UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
|
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172018
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 SeptemberJune 30, 20172018 |
Common Stock, $.625 par value | | 234,230,515325,003,353 |
Table of Contents
FIRST HORIZON NATIONAL CORPORATION
INDEX
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
This financial information reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of the financial condition and results of operations for the interim periods presented.
CONSOLIDATED CONDENSED STATEMENTS OF CONDITION
|
| | | | | | | | |
| | First Horizon National Corporation |
| | (Unaudited) | | December 31 |
| | June 30 | |
(Dollars in thousands, except per share amounts) | | 2018 | | 2017 |
Assets: | | | | |
Cash and due from banks | | $ | 602,952 |
| | $ | 639,073 |
|
Federal funds sold | | 91,303 |
| | 87,364 |
|
Securities purchased under agreements to resell (Note 15) | | 782,765 |
| | 725,609 |
|
Total cash and cash equivalents | | 1,477,020 |
| | 1,452,046 |
|
Interest-bearing cash | | 750,634 |
| | 1,185,600 |
|
Trading securities | | 1,649,470 |
| | 1,416,345 |
|
Loans held-for-sale (a) | | 692,659 |
| | 699,377 |
|
Securities available-for-sale (Note 3) | | 4,724,411 |
| | 5,170,255 |
|
Securities held-to-maturity (Note 3) | | 10,000 |
| | 10,000 |
|
Loans, net of unearned income (Note 4) (b) | | 27,701,740 |
| | 27,658,929 |
|
Less: Allowance for loan losses (Note 5) | | 185,462 |
| | 189,555 |
|
Total net loans | | 27,516,278 |
| | 27,469,374 |
|
Goodwill (Note 6) | | 1,409,276 |
| | 1,386,853 |
|
Other intangible assets, net (Note 6) | | 167,955 |
| | 184,389 |
|
Fixed income receivables | | 68,148 |
| | 68,693 |
|
Premises and equipment, net (June 30, 2018 and December 31, 2017 include $43.6 million and $53.2 million, respectively, classified as held-for-sale) | | 525,175 |
| | 532,251 |
|
Other real estate owned (“OREO”) (c) | | 29,712 |
| | 43,382 |
|
Derivative assets (Note 14) | | 122,056 |
| | 81,634 |
|
Other assets | | 1,934,001 |
| | 1,723,189 |
|
Total assets | | $ | 41,076,795 |
| | $ | 41,423,388 |
|
Liabilities and equity: | | | | |
Deposits: | | | | |
Savings (December 31, 2017 includes $22.6 million classified as held-for-sale) | | $ | 11,284,013 |
| | $ | 10,872,665 |
|
Time deposits, net (December 31, 2017 includes $8.0 million classified as held-for-sale) | | 3,543,987 |
| | 3,322,921 |
|
Other interest-bearing deposits | | 7,911,977 |
| | 8,401,773 |
|
Interest-bearing | | 22,739,977 |
| | 22,597,359 |
|
Noninterest-bearing (December 31, 2017 includes $4.8 million classified as held-for-sale) | | 8,237,890 |
| | 8,023,003 |
|
Total deposits | | 30,977,867 |
| | 30,620,362 |
|
Federal funds purchased | | 351,655 |
| | 399,820 |
|
Securities sold under agreements to repurchase (Note 15) | | 713,152 |
| | 656,602 |
|
Trading liabilities | | 743,721 |
| | 638,515 |
|
Other short-term borrowings | | 1,836,852 |
| | 2,626,213 |
|
Term borrowings | | 1,227,281 |
| | 1,218,097 |
|
Fixed income payables | | 14,739 |
| | 48,996 |
|
Derivative liabilities (Note 14) | | 135,349 |
| | 85,061 |
|
Other liabilities | | 526,430 |
| | 549,234 |
|
Total liabilities | | 36,527,046 |
| | 36,842,900 |
|
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, 2018 and December 31, 2017) | | 95,624 |
| | 95,624 |
|
Common stock - $.625 par value (shares authorized - 400,000,000; shares issued - 325,003,353 on June 30, 2018 and 326,736,214 on December 31, 2017) | | 203,127 |
| | 204,211 |
|
Capital surplus | | 3,113,612 |
| | 3,147,613 |
|
Undivided profits | | 1,254,069 |
| | 1,160,434 |
|
Accumulated other comprehensive loss, net (Note 8) | | (412,114 | ) | | (322,825 | ) |
Total First Horizon National Corporation Shareholders’ Equity | | 4,254,318 |
| | 4,285,057 |
|
Noncontrolling interest | | 295,431 |
| | 295,431 |
|
Total equity | | 4,549,749 |
| | 4,580,488 |
|
Total liabilities and equity | | $ | 41,076,795 |
| | $ | 41,423,388 |
|
|
| | | | | | | | |
| | First Horizon National Corporation |
| | (Unaudited) | | December 31 |
| | September 30 | |
(Dollars in thousands, except per share amounts) | | 2017 | | 2016 |
Assets: | | | | |
Cash and due from banks | | $ | 347,802 |
| | $ | 373,274 |
|
Federal funds sold | | 76,316 |
| | 50,838 |
|
Securities purchased under agreements to resell (Note 15) | | 663,637 |
| | 613,682 |
|
Total cash and cash equivalents | | 1,087,755 |
| | 1,037,794 |
|
Interest-bearing cash | | 604,326 |
| | 1,060,034 |
|
Trading securities | | 1,469,402 |
| | 897,071 |
|
Loans held-for-sale (a) | | 339,780 |
| | 111,248 |
|
Securities available-for-sale (Note 3) | | 3,963,138 |
| | 3,943,499 |
|
Securities held-to-maturity (Note 3) | | 10,000 |
| | 14,347 |
|
Loans, net of unearned income (Note 4) (b) | | 20,166,091 |
| | 19,589,520 |
|
Less: Allowance for loan losses (Note 5) | | 194,867 |
| | 202,068 |
|
Total net loans | | 19,971,224 |
| | 19,387,452 |
|
Goodwill (Note 6) | | 236,335 |
| | 191,371 |
|
Other intangible assets, net (Note 6) | | 43,157 |
| | 21,017 |
|
Fixed income receivables | | 68,750 |
| | 57,411 |
|
Premises and equipment, net (September 30, 2017 and December 31, 2016 include $4.3 million and $5.8 million, respectively, classified as held-for-sale) | | 293,393 |
| | 289,385 |
|
Other real estate owned (“OREO”) (c) | | 12,522 |
| | 16,237 |
|
Derivative assets (Note 14) | | 80,976 |
| | 121,654 |
|
Other assets | | 1,441,878 |
| | 1,406,711 |
|
Total assets | | $ | 29,622,636 |
| | $ | 28,555,231 |
|
Liabilities and equity: | | | |
|
Deposits: | | | | |
Savings | | $ | 8,592,315 |
| | $ | 9,428,197 |
|
Time deposits | | 1,112,098 |
| | 1,355,133 |
|
Other interest-bearing deposits | | 5,909,596 |
| | 5,948,439 |
|
Interest-bearing | | 15,614,009 |
| | 16,731,769 |
|
Noninterest-bearing | | 6,485,245 |
| | 5,940,594 |
|
Total deposits | | 22,099,254 |
| | 22,672,363 |
|
Federal funds purchased | | 292,650 |
| | 414,207 |
|
Securities sold under agreements to repurchase (Note 15) | | 516,867 |
| | 453,053 |
|
Trading liabilities | | 579,028 |
| | 561,848 |
|
Other short-term borrowings | | 1,637,419 |
| | 83,177 |
|
Term borrowings | | 1,059,507 |
| | 1,040,656 |
|
Fixed income payables | | 44,304 |
| | 21,002 |
|
Derivative liabilities (Note 14) | | 83,146 |
| | 135,897 |
|
Other liabilities | | 426,910 |
| | 467,944 |
|
Total liabilities | | $ | 26,739,085 |
| | $ | 25,850,147 |
|
Equity: | | | | |
First Horizon National Corporation Shareholders’ Equity: | | | | |
Preferred stock - Series A, non-cumulative perpetual, no par value, liquidation preference of $100,000 per share - (shares authorized - 1,000; shares issued - 1,000 on September 30, 2017 and December 31, 2016) | | 95,624 |
| | 95,624 |
|
Common stock - $.625 par value (shares authorized - 400,000,000; shares issued - 234,230,515 on September 30, 2017 and 233,623,686 on December 31, 2016) | | 146,395 |
| | 146,015 |
|
Capital surplus | | 1,401,359 |
| | 1,386,636 |
|
Undivided profits | | 1,177,126 |
| | 1,029,032 |
|
Accumulated other comprehensive loss, net (Note 8) | | (232,384 | ) | | (247,654 | ) |
Total First Horizon National Corporation Shareholders’ Equity | | 2,588,120 |
| | 2,409,653 |
|
Noncontrolling interest | | 295,431 |
| | 295,431 |
|
Total equity | | 2,883,551 |
| | 2,705,084 |
|
Total liabilities and equity | | $ | 29,622,636 |
| | $ | 28,555,231 |
|
See accompanying notes to consolidated condensed financial statements.
| |
(a) | SeptemberJune 30, 20172018 and December 31, 20162017 include $12.8$8.9 million and $19.3$11.7 million, respectively, of held-for-sale consumer mortgage loans secured by residential real estate in process of foreclosure. |
| |
(b) | SeptemberJune 30, 20172018 and December 31, 20162017 include $24.8$21.4 million and $28.5$22.7 million, respectively, of held-to-maturity consumer mortgage loans secured by residential real estate properties in process of foreclosure. |
| |
(c) | SeptemberJune 30, 20172018 and December 31, 20162017 include $7.1$6.1 million and $8.1$6.3 million, respectively, of foreclosed residential real estate. |
CONSOLIDATEDCONSOLIDATED CONDENSED STATEMENTS OF INCOME
| | | | First Horizon National Corporation | First Horizon National Corporation |
| | Three Months Ended September 30 | | Nine Months Ended September 30 | 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 | 2018 | | 2017 | | 2018 | | 2017 |
Interest income: | | | | | | | | | | | | | | | |
Interest and fees on loans | | $ | 205,220 |
| | $ | 174,039 |
| | $ | 578,264 |
| | $ | 495,516 |
| $ | 323,974 |
| | $ | 192,580 |
| | $ | 623,467 |
| | $ | 373,044 |
|
Interest on investment securities available-for-sale | | 25,575 |
| | 23,655 |
| | 76,867 |
| | 72,082 |
| 32,634 |
| | 25,657 |
| | 65,481 |
| | 51,292 |
|
Interest on investment securities held-to-maturity | | 131 |
| | 197 |
| | 460 |
| | 592 |
| 132 |
| | 132 |
| | 263 |
| | 329 |
|
Interest on loans held-for-sale | | 6,123 |
| | 1,445 |
| | 10,916 |
| | 3,904 |
| 11,228 |
| | 3,510 |
| | 23,372 |
| | 4,793 |
|
Interest on trading securities | | 8,262 |
| | 6,793 |
| | 24,033 |
| | 22,564 |
| 14,742 |
| | 9,418 |
| | 29,150 |
| | 15,771 |
|
Interest on other earning assets | | 2,834 |
| | 843 |
| | 11,757 |
| | 3,354 |
| 5,101 |
| | 4,044 |
| | 9,433 |
| | 8,923 |
|
Total interest income | | 248,145 |
| | 206,972 |
| | 702,297 |
| | 598,012 |
| 387,811 |
| | 235,341 |
| | 751,166 |
| | 454,152 |
|
Interest expense: | | | | | | | | | | | | | | | |
Interest on deposits: | | | | | | | | | | | | | | | |
Savings | | 10,920 |
| | 4,939 |
| | 31,324 |
| | 13,275 |
| 25,600 |
| | 11,194 |
| | 40,500 |
| | 20,404 |
|
Time deposits | | 2,591 |
| | 2,496 |
| | 8,342 |
| | 7,293 |
| 11,236 |
| | 2,918 |
| | 20,761 |
| | 5,751 |
|
Other interest-bearing deposits | | 6,759 |
| | 2,592 |
| | 15,976 |
| | 7,422 |
| 11,913 |
| | 5,074 |
| | 22,521 |
| | 9,217 |
|
Interest on trading liabilities | | 3,298 |
| | 3,331 |
| | 11,282 |
| | 11,152 |
| 4,790 |
| | 4,203 |
| | 9,914 |
| | 7,984 |
|
Interest on short-term borrowings | | 4,998 |
| | 1,254 |
| | 9,293 |
| | 3,585 |
| 10,110 |
| | 2,903 |
| | 20,152 |
| | 4,295 |
|
Interest on term borrowings | | 9,762 |
| | 7,165 |
| | 25,854 |
| | 21,752 |
| 13,230 |
| | 8,348 |
| | 25,213 |
| | 16,092 |
|
Total interest expense | | 38,328 |
| | 21,777 |
| | 102,071 |
| | 64,479 |
| 76,879 |
| | 34,640 |
| | 139,061 |
| | 63,743 |
|
Net interest income | | 209,817 |
| | 185,195 |
| | 600,226 |
| | 533,533 |
| 310,932 |
| | 200,701 |
| | 612,105 |
| | 390,409 |
|
Provision/(provision credit) for loan losses | | — |
| | 4,000 |
| | (3,000 | ) | | 11,000 |
| — |
| | (2,000 | ) | | (1,000 | ) | | (3,000 | ) |
Net interest income after provision/(provision credit) for loan losses | | 209,817 |
| | 181,195 |
| | 603,226 |
| | 522,533 |
| 310,932 |
| | 202,701 |
| | 613,105 |
| | 393,409 |
|
Noninterest income: | | | | | | | | | | | | | | | |
Fixed income | | 55,758 |
| | 71,748 |
| | 161,546 |
| | 216,638 |
| 37,697 |
| | 55,110 |
| | 83,203 |
| | 105,788 |
|
Deposit transactions and cash management | | 28,011 |
| | 27,221 |
| | 80,434 |
| | 81,049 |
| 36,083 |
| | 27,858 |
| | 72,067 |
| | 52,423 |
|
Brokerage, management fees and commissions | | 11,937 |
| | 10,828 |
| | 35,872 |
| | 31,908 |
| 13,740 |
| | 12,029 |
| | 27,223 |
| | 23,935 |
|
Trust services and investment management | | 6,953 |
| | 6,885 |
| | 21,304 |
| | 20,674 |
| 8,132 |
| | 7,698 |
| | 15,409 |
| | 14,351 |
|
Bankcard income | | 6,170 |
| | 6,260 |
| | 17,230 |
| | 18,077 |
| 6,635 |
| | 5,605 |
| | 13,080 |
| | 11,060 |
|
Bank-owned life insurance | | 3,539 |
| | 3,997 |
| | 11,137 |
| | 11,129 |
| 5,773 |
| | 4,351 |
| | 9,766 |
| | 7,598 |
|
Debt securities gains/(losses), net (Note 3 and Note 8) | | 1 |
| | — |
| | 450 |
| | 1,654 |
| — |
| | 405 |
| | 52 |
| | 449 |
|
Equity securities gains/(losses), net (Note 3) | | 5 |
| | (200 | ) | | 5 |
| | (181 | ) | 31 |
| | — |
| | 65 |
| | — |
|
All other income and commissions (Note 7) | | 43 |
| | 21,806 |
| | 29,051 |
| | 47,416 |
| 19,434 |
| | 14,617 |
| | 42,677 |
| | 29,008 |
|
Total noninterest income | | 112,417 |
| | 148,545 |
| | 357,029 |
| | 428,364 |
| 127,525 |
| | 127,673 |
| | 263,542 |
| | 244,612 |
|
Adjusted gross income after provision/(provision credit) for loan losses | | 322,234 |
| | 329,740 |
| | 960,255 |
| | 950,897 |
| 438,457 |
| | 330,374 |
| | 876,647 |
| | 638,021 |
|
Noninterest expense: | | | | | | | | | | | | | | | |
Employee compensation, incentives, and benefits | | 137,798 |
| | 145,103 |
| | 411,818 |
| | 425,624 |
| 165,890 |
| | 138,276 |
| | 337,144 |
| | 272,770 |
|
Occupancy | | 13,619 |
| | 12,722 |
| | 38,759 |
| | 38,062 |
| 22,503 |
| | 12,800 |
| | 42,954 |
| | 25,140 |
|
Professional fees | | 15,415 |
| | 9,659 |
| | 27,687 |
| | 14,405 |
|
Computer software | | 11,993 |
| | 10,400 |
| | 35,077 |
| | 33,213 |
| 15,123 |
| | 12,285 |
| | 30,255 |
| | 23,084 |
|
Operations services | | 10,805 |
| | 10,518 |
| | 33,204 |
| | 30,939 |
| |
Operational services | | 14,653 |
| | 11,524 |
| | 30,214 |
| | 22,399 |
|
Equipment rentals, depreciation, and maintenance | | 6,626 |
| | 6,085 |
| | 20,013 |
| | 19,426 |
| 10,708 |
| | 7,036 |
| | 20,726 |
| | 13,387 |
|
Professional fees | | 6,566 |
| | 4,859 |
| | 20,971 |
| | 14,342 |
| |
FDIC premium expense | | 6,062 |
| | 5,721 |
| | 17,728 |
| | 15,490 |
| 9,978 |
| | 5,927 |
| | 18,592 |
| | 11,666 |
|
Communications and courier | | 7,530 |
| | 4,117 |
| | 15,762 |
| | 7,917 |
|
Amortization of intangible assets | | 6,460 |
| | 1,964 |
| | 12,934 |
| | 3,196 |
|
Contract employment and outsourcing
| | 5,907 |
| | 3,255 |
| | 9,960 |
| | 6,213 |
|
Advertising and public relations | | 5,205 |
| | 6,065 |
| | 13,901 |
| | 15,519 |
| 5,070 |
| | 4,095 |
| | 8,669 |
| | 8,696 |
|
Communications and courier | | 4,328 |
| | 3,883 |
| | 12,245 |
| | 10,672 |
| |
Contract employment and outsourcing | | 2,762 |
| | 2,443 |
| | 8,975 |
| | 7,365 |
| |
Legal fees | | 2,052 |
| | 4,750 |
| | 10,831 |
| | 15,520 |
| 2,784 |
| | 3,496 |
| | 5,129 |
| | 8,779 |
|
Amortization of intangible assets | | 1,964 |
| | 1,299 |
| | 5,160 |
| | 3,898 |
| |
Repurchase and foreclosure provision/(provision credit) | | (609 | ) | | (218 | ) | | (22,580 | ) | | (31,618 | ) | (252 | ) | | (21,733 | ) | | (324 | ) | | (21,971 | ) |
All other expense (Note 7) | | 27,698 |
| | 19,928 |
| | 70,889 |
| | 88,855 |
| 50,999 |
| | 25,216 |
| | 86,331 |
| | 44,441 |
|
Total noninterest expense | | 236,869 |
| | 233,558 |
| | 676,991 |
| | 687,307 |
| 332,768 |
| | 217,917 |
| | 646,033 |
| | 440,122 |
|
Income/(loss) before income taxes | | 85,365 |
| | 96,182 |
| | 283,264 |
| | 263,590 |
| 105,689 |
| | 112,457 |
| | 230,614 |
| | 197,899 |
|
Provision/(benefit) for income taxes | | 13,596 |
| | 28,547 |
| | 57,903 |
| | 82,802 |
| 19,697 |
| | 17,253 |
| | 49,628 |
| | 44,307 |
|
Net income/(loss) | | $ | 71,769 |
| | $ | 67,635 |
| | $ | 225,361 |
| | $ | 180,788 |
| $ | 85,992 |
| | $ | 95,204 |
| | $ | 180,986 |
| | $ | 153,592 |
|
Net income attributable to noncontrolling interest | | 2,883 |
| | 2,883 |
| | 8,555 |
| | 8,586 |
| 2,852 |
| | 2,852 |
| | 5,672 |
| | 5,672 |
|
Net income/(loss) attributable to controlling interest | | $ | 68,886 |
| | $ | 64,752 |
| | $ | 216,806 |
| | $ | 172,202 |
| $ | 83,140 |
| | $ | 92,352 |
| | $ | 175,314 |
| | $ | 147,920 |
|
Preferred stock dividends | | 1,550 |
| | 1,550 |
| | 4,650 |
| | 4,650 |
| 1,550 |
| | 1,550 |
| | 3,100 |
| | 3,100 |
|
Net income/(loss) available to common shareholders | | $ | 67,336 |
| | $ | 63,202 |
| | $ | 212,156 |
| | $ | 167,552 |
| $ | 81,590 |
| | $ | 90,802 |
| | $ | 172,214 |
| | $ | 144,820 |
|
Basic earnings/(loss) per share (Note 9) | | $ | 0.29 |
| | $ | 0.27 |
| | $ | 0.91 |
| | $ | 0.72 |
| $ | 0.25 |
| | $ | 0.39 |
| | $ | 0.53 |
| | $ | 0.62 |
|
Diluted earnings/(loss) per share (Note 9) | | $ | 0.28 |
| | $ | 0.27 |
| | $ | 0.90 |
| | $ | 0.71 |
| $ | 0.25 |
| | $ | 0.38 |
| | $ | 0.52 |
| | $ | 0.61 |
|
Weighted average common shares (Note 9) | | 233,749 |
| | 231,856 |
| | 233,438 |
| | 232,690 |
| 325,153 |
| | 233,482 |
| | 325,817 |
| | 233,280 |
|
Diluted average common shares (Note 9) | | 236,340 |
| | 234,092 |
| | 236,372 |
| | 234,775 |
| 328,426 |
| | 236,263 |
| | 329,353 |
| | 236,225 |
|
Cash dividends declared per common share | | $ | 0.09 |
| | $ | 0.07 |
| | $ | 0.27 |
| | $ | 0.21 |
| $ | 0.12 |
| | $ | 0.09 |
| | $ | 0.24 |
| | $ | 0.18 |
|
Certain previously reported amounts have been reclassifiedrevised to agree with current presentation.
reflect the retroactive effect of the adoption of ASU 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” See Note 1 - Financial Information for additional information.
See accompanying notes to consolidated condensed financial statements.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
| | | | First Horizon National Corporation | First Horizon National Corporation |
| | Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) (Unaudited) | | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Net income/(loss) | | $ | 71,769 |
| | $ | 67,635 |
| | $ | 225,361 |
| | $ | 180,788 |
| $ | 85,992 |
| | $ | 95,204 |
| | $ | 180,986 |
| | $ | 153,592 |
|
Other comprehensive income/(loss), net of tax: | | | | | | | | | | | | | | | |
Net unrealized gains/(losses) on securities available-for-sale | | 3,917 |
| | (7,887 | ) | | 11,292 |
| | 47,310 |
| (21,094 | ) | | 8,938 |
| | (80,637 | ) | | 7,375 |
|
Net unrealized gains/(losses) on cash flow hedges | | (734 | ) | | (1,570 | ) | | (493 | ) | | 3,121 |
| (2,994 | ) | | 2,155 |
| | (11,787 | ) | | 241 |
|
Net unrealized gains/(losses) on pension and other postretirement plans | | 1,895 |
| | 963 |
| | 4,471 |
| | 2,933 |
| 2,059 |
| | 1,403 |
| | 3,346 |
| | 2,576 |
|
Other comprehensive income/(loss) | | 5,078 |
| | (8,494 | ) | | 15,270 |
| | 53,364 |
| (22,029 | ) | | 12,496 |
| | (89,078 | ) | | 10,192 |
|
Comprehensive income | | 76,847 |
| | 59,141 |
| | 240,631 |
| | 234,152 |
| 63,963 |
| | 107,700 |
| | 91,908 |
| | 163,784 |
|
Comprehensive income attributable to noncontrolling interest | | 2,883 |
| | 2,883 |
| | 8,555 |
| | 8,586 |
| 2,852 |
| | 2,852 |
| | 5,672 |
| | 5,672 |
|
Comprehensive income attributable to controlling interest | | $ | 73,964 |
| | $ | 56,258 |
| | $ | 232,076 |
| | $ | 225,566 |
| $ | 61,111 |
| | $ | 104,848 |
| | $ | 86,236 |
| | $ | 158,112 |
|
Income tax expense/(benefit) of items included in Other comprehensive income: | | | | | | | | | | | | | | | |
Net unrealized gains/(losses) on securities available-for-sale | | $ | 2,430 |
| | $ | (4,902 | ) | | $ | 7,002 |
| | $ | 29,402 |
| $ | (6,924 | ) | | $ | 5,543 |
| | $ | (26,471 | ) | | $ | 4,573 |
|
Net unrealized gains/(losses) on cash flow hedges | | (455 | ) | | (975 | ) | | (306 | ) | | 1,940 |
| (983 | ) | | 1,336 |
| | (3,870 | ) | | 149 |
|
Net unrealized gains/(losses) on pension and other postretirement plans | | 1,175 |
| | 598 |
| | 2,772 |
| | 1,823 |
| 676 |
| | 870 |
| | 1,098 |
| | 1,597 |
|
See accompanying notes to consolidated condensed financial statements.
CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
| | | | First Horizon National Corporation | | First Horizon National Corporation |
| | 2017 | | 2016 | | 2018 | | 2017 |
(Dollars in thousands except per share data) (Unaudited) | | Controlling Interest | | Noncontrolling Interest | | Total | | Controlling Interest | | Noncontrolling Interest | | Total | | 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 |
| | $ | 4,285,057 |
| | $ | 295,431 |
| | $ | 4,580,488 |
| | $ | 2,409,653 |
| | $ | 295,431 |
| | $ | 2,705,084 |
|
Adjustment to reflect adoption of ASU 2017-12 | | | 67 |
| | — |
| | 67 |
| | — |
| | — |
| | — |
|
Beginning balance, as adjusted | | | $ | 4,285,124 |
| | $ | 295,431 |
| | $ | 4,580,555 |
| | $ | 2,409,653 |
| | $ | 295,431 |
| | $ | 2,705,084 |
|
Net income/(loss) | | 216,806 |
| | 8,555 |
| | 225,361 |
| | 172,202 |
| | 8,586 |
| | 180,788 |
| | 175,314 |
| | 5,672 |
| | 180,986 |
| | 147,920 |
| | 5,672 |
| | 153,592 |
|
Other comprehensive income/(loss) (a) | | 15,270 |
| | — |
| | 15,270 |
| | 53,364 |
| | — |
| | 53,364 |
| | (89,078 | ) | | — |
| | (89,078 | ) | | 10,192 |
| | — |
| | 10,192 |
|
Comprehensive income/(loss) | | 232,076 |
| | 8,555 |
| | 240,631 |
| | 225,566 |
| | 8,586 |
| | 234,152 |
| | 86,236 |
| | 5,672 |
| | 91,908 |
| | 158,112 |
| | 5,672 |
| | 163,784 |
|
Cash dividends declared: | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred stock ($4,650 per share for the nine months ended September 30, 2017 and 2016) | | (4,650 | ) | | — |
| | (4,650 | ) | | (4,650 | ) | | — |
| | (4,650 | ) | |
Common stock ($.27 and $.21 per share for the nine months ended September 30, 2017 and 2016, respectively) | | (63,777 | ) | | — |
| | (63,777 | ) | | (49,578 | ) | | — |
| | (49,578 | ) | |
Common stock repurchased (b) | | (5,285 | ) | | — |
| | (5,285 | ) | | (96,801 | ) | | — |
| | (96,801 | ) | |
Preferred stock ($3,100 per share for the six months ended June 30, 2018 and 2017) | | | (3,100 | ) | | — |
| | (3,100 | ) | | (3,100 | ) | | — |
| | (3,100 | ) |
Common stock ($.24 and $.18 per share for the six months ended June 30, 2018 and 2017, respectively) | | | (78,858 | ) | | — |
| | (78,858 | ) | | (42,404 | ) | | — |
| | (42,404 | ) |
Common stock repurchased | | | (4,790 | ) | | — |
| | (4,790 | ) | | (4,953 | ) | | — |
| | (4,953 | ) |
Common stock issued for: | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options and restricted stock - equity awards | | 5,132 |
| | — |
| | 5,132 |
| | 18,710 |
| | — |
| | 18,710 |
| | 4,421 |
| | — |
| | 4,421 |
| | 4,309 |
| | — |
| | 4,309 |
|
Acquisition equity adjustment (b) | | | (46,035 | ) | | — |
| | (46,035 | ) | | — |
| | — |
| | — |
|
Stock-based compensation expense | | 14,971 |
| | — |
| | 14,971 |
| | 12,378 |
| | — |
| | 12,378 |
| | 11,453 |
| | — |
| | 11,453 |
| | 9,840 |
| | — |
| | 9,840 |
|
Dividends declared - noncontrolling interest of subsidiary preferred stock | | — |
| | (8,555 | ) | | (8,555 | ) | | — |
| | (8,586 | ) | | (8,586 | ) | | — |
| | (5,672 | ) | | (5,672 | ) | | — |
| | (5,672 | ) | | (5,672 | ) |
Tax benefit/(benefit reversal) - stock based compensation expense | | — |
| | — |
| | — |
| | (629 | ) | | — |
| | (629 | ) | |
Balance, September 30 | | $ | 2,588,120 |
| | $ | 295,431 |
| | $ | 2,883,551 |
| | $ | 2,449,151 |
| | $ | 295,431 |
| | $ | 2,744,582 |
| |
Other | | | (133 | ) | | — |
| | (133 | ) | | | | | | |
Balance, June 30 | | | $ | 4,254,318 |
| | $ | 295,431 |
| | $ | 4,549,749 |
| | $ | 2,531,457 |
| | $ | 295,431 |
| | $ | 2,826,888 |
|
See accompanying notes to consolidated condensed financial statements.
| |
(a) | Due to the nature of the preferred stock issued by FHN and its subsidiaries, all components of Other comprehensive income/(loss) have been attributed solely to FHN as the controlling interest holder. |
| |
(b) | 2016 includes $93.5 million repurchased under share repurchase programs.See Note 2- Acquisitions and Divestitures for additional information. |
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
| | | | First Horizon National Corporation | | First Horizon National Corporation |
| | Nine months ended September 30 | | Six Months Ended June 30 |
(Dollars in thousands) (Unaudited) | | 2017 | | 2016 | | 2018 | | 2017 |
Operating Activities | | | | | | | | |
Net income/(loss) | | $ | 225,361 |
| | $ | 180,788 |
| | $ | 180,986 |
| | $ | 153,592 |
|
Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities: | | | | | | | | |
Provision/(provision credit) for loan losses | | (3,000 | ) | | 11,000 |
| | (1,000 | ) | | (3,000 | ) |
Provision/(benefit) for deferred income taxes | | (547 | ) | | 68,100 |
| | 38,030 |
| | (16,862 | ) |
Depreciation and amortization of premises and equipment | | 25,052 |
| | 24,032 |
| | 23,761 |
| | 16,617 |
|
Amortization of intangible assets | | 5,160 |
| | 3,898 |
| | 12,934 |
| | 3,196 |
|
Net other amortization and accretion | | 22,921 |
| | 19,536 |
| | (8,945 | ) | | 14,288 |
|
Net (increase)/decrease in derivatives | | (14,670 | ) | | 1,330 |
| | (13,735 | ) | | (13,683 | ) |
Fair value adjustment on interest-only strips | | (107 | ) | | — |
| | (1,296 | ) | | — |
|
Repurchase and foreclosure provision/(provision credit) | | (20,000 | ) | | (31,618 | ) | | — |
| | (20,000 | ) |
(Gains)/losses and write-downs on OREO, net | | 44 |
| | (543 | ) | | 167 |
| | 180 |
|
Litigation and regulatory matters | | 7,409 |
| | 25,285 |
| | 688 |
| | (753 | ) |
Stock-based compensation expense | | 14,971 |
| | 12,378 |
| | 11,453 |
| | 9,840 |
|
Equity securities (gains)/losses, net | | (5 | ) | | 181 |
| | (65 | ) | | — |
|
Debt securities (gains)/losses, net | | (450 | ) | | (1,654 | ) | | (52 | ) | | (449 | ) |
(Gain)/loss on extinguishment of debt | | 14,329 |
| | — |
| |
Net (gains)/losses on sale/disposal of fixed assets | | (13 | ) | | 2,519 |
| | (1,614 | ) | | (71 | ) |
Qualified pension plan contribution | | — |
| | (165,000 | ) | |
Loans held-for-sale: | | | | | | | | |
Purchases and originations | | (1,252,300 | ) | | (73,404 | ) | | (1,132,675 | ) | | (549,331 | ) |
Gross proceeds from settlements and sales | | 1,252,477 |
| | 43,653 |
| |
Gross proceeds from settlements and sales (a) | | | 524,195 |
| | 461,119 |
|
(Gain)/loss due to fair value adjustments and other | | 2,485 |
| | 878 |
| | (8,119 | ) | | 2,777 |
|
Net (increase)/decrease in: | | | | | | | | |
Trading securities | | (433,897 | ) | | (441,205 | ) | | 366,476 |
| | (280,135 | ) |
Fixed income receivables | | (11,339 | ) | | (28,337 | ) | | 545 |
| | (70,313 | ) |
Interest receivable | | (7,171 | ) | | (2,014 | ) | | (9,721 | ) | | (2,443 | ) |
Other assets | | (49,225 | ) | | (69,855 | ) | | 31,376 |
| | (4,366 | ) |
Net increase/(decrease) in: | | | | | | | | |
Trading liabilities | | 17,180 |
| | 136,207 |
| | 105,206 |
| | (6,055 | ) |
Fixed income payables | | (73,187 | ) | | 45,825 |
| | (34,257 | ) | | (88,920 | ) |
Interest payable | | 8,869 |
| | 505 |
| | 3,773 |
| | 1,303 |
|
Other liabilities | | (35,770 | ) | | (24,795 | ) | | (44,228 | ) | | (52,669 | ) |
Total adjustments | | (530,784 | ) | | (443,098 | ) | | (137,103 | ) | | (599,730 | ) |
Net cash provided/(used) by operating activities | | (305,423 | ) | | (262,310 | ) | | 43,883 |
| | (446,138 | ) |
Investing Activities | | | | | | | | |
Available-for-sale securities: | | | | | | | | |
Sales | | 3,360 |
| | 1,543 |
| | 13,104 |
| | 63 |
|
Maturities | | 420,136 |
| | 526,112 |
| | 320,631 |
| | 268,155 |
|
Purchases | | (426,129 | ) | | (557,216 | ) | | (254,992 | ) | | (265,770 | ) |
Held-to-maturity securities: | | | | | | | | |
Prepayments and maturities | | 4,740 |
| | — |
| | — |
| | 4,740 |
|
Premises and equipment: | | | | | | | | |
Sales | | 2,577 |
| | 9,636 |
| | 6,566 |
| | 2,103 |
|
Purchases | | (30,395 | ) | | (41,304 | ) | | (25,050 | ) | | (20,498 | ) |
Proceeds from sales of OREO | | 9,235 |
| | 22,887 |
| | 17,513 |
| | 7,340 |
|
Proceeds from BOLI | | | 7,630 |
| | 5,690 |
|
Net (increase)/decrease in: | | | | | | | | |
Loans (a) | | (586,426 | ) | | (1,895,345 | ) | |
Loans | | | (18,465 | ) | | (404,379 | ) |
Interests retained from securitizations classified as trading securities | | 648 |
| | 2,120 |
| | 567 |
| | 397 |
|
Interest-bearing cash | | 459,840 |
| | 383,002 |
| | 434,966 |
| | 490,500 |
|
Cash (paid)/received for acquisition, net | | (123,971 | ) | | — |
| |
Cash paid related to divestitures | | | (27,599 | ) | | — |
|
Cash (paid)/received for acquisition, net (b)
| | | (46,017 | ) | | (123,971 | ) |
Net cash provided/(used) by investing activities | | (266,385 | ) | | (1,548,565 | ) | | 428,854 |
| | (35,630 | ) |
Financing Activities | | | | | | | | |
Common stock: | | | | | | | | |
Stock options exercised | | 5,173 |
| | 18,710 |
| | 4,420 |
| | 2,823 |
|
Cash dividends paid | | (58,850 | ) | | (47,144 | ) | | (60,752 | ) | | (37,809 | ) |
Repurchase of shares (b) | | (5,285 | ) | | (96,801 | ) | | (4,790 | ) | | (4,953 | ) |
Cash dividends paid - preferred stock - noncontrolling interest | | | (5,703 | ) | | (5,672 | ) |
|
| | | | | | | | |
Cash dividends paid - Series A preferred stock | | (3,100 | ) | | (3,100 | ) |
Term borrowings: | | | | |
Payments/maturities | | (5,221 | ) | | (7,239 | ) |
Increases in restricted and secured term borrowings | | 20,965 |
| | — |
|
Net increase/(decrease) in: | | | | |
Deposits | | 387,394 |
| | (338,689 | ) |
Short-term borrowings | | (780,976 | ) | | 917,693 |
|
Net cash provided/(used) by financing activities | | (447,763 | ) | | 523,054 |
|
Net increase/(decrease) in cash and cash equivalents | | 24,974 |
| | 41,286 |
|
Cash and cash equivalents at beginning of period | | 1,452,046 |
| | 1,037,794 |
|
Cash and cash equivalents at end of period | | $ | 1,477,020 |
| | $ | 1,079,080 |
|
Supplemental Disclosures | | | | |
Total interest paid | | $ | 133,791 |
| | $ | 61,908 |
|
Total taxes paid | | 12,497 |
| | 21,805 |
|
Total taxes refunded | | 830 |
| | 8,200 |
|
Transfer from loans to OREO | | 4,010 |
| | 3,184 |
|
Transfer from loans HFS to trading securities | | 600,168 |
| | 265,134 |
|
|
| | | | | | | | |
Cash dividends paid - preferred stock - noncontrolling interest | | (8,523 | ) | | (8,523 | ) |
Cash dividends paid - Series A preferred stock | | (4,650 | ) | | (4,650 | ) |
Term borrowings: | | | | |
Issuance | | 121,184 |
| | 100 |
|
Payments/maturities | | (145,285 | ) | | (264,599 | ) |
Increases in restricted and secured term borrowings | | 29,231 |
| | — |
|
Net increase/(decrease) in: | | | | |
Deposits | | (572,621 | ) | | 1,607,412 |
|
Short-term borrowings | | 1,261,395 |
| | 732,858 |
|
Net cash provided/(used) by financing activities | | 621,769 |
| | 1,937,363 |
|
Net increase/(decrease) in cash and cash equivalents | | 49,961 |
| | 126,488 |
|
Cash and cash equivalents at beginning of period | | 1,037,794 |
| | 1,031,063 |
|
Cash and cash equivalents at end of period | | $ | 1,087,755 |
| | $ | 1,157,551 |
|
Supplemental Disclosures | | | | |
Total interest paid | | $ | 92,405 |
| | $ | 63,337 |
|
Total taxes paid | | 38,151 |
| | 11,580 |
|
Total taxes refunded | | 8,201 |
| | 3,854 |
|
Transfer from loans to OREO | | 5,564 |
| | 8,226 |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
See accompanying notes to consolidated condensed financial statements.
| |
(a) | 2016 includes $537.4 million UPB of loans acquired from GE Capital. |
| |
(b) | 2016 includes $93.5 million repurchased under share repurchase programs. |
(a) 2018 includes $107.4 million related to the sale of approximately $120 million UPB of subprime auto loans. See Note 2- Acquisitions and Divestitures for additional information.
(b) See Note 2- Acquisitions and Divestitures for additional information.
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 20172018 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, 2016.2017.
Revenues. Revenue is recognized when the performance obligations under the terms of a contract with a customer are satisfied in an amount that reflects the consideration FHN expects to be entitled. FHN derives a significant portion of its revenues from fee-based services. Noninterest income from transaction-based fees is generally recognized immediately upon completion of the transaction. Noninterest income from service-based fees is generally recognized over the period in which FHN provides the service. Any services performed over time generally require that FHN render services each period and therefore FHN measures progress in completing these services based upon the passage of time and recognizes revenue as invoiced.
Following is a discussion of FHN's key revenues within the scope of Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers", and all related amendments, except as noted.
Fixed Income. Fixed income includes fixed income securities sales, trading, and strategies, loan sales and derivative sales which are not within the scope of revenue from contracts with customers. Fixed income also includes investment banking fees earned for services related to underwriting debt securities and performing portfolio advisory services. FHN's performance obligation for underwriting services is satisfied on the trade date while advisory services is satisfied over time.
Deposit Transactions and Cash Management. Deposit transactions and cash management activities include fees for services related to consumer and commercial deposit products (such as service charges on checking accounts), cash management products and services such as electronic transaction processing (Automated Clearing House and Electronic Data Interchange), account reconciliation services, cash vault services, lockbox processing, and information reporting to large corporate clients. FHN's obligation for transaction-based services is satisfied at the time of the transaction when the service is delivered while FHN's obligation for service based fees is satisfied over the course of each month.
Brokerage, Management Fees and Commissions. Brokerage, management fees and commissions include fees for portfolio management, trade commissions, and annuity and mutual fund sales. Asset-based management fees are charged based on the market value of the client’s assets. The services associated with these revenues, which include investment advice and active management of client assets are generally performed and recognized over a month or quarter. Transactional revenues are based on the size and number of transactions executed at the client’s direction and are generally recognized on the trade date.
Trust Services and Investment Management. Trust services and investment management fees include investment management, personal trust, employee benefits, and custodial trust services. Obligations for trust services are generally satisfied over time but may be satisfied at points in time for certain activities that are transactional in nature.
Bankcard Income. Bankcard income includes credit interchange and network revenues and various card-related fees. Interchange income is recognized concurrently with the delivery of services on a daily basis. Card-related fees such as late fees, currency conversion, and cash advance fees are loan-related and excluded from the scope of ASU 2014-09.
Contract Balances. As of June 30, 2018, accounts receivable related to products and services on non-interest income were $7.7 million. For the three and six months ended June 30, 2018, FHN had no material impairment losses on non-interest accounts receivable and there were no material contract assets, contract liabilities or deferred contract costs recorded on the Consolidated Condensed Statement of Condition as of June 30, 2018.
Transaction Price Allocated to Remaining Performance Obligations. For the three and six months ended June 30, 2018, revenue recognized from performance obligations related to prior periods was not material.
Note 1 – Financial Information (Continued)
Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less and contracts where revenue is recognized as invoiced, is not material.
Refer to Note 12 - Business Segment Information for a reconciliation of disaggregated revenue by major product line and reportable segment.
Debt Investment Securities. Available-for-sale ("AFS") and held-to-maturity (“HTM”) securities are reviewed quarterly for possible other-than-temporary impairment (“OTTI”). The review includes an analysis of the facts and circumstances of each individual investment such as the degree of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and FHN’s intent and ability to hold the security. Debt securities that may be sold prior to maturity are classified as AFS and are carried at fair value. The unrealized gains and losses on debt securities AFS, including securities for which no credit impairment exists, are excluded from earnings and are reported, net of tax, as a component of other comprehensive income within shareholders’ equity and the Statements of Comprehensive Income. Debt securities which management has the intent and ability to hold to maturity are reported at amortized cost. Interest-only strips that are classified as securities AFS are valued at elected fair value. See Note 16 - Fair Value of Assets and Liabilities for additional information.
Realized gains and losses for investment securities are determined by the specific identification method and reported in noninterest income. Declines in value judged to be other-than-temporary based on FHN’s analysis of the facts and circumstances related to an individual investment, including securities that FHN has the intent to sell, are also determined by the specific identification method. For HTM debt securities, OTTI recognized is typically credit-related and is reported in noninterest income. For impaired AFS debt securities that FHN does not intend to sell and will not be required to sell prior to recovery but for which credit losses exist, the OTTI recognized is separated between the total impairment related to credit losses which is reported in noninterest income, and the impairment related to all other factors which is excluded from earnings and reported, net of tax, as a component of other comprehensive income within shareholders’ equity and the Statements of Comprehensive Income.
Equity Investment Securities. Equity securities were classified as AFS through December 31, 2017. Subsequently, all equity securities are classified in Other assets.
National banks chartered by the federal government are, by law, members of the Federal Reserve System. Each member bank is required to own stock in its regional Federal Reserve Bank ("FRB"). Given this requirement, FRB stock may not be sold, traded, or pledged as collateral for loans. Membership in the Federal Home Loan Bank (“FHLB”) network requires ownership of capital stock. Member banks are entitled to borrow funds from the FHLB and are required to pledge mortgage loans as collateral. Investments in the FHLB are non-transferable and, generally, membership is maintained primarily to provide a source of liquidity as needed. FRB and FHLB stock are recorded at cost and are subject to impairment reviews.
Other equity investments primarily consist of mutual funds which are marked to fair value through earnings. Smaller balances of equity investments without a readily determinable fair value, including FHN's holdings of Visa Class B Common Shares, are recorded at cost minus impairment with adjustments through earnings for observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
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). The effects of adopting ASU 2016-09 have not been significant.
Effective January 1, 2017,2018, 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.Customers,” and all related amendments to all contracts using a modified retrospective transaction method. 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 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“Narrow-
Note 1 – Financial Information (Continued)
Scope Improvements and Practical Expedients,” was issued in May 2016 to provide additional guidance for the implementation and application of ASU 2014-09. “Technical Corrections and Improvements” ASU 2016-20 was issued in December 2016 and
Note 1 – Financial Information (Continued)
provides further guidance on certain issues. These ASUs are effective in annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Transition to the new requirements may be made by retroactively revising prior financial statements (with certain practical expedients permitted) or by a cumulative effect through retained earnings. If the latter option is selected, additional disclosures are required for comparability. FHN is evaluating their effects on its revenue recognition practices. Currently, FHN anticipates that it will electelected to adopt the provisions of the revenue recognition standards through athe cumulative effect alternative and determined that there were no significant effects on the timing of recognition, which resulted in no cumulative effect adjustment being required. Beginning in first quarter 2018, in situations where FHN's broker-dealer operations serve as the lead underwriter, the associated revenues and expenses are presented gross. The effect on 2018 revenues and expenses is not expected to retained earnings with comparability disclosures provided throughout 2018. Based on reviews of its various revenues that are within the scope of ASU 2014-09, FHN has not identified a significant change in it's revenue recognition practices. However, FHN's implementation efforts are ongoing and additional information may change this assessment.be significant.
In February 2017,Effective January 1, 2018, FHN adopted the FASB issuedprovisions of ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” whichthrough the cumulative effect approach. ASU 2017-05 clarifies the meaning and application of the term in"in substance nonfinancial assetasset" 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 hasFHN determined that there were no significant effects on 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 effectstiming of ASU 2017-05 on its revenue recognition, practices. Currently,which resulted in no cumulative effect adjustment being required.
Effective January 1, 2018, FHN anticipates that it will elect to adoptadopted the provisions of ASU 2017-05 through a cumulative effect to retained earnings with comparability disclosures provided throughout 2018.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 makes several revisions to the accounting, presentation and disclosure for financial instruments. Equity investments (except those accounted for under the equity method, those that result in consolidation of the investee, and those held by entities subject to specialized industry accounting which already apply fair value through earnings) are required to be measured at fair value with changes in fair value recognized in net income. This excludes FRB and FHLB stock holdings which are specifically exempted from the provisions of ASU 2016-01. An entity may elect to measure equity investments that do not have readily determinable market values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar instruments from the same issuer. ASU 2016-01 also requires a qualitative impairment review for equity investments without readily determinable fair values, with measurement at fair value required if impairment is determined to exist. For liabilities for which fair value has been elected, ASU 2016-01 revises current accounting to record the portion of fair value changes resulting from instrument-specific credit risk within other comprehensive income rather than earnings. FHN has not elected fair value accounting for any existing financial liabilities. Additionally, ASU 2016-01 clarifies that the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be assessed in combination with all other deferred tax assets rather than being assessed in isolation. ASU 2016-01 also makes several changes to existing fair value presentation and disclosure requirements, including a provision that all disclosures must use an exit price concept in the determination of fair value. ASU 2016-01Transition 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 allreclassified $265.9 million of equity investments out of available-for-saleAFS securities to Other assets, leaving only debt securities within thisthe AFS classification. FHN has evaluated the nature of its current equity investments (excluding FRB and FHLB stock holdings which are specifically exempted from the provisions of ASU 2016-01) and determined that substantially all qualifyqualified for the election available to assets without readily determinable fair values, including its holdings of Visa Class B shares. Accordingly, FHN intends to applyhas applied this election and any future 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 willdid not have a significant effect on FHN because its current accounting and disclosure practices conform to the requirements of ASU 2016-01.
Effective January 1, 2018, FHN also continues to evaluateadopted the impactprovisions of ASU 2016-012016-04, “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. The adoption of ASU 2016-04 did not have a significant effect on other aspects of itsFHN’s current accounting and disclosure practices.
Note 1 – Financial Information (Continued)
Effective January 1, 2018, FHN adopted the provisions of 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. The adoption of ASU 2016-15 was applied retroactively resulting in proceeds from bank-owned life insurance (“BOLI”) being classified as an investing activity rather than their prior classification as an operating activity. All of these amounts are included in Other assets in the Consolidated Condensed Statement of Condition. The amounts reclassified are presented in the table below.
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2017 | | Six Months Ended June 30, 2017 | | Fiscal Years Ended December 31 |
(Dollars in thousands) | | | 2017 | | 2016 | | 2015 |
| | | | | | | | | |
Proceeds from BOLI | $ | 4,997 |
| | $ | 5,690 |
| | $ | 11,440 |
| | $ | 2,740 |
| | $ | 2,425 |
|
Effective January 1, 2018, FHN retroactively adopted the provisions of 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. 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. All of these amounts were previously included in Employee compensation, incentives, and benefits expense in the Consolidated Condensed Statements of Income. Upon adoption of ASU 2017-07 FHN reclassified the expense components other than service cost into All other expense and revised its disclosures accordingly. The amounts reclassified are presented in the table below.
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2017 | | Six Months Ended June 30, 2017 | | Fiscal Years Ended December 31 |
(Dollars in thousands) | | | 2017 | | 2016 | | 2015 |
| | | | | | | | | |
Net periodic benefit cost reclassified | $ | 812 |
| | $ | 1,250 |
| | $ | 1,946 |
| | $ | (843 | ) | | $ | (1,168 | ) |
Effective January 1, 2018, FHN early adopted the provisions of 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 either 1) debt securities where the prepayment date is not preset or the price is not known in advance or 2) debt securities that qualify for amortization based on estimated prepayment rates. The adoption of ASU 2017-08 did not have an effect on FHN's current investments.
Effective January 1, 2018, FHN early adopted the provisions of ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” which revises the financial reporting for hedging relationships through changes to both the designation and measurement requirements for qualifying hedge relationships and the presentation of hedge results. ASU 2017-12 expands permissible risk component hedging strategies, including the designation of a contractually specified interest rate (e.g., a bank’s prime rate) in hedges of cash flows from variable rate financial instruments. Additionally, ASU 2017-12 makes significant revisions to fair value hedging activities, including the ability to measure the fair value changes for a hedged item solely for changes in the benchmark interest rate, permitting partial-term hedges, limiting consideration of prepayment risk for hedged debt instruments solely to the effects of changes in the benchmark interest rate and allowing for certain hedging strategies to be applied to closed portfolios of prepayable debt instruments. ASU 2017-12 also provides elections for the exclusion of certain portions of a hedging instrument’s change in fair value from the assessment of hedge effectiveness. If elected, the fair value changes of these excluded components may be recognized immediately or recorded into other comprehensive income with recycling into earnings using a rational and systematic methodology over the life of the hedging instrument.
Under ASU 2017-12 some of the documentation requirements for hedge accounting relationships are relaxed, but the highly effective threshold has been retained. Hedge designation documentation and a prospective qualitative assessment are still required at hedge inception, but the initial quantitative analysis may be delayed until the end of the quarter the hedge is commenced. If certain criteria are met, an election can be made to perform future effectiveness assessments using a purely
Note 1 – Financial Information (Continued)
qualitative methodology. ASU 2017-12 also revises the income statement presentation requirements for hedging activities. For fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of effectiveness is recorded to the same income statement line item used to present the earnings effect of the hedged item. For cash flow hedges, the entire fair value change of the hedging instrument that is included in the assessment of hedge effectiveness is initially recorded in other comprehensive income and later recycled into earnings as the hedged transaction(s) affect net income with the income statement effects recorded in the same financial statement line item used to present the earnings effect of the hedged item.
ASU 2017-12 also makes revisions to the current disclosure requirements for hedging activities to reflect the presentation of hedging results consistent with the changes to income statement classification and to improve the disclosure of the hedging results on the balance sheet.
FHN early adopted the provisions of ASU 2017-12 in the first quarter of 2018. Prospectively, FHN is recording components of hedging results for its fair value and cash flow hedges previously recognized in other expense within either interest income or interest expense. Additionally, FHN made cumulative effect adjustments to the hedged items, accumulated other comprehensive income and retained earnings as of the beginning of 2018. The magnitude of the cumulative effect adjustments and prospective effects were insignificant for FHN’s hedge relationships.
Accounting Changes Issued but Not Currently Effective
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 transitionJuly 2018, the FASB issued ASU 2018-11, “Leases - Targeted Improvements,” which provides an election for a cumulative effect adjustment to retained earnings upon initial adoption of ASU 2016-02. Alternatively, under the initial guidance of ASU 2016-02, lessees and lessors are required to recognize and measure leases at the beginning of the earliest comparative period presented using a modified retrospective approach. The modified retrospective approach includesBoth adoption alternatives include 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 isand ASU 2018-11 are 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. Upon adoption, FHN intends to utilize the cumulative effect transition alternative provided by ASU 2018-11.
In March 2016, the FASB issued ASU 2016-04, “Recognition of Breakage of Certain Prepaid Stored-Value Products,” which indicates that liabilities related to the sale of prepaid stored-value products are considered financial liabilities and should have a breakage estimate applied for estimated unused funds. ASU 2016-04 does not apply to stored-value products that can only be redeemed for cash, are subject to escheatment or are linked to a segregated bank account. ASU 2016-04 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. FHN is evaluating the impact of ASU 2016-04 on its current accounting and disclosure practices.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which revises the measurement and recognition of credit losses for assets measured at amortized cost (e.g., held-to-maturity (“HTM”) loans and debt securities) and available-for-sale (“AFS”) debt securities. Under ASU 2016-13, for assets measured at amortized cost, the current expected credit loss (“CECL”) is measured as the difference between amortized cost and the net amount expected to be collected. This represents a departure from existing GAAP as the “incurred loss” methodology for recognizing credit losses delays recognition until it is probable a loss has been incurred. The measurement of current expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Additionally, current disclosures of credit quality indicators in relation to the amortized cost of financing receivables will be further disaggregated by year of origination. ASU 2016-13 leaves the methodology for measuring credit losses on AFS debt securities largely unchanged, with the maximum credit loss representing the difference between amortized cost and fair value. However, such credit losses will be recognized through an allowance for credit losses, which permits recovery of previously recognized credit losses if circumstances change.
Note 1 – Financial Information (Continued)
ASU 2016-13 also revises the recognition of credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”). For PCD assets, the initial allowance for credit losses is added to the purchase price. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for PCD assets. Interest income for PCD assets will be recognized based on the effective interest rate, excluding the discount embedded in the purchase price that is attributable to the acquirer’s assessment of credit losses at acquisition. Currently, credit losses for purchased credit-impaired assets are included in the initial basis of the assets with subsequent declines in credit resulting in expense while subsequent improvements in credit are reflected as an increase in the future yield from the assets.
The provisions of ASU 2016-13 will be generally adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in the year of adoption. Prospective implementation is required for debt securities for which an other-than-temporary-impairment (“OTTI”) had been previously recognized. Amounts previously recognized in accumulated other comprehensive income (“AOCI”) as of the date of adoption that relate to improvements in cash flows expected to be collected will continue to be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption will be recorded in earnings when received. A prospective transition approach will be used for existing PCD assets where, upon adoption, the amortized cost basis
Note 1 – Financial Information (Continued)
will be adjusted to reflect the addition of the allowance for credit losses. Thus, an entity will not be required to reassess its purchased financial assets that exist as of the date of adoption to determine whether they would have met at acquisition the new criteria of more-than-insignificant credit deterioration since origination. An entity will accrete the remaining noncredit discount (based on the revised amortized cost basis) into interest income at the effective interest rate at the adoption date.
ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in fiscal years beginning after December 15, 2018. FHN continues to evaluate the impact of ASU 2016-13. FHN has met with industry experts, initiated training for key employees associated with the new standard, and defined an initial approach that it is currently testing. Once testing is completed, FHN will then begin to develophas begun developing the formal models and processes that will be required in the implementation ofto implement the new standard.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies multiple cash flow presentation issues including providing guidance as to classification on the cash flow statement for certain cash receipts and cash payments where diversity in practice exists. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The provisions of ASU 2016-15 will be applied retroactively and will result in proceeds from bank-owned life insurance (“BOLI”) being classified as an investing activity rather than their prior classification as an operating activity.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” which requires the disaggregation of the service cost component from the other components of net benefit cost for pension and postretirement plans. Service cost must be included in the same income statement line item as other compensation-related expenses. All other components of net benefit cost are required to be presented in the income statement separately from the service cost component, with disclosure of the line items where these amounts are recorded. The presentation requirements of ASU 2017-07 must be applied retrospectively and adoption is required for annual periods beginning after December 15, 2017, including interim periods within those annual periods. FHN’s disclosures for pension and postretirement costs provide details of the service cost and all other components for expenses recognized for its applicable benefit plans. These amounts are currently included in Employee compensation, incentives, and benefits expense in the Consolidated Condensed Statements of Income. Upon adoption of ASU 2017-07 FHN will reclassify the expense components other than service cost into All other expense and revise its disclosures accordingly. The amounts to be reclassified are presented in Note 11—Pension, Savings, and Other Employee Benefits in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 and in Note 18—Pension, Savings, and Other Employee Benefits in Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.
In March 2017, the FASB issued ASU 2017-08, “Premium Amortization on Purchased Callable Debt Securities” which shortens the amortization period for securities that have explicit, noncontingent call features that are callable at fixed prices and on preset dates. In contrast to the current requirement for premium amortization to extend to the contractual maturity date, ASU 2017-08 requires the premium to be amortized to the earliest call date. ASU 2017-08 does not change the amortization of discounts, which will continue to be amortized to maturity. The new guidance does not apply to debt securities where the prepayment date is not preset or the price is not known in advance, which includes debt securities that qualify for amortization based on estimated prepayment rates. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted. Transition is accomplished through a cumulative-effect adjustment directly to retained earnings as of the beginning of the year of adoption. Based upon the current composition of its debt securities portfolios, FHN does not anticipate a significant effect upon adoption.
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities” which revises the financial reporting for hedging relationships through changes to both the designation and measurement requirements for qualifying hedge relationships and the presentation of hedge results. ASU 2017-12 expands permissible risk component hedging strategies, including the designation of a contractually specified interest rate (e.g., a bank’s prime rate) in hedges of cash flows from variable rate financial instruments. Additionally, ASU 2017-12 makes significant revisions to fair value hedging activities, including the ability to measure the fair value changes for a hedged item solely for changes in the benchmark interest rate, permitting partial-term hedges, limiting consideration of prepayment risk for hedged debt instruments solely to the effects of changes in the benchmark interest rate and allowing for certain hedging strategies to be applied to closed portfolios of prepayable debt instruments. ASU 2017-12 also provides elections for the exclusion of certain portions of a hedging instrument’s change in fair value from the assessment of hedge effectiveness. If elected, the fair value changes of these excluded components may be recognized immediately or recorded into other comprehensive income with recycling into earnings using a rational and systematic methodology over the life of the hedging instrument.
Note 1 – Financial Information (Continued)
Under ASU 2017-12 some of the documentation requirements for hedge accounting relationships are relaxed, but the highly effective threshold has been retained. Hedge designation documentation and a prospective qualitative assessment are still required at hedge inception, but the initial quantitative analysis may be delayed until the end of the quarter the hedge is commenced. If certain criteria are met, an election can be made to perform future effectiveness assessments using a purely qualitative methodology. ASU 2017-12 also revises the income statement presentation requirements for hedging activities. For fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of effectiveness is recorded to the same income statement line item used to present the earnings effect of the hedged item. For cash flow hedges, the entire fair value change of the hedging instrument that is included in the assessment of hedge effectiveness is initially recorded in other comprehensive income and later recycled into earnings as the hedged transaction(s) affect net income with the income statement effects recorded in the same financial statement line item used to present the earnings effect of the hedged item.
ASU 2017-12 also makes revisions to the current disclosure requirements for hedging activities to reflect the presentation of hedging results consistent with the changes to income statement classification and to improve the disclosure of the hedging results on the balance sheet. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 with early adoption permitted in any period after issuance. Adoption for all existing hedging relationships is performed through a cumulative effect adjustment to the applicable balance sheet accounts with an offset to retained earnings as of the beginning of the fiscal year.
FHN is evaluating the effects of adopting ASU 2017-12 on its current and potential future hedging relationships. Currently, FHN anticipates early adoption in the first quarter of 2018. Upon adoption of ASU 2017-12, FHN will prospectively record components of hedging results for its fair value and cash flow hedges previously recognized in other expense within either interest income or interest expense. Additionally, FHN will make cumulative effect adjustments to the hedged items, accumulated other comprehensive income and retained earnings as of the beginning of 2018. The magnitude of the cumulative effect adjustments and prospective effects are expected to be insignificant for FHN’s existing hedge relationships.
Note 2 – Acquisitions and Divestitures
On May 4,November 30, 2017, FHN andcompleted its acquisition of Capital Bank Financial Corp. (“Capital Bank” or "CBF"Corporation ("CBF") announced that they had entered into an agreement and plan of merger. Under the agreement FHN will acquireits subsidiaries, including Capital Bank Corporation, for an aggregate of 92,042,232 shares of FHN common stock and $423.6 million in cash in a transaction valued at $2.2 billion. In second quarter 2018, FHN canceled 2,373,220 common shares which is headquarteredhad been issued but set aside for certain shareholders of CBF who have commenced a dissenters' appraisal process resulting in Charlotte, North Carolina,a reduction in equity consideration and reported approximately $10 billionan increase in cash consideration of assets at June 30, 2017. At the time of announcement Capital Bank$46.0 million. The final appraisal or settlement amount, as applicable, may differ from current estimates. CBF operated 193178 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, measuredVirginia at the time of announcement, wasclosing. In relation to the acquisition, FHN acquired approximately $2.2 billion. $9.9 billion in assets, including approximately $7.3 billion in loans and $1.2 billion in AFS securities, and assumed approximately $8.1 billion of CBF deposits.
The agreement callsfollowing schedule details acquired assets and liabilities and consideration paid, as well as adjustments to record the assets and liabilities at their estimated fair values as of November 30, 2017. These fair value measurements are based on third party and internal valuations.
|
| | | | | | | | | | | | | | | | |
| | Capital Bank Financial Corporation |
| | As | | Purchase Accounting/Fair | | |
| | Acquired | | Value Adjustments (unaudited) | | As recorded |
(Dollars in thousands) | | (unaudited) | | 2017 | | 2018 (a) | | by FHN |
Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 205,999 |
| | $ | — |
| | $ | — |
| | $ | 205,999 |
|
Trading securities | | 4,758 |
| | (4,758 | ) | (b) | — |
| | — |
|
Loans held-for-sale | | — |
| | 134,003 |
| | (9,085 | ) | | 124,918 |
|
Securities available-for-sale | | 1,017,867 |
| | 175,526 |
| | — |
| | 1,193,393 |
|
Securities held-to-maturity | | 177,549 |
| | (177,549 | ) | | — |
| | — |
|
Loans | | 7,596,049 |
| | (320,372 | ) | | 867 |
| | 7,276,544 |
|
Allowance for loan losses | | (45,711 | ) | | 45,711 |
| | — |
| | — |
|
CBF Goodwill | | 231,292 |
| | (231,292 | ) | | — |
| | — |
|
Other intangible assets | | 24,498 |
| | 119,302 |
| | (2,593 | ) | | 141,207 |
|
Premises and equipment | | 196,298 |
| | 37,054 |
| | (1,905 | ) | | 231,447 |
|
OREO | | 43,077 |
| | (9,149 | ) | | (315 | ) | | 33,613 |
|
Other assets | | 617,232 |
| | 41,320 |
| (c) | (7,528 | ) | (c) | 651,024 |
|
Total assets acquired | | $ | 10,068,908 |
| | $ | (190,204 | ) | | $ | (20,559 | ) | | $ | 9,858,145 |
|
| | | | | | | | |
Liabilities: | | | | | | | | |
Deposits | | $ | 8,141,593 |
| | $ | (849 | ) | | $ | (642 | ) | | $ | 8,140,102 |
|
Securities sold under agreements to repurchase | | 26,664 |
| | — |
| | — |
| | 26,664 |
|
Other short-term borrowings | | 390,391 |
| | — |
| | — |
| | 390,391 |
|
Term borrowings | | 119,486 |
| | 67,683 |
| | — |
| | 187,169 |
|
Other liabilities | | 59,995 |
| | 4,291 |
| | 2,524 |
| | 66,810 |
|
Total liabilities assumed | | 8,738,129 |
| | 71,125 |
| | 1,882 |
| | 8,811,136 |
|
Net assets acquired | | $ | 1,330,779 |
| | $ | (261,329 | ) | | $ | (22,441 | ) | | 1,047,009 |
|
Consideration paid: | | | | | | | | |
Equity | | | | | | | | (1,746,724 | ) |
Cash | | | | | | | | (469,609 | ) |
Total consideration paid | | | | | | | | (2,216,333 | ) |
Goodwill | | | | | | | | $ | 1,169,324 |
|
| |
(a) | Amounts reflect adjustments made to provisional fair value estimates during the measurement period ending November 30, 2018. These adjustments were recorded in FHN's Consolidated Condensed Statement of Condition as of June 30, 2018 with a corresponding adjustment to goodwill. |
| |
(b) | Amount represents a conformity adjustment to align with FHN presentation. |
| |
(c) | Amount primarily relates to a net deferred tax asset recorded for the effects of the purchase accounting adjustments. |
Note 2 – Acquisitions and Divestitures (Continued)
Due to the timing of merger completion in relation to the previous year end, the fact that back office functions (including loan and deposit processing) only have recently been integrated, the evaluation of post-merger activity, and the extended information gathering and management review processes required to properly record acquired assets and liabilities, FHN considers its valuations of CBF's loans, loans held-for-sale, premises and equipment, OREO, other assets, tax receivables and payables, lease intangibles, other liabilities and acquired contingencies to be provisional as management continues to identify and assess information regarding the nature of these assets and liabilities and reviews the associated valuation assumptions and methodologies. Accordingly, the amounts recorded for two memberscurrent and deferred tax assets and liabilities are also considered provisional as FHN continues to evaluate the nature and extent 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 approvalpermanent and temporary (timing) differences between the book and tax bases of the saleacquired assets and liabilities assumed. Additionally, the accounting policies of both FHN and CBF are in the process of being reviewed in detail. Upon completion of such review, conforming adjustments or financial statement reclassification may be determined.
In relation to the acquisition, FHN has recorded preliminary goodwill of approximately $1.2 billion, representing the excess of acquisition consideration over the estimated fair value of net assets acquired.
All expenses related to the merger and integration with CBF are recorded in FHN's Corporate segment. Integration activities were substantially completed in second quarter 2018.
Total CBF merger and integration expense recognized for the three and six months ended June 30, 2018 are presented in the table below:
|
| | | | | | | |
| June 30, 2018 |
(Dollars in thousands) | Three Months Ended | | Six Months Ended |
Professional fees (a) | $ | 8,989 |
| | $ | 14,621 |
|
Employee compensation, incentives and benefits (b) | 2,548 |
| | 6,494 |
|
Contract employment and outsourcing (c) | 1,704 |
| | 3,103 |
|
Occupancy (d) | 2,214 |
| | 2,221 |
|
Miscellaneous expense (e) | 3,103 |
| | 5,138 |
|
All other expense (f) | 23,244 |
| | 40,285 |
|
Total | $ | 41,802 |
| | $ | 71,862 |
|
(a) Primarily comprised of fees for legal, accounting, and merger consultants.(b) Primarily comprised of fees for severance and retention.
(c) Primarily relates to fees for temporary assistance for merger and integration activities.
(d) Primarily relates to fees associated with lease exit accruals.
(e) Consists of fees for Operations services, communications and courier, equipment rentals, depreciation, and maintenance,
supplies, travel and entertainment, computer software, and advertising and public relations.
(f) Primarily relates to contract termination charges, costs of shareholder matters and asset impairments related
to the integration, as well as other miscellaneous expenses.
