ANNUAL REPORT 2016
   

 

 

 

CORPORATE OVERVIEW

 

Our Commitment

At First Horizon National Corp. we are committed to our customers, our people, our communities and our shareholders. We demonstrate that commitment through financial performance and corporate responsibility. We make investments that benefit our stakeholders because when they prosper, so do we. In 2016 we continued to make progress toward a future of sustained success – a future based on our 153-year history of earning the trust of Tennesseans, on our core regional banking and fixed income businesses, on the dedication of our 4,300 employees, on our support for the communities we serve and on the confidence of our shareholders.

 

Our People

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

 

Our Core Businesses

Regional banking: First Tennessee Bank has provided financial services in local communities since 1864. Today we have more than 160 offices in Tennessee and surrounding states. We have the top deposit market share in Tennessee, according to the latest FDIC figures. Our focus on consistently offering a distinctive customer experience has resulted in one of the highest customer retention rates of any bank in the country. Personal service, advanced technology and helpful employees set First Tennessee apart. We are consistently named best bank in newspaper reader surveys in the communities we serve.

 

We have a growing presence in the Carolinas, Virginia and North Florida – our Mid-Atlantic region – and in 2014 we opened an office in Houston, TX. In these new markets our services include commercial real estate, private client, commercial banking, wealth management and corporate and commercial lending. FTB Advisors, our wealth management team, offers access to the same products available from national brokerage firms delivered by local professionals who care about our communities and customers.

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

 

Fixed income: FTN Financial is an industry leader in fixed income sales, trading and strategies for institutional customers in the U.S. and abroad. The strength of FTN Financial’s platform is its extensive fixed income distribution network of more than 5,300 institutional customers worldwide, including approximately half of all U.S. banks with portfolios over $100 million. FTN Financial also provides investment services and balance sheet management solutions.

 

With 29 offices across the country, FTN Financial provides a broad spectrum of financial services for the investment and banking communities through the integration of traditional capital markets securities activities, loan sales, portfolio advisory services and derivative sales.

 

In 2016, FTN Financial’s performance again demonstrated the strength of our fixed income platform, anchored in our experienced sales and trading resources and deep customer relationships. More information can be found at www.FTNFinancial.com.

 

Our Communities

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

 

Our employee volunteer program has received national recognition from the Financial Services Roundtable. In 2016, our volunteers donated more than 23,000 hours of community service, and we supported their efforts through leadership grants to nearly 130 nonprofits and more than 380 matching gifts.


 

We created a $50 million Community Development Fund to distribute grants to nonprofits, ranging from $5,000 to $10,000 for Community Reinvestment Act projects. In 2016, our Community Development Fund donated more than $3 million to more than 120 organizations to support low to moderate income residents in the communities we serve.

 

We established the First Tennessee Foundation in 1993 to invest in the communities we serve. Through this private charitable foundation, we make donations in a way that engages our employees, responds inclusively to needs and promotes progress and prosperity throughout Tennessee and across our footprint. Since its inception, the First Tennessee Foundation has donated more than $70 million to meet community needs. In 2016, our foundation donated nearly $6 million divided among nearly 400 nonprofits. More information can be found at www.FirstTennesseeFoundation.com.

 

We focus our community investment in key areas:

Financial literacy and education:
To plant the seeds of success, we give to help educate young people. Our volunteers provide tutoring to students, with a special emphasis on financial literacy. The Tennessee Financial Literacy Commission has named us an outstanding corporate partner. We have partnered with Operation HOPE, a community development group, to offer free credit counseling workshops at several of our locations. We support Adopt-a-School programs throughout the state.

 

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

 

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

 

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

Our World

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

 

In 2016, our recycling program with Cintas Document Management helped us save the equivalent of an estimated 24,000 trees, enough energy to supply 365 homes a year, nearly 23 million gallons of water, nearly 2 million pounds of solid waste and the equivalent of the greenhouse gasses produced by 519 cars each year.
   
We continue to use less paper and cardboard and recycle an average of 5 tons of paper a month.
   
To reduce water consumption, we use indigenous plants for landscaping at all new facilities.
   
Buildings are designed with a goal of enhancing energy efficiency and sustainability, from window blinds to the heating and cooling systems to motion-sensor lighting and low-volume flush valves and faucets.
   
Recycled products are used in carpeting, wallpaper, fabrics and parking abutments.
   
At our corporate headquarters, air conditioning equipment uses environmentally friendly refrigerant, and we continue to upgrade aging equipment at our locations, using environmentally friendly refrigerant and improving air quality and efficiency.

 

Our Promise

We promise to be the best at serving our customers, one opportunity at a time. We will continue to advance our people, support our communities and reward our investors. Carrying on our 153-year tradition, First Horizon is building for a bright future.


 

CHAIRMAN’S LETTER

CAPITALIZING ON MOMENTUM, BUILDING A BRIGHTER FUTURE

 

Dear Fellow First Horizon Shareholders:

 

Our company made great strides in 2016, pursuing strategic goals and building significant momentum for 2017. Our core businesses of regional banking through First Tennessee and fixed income through FTN Financial generated solid results and our non-core legacy issues continued to decrease. By focusing on soundness, profitability and growth we believe First Horizon is well prepared for the opportunities, challenges and changing landscape of the financial services industry.

 

From 2015 to 2016, our loans and deposits were up double-digits, revenue grew 9 percent and expenses declined 12 percent.

 

We increased our quarterly cash dividend on common stock by 29 percent to $0.09 per share, up from $0.07 per share during 2016. This raised the annual common dividend rate from $0.28 per share to $0.36 per share. We also repurchased approximately 7.4 million shares at an average price of $12.67 in 2016.

 

Technology and innovation continue to play increasingly significant roles in our industry and First Horizon is committed to devoting the time and resources necessary to meet new challenges. This is not only practical, but also purposeful because financial companies must adapt to an evolving industry in order to survive and thrive.

 

Technology is having a profound impact on the industry in many ways. Most importantly, it is driving new entrants into financial services with new and innovative ways of serving customers. Secondarily, technology is changing the cost structure of the business. While driving efficiencies in the back office, substantial new technology investments for products, channels and other customer-facing tools are ongoing at an ever increasing pace.

 

Although technology in and of itself is not likely to lead to sustained competitive advantage, failure to deliver technology to meet customer service and product needs can be an immediate and long-term disadvantage. We plan to evaluate emerging customer and technology trends and make measured investments in continuing to evolve our business model.

 

Looking ahead, we expect to see continued rising interest rates and some moderation in regulation of financial services institutions. While we don’t know what challenges and opportunities will result from these changes, we are confident that First Horizon will be nimble enough to pivot when necessary to maximize our performance.

Our message for 2017 echoes our focus from the past decade: strategic focus, disciplined progress and drive for profitability. We remain committed to these goals to benefit our customers, our employees and our shareholders.

 

Solid foundation

Our Bonefish strategy continues to produce long-term earnings power and solid returns for our shareholders. Since 2011, both return on tangible common equity and return on common equity have increased at a compound annual growth rate of 12 percent. Our increased share price and reinvested dividends resulted in total shareholder returns of 169 percent over the same time period. Our focus on efficiency, productivity and economic profit has made First Horizon a more responsive and higher return company.

 

This efficiency model means working smarter to streamline processes and performing sharper to increase profitability. In the face of challenging circumstances in our industry, we experienced exceptional loan and deposit growth across our First Tennessee Bank footprint. We maintained our No. 1 deposit market share in Tennessee and we are steadily growing in our other markets.

 

Steady progress

We expect continued modest economic growth over the next few years. Solid, steady progress is the likely scenario for the foreseeable future, just as has been the case for the last several years.

 

As we celebrate our 153rd year, we remain committed to that foundation as we continue to strengthen our customer relationships and expand our presence across our markets. We are pursuing greater opportunities in Middle Tennessee, Houston and the Mid-Atlantic, and we are working hard to improve and grow all lines of business.

 

One example of this strategy is the expansion of First Tennessee’s restaurant franchise business through the acquisition of approximately $535 million in restaurant franchise loans from GE Capital. By acquiring the Southeast and Southwest loan portfolios from GE’s restaurant franchise finance business and hiring top managers to run this new line of business, we expect to grow our presence in this sector and return even greater value to our shareholders.

 

Another example is the announced acquisition of Houston-based Coastal Securities by FTN Financial. Coastal Securities is a national leader in the trading, securitization and analysis of Small Business Administration loans and


 

also trades in U.S. Department of Agriculture loans and fixed income products and provides municipal underwriting and advisory services. We believe this acquisition will establish an additional major product sector for FTN Financial and generate increased revenue and product diversification.

 

First Tennessee further positioned itself for sustained growth by expanding specialized banking needs through two other areas: music industry banking and healthcare finance. By hiring experienced bankers with established relationships to lead these segments, our company will broaden its expertise and grow its business throughout Tennessee and with selected customers across the country.

 

Sustained differentiation

Building on our performance in 2016, First Horizon continues to be a top workplace that recruits and retains the best and brightest employees. Our employees are engaged and empowered and deliver differentiated service that distinguishes our company from others in this or any industry.

 

Our longstanding commitment to diversity and inclusion in the workplace and marketplace is unwavering. We were rated by the Human Rights Campaign as one of the Top 10 companies in Tennessee for LGBT inclusiveness and we earned recognition for our focus on diversity and inclusion from Profiles in Diversity Journal and Savoy magazine. We also were named one of the Top 60 Companies for Executive Women by the National Association for Female Executives and one of the nation’s top employers by American Banker and Working Mother magazines.

 

Our employees are key to our success and they are phenomenally engaged not only at work, but also in the communities we serve. During 2016, 20 percent of our employees logged more than 23,000 hours of volunteer service at charitable and civic organizations. Our employees participated in more than 4,700 unique volunteer events and the value of our employee service exceeded an estimated $541,000.

Our corporate citizenship is equally impactful. The First Tennessee Foundation awarded approximately $6 million in foundation grants during 2016 to help our communities. Nearly 400 nonprofits received foundation grants and our investment in the communities we serve continues to be a substantial part of our identity. And our newly established First Tennessee Community Development Fund awarded an additional $3 million to organizations that support the needs of low to moderate income communities. When our communities thrive we thrive, and our actions prove our commitment to this belief.

 

Significant momentum

We are extraordinarily proud of our successes in the past year and we are incredibly excited about our future. Moving forward we plan to build on our momentum by adapting to changes and seeking growth opportunities. As we do so, we will strive to offer outstanding service to our customers and create an engaging environment for our employees. Our robust strategy will remain focused on our Bonefish targets and increasing value for shareholders.

 

As we celebrate a legacy that spans 153 years, we are confident of a bright and prosperous future for our company. We are grateful for our employees, our customers and our shareholders who have helped us create such a dynamic foundation.

 

I am honored and humbled to serve you at First Horizon. Thank you for your investment and trust in us, and be assured that we will continue to work hard to deserve it.

 

Sincerely,

 

 

 

D. Bryan Jordan

 

Chairman, President and CEO

 

First Horizon National Corp.

 

March 1, 2017


 

2016 HIGHLIGHTS

 

   
  First Tennessee Bank
Grew average loans 15 percent, with strength in specialty lending
Increased average core deposits 7 percent
No. 1 deposit market share in Tennessee
Earned top bank honors across markets
Launched online banking platform
   
  FTN Financial
Increased fixed income average daily revenues 18 percent
Other produce revenues up 12 percent
Ranked as top underwriter of callable GSE debt, outpacing large Wall Street firms
Top 10 competitive municipal underwriter
   
  Consolidated
Revenues grew 9 percent, driven by 12 percent net interest income gain
Net interest margin rose 11 basis points
Non-performing assets down 23 percent
   
  Capital deployment
Increased dividend 17 percent in 2016 and another 29 percent in 2017
Acquired franchise finance loan portfolio from GE Capital; agreed to acquire Coastal Securities
Repurchased 7.4 million shares at an average price of $12.67
   
  Community investment
Expanded partnership with Operation HOPE with new offices in Chattanooga and Knoxville that promote economic empowerment in distressed neighborhoods and offer free credit counseling workshops, with more to come across markets
Created a $50 million Community Development Fund to distribute grants to nonprofits, ranging from $5,000 to $10,000 for Community Reinvestment Act projects
   
Note: Loan growth, deposit growth and fixed income average daily revenue increases are from 2015-2016. Deposit market share ranking is based on FDIC data as of June 30, 2016.
   

 

 

 

©2017 First Horizon National Corporation

 

FINANCIAL INFORMATION AND DISCUSSION

 

TABLE OF CONTENTS

 

Selected Financial and Operating Data 2
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
   
General Information 3
   
Forward-Looking Statements 4
   
Financial Summary – 2016 compared to 2015 5
   
Business Line Review – 2016 compared to 2015 7
   
Income Statement Review – 2016 compared to 2015; 2015 compared to 2014 9
   
Statement of Condition Review – 2016 compared to 2015 19
   
Capital – 2016 compared to 2015 23
   
Asset Quality – Trend Analysis of 2016 compared to 2015 26
   
Risk Management 47
   
Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations 57
   
Market Uncertainties and Prospective Trends 63
   
Critical Accounting Policies 64
   
Quarterly Financial Information 72
   
Non-GAAP Information 73
   
Glossary of Selected Financial Terms and Acronyms 74
   
Report of Management on Internal Control over Financial Reporting 80
   
Reports of Independent Registered Public Accounting Firm 81
   
Consolidated Statements of Condition 83
   
Consolidated Statements of Income 84
   
Consolidated Statements of Comprehensive Income 85
   
Consolidated Statements of Equity 86
   
Consolidated Statements of Cash Flows 87
   
Notes to the Consolidated Financial Statements 88
   
Consolidated Historical Statements of Income 179
   
Consolidated Average Balance Sheet and Related Yields and Rates 180
   
Total Shareholder Return Performance Graph 182

 

FIRST HORIZON NATIONAL CORPORATION

 

SELECTED FINANCIAL AND OPERATING DATA

(Dollars in millions except per share data)  2016   2015   2014   2013   2012 
Income/(loss) from continuing operations  $238.5   $97.3   $234.0   $37.8   $(15.5)
Income/(loss) from discontinued operations, net of tax   -    -    -    0.5    0.1 
Net income/(loss)   238.5    97.3    234.0    38.4    (15.4)
Income/(loss) available to common shareholders   220.8    79.7    216.3    21.1    (26.8)
Common Stock Data                         
Earnings/(loss) per common share from continuing operations  $0.95   $0.34   $0.92   $0.09   $(0.11)
Earnings/(loss) per common share   0.95    0.34    0.92    0.09    (0.11)
Diluted earnings/(loss) per common share from continuing operations   0.94    0.34    0.91    0.09    (0.11)
Diluted earnings/(loss) per common share   0.94    0.34    0.91    0.09    (0.11)
Cash dividends declared per common share   0.28    0.24    0.20    0.20    0.04 
Book value per common share   9.90    9.42    9.35    8.87    9.05 
Closing price of common stock per share:                         
High   20.61    16.20    13.91    12.55    10.89 
Low   11.62    12.31    11.18    9.72    7.55 
Year-end   20.01    14.52    13.58    11.65    9.91 
Cash dividends per common share/year-end closing price   1.4%   1.7%   1.5%   1.7%   0.4%
Cash dividends per common share/diluted earnings per common share   29.8%   70.6%   22.0%   222.2%   (36.4)%
Price/earnings ratio   21.3x   42.7x   14.9x   129.4x   NM 
Market capitalization  $4,674.8   $3,464.3   $3,180.7   $2,753.7   $2,414.1 
Average shares (thousands)   232,700    234,189    234,997    237,972    248,349 
Average diluted shares (thousands)   235,292    236,266    236,735    239,794    248,349 
Period-end shares outstanding (thousands)   233,624    238,587    234,220    236,370    243,598 
Volume of shares traded (thousands)   574,196    562,553    592,399    787,295    1,221,242 
Selected Average Balances                         
Total assets  $27,427.2   $25,636.0   $23,993.0   $24,399.9   $25,045.2 
Total loans, net of unearned income   18,303.9    16,624.4    15,521.0    15,726.4    16,205.4 
Securities available-for-sale   4,002.1    3,692.3    3,548.4    3,180.4    3,145.5 
Earning assets   25,180.1    23,456.2    21,825.2    21,772.0    22,224.8 
Total deposits   20,898.8    18,753.7    16,401.7    16,340.2    16,212.0 
Total term borrowings   1,130.2    1,557.2    1,591.0    1,942.3    2,323.7 
Common equity   2,300.4    2,190.1    2,200.9    2,135.6    2,307.4 
Total equity   2,691.5    2,581.2    2,592.0    2,518.8    2,602.5 
Selected Period-End Balances                         
Total assets  $28,555.2   $26,192.6   $25,665.4   $23,782.4   $25,322.0 
Total loans, net of unearned income   19,589.5    17,686.5    16,230.2    15,389.1    16,708.6 
Securities available-for-sale   3,943.5    3,929.8    3,556.6    3,398.5    3,061.8 
Earning assets   26,280.2    23,971.5    23,470.9    21,168.4    22,424.8 
Total deposits   22,672.4    19,967.5    18,068.9    16,735.0    16,629.7 
Total term borrowings   1,040.7    1,312.7    1,877.3    1,737.8    2,223.7 
Common equity   2,314.0    2,248.5    2,190.5    2,097.3    2,204.4 
Total equity   2,705.1    2,639.6    2,581.6    2,488.4    2,499.5 
Selected Ratios                         
Return on average common equity (a)   9.60%   3.64%   9.83%   0.99%   (1.16)%
Return on average assets (b)   0.87    0.38    0.98    0.16    (0.06)
Net interest margin (c)   2.94    2.83    2.92    2.96    3.13 
Allowance for loan losses to loans   1.03    1.19    1.43    1.65    1.66 
Net charge-offs to average loans   0.10    0.19    0.31    0.50    1.14 
Total period-end equity to period-end assets   9.47    10.08    10.06    10.46    9.87 
Tangible common equity to tangible assets (d)   7.42    7.82    7.91    8.19    8.14 
Common equity tier 1 ratio   9.94    10.45    N/A    N/A    N/A 

Certain previously reported amounts have been revised to reflect the retroactive effect of the adoption of ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” See Note 1 – Summary of Significant Accounting Policies for additional information.

