ANNUAL REPORT   2017
   

 

 

CORPORATE OVERVIEW

 

Our Commitment

At First Horizon National Corp. we are committed to our customers, our people, our communities and our shareholders. We demonstrate that commitment through financial performance and corporate responsibility. We make investments that benefit our stakeholders because when they prosper, so do we. In 2017 we continued to make progress toward a future of sustained success – a future based on our 154-year history of earning the trust of Tennesseans, on our core regional banking and fixed income businesses, on the dedication of our 6,000 employees, on our support for the communities we serve and on the confidence of our shareholders.

 

Our People

We know that a company is only as strong as its people. We seek to attract, develop and retain the best people and empower them to serve our customers in exceptional ways. Our employee focus and our distinctive corporate culture –Firstpower – have earned us national recognition as one of the best companies to work for in America. Firstpower promotes accountability, adaptability, integrity and relationships, the pillars of our culture. First Horizon has been recognized as an outstanding employer by American Banker and Working Mother magazines and the National Association for Female Executives.

 

Our Core Businesses

Regional banking: First Tennessee Bank has provided financial services in local communities since 1864. Today we have more than 300 offices across the southern U.S. We have the top deposit market share in Tennessee, according to the latest FDIC figures. Our focus on consistently offering a distinctive customer experience has resulted in one of the highest customer retention rates of any bank in the country. Personal service, advanced technology and helpful employees set First Tennessee apart. We are consistently named best bank in newspaper reader surveys in the communities we serve.

 

In 2017 we closed our merger with Capital Bank and added to our growing presence in the Carolinas, Virginia and Florida – our Mid-Atlantic region. In 2014 we opened an office in Houston, Texas that continues to excel. In these new markets our services include commercial real estate, private client, commercial banking, wealth management and corporate and commercial lending. FTB Advisors, our wealth management team, offers access to the same products available from national brokerage firms delivered by local professionals who care about our communities and customers.

Our goal is to be easy to do business with, to be the best at serving customers in all our business lines. We offer a full range of products, convenient locations and hours, and the latest advances in mobile banking. We’ve been recognized by InformationWeek magazine as one of the most innovative users of technology. In fact, First Tennessee was the first bank in our markets to offer mobile banking for commercial customers and mobile check deposit to consumers, and our customers have enthusiastically embraced these new ways of doing business. Above all, our knowledgeable employees strive to be proactive and help customers manage their money and make sound financial decisions for the future. That adds up to a distinctive customer experience – our competitive advantage. More information is available at www.FirstTennessee.com, www.CapitalBank-US.com or at any of our convenient offices.

 

Fixed income: FTN Financial is an industry leader in fixed income sales, trading and strategies for institutional customers in the U.S. and abroad. The strength of FTN Financial’s platform is its extensive fixed income distribution network of 4,700 institutional customers worldwide, including approximately half of all U.S. banks with portfolios over $100 million. FTN Financial also provides investment services and balance sheet management solutions.

 

With 28 offices across the country, FTN Financial provides a broad spectrum of financial services for the investment and banking communities through the integration of traditional capital markets securities activities, loan sales, portfolio advisory services and derivative sales.

 

In 2017, FTN Financial’s performance again demonstrated the strength of our fixed income platform, anchored in our experienced sales and trading resources and deep customer relationships. More information can be found at www.FTNFinancial.com.

 

Our Communities

We share the hopes of our neighbors for a better place to live and work. In addition to the financial services we provide and the jobs and spending we bring to local economies, we express our corporate citizenship through our volunteer spirit and community investment.

 

Our employee volunteer program has received national recognition from the Financial Services Roundtable. In 2017, our volunteers donated more than 24,000 hours of community service, and we supported their efforts through leadership grants to nearly 200 nonprofits and more than 380 matching gifts.


 

 

In 2017, our First Tennessee Community Development Fund awarded grants to 150 organizations to support low to moderate income residents in the communities we serve.

 

We established the First Tennessee Foundation in 1993 to invest in the communities we serve. Through this private charitable foundation, we make donations in a way that engages our employees, responds inclusively to needs and promotes progress and prosperity throughout Tennessee and across our footprint. Since its inception, the First Tennessee Foundation has donated more than $80 million to meet community needs. In 2017, our Foundation awarded grants to nearly 600 nonprofits. More information can be found at www.FirstTennesseeFoundation.com.

 

We focus our community investment in key areas:

 

Financial literacy and education: To plant the seeds of success, we give to help educate young people. Our volunteers provide tutoring to students, with a special emphasis on financial literacy. The Tennessee Financial Literacy Commission has named us an outstanding corporate partner. We have partnered with Operation HOPE, a national nonprofit, to offer free credit counseling workshops at several of our locations. We support local schools, colleges and universities across our footprint.

 

Economic development: To encourage jobs and growth, we support Chambers of Commerce, regional development initiatives and small business resources. We have helped secure grants for nonprofits to develop hundreds of units of affordable housing. We have developed flexible banking products to expand access for the underserved.

 

Health and human services: We are one of the largest United Way supporters in Tennessee. Our executives serve in community-wide leadership roles, and our employees volunteer in agencies working to better our communities. To ensure that our employees and neighbors have access to top-quality care, First Tennessee supports healthcare institutions throughout the state.

 

Arts and culture: Because art plays a vital role in a healthy community, the First Tennessee Foundation is a long-time supporter. Arts organizations, museums, theaters, symphonies and cultural institutions throughout the state receive support.

Our World

Concern for environmental sustainability is part of the way we do business. In addition to the company’s commitment, the First Tennessee Foundation supports green projects across the state such as nature conservancy, bike trails and historic preservation. Examples of our sustainable practices:

 

In 2017, our recycling program with Cintas Document Management helped us save the equivalent of an estimated 24,000 trees, enough energy to supply 365 homes a year, nearly 23 million gallons of water, nearly 2 million pounds of solid waste and the equivalent of the greenhouse gasses produced by 519 cars each year.
   
We continue to use less paper and cardboard and recycle an average of 5 tons of paper a month.
   
To reduce water consumption, we use indigenous plants for landscaping at all new facilities.
   
Buildings are designed with a goal of enhancing energy efficiency and sustainability, from window blinds to the heating and cooling systems to motion-sensor lighting and low-volume flush valves and faucets.
   
Recycled products are used in carpeting, wallpaper, fabrics and parking abutments.
   
At our facilities, air conditioning equipment uses environmentally friendly refrigerant, and we continue to upgrade aging equipment at our locations, using environmentally friendly refrigerant and improving air quality and efficiency.
   
Our First Operations West facility generates approximately $14,000 in savings per year in energy consumption, via onsite solar panels.
   
At our Corporate Headquarters, we use water reclamation to reduce the amount of water used during the summer months by taking condensate water and injecting it back into our cooling towers.
   
Enterprise-wide, we are replacing all light sources with energy efficient LED lamps and fixtures.

 

Our Promise

We promise to be the best at serving our customers, one opportunity at a time. We will continue to advance our people, support our communities and reward our investors. Carrying on our 154-year tradition, First Horizon is building for a bright future.


 

 

CHAIRMAN’S LETTER

SIGNIFICANT TRANSFORMATION, SMOOTH INTEGRATION

 

Dear Fellow First Horizon Shareholders:

 

First Horizon experienced a transformational year in 2017, closing our merger with Capital Bank – the largest in our company’s history. The merger resulted in a $41 billion organization and prepares us for growth in very attractive markets. The Capital Bank merger also positions us to continue to invest in industry-leading products and services to meet evolving customer needs.

 

Thanks to the hard work and dedication of our people, we are on track to substantially complete the integration in the second quarter of 2018.

 

First Horizon’s merger with Capital Bank created the fourth-largest regional bank headquartered in the Southeast, with more than 300 branches in eight states. Our company now has a meaningful presence in attractive, high-growth markets in the Carolinas and South Florida, along with an expanded footprint in Middle Tennessee. We believe these markets, which have above-average population growth and robust economies, will be significant performance drivers for our company.

 

Capital Deployment Actions and Enhanced Merger Economics

When we announced our merger with Capital Bank in May 2017, we estimated cost savings of $65 million through vendor savings, technology, corporate functions and bank operations. Within six months we increased that amount significantly to $85 million. We now estimate revenue synergies of $25 million to $30 million over the next two to three years.

 

Revenue synergies include:

 

Commercial

 

Selling a full product suite across a larger client base
   
Expanding treasury management services and clients
   
Growing our balance sheet with a higher lending capacity
   
Generating organic growth through expanded geographic opportunities

 

Consumer

 

Increasing branch deposit-gathering efficiencies in the Capital Bank network
   
Introducing private client / wealth management services to the Capital Bank network
Expanding Capital Bank mortgage platforms in the First Horizon network
   
Achieving peer-level credit card penetration

 

In 2017, we completed the acquisition of Coastal Securities, a national leader in the trading, securitization and analysis of Small Business Administration loans. Coastal also trades United States Department of Agriculture loans and fixed income products and provides municipal underwriting and advisory services. The Coastal Securities transaction broadened depth and diversity for product offerings in the fixed income business.

 

Also in 2017, First Tennessee Bank National Association acquired PMC, a leading provider of institutional debt capital and commercial mortgage loan servicing, which expanded the capabilities of our commercial real estate platform.

 

In addition to deploying capital through acquisitions, we increased our annual common dividend rate by 29 percent to $0.36 per share, and in early 2018 we increased it again by 33 percent to $0.48 per share.

 

Innovation, technology spur new opportunities

The rate of technological change in financial services is unprecedented. As fintech continues to transform our industry, First Horizon is prepared to meet new challenges and pursue new opportunities. We recognize the changing landscape of banking, driven by customers seeking expanded digital banking services. As new, disruptive technologies are introduced to the market, we will continue to offer our customers leading edge solutions to their day-to-day business challenges. We have upgraded our digital banking platform and our mobile app, and we are engaging with technology firms to optimize transactions as customer preferences shift. Our improvements have generated impressive results, and in 2017 First Tennessee was ranked by Money as the top bank in Tennessee.

 

Our company is dedicated to exploring ways we can utilize technology and innovation to offer differentiated service to existing customers, attract new ones and operate more efficiently. We believe our adaptability will enable us to thrive in an ever-changing environment.

 

Strong foundation, solid growth

First Horizon’s impressive performance during 2017 was driven by strong fundamentals. We demonstrated healthy growth in our balance sheet, maintained stable credit


 

 

quality, and remain well positioned to deliver on strategic priorities and create long-term value for our shareholders.

 

During the past year, we generated solid growth in loans and deposits at First Tennessee. From 2016 to 2017, our regional bank average loans grew 13 percent, average deposits were up 11 percent, and revenue was up 12 percent from increased net interest income and higher fee income. Balance sheet growth was driven by our focus on specialty lending areas that are higher return businesses and generate strong levels of economic profit. Asset quality trends remained strong, reflecting disciplined underwriting from our experienced bankers.

 

Despite challenging conditions that led to lower sales volumes in 2017, FTN Financial remains an industry leader in fixed income, sales, trading and strategies for institutional customers. In recent years, FTN Financial has transacted business with about 40 percent of all domestic depositories with portfolios over $100 million.

 

Strategic focus, increased performance

As we celebrate our 154th year, we remain committed to strengthening our customer relationships, expanding our presence across our markets and improving and growing all lines of business.

 

Commitment to our Bonefish strategy is producing long-term earnings power and solid returns for our shareholders. By concentrating on efficiency, productivity and economic profit, First Horizon is a more responsive and higher return company.

 

The efficiency model enables us to work smarter to streamline processes and perform sharper to increase profitability. As we engage in an ever-evolving industry, we have continued to increase loans and deposits, we have maintained our No. 1 market share position in Tennessee, and we are pursuing new growth opportunities in new markets.

 

Our investments over the past few years in our specialty lending areas such as franchise finance, music industry banking and healthcare continue to deliver strong results. Our experienced bankers who are leading these segments are helping our company grow its business throughout our footprint and with customers across the country.

 

We expect to achieve our Bonefish ROTCE target by year-end 2018. Our merger with Capital Bank accelerates our hitting the targets by bringing scale and efficiency to our company. Tax reform and potential rate hikes will further accelerate reaching these goals.

Exceptional culture, continued excellence

Building on our exceptional culture and our tradition of excellence, First Horizon is consistently recognized as one of the top workplaces in the country. We focus on attracting, recruiting and retaining the best and brightest employees who are dedicated to providing differentiated service that sets us apart. Recently we distributed $1,000 bonuses to approximately 70 percent of our employees, increased the minimum pay level of employees to $15 an hour, and contributed $16.5 million to our Foundation.

 

Our commitment to diversity and inclusion has created a culture where employees are engaged and empowered. During the past year we were once again named one of the Top 60 Companies for Executive Women by the National Association for Female Executives, and one of the nation’s top employers by American Banker and Working Mother magazines. In 2017, First Horizon was also named one of the 25 Best Companies for Multicultural Women by Working Mother magazine, and First Tennessee was honored by American Banker as No. 5 on its list of Top 10 Most Reputable Banks in the nation.

 

The drivers of our success are our dedicated employees, whose contributions create engaging workplaces and vibrant communities. During 2017, our employees logged more than 24,000 hours of volunteer service at charitable and civic organizations and participated in nearly 5,300 unique volunteer events.

 

Our corporate citizenship delivers a similarly powerful impact. In 2017, the First Tennessee Foundation awarded grants to nearly 600 nonprofits across our footprint, and our First Tennessee Community Development Fund awarded grants to 150 organizations that support the needs of low to moderate income communities. These combined contributions reached nearly $11 million in the communities we serve. When our communities thrive we thrive, and our actions prove our commitment to this belief.

 

Harnessing momentum, maximizing opportunities

We enter 2018 with great momentum, fueled by the transformational merger with Capital Bank. The power of these two brands will open up exciting new avenues for us and increase opportunities for growth.

 

With our expanded footprint and capabilities, we are able to offer the same products and services from Houston to Memphis, from Nashville to Knoxville, from Raleigh to Naples. Our growing presence reflects a company that is stronger than ever and prepared for an outstanding future.


 

 

We are proud of our impressive gains of the past year and excited about the opportunities ahead. As we build on the momentum of our legacy of 154 years, we remain dedicated to providing differentiated service for our customers and increasing returns for shareholders.

 

Thank you to our employees for their dedication, to our customers for their trust, and to our communities for their support. We appreciate the investment and confidence of our shareholders, and we will continue to work hard to justify that trust as we build a bright future together.

 

Sincerely,

 

 

D. Bryan Jordan

 

Chairman, President and CEO

 

First Horizon National Corp.

 

March 1, 2018


 

 

2017 HIGHLIGHTS

 

     
  Completed merger with Capital Bank, creating the fourth largest regional bank in the Southeast with $41 billion in assets and more than 300 branches
  Total revenue was up 4 percent, driven by 16 percent increase in net interest income
  Net interest margin rose 18 basis points
  Regional banking grew average loans 13 percent, increased average deposits 11 percent and maintained No. 1 market share in Tennessee
  Increased dividend 29 percent in 2017 and by 33 percent in 2018
  Closed acquisitions of Coastal Securities and PMC
  Invested tax gains into its people and communities through charitable contributions, employee bonuses and pay increases
  Expanded partnership with Operation HOPE by opening five new offices in Tennessee and one in Mississippi, promoting economic empowerment in distressed neighborhoods and offering free credit counseling workshops,
  Distributed nearly $11 million through grants from the First Tennessee Foundation and Community Development Fund
     
  Note: All growth comparisons are from 2016-2017. Deposit market share ranking is based on FDIC data as of June 30, 2017.
     

