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Section 1: 10-Q (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 September 30, 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 September 30, 2018
Common Stock, $.625 par value
  
323,942,816
 
 
 
 
 




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
 
 
September 30
 
(Dollars in thousands, except per share amounts)
 
2018
 
2017
Assets:
 
 
 
 
Cash and due from banks
 
$
642,051

 
$
639,073

Federal funds sold
 
113,722

 
87,364

Securities purchased under agreements to resell (Note 15)
 
687,437

 
725,609

Total cash and cash equivalents
 
1,443,210

 
1,452,046

Interest-bearing cash
 
531,681

 
1,185,600

Trading securities
 
1,930,991

 
1,416,345

Loans held-for-sale (a)
 
725,651

 
699,377

Securities available-for-sale (Note 3)
 
4,608,383

 
5,170,255

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

 
10,000

Loans, net of unearned income (Note 4) (b)
 
27,350,214

 
27,658,929

Less: Allowance for loan losses (Note 5)
 
185,959

 
189,555

Total net loans
 
27,164,255

 
27,469,374

Goodwill (Note 6)
 
1,409,822

 
1,386,853

Other intangible assets, net (Note 6)
 
161,495

 
184,389

Fixed income receivables
 
177,802

 
68,693

Premises and equipment, net (September 30, 2018 and December 31, 2017 include $30.1 million and $53.2 million, respectively, classified as held-for-sale)
 
506,453

 
532,251

Other real estate owned (“OREO”) (c)
 
28,628

 
43,382

Derivative assets (Note 14)
 
54,476

 
81,634

Other assets
 
1,883,077

 
1,723,189

Total assets
 
$
40,635,924

 
$
41,423,388

Liabilities and equity:
 
 
 
 
Deposits:
 
 
 
 
Savings (December 31, 2017 includes $22.6 million classified as held-for-sale)
 
$
11,157,023

 
$
10,872,665

Time deposits, net (December 31, 2017 includes $8.0 million classified as held-for-sale)
 
4,056,184

 
3,322,921

Other interest-bearing deposits
 
7,768,997

 
8,401,773

Interest-bearing
 
22,982,204

 
22,597,359

Noninterest-bearing (December 31, 2017 includes $4.8 million classified as held-for-sale)
 
8,025,881

 
8,023,003

Total deposits
 
31,008,085

 
30,620,362

Federal funds purchased
 
437,474

 
399,820

Securities sold under agreements to repurchase (Note 15)
 
678,510

 
656,602

Trading liabilities
 
739,694

 
638,515

Other short-term borrowings
 
1,069,912

 
2,626,213

Term borrowings
 
1,200,134

 
1,218,097

Fixed income payables
 
36,939

 
48,996

Derivative liabilities (Note 14)
 
170,324

 
85,061

Other liabilities
 
552,921

 
549,234

Total liabilities
 
35,893,993

 
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 September 30, 2018 and December 31, 2017)
 
95,624

 
95,624

Common stock - $.625 par value (shares authorized - 400,000,000; shares issued - 323,942,816 on September 30, 2018 and 326,736,214 on December 31, 2017)
 
202,464

 
204,211

Capital surplus
 
3,101,102

 
3,147,613

Undivided profits
 
1,484,959

 
1,160,434

Accumulated other comprehensive loss, net (Note 8)
 
(437,649
)
 
(322,825
)
Total First Horizon National Corporation Shareholders’ Equity
 
4,446,500

 
4,285,057

Noncontrolling interest
 
295,431

 
295,431

Total equity
 
4,741,931

 
4,580,488

Total liabilities and equity
 
$
40,635,924

 
$
41,423,388

See accompanying notes to consolidated condensed financial statements.
 
(a)
September 30, 2018 and December 31, 2017 include $9.2 million and $11.7 million, respectively, of held-for-sale consumer mortgage loans secured by residential real estate in process of foreclosure.
(b)
September 30, 2018 and December 31, 2017 include $20.8 million and $22.7 million, respectively, of held-to-maturity consumer mortgage loans secured by residential real estate in process of foreclosure.
(c)
September 30, 2018 and December 31, 2017 include $11.0 million and $12.2 million, respectively, of foreclosed residential real estate.