See accompanying notes to consolidated financial statements.

Numbers may not add due to rounding.

NM - Not meaningful

N/A - Not applicable

(a) Calculated using net income/(loss) available to common shareholders divided by average common equity.
(b) Calculated using net income divided by average assets.
(c) Net interest margin is computed using total net interest income adjusted to a FTE basis assuming a statutory federal income tax rate of 35 percent and, where applicable, state income taxes.
(d) Represents a non-GAAP measure which is reconciled to total equity to total assets (GAAP) in the non-GAAP to GAAP reconciliation in table 31.

 

2 FIRST HORIZON NATIONAL CORPORATION
 

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

 

GENERAL INFORMATION

 

First Horizon National Corporation (“FHN”) began as a community bank chartered in 1864 and as of December 31, 2016, was one of the 40 largest publicly traded banking organizations in the United States in terms of asset size.

 

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

 

FHN is composed of the following operating segments:

 

  Regional banking offers financial products and services including traditional lending and deposit-taking to consumer and commercial customers in Tennessee and other selected markets. Regional banking provides investments, financial planning, trust services and asset management, along with credit card and cash management services. Additionally, the regional banking segment includes correspondent banking which provides credit, depository, and other banking-related services to other financial institutions nationally.
     
  Fixed income provides financial services for depository and non-depository institutions through the sale and distribution of fixed income securities, loan sales, portfolio advisory services, and derivative sales.
     
  Corporate consists of unallocated corporate expenses, expense on subordinated debt issuances, bank-owned life insurance (“BOLI”), unallocated interest income associated with excess equity, net impact of raising incremental capital, revenue and expense associated with deferred compensation plans, funds management, tax credit investment activities, gains on the extinguishment of debt, derivative valuation adjustments related to prior sales of Visa Class B shares, and acquisition-related costs.
     
  Non-strategic includes exited businesses and wind-down national consumer lending activities, other discontinued products, and loan portfolios and service lines.

 

On October 27, 2016, FTN Financial announced its plan to acquire substantially all of the assets and assume 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 $160 million in cash. Based in Houston, TX, Coastal also trades United States Department of Agriculture (“USDA”) loans and fixed income products and provides municipal underwriting and advisory services to its clients. Coastal’s government-guaranteed loan products, combined with FTN Financial’s existing SBA trading activities, will establish an additional major product sector for FTN Financial. The transaction, which is subject to regulatory approvals and other customary closing conditions, is expected to close in the second quarter of 2017.

 

On September 16, 2016, FTBNA acquired $537.4 million of UPB in restaurant franchise loans from GE Capital. The acquired loans were combined with existing FTBNA relationships to establish a franchise finance specialty lending business.

 

On October 2, 2015, FHN completed its acquisition of TrustAtlantic Financial Corporation (“TrustAtlantic Financial” or “TAF”), and its wholly owned bank subsidiary TrustAtlantic Bank (“TAB”), for an aggregate of 5.1 million shares of FHN common stock and $23.9 million in cash in a transaction valued at $96.7 million. The fair value of the acquired assets totaled $445.3 million, including $281.9 million in loans. FHN also assumed $344.1 million of TAB deposits. FHN’s operating results include the operating results of the acquired assets and assumed liabilities subsequent to the acquisition date. Refer to Note 2 – Acquisitions and Divestitures for additional information.

 

FIRST HORIZON NATIONAL CORPORATION 3
 

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

 

ADOPTION OF ACCOUNTING UPDATES

 

Effective January 1, 2016, FHN retroactively adopted the requirements of ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance costs related to a recognized debt liability be presented as a direct reduction from the carrying value of that debt liability, consistent with debt discounts. FHN previously classified debt issuance costs within Other assets in the Consolidated Statements of Condition, consistent with prior requirements. The retrospective application of ASU 2015-03 resulted in a decrease to Other assets and Term borrowings of $2.5 million at December 31, 2015 versus previously reported amounts. The adoption of ASU 2015-03 had no effect on FHN’s recognition of interest expense. All prior periods and associated narrative in this report have been revised to reflect this change. For additional information see Note 1 – Summary of Significant Accounting Policies in this report.

 

Non-GAAP Measures

 

Certain measures are included in the narrative and tables in this MD&A that are “non-GAAP”, meaning (under U.S. financial reporting rules) they are not presented in accordance with generally accepted accounting principles (“GAAP”) in the U.S. and also are not codified in U.S. banking regulations currently applicable to FHN. Although other entities may use calculation methods that differ from those used by FHN for non-GAAP measures, FHN’s management believes such measures are relevant to understanding the capital position or financial results of FHN. Non-GAAP measures are reported to FHN’s management and Board of Directors through various internal reports.

 

Presentation of regulatory measures, even those which are not GAAP, provide a meaningful base for comparability to other financial institutions subject to the same regulations as FHN, as demonstrated by their use by banking regulators in reviewing capital adequacy of financial institutions. Although not GAAP terms, these regulatory measures are not considered “non-GAAP” under U.S. financial reporting rules as long as their presentation conforms to regulatory standards. Regulatory measures used in this MD&A include: tier 1 capital, generally defined as the sum of core capital (including common equity and instruments that cannot be redeemed at the option of the holder) adjusted for certain items under risk based capital regulations; common equity tier 1 capital, generally defined as common equity less goodwill, other intangibles, and certain other required regulatory deductions; and risk-weighted assets (“RWA”), which is a measure of total on- and off-balance sheet assets adjusted for credit and market risk, used to determine regulatory capital ratios.

 

The non-GAAP measures presented in this filing are return on average tangible common equity (“ROTCE”), tangible common equity to tangible assets and adjusted tangible common equity to risk-weighted assets. Refer to table 31 for a reconciliation of non-GAAP to GAAP measures and presentation of the most comparable GAAP items.

 

FORWARD-LOOKING STATEMENTS

 

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

 

Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond FHN’s control, and many of which, with respect to future business decisions and actions (including acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among

 

4 FIRST HORIZON NATIONAL CORPORATION
 

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

 

FHN assumes no obligation to update or revise any forward-looking statements that are made in this Annual Report to Shareholders for the period ended December 31, 2016 of which this MD&A is a part or otherwise from time to time. Actual results could differ and expectations could change, possibly materially, because of one or more factors, including those presented in this Forward-Looking Statements section, in other sections of this MD&A, in other parts of the Annual Report, in the annual report on Form 10-K to which the Annual Report is an exhibit, in other exhibits to the Form 10-K, and in the documents incorporated into the Form 10-K.

 

FINANCIAL SUMMARY – 2016 COMPARED TO 2015

 

FHN reported net income available to common shareholders of $220.8 million or $.94 per diluted share in 2016 compared to $79.7 million or $.34 per diluted share in 2015. The increase in net income available to common shareholders in 2016 was due to improvements in both revenues and expenses. Various factors significantly impacted reported earnings including strategic transactions and initiatives expected to boost growth and profitability occurring in both 2016 and 2015, the completion of transactions associated with the wind-down of legacy businesses, the resolution of certain legal matters, and the economic environment.

 

2016 was a solid year for FHN with double-digit loan and deposit growth, higher revenue, expense discipline, and strong credit quality. FHN continued to see strong loan growth across many of our loan portfolios in the regional bank in 2016. Additionally, newer lines of business including franchise finance, energy lending, and specialty healthcare also contributed to loan growth within the regional banking segment in 2016, more than offsetting runoff of the higher-risk non-strategic loan balances. The company continued to focus on its core businesses through strategic hires, expansion into specialty businesses and growth markets, and investments in technology. While these investments led to higher expenses in some areas in 2016, expense control remained a priority, as management looked for opportunities to deploy capital in ways that drove higher returns.

 

FIRST HORIZON NATIONAL CORPORATION 5
 

Although the economy modestly expanded in 2016 and customer optimism began to increase, certain operating environments for the industry remained somewhat challenging. Despite those headwinds, FHN’s focused efforts yielded strong balance sheet growth within our Tennessee footprint and higher-return specialty businesses with continued investment in new markets and businesses, resulting in a 10 percent increase in average loans and an 11 percent increase in average deposits in 2016 compared to the prior year. Although, historically low interest rates continue to pressure FHN’s net interest margin (“NIM”) and net interest income (“NII”), the expansion of FHN’s balance sheet, coupled with a modest lift from the December 2015 rate increase led to a $75.4 million increase in NII in 2016 and NIM improvement of 11 basis points to 2.94 percent in 2016.

 

FHN’s fixed income business performed well in 2016, with total revenue growth of 13 percent compared to expense growth of 4 percent. Average fixed income product daily revenues increased to $.9 million in 2016 from $.8 million in 2015. Expenses within the fixed income segment were higher in 2016, primarily due to higher variable compensation costs, but this increase was somewhat mitigated by a decline in litigation charges related to the settlement of a legal matter recognized in 2015. In fourth quarter 2016, FHN entered into an agreement to acquire substantially all of the assets and assume substantially all of the liabilities of Coastal Securities, Inc. The transaction is expected to close in the second quarter of 2017, and should provide additional growth opportunities for the fixed income segment.

 

During 2016, FHN benefited from several transactions related to the wind-down of legacy businesses, including a $32.7 million favorable mortgage repurchase reserve release associated with the settlements and recoveries of certain repurchase claims. Additionally, FHN recognized gains related to recoveries associated with prior legacy mortgage servicing sales and the reversal of a contingency accrual associated with prior sales of MSR.

 

In 2016, FHN settled several legal matters, resulting in the recognition of $30.5 million in accruals related to loss contingencies and litigation matters, and elevated legal expenses relative to 2015. In 2015, FHN incurred significant costs associated with legal settlements, including a settlement with two federal agencies, the Department of Justice (“DOJ”) and the department of Housing and Urban Development Office of Inspector General (“HUD”), to settle potential claims related to FHN’s underwriting and origination of FHA-insured mortgage loans resulting in a $162.5 million charge to litigation and regulatory matters. In addition, FHN settled or moved forward with certain other legal matters contributing to higher litigation-related loss accruals in 2015 relative to 2016.

 

In 2016, FHN leveraged opportunities to smartly deploy capital via the acquisition of the franchise finance portfolio, share repurchases, and dividend payouts. FHN looks for opportunities in the valuation of FHN stock, which in 2016 led to the repurchase of $93.5 million of shares primarily in the first half of the year compared to $28.4 million of shares repurchased in 2015. Additionally, for the second year in a row, quarterly dividends increased $.01 per share, from $.06 per share in 2015 to $.07 per share in 2016, and FHN recently announced a 29 percent increase in quarterly dividends in 2017 to $.09 per share. While capital ratios decreased in 2016 relative to 2015, primarily due to increases in risk-weighted assets associated with the balance sheet expansion, overall FHN’s capital ratios remain strong, significantly above well capitalized standards.

 

Asset quality trends were again strong in 2016. Net charge-offs and nonperforming assets declined 39 percent and 22 percent, respectively, year-over-year, reflecting historically strong credit quality in 2016. The allowance for loan losses continued to decline, but at a slower pace, decreasing 4 percent in 2016 as a result of commercial loan growth which partially offset the positive impact of improving asset quality metrics on the allowance for loan losses and runoff of non-strategic balances.

 

Return on average common equity (“ROE”) and ROTCE for 2016 were 9.60 percent and 10.59 percent, respectively, compared to 3.64 percent and 3.97 percent in 2015. Return on average assets (“ROA”) was .87 percent in 2016 compared to .38 percent in 2015. The tangible common equity to tangible assets ratio was 7.42 percent in 2016 compared to 7.82 percent in 2015. Common equity tier 1, Tier 1, Total capital, and Leverage ratios were 9.94 percent, 11.17 percent, 12.24 percent, and 9.35 percent on December 31, 2016, compared to 10.45 percent, 11.79 percent, 13.01 percent, and 9.85 percent, respectively, on December 31, 2015. Total period-end assets were $28.6 billion on December 31, 2016, a 9 percent increase from $26.2 billion on December 31, 2015. Total period-end equity was $2.7 billion on December 31, 2016, up from $2.6 billion on December 31, 2015.

 

6 FIRST HORIZON NATIONAL CORPORATION
 

BUSINESS LINE REVIEW – 2016 COMPARED TO 2015

 

Regional Banking

Pre-tax income within the regional banking segment increased 9 percent to $336.5 million in 2016 from $309.6 million in 2015. The increase in pre-tax income was driven by higher net interest income which more than offset increases in expenses and loan loss provisioning.

 

Total revenue increased 9 percent, or $84.1 million, to $990.9 million in 2016, from $906.8 million in 2015, primarily driven by an increase in NII. The increase in NII was largely due to higher average balances of commercial loans and a higher earnings credit on deposits. Noninterest income was $249.0 million in 2016, down 1 percent from 2015 driven by a decline in fees from deposit transactions and cash management and lower brokerage, management fees, and commission income from the Bank’s wealth management group. These decreases were partially offset by an increase in bankcard income, higher fee income associated with derivative sales, and a $1.2 million increase in gains on the sale of properties compared to a year ago. The decrease in fees from deposit transactions and cash management was primarily due to lower non-sufficient funds (“NSF”)/overdraft fees in the current year as a result of changes in consumer behavior. The decline in brokerage, management fees, and commission income was primarily driven by a reduction in annuity income as a result of market conditions and lower variable annuity sales as practices were adjusted to meet the standards of a changing regulatory environment. Additionally, a shift in product and fee structures caused a temporary decline in revenues but better met client needs and should result in revenue streams over the life of the product. Bankcard income increased in 2016, relative to the prior year, largely driven by a significant new relationship.

 

Provision expense was $38.9 million in 2016 compared to $34.5 million in 2015. The net increase in provision in 2016 compared to the prior year was primarily driven by increased reserves related to loan growth within the commercial portfolio partially offset by a decrease in the consumer real estate portfolio which was favorably affected by improved portfolio performance and historically low net charge-offs which continued to drive lower loss rates.

 

Noninterest expense increased 9 percent to $615.5 million in 2016 from $562.6 million in 2015.The expense increase was largely driven by an increase in personnel-related expenses relative to 2015 and a $20.4 million increase in accruals related to loss contingencies and litigation matters. A majority of the litigation accrual relates to a matter that was settled in third quarter 2016. Expenses associated with strategic hires in expansion markets and specialty areas increased $9.6 million from 2015 to 2016. Additionally, higher incentive expense associated with loan growth and retention initiatives increased $4.5 million relative to 2015 and a year-over-year increase in headcount related to the TAB acquisition contributed $3.9 million to the increase in personnel expense within the regional bank in 2016. To a smaller extent, FHN recognized a $4.2 million net increase in fixed asset impairments and lease abandonment charges related to branch closures in 2016 relative to 2015 and higher FDIC premium expense relative to 2015 due in large part to balance sheet growth. Additionally, investments in the new digital banking platform led to higher computer software and operations services expense in 2016 relative to 2015, however, these increases were somewhat offset by decreases in legal, advertising, contract employment, and the provision for unfunded commitments in 2016 relative to the prior year.

 

Fixed Income

Pre-tax income in the fixed income segment was $50.2 million in 2016 compared to $26.4 million in 2015. The increase in pre-tax income was the result of higher revenues, which more than offset an increase in expenses. Fixed income product revenue increased to $229.7 million in 2016 from $195.9 million in 2015, with average daily revenue (“ADR”) increasing from $.8 million in 2015 to $.9 million in 2016. The increase in fixed income product revenue was driven by more favorable market conditions during most of 2016, including increased rate and market volatility as well as expansion of the distribution platform. However, trading activity was somewhat muted in late 2016 due to a sharp rate increase and market uncertainties following the U.S. presidential election. Other product revenue increased 12 percent to $39.7 million during 2016, primarily driven by increases in fees from loan and derivative sales and portfolio advisory services.

 

Noninterest expense was $229.9 million in 2016 compared to $220.4 million in 2015. The increase in expense in 2016 was largely the result of higher variable compensation associated with the increase in fixed income product

 

FIRST HORIZON NATIONAL CORPORATION 7
 

revenue, but was somewhat offset by a decline in litigation expense, as 2015 included $11.6 million related to the settlement of a legal matter.

 

Corporate

The pre-tax loss for the corporate segment was $104.4 million and $106.3 million for 2016 and 2015, respectively.