 

 

©2018 First Horizon National Corporation

 

FINANCIAL INFORMATION AND DISCUSSION

 

TABLE OF CONTENTS

 

Selected Financial and Operating Data 2
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
   
General Information 3
   
Forward-Looking Statements 5
   
Financial Summary – 2017 compared to 2016 6
   
Business Line Review – 2017 compared to 2016 7
   
Income Statement Review – 2017 compared to 2016; 2016 compared to 2015 9
   
Statement of Condition Review – 2017 compared to 2016 19
   
Capital - 2017 compared to 2016 24
   
Asset Quality – Trend Analysis of 2017 compared to 2016 27
   
Risk Management 47
   
Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations 57
   
Market Uncertainties and Prospective Trends 63
   
Critical Accounting Policies 64
   
Quarterly Financial Information 68
   
Non-GAAP Information 69
   
Glossary of Selected Financial Terms and Acronyms 70
   
Report of Management on Internal Control over Financial Reporting 76
   
Reports of Independent Registered Public Accounting Firm 77
   
Consolidated Statements of Condition 79
   
Consolidated Statements of Income 80
   
Consolidated Statements of Comprehensive Income 81
   
Consolidated Statements of Equity 82
   
Consolidated Statements of Cash Flows 83
   
Notes to Consolidated Financial Statements 84
   
Consolidated Historical Statements of Income 182
   
Consolidated Average Balance Sheets and Related Yields and Rates 184
   
Total Shareholder Return Performance Graph 186

 

FIRST HORIZON NATIONAL CORPORATION

 

SELECTED FINANCIAL AND OPERATING DATA

(Dollars in millions except per share data)  2017   2016   2015   2014   2013 
Income/(loss) from continuing operations  $177.0   $238.5   $97.3   $234.0   $37.8 
Income/(loss) from discontinued operations, net of tax   -    -    -    -    0.5 
Net income/(loss)   177.0    238.5    97.3    234.0    38.4 
Income/(loss) available to common shareholders   159.3    220.8    79.7    216.3    21.1 
Common Stock Data                         
Earnings/(loss) per common share from continuing operations  $0.66   $0.95   $0.34   $0.92   $0.09 
Earnings/(loss) per common share   0.66    0.95    0.34    0.92    0.09 
Diluted earnings/(loss) per common share from continuing operations   0.65    0.94    0.34    0.91    0.09 
Diluted earnings/(loss) per common share   0.65    0.94    0.34    0.91    0.09 
Cash dividends declared per common share   0.36    0.28    0.24    0.20    0.20 
Book value per common share   12.82    9.90    9.42    9.35    8.87 
Closing price of common stock per share:                         
High   20.76    20.61    16.20    13.91    12.55 
Low   16.05    11.62    12.31    11.18    9.72 
Year-end   19.99    20.01    14.52    13.58    11.65 
Cash dividends per common share/year-end closing price   1.8%   1.4%   1.7%   1.5%   1.7%
Cash dividends per common share/diluted earnings per common share   55.4%   29.8%   70.6%   22.0%   222.2%
Year-end price/earnings ratio   30.75x   21.3x   42.7x   14.9x   129.4x
Market capitalization  $6,531.5   $4,674.8   $3,464.3   $3,180.7   $2,753.7 
Average shares (thousands)   241,436    232,700    234,189    234,997    237,972 
Average diluted shares (thousands)   244,453    235,292    236,266    236,735    239,794 
Period-end shares outstanding (thousands)   326,736    233,624    238,587    234,220    236,370 
Volume of shares traded (thousands)   790,153    574,196    562,553    592,399    787,295 
Selected Average Balances                         
Total assets  $29,924.8   $27,427.2   $25,636.0   $23,993.0   $24,399.9 
Total loans, net of unearned income   20,104.0    18,303.9    16,624.4    15,521.0    15,726.4 
Securities available-for-sale   4,021.6    4,002.1    3,692.3    3,548.4    3,180.4 
Earning assets   27,461.0    25,180.1    23,456.2    21,825.2    21,772.0 
Total deposits   23,072.1    20,898.8    18,753.7    16,401.7    16,340.2 
Total term borrowings   1,077.3    1,130.2    1,557.2    1,591.0    1,942.3 
Common equity   2,579.3    2,300.4    2,190.1    2,200.9    2,135.6 
Total equity   2,970.3    2,691.5    2,581.2    2,592.0    2,518.8 
Selected Period-End Balances                         
Total assets  $41,423.3   $28,555.2   $26,192.6   $25,665.4   $23,782.4 
Total loans, net of unearned income   27,658.9    19,589.5    17,686.5    16,230.2    15,389.1 
Securities available-for-sale   5,170.3    3,943.5    3,929.8    3,556.6    3,398.5 
Earning assets   36,953.4    26,280.2    23,971.5    23,470.9    21,168.4 
Total deposits   30,620.4    22,672.4    19,967.5    18,068.9    16,735.0 
Total term borrowings   1,218.1    1,040.7    1,312.7    1,877.3    1,737.8 
Common equity   4,189.4    2,314.0    2,248.5    2,190.5    2,097.3 
Total equity   4,580.5    2,705.1    2,639.6    2,581.6    2,488.4 
Selected Ratios                         
Return on average common equity (a)   6.18%   9.60%   3.64%   9.83%   0.99%
Return on average tangible common equity (b) (c)   7.23    10.59    3.97    10.62    1.07 
Return on average assets (d)   0.59    0.87    0.38    0.98    0.16 
Net interest margin (e)   3.12    2.94    2.83    2.92    2.96 
Allowance for loan losses to loans   0.69    1.03    1.19    1.43    1.65 
Net charge-offs to average loans   0.06    0.10    0.19    0.31    0.50 
Total period-end equity to period-end assets   11.06    9.47    10.08    10.06    10.46 
Tangible common equity to tangible assets (c)   6.57    7.42    7.82    7.91    8.19 
Common equity tier 1 ratio   8.88    9.94    10.45    N/A    N/A 

See accompanying notes to consolidated financial statements.

Numbers may not add due to rounding. N/A - Not applicable

(a) Calculated using net income/(loss) available to common shareholders divided by average common equity.
(b) Calculated using adjusted tangible common equity divided by risk weighted assets.
(c) Represents a non-GAAP measure which is reconciled in the non-GAAP to GAAP reconciliation in table 33.
(d) Calculated using net income divided by average assets.
(e) Net interest margin is computed using total net interest income adjusted to a FTE basis assuming a statutory federal income tax rate of 35 percent and, where applicable, state income taxes.

 

2 FIRST HORIZON NATIONAL CORPORATION
 

FIRST HORIZON NATIONAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

 

GENERAL INFORMATION

 

First Horizon National Corporation (“FHN”) began as a community bank chartered in 1864 and as of December 31, 2017, was one of the 30 largest publicly traded banking organizations in the United States in terms of asset size.

 

FHN is the parent company of First Tennessee Bank National Association (“FTBNA”). FTBNA’s principal divisions and subsidiaries operate under the brands of First Tennessee Bank, Capital Bank, FTB Advisors, and FTN Financial. FHN offers regional banking, wealth management and capital market services through the First Horizon family of companies. First Tennessee Bank, Capital Bank, and FTB Advisors provide consumer and commercial banking and wealth management services. FTN Financial (“FTNF”), which operates partly through a division of FTBNA and partly through subsidiaries, is an industry leader in fixed income sales, trading, and strategies for institutional clients in the U.S. and abroad. FTBNA has over 350 banking offices in eight southeastern U.S. states, and FTNF has 28 offices in 18 states across the U.S.

 

FHN is composed of the following operating segments:

 

  Regional banking segment offers financial products and services, including traditional lending and deposit taking, to consumer and commercial customers in Tennessee, North Carolina, South Carolina, Florida and other selected markets. Regional banking also provides investments, financial planning, trust services and asset management, mortgage banking, credit card, and cash management. Additionally, the regional banking segment includes correspondent banking which provides credit, depository, and other banking related services to other financial institutions nationally.
     
  Fixed income segment consists of fixed income securities sales, trading, 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, and acquisition- and integration-related costs.
     
  Non-strategic segment consists of the wind-down national consumer lending activities, legacy mortgage banking elements including servicing fees, and the associated ancillary revenues and expenses related to these businesses. Non-strategic also includes the wind-down trust preferred loan portfolio and exited businesses.

 

On November 30, 2017, FHN completed its acquisition of Capital Bank Financial Corporation (“CBF”) and its subsidiaries, including Capital Bank Corporation for an aggregate of 92,043,171 shares of FHN common stock and $423.6 million in cash in a transaction valued at $2.2 billion. CBF operated 178 branches in North and South Carolina, Tennessee, Florida and Virginia at the time of closing.

 

On October 2, 2017, FTBNA acquired the operations and certain assets of Professional Mortgage Company, Inc. (“PMC”). PMC was a provider of institutional debt capital and commercial mortgage loan servicing. Eleven professionals joined FTBNA’s commercial real estate (“CRE”) team as a result of the transaction, expanding the capabilities of its CRE platform.

 

On April 3, 2017, FTNF acquired substantially all of the assets and assumed substantially all of the liabilities of Coastal Securities, Inc. (“Coastal”), a national leader in the trading, securitization, and analysis of Small Business Administration (“SBA”) loans, for approximately $131 million in cash. Coastal, which was based in Houston, TX,

 

FIRST HORIZON NATIONAL CORPORATION 3
 

also traded United States Department of Agriculture (“USDA”) loans and fixed income products and provided municipal underwriting and municipal advisory services to its clients. Coastal’s government-guaranteed loan products were combined with FTNF’s existing SBA trading activities to establish an additional major product sector for FTNF.

 

On September 16, 2016, FTBNA acquired $537.4 million of unpaid principal balance (“UPB”) in restaurant franchise loans from GE Capital. The acquired loans were combined with existing FTBNA relationships to establish a franchise finance specialty banking business.

 

On October 2, 2015, FHN completed its acquisition of TrustAtlantic Financial Corporation (“TrustAtlantic Financial” or “TAF”), and its wholly owned bank subsidiary TrustAtlantic Bank (“TAB”), for an aggregate of 5.1 million shares of FHN common stock and $23.9 million in cash in a transaction valued at $96.7 million. The fair value of the acquired assets totaled $445.3 million, including $281.9 million in loans. FHN also assumed $344.1 million of TAB deposits.

 

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 for additional information.

 

For the purpose of this management’s discussion and analysis (“MD&A”), earning assets have been expressed as averages, unless otherwise noted, and loans have been disclosed net of unearned income. The following financial discussion should be read with the accompanying audited Consolidated Financial Statements and Notes in this report.

 

ADOPTION OF ACCOUNTING UPDATES

 

Issued in February 2018, ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” provides an election for reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects solely resulting from the Tax Cuts and Jobs Act (“the Tax Act”). The stranded tax effects were created because current accounting requirements indicate that all changes in deferred tax assets and liabilities due to changes in enacted tax rates be recorded through tax provision, even when the deferred tax asset or liability was originally created with an offset to accumulated comprehensive income. For FHN, this includes net deferred tax assets related to net unrealized losses on available-for-sale (“AFS”) securities, net actuarial losses for pension and postretirement plans, and the effective portion of cash flow hedging activities. The provisions of ASU 2018-02 do not apply to past or future changes in tax rates. Adoption of ASU 2018-02 is required for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period for which financial statements have not yet been issued. FHN elected early adoption as of December 31, 2017 and made a reclassification of $57.5 million from accumulated other comprehensive income to retained earnings.

 

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,

 

4 FIRST HORIZON NATIONAL CORPORATION
 

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 measures presented in this filing are return on average tangible common equity (“ROTCE”), tangible common equity to tangible assets and adjusted tangible common equity to risk-weighted assets. Refer to table 33 for a reconciliation of the non-GAAP to GAAP measures and presentation of the most comparable GAAP items.

 

FORWARD-LOOKING STATEMENTS

 

This MD&A contains forward-looking statements with respect to FHN’s beliefs, plans, goals, expectations, and estimates. Forward-looking statements are not a representation of historical information but instead pertain to future operations, strategies, financial results, or other developments. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “should,” “is likely,” “will,” “going forward,” and other expressions that indicate future events and trends identify forward-looking statements.

 

Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond FHN’s control, and many of which, with respect to future business decisions and actions (including acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors: global, general and local economic and business conditions, including economic recession or depression; the stability or volatility of values and activity in the residential housing and commercial real estate markets; potential requirements for FHN to repurchase, or compensate for losses from, previously sold or securitized mortgages or securities based on such mortgages; potential claims alleging mortgage servicing failures, individually, on a class basis, or as master servicer of securitized loans; potential claims relating to participation in government programs, especially lending or other financial services programs; expectations of and actual timing and amount of interest rate movements, including the slope and shape of the yield curve, which can have a significant impact on a financial services institution; market and monetary fluctuations, including fluctuations in mortgage markets; inflation or deflation; customer, investor, competitor, regulatory, and legislative responses to any or all of these conditions; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geopolitical developments including possible terrorist activity; natural disasters; effectiveness and cost-efficiency of FHN’s hedging practices; technological changes; fraud, theft, or other incursions through conventional, electronic, or other means affecting FHN directly or affecting its customers, business counterparties or competitors; demand for FHN’s product offerings; new products and services in the industries in which FHN operates; the increasing use of new technologies to interact with customers and others; and critical accounting estimates. Other factors are those inherent in originating, selling, servicing, and holding loans and loan-based assets, including prepayment risks, pricing concessions, fluctuation in U.S. housing and other real estate prices, fluctuation of collateral values, and changes in customer profiles. Additionally, the actions of the Securities and Exchange Commission (“SEC”), the Financial Accounting Standards Board (“FASB”), the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System (“Federal Reserve” or “Fed”), the Federal Deposit Insurance Corporation (“FDIC”), the Financial Industry Regulatory Authority (“FINRA”), the U.S. Department of the Treasury (“U.S. Treasury”), the Municipal Securities Rulemaking Board (“MSRB”), the Consumer Financial Protection Bureau (“CFPB”), the Financial Stability Oversight Council (“Council”), the Public Company Accounting Oversight Board (“PCAOB”), and other regulators and agencies; pending, threatened, or possible future regulatory, administrative, and judicial outcomes, actions, and proceedings; current or future Executive orders; changes in laws and regulations applicable to FHN; and FHN’s success in executing its business plans and strategies and managing the risks involved in the foregoing, could cause actual results to differ, perhaps materially, from those contemplated by the forward-looking statements.

 

FHN assumes no obligation to update or revise any forward-looking statements that are made in this Annual Report to Shareholders for the period ended December 31, 2017 of which this MD&A is a part or otherwise from time to time. Actual results could differ and expectations could change, possibly materially, because of one or more factors, including those presented in this Forward-Looking Statements section, in other sections of this

 

FIRST HORIZON NATIONAL CORPORATION 5
 

MD&A, in other parts of and exhibits to this Annual Report to Shareholders, or in FHN’s Annual Report on Form 10-K for the period ended December 31, 2017 into which this MD&A has been incorporated, and in documents incorporated into the Form 10-K.

 

FINANCIAL SUMMARY – 2017 COMPARED TO 2016

 

FHN reported net income available to common shareholders of $159.3 million, or $.65 per diluted share, compared to net income of $220.8 million, or $.94 per diluted share in 2016. The decline in net income available to common shareholders in 2017 was due to higher noninterest expense, an increase in income taxes, and a decrease in noninterest income, somewhat mitigated by an increase in net interest income and a decline in the provision for loan losses. Various factors significantly impacted reported earnings in 2017 including acquisitions and other strategic transactions expected to boost growth, returns and profitability. Additional factors affecting reported results were increased interest rates, tax reform, certain legacy mortgage matters, and the steady economic environment.

 

During 2017, FHN continued to execute on strategic priorities by strengthening core businesses, controlling costs and prudently managing the balance sheet. FHN invested in its core businesses by focusing on higher-return specialty lending areas; making strategic hires; upgrading digital banking platforms; and expanding into growth markets both organically and through acquisitions. Management successfully deployed capital through profitable loan growth, dividend increases, and acquisitions.

 

FHN completed three acquisitions in 2017, significantly strengthening FHN’s ability to grow and improve returns over the long-term. In November 2017, FHN closed the acquisition of CBF, a $10 billion bank headquartered in North Carolina. The CBF acquisition expands FHN’s presence in high-growth, attractive geographic markets; provides scale and efficiency; and, accelerates the achievement of FHN’s long-term financial goals on return, profitability and productivity. In April 2017, FHN completed the purchase of Coastal, a national leader in the trading, securitization and analysis of SBA loans. The Coastal transaction provided a broadened depth and diversity for product offerings in the fixed income business. In October 2017, FHN closed on its purchase of PMC, a leading provider of institutional debt capital and commercial mortgage loan servicing which will expand the capabilities of FHN’s commercial real estate platform.

 

In December 2017, congress enacted the Tax Act, reducing the federal statutory tax rate from 35 percent to 21 percent for FHN. The rate reduction on January 1, 2018 should benefit financial results in the future; however, the enactment of the rate reduction affected FHN’s deferred tax balances and negatively impacted FHN’s 2017 operating results. Earlier in 2017, FHN recognized favorable effective tax rate adjustments primarily associated with the reversal of a capital loss deferred tax valuation allowance which somewhat offset the overall increase in provision for income taxes.

 

The economic environment remained steady-to-improving in 2017 with GDP growth throughout the year, low unemployment rates, and muted inflation. Organic loan growth and additional loans added through acquisitions coupled with a modest increase in short-term interest rates bolstered FHN’s net interest income (“NII”) and net interest margin (“NIM”); favorably impacting revenues in 2017 relative to the prior year. While the economic improvement positively impacted FHN’s NII in 2017, higher rates and a lack of interest rate volatility negatively impacted fee income from FTNF due to the counter-cyclical impact of the interest rate environment which led to lower fixed income sales revenue in 2017.

 

Asset quality trends were stable in 2017 reflecting continued strong underwriting standards. Allowance for loan losses continued to decline, decreasing 6 percent in 2017 as a result of the run-off of non-strategic loan balances partially offset by organic loan growth. Net charge-offs and nonperforming loans declined 35 percent and 10 percent, respectively, both reflecting strong credit quality in 2017. The addition of loans as a result of the CBF acquisition increased the diversification of the loan portfolio across geographic markets and various lending areas, including higher-return specialty areas.

 

Return on average common equity (“ROE”) and ROTCE for 2017 were 6.18 percent and 7.23 percent, respectively, compared to 9.60 percent and 10.59 percent in 2016. Return on average assets (“ROA”) was

 

6 FIRST HORIZON NATIONAL CORPORATION
 

.59 percent in 2017 compared to .87 percent in 2016. The tangible common equity to tangible assets ratio was 6.57 percent in 2017 compared to 7.42 percent in 2016. Common equity tier 1, Tier 1, Total capital, and Leverage ratios were 8.88 percent, 9.83 percent, 11.10 percent, and 10.31 percent on December 31, 2017, compared to 9.94 percent, 11.17 percent, 12.24 percent, and 9.35 percent, respectively, on December 31, 2016. Total period-end assets were $41.4 billion on December 31, 2017, a 45 percent increase from $28.6 billion on December 31, 2016. Total period-end equity was $4.6 billion on December 31, 2017, up from $2.7 billion on December 31, 2016.

 

BUSINESS LINE REVIEW – 2017 COMPARED TO 2016

 

Regional Banking

Pre-tax income within the regional banking segment increased 36 percent to $456.1 million in 2017 from $336.1 million in 2016. The increase in pre-tax income was primarily driven by higher revenue and a decline in loan loss provision, which more than offset an increase in expenses.

 

Total revenue increased 12 percent, or $116.7 million, to $1.1 billion in 2017, from $990.8 million in 2016, driven by an increase in NII. The increase in NII was largely due to the favorable impact of higher interest rates on loans, higher average balances of commercial loans and noninterest-bearing deposits, as well as loan and deposit growth associated with the CBF acquisition. Noninterest income was $258.6 million and $249.0 million in 2017 and 2016, respectively. The increase in noninterest income was largely driven by a $5.6 million increase in brokerage, management fees, and commission income from the Bank’s wealth management group due to increases in recurring revenue driven primarily by growth in FHN’s advisory business and favorable market conditions. Additionally, increases in fees from deposit transactions and cash management activities, mortgage banking income, and bankcard income also contributed to the increase in noninterest income in 2017. Deposit transactions and cash management activities increased $2.0 million in 2017 largely driven by higher fee income associated with cash management activities, which offset a decline in non-sufficient funds (“NSF”)/overdraft fees driven by changes in consumer behavior and a modification of billing practices. Fees associated with mortgage banking activities increased $1.7 million in 2017 and were primarily related to FHN’s Community Reinvestment Act (“CRA”) initiatives. Bankcard income increased $1.1 million relative to the prior year primarily due to an increase in interchange income as a result of increased volume due to the CBF acquisition. FHN recognized $.4 million in net securities gains for 2017 primarily resulting from the call of a $4.4 million held-to-maturity municipal bond in second quarter 2017. Gains on the sale of fixed assets decreased $2.0 million in 2017 and fees from derivative transactions decreased $2.0 million both reducing noninterest income in 2017 compared to 2016.