On March 23, 2018, FHN divested two branches, including approximately $30 million of deposits and $2 million of loans, to Apex Bank, a Tennessee banking corporation. The branches, both in Greeneville, Tennessee, were divested in connection with First Horizon's agreement with the U.S. Department of Justice and commitments to the Board of Governors of the Federal Reserve System, which were entered into in connection with a customary conditions.review of FHN's merger with CBF.
In second quarter 2018, FHN sold approximately $120 million UPB of its subprime auto loans. These loans, originally acquired as part of the CBF acquisition, did not fit within FHN's risk profile. Based on the sales price, a measurement period adjustment to the acquisition-date fair value of the subprime auto loans was recorded in second quarter 2018.
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. In relation to the acquisition, FTN Financial acquired approximately $418 million in assets, inclusive of approximately $236 million of HFS loans and $139
The following schedule details acquired assets
Note 2 – Acquisitions and liabilitiesDivestitures (Continued)
million of trading securities, and consideration paid, as well as adjustmentsassumed approximately $202 million of securities sold under agreements to record the assetsrepurchase and liabilities at their estimated fair values as$96 million of April 3, 2017:
|
| | | | | | | | | | | | |
| | Coastal Securities, Inc. |
| | Purchase Accounting/ |
| | As | | Fair Value | | As recorded |
(Dollars in thousands) | | Acquired | | Adjustments | | by FHN |
Assets: | | | | | | |
Cash and due from banks | | $ | 7,502 |
| | $ | — |
| | $ | 7,502 |
|
Interest-bearing cash | | 4,132 |
| | — |
| | 4,132 |
|
Trading securities | | 423,662 |
| | (284,580 | ) | | 139,082 |
|
Loans held-for-sale | | — |
| | 236,088 |
| | 236,088 |
|
Investment securities | | — |
| | 1,413 |
| | 1,413 |
|
Other intangible assets, net | | — |
| | 27,300 |
| | 27,300 |
|
Premises and equipment, net | | 1,229 |
| | — |
| | 1,229 |
|
Other assets | | 1,658 |
| | 14 |
| | 1,672 |
|
Total assets acquired | | $ | 438,183 |
| | $ | (19,765 | ) | | $ | 418,418 |
|
| | | | | | |
Liabilities: | | | | | | |
Securities sold under agreements to repurchase | | $ | 201,595 |
| | $ | — |
| | $ | 201,595 |
|
Other short-term borrowings | | 33,509 |
| | — |
| | 33,509 |
|
Fixed income payables | | 143,647 |
| | (47,158 | ) | | 96,489 |
|
Other liabilities | | 958 |
| | (642 | ) | | 316 |
|
Total liabilities assumed | | 379,709 |
| | (47,800 | ) | | 331,909 |
|
Net Assets Acquired | | $ | 58,474 |
| | $ | 28,035 |
| | 86,509 |
|
Consideration paid: | | | | | | |
Cash | | | | | | (131,473 | ) |
Goodwill | | | | | | $ | 44,964 |
|
fixed income payables. In relation to the acquisition, FHN has recorded $45.0 million in goodwill representing the excess of acquisition consideration over the estimated fair value of net assets acquired (refer to Note 6 - Intangible Assets for additional information), and all of which is expected to be deductible for tax purposes. The goodwill is the result of adding an experienced workforce, establishing an additional major product sector for FTN Financial, expected synergies, and other factors. FHN's operating results for 2017acquired.
See Note 2 –2- Acquisitions and Divestitures (Continued)
includein the operating results ofNotes to Consolidated Financial Statements on Form 10-K for the acquired assets and assumed liabilities of Coastal subsequent to the acquisition on April 3, 2017.
For the three and nine monthsyear ended September 30,December 31, 2017, FHN recognized $8.2 million and $14.6 million, respectively, of acquisition and integration-related expenses primarily associated withfor additional information about the CBF and Coastal acquisitions. These expenses were primarily included in Professional fees, Legal fees, Employee compensation, incentives and benefits, and All other expense on the Consolidated Condensed Statements of Income.
On September 16, 2016, FTBNA acquired $537.4 million in unpaid principal balance (“UPB”) of restaurant franchise loans from GE Capital’s Southeast and Southwest regional portfolios. Subsequent to the acquisition the acquired loans were combined with existing FTBNA relationships to establish a franchise finance specialty banking business.
In addition to the transactions mentioned above, FHN acquires or divests assets from time to time in transactions that are considered business combinations or divestitures but are not material to FHN individually or in the aggregate. The most recent transaction of that type closed in October 2017, when FTBNA acquired the operations and certain assets of Professional Mortgage Company, Inc. ("PMC"). PMC is a provider of institutional debt capital and commercial mortgage loan servicing. Eleven professionals joined FTBNA's commercial real estate ("CRE") team as a result of the transaction, expanding the capabilities of its CRE platform.
Note 3 – Investment Securities
The following tables summarize FHN’s investment securities on SeptemberJune 30, 20172018 and December 31, 2016:
| | | | September 30, 2017 | | June 30, 2018 |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities available-for-sale: | | | | | | | | | | | | | | | | |
U.S. treasuries | | $ | 100 |
| | $ | — |
| | $ | — |
| | $ | 100 |
| | $ | 100 |
| | $ | — |
| | $ | (2 | ) | | $ | 98 |
|
Government agency issued mortgage-backed securities (“MBS”) | | 2,081,677 |
| | 15,993 |
| | (10,165 | ) | | 2,087,505 |
| | 2,564,334 |
| | 4,524 |
| | (74,558 | ) | | 2,494,300 |
|
Government agency issued collateralized mortgage obligations (“CMO”) | | 1,701,467 |
| | 4,295 |
| | (19,767 | ) | | 1,685,995 |
| | 2,180,120 |
| | 395 |
| | (72,935 | ) | | 2,107,580 |
|
Equity and other (a) | | 186,413 |
| | 2 |
| | — |
| | 186,415 |
| |
Other U.S. government agencies | | | 54,797 |
| | — |
| | (395 | ) | | 54,402 |
|
Corporates and other debt | | | 55,609 |
| | 488 |
| | (259 | ) | | 55,838 |
|
States and municipalities | | | 6,433 |
| | 3 |
| | (30 | ) | | 6,406 |
|
| | $ | 3,969,657 |
| | $ | 20,290 |
| | $ | (29,932 | ) | | 3,960,015 |
| | $ | 4,861,393 |
| | $ | 5,410 |
| | $ | (148,179 | ) | | 4,718,624 |
|
AFS debt securities recorded at fair value through earnings:
| | | | | | | | | | | | | | | | |
SBA-interest only strips (b) | | | | | | | | 3,123 |
| |
Total securities available-for-sale (c) | | | | | | | | $ | 3,963,138 |
| |
SBA-interest only strips (a) | | | | | | | | | 5,787 |
|
Total securities available-for-sale (b) | | | | | | | | | $ | 4,724,411 |
|
Securities held-to-maturity: | | | | | | | | | | | | | | | | |
Corporate bonds | | $ | 10,000 |
| | $ | — |
| | $ | (15 | ) | | $ | 9,985 |
| |
Corporates and other debt | | | $ | 10,000 |
| | $ | — |
| | $ | (214 | ) | | $ | 9,786 |
|
Total securities held-to-maturity | | $ | 10,000 |
| | $ | — |
| | $ | (15 | ) | | $ | 9,985 |
| | $ | 10,000 |
| | $ | — |
| | $ | (214 | ) | | $ | 9,786 |
|
| |
(a) | Includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $68.6 million. The remainder is money market, mutual funds, and cost method investments. |
| |
(b) | SBA-interest only strips are recorded at elected fair value. See Note 16 - Fair Value for additional information. |
| |
(c)(b) | Includes $3.3$3.7 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes. |
| | | | December 31, 2016 | | December 31, 2017 |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities available-for-sale: | | | | | | | | | | | | | | | | |
U.S. treasuries | | $ | 100 |
| | $ | — |
| | $ | — |
| | $ | 100 |
| | $ | 100 |
| | $ | — |
| | $ | (1 | ) | | $ | 99 |
|
Government agency issued MBS | | 2,217,593 |
| | 14,960 |
| | (23,866 | ) | | 2,208,687 |
| | 2,580,442 |
| | 10,538 |
| | (13,604 | ) | | 2,577,376 |
|
Government agency issued CMO | | 1,566,986 |
| | 4,909 |
| | (23,937 | ) | | 1,547,958 |
| | 2,302,439 |
| | 1,691 |
| | (34,272 | ) | | 2,269,858 |
|
Corporates and other debt | | | 55,799 |
| | 23 |
| | (40 | ) | | 55,782 |
|
Equity and other (a) | | 186,756 |
| | — |
| | (2 | ) | | 186,754 |
| | 265,863 |
| | 7 |
| | — |
| | 265,870 |
|
Total securities available-for-sale (b) | | $ | 3,971,435 |
| | $ | 19,869 |
| | $ | (47,805 | ) | | $ | 3,943,499 |
| |
| | | $ | 5,204,643 |
| | $ | 12,259 |
| | $ | (47,917 | ) | | 5,168,985 |
|
AFS debt securities recorded at fair value through earnings: | | | | | | | | | |
SBA-interest only strips (b) | | | | | | | | | 1,270 |
|
Total securities available-for-sale (c) | | | | | | | | | $ | 5,170,255 |
|
Securities held-to-maturity: | | | | | | | | | | | | | | | | |
States and municipalities | | $ | 4,347 |
| | $ | 393 |
| | $ | — |
| | $ | 4,740 |
| |
Corporate bonds | | 10,000 |
| | 33 |
| | — |
| | 10,033 |
| |
Corporates and other debt | | | $ | 10,000 |
| | $ | — |
| | $ | (99 | ) | | $ | 9,901 |
|
Total securities held-to-maturity | | $ | 14,347 |
| | $ | 426 |
| | $ | — |
| | $ | 14,773 |
| | $ | 10,000 |
| | $ | — |
| | $ | (99 | ) | | $ | 9,901 |
|
| |
(a) | Includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $68.6$134.6 million. The remainder is money market, mutual funds, and cost method investments. Equity investments were reclassified to Other assets upon adoption of ASU 2016-01 on January 1, 2018. |
| |
(b) | SBA-interest only strips are recorded at elected fair value. See Note 16 - Fair Value of Assets and Liabilities for additional information. |
| |
(c) | Includes $3.3$4.0 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes. |
Note 3 – Investment Securities (Continued)
The amortized cost and fair value by contractual maturity for the available-for-sale and held-to-maturity debt securities portfolios on SeptemberJune 30, 20172018 are provided below:
| | | | Held-to-Maturity | | Available-for-Sale | | Held-to-Maturity | | Available-for-Sale |
(Dollars in thousands) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Within 1 year | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15,250 |
| | $ | 15,042 |
|
After 1 year; within 5 years | | — |
| | — |
| | 100 |
| | 120 |
| | — |
| | — |
| | 95,255 |
| | 95,321 |
|
After 5 years; within 10 years | | 10,000 |
| | 9,985 |
| | — |
| | 1,464 |
| | 10,000 |
| | 9,786 |
| | — |
| | 1,360 |
|
After 10 years | | — |
| | — |
| | — |
| | 1,639 |
| | — |
| | — |
| | 6,434 |
| | 10,808 |
|
Subtotal | | 10,000 |
| | 9,985 |
| | 100 |
| | 3,223 |
| | 10,000 |
| | 9,786 |
| | 116,939 |
| | 122,531 |
|
Government agency issued MBS and CMO (a) | | — |
| | — |
| | 3,783,144 |
| | 3,773,500 |
| | — |
| | — |
| | 4,744,454 |
| | 4,601,880 |
|
Equity and other | | — |
| | — |
| | 186,413 |
| | 186,415 |
| |
Total | | $ | 10,000 |
| | $ | 9,985 |
| | $ | 3,969,657 |
| | $ | 3,963,138 |
| | $ | 10,000 |
| | $ | 9,786 |
| | $ | 4,861,393 |
| | $ | 4,724,411 |
|
| |
(a) | Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. |
The table below provides information on gross gains and gross losses from debt investment securities for the three and ninesix months ended September 30:June 30, 2018. Equity securities are included for periods prior to 2018.
| | | Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Gross gains on sales of securities | $ | 6 |
| | $ | — |
| | $ | 455 |
| | $ | 3,999 |
| | $ | — |
| | $ | 405 |
| | $ | 52 |
| | $ | 449 |
|
Gross (losses) on sales of securities | — |
| | — |
| | — |
| | (2,326 | ) | | — |
| | — |
| | — |
| | — |
|
Net gain/(loss) on sales of securities (a) (b) | 6 |
| | — |
| | 455 |
| | 1,673 |
| | $ | — |
| | $ | 405 |
| | $ | 52 |
| | $ | 449 |
|
Net OTTI recorded (c) | — |
| | (200 | ) | | — |
| | (200 | ) | |
Total securities gain/(loss) | $ | 6 |
| | $ | (200 | ) | | $ | 455 |
| | $ | 1,473 |
| |
| |
(a) | Cash proceeds from the sale of available-for-sale securities for the three and ninesix months ended SeptemberJune 30, 2018 and 2017 were not material. There were no cash proceeds from the sale of available-for-sale securities for the three months ended September 30, 2016. Cash proceeds from the sale of available-for-sale securities for the nine months ended September 30, 2016 were $1.5 million and included a $1.7 million gain from an exchange of approximately $294 million of AFS debt securities. |
| |
(b) | NineThree and six months ended SeptemberJune 30, 2017 includes a $.4 million gain associated with the call of a $4.4 million held-to-maturity municipal bond. |
| |
(c) | OTTI recorded is related to equity securities. |
The following tables provide information on investments within the available-for-sale portfolio that had unrealized losses as of SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | | | As of September 30, 2017 | | As of June 30, 2018 |
| | Less than 12 months | | 12 months or longer | | Total | | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. treasuries | | | $ | 98 |
| | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | 98 |
| | $ | (2 | ) |
Government agency issued MBS | | | 1,937,255 |
| | (57,182 | ) | | 317,784 |
| | (17,376 | ) | | 2,255,039 |
| | (74,558 | ) |
Government agency issued CMO | | $ | 885,926 |
| | $ | (10,936 | ) | | $ | 311,471 |
| | $ | (8,831 | ) | | $ | 1,197,397 |
| | $ | (19,767 | ) | | 1,278,976 |
| | (30,862 | ) | | 754,927 |
| | (42,073 | ) | | 2,033,903 |
| | (72,935 | ) |
Government agency issued MBS | | 875,307 |
| | (8,770 | ) | | 34,184 |
| | (1,395 | ) | | 909,491 |
| | (10,165 | ) | |
Other U.S. government agencies | | | 54,402 |
| | (395 | ) | | — |
| | — |
| | 54,402 |
| | (395 | ) |
Corporates and other debt | | | 40,586 |
| | (259 | ) | | — |
| | — |
| | 40,586 |
| | (259 | ) |
States and municipalities | | | 4,724 |
| | (30 | ) | | — |
| | — |
| | 4,724 |
| | (30 | ) |
Total temporarily impaired securities | | 1,761,233 |
| | (19,706 | ) | | 345,655 |
| | (10,226 | ) | | 2,106,888 |
| | (29,932 | ) | | $ | 3,316,041 |
| | $ | (88,730 | ) | | $ | 1,072,711 |
| | $ | (59,449 | ) | | $ | 4,388,752 |
| | $ | (148,179 | ) |
Note 3 – Investment Securities (Continued)
| | | | As of December 31, 2016 | | As of December 31, 2017 |
| | Less than 12 months | | 12 months or longer | | Total | | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. treasuries | | | $ | 99 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | 99 |
| | $ | (1 | ) |
Government agency issued MBS | | | 1,455,476 |
| | (4,738 | ) | | 331,900 |
| | (8,866 | ) | | 1,787,376 |
| | (13,604 | ) |
Government agency issued CMO | | $ | 1,059,471 |
| | $ | (19,052 | ) | | $ | 116,527 |
| | $ | (4,885 | ) | | $ | 1,175,998 |
| | $ | (23,937 | ) | | 1,043,987 |
| | (7,464 | ) | | 832,173 |
| | (26,808 | ) | | 1,876,160 |
| | (34,272 | ) |
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 | ) | |
Corporates and other debt | | | 15,294 |
| | (40 | ) | | — |
| | — |
| | 15,294 |
| | (40 | ) |
Total temporarily impaired securities | | $ | 2,971,604 |
| | $ | (42,920 | ) | | $ | 116,527 |
| | $ | (4,885 | ) | | $ | 3,088,131 |
| | $ | (47,805 | ) | | $ | 2,514,856 |
| | $ | (12,243 | ) | | $ | 1,164,073 |
| | $ | (35,674 | ) | | $ | 3,678,929 |
| | $ | (47,917 | ) |
FHN has reviewed debt 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
The carrying amount of equity securities, FHN has bothinvestments without a readily determinable fair value was $16.4 million and $16.3 million at June 30, 2018 and January 1, 2018, respectively. The year-to-date 2018 gross amounts of upward and downward valuation adjustments were not significant.
Unrealized gains of $.7 million and $1.1 million were recognized in the abilitythree and intent to hold these securitiessix months ended June 30, 2018, respectively, for the time necessary to recover the amortized cost.equity investments with readily determinable fair values.
Note 4 – Loans
The following table provides the balance of loans, net of unearned income, by portfolio segment as of SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | | | September 30 | | December 31 | | June 30 | | December 31 |
(Dollars in thousands) | | 2017 | | 2016 | | 2018 | | 2017 |
Commercial: | | | | | | | | |
Commercial, financial, and industrial | | $ | 12,791,844 |
| | $ | 12,148,087 |
| | $ | 16,438,745 |
| | $ | 16,057,273 |
|
Commercial real estate | | 2,251,015 |
| | 2,135,523 |
| | 4,136,356 |
| | 4,214,695 |
|
Consumer: | | | | | | | | |
Consumer real estate (a) | | 4,369,717 |
| | 4,523,752 |
| | 6,222,611 |
| | 6,367,755 |
|
Permanent mortgage | | 403,082 |
| | 423,125 |
| | 354,916 |
| | 399,307 |
|
Credit card & other | | 350,433 |
| | 359,033 |
| | 549,112 |
| | 619,899 |
|
Loans, net of unearned income | | $ | 20,166,091 |
| | $ | 19,589,520 |
| | $ | 27,701,740 |
| | $ | 27,658,929 |
|
Allowance for loan losses | | 194,867 |
| | 202,068 |
| | 185,462 |
| | 189,555 |
|
Total net loans | | $ | 19,971,224 |
| | $ | 19,387,452 |
| | $ | 27,516,278 |
| | $ | 27,469,374 |
|
| |
(a) | Balances as of SeptemberJune 30, 20172018 and December 31, 2016,2017, include $26.2$18.9 million and $35.9$24.2 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. 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(23 percent of total loans). Loans to finance and insurance companies total $2.8 billion (22(17 percent of the C&I portfolio, or 1410 percent of the total loans). FHN had loans to mortgage companies totaling $2.0$2.4 billion (15(14 percent of the C&I segment, or 109 percent of total loans) as of SeptemberJune 30, 2017.2018. As a result, 3731 percent of the C&I segment is sensitive to impacts on the financial services industry.
Note 4 – Loans (Continued)
Purchased Credit-Impaired Loans
The following table presents a rollforward of the accretable yield for the three and nine months ended SeptemberJune 30, 20172018 and 2016:2017:
| | | | Three Months Ended September 30 | | Nine months ended September 30 | | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Balance, beginning of period | | $ | 4,045 |
| | $ | 6,171 |
| | $ | 6,871 |
| | $ | 8,542 |
| | $ | 15,323 |
| | $ | 5,198 |
| | $ | 15,623 |
| | $ | 6,871 |
|
Addition | | — |
| | 2,883 |
| | — |
| | 2,883 |
| |
Accretion | | (642 | ) | | (837 | ) | | (2,412 | ) | | (2,984 | ) | | (2,607 | ) | | (919 | ) | | (4,744 | ) | | (1,770 | ) |
Adjustment for payoffs | | (198 | ) | | (179 | ) | | (1,232 | ) | | (4,408 | ) | | (1,107 | ) | | (761 | ) | | (1,719 | ) | | (1,034 | ) |
Adjustment for charge-offs | | — |
| | — |
| | — |
| | (674 | ) | | (373 | ) | | — |
| | (924 | ) | | — |
|
Adjustment for pool excess recovery (a) | | — |
| | — |
| | (222 | ) | | — |
| | — |
| | — |
| | — |
| | (222 | ) |
Increase/(decrease) in accretable yield (b) | | (2 | ) | | 686 |
| | 112 |
| | 5,398 |
| | 3,481 |
| | 409 |
| | 6,659 |
| | 114 |
|
Disposals | | | (214 | ) | | — |
| | (240 | ) | | — |
|
Other | | — |
| | — |
| | 86 |
| | (33 | ) | | (29 | ) | | 118 |
| | (181 | ) | | 86 |
|
Balance, end of period | | $ | 3,203 |
| | $ | 8,724 |
| | $ | 3,203 |
| | $ | 8,724 |
| | $ | 14,474 |
| | $ | 4,045 |
| | $ | 14,474 |
| | $ | 4,045 |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
| |
(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 and amounts of the cash flows. |
At SeptemberJune 30, 2017,2018, the ALLL related to PCI loans was $3.1$3.0 million compared to $.7$3.2 million at December 31, 2016.2017. A loan loss provision expense related to PCI loans of $1.8 million was recognized during the three months ended June 30, 2018, as compared to a loan loss provision credit of $.1 million recognized during the three months ended June 30, 2017. A loan loss provision expense related to PCI loans of $2.6 million was recognized during the threesix months ended SeptemberJune 30, 2017,2018, as compared to $.3a loan loss provision credit of $.2 million recognized during the threesix months ended SeptemberJune 30, 2016. The loan loss provision expense related to PCI loans of $2.4 million was recognized during the nine months ended September 30, 2017. The loan loss provision related to PCI loans was not material during the nine months ended September 30, 2016.
The following table reflects the outstanding principal balance and carrying amounts of the acquired PCI loans as of SeptemberJune 30, 20172018 and December December��31, 2016:2017:
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
(Dollars in thousands) | | Carrying value | | Unpaid balance | | Carrying value | | Unpaid balance | | Carrying value | | Unpaid balance | | Carrying value | | Unpaid balance |
Commercial, financial and industrial | | $ | 17,903 |
| | $ | 21,239 |
| | $ | 40,368 |
| | $ | 41,608 |
| | $ | 54,143 |
| | $ | 60,727 |
| | $ | 96,598 |
| | $ | 109,280 |
|
Commercial real estate | | 3,842 |
| | 4,933 |
| | 4,763 |
| | 6,514 |
| | 27,042 |
| | 31,181 |
| | 36,107 |
| | 41,488 |
|
Consumer real estate | | 940 |
| | 1,259 |
| | 1,172 |
| | 1,677 |
| | 35,674 |
| | 39,920 |
| | 38,176 |
| | 42,568 |
|
Credit card and other | | — |
| | — |
| | 52 |
| | 64 |
| | 2,969 |
| | 3,381 |
| | 5,500 |
| | 6,351 |
|
Total | | $ | 22,685 |
| | $ | 27,431 |
| | $ | 46,355 |
| | $ | 49,863 |
| | $ | 119,828 |
| | $ | 135,209 |
| | $ | 176,381 |
| | $ | 199,687 |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
Note 4 – Loans (Continued)
Impaired Loans
The following tables provide information at SeptemberJune 30, 20172018 and December 31, 2016,2017, by class related to individually impaired loans and consumer TDRs, regardless of accrual status. Recorded investment is defined as the amount of the investment in a loan, excluding any valuation allowance but including any direct write-down of the investment. For purposes of this disclosure, PCI loans and the TRUPs valuation allowance have been excluded.
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
(Dollars in thousands) | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
Impaired loans with no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | |
General C&I | | $ | 2,055 |
| | $ | 10,769 |
| | $ | — |
| | $ | 10,419 |
| | $ | 16,636 |
| | $ | — |
| | $ | 25,924 |
| | $ | 37,325 |
| | $ | — |
| | $ | 8,183 |
| | $ | 17,372 |
| | $ | — |
|
Income CRE | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,748 |
| | 1,748 |
| | — |
| | — |
| | — |
| | — |
|
Residential CRE | | | 504 |
| | 972 |
| | — |
| | — |
| | — |
| | — |
|
Total | | $ | 2,055 |
| | $ | 10,769 |
| | $ | — |
| | $ | 10,419 |
| | $ | 16,636 |
| | $ | — |
| | $ | 28,176 |
| | $ | 40,045 |
| | $ | — |
| | $ | 8,183 |
| | $ | 17,372 |
| | $ | — |
|
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
HELOC (a) | | $ | 10,513 |
| | $ | 20,372 |
| | $ | — |
| | $ | 11,383 |
| | $ | 21,662 |
| | $ | — |
| | $ | 8,811 |
| | $ | 17,299 |
| | $ | — |
| | $ | 9,258 |
| | $ | 19,193 |
| | $ | — |
|
R/E installment loans (a) | | 4,431 |
| | 5,135 |
| | — |
| | 3,957 |
| | 4,992 |
| | — |
| | 3,370 |
| | 3,834 |
| | — |
| | 4,093 |
| | 4,663 |
| | — |
|
Permanent mortgage (a) | | 5,481 |
| | 7,604 |
| | — |
| | 5,311 |
| | 7,899 |
| | — |
| | 4,195 |
| | 6,586 |
| | — |
| | 5,132 |
| | 7,688 |
| | — |
|
Total | | $ | 20,425 |
| | $ | 33,111 |
| | $ | — |
| | $ | 20,651 |
| | $ | 34,553 |
| | $ | — |
| | $ | 16,376 |
| | $ | 27,719 |
| | $ | — |
| | $ | 18,483 |
| | $ | 31,544 |
| | $ | — |
|
Impaired loans with related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | |
General C&I | | $ | 26,876 |
| | $ | 27,345 |
| | $ | 5,970 |
| | $ | 34,334 |
| | $ | 34,470 |
| | $ | 3,294 |
| | $ | 3,692 |
| | $ | 3,692 |
| | $ | 288 |
| | $ | 31,774 |
| | $ | 38,256 |
| | $ | 5,119 |
|
TRUPS | | 3,097 |
| | 3,700 |
| | 925 |
| | 3,209 |
| | 3,700 |
| | 925 |
| | 2,983 |
| | 3,700 |
| | 925 |
| | 3,067 |
| | 3,700 |
| | 925 |
|
Income CRE | | 1,525 |
| | 1,525 |
| | 43 |
| | 1,831 |
| | 2,209 |
| | 62 |
| | — |
| | — |
| | — |
| | 1,612 |
| | 1,612 |
| | 49 |
|
Residential CRE | | 795 |
| | 1,263 |
| | 83 |
| | 1,293 |
| | 1,761 |
| | 132 |
| | — |
| | — |
| | — |
| | 795 |
| | 1,263 |
| | 83 |
|
Total | | $ | 32,293 |
| | $ | 33,833 |
| | $ | 7,021 |
| | $ | 40,667 |
| | $ | 42,140 |
| | $ | 4,413 |
| | $ | 6,675 |
| | $ | 7,392 |
| | $ | 1,213 |
| | $ | 37,248 |
| | $ | 44,831 |
| | $ | 6,176 |
|
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
HELOC | | $ | 74,009 |
| | $ | 76,587 |
| | $ | 14,174 |
| | $ | 84,711 |
| | $ | 87,126 |
| | $ | 15,927 |
| | $ | 70,739 |
| | $ | 73,717 |
| | $ | 12,641 |
| | $ | 72,469 |
| | $ | 75,207 |
| | $ | 14,382 |
|
R/E installment loans | | 46,905 |
| | 47,708 |
| | 9,762 |
| | 53,409 |
| | 54,559 |
| | 12,875 |
| | 39,415 |
| | 40,168 |
| | 7,758 |
| | 43,075 |
| | 43,827 |
| | 8,793 |
|
Permanent mortgage | | 78,600 |
| | 90,003 |
| | 12,601 |
| | 88,615 |
| | 100,983 |
| | 12,470 |
| | 72,666 |
| | 83,678 |
| | 10,787 |
| | 79,662 |
| | 90,934 |
| | 12,105 |
|
Credit card & other | | 544 |
| | 544 |
| | 246 |
| | 306 |
| | 306 |
| | 133 |
| | 604 |
| | 604 |
| | 305 |
| | 593 |
| | 593 |
| | 311 |
|
Total | | $ | 200,058 |
| | $ | 214,842 |
| | $ | 36,783 |
| | $ | 227,041 |
| | $ | 242,974 |
| | $ | 41,405 |
| | $ | 183,424 |
| | $ | 198,167 |
| | $ | 31,491 |
| | $ | 195,799 |
| | $ | 210,561 |
| | $ | 35,591 |
|
Total commercial | | $ | 34,348 |
| | $ | 44,602 |
| | $ | 7,021 |
| | $ | 51,086 |
| | $ | 58,776 |
| | $ | 4,413 |
| | $ | 34,851 |
| | $ | 47,437 |
| | $ | 1,213 |
| | $ | 45,431 |
| | $ | 62,203 |
| | $ | 6,176 |
|
Total consumer | | $ | 220,483 |
| | $ | 247,953 |
| | $ | 36,783 |
| | $ | 247,692 |
| | $ | 277,527 |
| | $ | 41,405 |
| | $ | 199,800 |
| | $ | 225,886 |
| | $ | 31,491 |
| | $ | 214,282 |
| | $ | 242,105 |
| | $ | 35,591 |
|
Total impaired loans | | $ | 254,831 |
| | $ | 292,555 |
| | $ | 43,804 |
| | $ | 298,778 |
| | $ | 336,303 |
| | $ | 45,818 |
| | $ | 234,651 |
| | $ | 273,323 |
| | $ | 32,704 |
| | $ | 259,713 |
| | $ | 304,308 |
| | $ | 41,767 |
|
| |
(a) | All discharged bankruptcy loans are charged down to an estimate of net realizable value and do not carry any allowance. |
Note 4 – Loans (Continued)
| | | | Three Months Ended September 30 | | Nine months ended September 30 | | Three Months Ended June 30 | | Six Months Ended June 30 |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
(Dollars in thousands) | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
Impaired loans with no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
General C&I | | $ | 5,771 |
| | $ | — |
| | $ | 13,708 |
| | $ | — |
| | $ | 8,706 |
| | $ | — |
| | $ | 12,088 |
| | $ | — |
| | $ | 24,825 |
| | $ | 183 |
| | $ | 9,941 |
| | $ | — |
| | $ | 20,389 |
| | $ | 358 |
| | $ | 10,174 |
| | $ | — |
|
Income CRE | | — |
| | — |
| | 1,234 |
| | — |
| | — |
| | — |
| | 2,057 |
| | — |
| | 1,665 |
| | 13 |
| | — |
| | — |
| | 1,228 |
| | 25 |
| | — |
| | — |
|
Residential CRE | | | 500 |
| | — |
| | — |
| | — |
| | 374 |
| | — |
| | — |
| | — |
|
Total | | $ | 5,771 |
| | $ | — |
| | $ | 14,942 |
| | $ | — |
| | $ | 8,706 |
| | $ | — |
| | $ | 14,145 |
| | $ | — |
| | $ | 26,990 |
| | $ | 196 |
| | $ | 9,941 |
| | $ | — |
| | $ | 21,991 |
| | $ | 383 |
| | $ | 10,174 |
| | $ | — |
|
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
HELOC (a) | | $ | 10,225 |
| | $ | — |
| | $ | 11,273 |
| | $ | — |
| | $ | 10,536 |
| | $ | — |
| | $ | 11,100 |
| | $ | — |
| | $ | 9,034 |
| | $ | — |
| | $ | 10,331 |
| | $ | — |
| | $ | 9,145 |
| | $ | — |
| | $ | 10,692 |
| | $ | — |
|
R/E installment loans (a) | | 4,182 |
| | — |
| | 4,158 |
| | — |
| | 4,014 |
| | — |
| | 4,333 |
| | — |
| | 3,553 |
| | — |
| | 3,925 |
| | — |
| | 3,733 |
| | — |
| | 3,931 |
| | — |
|
Permanent mortgage (a) | | 5,693 |
| | — |
| | 4,280 |
| | — |
| | 5,701 |
| | — |
| | 4,292 |
| | — |
| | 4,749 |
| | — |
| | 5,854 |
| | — |
| | 4,983 |
| | — |
| | 5,705 |
| | — |
|
Total | | $ | 20,100 |
| | $ | — |
| | $ | 19,711 |
| | $ | — |
| | $ | 20,251 |
| | $ | — |
| | $ | 19,725 |
| | $ | — |
| | $ | 17,336 |
| | $ | — |
| | $ | 20,110 |
| | $ | — |
| | $ | 17,861 |
| | $ | — |
| | $ | 20,328 |
| | $ | — |
|
Impaired loans with related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
General C&I | | $ | 26,144 |
| | $ | 193 |
| | $ | 33,433 |
| | $ | 289 |
| | $ | 29,136 |
| | $ | 597 |
| | $ | 29,896 |
| | $ | 668 |
| | $ | 8,850 |
| | $ | — |
| | $ | 28,402 |
| | $ | 189 |
| | $ | 15,870 |
| | $ | — |
| | $ | 30,632 |
| | $ | 403 |
|
TRUPS | | 3,117 |
| | — |
| | 3,258 |
| | — |
| | 3,157 |
| | — |
| | 3,291 |
| | — |
| | 3,005 |
| | — |
| | 3,160 |
| | — |
| | 3,026 |
| | — |
| | 3,178 |
| | — |
|
Income CRE | | 1,628 |
| | 11 |
| | 3,211 |
| | 15 |
| | 1,737 |
| | 39 |
| | 4,376 |
| | 55 |
| | — |
| | — |
| | 1,767 |
| | 14 |
| | 403 |
| | — |
| | 1,792 |
| | 28 |
|
Residential CRE | | 1,044 |
| | — |
| | 1,355 |
| | 5 |
| | 1,210 |
| | 10 |
| | 1,376 |
| | 17 |
| | — |
| | — |
| | 1,293 |
| | 5 |
| | 199 |
| | — |
| | 1,293 |
| | 10 |
|
Total | | $ | 31,933 |
| | $ | 204 |
| | $ | 41,257 |
| | $ | 309 |
| | $ | 35,240 |
| | $ | 646 |
| | $ | 38,939 |
| | $ | 740 |
| | $ | 11,855 |
| | $ | — |
| | $ | 34,622 |
| | $ | 208 |
| | $ | 19,498 |
| | $ | — |
| | $ | 36,895 |
| | $ | 441 |
|
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
HELOC | | $ | 74,894 |
| | $ | 554 |
| | $ | 87,919 |
| | $ | 546 |
| | $ | 78,859 |
| | $ | 1,695 |
| | $ | 88,266 |
| | $ | 1,527 |
| | $ | 70,789 |
| | $ | 578 |
| | $ | 78,608 |
| | $ | 577 |
| | $ | 71,222 |
| | $ | 1,155 |
| | $ | 80,841 |
| | $ | 1,141 |
|
R/E installment loans | | 47,628 |
| | 315 |
| | 57,775 |
| | 357 |
| | 49,634 |
| | 950 |
| | 58,890 |
| | 1,019 |
| | 40,280 |
| | 251 |
| | 49,373 |
| | 317 |
| | 41,195 |
| | 518 |
| | 50,637 |
| | 635 |
|
Permanent mortgage | | 79,305 |
| | 616 |
| | 90,697 |
| | 544 |
| | 82,186 |
| | 1,805 |
| | 92,716 |
| | 1,602 |
| | 74,227 |
| | 574 |
| | 81,475 |
| | 574 |
| | 75,976 |
| | 1,152 |
| | 83,626 |
| | 1,189 |
|
Credit card & other | | 452 |
| | 3 |
| | 348 |
| | 4 |
| | 351 |
| | 8 |
| | 353 |
| | 10 |
| | 653 |
| | 3 |
| | 315 |
| | 3 |
| | 650 |
| | 6 |
| | 301 |
| | 5 |
|
Total | | $ | 202,279 |
| | $ | 1,488 |
| | $ | 236,739 |
| | $ | 1,451 |
| | $ | 211,030 |
| | $ | 4,458 |
| | $ | 240,225 |
| | $ | 4,158 |
| | $ | 185,949 |
| | $ | 1,406 |
| | $ | 209,771 |
| | $ | 1,471 |
| | $ | 189,043 |
| | $ | 2,831 |
| | $ | 215,405 |
| | $ | 2,970 |
|
Total commercial | | $ | 37,704 |
| | $ | 204 |
| | $ | 56,199 |
| | $ | 309 |
| | $ | 43,946 |
| | $ | 646 |
| | $ | 53,084 |
| | $ | 740 |
| | $ | 38,845 |
| | $ | 196 |
| | $ | 44,563 |
| | $ | 208 |
| | $ | 41,489 |
| | $ | 383 |
| | $ | 47,069 |
| | $ | 441 |
|
Total consumer | | $ | 222,379 |
| | $ | 1,488 |
| | $ | 256,450 |
| | $ | 1,451 |
| | $ | 231,281 |
| | $ | 4,458 |
| | $ | 259,950 |
| | $ | 4,158 |
| | $ | 203,285 |
| | $ | 1,406 |
| | $ | 229,881 |
| | $ | 1,471 |
| | $ | 206,904 |
| | $ | 2,831 |
| | $ | 235,733 |
| | $ | 2,970 |
|
Total impaired loans | | $ | 260,083 |
| | $ | 1,692 |
| | $ | 312,649 |
| | $ | 1,760 |
| | $ | 275,227 |
| | $ | 5,104 |
| | $ | 313,034 |
| | $ | 4,898 |
| | $ | 242,130 |
| | $ | 1,602 |
| | $ | 274,444 |
| | $ | 1,679 |
| | $ | 248,393 |
| | $ | 3,214 |
| | $ | 282,802 |
| | $ | 3,411 |
|
| |
(a) | All discharged bankruptcy loans are charged down to an estimate of net realizable value and do not carry any allowance. |
Asset Quality Indicators
FHN employs a dual grade commercial risk grading methodology to assign an estimate for the probability of default (“PD”) and the loss given default (“LGD”) for each commercial loan using factors specific to various industry, portfolio, or product segments that result in a rank ordering of risk and the assignment of grades PD 1 to PD 16. This credit grading system is intended to identify and measure the credit quality of the loan portfolio by analyzing the migration of loans between grading categories. It is also integral to the estimation methodology utilized in determining the allowance for loan losses since an allowance is established for pools of commercial loans based on the credit grade assigned. Each PD grade corresponds to an estimated one-year default probability percentage; a PD 1 has the lowest expected default probability, and probabilities increase as grades progress down the scale. PD 1 through PD 12 are “pass” grades. PD grades 13-16 correspond to the regulatory-defined categories of special mention (13), substandard (14), doubtful (15), and loss (16). Pass loan grades are required to be reassessed annually or earlier whenever there has been a material change in the financial condition of the borrower or risk characteristics of the relationship. All commercial loans over $1 million and certain commercial loans over $500,000 that are graded 13 or worse are reassessed on a quarterly basis. Loan grading discipline is regularly reviewed internally by Credit Assurance Services to determine if the process continues to result in accurate loan grading across the portfolio. FHN may utilize availability of guarantors/sponsors to support lending decisions during the credit underwriting process and when determining the assignment of internal loan grades. LGD grades are assigned based on a scale of 1-12 and represent FHN’s expected recovery based on collateral type in the event a loan defaults. See Note 5 – Allowance for Loan Losses for further discussion on the credit grading system.
Note 4 – Loans (Continued)
The following tables provide the balances of commercial loan portfolio classes with associated allowance, disaggregated by PD grade as of SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | | | September 30, 2017 | | June 30, 2018 |
(Dollars in thousands) | | General C&I | | Loans to Mortgage Companies | | TRUPS (a) | | Income CRE | | Residential CRE | | Total | | Percentage of Total | | Allowance for Loan Losses | | General C&I | | Loans to Mortgage Companies | | TRUPS (a) | | Income CRE | | Residential CRE | | Total | | Percentage of Total | | Allowance for Loan Losses |
PD Grade: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 | | $ | 583,818 |
| | $ | — |
| | $ | — |
| | $ | 1,832 |
| | $ | — |
| | $ | 585,650 |
| | 4 | % | | $ | 81 |
| | $ | 547,654 |
| | $ | — |
| | $ | — |
| | $ | 2,104 |
| | $ | — |
| | $ | 549,758 |
| | 3 | % | | $ | 64 |
|
2 | | 905,992 |
| | — |
| | — |
| | 3,777 |
| | 112 |
| | 909,881 |
| | 6 |
| | 385 |
| | 840,122 |
| | — |
| | — |
| | 10,236 |
| | 41 |
| | 850,399 |
| | 4 |
| | 280 |
|
3 | | 500,056 |
| | 643,772 |
| | — |
| | 156,694 |
| | — |
| | 1,300,522 |
| | 9 |
| | 277 |
| | 633,000 |
| | 727,078 |
| | — |
| | 255,090 |
| | 214 |
| | 1,615,382 |
| | 8 |
| | 255 |
|
4 | | 1,026,592 |
| | 578,566 |
| | — |
| | 295,781 |
| | 212 |
| | 1,901,151 |
| | 13 |
| | 955 |
| | 845,405 |
| | 586,315 |
| | — |
| | 457,716 |
| | — |
| | 1,889,436 |
| | 9 |
| | 700 |
|
5 | | 1,460,107 |
| | 211,846 |
| | — |
| | 443,751 |
| | 2,053 |
| | 2,117,757 |
| | 14 |
| | 7,697 |
| | 1,892,574 |
| | 347,919 |
| | 63,017 |
| | 463,421 |
| | 1,421 |
| | 2,768,352 |
| | 13 |
| | 8,003 |
|
6 | | 1,519,911 |
| | 362,685 |
| | — |
| | 413,342 |
| | 6,114 |
| | 2,302,052 |
| | 14 |
| | 9,857 |
| | 1,475,963 |
| | 426,654 |
| | 90,296 |
| | 447,840 |
| | 6,117 |
| | 2,446,870 |
| | 12 |
| | 8,830 |
|
7 | | 1,705,394 |
| | 60,135 |
| | — |
| | 446,493 |
| | 8,372 |
| | 2,220,394 |
| | 14 |
| | 13,297 |
| | 2,387,509 |
| | 109,693 |
| | 65,193 |
| | 499,585 |
| | 5,054 |
| | 3,067,034 |
| | 15 |
| | 14,442 |
|
8 | | 1,042,209 |
| | 34,623 |
| | — |
| | 259,813 |
| | 4,908 |
| | 1,341,553 |
| | 9 |
| | 20,963 |
| | 1,078,583 |
| | 70,924 |
| | 4,068 |
| | 220,208 |
| | 11,600 |
| | 1,385,383 |
| | 7 |
| | 19,828 |
|
9 | | 556,662 |
| | 60,954 |
| | — |
| | 66,082 |
| | 4,276 |
| | 687,974 |
| | 5 |
| | 11,376 |
| | 2,604,602 |
| | 86,253 |
| | 45,117 |
| | 1,382,306 |
| | 60,385 |
| | 4,178,663 |
| | 20 |
| | 22,349 |
|
10 | | 395,187 |
| | — |
| | — |
| | 31,570 |
| | 6,558 |
| | 433,315 |
| | 3 |
| | 8,502 |
| | 371,017 |
| | — |
| | 18,536 |
| | 54,896 |
| | 3,488 |
| | 447,937 |
| | 2 |
| | 8,782 |
|
11 | | 217,190 |
| | 13,548 |
| | — |
| | 24,878 |
| | 4,819 |
| | 260,435 |
| | 2 |
| | 6,730 |
| | 257,439 |
| | — |
| | — |
| | 40,893 |
| | 341 |
| | 298,673 |
| | 1 |
| | 7,509 |
|
12 | | 185,929 |
| | — |
| | — |
| | 10,798 |
| | 2,709 |
| | 199,436 |
| | 1 |
| | 7,065 |
| | 300,482 |
| | — |
| | — |
| | 110,184 |
| | 6,306 |
| | 416,972 |
| | 2 |
| | 5,802 |
|
13 | | 142,729 |
| | — |
| | 304,236 |
| | 38,979 |
| | 91 |
| | 486,035 |
| | 3 |
| | 6,927 |
| | 247,731 |
| | — |
| | 17,621 |
| | 57,845 |
| | 9 |
| | 323,206 |
| | 2 |
| | 8,895 |
|
14,15,16 | | 226,924 |
| | 26 |
| | — |
| | 10,062 |
| | 819 |
| | 237,831 |
| | 2 |
| | 23,974 |
| | 209,046 |
| | — |
| | — |
| | 8,874 |
| | 800 |
| | 218,720 |
| | 1 |
| | 21,434 |
|
Collectively evaluated for impairment | | 10,468,700 |
| | 1,966,155 |
| | 304,236 |
| | 2,203,852 |
| | 41,043 |
| | 14,983,986 |
| | 99 |
| | 118,086 |
| | 13,691,127 |
| | 2,354,836 |
| | 303,848 |
| | 4,011,198 |
| | 95,776 |
| | 20,456,785 |
| | 99 |
| | 127,173 |
|
Individually evaluated for impairment | | 28,931 |
| | — |
| | 3,097 |
| | 1,525 |
| | 795 |
| | 34,348 |
| | 1 |
| | 7,021 |
| | 29,617 |
| | — |
| | 2,982 |
| | 1,748 |
| | 504 |
| | 34,851 |
| | — |
| | 1,213 |
|
Purchased credit-impaired loans | | 20,725 |
| | — |
| | — |
| | 3,792 |
| | 8 |
| | 24,525 |
| | — |
| | 2,781 |
| | 56,335 |
| | — |
| | — |
| | 23,781 |
| | 3,349 |
| | 83,465 |
| | 1 |
| | 2,280 |
|
Total commercial loans | | $ | 10,518,356 |
| | $ | 1,966,155 |
| | $ | 307,333 |
| | $ | 2,209,169 |
| | $ | 41,846 |
| | $ | 15,042,859 |
| | 100 | % | | $ | 127,888 |
| | $ | 13,777,079 |
| | $ | 2,354,836 |
| | $ | 306,830 |
| | $ | 4,036,727 |
| | $ | 99,629 |
| | $ | 20,575,101 |
| | 100 | % | | $ | 130,666 |
|
Note 4 – Loans (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
(Dollars in thousands) | | General C&I | | Loans to Mortgage Companies | | TRUPS (a) | | Income CRE | | Residential CRE | | Total | | Percentage of Total | | Allowance for Loan Losses |
PD Grade: | | | | | | | | | | | | | | | | |
1 | | $ | 465,179 |
| | $ | — |
| | $ | — |
| | $ | 1,078 |
| | $ | — |
| | $ | 466,257 |
| | 3 | % | | $ | 77 |
|
2 | | 791,183 |
| | — |
| | — |
| | 11,742 |
| | 87 |
| | 803,012 |
| | 6 |
| | 403 |
|
3 | | 491,386 |
| | 462,486 |
| | — |
| | 153,670 |
| | — |
| | 1,107,542 |
| | 8 |
| | 304 |
|
4 | | 978,282 |
| | 332,107 |
| | — |
| | 222,422 |
| | — |
| | 1,532,811 |
| | 11 |
| | 953 |
|
5 | | 1,232,401 |
| | 275,209 |
| | — |
| | 365,653 |
| | 702 |
| | 1,873,965 |
| | 13 |
| | 6,670 |
|
6 | | 1,540,519 |
| | 614,109 |
| | — |
| | 338,344 |
| | 9,338 |
| | 2,502,310 |
| | 17 |
| | 10,403 |
|
7 | | 1,556,117 |
| | 317,283 |
| | — |
| | 352,390 |
| | 2,579 |
| | 2,228,369 |
| | 16 |
| | 14,010 |
|
8 | | 963,359 |
| | 30,974 |
| | — |
| | 425,503 |
| | 2,950 |
| | 1,422,786 |
| | 10 |
| | 25,986 |
|
9 | | 611,774 |
| | 4,299 |
| | — |
| | 105,277 |
| | 4,417 |
| | 725,767 |
| | 5 |
| | 13,857 |
|
10 | | 355,359 |
| | 8,663 |
| | — |
| | 50,484 |
| | 9,110 |
| | 423,616 |
| | 3 |
| | 8,400 |
|
11 | | 238,230 |
| | — |
| | — |
| | 20,600 |
| | 6,541 |
| | 265,371 |
| | 2 |
| | 6,556 |
|
12 | | 170,531 |
| | — |
| | — |
| | 15,395 |
| | 4,168 |
| | 190,094 |
| | 1 |
| | 6,377 |
|
13 | | 121,276 |
| | — |
| | 304,236 |
| | 6,748 |
| | 311 |
| | 432,571 |
| | 3 |
| | 4,225 |
|
14,15,16 | | 194,572 |
| | 59 |
| | — |
| | 16,313 |
| | 1,659 |
| | 212,603 |
| | 1 |
| | 20,297 |
|
Collectively evaluated for impairment | | 9,710,168 |
| | 2,045,189 |
| | 304,236 |
| | 2,085,619 |
| | 41,862 |
| | 14,187,074 |
| | 99 |
| | 118,518 |
|
Individually evaluated for impairment | | 44,753 |
| | — |
| | 3,209 |
| | 1,831 |
| | 1,293 |
| | 51,086 |
| | 1 |
| | 4,413 |
|
Purchased credit-impaired loans | | 40,532 |
| | — |
| | — |
| | 4,583 |
| | 335 |
| | 45,450 |
| | — |
| | 319 |
|
Total commercial loans | | $ | 9,795,453 |
| | $ | 2,045,189 |
| | $ | 307,445 |
| | $ | 2,092,033 |
| | $ | 43,490 |
| | $ | 14,283,610 |
| | 100 | % | | $ | 123,250 |
|
| |
(a) | Balances as of September 30, 2017 and December 31, 2016, presented net of a $25.5 million valuation allowance. Based on the underlying structure of the notes, the highest possible internal grade iswas “13”. prior to second quarter 2018. In second quarter 2018, this portfolio was re-graded to align with the scorecard grading methodologies which resulted in upgrades to a majority of this portfolio. |
Note 4 – Loans (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 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 | | $ | 536,244 |
| | $ | — |
| | $ | — |
| | $ | 2,500 |
| | $ | — |
| | $ | 538,744 |
| | 3 | % | | $ | 70 |
|
2 | | 877,635 |
| | — |
| | — |
| | 1,798 |
| | 69 |
| | 879,502 |
| | 4 |
| | 339 |
|
3 | | 582,224 |
| | 652,982 |
| | — |
| | 210,073 |
| | 40 |
| | 1,445,319 |
| | 7 |
| | 272 |
|
4 | | 959,581 |
| | 629,432 |
| | — |
| | 309,699 |
| | — |
| | 1,898,712 |
| | 9 |
| | 854 |
|
5 | | 1,461,632 |
| | 328,477 |
| | — |
| | 415,764 |
| | 2,474 |
| | 2,208,347 |
| | 11 |
| | 7,355 |
|
6 | | 1,668,247 |
| | 335,169 |
| | — |
| | 456,706 |
| | 3,179 |
| | 2,463,301 |
| | 12 |
| | 10,495 |
|
7 | | 2,257,400 |
| | 47,720 |
| | — |
| | 554,590 |
| | 9,720 |
| | 2,869,430 |
| | 14 |
| | 13,490 |
|
8 | | 1,092,994 |
| | 35,266 |
| | — |
| | 241,938 |
| | 6,454 |
| | 1,376,652 |
| | 7 |
| | 21,831 |
|
9 | | 2,633,854 |
| | 70,915 |
| | — |
| | 1,630,176 |
| | 61,475 |
| | 4,396,420 |
| | 22 |
| | 9,804 |
|
10 | | 373,537 |
| | — |
| | — |
| | 43,297 |
| | 4,590 |
| | 421,424 |
| | 2 |
| | 8,808 |
|
11 | | 226,382 |
| | — |
| | — |
| | 31,785 |
| | 2,936 |
| | 261,103 |
| | 1 |
| | 6,784 |
|
12 | | 409,838 |
| | — |
| | — |
| | 156,717 |
| | 6,811 |
| | 573,366 |
| | 3 |
| | 5,882 |
|
13 | | 202,613 |
| | — |
| | 303,848 |
| | 15,707 |
| | 268 |
| | 522,436 |
| | 3 |
| | 7,265 |
|
14,15,16 | | 228,852 |
| | — |
| | — |
| | 6,587 |
| | 823 |
| | 236,262 |
| | 1 |
| | 24,400 |
|
Collectively evaluated for impairment | | 13,511,033 |
| | 2,099,961 |
| | 303,848 |
| | 4,077,337 |
| | 98,839 |
| | 20,091,018 |
| | 99 |
| | 117,649 |
|
Individually evaluated for impairment | | 39,957 |
| | — |
| | 3,067 |
| | 1,612 |
| | 795 |
| | 45,431 |
| | — |
| | 6,176 |
|
Purchased credit-impaired loans | | 99,407 |
| | — |
| | — |
| | 31,615 |
| | 4,497 |
| | 135,519 |
| | 1 |
| | 2,813 |
|
Total commercial loans | | $ | 13,650,397 |
| | $ | 2,099,961 |
| | $ | 306,915 |
| | $ | 4,110,564 |
| | $ | 104,131 |
| | $ | 20,271,968 |
| | 100 | % | | $ | 126,638 |
|
| |
(a) | Balances presented net of a $25.5 million valuation allowance. Based on the underlying structure of the notes, the highest possible internal grade was “13” prior to second quarter 2018. In second quarter 2018, this portfolio was re-graded to align with the scorecard grading methodologies which resulted in upgrades to a majority of this portfolio. |
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 SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
| | HELOC | | R/E Installment Loans | | Permanent Mortgage | | HELOC | | R/E Installment Loans | | Permanent Mortgage | | HELOC | | R/E Installment Loans | | Permanent Mortgage | | HELOC | | R/E Installment Loans | | Permanent Mortgage |
FICO score 740 or greater | | 58.5 | % | | 71.8 | % | | 45.1 | % | | 56.9 | % | | 70.3 | % | | 45.0 | % | | | 61.4 | % | | 74.8 | % | | 50.4 | % | | 60.0 | % | | 73.1 | % | | 46.4 | % | |
FICO score 720-739 | | 8.8 |
| | 8.1 |
| | 12.8 |
| | 8.8 |
| | 8.3 |
| | 9.5 |
| | | 8.7 |
| | 7.7 |
| | 10.2 |
| | 8.7 |
| | 8.0 |
| | 12.8 |
| |
FICO score 700-719 | | 8.2 |
| | 6.6 |
| | 11.0 |
| | 8.6 |
| | 6.8 |
| | 9.2 |
| | | 7.9 |
| | 6.1 |
| | 9.2 |
| | 8.3 |
| | 6.4 |
| | 9.2 |
| |
FICO score 660-699 | | 12.1 |
| | 8.4 |
| | 15.3 |
| | 13.2 |
| | 8.4 |
| | 17.1 |
| | | 10.7 |
| | 6.7 |
| | 13.9 |
| | 11.1 |
| | 7.2 |
| | 14.8 |
| |
FICO score 620-659 | | 5.6 |
| | 2.7 |
| | 7.0 |
| | 5.6 |
| | 3.5 |
| | 9.1 |
| | | 4.8 |
| | 2.6 |
| | 6.8 |
| | 4.9 |
| | 2.8 |
| | 7.3 |
| |
FICO score less than 620 (a) | | 6.8 |
| | 2.4 |
| | 8.8 |
| | 6.9 |
| | 2.7 |
| | 10.1 |
| | | 6.5 |
| | 2.1 |
| | 9.5 |
| | 7.0 |
| | 2.5 |
| | 9.5 |
| |
Total | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | |
| |
(a) | For this group, a majority of the loan balances had FICO scores at the time of the origination that exceeded 620 but have since deteriorated as the loans have seasoned. |
Note 4 – Loans (Continued)
Nonaccrual and Past Due Loans
The following table reflects accruing and non-accruing loans by class on SeptemberJune 30, 2017:2018:
| | | | Accruing | | Non-Accruing | | | | 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 | | Current | | 30-89 Days Past Due | | 90+ Days Past Due | | Total Accruing | | Current | | 30-89 Days Past Due | | 90+ Days Past Due | | Total Non- Accruing | | Total Loans |
Commercial (C&I): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
General C&I | | $ | 10,462,376 |
| | $ | 19,324 |
| | $ | 129 |
| | $ | 10,481,829 |
| | $ | 5,260 |
| | $ | 1,252 |
| | $ | 9,290 |
| | $ | 15,802 |
| | $ | 10,497,631 |
| | $ | 13,696,352 |
| | $ | 7,518 |
| | $ | 639 |
| | $ | 13,704,509 |
| | $ | 9,358 |
| | $ | 510 |
| | $ | 6,367 |
| | $ | 16,235 |
| | $ | 13,720,744 |
|
Loans to mortgage companies | | 1,966,129 |
| | — |
| | — |
| | 1,966,129 |
| | — |
| | — |
| | 26 |
| | 26 |
| | 1,966,155 |
| | 2,354,836 |
| | — |
| | — |
| | 2,354,836 |
| | — |
| | — |
| | — |
| | — |
| | 2,354,836 |
|
TRUPS (a) | | 304,236 |
| | — |
| | — |
| | 304,236 |
| | — |
| | — |
| | 3,097 |
| | 3,097 |
| | 307,333 |
| | 303,848 |
| | — |
| | — |
| | 303,848 |
| | — |
| | — |
| | 2,982 |
| | 2,982 |
| | 306,830 |
|
Purchased credit-impaired loans | | 6,080 |
| | 70 |
| | 14,575 |
| | 20,725 |
| | — |
| | — |
| | — |
| | — |
| | 20,725 |
| | 41,046 |
| | 850 |
| | 14,439 |
| | 56,335 |
| | — |
| | — |
| | — |
| | — |
| | 56,335 |
|
Total commercial (C&I) | | 12,738,821 |
| | 19,394 |
| | 14,704 |
| | 12,772,919 |
| | 5,260 |
| | 1,252 |
| | 12,413 |
| | 18,925 |
| | 12,791,844 |
| | 16,396,082 |
| | 8,368 |
| | 15,078 |
| | 16,419,528 |
| | 9,358 |
| | 510 |
| | 9,349 |
| | 19,217 |
| | 16,438,745 |
|
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income CRE | | 2,204,042 |
| | 490 |
| | — |
| | 2,204,532 |
| | 105 |
| | — |
| | 740 |
| | 845 |
| | 2,205,377 |
| | 4,010,460 |
| | 1,436 |
| | — |
| | 4,011,896 |
| | 43 |
| | 96 |
| | 911 |
| | 1,050 |
| | 4,012,946 |
|
Residential CRE | | 41,043 |
| | — |
| | — |
| | 41,043 |
| | — |
| | — |
| | 795 |
| | 795 |
| | 41,838 |
| | 95,887 |
| | — |
| | — |
| | 95,887 |
| | — |
| | — |
| | 393 |
| | 393 |
| | 96,280 |
|
Purchased credit-impaired loans | | 3,800 |
| | — |
| | — |
| | 3,800 |
| | — |
| | — |
| | — |
| | — |
| | 3,800 |
| | 25,926 |
| | 968 |
| | 236 |
| | 27,130 |
| | — |
| | — |
| | — |
| | — |
| | 27,130 |
|
Total commercial real estate | | 2,248,885 |
| | 490 |
| | — |
| | 2,249,375 |
| | 105 |
| | — |
| | 1,535 |
| | 1,640 |
| | 2,251,015 |
| | 4,132,273 |
| | 2,404 |
| | 236 |
| | 4,134,913 |
| | 43 |
| | 96 |
| | 1,304 |
| | 1,443 |
| | 4,136,356 |
|
Consumer real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
HELOC | | 1,375,690 |
| | 14,312 |
| | 8,518 |
| | 1,398,520 |
| | 43,188 |
| | 3,217 |
| | 9,020 |
| | 55,425 |
| | 1,453,945 |
| | 1,557,368 |
| | 13,302 |
| | 7,669 |
| | 1,578,339 |
| | 46,823 |
| | 4,157 |
| | 8,852 |
| | 59,832 |
| | 1,638,171 |
|
R/E installment loans | | 2,883,593 |
| | 5,855 |
| | 3,609 |
| | 2,893,057 |
| | 15,510 |
| | 2,875 |
| | 3,035 |
| | 21,420 |
| | 2,914,477 |
| | 4,511,603 |
| | 10,938 |
| | 6,014 |
| | 4,528,555 |
| | 14,766 |
| | 1,721 |
| | 3,083 |
| | 19,570 |
| | 4,548,125 |
|
Purchased credit-impaired loans | | 1,198 |
| | — |
| | 97 |
| | 1,295 |
| | — |
| | — |
| | — |
| | — |
| | 1,295 |
| | 31,886 |
| | 3,819 |
| | 610 |
| | 36,315 |
| | — |
| | — |
| | — |
| | — |
| | 36,315 |
|
Total consumer real estate | | 4,260,481 |
| | 20,167 |
| | 12,224 |
| | 4,292,872 |
| | 58,698 |
| | 6,092 |
| | 12,055 |
| | 76,845 |
| | 4,369,717 |
| | 6,100,857 |
| | 28,059 |
| | 14,293 |
| | 6,143,209 |
| | 61,589 |
| | 5,878 |
| | 11,935 |
| | 79,402 |
| | 6,222,611 |
|
Permanent mortgage | | 369,546 |
| | 3,333 |
| | 2,753 |
| | 375,632 |
| | 12,557 |
| | 577 |
| | 14,316 |
| | 27,450 |
| | 403,082 |
| | 323,736 |
| | 2,391 |
| | 4,419 |
| | 330,546 |
| | 13,143 |
| | 259 |
| | 10,968 |
| | 24,370 |
| | 354,916 |
|
Credit card & other: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit card | | 191,714 |
| | 1,254 |
| | 1,081 |
| | 194,049 |
| | — |
| | — |
| | — |
| | — |
| | 194,049 |
| | 189,849 |
| | 1,097 |
| | 1,055 |
| | 192,001 |
| | — |
| | — |
| | — |
| | — |
| | 192,001 |
|
Other | | 155,460 |
| | 610 |
| | 188 |
| | 156,258 |
| | — |
| | — |
| | 126 |
| | 126 |
| | 156,384 |
| | 347,702 |
| | 5,534 |
| | 460 |
| | 353,696 |
| | 100 |
| | 51 |
| | 209 |
| | 360 |
| | 354,056 |
|
Purchased credit-impaired loans | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,310 |
| | 1,366 |
| | 379 |
| | 3,055 |
| | — |
| | — |
| | — |
| | — |
| | 3,055 |
|
Total credit card & other | | 347,174 |
| | 1,864 |
| | 1,269 |
| | 350,307 |
| | — |
| | — |
| | 126 |
| | 126 |
| | 350,433 |
| | 538,861 |
| | 7,997 |
| | 1,894 |
| | 548,752 |
| | 100 |
| | 51 |
| | 209 |
| | 360 |
| | 549,112 |
|
Total loans, net of unearned income | | $ | 19,964,907 |
| | $ | 45,248 |
| | $ | 30,950 |
| | $ | 20,041,105 |
| | $ | 76,620 |
| | $ | 7,921 |
| | $ | 40,445 |
| | $ | 124,986 |
| | $ | 20,166,091 |
| | $ | 27,491,809 |
| | $ | 49,219 |
| | $ | 35,920 |
| | $ | 27,576,948 |
| | $ | 84,233 |
| | $ | 6,794 |
| | $ | 33,765 |
| | $ | 124,792 |
| | $ | 27,701,740 |
|
(a) TRUPS is presented net of the valuation allowance of $25.5 million.
Note 4 – Loans (Continued)
The following table reflects accruing and non-accruing loans by class on December 31, 2016:2017:
| | | | Accruing | | Non-Accruing | | | | 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 | | 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 |
| | $ | 13,514,752 |
| | $ | 8,057 |
| | $ | 95 |
| | $ | 13,522,904 |
| | $ | 1,761 |
| | $ | 7,019 |
| | $ | 19,306 |
| | $ | 28,086 |
| | $ | 13,550,990 |
|
Loans to mortgage companies | | 2,041,408 |
| | 3,722 |
| | — |
| | 2,045,130 |
| | — |
| | — |
| | 59 |
| | 59 |
| | 2,045,189 |
| | 2,099,961 |
| | — |
| | — |
| | 2,099,961 |
| | — |
| | — |
| | — |
| | — |
| | 2,099,961 |
|
TRUPS (a) | | 304,236 |
| | — |
| | — |
| | 304,236 |
| | — |
| | — |
| | 3,209 |
| | 3,209 |
| | 307,445 |
| | 303,848 |
| | — |
| | — |
| | 303,848 |
| | — |
| | — |
| | 3,067 |
| | 3,067 |
| | 306,915 |
|
Purchased credit-impaired loans | | 40,113 |
| | 185 |
| | 234 |
| | 40,532 |
| | — |
| | — |
| | — |
| | — |
| | 40,532 |
| | 77,843 |
| | 2,207 |
| | 19,357 |
| | 99,407 |
| | — |
| | — |
| | — |
| | — |
| | 99,407 |
|
Total commercial (C&I) | | 12,105,988 |
| | 9,106 |
| | 257 |
| | 12,115,351 |
| | 16,106 |
| | 374 |
| | 16,256 |
| | 32,736 |
| | 12,148,087 |
| | 15,996,404 |
| | 10,264 |
| | 19,452 |
| | 16,026,120 |
| | 1,761 |
| | 7,019 |
| | 22,373 |
| | 31,153 |
| | 16,057,273 |
|
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income CRE | | 2,085,455 |
| | 14 |
| | — |
| | 2,085,469 |
| | 232 |
| | 460 |
| | 1,289 |
| | 1,981 |
| | 2,087,450 |
| | 4,077,106 |
| | 1,240 |
| | — |
| | 4,078,346 |
| | 56 |
| | — |
| | 546 |
| | 602 |
| | 4,078,948 |
|
Residential CRE | | 42,182 |
| | 178 |
| | — |
| | 42,360 |
| | — |
| | — |
| | 795 |
| | 795 |
| | 43,155 |
| | 98,844 |
| | — |
| | — |
| | 98,844 |
| | — |
| | — |
| | 791 |
| | 791 |
| | 99,635 |
|
Purchased credit-impaired loans | | 4,809 |
| | 109 |
| | — |
| | 4,918 |
| | — |
| | — |
| | — |
| | — |
| | 4,918 |
| | 31,173 |
| | 2,686 |
| | 2,253 |
| | 36,112 |
| | — |
| | — |
| | — |
| | — |
| | 36,112 |
|
Total commercial real estate | | 2,132,446 |
| | 301 |
| | — |
| | 2,132,747 |
| | 232 |
| | 460 |
| | 2,084 |
| | 2,776 |
| | 2,135,523 |
| | 4,207,123 |
| | 3,926 |
| | 2,253 |
| | 4,213,302 |
| | 56 |
| | — |
| | 1,337 |
| | 1,393 |
| | 4,214,695 |
|
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 |
| | 1,743,776 |
| | 17,744 |
| | 9,702 |
| | 1,771,222 |
| | 40,508 |
| | 3,626 |
| | 8,354 |
| | 52,488 |
| | 1,823,710 |
|
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 |
| | 4,475,669 |
| | 7,274 |
| | 3,573 |
| | 4,486,516 |
| | 14,439 |
| | 1,957 |
| | 2,603 |
| | 18,999 |
| | 4,505,515 |
|
Purchased credit-impaired loans | | 1,319 |
| | 164 |
| | 93 |
| | 1,576 |
| | — |
| | — |
| | — |
| | — |
| | 1,576 |
| | 35,356 |
| | 2,016 |
| | 1,158 |
| | 38,530 |
| | — |
| | — |
| | — |
| | — |
| | 38,530 |
|
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 |
| | 6,254,801 |
| | 27,034 |
| | 14,433 |
| | 6,296,268 |
| | 54,947 |
| | 5,583 |
| | 10,957 |
| | 71,487 |
| | 6,367,755 |
|
Permanent mortgage | | 385,972 |
| | 4,544 |
| | 5,428 |
| | 395,944 |
| | 11,867 |
| | 2,194 |
| | 13,120 |
| | 27,181 |
| | 423,125 |
| | 365,527 |
| | 3,930 |
| | 3,460 |
| | 372,917 |
| | 13,245 |
| | 1,052 |
| | 12,093 |
| | 26,390 |
| | 399,307 |
|
Credit card & other: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit card | | 188,573 |
| | 1,622 |
| | 1,456 |
| | 191,651 |
| | — |
| | — |
| | — |
| | — |
| | 191,651 |
| | 193,940 |
| | 1,371 |
| | 1,053 |
| | 196,364 |
| | — |
| | — |
| | — |
| | — |
| | 196,364 |
|
Other | | 166,062 |
| | 992 |
| | 134 |
| | 167,188 |
| | — |
| | — |
| | 142 |
| | 142 |
| | 167,330 |
| | 415,070 |
| | 2,666 |
| | 103 |
| | 417,839 |
| | 31 |
| | — |
| | 165 |
| | 196 |
| | 418,035 |
|
Purchased credit-impaired loans | | 52 |
| | — |
| | — |
| | 52 |
| | — |
| | — |
| | — |
| | — |
| | 52 |
| | 2,993 |
| | 1,693 |
| | 814 |
| | 5,500 |
| | — |
| | — |
| | — |
| | — |
| | 5,500 |
|
Total credit card & other | | 354,687 |
| | 2,614 |
| | 1,590 |
| | 358,891 |
| | — |
| | — |
| | 142 |
| | 142 |
| | 359,033 |
| | 612,003 |
| | 5,730 |
| | 1,970 |
| | 619,703 |
| | 31 |
| | — |
| | 165 |
| | 196 |
| | 619,899 |
|
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 |
| | $ | 27,435,858 |
| | $ | 50,884 |
| | $ | 41,568 |
| | $ | 27,528,310 |
| | $ | 70,040 |
| | $ | 13,654 |
| | $ | 46,925 |
| | $ | 130,619 |
| | $ | 27,658,929 |
|
(a) TRUPS is presented net of the valuation allowance of $25.5 million.