 

Net interest expense decreased $5.8 million to $65.9 million in 2016 from $71.7 million in 2015, driven by a decrease in average term borrowings outstanding and a larger AFS securities portfolio. Noninterest income (including securities gain/losses) was $20.4 million in 2016, down from $23.3 million in 2015. The decrease in noninterest income was driven by a $5.8 million gain on the extinguishment of junior subordinated notes underlying $200 million of trust preferred debt recognized in 2015, the impact of which was somewhat offset by an increase in deferred compensation income in 2016 versus 2015. Deferred compensation income fluctuates with changes in the market value of the underlying investments and is mirrored by changes in deferred compensation expense which is included in personnel expense.

 

Noninterest expense increased to $58.9 million in 2016 from $57.9 million in 2015. The increase in noninterest expense was partially driven by higher personnel-related expenses due in large part to an increase in deferred compensation expense, which is directionally consistent with the increase in deferred compensation income described above. A promotional branding campaign and higher expenses associated with Community Reinvestment Act (“CRA”) initiatives led to an increase in advertising and public relations expense, which also contributed to the expense increase in 2016 relative to the prior year. Additionally, a $1.9 million net increase in negative valuation adjustments associated with derivatives related to prior sales of Visa Class B shares contributed to the expense increase in 2016. These increases were somewhat mitigated by a $3.3 million decline in acquisition-related expenses relative to 2015 and lower professional fees in 2016. In 2015, FHN recognized a $2.8 million impairment of a tax credit investment which also offset a portion of the expense increase in 2016.

 

Non-Strategic

The non-strategic segment had pre-tax income of $63.0 million in 2016 compared to a pre-tax loss of $121.5 million in 2015. A significant decline in expenses contributed to the year-over-year improved results and more than offset a decline in NII.

 

Total revenue was $56.0 million in 2016 down from $65.8 million in 2015. NII declined 23 percent to $42.4 million in 2016 from $54.7 million in the prior year, consistent with the run-off of the non-strategic loan portfolios. Noninterest income (including securities gains/losses) increased 23 percent from $11.1 million in 2015 to $13.7 million in 2016. The increase in noninterest income was primarily driven by an increase in mortgage banking income, partially offset by a $2.7 million gain on the sale of a building recognized in 2015. The increase in mortgage banking income was largely driven by recoveries recognized in 2016 associated with prior legacy mortgage servicing sales and a $1.5 million gain related to the reversal of a contingency accrual associated with prior sales of MSR, as well as an increase in the mortgage warehouse valuation.

 

The provision for loan losses within the non-strategic segment was a provision credit of $27.9 million in 2016 compared to a provision credit of $25.5 million in the prior year. Overall, the non-strategic segment continued to reflect stable performance combined with lower loan balances as reserves declined by $24.7 million to $48.0 million as of December 31, 2016, nearly all of which was in the consumer real estate portfolio. Losses remain historically low as the non-strategic segment had net recoveries in 2016 versus net charge-offs a year ago.

 

Noninterest expense was $20.9 million in 2016 compared to $212.8 million in 2015. The decline in noninterest expense was primarily due to $162.5 million of loss accruals recognized in 2015 associated with the settlement reached with DOJ/HUD. Additionally, $32.7 million of mortgage repurchase and foreclosure expenses were reversed in 2016 primarily due to the settlements/recoveries of certain repurchase claims; however, the favorable impact on expense was partially offset by an increase in legal fees in 2016 relative to 2015 and an increase in occupancy expense associated with the reduction in sublease income because of the building sale in 2015 previously mentioned. Generally, most other expense categories declined given the continued wind-down of the legacy businesses.

 

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INCOME STATEMENT REVIEW – 2016 COMPARED TO 2015; 2015 COMPARED TO 2014

 

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

 

In 2015 and 2014, total consolidated revenue was $1.2 billion, as increases in fixed income product revenue, net interest income, and gains on the extinguishment of debt offset a decline in mortgage banking income in 2015 relative to 2014. Total expenses increased 27 percent to $1.1 billion in 2015 from $832.5 million in 2014 primarily driven by higher net accruals related to loss contingencies and litigation matters and to a lesser extent an increase in personnel expenses compared to 2014.

 

NET INTEREST INCOME

Net interest income increased 12 percent to $729.1 million in 2016 from $653.7 million in 2015. On a fully taxable equivalent (“FTE”) basis, NII increased 11 percent to $740.7 million in 2016 from $664.4 million in 2015. As detailed in Table 1 – Analysis of Changes in Net Interest Income, the increase in NII was the result of loan growth within Regional Banking, the positive impact of higher interest rates on loans, lower long-term funding costs due to lower average balances, and a larger investment securities portfolio. These increases were partially offset by the continued run-off the non-strategic loan portfolios, the negative impact of higher market rates on deposits, lower average balances of trading securities, and a decrease in cash basis interest income in 2016 relative to the prior year. Average earning assets were $25.2 billion and $23.5 billion in 2016 and 2015, respectively. The 7 percent increase in average earning assets in 2016 was primarily driven by loan growth within the regional bank, but was also impacted by a larger securities portfolio and an increase in securities purchased under agreements to resell. These increases were somewhat offset by continued run-off of the non-strategic loan portfolios, a decrease in average balances of excess cash held at the Federal Reserve (“Fed”), and a decline in average fixed income trading securities.

 

Net interest income was $653.7 million in 2015, a 4 percent increase from $627.7 million in 2014. On an FTE basis, NII increased to $664.4 million in 2015 from $637.3 million in 2014. The increase was the result of loan growth within the regional bank’s commercial and consumer portfolios, higher average balances of loans to mortgage companies, and an increase in cash basis interest income and loan fees relative to 2014. Continued runoff of the non-strategic loan portfolios, lower yielding fixed rate commercial loans, and the impact on NII from the third quarter 2014 loan sales negatively impacted NII in 2015, offsetting a portion of the increase.

 

FIRST HORIZON NATIONAL CORPORATION 9
 

Table 1 – Analysis of Changes in Net Interest Income

 

   2016 Compared to 2015   2015 Compared to 2014 
(Fully taxable equivalent (“FTE”))  Increase / (Decrease) Due to (a)   Increase / (Decrease) Due to (a) 
(Dollars in thousands)  Rate (b)   Volume (b)   Total   Rate (b)   Volume (b)   Total 
Interest income – FTE:                              
Loans  $16,071   $64,325   $80,396   $(11,594)  $40,633   $29,039 
Loans held-for-sale   245    (196)   49    1,223    (6,936)   (5,713)
Investment securities:                              
U.S. treasuries   -    -    -    16    (31)   (15)
U.S. government agencies   (2,192)   7,791    5,599    (3,572)   4,613    1,041 
States and municipalities   336    (377)   (41)   121    (154)   (33)
Corporate bonds   1    505    506    -    19    19 
Other   (2,643)   114    (2,529)   (282)   (347)   (629)
Total investment securities   (4,532)   8,067    3,535    (3,351)   3,734    383 
Trading securities   (1,861)   (2,260)   (4,121)   (1,173)   4,875    3,702 
Other earning assets:                              
Federal funds sold   24    (44)   (20)   5    (12)   (7)
Securities purchased under agreements to resell   1,483    (56)   1,427    264    (170)   94 
Interest-bearing cash   1,901    (713)   1,188    187    608    795 
Total other earning assets   2,797    (202)   2,595    624    258    882 
Total change in interest income – earning assets – FTE            $82,454             $28,293 
Interest expense:                              
Interest-bearing deposits:                              
Savings  $6,075   $1,541   $7,616   $(1,071)  $1,501   $430 
Time deposits   (537)   (239)   (776)   (3,264)   (626)   (3,890)
Other interest-bearing deposits   5,093    773    5,866    568    845    1,413 
Total interest-bearing core deposits   9,858    2,848    12,706    (5,479)   3,432    (2,047)
Certificates of deposit $100,000 and more   579    1,551    2,130    1,105    (713)   392 
Federal funds purchased   1,569    (347)   1,222    92    (1,037)   (945)
Securities sold under agreements to repurchase   84    36    120    (101)   (57)   (158)
Trading liabilities   (1,788)   812    (976)   (1,676)   2,262    586 
Other short-term borrowings   (6)   228    222    1,103    (1,593)   (490)
Term borrowings   1,563    (10,847)   (9,284)   4,564    (748)   3,816 
Total change in interest expense – interest-bearing liabilities            $6,140             $1,154 
Net interest income – FTE            $76,314             $27,139 
Certain previously reported amounts have been reclassified to agree with current presentations.
(a) The changes in interest due to both rate and volume have been allocated to change due to rate and change due to volume in proportion to the absolute amounts of the changes in each.
(b) Variances are computed on a line-by-line basis and are non-additive.

 

For purposes of computing yields and the net interest margin, FHN adjusts net interest income to reflect tax exempt income on an equivalent pre-tax basis which provides comparability of net interest income arising from both taxable and tax-exempt sources. The consolidated net interest margin improved to 2.94 percent in 2016 from 2.83 percent in 2015. The net interest spread increased to 2.80 percent in 2016 from 2.70 percent in 2015, and the impact of free funding was 14 basis points and 13 basis points in 2016 and 2015, respectively. The positive impact of higher interest rates on loans, lower long-term funding costs, a decrease in average excess cash held at the Fed and higher average balances of loans to mortgage companies during 2016 all contributed to the increase in NIM, but were somewhat mitigated by the continued run-off of the nonstrategic loan portfolios, the negative impact of higher market rates on deposits, and a decrease in cash basis interest income relative to 2015.

 

The consolidated net interest margin was 2.83 percent in 2015 compared to 2.92 percent in 2014. The decrease in NIM was primarily driven by run-off of the non-strategic loan portfolios, a decline in yields on fixed rate loan portfolios due to the long-term low internet rate environment, and an increase in average excess cash held at the Fed during 2015. Higher cash basis interest income and loan fees relative to 2014 positively impacted NIM in 2015, offsetting a portion of the decline.

 

The activity levels and related funding for FHN’s fixed income activities affect the net interest margin. Generally fixed income activities compress the margin, especially where there are elevated levels of trading inventory, because of the strategy to reduce market risk by economically hedging a portion of its inventory on the balance

 

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sheet. As a result FHN’s consolidated margin cannot be readily compared to that of other bank holding companies. Table 2 – Net Interest Margin details the computation of the net interest margin for the past three years.

 

Table 2 – Net Interest Margin

 

   2016   2015   2014 
Assets:               
Earning assets:               
Loans, net of unearned income:               
Commercial loans   3.64%   3.51%   3.56%
Consumer loans   4.07    3.96    4.01 
Total loans, net of unearned income   3.77    3.67    3.74 
Loans held-for-sale   4.43    4.23    3.77 
Investment securities:               
U.S. treasuries   0.97    0.97    0.06 
U.S. government agencies   2.40    2.46    2.57 
States and municipalities (a)   7.95    3.52    2.72 
Corporate bonds   5.25    4.94    - 
Other (b)   2.67    4.08    4.23 
Total investment securities   2.43    2.54    2.64 
Trading securities   2.66    2.81    2.93 
Other earning assets:               
Federal funds sold   1.11    1.01    1.00 
Securities purchased under agreements to resell (c)   0.06    (0.12)   (0.15)
Interest bearing cash   0.51    0.25    0.22 
Total other earning assets   0.28    0.10    0.06 
Interest income / total earning assets   3.29%   3.19%   3.29%
Liabilities:               
Interest-bearing liabilities:               
Interest-bearing deposits:               
Savings   0.23%   0.16%   0.18%
Other interest-bearing deposits   0.19    0.09    0.08 
Time deposits   0.59    0.66    1.07 
Total interest-bearing core deposits   0.24    0.17    0.21 
Certificates of deposit $100,000 and more   1.02    0.89    0.63 
Federal funds purchased   0.52    0.26    0.25 
Securities sold under agreements to repurchase   0.08    0.06    0.08 
Trading liabilities   1.95    2.18    2.43 
Other short-term borrowings   0.67    0.67    0.30 
Term borrowings   2.58    2.47    2.17 
Interest expense / total interest-bearing liabilities   0.49    0.49    0.51 
Net interest spread   2.80%   2.70%   2.78%
Effect of interest-free sources used to fund earning assets   0.14    0.13    0.14 
Net interest margin (d)   2.94%   2.83%   2.92%
Certain previously reported amounts have been reclassified to agree with current presentation.
(a) 2016 increase driven by payoff of lower-yielding municipal bonds in fourth quarter 2015.
(b) 2016 decrease driven by a decline in the dividend rate of FHN’s holdings of federal reserve bank stock.
(c) 2015 and 2014 rates driven by negative market rates on reverse repurchase agreements.
(d) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 35 percent and, where applicable, state income taxes.

 

FHN’s net interest margin is primarily impacted by balance sheet factors such as interest-bearing cash levels, deposit balances, trading inventory levels, commercial loan volume, as well as loan fees, cash basis income, and changes in short-term interest rates. FHN’s balance sheet is positioned to benefit primarily from a rise in short-term interest rates. For 2017, an increase in NIM will depend on the extent of Fed interest rate increases, as well as levels of interest-bearing cash and trading inventory balances (higher balances of both of these typically compress margin), and commercial loan balances.

 

FIRST HORIZON NATIONAL CORPORATION 11
 

PROVISION FOR LOAN LOSSES

The provision for loan losses is the charge to earnings that management determines to be necessary to maintain the ALLL at a sufficient level reflecting management’s estimate of probable incurred losses in the loan portfolio. The provision for loan losses was $11.0 million in 2016 compared to $9.0 million in 2015 and $27.0 million in 2014. During 2016 and 2015, FHN experienced continued overall improvement in the loan portfolio which resulted in declines of 4 percent and 10 percent in the allowance for loan losses relative to the prior years, respectively. Additionally, net charge-offs declined 39 percent and 35 percent, respectively, during 2016 and 2015 relative to the prior years. Although asset quality metrics were strong in both periods, improvement continued to slow in 2016 and the commercial loan growth partially offset the positive effect of improvement on the allowance. For additional information about the provision for loan losses refer to the Regional Banking and Non-Strategic sections of the Business Line Review section in this MD&A. For additional information about general asset quality trends refer to Asset Quality – Trend Analysis of 2016 Compared to 2015 in this MD&A.

 

NONINTEREST INCOME

Noninterest income (including securities gains/(losses)) was $552.4 million in 2016 compared to $517.3 million in 2015 and $550.0 million in 2014. In 2016 noninterest income was 43 percent of total revenue compared to 44 percent and 47 percent in 2015 and 2014, respectively. The increase in noninterest income in 2016 relative to 2015 was primarily driven by higher fixed income product revenue. The decrease in noninterest income in 2015 relative to 2014 was primarily driven by a decrease in mortgage banking income within the non-strategic segment, but was partially mitigated by increases in fixed income product revenue and gains on the extinguishment of debt. FHN’s noninterest income for the last three years is provided in Table 3. The following discussion provides additional information about various line items reported in the following table.

 

Table 3 – Noninterest Income

 

               Compound 
               Annual Growth 
                  Rates 
(Dollars in thousands)  2016   2015   2014   16/15   16/14 
Noninterest income:                         
Fixed income  $268,561   $231,337   $200,595    16%   16%
Deposit transactions and cash management   108,553    112,843    111,951    (4)%   (2)%
Brokerage, management fees and commissions   42,911    46,496    49,099    (8)%   (7)%
Trust services and investment management   27,727    27,577    27,777    1%   * 
Bankcard income   24,430    22,238    23,697    10%   2%
Bank-owned life insurance   14,687    14,726    16,394    *   (5)%
Debt securities gains/(losses), net   1,485    1,836    -    (19)%   NM 
Equity securities gains/(losses), net   (144)   (458)   2,872    69%   NM 
All other income and commissions:                         
ATM interchange fees   11,965    11,917    10,943    *   5%
Other service charges   11,731    11,610    11,882    1%   (1)%
Mortgage banking   10,215    3,870    71,257    NM    (62)%
Electronic banking fees   5,477    5,840    6,190    (6)%   (6)%
Letter of credit fees   4,103    4,621    4,864    (11)%   (8)%
Deferred compensation (a)   3,025    (1,369)   2,042    NM    22%
Insurance commissions   2,981    2,627    2,257    13%   15%
Gain/(loss) on extinguishment of debt   -    5,793    (4,166)   NM    NM 
Other   14,734    15,821    12,390    (7)%   9%
Total all other income and commissions   64,231    60,730    117,659    6%   (26)%
Total noninterest income  $552,441   $517,325   $550,044    7%   *
Certain previously reported amounts have been reclassified to agree with current presentation.
NM - not meaningful
* Amount is less than one percent.
(a) Deferred compensation market value adjustments are mirrored by adjustments to employee compensation, incentives and benefits expense.

 

12 FIRST HORIZON NATIONAL CORPORATION
 

Fixed Income Noninterest Income

The major component of fixed income revenue is generated from the purchase and sale of fixed income securities as both principal and agent. Other noninterest revenues within this line item consist principally of fees from loan sales, portfolio advisory services, and derivative sales. Securities inventory positions are procured for distribution to customers by the sales staff. Fixed income noninterest income increased 16 percent in 2016 to $268.6 million from $231.3 million in 2015, reflecting more favorable market conditions during most of 2016, including increased rate and market volatility, as well as expansion of the distribution platform. However, trading activity was somewhat muted in late 2016 due to a sharp rate increase and market uncertainties following the U.S. presidential election. Revenue from other products increased $3.4 million to $38.9 million in 2016, largely driven by increases in fees from loan sales, derivative sales, and portfolio advisory services.

