ANNUAL REPORT 2015
   

 

 

 

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 2015 we continued to make progress toward a future of sustained success – a future based on our 152-year history of earning the trust of Tennesseans, on our core regional banking and fixed income businesses, on the dedication of our 4,300 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 Forbes, 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 175 offices in Tennessee and surrounding states. 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.

 

We have a growing presence in the Carolinas, Virginia and North Florida – our Mid-Atlantic region – and in 2014 we opened an office in Houston, TX. 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.

 

In our traditional Tennessee markets or in our newer growth markets, 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 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 more than 5,000 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 29 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 2015, 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 2015, our volunteers donated nearly 18,000 hours of community service, and we supported their efforts through leadership grants to more than 100 nonprofits and matching gifts to more than 340.

 

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 across Tennessee. Since its inception, the First Tennessee Foundation has donated more than $65 million to meet community needs. In 2015, our foundation donated nearly $6 million divided among more than 500 nonprofits across our footprint. 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 community development group, to offer free credit counseling workshops at several of our locations. We support Adopt-a-School programs throughout the state.

 

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 2015, 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.
   
Solar panels recently installed at one of our operations centers produce 3400 KWH of electricity per 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 corporate headquarters, air conditioning equipment uses environmentally friendly refrigerant, and we renovated the mechanical equipment to improve air quality and energy efficiency.

 

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 152-year tradition, First Horizon is building for a bright future.


 

 

CHAIRMAN’S LETTER

TURNING CHALLENGES INTO OPPORTUNITIES

 

Dear Fellow First Horizon Shareholders:

 

First Horizon continued its steady progress in 2015 toward our strategic goals, building momentum for 2016. Our core businesses of regional banking through First Tennessee and fixed income through FTN Financial performed well. Our legacy issues continued to recede. We continue to be guided by an operating philosophy that emphasizes soundness, profitability and growth, in that order. The future will test our strength and adaptability, but we believe we can meet that test. We are building for the long term.

 

Over the next few years we will continue to see tremendous challenges, opportunities and change in the financial services industry. The impact and reach of financial technology companies will continue to grow, and low interest rates – and the resulting constrained sources of revenue – will place great pressure on financial companies like ours to adapt to new technologies, build partnerships and adjust our cost structure.

 

At First Horizon we have shown the ability to adapt to change and turn challenges into opportunities. About eight years ago, we changed direction and refocused on our core businesses. If you review our annual reports from the intervening years, you will find a consistent message: Executing our strategy, making progress, building value, pursuing profitability and returns.

 

Long-term earnings power

We began building a foundation for long-term earnings power by setting profitability targets in a framework we call the Bonefish, with the ultimate goal of sustained returns for shareholders. Over the years we have aligned the company in pursuit of those targets. Amid the changes and challenges, we became more nimble. We streamlined decision-making.

 

With revenues under pressure, we improved productivity and efficiency – an ongoing emphasis. We are optimizing our workplaces to make more efficient use of our space. We have made and will continue to make significant investments in technology, products and revenue-generating businesses and people.

 

We used our profitability tools to disaggregate the business and understand the cost of delivering each product and service, giving us information

 

 

2015 HIGHLIGHTS

 

First Tennessee Bank

Grew average loans 13 percent, with strength in specialty lending
Increased average core deposits 13 percent
No. 1 deposit market share in Tennessee
Earned top bank honors across markets
Developed new online banking platform to be launched in 2016

 

FTN Financial

Increased fixed income average daily revenues 15 percent
Ranked as top underwriter of callable GSE debt, outpacing large Wall Street firms
Expanded fixed income sales force, adding 10 seasoned professionals
Enhanced extensive distribution platform, which provides competitive advantage

 

Legacy issues

Settled mortgage-related FHA lending inquiry and a private litigation matter
Non-strategic loans declined as percentage of total average loans

 

Capital deployment

Increased dividend 20 percent in 2015 and another 17 percent in 2016
Completed acquisition of TrustAtlantic, enhancing presence in growing Raleigh, NC, market
Bought back two million shares, with plans to repurchase more

 

Community investment

Launched partnership with Operation HOPE, which promotes economic empowerment in distressed neighborhoods, to offer free credit counseling workshops at three branches, with more to come across markets
Made investments to upgrade Community Reinvestment Act efforts, including appointment of corporate CRA officer

 

Note: Loan growth, deposit growth and fixed income average daily revenue increases are from 2014-2015. Deposit market share ranking is based on FDIC data as of June 30, 2015.

 


 

 

about where to focus our energy and investment. Access to this data allows us to make smarter decisions, compete better and establish more profitable customer relationships. We are asking our bankers to make profitability a priority when evaluating deals, even when staying disciplined occasionally costs us business.

 

By focusing on loan pricing and credit quality we have shown the ability to manage through a zero interest rate environment. We were encouraged by the Federal Reserve’s rate hike in the fourth quarter, and we are well-positioned to benefit from any further rate increases this year.

 

Multi-year window

Nevertheless, economic growth and interest rates are likely to remain very low by historical norms in the next few years. Further, if the typical economic cycle holds, we are likely to see a recession in the coming years. It’s our belief that low rates and the resulting reduced revenue along with cost and credit pressures could open a multi-year window where consolidation picks up through mergers and acquisitions.

 

A plodding, “plow horse” economy (or worse) may not be optimal, but we have shown we don’t need a racehorse economy to succeed. We have said many times that we are engaged in a marathon, not a sprint, and that perspective guides our decisions. As a company founded in 1864, we take the long view.

 

As we mark our 152nd year, we believe we have the right plan and the right people to execute it. We have unique strengths we are maximizing. Our brand is well-known and respected. We have long-standing customer relationships we are working to expand. We are improving profitability in our established markets and pursuing growth opportunities in our Middle Tennessee, Mid-Atlantic and Houston markets. We have shown the ability to overcome challenges, stay on course and meet our targets. When we say we will do something, we do it.

 

People and culture

Our people and our culture are the foundation of our strength. We rank nationally as a top workplace, able to attract and retain the best people. Employees are engaged in their work, committed to delivering differentiated service

 

 

and being easy to do business with. In recent months we have announced new positions and partnerships that reaffirm our commitment to inclusion and diversity in the workplace and marketplace.

 

Our corporate citizenship also sets us apart. The First Tennessee Foundation donated nearly $6 million in 2015 to help our communities. Our people give of their time and resources, serving in leadership positions with charitable and civic organizations and recording nearly 18,000 volunteer hours in 2015. We are a vital part of the life of our communities – for the financial services we provide, the economic impact we make and the investments we undertake. We are proud of that role.

 

Because of our strength as a company and a culture we are confident about the future – even though our industry is undergoing major change. In 2016 and beyond we will continue to adapt to those changes. We will look for growth opportunities, both organically and through acquisition. We will work to fulfill our promise of being the best at serving customers, one opportunity at a time. We will aim for our Bonefish targets and build value for shareholders.

 

We appreciate the hard work of our employees, the trust of our customers and the support of our communities.

 

Thanks to our shareholders for their confidence in our company. We will continue to work to justify that confidence.

 

Sincerely,

 

 

 

D. Bryan Jordan

 

Chairman, President and CEO

 

First Horizon National Corp.

 

March 1, 2016


 

 

 

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

 

 

 

4

 

Financial Summary – 2015 compared to 2014

 

 

 

5

 

Business Line Review – 2015 compared to 2014

 

 

 

6

 

Income Statement Review – 2015 compared to 2014; 2014 compared to 2013

 

 

 

9

 

Statement of Condition Review – 2015 compared to 2014

 

 

 

19

 

Capital – 2015 compared to 2014

 

 

 

23

 

Asset Quality – Trend Analysis of 2015 compared to 2014

 

 

 

26

 

Risk Management

 

 

 

48

 

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

 

 

 

57

 

Market Uncertainties and Prospective Trends

 

 

 

63

 

Critical Accounting Policies

 

 

 

64

 

Quarterly Financial Information

 

 

 

70

 

Non-GAAP Information

 

 

 

71

 

Glossary of Selected Financial Terms and Acronyms

 

 

 

72

 

Report of Management on Internal Control over Financial Reporting

 

 

 

79

 

Reports of Independent Registered Public Accounting Firm

 

 

 

80

 

Consolidated Statements of Condition

 

 

 

82

 

Consolidated Statements of Income

 

 

 

83

 

Consolidated Statements of Comprehensive Income

 

 

 

84

 

Consolidated Statements of Equity

 

 

 

85

 

Consolidated Statements of Cash Flows

 

 

 

87

 

Notes to Consolidated Financial Statements

 

 

 

88

 

Consolidated Historical Statements of Income

 

 

 

184

 

Consolidated Average Balance Sheets and Related Yields and Rates

 

 

 

186

 

Total Shareholder Return Performance Graph

 

 

 

188

 

FIRST HORIZON NATIONAL CORPORATION


 

SELECTED FINANCIAL AND OPERATING DATA

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions except per share data)

 

2015

 

2014

 

2013

 

2012

 

2011

 

Income/(loss) from continuing operations

 

 

$

 

97.3

 

 

 

$

 

234.0

 

 

 

$

 

37.8

 

 

 

$

 

(15.5

)

 

 

 

$

 

134.2

 

Income/(loss) from discontinued operations, net of tax

 

 

 

-

 

 

 

 

-

 

 

 

 

0.5

 

 

 

 

0.1

 

 

 

 

8.6

 

Net income/(loss)

 

 

 

97.3

 

 

 

 

234.0

 

 

 

 

38.4

 

 

 

 

(15.4

)

 

 

 

 

142.8

 

Income/(loss) available to common shareholders

 

 

 

79.7

 

 

 

 

216.3

 

 

 

 

21.1

 

 

 

 

(26.8

)

 

 

 

 

131.3

 

 

Common Stock Data

 

 

 

 

 

 

 

 

 

 

Earnings/(loss) per common share from continuing operations

 

 

$

 

0.34

 

 

 

$

 

0.92

 

 

 

$

 

0.09

 

 

 

$

 

(0.11

)

 

 

 

$

 

0.47

 

Earnings/(loss) per common share

 

 

 

0.34

 

 

 

 

0.92

 

 

 

 

0.09

 

 

 

 

(0.11

)

 

 

 

 

0.50

 

Diluted earnings/(loss) per common share from continuing operations

 

 

 

0.34

 

 

 

 

0.91

 

 

 

 

0.09

 

 

 

 

(0.11

)

 

 

 

 

0.47

 

Diluted earnings/(loss) per common share

 

 

 

0.34

 

 

 

 

0.91

 

 

 

 

0.09

 

 

 

 

(0.11

)

 

 

 

 

0.50

 

Cash dividends declared per common share

 

 

 

0.24

 

 

 

 

0.20

 

 

 

 

0.20

 

 

 

 

0.04

 

 

 

 

0.04

 

Book value per common share

 

 

 

9.42

 

 

 

 

9.35

 

 

 

 

8.87

 

 

 

 

9.05

 

 

 

 

9.24

 

Closing price of common stock per share:

 

 

 

 

 

 

 

 

 

 

High

 

 

 

16.20

 

 

 

 

13.91

 

 

 

 

12.55

 

 

 

 

10.89

 

 

 

 

12.53

 

Low

 

 

 

12.31

 

 

 

 

11.18

 

 

 

 

9.72

 

 

 

 

7.55

 

 

 

 

5.63

 

Year-end

 

 

 

14.52

 

 

 

 

13.58

 

 

 

 

11.65

 

 

 

 

9.91

 

 

 

 

8.00

 

Cash dividends per common share/year-end closing price

 

 

 

1.7

%

 

 

 

 

1.5

%

 

 

 

 

1.7

%

 

 

 

 

0.4

%

 

 

 

 

0.5

%

 

Cash dividends per common share/diluted earnings per common share

 

 

 

70.6

%

 

 

 

 

22.0

%

 

 

 

 

222.2

%

 

 

 

 

(36.4

)%

 

 

 

 

8.0

%

 

Price/earnings ratio

 

 

 

42.7

x

 

 

 

 

14.9

x

 

 

 

 

129.4

x

 

 

 

 

NM

 

 

 

 

16.0

x

 

Market capitalization

 

 

$

 

3,464.3

 

 

 

$

 

3,180.7

 

 

 

$

 

2,753.7

 

 

 

$

 

2,414.1

 

 

 

$

 

2,059.7

 

Average shares (thousands)

 

 

 

234,189

 

 

 

 

234,997

 

 

 

 

237,972

 

 

 

 

248,349

 

 

 

 

260,574

 

Average diluted shares (thousands)

 

 

 

236,266

 

 

 

 

236,735

 

 

 

 

239,794

 

 

 

 

248,349

 

 

 

 

262,861

 

Period-end shares outstanding (thousands)

 

 

 

238,587

 

 

 

 

234,220

 

 

 

 

236,370

 

 

 

 

243,598

 

 

 

 

257,468

 

Volume of shares traded (thousands)

 

 

 

562,553

 

 

 

 

592,399

 

 

 

 

787,295

 

 

 

 

1,221,242

 

 

 

 

1,049,982

 

 

Selected Average Balances

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

$

 

25,638.3

 

 

 

$

 

23,994.8

 

 

 

$

 

24,402.3

 

 

 

$

 

25,048.3

 

 

 

$

 

24,714.1

 

Total loans, net of unearned income

 

 

 

16,624.4

 

 

 

 

15,521.0

 

 

 

 

15,726.4

 

 

 

 

16,205.4

 

 

 

 

16,056.8

 

Securities available-for-sale

 

 

 

3,692.3

 

 

 

 

3,548.4

 

 

 

 

3,180.4

 

 

 

 

3,145.5

 

 

 

 

3,182.9

 

Earning assets

 

 

 

23,456.2

 

 

 

 

21,825.2

 

 

 

 

21,772.0

 

 

 

 

22,224.8

 

 

 

 

21,959.1

 

Total deposits

 

 

 

18,753.7

 

 

 

 

16,401.7

 

 

 

 

16,340.2

 

 

 

 

16,212.0

 

 

 

 

15,527.0

 

Total term borrowings

 

 

 

1,559.5

 

 

 

 

1,592.9

 

 

 

 

1,944.7

 

 

 

 

2,326.8

 

 

 

 

2,582.6

 

Common equity

 

 

 

2,190.1

 

 

 

 

2,200.9

 

 

 

 

2,135.6

 

 

 

 

2,307.4

 

 

 

 

2,404.1

 

Total equity

 

 

 

2,581.2

 

 

 

 

2,592.0

 

 

 

 

2,518.8

 

 

 

 

2,602.5

 

 

 

 

2,699.3

 

 

Selected Period-End Balances

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

$

 

26,195.1

 

 

 

$

 

25,668.2

 

 

 

$

 

23,784.5

 

 

 

$

 

25,324.8

 

 

 

$

 

24,700.4

 

Total loans, net of unearned income

 

 

 

17,686.5

 

 

 

 

16,230.2

 

 

 

 

15,389.1

 

 

 

 

16,708.6

 

 

 

 

16,397.1

 

Securities available-for-sale

 

 

 

3,929.8

 

 

 

 

3,556.6

 

 

 

 

3,398.5

 

 

 

 

3,061.8

 

 

 

 

3,066.3

 

Earning assets

 

 

 

23,971.5

 

 

 

 

23,470.9

 

 

 

 

21,168.4

 

 

 

 

22,424.8

 

 

 

 

21,762.0

 

Total deposits

 

 

 

19,967.5

 

 

 

 

18,068.9

 

 

 

 

16,735.0

 

 

 

 

16,629.7

 

 

 

 

16,213.0

 

Total term borrowings

 

 

 

1,315.2

 

 

 

 

1,880.1

 

 

 

 

1,739.9

 

 

 

 

2,226.5

 

 

 

 

2,481.7

 

Common equity

 

 

 

2,248.5

 

 

 

 

2,190.5

 

 

 

 

2,097.3

 

 

 

 

2,204.4

 

 

 

 

2,378.9

 

Total equity

 

 

 

2,639.6

 

 

 

 

2,581.6

 

 

 

 

2,488.4

 

 

 

 

2,499.5

 

 

 

 

2,674.0

 

 

Selected Ratios

 

 

 

 

 

 

 

 

 

 

Return on average common equity (a)

 

 

 

3.64

%

 

 

 

 

9.83

%

 

 

 

 

0.99

%

 

 

 

 

(1.16

)%

 

 

 

 

5.46

%

 

Return on average assets (b)

 

 

 

0.38

 

 

 

 

0.98

 

 

 

 

0.16

 

 

 

 

(0.06

)

 

 

 

 

0.58

 

Net interest margin (c)

 

 

 

2.83

 

 

 

 

2.92

 

 

 

 

2.96

 

 

 

 

3.13

 

 

 

 

3.22

 

Allowance for loan and lease losses to loans

 

 

 

1.19

 

 

 

 

1.43

 

 

 

 

1.65

 

 

 

 

1.66

 

 

 

 

2.34

 

Net charge-offs to average loans

 

 

 

0.19

 

 

 

 

0.31

 

 

 

 

0.50

 

 

 

 

1.14

 

 

 

 

2.02

 

Total period-end equity to period-end assets

 

 

 

10.08

 

 

 

 

10.06

 

 

 

 

10.46

 

 

 

 

9.87

 

 

 

 

10.83

 

Tangible common equity to tangible assets (d)

 

 

 

7.82

 

 

 

 

7.90

 

 

 

 

8.19

 

 

 

 

8.14

 

 

 

 

9.04

 

 

See accompanying notes to consolidated financial statements.

Numbers may not add due to rounding.

NM - Not meaningful

 

(a)

 

Calculated using net income/(loss) available to common shareholders divided by average common equity.

 

(b)

 

Calculated using net income divided by average assets.

 

(c)

 

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.

 

(d)

 

Represents a non-GAAP measure. Refer to table 34 for the non-GAAP to GAAP reconciliation.

