10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission File Number 001-15185

 

 

First Horizon National Corporation

(Exact name of registrant as specified in its charter)

 

 

 

TN   62-0803242

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

165 MADISON AVENUE

MEMPHIS, TENNESSEE

  38103
(Address of principal executive office)   (Zip Code)

(Registrant’s telephone number, including area code) (901) 523-4444

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨

Non-accelerated filer

  ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding on September 30, 2014

Common Stock, $.625 par value   235,248,564

 

 

 


Table of Contents

Table of Contents

FIRST HORIZON NATIONAL CORPORATION

INDEX

 

Part I. Financial Information

 
  Item 1. Financial Statements     3   
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     79   
  Item 3. Quantitative and Qualitative Disclosures about Market Risk     123   
  Item 4. Controls and Procedures     123   

Part II. Other Information

 
  Item 1. Legal Proceedings     124   
  Item 1A. Risk Factors     124   
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     124   
  Item 3. Defaults Upon Senior Securities     124   
  Item 4. Mine Safety Disclosures     124   
  Item 5. Other Information     124   
  Item 6. Exhibits     125   

Signatures

    127   

Exhibit Index

    128   
  Exhibit 10.1  
  Exhibit 31(a)  
  Exhibit 31(b)  
  Exhibit 32(a)  
  Exhibit 32(b)  

 

2


Table of Contents

PART I.

FINANCIAL INFORMATION

 

Item 1. Financial Statements

  
The Consolidated Condensed Statements of Condition (unaudited)      4   
The Consolidated Condensed Statements of Income (unaudited)      5   
The Consolidated Condensed Statements of Comprehensive Income (unaudited)      6   
The Consolidated Condensed Statements of Equity (unaudited)      7   
The Consolidated Condensed Statements of Cash Flows (unaudited)      8   
The Notes to the Consolidated Condensed Financial Statements (unaudited)      9   

Note 1 Financial Information

     9   

Note 2 Acquisitions and Divestitures

     11   

Note 3 Investment Securities

     12   

Note 4 Loans

     14   

Note 5 Allowance for Loan Losses

     25   

Note 6 Mortgage Servicing Rights

     27   

Note 7 Intangible Assets

     28   

Note 8 Other Income and Other Expense

     29   

Note 9 Changes in Accumulated Other Comprehensive Income Balances

     30   

Note 10 Earnings Per Share

     32   

Note 11 Contingencies and Other Disclosures

     33   

Note 12 Pensions, Savings, and Other Employee Benefits

     43   

Note 13 Business Segment Information

     45   

Note 14 Variable Interest Entities

     47   

Note 15 Derivatives

     53   

Note 16 Master Netting and Similar Agreements—Repurchase, Reverse Repurchase, and Securities Borrowing and Lending Transactions

     59   

Note 17 Fair Value of Assets & Liabilities

     60   

Note 18 Restructuring, Repositioning, and Efficiency

     77   

This financial information reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of the financial condition and results of operations for the interim periods presented.

 

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Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF CONDITION

 

     First Horizon National Corporation  
     September 30     December 31  

(Dollars in thousands, except restricted and per share amounts)(Unaudited)

   2014     2013     2013  

Assets:

      

Cash and due from banks (Restricted—$.3 million on September 30, 2014; $1.5 million on September 30, 2013; and $1.2 million on December 31, 2013)

   $ 292,687      $ 395,631      $ 349,216   

Federal funds sold

     55,242        52,830        66,079   

Securities purchased under agreements to resell (Note 16)

     561,802        576,355        412,614   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents (Restricted—$.3 million on September 30, 2014; $1.5 million on September 30, 2013; and $1.2 million on December 31, 2013)

     909,731        1,024,816        827,909   
  

 

 

   

 

 

   

 

 

 

Interest-bearing cash

     275,485        184,179        730,297   

Trading securities

     1,338,022        1,343,134        801,718   

Loans held-for-sale (Note 17)

     151,915        371,640        370,152   

Securities available-for-sale (Note 3)

     3,534,671        3,186,943        3,398,457   

Securities held-to-maturity (Note 3)

     4,286        —          —     

Loans, net of unearned income (Restricted—$.1 billion on September 30, 2014; September 30, 2013; and December 31, 2013) (Note 4)

     15,812,017        15,408,556        15,389,074   

Less: Allowance for loan losses (Restricted—$.8 million on September 30, 2014; $3.2 million on September 30, 2013; and $4.4 million on December 31, 2013) (Note 5)

     238,641        255,710        253,809   
  

 

 

   

 

 

   

