VI.H(ii)(1)(a)), the Company shall pay on the Payment Date to such Participant a Payment in an amount equal to the amount of such lump sum benefit otherwise payable under such applicable Section to such Participant (with continued interest accruals through the Payment Date only).

(3) If on the Payment Date a Participant is receiving or entitled to receive benefits under Section VI.G (other than any Participant designated by the Committee as eligible to receive benefits under Section VI.H(ii)(1)(a)(III) above), the Company shall pay on the Payment Date to such Participant a Payment in an amount equal to the unpaid balance as of the Payment Date of the Accrual Account (as recalculated under Section VI.G) in respect of such

 

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Participant; provided , that if such Participant has begun receiving monthly payments under Section VI.G, the Payment shall be in an amount equal to the present value as of the Payment Date of the remaining monthly payments to be made to such Participant under Section VI. G. For purposes of this Section VI.H(ii)(3), the “present value” shall be determined in the same manner as under Section VI.H(ii)(1)(a), except that the discount rate of 4.2% shall be replaced by the discount rate used to determine (under such Participant’s applicable Deferral and Acknowledgment Agreement or Agreements) the monthly payments that are currently being paid to such Participant.

(4) If on the Payment Date a Participant (or such Participant’s Designated Beneficiary) is receiving or entitled to receive a benefit under Section VI.D or Section VI.E, the Company shall pay on the Payment Date to such Participant (or such Participant’s Designated Beneficiary) a Payment in an amount equal to the amount of such lump sum benefit otherwise payable under such applicable Section to such Participant (or such Participant’s Designated Beneficiary) (with continued interest accruals through the Payment Date only); provided , that if such Participant (or such Participant’s Designated Beneficiary) is scheduled to receive such benefit in installments, the Company shall pay to such Participant (or such Participant’s Designated Beneficiary) the unpaid balance as of the Payment Date of the Accrual Account in respect of such Participant; provided , further , that if such Participant (or such Participant’s Designated Beneficiary) has begun to receive installment payments under Section VI.D or Section VI.E, the Payment shall be in an amount equal to the present value as of the Payment Date of the remaining installment payments to be made to such Participant under such applicable Section. For purposes of this Section VI.H(ii)(4), the “present value” shall be determined in the same manner as under Section VI.H(ii)(1)(a), except that the discount rate of 4.2% shall be replaced by the discount rate used by the Administrator to determine the installment payments that are currently being paid to such Participant.

If any Participant receives a payment pursuant to this Section VI.H(ii), then no persons or persons shall receive or be entitled to receive any benefit or payment under any other Section of this Plan or under any Deferral and Acknowledgment Agreement, notwithstanding any other provision of this Plan or any Deferral and Acknowledgment Agreement.

(iii) The provisions of Section VI.H(ii) shall not apply to a Participant who is a current or former Nonemployee Director; provided , however , that the provisions of Section VI.H(ii) shall apply to the extent any Participant defers Base Salary or Incentive Compensation earned while such Participant was not a Nonemployee Director.

I. Source of Payment . The Company shall establish a grantor trust to provide a source of payment of the monthly benefits defined in Paragraph 2 of each of the Deferral and Acknowledgment Agreements of the 2002 Retired Participants (the “Specified Retirement Benefits”). As soon as practicable, but in no event later than 30 days following the establishment of such grantor trust, the Company shall make an irrevocable contribution to such grantor trust in an amount which is sufficient to pay the Specified Retirement Benefits. The Company shall, on a basis no less frequent than annually, thereafter make any additional contributions to such grantor trust which are necessary so that the grantor trust holds assets which provide a sufficient amount to pay the Specified Retirement Benefits.

VII. BENEFICIARY DESIGNATION

Upon the death of the Participant, any benefit or benefits remaining to be paid to the Participant under the terms and conditions of this Plan, shall be paid to that person or persons designated by the Participant in the Deferral and Acknowledgment Agreement governing said benefit or benefits. If no Designated Beneficiary has been chosen by the Participant or if no Designated Beneficiary is then living on the date of the Participant’s death, then the remaining benefit or benefits shall be paid to the personal representative, executor, or administrator of the Participant’s estate who shall be deemed to be a Designated Beneficiary.