 

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, 2015, was one of the 40 largest publicly traded banking organizations in the United States in terms of asset size.

The corporation’s two major brands – First Tennessee and FTN Financial – provide customers with a broad range of products and services. First Tennessee provides retail and commercial banking services throughout Tennessee and other selected markets and is the largest bank headquartered in the state of Tennessee. FTN Financial (“FTNF”) is an industry leader in fixed income sales, trading, and strategies for institutional clients in the U.S. and abroad.

FHN is composed of the following operating segments:

 

 

Regional banking offers financial products and services including traditional lending and deposit-taking to retail and commercial customers in Tennessee and other selected markets. Regional banking provides investments, financial planning, trust services and asset management, along with credit card and cash management. Additionally, the regional banking segment includes correspondent banking which provides credit, depository, and other banking-related services to other financial institutions nationally.

 

 

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

 

 

Corporate consists of unallocated corporate expenses, expense on subordinated debt issuances, bank-owned life insurance (“BOLI”), unallocated interest income associated with excess equity, net impact of raising incremental capital, revenue and expense associated with deferred compensation plans, funds management, tax credit investment activities, gains on the extinguishment of debt, acquisition-related costs, and various charges related to restructuring, repositioning, and efficiency initiatives.

 

 

Non-strategic includes exited businesses and wind-down national consumer lending activities, other discontinued products, loan portfolios and service lines, and certain charges related to restructuring, repositioning, and efficiency initiatives.

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 TAF deposits.

On October 17, 2014, First Tennessee Bank National Association (“FTBNA”), a subsidiary of FHN, purchased thirteen bank branches in Middle and East Tennessee. The fair value of the acquired assets totaled $437.6 million, including an immaterial amount of loans. FTBNA also assumed $437.2 million of deposits associated with these branches. FTBNA paid a deposit premium of 3.32 percent.

On June 7, 2013, FTBNA acquired substantially all of the assets and assumed all of the liabilities of Mountain National Bank (“MNB”) from the Federal Deposit Insurance Corporation (“FDIC”), as receiver. The fair value of the acquired assets totaled $424.4 million, including $215.9 million in loans. FHN assumed $364.1 million of MNB deposits.

FHN’s operating results include the operating results of the acquired assets and assumed liabilities of the acquired entities subsequent to the acquisition dates. Refer to Note 2 – Acquisitions and Divestitures for additional information.

 

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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.

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: 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; common equity tier 1 capital (for periods subsequent to 2014), generally defined as common equity less goodwill, other intangibles, and certain other required regulatory deductions; 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 regulatory common equity tier 1 used in 2015 and later periods is not the same as the non-regulatory, non-GAAP tier 1 common commonly used prior to 2015; comparisons between the two are not meaningful.

The non-GAAP measures presented in this filing are tangible common equity to tangible assets, adjusted tangible common equity to risk weighted assets, and the tier 1 common capital ratio (for periods prior to 2015). Refer to Table 34 for a reconciliation of 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 statements that are not a representation of historical information but instead pertain to future operations, strategies, financial results, or other developments. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “should,” “is likely,” “will,” “going forward,” and other expressions that indicate future events and trends identify forward-looking statements.

Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond FHN’s control, and many of which, with respect to future business decisions and actions (including acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors: global, general and local economic and business conditions, including economic recession or depression; the stability or volatility of values and activity in the residential housing and commercial real estate markets; potential requirements for FHN to repurchase, or compensate for losses from, previously sold or securitized mortgages or securities based on such mortgages; potential claims relating to the foreclosure process; 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, 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;

 

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FIRST HORIZON NATIONAL CORPORATION


 

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”), the 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; 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 any forward-looking statements that are made in this Annual Report to shareholders for the period ended December 31, 2015 of which this MD&A is a part or otherwise from time to time. Actual results could differ and expectations could change, possibly materially, because of one or more factors, including those presented in this Forward-Looking Statements section, in other sections of this MD&A, in other parts of the Annual Report, in the annual report on Form 10-K to which the Annual Report is an exhibit, in other exhibits to the Form 10-K, and in the documents incorporated into the Form 10-K.

FINANCIAL SUMMARY – 2015 COMPARED TO 2014

FHN reported net income available to common shareholders of $79.7 million or $.34 per diluted share in 2015 compared to $216.3 million or $.91 per diluted share in 2014. The decline in net income available to common shareholders in 2015 was due to an increase in expenses and lower noninterest income, somewhat offset by an increase in net interest income and a decline in the provision for loan losses. Reported earnings are significantly impacted by a number of factors including strategic transactions and initiatives expected to boost growth and profitability occurring in both 2015 and 2014, the completion of transactions that expedited the wind-down of legacy businesses, the resolution of certain legal matters, and the economic environment.

During 2015, FHN continued to execute on strategic initiatives by focusing its attention on growing and strengthening core businesses, reducing risks associated with legacy businesses, and controlling expenses. FHN further invested in growth markets including Middle Tennessee, the Mid-Atlantic region, and Houston, as well as FHN’s wealth management business in 2015, leveraging relationships, market knowledge and balance sheet capacity which led to both loan and deposit growth within the regional bank. Additionally, FHN strengthened its market share in our Mid-Atlantic region through the acquisition of TAF.

In 2015, FHN reached a settlement with two federal agencies, the department of Justice (“DOJ”) and the department of Housing and Urban Development Office of Inspector General (“HUD”), to settle potential claims related to FHN’s underwriting and origination of FHA-insured mortgage loans which resulted in a $162.5 million charge to litigation and regulatory matters. In addition, FHN settled or moved forward with certain other legal matters which contributed to higher litigation-related loss accruals in 2015 relative to the prior year.

In 2014, FHN also made significant strides on certain legal matters including settlements with the Federal Home Loan Mortgage Corporation (“FHLMC”, “Freddie Mac”, or “Freddie”) and the Federal Housing Finance Agency (“FHFA”). FHN recognized $75.0 million in expense reversals related to agreements reached with insurance companies for the recovery of expenses FHN incurred in prior years, which favorably impacted expenses in 2014, offsetting a portion of litigation expenses in the prior year. During 2014, FHN had several other transactions related to the continued wind-down of legacy businesses that favorably impacted operating results. FHN sold approximately $315 million in UPB of held-for-sale (“HFS”) mortgage loans, which resulted in the recognition of $39.7 million of positive fair value adjustments that were recorded in mortgage banking income in 2014. FHN also

 

FIRST HORIZON NATIONAL CORPORATION

5


 

recognized approximately $20 million of previously unrecognized servicing fees in conjunction with transfers of servicing in 2014 associated with the sales of mortgage servicing rights (“MSR”) in late 2013.

The economy made modest progress in 2015, but the operating environment for the industry remained challenging. Despite that challenge, both average loans and average core deposits within the regional bank grew 13 percent during 2015, mitigating the impact of the wind-down of the non-strategic loan portfolios. The Federal Reserve remained cautious during 2015, holding interest rates at historically low levels, but the industry received a slight boost in December when the target federal funds rate was raised to 50 basis points. Low interest rates continued to pressure FHN’s net interest margin and net interest income (“NII”) in 2015. However, NII increased 4 percent from the prior year primarily driven by net loan growth.

FHN’s fixed income segment experienced revenue growth in 2015, with average fixed income product daily revenues increasing to $.8 million from $.7 million in 2014. Expenses within the fixed income segment were higher in 2015, in part because of higher variable compensation costs, as well as an increase in litigation charges related to the settlement of a legal matter. Additionally, expenses in 2014 included the benefit of a $47.1 million expense reversal related to agreements reached with insurance companies for litigation losses and legal fees associated with a lawsuit FHN settled in 2011.

Capital was strong in 2015, as FHN continued to look for opportunities to repatriate capital to shareholders through stock repurchases. Despite being limited for much of the year due to restrictions related to the TAF acquisition, FHN repurchased $28.4 million of shares in 2015 under the current share repurchase authorization compared to $38.5 million of shares in 2014. Additionally, quarterly dividends increased 20 percent in 2015 to $.06 per share, and FHN recently announced a 17 percent increase in quarterly dividends in 2016 to $.07 per share. The Basel III risk-based capital regulations, which increase minimum capital ratio requirements and modify risk-weighting definitions, became effective for FHN in 2015. Although capital ratios declined relative to 2014 under the new standard, FHN remains significantly above well capitalized standards.

Asset quality trends were again favorable in 2015 as our bankers continued to focus on high-quality, relationship-oriented loans. This focus resulted in solid broad-based loan growth across many of our loan portfolios in the regional bank, replacing run-off of the higher-risk non-strategic loan balances. The allowance for loan losses declined 10 percent in 2015. Additionally, loan loss provisioning and net charge-offs declined 67 percent and 35 percent, respectively, year-over-year, all reflecting strong credit quality in 2015.

Return on average common equity and return on average assets for 2015 were 3.64 percent and .38 percent, respectively, compared to 9.83 percent and .98 percent in 2014. The tangible common equity to tangible assets ratio was 7.82 percent in 2015 compared to 7.90 percent in 2014. Total capital, Tier 1, and Common Equity Tier 1 ratios were 13.01 percent, 11.79 percent, and 10.45 percent, respectively on December 31, 2015 (calculated under U.S. Basel III capital rules). Total capital and Tier 1 ratios were 16.18 percent and 14.46 percent, respectively on December 31, 2014 (calculated under U.S. Basel I capital rules, and as originally reported, consistent with regulatory reporting rules which prohibit restatement due to the adoption of new accounting standards (ASU 2014-01)). Total period-end assets were $26.2 billion on December 31, 2015, a 2 percent increase from $25.7 billion on December 31, 2014. Total period-end equity was $2.6 billion as of December 31, 2015 and 2014, respectively.

BUSINESS LINE REVIEW

Regional Banking

Pre-tax income within the regional banking segment increased 7 percent in 2015 to $308.7 million from $288.7 million in 2014. The increase in pre-tax income was driven by higher net interest income which more than offset increases in expenses and loan loss provisioning and a decline in non-interest income.

Total revenue increased 6 percent to $906.8 million in 2015 from $856.8 million in 2014, driven by an increase in net interest income (“NII”). The increase in NII was driven by several factors including higher average balances of loans to mortgage companies and other commercial loan growth, improved deposit pricing, and an increase in loan fees and cash basis income compared to 2014. These increases were somewhat offset by lower yielding fixed rate

 

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FIRST HORIZON NATIONAL CORPORATION


 

commercial loans. Noninterest income was $251.6 million in 2015, down 1 percent from 2014 largely driven by lower brokerage, management fees, and commission income from the Bank’s wealth management group and a decline in bankcard income, partially offset by an increase in fees from deposit transactions compared to a year ago. The decrease in brokerage, management fees and commissions was primarily driven by a reduction in annuity income as a result of a decrease in annuity sales in 2015 compared to the prior year, and also by a shift in product and fee structures which caused a temporary decline in revenues but should result in revenue streams over the long term. The decline in bankcard income was due in part to $2.8 million of Visa volume incentives recognized in 2014, but was somewhat mitigated by higher transaction volume in 2015 relative to the prior year.

Provision expense increased to $34.5 million in 2015 from $29.2 million in 2014. Overall, the performance of the regional bank portfolio in both years was favorable. The net increase in provision during 2015 was driven by a number of factors including loan growth within the commercial portfolios, a continued extension of the loss emergence period (“LEP”) for commercial loans, and provision in 2015 associated with borrower fraud. Provision in 2015 was favorably affected by historically low net charge-offs which continue to drive lower loss rates. Compared to 2014, provision was lower in the credit card and other portfolio for 2015 as 2014 provision was affected by an uptick in delinquencies and net charge-offs.

Noninterest expense increased 5 percent to $563.5 million in 2015 from $539.0 million in 2014. The increase in expense was largely attributable to higher personnel expenses associated with incentives related to loan growth, strategic hires, and retention efforts in 2015 relative to 2014. Increases in FDIC premiums, legal, and advertising expenses relative to 2014 also contributed to the increase in expenses in 2015. The increase in FDIC premium expense from 2014 was due in large part to $3.3 million of FDIC premium refunds recognized in second quarter 2014. Pension, technology and bank operations costs also increased in 2015 compared to 2014. Gains recognized in third quarter 2015 related to an employee benefit plan amendment mitigated a portion of the increase in expenses for 2015. Professional fees declined in 2015 relative to the prior year driven by various consulting projects in 2014, as well as tighter project management and ongoing focus on cost reductions. In addition, lower contract employment expenses primarily related to technology-related projects in 2014 also offset a portion of the 2015 expense increase.

Fixed Income

Pre-tax income in the fixed income segment was $26.6 million in 2015 compared to $68.6 million in 2014. The decline in results during 2015 compared to the prior year was primarily driven by an increase in net loss accruals related to legal matters. During 2015 the fixed income segment recognized $11.8 million of loss accruals related to legal matters. In 2014, FHN recognized $47.1 million in expense reversals related to agreements reached with insurance companies for litigation losses and legal fees associated with a lawsuit FHN settled in 2011. Of this amount $38.6 million was recorded as a reduction to losses from litigation and regulatory matters and $8.5 million was recorded as a reduction to legal fees.

Fixed income product revenue was $195.9 million in 2015, up from $170.3 million in 2014, as average daily revenue (“ADR”) increased from $.7 million in 2014 to $.8 million in 2015 reflecting more favorable market conditions due to increased rate volatility in 2015 relative to the prior year. Other product revenue increased 9 percent to $35.4 million during 2015, primarily driven by increases in fees from derivatives sales and portfolio advisory services in 2015 compared to 2014.

Noninterest expense was $220.2 million in 2015 compared to $146.8 million in 2014. The increase in expense during 2015 was largely driven by the increase in net loss accruals and legal expenses previously mentioned, but was also the result of higher variable compensation expenses connected with the increase in fixed income product revenue in 2015.

Corporate

The pre-tax loss for the corporate segment was $105.3 million and $88.6 million during 2015 and 2014, respectively. The decline in results in 2015 relative to 2014 was primarily driven by lower revenue, somewhat offset by an expense decline.

 

FIRST HORIZON NATIONAL CORPORATION

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Net interest expense increased $17.6 million in 2015 to $71.7 million due to the effect of the third quarter 2014 loan sales on FTP, the fourth quarter 2014 issuance of $400 million of senior notes, and a lower yielding available-for-sale (“AFS”) securities portfolio. Noninterest income (including securities gain/losses) was $23.3 million in 2015, down from $27.0 million in 2014. The decrease in noninterest income was largely driven by a decline in securities gains, decreases in deferred compensation income, and a decline in BOLI income as a result of lower policy benefits received in 2015 relative to 2014. The decline in securities gains was primarily driven by a $5.6 million gain associated with the sale of a cost method investment recognized in 2014 compared with a $1.8 million gain recognized in 2015. 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. These decreases were partially offset by a $5.8 million gain recognized in 2015 on the extinguishment of junior subordinated notes underlying $200 million of trust preferred debt.

Noninterest expense decreased 7 percent, or $4.5 million, from $61.4 million in 2014 to $56.9 million in 2015. The decline in noninterest expense was largely the result of a $5.1 million decline in negative valuation adjustments associated with derivatives related to prior sales of Visa Class B shares and lower occupancy expense in 2015 primarily related to an efficiency-related lease abandonment expense of $4.7 million that was recognized in 2014. Additionally, personnel and advertising expenses decreased in 2015 relative to the prior year. The decrease in personnel expense largely relates to a decline in deferred compensation income which is directionally consistent with the decline in deferred compensation income mentioned above, but was offset somewhat by higher incentive compensation and several favorable adjustments recognized in 2014, primarily associated with employee benefit plans and deferred compensation BOLI benefits. Advertising expense was elevated in 2014 because of FTBNA’s 150th anniversary celebration campaign. In 2015, FHN recognized $4.9 million of acquisition costs associated with the TAF acquisition as well as a $2.8 million impairment of a tax credit investment both of which offset a portion of the expense decline.

Non-Strategic

The non-strategic segment had a pre-tax loss of $121.8 million in 2015 compared to pre-tax income of $49.6 million in 2014. The decline in pre-tax income during 2015 was the result of an increase in expenses and a decrease in revenue, somewhat offset by a larger provision credit for loan losses in 2015 compared to 2014.

Total revenue was $65.8 million in 2015 down from $132.7 million in 2014. NII declined 18 percent to $54.7 million in 2015 from $67.1 million in the prior year, consistent with the run-off of the non-strategic loan portfolios and the third quarter 2014 sales of mortgage loans HFS. Noninterest income (including securities gains/losses) decreased $54.6 million from $65.6 million in 2014 to $11.1 million in 2015 driven by a decline in mortgage banking income. The decrease in mortgage banking income was driven by several transactions recognized in 2014, including $47.9 million of valuation gains primarily recognized as a result of the sale of approximately $315 million in unpaid principal balance (“UPB”) of mortgage loans HFS and approximately $20 million in previously unrecognized servicing fees recognized in conjunction with transfers of servicing in 2014. Other noninterest income increased in 2015 relative to the prior year due in part to the negative impact of a $4.2 million loss on the extinguishment of debt associated with the collapse of two HELOC securitization trusts, a $2.0 million loss on the deconsolidation of a securitization trust, and $3.0 million in securities losses all recognized in 2014. Other noninterest income included a $2.7 million gain on the sale of a building recognized in 2015.

The provision for loan losses within the non-strategic segment was a provision credit of $25.5 million in 2015 compared to a provision credit of $2.2 million in the prior year. The improvement was largely driven by a decrease in consumer real estate reserves primarily due to a decline in loan balances from run-off, sustained levels of low net charge-offs, and continued stabilization/improvement of property values.