 

Fixed income noninterest income was $231.3 million in 2015, up from $200.6 million in 2014, reflecting increased rate volatility in 2015 relative to 2014. Revenue from other products increased $5.2 million to $35.5 million in 2015, largely driven by increases in fees from derivative sales and portfolio advisory services.

 

Table 4 – Fixed Income Noninterest Income

 

               Compound
Annual Growth
Rates
(Dollars in thousands)  2016   2015   2014   16/15  16/14
Noninterest income:                         
Fixed income  $229,659   $195,877   $170,317    17%   16%
Other noninterest revenue   38,902    35,460    30,278    10%   13%
Total fixed income noninterest income  $268,561   $231,337   $200,595    16%   16%

 

Deposit Transactions and Cash Management

Fees from deposit transactions and cash management include fees for services related to consumer and commercial deposit products (such as service charges on checking accounts), cash management products and services such as electronic transaction processing (Automated Clearing House an Electronic Data Interchange), account reconciliation services, cash vault services, lockbox processing, and information reporting to large corporate clients. Deposit transactions and cash management income was $108.6 million in 2016, down from $112.8 million in 2015. The decrease in fees from deposit transactions and cash management activities was primarily related to lower NSF fee income driven by changes in consumer behavior. In 2015, deposit transactions and cash management income increased to $112.8 million from $112.0 million in 2014.

 

Brokerage, Management Fees and Commissions

Brokerage, management fees and commissions include fees for portfolio management, trade commissions, and annuity and mutual funds sales. Noninterest income from brokerage, management fees and commissions was $42.9 million in 2016, down from $46.5 million and $49.1 million in 2015 and 2014, respectively. The decline in income in both periods was primarily driven by a reduction in annuity income as a result of market conditions and lower variable annuity sales as practices were adjusted to meet the standards of a changing regulatory environment. The decline in both periods was also affected by a shift in product and fee structures, which caused a temporary decline in revenues but better met client needs and should result in revenue streams over the life of the product.

 

Bankcard Income

Bankcard income is derived from fees charged for processing and supporting credit card transactions including interchange, late charges, membership fees, miscellaneous merchant frees, cash advance fees, currency conversion fees, and research fees. Bankcard income increased 10 percent to $24.4 million in 2016 from $22.2 million in 2015 primarily driven by a significant new relationship. Bankcard income declined 6 percent in 2015 to $22.2 million from $23.7 million in 2014, due in large part to $2.8 million of Visa volume incentives recognized in 2014.

 

FIRST HORIZON NATIONAL CORPORATION 13
 

Securities Gains/(Losses)

In 2016 FHN recognized net securities gains of $1.3 million compared to $1.4 million and $2.9 million in 2015 and 2014, respectively. The 2016 net gain was primarily the result of a $1.5 million net gain from exchanges of approximately $736 million of AFS debt securities, partially offset by $.2 million of other-than-temporary impairment (“OTTI”) adjustments. The 2015 net gain was largely driven by a $1.8 million gain from an exchange of approximately $335 million of AFS debt securities, partially offset by $.7 million of OTTI adjustments. In 2014, the net gain was primarily the result of a $5.6 million gain on the sale of a cost method investment partially offset by $2.0 million of negative fair value adjustments and a $.9 million loss on the sale of an investment.

 

Other Noninterest Income

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

 

Revenue from all other income and commissions increased to $64.2 million in 2016 from $60.7 million in 2015. For 2016 all other income and commissions was favorably impacted by increases in mortgage banking and deferred compensation income, and higher fee income associated with derivative sales. These increases were somewhat offset by a $5.8 million gain recognized in 2015 on the extinguishment of junior subordinated notes underlying $200 million of trust preferred debt and a $1.3 million decrease in 2016 in gains on the sales of properties. The increase in Mortgage banking income was largely driven by recoveries recognized in 2016 associated with prior legacy mortgage servicing sales and a $1.5 million gain related to the reversal of a contingency accrual associated with prior sales of MSR. Deferred compensation income fluctuates with changes in the market value of the underlying investments and is mirrored by changes in deferred compensation expense which is included in personnel expense.

 

All other income and commissions decreased $56.9 million to $60.7 million in 2015 from $117.7 million in 2014. The decrease was primarily driven by lower mortgage banking income which was largely the result of several transactions recognized in 2014 that positively impacted mortgage banking income within the non-strategic segment in that year. These transactions included $39.7 million of gains on the sales of approximately $315 million in UPB of HFS mortgage loans in third quarter 2014, the receipt of approximately $20 million in previously unrecognized servicing fees in conjunction with servicing sales, and a larger positive mortgage warehouse valuation adjustment in 2014 due to positive fair value adjustment that reflected new information on market pricing for similar asset primarily related to the non-performing portion of the HFS portfolio. A $3.4 million decrease in deferred compensation income in 2015 also contributed to the revenue decrease in 2015, but was somewhat offset by the $5.8 million gain recognized within the corporate segment in 2015 on the extinguishment of junior subordinated notes previously mentioned and a $4.4 million loss recognized within the non-strategic segment in 2014 on the extinguishment of debt associated with the collapse of two HELOC securitization trusts. In addition, FHN recognized $3.7 million in gains on the sales of properties primarily within the non-strategic segment in 2015 compared to $.6 million in 2014, which also mitigated a portion of the decline in revenue from all other income and commissions.

 

NONINTEREST EXPENSE

Total noninterest expense decreased 12 percent, or $128.6 million, to $925.2 million in 2016, primarily driven by a reduction in accruals related to loss contingencies and litigation matters primarily within the non-strategic segment and, to a lesser extent, a mortgage repurchase and foreclosure provision expense reversal, somewhat offset by higher personnel expenses relative to 2015. Total noninterest expense increased 27 percent, or $221.3 million, to $1.1 billion in 2015 from $832.5 million in 2014, primarily driven by increases in accruals related to loss contingencies and litigation matters coupled with an increase in personnel expenses relative to 2014. FHN’s noninterest expense for the last three years is provided in table 5. The following discussion provides additional information about various line items reported in the following table.

 

14 FIRST HORIZON NATIONAL CORPORATION
 

Table 5 – Noninterest Expense

 

               Compound
Annual Growth
Rates
(Dollars in thousands)  2016   2015   2014   16/15  16/14
Noninterest expense:                         
Employee compensation, incentives and benefits  $562,948   $511,633   $478,159    10%   9%
Occupancy   50,880    51,117    54,018    *    (3)%
Computer software   45,122    44,724    42,931    1%   3%
Operations services   41,852    39,261    35,247    7%   9%
Equipment rentals, depreciation, and maintenance   27,385    30,864    29,964    (11)%   (4)%
Advertising and public relations   21,612    19,187    18,683    13%   8%
FDIC premium expense   21,585    18,027    11,464    20%   37%
Legal fees   21,558    16,287    20,907    32%   2%
Professional fees   19,169    18,922    23,298    1%   (9)%
Communications and courier   14,265    15,820    16,074    (10)%   (6)%
Contract employment and outsourcing   10,061    14,494    19,420    (31)%   (28)%
Amortization of intangible assets   5,198    5,253    4,170    (1)%   12%
Repurchase and foreclosure provision/(provision credit)   (32,722)   -    (4,300)   NM    NM 
All other expense:                         
Litigation and regulatory matters   30,469    187,607    (2,720)   (84)%   NM 
Other insurance and taxes   10,891    12,941    12,900    (16)%   (8)%
Travel and entertainment   10,275    9,590    9,095    7%   6%
Customer relations   6,255    5,382    5,726    16%   5%
Employee training and dues   5,691    5,390    4,518    6%   12%
Supplies   4,434    3,827    3,745    16%   9%
Tax credit investments   3,349    4,582    2,087    (27)%   27%
Miscellaneous loan costs   2,586    2,656    2,690    (3)%   (2)%
Foreclosed real estate   773    2,104    2,503    (63)%   (44)%
Other   41,568    34,123    41,952    22%   * 
Total all other expense   116,291    268,202    82,496    (57)%   19%
Total noninterest expense  $925,204   $1,053,791   $832,531    (12)%   5%
Certain previously reported amounts have been reclassified to agree with current presentation.
NM - not meaningful
*  Amount is less than one percent.

 

Employee Compensation, Incentives, and Benefits

Employee compensation, incentives, and benefits (personnel expense), the largest component of noninterest expense, increased 10 percent, or $51.3 million, to $562.9 million in 2016 from $511.6 million in 2015. The increase in personnel expense was driven in part by an increase in variable compensation associated with higher fixed income product sales revenue within FHN’s fixed income operating segment relative to 2015. Within the regional bank, expenses associated with strategic hires in expansion markets and specialty areas increased $9.6 million from 2015 to 2016. Additionally, higher incentive expense associated with loan growth and retention initiatives increased $4.5 million relative to 2015 and a year-over-year increase in headcount related to the TAB acquisition contributed $3.9 million to the increase in personnel expense within the regional bank in 2016. Personnel expenses in 2015 were favorably impacted by an $8.3 million gain related to an amendment of certain employee benefit plans recognized in third quarter 2015, which also contributed to the increase in personnel-related expenses in 2016. Deferred compensation expense increased in 2016, relative to 2015, further contributing to the personnel expense increase in 2016. These increases were partially offset by a decline in pension expense relative to 2015 due to a change in the discount rates used in the calculation of pension and postretirement interest costs.

 

Personnel expense increased 7 percent, or $33.5 million, to $511.6 million in 2015 from $478.2 million in 2014. The increase in personnel expense was driven by increases in variable compensation associated with higher fixed income product sales revenue within FHN’s fixed income operating segment relative to 2014 and higher incentive expense associated with loan growth, strategic hires, and retention within the regional bank. Additionally, higher pension-related costs contributed to the increase in personnel expense during 2015, as well as several favorable

 

FIRST HORIZON NATIONAL CORPORATION 15
 

adjustments recognized during 2014 related to employee performance equity awards, employee benefit plans, and deferred compensation BOLI benefits resulting in lower personnel expense in 2014. The increase in pension-related expenses was driven by an increase in the pension liability as a result of a decline in the discount rate and new life expectancy tables used at the December 31, 2014 measurement date. These increases were offset somewhat by an $8.3 million gain recognized during third quarter 2015 related to an amendment of certain employee benefit plans and lower deferred compensation expenses relative to 2014.

 

Occupancy

Occupancy expense decreased to $50.9 million in 2016 from $51.1 million in 2015, as a decrease in sublease income related to the sale of a building in 2015 was somewhat offset by $.9 million of lease abandonment expense related to efficiency initiatives and higher rent expense in 2016 associated with sale-leaseback transactions recognized in 2016. Occupancy expense decreased $2.9 million from $54.0 million in 2014 to $51.1 million in 2015 driven by $4.7 million of lease abandonment expense recognized in 2014 related to efficiency initiatives, somewhat offset by lower sublease income received in 2015 relative to the prior year as a result of the building sale within the non-strategic segment previously mentioned.

 

Computer Software

Computer software expense was $45.1 million, $44.7 million, and $42.9 million in 2016, 2015, and 2014, respectively. The increase in computer software expense is the result of FHN’s focus on technology-related projects.

 

Operations Services

Operations services expense increased 7 percent, or $2.6 million, to $41.9 million in 2016, primarily related to an increase in third party fees associated with the online digital banking platform. In 2015, expenses from operations services were $39.3 million compared to $35.2 million in 2014, primarily driven by an increase in third party fees and expense associated with the TAB acquisition.

 

Equipment Rentals, Depreciation, and Maintenance

Equipment rentals, depreciation, and maintenance expenses were $27.4 million in 2016, compared to $30.9 million and $30.0 million in 2015 and 2014, respectively. The decrease in 2016 was driven by a decrease in depreciation expense as a result of branch sales and sale-leaseback transactions and refunds from an equipment rental vendor recognized in 2016.

 

Advertising and Public Relations

Expenses associated with advertising and public relations were $21.6 million in 2016, compared to $19.2 million and $18.7 million in 2015 and 2014, respectively. In 2016, FHN recognized higher advertising and public relations expense due in large part to a promotional branding campaign and an increase in CRA initiatives.

 

FDIC Premium Expense

FDIC premium expense was $21.6 million in 2016, compared to $18.0 million and $11.5 million in 2015 and 2014, respectively. The increase in FDIC premium expense was due in large part to balance sheet growth, coupled with the run-off of long-term unsecured debt. Additionally, a rate increase also contributed to the increase in FDIC premium expense. 2014 FDIC premium expense included the receipt of $3.3 million of FDIC premium refunds.

 

Legal Fees

Legal fees were $21.6 million, $16.3 million, and $20.9 million in 2016, 2015, and 2014, respectively. Legal fees fluctuate based on the status, timing, type, and composition of cases.

 

16 FIRST HORIZON NATIONAL CORPORATION
 

Professional Fees

Professional fees were $19.2 million, $18.9 million, and $23.3 million in 2016, 2015, and 2014, respectively. During 2014, FHN had various consulting projects that attributed to higher professional fees.

 

Contract Employment and Outsourcing

Expenses associated with contract employment and outsourcing decreased 31 percent, or $4.4 million, to $10.1 million in 2016. The decrease was attributable to a lower number of technology-related projects in 2016 relative to the prior year coupled with the completion of a large operations efficiency project in 2015. Contract employment and outsourcing expenses decreased $4.9 million to $14.5 million in 2015 from $19.4 million in 2014. The decrease was due to lower mortgage subservicing costs within the non-strategic segment associated with the sales of servicing and elevated expenses in 2014 related to technology-related projects within the regional bank.

 

Repurchase and Foreclosure Provision

During 2016, FHN recognized a $32.7 million pre-tax expense reversal of mortgage repurchase and foreclosure provision primarily as a result of the settlement/recoveries of certain repurchase claims, which favorably impacted expenses for 2016. The mortgage repurchase and foreclosure provision was $0 in 2015. During 2014 FHN recognized a $4.3 million reversal of repurchase and foreclosure provision related to the settlements of certain repurchase claims.

 

Other Noninterest Expense

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

 

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

 

All other expenses were $268.2 million and $82.5 million in 2015 and 2014, respectively. The increase in expense between 2015 and 2014 was primarily the result of a $190.3 million increase in net loss accruals related to legal matters, primarily driven by $162.5 million of loss accruals related to the 2015 DOJ/HUD settlement within the non-strategic segment previously mentioned and $25.1 million of other loss accruals recognized within the non-strategic and fixed income segments in 2015. During 2014, FHN recognized $110.9 million of loss accruals primarily within the non-strategic segment related to legal matters, which were more than offset by $113.6 million of expense reversals recognized within the non-strategic and fixed income segments associated with agreements with insurance companies for the recovery of expenses FHN incurred related to litigation losses in periods prior to 2014. In 2015, FHN recognized a $2.8 million impairment of a tax credit investment, which contributed to the expense increase. These increases in expense were somewhat offset by a $5.1 million decrease in negative valuation adjustments associated with the derivatives related to prior sales of Visa Class B shares.

 

FIRST HORIZON NATIONAL CORPORATION 17
 

INCOME TAXES

FHN recorded an income tax provision of $106.8 million in 2016, compared to $10.9 million in 2015 and $84.2 million in 2014. The effective tax rates for 2016, 2015, and 2014 were approximately 31 percent, 10 percent, and 26 percent, respectively. The increase in the effective tax rates in 2016 compared to 2015 and the decrease in the effective tax rate in 2015 compared to 2014 was primarily driven by the change in pre-tax income levels. Since pre-tax income is the most important component in determining the effective tax rate, the comparison of the tax rate from period to period, by itself, will not provide meaningful information unless pre-tax income is fairly consistent. The company’s effective tax rate is favorably affected by recurring items such as bank-owned life insurance, tax-exempt income, and credits and other tax benefits from affordable housing investments. The company’s effective tax rate also may be affected by items that may occur in any given period but are not consistent from period to period, such as changes in the deferred tax asset valuation allowance and changes in unrecognized tax benefits.

 

A deferred tax asset (“DTA”) or deferred tax liability (“DTL”) is recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax consequence is calculated by applying enacted statutory tax rates, applicable to future years, to these temporary differences. As of December 31, 2016, FHN’s gross DTA (net of a valuation allowance) and gross DTL were $297.0 million and $97.4 million, respectively, resulting in a net DTA of $199.6 million at December 31, 2016, compared with $259.3 million at December 31, 2015 and $260.6 million at December 31, 2014. The decline in DTA in 2016 relative to 2015 was primarily driven by increased funding of FHN’s pension plan, a reduction in loss reserves, and deductions associated with certain compensation arrangements.

 

As of December 31, 2016, FHN had deferred tax asset balances related to federal and state income tax carryforwards of $124.7 million and $19.4 million, which will expire at various dates. Refer to Note 15 – Income Taxes for additional information.

 

As of December 31, 2016 and 2015, FHN established a valuation allowance of $40.4 million and $40.5 million, respectively, against its federal capital loss carryforwards. FHN’s DTA after valuation allowance was $297.0 million and $352.6 million as of December 31, 2016 and 2015, respectively. Based on current analysis, FHN believes that its ability to realize the remaining DTA is more likely than not. FHN monitors its DTA and the need for a valuation allowance on a quarterly basis. A significant adverse change in FHN’s taxable earnings outlook could result in the need for further valuation allowances. In the event FHN is able to determine that the deferred tax assets are realizable in the future in excess of their net recorded amount, FHN would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.