 

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VIII. RECALCULATION EVENTS

A. Treatment of This Plan Under Applicable Federal Income Tax Laws . The adoption and maintenance of the Plan is conditioned upon (i) the applicability of Section 451 (a) of the Internal Revenue Code of 1986 (“Code”) to the Participant’s recognition of gross income as a result of his or her participation, (ii) the fact that Participants will not recognize gross income as a result of participation in this Plan until and to the extent that benefits are received, (iii) the applicability of Code Section 404 (a) (5) to the deductibility of the amounts paid to Participants hereunder, (iv) the fact that the Company will not receive a deduction for amounts credited to any accounting reserve created as a result of this Plan until and only to the extent that benefits are paid, and (v) the very limited applicability of the provisions of the Employee Retirement Income Security Act of 1974. If the Internal Revenue Service, the Department of Labor or any court determines or find as a fact or legal conclusion that any of the above conditions is untrue and issues or intends to issue an assessment, determination, opinion or report stating such, or if the opinion of the legal counsel of the Company based upon legal authorities then existing is that any of the above assumptions is incorrect, then, if the Committee so elects, a Recalculation Event shall be deemed to have occurred. If a Recalculation Event occurs under this or any other section of this Plan, then the Participant thereafter, or a Designated Beneficiary, shall be paid benefits on the dates stated in Section VI, herein, or in the Deferral and Acknowledgment Agreement; however, the amount of each benefit stated in Paragraphs 2 and 3 of the Deferral and Acknowledgment Agreement shall be recalculated and restated, at the Committee’s discretion, using a rate of interest not less than the Guaranteed Rate nor more than the Projected Rate on each date upon which interest should have been or will be calculated, compounded annually. If the Participant receives or is entitled to receive a benefit as a result of the occurrence of a Recalculation Event, then no person or persons shall receive or be entitled to receive any benefit or payment under any other Section of this Plan or under any Deferral and Acknowledgment Agreement, notwithstanding any other provision of the Plan or the Deferral and Acknowledgment Agreement.

B. Changes in the Internal Revenue Code of 1986 . Subsequent to December 15, 1992, and prior to a Change in Control, (1) if Code Section 11(b) is deleted or amended or a surtax or other addition to tax is imposed hereafter and, as a result thereof, the amount of federal income tax imposed on taxable income of corporations in excess of One Hundred Thousand Dollars ($100,000) is less than thirty-four percent (34%), (2) if a tax is imposed by the federal government on income, sales, consumption, or the value of goods and services which is not currently contained in the Code, or (3) if the Code is amended or restated so extensively that in the opinion of the legal counsel of the Company the tax treatment of this Plan to the Company has materially changed to the detriment of the Company, then, if the Committee so elects, a Recalculation Event shall be deemed to have occurred and a benefit will be payable only as described in Section VIII.A.

IX. PROVISIONS APPLICABLE TO ADDENDUM PARTICIPANTS

A. The terms of this Section IX were added to the Plan by amendment in 2007. Section V.G., this Section IX, and Exhibit B incorporate into this restated Plan document all the provisions of that amendment. The definitions, terms, conditions, Plan modifications, and other provisions of this Section IX shall apply to all Participants who execute an Addendum, and to no other Participants.

 

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B. All references in the Plan and in any Deferral and Acknowledgement Agreement subject to an Addendum to a “termination of employment” or any similar terms are hereby amended to refer instead to a “separation from service.” Whether a separation from service has occurred shall be determined in accordance with Section 409A of the Code, and the following rules shall apply:

(a) Except in the case of a Participant on a bona fide leave of absence as provided below, a Participant is deemed to have incurred a separation from service if the Company and the Participant reasonably anticipate that the level of services to be performed by the Participant after a date certain would be reduced to twenty percent (20%) or less of the average services rendered by the Participant during the immediately preceding thirty-six (36) month period disregarding periods during which the Participant was on a bona fide leave of absence.

(b) A Participant who is absent from work due to military leave, sick leave or other bona fide leave of absence shall incur a separation from service on the first day immediately following the later of (i) the six-month anniversary of the commencement of the leave or (ii) the expiration of the Participant’s right, if any, to reemployment or to return to work under statute or contract.

(c) For purposes of determining whether a separation from service has occurred, the Company and its affiliates shall be treated as a single employer. For this purpose, an affiliate means a corporation, trade or business that, together with the Company, is treated as a single employer under Section 414(b) or (c) of the Code, except that for the foregoing purposes, common ownership of at least fifty percent (50%) shall be determinative.