Noninterest expense increased to $213.1 million in 2015 from $85.3 million in 2014. The increase in noninterest expense was primarily due to a $140.4 million net increase in loss accruals related to litigation and regulatory matters. In 2015 the non-strategic segment had $175.8 million in net loss accruals including $162.5 million of loss accruals recognized in first quarter 2015 associated with the settlement reached with DOJ/HUD as previously mentioned. In 2014, FHN recognized $35.4 million of net litigation loss accruals. Additionally, the reversal of $4.3 million of repurchase and foreclosure provision recognized in 2014 related to the settlement of certain claims, and an increase in occupancy expense associated with the reduction in sublease income because of the building

 

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FIRST HORIZON NATIONAL CORPORATION


 

sale previously mentioned contributed to the expense increase. Offsetting a portion of this increase, legal fees decreased $4.8 million in 2015 relative to 2014. Generally, most other expense categories declined given the continued wind-down of the legacy businesses.

INCOME STATEMENT REVIEW – 2015 COMPARED TO 2014; 2014 COMPARED TO 2013

Total consolidated revenue was $1.2 billion in 2015 and 2014, as increases in fixed income product revenue, net interest income, and gains on the extinguishment of debt offset a decline in mortgage banking income relative to the prior year. Total expenses were $1.1 billion in 2015, up 26 percent from $832.5 million in 2014. The increase in expenses was primarily due to higher net losses from litigation and regulatory matters and to a lesser extent, an increase in personnel expenses compared to 2014.

In 2014, total consolidated revenue decreased $44.2 million from 2013 to $1.2 billion, primarily driven by declines in fixed income product revenue and net interest income, but were partially mitigated by increases in mortgage banking income. Total expenses declined 28 percent to $832.5 million in 2014 from $1.1 billion in 2013 primarily driven by declines in the mortgage repurchase provision, net litigation loss accruals, and personnel expenses.

NET INTEREST INCOME

Net interest income increased 4 percent to $653.7 million in 2015 from $627.7 million in 2014. As detailed in Table 1 – Analysis of Changes in Net Interest Income, the increase in NII was the result of loan growth within the regional bank’s commercial and consumer portfolios, higher average balances of loans to mortgage companies and an increase in cash basis interest income and loan fees relative to the prior year. These increases were partially offset by the continued run-off of the non-strategic loan portfolios, lower yielding fixed rate commercial loans, and the impact on NII from the third quarter 2014 loan sales. Average earning assets increased 7 percent, or $1.6 billion, from $21.8 billion in 2014 to $23.5 billion in 2015 primarily driven by loan growth within the regional bank, but was also impacted by higher average balances of excess cash held at the Federal Reserve (“Fed”), an increase in average fixed income trading securities and a larger securities portfolio, which more than offset continued run-off of the non-strategic loan portfolios and a decline in average balances of Loans HFS.

Net interest income was $627.7 million in 2014, a 2 percent decline from $637.4 million in 2013. The decline was primarily attributable to continued run-off of the nonstrategic loan portfolios, lower yielding commercial loans, and lower balances of loans to mortgage companies. The effects of these were somewhat mitigated by commercial loan growth, improved deposit pricing, and a larger securities portfolio. In 2014 and 2013 average earning assets were $21.8 billion as continued run-off on the non-strategic loan portfolios and the resolution of several on-balance sheet structures were offset by loan growth within the regional bank and an increase in the investment securities portfolio.

 

FIRST HORIZON NATIONAL CORPORATION

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Table 1   Analysis of Changes in Net Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

(Fully taxable equivalent (“FTE”))
(Dollars in thousands)

 

2015 Compared to 2014
Increase / (Decrease) Due to (a)

 

2014 Compared to 2013
Increase / (Decrease) Due to (a)

 

Rate (b)

 

Volume (b)

 

Total

 

Rate (b)

 

Volume (b)

 

Total

 

Interest income – FTE:

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

$

 

(11,594

)

 

 

 

$

 

40,633

 

 

 

$

 

29,039

 

 

 

$

 

(18,528

)

 

 

 

$

 

(7,853

)

 

 

 

$

 

(26,381

)

 

Loans held-for-sale

 

 

 

1,223

 

 

 

 

(6,936

)

 

 

 

 

(5,713

)

 

 

 

 

1,323

 

 

 

 

(3,135

)

 

 

 

 

(1,812

)

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury

 

 

 

16

 

 

 

 

(31

)

 

 

 

 

(15

)

 

 

 

 

(6

)

 

 

 

 

(10

)

 

 

 

 

(16

)

 

U.S. government agencies

 

 

 

(3,572

)

 

 

 

 

4,613

 

 

 

 

1,041

 

 

 

 

35

 

 

 

 

10,640

 

 

 

 

10,675

 

States and municipalities

 

 

 

127

 

 

 

 

(141

)

 

 

 

 

(14

)

 

 

 

 

375

 

 

 

 

16

 

 

 

 

391

 

Other

 

 

 

(282

)

 

 

 

 

(347

)

 

 

 

 

(629

)

 

 

 

 

108

 

 

 

 

(1,290

)

 

 

 

 

(1,182

)

 

 

   

 

 

   

 

 

Total investment securities

 

 

 

(3,351

)

 

 

 

 

3,734

 

 

 

 

383

 

 

 

 

52

 

 

 

 

9,816

 

 

 

 

9,868

 

 

   

 

 

   

 

 

Trading securities

 

 

 

(1,173

)

 

 

 

 

4,875

 

 

 

 

3,702

 

 

 

 

1,970

 

 

 

 

(4,279

)

 

 

 

 

(2,309

)

 

Other earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

 

 

5

 

 

 

 

(12

)

 

 

 

 

(7

)

 

 

 

 

(2

)

 

 

 

 

41

 

 

 

 

39

 

Securities purchased under agreements to resell

 

 

 

264

 

 

 

 

(170

)

 

 

 

 

94

 

 

 

 

(579

)

 

 

 

 

4

 

 

 

 

(575

)

 

Interest-bearing deposits with other financial institutions

 

 

 

187

 

 

 

 

608

 

 

 

 

795

 

 

 

 

43

 

 

 

 

237

 

 

 

 

280

 

 

   

 

 

   

 

 

Total other earning assets

 

 

 

624

 

 

 

 

258

 

 

 

 

882

 

 

 

 

(336

)

 

 

 

 

80

 

 

 

 

(256

)

 

 

   

 

 

   

 

 

Total change in interest income – earning assets – FTE

 

 

$

 

(24,197

)

 

 

 

$

 

52,490

 

 

 

$

 

28,293

 

 

 

$

 

(22,695

)

 

 

 

$

 

1,805

 

 

 

$

 

(20,890

)

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

 

$

 

(1,071

)

 

 

 

$

 

1,501

 

 

 

$

 

430

 

 

 

$

 

(3,011

)

 

 

 

$

 

(189

)

 

 

 

$

 

(3,200

)

 

Time deposits

 

 

 

(3,264

)

 

 

 

 

(626

)

 

 

 

 

(3,890

)

 

 

 

 

(4,639

)

 

 

 

 

(2,164

)

 

 

 

 

(6,803

)

 

Other interest-bearing deposits

 

 

 

568

 

 

 

 

845

 

 

 

 

1,413

 

 

 

 

(876

)

 

 

 

 

208

 

 

 

 

(668

)

 

 

   

 

 

   

 

 

Total interest-bearing core deposits

 

 

 

(5,479

)

 

 

 

 

3,432

 

 

 

 

(2,047

)

 

 

 

 

(10,580

)

 

 

 

 

(91

)

 

 

 

 

(10,671

)

 

 

   

 

 

   

 

 

Certificates of deposit $100,000 and more

 

 

 

1,105

 

 

 

 

(713

)

 

 

 

 

392

 

 

 

 

(1,950

)

 

 

 

 

(602

)

 

 

 

 

(2,552

)

 

Federal funds purchased

 

 

 

92

 

 

 

 

(1,037

)

 

 

 

 

(945

)

 

 

 

 

(13

)

 

 

 

 

(410

)

 

 

 

 

(423

)

 

Securities sold under agreements to repurchase

 

 

 

(101

)

 

 

 

 

(57

)

 

 

 

 

(158

)

 

 

 

 

(251

)

 

 

 

 

(52

)

 

 

 

 

(303

)

 

Fixed income trading liabilities

 

 

 

(1,676

)

 

 

 

 

2,262

 

 

 

 

586

 

 

 

 

2,429

 

 

 

 

(664

)

 

 

 

 

1,765

 

Other short-term borrowings

 

 

 

1,103

 

 

 

 

(1,593

)

 

 

 

 

(490

)

 

 

 

 

95

 

 

 

 

692

 

 

 

 

787

 

Term borrowings

 

 

 

4,564

 

 

 

 

(748

)

 

 

 

 

3,816

 

 

 

 

5,379

 

 

 

 

(7,129

)

 

 

 

 

(1,750

)

 

 

   

 

 

   

 

 

Total change in interest expense – interest-bearing liabilities

 

 

$

 

(3,379

)

 

 

 

$

 

4,533

 

 

 

$

 

1,154

 

 

 

$

 

(10,636

)

 

 

 

$

 

(2,511

)

 

 

 

$

 

(13,147

)

 

 

 

 

Net interest income – FTE

 

 

 

 

 

 

$

 

27,139

 

 

 

 

 

 

 

$

 

(7,743

)

 

 

 

(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 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 was 2.83 percent in 2015, down from 2.92 percent in 2014. The net interest spread was 2.70 percent in 2015, down 8 basis points from 2.78 percent in 2014. The decrease in NIM was primarily driven by run-off of the non-strategic loan portfolios, a decline in yields on fixed rate loan portfolios due to the long-term low interest rate environment, and an increase in average excess cash held at the Fed during the year. An increase in cash basis interest income and loan fees relative to 2014 positively impacted NIM in 2015, offsetting a portion of the decline.

The consolidated net interest margin was 2.92 percent in 2014 compared to 2.96 percent in 2013. The decline in NIM in 2014 compared to 2013 was driven by lower yielding commercial loans and run-off of the non-strategic loan portfolios, partially offset by lower funding costs.

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 when 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 companies. Table 2 details the computation of the net interest margin for the past three years.

 

10

FIRST HORIZON NATIONAL CORPORATION


 

Table 2   Net Interest Margin

 

 

 

 

 

 

 

 

 

2015

 

2014

 

2013

 

Assets:

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

Loans, net of unearned income:

 

 

 

 

 

 

Commercial loans

 

 

 

3.51

%

 

 

 

 

3.56

%

 

 

 

 

3.68

%

 

Retail loans

 

 

 

3.96

 

 

 

 

4.01

 

 

 

 

4.10

 

 

Total loans, net of unearned income

 

 

 

3.67

 

 

 

 

3.74

 

 

 

 

3.86

 

 

Loans held-for-sale (a)

 

 

 

4.23

 

 

 

 

3.77

 

 

 

 

3.40

 

Investment securities:

 

 

 

 

 

 

U.S. treasuries (b)

 

 

 

0.97

 

 

 

 

0.06

 

 

 

 

0.08

 

U.S. government agencies

 

 

 

2.46

 

 

 

 

2.57

 

 

 

 

2.56

 

States and municipalities (c)

 

 

 

3.56

 

 

 

 

2.72

 

 

 

 

0.59

 

Other

 

 

 

4.08

 

 

 

 

4.23

 

 

 

 

4.19

 

 

Total investment securities

 

 

 

2.54

 

 

 

 

2.64

 

 

 

 

2.64

 

 

Trading securities

 

 

 

2.81

 

 

 

 

2.93

 

 

 

 

2.80

 

Other earning assets:

 

 

 

 

 

 

Federal funds sold

 

 

 

1.01

 

 

 

 

1.00

 

 

 

 

1.00

 

Securities purchased under agreements to resell (d)

 

 

 

(0.12

)

 

 

 

 

(0.15

)

 

 

 

 

(0.06

)

 

Interest bearing cash

 

 

 

0.25

 

 

 

 

0.22

 

 

 

 

0.22

 

 

Total other earning assets

 

 

 

0.10

 

 

 

 

0.06

 

 

 

 

0.08

 

 

Interest income / total earning assets

 

 

 

3.19

%

 

 

 

 

3.29

%

 

 

 

 

3.40

%

 

 

Liabilities:

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

Savings

 

 

 

0.16

%

 

 

 

 

0.18

%

 

 

 

 

0.22

%

 

Other interest-bearing deposits

 

 

 

0.09

 

 

 

 

0.08

 

 

 

 

0.10

 

Time deposits (e)

 

 

 

0.66

 

 

 

 

1.07

 

 

 

 

1.59

 

 

Total interest-bearing core deposits

 

 

 

0.17

 

 

 

 

0.21

 

 

 

 

0.31

 

 

Certificates of deposit $100,000 and more (f)

 

 

 

0.89

 

 

 

 

0.63

 

 

 

 

1.01

 

 

Federal funds purchased

 

 

 

0.26

 

 

 

 

0.25

 

 

 

 

0.25

 

Securities sold under agreements to repurchase

 

 

 

0.06

 

 

 

 

0.08

 

 

 

 

0.14

 

Fixed income trading liabilities

 

 

 

2.18

 

 

 

 

2.43

 

 

 

 

2.05

 

Other short-term borrowings

 

 

 

0.67

 

 

 

 

0.30

 

 

 

 

0.27

 

Term borrowings (g)

 

 

 

2.47

 

 

 

 

2.17

 

 

 

 

1.87

 

 

Interest expense / total interest-bearing liabilities

 

 

 

0.49

 

 

 

 

0.51

 

 

 

 

0.57

 

 

Net interest spread

 

 

 

2.70

%

 

 

 

 

2.78

%

 

 

 

 

2.83

%

 

Effect of interest-free sources used to fund earning assets

 

 

 

0.13

 

 

 

 

0.14

 

 

 

 

0.13

 

 

Net interest margin (h)

 

 

 

2.83

%

 

 

 

 

2.92

%

 

 

 

 

2.96

%

 

 

 

(a)

 

2015 increase driven by sales of certain lower-yielding loans in third quarter 2014.

 

(b)

 

2015 increase driven by the maturity of lower-yielding US Treasury Bills in third quarter 2014.

 

(c)

 

2015 and 2014 increase driven by the yield on a held-to-maturity (“HTM”) municipal bond.

 

(d)

 

Driven by negative market rates on reverse repurchase agreements.

 

(e)

 

2015 rate includes the effect of amortizing the premium valuation adjustment for time deposits related to acquisitions.

 

(f)

 

2014 rate includes the effect of amortizing the premium valuation adjustment for time deposits related to acquisitions.

 

(g)

 

2015 increase driven by the issuance of $400 million of senior notes in fourth quarter 2014.

 

(h)

 

Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 35 percent and, where applicable, state income taxes.

FHN’s net interest margin is impacted by balance sheet factors such as interest-bearing cash levels, deposit balances, trading inventory, commercial loan volume, loan fees, cash basis income, and the potential rise in short term interest rates. FHN’s balance sheet is positioned to benefit from a rise in interest rates. During 2016, any

 

FIRST HORIZON NATIONAL CORPORATION

11


 

benefit to NIM will be dependent on the extent of Fed interest rate increases, as well as levels of interest bearing cash and trading inventory balances.

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 $9.0 million in 2015 compared to $27.0 million in 2014 and $55.0 million in 2013. During 2015 and 2014, FHN experienced continued overall improvement in the loan portfolio which resulted in declines of 10 percent and 8 percent in the allowance for loan losses, respectively. Additionally, net charge-offs declined 35 percent and 38 percent, respectively, during 2015 and 2014 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 2015 Compared to 2014 in this MD&A.

NONINTEREST INCOME

Noninterest income (including securities gains/(losses)) was $517.3 million in 2015 compared to $550.0 million in 2014 and $584.6 million in 2013. In 2015 noninterest income was 44 percent of total revenue compared to 47 percent and 48 percent of total revenue in 2014 and 2013, respectively. The decline in noninterest income in 2015 relative to 2014 was primarily driven by a decrease in mortgage banking income, but was partially mitigated by increases in fixed income sales revenue and gains on the extinguishment of debt. The decrease in noninterest income in 2014 relative to 2013 largely resulted from a decrease in fixed income sales revenue partially offset by an increase in mortgage banking income. FHN’s noninterest income for the last three years is provided in Table 3. The following discussion provides additional information about various line items reported in the following table.