2



CONSOLIDATED CONDENSED STATEMENTS OF INCOME
 
First Horizon National Corporation
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
(Dollars and shares in thousands except per share data, unless otherwise noted) (Unaudited)
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans
$
331,000

 
$
205,220

 
$
954,467

 
$
578,264

Interest on investment securities available-for-sale
32,391

 
25,575

 
97,872

 
76,867

Interest on investment securities held-to-maturity
131

 
131

 
394

 
460

Interest on loans held-for-sale
9,977

 
6,123

 
33,349

 
10,916

Interest on trading securities
14,130

 
8,262

 
43,280

 
24,033

Interest on other earning assets
6,040

 
2,834

 
15,473

 
11,757

Total interest income
393,669

 
248,145

 
1,144,835

 
702,297

Interest expense:
 
 
 
 
 
 
 
Interest on deposits:
 
 
 
 
 
 
 
Savings
30,022

 
10,920

 
70,522

 
31,324

Time deposits
14,667

 
2,591

 
35,428

 
8,342

Other interest-bearing deposits
14,401

 
6,759

 
36,922

 
15,976

Interest on trading liabilities
5,125

 
3,298

 
15,039

 
11,282

Interest on short-term borrowings
9,762

 
4,998

 
29,914

 
9,293

Interest on term borrowings
13,992

 
9,762

 
39,205

 
25,854

Total interest expense
87,969

 
38,328

 
227,030

 
102,071

Net interest income
305,700

 
209,817

 
917,805

 
600,226

Provision/(provision credit) for loan losses
2,000

 

 
1,000

 
(3,000
)
Net interest income after provision/(provision credit) for loan losses
303,700

 
209,817

 
916,805

 
603,226

Noninterest income:
 
 
 
 
 
 
 
Fixed income
44,813

 
55,758

 
128,016

 
161,546

Deposit transactions and cash management
35,792

 
28,011

 
107,859

 
80,434

Brokerage, management fees and commissions
14,200

 
11,937

 
41,423

 
35,872

Trust services and investment management
7,438

 
6,953

 
22,847

 
21,304

Bankcard income
6,878

 
6,170

 
19,958

 
17,230

Bank-owned life insurance ("BOLI")
4,337

 
3,539

 
14,103

 
11,137

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

 
1

 
52

 
450

Equity securities gains/(losses), net (Note 3)
212,859

 
5

 
212,924

 
5

All other income and commissions (Note 7)
22,655

 
43

 
65,332

 
29,051

Total noninterest income
348,972

 
112,417

 
612,514

 
357,029

Adjusted gross income after provision/(provision credit) for loan losses
652,672

 
322,234

 
1,529,319

 
960,255

Noninterest expense:
 
 
 
 
 
 
 
Employee compensation, incentives, and benefits
164,839

 
137,383

 
501,983

 
410,153

Occupancy
20,002

 
13,619

 
62,956

 
38,759

Computer software
15,693

 
11,993

 
45,948

 
35,077

Operational services
13,121

 
10,805

 
43,335

 
33,204

Equipment rentals, depreciation, and maintenance
9,423

 
6,626

 
30,149

 
20,013

Professional fees
9,270

 
6,566

 
36,957

 
20,971

Advertising and public relations
8,365

 
5,205

 
17,034

 
13,901

FDIC premium expense

7,850

 
6,062

 
26,442

 
17,728

Communications and courier
7,014

 
4,328

 
22,776

 
12,245

Amortization of intangible assets
6,460

 
1,964

 
19,394

 
5,160

Contract employment and outsourcing

4,314

 
2,762

 
14,274

 
8,975

Legal fees
2,541

 
2,052

 
7,670

 
10,831

Repurchase and foreclosure provision/(provision credit)
(562
)
 
(609
)
 
(886
)
 