 

Provision expense was $21.6 million in 2017 down from $38.9 million in 2016. The net decrease in provision in 2017 compared to the prior year was primarily due to continued strong performance in both the commercial and consumer portfolios. The provision in 2017 was favorably affected by historically lower net charge-offs which continue to drive lower loss rates.

 

Noninterest expense increased 2 percent to $629.7 million in 2017 from $615.8 million in 2016. The increase in expenses was primarily driven by an increase in personnel-related expenses due to strategic hires in expansion markets and specialty areas, higher incentive expense associated with loan/deposit growth, retention initiatives, and $19.1 million attributable to CBF activities ($10.7 million of which relates to a 27 percent increase in headcount for one month). Additionally, FHN recognized $4.1 million in special employee bonuses which also contributed to the increase in personnel expense in 2017. To a lesser extent FDIC premium expense, occupancy, computer software, intangible asset amortization, and expenses associated with equipment rentals, deprecation and maintenance all increased relative to 2016, negatively impacting regional banking expenses. The increase in FDIC premium expense was due in large part to organic and acquisition-related balance sheet growth, as well as the net loss recognized in fourth quarter 2017. The other expense categories increased primarily due to the CBF acquisition. The regional banking segment recognized a $15.9 million net decline in loss accruals related to legal matters favorably impacting expenses in 2017. Additionally, a recovery from a vendor recognized in first quarter 2017 related to previous overbillings also positively impacted expenses in 2017.

 

FIRST HORIZON NATIONAL CORPORATION 7
 

Fixed Income

Pre-tax income in the fixed income segment was $24.2 million in 2017 compared to $50.5 million in 2016. The decline in results in 2017 was driven by lower fee income, somewhat offset by a decline in expenses and an increase in NII.

 

NII increased from $10.8 million in 2016 to $18.0 million in 2017, primarily driven by an increase in loans held-for-sale as a result of the Coastal acquisition. Fixed income product revenue decreased 24 percent to $173.9 million in 2017 from $229.7 million in 2016, as average daily revenue (“ADR”) declined to $696 thousand in 2017 from $919 thousand in 2016. This decline reflects lower activity due to challenging market conditions (interest rate increases, a flattening yield curve, and low levels of market volatility). Other product revenue was $43.2 million in 2017 up from $39.7 million in the prior year, primarily driven by increases in fees from loan sales, which more than offset declines in fees from derivative sales and portfolio advisory services.

 

Noninterest expense decreased 8 percent, or $18.6 million, to $210.9 million in 2017 from $229.6 million in 2016. The expense decline during 2017 was primarily the result of lower variable compensation associated with the decrease in fixed income sales revenue in 2017. A portion of the expense decline was somewhat offset by an increase in legal fees and increased amortization and other expenses associated with the Coastal acquisition.

 

Corporate

The pre-tax loss for the corporate segment was $189.4 million and $104.4 million for 2017 and 2016, respectively.

 

Net interest expense was $58.9 million in 2017 compared to $65.9 million in 2016. The improvement in net interest expense for 2017 was largely driven by a higher yielding securities portfolio. Noninterest income (including securities gain/losses) was $8.9 million in 2017, compared to $20.4 million in 2016. Noninterest income declined in 2017 compared to the prior year due in large part to a $14.3 million loss from the repurchase of equity securities previously included in a financing transaction. Additionally, net gains on the sale of securities decreased $1.1 million in 2017, largely the result of a $1.7 million gain from an exchange of approximately $294 million of available-for-sale (“AFS”) debt securities recognized in 2016. Deferred compensation income, which fluctuates with changes in the market value of the underlying investments and is mirrored by changes in deferred compensation expense which is included in personnel expense, increased $3.3 million in 2017 partially mitigating the decline in noninterest income.

 

Noninterest expense was $139.4 million in 2017 compared to $58.9 million in 2016. The increase in noninterest expense was largely due to a $53.6 million increase in acquisition- and integration-related expenses primarily associated with the CBF and Coastal acquisitions, $5.7 million of special employee bonuses, and $8.8 million of charitable contributions to the First Tennessee Foundation made in 2017. To a lesser extent, higher deferred compensation expense also contributed to the expense increase in 2017, but was offset by $6.5 million of deferred compensation BOLI gains recognized in 2017. Advertising and public relations expense decreased $1.7 million in 2017 due in large part to a promotional branding campaign and higher expenses associated with CRA initiatives recognized in 2016. Additionally, a $2.1 million decrease in negative valuation adjustments associated with derivatives related to prior sales of Visa Class B shares offset a portion of the overall expense increase.

 

Non-Strategic

The non-strategic segment had pre-tax income of $18.0 million in 2017 compared to $63.0 million in 2016. The decline in results was primarily driven by higher expenses and a lower loan loss provision credit in 2017 relative to the prior year, coupled with a decline in revenues.

 

Total revenue decreased $16.2 million to $39.9 million in 2017 from $56.0 million in 2016. NII declined 19 percent to $34.3 million in 2017 consistent with the run-off of the non-strategic loan portfolios. Noninterest income (including securities gains/losses) was $5.6 million in 2017 compared to $13.7 million in 2016. The decrease in noninterest income was largely attributable to a decline in mortgage banking income due in large part to $4.4 million of recoveries recognized in 2016 associated with prior legacy mortgage servicing sales and a $1.5 million gain in 2016 related to the reversal of a contingency accrual associated with prior sales of mortgage servicing rights (“MSR”).

 

8 FIRST HORIZON NATIONAL CORPORATION
 

The provision for loan losses within the non-strategic segment was a provision credit of $21.6 million in 2017 compared to a provision credit of $27.9 million in the prior year. Overall, the non-strategic segment continued to reflect stable performance combined with lower loan balances as reserves declined by $12.5 million to $35.4 in December 31, 2017, nearly all of which was in the consumer real estate portfolio. Losses remain historically low as the non-strategic segment experienced an increase in net recoveries of $5.9 million in 2017 compared to the prior year.

 

Noninterest expense was $43.6 million in 2017 compared to $20.9 million in 2016. The increase in noninterest expense was primarily due to a $25.7 million net increase in loss accruals related to legal matters. Additionally, a smaller repurchase and foreclosure provision expense reversal related to the settlement of certain repurchase claims in 2017 relative to 2016 ($22.5 million and $32.7 million, respectively) also contributed to the increase in expense. An $11.9 million decrease in legal fees favorably impacted non-strategic expenses in 2017.

 

INCOME STATEMENT REVIEW – 2017 COMPARED TO 2016; 2016 COMPARED TO 2015

 

Total consolidated revenue increased 4 percent, or $51.0 million to $1.3 billion in 2017, driven by a 16 percent increase in net interest income, which more than offset lower fee income from fixed income product revenue. Total consolidated expense increased 11 percent to $1.0 billion in 2017 from $925.2 million in 2016. The expense increase was primarily driven by an increase in acquisition-related expenses associated with the CBF and Coastal acquisitions, and to a lesser extent an increase in accruals related to loss contingencies and litigation matters.

 

In 2016 and 2015, total consolidated revenue was $1.3 billion and $1.2 billion, respectively, largely driven by increases in net interest income and fixed income product revenue. Total consolidated expense decreased 12 percent to $925.2 million in 2016 from $1.1 billion in 2015 primarily driven by a decline in accruals related to loss contingencies and litigation matters and a mortgage repurchase provision expense reversal recognized in 2016, somewhat offset by higher personnel expense in 2016 compared to 2015.

 

NET INTEREST INCOME

Net interest income increased 16 percent to $842.3 million in 2017 from $729.1 million in 2016. On a fully taxable equivalent (“FTE”) basis, NII increased 16 percent to $855.9 million in 2017 from $740.7 million in 2016. As detailed in Table 1 – Analysis of Changes in Net Interest Income, the increase in NII was primarily driven by organic loan growth within the regional banking commercial loan portfolio, the positive impact of higher market rates on loans and other earning assets, and commercial and consumer loans added through the CBF acquisition, somewhat offset by lower average balances of consumer loans and loans to mortgage companies. An increase in loans held-for-sale (“HFS”) added through the Coastal and CBF acquisitions also improved NII in 2017 relative to 2016. The negative impact of higher market rates on deposits and other funding sources and the continued run-off of the non-strategic loan portfolios negatively impacted NII in 2017. Average earning assets were $27.5 billion and $25.2 billion in 2017 and 2016, respectively. The 9 percent increase in average earning assets in 2017 was primarily driven by organic loan growth within FHN’s regional banking activities, loans added as part of the CBF acquisition, higher average balances of excess cash held at the Federal Reserve (“Fed”) and an increase in loans held-for-sale (“HFS”) associated with the Coastal and CBF acquisitions. These increases were somewhat offset by continued run-off of the non-strategic loan portfolios, a decrease in securities purchased under agreements to resell and lower average balances of fixed income trading securities relative to 2016.

 

Net interest income was $729.1 million in 2016, a 12 percent increase from $653.7 million in 2015. On an FTE basis, NII increased to $740.7 million in 2016 from $664.4 million in 2015. The increase in NII was the result of loan growth within Regional Banking, the positive impact of higher interest rates on loans, lower long-term funding costs due to lower average balances, and a larger investment securities portfolio. These increases were partially offset by the continued run-off the non-strategic loan portfolios, the negative impact of higher market rates on deposits, lower average balances of trading securities, and a decrease in cash basis interest income in 2016 relative to 2015.

 

FIRST HORIZON NATIONAL CORPORATION 9
 

Table 1 – Analysis of Changes in Net Interest Income

   2017 Compared to 2016  2016 Compared to 2015
(Fully taxable equivalent (“FTE”))  Increase / (Decrease) Due to (a)  Increase / (Decrease) Due to (a)
(Dollars in thousands)  Rate (b)   Volume (b)   Total   Rate (b)   Volume (b)   Total 
Interest income – FTE:                              
Loans  $69,059   $70,022   $139,081   $16,071   $64,325   $80,396 
Loans held-for-sale   408    11,603    12,011    245    (196)   49 
Investment securities:                              
U.S. government agencies   6,167    230    6,397    (2,192)   7,791    5,599 
States and municipalities   63    (365)   (302)   336    (377)   (41)
Corporates and other debt   -    223    223    1    505    506 
Other   1,063    662    1,725    (2,643)   114    (2,529)
Total investment securities   7,660    383    8,043    (4,532)   8,067    3,535 
Trading securities   4,559    (507)   4,052    (1,861)   (2,260)   (4,121)
Other earning assets:                              
Federal funds sold   137    47    184    24    (44)   (20)
Securities purchased under agreements to resell   4,681    (53)   4,628    1,483    (56)   1,427 
Interest-bearing cash   3,902    2,046    5,948    1,901    (713)   1,188 
Total other earning assets   10,011    749    10,760    2,797    (202)   2,595 
Total change in interest income – earning assets – FTE            $173,947             $82,454 
Interest expense:                              
Interest-bearing deposits:                              
Savings  $21,039   $1,872   $22,911   $6,075   $1,541   $7,616 
Time Deposits   1,741    1,349    3,090    42    1,312    1,354 
Other interest-bearing deposits   12,891    1,233    14,124    5,093    773    5,866 
Total interest-bearing deposits   35,827    4,298    40,125    11,289    3,546    14,836 
Federal funds purchased   2,536    (884)   1,652    1,569    (347)   1,222 
Securities sold under agreements to repurchase   3,664    161    3,825    84    36    120 
Trading liabilities   2,245    (1,777)   468    (1,788)   812    (976)
Other short-term borrowings   1,958    3,828    5,786    (6)   228    222 
Term borrowings   8,359    (1,424)   6,935    1,563    (10,847)   (9,284)
Total change in interest expense - interest-bearing liabilities            $58,791             $6,140 
Net interest income – FTE            $115,156             $76,314 
Certain previously reported amounts have been reclassified to agree with current presentations.
(a) The changes in interest due to both rate and volume have been allocated to change due to rate and change due to volume in proportion to the absolute and amounts of the changes in each.
(b) Variances are computed on a line-by-line basis and are non-additive.

 

For purposes of computing yields and the net interest margin, FHN adjusts net interest income to reflect tax exempt income on an equivalent pre-tax basis which provides comparability of net interest income arising from both taxable and tax-exempt sources. The consolidated net interest margin improved to 3.12 percent in 2017 from 2.94 percent in 2016. The net interest spread increased to 2.91 percent in 2017 from 2.80 percent in 2016, and the impact of free funding was 21 basis points and 14 basis points in 2017 and 2016, respectively. The improvement in NIM in 2017 relative to 2016 was largely the result of the positive impact of higher market rates and an increase in average deposits, somewhat offset by an increase in average excess cash held at the Fed during 2017.

 

The consolidated net interest margin was 2.94 percent in 2016 compared to 2.83 percent in 2015. The positive impact of higher interest rates on loans, lower long-term funding costs, a decrease in average excess cash held at the Fed and higher average balances of loans to mortgage companies during 2016 all contributed to the increase in NIM in 2016 relative to 2015, but were somewhat mitigated by the continued run-off of the nonstrategic loan portfolios, the negative impact of higher market rates on deposits, and a decrease in cash basis interest income relative to 2015.

 

The activity levels and related funding for FHN’s fixed income activities affect the net interest margin. Generally fixed income activities compress the margin, especially where there are elevated levels of trading inventory, because of the strategy to reduce market risk by economically hedging a portion of its inventory on the balance sheet. As a result, FHN’s consolidated margin cannot be readily compared to that of other bank holding

 

10 FIRST HORIZON NATIONAL CORPORATION
 

companies. Table 2 – Net Interest Margin details the computation of the net interest margin for the past three years.

 

Table 2 – Net Interest Margin

 

   2017   2016   2015 
Assets:               
Earning assets:               
Loans, net of unearned income:               
Commercial loans   4.08%   3.64%   3.51%
Consumer loans   4.23    4.07    3.96 
Total loans, net of unearned income   4.12    3.77    3.67 
Loans held-for-sale   4.73    4.43    4.23 
Investment securities:               
U.S. government agencies   2.56    2.40    2.46 
States and municipalities (a)   9.36    7.95    3.52 
Corporates and other debt   4.98    5.25    4.94 
Other (b)   3.49    2.67    4.08 
Total investment securities   2.62    2.43    2.54 
Trading securities   3.04    2.66    2.81 
Other earning assets:               
Federal funds sold   1.63    1.11    1.01 
Securities purchased under agreements to resell (c)   0.69    0.06    (0.12)
Interest bearing cash   0.96    0.51    0.25 
Total other earning assets   0.85    0.28    0.10 
Interest income / total earning assets   3.65%   3.29%   3.19%
Liabilities:               
Interest-bearing liabilities:               
Interest-bearing deposits:               
Savings   0.47%   0.23%   0.16%
Other interest-bearing deposits   0.40    0.19    0.09 
Time deposits   0.90    0.77    0.73 
Total interest-bearing deposits   0.48    0.26    0.19 
Federal funds purchased   1.06    0.52    0.26 
Securities sold under agreements to repurchase   0.72    0.08    0.06 
Fixed income trading liabilities   2.26    1.95    2.18 
Other short-term borrowings   1.28    0.67    0.67 
Term borrowings   3.35    2.58    2.47 
Interest expense / total interest-bearing liabilities   0.74    0.49    0.49 
Net interest spread   2.91%   2.80%   2.70%
Effect of interest-free sources used to fund earning assets   0.21    0.14    0.13 
Net interest margin (d)   3.12%   2.94%   2.83%
Certain previously reported amounts have been reclassified to agree with current presentation.
(a) 2016 increase driven by payoff of lower yielding municipal bonds in fourth quarter 2015.
(b) 2016 decrease driven by a decline in the dividend rate of FHN’s holdings of federal reserve bank stock.
(c) 2015 driven by negative market rates on reverse repurchase agreements.
(d) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 35 percent, and no where applicable, state income taxes.

 

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. FHN’s balance sheet is positioned to benefit from a rise in short-term interest rates. For 2018, NIM will also depend on loan accretion levels, the extent of Fed interest rate increases, and the competitive pricing environment for core deposits.

 

FIRST HORIZON NATIONAL CORPORATION 11
 

PROVISION FOR LOAN LOSSES

The provision for loan losses is the charge to earnings that management determines to be necessary to maintain the ALLL at a sufficient level reflecting management’s estimate of probable incurred losses in the loan portfolio. The provision for loan losses was $0 in 2017 compared to $11.0 million in 2016 and $9.0 million in 2015. During 2017 and 2016, the continued overall improvement in the loan portfolio and declining non-strategic balances contributed to the declines of 6 percent and 4 percent in the allowance for loan losses relative to the prior years, respectively. Additionally, net charge-offs declined 35 percent and 39 percent, respectively, during 2017 and 2016 relative to the prior years. For additional information about the provision for loan losses refer to the Regional Banking and Non-Strategic sections of the Business Line Review section in this MD&A. For additional information about general asset quality trends refer to Asset Quality – Trend Analysis of 2017 Compared to 2016 in this MD&A.

 

NONINTEREST INCOME

Noninterest income (including securities gains/(losses)) was $490.2 million in 2017 compared to $552.4 million in 2016 and $517.3 million in 2015. In 2017 noninterest income was 37 percent of total revenue compared to 43 percent and 44 percent in 2016 and 2015, respectively. The decrease in noninterest income in 2017 relative to 2016 was primarily driven by a 19 percent decrease in fixed income non-interest income, as well as a $14.3 million loss from the repurchase of equity securities previously included in a financing transaction recognized in 2017. The increase in noninterest income in 2016 relative to 2015 was primarily driven by higher fixed income sales revenue. FHN’s noninterest income for the last three years is provided in Table 3 - Noninterest Income. The following discussion provides additional information about various line items reported in the following table.