Note 4 – Loans (Continued)
Troubled Debt Restructurings
As part of FHN’s ongoing risk management practices, FHN attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately.
A modification is classified as a TDR if the borrower is experiencing financial difficulty and it is determined that FHN has granted a concession to the borrower. FHN may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that a borrower may default in the foreseeable future. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty. Concessions could include extension of the maturity date, reductions of the interest rate (which may make the rate lower than current market for a new loan with similar risk), reduction or forgiveness of accrued interest, or principal forgiveness. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty, and whether a concession has been granted, are subjective in nature and management’s judgment is required when determining whether a modification is classified as a TDR.
For all classes within the commercial portfolio segment, TDRs are typically modified through forbearance agreements (generally 6 to 12 months). Forbearance agreements could include reduced interest rates, reduced payments, release of guarantor, or entering into short sale agreements. FHN’s proprietary modification programs for consumer loans are generally structured using parameters of U.S. government-sponsored programs such as the former Home Affordable Modification Program (“HAMP”). Within the HELOC and R/E installment loans classes of the consumer portfolio segment, TDRs are typically modified by reducing the interest rate (in increments of 25 basis points to a minimum of 1 percent for up to 5 years) and a possible maturity date extension to reach an affordable housing debt-to-income ratio. After 5 years, the interest rate generally returns to the original interest rate prior to modification; for certain modifications, the modified interest rate increases 2 percent per year until the original interest rate prior to modification is achieved. Permanent mortgage TDRs are typically modified by reducing the interest rate (in increments of 25 basis points to a minimum of 2 percent for up to 5 years) and a possible maturity date extension to reach an affordable housing debt-to-income ratio. After 5 years, the interest rate steps up 1 percent every year until it reaches the Federal Home Loan Mortgage Corporation Weekly Survey Rate cap. Contractual maturities may be extended to 40 years on permanent mortgages and to 30 years for consumer real estate loans. Within the credit card class of the consumer portfolio segment, TDRs are typically modified through either a short-term credit card hardship program or a longer-term credit card workout program. In the credit card hardship program, borrowers may be granted rate and payment reductions for 6 months to 1 year. In the credit card workout program, customers are granted a rate reduction to 0 percent and term extensions for up to 5 years to pay off the remaining balance.
Despite the absence of a loan modification, the discharge of personal liability through bankruptcy proceedings is considered a concession. As a result, FHN classifies all non-reaffirmed residential real estate loans discharged in Chapter 7 bankruptcy as nonaccruing TDRs.
On SeptemberJune 30, 20172018 and December 31, 2016,2017, FHN had $241.6$217.6 million and $285.2$234.4 million of portfolio loans classified as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reserves of $38.6$31.5 million, or 1614 percent as of SeptemberJune 30, 2017,2018, and $44.9$37.3 million, or 16 percent as of December 31, 2016.2017. Additionally, $63.2$60.5 million and $69.3$63.2 million of loans held-for-sale as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively, were classified as TDRs.
Note 4 – Loans (Continued)
The following tables reflect portfolio loans that were classified as TDRs during the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
| | | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 | |
(Dollars in thousands) | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | |
Commercial (C&I): | | | | | | | | | | | | | |
General C&I | | — |
| | $ | — |
| | $ | — |
| | 2 |
| | $ | 842 |
| | $ | 836 |
| |
Total commercial (C&I) | | — |
| | — |
| | — |
| | 2 |
| | 842 |
| | 836 |
| |
Consumer real estate: | | | | | | | | | | | | | |
HELOC | | 45 |
| | 4,451 |
| | 4,396 |
| | 107 |
| | 9,333 |
| | 9,139 |
| |
R/E installment loans | | 15 |
| | 1,630 |
| | 1,622 |
| | 43 |
| | 3,386 |
| | 3,306 |
| |
Total consumer real estate | | 60 |
| | 6,081 |
| | 6,018 |
| | 150 |
| | 12,719 |
| | 12,445 |
| |
Permanent mortgage | | 2 |
| | 34 |
| | 32 |
| | 11 |
| | 2,043 |
| | 2,028 |
| |
Credit card & other | | 37 |
| | 261 |
| | 251 |
| | 66 |
| | 426 |
| | 411 |
| |
Total troubled debt restructurings | | 99 |
| | $ | 6,376 |
| | $ | 6,301 |
| | 229 |
| | $ | 16,030 |
| | $ | 15,720 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
(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 | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Commercial (C&I): | | | | | | | | | | | | | | | | | | | | | | | | |
General C&I | | 2 |
| | $ | 419 |
| | $ | 419 |
| | 7 |
| | $ | 20,302 |
| | $ | 19,194 |
| | 3 |
| | $ | 544 |
| | $ | 537 |
| | 8 |
| | $ | 2,048 |
| | $ | 1,751 |
|
Total commercial (C&I) | | 2 |
| | 419 |
| | 419 |
| | 7 |
| | 20,302 |
| | 19,194 |
| | 3 |
| | 544 |
| | 537 |
| | 8 |
| | 2,048 |
| | 1,751 |
|
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Income CRE | | 1 |
| | 100 |
| | 99 |
| | 1 |
| | 100 |
| | 99 |
| | 3 |
| | 201 |
| | 195 |
| | 3 |
| | 201 |
| | 195 |
|
Total commercial real estate | | 1 |
| | 100 |
| | 99 |
| | 1 |
| | 100 |
| | 99 |
| | 3 |
| | 201 |
| | 195 |
| | 3 |
| | 201 |
| | 195 |
|
Consumer real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
HELOC | | 48 |
| | 5,720 |
| | 5,573 |
| | 200 |
| | 18,418 |
| | 18,189 |
| | 34 |
| | 3,824 |
| | 3,806 |
| | 64 |
| | 6,584 |
| | 6,539 |
|
R/E installment loans | | 10 |
| | 345 |
| | 337 |
| | 44 |
| | 4,569 |
| | 4,846 |
| | 10 |
| | 772 |
| | 770 |
| | 15 |
| | 1,383 |
| | 1,382 |
|
Total consumer real estate | | 58 |
| | 6,065 |
| | 5,910 |
| | 244 |
| | 22,987 |
| | 23,035 |
| | 44 |
| | 4,596 |
| | 4,576 |
| | 79 |
| | 7,967 |
| | 7,921 |
|
Permanent mortgage | | 2 |
| | 710 |
| | 704 |
| | 6 |
| | 1,551 |
| | 1,544 |
| | 4 |
| | 434 |
| | 440 |
| | 5 |
| | 709 |
| | 713 |
|
Credit card & other | | 10 |
| | 45 |
| | 44 |
| | 15 |
| | 66 |
| | 64 |
| | 27 |
| | 95 |
| | 94 |
| | 68 |
| | 305 |
| | 291 |
|
Total troubled debt restructurings | | 73 |
| | $ | 7,339 |
| | $ | 7,176 |
| | 273 |
| | $ | 45,006 |
| | $ | 43,936 |
| | 81 |
| | $ | 5,870 |
| | $ | 5,842 |
| | 163 |
| | $ | 11,230 |
| | $ | 10,871 |
|
| | | | | |
| | | | | |
| | | | | |
| | | 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 |
|
Note 4 – Loans (Continued)
The following tables present TDRs which re-defaulted during the three and ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, and as to which the modification occurred 12 months or less prior to the re-default. For purposes of this disclosure, FHN generally defines payment default as 30 or more days past due.
| | | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
(Dollars in thousands) | | Number | | Recorded Investment | | Number | | Recorded Investment | | Number | | Recorded Investment | | Number | | Recorded Investment |
Commercial (C&I): | | | | | | | | | | | | | | | | |
General C&I | | 1 |
| | $ | 1,763 |
| | 4 |
| | $ | 9,770 |
| | 1 |
| | $ | 258 |
| | 1 |
| | $ | 258 |
|
Total commercial (C&I) | | 1 |
| | 1,763 |
| | 4 |
| | 9,770 |
| | 1 |
| | 258 |
| | 1 |
| | 258 |
|
Commercial real estate: | | | | | | | | | |
Income CRE | | 1 |
| | 88 |
| | 1 |
| | 88 |
| |
Total commercial real estate | | 1 |
| | 88 |
| | 1 |
| | 88 |
| |
Consumer real estate: | | | | | | | | | |
HELOC | | | 2 |
| | 95 |
| | 4 |
| | 164 |
|
R/E installment loans | | | 1 |
| | 25 |
| | 1 |
| | 25 |
|
Total consumer real estate | | | 3 |
| | 120 |
| | 5 |
| | 189 |
|
Permanent mortgage | | | 1 |
| | 293 |
| | 2 |
| | 405 |
|
Credit card & other | | | 12 |
| | 75 |
| | 26 |
| | 156 |
|
Total troubled debt restructurings | | | 17 |
| | $ | 746 |
| | 34 |
| | $ | 1,008 |
|
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | 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 |
| | — |
| | — |
| | 4 |
| | 685 |
|
Total consumer real estate | | — |
| | — |
| | 4 |
| | 685 |
| | — |
| | — |
| | 4 |
| | 685 |
|
Permanent mortgage | | 1 |
| | 89 |
| | 2 |
| | 627 |
| | 1 |
| | 538 |
| | 1 |
| | 538 |
|
Credit card & other | | 2 |
| | 12 |
| | 5 |
| | 30 |
| | 1 |
| | 11 |
| | 3 |
| | 18 |
|
Total troubled debt restructurings | | 5 |
| | $ | 1,952 |
| | 16 |
| | $ | 11,200 |
| | 4 |
| | $ | 2,777 |
| | 11 |
| | $ | 9,248 |
|
| | | | | | | | | |
| | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 | |
(Dollars in thousands) | | Number | | Recorded Investment | | Number | | Recorded Investment | |
Consumer real estate: | | | | | | | | | |
HELOC | | — |
| | $ | — |
| | 2 |
| | $ | 138 |
| |
R/E installment loans | | — |
| | — |
| | 1 |
| | 180 |
| |
Total consumer real estate | | — |
| | — |
| | 3 |
| | 318 |
| |
Total troubled debt restructurings | | — |
| | $ | — |
| | 3 |
| | $ | 318 |
| |
Note 5 – Allowance for Loan Losses
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, 2016,2017, for additional information about the policies and methodologies used in the aforementioned components of the ALLL.
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 ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
| | (Dollars in thousands) | | C&I | | Commercial Real Estate | | Consumer Real Estate | | Permanent Mortgage | | Credit Card and Other | | Total | | C&I | | Commercial Real Estate | | Consumer Real Estate | | Permanent Mortgage | | Credit Card and Other | | Total |
Balance as of July 1, 2017 | | $ | 92,379 |
| | $ | 30,470 |
| | $ | 46,069 |
| | $ | 16,398 |
| | $ | 11,941 |
| | $ | 197,257 |
| |
Balance as of April 1, 2018 | | | $ | 100,238 |
| | $ | 29,057 |
| | $ | 32,750 |
| | $ | 15,435 |
| | $ | 9,714 |
| | $ | 187,194 |
|
Charge-offs | | (3,723 | ) | | — |
| | (3,601 | ) | | (173 | ) | | (3,173 | ) | | (10,670 | ) | | (3,287 | ) | | (228 | ) | | (1,481 | ) | | (300 | ) | | (4,712 | ) | | (10,008 | ) |
Recoveries | | 601 |
| | 278 |
| | 6,188 |
| | 542 |
| | 671 |
| | 8,280 |
| | 1,036 |
| | 75 |
| | 5,444 |
| | 631 |
| | 1,090 |
| | 8,276 |
|
Provision/(provision credit) for loan losses | | 8,948 |
| | (1,065 | ) | | (7,717 | ) | | (1,048 | ) | | 882 |
| | — |
| | (1,153 | ) | | 4,928 |
| | (4,944 | ) | | (1,688 | ) | | 2,857 |
| | — |
|
Balance as of September 30, 2017 | | 98,205 |
| | 29,683 |
| | 40,939 |
| | 15,719 |
| | 10,321 |
| | 194,867 |
| |
Balance as of June 30, 2018 | | | 96,834 |
| | 33,832 |
| | 31,769 |
| | 14,078 |
| | 8,949 |
| | 185,462 |
|
Balance as of January 1, 2018 | | | $ | 98,211 |
| | $ | 28,427 |
| | $ | 37,371 |
| | $ | 15,565 |
| | $ | 9,981 |
| | $ | 189,555 |
|
Charge-offs | | | (5,362 | ) | | (272 | ) | | (3,392 | ) | | (460 | ) | | (9,005 | ) | | (18,491 | ) |
Recoveries | | | 2,555 |
| | 81 |
| | 9,827 |
| | 696 |
| | 2,239 |
| | 15,398 |
|
Provision/(provision credit) for loan losses | | | 1,430 |
| | 5,596 |
| | (12,037 | ) | | (1,723 | ) | | 5,734 |
| | (1,000 | ) |
Balance as of June 30, 2018 | | | 96,834 |
| | 33,832 |
| | 31,769 |
| | 14,078 |
| | 8,949 |
| | 185,462 |
|
Allowance - individually evaluated for impairment | | | 1,213 |
| | — |
| | 20,399 |
| | 10,787 |
| | 305 |
| | 32,704 |
|
Allowance - collectively evaluated for impairment | | | 93,429 |
| | 33,744 |
| | 10,730 |
| | 3,291 |
| | 8,557 |
| | 149,751 |
|
Allowance - purchased credit-impaired loans | | | 2,192 |
| | 88 |
| | 640 |
| | — |
| | 87 |
| | 3,007 |
|
Loans, net of unearned as of June 30, 2018: | | | | | | | | | | | | | |
Individually evaluated for impairment | | | 32,599 |
| | 2,252 |
| | 122,335 |
| | 76,861 |
| | 604 |
| | 234,651 |
|
Collectively evaluated for impairment | | | 16,349,811 |
| | 4,106,974 |
| | 6,063,961 |
| | 278,055 |
| | 545,453 |
| | 27,344,254 |
|
Purchased credit-impaired loans | | | 56,335 |
| | 27,130 |
| | 36,315 |
| | — |
| | 3,055 |
| | 122,835 |
|
Total loans, net of unearned income | | | $ | 16,438,745 |
| | $ | 4,136,356 |
| | $ | 6,222,611 |
| | $ | 354,916 |
| | $ | 549,112 |
| | $ | 27,701,740 |
|
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 |
| | $ | 89,398 |
| | $ | 33,852 |
| | $ | 50,357 |
| | $ | 16,289 |
| | $ | 12,172 |
| | $ | 202,068 |
|
Charge-offs | | (6,188 | ) | | (20 | ) | | (11,401 | ) | | (1,499 | ) | | (9,805 | ) | | (28,913 | ) | | (2,465 | ) | | (20 | ) | | (7,800 | ) | | (1,326 | ) | | (6,632 | ) | | (18,243 | ) |
Recoveries | | 2,877 |
| | 639 |
| | 17,007 |
| | 1,933 |
| | 2,256 |
| | 24,712 |
| | 2,276 |
| | 361 |
| | 10,819 |
| | 1,391 |
| | 1,585 |
| | 16,432 |
|
Provision/(provision credit) for loan losses | | 12,118 |
| | (4,788 | ) | | (15,024 | ) | | (1,004 | ) | | 5,698 |
| | (3,000 | ) | | 3,170 |
| | (3,723 | ) | | (7,307 | ) | | 44 |
| | 4,816 |
| | (3,000 | ) |
Balance as of September 30, 2017 | | 98,205 |
| | 29,683 |
| | 40,939 |
| | 15,719 |
| | 10,321 |
| | 194,867 |
| |
Balance as of June 30, 2017 | | | 92,379 |
| | 30,470 |
| | 46,069 |
| | 16,398 |
| | 11,941 |
| | 197,257 |
|
Allowance - individually evaluated for impairment | | 6,895 |
| | 126 |
| | 23,936 |
| | 12,601 |
| | 246 |
| | 43,804 |
| | 3,641 |
| | 176 |
| | 27,149 |
| | 11,858 |
| | 161 |
| | 42,985 |
|
Allowance - collectively evaluated for impairment | | 88,529 |
| | 29,557 |
| | 16,649 |
| | 3,118 |
| | 10,075 |
| | 147,928 |
| | 88,609 |
| | 30,277 |
| | 18,536 |
| | 4,540 |
| | 11,780 |
| | 153,742 |
|
Allowance - purchased credit-impaired loans | | 2,781 |
| | — |
| | 354 |
| | — |
| | — |
| | 3,135 |
| | 129 |
| | 17 |
| | 384 |
| | — |
| | — |
| | 530 |
|
Loans, net of unearned as of September 30, 2017: | | | | | | | | | | | | | |
Loans, net of unearned as of June 30, 2017: | | | | | | | | | | | | | |
Individually evaluated for impairment | | 32,028 |
| | 2,320 |
| | 135,858 |
| | 84,081 |
| | 544 |
| | 254,831 |
| | 38,034 |
| | 3,024 |
| | 137,999 |
| | 85,913 |
| | 360 |
| | 265,330 |
|
Collectively evaluated for impairment | | 12,739,091 |
| | 2,244,895 |
| | 4,232,564 |
| | 319,001 |
| | 349,889 |
| | 19,885,440 |
| | 12,538,913 |
| | 2,204,947 |
| | 4,278,063 |
| | 322,182 |
| | 353,135 |
| | 19,697,240 |
|
Purchased credit-impaired loans | | 20,725 |
| | 3,800 |
| | 1,295 |
| | — |
| | — |
| | 25,820 |
| | 21,272 |
| | 4,025 |
| | 1,397 |
| | — |
| | 55 |
| | 26,749 |
|
Total loans, net of unearned income | | $ | 12,791,844 |
| | $ | 2,251,015 |
| | $ | 4,369,717 |
| | $ | 403,082 |
| | $ | 350,433 |
| | $ | 20,166,091 |
| | $ | 12,598,219 |
| | $ | 2,211,996 |
| | $ | 4,417,459 |
| | $ | 408,095 |
| | $ | 353,550 |
| | $ | 19,989,319 |
|
Balance as of July 1, 2016 | | $ | 80,972 |
| | $ | 30,264 |
| | $ | 59,081 |
| | $ | 17,600 |
| | $ | 11,890 |
| | $ | 199,807 |
| |
Charge-offs | | (1,992 | ) | | (49 | ) | | (4,359 | ) | | (373 | ) | | (3,589 | ) | | (10,362 | ) | |
Recoveries | | 725 |
| | 651 |
| | 5,591 |
| | 239 |
| | 906 |
| | 8,112 |
| |
Provision/(provision credit) for loan losses | | 7,161 |
| | 1,554 |
| | (7,078 | ) | | (877 | ) | | 3,240 |
| | 4,000 |
| |
Balance as of September 30, 2016 | | 86,866 |
| | 32,420 |
| | 53,235 |
| | 16,589 |
| | 12,447 |
| | 201,557 |
| |
Balance as of January 1, 2016 | | $ | 73,637 |
| | $ | 25,159 |
| | $ | 80,614 |
| | $ | 18,947 |
| | $ | 11,885 |
| | $ | 210,242 |
| |
Charge-offs | | (16,386 | ) | | (742 | ) | | (17,867 | ) | | (834 | ) | | (10,441 | ) | | (46,270 | ) | |
Recoveries | | 3,107 |
| | 1,782 |
| | 17,408 |
| | 1,502 |
| | 2,786 |
| | 26,585 |
| |
Provision/(provision credit) for loan losses | | 26,508 |
| | 6,221 |
| | (26,920 | ) | | (3,026 | ) | | 8,217 |
| | 11,000 |
| |
Balance as of September 30, 2016 | | 86,866 |
| | 32,420 |
| | 53,235 |
| | 16,589 |
| | 12,447 |
| | 201,557 |
| |
Allowance - individually evaluated for impairment | | 5,187 |
| | 216 |
| | 29,461 |
| | 14,611 |
| | 139 |
| | 49,614 |
| |
Allowance - collectively evaluated for impairment | | 81,376 |
| | 31,674 |
| | 23,441 |
| | 1,978 |
| | 12,308 |
| | 150,777 |
| |
Allowance - purchased credit-impaired loans | | 303 |
| | 530 |
| | 333 |
| | — |
| | — |
| | 1,166 |
| |
Loans, net of unearned as of September 30, 2016: | | | | | | | | | | | | | |
Individually evaluated for impairment | | 49,351 |
| | 3,302 |
| | 158,909 |
| | 94,071 |
| | 340 |
| | 305,973 |
| |
Collectively evaluated for impairment | | 12,022,457 |
| | 2,053,101 |
| | 4,417,896 |
| | 342,029 |
| | 357,032 |
| | 19,192,515 |
| |
Purchased credit-impaired loans | | 46,490 |
| | 9,192 |
| | 1,566 |
| | — |
| | 51 |
| | 57,299 |
| |
Total loans, net of unearned income | | $ | 12,118,298 |
| | $ | 2,065,595 |
| | $ | 4,578,371 |
| | $ | 436,100 |
| | $ | 357,423 |
| | $ | 19,555,787 |
| |
Note 6 – Intangible Assets
The following is a summary of other intangible assets included in the Consolidated Condensed Statements of Condition:
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
(Dollars in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
Core deposit intangibles(a) | | $ | 16,850 |
| | $ | (6,154 | ) | | $ | 10,696 |
| | $ | 16,850 |
| | $ | (4,721 | ) | | $ | 12,129 |
| | $ | 157,150 |
| | $ | (18,146 | ) | | $ | 139,004 |
| | $ | 160,650 |
| | $ | (8,176 | ) | | $ | 152,474 |
|
Customer relationships (a) | | 76,865 |
| | (49,496 | ) | | 27,369 |
| | 54,865 |
| | (46,302 | ) | | 8,563 |
| | 77,865 |
| | (53,211 | ) | | 24,654 |
| | 77,865 |
| | (50,777 | ) | | 27,088 |
|
Other (a) (b) | | 5,622 |
| | (530 | ) | | 5,092 |
| | 555 |
| | (230 | ) | | 325 |
| |
Other (b) | | | 5,622 |
| | (1,325 | ) | | 4,297 |
| | 5,622 |
| | (795 | ) | | 4,827 |
|
Total | | $ | 99,337 |
| | $ | (56,180 | ) | | $ | 43,157 |
| | $ | 72,270 |
| | $ | (51,253 | ) | | $ | 21,017 |
| | $ | 240,637 |
| | $ | (72,682 | ) | | $ | 167,955 |
| | $ | 244,137 |
| | $ | (59,748 | ) | | $ | 184,389 |
|
| |
(a) | 2017 increase2018 decrease in gross carrying amounts associated with the Coastalsale of two CBF branches and purchase accounting measurement period adjustments related to the CBF acquisition. See Note 2 - Acquisitions and Divestitures for additional information. |
| |
(b) | Balance primarily includes noncompete covenants, as well as $.3 million related to state banking licenses not subject to amortization. |
Amortization expense was $2.0$6.5 million and $1.3$2.0 million for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively and $5.2$12.9 million and $3.9$3.2 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. As of SeptemberJune 30, 20172018 the estimated aggregated amortization expense is expected to be:
| | (Dollars in thousands) | | | | |
Year | | Amortization | | Amortization |
Remainder of 2017 | | $ | 1,964 |
| |
2018 | | 7,483 |
| |
Remainder of 2018 | | | $ | 12,931 |
|
2019 | | 7,179 |
| | 24,834 |
|
2020 | | 4,303 |
| | 21,159 |
|
2021 | | 4,123 |
| | 19,547 |
|
2022 | | 3,356 |
| | 17,412 |
|
2023 | | | 16,117 |
|
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 SeptemberJune 30, 20172018 and December 31, 2016.2017. 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 SeptemberJune 30, 20172018 and December 31, 2016.2017.
|
| | | | | | | | | | | | |
(Dollars in thousands) | | Regional Banking | | Fixed Income | | Total |
December 31, 2015 | | $ | 93,303 |
| | $ | 98,004 |
| | $ | 191,307 |
|
Additions | | 64 |
| | — |
| | 64 |
|
September 30, 2016 | | $ | 93,367 |
| | $ | 98,004 |
| | $ | 191,371 |
|
December 31, 2016 | | $ | 93,367 |
| | $ | 98,004 |
| | $ | 191,371 |
|
Additions (a) | | — |
| | 44,964 |
| | 44,964 |
|
September 30, 2017 | | $ | 93,367 |
| | $ | 142,968 |
| | $ | 236,335 |
|
|
| | | | | | | | | | | | |
(Dollars in thousands) | | Regional Banking | | Fixed Income | | Total |
December 31, 2016 | | $ | 93,367 |
| | $ | 98,004 |
| | $ | 191,371 |
|
Additions (a) | | — |
| | 44,964 |
| | 44,964 |
|
June 30, 2017 | | $ | 93,367 |
| | $ | 142,968 |
| | $ | 236,335 |
|
| | | | | | |
December 31, 2017 | | $ | 1,243,885 |
| | $ | 142,968 |
| | $ | 1,386,853 |
|
Additions (a) | | 22,423 |
| | — |
| | 22,423 |
|
June 30, 2018 | | $ | 1,266,308 |
| | $ | 142,968 |
| | $ | 1,409,276 |
|
(a) 2017 increase associated with the Coastal acquisition, 2018 increase associated with measurement period adjustments for the CBF acquisition. See Note 2 - Acquisitions and Divestitures for further details regarding goodwill related to acquisitions.additional information.
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 September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
All other income and commissions: | | | | | | | | | | | | | | | |
ATM interchange fees
| | $ | 3,137 |
| | $ | 3,081 |
| | $ | 8,998 |
| | $ | 8,918 |
| |
Other service charges | | 2,954 |
| | 3,004 |
| | 9,047 |
| | 8,713 |
| $ | 3,728 |
| | $ | 3,109 |
| | $ | 8,076 |
| | $ | 6,093 |
|
ATM and interchange fees | | 3,413 |
| | 3,083 |
| | 6,680 |
| | 5,861 |
|
Dividend income (a) | | 3,124 |
| | — |
| | 5,373 |
| | — |
|
Mortgage banking
| | 1,354 |
| | 5,524 |
| | 3,883 |
| | 7,395 |
| 2,431 |
| | 1,268 |
| | 4,977 |
| | 2,529 |
|
Letter of credit fees | | 1,295 |
| | 1,122 |
| | 2,544 |
| | 2,158 |
|
Electronic banking fees | | 1,282 |
| | 1,398 |
| | 3,911 |
| | 4,176 |
| 1,228 |
| | 1,306 |
| | 2,432 |
| | 2,629 |
|
Letter of credit fees
| | 1,211 |
| | 981 |
| | 3,369 |
| | 3,157 |
| |
Deferred compensation | | 1,128 |
| | 1,038 |
| | 4,446 |
| | 2,162 |
| 991 |
| | 1,491 |
| | 1,442 |
| | 3,318 |
|
Insurance commissions | | 567 |
| | 1,262 |
| | 2,042 |
| | 2,301 |
| 476 |
| | 592 |
| | 1,233 |
| | 1,475 |
|
Gain/(loss) on extinguishment of debt (a) | | (14,329 | ) | | — |
| | (14,329 | ) | | — |
| |
Other | | 2,739 |
| | 5,518 |
| | 7,684 |
| | 10,594 |
| 2,748 |
| | 2,646 |
| | 9,920 |
| | 4,945 |
|
Total | | $ | 43 |
| | $ | 21,806 |
| | $ | 29,051 |
| | $ | 47,416 |
| $ | 19,434 |
| | $ | 14,617 |
| | $ | 42,677 |
| | $ | 29,008 |
|
All other expense: | | | | | | | | | | | | | | | |
Litigation and regulatory matters | | $ | 8,162 |
| | $ | 260 |
| | $ | 8,403 |
| | $ | 25,785 |
| |
Travel and entertainment | | 2,798 |
| | 2,478 |
| | 8,308 |
| | 7,035 |
| $ | 5,131 |
| | $ | 3,162 |
| | $ | 8,114 |
| | $ | 5,510 |
|
Other insurance and taxes | | 2,396 |
| | 2,625 |
| | 7,229 |
| | 8,952 |
| 2,752 |
| | 2,443 |
| | 5,417 |
| | 4,833 |
|
Supplies | | 1,987 |
| | 1,093 |
| | 3,823 |
| | 1,956 |
|
Employee training and dues | | 1,849 |
| | 1,453 |
| | 3,628 |
| | 2,996 |
|
Non-service components of net periodic pension and post-retirement cost | | 1,530 |
| | 851 |
| | 2,034 |
| | 1,328 |
|
Customer relations | | 1,361 |
| | 1,442 |
| | 4,240 |
| | 4,804 |
| 1,358 |
| | 1,543 |
| | 2,421 |
| | 2,879 |
|
Employee training and dues | | 1,198 |
| | 1,360 |
| | 4,194 |
| | 4,088 |
| |
Supplies | | 928 |
| | 1,158 |
| | 2,884 |
| | 3,114 |
| |
Tax credit investments | | 762 |
| | 788 |
| | 2,646 |
| | 2,325 |
| 1,079 |
| | 942 |
| | 2,216 |
| | 1,884 |
|
Miscellaneous loan costs | | 757 |
| | 676 |
| | 2,078 |
| | 1,958 |
| 1,035 |
| | 699 |
| | 2,177 |
| | 1,321 |
|
OREO | | 303 |
| | 815 |
| | 953 |
| | 125 |
| 810 |
| | 446 |
| | 918 |
| | 650 |
|
Other | | 9,033 |
| | 8,326 |
| | 29,954 |
| | 30,669 |
| |
Litigation and regulatory matters | | 16 |
| | 533 |
| | 2,150 |
| | 241 |
|
Other (b) | | 33,452 |
| | 12,051 |
| | 53,433 |
| | 20,843 |
|
Total | | $ | 27,698 |
| | $ | 19,928 |
| | $ | 70,889 |
| | $ | 88,855 |
| $ | 50,999 |
| | $ | 25,216 |
| | $ | 86,331 |
| | $ | 44,441 |
|
Certain previously reported amounts have been revised to reflect the retroactive effect of the adoption of ASU 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” See Note 1 - Financial Information for additional information.
| |
(a) | Effective January 1, 2018, FHN adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” and began recording dividend income from FRB and FHLB holdings in Other income. Prior to first quarter 2018 these amounts were included in Interest income on the Consolidated Condensed Statements of Income. |
| |
(b) | Expense increase for the three and six months ended June 30, 2018 largely attributable to acquisition- and integration-related expenses associated with the CBF acquisition. See Note 2 - Acquisitions and Divestitures for additional information. |
(a) Loss on extinguishment of debt for the three and nine months ended September 30, 2017 relates to the repurchase of equity securities previously included in a financing transaction.
Note 8 – Components of Other Comprehensive Income/(loss)
The following table provides the changes in accumulated other comprehensive income/(loss) by component, net of tax, for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
| | (Dollars in thousands) | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total |
Balance as of July 1, 2017 | | $ | (9,857 | ) | | $ | (1,024 | ) | | $ | (226,581 | ) | | $ | (237,462 | ) | |
Balance as of April 1, 2018 | | | $ | (86,382 | ) | | $ | (16,763 | ) | | $ | (286,940 | ) | | $ | (390,085 | ) |
Net unrealized gains/(losses) | | 3,918 |
| | (91 | ) | | 490 |
| | 4,317 |
| | (21,094 | ) | | (3,457 | ) | | — |
| | (24,551 | ) |
Amounts reclassified from AOCI | | (1 | ) | | (643 | ) | | 1,405 |
| | 761 |
| | — |
| | 463 |
| | 2,059 |
| | 2,522 |
|
Other comprehensive income/(loss) | | 3,917 |
| | (734 | ) | | 1,895 |
| | 5,078 |
| | (21,094 | ) | | (2,994 | ) | | 2,059 |
| | (22,029 | ) |
Balance as of September 30, 2017 | | $ | (5,940 | ) | | $ | (1,758 | ) | | $ | (224,686 | ) | | $ | (232,384 | ) | |
Balance as of June 30, 2018 | | | $ | (107,476 | ) | | $ | (19,757 | ) | | $ | (284,881 | ) | | $ | (412,114 | ) |
| | | | | | | | | | | | | | | | |
Balance as of January 1, 2017 | | $ | (17,232 | ) | | $ | (1,265 | ) | | $ | (229,157 | ) | | $ | (247,654 | ) | |
Balance as of January 1, 2018 | | | $ | (26,834 | ) | | $ | (7,764 | ) | | $ | (288,227 | ) | | $ | (322,825 | ) |
Adjustment to reflect adoption of ASU 2016-01 and ASU 2017-12 | | | (5 | ) | | (206 | ) | | — |
| | (211 | ) |
Beginning balance, as adjusted | | | $ | (26,839 | ) | | $ | (7,970 | ) | | $ | (288,227 | ) | | $ | (323,036 | ) |
Net unrealized gains/(losses) | | 11,570 |
| | 1,906 |
| | 490 |
| | 13,966 |
| | (80,598 | ) | | (12,095 | ) | | — |
| | (92,693 | ) |
Amounts reclassified from AOCI | | (278 | ) | | (2,399 | ) | | 3,981 |
| | 1,304 |
| | (39 | ) | | 308 |
| | 3,346 |
| | 3,615 |
|
Other comprehensive income/(loss) | | 11,292 |
| | (493 | ) | | 4,471 |
| | 15,270 |
| | (80,637 | ) | | (11,787 | ) | | 3,346 |
| | (89,078 | ) |
Balance as of September 30, 2017 | | $ | (5,940 | ) | | $ | (1,758 | ) | | $ | (224,686 | ) | | $ | (232,384 | ) | |
Balance as of June 30, 2018 | | | $ | (107,476 | ) | | $ | (19,757 | ) | | $ | (284,881 | ) | | $ | (412,114 | ) |
| | (Dollars in thousands) | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total |
Balance as of July 1, 2016 | | $ | 58,591 |
| | $ | 4,691 |
| | $ | (215,616 | ) | | $ | (152,334 | ) | |
Balance as of April 1, 2017 | | | $ | (18,795 | ) | | $ | (3,179 | ) | | $ | (227,984 | ) | | $ | (249,958 | ) |
Net unrealized gains/(losses) | | (7,887 | ) | | (1,211 | ) | | — |
| | (9,098 | ) | | 9,188 |
| | 3,059 |
| | — |
| | 12,247 |
|
Amounts reclassified from AOCI | | — |
| | (359 | ) | | 963 |
| | 604 |
| | (250 | ) | | (904 | ) | | 1,403 |
| | 249 |
|
Other comprehensive income/(loss) | | (7,887 | ) | | (1,570 | ) | | 963 |
| | (8,494 | ) | | 8,938 |
| | 2,155 |
| | 1,403 |
| | 12,496 |
|
Balance as of September 30, 2016 | | $ | 50,704 |
| | $ | 3,121 |
| | $ | (214,653 | ) | | $ | (160,828 | ) | |
Balance as of June 30, 2017 | | | $ | (9,857 | ) | | $ | (1,024 | ) | | $ | (226,581 | ) | | $ | (237,462 | ) |
| | | | | | | | | | | | | | | | |
Balance as of January 1, 2016 | | $ | 3,394 |
| | $ | — |
| | $ | (217,586 | ) | | $ | (214,192 | ) | |
Balance as of January 1, 2017 | | | $ | (17,232 | ) | | $ | (1,265 | ) | | $ | (229,157 | ) | | $ | (247,654 | ) |
Net unrealized gains/(losses) | | 48,330 |
| | 4,228 |
| | — |
| | 52,558 |
| | 7,652 |
| | 1,997 |
| | — |
| | 9,649 |
|
Amounts reclassified from AOCI | | (1,020 | ) | | (1,107 | ) | | 2,933 |
| | 806 |
| | (277 | ) | | (1,756 | ) | | 2,576 |
| | 543 |
|
Other comprehensive income/(loss) | | 47,310 |
| | 3,121 |
| | 2,933 |
| | 53,364 |
| | 7,375 |
| | 241 |
| | 2,576 |
| | 10,192 |
|
Balance as of September 30, 2016 | | $ | 50,704 |
| | $ | 3,121 |
| | $ | (214,653 | ) | | $ | (160,828 | ) | |
Balance as of June 30, 2017 | | | $ | (9,857 | ) | | $ | (1,024 | ) | | $ | (226,581 | ) | | $ | (237,462 | ) |
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 September 30 | | Nine Months Ended September 30 | | | | 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 | | 2018 | | 2017 | | 2018 | | 2017 | | Affected line item in the statement where net income is presented |
Securities AFS: | | | | | | | | | | | | | | | | | | |
Realized (gains)/losses on securities AFS | | $ | (1 | ) | | $ | — |
| | $ | (450 | ) | | $ | (1,654 | ) | | Debt securities gains/(losses), net | | $ | — |
| | $ | (405 | ) | | $ | (52 | ) | | $ | (449 | ) | | Debt securities gains/(losses), net |
Tax expense/(benefit) | | — |
| | — |
| | 172 |
| | 634 |
| | Provision/(benefit) for income taxes | | — |
| | 155 |
| | 13 |
| | 172 |
| | Provision/(benefit) for income taxes |
| | (1 | ) | | — |
| | (278 | ) | | (1,020 | ) | | | — |
| | (250 | ) | | (39 | ) | | (277 | ) | |
Cash flow hedges: | | | | | | | | | | | | | | | | | | |
Realized (gains)/losses on cash flow hedges | | (1,041 | ) | | (582 | ) | | (3,886 | ) | | (1,795 | ) | | Interest and fees on loans | | 615 |
| | (1,465 | ) | | 409 |
| | (2,845 | ) | | Interest and fees on loans |
Tax expense/(benefit) | | 398 |
| | 223 |
| | 1,487 |
| | 688 |
| | Provision/(benefit) for income taxes | | (152 | ) | | 561 |
| | (101 | ) | | 1,089 |
| | Provision/(benefit) for income taxes |
| | (643 | ) | | (359 | ) | | (2,399 | ) | | (1,107 | ) | | | 463 |
| | (904 | ) | | 308 |
| | (1,756 | ) | |
Pension and Postretirement Plans: | | | | | | | | | | | | | | | | | | |
Amortization of prior service cost and net actuarial gain/(loss) | | 2,277 |
| | 1,561 |
| | 6,450 |
| | 4,756 |
| | Employee compensation, incentives, and benefits | | 2,735 |
| | 2,273 |
| | 4,444 |
| | 4,173 |
| | All other expense |
Tax expense/(benefit) | | (872 | ) | | (598 | ) | | (2,469 | ) | | (1,823 | ) | | Provision/(benefit) for income taxes | | (676 | ) | | (870 | ) | | (1,098 | ) | | (1,597 | ) | | Provision/(benefit) for income taxes |
| | 1,405 |
| | 963 |
| | 3,981 |
| | 2,933 |
| | | 2,059 |
| | 1,403 |
| | 3,346 |
| | 2,576 |
| |
Total reclassification from AOCI | | $ | 761 |
| | $ | 604 |
| | $ | 1,304 |
| | $ | 806 |
| | | $ | 2,522 |
| | $ | 249 |
| | $ | 3,615 |
| | $ | 543 |
| |
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 September 30 | | Nine Months Ended September 30 | | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars and shares in thousands, except per share data) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Net income/(loss) | | $ | 71,769 |
| | $ | 67,635 |
| | $ | 225,361 |
| | $ | 180,788 |
| | $ | 85,992 |
| | $ | 95,204 |
| | $ | 180,986 |
| | $ | 153,592 |
|
Net income attributable to noncontrolling interest | | 2,883 |
| | 2,883 |
| | 8,555 |
| | 8,586 |
| | 2,852 |
| | 2,852 |
| | 5,672 |
| | 5,672 |
|
Net income/(loss) attributable to controlling interest | | 68,886 |
| | 64,752 |
| | 216,806 |
| | 172,202 |
| | 83,140 |
| | 92,352 |
| | 175,314 |
| | 147,920 |
|
Preferred stock dividends | | 1,550 |
| | 1,550 |
| | 4,650 |
| | 4,650 |
| | 1,550 |
| | 1,550 |
| | 3,100 |
| | 3,100 |
|
Net income/(loss) available to common shareholders | | $ | 67,336 |
| | $ | 63,202 |
| | $ | 212,156 |
| | $ | 167,552 |
| | $ | 81,590 |
| | $ | 90,802 |
| | $ | 172,214 |
| | $ | 144,820 |
|
| | | | | | | | | | | | | | | | |
Weighted average common shares outstanding—basic | | 233,749 |
| | 231,856 |
| | 233,438 |
| | 232,690 |
| | 325,153 |
| | 233,482 |
| | 325,817 |
| | 233,280 |
|
Effect of dilutive securities | | 2,591 |
| | 2,236 |
| | 2,934 |
| | 2,085 |
| | 3,273 |
| | 2,781 |
| | 3,536 |
| | 2,945 |
|
Weighted average common shares outstanding—diluted | | 236,340 |
| | 234,092 |
| | 236,372 |
| | 234,775 |
| | 328,426 |
| | 236,263 |
| | 329,353 |
| | 236,225 |
|
| | | | | | | | | | | | | | | | |
Net income/(loss) per share available to common shareholders | | $ | 0.29 |
| | $ | 0.27 |
| | $ | 0.91 |
| | $ | 0.72 |
| | $ | 0.25 |
| | $ | 0.39 |
| | $ | 0.53 |
| | $ | 0.62 |
|
Diluted income/(loss) per share available to common shareholders | | $ | 0.28 |
| | $ | 0.27 |
| | $ | 0.90 |
| | $ | 0.71 |
| | $ | 0.25 |
| | $ | 0.38 |
| | $ | 0.52 |
| | $ | 0.61 |
|
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 September 30 | | Nine Months Ended September 30 | | Three Months Ended June 30 | | Six Months Ended June 30 |
(Shares in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Stock options excluded from the calculation of diluted EPS | | 2,595 |
| | 2,793 |
| | 2,490 |
| | 2,996 |
| | 2,446 |
| | 2,721 |
| | 2,428 |
| | 2,512 |
|
Weighted average exercise price of stock options excluded from the calculation of diluted EPS | | $ | 25.00 |
| | $ | 24.95 |
| | $ | 25.70 |
| | $ | 25.21 |
| | $ | 24.38 |
| | $ | 25.24 |
| | $ | 24.60 |
| | $ | 25.85 |
|
Other equity awards excluded from the calculation of diluted EPS | | 1,002 |
| | 371 |
| | 325 |
| | 51 |
| | 565 |
| | 482 |
| | 404 |
| | 247 |
|
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.businesses. Certain matters of that sort are pending at this time, and FHN is cooperating in those matters. Pending and threatened litigation matters sometimes are settled by the parties, and sometimes pending matters are resolved in court or before an arbitrator, and sometimes are settled by the parties.arbitrator. Regardless of the manner of resolution, frequently the most significant changes in status of a matter occur over a short time period, often following a lengthy period of little substantive activity. In view of the inherent difficulty of predicting the outcome of these matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories or involve a large number of parties, or where claims or other actions may be possible but have not been brought, FHN cannot reasonably determine what the eventual outcome of the matters will be, what the timing of the ultimate resolution of these matters may be, or what the eventual loss or impact related to each matter may be. FHN establishes a loss contingency liability for a litigation matter when loss is both probable and reasonably estimable as prescribed by applicable financial accounting guidance. If loss for a matter is probable and a range of possible loss outcomes is the best estimate available, accounting guidance requires a liability to be established at the low end of the range.
Based on current knowledge, and after consultation with counsel, management is of the opinion that loss contingencies related to threatened or pending litigation matters should not have a material adverse effect on the consolidated financial condition of FHN, but may be material to FHN’s operating results for any particular reporting period depending, in part, on the results from that period.
Material Loss Contingency Matters
Summary
As used in this Note, except for matters that are reported as having been substantially settled or otherwise substantially resolved, FHN's “material loss contingency matters” generally fall into at least one of the following categories: (i) FHN has determined material loss to be probable and has established a material loss liability in accordance with applicable financial accounting guidance, other than certain matters reported as having been substantially settled or otherwise substantially resolved;guidance; (ii) FHN has determined material loss to be probable but is not reasonably able to estimate an amount or range of material loss liability; or (iii) FHN has determined that material loss is not probable but is reasonably possible, and that the amount or range of that reasonably possible material loss is estimable. As defined in applicable accounting guidance, loss is reasonably possible if there is more than a remote chance of a material loss outcome for FHN. Set forth below are disclosures for certain pending or threatened litigation matters, including all matters mentioned in (i) or (ii) and certain matters mentioned in (iii). In addition, certain other matters, or groups of matters, are discussed relating to FHN’s 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 SeptemberJune 30, 2017,2018, the aggregate amount of liabilities established for all such loss contingency matters was $8.8$41.3 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 SeptemberJune 30, 2017,2018, 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$21 million.
As a result of the general uncertainties discussed above and the specific uncertainties discussed for each matter mentioned below, it is possible that the ultimate future loss experienced by FHN for any particular matter may materially exceed the amount, if any, of currently established liability for that matter. That possibility exists both for matters included in the estimated reasonably possible loss (“RPL”) range mentioned above and for matters not included in that range.
Note 10 – Contingencies and Other Disclosures (Continued)
Material Matters
FHN, along with multiple co-defendants, is defending lawsuits brought by investors which claim that the offering documents under which certificates relating to First Horizon branded securitizations were sold to them were materially deficient. One of those matters is viewed as material currently: Federal Deposit Insurance Corporation (“FDIC”) as receiver for Colonial Bank, in the U.S. District Court for the Southern District of New York (Case No. 12 Civ. 6166 (LLS)(MHD)). The plaintiff in that suit claims to have purchased (and later sold) certificates totaling $83.4 million, relating to a number of separate securitizations. Plaintiff demands damages and prejudgment interest, among several remedies sought. The current liability and RPL estimateestimates for this matter isare subject to significant uncertainties regarding: the dollar amounts claimed; the potential remedies that might be available or awarded; the outcome of any settlement discussions;discussions that may occur; the availability of significantly dispositive defenses; and the incomplete status of the discovery process. Additional information concerning FHN’s former mortgage businesses is provided below in “Obligations from Legacy Mortgage Businesses.”
Underwriters are co-defendants in the FDIC-New York matter and have demanded, under provisions in the applicable underwriting agreements, that FHN indemnify them for their expenses and any losses they may incur. In addition, FHN has received indemnity demands from underwriters in certain other suits as to which investors claim to have purchased certificates in FH proprietary securitizations but as to which FHN has not been named a defendant.
For most pending indemnity claims involving FH proprietary securitizations 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$231.2 million.
In late October, 2017, FHN has received a notice of indemnification claims from Nationstar Mortgage LLC, currently doing business as “Mr. Cooper.” Nationstar was the purchaser of FHN’s mortgage servicing obligations and assets in 2013 and 2014 and, starting in 2011, FHN’s subservicer. The notice asserts several categories of indemnity obligations by FHN to Nationstar in connection with mortgage loans under the subservicing arrangement and under the purchase transaction. This matter currently is not in formal litigation, but litigation in the future is possible. FHN is unable to estimate an RPL range for this matter due to significant uncertainties regarding: the exact nature of each of Nationstar’s claims and its position in respect of each; the number of, and the facts underlying, the claimed instances of indemnifiable events; the applicability of FHN’s contractual indemnity covenants to those facts and events; and, in those cases where the facts and events might support an indemnity claim, whether any legal defenses, counterclaims, other counter-positions, or third-party claims might eliminate or reduce claims against FHN or their impact on FHN.
In 2018, FHN received an indemnification notice from JPMorgan Chase & Co. related to other whole loans sold. The notice asserts that FHN-originated loans contributed to claimant’s losses in connection with large settlements that claimant paid to various third parties in connection with mortgage loans securitized by claimant. The notice does not include specific claimed deficiencies for specific loans, but does assert that quantitative analysis of loss allocation has been performed. This matter, currently at an early stage, may result in discussions and possibly settlement without litigation, or may evolve into litigation, among many possible outcomes. FHN is unable to estimate an RPL range for this matter due to significant uncertainties regarding: the number of, and the facts underlying, the loan originations which claimant asserts are indemnifiable; the applicability of FHN’s contractual indemnity covenants to those facts and originations; and, in those cases where an indemnity claim may be supported, whether any legal defenses, counterclaims, other counter-positions, or third-party claims might eliminate or reduce claims against FHN or their impact on FHN.
FHN 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 discussed below, and some might eventually result in damages or other litigation-oriented liability, including indemnity payments, but none are included in the material loss contingency liabilities mentioned above or in the RPL range mentioned above. Additional information concerning such exposures is provided below in “Obligations from Legacy Mortgage Businesses.”
Matters Related to Capital Bank Financial Transaction Settled
As mentioned in Note 10 within Item 1 of FHN’s Quarterly Report on Form 10-Q for the period ended June 30, 2017, (1) on July 14, 2017, a complaint captioned Robert Garfield v. First Horizon National Corporation, et al., No. CH-17-1022, was filed on behalf of a putative class of FHN shareholders against FHN, its directors, and Capital Bank Financial Corp. (“Capital Bank Financial”) in the Court of Chancery of Shelby County, Tennessee (30th Judicial District), in connection with FHN’s agreement to acquire Capital Bank Financial by merger. In addition, Capital Bank Financial and the individual members of the Capital Bank Financial board of directors were named as defendants in three substantially similar putative derivative and class action lawsuits filed by alleged shareholders of Capital Bank Financial; (2) Bushansky v. Capital Bank Financial Corp., et al., No. 3:17-cv-00422 (W.D. North Carolina filed July 17, 2017); (3) Parshall v. Capital Bank Financial Corp., et al., No. 3:17-cv-00428 (W.D. North Carolina filed July 19, 2017); and (4) McNamara v. Capital Bank Financial Corp., et al., No. 3:17-cv-00439 (W.D. North Carolina filed July 25, 2017). The Parshall complaint also named FHN as a defendant. During the third quarter of 2017, those four matters were settled and dismissed. Amounts expended by FHN were not material.
Note 10 – Contingencies and Other Disclosures (Continued)
Material Gain Contingency Matter
In second quarter 2015 FHN reached an agreement with DOJ and HUD to settle potential claims related to FHN’s underwriting and origination of loans insured by FHA. Under that agreement FHN paid $212.5 million. FHN believes that certain insurance policies, having an aggregate policy limit of $75 million, provide coverage for FHN’s losses and related costs. The insurers have denied and/or reserved rights to deny coverage. FHN sued the insurers to enforce the policies under Tennessee law. The trial court granted summary judgment to the defendants, and FHN has appealed. In connection with this litigation FHN seeks to partly recoup previously recognized expenses associated with the settled matter. Under applicable financial accounting guidance FHN has determined that although material gain from this litigation is not probable, there is a reasonably possible (more than remote) chance of a material gain outcome for FHN. FHN cannot determine a probable outcome that may result from this matter because of the uncertainty of the potential outcomes of the legal proceedings and also due to significant uncertainties regarding: legal interpretation of the relevant contracts; potential remedies that might be available or awarded; and the ultimate effect of counterclaims asserted by the defendants. Additional information concerning FHN’s former mortgage businesses is provided below in “Obligations from Legacy Mortgage Businesses.”
Obligations from Legacy Mortgage Businesses
Loss contingencies mentioned above under “Material Matters” stem from FHN’s former mortgage origination and servicing businesses. FHN retains potential for further exposure, in addition to the matters mentioned, from those former businesses. The following discussion provides context and other information to enhance an understanding of those matters and exposures.
Overview
Prior to September 2008 FHN originated loans through its legacy mortgage business, primarily first lien home loans, with the intention of selling them. Sales typically were effected either as non-recourse whole-loan sales or through non-recourse proprietary securitizations. Conventional conforming single-family residential mortgage loans were sold predominately to two GSEs: Fannie Mae and Freddie Mac. Also, federally insured or guaranteed whole loans were pooled, and payments to investors were guaranteed through Ginnie Mae. Many mortgage loan originations, especially nonconforming mortgage loans, were sold to investors, or certificate-holders, predominantly through FH proprietary securitizations but also, to a lesser extent, through other whole loans sold to private non-Agency purchasers. FHN used only one trustee for all of its FH proprietary securitizations. FHN also originated mortgage loans eligible for FHA insurance or VA guaranty. In addition, FHN originated and sold HELOCs and second lien mortgages through other whole loans sold to private purchasers and, to a lesser extent, through FH proprietary securitizations. Currently, only one FH securitization of HELOCs remains outstanding.
For non-recourse loan sales, FHN has exposure for repurchase of loans, make-whole damages, or other related damages, arising from claims that FHN breached its representations and warranties made at closing to the purchasers, including GSEs, other whole loan purchasers, and the trustee of FH proprietary securitizations.
During the time these legacy activities were conducted, FHN frequently sold mortgage loans “with servicing retained.” As a result, FHN accumulated substantial amounts of MSR on its consolidated balance sheet, as well as contractual servicing obligations and related deposits and receivables. FHN conducted a significant servicing business under its First Horizon Home Loans brand.
MI was required by GSE rules for certain of the loans sold to GSEs and was also provided for certain of the loans that were securitized. MI generally was provided for first lien loans sold or securitized having an LTV ratio at origination of greater than 80 percent.
In 2007, market conditions deteriorated to the point where mortgage-backed securitizations no longer could be sold economically; FHN’s last securitization occurred that year. FHN continued selling mortgage loans to GSEs until August 31, 2008, when FHN sold its national mortgage origination and servicing platforms along with a portion of its servicing assets and obligations. FHN contracted to have its remaining servicing obligations sub-serviced. Since the platform sale FHN has sold substantially all remaining servicing assets and obligations.
Certain mortgage-related terms used in this “Contingencies” section are defined in “Mortgage-Related Glossary” at the end of this Overview.
Repurchase and Make-Whole Obligations
Note 10 – Contingencies and Other Disclosures (Continued)
Starting in 2009, FHN received a high number of claims either to repurchase loans from the purchaser or to pay the purchaser to “make them whole” for economic losses incurred. These claims have been driven primarily by loan delinquencies. In repurchase or make-whole claims a loan purchaser typically asserts that specified loans violated representations and warranties FHN made when the loans were sold. A significant majority of claims received overall have come from GSEs, and the remainder are from purchasers of other whole loan sales.loans sold. 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 fractionsubstantial majority 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
Note 10 – Contingencies and Other Disclosures (Continued)
responsible for repurchase obligations related to certain excluded defects (such as title defects and violations of the GSE’s Charter Act) and FHN continues to have loan repurchase or monetary compensation obligations under the DRAs related to private mortgage insurance rescissions, cancellations, and denials (with certain exceptions). FHN also has exposure related to loans where there has been a prior bulk sale of servicing, as well as certain other whole-loan sales. With respect to loans where there has been a prior bulk sale of servicing, FHN is not responsible for MI cancellations and denials to the extent attributable to the acts of the current servicer.
While large portions of repurchase claims from the GSEs were settled with the DRAs, comprehensive settlement of repurchase, make-whole, and indemnity claims with non-Agency claimants is not practical. Such claims that are not resolved by the parties can, and sometimes have, become litigation.
FH Proprietary Securitization Actions
FHN has potential financial exposure from FH proprietary securitizations outside of the repurchase/make-whole process. Several investors in certificates sued FHN and others starting in 2009, and several underwriters or other counterparties have demanded that FHN indemnify and defend them in securitization lawsuits. The pending suits generally assert that disclosures made to investors in the offering and sale of certificates were legally deficient.
Servicing Obligations
FHN’s national servicing business was sold as part of the platform sale in 2008. A significant amount of MSR was sold at that time, and a significant amount was retained. The related servicing activities, including foreclosure and loss mitigation practices, not sold in 2008 were outsourced through a three-year subservicing arrangement (the “2008 subservicing agreement”) with the platform buyer (the “2008 subservicer”). The 2008 subservicing agreement expired in 2011 when FHN entered into a replacement agreement with a new subservicer (the “2011 subservicer”). In fourth quarter 2013, FHN contracted to sell a substantial majority of its remaining servicing obligations and servicing assets (including advances) to the 2011 subservicer. The servicing was transferred to the buyer in stages, and was substantially completed in first quarter 2014. The servicing still retained by FHN continues to be subserviced.
As servicer, FHN had contractual obligations to the owners of the loans (primarily GSEs) and securitization trustees, to handle billing, custodial, and other tasks related to each loan. Each subservicer undertook to perform those obligations on FHN’s behalf during the applicable subservicing period, although FHN legally remained the servicer of record for those loans that were subserviced.
The 2008 subservicer has been subject to a consent decree, and entered into a settlement agreement with regulators related to alleged deficiencies in servicing and foreclosure practices. The 2008 subservicer has made demands of FHN, under the 2008 subservicing agreement, to pay certain resulting costs and damages totaling $43.5 million. FHN disagrees with those demands and has made no payments. This disagreement has the potential to result in litigation and, in any such future litigation, the claim against FHN may be substantial.
A certificate holder has contacted FHN, claiming that it has been damaged from alleged deficiencies in servicing loans held in certain FH proprietary securitization trusts. The holder has sued the FH securitization trustee on related grounds, but has not yet
Note 10 – Contingencies and Other Disclosures (Continued)
sued FHN. FHN cannot predict how this matter will proceed nor can FHN predict whether this matter ultimately will be material to FHN.
Origination Data
From 2005 through 2008, FHN originated and sold $69.5 billion of mortgage loans toconnected with 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.
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, 2008 sale, platform sale | | FHN’s sale of its national mortgage origination and servicing platforms in 2008 |
| | | |
Ginnie Mae, Ginnie, GNMA | | Government National Mortgage Association | | pipeline or active pipeline | | pipeline of mortgage repurchase, make-whole, & certain related claims against FHN |
| | | |
GSEs | | Fannie Mae and Freddie Mac | | VA | | Veterans Administration |
Repurchase and Foreclosure Liability
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 $34.6$32.9 million and $66.0$34.2 million as of SeptemberJune 30, 20172018 and December 31, 2016,2017, 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
Note 10 – Contingencies and Other Disclosures (Continued)
foreclosure liability since year-end is the result of the settlement of certain repurchase claims. The estimates are based upon currently available information and fact patterns that exist as of theeach balance sheet datesdate and could be subject to future changes. Changes to any one of these factors could significantly impact the estimate of FHN’s liability.
Other FHN Mortgage 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 SeptemberJune 30, 2017, FHN had not accrued a liability for any matter related to these government lending programs, and no pending or known threatened matter related to these programs represented a material loss contingency described above.
At September 30, 2017,2018, 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.closing, and no such claims had been made. 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.
Note 10 – Contingencies and Other Disclosures (Continued)
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 infrom 2008 to 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; and (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.assignees. At SeptemberJune 30, 2017,2018, FHN’s repurchase and foreclosure liability considered certain known exposures from other whole loans sold.
Certain government entities have subpoenaed information from FHN and others. These entities include the FDIC (on behalf of certain failed banks) and the FHLBs of San Francisco, Atlanta, and Seattle, among others. These entities purport to act on behalf of several purchasers of FH proprietary securitizations, and of non-FH securitizations which included other whole loans sold. Collectively, the subpoenas seek information concerning: a number of FH proprietary securitizations and/or underlying loan originations; and originations of certain other whole loans sold which, in many cases, were included by the purchaser in its own securitizations. Some subpoenas fail to identify the specific investments made or loans at issue. Moreover, FHN has limited information regarding at least some of the loans under review. Unless and until a review (if related to specific loans) becomes an identifiable repurchase claim, the associated loans are not considered part of the active pipeline.
OTHER DISCLOSURES
Visa Matters
FHN is a member of the Visa USA network. In October 2007, the Visa organization of affiliated entities completed a series of global restructuring transactions to combine its affiliated operating companies, including Visa USA, under a single holding company, Visa Inc. (“Visa”). Upon completion of the reorganization, the members of the Visa USA network remained contingently liable for certain Visa litigation matters (the “Covered Litigation”). Based on its proportionate membership share of Visa USA, FHN recognized a contingent liability in fourth quarter 2007 related to this contingent obligation. In March 2008, Visa completed its initial public offering (“IPO”) and funded an escrow account from its IPO proceeds to be used to make payments related to the Visa litigation matters. FHN received approximately 2.4 million Class B shares in conjunction with Visa’s IPO.
Note 10 – Contingencies and Other Disclosures (Continued)
Conversion of these shares into Class A shares of Visa is prohibited until the final resolution of the covered litigation. In conjunction with the prior sales of Visa Class B shares in December 2010 and September 2011, FHN and the purchasers entered into derivative transactions whereby FHN will make, or receive, cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. The conversion ratio is adjusted when Visa deposits funds into the escrow account to cover certain litigation. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the derivative liabilities were $5.5$9.4 million and $6.2$5.6 million, respectively.
In July 2012, Visa and MasterCard announced a joint settlement (the “Settlement”) related to the Payment Card Interchange matter, one of the Covered Litigation matters. Based on the amount of the Settlement attributable to Visa and an assessment of FHN’s contingent liability accrued for Visa litigation matters, the Settlement did not have a material impact on FHN. The Settlement was vacated upon appeal in June 2016 and the Supreme Court declined to hear the case in March 2017. Accordingly, the outcome of this matter remains uncertain. Additionally, other Covered Litigation matters are also pending judicial resolution. So long as any Covered Litigation matter remains pending, FHN’s ability to transfer its Visa holdings is restricted, with limited exceptions.
FHN holds approximately 1.11.0 million Visa Class B shares. FHN’s Visa shares are not considered to be marketablehave a readily determinable fair value ("RDFV") and therefore are currently included in the Consolidated Condensed Statements of Condition at their historical cost of $0. As of September 30, 2017,$0 under the accounting election available to equity investments that lack an RDFV. The conversion ratio is 165163 percent reflecting a Visa stock split in March 2015, and the contingent liability is $.8 million. Future funding of the escrow would dilute this conversion ratio by an amount that is not determinable at present. Based on the closing price on September 30, 2017, assumingAssuming conversion into Class A shares at the current conversion ratio, FHN’s Visa holdings would have had a value of approximately $193 million.$226 million, based on the closing price on June 30, 2018. Recognition of thismarket value in the future with that conversion ratio 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
Note 10 – Contingencies and Other Disclosures (Continued)
under these agreements depends upon the occurrence of future events; therefore, it is not possible to estimate a maximum potential amount of payouts that could be required by such agreements.
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. Themade an insignificant contribution had no effect on FHN’s 2016 Consolidated Statements of Income. FHN did not make any contributions to the qualified pension plan in the nine months ended September 30, 2017.second quarter of 2018. Management does not currently anticipate that FHN will make a contribution to the qualified pension plan for the remainder of 2018.
FHN assumed two additional qualified plans in conjunction with the CBF acquisition. Both legacy CBF plans are frozen. FHN contributed $5.1 million to these plans in December 2017. As of December 31, 2017, the aggregate benefit obligation for the plans was $18.7 million and aggregate plan assets were $18.6 million. Benefit payments, expense and actuarial gains/losses related to these plans were insignificant for 2018 and 2017. Additional funding amounts to these plans are dependent upon the potential settlement of the plans. Due to the insignificant financial statement impact, these two plans are not included in the disclosures that follow.
FHN also maintains non-qualified plans including a supplemental retirement plan that covers certain employees whose benefits under the qualified pension plan have been limited by tax rules. These other non-qualified plans are unfunded, and contributions to these plans cover all benefits paid under the non-qualified plans. Payments made under the non-qualified plans were $5.1$5.4 million for 2016.2017. FHN anticipates making benefit payments under the non-qualified plans of $5.0$5.7 million in 2017.2018.
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.
Service cost is included in Employee compensation, incentives, and benefits in the Consolidated Condensed Statements of Income. All other components of net periodic benefit cost are included in All other expense.
The components of net periodic benefit cost for the three months ended SeptemberJune 30 are as follows:
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Components of net periodic benefit cost | | | | | | | | |
Service cost | | $ | 9 |
| | $ | 10 |
| | $ | 26 |
| | $ | 28 |
|
Interest cost | | 7,276 |
| | 7,648 |
| | 328 |
| | 335 |
|
Expected return on plan assets | | (9,230 | ) | | (9,797 | ) | | (236 | ) | | (227 | ) |
Amortization of unrecognized: | | | | | | | | |
Prior service cost/(credit) | | 13 |
| | 48 |
| | 23 |
| | 43 |
|
Actuarial (gain)/loss | | 2,380 |
| | 1,971 |
| | (140 | ) | | (143 | ) |
Net periodic benefit cost/(credit) | | $ | 448 |
| | $ | (120 | ) | | $ | 1 |
| | $ | 36 |
|
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(Dollars in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Components of net periodic benefit cost | | | | | | | | |
Service cost | | $ | 10 |
| | $ | 10 |
| | $ | 34 |
| | $ | 27 |
|
Interest cost | | 6,987 |
| | 7,380 |
| | 327 |
| | 325 |
|
Expected return on plan assets | | (8,226 | ) | | (8,890 | ) | | (269 | ) | | (237 | ) |
Amortization of unrecognized: | | | | | | | | |
Prior service cost/(credit) | | — |
| | 13 |
| | — |
| | 24 |
|
Actuarial (gain)/loss | | 2,956 |
| | 2,380 |
| | (91 | ) | | (143 | ) |
Net periodic benefit cost/(credit) | | $ | 1,727 |
| | $ | 893 |
| | $ | 1 |
| | $ | (4 | ) |
Note 11 – Pension, Savings, and Other Employee Benefits (Continued)
The components of net periodic benefit cost for the ninesix months ended SeptemberJune 30 are as follows:
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Components of net periodic benefit cost | | | | | | | | |
Service cost | | $ | 28 |
| | $ | 30 |
| | $ | 80 |
| | $ | 83 |
|
Interest cost | | 22,035 |
| | 23,412 |
| | 979 |
| | 969 |
|
Expected return on plan assets | | (27,011 | ) | | (29,342 | ) | | (710 | ) | | (685 | ) |
Amortization of unrecognized: | | | | | | | | |
Prior service cost/(credit) | | 39 |
| | 147 |
| | 71 |
| | 128 |
|
Actuarial (gain)/loss | | 7,140 |
| | 6,106 |
| | (425 | ) | | (608 | ) |
Net periodic benefit cost/(credit) | | $ | 2,231 |
| | $ | 353 |
| | $ | (5 | ) | | $ | (113 | ) |
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(Dollars in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Components of net periodic benefit cost | | | | | | | | |
Service cost | | $ | 20 |
| | $ | 19 |
| | $ | 67 |
| | $ | 54 |
|
Interest cost | | 13,973 |
| | 14,759 |
| | 654 |
| | 651 |
|
Expected return on plan assets | | (16,451 | ) | | (17,781 | ) | | (538 | ) | | (474 | ) |
Amortization of unrecognized: | | | | | | | | |
Prior service cost/(credit) | | — |
| | 26 |
| | — |
| | 48 |
|
Actuarial (gain)/loss | | 5,912 |
| | 4,760 |
| | (182 | ) | | (285 | ) |
Net periodic benefit cost/(credit) | | $ | 3,454 |
| | $ | 1,783 |
| | $ | 1 |
| | $ | (6 | ) |
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, North Carolina, South Carolina, Florida and other selected markets. Regional banking also provides investments, wealth management, financial planning, trust services and asset management, mortgage banking, credit card, and cash management. Additionally, the regional banking segment includes correspondent banking which provides credit, depository, and other banking related services to other financial institutions nationally. The fixed income segment consists of fixed income securities sales, trading, underwriting, and strategies for institutional clients in the U.S. and abroad, as well as loan sales, portfolio advisory services, and derivative sales. The corporate segment consists of unallocated corporate expenses, expense on subordinated debt issuances, bank-owned life insurance, unallocated interest income associated with excess equity, net impact of raising incremental capital, revenue and expense associated with deferred compensation plans, funds management, tax credit investment activities, derivative valuation adjustments related to prior sales of Visa Class B shares, loss on extinguishment of debt, and acquisition- and integration-related costs. The non-strategic segment consists of the wind-down nationalrun-off consumer lending activities, legacy (pre-2009) mortgage banking elements, including servicing fees, and the associated ancillary revenues and expenses related to these businesses. Non-strategic also includes the wind-down trust preferred loan portfolio and exited businesses.