(22,580
)
All other expense (Note 7)
25,701

 
28,113

 
112,032

 
72,554

Total noninterest expense
294,031

 
236,869

 
940,064

 
676,991

Income/(loss) before income taxes
358,641

 
85,365

 
589,255

 
283,264

Provision/(benefit) for income taxes
83,925

 
13,596

 
133,553

 
57,903

Net income/(loss)
$
274,716

 
$
71,769

 
$
455,702

 
$
225,361

Net income attributable to noncontrolling interest
2,883

 
2,883

 
8,555

 
8,555

Net income/(loss) attributable to controlling interest
$
271,833

 
$
68,886

 
$
447,147

 
$
216,806

Preferred stock dividends
1,550

 
1,550

 
4,650

 
4,650

Net income/(loss) available to common shareholders
$
270,283

 
$
67,336

 
$
442,497

 
$
212,156

Basic earnings/(loss) per share (Note 9)
$
0.83

 
$
0.29

 
$
1.36

 
$
0.91

Diluted earnings/(loss) per share (Note 9)
$
0.83

 
$
0.28

 
$
1.35

 
$
0.90

Weighted average common shares (Note 9)
324,406

 
233,749

 
325,341

 
233,438

Diluted average common shares (Note 9)
327,252

 
236,340

 
328,645

 
236,372

Cash dividends declared per common share
$
0.12

 
$
0.09

 
$
0.36

 
$
0.27

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
September 30
 
Nine Months Ended
September 30
(Dollars in thousands) (Unaudited)
2018
 
2017
 
2018
 
2017
Net income/(loss)
$
274,716

 
$
71,769

 
$
455,702

 
$
225,361

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
Net unrealized gains/(losses) on securities available-for-sale
(25,924
)
 
3,917

 
(106,561
)
 
11,292

Net unrealized gains/(losses) on cash flow hedges
(1,746
)
 
(734
)
 
(13,533
)
 
(493
)
Net unrealized gains/(losses) on pension and other postretirement plans
2,135

 
1,895

 
5,481

 
4,471

Other comprehensive income/(loss)
(25,535
)
 
5,078

 
(114,613
)
 
15,270

Comprehensive income
249,181

 
76,847

 
341,089

 
240,631

Comprehensive income attributable to noncontrolling interest
2,883

 
2,883

 
8,555

 
8,555

Comprehensive income attributable to controlling interest
$
246,298

 
$
73,964

 
$
332,534

 
$
232,076

Income tax expense/(benefit) of items included in Other comprehensive income:
 
 
 
 
 
 
 
Net unrealized gains/(losses) on securities available-for-sale
$
(8,510
)
 
$
2,430

 
$
(34,981
)
 
$
7,002

Net unrealized gains/(losses) on cash flow hedges
(573
)
 
(455
)
 
(4,443
)
 
(306
)
Net unrealized gains/(losses) on pension and other postretirement plans
701

 
1,175

 
1,799

 
2,772

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)
 
447,147

 
8,555

 
455,702

 
216,806

 
8,555

 
225,361

Other comprehensive income/(loss) (a)
 
(114,613
)
 

 
(114,613
)
 
15,270

 

 
15,270

Comprehensive income/(loss)
 
332,534

 
8,555

 
341,089

 
232,076

 
8,555

 
240,631

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock ($4,650 per share for the nine months ended September 30, 2018 and 2017)
 
(4,650
)
 

 
(4,650
)
 
(4,650
)
 

 
(4,650
)
Common stock ($.36 and $.27 per share for the nine months ended September 30, 2018 and 2017, respectively)
 
(118,250
)
 

 
(118,250
)
 
(63,777
)
 

 
(63,777
)
Common stock repurchased (b)
 
(23,997
)
 

 
(23,997
)
 
(5,285
)
 

 
(5,285
)
Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
Stock options and restricted stock - equity awards
 
4,442

 

 
4,442

 
5,132

 

 
5,132

Acquisition equity adjustment (c)
 
(46,035
)
 

 
(46,035
)
 

 

 

Stock-based compensation expense
 
17,465

 

 
17,465

 
14,971

 

 
14,971

Dividends declared - noncontrolling interest of subsidiary preferred stock
 

 
(8,555
)
 
(8,555
)
 

 
(8,555
)
 
(8,555
)
Other
 
(133
)
 

 
(133
)
 

 

 

Balance, September 30
 
$
4,446,500

 
$
295,431

 
$
4,741,931

 
$
2,588,120

 
$
295,431

 
$
2,883,551

See accompanying notes to consolidated condensed financial statements.
 
(a)
Due to the nature of the preferred stock issued by FHN and its subsidiaries, all components of Other comprehensive income/(loss) have been attributed solely to FHN as the controlling interest holder.
(b)
2018 includes $19.0 million repurchased under share repurchase programs.
(c)
See Note 2- Acquisitions and Divestitures for additional information.

