The table below provides information on gross gains and gross losses from debt investment securities for the three and nine months ended March 31,September 30, 2020 and 2019.
The following tables provide information on investments within the available-for-sale portfolio that had unrealized losses as of March 31,September 30, 2020 and December 31, 2019:
Certain previously reported amounts have been reclassified to agree with current presentation.
At December 31, 2019, the ALLL related to PCI loans was $2.0 million. Net charge-offs related to PCI loans during 2019 were $5.8 million. The loan loss provision expense related to PCI loans during 2019 was $1.3 million.
The following table reflects the outstanding principal balance and carrying amounts of the acquired PCI loans as of December 31, 2019:
Certain previously reported amounts have been reclassified to agree with current presentation.
| |
(a) | First quarter 2020 increase in provision expense primarily associated with a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic. |
| |
(b) | First quarter 2020 decrease due to fluctuations in deferred compensation income driven by equity market valuations and mirrored by changes in deferred compensation expense, which is included in employee compensation expense. |
| |
(c) | 2020 and 2019 include restructuring-related costs associated with efficiency initiatives; refer to Note 17 - Restructuring, Repositioning, and Efficiency for additional information. 2020 and 2019 include acquisition-related expenses; refer to Note 2 - Acquisitions and Divestitures for additional information. |
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 4553
Note 1213 – Business Segment Information (Continued)
The following tables reflect a disaggregation of FHN’s noninterest income by major product line and reportable segment for the three months ended March 31,September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2020 |
(Dollars in thousands) | Regional Banking | | Fixed Income | | Corporate | | Non-Strategic | | Consolidated |
Fixed income (a) | 380 | | | 110,563 | | | 0 | | | 0 | | | 110,943 | |
Mortgage banking and title income | 65,569 | | | 0 | | | 23 | | | (89) | | | 65,503 | |
Deposit transactions and cash management | 40,500 | | | 0 | | | 1,528 | | | 28 | | | 42,056 | |
Brokerage, management fees and commissions | 19,595 | | | 0 | | | (1,704) | | | 0 | | | 17,891 | |
Trust services and investment management | 14,599 | | | 0 | | | (2,858) | | | 0 | | | 11,741 | |
Bankcard income | 10,150 | | | 0 | | | 277 | | | 30 | | | 10,457 | |
Securities gains (losses), net (b) | 0 | | | 0 | | | (1,170) | | | 0 | | | (1,170) | |
Purchase accounting gain | 0 | | | 0 | | | 532,150 | | | 0 | | | 532,150 | |
Other income (c) | 21,664 | | | 220 | | | 11,422 | | | 46 | | | 33,352 | |
Total noninterest income | $ | 172,457 | | | $ | 110,783 | | | $ | 539,668 | | | $ | 15 | | | $ | 822,923 | |
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2020 |
(Dollars in thousands) | Regional Banking | | Fixed Income | | Corporate | | Non-Strategic | | Consolidated |
Noninterest income: | | | | | | | | | |
Fixed income (a) | $ | 121 |
| | $ | 95,514 |
| | $ | — |
| | $ | — |
| | $ | 95,635 |
|
Deposit transactions and cash management | 28,812 |
| | — |
| | 1,435 |
| | 43 |
| | 30,290 |
|
Brokerage, management fees and commissions | 15,405 |
| | — |
| | — |
| | — |
| | 15,405 |
|
Bankcard income | 7,150 |
| | — |
| | 70 |
| | 33 |
| | 7,253 |
|
Trust services and investment management | 7,213 |
| | — |
| | (18 | ) | | — |
| | 7,195 |
|
BOLI (b) | — |
| | — |
| | 4,589 |
| | — |
| | 4,589 |
|
Equity securities gains/(losses), net (b) | — |
| | — |
| | 25 |
| | — |
| | 25 |
|
All other income and commissions (c) (d) | 23,170 |
| | 209 |
| | (9,819 | ) | | 804 |
| | 14,364 |
|
Total noninterest income | $ | 81,871 |
| | $ | 95,723 |
| | $ | (3,718 | ) | | $ | 880 |
| | $ | 174,756 |
|
| |
(a) | Includes $9.3 million of underwriting, portfolio advisory, and other noninterest income in scope of Accounting Standards Codification ("ASC") 606, "Revenue From Contracts With Customers." |
| |
(b) | Represents noninterest income excluded from the scope of ASC 606. Amount is presented for informational purposes to reconcile total non-interest income. |
| |
(c) | Includes other service charges, ATM and interchange fees, electronic banking fees, and insurance commission in scope of ASC 606. |
| |
(d) | First quarter 2020 Corporate balance includes negative deferred compensation income driven by equity market valuations. |
(a)Includes $9.9 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 noninterest income. |
| | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 |
(Dollars in thousands) | Regional Banking | | Fixed Income | | Corporate | | Non- Strategic | | Consolidated |
Noninterest income: | | | | | | | | | |
Fixed income (a) | $ | 17 |
| | $ | 53,732 |
| | $ | — |
| | $ | — |
| | $ | 53,749 |
|
Deposit transactions and cash management | 30,003 |
| | 3 |
| | 1,563 |
| | 52 |
| | 31,621 |
|
Brokerage, management fees and commissions | 12,630 |
| | — |
| | — |
| | 3 |
| | 12,633 |
|
Bankcard income | 7,039 |
| | — |
| | 62 |
| | (149 | ) | | 6,952 |
|
Trust services and investment management | 7,056 |
| | — |
| | (30 | ) | | — |
| | 7,026 |
|
BOLI (b) | — |
| | — |
| | 4,402 |
| | — |
| | 4,402 |
|
Equity securities gains/(losses), net (b) | — |
| | — |
| | 31 |
| | — |
| | 31 |
|
All other income and commissions (c) | 16,284 |
| | 72 |
| | 7,325 |
| | 950 |
| | 24,631 |
|
Total noninterest income | $ | 73,029 |
| | $ | 53,807 |
| | $ | 13,353 |
| | $ | 856 |
| | $ | 141,045 |
|
(c)Includes other service charges, ATM and interchange fees, electronic banking fees, and insurance commissions in scope of ASC 606.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2019 |
(Dollars in thousands) | Regional Banking | | Fixed Income | | Corporate | | Non- Strategic | | Consolidated |
| | | | | | | | | |
Fixed income (a) | 57 | | | 77,588 | | | 0 | | | 0 | | | 77,645 | |
Mortgage banking and title income | 1,643 | | | 0 | | | 0 | | | 376 | | | 2,019 | |
Deposit transactions and cash management | 32,624 | | | 0 | | | 1,721 | | | 34 | | | 34,379 | |
Brokerage, management fees and commissions | 14,157 | | | 0 | | | 0 | | | 0 | | | 14,157 | |
Trust services and investment management | 7,190 | | | 0 | | | (27) | | | 0 | | | 7,163 | |
Bankcard income | 7,030 | | | 11 | | | 63 | | | (87) | | | 7,017 | |
Securities gains (losses), net (b) | 0 | | | 0 | | | 97 | | | 0 | | | 97 | |
| | | | | | | | | |
Other income (c) | 23,229 | | | 209 | | | 5,505 | | | 315 | | | 29,258 | |
Total noninterest income | $ | 85,930 | | | $ | 77,808 | | | $ | 7,359 | | | $ | 638 | | | $ | 171,735 | |
Certain previously reported amounts have been reclassified to agree with current presentation.
| |
(a) | Includes $7.3 million of underwriting, portfolio advisory, and other noninterest income in scope of Accounting Standards |
(a)Includes $9.2 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 |
(b)Represents noninterest income excluded from the scope of ASC 606. Amount is presented for informational purposes to reconcile
total non-interestnoninterest income.
| |
(c) | Includes other service charges, ATM and interchange fees, electronic banking fees, and insurance commission in scope of ASC |
(c)Includes other service charges, ATM and interchange fees, electronic banking fees, and insurance commissions in scope of ASC
606.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 4654
Note 13 – Business Segment Information (Continued)
The following tables reflect a disaggregation of FHN’s noninterest income by major product line and reportable segment for the nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
(Dollars in thousands) | Regional Banking | | Fixed Income | | Corporate | | Non-Strategic | | Consolidated |
Fixed income (a) | 582 | | | 318,417 | | | 0 | | | 0 | | | 318,999 | |
Deposit transactions and cash management | 98,906 | | | 0 | | | 4,131 | | | 96 | | | 103,133 | |
Mortgage banking and title income | 71,168 | | | 0 | | | 23 | | | 881 | | | 72,072 | |
Brokerage, management fees and commissions | 48,799 | | | 0 | | | (1,703) | | | 0 | | | 47,096 | |
Trust services and investment management | 29,562 | | | 0 | | | (2,893) | | | 0 | | | 26,669 | |
Bankcard income | 23,853 | | | 0 | | | 421 | | | 88 | | | 24,362 | |
Securities gains (losses), net (b) | 0 | | | 0 | | | (2,638) | | | 0 | | | (2,638) | |
Purchase accounting gain | 0 | | | 0 | | | 532,150 | | | 0 | | | 532,150 | |
Other income (c)(d) | 60,799 | | | 1,324 | | | 19,400 | | | 582 | | | 82,105 | |
Total noninterest income | $ | 333,669 | | | $ | 319,741 | | | $ | 548,891 | | | $ | 1,647 | | | $ | 1,203,948 | |
(a)Includes $28.6 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 noninterest income.
(c)Includes other service charges, ATM and interchange fees, electronic banking fees, and insurance commissions in scope of ASC 606.
(d)Corporate balance includes negative deferred compensation income driven by equity market valuations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
(Dollars in thousands) | Regional Banking | | Fixed Income | | Corporate | | Non- Strategic | | Consolidated |
| | | | | | | | | |
Fixed income (a) | 120 | | | 196,582 | | | 0 | | | 1,106 | | | 197,808 | |
Mortgage banking and title income | 5,119 | | | 0 | | | 0 | | | 1,358 | | | 6,477 | |
Deposit transactions and cash management | 93,316 | | | 4 | | | 4,956 | | | 98 | | | 98,374 | |
Brokerage, management fees and commissions | 40,910 | | | 0 | | | 0 | | | 0 | | | 40,910 | |
Trust services and investment management | 22,148 | | | 0 | | | (71) | | | 0 | | | 22,077 | |
Bankcard income | 20,670 | | | 11 | | | 185 | | | (542) | | | 20,324 | |
Securities gains (losses), net (b) | 0 | | | 0 | | | 177 | | | 0 | | | 177 | |
Purchase accounting gain | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Other income (c)(d) | 58,272 | | | 641 | | | 24,865 | | | 848 | | | 84,626 | |
Total noninterest income | $ | 240,555 | | | $ | 197,238 | | | $ | 30,112 | | | $ | 2,868 | | | $ | 470,773 | |
Certain previously reported amounts have been reclassified to agree with current presentation.
(a)Includes $23.6 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 noninterest income.
(c)Includes other service charges, ATM and interchange fees, electronic banking fees, and insurance commissions in scope of ASC
606.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 55
Note 14 – 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 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.
The following table summarizes the carrying value of assets and liabilities associated with rabbi trusts used for deferred compensation plans which are consolidated by FHN as of March 31,September 30, 2020 and December 31, 2019:
|
| | | | | | | | | | |
| | | | | | |
(Dollars in thousands) | | | March 31, 2020 | | | December 31, 2019 |
Assets: | | | | | | |
Other assets | | | $ | 82,904 |
| | | $ | 91,873 |
|
Total assets | | | $ | 82,904 |
| | | $ | 91,873 |
|
Liabilities: | | | | | | |
Other liabilities | | | $ | 61,517 |
| | | $ | 70,830 |
|
Total liabilities | | | $ | 61,517 |
| | | $ | 70,830 |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(Dollars in thousands) | | | | September 30, 2020 | | | | December 31, 2019 |
Assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other assets | | | | $ | 154,783 | | | | | $ | 91,873 | |
Total assets | | | | $ | 154,783 | | | | | $ | 91,873 | |
Liabilities: | | | | | | | | |
| | | | | | | | |
Other liabilities | | | | $ | 131,782 | | | | | $ | 70,830 | |
Total liabilities | | | | $ | 131,782 | | | | | $ | 70,830 | |
Nonconsolidated Variable Interest Entities
Low Income Housing Partnerships. First Horizon Community Investment Group, Inc. ("FHCIG"), aThrough designated wholly-owned subsidiary ofsubsidiaries, First Horizon Bank, makes equity investments as a limited partner in various partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital and to support FHN’s community reinvestment initiatives. The activities of the limited partnerships include the identification, development, and operation of multi-family housing units that are leased to qualifying residential tenants generally within FHN’s primary geographic region. LIHTC partnerships are considered VIEs as FHCIG, the holdersubsidiaries represent the holders of the equity investment at risk doesbut do not have the ability to direct the activities that most significantly affect the performance of the entity through
rights. FHCIGThe subsidiaries could absorb losses that are significant to the LIHTC partnerships as it hasthey have a risk of loss for itstheir 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 FHCIG’sthe subsidiaries’ initial capital contributions and funding commitments.
FHN accounts for all qualifying LIHTC investments under the proportional amortization method. Under this method an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense/
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 47
Note 13 – Variable Interest Entities (Continued)
expense (benefit). LIHTC investments that do not qualify for the
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 56
Note 14 – Variable Interest Entities (Continued)
proportional amortization method are accounted for using the equity method. Expenses associated with these
investments were $.2 million and $.5 millionnot material for the three or nine months ended March 31,September 30, 2020 and 2019, respectively.2019.
The following table summarizes the impact to the Provision/Provision (benefit) for income taxes on the Consolidated Condensed Statements of Income for the three and nine months ended March 31,September 30, 2020, and 2019 for LIHTC investments accounted for under the proportional amortization method.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Provision (benefit) for income taxes: | | | | | | | | |
Amortization of qualifying LIHTC investments | | $ | 8,273 | | | $ | 4,436 | | | $ | 19,586 | | | $ | 12,721 | |
Low income housing tax credits | | (6,738) | | | (3,607) | | | (16,094) | | | (10,758) | |
Other tax benefits related to qualifying LIHTC investments | | (3,034) | | | (1,751) | | | (8,172) | | | (4,970) | |
|
| | | | | | | | |
| | Three Months Ended March 31 |
(Dollars in thousands)
| | 2020 | | 2019 |
Provision/(benefit) for income taxes: | | | | |
Amortization of qualifying LIHTC investments | | $ | 5,561 |
| | $ | 3,998 |
|
Low income housing tax credits | | (4,598 | ) | | (3,629 | ) |
Other tax benefits related to qualifying LIHTC investments | | (2,555 | ) | | (1,610 | ) |
Other Tax Credit Investments. First Tennessee New Markets Corporation (“FTNMC”), a wholly-owned subsidiary ofThrough designated subsidiaries, First Horizon Bank periodically makes equity investments through wholly-owned subsidiaries as a non-managing member in various limited liability companies (“LLCs”) that sponsor community development projects utilizing the New Market Tax Credit (“NMTC”) pursuant to Section 45 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital and to support FHN’s community reinvestment initiatives. The activities of the LLCs include providing investment capital for low-income communities within FHN’s primary geographic region. A portion of the funding of FTNMC’sthe 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,First Horizon Bank's subsidiaries represent the holderholders of the equity investment at risk doesbut do not have the ability to direct the activities that most significantly affect the performance of the entity through voting rights or similar rights. While FTNMCthe subsidiaries could absorb losses that are significant to the NMTC LLCs as it hasthey have a risk of loss for itstheir 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’sthe subsidiaries' initial capital contributions.
FHCIGFirst Horizon Bank also makes equity investments as a limited partner or non-managing member in entities that receive Historic Tax Credits pursuant to Section 47 of the Internal Revenue Code. As of March 31, 2020 and December 31, 2019, there were no investments funded through loans from community development enterprises. The purpose of these entities is the rehabilitation of historic buildings with the tax credits provided to incent private investment in the historic cores of cities and towns. These entities are considered VIEs as FHCIG, the holdersubsidiaries represent the holders of the equity investment at risk does
but do not have the ability to direct the activities that most significantly affect the performance of the entity through voting rights or similar rights. FHCIGThe subsidiaries could absorb losses that are significant to the entities as it hasthey have a risk of loss for itstheir 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 FHCIG’sthe subsidiaries’ initial capital contributions and funding commitments.
Small Issuer Trust Preferred Holdings. First Horizon Bank holds variable interests in trusts which have issued mandatorily redeemable preferred capital securities (“trust preferreds”) for smaller banking and insurance enterprises. First Horizon Bank has no voting rights for the trusts’ activities. The trusts’ only assets are junior subordinated debentures of the issuing enterprises. The creditors of the trusts hold no recourse to the assets of First Horizon Bank. These trusts meet the definition of a VIE as the holders of the equity investment at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the trusts’ economic performance. Based on the nature of the trusts’ activities and the size of First Horizon Bank’s holdings, First Horizon Bank could potentially receive benefits or absorb losses that are significant to the trusts regardless of whether a majority of a trust’s securities are held by First Horizon Bank. However, since First Horizon Bank is solely a holder of the trusts’ securities, it has no rights which would give it the power to direct the activities that most significantly impact the trusts’ economic performance and thus it is not considered the primary beneficiary of the trusts. First Horizon Bank has no contractual requirements to provide financial support to the trusts.
On-Balance Sheet Trust Preferred Securitization. In 2007, First Horizon Bank executed a securitization of certain small issuer trust preferreds for which the
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 48
Note 13 – Variable Interest Entities (Continued)
underlying trust meets the definition of a VIE as the holders of the equity investment at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entity’s economic performance. First Horizon Bank could potentially receive benefits or absorb losses that are significant to the trust based on the size and priority of the interests it retained in the securities issued by the trust.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 57
Note 14 – Variable Interest Entities (Continued)
However, since First Horizon Bank did not retain servicing or other decision making rights, First Horizon Bank is not the primary beneficiary as it does not have the power to direct the activities that most significantly impact the trust’s economic performance. Accordingly, First Horizon Bank has accounted for the funds received through the securitization as a term borrowing in its Consolidated Condensed Statements of Condition.Balance Sheets. First Horizon Bank has no contractual requirements to provide financial support to the trust.
Proprietary Residential Mortgage Securitizations. FHN holds variable interests (primarily principal-only strips) in proprietary residential mortgage securitization trusts it established prior to 2008 as a source of liquidity for its mortgage banking operations. 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. However, 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.
Holdings in Agency Mortgage-Backed Securities. FHN holds securities issued by various Agency securitization trusts. Based on their restrictive nature, the trusts meet the definition of a VIE since the holders of the equity investments at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entities’ economic performance. FHN could potentially receive benefits or absorb losses that are significant to the trusts based on the nature of the trusts’ activities and the size of FHN’s holdings. However, FHN is solely a holder of the trusts’ securities and does not have the power to direct the activities that most significantly impact the trusts’ economic performance, and is not considered the primary beneficiary of the trusts. FHN has no contractual requirements to provide financial support to the trusts.
Commercial Loan Troubled Debt Restructurings. For certain troubled commercial loans, First Horizon Bank
restructures the terms of the borrower’s debt in an effort to increase the probability of receipt of amounts contractually due. Following a troubled debt restructuring, the borrower entity typically meets the definition of a VIE as the initial determination of whether an entity is a VIE must be
reconsidered as events have proven that the entity’s equity is not sufficient to permit it to finance its activities without additional subordinated financial support or a restructuring of the terms of its financing.
As First Horizon Bank does not have the power to direct the activities that most significantly impact such troubled commercial borrowers’ operations, it is not considered the primary beneficiary even in situations where, based on the size of the financing provided, First Horizon Bank is exposed to potentially significant benefits and losses of the borrowing entity. First Horizon Bank has no contractual requirements to provide financial support to the borrowing entities beyond certain funding commitments established upon restructuring of the terms of the debt that allows for preparation of the underlying collateral for sale.
Sale Leaseback Transaction. First Horizon Bank has entered into an agreement with a single asset leasing entity for the sale and leaseback of an office building. In conjunction with this transaction, First Horizon Bank loaned funds to a related party of the buyer that were used for the purchase price of the building. First Horizon Bank also entered into a construction loan agreement with the single asset entity for renovation of the building. Since this transaction did not qualify as a sale prior to 2019, it was accounted for using the deposit method which created a net asset or liability for all cash flows between First Horizon Bank and the buyer. Upon adoption of ASU 2016-02 the transaction qualified as a seller-financed sale-leaseback. The buyer-lessor in this transaction meets the definition of a VIE as it does not have sufficient equity at risk since First Horizon Bank is providing the funding for the purchase and renovation. A related party of the buyer-lessor has the power to direct the activities that most significantly impact the operations and could potentially receive benefits or absorb losses that are significant to the transactions, making it the primary beneficiary. Therefore, First Horizon Bank does not consolidate the leasing entity.
Proprietary Trust Preferred Issuances. In conjunction with the acquisition of CBF,its acquisitions, FHN has acquired junior subordinated debt underlying multiple issuances of trust preferred debt by institutions previously acquired by CBF.debt. All of the remaining trusts are considered VIEs because the ownership interests from the capital contributions to these trusts are not considered “at risk” in evaluating whether the holders of the equity investments at risk in the trusts have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entities’ economic performance. Thus, FHN cannot be the trusts’ primary beneficiary because its ownership interests in the trusts are not considered variable interests as they are not
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 49
Note 13 – Variable Interest Entities (Continued)
considered “at risk”. Consequently, none of the trusts are consolidated by FHN.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 58
Note 14 – Variable Interest Entities (Continued)
The following table summarizes FHN’s nonconsolidated VIEs as of March 31,September 30, 2020:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | |
Low income housing partnerships | | $ | 338,558 | | | $ | 166,931 | | | (a) |
Other tax credit investments (b) | | 66,172 | | | 34,993 | | | Other assets |
Small issuer trust preferred holdings (c) | | 209,442 | | | 0 | | | Loans and leases |
On-balance sheet trust preferred securitization | | 32,031 | | | 82,143 | | | (d) |
Proprietary residential mortgage securitizations | | 471 | | | 0 | | | Trading securities |
Holdings of agency mortgage-backed securities (c) | | 7,386,169 | | | 0 | | | (e) |
Commercial loan troubled debt restructurings (f) | | 177,949 | | | 0 | | | Loans and leases |
Sale-leaseback transaction | | 17,993 | | | 0 | | | (g) |
Proprietary trust preferred issuances (h) | | 0 | | | 287,124 | | | Term borrowings |
|
| | | | | | | | | | |
(Dollars in thousands) | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | |
Low income housing partnerships | | $ | 241,435 |
| | $ | 123,720 |
| | (a) |
Other tax credit investments (b) | | 6,161 |
| | — |
| | Other assets |
Small issuer trust preferred holdings (c) | | 234,214 |
| | — |
| | Loans, net of unearned income |
On-balance sheet trust preferred securitization | | 32,261 |
| | 81,912 |
| | (d) |
Proprietary residential mortgage securitizations | | 785 |
| | — |
| | Trading securities |
Holdings of agency mortgage-backed securities (c) | | 5,126,372 |
| | — |
| | (e) |
Commercial loan troubled debt restructurings (f) | | 42,109 |
| | — |
| | Loans, net of unearned income |
Sale-leaseback transaction | | 18,052 |
| | — |
| | (g) |
Proprietary trust preferred issuances (h)
| | — |
| | 167,014 |
| | Term borrowings |
(a)Maximum loss exposure represents $171.7 million of current investments and $166.9 million of accrued contractual funding commitments. Accrued funding commitments represent unconditional contractual obligations for future funding events, and are also recognized in Other liabilities. FHN currently expects to be required to fund these accrued commitments by the end of 2024. | |
(a) | Maximum loss exposure represents $117.7 million of current investments and $123.7 million of accrued contractual funding commitments. Accrued funding commitments represent unconditional contractual obligations for future funding events, and are also recognized in Other liabilities. FHN currently expects to be required to fund these accrued commitments by the end of 2023. |
| |
(b) | A liability is not recognized as investments are written down over the life of the related tax credit. Maximum loss exposure represents the value of current investments. |
| |
(c) | Maximum loss exposure represents the value of current investments. A liability is not recognized as FHN is solely a holder of the trusts’ securities. |
| |
(d) | Includes $112.5 million classified as Loans, net of unearned income, and $1.7 million classified as Trading securities which are offset by $81.9 million classified as Term borrowings. |
| |
(e) | Includes $1.1 billion classified as Trading securities and $4.0 billion classified as Securities available-for-sale. |
| |
(f) | Maximum loss exposure represents $41.6 million of current receivables and $.5 million of contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring. |
| |
(g) | Maximum loss exposure represents the current loan balance plus additional funding commitments. |
| |
(h) | No exposure to loss due to nature of FHN's involvement. |
(b)Maximum loss exposure represents the value of current investments.
(c)Maximum loss exposure represents the value of current investments. A liability is not recognized as FHN is solely a holder of the trusts’ securities.
(d)Includes $112.5 million classified as Loans and leases, and $1.7 million classified as Trading securities which are offset by $82.1 million classified as Term borrowings.
(e)Includes $0.9 billion classified as Trading securities and $6.5 billion classified as Securities available for sale.
(f)Maximum loss exposure represents $172.8 million of current receivables and contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring were $5.1 million.
(g)Maximum loss exposure represents the current loan balance plus additional funding commitments.
(h)No exposure to loss due to nature of FHN's involvement.
The following table summarizes FHN’s nonconsolidated VIEs as of December 31, 2019:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | |
Low income housing partnerships | | $ | 237,668 | | | $ | 136,404 | | | (a) |
Other tax credit investments (b) (c) | | 6,282 | | | 0 | | | Other assets |
Small issuer trust preferred holdings (d) | | 238,397 | | | 0 | | | Loans and leases |
On-balance sheet trust preferred securitization | | 33,265 | | | 80,908 | | | (e) |
Proprietary residential mortgage securitizations | | 941 | | | 0 | | | Trading securities |
Holdings of agency mortgage-backed securities (d) | | 4,537,685 | | | 0 | | | (f) |
Commercial loan troubled debt restructurings (g) | | 45,169 | | | 0 | | | Loans and leases |
Sale-leaseback transaction | | 18,111 | | | 0 | | | (h) |
Proprietary trust preferred issuances (i) | | 0 | | | 167,014 | | | Term borrowings |
|
| | | | | | | | | | |
(Dollars in thousands) | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | |
Low income housing partnerships | | $ | 237,668 |
| | $ | 136,404 |
| | (a) |
Other tax credit investments (b) (c) | | 6,282 |
| | — |
| | Other assets |
Small issuer trust preferred holdings (d) | | 238,397 |
| | — |
| | Loans, net of unearned income |
On-balance sheet trust preferred securitization | | 33,265 |
| | 80,908 |
| | (e) |
Proprietary residential mortgage securitizations | | 941 |
| | — |
| | Trading securities |
Holdings of agency mortgage-backed securities (d) | | 4,537,685 |
| | — |
| | (f) |
Commercial loan troubled debt restructurings (g) | | 45,169 |
| | — |
| | Loans, net of unearned income |
Sale-leaseback transaction | | 18,111 |
| | — |
| | (h) |
Proprietary trust preferred issuances (i) | | — |
| | 167,014 |
| | Term borrowings |
(a)Maximum loss exposure represents $101.3 million of current investments and $136.4 million of accrued contractual funding commitments. Accrued funding commitments represent unconditional contractual obligations for future funding events, and are also recognized in Other liabilities. FHN currently expects to be required to fund these accrued commitments by the end of 2023. | |
(a) | Maximum loss exposure represents $101.3 million of current investments and $136.4 million of accrued contractual funding commitments. Accrued funding commitments represent unconditional contractual obligations for future funding events, and are also recognized in Other liabilities. FHN currently expects to be required to fund these accrued commitments by the end of 2023. |
| |
(b) | A liability is not recognized as investments are written down over the life of the related tax credit. |
| |
(c) | Maximum loss exposure represents current investment balance. As of December 31, 2019, there were no investments funded through loans from community development enterprises. |
| |
(d) | Maximum loss exposure represents the value of current investments. A liability is not recognized as FHN is solely a holder of the trusts’ securities. |
| |
(e) | Includes $112.5 million classified as Loans, net of unearned income, and $1.7 million classified as Trading securities which are offset by $80.9 million classified as Term borrowings. |
| |
(f) | Includes $.5 billion classified as Trading securities and $4.0 billion classified as Securities available-for-sale. |
| |
(g) | Maximum loss exposure represents $43.4 million of current receivables and $1.8 million of contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring. |
| |
(h) | Maximum loss exposure represents the current loan balance plus additional funding commitments less amounts received from the buyer-lessor. |
| |
(i) | No exposure to loss due to nature of FHN's involvement. |
(b)A liability is not recognized as investments are written down over the life of the related tax credit.
(c)Maximum loss exposure represents current investment balance. As of December 31, 2019, there were no investments funded through loans from community development enterprises.
(d)Maximum loss exposure represents the value of current investments. A liability is not recognized as FHN is solely a holder of the trusts’ securities.
(e)Includes $112.5 million classified as Loans and leases, and $1.7 million classified as Trading securities which are offset by $80.9 million classified as Term borrowings.
(f)Includes $0.5 billion classified as Trading securities and $4.0 billion classified as securities available for sale.
(g)Maximum loss exposure represents $43.4 million of current receivables and $1.8 million of contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring.
(h)Maximum loss exposure represents the current loan balance plus additional funding commitments less amounts received from the buyer-lessor.
(i)No exposure to loss due to nature of FHN's involvement.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 5059
Note 1415 – 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. Daily margin posted or received with central clearinghouses is considered a legal settlement of the related derivative contracts which results in a net presentation for each contract in the Consolidated Condensed Statements of Condition.Balance Sheets. Treatment of daily margin as a settlement has no effect on hedge accounting or gains/losses for the applicable derivative contracts. On March 31,September 30, 2020 and December 31, 2019, respectively, FHN had $214.4$289.5 million and $136.6 million of cash receivables and $160.7$141.9 million and $53.0 million of cash payables related to collateral posting under master netting arrangements, inclusive of collateral posted related to contracts with adjustable collateral posting thresholds and over-collateralized positions, with derivative counterparties. With exchange-traded contracts, the credit risk is limited to the clearinghouse used. For non-exchange traded instruments, credit risk may occur when there is a gain in the fair value of the financial instrument and the counterparty fails to perform according to the terms of the contract and/or when the collateral proves to be of insufficient value. See additional discussion regarding master netting agreements and collateral posting requirements later in this note under the heading “Master Netting and Similar Agreements.” Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates or the prices of debt instruments. FHN manages market risk by establishing and monitoring limits on the types and degree of risk that may be undertaken.
FHN continually measures this risk through the use of models that measure value-at-risk and earnings-at-risk.
Derivative Instruments. FHN enters into various derivative contracts both 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 ConditionBalance Sheets as Derivativederivative assets and Derivativederivative liabilities within Other assets and Other liabilities. The FHN Financial Risk Committee and the Credit Risk Management Committee collaborate to mitigate credit risk related to these transactions. Credit risk is controlled through credit approvals, risk control limits, and ongoing monitoring procedures. Total trading revenues were $78.4$98.9 million and $44.5$63.6 million for the three months ended
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 5160
Note 1415 – Derivatives (Continued)
March 31,ended September 30, 2020 and 2019, and $277.5 million and $162.7 million for the nine months ended September 30, 2020 and 2019, respectively. Trading
revenues are inclusive of both derivative and non-derivative financial instruments, and are included in Fixed income
noninterest income on the Consolidated Condensed Statements of Income.
The following tables summarize FHN’s derivatives associated with fixed income trading activities as of March 31,September 30, 2020 and December 31, 2019:
| | | | March 31, 2020 | | | September 30, 2020 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities | (Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer interest rate contracts | | $ | 3,395,932 |
| | $ | 232,886 |
| | $ | 1,509 |
| Customer interest rate contracts | | $ | 3,847,085 | | | $ | 240,218 | | | $ | 2,444 | |
Offsetting upstream interest rate contracts | | 3,395,932 |
| | 8,822 |
| | 16,735 |
| Offsetting upstream interest rate contracts | | 3,847,085 | | | 2,317 | | | 16,828 | |
| Forwards and futures purchased | | 8,641,017 |
| | 156,687 |
| | 8,508 |
| Forwards and futures purchased | | 15,069,709 | | | 41,553 | | | 3,456 | |
Forwards and futures sold | | 9,435,099 |
| | 8,829 |
| | 163,096 |
| Forwards and futures sold | | 15,596,324 | | | 5,788 | | | 39,018 | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer interest rate contracts | | $ | 2,697,522 | | | $ | 65,768 | | | $ | 6,858 | |
Offsetting upstream interest rate contracts | | 2,697,522 | | | 2,583 | | | 3,994 | |
Option contracts purchased | | 40,000 | | | 131 | | | 0 | |
Forwards and futures purchased | | 9,217,350 | | | 17,029 | | | 3,187 | |
Forwards and futures sold | | 9,403,112 | | | 3,611 | | | 16,620 | |
|
| | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer interest rate contracts | | $ | 2,697,522 |
| | $ | 65,768 |
| | $ | 6,858 |
|
Offsetting upstream interest rate contracts | | 2,697,522 |
| | 2,583 |
| | 3,994 |
|
Option contracts purchased | | 40,000 |
| | 131 |
| | — |
|
Forwards and futures purchased | | 9,217,350 |
| | 17,029 |
| | 3,187 |
|
Forwards and futures sold | | 9,403,112 |
| | 3,611 |
| | 16,620 |
|
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 designated a derivative transaction in a hedging strategy to manage interest rate risk on $400.0 million of senior debt issued by First Horizon Bank prior to its maturity in December 2019. This qualified 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. First Horizon Bank early redeemed the $400.0 million senior debt on November 1, 2019.
FHN has designated a derivative transaction in a hedging strategy to manage interest rate risk on $500.0 million of senior debt which matures in December 2020. This qualifies for hedge accounting under ASC 815-20 using the long-haul method. FHN entered into a pay floating, receive fixed interest rate swap to hedge the interest rate risk of the senior debt. FHN has provided notice of its intent to exercise the early redemption option for this senior debt on November 15, 2020.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 5261
Note 1415 – Derivatives (Continued)
The following tables summarize FHN’s derivatives associated with interest rate risk management activities as of March 31,September 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | |
Customer interest rate contracts | | $ | 6,667,600 | | | $ | 487,005 | | | $ | 303 | |
Offsetting upstream interest rate contracts | | 6,667,600 | | | 303 | | | 25,997 | |
Debt Hedging | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate swaps | | $ | 500,000 | | | $ | 13 | | | N/A |
Hedged Items: | | | | | | |
Term borrowings: | | | | | | |
Par | | N/A | | N/A | | $ | 500,000 | |
Cumulative fair value hedging adjustments | | N/A | | N/A | | 729 | |
Unamortized premium (discount) and issuance costs | | N/A | | N/A | | (74) | |
Total carrying value | | N/A | | N/A | | $ | 500,655 | |
|
| | | | | | | | | | | | |
| | March 31, 2020 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | |
Customer interest rate contracts | | $ | 3,433,278 |
| | $ | 282,434 |
| | $ | 503 |
|
Offsetting upstream interest rate contracts | | 3,433,278 |
| | 5,750 |
| | 23,066 |
|
Debt Hedging | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate swaps | | $ | 500,000 |
| | $ | 61 |
| | N/A |
|
Hedged Items: | | | | | | |
Term borrowings: | | | | | | |
Par | | N/A |
| | N/A |
| | $ | 500,000 |
|
Cumulative fair value hedging adjustments | | N/A |
| | N/A |
| | 2,862 |
|
Unamortized premium/(discount) and issuance costs | | N/A |
| | N/A |
| | (519 | ) |
Total carrying value | | N/A |
| | N/A |
| | $ | 502,343 |
|
|
| | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | |
Customer interest rate contracts | | $ | 3,044,067 |
| | $ | 90,394 |
| | $ | 3,515 |
|
Offsetting upstream interest rate contracts | | 3,044,067 |
| | 3,537 |
| | 9,735 |
|
Debt Hedging | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate swaps | | $ | 500,000 |
| | N/A |
| | $ | 69 |
|
Hedged Items: | | | | | | |
Term borrowings: | | | | | | |
Par | | N/A |
| | N/A |
| | $ | 500,000 |
|
Cumulative fair value hedging adjustments | | N/A |
| | N/A |
| | (1,604 | ) |
Unamortized premium/(discount) and issuance costs | | N/A |
| | N/A |
| | (740 | ) |
Total carrying value | | N/A |
| | N/A |
| | $ | 497,656 |
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | |
Customer interest rate contracts | | $ | 3,044,067 | | | $ | 90,394 | | | $ | 3,515 | |
Offsetting upstream interest rate contracts | | 3,044,067 | | | 3,537 | | | 9,735 | |
Debt Hedging | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate swaps | | $ | 500,000 | | | N/A | | $ | 69 | |
Hedged Items: | | | | | | |
Term borrowings: | | | | | | |
Par | | N/A | | N/A | | $ | 500,000 | |
Cumulative fair value hedging adjustments | | N/A | | N/A | | (1,604) | |
Unamortized premium (discount) and issuance costs | | N/A | | N/A | | (740) | |
Total carrying value | | N/A | | N/A | | $ | 497,656 | |
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 5362
Note 1415 – Derivatives (Continued)
The following table summarizes gains/gains (losses) on FHN’s derivatives associated with interest rate risk management activities for the three and nine months ended March 31,September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
(Dollars in thousands) | | Gains (Losses) | | Gains (Losses) | | Gains (Losses) | | Gains (Losses) |
Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | | | |
Customer interest rate contracts (a) | | $ | (14,050) | | | $ | 44,375 | | | $ | 197,346 | | | $ | 124,193 | |
Offsetting upstream interest rate contracts (a) | | 14,050 | | | (44,375) | | | (197,346) | | | (124,193) | |
Debt Hedging | | | | | | | | |
Hedging Instruments: | | | | | | | | |
Interest rate swaps (b) | | $ | (1,421) | | | $ | 1,994 | | | $ | 2,776 | | | $ | 12,969 | |
Hedged Items: | | | | | | | | |
Term borrowings (a) (c) | | 1,412 | | | (2,004) | | | (2,333) | | | (12,876) | |
|
| | | | | | | | |
| | Three Months Ended March 31 |
| | 2020 | | 2019 |
(Dollars in thousands) | | Gains/(Losses) | | Gains/(Losses) |
Customer Interest Rate Contracts Hedging | | |
Hedging Instruments and Hedged Items: | | | | |
Customer interest rate contracts (a) | | $ | 195,552 |
| | $ | 29,112 |
|
Offsetting upstream interest rate contracts (a) | | (195,552 | ) | | (29,112 | ) |
Debt Hedging | | | | |
Hedging Instruments: | | | | |
Interest rate swaps (b) | | $ | 4,934 |
| | $ | 4,279 |
|
Hedged Items: | | | | |
Term borrowings (a) (c) | | (4,465 | ) | | (4,266 | ) |
(a)Gains (losses) included in Other expense within the Consolidated Statements of Income. | |
(a) | Gains/losses included in All other expense within the Consolidated Condensed Statements of Income. |
| |
(b) | Gains/losses included in the Interest expense. |
| |
(c) | Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships. |
(b)Gains (losses) included in Interest expense.
(c)Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships.
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 had initial durations between three years and seven years. $200 million of these swaps expired in first quarter 2020. In conjunction with the IBKC merger, FHN acquired interest rate contracts (floors and collars) with a notional value of $800 million and initial remaining terms between 11 and 34 months which have
been re-designated as cash floor hedges. The debt instruments primarily
consist of held-to-maturity commercial loans that have variable interest payments based on 1-month LIBOR. $200 million of these swaps expired in first quarter 2020. These qualify for hedge accounting as cash flow hedges under ASC 815-20. All changes in the fair value of these derivatives are recorded as a component of AOCI. Amounts are reclassified from AOCI to earnings as the hedged cash flows affect 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 March 31,September 30, 2020 and December 31, 2019:
| | | | March 31, 2020 | | | September 30, 2020 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities | (Dollars in thousands) | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | Hedging Instruments: | |
Interest rate swaps | | $ | 700,000 |
| | $ | 187 |
| | N/A | |
Interest rate contracts | | Interest rate contracts | | $ | 1,500,000 | | | $ | 35,606 | | | N/A |
Hedged Items: | | | | | | Hedged Items: | |
Variability in cash flows related to debt instruments (primarily loans) | | N/A |
| | $ | 700,000 |
| | N/A | Variability in cash flows related to debt instruments (primarily loans) | | N/A | | $ | 1,500,000 | | | N/A |
|
| | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate swaps | | $ | 900,000 |
| | N/A |
| | $ | 241 |
|
Hedged Items: | | | | | | |
Variability in cash flows related to debt instruments (primarily loans) | | N/A |
| | $ | 900,000 |
| | N/A |
|
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 5463
Note 1415 – Derivatives (Continued)
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate contracts | | $ | 900,000 | | | N/A | | $ | 241 | |
Hedged Items: | | | | | | |
Variability in cash flows related to debt instruments (primarily loans) | | N/A | | $ | 900,000 | | | N/A |
The following table summarizes gains/gains (losses) on FHN’s derivatives associated with cash flow hedges for the three and nine months ended March 31,September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
(Dollars in thousands) | | Gains (Losses) | | Gains (Losses) | | Gains (Losses) | | Gains (Losses) |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | | | |
Interest rate contracts (a) | | $ | (7,799) | | | $ | 3,840 | | | $ | 9,644 | | | $ | 22,954 | |
Gain (loss) recognized in Other comprehensive income (loss) | | (805) | | | 1,855 | | | 13,998 | | | 13,367 | |
Gain (loss) reclassified from AOCI into Interest income | | (2,128) | | | 989 | | | (3,853) | | | 3,773 | |
|
| | | | | | | | |
| | Three Months Ended March 31 |
| | 2020 | | 2019 |
(Dollars in thousands) | | Gains/(Losses) | | Gains/(Losses) |
Cash Flow Hedges | | |
Hedging Instruments: | | | | |
Interest rate swaps (a) | | $ | 17,374 |
| | $ | 7,218 |
|
Gain/(loss) recognized in Other comprehensive income/(loss) | | 13,155 |
| | 3,936 |
|
Gain/(loss) reclassified from AOCI into Interest income | | (94 | ) | | 1,451 |
|
(a)Approximately $26.5 million of pre-tax gains are expected to be reclassified into earnings in the next twelve months. | |
(a) | Approximately $9.1 million of pre-tax gains are expected to be reclassified into earnings in the next twelve months. |
Other Derivatives
As part of the merger with IBKC, FHN acquired mortgage banking operations that include the origination and sale of loans into the secondary market. As part of the origination of loans, FHN enters into interest rate lock commitments with borrowers. Additionally, FHN enters into forward sales contracts with buyers for delivery of loans at a future date.
Both of these contracts qualify as freestanding derivatives and are recognized at fair value through earnings. The notional and fair values of these contracts are presented in the table below. Balances and activity for periods prior to the IBKC merger were not significant.
| | | | | | | | | | | | | | | | | |
| September 30, 2020 |
(Dollars in thousands) | Notional | | Assets | | Liabilities |
Mortgage Banking Hedges | | | | | |
| | | | | |
Option contracts written | $ | 698,744 | | | $ | 21,677 | | | $ | 223 | |
Forward contracts purchased | 753,660 | | | 859 | | | 2,577 | |
| | | | | |
The following table summarizes gains (losses) on FHN's derivatives associated with mortgage banking activities for the three and nine month periods ended September 30, 2020.
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2020 |
(Dollars in thousands) | | Gains (Losses) | | Gains (Losses) |
Mortgage Banking Hedges | | | | |
| | | | |
Option contracts written | | $ | 7,434 | | | $ | 7,434 | |
Forward contracts purchased | | (9,633) | | | (9,633) | |
| | | | |
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 64
Note 15 – Derivatives (Continued)
In conjunction with the sales of a portion of its Visa Class B shares in 2010 and 2011, FHN and the purchaser entered into derivative transactions whereby FHN will make or receive cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. FHN is also required to make periodic financing payments to the purchasers until all of Visa's covered litigation matters are resolved. In third quarter 2018, FHN sold the remainder of its Visa Class B shares, entering into a similar derivative arrangement with the counterparty. All of these derivatives extend until the end of Visa’s Covered Litigation matters. In September 2018, Visa reached a preliminary settlement for one class of plaintiffs in its Payment Card Interchange matter which later received final court approval in December 2019. In accordance with the agreement terms, several individual plaintiffs opted out of the settlement and have the opportunity to separately pursue resolution with Visa. Settlement has not been reached with the second class of plaintiffs in this matter and other covered litigation matters are also pending judicial resolution. Accordingly, the value and timing for completion of Visa’s Covered Litigation matters are uncertain.
The derivative transaction executed in third quarter 2018 includes a contingent accelerated termination clause based on the credit ratings of FHN and First Horizon Bank. FHN has not received or paid collateral related to this contract.
As of March 31,September 30, 2020 and December 31, 2019, the derivative liabilities associated with the sales of Visa Class B shares were $20.4$15.6 million and $22.8 million, respectively. See Note 17 - Fair Value of Assets & Liabilities for discussion of the valuation inputs and processes for these Visa-related derivatives.
FHN utilizes cross currency swaps and cross currency interest rate swaps to economically hedge its exposure to foreign currency risk and interest rate risk associated with
non-U.S. dollar denominated loans. As of March 31,September 30, 2020
and December 31, 2019, these loans were valued at $16.2$9.1 million and $18.4 million, respectively. The balance sheet amount and the gains/losses associated with these derivatives were not significant.
Related to its loan participation/syndication activities, FHN enters into risk participation agreements, under which it assumes exposure for, or receives indemnification for, borrowers’ performance on underlying interest rate derivative contracts. FHN’s counterparties in these contracts are other lending institutions involved in the loan participation/syndication arrangements for which the underlying interest rate derivative contract is intended to hedge interest rate risk for the borrower. FHN will make (other institution is the lead bank) or receive (FHN is the lead bank) payments for risk participations if the borrower defaults on its obligation to perform under the terms of its
interest rate derivative agreement with the lead bank in the participation. As of March 31,September 30, 2020 the notional values of FHN’s risk participations were $120.8$248.5 million of derivative assets and $226.7$543.0 million of derivative liabilities. The notional value for risk participation/syndication agreements is consistent with the percentage of participation in the lending arrangement. FHN’s maximum exposure or benefit in the risk participation agreements is contingent on the fair value of the underlying interest rate derivative contracts for which the borrower is in a liability position at the time of default. FHN monitors the credit risk associated with the borrowers to which the risk participations relate through the same credit risk assessment process utilized for establishing credit loss estimates for its loan portfolio. These credit risk estimates are included in the determination of fair value for the risk participations. As of March 31,September 30, 2020, FHN had recognized $280$342 thousand of derivative assets and $780 thousand$1.5 million of derivative liabilities associated with risk participation agreements.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 55
TableIn conjunction with the IBKC merger, FHN obtained certain certificates of Contentsdeposit with the rate of return based on an equity index which is considered an embedded derivative as a written option that must be separately recognized. The risks of the written option are offset by purchasing an option with terms that mirror the written option, which is also carried at fair value on the Company’s consolidated balance sheets. As of September 30, 2020, FHN had recognized $1.3 million of both assets and liabilities associated with these contracts.