Periodically, FHN adapts its segments to reflect managerial or strategic changes. FHN may also modify its methodology of allocating expenses and equity among segments which could change historical segment results. Business segment revenue, expense, asset, and equity levels reflect those which are specifically identifiable or which are allocated based on an internal allocation method. Because the allocations are based on internally developed assignments and allocations, to an extent they are subjective. Generally, all assignments and allocations have been consistently applied for all periods presented. The following table reflects the amounts of consolidated revenue, expense, tax, and average assets for each segment for the three and ninesix months ended SeptemberJune 30:
| | | | Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Consolidated | | | | | | | | | | | | | | | |
Net interest income | | $ | 209,817 |
| | $ | 185,195 |
| | $ | 600,226 |
| | $ | 533,533 |
| $ | 310,932 |
| | $ | 200,701 |
| | $ | 612,105 |
| | $ | 390,409 |
|
Provision/(provision credit) for loan losses | | — |
| | 4,000 |
| | (3,000 | ) | | 11,000 |
| — |
| | (2,000 | ) | | (1,000 | ) | | (3,000 | ) |
Noninterest income | | 112,417 |
| | 148,545 |
| | 357,029 |
| | 428,364 |
| 127,525 |
| | 127,673 |
| | 263,542 |
| | 244,612 |
|
Noninterest expense | | 236,869 |
| | 233,558 |
| | 676,991 |
| | 687,307 |
| 332,768 |
| | 217,917 |
| | 646,033 |
| | 440,122 |
|
Income/(loss) before income taxes | | 85,365 |
| | 96,182 |
| | 283,264 |
| | 263,590 |
| 105,689 |
| | 112,457 |
| | 230,614 |
| | 197,899 |
|
Provision/(benefit) for income taxes (a) | | 13,596 |
| | 28,547 |
| | 57,903 |
| | 82,802 |
| 19,697 |
| | 17,253 |
| | 49,628 |
| | 44,307 |
|
Net income/(loss) | | $ | 71,769 |
| | $ | 67,635 |
| | $ | 225,361 |
| | $ | 180,788 |
| $ | 85,992 |
| | $ | 95,204 |
| | $ | 180,986 |
| | $ | 153,592 |
|
Average assets | | $ | 28,874,827 |
| | $ | 27,609,702 |
| | $ | 28,852,679 |
| | $ | 27,021,137 |
| $ | 40,173,712 |
| | $ | 28,876,350 |
| | $ | 40,261,729 |
| | $ | 28,841,422 |
|
Note 12 – Business Segment Information (Continued)
| | | | Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Regional Banking | | | | | | | | | | | | | | | |
Net interest income | | $ | 209,319 |
| | $ | 190,508 |
| | $ | 604,680 |
| | $ | 541,135 |
| $ | 308,870 |
| | $ | 201,658 |
| | $ | 607,569 |
| | $ | 394,740 |
|
Provision/(provision credit) for loan losses | | 8,552 |
| | 8,544 |
| | 11,910 |
| | 34,195 |
| 6,139 |
| | 260 |
| | 11,451 |
| | 3,358 |
|
Noninterest income | | 64,369 |
| | 65,128 |
| | 188,082 |
| | 185,679 |
| 78,568 |
| | 64,740 |
| | 157,421 |
| | 123,718 |
|
Noninterest expense | | 150,464 |
| | 145,050 |
| | 451,175 |
| | 454,970 |
| 212,445 |
| | 152,637 |
| | 417,646 |
| | 300,687 |
|
Income/(loss) before income taxes | | 114,672 |
| | 102,042 |
| | 329,677 |
| | 237,649 |
| 168,854 |
| | 113,501 |
| | 335,893 |
| | 214,413 |
|
Provision/(benefit) for income taxes | | 41,267 |
| | 37,027 |
| | 118,986 |
| | 84,736 |
| 39,634 |
| | 41,015 |
| | 78,996 |
| | 77,491 |
|
Net income/(loss) | | $ | 73,405 |
| | $ | 65,015 |
| | $ | 210,691 |
| | $ | 152,913 |
| $ | 129,220 |
| | $ | 72,486 |
| | $ | 256,897 |
| | $ | 136,922 |
|
Average assets | | $ | 19,158,458 |
| | $ | 17,582,899 |
| | $ | 18,519,584 |
| | $ | 16,704,462 |
| $ | 28,746,968 |
| | $ | 18,432,141 |
| | $ | 28,611,686 |
| | $ | 18,195,201 |
|
Fixed Income | | | | | | | | | | | | | | | |
Net interest income | | $ | 5,979 |
| | $ | 2,411 |
| | $ | 12,109 |
| | $ | 8,224 |
| $ | 9,174 |
| | $ | 4,985 |
| | $ | 17,637 |
| | $ | 6,141 |
|
Noninterest income | | 55,802 |
| | 72,073 |
| | 161,829 |
| | 217,278 |
| 38,363 |
| | 55,207 |
| | 83,968 |
| | 106,030 |
|
Noninterest expense | | 53,105 |
| | 59,423 |
| | 155,791 |
| | 180,850 |
| 48,300 |
| | 54,022 |
| | 98,844 |
| | 102,729 |
|
Income/(loss) before income taxes | | 8,676 |
| | 15,061 |
| | 18,147 |
| | 44,652 |
| (763 | ) | | 6,170 |
| | 2,761 |
| | 9,442 |
|
Provision/(benefit) for income taxes | | 2,979 |
| | 5,518 |
| | 5,949 |
| | 16,195 |
| (414 | ) | | 1,941 |
| | 328 |
| | 2,959 |
|
Net income/(loss) | | $ | 5,697 |
| | $ | 9,543 |
| | $ | 12,198 |
| | $ | 28,457 |
| $ | (349 | ) | | $ | 4,229 |
| | $ | 2,433 |
| | $ | 6,483 |
|
Average assets | | $ | 2,586,997 |
| | $ | 2,305,986 |
| | $ | 2,388,984 |
| | $ | 2,348,640 |
| $ | 3,251,876 |
| | $ | 2,696,144 |
| | $ | 3,365,912 |
| | $ | 2,288,083 |
|
Corporate | | | | | | | | | | | | | | | |
Net interest income/(expense) | | $ | (13,990 | ) | | $ | (18,193 | ) | | $ | (43,060 | ) | | $ | (48,401 | ) | $ | (14,002 | ) | | $ | (14,637 | ) | | $ | (27,192 | ) | | $ | (28,408 | ) |
Noninterest income (b) | | (9,477 | ) | | 5,134 |
| | 2,217 |
| | 15,766 |
| |
Noninterest income | | 8,848 |
| | 6,219 |
| | 18,327 |
| | 11,695 |
|
Noninterest expense | | 23,935 |
| | 14,929 |
| | 65,390 |
| | 44,320 |
| 66,020 |
| | 24,566 |
| | 117,136 |
| | 41,440 |
|
Income/(loss) before income taxes | | (47,402 | ) | | (27,988 | ) | | (106,233 | ) | | (76,955 | ) | (71,174 | ) | | (32,984 | ) | | (126,001 | ) | | (58,153 | ) |
Provision/(benefit) for income taxes (a) | | (34,255 | ) | | (16,736 | ) | | (83,019 | ) | | (40,695 | ) | |
Provision/(benefit) for income taxes | | (21,691 | ) | | (35,574 | ) | | (34,135 | ) | | (48,503 | ) |
Net income/(loss) | | $ | (13,147 | ) | | $ | (11,252 | ) | | $ | (23,214 | ) | | $ | (36,260 | ) | $ | (49,483 | ) | | $ | 2,590 |
| | $ | (91,866 | ) | | $ | (9,650 | ) |
Average assets | | $ | 5,698,161 |
| | $ | 5,880,268 |
| | $ | 6,421,890 |
| | $ | 6,024,736 |
| $ | 6,956,898 |
| | $ | 6,226,499 |
| | $ | 7,033,090 |
| | $ | 6,789,515 |
|
Non-Strategic | | | | | | | | | | | | | | | |
Net interest income | | $ | 8,509 |
| | $ | 10,469 |
| | $ | 26,497 |
| | $ | 32,575 |
| $ | 6,890 |
| | $ | 8,695 |
| | $ | 14,091 |
| | $ | 17,936 |
|
Provision/(provision credit) for loan losses | | (8,552 | ) | | (4,544 | ) | | (14,910 | ) | | (23,195 | ) | (6,139 | ) | | (2,260 | ) | | (12,451 | ) | | (6,358 | ) |
Noninterest income | | 1,723 |
| | 6,210 |
| | 4,901 |
| | 9,641 |
| 1,746 |
| | 1,507 |
| | 3,826 |
| | 3,169 |
|
Noninterest expense | | 9,365 |
| | 14,156 |
| | 4,635 |
| | 7,167 |
| 6,003 |
| | (13,308 | ) | | 12,407 |
| | (4,734 | ) |
Income/(loss) before income taxes | | 9,419 |
| | 7,067 |
| | 41,673 |
| | 58,244 |
| 8,772 |
| | 25,770 |
| | 17,961 |
| | 32,197 |
|
Provision/(benefit) for income taxes | | 3,605 |
| | 2,738 |
| | 15,987 |
| | 22,566 |
| 2,168 |
| | 9,871 |
| | 4,439 |
| | 12,360 |
|
Net income/(loss) | | $ | 5,814 |
| | $ | 4,329 |
| | $ | 25,686 |
| | $ | 35,678 |
| $ | 6,604 |
| | $ | 15,899 |
| | $ | 13,522 |
| | $ | 19,837 |
|
Average assets | | $ | 1,431,211 |
| | $ | 1,840,549 |
| | $ | 1,522,221 |
| | $ | 1,943,299 |
| $ | 1,217,970 |
| | $ | 1,521,566 |
| | $ | 1,251,041 |
| | $ | 1,568,623 |
|
Certain previously reported amounts have been reclassified to agree with current presentation.
(a) Provision/(benefit) for
Note 12 – Business Segment Information (Continued)
The following table reflects a disaggregation of FHN’s noninterest income taxes for consolidated resultsby major product line and the Corporatereportable segment for the three and ninesix months ended SeptemberJune 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 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
(Dollars in thousands) | Regional Banking | | Fixed Income | | Corporate | | Non-Strategic | | Consolidated |
Noninterest income: | | | | | | | | | |
Fixed income (a) | $ | 130 |
| | $ | 37,567 |
| | $ | — |
| | $ | — |
| | $ | 37,697 |
|
Deposit transactions and cash management | 34,522 |
| | 3 |
| | 1,497 |
| | 61 |
| | 36,083 |
|
Brokerage, management fees and commissions | 13,740 |
| | — |
| | — |
| | — |
| | 13,740 |
|
Trust services and investment management | 8,146 |
| | — |
| | (14 | ) | | — |
| | 8,132 |
|
Bankcard income | 6,658 |
| | — |
| | 55 |
| | (78 | ) | | 6,635 |
|
Bank-owned life insurance (b) | — |
| | — |
| | 5,773 |
| | — |
| | 5,773 |
|
Debt securities gains/(losses), net (b) | — |
| | — |
| | — |
| | — |
| | — |
|
Equity securities gains/(losses), net (b) | — |
| | — |
| | 31 |
| | — |
| | 31 |
|
All other income and commissions (c) | 15,372 |
| | 793 |
| | 1,506 |
| | 1,763 |
| | 19,434 |
|
Total noninterest income | $ | 78,568 |
| | $ | 38,363 |
| | $ | 8,848 |
| | $ | 1,746 |
| | $ | 127,525 |
|
| | | | | | | | | |
| Three Months Ended June 30, 2017 |
| Regional Banking | | Fixed Income | | Corporate | | Non-Strategic | | Consolidated |
Noninterest income: | | | | | | | | | |
Fixed income | $ | 139 |
| | $ | 54,971 |
| | $ | — |
| | $ | — |
| | $ | 55,110 |
|
Deposit transactions and cash management | 26,433 |
| | — |
| | 1,376 |
| | 49 |
| | 27,858 |
|
Brokerage, management fees and commissions | 12,029 |
| | — |
| | — |
| | — |
| | 12,029 |
|
Trust services and investment management | 7,712 |
| | — |
| | (14 | ) | | — |
| | 7,698 |
|
Bankcard income | 5,495 |
| | — |
| | 57 |
| | 53 |
| | 5,605 |
|
Bank-owned life insurance | — |
| | — |
| | 4,351 |
| | — |
| | 4,351 |
|
Debt securities gains/(losses), net | 386 |
| | — |
| | 19 |
| | — |
| | 405 |
|
Equity securities gains/(losses), net | — |
| | — |
| | — |
| | — |
| | — |
|
All other income and commissions | 12,546 |
| | 236 |
| | 430 |
| | 1,405 |
| | 14,617 |
|
Total noninterest income | $ | 64,740 |
| | $ | 55,207 |
| | $ | 6,219 |
| | $ | 1,507 |
| | $ | 127,673 |
|
| |
(a) | Includes $7.3 million of underwriting, portfolio advisory, and other noninterest income in scope of Accounting Standards Codification ("ASC") 606, "Revenue From Contracts With Customers." |
| |
(b) | Represents noninterest income excluded from the scope of ASC 606. Amount is presented for informational purposes to reconcile total non-interest income. |
| |
(c) | Includes other service charges, ATM and interchange fees, electronic banking fees, and insurance commission in scope of ASC 606. |
Note 1512 – Income Taxes in the Notes to Consolidated Financial Statements on FHN’s Form 10-K for the year ended December 31, 2016, for additional information related to FHN's valuation allowance related to its capital loss carryforward.Business Segment Information (Continued)
(b) Three and nine months ended September 30, 2017 includes a $14.3 million pre-tax loss from the repurchase of equity securities previously included in a financing transaction.
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
(Dollars in thousands) | Regional Banking | | Fixed Income | | Corporate | | Non-Strategic | | Consolidated |
Noninterest income: | | | | | | | | | |
Fixed income (a) | $ | 211 |
| | $ | 82,992 |
| | $ | — |
| | $ | — |
| | $ | 83,203 |
|
Deposit transactions and cash management | 69,262 |
| | 6 |
| | 2,691 |
| | 108 |
| | 72,067 |
|
Brokerage, management fees and commissions | 27,223 |
| | — |
| | — |
| | — |
| | 27,223 |
|
Trust services and investment management | 15,438 |
| | — |
| | (29 | ) | | — |
| | 15,409 |
|
Bankcard income | 12,951 |
| | — |
| | 112 |
| | 17 |
| | 13,080 |
|
Bank-owned life insurance (b) | — |
| | — |
| | 9,766 |
| | — |
| | 9,766 |
|
Debt securities gains/(losses), net (b) | — |
| | — |
| | 52 |
| | — |
| | 52 |
|
Equity securities gains/(losses), net (b) | — |
| | — |
| | 65 |
| | — |
| | 65 |
|
All other income and commissions (c) (d) | 32,336 |
| | 970 |
| | 5,670 |
| | 3,701 |
| | 42,677 |
|
Total noninterest income | $ | 157,421 |
| | $ | 83,968 |
| | $ | 18,327 |
| | $ | 3,826 |
| | $ | 263,542 |
|
| | | | | | | | | |
| Six Months Ended June 30, 2017 |
| Regional Banking | | Fixed Income | | Corporate | | Non-Strategic | | Consolidated |
Noninterest income: | | | | | | | | | |
Fixed income | $ | 213 |
| | $ | 105,575 |
| | $ | — |
| | $ | — |
| | $ | 105,788 |
|
Deposit transactions and cash management | 49,667 |
| | — |
| | 2,665 |
| | 91 |
| | 52,423 |
|
Brokerage, management fees and commissions | 23,935 |
| | — |
| | — |
| | — |
| | 23,935 |
|
Trust services and investment management | 14,392 |
| | — |
| | (41 | ) | | — |
| | 14,351 |
|
Bankcard income | 10,837 |
| | — |
| | 113 |
| | 110 |
| | 11,060 |
|
Bank-owned life insurance | — |
| | — |
| | 7,598 |
| | — |
| | 7,598 |
|
Debt securities gains/(losses), net | 386 |
| | — |
| | 63 |
| | — |
| | 449 |
|
Equity securities gains/(losses), net | — |
| | — |
| | — |
| | — |
| | — |
|
All other income and commissions | 24,288 |
| | 455 |
| | 1,297 |
| | 2,968 |
| | 29,008 |
|
Total noninterest income | $ | 123,718 |
| | $ | 106,030 |
| | $ | 11,695 |
| | $ | 3,169 |
| | $ | 244,612 |
|
| |
(a) | Includes $15.6 million of underwriting, portfolio advisory, and other noninterest income in scope of Accounting Standards Codification ("ASC") 606, "Revenue From Contracts With Customers." |
| |
(b) | Represents noninterest income excluded from the scope of ASC 606. Amount is presented for informational purposes to reconcile total non-interest income. |
| |
(c) | Includes other service charges, ATM and interchange fees, electronic banking fees, and insurance commission in scope of ASC 606. |
| |
(d) | Corporate includes a $3.3 million gain on the sale of a building. |
Note 13 – Variable Interest Entities
ASC 810 defines a VIE as a legal entity where (a) the equity investors, as a group, lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, (b) the equity investors, as a group, lack either, (1) the power through voting rights, or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance, (2) the obligation to absorb the expected losses of the entity, or (3) the right to receive the expected residual returns of the entity, or (c) the entity is structured with non-substantive voting rights. A variable interest is a contractual ownership or other interest that fluctuates with changes in the fair value of the VIE’s net assets exclusive of variable interests. Under ASC 810, as amended, a primary beneficiary is required to consolidate a VIE when it has a variable interest in a VIE that provides it with a controlling financial interest. For such purposes, the determination of whether a controlling financial interest exists is based on whether a single party has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant.
Consolidated Variable Interest Entities
FHN holds variable interests in a proprietary HELOC securitization trust it established as a source of liquidity for consumer lending operations. Based on its restrictive nature, the trust is considered a VIE as the holders of equity at risk do not have the power through voting rights or similar rights to direct the activities that most significantly impact the trust’s economic performance. The retention of mortgage service rights ("MSR") and a residual interest results in FHN potentially absorbing losses or receiving benefits that are significant to the trust. FHN is considered the primary beneficiary, as it is assumed to have the power, as Master Servicer, to most significantly impact the activities of the VIE. Consolidation of the trust results in the recognition of the trust proceeds as restricted borrowings since the cash flows on the securitized loans can only be used to settle the obligations due to the holders of trust securities. Through first quarter 2016 the trust experienced a rapid amortization period and FHN was obligated to provide subordinated funding. During the period, cash payments from borrowers were accumulated to repay outstanding debt securities while FHN continued to make advances to borrowers when they drew on their lines of credit. FHN then transferred the newly generated receivables into the securitization trust. FHN is reimbursed for these advances only after other parties in the securitization have received all of the cash flows to which they are entitled. If loan losses requiring draws on the related monoline insurers’ policies (which protect bondholders in the securitization) exceed a certain level, FHN may not receive reimbursement for all of the funds advanced to borrowers, as the senior bondholders and the monoline insurers typically have priority for repayment. Amounts funded from monoline insurance policies are considered restricted term borrowings in FHN’s Consolidated Condensed Statements of Condition. Except for recourse due to breaches of representations and warranties made by FHN in connection with the sale of the loans to the trust, the creditors of the trust hold no recourse to the assets of FHN.
FHN has established certain rabbi trusts related to deferred compensation plans offered to its employees. FHN contributes employee cash compensation deferrals to the trusts and directs the underlying investments made by the trusts. The assets of these trusts are available to FHN’s creditors only in the event that FHN becomes insolvent. These trusts are considered VIEs as there is no equity at risk in the trusts since FHN provided the equity interest to its employees in exchange for services rendered. FHN is considered the primary beneficiary of the rabbi trusts as it has the power to direct the activities that most significantly impact the economic performance of the rabbi trusts through its ability to direct the underlying investments made by the trusts. Additionally, FHN could potentially receive benefits or absorb losses that are significant to the trusts due to its right to receive any asset values in excess of liability payoffs and its obligation to fund any liabilities to employees that are in excess of a rabbi trust’s assets.
Note 13 – Variable Interest Entities (Continued)
The following table summarizes VIEs consolidated by FHN as of SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
| | 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 | | 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 | | Carrying Value | | Carrying Value | | Carrying Value | | Carrying Value |
Assets: | | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | — |
| | N/A |
| | $ | — |
| | N/A |
| | $ | — |
| | N/A |
| | $ | — |
| | N/A |
|
Loans, net of unearned income | | 26,210 |
| | N/A |
| | 35,873 |
| | N/A |
| | 18,921 |
| | N/A |
| | 24,175 |
| | N/A |
|
Less: Allowance for loan losses | | — |
| | N/A |
| | 587 |
| | N/A |
| | — |
| | N/A |
| | — |
| | N/A |
|
Total net loans | | 26,210 |
| | N/A |
| | 35,286 |
| | N/A |
| | 18,921 |
| | N/A |
| | 24,175 |
| | N/A |
|
Other assets | | 47 |
| | $ | 77,997 |
| | 283 |
| | $ | 74,160 |
| | 38 |
| | $ | 82,802 |
| | 47 |
| | $ | 80,479 |
|
Total assets | | $ | 26,257 |
| | $ | 77,997 |
| | $ | 35,569 |
| | $ | 74,160 |
| | $ | 18,959 |
| | $ | 82,802 |
| | $ | 24,222 |
| | $ | 80,479 |
|
Liabilities: | | | | | | | | | | | | | | | | |
Term borrowings | | $ | 13,354 |
| | N/A |
| | $ | 23,126 |
| | N/A |
| | $ | 6,004 |
| | N/A |
| | $ | 11,226 |
| | N/A |
|
Other liabilities | | 3 |
| | $ | 58,785 |
| | 3 |
| | $ | 54,746 |
| | 1 |
| | $ | 61,925 |
| | 2 |
| | $ | 61,733 |
|
Total liabilities | | $ | 13,357 |
| | $ | 58,785 |
| | $ | 23,129 |
| | $ | 54,746 |
| | $ | 6,005 |
| | $ | 61,925 |
| | $ | 11,228 |
| | $ | 61,733 |
|
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$.9 million and $.5 million for the three and nine months ended SeptemberJune 30, 2018 and 2017, respectively and 2016.$1.9 million and $1.1 million for six months ended June 30, 2018 and 2017, respectively. The following table summarizes the impact to the Provision/(benefit) for income taxes on the Consolidated Condensed Statements of Income for the three and ninesix months ended SeptemberJune 30, 2017,2018, and 20162017 for LIHTC investments accounted for under the proportional amortization method.
| | | | Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands)
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Provision/(benefit) for income taxes: | | | | | | | | | | | | | | | | |
Amortization of qualifying LIHTC investments | | $ | 3,774 |
| | $ | 5,445 |
| | $ | 8,414 |
| | $ | 10,073 |
| | $ | 2,191 |
| | $ | 2,362 |
| | $ | 4,547 |
| | $ | 4,640 |
|
Low income housing tax credits | | (3,103 | ) | | (2,615 | ) | | (8,101 | ) | | (7,672 | ) | | (2,560 | ) | | (2,598 | ) | | (5,097 | ) | | (4,998 | ) |
Other tax benefits related to qualifying LIHTC investments | | (2,478 | ) | | (6,131 | ) | | (4,307 | ) | | (8,310 | ) | | (894 | ) | | (910 | ) | | (1,584 | ) | | (1,829 | ) |
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 the trusts hold no recourse to the assets of FHN. Additionally, FHN has no contractual requirements to provide financial support to the trusts. Based on their restrictive nature, the trusts are considered VIEs as the holders of equity at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the trusts’ economic performance. While it held MSR, FHN was assumed to have the power as servicer to most significantly impact the activities of such VIEs. However, in situations where FHN did not have the ability to participate in significant portions of a securitization trust’s cash flows and FHN was not considered the primary beneficiary of the trust. Therefore, these trusts were not consolidated by FHN.
Note 13 – Variable Interest Entities (Continued)
Holdings in Agency Mortgage-Backed Securities. FHN holds securities issued by various Agency securitization trusts. Based on their restrictive nature, the trusts meet the definition of a VIE since the holders of the equity investments at risk do not have
Note 13 – Variable Interest Entities (Continued)
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.
Proprietary Trust Preferred Issuances. In conjunction with the acquisition of CBF, FHN acquired junior subordinated debt totaling $212.4 million underlying multiple issuances of trust preferred debt by institutions previously acquired by CBF. All of these trusts are considered VIEs because the ownership interests from the capital contributions to these trusts are not considered “at risk” in evaluating whether the holders of the equity investments at risk in the trusts have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entities’ economic performance. Thus, FHN cannot be the trusts’ primary beneficiary because its ownership interests in the trusts are not considered variable interests as they are not considered “at risk”. Consequently, none of the trusts are consolidated by FHN.
Note 13 – Variable Interest Entities (Continued)
The following table summarizes FHN’s nonconsolidated VIEs as of SeptemberJune 30, 2017:
2018:
| | (Dollars in thousands) | | Maximum Loss Exposure | | Liability Recognized | | Classification | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | | | | | |
Low income housing partnerships | | $ | 96,007 |
| | $ | 34,236 |
| | (a) | | $ | 96,289 |
| | $ | 36,968 |
| | (a) |
Other tax credit investments (b) (c) | | 20,444 |
| | — |
| | Other assets | | 19,023 |
| | — |
| | Other assets |
Small issuer trust preferred holdings (d) | | 332,873 |
| | — |
| | Loans, net of unearned income | | 332,370 |
| | — |
| | Loans, net of unearned income |
On-balance sheet trust preferred securitization | | 48,902 |
| | 65,272 |
| | (e) | | 48,479 |
| | 65,695 |
| | (e) |
Proprietary residential mortgage securitizations | | 2,300 |
| | — |
| | Trading securities | | 1,724 |
| | — |
| | Trading securities |
Holdings of agency mortgage-backed securities (d) | | 4,173,080 |
| | — |
| | (f) | | 5,092,123 |
| | — |
| | (f) |
Commercial loan troubled debt restructurings (g) | | 21,763 |
| | — |
| | Loans, net of unearned income | | 18,612 |
| | — |
| | Loans, net of unearned income |
Sale-leaseback transaction | | 14,827 |
| | — |
| | (h) | | 14,827 |
| | — |
| | (h) |
Proprietary trust preferred issuances (i)
| | | — |
| | 212,378 |
| | Term borrowings |
| |
(a) | Maximum loss exposure represents $61.8$59.3 million of current investments and $34.2$37.0 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. |
| |
(c) | Maximum loss exposure represents current investment balance. Of the initial investment, $18.0 million was funded through loans from community development enterprises. |
| |
(d) | Maximum loss exposure represents the value of current investments. A liability is not recognized as FHN is solely a holder of the trusts’ securities. |
| |
(e) | Includes $112.5 million classified as Loans, net of unearned income, and $1.7 million classified as Trading securities which are offset by $65.3$65.7 million classified as Term borrowings. |
| |
(f) | Includes $.4$.5 billion classified as Trading securities and $3.8$4.6 billion classified as Securities available-for-sale. |
| |
(g) | Maximum loss exposure represents $21.1$17.8 million of current receivables and $.6$.8 million of contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring. |
| |
(h) | Maximum loss exposure represents the current loan balance plus additional funding commitments less amounts received from the buyer-lessor. |
| |
(i) | No exposure to loss due to nature of FHN's involvement. |
The following table summarizes FHN’s nonconsolidated VIEs as of December 31, 2016:2017:
| | (Dollars in thousands) | | Maximum Loss Exposure | | Liability Recognized | | Classification | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | | | | | |
Low income housing partnerships | | $ | 73,582 |
| | $ | 17,398 |
| | (a) | | $ | 94,798 |
| | $ | 33,348 |
| | (a) |
Other tax credit investments (b) (c) | | 21,898 |
| | — |
| | Other assets | | 20,394 |
| | — |
| | Other assets |
Small issuer trust preferred holdings (d) | | 332,985 |
| | — |
| | Loans, net of unearned income | | 332,455 |
| | — |
| | Loans, net of unearned income |
On-balance sheet trust preferred securitization | | 49,361 |
| | 64,812 |
| | (e) | | 48,817 |
| | 65,357 |
| | (e) |
Proprietary residential mortgage securitizations | | 2,568 |
| | — |
| | Trading securities | | 2,151 |
| | — |
| | Trading securities |
Holdings of agency mortgage-backed securities (d) | | 4,163,313 |
| | — |
| | (f) | | 5,349,287 |
| | — |
| | (f) |
Commercial loan troubled debt restructurings (g) | | 42,696 |
| | — |
| | Loans, net of unearned income | | 19,411 |
| | — |
| | Loans, net of unearned income |
Sale-leaseback transaction | | 11,827 |
| | — |
| | (h) | | 14,827 |
| | — |
| | (h) |
Proprietary trust preferred issuances (i) | | | — |
| | 212,378 |
| | Term borrowings |
| |
(a) | Maximum loss exposure represents $56.2$61.5 million of current investments and $17.4$33.3 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 2017.2020. |
| |
(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$65.4 million classified as Term borrowings. |
| |
(f) | Includes $.4$.5 billion classified as Trading securities and $3.8$4.8 billion classified as Securities available-for-sale. |
| |
(g) | Maximum loss exposure represents $37.5$19.1 million of current receivables and $5.2$.3 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. |
| |
(i) | No exposure to loss due to nature of FHN's involvement. |
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, aOne central clearinghouse revised the treatment ofconsiders daily margin posted or received from collateral toas legal settlements of the related derivative contracts. This change resultedresults in a reduction in derivative assets and liabilities and corresponding reductions in collateral posted and received as these amounts arebeing 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 SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively, FHN had $34.5$80.5 million and $47.8$60.3 million of cash receivables and $28.2$98.8 million and $32.8$49.7 million of cash payables related to collateral posting under master netting arrangements, inclusive of collateral posted related to contracts with adjustable collateral posting thresholds and over-collateralized positions, with derivative counterparties. With exchange-traded contracts, the credit risk is limited to the clearinghouse used. For non-exchange traded instruments, credit risk may occur when there is a gain in the fair value of the financial instrument and the counterparty fails to perform according to the terms of the contract and/or when the collateral proves to be of insufficient value. See additional discussion regarding master netting agreements and collateral posting requirements later in this note under the heading “Master Netting and Similar Agreements.” Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates or the prices of debt instruments. FHN manages market risk by establishing and monitoring limits on the types and degree of risk that may be undertaken. FHN continually measures this risk through the use of models that measure value-at-risk and earnings-at-risk.
Derivative Instruments. FHN enters into various derivative contracts both in a dealer capacity to facilitate customer transactions and as a risk management tool. Where contracts have been created for customers, FHN enters into upstream transactions with dealers to offset its risk exposure. Contracts with dealers that require central clearing are novated to a clearing agent who becomes FHN’s counterparty. Derivatives are also used as a risk management tool to hedge FHN’s exposure to changes in interest rates or other defined market risks.
Forward contracts are over-the-counter contracts where two parties agree to purchase and sell a specific quantity of a financial instrument at a specified price, with delivery or settlement at a specified date. Futures contracts are exchange-traded contracts where two parties agree to purchase and sell a specific quantity of a financial instrument at a specified price, with delivery or settlement at a specified date. Interest rate option contracts give the purchaser the right, but not the obligation, to buy or sell a specified quantity of a financial instrument, at a specified price, during a specified period of time. Caps and floors are options that are linked to a notional principal amount and an underlying indexed interest rate. Interest rate swaps involve the exchange of interest payments at specified intervals between two parties without the exchange of any underlying principal. Swaptions are options on interest rate swaps that give the purchaser the right, but not the obligation, to enter into an interest rate swap agreement during a specified period of time.
Trading Activities
FHN’s fixed income segment trades U.S. Treasury, U.S. Agency, government-guaranteed loan, mortgage-backed, corporate and municipal fixed income securities, and other securities for distribution to customers. When these securities settle on a delayed basis, they are considered forward contracts. Fixed income also enters into interest rate contracts, including caps, swaps, and floors, for its customers. In addition, fixed income enters into futures and option contracts to economically hedge interest rate risk associated with a portion of its securities inventory. These transactions are measured at fair value, with changes in fair value recognized currently in fixed income noninterest income. Related assets and liabilities are recorded on the Consolidated Condensed Statements of Condition as Derivative assets and Derivative liabilities. The FTN Financial Risk Committee and the Credit Risk Management Committee collaborate to mitigate credit risk related to these transactions. Credit risk is controlled
Note 14 – Derivatives (Continued)
through credit approvals, risk control limits, and ongoing monitoring procedures. Total trading revenues were $45.0$29.9 million and $59.0
Note 14 – Derivatives (Continued)
$45.6 million for the three months ended SeptemberJune 30, 2018 and 2017, and 2016, respectively, and $133.3$68.0 million and $185.9$88.3 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, 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 SeptemberJune 30, 20172018 and December 31, 2016:2017:
|
| | | | | | | | | | | | |
| | September 30, 2017 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts | | $ | 1,954,439 |
| | $ | 30,564 |
| | $ | 12,256 |
|
Offsetting Upstream Interest Rate Contracts | | 1,954,439 |
| | 12,119 |
| | 28,012 |
|
Option Contracts Purchased | | 40,000 |
| | 69 |
| | — |
|
Forwards and Futures Purchased | | 4,506,883 |
| | 3,648 |
| | 5,296 |
|
Forwards and Futures Sold | | 4,499,160 |
| | 6,355 |
| | 2,331 |
|
|
| | | | | | | | | | | | |
| | June 30, 2018 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer interest rate contracts | | $ | 2,204,706 |
| | $ | 9,837 |
| | $ | 48,272 |
|
Offsetting upstream interest rate contracts | | 2,204,706 |
| | 46,619 |
| | 9,676 |
|
Option contracts purchased | | 70,000 |
| | 58 |
| | — |
|
Forwards and futures purchased | | 5,466,761 |
| | 16,942 |
| | 1,902 |
|
Forwards and futures sold | | 5,556,237 |
| | 2,185 |
| | 16,836 |
|
|
| | | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | | |
| | December 31, 2017 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer interest rate contracts | | $ | 2,026,753 |
| | $ | 22,097 |
| | $ | 18,323 |
|
Offsetting upstream interest rate contracts | | 2,026,753 |
| | 17,931 |
| | 20,720 |
|
Option contracts purchased | | 20,000 |
| | 15 |
| | — |
|
Forwards and futures purchased | | 6,257,140 |
| | 4,354 |
| | 5,526 |
|
Forwards and futures sold | | 6,292,012 |
| | 5,806 |
| | 4,010 |
|
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. The balance sheet impact of this swap was $.2 million in Derivative liabilitiesnot significant as of SeptemberJune 30, 20172018 and $1.6was $.1 million in Derivative assets as of December 31, 2016. There was an insignificant level of ineffectiveness related to this hedge.2017.
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 millionnot significant as of June 30, 2018 and $7.3was $.2 million in Derivative liabilitiesassets as of September 30, 2017 and December 31, 2016, respectively. There was an insignificant level of ineffectiveness related to this hedge.2017.
Note 14 – Derivatives (Continued)
The following tables summarize FHN’s derivatives associated with interest rate risk management activities as of SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | | | September 30, 2017 | | | | June 30, 2018 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities | | | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts Hedging | | | | | | | | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | | | | | | | | |
Customer Interest Rate Contracts | | $ | 1,540,036 |
| | $ | 16,607 |
| | $ | 12,675 |
| | | |
Offsetting Upstream Interest Rate Contracts | | 1,540,036 |
| | 11,612 |
| | 15,350 |
| | | |
Customer interest rate contracts | | | $ | 1,843,573 |
| | $ | 6,180 |
| | $ | 42,760 |
|
Offsetting upstream interest rate contracts | | | 1,843,573 |
| | 40,026 |
| | 6,383 |
|
Debt Hedging | | | | | | | | | | | | | |
Hedging Instruments: | | | | | | | | | | | | | |
Interest Rate Swaps | | $ | 900,000 |
| | N/A |
| | $ | 779 |
| | | |
Interest rate swaps | | | $ | 900,000 |
| | $ | 22 |
| | $ | 4 |
|
Hedged Items: | | | | | | | | | | | | | |
Term Borrowings | | N/A |
| | N/A |
| | $ | 900,000 |
| | (a) | |
Term borrowings: | | | | | | | |
Par | | | N/A |
| | N/A |
| | $ | 900,000 |
|
Cumulative fair value hedging adjustments | | | N/A |
| | N/A |
| | (21,542 | ) |
Unamortized premium/(discount) and issuance costs | | | N/A |
| | N/A |
| | (3,103 | ) |
Total carrying value | | | N/A |
| | N/A |
| | 875,355 |
|
| | | | December 31, 2016 | | | | December 31, 2017 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities | | | | 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 |
| | | |
Customer interest rate contracts | | | $ | 1,608,912 |
| | $ | 11,644 |
| | $ | 19,780 |
|
Offsetting upstream interest rate contracts | | | 1,608,912 |
| | 18,473 |
| | 11,019 |
|
Debt Hedging | | | | | | | | | | | | | |
Hedging Instruments: | | | | | | | | | | | | | |
Interest Rate Swaps | | $ | 900,000 |
| | $ | 1,628 |
| | $ | 7,276 |
| | | |
Interest rate swaps | | | $ | 900,000 |
| | $ | 371 |
| | N/A |
|
Hedged Items: | | | | | | | | | | | | | |
Term Borrowings | | N/A |
| | N/A |
| | $ | 900,000 |
| | (a) | |
Term borrowings: | | | | | | | |
Par | | | N/A |
| | N/A |
| | $ | 900,000 |
|
Cumulative fair value hedging adjustments | | | N/A |
| | N/A |
| | (13,472 | ) |
Unamortized premium/(discount) and issuance costs | | | N/A |
| | N/A |
| | (3,910 | ) |
Total carrying value | | | N/A |
| | N/A |
| | $ | 882,618 |
|
| |
(a) | Represents par value of term borrowings being hedged. |
Note 14 – Derivatives (Continued)
The following table summarizes gains/(losses) on FHN’s derivatives associated with interest rate risk management activities for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:
2017:
| | | | Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended June 30 | | Six Months Ended June 30 |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
(Dollars in thousands) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) |
Customer Interest Rate Contracts Hedging | Customer Interest Rate Contracts Hedging | | | | | | | Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | | | | | | | | | | | |
Customer Interest Rate Contracts (a) | | $ | (180 | ) | | $ | (1,964 | ) | | 643 |
| | 18,749 |
| |
Offsetting Upstream Interest Rate Contracts (a) | | 180 |
| | 1,964 |
| | (643 | ) | | (18,749 | ) | |
Customer interest rate contracts (a) | | | $ | (4,459 | ) | | $ | 4,099 |
| | $ | (29,183 | ) | | $ | 823 |
|
Offsetting upstream interest rate contracts (a) | | | 4,459 |
| | (4,099 | ) | | 29,183 |
| | (823 | ) |
Debt Hedging | | | | | | | | | | | | | | | | |
Hedging Instruments: | | | | | | | | | | | | | | | | |
Interest Rate Swaps (a) | | $ | (966 | ) | | $ | (7,254 | ) | | $ | (1,958 | ) | | $ | 19,352 |
| |
Interest rate swaps (b) | | | $ | (1,545 | ) | | $ | 1,808 |
| | $ | (8,140 | ) | | $ | (992 | ) |
Hedged Items: | | | | | | | | | | | | | | | | |
Term Borrowings (a) (b) | | 941 |
| | 7,152 |
| | 1,870 |
| | (19,059 | ) | |
Term borrowings (b) (c) | | | 1,520 |
| | (1,804 | ) | | 8,070 |
| | 929 |
|
| |
(a) | Gains/losses included in the All other expense section ofwithin the Consolidated Condensed Statements of Income. |
| |
(b) | Gains/losses included in the Interest expense for 2018 and All other expense for 2017 within the Consolidated Condensed Statements of Income. |
| |
(c) | Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships. |
Note 14 – Derivatives (Continued)
In first quarter 2016, FHN entered into a pay floating, receive fixed interest rate swap in a hedging strategy to manage its exposure to the variability in cash flows related to the interest payments for the following five years on $250 million principal of debt instruments, which primarily consist of held-to-maturity trust preferred loans that have variable interest payments based on 3-month LIBOR. In first quarter 2017, FHN initiated cash flow hedges of $650 million notional amount that havehad initial durations between three 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. ChangesSubsequent to 2017, all changes in the fair value of these derivatives are recorded as a component of AOCI, to the extent that the hedging relationships are effective.AOCI. Amounts are reclassified from AOCI to earnings as the hedged cash flows affect earnings. Prior to 2018, FTB measures themeasured ineffectiveness using the Hypothetical Derivative Method.Method and AOCI iswas adjusted to an amount that reflectsreflected 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 existsexisted in the hedge relationships, the amounts arewere 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 SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | | | September 30, 2017 | | June 30, 2018 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | | | | | | | |
Hedging Instruments: | | | | | | | | | | | | |
Interest Rate Swaps | | $ | 900,000 |
| | N/A |
| | $ | 916 |
| |
Interest rate swaps | | | $ | 900,000 |
| | $ | 24 |
| | $ | 85 |
|
Hedged Items: | | | | | | | | | | | | |
Variability in Cash Flows Related to Debt Instruments (Primarily Loans) | | N/A |
| | $ | 900,000 |
| | N/A |
| |
Variability in cash flows related to debt instruments (primarily loans) | | | N/A |
| | $ | 900,000 |
| | N/A |
|
Note 14 – Derivatives (Continued)
| | | | December 31, 2016 | | December 31, 2017 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | | | | | | |
Hedging Instruments: | | | | | | | | | | | |
Interest Rate Swaps | | $ | 250,000 |
| | N/A |
| | $ | 2,045 |
| |
Interest rate swaps | | | $ | 900,000 |
| | $ | 942 |
| | N/A |
Hedged Items: | | | | | | | | | | | |
Variability in Cash Flows Related to Debt Instruments (Primarily Loans) | | N/A |
| | $ | 250,000 |
| | N/A |
| |
Variability in cash flows related to debt instruments (primarily loans) | | | N/A |
| | $ | 900,000 |
| | N/A |
The following table summarizes gains/(losses) on FHN’s derivatives associated with cash flow hedges for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:
2017:
| | | | Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended June 30 | | Six Months Ended June 30 |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
(Dollars in thousands) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) | | Gains/(Losses) |
Cash Flow Hedges | Cash Flow Hedges | | | | | | | Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | | | | | | | | | | | |
Interest Rate Swaps (a) (b) | | $ | (1,190 | ) | | $ | (2,545 | ) | | $ | (800 | ) | | $ | 5,061 |
| |
Hedged Items: | | | | | | | | | |
Variability in Cash Flows Related to Debt Instruments (Primarily Loans) | | N/A |
| | N/A |
| | N/A |
| | N/A |
| |
Interest rate swaps (a) | | | $ | (3,914 | ) | | $ | 3,491 |
| | $ | (15,531 | ) | | $ | 390 |
|
Gain/(loss) recognized in Other comprehensive income/(loss) | | | (3,457 | ) | | 3,059 |
| | (12,095 | ) | | 1,997 |
|
Gain/(loss) reclassified from AOCI into Interest income | | | 463 |
| | (904 | ) | | 308 |
| | (1,756 | ) |
| |
(a) | Amount represents the pre-tax gains/(losses) included within AOCI. |
| |
(b) | Includes approximately $1.2Approximately $9.0 million of pre-tax losses are expected to be reclassified into earnings in the next twelve months. |
Note 14 – Derivatives (Continued)
Prior to third quarter 2017, FHN hedged held-to-maturity trust preferred loans which had an initial fixed rate term before conversion to a floating rate. FHN had entered into pay fixed, receive floating interest rate swaps to hedge the interest rate risk associated with the initial term. Interest paid or received for these swaps was recognized as an adjustment of the interest income of the assets whose risk was being hedged. Basis adjustments remaining at the end of the hedge term were amortized as an adjustment to interest income over the remaining life of the loans.Gains or losses were included in Other income and commissions on the Consolidated Condensed Statements of Income. These hedges expired in third quarter 2017.
The following table summarizes FHN’s derivative activities associated with held-to-maturity trust preferred loans as of December 31, 2016:
|
| | | | | | | | | | | | | | |
| | December 31, 2016 |
(Dollars in thousands) | | Notional | | Assets | | | | Liabilities |
Loan Portfolio Hedging | | | | | | | | |
Hedging Instruments: | | | | | | | | |
Interest Rate Swaps | | $ | 6,500 |
| | N/A |
| | | | $ | 208 |
|
Hedged Items: | | | | | | | | |
Trust Preferred Loans (a) | | N/A |
| | $ | 6,500 |
| | (b) | | N/A |
|
| |
(a) | Assets included in the Loans, net of unearned income section of the Consolidated Condensed Statements of Condition. |
| |
(b) | Represents principal balance being hedged. |
The following table summarizes gains/(losses) on FHN’s derivatives associated with held-to-maturity trust preferred loans for the three and nine months ended September 30, 2016:
|
| | | | | | | | |
| | September 30, 2016 |
| | Three Months Ended | | Nine Months Ended |
(Dollars in thousands) | | Gains/(Losses) | | Gains/(Losses) |
Loan Portfolio Hedging | | | | |
Hedging Instruments: | | | | |
Interest Rate Swaps | | $ | 93 |
| | $ | 201 |
|
Hedged Items: | | | | |
Trust Preferred Loans (a) | | $ | (92 | ) | | $ | (199 | ) |
| |
(a) | Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships. |
Other Derivatives
In conjunction with the sales of a portion of its Visa Class B shares, 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 SeptemberJune 30, 20172018 and December 31, 2016,2017, the derivative liabilities associated with the sales of Visa Class B shares were $5.5$9.4 million and $6.2$5.6 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 SeptemberJune 30, 20172018 and December 31, 2016,2017, these loans were valued at $1.3$6.4 million and $3.8$1.5 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
Note 14 – Derivatives (Continued)
following discussion provides an overview of these arrangements which may vary due to the derivative type and market in which a derivative transaction is executed.
Interest rate derivatives are subject to agreements consistent with standard agreement forms of the International Swap and Derivatives Association (“ISDA”). Currently, all interest rate derivative contracts are entered into as over-the-counter transactions and collateral posting requirements are based on the net asset or liability position with each respective counterparty. For contracts that require central clearing, novation to a counterparty with access to a clearinghouse occurs and margin is posted. Cash margin received (posted) that is considered settlements for the derivative contracts is included in the respective derivative asset (liability) value. Cash margin that is considered collateral received (posted) for interest rate derivatives is recognized as a liability (asset) on FHN’s Consolidated Condensed Statements of Condition.
Note 14 – Derivatives (Continued)
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 $27.4$21.7 million of assets and $34.6$52.4 million of liabilities on SeptemberJune 30, 2017,2018, and $35.9$23.3 million of assets and $49.0$34.5 million of liabilities on December 31, 2016.2017. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, FHN had received collateral of $113.6$108.7 million and $137.6$119.3 million and posted collateral of $26.2$16.5 million and $39.3$18.9 million, respectively, in the normal course of business related to these agreements.
Certain agreements entered into prior to required central clearing also contain accelerated termination provisions, inclusive of the right of offset, if a counterparty’s credit rating falls below a specified level. If a counterparty’s debt rating (including FHN’s and FTBNA’s) were to fall below these minimums, these provisions would be triggered, and the counterparties could terminate the agreements and require immediate settlement of all derivative contracts under the agreements. The net fair value, determined by individual counterparty, of all derivative instruments with credit-risk-related contingent accelerated termination provisions was $27.4$18.5 million of assets and $14.9$47.0 million of liabilities on SeptemberJune 30, 2017,2018, and $35.9$22.8 million of assets and $19.6$19.4 million of liabilities on December 31, 2016.2017. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, FHN had received collateral of $113.6$105.5 million and $137.5$118.6 million and posted collateral of $9.0$15.0 million and $12.9$6.7 million, respectively, in the normal course of business related to these contracts.
FHN’s fixed income segment buys and sells various types of securities for its customers. When these securities settle on a delayed basis, they are considered forward contracts, and are generally not subject to master netting agreements. For futures and options, FHN transacts through a third party, and the transactions are subject to margin and collateral maintenance requirements. In the event of default, open positions can be offset along with the associated collateral.
For this disclosure, FHN considers the impact of master netting and other similar agreements which allow FHN to settle all contracts with a single counterparty on a net basis and to offset the net derivative asset or liability position with the related securities and cash collateral. The application of the collateral cannot reduce the net derivative asset or liability position below zero, and therefore any excess collateral is not reflected in the following tables.
Note 14 – Derivatives (Continued)
The following table provides details of derivative assets and collateral received as presented on the Consolidated Condensed Statements of Condition as of SeptemberJune 30, 20172018 and December 31, 2016:2017:
Note 14 – Derivatives (Continued)
| | | | | | | | | | Gross amounts not offset in the Statements of Condition | | | | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized assets | | Gross amounts offset in the Statements of Condition | | Net amounts of assets presented in the Statements of Condition (a) | | Derivative liabilities available for offset | | Collateral Received | | Net amount | | Gross amounts of recognized assets | | Gross amounts offset in the Statements of Condition | | Net amounts of assets presented in the Statements of Condition (a) | | Derivative liabilities available for offset | | Collateral received | | Net amount |
Derivative assets: | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2017 (b) | | $ | 70,902 |
| | $ | — |
| | $ | 70,902 |
| | $ | (23,283 | ) | | $ | (43,379 | ) | | $ | 4,240 |
| |
December 31, 2016 (b) | | 87,962 |
| | — |
| | 87,962 |
| | (25,953 | ) | | (52,888 | ) | | 9,121 |
| |
June 30, 2018 (b) | | | $ | 102,852 |
| | $ | — |
| | $ | 102,852 |
| | $ | (13,490 | ) | | $ | (89,317 | ) | | $ | 45 |
|
December 31, 2017 (b) | | | 71,458 |
| | — |
| | 71,458 |
| | (17,278 | ) | | (51,271 | ) | | 2,909 |
|
| |
(a) | Included in Derivative assets on the Consolidated Condensed Statements of Condition. As of SeptemberJune 30, 20172018 and December 31, 2016, $10.12017, $19.2 million and $33.7$10.2 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 SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | | | | | | | | | Gross amounts not offset in the Statements of Condition | | | | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized 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 | | Gross amounts of recognized liabilities | | Gross amounts offset in the Statements of Condition | | Net amounts of liabilities presented in the Statements of Condition (a) | | Derivative assets available for offset | | Collateral pledged | | Net amount |
Derivative liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2017 (b) | | $ | 69,988 |
| | $ | — |
| | $ | 69,988 |
| | $ | (23,283 | ) | | $ | (42,686 | ) | | $ | 4,019 |
| |
December 31, 2016 (b) | | 96,363 |
| | — |
| | 96,363 |
| | (25,953 | ) | | (60,746 | ) | | 9,664 |
| |
June 30, 2018 (b) | | | $ | 107,178 |
| | $ | — |
| | $ | 107,178 |
| | $ | (13,490 | ) | | $ | (65,689 | ) | | $ | 27,999 |
|
December 31, 2017 (b) | | | 69,842 |
| | — |
| | 69,842 |
| | (17,278 | ) | | (51,801 | ) | | 763 |
|
| |
(a) | Included in Derivative liabilities on the Consolidated Condensed Statements of Condition. As of SeptemberJune 30, 20172018 and December 31, 2016, $13.22017, $28.2 million and $39.5$15.2 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. |
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 SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | | | | | | | | | Gross amounts not offset in the Statements of Condition | | | | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized assets | | Gross amounts offset in the Statements of Condition | | Net amounts of assets presented in the Statements of Condition | | Offsetting securities sold under agreements to repurchase | | Securities collateral (not recognized on FHN’s Statements of Condition) | | Net amount | | Gross amounts of recognized assets | | Gross amounts offset in the Statements of Condition | | Net amounts of assets presented in the Statements of Condition | | Offsetting securities sold under agreements to repurchase | | Securities collateral (not recognized on FHN’s Statements of Condition) | | Net amount |
Securities purchased under agreements to resell: | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2017 | | $ | 663,637 |
| | $ | — |
| | $ | 663,637 |
| | $ | (1,044 | ) | | $ | (655,136 | ) | | $ | 7,457 |
| |
December 31, 2016 | | 613,682 |
| | — |
| | 613,682 |
| | (1,628 | ) | | (603,813 | ) | | 8,241 |
| |
June 30, 2018 | | | $ | 782,765 |
| | $ | — |
| | $ | 782,765 |
| | $ | (2,090 | ) | | $ | (772,347 | ) | | $ | 8,328 |
|
December 31, 2017 | | | 725,609 |
| | — |
| | 725,609 |
| | (259 | ) | | (720,036 | ) | | 5,314 |
|
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 SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | | | | | | | | | Gross amounts not offset in the Statements of Condition | | | | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized 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 | | Gross amounts of recognized liabilities | | Gross amounts offset in the Statements of Condition | | Net amounts of liabilities presented in the Statements of Condition | | Offsetting securities purchased under agreements to resell | | Securities/ government guaranteed loans collateral | | Net amount |
Securities sold under agreements to repurchase: | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2017 | | $ | 516,867 |
| | $ | — |
| | $ | 516,867 |
| | $ | (1,044 | ) | | $ | (515,673 | ) | | $ | 150 |
| |
December 31, 2016 | | 453,053 |
| | — |
| | 453,053 |
| | (1,628 | ) | | (451,414 | ) | | 11 |
| |
June 30, 2018 | | | $ | 713,152 |
| | $ | — |
| | $ | 713,152 |
| | $ | (2,090 | ) | | $ | (710,862 | ) | | $ | 200 |
|
December 31, 2017 | | | 656,602 |
| | — |
| | 656,602 |
| | (259 | ) | | (656,216 | ) | | 127 |
|
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 SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | | | September 30, 2017 | | June 30, 2018 |
(Dollars in thousands) | | Overnight and Continuous | | Up to 30 Days | | Total | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | | | | | | | |
U.S. treasuries | | $ | 18,970 |
| | $ | — |
| | $ | 18,970 |
| | $ | 24,153 |
| | $ | — |
| | $ | 24,153 |
|
Government agency issued MBS | | 276,903 |
| | 5,521 |
| | 282,424 |
| | 383,835 |
| | 6,929 |
| | 390,764 |
|
Government agency issued CMO | | 50,554 |
| | 5,749 |
| | 56,303 |
| | 54,530 |
| | 3,023 |
| | 57,553 |
|
Government guaranteed loans (SBA and USDA) | | 159,170 |
| | — |
| | 159,170 |
| | 240,682 |
| | — |
| | 240,682 |
|
Total Securities sold under agreements to repurchase | | $ | 505,597 |
| | $ | 11,270 |
| | $ | 516,867 |
| | $ | 703,200 |
| | $ | 9,952 |
| | $ | 713,152 |
|
| | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2017 |
(Dollars in thousands) | | Overnight and Continuous | | Up to 30 Days | | Total | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | | | | | | | |
U.S. treasuries | | $ | 14,864 |
| | $ | — |
| | $ | 14,864 |
| | $ | 13,830 |
| | $ | — |
| | $ | 13,830 |
|
Government agency issued MBS | | 421,771 |
| | — |
| | 421,771 |
| | 424,821 |
| | 5,365 |
| | 430,186 |
|
Government agency issued CMO | | — |
| | 16,418 |
| | 16,418 |
| | 54,037 |
| | 3,666 |
| | 57,703 |
|
Government guaranteed loans (SBA and USDA) | | | 154,883 |
| | — |
| | 154,883 |
|
Total Securities sold under agreements to repurchase | | $ | 436,635 |
| | $ | 16,418 |
| | $ | 453,053 |
| | $ | 647,571 |
| | $ | 9,031 |
| | $ | 656,602 |
|
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.
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 SeptemberJune 30, 2017:2018:
| | | | September 30, 2017 | | June 30, 2018 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Trading securities—fixed income: | | | | | | | | | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 157,483 |
| | $ | — |
| | $ | 157,483 |
| | $ | — |
| | $ | 53,315 |
| | $ | — |
| | $ | 53,315 |
|
Government agency issued MBS | | — |
| | 155,260 |
| | — |
| | 155,260 |
| | — |
| | 185,118 |
| | — |
| | 185,118 |
|
Government agency issued CMO | | — |
| | 244,321 |
| | — |
| | 244,321 |
| | — |
| | 305,125 |
| | — |
| | 305,125 |
|
Other U.S. government agencies | | — |
| | 186,573 |
| | — |
| | 186,573 |
| | — |
| | 111,516 |
| | — |
| | 111,516 |
|
States and municipalities | | — |
| | 61,290 |
| | — |
| | 61,290 |
| | — |
| | 89,629 |
| | — |
| | 89,629 |
|
Corporate and other debt | | — |
| | 655,976 |
| | 5 |
| | 655,981 |
| |
Corporates and other debt | | | — |
| | 902,580 |
| | — |
| | 902,580 |
|
Equity, mutual funds, and other | | — |
| | 6,194 |
| | — |
| | 6,194 |
| | — |
| | 463 |
| | — |
| | 463 |
|
Total trading securities—fixed income | | — |
| | 1,467,097 |
| | 5 |
| | 1,467,102 |
| | — |
| | 1,647,746 |
| | — |
| | 1,647,746 |
|
Trading securities—mortgage banking | | — |
| | — |
| | 2,300 |
| | 2,300 |
| | — |
| | — |
| | 1,724 |
| | 1,724 |
|
Loans held-for-sale | | — |
| | 1,727 |
| | 20,081 |
| | 21,808 |
| |
Loans held-for-sale (elected fair value) | | | — |
| | 2,222 |
| | 16,718 |
| | 18,940 |
|
Securities available-for-sale: | | | | | | | | | | | | | | | | |
U.S. treasuries | | — |
| | 100 |
| | — |
| | 100 |
| | — |
| | 98 |
| | — |
| | 98 |
|
Government agency issued MBS | | — |
| | 2,087,505 |
| | — |
| | 2,087,505 |
| | — |
| | 2,494,300 |
| | — |
| | 2,494,300 |
|
Government agency issued CMO | | — |
| | 1,685,995 |
| | — |
| | 1,685,995 |
| | — |
| | 2,107,580 |
| | — |
| | 2,107,580 |
|
Interest-only strips | | — |
| | — |
| | 3,123 |
| | 3,123 |
| |
Equity, mutual funds, and other | | 24,756 |
| | — |
| | — |
| | 24,756 |
| |
Other U.S. government agencies | | | — |
| | 54,402 |
| | — |
| | 54,402 |
|
States and municipalities | | | — |
| | 6,406 |
| | — |
| | 6,406 |
|
Corporates and other debt | | | — |
| | 55,838 |
| | — |
| | 55,838 |
|
Interest-only strips (elected fair value) | | | — |
| | — |
| | 5,787 |
| | 5,787 |
|
Total securities available-for-sale | | 24,756 |
| | 3,773,600 |
| | 3,123 |
| | 3,801,479 |
| | — |
| | 4,718,624 |
| | 5,787 |
| | 4,724,411 |
|
Other assets: | | | | | | | | | | | | | | | | |
Deferred compensation assets | | 34,951 |
| | — |
| | — |
| | 34,951 |
| |
Deferred compensation mutual funds | | | 40,068 |
| | — |
| | — |
| | 40,068 |
|
Equity, mutual funds, and other | | | 27,135 |
| | — |
| | — |
| | 27,135 |
|
Derivatives, forwards and futures | | 10,003 |
| | — |
| | — |
| | 10,003 |
| | 19,127 |
| | — |
| | — |
| | 19,127 |
|
Derivatives, interest rate contracts | | — |
| | 70,971 |
| | — |
| | 70,971 |
| | — |
| | 102,766 |
| | — |
| | 102,766 |
|
Derivatives, other | | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 163 |
| | — |
| | 163 |
|
Total other assets | | 44,954 |
| | 70,973 |
| | — |
| | 115,927 |
| | 86,330 |
| | 102,929 |
| | — |
| | 189,259 |
|
Total assets | | $ | 69,710 |
| | $ | 5,313,397 |
| | $ | 25,509 |
| | $ | 5,408,616 |
| | $ | 86,330 |
| | $ | 6,471,521 |
| | $ | 24,229 |
| | $ | 6,582,080 |
|
Trading liabilities—fixed income: | | | | | | | | | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 424,461 |
| | $ | — |
| | $ | 424,461 |
| | $ | — |
| | $ | 520,463 |
| | $ | — |
| | $ | 520,463 |
|
Government agency issued CMO | | — |
| | 1,372 |
| | — |
| | 1,372 |
| |
Other U.S. government agencies | | — |
| | 998 |
| | — |
| | 998 |
| | — |
| | 329 |
| | — |
| | 329 |
|
Corporate and other debt | | — |
| | 152,197 |
| | — |
| | 152,197 |
| |
States and municipalities | | | — |
| | 2,572 |
| | — |
| | 2,572 |
|
Corporates and other debt | | | — |
| | 220,357 |
| | — |
| | 220,357 |
|
Total trading liabilities—fixed income | | — |
| | 579,028 |
| | — |
| | 579,028 |
| | — |
| | 743,721 |
| | — |
| | 743,721 |
|
Other liabilities: | | | | | | | | | | | | | | | | |
Derivatives, forwards and futures | | 7,627 |
| | — |
| | — |
| | 7,627 |
| | 18,738 |
| | — |
| | — |
| | 18,738 |
|
Derivatives, interest rate contracts | | — |
| | 69,988 |
| | — |
| | 69,988 |
| | — |
| | 107,179 |
| | — |
| | 107,179 |
|
Derivatives, other | | — |
| | 1 |
| | 5,530 |
| | 5,531 |
| | — |
| | 7 |
| | 9,425 |
| | 9,432 |
|
Total other liabilities | | 7,627 |
| | 69,989 |
| | 5,530 |
| | 83,146 |
| | 18,738 |
| | 107,186 |
| | 9,425 |
| | 135,349 |
|
Total liabilities | | $ | 7,627 |
| | $ | 649,017 |
| | $ | 5,530 |
| | $ | 662,174 |
| | $ | 18,738 |
| | $ | 850,907 |
| | $ | 9,425 |
| | $ | 879,070 |
|
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, 2016:2017: | | | | December 31, 2016 | | December 31, 2017 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Trading securities—fixed income: | | | | | | | | | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 146,988 |
| | $ | — |
| | $ | 146,988 |
| | $ | — |
| | $ | 128,995 |
| | $ | — |
| | $ | 128,995 |
|
Government agency issued MBS | | — |
| | 256,611 |
| | — |
| | 256,611 |
| | — |
| | 227,038 |
| | — |
| | 227,038 |
|
Government agency issued CMO | | — |
| | 150,058 |
| | — |
| | 150,058 |
| | — |
| | 275,014 |
| | — |
| | 275,014 |
|
Other U.S. government agencies | | — |
| | 52,314 |
| | — |
| | 52,314 |
| | — |
| | 54,699 |
| | — |
| | 54,699 |
|
States and municipalities | | — |
| | 60,351 |
| | — |
| | 60,351 |
| | — |
| | 34,573 |
| | — |
| | 34,573 |
|
Corporate and other debt | | — |
| | 227,934 |
| | 5 |
| | 227,939 |
| |
Corporates and other debt | | | — |
| | 693,877 |
| | — |
| | 693,877 |
|
Equity, mutual funds, and other | | — |
| | 242 |
| | — |
| | 242 |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Total trading securities—fixed income | | — |
| | 894,498 |
| | 5 |
| | 894,503 |
| | — |
| | 1,414,194 |
| | — |
| | 1,414,194 |
|
Trading securities—mortgage banking | | — |
| | — |
| | 2,568 |
| | 2,568 |
| | — |
| | — |
| | 2,151 |
| | 2,151 |
|
Loans held-for-sale | | — |
| | 2,345 |
| | 21,924 |
| | 24,269 |
| | — |
| | 1,955 |
| | 18,926 |
| | 20,881 |
|
Securities available-for-sale: | | | | | | | | | | | | | | | | |
U.S. treasuries | | — |
| | 100 |
| | — |
| | 100 |
| | — |
| | 99 |
| | — |
| | 99 |
|
Government agency issued MBS | | — |
| | 2,208,687 |
| | — |
| | 2,208,687 |
| | — |
| | 2,577,376 |
| | — |
| | 2,577,376 |
|
Government agency issued CMO | | — |
| | 1,547,958 |
| | — |
| | 1,547,958 |
| | — |
| | 2,269,858 |
| | — |
| | 2,269,858 |
|
Corporates and other debt | | | — |
| | 55,782 |
| | — |
| | 55,782 |
|
Interest-only strips | | | — |
| | — |
| | 1,270 |
| | 1,270 |
|
Equity, mutual funds, and other | | 25,249 |
| | — |
| | — |
| | 25,249 |
| | 27,017 |
| | — |
| | — |
| | 27,017 |
|
Total securities available-for-sale | | 25,249 |
| | 3,756,745 |
| | — |
| | 3,781,994 |
| | 27,017 |
| | 4,903,115 |
| | 1,270 |
| | 4,931,402 |
|
Other assets: | | | | | | | | | | | | | | | | |
Mortgage servicing rights | | — |
| | — |
| | 985 |
| | 985 |
| |
Deferred compensation assets | | 32,840 |
| | — |
| | — |
| | 32,840 |
| | 39,822 |
| | — |
| | — |
| | 39,822 |
|
Derivatives, forwards and futures | | 33,587 |
| | — |
| | — |
| | 33,587 |
| | 10,161 |
| | — |
| | — |
| | 10,161 |
|
Derivatives, interest rate contracts | | — |
| | 88,025 |
| | — |
| | 88,025 |
| | — |
| | 71,473 |
| | — |
| | 71,473 |
|
Derivatives, other | | — |
| | 42 |
| | — |
| | 42 |
| |
Total other assets | | 66,427 |
| | 88,067 |
| | 985 |
| | 155,479 |
| | 49,983 |
| | 71,473 |
| | — |
| | 121,456 |
|
Total assets | | $ | 91,676 |
| | $ | 4,741,655 |
| | $ | 25,482 |
| | $ | 4,858,813 |
| | $ | 77,000 |
| | $ | 6,390,737 |
| | $ | 22,347 |
| | $ | 6,490,084 |
|
Trading liabilities—fixed income: | | | | | | | | | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 381,229 |
| | $ | — |
| | $ | 381,229 |
| | $ | — |
| | $ | 506,679 |
| | $ | — |
| | $ | 506,679 |
|
Other U.S. government agencies | | — |
| | 844 |
| | — |
| | 844 |
| |
Corporate and other debt | | — |
| | 179,775 |
| | — |
| | 179,775 |
| |
Corporates and other debt | | | — |
| | 131,836 |
| | — |
| | 131,836 |
|
Total trading liabilities—fixed income | | — |
| | 561,848 |
| | — |
| | 561,848 |
| | — |
| | 638,515 |
| | — |
| | 638,515 |
|
Other liabilities: | | | | | | | | | | | | | | | | |
Derivatives, forwards and futures | | 33,274 |
| | — |
| | — |
| | 33,274 |
| | 9,535 |
| | — |
| | — |
| | 9,535 |
|
Derivatives, interest rate contracts | | — |
| | 96,371 |
| | — |
| | 96,371 |
| | — |
| | 69,842 |
| | — |
| | 69,842 |
|
Derivatives, other | | — |
| | 7 |
| | 6,245 |
| | 6,252 |
| | — |
| | 39 |
| | 5,645 |
| | 5,684 |
|
Total other liabilities | | 33,274 |
| | 96,378 |
| | 6,245 |
| | 135,897 |
| | 9,535 |
| | 69,881 |
| | 5,645 |
| | 85,061 |
|
Total liabilities | | $ | 33,274 |
| | $ | 658,226 |
| | $ | 6,245 |
| | $ | 697,745 |
| | $ | 9,535 |
| | $ | 708,396 |
| | $ | 5,645 |
| | $ | 723,576 |
|
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 SeptemberJune 30, 20172018 and 2016,2017, on a recurring basis are summarized as follows:
| | | | Three Months Ended September 30, 2017 | | | | Three Months Ended June 30, 2018 | | |
(Dollars in thousands) | | Trading securities | | | Interest- only strips- AFS | | | Loans held- for-sale | | Net derivative liabilities | | | Trading securities | | | Interest- only strips- AFS | | | Loans held- for-sale | | Net derivative liabilities | |
Balance on July 1, 2017 | | $ | 2,464 |
| | $ | 1,163 |
| | $ | 20,587 |
| | $ | (5,700 | ) | | |
Balance on April 1, 2018 | | | $ | 1,926 |
| | $ | 2,733 |
| | $ | 18,334 |
| | $ | (5,645 | ) | |
Total net gains/(losses) included in: | | | | | | | | | | | | | | | | | | |
Net income | | 92 |
| | (160 | ) | | 390 |
| | (129 | ) | | | 124 |
| | (296 | ) | | 540 |
| | (4,079 | ) | |
Purchases | | — |
| | — |
| | 43 |
| | — |
| | | — |
| | — |
| | 34 |
| | — |
| |
Sales | | | — |
| | — |
| | — |
| | — |
| |
Settlements | | (251 | ) | | — |
| | (939 | ) | | 299 |
| | | (326 | ) | | — |
| | (2,134 | ) | | 299 |
| |
Net transfers into/(out of) Level 3 | | — |
| | 2,120 |
| | (b) | | — |
| | (d) | | — |
| | | — |
| | 3,350 |
| | (b) | | (56 | ) | | (d) | | — |
| |
Balance on September 30, 2017 | | $ | 2,305 |
| | $ | 3,123 |
| | $ | 20,081 |
| | $ | (5,530 | ) | | |
Balance on June 30, 2018 | | | $ | 1,724 |
| | $ | 5,787 |
| | $ | 16,718 |
| | $ | (9,425 | ) | |
Net unrealized gains/(losses) included in net income | | $ | 62 |
| | (a) | | $ | (72 | ) | | (c) | | $ | 390 |
| | (a) | | $ | (129 | ) | | (e) | | $ | 87 |
| | (a) | | $ | (128 | ) | | (c) | | $ | 542 |
| | (a) | | $ | (4,079 | ) | | (e) |
| | | | Three Months Ended September 30, 2016 | | | | Three Months Ended June 30, 2017 | | |
(Dollars in thousands) | | Trading securities | | Loans held-for-sale | | Securities available- for-sale | | | Mortgage servicing rights, net | | | Net derivative liabilities | | | Trading securities | | Interest-only strips-AFS | | | | Loans held-for-sale | | Net derivative liabilities | |
Balance on July 1, 2016 | | $ | 2,826 |
| | $ | 25,738 |
| | $ | 1,500 |
| | | $ | 1,406 |
| | | $ | (6,835 | ) | | |
Balance on April 1, 2017 | | | $ | 2,335 |
| | $ | — |
| | | $ | 21,221 |
| | $ | (5,950 | ) | |
Total net gains/(losses) included in: | | | | | | | | | | | | | | | | | | | | |
Net income | | 304 |
| | 1,604 |
| | — |
| | — |
| | (4 | ) | | | 271 |
| | 267 |
| | 410 |
| | (49 | ) | |
Purchases | | — |
| | 198 |
| | — |
| | — |
| | — |
| | | — |
| | 1,413 |
| | 43 |
| | — |
| |
Settlements | | (346 | ) | | (2,146 | ) | | (1,500 | ) | | (160 | ) | | 299 |
| | | (142 | ) | | (3,291 | ) | | (827 | ) | | 299 |
| |
Net transfers into/(out of) Level 3 | | — |
| | (2,858 | ) | | (d) | | — |
| | | — |
| | — |
| | | — |
| | 2,774 |
| | (b) | | (260 | ) | | (d) | | — |
| |
Balance on September 30, 2016 | | $ | 2,784 |
| | $ | 22,536 |
| | $ | — |
| | | $ | 1,246 |
| | $ | (6,540 | ) | | |
Balance on June 30, 2017 | | | $ | 2,464 |
| | $ | 1,163 |
| | | $ | 20,587 |
| | $ | (5,700 | ) | |
Net unrealized gains/(losses) included in net income | | $ | 244 |
| | (a) | | $ | 1,604 |
| | (a) | | $ | — |
| | | $ | — |
| | $ | (4 | ) | | (e) | | $ | 229 |
| | (a) | | $ | (53 | ) | | (c) | | $ | 410 |
| | (a) | | $ | (49 | ) | | (e) |
Certain previously reported amounts have been reclassified to agree with current presentation.