Table 3   Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2015

 

2014

 

2013

 

Compound
Annual Growth
Rates

 

15/14

 

15/13

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

Fixed income

 

 

$

 

231,337

   

$200,595

 

 

$

 

272,364

 

 

 

 

15

%

 

 

 

 

(8

)%

 

Deposit transactions and cash management

 

 

 

112,843

 

 

 

 

111,951

 

 

 

 

114,383

 

 

 

 

1

%

 

 

 

 

(1

)%

 

Brokerage, management fees and commissions

 

 

 

46,496

 

 

 

 

49,099

 

 

 

 

42,261

 

 

 

 

(5

)%

 

 

 

 

5

%

 

Trust services and investment management

 

 

 

27,577

 

 

 

 

27,777

 

 

 

 

26,523

 

 

 

 

(1

)%

 

 

 

 

2

%

 

Bankcard income

 

 

 

22,238

 

 

 

 

23,697

 

 

 

 

20,482

 

 

 

 

(6

)%

 

 

 

 

4

%

 

Bank-owned life insurance

 

 

 

14,726

 

 

 

 

16,394

 

 

 

 

16,614

 

 

 

 

(10

)%

 

 

 

 

(6

)%

 

Other service charges

 

 

 

11,610

 

 

 

 

11,882

 

 

 

 

13,440

 

 

 

 

(2

)%

 

 

 

 

(7

)%

 

Mortgage banking

 

 

 

3,870

 

 

 

 

71,257

 

 

 

 

33,275

 

 

 

 

(95

)%

 

 

 

 

(66

)%

 

Insurance commissions

 

 

 

2,627

 

 

 

 

2,257

 

 

 

 

3,023

 

 

 

 

16

%

 

 

 

 

(7

)%

 

Debt securities gains/(losses), net

 

 

 

1,836

 

 

 

 

-

 

 

 

 

(451

)

 

 

 

 

NM

 

 

 

 

NM

 

Equity securities gains/(losses), net

 

 

 

(458

)

 

 

 

 

2,872

 

 

 

 

2,211

 

 

 

 

NM

 

 

 

 

NM

 

Gain on divestitures

 

 

 

-

 

 

 

 

-

 

 

 

 

111

 

 

 

 

NM

 

 

 

 

NM

 

All other income and commissions:

 

 

 

 

 

 

 

 

 

 

ATM interchange fees

 

 

 

11,917

 

 

 

 

10,943

 

 

 

 

10,412

 

 

 

 

9

%

 

 

 

 

7

%

 

Electronic banking fees

 

 

 

5,840

 

 

 

 

6,190

 

 

 

 

6,289

 

 

 

 

(6

)%

 

 

 

 

(4

)%

 

Gain/(loss) on extinguishment of debt

 

 

 

5,793

 

 

 

 

(4,166

)

 

 

 

 

-

 

 

 

 

NM

 

 

 

 

NM

 

Letter of credit fees

 

 

 

4,621

 

 

 

 

4,864

 

 

 

 

5,081

 

 

 

 

(5

)%

 

 

 

 

(5

)%

 

Deferred compensation (a)

 

 

 

(1,369

)

 

 

 

 

2,042

 

 

 

 

4,685

 

 

 

 

NM

 

 

 

 

NM

 

Other

 

 

 

15,821

 

 

 

 

12,390

 

 

 

 

13,874

 

 

 

 

28

%

 

 

 

 

7

%

 

 

Total all other income and commissions

 

 

 

42,623

 

 

 

 

32,263

 

 

 

 

40,341

 

 

 

 

32

%

 

 

 

 

3

%

 

 

Total noninterest income

 

 

$

 

517,325

 

 

 

$

 

550,044

 

 

 

$

 

584,577

 

 

 

 

(6

)%

 

 

 

 

(6

)%

 

 

NM - not meaningful

 

(a)

  Deferred compensation market value adjustments are mirrored by adjustments to employee compensation, incentives and benefits expense.

 

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 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 increased 15 percent in 2015 to $231.3 million from $200.6 million in 2014, reflecting more favorable market conditions due to increased rate volatility in 2015 relative to 2014. Revenue from other products increased $5.2 million to $35.5 million in 2015, largely driven by increases in fees from derivative sales and portfolio advisory services.

Fixed income noninterest income was $200.6 million in 2014, down from $272.4 million in 2013, reflecting less favorable market conditions in 2014 relative to 2013 due to low rates, low market volatility and uncertainty around the Fed’s monetary policy. Other noninterest revenue decreased $10.2 million to $30.3 million in 2014. The decline in other noninterest revenue was largely due to $3.5 million of gains recognized in 2013 within the non-strategic segment from the reversal of previously established LOCOM valuation adjustments associated with TRUP loan payoffs, as well as decreases in revenues from derivative sales and loan trading and related activities in 2014 relative to 2013.

Table 4   Fixed Income Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2015

 

2014

 

2013

 

Compound
Annual Growth
Rates

 

15/14

 

15/13

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

Fixed income

 

 

$

 

195,877

 

 

 

$

 

170,317

 

 

 

$

 

231,853

 

 

 

 

15

%

 

 

 

 

(8

)%

 

Other noninterest revenue

 

 

 

35,460

 

 

 

 

30,278

 

 

 

 

40,511

 

 

 

 

17

%

 

 

 

 

(6

)%

 

 

Total fixed income noninterest income

 

 

$

 

231,337

 

 

 

$

 

200,595

 

 

 

$

 

272,364

 

 

 

 

15

%

 

 

 

 

(8

)%

 

 

Deposit Transactions and Cash Management

Fees from deposit transactions and cash management include fees for services related to retail 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 income increased to $112.8 million in 2015 from $112.0 million in 2014.

In 2014, deposit transactions and cash management income declined 2 percent to $112.0 million from $114.4 million in 2013. The decrease was primarily the result of lower cash management fees on commercial products due to price reductions and discounting resulting from increased market competitive price pressure and overall lower managed balances between 2014 and 2013.

Brokerage, Management Fees and Commissions

Brokerage, management fees and commissions include fees for portfolio management, trade commission, and annuity and mutual funds sales. Noninterest income from brokerage and management fees decreased 5 percent to $46.5 million in 2015 from $49.1 million in 2014. The decline in income was primarily driven by a reduction in annuity income as a result of lower annuity sales in 2015 compared to the prior year. The decline was also affected by a shift in product and fee structures which caused a temporary decrease in revenues but should result in revenue streams over the long term. Noninterest income from brokerage and management fees increased 16 percent, or $6.8 million, in 2014 relative to 2013 due in large part to FHN’s strategic focus on growing these businesses with new products and offerings, an expanded sales force, and a refined advisory team strategy.

Trust Services

Trust services and investment management fees include investment management, personal trust, employee benefits, and custodial trust services, and are primarily influenced by equity and fixed income market activity. Noninterest income from trust services and investment management was relatively flat in 2015 at $27.6 million. In

 

FIRST HORIZON NATIONAL CORPORATION

13


 

2014, noninterest income from trust services and investment management increased 5 percent to $27.8 million from $26.5 million in 2013. The increase in trust services and investment management revenue in 2014 relative to 2013 was primarily due to improved market conditions and strong new account activity in Trust, FTB Advisory, and Retirement Services.

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 fees, and research fees. Bankcard income was $22.2 million in 2015 compared to $23.7 million and $20.5 million in 2014 and 2013, respectively. Bankcard income in 2014 included $2.8 million of Visa volume incentives.

Bank Owned Life Insurance

BOLI income was $14.7 million in 2015 compared to $16.4 million and $16.6 million in 2014 and 2013, respectively, reflecting lower policy benefits in 2015 compared to 2014 and 2013.

Other Service Charges

Income from other service charges includes international income (foreign exchange and wire transfer fees), other retail fees, check order income, and other service charges including check cashing, safe deposit, wire transfers, and money orders. Income from other service charges decreased to $11.6 million in 2015 from $11.9 million and $13.4 million in 2014 and 2013, respectively.

Mortgage Banking Noninterest Income

Mortgage banking income has been primarily comprised of servicing income related to legacy mortgage banking operations and fair value adjustments to the mortgage warehouse. Servicing income, which includes fees for servicing mortgage loans, changes in the value of servicing assets, results of hedging servicing assets, and the negative impact of runoff on the value of MSR, historically was the largest component of mortgage banking income. In 2014 and 2013, FHN sold substantially all remaining legacy mortgage servicing, which resulted in substantially diminished fees from mortgage servicing after the sales. Mortgage banking income was $3.9 million in 2015, compared to $71.3 million in 2014 and $33.3 million in 2013.

The decrease in mortgage banking income during 2015 relative to 2014 was the result of several transactions recognized in 2014 that positively impacted mortgage banking income in that year, including $39.7 million of gains on the sales of approximately $315 million in UPB of HFS mortgage loans in third quarter 2014, the receipt of approximately $20 million in previously unrecognized servicing fees in conjunction with servicing sales, and a larger positive mortgage warehouse valuation adjustment in 2014 due to positive fair value adjustments that reflected new information on market pricing for similar assets primarily related to the non-performing portion of the HFS portfolio.

The increase in mortgage banking income during 2014 relative to 2013 was primarily due to valuation gains related to the sale of HFS mortgage loans previously mentioned. Total servicing income was $20.8 million in 2014 down from $39.1 million in 2013 because of lower servicing fees due to the 2013 and 2014 MSR sales. The decrease was partially offset by the receipt of approximately $20 million of previously unrecognized servicing fees previously mentioned. During 2013, total servicing income was $39.1 million and was comprised of $41.9 million in servicing fees and $18.1 million of net hedging results, and was partially offset by the negative impact of run-off on the value of MSR. Other mortgage banking income in 2014 included a $2.0 million loss associated with the deconsolidation of a securitization trust. 2013 included a $2.2 million charge associated with estimated costs for obligations related to the agreement to sell mortgage servicing. The following table shows a detail of FHN’s mortgage banking income for the years ending December 31, 2014 and 2013. 2015 information has been omitted from the table due to immateriality.

 

14

FIRST HORIZON NATIONAL CORPORATION


 

Table 5   Mortgage Banking Noninterest Income

 

 

 

 

 

 

 

   

2014

 

2013

 

Compound
Annual Growth
Rates

 

14/13

 

Noninterest income (thousands):

 

 

 

 

 

 

Origination income

 

 

$

 

-

 

 

 

$

 

771

 

 

 

 

NM

 

Mortgage warehouse valuation (a)

 

 

 

51,785

 

 

 

 

(4,355

)

 

 

 

 

NM

 

Servicing income/(expense):

 

 

 

 

 

 

Servicing fees

 

 

 

21,082

 

 

 

 

41,905

 

 

 

 

(50

)%

 

Change in MSR value – runoff

 

 

 

(833

)

 

 

 

 

(20,937

)

 

 

 

 

96

%

 

Net hedging results (b)

 

 

 

528

 

 

 

 

18,083

 

 

 

 

(97

)%

 

 

Total servicing income

 

 

 

20,777

 

 

 

 

39,051

 

 

 

 

(47

)%

 

Other (c)

 

 

 

(1,305

)

 

 

 

 

(2,192

)

 

 

 

 

40

%

 

 

Total mortgage banking noninterest income

 

 

$

 

71,257

 

 

 

$

 

33,275

 

 

 

 

NM

 

 

Mortgage banking statistics (millions):

 

 

 

 

 

 

Servicing portfolio – owned (first lien mortgage loans) (d)

 

 

$

 

83

 

 

 

$

 

8,512

 

 

 

 

(99

)%

 

 

NM - not meaningful

 

(a)

 

2014 includes $39.7 million in gains on the sale of HFS mortgage loans and $8.2 million of positive Fair Value adjustments primarily related to the non-performing portion of the HFS portfolio.

 

(b)

 

2013 includes an increase in net hedging results reflecting the terms of the mortgage servicing sale agreement.

 

(c)

 

2014 includes a $2.0 million loss associated with the deconsolidation of a securitization trust. 2013 includes a negative adjustment as a result of estimated costs for obligations associated with the agreement to sell servicing.

 

(d)

 

Excludes foreclosed assets. Substantially all mortgage servicing was sold in January 2014.

Securities Gains/Losses

In 2015, FHN recognized net securities gains of $1.4 million compared to $2.9 million and $1.8 million in 2014 and 2013, respectively. The 2015 net gain was largely driven by a $1.8 million gain from an exchange of AFS debt securities, partially offset by $.7 million of other-than-temporary impairment (“OTTI”) adjustments. The 2014 net gain was primarily the result of a $5.6 million gain on the sale of a cost method investment partially offset by $2.0 million of negative fair value adjustments and a $.9 million loss on the sale of an investment. The 2013 net gain was primarily the result of a $3.3 million gain on the sale of a cost method investment, partially offset by a $1.1 million OTTI adjustment.

Insurance Commissions

Insurance commissions are derived from the sale of insurance products, including acting as an independent agent to provide life, long-term care, and disability insurance. Noninterest income from insurance commissions was $2.6 million in 2015, $2.3 million in 2014 and $3.0 million in 2013.

Other Noninterest Income

Other income includes revenues from ATM and interchange fees, electronic banking fees, revenue related to deferred compensation plans (which are mirrored by changes in noninterest expense), gains/(losses) from the extinguishment of debt and various other fees.

All other income and commissions increased $10.4 million to $42.6 million in 2015 primarily due to a $5.8 million gain on the extinguishment of junior subordinated notes underlying $200 million of trust preferred debt and a $4.4 million loss recognized in 2014 on the extinguishment of debt associated with the collapse of two HELOC securitization trusts. These increases were somewhat offset by a decline in deferred compensation income, which is driven by changes in the market balance of the underlying investments.

Other income decreased $8.1 million from 2013 to $32.3 million in 2014 primarily driven by the $4.2 million loss on the extinguishment of debt associated with the collapse of two HELOC securitization trusts previously mentioned and a $2.6 million decrease in deferred compensation income relative to 2013.

 

FIRST HORIZON NATIONAL CORPORATION

15


 

NONINTEREST EXPENSE

Total noninterest expense increased 27 percent, or $221.3 million, to $1.1 billion in 2015, primarily driven by increases in net litigation and regulatory loss accruals coupled with an increase in personnel expenses relative to the prior year. Total noninterest expense decreased 28 percent or $316.0 million to $832.5 million in 2014 from $1.1 billion in 2013, largely driven by declines in expenses associated with the repurchase and foreclosure provision, litigation expenses, and personnel expenses. Table 6 provides noninterest expense detail by category for the last three years with growth rates.

Table 6   Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2015

 

2014

 

2013

 

Compound
Annual Growth
Rates

 

15/14

 

15/13

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

Employee compensation, incentives and benefits

 

 

$

 

511,633

 

 

 

$

 

478,159

 

 

 

$

 

529,041

 

 

 

 

7

%

 

 

 

 

(2

)%

 

Occupancy

 

 

 

51,117

 

 

 

 

54,018

 

 

 

 

50,565

 

 

 

 

(5

)%

 

 

 

 

1

%

 

Computer software

 

 

 

44,724

 

 

 

 

42,931

 

 

 

 

40,327

 

 

 

 

4

%

 

 

 

 

5

%

 

Operations services

 

 

 

39,261

 

 

 

 

35,247

 

 

 

 

35,215

 

 

 

 

11

%

 

 

 

 

6

%

 

Equipment rentals, depreciation, and maintenance

 

 

 

30,864

 

 

 

 

29,964

 

 

 

 

31,738

 

 

 

 

3

%

 

 

 

 

(1

)%

 

Advertising and public relations

 

 

 

19,187

 

 

 

 

18,683

 

 

 

 

18,239

 

 

 

 

3

%

 

 

 

 

3

%

 

Professional fees

 

 

 

18,922

 

 

 

 

23,298

 

 

 

 

23,454

 

 

 

 

(19

)%

 

 

 

 

(10

)%

 

FDIC premium expense

 

 

 

18,027

 

 

 

 

11,464

 

 

 

 

20,156

 

 

 

 

57

%

 

 

 

 

(5

)%

 

Legal fees

 

 

 

16,287

 

 

 

 

20,907

 

 

 

 

29,905

 

 

 

 

(22

)%

 

 

 

 

(26

)%

 

Communications and courier

 

 

 

15,820

 

 

 

 

16,074

 

 

 

 

17,958

 

 

 

 

(2

)%

 

 

 

 

(6

)%

 

Contract employment and outsourcing

 

 

 

14,494

 

 

 

 

19,420

 

 

 

 

35,920

 

 

 

 

(25

)%

 

 

 

 

(36

)%

 

Other insurance and taxes

 

 

 

12,941

 

 

 

 

12,900

 

 

 

 

12,598

 

 

 

 

*

 

 

 

 

1

%

 

Amortization of intangible assets

 

 

 

5,253

 

 

 

 

4,170

 

 

 

 

3,912

 

 

 

 

26

%

 

 

 

 

16

%

 

Foreclosed real estate

 

 

 

2,104

 

 

 

 

2,503

 

 

 

 

4,299

 

 

 

 

(16

)%

 

 

 

 

(30

)%

 

Repurchase and foreclosure provision

 

 

 

-

 

 

 

 

(4,300

)

 

 

 

 

170,000

 

 

 

 

NM

 

 

 

 

NM

 

All other expense:

 

 

 

 

 

 

 

 

 

 

Litigation and regulatory matters

 

 

 

187,607

 

 

 

 

(2,720

)

 

 

 

 

63,654

 

 

 

 

NM

 

 

 

 

72

%

 

Travel and entertainment

 

 

 

9,590

 

 

 

 

9,095

 

 

 

 

8,959

 

 

 

 

5

%

 

 

 

 

3

%

 

Employee training and dues

 

 

 

5,390

 

 

 

 

4,518

 

 

 

 

5,054

 

 

 

 

19

%

 

 

 

 

3

%

 

Customer relations

 

 

 

5,382

 

 

 

 

5,726

 

 

 

 

4,916

 

 

 

 

(6

)%

 

 

 

 

5

%

 

Tax credit investments

 

 

 

4,582

 

 

 

 

2,087

 

 

 

 

2,021

 

 

 

 

NM

 

 

 

 

51

%

 

Supplies

 

 

 

3,827

 

 

 

 

3,745

 

 

 

 

3,800

 

 

 

 

2

%

 

 

 

 

*

 

Miscellaneous loan costs

 

 

 

2,656

 

 

 

 

2,690

 

 

 

 

4,209

 

 

 

 

(1

)%

 

 

 

 

(21

)%

 

Other

 

 

 

34,123

 

 

 

 

41,952

 

 

 

 

32,579

 

 

 

 

(19

)%

 

 

 

 

2

%

 

 

Total all other expense

 

 

 

253,157

 

 

 

 

67,093

 

 

 

 

125,192

 

 

 

 

NM

 

 

 

 

42

%

 

 

Total noninterest expense

 

 

$

 

1,053,791

 

 

 

$

 

832,531

 

 

 

$

 

1,148,519

 

 

 

 

27

%

 

 

 

 

(4

)%

 

 

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

NM - not meaningful

* Amount is less than one percent.