Note 14 – Derivatives (Continued)
Master Netting and Similar Agreements
As previously discussed, FHN uses master netting agreements, mutual margining agreements and collateral posting requirements to minimize credit risk on derivative contracts. Master netting and similar agreements are used when counterparties have multiple derivatives contracts that allow for a “right of setoff,” meaning that a counterparty may net offsetting positions and collateral with the same counterparty under the contract to determine a net receivable or payable. The 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 initial margin is posted. Cash margin received (posted) that is considered settlements for the derivative contracts is included in the
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 65
Note 15 – Derivatives (Continued)
respective derivative asset (liability) value. Cash margin that is considered collateral received (posted) for interest rate derivatives is recognized as a liability (asset) on FHN’s Consolidated Condensed Statements of Condition.Balance Sheets.
Interest rate derivatives with 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.Balance Sheets. Interest rate derivatives associated with lending arrangements share the collateral with the related loan(s). The derivative and loan positions may be netted in the event of default. For disclosure purposes, the entire collateral amount is allocated to the loan.
Interest rate derivatives with larger financial institutions entered into prior to required central clearing typically contain provisions whereby the collateral posting thresholds under the agreements adjust based on the credit ratings of both counterparties. If the credit rating of FHN and/or First Horizon Bank is lowered, FHN could be required to post additional collateral with the counterparties. Conversely, if the credit rating of FHN and/or First Horizon Bank is increased, FHN could have collateral released and be required to post less collateral in the future. Also, if a counterparty’s credit ratings were to
decrease, FHN and/or First Horizon Bank could require the posting of additional collateral; whereas if a counterparty’s credit ratings were to increase, the counterparty could require the release of excess collateral. Collateral for these arrangements is adjusted daily based on changes in the net fair value position with each counterparty.
The net fair value, determined by individual counterparty, of all interest rate derivative instruments with adjustable collateral posting thresholds was $232.5$239.0 million of assets and $4.4$3.6 million of liabilities on March 31,September 30, 2020, and $63.1 million of assets and $6.4 million of liabilities on December 31, 2019. As of March 31,September 30, 2020 and December 31, 2019, FHN had received collateral of $291.3 $349.6
million and $148.5 million and posted collateral of $41.4$41.1 million and $18.4 million, respectively, in the normal course of business related to these agreements.
Certain agreements entered into prior to required central clearing also contain accelerated termination provisions, inclusive of the right of offset, if a counterparty’s credit rating falls below a specified level. If a counterparty’s debt rating (including FHN’s and First Horizon Bank’s) were to fall below these minimums, these provisions would be triggered, and the counterparties could terminate the agreements and require immediate settlement of all derivative contracts under the agreements. The net fair value, determined by individual counterparty, of all interest rate derivative instruments with credit-risk-related contingent accelerated termination provisions was $232.3$239.0 million of assets and $24.2$24.0 million of liabilities on March 31,September 30, 2020, and $63.1 million of assets and $10.3 million of liabilities on December 31, 2019. As of March 31,September 30, 2020 and December 31, 2019, FHN had received collateral of $291.4$349.6 million and $148.5 million and posted collateral of $62.5$62.8 million and $22.7 million, respectively, in the normal course of business related to these contracts.
FHN’s fixed income segment buys and sells various types of securities for its customers. When these securities settle on a delayed basis, they are considered forward contracts, and are generally not subject to master netting agreements. For futures and options, FHN transacts through a third party, and the transactions are subject to margin and collateral maintenance requirements. In the event of default, open positions can be offset along with the associated collateral.
For this disclosure, FHN considers the impact of master netting and other similar agreements which allow FHN to settle all contracts with a single counterparty on a net basis and to offset the net derivative asset or liability position with the related securities and cash collateral. The application of the collateral cannot reduce the net derivative asset or liability position below zero, and therefore any excess collateral is not reflected in the following tables.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 5666
Note 1415 – Derivatives (Continued)
The following table provides details of derivative assets and collateral received as presented on the Consolidated Condensed Statements of ConditionBalance Sheets as of March 31,September 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Balance Sheets | | |
(Dollars in thousands) | | Gross amounts of recognized assets | | Gross amounts offset in the Balance Sheets | | Net amounts of assets presented in the Balance Sheets (a) | | Derivative liabilities available for offset | | Collateral received | | Net amount |
Derivative assets: | | | | | | | | | | | | |
September 30, 2020 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 787,139 | | | $ | 0 | | | $ | 787,139 | | | $ | (11,401) | | | $ | (369,510) | | | $ | 406,228 | |
Forward contracts | | 47,341 | | | 0 | | | 47,341 | | | (16,105) | | | (16,213) | | | 15,023 | |
| | $ | 834,480 | | | $ | 0 | | | $ | 834,480 | | | $ | (27,506) | | | $ | (385,723) | | | $ | 421,251 | |
| | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 162,344 | | | $ | 0 | | | $ | 162,344 | | | $ | (5,604) | | | $ | (143,334) | | | $ | 13,406 | |
Forward contracts | | 20,640 | | | 0 | | | 20,640 | | | (13,292) | | | (2,000) | | | 5,348 | |
| | $ | 182,984 | | | $ | 0 | | | $ | 182,984 | | | $ | (18,896) | | | $ | (145,334) | | | $ | 18,754 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized assets | | Gross amounts offset in the Statements of Condition | | Net amounts of assets presented in the Statements of Condition (a) | | Derivative liabilities available for offset | | Collateral received | | Net amount |
Derivative assets: | | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 530,337 |
| | $ | — |
| | $ | 530,337 |
| | $ | (1,974 | ) | | $ | (303,798 | ) | | $ | 224,565 |
|
Forward contracts | | 165,516 |
| | — |
| | 165,516 |
| | (89,790 | ) | | (54,018 | ) | | 21,708 |
|
| | $ | 695,853 |
| | $ | — |
| | $ | 695,853 |
| | $ | (91,764 | ) | | $ | (357,816 | ) | | $ | 246,273 |
|
| | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 162,344 |
| | $ | — |
| | $ | 162,344 |
| | $ | (5,604 | ) | | $ | (143,334 | ) | | $ | 13,406 |
|
Forward contracts | | 20,640 |
| | — |
| | 20,640 |
| | (13,292 | ) | | (2,000 | ) | | 5,348 |
|
| | $ | 182,984 |
| | $ | — |
| | $ | 182,984 |
| | $ | (18,896 | ) | | $ | (145,334 | ) | | $ | 18,754 |
|
| |
(a) | Included in Derivative assets on the Consolidated Condensed Statements of Condition. As of March 31, 2020 and December 31, 2019, $.4 million and $.1 million, respectively, of derivative assets have been excluded from these tables because they are generally not subject to master netting or similar agreements. |
(a)Included in Other assets on the Consolidated Balance Sheets. As of September 30, 2020 and December 31, 2019, $2.6 million and $0.1 million of derivative assets have been excluded from these tables because they are generally not subject to master netting or similar agreements.
The following table provides details of derivative liabilities and collateral pledged as presented on the Consolidated Condensed Statements of ConditionBalance Sheets as of March 31,September 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Balance Sheets | | |
(Dollars in thousands) | | Gross amounts of recognized liabilities | | Gross amounts offset in the Balance Sheets | | Net amounts of liabilities presented in the Balance Sheets (a) | | Derivative assets available for offset | | Collateral pledged | | Net amount |
Derivative liabilities: | | | | | | | | | | | | |
September 30, 2020 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 47,047 | | | $ | 0 | | | $ | 47,047 | | | $ | (11,401) | | | $ | (30,829) | | | $ | 4,817 | |
Forward contracts | | 42,474 | | | 0 | | | 42,474 | | | (16,105) | | | (26,369) | | | 0 | |
| | $ | 89,521 | | | $ | 0 | | | $ | 89,521 | | | $ | (27,506) | | | $ | (57,198) | | | $ | 4,817 | |
December 31, 2019 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 24,431 | | | $ | 0 | | | $ | 24,431 | | | $ | (5,604) | | | $ | (18,689) | | | $ | 138 | |
Forward contracts | | 19,807 | | | 0 | | | 19,807 | | | (13,292) | | | (6,515) | | | 0 | |
| | $ | 44,238 | | | $ | 0 | | | $ | 44,238 | | | $ | (18,896) | | | $ | (25,204) | | | $ | 138 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized liabilities | | Gross amounts offset in the Statements of Condition | | Net amounts of liabilities presented in the Statements of Condition (a) | | Derivative assets available for offset | | Collateral pledged | | Net amount |
Derivative liabilities: | | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 41,980 |
| | $ | — |
| | $ | 41,980 |
| | $ | (1,974 | ) | | $ | (36,129 | ) | | $ | 3,877 |
|
Forward contracts | | 171,604 |
| | — |
| | 171,604 |
| | (89,790 | ) | | (81,814 | ) | | — |
|
| | $ | 213,584 |
| | $ | — |
| | $ | 213,584 |
| | $ | (91,764 | ) | | $ | (117,943 | ) | | $ | 3,877 |
|
December 31, 2019 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 24,431 |
| | $ | — |
| | $ | 24,431 |
| | $ | (5,604 | ) | | $ | (18,689 | ) | | $ | 138 |
|
Forward contracts | | 19,807 |
| | — |
| | 19,807 |
| | (13,292 | ) | | (6,515 | ) | | — |
|
| | $ | 44,238 |
| | $ | — |
| | $ | 44,238 |
| | $ | (18,896 | ) | | $ | (25,204 | ) | | $ | 138 |
|
(a)
| |
(a) | Included in Derivative liabilities on the Consolidated Condensed Statements of Condition. As of March 31, 2020 and December 31, 2019, $21.4 million and $23.2 million, respectively, of derivative liabilities (primarily Visa-related derivatives) have been excluded from these tables because they are generally not subject to master netting or similar agreements. |
Included in Other liabilities on the Consolidated Balance Sheets. As of September 30, 2020 and December 31, 2019, $19.9 million and $23.2 million, respectively, of derivative liabilities (primarily Visa-related derivatives) have been excluded from these tables because they are generally not subject to master netting or similar agreements.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 5767
Note 1516 – Master Netting and Similar Agreements—Repurchase, Reverse Repurchase, and Securities Borrowing Transactions
For repurchase, reverse repurchase and securities borrowing transactions, FHN and each counterparty have the ability to offset all open positions and related collateral in the event of default. Due to the nature of these transactions, the value of the collateral for each transaction approximates the value of the corresponding receivable or payable. For repurchase agreements through FHN’s fixed income business (Securities(securities purchased under agreements to resell and Securitiessecurities sold under agreements to repurchase), transactions are collateralized by securities and/or government guaranteed loans which are delivered on the settlement date and are maintained throughout the term of the transaction. For FHN’s repurchase agreements through banking activities (Securities(securities sold under agreements to repurchase), securities are typically pledged at settlement
and not released until maturity. For asset positions, the collateral is not included on FHN’s Consolidated Condensed Statements of Condition.Balance
Sheets. For liability positions, securities collateral pledged by FHN is generally represented within FHN’s trading or available-for-sale securities portfolios.
For this disclosure, FHN considers the impact of master netting and other similar agreements that allow FHN to settle all contracts with a single counterparty on a net basis and to offset the net asset or liability position with the related securities collateral. The application of the collateral cannot reduce the net asset or liability position below zero, and therefore any excess collateral is not reflected in the tables below.
Securities purchased under agreements to resell is included in Federal funds sold and securities purchased under agreements to resell in the Consolidated Balance Sheets. Securities sold under agreements to repurchase is included in Short-term borrowings.
The following table provides details of Securitiessecurities purchased under agreements to resell as presented on the Consolidated Condensed Statements of Condition and collateral pledged by counterparties as of March 31,September 30, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized assets | | Gross amounts offset in the Statements of Condition | | Net amounts of assets presented in the Statements of Condition | | Offsetting securities sold under agreements to repurchase | | Securities collateral (not recognized on FHN’s Statements of Condition) | | Net amount |
Securities purchased under agreements to resell: | | | | | | | | | | | | |
March 31, 2020 | | $ | 562,435 |
| | $ | — |
| | $ | 562,435 |
| | $ | (6,290 | ) | | $ | (553,688 | ) | | $ | 2,457 |
|
December 31, 2019 | | 586,629 |
| | — |
| | 586,629 |
| | (21,004 | ) | | (562,702 | ) | | 2,923 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Balance Sheets | | |
(Dollars in thousands) | | Gross amounts of recognized assets | | Gross amounts offset in the Balance Sheets | | Net amounts of assets presented in the Balance Sheets | | Offsetting securities sold under agreements to repurchase | | Securities collateral (not recognized on FHN’s Balance Sheets) | | Net amount |
Securities purchased under agreements to resell: | | | | | | | | | | | | |
September 30, 2020 | | $ | 591,987 | | | $ | 0 | | | $ | 591,987 | | | $ | (70) | | | $ | (590,123) | | | $ | 1,794 | |
December 31, 2019 | | 586,629 | | | 0 | | | 586,629 | | | (21,004) | | | (562,702) | | | 2,923 | |
The following table provides details of Securitiessecurities sold under agreements to repurchase as presented on the Consolidated Condensed Statements of Condition and collateral pledged by FHN as of March 31,September 30, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Statements of Condition | | |
(Dollars in thousands) | | Gross amounts of recognized liabilities | | Gross amounts offset in the Statements of Condition | | Net amounts of liabilities presented in the Statements of Condition | | Offsetting securities purchased under agreements to resell | | Securities/ government guaranteed loans collateral | | Net amount |
Securities sold under agreements to repurchase: | | | | | | | | | | | | |
March 31, 2020 | | $ | 788,595 |
| | $ | — |
| | $ | 788,595 |
| | $ | (6,290 | ) | | $ | (782,305 | ) | | $ | — |
|
December 31, 2019 | | 716,925 |
| | — |
| | 716,925 |
| | (21,004 | ) | | (695,879 | ) | | 42 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross amounts not offset in the Balance Sheets | | |
(Dollars in thousands) | | Gross amounts of recognized liabilities | | Gross amounts offset in the Balance Sheets | | Net amounts of liabilities presented in the Balance Sheets | | Offsetting securities purchased under agreements to resell | | Securities/ government guaranteed loans collateral | | Net amount |
Securities sold under agreements to repurchase: | | | | | | | | | | | | |
September 30, 2020 | | $ | 1,158,994 | | | $ | 0 | | | $ | 1,158,994 | | | $ | (70) | | | $ | (1,158,791) | | | $ | 133 | |
December 31, 2019 | | 716,925 | | | 0 | | | 716,925 | | | (21,004) | | | (695,879) | | | 42 | |
Due to the short duration of Securitiessecurities sold under agreements to repurchase and the nature of collateral involved, the risks associated with these transactions are considered minimal.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 5868
Note 1516 – Master Netting and Similar Agreements—Repurchase, Reverse Repurchase, and Securities Borrowing Transactions (Continued)
The following tables provide details, by collateral type, of the remaining contractual maturity of Securitiessecurities sold under agreements to repurchase as of March 31,September 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
(Dollars in thousands) | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | |
U.S. treasuries | | $ | 363,674 | | | $ | 0 | | | $ | 363,674 | |
Government agency issued MBS | | 578,284 | | | 6,882 | | | 585,166 | |
Government agency issued CMO | | 4,529 | | | 2,412 | | | 6,941 | |
Other U.S. government agencies | | 82,576 | | | 0 | | | 82,576 | |
Government guaranteed loans (SBA and USDA) | | 120,637 | | | 0 | | | 120,637 | |
Total securities sold under agreements to repurchase | | $ | 1,149,700 | | | $ | 9,294 | | | $ | 1,158,994 | |
| | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | |
U.S. treasuries | | $ | 41,364 | | | $ | 0 | | | $ | 41,364 | |
Government agency issued MBS | | 341,173 | | | 4,545 | | | 345,718 | |
Other U.S. government agencies | | 54,924 | | | 0 | | | 54,924 | |
Government guaranteed loans (SBA and USDA) | | 274,919 | | | 0 | | | 274,919 | |
Total securities sold under agreements to repurchase | | $ | 712,380 | | | $ | 4,545 | | | $ | 716,925 | |
|
| | | | | | | | | | | | |
| | March 31, 2020 |
(Dollars in thousands) | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | |
U.S. treasuries | | $ | 18,955 |
| | $ | — |
| | $ | 18,955 |
|
Government agency issued MBS | | 399,353 |
| | 10,397 |
| | 409,750 |
|
Government agency issued CMO | | — |
| | 5,498 |
| | 5,498 |
|
Other U.S. government agencies | | 83,214 |
| | — |
| | 83,214 |
|
Government guaranteed loans (SBA and USDA) | | 271,178 |
| | — |
| | 271,178 |
|
Total Securities sold under agreements to repurchase | | $ | 772,700 |
| | $ | 15,895 |
| | $ | 788,595 |
|
| | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | |
U.S. treasuries | | $ | 41,364 |
| | $ | — |
| | $ | 41,364 |
|
Government agency issued MBS | | 341,173 |
| | 4,545 |
| | 345,718 |
|
Other U.S. government agencies | | 54,924 |
| | — |
| | 54,924 |
|
Government guaranteed loans (SBA and USDA) | | 274,919 |
| | — |
| | 274,919 |
|
Total Securities sold under agreements to repurchase | | $ | 712,380 |
| | $ | 4,545 |
| | $ | 716,925 |
|
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 5969
Note 1617 – 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.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 6070
Note 1617 – 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 March 31,September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | |
Trading securities—fixed income: | | | | | | | | | | |
U.S. treasuries | | $ | 0 | | | $ | 98,743 | | | $ | 0 | | | $ | 98,743 | | | |
Government agency issued MBS | | 0 | | | 352,564 | | | 0 | | | 352,564 | | | |
Government agency issued CMO | | 0 | | | 501,091 | | | 0 | | | 501,091 | | | |
Other U.S. government agencies | | 0 | | | 261,569 | | | 0 | | | 261,569 | | | |
States and municipalities | | 0 | | | 13,087 | | | 0 | | | 13,087 | | | |
Corporate and other debt | | 0 | | | 158,544 | | | 0 | | | 158,544 | | | |
| | | | | | | | | | |
Total trading securities—fixed income | | 0 | | | 1,385,598 | | | 0 | | | 1,385,598 | | | |
Trading securities—mortgage banking | | 0 | | | 0 | | | 471 | | | 471 | | | |
Loans held for sale (elected fair value) | | 0 | | | 359,396 | | | 12,435 | | | 371,831 | | | |
Loans held for investment (elected fair value) | | 0 | | | 0 | | | 12,372 | | | 12,372 | | | |
Securities available for sale: | | | | | | | | | | |
U.S. treasuries | | 0 | | | 300,034 | | | 0 | | | 300,034 | | | |
Government agency issued MBS | | 0 | | | 3,827,066 | | | 0 | | | 3,827,066 | | | |
Government agency issued CMO | | 0 | | | 2,705,447 | | | 0 | | | 2,705,447 | | | |
Other U.S. government agencies | | 0 | | | 658,266 | | | 0 | | | 658,266 | | | |
States and municipalities | | 0 | | | 432,090 | | | 0 | | | 432,090 | | | |
Corporate and other debt | | 0 | | | 40,010 | | | 0 | | | 40,010 | | | |
Interest-Only Strip (elected fair value) | | 0 | | | 0 | | | 32,959 | | | 32,959 | | | |
Total securities available for sale | | 0 | | | 7,962,913 | | | 32,959 | | | 7,995,872 | | | |
Other assets: | | | | | | | | | | |
Deferred compensation mutual funds | | 109,907 | | | 0 | | | 0 | | | 109,907 | | | |
Equity, mutual funds, and other | | 24,712 | | | 0 | | | 0 | | | 24,712 | | | |
Derivatives, forwards and futures | | 48,200 | | | 0 | | | 0 | | | 48,200 | | | |
Derivatives, interest rate contracts | | 0 | | | 787,139 | | | 0 | | | 787,139 | | | |
Derivatives, other | | 0 | | | 1,436 | | | 342 | | | 1,778 | | | |
Total other assets | | 182,819 | | | 788,575 | | | 342 | | | 971,736 | | | |
Total assets | | $ | 182,819 | | | $ | 10,496,482 | | | $ | 58,579 | | | $ | 10,737,880 | | | |
Trading liabilities—fixed income: | | | | | | | | | | |
U.S. treasuries | | $ | 0 | | | $ | 431,565 | | | $ | 0 | | | $ | 431,565 | | | |
| | | | | | | | | | |
States and municipalities | | 0 | | | 203 | | | 0 | | | 203 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Corporate and other debt | | 0 | | | 45,298 | | | 0 | | | 45,298 | | | |
Equity, mutual funds, and other | | 0 | | | 7 | | | 0 | | | 7 | | | |
Total trading liabilities—fixed income | | 0 | | | 477,073 | | | 0 | | | 477,073 | | | |
Other liabilities: | | | | | | | | | | |
Derivatives, forwards and futures | | 45,051 | | | 0 | | | 0 | | | 45,051 | | | |
Derivatives, interest rate contracts | | 0 | | | 45,795 | | | 0 | | | 45,795 | | | |
Derivatives, other | | 0 | | | 1,462 | | | 17,140 | | | 18,602 | | | |
Total other liabilities | | 45,051 | | | 47,257 | | | 17,140 | | | 109,448 | | | |
Total liabilities | | $ | 45,051 | | | $ | 524,330 | | | $ | 17,140 | | | $ | 586,521 | | | |
|
| | | | | | | | | | | | | | | | |
| | March 31, 2020 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Trading securities—fixed income: | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 243,315 |
| | $ | — |
| | $ | 243,315 |
|
Government agency issued MBS | | — |
| | 661,174 |
| | — |
| | 661,174 |
|
Government agency issued CMO | | — |
| | 435,738 |
| | — |
| | 435,738 |
|
Other U.S. government agencies | | — |
| | 57,993 |
| | — |
| | 57,993 |
|
States and municipalities | | — |
| | 75,288 |
| | — |
| | 75,288 |
|
Corporate and other debt | | — |
| | 403,019 |
| | — |
| | 403,019 |
|
Equity, mutual funds, and other | | — |
| | 202 |
| | — |
| | 202 |
|
Total trading securities—fixed income | | — |
| | 1,876,729 |
| | — |
| | 1,876,729 |
|
Trading securities—mortgage banking | | — |
| | — |
| | 785 |
| | 785 |
|
Loans held-for-sale (elected fair value) | | — |
| | — |
| | 13,584 |
| | 13,584 |
|
Securities available-for-sale: | | | | | | | | |
U.S. treasuries | | — |
| | 100 |
| | — |
| | 100 |
|
Government agency issued MBS | | — |
| | 2,402,517 |
| | — |
| | 2,402,517 |
|
Government agency issued CMO | | — |
| | 1,626,943 |
| | — |
| | 1,626,943 |
|
Other U.S. government agencies | | — |
| | 372,497 |
| | — |
| | 372,497 |
|
States and municipalities | | — |
| | 79,125 |
| | — |
| | 79,125 |
|
Corporate and other debt | | — |
| | 40,621 |
| | — |
| | 40,621 |
|
Interest-Only Strip (elected fair value) | | — |
| | — |
| | 23,104 |
| | 23,104 |
|
Total securities available-for-sale | | — |
| | 4,521,803 |
| | 23,104 |
| | 4,544,907 |
|
Other assets: | | | | | | | | |
Deferred compensation mutual funds | | 41,666 |
| | — |
| | — |
| | 41,666 |
|
Equity, mutual funds, and other | | 22,833 |
| | — |
| | — |
| | 22,833 |
|
Derivatives, forwards and futures | | 165,516 |
| | — |
| | — |
| | 165,516 |
|
Derivatives, interest rate contracts | | — |
| | 530,140 |
| | — |
| | 530,140 |
|
Derivatives, other | | — |
| | 314 |
| | 280 |
| | 594 |
|
Total other assets | | 230,015 |
| | 530,454 |
| | 280 |
| | 760,749 |
|
Total assets | | $ | 230,015 |
| | $ | 6,928,986 |
| | $ | 37,753 |
| | $ | 7,196,754 |
|
Trading liabilities—fixed income: | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 387,498 |
| | $ | — |
| | $ | 387,498 |
|
Government issued agency CMO | | — |
| | 1,746 |
| | — |
| | 1,746 |
|
Corporate and other debt | | — |
| | 63,367 |
| | — |
| | 63,367 |
|
Total trading liabilities—fixed income | | — |
| | 452,611 |
| | — |
| | 452,611 |
|
Other liabilities: | | | | | | | | |
Derivatives, forwards and futures | | 171,604 |
| | — |
| | — |
| | 171,604 |
|
Derivatives, interest rate contracts | | — |
| | 41,813 |
| | — |
| | 41,813 |
|
Derivatives, other | | — |
| | 397 |
| | 21,170 |
| | 21,567 |
|
Total other liabilities | | 171,604 |
| | 42,210 |
| | 21,170 |
| | 234,984 |
|
Total liabilities | | $ | 171,604 |
| | $ | 494,821 |
| | $ | 21,170 |
| | $ | 687,595 |
|
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 6171
Note 1617 – 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, 2019:
| | | | December 31, 2019 | | | December 31, 2019 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | (Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Trading securities—fixed income: | | | | | | | | | Trading securities—fixed income: | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 134,844 |
| | $ | — |
| | $ | 134,844 |
| U.S. treasuries | | $ | 0 | | | $ | 134,844 | | | $ | 0 | | | $ | 134,844 | |
Government agency issued MBS | | — |
| | 268,024 |
| | — |
| | 268,024 |
| Government agency issued MBS | | 0 | | | 268,024 | | | 0 | | | 268,024 | |
Government agency issued CMO | | — |
| | 250,652 |
| | — |
| | 250,652 |
| Government agency issued CMO | | 0 | | | 250,652 | | | 0 | | | 250,652 | |
Other U.S. government agencies | | — |
| | 124,972 |
| | — |
| | 124,972 |
| Other U.S. government agencies | | 0 | | | 124,972 | | | 0 | | | 124,972 | |
States and municipalities | | — |
| | 120,744 |
| | — |
| | 120,744 |
| States and municipalities | | 0 | | | 120,744 | | | 0 | | | 120,744 | |
Corporate and other debt | | — |
| | 445,253 |
| | — |
| | 445,253 |
| Corporate and other debt | | 0 | | | 445,253 | | | 0 | | | 445,253 | |
Equity, mutual funds, and other | | — |
| | 777 |
| | — |
| | 777 |
| Equity, mutual funds, and other | | 0 | | | 777 | | | 0 | | | 777 | |
Total trading securities—fixed income | | — |
| | 1,345,266 |
| | — |
| | 1,345,266 |
| Total trading securities—fixed income | | 0 | | | 1,345,266 | | | 0 | | | 1,345,266 | |
Trading securities—mortgage banking | | — |
| | — |
| | 941 |
| | 941 |
| Trading securities—mortgage banking | | 0 | | | 0 | | | 941 | | | 941 | |
Loans held-for-sale (elected fair value) | | — |
| | — |
| | 14,033 |
| | 14,033 |
| |
Securities available-for-sale: | | | | | | | | | |
Loans held for sale (elected fair value) | | Loans held for sale (elected fair value) | | 0 | | | 0 | | | 14,033 | | | 14,033 | |
Securities available for sale: | | Securities available for sale: | |
U.S. treasuries | | — |
| | 100 |
| | — |
| | 100 |
| U.S. treasuries | | 0 | | | 100 | | | 0 | | | 100 | |
Government agency issued MBS | | — |
| | 2,348,517 |
| | — |
| | 2,348,517 |
| Government agency issued MBS | | 0 | | | 2,348,517 | | | 0 | | | 2,348,517 | |
Government agency issued CMO | | — |
| | 1,670,492 |
| | — |
| | 1,670,492 |
| Government agency issued CMO | | 0 | | | 1,670,492 | | | 0 | | | 1,670,492 | |
Other U.S. government agencies | | — |
| | 306,092 |
| | — |
| | 306,092 |
| Other U.S. government agencies | | 0 | | | 306,092 | | | 0 | | | 306,092 | |
States and municipalities | | — |
| | 60,526 |
| | — |
| | 60,526 |
| States and municipalities | | 0 | | | 60,526 | | | 0 | | | 60,526 | |
Corporate and other debt | | — |
| | 40,540 |
| | — |
| | 40,540 |
| Corporate and other debt | | 0 | | | 40,540 | | | 0 | | | 40,540 | |
Interest-Only Strip (elected fair value) | | — |
| | — |
| | 19,136 |
| | 19,136 |
| Interest-Only Strip (elected fair value) | | 0 | | | 0 | | | 19,136 | | | 19,136 | |
Total securities available-for-sale | | — |
| | 4,426,267 |
| | 19,136 |
| | 4,445,403 |
| |
Total securities available for sale | | Total securities available for sale | | 0 | | | 4,426,267 | | | 19,136 | | | 4,445,403 | |
Other assets: | | | | | | | | | Other assets: | | | | | | | | |
Deferred compensation mutual funds | | 46,815 |
| | — |
| | — |
| | 46,815 |
| Deferred compensation mutual funds | | 46,815 | | | 0 | | | 0 | | | 46,815 | |
Equity, mutual funds, and other | | 22,643 |
| | — |
| | — |
| | 22,643 |
| Equity, mutual funds, and other | | 22,643 | | | 0 | | | 0 | | | 22,643 | |
Derivatives, forwards and futures | | 20,640 |
| | — |
| | — |
| | 20,640 |
| Derivatives, forwards and futures | | 20,640 | | | 0 | | | 0 | | | 20,640 | |
Derivatives, interest rate contracts | | — |
| | 162,413 |
| | — |
| | 162,413 |
| Derivatives, interest rate contracts | | 0 | | | 162,413 | | | 0 | | | 162,413 | |
Derivatives, other | | — |
| | 62 |
| | — |
| | 62 |
| Derivatives, other | | 0 | | | 62 | | | 0 | | | 62 | |
Total other assets | | 90,098 |
| | 162,475 |
| | — |
| | 252,573 |
| Total other assets | | 90,098 | | | 162,475 | | | 0 | | | 252,573 | |
Total assets | | $ | 90,098 |
| | $ | 5,934,008 |
| | $ | 34,110 |
| | $ | 6,058,216 |
| Total assets | | $ | 90,098 | | | $ | 5,934,008 | | | $ | 34,110 | | | $ | 6,058,216 | |
Trading liabilities—fixed income: | | | | | | | | | Trading liabilities—fixed income: | | | | | | | | |
U.S. treasuries | | $ | — |
| | $ | 406,380 |
| | $ | — |
| | $ | 406,380 |
| U.S. treasuries | | $ | 0 | | | $ | 406,380 | | | $ | 0 | | | $ | 406,380 | |
Other U.S. government agencies | | — |
| | 88 |
| | — |
| | 88 |
| Other U.S. government agencies | | 0 | | | 88 | | | 0 | | | 88 | |
Government agency issued MBS | | — |
| | 33 |
| | — |
| | 33 |
| Government agency issued MBS | | 0 | | | 33 | | | 0 | | | 33 | |
Corporate and other debt | | — |
| | 99,080 |
| | — |
| | 99,080 |
| Corporate and other debt | | 0 | | | 99,080 | | | 0 | | | 99,080 | |
Total trading liabilities—fixed income | | — |
| | 505,581 |
| | — |
| | 505,581 |
| Total trading liabilities—fixed income | | 0 | | | 505,581 | | | 0 | | | 505,581 | |
Other liabilities: | | | | | | | | | Other liabilities: | | | | | | | | |
Derivatives, forwards and futures | | 19,807 |
| | — |
| | — |
| | 19,807 |
| Derivatives, forwards and futures | | 19,807 | | | 0 | | | 0 | | | 19,807 | |
Derivatives, interest rate contracts | | — |
| | 24,412 |
| | — |
| | 24,412 |
| Derivatives, interest rate contracts | | 0 | | | 24,412 | | | 0 | | | 24,412 | |
Derivatives, other | | — |
| | 466 |
| | 22,795 |
| | 23,261 |
| Derivatives, other | | 0 | | | 466 | | | 22,795 | | | 23,261 | |
Total other liabilities | | 19,807 |
| | 24,878 |
| | 22,795 |
| | 67,480 |
| Total other liabilities | | 19,807 | | | 24,878 | | | 22,795 | | | 67,480 | |
Total liabilities | | $ | 19,807 |
| | $ | 530,459 |
| | $ | 22,795 |
| | $ | 573,061 |
| Total liabilities | | $ | 19,807 | | | $ | 530,459 | | | $ | 22,795 | | | $ | 573,061 | |
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 6272
Note 1617 – 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 March 31,September 30, 2020 and 2019, on a recurring basis are summarized as follows:
| | | | Three Months Ended March 31, 2020 | | | | | Three Months Ended September 30, 2020 | | |
(Dollars in thousands) | | Trading securities | | | Interest- only strips- AFS | | | Loans held- for-sale | | Net derivative liabilities | | (Dollars in thousands) | | Trading securities | | Interest- only strips- AFS | | Loans held for sale | | Loans held for investment | | Net derivative liabilities | |
Balance on January 1, 2020 | | $ | 941 |
| | $ | 19,136 |
| | $ | 14,033 |
| | $ | (22,795 | ) | | |
Total net gains/(losses) included in: | | | | | | | | | | |
Balance on July 1, 2020 | | Balance on July 1, 2020 | | $ | 628 | | | $ | 25,446 | | | $ | 13,263 | | | $ | 0 | | | $ | (18,645) | | |
Acquired | | Acquired | | 0 | | | 0 | | | 0 | | | 13,746 | | | 0 | | |
Total net gains (losses) included in: | | Total net gains (losses) included in: | |
Net income | | (156 | ) | | (1,295 | ) | | 329 |
| | (511 | ) | | Net income | | (157) | | | (1,282) | | | (80) | | | (418) | | | (599) | | |
Purchases | | — |
| | 5,481 |
| | — |
| | — |
| | Purchases | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | |
Sales | | — |
| | (8,703 | ) | | — |
| | — |
| | Sales | | 0 | | | (56) | | | 0 | | | (2,927) | | | 0 | | |
Settlements | | — |
| | — |
| | (778 | ) | | 2,416 |
| | Settlements | | 0 | | | 0 | | | (748) | | | (2,312) | | | 2,446 | | |
Net transfers into/(out of) Level 3 | | — |
| | 8,485 |
| | (b) | | — |
| | — |
| | |
Balance on March 31, 2020 | | $ | 785 |
| | $ | 23,104 |
| | $ | 13,584 |
| | $ | (20,890 | ) | | |
Net unrealized gains/(losses) included in net income | | $ | — |
| | (a) | | $ | (865 | ) | | (c) | | $ | 329 |
| | (a) | | $ | (511 | ) | | (d) | |
Net transfers into (out of) Level 3 | | Net transfers into (out of) Level 3 | | 0 | | | 8,851 | | | (b) | | 0 | | | 4,283 | | | 0 | | |
Balance on September 30, 2020 | | Balance on September 30, 2020 | | $ | 471 | | | $ | 32,959 | | | $ | 12,435 | | | $ | 12,372 | | | $ | (16,798) | | |
Net unrealized gains (losses) included in net income | | Net unrealized gains (losses) included in net income | | $ | 0 | | | (a) | | $ | 1,192 | | | (c) | | $ | (80) | | | (a) | | $ | 367 | | | $ | (76) | | | (d) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 | | |
(Dollars in thousands) | | Trading securities | | | | Interest-only-strips-AFS | | | | Loans held for sale | | | | Net derivative liabilities | | |
Balance on July 1, 2019 | | $ | 1,255 | | | | | $ | 17,792 | | | | | $ | 15,092 | | | | | $ | (26,545) | | | |
Total net gains (losses) included in: | | | | | | | | | | | | | | | | |
Net income | | (157) | | | | | (1,421) | | | | | 443 | | | | | (4,008) | | | |
Purchases | | 0 | | | | | 0 | | | | | 0 | | | | | 0 | | | |
Sales | | 0 | | | | | (11,401) | | | | | 0 | | | | | 0 | | | |
Settlements | | 0 | | | | | 0 | | | | | (1,126) | | | | | 2,468 | | | |
Net transfers into (out of) Level 3 | | 0 | | | | | 10,279 | | | (b) | | 0 | | | | | 0 | | | |
Balance on September 30, 2019 | | $ | 1,098 | | | | | $ | 15,249 | | | | | $ | 14,409 | | | | | $ | (28,085) | | | |
Net unrealized gains (losses) included in net income | | $ | 0 | | | (a) | | $ | (1,977) | | | (c) | | $ | 443 | | | (a) | | $ | (4,008) | | | (d) |
(a)Primarily included in mortgage banking and title income on the Consolidated 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 Statements of Income.
(d)Included in Other expense.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 73
Note 17 – Fair Value of Assets & Liabilities (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 | | |
(Dollars in thousands) | | Trading securities | | | | Interest-only-strips-AFS | | | | Loans held-for-sale | | | | Net derivative liabilities | | |
Balance on January 1, 2019 | | $ | 1,524 |
| | | | $ | 9,902 |
| | | | $ | 16,273 |
| | | | $ | (31,540 | ) | | |
Total net gains/(losses) included in: | | | | | | | | | | | | | | | | |
Net income | | 21 |
| | | | (1,258 | ) | | | | 495 |
| | | | 135 |
| | |
Purchases | | — |
| | | | 86 |
| | | | — |
| | | | — |
| |
|
Sales | | — |
| | | | (13,012 | ) | | | | — |
| | | | — |
| | |
Settlements | | (148 | ) | | | | — |
| | | | (1,017 | ) | | | | 2,435 |
| | |
Net transfers into/(out of) Level 3 | | — |
| | | | 17,477 |
| | (b) | | — |
| | | | — |
| | |
Balance on March 31, 2019 | | $ | 1,397 |
| | | | $ | 13,195 |
| | | | $ | 15,751 |
| | | | $ | (28,970 | ) | | |
Net unrealized gains/(losses) included in net income | | $ | (30 | ) | | (a) | | $ | (894 | ) | | (c) | | $ | 495 |
| | (a) | | $ | 135 |
| | (d) |
| |
(a) | Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income. |
| |
(b) | Transfers into interest-only strips - AFS level 3 measured on a recurring basis reflect movements from loans held-for-sale (Level 2 nonrecurring). |
| |
(c) | Primarily included in fixed income on the Consolidated Condensed Statements of Income. |
| |
(d) | Included in Other expense. |
The changes in Level 3 assets and liabilities measured at fair value for the nine months ended September 30, 2020 and 2019, on a recurring basis are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | | |
(Dollars in thousands) | | Trading securities | | | | Interest- only strips- AFS | | | | Loans held for sale | | | | Loans held for investment | | Net derivative liabilities | | |
Balance on January 1, 2020 | | $ | 941 | | | | | $ | 19,136 | | | | | $ | 14,033 | | | | | $ | 0 | | | $ | (22,795) | | | |
Acquired | | 0 | | | | | 0 | | | | | 0 | | | | | 13,746 | | | 0 | | | |
Total net gains (losses) included in: | | | | | | | | | | | | | | | | | | |
Net income | | (470) | | | | | (3,810) | | | | | 671 | | | | | (418) | | | (1,311) | | | |
Purchases | | 0 | | | | | 5,481 | | | | | 0 | | | | | 0 | | | 0 | | | |
Sales | | 0 | | | | | (8,759) | | | | | 0 | | | | | (2,927) | | | 0 | | | |
Settlements | | 0 | | | | | 0 | | | | | (2,269) | | | | | (2,312) | | | 7,308 | | | |
Net transfers into (out of) Level 3 | | 0 | | | | | 20,911 | | | (b) | | 0 | | | | | 4,283 | | | 0 | | | |
Balance on September 30, 2020 | | $ | 471 | | | | | $ | 32,959 | | | | | $ | 12,435 | | | | | $ | 12,372 | | | $ | (16,798) | | | |
Net unrealized gains (losses) included in net income | | $ | 0 | | | (a) | | $ | 2,994 | | | (c) | | $ | 671 | | | (a) | | $ | 367 | | | $ | (788) | | | (d) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 | | |
(Dollars in thousands) | | Trading securities | | | | Interest-only-strips-AFS | | | | Loans held for sale | | | | Net derivative liabilities | | |
Balance on January 1, 2019 | | $ | 1,524 | | | | | $ | 9,902 | | | | | $ | 16,273 | | | | | $ | (31,540) | | | |
Total net gains (losses) included in: | | | | | | | | | | | | | | | | |
Net income | | (128) | | | | | (2,820) | | | | | 1,259 | | | | | (3,892) | | | |
Purchases | | 0 | | | | | 86 | | | | | 10 | | | | | 0 | | | |
Sales | | 0 | | | | | (38,612) | | | | | 0 | | | | | 0 | | | |
Settlements | | (298) | | | | | 0 | | | | | (3,133) | | | | | 7,347 | | | |
Net transfers into (out of) Level 3 | | 0 | | | | | 46,693 | | | (b) | | 0 | | | | | 0 | | | |
Balance on September 30, 2019 | | $ | 1,098 | | | | | $ | 15,249 | | | | | $ | 14,409 | | | | | $ | (28,085) | | | |
Net unrealized gains (losses) included in net income | | $ | (66) | | | (a) | | $ | (1,250) | | | (c) | | $ | 1,259 | | | (a) | | $ | (3,892) | | | (d) |
(a)Primarily included in mortgage banking and title income on the Consolidated 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 Statements of Income.
(d)Included in Other expense.
There were no0 net unrealized gains/gains (losses) for Level 3 assets and liabilities included in other comprehensive income as of March 31,September 30, 2020 and 2019.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 6374
Note 1617 – 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 Consolidated Condensed Statements of ConditionBalance Sheets at March 31,September 30, 2020, and December 31, 2019, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the related carrying value.
| | | | Carrying value at March 31, 2020 | | | Carrying value at September 30, 2020 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | (Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Loans held-for-sale—SBAs and USDA | | $ | — |
| | $ | 493,876 |
| | $ | 890 |
| | $ | 494,766 |
| |
Loans held-for-sale—first mortgages | | — |
| | — |
| | 515 |
| | 515 |
| |
Loans, net of unearned income (a) | | — |
| | — |
| | 31,535 |
| | 31,535 |
| |
| Loans held for sale—SBAs and USDA | | Loans held for sale—SBAs and USDA | | $ | 0 | | | $ | 594,485 | | | $ | 743 | | | $ | 595,228 | |
Loans held for sale—first mortgages | | Loans held for sale—first mortgages | | 0 | | | 0 | | | 529 | | | 529 | |
Loans and leases (a) | | Loans and leases (a) | | 0 | | | 0 | | | 114,583 | | | 114,583 | |
OREO (b) | | — |
| | — |
| | 13,881 |
| | 13,881 |
| OREO (b) | | 0 | | | 0 | | | 17,767 | | | 17,767 | |
Other assets (c) | | — |
| | — |
| | 10,262 |
| | 10,262 |
| Other assets (c) | | 0 | | | 0 | | | 9,490 | | | 9,490 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying value at December 31, 2019 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
Loans held for sale—SBAs and USDA | | $ | 0 | | | $ | 492,595 | | | $ | 929 | | | $ | 493,524 | |
Loans held for sale—first mortgages | | 0 | | | 0 | | | 516 | | | 516 | |
Loans and leases (a) | | 0 | | | 0 | | | 42,208 | | | 42,208 | |
OREO (b) | | 0 | | | 0 | | | 15,660 | | | 15,660 | |
Other assets (c) | | 0 | | | 0 | | | 10,608 | | | 10,608 | |
|
| | | | | | | | | | | | | | | | |
| | Carrying value at December 31, 2019 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Loans held-for-sale—SBAs and USDA | | $ | — |
| | $ | 492,595 |
| | $ | 929 |
| | $ | 493,524 |
|
Loans held-for-sale—first mortgages | | — |
| | — |
| | 516 |
| | 516 |
|
Loans, net of unearned income (a) | | — |
| | — |
| | 42,208 |
| | 42,208 |
|
OREO (b) | | — |
| | — |
| | 15,660 |
| | 15,660 |
|
Other assets (c) | | — |
| | — |
| | 10,608 |
| | 10,608 |
|
(a)Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for credit losses. | |
(a) | Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for loan losses. |
| |
(b) | Represents the fair value and related losses of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages. |
| |
(c) | Represents tax credit investments accounted for under the equity method. |
(b)Represents the fair value and related losses of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages.
(c)Represents tax credit investments accounted for under the equity method.
For assets measured on a nonrecurring basis which were still held on the Consolidated Condensed Statements of ConditionBalance Sheets at period end, the following table provides information about the fair value adjustments recorded during the three and nine months ended March 31,September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net gains (losses) Three Months Ended September 30, | | Net gains (losses) Nine months ended September 30, |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | |
Loans held for sale—SBAs and USDA | | $ | (1,560) | | | $ | (977) | | | $ | (2,304) | | | $ | (1,208) | |
Loans held for sale—first mortgages | | 31 | | | 2 | | | 32 | | | 27 | |
Loans and leases (a) | | (17,444) | | | (15,559) | | | (31,040) | | | (16,036) | |
OREO (b) | | (34) | | | (282) | | | (203) | | | (256) | |
Other assets (c) | | (346) | | | (407) | | | (1,118) | | | (1,349) | |
| | $ | (19,353) | | | $ | (17,223) | | | $ | (34,633) | | | $ | (18,822) | |
(a)Write-downs on these loans are recognized as part of provision for credit losses. |
| | | | | | | | |
| | Net gains/(losses) Three Months Ended March 31 |
(Dollars in thousands) | | 2020 | | 2019 |
Loans held-for-sale—other consumer | | $ | — |
| | $ | (200 | ) |
Loans held-for-sale—SBAs and USDA | | (1,391 | ) | | (683 | ) |
Loans held-for-sale—first mortgages | | 5 |
| | 15 |
|
Loans, net of unearned income (a) | | (4,839 | ) | | 200 |
|
OREO (b) | | (27 | ) | | 35 |
|
Other assets (c) | | (346 | ) | | (675 | ) |
| | $ | (6,598 | ) | | $ | (1,308 | ) |
(b)Represents losses of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages. | |
(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. |
(c)Represents tax credit investments accounted for under the equity method.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 6475
Note 1617 – Fair Value of Assets & Liabilities (Continued)
In 2020, FHN recognized $4.8 million of fixed asset impairments and $4.2 million of impairments for lease assets primarily related to continuing acquisition integration efforts associated with reduction of leased office space and branch optimization. These amounts were primarily recognized in the Corporate segment.