 

Table 3 – Noninterest Income

 

               Compound
               Annual Growth
               Rates
(Dollars in thousands)  2017   2016   2015     17/16   17/15 
Noninterest income:                         
Fixed income  $216,625   $268,561   $231,337    (19)%   (3)%
Deposit transactions and cash management   110,592    108,553    112,843    2%   (1)%
Brokerage, management fees and commissions   48,514    42,911    46,496    13%   2%
Trust services and investment management   28,420    27,727    27,577    2%   2%
Bankcard income   25,467    24,430    22,238    4%   7%
Bank-owned life insurance   15,124    14,687    14,726    3%   1%
Debt securities gains/(losses), net   483    1,485    1,836    (67)%   (49)%
Equity securities gains/(losses),net   109    (144)   (458)   NM    NM 
All other income and commissions:                         
Other service charges   12,532    11,731    11,610    7%   4%
ATM interchange fees   12,425    11,965    11,917    4%   2%
Deferred compensation   6,322    3,025    (1,369)   NM    NM 
Electronic banking fees   5,082    5,477    5,840    (7)%   (7)%
Letter of credit fees   4,661    4,103    4,621    14%   * 
Mortgage banking   4,649    10,215    3,870    (54)%   10%
Insurance commissions   2,514    2,981    2,627    (16)%   (2)%
Gain/(loss) on extinguishment of debt (a)   (14,329)   -    5,793    NM    NM 
Other   11,029    14,734    15,821    (25)%   (17)%
Total all other income and commissions   44,885    64,231    60,730    (30)%   (14)%
Total noninterest income  $490,219   $552,441   $517,325    (11)%   (3)%
NM - Not meaningful
   * Amount less than one percent.
(a) Loss on extinguishment of debt for 2017 relates to the repurchase of equity securities previously included in a financing transaction.

 

12 FIRST HORIZON NATIONAL CORPORATION
 

Fixed Income Noninterest Income

The major component of fixed income revenue is generated from the purchase and sale of fixed income securities as both principal and agent. Other noninterest revenues within this line item consist principally of fees from loan sales, portfolio advisory services, and derivative sales. Securities inventory positions are procured for distribution to customers by the sales staff. Fixed income noninterest income decreased 19 percent in 2017 to $216.6 million from $268.6 million in 2016, reflecting lower activity due to challenging market conditions (interest rate increases, a flattening yield curve, and low levels of market volatility). Revenue from other products increased 10 percent, or $3.8 million, to $42.7 million from $38.9 million in 2016, driven by increases in fees from loan sales, which more than offset declines in fees from derivative sales and portfolio advisory services.

 

Fixed income noninterest income was $268.6 million in 2016, up from $231.3 million in 2015, reflecting more favorable market conditions during most of 2016, including increased rate and market volatility, as well as expansion of the distribution platform. In late 2016, trading activity was somewhat muted due to a sharp rate increase and market uncertainties following the U.S. presidential election. Revenue from other products increased $3.4 million to $38.9 million in 2016, largely driven by increases in fees from loan sales, derivative sales and portfolio advisory services.

 

Table 4 – Fixed Income Noninterest Income

 

               Compound
               Annual Growth
               Rates
(Dollars in thousands)  2017   2016   2015     17/16   17/15 
Noninterest income:                         
Fixed income  $173,910   $229,659   $195,877    (24)%   (6)%
Other product revenue   42,715    38,902    35,460    10%   10%
Total fixed income noninterest income  $216,625   $268,561   $231,337    (19)%   (3)%

 

Deposit Transactions and Cash Management

Fees from deposit transactions and cash management include fees for services related to consumer and commercial deposit products (such as service charges on checking accounts), cash management products and services such as electronic transaction processing (Automated Clearing House and Electronic Data Interchange), account reconciliation services, cash vault services, lockbox processing, and information reporting to large corporate clients. Deposit transactions and cash management activities increased to $110.6 million in 2017 from $108.6 million in 2016 largely driven by higher fee income associated with cash management activities, which offset a decline in NSF/overdraft fees driven by changes in consumer behavior and a modification of billing practices. In 2016, deposit transactions and cash management income decreased to $108.6 million from $112.8 million in 2015, primarily related to lower NSF fee income driven by changes in consumer behavior.

 

Brokerage, Management Fees and Commissions

Brokerage, management fees and commissions include fees for portfolio management, trade commissions, and annuity and mutual funds sales. Noninterest income from brokerage, management fees and commissions increased 13 percent, or $5.6 million, to $48.5 million in 2017. The increase was due in large part to increases in recurring revenue driven primarily by growth in FHN’s advisory business and favorable market conditions. Noninterest income from brokerage, management fees and commissions was $42.9 million and $46.5 million in 2016 and 2015, respectively. The decline in income in 2016 compared to 2015 was primarily driven by a reduction in annuity income as a result of market conditions and lower variable annuity sales as practices were adjusted to meet the standards of a changing regulatory environment. The decline was also affected by a shift in product and fee structures, which caused a temporary decline in revenues but better met client needs and should result in revenue streams over the life of the product.

 

Bankcard Income

Bankcard income is derived from fees charged for processing and supporting credit card transactions including interchange, late charges, membership fees, miscellaneous merchant fees, cash advance fees, currency conversion

 

FIRST HORIZON NATIONAL CORPORATION 13
 

fees, and research fees. Bankcard income increased 4 percent to $25.5 million in 2017 from $24.4 million in 2016. The increase in bankcard income relative to the prior year was primarily due to an increase in interchange income driven by higher volume due in large part to the CBF acquisition. Bankcard income increased 10 percent in 2016 to $24.4 million from $22.2 million in 2015, primarily driven by volume incentives received in 2016 driven by a significant new relationship.

 

Securities Gains/(Losses)

In 2017 FHN recognized net securities gains of $.6 million compared to $1.3 million and $1.4 million in 2016 and 2015, respectively. The 2017 net gain was primarily the result of the call of a $4.4 million held-to-maturity municipal bond within the regional banking segment. The 2016 net gain was largely driven by a $1.5 million net gain from the exchanges of approximately $736 million of AFS debt securities, partially offset by $.2 million of other-than-temporary impairment (“OTTI”) adjustments. The 2015 net gain was largely driven by a $1.8 million gain from an exchange of approximately $335 million of AFS debt securities, partially offset by $.7 million of OTTI adjustments.

 

Other Noninterest Income

Other income includes revenues from other service charges, ATM and interchange fees, revenue related to deferred compensation plans (which are mirrored by changes in noninterest expense), electronic banking fees, letter of credit fees, mortgage banking (primarily within the non-strategic and regional banking segments), insurance commissions, gains/(losses) on the extinguishment of debt, and various other fees.

 

Revenue from all other income and commissions was $44.9 million in 2017 compared to $64.2 million in 2016. The decrease in all other income and commissions was primarily driven by a $14.3 million loss from the repurchase of equity securities previously included in a financing transaction recognized in 2017, a $5.6 million decrease in mortgage banking income, and a $2.1 million decrease in gains on the sales of properties. The decline in mortgage banking income was due in large part to $4.4 million of recoveries recognized in 2016 associated with prior legacy mortgage servicing sales and a $1.5 million gain related to the reversal of a contingency accrual associated with prior sales of MSR, but was somewhat mitigated by a $1.7 million increase in new originations within the regional banking segment related to CRA initiatives. For 2017, all other income and commissions was favorably impacted by a $3.3 million increase in deferred compensation income, offsetting a portion of the overall decline in revenues from all other income and commissions. Deferred compensation income fluctuates with changes in the market value of the underlying investments and is mirrored by changes in deferred compensation expense which is included in personnel expense.

 

Revenue from all other income and commissions increased to $64.2 million in 2016 from $60.7 million in 2015. For 2016 all other income and commissions was favorably impacted by increases in mortgage banking and deferred compensation income, and higher fee income associated with derivative sales. These increases were somewhat offset by a $5.8 million gain recognized in 2015 on the extinguishment of junior subordinated notes underlying $200 million of trust preferred debt and a $1.3 million decrease in 2016 in gains on the sales of properties. The increase in mortgage banking income was driven by gains recognized in 2016 related to prior legacy mortgage servicing sales and the reversal of a contingency accrual associated with prior sales of MSR previously mentioned.

 

NONINTEREST EXPENSE

Total noninterest expense increased 11 percent, or $98.5 million, to $1.0 billion in 2017 from $925.2 million in 2016. The increase in expense was primarily driven by higher acquisition- and integration-related expense associated with the CBF and Coastal acquisitions. To a lesser extent, a smaller repurchase and foreclosure provision expense reversal related to the settlement of certain repurchase claims in 2017 relative to 2016, a net increase in loss accruals related to litigation and regulatory matters, and an increase in personnel expense also contributed to the expense increase in 2017. Legal fees decreased in 2017, favorably impacting expense relative to 2016.

 

In 2016, total noninterest expense decreased 12 percent, or $128.6 million, to $925.2 from $1.1 billion. The decrease in noninterest expense was driven by a reduction in accruals related to loss contingencies and litigation matters primarily within the non-strategic segment and, to a lesser extent, a mortgage repurchase and foreclosure provision expense reversal, somewhat offset by higher personnel expense relative to 2015. FHN’s noninterest

 

14 FIRST HORIZON NATIONAL CORPORATION
 

expense for the last three years is provided in Table 5 - Noninterest Expense. The following discussion provides additional information about various line items reported in the following table.

 

Table 5 – Noninterest Expense

 

               Compound
               Annual Growth
               Rates
(Dollars in thousands)  2017   2016   2015     17/16   17/15 
Noninterest expense:                         
Employee compensation, incentives and benefits  $589,411   $562,948   $511,633    5%   7%
Occupancy   54,646    50,880    51,117    7%   3%
Computer software   48,234    45,122    44,724    7%   4%
Professional fees   47,929    19,169    18,922    NM    59%
Operations services   43,823    41,852    39,261    5%   6%
Equipment rentals, depreciation and maintenance   29,543    27,385    30,864    8%   (2)%
FDIC premium expense   26,818    21,585    18,027    24%   22%
Advertising and public relations   19,214    21,612    19,187    (11)%   * 
Communications and courier   17,624    14,265    15,820    24%   6%
Contract employment and outsourcing   14,954    10,061    14,494    49%   2%
Legal fees   12,076    21,558    16,287    (44)%   (14)%
Amortization of intangible assets   8,728    5,198    5,253    68%   29%
Repurchase and foreclosure provision/(provision credit)   (22,527)   (32,722)   -    31%   NM 
All other expense:                         
Litigation and regulatory matters   40,517    30,469    187,607    33%   (54)%
Travel and entertainment   11,462    10,275    9,590    12%   9%
Other insurance and taxes   9,686    10,891    12,941    (11)%   (13)%
Customer relations   5,750    6,255    5,382    (8)%   3%
Employee training and dues   5,551    5,691    5,390    (2)%   1%
Supplies   4,106    4,434    3,827    (7)%   4%
Tax credit investments   3,468    3,349    4,582    4%   (13)%
Miscellaneous loan costs   2,751    2,586    2,656    6%   2%
OREO   1,006    773    2,104    30%   (31)%
Other (a)   48,891    41,568    34,123    18%   20%
Total all other expense   133,188    116,291    268,202    15%   (30)%
Total noninterest expense  $1,023,661   $925,204   $1,053,791    11%   (1)%
NM - Not Meaningful
   * Amount is less than one percent.
For more detailed information about acquisition- and integration-related expenses related to the CBF acquisition refer to Note 2 – Acquisitions and Divestitures.
(a) 2017 includes $8.8 million of charitable contributions to the First Tennessee Foundation. An additional contribution of 65,000 Visa Class B shares with a cost basis of $0 was also made in 2017.

 

Employee Compensation, Incentives, and Benefits

Employee compensation, incentives, and benefits (personnel expense), the largest component of noninterest expense, increased 5 percent, or $26.5 million, to $589.4 million in 2017 from $562.9 million in 2016. The increase in personnel expense was driven by several factors. Within the regional banking segment personnel expense increased due to strategic hires in expansion markets and specialty areas, higher incentive expense associated with loan/deposit growth, retention initiatives, and $19.1 million attributable to CBF activities ($10.7 million of which relates to a 27 percent increase in headcount for one month). In 2017, FHN recognized $9.9 million of special bonuses, $3.0 million related to higher deferred compensation expense, and a $2.6 million increase in pension fund expense which also contributed to the increase in personnel expense compared to 2016. Personnel expense within the fixed income segment decreased in 2017 largely driven by a decrease in variable compensation associated with lower fixed income sales revenue relative to 2016, offsetting a portion of the overall increase in personnel expense. Additionally, personnel expense was favorably impacted by $6.5 million of deferred compensation BOLI gains recognized in 2017.

 

Personnel expense increased 10 percent, or $51.3 million, to $562.9 million in 2016 from $511.6 million in 2015. The increase in personnel expense in 2016 was driven in part by an increase in variable compensation associated

 

FIRST HORIZON NATIONAL CORPORATION 15
 

with higher fixed income product sales revenue within FHN’s fixed income operating segment relative to 2015. Within the regional bank, expenses associated with strategic hires in expansion markets and specialty areas increased $9.6 million from 2015 to 2016. Additionally, higher incentive expense associated with loan growth and retention initiatives increased $4.5 million relative to 2015 and a year-over-year increase in headcount related to the TAB acquisition contributed $3.9 million to the increase in personnel expense within the regional bank in 2016. Personnel expense in 2015 was favorably impacted by an $8.3 million gain related to an amendment of certain employee benefit plans recognized in third quarter 2015, which also contributed to the increase in personnel-related expenses in 2016. Deferred compensation expense increased in 2016, relative to 2015, further contributing to the personnel expense increase in 2016. These increases were partially offset by a decline in pension expense relative to 2015 due to a change in the discount rates used in the calculation of pension and post retirement interest costs.

 

Occupancy

Occupancy expense increased to $54.6 million in 2017 from $50.9 in 2016, primarily driven by higher rental expense due to the CBF and Coastal acquisitions. Additionally, an increase in depreciation expense due to the completion of renovations to consolidated space made to the headquarters and other strategic locations during 2017 also increased occupancy relative to 2016.

 

In 2016, occupancy expense decreased to $50.9 million from $51.1 million in 2015. The decrease in occupancy expense was the result of a decline in sublease income related to the sale of a building in 2015, somewhat offset by $.9 million of lease abandonment expense related to efficiency initiatives and higher rent expense in 2016 associated with sale-leaseback transactions recognized in 2016.

 

Computer Software

Computer software expense was $48.2 million, $45.1 million, and $44.7 million in 2017, 2016, and 2015, respectively. The increase in computer software expense is the result of FHN’s focus on technology-related projects, as well as an increase in computer software expense as a result of one month of expense related to the inclusion of Capital Bank.

 

Professional Fees

Professional fees increased $28.8 million to $47.9 million in 2017 primarily driven by acquisition- and integration-related expenses primarily associated with the CBF and Coastal acquisitions. Professional fees were $19.2 million and $18.9 million in 2016 and 2015, respectively.

 

Operations Services

Operations services expense increased 5 percent, or $2.0 million to $43.8 million in 2017, primarily related to an increase in thirty party fees associated with the CBF and Coastal acquisitions. In 2016, expenses from operations services were $41.9 million compared to $39.3 million in 2015, primarily related to an increase in third party fees associated with FHN’s online digital banking platform.

 

FDIC Premium Expense

FDIC premium expense was $26.8 million in 2017, compared to $21.6 million and $18.0 million in 2016 and 2015, respectively. The increase in FDIC premium expense was due in large part to balance sheet growth, both organically and with the CBF and Coastal acquisitions for 2017. Additionally, the net loss recognized in fourth quarter 2017 also contributed to the increase in FDIC premium expense.

 

Advertising and Public Relations

Expenses associated with advertising and public relations decreased to $19.2 million in 2017 compared in $21.6 million and $19.2 million in 2016 and 2015, respectively. In 2016, FHN recognized higher advertising and public relations expense due in large part to a promotional branding campaign and higher expenses associated with CRA initiatives.

 

16 FIRST HORIZON NATIONAL CORPORATION
 

Contract Employment and Outsourcing

Expenses associated with contract employment and outsourcing increased 49 percent, or $4.9 million, to $15.0 million in 2017, primarily driven by acquisition- and integration-related projects primarily associated with the CBF acquisition and an increase in technology-related projects as compared to 2016. Expenses associated with contract employment and outsourcing decreased 31 percent, or $4.4 million, to $10.1 million in 2016. The decrease was attributable to a lower number of technology-related projects in 2016 relative to 2015 coupled with the completion of a large operations efficiency project in 2015.

 

Legal Fees

Legal fees were $12.1 million, $21.6 million, and $16.3 million in 2017, 2016, and 2015, respectively. Legal fees fluctuate primarily based on the status, timing, type, and composition of cases or other projects.

 

Amortization of Intangibles

Amortization expense was $8.7 million in 2017, up from $5.2 million in 2016 and $5.3 million in 2015. The increase was due to amortization expense as a result of the CBF and Coastal acquisitions.

 

Repurchase and Foreclosure Provision

During 2017 and 2016, FHN recognized a $22.5 million and a $32.7 million pre-tax expense reversal of mortgage repurchase and foreclosure provision primarily as a result of the settlement/recoveries of certain repurchase claims. The mortgage repurchase and foreclosure provision expense was $0 in 2015.

 

Other Noninterest Expense

Other expense includes losses from litigation and regulatory matters, travel and entertainment expense, other insurance and tax expense, customer relations expense, costs associated with employee training and dues, supplies, tax credit investments expenses, miscellaneous loan costs, expenses associated with OREO, and various other expenses.

 

All other expense increased 15 percent, or $16.9 million, to $133.2 million in 2017 from $116.3 million in 2016. The increase was primarily driven by a $10.0 million increase in pre-tax loss accruals related to legal matters and $8.8 million of charitable contributions to the First Tennessee Foundation. Additionally, FHN recognized $9.0 million in acquisition-and integration-related costs in 2017 and a $2.0 million vendor payment adjustment which also contributed to the expense increase in 2017. Offsetting a portion of the expense increase, FHN experienced a $2.0 million decrease in negative valuation adjustments associated with derivatives related to prior sales of Visa Class B shares, as well as a $1.2 million decrease in other insurance and taxes driven by favorable adjustments to franchise taxes related to community reinvestment efforts.