 

The President of the United States has publicly favored legislation (not yet formally proposed) to reduce corporate income tax rates to 15 to 20 percent, possibly in 2017. Any such rate reduction is likely to be part of a broader tax reform bill. Although a rate reduction would have a net beneficial effect over the long-term certain deductions may be eliminated or reduced as a part of tax reform, which could partially offset the beneficial effect of a rate reduction. Additionally, a rate reduction would result in the impairment of a portion of the deferred tax asset, as mentioned above, in the quarter that it is signed into law by the President. The actual impacts are subject to significant uncertainties including whether, and to what extent, rate reductions or broader tax reform can actually be executed and if executed, the timing.

 

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

 

See also Note 15 – Income Taxes for additional information.

 

18 FIRST HORIZON NATIONAL CORPORATION
 

STATEMENT OF CONDITION REVIEW – 2016 COMPARED TO 2015

 

Total period-end assets were $28.6 billion on December 31, 2016, up 9 percent from $26.2 billion on December 31, 2015. Average assets increased to $27.4 billion in 2016 from $25.6 billion in 2015. The increase in average assets compared to 2015 is primarily attributable to net increases in the loan portfolios. A larger investment securities portfolio also contributed to the increase in average assets relative to 2015, but was somewhat offset by declines in interest-bearing cash and trading securities. The increase in period-end assets relative to December 31, 2015 was also primarily driven by net increases in loan balances. In addition, higher balances of interest bearing cash on December 31, 2016 contributed to the increase in assets on a period-end basis.

 

Total period-end liabilities were $25.9 billion on December 31, 2016, up 10 percent from $23.6 billion on December 31, 2015. Average liabilities increased 7 percent to $24.7 billion in 2016, from $23.1 billion in 2015. The increase in average liabilities was largely due to an increase in deposits, somewhat offset by lower Term borrowings and a decline in Federal funds purchased relative to 2015.

 

EARNING ASSETS

Earning assets consist of loans, investment securities, other earning assets such as trading securities, interest-bearing cash, and loans HFS. Average earning assets increased to $25.2 billion in 2016 from $23.5 billion in 2015. A more detailed discussion of the major line items follows.

 

Loans

Period-end loans increased 11 percent to $19.6 billion as of December 31, 2016 from $17.7 billion on December 31, 2015. Average loans for 2016 were $18.3 billion compared to $16.6 billion for 2015. The increase in average and period-end loan balances was primarily due to organic loan growth within the regional bank’s commercial portfolios and also loans added through the purchase of franchise finance loans in third quarter 2016, partially offset by run-off of consumer loan portfolios within the non-strategic segment. On an average basis loans added through the fourth quarter 2015 TAB acquisition also contributed to the increase in average loans from 2015 to 2016.

 

Table 6 – Average Loans

 

(Dollars in thousands)  2016   Percent
of Total
  2016
Growth
Rate
  2015   Percent
of Total
  2015
Growth
Rate
  2014   Percent
of Total
  2014
Growth
Rate
Commercial:                                    
Commercial, financial, and industrial$ 10,932,679   60%  15%$ 9,477,376   57%  16%$ 8,156,750   52%  2%
Commercial real estate  1,938,939   11   36   1,425,813   9   17   1,223,487   8   5 
Total commercial  12,871,618   71   18   10,903,189   66   16   9,380,237   60   3 
Consumer:                                    
Consumer real estate (a)  4,635,213   25   (5)  4,879,083   29   (6)  5,198,304   34   (6)
Permanent mortgage  437,524   2   (11)  489,190   3   (18)  594,450   4   (20)
Credit card and other  359,515   2   2   352,977   2   1   347,981   2   11 
Total consumer  5,432,252   29   (5)  5,721,250   34   (7)  6,140,735   40   (7)
Total loans, net of unearned income$ 18,303,870   100%  10%$ 16,624,439   100%  7%$ 15,520,972   100%  (1)%
(a)  2016, 2015, and 2014 include $43.4 million, $65.6 million, and $140.7 million of restricted and secured real estate loans, respectively.

 

C&I loans are the largest component of the commercial portfolio comprising 85 percent and 87 percent of average commercial loans in 2016 and 2015, respectively. C&I loans increased 15 percent, or $1.5 billion, from 2015 due to higher balances of loans to mortgage companies, as well as net loan growth within several of the regional bank’s

 

FIRST HORIZON NATIONAL CORPORATION 19
 

portfolios including general commercial, correspondent banking, and corporate. Additionally, new lines of business including franchise finance (a majority of which was added through a third quarter 2016 asset purchase), energy, specialty healthcare, and music industry contributed to C&I loan growth from 2015. Commercial real estate loans increased 36 percent or $.5 billion to $1.9 billion in 2016 because of growth in expansion markets, increased funding under existing commitments, and an increased focus on funded term debt products. In addition, the fourth quarter 2015 TAB acquisition contributed to the increase.

 

Average consumer loans declined 5 percent, or $.3 billion, from a year ago to $5.4 billion in 2016. The consumer real estate portfolio (home equity lines and installment loans) declined $243.9 million, to $4.6 billion, as the continued wind-down of portfolios within the non-strategic segment outpaced a $234.5 million increase in real estate installment loans from new originations within the regional bank. The permanent mortgage portfolio declined $51.7 million to $437.5 million in 2016 driven by run-off of legacy assets within non-strategic offset by some growth in mortgage loans within regional banking, primarily related to FHN’s CRA initiatives. Credit Card and Other slightly increased to $359.5 million in 2016.

 

The following table provides a detail of contractual maturities of commercial loans on December 31, 2016.

 

Table 7 – Contractual Maturities of Commercial Loans on December 31, 2016

 

(Period-end)
(Dollars in thousands)
  Within 1 Year  After 1 Year
Within 5 Years
  After 5 Years  Total
Commercial, financial, and industrial      $4,717,030        $5,850,598       $1,580,459       $12,148,087
Commercial real estate   532,918    1,306,608    295,997    2,135,523
Total commercial loans  $5,249,948   $7,157,206   $1,876,456   $14,283,610
For maturities over one year:                   
Interest rates - floating       $5,586,938   $1,097,819   $6,684,757
Interest rates - fixed        1,570,268    778,637    2,348,905
Total maturities over one year       $7,157,206   $1,876,456   $9,033,662

 

20 FIRST HORIZON NATIONAL CORPORATION
 

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

 

Investment Securities

FHN’s investment portfolio consists principally of debt securities including government agency issued mortgage-backed securities (“MBS”) and government agency issued collateralized mortgage obligations (“CMO”), substantially all of which are classified as available-for-sale (“AFS”). FHN utilizes the securities portfolio as a source of income, liquidity and collateral for repurchase agreements, for public funds, and as a tool for managing risk of interest rate movements. Table 8 – Contractual Maturities of Investment Securities on December 31, 2016 (Amortized Cost) shows information pertaining to the composition, yields, and contractual maturities of the investment securities portfolio. Investment securities were $4.0 billion on December 31, 2016 and 2015. Average investment securities were $4.0 billion in 2016 and $3.7 billion in 2015, representing 16 percent of average earning assets in 2016 and 2015. The amount of securities purchased for the investment portfolio is largely driven by the desire to protect the value of non-rate sensitive liabilities and equity and maximize yield on FHN’s excess liquidity without negatively affecting future yields while operating in this historically low interest rate environment.

 

Government agency issued MBS, CMO, and other agencies averaged $3.8 billion and $3.5 billion in 2016 and 2015, respectively, as a $.7 billion decrease in government agency CMO securities were more than offset by a $1.0 billion increase in government agency MBS securities. In 2016, FHN executed two portfolio restructurings as part of an initiative to moderate the overall asset sensitivity position of the balance sheet. As a result of these restructurings and the natural extension that occurs as interest rates rise, the effective duration of the portfolio extended from 3.8 years in 2015 to 4.8 years in 2016. U.S. treasury securities and corporate and municipal bonds averaged $15.2 million in 2016 compared to $13.2 million in 2015. Investments in equity securities averaged $186.4 million in 2016 compared with $183.6 million in 2015. A majority of the equity security balances include restricted investments in the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) which averaged $156.0 million and $153.7 million in 2016 and 2015, respectively. On December 31, 2016, AFS investment securities had $27.9 million of net unrealized losses compared to $5.5 million of net unrealized gains on December 31, 2015. The increase in net unrealized losses was primarily driven by higher market rates and resulted in a decrease in shareholder’s equity of $17.2 million, net of $10.7 million of deferred tax liabilities. See Note 3 – Investment Securities for additional detail.

 

FIRST HORIZON NATIONAL CORPORATION 21
 

Table 8 – Contractual Maturities of Investment Securities on December 31, 2016 (Amortized Cost)

 

(Period-end)  Within 1 year   After 1 year
Within 5 years
   After 5 years
Within 10 years
   After 10 years 
(Dollars in thousands)  Amount   Yield   Amount   Yield   Amount   Yield   Amount    Yield 
Securities available-for-sale:                                        
Government agency issued MBS and CMO (a)     $-    -%      $21    6.72%  $176,948    3.60%  $3,607,610    2.56%
U.S. treasuries   100    0.98    -    -    -    -    -    - 
Other (b)   -    -    -    -    -    -    186,756    3.02 
Total securities available-for-sale  $100    0.98%  $21    6.72%  $176,948    3.60%  $3,794,366    2.58%
Securities held-to-maturity:                                        
State and municipalities  $-    -%  $-    -%  $-    -%  $4,347    6.10%
Corporate bonds   -    -    -    -    10,000    5.25    -    - 
Total securities held-to-maturity  $-    -%  $-    -%  $10,000    5.25%  $4,347    6.10%

 

(a) Represents government agency-issued mortgage-backed securities and collateralized mortgage obligations which, when adjusted for early pay downs, have an estimated average life of 6.3 years.
(b) The amount classified as maturing after 10 years represents equity securities with no stated maturity.

 

Loans Held-for-Sale

Loans HFS consists of the mortgage warehouse (primarily repurchased government-guaranteed loans), small business, student, and home equity loans. The average balance of loans HFS decreased to $124.3 million in 2016 from $129.0 million in 2015. On December 31, 2016 and 2015, loans HFS were $111.2 million and $126.3 million, respectively. The decrease in both average and period-end loans HFS was largely driven by a smaller mortgage warehouse, and to a lesser extent declines in home equity and student loans. On an average basis, a portion of the decrease was somewhat mitigated by an increase in small business loans.

 

Other Earning Assets

Other earning assets include trading securities, securities purchased under agreements to resell, federal funds sold (“FFS”), and interest-bearing deposits with the Fed and other financial institutions. Other earning assets averaged $2.7 billion in 2016, a $270.3 million decrease from $3.0 billion in 2015. The decrease was largely driven by a decrease in interest bearing cash which was used to fund loan growth and purchases of AFS securities. Additionally lower balances of trading securities also contributed to the decline in other earning assets, but was somewhat offset by an increase in securities purchased under agreements to resell (“asset repos”). Fixed income’s trading inventory fluctuates daily based on customer demand. Asset repos are used in fixed income trading activity and generally fluctuate with the level of fixed income trading liabilities (short-positions) as securities collateral from asset repo transactions are used to fulfill trades. Other earning assets were $2.6 billion and $2.2 billion on December 31, 2016 and 2015, respectively. The increase in other earning assets on a period-end basis was primarily due to an increase in interest-bearing cash in anticipation of the Coastal Securities acquisition.

 

Non-earning assets

Period-end non-earning assets increased to $2.3 billion on December 31, 2016 from $2.2 billion on December 31, 2015.

 

Deposits

Average deposits were $20.9 billion during 2016, up 11 percent from $18.8 billion during 2015. The increase in average deposits was driven by several factors including FHN’s decision to increase deposits in a third party network deposit sweep program, an increase in commercial customer deposits, and the addition of deposits associated with the fourth quarter 2015 TAB acquisition. The third party deposits program is an FDIC-insured deposit sweep program where financial institutions can receive unsecured deposits for the long-term (several years) and in larger-dollar increments. Period-end deposits were $22.7 billion on December 31, 2016, up 14 percent from $20.0 billion on December 31, 2015, and were driven by the same factors that affected average balances,

 

22 FIRST HORIZON NATIONAL CORPORATION
 

with the exception of the fourth quarter 2015 TAB acquisition which did not impact deposits variance on a period-end basis.

 

Short-Term Borrowings

Average short-term borrowings (federal funds purchased (“FFP”), securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings) averaged $2.0 billion in 2016 and 2015, as increases from securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings offset a decrease in FFP. Securities sold under agreements to repurchase and other short-term borrowings contributed to the year-over-year increase as additional sources of wholesale funding were used to fund loan growth. Average FFP fluctuates depending on the amount of excess funding of FHN’s correspondent bank customers. Period-end short-term borrowings were $1.5 billion on December 31, 2016 and 2015. See Note 9 – Short-term Borrowings for additional information.

 

Term Borrowings

Term borrowings include senior and subordinated borrowings with original maturities greater than one year. Term borrowings were $1.0 billion on December 31, 2016 compared to $1.3 billion on December 31, 2015. Average term borrowings were $1.1 billion in 2016 compared to $1.6 billion in 2015. The decrease in average term borrowings primarily relates to $250 million of FTBNA subordinated notes that matured in second quarter 2016 and $206 million of junior subordinated notes underlying $200 million of trust preferred debt that were called in third quarter 2015. See Note 10 – Term Borrowings for additional information.

 

Other Liabilities

Period-end other liabilities decreased to $.6 billion on December 31, 2016 from $.8 billion on December 31, 2015. Other liabilities decreased as the pension liability was reduced as a result of the third quarter 2016 $165 million qualified pension plan contribution. The qualified pension plan is now reflected as a prepaid pension asset. Additionally a decrease in the repurchase and foreclosure reserve also contributed to the year-over-year decline in other liabilities, but was partially offset by an increase in derivative liabilities.

 

CAPITAL – 2016 COMPARED TO 2015

 

Management’s objectives are to provide capital sufficient to cover the risks inherent in FHN’s businesses, to maintain excess capital to well-capitalized standards, and to assure ready access to the capital markets. Period-end and average equity increased to $2.7 billion in 2016 from $2.6 billion in 2015. The increase in average equity was primarily due to net income recognized since 2015 and $72.8 million of equity issued related to the TAF acquisition in October 2015. Additionally, an increase in average unrealized gains associated with the AFS securities portfolio also increased average equity, but was somewhat offset by share repurchases (discussed below), common and preferred dividends paid, and an increase of net actuarial losses for pension and postretirement plans. The increase in equity from December 31, 2015 to December 31, 2016 was due to net income recognized in 2016, somewhat offset by share repurchases, common and preferred dividends paid, and a decrease in other comprehensive income. The decline in other comprehensive income on December 31, 2016 was driven by unrealized losses within the AFS securities portfolio and an increase of net actuarial losses for pension and postretirement plans.

 

In January 2014, FHN’s board of directors approved a share repurchase program which enables FHN to repurchase its common stock in the open market or in privately negotiated transactions, subject to certain conditions. In July 2015 and April 2016 the board increased and extended that program. The current program authorizes total purchases of up to $350 million and expires on January 31, 2018. During 2016, FHN repurchased $93.5 million of common shares under the program; during 2015, FHN repurchased $28.4 million of common shares. Total purchases under this program through December 31, 2016 were $160.3 million.

 

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

 

FIRST HORIZON NATIONAL CORPORATION 23
 

Table 9 – Regulatory Capital and Ratios

 

(Dollars in thousands)  2016  2015  
Shareholders’ equity  $2,409,653   $2,344,155 
FHN non-cumulative perpetual preferred   (95,624)   (95,624)
Common equity  $2,314,029   $2,248,531 
Regulatory adjustments:          
Disallowed goodwill and other intangibles   (165,292)   (165,661)
Net unrealized (gains)/losses on securities available for sale   17,232    (3,394)
Net unrealized (gains)/losses on pension and other postretirement plans   229,157    217,586 
Net unrealized (gains)/losses on cash flow hedges   1,265    - 
Disallowed deferred tax assets   (18,027)   (18,404)
Other deductions from common equity tier 1   (377)   (78)
Common equity tier 1  $2,377,987   $2,278,580 
FHN non-cumulative perpetual preferred   95,624    95,624 
Qualifying noncontrolling interest – FTBNA preferred stock   256,811    260,794 
Other deductions from tier 1   (58,551)   (62,857)
Tier 1 capital  $2,671,871   $2,572,141 
Tier 2 capital   254,139    264,574 
Total regulatory capital  $2,926,010   $2,836,715 
Risk-Weighted Assets          
First Horizon National Corporation  $23,914,158   $21,812,015 
First Tennessee Bank National Association   23,447,251    21,143,459 
Average Assets for Leverage          
First Horizon National Corporation   28,581,251    26,109,449 
First Tennessee Bank National Association   27,710,158    25,105,163 

 

   2016   2015 
   Ratio  Amount   Ratio  Amount  
Common Equity Tier 1                    
First Horizon National Corporation   9.94%  $2,377,987    10.45%  $2,278,580 
First Tennessee Bank National Association   9.80    2,298,080    10.81    2,284,646 
Tier 1                    
First Horizon National Corporation   11.17    2,671,871    11.79    2,572,141 
First Tennessee Bank National Association   10.83    2,538,382    11.95    2,525,912 
Total                    
First Horizon National Corporation   12.24    2,926,010    13.01    2,836,715 
First Tennessee Bank National Association   11.78    2,762,271    13.09    2,768,625 
Tier 1 Leverage                    
First Horizon National Corporation   9.35    2,671,871    9.85    2,572,141 
First Tennessee Bank National Association   9.16    2,538,382    10.06    2,525,912 
Other Capital Ratios                    
Total period-end equity to period-end assets   9.47         10.08      
Tangible common equity to tangible assets (a)   7.42         7.82      
Adjusted tangible common equity to risk weighted assets (a)   8.86         9.30      

 

(a) Tangible common equity to tangible assets and Adjusted tangible common equity to risk-weighted assets are non-GAAP measures and are reconciled to Total equity to total assets (GAAP) in the Non-GAAP to GAAP Reconciliation – Table 31.