In 2019, FHN recognized $4.6 million of impairments and $.7$0.7 million of impairment reversals, respectively, related to dispositions of acquired properties and $1.5 million of impairments for lease assets related to continuing acquisition integration efforts associated with reduction of leased office space and branch optimization. Related to its restructuring, repositioning, and efficiency efforts, FHN recognized $14.0 million of impairments and $1.4 million of impairment reversals, respectively, for tangible long-lived assets and lease assets. Related to the Company'sFHN's rebranding initiative, FHN recognized $7.1 million of impairments within the Corporate segment for long-lived tangible assets, primarily signage, related to the company'sFHN's rebranding initiative. These amounts were recognized in the Corporate segment.
Lease asset impairments recognized in 2019 represent the reduction in value of the right-of-use assets associated with leases that are being exited in advance of the contractual lease expiration.
Impairments are measured using a discounted cash flow methodology, which is considered a Level 3 valuation.
Impairments of long-lived tangible assets reflect locations where the associated land and building are either owned or leased. The fair values of owned sites were determined using estimated sales prices from appraisals and broker opinions less estimated costs to sell with adjustments upon final disposition. The fair values of owned assets in leased sites (e.g., leasehold improvements) were determined using a discounted cash flow approach, based on the revised estimated useful lives of the related assets. Both measurement methodologies are considered Level 3 valuations. Impairment adjustments recognized upon disposition of a location are considered Level 2 valuations.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 6576
Note 1617 – Fair Value of Assets & Liabilities (Continued)
Level 3 Measurements
The following tables provide information regarding the unobservable inputs utilized in determining the fair value of Level 3 recurring and non-recurring measurements as of March 31,September 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | |
| | | | | | | | Values Utilized |
Level 3 Class | | Fair Value at September 30, 2020 | | Valuation Techniques | | Unobservable Input | | Range | | Weighted Average (d) |
Available for sale securities SBA-interest only strips | | $ | 32,959 | | | Discounted cash flow | | Constant prepayment rate | | 12% | | 12% |
| | | | | | Bond equivalent yield | | 14% - 16% | | 15% |
Loans held for sale - residential real estate | | 12,964 | | | Discounted cash flow | | Prepayment speeds - First mortgage | | 5% - 15% | | 5.4% |
| | | | | | Foreclosure losses | | 50% - 65% | | 63% |
| | | | | | Loss severity trends - First mortgage | | 3% - 19% of UPB | | 13.3% |
Loans held for sale - unguaranteed interest in SBA loans | | 743 | | | Discounted cash flow | | Constant prepayment rate | | 8% - 12% | | 10% |
| | | | | | Bond equivalent yield | | 7% | | 7% |
Loans held for investment | | 12,372 | | | Discounted cash flow | | Constant prepayment rate | | 0% - 24% | | 11% |
| | | | | | Constant default rate | | 0% - 15% | | 1% |
| | | | | | Loss severity trends | | 0% - 100% | | 1% |
Derivative liabilities, other | | 16,798 | | | Discounted cash flow | | Visa covered litigation resolution amount | | $5.4 billion - $6.0 billion | | $5.8 billion |
| | | | | | Probability of resolution scenarios | | 10% - 50% | | 16% |
| | | | | | Time until resolution | | 6 - 30 | | 21 months |
Loans and leases (a) | | 114,583 | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 10% of appraisal | | NM |
| | | | Other collateral valuations | | Borrowing base certificates adjustment | | 20% - 50% of gross value | | NM |
| | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value | | NM |
OREO (b) | | 17,767 | | | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | NM |
Other assets (c) | | 9,490 | | | Discounted cash flow | | Adjustments to current sales yields for specific properties | | 0% - 15% adjustment to yield | | NM |
| | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 25% of appraisal | | NM |
|
| | | | | | | | | | | | |
(Dollars in thousands) | | |
| | | | | | | | Values Utilized |
Level 3 Class | | Fair Value at March 31, 2020 | | Valuation Techniques | | Unobservable Input | | Range | | Weighted Average (d) |
Available-for-sale- securities SBA-interest only strips | | $ | 23,104 |
| | Discounted cash flow | | Constant prepayment rate | | 12% | | 12% |
| | | | | | Bond equivalent yield | | 14% - 18% | | 14% |
Loans held-for-sale - residential real estate | | 14,099 |
| | Discounted cash flow | | Prepayment speeds - First mortgage | | 3% - 15% | | 4.6% |
| | | | | | Foreclosure losses | | 50% - 66% | | 64% |
| | | | | | Loss severity trends - First mortgage | | 2% - 20% of UPB | | 14.2% |
Loans held-for-sale- unguaranteed interest in SBA loans | | 890 |
| | Discounted cash flow | | Constant prepayment rate | | 8% - 12% | | 10% |
| | | | | | Bond equivalent yield | | 8% | | 8% |
Derivative liabilities, other | | 20,890 |
| | Discounted cash flow | | Visa covered litigation resolution amount | | $5.4 billion - $6.0 billion | | $5.8 billion |
| | | | | | Probability of resolution scenarios | | 10% - 50% | | 16% |
| | | | | | Time until resolution | | 12 - 36 months | | 26 months |
Loans, net of unearned income (a) | | 31,535 |
| | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 10% of appraisal | | NM |
| | | | Other collateral valuations | | Borrowing base certificates adjustment | | 20% - 50% of gross value | | NM |
| | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value | | NM |
OREO (b) | | 13,881 |
| | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | NM |
Other assets (c) | | 10,262 |
| | Discounted cash flow | | Adjustments to current sales yields for specific properties | | 0% - 15% adjustment to yield | | NM |
| | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 25% of appraisal | | NM |
NM - Not meaningful.
| |
(a) | Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for loan losses. |
| |
(b) | Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages. |
| |
(c) | Represents tax credit investments accounted for under the equity method. |
| |
(d) | Weighted averages are determined by the relative fair value of the instruments or the relative contribution to an instrument's fair value. |
(a)Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for credit losses.
(b)Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages.
(c)Represents tax credit investments accounted for under the equity method.
(d)Weighted averages are determined by the relative fair value of the instruments or the relative contribution to an instrument's fair value.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 6677
Note 1617 – Fair Value of Assets & Liabilities (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | |
| | | | | | | | Values Utilized |
Level 3 Class | | Fair Value at December 31, 2019 | | Valuation Techniques | | Unobservable Input | | Range | | Weighted Average (d) |
Available for sale securities SBA-interest only strips | | $ | 19,136 | | | Discounted cash flow | | Constant prepayment rate | | 12% | | 12% |
| | | | | | Bond equivalent yield | | 16% - 17% | | 16% |
Loans held for sale - residential real estate | | 14,549 | | | Discounted cash flow | | Prepayment speeds - First mortgage | | 3% - 14% | | 4.1% |
| | | | | | Prepayment speeds - HELOC | | 0% - 12% | | 7.6% |
| | | | | | Foreclosure losses | | 50% - 66% | | 64% |
| | | | | | Loss severity trends - First mortgage | | 3% - 24% of UPB | | 14.3% |
| | | | | | Loss severity trends - HELOC | | 0% - 72% of UPB | | 50% |
Loans held for sale - unguaranteed interest in SBA loans | | 929 | | | Discounted cash flow | | Constant prepayment rate | | 8% - 12% | | 10% |
| | | | | | Bond equivalent yield | | 9% | | 9% |
Derivative liabilities, other | | 22,795 | | | Discounted cash flow | | Visa covered litigation resolution amount | | $5.4 billion - $6.0 billion | | $5.8 billion |
| | | | | | Probability of resolution scenarios | | 10% - 50% | | 16% |
| | | | | | Time until resolution | | 15 - 39 months | | 29 months |
Loans and leases (a) | | 42,208 | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 10% of appraisal | | NM |
| | | | Other collateral valuations | | Borrowing base certificates adjustment | | 20% - 50% of gross value | | NM |
| | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value | | NM |
OREO (b) | | 15,660 | | | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | NM |
Other assets (c) | | 10,608 | | | Discounted cash flow | | Adjustments to current sales yields for specific properties | | 0% - 15% adjustment to yield | | NM |
| | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 25% of appraisal | | NM |
|
| | | | | | | | | | | | |
(Dollars in thousands) | | |
| | | | | | | | Values Utilized |
Level 3 Class | | Fair Value at December 31, 2019 | | Valuation Techniques | | Unobservable Input | | Range | | Weighted Average (d) |
Available-for-sale- securities SBA-interest only strips | | $ | 19,136 |
| | Discounted cash flow | | Constant prepayment rate | | 12% | | 12% |
| | | | | | Bond equivalent yield | | 16% - 17% | | 16% |
Loans held-for-sale - residential real estate | | 14,549 |
| | Discounted cash flow | | Prepayment speeds - First mortgage | | 3% - 14% | | 4.1% |
| | | | | | Prepayment speeds - HELOC | | 0% - 12% | | 7.6% |
| | | | | | Foreclosure losses | | 50% - 66% | | 64% |
| | | | | | Loss severity trends - First mortgage | | 3% - 24% of UPB | | 14.3% |
| | | | | | Loss severity trends - HELOC | | 0% - 72% of UPB | | 50% |
Loans held-for-sale- unguaranteed interest in SBA loans | | 929 |
| | Discounted cash flow | | Constant prepayment rate | | 8% - 12% | | 10% |
| | | | | | Bond equivalent yield | | 9% | | 9% |
Derivative liabilities, other | | 22,795 |
| | Discounted cash flow | | Visa covered litigation resolution amount | | $5.4 billion - $6.0 billion | | $5.8 billion |
| | | | | | Probability of resolution scenarios | | 10% - 50% | | 16% |
| | | | | | Time until resolution | | 15 - 39 months | | 29 months |
Loans, net of unearned income (a) | | 42,208 |
| | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 10% of appraisal | | NM |
| | | | Other collateral valuations | | Borrowing base certificates adjustment | | 20% - 50% of gross value | | NM |
| | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value | | NM |
OREO (b) | | 15,660 |
| | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | NM |
Other assets (c) | | 10,608 |
| | Discounted cash flow | | Adjustments to current sales yields for specific properties | | 0% - 15% adjustment to yield | | NM |
| | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 25% of appraisal | | NM |
NM - Not meaningful.(a)Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for credit losses.
| |
(a) | Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for loan losses. |
| |
(b) | Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages. |
| |
(c) | Represents tax credit investments accounted for under the equity method. |
| |
(d) | Weighted averages are determined by the relative fair value of the instruments or the relative contribution to an instrument's fair value |
(b)Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages.
(c)Represents tax credit investments accounted for under the equity method.
(d)Weighted averages are determined by the relative fair value of the instruments or the relative contribution to an instrument's fair value.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 67
Note 16 – Fair Value of Assets & Liabilities (Continued)
Securities AFS. Increases (decreases) in estimated prepayment rates and bond equivalent yields negatively (positively) affect the value of SBA interest only strips. Management additionally considers whether the loans underlying related SBA-interest only strips are delinquent, in default or prepaying, and adjusts the fair value down 20 - 100% depending on the length of time in default.
Loans held-for-sale.held for sale. Foreclosure losses and prepayment rates are significant unobservable inputs used in the fair value measurement of FHN’s residential real estate loans held-for-sale.held for sale. Loss severity trends are also assessed to evaluate the reasonableness of fair value estimates resulting from discounted cash flows methodologies as well as to estimate fair value for newly repurchased loans and loans that are near foreclosure. Significant increases
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 78
Note 17 – Fair Value of Assets & Liabilities (Continued)
(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.
Increases (decreases) in estimated prepayment rates and bond equivalent yields negatively (positively) affect the value of unguaranteed interests in SBA loans. Unguaranteed interest in SBA loans held-for-saleheld for sale are carried at less than the outstanding balance due to credit risk estimates. Credit risk adjustments may be reduced if prepayment is likely or as consistent payment history is realized. Management also considers other factors such as delinquency or default and adjusts the fair value accordingly.
Loans held for investment. Constant prepayment rate, constant default rate and loss severity trends are significant unobservable inputs used in the fair value measurement of loans held for investment. Increases (decreases) in each of these inputs in isolation result in negative (positive) effects on the valuation of the associated loans.
Derivative liabilities. In conjunction with the sales of portions of its Visa Class B shares, 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. 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.
Loans net of unearned incomeand leases 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. 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.
Fair Value Option
FHN has elected the fair value option on a prospective basis for almostsubstantially all types of mortgage loans originated for sale purposes 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 relating to mortgage banking operations conducted prior to the IBKC merger are recognized within loans held-for-saleheld for sale at fair value at the time of repurchase, which includes consideration of the credit status of the loans and the estimated liquidation value. FHN has elected to continue recognition of these loans at fair value in periods subsequent to reacquisition. Due to the credit-distressed nature of the vast majority of repurchased loans and the related loss severities experienced upon repurchase, FHN believes that the fair value election provides a more timely recognition of changes in value for these loans that occur subsequent to repurchase. Absent the fair value election, these loans would be subject to valuation at the LOCOM value, which would prevent subsequent values from exceeding the initial fair value, determined at the time of repurchase, but would require recognition of subsequent declines in value. Thus, the fair value election provides for a more timely recognition of any potential future recoveries in asset values while not affecting the requirement to recognize subsequent declines in value.
FHN also has a portion of mortgage loans held for investment for which the fair value option was elected upon origination and which continue to be accounted for at fair value.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 6879
Note 1617 – 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-saleheld for sale and held for investment measured at fair value in accordance with management’s election and the aggregate unpaid principal amount FHN is contractually entitled to receive at maturity.
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
(Dollars in thousands) | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal |
Residential real estate loans held for sale reported at fair value: | | | | | | |
Total loans | | $ | 371,831 | | | $ | 361,865 | | | $ | 9,966 | |
Nonaccrual loans | | 2,972 | | | 6,073 | | | (3,101) | |
Loans 90 days or more past due and still accruing | | 287 | | | 419 | | | (132) | |
Loans held for investment reported at fair value: | | | | | | |
Total loans | | $ | 12,372 | | | $ | 13,062 | | | $ | (690) | |
Nonaccrual loans | | 643 | | | 890 | | | (247) | |
| | | | | | |
| | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal |
Residential real estate loans held for sale reported at fair value: | | | | | | |
Total loans | | $ | 14,033 | | | $ | 19,278 | | | $ | (5,245) | |
Nonaccrual loans | | 3,532 | | | 6,646 | | | (3,114) | |
Loans 90 days or more past due and still accruing | | 163 | | | 268 | | | (105) | |
|
| | | | | | | | | | | | |
| | March 31, 2020 |
(Dollars in thousands) | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal |
Residential real estate loans held-for-sale reported at fair value: | | | | | | |
Total loans | | $ | 13,584 |
| | $ | 18,546 |
| | $ | (4,962 | ) |
Nonaccrual loans | | 3,181 |
| | 6,069 |
| | (2,888 | ) |
Loans 90 days or more past due and still accruing | | 190 |
| | 268 |
| | (78 | ) |
| | December 31, 2019 |
(Dollars in thousands) | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal |
Residential real estate loans held-for-sale reported at fair value: | | | | | | |
Total loans | | $ | 14,033 |
| | $ | 19,278 |
| | $ | (5,245 | ) |
Nonaccrual loans | | 3,532 |
| | 6,646 |
| | (3,114 | ) |
Loans 90 days or more past due and still accruing | | 163 |
| | 268 |
| | (105 | ) |
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, |
(Dollars in thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Changes in fair value included in net income: | | | | | | | |
Mortgage banking noninterest income | | | | | | | |
Loans held for sale | $ | 1,867 | | | $ | 443 | | | $ | 2,618 | | | $ | 1,259 | |
Loans held for investment | (418) | | | 0 | | | (418) | | | 0 | |
|
| | | | | | | |
| Three Months Ended March 31 |
(Dollars in thousands) | 2020 | | 2019 |
Changes in fair value included in net income: | | | |
Mortgage banking noninterest income | | | |
Loans held-for-sale | $ | 329 |
| | $ | 495 |
|
For the three and nine months ended March 31,September 30, 2020 and 2019, the amount for residential real estate loans held-for-saleheld for sale included ainsignificant amounts of gain of $.3 million in pretax earnings that is attributable to changes in instrument-specific credit risk. For the three months ended March 31, 2020 this amount was not material. The portion of the fair value adjustments related to credit risk was determined based on estimated default rates and estimated loss severities. Interest income on residential real estate loans held-for-saleheld for sale measured at fair value is calculated based on the note rate of the loan and is recorded in the interest income section of the Consolidated Condensed Statements of Income as interest on loans held-for-sale.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
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 80
Note 17 – Fair Value of Assets & Liabilities (Continued)
fair value in the Consolidated Condensed Statements of ConditionBalance Sheets and for estimating the fair value of financial instruments for which fair value is disclosed under ASC 825-10-50.
Short-term financial assets. Federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with other financial institutions and the Federal Reserve are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 69
Note 16 – Fair Value of Assets & Liabilities (Continued)
Trading securities and trading liabilities. Trading securities and trading liabilities are recognized at fair value through current earnings. Trading inventory held for broker-dealer operations is included in trading securities and trading liabilities. Broker-dealer long positions are valued at bid price in the bid-ask spread. Short positions are valued at the ask price. Inventory positions are valued using observable inputs including current market transactions, LIBOR and U.S. treasury curves, credit spreads, and consensus prepayment speeds. Trading loans are valued using observable inputs including current market transactions, swap rates, mortgage rates, and consensus prepayment speeds.
Trading securities also include retained interests in prior mortgage securitizations that qualify as financial assets, which include primarily principal-only strips. FHN uses inputs including yield curves, credit spreads, and prepayment speeds to determine the fair value of principal-only strips.
Securities available-for-sale.available for sale. Securities available-for-saleavailable for sale includes the investment portfolio accounted for as available-for-saleavailable for sale under ASC 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.
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 CompanyFHN not recovering all or a portion of its recorded investment. When appropriate, valuations are adjusted for various factors including default or prepayment status of the underlying SBA loans. Because of the inherent uncertainty of valuation, those estimated values may be higher or lower than the values that would have been used had a ready market for the securities existed, and may change in the near term.
Loans held-for-sale.held for sale. Residential real estateFHN determines the fair value of loans held-for-saleheld for sale using either current transaction prices or discounted cash flow models. Fair values are valueddetermined using current transaction prices and/or values on similar assets when available includingwhich includes committed bids for specific loans or loan portfolios. Uncommitted bids may be adjusted based on other available market information. For all other loans FHN determines the fair
Fair value of residential real estate loans held-for-saleheld for sale determined using a discounted cash flow model which incorporates both observable and unobservable inputs. Inputs in the discounted cash flow model include current mortgage rates for similar products, estimated prepayment rates, foreclosure losses, and various loan performance measures (delinquency, LTV, credit score). Adjustments for delinquency and other differences
in loan characteristics are typically reflected in the model’s discount rates. Loss severity trends and the value of underlying collateral are also considered in assessing the appropriate fair value for severely delinquent loans and loans in foreclosure. The valuation of HELOCs also incorporates estimated cancellation rates for loans expected to become delinquent.
Non-mortgage consumer loans held-for-saleheld for sale are valued using committed bids for specific loans or loan portfolios or current market pricing for similar assets with adjustments for differences in credit standing (delinquency, historical default rates for similar loans), yield, collateral values and prepayment rates. If pricing for similar assets is not available, a discounted cash flow methodology is utilized, which incorporates all of these factors into an estimate of investor required yield for the discount rate.
The CompanyFHN utilizes quoted market prices of similar instruments or broker and dealer quotations to value the SBA and USDA guaranteed loans. The CompanyFHN values SBA-unguaranteed interests in loans held-for-saleheld for sale based on individual loan characteristics, such as industry type and pay history which generally follows an income approach. Furthermore, these valuations are adjusted for changes in prepayment estimates and are reduced due to restrictions on trading. The fair value of other non-residential real estate loans held-for-saleheld for sale is approximated by their carrying values based on current transaction values.
Collateral-Dependent loans.Mortgage loans held for investment at fair value option. The fair value of mortgage loans held for investment at fair value option is determined by a third party using a discounted cash flow model using various assumptions about future loan performance and market discount rates.
Loans held for investment. The fair values of mortgage loans are estimated using an exit price methodology that is based on present values using the interest rate that would be charged for a similar loan to a borrower with similar risk, weighted for varying maturity dates and adjusted for a liquidity discount based on the estimated time period to complete a sale transaction with a market participant.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 81
Note 17 – Fair Value of Assets & Liabilities (Continued)
Other loans and leases are valued based on present values using the interest rate that would be charged for a similar instrument to a borrower with similar risk, applicable to each category of instruments, and adjusted for a liquidity discount based on the estimated time period to complete a sale transaction with a market participant.
For loans measured using the estimated fair value of collateral less costs to sell, fair value is estimated using appraisals of the collateral. Collateral values are monitored and additional write-downs are recognized if it is determined that the estimated collateral values have declined further. Estimated costs to sell are based on current amounts of disposal costs for similar assets. Carrying value is considered to reflect fair value for these loans.
Derivative assets and liabilities. The fair value for forwards and futures contracts is based on current transactions involving identical securities. Futures contracts are exchange-traded and thus have no credit risk factor assigned as the risk of non-performance is limited to the clearinghouse used.
Valuations of other derivatives (primarily interest rate related swaps) are based on inputs observed in active markets for similar instruments. Typical inputs include the LIBOR curve, Overnight Indexed Swap (“OIS”) curve, option volatility, and option skew. In measuring the fair value of these derivative assets and liabilities, FHN has elected to consider credit risk based on the net exposure to individual counterparties. Credit risk is mitigated for these instruments through the use of mutual margining and master netting agreements as well as collateral posting requirements. For derivative contracts with daily cash margin requirements that are considered settlements, the
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 70
Note 16 – Fair Value of Assets & Liabilities (Continued)
daily margin amount is netted within derivative assets or liabilities. Any remaining credit risk related to interest rate derivatives is considered in determining fair value through evaluation of additional factors such as customer loan grades and debt ratings. Foreign currency related derivatives also utilize observable exchange rates in the determination of fair value. The determination of fair value for FHN’s derivative liabilities associated with its prior sales of Visa Class B shares are classified within Level 3 in the fair value measurements disclosure as previously discussed in the unobservable inputs discussion.
The fair value of risk participations is determined in reference to the fair value of the related derivative contract between the borrower and the lead bank in the participation structure, which is determined consistent with the valuation process discussed above. This value is adjusted for the pro rata portion of the reference derivative’s notional value and an assessment of credit risk for the referenced borrower.
OREO. OREO primarily consists of properties that have been acquired in satisfaction of debt. These properties are carried at the lower of the outstanding loan amount or
estimated fair value less estimated costs to sell the real estate. Estimated fair value is determined using appraised values with subsequent adjustments for deterioration in values that are not reflected in the most recent appraisal.
Other assets. For disclosure purposes, other assets consist of tax credit investments, FRB and FHLB Stock, deferred compensation 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 mutual 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 ConditionBalance Sheets which is considered to approximate fair value. Investments in mutual funds are measured at the funds’ reported closing net asset values. Investments in equity securities are valued using quoted market prices when available.
Defined maturity deposits. 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.
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.
Loan commitments. Fair values of these commitments are based on fees charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Other commitments. Fair values of these commitments are based on fees charged to enter into similar agreements.
The following fair value estimates are determined as of a specific point in time utilizing various assumptions and estimates. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, reduces the comparability of fair value disclosures between financial institutions. Due to market illiquidity, the fair values for loans net of unearned income,and leases, loans held-for-sale,held for sale, and term borrowings as of March 31, September 30,
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 82
Note 17 – Fair Value of Assets & Liabilities (Continued)
2020 and December 31, 2019, involve the use of significant internally-developed pricing assumptions for certain components of these line items. The assumptions and valuations utilized for this disclosure are considered to reflect inputs that market participants would use in transactions involving these instruments as of the measurement date. The valuations of legacy assets, particularly consumer loans within the Non-Strategic segment and TRUPS 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.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 7183
Note 1617 – 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 March 31, 2020: |
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 |
| | Book Value | | Fair Value |
(Dollars in thousands) | | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | |
Loans, net of unearned income and allowance for loan losses | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial, financial and industrial | | $ | 21,869,914 |
| | $ | — |
| | $ | — |
| | $ | 22,072,783 |
| | $ | 22,072,783 |
|
Commercial real estate | | 4,592,067 |
| | — |
| | — |
| | 4,624,811 |
| | 4,624,811 |
|
Consumer: | | | | | | | | | | |
Consumer real estate (a) | | 5,996,361 |
| | — |
| | — |
| | 6,141,872 |
| | 6,141,872 |
|
Credit card & other | | 475,471 |
| | — |
| | — |
| | 481,763 |
| | 481,763 |
|
Total loans, net of unearned income and allowance for loan losses | | 32,933,813 |
| | — |
| | — |
| | 33,321,229 |
| | 33,321,229 |
|
Short-term financial assets: | | | | | | | | | | |
Interest-bearing cash | | 670,525 |
| | 670,525 |
| | — |
| | — |
| | 670,525 |
|
Federal funds sold | | 30,050 |
| | — |
| | 30,050 |
| | — |
| | 30,050 |
|
Securities purchased under agreements to resell | | 562,435 |
| | — |
| | 562,435 |
| | — |
| | 562,435 |
|
Total short-term financial assets | | 1,263,010 |
| | 670,525 |
| | 592,485 |
| | — |
| | 1,263,010 |
|
Trading securities (b) | | 1,877,514 |
| | — |
| | 1,876,729 |
| | 785 |
| | 1,877,514 |
|
Loans held-for-sale | | | | | | | | | | |
Mortgage loans (elected fair value) (b) | | 13,584 |
| | — |
| | — |
| | 13,584 |
| | 13,584 |
|
USDA & SBA loans- LOCOM | | 494,766 |
| | — |
| | 497,071 |
| | 905 |
| | 497,976 |
|
Other consumer loans- LOCOM | | 4,940 |
| | — |
| | 4,940 |
| | — |
| | 4,940 |
|
Mortgage loans- LOCOM | | 82,311 |
| | — |
| | — |
| | 82,311 |
| | 82,311 |
|
Total loans held-for-sale | | 595,601 |
| | — |
| | 502,011 |
| | 96,800 |
| | 598,811 |
|
Securities available-for-sale (b) | | 4,544,907 |
| | — |
| | 4,521,803 |
| | 23,104 |
| | 4,544,907 |
|
Securities held-to-maturity | | 10,000 |
| | — |
| | — |
| | 9,824 |
| | 9,824 |
|
Derivative assets (b) | | 696,250 |
| | 165,516 |
| | 530,454 |
| | 280 |
| | 696,250 |
|
Other assets: | | | | | | | | | | |
Tax credit investments | | 250,596 |
| | — |
| | — |
| | 249,450 |
| | 249,450 |
|
Deferred compensation mutual funds | | 41,666 |
| | 41,666 |
| | — |
| | — |
| | 41,666 |
|
Equity, mutual funds, and other (c) | | 715,549 |
| | 22,833 |
| | — |
| | 692,716 |
| | 715,549 |
|
Total other assets | | 1,007,811 |
| | 64,499 |
| | — |
| | 942,166 |
| | 1,006,665 |
|
Total assets | | $ | 42,928,906 |
| | $ | 900,540 |
| | $ | 8,023,482 |
| | $ | 34,394,188 |
| | $ | 43,318,210 |
|
Liabilities: | | | | | | | | | | |
Defined maturity deposits | | $ | 3,058,198 |
| | $ | — |
| | $ | 3,105,082 |
| | $ | — |
| | $ | 3,105,082 |
|
Trading liabilities (b) | | 452,611 |
| | — |
| | 452,611 |
| | — |
| | 452,611 |
|
Short-term financial liabilities: | | | | | | | | | | |
Federal funds purchased | | 476,013 |
| | — |
| | 476,013 |
| | — |
| | 476,013 |
|
Securities sold under agreements to repurchase | | 788,595 |
| | — |
| | 788,595 |
| | — |
| | 788,595 |
|
Other short-term borrowings | | 4,060,673 |
| | — |
| | 4,060,673 |
| | — |
| | 4,060,673 |
|
Total short-term financial liabilities | | 5,325,281 |
| | — |
| | 5,325,281 |
| | — |
| | 5,325,281 |
|
Term borrowings: | | | | | | | | | | |
Real estate investment trust-preferred | | 46,253 |
| | — |
| | — |
| | 47,000 |
| | 47,000 |
|
Secured borrowings | | 17,315 |
| | — |
| | — |
| | 17,315 |
| | 17,315 |
|
Junior subordinated debentures | | 144,928 |
| | — |
| | — |
| | 129,200 |
| | 129,200 |
|
Other long term borrowings | | 584,255 |
| | — |
| | 560,530 |
| | — |
| | 560,530 |
|
Total term borrowings | | 792,751 |
| | — |
| | 560,530 |
| | 193,515 |
| | 754,045 |
|
Derivative liabilities (b) | | 234,984 |
| | 171,604 |
| | 42,210 |
| | 21,170 |
| | 234,984 |
|
Total liabilities | | $ | 9,863,825 |
| | $ | 171,604 |
| | $ | 9,485,714 |
| | $ | 214,685 |
| | $ | 9,872,003 |
|
| |
(a) | In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability. |
| |
(b) | Classes are detailed in the recurring and nonrecurring measurement tables. |
| |
(c) | Level 1 primarily consists of mutual funds with readily determinable fair values. Level 3 includes restricted investments in FHLB-Cincinnati stock of $562.0 million and FRB stock of $130.7 million. |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 72
Note 16 – Fair Value of Assets & Liabilities (Continued)
The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated StatementsBalance Sheets as of ConditionSeptember 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | Book Value | | Fair Value |
(Dollars in thousands) | | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | |
Loans and leases, net of allowance for loan and lease losses | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial, financial and industrial | | $ | 33,166,623 | | | $ | 0 | | | $ | 0 | | | $ | 33,295,053 | | | $ | 33,295,053 | |
Commercial real estate | | 12,302,929 | | | 0 | | | 0 | | | 12,304,261 | | | 12,304,261 | |
Consumer: | | | | | | | | | | |
Consumer real estate (a) | | 12,062,439 | | | 0 | | | 0 | | | 12,327,350 | | | 12,327,350 | |
| | | | | | | | | | |
Credit card & other | | 1,186,438 | | | 0 | | | 0 | | | 1,210,286 | | | 1,210,286 | |
Total loans and leases, net of allowance for loan and lease losses | | 58,718,429 | | | 0 | | | 0 | | | 59,136,950 | | | 59,136,950 | |
Short-term financial assets: | | | | | | | | | | |
Interest-bearing cash | | 5,443,292 | | | 5,443,292 | | | 0 | | | 0 | | | 5,443,292 | |
Federal funds sold | | 1,480 | | | 0 | | | 1,480 | | | 0 | | | 1,480 | |
Securities purchased under agreements to resell | | 591,987 | | | 0 | | | 591,987 | | | 0 | | | 591,987 | |
Total short-term financial assets | | 6,036,759 | | | 5,443,292 | | | 593,467 | | | 0 | | | 6,036,759 | |
Trading securities (b) | | 1,386,069 | | | 0 | | | 1,385,598 | | | 471 | | | 1,386,069 | |
Loans held for sale | | | | | | | | | | |
Mortgage loans (elected fair value) (b) | | 371,831 | | | 0 | | | 359,396 | | | 12,435 | | | 371,831 | |
USDA & SBA loans- LOCOM | | 595,228 | | | 0 | | | 599,501 | | | 776 | | | 600,277 | |
Other consumer loans- LOCOM | | 4,569 | | | 0 | | | 4,569 | | | 0 | | | 4,569 | |
Mortgage loans- LOCOM | | 78,876 | | | 0 | | | 0 | | | 78,876 | | | 78,876 | |
Total loans held for sale | | 1,050,504 | | | 0 | | | 963,466 | | | 92,087 | | | 1,055,553 | |
Securities available for sale (b) | | 7,995,872 | | | 0 | | | 7,962,913 | | | 32,959 | | | 7,995,872 | |
| | | | | | | | | | |
Derivative assets (b) | | 837,117 | | | 48,200 | | | 788,575 | | | 342 | | | 837,117 | |
Other assets: | | | | | | | | | | |
Tax credit investments | | 407,480 | | | 0 | | | 0 | | | 386,901 | | | 386,901 | |
Deferred compensation mutual funds | | 109,907 | | | 109,907 | | | 0 | | | 0 | | | 109,907 | |
Equity, mutual funds, and other (c) | | 315,828 | | | 24,712 | | | 0 | | | 291,116 | | | 315,828 | |
Total other assets | | 833,215 | | | 134,619 | | | 0 | | | 678,017 | | | 812,636 | |
Total assets | | $ | 76,867,965 | | | $ | 5,626,111 | | | $ | 11,694,019 | | | $ | 59,950,803 | | | $ | 77,270,933 | |
Liabilities: | | | | | | | | | | |
Defined maturity deposits | | $ | 5,525,913 | | | $ | 0 | | | $ | 5,602,997 | | | $ | 0 | | | $ | 5,602,997 | |
Trading liabilities (b) | | 477,073 | | | 0 | | | 477,073 | | | 0 | | | 477,073 | |
Short-term financial liabilities: | | | | | | | | | | |
Federal funds purchased | | 840,847 | | | 0 | | | 840,847 | | | 0 | | | 840,847 | |
Securities sold under agreements to repurchase | | 1,158,994 | | | 0 | | | 1,158,994 | | | 0 | | | 1,158,994 | |
Other short-term borrowings | | 141,878 | | | 0 | | | 141,878 | | | 0 | | | 141,878 | |
Total short-term financial liabilities | | 2,141,719 | | | 0 | | | 2,141,719 | | | 0 | | | 2,141,719 | |
Term borrowings: | | | | | | | | | | |
Real estate investment trust-preferred | | 46,287 | | | 0 | | | 0 | | | 47,000 | | | 47,000 | |
Term borrowings—new market tax credit investment | | 37,881 | | | 0 | | | 0 | | | 37,993 | | | 37,993 | |
Secured borrowings | | 15,314 | | | 0 | | | 0 | | | 15,314 | | | 15,314 | |
Junior subordinated debentures | | 237,475 | | | 0 | | | 0 | | | 229,699 | | | 229,699 | |
Other long term borrowings | | 1,824,913 | | | 0 | | | 1,929,827 | | | 0 | | | 1,929,827 | |
Total term borrowings | | 2,161,870 | | | 0 | | | 1,929,827 | | | 330,006 | | | 2,259,833 | |
Derivative liabilities (b) | | 109,448 | | | 45,051 | | | 47,257 | | | 17,140 | | | 109,448 | |
Total liabilities | | $ | 10,416,023 | | | $ | 45,051 | | | $ | 10,198,873 | | | $ | 347,146 | | | $ | 10,591,070 | |
(a)In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability.
(b)Classes are detailed in the recurring and nonrecurring measurement tables.
(c)Level 1 primarily consists of mutual funds with readily determinable fair values. Level 3 includes restricted investments in FHLB-Cincinnati stock of $85.6 million and FRB stock of $205.6 million.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 84
Note 17 – Fair Value of Assets & Liabilities (Continued)
The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Balance Sheets as of December 31, 2019:
| | | | December 31, 2019 | | | December 31, 2019 |
| | Book Value | | Fair Value | | | Book Value | | Fair Value |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | (Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | Assets: | | | | | | | | | | |
Loans, net of unearned income and allowance for loan losses | | | | | | | | | | | |
Loans and leases and allowance for loan and lease losses | | Loans and leases and allowance for loan and lease losses | |
Commercial: | | | | | | | | | | | Commercial: | |
Commercial, financial and industrial | | $ | 19,928,605 |
| | $ | — |
| | $ | — |
| | $ | 20,096,397 |
| | $ | 20,096,397 |
| Commercial, financial and industrial | | $ | 19,928,605 | | | $ | 0 | | | $ | 0 | | | $ | 20,096,397 | | | $ | 20,096,397 | |
Commercial real estate | | 4,300,905 |
| | — |
| | — |
| | 4,300,489 |
| | 4,300,489 |
| Commercial real estate | | 4,300,905 | | | 0 | | | 0 | | | 4,300,489 | | | 4,300,489 | |
Consumer: | | | | | | | | | | | Consumer: | |
Consumer real estate | | 6,148,696 |
| | — |
| | — |
| | 6,334,187 |
| | 6,334,187 |
| Consumer real estate | | 6,148,696 | | | 0 | | | 0 | | | 6,334,187 | | | 6,334,187 | |
Credit card & other | | 482,598 |
| | — |
| | — |
| | 487,079 |
| | 487,079 |
| Credit card & other | | 482,598 | | | 0 | | | 0 | | | 487,079 | | | 487,079 | |
Total loans, net of unearned income and allowance for loan losses | | 30,860,804 |
| | — |
| | — |
| | 31,218,152 |
| | 31,218,152 |
| |
Total loans and leases and allowance for loan and lease losses | | Total loans and leases and allowance for loan and lease losses | | 30,860,804 | | | 0 | | | 0 | | | 31,218,152 | | | 31,218,152 | |
Short-term financial assets: | | | | | | | | | | | Short-term financial assets: | |
Interest-bearing cash | | 482,405 |
| | 482,405 |
| | — |
| | — |
| | 482,405 |
| Interest-bearing cash | | 482,405 | | | 482,405 | | | 0 | | | 0 | | | 482,405 | |
Federal funds sold | | 46,536 |
| | — |
| | 46,536 |
| | — |
| | 46,536 |
| Federal funds sold | | 46,536 | | | 0 | | | 46,536 | | | 0 | | | 46,536 | |
Securities purchased under agreements to resell | | 586,629 |
| | — |
| | 586,629 |
| | — |
| | 586,629 |
| Securities purchased under agreements to resell | | 586,629 | | | 0 | | | 586,629 | | | 0 | | | 586,629 | |
Total short-term financial assets | | 1,115,570 |
| | 482,405 |
| | 633,165 |
| | — |
| | 1,115,570 |
| Total short-term financial assets | | 1,115,570 | | | 482,405 | | | 633,165 | | | 0 | | | 1,115,570 | |
Trading securities (a) | | 1,346,207 |
| | — |
| | 1,345,266 |
| | 941 |
| | 1,346,207 |
| Trading securities (a) | | 1,346,207 | | | 0 | | | 1,345,266 | | | 941 | | | 1,346,207 | |
Loans held-for-sale | | | | | | | | | | | |
Loans held for sale | | Loans held for sale | |
Mortgage loans (elected fair value) (a) | | 14,033 |
| | — |
| | — |
| | 14,033 |
| | 14,033 |
| Mortgage loans (elected fair value) (a) | | 14,033 | | | 0 | | | 0 | | | 14,033 | | | 14,033 | |
USDA & SBA loans- LOCOM | | 493,525 |
| | — |
| | 495,323 |
| | 947 |
| | 496,270 |
| USDA & SBA loans- LOCOM | | 493,525 | | | 0 | | | 495,323 | | | 947 | | | 496,270 | |
Other consumer loans- LOCOM | | 5,197 |
| | — |
| | 5,197 |
| | — |
| | 5,197 |
| Other consumer loans- LOCOM | | 5,197 | | | 0 | | | 5,197 | | | 0 | | | 5,197 | |
Mortgage loans- LOCOM | | 81,035 |
| | — |
| | — |
| | 81,035 |
| | 81,035 |
| Mortgage loans- LOCOM | | 81,035 | | | 0 | | | 0 | | | 81,035 | | | 81,035 | |
Total loans held-for-sale | | 593,790 |
| | — |
| | 500,520 |
| | 96,015 |
| | 596,535 |
| |
Securities available-for-sale (a) | | 4,445,403 |
| | — |
| | 4,426,267 |
| | 19,136 |
| | 4,445,403 |
| |
Total loans held for sale | | Total loans held for sale | | 593,790 | | | 0 | | | 500,520 | | | 96,015 | | | 596,535 | |
Securities available for sale (a) | | Securities available for sale (a) | | 4,445,403 | | | 0 | | | 4,426,267 | | | 19,136 | | | 4,445,403 | |
Securities held-to-maturity | | 10,000 |
| | — |
| | — |
| | 10,001 |
| | 10,001 |
| Securities held-to-maturity | | 10,000 | | | 0 | | | 0 | | | 10,001 | | | 10,001 | |
Derivative assets (a) | | 183,115 |
| | 20,640 |
| | 162,475 |
| | — |
| | 183,115 |
| Derivative assets (a) | | 183,115 | | | 20,640 | | | 162,475 | | | 0 | | | 183,115 | |
Other assets: | | | | | | | | | | | Other assets: | |
Tax credit investments | | 247,075 |
| | — |
| | — |
| | 244,755 |
| | 244,755 |
| Tax credit investments | | 247,075 | | | 0 | | | 0 | | | 244,755 | | | 244,755 | |
Deferred compensation assets | | 46,815 |
| | 46,815 |
| | — |
| | — |
| | 46,815 |
| Deferred compensation assets | | 46,815 | | | 46,815 | | | 0 | | | 0 | | | 46,815 | |
Equity, mutual funds, and other (b) | | 229,352 |
| | 22,643 |
| | — |
| | 206,709 |
| | 229,352 |
| Equity, mutual funds, and other (b) | | 229,352 | | | 22,643 | | | 0 | | | 206,709 | | | 229,352 | |
Total other assets | | 523,242 |
| | 69,458 |
| | — |
| | 451,464 |
| | 520,922 |
| Total other assets | | 523,242 | | | 69,458 | | | 0 | | | 451,464 | | | 520,922 | |
Total assets | | $ | 39,078,131 |
| | $ | 572,503 |
| | $ | 7,067,693 |
| | $ | 31,795,709 |
| | $ | 39,435,905 |
| Total assets | | $ | 39,078,131 | | | $ | 572,503 | | | $ | 7,067,693 | | | $ | 31,795,709 | | | $ | 39,435,905 | |
Liabilities: | | | | | | | | | | | Liabilities: | | | | | | | | | | |
Deposits: | | | | | | | | | | | Deposits: | |
Defined maturity | | $ | 3,618,337 |
| | $ | — |
| | $ | 3,631,090 |
| | $ | — |
| | $ | 3,631,090 |
| Defined maturity | | $ | 3,618,337 | | | $ | 0 | | | $ | 3,631,090 | | | $ | 0 | | | $ | 3,631,090 | |
Trading liabilities (a) | | 505,581 |
| | — |
| | 505,581 |
| | — |
| | 505,581 |
| Trading liabilities (a) | | 505,581 | | | 0 | | | 505,581 | | | 0 | | | 505,581 | |
Short-term financial liabilities: | | | | | | | | | | | Short-term financial liabilities: | |
Federal funds purchased | | 548,344 |
| | — |
| | 548,344 |
| | — |
| | 548,344 |
| Federal funds purchased | | 548,344 | | | 0 | | | 548,344 | | | 0 | | | 548,344 | |
Securities sold under agreements to repurchase | | 716,925 |
| | — |
| | 716,925 |
| | — |
| | 716,925 |
| Securities sold under agreements to repurchase | | 716,925 | | | 0 | | | 716,925 | | | 0 | | | 716,925 | |
Other short-term borrowings | | 2,253,045 |
| | — |
| | 2,253,045 |
| | — |
| | 2,253,045 |
| Other short-term borrowings | | 2,253,045 | | | 0 | | | 2,253,045 | | | 0 | | | 2,253,045 | |
Total short-term financial liabilities | | 3,518,314 |
| | — |
| | 3,518,314 |
| | — |
| | 3,518,314 |
| Total short-term financial liabilities | | 3,518,314 | | | 0 | | | 3,518,314 | | | 0 | | | 3,518,314 | |
Term borrowings: | | | | | | | | | | | Term borrowings: | |
Real estate investment trust-preferred | | 46,236 |
| | — |
| | — |
| | 47,000 |
| | 47,000 |
| Real estate investment trust-preferred | | 46,236 | | | 0 | | | 0 | | | 47,000 | | | 47,000 | |
| Secured Borrowings | | 21,975 |
| | — |
| | — |
| | 21,975 |
| | 21,975 |
| Secured Borrowings | | 21,975 | | | 0 | | | 0 | | | 21,975 | | | 21,975 | |
Junior subordinated debentures | | 144,593 |
| | — |
| | — |
| | 142,375 |
| | 142,375 |
| Junior subordinated debentures | | 144,593 | | | 0 | | | 0 | | | 142,375 | | | 142,375 | |
Other long term borrowings | | 578,564 |
| | — |
| | 574,287 |
| | — |
| | 574,287 |
| Other long term borrowings | | 578,564 | | | 0 | | | 574,287 | | | 0 | | | 574,287 | |
Total term borrowings | | 791,368 |
| | — |
| | 574,287 |
| | 211,350 |
| | 785,637 |
| Total term borrowings | | 791,368 | | | 0 | | | 574,287 | | | 211,350 | | | 785,637 | |
Derivative liabilities (a) | | 67,480 |
| | 19,807 |
| | 24,878 |
| | 22,795 |
| | 67,480 |
| Derivative liabilities (a) | | 67,480 | | | 19,807 | | | 24,878 | | | 22,795 | | | 67,480 | |
Total liabilities | | $ | 8,501,080 |
| | $ | 19,807 |
| | $ | 8,254,150 |
| | $ | 234,145 |
| | $ | 8,508,102 |
| Total liabilities | | $ | 8,501,080 | | | $ | 19,807 | | | $ | 8,254,150 | | | $ | 234,145 | | | $ | 8,508,102 | |
Certain previously reported amounts have been reclassified to agree with current presentation.
| |
(a) | Classes are detailed in the recurring and nonrecurring measurement tables. |
| |
(b) | Level 1 primarily consists of mutual funds with readily determinable fair values. Level 3 includes restricted investments in FHLB-Cincinnati stock of $76.0 million and FRB stock of $130.7 million. |
(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 $76.0 million and FRB stock of $130.7 million.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 7385
Note 1617 – 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 March 31,September 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Contractual Amount | | Fair Value |
(Dollars in thousands) | | September 30, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
Unfunded Commitments: | | | | | | | | |
Loan commitments | | $ | 20,627,190 | | | $ | 12,355,220 | | | $ | 1,823 | | | $ | 3,656 | |
Standby and other commitments | | 742,278 | | | 459,268 | | | 6,119 | | | 5,513 | |
|
| | | | | | | | | | | | | | | | |
| | Contractual Amount | | Fair Value |
(Dollars in thousands) | | March 31, 2020 | | December 31, 2019 | | March 31, 2020 | | December 31, 2019 |
Unfunded Commitments: | | | | | | | | |
Loan commitments | | $ | 10,966,768 |
| | $ | 12,355,220 |
| | $ | 2,909 |
| | $ | 3,656 |
|
Standby and other commitments | | 455,028 |
| | 459,268 |
| | 6,211 |
| | 5,513 |
|
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 7486
Note 1718 – Restructuring, Repositioning, and Efficiency
Beginning in 2019, FHN initiated a company-wide review of business practices with the goal of optimizing its expense base to improve profitability and create capacity to reinvest savings into technology and revenue production activities. Restructuring, repositioning, and efficiency charges related to these corporate-driven actions were not significant in first quarterthe nine months ended September 30, 2020 and were $12.2$38.7 million in first quarterthe nine months ended September 30, 2019 and are included in the Corporate segment. Significant expenses resulted from the following actions:
•Severance and other employee costs primarily related to efficiency initiatives within corporate
and bank services functions which are classified as Employee compensation, incentives and benefitspersonnel expense within noninterest expense.