Employee Compensation, Incentives, and Benefits

Employee compensation, incentives, and benefits (personnel expense), which is generally the largest component of noninterest expense, increased 7 percent, or $33.5 million, to $511.6 million in 2015 from $478.2 million in 2014. The increase in personnel expense was driven by increases in variable compensation associated with higher fixed income product sales revenue within FHN’s fixed income operating segment relative to 2014 and higher incentive expense associated with loan growth, strategic hires, and retention within the regional bank. Additionally, higher pension-related costs contributed to the increase in personnel expenses during 2015, as well as several favorable adjustments recognized during 2014 related to employee performance equity awards, employee benefit plans, and deferred compensation BOLI benefits resulting in lower personnel expense in 2014. The increase in pension-related expenses was driven by an increase in the pension liability as a result of a decline in the discount rate and new life expectancy tables used at the December 31, 2014 measurement date. These increases were offset somewhat

 

16

FIRST HORIZON NATIONAL CORPORATION


 

by an $8.3 million gain recognized during third quarter 2015 related to an amendment of certain employee benefit plans and lower deferred compensation expenses relative to 2014.

Personnel expense decreased 10 percent or $50.9 million to $478.2 million in 2014 from $529.0 million in 2013. The decline in personnel expense was largely driven by a decline in variable compensation associated with lower fixed income product sales revenue within FHN’s fixed income operating segment in 2014. Additionally, lower pension-related expenses, deferred compensation expense and several small favorable adjustments related to employee performance equity awards, employee benefit plans, and deferred compensation BOLI benefits in 2014 also contributed to the decline in personnel expense from 2013.

Occupancy

Occupancy expense decreased 5 percent, or $2.9 million, to $51.1 million in 2015 driven by $4.7 million of lease abandonment expense recognized in 2014 related to efficiency initiatives. This decrease was somewhat offset by lower sublease income received in 2015 relative to the prior year as a result of the sale of a building in second quarter 2015. During 2014, occupancy expense increased $3.5 million to $54.0 million from $50.6 million in 2013, which was largely the result of the 2014 lease abandonment expense previously mentioned.

Computer Software

Computer software expense was $44.7 million, $42.9 million, and $40.3 million in 2015, 2014, and 2013. The increase in computer software expense is the result of FHN’s focus on technology-related projects.

Operations Services

Operations services expense increased 11 percent, or $4.0 million, to $39.3 million in 2015, primarily driven by an increase in third party fees and expenses associated with the TAF acquisition. Expenses associated with operations services were flat between 2014 and 2013 at $35.2 million.

Professional Fees

Professional fees decreased $4.4 million to $18.9 million in 2015. The decline in professional fees is related to various consulting projects in 2014 and 2013 compared to 2015, as well as tighter project management and ongoing focus on cost reductions. Professional fees were $23.3 million and $23.5 million in 2014 and 2013, respectively.

FDIC Premium Expense

FDIC premium expense was $18.0 million in 2015, compared to $11.5 million and $20.2 million in 2014 and 2013, respectively. 2014 FDIC premium expense includes the receipt of $3.3 million of FDIC premium refunds.

Legal Fees

Legal fees decreased from $20.9 million in 2014 to $16.3 million in 2015 driven by a reduction in costs related to litigation matters in 2015 relative to the prior year. Legal fees in 2014 included an $8.5 million expense recovery related to a legal matter. Legal fees decreased $9.0 million from $29.9 million in 2013 to $20.9 million in 2014 primarily driven by the legal fee expense recovery.

Contract Employment and Outsourcing

Expenses associated with contract employment and outsourcing decreased $4.9 million to $14.5 million in 2015 primarily driven by elevated expenses in 2014 related to technology-related projects within the regional bank. Contract employment and outsourcing expenses decreased 46 percent or $16.5 million, to $19.4 million in 2014 from $35.9 million in 2013 due to lower mortgage subservicing costs associated with the sales of servicing, but partially offset by increases in contract employment associated with technology-related projects within the regional bank.

 

FIRST HORIZON NATIONAL CORPORATION

17


 

Repurchase and Foreclosure Provision

No repurchase and foreclosure provision expense was recorded in 2015. During 2014, FHN recorded a $4.3 million reversal of repurchase and foreclosure provision related to the settlement of certain repurchase claims. In 2013, FHN recognized $170.0 million of repurchase and foreclosure provision expense stemming from the resolution of certain legacy representations and warranty mortgage loan repurchase obligations to government-sponsored entities.

Other Noninterest Expense

All other expenses were $253.2 million in 2015 compared to $67.1 million in 2014. The increase in expense between 2015 and 2014 was primarily the result of a $190.3 million increase in net loss accruals related to legal matters. Losses from litigation and regulatory matters were $187.6 million in 2015 and primarily relate to $162.5 million of loss accruals recognized in first quarter 2015 associated with the settlement of potential claims related to FHN’s underwriting and origination of FHA-insured mortgage loans and $25.1 million of other loss accruals recognized in 2015. During 2014, FHN recognized $110.9 million of loss accruals related to legal matters, which were more than offset by $113.6 million of expense reversals associated with agreements with insurance companies for the recovery of expenses FHN incurred related to litigation losses in previous periods. During 2015, FHN recognized a $2.8 million impairment of a tax credit investment. However, these expense increases were somewhat offset by a $5.1 million decrease in negative valuation adjustments associated with the derivatives related to prior sales of Visa Class B shares.

All other expenses were $67.1 million and $125.2 million in 2014 and 2013, respectively. The decrease in all other expense was primarily due to a $66.4 million net decline in losses from litigation and regulatory matters as $113.6 million of expense reversals recognized in 2014 more than offset a $47.2 million net increase in loss accruals. In 2014, other expenses include $5.9 million of negative valuation adjustments associated with the derivatives related to prior sales of Visa Class B shares compared to $1.9 million in 2013.

INCOME TAXES

FHN recorded an income tax provision of $10.9 million in 2015, compared to an income tax provision of $84.2 million in 2014. The effective tax rates for 2015 and 2014 were approximately 10 percent and 26 percent, respectively. Since pre-tax income is the most important component in determining the effective tax rate, the comparison of the tax rate from period to period, by itself, will not provide meaningful information unless pre-tax income is fairly consistent. 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, 2015, FHN’s gross DTA (net of a valuation allowance) and gross DTL were $352.6 million and $93.3 million, respectively, resulting in a net DTA of $259.3 million at December 31, 2015, compared with $260.6 million at December 31, 2014.

In order to support the recognition of the DTA, FHN’s management must conclude that the realization of the DTA is more likely than not. FHN evaluates the likelihood of realization of the DTA based on both positive and negative evidence available at the time, including (as appropriate) scheduled reversals of DTLs, projected future taxable income, tax planning strategies, and recent financial performance. Realization is dependent on generating sufficient taxable income prior to the expiration of the carryforwards attributable to the DTA. In projecting future taxable income, FHN incorporates assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates used to manage the underlying business.

 

18

FIRST HORIZON NATIONAL CORPORATION


 

As of December 31, 2015, FHN had federal tax credit carryforwards which will expire in varying amounts between 2030 and 2035, state income tax net operating loss (“NOL”) carryforwards which will expire in varying amounts between 2016 and 2035, and federal capital loss carryforwards, which will expire in 2017. As of December 31, 2015 and 2014, FHN established a valuation allowance of $.3 million and $.1 million, respectively, against its state NOL carryforwards and $40.5 million and $44.4 million, respectively, against its capital loss carryforwards. Management believes it is more likely than not that the benefit of the capital loss carryover to 2016 will not be realized because there is uncertainty as to whether FHN will generate capital gains over the five year carryforward period. FHN’s DTA after valuation allowance was $352.6 million and $346.6 million as of December 31, 2015 and 2014, respectively. Based on current analysis, FHN believes that its ability to realize the remaining DTA is more likely than not. FHN monitors its DTA and the need for a valuation allowance on a quarterly basis. A significant adverse change in FHN’s taxable earnings outlook could result in the need for further valuation allowances. In the event FHN is able to determine that the deferred tax assets are realizable in the future in excess of their net recorded amount, FHN would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.

Changes in tax laws and rates could also affect recorded DTAs and DTLs in the future. Management is not aware of the enactment of any such changes that would have a material effect on the company’s results of operations, cash flows or financial position.

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. With few exceptions, FHN is no longer subject to federal or state and local tax examinations by tax authorities for years before 2012. FHN is currently under audit in several states.

See also Note 15 – Income Taxes for additional information.

STATEMENT OF CONDITION REVIEW – 2015 COMPARED TO 2014

Total period-end assets increased 2 percent to $26.2 billion on December 31, 2015, from $25.7 billion on December 31, 2014. Average assets increased to $25.6 billion in 2015 from $24.0 billion in 2014. The increase in average assets compared to 2014 is primarily attributable to increases in loan balances and other earning assets, somewhat offset by a decline in loans HFS. The increase in period-end assets relative to December 31, 2014 was primarily driven by increases in loan balances and a larger securities portfolio, somewhat offset by declines in interest bearing cash and trading securities.

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 $23.5 billion in 2015 from $21.8 billion in 2014. A more detailed discussion of the major line items follows.

Loans

Period-end loans increased to $17.7 billion as of December 31, 2015 from $16.2 billion on December 31, 2014. Average loans for 2015 were $16.6 billion compared to $15.5 billion for 2014. The increase in average and period-end loan balances was primarily due to loan growth within the regional bank’s commercial portfolios and also loans added through the TAF acquisition in fourth quarter 2015, partially offset by balance declines within FHN’s run-off portfolios within the non-strategic segment.

 

FIRST HORIZON NATIONAL CORPORATION

19


 

Table 7   Average Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2015

 

Percent
of Total

 

2015
Growth
Rate

 

2014

 

Percent
of Total

 

2014
Growth
Rate

 

2013

 

Percent
of Total

 

2013
Growth
Rate

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial, and industrial

 

 

$

 

9,477,376

 

 

 

 

57

%

 

 

 

 

16

%

 

 

 

$

 

8,156,750

 

 

 

 

52

%

 

 

 

 

2

%

 

 

 

$

 

7,972,875

 

 

 

 

51

%

 

 

 

 

*

 

Commercial real estate

 

 

 

1,425,813

 

 

 

 

9

 

 

 

 

17

 

 

 

 

1,223,487

 

 

 

 

8

 

 

 

 

5

 

 

 

 

1,170,618

 

 

 

 

7

 

 

 

 

(10

)%

 

 

   

 

 

   

 

 

Total commercial

 

 

 

10,903,189

 

 

 

 

66

 

 

 

 

16

 

 

 

 

9,380,237

 

 

 

 

60

 

 

 

 

3

 

 

 

 

9,143,493

 

 

 

 

58

 

 

 

 

(2

)

 

 

   

 

 

   

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate (a)

 

 

 

4,879,083

 

 

 

 

29

 

 

 

 

(6

)

 

 

 

 

5,198,304

 

 

 

 

34

 

 

 

 

(6

)

 

 

 

 

5,526,386

 

 

 

 

35

 

 

 

 

(5

)

 

Permanent mortgage (b)

 

 

 

489,190

 

 

 

 

3

 

 

 

 

(18

)

 

 

 

 

594,450

 

 

 

 

4

 

 

 

 

(20

)

 

 

 

 

742,793

 

 

 

 

5

 

 

 

 

(7

)

 

Credit card and other

 

 

 

352,977

 

 

 

 

2

 

 

 

 

1

 

 

 

 

347,981

 

 

 

 

2

 

 

 

 

11

 

 

 

 

313,702

 

 

 

 

2

 

 

 

 

12

 

 

   

 

 

   

 

 

Total retail

 

 

 

5,721,250

 

 

 

 

34

 

 

 

 

(7

)

 

 

 

 

6,140,735

 

 

 

 

40

 

 

 

 

(7

)

 

 

 

 

6,582,881

 

 

 

 

42

 

 

 

 

(5

)

 

 

   

 

 

   

 

 

Total loans, net of unearned

 

 

$

 

16,624,439

 

 

 

 

100

%

 

 

 

 

7

%

 

 

 

$

 

15,520,972

 

 

 

 

100

%

 

 

 

 

(1

)%

 

 

 

$

 

15,726,374

 

 

 

 

100

%

 

 

 

 

(3

)%

 

 

   

 

 

   

 

 

* Amount is less than one percent.

 

(a)

 

2015, 2014, and 2013 include $65.6 million, $140.7 million, and $369.3 million of restricted and secured real estate loans, respectively.

 

(b)

 

2014 and 2013 include $.4 million, and $12.4 million of restricted and secured real estate loans, respectively.

C&I loans are the largest component of the commercial portfolio comprising 87 percent of average commercial loans in 2015 and 2014. C&I loans increased 16 percent, or $1.3 billion, from 2014 due to an increase in the average balance of loans to mortgage companies coupled with net loan growth within several of the regional bank’s portfolios including general commercial, private client, and asset-based lending. Commercial real estate loans increased 17 percent or $202.3 million to $1.4 billion in 2015 because of growth in expansion markets and opportunities with new and existing customers within the regional bank.

Average retail loans declined 7 percent, or $419.5 million, from a year ago to $5.7 billion in 2015. The consumer real estate portfolio (home equity lines and installment loans) declined $319.2 million, to $4.9 billion as the continued wind-down of portfolios within the non-strategic segment outpaced a $181.3 million increase in real estate installment loans from new originations within the regional bank. The permanent mortgage portfolio declined $105.3 million to $489.2 million in 2015 largely driven by run-off of legacy assets. Credit Card and Other increased slightly to $353.0 million in 2015.

 

20

FIRST HORIZON NATIONAL CORPORATION


 

Table 8   Contractual Maturities of Commercial Loans on December 31, 2015

 

 

 

 

 

 

 

 

 

(Period-end)
(Dollars in thousands)

 

Within 1 Year

 

After 1 Year
Within 5 Years

 

After 5 Years

 

Total

 

Commercial, financial, and industrial

 

 

$

 

4,100,597

 

 

 

$

 

4,864,254

 

 

 

$

 

1,471,539

 

 

 

$

 

10,436,390

 

Commercial real estate

 

 

 

434,883

 

 

 

 

1,026,540

 

 

 

 

213,512

 

 

 

 

1,674,935

 

 

Total commercial loans

 

 

$

 

4,535,480

 

 

 

$

 

5,890,794

 

 

 

$

 

1,685,051

 

 

 

$

 

12,111,325

 

 

For maturities over one year:

 

 

 

 

 

 

 

 

Interest rates - floating

 

 

 

 

$

 

4,651,527

 

 

 

$

 

998,427

 

 

 

$

 

5,649,954

 

Interest rates - fixed

 

 

 

 

 

1,239,267

 

 

 

 

686,624

 

 

 

 

1,925,891

 

 

Total maturities over one year

 

 

 

 

$

 

5,890,794

 

 

 

$

 

1,685,051

 

 

 

$

 

7,575,845

 

 

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 period and a 10/20 loan has a 10 year draw period followed by a 20-year principal-and-interest 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 as the prepayment rates for these portfolios typically do not trend consistent with contractual maturities. 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 limited availability of new credit in the marketplace, historically weak performance of the housing market, and a historically low interest rate environment. 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 available-for-sale (“AFS”). FHN utilizes the securities portfolio as a source of income, liquidity and collateral for repurchase agreements, for public funds, and as a tool for managing risk of interest rate movements. Table 9 shows information pertaining to the composition, yields, and contractual maturities of the investment securities portfolio. Period-end investment securities increased 11 percent from $3.6 billion on December 31, 2014 to $3.9 billion on December 31, 2015. Average investment securities were $3.7 billion in 2015 and $3.6 billion in 2014, representing 16 percent of earning assets in 2015 and 2014. The amount of securities purchased for the investment portfolio is largely driven by the desire to protect the value of non-rate sensitive liabilities and equity and maximize yield on FHN’s excess liquidity without negatively affecting future yields while operating in this historically low interest rate environment.

Government agency issued MBS and CMO, and other agencies averaged $3.5 billion and $3.3 billion in 2015 and 2014, respectively. U.S. treasury securities and municipal bonds averaged $13.2 million in 2015 compared to $44.7 million in 2014. Investments in equity securities averaged $183.6 million in 2015 compared with $191.9 million in 2014. A majority of the equity security balances include restricted investments in the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) which averaged over $150 million and $160 million in 2015 and 2014, respectively. On December 31, 2015, AFS investment securities had $5.5 million of net unrealized gains that resulted in an increase in shareholders’ equity of $3.4 million, net of $2.1 million of deferred tax benefits. See Note 3 – Investment Securities for additional detail.

 

FIRST HORIZON NATIONAL CORPORATION

21


 

Table 9   Contractual Maturities of Investment Securities on December 31, 2015 (Amortized Cost)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Period-end)
(Dollars in thousands)

 

Within 1 year

 

After 1 year
After 5 years

 

Within 5 years
Within 10 years

 

After 10 years

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

Government agency issued MBS and CMO (a)

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

65

 

 

 

 

7.01

%

 

 

 

$

 

131,354

 

 

 

 

3.45

%

 

 

 

$

 

3,606,377

 

 

 

 

2.51

%

 

U.S. treasuries

 

 

 

-

 

 

 

 

-

 

 

 

 

100

 

 

 

 

0.98

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Other U.S. government agencies

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

102

 

 

 

 

2.50

 

 

 

 

-

 

 

 

 

-

 

State and municipalities (b)

 

 

 

1,500

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Other (c)

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

184,850

 

 

 

 

4.21

 

 

Total securities available-for-sale

 

 

$

 

1,500

 

 

 

 

-

%

 

 

 

$

 

165

 

 

 

 

3.36

%

 

 

 

$

 

131,456

 

 

 

 

3.45

%

 

 

 

$

 

3,791,227

 

 

 

 

2.59

%

 

 

Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

State and municipalities

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

4,320

 

 

 

 

6.14

%

 

Corporate bonds

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

10,000

 

 

 

 

4.94

 

 

Total securities held-to-maturity

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

14,320

 

 

 

 

5.30

%

 

 

 

(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)

 

Weighted average yields on tax-exempt obligations have been computed by adjusting allowable tax-exempt income to a fully taxable equivalent basis.

 

(c)

 

The amount classified as maturing after 10 years represents equity securities with no stated maturity.