 

 

 

Total net loans (Restricted—$.1 billion on September 30, 2014; September 30, 2013; and December 31, 2013)

     15,573,376        15,152,846        15,135,265   
  

 

 

   

 

 

   

 

 

 

Mortgage servicing rights (Note 6)

     2,880        116,686        72,793   

Goodwill (Note 7)

     141,943        140,479        141,943   

Other intangible assets, net (Note 7)

     19,044        22,216        21,988   

Capital markets receivables

     197,507        83,154        45,255   

Premises and equipment, net

     295,833        308,779        305,244   

Real estate acquired by foreclosure

     47,996        71,626        71,562   

Derivative assets (Note 15)

     137,742        215,116        181,866   

Other assets (Restricted—$.4 million on September 30, 2014; $1.4 million on September 30, 2013; and $1.9 million on December 31, 2013)

     1,356,356        1,637,139        1,685,384   
  

 

 

   

 

 

   

 

 

 

Total assets (Restricted—$.1 billion on September 30, 2014; September 30, 2013; and December 31, 2013)

   $ 23,986,787      $ 23,858,753      $ 23,789,833   
  

 

 

   

 

 

   

 

 

 

Liabilities and equity:

      

Deposits:

      

Savings

   $ 6,371,156      $ 6,781,522      $ 6,732,326   

Time deposits

     767,699        997,726        951,755   

Other interest-bearing deposits

     3,955,152        3,494,236        3,859,079   

Certificates of deposit $100,000 and more

     446,938        575,679        553,957   
  

 

 

   

 

 

   

 

 

 

Interest-bearing

     11,540,945        11,849,163        12,097,117   

Noninterest-bearing

     4,603,826        4,434,746        4,637,839   
  

 

 

   

 

 

   

 

 

 

Total deposits

     16,144,771        16,283,909        16,734,956   
  

 

 

   

 

 

   

 

 

 

Federal funds purchased

     928,159        1,062,901        1,042,633   

Securities sold under agreements to repurchase (Note 16)

     479,384        427,232        442,789   

Trading liabilities

     532,234        585,969        368,348   

Other short-term borrowings

     790,080        303,686        181,146   

Term borrowings (Restricted—$.1 billion on September 30, 2014; September 30, 2013; and December 31, 2013)

     1,491,138        1,771,288        1,739,859   

Capital markets payables

     329,960        53,784        21,173   

Derivative liabilities (Note 15)

     123,442        165,918        154,280   

Other liabilities

     545,678        770,773        603,898   
  

 

 

   

 

 

   

 

 

 

Total liabilities (Restricted—$.1 billion on September 30, 2014; September 30, 2013; and December 31, 2013)

     21,364,846        21,425,460        21,289,082   
  

 

 

   

 

 

   

 

 

 

Equity:

      

First Horizon National Corporation Shareholders’ Equity:

      

Preferred stock—Series A, non-cumulative perpetual, no par value, liquidation preference of $100,000 per share—(shares authorized—1,000; shares issued—1,000 on September 30, 2014, September 30, 2013 and December 31, 2013)

     95,624        95,624        95,624   

Common stock—$.625 par value (shares authorized—400,000,000; shares issued—235,248,564 on September 30, 2014; 236,328,090 on September 30, 2013; and 236,369,554 on December 31, 2013)

     147,030        147,705        147,731   

Capital surplus

     1,390,081        1,413,248        1,416,767   

Undivided profits

     826,610        657,676        695,207   

Accumulated other comprehensive loss, net (Note 9)

     (132,835     (176,391     (150,009
  

 

 

   

 

 

   

 

 

 

Total First Horizon National Corporation Shareholders’ Equity

     2,326,510        2,137,862        2,205,320   
  

 

 

   

 

 

   

 

 

 

Noncontrolling interest

     295,431        295,431        295,431   
  

 

 

   

 

 

   

 

 

 

Total equity

     2,621,941        2,433,293        2,500,751   
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity (Restricted—$.1 billion on September 30, 2014; September 30, 2013; and December 31, 2013)

   $ 23,986,787      $ 23,858,753      $ 23,789,833   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

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Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

 

     First Horizon National Corporation  
     Three Months Ended
September 30
    Nine Months Ended
September 30
 

(Dollars and shares in thousands except per share data, unless otherwise noted)(Unaudited)

   2014     2013     2014     2013  

Interest income:

        