 

24 FIRST HORIZON NATIONAL CORPORATION
 

Banking regulators define minimum capital ratios for bank holding companies and their bank subsidiaries. Based on the capital rules and definitions prescribed by the banking regulators, should any depository institution’s capital ratios decline below predetermined levels, it would become subject to a series of increasingly restrictive regulatory actions. The system categorizes a depository institution’s capital position into one of five categories ranging from well-capitalized to critically under-capitalized. In 2016, for an institution the size of FHN to qualify as well-capitalized, Common Equity Tier 1, Tier 1 Capital, Total Capital, and Leverage capital ratios must be at least 6.5 percent, 8 percent, 10 percent, and 5 percent, respectively. As of December 31, 2016, FHN and FTBNA had sufficient capital to qualify as a well-capitalized institution. Regulatory capital ratios decreased in 2016 relative to 2015 due primarily to increases in risk-weighted assets from growth in earning assets, share repurchases and the phased-in implementation of the Basel III regulations partially offset by the impact of net income less dividends. During 2017, capital ratios are expected to remain significantly above well-capitalized standards.

 

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

 

In July 2016, FHN submitted results of its annual Dodd-Frank Act Stress Test, commonly known as DFAST, to the OCC and the Federal Reserve. A summary of the results was posted in October 2016 to FHN’s investor relations website. (Neither FHN’s stress test posting, nor any other material found on FHN’s website generally, is part of this report or incorporated herein.)

 

Pursuant to board authority, FHN may repurchase shares of its common stock from time to time and will evaluate the level of capital and take action designed to generate or use capital, as appropriate, for the interests of the shareholders, subject to legal and regulatory restrictions. FHN’s board has not authorized a preferred stock purchase program. The following tables provide information related to securities repurchased by FHN during fourth quarter 2016:

 

Table 10 – Issuer Purchases of Common Stock

 

Compensation Plan-Related Repurchase Authority:

 

(Volume in thousands,
except per share data)
  Total number
of shares
purchased
  Average price
paid per share
  Total number of
shares purchased
as part of publicly
announced programs
  Maximum number
of shares that may
yet be purchased
under the programs
2016                    
October 1 to October 31   8    $15.25    8    28,340 
November 1 to November 30   26    $18.38    26    28,314 
December 1 to December 31   -    N/A    -    28,251 
Total   34    $17.67    34      
N/A – Not applicable
Compensation Plan Programs:
A consolidated compensation plan share purchase program was announced on August 6, 2004. This program consolidated into a single share purchase program all of the previously authorized compensation plan share programs as well as the renewal of the authorization to purchase shares for use in connection with two compensation plans for which the share purchase authority had expired. The total amount authorized under this consolidated compensation plan share purchase program, inclusive of a program amendment on April 24, 2006, is 29.6 million shares calculated before adjusting for stock dividends distributed through January 1, 2011. The authorization has been reduced for that portion which relates to compensation plans for which no options remain outstanding. The shares may be purchased over the option exercise period of the various compensation plans on or before December 31, 2023. On December 31, 2016, the maximum number of shares that may be purchased under the program was 28.3 million shares. Purchases may be made in the open market or through privately negotiated transactions and are subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions. Management currently does not anticipate purchasing a material number of shares under this authority during 2017.

 

FIRST HORIZON NATIONAL CORPORATION 25
 

Other Repurchase Authority:

 

         Total number of  Maximum approximate
   Total number     shares purchased  dollar value that may
(Dollar values and volume in  of shares  Average price  as part of publicly  yet be purchased
thousands, except per share data)  purchased  paid per share  announced programs  under the programs
2016              
October 1 to October 31  -  N/A  -  $189,690 
November 1 to November 30  -  N/A  -  $189,690 
December 1 to December 31  -  N/A  -  $189,690 
Total  -  N/A  -     
N/A – Not applicable
Other Programs:
On January 22, 2014, FHN announced a $100 million share purchase authority with an expiration date of January 31, 2016. On July 21, 2015, FHN announced a $100 million increase in that authority along with an extension of the expiration date to January 31, 2017, and on April 26, 2016, FHN announced a $150 million increase and further extension to January 31, 2018. As of December 31, 2016, $160.3 million in purchases had been made under this authority at an average price per share of $12.86, $12.84 excluding commissions. Purchases may be made in the open market or through privately negotiated transactions and are subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions.

 

ASSET QUALITY – TREND ANALYSIS OF 2016 COMPARED TO 2015

 

Loan Portfolio Composition

FHN groups its loans into portfolio segments based on internal classifications reflecting the manner in which the ALLL is established and how credit risk is measured, monitored, and reported. From time to time, and if conditions are such that certain subsegments are uniquely affected by economic or market conditions or are experiencing greater deterioration than other components of the loan portfolio, management may determine the ALLL at a more granular level. Commercial loans are composed of commercial, financial, and industrial (“C&I”) and commercial real estate (“CRE”). Consumer loans are composed of consumer real estate; permanent mortgage; and credit card and other. FHN has a concentration of residential real estate loans (25 percent of total loans), the majority of which is in the consumer real estate portfolio (23 percent of total loans). Industry concentrations are discussed under the heading C&I below.

 

Acquired Loans

On September 16, 2016, FHN completed its acquisition of franchise finance loans with an unpaid principal balance of $537.4 million. Acquired loans were initially recorded at fair value which was estimated by discounting expected cash flows at the acquisition date. The expected cash flows include all contractually expected amounts and incorporate an estimate for future expected credit losses, pre-payment assumptions and yield requirement for a market participant, among other things. Because an expectation of credit losses is embedded in the fair value estimate, there is no carryover of allowance for loan losses. See Note 4 – Loans for additional information regarding the acquisition.

 

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

 

On December 31, 2016, the unpaid principal balance and the carrying value of PCI loans (inclusive of the franchise finance loan purchase and two previous bank acquisitions) were $49.9 million and $46.4 million, respectively.

 

Underwriting Policies and Procedures

The following sections describe each portfolio as well as general underwriting procedures for each. As economic and real estate conditions develop, enhancements to underwriting and credit policies and procedures may be necessary or desirable. Loan policies and procedures for all portfolios are reviewed by credit risk working groups

 

26 FIRST HORIZON NATIONAL CORPORATION
 

and management risk committees comprised of business line managers and credit administration professionals as well as by various other reviewing bodies within FHN. Policies and procedures are approved by key executive and/or senior managers leading the applicable credit risk working groups as well as by management risk committees. The credit risk working groups and management risk committees strive to ensure that the approved policies and procedures address the associated risks and establish reasonable underwriting criteria that appropriately mitigate risk. Policies and procedures are reviewed, revised and re-issued periodically at established review dates or earlier if changes in the economic environment, portfolio performance, the size of portfolio or industry concentrations, or regulatory guidance warrant an earlier review. In 2015, origination and underwriting policies and procedures were modified such that the total amount of credit FHN could make available to individual commercial borrowers was increased for borrowers within the strongest grade categories. Additionally, in 2016, borrower limits were generally increased for customers of our Mortgage Warehouse Lending line of business. These changes were approved by management risk committees and the Executive and Risk Committee of the Board in order to enhance and support loan growth while also minimizing incremental credit risk.

 

COMMERCIAL LOAN PORTFOLIOS

 

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

 

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

 

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

 

C&I

The C&I portfolio was $12.1 billion on December 31, 2016, and is comprised of loans used for general business purposes and primarily composed of relationship customers in Tennessee and other selected markets. Typical products include working capital lines of credit, term loan financing of owner-occupied real estate and fixed assets, and trade credit enhancement through letters of credit.

 

FIRST HORIZON NATIONAL CORPORATION 27
 

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

 

The following table provides the composition of the C&I portfolio by industry as of December 31, 2016 and 2015. For purposes of this disclosure, industries are determined based on the North American Industry Classification System (“NAICS”) industry codes used by Federal statistical agencies in classifying business establishments for the collection, analysis, and publication of statistical data related to the U.S. business economy.

 

Table 11 – C&I Loan Portfolio by Industry

 

   December 31, 2016  December 31, 2015
(Dollars in thousands)  Amount  Percent  Amount  Percent
Industry:                    
Finance & insurance  $2,573,713    21%  $2,214,270    21%
Loans to mortgage companies   2,045,189    17    1,669,908    16 
Accommodation & food service (a)   987,973    8    408,941    4 
Health care & social assistance   893,629    7    737,243    7 
Wholesale trade   826,226    7    803,993    8 
Real estate rental & leasing (b)   769,457    6    741,739    7 
Manufacturing   762,947    6    663,720    6 
Transportation & warehousing   578,586    5    467,485    4 
Public administration   565,119    5    609,930    6 
Other (education, arts, entertainment, etc.) (c)   2,145,248    18    2,119,161    21 
Total C&I loan portfolio  $12,148,087    100%  $10,436,390    100%
Certain previously reported amounts have been reclassified to agree with current presentation.
(a) Includes FHN’s franchise finance loans which increased approximately $535 million as a result of the GE Capital loan acquisition.
(b) Leasing, rental of real estate, equipment, and goods.
(c) Industries in this category each comprise less than 5 percent for 2016.

 

Industry Concentrations

Loan concentrations are considered to exist for a financial institution when there are loans to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. 38 percent of FHN’s C&I portfolio (Finance and insurance plus Loans to mortgage companies) could be affected by items that uniquely impact the financial services industry. Except “Finance and Insurance” and “Loans to Mortgage Companies”, as discussed below, on December 31, 2016, FHN did not have any other concentrations of C&I loans in any single industry of 10 percent or more of total loans.

 

28 FIRST HORIZON NATIONAL CORPORATION
 

Finance and Insurance

The finance and insurance component represents 21 percent of the C&I portfolio and includes TRUPS (i.e., long-term unsecured loans to bank and insurance-related businesses), loans to bank holding companies, and asset-based lending to consumer finance companies. As of December 31, 2016, asset-based lending to consumer finance companies represents approximately $1.0 billion of the finance and insurance component.

 

TRUPS lending was originally extended as a form of “bridge” financing to participants in the pooled trust preferred securitization program offered primarily to smaller banking (generally less than $15 billion in total assets) and insurance institutions through FHN’s fixed income business. Origination of TRUPS lending ceased in early 2008. Individual TRUPS are re-graded at least quarterly as part of FHN’s commercial loan review process. Typically, the terms of these loans include a prepayment option after a 5 year initial term, have a scheduled 30 year balloon payoff, and include an option to defer interest for up to 20 consecutive quarters. As of December 31, 2016 and 2015, one TRUP relationship was on interest deferral.

 

As of December 31, 2016, the unpaid principal balance (“UPB”) of trust preferred loans totaled $333.0 million ($206.7 million of bank TRUPS and $126.3 million of insurance TRUPS) with the UPB of other bank-related loans totaling $279.9 million. Inclusive of a valuation allowance on TRUPS of $25.5 million, total reserves (ALLL plus the valuation allowance) for TRUPS and other bank-related loans were $26.5 million or 4 percent of outstanding UPB.

 

Loans to Mortgage Companies

The balance of loans to mortgage companies was 17 percent of the C&I portfolio as of December 31, 2016, as compared to 16 percent of the C&I portfolio in 2015, and include balances related to both home purchase and refinance activity. This portfolio class, which generally fluctuates with mortgage rates and seasonal factors, includes commercial lines of credit to qualified mortgage companies primarily for the temporary warehousing of eligible mortgage loans prior to the borrower’s sale of those mortgage loans to third party investors. Generally, lending to mortgage lenders increases when there is a decline in mortgage rates and decreases when rates rise.

 

C&I Asset Quality Trends

Overall, nearly all of the C&I portfolio trends remain strong in 2016, continuing in line with recent historical performance. The C&I ALLL increased $15.8 million from December 31, 2015, to $89.4 million as of December 31, 2016. The net increase in reserves is largely driven by loan growth but was somewhat offset by the favorable impact of lower loss rates as net charge-offs remain at historical lows. The allowance as a percentage of period-end loans increased to .74 percent as of December 31, 2016, from .71 percent as of December 31, 2015. Net charge-offs were $11.7 million in 2016 compared to $9.1 million 2015. Nonperforming C&I loans increased $6.4 million from December 31, 2015, to $32.7 million on December 31, 2016. The nonperforming loan (“NPL”) ratio increased 2 basis points from December 31, 2015, to .27 percent of C&I loans as of December 31, 2016. The 30+ delinquency ratio remained flat at .08 percent of C&I loans as of December 31, 2016. The following table shows C&I asset quality trends by segment.

 

FIRST HORIZON NATIONAL CORPORATION 29
 

Table 12 – C&I Asset Quality Trends by Segment

 

   December 31
(Dollars in thousands)  2016  2015  2014  2013  2012
Regional Bank               
Period-end loans  $11,728,160   $10,014,752   $8,553,080   $7,431,430   $8,262,351 
Nonperforming loans   28,619    22,793    20,627    43,691    70,083 
Allowance for loan losses as of January 1  $72,213   $61,998   $72,310   $78,181   $101,373 
Charge-offs   (18,196)   (17,994)   (14,832)   (22,274)   (29,898)
Recoveries   6,719    11,969    9,003    10,167    10,622 
Provision/(provision credit) for loan losses   27,274    16,240    (4,483)   6,236    (3,916)
Allowance for loan losses as of December 31  $88,010   $72,213   $61,998   $72,310   $78,181 
Accruing restructured loans  $20,151   $4,358   $19,214   $8,515   $12,254 
Nonaccruing restructured loans   14,183    14,284    9,632    27,345    32,786 
Total troubled debt restructurings (a)  $34,334   $18,642   $28,846   $35,860   $45,040 
30+ Delinq. % (b)   0.08%   0.08%   0.05%   0.14%   0.23%
NPL %   0.24    0.23    0.24    0.59    0.85 
Charge-offs %   0.11    0.07    0.08    0.17    0.27 
Allowance / loans %   0.75%   0.72%   0.72%   0.97%   0.95%
Allowance / charge-offs   7.67x   11.99x   10.63x   5.72x   3.86x
Non-Strategic                         
Period-end loans  $419,927   $421,638   $454,206   $492,146   $534,605 
Nonperforming loans   4,117    3,520    11,983    36,068    52,517 
Allowance for loan losses as of January 1  $1,424   $5,013   $14,136   $18,010   $29,040 
Charge-offs   (264)   (4,412)   (5,660)   (662)   (989)
Recoveries   76    1,370    663    2,320    529 
Provision/(provision credit) for loan losses   152    (547)   (4,126)   (5,532)   (10,570)
Allowance for loan losses as of December 31  $1,388   $1,424   $5,013   $14,136   $18,010 
30+ Delinq. % (b)   -%   0.02%   0.05%   0.06%   -%
NPL %   0.98    0.83    2.64    7.33    9.82 
Charge-offs %   0.04    0.69    1.07    NM    NM 
Allowance / loans %   0.33%   0.34%   1.10%   2.87%   3.37%
Allowance / charge-offs   7.39x   0.47x   1.00x   NM    NM 
Consolidated                         
Period-end loans  $12,148,087   $10,436,390   $9,007,286   $7,923,576   $8,796,956 
Nonperforming loans   32,736    26,313    32,610    79,759    122,600 
Allowance for loan losses as of January 1  $73,637   $67,011   $86,446   $96,191   $130,413 
Charge-offs   (18,460)   (22,406)   (20,492)   (22,936)   (30,887)
Recoveries   6,795    13,339    9,666    12,487    11,151 
Provision/(provision credit) for loan losses   27,426    15,693    (8,609)   704    (14,486)
Allowance for loan losses as of December 31  $89,398   $73,637   $67,011   $86,446   $96,191 
Accruing restructured loans  $20,151   $4,358   $19,214   $8,515   $12,254 
Nonaccruing restructured loans   14,183    14,284    9,632    27,345    32,786 
Total troubled debt restructurings  $34,334   $18,642   $28,846   $35,860   $45,040 
30+ Delinq. % (b)   0.08%   0.08%   0.05%   0.13%   0.22%
NPL %   0.27    0.25    0.36    1.01    1.39 
Charge-offs %   0.11    0.10    0.13    0.13    0.25 
Allowance / loans %   0.74%   0.71%   0.74%   1.09%   1.09%
Allowance / charge-offs   7.66x   8.12x   6.19x   8.27x   4.87x

NM - Not meaningful.

Loans are expressed net of unearned income.

(a) 2012 balances within the non-strategic segment have been combined into the regional bank segment due to immateriality. Other years presented have a zero balance.
(b) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.