(d) The Committee specifically reserves the right to determine whether a sale or other disposition of substantial assets to an unrelated party constitutes a separation from service with respect to a Participant providing services to the seller immediately prior to the transaction and providing services to the buyer after the transaction. Such determination shall be made in accordance with the requirements of Section 409A of the Code.

C. Section III.H (formerly III.G) of the Plan is replaced with the following:

“Change in Control” means the occurrence with respect to the Company of any of the following events: (i) a change in the ownership of the Company; (ii) a change in the effective control of the Company; (iii) a change in the ownership of a substantial portion of the assets of the Company.

For purposes of this Section, a change in the ownership of the Company occurs on the date on which any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, together with stock held by such person or group constitutes more than 50% of the total fair market value or total voting power of the stock of the Company. A change in the effective control of the Company occurs on the date on which either (i) a person, or more than one person acting as a group, acquires ownership of stock of the Company possessing 30% or more of the total voting power of the stock of the Company, taking into account all such stock acquired during the 12-month period ending on the date of the most recent acquisition, or (ii) a majority of the members of the Company’s Board of Directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of such Board of Directors prior to the date of the appointment or election. A change in the ownership of a substantial portion of assets occurs on the date on which any one person, or more than one person acting as a group, other than a person or group of persons that is related to the Company, acquires assets from the Company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions, taking into account all such assets acquired during the 12-month period ending on the date of the most recent acquisition.

 

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An event constitutes a Change in Control with respect to a Participant only if the Participant performs services for the Company, or the Participant’s relationship to the Company otherwise satisfies the requirements of Treasury Regulation Section 1.409A-3(i)(5)(ii).

The determination as to the occurrence of a Change in Control shall be based on objective facts and in accordance with the requirements of Code Section 409A.

D. Notwithstanding any provision of the Plan to the contrary, specifically including but not limited to Sections IV and V:

(a) No new Deferral and Acknowledgement Agreements shall be accepted by the Company.

(b) Existing Deferral and Acknowledgement Agreements may not be amended or modified without the consent of the Committee, which consent shall be withheld if such amendment or modification would cause such Deferral and Acknowledgement Agreement not to comply with Section 409A of the Code.

(c) Neither the Company nor the Committee may accelerate the time or form of payment of any benefit due to the Participant hereunder unless such acceleration is permitted under Treas. Reg. §1.409A-3(j)(4). Neither the Company nor the Committee may delay the time for payment of any benefit due to the Participant hereunder except to the extent permitted under Treas. Reg. §1.409A-2(b)(7).

E. Section VI.A of the Plan is replaced with the following:

A. Retirement Benefit . If a Participant separates from service with the Company and such separation constitutes a Normal Retirement, the Company shall pay to the Participant the benefits from the Participant’s Accrual Account as provided in this paragraph. The first benefit to be paid on the thirty-first (31 st ) day of January following the calendar year in which the Participant attains Normal Retirement. The Accrual Account shall be payable in a total of one hundred eighty (180) monthly payments, calculated initially as one hundred eighty (180) equal payments of the Accrual Account including interest at the Applicable Rate in effect on the later of (i) January 1, 2008 or (ii) January 1 of the year in which the Participant attains Normal Retirement. The monthly payments shall not thereafter be adjusted in the event of a subsequent change in the Applicable Rate.

F. Notwithstanding any provision of Section VI.B of the Plan to the contrary, in the event that (a) a recalculation is required under Section VI.B and (b) any remaining balance shall remain payable to the Participant thereafter, any remaining Accrual Account balance recalculated as of the date of the next installment shall be paid in the same number of installments remaining to be made to the Participant under Section VI.A but for the occurrence of the recalculation. Each installment shall be in an equal amount including interest at the Guaranteed Rate in effect as of January 1 of the year in which the recalculation occurs. Interest at the aforesaid Guaranteed Rate shall accrue on any remaining Accrual Account balance from and after the date of the first installment following the recalculation.

G. The following new sentence is added at the end of Section VI.C of the Plan:

No Interim Distributions shall be made after December 31, 2006.

H. Notwithstanding any provisions of Section VI.D and VI.E of the Plan to the contrary, all payments under such sections shall only be made in one lump sum on the date therein specified and no installment payments shall be made under such sections.

