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Section 1: 10-Q (FHN Q1 2018 10-Q)

Document


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________  
FORM 10-Q
 ______________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to                     
Commission File Number 001-15185
____________________________________ 
First Horizon National Corporation
(Exact name of registrant as specified in its charter)
 ______________________________________  
TN
 
62-0803242
(State or other jurisdiction
incorporation of organization)
 
(IRS Employer
Identification No.)
 
 
165 MADISON AVENUE
MEMPHIS, TENNESSEE
 
38103
(Address of principal executive office)
 
(Zip Code)
(Registrant’s telephone number, including area code) (901) 523-4444
______________________________________ 
(Former name, former address and former fiscal year, if changed since last report)
 ______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     ☒  Yes    ☐  No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
  
Accelerated filer
 
Non-accelerated filer
 
 
 
 
 
 
 
 
 
 
Smaller reporting company
  
Emerging Growth Company
 
(Do not check if a smaller reporting company)
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
Class
  
Outstanding on March 31, 2018
Common Stock, $.625 par value
  
327,193,702
 
 
 
 
 




Table of Contents
FIRST HORIZON NATIONAL CORPORATION
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I.
FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
 
 
 
 
 
 
 
 
 
This financial information reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of the financial condition and results of operations for the interim periods presented.


1



CONSOLIDATED CONDENSED STATEMENTS OF CONDITION
 
 
First Horizon National Corporation
 
 
(Unaudited)
 
December 31
 
 
March 31
 
(Dollars in thousands, except per share amounts)
 
2018
 
2017
Assets:
 
 
 
 
Cash and due from banks
 
$
459,820

 
$
639,073

Federal funds sold
 
62,541

 
87,364

Securities purchased under agreements to resell (Note 15)
 
910,670

 
725,609

Total cash and cash equivalents
 
1,433,031

 
1,452,046

Interest-bearing cash
 
309,351

 
1,185,600

Trading securities
 
1,759,430

 
1,416,345

Loans held-for-sale (a)
 
770,412

 
699,377

Securities available-for-sale (Note 3)
 
4,826,155

 
5,170,255

Securities held-to-maturity (Note 3)
 
10,000

 
10,000

Loans, net of unearned income (Note 4) (b)
 
27,249,793

 
27,658,929

Less: Allowance for loan losses (Note 5)
 
187,194

 
189,555

Total net loans
 
27,062,599

 
27,469,374

Goodwill (Note 6)
 
1,398,501

 
1,386,853

Other intangible assets, net (Note 6)
 
174,415

 
184,389

Fixed income receivables
 
94,036

 
68,693

Premises and equipment, net (March 31, 2018 and December 31, 2017 include $43.2 million and $53.2 million, respectively, classified as held-for-sale)
 
531,981

 
532,251

Other real estate owned (“OREO”) (c)
 
35,715

 
43,382

Derivative assets (Note 14)
 
114,348

 
81,634

Other assets
 
1,943,221

 
1,723,189

Total assets
 
$
40,463,195

 
$
41,423,388

Liabilities and equity:
 
 
 
 
Deposits:
 
 
 
 
Savings (December 31, 2017 includes $22.6 million classified as held-for-sale)
 
$
11,283,551

 
$
10,872,665

Time deposits, net (December 31, 2017 includes $8.0 million classified as held-for-sale)
 
3,328,732

 
3,322,921

Other interest-bearing deposits
 
8,225,822

 
8,401,773

Interest-bearing
 
22,838,105

 
22,597,359

Noninterest-bearing (December 31, 2017 includes $4.8 million classified as held-for-sale)
 
7,980,846

 
8,023,003

Total deposits
 
30,818,951

 
30,620,362

Federal funds purchased
 
392,714

 
399,820

Securities sold under agreements to repurchase (Note 15)
 
672,154

 
656,602

Trading liabilities
 
827,362

 
638,515

Other short-term borrowings
 
1,332,141

 
2,626,213

Term borrowings
 
1,214,967

 
1,218,097

Fixed income payables
 
6,167

 
48,996

Derivative liabilities (Note 14)
 
121,394

 
85,061

Other liabilities
 
504,817

 
549,234

Total liabilities
 
35,890,667

 
36,842,900

Equity:
 
 
 
 
First Horizon National Corporation Shareholders’ Equity:
 
 
 
 
Preferred stock - Series A, non-cumulative perpetual, no par value, liquidation preference of $100,000 per share - (shares authorized - 1,000; shares issued - 1,000 on March 31, 2018 and December 31, 2017)
 
95,624

 
95,624

Common stock - $.625 par value (shares authorized - 400,000,000; shares issued - 327,193,702 on March 31, 2018 and 326,736,214 on December 31, 2017)
 
204,496

 
204,211

Capital surplus
 
3,155,407

 
3,147,613

Undivided profits
 
1,211,655

 
1,160,434

Accumulated other comprehensive loss, net (Note 8)
 
(390,085
)
 
(322,825
)
Total First Horizon National Corporation Shareholders’ Equity
 
4,277,097

 
4,285,057

Noncontrolling interest
 
295,431

 
295,431

Total equity
 
4,572,528

 
4,580,488

Total liabilities and equity
 
$
40,463,195

 
$
41,423,388

See accompanying notes to consolidated condensed financial statements.
 
(a)
March 31, 2018 and December 31, 2017 include $9.1 million and $11.7 million, respectively, of held-for-sale consumer mortgage loans secured by residential real estate in process of foreclosure.
(b)
March 31, 2018 and December 31, 2017 include $21.5 million and $22.7 million, respectively, of held-to-maturity consumer mortgage loans secured by residential real estate in process of foreclosure.
(c)
March 31, 2018 and December 31, 2017 include $6.4 million and $6.3 million, respectively, of foreclosed residential real estate.

2



CONSOLIDATED CONDENSED STATEMENTS OF INCOME
 
First Horizon National Corporation
 
Three Months Ended
March 31
(Dollars and shares in thousands except per share data, unless otherwise noted) (Unaudited)
2018
 
2017
Interest income:
 
 
 
Interest and fees on loans
$
299,493

 
$
180,464

Interest on investment securities available-for-sale
32,847

 
25,635

Interest on investment securities held-to-maturity
131

 
197

Interest on loans held-for-sale
12,144

 
1,283

Interest on trading securities
14,408

 
6,353

Interest on other earning assets
4,332

 
4,879

Total interest income
363,355

 
218,811

Interest expense:
 
 
 
Interest on deposits:
 
 
 
Savings
14,900

 
9,210

Time deposits
9,525

 
2,833

Other interest-bearing deposits
10,608

 
4,143

Interest on trading liabilities
5,124

 
3,781

Interest on short-term borrowings
10,042

 
1,392

Interest on term borrowings
11,983

 
7,744

Total interest expense
62,182

 
29,103

Net interest income
301,173

 
189,708

Provision/(provision credit) for loan losses
(1,000
)
 
(1,000
)
Net interest income after provision/(provision credit) for loan losses
302,173

 
190,708

Noninterest income:
 
 
 
Fixed income
45,506

 
50,678

Deposit transactions and cash management
31,162

 
24,565

Brokerage, management fees and commissions
13,483

 
11,906

Bankcard income
11,267

 
5,455

Trust services and investment management
7,277

 
6,653

Bank-owned life insurance
3,993

 
3,247

Debt securities gains/(losses), net (Note 3 and Note 8)
52

 
44

Equity securities gains/(losses), net (Note 3)
34

 