•Expense largely related to the identification of efficiency opportunities within the organization which is reflected in Professionallegal and professional fees.
•Expense related to costs associated with asset impairments which is reflected in other expense.
Settlement of the obligations arising from current initiatives will be funded from operating cash flows.
Total expense recognized for the three and nine months ended March 31,September 30, 2020 and 2019 is presented in the table below:
|
| | | | | | | | |
| | Three Months Ended March 31 |
Dollars in thousands | | 2020 | | 2019 |
Employee compensation, incentives and benefits | | $ | 57 |
| | $ | 6,505 |
|
Professional fees | | 7 |
| | 4,295 |
|
Occupancy | | 2 |
| | 817 |
|
Other | | (103 | ) | | 535 |
|
Total restructuring and repositioning charges | | $ | (37 | ) | | $ | 12,152 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Dollars in thousands | | 2020 | | 2019 | | 2020 | | 2019 |
Personnel expense | | $ | 0 | | | $ | 1,182 | | | $ | 89 | | | $ | 10,244 | |
Legal and professional fees | | 2 | | | 6,488 | | | 16 | | | 15,025 | |
Net occupancy expense | | 0 | | | (128) | | | 2 | | | 761 | |
Other | | (83) | | | 300 | | | (185) | | | 12,632 | |
Total restructuring, repositioning, and efficiency charges | | $ | (81) | | | $ | 7,842 | | | $ | (78) | | | $ | 38,662 | |
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 7587
Note 18 – Other Events
In April 2020, First Horizon Bank issued $450 million of 5.750% Subordinated Notes due May 1, 2030. Interest payments are due semi-annually on May 1 and November 1, commencing November 1, 2020. The sale of the Notes resulted in net proceeds to the Company of approximately $446 million.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 76
---------------------------
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
---------------------------
TABLE OF ITEM 2 TOPICS
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 7788
| | | | | | | | | | | | | | |
General Information |
| | | | |
General Information |
INTRODUCTION
First Horizon National Corporation (“FHN”) began as a community bank chartered in 1864. FHN's sole class of common stock, $.625 par value, is listed and trades on the New York Stock Exchange LLC under the symbol FHN.
FHN is the parent company of First Horizon Bank. First Horizon Bank's principal divisions and subsidiaries operate under the brands of First Horizon Bank, IBERIABANK, First Horizon Advisors, and FHN Financial. FHN offers regional banking, wealth management and capital market services through the First Horizon family of companies. First Horizon Bank, IBERIABANK and First Horizon Advisors provide consumer and commercial banking and wealth management services. FHN Financial, which operates partly through a division of First Horizon Bank and partly through subsidiaries, is an industry leader in fixed income sales, trading, and strategies for institutional clients in the U.S. and abroad. First Horizon Bank has over 270490 banking offices in seven southeastern U.S.12 states, and FHN Financial has 29 offices in 18 states across the U.S.
SegmentsThe following financial discussion should be read with the accompanying unaudited Consolidated Financial Statements and Notes in this report. Additional information including the 2019 financial statements, notes, and management's discussion and analysis ("MD&A") is provided in Item 7 and 8 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2019.
RECENT EVENTS
Merger and Branch Purchase
On July 1, 2020, FHN and IBERIABANK Corporation ("IBKC") closed their merger-of-equals transaction (the "IBKC merger"). FHN issued approximately 243 million shares of FHN common stock, plus 3 new series of preferred stock (Series B, Series C, and Series D) in a transaction valued at $2.5 billion. At the time of closing, IBKC operated 319 offices in 12 states, mostly in the southern and southeastern U.S. During the third quarter of 2020, FHN recorded preliminary purchase price allocations related to the transaction and recognized a purchase accounting gain of $532.2 million.
On July 17, 2020, First Horizon Bank completed its purchase of 30 branches from Truist Bank. As part of the transaction, FHN assumed approximately $2.2 billion of branch deposits for a 3.40% deposit premium and purchased approximately $423.7 million of branch loans. The acquired branches are in communities in North Carolina (20 branches), Virginia (8 branches), and Georgia (2 branches).
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. Refer to Note 2 – Acquisitions and Divestitures in this report and in Item 7 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information.
COVID-19 Pandemic
The COVID-19 pandemic has caused and continues to cause significant, unprecedented disruption to the national economy as well as the local economies within FHN's footprint. FHN continues to closely monitor the pandemic and its effects on clients and the financial markets in which FHN conducts business. The impact of the pandemic and FHN's response are discussed in further detail in the Market Uncertainties and Prospective Trends section included in this MD&A.
SEGMENTS
FHN is composed of the following operating segments:
•Regional banking segment offers financial products and services, including traditional lending and deposit taking, to consumer and commercial customers primarily in the southeastsouthern and southeastern U.S. and other selected markets. Regional banking also provides investments,investment, wealth management, financial planning, trust services and asset management, mortgage banking, title, credit card, and cash management.management services. Additionally, the regional banking segment includes correspondent banking which provides credit, depository, and other banking related services to other financial institutions nationally.
•Fixed income 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, gain/(loss) on extinguishment of debt, acquisition- and integration-related costs, expenses associated with
rebranding initiatives, and various charges related to restructuring, repositioning, and efficiency efforts.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 89
•Non-strategic segment consists of run-off consumer lending activities, pre-2009 mortgage banking elements, 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.
Significant Pending Transactions
On November 4, 2019, FHN and IBERIABANK Corporation ("IBKC") announced that they had entered into an agreement and plan of merger under which IBKC will merge with FHN in a merger-of-equals transaction. IBKC, headquartered in Lafayette, Louisiana, has 319 offices in 12 states, mostly in the southern and southeastern U.S., and has reported $32.2 billion of total assets, $24.5 billion in loans, and $25.5 billion in deposits, at March 31, 2020. IBKC's common stock is listed on The NASDAQ Stock Market, LLC under the symbol IBKC. Under the merger agreement, each share of IBKC common stock will be converted into 4.584 shares of FHN common stock. After closing, FHN expects IBKC common shares will be converted into approximately 44 percent of the then-outstanding shares of FHN common stock. The merger agreement requires FHN to expand its board of directors to seventeen persons; after closing, eight board positions will be held by current IBKC directors, and nine will be held by current FHN directors. FHN expects the transaction to close in second quarter, subject to regulatory approvals and other customary closing conditions.
On November 8, 2019, FHN announced an agreement for First Horizon Bank to purchase 30 branches from SunTrust Bank in conjunction with SunTrust Banks, Inc.'s merger with BB&T Corporation, which created Truist Financial Corp. As part of the agreement, FHN will assume approximately $2.4 billion of branch deposits for a 3.40 percent deposit premium and purchase approximately $410 million of branch loans. The branches are in communities in North Carolina (20 branches), Virginia (8 branches), and Georgia (2 branches). FHN expects the purchase to close in third quarter 2020, subject to customary closing conditions.
In second quarter 2019, FHN sold a subsidiary acquired as part of the Capital Bank Financial Corporation ("CBF") merger (in 2017), that did not fit within FHN's risk profile. The sale resulted in the removal of approximately $25 million UPB of subprime consumer loans from Loans held-for-sale on FHN's Consolidated Condensed Statements of Condition.
In relation to all acquisitions, FHN's operating results include the operating results of the acquired assets and
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 78
assumed liabilities subsequent to the acquisition date. Refer to Note 2 – Acquisitions and Divestitures in this report and in Item 7 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information.
For the purpose of this management’s discussion and analysis (“MD&A”), earning assets have been expressed as averages, unless otherwise noted, and loans have been disclosed net of unearned income. The following financial discussion should be read with the accompanying unaudited Consolidated Condensed Financial Statements and Notes in this report. Additional information including the 2019 financial statements, notes, and MD&A is provided in Item 7 and 8 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2019.
ADOPTION OF ACCOUNTING UPDATES
Effective January 1, 2020 FHN adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," (CECL); which resulted in a $106.4 million increase to the allowance for loan losses ("ALLL") and a $24.0 million increase to the reserve for unfunded commitments, resulting in a $96.1 million decrease of retained earnings (net of taxes). See Note 1– Financial Information for additional information.
Non-GAAP Measures
Certain measures are included in the narrative and tables in this MD&A that are “non-GAAP”, meaning (under U.S. financial reporting rules) they are not presented in accordance with generally accepted accounting principles (“GAAP”) in the U.S. and also are not codified in U.S. banking regulations currently applicable to FHN.
Although other entities may use calculation methods that differ from those used by FHN for non-GAAP measures, FHN’s management believes such measures are relevant to understanding the capital position or financial results of FHN. Non-GAAP measures are reported to FHN’s management and Board of Directors through various internal reports.
Presentation of regulatory measures, even those which are not GAAP, provide a meaningful base for comparability to other financial institutions subject to the same regulations
as FHN, as demonstrated by their use by banking regulators in reviewing capital adequacy of financial institutions. Although not GAAP terms, these regulatory measures are not considered “non-GAAP” under U.S. financial reporting rules as long as their presentation conforms to regulatory standards.
Regulatory measures used in this MD&A include: common equity tier 1 capital, generally defined as common equity less goodwill, other intangibles, and certain other required regulatory deductions; tier 1 capital, generally defined as the sum of core capital (including common equity and instruments that cannot be redeemed at the option of the holder) adjusted for certain items under risk based capital regulations; and risk-weighted assets (“RWA”), which is a measure of total on- and off-balance sheet assets adjusted for credit and market risk, used to determine regulatory capital ratios.
The non-GAAP measuremeasures presented in this filing isare pre-provision net revenue ("PPNR"), return on average tangible common equity (“ROTCE”)., tangible common equity to tangible assets ("TCE/TA"), and tangible book value per common share. Refer to table 23Table 22 for a reconciliation of the non-GAAP to GAAP measuremeasures and presentation of the most comparable GAAP item.
items.
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Forward-Looking Statements |
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Forward-Looking Statements |
This MD&A contains forward-looking statementscertain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21 E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") with respect to FHN’sFHN's beliefs, plans, goals, expectations, and estimates. Forward-looking statements are not a representation of historical information, but instead pertain to future operations, strategies, financial results or other developments. TheThese statements often include the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “should,” “is"believe," "expect," "anticipate," "intend," "estimate," "should," "is likely,” “will,” “going forward,”" "will," "going forward" and other expressions that indicate future events and trends identify forward-looking statements.trends.
Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond FHN’sthe control of FHN, and many of which, with respect to future business decisions and actions, (including acquisitions and divestitures), are subject to change.change and which could cause actual results to differ materially from those contemplated or implied by forward-looking statements or historical performance. Examples of uncertainties and contingencies include factors previously disclosed in FHN's recent annual, quarterly, and current reports filed with the U.S. Securities
and Exchange Commission (the "SEC"), as well as the following factors, among other important factors: general economic and financial market conditions, including expectations of and actual timing and amount of interest rate movements including others:
•the slopepossibility that the anticipated benefits of the yield curve, competition, customerIBKC merger will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and investor responsescompetitive factors in any or all of FHN’s market areas;
•the possibility that the IBKC merger may be more expensive to these conditions, abilityintegrate than anticipated, including as a result of unexpected factors or events;
•diversion of management's attention from ongoing business operations and opportunities;
•potential adverse reactions or changes to executebusiness or employee relationships resulting from the IBKC merger;
•FHN’s success in executing its business plans geopolitical developments, recent and future legislativestrategies following the IBKC merger, and regulatory developments, natural disasters, managing the risks involved in the foregoing;
•the potential impacts on FHN’s businesses of the coronavirus COVID-19 pandemic, including negative impacts from quarantines, market declines, and volatility,
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 90
and changes in customer behavior related to the COVID-19 potential requirements for pandemic; and
•other factors that may affect future results of FHN.
FHN to repurchase, or compensate for losses from, previously sold or securitized mortgages or securities based on such mortgages; potential claims alleging mortgage servicing failures, individually, on a class basis, or as master servicer of securitized loans; potential claims relating to participation in government programs, especially lending or other financial services programs; expectations of and actual timing and amount of interest rate movements, including the slope and shape of the yield curve, which can have a significant impact on a financial services institution; market and monetary fluctuations, including fluctuations in mortgage markets; inflation or deflation; customer, investor, competitor, regulatory, and legislative responses to any or all of these conditions; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry;
geopolitical developments including possible terrorist activity; natural disasters; effectiveness and cost-efficiency of FHN’s hedging practices; technological changes; fraud, theft, or other incursions through conventional, electronic, or other means directly or indirectly affecting FHN or 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 Tennessee Department of Financial Institutions ("TDFI") and its Commissioner, the Board of Governors of the Federal Reserve System (“Federal Reserve” or “Fed”), the Federal Deposit Insurance Corporation (“FDIC”), the Financial Industry Regulatory Authority (“FINRA”), the U.S. Department of the Treasury (“U.S. Treasury”), the Municipal Securities Rulemaking Board (“MSRB”), the Consumer Financial Protection Bureau (“CFPB”), the Office of the Comptroller of the Currency ("OCC"), the Financial Stability Oversight Council (“Council”), the Public Company Accounting Oversight Board (“PCAOB”), and other regulators and agencies; pending, threatened, or possible future regulatory, administrative, and judicial outcomes, actions, and proceedings; current or future Executive orders; changes in laws and regulations applicable to FHN; and FHN’s success in executing its business plans and strategies and managing the risks involved incautions that the foregoing list of important factors that may affect future results is not exhaustive. Additional factors that 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 madecan be
found in this Quarterly Report of which this MD&A is a part or otherwise from time to time. Actual results could differFHN's annual report on Form 10-K for the year ended December 31, 2019, 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 Reportits quarterly reports on Form 10-Q for the periodperiods ended March 31, 2020 and June 30, 2020, all filed with the SEC and available on the SEC’s website, http://www.sec.gov, and also available in the "Investor Relations" section of FHN's website, http://www.FirstHorizon.com, under the heading "SEC Filings," and in other documents incorporated into this Quarterly Report.
FHN files with the SEC.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 80
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Financial Summary |
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Financial Summary |
As previously mentioned, effective January
FHN's results of operations for the third quarter of 2020 were significantly impacted by the IBKC merger on July 1 2020, FHN adopted ASU 2016-13, (CECL). Application of CECL methodology creates larger immediate impactsand to a much lesser extent the Truist branch acquisition on credit loss estimates in unanticipated rapid declines in economic projections when compared to the prior incurred loss estimation methodology. The sudden, steep decline in the economic forecast associated with the Coronavirus Disease 2019 (“COVID-19”) pandemic late in firstJuly 17.
Quarterly Financial Performance Summary
Third quarter 2020 resulted in a significant increase in loan loss provision expense and the reserve for unfunded commitments, negatively impacting FHN’s operating results in first quarter 2020.
In first quarter 2020, FHN reported net income available to common shareholders of $12.1 was $523.3 million, or $.04$0.95 per diluted share, compared to $109.5 million, or $0.35 per diluted share in third quarter 2019.
Net interest income increased 77% to $532.4 million in the third quarter of 2020 primarily from an increase in average interest-earning assets as a result of the IBKC merger and Truist branch acquisition, deposit pricing discipline and PPP lending, partially offset by the negative impact of lower interest yields on loans from the decline in LIBOR and Prime rates.
The provision for credit losses totaled $227.0 million for the third quarter of 2020 compared to $14.4 million for the same quarter of 2019. The increase in provision was primarily attributable to $147.0 million in provision related to non-purchased credit deteriorated ("non-PCD") loans acquired from the IBKC merger and Truist branch acquisition, the adoption of CECL, and deterioration in the overall macro-economic outlook from the effects of the COVID-19 pandemic.
Noninterest income increased $651.2 million to $822.9 million in the third quarter 2020, primarily from a $532.2 million preliminary purchase accounting gain recognized as a result of the IBKC merger. The increase in noninterest income was also driven by the addition of IBKC as well as strong fixed income revenue during the quarter.
Noninterest expense increased 90% to $587.0 million for the quarter ended September 30, 2020 compared to $308.3 million for the same period in 2019. Noninterest expense for the third quarter of 2020 included $116 million in merger and acquisition-related costs. In addition, noninterest expense increased from the addition of IBKC during the quarter, primarily in personnel expense.
Year-to-Date Financial Performance Summary
For the nine months ended September 30, 2020, net income available to common of $99.0shareholders was $587.7 million, or $.31$1.50 per diluted share, compared to $317.9 million, or $1.00 per diluted share, for the nine months ended September 30, 2019.
Net interest income for the nine months ended September 30, 2020 increased 27% to $1.1 billion. The same factors that contributed to the third quarter 2020 increase in first quarter 2019. The decline in results in first quarternet interest income also drove the increase for the year-to-date period of 2020 relative to the prior yearyear.
The provision for credit losses was driven by a significant$502.4 million for the nine months ended September 30, 2020 compared to $36.3 million for the comparable 2019 period. The increase in loan loss provision expense and an increasewas primarily attributable to deterioration in the reserve for unfunded commitments, somewhat offset by higher revenue.
Total revenue increased 10 percent to $477.6 million in first quarter 2020overall macro-economic outlook from $435.6 million in first quarter 2019. NII increased to $302.8 million in first quarter 2020 from $294.5 million in first quarter 2019 primarily due to strong loan and deposit growth, favorable deposit costs, and the maturity of $400 million of senior debt in fourth quarter 2019. Lower loan yields compared to first quarter 2019 negatively impacted NII in first quarter 2020, offsetting a portioneffects of the overall increase in NII. COVID-19 pandemic, CECL adoption, and provision related to non-PCD loans acquired from the IBKC merger and Truist branch acquisition.
Noninterest income increased 24 percent, or $33.7$733.2 million, to $1.2 billion in the first quarternine months of 2020, driven by higher fixed income revenue, somewhat offset by a decrease in deferred compensation income relative to firstthe same factors as noted for the third quarter 2019.of 2020.
Noninterest expense increased 5 percentincreased 34% to $311.9$1.2 billion compared to $904.9 million for the same period in first quarter 2020 from $296.1 million in first quarter 2019. The expense increase in first quarter 2020, was due in large part to an increase in credit expense on unfunded
commitments associated with economic uncertainty attributable to the COVID-19 pandemic,2019, largely as well asa result of merger and acquisition-related expenses and higher personnel-related expenses,charitable contributions, somewhat offset by lower restructuring and rebranding related expenses.
Financial Condition Summary
Average assets increased to $81.7 billion for the third quarter of 2020 from $41.9 billion for the third quarter of 2019. For the nine months ended September 30, 2020, average assets increased to $57.8 billion from $41.4 billion for the same period in 2019.
Average loans and leases increased to $60.1 billion in third quarter 2020 from $30.0 billion in third quarter 2019. For the nine months ended September 30, 2020, average loans
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 91
and leases increased to $41.6 billion from $28.7 billion in 2019.
Average deposits increased to $67.1 billion for the third quarter of 2020 from $32.4 billion for third quarter of 2019. For the nine months ended September 20, 2020, average deposits increased to $45.9 billion from $32.3 billion for the prior year period.
Asset quality trends in first quarter 2020ratios were relatively consistent with trends in first quarterstable at September 30, 2020, tempered by relief from both the CARES Act and Interagency Guidance. As of September 30, 2020, nonperforming loans and leases were 0.75% of total loans
and leases compared to 0.52% at December 31, 2019. The NPL ratioallowance for loan and 30+ delinquencies improved from .65 percentlease losses to nonperforming loans and .23 percent, respectively in first quarter 2019 to .57 percent and .19 percent, respectively in first quarter 2020. Net charge offs increased from .07 percent in first quarter 2019 to .10 percent in first quarter 2020 primarily driven by two credits.
Return on average common equity (“ROCE”) and ROTCE were 1.05 percent and 1.59 percent, respectively, in first quarter 2020leases was 221% compared to 9.09 percent124% at December 31, 2019. The higher coverage ratio reflects CECL adoption, as well as reserve build in 2020 in connection with COVID-19 and 14.17 percent, respectively, in first quarter 2019. Return on average assets (“ROA”) declined to .15 percent in first quarter 2020 from 1.03 percent in first quarter 2019. Key financial ratios were negatively impacted in first quarter 2020 by the large increase in loan loss provision expense.economic downturn.
FHN maintained strong capital measures. Common Equity Tier 1, Tier 1, Total Capital, and Leverage ratios were 8.54 percent, 9.52 percent, 10.78 percent,9.21%, 10.25%, 12.05%, and 9.00 percent,8.25%, respectively, in first third quarter 2020 down from 9.62 percent, 10.65 percent, 11.78 percent,compared to 9.20%, 10.15%, 11.22%, and 9.02 percent,9.04%, respectively, at December 31, 2019.
Key Performance Indicators
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| As of or for the three months ended September 30, | | As of or for the nine months ended September 30, | |
(Dollars in thousands, except per share data) | 2020 | | 2019 | | 2020 | | 2019 | |
Pre-Provision Net Revenue ("PPNR") (a) | $ | 768,248 | | | $ | 164,105 | | | $ | 1,134,320 | | | $ | 464,684 | | |
Diluted earnings per common share | $ | 0.95 | | | $ | 0.35 | | | $ | 1.50 | | | $ | 1.00 | | |
Return on average assets (annualized) (b) | 2.63 | % | | 1.08 | % | | 1.41 | % | | 1.07 | % | |
Return on average common equity (“ROCE”) (annualized) (c) | 28.49 | % | | 9.50 | % | | 14.18 | % | | 9.47 | % | |
Return on average tangible common equity (“ROTCE”) (annualized) (a) (d) | 37.75 | % | | 14.49 | % | | 20.13 | % | | 14.60 | % | |
Net interest margin (e) | 2.84 | % | | 3.21 | % | | 2.93 | % | | 3.29 | % | |
Fee income to total revenue (f) | 60.75 | % | | 36.34 | % | | 51.41 | % | | 34.37 | % | |
Efficiency ratio (g) | 43.31 | % | | 65.14 | % | | 51.56 | % | | 66.08 | % | |
Allowance for loan and lease losses to total loans and leases | 1.65 | % | | 0.62 | % | | 1.65 | % | | 0.62 | % | |
Net charge-offs to average loans and leases (annualized) | 0.44 | % | | 0.19 | % | | 0.22 | % | | 0.08 | % | |
Total period-end equity to period-end assets | 9.81 | % | | 11.43 | % | | 9.81 | % | | 11.43 | % | |
Tangible common equity to tangible assets ("TCE/TA") (a) | 6.78 | % | | 7.20 | % | | 6.78 | % | | 7.20 | % | |
Cash dividends declared per common share | $ | 0.15 | | | $ | 0.14 | | | $ | 0.45 | | | $ | 0.42 | | |
Book value per common share | $ | 13.30 | | | $ | 14.80 | | | $ | 26.46 | | | $ | 14.80 | | |
Tangible book value per common share (a) | $ | 9.92 | | | $ | 9.76 | | | $ | 22.42 | | | $ | 9.47 | | |
Common equity Tier 1 | 9.15 | % | | 9.01 | % | | 9.15 | % | | 9.01 | % | |
Market capitalization (millions) | $ | 5,231.7 | | | $ | 5,041.1 | | | $ | 5,231.7 | | | $ | 5,041.1 | | |
(a) Represents a non-GAAP measure which is reconciled in first quarter 2019 driventhe non-GAAP to GAAP reconciliation in table 22.
(b) Calculated using net income divided by average assets.
(c) Calculated using net income available to common shareholders divided by average common equity.
(d) Calculated using net income available to common shareholders divided by average tangible common equity.
(e) Net interest margin is computed using total net interest income adjusted to an FTE basis assuming a statutory federal income tax rate of 21% and, where applicable, state income taxes.
(f) Ratio is fee income excluding securities gains (losses) to total revenue excluding securities gains (losses).
(g) Ratio is noninterest expense to total revenue excluding securities gains (losses).
Key financial ratios were impacted during the three and nine months ended September 30, 2020 by the IBKC merger and to a lesser extent the Truist branch acquisition, as well as a large increase in risk-weighted assetsprovision for credit losses due to higher loan balances and an increasethe deterioration in fixed income market risk assets. Average assets increasedthe economic forecast related to $43.6 billion in first quarter 2020 from $40.9 billion in first quarter 2019. Average loans and average deposits increased to $30.5 billion and $32.9 billion, respectively, in first quarter 2020, up 12 percent and 1 percent from first quarter 2019. Period-end Shareholders’ equity increased to $5.1 billion in first quarter 2020 from $4.8 billion in first quarter 2019. Average Shareholders’ equity increased to $5.0 billion in first quarter 2020 from $4.8 billion in first quarter 2019.
the effects of the COVID-19 pandemic. | | | | | | | | | | | | | | |
Business Line Review |
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Business Line Review |
Regional Banking
Pre-tax income within the
Third quarter 2020 regional banking segment was $25.6 million in first quarter 2020, down from $147.0 million in first quarter 2019. The decrease in pre-tax income was $155.4 million, down from $174.6 million in third quarter 2019. For the nine months ended September 30, 2020,
regional banking pre-tax income was $297.0 million compared to $488.8 million for the nine months ended September 30, 2019. The decrease in pre-tax income in 2020 reflected an increase in the provision for credit losses
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 92
and noninterest expense somewhat offset by an increase in revenue.
Total revenue increased 95%, or $368.0 million, to $756.4 million in third quarter 2020 from $388.4 million in third quarter 2019, primarily driven by an increase in loan loss provision expense,NII due to interest-earning asset growth from the IBKC merger and higher credit expense on unfunded commitments somewhat offset by increaseTruist branch acquisition. Noninterest income increased $86.5 million to $172.5 million in revenue.
Total revenue increased 6 percent to $382.0 million in firstthird quarter 2020 from $359.1 million in first quarter 2019, driven by increases in NII and noninterest income. The
increase in NII was primarily due to strong loan and deposit growth and favorable deposit costs, which more than offset lower loan yields compared to first quarter 2019. Noninterest income increased 12 percent or $8.8 million to $81.9 million in first quarter 2020 from $73.0$85.9 million in the prior year. Mortgage banking and title income increased $63.9 million primarily as a result of the IBKC merger and higher activity due to the low rate environment. Noninterest income was also positively impacted by increases in other fee income driven by the addition of IBKC.
Provision expense increased to $227.3 million in third quarter 2020 from $19.8 million in third quarter 2019, primarily driven by $147.0 million in provision related to acquired non-PCD loans, CECL adoption, and deterioration in the overall macro-economic outlook from the effects of the COVID-19 pandemic.
Noninterest expense was $373.7 million in third quarter 2020, up from $194.0 million in third quarter 2019. The increase in noninterest incomein expense was primarily driven by anthe addition of IBKC. Personnel expense increased $82.3 million primarily due to increased headcount from the IBKC merger and Truist branch acquisition as well as higher incentives. Occupancy expense and amortization of intangible assets also increased as a result of the IBKC merger and Truist branch acquisition.
Total revenue increased 39%, or $440.8 million, to $1.6 billion in the nine months ended 2020 from $1.1 billion in the nine months ended 2019, driven by increases in NII and noninterest income. The increase in feesNII for the year-to-date period of 2020 was driven by acquisition-related growth, deposit pricing discipline, and PPP lending, partially offset by the negative impact of lower interest yields on loans from derivative sales, higherthe decline in LIBOR and Prime rates. Noninterest income increased 39% or $93.1 million to $333.7 million in the nine months ended 2020 from $240.6 million in the prior year. Mortgage banking and title income increased $66.0 million to $71.2 million primarily from the addition of IBKC. A $7.9 million increase in brokerage, management fees and commissions was driven by the inclusion of IBKC in third quarter and an increase in other service chargeshigher advisory revenue partially offsetand annuity income as a result of increased transaction volume. Trust services and investment management increased $7.4 million driven by lower fees from deposit transactions and cash management activities relativethe inclusion of IBKC when compared to first quarter 2019.
the prior year.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 81
Provision expense increased to $145.4 $501.5 million in first quarterfor the nine months ended September 30, 2020 from $13.4$51.0 million in first quarterfor the nine months ended September 30, 2019, primarily driven by the applicationadoption of CECL, methodology and a sudden, steep declinedeterioration in the economic forecast attributable to the effects of the COVID-19 pandemic.pandemic and provision related to acquired non-PCD loans.
Noninterest expense was $211.0 $768.9 million in first quarterfor the nine months ended September 30, 2020, up from $198.6$586.7 million in first quarterfor the nine months ended September 30, 2019. The increase in expense was primarily driven by a $8.8 million increase in the credit expense on unfunded commitments largely associated withinclusion of IBKC during the application of CECL methodology with a sudden, steep decline in economic forecast attributable to the COVID-19 pandemic. An increase in FDIC premium expense due to balance sheet growth and expected loss severity ratios as well as $1.0 million of additional credit risk adjustments related to Regional Banking interest rate derivatives and swap participations also contributed to the overall increase in expenses in first quarter 2020 compared to the prior year..
Fixed Income
Pre-taxFixed income pre-tax income increased to $55.0 million in the fixed income segment more than doubled to $25.6 million in firstthird quarter 2020 from $10.6$15.5 million in firstthird quarter 2019. The increase inFor the nine months ended September 30, 2020 fixed income pre-tax income in first quarter 2020 was driven by higher revenue, somewhat offset by an increase in expenses.income increased to $124.3 million from $42.4 million for the nine months ended September 30, 2019.
Noninterest incomeincome increased 78 percent,42%, or $41.9$33.0 million, to $95.7$110.8 million in firstthird quarter 20202020 from $53.8$77.8 million in firstthird quarter 2019. AverageFixed income product average daily revenue (“ADR”) increased to $1.3 million$1.5 million in firstthird quarter 20192020 from $729$994 thousand in firstthird quarter 2019, due to elevated levels of commissionable revenues, partially offset by elevated levels of trading losses driven by extremefavorable market conditions including market volatility as compared to first quarter 2019.and increased depository liquidity. Other product revenue was $17.4$11.9 million in first quarterthird quarter 2020, updown from $9.3$14.2 million in the prior year, primarily driven by decreases in fees from derivative and loan sales. NII was $11.6 million in third quarter 2020, up from $5.3 million in third quarter 2019, primarily due to higher spreads on inventory positions compared to prior year.
Noninterest expense remained relatively flat at $67.4 million in third quarter 2020 compared to $67.6 million in third quarter 2019 as an increase in variable compensation associated with increased revenues in 2020 was offset by a $7.5 million net impact related to the resolution of legal matters in third quarter 2019.
Noninterest income increased 62%, or $122.5 million, to $319.7 million for the nine months ended September 30, 2020 from $197.2 million in the nine months ended September 30, 2019. Fixed income product revenue increased to $277.5 million for the nine months ended September 30, 2020 from $162.7 million for the nine months ended September 30, 2019, largely driven by the same factors impacting the quarterly period. Other product revenue was $42.2 million in the nine months ended September 30, 2020, up 22% from $34.6 million in the prior year, driven by increases in fees from derivative sales and portfolio advisory services, somewhat offset by lower fees from loan sales. NII was $10.9$36.1 million and $18.8 million, respectively, for the nine months ended September 30, 2020 and 2019. The increase was due in first quarter 2020, up from $7.3 million in first quarter 2019, primarily duelarge part to higher spreads on inventory positions in addition to higher inventory balances compared to prior year.
Noninterest expense was $81.1 $231.5 million in first quarterfor the nine months ended September 30, 2020 compared to $50.5$173.7 million in first quarterfor the nine months ended September 30, 2019, primarily driven by higher variable compensation due to increased commissionable revenues.revenues, somewhat offset by the $7.5 million
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 93
net impact related to the resolution of legal matters previously mentioned.
Corporate
The pre-tax lossPre-tax income for the corporate segment was $32.5 $327.6 million in firstthird quarter 2020 compared to $36.3pre-tax loss of $48.2 million in firstthird quarter 2019. For the nine months ended September 30, 2020, pre-tax income for the corporate segment was $203.6 million compared to pre-tax loss of $137.1 million in the prior year. The increase in income before income taxes was primarily driven by the purchase accounting gain from the IBKC merger.
Net interest expense was $13.4 million $69.2 million and $7.9$13.2 million in firstthird quarter 2020 and 2019, respectively. Net interest expense was negatively impactedimpacted by lower average balances of excess cash at the Federal reserve (“Fed”funds transfer pricing ("FTP") and AFS securities, somewhatmethodology (with offset by the maturity of $400 million of senior debt in fourth quarter 2019.regional banking segment). Noninterest income/(loss)(including securities gain/losses)income in firstthird quarter 2020 was negative $3.7 $539.7 million, compared to $13.4up from $7.4 million in firstthird quarter 2019, primarily due to a $15.0 million decrease in deferred compensation income driven by negative equity market valuations relative to the prior year.preliminary purchase accounting gain from the IBKC merger.
Noninterest expense decreased 63 percent or $26.3increased $100.6 million from $41.8 to $142.9 million in firstthird quarter 2019 to $15.52020 from $42.3 million in firstthird quarter 2020.2019. The decreaseincrease in expense for firstthird quarter 2020 was primarily driven by decreasesan increase in deferred compensation expense,merger and integration-related charges relative to third quarter 2019 and the inclusion of IBKC, somewhat offset by $7.8 million of restructuring costs associated with efficiency initiatives and $3.1 million in rebranding expenses relativerecognized in 2019.
Net interest expense was $145.8 million and $28.1 million for the nine months ended September 30, 2020 and 2019, respectively, as net interest expense for the nine months ended September 30, 2020 was also negatively impacted by FTP. Noninterest income for the nine months ended September 30, 2020 was $548.9 million compared to first quarter$30.1 million in the nine months ended 2019, primarily a result of the purchase accounting gain from the IBKC merger.
Noninterest expense increased 43% or $60.4 million to $199.5 million for the nine months ended September 30, 2020 from $139.1 million for the nine months ended
September 30, 2019. ThisThe increase in expense decreasefor the nine months ended September 30, 2020 was primarily driven by a $97.6 million increase in merger and integration-related charges and expenses associated with the inclusion of IBKC, somewhat offset by an increase$38.7 million of restructuring costs and $12.2 million in pension expense.rebranding expenses recognized in 2019.
Non-Strategic
The non-strategic segment had pre-tax income of $2.6 of $3.3 million in firstthird quarter 2020 compared to $9.2$7.8 million in firstthird quarter 2019. The decreaseFor the nine months ended September 30, 2020 the non-strategic segment had pre-tax income of $7.0 million compared to $34.3 million for the nine months ended September 30, 2019.
Total revenue was $6.0 million in resultsthird quarter 2020 down from $6.8 million in third quarter 2019. For the nine months ended September 30, 2020, total revenue was $18.3 million, down from $25.1 million for first quarter 2020 was driven by a smaller provision credit and athe nine months ended September 30, 2019. The decline in NII relative to first quarter 2019 somewhat offset by a decrease in expenses.
Total revenue was $6.0 million in first quarter 2020 down from $9.9 million in first quarter 2019. NII decreased to $5.1 million in first quarter 2020 from $9.1 million in first quarter 2019,is primarily due to continued run-off of the loan portfolios. Noninterest income was $.9 million in first quarter 2020 and 2019.
The provision for loancredit losses within the non-strategic segment was a provision credit of $.4$0.3 million in firstthird quarter 2020 compared to a provision credit of $4.4$5.5 million in third quarter 2019. The provision for credit losses within the non-strategic segment was an expense of $0.9 million for the nine months ended September 30, 2020 compared to a provision credit of $14.7 million in the prior year. The reductionThe increase in provision credit in first quarter 2020expense was due to additional consumer reserves associated with a sudden, steep declinedriven by deterioration in the economic forecast attributable to the effects of the COVID-19 pandemic.
Noninterest expense decreased 27 percent to $3.8was $10.3 million and $5.5 million, respectively, for the nine months ended September 30, 2020 and 2019. The increase in first quarternoninterest expense in the nine months ended September 30, 2020 from $5.2 million in first quarterwas the result of the favorable impact of a litigation expense reversal on expenses during the nine months ended September 30, 2019.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 82
| | | | | | | | | | | | | | |
Results of Operations |
| | | | |
Income Statement Review |
Total consolidated revenue was $477.6 million in first quarter 2020, up 10 percent from $435.6 million in first quarter 2019 driven by a 24 percent increase in noninterest income and a 3 percent increase in NII. Provision expense increased significantly from $9.0 million in first quarter 2019 to $145.0 million in first quarter 2020 primarily driven by a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic. Total consolidated expenses increased 5 percent to $311.3 million in first quarter 2020 from $296.1 million in first quarter 2019, driven by an increase in expense on unfunded commitments and higher personnel-related expenses, somewhat offset by lower restructuring and rebranding related expenses.
Net Interest Income
Net interest income was $302.8 million in first quarter 2020, up from $294.5 million in first quarter 2019. The increase in NII was primarily attributable to strong loan and deposit growth, favorable deposit costs, and the maturity of $400 million of senior debt in fourth quarter 2019, somewhat offset by lower loan yields compared to first quarter 2019. Average earning assets increased to $38.8 billion in first quarter 2020 from $36.3 billion in first quarter 2019.
The increase in average earning assets was primarily driven by increases in loans, securities purchased under agreement to resell ("asset repos"), and fixed income inventory, somewhat offset by decreases in interest-bearing cash.
For purposes of computing yields and the net interest margin, FHN adjusts net interest income to reflect tax-exempt income on an equivalent pre-tax basis which provides comparability of net interest income arising from both taxable and tax-exempt sources.
The consolidated net interest margin was 3.16 percent in first quarter 2020 down 15 basis points from 3.31 percent in first quarter 2019. The net interest spread was 2.89 percent in first quarter 2020, down 3 basis points from 2.92 percent in first quarter 2019. The decrease in NIM in first quarter 2020 was primarily the result of the negative impact of interest rates (including LIBOR and Prime) relative to first quarter 2019. Additionally, higher balances of trading securities negatively impacted NIM in first quarter 2020, but was somewhat mitigated by loan and deposit growth, lower balances of cash held at the Fed, and the maturity of $400 million of senior debt in fourth quarter 2019.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 83
Table 1—Income/Net Interest Margin
|
| | | | | |
| Three Months Ended March 31 |
| 2020 | | 2019 |
Assets: | | | |
Earning assets: | | | |
Loans, net of unearned income: | | | |
Commercial loans | 4.33 | % | | 5.08 | % |
Consumer loans | 4.33 |
| | 4.59 |
|
Total loans, net of unearned income | 4.33 |
| | 4.96 |
|
Loans held-for-sale | 4.67 |
| | 5.89 |
|
Investment securities: | | | |
U.S. government agencies | 2.32 |
| | 2.68 |
|
States and municipalities | 3.35 |
| | 4.33 |
|
Corporates and other debt | 4.67 |
| | 4.37 |
|
Other | 33.76 |
| | 34.56 |
|
Total investment securities | 2.51 |
| | 2.79 |
|
Trading securities | 2.91 |
| | 3.80 |
|
Other earning assets: | | | |
Federal funds sold | 1.05 |
| | 2.63 |
|
Securities purchased under agreements to resell | 1.13 |
| | 2.21 |
|
Interest-bearing cash | 1.13 |
| | 2.41 |
|
Total other earning assets | 1.13 |
| | 2.38 |
|
Interest income / total earning assets | 3.94 | % | | 4.49 | % |
Liabilities: | | | |
Interest-bearing liabilities: | | | |
Interest-bearing deposits: | | | |
Savings | 0.87 | % | | 1.36 | % |
Other interest-bearing deposits | 0.65 |
| | 1.05 |
|
Time deposits | 1.67 |
| | 1.91 |
|
Total interest-bearing deposits | 0.90 |
| | 1.35 |
|
Federal funds purchased | 1.19 |
| | 2.50 |
|
Securities sold under agreements to repurchase | 1.36 |
| | 2.06 |
|
Fixed income trading liabilities | 1.76 |
| | 3.04 |
|
Other short-term borrowings | 1.20 |
| | 3.40 |
|
Term borrowings | 4.01 |
| | 4.89 |
|
Interest expense / total interest-bearing liabilities | 1.05 |
| | 1.57 |
|
Net interest spread | 2.89 | % | | 2.92 | % |
Effect of interest-free sources used to fund earning assets | 0.27 |
| | 0.39 |
|
Net interest margin (a) | 3.16 | % | | 3.31 | % |
(a) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 21 percent and, where applicable, state income taxes.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 84
FHN’s net interest margin is primarily impacted by its balance sheet mix, including the levels of fixed and floating rate loans, rate sensitive and non-rate sensitive liabilities, cash levels, trading inventory levels as well as loan fees and cash basis income. For 2020, NIMNet interest margin will also depend on potentially modest loan growth, rate impact from the elevated spread of LIBOR to Fed Funds, widening credit spreads, PPP fees, Fixed Incomefixed income trading inventory and the extent of assets moving to nonaccrual status. For purposes of
PROVISION FOR LOAN LOSSES
computing yields and the net interest margin, FHN adjusts net interest income to reflect tax-exempt income on an equivalent pre-tax basis, which provides comparability of net interest income arising from both taxable and tax-exempt sources.
Third Quarter 2020 compared to Third Quarter 2019
Net interest income was $532.4 million in third quarter 2020, up from $300.7 million in third quarter 2019. The increase was primarily attributable to growth in average earning assets from the IBKC merger and Truist branch
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 94
acquisition, deposit pricing discipline, and PPP lending, partially offset by the negative impact of lower interest yields on loans from the decline of LIBOR and Prime rates.
The consolidated net interest margin was 2.84% in third quarter 2020, down 37 basis points from 3.21% in third quarter 2019. The net interest spread was 2.68% in third quarter 2020, down 15 basis points from 2.83% in third quarter 2019. The decline in net interest margin for the quarter ended September 30, 2020 was primarily the result of the negative impact of lower interest rates (including LIBOR and Prime) on loan yields, somewhat mitigated by deposit pricing discipline, purchase accounting accretion and the impact of PPP. For the third quarter of 2020, an increase in average excess cash also negatively impacted net interest margin relative to the prior year.
Average earning assets increased to $75.0 billion for the quarter ended September 30, 2020 from $37.4 billion for the same quarter of 2019, primarily driven by the IBKC merger and Truist branch acquisition.
Nine Months of 2020 compared to Nine Months of 2019
For the nine months ended September 30, 2020, net interest income was $1.1 billion, up from $898.8 million for the nine months ended September 30, 2019. The same factors that contributed to the third quarter 2020 increase in net interest income also drove the increase for the year-to-date period of 2020 relative to the prior year.
Average earning assets increased to $52.2 billion for the nine months ended September 30, 2020 from $36.8 billion for the nine months ended September 30, 2019, primarily driven by the IBKC merger and Truist branch acquisition.
For the nine months ended September 30, 2020, the net interest margin was 2.93%, down 36 basis points from 3.29% for the nine months ended September 30, 2019. The decline in net interest margin for the nine months ended September 30, 2020 was primarily the result of the negative impact of lower interest rates (including LIBOR and Prime) on loan yields, somewhat mitigated by deposit pricing discipline, purchase accounting accretion, and the impact of PPP lending.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 95
Table 1—Net Interest Margin
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Assets: | | | | | | | |
Earning assets: | | | | | | | |
Loans and leases: | | | | | | | |
Commercial | 3.59 | % | | 4.78 | % | | 3.76 | % | | 4.96 | % |
Consumer | 4.11 | | | 4.55 | | | 4.13 | | | 4.60 | |
Total loans and leases | 3.70 | | | 4.73 | | | 3.84 | | | 4.88 | |
Loans held for sale | 3.36 | | | 5.33 | | | 3.77 | | | 5.57 | |
Investment securities: | | | | | | | |
U.S. government agencies | 1.12 | | | 2.45 | | | 1.69 | | | 2.58 | |
States and municipalities | 1.74 | | | 3.51 | | | 2.17 | | | 3.66 | |
Corporates and other debt | 4.66 | | | 4.57 | | | 4.59 | | | 4.33 | |
| | | | | | | |
Other | 33.76 | | | 34.71 | | | 33.67 | | | 34.76 | |
Total investment securities | 1.21 | | | 2.62 | | | 1.80 | | | 2.72 | |
Trading securities | 2.08 | | | 3.06 | | | 2.55 | | | 3.43 | |
Other earning assets: | | | | | | | |
Federal funds sold and securities purchased under agreements to resell | 0.04 | | | 2.04 | | | 0.53 | | | 2.20 | |
| | | | | | | |
Interest-bearing deposits with banks | 0.09 | | | 1.96 | | | 0.19 | | | 2.30 | |
Total other earning assets | 0.09 | | | 2.00 | | | 0.27 | | | 2.26 | |
Interest income / total earning assets | 3.19 | % | | 4.35 | % | | 3.40 | % | | 4.45 | % |
Liabilities: | | | | | | | |
Interest-bearing liabilities: | | | | | | | |
Interest-bearing deposits: | | | | | | | |
Savings | 0.38 | % | | 1.26 | % | | 0.49 | % | | 1.30 | % |
Time deposits | 0.72 | | | 2.15 | | | 1.12 | | | 1.98 | |
Other interest-bearing deposits | 0.20 | | | 0.94 | | | 0.30 | | | 0.99 | |
Total interest-bearing deposits | 0.36 | | | 1.29 | | | 0.50 | | | 1.32 | |
| | | | | | | |
| | | | | | | |
Trading liabilities | 0.77 | | | 2.33 | | | 1.36 | | | 2.68 | |
Short-term borrowings | 0.27 | | | 2.13 | | | 0.72 | | | 2.35 | |
Term borrowings | 3.98 | | | 4.64 | | | 3.97 | | | 4.84 | |
Interest expense / total interest-bearing liabilities | 0.51 | | | 1.52 | | | 0.66 | | | 1.55 | |
Net interest spread | 2.68 | % | | 2.83 | % | | 2.74 | % | | 2.90 | % |
Effect of interest-free sources used to fund earning assets | 0.16 | | | 0.38 | | | 0.19 | | | 0.39 | |
Net interest margin (a) | 2.84 | % | | 3.21 | % | | 2.93 | % | | 3.29 | % |
NM – Not meaningful
(a) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 21% and, where applicable, state income taxes.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 96
Provision for Credit Losses
The provision for credit losses includes the provision for loan and lease losses and the reserve for unfunded lending commitments ("RULC"). The provision for credit losses is the charge to earnings that management determines to beexpense necessary to maintain the ALLL and the RULC at a sufficient level reflectinglevels appropriate to absorb management’s estimate of expected credit losses inexpected over the life of the loan portfolio. Provision expenseand lease portfolio and the portfolio of unfunded loan commitments.