| |
(a) | Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income. |
| |
(b) | Transfers into interest-only strips - AFS level 3 measured on a recurring basis reflect movements from loans held-for-sale (Level 2 nonrecurring). |
| |
(c) | Primarily included in fixed income on the Consolidated Condensed Statements of Income. |
| |
(d) | Transfers out of loans held-for-sale level 3 measured on a recurring basis generally reflect movements into OREO (level 3 nonrecurring). |
| |
(e) | Included in Other expense. |
Note 16 – Fair Value of Assets & Liabilities (Continued)
Changes in Recurring Level 3 Fair Value Measurements
The changes in Level 3 assets and liabilities measured at fair value for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, on a recurring basis are summarized as follows:
| | | | Nine Months Ended September 30, 2017 | | | | Six Months Ended June 30, 2018 | | |
(Dollars in thousands) | | Trading securities | | | | Interest-only strips- AFS | | Loans held- for-sale | | | | Net derivative liabilities | | | | Trading securities | | | Interest- only strips- AFS | | | Loans held- for-sale | | Net derivative liabilities | |
Balance on January 1, 2017 | | $ | 2,573 |
| | $ | — |
| | $ | 21,924 |
| | $ | (6,245 | ) | | |
Balance on January 1, 2018 | | | $ | 2,151 |
| | $ | 1,270 |
| | $ | 18,926 |
| | $ | (5,645 | ) | |
Total net gains/(losses) included in: | | | |
| | | | | | | | | | | | | | |
Net income | | 380 |
| | 107 |
| | 1,722 |
| | (179 | ) | | | 140 |
| | 1,296 |
| | 709 |
| | (4,375 | ) | |
Purchases | | — |
| | 1,413 |
| | 118 |
| | — |
| | | — |
| | — |
| | 62 |
| | — |
| |
Sales | | — |
| | (3,291 | ) | | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| |
Settlements | | (648 | ) | | — |
| | (3,340 | ) | | 894 |
| | | (567 | ) | | (9,193 | ) | | (2,923 | ) | | 595 |
| |
Net transfers into/(out of) Level 3 | | — |
| | 4,894 |
| | (b) | (343 | ) | | (d) | | — |
| | | — |
| | 12,414 |
| | (b) | | (56 | ) | | (d) | | — |
| |
Balance on September 30, 2017 | | $ | 2,305 |
| | $ | 3,123 |
| | $ | 20,081 |
| | $ | (5,530 | ) | | |
Balance on June 30, 2018 | | | $ | 1,724 |
| | $ | 5,787 |
| | $ | 16,718 |
| | $ | (9,425 | ) | |
Net unrealized gains/(losses) included in net income | | $ | 264 |
| | (a) | | $ | (122 | ) | | (c) | $ | 1,722 |
| | (a) | | $ | (179 | ) | | (e) | | $ | 63 |
| | (a) | | $ | (109 | ) | | (c) | | $ | 709 |
| | (a) | | $ | (4,375 | ) | | (e) |
| | | | Nine Months Ended September 30, 2016 | | | | Six Months Ended June 30, 2017 | | |
(Dollars in thousands) | | Trading securities | | | | Loans held-for-sale | | | | Securities available- for-sale | | Mortgage servicing rights, net | | Net derivative liabilities | | | | Trading securities | | | | Interest-only-strips- AFS | | | | Loans held- for-sale | | Net derivative liabilities | | |
Balance on January 1, 2016 | | $ | 4,377 |
| | $ | 27,418 |
| | $ | 1,500 |
| | $ | 1,841 |
| | $ | (4,810 | ) | | |
Balance on January 1, 2017 | | | $ | 2,573 |
| | | | $ | — |
| | | | $ | 21,924 |
| | $ | (6,245 | ) | |
Total net gains/(losses) included in: | | | | | | | | | | | | | | | | | | | | |
Net income | | 506 |
| | 2,375 |
| | — |
| | 31 |
| | (2,627 | ) | | | 288 |
| | | | 267 |
| | | | 1,332 |
| | (50 | ) | |
Purchases | | — |
| | 673 |
| | — |
| | — |
| | — |
| | | — |
| | 1,413 |
| | 75 |
| | — |
| |
Sales | | — |
| |
| — |
| |
| — |
| | (205 | ) | | — |
| | |
Settlements | | (2,099 | ) | | (4,643 | ) | | (1,500 | ) | | (421 | ) | | 897 |
| | | (397 | ) | | (3,291 | ) | | (2,401 | ) | | 595 |
| |
Net transfers into/(out of) Level 3 | | — |
| | (3,287 | ) | | (d) | | — |
| | — |
| | — |
| | | — |
| | | | 2,774 |
| | (b) | | (343 | ) | | (d) | | — |
| |
Balance on September 30, 2016 | | $ | 2,784 |
| | $ | 22,536 |
| | $ | — |
| | $ | 1,246 |
| | $ | (6,540 | ) | | |
Balance on June 30, 2017 | | | $ | 2,464 |
| | | | $ | 1,163 |
| | $ | 20,587 |
| | $ | (5,700 | ) | |
Net unrealized gains/(losses) included in net income | | $ | 324 |
| | (a) | | $ | 2,375 |
| | (a) | | $ | — |
| | $ | — |
| | $ | (2,627 | ) | | (e) | | $ | 202 |
| | (a) | | $ | (53 | ) | | (c) | | $ | 1,332 |
| | (a) | | $ | (50 | ) | | (e) |
Certain previously reported amounts have been reclassified to agree with current presentation.
| |
(a) | Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income. |
| |
(b) | Transfers into interest-only strips - AFS level 3 measured on a recurring basis reflect movements from loans held-for-sale (Level 2 nonrecurring). |
| |
(c) | Primarily included in fixed income on the Consolidated Condensed Statements of Income. |
| |
(d) | Transfers out of loans held-for-sale level 3 measured on a recurring basis generally reflect movements into OREO (level 3 nonrecurring). |
| |
(e) | Included in Other expense. |
Note 16 – Fair Value of Assets & Liabilities (Continued)
Nonrecurring Fair Value Measurements
From time to time, FHN may be required to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market (“LOCOM”) accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis which were still held on the balance sheet at SeptemberJune 30, 2017,2018, and December 31, 2016,2017, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the related carrying value.
Note 16 – Fair Value of Assets & Liabilities (Continued)
| | | | Carrying value at September 30, 2017 | | Carrying value at June 30, 2018 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Loans held-for-sale—SBAs and USDA | | $ | — |
| | $ | 244,089 |
| | $ | 1,484 |
| | $ | 245,573 |
| | $ | — |
| | $ | 578,498 |
| | $ | 1,025 |
| | $ | 579,523 |
|
Loans held-for-sale—first mortgages | | — |
| | — |
| | 611 |
| | 611 |
| | — |
| | — |
| | 607 |
| | 607 |
|
Loans, net of unearned income (a) | | — |
| | — |
| | 23,210 |
| | 23,210 |
| | — |
| | — |
| | 29,061 |
| | 29,061 |
|
OREO (b) | | — |
| | — |
| | 7,877 |
| | 7,877 |
| | — |
| | — |
| | 26,457 |
| | 26,457 |
|
Other assets (c) | | — |
| | — |
| | 27,394 |
| | 27,394 |
| | — |
| | — |
| | 24,699 |
| | 24,699 |
|
| | | | Carrying value at December 31, 2016 | | Carrying value at December 31, 2017 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Loans held-for-sale—SBAs | | $ | — |
| | $ | 4,286 |
| | $ | — |
| | $ | 4,286 |
| |
Loans held-for-sale—SBAs and USDA | | | $ | — |
| | $ | 465,504 |
| | $ | 1,473 |
| | $ | 466,977 |
|
Loans held-for-sale—first mortgages | | — |
| | — |
| | 638 |
| | 638 |
| | — |
| | — |
| | 618 |
| | 618 |
|
Loans, net of unearned income (a) | | — |
| | — |
| | 31,070 |
| | 31,070 |
| | — |
| | — |
| | 26,666 |
| | 26,666 |
|
OREO (b) | | — |
| | — |
| | 11,235 |
| | 11,235 |
| | — |
| | — |
| | 39,566 |
| | 39,566 |
|
Other assets (c) | | — |
| | — |
| | 29,609 |
| | 29,609 |
| | — |
| | — |
| | 26,521 |
| | 26,521 |
|
| |
(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 OREO. Balance excludes OREO related to government insured mortgages. |
| |
(c) | Represents tax credit investments accounted for under the equity method. |
For assets measured on a nonrecurring basis which were still held on the consolidated balance sheet at period end, the following table provides information about the fair value adjustments recorded during the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
| | | | Net gains/(losses) Three Months Ended September 30 | | Net gains/(losses) Nine months ended September 30 | | Net gains/(losses) Three Months Ended June 30 | | Net gains/(losses) Six Months Ended June 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Loans held-for-sale—SBAs and USDA | | $ | (86 | ) | | $ | — |
| | $ | (1,259 | ) | | $ | — |
| | $ | (1,425 | ) | | $ | (1,140 | ) | | $ | (1,987 | ) | | $ | (1,173 | ) |
Loans held-for-sale—first mortgages | | 6 |
| | 10 |
| | 22 |
| | 17 |
| | (1 | ) | | 13 |
| | 4 |
| | 16 |
|
Loans, net of unearned income (a) | | (2,388 | ) | | 461 |
| | (1,456 | ) | | (3,249 | ) | | 665 |
| | (452 | ) | | 1,167 |
| | 32 |
|
OREO (b) | | (41 | ) | | (711 | ) | | (662 | ) | | (1,561 | ) | | (262 | ) | | (176 | ) | | (1,422 | ) | | (621 | ) |
Other assets (c) | | (762 | ) | | (788 | ) | | (2,646 | ) | | (2,325 | ) | | (1,079 | ) | | (942 | ) | | (2,216 | ) | | (1,884 | ) |
| | $ | (3,271 | ) | | $ | (1,028 | ) | | $ | (6,001 | ) | | $ | (7,118 | ) | | $ | (2,102 | ) | | $ | (2,697 | ) | | $ | (4,454 | ) | | $ | (3,630 | ) |
| |
(a) | Write-downs on these loans are recognized as part of provision for loan losses. |
| |
(b) | Represents losses of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages. |
| |
(c) | Represents tax credit investments accounted for under the equity method. |
Note 16 – Fair Valueimpairments of Assets & Liabilities (Continued)
long-lived assets in its corporate segment related to optimization efforts for its facilities. In thirdfourth quarter 2017, FHN’s Corporate segmentFHN recognized $2.0$3.0 million and $.8 million of impairments on long-lived technology assets associated with an expansion of processing capacity that will be required upon completion of the merger with CBF. The fair values of the assets impaired were determined using a discounted cash flow approach which reflected short estimated remaining livesin its Corporate and considered estimated salvage values. The measurement methodologies are considered Level 3 valuations. In first quarter 2016, FHN’s Regional Banking segment recognized $3.7 million of impairments on long-lived assetssegments, respectively, associated with efforts to more efficiently utilize its bank branch locations.locations, including integration with branches acquired from CBF. 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 sales contract or 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.
In third quarter 2017, FHN’s Corporate segment recognized $2.0 million of impairments on long-lived technology assets associated with the transition to expanded processing capacity that will be required upon completion of the merger with CBF.
Note 16 – Fair Value of Assets & Liabilities (Continued)
The fair values of the assets impaired were determined using a discounted cash flow approach which reflected short estimated remaining lives and considered estimated salvage values. The measurement methodologies are considered Level 3 valuations.
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 SeptemberJune 30, 20172018 and December 31, 2016:2017:
| | (Dollars in thousands) | Level 3 Class | | Fair Value at September 30, 2017 | | Valuation Techniques | | Unobservable Input | | Values Utilized | | Fair Value at June 30, 2018 | | Valuation Techniques | | Unobservable Input | | Values Utilized |
Available-for-sale- securities SBA-interest only strips | | $ | 3,123 |
| | Discounted cash flow | | Constant prepayment rate | | 9% - 10% | | $ | 5,787 |
| | Discounted cash flow | | Constant prepayment rate | | 11% |
| | | | | | Bond equivalent yield | | 14%- 19% | | | | | | Bond equivalent yield | | 12%- 14% |
Loans held-for-sale - residential real estate | | 20,692 |
| | Discounted cash flow | | Prepayment speeds - First mortgage | | 2% - 12% | | 17,325 |
| | Discounted cash flow | | Prepayment speeds - First mortgage | | 2% - 11% |
| | | | Prepayment speeds - HELOC | | 3% - 12% | | | | Prepayment speeds - HELOC | | 5% - 12% |
| | | | Foreclosure losses | | 50% - 70% | | | | Foreclosure losses | | 50% - 70% |
| | | | Loss severity trends - First mortgage | | 5% - 50% of UPB | | | | Loss severity trends - First mortgage | | 5% - 25% of UPB |
| | | | | | Loss severity trends - HELOC | | 15% - 100% of UPB | | | | | | Loss severity trends - HELOC | | 50% - 100% of UPB |
Loans held-for-sale- unguaranteed interest in SBA loans | | 1,484 |
| | Discounted cash flow | | Constant prepayment rate | | 8% - 12% | | 1,025 |
| | Discounted cash flow | | Constant prepayment rate | | 8% - 12% |
| | | | Bond equivalent yield | | 9% - 10% | | | | Bond equivalent yield | | 13% - 14% |
Derivative liabilities, other | | 5,530 |
| | Discounted cash flow | | Visa covered litigation resolution amount | | $4.4 billion - $5.2 billion | | 9,425 |
| | Discounted cash flow | | Visa covered litigation resolution amount | | $5.0 billion - $5.6 billion |
| | | | Probability of resolution scenarios | | 10% - 30% | | | | Probability of resolution scenarios | | 20% - 30% |
| | | | | | Time until resolution | | 18 - 48 months | | | | | | Time until resolution | | 24- 48 months |
Loans, net of unearned income (a) | | 23,210 |
| | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 10% of appraisal | | 29,061 |
| | 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 | | | | Other collateral valuations | | Borrowing base certificates adjustment | | 20% - 50% of gross value |
| | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value | | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value |
OREO (b) | | 7,877 |
| | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | 26,457 |
| | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal |
Other assets (c) | | 27,394 |
| | Discounted cash flow | | Adjustments to current sales yields for specific properties | | 0% - 15% adjustment to yield | | 24,699 |
| | 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 | | | | 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. |
Note 16 – Fair Value of Assets & Liabilities (Continued)
| |
(b) | Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages. |
| |
(c) | Represents tax credit investments accounted for under the equity method. |
Note 16 – Fair Value of Assets & Liabilities (Continued)
| | (Dollars in thousands) | | | | | | | | | | | | | | | | |
Level 3 Class | | Fair Value at December 31, 2016 | | Valuation Techniques | | Unobservable Input | | Values Utilized | | Fair Value at December 31, 2017 | | Valuation Techniques | | Unobservable Input | | Values Utilized |
Available-for-sale- securities SBA-interest only strips | | | $ | 1,270 |
| | Discounted cash flow | | Constant prepayment rate | | 10% - 11% |
| | | | | | | Bond equivalent yield | | 17% |
Loans held-for-sale - residential real estate | | $ | 22,562 |
| | Discounted cash flow | | Prepayment speeds - First mortgage | | 2% - 13% | | 19,544 |
| | Discounted cash flow | | Prepayment speeds - First mortgage | | 2% - 12% |
| | | | Prepayment speeds - HELOC | | 3% - 15% | | | | Prepayment speeds - HELOC | | 5% - 12% |
| | | | Foreclosure Losses | | 50% - 70% | | | | Foreclosure losses | | 50% - 70% |
| | | | Loss severity trends - First mortgage | | 5% - 50% of UPB | |
| |
| | Loss severity trends - First mortgage | | 5% - 30% of UPB |
| | | | | | | Loss severity trends - HELOC | | 15% - 100% of UPB |
Loans held-for-sale- unguaranteed interest in SBA loans | | | 1,473 |
| | Discounted cash flow | | Constant prepayment rate | | 8% - 12% |
| | | | | | Loss severity trends - HELOC | | 15% - 100% of UPB | |
|
| |
| | Bond equivalent yield | | 9% - 10% |
Derivative liabilities, other | | 6,245 |
| | Discounted cash flow | | Visa covered litigation resolution amount | | $4.4 billion - $5.2 billion | | 5,645 |
| | Discounted cash flow | | Visa covered litigation resolution amount | | $4.4 billion - $5.2 billion |
| | | | Probability of resolution scenarios | | 10% - 30% | | | | Probability of resolution scenarios | | 10% - 30% |
| | | | | | Time until resolution | | 24 - 54 months | | | | | | Time until resolution | | 18 - 48 months |
Loans, net of unearned income (a) | | 31,070 |
| | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 10% of appraisal | | 26,666 |
| | 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 | | | | Other collateral valuations | | Borrowing base certificates adjustment | | 20% - 50% of gross value |
| | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value | | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value |
OREO (b) | | 11,235 |
| | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | 39,566 |
| | 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 | | 26,521 |
| | 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 | | | | 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 OREO. Balance excludes OREO 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 the loans underlying related SBA-interest only strips are delinquent, in default or prepaying, and adjusts the fair value down 20 - 100% depending on the length of time in default.
Loans held-for-sale. Foreclosure losses and prepayment rates are significant unobservable inputs used in the fair value measurement of FHN’s residential real estate loans held-for-sale. Loss severity trends are also assessed to evaluate the reasonableness of fair value estimates resulting from discounted cash flows methodologies as well as to estimate fair value for newly repurchased loans and loans that are near foreclosure. Significant increases (decreases) in any of these inputs in isolation would result in significantly lower (higher) fair value measurements. All observable and unobservable inputs are re-assessed quarterly. Fair value measurements are reviewed at least quarterly by FHN’s Corporate Accounting Department.
Note 16 – Fair Value of Assets & Liabilities (Continued)
Increases (decreases) in estimated prepayment rates and bond equivalent yields negatively (positively) affect the value of unguaranteed interests in SBA loans. Unguaranteed interest in SBA loans held-for-sale are carried at less than the outstanding balance due to credit risk estimates. Credit risk adjustments may be reduced if prepayment is likely or as consistent payment
Note 16 – Fair Value of Assets & Liabilities (Continued)
history is realized. Management also considers other factors such as delinquency or default and adjusts the fair value accordingly.
Derivative liabilities. In conjunction with the sales of portions of its Visa Class B shares, FHN and the 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 Other Real Estate Owned. Collateral-dependent loans and OREO are primarily valued using appraisals based on sales of comparable properties in the same or similar markets. Multiple appraisal firms are utilized to ensure that estimated values are consistent between firms. This process occurs within FHN’s Credit Risk Management (commercial) and Default Servicing functions (primarily consumer). The Credit Risk Management Committee reviews dispositions and additions of OREO annually. Back testing is performed during the year through comparison to ultimate disposition values. Other collateral (receivables, inventory, equipment, etc.) is valued through borrowing base certificates, financial statements and/or auction valuations. These valuations are discounted based on the quality of reporting, knowledge of the marketability/collectability of the collateral and historical disposition rates.
Other assets – tax credit investments. The estimated fair value of tax credit investments accounted for under the equity method is generally determined in relation to the yield (i.e., future tax credits to be received) an acquirer of these investments would expect in relation to the yields experienced on current new issue and/or secondary market transactions. Thus, as tax credits are recognized, the future yield to a market participant is reduced, resulting in consistent impairment of the individual investments. Individual investments are reviewed for impairment quarterly, which may include the consideration of additional marketability discounts related to specific investments which typically includes consideration of the underlying property’s appraised value. Unusual valuation adjustments and the associated triggering events are discussed with senior and executive management when appropriate. A portfolio review is conducted annually, with the assistance of a third party, to assess the reasonableness of current valuations.
Fair Value Option
FHN has elected the fair value option on a prospective basis for almost all types of mortgage loans originated for sale purposes under the Financial Instruments Topic (“ASC 825”). except for mortgage origination operations which utilize the platform acquired from CBF. FHN determined that the election reduces certain timing differences and better matches changes in the value of such loans with changes in the value of derivatives and forward delivery commitments used as economic hedges for these assets at the time of election.
Repurchased loans are recognized within loans held-for-sale at fair value at the time of repurchase, which includes consideration of the credit status of the loans and the estimated liquidation value. FHN has elected to continue recognition of these loans at fair value in periods subsequent to reacquisition. Due to the credit-distressed nature of the vast majority of repurchased loans and the related loss severities experienced upon repurchase, FHN believes that the fair value election provides a more timely recognition of changes in value for these loans that occur subsequent to repurchase. Absent the fair value election, these loans would be subject to valuation at the LOCOM value, which would prevent subsequent values from exceeding the initial fair value, determined at the time of repurchase, but would require recognition of subsequent declines in value. Thus, the fair value election provides for a more timely recognition of any potential future recoveries in asset values while not affecting the requirement to recognize subsequent declines in value.
Note 16 – Fair Value of Assets & Liabilities (Continued)
The following tables reflect the differences between the fair value carrying amount of residential real estate loans held-for-sale measured at fair value in accordance with management’s election and the aggregate unpaid principal amount FHN is contractually entitled to receive at maturity.
| | | | September 30, 2017 | | June 30, 2018 |
(Dollars in thousands) | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal |
Residential real estate loans held-for-sale reported at fair value: | | | | | | | | | | | | |
Total loans | | $ | 21,808 |
| | $ | 30,686 |
| | $ | (8,878 | ) | | $ | 18,940 |
| | $ | 26,644 |
| | $ | (7,704 | ) |
Nonaccrual loans | | 6,428 |
| | 11,551 |
| | (5,123 | ) | | 4,674 |
| | 8,830 |
| | (4,156 | ) |
Loans 90 days or more past due and still accruing | | 44 |
| | 175 |
| | (131 | ) | | 34 |
| | 51 |
| | (17 | ) |
| | December 31, 2016 | | December 31, 2017 |
(Dollars in thousands) | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal | | 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 | ) | | $ | 20,881 |
| | $ | 29,755 |
| | $ | (8,874 | ) |
Nonaccrual loans | | 6,775 |
| | 12,910 |
| | (6,135 | ) | | 5,783 |
| | 10,881 |
| | (5,098 | ) |
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 September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Changes in fair value included in net income: | | | | | | | | | | | | | | |
Mortgage banking noninterest income | | | | | | | | | | | | | | |
Loans held-for-sale | $ | 390 |
| | $ | 1,604 |
| | $ | 1,722 |
| | $ | 2,375 |
| $ | 540 |
| | $ | 410 |
| | $ | 709 |
| | $ | 1,332 |
|
For the three months ended SeptemberJune 30, 2018, residential real estate loans held-for-sale included an insignificant amount of gains in pretax earnings that are attributable to change in instruments-specific credit risk. For the three months ended June 30, 2017, and 2016, the amountsamount for residential real estate loans held-for-sale includeincluded gains of $.1$.2 million, and $.5 million, respectively, in pretax earnings that are attributable to changes in instruments-specific credit risk. For the ninesix months ended SeptemberJune 30, 2017,2018, and 2016,2017, the amounts for residentialthe real estate loans held-for-sale included gains of $.5$.3 million and $.7 million, respectively, in pretax earnings that are attributable to changes in instrument-specificinstruments-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.
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
Note 16 – Fair Value of Assets & Liabilities (Continued)
assumptions and methodologies used to estimate the fair value of financial instruments recorded at fair value in the Consolidated Condensed Statements of Condition and for estimating the fair value of financial instruments for which fair value is disclosed under ASC 825-10-50.disclosed.
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.320-10-25. Valuations of available-for-sale securities are performed using observable inputs obtained from market transactions in similar securities. Typical inputs include LIBOR and U.S. treasury curves, consensus prepayment estimates, and credit spreads. When available, broker quotes are used to support these valuations.
Investments in the stock of the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical cost in the Consolidated Condensed Statements of Condition which is considered to approximate fair value. Short-term investments in mutual funds are measured at the funds’ reported closing net asset values. Investments in equity securities are valued using quoted market prices when available. Cost method investments are valued at historical cost less any recorded impairment due to the illiquid nature of these investments.
Interest only strips are valued at elected fair value based on an income approach using an internal valuation model. The internal valuation model includes assumptions regarding projections of future cash flows, prepayment rates, default rates and interest only strip terms. These securities bear the risk of loan prepayment or default that may result in the Company not recovering all or a portion of its recorded investment. When appropriate, valuations are adjusted for various factors including default or prepayment status of the underlying SBA loans. Because of the inherent uncertainty of valuation, those estimated values may be higher or lower than the values that would have been used had a ready market for the securities existed, and may change in the near term.
Securities held-to-maturity. Securities held-to-maturity reflects debt securities for which management has the positive intent and ability to hold to maturity. To the extent possible, valuations of held-to-maturity securities are performed using observable inputs obtained from market transactions in similar securities. Typical inputs include LIBOR and U.S. treasury curves and credit spreads. Debt securities with limited trading activity are valued using a discounted cash flow model that incorporates a combination of observable and unobservable inputs. Primary observable inputs include contractual cash flows, the treasury curve and credit spreads from similar instruments. Significant unobservable inputs include estimated credit spreads for individual issuers and instruments as well as prepayment speeds, as applicable.
Loans held-for-sale. Residential real estate loans held-for-sale are valued using current transaction prices and/or values on similar assets when available, including committed bids for specific loans or loan portfolios. Uncommitted bids may be adjusted based on other available market information. For all other loans FHN determines the fair value of residential real estate loans held-for-sale using a discounted cash flow model which incorporates both observable and unobservable inputs. Inputs include current mortgage rates for similar products, estimated prepayment rates, foreclosure losses, and various loan performance measures (delinquency, LTV, credit score). Adjustments for delinquency and other differences in loan characteristics are typically reflected in the model’s discount rates. Loss severity trends and the value of underlying collateral are also considered in assessing the appropriate fair value for severely delinquent loans and loans in foreclosure. The valuation of HELOCs also incorporates estimated cancellation rates for loans expected to become delinquent.
Non-mortgage consumer loans held-for-sale are valued using current market pricing for similar assets with adjustments for differences in credit standing (delinquency, historical default rates for similar loans), yield, collateral values and prepayment rates. If pricing for similar assets is not available, a discounted cash flow methodology is utilized, which incorporates all of these factors into an estimate of investor required yield for the discount rate.
The Company utilizes quoted market prices of similar instruments or broker and dealer quotations to value the SBA and USDA guaranteed loans. The Company values SBA-unguaranteed interests in loans held-for-sale based on individual loan
Note 16 – Fair Value of Assets & Liabilities (Continued)
characteristics, such as industry type and pay history which generally follows an income approach. Furthermore, these valuations are adjusted for changes in prepayment estimates and are reduced due to restrictions on trading. The fair value of other non-residential real estate loans held-for-sale is approximated by their carrying values based on current transaction values.
Loans, net of unearned income.Collateral-Dependent loans. Loans, net of unearned income are recognized at the amount of funds advanced, less charge-offs and an estimation of credit risk represented by the allowance for loan losses. The fair value estimates for disclosure purposes differentiate loans based on their financial characteristics, such as product classification, vintage, loan category, pricing features, and remaining maturity.
The fair value of floating rate loans is estimated through comparison to recent market activity in loans of similar product types, with adjustments made for differences in loan characteristics. In situations where market pricing inputs are not available, fair value is considered to approximate book value due to the monthly repricing for commercial and consumer loans, with the exception of floating rate 1-4 family residential mortgage loans which reprice annually and will lag movements in market rates. The fair value for floating rate 1-4 family mortgage loans is calculated by discounting future cash flows to their present value. Future cash flows are discounted to their present value by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same time period. Prepayment assumptions based on historical prepayment speeds and industry speeds for similar loans have been applied to the floating rate 1-4 family residential mortgage portfolio.
The fair value of fixed rate loans is estimated through comparison to recent market activity in loans of similar product types, with adjustments made for differences in loan characteristics. In situations where market pricing inputs are not available, fair value is estimated by discounting future cash flows to their present value. Future cash flows are discounted to their present value by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same time period. Prepayment assumptions based on historical prepayment speeds and industry speeds for similar loans have been applied to the fixed rate mortgage and installment loan portfolios.
For all loan portfolio classes, adjustments are made to reflect liquidity or illiquidity of the market. Such adjustments reflect discounts that FHN believes are consistent with what a market participant would consider in determining fair value given current market conditions.
Individually impaired loans are measured using either a discounted cash flow methodology or the estimated fair value of the underlying collateral less costs to sell, if the loan is considered collateral-dependent. In accordance with accounting standards, the discounted cash flow analysis utilizes the loan’s effective interest rate for discounting expected cash flow amounts. Thus, this analysis is not considered a fair value measurement in accordance with ASC 820. However, the results of this methodology are considered to approximate fair value for the 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.
Note 16 – Fair Value of Assets & Liabilities (Continued)
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.
OREO. OREO primarily consists of properties that have been acquired in satisfaction of debt. These properties are carried at the lower of the outstanding loan amount or estimated fair value less estimated costs to sell the real estate. Estimated fair value
Note 16 – Fair Value of Assets & Liabilities (Continued)
is determined using appraised values with subsequent adjustments for deterioration in values that are not reflected in the most recent appraisal.
Nonearning assets. For disclosure purposes, for periods prior to 2018, nonearning financial assets include cash and due from banks, accrued interest receivable, and fixed income receivables. Due to the short-term nature of cash and due from banks, accrued interest receivable, and fixed income receivables, the fair value is approximated by the book value.
Other assets. For disclosure purposes, other assets consist of tax credit investments, FRB and FHLB Stock, deferred compensation assets that are considered financial assets.mutual funds and equity investments (including other mutual funds) with readily determinable fair values. Tax credit investments accounted for under the equity method are written down to estimated fair value quarterly based on the estimated value of the associated tax credits which incorporates estimates of required yield for hypothetical investors. The fair value of all other tax credit investments is estimated using recent transaction information with adjustments for differences in individual investments. Deferred compensation assetsmutual funds are recognized at fair value, which is based on quoted prices in active markets.
Investments in the stock of the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical cost in the Consolidated Condensed Statements of Condition which is considered to approximate fair value. Investments in mutual funds are measured at the funds’ reported closing net asset values. Investments in equity securities are valued using quoted market prices when available.
Defined maturity deposits. The fair value of these deposits is estimated by discounting future cash flows to their present value. Future cash flows are discounted by using the current market rates of similar instruments applicable to the remaining maturity. For disclosure purposes, defined maturity deposits include all time deposits.
Undefined maturity deposits. InFor periods prior to 2018, in accordance with ASC 825, the fair value of these deposits is approximated by the book value. For the purpose of this disclosure, undefined maturity deposits include demand deposits, checking interest accounts, savings accounts, and money market accounts.
Short-term financial liabilities. The fair value of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings are approximated by the book value. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Term borrowings. The fair value of term borrowings is based on quoted market prices or dealer quotes for the identical liability when traded as an asset. When pricing information for the identical liability is not available, relevant prices for similar debt instruments are used with adjustments being made to the prices obtained for differences in characteristics of the debt instruments. If no relevant pricing information is available, the fair value is approximated by the present value of the contractual cash flows discounted by the investor’s yield which considers FHN’s and FTBNA’s debt ratings. Secured borrowings also consider the values of the associated assets and whether overcollateralization exists.
Other noninterest-bearing liabilities. For disclosure purposes, for periods prior to 2018, 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.
Note 16 – Fair Value of Assets & Liabilities (Continued)
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 SeptemberJune 30, 20172018 and December 31, 2016,2017, 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.
Note 16 – Fair Value of Assets & Liabilities (Continued)
The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Condensed Statements of Condition as of September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Book Value | | Fair Value |
(Dollars in thousands) | | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | |
Loans, net of unearned income and allowance for loan losses | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial, financial and industrial | | $ | 12,693,639 |
| | $ | — |
| | $ | — |
| | $ | 12,658,237 |
| | $ | 12,658,237 |
|
Commercial real estate | | 2,221,332 |
| | — |
| | — |
| | 2,208,208 |
| | 2,208,208 |
|
Consumer: | | | | | | | | | | |
Consumer real estate | | 4,328,778 |
| | — |
| | — |
| | 4,252,704 |
| | 4,252,704 |
|
Permanent mortgage | | 387,363 |
| | — |
| | — |
| | 392,407 |
| | 392,407 |
|
Credit card & other | | 340,112 |
| | — |
| | — |
| | 340,168 |
| | 340,168 |
|
Total loans, net of unearned income and allowance for loan losses | | 19,971,224 |
| | — |
| | — |
| | 19,851,724 |
| | 19,851,724 |
|
Short-term financial assets: | | | | | | | | | | |
Interest-bearing cash | | 604,326 |
| | 604,326 |
| | — |
| | — |
| | 604,326 |
|
Federal funds sold | | 76,316 |
| | — |
| | 76,316 |
| | — |
| | 76,316 |
|
Securities purchased under agreements to resell | | 663,637 |
| | — |
| | 663,637 |
| | — |
| | 663,637 |
|
Total short-term financial assets | | 1,344,279 |
| | 604,326 |
| | 739,953 |
| | — |
| | 1,344,279 |
|
Trading securities (a) | | 1,469,402 |
| | — |
| | 1,467,097 |
| | 2,305 |
| | 1,469,402 |
|
Loans held-for-sale (a) | | 339,780 |
| | — |
| | 246,441 |
| | 94,000 |
| | 340,441 |
|
Securities available-for-sale (a) (b) | | 3,963,138 |
| | 24,756 |
| | 3,773,600 |
| | 164,782 |
| | 3,963,138 |
|
Securities held-to-maturity | | 10,000 |
| | — |
| | — |
| | 9,985 |
| | 9,985 |
|
Derivative assets (a) | | 80,976 |
| | 10,003 |
| | 70,973 |
| | — |
| | 80,976 |
|
Other assets: | | | | | | | | | | |
Tax credit investments | | 120,701 |
| | — |
| | — |
| | 121,435 |
| | 121,435 |
|
Deferred compensation assets | | 34,951 |
| | 34,951 |
| | — |
| | — |
| | 34,951 |
|
Total other assets | | 155,652 |
| | 34,951 |
| | — |
| | 121,435 |
| | 156,386 |
|
Nonearning assets: | | | | | | | | | | |
Cash & due from banks | | 347,802 |
| | 347,802 |
| | — |
| | — |
| | 347,802 |
|
Fixed income receivables | | 68,750 |
| | — |
| | 68,750 |
| | — |
| | 68,750 |
|
Accrued interest receivable | | 70,058 |
| | — |
| | 70,058 |
| | — |
| | 70,058 |
|
Total nonearning assets | | 486,610 |
| | 347,802 |
| | 138,808 |
| | — |
| | 486,610 |
|
Total assets | | $ | 27,821,061 |
| | $ | 1,021,838 |
| | $ | 6,436,872 |
| | $ | 20,244,231 |
| | $ | 27,702,941 |
|
Liabilities: | | | | | | | | | | |
Deposits: | | | | | | | | | | |
Defined maturity | | $ | 1,112,098 |
| | $ | — |
| | $ | 1,108,919 |
| | $ | — |
| | $ | 1,108,919 |
|
Undefined maturity | | 20,987,156 |
| | — |
| | 20,987,156 |
| | — |
| | 20,987,156 |
|
Total deposits | | 22,099,254 |
| | — |
| | 22,096,075 |
| | — |
| | 22,096,075 |
|
Trading liabilities (a) | | 579,028 |
| | — |
| | 579,028 |
| | — |
| | 579,028 |
|
Short-term financial liabilities: | | | | | | | | | | |
Federal funds purchased | | 292,650 |
| | — |
| | 292,650 |
| | — |
| | 292,650 |
|
Securities sold under agreements to repurchase | | 516,867 |
| | — |
| | 516,867 |
| | — |
| | 516,867 |
|
Other short-term borrowings | | 1,637,419 |
| | — |
| | 1,637,419 |
| | — |
| | 1,637,419 |
|
Total short-term financial liabilities | | 2,446,936 |
| | — |
| | 2,446,936 |
| | — |
| | 2,446,936 |
|
Term borrowings: | | | | | | | | | | |
Real estate investment trust-preferred | | 46,083 |
| | — |
| | — |
| | 49,350 |
| | 49,350 |
|
Term borrowings—new market tax credit investment | | 18,000 |
| | — |
| | — |
| | 17,959 |
| | 17,959 |
|
Secured borrowings | | 42,585 |
| | — |
| | — |
| | 42,184 |
| | 42,184 |
|
Other long term borrowings | | 952,839 |
| | — |
| | 968,297 |
| | — |
| | 968,297 |
|
Total term borrowings | | 1,059,507 |
| | — |
| | 968,297 |
| | 109,493 |
| | 1,077,790 |
|
Derivative liabilities (a) | | 83,146 |
| | 7,627 |
| | 69,989 |
| | 5,530 |
| | 83,146 |
|
Other noninterest-bearing liabilities: | | | | | | | | | | |
Fixed income payables | | 44,304 |
| | — |
| | 44,304 |
| | — |
| | 44,304 |
|
Accrued interest payable | | 19,205 |
| | — |
| | 19,205 |
| | — |
| | 19,205 |
|
Total other noninterest-bearing liabilities | | 63,509 |
| | — |
| | 63,509 |
| | — |
| | 63,509 |
|
Total liabilities | | $ | 26,331,380 |
| | $ | 7,627 |
| | $ | 26,223,834 |
| | $ | 115,023 |
| | $ | 26,346,484 |
|
| |
(a) | Classes are detailed in the recurring and nonrecurring measurement tables. |
| |
(b) | Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $68.6 million. |
Note 16 – Fair Value of Assets & Liabilities (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, 2018: |
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2018 |
| | Book Value | | Fair Value |
(Dollars in thousands) | | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | |
Loans, net of unearned income and allowance for loan losses | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial, financial and industrial | | $ | 16,341,911 |
| | $ | — |
| | $ | — |
| | $ | 16,289,383 |
| | $ | 16,289,383 |
|
Commercial real estate | | 4,102,524 |
| | — |
| | — |
| | 4,106,951 |
| | 4,106,951 |
|
Consumer: | | | | | | | | | | |
Consumer real estate | | 6,190,842 |
| | — |
| | — |
| | 6,139,842 |
| | 6,139,842 |
|
Permanent mortgage | | 340,838 |
| | — |
| | — |
| | 347,349 |
| | 347,349 |
|
Credit card & other | | 540,163 |
| | — |
| | — |
| | 539,609 |
| | 539,609 |
|
Total loans, net of unearned income and allowance for loan losses | | 27,516,278 |
| | — |
| | — |
| | 27,423,134 |
| | 27,423,134 |
|
Short-term financial assets: | | | | | | | | | | |
Interest-bearing cash | | 750,634 |
| | 750,634 |
| | — |
| | — |
| | 750,634 |
|
Federal funds sold | | 91,303 |
| | — |
| | 91,303 |
| | — |
| | 91,303 |
|
Securities purchased under agreements to resell | | 782,765 |
| | — |
| | 782,765 |
| | — |
| | 782,765 |
|
Total short-term financial assets | | 1,624,702 |
| | 750,634 |
| | 874,068 |
| | — |
| | 1,624,702 |
|
Trading securities (a) | | 1,649,470 |
| | — |
| | 1,647,746 |
| | 1,724 |
| | 1,649,470 |
|
Loans held-for-sale | | | | | | | | | | |
Mortgage loans (elected fair value) (a) | | 18,940 |
| | — |
| | 2,222 |
| | 16,718 |
| | 18,940 |
|
USDA & SBA loans- LOCOM | | 579,523 |
| | — |
| | 581,051 |
| | 1,038 |
| | 582,089 |
|
Other consumer loans- LOCOM | | 30,175 |
| | — |
| | 6,959 |
| | 23,216 |
| | 30,175 |
|
Mortgage loans- LOCOM | | 64,021 |
| | — |
| | — |
| | 64,021 |
| | 64,021 |
|
Total loans held-for-sale | | 692,659 |
| | — |
| | 590,232 |
| | 104,993 |
| | 695,225 |
|
Securities available-for-sale (a) | | 4,724,411 |
| | — |
| | 4,718,624 |
| | 5,787 |
| | 4,724,411 |
|
Securities held-to-maturity | | 10,000 |
| | — |
| | — |
| | 9,786 |
| | 9,786 |
|
Derivative assets (a) | | 122,056 |
| | 19,127 |
| | 102,929 |
| | — |
| | 122,056 |
|
Other assets: | | | | | | | | | | |
Tax credit investments | | 119,186 |
| | — |
| | — |
| | 114,392 |
| | 114,392 |
|
Deferred compensation mutual funds | | 40,068 |
| | 40,068 |
| | — |
| | — |
| | 40,068 |
|
Equity, mutual funds, and other (b) | | 245,617 |
| | 27,135 |
| | — |
| | 218,482 |
| | 245,617 |
|
Total other assets | | 404,871 |
| | 67,203 |
| | — |
| | 332,874 |
| | 400,077 |
|
Total assets | | $ | 36,744,447 |
| | $ | 836,964 |
| | $ | 7,933,599 |
| | $ | 27,878,298 |
| | $ | 36,648,861 |
|
Liabilities: | | | | | | | | | | |
Defined maturity deposits | | $ | 3,543,987 |
| | $ | — |
| | $ | 3,518,069 |
| | $ | — |
| | $ | 3,518,069 |
|
Trading liabilities (a) | | 743,721 |
| | — |
| | 743,721 |
| | — |
| | 743,721 |
|
Short-term financial liabilities: | | | | | | | | | | |
Federal funds purchased | | 351,655 |
| | — |
| | 351,655 |
| | — |
| | 351,655 |
|
Securities sold under agreements to repurchase | | 713,152 |
| | — |
| | 713,152 |
| | — |
| | 713,152 |
|
Other short-term borrowings | | 1,836,852 |
| | — |
| | 1,836,852 |
| | — |
| | 1,836,852 |
|
Total short-term financial liabilities | | 2,901,659 |
| | — |
| | 2,901,659 |
| | — |
| | 2,901,659 |
|
Term borrowings: | | | | | | | | | | |
Real estate investment trust-preferred | | 46,134 |
| | — |
| | — |
| | 47,940 |
| | 47,940 |
|
Term borrowings—new market tax credit investment | | 18,000 |
| | — |
| | — |
| | 17,898 |
| | 17,898 |
|
Secured borrowings | | 34,046 |
| | — |
| | — |
| | 33,866 |
| | 33,866 |
|
Junior subordinated debentures | | 187,950 |
| | — |
| | — |
| | 187,950 |
| | 187,950 |
|
Other long term borrowings | | 941,151 |
| | — |
| | 953,035 |
| | — |
| | 953,035 |
|
Total term borrowings | | 1,227,281 |
| | — |
| | 953,035 |
| | 287,654 |
| | 1,240,689 |
|
Derivative liabilities (a) | | 135,349 |
| | 18,738 |
| | 107,186 |
| | 9,425 |
| | 135,349 |
|
Total liabilities | | $ | 8,551,997 |
| | $ | 18,738 |
| | $ | 8,223,670 |
| | $ | 297,079 |
| | $ | 8,539,487 |
|
| |
(a) | Classes are detailed in the recurring and nonrecurring measurement tables. |
| |
(b) | Level 1 primarily consists of mutual funds with readily determinable fair values. Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $130.6 million. |
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, 2016:2017:
| | | | December 31, 2016 | | December 31, 2017 |
| | Book Value | | Fair Value | | Book Value | | Fair Value |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | | | | | | |
Loans, net of unearned income and allowance for loan losses | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
Commercial, financial and industrial | | $ | 12,058,689 |
| | $ | — |
| | $ | — |
| | $ | 11,918,374 |
| | $ | 11,918,374 |
| | $ | 15,959,062 |
| | $ | — |
| | $ | — |
| | $ | 15,990,991 |
| | $ | 15,990,991 |
|
Commercial real estate | | 2,101,671 |
| | — |
| | — |
| | 2,078,306 |
| | 2,078,306 |
| | 4,186,268 |
| | — |
| | — |
| | 4,215,367 |
| | 4,215,367 |
|
Consumer: | | | | | | | | | | | | | | | | | | | | |
Consumer real estate | | 4,473,395 |
| | — |
| | — |
| | 4,385,669 |
| | 4,385,669 |
| | 6,330,384 |
| | — |
| | — |
| | 6,320,308 |
| | 6,320,308 |
|
Permanent mortgage | | 406,836 |
| | — |
| | — |
| | 404,930 |
| | 404,930 |
| | 383,742 |
| | — |
| | — |
| | 388,396 |
| | 388,396 |
|
Credit card & other | | 346,861 |
| | — |
| | — |
| | 347,577 |
| | 347,577 |
| | 609,918 |
| | — |
| | �� |
| | 607,955 |
| | 607,955 |
|
Total loans, net of unearned income and allowance for loan losses | | 19,387,452 |
| | — |
| | — |
| | 19,134,856 |
| | 19,134,856 |
| | 27,469,374 |
| | — |
| | — |
| | 27,523,017 |
| | 27,523,017 |
|
Short-term financial assets: | | | | | | | | | | | | | | | | | | | | |
Interest-bearing cash | | 1,060,034 |
| | 1,060,034 |
| | — |
| | — |
| | 1,060,034 |
| | 1,185,600 |
| | 1,185,600 |
| | — |
| | — |
| | 1,185,600 |
|
Federal funds sold | | 50,838 |
| | — |
| | 50,838 |
| | — |
| | 50,838 |
| | 87,364 |
| | — |
| | 87,364 |
| | — |
| | 87,364 |
|
Securities purchased under agreements to resell | | 613,682 |
| | — |
| | 613,682 |
| | — |
| | 613,682 |
| | 725,609 |
| | — |
| | 725,609 |
| | — |
| | 725,609 |
|
Total short-term financial assets | | 1,724,554 |
| | 1,060,034 |
| | 664,520 |
| | — |
| | 1,724,554 |
| | 1,998,573 |
| | 1,185,600 |
| | 812,973 |
| | — |
| | 1,998,573 |
|
Trading securities (a) | | 897,071 |
| | — |
| | 894,498 |
| | 2,573 |
| | 897,071 |
| | 1,416,345 |
| | — |
| | 1,414,194 |
| | 2,151 |
| | 1,416,345 |
|
Loans held-for-sale (a) | | 111,248 |
| | — |
| | 6,631 |
| | 104,617 |
| | 111,248 |
| | | | | | | | | | |
Mortgage loans | | | 88,173 |
| | — |
| | 6,902 |
| | 81,271 |
| | 88,173 |
|
USDA & SBA loans | | | 466,977 |
| | — |
| | 467,227 |
| | 1,510 |
| | 468,737 |
|
Other consumer loans | | | 144,227 |
| | — |
| | 9,965 |
| | 134,262 |
| | 144,227 |
|
Securities available-for-sale (a) (b) | | 3,943,499 |
| | 25,249 |
| | 3,756,745 |
| | 161,505 |
| | 3,943,499 |
| | 5,170,255 |
| | 27,017 |
| | 4,903,115 |
| | 240,123 |
| | 5,170,255 |
|
Securities held-to-maturity | | 14,347 |
| | — |
| | — |
| | 14,773 |
| | 14,773 |
| | 10,000 |
| | — |
| | — |
| | 9,901 |
| | 9,901 |
|
Derivative assets (a) | | 121,654 |
| | 33,587 |
| | 88,067 |
| | — |
| | 121,654 |
| | 81,634 |
| | 10,161 |
| | 71,473 |
| | — |
| | 81,634 |
|
Other assets: | | | | | | | | | | | | | | | | | | | | |
Tax credit investments | | 100,105 |
| | — |
| | — |
| | 98,400 |
| | 98,400 |
| | 119,317 |
| | — |
| | — |
| | 112,292 |
| | 112,292 |
|
Deferred compensation assets | | 32,840 |
| | 32,840 |
| | — |
| | — |
| | 32,840 |
| | 39,822 |
| | 39,822 |
| | — |
| | — |
| | 39,822 |
|
Total other assets | | 132,945 |
| | 32,840 |
| | — |
| | 98,400 |
| | 131,240 |
| | 159,139 |
| | 39,822 |
| | — |
| | 112,292 |
| | 152,114 |
|
Nonearning assets: | | | | | | | | | | | | | | | | | | | | |
Cash & due from banks | | 373,274 |
| | 373,274 |
| | — |
| | — |
| | 373,274 |
| | 639,073 |
| | 639,073 |
| | — |
| | — |
| | 639,073 |
|
Fixed income receivables | | 57,411 |
| | — |
| | 57,411 |
| | — |
| | 57,411 |
| | 68,693 |
| | — |
| | 68,693 |
| | — |
| | 68,693 |
|
Accrued interest receivable | | 62,887 |
| | — |
| | 62,887 |
| | — |
| | 62,887 |
| | 97,239 |
| | — |
| | 97,239 |
| | — |
| | 97,239 |
|
Total nonearning assets | | 493,572 |
| | 373,274 |
| | 120,298 |
| | — |
| | 493,572 |
| | 805,005 |
| | 639,073 |
| | 165,932 |
| | — |
| | 805,005 |
|
Total assets | | $ | 26,826,342 |
| | $ | 1,524,984 |
| | $ | 5,530,759 |
| | $ | 19,516,724 |
| | $ | 26,572,467 |
| | $ | 37,809,702 |
| | $ | 1,901,673 |
| | $ | 7,851,781 |
| | $ | 28,104,527 |
| | $ | 37,857,981 |
|
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | |
Defined maturity | | $ | 1,355,133 |
| | $ | — |
| | $ | 1,361,104 |
| | $ | — |
| | $ | 1,361,104 |
| | $ | 3,322,921 |
| | $ | — |
| | $ | 3,293,650 |
| | $ | — |
| | $ | 3,293,650 |
|
Undefined maturity | | 21,317,230 |
| | — |
| | 21,317,230 |
| | — |
| | 21,317,230 |
| | 27,297,441 |
| | — |
| | 27,297,431 |
| | — |
| | 27,297,431 |
|
Total deposits | | 22,672,363 |
| | — |
| | 22,678,334 |
| | — |
| | 22,678,334 |
| | 30,620,362 |
| | — |
| | 30,591,081 |
| | — |
| | 30,591,081 |
|
Trading liabilities (a) | | 561,848 |
| | — |
| | 561,848 |
| | — |
| | 561,848 |
| | 638,515 |
| | — |
| | 638,515 |
| | — |
| | 638,515 |
|
Short-term financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Federal funds purchased | | 414,207 |
| | — |
| | 414,207 |
| | — |
| | 414,207 |
| | 399,820 |
| | — |
| | 399,820 |
| | — |
| | 399,820 |
|
Securities sold under agreements to repurchase | | 453,053 |
| | — |
| | 453,053 |
| | — |
| | 453,053 |
| | 656,602 |
| | — |
| | 656,602 |
| | — |
| | 656,602 |
|
Other short-term borrowings | | 83,177 |
| | — |
| | 83,177 |
| | — |
| | 83,177 |
| | 2,626,213 |
| | — |
| | 2,626,213 |
| | — |
| | 2,626,213 |
|
Total short-term financial liabilities | | 950,437 |
| | — |
| | 950,437 |
| | — |
| | 950,437 |
| | 3,682,635 |
| | — |
| | 3,682,635 |
| | — |
| | 3,682,635 |
|
Term borrowings: | | | | | | | | | | | | | | | | | | | | |
Real estate investment trust-preferred | | 46,032 |
| | — |
| | — |
| | 49,350 |
| | 49,350 |
| | 46,100 |
| | — |
| | — |
| | 48,880 |
| | 48,880 |
|
Term borrowings—new market tax credit investment | | 18,000 |
| | — |
| | — |
| | 17,918 |
| | 17,918 |
| | 18,000 |
| | — |
| | — |
| | 17,930 |
| | 17,930 |
|
Borrowings secured by residential real estate | | 23,126 |
| | — |
| | — |
| | 21,969 |
| | 21,969 |
| |
Secured borrowings | | | 18,642 |
| | — |
| | — |
| | 18,305 |
| | 18,305 |
|
Junior subordinated debentures | | | 187,281 |
| | — |
| | — |
| | 187,281 |
| | 187,281 |
|
Other long term borrowings | | 953,498 |
| | — |
| | 965,066 |
| | — |
| | 965,066 |
| | 948,074 |
| | — |
| | 966,292 |
| | — |
| | 966,292 |
|
Total term borrowings | | 1,040,656 |
| | — |
| | 965,066 |
| | 89,237 |
| | 1,054,303 |
| | 1,218,097 |
| | — |
| | 966,292 |
| | 272,396 |
| | 1,238,688 |
|
Derivative liabilities (a) | | 135,897 |
| | 33,274 |
| | 96,378 |
| | 6,245 |
| | 135,897 |
| | 85,061 |
| | 9,535 |
| | 69,881 |
| | 5,645 |
| | 85,061 |
|
Other noninterest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | |
Fixed income payables | | 21,002 |
| | — |
| | 21,002 |
| | — |
| | 21,002 |
| | 48,996 |
| | — |
| | 48,996 |
| | — |
| | 48,996 |
|
Accrued interest payable | | 10,336 |
| | — |
| | 10,336 |
| | — |
| | 10,336 |
| | 16,270 |
| | — |
| | 16,270 |
| | — |
| | 16,270 |
|
Total other noninterest-bearing liabilities | | 31,338 |
| | — |
| | 31,338 |
| | — |
| | 31,338 |
| | 65,266 |
| | — |
| | 65,266 |
| | — |
| | 65,266 |
|
Total liabilities | | $ | 25,392,539 |
| | $ | 33,274 |
| | $ | 25,283,401 |
| | $ | 95,482 |
| | $ | 25,412,157 |
| | $ | 36,309,936 |
| | $ | 9,535 |
| | $ | 36,013,670 |
| | $ | 278,041 |
| | $ | 36,301,246 |
|
| |
(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$134.6 million. |
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 SeptemberJune 30, 20172018 and December 31, 2016:
2017:
| | | | Contractual Amount | | Fair Value | | Contractual Amount | | Fair Value |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 | | June 30, 2018 | | December 31, 2017 |
Unfunded Commitments: | | | | | | | | | | | | | | | | |
Loan commitments | | $ | 8,868,115 |
| | $ | 8,744,649 |
| | $ | 2,388 |
| | $ | 2,924 |
| | $ | 10,228,615 |
| | $ | 10,678,485 |
| | $ | 2,186 |
| | $ | 2,617 |
|
Standby and other commitments | | 336,953 |
| | 277,549 |
| | 4,139 |
| | 4,037 |
| | 464,600 |
| | 420,728 |
| | 5,028 |
| | 5,274 |
|
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 SeptemberJune 30, 2017,2018, was one of the 4030 largest publicly traded banking organizations in the United States in terms of asset size.
FHN’s two major brands—FHN is the parent company of First Tennessee Bank National Association ("FTBNA"). FTBNA's principal divisions and subsidiaries operate under the brands of First Tennessee Bank, Capital Bank, FTB Advisors, and FTN Financial—provide customers with a broad rangeFinancial. FHN offers regional banking, wealth management and capital market services through the First Horizon family of products and services.companies. First Tennessee ("FTBNA" or the "Bank") providesBank, Capital Bank, and FTB Advisors provide consumer and commercial banking services throughout Tennessee and other selected markets and is the largest bank headquartered in the state of Tennessee.wealth management services. FTN Financial (“FTNF”("FTNF"), which operates partly through a division of FTBNA and partly through subsidiaries, is an industry leader in fixed income sales, trading, and strategies for institutional clients in the U.S. and abroad. FTBNA has approximately 300 banking offices in eight southeastern U.S. states, and FTNF has 28 offices in 18 states across the U.S.
FHN is composed of the following operating segments:
Regional banking segment offers financial products and services, including traditional lending and deposit taking, to consumer and commercial customers in Tennessee, North Carolina, South Carolina, Florida and other selected markets. Regional banking also provides investments, wealth management, financial planning, trust services and asset management, credit card, and cash management. Additionally, the regional banking segment includes correspondent banking which provides credit, depository, and other banking related services to other financial institutions nationally.
Fixed income segment consists of fixed income securities sales, trading, underwriting, and strategies for institutional clients in the U.S. and abroad, as well as loan sales, portfolio advisory services, and derivative sales.
Corporate segment consists of unallocated corporate expenses, expense on subordinated debt issuances, bank-owned life insurance, unallocated interest income associated with excess equity, net impact of raising incremental capital, revenue and expense associated with deferred compensation plans, funds management, tax credit investment activities, derivative valuation adjustments related to prior sales of Visa Class B shares, loss on extinguishment of debt, and acquisition and integration-related costs.
Non-strategic segment consists of the wind-down nationalrun-off consumer lending activities, legacy (pre-2009) mortgage banking elements, including servicing fees, and the associated ancillary revenues and expenses related to these businesses. Non-strategic also includes the wind-down trust preferred loan portfolio and exited businesses.
On November 30, 2017, FHN completed its merger with Capital Bank Financial Corporation ("CBF") for an aggregate of 92,042,232 shares of FHN common stock and $423.6 million in cash in a transaction valued at $2.2 billion. In second quarter 2018, FHN canceled 2,373,220 FHN common shares which had been issued but set aside for certain CBF shareholders who have commenced a dissenter appraisal process. That process is discussed more fully in this MD&A at "Capital--Cancellation of Dissenters' Shares."
On March 23, 2018, FHN divested two branches, including approximately $30 million of deposits and $2 million of loans to Apex Bank, a Tennessee banking corporation. The branches, both in Greeneville, Tennessee, were divested in connection with First Horizon's agreement with the U.S. Department of Justice and commitments to the Board of Governors of the Federal Reserve System, which were entered into in connection with a customary review of FHN's merger with CBF.
In second quarter 2018, FHN sold approximately $120 million UPB of its subprime auto loans. These loans, originally acquired as part of the CBF acquisition, did not fit within FHN's risk profile.
On October 2, 2017, FTBNA acquired the operations and certain assets of Professional Mortgage Company, Inc. ("PMC"). PMC iswas a provider of institutional debt capital and commercial mortgage loan servicing. Eleven professionals joined FTBNA's commercial real estate ("CRE") team as a result of the transaction, expanding the capabilities of its CRE platform.
On May 4, 2017, FHN and Capital Bank Financial Corp. (“Capital Bank" or "CBF”) announced that they had entered into an agreement and plan of merger under which FHN will acquire Capital Bank, which is headquartered in Charlotte, North Carolina. Capital Bank reported approximately $10 billion of assets at June 30, 2017. The transaction is expected to close in fourth quarter 2017, subject to regulatory approval of the sale of two branches and customary conditions.
On April 3, 2017, FTNF acquired substantially all of the assets and assumed substantially all of the liabilities of Coastal Securities, Inc. (“Coastal”), a national leader in the trading, securitization, and analysis of Small Business Administration (“SBA”) loans, for approximately $131 million in cash. Coastal, which was based in Houston, TX, also traded United States Department of Agriculture (“USDA”) loans and fixed income products and provided municipal underwriting and advisory
services to its clients. Coastal’s government-guaranteed loan products were combined with FTNF's existing SBA trading activities to establish an additional major product sector for FTNF.
In relation to all acquisitions, 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, 20162017 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 beread with the accompanying auditedunaudited Consolidated Condensed Financial Statements and Notes in this report. Additional information including the 20162017 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, 2016.2017.
ADOPTION OF ACCOUNTING UPDATES
Effective January 1, 2018, FHN retroactively adopted the provisions of ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which resulted in the reclassification of $.8 million and $1.3 million of non-service components of net periodic pension and post-retirement costs from Employee compensation, incentives, and benefits to Other expense for the three and six months ended June 30, 2017. All prior periods and associated narrative have been revised to reflect this change. See Note 1 – Financial Information for additional information.
Non-GAAP Measures
Certain measures are included in the narrative and tables in this MD&A that are “non-GAAP”, meaning (under U.S. financial reporting rules) they are not presented in accordance with generally accepted accounting principles (“GAAP”) in the U.S. and also are not codified in U.S. banking regulations currently applicable to FHN. Although other entities may use calculation methods that differ from those used by FHN for non-GAAP measures, FHN’s management believes such measures are relevant to understanding the capital position or financial results of FHN. Non-GAAP measures are reported to FHN’s management and Board of Directors through various internal reports.
Presentation of regulatory measures, even those which are not GAAP, provide a meaningful base for comparability to other financial institutions subject to the same regulations as FHN, as demonstrated by their use by banking regulators in reviewing capital adequacy of financial institutions. Although not GAAP terms, these regulatory measures are not considered “non-GAAP” under U.S. financial reporting rules as long as their presentation conforms to regulatory standards. Regulatory measures used in this MD&A include: common equity tier 1 capital, generally defined as common equity less goodwill, other intangibles, and certain other required regulatory deductions; tier 1 capital, generally defined as the sum of core capital (including common equity and instruments that cannot be redeemed at the option of the holder) adjusted for certain items under risk based capital regulations; and risk-weighted assets (“RWA”), which is a measure of total on- and off-balance sheet assets adjusted for credit and market risk, used to determine regulatory capital ratios.
The non-GAAP measure presented in this filing is return on average tangible common equity (“ROTCE”). Refer to table 2524 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 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 SeptemberJune 30, 2017,2018, and in documents incorporated into this Quarterly Report.
FINANCIAL SUMMARY
In thirdsecond quarter 2017,2018, FHN reported net income available to common shareholders of $67.3$81.6 million, or $.28 per diluted share, compared to net income of $63.2 million, or $.27 per diluted share in third quarter 2016. For the nine months ended September 30, 2017, FHN reported net income available to common shareholders of $212.2 million, or $.90$.25 per diluted share, compared to net income available to common shareholders of $167.6$90.8 million, or $.71$.38 per diluted share for the nine months ended September 30, 2016. Results improved for both periods primarilyin second quarter 2017. The decline in results in second quarter 2018 was driven by an increase in expenses which outpaced an increase in net interest income ("NII") and a decrease in. For the provision forsix months ended June 30, 2018, FHN reported net income taxes, somewhat offset by lower noninterestavailable to common shareholders of $172.2 million, or $.52 per diluted share, compared to net income relativeavailable to 2016. Total expenses including loan loss provision were flatcommon of $144.8 million, or $.61 per diluted share, for the quarterly period, but declinedsix months ended June 30, 2017. The increase in net income available to common shareholders for the year-to-date period was primarily due to an increase in revenue which also contributed tomore than offset higher expenses. The decrease in earnings per diluted share was the improvement inresult of additional shares added through the CBF acquisition. Operating results for the ninethree and six months ended SeptemberJune 30, 2017. The decline2018 include activity associated with the CBF acquisition which closed late in provision for income taxesfourth quarter 2017 and significantly impacted FHN's operating results and balance sheet trends for both the three and nine months ended Septembersix month periods ending June 30, 2017 was due to favorable effective tax rate adjustments primarily associated with the reversal of a capital loss deferred tax valuation allowance in 2017.2018.
Total revenue was $322.2increased $110.1 million and $957.3$240.6 million, respectively, for the three and ninesix months ended SeptemberJune 30, 2017 compared2018 to $333.7$438.5 million and $961.9$875.6 million, primarily driven by an increase in NII. NII increased 55 percent and 57 percent, respectively from $200.7 million and $390.4 million for the three and ninesix months ended SeptemberJune 30, 2016. NII increased 13 percent2017 to $310.9 million and $612.1 million for both periods,the three and six months ended June 30, 2018. This increase was largely driven by loans and deposits added through the CBF acquisition, as well as the positive impact of higher short-term marketinterest rates and netorganic loan growth.growth within the regional banking commercial loan portfolios. Noninterest income declined 24was relatively flat in second quarter 2018 compared to the prior year. For the six months ended June 30, 2018 noninterest income increased due in large part to additional fee income as a result of the inclusion of Capital Bank, increases in fees generated from FTB's wealth management group, an increase in BOLI policy gains and an increase in bankcard income. The adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" on January 1, 2018 which resulted in $5.4 million of dividend income recognized in noninterest income in the first half of 2018, and a $3.3 million gain on the sale of a building recognized in first quarter 2018, both favorably impacted noninterest income for the six months ended June 30, 2018. These increases were somewhat offset by lower fixed income revenue relative to the six months ended June 30, 2017.