 

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I. The first two sentences of Section VI.G of the Plan are replaced with the following:

If a Participant other than a Nonemployee Director separates from service with the Company after the date on which he or she qualifies for early retirement (as such term is defined in the First Tennessee National Corporation Pension Plan or upon satisfaction of a “Rule of 75”, where the sum of a Participant’s age and years of service with the Company equals at least 75), or if a Participant who is a Nonemployee Director separates from service as a director of the Company after at least 10 years of services as a director of the Company, then the Participant shall be entitled to receive a monthly benefit as described in Section VI.A, however, the Accrual Account shall be recalculated over the entire period of deferral using an interest rate equal to the Guaranteed Rate (unless a higher rate is approved by the Committee). In addition, said benefit shall commence on the thirty-first (31 st ) day of January following the calendar year in which the Participant attains the age of 65.

J. The first two sentences of Section VI.H(ii) of the Plan are replaced with the following:

Notwithstanding any provision of this Plan to the contrary, in the event a Change in Control occurs, the Company shall make a lump sum payment (a “Payment”) to each Participant other than current or former Nonemployee Directors (except as provided below) on the date of the Change of Control simultaneously with the closing thereof, if administratively practicable, or as soon thereafter as is administratively practicable, but no later than 2 business days after the Change in Control has occurred (the “Payment Date”). For purposes of this Section VI.H(ii), “Determination Date” shall mean the date of the Change in Control (or, if an agreement to effectuate a Change in Control pursuant to a Business Combination (as defined under the Plan prior to the amendment which was restated as Section IX) has been executed, the date one month prior to the date such agreement was executed).

K. Notwithstanding any provision of the Plan or this Section IX to the contrary, with respect to a Participant who is a Specified Employee (as defined in Section IX.M) as of the date such Participant incurs a separation from service, payment shall be made no earlier than the first day of the seventh month following the month in which such separation from service occurs. On such date, the Participant shall receive all payments that would have been made on or before such date but for the provisions of this section, and the terms of this section shall not affect the timing or amount of any payments to be made after such date under the other provisions of the Plan or this Section IX.

L. Notwithstanding any provision in Section VIII of the Plan to the contrary, any exercise of discretion by the Committee under Section VIII shall be limited to determining the calculation of the amount of benefits payable and not to changing the time or form of payment of any benefit due to the Participant hereunder.

M. Capitalized terms not otherwise defined in this Section IX shall have the meaning given to such terms in the Plan. In addition, the following definitions shall apply to this Section IX:

(a) “Specified Employee” means a Participant who, as of the date of his separation from service, is a “key employee” of the Company or any Affiliate, any stock of which is actively traded on an established securities market or otherwise. A Participant is a key employee if he or she meets the requirements of Section 416(i)(1)(A)(i), (ii) or (iii) of the Code, (applied in accordance with applicable regulations thereunder and without regard to Section 416(i)(5)) at any time during the 12-month period ending on the Specified Employee Identification Date. Such Participant shall be treated as a key employee for the entire 12-month period beginning on the Specified Employee Effective Date.

 

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                For purposes of determining whether a Participant is a Specified Employee, the compensation of the Participant shall be determined in accordance with the definition of compensation provided under Treas. Reg. Section 1.415(c)-2(d)(3) (wages within the meaning of Section 3401(a) of the Code for purposes of income tax withholding at the source, plus amounts excludible from gross income under Section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k) or 457(b), without regard to rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed); provided, however, that, with respect to a nonresident alien who is not a Participant in the Plan, compensation shall not include compensation that is not includible in the gross income of such person under Sections 872, 893, 894, 911, 931 and 933, provided such compensation is not effectively connected with the conduct of a trade or business within the United States.

                Notwithstanding anything in this paragraph to the contrary, (i) if a different definition of compensation has been designated by the Company with respect to another nonqualified deferred compensation plan in which a key employee participates, the definition of compensation shall be the definition provided in Treas. Reg. Section 1.409A-1(i)(2), and (ii) the Company may through action that is legally binding with respect to all nonqualified deferred compensation plans maintained by the Company, elect to use a different definition of compensation.