The provision for credit losses was $145.0 million in first quarter$227.0 million and $502.4 million for the three and nine months ended September 30, 2020, calculated under the CECL methodology, adopted January 1, 2020, compared to $9.0$14.4 million in first quarterand $36.3 million for the three and nine months ended September 30, 2019 calculated under the “incurred loss” methodology. The increase in provision expense was primarily the result of a sudden, steep declineattributable to $147.0 million in provision related to non-PCD loans, CECL adoption, and the economic forecast attributable to the COVID-19 pandemic, and to a much less extent associated with loan growth. pandemic.
For additional information about the provision for loancredit 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
Noninterest income (including securities gains/(losses)) was $174.8 million in first$822.9 million for the third quarter 2020 and represented 37 percentrepresented 61% of total revenue compared to $141.0$171.7 million and 36% in firstthird quarter 2019 and 32 percent.2019. The increase in noninterest income in firstthird quarter 2020 was primarily driven by higherthe preliminary purchase accounting gain of $532.2 million recorded in connection
with the IBKC merger. The increase in noninterest income was also driven by the addition of IBKC as well as strong fixed income revenue during the quarter.
For the nine months ended September 30, 2020, noninterest income was $1.2 billion and represented 51% of total revenue compared to $470.8 million and 34% for the nine months ended September 30, 2019. The increase in noninterest income for the year-to-date period of 2020 was primarily driven by the preliminary purchase accounting gain. Higher mortgage banking and title income and fixed income revenue also contributed to the increase in noninterest income.
Fixed Income
Fixed income was $110.9 million in third quarter 2020, a 43% increase from $77.6 million in third quarter 2019. The increase in third quarter 2020 was largely driven by favorable market conditions including market volatility and increased depository liquidity. Revenue from other products was $12.1 million and $14.0 million in third quarter 2020 and 2019, respectively. The modest decrease was primarily driven by decreases in derivative and loan sales.
For the nine months ended September 30, 2020, fixed income was $319.0 million, up 61% from $197.8 million for the nine months ended September 30, 2019. The increase in the nine months ended September 30, 2020 was largely driven by the same factors impacting the quarterly period. Revenue from other products increased 18% to $41.5 million for the year-to-date period of 2020 from $35.2 million in 2019, driven by increases in fees from derivative sales and portfolio advisory services, somewhat offset by a decrease in deferred compensation income relative to first quarter 2019.fees from loan sales.
Fixed Income Noninterest Income
Fixed income noninterest income was $95.6 million in first quarter 2020, a 78 percent increase from $53.7 million in first quarter 2019. The increase in first quarter 2020 was largely driven by elevated levels of commissionable revenues, partially offset by elevated levels of trading losses driven by extreme market volatility in March 2020. Revenue from other products increased 86 percent to $17.3 million in first quarter 2020 from $9.3 million in first quarter 2019, primarily driven by increases in derivative sales.
The following table summarizes FHN’s fixed income noninterest income for the three and nine months ended March 31,September 30, 2020 and 2019.
Table 2—Fixed Income Noninterest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Percent Change | | Nine Months Ended September 30, | | Percent Change |
(Dollars in thousands) | 2020 | | 2019 | | | 2020 | | 2019 | |
Noninterest income: | | | | | | | | | | | |
Fixed income | $ | 98,871 | | | $ | 63,646 | | | 55 | % | | $ | 277,497 | | | $ | 162,651 | | | 71 | % |
Other product revenue | 12,072 | | | 13,999 | | | (14) | % | | 41,502 | | | 35,157 | | | 18 | % |
Total fixed income noninterest income | $ | 110,943 | | | $ | 77,645 | | | 43 | % | | $ | 318,999 | | | $ | 197,808 | | | 61 | % |
|
| | | | | | | | | | | |
| | Three Months Ended March 31 | | Percent Change |
(Dollars in thousands) | | 2020 | | 2019 | |
Noninterest income: | | | | | | |
Fixed income | | $ | 78,354 |
| | $ | 44,472 |
| | 76 | % |
Other product revenue | | 17,281 |
| | 9,277 |
| | 86 | % |
Total fixed income noninterest income | | $ | 95,635 |
| | $ | 53,749 |
| | 78 | % |
Brokerage, Management Fees and CommissionsFIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 97
Noninterest income from brokerage, management fees and commissions increased 22 percent or $2.8 million from $12.6 million in first quarter 2019 to $15.4 million in first quarter 2020. The increase in first quarter 2020 was primarily driven by higher advisory revenue and annuity income as a result of increased transaction volume.
Deposit Transactions and Cash Management
Fees from deposit transactions and cash management activities were $42.1 million and $103.1 million for the three and nine months ended September 30, 2020 up 22% and 5% from $34.4 million and $98.4 million for the three and nine months ended September 30, 2019. The increases for both periods were $30.3primarily volume-related from the addition of IBKC and were partially offset by a decline in NSF fees from pandemic-related impacts such as a decline in transaction volume and fee waivers. For the year-to-date period, a $4.6 million debit card incentive payment recognized in firstsecond quarter 2020 down 4 percentalso contributed to the increase in deposit transaction and cash management fees.
Brokerage, Management Fees and Commissions
Noninterest income from $31.6brokerage, management fees and commissions was $17.9 million in first quarterand $47.1 million for the three and nine months ended September 30, 2020 compared to $14.2 million and $40.9 million for the three and nine months ended September 30, 2019. The decrease in first quarterincrease for both periods was primarily driven by the inclusion of IBKC and increased annuity income from higher transaction activity, and for the year-to-date period, higher advisory income.
Mortgage Banking and Title Income
Mortgage banking and title income was $65.5 million and $72.1 million for the three and nine months ended September 30, 2020 iscompared to $2.0 million and $6.5 million for the same periods of 2019. The increases were largely the result of the added revenue stream from the IBKC merger and higher activity due to lower debitthe low rate environment.
Trust Services and Investment Management
Trust services and investment management was $11.7 million and $26.7 million for the three and nine months ended September 30, 2020 compared to $7.2 million and $22.1 million for the same periods in 2019. The increase for both periods was primarily the inclusion of IBKC in the third quarter.
Bankcard Income
card transaction fees as aBankcard income was $10.5 million and $24.4 million for the three and nine months ended September 30, 2020 compared to $7.0 million and $20.3 million for the same periods in 2019. The increase for both periods was primarily the result of volume incentives receivedthe inclusion of IBKC in 2019 and lower NSF/overdraft fee income driven by changes in consumer behavior relative to first quarter 2019, somewhat offset by an increase in fees from cash management activities.the third quarter.
Other NoninterestNoninterest Income
Other income includes revenues related to other service charges, ATM and interchange fees, mortgage banking (primarily within the non-strategic and regional banking segments), letters of credit fees, dividend income, electronic banking fees, insurance commissions, gain/(loss)
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 85
on the extinguishment of debt, deferred compensation plans (which are mirrored by changes in noninterest expense) and various other fees.
Revenue from all other income and commissions decreasedincome increased $4.1 million to $14.4 million$33.4 million in firstthird quarter 2020 from $24.6$29.3 million in firstthird quarter 2019. The decreaseincrease in all other income and commissions in firstthe third quarter 2020 was largely due to a $15.0$3.4 million decreaseincrease in deferred compensation income driven by negative equity market valuations.valuations relative to the prior year. Deferred compensation income fluctuates withwith changes in the market value of the underlying investments and is mirrored
by changes in deferred compensation expense which is included in personnel expense. AnAdditionally, an increase in other service charges contributed to the increase in all other income in third quarter 2020, but was partially offset by a decrease in interest rate swap income relative to third quarter 2019. The increase in other service charges was primarily merger-related.
For the nine months ended September 30, 2020 revenue from all other income decreased $2.5 million to $82.1 million from $84.6 million for the nine months ended September 30, 2019. Significant declines in all other income in third quarter 2020 included a $5.4 million decrease in deferred compensation income. The decline in deferred compensation income was driven by the timing of and higherextreme variability in equity market valuations in both 2020 and 2019. In addition, all other income declined in third quarter of 2020 from collections on fully-charged off CBF loans and gains on sales of fixed assets in the prior year. Increases in fees from derivative sales, relative to first quarter 2019income from other services charges and BOLI income offset a portion of the overall decline in other noninterest income.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 98
The following tabletable provides detail regarding FHN’sthe components of other income.
Table 3—Other Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Percent Change | | Nine Months Ended September 30, | | Percent Change |
(Dollars in thousands) | | 2020 | | 2019 | | | 2020 | | 2019 | |
Other income: | | | | | | | | | | | | |
Other service charges | | $ | 8,249 | | | $ | 5,738 | | | 44 | % | | $ | 18,050 | | | $ | 15,231 | | | 19 | % |
Income from bank owned life insurance | 5,627 | | | 4,427 | | | 27 | % | | 16,596 | | | 13,955 | | | 19 | % |
ATM and interchange fees | | 4,556 | | | 4,507 | | | 1 | % | | 12,777 | | | 12,010 | | | 6 | % |
Deferred compensation (a) | | 3,857 | | | 472 | | | NM | | 2,521 | | | 7,884 | | | (68) | % |
Interest rate swap income | 3,458 | | | 5,408 | | | (36) | % | | 13,426 | | | 10,229 | | | 31 | % |
Dividend income (b) | | 2,679 | | | 1,556 | | | 72 | % | | 4,866 | | | 5,678 | | | (14) | % |
Letter of credit fees | | 1,652 | | | 1,400 | | | 18 | % | | 4,673 | | | 4,021 | | | 16 | % |
Electronic banking fees | | 1,566 | | | 1,288 | | | 22 | % | | 3,778 | | | 3,826 | | | (1) | % |
Other | | 1,708 | | | 4,462 | | | (62) | % | | 5,418 | | | 11,792 | | | (54) | % |
Total other income | | $ | 33,352 | | | $ | 29,258 | | | 14 | % | | $ | 82,105 | | | $ | 84,626 | | | (3) | % |
|
| | | | | | | | | | | |
| | Three Months Ended March 31 | | Percent Change |
(Dollars in thousands) | | 2020 | | 2019 | |
Other income: | | | | | | |
Other service charges
| | $ | 5,219 |
| | $ | 3,869 |
| | 35 | % |
ATM and interchange fees | | 4,212 |
| | 3,241 |
| | 30 | % |
Mortgage banking | | 2,431 |
| | 1,886 |
| | 29 | % |
Letter of credit fees | | 1,462 |
| | 1,368 |
| | 7 | % |
Dividend income (a) | | 1,130 |
| | 2,313 |
| | (51 | )% |
Electronic banking fees | | 1,030 |
| | 1,271 |
| | (19 | )% |
Insurance commissions | | 789 |
| | 624 |
| | 26 | % |
Gain/(loss) on extinguishment of debt | | — |
| | (1 | ) | | NM |
|
Deferred compensation (b) | | (9,507 | ) | | 5,474 |
| | NM |
|
Other | | 7,598 |
| | 4,586 |
| | 66 | % |
Total | | $ | 14,364 |
| | $ | 24,631 |
| | (42 | )% |
Certain previously reported amounts have been reclassified to agree with current presentation.
NM – Not meaningful
| |
(a) | Represents dividend income from Federal Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB") holdings. Variability largely driven by dividend rate. |
| |
(b) | Amounts are driven by market conditions and are mirrored by changes in deferred compensation expense which is included in employee compensation expense. First quarter 2020 decrease was driven by negative equity market valuations. |
(a)Amounts are driven by market conditions and are mirrored by changes in deferred compensation expense which is included in personnel expense; nine months ended September 30, 2020 decrease driven by variability in equity market valuations.
(b)Represents primarily dividend income from Federal Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB") holdings. Variability largely driven by dividend rate.
NONINTEREST EXPENSE
Total noninterest expense increased $278.7 million, or 90%, to $311.3 $587.0 million in firstthird quarter 2020 from $296.1$308.3 million in firstthird quarter 2019. For the nine months ended September 30, 2020 noninterest expense increased 34% to $1.2 billion from $904.9 million for the nine months ended September 30, 2019. The increase in noninterest expense for the quarter and year-to-date periods of 2020 was primarily attributable to increases from the addition of IBKC as well as merger and acquisition-related expenses. Contributions expense increased $39.2 million for the quarterly period and $39.4 million for the year-to-date period. The increased contributions expense was reflective of a $20 million contribution to the Louisiana First Horizon Foundation in firstconnection with the IBKC merger and a $15 million donation of Paycheck Protection Plan fees to the First Horizon Foundation to assist low- and moderate-income communities.
Personnel Expense
Personnel expense, the largest component of noninterest expense, increased $162.4 million in third quarter 2020 to $329.4 million from $167.0 million in third quarter 2019. The increase in personnel expense in third quarter 2020 was primarily driven by an increase in credit expense on unfunded commitments associated with a sudden, steep decline in economic forecast attributable to the COVID-19 pandemic.
To a lesser extent, higher personnel-related expense also contributed to the increase in noninterest expense, somewhat offset by restructuring costsheadcount associated with the identification of efficiency opportunities within the organization, strategic initiativesIBKC merger and rebranding expenses recognizedTruist branch acquisition, higher variable compensation due to higher fixed income sales revenue, and increases in first quarter 2019.
deferred compensation expense driven by equity market valuations
Employee Compensation, Incentives, and Benefits
Employee compensation, incentives, and benefits (personnel expense), the largest component of noninterestacquisition-related costs. In addition, personnel expense increased 3 percent in first quarter 2020 to $183.5 million from $177.9included $34.9 million in first quartermerger and acquisition-related expenses during the current quarter.
For the nine months ended September 30, 2020 personnel expense was $713.2 million, up $196.6 million from $516.6 million for the nine months ended September 30, 2019. The increase in personnel expense in first quarter 2020for the year-to-date period was primarily driven by higher headcount from the IBKC merger and Truist branch acquisition, merger and acquisition-related expense, and higher variable compensation due to increased commissionable revenues within Fixed Income.
These expense increases were somewhat offset by a $16.6 million decrease in For the year-to-date period of 2020, deferred compensation expense decreased $6.9 million driven by negativethe timing of and extreme variability in equity market valuations in first quarterboth 2020 and 2019. Additionally, a $6.4 million decrease in restructuring costs associated withalso offset a portion of the identification of efficiency opportunities withinoverall increase in personnel expenses for the organization.nine months ended 2020.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 86
Legal and Professional Fees
ProfessionalLegal and professional fees decreased 43 percent or $5.3 million from $12.3 were $43.2 million in firstthird quarter 2019 to $7.02020, an increase of $23.5 million from $19.8 million in firstthird quarter 2020.2019. The decreaseincrease in legal and professional fees was primarily driven by an increase in merger and integration-related expenses and the inclusion of IBKC, somewhat offset by $6.5 million of restructuring costs associated with efficiency initiatives recognized in third quarter 2019.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 99
For the nine months ended September 30, 2020, legal and professional fees were $64.9 million, an increase of $12.2 million compared to the same period in 2019. The increase for the year-to-date period was the result of an increase in merger and integration-related expenses and the inclusion of IBKC, partially offset by lower restructuring costs associated with the identification of efficiency opportunities within the organization.initiatives recognized in 2019. Additionally, strategic investments recognized in the first quarter of 2019 to analyze growth potential and product mix for new markets also contributed to thea year-over-year decline in professional fees.
FDIC premium expense
FDIC premium expense increased 58 percent from $4.3 million in first quarter 2019 to $6.7 million in first quarter 2020 driven by balance sheet growth and expected loss severity ratios.
Contract employment and outsourcing
Expenses associated with contract employment and outsourcing increased 46 percent or $1.6 million to $4.9 million in first quarter 2020 compared to $3.4 million in first quarter 2019, primarily driven by merger and acquisition related projects.
Other Noninterest Expense
OtherAll other expenses increased 11% to $68.1 million in third quarter 2020 from $61.2 million in third quarter 2019. Miscellaneous loans costs increased $5.2 million, communications and delivery increased $4.0 million, contract employment and outsourcing increased $2.7 million and FDIC premium expense includesincreased $2.6 million. These increases were offset by a decrease in advertising and public relations expense largely due to promotional branding campaigns and target marketing in new markets in 2019.
All other expenses associated with unfunded commitments, travel increased 7% to $161.0 million for the nine months ended September 30, 2020 from $150.7 million for the nine months ended September 30, 2019. FDIC premium expense increased $7.3 million, largely due to the addition of IBKC as well as balance sheet growth and entertainment, other insuranceexpected loss severity ratios. Miscellaneous loan costs increased $6.7 million, primarily from the inclusion of IBKC. Contract employment and tax expenses, expenses associated withoutsourcing increased $6.4 million from technology-related projects as well as merger and integration-related expense. Pension-related costs increased $6.3 million primarily from the non-service componentschange in the expected rate of net periodic pensionreturn on plan assets and post-retirementinterest cost supplies, customer relation expenses,due to the discount rate. These increases were somewhat offset by a decrease in asset impairments and technology related costs associated with employee trainingrestructuring and dues, miscellaneous loan costs, tax credit investments expenses, losses from litigation and regulatory matters, expenses associated with OREO, and various other expenses.
All other expenses increased 72 percent to $33.2 millionrebranding initiatives recognized in first quarter 2020 from $19.3 million in first quarter 2019. The increase was primarily driven by an $8.8 million increase in credit expense on unfunded commitments largely associated with the application of CECL methodology with a sudden, steep decline in economic forecast attributableadvertising and public relations expense was largely due to the COVID-19 pandemic. Additionally, a $2.1 million increasepromotional branding campaigns and target marketing in pension-related costs and $1.0 million of additional credit risk adjustments on Regional Banking interest rate derivatives and swap participations also contributed to the overall increasenew markets in all other expenses in first quarter 2020 related to prior year.2019.
The following table provides detail regarding FHN’sthe components of other expense.
Table 4—Other Expense
|
| | | | | | | | | | | |
| | Three Months Ended March 31 | | Percent Change |
(Dollars in thousands) | | 2020 | | 2019 | |
Other expense: | | | | | | |
Credit expense on unfunded commitments (a) | | $ | 9,230 |
| | $ | 396 |
| | NM |
|
Travel and entertainment | | 2,709 |
| | 2,712 |
| | * |
|
Other insurance and taxes | | 2,679 |
| | 2,694 |
| | (1 | )% |
Non-service components of net periodic pension and post-retirement cost | | 2,508 |
| | 432 |
| | NM |
|
Supplies | | 2,411 |
| | 1,804 |
| | 34 | % |
Customer relations | | 2,004 |
| | 1,599 |
| | 25 | % |
Employee training and dues | | 1,341 |
| | 1,457 |
| | (8 | )% |
Miscellaneous loan costs | | 1,094 |
| | 1,027 |
| | 7 | % |
Tax credit investments | | 346 |
| | 675 |
| | (49 | )% |
Litigation and regulatory matters | | 13 |
| | 13 |
| | * |
|
OREO | | (184 | ) | | (366 | ) | | 50 | % |
Other | | 9,075 |
| | 6,888 |
| | 32 | % |
Total | | $ | 33,226 |
| | $ | 19,331 |
| | 72 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Percent Change | | Nine Months Ended September 30, | | Percent Change |
(Dollars in thousands) | 2020 | | 2019 | | | 2020 | | 2019 | |
Other expense: | | | | | | | | | | | |
Communications and delivery | $ | 9,662 | | | $ | 5,650 | | | 71 | % | | $ | 21,058 | | | $ | 19,483 | | | 8 | % |
FDIC premium expense | 8,194 | | | 5,564 | | | 47 | % | | 21,368 | | | 14,084 | | | 52 | % |
Miscellaneous loan costs | 6,186 | | | 1,017 | | | NM | | 9,636 | | | 2,901 | | | NM |
Contract employment and outsourcing | 5,961 | | | 3,256 | | | 83 | % | | 16,133 | | | 9,705 | | | 66 | % |
Other insurance and taxes | 4,462 | | | 2,475 | | | 80 | % | | 9,740 | | | 7,664 | | | 27 | % |
Advertising and public relations | 3,157 | | | 6,646 | | | (52) | % | | 13,138 | | | 19,462 | | | (32) | % |
| | | | | | | | | | | |
Non-service components of net periodic pension and post-retirement cost | 2,765 | | | 986 | | | NM | | 8,234 | | | 1,977 | | | NM |
Supplies | 2,149 | | | 1,668 | | | 29 | % | | 6,493 | | | 4,814 | | | 35 | % |
Other | 25,595 | | | 33,976 | | | (25) | % | | 55,171 | | | 70,630 | | | (22) | % |
Total other expense | $ | 68,131 | | | $ | 61,238 | | | 11 | % | | $ | 160,971 | | | $ | 150,720 | | | 7 | % |
| | | | | | | | | | | |
Certain previously reported amounts have been reclassified to agree with current presentation.
NM – Not meaningful
* Amount is less than one percent.
| |
(a) | First quarter 2020 increase largely associated with a sudden, steep decline in economic forecast attributable to the COVID-19 pandemic. |
FHNFHN recorded an income tax provision of $4.8 million$2.2 million in firstthird quarter 2020, compared to $27.1$35.8 million in first
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 87
third quarter 2019. For the nine months ended September 30, 2020 and 2019, FHN recorded an income tax provision of $19.8 million and $97.3 million, respectively. The effective tax rate for the three and nine months ended March 31,September 30, 2020 was approximately 22 percent approximately 0.4% and 3% compared to 21 percent24% and 23% for the three and nine months ended March 31,
September 30, 2019.The decrease in the effective tax rate was the result of the preliminary purchase accounting gain from the IBKC merger, which is not taxable.
The Company’s effectiveFHN’s effective tax rate is favorably affected by recurring items such as bank-owned life insurance, tax-exempt income, and credits and other tax benefits from affordable housing investments. The effective rate is unfavorably affected by the non-deductibility of a portion of the Company'sFHN's FDIC premium and executive compensation expenses. The Company’s
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 100
FHN’s effective tax rate also may be affected by items that may occur in any given period but are not consistent from period to period, such as changes in the deferred tax asset valuation allowance and changes in unrecognized tax benefits. The rate also may be affected by items resulting from business combinations.
A deferred tax asset (“DTA”) or deferred tax liability (“DTL”) is recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax consequence is calculated by applying enacted statutory tax rates, applicable to future years, to these temporary differences. As of March 31,September 30, 2020, FHN’s gross DTA (net of a valuation allowance) and gross DTL were $292.8$454.9 million and $207.6$409.8 million, respectively, resulting in a net DTA of $85.2 million$45.1 million at March 31,September 30, 2020, compared with a net DTA of $69.0 million at December 31, 2019.
As of March 31,September 30, 2020, FHN had deferred tax asset balances related to federal and state income tax carryforwards of $37.5 $47.4 million and $1.2 million,$8.9 million, respectively, which will expire at various dates.
FHN believes that it will be able to realize the value of its DTA and that no valuation allowance is needed. FHN monitors its DTA and the need for a valuation allowance on a quarterly basis.
RESTRUCTURING, REPOSITIONING, AND EFFICIENCY INITIATIVESRestructuring, Repositioning, and Efficiency Initiatives
Beginning in 2019, FHN initiated a company-wide review of business practices with the goal of optimizing its expense base to improve profitability and create capacity to reinvest savings into technology and revenue production activities. The net charges for restructuring, repositioning, and efficiency initiatives were immaterialnot significant in first quarterthe nine months ended September 30, 2020 compared to $12.2and were $38.7 million in first quarterthe nine months ended September 30, 2019. These expenses are primarily associated with severance and other employee costs, professional fees, and professional fees.costs associated with asset impairments. Due to the broad nature of the actions being taken, many components of expense are expected to benefit from the current efficiency initiatives. See Note 1718 - Restructuring, Repositioning, and Efficiency for additional information.
| | | | | | | | | | | | | | |
Financial Condition |
| | | | |
Statement of Condition Review |
Total period-end assets were $47.2were$83.0 billion on March 31,at September 30, 2020 up 9 percent fromcompared to $43.3 billion onat December 31, 2019. The increase in period-end assets was2019, primarily driven by strong loan growth. Additionally, a net increase in other earning assets (primarily trading securities), derivative assetsthe IBKC merger and FHLB stock also contributed to the increase in period-end assets. These increases were somewhat offset by an increase in the allowance for loan losses due to the Adoption of ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” or (“CECL”) and all related ASUs on January 1, 2020 and additional reserves recognized in first quarter 2020 due to a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic. Average assets increased 2 percent to $43.6 billion in first quarter 2020 from $42.9 billion in fourth quarter 2019. The increase in average assets was driven by higher balances of trading securities and securities purchased under agreements to resell (“asset repos”), somewhat offset by lower average loan balances and an increase in the ALLL due to the adoption of CECL.Truist branch acquisition.
Total period-end liabilities were $42.1 billion on March 31, 2020, a 10 percent increase from $38.2 billion on December 31, 2019. The net increase in period-end liabilities was primarily due to increases in deposits and
higher balances of short-term borrowings. In first quarter 2020, average liabilities increased to $38.5 billion from $37.8 billion in fourth quarter 2019. The increase in
average liabilities was largely driven by higher balances of short-term borrowings somewhat offset by a decrease in federal funds purchased (“FFP”) relative to fourth quarter 2019.
EARNING ASSETS
Earning assets consist of loans, investment securities, loans HFS,held for sale, and other earning assets, such as trading securities and interest-bearing cash. Average earning assets increased 1 percent and 7 percent to $38.8 billion in first quarter 2020 from $38.2 billion and $36.3 billion, respectively, in fourth quarter 2019 and first quarter 2019.deposits with banks. Amore detailed discussion of the major line items follows.components of earning assets is provided in the following sections.
Loans
Loans and Leases
Period-end loans and leases increased 7 percent and 19 percent$28.6 billion, or 92% to $33.4$59.7 billion as of March 31,September 30, 2020 from $31.1 billion on December 31, 2019, driven by both $26.3 billion in acquired loans and $28.0leases and PPP lending. Average loans and leases increased $29.4 billion as of March 31, 2019. The increase is period-end loan balancesto $60.1 billion in third quarter 2020 compared to December 31,$30.7 billion in fourth quarter 2019 was primarily due to an increaseand $30.0 billion in third quarter 2019.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 88101
loans to mortgage companies during the end of March and additional commercial line draws. Average loans for first quarter 2020 were $30.5 billion compared to $30.7 billion
in fourth quarter 2019 and $27.3 billion in first quarter 2019.
The following table summarizes FHN's average depositsloans and leases for quarters-ended March 31,the quarters ended September 30, 2020 and December 31, 2019.2019.
Table 5—Average Loans and Leases
|
| | | | | | | | | | | | | | | | | |
| | Quarter Ended March 31, 2020 | | Quarter Ended December 31, 2019 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Commercial: | | | | | | | | | | |
Commercial, financial, and industrial | | $ | 19,469,572 |
| | 64 | % | | $ | 19,739,937 |
| | 64 | % | | (1 | )% |
Commercial real estate | | 4,421,913 |
| | 14 |
| | 4,263,597 |
| | 14 |
| | 4 |
|
Total commercial | | 23,891,485 |
| | 78 |
| | 24,003,534 |
| | 78 |
| | * |
|
Consumer: | | | | | | | | | | |
Consumer real estate (a) (b) | | 6,134,390 |
| | 20 |
| | 6,194,134 |
| | 20 |
| | (1 | ) |
Credit card, OTC and other | | 498,290 |
| | 2 |
| | 508,651 |
| | 2 |
| | (2 | ) |
Total consumer | | 6,632,680 |
| | 22 |
| | 6,702,785 |
| | 22 |
| | (1 | ) |
Total loans, net of unearned income | | $ | 30,524,165 |
| | 100 | % | | $ | 30,706,319 |
| | 100 | % | | (1 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2020 | | Quarter Ended December 31, 2019 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Commercial: | | | | | | | | | | |
Commercial, financial, and industrial (C&I) | | $ | 34,051,174 | | | 57 | % | | $ | 19,739,937 | | | 64 | % | | 72 | % |
Commercial real estate (CRE) | | 12,413,582 | | | 21 | | | 4,263,597 | | | 14 | | | 191 | |
Total commercial | | 46,464,756 | | | 77 | | | 24,003,534 | | | 78 | | | 94 | |
Consumer: | | | | | | | | | | |
Consumer real estate (a) (b) | | 12,443,874 | | | 21 | | | 6,194,134 | | | 20 | | | 101 | |
Credit card and other | | 1,208,994 | | | 2 | | | 508,651 | | | 2 | | | 138 | |
Total consumer | | 13,652,868 | | | 23 | | | 6,702,785 | | | 22 | | | 104 | |
Total loans and leases | | $ | 60,117,624 | | | 100 | % | | $ | 30,706,319 | | | 100 | % | | 96 | % |
* AmountAmount is less than one percent.
(a)Balance for the quarter ended December 31, 2019 includes $7.1 million of restricted and secured real estate loans.
| |
(a) | Balance as December 31, 2019 includes $7.1 million of restricted and secured real estate loans. |
| |
(b) | In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability. |
(b)In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability.
C&I loans are the largest component of the loan portfolio, comprising 64 percent57% of total loans in both firstthird quarter 2020 and 64% in fourth quarter 2019. C&I loans declined 1 percent,loans increased 72% from fourth quarter 2019, largely drivendriven by loweracquired loans from IBKC and Truist Bank, PPP lending and higher balances within mortgage warehouse lending, partially mitigatedlending. Driven by strong loan growth within otheracquired IBKC loans, commercial portfolios of Regional Banking. Growth in other specialty lending areas, such as franchise finance, private client, asset based lending, and healthcare also offset a portion of the overall decline in average C&I loans in first quarter 2020 compared to fourth quarter 2019.Commercial real estate loans experienced a net increase of 4 percentincreased 191% to $4.4 billion$12.4 billion in firstthird quarter 2020.
Average consumer loans declined 1 percentincreased 104% from fourth quarter 2019 to $6.6$13.7 billion in firstthird quarter 2020, largely driven by acquired loans.
Loans Held for Sale
On July 1, 2020 as part of the continued wind-downIBKC merger, FHN acquired a portfolio of portfolios withinloans held for sale which primarily consist of fixed rate single-family residential mortgage loans originated by IBKC and committed to be sold in the Non-strategic segmentsecondary market. The legacy FHN loans HFS portfolio consists of small business, other consumer loans, the mortgage warehouse, USDA, student, and declines in home equity linesloans. On September 30, 2020, and December 31, 2019, loans HFS were $1.1 billion and $593.8 million, respectively. The average balance of credit withinloans HFS increased to $984.9 million in third quarter 2020 from $581.8 million in fourth quarter 2019. The increase in period-end and average loans HFS was primarily driven by the Regional Banking segment.acquired IBKC HFS loans, somewhat offset by a decrease in small business loans. Held-for-sale consumer mortgage loans secured by residential real estate in process of foreclosure totaled $2.4 million and $6.8 million at September 30, 2020 and December 31, 2019, respectively.
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 managing risk of interest rate movements. Period-end investment securities wewere re $4.6 billi$8.0 billion on on March 31, 2020 compared to $4.5September 30, 2020 up from $4.4 billion on December 31, 2019.2019, primarily as a result of securities acquired from the IBKC merger.
Average investment securities were $8.6 billion in third quarter $4.5 billion in first quarter 2020 and $4.4 billionbillion in fourth quarter 2019, representing 12 percent 11% and 12% of average earning assets, in first quarter 2020 and fourth quarter 2019.respectively. The increase in period-end and average investment securities was also driven by FHN's reinvestment strategy in 2020. the IBKC merger. FHN manages the size and mix of the investment portfolio to assist in asset
liability management, provide liquidity, and optimize risk adjusted returns.return.
Loans Held-for-Sale
Loans HFS consists of small business, other consumer loans, the mortgage warehouse, USDA, student, and home equity loans. On March 31, 2020, loans H
Deposits
Period-end deposiFS were $595.6 million and $593.8 million, respectively. The average balance of loans HFSts increased to $590.5 million in first quarter$68.4 billion on September 30, 2020, from $581.8 million in fourth quarter 2019. The increase in period-end and average loans HFS was primarily driven by an increase in small business loans, somewhat offset by a decrease in USDA loans.
Other Earning Assets
Other earning assets include trading securities, securities purchased under agreements to resell ("asset repos"), federal funds sold (“FFS”), and interest-bearing deposits with the Fed and other financial institutions. Other earning assets averaged $3.2 billion in first quarter 2020, a 28 percent increase from $2.5 billion in fourth quarter 2019. The increase in average other earning assets was primarily driven by increases in fixed income trading inventory and asset repos relative to fourth quarter 2019. Fixed income's trading inventory fluctuates daily based on customer demand. Asset repos are used in fixed income trading activity and generally fluctuate with the level of fixed income trading liabilities (short-positions) as securities collateral from asset repo transactions are used to fulfill trades. Other earning assets were $3.1 billion on March 31, 2020, up from $2.5$32.4 billion on December 31, 2019, primarily driven by increases in fixed income trading inventory and interest-bearing cash.
Th2019. Average depose following table summarizes FHN's average other earning assets for quarters-ended March 31, 2020 and December 31, 2019.
Table 6—Average Other Earning Assets
|
| | | | | | | | | | | | | | | | | |
| | Quarter Ended March 31, 2020 | | Quarter Ended December 31, 2019 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Other earning assets | | | | | | | | | | |
Trading securities | | $ | 1,831,492 |
| | 57 | % | | $ | 1,263,633 |
| | 50 | % | | 45 | % |
Securities purchased under agreements to resell | | 816,794 |
| | 25 |
| | 645,979 |
| | 26 |
| | 26 |
|
Interest-bearing cash | | 548,036 |
| | 17 |
| | 586,495 |
| | 23 |
| | (7 | ) |
Federal funds sold | | 10,192 |
| | 1 |
| | 9,700 |
| | 1 |
| | 5 |
|
Total other earning assets | | $ | 3,206,514 |
| | 100 | % | | $ | 2,505,807 |
| | 100 | % | | 28 | % |
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 89
Non-earning assets
Period-end non-earning assets were $5.5 billion and $4.7 billion on March 31, 2020 and December 31, 2019, respectively, driven largely by increases in derivative assets, equity investments (primarily FHLB stock), and fixed income receivables, partially offset by an increase in the ALLL and a decrease in cash balances. Derivative assets and fixed income receivable balances were higher as a result of extreme market volatility during first quarter 2020 and an increase in required margin posting. The increase in the ALLL was due to the adoption of ASU 2016-13 (CECL) on January 1, 2020 and additional reserves established during first quarter 2020 associated with a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic.
Deposits
Average depositsits increased to $32.9 $67.1 billion during firstin third quarter 2020, from $32.8 billion in fourth quarter 2019 and $32.5$32.4 billion in firstthird quarter 2019. The increase in both period-end and average deposits from fourth quarter 2019 was driven by a seasonal influx of consumer deposits (both non-interest bearing and interest bearing), coupled with an increase in market-indexed deposits, partially offset by lower commercial interest deposits. The increase in first quarter 2020 relative to first quarter 2019 was driven by increases in non-interest
bearing and consumer interest deposits as a result of FHN’s strategic focus on growing deposits during 2019, partially offset by decreases in commercial interest and market-indexed deposits. FHN's mix of interest-bearing deposits and noninterest-bearing deposits remained relatively consistent between periods.
Period-end deposits increased 6 percent to $34.4 billion on March 31, 2020, from $32.4 billion on December 31, 2019 and $32.5 billion on March 31, 2019. The increase in deposits from December 31, 2019 and March 31, 2019balances was largely the result of management’s decision to increase market-indexed deposits (given the favorable benefits of this funding source in lower interest-rate environments) to fund loan growth, as well asIBKC merger and the Truist branch acquisition. In
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 102
addition, deposit balances were impacted by significant customer deposit inflows beginning in March 2020 as brokerage customers exited equity markets to move in cash positions given the market volatility associated with the COVID-19 pandemic.
pandemic, municipalities received federal stimulus payments, and PPP funding began, as well as management’s decision in first quarter 2020 to increase market-indexed deposits (given the favorable benefits of this funding source in lower interest-rate environments). As short-term rates have come down, particularly in the third quarter, bank deposits provide institutional clients
with overnight liquidity at a competitive, and often superior, rate to other short-term cash management options. Additionally, there has been a notable shift from interest-bearing deposits to non-interest bearing deposits within many of FHN's institutional relationships. The influx in noninterest-bearing deposits during the nine months ended September 30, 2020 resulted in an increase in the percentage of average noninterest-bearing deposits from 26% of total deposits in fourth quarter 2019 to 31% of total deposits in third quarter 2020.
The following table summarizes FHN's average deposits for quarters-ended March 31,quarters ended September 30, 2020 and December 31, 2019.
Table 7—6—Average Deposits
| | | | Quarter Ended March 31, 2020 | | Quarter Ended December 31, 2019 | | | | | Quarter Ended September 30, 2020 | | Quarter Ended December 31, 2019 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate | (Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Interest-bearing deposits: | | | | | | | | | | | Interest-bearing deposits: | | | | | | | | | | |
Consumer | | $ | 13,760,968 |
| | 42 | % | | $ | 13,718,820 |
| | 42 | % | | * |
| |
Commercial | | 6,006,364 |
| | 18 |
| | 6,145,681 |
| | 19 |
| | (2 | ) | |
Market-indexed (a) | | 4,448,587 |
| | 14 |
| | 4,370,025 |
| | 13 |
| | 2 |
| |
Savings | | Savings | | $ | 25,648,149 | | | 38 | % | | $ | 11,579,655 | | | 35 | % | | 121 | % |
Time deposits | | Time deposits | | 5,782,686 | | | 9 | | | 3,933,741 | | | 12 | | | 47 | |
Other interest-bearing deposits | | Other interest-bearing deposits | | 14,771,168 | | | 22 | | | 8,721,130 | | | 27 | | | 69 | |
| Total interest-bearing deposits | | 24,215,919 |
| | 74 |
| | 24,234,526 |
| | 74 |
| | * |
| Total interest-bearing deposits | | 46,202,003 | | | 69 | | | 24,234,526 | | | 74 | | | 91 | |
Noninterest-bearing deposits | | 8,666,087 |
| | 26 |
| | 8,542,521 |
| | 26 |
| | 1 |
| Noninterest-bearing deposits | | 20,903,559 | | | 31 | | | 8,542,521 | | | 26 | | | 145 | |
Total deposits | | $ | 32,882,006 |
| | 100 | % | | $ | 32,777,047 |
| | 100 | % | | * |
| Total deposits | | $ | 67,105,562 | | | 100 | % | | $ | 32,777,047 | | | 100 | % | | 105 | % |
* Amount is less than one percent.
| |
(a) | Market-indexed deposits are tied to an index not administered by FHN and are comprised of insured network deposits, correspondent banking deposits, and trust/sweep deposits. |
Short-Term Borrowings
Short-termPeriod-end short-term borrowings (federal funds decreased 35% to $2.6 billion on September 30, 2020 from $4.0 billion on December 31, 2019, primarily driven by a decrease in other short-term borrowings, as FHN was able to use customer deposits to support balance sheet funding. The decrease in other short-term borrowings was somewhat offset by increases in securities purchased (“FFP”), securities sold under agreements to repurchase, trading liabilities,resell and other short-term borrowings)federal funds purchased.
Short-term borrowings averaged $4.0 billion $2.8 billion in firstthird quarter 2020, up 20 percent down 14% from $3.3 billion in fourth quarter 2019. As noted in the table below, the increasedecrease in short-term borrowings between first quarter 2020 and fourth quarter 2019 and third quarter 2020 was primarily driven by increasesdecreases in other
short-term borrowings, federal funds purchased and trading liabilities, partially offset by a decreasean increase in FFP.securities sold under agreements to repurchase. 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. Trading liabilities fluctuatesfluctuate based on expectationsvarious factors including variations in levels of customer demand. FFPtrading securities. Federal funds purchased fluctuates depending on the amount of excess funding of FHN’s correspondent bank customers. Period-end short-term borrowings increased 44 percentBalances of securities sold under agreements to $5.8 billionresell fluctuate based on March 31, 2020 from $4.0 billion on December 31, 2019, primarily driven by an increase in other short-term borrowings, somewhat offset by a decreases in FFP. The increase in short-term borrowings was usedcost attractiveness relative to fund commercial loan growth including an uptick in loansFHLB borrowing levels and the ability to mortgage companies in the latter part of the quarter.pledge securities toward such transactions.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 90103
Table 8—7—Average Short-Term Borrowings
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended September 30, 2020 | | Quarter Ended December 31, 2019 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Short-term borrowings: | | | | | | | | | | |
| | | | | | | | | | |
Federal funds purchased | | $ | 832,800 | | | 29 | % | | $ | 1,163,701 | | | 35 | % | | (28) | % |
Securities sold under agreements to repurchase | | 1,503,305 | | | 53 | | | 701,213 | | | 21 | | | 114 | |
| | | | | | | | | | |
Other short-term borrowings | | 132,546 | | | 5 | | | 844,558 | | | 26 | | | (84) | |
Trading liabilities | | 360,054 | | | 13 | | | 585,889 | | | 18 | | | (39) | |
| | | | | | | | | | |
| | | | | | | | | | |
Total short-term borrowings | | $ | 2,828,705 | | | 100 | % | | $ | 3,295,361 | | | 100 | % | | (14) | % |
|
| | | | | | | | | | | | | | | | | |
| | Quarter Ended March 31, 2020 | | Quarter Ended December 31, 2019 | | |
(Dollars in thousands) | | Amount | | Percent of total | | Amount | | Percent of total | | Growth Rate |
Short-term borrowings: | | | | | | | | | | |
Securities sold under agreements to repurchase | | $ | 777,692 |
| | 20 | % | | $ | 701,213 |
| | 21 | % | | 11 | % |
Trading liabilities | | 750,520 |
| | 19 |
| | 585,889 |
| | 18 |
| | 28 |
|
Federal funds purchased | | 746,686 |
| | 19 |
| | 1,163,701 |
| | 35 |
| | (36 | ) |
Other short-term borrowings | | 1,686,690 |
| | 42 |
| | 844,558 |
| | 26 |
| | NM |
|
Total short-term borrowings | | $ | 3,961,588 |
| | 100 | % | | $ | 3,295,361 |
| | 100 | % | | 20 | % |
NM – Not meaningful
Term Borrowings
Term borrowings include senior and subordinated borrowings with original maturities greater than one year. Period-end term borrowings were $2.2 billion on September 30, 2020, up from $.8 billion on December 31, 2019. Average term borrowings were $.8 were $2.2 billion in firstthird quarter 2020 and $.9 billion in fourth quarter 2019. Period-endThe
increase in term borrowings were $.8 billion on March 31, 2020both an average and December 31, 2019. In April 2020, First Horizon Bank issuedperiod-end basis was the result of the issuance of $450 million of subordinated notes.
Other Liabilitiesnotes by First Horizon Bank in April 2020, and the issuance of $800 million of senior notes by FHN in May 2020.
Period-end other liabilities were $1.2 billion on March 31, 2020, up from $1.0 billion on December 31, 2019, primarily driven by increases in derivative liabilities and fixed income payables.
Management’s objectives are to provide capital sufficient to cover the risks inherent in FHN’s businesses, to maintain excess capital to well-capitalizedwell-capitalized standards, and to assure ready access to the capital markets. Period-end equity decreased $20.4 million was $8.1 billion at September 30, 2020, an increase of $3.1 billion from $5.1 billion on December 31, 2019 to $5.1 billion on March 31, 2020.2019. Average equity decreased $37.5 millionincreased to $5.0 billion$8.1 billion in firstthird quarter 2020 from $5.0 billion in fourth quarter 2019. The decreaseEquity issued in period-endconnection
with the IBKC merger was $2.5 billion. In addition, FHN issued 1,500 shares of Series E Non-Cumulative Perpetual Preferred Stock in May 2020 for net proceeds of $144.7 million. Other significant changes included net income of $612.2 million and average equity was largely attributable to the adoption impactan increase in AOCI of ASU 2016-13 (CECL)$99.1 million, which
resulted in a net decrease to retained earnings of $96.1 were partially offset by $195.0 million on January 1, 2020, coupled withfor common and preferred dividends paid, somewhat offset by net income recognized since fourth quarter 2019. A decrease in accumulated other comprehensive income ("AOCI"), largelyand $96.1 million related to the resultadoption of an increase in unrealized gains associated with AFS debt securities partially mitigated the decrease in period-end and average equity.
CECL.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 91104
The following tables provide a reconciliation of Shareholders’ equity from the Consolidated Condensed Statements of ConditionBalance Sheets to Common Equity Tier 1, Tier 1 and Total Regulatory Capital as well as certain selected capital ratios:
Table 9—8—Regulatory Capital and Ratios
| | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
Shareholders’ equity | | $ | 7,848,711 | | | $ | 4,780,577 | |
Modified CECL transitional amount (a) | | 199,051 | | | — | |
FHN non-cumulative perpetual preferred | | (470,370) | | | (95,624) | |
Common equity | | $ | 7,577,392 | | | $ | 4,684,953 | |
Regulatory adjustments: | | | | |
Disallowed goodwill and other intangibles | | (1,766,718) | | | (1,505,971) | |
Net unrealized (gains) losses on securities available for sale | | (113,209) | | | (31,079) | |
Net unrealized (gains) losses on pension and other postretirement plans | | 267,051 | | | 273,914 | |
Net unrealized (gains) losses on cash flow hedges | | (13,372) | | | (3,227) | |
Disallowed deferred tax assets | | (9,154) | | | (8,610) | |
Other deductions from common equity tier 1 | | (748) | | | (1,044) | |
Common equity tier 1 | | $ | 5,941,242 | | | $ | 3,408,936 | |
Qualifying FHN non-cumulative perpetual preferred (b) | | 376,721 | | | 95,624 | |
Qualifying noncontrolling interest—First Horizon Bank preferred stock | | 294,816 | | | 255,890 | |
| | | | |
Tier 1 capital | | $ | 6,612,779 | | | $ | 3,760,450 | |
Tier 2 capital | | 1,158,924 | | | 394,435 | |
Total regulatory capital | | $ | 7,771,703 | | | $ | 4,154,885 | |
Risk-Weighted Assets | | | | |
First Horizon National Corporation | | $ | 64,486,809 | | | $ | 37,045,782 | |
First Horizon Bank | | 63,788,902 | | | 36,626,993 | |
Average Assets for Leverage | | | | |
First Horizon National Corporation | | 80,199,066 | | | 41,583,446 | |
First Horizon Bank | | 79,551,797 | | | 40,867,365 | |
|
| | | | | | | | |
(Dollars in thousands) | | March 31, 2020 | | December 31, 2019 |
Shareholders’ equity | | $ | 4,760,149 |
| | $ | 4,780,577 |
|
Modified CECL transitional amount (a) | | 132,811 |
| | — |
|
FHN non-cumulative perpetual preferred | | (95,624 | ) | | (95,624 | ) |
Common equity | | $ | 4,797,336 |
| | $ | 4,684,953 |
|
Regulatory adjustments: | | | | |
Disallowed goodwill and other intangibles | | (1,501,286 | ) | | (1,505,971 | ) |
Net unrealized (gains)/losses on securities available-for-sale | | (119,357 | ) | | (31,079 | ) |
Net unrealized (gains)/losses on pension and other postretirement plans | | 271,809 |
| | 273,914 |
|
Net unrealized (gains)/losses on cash flow hedges | | (16,288 | ) | | (3,227 | ) |
Disallowed deferred tax assets | | (9,502 | ) | | (8,610 | ) |
Other deductions from common equity tier 1 | | (949 | ) | | (1,044 | ) |
Common equity tier 1 | | $ | 3,421,763 |
| | $ | 3,408,936 |
|
FHN non-cumulative perpetual preferred | | 95,624 |
| | 95,624 |
|
Qualifying noncontrolling interest—First Horizon Bank preferred stock | | 294,816 |
| | 255,890 |
|
Tier 1 capital | | $ | 3,812,203 |
| | $ | 3,760,450 |
|
Tier 2 capital | | 507,181 |
| | 394,435 |
|
Total regulatory capital | | $ | 4,319,384 |
| | $ | 4,154,885 |
|
Risk-Weighted Assets | | | | |
First Horizon National Corporation | | $ | 40,055,114 |
| | $ | 37,045,782 |
|
First Horizon Bank | | 39,670,943 |
| | 36,626,993 |
|
Average Assets for Leverage | | | | |
First Horizon National Corporation | | 42,348,418 |
| | 41,583,446 |
|
First Horizon Bank | | 41,632,972 |
| | 40,867,365 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | Ratio | | Amount | | Ratio | | Amount |
Common Equity Tier 1 | | | | | | | | |
First Horizon National Corporation | | 9.21 | % | | $ | 5,941,242 | | | 9.20 | % | | $ | 3,408,936 | |
First Horizon Bank | | 9.83 | | | 6,268,056 | | | 9.38 | | | 3,433,867 | |
Tier 1 | | | | | | | | |
First Horizon National Corporation | | 10.25 | | | 6,612,779 | | | 10.15 | | | 3,760,450 | |
First Horizon Bank | | 10.29 | | | 6,562,872 | | | 10.18 | | | 3,728,683 | |
Total | | | | | | | | |
First Horizon National Corporation | | 12.05 | | | 7,771,703 | | | 11.22 | | | 4,154,885 | |
First Horizon Bank | | 11.88 | | | 7,578,857 | | | 10.77 | | | 3,944,613 | |
Tier 1 Leverage | | | | | | | | |
First Horizon National Corporation | | 8.25 | | | 6,612,779 | | | 9.04 | | | 3,760,450 | |
First Horizon Bank | | 8.25 | | | 6,562,872 | | | 9.12 | | | 3,728,683 | |
(a)The modified CECL transitional amount is calculated as defined in the final rule issued by the banking regulators on August 26, 2020 and includes the full amount of the impact to retained earnings from the initial adoption of CECL plus 25% of the change in the adjusted allowance for credit losses (“AACL”) since FHN’s initial adoption of CECL through September 30, 2020.