Loans Held-for-Sale

Loans HFS consists of the mortgage warehouse (primarily repurchased government-guaranteed loans), student, small business, and home equity loans. The average balance of loans HFS decreased to $129.0 million in 2015 from $296.1 million in 2014, primarily driven by the third quarter 2014 sales of loans with approximately $315 million in unpaid principal balance. On December 31, 2015 and 2014, loans HFS were $126.3 million and $141.3 million, respectively. The decrease in period-end loans HFS was largely driven by a smaller mortgage warehouse.

Other Earning Assets

All other earning assets include trading securities, securities purchased under agreements to resell, federal funds sold (“FFS”), and interest-bearing deposits with the Federal Reserve Bank (“FRB”) and other financial institutions. All other earning assets averaged $3.0 billion in 2015, a $550.4 million increase from $2.5 billion in 2014. The increase was largely the result of a $249.4 million increase in interest-bearing cash driven primarily by inflow of core deposits during 2015, as well as increases of $176.7 million and $125.3 million in trading securities and securities purchased under agreements to resell (“asset repos”), respectively. Fixed income’s trading inventory fluctuates daily based on customer demand. Asset repos are used in fixed income trading activity and generally correlate with the level of fixed income trading liabilities (short-positions) as securities collateral from repo transactions is used to fulfill trades. All other earning assets were $2.2 billion and $3.5 billion on December 31, 2015 and 2014, respectively. The decrease in other earning assets on a period-end basis was primarily due to higher levels of interest bearing cash on December 31, 2014 driven by an inflow of customer deposits and proceeds from the issuance of senior notes in fourth quarter 2014, and to a lesser extent a decline in fixed income trading inventory levels.

Non-earning assets

Period-end non-earning assets were $2.2 billion on December 31, 2015 and 2014, respectively.

Core Deposits

Average core deposits were $18.4 billion during 2015, up 15 percent from $15.9 billion during 2014. The increase in average core deposits was driven by several factors including an increase in commercial customer deposits, the timing of a new product offering within correspondent banking in late 2014, the addition of deposits associated with the fourth quarter 2014 branch acquisition, and the fourth quarter 2015 TAF acquisition, and FHN’s decision

 

22

FIRST HORIZON NATIONAL CORPORATION


 

to increase deposits in a third party network deposits sweep program. The third party deposits program is an FDIC-insured deposit sweep program where financial institutions can receive unsecured deposits for the long-term (several years) and in larger-dollar increments. The new product offering within correspondent banking previously mentioned resulted in a shift in funding from federal funds purchased (“FFP”) to deposits. Period-end core deposits were $19.5 billion on December 31, 2015, up 11 percent from $17.6 billion on December 31, 2014, and were driven by the same factors that affected average balances, with the exception of the 2014 branch acquisition which did not impact the core deposits variance on a period-end basis.

Short-Term Funds

Average short-term funds (certificates of deposit greater than $100,000, FFP, securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings) decreased 26 percent to $2.4 billion in 2015 from $3.2 billion in 2014. The decrease was primarily driven by declines in FFP and other short-term borrowings. Average FFP, which currently is composed primarily of funds from correspondent banks, was $.7 billion in 2015 compared to $1.1 billion in 2014. FFP fluctuates depending on the amount of excess funding of FHN’s correspondent bank customers. The decrease between 2015 and 2014 was also affected by a new product offering introduced in late fourth quarter 2014 in correspondent banking that resulted in a shift of funds from FFP to deposits. The decline in other short-term borrowings was due to higher FHLB borrowings in 2014 as a result of loan growth and deposit fluctuations. Loan growth in 2015 was largely funded with deposits. On average, short-term purchased funds accounted for 11 percent of FHN’s funding (core deposits plus short-term purchased funds and term borrowings) in 2015 compared to 15 percent in 2014. Period-end short-term funds decreased $.8 billion from $2.8 billion on December 31, 2014 to $1.9 billion on December 31, 2015. The decrease in period-end balances was largely driven by a reduction of FFP which resulted from the shift in funding previously mentioned, as well as a decline in securities sold under agreements to repurchase. See Note 9 - Short Term Borrowings for additional information.

Term Borrowings

Term borrowings include senior and subordinated borrowings with original maturities greater than one year. Term borrowings were $1.3 billion on December 31, 2015 compared to $1.9 billion on December 31, 2014. The decrease in term borrowings primarily relates to $304 million of subordinated notes that matured during first quarter 2015 and $206 million of junior subordinated notes underlying $200 million of trust preferred debt that were called in third quarter 2015. In fourth quarter 2015, FHN issued $500 million of senior capital notes, the proceeds of which were used to repay $500 million of senior capital notes that matured in December 2015. Average term borrowings were $1.6 billion in 2015 and 2014, respectively. See Note 10 – Term Borrowings for additional information.

Other Liabilities

Period-end other liabilities were $.8 billion on December 31, 2015 and 2014, respectively.

CAPITAL – 2015 COMPARED TO 2014

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. Average equity decreased $10.8 million in 2015 relative to 2014 and averaged $2.6 billion in 2015 and 2014. The decrease in average equity was driven by negative changes in the funded status of the pension plans within accumulated other comprehensive income largely due to a decline in the discount rate as of the December 31, 2014 measurement date, as well as decreases in capital surplus and common stock due to share repurchases. These decreases were somewhat offset by the impact of net income recognized since December 31, 2014 on retained earnings and an increase in unrealized gains associated with the AFS securities portfolio within accumulated other comprehensive income. Period-end equity increased $58.0 million from December 31, 2014 to $2.6 billion on December 31, 2015. The increase in period-end equity was primarily due to net income in 2015 and $72.8 million of equity issued related to the TAF acquisition in October 2015, somewhat offset by common and preferred dividends paid, share repurchases, a decrease in unrealized gains within the AFS securities portfolio and an increase of net pension underfunding and the effects of a retiree medical amendment.

In January 2014, FHN’s board of directors approved a share repurchase program which enables FHN to repurchase its common stock in the open market or in privately negotiated transactions, subject to certain

 

FIRST HORIZON NATIONAL CORPORATION

23


 

conditions. In July 2015 the board increased and extended that program. The current program authorizes total purchases of up to $200 million and expires on January 31, 2017. During 2015 and 2014, FHN repurchased $28.4 million and $38.5 million, respectively, of common shares under this program.

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 10   Regulatory Capital and Ratios

 

 

 

 

 

(Dollars in thousands)

 

2015

 

2014 (a)

 

Shareholders’ equity

 

 

$

 

2,344,155

 

 

 

$

 

2,295,537

 

FHN Non-cumulative perpetual preferred

 

 

 

(95,624

)

 

 

 

 

(95,624

)

 

 

Common equity

 

 

$

 

2,248,531

 

 

 

$

 

2,199,913

 

Regulatory adjustments:

 

 

 

 

Goodwill and other intangibles

 

 

 

(165,661

)

 

 

 

 

(141,831

)

 

Net unrealized (gains)/losses on securities

 

 

 

(3,394

)

 

 

 

 

(18,651

)

 

Minimum pension liability

 

 

 

217,586

 

 

 

 

206,827

 

Disallowed servicing assets

 

 

 

-

 

 

 

 

(225

)

 

Disallowed deferred tax assets

 

 

 

(18,404

)

 

 

 

 

(22,862

)

 

Other

 

 

 

(78

)

 

 

 

 

-

 

 

Common equity tier 1 (b)

 

 

$

 

2,278,580

 

 

 

FHN Non-cumulative perpetual preferred

 

 

 

95,624

 

 

 

 

95,624

 

Qualifying noncontrolling interest – FTBNA preferred stock (c)

 

 

 

260,794

 

 

 

 

294,816

 

Qualifying trust preferred (d)

 

 

 

-

 

 

 

 

200,000

 

Other deductions from tier 1 (e)

 

 

 

(62,857

)

 

 

 

 

(108

)

 

 

Tier 1 capital

 

 

$

 

2,572,141

 

 

 

$

 

2,813,503

 

Tier 2 capital

 

 

 

264,574

 

 

 

 

334,833

 

 

Total regulatory capital

 

 

$

 

2,836,715

 

 

 

$

 

3,148,336

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Common Equity Tier 1 (a) (b)

 

 

 

 

 

 

 

 

First Horizon National Corporation

 

 

 

10.45

%

 

 

 

$

 

2,278,580

 

 

 

 

N/A

 

 

 

 

N/A

 

First Tennessee Bank National Association (f)

 

 

 

10.81

 

 

 

 

2,284,646

 

 

 

 

N/A

 

 

 

 

N/A

 

Tier 1 (a)

 

 

 

 

 

 

 

 

First Horizon National Corporation

 

 

 

11.79

 

 

 

 

2,572,141

 

 

 

 

14.46

%

 

 

 

$

 

2,813,503

 

First Tennessee Bank National Association (f)

 

 

 

11.95

 

 

 

 

2,525,912

 

 

 

 

16.12

 

 

 

 

3,107,407

 

Total (a)

 

 

 

 

 

 

 

 

First Horizon National Corporation

 

 

 

13.01

 

 

 

 

2,836,715

 

 

 

 

16.18

 

 

 

 

3,148,336

 

First Tennessee Bank National Association (f)

 

 

 

13.09

 

 

 

 

2,768,625

 

 

 

 

17.86

 

 

 

 

3,441,315

 

Tier 1 Leverage (a)

 

 

 

 

 

 

 

 

First Horizon National Corporation

 

 

 

9.85

 

 

 

 

2,572,141

 

 

 

 

11.43

 

 

 

 

2,813,503

 

First Tennessee Bank National Association (f)

 

 

 

10.06

 

 

 

 

2,525,912

 

 

 

 

12.72

 

 

 

 

3,107,407

 

Tier 1 Common (a) (g) (h)

 

 

 

 

 

 

 

 

First Horizon National Corporation

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

11.43

 

 

 

 

2,223,063

 

Other Capital Ratios

 

 

 

 

 

 

 

 

Total period-end equity to period-end assets

 

 

 

10.08

 

 

 

 

 

 

10.06

 

 

 

Adjusted tangible common equity to risk weighted assets (h)

 

 

 

9.30

 

 

 

 

 

 

10.26

 

 

 

Tangible common equity to tangible assets (h)

 

 

 

7.82

 

 

 

 

 

 

7.90

 

 

 

 

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

 

(a)

 

2014 Regulatory capital balances and ratios are presented as originally reported, consistent with regulatory reporting rules which prohibit the retroactive restatement of prior years’ Reports of Condition and Income due to the adoption of new accounting standards. As a result, 2014 was not restated to reflect the adoption of ASU 2014-01 related to Low Income Housing Tax Credit Investments.

 

24

FIRST HORIZON NATIONAL CORPORATION


 

 

(b)

 

Common equity tier 1 is a measure of a company’s capital position under U.S Basel III capital rules and was first applicable to FHN in 2015.

 

(c)

 

Beginning in 2015, a portion of the FTBNA preferred stock (noncontrolling interest) is disallowed from Tier 1 capital at the consolidated level based on the relative percentage it represents of FTBNA’s excess capital as defined by the Basel III regulations. At December 31, 2015, $34.0 million of the FTBNA’s preferred stock did not qualify as Tier 1 capital for FHNC, but did qualify as Tier 2 capital.

 

(d)

 

Under Basel III, FHN’s trust preferred securities began phasing out of Tier 1 capital in 2015. In 2014, all $200 million of FHN’s trust preferred securities qualified as Tier 1 capital. In third quarter 2015 FHN redeemed its junior subordinated debt, which triggered the redemption of the trust preferred securities.

 

(e)

 

Beginning in 2015, includes additional disallowances under Basel III not present in 2014, including additional DTA disallowances as well as disallowances for investments in the capital of other financial institutions, including our TRUPS loans, which exceed 10 percent of Common equity tier 1.

 

(f)

 

December 31, 2015 ratios and amounts for FTBNA are reported excluding financial subsidiaries, while for the 2014 periods they are reported on a consolidated basis. Excluding financial subsidiaries, FTBNA’s Tier 1 and Total capital ratios were 15.77 percent and 16.59 percent, respectively, at December 31, 2014.

 

(g)

 

Tier 1 Common is a non-GAAP measure of a company’s capital position associated with U.S. capital rules applicable to FHN prior to 2015.

 

(h)

 

Refer to the Non-GAAP to GAAP Reconciliation – Table 34.

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. In 2015, 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, 2015, FHN and FTBNA had sufficient capital to qualify as well-capitalized institutions. The Basel III risk-based capital regulations became effective January 1, 2015 for FHN and FTBNA. Regulatory capital ratios decreased in 2015 relative to 2014 due to the implementation of the Basel III regulations, the impact of net income/(loss) less dividends and share repurchases on retained earnings and increases in risk-weighted assets from growth in earning assets. Additionally, Tier 1 and Total Capital ratios for FHN decreased relative to 2014 as a result of the redemption of the $200 million trust preferred securities. Throughout 2016, capital ratios are expected to remain significantly above well-capitalized standards.

Pursuant to board authority, FHN may repurchase shares of its common stock from time to time and will evaluate the level of capital and take action designed to generate or use capital, as appropriate, for the interests of the shareholders, subject to legal and regulatory restrictions. FHN’s board has not authorized a preferred stock purchase program. The following tables provide information related to securities repurchased by FHN during fourth quarter 2015:

Table 11   Issuer Purchases of Common Stock

Compensation Plan-Related Repurchase Authority:

 

 

 

 

 

 

 

 

 

(Volume in thousands,
except per share data)

 

Total number
of shares
purchased

 

Average price
paid per share

 

Total number of
shares purchased
as part of publicly
announced programs

 

Maximum number
of shares that may
yet be purchased
under the programs

 

2015

 

 

 

 

 

 

 

 

October 1 to October 31

 

 

 

3

 

 

 

$

 

13.83

 

 

 

 

3

 

 

 

 

31,035

 

November 1 to November 30

 

 

 

-

 

 

 

 

N/A

 

 

 

 

-

 

 

 

 

31,035

 

December 1 to December 31

 

 

 

-

 

 

 

 

N/A

 

 

 

 

-

 

 

 

 

31,035

 

 

Total

 

 

 

3

 

 

 

$

 

13.83

 

 

 

 

3

 

 

 

 

N/A – Not applicable
Compensation Plan Programs:

 

 

A consolidated compensation plan share purchase program was announced on August 6, 2004. This action 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, 2015, the maximum number of shares that may be purchased under the program was 31.0 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 2016.

 

FIRST HORIZON NATIONAL CORPORATION

25


 

Other Repurchase Authority:

 

 

 

 

 

 

 

 

 

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

 

Total number
of shares
purchased

 

Average price
paid per share (a)

 

Total number of
shares purchased
as part of publicly
announced programs

 

Maximum approximate
dollar value that may
yet be purchased
under the programs

 

2015

 

 

 

 

 

 

 

 

October 1 to October 31

 

 

 

-

 

 

 

 

N/A

 

 

 

 

-

 

 

 

$

 

145,707

 

November 1 to November 30

 

 

 

425

 

 

 

$

 

14.87

 

 

 

 

425

 

 

 

$

 

139,390

 

December 1 to December 31

 

 

 

428

 

 

 

 

14.60

 

 

 

 

428

 

 

 

$

 

133,146

 

 

Total

 

 

 

853

 

 

 

$

 

14.73

 

 

 

 

853

 

 

 

 

N/A – not applicable

 

(a)

 

Represents total costs including commissions paid.

Other Programs:

 

  On January 22, 2014, FHN announced a $100 million share purchase authority with an expiration date of January 31, 2016. On July 21, 2015, FHN announced a $100 million increase in that authority along with an extension of the expiration date to January 31, 2017. As of December 31, 2015, $66.9 million in purchases had been made under this $200 million authority at an average price per share of $13.13, $13.11 excluding commissions. Purchases may be made in the open market or through privately negotiated transactions and will be subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions.

ASSET QUALITY – TREND ANALYSIS OF 2015 COMPARED TO 2014

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”). Retail loans are composed of consumer real estate; permanent mortgage; and credit card and other. FHN has a concentration of residential real estate loans (30 percent of total loans), the majority of which is in the consumer real estate portfolio (27 percent of total loans). Industry concentrations are discussed under the heading C&I below.

Acquired Loans

On October 2, 2015, FHN completed its acquisition of TAF, and its wholly-owned bank subsidiary TAB. The acquisition included $298.1 million in unpaid principal balance of loans with an estimated fair value of $281.9 million. 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, pre-payment 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.

FHN now has loans designated as purchased credit-impaired (“PCI”) as a result of 2 acquisitions – the acquisition of TAF that closed in October 2015 and the acquisition of a failed bank from the FDIC in 2013. 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, 2015, the unpaid principal balance and the carrying value of PCI loans were $48.7 million and $39.7 million, respectively. PCI loans are allowed to be aggregated and accounted for in pools under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. FHN is accounting for PCI loans acquired from TAF individually as a result of the low volume of PCI loans identified from that acquisition. However, FHN did elect to pool certain loans that were acquired from a failed bank through the FDIC. Loans accounted for in pools were aggregated with composite interest rate and cash flows expected to be collected for the pool. Aggregation into loan pools is based on common risk characteristics that include similar credit risk or risk ratings, and one or more predominant risk characteristics. Generally, FHN

 

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FIRST HORIZON NATIONAL CORPORATION


 

pooled loans with smaller balances and common internal loan grades and portfolio types. Subsequent to the initial accounting at acquisition, each PCI pool is accounted for as a single unit.

PCI loans are not reported as nonperforming/nonaccrual loans due to the accretion of interest income. Additionally, PCI loans that have been pooled and subsequently modified are not reported as troubled debt restructurings since each pool is the unit of measurement. A majority of the PCI portfolio is included in the commercial real estate portfolio segment.