All other income and commissions (Note 7)
23,243

 
14,391

Total noninterest income
136,017

 
116,939

Adjusted gross income after provision/(provision credit) for loan losses
438,190

 
307,647

Noninterest expense:
 
 
 
Employee compensation, incentives, and benefits
171,254

 
134,494

Occupancy
20,451

 
12,340

Operations services

15,561

 
10,875

Computer software
15,132

 
10,799

Professional fees
12,272

 
4,746

Equipment rentals, depreciation, and maintenance
10,018

 
6,351

FDIC premium expense

8,614

 
5,739

Communications and courier
8,232

 
3,800

Amortization of intangible assets
6,474

 
1,232

Contract employment and outsourcing

4,053

 
2,958

Advertising and public relations
3,599

 
4,601

Legal fees
2,345

 
5,283

Repurchase and foreclosure provision/(provision credit)
(72
)
 
(238
)
All other expense (Note 7)
35,332

 
19,225

Total noninterest expense
313,265

 
222,205

Income/(loss) before income taxes
124,925

 
85,442

Provision/(benefit) for income taxes
29,931

 
27,054

Net income/(loss)
$
94,994

 
$
58,388

Net income attributable to noncontrolling interest
2,820

 
2,820

Net income/(loss) attributable to controlling interest
$
92,174

 
$
55,568

Preferred stock dividends
1,550

 
1,550

Net income/(loss) available to common shareholders
$
90,624

 
$
54,018

Basic earnings/(loss) per share (Note 9)
$
0.28

 
$
0.23

Diluted earnings/(loss) per share (Note 9)
$
0.27

 
$
0.23

Weighted average common shares (Note 9)
326,489

 
233,076

Diluted average common shares (Note 9)
330,344

 
236,855

Cash dividends declared per common share
$
0.12

 
$
0.09

Certain previously reported amounts have been revised to reflect the retroactive effect of the adoption of ASU 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” See Note 1 - Financial Information for additional information.
See accompanying notes to consolidated condensed financial statements.

3



CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 
 
First Horizon National Corporation
 
Three Months Ended
March 31
(Dollars in thousands) (Unaudited)
2018
 
2017
Net income/(loss)
$
94,994

 
$
58,388

Other comprehensive income/(loss), net of tax:
 
 
 
Net unrealized gains/(losses) on securities available-for-sale
(59,543
)
 
(1,563
)
Net unrealized gains/(losses) on cash flow hedges
(8,793
)
 
(1,914
)
Net unrealized gains/(losses) on pension and other postretirement plans
1,287

 
1,173

Other comprehensive income/(loss)
(67,049
)
 
(2,304
)
Comprehensive income
27,945

 
56,084

Comprehensive income attributable to noncontrolling interest
2,820

 
2,820

Comprehensive income attributable to controlling interest
$
25,125

 
$
53,264

Income tax expense/(benefit) of items included in Other comprehensive income:
 
 
 
Net unrealized gains/(losses) on securities available-for-sale
$
(19,543
)
 
$
(970
)
Net unrealized gains/(losses) on cash flow hedges
(2,887
)
 
(1,187
)
Net unrealized gains/(losses) on pension and other postretirement plans
422

 
727

See accompanying notes to consolidated condensed financial statements.


4



CONSOLIDATED CONDENSED STATEMENTS OF EQUITY 
 
 
First Horizon National Corporation
 
 
2018
 
2017
(Dollars in thousands except per share data) (Unaudited)
 
Controlling
Interest
 
Noncontrolling
Interest
 
Total
 
Controlling
Interest
 
Noncontrolling
Interest
 
Total
Balance, January 1
 
$
4,285,057

 
$
295,431

 
$
4,580,488

 
$
2,409,653

 
$
295,431

 
$
2,705,084

Adjustment to reflect adoption of ASU 2017-12
 
67

 

 
67

 

 

 

Beginning balance, as adjusted
 
$
4,285,124

 
$
295,431

 
$
4,580,555

 
$
2,409,653

 
$
295,431

 
$
2,705,084

Net income/(loss)
 
92,174

 
2,820

 
94,994

 
55,568

 
2,820

 
58,388

Other comprehensive income/(loss) (a)
 
(67,049
)
 

 
(67,049
)
 
(2,304
)
 

 
(2,304
)
Comprehensive income/(loss)
 
25,125

 
2,820

 
27,945

 
53,264

 
2,820

 
56,084

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock ($1,550 per share for the three months ended March 31, 2018 and 2017)
 
(1,550
)
 

 
(1,550
)
 
(1,550
)
 

 
(1,550
)
Common stock ($.12 and $.09 per share for the three months ended March 31, 2018 and 2017, respectively)
 
(39,680
)
 

 
(39,680
)
 
(21,354
)
 

 
(21,354
)
Common stock repurchased
 
(2,185
)
 

 
(2,185
)
 
(2,016
)
 

 
(2,016
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
Stock options and restricted stock - equity awards
 
4,375

 

 
4,375

 
2,003

 

 
2,003

Equity acquisition adjustment
 
(18
)
 

 
(18
)
 

 

 

Stock-based compensation expense
 
5,906

 

 
5,906

 
5,029

 

 
5,029

Dividends declared - noncontrolling interest of subsidiary preferred stock
 

 
(2,820
)
 
(2,820
)
 

 
(2,820
)
 
(2,820
)
Balance, March 31
 
$
4,277,097

 
$
295,431

 
$
4,572,528

 
$
2,445,029

 
$
295,431

 
$
2,740,460

See accompanying notes to consolidated condensed financial statements.
 
(a)
Due to the nature of the preferred stock issued by FHN and its subsidiaries, all components of Other comprehensive income/(loss) have been attributed solely to FHN as the controlling interest holder.


5



CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 
 
 
First Horizon National Corporation
 
 
Three months ended March 31
(Dollars in thousands) (Unaudited)
 
2018
 
2017
Operating Activities
 
 
 
 
Net income/(loss)
 
$
94,994

 
$
58,388

Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities:
 
 
 
 
Provision/(provision credit) for loan losses
 
(1,000
)
 
(1,000
)
Provision/(benefit) for deferred income taxes
 
20,309

 
6,920

Depreciation and amortization of premises and equipment
 
11,978

 
8,151

Amortization of intangible assets
 
6,474

 
1,232

Net other amortization and accretion
 
(1,613
)
 
6,207

Net (increase)/decrease in derivatives
 
(14,549
)
 
(16,864
)
Fair value adjustment on interest-only strips
 
(1,592
)
 

Repurchase and foreclosure provision/(provision credit)
 

 
(238
)
(Gains)/losses and write-downs on OREO, net
 
216

 
156

Litigation and regulatory matters
 
671

 
(294
)
Stock-based compensation expense
 
5,906

 
5,029

Equity securities (gains)/losses, net
 
(34
)
 

Debt securities (gains)/losses, net
 
(52
)
 
(44
)
Net (gains)/losses on sale/disposal of fixed assets
 
(3,202
)
 
36

Loans held-for-sale:
 
 
 
 
Purchases and originations
 
(574,735
)
 
(47,445
)
Gross proceeds from settlements and sales
 
152,209

 
54,046

(Gain)/loss due to fair value adjustments and other
 
3,651

 
(809
)
Net (increase)/decrease in:
 
 
 
 
Trading securities
 
(9,843
)
 
(270,495
)
Fixed income receivables
 
(25,343
)
 