(b)The $96.3 million carrying value of the Series D preferred stock does not qualify as Tier 1 capital because the earliest redemption date is less than five years from the issuance date.
|
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| | Ratio | | Amount | | Ratio | | Amount |
Common Equity Tier 1 | | | | | | | | |
First Horizon National Corporation | | 8.54 | % | | $ | 3,421,763 |
| | 9.20 | % | | $ | 3,408,936 |
|
First Horizon Bank | | 8.70 |
| | 3,450,974 |
| | 9.38 |
| | 3,433,867 |
|
Tier 1 | | | | | | | | |
First Horizon National Corporation | | 9.52 |
| | 3,812,203 |
| | 10.15 |
| | 3,760,450 |
|
First Horizon Bank | | 9.44 |
| | 3,745,790 |
| | 10.18 |
| | 3,728,683 |
|
Total | | | | | | | | |
First Horizon National Corporation | | 10.78 |
| | 4,319,384 |
| | 11.22 |
| | 4,154,885 |
|
First Horizon Bank | | 10.37 |
| | 4,113,057 |
| | 10.77 |
| | 3,944,613 |
|
Tier 1 Leverage | | | | | | | | |
First Horizon National Corporation | | 9.00 |
| | 3,812,203 |
| | 9.04 |
| | 3,760,450 |
|
First Horizon Bank | | 9.00 |
| | 3,745,790 |
| | 9.12 |
| | 3,728,683 |
|
| |
(a) | The modified CECL transitional amount is calculated as defined in the CECL interim final rule issued by the banking regulators on March 27, 2020 and includes the full amount of the impact to retained earnings from the initial adoption of CECL plus 25 percent of the change in the adjusted allowance for credit losses (“AACL”) since FHN’s initial adoption of CECL through March 31, 2020. |
Banking regulators define minimum capital ratios for bank holding companies and their bank subsidiaries. Based on the capital rules and definitions prescribed by the banking regulators, should any depository institution’s capital ratios decline below predetermined levels, it would become subject to a series of increasingly restrictive regulatory actions. The system categorizes a depository institution’s
capital position into one of five categories ranging from well-capitalized to critically under-capitalized. For an
institution the size of FHN to qualify as well-capitalized, Common Equity Tier 1, Tier 1 Capital, Total Capital, and Leverage capital ratios must be at least 6.5 percent, 8 percent, 10 percent,6.50%, 8.00%, 10.00%, and 5 percent,5.00%, respectively. Furthermore, beginning January 1, 2019, a capital conservation buffer of 50 basis points above these levels
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 92105
points above these levels must be maintained on the Common Equity Tier 1, Tier 1 Capital and Total Capital ratios to avoid restrictions on dividends, share repurchases and certain discretionary bonuses.
As of March 31,September 30, 2020, each of FHN and First Horizon Bank had sufficientsufficient capital to qualify as well-capitalized institutions. FHN also had sufficient capitalinstitutions and to meet the capital conservation buffer requirement while First Horizon Bank fell slightly below based on its Total Capital Ratio. (See discussion on dividend limitations for First Horizon Bank in the “Liquidity Risk Management” section of this MD&A.) In April 2020, First Horizon Bank generated additional Tier 2 capital through the issuance of $450 million of subordinated notes.requirement. The firstthird quarter 2020 capital ratios for both FHN and First Horizon Bank are calculated under the interim final rule issued by the banking regulators in late MarchAugust 2020 to delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period. For both FHN and First Horizon Bank, the risk-based regulatory capital ratios decreasedincreased in firstthird quarter 2020 relative to fourth quarter 2019 primarily due to increased risk-weightedfrom the issuance of preferred and common equity in connection with the IBKC merger, offset by the intangible assets due to period-end commercial loan growth (primarily loans to mortgage companies)created in the IBKC merger and higher draw activity in March, coupled with an increase in market risk assets drivenTruist Bank branch acquisition. Regulatory capital ratios were also favorably impacted by the impact of net income less dividends during the first nine months of 2020. For the Bank only, the risk-based regulatory capital ratios were impacted by a spikereduction of $115 million in VaR dueits equity investment in its financial subsidiary, FHN Financial Securities Corp. In addition, the Tier 1 Capital ratio for FHN benefited from the issuance of $150 million of Non-Cumulative Perpetual Preferred Stock, Series E. The Total Capital ratios for both FHN and First Horizon Bank benefited from the Bank’s issuance of $450 million of Tier 2 qualifying subordinated notes. The Tier 1 leverage ratio declined for both FHNC and First Horizon Bank as average assets for leverage in the third quarter 2020 increased relative to extreme volatilityfourth quarter 2019 primarily in March.connection with the IBKC merger. During 2020, capital
ratios are expected to remain above well-capitalized standards.standards plus the required capital conservation buffer.
Common Stock Purchase Programs
Pursuant to board authority, FHN may repurchase shares of its common stock from time to time and will evaluate the level of capital and take action designed to generate or use capital, as appropriate, for the interests of the shareholders, subject to legal and regulatory restrictions. Two common stock purchase programs currently authorized are discussed below. FHN’s board has not authorized a preferred stock purchase program.
General Authority
On January 23, 2018, FHN announced a $250 million share purchase authority with an expiration date of January 31, 2020. On January 29, 2019, FHN announced a $250 million increase in that authority along with an extension of the expiration date to January 31, 2021. Purchases may be made in the open market or through privately negotiated transactions and are subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions. As of March 31,September 30, 2020, $229.3 million in purchases had been made under this authority at an average price per share of $15.09, or $15.07 excluding commissions. Management currently does not anticipate purchasing a material number of shares under this authority during the first half of 2020 due to the pending merger of equals with IBKC.2020.
Table 10a—9a—Issuer Purchases of Common Stock - General Authority
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollar values and volume in thousands, except per share data) | | Total number of shares purchased | | Average price paid per share (a) | | Total number of shares purchased as part of publicly announced programs | | Maximum approximate dollar value that may yet be purchased under the programs |
2020 | | | | | | | | |
July 1 to July 31 | | — | | | NA | | — | | | $ | 270,654 | |
August 1 to August 31 | | — | | | NA | | — | | | 270,654 | |
September 1 to September 30 | | — | | | NA | | — | | | 270,654 | |
Total | | — | | | N/A | | — | | | |
|
| | | | | | | | | | | | |
(Dollar values and volume in thousands, except per share data) | | Total number of shares purchased | | Average price paid per share (a) | | Total number of shares purchased as part of publicly announced programs | | Maximum approximate dollar value that may yet be purchased under the programs |
2020 | | | | | | | | |
January 1 to January 31 | | — |
| | NA | | — |
| | $ | 270,654 |
|
February 1 to February 29 | | — |
| | NA | | — |
| | 270,654 |
|
March 1 to March 31 | | — |
| | NA | | — |
| | 270,654 |
|
Total | | — |
| | N/A | | — |
| | |
N/A - not applicable(a) Represents total costs including commissions paid.
Compensation 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
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 106
exercise period of the various compensation plans on or before December 31, 2023. Purchases may be made in the
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 93
open market or through privately negotiated transactions and are subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions. As of March 31,September 30, 2020, the
maximum number of shares that may be purchased under the program was 24.324.0 million shares. Management currently does not anticipate purchasing a material number of shares under this authority during 2020.
Table 10b—9b—Issuer Purchase of Common Stock - Compensation 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 |
2020 | | | | | | | | |
July 1 to July 31 | | 29 | | | $ | 9.49 | | | 29 | | | $ | 24,104 | |
August 1 to August 31 | | 5 | | | 9.32 | | | 5 | | | 24,099 | |
September 1 to September 30 | | 54 | | | 9.42 | | | 54 | | | 24,045 | |
Total | | 88 | | | $ | 9.44 | | | 88 | | | |
|
| | | | | | | | | | | | | |
(Volume in thousands, except per share data) | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced programs | | Maximum number of shares that may yet be purchased under the programs |
2020 | | | | | | | | |
January 1 to January 31 | | 26 |
| | $ | 16.81 |
| | 26 |
| | 24,431 |
|
February 1 to February 29 | | 7 |
| | 16.30 |
| | 7 |
| | 24,424 |
|
March 1 to March 31 | | 108 |
| | 14.05 |
| | 108 |
| | 24,316 |
|
Total | | 141 |
| | $ | 14.67 |
| | 141 |
| | |
| | | | | | | | | | | | | | |
Asset Quality |
| | | | |
| | | | |
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; and credit card and other. In first quarter 2020, FHN consolidated its permanent mortgage portfolio into consumer real estate. Loans previously classified in permanent mortgage included primarily jumbo mortgages and one-time-close (“OTC”) completed construction loans in the non-strategic segment that were originated through pre-2009 mortgage businesses. FHN has a concentration of residential real estate loans (19 percent(21% of total loans).Industry concentrations are discussed under the heading C&I below.
Consolidated key asset quality metrics for each of these portfolios can be found in Table 1716 – Asset Quality by Portfolio. Credit underwriting guidelines are outlined in Exhibit 13 toItem 7 of FHN’s Annual Report on Form 10-K for the year ended December 31, 2019, in the Loan Portfolio Composition discussion in the Asset Quality Section
beginning on pagepage 67 and continuing to page 87. FHN’s FHN’s
credit underwriting guidelines and loan product offerings as of March 31,September 30, 2020, are generally consistent with those reported and disclosed in the Company’sFHN’s Form 10-K for the year ended December 31, 2019.
COMMERCIAL LOAN PORTFOLIOS
C&I
The C&I portfolio was $22.1$33.7 billion on March 31,September 30, 2020, and is comprised of loans and leases used for general business purposes. Typical products include working capital lines of credit, term loan financing of owner-occupied real estate and fixed assets, direct financing and sales-type leases, and trade credit enhancement through letters of credit. The largest geographical concentrations of balances as of March 31,September 30, 2020, are in Tennessee (29 percent)(22%), Florida (11%), Texas (10%), Louisiana (8%), North Carolina (10 percent)(8%), California (9 percent), Texas (6 percent), Florida (6 percent)(6%), Georgia (4 percent), South Carolina (3 percent)(5%), and Virginia (3 percent)Alabama (4%), with no other state representing more than 3 percent3% of the portfolio.
The following table provides the compositioncomposition of the C&I portfolio by industry as of March 31,September 30, 2020, and December 31, 2019. For purposes of this disclosure, industries are determined based on the North American Industry Classification System (“NAICS”) industry codes used by Federal statistical agencies in classifying business establishments for the collection, analysis, and publication of statistical data related to the U.S. business economy.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 107
Table 11—10—C&I Loan Portfolio by Industry
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent |
Industry: | | | | | | | | |
Loans to mortgage companies | | $ | 5,607,068 | | | 17 | % | | $ | 4,410,883 | | | 22 | % |
Finance & insurance | | 3,120,262 | | | 9 | | | 2,778,411 | | | 14 | |
Health care & social assistance | | 2,781,907 | | | 8 | | | 1,499,178 | | | 7 | |
Accommodation & food service | | 2,347,160 | | | 7 | | | 1,364,833 | | | 7 | |
Real estate rental & leasing (a) | | 2,378,081 | | | 7 | | | 1,454,336 | | | 7 | |
Wholesale trade | | 2,089,880 | | | 6 | | | 1,372,147 | | | 7 | |
Manufacturing | | 1,973,045 | | | 6 | | | 1,150,701 | | | 6 | |
Transportation & warehousing | | 1,851,054 | | | 6 | | | 691,235 | | | 3 | |
Other (education, arts, entertainment, etc) (b) | | 11,507,260 | | | 34 | | | 5,329,367 | | | 27 | |
Total C&I loan portfolio | | $ | 33,655,717 | | | 100 | % | | $ | 20,051,091 | | | 100 | % |
(a)Leasing, rental of real estate, equipment, and goods.
(b)Industries in this category each comprise less than 5% for 2020.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 94
|
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent |
Industry: | | | | | | | | |
Loans to mortgage companies | | $ | 5,713,914 |
| | 26 | % | | $ | 4,410,883 |
| | 22 | % |
Finance & insurance | | 2,797,370 |
| | 13 |
| | 2,778,411 |
| | 14 |
|
Real estate rental & leasing (a) | | 1,584,095 |
| | 7 |
| | 1,454,336 |
| | 7 |
|
Health care & social assistance | | 1,527,531 |
| | 7 |
| | 1,499,178 |
| | 8 |
|
Accommodation & food service | | 1,504,690 |
| | 7 |
| | 1,364,833 |
| | 7 |
|
Wholesale trade | | 1,464,847 |
| | 6 |
| | 1,372,147 |
| | 7 |
|
Manufacturing | | 1,343,586 |
| | 6 |
| | 1,150,701 |
| | 6 |
|
Other (education, arts, entertainment, etc) (b) | | 6,188,397 |
| | 28 |
| | 6,020,602 |
| | 29 |
|
Total C&I loan portfolio | | $ | 22,124,430 |
| | 100 | % | | $ | 20,051,091 |
| | 100 | % |
| |
(a) | Leasing, rental of real estate, equipment, and goods. |
| |
(b) | Industries in this category each comprise less than 5 percent for 2020.
|
Industry Concentrations
Loan concentrations are considered to exist for a financial institution when there are loans to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. 39 percent26% ofFHN’s C&I portfolio (Financeloans are loans to mortgage companies or borrowers in the finance and insurance plus Loans to mortgage companies)industry and as a result could be affected by items that uniquely impact the financial services industry. Except “Finance and Insurance” and “Loans to Mortgage Companies”, as discussed below, on March 31,September 30, 2020, FHN did not have any other concentrations of C&I loans in any single industry of 10 percent10% or more of total loans.
Loans to Mortgage Companies
The balance of loans to mortgage companies was 26 perc17% of ent of the C&I portfolio as of March 31,September 30, 2020, 22 percent22% as of December 31, 2019 and 13 percent 25% as of March 31,September 30, 2019, and includes balances related to both home purchase and refinance activity. This portfolio class, which generally fluctuates with mortgage rates and seasonal factors, includes commercial lines of credit to qualified mortgage companies primarily for the temporary warehousing of eligible mortgage loans prior to the borrower’s sale of those mortgage loans to third party investors. Generally, lending to mortgage lenders increases when there is a decline in mortgage rates and decreases when rates rise.In periods of economic uncertainty, this trend may not occur even if interest rates are declining. In firstthird quarter 2020, 46 percent40% of the loans funded were home purchases and 54 percent60% were refinance transactions.transactions.
Finance and Insurance
The finance and insurance component representrepresens 13 pts 9% of ercent of the C&I portfolio as of March 31,September 30, 2020 compared to 14 percent14% as of December 31, 2019, and includes TRUPSTRUPs (i.e., long-termlong-
term unsecured loans to bank
and insurance-related businesses), loans to bank holding companies, and asset-based lending to consumer finance companies. As of March 31,September 30, 2020, asset-based lending to consumer finance companies represents approximately $1.2$1.1 billion of the finance and insurance component.
TRUPSTRUPs 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 TRUPSTRUPs lending ceased in early 2008. Individual TRUPSTRUPs are re-graded at least quarterly as part of FHN’s commercial loan review process. The terms of these loans generally include a scheduled 30 year balloon payoff and include an option to defer interest for up to 20 consecutive quarters. As of March 31,September 30, 2020, no TRUP relationship was on interest deferral.
As of March 31,September 30, 2020, the unpaid principal balance (“UPB”) of trust preferred loans totaled $234.2 million ($173.6 million of bank TRUPS and $60.7 million of insurance TRUPS) with the UPB of other bank-related loans totaling $282.3 totaled $227.6 million. Inclusive of a valuation allowancean amortizing discount on TRUPSTRUPs of $18.9 million,$18.2 million, total reserves (ALLL plus the valuation allowance)amortizing discount) for TRUPSTRUPs and other bank-related loans were $29.9$28.5 million, or 6 percent13% of outstandingoutstanding UPB.
C&I Asset Quality Trends
The C&I portfolio trends remained stablehave been negatively impacted in firstthe third quarter 2020; however, the impact of2020 by economic uncertainty attributable to the COVID-19 pandemic and could continue to be negatively impactimpacted in future trends.periods. The C&I ALLLALLL increased $132.0 million$366.6 million from December 31, 2019, to $254.5 million$489.1 million as of March 31,September 30, 2020,primarily due to the sudden, steep decline
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 95
in the economic forecast attributable to the COVID-19 pandemic, the initial allowance recorded on PCD loans, and the adoption of ASU 2016-13.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 108
The allowance as a percentage of period-end loans increased 54 basisincreased 84 basis points to 1.15 percent1.45% as of March 31,September 30, 2020, compared to .61 percent.61% as of year-end 2019.
Nonperforming C&I loans increased $21.8 increased $138.5 million from December 31, 2019, to $96.1$212.8 million on March 31,September 30, 2020. The nonperforming loan (“NPL”) ratio increased to .43 percent0.63% of C&I loans as of March 31,September 30, 2020, from .37 percent0.37% as of December 31, 2019.The increase in NPLs was primarily driven by one credit.acquired NPLs from IBKC.
The 30+ delinquencydelinquency ratio increased 3one basis points to .08 percentpoint as of March 31, September 30, 2020. FirstNet charge-offs in third quarter 2020 experienced net charge-offs of $5.8were $66.2 million compared to $3.3 millionmillion and $2.3$15.4 million of net charge-offs in fourth quarter 2019 and firstthird quarter 2019, respectively. FirstThird quarter 2020 net charge-offs were primarily driven by one credit.losses in the energy portfolio.
The following table shows C&I asset quality trends by segment.
Table 12—11—C&I Asset Quality Trends by Segment
| | | | 2020 | | | 2020 | |
| | Three months ended | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | (Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of January 1 | | $ | 122,426 |
| | $ | 60 |
| | $ | 122,486 |
| |
ASU Adoption 2016-13 | | 9,086 |
| | 9,696 |
| | 18,782 |
| |
Allowance for loan and lease losses as of July 1 | | Allowance for loan and lease losses as of July 1 | | $ | 308,461 | | | $ | 10,261 | | | $ | 318,722 | | |
Charge-offs | | (6,751 | ) | | — |
| | (6,751 | ) | Charge-offs | | (69,384) | | | (64) | | | (69,448) | | |
Recoveries | | 931 |
| | 4 |
| | 935 |
| Recoveries | | 3,194 | | | 6 | | | 3,200 | | |
Provision/(provision credit) for loan losses | | 118,970 |
| | 94 |
| | 119,064 |
| |
Allowance for loan losses as of March 31 | | $ | 244,662 |
| | $ | 9,854 |
| | $ | 254,516 |
| |
Initial allowance on loans purchased with credit deterioration (b) | | Initial allowance on loans purchased with credit deterioration (b) | | 137,530 | | | 172 | | | 137,702 | | |
Provision for loan and lease losses | | Provision for loan and lease losses | | 97,112 | | | 1,806 | | | 98,918 | | |
Allowance for loan and lease losses as of September 30 | | Allowance for loan and lease losses as of September 30 | | $ | 476,913 | | | $ | 12,181 | | | $ | 489,094 | | |
Net charge-offs % (qtr. annualized) | | 0.12 | % | | NM |
| | 0.12 | % | Net charge-offs % (qtr. annualized) | | 0.78 | % | | N/M | | 0.77 | % | |
Allowance / net charge-offs | | 10.45 | x | | NM |
| | 10.88 | x | Allowance / net charge-offs | | 1.81 | x | | N/M | | 1.86 | x | |
| | | | | | | | | | | | | |
| | As of March 31 | | | As of September 30 | |
Period-end loans | | $ | 21,798,168 |
| | $ | 326,262 |
| | $ | 22,124,430 |
| Period-end loans | | $ | 33,264,706 | | | $ | 391,011 | | | $ | 33,655,717 | | |
Nonperforming loans | | 96,081 |
| | — |
| | 96,081 |
| Nonperforming loans | | 212,522 | | | 288 | | | 212,810 | | |
Troubled debt restructurings | | 40,439 |
| | — |
| | 40,439 |
| Troubled debt restructurings | | 153,831 | | | — | | | 153,831 | | |
30+ Delinq. % (a) | | 0.07 | % | | 0.50 | % | | 0.08 | % | 30+ Delinq. % (a) | | 0.06 | % | | — | % | | 0.06 | % | |
NPL % | | 0.44 |
| | — |
| | 0.43 |
| NPL % | | 0.64 | % | | 0.07 | % | | 0.63 | % | |
Allowance / loans % | | 1.12 |
| | 3.02 |
| | 1.15 |
| Allowance / loans % | | 1.43 | | | 3.12 | | | 1.45 | | |
| | | | | | | | | | | | | |
| | 2019 | | 2019 | |
| | Three months ended | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | (Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of January 1 | | $ | 97,617 |
| | $ | 1,330 |
| | $ | 98,947 |
| |
Allowance for loan and lease losses as of July 1 | | Allowance for loan and lease losses as of July 1 | | $ | 114,810 | | | $ | 1,286 | | | $ | 116,096 | | |
Charge-offs | | (3,101 | ) | | — |
| | (3,101 | ) | Charge-offs | | (18,598) | | | — | | | (18,598) | | |
Recoveries | | 801 |
| | 28 |
| | 829 |
| Recoveries | | 3,244 | | | 1 | | | 3,245 | | |
Provision/(provision credit) for loan losses | | 7,076 |
| | (38 | ) | | 7,038 |
| Provision/(provision credit) for loan losses | | 14,478 | | | (1,091) | | | 13,387 | | |
Allowance for loan losses as of March 31 | | $ | 102,393 |
| | $ | 1,320 |
| | $ | 103,713 |
| |
Allowance for loan and lease losses as of September 30 | | Allowance for loan and lease losses as of September 30 | | $ | 113,934 | | | $ | 196 | | | $ | 114,130 | | |
Net charge-offs % (qtr. annualized) | | 0.06 | % | | NM |
| | 0.06 | % | Net charge-offs % (qtr. annualized) | | 0.33 | % | | NM | | 0.32 | % | |
Allowance / net charge-offs | | 10.98 | x | | NM |
| | 11.26 | x | Allowance / net charge-offs | | 1.87 | x | | NM | | 1.87 | x | |
| | | | | | | | | | | | | |
| | As of December 31 | | As of December 31 | |
Period-end loans | | $ | 19,721,457 |
| | $ | 329,634 |
| | $ | 20,051,091 |
| Period-end loans | | $ | 19,721,457 | | | $ | 329,634 | | | $ | 20,051,091 | | |
Nonperforming loans | | 74,312 |
| | — |
| | 74,312 |
| Nonperforming loans | | 74,312 | | | — | | | 74,312 | | |
Troubled debt restructurings | | 42,199 |
| | — |
| | 42,199 |
| Troubled debt restructurings | | 42,199 | | | — | | | 42,199 | | |
30+ Delinq. % (a) | | 0.05 | % | | — | % | | 0.05 | % | 30+ Delinq. % (a) | | 0.05 | % | | — | % | | 0.05 | % | |
NPL % | | 0.38 |
| | — |
| | 0.37 |
| NPL % | | 0.38 | | | — | | | 0.37 | | |
Allowance / loans % | | 0.62 |
| | 0.02 |
| | 0.61 |
| Allowance / loans % | | 0.62 | | | 0.02 | | | 0.61 | | |
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. |
(a)30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 96109
Commercial Real Estate
The CRE portfolio was $4.6$12.5 billion on March 31,September 30, 2020. The CRE portfolio includes both financings for commercial construction and nonconstruction loans. The largest geographical concentrations of balances as of March 31,September 30, 2020 are in Florida (28%), North Carolina (28 percent)(12%), Texas (11%), Louisiana (11%), Tennessee (20 percent), Florida (13 percent), South Carolina (8 percent), Texas (8 percent), Georgia (6 percent)(9%), and Kentucky (3 percent)Georgia (8%), with no other state representing more than 3 percent5% of the portfolio. Thisportfolio 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.estate. Subcategories of income CRE consist ofof multi-family (28%), office (27 percent), multi-family (22 percent)(22%), retail (19 percent)(19%), industrial (13 percent)(10%), hospitality (12 percent)(10%), land/land development (1 percent)(2%), and other (6 percent)(9%).
The residential CRE class includes loans to residential builders and developers for the purpose of constructing single-family homes, condominiums, and town homes, and on a limited basis, for developing residential subdivisions. After the fulfillment of existing commitments over the near term, the residential CRE class will be in a wind-down state with the expectation of full runoff in the foreseeable future.
CRE Asset Quality Trends
The CRE portfolio asset quality trends as of March 31,September 30, 2020 was not significantly affectedhave been negatively impacted by economic uncertainty attributable to the global COVID-19 pandemic, as well as acquired nonperforming loans during third
quarter 2020, with nonperforming loans up $.4$49.2 million fromfrom December 31, 2019. However, economic uncertainty attributable to COVID-19 could impact futureThe CRE portfolio trends.could also continue to be negatively impacted in future periods due to COVID-19. The allowance increased to $47.6$208.0 million as of March 31,September 30, 2020, from $36.1 million as of December 31, 2019 primarily due to the initial allowance recorded on PCD loans in the third quarter 2020 and the impact of COVID-19. Allowance as a percentage of loans increased 2083 basis points from .83 percent0.83% as of December 31, 2019, to 1.03 percent1.66% as of March 31,September 30, 2020. Nonperforming loans as a percentage of total CRE loans increased 1 basis pointto 0.41% as of September 30, 2020 from 0.04% at December 31, 2019, to .05 percent as of March 31, 2020.2019.
Accruing delinquencies as a percentage of period-end loans decreasedincreased to .01 percent12 basis points as of March 31,September 30, 2020, from .02 percent2 basis points as of December 31, 2019. Net charge-offs were not significant$1.3 million in firstthird quarter 2020 and were $377 thousandcompared to $0.2 million in firstthird quarter 2019.
The following table shows commercial real estate asset quality trends by segment.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 97110
Table 13—12—Commercial Real Estate Asset Quality Trends by Segment
| | | | 2020 | | | 2020 | |
| | Three months ended | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | (Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of January 1 | | $ | 33,729 |
| | $ | 2,383 |
| | $ | 36,112 |
| |
ASU Adoption 2016-13 | | (5,191 | ) | | (2,157 | ) | | (7,348 | ) | |
Allowance for loan and lease losses as of July 1 | | Allowance for loan and lease losses as of July 1 | | $ | 56,723 | | | $ | 562 | | | $ | 57,285 | | |
Charge-offs | | (581 | ) | | — |
| | (581 | ) | Charge-offs | | (3,540) | | | — | | | (3,540) | | |
Recoveries | | 573 |
| | — |
| | 573 |
| Recoveries | | 2,243 | | | — | | | 2,243 | | |
Provision/(provision credit) for loan losses | | 18,399 |
| | 470 |
| | 18,869 |
| |
Allowance for loan losses as of March 31 | | $ | 46,929 |
| | $ | 696 |
| | $ | 47,625 |
| |
Initial allowance on loans purchased with credit deterioration (b) | | Initial allowance on loans purchased with credit deterioration (b) | | 100,123 | | | — | | | 100,123 | | |
Provision for loan losses | | Provision for loan losses | | 51,033 | | | 814 | | | 51,847 | | |
Allowance for loan and lease losses as of September 30 | | Allowance for loan and lease losses as of September 30 | | $ | 206,582 | | | $ | 1,376 | | | $ | 207,958 | | |
Net charge-offs % (qtr. annualized) | | — | % | | — |
| | — | % | Net charge-offs % (qtr. annualized) | | 0.04 | | | — | | | 0.04 | | |
Allowance / net charge-offs | | NM |
| | NM |
| | NM |
| Allowance / net charge-offs | | 40.04 | x | | — | | | 40.31 | x | |
| | | | | | | | | |
| | As of March 31 | | As of September 30 | |
Period-end loans | | $ | 4,608,103 |
| | $ | 31,589 |
| | $ | 4,639,692 |
| Period-end loans | | $ | 12,440,481 | | | $ | 70,406 | | | $ | 12,510,887 | | |
Nonperforming loans | | 2,190 |
| | — |
| | 2,190 |
| Nonperforming loans | | 51,061 | | | — | | | 51,061 | | |
Troubled debt restructurings | | 1,153 |
| | — |
| | 1,153 |
| Troubled debt restructurings | | 18,994 | | | — | | | 18,994 | | |
30+ Delinq. % (a) | | 0.01 | % | | — | % | | 0.01 | % | 30+ Delinq. % (a) | | 0.12 | % | | — | % | | 0.12 | % | |
NPL % | | 0.05 |
| | — |
| | 0.05 |
| NPL % | | 0.41 | | | — | | | 0.41 | | |
Allowance / loans % | | 1.02 |
| | 2.20 |
| | 1.03 |
| Allowance / loans % | | 1.66 | | | 1.95 | | | 1.66 | | |
| | | | | | | | | | | | | |
| | 2019 | | 2019 | |
| | Three months ended | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | (Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of January 1 | | $ | 31,311 |
| | $ | — |
| | $ | 31,311 |
| |
Allowance for loan and lease losses as of July 1 | | Allowance for loan and lease losses as of July 1 | | $ | 29,215 | | | $ | 3,738 | | | $ | 32,953 | | |
Charge-offs | | (434 | ) | | — |
| | (434 | ) | Charge-offs | | (369) | | | — | | | (369) | | |
Recoveries | | 57 |
| | — |
| | 57 |
| Recoveries | | 181 | | | — | | | 181 | | |
Provision/(provision credit) for loan losses | | 3,448 |
| | — |
| | 3,448 |
| Provision/(provision credit) for loan losses | | 3,797 | | | (937) | | | 2,860 | | |
Allowance for loan losses as of March 31 | | $ | 34,382 |
| | $ | — |
| | $ | 34,382 |
| |
Allowance for loan and lease losses as of September 30 | | Allowance for loan and lease losses as of September 30 | | $ | 32,824 | | | $ | 2,801 | | | $ | 35,625 | | |
Net charge-offs % (qtr. annualized) | | 0.04 | % | | NM |
| | 0.04 | % | Net charge-offs % (qtr. annualized) | | 0.02 | % | | — | | | 0.02 | % | |
Allowance / net charge-offs | | 22.50 | x | | NM |
| | 22.50 | x | Allowance / net charge-offs | | 43.95 | x | | NM | | 47.70 | x | |
| | | | | | | | | | | | | |
| | As of December 31 | | As of December 31 | |
Period-end loans | | $ | 4,292,199 |
| | $ | 44,818 |
| | $ | 4,337,017 |
| Period-end loans | | $ | 4,292,199 | | | $ | 44,818 | | | $ | 4,337,017 | | |
Nonperforming loans | | 1,825 |
| | — |
| | 1,825 |
| Nonperforming loans | | 1,825 | | | — | | | 1,825 | | |
Troubled debt restructurings | | 1,200 |
| | — |
| | 1,200 |
| Troubled debt restructurings | | 1,200 | | | — | | | 1,200 | | |
30+ Delinq. % (a) | | 0.02 | % | | — | % | | 0.02 | % | 30+ Delinq. % (a) | | 0.02 | % | | — | % | | 0.02 | % | |
NPL % | | 0.04 |
| | — |
| | 0.04 |
| NPL % | | 0.04 | | | — | | | 0.04 | | |
Allowance / loans % | | 0.79 |
| | 5.32 |
| | 0.83 |
| Allowance / loans % | | 0.79 | | | 5.32 | | | 0.83 | | |
NM—Not meaningful
Loans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
(a)30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 98111
CONSUMER LOAN PORTFOLIOS
Consumer Real Estate
The consumer real estate portfolio was $6.1$12.3 billion on March 31,September 30, 2020, and is primarily composed of home equity lines and installment loans including restricted balances (loans consolidated under ASC 810). The largest geographical concentrationsconcentrations of balances as of March 31,September 30, 2020, are inin Florida (31%), Tennessee (55 percent)(26%), Louisiana (10%), North Carolina (15 percent)(9%), Florida (14 percent)Georgia (3%), and California (3 percent)Alabama (3%), with no other state representingrepresenting more than 3 percent3% of the portfolio.portfolio. As of March 31,September 30, 2020, approximately 85 percent84% of the consumer real estate portfolio was in a first lien position. At origination, weighted average FICO score of this portfolio was 755750 and refreshed FICO scores averaged 754749 on March 31,September 30, 2020. Generally, performanceperformance of this portfolio is affected by life events that affect borrowers’ finances, the level of unemployment, and home prices.
Home equity lines of credit (“HELOCs”) comprise $1.3$2.5 billion of the consumer real estate portfolio as of March 31,September 30, 2020. FHN’s HELOCs typically have a 5 or 10 year draw period followed by a 10 or 20 year repayment period, respectively. During the draw period, a borrower is able to draw on the line and is only required to make interest payments. The line is automatically frozen if a borrower becomes 45 days or more past due on payments. Once the draw period has concluded, the line is closed and the borrower is required to make both principal and interest
payments monthly until the loan matures. The principal payment generally is fully amortizing, but payment amounts will adjust when variable rates reset to reflect changes in the prime rate.
As of March 31,September 30, 2020, approximatelyapproxima 78 percenttely 86% of FHN's HELOCs are in the draw period compared to approximately 76 percent76% as of December 31, 2019. Based on when draw periods are scheduled to end per the line agreement, it is expected that $306.7 $472.8 million, or 32 percent of21% of HELOCs currently in the draw period, will enter the repayment period during the next 60 months. Delinquencies and charge-off rates for HELOCs that have entered the repayment period are initially higher than HELOCs still in the draw period because of the increased minimum payment requirement; however, after some seasoning, performance of these loans usually begins to stabilize. The home equity lines of the consumer real estate portfolio are being monitored closely for those nearing the end of the draw period and borrowers are initially being contacted at least 24 months before the repayment period begins to remind the customer of the terms of their agreement and to inform them of options.
September 30, 2020 and December 31, 2019 include $40.0 million and $18.8 million, respectively, of held-to-maturity consumer mortgage loans secured by residential real estate in process of foreclosure.
The following table shows the HELOCs currently in the draw period and expected timing of conversion to the repayment period.
Table 14—13—HELOC Draw To Repayment Schedule
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Repayment Amount | | Percent | | Repayment Amount | | Percent |
Months remaining in draw period: | | | | | | | | |
0-12 | | $ | 92,670 | | | 4 | % | | $ | 47,455 | | | 5 | % |
13-24 | | 74,067 | | | 3 | | | 58,843 | | | 6 | |
25-36 | | 66,411 | | | 3 | | | 65,833 | | | 7 | |
37-48 | | 68,842 | | | 3 | | | 67,692 | | | 7 | |
49-60 | | 170,780 | | | 8 | | | 75,246 | | | 7 | |
>60 | | 1,746,350 | | | 79 | | | 666,001 | | | 68 | |
Total | | $ | 2,219,120 | | | 100 | % | | $ | 981,070 | | | 100 | % |
|
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Repayment Amount | | Percent | | Repayment Amount | | Percent |
Months remaining in draw period: | | | | | | | | |
0-12 | | $ | 46,788 |
| | 5 | % | | $ | 47,455 |
| | 5 | % |
13-24 | | 59,132 |
| | 6 |
| | 58,843 |
| | 6 |
|
25-36 | | 64,613 |
| | 7 |
| | 65,833 |
| | 7 |
|
37-48 | | 60,114 |
| | 6 |
| | 67,692 |
| | 7 |
|
49-60 | | 76,089 |
| | 8 |
| | 75,246 |
| | 7 |
|
>60 | | 665,293 |
| | 68 |
| | 666,001 |
| | 68 |
|
Total | | $ | 972,029 |
| | 100 | % | | $ | 981,070 |
| | 100 | % |
Consumer Real Estate Asset Quality Trends
Overall, performance of the consumer real estate portfolio remained stable in firstthird quarter 2020. Economic uncertainty attributable to the COVID-19 pandemic could impact future trends. The non-strategic segment is a run-off portfolio and while the absolute dollars of delinquencies, and nonaccruals, as well as theand 30+ accruing delinquencies increased from year-end, due primarily to acquired loans, the 30+
delinquencies ratio improved from year-end,while the nonperforming loans ratios deteriorated.ratio remained relatively stable. That trend of increasing deterioration of ratios in the non-strategic
segment is likely to continue and may become more skewed as the portfolio shrinks and some of the stronger borrowers are better able than weaker ones to payoff or refinance elsewhere. NPLs as a percentage of loans increased 107 basis pointpoints from year-end to 1.49 percent1.46% as of March 31,September 30, 2020. The ALLL increased $94.6$237.0 million from December 31,
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 112
2019, to $123.0$265.4 million as of March 31,September 30, 2020, primarily due to the impact of the COVID-19 pandemic, the initial allowance recorded on PCD loans, and the adoption of ASU 2016-13. The allowance as a percentage of loans increased 155169 basis points to 2.01 percent2.15% as of March 31,September 30, 2020 compared to year-end. Theyear-end 2019. Driven by acquired loans, the balance of nonperformingnonperforming loans increased $5.5$94.4 million to $91.2$180.1 million as of
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 99
million as of March 31,September 30, 2020. Loans delinquent 30 or more days and still accruing declinedincreased from $42.9 million as of December 31, 2019, to $40.1 million$48.4 million as of March 31,September 30, 2020. The portfolio realized net recoveries of $1.2 millionof $3.5 million in firstthird quarter 2020 compared to net recoveries of $3.3 million in
fourth quarter 2019 and net recoveries of $1.2$3.6 million in firstthird quarter 2019.
The following table shows consumer real estate asset quality trends by segment.
Table 15—14—Consumer Real Estate Asset Quality Trends by Segment
| | | | 2020 | | | 2020 | |
| | Three months ended | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Corporate | | Non-Strategic | | Consolidated | (Dollars in thousands) | | Regional Bank | | Corporate | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of January 1 | | $ | 13,340 |
| | N/A |
| | $ | 15,103 |
| | $ | 28,443 |
| |
ASU Adoption 2016-13 | | 88,004 |
| | N/A |
| | 4,988 |
| | 92,992 |
| |
Allowance for loan and lease losses as of July 1 | | Allowance for loan and lease losses as of July 1 | | $ | 120,885 | | | N/A | | $ | 22,872 | | | $ | 143,757 | | |
Charge-offs | | (488 | ) | | N/A |
| | (1,822 | ) | | (2,310 | ) | Charge-offs | | (1,473) | | | N/A | | (361) | | | (1,834) | | |
Recoveries | | 690 |
| | N/A |
| | 2,865 |
| | 3,555 |
| Recoveries | | 1,598 | | | N/A | | 3,713 | | | 5,311 | | |
Initial allowance on loans purchased with credit deterioration (b) | | Initial allowance on loans purchased with credit deterioration (b) | | 42,127 | | | N/A | | 2,014 | | | 44,141 | | |
Provision/(provision credit) for loan losses | | 1,412 |
| | N/A |
| | (1,070 | ) | | 342 |
| Provision/(provision credit) for loan losses | | 76,994 | | | N/A | | (2,939) | | | 74,055 | | |
Allowance for loan losses as of March 31 | | $ | 102,958 |
| | N/A |
| | $ | 20,064 |
| | $ | 123,022 |
| |
| Allowance for loan and lease losses as of September 30 | | Allowance for loan and lease losses as of September 30 | | $ | 240,131 | | | N/A | | $ | 25,299 | | | $ | 265,430 | | |
Net charge-offs % (qtr. annualized) | | NM |
| | N/A |
| | NM |
| | NM |
| Net charge-offs % (qtr. annualized) | | NM | | N/A | | NM | | NM | |
Allowance / net charge-offs | | NM |
| | N/A |
| | NM |
| | NM |
| Allowance / net charge-offs | | NM | | N/A | | NM | | NM | |
| | | | | | | | | | | | | | | | | |
| | As of March 31 | | As of September 30 | |
Period-end loans | | $ | 5,716,888 |
| | $ | 30,613 |
| | $ | 371,882 |
| | $ | 6,119,383 |
| Period-end loans | | $ | 11,874,481 | | | $ | — | | | $ | 453,388 | | | $ | 12,327,869 | | |
Nonperforming loans | | 44,536 |
| | 1,302 |
| | 45,344 |
| | 91,182 |
| Nonperforming loans | | 122,521 | | | — | | | 57,567 | | | 180,088 | | |
Troubled debt restructurings | | 43,360 |
| | 2,041 |
| | 106,992 |
| | 152,393 |
| Troubled debt restructurings | | 54,036 | | | — | | | 93,862 | | | 147,898 | | |
30+ Delinq. % (a) | | 0.51 | % | | 5.39 | % | | 2.56 | % | | 0.66 | % | 30+ Delinq. % (a) | | 0.31 | % | | — | | | 2.54 | % | | 0.39 | % | |
NPL % | | 0.78 |
| | 4.25 |
| | 12.19 |
| | 1.49 |
| NPL % | | 1.03 | | | — | | | 12.70 | | | 1.46 | | |
Allowance / loans % | | 1.80 |
| | N/A |
| | 5.40 |
| | 2.01 |
| Allowance / loans % | | 2.02 | | | — | | | 5.58 | | | 2.15 | | |
| | | | | | | | | | | | | | | | | |
| | 2019 | | 2019 | |
| | Three months ended (a) | | Three months ended (a) | |
(Dollars in thousands) | | Regional Bank | | Corporate | | Non-Strategic | | Consolidated | (Dollars in thousands) | | Regional Bank | | Corporate | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of January 1 | | $ | 14,555 |
| | N/A |
| | $ | 22,884 |
| | $ | 37,439 |
| |
Allowance for loan and lease losses as of July 1 | | Allowance for loan and lease losses as of July 1 | | $ | 14,705 | | | N/A | | $ | 16,827 | | | $ | 31,532 | | |
Charge-offs | | (1,641 | ) | | N/A |
| | (1,163 | ) | | (2,804 | ) | Charge-offs | | (378) | | | N/A | | (1,095) | | | (1,473) | | |
Recoveries | | 1,036 |
| | N/A |
| | 3,005 |
| | 4,041 |
| Recoveries | | 1,124 | | | N/A | | 3,931 | | | 5,055 | | |
Provision/(provision credit) for loan losses | | 1,253 |
| | N/A |
| | (5,775 | ) | | (4,522 | ) | Provision/(provision credit) for loan losses | | (644) | | | N/A | | (3,796) | | | (4,440) | | |
Allowance for loan losses as of March 31 | | $ | 15,203 |
| | N/A |
| | $ | 18,951 |
| | $ | 34,154 |
| |
Allowance for loan and lease losses as of September 30 | | Allowance for loan and lease losses as of September 30 | | $ | 14,807 | | | N/A | | $ | 15,867 | | | $ | 30,674 | | |
Net charge-offs % (qtr. annualized) | | 0.04 | % | | N/A |
| | NM |
| | NM |
| Net charge-offs % (qtr. annualized) | | NM | | N/A | | NM | | NM | |
Allowance / net charge-offs | | 6.20 | x | | N/A |
| | NM |
| | NM |
| Allowance / net charge-offs | | NM | | N/A | | NM | | NM | |
| | | | | | | | | | | | | | | | | |
| | As of December 31 (a) | | As of December 31 (a) | |
Period-end loans | | $ | 5,738,455 |
| | $ | 31,473 |
| | $ | 407,211 |
| | $ | 6,177,139 |
| Period-end loans | | $ | 5,738,455 | | | $ | 31,473 | | | $ | 407,211 | | | $ | 6,177,139 | | |
Nonperforming loans | | 37,014 |
| | 1,327 |
| | 47,353 |
| | 85,694 |
| Nonperforming loans | | 37,014 | | | 1,327 | | | 47,353 | | | 85,694 | | |
Troubled debt restructurings | | 46,031 |
| | 2,457 |
| | 113,758 |
| | 162,246 |
| Troubled debt restructurings | | 46,031 | | | 2,457 | | | 113,758 | | | 162,246 | | |
30+ Delinq. % (b) | | 0.50 | % | | 5.29 | % | | 3.10 | % | | 0.70 | % | 30+ Delinq. % (b) | | 0.50 | % | | 5.29 | % | | 3.10 | % | | 0.70 | % | |
NPL % | | 0.65 |
| | 4.22 |
| | 11.63 |
| | 1.39 |
| NPL % | | 0.65 | | | 4.22 | | | 11.63 | | | 1.39 | | |
Allowance / loans % | | 0.23 |
| | N/A |
| | 3.71 |
| | 0.46 |
| Allowance / loans % | | 0.23 | | | N/A | | 3.71 | | | 0.46 | | |
NM—Not meaningful
Loans are expressed net of unearned income.
| |
(a) | In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability. |
| |
(b) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
(a)In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability.