 

All other expense decreased 57 percent to $116.3 million in 2016 from $268.2 million in 2015. The decrease in expense between 2016 and 2015 was primarily driven by a $157.1 million net decline in accruals related to loss contingencies and legal matters, from $187.6 million in 2015 to $30.5 million in 2016. The decrease in accruals related to loss contingencies and legal matters was largely associated with the 2015 DOJ/HUD settlement of potential claims related to FHN’s underwriting and origination of FHA-insured mortgage loans within the non-strategic segment. To a much smaller extent, a decline in other insurance and taxes in 2016 associated with favorable adjustments to franchise taxes related to community reinvestment efforts, and a $1.2 million decrease in tax credit investments due in large part to a $2.8 million impairment recognized in 2015 also contributed to the 2016 expense decline. FHN recognized a $3.9 million net increase in fixed asset impairments and lease abandonment charges related to branch closures in 2016 relative to 2015, offsetting a portion of the expense decline. Additionally, a $1.9 million net increase in negative valuation adjustments associated with derivatives related to prior sales of Visa Class B shares resulted in higher expenses in 2016.

 

FIRST HORIZON NATIONAL CORPORATION 17
 

INCOME TAXES

FHN recorded an income tax provision of $131.9 million in 2017, compared to $106.8 million in 2016 and $10.9 million in 2015. FHN’s effective tax rates for 2017, 2016, 2015 were approximately 42.7 percent, 30.9 percent and 10.1 percent, respectively. The increase in the effective tax rates in 2017 compared to 2016 and 2015 was primarily driven by $82 million of tax expense related to the effects of federal tax reform, this was partially offset by the reversal of a capital loss valuation allowance which lowered taxes by $40.4 million. The reversal of the capital loss valuation allowance was attributable to the utilization of the carryforward against capital gains realized in 2017.

 

On December 22, 2017, the Tax Cuts and Jobs Act “Tax Act” was signed into law. The Tax Act reduces the federal statutory tax rate from 35 percent to 21 percent. Although the rate reduction was not effective until January 1, 2018, ASC Topic 740 requires an adjustment in 2017 of deferred tax balances to reflect the new effective tax rate.

 

The $82 million increase in tax expense related to the Tax Act is primarily based on the decrease in FHN’s net deferred tax balance resulting from a decrease in the federal tax rate. This amount will be adjusted during the measurement period related to the CBF acquisition and as deferred tax items are finalized for the 2017 return.

 

Although the initial effect of the Tax Act resulted in a tax increase during 2017, the changes under the Tax Act will favorably impact First Horizon’s financial results and operations in future years due to the reduced federal statutory rate.

 

The company’s effective tax rate is favorably affected by recurring items such as bank-owned life insurance, tax-exempt income, and credits and other tax benefits from affordable housing investments. The company’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.

 

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 December 31, 2017, FHN’s net DTA was $221.8 million compared with $199.6 million at December 31, 2016 and $259.3 million at December 31, 2015. FHN’s gross DTA (net of a valuation allowance) and gross DTL were $353.2 million and $131.4 million, respectively. FHN’s net DTA increased by $137.7 million on November 30, 2017 upon the merger of CBF into FHN. The $82 million adjustment related to the Tax Act, discussed above, includes tax expense related to a decrease in the acquired net DTA from CBF by approximately $48 million due to the adjustment of the DTA to the lower federal tax rate.

 

As of December 31, 2017, FHN had deferred tax asset balances related to federal and state income tax carryforwards of $126.8 million and $19.8 million, which will expire at various dates.

 

As of December 31, 2017, FHN had fully utilized all federal capital loss carryovers. As of December 31, 2016, FHN had a valuation allowance of $40.4 million against its federal capital loss carryforwards.

 

FHN’s gross DTA after valuation allowance was $353.2 million and $297.0 million as of December 31, 2017 and 2016, respectively. Based on current analysis, FHN believes that its ability to realize the remaining DTA is more likely than not. FHN monitors its DTA and the need for a valuation allowance on a quarterly basis. A significant adverse change in FHN’s taxable earnings outlook could result in the need for a valuation allowance.

 

FHN and its eligible subsidiaries are included in a consolidated federal income tax return. FHN files separate returns for subsidiaries that are not eligible to be included in a consolidated federal income tax return. Based on the laws of the applicable states where it conducts business operations, FHN either files consolidated, combined, or separate returns. The federal tax returns for Capital Bank Financial Corporation for 2010 - 2012 are under examination by the IRS. With few exceptions, FHN returns are no longer subject to federal or state and local tax examinations by tax authorities for years before 2013. FHN is currently under federal examination for 2013 - 2015 and is also under examination in several states.

 

See also Note 15 – Income Taxes for additional information.

 

18 FIRST HORIZON NATIONAL CORPORATION
 

STATEMENT OF CONDITION REVIEW – 2017 COMPARED TO 2016

 

Total period-end assets were $41.4 billion on December 31, 2017, up 45 percent from $28.6 billion on December 31, 2016. Average assets increased to $29.9 billion in 2017 from $27.4 billion in 2016. The increase in average assets compared to 2016 is primarily attributable to net increases in the loan portfolios, loans held-for-sale (“HFS”), and interest bearing cash, as well as, goodwill and other intangible assets added during 2017 as a result of the CBF and Coastal acquisitions. On a period-end basis, the increase was primarily due to the CBF acquisition which resulted in net increases in the loan portfolios, a larger investment securities portfolio, and increases to goodwill and other intangible assets. Increases in loans HFS and fixed income inventory also contributed to the increase in period-end assets on December 31, 2017, as did nearly all line items on the balance sheet due to the acquisition of CBF.

 

Total period-end liabilities were $36.8 billion on December 31, 2017, a 43 percent increase from $25.9 billion on December 31, 2016. Average liabilities increased to $27.0 billion in 2017, from $24.7 billion in 2016. The increase in period end and average liabilities was primarily the result of the CBF and Coastal acquisitions. The increase in average liabilities was due to an increase in deposits, and to a lesser extent an increase in other short-term borrowings. Lower average balances of federal funds purchased and trading liabilities during 2017 compared to the prior year offset a portion of the overall increase in liabilities. Higher deposit balances and an increase in other short-term borrowings (primarily FHLB borrowings) at December 31, 2017 were the primary drivers of the increase in liabilities on a period-end basis.

 

EARNING ASSETS

Earning assets consist of loans, investment securities, other earning assets such as trading securities, interest-bearing cash, and loans HFS. Average earning assets increased to $27.5 billion in 2017 from $25.2 billion in 2016. A more detailed discussion of the major line items follows.

 

Loans

Period-end loans increased 41 percent to $27.7 billion as of December 31, 2017 from $19.6 billion on December 31, 2016. Average loans for 2017 were $20.1 billion compared to $18.3 billion for 2016. The increase in average loan balances was primarily due to organic growth in several of the commercial loan portfolios within FHN’s regional banking segment excluding the CBF merger, coupled with commercial and consumer loans added through the CBF acquisition in fourth quarter 2017. Continued run-off of consumer loans portfolios within the non-strategic segment negatively impacted loan balances on an average basis in 2017, somewhat offsetting a portion of the overall increase in average loan balances. Additionally, lower average balances of loans to mortgage companies also offset a portion of the increase in average loans. The increase in period-end loans was primarily the result of the addition of $7.3 billion in loans from the CBF acquisition and organic growth within FHN’s ex-CBF regional banking segment, somewhat offset by run-off within the non-strategic portfolios.

 

FIRST HORIZON NATIONAL CORPORATION 19
 

Table 6 – Average Loans

 

           2017          2016          2015
       Percent  Growth      Percent  Growth      Percent  Growth
(Dollars in thousands)  2017   of total  Rate  2016   of total  Rate  2015   of total  Rate
Commercial:                                             
Commercial, financial, and industrial  $12,367,420    61%   13%  $10,932,679    60%   15%  $9,477,376    57%   16%
Commercial real estate   2,365,763    12    22    1,938,939    11    36    1,425,813    9    17 
Total commercial   14,733,183    73    14    12,871,618    71    18    10,903,189    66    16 
Consumer:                                             
Consumer real estate (a)   4,588,833    23    (1)   4,635,213    25    (5)   4,879,083    29    (6)
Permanent mortgage   407,552    2    (7)   437,524    2    (11)   489,190    3    (18)
Credit card, OTC and other   374,474    2    4    359,515    2    2    352,977    2    1 
Total consumer   5,370,859    27    (1)   5,432,252    29    (5)   5,721,250    34    (7)
Total loans, net of unearned income  $20,104,042    100%   10%  $18,303,870    100%   10%  $16,624,439    100%   7%
(a) 2017, 2016, and 2015 include $29.3 million, $43.4 million, and $65.6 million of restricted and secured real estate loans, respectively.

 

C&I loans are the largest component of the commercial portfolio, comprising 84 percent of average commercial loans in both 2017 and 2016. Average C&I loans increased 13 percent, or $1.4 billion, from 2016 due to net loan growth within several of the regional bank’s portfolios including franchise finance, commercial, and international, somewhat offset by lower balances of loans to mortgage companies. Average commercial real estate loans increased 22 percent to $2.4 billion in 2017 because of growth in expansion markets and increased funding under existing commitments. In addition, the fourth quarter 2017 CBF acquisition also contributed to the increase.

 

Average consumer loans declined 1 percent from a year ago to $5.4 billion in 2017. The consumer real estate portfolio (home equity lines and installment loans) declined $46.4 million to $4.6 billion, as the continued wind-down of portfolios within the non-strategic segment outpaced a $353.9 million increase in real estate installment loans within the regional banking segment primarily from new originations combined with the impact of the CBF acquisition. The permanent mortgage portfolio declined $30.0 million to $407.6 million in 2017 driven by run-off of legacy assets within the non-strategic segment offset by some growth in mortgage loans within regional banking, primarily related to FHN’s CRA initiatives. Credit Card and Other increased $15.0 million to $374.4 million.

 

The following table provides a detail of contractual maturities of commercial loans on December 31, 2017.

 

Table 7 – Contractual Maturities of Commercial Loans on December 31, 2017

 

(Period-end)
(Dollars in thousands)
  Within 1 Year   After 1 Year
Within 5 Years
   After 5 Years   Total
Commercial, financial, and industrial  $3,822,516   $7,987,389   $4,247,368   $16,057,273
Commercial real estate   972,077    2,517,059    725,559    4,214,695
Total commercial loans  $4,794,593   $10,504,448   $4,972,927   $20,271,968
For maturities over one year:                   
Interest rates - floating       $7,452,550   $3,748,117   $11,200,667
Interest rates - fixed        3,051,898    1,224,810    4,276,708
Total maturities over one year       $10,504,448   $4,972,927   $15,477,375

 

20 FIRST HORIZON NATIONAL CORPORATION
 

Because of various factors, the contractual maturities of consumer loans are not indicative of the actual lives of such loans. A significant component of FHN’s loan portfolio consists of consumer real estate loans – a majority of which are home equity lines of credit and home equity installment loans. Typical home equity lines originated by FHN are variable rate 5/15, 10/10, or 10/20 lines. In a 5/15 line, a borrower may draw on the loan for 5 years and pay interest only during that period (“the draw period”), and for the next 15 years the customer pays principal and interest and may no longer draw on that line. A 10/10 loan has a 10 year draw period followed by a 10-year principal-and-interest repayment period, and a 10/20 loan has a 10 year draw period followed by a 20-year principal-and-interest repayment period. Therefore, the contractual maturity for 5/15 and 10/10 home equity lines is 20 years and the contractual maturity for 10/20 home equity lines is 30 years. Numerous factors can contribute to the actual life of a home equity line or installment loan. In normalized market conditions, the average life of home equity line and installment loan portfolios is significantly less than the contractual period as indicated by historical trends. More recent indicators suggest that the average life of these portfolios could be longer when compared to that observed in normalized market conditions. This could be attributed to the reduced availability of new credit in the marketplace, weak performance of the housing market for much of the past ten years, and a historically low interest rate environment which is likely to have slowed prepayment rates. However, the actual average life of home equity lines and loans is difficult to predict and changes in any of these factors could result in changes in projections of average lives.

 

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 AFS. FHN utilizes the securities portfolio as a source of income, liquidity and collateral for repurchase agreements, for public funds, and as a tool for managing risk of interest rate movements. Table 8 – Contractual Maturities of Investment Securities on December 31, 2017 (Amortized Cost) shows information pertaining to the composition, yields, and contractual maturities of the investment portfolio. Investment securities increased to $5.2 billion on December 31, 2017 from $4.0 billion on December 31, 2016 primarily due to the acquisition of CBF. Average investment securities were $4.0 billion in 2017 and 2016, representing 15 percent and 16 percent of average earning assets in 2017 and 2016, respectively. FHN manages the size and mix of the investment portfolio to assist in asset liability management, provide liquidity, and optimize risk adjusted returns.

 

Government agency issued MBS, CMO, and other agencies averaged $3.8 billion in 2017 and 2016. U.S. treasury securities and corporate and municipal bonds averaged $16.2 million in 2017 compared to $15.2 million in 2016. Investments in equity securities averaged $190.3 million in 2016 compared with $186.4 million in 2016. A majority of the equity security balances include restricted investments in the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) which averaged $151.4 million and $156.0 million in 2017 and 2016, respectively. On December 31, 2017, AFS investment securities had $35.7 million of net unrealized losses compared to $27.9 million of net unrealized losses on December 31, 2016. See Note 3 - Investment Securities for additional detail.

 

FIRST HORIZON NATIONAL CORPORATION 21
 

Table 8 – Contractual Maturities of Investment Securities on December 31, 2017 (Amortized Cost)

 

(Period-end)  Within 1 year   After 1 year
Within 5 years
   After 5 years
Within 10 years
   After 10 years 
(Dollars in thousands)  Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield 
Securities available-for-sale:                                        
Government agency issued MBS and CMO (a)  $20,038    1.84%  $109,181    2.17%  $266,588    3.11%  $4,487,073    2.53%
U.S. treasuries   -    -    100    1.51    -    -    -    - 
Corporates and other debt   -    -    55,799    4.26    -    -    -    - 
Other (b)   -    -    -    -    -    -    265,863    3.4 
Total securities available-for-sale  $20,038    1.84%  $165,080    2.88%  $266,588    3.11%  $4,752,936    2.58%
Securities held-to-maturity:                                        
State and municipalities  $-    -%  $-    -%  $-    -%  $-    -%
Corporate bonds   -    -    -    -    10,000    5.25    -    - 
Total securities held-to-maturity  $-    -%  $-    -%  $10,000    5.25%  $-    -% 
(a) Represents government agency-issued mortgage-backed securities and collateralized mortgage obligations which, when adjusted for early pay downs, have an estimated average life of 5.1 years.
(b) The amount classified as maturing after 10 years represents equity securities with no stated maturity.

 

Loans Held-for-Sale

Loans HFS consists of small business, other consumer loans, the mortgage warehouse, USDA, student, and home equity loans. On December 31, 2017 loans HFS were $699.4 million compared to $111.2 million on December 31, 2016. The average balance of loans HFS increased to $370.6 million from $124.3 million in 2016. The increase in period-end and average loans HFS was primarily driven by the Coastal acquisition in second quarter 2017, which resulted in an increase in small business loans and the addition of USDA loans, as well as the addition of other consumer loans acquired as part of the CBF acquisition in fourth quarter 2017.

 

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 $3.0 billion in 2017, up from $2.7 billion in 2016. The increase in other earning assets was primarily driven by higher levels of interest-bearing cash primarily driven by higher average balances of customer deposits. A decrease in average asset repos and fixed income trading securities in 2017 compared with 2016 offset a portion of the overall increase in other earning assets. 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. Fixed income’s trading inventory fluctuates daily based on customer demand. Other earning assets were $3.4 billion and $2.6 billion on December 31, 2017 and 2016, respectively. The increase in other earning assets on a period-end basis was primarily driven by an increase in fixed income trading securities, as well as increases in interest-bearing cash and asset repos.

 

Non-earning assets

Period-end non-earning assets increased to $4.5 billion on December 31, 2017 from $2.3 billion on December 31, 2016. The increase in non-earning assets was primarily due to increases in goodwill, premises and equipment, and intangible assets associated with the CBF and Coastal acquisitions. Other assets also increased from December 31, 2016 to December 31, 2017 largely driven by increases in deferred tax assets associated with the CBF acquisition, and BOLI assets acquired in the CBF acquisition.

 

Deposits

Average deposits were $23.1 billion during 2017, up 10 percent from $20.9 billion during 2016. As noted in the table below, the composition of deposits remained consistent in 2017 with interest-bearing deposits comprising 72 percent of total deposits. As a percentage of total deposits, market-indexed deposits decreased 1 percent and commercial interest deposits increased 1 percent compared with 2016. Period-end deposits were $30.6 billion on December 31, 2017, up 35 percent from $22.7 billion on December 31, 2016. The increase in period-end and

 

22 FIRST HORIZON NATIONAL CORPORATION
 

average deposits was due primarily to the addition of $8.1 billion of deposits associated with the CBF acquisition; however, due to the late-year timing of the acquisition, the impact was much less on an average basis.

 

Table 9 – Average Deposits

 

           2017          2016          2015
       Percent  Growth      Percent  Growth      Percent  Growth
(Dollars in thousands)  2017   of Total  Rate  2016   of Total  Rate  2015   of Total  Rate
Interest-bearing deposits:                                             
Consumer interest  $9,467,518    41%   11%  $8,537,255    41%   5%  $8,140,316    43%   7%
Commercial interest   3,187,034    14    13    2,812,222    13    3    2,717,454    14    (2)
Market-indexed (a)   3,986,095    17    5    3,788,420    18    48    2,567,213    14    90 
Total interest-bearing deposits   16,640,647    72    10    15,137,897    72    13    13,424,983    72    14 
Noninterest-bearing deposits   6,431,489    28    12    5,760,873    28    8    5,328,762    28    14 
Total deposits  $23,072,136    100%   10%  $20,898,770    100%   11%  $18,753,745    100%   14%
(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 Borrowing

Short-term borrowings (federal funds purchased (“FFP”), securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings) averaged $2.3 billion in 2017 and $2.0 billion in 2016. As noted in the table below other short-term borrowings and securities sold under agreements to repurchase increased during 2017, while trading liabilities and FFP decreased during 2017 compared to the prior year. 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. Securities sold under agreements to repurchase increased primarily as a result of the Coastal and CBF acquisitions. Average FFP fluctuates depending on the amount of excess funding of FHN’s correspondent bank customers and average trading liabilities fluctuates based on expectations of customer demand. Period-end short-term borrowings were $4.3 billion on December 31, 2017 and $1.5 billion in 2016. The increase in period-end short-term borrowings was primarily due to an increase in FHLB borrowings. See Note 9 – Short-Term Borrowings for additional information.