Underwriting Policies and Guidelines

The following is a description of each portfolio as well as general underwriting guidelines for each. As economic and real estate conditions develop, enhancements to underwriting and credit policies and guidelines may be necessary or desirable. Loan policies and guidelines for all portfolios are approved by management risk committees that consist of business line managers and credit administration professionals. The committees strive to ensure that the resulting guidelines address the associated risks and establish reasonable underwriting criteria that appropriately mitigate risk. Policies and guidelines 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 2015, origination and underwriting guidelines and policies were modified such that the total amount of credit FHN could make available to individual commercial borrowers was increased for existing borrowers within the strongest grade categories. Additionally, in 2014, FHN adopted credit underwriting guidelines to enable a limited amount of energy lending within the C&I portfolio and non-recourse lending with the CRE portfolio. 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 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 guarantees 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

 

FIRST HORIZON NATIONAL CORPORATION

27


 

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 $10.4 billion on December 31, 2015, and is comprised of loans used for general business purposes and primarily composed of relationship customers in Tennessee and other selected markets that are managed within the regional bank. 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.

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 transaction sizes over PM authorities. 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, 2015 and 2014. 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 12   C&I Loan Portfolio by Industry

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

December 31, 2015

 

December 31, 2014

 

Amount

 

Percent

 

Amount

 

Percent

 

Industry:

 

 

 

 

 

 

 

 

Finance & insurance

 

 

$

 

2,214,270

 

 

 

 

21

%

 

 

 

$

 

1,977,441

 

 

 

 

22

%

 

Loans to mortgage companies

 

 

 

1,669,908

 

 

 

 

16

 

 

 

 

1,163,018

 

 

 

 

13

 

Wholesale trade

 

 

 

803,993

 

 

 

 

8

 

 

 

 

733,262

 

 

 

 

8

 

Real estate rental & leasing (a)

 

 

 

741,739

 

 

 

 

7

 

 

 

 

556,096

 

 

 

 

6

 

Healthcare

 

 

 

737,243

 

 

 

 

7

 

 

 

 

773,622

 

 

 

 

9

 

Manufacturing

 

 

 

663,720

 

 

 

 

6

 

 

 

 

701,538

 

 

 

 

8

 

Public Administration

 

 

 

609,930

 

 

 

 

6

 

 

 

 

560,274

 

 

 

 

6

 

Retail trade

 

 

 

489,460

 

 

 

 

5

 

 

 

 

508,418

 

 

 

 

6

 

Other (transportation, education, arts, entertainment, etc) (b)

 

 

 

2,506,127

 

 

 

 

24

 

 

 

 

2,033,617

 

 

 

 

22

 

 

Total C&I loan portfolio

 

 

$

 

10,436,390

 

 

 

 

100

%

 

 

 

$

 

9,007,286

 

 

 

 

100

%

 

 

 

(a)

 

Leasing, rental of real estate, equipment, and goods.

 

(b)

 

Industries in this category each comprise less than 5 percent for 2015 and 2014.

As of December 31, 2015, finance and insurance, the largest component, represents 21 percent of the C&I portfolio. The balances of loans to mortgage companies were 16 percent of the C&I portfolio and include volumes related to both home purchase and refinance activity. Loans to mortgage companies include commercial lines of

 

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FIRST HORIZON NATIONAL CORPORATION


 

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. Significant 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. Of FHN’s C&I portfolio (Finance and Insurance plus Loans to Mortgage Companies), 37 percent could be affected by items that uniquely impact the financial services industry. With the exception of “Finance and Insurance” (discussed below) or Loans to Mortgage Companies (discussed above), on December 31, 2015, 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 of the C&I portfolio, which includes bank-related loans and TRUPs (i.e., long term unsecured loans to bank and insurance-related businesses), has been stressed over the last few years but has seen the stronger borrowers stabilize as there have been upgrades and payoffs within the TRUPs and bank-related portfolio. Finance and Insurance also includes approximately $1.1 billion of asset-based lending to consumer financing companies which have accounted for the majority of the growth in the finance and insurance component in 2015.

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. Typically, the terms of these loans include a prepayment option after a 5 year initial term (with possible triggers of early activation), have a scheduled 30 year balloon payoff, and include an option to defer interest for up to 20 consecutive quarters. As of December 31, 2015, one TRUP relationship (bank) was on interest deferral, down from two at year-end 2014.

As of December 31, 2015, the UPB of trust preferred loans totaled $333.9 million ($207.7 million of bank TRUPs and $126.3 million of insurance TRUPs) with the UPB of other bank-related loans totaling $115.5 million. Inclusive of a remaining lower of cost or market (“LOCOM”) valuation allowance on TRUPs of $25.5 million, total reserves (ALLL plus the LOCOM) for TRUPs and other bank-related loans were $26.6 million or 6 percent of outstanding UPB.

C&I Asset Quality Trends

During 2015, performance of the C&I portfolio continued to improve although at a slower pace than in 2014, with continued positive shifts in the risk rating assignments and lower loss rates. The ALLL increased $6.6 million to $73.6 million as of December 31, 2015, and the allowance as a percentage of period-end loans declined to .71 percent in 2015 from .74 percent in 2014. The level of the ALLL as of December 31, 2015 was affected by higher loan balances compared to December 31, 2014 and a continued extension of the loss emergence period in the regional banking segment combined with continued strong asset quality trends and net positive grade migration. Net charge-offs in the C&I portfolio remained at historically low levels in both 2015 and 2014, with net charge-offs decreasing to $9.1 million for 2015 from $10.8 million in 2014. Net charge-offs as a percentage of average loans decreased to .10 percent in 2015 from .13 percent in 2014. Nonperforming C&I loans decreased $6.3 million to $26.3 million as of December 31, 2015. The decrease was mainly because of the third quarter 2015 sale of a TRUP loan that was on interest deferral. Nonperforming loans as a percentage of period-end loans decreased to .25 percent in 2015 from .36 percent in 2014. Accruing loans thirty or more days past due as a percentage of period-end loans increased to .08 percent in 2015 from .05 percent in 2014.

 

FIRST HORIZON NATIONAL CORPORATION

29


 

The following table shows C&I asset quality trends by segment:

Table 13   C&I Asset Quality Trends by Segment

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

December 31

 

2015

 

2014

 

2013

 

2012

 

2011

 

Regional Bank

 

 

 

 

 

 

 

 

 

 

 

Period-end loans

 

 

$

 

10,014,752

 

 

 

$

 

8,553,080

 

 

 

$

 

7,431,430

 

 

 

$

 

8,262,351

 

 

 

$

 

7,465,479

 

Nonperforming loans

 

 

 

22,793

 

 

 

 

20,627

 

 

 

 

43,691

 

 

 

 

70,083

 

 

 

 

88,054

 

 

Allowance for loan losses as of January 1

 

 

$

 

61,998

 

 

 

$

 

72,310

 

 

 

$

 

78,181

 

 

 

$

 

101,373

 

 

 

$

 

188,761

 

Charge-offs

 

 

 

(17,994

)

 

 

 

 

(14,832

)

 

 

 

 

(22,274

)

 

 

 

 

(29,898

)

 

 

 

 

(68,575

)

 

Recoveries

 

 

 

11,969

 

 

 

 

9,003

 

 

 

 

10,167

 

 

 

 

10,622

 

 

 

 

16,180

 

Provision/(provision credit) for loan losses

 

 

 

16,240

 

 

 

 

(4,483

)

 

 

 

 

6,236

 

 

 

 

(3,916

)

 

 

 

 

(34,993

)

 

Allowance for loan losses as of December 31

 

 

$

 

72,213

 

 

 

$

 

61,998

 

 

 

$

 

72,310

 

 

 

$

 

78,181

 

 

 

$

 

101,373

 

 

Accruing restructured loans

 

 

$

 

4,358

 

 

 

$

 

19,214

 

 

 

$

 

8,515

 

 

 

$

 

12,254

 

 

 

$

 

23,812

 

Nonaccruing restructured loans

 

 

 

14,284

 

 

 

 

9,632

 

 

 

 

27,345

 

 

 

 

32,664

 

 

 

 

24,055

 

 

Total troubled debt restructurings

 

 

$

 

18,642

 

 

 

$

 

28,846

 

 

 

$

 

35,860

 

 

 

$

 

44,918

 

 

 

$

 

47,867

 

 

30+ Delinq. % (a)

 

 

 

0.08

%

 

 

 

 

0.05

%

 

 

 

 

0.14

%

 

 

 

 

0.23

%

 

 

 

 

0.16

%

 

NPL %

 

 

 

0.23

%

 

 

 

 

0.24

%

 

 

 

 

0.59

%

 

 

 

 

0.85

%

 

 

 

 

1.18

%

 

Charge-offs %

 

 

 

0.07

%

 

 

 

 

0.08

%

 

 

 

 

0.17

%

 

 

 

 

0.27

%

 

 

 

 

0.78

%

 

Allowance / loans %

 

 

 

0.72

%

 

 

 

 

0.72

%

 

 

 

 

0.97

%

 

 

 

 

0.95

%

 

 

 

 

1.36

%

 

Allowance / charge-offs

 

 

 

11.99

x

 

 

 

 

10.63

x

 

 

 

 

5.72

x

 

 

 

 

3.86

x

 

 

 

 

1.98

x

 

 

Non-Strategic

 

 

 

 

 

 

 

 

 

 

 

Period-end loans

 

 

$

 

421,638

 

 

 

$

 

454,206

 

 

 

$

 

492,146

 

 

 

$

 

534,605

 

 

 

$

 

549,448

 

Nonperforming loans

 

 

 

3,520

 

 

 

 

11,983

 

 

 

 

36,068

 

 

 

 

52,517

 

 

 

 

74,175

 

 

Allowance for loan losses as of January 1

 

 

$

 

5,013

 

 

 

$

 

14,136

 

 

 

$

 

18,010

 

 

 

$

 

29,040

 

 

 

$

 

50,708

 

Charge-offs

 

 

 

(4,412

)

 

 

 

 

(5,660

)

 

 

 

 

(662

)

 

 

 

 

(989

)

 

 

 

 

(8,153

)

 

Recoveries

 

 

 

1,370

 

 

 

 

663

 

 

 

 

2,320

 

 

 

 

529

 

 

 

 

382

 

Provision/(provision credit) for loan losses

 

 

 

(547

)

 

 

 

 

(4,126

)

 

 

 

 

(5,532

)

 

 

 

 

(10,570

)

 

 

 

 

(13,897

)

 

Allowance for loan losses as of December 31

 

 

$

 

1,424

 

 

 

$

 

5,013

 

 

 

$

 

14,136

 

 

 

$

 

18,010

 

 

 

$

 

29,040

 

 

Accruing restructured loans

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

-

 

Nonaccruing restructured loans

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

122

 

 

 

 

865

 

 

Total troubled debt restructurings

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

-

 

 

 

$

 

122

 

 

 

$

 

865

 

 

30+ Delinq. % (a)

 

 

 

0.02

%

 

 

 

 

0.05

%

 

 

 

 

0.06

%

 

 

 

 

-

%

 

 

 

 

-

%

 

NPL %

 

 

 

0.83

%

 

 

 

 

2.64

%

 

 

 

 

7.33

%

 

 

 

 

9.82

%

 

 

 

 

13.50

%

 

Charge-offs %

 

 

 

0.69

%

 

 

 

 

1.07

%

 

 

 

 

NM

 

 

 

 

NM

 

 

 

 

1.57

%

 

Allowance / loans %

 

 

 

0.34

%

 

 

 

 

1.10

%

 

 

 

 

2.87

%

 

 

 

 

3.37

%

 

 

 

 

5.29

%

 

Allowance / charge-offs

 

 

 

0.47

x

 

 

 

 

1.00

x

 

 

 

 

NM

 

 

 

 

NM

 

 

 

 

3.19

x

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Period-end loans

 

 

$

 

10,436,390

 

 

 

$

 

9,007,286

 

 

 

$

 

7,923,576

 

 

 

$

 

8,796,956

 

 

 

$

 

8,014,927

 

Nonperforming loans

 

 

 

26,313

 

 

 

 

32,610

 

 

 

 

79,759

 

 

 

 

122,600

 

 

 

 

162,229

 

 

Allowance for loan losses as of January 1

 

 

$

 

67,011

 

 

 

$

 

86,446

 

 

 

$

 

96,191

 

 

 

$

 

130,413

 

 

 

$

 

239,469

 

Charge-offs

 

 

 

(22,406

)

 

 

 

 

(20,492

)

 

 

 

 

(22,936

)

 

 

 

 

(30,887

)

 

 

 

 

(76,728

)

 

Recoveries

 

 

 

13,339

 

 

 

 

9,666

 

 

 

 

12,487

 

 

 

 

11,151

 

 

 

 

16,562

 

Provision/(provision credit) for loan losses

 

 

 

15,693

 

 

 

 

(8,609

)

 

 

 

 

704

 

 

 

 

(14,486

)

 

 

 

 

(48,890

)

 

Allowance for loan losses as of December 31

 

 

$

 

73,637

 

 

 

$

 

67,011

 

 

 

$

 

86,446

 

 

 

$

 

96,191

 

 

 

$

 

130,413

 

 

Accruing restructured loans

 

 

$

 

4,358

 

 

 

$

 

19,214

 

 

 

$

 

8,515

 

 

 

$

 

12,254

 

 

 

$

 

23,812

 

Nonaccruing restructured loans

 

 

 

14,284

 

 

 

 

9,632

 

 

 

 

27,345

 

 

 

 

32,786

 

 

 

 

24,920

 

 

Total troubled debt restructurings

 

 

$

 

18,642

 

 

 

$

 

28,846

 

 

 

$

 

35,860

 

 

 

$

 

45,040

 

 

 

$

 

48,732

 

 

30+ Delinq. % (a)

 

 

 

0.08

%

 

 

 

 

0.05

%

 

 

 

 

0.13

%

 

 

 

 

0.22

%

 

 

 

 

0.15

%

 

NPL %

 

 

 

0.25

%

 

 

 

 

0.36

%

 

 

 

 

1.01

%

 

 

 

 

1.39

%

 

 

 

 

2.02

%

 

Charge-offs %

 

 

 

0.10

%

 

 

 

 

0.13

%

 

 

 

 

0.13

%

 

 

 

 

0.25

%

 

 

 

 

0.84

%

 

Allowance / loans %

 

 

 

0.71

%

 

 

 

 

0.74

%

 

 

 

 

1.09

%

 

 

 

 

1.09

%

 

 

 

 

1.63

%

 

Allowance / charge-offs

 

 

 

8.12

x

 

 

 

 

6.19

x

 

 

 

 

8.27

x

 

 

 

 

4.87

x

 

 

 

 

2.17

x

 

 

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.

 

30

FIRST HORIZON NATIONAL CORPORATION


 

Commercial Real Estate

The CRE portfolio was $1.7 billion on December 31, 2015. The CRE portfolio includes both financings for commercial construction and nonconstruction loans inclusive of a limited amount of non-recourse lending. This portfolio is segregated between the income producing CRE class which contains loans, 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 (25 percent), retail (25 percent), hospitality (14 percent), office (14 percent), industrial (14 percent), other (5 percent), and land/land development (3 percent). Nearly all of the income CRE class was originated through and continues to be managed by the regional bank.

The residential CRE class includes loans to residential builders and developers for the purpose of constructing single-family detached homes, condominiums, and town homes. Until the recent acquisition of TAB, the active residential CRE lending within the regional banking footprint was minimal with nearly all new originations limited to tactical advances to facilitate workout strategies with existing clients and selected new transactions with “strategic” clients. FHN considers a “strategic” residential CRE borrower as a homebuilder within the regional banking footprint who remained profitable during the down cycle. With this acquisition, the Residential CRE portfolio has increased to $127 million in commitments. FHN’s strategy with the recently added segment of the portfolio is to continue to serve existing customers, but not grow overall exposure materially.

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 10 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 120 percent at inception or stabilization of the project based on loan amortization and a minimum underwriting (interest) rate. Some product types require a higher level of equity, as well as a higher DSCR ranging from 125 percent to 150 percent of the debt service requirement. Variability depends on borrower versus non-borrower tenancy, lease structure, property type, and quality. 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 borrower and guarantor 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 economic 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

Total CRE loans increased $397.2 million or 31 percent in 2015 from the end of 2014. Overall, the portfolio remained stable although the ALLL increased $6.6 million to $25.2 million. All of the increase was within the regional bank. The increase in the ALLL was primarily the result of loan growth as well as the continued extension of the loss emergence period. Delinquencies as a percentage of period-end loans increased 13 basis points to .27 percent at December 31, 2015 from .14 percent at December 31, 2014. Nonperforming loans within the CRE portfolio improved to .52 percent in 2015 from 1.20 percent in 2014. In 2015, net charge-offs were $1.7 million compared to a net recovery of $.4 million in 2014.