(110,904
)
Interest receivable
 
(2,990
)
 
1,055

Other assets
 
44,468

 
16,592

Net increase/(decrease) in:
 
 
 
 
Trading liabilities
 
188,847

 
286,342

Fixed income payables
 
(42,829
)
 
114

Interest payable
 
10,030

 
7,360

Other liabilities
 
(66,349
)
 
(75,014
)
Total adjustments
 
(299,372
)
 
(129,867
)
Net cash provided/(used) by operating activities
 
(204,378
)
 
(71,479
)
Investing Activities
 
 
 
 
Available-for-sale securities:
 
 
 
 
Sales
 
13,104

 
44

Maturities
 
152,800

 
135,046

Purchases
 
(159,951
)
 
(135,676
)
Premises and equipment:
 
 
 
 
Sales
 
2,619

 
18

Purchases
 
(18,020
)
 
(9,318
)
Proceeds from sales of OREO
 
10,527

 
2,135

Proceeds from BOLI
 
494

 
281

Net (increase)/decrease in:
 
 
 
 
Loans
 
418,174

 
499,796

Interests retained from securitizations classified as trading securities
 
241

 
256

Interest-bearing cash
 
876,249

 
(1,046,563
)
Cash paid related to divestitures
 
(27,599
)
 

Net cash provided/(used) by investing activities
 
1,268,638

 
(553,981
)
Financing Activities
 
 
 
 
Common stock:
 
 
 
 
Stock options exercised
 
4,327

 
2,045

Cash dividends paid
 
(21,353
)
 
(16,465
)
Repurchase of shares
 
(2,184
)
 
(2,016
)
Equity acquisition adjustment
 
(18
)
 

Cash dividends paid - preferred stock - noncontrolling interest
 
(2,883
)
 
(2,852
)
Cash dividends paid - Series A preferred stock
 
(1,550
)
 
(1,550
)

6



Term borrowings:
 
 
 
 
Payments/maturities
 
(2,625
)
 
(3,306
)
Increases in restricted and secured term borrowings
 
159

 

Net increase/(decrease) in:
 
 
 
 
Deposits
 
228,478

 
807,641

Short-term borrowings
 
(1,285,626
)
 
40,176

Net cash provided/(used) by financing activities
 
(1,083,275
)
 
823,673

Net increase/(decrease) in cash and cash equivalents
 
(19,015
)
 
198,213

Cash and cash equivalents at beginning of period
 
1,452,046

 
1,037,794

Cash and cash equivalents at end of period
 
$
1,433,031

 
$
1,236,007

Supplemental Disclosures
 
 
 
 
Total interest paid
 
$
51,418

 
$
21,478

Total taxes paid
 
4,066

 
951

Total taxes refunded
 
90

 
8,166

Transfer from loans to OREO
 
3,076

 
1,198

Transfer from loans HFS to trading securities
 
333,483

 

Certain previously reported amounts have been reclassified to agree with current presentation.
See accompanying notes to consolidated condensed financial statements.
 



7



Notes to the Consolidated Condensed Financial Statements (Unaudited)

Note 1 – Financial Information

Basis of Accounting. The unaudited interim consolidated condensed financial statements of First Horizon National Corporation (“FHN”), including its subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which it operates. This preparation requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions are based on information available as of the date of the financial statements and could differ from actual results. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented. These adjustments are of a normal recurring nature unless otherwise disclosed in this Quarterly Report on Form 10-Q. The operating results for the interim 2018 period are not necessarily indicative of the results that may be expected going forward. For further information, refer to the audited consolidated financial statements in Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2017.

Revenues. Revenue is recognized when the performance obligations under the terms of a contract with a customer are satisfied in an amount that reflects the consideration FHN expects to be entitled. FHN derives a significant portion of its revenues from fee-based services. Noninterest income from transaction-based fees is generally recognized immediately upon completion of the transaction. Noninterest income from service-based fees is generally recognized over the period in which FHN provides the service. Any services performed over time generally require that FHN render services each period and therefore FHN measures progress in completing these services based upon the passage of time and recognizes revenue as invoiced.

Following is a discussion of FHN's key revenues within the scope of Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers", and all related amendments, except as noted.

Fixed Income. Fixed income includes fixed income securities sales, trading, and strategies, loan sales and derivative sales which are not within the scope of revenue from contracts with customers. Fixed income also includes investment banking fees earned for services related to underwriting debt securities and performing portfolio advisory services. FHN's performance obligation for underwriting services is satisfied on the trade date while advisory services is satisfied over time.

Deposit Transactions and Cash Management. Deposit transactions and cash management activities include fees for services related to consumer and commercial deposit products (such as service charges on checking accounts), cash management products and services such as electronic transaction processing (Automated Clearing House and Electronic Data Interchange), account reconciliation services, cash vault services, lockbox processing, and information reporting to large corporate clients. FHN's obligation for transaction-based services is satisfied at the time of the transaction when the service is delivered while FHN's obligation for service based fees is satisfied over the course of each month.

Brokerage, Management Fees and Commissions. Brokerage, management fees and commissions include fees for portfolio management, trade commissions, and annuity and mutual fund sales. Asset-based management fees are charged based on the market value of the client’s assets. The services associated with these revenues, which include investment advice and active management of client assets are generally performed and recognized over a month or quarter. Transactional revenues are based on the size and number of transactions executed at the client’s direction and are generally recognized on the trade date.
Trust Services and Investment Management. Trust services and investment management fees include investment management, personal trust, employee benefits, and custodial trust services. Obligations for trust services are generally satisfied over time but may be satisfied at points in time for certain activities that are transactional in nature.

Bankcard Income. Bankcard income includes credit interchange and network revenues and various card-related fees. Interchange income is recognized concurrently with the delivery of services on a daily basis. Card-related fees such as late fees, currency conversion, and cash advance fees are loan-related and excluded from the scope of ASU 2014-09.

Contract Balances. As of March 31, 2018, accounts receivable related to products and services on non-interest income were $7.7 million. For the three months ended March 31, 2018, FHN had no material impairment losses on non-interest accounts receivable and there were no material contract assets, contract liabilities or deferred contract costs recorded on the Consolidated Condensed Statement of Condition as of March 31, 2018.

Transaction Price Allocated to Remaining Performance Obligations. For the three months ended March 31, 2018, revenue recognized from performance obligations related to prior periods was not material.

8



Note 1 – Financial Information (Continued)

Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less and contracts where revenue is recognized as invoiced, is not material.
Refer to Note 12 - Business Segment Information for a reconciliation of disaggregated revenue by major product line and reportable segment.