 

Commercial Real Estate

The CRE portfolio was $2.1 billion on December 31, 2016. The CRE portfolio includes both financings for commercial construction and nonconstruction loans. This portfolio is segregated between the income-producing CRE class which contains loans, draws on lines and letters of credit to commercial real estate developers for the

 

30 FIRST HORIZON NATIONAL CORPORATION
 

construction and mini-permanent financing of income-producing real estate, and the residential CRE class. Subcategories of income CRE consist of multi-family (32 percent), retail (23 percent), office (15 percent), hospitality (14 percent), industrial (10 percent), land/land development (1 percent), and other (5 percent).

 

The residential CRE class includes loans to residential builders and developers for the purpose of constructing single-family homes, condominiums, and town homes. Active residential CRE lending has been minimal with nearly all new originations limited to tactical advances to facilitate workout strategies with existing clients and selected new transactions with “strategic” clients. FHN considers a “strategic” residential CRE borrower as a homebuilder within the regional banking footprint who remained profitable during the most recent down cycle.

 

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

 

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

 

CRE Asset Quality Trends

The CRE portfolio had continued stable performance in 2016 with nonperforming loans down $5.9 million from a year ago, net recoveries in 2016, and minimal past due activity. The allowance increased $8.7 million from December 31, 2015, to $33.9 million as of December 31, 2016. The increase in allowance is primarily driven by loan growth as balances increased $460.6 million from a year ago and consideration of the current economic environment. Allowance as a percentage of loans increased 9 basis points from 2015 to 1.59 percent as of December 31, 2016. FHN recognized a net recovery of $.6 million in 2016 compared to net charge-offs of $1.7 million in 2015. Nonperforming loans as a percentage of total CRE loans improved 39 basis points from December 31, 2015 to .13 percent as of December 31, 2016. Accruing delinquencies as a percentage of period-end loans improved 26 basis points from December 31, 2015, to .01 percent as of December 31, 2016. The following table shows commercial real estate asset quality trends by segment.

 

FIRST HORIZON NATIONAL CORPORATION 31
 

Table 13 – Commercial Real Estate Asset Quality Trends by Segment

 

   December 31
(Dollars in thousands)  2016   2015   2014   2013   2012 
Regional Bank                    
Period-end loans  $2,135,523   $1,674,871   $1,273,220   $1,124,131   $1,148,153 
Nonperforming loans   2,776    8,684    14,571    15,146    39,746 
Allowance for loan losses as of January 1  $25,159   $18,158   $9,873   $18,385   $48,990 
Charge-offs   (1,371)   (3,441)   (3,331)   (3,021)   (16,375)
Recoveries   1,816    1,450    3,764    2,798    1,800 
Provision/(provision credit) for loan losses   8,248    8,992    7,852    (8,289)   (16,030)
Allowance for loan losses as of December 31  $33,852   $25,159   $18,158   $9,873   $18,385 
Accruing restructured loans  $1,736   $5,039   $4,588   $11,977   $11,477 
Nonaccruing restructured loans   1,388    3,969    6,947    7,861    13,236 
Total troubled debt restructurings  $3,124   $9,008   $11,535   $19,838   $24,713 
30+ Delinq. % (a)   0.01%   0.27%   0.14%   0.91%   0.40%
NPL %   0.13    0.52    1.14    1.35    3.46 
Charge-offs %   NM    0.14    NM    NM    1.08 
Allowance / loans %   1.59%   1.50%   1.43%   0.88%   1.60%
Allowance / charge-offs   NM    12.63 x   NM    NM    1.35 x
Non-Strategic                         
Period-end loans  $-   $64   $4,497   $9,148   $20,082 
Nonperforming loans   -    -    785    2,955    5,824 
Allowance for loan losses as of January 1  $-   $416   $730   $1,612   $6,596 
Charge-offs   -    (109)   (410)   (481)   (3,602)
Recoveries   111    426    386    1,477    2,675 
Provision/(provision credit) for loan losses   (111)   (733)   (290)   (1,878)   (4,057)
Allowance for loan losses as of December 31  $-   $-   $416   $730   $1,612 
Accruing restructured loans  $-   $-   $3,095   $3,274   $3,921 
Nonaccruing restructured loans   -    -    568    906    2,606 
Total troubled debt restructurings  $-   $-   $3,663   $4,180   $6,527 
30+ Delinq. % (a)   -%   -%   -%   -%   -%
NPL %   -    -    17.47    32.30    29.00 
Charge-offs %   NM    NM    0.41    NM    4.10 
Allowance / loans %   -%   -%   9.25%   7.98%   8.03%
Allowance / charge-offs   NM    NM    16.43 x   NM    0.84 x
Consolidated                         
Period-end loans  $2,135,523   $1,674,935   $1,277,717   $1,133,279   $1,168,235 
Nonperforming loans   2,776    8,684    15,356    18,101    45,570 
Allowance for loan losses as of January 1  $25,159   $18,574   $10,603   $19,997   $55,586 
Charge-offs   (1,371)   (3,550)   (3,741)   (3,502)   (19,977)
Recoveries   1,927    1,876    4,150    4,275    4,475 
Provision/(provision credit) for loan losses   8,137    8,259    7,562    (10,167)   (20,087)
Allowance for loan losses as of December 31  $33,852   $25,159   $18,574   $10,603   $19,997 
Accruing restructured loans  $1,736   $5,039   $7,683   $15,251   $15,398 
Nonaccruing restructured loans   1,388    3,969    7,515    8,767    15,842 
Total troubled debt restructurings  $3,124   $9,008   $15,198   $24,018   $31,240 
30+ Delinq. % (a)   0.01%   0.27%   0.14%   0.90%   0.39%
NPL %   0.13    0.52    1.20    1.60    3.90 
Charge-offs %   NM    0.12    NM    NM    1.19 
Allowance / loans %   1.59%   1.50%   1.45%   0.94%   1.71%
Allowance / charge-offs   NM    15.03 x   NM    NM    1.29 x

NM–Not meaningful.

Loans are expressed net of unearned income.

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

 

32 FIRST HORIZON NATIONAL CORPORATION
 

CONSUMER LOAN PORTFOLIOS

 

Consumer Real Estate

The consumer real estate portfolio was $4.5 billion on December 31, 2016, and is primarily composed of home equity lines and installment loans including restricted balances (loans consolidated under ASC 810). The largest geographical concentrations of balances as of December 31, 2016, are in Tennessee (69 percent) and California (5 percent) with no other state representing more than 3 percent of the portfolio. As of December 31, 2016, approximately 69 percent of the consumer real estate portfolio was in a first lien position. At origination, weighted average FICO score of this portfolio was 750 and refreshed FICO scores averaged 747 as of December 31, 2016, as compared to 747 and 743, respectively, as of December 31, 2015. As of December 31, 2016, approximately $1.3 billion, or 28 percent, of the consumer real estate portfolio consisted of stand-alone second liens while $.1 billion, or 3 percent, were owned or serviced by FHN. We obtain first lien performance information from third parties and through loss mitigation activities, and we place a stand-alone second lien loan on nonaccrual if we discover that there are performance issues with the first lien loan. Generally, performance of this portfolio is affected by life events that affect borrowers’ finances, the level of unemployment, and home prices.

 

Home equity lines of credit (“HELOCs”) comprise $1.7 billion of the consumer real estate portfolio as of December 31, 2016. FHN’s HELOCs typically have a 5 or 10 year draw period followed by a 10 or 20 year repayment period, respectively. During the draw period, a borrower is able to draw on the line and is only required to make interest payments. The line is automatically frozen if a borrower becomes 45 days or more past due on payments. Once the draw period has concluded, the line is closed and the borrower is required to make both principal and interest payments monthly until the loan matures. The principal payment generally is fully amortizing, but payment amounts will adjust when variable rates reset to reflect changes in the prime rate.

 

As of December 31, 2016, approximately 63 percent of FHN’s HELOCs are in the draw period, compared to 66 percent as of December 31, 2015. Based on when draw periods are scheduled to end per the line agreement, it is expected that $551.2 million, or 52 percent of HELOCs currently in the draw period, will have entered the repayment period during the next 60 months. Delinquencies and charge-off rates for HELOCs that have entered the repayment period are initially higher than HELOCs still in the draw period because of the increased minimum payment requirement; however, after some seasoning, performance of these loans usually begins to stabilize. The home equity lines of the consumer real estate portfolio are being monitored closely for those nearing the end of the draw period and borrowers are initially being contacted at least 24 months before the repayment period begins to remind the customer of the terms of their agreement and to inform them of options. The following table shows the HELOCs currently in the draw period and expected timing of conversion to the repayment period.

 

Table 14 – HELOC Draw To Repayment Schedule

 

   December 31, 2016   December 31, 2015
(Dollars in thousands)  Repayment
Amount
   Percent  Repayment
Amount
   Percent
Months remaining in draw period:                    
0-12  $212,665    20%  $230,662    17%
13-24   127,662    12    262,788    19 
25-36   73,331    7    159,599    12 
37-48   68,768    6    88,629    6 
49-60   68,792    7    85,624    6 
>60   514,126    48    549,700    40 
Total  $1,065,344    100%  $1,377,002    100%

 

Underwriting

For the majority of loans in this portfolio, underwriting decisions are made through a centralized loan underwriting center. To obtain a consumer real estate loan, the loan applicant(s) in most cases must first meet a minimum qualifying FICO score. Minimum FICO score requirements are established by management for both loans secured

 

FIRST HORIZON NATIONAL CORPORATION 33
 

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

 

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

 

HELOC Portfolio Risk Management

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

 

Consumer Real Estate Asset Quality Trends

Overall, performance of the consumer real estate portfolio remained strong in 2016 as nearly all consolidated asset quality metrics improved from a year ago. Specifically, the regional bank’s asset quality metrics improved from a year ago. The non-strategic segment is a run-off portfolio and while the absolute dollars of delinquencies and nonaccruals mostly improved from a year ago, the 30+ accruing delinquencies and nonperforming loans ratios deteriorated and may become more skewed as the portfolio shrinks and some of the stronger borrowers payoff or refinance elsewhere. The ALLL decreased $30.3 million from December 31, 2015, to $50.4 million as of December 31, 2016, with 67 percent of the decline attributable to the non-strategic segment. The allowance as a percentage of loans was 1.11 percent as of December 31, 2016, compared to 1.69 percent as of December 31, 2015. The 58 basis point decline in the allowance as a percentage of loans is the result of continued run-off of the balances within the non-strategic portfolio, sustained levels of low net charge-offs, strong performance, and continued improvement/stabilization of property values. The balance of nonperforming loans was $82.8 million and $111.1 million as of December 31, 2016 and 2015, respectively. Loans delinquent 30 or more days and still accruing declined from $47.7 million as of December 31, 2015, to $42.1 million as of December 31, 2016. The portfolio realized a net recovery of $1.7 million in 2016 compared to a net charge-off of $6.2 million in 2015. The ratios of 30+ delinquency and NPLs as a percentage of loans within the nonstrategic segment have declined compared to 2015. The following table shows consumer real estate asset quality trends by segment.

 

34 FIRST HORIZON NATIONAL CORPORATION
 

Table 15 – Consumer Real Estate Asset Quality Trends by Segment

 

   December 31
(Dollars in thousands)  2016   2015   2014   2013   2012 
Regional Bank                    
Period-end loans  $3,642,894   $3,515,459   $3,384,746   $3,278,365   $3,121,477 
Nonperforming loans   18,865    23,935    28,953    27,939    20,991 
Allowance for loan losses as of January 1  $29,108   $32,180   $31,474   $25,291   $31,047 
Charge-offs   (5,346)   (8,414)   (10,780)   (10,261)   (21,419)
Recoveries   4,863    4,660    3,551    5,057    4,740 
Provision/(provision credit) for loan losses   (9,615)   682    7,935    11,387    10,923 
Allowance for loan losses as of December 31  $19,010   $29,108   $32,180   $31,474   $25,291 
Accruing restructured loans  $36,784   $36,912   $40,841   $41,304   $40,425 
Nonaccruing restructured loans   10,694    13,723    14,229    14,636    15,102 
Total troubled debt restructurings  $47,478   $50,635   $55,070   $55,940   $55,527 
30+ Delinq. % (a)   0.49%   0.52%   0.57%   0.65%   0.65%
NPL %   0.52    0.68    0.86    0.85    0.67 
Charge-offs %   0.01    0.11    0.22    0.16    0.56 
Allowance / loans %   0.52%   0.83%   0.95%   0.96%   0.81%
Allowance / charge-offs   39.42x   7.76 x   4.45 x   6.05 x   1.52 x
Non-Strategic                         
Period-end loans  $880,858   $1,251,059   $1,663,325   $2,055,006   $2,567,226 
Nonperforming loans   63,947    87,157    91,679    89,659    43,454 
Allowance for loan losses as of January 1  $51,506   $80,831   $95,311   $103,658   $134,030 
Charge-offs   (16,647)   (21,654)   (34,611)   (63,381)   (126,499)
Recoveries   18,856    19,235    19,273    16,303    13,030 
Provision/(provision credit) for loan losses   (22,368)   (26,906)   858    38,731    83,097 
Allowance for loan losses as of December 31  $31,347   $51,506   $80,831   $95,311   $103,658 
Accruing restructured loans  $68,217   $67,942   $71,389   $83,459   $77,488 
Nonaccruing restructured loans   37,765    47,107    46,766    31,023    26,985 
Total troubled debt restructurings  $105,982   $115,049   $118,155   $114,482   $104,473 
30+ Delinq. % (a)   2.76%   2.34%   2.17%   1.89%   2.23%
NPL %   7.26    6.97    5.51    4.36    1.69 
Charge-offs %   NM    0.17    0.82    2.04    3.96 
Allowance / loans %   3.56%   4.12%   4.86%   4.64%   4.04%
Allowance / charge-offs   NM    21.29 x   5.27 x   2.02 x   0.91 x
Consolidated                         
Period-end loans  $4,523,752   $4,766,518   $5,048,071   $5,333,371   $5,688,703 
Nonperforming loans   82,812    111,092    120,632    117,598    64,445 
Allowance for loan losses as of January 1  $80,614   $113,011   $126,785   $128,949   $165,077 
Charge-offs   (21,993)   (30,068)   (45,391)   (73,642)   (147,918)
Recoveries   23,719    23,895    22,824    21,360    17,770 
Provision/(provision credit) for loan losses   (31,983)   (26,224)   8,793    50,118    94,020 
Allowance for loan losses as of December 31  $50,357   $80,614   $113,011   $126,785   $128,949 
Accruing restructured loans  $105,001   $104,854   $112,230   $124,763   $117,913 
Nonaccruing restructured loans   48,459    60,830    60,995    45,659    42,087 
Total troubled debt restructurings  $153,460   $165,684   $173,225   $170,422   $160,000 
30+ Delinq. % (a)   0.93%   1.00%   1.10%   1.13%   1.36%
NPL %   1.83    2.33    2.39    2.20    1.13 
Charge-offs %   NM    0.13    0.43    0.95    2.23 
Allowance / loans %   1.11%   1.69%   2.24%   2.38%   2.27%
Allowance / charge-offs   NM    13.06 x   5.01 x   2.42 x   0.99 x

NM - Not meaningful.

Loans are expressed net of unearned income.

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

 

FIRST HORIZON NATIONAL CORPORATION 35
 

Permanent Mortgage

The permanent mortgage portfolio was $.4 billion on December 31, 2016. This portfolio is primarily composed of jumbo mortgages and one-time-close (“OTC”) completed construction loans in the non-strategic segment that were originated through legacy businesses. In 2015 and 2016, the regional banking segment primarily includes recently acquired mortgage loans associated with FHN’s CRA initiatives. The corporate segment includes loans that were previously included in off-balance sheet proprietary securitization trusts. These loans were brought back into the loan portfolios at fair value through the execution of cleanup calls due to the relatively small balances left in the securitization and should continue to run-off. Approximately 25 percent of loan balances as of December 31, 2016, are in California, but the remainder of the portfolio is somewhat geographically diverse. Non-strategic and corporate segment run-off contributed to a majority of the $31.0 million net decrease in permanent mortgage period-end balances from December 31, 2015 to December 31, 2016.

 

The permanent mortgage portfolios within the non-strategic and corporate segments are run-off portfolios. As a result, asset quality metrics may become skewed as the portfolio shrinks and some of the stronger borrowers payoff or refinance elsewhere. The ALLL decreased $2.7 million as of December 31, 2016, from $18.9 million as of December 31, 2015. TDR reserves (which are estimates of losses for the expected life of the loan) are within the non-strategic segment and comprise 77 percent of the ALLL for the permanent mortgage portfolio as of December 31, 2016. Consolidated accruing delinquencies as a percentage of total loans increased 25 basis points from prior year to 2.36 percent as of December 31, 2016. Nonperforming loans declined $4.5 million to $27.2 million as of December 31, 2016. The portfolio realized a net recovery of $.8 million in 2016 compared to net charge-offs of $1.5 million in 2015. The following table shows permanent mortgage asset quality trends by segment.