5



CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 
 
 
First Horizon National Corporation
 
 
Nine months ended September 30
(Dollars in thousands) (Unaudited)
 
2018
 
2017
Operating Activities
 
 
 
 
Net income/(loss)
 
$
455,702

 
$
225,361

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

 
(3,000
)
Provision/(benefit) for deferred income taxes
 
106,314

 
(547
)
Depreciation and amortization of premises and equipment
 
35,700

 
25,052

Amortization of intangible assets
 
19,394

 
5,160

Net other amortization and accretion
 
(9,991
)
 
22,921

Net (increase)/decrease in derivatives
 
86,135

 
(14,670
)
Fair value adjustment on interest-only strips
 
(840
)
 
(107
)
Repurchase and foreclosure provision/(provision credit)
 

 
(20,000
)
(Gains)/losses and write-downs on OREO, net
 
814

 
44

Litigation and regulatory matters
 
(1,447
)
 
7,409

Stock-based compensation expense
 
17,465

 
14,971

Gain on sale of held-to-maturity loans
 
3,777

 

Equity securities (gains)/losses, net
 
(212,924
)
 
(5
)
Debt securities (gains)/losses, net
 
(52
)
 
(450
)
(Gain)/loss on extinguishment of debt
 
1

 
14,329

Net (gains)/losses on sale/disposal of fixed assets
 
(2,469
)
 
(13
)
(Gain)/loss on BOLI
 
(2,785
)
 
(3,500
)
Loans held-for-sale:
 
 
 
 
Purchases and originations
 
(1,729,549
)
 
(1,252,300
)
Gross proceeds from settlements and sales (a)
 
751,589

 
1,252,477

(Gain)/loss due to fair value adjustments and other
 
13,755

 
2,485

Net (increase)/decrease in:
 
 
 
 
Trading securities
 
392,411

 
(433,897
)
Fixed income receivables
 
(109,109
)
 
(11,339
)
Interest receivable
 
(14,052
)
 
(7,171
)
Other assets
 
(6,699
)
 
(51,575
)
Net increase/(decrease) in:
 
 
 
 
Trading liabilities
 
101,179

 
17,180

Fixed income payables
 
(12,057
)
 
(73,187
)
Interest payable
 
16,610

 
8,869

Other liabilities
 
(30,717
)
 
(35,770
)
Total adjustments
 
(586,547
)
 
(536,634
)
Net cash provided/(used) by operating activities
 
(130,845
)
 
(311,273
)
Investing Activities
 
 
 
 
Available-for-sale securities:
 
 
 
 
Sales
 
15,137

 
3,360

Maturities
 
510,232

 
420,136

Purchases
 
(362,215
)
 
(426,129
)
Held-to-maturity securities:
 
 
 
 
Prepayments and maturities
 

 
4,740

Premises and equipment:
 
 
 
 
Sales
 
22,794

 
2,577

Purchases
 
(32,928
)
 
(30,395
)
Proceeds from the sale of Visa Class B shares
 
240,206

 

Proceeds from sales of OREO
 
25,328

 
9,235

Proceeds from sales of loans classified as held-to-maturity
 
50,498

 

Proceeds from BOLI
 
11,559

 
5,850

Net (increase)/decrease in:
 
 
 
 
Loans
 
283,922

 
(586,426
)
Interests retained from securitizations classified as trading securities
 
731

 
648

Interest-bearing cash
 
653,919

 
459,840

Cash paid related to divestitures
 
(27,599
)
 

Cash (paid)/received for acquisition, net (b)
 
(46,017
)
 
(123,971
)
Net cash provided/(used) by investing activities
 
1,345,567

 
(260,535
)
Financing Activities
 
 
 
 

6



Common stock:
 
 
 
 
Stock options exercised
 
4,443

 
5,173

Cash dividends paid
 
(99,753
)
 
(58,850
)
Repurchase of shares (c)
 
(23,997
)
 
(5,285
)
Cash dividends paid - preferred stock - noncontrolling interest
 
(8,555
)
 
(8,523
)
Cash dividends paid - Series A preferred stock
 
(4,650
)
 
(4,650
)
Term borrowings:
 
 
 
 
Issuance
 

 
121,184

Payments/maturities
 
(17,565
)
 
(145,285
)
Increases in restricted and secured term borrowings
 
5,646

 
29,231

Net increase/(decrease) in:
 
 
 
 
Deposits
 
417,612

 
(572,621
)
Short-term borrowings
 
(1,496,739
)
 
1,261,395

Net cash provided/(used) by financing activities
 
(1,223,558
)
 
621,769

Net increase/(decrease) in cash and cash equivalents
 
(8,836
)
 
49,961

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

 
1,037,794

Cash and cash equivalents at end of period
 
$
1,443,210

 
$
1,087,755

Supplemental Disclosures
 
 
 
 
Total interest paid
 
$
208,160

 
$
92,405

Total taxes paid
 
12,779

 
38,151

Total taxes refunded
 
1,576

 
8,201

Transfer from loans to OREO
 
11,388

 
5,564

Transfer from loans HFS to trading securities
 
907,788

 
829,668

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

See accompanying notes to consolidated condensed financial statements.