Debt Investment Securities. Available-for-sale ("AFS") and held-to-maturity (“HTM”) securities are reviewed quarterly for possible other-than-temporary impairment (“OTTI”). The review includes an analysis of the facts and circumstances of each individual investment such as the degree of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and FHN’s intent and ability to hold the security. Debt securities that may be sold prior to maturity are classified as AFS and are carried at fair value. The unrealized gains and losses on debt securities AFS, including securities for which no credit impairment exists, are excluded from earnings and are reported, net of tax, as a component of other comprehensive income within shareholders’ equity and the Statements of Comprehensive Income. Debt securities which management has the intent and ability to hold to maturity are reported at amortized cost. Interest-only strips that are classified as securities AFS are valued at elected fair value. See Note 16 - Fair Value of Assets and Liabilities for additional information.
Realized gains and losses for investment securities are determined by the specific identification method and reported in noninterest income. Declines in value judged to be other-than-temporary based on FHN’s analysis of the facts and circumstances related to an individual investment, including securities that FHN has the intent to sell, are also determined by the specific identification method. For HTM debt securities, OTTI recognized is typically credit-related and is reported in noninterest income. For impaired AFS debt securities that FHN does not intend to sell and will not be required to sell prior to recovery but for which credit losses exist, the OTTI recognized is separated between the total impairment related to credit losses which is reported in noninterest income, and the impairment related to all other factors which is excluded from earnings and reported, net of tax, as a component of other comprehensive income within shareholders’ equity and the Statements of Comprehensive Income.
Equity Investment Securities. Equity securities were classified as AFS through December 31, 2017. Subsequently, all equity securities are classified in Other assets.
National banks chartered by the federal government are, by law, members of the Federal Reserve System. Each member bank is required to own stock in its regional Federal Reserve Bank ("FRB"). Given this requirement, FRB stock may not be sold, traded, or pledged as collateral for loans. Membership in the Federal Home Loan Bank (“FHLB”) network requires ownership of capital stock. Member banks are entitled to borrow funds from the FHLB and are required to pledge mortgage loans as collateral. Investments in the FHLB are non-transferable and, generally, membership is maintained primarily to provide a source of liquidity as needed. FRB and FHLB stock are recorded at cost and are subject to impairment reviews.
Other equity investments primarily consist of mutual funds which are marked to fair value through earnings. Smaller balances of equity investments without a readily determinable fair value, including FHN's holdings of Visa Class B Common Shares, are recorded at cost minus impairment with adjustments through earnings for observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Summary of Accounting Changes.
Effective January 1, 2018, FHN adopted the provisions of ASU 2014-09, “Revenue from Contracts with Customers,” and all related amendments to all contracts using a modified retrospective transaction method. ASU 2014-09 does not change revenue recognition for financial assets. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This is accomplished through a five-step recognition framework involving 1) the identification of contracts with customers, 2) identification of performance obligations, 3) determination of the transaction price, 4) allocation of the transaction price to the performance obligations and 5) recognition of revenue as performance obligations are satisfied. Additionally, qualitative and quantitative information is required for disclosure regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In February 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations,” which provides additional guidance on whether an entity should recognize revenue on a gross or net basis, based on which party controls the specified good or service before that good or service is transferred to a customer. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which clarifies the original guidance included in ASU 2014-09 for identification of the goods or services provided to customers and enhances the implementation guidance for licensing arrangements. ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” was issued in May 2016 to provide additional guidance for the implementation

9



Note 1 – Financial Information (Continued)

and application of ASU 2014-09. “Technical Corrections and Improvements” ASU 2016-20 was issued in December 2016 and provides further guidance on certain issues. FHN elected to adopt the provisions of the revenue recognition standards through the cumulative effect alternative and determined that there were no significant effects on the timing of recognition, which resulted in no cumulative effect adjustment being required. Beginning in first quarter 2018, in situations where FHN's broker-dealer operations serve as the lead underwriter, the associated revenues and expenses are presented gross. The effect on 2018 revenues and expenses is not expected to be significant.

Effective January 1, 2018, FHN adopted the provisions of ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” through the cumulative effect approach. ASU 2017-05 clarifies the meaning and application of the term "in substance nonfinancial asset" in transactions involving both financial and nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract are concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of revenue recognition guidance for nonfinancial assets. ASU 2017-05 also clarifies that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it with the amount of revenue recognized based on the allocation guidance provided in ASU 2014-09. ASU 2017-05 also requires an entity to derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when it 1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Topic 810 and 2) transfers control of the asset in accordance with the provisions of ASU 2014-09. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset, it is required to measure any noncontrolling interest it receives (or retains) at fair value. FHN determined that there were no significant effects on the timing of revenue recognition, which resulted in no cumulative effect adjustment being required.

Effective January 1, 2018, FHN adopted the provisions of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 makes several revisions to the accounting, presentation and disclosure for financial instruments. Equity investments (except those accounted for under the equity method, those that result in consolidation of the investee, and those held by entities subject to specialized industry accounting which already apply fair value through earnings) are required to be measured at fair value with changes in fair value recognized in net income. This excludes FRB and FHLB stock holdings which are specifically exempted from the provisions of ASU 2016-01. An entity may elect to measure equity investments that do not have readily determinable market values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar instruments from the same issuer. ASU 2016-01 also requires a qualitative impairment review for equity investments without readily determinable fair values, with measurement at fair value required if impairment is determined to exist. For liabilities for which fair value has been elected, ASU 2016-01 revises current accounting to record the portion of fair value changes resulting from instrument-specific credit risk within other comprehensive income rather than earnings. FHN has not elected fair value accounting for any existing financial liabilities. Additionally, ASU 2016-01 clarifies that the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be assessed in combination with all other deferred tax assets rather than being assessed in isolation. ASU 2016-01 also makes several changes to existing fair value presentation and disclosure requirements, including a provision that all disclosures must use an exit price concept in the determination of fair value. Transition is through a cumulative effect adjustment to retained earnings for equity investments with readily determinable fair values. Equity investments without readily determinable fair values, for which the accounting election is made, will have any initial fair value marks recorded through earnings prospectively after adoption.

Upon adoption, FHN reclassified $265.9 million of equity investments out of AFS securities to Other assets, leaving only debt securities within the AFS classification. FHN evaluated the nature of its current equity investments (excluding FRB and FHLB stock holdings which are specifically exempted from the provisions of ASU 2016-01) and determined that substantially all qualified for the election available to assets without readily determinable fair values, including its holdings of Visa Class B shares. Accordingly, FHN has applied this election and any future fair value marks for these investments will be recognized through earnings on a prospective basis subsequent to adoption. The requirements of ASU 2016-01 related to assessment of deferred tax assets and disclosure of the fair value of financial instruments did not have a significant effect on FHN because its current accounting and disclosure practices conform to the requirements of ASU 2016-01.

Effective January 1, 2018, FHN adopted the provisions of ASU 2016-04, “Recognition of Breakage of Certain Prepaid Stored-Value Products,” which indicates that liabilities related to the sale of prepaid stored-value products are considered financial liabilities and should have a breakage estimate applied for estimated unused funds. ASU 2016-04 does not apply to stored-value products that can only be redeemed for cash, are subject to escheatment or are linked to a segregated bank account. The adoption of ASU 2016-04 did not have a significant effect on FHN’s current accounting and disclosure practices.


10



Note 1 – Financial Information (Continued)

Effective January 1, 2018, FHN adopted the provisions of ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies multiple cash flow presentation issues including providing guidance as to classification on the cash flow statement for certain cash receipts and cash payments where diversity in practice exists. The adoption of ASU 2016-15 was applied retroactively resulting in proceeds from bank-owned life insurance (“BOLI”) being classified as an investing activity rather than their prior classification as an operating activity. All of these amounts were previously included in Other assets in the Consolidated Condensed Statement of Condition. The amounts reclassified are presented in the table below.