(b)30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 100113
Credit Card and Other
The credit card and other portfolio, which is primarily within the regional banking segment, was $.5$1.2 billion as of March 31,September 30, 2020, and primarily includes creditconsumer-related credits, including home equity and other personal consumer loans, credit card receivables, other consumer-related credits, and automobile loans. The allowance increased to $19.3$25.6 million as of March 31,September 30, 2020, from $13.3 million as December 31,
2019, primarily driven by the sudden, steep decline in the
economic forecastuncertainty attributable to the COVID-19 pandemic, the initial allowance recorded on PCD loans, and the adoption of ASU 2016-13. Loans 30 days or more delinquent and accruing as a percentage of loans increased 6 decreased 51 basis points from December 31, 2019, to .99 percent 0.42% as of March 31,September 30, 2020. Net charge-offs were $2.6$2.5 million in firstthird quarter 2020 compared to $3.1$2.6 million in firstthird quarter 2019.
Table 16—15—Credit Card and Other Asset Quality Trends by Segment
| | | | 2020 | | | 2020 | |
| | Three months ended | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | (Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of January 1 | | $ | 13,235 |
| | $ | 31 |
| | $ | 13,266 |
| |
ASU Adoption 2016-13 | | 1,607 |
| | 361 |
| | 1,968 |
| |
Allowance for loan and lease losses as of July 1 | | Allowance for loan and lease losses as of July 1 | | $ | 17,807 | | | $ | 310 | | | $ | 18,117 | | |
Charge-offs | | (3,408 | ) | | (403 | ) | | (3,811 | ) | Charge-offs | | (3,271) | | | (248) | | | (3,519) | | |
Recoveries | | 915 |
| | 264 |
| | 1,179 |
| Recoveries | | 761 | | | 236 | | | 997 | | |
Initial allowance on loans purchased with credit deterioration (b) | | Initial allowance on loans purchased with credit deterioration (b) | | 4,762 | | | 83 | | | 4,845 | | |
Provision/(provision credit) for loan losses | | 6,654 |
| | 71 |
| | 6,725 |
| Provision/(provision credit) for loan losses | | 5,202 | | | (22) | | | 5,180 | | |
Allowance for loan losses as of March 31 | | $ | 19,003 |
| | $ | 324 |
| | $ | 19,327 |
| |
Allowance for loan and lease losses as of September 30 | | Allowance for loan and lease losses as of September 30 | | $ | 25,261 | | | $ | 359 | | | $ | 25,620 | | |
Net charge-offs % (qtr. annualized) | | 2.14 | % | | 1.82 | % | | 2.12 | % | Net charge-offs % (qtr. annualized) | | 0.87 | % | | 0.08 | % | | 0.83 | % | |
Allowance / net charge-offs | | 1.89 | x | | 0.58 | x | | 1.83 | x | Allowance / net charge-offs | | 2.53 | x | | 7.38 | x | | 2.55 | x | |
| | | | | | | | | | | | | |
| | As of March 31 | | As of September 30 | |
Period-end loans | | $ | 468,183 |
| | $ | 26,615 |
| | $ | 494,798 |
| Period-end loans | | $ | 1,146,005 | | | $ | 66,053 | | | $ | 1,212,058 | | |
Nonperforming loans | | 109 |
| | 251 |
| | 360 |
| Nonperforming loans | | 2,714 | | | 164 | | | 2,878 | | |
Troubled debt restructurings | | 667 |
| | 32 |
| | 699 |
| Troubled debt restructurings | | 660 | | | 24 | | | 684 | | |
30+ Delinq. % (a) | | 0.90 | % | | 2.60 | % | | 0.99 | % | 30+ Delinq. % (a) | | 0.42 | % | | 0.53 | % | | 0.42 | % | |
NPL % | | 0.02 |
| | 0.94 |
| | 0.07 |
| NPL % | | 0.24 | | | 0.25 | | | 0.24 | | |
Allowance / loans % | | 4.06 |
| | 1.21 |
| | 3.91 |
| Allowance / loans % | | 2.20 | | | 0.54 | | | 2.11 | | |
| | | | | | | | | | | | | |
| | 2019 | | | 2019 | |
| | Three months ended | | Three months ended | |
(Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | (Dollars in thousands) | | Regional Bank | | Non-Strategic | | Consolidated | |
Allowance for loan losses as of January 1 | | $ | 12,595 |
| | $ | 132 |
| | $ | 12,727 |
| |
Allowance for loan and lease losses as of July 1 | | Allowance for loan and lease losses as of July 1 | | $ | 12,119 | | | $ | 49 | | | $ | 12,168 | | |
Charge-offs | | (3,002 | ) | | (1,186 | ) | | (4,188 | ) | Charge-offs | | (3,300) | | | (597) | | | (3,897) | | |
Recoveries | | 745 |
| | 342 |
| | 1,087 |
| Recoveries | | 1,022 | | | 234 | | | 1,256 | | |
Provision/(provision credit) for loan losses | | 2,179 |
| | 857 |
| | 3,036 |
| |
Allowance for loan losses as of March 31 | | $ | 12,517 |
| | $ | 145 |
| | $ | 12,662 |
| |
Provision for loan losses | | Provision for loan losses | | 2,840 | | | 353 | | | 3,193 | | |
Allowance for loan and lease losses as of September 30 | | Allowance for loan and lease losses as of September 30 | | $ | 12,681 | | | $ | 39 | | | $ | 12,720 | | |
Net charge-offs % (qtr. annualized) | | 2.10 | % | | 4.35 | % | | 2.44 | % | Net charge-offs % (qtr. annualized) | | 2.02 | % | | 2.84 | % | | 2.10 | % | |
Allowance / net charge-offs | | 1.37 | x | | 0.04 | x | | 1.01 | x | Allowance / net charge-offs | | 1.40 | x | | 0.03 | x | | 1.21 | x | |
| | | | | | | | | | | | | |
| | As of December 31 | | | As of December 31 | |
Period-end loans | | $ | 460,742 |
| | $ | 35,122 |
| | $ | 495,864 |
| Period-end loans | | $ | 460,742 | | | $ | 35,122 | | | $ | 495,864 | | |
Nonperforming loans | | 36 |
| | 298 |
| | 334 |
| Nonperforming loans | | 36 | | | 298 | | | 334 | | |
Troubled debt restructurings | | 615 |
| | 38 |
| | 653 |
| Troubled debt restructurings | | 615 | | | 38 | | | 653 | | |
30+ Delinq. % (a) | | 0.69 | % | | 4.05 | % | | 0.93 | % | 30+ Delinq. % (a) | | 0.69 | % | | 4.05 | % | | 0.93 | % | |
NPL % | | 0.01 |
| | 0.85 |
| | 0.07 |
| NPL % | | 0.01 | | | 0.85 | | | 0.07 | | |
Allowance / loans % | | 2.87 |
| | 0.09 |
| | 2.68 |
| Allowance / loans % | | 2.87 | | | 0.09 | | | 2.68 | | |
NM—Not meaningful
Loans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
(a)30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 101114
The following table provides additional asset quality data by loan portfolio:
Table 17—16—Asset Quality by Portfolio
| | | | | | | | | | | | | | | |
| | September 30 | | December 31 | |
| | 2020 | | 2019 | |
Key Portfolio Details | | | | | |
C&I | | | | | |
Period-end loans ($ millions) | | $ | 33,656 | | | $ | 20,051 | | |
30+ Delinq. % (a) | | 0.06 | % | | 0.05 | % | |
NPL % | | 0.63 | | | 0.37 | | |
Charge-offs % (qtr. annualized) | | 0.77 | | | 0.07 | | |
Allowance / loans % | | 1.45 | % | | 0.61 | % | |
Allowance / net charge-offs | | 1.86 | x | | 9.25 | x | |
Commercial Real Estate | | | | | |
Period-end loans ($ millions) | | $ | 12,511 | | | $ | 4,337 | | |
30+ Delinq. % (a) | | 0.12 | % | | 0.02 | % | |
NPL % | | 0.41 | | | 0.04 | | |
Charge-offs % (qtr. annualized) | | 0.04 | | | NM | |
Allowance / loans % | | 1.66 | % | | 0.83 | % | |
Allowance / net charge-offs | | 40.31 | x | | NM | |
Consumer Real Estate (b) | | | | | |
Period-end loans ($ millions) | | $ | 12,328 | | | $ | 6,177 | | |
30+ Delinq. % (a) | | 0.39 | % | | 0.70 | % | |
NPL % | | 1.46 | | | 1.39 | | |
Charge-offs % (qtr. annualized) | | NM | | NM | |
Allowance / loans % | | 2.15 | % | | 0.46 | % | |
Allowance / net charge-offs | | NM | | NM | |
Credit Card and Other | | | | | |
Period-end loans ($ millions) | | $ | 1,212 | | | $ | 496 | | |
30+ Delinq. % (a) | | 0.42 | % | | 0.93 | % | |
NPL % | | 0.24 | | | 0.07 | | |
Charge-offs % (qtr. annualized) | | 0.83 | | | 2.29 | | |
Allowance / loans % | | 2.11 | % | | 2.68 | % | |
Allowance / net charge-offs | | 2.55 | x | | 1.14 | x | |
|
| | | | | | | | |
| | March 31 | | December 31 |
| | 2020 | | 2019 |
Key Portfolio Details | | | | |
C&I | | | | |
Period-end loans ($ millions) | | $ | 22,124 |
| | $ | 20,051 |
|
30+ Delinq. % (a) | | 0.08 | % | | 0.05 | % |
NPL % | | 0.43 |
| | 0.37 |
|
Charge-offs % (qtr. annualized) | | 0.12 |
| | 0.07 |
|
Allowance / loans % | | 1.15 | % | | 0.61 | % |
Allowance / net charge-offs | | 10.88 | x | | 9.25 | x |
Commercial Real Estate | | | | |
Period-end loans ($ millions) | | $ | 4,640 |
| | $ | 4,337 |
|
30+ Delinq. % (a) | | 0.01 | % | | 0.02 | % |
NPL % | | 0.05 |
| | 0.04 |
|
Charge-offs % (qtr. annualized) | | — |
| | NM |
Allowance / loans % | | 1.03 | % | | 0.83 | % |
Allowance / net charge-offs | | NM |
| | NM |
|
Consumer Real Estate (b) | | | | |
Period-end loans ($ millions) | | $ | 6,119 |
| | $ | 6,177 |
|
30+ Delinq. % (a) | | 0.66 | % | | 0.70 | % |
NPL % | | 1.49 |
| | 1.39 |
|
Charge-offs % (qtr. annualized) | | NM |
| | NM |
|
Allowance / loans % | | 2.01 | % | | 0.46 | % |
Allowance / net charge-offs | | NM |
| | NM |
|
Credit Card and Other | | | | |
Period-end loans ($ millions) | | $ | 495 |
| | $ | 496 |
|
30+ Delinq. % (a) | | 0.99 | % | | 0.93 | % |
NPL % | | 0.07 |
| | 0.07 |
|
Charge-offs % (qtr. annualized) | | 2.12 |
| | 2.29 |
|
Allowance / loans % | | 3.91 | % | | 2.68 | % |
Allowance / net charge-offs | | 1.83 | x | | 1.14 | x |
NM – Not meaningfulLoans are expressed net of unearned income.
| |
(a) | 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. |
| |
(b) | In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability. |
(a)30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.
(b)In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 102115
Allowance for Loan and Lease Losses
Management’s policy is to maintain the ALLL at a level sufficient to recognize current expected credit losses on the amortized cost basis of the loanportfolio. The total allowance for loan and lease losses increased to $444.5$988.1 million on March 31,September 30, 2020, from $200.3 million on December 31, 2019. The ALLL as of March 31,September 30, 2020 reflects the adoption of ASU 2016-13 on January 1, 2020, and the sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic.pandemic, and an initial allowance on PCD loans of $286.8 million. The ratio of allowance for credit losses to total loans net of unearned income, increase 69and leases increased 101 basis points to 1.33 percent1.65% on March 31,September 30, 2020, compared to .64 percent0.64% on December 31, 2019.
The provision for loan and lease losses is the charge to or release of earnings necessary to maintain the ALLL at a sufficient level reflecting management’s estimate of current expected losses on the amortized cost basis of the loan portfolio. Provision expense was $145.0$230.0 million in firstthird quarter 2020, compared to $9.0$15.0 million provision expense in firstthird quarter 2019. The increase is primarily attributable to a $147.0 million provision for non-PCD assets acquired in the IBKC merger and Truist Bank branch acquisition, as well as from the declining economic forecast attributable to the COVID-19 pandemic.
FHN expects asset quality trends to be impacted by the economic uncertainty attributable to the COVID-19 pandemic. The C&I portfolio reflects a broad mix of categories with the heaviest concentration in loans to mortgage companies which carry minimal credit risk. The C&I portfolio as of September 30, 2020 includes $4.2 billion of loans made under the Paycheck Protection Program ("PPP Loans") of the Small Business Administration ("SBA"). PPP loans are fully government guaranteed with the SBA. Due to the government guarantee and forgiveness provisions, PPP loans are considered to have no credit risk. The CRE portfolio metrics could be impacted by the COVID-19 pandemic due to travel and occupancy restrictions set by state and local governments affecting CRE- Hospitality and CRE-Retail. The consumer portfolio could be impacted by the COVID-19 pandemic if consumer unemployment continues to rise and customers are unable to continue making loan payments. The consumer portfolio, however, is high quality with no subprime and minimal exposure to other traditional categories of high risk lending. The remaining non-strategic consumer real estate should continue to steadily wind down; however, it could be impacted if unemployment continues to rise and borrowers have difficulty making loan payments. Asset quality metrics within non-strategic have become skewed as the portfolio continues to shrink.
Consolidated Net Charge-offs
In firstNet charge-offs in third quarter 2020 FHN experienced net charge-offs of $7.2were $66.6 million compared to $4.5$14.6 million of net charge-offs in firstthird quarter 2019.
TheNet charge-offs in third quarter 2020 in the commercial portfolio experienced $5.8were $67.5 million ofcompared to $15.5 million in net charge-offs in firstthird quarter 2019. Net charge-offs were impacted by higher energy charge-offs in the current quarter. Net recoveries in the consumer real estate portfolio were $3.5 million in third quarter 2020 compared to $3.6 million in net recoveries in third quarter 2019. Net charge-offs in the credit card and other consumer portfolio were $2.5 million in third quarter 2020 compared to $2.6 million in net charge-offs in first quarter 2019. In addition, the consumer real estate portfolio experienced net recoveries of $1.2 million in both first quarter 2020 and first quarter 2019. Credit card and other consumer experienced net charge-offs of $2.6 million in first quarter 2020 compared to $3.1 million a year ago.
ago.Nonperforming Assets
Nonperforming loans are loans placed on nonaccrual if it becomes evident that full collection of principal and interest is at risk, if impairment has been recognized as a partial charge-off of principal balance due to insufficient collateral value and past due status, or on(on a case-by-case basisbasis), if FHN continues to receive payments but there are other borrower-specific issues. Included in nonaccruals are loans 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.bankruptcy. These, along with OREO, excluding OREO from government insured mortgages, represent nonperforming assets (“NPAs”).
TotalDriven by acquired NPLs, total nonperforming assets (including NPLs HFS) increased to $207.3$470.8 million on March 31,September 30, 2020, from $181.9 million on December 31, 2019. The nonperforming assets ratio (nonperforming assets excluding NPLs HFS to total period-end loansloans plus OREO and other assets) increased to .61 percent0.78% as of March 31,September 30, 2020, from .57 percent0.57% as of December 31, 2019. Portfolio nonperforming loans increased to $189.8 million$446.8 million as of March 31,September 30, 2020 from $162.2 million as of December 31, 2019. The increase in nonperforming loans was driven by the C&I portfolio.consumer real estate and CRE portfolios from acquired loans.
The ratio of the ALLL to NPLs in the loan portfolio was 2.342.21 times as of March 31,September 30, 2020, compared to 1.24 times as of December 31, 2019. Certain nonperforming loans in both the commercial and consumer portfolios are deemed collateral-dependent and are charged down to an estimate of collateral value less costs to sell. Because loss content has been recognized through a partial charge-off, typically reserves are not recorded.
Table 1917 provides an activity rollforward of OREO balances for March 31,September 30, 2020 and 2019. The balance of OREO, exclusive of inventory from government insured mortgages, decreased to $13.9was $17.8 million as of March 31,September 30, 2020, from $20.7 million as of March 31, 2019, driven by the sale of OREO. Moreover, property values have stabilized which also affects the balance of OREO.an
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 103116
increase of $2.1 million from December 31, 2019, driven by acquired OREO from IBKC.
Table 18—17—Rollforward of OREO
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 | |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | |
Beginning balance | | $ | 13,177 | | | $ | 16,593 | | | $ | 15,660 | | | $ | 22,387 | | |
Acquired | | 8,593 | | | — | | | 8,593 | | | — | | |
Valuation adjustments | | (34) | | | (282) | | | (203) | | | (256) | | |
New foreclosed property | | 99 | | | 2,862 | | | 1,784 | | | 5,863 | | |
Disposal | | (4,068) | | | (1,357) | | | (8,067) | | | (10,178) | | |
Ending balance, September 30 (a) | | $ | 17,767 | | | $ | 17,816 | | | $ | 17,767 | | | $ | 17,816 | | |
|
| | | | | | | | |
| | Three Months Ended March 31 |
(Dollars in thousands) | | 2020 | | 2019 |
Beginning balance | | $ | 15,660 |
| | $ | 22,387 |
|
Valuation adjustments | | (27 | ) | | 35 |
|
New foreclosed property | | 928 |
| | 1,607 |
|
Disposal | | (2,680 | ) | | (3,353 | ) |
Ending balance, March 31 (a) | | $ | 13,881 |
| | $ | 20,676 |
|
(a)Excludes OREO and receivables related to government insured mortgages of $5.2 million and $9.7 million as of September 30, 2020 and 2019, respectively. | |
(a) | Excludes OREO and receivables related to government insured mortgages of $7.8 million and $3.4 million as of March 31, 2020 and 2019, respectively. |
The following table provides consolidated asset quality information for the three months ended March 31,September 30, 2020 and 2019, and as of March 31,September 30, 2020, and December 31, 2019:
Table 19—18—Asset Quality Information
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | |
(Dollars in thousands) | | 2020 | | 2019 | |
Allowance for loan and lease losses: | | | | | |
Beginning balance on July 1 | | $ | 537,881 | | | $ | 192,749 | | |
Provision for loan and lease losses | | 230,000 | | | 15,000 | | |
Charge-offs (a) | | (78,341) | | | (24,337) | | |
Recoveries | | 11,751 | | | 9,737 | | |
Initial allowance on loans purchased with credit deterioration | | $ | 286,811 | | | $ | — | | |
Ending balance on September 30 | | $ | 988,102 | | | $ | 193,149 | | |
Reserve for remaining unfunded commitments | | 88,720 | | | 6,890 | | |
Total allowance for loan and lease losses and reserve for unfunded commitments | | $ | 1,076,822 | | | $ | 200,039 | | |
Key ratios | | | | | |
Allowance / net charge-offs (b) | | 3.73 | x | | 3.33 | x | |
Net charge-offs % (c) | | 0.44 | % | | 0.19 | % | |
| | | | | |
| | As of September 30 | | As of December 31 | |
Nonperforming Assets by Segment | | 2020 | | 2019 | |
Regional Banking: | | | | | |
Nonperforming loans (d) | | $ | 388,817 | | | $ | 113,187 | | |
OREO (e) | | 15,652 | | | 12,347 | | |
Total Regional Banking | | 404,469 | | | 125,534 | | |
Non-Strategic: | | | | | |
Nonperforming loans (d) | | 58,019 | | | 48,978 | | |
Nonperforming loans held for sale, net of fair value adjustment (d) | | 6,188 | | | 4,047 | | |
OREO (e) | | 2,115 | | | 3,313 | | |
Total Non-Strategic | | 66,322 | | | 56,338 | | |
| | | | | |
| | | | | |
| | | | | |
Total nonperforming assets (d) (e) | | $ | 470,791 | | | $ | 181,872 | | |
|
| | | | | | | | |
| | Three Months Ended March 31 |
(Dollars in thousands) | | 2020 | | 2019 |
Allowance for loan losses: | | | | |
Beginning balance on January 1 | | $ | 200,307 |
| | $ | 180,424 |
|
ASU Adoption 2016-13 | | 106,394 |
| | — |
|
Provision/(provision credit) for loan losses | | 145,000 |
| | 9,000 |
|
Charge-offs | | (13,453 | ) | | (10,527 | ) |
Recoveries | | 6,242 |
| | 6,014 |
|
Ending balance on March 31 | | $ | 444,490 |
| | $ | 184,911 |
|
Reserve for remaining unfunded commitments | | 39,303 |
| | 8,014 |
|
Total allowance for loan losses and reserve for unfunded commitments | | $ | 483,793 |
| | $ | 192,925 |
|
Key ratios | | | | |
Allowance / net charge-offs (a) | | 15.33 | x | | 10.10 | x |
Net charge-offs % (b) | | 0.10 | % | | 0.07 | % |
| | | | |
| | As of March 31 | | As of December 31 |
Nonperforming Assets by Segment | | 2020 | | 2019 |
Regional Banking: | | | | |
Nonperforming loans (c) | | $ | 142,916 |
| | $ | 113,187 |
|
OREO (e) | | 10,278 |
| | 12,347 |
|
Total Regional Banking | | 153,194 |
| | 125,534 |
|
Non-Strategic: | | | | |
Nonperforming loans (c) | | 45,595 |
| | 47,651 |
|
Nonperforming loans held-for-sale net of fair value adjustment (c) | | 3,611 |
| | 4,047 |
|
OREO (e) | | 3,603 |
| | 3,313 |
|
Total Non-Strategic | | 52,809 |
| | 55,011 |
|
Corporate: | | | | |
Nonperforming loans (c) | | 1,302 |
| | 1,327 |
|
Total Corporate | | 1,302 |
| | 1,327 |
|
Total nonperforming assets (c) (d) | | $ | 207,305 |
| | $ | 181,872 |
|
NM - Not meaningful.
| |
(a) | Ratio is total allowance divided by annualized net charge-offs. |
| |
(b) | Ratio is annualized net charge-offs divided by quarterly average loans, net of unearned income. |
(a)The three months ended September 30, 2020 exclude day 1 charge-offs and the related initial allowance on PCD loans is net of these amounts. Under the new CECL standard, the initial ALLL recognized on PCD assets included an additional $237.3 million for charged-
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 104117
| |
(c) | Excludes loans that are 90 or more days past due and still accruing interest. |
| |
(d) | Excludes OREO from government-insured mortgages. |
off loans that had been written off prior to acquisition (whether full or partial) or which met FHN's charge-off policy at the time of acquisition. After charging these amounts off immediately upon acquisition, the net impact was $286.8 million of additional ALLL for PCD loans. |
| | | | | | | | |
| | As of March 31 | | As of December 31 |
| | 2020 | | 2019 |
Loans and commitments: | | | | |
Total period-end loans, net of unearned income | | $ | 33,378,303 |
| | $ | 31,061,111 |
|
Potential problem assets (a) | | 411,122 |
| | 346,896 |
|
Loans 30 to 89 days past due | | 48,498 |
| | 36,052 |
|
Loans 90 days past due (b) (c) | | 14,144 |
| | 21,859 |
|
Loans held-for-sale 30 to 89 days past due (c) | | 4,164 |
| | 3,732 |
|
Loans held-for-sale 30 to 89 days past due—guaranteed portion (c) (d) | | 4,049 |
| | 3,424 |
|
Loans held-for-sale 90 days past due (c) | | 5,397 |
| | 6,484 |
|
Loans held-for-sale 90 days past due—guaranteed portion (c) (d) | | 5,165 |
| | 6,417 |
|
Remaining unfunded commitments | | $ | 10,966,768 |
| | $ | 12,355,220 |
|
Key ratios | | | | |
Allowance / loans % | | 1.33 | % | | 0.64 | % |
Allowance / NPL | | 2.34 | x | | 1.24 | x |
NPA % (e) | | 0.61 | % | | 0.57 | % |
NPL % | | 0.57 | % | | 0.52 | % |
(b)Ratio is total allowance divided by annualized net charge-offs.(c)Ratio is annualized net charge-offs divided by quarterly average loans, net of unearned income.
(d)Excludes loans that are 90 or more days past due and still accruing interest.
(e)Excludes OREO from government-insured mortgages.
Table 18—Asset Quality Information (continued)
| | | | | | | | | | | | | | |
| | As of September 30 | | As of December 31 |
| | 2020 | | 2019 |
Loans and commitments: | | | | |
Total period-end loans | | $ | 59,706,531 | | | $ | 31,061,111 | |
Potential problem assets (a) | | 698,463 | | | 346,896 | |
Loans 30 to 89 days past due | | 74,042 | | | 36,052 | |
Loans 90 days past due (b) (c) | | 14,615 | | | 21,859 | |
Loans held for sale 30 to 89 days past due (c) | | 4,979 | | | 3,732 | |
Loans held for sale 30 to 89 days past due—guaranteed portion (c) (d) | | 4,712 | | | 3,424 | |
Loans held for sale 90 days past due (c) | | 11,150 | | | 6,484 | |
Loans held for sale 90 days past due—guaranteed portion (c) (d) | | 9,039 | | | 6,417 | |
Remaining unfunded commitments | | $ | 20,627,190 | | | $ | 12,355,220 | |
Key ratios | | | | |
Allowance for loan and lease losses / loans % | | 1.65 | % | | 0.64 | % |
Allowance for loan and lease losses / NPL | | 2.21 | x | | 1.24 | x |
NPA % (e) | | 0.78 | % | | 0.57 | % |
NPL % | | 0.75 | % | | 0.52 | % |
| |
(a) | Includes past due loans. |
| |
(b) | Excludes loans classified as held-for-sale. |
| |
(c) | Amounts are not included in nonperforming/nonaccrual loans. |
| |
(d) | Guaranteed loans include FHA, VA, SBA, USDA, and GNMA loans repurchased through the GNMA buyout program. |
| |
(e) | Ratio is non-performing assets related to the loan portfolio to total loans plus OREO and other assets. |
(a)Includes past due loans.
(b)Excludes loans classified as held-for-sale.
(c)Amounts are not included in nonperforming/nonaccrual loans.
(d)Guaranteed loans include FHA, VA, SBA, USDA, and GNMA loans repurchased through the GNMA buyout program.
(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 contractually past due as to interest or principal payments, but which have not yet been put on nonaccrual status. Loans in the portfolio that are 90 days or more past due and still accruing were $14.1$14.6 million on March 31,September 30, 2020, compared to $21.9 million on December 31, 2019. The decrease was primarily driven by consumer real estate loans. Loans 30 to 89 days past due were $48.5$74.0 million on March 31,September 30, 2020, compared to $36.1 million on December 31, 2019. The increase was primarily driven by acquired loans, most notably in the CRE and C&I portfolio.portfolios.
Potential problem assets represent those assets where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms and includes loans past due 90 days or more and still accruing. This definition is believed to be substantially consistent with the standards established by Federal
banking regulators for loans classified as substandard. Potential problem assets in the loan portfolio were $411.1$698.5 million on March 31,September 30, 2020, $346.9 million on December 31, 2019, and $270.4$305.0 million on March 31,September 30, 2019. The increase in potential problem assets compared to December 31, 2019 was due to acquired loans in third quarter 2020 and a net increase in classified commercial loans within the C&I portfolio. The current expectation of losses from potential problem assets has been included in management’s analysis for assessing the adequacy of the allowance for loan and lease losses.
Troubled Debt 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
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 118
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 and Leases for further discussion regarding TDRs and loan modifications.
On March 31,September 30, 2020 and December 31, 2019, FHN had $194.7$321.4 million and $206.3 million portfolio loans classified
as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reserves of $13.9$12.6 million and $19.7 million, or 7 percent4% and 10 percent10% of TDR balances, as of March 31,September 30, 2020 and December 31, 2019, respectively. Additionally, FHN had $50.5$44.1 million and $51.1 million of HFS loans classified as TDRs as of March 31,September 30, 2020 and December 31, 2019, respectively.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 105
The following table provides a summary of TDRs for the periods ended March 31,September 30, 2020 and December 31, 2019:
Table 20—19—Troubled Debt Restructurings
| | | | | | | | | | | | | | |
(Dollars in thousands) | | As of September 30, 2020 | | As of December 31, 2019 |
Held-to-maturity: | | | | |
Consumer real estate (a): | | | | |
Current | | 81,477 | | | 105,525 | |
Delinquent | | 1,151 | | | 4,634 | |
Non-accrual (b) | | 65,270 | | | 52,087 | |
Total consumer real estate | | 147,898 | | | 162,246 | |
Credit card and other: | | | | |
Current | | 651 | | | 615 | |
Delinquent | | 22 | | | 38 | |
Non-accrual | | 11 | | | — | |
Total credit card and other | | 684 | | | 653 | |
Commercial loans: | | | | |
Current | | 87,552 | | | 10,558 | |
Delinquent | | — | | | — | |
Non-accrual | | 85,272 | | | 32,841 | |
Total commercial loans | | 172,824 | | | 43,399 | |
Total held-to-maturity | | $ | 321,406 | | | $ | 206,298 | |
Held-for-sale: | | | | |
Current | | $ | 37,158 | | | $ | 39,014 | |
Delinquent | | 5,093 | | | 8,008 | |
Non-accrual | | 1,858 | | | 4,106 | |
Total held-for-sale | | 44,109 | | | 51,128 | |
Total troubled debt restructurings | | $ | 365,515 | | | $ | 257,426 | |
|
| | | | | | | | |
(Dollars in thousands) | | As of March 31, 2020 | | As of December 31, 2019 |
Held-to-maturity: | | | | |
Consumer real estate (a): | | | | |
Current | | 98,965 |
| | 105,525 |
|
Delinquent | | 4,871 |
| | 4,634 |
|
Non-accrual (b) | | 48,557 |
| | 52,087 |
|
Total consumer real estate | | 152,393 |
| | 162,246 |
|
Credit card and other: | | | | |
Current | | 654 |
| | 615 |
|
Delinquent | | 45 |
| | 38 |
|
Non-accrual | | — |
| | — |
|
Total credit card and other | | 699 |
| | 653 |
|
Commercial loans: | | | | |
Current | | 10,401 |
| | 10,558 |
|
Delinquent | | — |
| | — |
|
Non-accrual | | 31,191 |
| | 32,841 |
|
Total commercial loans | | 41,592 |
| | 43,399 |
|
Total held-to-maturity | | $ | 194,684 |
| | $ | 206,298 |
|
Held-for-sale: | | | | |
Current | | $ | 38,914 |
| | $ | 39,014 |
|
Delinquent | | 7,555 |
| | 8,008 |
|
Non-accrual | | 4,042 |
| | 4,106 |
|
Total held-for-sale | | 50,511 |
| | 51,128 |
|
Total troubled debt restructurings | | $ | 245,195 |
| | $ | 257,426 |
|
(a)In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability.(b)Balances as of September 30, 2020 and December 31, 2019, include $13.1 million and $12.6 million, respectively, of discharged bankruptcies.
| |
(a) | In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability. |
| |
(b) | Balances as of March 31, 2020 and December 31, 2019, include $12.1 million and $12.6 million, respectively, of discharged bankruptcies. |
There have been no significant changes to FHN’s risk management practices as described under “Risk Management” beginning on page 88 of Item 7 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2019.
MARKET RISK MANAGEMENT
There have been no significant changes to FHN’s market risk management practices as described under “Market Risk Management” beginning onon page 89 of Item 7 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2019.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 119
Value-at-Risk (“VaR”) and Stress Testing
VaR is a statistical risk measure used to estimate the potential loss in value from adverse market movements over an assumed fixed holding period within a stated confidence level. FHN employs a model to compute daily VaR measures for its trading securities inventory. FHN computes VaR using historical simulation with a 1-year lookback period at a 99 percent99% confidence level and 1-day and 10-day time horizons. Additionally, FHN computes a Stressed VaR (“SVaR”) measure. The SVaR computation uses the same model but with model inputs reflecting historical data from a continuous 12-month period that reflects a period of significant financial stress appropriate for our trading securities portfolio.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 106
A summary of FHN’s VaR and SVaR measures for 1-day and 10-day time horizons is as follows:
Table 21—20—VaR and SVaR Measures
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 | | As of September 30, 2020 |
(Dollars in thousands) | | Mean | | High | | Low | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | |
VaR | | $ | 3,174 | | | $ | 4,399 | | | $ | 2,226 | | | $ | 2,839 | | | $ | 6,783 | | | $ | 1,023 | | | $ | 3,171 | |
SVaR | | 3,183 | | | 4,446 | | | 2,226 | | | 5,186 | | | 17,727 | | | 2,226 | | | 3,171 | |
10-day | | | | | | | | | | | | | | |
VaR | | 16,092 | | | 21,628 | | | 9,769 | | | 12,146 | | | 24,880 | | | 1,807 | | | 13,332 | |
SVaR | | 16,102 | | | 21,628 | | | 9,769 | | | 18,709 | | | 43,221 | | | 9,316 | | | 13,542 | |
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 | | As of September 30, 2019 |
(Dollars in thousands) | | Mean | | High | | Low | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | |
VaR | | $ | 824 | | | $ | 1,341 | | | $ | 503 | | | $ | 1,086 | | | $ | 1,907 | | | $ | 503 | | | $ | 1,092 | |
SVaR | | 4,854 | | | 6,733 | | | 3,157 | | | 6,415 | | | 9,629 | | | 3,157 | | | 6,640 | |
10-day | | | | | | | | | | | | | | |
VaR | | 2,389 | | | 4,055 | | | 1,499 | | | 2,794 | | | 4,518 | | | 1,499 | | | 3,460 | |
SVaR | | 13,927 | | | 20,839 | | | 8,803 | | | 17,451 | | | 28,086 | | | 8,803 | | | 19,743 | |
| | | | | | | | | | | | | | |
| | | | | | | | Year Ended December 31, 2019 | | As of December 31, 2019 |
(Dollars in thousands) | | | | | | | | Mean | | High | | Low | | |
1-day | | | | | | | | | | | | | | |
VaR | | | | | | | | $ | 1,068 | | | $ | 1,907 | | | $ | 503 | | | $ | 1,325 | |
SVaR | | | | | | | | 6,198 | | | 9,629 | | | 3,157 | | | 4,579 | |
10-day | | | | | | | | | | | | | | |
VaR | | | | | | | | 2,824 | | | 7,000 | | | 1,499 | | | 2,233 | |
SVaR | | | | | | | | 17,367 | | | 28,086 | | | 8,803 | | | 14,975 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | As of March 31, 2020 |
(Dollars in thousands) | | Mean | | High | | Low | | |
1-day | | | | | | | | |
VaR | | $ | 2,291 |
| | $ | 6,783 |
| | $ | 1,023 |
| | $ | 4,970 |
|
SVaR | | 8,526 |
| | 17,727 |
| | 4,592 |
| | 4,970 |
|
10-day | | | | | | | | |
VaR | | 6,940 |
| | 24,880 |
| | 1,807 |
| | 18,568 |
|
SVaR | | 26,510 |
| | 43,221 |
| | 15,887 |
| | 18,568 |
|
| | | | | | | | |
| | Three Months Ended March 31, 2019 | | As of March 31, 2019 |
(Dollars in thousands) | | Mean | | High | | Low | | |
1-day | | | | | | | | |
VaR | | $ | 1,433 |
| | $ | 1,907 |
| | $ | 1,018 |
| | $ | 1,307 |
|
SVaR | | 8,243 |
| | 9,629 |
| | 6,242 |
| | 8,144 |
|
10-day | | | | | | | | |
VaR | | 3,390 |
| | 4,280 |
| | 2,592 |
| | 3,046 |
|
SVaR | | 21,757 |
| | 28,086 |
| | 16,032 |
| | 21,812 |
|
| | | | | | | | |
| | Year Ended December 31, 2019 | | As of December 31, 2019 |
(Dollars in thousands) | | Mean | | High | | Low | | |
1-day | | | | | | | | |
VaR | | $ | 1,068 |
| | $ | 1,907 |
| | $ | 503 |
| | $ | 1,325 |
|
SVaR | | 6,198 |
| | 9,629 |
| | 3,157 |
| | 4,579 |
|
10-day | | | | | | | | |
VaR | | 2,824 |
| | 7,000 |
| | 1,499 |
| | 2,233 |
|
SVaR | | 17,367 |
| | 28,086 |
| | 8,803 |
| | 14,975 |
|
First quarter 2020 VaR and SVaR increased due to extreme volatility as a result of economic uncertainty associated with the COVID-19 pandemic.
FHN’s overall VaR measure includes both interest rate risk and credit spread risk. Separate measures of these component risks are as follows:
Table 22—Schedule of Risks Included in VaR
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2020 | | As of March 31, 2019 | | As of December 31, 2019 |
(Dollars in thousands) | | 1-day | | 10-day | | 1-day | | 10-day | | 1-day | | 10-day |
Interest rate risk | | $ | 1,255 |
| | $ | 2,628 |
| | $ | 560 |
| | $ | 1,412 |
| | $ | 693 |
| | $ | 3,929 |
|
Credit spread risk | | 2,301 |
| | 11,758 |
| | 398 |
| | 726 |
| | 417 |
| | 828 |
|
First quarter 2020 VaR and SVaR increased due to extreme volatility as a result of economic uncertainty associated with the COVID-19 pandemic.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 120
FHN’s overall VaR measure includes both interest rate risk and credit spread risk. Separate measures of these component risks were as follows:
Table 21—Schedule of Risks Included in VaR
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2020 | | As of September 30, 2019 | | As of December 31, 2019 |
(Dollars in thousands) | | 1-day | | 10-day | | 1-day | | 10-day | | 1-day | | 10-day |
Interest rate risk | | $ | 3,621 | | | $ | 5,039 | | | $ | 1,379 | | | $ | 7,182 | | | $ | 693 | | | $ | 3,929 | |
Credit spread risk | | 2,689 | | | 9,688 | | | 661 | | | 1,407 | | | 417 | | | 828 | |
2020 VaR and SVaR increased due to extreme volatility as a result of economic uncertainty associated with the COVID-19 pandemic.
The potential risk of loss reflected by FHN’s VaR measures assumes the trading securities inventory is static. Because FHN’s Fixed Income division procures fixed income securities for purposes of distribution to customers, its trading securities inventory turns over regularly.
Additionally, Fixed Income traders actively manage the trading securities inventory continuously throughout each trading day. Accordingly, FHN’s trading securities inventory is highly dynamic, rather than static. As a result, it would be rare for Fixed Income to incur a negative
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 107
revenue day in its fixed income activities of the level indicated by its VaR measurements.
In addition to being used in FHN’s daily market risk management process, the VaR and SVaR measures are also used by FHN in computing its regulatory market risk capital requirements in accordance with the Market Risk Capital rules. For additional information regarding FHN's capital adequacy refer to the "Capital" section of this MD&A.
FHN also performs stress tests on its trading securities portfolio to calculate the potential loss under various assumed market scenarios. Key assumed stresses used in those tests are:
Down 25 bps - assumes an instantaneous downward move in interest rates of 25 basis points at all points on the interest rate yield curve.
Up 25 bps - assumes an instantaneous upward move in interest rates of 25 basis points at all points on the interest rate yield curve.
Curve flattening - assumes an instantaneous flattening of the interest rate yield curve through an increase in short-term rates and a decrease in long-term rates. The 2-year point on the Treasury yield curve is assumed to increase 15 basis points and the 10-year point on the Treasury yield curve is assumed to decrease 15 basis points. Shifts in other points on the yield curve are predicted based on their correlation to the 2-year and 10-year points.
Curve steepening - assumes an instantaneous steepening of the interest rate yield curve through a decrease in short-term rates and an increase in long-term rates. The 2-year point on the Treasury yield curve is assumed to decrease 15 basis points and the 10-year point on the Treasury yield
curve is assumed to increase 15 basis points. Shifts in other points on the yield curve are predicted based on their correlation to the 2-year and 10-year points.
Credit spread widening - assumes an instantaneous increase in credit spreads (the difference between yields on Treasury securities and non-Treasury securities) of 25 basis points.
Model Validation
Trading risk management personnel within Fixed Income have primary responsibility for model risk management with respect to the model used by FHN to compute its VaR measures and perform stress testing on the trading inventory. Among other procedures, these personnel monitor model results and perform periodic backtesting as part of an ongoing process of validating the accuracy of the model. These model risk management activities are subject to annual review by FHN’s Model Validation Group, an independentinternal assurance group charged with oversight responsibility for FHN’s model risk management.
INTEREST RATE RISK MANAGEMENT
There have been no significant changes to FHN's interest rate risk management practices as described under "Interest Rate Risk Management" beginning onon page 90 ofof Item 7 to FHN's Annual Report on Form 10-K for the year ended December 31, 2019.
Net Interest Income Simulation Analysis
The information provided in this section, including the discussion regarding the outcomes of simulation analysis and rate shock analysis, is forward-looking. Actual results, if the assumed scenarios were to occur, could differ because of interest rate movements, the ability of management to execute its business plans, and other factors, including those presented in the Forward-Looking Statements section of this MD&A.
Management uses a simulation model to measure interest rate risk and to formulate strategies to improve balance sheet positioning, earnings, or both, within FHN’s interest rate risk, liquidity, and capital guidelines. Interest rate exposure is measured by forecasting 12 months of NII under various interest rate scenarios and comparing the
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 121
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 March 31,September 30, 2020, NII exposuresexposures over the next 12 months assuming rate shocks of plus 25 basis points, 50 basis points, 100 basis points, and 200 basis points are estimated to have favorable variances of 2.2 percent, 3.5 percent, 5.1 percent,1.9%, 3.6% , 6.8%, and 6.5 percent,10.7%, respectively compared to base NII. A steepening yield curve scenario where long-term rates increase by 50 basis points and short-term rates are static, results in a favorable NII variance of 1.7 percent.of 1.4%. A flattening yield curve scenario where long-term rates decrease by 50 basis points and short-term rates are static, results in an unfavorable NII variance of 1.9 percent. 1.5%. Rate shocks of minus 25 basis points and 50 basis points result in unfavorable NII variances of 4.1 percent2.3% and 8.7 percent.2.7%, assuming the absence of negative rates. 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.
During March 2020, the Federal Reserve lowered the Fed Funds range to 0.00% - 0.25%. However, due to
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dislocation in the short end of the curve, LIBOR has remained elevated compared to the Fed Funds rate. As most of FHN’s assets are indexed to LIBOR while most of FHN’s floating liabilities are indexed to Fed Funds, this has a material impact on the shock scenarios.
FHN’s net interest income mayhas been, and likely will continue to be, impacted by the disruption from the recent COVID-19 crisis.pandemic. The increase in the unemployment rate, customer loan deferral requests, the impact of government assistance programs, and other developments could influencehave influenced net interest income results. FHN is monitoring the current economic situationtrends and potential exposures closely.
CAPITAL RISK MANAGEMENT AND ADEQUACY
There have been no significant changes to FHN's capital management practices as described under "Capital Risk Management and Adequacy" on pagepage 91 of Item 7 to FHN's Annual Report on Form 10-K for the year ended December 31, 2019.
OPERATIONAL RISK MANAGEMENT
There have been no significant changes to FHN's operational risk management practices as described under "Operational Risk Management" beginning on pagepage 91 of Item 7 to FHN's Annual Report on Form 10-K for the year ended December 31, 2019.
COMPLIANCE RISK MANAGEMENT
There have been no significant changes to FHN's compliance risk management practices as described under "Compliance Risk Management" on page 92 of Item 7 to FHN's Annual Report on Form 10-K for the year ended December 31, 2019.
CREDIT RISK MANAGEMENT
There have been no significant changes to FHN's credit risk management practices as described under "Credit Risk Management" beginning on page 92 of Item 7 to FHN's Annual Report on Form 10-K for the year ended December 31, 2019.
LIQUIDITY RISK MANAGEMENT
Among other things, 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 FundsFunds markets, incremental borrowing capacitycapacity at the FHLBFHLB ($2.114.3 billion waswas available at March 31,September 30, 2020), brokered deposits, loan sales, syndications, and access to the Federal Reserve Bank.
Core deposits are a significant source of funding and have historically been a stable source of liquidity for banks. Generally, core deposits represent funding from a financial institution's customer base which provide inexpensive, predictable pricing. The Federal Deposit Insurance Corporation insures these deposits to the extent authorized by law. Generally, these limits are $250 thousand per account owner for interest bearing and non-interestnoninterest bearing
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accounts. The ratio of total loans, excludingexcluding loans HFS and restricted real estate loans, to core deposits was 100 percent on March 31,98% for September 30, 2020 coandmpared to 98 percent on December 31, 2019.
FHN also may use unsecured short-term borrowings as a source of liquidity. Currently, the largest concentration of unsecured borrowings is federal funds purchased from correspondent bank 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 First Horizon Bank may access the debt markets in order to provide funding through the issuance of senior or subordinated unsecured debt subject to market conditions and compliance with applicable regulatory requirements. In May 2020, FHN issued $800 million of senior capital notes. In April 2020, First Horizon Bank issued $450 million of subordinated notes. These subordinated notes qualify as Tier 2 capital for First Horizon Bank as well as FHN, up to certain regulatory limits for minority interest capital instruments.
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Both FHN and First Horizon Bank have the ability to generate liquidity by issuing preferred equity, and (for FHN) by issuing common equity, subject to market conditions and compliance with applicable regulatory requirements. In January 2013, FHN issued $100 million of Non-Cumulative Perpetual Preferred Stock, Series A. A, and in May 2020, FHN issued $150 million of Non-Cumulative Perpetual Preferred Stock, Series E. On July 2, 2020, as a result of the IBKC merger, FHN issued $237.5 million of three new series of Non-Cumulative Perpetual Preferred Stock (Series B, Series C, and Series D).
As ofMarch 31, September 30, 2020, First Horizon Bank and subsidiaries had outstanding preferred shares of $295.4 million, which are reflected as noncontrolling interest on the Consolidated Condensed Statements of Condition.Balance Sheets.