 

Table 10 – Average Short-Term Borrowings

 

           2017          2016          2015
       Percent  Growth      Percent  Growth      Percent  Growth
(Dollars in thousands)  2017   of Total  Rate  2016   of Total  Rate  2015   of Total  Rate
Short-term borrowings                                             
Federal funds purchased  $447,137    20%   (24)%  $589,223    30%   (16)%  $705,054    36%   (36)%
Securities sold under agreements to repurchase   578,666    26    36    425,452    21    15    370,097    19    (17)
Trading liabilities   685,891    30    (11)   771,039    39    5    733,189    37    16 
Other short-term borrowings   554,502    24    NM    198,440    10    20    164,951    8    (69)
Total short-term borrowings   2,266,196    100%   14%  $1,984,154    100%   1%  $1,973,291    100%   (27)%

NM – Not meaningful

 

Term Borrowings

Term borrowings include senior and subordinated borrowings with original maturities greater than one year. Term borrowings were $1.2 billion on December 31, 2017 compared to $1.0 billion on December 31, 2016, primarily due to the addition of junior subordinated debentures underlying $206 million of trust preferred debt acquired in association with the CBF acquisition. Average term borrowings were $1.1 billion in 2017 and 2016. See Note 10 – Term Borrowings for additional information.

 

FIRST HORIZON NATIONAL CORPORATION 23
 

Other Liabilities

Period-end other liabilities increased to $.7 billion on December 31, 2017 from $.6 billion on December 31, 2016.

 

CAPITAL – 2017 COMPARED TO 2016

 

Management’s objectives are to provide capital sufficient to cover the risks inherent in FHN’s businesses, to maintain excess capital to well-capitalized standards, and to assure ready access to the capital markets. Period-end equity increased to $4.6 billion on December 31, 2017 from $2.7 billion on December 31, 2016 due in large part to $1.8 billion of equity issued in connection with the CBF acquisition on November 30, 2017. Average equity increased to $3.0 billion in 2017 from $2.7 billion in 2016. The increase in average equity was due to net income recognized since 2016, partially offset by common and preferred dividends paid, and the average impact of the equity issued in association with the CBF acquisition previously mentioned. Average equity was negatively impacted by a decline in accumulated other comprehensive income in 2017, offsetting a portion of the increase in average equity. The decline in average accumulated other comprehensive income was largely the result of unrealized losses recognized on the AFS securities portfolio, as well as an increase of net actuarial losses for pension and post retirement plans and results of cash flow hedges.

 

As previously mentioned, effective February 14, 2018 FHN elected early adoption of ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which resulted in a reclassification of $57.5 million out of period-end AOCI into retained earnings. This reclassification is reflected in FHN’s and FTBNA’s regulatory capital balances and ratios as of December 31, 2017.

 

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

 

Table 11 – Regulatory Capital and Ratios

 

(Dollars in thousands)  December 31, 2017  December 31, 2016
Shareholders’ equity  $4,285,057   $2,409,653 
FHN non-cumulative perpetual preferred   (95,624)   (95,624)
Common equity  $4,189,433   $2,314,029 
Regulatory adjustments:          
Disallowed goodwill and other intangibles   (1,480,725)   (165,292)
Net unrealized (gains)/losses on securities available-for-sale   26,834    17,232 
Net unrealized (gains)/losses on pension and other postretirement plans   288,227    229,157 
Net unrealized (gains)/losses on cash flow hedges   7,764    1,265 
Disallowed deferred tax assets   (69,065)   (18,027)
Other deductions from common equity tier 1   (313)   (377)
Common equity tier 1  $2,962,155   $2,377,987 
FHN non-cumulative perpetual preferred   95,624    95,624 
Qualifying noncontrolling interest – FTBNA preferred stock   257,080    256,811 
Other deductions from tier 1   (33,381)   (58,551)
Tier 1 capital  $3,281,478   $2,671,871 
Tier 2 capital   422,276    254,139 
Total regulatory capital  $3,703,754   $2,926,010 
Risk-Weighted Assets          
First Horizon National Corporation  $33,373,877   $23,914,158 
First Tennessee Bank National Association   32,786,547    23,447,251 
Average Assets for Leverage          
First Horizon National Corporation   31,824,751    28,581,251 
First Tennessee Bank National Association   31,016,187    27,710,158 

 

24 FIRST HORIZON NATIONAL CORPORATION
 
   December 31, 2017   December 31, 2016 
   Ratio   Amount   Ratio   Amount 
Common Equity Tier 1                    
First Horizon National Corporation   8.88%  $2,962,155    9.94%  $2,377,987 
First Tennessee Bank National Association   9.28    3,041,420    9.80    2,298,080 
Tier 1                    
First Horizon National Corporation   9.83    3,281,478    11.17    2,671,871 
First Tennessee Bank National Association   10.12    3,317,684    10.83    2,538,382 
Total                    
First Horizon National Corporation   11.10    3,703,754    12.24    2,926,010 
First Tennessee Bank National Association   10.74    3,520,670    11.78    2,762,271 
Tier 1 Leverage                    
First Horizon National Corporation   10.31    3,281,478    9.35    2,671,871 
First Tennessee Bank National Association   10.70    3,317,684    9.16    2,538,382 
Other Capital Ratios                    
Total period-end equity to tangible assets   11.06         9.47      
Tangible common equity to tangible assets (a)   6.57         7.42      
Adjusted tangible common equity to risk weighted assets (a)   7.91         8.86      
(a) Tangible common equity to tangible assets and Adjusted tangible common equity to risk-weighted assets are non-GAAP measures and are reconciled to Total equity to total assets (GAAP) in the Non-GAAP to GAAP Reconciliation – Table 33.

 

Banking regulators define minimum capital ratios for bank holding companies and their bank subsidiaries. Based on the capital rules and definitions prescribed by the banking regulators, should any depository institution’s capital ratios decline below predetermined levels, it would become subject to a series of increasingly restrictive regulatory actions. The system categorizes a depository institution’s capital position into one of five categories ranging from well-capitalized to critically under-capitalized. For an institution the size of FHN to qualify as well-capitalized, Common Equity Tier 1, Tier 1 Capital, Total Capital, and Leverage capital ratios must be at least 6.5 percent, 8 percent, 10 percent, and 5 percent, respectively. As of December 31, 2017, each of FHN and FTBNA had sufficient capital to qualify as a well-capitalized institution. For both FHN and FTBNA, regulatory capital ratios declined in 2017 relative to 2016 primarily due to the impact of increased disallowed intangible assets related to the CBF and Coastal acquisitions and increased risk-weighted assets primarily as a result of the increase in period end loans from the CBF acquisition. During 2018, capital ratios are expected to remain above well-capitalized standards.

 

In March 2014, the OCC, Federal Reserve, and FDIC issued final supervisory guidance for stress tests pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Reform Act”). Under these requirements, bank holding companies with $10 billion to $50 billion in assets must conduct an annual stress test to determine whether capital is likely to be adequate to absorb losses under hypothetical economic scenarios provided by the regulators.

 

In July 2017, FHN submitted results of its annual Dodd-Frank Act Stress Test, commonly known as DFAST, to the OCC and the Federal Reserve. A summary of the results was posted in October 2017 to FHN’s investor relations website. (Neither FHN’s stress test posting, nor any other material found on FHN’s website generally, is part of this report or incorporated herein.)

 

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.

 

FIRST HORIZON NATIONAL CORPORATION 25
 

Table 12 – Issuer Purchases of Common Stock

 

General Program. On January 22, 2014, FHN announced a $100 million share purchase authority with an expiration date of January 31, 2016. On July 21, 2015, FHN announced a $100 million increase in that authority along with an extension of the expiration date to January 31, 2017, and on April 26, 2016, FHN announced a $150 million increase and further extension to January 31, 2018. As of December 31, 2017, the program authorized total purchases of up to $350 million and expired on January 31, 2018. As of December 31, 2017, $160.3 million in purchases had been made under this authority at an average price per share of $12.86, $12.84 excluding commissions. During 2017, FHN did not repurchase any common shares under the program. In 2016 FHN repurchased $93.5 million of common shares under the program.

 

In January 2018, FHN’s board of directors approved a new $250 million common share purchase program that will expire on January 31, 2020. The new program is not tied to any compensation plan, and replaces the general share purchase program previously mentioned, which was terminated by the board. 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.

 

General Repurchase Authority:

 

(Dollar values and volume in
thousands, except per share data)
  Total number
of shares
purchased
  Average price
paid per share
  Total number of
shares purchased
as part of publicly
announced programs
  Maximum approximate
dollar value that may
yet be purchased
under the programs
2017                
October 1 to October 31   -   N/A   -   $189,690
November 1 to November 30   -   N/A   -   $189,690
December 1 to December 31   -   N/A   -   $189,690(a)
Total   -   N/A   -    

N/A – Not applicable

(a) On December 31, 2017 the maximum dollar value of shares that may be purchased under the program was $189.7 million. In January 2018, the current plan was terminated and FHN’s board of directors approved a new $250.0 million common share repurchase program.

 

Compensation Plan Program. A consolidated compensation plan share purchase program was announced on August 6, 2004. This program consolidated into a single share purchase program all of the previously authorized compensation plan share programs as well as the renewal of the authorization to purchase shares for use in connection with two compensation plans for which the share purchase authority had expired. The total amount authorized under this consolidated compensation plan share purchase program, inclusive of a program amendment on April 24, 2006, is 29.6 million shares calculated before adjusting for stock dividends distributed through January 1, 2011. The authorization has been reduced for that portion which relates to compensation plans for which no options remain outstanding. The shares may be purchased over the option exercise period of the various compensation plans on or before December 31, 2023. On December 31, 2017, the maximum number of shares that may be purchased under the program was 25.4 million shares. Purchases may be made in the open market or through privately negotiated transactions and are subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions. Management currently does not anticipate purchasing a material number of shares under this authority during 2018.

 

26 FIRST HORIZON NATIONAL CORPORATION
 

Compensation Plan-Related Repurchase Authority:

 

(Volume in thousands, except per share data)   Total number
of shares
purchased
  Average price
paid per share
  Total number of
shares purchased
as part of publicly
announced programs
  Maximum number
of shares that may
yet be purchased
under the programs
2017                
October 1 to October 31   12     $19.02   12     25,446
November 1 to November 30   1     $18.63   1     25,446
December 1 to December 31   1     $20.09   1     25,444
Total   14     $19.10   14      

 

ASSET QUALITY – TREND ANALYSIS OF 2017 COMPARED TO 2016

 

Loan Portfolio Composition

FHN groups its loans into portfolio segments based on internal classifications reflecting the manner in which the ALLL is established and how credit risk is measured, monitored, and reported. From time to time, and if conditions are such that certain subsegments are uniquely affected by economic or market conditions or are experiencing greater deterioration than other components of the loan portfolio, management may determine the ALLL at a more granular level. Commercial loans are composed of commercial, financial, and industrial (“C&I”) and commercial real estate (“CRE”). Consumer loans are composed of consumer real estate; permanent mortgage; and credit card and other. FHN has a concentration of residential real estate loans (24 percent of total loans), the majority of which is in the consumer real estate portfolio (23 percent of total loans). Industry concentrations are discussed under the heading C&I below.

 

Acquired Loans

On November 30, 2017, FHN completed its acquisition of CBF. The acquisition included $7.6 billion in unpaid principal balance of loans with an estimated fair value of $7.4 billion. Acquired loans were initially recorded at fair value which was estimated by discounting expected cash flows at the acquisition date. The expected cash flows include all contractually expected amounts and incorporate an estimate for future expected credit losses, prepayment assumptions and yield requirement for a market participant, among other things. Because an expectation of credit losses is embedded in the fair value estimate, there is no carryover of allowance for loan losses. See Note 4 - Loans for additional information regarding the acquisition.

 

Certain loans acquired were designated as purchased credit-impaired (“PCI”) loans. PCI loans are loans that have exhibited deterioration of credit quality between origination and the time of acquisition and for which the timely collection of the interest and principal is no longer reasonably assured. FHN considered several factors when determining whether a loan met the definition of a PCI loan at the time of acquisition including accrual status, loan grade, delinquency trends, pre-acquisition charge-offs, as well as both originated versus refreshed credit scores and ratios when available.

 

On December 31, 2017, the unpaid principal balance and the carrying value of PCI loans (inclusive of the CBF acquisition and prior franchise finance loan purchase and two previous bank acquisitions) were $199.7 million and $176.4 million, respectively.

 

Underwriting Policies and Procedures

The following sections describe each portfolio as well as general underwriting procedures for each. As economic and real estate conditions develop, enhancements to underwriting and credit policies and procedures may be necessary or desirable. Loan policies and procedures for all portfolios are reviewed by credit risk working groups and management risk committees comprised of business line managers and credit administration professionals as well as by various other reviewing bodies within FHN. Policies and procedures are approved by key executive and/or senior managers leading the applicable credit risk working groups as well as by management risk committees. The credit risk working groups and management risk committees strive to ensure that the approved

 

FIRST HORIZON NATIONAL CORPORATION 27
 

policies and procedures address the associated risks and establish reasonable underwriting criteria that appropriately mitigate risk. Policies and procedures are reviewed, revised and re-issued periodically at established review dates or earlier if changes in the economic environment, portfolio performance, the size of portfolio or industry concentrations, or regulatory guidance warrant an earlier review. In 2017, we expanded our borrower limits in association with the expansion of our overall portfolio through the acquisition of CBF. Additionally, we also revised our Portfolio Concentration, Country Exposure, and Automated Clearing House limits to more appropriately align with our overall risk appetite and to provide more granularity into some of our portfolio sub segments. These changes were approved by management risk committees and the Executive and Risk Committee of the Board in order to enhance and support loan growth while also minimizing incremental credit risk.

 

COMMERCIAL LOAN PORTFOLIOS

 

FHN’s commercial loan approval process grants lending authority based upon job description, experience, and performance. The lending authority is delegated to the business line (Market Managers, Departmental Managers, Regional Presidents, Relationship Managers (“RM”) and Portfolio Managers (“PM”)) and to Credit Risk Managers. While individual limits vary, the predominant amount of approval authority is vested with the Credit Risk Management function. Portfolio, industry, and borrower concentration limits for the various portfolios are established by executive management and approved by the Executive and Risk Committee of the Board.

 

FHN’s commercial lending process incorporates a RM and PM for most commercial credits. The PM is responsible for assessing the credit quality of the borrower, beginning with the initial underwriting and continuing through the servicing period, while the RM is primarily responsible for communications with the customer and maintaining the relationship. Other specialists and the assigned RM/PM are organized into units called deal teams. Deal teams are constructed with specific job attributes that facilitate FHN’s ability to identify, mitigate, document, and manage ongoing risk. PMs and credit analysts provide enhanced analytical support during loan origination and servicing, including monitoring of the financial condition of the borrower and tracking compliance with loan agreements. Loan closing officers and the construction loan management unit specialize in loan documentation and the management of the construction lending process. FHN strives to identify problem assets early through comprehensive policies and guidelines, targeted portfolio reviews, and an emphasis on frequent grading. For smaller commercial credits, generally $3 million or less, FHN utilizes a centralized underwriting unit in order to originate and grade small business loans more efficiently and consistently.

 

FHN may utilize availability of guarantors/sponsors to support commercial lending decisions during the credit underwriting process and when determining the assignment of internal loan grades. Reliance on the guaranty as a viable secondary source of repayment is a function of an analysis proving capability to pay, factoring in, among other things, liquidity and direct/indirect cash flows. FHN also considers the volume and amount of guaranties provided for all global indebtedness and the likelihood of realization. FHN presumes a guarantor’s willingness to perform until there is any current or prior indication or future expectation that the guarantor may not willingly and voluntarily perform under the terms of the guaranty. In FHN’s risk grading approach, it is deemed that financial support becomes necessary generally at a point when the loan would otherwise be graded substandard, reflecting a well-defined weakness. At that point, provided willingness and capacity to support are appropriately demonstrated, a strong, legally enforceable guaranty can mitigate the risk of default or loss, justify a less severe rating, and consequently reduce the level of allowance or charge-off that might otherwise be deemed appropriate.

 

C&I

The C&I portfolio was $16.1 billion on December 31, 2017, and is comprised of loans used for general business purposes. Typical products include working capital lines of credit, term loan financing of owner-occupied real estate and fixed assets, and trade credit enhancement through letters of credit. The largest geographical concentrations of balances as of December 31, 2017, are in Tennessee (36 percent), North Carolina (13 percent), Florida (6 percent), California (6 percent), Texas (5 percent), Georgia (4 percent), and South Carolina (4 percent), with no other state representing more than 3 percent of the portfolio.

 

C&I loans are underwritten in accordance with a well-defined credit origination process. This process includes applying minimum underwriting standards as well as separation of origination and credit approval roles on

 

28 FIRST HORIZON NATIONAL CORPORATION
 

transaction sizes over PM authorization limits. Underwriting typically includes due diligence of the borrower and the applicable industry of the borrower, analysis of the borrower’s available financial information, identification and analysis of the various sources of repayment and identification of the primary risk attributes. Stress testing the borrower’s financial capacity, adherence to loan documentation requirements, and assigning credit risk grades using internally developed scorecards are also used to help quantify the risk when appropriate. Underwriting parameters also include loan-to-value ratios (“LTVs”) which vary depending on collateral type, use of guaranties, loan agreement requirements, and other recommended terms such as equity requirements, amortization, and maturity. Approval decisions also consider various financial ratios and performance measures of the borrowers, such as cash flow and balance sheet leverage, liquidity, coverage of fixed charges, and working capital. Additionally, approval decisions consider the capital structure of the borrower, sponsorship, and quality/value of collateral. Generally, guideline and policy exceptions are identified and mitigated during the approval process. Pricing of C&I loans is based upon the determined credit risk specific to the individual borrower. These loans typically have variable rates tied to the London Inter-Bank Offered Rate (“LIBOR”) or the prime rate of interest plus or minus the appropriate margin.