 
Three Months Ended
March 31, 2017
 
Fiscal Years Ended December 31
(Dollars in thousands)
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
 
Proceeds from BOLI
$
281

 
$
3,785

 
$
2,740

 
$
2,425



Effective January 1, 2018, FHN retroactively adopted the provisions of ASU 2017-07, “Improving the Presentation of Net
Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires the disaggregation of the service cost component from the other components of net benefit cost for pension and postretirement plans. Service cost must be included in the same income statement line item as other compensation-related expenses. All other components of net benefit cost are required to be presented in the income statement separately from the service cost component, with disclosure of the line items where these amounts are recorded. FHN’s disclosures for pension and postretirement costs provide details of the service cost and all other components for expenses recognized for its applicable benefit plans. All of these amounts were previously included in Employee compensation, incentives, and benefits expense in the Consolidated Condensed Statements of Income. Upon adoption of ASU 2017-07 FHN reclassified the expense components other than service cost into All other expense and revised its disclosures accordingly. The amounts reclassified are presented in the table below.

 
Three Months Ended
March 31, 2017
 
Fiscal Years Ended December 31
(Dollars in thousands)
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
 
Net periodic benefit cost reclassified
$
438

 
$
1,946

 
$
(843
)
 
$
(1,168
)

Effective January 1, 2018, FHN early adopted the provisions of ASU 2017-08, “Premium Amortization on Purchased Callable Debt Securities,” which shortens the amortization period for securities that have explicit, noncontingent call features that are callable at fixed prices and on preset dates. In contrast to the current requirement for premium amortization to extend to the contractual maturity date, ASU 2017-08 requires the premium to be amortized to the earliest call date. ASU 2017-08 does not change the amortization of discounts, which will continue to be amortized to maturity. The new guidance does not apply to either 1) debt securities where the prepayment date is not preset or the price is not known in advance or 2) debt securities that qualify for amortization based on estimated prepayment rates. The adoption of ASU 2017-08 did not have an effect on FHN's current investments.

Effective January 1, 2018, FHN early adopted the provisions of ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” which revises the financial reporting for hedging relationships through changes to both the designation and measurement requirements for qualifying hedge relationships and the presentation of hedge results. ASU 2017-12 expands permissible risk component hedging strategies, including the designation of a contractually specified interest rate (e.g., a bank’s prime rate) in hedges of cash flows from variable rate financial instruments. Additionally, ASU 2017-12 makes significant revisions to fair value hedging activities, including the ability to measure the fair value changes for a hedged item solely for changes in the benchmark interest rate, permitting partial-term hedges, limiting consideration of prepayment risk for hedged debt instruments solely to the effects of changes in the benchmark interest rate and allowing for certain hedging strategies to be applied to closed portfolios of prepayable debt instruments. ASU 2017-12 also provides elections for the exclusion of certain portions of a hedging instrument’s change in fair value from the assessment of hedge effectiveness. If elected, the fair value changes of these excluded components may be recognized immediately or recorded into other comprehensive income with recycling into earnings using a rational and systematic methodology over the life of the hedging instrument.

Under ASU 2017-12 some of the documentation requirements for hedge accounting relationships are relaxed, but the highly effective threshold has been retained. Hedge designation documentation and a prospective qualitative assessment are still required at hedge inception, but the initial quantitative analysis may be delayed until the end of the quarter the hedge is commenced. If certain criteria are met, an election can be made to perform future effectiveness assessments using a purely qualitative methodology. ASU 2017-12 also revises the income statement presentation requirements for hedging activities. For

11



Note 1 – Financial Information (Continued)

fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of effectiveness is recorded to the same income statement line item used to present the earnings effect of the hedged item. For cash flow hedges, the entire fair value change of the hedging instrument that is included in the assessment of hedge effectiveness is initially recorded in other comprehensive income and later recycled into earnings as the hedged transaction(s) affect net income with the income statement effects recorded in the same financial statement line item used to present the earnings effect of the hedged item.

ASU 2017-12 also makes revisions to the current disclosure requirements for hedging activities to reflect the presentation of hedging results consistent with the changes to income statement classification and to improve the disclosure of the hedging results on the balance sheet.

FHN early adopted the provisions of ASU 2017-12 in the first quarter of 2018. Prospectively, FHN is recording components of hedging results for its fair value and cash flow hedges previously recognized in other expense within either interest income or interest expense. Additionally, FHN made cumulative effect adjustments to the hedged items, accumulated other comprehensive income and retained earnings as of the beginning of 2018. The magnitude of the cumulative effect adjustments and prospective effects were insignificant for FHN’s hedge relationships.

Accounting Changes Issued but Not Currently Effective

In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires a lessee to recognize in its statement of condition a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 leaves lessor accounting largely unchanged from prior standards. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. All other leases must be classified as financing or operating leases which depends on the relationship of the lessee’s rights to the economic value of the leased asset. For finance leases, interest on the lease liability is recognized separately from amortization of the right-of-use asset in earnings, resulting in higher expense in the earlier portion of the lease term. For operating leases, a single lease cost is calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.

In transition to ASU 2016-02, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply, which would result in continuing to account for leases that commence before the effective date in accordance with previous requirements (unless the lease is modified) except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous requirements. ASU 2016-02 also requires expanded qualitative and quantitative disclosures to assess the amount, timing, and uncertainty of cash flows arising from lease arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. FHN is evaluating the impact of ASU 2016-02 on its current accounting and disclosure practices. An alternative cumulative effect transition methodology has been proposed, but not yet issued, which FHN anticipates that it would elect if available.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which revises the measurement and recognition of credit losses for assets measured at amortized cost (e.g., held-to-maturity (“HTM”) loans and debt securities) and available-for-sale (“AFS”) debt securities. Under ASU 2016-13, for assets measured at amortized cost, the current expected credit loss (“CECL”) is measured as the difference between amortized cost and the net amount expected to be collected. This represents a departure from existing GAAP as the “incurred loss” methodology for recognizing credit losses delays recognition until it is probable a loss has been incurred. The measurement of current expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Additionally, current disclosures of credit quality indicators in relation to the amortized cost of financing receivables will be further disaggregated by year of origination. ASU 2016-13 leaves the methodology for measuring credit losses on AFS debt securities largely unchanged, with the maximum credit loss representing the difference between amortized cost and fair value. However, such credit losses will be recognized through an allowance for credit losses, which permits recovery of previously recognized credit losses if circumstances change.

ASU 2016-13 also revises the recognition of credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”). For PCD assets, the initial allowance for credit losses is added to the purchase price. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for PCD assets.

12



Note 1 – Financial Information (Continued)

Interest income for PCD assets will be recognized based on the effective interest rate, excluding the discount embedded in the purchase price that is attributable to the acquirer’s assessment of credit losses at acquisition. Currently, credit losses for purchased credit-impaired assets are included in the initial basis of the assets with subsequent declines in credit resulting in expense while subsequent improvements in credit are reflected as an increase in the future yield from the assets.

The provisions of ASU 2016-13 will be generally adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in the year of adoption. Prospective implementation is required for debt securities for which an other-than-temporary-impairment (“OTTI”) had been previously recognized. Amounts previously recognized in accumulated other comprehensive income (“AOCI”) as of the date of adoption that relate to improvements in cash flows expected to be collected will continue to be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption will be recorded in earnings when received. A prospective transition approach will be used for existing PCD assets where, upon adoption, the amortized cost basis will be adjusted to reflect the addition of the allowance for credit losses. Thus, an entity will not be required to reassess its purchased financial assets that exist as of the date of adoption to determine whether they would have met at acquisition the new criteria of more-than-insignificant credit deterioration since origination. An entity will accrete the remaining noncredit discount (based on the revised amortized cost basis) into interest income at the effective interest rate at the adoption date.

ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in fiscal years beginning after December 15, 2018. FHN continues to evaluate the impact of ASU 2016-13.  FHN has met with industry experts, initiated training for key employees associated with the new standard, and defined an initial approach that it is currently testing.  Once testing is completed, FHN will begin to develop the formal models and processes that will be required to implement the new standard.

13



Note 2 – Acquisitions and Divestitures
On November 30, 2017, FHN completed its acquisition of Capital Bank Financial Corporation ("CBF") and its subsidiaries, including Capital Bank Corporation for an aggregate of 92,042,232 shares of FHN common stock and $423.6 million in cash in a transaction valued at $2.2 billion. CBF operated 178 branches in North and South Carolina, Tennessee, Florida and Virginia at the time of closing. In relation to the acquisition, FHN acquired approximately $9.9 billion in assets, including approximately $7.3 billion in loans and $1.2 billion in AFS securities, and assumed approximately $8.1 billion of CBF deposits.
The following schedule details acquired assets and liabilities and consideration paid, as well as adjustments to record the assets and liabilities at their estimated fair values as of November 30, 2017. These fair value measurements are based on third party and internal valuations.
 
 
Capital Bank Financial Corporation
 
 
As
 
Purchase Accounting/Fair
 
 
 
 
Acquired
 
Value Adjustments (unaudited)
 
As recorded
(Dollars in thousands)
 
(unaudited)
 
2017
 
2018 (a)
 
by FHN
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
205,999

 
$

 
$

 
$
205,999

Trading securities
 
4,758

 
(4,758
)
(b)

 

Loans held-for-sale
 

 
134,003

 
(8,659
)
 
125,344

Securities available-for-sale
 
1,017,867

 
175,526

 

 
1,193,393

Securities held-to-maturity
 
177,549

 
(177,549
)
 

 

Loans
 
7,596,049

 
(320,372
)
 
1,064

 
7,276,741

Allowance for loan losses
 
(45,711
)
 
45,711

 

 

CBF Goodwill
 
231,292

 
(231,292
)
 

 

Other intangible assets
 
24,498

 
119,302

 
(2,593
)
 
141,207

Premises and equipment
 
196,298

 
37,054

 
(846
)
 
232,506

OREO
 
43,077

 
(9,149
)
 
(362
)
 
33,566

Other assets
 
617,232

 
41,320

(c)
433

 
658,985

Total assets acquired
 
$
10,068,908

 
$
(190,204
)
 
$
(10,963
)
 
$
9,867,741

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Deposits
 
$
8,141,593

 
$
(849
)
 
$
(642
)
 
$
8,140,102

Securities sold under agreements to repurchase
 
26,664

 

 

 
26,664

Other short-term borrowings
 
390,391

 

 

 
390,391

Term borrowings
 
119,486

 
67,683

 

 
187,169

Other liabilities
 
59,995

 
4,291

 
1,345

 
65,631

Total liabilities assumed
 
8,738,129

 
71,125

 
703

 
8,809,957

Net assets acquired
 
$
1,330,779

 
$
(261,329
)
 
$
(11,666
)
 
1,057,784

Consideration paid:
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
(1,792,741
)
Cash
 
 
 
 
 
 
 
(423,592
)
Total consideration paid
 
 
 
 
 
 
 
(2,216,333
)
Goodwill
 
 
 
 
 
 
 
$
1,158,549

(a) Amounts reflect adjustments made to provisional fair value estimates based on information received during the three
months ended March 31, 2018. These updated estimates were recorded in FHN's Consolidated Condensed Statement of
Condition as of March 31, 2018 with a corresponding adjustment to goodwill.
(b) Amount represents a conformity adjustment to align with FHN presentation.
(c) Amount primarily relates to a net deferred tax asset recorded for the effects of the purchase accounting adjustments.

Due to the timing of merger completion in relation to the previous year end, the fact that back office functions (including loan and deposit processing) have not yet been integrated, the evaluation of post-merger activity, and the extended information

14

Table of Contents

Note 2 – Acquisitions and Divestitures (Continued)

gathering and management review processes required to properly record acquired assets and liabilities, FHN considers its valuations of CBF's loans, loans held-for-sale, premises and equipment, OREO, other assets, tax receivables and payables, core deposit intangibles, other potential intangibles, time deposits, lease intangibles, other liabilities and acquired contingencies to be provisional as management continues to identify and assess information regarding the nature of these assets and liabilities and reviews the associated valuation assumptions and methodologies. Accordingly, the amounts recorded for current and deferred tax assets and liabilities are also considered provisional as FHN continues to evaluate the nature and extent of permanent and temporary (timing) differences between the book and tax bases of the acquired assets and liabilities assumed. Additionally, the accounting policies of both FHN and CBF are in the process of being reviewed in detail. Upon completion of such review, conforming adjustments or financial statement reclassification may be determined.
In relation to the acquisition, FHN has recorded preliminary goodwill of approximately $1.2 billion, representing the excess of acquisition consideration over the estimated fair value of net assets acquired.
All expenses related to the merger and integration with CBF are recorded in FHN's Corporate segment. Integration activities are expected to be substantially complete within 2018.
Total CBF merger and integration expense recognized for the three months ended March 31, 2018 are presented in the table below:
(Dollars in thousands)
 
Professional fees (a)
$
5,632

Employee compensation, incentives and benefits (b)
3,946

Contract employment and outsourcing (c)
1,399

Miscellaneous expense (d)
2,042

All other expense (e)
17,041

Total
$
30,060

(a) Primarily comprised of fees for legal, accounting, and merger consultants.
(b) Primarily comprised of fees for severance and retention.
(c) Primarily relates to fees for temporary assistance for merger and integration activities.
(d) Consists of fees for communications and courier, operations services, equipment rentals, depreciation, and maintenance,
supplies, travel and entertainment, computer software, advertising and public relations, and occupancy.
(e) Primarily relates to contract termination charges, lease buyouts, costs of shareholder matters and asset impairments related to the integration, as well as other miscellaneous expenses.
On March 23, 2018, FHN divested two branches, including approximately $30 million of deposits and $2 million of loans to Apex Bank, a Tennessee banking corporation. The branches, both in Greeneville, Tennessee, were divested in connection with First Horizon's agreement with the U.S. Department of Justice and commitments to the Board of Governors of the Federal Reserve System, which were entered into in connection with a customary review of FHN's merger with CBF.
On April 3, 2017, FTN Financial acquired substantially all of the assets and assumed substantially all of the liabilities of Coastal Securities, Inc. (“Coastal”), a national leader in the trading, securitization, and analysis of Small Business Administration (“SBA”) loans, for approximately $131 million in cash. Coastal, which was based in Houston, TX, also traded United States Department of Agriculture (“USDA”) loans and fixed income products and provided municipal underwriting and advisory services to its clients. Coastal’s government-guaranteed loan products, combined with FTN Financial’s existing SBA trading activities, have established an additional major product sector for FTN Financial. In relation to the acquisition, FTN Financial acquired approximately $418 million in assets, inclusive of approximately $236 million of HFS loans and $139 million of trading securities, and assumed approximately $202 million of securities sold under agreements to repurchase and $96 million of fixed income payables. In relation to the acquisition, FHN has recorded $45.0 million in goodwill representing the excess of aquisition consideration over the estimated fair value of net assets acquired.