(a) 2018 includes $107.4 million related to the sale of approximately $120 million UPB of subprime auto loans. See Note 2- Acquisitions and Divestitures for additional information.
(b) See Note 2- Acquisitions and Divestitures for additional information.
(c) 2018 includes $19.0 million repurchased under share repurchase programs.
 



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 September 30, 2018, accounts receivable related to products and services on non-interest income were $9.0 million. For the three and nine months ended September 30, 2018, FHN had no material impairment losses on non-interest accounts receivable and there were no material contract assets, contract liabilities or deferred contract costs recorded on the Consolidated Condensed Statement of Condition as of September 30, 2018.

Transaction Price Allocated to Remaining Performance Obligations. For the three and nine months ended September 30, 2018, revenue recognized from performance obligations related to prior periods was not material.

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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 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

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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. 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.


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Note 1 – Financial Information (Continued)

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

 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
 
Fiscal Years Ended December 31
(Dollars in thousands)
 
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
Proceeds from BOLI
$
160

 
$
5,850

 
$
11,440

 
$
2,740

 
$
2,425



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

 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
 
Fiscal Years Ended December 31
(Dollars in thousands)
 
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
Net periodic benefit cost reclassified
$
415

 
$
1,665

 
$
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

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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 July 2018, the FASB issued ASU 2018-11, “Leases - Targeted Improvements,” which provides an election for a cumulative effect adjustment to retained earnings upon initial adoption of ASU 2016-02. Alternatively, under the initial guidance of ASU 2016-02, lessees and lessors are required to recognize and measure leases at the beginning of the earliest comparative period presented using a modified retrospective approach. Both adoption alternatives include a number of optional practical expedients that entities may elect to apply, which would result in continuing to account for leases that commence before the effective date in accordance with previous requirements (unless the lease is modified) except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous requirements. ASU 2016-02 also requires expanded qualitative and quantitative disclosures to assess the amount, timing, and uncertainty of cash flows arising from lease arrangements. ASU 2016-02 and ASU 2018-11 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. FHN continues to evaluate the impact of ASU 2016-02 on its current accounting and disclosure practices. Upon adoption, FHN intends to utilize the cumulative effect transition alternative provided by ASU 2018-11. FHN also intends to utilize the lease classification practical expedients and the short-term lease exemption upon adoption. FHN currently estimates that adoption of ASU 2016-02 will result in recognition of lease assets of approximately $185 million and lease liabilities of approximately $195 million along with smaller impacts to other balance sheet classifications as well as an after-tax increase in retained earnings of approximately $3 million, primarily reflecting the recognition of deferred gains associated with prior sale-leaseback transactions. Since FHN will elect to determine the discount rate on leases as of the effective date and will also elect to use hindsight in determining remaining lease terms as well as impairments of lease assets resulting from lease abandonments upon adoption, this amount may change based on revisions to the inputs used in calculating this estimated adoption effect.

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

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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. 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. FHN has begun developing the formal models and processes that will be required to implement the new standard.

In August 2018, the FASB issued ASU 2018-13,Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,” which makes multiple revisions to current disclosures requirements for fair value measurements. ASU 2018-13 removes the disclosure requirements for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for the timing of recognition for transfers between fair value levels and the discussion of valuation processes for Level 3 measurements. Additional disclosure is required for unrealized gains and losses recognized with accumulated other comprehensive income and the weighted average and range of unobservable inputs used in Level 3 measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted at an individual level for each removed or modified disclosure while adoption of other changes may be delayed until their effective date. FHN is assessing the effects of ASU 2018-13 on its current fair value disclosures.