                In the event of corporate transactions described in Treas. Reg. Section 1.409A-1(i)(6), the identification of Specified Employees shall be determined in accordance with the default rules described therein, unless the Company elects to utilize the available alternative methodology through designations made within the timeframes specified therein.

(b) “Specified Employee Identification Date” means September 30, unless the Company has elected a different date through action that is legally binding with respect to all nonqualified deferred compensation plans maintained by the Company.

(c) “Specified Employee Effective Date” means the first day of the fourth month following the Specified Employee Identification Date, or such earlier date as is selected by the Committee.

N. The foregoing provisions of this Section IX are intended to cause the Plan as amended to conform with the requirements of Section 409A of the Code, including the regulations thereunder, and the provisions of this Section IX shall be construed in accordance with that intention. If any provision of this Section IX shall be inconsistent or in conflict with the applicable requirements of Section 409A, then such requirements shall be deemed to override and supersede the inconsistent or conflicting provision. Any provision required for compliance with Section 409A that is omitted from this Section IX shall be incorporated herein by reference and shall apply retroactively, if necessary, and be deemed part of this Section IX to the same extent as though expressly set forth herein. The Company will bear no responsibility for any determination by any other person or persons that the terms, arrangements or administration of the Plan has given rise to any tax liability under Section 409A of the Code.

O. This Section IX shall take effect with respect to all benefits payable under the Plan after December 31, 2007 to Participants who execute an Addendum.

X. CLAIMS PROCEDURE

A. Administration . The Plan shall be administered by the Administrator.

B. Benefit Payments . All benefits described in this Plan shall be paid when due. In the event the Participant or Designated Beneficiary fails to receive a benefit which he or she feels is due, a written claim for the benefit shall be submitted in writing to the Administrator. The Administrator shall review the claim when filed and advise the claimant as to whether the claim is approved or denied. If the claim is wholly or partially denied, the Administrator shall furnish a written denial within 90 days after receipt of the filed claim unless special circumstances required an extension of time for processing the claim, in

 

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which case the Administrator shall furnish the written denial within 180 days after receipt of the filed claim. The written denial shall contain (a) the specific reason or reasons for denial; (b) specific reference to pertinent Plan provisions on which the denial is based; (c) a description of any additional information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (d) appropriate information as to the steps to be taken if the claimant wishes to appeal the denial of the claim.

C. Appeal . The claimant may appeal the denial of the claim to the Committee within 90 days after receipt of such decision. The appeal shall be in writing addressed to the Committee and shall state the reason why it should grant the appeal. The Committee shall conduct a full and fair review of the claim and shall issue its decision within 60 days of the receipt of the appeal unless there are special circumstances, in which case a decision shall be rendered within 120 days of the receipt of the appeal. The Committee’s decision shall be in writing, stating the reasons therefor and shall make specific references to the pertinent Plan provisions on which the decision is based.

D. Binding Effect . The Committee’s decision upon appeal, or the Administrator’s initial decision if no appeal is taken, shall be final, conclusive and binding on all parties.

E. Claims after Change in Control . Notwithstanding anything in Section X to the contrary, after a Change in Control:

 

  1. Subsection (D) shall be inoperative;

 

  2. the “90” and “180” day periods in subsection (B) shall be changed to “15” and “30” day periods, respectively;

 

  3. the “90”, “60” and “120” day periods in subsection (C) shall be changed to “30”, “15” and “30” day periods, respectively; and

 

  4. if the claim has not been wholly approved within 90 days after receipt by the Administrator, then the claimant may bring a lawsuit in a court of competent jurisdiction to enforce claimant’s rights under the Plan. All attorneys’ fees and all other costs and expenses incurred by claimant in connection with such litigation shall be the obligation of and shall be paid on a timely basis by the Company regardless of whether claimant prevails in such litigation.

XI. MISCELLANEOUS PROVISIONS

A. Governing Law . This Plan and the Deferral and Acknowledgment Agreements are subject to the laws of the State of Tennessee.

B. Successors This Plan shall bind any successor of the Company, its assets or its businesses (whether direct or indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Company would be obligated under this Plan if no succession had taken place. In the case of any transaction in which a successor would not by the foregoing provision or by operation of law be bound by this Plan, the Company shall require such successor expressly and unconditionally to assume and agree to perform the Company’s obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. The term “Company,” as used in the Plan, shall mean the Company as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by this Plan.