See Note 2- Acquisitions and Divestitures in the Notes to Consolidated Financial Statements on Form 10-K for the year ended December 31, 2017, for additional information about the CBF and Coastal acquisitions.
In addition to the transactions mentioned above, FHN acquires or divests assets from time to time in transactions that are considered business combinations or divestitures but are not material to FHN individually or in the aggregate.

15



Note 3 – Investment Securities
The following tables summarize FHN’s investment securities on March 31, 2018 and December 31, 2017:
 
 
March 31, 2018
(Dollars in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. treasuries
 
$
100

 
$

 
$
(2
)
 
$
98

Government agency issued mortgage-backed securities (“MBS”)
 
2,585,250

 
6,384

 
(60,772
)
 
2,530,862

Government agency issued collateralized mortgage obligations (“CMO”)
 
2,266,776

 
984

 
(61,419
)
 
2,206,341

Other U.S. government agencies
 
29,822

 

 
(199
)
 
29,623

Corporates and other debt
 
55,716

 
587

 
(315
)
 
55,988

States and municipalities
 
512

 

 
(2
)
 
510

 
 
$
4,938,176

 
$
7,955

 
$
(122,709
)
 
4,823,422

AFS debt securities recorded at fair value through earnings:

 
 
 
 
 
 
 
 
SBA-interest only strips (a)
 
 
 
 
 
 
 
2,733

Total securities available-for-sale (b)
 
 
 
 
 
 
 
$
4,826,155

Securities held-to-maturity:
 
 
 
 
 
 
 
 
Corporates and other debt
 
$
10,000

 
$

 
$
(183
)
 
$
9,817

Total securities held-to-maturity
 
$
10,000

 
$

 
$
(183
)
 
$
9,817

 
(a)
SBA-interest only strips are recorded at elected fair value. See Note 16 - Fair Value for additional information.
(b)
Includes $4.1 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes.
 
 
December 31, 2017
(Dollars in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Securities available-for-sale: 
 
 
 
 
 
 
 
 
U.S. treasuries
 
$
100

 
$

 
$
(1
)
 
$
99

Government agency issued MBS
 
2,580,442

 
10,538

 
(13,604
)
 
2,577,376

Government agency issued CMO
 
2,302,439

 
1,691

 
(34,272
)
 
2,269,858

Corporates and other debt
 
55,799

 
23

 
(40
)
 
55,782

Equity and other (a)
 
265,863

 
7

 

 
265,870

 
 
$
5,204,643

 
$
12,259

 
$
(47,917
)
 
5,168,985

AFS debt securities recorded at fair value through earnings:
 
 
 
 
 
 
 
 
SBA-interest only strips (b)
 
 
 
 
 
 
 
1,270

Total securities available-for-sale (c)
 
 
 
 
 
 
 
$
5,170,255

Securities held-to-maturity:
 
 
 
 
 
 
 
 
Corporates and other debt
 
$
10,000

 
$

 
$
(99
)
 
$
9,901

Total securities held-to-maturity
 
$
10,000

 
$

 
$
(99
)
 
$
9,901

 
(a)
Includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $134.6 million. The remainder is money market, mutual funds, and cost method investments. Equity investments were reclassified to Other assets upon adoption of ASU 2016-01 on January 1, 2018.
(b)
SBA-interest only strips are recorded at elected fair value. See Note 16 - Fair Value of Assets and Liabilities for additional information.
(c)
Includes $4.0 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes.

16

Table of Contents

Note 3 – Investment Securities (Continued)

The amortized cost and fair value by contractual maturity for the available-for-sale and held-to-maturity debt securities portfolios on March 31, 2018 are provided below:
 
 
 
Held-to-Maturity
 
Available-for-Sale
(Dollars in thousands)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Within 1 year
 
$

 
$

 
$

 
$

After 1 year; within 5 years
 

 

 
85,638

 
85,733

After 5 years; within 10 years
 
10,000

 
9,817

 
512

 
1,897

After 10 years
 

 

 

 
1,322

Subtotal
 
10,000

 
9,817

 
86,150

 
88,952

Government agency issued MBS and CMO (a)
 

 

 
4,852,026

 
4,737,203

Total
 
$
10,000

 
$
9,817

 
$
4,938,176

 
$
4,826,155

 
(a)
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The table below provides information on gross gains and gross losses from debt investment securities for the three months ended March 31, 2018. Equity securities are included for periods prior to 2018.
 
 
Three Months Ended
March 31
(Dollars in thousands)
2018
 
2017
Gross gains on sales of securities
$
52

 
$
44

Gross (losses) on sales of securities

 

Net gain/(loss) on sales of securities (a)
$
52

 
$
44

 
(a)
Cash proceeds for the three months ended March 31, 2018 and 2017 were not material.

The following tables provide information on investments within the available-for-sale portfolio that had unrealized losses as of March 31, 2018 and December 31, 2017:

 
 
As of March 31, 2018
 
 
Less than 12 months
 
12 months or longer
 
Total
(Dollars in thousands)
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
U.S. treasuries
 
$
98

 
$
(2
)
 
$

 
$

 
$
98

 
$
(2
)
Government agency issued MBS
 
1,976,042

 
(46,036
)
 
321,350

 
(14,736
)
 
2,297,392

 
(60,772
)
Government agency issued CMO
 
1,303,393

 
(23,774
)
 
788,798

 
(37,645
)
 
2,092,191

 
(61,419
)
Other U.S. government agencies
 
29,623

 
(199
)
 

 

 
29,623

 
(199
)
Corporates and other debt
 
40,658

 
(315
)
 

 

 
40,658

 
(315
)
States and municipalities
 
510

 
(2
)
 

 

 
510

 
(2
)
Total temporarily impaired securities
 
$
3,350,324

 
$
(70,328
)
 
$
1,110,148

 
$
(52,381
)
 
$
4,460,472

 
$
(122,709
)
 

17

Table of Contents

Note 3 – Investment Securities (Continued)

 
 
As of December 31, 2017
 
 
Less than 12 months
 
12 months or longer
 
Total
(Dollars in thousands)
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
U.S. treasuries
 
$
99

 
$
(1
)
 
$

 
$

 
$
99

 
$
(1
)
Government agency issued MBS
 
1,455,476

 
(4,738
)
 
331,900

 
(8,866
)
 
1,787,376

 
(13,604
)
Government agency issued CMO
 
1,043,987

 
(7,464
)
 
832,173

 
(26,808
)
 
1,876,160

 
(34,272
)
Corporates and other debt
 
15,294

 
(40
)
 

 

 
15,294

 
(40
)
Total temporarily impaired securities
 
$
2,514,856

 
$
(12,243
)
 
$
1,164,073

 
$
(35,674
)
 
$
3,678,929

 
$
(47,917
)
FHN has reviewed debt investment securities that were in unrealized loss positions in accordance with its accounting policy for OTTI and does not consider them other-than-temporarily impaired. For debt securities with unrealized losses, FHN does not intend to sell them and it is more-likely-than-not that FHN will not be required to sell them prior to recovery. The decline in value is primarily attributable to changes in interest rates and not credit losses.
The carrying amount of equity investments without a readily determinable fair value was $16.1 million and $16.3 million at March 31, 2018 and January 1, 2018, respectively. The year-to-date 2018 gross amounts of upward and downward valuation adjustments were not significant.
Unrealized gains of $.3 million were recognized in the three months ended March 31, 2018 for equity investments with readily determinable fair values.