In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans,” which makes multiple revisions to the disclosure requirements for defined benefit pension and postretirement plans. ASU 2018-14 removes the disclosure requirements for 1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, 2) the amount and timing of plan assets expected to be returned to the employer, and 3) the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits. ASU 2018-14 adds disclosures for 1) the weighted-average interest crediting rates for plans with promised interest crediting rates, 2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period, 3) the projected benefit obligation ("PBO") and fair value of plan assets for plans with PBOs in excess of plan assets and 4) the accumulated benefit obligation ("ABO") and fair value of plan assets for plans with ABOs in excess of plan assets. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 with full

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retrospective presentation required. Early adoption is permitted. FHN is assessing the effects of ASU 2018-14 on its current benefit plan disclosures.

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). Capitalized implemented costs are required to be expensed over the term of the hosting arrangement which includes the non-cancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the customer is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the customer is reasonably certain not to exercise the termination option, and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor. ASU 2018-15 also requires application of the impairment guidance applicable to long-lived assets to the capitalized implementation costs. Amortization expense related to capitalized implementation costs must be presented in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement and payments for capitalized implementation costs will be classified in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. Capitalized implementation costs will be presented in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. Adoption may be either fully retrospective or prospective only. FHN is assessing the effects of ASU 2018-15 on it current accounting practices.


14



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. In second quarter 2018, FHN canceled 2,373,220 common shares which had been issued but set aside for certain shareholders of CBF who have commenced a dissenters' appraisal process resulting in a reduction in equity consideration and an increase in cash consideration of $46.0 million. The final appraisal or settlement amount, as applicable, may differ from current estimates. 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

 
(9,085
)
 
124,918

Securities available-for-sale
 
1,017,867

 
175,526

 

 
1,193,393

Securities held-to-maturity
 
177,549

 
(177,549
)
 

 

Loans
 
7,596,049

 
(320,372
)
 
867

 
7,276,544

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

 

 

CBF Goodwill
 
231,292

 
(231,292
)
 

 

Other intangible assets
 
24,498

 
119,302

 
(2,593
)
 
141,207

Premises and equipment
 
196,298

 
37,054

 
(2,351
)
 
231,001

OREO
 
43,077

 
(9,149
)
 
(315
)
 
33,613

Other assets
 
617,232

 
41,320

(c)
(7,248
)
(c)
651,304

Total assets acquired
 
$
10,068,908

 
$
(190,204
)
 
$
(20,725
)
 
$
9,857,979

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Deposits
 
$
8,141,593

 
$
(849
)
 
$
(642
)
 
$
8,140,102

Securities sold under agreements to repurchase
 
26,664

 

 

 
26,664

Other short-term borrowings
 
390,391

 

 

 
390,391

Term borrowings
 
119,486

 
67,683

 

 
187,169

Other liabilities
 
59,995

 
4,291

 
2,908

 
67,194

Total liabilities assumed
 
8,738,129

 
71,125

 
2,266

 
8,811,520

Net assets acquired
 
$
1,330,779

 
$
(261,329
)
 
$
(22,991
)
 
1,046,459

Consideration paid:
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
(1,746,724
)
Cash
 
 
 
 
 
 
 
(469,609
)
Total consideration paid
 
 
 
 
 
 
 
(2,216,333
)
Goodwill
 
 
 
 
 
 
 
$
1,169,874

(a)
Amounts reflect adjustments made to provisional fair value estimates during the measurement period ending November 30, 2018. These adjustments were recorded in FHN's Consolidated Condensed Statement of Condition as of September 30, 2018 with a corresponding adjustment to goodwill.
(b)
Amount represents a conformity adjustment to align with FHN presentation.
(c)
Amount primarily relates to a net deferred tax asset recorded for the effects of the purchase accounting adjustments.


15

Table of Contents

Note 2 – Acquisitions and Divestitures (Continued)

Due to the timing of merger completion in relation to the previous year end, the fact that back office functions (including loan and deposit processing) have only recently been integrated, the evaluation of post-merger activity, and the extended information gathering and management review processes required to properly record acquired assets and liabilities, FHN considers its valuations of CBF's loans, loans held-for-sale, premises and equipment, other assets, tax receivables and payables, lease intangibles, other liabilities and acquired contingencies to be provisional as management continues to identify and assess information regarding the nature of these assets and liabilities and reviews the associated valuation assumptions and methodologies. Accordingly, the amounts recorded for current and deferred tax assets and liabilities are also considered provisional as FHN continues to evaluate the nature and extent of temporary (timing) and permanent 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 were substantially completed in second quarter 2018.
Total CBF merger and integration expense recognized for the three and nine months ended September 30, 2018 and 2017 are presented in the table below:
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in thousands)
2018
 