C. Discharge of Company’s Obligation . The payment by the Company of the benefits due under each and every Deferral and Acknowledgment Agreement to the Participant or to the Designated Beneficiary discharges the Company’s obligations hereunder, and the Participant has no further rights under this Plan or the Deferral and Acknowledgment Agreements upon receipt by the appropriate person of all benefits.

 

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D. Social Security and Income Tax Withholding . The Participants agree as a condition of participation hereunder that the Company may withhold federal, state, and local income taxes and Social Security taxes from any distribution or benefit paid hereunder.

E. Notice; Delivery of Deferral and Acknowledgment Agreement . Any notice required to be delivered hereunder and any Deferral and Acknowledgment Agreement is properly delivered to the Company when personally delivered to, or actually received from the United States mail, postage prepaid, by the Administrator.

F. Nature of Obligations Created Hereunder . The Participants agree as a condition of participation hereunder that:

1.         the Company only has a contractual obligation to make payments to or on behalf of the Participants, and the rights of Participants under this Plan and the Deferral and Acknowledgment Agreements are no greater than the rights of any general unsecured creditor of the Company;

2.         to the extent that any person, other than a Participant, acquires a right to receive payments from the Company under this Plan or any Deferral and Acknowledgment Agreement, such right is no greater than the rights of any general unsecured creditor of the Company;

3.         nothing contained in this Plan or any Deferral and Acknowledgment Agreement shall create or be construed to create a trust of any kind or a fiduciary relationship between the Company and any Participant;

4.         the rights of any Participant may not be sold, assigned, transferred, pledged, or encumbered, nor shall any interest of the Participant be liable to the claim of any creditor of the Participant or subject to any judicial process involving the Participant;

5.         no Participant shall have any rights in any specific assets of the Company, and any accounting reserve established as a result of the Plan only reflects a contractual obligation of the Company on its books of accounting and does not constitute a segregated fund of assets or separation of assets, and the obligations of the Company only are payable from its operating assets at the time the payment is due;

6.         neither this Plan nor any Deferral and Acknowledgment Agreement constitutes a modification of the employment conditions of any Participant, and no right to continued employment is created by this Plan or the Deferral and Acknowledgment Agreement.

G. Non-Uniform Determinations . The Committee’s determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, benefits under the Plan, regardless of whether such persons are similarly situated.

 

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Exhibit A

To Directors and Executives DC Plan

Deferral and Acknowledgement Agreement

for the First Tennessee National Corporation

Directors and Executives Deferred Compensation Plan

1.     Amount of Deferral . I, ___________________, hereby agree to participate in the First Tennessee National Corporation Directors and Executives Deferred Compensation Plan (“Plan”). I have read the Plan in its entirety and agree to its terms and conditions, which are incorporated herein by reference. Pursuant to the terms of the Plan, I elect to defer from my Director’s Compensation to be paid to me in 19__ the sum of ______ Dollars, or in the alternative, ___% of my Director’s Compensation. [Choose amount less than or equal to 100% of Director’s Compensation.] I understand that the compensation which ordinarily would be paid to me in the Plan Year will be reduced by the amount of my deferral, and that such reduction will be made only from my retainer and fees as a director. I further understand that the amount of directors’ fees which will be paid to me depends on the full performance of my obligations as a director for the entire year, that the total amount of directors’ fees paid to me during the year will be decreased from the amount normally paid to directors if I fail to attend any scheduled meetings of the Board of Directors or the committees upon which I serve, and that the benefits stated below and the benefits promised in the Plan will be decreased and adjusted if the amount of my Director’s Compensation actually paid to me during the Plan Year is insufficient to permit the full deferral stated above in accordance with the terms and conditions of the Plan.

2.     Retirement Benefits . Retirement benefits will begin on January 31 following the later of (1) the fifth anniversary of the execution of this Agreement or (2) the Normal Retirement date, as set forth in the Plan. In consideration for my deferral, the Company shall pay to me the following benefits from my Accrual Account on the dates specified in Paragraph VI of the Plan, if I am entitled to these benefits under the terms and conditions of the Plan:

A total of one hundred eighty (180) monthly payments, calculated initially as 180 equal payments, including interest at the Applicable Rate in effect on January 1 following attainment of Normal Retirement. In the event the Applicable Rate in effect on the date of the first payment hereunder is changed during the period in which benefits are being paid, a recalculation of the monthly benefit for the remaining period shall be made to reflect the change in the Applicable Rate.