 

The following table provides the composition of the C&I portfolio by industry as of December 31, 2017 and 2016. For purposes of this disclosure, industries are determined based on the North American Industry Classification System (“NAICS”) industry codes used by Federal statistical agencies in classifying business establishments for the collection, analysis, and publication of statistical data related to the U.S. business economy.

 

Table 13 – C&I Loan Portfolio by Industry

 

   December 31, 2017  December 31, 2016
(Dollars in thousands)  Amount   Percent  Amount   Percent
Industry:                    
Finance & insurance  $2,859,769    18%  $2,573,713    21
Loans to mortgage companies   2,099,961    13    2,045,189    17 
Real estate rental & leasing (a)   1,408,299    9    769,457    6 
Health care & social assistance   1,201,285    7    893,629    7 
Manufacturing   1,184,861    7    762,947    6 
Accommodation & food service   1,145,944    7    987,973    8 
Wholesale trade   1,060,642    7    826,226    7 
Retail trade   831,790    5    488,189    4 
Other (transportation, education, arts, entertainment, etc) (b)   4,264,722    27    2,800,764    24 
Total C&I loan portfolio  $16,057,273    100%  $12,148,087    100%
(a) Leasing, rental of real estate, equipment, and goods.
(b) Industries in this category each comprise less than 5 percent for 2017.

 

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. 31 percent of FHN’s C&I portfolio (Finance and insurance plus Loans to mortgage companies) could be affected by items that uniquely impact the financial services industry. Except “Finance and Insurance” and “Loans to Mortgage Companies”, as discussed below, on December 31, 2017, FHN did not have any other concentrations of C&I loans in any single industry of 10 percent or more of total loans.

 

Finance and Insurance

The finance and insurance component represents 18 percent of the C&I portfolio and includes TRUPS (i.e., long-term unsecured loans to bank and insurance-related businesses), loans to bank holding companies, and asset-based lending to consumer finance companies. As of December 31, 2017, asset-based lending to consumer finance companies represents approximately $1.2 billion of the finance and insurance component.

 

FIRST HORIZON NATIONAL CORPORATION 29
 

TRUPS lending was originally extended as a form of “bridge” financing to participants in the pooled trust preferred securitization program offered primarily to smaller banking (generally less than $15 billion in total assets) and insurance institutions through FHN’s fixed income business. Origination of TRUPS lending ceased in early 2008. Individual TRUPS are re-graded at least quarterly as part of FHN’s commercial loan review process. The terms of these loans generally include a scheduled 30 year balloon payoff and include an option to defer interest for up to 20 consecutive quarters. As of December 31, 2017, and December 31, 2016, one TRUP relationship was on interest deferral.

 

As of December 31, 2017, the unpaid principal balance (“UPB”) of trust preferred loans totaled $332.5 million ($206.2 million of bank TRUPS and $126.3 million of insurance TRUPS) with the UPB of other bank-related loans totaling $262.4 million. Inclusive of a valuation allowance on TRUPS of $25.5 million, total reserves (ALLL plus the valuation allowance) for TRUPS and other bank-related loans were $26.8 million or 5 percent of outstanding UPB.

 

Loans to Mortgage Companies

The balance of loans to mortgage companies was 13 percent of the C&I portfolio as of December 31, 2017, and 17 percent of the C&I portfolio as of December 31, 2016, and includes balances related to both home purchase and refinance activity. This portfolio class, which generally fluctuates with mortgage rates and seasonal factors, includes commercial lines of credit to qualified mortgage companies primarily for the temporary warehousing of eligible mortgage loans prior to the borrower’s sale of those mortgage loans to third party investors. Generally, lending to mortgage lenders increases when there is a decline in mortgage rates and decreases when rates rise.

 

C&I Asset Quality Trends

Overall, the C&I portfolio trends remain strong in 2017, continuing in line with recent historical performance. The C&I ALLL increased $8.8 million from December 31, 2016, to $98.2 million as of December 31, 2017. The allowance as a percentage of period-end loans decreased to .61 percent as of December 31, 2017, from .74 percent as of December 31, 2016. The decrease in allowance to loans reflects the addition of loans acquired from CBF at fair value which includes an estimate of life of loan credit losses. Nonperforming C&I loans decreased $1.6 million from December 31, 2016, to $31.2 million on December 31, 2017. The nonperforming loan (“NPL”) ratio decreased 8 basis points from December 31, 2016, to .19 percent of C&I loans as of December 31, 2017. The 30+ delinquency ratio increased to .19 percent as of December 31, 2017, from .08 percent as of December 31, 2016, driven by one large relationship, a portion of which is a purchased credit-impaired loan, and the addition of loans as a result of the CBF acquisition. Net charge-offs were $13.1 million in 2017 compared to $11.7 million in 2016. The following table shows C&I asset quality trends by segment.

 

30 FIRST HORIZON NATIONAL CORPORATION
 

Table 14 – C&I Asset Quality Trends by Segment

 

   December 31
(Dollars in thousands)  2017   2016   2015   2014   2013 
Regional Bank                         
Period-end loans  $15,639,060   $11,728,160   $10,014,752   $8,553,080   $7,431,430 
Nonperforming loans   28,086    28,619    22,793    20,627    43,691 
Allowance for loan losses as of January 1  $88,010   $72,213   $61,998   $72,310   $78,181 
Charge-offs   (17,657)   (18,196)   (17,994)   (14,832)   (22,274)
Recoveries   4,516    6,719    11,969    9,003    10,167 
Provision/(provision credit) for loan losses   21,981    27,274    16,240    (4,483)   6,236 
Allowance for loan losses as of December 31  $96,850   $88,010   $72,213   $61,998   $72,310 
Accruing restructured loans  $14,186   $20,151   $4,358   $19,214   $8,515 
Nonaccruing restructured loans   3,484    14,183    14,284    9,632    27,345 
Total troubled debt restructurings  $17,670   $34,334   $18,642   $28,846   $35,860 
30+ Delinq. % (a)   0.20%   0.08%   0.08%   0.05%   0.14%
NPL %   0.18    0.24    0.23    0.24    0.59 
Net charge-offs %   0.11    0.11    0.07    0.08    0.17 
Allowance / loans %   0.62%   0.75%   0.72%   0.72%   0.97%
Allowance / net charge-offs   7.38x   7.67x   11.99x   10.63x   5.72x
Non-Strategic                         
Period-end loans  $418,213   $419,927   $421,638   $454,206   $492,146 
Nonperforming loans   3,067    4,117    3,520    11,983    36,068 
Allowance for loan losses as of January 1  $1,388   $1,424   $5,013   $14,136   $18,010 
Charge-offs   -    (264)   (4,412)   (5,660)   (662)
Recoveries   52    76    1,370    663    2,320 
Provision/(provision credit) for loan losses   (79)   152    (547)   (4,126)   (5,532)
Allowance for loan losses as of December 31  $1,361   $1,388   $1,424   $5,013   $14,136 
30+ Delinq. % (a)   -%   -%   0.02%   0.05%   0.06%
NPL %   0.73    0.98    0.83    2.64    7.33 
Net charge-offs %   NM    0.04    0.69    1.07    NM 
Allowance / loans %   0.33%   0.33%   0.34%   1.10%   2.87%
Allowance / net charge-offs   NM    7.39x   0.47x   1.00x   NM 
Consolidated                         
Period-end loans  $16,057,273   $12,148,087   $10,436,390   $9,007,286   $7,923,576 
Nonperforming loans   31,153    32,736    26,313    32,610    79,759 
Allowance for loan losses as of January 1  $89,398   $73,637   $67,011   $86,446   $96,191 
Charge-offs   (17,657)   (18,460)   (22,406)   (20,492)   (22,936)
Recoveries   4,568    6,795    13,339    9,666    12,487 
Provision/(provision credit) for loan losses   21,902    27,426    15,693    (8,609)   704 
Allowance for loan losses as of December 31  $98,211   $89,398   $73,637   $67,011   $86,446 
Accruing restructured loans  $14,186   $20,151   $4,358   $19,214   $8,515 
Nonaccruing restructured loans   3,484    14,183    14,284    9,632    27,345 
Total troubled debt restructurings  $17,670   $34,334   $18,642   $28,846   $35,860 
30+ Delinq. % (a)   0.19%   0.08%   0.08%   0.05%   0.13%
NPL %   0.19    0.27    0.25    0.36    1.01 
Net charge-offs %   0.11    0.11    0.10    0.13    0.13 
Allowance / loans %   0.61%   0.74%   0.71%   0.74%   1.09%
Allowance / net charge-offs   7.51x   7.66x   8.12x   6.19x   8.27x

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.

 

Commercial Real Estate

The CRE portfolio was $4.2 billion on December 31, 2017. The CRE portfolio includes both financings for commercial construction and nonconstruction loans. The largest geographical concentrations of balances as of December 31, 2017, are in North Carolina (31 percent), Tennessee (20 percent), Florida (13 percent), South Carolina (9 percent), Georgia (7 percent), and Texas (6 percent), with no other state representing more than

 

FIRST HORIZON NATIONAL CORPORATION 31
 

3 percent of the portfolio. This portfolio is segregated between the income-producing CRE class which contains loans, draws on lines and letters of credit to commercial real estate developers for the construction and mini-permanent financing of income-producing real estate, and the residential CRE class. Subcategories of income CRE consist of multi-family (24 percent), retail (21 percent), office (21 percent), industrial (11 percent), hospitality (10 percent), land/land development (1 percent) and other (12 percent).

 

The residential CRE class includes loans to residential builders and developers for the purpose of constructing single-family homes, condominiums, and town homes. Active residential CRE lending has been modest with new originations primarily targeted in select markets. We have relationships with existing strategic clients, and we are seeking new clients on a selective basis. FHN desires a “strategic” residential CRE borrower to have solid experience, effective process and controls, appropriate risk tolerance, and a sound financial position that we believe can sustain their operations through the inevitable real estate cycles.

 

Income CRE loans are underwritten in accordance with credit policies and underwriting guidelines that are reviewed at least annually and revised as necessary based on market conditions. Loans are underwritten based upon project type, size, location, sponsorship, and other market-specific data. Generally, minimum requirements for equity, debt service coverage ratios (“DSCRs”), and level of pre-leasing activity are established based on perceived risk in each subcategory. Loan-to-value (value is defined as the lower of cost or market) limits are set below regulatory prescribed ceilings and generally range between 50 and 80 percent depending on underlying product set. Term and amortization requirements are set based on prudent standards for interim real estate lending. Equity requirements are established based on the quality and liquidity of the primary source of repayment. For example, more equity would be required for a speculative construction project or land loan than for a property fully leased to a credit tenant or a roster of tenants. Typically, a borrower must have at least 15 percent of cost invested in a project before FHN will fund loan dollars. Income properties are required to achieve a DSCR greater than or equal to 125 percent at inception or stabilization of the project based on loan amortization and a minimum underwriting interest rate. Some product types that possess a greater risk profile require a higher level of equity, as well as a higher DSCR threshold. A proprietary minimum underwriting interest rate is used to calculate compliance with underwriting standards. Generally, specific levels of pre-leasing must be met for construction loans on income properties. A global cash flow analysis is performed at the sponsor level. The majority of the portfolio is on a floating rate basis tied to appropriate spreads over LIBOR.

 

The credit administration and ongoing monitoring consists of multiple internal control processes. Construction loans are closed and administered by a centralized control unit. Underwriters and credit approval personnel stress the borrower’s/project’s financial capacity utilizing numerous attributes such as interest rates, vacancy, and discount rates. Key information is captured from the various portfolios and then stressed at the aggregate level. Results are utilized to assist with the assessment of the adequacy of the ALLL and to steer portfolio management strategies.

 

CRE Asset Quality Trends

The CRE portfolio had continued stable performance as of December 31, 2017, with nonperforming loans down $1.4 million from December 31, 2016 and net recoveries in 2017. The allowance decreased $5.4 million from December 31, 2016, to $28.4 million as of December 31, 2017. Allowance as a percentage of loans decreased 92 basis points from December 31, 2016, to .67 percent as of December 31, 2017. The decrease in allowance to loans reflects the addition of loans acquired from CBF at fair value which includes an estimate of life of loan credit losses. Nonperforming loans as a percentage of total CRE loans improved 10 basis points from 2016 to .03 percent as of December 31, 2017. Accruing delinquencies as a percentage of period-end loans increased to .11 percent as of December 31, 2017, from .01 percent as of December 31, 2016, primarily driven by the addition of loans as a result of the CBF acquisition. FHN recognized net recoveries of $.8 million in 2017 compared to net recoveries of $.6 million in 2016. The following table shows commercial real estate asset quality trends by segment.

 

32 FIRST HORIZON NATIONAL CORPORATION
 

Table 15 – Commercial Real Estate Asset Quality Trends by Segment

 

   December 31
(Dollars in thousands)  2017   2016   2015   2014   2013 
Regional Bank                         
Period-end loans  $4,214,695   $2,135,523   $1,674,871   $1,273,220   $1,124,131 
Nonperforming loans   1,393    2,776    8,684    14,571    15,146 
Allowance for loan losses as of January 1  $33,852   $25,159   $18,158   $9,873   $18,385 
Charge-offs   (195)   (1,371)   (3,441)   (3,331)   (3,021)
Recoveries   915    1,816    1,450    3,764    2,798 
Provision/(provision credit) for loan losses   (6,145)   8,248    8,992    7,852    (8,289)
Allowance for loan losses as of December 31  $28,427   $33,852   $25,159   $18,158   $9,873 
Accruing restructured loans  $1,125   $1,736   $5,039   $4,588   $11,977 
Nonaccruing restructured loans   1,282    1,388    3,969    6,947    7,861 
Total troubled debt restructurings  $2,407   $3,124   $9,008   $11,535   $19,838 
30+ Delinq. % (a)   0.11%   0.01%   0.27%   0.14%   0.91%
NPL %   0.03    0.13    0.52    1.14    1.35 
Net charge-offs %   NM    NM    0.14    NM    NM 
Allowance / loans %   0.67%   1.59%   1.50%   1.43%   0.88%
Allowance / net charge-offs   NM    NM    12.63x   NM    NM 
Non-Strategic                         
Period-end loans  $-   $-   $64   $4,497   $9,148 
Nonperforming loans   -    -    -    785    2,955 
Allowance for loan losses as of January 1  $-   $-   $416   $730   $1,612 
Charge-offs   -    -    (109)   (410)   (481)
Recoveries   51    111    426    386    1,477 
Provision/(provision credit) for loan losses   (51)   (111)   (733)   (290)   (1,878)
Allowance for loan losses as of December 31  $-   $-   $-   $416   $730 
Accruing restructured loans  $-   $-   $-   $3,095   $3,274 
Nonaccruing restructured loans   -    -    -    568    906 
Total troubled debt restructurings  $-   $-   $-   $3,663   $4,180 
30+ Delinq. % (a)   -%   -%   -%   -%   -%
NPL %   -    -    -    17.47    32.30 
Net charge-offs %   NM    NM    NM    0.41    NM 
Allowance / loans %   -%   -%   -%   9.25%   7.98%
Allowance / net charge-offs   NM    NM    NM    16.43x   NM 
Consolidated                         
Period-end loans  $4,214,695   $2,135,523   $1,674,935   $1,277,717   $1,133,279 
Nonperforming loans   1,393    2,776    8,684    15,356    18,101 
Allowance for loan losses as of January 1  $33,852   $25,159   $18,574   $10,603   $19,997 
Charge-offs   (195)   (1,371)   (3,550)   (3,741)   (3,502)
Recoveries   966    1,927    1,876    4,150    4,275 
Provision/(provision credit) for loan losses   (6,196)   8,137    8,259    7,562    (10,167)
Allowance for loan losses as of December 31  $28,427   $33,852   $25,159   $18,574   $10,603 
Accruing restructured loans  $1,125   $1,736   $5,039   $7,683   $15,251 
Nonaccruing restructured loans   1,282    1,388    3,969    7,515    8,767 
Total troubled debt restructurings  $2,407   $3,124   $9,008   $15,198   $24,018 
30+ Delinq. % (a)   0.11%   0.01%   0.27%   0.14%   0.90%
NPL %   0.03    0.13    0.52    1.20    1.60 
Net charge-offs %   NM    NM    0.12    NM    NM 
Allowance / loans %   0.67%   1.59%   1.50%   1.45%   0.94%
Allowance / net charge-offs   NM    NM    15.03x   NM    NM 

NM–Not meaningful

Loans are expressed net of unearned income.

(a) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.

 

FIRST HORIZON NATIONAL CORPORATION 33
 

CONSUMER LOAN PORTFOLIOS

 

Consumer Real Estate

The consumer real estate portfolio was $6.4 billion on December 31, 2017, and is primarily composed of home equity lines and installment loans including restricted balances (loans consolidated under ASC 810). The largest geographical concentrations of balances as of December 31, 2017, are in Tennessee (51 percent), North Carolina (16 percent), Florida (13 percent), and California (4 percent), with no other state representing more than 3 percent of the portfolio. As of December 31, 2017, approximately 76 percent of the consumer real estate portfolio was in a first lien position. At origination, weighted average FICO score of this portfolio was 752 and refreshed FICO scores averaged 756 as of December 31, 2017, as compared to 750 and 747, respectively, as of December 31, 2016. As of December 31, 2017, approximately $1.4 billion, or 21 percent, of the consumer real estate portfolio consisted of stand-alone second liens while $.2 billion, or 3 percent, were second liens whose first liens are owned or serviced by FHN. We obtain first lien performance information from third parties and through loss mitigation activities, and we place a stand-alone second lien loan on nonaccrual if we discover that there are performance issues with the first lien loan. Generally, performance of this portfolio is affected by life events that affect borrowers’ finances, the level of unemployment, and home prices.

 

Home equity lines of credit (“HELOCs”) comprise $1.8 billion of the consumer real estate portfolio as of December 31, 2017. FHN’s HELOCs typically have a 5 or 10 year draw period followed by a 10 or 20 year repayment period, respectively. During the draw period, a borrower is able to draw on the line and is only required to make interest payments. The line is automatically frozen if a borrower becomes 45 days or more past due on payments. Once the draw period has concluded, the line is closed and the borrower is required to make both principal and interest payments monthly until the loan matures. The principal payment generally is fully amortizing, but payment amounts will adjust when variable rates reset to reflect changes in the prime rate.