18



Note 4 – Loans
The following table provides the balance of loans, net of unearned income, by portfolio segment as of March 31, 2018 and December 31, 2017:
 
 
March 31
 
December 31
(Dollars in thousands)
 
2018
 
2017
Commercial:
 
 
 
 
Commercial, financial, and industrial
 
$
15,828,308

 
$
16,057,273

Commercial real estate
 
4,234,435

 
4,214,695

Consumer:
 
 
 
 
Consumer real estate (a)
 
6,246,552

 
6,367,755

Permanent mortgage
 
379,688

 
399,307

Credit card & other
 
560,810

 
619,899

Loans, net of unearned income
 
$
27,249,793

 
$
27,658,929

Allowance for loan losses
 
187,194

 
189,555

Total net loans
 
$
27,062,599

 
$
27,469,374

 
(a)
Balances as of March 31, 2018 and December 31, 2017, include $21.3 million and $24.2 million of restricted real estate loans, respectively. See Note 13—Variable Interest Entities for additional information.
COMPONENTS OF THE LOAN PORTFOLIO
The loan portfolio is disaggregated into segments and then further disaggregated into classes for certain disclosures. GAAP defines a portfolio segment as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. A class is generally determined based on the initial measurement attribute (i.e., amortized cost or purchased credit-impaired), risk characteristics of the loan, and FHN’s method for monitoring and assessing credit risk. Commercial loan portfolio segments include commercial, financial and industrial (“C&I”) and commercial real estate. Commercial classes within C&I include general C&I, loans to mortgage companies, the trust preferred loans (“TRUPS”) (i.e. long-term unsecured loans to bank and insurance-related businesses) portfolio and purchased credit-impaired (“PCI”) loans. Loans to mortgage companies include commercial lines of credit to qualified mortgage companies primarily for the temporary warehousing of eligible mortgage loans prior to the borrower’s sale of those mortgage loans to third party investors. Commercial classes within CRE include income CRE, residential CRE and PCI loans. Consumer loan portfolio segments include consumer real estate, permanent mortgage, and the credit card and other portfolio. Consumer classes include home equity lines of credit (“HELOCs”), real estate (“R/E”) installment and PCI loans within the consumer real estate segment, permanent mortgage (which is both a segment and a class), and credit card and other.
Concentrations
FHN has a concentration of residential real estate loans (24 percent of total loans), the majority of which is in the consumer real estate segment (23 percent of total loans). Loans to finance and insurance companies total $2.8 billion (18 percent of the C&I portfolio, or 10 percent of the total loans). FHN had loans to mortgage companies totaling $1.8 billion (11 percent of the C&I segment, or 7 percent of total loans) as of March 31, 2018. As a result, 29 percent of the C&I segment is sensitive to impacts on the financial services industry.









19

Table of Contents

Note 4 – Loans (Continued)

Purchased Credit-Impaired Loans
The following table presents a rollforward of the accretable yield for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended
March 31
(Dollars in thousands)
 
2018
 
2017
Balance, beginning of period
 
$
15,623

 
$
6,871

Addition
 

 

Accretion
 
(2,137
)
 
(851
)
Adjustment for payoffs
 
(612
)
 
(273
)
Adjustment for charge-offs
 
(551
)
 

Adjustment for pool excess recovery (a)
 

 
(222
)
Increase/(decrease) in accretable yield (b)
 
3,178

 
(295
)
Other
 
(178
)
 
(32
)
Balance, end of period
 
$
15,323

 
$
5,198

 
(a)
Represents the removal of accretable difference for the remaining loans in a pool which is now in a recovery state.
(b)
Includes changes in the accretable yield due to both transfers from the nonaccretable difference and the impact of changes in the expected timing and amounts of the cash flows.
At March 31, 2018, the ALLL related to PCI loans was $2.6 million compared to $3.2 million at December 31, 2017. The loan loss provision expense related to PCI loans of $.8 million was recognized during the three months ended March 31, 2018. The loan loss provision related to PCI loans was not significant during the three months ended March 31, 2017.
The following table reflects the outstanding principal balance and carrying amounts of the acquired PCI loans as of March 31, 2018 and December 31, 2017:
 
 
March 31, 2018
 
December 31, 2017
(Dollars in thousands)
 
Carrying value
 
Unpaid balance
 
Carrying value
 
Unpaid balance
Commercial, financial and industrial
 
$
79,575

 
$
89,462

 
$
96,598

 
$
109,280

Commercial real estate
 
30,950

 
35,879

 
36,107

 
41,488

Consumer real estate
 
35,820

 
39,995

 
38,176

 
42,568

Credit card and other
 
3,907

 
4,335

 
5,500

 
6,351

Total
 
$
150,252

 
$
169,671

 
$
176,381

 
$
199,687

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









20

Table of Contents

Note 4 – Loans (Continued)

Impaired Loans
The following tables provide information at March 31, 2018 and December 31, 2017, by class related to individually impaired loans and consumer TDRs, regardless of accrual status. Recorded investment is defined as the amount of the investment in a loan, excluding any valuation allowance but including any direct write-down of the investment. For purposes of this disclosure, PCI loans and the TRUPs valuation allowance have been excluded.
 
 
March 31, 2018
 
December 31, 2017
(Dollars in thousands)
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
Impaired loans with no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
General C&I
 
$
23,725

 
$
33,797

 
$

 
$
8,183

 
$
17,372

 
$

Income CRE
 
1,582

 
1,582

 

 

 

 

Residential CRE
 
495

 
963

 

 

 

 

Total
 
$
25,802

 
$
36,342

 
$

 
$
8,183

 
$
17,372

 
$

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
HELOC (a)
 
$
9,256

 
$
18,143

 
$

 
$
9,258

 
$
19,193

 
$

R/E installment loans (a)
 
3,735

 
4,304

 

 
4,093

 
4,663

 

Permanent mortgage (a)
 
5,302

 
7,897

 

 
5,132

 
7,688

 

Total
 
$
18,293

 
$
30,344

 
$

 
$
18,483

 
$
31,544

 
$

Impaired loans with related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
General C&I
 
$
14,007

 
$
20,145

 
$
3,630

 
$
31,774

 
$
38,256

 
$
5,119

TRUPS
 
3,026

 
3,700

 
925

 
3,067

 
3,700

 
925

Income CRE
 

 

 

 
1,612

 
1,612

 
49

Residential CRE
 

 

 

 
795

 
1,263

 
83

Total
 
$
17,033

 
$
23,845

 
$
4,555

 
$
37,248

 
$
44,831

 
$
6,176

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
HELOC
 
$
70,839

 
$
73,605

 
$
13,571

 
$
72,469

 
$
75,207

 
$
14,382

R/E installment loans
 
41,145

 
41,898

 
9,478

 
43,075

 
43,827

 
8,793

Permanent mortgage
 
75,788

 
86,850

 
11,311

 
79,662

 
90,934

 
12,105

Credit card & other
 
702

 
702

 
359

 
593

 
593

 
311

Total
 
$
188,474

 
$
203,055

 
$
34,719

 
$
195,799

 
$
210,561

 
$
35,591

Total commercial
 
$
42,835

 
$
60,187

 
$
4,555

 
$
45,431

 
$
62,203

 
$
6,176

Total consumer
 
$
206,767

 
$
233,399

 
$
34,719

 
$
214,282

 
$
242,105

 
$
35,591

Total impaired loans
 
$
249,602

 
$
293,586

 
$
39,274

 
$