2017
 
2018
 
2017
Professional fees (a)
$
4,594

 
$
3,492

 
$
19,215

 
$
8,004

Employee compensation, incentives and benefits (b)
1,965

 
232

 
8,459

 
232

Contract employment and outsourcing (c)
599

 
351

 
3,702

 
351

Occupancy (d)
100

 
15

 
2,321

 
15

Miscellaneous expense (e)
1,384

 
130

 
6,522

 
234

All other expense (f)
1,548

 
2,771

 
41,833

 
2,786

Total
$
10,190

 
$
6,991

 
$
82,052

 
$
11,622


(a) Primarily comprised of fees for legal, accounting, investment bankers, and merger consultants.
(b) Primarily comprised of fees for severance and retention.
(c) Primarily relates to fees for temporary assistance for merger and integration activities.
(d) Primarily relates to fees associated with lease exit accruals.
(e) Consists of fees for Operations services, communications and courier, equipment rentals, depreciation, and maintenance,
supplies, travel and entertainment, computer software, and advertising and public relations.
(f) Primarily relates to contract termination charges, costs of shareholder matters and asset impairments related
to the integration, as well as other miscellaneous expenses.
On March 23, 2018, FHN divested two branches, including approximately $30 million of deposits and $2 million of loans, to Apex Bank, a Tennessee banking corporation. The branches, both in Greeneville, Tennessee, were divested in connection with First Horizon's agreement with the U.S. Department of Justice and commitments to the Board of Governors of the Federal Reserve System, which were entered into in connection with a customary review of FHN's merger with CBF.

In second quarter 2018, FHN sold approximately $120 million UPB of its subprime auto loans. These loans, originally acquired as part of the CBF acquisition, did not fit within FHN's risk profile. Based on the sales price, a measurement period adjustment to the acquisition-date fair value of the subprime auto loans was recorded in second quarter 2018.
On April 3, 2017, FTN Financial acquired substantially all of the assets and assumed substantially all of the liabilities of Coastal Securities, Inc. (“Coastal”), a national leader in the trading, securitization, and analysis of Small Business Administration (“SBA”) loans, for approximately $131 million in cash. Coastal, which was based in Houston, TX, also traded United States Department of Agriculture (“USDA”) loans and fixed income products and provided municipal underwriting and advisory services to its clients. Coastal’s government-guaranteed loan products, combined with FTN Financial’s existing SBA trading activities, have established an additional major product sector for FTN Financial. In relation to the acquisition, FTN

16

Table of Contents

Note 2 – Acquisitions and Divestitures (Continued)

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 acquisition 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.

17



Note 3 – Investment Securities
The following tables summarize FHN’s investment securities on September 30, 2018 and December 31, 2017:
 
 
September 30, 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”)
 
2,504,101

 
2,987

 
(92,211
)
 
2,414,877

Government agency issued collateralized mortgage obligations (“CMO”)
 
2,077,326

 
216

 
(86,358
)
 
1,991,184

Other U.S. government agencies
 
114,053

 

 
(965
)
 
113,088

Corporates and other debt
 
55,495

 
270

 
(691
)
 
55,074

States and municipalities
 
24,151

 

 
(450
)
 
23,701

 
 
$
4,775,226

 
$
3,473

 
$
(180,677
)
 
4,598,022

AFS debt securities recorded at fair value through earnings:

 
 
 
 
 
 
 
 
SBA-interest only strips (a)
 
 
 
 
 
 
 
10,361

Total securities available-for-sale (b)
 
 
 
 
 
 
 
$
4,608,383

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

 
$

 
$
(244
)
 
$
9,756

Total securities held-to-maturity
 
$
10,000

 
$

 
$
(244
)
 
$
9,756

 
(a)
SBA-interest only strips are recorded at elected fair value. See Note 16 - Fair Value of Assets and Liabilities for additional information.
(b)
Includes $3.6 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.