Noninterest expense increased 53 percent and 1747 percent, respectively, to $332.8 million and $646.0 million for the three and ninesix months ended SeptemberJune 30, 2017 due to lower fixed income revenue and a loss from the repurchase of equity securities previously included in a financing transaction.
Noninterest expense increased 1 percent to $236.9 million for the three months ended September 30, 2017 and decreased 2 percent to $677.0 million for the nine months ended September 30, 20172018 compared to the three and ninesix months ended SeptemberJune 30, 2016.2017. Expenses increased in third quarter 2017for both
periods of 2018 largely driven by higher acquisition- and integration-related expenses primarily associated with the CBF and Coastal acquisitions and an increase in net loss accruals related to legal matters, but were favorably impacted by lower variable compensation expense within the fixed income segment and a decline in legal fees relative to third quarter 2016. For the nine months ended September 30, 2017, expense decreased primarily due to a net decline in the loss accruals related to legal matters, as well as loweracquisition, higher personnel-related expenses, and legal fees. A net increaseincreases in acquisition- and integration-related costs and a smallerseveral other expense reversalcategories due to the mortgage repurchase provision forinclusion of Capital Bank in the nine months ended 2017 compared to the nine months ended September 30, 2016, offset a portionquarter and year-to-date periods of the expense decline for the year-to-date period.2018.
On a consolidated basis, credit quality remained strong in 2017,the first half of 2018, with non-performing loans and the allowance for loan losses decreasing relative to the comparative periods of the prior year. There was no provision for loan losses in third quarter 2017 compared to provision expense of $4.0 million in third quarter 2016. For the nine months ended September 30, 2017 theThe provision for loan losses was $0 in second quarter 2018 compared to a provision credit of $2.0 million in second quarter 2017. For the six months ended June 30, 2018 and 2017, FHN recognized a $1.0 million credit and a $3.0 million comparedcredit, respectively, to the provision expense of $11.0 million for the nine months ended September 30, 2016.loan losses.
Return on average common equity (“ROE”) and ROTCE were 10.797.86 percent and 12.1712.63 percent, respectively, in thirdsecond quarter 20172018 compared to 10.8015.26 percent and 11.9017.30 percent, respectively in thirdsecond quarter 2016. 2017. For the six months ended June 30, 2018, ROE and ROTCE were 8.32 percent and 13.34 percent, respectively, compared to 12.38 percent and 13.82 percent, respectively, for the six months ended June 30, 2017. The decline in these performance measures relative to the prior year was primarily the result of higher acquisition- and integration-related expenses associated with the CBF acquisition which negatively impacted net income available to common for the three and six months ended June 30, 2018. Return on average assets (“ROA”) improvedalso declined in 2018 relative to .99the prior year and was .86 percent in third quarter 2017 from .97and .91 percent in third quarter 2016. Forfor the ninethree and six months ended SeptemberJune 30, 2017 ROE, ROTCE, and ROA improved2018 compared to 11.83 percent, 13.251.32 percent and 1.041.07 percent respectively from 9.81 percent, 10.83 percent,for the three and .89 percent, respectively, for the ninesix months ended SeptemberJune 30, 2016.2017. Common equity tier 1, Tier 1, Total capital, and Leverage ratios were 10.048.98 percent, 11.209.98 percent, 12.1811.25 percent, and 9.608.56 percent, respectively, in thirdsecond quarter 20172018 compared to 9.819.85 percent, 11.0310.99 percent, 12.0911.98 percent and 9.529.38 percent, respectively, in thirdsecond quarter 2016.2017. Average assets increased 539 percent and 740 percent respectively, for the three and ninesix months ended SeptemberJune 30, 20172018 to $40.2 billion and $40.3 billion from $28.9 billion from $27.6 billion and $27.0$28.8 billion, respectively, for the three and ninesix months ended SeptemberJune 30, 2016.2017 primarily due to the CBF acquisition. Average loans were $19.8and average deposits increased 42 percent and 36 percent, respectively to $27.3 billion and $19.3$30.7 billion in second quarter 2018 from second quarter 2017. For the six months ended June 30, 2018 average loans and average deposits increased 43 percent and 34 percent, respectively, to $27.2 billion and $30.5 billion. Average shareholder's equity increased to $4.6 billion from $2.8 billion for both the three and ninesix months ended SeptemberJune 30, 2017, a 6 percent and 8 percent increase relative2018 compared to the same periods in 2016.of 2017. Period-end and average Shareholders’shareholders’ equity increased to $2.9$4.5 billion in third quarter 2017on June 30, 2018 from $2.7$2.8 billion in third quarter 2016.
on June 30, 2017.
BUSINESS LINE REVIEW
Regional Banking
Pre-tax income within the regional banking segment increased 1249 percent, or $55.4 million to $114.7$168.9 million in thirdsecond quarter 20172018 from $102.0$113.5 million in thirdsecond quarter 2016. The increase in pre-tax income was primarily driven by higher revenue somewhat offset by an increase in expenses.2017. For the ninesix months ended SeptemberJune 30, 2017,2018, the regional banking pre-tax income was $329.7increased 57 percent, or $121.5 million compared to $237.6$335.9 million from $214.4 million for the ninesix months ended SeptemberJune 30, 2016.2017. The increase in pre-tax income for both the nine months ended September 30, 2017quarter and year-to-date periods was driven by an increase in revenue coupled with a decline insomewhat offset by higher expenses.
Total revenue increased 7$121.0 million, or 45 percent, or $18.1 million, to $273.7$387.4 million in thirdsecond quarter 2018, from $266.4 million in second quarter 2017, from $255.6 million in third quarter 2016,largely driven by ana $107.2 million increase in NII. The increase in NII was largely due to loans and deposits added through the CBF acquisition, the favorable impact of higher short-term interest rates on loans, higher average balances ofand organic loan growth within the commercial loans and noninterest-bearing deposits, as well as lower deposit costsloan portfolios. Noninterest income also increased for the three months ended June 30, 2018 relative to thirdthe prior year, favorably impacting second quarter 2016. Noninterest2018 operating results. The increase in noninterest income was $64.4largely driven by an $8.1 million increase in deposit transactions and $65.1cash management fee income primarily the result of higher fee income associated with the inclusion of Capital Bank in second quarter 2018. To a lesser extent, fees from mortgage banking activities and other service charges also increased in second quarter 2018 due in large part to the inclusion of Capital Bank activity. A $1.7 million increase in third quarter 2017 and 2016, respectively. In third quarter 2017, fees from brokerage, management fees, and commissions increased asand a result$1.2 million increase in bankcard income also contributed to the increase in noninterest income in second quarter 2018 relative to the prior year. The increase in fees from brokerage, management fees, and commissions was driven by the continued growth of increases in recurring revenue driven primarily by growth in FHN’sFHN's advisory business and favorable market conditions. Deposit transactions and cash management feeconditions, coupled with an increase in the sales of structured products. The increase in bankcard income also increasedwas primarily the result of an increase in third quarter 2017, largelyinterchange income driven by higher fee income associated with cash management activities. Noninterest incomevolume in third quarter 2016 was favorably impacted by a $1.8 million gain on the sale of property and higher fee income associated with derivative sales compared2018 compared to third quarter 2017, resulting in a decline in noninterest income in third quarter 2017 relative to the prior year.2017.
Provision expense was $8.6 million and $8.5$6.1 million in thirdsecond quarter 2017 and 2016, respectively, reflecting2018 compared to $.3 million in second quarter 2017. Both periods reflect continued strong performance in both the commercial and consumer portfolios. In thirdThe current quarter provision expense was driven by net charge-offs of $5.5 million as the reserves were relatively flat due to the impact of lower loss rates which were offset by effect of higher balances. The increase in provision compared to second quarter 2017 reserves increased $2.8 million from second quarterwas driven by the C&I portfolio, partially offset by reserve decreasesan increase in both the consumerreserves of $3.3 million and commercial real estate portfolios. Netan increase in net charge-offs were $5.7 million in third quarter 2017 compared to $3.5 million a year ago and the loan portfolio grew nearly $1.0 billion from third quarter 2016 driven by the C&I portfolio.of $2.5 million.
Noninterest expense was $150.5$212.4 million in thirdsecond quarter 2017,2018, up 439 percent from $145.1$152.6 million in thirdsecond quarter 2016.2017. The increase in expense was primarily driven by the inclusion of Capital Bank in second quarter 2018, which led to higher
personnel-related expenses, an $8.7increase in occupancy expense, amortization expense, and operation services. Communication expenses, equipment rentals, depreciation and maintenance expense, computer software, and FDIC premium expense increased in second quarter 2018 relative to the prior year also driven by the inclusion of Capital Bank. Additionally, strategic hires in expansion markets and specialty areas, higher incentive expense associated with loan growth, and an increase in minimum wage also contributed to an increase in personnel expense in second quarter 2018 compared to the prior year.
Total revenue increased 48 percent to $765.0 million for the six months ended June 30, 2018, from $518.5 million for the six months ended June 30, 2017, largely driven by a $212.8 million increase in NII. The increase in NII was largely due to loans and deposits added through the CBF acquisition. Additionally, organic loan growth within the commercial loan portfolio, the favorable impact of higher interest rates on loans, and higher average balances of loans to mortgage companies also improved NII in the six months ended June 30, 2018 relative to the prior year. Noninterest income increased $33.7 million, or 27 percent, to $157.4 million in the first half of 2018 from $123.7 million in the first half of 2017. The increase in noninterest income was largely driven by a $19.6 million increase in deposit transactions and cash management fee income, primarily the result of higher fee income associated with the inclusion of Capital Bank in the first half of 2018. Additionally, fees from deposit transactions and cash management activities were negatively impacted in first quarter 2017 due to changes in consumer behavior and a modification of billing practices, which further contributed to the year-to-date increase in fees from deposit transactions and cash management activities relative to the prior year. A $3.3 million increase in fees from brokerage, management fees, and commissions and a $2.1 million increase in bankcard income also contributed to the increase in noninterest income for the six months ended June 30, 2018 relative to the prior year. These increases were driven by the same factors that impacted second quarter results. Additionally, to a lesser extent, fees from mortgage banking activities and other service charges also increased in the first half of 2018 due in large part to the inclusion of Capital Bank activity.
Provision expense was $11.5 million for the six months ended June 30, 2018, compared to $3.4 million for the six months ended June 30, 2017. The same factors impacting the quarterly change in loan loss provisioning levels also drove the change for the year-to-date period.
Noninterest expense was $417.6 million for the six months ended June 30, 2018, up 39 percent from $300.7 million for the same period of 2017. The increase in expense was primarily driven by the inclusion of Capital Bank for the six months ended June 30, 2018, which led to higher expenses in the same categories noted above. Additionally, strategic hires in expansion markets and specialty areas, higher incentive expense associated with loan growth, and an increase in minimum wage also contributed to an increase in personnel expense for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. A $1.9 million net increase in loss accruals related to legal matters as a result of $4.4 million of loss accruals associated with trust services recognized in third quarter 2017 and a favorable $4.3 million reversal of loss accruals related to legal matters recognized in third quarter 2016. Expenses associated with advertising and public relations decreased from $5.0 million in third quarter 2016 to $4.0 million in third quarter 2017 due in large part to a promotional branding campaign in third quarter 2016.
Total revenue increased 9 percent to $792.8 million for the nine months ended September 30, 2017, from $726.8 million for the nine months ended September 30, 2016, driven by an increase in NII. The increase in NII for the year-to-date period was also driven by the favorable impact of higher interest rates on loans, higher average balances of commercial loans and noninterest-bearing deposits, and lower deposit costs relative to 2016. For the nine months ended September 30, 2017 and 2016, noninterest income was $188.1 million and $185.7 million, respectively. The increase in noninterest income was largely driven by an increase in brokerage, management fees, and commission income from the Bank's wealth management group and a $1.2 million increase in mortgage banking income, primarily related to FHN’s Community Reinvestment Act ("CRA") initiatives. Additionally, FHN recognized $.4 million in net securities gains for the nine months ended September 30, 2017 primarily the resulting from the call of a $4.4 million held-to-maturity municipal bond in second quarter 2017. Gains on the sale of fixed assets decreased $2.0 million for the nine months ended September 30, 2017 and fees from derivative transactions decreased $.9 million both reducing noninterest income in 2017 compared to 2016. Additionally, declines in fees from deposit transactions and cash management and bankcard income also negatively impacted noninterest income for the nine months ended September 30, 2017 relative to the prior year. The decrease in fees from deposit transactions and cash management was primarily due to lower non-sufficient funds (“NSF”)/overdraft fees in first quarter 2017 driven by changes in consumer behavior and a modification of billing practices, somewhat mitigated by an increase in fee income associated with cash management activities. The decrease in bankcard income was the result of volume incentives received in 2016 driven by a significant new relationship.
Provision expense was $11.9 million for the nine months ended September 30, 2017 compared to $34.2 million for the nine months ended September 30, 2016. The net decrease in provision in 2017 reflects continued strong performance in both the commercial and consumer portfolios and historically low net charge-offs which continued to drive lower loss rates. Net charge-offs for the nine months ended September 30, 2017 decreased to $10.0 million from $20.4 million for the nine months ended September 30, 2016.
Noninterest expense decreased to $451.2 million for the nine months ended September 30, 2017 from $455.0 million for the nine months ended September 30, 2016. The decrease in noninterest expense was largely attributable to a $13.3 million net decline in loss accruals related to legal matters and a $4.3 million net decrease associated with fixed asset impairment charges.
Additionally, a recovery from a vendor recognized in first quarter 2017 related to previous overbillings also contributed to the expense decrease for the nine months ended September 30, 2017. During the nine months ended September 30, 2017 personnel expenses, operations services expenses and FDIC premium expense all increased relative to 2016, negatively impacting regional banking expenses. The increase in personnel expense was largely driven by expenses associated with strategic hires in expansion markets and specialty areas, as well as higher incentive expense associated with loan/deposit growth and retention initiatives. The increase in operations services expense was primarily related to an increase in third party fees associated with FHN’s online digital banking platform and the increase in FDIC premium expense was due in large part to balance sheet growth.first half of 2018.
Fixed Income
Pre-taxThe fixed income segment had a pre-tax loss of $.8 million in second quarter 2018 compared to pre-tax income of $6.2 million in second quarter 2017. For the six months ended June 30, 2018 the pre-tax income within the fixed income segment was $8.7 million in third quarter 2017 compared to $15.1 million in third quarter 2016. For the nine months ended September 30, 2017, fixed income's pre-tax income was $18.1$2.8 million compared to $44.7$9.4 million for the ninesix months ended SeptemberJune 30, 2016.2017. The decline in results in bothfor the three and six months ended June 30, 2018 relative to the same periods of 2017 was driven bythe result of lower revenues,noninterest income, somewhat offset by a decline in expenses.expenses and an increase in NII.
NII increased from $2.4$5.0 million in thirdsecond quarter 20162017 to $6.0$9.2 million in thirdsecond quarter 2017,2018. The increase in NII in second quarter 2018 was primarily driven bydue to an increase in trading securities and loans held-for-sale as a result of the Coastal acquisition.largely associated with government-guaranteed loan products. Fixed income product revenue decreased 2434 percent to $45.0$29.9 million in thirdsecond quarter 20172018 from $59.0$45.6 million in thirdsecond quarter 2016,2017, as average daily revenue (“ADR”) declined to $715$468 thousand in thirdsecond quarter 20172018 from $922$723 thousand in thirdsecond quarter 2016.2017. This decline reflects lower activity due to challenging market conditions (interest(expected interest rate increases, a flattening yield curve, and low levels of market volatility). Other product revenue was $10.8$8.4 million in thirdsecond quarter 20172018, down from $13.1$9.7 million in the prior year, primarily driven by lower fees from derivative and loan sales. Noninterest expense decreased 11 percent, or $6.3$5.7 million, to $53.1$48.3 million in thirdsecond quarter 2017 from $59.4 million in third quarter 2016, due to2018 primarily driven by lower variable compensation associated with the decrease in fixed income product revenue in thirdsecond quarter 2017, somewhat offset by increased expenses due to the Coastal acquisition.2018.
For the ninesix months ended SeptemberJune 30, 2017 and 2016,2018, NII increased $11.5 million to $17.6 million from $6.1 million for the six months ended June 30, 2017. The increase in NII for the six months ended June 30, 2018 was $12.1 million and $8.2 million, respectively, also driven bywas primarily due to an increase in trading securities and loans held-for-sale.held-for-sale largely associated with government-guaranteed loan products. Fixed income product revenue was $133.3 million$68.0 million for the nine months ended September 30, 2017,first half of 2018, down from $185.9$88.2 million in the prior year reflecting lower activity due to challenging market conditions (interest(expected interest rate increases, a flattening yield curve, and low levels of market volatility). Other product revenue was $28.5$16.0 million and $31.4$17.7 million for the ninesix months ended SeptemberJune 30, 2018 and 2017, and 2016, respectively. The decrease in other product revenue was largely due to lower fees from portfolio advisory services and derivative sales relative to the prior year. Noninterest expense decreased 144 percent, or $25.1$3.9 million, to $155.8$98.8 million for the ninesix months ended SeptemberJune 30, 20172018 from $180.9 $102.7
million for the ninesix months ended SeptemberJune 30, 2016.2017. The expense decline during 2017decrease was primarily the result ofdue to lower variable compensation associated with thethe decrease in fixed income product revenue during the six months ended June 30, 2018 and a decrease in 2017,legal fees relative to the prior year. These decreases were somewhat offset by an increase in legal feeshigher personnel-related expenses and increased expenseshigher amortization expense, both due to the Coastal acquisition.acquisition (2018 includes two quarters of expense compared with one quarter in 2017 due to the timing of the acquisition).
Corporate
The pre-tax loss for the corporate segment was $47.4$71.2 million and $28.0$33.0 million for the quarters ended SeptemberJune 30, 20172018 and 2016,2017, respectively and $106.2$126.0 million and $77.0$58.2 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively.
Net interest expenseexpense was $14.0 million and $18.2$14.6 million, respectively in thirdsecond quarter 2018 and 2017, and 2016. The decline in net interest expense was the result of a higher yielding securities portfolio in 2017.respectively. Noninterest income (including securities gain/losses) was negative $9.5increased to $8.8 million in thirdsecond quarter 2017, compared to $5.12018 from $6.2 million in thirdsecond quarter 2016.2017. The decreaseincrease in noninterest income was due in part to a $14.3 million lossthe adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" on January 1, 2018, which resulted in dividend income from the repurchase of equity securities previously included in a financing transactionFRB and FHLB holdings being recognized in third quarter 2017.
Noninterest expenseother income rather than Interest income where it was $23.9recognized prior to adoption. Additionally, a $1.4 million in third quarter 2017 up from $14.9 million in third quarter 2016. The increase in expense for thirdBOLI policy gains also contributed to the increase in noninterest income within the corporate segment in second quarter 2017 2018, but was largely drivensomewhat offset by $8.2 million of acquisition- and integration-related expenses primarily associated with the CBF and Coastal acquisitions.
Net interest expense was $43.1 million and $48.4 million, respectively for the nine months ended September 30, 2017 and 2016, respectively. The improvement in net interest expense for the year-to-date period of 2017 was also driven by a higher yielding securities portfolio. Noninterest income (including securities gain/losses) decreased to $2.2 million for the nine months ended September 30, 2017 from $15.8 million in the prior year. The decrease was primarily driven by a $14.3 million loss from the repurchase of equity securities previously included in a financing transaction and a decline in net security gains. The decline in net securities gains was largely the result of a $1.7 million gain from an exchange of approximately $294 million of
available-for-sale (“AFS”) debt securities recognized in 2016. For the nine months ended September 30, 2017, deferred compensation income increased $2.3 million, offsetting a portion of the decline in noninterest income. Deferred compensation income fluctuates with changes in the market value of the underlying investments and is mirrored by changes in deferred compensation expense which is included in personnel expense.
Noninterest expense was $65.4increased to $66.0 million and $44.3 million for the nine months ended September 30, 2017 and 2016, respectively.in second quarter 2018 from $24.6 million in second quarter 2017. The increase in noninterest expense in 2017for second quarter 2018 was largely due toprimarily driven by a $13.7$36.7 million increase inof acquisition- and integration-related expenses primarily associated with the CBF acquisition and Coastal acquisitions, a $3.7 million increase in salary expenses, and a $3.2 million charitable contribution to the First Tennessee Foundation made in second quarter 2017. To a lesser extent, higher deferred compensation expense also contributed to the expense increase for the nine months ended September 30, 2017, but was offset by $2.2$4.1 million of deferred compensation BOLI gains recognized in second quarter 2017. Additionally, a $2.4 million decrease of negative valuation adjustments associated with derivatives related to prior sales of Visa Class B sharesshares. These expense increases were somewhat offset by a $3.2 million charitable contribution made to the First Tennessee Foundation in second quarter 2017; a similar contribution was not made in 2018.
Net interest expense was $27.2 million and $28.4 million, respectively for the six months ended June 30, 2018. Noninterest income (including securities gain/losses) increased $6.6 million from $11.7 million in the first half of 2017 to $18.3 million in the first half of 2018. The increase in noninterest income for the year-to-date period was driven by the same factors impacting the quarterly increase in noninterest income. Additionally, a $3.3 million gain on the sale of a building recognized in first quarter 2018 also contributed to the increase in noninterest income during the six months ended June 30, 2018.
Noninterest expense increased to $117.1 million for the six months ended June 30, 2018 from $41.4 million for the six months ended June 30, 2017. The increase in expense for second quarter 2018 was primarily driven by a $67.9 million increase of acquisition- and integration-related expenses primarily associated with the CBF acquisition and $4.1 million of valuation adjustments associated with derivatives related to prior sales of Visa Class B shares. The $3.2 million charitable contribution made in second quarter 2017 to the First Tennessee Foundation offset a portion of the overallyear-to-date expense increase for the year-to-date period.increase.
Non-StrategicNon-Strategic
The non-strategic segment had pre-tax income of $9.4$8.8 million in thirdsecond quarter 20172018 compared to $7.1$25.8 million in thirdsecond quarter 2016.2017. For the ninesix months ended SeptemberJune 30, 2017,2018 the non-strategic segment had pre-tax income of $41.7$18.0 million compared to $58.2$32.2 million for the ninesix months ended SeptemberJune 30, 2016. The increase in results for the quarterly period was driven by lower expenses in 2017 relative to the prior year which more than offset a decline in revenue.2017. The decline in results for both periods was largely due to a net expense increase as a result of a $21.7 million pre-tax reversal of mortgage repurchase and foreclosure provision recognized in second quarter 2017 primarily as a result of the settlement of certain repurchase claims, which favorably impacted expenses for both the quarterly and year-to-date period was primarily driven byperiods of 2017. To a lower loan loss provision credit in 2017 relativelesser extent revenue also decreased during the three and six months ended June 30, 2018, compared to the prior year, and aalso contributing to the decline in revenues,results, but a portion of the decline was somewhat offset by lower expenses.a larger provision credit for both the quarter and year-to-date period of 2018.
Total revenue was $8.6 million in second quarter 2018 down from $10.2 million in thirdsecond quarter 2017 down from $16.72017. NII declined 21 percent to $6.9 million in thirdsecond quarter 2016. NII declined 19 percent to $8.5 million in third quarter 2017,2018, consistent with the run-off of the non-strategic loan portfolios. Noninterest income (including securities gains/losses) was $1.7 million in third quarter 2017 down from $6.2and $1.5 million in thirdsecond quarter 2016. The decrease in noninterest income was largely attributable to a $4.4 million gain recognized in third quarter 2016 primarily related to recoveries associated with prior legacy mortgage servicing sales.2018 and 2017, respectively.
The provision for loan losses within the non-strategicnon-strategic segment was a provision credit of $8.6$6.1 million in thirdsecond quarter 20172018 compared to a provision credit of $4.5$2.3 million in the prior year. Overall, the non-strategic segment continued to reflect stable performance combined with lower loan balances as reserves declined by $9.1$6.5 million from December 31, 2016,2017, to $38.8 $29.0
million as of SeptemberJune 30, 2017.2018. Losses remain historically low as the non-strategic segment had net recoveries of $3.3 million$3.8 million in thirdsecond quarter 20172018 compared to net recoveries of $1.2$.3 million a year ago.
Noninterest expense was $9.4$6.0 million in thirdsecond quarter 20172018 compared to $14.2a net expense reversal of $13.3 million in thirdsecond quarter 2016.2017. The decreaseincrease in expense in second quarter 2018 relative to the prior year was primarily driven by lower legalthe result of the pre-tax reversal of mortgage repurchase and foreclosure provision in 2017 previously mentioned. Legal fees and by loss accruals related to legal matters which decreased from $4.5$1.1 million in thirdsecond quarter 20162018 to $3.6$.8 million, offsetting a portion of the quarterly increase in third quarter 2017.noninterest expense.
For the ninesix months ended SeptemberJune 30, 2017,2018, total revenue was $31.4$17.9 million, down from $42.2$21.1 million for the ninesix months ended SeptemberJune 30, 2016.2017. NII declined 1921 percent to $26.5$14.1 million during 2017,in the first six months of 2018, consistent with the run-off of the non-strategic loan portfolios.portfolios. Noninterest income (including securities gains/losses) decreased to $4.9was $3.8 million and $3.2 million in first half of 2018 and 2017, from $9.6 million in 2016. The decrease in noninterest income was largely attributable to the $4.4 million gain recognized in third quarter 2016 primarily related to recoveries associated with prior legacy mortgage servicing sales mentioned above.respectively.
The provision for loan losses within the non-strategic segment was a provision credit of $14.9$12.5 million for the ninesix months ended SeptemberJune 30, 20172018 compared to a provision credit of $23.2$6.4 million forin the nine months ended September 30, 2016.prior year. The same factors impacting the quarterly change in loan loss provisioning levels also drove the change for the year-to-date period.
For the ninesix months ended SeptemberJune 30, 2017, noninterest2018, noninterest expense was $4.6$12.4 million compared to $7.2a net expense reversal of $4.7 million for the ninesix months ended SeptemberJune 30, 2016.2017. The net decreaseincrease in expense during 2017 relative tofor the prior yearyear-to-date period was driven by a decline in legal fees and by lower loss accruals related to legal matters which were $3.7 million in 2017 compared to $8.0 million in 2016. A smallerthe same factors impacting the quarterly expense reversal to the mortgage repurchase provision for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, offset a portion of the expense decline.increase.
INCOME STATEMENT REVIEW
Total consolidated revenue decreased 3increased 34 percent to $322.2$438.5 million in thirdsecond quarter 2018 from $328.4 million in second quarter 2017 from $333.7 million in third quarter 2016, asdriven by an increase in NII was more than offset by lower noninterest income.NII. Total expenses increased 53 percent to $236.9$332.8 million in thirdsecond quarter 20172018 from $233.6$217.9 million in thirdsecond quarter 2016.2017.
Total consolidated revenue for the ninesix months ended SeptemberJune 30, 20172018 was $957.3$875.6 million, compared to $961.9a 38 percent increase from $635.0 million for the ninesix months ended SeptemberJune 30, 2016.2017. The decreaseincrease in revenue for the 2017 relativefirst half of 2018 was also primarily attributable to 2016 was the result of lower noninterest income (largely associated with a decline in fixed income product revenue) which more than offset an increase in NII. TotalNII, but was also due to higher noninterest income. Total expenses decreased 2 percent to $677.0were $646.0 million for the ninesix months ended SeptemberJune 30, 2017,2018, up 47 percent from $687.3$440.1 million for the ninesix months ended SeptemberJune 30, 2016.2017.
NET INTEREST INCOME
Net interest income increased 13increased 55 percent, or $24.6$110.2 million, to $209.8$310.9 million in thirdsecond quarter 20172018 from $185.2$200.7 million in thirdsecond quarter 2016.2017. The increase in NII in thirdsecond quarter 20172018 was primarilylargely due to loans and deposits added through the result ofCBF acquisition, including CBF loan accretion. Additionally, the favorable impact of higher interest rates on loans, andorganic loan growth within the regional banking. To a lesser extent,banking commercial loan portfolio, increases in loans held-for-sale ("HFS") and trading securities balances, and higher average balances of loans held-for-sale positivelyto mortgage companies also improved NII in second quarter 2018 relative to second quarter 2017. Run-off of the non-strategic loan portfolios negatively impacted NII in thirdsecond quarter 2017. These increases were partially offset by2018, offsetting a portion of the continued run-off the non-strategic loan portfolios.increase in NII. For the ninesix months ended SeptemberJune 30, 2017,2018, NII increased 1357 percent, or $221.7 million, to $600.2$612.1 million from $533.5 million.$390.4 for the six months ended June 30, 2017. The same factors that contributed to the second quarter 2018 increase in NII also drove the increase in NII for the year-to-date period was primarily driven by loan growth within regional banking andof 2018 relative to the favorable impact of higher interest rates on loans, somewhat offset by the continued run-off of the non-strategic loan portfolios.prior year. Average earning assets were $26.6$35.6 billion and $25.3 billion in third quarter 2017 and 2016, respectively, and $26.6 billion in second quarter 2018 and $24.82017, respectively, and $35.7 billion and $26.6 billion for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. The increase in average earning assets in both periods relative to 20162017 was primarily driven by loan growth within regional banking and an increase in loans held-for-sale ("HFS") associated with the Coastal acquisition. These increases were somewhat offset by continued run-off of the non-strategic loan portfolios, a decrease in securities purchased under agreements to resell and a smaller investment securities portfolio relative to the prior year. The increase in loans HFS was less for the year-to-date period, due to the timing ofCBF acquisition, as well as organic growth within the Coastal acquisition. Additionally, for the nine months ended September 30, 2017 higher average balances of excess cash held at the Federal Reserve (“Fed”) contributed to the increase in average earning assets, but were somewhat offset by a decline in average fixed income trading securities.regional banking segment.
For purposes of computing yields and the net interest margin, FHN adjusts net interest income to reflect tax exempttax-exempt income on an equivalent pre-tax basis which provides comparability of net interest income arising from both taxable and tax-exempt sources. The consolidated net interest margin improved to 3.193.53 percent in thirdsecond quarter 20172018 from 2.963.07 percent in thirdsecond quarter 2016.2017. The net interest spread was 2.963.25 percent in thirdsecond quarter 2017,2018, up 1338 basis points from 2.832.87 percent in thirdsecond quarter 2016. For the nine months ended September 30, 2017, the net interest margin was 3.06 percent, up 14 basis points from 2.92 percent for the nine months ended September 30, 2016.2017. The net interest spread increased to 2.86 percent for the nine months ended September 30, 2017 from 2.79 percent in 2016. The increaseimprovement in NIM in both periodssecond quarter 2018 was primarily thea result of loans and deposits added through the CBF acquisition (including accretion) and the favorable impact of higher interest rates on loans. For the year-to-date period in 2017 NIMsix months ended June 30, 2018, the net interest margin was negatively impacted by an3.48 percent, up 48 basis points from 3.00 percent for the six months ended June 30, 2017. The increase in average excess cash held atNIM for the Fed.six months ended June 30, 2018 was also favorably impacted by higher short-term interest rates on loans, CBF loan accretion, and loans and deposits added through the CBF acquisition, but was also favorably impacted by lower balances of interest bearing cash.
Table 1—Net Interest Margin
| | | Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Assets: | | | | | | | | | | | | | | |
Earning assets: | | | | | | | | | | | | | | |
Loans, net of unearned income: | | | | | | | | | | | | | | |
Commercial loans | 4.13 | % | | 3.63 | % | | 4.01 | % | | 3.60 | % | 4.88 | % | | 4.03 | % | | 4.71 | % | | 3.95 | % |
Consumer loans | 4.23 |
| | 4.08 |
| | 4.19 |
| | 4.08 |
| 4.52 |
| | 4.21 |
| | 4.50 |
| | 4.17 |
|
Total loans, net of unearned income | 4.16 |
| | 3.76 |
| | 4.06 |
| | 3.74 |
| 4.79 |
| | 4.08 |
| | 4.65 |
| | 4.01 |
|
Loans held-for-sale | 4.53 |
| | 4.36 |
| | 4.47 |
| | 4.23 |
| 6.18 |
| | 4.38 |
| | 6.43 |
| | 4.43 |
|
Investment securities: | | | | | | | | | | | | | | |
U.S. treasuries | 1.26 |
| | 0.97 |
| | 1.08 |
| | 0.98 |
| |
U.S. government agencies | 2.54 |
| | 2.34 |
| | 2.57 |
| | 2.40 |
| 2.69 |
| | 2.57 |
| | 2.68 |
| | 2.58 |
|
States and municipalities | — |
| | 9.01 |
| | 9.43 |
| | 7.55 |
| 3.12 |
| | — |
| | 3.11 |
| | 9.38 |
|
Corporate bonds | 5.25 |
| | 5.25 |
| | 5.25 |
| | 5.25 |
| |
Other | 3.67 |
| | 2.44 |
| | 3.32 |
| | 2.50 |
| |
Corporates and other debt | | 4.38 |
| | 5.25 |
| | 4.46 |
| | 5.25 |
|
Other (a) | | 32.48 |
| | 3.26 |
| | 29.78 |
| | 3.22 |
|
Total investment securities | 2.60 |
| | 2.36 |
| | 2.61 |
| | 2.42 |
| 2.74 |
| | 2.61 |
| | 2.73 |
| | 2.62 |
|
Trading securities | 3.06 |
| | 2.46 |
| | 3.00 |
| | 2.65 |
| 3.82 |
| | 3.07 |
| | 3.60 |
| | 2.97 |
|
Other earning assets: | | | | | | | | | | | | | | |
Federal funds sold | 1.75 |
| | 0.99 |
| | 1.58 |
| | 1.12 |
| 2.36 |
| | 1.58 |
| | 2.25 |
| | 1.49 |
|
Securities purchased under agreements to resell | 0.88 |
| | 0.08 |
| | 0.64 |
| | 0.11 |
| 1.62 |
| | 0.69 |
| | 1.37 |
| | 0.54 |
|
Interest bearing cash | 1.24 |
| | 0.49 |
| | 0.92 |
| | 0.49 |
| 1.75 |
| | 1.02 |
| | 1.58 |
| | 0.88 |
|
Total other earning assets | 1.03 |
| | 0.25 |
| | 0.82 |
| | 0.29 |
| 1.69 |
| | 0.88 |
| | 1.46 |
| | 0.77 |
|
Interest income / total earning assets | 3.76 | % | | 3.30 | % | | 3.57 | % | | 3.27 | % | 4.39 | % | | 3.59 | % | | 4.26 | % | | 3.48 | % |
Liabilities: | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | |
Savings | 0.50 | % | | 0.23 | % | | 0.46 | % | | 0.22 | % | 0.90 | % | | 0.49 | % | | 0.73 | % | | 0.44 | % |
Other interest-bearing deposits | 0.46 |
| | 0.19 |
| | 0.37 |
| | 0.18 |
| 0.61 |
| | 0.35 |
| | 0.57 |
| | 0.32 |
|
Time deposits | 0.97 |
| | 0.86 |
| | 0.94 |
| | 0.83 |
| 1.30 |
| | 0.85 |
| | 1.23 |
| | 0.83 |
|
Total interest-bearing deposits | 0.51 |
| | 0.26 |
| | 0.46 |
| | 0.25 |
| 0.86 |
| | 0.47 |
| | 0.75 |
| | 0.43 |
|
Federal funds purchased | 1.24 |
| | 0.52 |
| | 0.98 |
| | 0.51 |
| 1.79 |
| | 1.02 |
| | 1.64 |
| | 0.88 |
|
Securities sold under agreements to repurchase | 1.06 |
| | 0.09 |
| | 0.70 |
| | 0.09 |
| 1.20 |
| | 0.70 |
| | 1.10 |
| | 0.45 |
|
Fixed income trading liabilities | 2.19 |
| | 1.76 |
| | 2.26 |
| | 1.91 |
| 2.88 |
| | 2.21 |
| | 2.69 |
| | 2.29 |
|
Other short-term borrowings | 1.22 |
| | 0.61 |
| | 1.24 |
| | 0.70 |
| 1.86 |
| | 1.30 |
| | 1.68 |
| | 1.28 |
|
Term borrowings | 3.51 |
| | 2.67 |
| | 3.24 |
| | 2.52 |
| 4.34 |
| | 3.23 |
| | 4.13 |
| | 3.10 |
|
Interest expense / total interest-bearing liabilities | 0.80 |
| | 0.47 |
| | 0.71 |
| | 0.48 |
| 1.14 |
| | 0.72 |
| | 1.03 |
| | 0.66 |
|
Net interest spread | 2.96 | % | | 2.83 | % | | 2.86 | % | | 2.79 | % | 3.25 | % | | 2.87 | % | | 3.23 | % | | 2.82 | % |
Effect of interest-free sources used to fund earning assets | 0.23 |
| | 0.13 |
| | 0.20 |
| | 0.13 |
| 0.28 |
| | 0.20 |
| | 0.25 |
| | 0.18 |
|
Net interest margin (a) | 3.19 | % | | 2.96 | % | | 3.06 | % | | 2.92 | % | |
Net interest margin (b) | | 3.53 | % | | 3.07 | % | | 3.48 | % | | 3.00 | % |
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. |
(a) 2018 increase driven by the adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" which resulted in the reclassification of interest and dividend income on equity securities to noninterest income on a prospective basis. The remaining balance is primarily comprised of higher-yielding SBA IO strips.
(b) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 21 percent and, where applicable, state income taxes.
FHN’s net interest margin is primarily impacted by its balance sheet factors such as interest-bearingmix including the levels of fixed and floating rate loans, rate sensitive and non-rate sensitive liabilities, cash levels, deposit balances, trading inventory levels and commercial loan volume, as well as loan fees and cash basis income, and changes in short-term interest rates. income.
FHN’s balance sheet is positioned to benefit primarily from a rise in short-term interest rates. For the remainder of 2017,2018, NIM will also depend on theloan accretion levels, of interest-bearing cash;the extent of Fed interest rate increases; commercial loan
balances, particularly in specialty loan portfolios;increases, and levels of trading inventory balances. With interest-bearing cash and trading inventory levels, higher balances typically compress margin.the competitive pricing environment for core deposits.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the charge to or credit to earnings that management determines to be necessary to maintain the ALLL at a sufficient level reflecting management’s estimate of probable incurred losses in the loan portfolio. There was no provision for loan losses recognized for the three months ended September 30, 2017 compared to a provision expense of $4.0 million for the three months ended September 30, 2016. For the nine months ended September 30, 2017 and 2016, theThe provision for loan losses was $0 and a credit of $1.0 million for the three and six months ended June 30, 2018 compared to a credit to provision for loan losses of $2.0 million and $3.0 million, respectively, for the three and an expense of $11.0 million, respectively.six months ended June 30, 2017. For the three and ninesix months ended SeptemberJune 30, 2017,2018, FHN’s asset quality metrics remained strong. In both third quarter 2017 and 2016, netNet charge-offs as a percentage of loans was .05 percent. Net charge-offs as a percentage of loans declined to .03 percent and .02 percent for the ninethree and six months ended SeptemberJune 30, 2017 from .15 percent for the nine months ended September 30, 2016.2018. The ALLL decreased $7.2$4.1 million from year-end 2017 to $194.9$185.5 million as of SeptemberJune 30, 2017.2018. For additional information about the provision for loan losses refer to the Regional Banking and Non-Strategic sections of the Business Line Review section in this MD&A. For additional information about general asset quality trends refer to the Asset Quality section in this MD&A.
NONINTEREST INCOME
Noninterest income (including securities gains/(losses)) was $112.4$127.5 million in thirdsecond quarter 20172018 and represented 3529 percent of total revenue compared to $148.5$127.7 million in thirdsecond quarter 20162017 and 4539 percent. For the ninesix months ended SeptemberJune 30, 20172018 and 20162017 noninterest income was $357.0$263.5 million and $428.4$244.6 million, respectively, representing 3730 percent and 4539 percent of total revenue. The decrease in noninterest income for both 2017 periodsin second quarter 2018 was largely driven by lower fixed income product revenue, largely offset by additional fee income due to the inclusion of Capital Bank and $3.1 million of dividend income as a result of the adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" (prior to January 1, 2018 these amounts were included in Interest income). For the six months ended June 30, 2018, the increase in noninterest income was largely the result of the inclusion of Capital Bank, $5.4 million of dividend income, and a $14.3$3.3 million lossgain on the sale of a building. Additionally, increases in fees generated from FTB's wealth management group, an increase in BOLI policy gains and an increase in bankcard income also contributed to the repurchaseincrease in noninterest income in the first half of equity securities previously included in a financing transaction.2018; however, these increases were offset by lower fixed income revenue relative to the six months ended June 30, 2017.
Fixed Income Noninterest Income
Fixed income noninterest income was $55.8$37.7 million and $161.5$83.2 million for the three and ninesix months ended SeptemberJune 30, 2017,2018, down 2232 percent and 2521 percent, respectively, from $71.7$55.1 million and $216.6$105.8 million for the three and ninesix months ended SeptemberJune 30, 2016.2017. The decline in both periods reflects lower activity duedue to challenging market conditions (interest(expected interest rate increases, a flattening yield curve, and low levels of market volatility). Revenue from other products decreased 16 percentfrom $9.6 million and $17.5 million for the three and six months ended June 30, 2017 to $10.7$7.8 million in third quarter 2017 from $12.7and $15.2 million in third quarter 2016,for the three and six months ended June 30, 2018, largely driven by lower fees from derivative and loan sales. For the nine months ended September 30, 2017, revenue from other products decreased to $28.2 million from $30.8 million for the nine months ended September 30, 2016. The decline in other product revenue for the year-to-date period of 2017 was largely due to lower fees from portfolio advisory services and derivative sales relative to the same period of 2016. The following table summarizes FHN’s fixed income noninterest income for the three and nine months ended SeptemberJune 30, 20172018 and 2016.2017.
Table 2—Fixed Income Noninterest Income
| | | | Three Months Ended September 30 | | Percent Change | | Nine Months Ended September 30 | | Percent Change | Three Months Ended June 30 | | Percent Change | | Six Months Ended June 30 | | Percent Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 | |
Noninterest income: | | | | | | | | | | | | | | | | | | | | | | | |
Fixed income | | $ | 45,020 |
| | $ | 59,003 |
| | (24 | )% | | $ | 133,302 |
| | $ | 185,865 |
| | (28 | )% | $ | 29,940 |
| | $ | 45,555 |
| | (34 | )% | | $ | 67,987 |
| | $ | 88,282 |
| | (23 | )% |
Other product revenue | | 10,738 |
| | 12,745 |
| | (16 | )% | | 28,244 |
| | 30,773 |
| | (8 | )% | 7,757 |
| | 9,555 |
| | (19 | )% | | 15,216 |
| | 17,506 |
| | (13 | )% |
Total fixed income noninterest income | | $ | 55,758 |
| | $ | 71,748 |
| | (22 | )% | | $ | 161,546 |
| | $ | 216,638 |
| | (25 | )% | $ | 37,697 |
| | $ | 55,110 |
| | (32 | )% | | $ | 83,203 |
| | $ | 105,788 |
| | (21 | )% |
Deposit Transactions and Cash Management
Fees from deposit transactions and cash management activities increased to $28.0$36.1 million in thirdsecond quarter 20172018 from $27.2$27.9 million in thirdsecond quarter 20162017 largely driven by higher fee income associated with cash management activities.the inclusion of Capital Bank. For the ninesix months ended SeptemberJune 30, 20172018 and 20162017 fees from deposit transactions and cash management activities were $80.4$72.1 million and $81.0$52.4 million, respectively. The decrease foryear-to-date increase was also largely associated with the nine months ended September 30,inclusion of Capital Bank. Fees from deposit transactions and cash management activities were negatively impacted in first quarter 2017 was primarily the result of lower NSF/overdraft fees in 2017 driven bydue to changes in consumer behavior and a modification of billing practices, but was partially mitigated by anwhich further contributed to the year-over-year increase in fee income associated withfees from deposit transactions and cash management activities.activities for the six months ended June 30, 2018.
Brokerage, Management Fees and Commissions
Noninterest income from brokerage, management fees and commissions increased 1014 percent to $11.9$13.7 million in thirdsecond quarter 20172018 from $10.8$12.0 million in thirdsecond quarter 2016.2017. For the ninesix months ended SeptemberJune 30, 20172018 noninterest income from brokerage, management fees and commissions also increased 1214 percent to $35.9 million from $31.9$23.9 million for the ninesix months ended SeptemberJune 30, 2016.2017 to $27.2 million for the six months ended June 30, 2018. The increase in both periods was due in large part to increases in recurring revenue driven primarily bythe continued growth inof FHN's advisory business and favorable market conditions.conditions, coupled with an increase in the sales of structured products.
Bank-owned Life Insurance
Bank-owned life insurance ("BOLI") increased to $5.8 million and $9.8 million for the three and six months ended June 30, 2018 from $4.4 million and $7.6 million for the three and six months ended June 30, 2017, largely driven by $2.5 million of BOLI policy gains recognized in second quarter 2018 compared with $1.1 million of BOLI policy gains recognized in second quarter 2017.
Bankcard Income
Bankcard income was $6.2$6.6 million and $17.2$13.1 million for the three and ninesix months ended SeptemberJune 30, 20172018 compared to $6.3$5.6 million and $18.1$11.1 million for the three and ninesix months ended SeptemberJune 30, 2016.2017. The declineincrease in bankcard income for the nine months ended September 30, 2017 relative to the prior year was primarily the result of volume incentives receivedan increase in 2016interchange income driven by a significant new relationship.
higher volume in 2018 compared to 2017.
Securities Gains/(Losses)
Net securities gains were not significant for the three or six months ended SeptemberJune 30, 2018. For the three and six months ended June 30, 2017, and 2016 were not material. Netnet securities gains for the nine months ended September 30, 2017 were $.5$.4 million, and were primarily the result of the call of a $4.4 million held-to-maturity municipal bond within the regional banking segment in second quarter 2017. For the nine months ended September 30, 2016, FHN recognized net securities gains of $1.5 million, which was primarily the result of a $1.7 million gain on an exchange of approximately $294 million of AFS debt securities.segment.
Other Noninterest Income
Other income includes revenues from other service charges, ATM and interchange fees, other service charges,dividend income (subsequent to 2017), mortgage banking (primarily within the non-strategic and regional banking segments), electronic banking fees, letter of credit fees, electronic banking fees, revenue related to deferred compensation plans (which are mirrored by changes in noninterest expense), insurance commissions, gains/(losses) on the extinguishment of debt, and various other fees.
Revenue from all other income and commissions decreasedincreased 33 percent to $43 thousand in third quarter 2017 from $21.8$19.4 million in thirdsecond quarter 2016.2018 from $14.6 million in second quarter 2017. Effective January 1, 2018, FHN adopted ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" and began recording dividend income from FRB and FHLB holdings in other income which contributed to the increase in other noninterest income in second quarter 2018 relative to the prior year, as previously these amounts were included in Interest income. Additionally, increases in mortgage banking income and other service charges related to the inclusion of Capital Bank also contributed to the increase in all other interest and commissions in second quarter 2018 compared with the prior year.
Revenue from all other income and commissions increased 47 percent, or $13.7 million, to $42.7 million for the six months ended June 30, 2018 from $29.0 million for the six months ended June 30, 2017. The increase in all other income and commissions for the six months ended June 30, 2018 was largely due to $5.4 million in dividend income from FRB and FHLB holdings and a $3.3 million gain on the sale of a building recognized in first quarter 2018. Additionally, mortgage banking income and other service charges increased primarily related to the inclusion of Capital Bank. For the ninesix months ended SeptemberJune 30, 20172018 deferred compensation income decreased $1.9 million to $1.4 million, offsetting a portion of the overall increase in revenue from all other income and commissions was $29.1 million, down 39 percent from $47.4 million forcommissions. Deferred compensation income fluctuates with changes in the nine months ended September 30, 2016. The decreasemarket value of
the underlying investments and is mirrored by changes in all other income and commissions in both periods was primarily due to a $14.3 million loss from the repurchase of equity securities previouslydeferred compensation expense which is included in a financing transaction. Additionally, a decrease in mortgage banking income associated with a $4.4 million gain recognized in third quarter 2016 primarily related to recoveries associated with prior legacy mortgage servicing sales and a $1.8 million gain on the sales of property recognized in third quarter 2016 also contributed to the decline in other noninterest income for the three and nine months ended September 30, 2017 relative to the comparative periods of 2016.personnel expense. The following table provides detail regarding FHN’s other income.
Table 3—Other Income
| | | | Three Months Ended September 30 | | Percent Change | | Nine Months Ended September 30 | | Percent Change | Three Months Ended June 30 | | Percent Change | | Six Months Ended June 30 | | Percent Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 | |
Other income: | | | | | | | | | | | | | | | | | | | | | | | |
ATM interchange fees | | $ | 3,137 |
| | $ | 3,081 |
| | 2 | % | | $ | 8,998 |
| | $ | 8,918 |
| | 1 | % | |
Other service charges | | 2,954 |
| | 3,004 |
| | (2 | )% | | 9,047 |
| | 8,713 |
| | 4 | % | $ | 3,728 |
| | $ | 3,109 |
|
| 20 | % | | $ | 8,076 |
| | $ | 6,093 |
| | 33 | % |
ATM and interchange fees | | 3,413 |
| | 3,083 |
|
| 11 | % | | 6,680 |
| | 5,861 |
| | 14 | % |
Dividend income (a) | | 3,124 |
| | — |
|
| NM |
| | 5,373 |
| | — |
| | NM |
|
Mortgage banking | | 1,354 |
| | 5,524 |
| | (75 | )% | | 3,883 |
| | 7,395 |
| | (47 | )% | 2,431 |
| | 1,268 |
|
| 92 | % | | 4,977 |
| | 2,529 |
| | 97 | % |
Letter of credit fees | | 1,295 |
| | 1,122 |
|
| 15 | % | | 2,544 |
| | 2,158 |
| | 18 | % |
Electronic banking fees | | 1,282 |
| | 1,398 |
| | (8 | )% | | 3,911 |
| | 4,176 |
| | (6 | )% | 1,228 |
| | 1,306 |
|
| (6 | )% | | 2,432 |
| | 2,629 |
| | (7 | )% |
Letter of credit fees | | 1,211 |
| | 981 |
| | 23 | % | | 3,369 |
| | 3,157 |
| | 7 | % | |
Deferred compensation (a) | | 1,128 |
| | 1,038 |
| | 9 | % | | 4,446 |
| | 2,162 |
| | NM |
| |
Deferred compensation | | 991 |
| | 1,491 |
|
| (34 | )% | | 1,442 |
| | 3,318 |
| | (57 | )% |
Insurance commissions | | 567 |
| | 1,262 |
| | (55 | )% | | 2,042 |
| | 2,301 |
| | (11 | )% | 476 |
| | 592 |
|
| (20 | )% | | 1,233 |
| | 1,475 |
| | (16 | )% |
Gain/(loss) on extinguishment of debt (b) | | (14,329 | ) | | — |
| | NM |
| | (14,329 | ) | | — |
| | NM |
| |
Other | | 2,739 |
| | 5,518 |
| | (50 | )% | | 7,684 |
| | 10,594 |
| | (27 | )% | 2,748 |
| | 2,646 |
|
| 4 | % | | 9,920 |
| | 4,945 |
| | NM |
|
Total | | $ | 43 |
|
| $ | 21,806 |
| | NM |
| | $ | 29,051 |
| | $ | 47,416 |
| | (39 | )% | $ | 19,434 |
| | $ | 14,617 |
|
| 33 | % | | $ | 42,677 |
| | $ | 29,008 |
| | 47 | % |
NM – Not meaningful
| |
(a) | Deferred compensation market value adjustments are mirrored by changesEffective January 1, 2018, FHN adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” and began recording dividend income from FRB and FHLB holdings in deferred compensation expense which isOther income. Prior to first quarter 2018 these amounts were included in employee compensation, incentives, and benefits expense.Interest income on the Consolidated Condensed Statements of Income. |
(b) Loss on extinguishment of debt for the three and nine months ended September 30, 2017 relates to the repurchase of equity securities previously included in a financing transaction.
NONINTEREST EXPENSE
Total noninterest expense increased to $236.9$332.8 million in thirdsecond quarter 20172018 from $233.6$217.9 million in thirdsecond quarter 2016.2017. The increase in noninterest expense in thirdsecond quarter 20172018 was primarilylargely driven by higher acquisition- and integration-related expenses primarily associated with the CBF and Coastal acquisitions and a net increase in loss accruals related to legal matters compared to third quarter 2016. Loweracquisition, higher personnel-related expenses, and increases in several other expense categories due to the inclusion of Capital Bank in second quarter 2018. Additionally, 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 in second quarter 2017. For the six months ended June 30, 2018, total noninterest expense increased 47 percent to $646.0 million, largely driven by the same factors that contributed to the quarterly expense increase. For the six months ended June 30, 2018, lower legal fees relative to third quarter 2016the six months ended June 30, 2017 favorably impacted expense in third quarter 2017,the first half of 2018, offsetting a portion of the net increase in expenses. For the nine months ended September 30, 2017, total noninterest expense decreased 2 percent, or $10.3 million, to $677.0 million from $687.3 million. The decrease in noninterest expense for the year-to-date period was primarily the result of a reduction of loss accruals related to legal matters, lower personnel expenses, and lower legal fees. A net increase in acquisition- and integration-related costs and a smaller expense reversal to the mortgage repurchase provision for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, offset a portion of the expense decline.
Employee Compensation, Incentives, and Benefits
Employee compensation, incentives, and benefits (personnel expense), the largest component of noninterest expense, decreased 5increased 20 percent and 3 percent for the three and nine months ended September 30, 2017in second quarter 2018 to $137.8$165.9 million and $411.8from $138.3 million respectively, from $145.1 million and $425.6 million for the three and nine months ended September 30, 2016.in second quarter 2017. The decreaseincrease in personnel expense for both the quarterly and year-to-date periods was primarily driven bythe result of a decrease34 percent increase in variable compensationheadcount in connection with the CBF acquisition. Strategic hires in expansion markets and specialty areas and higher incentive expense associated with lower fixed income product sales revenueloan growth within FHN’s fixed income operatingthe regional banking segment in second quarter 2018, as well as an increase in minimum wage also contributed to the increase in personnel expense relative to the comparative periods of 2016. For the quarterly periodprior year. Additionally, FHN recognized $1.5a $2.7 million increase of personnel expense related to acquisition- and integration-related expenses during second quarter 2018. A decline in variable compensation associated with lower fixed income sales revenue relative to second quarter 2017, favorably impacted personnel expense in second quarter 2018, offsetting a portion of the declineexpense increase.
For the six months ended June 30, 2018, personnel expense increased 24 percent, or $64.4 million to $337.1 million. The increase in personnel expense. Forexpense for the nine months ended September 30, 2017, FHN recognizedyear-to-date period was also due primarily to an increase in personnel expenses associatedheadcount in connection with
the CBF acquisition. Within the regional banking segment, strategic hires in expansion markets and specialty areas as well asand higher incentive expense associated with loan/depositloan growth, and retention initiatives withinas well as an increase in minimum wage also contributed to the regional banking segmentincrease in 2017.personnel expense relative to the prior year. Additionally, FHN recognized $2.9$9.1 million of personnel expense related to acquisition- and integration-related expenses during the ninesix months ended SeptemberJune 30, 20172018 compared to $1.1 million for the six months ended June 30, 2017. A decline in variable compensation associated with lower fixed income sales revenue relative to the prior year offset a portion of the expense increase.
Occupancy
Occupancy expense increased to $22.5 million in second quarter 2018 from $12.8 million in second quarter 2017. For the six months ended June 30, 2018, occupancy expense increased to $43.0 million from $25.1 million. The increase in occupancy was primarily driven by higher rental expense due to the inclusion of Capital Bank and Coastal (for year-to-date 2018) expenses, as well as an increase in deferred compensationdepreciation expense relativedue to 2016, which somewhat offset the declinecompletion of space-consolidating renovations made to FHN's headquarters and other locations completed during 2017. In addition, in personnel expenses for the year-to-date period. Personnel expense for the nine months ended September 30, 2017 was favorably impacted bysecond quarter 2018 FHN recognized $2.2 million of deferred compensation BOLI gains recognized in second quarter 2017.acquisition- and integration-related expenses primarily associated with the CBF acquisition.
Professional Fees
Operations Services
Operations services expense was $10.8Professional fees were $15.4 million and $10.5$27.7 million for the three and six months ended SeptemberJune 30, 20172018 compared to $9.7 million and 2016, respectively. For the nine months ended September 30, 2017 operation services expense increased 7 percent to $33.2 million from $30.9$14.4 million for the ninethree and six months ended September 30, 2016, primarily related to an increase in third party fees associated with FHN’s online digital banking platform.
Professional Fees
Professional fees were $6.6 million in third quarter 2017 compared to $4.9 million in third quarter 2016. For the nine months ended September 30, 2017, professional fees increased to $21.0 million from $14.3 million for the nine months ended September 30, 2016.June 30, 2017. The increase in professional fees for both periods was primarily driven by acquisition- and integration-related expenses primarily associated with the CBF acquisition, as well as strategic investments to analyze growth potential and Coastal acquisitions.product mix for new markets.
Computer Software
Computer software expense was $15.1 million in second quarter 2018, up 23 percent from $12.3 million in second quarter 2017. For the six months ended June 30, 2018, computer software expense was $30.3 million, up from $23.1 million for the first half of 2017. The increase in computer software expense in both periods was driven by the inclusion of Capital Bank, as well as FHN's focus on technology-related projects. To a lesser extent acquisition- and integration-related expenses primarily associated with the CBF acquisition also contributed to the increase in computer software expense.
Operations Services
Operations services expense increased $3.1 million and $7.8 million, respectively to $14.7 million and $30.2 million for the three and six months ended June 30, 2018 from $11.5 million and $22.4 million for the same periods of 2017. The increase in operations services expense was primarily related to an increase in third party fees associated with the inclusion of Capital Bank expenses, as well as higher acquisition- and integration-related expenses primarily related to the CBF acquisition.
Equipment Rentals, Depreciation, and Maintenance
Equipment rentals, depreciation, and maintenance expense increased 52 percent, or $3.7 million, to $10.7 million in second quarter 2018 from $7.0 million in second quarter 2017. For the six months ended June 30, 2018, equipment rentals depreciation and maintenance expense increased $7.3 million to $20.7 million. The increase in equipment rentals, depreciation, and maintenance expense in both periods was due in large part to the inclusion of Capital Bank in 2018, as well as higher acquisition- and integration-related expenses primarily related to the CBF acquisition.
FDIC Premium Expense
FDIC premium expense was $6.1$10.0 million in third quarter 2017, compared to $5.7 million in third quarter 2016. For the nine months ended September 30, 2017 FDIC premium expense was $17.7 million, up from $15.5and $18.6 million for the ninethree and six months ended SeptemberJune 30, 2016.2018, compared to $5.9 million and $11.7 million for the three and six months ended June 30, 2017. The increase in FDIC premium expense for both periodsin second quarter 2018 was due in large part to balance sheetthe CBF acquisition, as well as organic growth. For the six months ended June 30, 2018, the increase was also impacted by the Coastal acquisition.
Communications and Courier
Expenses associated with communications and courier increased from $4.1 million in second quarter 2017 to $7.5 million in second quarter 2018 and from $7.9 million in the first half of 2017 to $15.8 million in the first half of 2018. The increase in communication and courier expense was primarily driven by the inclusion of Capital Bank for the quarter and year-to-date
periods of 2018. Expenses related to acquisition- and integration- related projects primarily associated with the CBF acquisition also contributed to the increase in expenses.
Amortization of Intangible Assets
Amortization expense was $6.5 million and $12.9 million for the three and six months ended June 30, 2018, a $4.5 million and $9.7 million increase, respectively, from $2.0 million and $3.2 million for the three and six months ended June 30, 2017. The increase was due to amortization expense as a result of the CBF and Coastal acquisitions.
Contract employment and outsourcing
Expenses associated with contract employment and outsourcing increased from $3.3 million and $6.2 million for the three and six months ended June 30, 2017 to $5.9 million and $10.0 million for the three and six months ended June 30, 2018, primarily driven by acquisition- and integration- related projects primarily associated with the CBF acquisition.
Legal Fees
Legal fees decreased $2.720 percent and 42 percent to $2.8 million and $4.7 million during the three and nine months ended September 30, 2017 to $2.1 million and $10.8 million, respectively, from $4.8 million and $15.5$5.1 million for the three and ninesix months ended SeptemberJune 30, 2016.2018 from $3.5 million and $8.8 million for the three and six months ended June 30, 2017. Legal fees fluctuate primarily based on the status, timing, type, and composition of cases or other projects.
Repurchase and Foreclosure Provision/(Provision Credit)
For the three months ended September 30, 2017 and 2016, the mortgage repurchase and foreclosure provision was not material. For the nine months ended September 30,During second quarter 2017, FHN recognized a $22.6$21.7 million pre-tax reversal of mortgage repurchase and foreclosure provision primarily as a result of the settlement of certain repurchase claims, in second quarter 2017, which favorably impacted expenses infor both the quarterly and year-to-date periods of 2017. Similarly, during the nine months ended September 30, 2016, FHN recognized a $31.6 million reversal of mortgage repurchase and foreclosure provision as a result of the settlement of certain repurchase claims, which also resulted in a favorable impact on expenses in 2016.
Other Noninterest Expense
Other expense includes losses from litigation and regulatory matters, travel and entertainment expenses, other insurance and tax expense, customer relations expenses,supplies, costs associated with employee training and dues, supplies,expenses associated with the non-service components of net periodic pension and post-retirement cost, customer relations expenses, tax credit investments expenses, miscellaneous loan costs, expenses associated with OREO, losses from litigation and regulatory matters, and various other expenses.
All otherother expenses increased to $27.7$51.0 million in thirdsecond quarter 20172018 from $19.9$25.2 million in thirdsecond quarter 2016,2017. The increase was primarily driven by a $7.9 million net increase in loss accruals relateddue to legal matters. Additionally, all other expenses in third quarter 2017 included $2.2$24.2 million of acquisition- and integration-related expenses. Forintegration- related expenses primarily associated with the nine months ended September 30, 2017 all other expenses were $70.9 million compared to $88.9 million for the nine months ended September 30, 2016. The decline in all other expenses for the year-to-date period was primarily driven by a decline in loss accrualsCBF acquisition, including contract termination charges and asset impairments related to legal matters.the integration, as well as other miscellaneous expenses. In the nine months ended September 30, 2017,second quarter 2018, FHN experienced a $4.6recognized $4.1 million net decrease in fixed asset impairments and lease abandonment charges and a $2.4 million decrease in negativeof valuation adjustments associated with derivatives related to prior sales of Visa Class B shares, which also contributed to the increase in other noninterest income relative to the prior year. These expense decline during 2017. Additionally, other insurance and taxes decreased to $7.2 million for the nine months ended September 30, 2017 from $9.0 million for the comparable period of 2016 largely drivenincreases were somewhat offset by favorable adjustments to franchise taxes related to community reinvestment efforts. For the nine months ended September 30, 2017 FHN recognized a $3.2 million charitable contribution made to the First Tennessee Foundation $2.2in second quarter 2017; a similar contribution was not made in the second quarter of 2018.
For the six months ended June 30, 2018, all other expenses increased to $86.3 million from $44.4 million for the six months ended June 30, 2017. The increase was primarily due to a $40.9 million increase of acquisition- and integration-related expensescosts primarily associated with the CBF acquisition, including contract termination charges, costs of shareholder matters and asset impairments related to the integration, as well as other miscellaneous expenses. The Visa derivative valuation adjustment previously mentioned and a $2.0$1.9 million vendor payment adjustment, all of whichincrease in loss accruals related to legal matters also negatively impacted expense forin the year-to-date periodfirst half of 2018 relative to the prior year. As previously mentioned, expense in the first half of 2017 relativeincluded a $3.2 million charitable contribution made to 2016.the First Tennessee Foundation in second quarter 2017. The following table provides detail regarding FHN’s other expense.
Table 4—Other Expense
| | | | Three Months Ended September 30 | | Percent Change | | Nine Months Ended September 30 | | Percent Change | Three Months Ended June 30 | | Percent Change | | Six Months Ended June 30 | | Percent Change |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 | |
Other expense: | | | | | |
|
| | | | | | | | | | |
|
| | | | | | |
Litigation and regulatory matters | | $ | 8,162 |
| | $ | 260 |
| | NM |
| | $ | 8,403 |
| | $ | 25,785 |
| | (67 | )% | |
Travel and entertainment | | 2,798 |
| | 2,478 |
| | 13 | % | | 8,308 |
| | 7,035 |
| | 18 | % | $ | 5,131 |
| | $ | 3,162 |
| | 62 | % | | $ | 8,114 |
| | $ | 5,510 |
| | 47 | % |
Other insurance and taxes | | 2,396 |
| | 2,625 |
| | (9 | )% | | 7,229 |
| | 8,952 |
| | (19 | )% | 2,752 |
| | 2,443 |
| | 13 | % | | 5,417 |
| | 4,833 |
| | 12 | % |
Supplies | | 1,987 |
| | 1,093 |
| | 82 | % | | 3,823 |
| | 1,956 |
| | 95 | % |
Employee training and dues | | 1,849 |
| | 1,453 |
| | 27 | % | | 3,628 |
| | 2,996 |
| | 21 | % |
Non-service components of net periodic pension and post-retirement cost | | 1,530 |
| | 851 |
| | 80 | % | | 2,034 |
| | 1,328 |
| | 53 | % |
Customer relations | | 1,361 |
| | 1,442 |
| | (6 | )% | | 4,240 |
| | 4,804 |
| | (12 | )% | 1,358 |
| | 1,543 |
| | (12 | )% | | 2,421 |
| | 2,879 |
| | (16 | )% |
Employee training and dues | | 1,198 |
| | 1,360 |
| | (12 | )% | | 4,194 |
| | 4,088 |
| | 3 | % | |
Supplies | | 928 |
| | 1,158 |
| | (20 | )% | | 2,884 |
| | 3,114 |
| | (7 | )% | |
Tax credit investments | | 762 |
| | 788 |
| | (3 | )% | | 2,646 |
| | 2,325 |
| | 14 | % | 1,079 |
| | 942 |
| | 15 | % | | 2,216 |
| | 1,884 |
| | 18 | % |
Miscellaneous loan costs | | 757 |
| | 676 |
| | 12 | % | | 2,078 |
| | 1,958 |
| | 6 | % | 1,035 |
| | 699 |
| | 48 | % | | 2,177 |
| | 1,321 |
| | 65 | % |
OREO | | 303 |
| | 815 |
| | (63 | )% | | 953 |
| | 125 |
| | NM |
| 810 |
| | 446 |
| | 82 | % | | 918 |
| | 650 |
| | 41 | % |
Other | | 9,033 |
| | 8,326 |
| | 8 | % | | 29,954 |
| | 30,669 |
| | (2 | )% | |
Litigation and regulatory matters | | 16 |
| | 533 |
| | (97 | )% | | 2,150 |
| | 241 |
| | NM |
|
Other (a) | | 33,452 |
| | 12,051 |
| | NM |
| | 53,433 |
| | 20,843 |
| | NM |
|
Total | | $ | 27,698 |
|
| $ | 19,928 |
| | 39 | % | | $ | 70,889 |
|
| $ | 88,855 |
| | (20 | )% | $ | 50,999 |
| | $ | 25,216 |
| | NM |
| | $ | 86,331 |
| | $ | 44,441 |
| | 94 | % |
NM – Not meaningful
Certain previously reported amounts have been revised to reflect the retroactive effect of the adoption of ASU 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” See Note 1 - Financial Information for additional information.
(a) Expense increase for the three and six months ended June 30, 2018 largely attributable to acquisition- and integration-related expenses associated with the CBF acquisition. See Note 2 - Acquisitions and Divestitures for additional information.
INCOME TAXES
FHN recorded an income tax provisionprovision of $13.6 $19.7 million in thirdsecond quarter 2017,2018, compared to $28.5$17.3 million in thirdsecond quarter 2016.2017. For the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, FHN recorded an income tax provision of $57.9 $49.6 million and $82.8$44.3 million, respectively. The effective tax rate for thethree and nine months ended September 30, 2017 were approximately 16 percent and 20 percent compared to 30 percent and 31 percentrates for the three and ninesix months endended June 30, 2018 were approximately 19 percent and 22 percent compared to 15 percent and 22 percent for ted Septemberhe three and six months ended June 30, 2016. 2017.