3.     Interim Distributions . In consideration for my deferral, the Company shall pay to me the benefits set forth on Exhibit “B,” a copy of which is attached hereto and made a part hereof, on January 31 of each year in which I am entitled to receive such benefits under the terms and conditions of the Plan. An Interim Distribution shall be payable so long as the value of the Accrual Account equals or exceeds the value of the benefit payable. In the event that, on any January 31 of a year in which an Interim Distribution is payable the value of the Accrual Account is less than the amount of the scheduled payment, then the balance of the Accrual Account shall be paid to the Participant and no further benefits shall be payable under the Plan.

4.     Primacy of Plan . I recognize that I am entitled to benefits hereunder and that this Agreement is subject to the terms and conditions of the Plan.

 

1


5.     Designated Beneficiary . For any and all purposes of this Plan, I hereby designate ___________________________ as my beneficiary pursuant to Paragraph VII of the Plan.

 

 

 

Signature

 

 

 

Date

 

Accepted by Company:
 

 

Signature

 

 

 

Date

[This form document was used before the Company changed its name to First Horizon

National Association, and the Plan’s name was changed correspondingly.

Also, this form document refers to certain provisions of the Plan

in effect prior to several amendments and restatements.]

 

2


Exhibit B

To Directors and Executives DC Plan

ADDENDUM TO

DEFERRAL AND ACKNOWLEDGEMENT AGREEMENT

FOR THE FIRST HORIZON NATIONAL CORPORATION

DIRECTORS AND EXECUTIVES DEFERRED COMPENSATION PLAN

The undersigned agrees that each and every Deferral and Acknowledgement Agreement between the undersigned and First Horizon National Corporation (and/or its affiliates) under the First Horizon National Corporation Directors and Executives Deferred Compensation Plan is hereby amended to be subject to all applicable terms, conditions and provisions as set forth in [the Amendment to the Plan as adopted by the Compensation Committee on the ______ day of ____________________, 20___.] USED PRIOR TO 2017 PLAN RESTATEMENT [Section V.G. and Section IX of the Plan.] IF NEEDED, TO BE USED AFTER 2017 PLAN RESTATEMENT

 

 

 

Signature

 

 

 

Print Name

 

 

 

Date

 

Accepted by Company:
By:                                                                                                   
Title:                                                                                               
Date:                                                                                               

 

3

Exhibit 31(a)

FIRST HORIZON NATIONAL CORPORATION

RULE 13a – 14(a) CERTIFICATIONS OF CEO

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(QUARTERLY REPORT)

CERTIFICATIONS

I, D. Bryan Jordan, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of First Horizon National Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or noaterial, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2017

/s/ D. Bryan Jordan

D. Bryan Jordan

Chairman of the Board, President and

Chief Executive Officer

Exhibit 31(b)

FIRST HORIZON NATIONAL CORPORATION

RULE 13a – 14(a) CERTIFICATIONS OF CFO

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(QUARTERLY REPORT) CERTIFICATIONS

I, William C. Losch III, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of First Horizon National Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or noaterial, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2017

/s/ William C. Losch III

William C. Losch III

Executive Vice President and Chief Financial Officer

Exhibit 32(a)

CERTIFICATION OF PERIODIC REPORT

18 USC 1350 CERTIFICATIONS OF CEO

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,

As Codified at 18 U.S.C. Section 1350

I, the undersigned D. Bryan Jordan, Chairman of the Board, President and Chief Executive Officer of First Horizon National Corporation (“Corporation”), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, as follows:

 

1. The Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

 

Date: August 8, 2017
/s/ D. Bryan Jordan

D. Bryan Jordan

Chairman of the Board, President and Chief Executive Officer

Exhibit 32(b)

CERTIFICATION OF PERIODIC REPORT

18 USC 1350 CERTIFICATIONS OF CFO

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,

As Codified at 18 U.S.C. Section 1350

I, the undersigned William C. Losch III, Executive Vice President and Chief Financial Officer of First Horizon National Corporation (“Corporation”), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, as follows:

 

1. The Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

 

Date: August 8, 2017
/s/ William C. Losch III

William C. Losch III

Executive Vice President and Chief Financial Officer