 

FIRST HORIZON NATIONAL CORPORATION

31


 

The following table shows CRE asset quality trends by segment:

Table 14   Commercial Real Estate Asset Quality Trends by Segment

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

December 31

 

2015

 

2014

 

2013

 

2012

 

2011

 

Regional Bank

 

 

 

 

 

 

 

 

 

 

 

Period-end loans

 

 

$

 

1,674,871

 

 

 

$

 

1,273,220

 

 

 

$

 

1,124,131

 

 

 

$

 

1,148,153

 

 

 

$

 

1,301,320

 

Nonperforming loans

 

 

 

8,684

 

 

 

 

14,571

 

 

 

 

15,146

 

 

 

 

39,746

 

 

 

 

98,841

 

 

Allowance for loan losses as of January 1

 

 

$

 

18,158

 

 

 

$

 

9,873

 

 

 

$

 

18,385

 

 

 

$

 

48,990

 

 

 

$

 

130,663

 

Charge-offs

 

 

 

(3,441

)

 

 

 

 

(3,331

)

 

 

 

 

(3,021

)

 

 

 

 

(16,375

)

 

 

 

 

(26,169

)

 

Recoveries

 

 

 

1,450

 

 

 

 

3,764

 

 

 

 

2,798

 

 

 

 

1,800

 

 

 

 

5,492

 

Provision/(provision credit) for loan losses

 

 

 

8,992

 

 

 

 

7,852

 

 

 

 

(8,289

)

 

 

 

 

(16,030

)

 

 

 

 

(60,996

)

 

Allowance for loan losses as of December 31

 

 

$

 

25,159

 

 

 

$

 

18,158

 

 

 

$

 

9,873

 

 

 

$

 

18,385

 

 

 

$

 

48,990

 

 

Accruing restructured loans

 

 

$

 

5,039

 

 

 

$

 

4,588

 

 

 

$

 

11,977

 

 

 

$

 

11,477

 

 

 

$

 

15,103

 

Nonaccruing restructured loans

 

 

 

3,969

 

 

 

 

6,947

 

 

 

 

7,861

 

 

 

 

13,236

 

 

 

 

16,470

 

 

Total troubled debt restructurings

 

 

$

 

9,008

 

 

 

$

 

11,535

 

 

 

$

 

19,838

 

 

 

$

 

24,713

 

 

 

$

 

31,573

 

 

30+ Delinq. % (a)

 

 

 

0.27

%

 

 

 

 

0.14

%

 

 

 

 

0.91

%

 

 

 

 

0.40

%

 

 

 

 

0.43

%

 

NPL %

 

 

 

0.52

%

 

 

 

 

1.14

%

 

 

 

 

1.35

%

 

 

 

 

3.46

%

 

 

 

 

7.60

%

 

Charge-offs %

 

 

 

0.14

%

 

 

 

 

NM

 

 

 

 

NM

 

 

 

 

1.08

%

 

 

 

 

1.58

%

 

Allowance / loans %

 

 

 

1.50

%

 

 

 

 

1.43

%

 

 

 

 

0.88

%

 

 

 

 

1.60

%

 

 

 

 

3.76

%

 

Allowance / charge-offs

 

 

 

12.63

x

 

 

 

 

NM

 

 

 

 

NM

 

 

 

 

1.35

x

 

 

 

 

2.23

x

 

 

Non-Strategic

 

 

 

 

 

 

 

 

 

 

 

Period-end loans

 

 

$

 

64

 

 

 

$

 

4,497

 

 

 

$

 

9,148

 

 

 

$

 

20,082

 

 

 

$

 

77,090

 

Nonperforming loans

 

 

 

-

 

 

 

 

785

 

 

 

 

2,955

 

 

 

 

5,824

 

 

 

 

16,124

 

 

Allowance for loan losses as of January 1

 

 

$

 

416

 

 

 

$

 

730

 

 

 

$

 

1,612

 

 

 

$

 

6,596

 

 

 

$

 

24,422

 

Charge-offs

 

 

 

(109

)

 

 

 

 

(410

)

 

 

 

 

(481

)

 

 

 

 

(3,602

)

 

 

 

 

(14,978

)

 

Recoveries

 

 

 

426

 

 

 

 

386

 

 

 

 

1,477

 

 

 

 

2,675

 

 

 

 

5,555

 

Provision/(provision credit) for loan losses

 

 

 

(733

)

 

 

 

 

(290

)

 

 

 

 

(1,878

)

 

 

 

 

(4,057

)

 

 

 

 

(8,403

)

 

Allowance for loan losses as of December 31

 

 

$

 

-

 

 

 

$

 

416

 

 

 

$

 

730

 

 

 

$

 

1,612

 

 

 

$

 

6,596

 

 

Accruing restructured loans

 

 

$

 

-

 

 

 

$

 

3,095

 

 

 

$

 

3,274

 

 

 

$

 

3,921

 

 

 

$

 

4,939

 

Nonaccruing restructured loans

 

 

 

-

 

 

 

 

568

 

 

 

 

906

 

 

 

 

2,606

 

 

 

 

4,669

 

 

Total troubled debt restructurings

 

 

$

 

-

 

 

 

$

 

3,663

 

 

 

$

 

4,180

 

 

 

$

 

6,527

 

 

 

$

 

9,608

 

 

30+ Delinq. % (a)

 

 

 

-

%

 

 

 

 

-

%

 

 

 

 

-

%

 

 

 

 

-

%

 

 

 

 

6.30

%

 

NPL %

 

 

 

-

%

 

 

 

 

17.47

%

 

 

 

 

32.30

%

 

 

 

 

29.00

%

 

 

 

 

20.92

%

 

Charge-offs %

 

 

 

NM

 

 

 

 

0.41

%

 

 

 

 

NM

 

 

 

 

4.10

%

 

 

 

 

5.44

%

 

Allowance / loans %

 

 

 

-

%

 

 

 

 

9.25

%

 

 

 

 

7.98

%

 

 

 

 

8.03

%

 

 

 

 

8.56

%

 

Allowance / charge-offs

 

 

 

NM

 

 

 

 

16.43

x

 

 

 

 

NM

 

 

 

 

0.84

x

 

 

 

 

0.81

x

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Period-end loans

 

 

$

 

1,674,935

 

 

 

$

 

1,277,717

 

 

 

$

 

1,133,279

 

 

 

$

 

1,168,235

 

 

 

$

 

1,378,410

 

Nonperforming loans

 

 

 

8,684

 

 

 

 

15,356

 

 

 

 

18,101

 

 

 

 

45,570

 

 

 

 

114,965

 

 

Allowance for loan losses as of January 1

 

 

$

 

18,574

 

 

 

$

 

10,603

 

 

 

$

 

19,997

 

 

 

$

 

55,586

 

 

 

$

 

155,085

 

Charge-offs

 

 

 

(3,550

)

 

 

 

 

(3,741

)

 

 

 

 

(3,502

)

 

 

 

 

(19,977

)

 

 

 

 

(41,147

)

 

Recoveries

 

 

 

1,876

 

 

 

 

4,150

 

 

 

 

4,275

 

 

 

 

4,475

 

 

 

 

11,047

 

Provision/(provision credit) for loan losses

 

 

 

8,259

 

 

 

 

7,562

 

 

 

 

(10,167

)

 

 

 

 

(20,087

)

 

 

 

 

(69,399

)

 

Allowance for loan losses as of December 31

 

 

$

 

25,159

 

 

 

$

 

18,574

 

 

 

$

 

10,603

 

 

 

$

 

19,997

 

 

 

$

 

55,586

 

 

Accruing restructured loans

 

 

$

 

5,039

 

 

 

$

 

7,683

 

 

 

$

 

15,251

 

 

 

$

 

15,398

 

 

 

$

 

20,042

 

Nonaccruing restructured loans

 

 

 

3,969

 

 

 

 

7,515

 

 

 

 

8,767

 

 

 

 

15,842

 

 

 

 

21,139

 

 

Total troubled debt restructurings

 

 

$

 

9,008

 

 

 

$

 

15,198

 

 

 

$

 

24,018

 

 

 

$

 

31,240

 

 

 

$

 

41,181

 

 

30+ Delinq. % (a)

 

 

 

0.27

%

 

 

 

 

0.14

%

 

 

 

 

0.90

%

 

 

 

 

0.39

%

 

 

 

 

0.76

%

 

NPL %

 

 

 

0.52

%

 

 

 

 

1.20

%

 

 

 

 

1.60

%

 

 

 

 

3.90

%

 

 

 

 

8.34

%

 

Charge-offs %

 

 

 

0.12

%

 

 

 

 

NM

 

 

 

 

NM

 

 

 

 

1.19

%

 

 

 

 

1.96

%

 

Allowance / loans %

 

 

 

1.50

%

 

 

 

 

1.45

%

 

 

 

 

0.94

%

 

 

 

 

1.71

%

 

 

 

 

4.03

%

 

Allowance / charge-offs

 

 

 

15.03

x

 

 

 

 

NM

 

 

 

 

NM

 

 

 

 

1.29

x

 

 

 

 

1.85

x

 

 

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.

 

32

FIRST HORIZON NATIONAL CORPORATION


 

RETAIL LOAN PORTFOLIOS

Consumer Real Estate

The consumer real estate portfolio was $4.8 billion on December 31, 2015, and is primarily composed of home equity lines. The largest geographical concentrations of balances as of December 31, 2015, are in Tennessee (64 percent) and California (7 percent) with no other state representing greater than 3 percent of the portfolio. At December 31, 2015, approximately 62 percent of the consumer real estate portfolio was in a first lien position. At origination, the weighted average FICO score of this portfolio was 747 and refreshed FICO scores averaged 743 as of December 31, 2015. Generally, performance of this portfolio is affected by life events that affect borrowers’ finances, the level of unemployment and home prices.

HELOCs comprise $2.1 billion of the consumer real estate portfolio. FHN’s HELOCs typically have a 5 to10 year draw period followed by a 10 to 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 is fully amortizing, but payment amounts will adjust when variable rates reset to reflect changes in the prime rate.

As of December 31, 2015, approximately 66 percent of FHN’s HELOCs are in the draw period. Based on when draw periods are scheduled to end, it is expected that $.8 billion, or 60 percent of HELOCs currently in the draw period will have entered 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 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 being contacted proactively early in the process.

The following table shows the HELOCs currently in the draw period and expected timing of conversion to the repayment period.

Table 15   HELOC Draw To Repayment Schedule

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

December 31, 2015

 

December 31, 2014

 

Repayment
Amount

 

Percent

 

Repayment
Amount

 

Percent

 

Months remaining in draw period:

 

 

 

 

 

 

 

 

0-12

 

 

$

 

230,662

 

 

 

 

17

%

 

 

 

$

 

386,598

 

 

 

 

21

%

 

13-24

 

 

 

262,788

 

 

 

 

19

 

 

 

 

275,842

 

 

 

 

15

 

25-36

 

 

 

159,599

 

 

 

 

12

 

 

 

 

310,206

 

 

 

 

17

 

37-48

 

 

 

88,629

 

 

 

 

6

 

 

 

 

179,020

 

 

 

 

10

 

49-60

 

 

 

85,624

 

 

 

 

6

 

 

 

 

100,428

 

 

 

 

6

 

>60

 

 

 

549,700

 

 

 

 

40

 

 

 

 

574,665

 

 

 

 

31

 

 

Total

 

 

$

 

1,377,002

 

 

 

 

100

%

 

 

 

$

 

1,826,759

 

 

 

 

100

%

 

 

Underwriting

To obtain a consumer real estate loan, the loan applicant(s) in most cases must first meet a minimum qualifying FICO score. Applicants must also have the financial capacity (or available income) to service the debt by not exceeding a calculated Debt-to-Income (“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. For the majority of loans in this portfolio, underwriting decisions are made through a centralized loan underwriting center. 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 DTI ratios for each consumer real estate

 

FIRST HORIZON NATIONAL CORPORATION

33


 

product. 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 to which the line is tied. 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. If the first mortgage loan is a non-traditional mortgage, the DTI calculation is based on a fully amortizing first mortgage payment. 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 and/or lower account limits in order to mitigate risk of loss to FHN.

Consumer Real Estate Asset Quality Trends

Overall, performance of the consumer real estate portfolio improved in 2015 when compared with 2014. The ALLL decreased $32.4 million from the end of 2014 to $80.6 million in 2015. $29.3 million of the decrease was within the non-strategic segment consistent with a 26 percent decline in loan balances from a year ago. The allowance as a percentage of loans was 1.69 percent as of December 31, 2015 compared to 2.24 percent as of December 31, 2014. The balance of nonperforming loans declined to $111.1 million as of December 31, 2015 from $120.6 million as of December 31, 2014. Loans delinquent 30 or more days and still accruing declined to 1.00 percent of the consumer real estate portfolio in 2015 from 1.10 percent in 2014 primarily due to runoff of loans within the non-strategic segment. The net charge-offs ratio decreased 31 basis points to .13 percent of average loans in 2015. The decline in net charge- offs was related to improved borrower performance as well as stronger underlying collateral values and enhanced recovery efforts.

 

34

FIRST HORIZON NATIONAL CORPORATION


 

The following table shows consumer real estate asset quality trends by segment:

Table 16   Consumer Real Estate Asset Quality Trends by Segment

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

December 31

 

2015

 

2014

 

2013

 

2012

 

2011

 

Regional Bank

 

 

 

 

 

 

 

 

 

 

 

Period-end loans

 

 

$

 

3,515,459

 

 

 

$

 

3,384,746

 

 

 

$

 

3,278,365

 

 

 

$

 

3,121,477

 

 

 

$

 

2,756,312

 

Nonperforming loans

 

 

 

23,935

 

 

 

 

28,953

 

 

 

 

27,939

 

 

 

 

20,991

 

 

 

 

12,052

 

 

Allowance for loan losses as of January 1

 

 

$

 

32,180

 

 

 

$

 

31,474

 

 

 

$

 

25,291

 

 

 

$

 

31,047

 

 

 

$

 

22,270

 

Charge-offs

 

 

 

(8,414

)

 

 

 

 

(10,780

)

 

 

 

 

(10,261

)

 

 

 

 

(21,419

)

 

 

 

 

(21,086

)

 

Recoveries

 

 

 

4,660

 

 

 

 

3,551

 

 

 

 

5,057

 

 

 

 

4,740

 

 

 

 

2,811

 

Provision/(provision credit) for loan losses

 

 

 

682

 

 

 

 

7,935

 

 

 

 

11,387

 

 

 

 

10,923

 

 

 

 

27,052

 

Allowance for loan losses as of December 31

 

 

$

 

29,108

 

 

 

$

 

32,180

 

 

 

$

 

31,474

 

 

 

$

 

25,291

 

 

 

$

 

31,047

 

 

Accruing restructured loans

 

 

$

 

36,912

 

 

 

$

 

40,841

 

 

 

$

 

41,304

 

 

 

$

 

40,425

 

 

 

$

 

30,436

 

Nonaccruing restructured loans

 

 

 

13,723

 

 

 

 

14,229

 

 

 

 

14,636

 

 

 

 

15,102

 

 

 

 

6,556

 

 

Total troubled debt restructurings

 

 

$

 

50,635

 

 

 

$

 

55,070

 

 

 

$

 

55,940

 

 

 

$

 

55,527

 

 

 

$

 

36,992

 

 

30+ Delinq. % (a)

 

 

 

0.52

%

 

 

 

 

0.57

%

 

 

 

 

0.65

%

 

 

 

 

0.65

%

 

 

 

 

1.00

%

 

NPL %

 

 

 

0.68

%

 

 

 

 

0.86

%

 

 

 

 

0.85

%

 

 

 

 

0.67

%

 

 

 

 

0.44

%

 

Charge-offs %

 

 

 

0.11

%

 

 

 

 

0.22

%

 

 

 

 

0.16

%

 

 

 

 

0.56

%

 

 

 

 

0.69

%

 

Allowance / loans %

 

 

 

0.83

%

 

 

 

 

0.95

%

 

 

 

 

0.96

%

 

 

 

 

0.81

%

 

 

 

 

1.13

%

 

Allowance / charge-offs

 

 

 

7.76

x

 

 

 

 

4.45

x

 

 

 

 

6.05

x

 

 

 

 

1.52

x

 

 

 

 

1.70

x

 

 

Non-Strategic

 

 

 

 

 

 

 

 

 

 

 

Period-end loans

 

 

$

 

1,251,059

 

 

 

$

 

1,663,325

 

 

 

$

 

2,055,006

 

 

 

$

 

2,567,226

 

 

 

$

 

3,135,234

 

Nonperforming loans

 

 

 

87,157

 

 

 

 

91,679

 

 

 

 

89,659

 

 

 

 

43,454

 

 

 

 

26,724

 

 

Allowance for loan losses as of January 1

 

 

$

 

80,831

 

 

 

$

 

95,311

 

 

 

$

 

103,658

 

 

 

$

 

134,030

 

 

 

$

 

170,080

 

Charge-offs

 

 

 

(21,654

)

 

 

 

 

(34,611

)

 

 

 

 

(63,381

)

 

 

 

 

(126,499

)

 

 

 

 

(143,836

)

 

Recoveries

 

 

 

19,235

 

 

 

 

19,273

 

 

 

 

16,303

 

 

 

 

13,030

 

 

 

 

13,208

 

Provision/(provision credit) for loan losses

 

 

 

(26,906

)

 

 

 

 

858

 

 

 

 

38,731

 

 

 

 

83,097

 

 

 

 

94,578

 

Allowance for loan losses as of December 31

 

 

$

 

51,506

 

 

 

$

 

80,831

 

 

 

$

 

95,311

 

 

 

$

 

103,658

 

 

 

$

 

134,030

 

 

Accruing restructured loans

 

 

$

 

67,942

 

 

 

$

 

71,389

 

 

 

$

 

83,459

 

 

 

$

 

77,488

 

 

 

$

 

65,250

 

Nonaccruing restructured loans

 

 

 

47,107

 

 

 

 

46,766

 

 

 

 

31,023

 

 

 

 

26,985

 

 

 

 

9,988

 

 

Total troubled debt restructurings

 

 

$

 

115,049

 

 

 

$

 

118,155

 

 

 

$

 

114,482

 

 

 

$

 

104,473

 

 

 

$

 

75,238

 

 

30+ Delinq. % (a)

 

 

 

2.34

%

 

 

 

 

2.17

%

 

 

 

 

1.89

%

 

 

 

 

2.23

%

 

 

 

 

2.58

%

 

NPL %

 

 

 

6.97

%

 

 

 

 

5.51

%

 

 

 

 

4.36

%

 

 

 

 

1.69

%

 

 

 

 

0.85

%

 

Charge-offs %

 

 

 

0.17

%

 

 

 

 

0.82

%

 

 

 

 

2.04

%

 

 

 

 

3.96

%

 

 

 

 

3.82

%

 

Allowance / loans %

 

 

 

4.12

%

 

 

 

 

4.86

%

 

 

 

 

4.64

%

 

 

 

&nbs