FHN’s effective tax rate for 2018 is favorably affected by the decrease in the federal rate from 35 percent to 21 percent. It is also favorably affected by recurring items such as bank-owned life insurance, tax-exempt income, and credits and other tax benefits from affordable housing investments. The company’seffective rate is unfavorably affected by the non-deductibility of portions of FHN's FDIC premium and executive compensation expense. FHN’s effective tax rate also may be affected by items that may occur in any given periodperiod but are not consistent from period to period, such as changes in the deferred tax asset valuation allowance and changes in unrecognized tax benefits. The decrease in For the three and six months ended June 30, 2018, FHN recognized $4.8 million and $3.7 million, respectively, of net favorable discrete items primarily related to CBF purchase accounting adjustments.
FHN's effective tax rate for the three and nine months ended September 30,in second quarter 2017 relative to the prior year was primarily related tofavorably impacted by the reversal of the valuation allowance for the deferred tax asset related to its 2012 federal capital loss carryforward based on capital gain transactions initiated in second quarter 2017. See Note 15 – Income Taxes in the Notes to Consolidated Financial Statements on FHN’s Form 10-K for the year ended December 31, 2016, for additional information related to FHN's valuation allowance related to its capital loss carryforward.
A deferred tax asset (“DTA”) or deferred tax liability (“DTL”) is recognized for the tax consequences of temporary differences between the financial statement carrying amountsamounts and the tax bases of existing assets and liabilities. The tax consequence is calculated by applying enacted statutory tax rates, applicable to future years, to these temporary differences. As of SeptemberJune 30, 2017,2018, FHN’s gross DTA (net of a valuation allowance) and gross DTL were $282.3$316.3 million and $91.6$107.4 million, respectively, resulting in a net DTA of $190.7$209.0 million at Septemberat June 30, 2017,2018, compared with a net DTA of $157.2$210.2 million at September June 30, 2016. The2017. There have been various changes to FHN's DTA since the second quarter of 2017. Major changes include an increase in the DTA since the third quarter of 2016 is primarily theas a result of the reversalacquisition of CBF and a capital loss deferreddecrease in the DTA as a result of the decrease in the federal tax asset valuation allowance. rate.
As of SeptemberJune 30, 2017,2018, FHN had gross deferred tax asset balances related to federal and state income tax carryforwards of $57.3$79.9 million and $14.1$12.2 million, respectively, which will expire at various dates.
As of September 30, 2017 FHN did not have a valuation allowance against its federal capital loss carryforwards. As of September 30, 2016, FHN's valuation allowance against its federal capital loss carryforwards was $40.3 million. FHN’s gross DTA after valuation allowance was $ 282.3 $316.3 million and $289.2$299.4 million as of SeptemberJune 30, 2018 and 2017, and 2016, respectively. Based on current analysis,Other than a small valuation allowance against state NOLs, FHN believes that its abilityit will be able to realize the remainingvalue of its DTA and that no valuation allowance is more likely than not.needed. FHN monitors its DTA and the need for a valuation allowance on a quarterly basis. A significant adverse change in FHN’s taxable earnings outlook could result in the need for further valuation allowances. In the event FHN determines that the deferred tax assets are realizable in the future in excess of their net recorded amount, FHN makes an adjustment to the valuation allowance, which reduces the effective tax rate and provision for income taxes.
Tax reform, including the reduction of the corporate tax rate, is expected to be on the legislative agenda this year. A rate reduction, if enacted, will have a net beneficial effect to FHN over the long-term; however, certain deductions may be eliminated or reduced as a part of tax reform which could reduce the beneficial effect of the rate reduction. Additionally, a rate
reduction would result in the impairment of a portion of the deferred tax asset in the quarter that it is signed into law by the President. The actual impacts are subject to significant uncertainties including whether, and to what extent, rate reductions or broader tax reform can actually be executed and, if executed, the timing.
STATEMENT OF CONDITION REVIEW
Total period-end assets were $29.6$41.1 billion on Septemberon June 30, 2017, up 42018, a 1 percent decrease from $28.6$41.4 billion on December 31, 2016.2017. Average assets increased to $28.9 billion in third quarter 201721 percent from $28.6$33.1 billion in fourth quarter 2016. A2017 to $40.2 billion in second quarter 2018. The increase in average assets was primarily driven by the timing of the CBF acquisition on November 30, 2017; second quarter 2018 includes the average impact of three months of balances compared with one month in fourth quarter 2017. The increase was largely due to net increaseincreases in the loan portfolios, a larger investment securities portfolio, and higher balances ofincreases in goodwill and other intangible assets. Additionally, loans held-for-sale, significantlypremises and equipment, and fixed income inventory also contributed to the increase in totalaverage assets onfrom December 31, 2017. The decrease in period-end assets was due in large part to decreases in interest bearing cash levels and a period-end and average basis,net decrease in the available-for-sale ("AFS") securities portfolios, but werewas somewhat offset by a decline in the levels of interest bearing cash on hand during the quarter and at September 30, 2017 relative to December 31, 2016. Additionally, an increase in Fixed income trading inventory on September 30, 2017 also contributedand securities purchased under agreements to the increase in total assets on a period-end basis.resell.
Total period-end liabilities were $26.7$36.5 billion on SeptemberJune 30, 2017,2018, a 31 percent increasedecrease from $25.9$36.8 billion on DecemberDecember 31, 2016.2017. Average liabilities increased to $26.0$35.6 billion in thirdsecond quarter 2017,2018, from $25.9$29.6 billion in fourth quarter 2016.2017. The net increase in period-end and average liabilities relative to fourth quarter 20162017 was also the result of the timing of the CBF acquisition in late fourth quarter 2017 and was primarily attributable to acquired deposits, and to a lesser extent short-term borrowings. The decrease in period-end liabilities was primarily due to a decrease in short-term borrowings, somewhat offset by increases in short-term borrowings. Deposits decreased relative to fourth quarter 2016 on both a period-enddeposits and average basis.trading liabilities.
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 118 percent and 34 percent to $26.6$35.6 billion in thirdsecond quarter 20172018 from $26.4$30.0 billion and $26.6 billion in fourth quarter 2016.2017 and second quarter 2017, respectively. A more detailed discussion of the major line items follows.
Loans
Period-end loans increased 3 percent to $20.2were $27.7 billion as of SeptemberJune 30, 2017 from $19.6 billion on2018 and December 31, 2016 and September2017 compared with $20.0 billion as of June 30, 2016.2017. Average loans for thirdsecond quarter 2018 increased to $27.3 billion from $22.5 billion in fourth quarter 2017 were $19.8and $19.2 billion compared to $19.4 billion for fourthin second quarter 2016 and $18.7 billion for third quarter 2016.2017. The increase in period-end and average loan balances from fourth and third quarters 2016second quarter 2017 was primarily due tothe result of $7.3 billion in loans from the CBF acquisition and organic growth in several of the commercial loan portfolios within theFHN's regional banking segment, somewhat offset by lower balances of loans to mortgage companies and the continued run-off of consumer loan portfolios within the non-strategic segment.portfolios. The increase in average loanloans from fourth quarter 2017 was primarily due to the timing of the CBF acquisition, as second quarter 2018 includes the average impact of three months of balances from thirdcompared with one month in fourth quarter 2016 was also impacted by the purchase of franchise finance loans in third quarter 2016.2017.
Table 5—Average Loans
| | | | Quarter Ended September 30, 2017 | | Quarter Ended December 31, 2016 | | | | Quarter Ended June 30, 2018 | | Quarter Ended December 31, 2017 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Commercial: | | | | | | | | | | | | | | | | | | | | |
Commercial, financial, and industrial | | $ | 12,474,188 |
| | 63 | % | | $ | 11,987,561 |
| | 62 | % | | 4 | % | | $ | 15,958,162 |
| | 59 | % | | $ | 13,756,024 |
| | 61 | % | | 16 | % |
Commercial real estate | | 2,211,831 |
| | 11 |
| | 2,089,314 |
| | 11 |
| | 6 | % | | 4,198,275 |
| | 15 |
| | 2,892,949 |
| | 13 |
| | 45 |
|
Total commercial | | 14,686,019 |
| | 74 |
| | 14,076,875 |
| | 73 |
| | 4 | % | | 20,156,437 |
| | 74 |
| | 16,648,973 |
| | 74 |
| | 21 |
|
Consumer: | | | | | | | | | | | | | | | | | | | | |
Consumer real estate (a) | | 4,398,550 |
| | 22 |
| | 4,545,647 |
| | 23 |
| | (3 | )% | | 6,217,618 |
| | 23 |
| | 5,029,588 |
| | 22 |
| | 24 |
|
Permanent mortgage | | 405,287 |
| | 2 |
| | 429,914 |
| | 2 |
| | (6 | )% | | 369,144 |
| | 1 |
| | 400,991 |
| | 2 |
| | (8 | ) |
Credit card, OTC and other | | 354,807 |
| | 2 |
| | 361,311 |
| | 2 |
| | (2 | )% | | 555,588 |
| | 2 |
| | 439,057 |
| | 2 |
| | 27 |
|
Total consumer | | 5,158,644 |
| | 26 |
| | 5,336,872 |
| | 27 |
| | (3 | )% | | 7,142,350 |
| | 26 |
| | 5,869,636 |
| | 26 |
| | 22 |
|
Total loans, net of unearned income | | $ | 19,844,663 |
| | 100 | % | | $ | 19,413,747 |
| | 100 | % | | 2 | % | | $ | 27,298,787 |
| | 100 | % | | $ | 22,518,609 |
| | 100 | % | | 21 | % |
(a) Balance as of SeptemberJune 30, 20172018 and December 31, 2016,2017, includes $27.3$20.1 million and $37.2$25.1 million of restricted and secured real estate loans, respectively.
C&I loans are the largest component of the commercial portfolio comprising 85 percent of average commercial loans in both third quarter 2017 and fourth quarter 2016. C&I loans increased 4 percent, or $.5 billion, from fourth quarter 2016 due to net loan growth within several of the regional bank’s portfolios including commercial, asset-based lending ("ABL"), and franchise
finance, somewhat offset by lower balances of loans to mortgage companies. Commercial real estate loans increased 6 percent to $2.2 billion in third quarter 2017 because of growth in expansion markets and increased funding under existing commitments.
Average consumer loans declined 3 percent, or $.2 billion, from fourth quarter 2016 to $5.2 billion in third quarter 2017. The consumer real estate portfolio (home equity lines and installment loans) declined $147.1 million, to $4.4 billion, as the continued wind-down of portfolios within the non-strategic segment outpaced a $148.6 million increase in real estate installment loans from new originations within the regional banking segment. The permanent mortgage portfolio declined $24.6 million to $405.3 million in third quarter 2017 driven by run-off of legacy assets within the non-strategic segment offset by some growth in mortgage loans within regional banking, primarily related to FHN’s CRA initiatives. Credit Card and Other decreased $6.5 million to $354.8 million in third quarter 2017.
Investment Securities
FHN’s investment portfolio consists principally of debt securities including government agency issued mortgage-backed securities (“MBS”) and government agency issued collateralized mortgage obligations (“CMO”), substantially all of which are classified as available-for-sale (“AFS”).available-for-sale. FHN utilizes the securities portfolio as a source of income, liquidity and collateral for repurchase agreements, for public funds, and as a tool for managingmanaging risk of interest rate movements. Investment securities were $4.0$4.7 billion on SeptemberJune 30, 2017 and2018 compared to $5.2 billion on December 31, 20162017. Investment securities averaged $4.8 billion and averaged $4.0$4.3 billion in thirdsecond quarter 20172018 and fourth quarter 2016,2017, respectively, representing 1513 percent and 14 percent of average earning assets in both periods.second quarter 2018 and fourth quarter 2017, respectively. The decrease in period-end investment securities was due in large part to the adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities," on January 1, 2018, which resulted in the reclassification of equity securities from Investment securities to Other assets. Additionally, an increase in unrealized losses as a result of higher rates contributed to the decrease in the investment securities balance on June 30, 2018. The increase in average assets in second quarter 2018 compared to fourth quarter 2017 was primarily due to the timing of the CBF acquisition, as second quarter 2018 includes the average impact of three months of CBF balances compared to one month in fourth quarter 2017, somewhat offset by the reclassification of equity securities previously mentioned. FHN manages the size and mix of the investment portfolio to assist in asset liability management, provide liquidity, and optimize risk adjusted returns.
Loans Held-for-Sale
Loans HFS consists of small business, other consumer loans, the mortgage warehouse, (primarily repurchased government-guaranteed loans), USDA, student, and home equity loans. On SeptemberJune 30, 20172018 loans HFS were $339.8$692.7 million compared to $111.2$699.4 million on December 31, 2016.2017. The average balance of loans HFS increased to $540.1$727.2 million in thirdsecond quarter 20172018 from $127.5$504.6 million in fourth quarter 2016.2017. The increasedecrease in period-end and averagebalances is primarily attributable to the second quarter 2018 sale of approximately $120 million UPB of subprime auto loans HFS was drivenacquired from the CBF acquisition, somewhat offset by the Coastal acquisition, which resulted in an increase in small business loans. The increase in average loans and the addition of USDAHFS was primarily due to an increase in small business loans.
Other Earning Assets
Other earning assets include trading securities, securities purchased under agreements to resell, federal funds sold (“FFS”), and interest-bearing deposits with the Fed and other financial institutions. Other earning assets averaged $2.2$2.8 billion in thirdsecond quarter 2017, down2018, up from $2.8$2.7 billion in fourth quarter 2016.2017. The decreaseincrease in other earning assets was primarily driven by lower levels of interest bearing cash as a result of loan growth and the Coastal acquisition. Additionally,an increase in fixed income trading securities, andsomewhat offset by a decrease in securities purchased under agreements to resell ("asset repos") decreased fromrelative to fourth quarter 2016.2017. Fixed income's trading inventory fluctuates daily based on customer demand. Asset repos are used in fixed income trading activity and generally fluctuate with the level of fixed income trading liabilities (short-positions) as securities collateral from asset repo transactions are used to fulfill trades. Other earning assets were $2.8$3.3 billion on SeptemberJune 30, 2017,2018, a 74 percent increasedecrease from $2.6$3.4 billion on December 31, 2016.2017. The increasedecrease in other earning assets on a period-end basis werewas driven by lower levels of interest bearing cash, somewhat offset by an increase in fixed income trading securities, offset by a decline in interest-bearing cash.securities.
Non-earning assets
Period-end non-earning assets increased $55.0 million to $2.3$4.7 billion on SeptemberJune 30, 2018 from $4.5 billion on December 31, 2017. The increase in non-earning assets was primarily due to increasesthe adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities," which resulted in Fixed income receivables, goodwill and intangiblethe reclassification of equity securities from investment securities to other assets. Additionally, an increase in derivative assets associated withalso contributed to the Coastal acquisition,increase in non-earning assets as well as the addition of LIHTC investments in third quarter 2017,June 30, 2018, but was somewhat offset by a decline in derivative assets and lower cash balances.
Deposits
Average deposits were $22.1$30.7 billion during thirdsecond quarter 2018, up 23 percent and 36 percent, respectively from $24.9 billion in fourth quarter 2017 down 1 percent from $22.3 billion during fourth quarter 2016 and up 5 percent from $21.1$22.5 billion in thirdsecond quarter 2016. The decrease in average deposits from fourth quarter 2016 was primarily driven by FHN's decision to decrease market-indexed deposit balances and use alternate sources of wholesale funding to support loan growth; however, this decline was somewhat offset by increases in consumer interest (largely priority and other consumer savings), non-interest bearing deposits and commercial customer deposits.2017. The increase in average deposits was due primarily to the addition of $8.1 billion of deposits associated with the CBF acquisition.
FHN's composition of deposits shifted slightly from thirdsecond and fourth quarter 20162017, resulting in an increase in interest-bearing deposits in second quarter 2018 relative to the prior year. Additionally, market-indexed deposits as a percentage of total deposits decreased from 17 percent and 16 percent in second quarter 2017 and fourth quarter 2017, respectively, to 15 percent in second quarter 2018, while commercial interest increased as a percentage of total deposits.
Period-end deposits were $31.0 billion on June 30, 2018, up 1 percent from $30.6 billion on December 31, 2017, and up 39 percent from $22.3 billion on June 30, 2017. The increase in period-end deposits from June 30, 2017 was also primarily due to deposits acquired in the CBF acquisition. The increase in period-end deposits from December 31, 2017 was largely due to increasesthe result of an increase in consumer interest, non-interest bearing depositssavings and commercial customertime deposits, somewhat offset by a decreasedecline in market-indexedother interest bearing deposits. Period-end deposits were $22.1 billion on September 30, 2017, down 3 percent from $22.7 billion on December 31, 2016, and up 2 percent from $21.6 billion on September 30, 2016.
FHN experienced deposit growth within consumer interest, commercial interest and non-interest bearing deposits from September 30, 2016 and December 31, 2016 to September 30, 2017. Market-indexed deposits decreased from September 30, 2016 and December 31, 2016 to September 30, 2017; however the decrease from year-end was much more significant, more than offsetting other deposit growth and resulting in the net decrease in total deposits from December 31, 2016 on a period-end basis.
Table 6—Average Deposits
| | | | Quarter Ended September 30, 2017 | | Quarter Ended December 31, 2016 | | | | Quarter Ended June 30, 2018 | | Quarter Ended December 31, 2017 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | |
Consumer interest | | $ | 9,244,021 |
| | 42 | % | | $ | 8,641,507 |
| | 39 | % | | 7 | % | | $ | 12,581,023 |
| | 41 | % | | $ | 10,279,937 |
| | 41 | % | | 22 | % |
Commercial interest | | 2,876,398 |
| | 13 |
| | 2,819,980 |
| | 13 |
| | 2 | % | | 5,618,245 |
| | 18 |
| | 3,684,643 |
| | 15 |
| | 52 |
|
Market-indexed (a) | | 3,523,450 |
| | 16 |
| | 4,787,912 |
| | 21 |
| | (26 | )% | | 4,488,503 |
| | 15 |
| | 3,958,224 |
| | 16 |
| | 13 |
|
Total interest-bearing deposits | | 15,643,869 |
| | 71 |
| | 16,249,399 |
| | 73 |
| | (4 | )% | | 22,687,771 |
| | 74 |
| | 17,922,804 |
| | 72 |
| | 27 |
|
Noninterest-bearing deposits | | 6,411,160 |
| | 29 |
| | 6,039,025 |
| | 27 |
| | 6 | % | | 8,003,901 |
| | 26 |
| | 6,972,912 |
| | 28 |
| | 15 |
|
Total deposits | | $ | 22,055,029 |
| | 100 | % | | $ | 22,288,424 |
| | 100 | % | | (1 | )% | | $ | 30,691,672 |
| | 100 | % | | $ | 24,895,716 |
| | 100 | % | | 23 | % |
(a) Market-indexed deposits are tied to an index not administered by FHN and are comprised of insured network deposits, correspondent banking deposits, and trust/sweep deposits.
Short-Term Borrowings
Short-term borrowings (federal funds purchased (“FFP”), securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings) averaged $2.3$3.1 billion in thirdsecond quarter 2017,2018, up 223 percent from $1.9$3.0 billion in fourth quarter 2016.2017. The increase in short-term borrowings between thirdsecond quarter 20172018 and fourth quarter 20162017 was primarily due to increases in other short-termshort-term borrowings and securities sold under agreements to repurchase, partially offset by lower levels of FFPa decrease in trading liabilities and trading liabilities.federal funds purchased. Other short-term borrowings balances fluctuate largely based on the level of FHLB borrowing as a result of loan demand, deposit levels and balance sheet funding strategies. Average securities sold under agreements to repurchase increased in thirdsecond quarter 2017, primarily due to the Coastal acquisition. 2018, as an additional source of wholesale funding for FHN's balance sheet activities. Average trading liabilities fluctuates based on expectations of customer demand and average FFP fluctuates depending on the amount of excess funding of FHN’sFHN's correspondent bank customers and average trading liabilities fluctuates based on expectations of customer demand.customers. Period-end short-term borrowings increaseddecreased to $3.0$3.6 billion on SeptemberJune 30, 20172018 from $1.5$4.3 billion on December 31, 2016.2017. The increasedecrease in short-term borrowings on a period-end basis was driven by an increasea decrease in other short-term borrowings (primarily FHLB advances) which management uses as an additional source, somewhat offset by higher levels of wholesale funding to support loan growth.trading inventory.
Table 7—Average Short-Term Borrowings
| | | | Quarter Ended September 30, 2017 | | Quarter Ended December 31, 2016 | | | | Quarter Ended June 30, 2018 | | Quarter Ended December 31, 2017 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Short-term borrowings: | | | | | | | | | | | | | | | | | | | | |
Federal funds purchased | | $ | 376,150 |
| | 16 | % | | $ | 528,266 |
| | 28 | % | | (29 | )% | | $ | 368,321 |
| | 12 | % | | $ | 425,900 |
| | 14 | % | | (14 | )% |
Securities sold under agreements to repurchase | | 680,366 |
| | 30 |
| | 378,837 |
| | 20 |
| | 80 | % | | 667,689 |
| | 22 |
| | 595,275 |
| | 20 |
| | 12 |
|
Trading liabilities | | 597,269 |
| | 26 |
| | 745,011 |
| | 39 |
| | (20 | )% | | 666,092 |
| | 21 |
| | 741,063 |
| | 25 |
| | (10 | ) |
Other short-term borrowings | | 655,599 |
| | 28 |
| | 243,527 |
| | 13 |
| | NM |
| | 1,399,580 |
| | 45 |
| | 1,246,087 |
| | 41 |
| | 12 |
|
Total short-term borrowings | | $ | 2,309,384 |
| | 100 | % | | $ | 1,895,641 |
| | 100 | % | | 22 | % | | $ | 3,101,682 |
| | 100 | % | | $ | 3,008,325 |
| | 100 | % | | 3 | % |
NM - Not meaningful | | | | | | | | | | | |
Term Borrowings
Term borrowings include senior and subordinated borrowings with original maturities greater than one year. Term borrowings were $1.1 billion and $1.0$1.2 billion on SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. Average term borrowings
increased $48.5 millionto $1.2 billion in second quarter 2018 from fourth quarter 2016 to $1.1 billion in thirdfourth quarter 2017 primarily driven by a temporary increasefull quarter of average impact of the addition of $212.4 million junior subordinated debentures underlying trust preferred debt acquired in secured borrowings associatedassociation with a financing transaction.the CBF acquisition. In fourth quarter 2017, this balance was only included for one month due to the timing of the CBF acquisition.
Other Liabilities
Period-end other liabilities were $.6$.7 billion on SeptemberJune 30, 20172018 and December 31, 2016.2017.
CAPITAL
Management’s objectives are to provideprovide capital sufficient to cover the risks inherent in FHN’s businesses, to maintain excess capital to well-capitalized standards, and to assure ready access to the capitalcapital markets. Period-end equity increased to $ 2.9was $4.5 billion on SeptemberJune 30, 2017 from $2.72018 compared to $4.6 billion on December 31, 2016 primarily due to31, 2017 as net income recognized since fourthin first and second quarter 2016, partially2018 was offset by common and preferred dividends, paid.a decrease in accumulated other comprehensive income ("AOCI"), and the cancellation of 2,373,220 common shares in connection with CBF dissenting shareholders (mentioned below). The decrease in AOCI was largely driven by an increase in unrealized losses on AFS debt securities as a result of higher rates. Average equity increased $119.9 million to $2.9$4.6 billion in thirdsecond quarter 2018 from $3.5 billion in fourth quarter 2017, from fourth quarter 2016, asdue in large part to the average impact of net income less dividends paid$1.8 billion of equity issued in connection with the CBF acquisition on November 30, 2017. Average equity recognized in the nine months ended September 30, 2017 on an average basis was somewhat offsetnegatively impacted by a decrease attributable to average accumulated other comprehensive income.decline in AOCI and the cancellation of the dissenters' shares. The decline attributable to average accumulated other comprehensive incomein AOCI was largely the result of an increase in unrealized losses recognized on the AFS debt securities portfolio, as well asand an increase ofin net actuarial losses for pension and post retirement plans.
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) | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
Shareholders’ equity | | $ | 2,588,120 |
| | $ | 2,409,653 |
| | $ | 4,254,318 |
| | $ | 4,285,057 |
|
FHN non-cumulative perpetual preferred | | (95,624 | ) | | (95,624 | ) | | (95,624 | ) | | (95,624 | ) |
Common equity | | $ | 2,492,496 |
| | $ | 2,314,029 |
| | $ | 4,158,694 |
| | $ | 4,189,433 |
|
Regulatory adjustments: | | | | | | | | |
Disallowed goodwill and other intangibles | | (229,555 | ) | | (165,292 | ) | | (1,518,717 | ) | | (1,480,725 | ) |
Net unrealized (gains)/losses on securities available-for-sale | | 5,940 |
| | 17,232 |
| | 107,476 |
| | 26,834 |
|
Net unrealized (gains)/losses on pension and other postretirement plans | | 224,686 |
| | 229,157 |
| | 284,881 |
| | 288,227 |
|
Net unrealized (gains)/losses on cash flow hedges | | 1,758 |
| | 1,265 |
| | 19,757 |
| | 7,764 |
|
Disallowed deferred tax assets | | (17,637 | ) | | (18,027 | ) | | (48,834 | ) | | (69,065 | ) |
Other deductions from common equity tier 1 | | (478 | ) | | (377 | ) | | (299 | ) | | (313 | ) |
Common equity tier 1 | | $ | 2,477,210 |
| | $ | 2,377,987 |
| | $ | 3,002,958 |
| | $ | 2,962,155 |
|
FHN non-cumulative perpetual preferred | | 95,624 |
| | 95,624 |
| | 95,624 |
| | 95,624 |
|
Qualifying noncontrolling interest—FTBNA preferred stock | | 250,409 |
| | 256,811 |
| | 252,407 |
| | 257,080 |
|
Other deductions from tier 1 | | (58,463 | ) | | (58,551 | ) | | (12,810 | ) | | (33,381 | ) |
Tier 1 capital | | $ | 2,764,780 |
| | $ | 2,671,871 |
| | $ | 3,338,179 |
| | $ | 3,281,478 |
|
Tier 2 capital | | 240,418 |
| | 254,139 |
| | 422,472 |
| | 422,276 |
|
Total regulatory capital | | $ | 3,005,198 |
| | $ | 2,926,010 |
| | $ | 3,760,651 |
| | $ | 3,703,754 |
|
Risk-Weighted Assets | | | | | | | | |
First Horizon National Corporation | | $ | 24,678,030 |
| | $ | 23,914,158 |
| | $ | 33,437,145 |
| | $ | 33,373,877 |
|
First Tennessee Bank National Association | | 24,186,100 |
| | 23,447,251 |
| | 32,698,480 |
| | 32,786,547 |
|
Average Assets for Leverage | | | | | | | | |
First Horizon National Corporation | | 28,793,816 |
| | 28,581,251 |
| | 39,003,215 |
| | 31,824,751 |
|
First Tennessee Bank National Association | | 27,962,251 |
| | 27,710,158 |
| | 38,117,285 |
| | 31,016,187 |
|
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
| | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount |
Common Equity Tier 1 | | | | | | | | | | | | | | | | |
First Horizon National Corporation | | 10.04 | % | | $ | 2,477,210 |
| | 9.94 | % | | $ | 2,377,987 |
| | 8.98 | % | | $ | 3,002,958 |
| | 8.88 | % | | $ | 2,962,155 |
|
First Tennessee Bank National Association | | 9.53 |
| | 2,304,244 |
| | 9.80 |
| | 2,298,080 |
| | 9.47 |
| | 3,097,088 |
| | 9.28 |
| | 3,041,420 |
|
Tier 1 | | | | | | | | | | | | | | | | |
First Horizon National Corporation | | 11.20 |
| | 2,764,780 |
| | 11.17 |
| | 2,671,871 |
| | 9.98 |
| | 3,338,179 |
| | 9.83 |
| | 3,281,478 |
|
First Tennessee Bank National Association | | 10.47 |
| | 2,532,669 |
| | 10.83 |
| | 2,538,382 |
| | 10.36 |
| | 3,388,698 |
| | 10.12 |
| | 3,317,684 |
|
Total | | | | | | | | | | | | | | | | |
First Horizon National Corporation | | 12.18 |
| | 3,005,198 |
| | 12.24 |
| | 2,926,010 |
| | 11.25 |
| | 3,760,651 |
| | 11.10 |
| | 3,703,754 |
|
First Tennessee Bank National Association | | 11.32 |
| | 2,738,372 |
| | 11.78 |
| | 2,762,271 |
| | 10.98 |
| | 3,589,188 |
| | 10.74 |
| | 3,520,670 |
|
Tier 1 Leverage | | | | | | | | | | | | | | | | |
First Horizon National Corporation | | 9.60 |
| | 2,764,780 |
| | 9.35 |
| | 2,671,871 |
| | 8.56 |
| | 3,338,179 |
| | 10.31 |
| | 3,281,478 |
|
First Tennessee Bank National Association | | 9.06 |
| | 2,532,669 |
| | 9.16 |
| | 2,538,382 |
| | 8.89 |
| | 3,388,698 |
| | 10.70 |
| | 3,317,684 |
|
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.under-
capitalized. For an institution the size of FHN to qualify as well-capitalized, Common Equity Tier 1, Tier 1 Capital, Total Capital, and Leverage capital ratios must be at least 6.5 percent, 8 percent, 10 percent, and 5 percent, respectively.respectively. As of SeptemberJune 30, 2017,2018, each of FHN and FTBNA had sufficient capital to qualify as a well-capitalized institution. For both FHN and FTBNA, the risk-based regulatory capital ratios remained consistentincreased in the thirdsecond quarter of 20172018 relative to fourth quarter 2016 as2017 primarily due to the capital generated fromimpact of net income less dividends with no share repurchases under the general repurchase authority during the first half of 2018. The increase in the ratios for FHN was partially offset by CBF dissenters' share cancellations. The Tier 1 leverage ratio declined for both FHNC and FTBNA as average assets for leverage in the second quarter 2018 reflect the full impact of increased disallowed intangible assets related to the Coastal acquisition, the continued phased-in implementation of the Basel III regulations, and an increase in risk-weighted assets primarily as a result of increased period end loans. Over the same period, the regulatory capital ratios for FTBNA declined due primarily to common dividends paid to the parent company to provide additional liquidity for the CBF acquisition. Foracquisition compared to only one month in fourth quarter 2017 and through2017. During the remainder of 2018, capital ratios are expected to remain above well-capitalizedwell capitalized standards.
Common Stock Purchase Programs
Pursuant to board authority, FHN may repurchase shares of its common stock from time to time and will evaluate the level of capital and take action designed to generate or use capital, as appropriate, for the interests of the shareholders, subject to legal and regulatory restrictions. Two common stock purchase programs currently authorized are discussed below. FHN’s board has not authorized a preferred stock purchase program.
Table 9a—Issuer Purchases of Common Stock - General Program. Authority
On January 22, 2014,23, 2018, FHN announced a $100$250 million share purchase authority with an expiration date of January 31, 2016. 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, 2018.2020. The program currently authorizes total purchasesreplaced an older program that was terminated at the same time with $189.7 million of upremaining authority unused which was scheduled to $350 million and expiresexpire on January 31, 2018. As of September 30, 2017, $160.3 million in purchases had been made under this authority at an average price per share of $12.86, $12.84 excluding commissions. Purchases may be made in the open market or through privately negotiated transactions and are subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions. During third quarter 2017, FHN did not repurchase any common shares under the program. In third quarter 2016 FHN repurchased $7.1 millionAs of common shares under the program. FHN does not anticipate repurchasing any sharesJune 30, 2018, no purchases had been made under this authorization through the closing of the CBF Bank acquisition.
The following tables provide information related to securities repurchased by FHN during third quarter 2017:
Table 9a—Issuer Purchases of Common Stock
General Repurchase Authority:
authority.
|
| | | | | | | | | | | | |
(Dollar values and volume in thousands, except per share data) | | Total number
of shares
purchased | | Average price
paid per share | | Total number of
shares purchased
as part of publicly
announced programs | | Maximum approximate dollar value that may yet be purchased under the programs |
2017 | | | | | | | | |
July 1 to July 31 | | — |
| | N/A | | — |
| | $ | 189,690 |
|
August 1 to August 31 | | — |
| | N/A | | — |
| | $ | 189,690 |
|
September 1 to September 30 | | — |
| | N/A | | — |
| | $ | 189,690 |
|
Total | | — |
| | N/A | | — |
| | |
|
| | | | | | | | | | | | |
(Dollar values and volume in thousands, except per share data) | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced programs | | Maximum approximate dollar value that may yet be purchased under the programs |
2018 | | | | | | | | |
April 1 to April 30 | | — |
| | N/A | | — |
| | $ | 250,000 |
|
May 1 to May 31 | | — |
| | N/A | | — |
| | $ | 250,000 |
|
June 1 to June 30 | | — |
| | N/A | | — |
| | $ | 250,000 |
|
Total | | — |
| | N/A | | — |
| | |
N/A—Not applicable
Table 9b—Issuer Purchase of Common Stock - Compensation Plan Program.Authority
A consolidated compensation plan share purchase program was announced on August 6, 2004. This program consolidated into a single share purchase program all of the previously authorized compensation plan share programs as well as the renewal of the authorization to purchase shares for use in connection with two compensation plans for which the share purchase authority had expired. The total amount authorized under this consolidated compensation plan share purchase program, inclusive of a program amendment on April 24, 2006, is 29.6 million shares calculated before adjusting for stock dividends distributed through January 1, 2011. The authorization has been reduced for that portion which relates to compensation plans for which no options remain outstanding. The shares may be purchased over the option exercise period of the various compensation plans on or before December 31, 2023. On SeptemberJune 30, 2017,2018, the maximum number of shares that may be purchased under the program was 25.525.2 million shares. Purchases may be made in the open market or through privately negotiated transactions and are subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions. Management currently does not anticipate purchasing a material number of shares under this authority during the fourth quarter 2017 or through 2018.
Table 9b—Issuer Purchase of Common Stock
Compensation Plan-Related Repurchase Authority:
|
| | | | | | | | | | | | | |
(Volume in thousands, except per share data) | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced programs | | Maximum number of shares that may yet be purchased under the programs |
2017 | | | | | | | | |
July 1 to July 31 | | 2 |
| | $ | 17.50 |
| | 2 |
| | 25,475 |
|
August 1 to August 31 | | 16 |
| | $ | 17.70 |
| | 16 |
| | 25,459 |
|
September 1 to September 30 | | * |
| | $ | 17.82 |
| | * |
| | 25,458 |
|
Total | | 18 |
| | $ | 17.68 |
| | 18 |
| | |
|
| | | | | | | | | | | | | |
(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 |
2018 | | | | | | | | |
April 1 to April 30 | | * |
| | $ | 18.68 |
| | * |
| | 25,333 |
|
May 1 to May 31 | | 137 |
| | $ | 18.78 |
| | 137 |
| | 25,196 |
|
June 1 to June 30 | | 1 |
| | $ | 18.81 |
| | 1 |
| | 25,195 |
|
Total | | 139 |
| | $ | 18.78 |
| | 139 |
| | |
*- Amountamount less than 500 shares
Cancellation of Dissenters' Shares
On November 30, 2017, FHN completed its merger with CBF, which was a Delaware corporation. Under Delaware corporate law, each CBF shareholder had the right to dissent from the terms of the merger and obtain a judicial appraisal of the pre-merger value of his, her, or its CBF shares. If the dissent and appraisal process is followed to its conclusion, FHN is required by law to pay each dissenter the appraised value, entirely in cash. In 2017 certain CBF shareholders commenced the dissent and appraisal process. When the merger closed in 2017, FHN issued a total of 2,373,220 FHN common shares for those CBF shareholders in accordance with the terms of the merger agreement, but FHN set them aside for later delivery or cancellation. In April, 2018, the process reached a point where FHN canceled those set-aside shares. Cancellation resulted in a reduction in the equity consideration recorded by FHN and an increase in cash consideration of $46.0 million. The final appraisal or settlement amounts, as applicable, may differ from current estimates.
Stress Testing
On May 24, 2018 the Economic Growth, Regulatory Relief, and Consumer Protection Act was signed into law. This Act, along with an interagency regulatory statement issued on July 6, 2018, effectively exempts both FHN and FTBNA from Dodd-Frank Act ("DFA") stress testing requirements for 2018 and future years.
For 2018, even though no longer required, FHN and FTBNA completed a stress test using DFA scenarios and requirements previously in effect.Results of these tests indicate that both FHN and FTBNA would be able to maintain capital well in excess of Basel III Adequately Capitalized standards under the hypothetical severe global recession of the 2018 DFA Severely Adverse scenario. A summary of those results was posted in the “News & Events-Stress Testing Results” section on FHN’s investor relations website on August 6, 2018. Neither FHN’s stress test posting, nor any other material found on FHN’s website generally, is part of this quarterly report or incorporated herein.
First Horizon intends to develop a framework to continue annual stress testing after 2018 as part of its capital and risk management processes.
The disclosures in this “Stress Testing” section include forward-looking statements. Please refer to “Forward-Looking Statements” for additional information concerning the characteristics and limitations of statements of that type.
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(23 percent of totaltotal loans). Industry concentrations are discussed under the heading C&I below.
Consolidated key asset quality metrics for each of these portfolios can be foundfound in Table 17 – Asset QualityQuality by Portfolio. Credit underwriting guidelines are outlined in Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, in the Loan Portfolio Composition discussion in the Asset Quality Section beginning on page 2627 and continuing to page 46. FHN’s credit underwriting guidelines and loan product offerings as of SeptemberJune 30, 2017,2018, are generally consistent with those reported and disclosed in the Company’s Form 10-K for the year ended December 31, 2016.2017.
COMMERCIAL LOAN PORTFOLIOS
C&I
The C&I portfolio was $12.8$16.4 billion on SeptemberJune 30, 2017,2018, and is comprised of loans used for general business purposes and primarily composed of relationship customers in Tennessee and other selected markets.purposes. Typical products include working capital lines of credit, term loan financing of owner-occupied real estate and fixed assets, and trade credit enhancement through letters of credit.credit. The largest geographical concentrations of balances as of June 30, 2018, are in Tennessee (36 percent), North Carolina (12 percent), Florida (6 percent), Texas (6 percent), California (5 percent), and Georgia (4 percent), with no other state representing more than 3 percent of the portfolio.
The following table provides the composition of the C&I portfolio by industry as of SeptemberJune 30, 2017,2018, and December 31, 2016.2017. 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
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Industry: | | | | | | | | | | | | | | | | |
Finance & insurance | | $ | 2,844,411 |
| | 22 | % | | $ | 2,573,713 |
| | 21 | % | | $ | 2,780,488 |
| | 17 | % | | $ | 2,859,769 |
| | 18 | % |
Loans to mortgage companies | | 1,966,155 |
| | 15 |
| | 2,045,189 |
| | 17 |
| | 2,354,836 |
| | 14 |
| | 2,099,961 |
| | 13 |
|
Real estate rental & leasing (a) | | | 1,374,771 |
| | 8 |
| | 1,408,299 |
| | 9 |
|
Health care & social assistance | | 966,706 |
| | 8 |
| | 893,629 |
| | 7 |
| | 1,219,095 |
| | 7 |
| | 1,201,285 |
| | 7 |
|
Real estate rental & leasing (a) | | 943,496 |
| | 7 |
| | 769,457 |
| | 6 |
| |
Wholesale trade | | 938,663 |
| | 7 |
| | 826,226 |
| | 7 |
| |
Accommodation & food service | | 913,774 |
| | 7 |
| | 987,973 |
| | 8 |
| | 1,182,776 |
| | 7 |
| | 1,145,944 |
| | 7 |
|
Manufacturing | | 870,324 |
| | 7 |
| | 762,947 |
| | 6 |
| | 1,182,686 |
| | 7 |
| �� | 1,184,861 |
| | 7 |
|
Public administration | | 583,834 |
| | 5 |
| | 565,119 |
| | 5 |
| |
Wholesale trade | | | 1,079,080 |
| | 7 |
| | 1,060,642 |
| | 7 |
|
Retail trade | | | 750,396 |
| | 5 |
| | 831,790 |
| | 5 |
|
Transportation & warehousing | | 583,432 |
| | 5 |
| | 578,586 |
| | 5 |
| | 740,319 |
| | 5 |
| | 716,572 |
| | 4 |
|
Other (education, arts, entertainment, etc) (b) | | 2,181,049 |
| | 17 |
| | 2,145,248 |
| | 18 |
| | 3,774,298 |
| | 23 |
| | 3,548,150 |
| | 23 |
|
Total C&I loan portfolio | | $ | 12,791,844 |
| | 100 | % | | $ | 12,148,087 |
| | 100 | % | | $ | 16,438,745 |
| | 100 | % | | $ | 16,057,273 |
| | 100 | % |
| |
(a) | Leasing, rental of real estate, equipment, and goods. |
| |
(b) | Industries in this category each comprise less than 5 percent for 2017.2018. |
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. 3731 percent of FHN’s C&I portfolio (Finance and insurance plus Loans to mortgage companies) could be affected by items that uniquely impact the financial services industry.industry. Except “Finance and Insurance” and “Loans to Mortgage Companies”, as discussed below, onSeptember June 30, 2017,2018, 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 percentrepresents 17 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 SeptemberJune 30, 2017,2018, asset-based lending to consumer finance companies represents approximatelyapproximately $1.2 billion ofof the finance and insurance component.
TRUPS lending was originally extended as a form of “bridge” financing to participants in the pooled trust preferred securitization program offered primarily to smaller banking (generally less than $15 billion in total assets) and insurance institutions through FHN’s fixed income business. Origination of TRUPS lending ceased in early 2008. Individual TRUPS are re-graded at least quarterly as part of FHN’s commercial loan review process. During second quarter 2018, FHN revised the grading approach associated with the TRUPs portfolio to align with its scorecard grading methodologies which resulted in upgrades to a majority of this portfolio. 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 SeptemberJune 30, 2017,2018, and December 31, 2016,2017, one TRUP relationship was on interest deferral.
As of SeptemberJune 30, 2017,2018, the unpaid principal balance (“UPB”) of trust preferred loans totaled $332.9$332.4 million ($206.6206.1 million of bank TRUPS and $126.3 million of insurance TRUPS) with the UPB of other bank-related loans totaling $345.8$263.3 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 $26.8$26.5 million or 4 percent of outstanding UPB.
Loans to Mortgage Companies
The balance of loans to mortgage companiescompanies was 15 percent14 percent of the C&I portfolio as of September June 30, 2017, 17 percent2018, and 13 percent of the C&I portfolio as of December 31, 2016, and 20 percent of the C&I portfolio as of September 30, 2016,2017, and includes balances related to both home purchase and refinance activity. In second quarter 2018, 73 percent of the loans funded were home purchases and 27 percent were refinance transactions. This portfolio class,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 2017,2018, continuing in line with recent historical performance. The C&I ALLL increased $8.8decreased $1.4 million from December 31, 2016,2017, to $98.2$96.8 million as of SeptemberJune 30, 2017.2018. The allowance as a percentage of period-end loans increaseddecreased to .77.59 percent as of SeptemberJune 30, 2017,2018, from .74.61 percent as of December 31, 2016.2017. Nonperforming C&I loans decreased $13.8$11.9 million from December 31, 2016,2017, to $18.9$19.2 million on SeptemberJune 30, 2017.2018, primarily driven by one credit. The nonperforming loan (“NPL”) ratio decreased 127 basis points from December 31, 2016,2017, to .15.12 percent of C&I loans as of SeptemberJune 30, 2017.2018. The 30+ delinquency ratio increaseddecreased 5 basis points to .27.14 percent as of September June 30, 2017, from .08 percent as of December 31, 2016, driven by two larger relationships, one of which is a purchased credit-impaired loan. Third 2018. Second quarter 20172018 experienced net charge-offs of $3.1$2.3 million compared to $1.6 million of net recoveries in fourth quarter 2016 and $1.3 million of net charge-offs in thirdsecond quarter 2016.2017. The following table shows C&I asset quality trends by segment.
Table 11—C&I Asset Quality Trends by Segment
| | | | 2017 | | | 2018 | |
| | Three months ended | | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 90,958 |
| | $ | 1,421 |
| | $ | 92,379 |
| | |
Allowance for loan losses as of April 1 | | | $ | 98,982 |
| | $ | 1,256 |
| | $ | 100,238 |
| |
Charge-offs | | (3,723 | ) | | — |
| | (3,723 | ) | | | (3,287 | ) | | — |
| | (3,287 | ) | |
Recoveries | | 586 |
| | 15 |
| | 601 |
| | | 1,033 |
| | 3 |
| | 1,036 |
| |
Provision/(provision credit) for loan losses | | 9,039 |
| | (91 | ) | | 8,948 |
| | | (1,202 | ) | | 49 |
| | (1,153 | ) | |
Allowance for loan losses as of September 30 | | $ | 96,860 |
| | $ | 1,345 |
| | $ | 98,205 |
| | |
Allowance for loan losses as of June 30 | | | $ | 95,526 |
| | $ | 1,308 |
| | $ | 96,834 |
| |
Net charge-offs % (qtr. annualized) | | 0.10 | % | | NM | | 0.10 | % | | | 0.06 | % | | NM | | 0.06 | % | |
Allowance / net charge-offs | | 7.83 | x | | NM | | 7.97 | x | | | 10.57 | x | | NM | | 10.73 | x | |
| | | | | | | | | | | | | | |
| | As of September 30 | | | As of June 30 | |
Period-end loans | | $ | 12,373,245 |
| | $ | 418,599 |
| | $ | 12,791,844 |
| | | $ | 16,019,441 |
| | $ | 419,304 |
| | $ | 16,438,745 |
| |
Nonperforming loans | | 15,828 |
| | 3,097 |
| | 18,925 |
| | | 16,235 |
| | 2,982 |
| | 19,217 |
| |
Troubled debt restructurings | | 16,336 |
| | — |
| | 16,336 |
| | | 14,544 |
| | — |
| | 14,544 |
| |
30+ Delinq. % (a) | | 0.28 | % | | — | % | | 0.27 | % | | | 0.15 | % | | — | % | | 0.14 | % | |
NPL % | | 0.13 |
| | 0.74 |
| | 0.15 |
| | | 0.10 |
| | 0.71 |
| | 0.12 |
| |
Allowance / loans % | | 0.78 |
| | 0.32 |
| | 0.77 |
| | | 0.60 |
| | 0.31 |
| | 0.59 |
| |
| | | | | | | | | | | | | | |
| | 2016 | | | 2017 | |
| | Three months ended | | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 79,597 |
| | $ | 1,375 |
| | $ | 80,972 |
| | |
Allowance for loan losses as of April 1 | | | $ | 91,625 |
| | $ | 1,482 |
| | $ | 93,107 |
| |
Charge-offs | | (1,992 | ) | | — |
| | (1,992 | ) | | | (1,865 | ) | | — |
| | (1,865 | ) | |
Recoveries | | 711 |
| | 14 |
| | 725 |
| | | 594 |
| | 6 |
| | 600 |
| |
Provision/(provision credit) for loan losses | | 7,151 |
| | 10 |
| | 7,161 |
| | | 604 |
| | (67 | ) | | 537 |
| |
Allowance for loan losses as of September 30 | | $ | 85,467 |
| | $ | 1,399 |
| | $ | 86,866 |
| | |
Allowance for loan losses as of June 30 | | | $ | 90,958 |
| | $ | 1,421 |
| | $ | 92,379 |
| |
Net charge-offs % (qtr. annualized) | | 0.05 | % | | NM | | 0.04 | % | | | 0.04 | % | | NM | | 0.04 | % | |
Allowance / net charge-offs | | 16.76 | x | | NM | | 17.23 | x | | | 17.85 | x | | NM | | 18.21 | x | |
| | | | | | | | | | | | | | |
| | As of December 31 | | | As of December 31 | |
Period-end loans | | $ | 11,728,160 |
| | $ | 419,927 |
| | $ | 12,148,087 |
| | | $ | 15,639,060 |
| | $ | 418,213 |
| | $ | 16,057,273 |
| |
Nonperforming loans | | 28,619 |
| | 4,117 |
| | 32,736 |
| | | 28,086 |
| | 3,067 |
| | 31,153 |
| |
Troubled debt restructurings | | 34,334 |
| | — |
| | 34,334 |
| | | 17,670 |
| | — |
| | 17,670 |
| |
30+ Delinq. % (a) | | 0.08 | % | | — | % | | 0.08 | % | | | 0.20 | % | | — | % | | 0.19 | % | |
NPL % | | 0.24 |
| | 0.98 |
| | 0.27 |
| | | 0.18 |
| | 0.73 |
| | 0.19 |
| |
Allowance / loans % | | 0.75 |
| | 0.33 |
| | 0.74 |
| | | 0.62 |
| | 0.33 |
| | 0.61 |
| |
NM—Not meaningfulLoans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
Commercial Real Estate
The CRE portfolio was $2.3$4.1 billion on SeptemberJune 30, 2017.2018. The CRE portfolio includes both financings for commercial construction and nonconstruction loans. The largest geographical concentrations of balances as of June 30, 2018, are in North Carolina (33 percent), Tennessee (18 percent), Florida (15 percent), South Carolina (7 percent), Texas (6 percent), and Georgia (6 percent), with no other state representing more than 3 percent of the portfolio. This portfolio is segregated between the income-producing CRE class which contains loans, draws on lines and letters of credit to commercial real estate developers for the construction and mini-permanent financing of income-producing real estate, and the residential CRE class. Subcategories of income CRE consist of multi-family (31(26 percent), retail (22(20 percent), office (18 percent), hospitalityindustrial (12 percent), industrial (12hospitality (10 percent), land/land development (1(2 percent), and other (4(12 percent).
The residential CRE class includes loans to residential builders and developers for the purpose of constructing single-family homes, condominiums, and town homes. Activehomes, and on a limited basis, for developing residential subdivisions. Subsequent to the Capital Bank merger completed in 2017, active residential CRE lending has been minimal with nearlyis now primarily focused in certain FHN core markets. Nearly all new originations limitedare 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 withinwho demonstrates the regional banking footprint who remained profitable during the most recent down cycle.ability to withstand cyclical downturns, maintains active development and investment activities providing for regular financing opportunities, and is fundamentally sound as evidenced by a prudent loan structure, appropriate covenants and recourse, and capable and willing sponsors in markets with positive homebuilding and economic dynamics.
CRE Asset Quality Trends
The CRE portfolio had continued stable performance as of SeptemberJune 30, 2017,2018, with nonperforming loans down $1.1flat at $1.4 million compared to December 31, 2017 and a $3.5 million decrease in delinquencies since December 31, 2017. The allowance increased $5.4 million from December 31, 2016, net recoveries in third quarter 2017, and minimal past due activity. The allowance decreased $4.2 million from December 31, 2016, to $29.7$33.8 million as of SeptemberJune 30, 2017. 2018. The increase in allowance was driven by organic loan growth. Allowance as a percentage of loans decreased 27increased 15 basis points from December 31, 2016,2017, to 1.32.82 percent as of SeptemberJune 30, 2017.2018. Nonperforming loans as a percentage of total CRE loans improved 6 basis points from year-end to .07remained at .03 percent as of SeptemberJune 30, 2017.2018. Accruing delinquencies as a percentage of period-end loans increaseddecreased to .02.06 percent as of SeptemberJune 30, 20172018 from .01.15 percent as of year-end 2016. FHN recognized2017. Net charge-offs were $.2 million in second quarter 2018 which can not be compared to $.1 million of net recoveries of $.3 million in thirdsecond quarter 2017 compared to $.6 million in third quarter 2016.2017. The following table shows commercial real estate asset quality trends by segment.
Table 12—Commercial Real Estate Asset Quality Trends by Segment
|
| | | | | | | | | | | | | |
| | 2017 | |
| | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 30,470 |
| | $ | — |
| | $ | 30,470 |
| |
Charge-offs | | — |
| | — |
| | — |
| |
Recoveries | | 267 |
| | 11 |
| | 278 |
| |
Provision/(provision credit) for loan losses | | (1,054 | ) | | (11 | ) | | (1,065 | ) | |
Allowance for loan losses as of September 30 | | $ | 29,683 |
| | $ | — |
| | $ | 29,683 |
| |
Net charge-offs % (qtr. annualized) | | NM | | NM | | NM | |
Allowance / net charge-offs | | NM | | NM | | NM | |
| | | | | | | |
| | As of September 30 | |
Period-end loans | | $ | 2,251,015 |
| | $ | — |
| | $ | 2,251,015 |
| |
Nonperforming loans | | 1,640 |
| | — |
| | 1,640 |
| |
Troubled debt restructurings | | 4,780 |
| | — |
| | 4,780 |
| |
30+ Delinq. % (a) | | 0.02 | % | | — | % | | 0.02 | % | |
NPL % | | 0.07 |
| | — |
| | 0.07 |
| |
Allowance / loans % | | 1.32 |
| | — |
| | 1.32 |
| |
| | | | | | | |
| | 2016 | |
| | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 30,264 |
| | $ | — |
| | $ | 30,264 |
| |
Charge-offs | | (49 | ) | | — |
| | (49 | ) | |
Recoveries | | 636 |
| | 15 |
| | 651 |
| |
Provision/(provision credit) for loan losses | | 1,569 |
| | (15 | ) | | 1,554 |
| |
Allowance for loan losses as of September 30 | | $ | 32,420 |
| | $ | — |
| | $ | 32,420 |
| |
Net charge-offs % (qtr. annualized) | | NM | | NM | | NM | |
Allowance / net charge-offs | | NM | | NM | | NM | |
| | | | | | | |
| | As of December 31 | |
Period-end loans | | $ | 2,135,523 |
| | $ | — |
| | $ | 2,135,523 |
| |
Nonperforming loans | | 2,776 |
| | — |
| | 2,776 |
| |
Troubled debt restructurings | | 3,124 |
| | — |
| | 3,124 |
| |
30+ Delinq. % (a) | | 0.01 | % | | — | % | | 0.01 | % | |
NPL % | | 0.13 |
| | — |
| | 0.13 |
| |
Allowance / loans % | | 1.59 |
| | — |
| | 1.59 |
| |
|
| | | | | | | | | | | | | |
| | 2018 | |
| | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of April 1 | | $ | 29,057 |
| | $ | — |
| | $ | 29,057 |
| |
Charge-offs | | (228 | ) | | — |
| | (228 | ) | |
Recoveries | | 75 |
| | — |
| | 75 |
| |
Provision/(provision credit) for loan losses | | 4,928 |
| | — |
| | 4,928 |
| |
Allowance for loan losses as of June 30 | | $ | 33,832 |
| | $ | — |
| | $ | 33,832 |
| |
Net charge-offs % (qtr. annualized) | | 0.01 | % | | — | % | | 0.01 | % | |
Allowance / net charge-offs | | 55.04 | x | | — |
| | 55.04 | x | |
| | | | | | | |
| | As of June 30 | |
Period-end loans | | $ | 4,136,356 |
| | $ | — |
| | $ | 4,136,356 |
| |
Nonperforming loans | | 1,443 |
| | — |
| | 1,443 |
| |
Troubled debt restructurings | | 3,278 |
| | — |
| | 3,278 |
| |
30+ Delinq. % (a) | | 0.06 | % | | — | % | | 0.06 | % | |
NPL % | | 0.03 |
| | — |
| | 0.03 |
| |
Allowance / loans % | | 0.82 |
| | — |
| | 0.82 |
| |
| | | | | | | |
| | 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 / net charge-offs | | NM | | NM | | NM | |
| | | | | | | |
| | As of December 31 | |
Period-end loans | | $ | 4,214,695 |
| | $ | — |
| | $ | 4,214,695 |
| |
Nonperforming loans | | 1,393 |
| | — |
| | 1,393 |
| |
Troubled debt restructurings | | 2,407 |
| | — |
| | 2,407 |
| |
30+ Delinq. % (a) | | 0.15 | % | | — | % | | 0.15 | % | |
NPL % | | 0.03 |
| | — |
| | 0.03 |
| |
Allowance / loans % | | 0.67 |
| | — |
| | 0.67 |
| |
Certain previously reported amounts have been reclassified to agree with current presentation.
NM—Not meaningful
Loans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
CONSUMER LOAN PORTFOLIOS
Consumer Real Estate
The consumer real estate portfolio was $4.4$6.2 billion on SeptemberJune 30, 2017,2018, and is primarily composed of home equity lines and installment loans including restrictedrestricted balances (loans consolidated under ASC 810). The largest geographical concentrations of balances as of SeptemberJune 30, 2017,2018, are in Tennessee (72(53 percent), North Carolina (16 percent), Florida (11 percent), and California (4 percent), and North Carolina (4 percent) with no other state representing more than 3 percent of the portfolio. As of SeptemberJune 30, 2017,2018, approximately 7478 percent of the consumer real estate portfolio was in a first lien position. At origination, weighted average FICO score of this portfolio was 751753 and refreshed FICO scores averaged 749 as of September758 on both June 30, 2017, as compared to 7502018, and 747, respectively, as of December 31, 2016. Generally,2017. 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$1.6 billion of the consumer real estate portfolio as of SeptemberJune 30, 2017.2018. 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 SeptemberJune 30, 2017, approximately 60 percent2018, approximately 70 percent of FHN's HELOCs are in the draw period compared to approximately 6272 percent as of December 31, 2016.2017. Based on when draw periods are scheduled to end per the line agreement, it is expected that $362.6 $435.9 million, or 4237 percent ofof HELOCs currently in the draw period, will enter the repayment period during the next 60 months. Delinquencies and charge-off rates for HELOCs that have entered the repayment period are initially higher than HELOCs still in the draw period because of the increased minimum payment requirement; however, after some seasoning, performance of these loans usually begins to stabilize. The home equity lines of the consumer real estate portfolio are being monitored closely for those nearing the end of the draw period and borrowers are initially being contacted at least 24 months before the repayment period begins to remind the customer of the terms of their agreement and to inform them of options. The following table shows the HELOCs currently in the draw period and expected timing of conversion to the repayment period.
Table 13—HELOC Draw To Repayment Schedule
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
(Dollars in thousands) | | Repayment Amount | | Percent | | Repayment Amount | | Percent | | Repayment Amount | | Percent | | Repayment Amount | | Percent |
Months remaining in draw period: | | | | | | | | | | | | | | | | |
0-12 | | $ | 112,207 |
| | 13 | % | | $ | 212,665 |
| | 20 | % | | $ | 93,323 |
| | 8 | % | | $ | 138,333 |
| | 10 | % |
13-24 | | 69,367 |
| | 8 |
| | 127,662 |
| | 12 |
| | 68,789 |
| | 6 |
| | 88,188 |
| | 7 |
|
25-36 | | 56,098 |
| | 6 |
| | 73,331 |
| | 7 |
| | 83,519 |
| | 7 |
| | 99,109 |
| | 8 |
|
37-48 | | 57,254 |
| | 7 |
| | 68,768 |
| | 6 |
| | 94,488 |
| | 8 |
| | 96,997 |
| | 7 |
|
49-60 | | 67,625 |
| | 8 |
| | 68,792 |
| | 7 |
| | 95,822 |
| | 8 |
| | 105,753 |
| | 8 |
|
>60 | | 510,670 |
| | 58 |
| | 514,126 |
| | 48 |
| | 721,775 |
| | 63 |
| | 792,723 |
| | 60 |
|
Total | | $ | 873,221 |
| | 100 | % | | $ | 1,065,344 |
| | 100 | % | | $ | 1,157,716 |
| | 100 | % | | $ | 1,321,103 |
| | 100 | % |
Consumer Real Estate Asset Quality Trends
Overall,The overall performance of the consumer real estate portfolio remained strong in thirdsecond quarter 2017.2018 despite deterioration of some metrics compared to year-end. 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 918 basis points from year-end to .61.57 percent and the 30+ delinquencies increased 11 basis points as of SeptemberJune 30, 2017.2018. The balance of nonperforming loans increased $7.9 million to $79.4 million on June 30, 2018, primarily driven by the alignment of CBF's and FTB's policies related to second liens behind delinquent or modified first liens. The non-strategic segment is a run-off portfolio and while the absolute dollars of delinquencies and nonaccruals as well as the 30+ accruing delinquencies ratio improved from year-end, nonperforming loans ratios deteriorated and may become more skewed as the portfolio shrinks and some of the stronger borrowers payoff or refinance elsewhere. The ALLL decreased $9.4$5.6 million from December 31, 2016,2017, to $40.9$31.8 million as of SeptemberJune 30, 2017,2018, with the majority of the decline attributable to the non-strategic segment. The allowance as a percentage of loans declined 178 basis points to .94.51 percent as of SeptemberJune 30, 2017,2018, compared to year-end. The balance of nonperforming loans declined $6.0 million to $76.8 million on September 30, 2017. Loans delinquent 30 or more days and still accruing declinedincreased from $42.1$41.5 million as of December 31, 2016,2017, to $32.4$42.4 million as of SeptemberJune 30, 2017.2018. The portfolio realized net recoveries of $2.6$4.0 million in thirdsecond quarter 20172018 compared to net recoveries of $2.2 million in fourth quarter 2016 and net recoveries of $1.2 million in thirdsecond quarter 2016.2017. The following table shows consumer real estate asset quality trends by segment.
Table 14—Consumer Real Estate Asset Quality Trends by Segment
| | | | 2017 | | | 2018 | |
| | Three months ended | | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 17,881 |
| | $ | 28,188 |
| | $ | 46,069 |
| | |
Allowance for loan losses as of April 1 | | | $ | 15,646 |
| | $ | 17,104 |
| | $ | 32,750 |
| |
Charge-offs | | (1,492 | ) | | (2,109 | ) | | (3,601 | ) | | | (618 | ) | | (863 | ) | | (1,481 | ) | |
Recoveries | | 1,105 |
| | 5,083 |
| | 6,188 |
| | | 1,113 |
| | 4,331 |
| | 5,444 |
| |
Provision/(provision credit) for loan losses | | (562 | ) | | (7,155 | ) | | (7,717 | ) | | | (393 | ) | | (4,551 | ) | | (4,944 | ) | |
Allowance for loan losses as of September 30 | | $ | 16,932 |
| | $ | 24,007 |
| | $ | 40,939 |
| | |
Allowance for loan losses as of June 30 | | | $ | 15,748 |
| | $ | 16,021 |
| | $ | 31,769 |
| |
Net charge-offs % (qtr. annualized) | | 0.04 | % | | NM | | NM | | | NM | | NM | | NM | |
Allowance / net charge-offs | | 11.04 | x | | NM | | NM | | | NM | | �� NM | | NM | |
| | | | | | | | | | | | | | |
| | As of September 30 | | | As of June 30 | |
Period-end loans | | $ | 3,713,951 |
| | $ | 655,766 |
| | $ | 4,369,717 |
| | | $ | 5,733,823 |
| | $ | 488,788 |
| | $ | 6,222,611 |
| |
Nonperforming loans | | 22,707 |
| | 54,138 |
| | 76,845 |
| | | 32,713 |
| | 46,689 |
| | 79,402 |
| |
Troubled debt restructurings | | 46,292 |
| | 89,566 |
| | 135,858 |
| | | 44,481 |
| | 77,854 |
| | 122,335 |
| |
30+ Delinq. % (a) | | 0.38 | % | | 2.80 | % | | 0.74 | % | | | 0.51 | % | | 2.63 | % | | 0.68 | % | |
NPL % | | 0.61 |
| | 8.26 |
| | 1.76 |
| | | 0.57 |
| | 9.55 |
| | 1.28 |
| |
Allowance / loans % | | 0.46 |
| | 3.66 |
| | 0.94 |
| | | 0.27 |
| | 3.28 |
| | 0.51 |
| |
| | | | | | | | | | | | | | |
| | 2016 | | | 2017 | |
| | Three months ended | | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 24,278 |
| | $ | 34,803 |
| | $ | 59,081 |
| | |
Allowance for loan losses as of April 1 | | | $ | 19,204 |
| | $ | 30,476 |
| | $ | 49,680 |
| |
Charge-offs | | (1,074 | ) | | (3,285 | ) | | (4,359 | ) | | | (793 | ) | | (3,158 | ) | | (3,951 | ) | |
Recoveries | | 985 |
| | 4,606 |
| | 5,591 |
| | | 1,343 |
| | 3,800 |
| | 5,143 |
| |
Provision/(provision credit) for loan losses | | (3,965 | ) | | (3,113 | ) | | (7,078 | ) | | | (1,873 | ) | | (2,930 | ) | | (4,803 | ) | |
Allowance for loan losses as of September 30 | | $ | 20,224 |
| | $ | 33,011 |
| | $ | 53,235 |
| | |
Allowance for loan losses as of June 30 | | | $ | 17,881 |
| | $ | 28,188 |
| | $ | 46,069 |
| |
Net charge-offs % (qtr. annualized) | | 0.01 | % | | NM | | NM | | | NM | | NM | | NM | |
Allowance / net charge-offs | | 57.14 | x | | NM | | NM | | | NM | | NM | | NM | |
| | | | | | | | | | | | | | |
| | As of December 31 | | | As of December 31 | |
Period-end loans | | $ | 3,642,894 |
| | $ | 880,858 |
| | $ | 4,523,752 |
| | | $ | 5,774,411 |
| | $ | 593,344 |
| | $ | 6,367,755 |
| |
Nonperforming loans | | 18,865 |
| | 63,947 |
| | 82,812 |
| | | 22,678 |
| | 48,809 |
| | 71,487 |
| |
Troubled debt restructurings | | 47,478 |
| | 105,982 |
| | 153,460 |
| | | 44,375 |
| | 84,520 |
| | 128,895 |
| |
30+ Delinq. % (a) | | 0.49 | % | | 2.76 | % | | 0.93 | % | | | 0.40 | % | | 3.06 | % | | 0.65 | % | |
NPL % | | 0.52 |
| | 7.26 |
| | 1.83 |
| | | 0.39 |
| | 8.23 |
| | 1.12 |
| |
Allowance / loans % | | 0.52 |
| | 3.56 |
| | 1.11 |
| | | 0.28 |
| | 3.53 |
| | 0.59 |
| |
NM—Not meaningfulLoans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
Permanent Mortgage
The permanent mortgage portfolio was $.4 billion on SeptemberJune 30, 2017.2018. 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. ApproximatelyApproximately 19 percent of loan balances as of SeptemberJune 30, 2017,2018, are in California, but the remainder of the portfolio is somewhat geographically diverse. Non-strategic and corporate segment run-off contributed to a majority of the $20.0$44.4 million net decrease in permanent mortgage period-end balances from December 31, 2016,2017, to SeptemberJune 30, 2017.2018.
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 slightly decreased $.6$1.5 million to $14.1 million as of SeptemberJune 30, 2017,2018, from $16.3 million as of December 31, 2016.2017. TDR reserves (which are estimates of losses for the expected life of the loan) comprise 8077 percent of the ALLL for the permanent mortgage portfolio as of SeptemberJune 30, 2017.2018. Consolidated accruing delinquencies as a percentage of total loans decreased 85 basis points$.6 million from year-end to 1.51 percent$6.8 million as of SeptemberJune 30, 2017.2018. Nonperforming loans increased slightlydecreased $2.0 million from December 31, 2016,2017, to $27.4$24.4 million as of SeptemberJune 30, 2017.2018. The portfolio experiencedexperienced net recoveries of $.4$.3 million in thirdsecond quarter 20172018 compared to net charge-offs of $.1$.4 million in thirdsecond quarter 2016.2017. The following table shows permanent mortgage asset quality trends by segment.