Parent company liquidity is primarily provided by cash flows stemming from dividends and interest payments collected from subsidiaries. These sources of cash represent the primary sources of funds to pay cash dividends to shareholders and principal and interest to debt holders of FHN. The amount paid to the parent company through First Horizon Bank common dividends is managed as part of FHN’s overall cash management process, subject to applicable regulatory restrictions. Certain regulatory restrictions exist regarding the ability of First Horizon Bank to transfer funds to FHN in the form of cash, common dividends, loans, or advances. At any given time, the pertinent portions of those regulatory restrictions allow First Horizon Bank to declare preferred or common
dividends without prior regulatory approval in an aggregate amount equal to First Horizon Bank’s retained net income for the two most recent completed years plus the current year to date. For any period, First Horizon Bank’s ‘retained net income’ generally is equal to First Horizon Bank’s regulatory net income reduced by the preferred and common dividends declared by First Horizon Bank. Applying the dividend restrictions imposed under applicable federal and state rules as outlined above, the Bank’s total amount available for dividends was $294.7$806.4 million as of AprilOctober 1, 2020. Additionally, a capital conservation buffer of 50 basis points above well-capitalized levels (equal to an extra 2.5 percent2.50% above minimum levels) must be maintained on the Common Equity Tier 1, Tier 1 Capital and Total Capital ratios to avoid restrictions on dividends. Since the Total Capital ratio for First Horizon Bank fell slightly below the required buffer as of March 31, 2020, these capital conservation buffer rules limit the amount of dividends that the Bank can declare in second quarter 2020 to its sole common stockholder, FHN, or to its preferred shareholders without prior regulatory approval at $70.9 million. First Horizon Bank declared and paid common dividends to the parent company in the amountamounts of $65 million and $115 million in first and third quarter 2020 and $345.0 million in 2019. First Horizon Bank declared and paid preferred dividends in first, second, and third quarter 2020 and each quarter of 2019. Additionally, First Horizon Bank declared preferred dividends in secondfourth quarter 2020, payable in July 2020.January 2021.
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 First Horizon Bank. FHN is subject to the capital conservation buffer requirements as described in the above paragraph for First Horizon Bank. Additionally, banking regulators generally require insured banks and bank holding companies to pay cash dividends only out of current operating earnings. Consequently, the decision of whether FHN will pay future dividends and the amount of dividends will be affected by current operating results. FHN paid a cash dividend of $.15$0.15 per common share on AprilOctober 1, 2020. FHN paid cash dividends of $331.25 per Series B preferred share and $165.00 per Series C preferred share on August 3, 2020, $1,550.00 per Series A preferred share and $2,383.33 per Series E preferred share on October 13, 2020 and $165.00 per Series C preferred share and $305.00 per Series D preferred share on November 2, 2020. In addition, in AprilOctober 2020 the Board approved a $.15 per common share cash dividend payable on July 1, 2020, to shareholders of record on June 12, 2020. FHN paid a cash dividend of $1,550.00 per preferred share on April 10, 2020, and in April 2020 the Board approved a $1,550.00 per preferred share cash dividend payable on July 10, 2020, to shareholders of record on June 25, 2020.
CASH FLOWS
The Consolidated Condensed Statements of Cash Flows provide information on cash flows from operating, investing, and financing activities for the three months ended March 31, 2020 and 2019. The level of cash and cash equivalents decreased $136.8 million during first quarter 2020 and $192.5 million in first quarter 2019.
Net cash provided in financing activities was $3.7 billion in first quarter 2020, largely driven by an inflow of deposits and higher short-term borrowings (primarily FHLB stock). Net cash used by investing activities was $2.5 billion in first quarter 2020, driven by strong loan growth and an increase in interest-bearing cash. Net cash used by operating activities was $1.4 billion in first quarter 2020 primarily due to net cash outflows of $407.9 million related to loans held-for-sale as purchases and originations outpaced proceeds from sales and settlements, $285.4 million related to fixed income trading activities and $323.8 million related to an increase in derivatives.
Net cash used in financing activities was $222.2 million in first quarter 2019, largely driven by a decrease in deposits, share repurchases and cash dividends paid during first quarter 2019, somewhat offset by an increaseper share in other short-term borrowings, primarily FFP. Net cash used by investing activities was $92.7 million in first quarter 2019, largely driven by increases in loan balances somewhat offset by a decrease in interest-bearing cash and a net decrease in AFS debt securities, as maturities and sales outpaced purchases. Net cash provided by operating activities was $122.5 million in first quarter 2019 primarily due to net cash inflows of $369.2 million related to fixed income trading activities and favorably driven cash-related
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net income items, somewhat offset by outflows of $358.6 million related to loans held-for-sale.
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| | Dividend/Share | | Record Date | | Payment Date |
Common Stock | | $ | 0.15 | | | 12/11/2020 | | 01/04/2021 |
Preferred Stock | | | | | | |
Series A | | $ | 1,550.00 | | | 12/24/2020 | | 01/11/2021 |
Series B | | $ | 331.25 | | | 01/15/2021 | | 02/01/2021 |
Series C | | $ | 165.00 | | | 01/15/2021 | | 02/01/2021 |
Series E | | $ | 1,625.00 | | | 12/24/2020 | | 01/11/2021 |
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Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations |
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Obligations from Pre-2009 Mortgage Businesses
Prior to September 2008 FHN originated loans through its pre-2009 mortgagemortgage 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 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 First Horizon proprietary securitizations but also, to a lesser extent, through other whole loans sold to private non-Agency purchasers. FHN used only one trustee for all of its First Horizon proprietary securitizations. In addition to First Horizon 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.
From these pre-2009 activities, FHN has incurred substantial losses stemming from obligations to repurchase loans, pay make-whole amounts, or otherwise resolve claims that loans which FHN originated, or FHN's servicing of those loans, were deficient in a manner for which FHN was liable. Many years ago, FHN established a repurchase and foreclosure liability, or reserve, in connection with those claims. FHN has settled many claims, and the reserve is reduced each time a claim is settled. As discussed in Note 1011 - Contingencies and Other Disclosures, FHN's principal remaining exposures for those activities relate to (i) indemnification claims by underwriters, loan purchasers, and other parties which assert that FHN-originated loans caused or contributed to losses which FHN is legally obliged to indemnify, and (ii) indemnification or other claims related to FHN's servicing of pre-2009 mortgage loans.
Servicing Obligations
FHN's national servicing business was sold as part of the platform sale in 2008. A significant amount of mortgage 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 including a subservicing arrangement initiated in 2011 (the "2011 subservicer"). In fourth quarter 2013 and first quarter 2014, FHN sold and transferred a substantial majority of its
remaining servicing obligations and servicing assets (including advances) to the 2011 subservicer. 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.
As mentioned in Note 1011 - 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.
Repurchase Accrual Methodology
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
In determining potential loss content, claims are analyzed by purchaser, vintage, and claim type. FHN considers various inputs including claim rate estimates, historical average repurchase and loss severity rates, mortgage insurance cancellations, and mortgage insurance curtailment requests. Inputs are applied to claims in the active pipeline, as well as to historical average inflows to estimate loss content related to potential future inflows. Management also evaluates the nature of claims from purchasers and/or servicers of loans sold to determine if qualitative adjustments are appropriate.
Repurchase and Foreclosure Liability
The repurchase and foreclosure liability is comprised of accruals to cover estimated loss content in the active pipeline (consisting of mortgage loan repurchase, make-whole, foreclosure/servicing demands and certain related exposures), estimated future inflows, and estimated loss content related to certain known claims not currently
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included in the active pipeline. The liability contemplates repurchase/make-whole and damages obligations and estimates for probable incurred losses associated with loan populations excluded from the settlements with the GSEs,
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as well as other whole loans sold, mortgage insurance cancellations rescissions, and loans included in bulk servicing sales effected prior to the settlements with the GSEs. FHN compares the estimated probable incurred losses determined under the applicable loss estimation
approaches 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 repurchase and foreclosure liability decreasedincreased to $13.5 million$15.9 million on March 31, 2019September 30, 2020 from $14.5 million on December 31, 2019.
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Market Uncertainties and Prospective Trends |
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FHN’s future results could be affected both positively and negatively by several known trends. Key among those are changes in the U.S. and global economy and outlook, government actions affecting interest rates, availability and the administration of stimulus relief for the economy andeconomy. Additional impacts include how the pandemic affects FHN’s customers, related to the recent global COVID-19 pandemic,as well as political uncertainty, potential changes in federal policies and the potential impact to our customers, and FHN’s strategic initiatives. In addition, pre-2009 mortgage business matters in the Non-strategic segment could continue to impact FHN’s quarterly results in ways which are both difficult to predict and unrelated to current operations.
Performance by FHN,FHN's performance, and the entire U.S. financial services industry, is affected considerably by the overall health of the U.S. and global economy and outlook. Furthermore, FHN may be directly or indirectly impacted by global events that impact our customersclients and their businesses. The recent global COVID-19 pandemic has led to periods of significant volatility in financial commodities (including oil and gas) and other markets, and has adversely affected FHN’s and its clients' ability to conduct normal business, has adversely affected FHN customers, and is likely tocould harm FHN’s business and future results of operations.
In March 2020 the Federal Reserve lowered short-term interest rates twice and started a “quantitative easing” program intended to lower longer-term interest rates and foster access to credit. The effective yields of 10-year and 30-year U.S. Treasury securities achieved record low rates and the U.S. Congress enacted relief legislation which, among other things, is intended to provide emergency credit to businesses at risk for failure from government and public actions related to the COVID-19 pandemic, and to mitigate the severity of an economic recession. These changes in interest rates and the volatility in the market are likely to negatively impact FHN’s net interest margin. In the near term, amortization of net processing fees related to government relief programs, including the Paycheck Protection Program ("PPP"), may offset a portion of the net interest margin decline. In addition, credit spreads have widened. For new loans, wider spreads should help mitigate net interest margin compression. However, FHN will not be able to capture the widened spreads quickly for outstanding floating-rate loans.
The economic effects of the COVID-19 pandemic have significantly altered business in the U.S. and globally leading to partial or full business closures, individuals being furloughed or laid off, significant increases in unemployment, and workers being partially or wholly ordered to work from home. Disruption to FHN’s customers due to governmental and societal responses to COVID-19 are likely to adversely affect FHN’s loan and deposit fee income as well asand could create downward loan migration and a corresponding increase in loan loss expense and reserves. In addition, loan charge-offs likely will increase over time, especially if economic disruption
related to the COVID-19 pandemic continues for more than a few months.an extended period of time. Furthermore, government programs under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and other guidance intended to provide relief to customers through temporary modifications and deferrals, may in some instances mask or postpone reporting of credit problems and potential defaults. In these circumstances, current credit quality indicators may not be reflective of the underlying health of FHN's portfolios.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on the businesses of FHN for the remainder of 2020 or afterward.
In 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates the London InterBank Offered Rate (“LIBOR”), announced that it intends to halt persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, LIBOR as currently operated may not continue after 2021. FHN is not currently able to predict the impact that the transition from LIBOR will have on the Company;FHN; however, because FHN has instruments with floating rate terms based on LIBOR, FHN may experience increases in interest, dividends, and other costs relative to these instruments subsequent to 2021. Additionally, the transition from LIBOR could impact or change FHN’s hedge accounting practices. FHN has initiated efforts to 1) develop an inventory of affected loans, securities, and derivatives, 2) evaluate and draft modifications as needed to address loans outstanding at the time of LIBOR retirement, 3) obtain an understanding of the potential
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effects for applicable securities and derivatives and 4) assess revisions to product pricing structures based on alternative reference rates. In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides several optional expedients and exceptions to ease the potential burden in accounting for reference rate reform. Refer to the Accounting Changes Issued but Not Currently Effective section of Note 1 - Financial Information for additional information. Additionally, the IRS has released a proposal that is intended to facilitate the transition of existing contracts from LIBOR to new reference rates without triggering modification accounting or taxable exchange treatment for those contracts. This proposal contains specific guidance that must be met in
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order to qualify for the beneficial transition approach and FHN is considering this guidance in its transition plans.
FHN has prioritized expense discipline to include reducing or controlling certain expenses including realization of expensemerger efficiencies, from its 2017 merger with CBF and investing inenabling the investment into revenue-producing activities, customer-facing technology, and critical infrastructure. FHN remains committed to organic growth through customer retention, key hires, targeted incentives, and other traditional means.
When FHN closes its proposed merger with IBKC, under applicable accounting guidance FHN will be required to record IBKC's loans at estimated fair value as of the closing date. In addition, FHN will be required to assess the current (at that time) expected credit losses associated with IBKC loans. That credit loss assessment will be separate from the fair value estimation, and will result in a charge to FHN's income for certain loans for the period in which closing occurs. FHN is not able make that assessment at this time, but believes that the associated charge to income will be substantial to quarterly income.
Lastly, while FHN has resolved most matters from the pre-2009 mortgage business, some remain unresolved. The timing or financial impact of resolution of these matters cannot be predicted with accuracy. Accordingly, the non-strategic segment may occasionally and unexpectedly impact FHN’s overall quarterly results negatively or positively with reserve accruals or releases. Also, although new pre-2009 mortgage business matters of significance arise at a much slower pace than in years past and some formerly common legal claims no longer can be made due to the passage of time, potential for new pre-2009 mortgage business matters remains.
Foreclosure Practices
FHN retains exposure for potential deficiencies in servicing related to its pre-2009 mortgage servicing business and subservicing arrangements. Further details regarding these matters are provided in
"Obligations from Pre-2009 Mortgage Businesses - Servicing Obligations" under "Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations."
FHN response to the COVID-19 pandemic
As previously mentioned, the COVID-19 pandemic has, and will continue, to directly and indirectly impact FHN and our customers. FHN has adapted many operations to help ensure the health and safety of employeesemployees and customers during these uncertain times. Among other things, FHN has implemented remote work policies, encouraged contactless banking or in-person branch activities to be handled by appointment, or via drive-through only, as wellwell as additional sick time and child care assistance for employees. Additionally, FHN’s foundation has donated $2.5 million to support community relief efforts.
Loans
FHN is activelyactively monitoring the COVID-19 pandemic and its impact on customers and FHN’s credit quality. In response, FHN is proactively reachingcontinues to reach out to customers to discuss challenges and solutions, is providingprovide line draws and new extensions to existing customers, is providingprovide support for small businesses through the PPP (discussed in more detail below) and other stimulus programs, as well as providingprovide lending and deposit assistance through deferrals and waived fees. Additionally, in certain sectors, FHN has reduced or stopped new lending.
Paycheck Protection Program
On March 27,In 2020 Congress created the CARES Act was signed into law. Sections 1102 and 1106 offoundation for a paycheck protection program ("PPP"). Under the CARES Act include a PPP, that made $349 billion of funds available for qualifying businesses tomay receive fully-guaranteed loans viafrom private lenders, such as FHN, that are fully guaranteed by the Small Business Administration’s Section 7(a) lending program.Administration. These loans potentially are potentiallypartly or fully forgivable, depending upon the borrower’s use of the funds and maintenance of employment levels.
PPP loans are intended to provide cash-flow assistance to nonprofit and small business employers for expenses incurred between February 15, 2020, and June 30, 2020. Generally, the maximum loan amount per qualified borrower is the lesser of 1) 250 percent of average monthly payroll costs (e.g., salaries and wages up to $100,000 and benefits) during the previous one-year period plus the outstanding amount of any existing SBA Economic Injury Disaster Loan made from January 1, 2020 through April 3, 2020, that is being refinanced under the PPP and 2) $10 million. Eligible borrowers include any of the following that were in operation on February 15, 2020:
Businesses, including nonprofit organizations under Internal Revenue Code (“IRC”) Section 501(c)(3), veterans’ organizations under IRC Section 501(c)(19), and tribal organizations, that
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have 500 or fewer employees (or the Small Business Administration’s employee-based or revenue-based industry size standard, if higher).
Businesses in the food and accommodations industry (as defined in NAICS 724) with 500 or fewer employees per location.
Sole proprietors, independent contractors, and self-employed individuals.
All PPP loans carry the same terms which are as follows:
Fixed interest rate of 1 percent per annum
Maturity date of two years, with the ability to prepay earlier with no fees
First payment deferred for six months
Waiver of “credit elsewhere” SBA 7(a) requirement
No collateral or personal guarantees required
No borrower fees charged to obtain such loans
Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on PPP loanslevels; to the extent that the proceeds are used to cover eligible payroll, interest, rent, and utility costs over the eight-week period after the loan is made as long asforgiven, the borrower retains its employeesis relieved from payment, while the lender still is paid from the program. Congress has revised the PPP this year, and their compensation levels. However, no more than 25 percent of loan forgiveness may be attributablemake further revisions to eligible rent, utilities and interest. In addition, loans qualifying for forgiveness will not be includedPPP in the borrower’s taxable income.future.
Lenders making these PPP loans are paid a fee by the Small Business Administration onAdministration. Gross lender fees range from 1% to 5% of the date the loans are made. Lender fees are based on the following sliding scale.
Loans $350,000 and under: 5.00%
Loans greater than $350,000 to $2 million: 3.00%
Loans greater than $2 million: 1.00%
Borrowersloan amount. A borrower can use agentsan agent to assist in the preparation of their PPP applications. Those agents areapplications, with the costs of the agent potentially being paid from the SBA fees received from the originating bank.gross lender fee. Additionally, originating banks have certain internal costs of originating PPP loans. For applicable loans, agent fees are paid by originating banks based on the following scale.
Loans $350,000 and under: 1.00%
Loans greater than $350,000 to $2 million: 0.50%
Loans greater than $2 million: 0.25%
The SBA provides a 100 percent guarantee on PPP loans, which is an increase to the existing guarantee percentages under current SBA loan programs. In the event that a lender sells a PPP loan on the secondary market, the guarantee will transfer with the loan. Lenders are not required to conduct any verification regarding loan forgiveness provided that a borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the eligibility of the expenditures made. Lenders will be held harmless if they rely on such documentation. Lenders must make a decision on the forgiveness within 60 days. Section 1106 of the CARES Act indicates that any lender or purchaser of PPP loans may report to the SBA an expected forgiveness amount, and the SBA will purchase the expected forgiveness amounts, plus any interest accrued to date, within 15 days after such requests are received. Requests for forgiveness may occur as early as seven weeks after the loan is originated.
As part of FHN’s efforts to support customersFHN originated/acquired through various stimulus programs, FHN originated 6,761merger 32,727 of PPP loans with an aggregate principal of $1.7$4.2 billion in Aprilthrough September 30, 2020. For these loans, FHN anticipates recognizing net originationlender fees of approximately $45 to $50$60 million. Additional lower origination volumes are anticipated in May. FHN has decided to hold its PPP loans for investment. Therefore, the net amount of SBA fees andnet of total direct origination costs are deferred as a discount to the recorded carrying value of the PPP loans. This discount is being amortized prospectively to interest income. SBA loan forgiveness payments are considered prepayments of the related loans. Under existing accounting principles, amortization of net origination fees can reflect expected prepayment activity if prepayments are determined to be probable and both the timing and volume can be reasonably estimated. Based on the current terms of the PPP loans, including the expected end of the payment deferral period, FHN estimates that substantially all of the prepayment-eligible portions of PPP loans will be prepaid in 2020by the end of 2021 as these loans are forgiven. These estimated prepayments will result in a similar amount of the net fees being recognized in interest income in 2020.
income.
Since PPP loans carry a full SBA guarantee, they do not have any credit risk and will not affect the amount of provision and ALLL recorded. Consistent with this view, the CARES Act indicates that investors should assignFHN has assigned a risk weight of zero to PPP loans for regulatory capital purposes.
The initial funding for the $359 billion PPP loans was exhausted by April 16, 2020. However, on April 24, 2020, an additional $320 billion of funding was approved for the PPP. These funds will likely be exhausted in early May.
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Lending Assistance for Borrowers
Other customer support initiatives include incremental lending assistance for borrowers through delayed payment programs and fee waivers. The following table provides the UPB of loans related to deferrals granted to FHN’s customers that have been processed through AprilSeptember 30, 2020.
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(Dollars in thousands) | | As of April 30, 2020 |
Commercial: | | |
General C&I | | $ | 1,582,903 |
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Loans to mortgage companies | | — |
|
TRUPS | | — |
|
Income CRE | | 1,061,452 |
|
Residential CRE | | 1,715 |
|
Total Commercial | | $ | 2,646,070 |
|
Consumer: | | |
HELOC | | $ | 69,531 |
|
R/E installment loans | | 494,205 |
|
Credit Card & Other | | 3,279 |
|
Total Consumer | | 567,015 |
|
Total | | $ | 3,213,085 |
|
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 126
| | | | | | | | |
(Dollars in thousands) | | As of September 30, 2020 |
Commercial: | | |
Commercial and industrial | | $ | 352,124 | |
| | |
Commercial real estate | | 556,063 | |
Total Commercial | | $ | 908,187 | |
Consumer: | | |
HELOC | | $ | 21,750 | |
R/E installment loans | | 404,983 | |
Credit Card and Other | | 2,980 | |
Total Consumer | | 429,713 | |
Total | | $ | 1,337,900 | |
| | |
Commercial deferrals processed arein our different lines of business were comprised primarily of general commercial (39 percent(75% or $1.0 billion)$684.5 million), private client (10% or $90.0 million), specialty (7% or $66.0 million - primarily franchise finance), and professional commercial real estate (28 percent(5% or $731.3 million - primarily within our Mid-Atlantic, Southeast Tennessee,
and Middle Tennessee markets), franchise finance (13 percent or $334.9 million), business banking (8 percent or $208.9 million), and private client (6 percent - $152.0$46.5 million).
Deposits
Deposit levels were also significantly impacted in April due to the impacts of COVID-19 pandemic which resulted in an increase in period-end deposits of $3.7 billion, or 11 percent, from March 31, 2020 levels. This increase was due to an increase in commercial deposits as FHN saw many firms deposit funds (from lines of credit, PPP loans, operational revenues, etc.) into non-interest bearing operating accounts in order to increase their liquidity positions. Additionally, as various government stimulus programs were rolled out FHN saw increases in deposits from the Healthcare industry as Medicare reimbursements related to COVID-19 became available and a jump in deposits in Correspondent banking due to stimulus and PPP funds deposited into client banks. Consumer deposit inflows were also impacted by approximately $300 million in initial stimulus payments in mid-April.
| | | | | | | | | | | | | | |
Critical Accounting Policies |
| | | | |
Critical Accounting Policies |
Except for the changes to the following Allowance for Loan and Lease Losses section,and Business Combinations sections, there have been no significant changes to FHN’s critical accounting policies as described in “Critical Accounting Policies” beginning on page 99 of Item 7 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2019.
ALLOWANCE FOR LOAN AND LEASE LOSSES
Management’s policy is to maintain the ALLL at a level sufficient to absorb expected credit losses in the loan and lease portfolio. Management performs periodic and systematic detailed reviews of its loan and lease portfolio to identify trends and to assess the overall collectability of the loan portfolio. Management believes the accounting estimate related to the ALLL is a “critical accounting estimate” as: (1) changes in it can materially affect the provision for loan and lease losses and net income, (2) it requires management to predict borrowers’ likelihood or capacity to repay, including evaluation of inherently uncertain future economic conditions, (3) prepayment activity must be projected to estimate of the life of loans that often are shorter than contractual terms, (4) it requires estimation of a reasonable and supportable forecast period for credit losses for loan portfolio segments before reversion to historical loss levels over the remaining life of a loan and (5) expected future recoveries of amounts previously charged off must be estimated. Accordingly, this is a highly subjective process and requires significant judgment since it is difficult to evaluate current and future economic conditions in relation to an overall credit cycle and estimate the timing and extent of loss events that are expected to occur prior to end of a loan’s estimated life. The ALLL is increased by the provision for loan and lease losses and recoveries and is decreased by charged-off loans. Principal loan amounts are charged off against the ALLL in the period in which the loan or any portion of the loan is deemed to be uncollectible. This critical accounting estimate applies to the regional banking, non-strategic, and corporate segments. A management committee comprised of representatives from Risk Management, Finance, Credit,
and Treasury performs a quarterly review of the assumptions used in FHN’s ALLL analytical models, makes qualitative assessments of the loan and lease portfolio, and determines if qualitative adjustments should be recommended to the modeled results. On a quarterly basis, as a part of Enterprise Risk reporting and discussion, management addresses credit reserve adequacy and credit losses with the Executive and Risk Committee of FHN’s Board of Directors.
FHN believes that the critical assumptions underlying the accounting estimates made by management include: (1) the commercial loan portfolio has been properly risk graded based on information about borrowers in specific industries and specific issues with respect to single borrowers; (2) borrower specific information made available to FHN is current and accurate; (3) the loan portfolio has been segmented properly and individual loans have similar credit risk characteristics and will behave similarly; (4) the lives for loan portfolio pools have been estimated properly, including consideration of expected prepayments; (5) the economic forecasts utilized in the modeling of expected credit losses are reflective of future economic conditions; (6) entity-specific historical loss information has been properly assessed for all loan portfolio segments as the
initial basis for estimating expected credit losses; (7) the reasonable and supportable periods for loan portfolio segments have been properly determined; (8) the reversion methodologies and timeframes for migration from the reasonable and supportable period to the use of historical loss rates are reasonable; (9) expected recoveries of prior charge off amounts have been properly estimated; and (10) qualitative adjustments to modeled loss results reasonably reflect expected future credit losses as of the date of the financial statements.
While management uses the best information available to establish the ALLL, future adjustments to the ALLL and methodology may be necessary if economic or other conditions differ substantially from the assumptions used in making the estimates. Such adjustments to original estimates, as necessary, are made in the period in which
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 127
these factors and other relevant considerations indicate that loss levels vary from previous estimates.
See Note 1 - Summary of Significant Accounting PoliciesFinancial Information and Note 5 - Allowance for LoanCredit Losses for detail regarding FHN’s processes, models, and methodology for determining the ALLL.
BUSINESS COMBINATIONS
Pursuant to applicable accounting guidance FHN generally recognizes assets acquired, including identified intangible assets, and the liabilities assumed in acquisitions at their fair values as of the acquisition date, with the merger-related transaction costs expensed in the period incurred. Specified items such as net investment in leases as lessor, acquired operating lease assets and liabilities as lessee, employee benefit plans and income-tax related balances are recognized in accordance with accounting guidance that results in measurements other than fair value. Determining the fair value of assets acquired, including identified intangible assets, and liabilities assumed follows the fair value hierarchy described in Note 17 – Fair Value of Assets & Liabilities. This often involves estimates based on internal or third-party valuations which include appraisals, discounted cash flow analysis or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, discount rates, credit risk, multiples ofearnings or other relevant factors. The credit allowance for
PCD assets is recognized within business combination accounting. The credit allowance for non-PCD assets is recognized as provision expense in the same reporting period as the business combination.
Premiums and discounts on acquired AFS debt securities and loans and leases held for investment are amortized to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances. Premiums and discounts on acquired debt are amortized to interest expense over their remaining lives. In addition, the determination of the useful lives over which identified finite-life intangible assets will be amortized is subjective. Intangible assets are generally amortized using an accelerated methodology that reflects the cash flow projections utilized in the applicable valuation.
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.
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 128
The following table provides a reconciliation of non-GAAP items presented in this MD&A to the most comparable GAAP presentation:
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 115
Table 23—22—Non-GAAP to GAAP Reconciliation
|
| | | | | | | | |
| | Three Months Ended March 31 |
(Dollars in thousands) | | 2020 | | 2019 |
Average Tangible Common Equity (Non-GAAP) | | | | |
Average total equity (GAAP) | | $ | 5,002,394 |
| | $ | 4,809,235 |
|
Less: Average noncontrolling interest (a) | | 295,431 |
| | 295,431 |
|
Less: Average preferred stock (a) | | 95,624 |
| | 95,624 |
|
(A) Total average common equity | | $ | 4,611,339 |
| | $ | 4,418,180 |
|
Less: Average intangible assets (GAAP) (b) | | 1,560,340 |
| | 1,584,694 |
|
(B) Average Tangible Common Equity (Non-GAAP) | | $ | 3,050,999 |
| | $ | 2,833,486 |
|
Net Income Available to Common Shareholders | | | | |
(C) Net income available to common shareholders (annualized) (GAAP) | | $ | 48,545 |
| | $ | 401,642 |
|
Ratios | | | | |
(C)/(A) Return on average common equity (“ROCE”) (GAAP) (c) | | 1.05 | % | | 9.09 | % |
(C)/(B) Return on average tangible common equity (“ROTCE”) (Non-GAAP) (d) | | 1.59 |
| | 14.17 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Pre-provision Net Revenue ("PPNR") | | | | | | | | |
Net interest income (GAAP) | | $ | 532,365 | | | $ | 300,676 | | | $ | 1,140,511 | | | $ | 898,794 | |
Plus: Noninterest income (GAAP) | | 822,923 | | | 171,735 | | | 1,203,948 | | | 470,773 | |
Total revenues (GAAP) | | 1,355,288 | | | 472,411 | | | 2,344,459 | | | 1,369,567 | |
Less: Noninterest expense (GAAP) | | 587,040 | | | 308,306 | | | 1,210,139 | | | 904,883 | |
PPNR (Non-GAAP) | | 768,248 | | | 164,105 | | | 1,134,320 | | | 464,684 | |
Provision for credit losses (GAAP) | | 227,000 | | | 14,366 | | | 502,388 | | | 36,273 | |
Income before income taxes (pre-tax income ("PTI")) (GAAP) | | $ | 541,248 | | | $ | 149,739 | | | $ | 631,932 | | | $ | 428,411 | |
| | | | | | | | |
Average Tangible Common Equity (Non-GAAP) | | | | | | | | |
Average total equity (GAAP) | | 8,072,000 | | | 4,962,341 | | | 6,071,331 | | | 4,880,806 | |
Less: Average noncontrolling interest (a) | | 295,431 | | | 295,431 | | | 295,431 | | | 295,431 | |
Less: Average preferred stock (a) | | 467,963 | | | 95,624 | | | 238,594 | | | 95,624 | |
(A) Total average common equity | | $ | 7,308,606 | | | $ | 4,571,286 | | | $ | 5,537,306 | | | $ | 4,489,751 | |
Less: Average intangible assets (GAAP) (b) | | 1,793,546 | | | 1,572,312 | | | 1,636,886 | | | 1,578,458 | |
(B) Average Tangible Common Equity (Non-GAAP) | | $ | 5,515,060 | | | $ | 2,998,974 | | | $ | 3,900,420 | | | $ | 2,911,293 | |
Net Income Available to Common Shareholders | | | | | | | | |
(C) Net income available to common shareholders (annualized) (GAAP) | | $ | 2,081,979 | | | $ | 434,469 | | | $ | 784,994 | | | $ | 425,011 | |
| | | | | | | | |
Tangible Common Equity (Non-GAAP) | | | | | | | | |
(D) Total equity (GAAP) | | 8,144,142 | | | 4,996,043 | | | 8,144,142 | | | 4,996,043 | |
Less: Noncontrolling interest (a) | | 295,431 | | | 295,431 | | | 295,431 | | | 295,431 | |
Less: Preferred stock (a) | | 470,370 | | | 95,624 | | | 470,370 | | | 95,624 | |
(E) Total common equity | | $ | 7,378,341 | | | $ | 4,604,988 | | | $ | 7,378,341 | | | $ | 4,604,988 | |
Less: Intangible assets (GAAP) (b) | | 1,876,131 | | | 1,569,193 | | | 1,876,131 | | | 1,569,193 | |
(F) Tangible common equity (Non-GAAP) | | $ | 5,502,210 | | | $ | 3,035,795 | | | $ | 5,502,210 | | | $ | 3,035,795 | |
| | | | | | | | |
Tangible Assets (Non-GAAP) | | | | | | | | |
(G) Total assets (GAAP) | | 83,029,579 | | | 43,717,684 | | | 83,029,579 | | | 43,717,684 | |
Less: Intangible assets (GAAP) (b) | | 1,876,131 | | | 1,569,193 | | | 1,876,131 | | | 1,569,193 | |
(H) Tangible assets (Non-GAAP) | | $ | 81,153,448 | | | $ | 42,148,491 | | | $ | 81,153,448 | | | $ | 42,148,491 | |
| | | | | | | | |
Period-end Shares Outstanding | | | | | | | | |
(I) Period-end shares outstanding | | 554,788 | | | 312,478 | | | 554,788 | | | 312,478 | |
| | | | | | | | |
Ratios | | | | | | | | |
(C)/(A) Return on average common equity (“ROCE”) (GAAP) (c) | | 28.49 | % | | 9.50 | % | | 14.18 | % | | 9.47 | % |
(C)/(B) Return on average tangible common equity (“ROTCE”) (Non-GAAP) (d) | | 37.75 | | | 14.49 | | | 20.13 | | | 14.60 | |
(D)/(G) Total equity to total assets (GAAP) | | 9.81 | | | 11.43 | | | 9.81 | | | 11.43 | |
(F)/(H) Tangible common equity to tangible assets (“TCE/TA”) (Non-GAAP) | | 6.78 | | | 7.20 | | | 6.78 | | | 7.20 | |
(E)/(I) Book value per common share (GAAP) | | $ | 13.30 | | | $ | 14.80 | | | $ | 13.30 | | | $ | 14.80 | |
(F)/(I) Tangible book value per common share (Non-GAAP) | | $ | 9.92 | | | $ | 9.76 | | | $ | 9.92 | | | $ | 9.76 | |
(a)Included in Total equity on the Consolidated Condensed Statements of Condition.Balance Sheets.
(b)Includes Goodwill and other intangible assets, net of amortization.
(c)Ratio is annualized net income available to common shareholders to average common equity.
(d)Ratio is annualized net income available to common shareholders to average tangible common equity.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 116129
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 106119 of this report and the subsections entitled “Market Risk Management” beginning on page 106119 and “Interest Rate Risk Management” beginning on page 108121 of this report, and |
(b) | Note 1415 to the Consolidated Condensed Financial Statements appearing on pages 51-5762-69 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 Item 7 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2019, including in particular the section entitled “Risk Management” beginning on page 88 of that Report and the subsections entitled “Market Risk Management” beginning on page 89 and “Interest Rate Risk Management” beginning on page 90 of that Report; and Note 22 to the Consolidated Financial Statements appearing on pages 194-200 of Item 8 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2019.
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. |
(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. Other than as explained below, there have not been any changes in FHN’s internal control over financial reporting during the third fiscal quarter that have materially affected, or are reasonably likely to materially affect, FHN’s internal control over financial reporting.
On July 1, 2020, FHN and IBERIABANK Corporation ("IBKC") closed their merger-of-equals transaction. As permitted by Securities and Exchange Commission rules, we have elected to exclude IBKC from our assessment of internal control over financial reporting as of December 31, 2020. Our integration of IBKC’s systems and processes with our own could cause changes to our internal controls over financial reporting in future periods.
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 117130
---------------------------
Part II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
The “Contingencies” section of Note 1011 to the Consolidated Condensed Financial Statements beginning on page 4050 of this Report is incorporated into this Item by reference.
Item 1A. Risk Factors
The following supplements Item 1A of our annual reportMaterial changes from risk factor disclosures in FHN’s Annual Report on Form 10-K for the year ended December 31, 2019. It relates to most discussions within that Item, particularly discussions under the captions: “Operational Risks,” “Risks Associated with Economic Downturns2019 and Changes,” “Risks Associated with Monetary Events,” “Reputation Risks,” “Credit Risks,” “Service Risks,” “Regulatory, Legislative, and Legal Risks,” “Risks of Expense Control,” “Insurance,” “Liquidity and Funding Risks,” “Credit Ratings,” “Interest Rate and Yield Curve Risks,” “Asset Inventories and Market Risks,” and “Stockholding and Governance Risks.”
Supplemental Risk Factor Disclosures related to COVID-19
The recent global COVID-19 pandemic has led to periods of significant volatilityfrom supplemental risk factor disclosures in financial, commodities (including oil and gas) and other markets, has adversely affected FHN’s ability to conduct normal business, has adversely affected FHN customers, and is likely to harm FHN’s businesses and future results of operations.
In December 2019, a coronavirus (COVID-19) was reported in China, and has since spread to most countries in the world, including the United States. Starting in late February 2020, financial market volatility increased dramatically basedits Quarterly Report on concerns that COVID-19, and the steps being undertaken in many countries to mitigate its spread, would significantly disrupt economic activity.
In March 2020, financial market volatility increased further, with several one-day stock market swings that resulted in significant market declines. Additionally, in March: market pricing deteriorated in virtually all sectors and asset classes except U.S. Treasury securities; the World Health Organization declared COVID-19 to be a pandemic; the U.S. President declared the COVID-19 pandemic to be a national emergency, allowing several federal disaster programs to be accessed by states and cities; many states and cities in the U.S. declared health emergencies, lockdowns, travel restrictions, and quarantines, prohibiting gatherings of more than a small number of people and ordering or urging most businesses and workplaces to close or operate on a very restricted basis; the Federal Reserve lowered short-term interest rates twice and started a “quantitative easing” program intended to lower longer-term interest rates and foster access to credit; the effective yields of 10-year and 30-year U.S. Treasury securities achieved record low rates; and the U.S. Congress enacted relief legislation which, among other things, is intended to provide emergency credit to businesses at risk for failure
from government and public actions related to the COVID-19 pandemic, and to mitigate an economic recession which has not been officially declared but is widely believed to have begun in March. Government programs instituted recently include loan programs administered by banks and other private-sector lenders, liquidity programs administered by the U.S. Treasury, and favorable accounting and regulatory treatment (for lenders) of certain loan payment deferrals.
The economic effects of these and related actions and events in the U.S. have included: large numbers of partial or full business closures; large numbers of people being furloughed or laid off; large increases in unemployment; large numbers of workers being partially or wholly ordered to work from home; large numbers of businesses at risk of insolvency as revenues drop off precipitously, especially in businesses related to travel, leisure, and physical personal services; large numbers of investors realizing substantial losses in their portfolios and retirement funds; and large numbers of consumers being unwilling to undertake significant discretionary spending. In addition, worldwide demand for oil has fallen sharply in conjunction with the pandemic resulting in sharp drops in oil prices and sharp drops in the values of oil-related assets. Further, certain banking organizations globally have limited share buybacks and other capital actions. The most significant effects already experienced by FHN, and actions already taken by FHN, are mentioned in Part I, Item 2 of this report under the captions “Financial Summary,” “Income Statement Review,” “Asset Quality,” and “Market Uncertainties and Prospective Trends,” beginning on pages 81, 83, 94, and 112 of this report, respectively.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on the businesses of FHNForm 10-Q for the remainder of 2020 or afterward. FHN’s efforts to mitigate
period ended March 31, 2020:
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 118
the adverse impacts of COVID-19 may not be effective, and in any case are likely to be only a partial mitigate. The full extent of impacts resulting from the COVID-19 pandemic and other events beyond the control of FHN will depend on future developments, which are highly uncertain and unpredictable, including new information which may emerge concerning the severity of the pandemic and further actions taken to prevent, treat, or mitigate the spread of COVID-19, among others. Moreover, global markets for oil and gas have been, and may continue to be, severely impacted by events beyond the control of FHN. The current low commodity prices, especially if sustained, could have a negative impact on the economies of several states in which FHN conducts business, as well as FHN’s customers, businesses, and assets in those states.
In addition, the COVID-19 pandemic could result in business disruption to FHN, and if unable to recover from such a business disruption on a timely basis, FHN’s businesses, financial condition, and results of operations would be adversely affected. The efforts to integrate the businesses of IBKC and those of FHN may also be delayed and adversely affected by the COVID-19 pandemic, and become more costly. FHN may also incur additional costs to remedy damages caused by such disruptions, which could adversely affect FHN’s financial condition and results of operations.
Changes in interest rates due to Federal Reserve actions and market forces, mentioned above, are likely to negatively impact FHN’s net interest margin (a measure of the average profit margin applicable to
lending). In addition, “spreads” (the difference between U.S. Treasury borrowing rates and private sector borrowing rates) have widened. For new loans, wider spreads should help mitigate net interest margin compression. However, FHN will not be able to capture the widened spreads quickly for outstanding floating-rate loans: for loans pre-dating the COVID-19 crisis, spreads are fixed by the loan contracts based on pre-COVID pricing.
Not Applicable
FHN’s customers have been adversely impacted by governmental and societal responses to COVID-19; those impacts are likely to adversely affect FHN’s noninterest income from loans and deposits as well as create downward loan migration (a reduction in loan-grading) and a corresponding increase in loan loss provision expense and reserves. In addition, loan charge-offs likely will increase over time, especially if economic disruption related to COVID-19 continues for more than a few months.
In the U.S., initial government responses to the COVID-19 pandemic were intended mainly to slow the spread of illness, regardless of the impact on economic activity. As governments relax restrictions in an effort re-invigorate the economy, it is not clear how well or how quickly the economy will recover. Substantial uncertainty regarding COVID-19, and the resulting economic damage, likely will continue until a substantial percentage of the population no longer fears contracting it.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| | | | | | | | |
| (a) & (b) | Not Applicable |
| | |
| (a) & (b) | Not Applicable |
| | |
| (c) | The "Common Stock Purchase Programs” section including tables 10(a)9(a) and 10(b)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 93106 of this report, is incorporated herein by reference. |
| |
Items 3., 4.,3, 4, and 5.5
Not applicable
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 119131
Item 6. Exhibits
(a) Exhibits
In the Exhibit Table below: the “Filed Here” column denotes each exhibit which is filed or furnished (as applicable) with this report; the “Mngt Exh” column denotes each exhibit that represents a management contract or compensatory plan or arrangement required to be identified as such; and the “Furnished” column denotes each exhibit that is “furnished” pursuant to 18 U.S.C. Section 1350 or otherwise, and is not “filed” as part of this Report or as a separate disclosure document.
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. Exceptions to such representations and warranties may be partially or fully waived by such parties, or not enforced by such parties, in their discretion. No such representation or warranty may be relied upon by any other person for any purpose.
| | | | | | | | | | | | | | | | | | | | | | | |
Exh No | Description of Exhibit to this Report | Filed Here | Mngt Exh | Furn-ished | Incorporated by Reference to |
Form | Exh No | Filing Date |
3.1 | Restated Charter of First Horizon National Corporation | | | | 8-K | 3.1 | 10/29/2020 |
3.2 | Bylaws of First Horizon National Corporation, as amended and restated effective October 27, 2020 | | | | 8-K | 3.2 | 10/29/2020 |
4.1 | Deposit Agreement, dated as of January 31, 2013, by and among First Horizon National Corporation, Wells Fargo Bank, N.A., as depositary, and the holders from time to time of the depositary receipts described therein [Series A] | | | | 8-K | 4.1 | 1/31/2013 |
4.2 | Form of certificate representing Series A Preferred Stock | | | | 8-K | 4.2 | 1/31/2013 |
4.3 | Form of Depositary Receipt-Series A (included as part of Exhibit 4.1 to this report) | | | | 8-K | 4.3 | 1/31/2013 |
4.4 | Deposit Agreement, dated as of July 1, 2020, by and among First Horizon National Corporation, Equiniti Trust Company, as depositary, and the holders from time to time of the depositary receipts described therein [Series B] | | | | 8-K | 4.1 | 7/2/2020 |
4.5 | Form of Depositary Receipt-Series B (included as part of Exhibit 4.4 to this report) | | | | 8-K | 4.4 | 7/2/2020 |
4.6 | Deposit Agreement, dated as of July 1, 2020, by and among First Horizon National Corporation, Equiniti Trust Company, as depositary, and the holders from time to time of the depositary receipts described therein [Series C] | | | | 8-K | 4.2 | 7/2/2020 |
4.7 | Form of Depositary Receipt-Series C (included as part of Exhibit 4.6 to this report) | | | | 8-K | 4.5 | 7/2/2020 |
4.8 | Deposit Agreement, dated as of July 1, 2020, by and among First Horizon National Corporation, Equiniti Trust Company, as depositary, and the holders from time to time of the depositary receipts described therein [Series D] | | | | 8-K | 4.3 | 7/2/2020 |
4.9 | Form of Depositary Receipt-Series D (included as part of Exhibit 4.8 to this report) | | | | 8-K | 4.6 | 7/2/2020 |
4.10 | Deposit Agreement, dated as of May 28, 2020, by and among First Horizon National Corporation, Equiniti Trust Company, as depositary, and the holders from time to time of the depositary receipts described therein [Series E] | | | | 8-K | 4.1 | 5/28/2020 |
4.11 | Form of certificate representing Series E Preferred Stock | | | | 8-K | 4.2 | 5/28/2020 |
4.12 | Form of Depositary Receipt-Series E (included as part of Exhibit 4.10 to this report) | | | | 8-K | 4.3 | 5/28/2020 |
4.13 | | X | | | | | |
4.14 | FHN agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument defining the rights of the holders of the senior and subordinated long-term debt of FHN and its consolidated subsidiaries. | | | | | | |
10.1 | | X | | | | | |
10.2 | | X | | | | | |
10.3 | | X | | | | | |
31(a) | | X | | | | | |
FIRST HORIZON NATIONAL CORP. 3Q20 FORM 10-Q REPORT 132
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Exh No | Description of Exhibit to this Report | Filed Here | Mngt Exh | Furn-ished | Incorporated by Reference to |
Form | Exh No | Filing Date |
4.2 | FHN agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument defining the rights of the holders of the senior and subordinated long-term debt of FHN and its consolidated subsidiaries. | | | | | | |
10.131(b) | | X | X | | | | |
10.2 | | X | X | | | | |
10.3 | | X | X | | | | |
10.4 | | X | X | | | | |
31(a) | | X | | | | | |
31(b) | | X | | | | | |
32(a) | | X | | X | | | |
32(b) | | X | | X | | | |
| XBRL Exhibits | | | | | | |
101 | The following financial information from First Horizon National Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31,September 30, 2020, formatted in Inline XBRL: (i) Consolidated Condensed Statements of ConditionBalance Sheets at March 31,September 30, 2020 and December 31, 2019; (ii) Consolidated Condensed Statements of Income for the Three and Nine Months Ended March 31,September 30, 2020 and 2019; (iii) Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months Ended March 31,September 30, 2020 and 2019; (iv) Consolidated Condensed Statements of Changes in Equity for the Three and Nine Months Ended March 31,September 30, 2020 and 2019; (v) Consolidated Condensed Statements of Cash Flows for the Three and Nine Months Ended March 31,September 30, 2020 and 2019; (vi) Notes to Consolidated Condensed Financial Statements. | | | | | | |
101. INS | XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | |
101. SCH | Inline XBRL Taxonomy Extension Schema | X | | | | | |
101.CAL101. CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | X | | | | | |
101.LAB101. LAB | Inline XBRL Taxonomy Extension Label Linkbase | X | | | | | |
101. PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | X | | | | | |
101.DEF101. DEF | Inline XBRL Taxonomy Extension Definition Linkbase | X | | | | | |
104 | Cover Page Interactive Data File, formatted in Inline XBRL (included in Exhibit 101) | X | | | | | |
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 120133
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | | | | | | | | | | |
| | FIRST HORIZON NATIONAL CORPORATION (Registrant) |
| | | |
Date: May 8,November 5, 2020 | | By: | | /s/ William C. Losch III |
| | Name: | | William C. Losch III |
| | Title: | | Senior Executive Vice President and Chief Financial Officer |
| | | | (Duly Authorized Officer and Principal Financial Officer) |
FIRST HORIZON NATIONAL CORP. 1Q203Q20 FORM 10-Q REPORT 121134