 

36 FIRST HORIZON NATIONAL CORPORATION
 

Table 16 – Permanent Mortgage Asset Quality Trends by Segment

 

   December 31
(Dollars in thousands)  2016   2015   2014   2013   2012 
Regional Bank                         
Period-end loans (a)  $76,973   $21,162   $10,852   $12,623   $16,125 
Nonperforming loans   393    443    503    535    1,000 
Allowance for loan losses as of January 1  $140   $167   $245   $117   $166 
Charge-offs   -    (14)   (19)   -    - 
Recoveries   -    -    -    -    - 
Provision/(provision credit) for loan losses   1,075    (13)   (59)   128    (49)
Allowance for loan losses as of December 31  $1,215   $140   $167   $245   $117 
Accruing restructured loans  $563   $720   $1,254   $597   $- 
Nonaccruing restructured loans   315    364    -    466    916 
Total troubled debt restructurings  $878   $1,084   $1,254   $1,063   $916 
30+ Delinq. % (b)   0.72%   2.08%   5.75%   7.77%   3.03%
NPL %   0.51    2.09    4.64    4.23    6.20 
Charge-offs %   -    0.14    0.16    -    - 
Allowance / loans %   1.58%   0.66%   1.54%   1.94%   0.73%
Allowance / charge-offs   NM    9.96x   8.88x   NM    NM 
Corporate                         
Period-end loans  $71,380   $97,450   $135,538   $174,621   $180,034 
Nonperforming loans   1,186    1,677    3,045    4,598    1,915 
Allowance for loan losses as of December 31 (c)   N/A    N/A    N/A    N/A    N/A 
Accruing restructured loans  $3,792   $3,992   $5,494   $2,691   $- 
Nonaccruing restructured loans   -    -    -    204    2,177 
Total troubled debt restructurings  $3,792   $3,992   $5,494   $2,895   $2,177 
30+ Delinq. % (b)   4.37%   2.92%   2.32%   2.34%   1.83%
NPL %   1.66    1.72    2.25    2.63    1.06 
Allowance / loans % (c)   N/A    N/A    N/A    N/A    N/A 
Non-Strategic                         
Period-end loans  $274,772   $335,511  $392,571   $474,998   $569,424 
Nonperforming loans   25,602    29,532    30,530    33,038    29,806 
Allowance for loan losses as of January 1  $18,807   $18,955   $22,246   $24,811   $26,028 
Charge-offs   (1,591)   (3,127)   (5,872)   (9,934)   (13,604)
Recoveries   2,403    1,687    2,314    2,473    3,024 
Provision/(provision credit) for loan losses   (4,545)   1,292    267    4,896    9,363 
Allowance for loan losses as of December 31  $15,074   $18,807   $18,955   $22,246   $24,811 
Accruing restructured loans  $71,896   $78,719   $84,701   $94,532   $97,501 
Nonaccruing restructured loans   17,360    18,666    22,010    22,968    20,330 
Total troubled debt restructurings  $89,256   $97,385  $106,711   $117,500   $117,831 
30+ Delinq. % (b)   2.29%   1.88%   1.40%   2.59%   2.40%
NPL %   9.32    8.80    7.78    6.96    5.23 
Charge-offs %   NM    0.40    0.83    1.42    1.71 
Allowance / loans %   5.49%   5.61%   4.83%   4.68%   4.36%
Allowance / charge-offs   NM    13.07x   5.32x   2.98x   2.34x
Consolidated                         
Period-end loans  $423,125   $454,123  $538,961   $662,242   $765,583 
Nonperforming loans   27,181    31,652    34,078    38,171    32,721 
Allowance for loan losses as of January 1  $18,947   $19,122   $22,491   $24,928   $26,194 
Charge-offs   (1,591)   (3,141)   (5,891)   (9,934)   (13,604)
Recoveries   2,403    1,687    2,314    2,473    3,024 
Provision/(provision credit) for loan losses   (3,470)   1,279    208    5,024    9,314 
Allowance for loan losses as of December 31  $16,289   $18,947   $19,122   $22,491   $24,928 
Accruing restructured loans  $76,251   $83,431   $91,449   $97,820   $97,501 
Nonaccruing restructured loans   17,675    19,030    22,010    23,638    23,423 
Total troubled debt restructurings  $93,926   $102,461  $113,459   $121,458   $120,924 
30+ Delinq. % (b)   2.36%   2.11%   1.72%   2.62%   2.28%
NPL %   6.42    6.97    6.32    5.76    4.27 
Charge-offs %   NM    0.30    0.60    1.00    1.33 
Allowance / loans %   3.85%   4.17%   3.55%   3.40%   3.26%
Allowance / charge-offs   NM    13.04x   5.34x   3.01x   2.36x

NM - Not meaningful.

Loans are expressed net of unearned income.

(a) The increase in Regional Bank is primarily due to FHN’s CRA initiatives.
(b) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.
(c) An allowance has not been established for these loans as the valuation adjustment taken upon exercise of clean-up calls included expected losses.
   
FIRST HORIZON NATIONAL CORPORATION 37
 

Credit Card and Other

The credit card and other portfolio, which is primarily within the regional banking segment, was $.4 billion as of December 31, 2016, and primarily includes credit card receivables, other consumer-related credits, and automobile loans. The allowance increased to $12.2 million as of December 31, 2016, from $11.9 million as of December 31, 2015. In 2016, FHN recognized $10.6 million of net charge-offs in the credit card and other portfolio, compared to $12.8 million in 2015. Loans 30 days or more delinquent and accruing as a percentage of loans increased 9 basis points from December 31, 2015, to 1.17 percent as of December 31, 2016. The following table shows credit card and other asset quality trends by segment.

 

38 FIRST HORIZON NATIONAL CORPORATION
 

Table 17 – Credit Card and Other Asset Quality Trends by Segment

 

   December 31
(Dollars in thousands)  2016   2015   2014   2013   2012 
Regional Bank                         
Period-end loans  $351,198   $344,405   $345,859   $320,607   $270,874 
Nonperforming loans   -    620    -    12    14 
Allowance for loan losses as of January 1  $10,966   $14,310   $7,125   $6,235   $6,215 
Charge-offs   (13,983)   (15,542)   (13,781)   (10,533)   (10,868)
Recoveries   3,297    3,555    3,026    2,421    2,713 
Provision/(provision credit) for loan losses   11,715    8,643    17,940    9,002    8,175 
Allowance for loan losses as of December 31  $11,995   $10,966   $14,310   $7,125   $6,235 
Accruing restructured loans  $274   $314   $406   $370   $574 
Nonaccruing restructured loans   -    -    -    -    - 
Total troubled debt restructurings  $274   $314   $406   $370   $574 
30+ Delinq. % (a)   1.16%   1.07%   1.38%   1.30%   1.36%
NPL %   -    0.18    -    -    0.01 
Charge-offs %   3.05    3.51    3.22    2.73    3.13 
Allowance / loans %   3.42%   3.18%   4.14%   2.22%   2.30%
Allowance / charge-offs   1.12   0.91x   1.33x   0.88x   0.76x
Non-Strategic                         
Period-end loans  $7,835   $10,131   $12,272   $15,999   $18,231 
Nonperforming loans   142    737    763    1,385    1,684 
Allowance for loan losses as of January 1  $919   $420   $359   $663   $866 
Charge-offs   (241)   (1,149)   (1,150)   (871)   (1,756)
Recoveries   324    298    105    248    489 
Provision/(provision credit) for loan losses   (825)   1,350    1,106    319    1,064 
Allowance for loan losses as of December 31  $177   $919   $420   $359   $663 
Accruing restructured loans  $32   $63   $127   $175   $244 
Nonaccruing restructured loans   -    -    -    -    - 
Total troubled debt restructurings  $32   $63   $127   $175   $244 
30+ Delinq. % (a)   1.73%   1.47%   2.48%   2.33%   2.82%
NPL %   1.82    7.28    6.22    8.66    9.23 
Charge-offs %   NM    7.75    7.37    3.68    6.42 
Allowance/loans %   2.26%   9.07%   3.43%   2.25%   3.64%
Allowance/charge-offs   NM    1.08x   0.40x   0.58x   0.52x
Consolidated                         
Period-end loans  $359,033   $354,536   $358,131   $336,606   $289,105 
Nonperforming loans   142    1,357    763    1,397    1,698 
Allowance for loan losses as of January 1  $11,885   $14,730   $7,484   $6,898   $7,081 
Charge-offs   (14,224)   (16,691)   (14,931)   (11,404)   (12,624)
Recoveries   3,621    3,853    3,131    2,669    3,202 
Provision/(provision credit) for loan losses   10,890    9,993    19,046    9,321    9,239 
Allowance for loan losses as of December 31  $12,172   $11,885   $14,730   $7,484   $6,898 
Accruing restructured loans  $306   $377   $533   $545   $818 
Nonaccruing restructured loans   -    -    -    -    - 
Total troubled debt restructurings  $306   $377   $533   $545   $818 
30+ Delinq. % (a)   1.17%   1.08%   1.42%   1.35%   1.45%
NPL %   0.04    0.38    0.21    0.42    0.59 
Charge-offs %   2.95    3.64    3.39    2.78    3.36 
Allowance / loans %   3.39%   3.35%   4.11%   2.22%   2.39%
Allowance / charge-offs   1.15x    0.93x   1.25x   0.86x   0.73x

NM - Not meaningful.

Loans are expressed net of unearned income.

(a) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.
   
FIRST HORIZON NATIONAL CORPORATION 39
 

Allowance for Loan Losses

Management’s policy is to maintain the ALLL at a level sufficient to absorb estimated probable incurred losses in the loan portfolio. The total allowance for loan losses decreased 4 percent to $202.1 million on December 31, 2016, from $210.2 million on December 31, 2015. The ALLL as of December 31, 2016, reflects loan growth within the regional bank, strong asset quality with the consumer real estate portfolio continuing to stabilize, declining non-strategic balances, and the moderation of the pace of improvement from a year ago. The ratio of allowance for loan losses to total loans, net of unearned income, decreased to 1.03 percent on December 31, 2016, from 1.19 percent on December 31, 2015.

 

The provision for loan losses is the charge to earnings necessary to maintain the ALLL at a sufficient level reflecting management’s estimate of probable incurred losses in the loan portfolio. The provision for loan losses increased to $11.0 million in 2016 from $9.0 million in 2015.

 

FHN expects asset quality trends to remain relatively stable for the near term if the slow growth of the economy continues. The C&I portfolio is expected to continue to show stable trends but short-term variability (both positive and negative) is possible primarily due to the size of the credits within this portfolio. The CRE portfolio metrics should be relatively consistent as FHN expects stable property values over the near term; however, oversupply of any CRE product type, changes in the lending environment, or economic uncertainty could result in decreased property values (which could happen abruptly). The remaining non-strategic consumer real estate and permanent mortgage portfolios should continue to steadily wind down. Asset quality metrics within non-strategic may become skewed as the portfolio continues to shrink. Continued stabilization in performance of the consumer real estate portfolio assumes an ongoing economic recovery as consumer delinquency and loss rates are correlated with unemployment trends and strength of the housing market.

 

Consolidated Net Charge-offs

Overall, net charge-offs continue to be at historical lows. Net charge-offs decreased $12.0 million from 2015 to $19.2 million in 2016. The ALLL was 10.54 times net charge-offs for 2016 compared with 6.74 times net charge-offs for 2015.

 

The decline in consolidated net charge-offs was driven by the consumer portfolio which declined $12.4 million from 2015. The decline in consumer net charge-offs was largely driven by the consumer real estate portfolio as gross charge-offs have been lower but also due to overall improvement within the portfolio. Permanent mortgage net charge-offs declined $2.3 million in 2016 while credit card and other net charge-offs declined $2.2 million from a year ago. These declines were partially offset by a slight increase of $.4 million in total commercial net charge-offs.

 

40 FIRST HORIZON NATIONAL CORPORATION
 

The following table provides consolidated asset quality information for the years 2012 through 2016:

 

Table 18 – Analysis of Allowance for Loan Losses and Charge-offs

 

(Dollars in thousands)  2016   2015   2014   2013   2012 
Allowance for loan losses:                         
Beginning balance  $210,242   $232,448   $253,809   $276,963   $384,351 
Provision for loan losses   11,000    9,000    27,000    55,000    78,000 
Charge-offs:                         
Commercial, financial, and industrial   18,460    22,406    20,492    22,936    30,887 
Commercial real estate   1,371    3,550    3,741    3,502    19,977 
Consumer real estate   21,993    30,068    45,391    73,642    147,918 
Permanent mortgage   1,591    3,141    5,891    9,934    13,604 
Credit card and other   14,224    16,691    14,931    11,404    12,624 
Total charge-offs   57,639    75,856    90,446    121,418    225,010 
Recoveries:                         
Commercial, financial, and industrial   6,795    13,339    9,666    12,487    11,151 
Commercial real estate   1,927    1,876    4,150    4,275    4,475 
Consumer real estate   23,719    23,895    22,824    21,360    17,770 
Permanent mortgage   2,403    1,687    2,314    2,473    3,024 
Credit card and other   3,621    3,853    3,131    2,669    3,202 
Total recoveries   38,465    44,650    42,085    43,264    39,622 
Net charge-offs   19,174    31,206    48,361    78,154    185,388 
Ending balance  $202,068   $210,242   $232,448   $253,809   $276,963 
Reserve for unfunded commitments   5,312    5,926    4,770    3,017    4,145 
Total of allowance for loan losses and reserve for unfunded commitments  $207,380   $216,168   $237,218   $256,826   $281,108 
Loans and commitments:                         
Total period end loans, net of unearned income  $19,589,520   $17,686,502   $16,230,166   $15,389,074   $16,708,582 
Remaining unfunded commitments  $8,744,649   $7,903,294   $7,231,879   $7,469,553   $7,993,218 
Average loans, net of unearned income  $18,303,870   $16,624,439   $15,520,972   $15,726,374   $16,205,403 
Reserve Rates                         
Total commercial loans
Allowance/loans %
   0.86%   0.82%   0.83%   1.07%   1.17%
Period End Loans % of Total Loans   73    68    63    59    60 
Consumer real estate
Allowance/loans %
   1.11    1.69    2.24    2.38    2.27 
Period End Loans % of Total Loans   23    27    31    35    34 
Permanent mortgage
Allowance/loans %
   3.85    4.17    3.55    3.40    3.26 
Period End Loans % of Total Loans   2    3    3    4    4 
Credit card and other
Allowance/loans %
   3.39    3.35    4.11    2.22    2.39 
Period End Loans % of Total Loans   2    2    2    2    2 
Allowance and net charge-off ratios                         
Allowance to total loans %   1.03    1.19    1.43    1.65    1.66 
Net charge-offs to average loans %   0.10    0.19    0.31    0.50    1.14 
Allowance to net charge-offs   10.54   6.74x   4.81x   3.25x   1.49x
   
FIRST HORIZON NATIONAL CORPORATION 41
 

Nonperforming Assets

Nonperforming loans are loans placed on nonaccrual if it becomes evident that full collection of principal and interest is at risk, impairment has been recognized as a partial charge-off of principal balance due to insufficient collateral value and past due status, or on a case-by-case basis if FHN continues to receive payments, but there are other borrower-specific issues. Included in nonaccruals are loans in which FHN continues to receive payments, including residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy and second liens, regardless of delinquency status, behind first liens that are 90 or more days past due, are bankruptcies, or are TDRs. These, along with foreclosed real estate, excluding foreclosed real estate from government insured mortgages, represent nonperforming assets (“NPAs”).

 

Total nonperforming assets (including NPLs HFS) decreased to $164.6 million on December 31, 2016, from $211.9 million on December 31, 2015. The nonperforming assets ratio (nonperforming assets excluding NPLs HFS to total period-end loans plus foreclosed real estate and other assets) decreased to .80 percent in 2016 from 1.15 percent in 2015 due to a 55 percent decrease in foreclosed real estate (excluding foreclosed real estate from government insured mortgages) and a 19 percent decline in portfolio nonperforming loans from December 31, 2015 to December 31, 2016. Portfolio nonperforming loans declined $33.5 million from December 31, 2015 to $145.6 million on December 31, 2016. The decline in nonperforming loans was primarily driven by a decrease within the consumer real estate portfolio. Consolidated nonperforming consumer real estate loans decreased $28.3 million in 2016 from $111.1 million in 2015. This decrease was largely driven by performing troubled debt restructurings (“TDRs”) returning to accrual status combined with a decline in balances of second-lien loans behind delinquent first-lien loans.

 

The ratio of the ALLL to NPLs in the loan portfolio was 1.39 times in 2016 compared to 1.17 times in 2015, driven by lower nonperforming loans. Certain nonperforming loans in both the commercial and consumer portfolios are deemed collateral-dependent and are charged down to an estimate of collateral value less costs to sell. Because loss content has been recognized through a partial charge-off, typically reserves are not recorded.

 

Table 19 – Nonaccrual/Nonperforming Loans, Foreclosed Assets, and Other Disclosures (a)

 

   December 31
(Dollars in thousands)  2016   2015   2014   2013   2012 
Commercial:                         
Commercial, financial, and industrial  $32,736   $26,313   $32,610   $79,759   $122,600 
Commercial real estate   2,776    8,684    15,356    18,101    45,570 
Total commercial   35,512    34,997    47,966    97,860    168,170 
Consumer:                         
Consumer real estate   82,812    111,092    120,632    117,598    64,445 
Permanent mortgage   27,181    31,652    34,078    38,171    32,721 
Credit card & other (b)   142    1,357    763    1,397    1,698 
Total consumer   110,135    144,101    155,473    157,166    98,864 
Total nonperforming loans (c) (d)   145,647    179,098    203,439    255,026    267,034 
Nonperforming loans held-for-sale (d)   7,741    7,846    7,643    61,139    51,385 
Foreclosed real estate and other assets   11,235    24,977    30,430    45,753    41,767 
Foreclosed real estate from GNMA loans