Table 15—Permanent Mortgage Asset Quality Trends by Segment
| | | | 2017 | | 2018 |
| | Three months ended | | Three months ended |
(Dollars in thousands) | | Regional Bank | | Corporate (a) | | Non-Strategic | | Consolidated | | Regional Bank | | Corporate (a) | | Non-Strategic | | Consolidated |
Allowance for loan losses as of July 1 | | $ | 1,981 |
| | N/A | | $ | 14,417 |
| | $ | 16,398 |
| |
Allowance for loan losses as of April 1 | | | $ | 2,546 |
| | N/A | | $ | 12,889 |
| | $ | 15,435 |
|
Charge-offs | | — |
| | N/A | | (173 | ) | | (173 | ) | | — |
| | N/A | | (300 | ) | | (300 | ) |
Recoveries | | — |
| | N/A | | 542 |
| | 542 |
| | — |
| | N/A | | 631 |
| | 631 |
|
Provision/(provision credit) for loan losses | | 287 |
| | N/A | | (1,335 | ) | | (1,048 | ) | | (68 | ) | | N/A | | (1,620 | ) | | (1,688 | ) |
Allowance for loan losses as of September 30 | | $ | 2,268 |
| | N/A | | $ | 13,451 |
| | $ | 15,719 |
| |
Allowance for loan losses as of June 30 | | | $ | 2,478 |
| | N/A | | $ | 11,600 |
| | $ | 14,078 |
|
Net charge-offs % (qtr. annualized) | | — | % | | N/A | | NM | | NM | | — | % | | N/A | | NM | | NM |
Allowance / net charge-offs | | NM | | N/A | | NM | | NM | | NM | | N/A | | NM | | NM |
| | | | | | | | | | | | | | | | |
| | As of September 30 | | As of June 30 |
Period-end loans | | $ | 106,002 |
| | $ | 57,891 |
| | $ | 239,189 |
| | $ | 403,082 |
| | $ | 109,499 |
| | $ | 44,255 |
| | $ | 201,162 |
| | $ | 354,916 |
|
Nonperforming loans | | 435 |
| | 2,173 |
| | 24,842 |
| | 27,450 |
| | 341 |
| | 1,746 |
| | 22,283 |
| | 24,370 |
|
Troubled debt restructurings | | 955 |
| | 3,676 |
| | 79,450 |
| | 84,081 |
| | 858 |
| | 3,214 |
| | 72,789 |
| | 76,861 |
|
30+ Delinq. % (b) | | 0.72 | % | | 4.22 | % | | 1.20 | % | | 1.51 | % | | 0.69 | % | | 3.32 | % | | 2.28 | % | | 1.92 | % |
NPL % | | 0.41 |
| | 3.75 |
| | 10.39 |
| | 6.81 |
| | 0.31 |
| | 3.94 |
| | 11.08 |
| | 6.87 |
|
Allowance / loans % | | 2.14 |
| | N/A | | 5.62 |
| | 3.90 |
| | 2.26 |
| | N/A | | 5.77 |
| | 3.97 |
|
| | | | | | | | | | | | | | | | |
| | 2016 | | 2017 |
| | Three months ended | | Three months ended |
(Dollars in thousands) | | Regional Bank | | Corporate (a) | | Non-Strategic | | Consolidated | | Regional Bank | | Corporate (a) | | Non-Strategic | | Consolidated |
Allowance for loan losses as of July 1 | | $ | 579 |
| | N/A | | $ | 17,021 |
| | $ | 17,600 |
| |
Allowance for loan losses as of April 1 | | | $ | 1,857 |
| | N/A | | $ | 14,036 |
| | $ | 15,893 |
|
Charge-offs | | — |
| | N/A | | (373 | ) | | (373 | ) | | — |
| | N/A | | (843 | ) | | (843 | ) |
Recoveries | | — |
| | N/A | | 239 |
| | 239 |
| | — |
| | N/A | | 488 |
| | 488 |
|
Provision/(provision credit) for loan losses | | 461 |
| | N/A | | (1,338 | ) | | (877 | ) | | 124 |
| | N/A | | 736 |
| | 860 |
|
Allowance for loan losses as of September 30 | | $ | 1,040 |
| | N/A | | $ | 15,549 |
| | $ | 16,589 |
| |
Allowance for loan losses as of June 30 | | | $ | 1,981 |
| | N/A | | $ | 14,417 |
| | $ | 16,398 |
|
Net charge-offs % (qtr. annualized) | | — | % | | N/A | | 0.18 | % | | 0.12 | % | | — | % | | N/A | | 0.56 | % | | 0.35 | % |
Allowance / net charge-offs | | NM | | N/A | | 29.16 | x | | 31.11 | x | | NM | | N/A | | 10.13 | x | | 11.52 | x |
| | | | | | | | | | | | | | | | |
| | As of December 31 | | As of December 31 |
Period-end loans | | $ | 76,973 |
| | $ | 71,380 |
| | $ | 274,772 |
| | $ | 423,125 |
| | $ | 116,914 |
| | $ | 53,556 |
| | $ | 228,837 |
| | $ | 399,307 |
|
Nonperforming loans | | 393 |
| | 1,186 |
| | 25,602 |
| | 27,181 |
| | 427 |
| | 2,157 |
| | 23,806 |
| | 26,390 |
|
Troubled debt restructurings | | 878 |
| | 3,792 |
| | 89,256 |
| | 93,926 |
| | 941 |
| | 3,637 |
| | 80,216 |
| | 84,794 |
|
30+ Delinq. % (b) | | 0.72 | % | | 4.37 | % | | 2.29 | % | | 2.36 | % | | 0.35 | % | | 3.98 | % | | 2.12 | % | | 1.85 | % |
NPL % | | 0.51 |
| | 1.66 |
| | 9.32 |
| | 6.42 |
| | 0.37 |
| | 4.03 |
| | 10.40 |
| | 6.61 |
|
Allowance / loans % | | 1.58 |
| | N/A | | 5.49 |
| | 3.85 |
| | 2.17 |
| | N/A | | 5.70 |
| | 3.90 |
|
NM—Not meaningfulLoans 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. |
Credit Card and Other
The credit card and other portfolio, which is primarily within the regional banking segment, was $.4$.5 billion as of SeptemberJune 30, 2017,2018, and primarily includes credit card receivables, automobile loans, and other consumer-related credits, andcredits. The automobile loans.loans are a run-off portfolio of indirect auto loans acquired through the CBF acquisition. As a result, asset quality metrics within this portfolio may become skewed as the auto loan portfolio continues to shrink. The allowance decreased $1.0 million from December 31, 2017, to $10.3$8.9 million as of SeptemberJune 30, 2017, from $12.2 million as of December 31, 2016.2018. Loans 30 days or more delinquent and accruing as a percentage of loans decreased 28 basis pointsincreased $2.2 million from December 31, 2016,2017, to .89 percent$9.9 million as of SeptemberJune 30, 2017.2018. In thirdsecond quarter 2017,2018, FHN recognized $2.5$3.6 million of net charge-offs in the credit card and other portfolio, compared to $2.7$2.4 million in thirdsecond quarter 2016.2017. 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 | | | 2018 | |
| | Three months ended | | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 11,917 |
| | $ | 24 |
| | $ | 11,941 |
| | |
Allowance for loan losses as of April 1 | | | $ | 9,641 |
| | $ | 73 |
| | $ | 9,714 |
| |
Charge-offs | | (3,100 | ) | | (73 | ) | | (3,173 | ) | | | (4,664 | ) | | (48 | ) | | (4,712 | ) | |
Recoveries | | 617 |
| | 54 |
| | 671 |
| | | 1,037 |
| | 53 |
| | 1,090 |
| |
Provision/(provision credit) for loan losses | | 842 |
| | 40 |
| | 882 |
| | | 2,874 |
| | (17 | ) | | 2,857 |
| |
Allowance for loan losses as of September 30 | | $ | 10,276 |
| | $ | 45 |
| | $ | 10,321 |
| | |
Allowance for loan losses as of June 30 | | | $ | 8,888 |
| | $ | 61 |
| | $ | 8,949 |
| |
Net charge-offs % (qtr. annualized) | | 2.83 | % | | 1.14 | % | | 2.80 | % | | | 2.64 | % | | NM | | 2.61 | % | |
Allowance / net charge-offs | | 1.04 | x | | 0.60 | x | | 1.04 | x | | | 0.61 | x | | NM | | 0.62 | x | |
| | | | | | | | | | | | | | |
| | As of September 30 | | | As of June 30 | |
Period-end loans | | $ | 343,864 |
| | $ | 6,569 |
| | $ | 350,433 |
| | | $ | 543,617 |
| | $ | 5,495 |
| | $ | 549,112 |
| |
Nonperforming loans | | — |
| | 126 |
| | 126 |
| | | 360 |
| | — |
| | 360 |
| |
Troubled debt restructurings | | 500 |
| | 44 |
| | 544 |
| | | 580 |
| | 24 |
| | 604 |
| |
30+ Delinq. % (a) | | 0.88 | % | | 1.44 | % | | 0.89 | % | | | 1.81 | % | | 1.31 | % | | 1.80 | % | |
NPL % | | — |
| | 1.92 |
| | 0.04 |
| | | 0.07 |
| | — |
| | 0.07 |
| |
Allowance / loans % | | 2.99 |
| | 0.69 |
| | 2.95 |
| | | 1.64 |
| | 1.11 |
| | 1.63 |
| |
| | | | | | | | | | | | | | |
| | 2016 | | | 2017 | |
| | Three months ended | | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of July 1 | | $ | 11,633 |
| | $ | 257 |
| | $ | 11,890 |
| | |
Allowance for loan losses as of April 1 | | | $ | 12,394 |
| | $ | 6 |
| | $ | 12,400 |
| |
Charge-offs | | (3,550 | ) | | (39 | ) | | (3,589 | ) | | | (3,084 | ) | | (67 | ) | | (3,151 | ) | |
Recoveries | | 835 |
| | 71 |
| | 906 |
| | | 678 |
| | 70 |
| | 748 |
| |
Provision/(provision credit) for loan losses | | 3,328 |
| | (88 | ) | | 3,240 |
| | | 1,929 |
| | 15 |
| | 1,944 |
| |
Allowance for loan losses as of September 30 | | $ | 12,246 |
| | $ | 201 |
| | $ | 12,447 |
| | |
Allowance for loan losses as of June 30 | | | $ | 11,917 |
| | $ | 24 |
| | $ | 11,941 |
| |
Net charge-offs % (qtr. annualized) | | 3.06 | % | | NM | | 2.95 | % | | | 2.77 | % | | NM | | 2.71 | % | |
Allowance / net charge-offs | | 1.13 | x | | NM | | 1.17 | x | | | 1.24 | x | | NM | | 1.24 | x | |
| | | | | | | | | | | | | | |
| | As of December 31 | | | As of December 31 | |
Period-end loans | | $ | 351,198 |
| | $ | 7,835 |
| | $ | 359,033 |
| | | $ | 613,540 |
| | $ | 6,359 |
| | $ | 619,899 |
| |
Nonperforming loans | | — |
| | 142 |
| | 142 |
| | | 75 |
| | 121 |
| | 196 |
| |
Troubled debt restructurings | | 274 |
| | 32 |
| | 306 |
| | | 564 |
| | 29 |
| | 593 |
| |
30+ Delinq. % (a) | | 1.16 | % | | 1.73 | % | | 1.17 | % | | | 1.25 | % | | 0.95 | % | | 1.24 | % | |
NPL % | | — |
| | 1.82 |
| | 0.04 |
| | | 0.01 |
| | 1.89 |
| | 0.03 |
| |
Allowance / loans % | | 3.42 |
| | 2.26 |
| | 3.39 |
| | | 1.61 |
| | 1.36 |
| | 1.61 |
| |
NM—Not meaningfulLoans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
The following table provides additional asset quality data by loan portfolio:
Table 17—Asset Quality by Portfolio
|
| | | | | | | | | |
| | September 30 | | December 31 | |
| | 2017 | | 2016 | |
Key Portfolio Details | | | | | |
C&I | | | | | |
Period-end loans ($ millions) | | $ | 12,792 |
| | $ | 12,148 |
| |
30+ Delinq. % (a) | | 0.27 | % | | 0.08 | % | |
NPL % | | 0.15 |
| | 0.27 |
| |
Charge-offs % (qtr. annualized) | | 0.10 |
| | NM |
| |
Allowance / loans % | | 0.77 | % | | 0.74 | % | |
Allowance / net charge-offs | | 7.97 | x | | NM |
| |
Commercial Real Estate | | | | | |
Period-end loans ($ millions) | | $ | 2,251 |
| | $ | 2,136 |
| |
30+ Delinq. % (a) | | 0.02 | % | | 0.01 | % | |
NPL % | | 0.07 |
| | 0.13 |
| |
Charge-offs % (qtr. annualized) | | NM |
| | 0.09 |
| |
Allowance / loans % | | 1.32 | % | | 1.59 | % | |
Allowance / net charge-offs | | NM |
| | 17.56 | x | |
Consumer Real Estate | | | | | |
Period-end loans ($ millions) | | $ | 4,370 |
| | $ | 4,524 |
| |
30+ Delinq. % (a) | | 0.74 | % | | 0.93 | % | |
NPL % | | 1.76 |
| | 1.83 |
| |
Charge-offs % (qtr. annualized) | | NM |
| | NM |
| |
Allowance / loans % | | 0.94 | % | | 1.11 | % | |
Allowance / net charge-offs | | NM |
| | NM |
| |
Permanent Mortgage | | | | | |
Period-end loans ($ millions) | | $ | 403 |
| | $ | 423 |
| |
30+ Delinq. % (a) | | 1.51 | % | | 2.36 | % | |
NPL % | | 6.81 |
| | 6.42 |
| |
Charge-offs % (qtr. annualized) | | NM |
| | NM |
| |
Allowance / loans % | | 3.90 | % | | 3.85 | % | |
Allowance / net charge-offs | | NM |
| | NM |
| |
Credit Card and Other | | | | | |
Period-end loans ($ millions) | | $ | 350 |
| | $ | 359 |
| |
30+ Delinq. % (a) | | 0.89 | % | | 1.17 | % | |
NPL % | | 0.04 |
| | 0.04 |
| |
Charge-offs % (qtr. annualized) | | 2.80 |
| | 3.25 |
| |
Allowance / loans % | | 2.95 | % | | 3.39 | % | |
Allowance / net charge-offs | | 1.04 | x | | 1.04 | x | |
|
| | | | | | | | | |
| | June 30 | | December 31 | |
| | 2018 | | 2017 | |
Key Portfolio Details | | | | | |
C&I | | | | | |
Period-end loans ($ millions) | | $ | 16,439 |
| | $ | 16,057 |
| |
30+ Delinq. % (a) | | 0.14 | % | | 0.19 | % | |
NPL % | | 0.12 |
| | 0.19 |
| |
Charge-offs % (qtr. annualized) | | 0.06 |
| | 0.28 |
| |
Allowance / loans % | | 0.59 | % | | 0.61 | % | |
Allowance / net charge-offs | | 10.73 | x | | 2.52 | x | |
Commercial Real Estate | | | | | |
Period-end loans ($ millions) | | $ | 4,136 |
| | $ | 4,215 |
| |
30+ Delinq. % (a) | | 0.06 | % | | 0.15 | % | |
NPL % | | 0.03 |
| | 0.03 |
| |
Charge-offs % (qtr. annualized) | | 0.01 |
| | NM | |
Allowance / loans % | | 0.82 | % | | 0.67 | % | |
Allowance / net charge-offs | | 55.04 | x | | NM | |
Consumer Real Estate | | | | | |
Period-end loans ($ millions) | | $ | 6,223 |
| | $ | 6,368 |
| |
30+ Delinq. % (a) | | 0.68 | % | | 0.65 | % | |
NPL % | | 1.28 |
| | 1.12 |
| |
Charge-offs % (qtr. annualized) | | NM | | NM | |
Allowance / loans % | | 0.51 | % | | 0.59 | % | |
Allowance / net charge-offs | | NM | | NM | |
Permanent Mortgage | | | | | |
Period-end loans ($ millions) | | $ | 355 |
| | $ | 399 |
| |
30+ Delinq. % (a) | | 1.92 | % | | 1.85 | % | |
NPL % | | 6.87 |
| | 6.61 |
| |
Charge-offs % (qtr. annualized) | | NM | | 0.10 |
| |
Allowance / loans % | | 3.97 | % | | 3.90 | % | |
Allowance / net charge-offs | | NM | | 37.67 | x | |
Credit Card and Other | | | | | |
Period-end loans ($ millions) | | $ | 549 |
| | $ | 620 |
| |
30+ Delinq. % (a) | | 1.80 | % | | 1.24 | % | |
NPL % | | 0.07 |
| | 0.03 |
| |
Charge-offs % (qtr. annualized) | | 2.61 |
| | 2.30 |
| |
Allowance / loans % | | 1.63 | % | | 1.61 | % | |
Allowance / net charge-offs | | 0.62 | x | | 0.99 | x | |
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. |
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 $194.9$185.5 million on SeptemberJune 30, 2017,2018, from $202.1$189.6 million on December 31, 2016.2017. The ALLL as of SeptemberJune 30, 2017,2018, 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 2 basis points to .97.67 percent on SeptemberJune 30, 2017, from 1.03 percent on2018, compared to December 31, 2016.2017.
The provision for loan losses is the charge to or release of earnings necessary to maintain the ALLL at a sufficient level reflecting management’s estimate of probable incurred losses in the loan portfolio. There was no provision expense recorded in thirdsecond quarter 20172018 compared to a provision expensecredit of $4.0$2.0 million in thirdsecond quarter 2016.2017.
FHN expects asset quality trends to remain relatively stable for the near term if the slow growth ofeconomy continues to grow at the economy continues.current pace. 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. ThirdSecond quarter 20172018 experienced net charge-offs of $2.4$1.7 million compared to $2.3$2.7 million of net charge-offs in thirdsecond quarter 2016.2017.
The commercial portfolio experienced $2.8$2.4 million of net charge-offs in thirdsecond quarter 20172018 compared to $.7$1.1 million of net charge-offs in thirdsecond quarter 2016.2017. In addition, the consumer real estate portfolio experienced net recoveries of $2.6$4.0 million in thirdsecond quarter 20172018 compared to $1.2 million in net recoveries during thirdsecond quarter 2016.2017. Permanent mortgage and credit card and other remained relatively flatexperienced net charge-offs of $3.3 million in second quarter 2018 compared to $2.8 million a year ago.
Nonperforming Assets
Nonperforming loans are loans placed on nonaccrual if it becomes evident that full collection of principal and interest is at risk, impairment has been recognized as a partial charge-off of principal balance due to insufficient collateral value and past due status, or on a case-by-case basis if FHN continues to receive payments but there are other borrower-specific issues. Included in nonaccruals are loans in which FHN continues to receive payments including residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy, and second liens, regardless of delinquency status, behind first liens that are 90 or more days past due, are bankruptcies, or are TDRs. These, along with OREO, excluding OREO from government insured mortgages, represent nonperforming assets (“NPAs”).
Total nonperforming assets (including NPLs HFS) decreased to $140.2$157.0 million on SeptemberJune 30, 2017,2018, from $164.6$177.2 million on December 31, 2016.2017. The nonperforming assets ratio (nonperforming assets excluding NPLs HFS to total period-end loans plus OREO and other assets) decreased to .66.55 percent as of SeptemberJune 30, 2017,2018, compared to .80.61 percent as of December 31, 2016.2017. Portfolio nonperforming loans declined $20.7decreased $5.8 million from December 31, 2016,2017, to $125.0$124.8 million on SeptemberJune 30, 2017.2018. The declinedecrease in nonperforming loans was primarily driven by decreases within the C&I andportfolio which was partially offset by an increase in the consumer real estate portfolios. This decrease in the C&I portfolio was largely driven by payoffs.portfolio.
The ratio of the ALLL to NPLs in the loan portfolio was 1.561.49 times as of SeptemberJune 30, 2017,2018, compared to 1.391.45 times as of December 31, 2016.2017. Certain nonperforming loans in both the commercial and consumer portfolios are deemed collateral-dependent and are charged down to an estimate of collateral value less costs to sell. Because loss content has been recognized through a partial charge-off, typically reserves are not recorded.
Table 18 provides an activity rollforward of OREO balances for SeptemberJune 30, 20172018 and 2016.2017. The balance of OREO, exclusive of inventory from government insured mortgages, decreasedincreased to $7.9$26.5 million as of SeptemberJune 30, 2018, from $7.0 million as of June 30, 2017, from $13.7 million asdriven by the acquisition of September 30, 2016, asCBF. In addition, FHN has executed sales of existing OREO and continued efforts to avoid foreclosures by
foreclosures by restructuring loans and working with borrowers. Additionally,Moreover, property values have stabilized which also affects the balance of OREO.
Table 18—Rollforward of OREO
| | | | Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Beginning balance | | $ | 7,038 |
| | $ | 14,150 |
| | $ | 11,235 |
| | $ | 24,977 |
| | $ | 32,375 |
| | $ | 10,259 |
| | $ | 39,566 |
| | $ | 11,235 |
|
Valuation adjustments | | (41 | ) | | (711 | ) | | (662 | ) | | (1,561 | ) | | (262 | ) | | (176 | ) | | (1,422 | ) | | (621 | ) |
New foreclosed property | | 2,434 |
| | 3,745 |
| | 5,280 |
| | 7,291 |
| | 976 |
| | 1,741 |
| | 4,052 |
| | 2,846 |
|
Disposals: | | | | | | | | | |
Single transactions | | (1,554 | ) | | (3,506 | ) | | (7,976 | ) | | (17,029 | ) | |
Ending balance, September 30 (a) | | $ | 7,877 |
| | $ | 13,678 |
| | $ | 7,877 |
| | $ | 13,678 |
| |
Disposal | | | (6,632 | ) | | (4,786 | ) | | (15,739 | ) | | (6,422 | ) |
Ending balance, June 30 (a) | | | $ | 26,457 |
| | $ | 7,038 |
| | $ | 26,457 |
| | $ | 7,038 |
|
| |
(a) | Excludes OREO and receivables related to government insured mortgages of $6.5$3.8 million and $6.4 million as of SeptemberJune 30, 20172018 and 2016,2017, respectively. |
The following table provides consolidated asset quality information for the three months ended SeptemberJune 30, 20172018 and 2016,2017, and as of SeptemberJune 30, 2017,2018, and December 31, 2016:2017:
Table 19—Asset Quality Information
| | | | Three Months Ended September 30 | | | Three Months Ended June 30 | |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Allowance for loan losses: | | | | | | | | | | |
Beginning balance on July 1 | | $ | 197,257 |
| | $ | 199,807 |
| | |
Beginning balance on April 1 | | | $ | 187,194 |
| | $ | 201,968 |
| |
Provision/(provision credit) for loan losses | | — |
| | 4,000 |
| | | — |
| | (2,000 | ) | |
Charge-offs | | (10,670 | ) | | (10,362 | ) | | | (10,008 | ) | | (9,830 | ) | |
Recoveries | | 8,280 |
| | 8,112 |
| | | 8,276 |
| | 7,119 |
| |
Ending balance on September 30 | | $ | 194,867 |
| | $ | 201,557 |
| | |
Ending balance on June 30 | | | $ | 185,462 |
| | $ | 197,257 |
| |
Reserve for remaining unfunded commitments | | 4,372 |
| | 4,802 |
| | | 6,536 |
| | 5,554 |
| |
Total allowance for loan losses and reserve for unfunded commitments | | $ | 199,239 |
| | $ | 206,359 |
| | | $ | 191,998 |
| | $ | 202,811 |
| |
Key ratios | | | | | | | | | | |
Allowance / net charge-offs (a) | | 20.55 | x | | 22.51 | x | | | 26.70 | x | | 18.14 | x | |
Net charge-offs % (b) | | 0.05 | % | | 0.05 | % | | | 0.03 | % | | 0.06 | % | |
| | | | | | | | | | |
| | As of September 30 | | As of December 31 | | | As of June 30 | | As of December 31 | |
Nonperforming Assets by Segment | | 2017 | | 2016 | | | 2018 | | 2017 | |
Regional Banking: | | | | | | | | | | |
Nonperforming loans (c) | | $ | 40,610 |
| | $ | 50,653 |
| | | $ | 51,092 |
| | $ | 52,659 |
| |
OREO (d) | | 2,848 |
| | 5,081 |
| | | 22,288 |
| | 34,844 |
| |
Total Regional Banking | | 43,458 |
| | 55,734 |
| | | 73,380 |
| | 87,503 |
| |
Non-Strategic: | | | | | | | | | | |
Nonperforming loans (c) | | 82,203 |
| | 93,808 |
| | | 71,954 |
| | 75,803 |
| |
Nonperforming loans held-for-sale net of fair value adjustment (c) | | 7,314 |
| | 7,741 |
| | | 5,769 |
| | 6,971 |
| |
OREO (d) | | 5,029 |
| | 6,154 |
| | | 4,168 |
| | 4,722 |
| |
Total Non-Strategic | | 94,546 |
| | 107,703 |
| | | 81,891 |
| | 87,496 |
| |
Corporate: | | | | | | | | | | |
Nonperforming loans (c) | | 2,173 |
| | 1,186 |
| | | 1,746 |
| | 2,157 |
| |
Total Corporate | | 2,173 |
| | 1,186 |
| | | 1,746 |
| | 2,157 |
| |
Total nonperforming assets (c) (d) | | $ | 140,177 |
| | $ | 164,623 |
| | | $ | 157,017 |
| | $ | 177,156 |
| |
| |
(a) | Ratio is total allowance divided by annualized net charge-offs. |
| |
(b) | Ratio is annualized net charge-offs divided by quarterly average loans, net of unearned income. |
| |
(c) | Excludes loans that are 90 or more days past due and still accruing interest. |
| |
(d) | Excludes OREO from government-insured mortgages. |
|
| | | | | | | | | |
| | As of September 30 | | As of December 31 | |
| | 2017 | | 2016 | |
Loans and commitments: | | | | | |
Total period-end loans, net of unearned income | | $ | 20,166,091 |
| | $ | 19,589,520 |
| |
Potential problem assets (a) | | 280,358 |
| | 290,354 |
| |
Loans 30 to 89 days past due | | 45,248 |
| | 42,570 |
| |
Loans 90 days past due (b) (c) | | 30,950 |
| | 23,385 |
| |
Loans held-for-sale 30 to 89 days past due (d) | | 34,325 |
| | 6,462 |
| |
Loans held-for-sale 30 to 89 days past due—guaranteed portion (d) (e) | | 33,877 |
| | 6,248 |
| |
Loans held-for-sale 90 days past due (c) (d) | | 10,075 |
| | 14,868 |
| |
Loans held-for-sale 90 days past due—guaranteed portion (c) (d) (e) | | 9,932 |
| | 14,657 |
| |
Remaining unfunded commitments | | $ | 8,868,115 |
| | $ | 8,744,649 |
| |
Key ratios | | | | | |
Allowance / loans % | | 0.97 | % | | 1.03 | % | |
Allowance / NPL | | 1.56 | x | | 1.39 | x | |
NPA % (f) | | 0.66 | % | | 0.80 | % | |
NPL % | | 0.62 | % | | 0.74 | % | |
Table 19—Asset Quality Information (continued)
|
| | | | | | | | | |
| | As of June 30 | | As of December 31 | |
| | 2018 | | 2017 | |
Loans and commitments: | | | | | |
Total period-end loans, net of unearned income | | $ | 27,701,740 |
| | $ | 27,658,929 |
| |
Potential problem assets (a) | | 293,990 |
| | 327,214 |
| |
Loans 30 to 89 days past due | | 49,219 |
| | 50,884 |
| |
Loans 90 days past due (b) (c) | | 35,920 |
| | 41,568 |
| |
Loans held-for-sale 30 to 89 days past due | | 5,537 |
| | 13,419 |
| |
Loans held-for-sale 30 to 89 days past due—guaranteed portion (d) | | 5,128 |
| | 5,975 |
| |
Loans held-for-sale 90 days past due (c) | | 8,558 |
| | 10,885 |
| |
Loans held-for-sale 90 days past due—guaranteed portion (c) (d) | | 8,410 |
| | 9,451 |
| |
Remaining unfunded commitments | | $ | 10,228,615 |
| | $ | 10,678,485 |
| |
Key ratios | | | | | |
Allowance / loans % | | 0.67 | % | | 0.69 | % | |
Allowance / NPL | | 1.49 | x | | 1.45 | x | |
NPA % (e) | | 0.55 | % | | 0.61 | % | |
NPL % | | 0.45 | % | | 0.47 | % | |
| |
(a) | Includes past due loans. |
| |
(b) | Excludes loans classified as held-for-sale. |
| |
(c) | Amounts are not included in nonperforming/nonaccrual loans. |
| |
(d) | 2017 includes loans related to the Coastal acquisition. |
| |
(e) | Guaranteed loans include FHA, VA, SBA, USDA, and GNMA loans repurchased through the GNMA buyout program. |
| |
(f)(e) | Ratio is non-performing assets related to the loan portfolio to total loans plus OREO and other assets. |
Past Due Loans and Potential Problem Assets
Past due loans are loans contractuallycontractually past due as to interest or principal payments, but which have not yet been put on nonaccrual status. Loans in the portfolio that are 90 days or more past due and still accruing were $31.0$35.9 million on SeptemberJune 30, 2017,2018, compared to $23.4$41.6 million on December 31, 2016. The increase was due in large part to one relationship, which is a purchased credit-impaired loan.2017. Loans 30 to 89 days past due increaseddecreased to $45.2$49.2 million on SeptemberJune 30, 2017,2018, from $42.6$50.9 million on December 31, 2016.2017. The decrease in past due loans was primarily driven by the C&I portfolio.
Potential problem assets represent those assets where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms and includes loans past due 90 days or more and still accruing. This definition is believed to be substantially consistent with the standards established by the OCC for loans classified as substandard. Potential problem assets in the loan portfolio were $280.4$294.0 million on SeptemberJune 30, 2017, $290.42018, $327.2 million on December 31, 2016,2017, and $255.4$285.4 million on SeptemberJune 30, 2016.2017. The decline from year-enddecrease in potential problem assets was due to a net decrease in classified commercial loans primarily driven by the payoff of a few credits.two credits which were upgraded. The current expectation of losses from potential problem assets has been included in management’s analysis for assessing the adequacyadequacy of the allowance for loan losses.
Troubled Debt Restructuring and Loan Modifications
As part of FHN’s ongoing risk management practices, FHN attempts to work with borrowers when appropriate to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. In a situation where an economic concession has been granted to a borrower that is experiencing financial difficulty, FHN identifies and reports that loan as a Troubled Debt Restructuring (“TDR”). See Note 4 – Loans for further discussion regarding TDRs and loan modifications.
On SeptemberJune 30, 20172018 and December 31, 2016,2017, FHN had $241.6$217.6 million and $285.2$234.4 million portfolio loans classified as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reserves of $38.6$31.5 million and $44.9$37.3 million, or 14 percent and 16 percent of TDR balances, as of SeptemberJune 30, 20172018 and December 31, 2016.2017, respectively. Additionally, FHN had $63.2$60.5 million and $69.3$63.2 million of HFS loans classified as TDRs as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. Total held-to-maturityheld-to-
maturity TDRs decreased by $43.6$16.8 million with the majority of the decline attributable to consumer real estate commercial and
permanent mortgage loans. Generally, the volume of new TDRs, particularly within the consumer real estate and permanent mortgage portfolios, has substantially declined.loans.
The following table provides a summary of TDRs for the periods ended SeptemberJune 30, 20172018 and December 31, 2016:2017:
Table 20—Troubled Debt Restructurings
| | (Dollars in thousands) | | As of September 30, 2017 | | As of December 31, 2016 | | As of June 30, 2018 | | As of December 31, 2017 |
Held-to-maturity: | | | | | | | | |
Permanent mortgage: | | | | | | | | |
Current | | $ | 65,215 |
| | $ | 73,500 |
| | $ | 58,917 |
| | $ | 63,891 |
|
Delinquent | | 1,657 |
| | 2,751 |
| | 2,258 |
| | 4,463 |
|
Non-accrual (a) | | 17,209 |
| | 17,675 |
| | 15,686 |
| | 16,440 |
|
Total permanent mortgage | | 84,081 |
| | 93,926 |
| | 76,861 |
| | 84,794 |
|
Consumer real estate: | | | | | | | | |
Current | | 87,732 |
| | 100,383 |
| | 75,931 |
| | 84,697 |
|
Delinquent | | 3,889 |
| | 4,618 |
| | 2,179 |
| | 1,975 |
|
Non-accrual (b) | | 44,237 |
| | 48,459 |
| | 44,225 |
| | 42,223 |
|
Total consumer real estate | | 135,858 |
| | 153,460 |
| | 122,335 |
| | 128,895 |
|
Credit card and other: | | | | | | | | |
Current | | 512 |
| | 288 |
| | 597 |
| | 544 |
|
Delinquent | | 32 |
| | 18 |
| | 7 |
| | 49 |
|
Non-accrual | | — |
| | — |
| | — |
| | — |
|
Total credit card and other | | 544 |
| | 306 |
| | 604 |
| | 593 |
|
Commercial loans: | | | | | | | | |
Current | | 16,412 |
| | 21,887 |
| | 15,492 |
| | 15,311 |
|
Delinquent | | 88 |
| | — |
| | — |
| | — |
|
Non-accrual | | 4,616 |
| | 15,571 |
| | 2,330 |
| | 4,766 |
|
Total commercial loans | | 21,116 |
| | 37,458 |
| | 17,822 |
| | 20,077 |
|
Total held-to-maturity | | $ | 241,599 |
| | $ | 285,150 |
| | $ | 217,622 |
| | $ | 234,359 |
|
Held-for-sale: | | | | | | | | |
Current | | $ | 43,864 |
| | $ | 46,625 |
| | $ | 44,713 |
| | $ | 43,455 |
|
Delinquent | | 13,956 |
| | 16,436 |
| | 9,577 |
| | 13,269 |
|
Non-accrual | | 5,347 |
| | 6,283 |
| | 6,184 |
| | 6,515 |
|
Total held-for-sale | | 63,167 |
| | 69,344 |
| | 60,474 |
| | 63,239 |
|
Total troubled debt restructurings | | $ | 304,766 |
| | $ | 354,494 |
| | $ | 278,096 |
| | $ | 297,598 |
|
| |
(a) | Balances as of SeptemberJune 30, 20172018 and December 31, 2016,2017, include $5.5$4.2 million and $5.3$5.1 million, respectively, of discharged bankruptcies. |
| |
(b) | Balances as of SeptemberJune 30, 20172018 and December 31, 2016,2017, include $14.9$12.2 million and $15.3$13.4 million, respectively, of discharged bankruptcies. |
RISK MANAGEMENT
Except as discussed below, thereThere have been no significant changes to FHN’s risk management practices as described under “Risk Management” beginning on page 4752 of Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
MARKET RISK MANAGEMENT
Except as discussed below, thereThere have been no significant changes to FHN’s market risk management practices as described under “Market Risk Management” beginning on page 4853 of Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
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
| | | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 | | As of September 30, 2017 | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | | As of June 30, 2018 |
(Dollars in thousands) | | Mean | | High | | Low | | Mean | | High | | Low | | | | Mean | | High | | Low | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
VaR | | $ | 1,620 |
| | $ | 3,310 |
| | $ | 521 |
| | $ | 1,450 |
| | $ | 3,310 |
| | $ | 521 |
| | $ | 3,174 |
| | $ | 1,747 |
| | $ | 2,021 |
| | $ | 1,496 |
| | $ | 1,747 |
| | $ | 2,294 |
| | $ | 1,148 |
| | $ | 1,921 |
|
SVaR | | 4,575 |
| | 7,781 |
| | 2,150 |
| | 4,023 |
| | 7,781 |
| | 1,775 |
| | 6,805 |
| | 9,568 |
| | 11,465 |
| | 8,009 |
| | 9,664 |
| | 11,918 |
| | 6,576 |
| | 8,767 |
|
10-day | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
VaR | | 4,112 |
| | 8,039 |
| | 870 |
| | 3,538 |
| | 8,039 |
| | 870 |
| | 6,302 |
| | 3,825 |
| | 4,349 |
| | 3,343 |
| | 3,885 |
| | 4,589 |
| | 2,601 |
| | 3,635 |
|
SVaR | | 15,021 |
| | 22,511 |
| | 7,833 |
| | 13,390 |
| | 24,550 |
| | 4,916 |
| | 18,602 |
| | 27,375 |
| | 32,343 |
| | 22,100 |
| | 27,421 |
| | 32,343 |
| | 20,382 |
| | 28,588 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 | | As of September 30, 2016 | | 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 | | | | Mean | | High | | Low | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
VaR | | $ | 814 |
| | $ | 1,040 |
| | $ | 606 |
| | $ | 769 |
| | $ | 1,411 |
| | $ | 393 |
| | $ | 880 |
| | $ | 1,668 |
| | $ | 2,394 |
| | $ | 1,210 |
| | $ | 1,365 |
| | $ | 2,394 |
| | $ | 779 |
| | $ | 1,605 |
|
SVaR | | 3,823 |
| | 5,641 |
| | 2,253 |
| | 3,607 |
| | 5,789 |
| | 1,748 |
| | 4,017 |
| | 4,436 |
| | 6,284 |
| | 3,217 |
| | 3,745 |
| | 6,284 |
| | 1,775 |
| | 3,217 |
|
10-day | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
VaR | | 1,917 |
| | 3,167 |
| | 1,170 |
| | 1,848 |
| | 4,058 |
| | 751 |
| | 2,998 |
| | 3,644 |
| | 5,251 |
| | 2,503 |
| | 3,249 |
| | 5,712 |
| | 1,759 |
| | 4,009 |
|
SVaR | | 12,439 |
| | 18,221 |
| | 7,105 |
| | 11,703 |
| | 18,221 |
| | 3,263 |
| | 12,055 |
| | 15,686 |
| | 24,550 |
| | 11,176 |
| | 12,568 |
| | 24,550 |
| | 4,916 |
| | 11,176 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, 2016 | | As of December 31, 2016 | | | | | | | | Year Ended December 31, 2017 | | As of December 31, 2017 |
(Dollars in thousands) | | | | | | | | Mean | | High | | Low | | | | | | | | | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
VaR | | | | | | | | $ | 821 |
| | $ | 1,745 |
| | $ | 393 |
| | $ | 932 |
| | | | | | | | $ | 1,529 |
| | $ | 3,310 |
| | $ | 521 |
| | $ | 1,287 |
|
SVaR | | | | | | | | 3,643 |
| | 5,789 |
| | 1,748 |
| | 2,830 |
| | | | | | | | 4,704 |
| | 8,301 |
| | 1,775 |
| | 6,230 |
|
10-day | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
VaR | | | | | | | | 2,088 |
| | 5,852 |
| | 751 |
| | 2,136 |
| | | | | | | | 3,560 |
| | 8,039 |
| | 870 |
| | 3,059 |
|
SVaR | | | | | | | | 11,671 |
| | 18,483 |
| | 3,263 |
| | 6,443 |
| | | | | | | | 15,511 |
| | 28,232 |
| | 4,916 |
| | 19,813 |
|
FHN’s overall VaR measure includes both interest rate risk and credit spread risk. Separate measures of these component risks are as follows:
Table 22—Schedule of Risks Included in VaR
| | | | As of September 30, 2017 | | As of September 30, 2016 | | As of December 31, 2016 | | As of June 30, 2018 | | As of June 30, 2017 | | As of December 31, 2017 |
(Dollars in thousands) | | 1-day | | 10-day | | 1-day | | 10-day | | 1-day | | 10-day | | 1-day | | 10-day | | 1-day | | 10-day | | 1-day | | 10-day |
Interest rate risk | | $ | 2,055 |
| | $ | 8,334 |
| | $ | 683 |
| | $ | 1,436 |
| | $ | 917 |
| | $ | 1,771 |
| | $ | 1,035 |
| | $ | 2,263 |
| | $ | 1,194 |
| | $ | 4,664 |
| | $ | 930 |
| | $ | 2,084 |
|
Credit spread risk | | 370 |
| | 701 |
| | 785 |
| | 2,710 |
| | 537 |
| | 1,391 |
| | 555 |
| | 1,009 |
| | 433 |
| | 570 |
| | 305 |
| | 471 |
|
The potential risk of loss reflected by FHN’s VaR measures assumes the trading securities inventory is static. Because FHN’s Fixed Income division procures fixed income securities for purposes of distribution to customers, its trading securities inventory turns over multiple times daily, on average.regularly. Additionally, Fixed Income traders actively manage the trading securities
inventory continuously throughout each trading day. Accordingly, FHN’s trading securities inventory is highly dynamic, rather than static. As a result, it would be rare for Fixed Income to incur a negative 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 5055 of Exhibit 13 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.2017.
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 SeptemberJune 30, 2017,2018, 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 1.0.9 percent, 2.11.7 percent, 4.13.1 percent, and 7.76.1 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 0.6.5 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 1.2.9 percent of base net interest income. A rate shock of minus 25 basis points and minus 50 basis points results in an unfavorable variance in net interest income of 1.5.4 percent and 4.42.2 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.
The recent movement of short-term interest rates higher after a prolonged period of very low interest rates has had a positive effect on FHN's net interest income and net interest margin. Given recent strength in the economy, the upward trend in interest rates, and market expectations for higher rates in the future, FHN reports itshas employed a moderately asset sensitive position. While it is expected that rates will continue to move higher, the movement of rates off the zero boundary during the past year has created the possibility that rates could decline in the future. FHN continues to monitor economic conditions and remains prepared to take any actions to mitigate exposure to falling interest rate risk profilerates should that occur. In addition, it is possible that interest rates continue to the Board quarterly.rise and that competitive pressures might cause FHN's deposit costs to rise faster than assumed in FHN's simulation analysis. If that were to occur, management believes FHN's asset sensitivity could moderate further.
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 5156 of Exhibit 13 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.2017.
OPERATIONAL RISK MANAGEMENT
Except as discussed below, thereThere have been no significant changes to FHN's operational risk management practices as described under "Operational Risk Management" on page 5257 of Exhibit 13 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.
FHN operates a Merger Project Office to manage the execution risk in connection with the Capital Bank merger.2017.
COMPLIANCE RISK MANAGEMENT
There have been no significant changes to FHN's compliance risk management practices as described under "Compliance Risk Management" on page 5257 of Exhibit 13 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.2017.
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 5257 of Exhibit 13 to FHN's Annual Report on Form 10-K for the year ended December 31, 2016.2017.
LIQUIDITY RISK MANAGEMENT
ALCO also focuses on liquidity management: the funding of assets with liabilities of appropriate duration, while mitigating the risk of unexpected cash needs. ALCO and the Board of Directors have adopted a Liquidity Policy. The objective of the Liquidity Policy is to ensure that FHN meets its cash and collateral obligations promptly, in a cost-effective manner and with the highest degree of reliability. The maintenance of adequate levels of asset and liability liquidity should provide FHN with the ability to meet both expected and unexpected cash and collateral needs. Key liquidity ratios, asset liquidity levels and the amount available from funding sources are reported to ALCO on a regular basis. FHN’s Liquidity Policy establishes liquidity limits that are deemed appropriate for FHN’s risk profile.
In accordance with the Liquidity Policy, ALCO manages FHN’s exposure to liquidity risk through a dynamic, real time forecasting methodology. Base liquidity forecasts are reviewed by ALCO and are updated as financial conditions dictate. In addition to the baseline liquidity reports, robust stress testing of assumptions and funds availability are periodically reviewed. FHN maintains a contingency funding plan that may be executed, should unexpected difficulties arise in accessing funding that affects FHN, the industry as a whole, or both. Subject to market conditions and compliance with applicable regulatory requirements from time to time, funds are available from a number of sources including the available-for-sale securities
portfolio, dealer and commercial customer repurchase agreements, access to the overnight and term Federal Funds markets, incremental borrowing capacitycapacity at the FHLB ($1.41.5 billion waswas available at SeptemberJune 30, 2017)2018), 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 104103 percent on SeptemberJune 30, 20172018 compared to 105101 percent on December 31, 2016.
2017.
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 SeptemberJune 30, 2017,2018, 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 dividend restrictions imposed under applicable federal rules FTBNA’sas outlined above, the Bank's total amount available for dividends was negative $64.7$149.1 million as of September 30, 2017 comparedJuly 1, 2018. Consequently, on that date the bank could pay common dividends up to negative $132.5 million as of December 31, 2016. Consequently, FTBNA could not pay common dividendsthat amount to its sole common stockholder, FHN, or to its preferred shareholders without prior regulatory approval. FTBNA declared and paid common dividends to FHN in second and third quarter 2018 in the amount of $90 million and $145 million, respectively. FTBNA applied for and received approval from the OCC to declare and pay common dividends to FHN in first, second, third and fourth quarter 2017 in the amounts of $40 million, $50 million, $80 million, and $80 million, respectively, and in the amount of $250 million in 2016.2017. FTBNA declared and paid preferred dividends in eachfirst and second quarter to date of 20172018 and each quarter of 2016,2017, with OCC approval as necessary. Additionally, FTBNA declared preferred dividends in fourththird quarter 2017, with OCC approval.2018, payable in October 2018.
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 $.09$.12 per common share on October July 2, 2017,2018, and in October 2017July 2018 the Board approved a $.09$.12 per common share cash dividend payable on January 2,October 1, 2018, to shareholders of record on November 3, 2017.September 7, 2018. FHN paid a cash dividend of $1,550.00 per preferred share on OctoberJuly 10, 2017,2018, and in October 2017July 2018 the Board approved a $1,550.00 per preferred share cash dividend payable on JanuaryOctober 10, 2018, to shareholders of record on December 22, 2017.September 25, 2018.
CASH FLOWS
The Consolidated Condensed Statements of Cash Flows provide information on cash flows from operating, investing, and financing activities for the ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. The level of cash and cash equivalents increased $50.0$25.0 million during 2017the first half of 2018 compared to an increase of $126.5$41.3 million in 2016, asfirst half of 2017. In 2018, cash provided by investing and operating activities was more than cash used by financing activities. In 2017, cash provided by financing activities more than offset cash used by investing and operating andactivities.
Net cash provided by investing activities was $428.9 million in the first half of 2018, primarily driven by a decrease in interest-bearing cash. Additionally, a net decrease in the AFS securities portfolio positively impacted cash flows during both periods.the six months ended June 30, 2018, but was somewhat offset by cash paid associated with the cancellation of common shares in connection with CBF dissenting shareholders and cash paid related to the divestiture of two branches. Net cash provided by operating activities was $43.9 million in first half of 2018 and was primarily the result of a net increase in fixed income trading activities of $438.0 million and favorably driven cash-related net income items. Cash outflows of $616.6 million related to a net increase in loans HFS negatively impacted operating cash flows during the first half of 2018, as purchases of government guaranteed loans outpaced sales, including the sale of approximately $120 million UPB of subprime auto loans. Net cash used in financing activities was $447.8 million in first half of 2018, largely driven by a decrease in short-term borrowings, somewhat offset by an increase in deposits. The decrease in short-term borrowings was primarily the result of a decline in FHLB borrowings, which fluctuate largely based on loan demand, deposit levels and balance sheet funding strategies.
Net cash provided by financing activities was $621.8$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 $266.4$35.6 million in the first half of 2017, as loan growth and cash paid to acquire Coastal, was partially offset by a $459.8$490.5 million decrease in interest bearing cash. Net cash used by operating activities was $305.4$446.1 million in the first half of 2017. Operating cash decreased in the first half of 2017 primarily due to net cash outflows of $501.2$445.4 million related to fixed income trading activities, an $85.4 million increase in loans held-for-sale, and
cash outflows of $85.0$57.0 million related to operating assets and liabilities, but were somewhat offset by favorably driven cash-related net income items.
Net cash provided by financing activities was $1.9 billion in 2016. Financing cash inflows in 2016 were positively affected by a $1.6 billion increase in deposits and a $732.9 million increase in short-term borrowings, but were partially offset by $264.6 million in payments of long-term borrowings, which included the maturity of $250 million of subordinated notes. Net cash used by investing activities was $1.6 billion in 2016 and was primarily due to a $1.9 billion increase in loans, which included $537.4 million UPB of loans acquired from GE Capital. Cash outflows were partially offset by a $383.0 million decrease in interest-bearing cash. Net cash used by operating activities was $262.3 million in 2016. Operating cash decreased in 2016 primarily driven by net cash outflows of net fixed income trading activities of $287.5 million, a $165 million cash contribution to the qualified pension plan and net changes in operating assets and liabilities of $94.7 million.
REPURCHASE OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS, AND OTHER CONTRACTUAL OBLIGATIONS
Obligations from Legacy Mortgage Businesses
[Certain mortgage-related terms used in this section are defined in “Mortgage-Related Glossary” below.]
Overview
Prior to September 2008 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:government-sponsored entities, or "GSEs": Fannie Mae and Freddie Mac. Also, federally insured or guaranteed whole loans were pooled, and payments to investors were guaranteed through Ginnie Mae. Many mortgage loan originations, especially nonconforming mortgage loans, were sold to investors, or certificate-holders, predominantly through 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. In addition to FH proprietary securitization and other whole loan sales activities, FHN also originated and sometimes sold or securitized second-lien, line of credit, and government-insured 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.loans.
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.
Repurchase and Make-Whole Obligations
StartingAs mentioned in Note 10 - Contingencies and Other Disclosures - starting in 2009 FHN received a high number of claims (primarily from GSEs, but to a lesser extent from purchasers of other whole loans sold) 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 MIprivate mortgage insurance ("MI") cancellation notice individually. FHN’s responses include appeal, provide additional information, deny the claim (rescission), repurchaserepurchase the loan or remit a make-whole payment, or reflect cancellation of MI.
After several years resolving repurchase and make-wholeTo date, FHN has resolved a substantial number of GSE claims through definitive resolution agreements ("DRAs") with each GSEthe GSEs, while the remainder have been resolved 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.basis. Under each DRA, FHN remains responsible for repurchase obligations related to certain excluded defects (such as title defects and violations of the GSE’s Charter Act) and FHN continues to have loan repurchase or monetary compensation obligations under the DRAs related to private mortgage insurance rescissions, cancellations, and denials (with certain exceptions). FHN also has exposure related to loans where there has been a prior bulk sale of servicing, as well as certain other whole-loan sales. With respect to loans where there has been a prior bulk sale of servicing, FHN is not responsible for MI cancellations and denials to the extent attributable to the acts of the current servicer.
While large portions of repurchase claims from the GSEs were settled with the DRAs, comprehensive settlement of repurchase, make-whole, and indemnity claims with non-Agency claimants is not practical. Such claims that are not resolved by the parties can, and sometimes have, become litigation.
FH Proprietary Securitization Actions
FHN has potential financial exposure from FH proprietary securitizations outside of the repurchase/make-whole process. Several investors in certificates sued FHN and others starting in 2009, and several underwriters or other counterparties have demanded that FHN indemnify and defend them in securitization lawsuits. The pending suits generally assert that disclosures made to investors in the offering and sale of certificates were legally deficient. A number of those matters have settled or otherwise been resolved. On June 30, 2018, the remaining UPB of loans held in FH proprietary securitizations was $2.6 billion, comprised of $1.9 billion of Alt-A loans and $.7 billion of Jumbo loans. See Note 10 – Contingencies and Other Disclosures for a discussion of certain actions pending against FHN in relation to FH proprietary securitizations.
Servicing Obligations
As mentioned in Note 10 - Contingencies and Other Disclosures - FHN’s national servicing business was sold as part of the platform sale in 2008. A significant amount of MSRmortgage servicing rights ("MSR") was sold at that time, and a significant amount was retained. The related servicing activities, including foreclosure and loss mitigation practices, not sold in 2008 were outsourced through a three-yeartwo separate subservicing arrangement (the “2008 subservicing agreement”) witharrangements to the platform buyer (the “2008"2008 subservicer”). The 2008 subservicing agreement expired in 2011 when FHN entered into a replacement agreement with a new subservicer (the “2011 subservicer”) and the "2011 subservicer". In fourth quarter 2013 and first quarter 2014, FHN contracted to sellsold and transferred a substantial majority of its remaining servicing obligations and servicing assets (including advances) to the 2011 subservicer. The servicing was transferred to the buyer in stages, and was substantially completed in first quarter 2014. The servicing still retained by FHN is not significant and continues to be subserviced.
As servicer, FHN had contractual obligations to the owners of the loans (primarily GSEs) and securitization trustees to handle billing, custodial, and other tasks related to each loan. Each subservicer undertook to perform those obligations on FHN’s behalf during the applicable subservicing period, although FHN legally remained the servicer of record for those loans that were subserviced.
The 2008 subservicer has been subject to a consent decree, and entered into a settlement agreement, with regulators related to alleged deficiencies in servicing and foreclosure practices. The 2008 subservicer has made demands of FHN, under the 2008 subservicing agreement, to pay certain resulting costs and damages totaling $43.5 million. FHN disagrees with those demands and has made no payments. This disagreement has the potential to result in litigation and, in any such future litigation, the claim against FHN may be substantial.
A certificate holder has contacted FHN, claiming that it has been damaged from alleged deficiencies in servicing loans held in certain FH proprietary securitization trusts. The holder has sued the FH securitization trustee on related grounds, but has not yet sued FHN. FHN cannot predict how this matter will proceed nor can FHN predict whether this matter ultimately will be material to FHN.
As mentioned in Note 10—Contingencies and Other Disclosures—FHN has received a notice of indemnification claims from its 2011 subservicer, Nationstar Mortgage LLC, currently doing business as “Mr. Cooper.” The notice asserts several categories of indemnity obligations by FHN to Nationstar in connection with mortgage loans under the subservicing arrangement and under the purchase transaction. This matter currently is not in formal litigation, but litigation in the future is possible.
Origination Data
From 2005 through 2008, FHN originated and sold $69.5 billion of mortgage loans to the Agencies. This includes $57.6 billion of loans sold to GSEs and $11.9 billion of loans guaranteed by Ginnie Mae. Although FHN conducted these businesses before 2005, GSE loans originated in 2005 through 2008 account for a substantial majority of all repurchase requests/make-whole claims received since the 2008 platform sale.
From 2005 through 2007, $26.7 billion of mortgage loans were included in FH proprietary securitizations. The last FH securitization occurred in 2007. On September 30, 2017, the remaining UPB of loans held in FH proprietary securitizations was $3.2 billion, comprised of $2.3 billion of Alt-A loans and $0.9 billion of Jumbo loans.
Mortgage-Related Glossary
|
| | | | | | |
Agencies | | the two GSEs and Ginnie Mae | | HELOC | | home equity line of credit |
| | | |
certificates | | securities sold to investors representing interests in mortgage loan securitizations | | HUD | | Dept. of Housing and Urban Development |
| | | |
DOJ | | U.S. Department of Justice | | LTV | | loan-to-value, a ratio of the loan amount divided by the home value |
| | | |
DRA | | definitive resolution agreement with a GSE | | MI | | private mortgage insurance, insuring against borrower payment default |
| | | |
Fannie Mae, Fannie, FNMA | | Federal National Mortgage Association | | MSR | | mortgage servicing rights |
| | | |
FH proprietary securitization | | securitization of mortgages sponsored by FHN under its First Horizon brand | | nonconforming loans | | loans that did not conform to Agency program requirements |
| | | |
FHA | | Federal Housing Administration | | other whole loans sold | | mortgage loans sold to private, non-Agency purchasers |
| | | |
Freddie Mac, Freddie, FHLMC | | Federal Home Loan Mortgage Corporation | | 2008 platform sale, platform sale, 2008 sale | | FHN’s sale of its national mortgage origination and servicing platforms in 2008 |
| | | |
Ginnie Mae, Ginnie, GNMA | | Government National Mortgage Association | | pipeline or active pipeline | | pipeline of mortgage repurchase, make-whole, & certain related claims against FHN |
| | | |
GSEs | | Fannie Mae and Freddie Mac | | VA | | Veterans Administration |
Active Pipeline
FHN accumulates the amount of repurchase requests, make-whole claims, and certain other related claims into the “active pipeline.” The active pipeline includes the amount of claims for loan repurchase, make-whole payments, loans as to which MI has been canceled, and information requests from purchasers of loans originated and sold through FHN’s legacy mortgage banking business. MI was required for certain of the loans sold to GSEs or that were securitized. Although unresolved MI cancellation notices are not formal repurchase requests, FHN includes those loans in the active pipeline. Additionally, FHN is responsible for covering losses for purchasers to the extent there is a shortfall in MI
insurance coverage (MI curtailment). Generally, the amount of a loan subject to a repurchase/make-whole claim, or with open MI issues, remains in the active pipeline throughout the resolution process with a claimant. Through June 2016 the active pipeline decreased, due in part to settlements and other resolutions, but also due to significant reductions in inflows. The pipeline is now relatively flat at a much
lower level due to a slower pace of inflows and resolutions. On September 30, 2017, the active pipeline was $52.9 million, slightly higher than $51.7 million on December 31, 2016.
The following table provides a detail of the active pipeline as of September 30, 2017 and December 31, 2016:
Table 23—Active Pipeline
|
| | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Number | | Amount | | Number | | Amount |
Repurchase/make whole requests: | | | | | | | | |
Agencies | | 34 |
| | $ | 4,979 |
| | 23 |
| | $ | 4,196 |
|
Non-Agency whole loan-related | | 119 |
| | 18,126 |
| | 126 |
| | 19,214 |
|
MI | | 156 |
| | 25,307 |
| | 147 |
| | 23,171 |
|
Other requests (a) | | 33 |
| | 4,488 |
| | 37 |
| | 5,122 |
|
Total | | 342 |
| | $ | 52,900 |
| | 333 |
| | $ | 51,703 |
|
| |
(a) | Other requests typically include requests for additional information from both GSE and non-GSE purchasers. |
On September 30, 2017, Agencies accounted for approximately 63 percent of the total active pipeline, inclusive of MI cancellation notices, MI curtailments, and all other claims. MI curtailment requests are the largest portion of the active pipeline and are intended onlyonly to cover the shortfall in MI insurance proceeds. Asproceeds; as a result, FHN’sFHN's currently accrued loss from MI curtailments as a percentage of UPB generally is significantly lower than that of a repurchase or make-whole claim. On June 30, 2018, the active pipeline was $12.0 million, compared to $44.1 million on December 31, 2017.
At SeptemberJune 30, 2017,2018, 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-wholemake-whole and Damagesdamages 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 SeptemberJune 30, 2017.2018. 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 vintagevintage 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,canceled, 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.
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.
The following table provides a rollforward of the legacy mortgage repurchase liability for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
Table 24—23—Reserves for Repurchase and Foreclosure Losses
| | | | Three Months Ended September 30 | | Nine Months Ended September 30 | | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Legacy Mortgage | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 34,599 |
| | $ | 67,383 |
| | $ | 65,309 |
| | $ | 114,947 |
| | $ | 33,490 |
| | $ | 64,777 |
| | $ | 33,556 |
| | $ | 65,309 |
|
Provision/(provision credit) for repurchase and foreclosure losses (a) | | (609 | ) | | (218 | ) | | (22,580 | ) | | (31,618 | ) | | (252 | ) | | (21,733 | ) | | (324 | ) | | (21,971 | ) |
Net realized losses | | (124 | ) | | (203 | ) | | (8,863 | ) | | (16,367 | ) | | (1,015 | ) | | (8,445 | ) | | (1,009 | ) | | (8,739 | ) |
Balance on September 30 | | $ | 33,866 |
| | $ | 66,962 |
| | $ | 33,866 |
| | $ | 66,962 |
| |
Balance on June 30 | | | $ | 32,223 |
| | $ | 34,599 |
| | $ | 32,223 |
| | $ | 34,599 |
|
(a) Nine months ended September 30, 2017 and 2016 include $20.0 million and $31.4 million, respectively, related to the settlement of certain repurchase claims.
Other FHN Mortgage Exposures
FHN’s FHA and VA program lending was substantial prior to the 2008 platform sale, and has continued at a much lower level since then. As lender, FHN made certain representations and warranties as to the compliance of the loans with program requirements. Over the past several years, most recently in first quarter 2015, FHN occasionally has recognized significant losses associated with settling claims and potential claims by government agencies, and by private parties asserting claims on behalf of agencies, related to these origination activities. At SeptemberJune 30, 2017, FHN had not accrued a liability for any matter related to these government lending programs, and no pending or known threatened matter related to these programs represented a material loss contingency described in Note 10 – Contingencies and Other Disclosures.
At September 30, 2017,2018, 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; and (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.assignees. At SeptemberJune 30, 2017,2018, FHN’s repurchase and foreclosure liability included 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.
MARKET UNCERTAINTIES AND PROSPECTIVEPROSPECTIVE 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 tocould continue to impact FHN’s quarterly results in ways whichwhich are both difficult to predict and unrelated to current operations.
FHN has prioritized expense discipline to include reducing or controlling certain expenses and investing in revenue-producing activities and critical infrastructure. FHN has actively pursued acquisition opportunities while maintaining a disciplined approach to valuations; to date all which closed have been moderate in size. FHN has been and remains amenable to a much more impactful acquisition, including FHN's agreement to acquire Capital Bank which will increase FHN's proforma size to approximately $40 billion in assets.valuations. 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 largely has beenfor many years was muted, compared to earlier recoveries, and somewhatsomewhat inconsistent from one quarter to the next. Though the economic expansion is over 8 years old, currently the U.S. economy does not appear to be weakening or falling back into recession. In
fact, starting in 2017, many aspects of the economy have strengthened. A continuation of the current expansion would support, rather than hinder, future loan and other financial activity growth by our customers.growth.
TheStarting in 2015, the Federal Reserve has raised short-term interest rates several times, in each case by 25 basis points, three times in the past four quarters and has signaledsignaling a willingness to continue to raise rates in a measured fashion depending on economic data and trends. Although another increase is expected late in 2017, increases after that may be less frequent than in 2017. If the Fed continues to raise rates, FHN’s net interest margin in the future is likely to continue an improving trend. A steeperHowever, in many instances long-term rates have not risen as much or as quickly as short-term rates, resulting in a flatter yield curve should also bolster activity within FHN’s Fixed Incomeand adverse pressure on net interest margin and our fixed income business. However,Moreover, 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 potential legislative actions which currently seem the most likely to be impactful to FHN include corporate tax reform, general regulatory reform and financial regulatory reform, allboth 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, severalsome matters remain unresolved. The timing or financial impact of resolution of these matters, most of which are in litigation, cannot be predicted with accuracy. Accordingly, the non-strategic segment is expected to occasionally and unexpectedly impact FHN’s overall quarterly results negatively or positively with reserve accruals or releases. Also, although new legacy matters of significance arise at a much slower pace than in years past and some formerly common legal claims no longer can be made due to the passage of time, potential for new legacy matters remains.
Foreclosure Practices
All lenders are affected by the heightened regulation of servicing, foreclosure, and loss mitigation practices, at both federal and state levels, implemented since 2009. In addition, FHN retains exposure for potential deficiencies in servicing related to its legacy servicing business and subservicing arrangements. Further details regarding these legacy matters are provided in “Obligations from Legacy Mortgage Businesses – Overview – Servicing Obligations” under “Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations.”
CRITICAL ACCOUNTING POLICIES
There have been no significant changes to FHN’s critical accounting policies as described in “Critical Accounting Policies” beginning on page 6467 of Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
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.
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—24—Non-GAAP to GAAP Reconciliation
| | | Three Months Ended September 30 | | Nine Months Ended September 30 | Three Months Ended June 30 | | Six Months Ended June 30 |
(Dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Average Tangible Common Equity (Non-GAAP) | | | | | | | | | | | | | | |
Average total equity (GAAP) | $ | 2,866,757 |
| | $ | 2,718,319 |
| | $ | 2,789,726 |
| | $ | 2,672,894 |
| $ | 4,552,546 |
| | $ | 2,778,169 |
| | $ | 4,563,172 |
| | $ | 2,750,571 |
|
Less: Average noncontrolling interest (a) | 295,431 |
| | 295,431 |
| | 295,431 |
| | 295,431 |
| 295,431 |
| | 295,431 |
| | 295,431 |
| | 295,431 |
|
Less: Average preferred stock (a) | 95,624 |
| | 95,624 |
| | 95,624 |
| | 95,624 |
| 95,624 |
| | 95,624 |
| | 95,624 |
| | 95,624 |
|
(A) Total average common equity | $ | 2,475,702 |
| | $ | 2,327,264 |
| | $ | 2,398,671 |
| | $ | 2,281,839 |
| $ | 4,161,491 |
| | $ | 2,387,114 |
| | $ | 4,172,117 |
| | $ | 2,359,516 |
|
Less: Average intangible assets (GAAP) (b) | 280,575 |
| | 214,260 |
| | 258,138 |
| | 215,552 |
| 1,569,449 |
| | 281,326 |
| | 1,568,743 |
| | 246,734 |
|
(B) Average Tangible Common Equity (Non-GAAP) | $ | 2,195,127 |
| | $ | 2,113,004 |
| | $ | 2,140,533 |
| | $ | 2,066,287 |
| $ | 2,592,042 |
| | $ | 2,105,788 |
| | $ | 2,603,374 |
| | $ | 2,112,782 |
|
Net Income Available to Common Shareholders | | | | | | | | | | | | | | |
(C) Net income available to common shareholders (annualized) (GAAP) | $ | 267,148 |
| | $ | 251,434 |
| | $ | 283,652 |
| | $ | 223,810 |
| $ | 327,257 |
| | $ | 364,206 |
| | $ | 347,282 |
| | $ | 292,040 |
|
Ratios | | | | | | | | | | | | | | |
(C)/(A) Return on average common equity (“ROE”) (GAAP) (c) | 10.79 | % | | 10.80 | % | | 11.83 | % | | 9.81 | % | 7.86 | % | | 15.26 | % | | 8.32 | % | | 12.38 | % |
(C)/(B) Return on average tangible common equity (“ROTCE”) (Non-GAAP) (d) | 12.17 |
| | 11.90 |
| | 13.25 |
| | 10.83 |
| 12.63 |
| | 17.30 |
| | 13.34 |
| | 13.82 |
|
(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.
| |
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 114119 of this report and the subsections entitled “Market Risk Management” beginning on page 114119 and “Interest Rate Risk Management” beginning on page 116121 of this report, and |
| |
(b) | Note 14 to the Consolidated Condensed Financial Statements appearing on pages 53-5956-62 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, 2016,2017, including in particular the section entitled “Risk Management” beginning on page 4752 of that Report and the subsections entitled “Market Risk Management” beginning on page 4853 and “Interest Rate Risk Management” appearing on pages 50-5155-56 of that Report; and Note 22 to the Consolidated Financial Statements appearing on pages 153-158163-169 of Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.
| |
Item 4. | Controls and Procedures |
Item 4. Controls and Procedures
| |
(a) | Evaluation of Disclosure Controls and Procedures. FHN’s management, with the participation of FHN’s chief executive officer and chief financial officer, has evaluated the effectiveness of FHN’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and the chief financial officer have concluded that FHN’s disclosure controls and procedures were effective as of the end of the period covered by this report. |
| |
(b) | Changes in Internal Control over Financial Reporting. There have not been any changes in FHN’s internal control over financial reporting during FHN’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, FHN’s internal control over financial reporting. |
Part II.
OTHER INFORMATION
The “Contingencies” section of Note 10 to the Consolidated Condensed Financial Statements beginning on page 3738 of this Reportreport is incorporated into this Item by reference.
Not applicable
| |
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds |
|
| | | | |
| (a) & (b) | Not Applicable | | |
| | | | |
| (c) | The "Common Stock Purchase Programs” section including tables 9(a) and 9(b) and explanatory discussions included in Item 2 of Part I of this report under the heading “First Horizon National Corporation Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning on page 96101 of this report, is incorporated herein by reference. |
| |
| | | | |
| | Although technically not called for by this Item, the disclosure under the caption "Cancellation of Dissenters' Shares," appearing on page 102 of this report, also is incorporated into this Item by reference. |
Items 3, 4, and 5
Not applicable
(a) Exhibits
Exhibits marked * represent management contracts or compensatory plans or arrangements required to be identified as such and filed as exhibits.
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 |
3.1 | Restated Charter of FHN, incorporated by reference to Exhibit 3.1 to FHN's Current Report on Form 8-K dated July 24, 2018.
|
| |
3.2 | Bylaws of FHN, as amended and restated July 24, 2018, incorporated by reference to Exhibit 3.2 to FHN's Current Report on Form 8-K dated July 24, 2018. |
| |
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* | |
| |
10.2* | |
| |
31(a) | |
| |
31(b) | |
| |
32(a)** | |
| |
32(b)** | |
| |
101*** | The following financial information from First Horizon National Corporation’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017,2018, formatted in XBRL: (i) Consolidated Condensed Statements of Condition at SeptemberJune 30, 20172018 and December 31, 2016;2017; (ii) Consolidated Condensed Statements of Income for the Three and NineSix Months Ended SeptemberJune 30, 20172018 and 2016;2017; (iii) Consolidated Condensed Statements of Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20172018 and 2016;2017; (iv) Consolidated Condensed Statements of Equity for the NineSix Months Ended SeptemberJune 30, 20172018 and 2016;2017; (v) Consolidated Condensed Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20172018 and 2016;2017; (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 |
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: NovemberAugust 7, 20172018 | | 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) |