 

As of December 31, 2017, approximately 72 percent of FHN’s HELOCs are in the draw period compared to approximately 62 percent as of December 31, 2016. Based on when draw periods are scheduled to end per the line agreement, it is expected that $528.4 million, or 40 percent of HELOCs currently in the draw period, will enter the repayment period during the next 60 months. Delinquencies and charge-off rates for HELOCs that have entered the repayment period are initially higher than HELOCs still in the draw period because of the increased minimum payment requirement; however, after some seasoning, performance of these loans usually begins to stabilize. The home equity lines of the consumer real estate portfolio are being monitored closely for those nearing the end of the draw period and borrowers are initially being contacted at least 24 months before the repayment period begins to remind the customer of the terms of their agreement and to inform them of options. The following table shows the HELOCs currently in the draw period and expected timing of conversion to the repayment period.

 

Table 16 – HELOC Draw To Repayment Schedule

 

   December 31, 2017  December 31, 2016
   Repayment       Repayment     
(Dollars in thousands)  Amount   Percent  Amount   Percent
Months remaining in draw period:                    
0-12  $138,333    10%  $212,665    20%
13-24   88,188    7    127,662    12 
25-36   99,109    8    73,331    7 
37-48   96,997    7    68,768    6 
49-60   105,753    8    68,792    7 
>60   792,723    60    514,126    48 
Total  $1,321,103    100%  $1,065,344    100%

 

Underwriting

For the majority of loans in this portfolio, underwriting decisions are made through a centralized loan underwriting center. To obtain a consumer real estate loan, the loan applicant(s) in most cases must first meet a minimum

 

34 FIRST HORIZON NATIONAL CORPORATION
 

qualifying FICO score. Minimum FICO score requirements are established by management for both loans secured by real estate as well as non-real estate loans. Management also establishes maximum loan amounts, loan-to-value ratios, and Debt-to-Income (“DTI”) ratios for each consumer real estate product. Applicants must have the financial capacity (or available income) to service the debt by not exceeding a calculated DTI ratio. The amount of the loan is limited to a percentage of the lesser of the current value or sales price of the collateral. Identified guideline and policy exceptions require established mitigating factors that have been approved for use by Credit Risk Management.

 

HELOC interest rates are variable and adjust with movements in the index rate stated in the loan agreement. Such loans can have elevated risks of default, particularly in a rising interest rate environment, potentially stressing borrower capacity to repay the loan at the higher interest rate. FHN’s current underwriting practice requires HELOC borrowers to qualify based on a fully indexed, fully amortized payment methodology. FHN’s underwriting guidelines require borrowers to qualify at an interest rate that is 200 basis points above the note rate. This mitigates risk to FHN in the event of a sharp rise in interest rates over a relatively short time horizon.

 

HELOC Portfolio Risk Management

FHN performs continuous HELOC account review processes in order to identify higher-risk home equity lines and initiate preventative and corrective actions. The reviews consider a number of account activity patterns and characteristics such as the number of times delinquent within recent periods, changes in credit bureau score since origination, score degradation, performance of the first lien, and account utilization. In accordance with FHN’s interpretation of regulatory guidance, FHN may block future draws on accounts in order to mitigate risk of loss to FHN.

 

Consumer Real Estate Asset Quality Trends

Overall, performance of the consumer real estate portfolio remained strong in 2017. The non-strategic segment is a run-off portfolio and while the absolute dollars of delinquencies and nonaccruals declined compared to December 31, 2016, 30+ accruing delinquencies and nonperforming loans ratios deteriorated. That trend of increasing deterioration in the non-strategic segment is likely to continue and may become more skewed as the portfolio shrinks unevenly, with stronger borrowers exiting the portfolio more rapidly than others. The ALLL decreased $13.0 million from December 31, 2016, to $37.4 million as of December 31, 2017, with the majority of the decline attributable to the non-strategic segment. The balance of nonperforming loans declined $11.3 million to $71.5 million on December 31, 2017. Loans delinquent 30 or more days and still accruing declined from $42.1 million as of December 31, 2016, to $41.5 million as of December 31, 2017. The portfolio realized net recoveries of $9.6 million in 2017 compared to net recoveries of $1.7 million in 2016. The following table shows consumer real estate asset quality trends by segment.

 

FIRST HORIZON NATIONAL CORPORATION 35
 

Table 17 – Consumer Real Estate Asset Quality Trends by Segment

 

   December 31
(Dollars in thousands)  2017   2016   2015   2014   2013 
Regional Bank                         
Period-end loans  $5,774,411   $3,642,894   $3,515,459   $3,384,746   $3,278,365 
Nonperforming loans   22,678    18,865    23,935    28,953    27,939 
Allowance for loan losses as of January 1  $19,010   $29,108   $32,180   $31,474   $25,291 
Charge-offs   (3,491)   (5,346)   (8,414)   (10,780)   (10,261)
Recoveries   4,342    4,863    4,660    3,551    5,057 
Provision/(provision credit) for loan losses   (3,454)   (9,615)   682    7,935    11,387 
Allowance for loan losses as of December 31  $16,407   $19,010   $29,108   $32,180   $31,474 
Accruing restructured loans  $31,970   $36,784   $36,912   $40,841   $41,304 
Nonaccruing restructured loans   12,405    10,694    13,723    14,229    14,636 
Total troubled debt restructurings  $44,375   $47,478   $50,635   $55,070   $55,940 
30+ Delinq. % (a)   0.40%   0.49%   0.52%   0.57%   0.65%
NPL %   0.39    0.52    0.68    0.86    0.85 
Net charge-offs %   NM    0.01    0.11    0.22    0.16 
Allowance / loans %   0.28%   0.52%   0.83%   0.95%   0.96%
Allowance / net charge-offs   NM    39.42x   7.76x   4.45x   6.05x
Non-Strategic                         
Period-end loans  $593,344   $880,858   $1,251,059   $1,663,325   $2,055,006 
Nonperforming loans   48,809    63,947    87,157    91,679    89,659 
Allowance for loan losses as of January 1  $31,347   $51,506   $80,831   $95,311   $103,658 
Charge-offs   (9,665)   (16,647)   (21,654)   (34,611)   (63,381)
Recoveries   18,381    18,856    19,235    19,273    16,303 
Provision/(provision credit) for loan losses   (19,099)   (22,368)   (26,906)   858    38,731 
Allowance for loan losses as of December 31  $20,964   $31,347   $51,506   $80,831   $95,311 
Accruing restructured loans  $54,702   $68,217   $67,942   $71,389   $83,459 
Nonaccruing restructured loans   29,818    37,765    47,107    46,766    31,023 
Total troubled debt restructurings  $84,520   $105,982   $115,049   $118,155   $114,482 
30+ Delinq. % (a)   3.06%   2.76%   2.34%   2.17%   1.89%
NPL %   8.23    7.26    6.97    5.51    4.36 
Net charge-offs %   NM    NM    0.17    0.82    2.04 
Allowance / loans %   3.53%   3.56%   4.12%   4.86%   4.64%
Allowance / net charge-offs   NM    NM    21.29x   5.27x   2.02x
Consolidated                         
Period-end loans  $6,367,755   $4,523,752   $4,766,518   $5,048,071   $5,333,371 
Nonperforming loans   71,487    82,812    111,092    120,632    117,598 
Allowance for loan losses as of January 1  $50,357   $80,614   $113,011   $126,785   $128,949 
Charge-offs   (13,156)   (21,993)   (30,068)   (45,391)   (73,642)
Recoveries   22,723    23,719    23,895    22,824    21,360 
Provision/(provision credit) for loan losses   (22,553)   (31,983)   (26,224)   8,793    50,118 
Allowance for loan losses as of December 31  $37,371   $50,357   $80,614   $113,011   $126,785 
Accruing restructured loans  $86,672   $105,001   $104,854   $112,230   $124,763 
Nonaccruing restructured loans   42,223    48,459    60,830    60,995    45,659 
Total troubled debt restructurings  $128,895   $153,460   $165,684   $173,225   $170,422 
30+ Delinq. % (a)   0.65%   0.93%   1.00%   1.10%   1.13%
NPL %   1.12    1.83    2.33    2.39    2.20 
Net charge-offs %   NM    NM    0.13    0.43    0.95 
Allowance / loans %   0.59%   1.11%   1.69%   2.24%   2.38%
Allowance / net charge-offs   NM    NM    13.06x   5.01x   2.42x

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.

 

36 FIRST HORIZON NATIONAL CORPORATION
 

Permanent Mortgage

The permanent mortgage portfolio was $.4 billion on December 31, 2017. This portfolio is primarily composed of jumbo mortgages and one-time-close (“OTC”) completed construction loans in the non-strategic segment that were originated through legacy businesses. The regional banking segment primarily includes recently acquired mortgage loans associated with FHN’s CRA initiatives. The corporate segment includes loans that were previously included in off-balance sheet proprietary securitization trusts. These loans were brought back into the loan portfolios at fair value through the execution of cleanup calls due to the relatively small balances left in the securitization and should continue to run-off. Approximately 19 percent of loan balances as of December 31, 2017, are in California, but the remainder of the portfolio is somewhat geographically diverse. Non-strategic and corporate segment run-off, partially offset by increases in the regional banking segment, contributed to the $23.8 million net decrease in permanent mortgage period-end balances from December 31, 2016, to December 31, 2017.

 

The permanent mortgage portfolios within the non-strategic and corporate segments are run-off portfolios. As a result, asset quality metrics are becoming skewed as the portfolio shrinks and some of the stronger borrowers payoff or refinance elsewhere. The ALLL decreased $.7 million as of December 31, 2017, from $16.3 million as of December 31, 2016. TDR reserves (which are estimates of losses for the expected life of the loan) comprise 78 percent of the ALLL for the permanent mortgage portfolio as of December 31, 2017. Consolidated accruing delinquencies as a percentage of total loans decreased 51 basis points from December 31, 2016 to 1.85 percent as of December 31, 2017. Nonperforming loans decreased $.8 million from December 31, 2016, to $26.4 million as of December 31, 2017. The portfolio experienced net recoveries of $.3 million in 2017 compared to net recoveries of $.8 million in 2016. The following table shows permanent mortgage asset quality trends by segment.

 

FIRST HORIZON NATIONAL CORPORATION 37
 

Table 18 – Permanent Mortgage Asset Quality Trends by Segment

 

   December 31
(Dollars in thousands)  2017   2016   2015   2014   2013 
Regional Bank                         
Period-end loans (a)  $116,914   $76,973   $21,162   $10,852   $12,623 
Nonperforming loans   427    393    443    503    535 
Allowance for loan losses as of January 1  $1,215   $140   $167   $245   $117 
Charge-offs   -    -    (14)   (19)   - 
Recoveries   -    -    -    -    - 
Provision/(provision credit) for loan losses   1,317    1,075    (13)   (59)   128 
Allowance for loan losses as of December 31  $2,532   $1,215   $140   $167   $245 
Accruing restructured loans  $615   $563   $720   $1,254   $597 
Nonaccruing restructured loans   326    315    364    -    466 
Total troubled debt restructurings  $941   $878   $1,084   $1,254   $1,063 
30+ Delinq. % (b)   0.35%   0.72%   2.08%   5.75%   7.77%
NPL %   0.37    0.51    2.09    4.64    4.23 
Net charge-offs %   -    -    0.14    0.16    - 
Allowance / loans %   2.17%   1.58%   0.66%   1.54%   1.94%
Allowance / net charge-offs   NM    NM    9.96x   8.88x   NM 
Corporate                         
Period-end loans  $53,556   $71,380   $97,450   $135,538   $174,621 
Nonperforming loans   2,157    1,186    1,677    3,045    4,598 
Allowance for loan losses as of December 31 (c)   N/A    N/A    N/A    N/A    N/A 
Accruing restructured loans  $3,637   $3,792   $3,992   $5,494   $2,691 
Nonaccruing restructured loans   -    -    -    -    204 
Total troubled debt restructurings  $3,637   $3,792   $3,992   $5,494   $2,895 
30+ Delinq. % (b)   3.98%   4.37%   2.92%   2.32%   2.34%
NPL %   4.03    1.66    1.72    2.25    2.63 
Allowance / loans % (c)   N/A    N/A    N/A    N/A    N/A 
Non-Strategic                         
Period-end loans  $228,837   $274,772   $335,511   $392,571   $474,998 
Nonperforming loans   23,806    25,602    29,532    30,530    33,038 
Allowance for loan losses as of January 1  $15,074   $18,807   $18,955   $22,246   $24,811 
Charge-offs   (2,179)   (1,591)   (3,127)   (5,872)   (9,934)
Recoveries   2,509    2,403    1,687    2,314    2,473 
Provision/(provision credit) for loan losses   (2,371)   (4,545)   1,292    267    4,896 
Allowance for loan losses as of December 31  $13,033   $15,074   $18,807   $18,955   $22,246 
Accruing restructured loans  $64,102   $71,896   $78,719   $84,701   $94,532 
Nonaccruing restructured loans   16,114    17,360    18,666    22,010    22,968 
Total troubled debt restructurings  $80,216   $89,256   $97,385   $106,711   $117,500 
30+ Delinq. % (b)   2.12%   2.29%   1.88%   1.40%   2.59%
NPL %   10.40    9.32    8.80    7.78    6.96 
Net charge-offs %   NM    NM    0.40    0.83    1.42 
Allowance / loans %   5.70%   5.49%   5.61%   4.83%   4.68%
Allowance / net charge-offs   NM    NM    13.07x   5.32x   2.98x
Consolidated                         
Period-end loans  $399,307   $423,125   $454,123   $538,961   $662,242 
Nonperforming loans   26,390    27,181    31,652    34,078    38,171 
Allowance for loan losses as of January 1  $16,289   $18,947   $19,122   $22,491   $24,928 
Charge-offs   (2,179)   (1,591)   (3,141)   (5,891)   (9,934)
Recoveries   2,509    2,403    1,687    2,314    2,473 
Provision/(provision credit) for loan losses   (1,054)   (3,470)   1,279    208    5,024 
Allowance for loan losses as of December 31  $15,565   $16,289   $18,947   $19,122   $22,491 
Accruing restructured loans  $68,354   $76,251   $83,431   $91,449   $97,820 
Nonaccruing restructured loans   16,440    17,675    19,030    22,010    23,638 
Total troubled debt restructurings  $84,794   $93,926   $102,461   $113,459   $121,458 
30+ Delinq. % (b)   1.85%   2.36%   2.11%   1.72%   2.62%
NPL %   6.61    6.42    6.97    6.32    5.76 
Net charge-offs %   NM    NM    0.30    0.60    1.00 
Allowance / loans %   3.90%   3.85%   4.17%   3.55%   3.40%
Allowance / net charge-offs   NM    NM    13.04x   5.34x   3.01x

NM - Not meaningful

Loans are expressed net of unearned income.

(a) The increase in Regional Bank is primarily due to FHN’s CRA initiatives.
(b) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.
(c) An allowance has not been established for these loans as the valuation adjustment taken upon exercise of clean-up calls included expected losses.

 

38 FIRST HORIZON NATIONAL CORPORATION
 

Credit Card and Other

The credit card and other portfolio, which is primarily within the regional banking segment, was $.6 billion as of December 31, 2017, and primarily includes automobile loans, credit card receivables, and other consumer-related credits. The allowance decreased to $10.0 million as of December 31, 2017, from $12.2 million as of December 31, 2016. Loans 30 days or more delinquent and accruing as a percentage of loans increased 7 basis points from December 31, 2016, to 1.24 percent as of December 31, 2017. In 2017, FHN recognized $10.1 million of net charge-offs in the credit card and other portfolio, compared to net charge-offs of $10.6 million in 2016. The following table shows credit card and other asset quality trends by segment.

 

Table 19 – Credit Card and Other Asset Quality Trends by Segment

 

   December 31
(Dollars in thousands)  2017   2016   2015   2014   2013 
Regional Bank                         
Period-end loans  $613,540   $351,198   $344,405   $345,859   $320,607 
Nonperforming loans   75    -    620    -    12 
Allowance for loan losses as of January 1  $11,995   $10,966   $14,310   $7,125   $6,235 
Charge-offs   (12,962)   (13,983)   (15,542)   (13,781)   (10,533)
Recoveries   2,913    3,297    3,555    3,026    2,421 
Provision/(provision credit) for loan losses   7,948    11,715    8,643    17,940    9,002 
Allowance for loan losses as of December 31  $9,894   $11,995   $10,966   $14,310   $7,125 
Accruing restructured loans  $564   $274   $314   $406   $370 
Nonaccruing restructured loans   -    -    -    -    - 
Total troubled debt restructurings  $564   $274   $314   $406   $370 
30+ Delinq. % (a)   1.25%   1.16%   1.07%   1.38%   1.30%
NPL %   0.01    -    0.18    -    - 
Net charge-offs %   2.73    3.05    3.51    3.22    2.73 
Allowance / loans %   1.61%   3.42%   3.18%   4.14%   2.22%
Allowance / net charge-offs   0.98x   1.12x   0.91x   1.33x   0.88x
Non-Strategic                         
Period-end loans  $6,359   $7,835   $10,131   $12,272   $15,999 
Nonperforming loans   121    142    737    763    1,385 
Allowance for loan losses as of January 1  $177   $919   $420   $359   $663 
Charge-offs   (245)   (241)   (1,149)   (1,150)   (871)
Recoveries   202    324    298    105    248 
Provision/(provision credit) for loan losses   (47)   (825)   1,350    1,106    319 
Allowance for loan losses as of December 31  $87   $177   $919   $420   $359 
Accruing restructured loans  $29   $32   $63   $127   $175 
Nonaccruing restructured loans   -    -    -    -    - 
Total troubled debt restructurings  $29   $32   $63   $127   $175 
30+ Delinq. % (a)   0.95%   1.73%   1.47%   2.48%   2.33%
NPL %   1.89    1.82    7.28    6.22    8.66 
Net charge-offs %   0.64    NM    7.75    7.37    3.68 
Allowance / loans %   1.36%   2.26%   9.07%   3.43%   2.25%
Allowance / net charge-offs   1.99x   NM    1.08x   0.40x   0.58x
Consolidated                         
Period-end loans  $619,899   $359,033   $354,536   $358,131   $336,606 
Nonperforming loans   196    142    1,357    763    1,397