18

Table of Contents

Note 3 – Investment Securities (Continued)

(c)
Includes $4.0 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes.
The amortized cost and fair value by contractual maturity for the available-for-sale and held-to-maturity debt securities portfolios on September 30, 2018 are provided below:
 
 
 
Held-to-Maturity
 
Available-for-Sale
(Dollars in thousands)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Within 1 year
 
$

 
$

 
$
15,188

 
$
15,025

After 1 year; within 5 years
 

 

 
154,460

 
153,261

After 5 years; within 10 years
 
10,000

 
9,756

 

 
3,741

After 10 years
 

 

 
24,151

 
30,295

Subtotal
 
10,000

 
9,756

 
193,799

 
202,322

Government agency issued MBS and CMO (a)
 

 

 
4,581,427

 
4,406,061

Total
 
$
10,000

 
$
9,756

 
$
4,775,226

 
$
4,608,383

 
(a)
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The table below provides information on gross gains and gross losses from debt investment securities for the three and nine months ended September 30, 2018. Equity securities are included for periods prior to 2018.
 
 
 
Three Months Ended
September 30
 
Nine Months Ended September 30
(Dollars in thousands)
 
2018
 
2017
 
2018
 
2017
Gross gains on sales of securities
 
$

 
$
6

 
$
52

 
$
455

Gross (losses) on sales of securities
 

 

 

 

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

 
$
6

 
$
52

 
$
455

 
(a)
Cash proceeds from the sale of available-for-sale securities for the three and nine months ended September 30, 2018 and 2017 were not material.
(b)
Nine months ended September 30, 2017 includes a $.4 million gain associated with the call of a $4.4 million held-to-maturity municipal bond.
The following tables provide information on investments within the available-for-sale portfolio that had unrealized losses as of September 30, 2018 and December 31, 2017:

 
 
As of September 30, 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
 
1,500,317

 
(52,607
)
 
732,470

 
(39,604
)
 
2,232,787

 
(92,211
)
Government agency issued CMO
 
1,000,444

 
(28,664
)
 
963,763

 
(57,694
)
 
1,964,207

 
(86,358
)
Other U.S. government agencies
 
113,088

 
(965
)
 

 

 
113,088

 
(965
)
Corporates and other debt
 
40,024

 
(691
)
 

 

 
40,024

 
(691
)
States and municipalities
 
23,701

 
(450
)
 

 

 
23,701

 
(450
)
Total temporarily impaired securities
 
$
2,677,574

 
$
(83,377
)
 
$
1,696,331

 
$
(97,300
)
 
$
4,373,905

 
$
(180,677
)
 

19

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 $21.6 million and $16.3 million at September 30, 2018 and January 1, 2018, respectively. The year-to-date 2018 gross amounts of upward and downward valuation adjustments were not significant.
Unrealized gains of $1.0 million and $2.1 million were recognized in the three and nine months ended September 30, 2018, respectively, for equity investments with readily determinable fair values.
In third quarter 2018 FHN sold its remaining holdings of Visa Class B Shares resulting in a pre-tax gain of $212.9 million recognized within the Corporate segment. See the Visa Matters section of Note 10 - Contingencies and Other Disclosures and Other Derivatives section of Note 14 - Derivatives for more information regarding FHN’s Visa shares.




20



Note 4 – Loans
The following table provides the balance of loans, net of unearned income, by portfolio segment as of September 30, 2018 and December 31, 2017:
 
 
September 30
 
December 31
(Dollars in thousands)
 
2018
 
2017
Commercial:
 
 
 
 
Commercial, financial, and industrial
 
$
16,044,145

 
$
16,057,273

Commercial real estate
 
4,237,036

 
4,214,695

Consumer:
 
 
 
 
Consumer real estate (a)
 
6,191,183

 
6,367,755

Permanent mortgage
 
347,054

 
399,307

Credit card & other
 
530,796

 
619,899

Loans, net of unearned income
 
$
27,350,214

 
$
27,658,929

Allowance for loan losses
 
185,959

 
189,555

Total net loans
 
$
27,164,255

 
$
27,469,374

 
(a)
Balances as of September 30, 2018 and December 31, 2017, include $17.1 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 $2.7 billion (17 percent of the C&I portfolio, or 10 percent of the total loans). FHN had loans to mortgage companies totaling $2.1 billion (13 percent of the C&I segment, or 8 percent of total loans) as of September 30, 2018. As a result, 30 percent of the C&I segment is sensitive to impacts on the financial services industry.









21

Table of Contents

Note 4 – Loans (Continued)

Purchased Credit-Impaired Loans
The following table presents a rollforward of the accretable yield for the three and nine months ended September 30, 2018 and 2017:
 
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
(Dollars in thousands)
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
 
$
14,474

 
$
4,045

 
$
15,623

 
$
6,871

Accretion
 
(2,183
)
 
(642
)