Interest and fees on loans

   $ 144,675      $ 149,698      $ 426,042      $ 454,297   

Interest on investment securities available-for-sale

     23,254        20,916        70,038        62,442   

Interest on investment securities held-to-maturity

     66        —          198        —     

Interest on loans held-for-sale

     3,263        3,058        9,687        9,729   

Interest on trading securities

     7,737        8,747        23,529        25,798   

Interest on other earning assets

     (137     191        307        734   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     178,858        182,610        529,801        553,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Interest on deposits:

        

Savings

     2,600        3,471        8,475        11,557   

Time deposits

     1,786        4,013        7,334        12,294   

Other interest-bearing deposits

     754        817        2,318        2,975   

Certificates of deposit $100,000 and more

     685        1,658        2,577        4,769   

Interest on trading liabilities

     3,782        3,632        11,440        10,182   

Interest on short-term borrowings

     1,265        1,103        3,565        3,565   

Interest on term borrowings

     8,445        9,078        25,424        27,419   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     19,317        23,772        61,133        72,761   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     159,541        158,838        468,668        480,239   

Provision for loan losses

     6,000        10,000        21,000        40,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     153,541        148,838        447,668        440,239   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income:

        

Capital markets

     47,589        64,283        152,109        212,711   

Mortgage banking

     41,559        14,460        69,449        29,422   

Deposit transactions and cash management

     28,546        29,279        82,913        85,189   

Brokerage, management fees and commissions

     12,333        10,868        37,452        30,756   

Trust services and investment management

     6,779        6,649        20,832        19,927   

Bankcard income

     5,521        5,303        17,960        15,484   

Bank-owned life insurance

     3,547        3,560        12,891        12,978   

Other service charges

     3,064        3,707        9,052        10,296   

Insurance commissions

     593        733        1,641        2,063   

Gain on divestiture

     —          115        —          115   

Debt securities gains/(losses), net

     —          (96     —          (451

Equity securities gains/(losses), net

     (862     —          2,872        28   

All other income and commissions (Note 8)

     9,146        11,614        23,275        31,016   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     157,815        150,475        430,446        449,534   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted gross income after provision for loan losses

     311,356        299,313        878,114        889,773   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense:

        

Employee compensation, incentives, and benefits (three and nine months ended September 30, 2014, include $.9 million and $2.6 million, respectively, and three and nine months ended September 30, 2013, include $2.7 million and $8.1 million, respectively, of expense associated with pension and post-retirement plans reclassified from accumulated other comprehensive income)

     120,742        132,213        359,630        401,897   

Occupancy

     12,405        13,147        41,941        37,754   

Computer software

     10,614        10,446        32,357        30,130   

Legal and professional fees

     10,463        12,704        31,653        37,940   

Operations services

     9,044        9,199        26,830        26,111   

Equipment rentals, depreciation, and maintenance

     7,150        7,890        22,441        23,307   

Contract employment and outsourcing

     5,199        9,241        14,842        26,861   

Advertising and public relations

     4,386        5,486        14,606        13,554   

Communications and courier

     3,628        4,517        11,800        13,485   

FDIC premium expense

     3,456        4,631        8,583        15,679   

Amortization of intangible assets

     982        928        2,945        2,784   

Foreclosed real estate

     788        523        2,011        3,249   

Repurchase and foreclosure provision

     (4,300     200,000        (4,300     200,000   

All other expense (Note 8)

     61,629        22,631        66,393        68,753   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     246,186        433,556        631,732        901,504   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before income taxes

     65,170        (134,243     246,382        (11,731

Provision/(benefit) for income taxes (three and nine months ended September 30, 2014, include $.3 million and $1.0 million, respectively, and three and nine months ended September 30, 2013, include $1.0 million and $3.1 million, respectively, of income tax benefit reclassified from accumulated other comprehensive income)

     15,421        (31,094     66,223        1,644   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) from continuing operations

     49,749        (103,149     180,159        (13,375

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

     —          123        —          554   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss)

   $ 49,749      $ (103,026   $ 180,159      $ (12,821
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to noncontrolling interest

     2,875        2,875        8,547        8,531   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss) attributable to controlling interest

   $ 46,874      $ (105,901   $ 171,612      $ (21,352
  

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends

     1,550        1,550        4,650        4,288   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss) available to common shareholders

   $ 45,324      $ (107,451   $ 166,962      $ (25,640
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings/(loss) per share from continuing operations (Note 10)

   $ 0.19      $ (0.45   $ 0.71      $ (0.11
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings/(loss) per share from continuing operations (Note 10)

   $ 0.19      $ (0.45   $ 0.70      $ (0.11
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings/(loss) per share (Note 10)

   $ 0.19      $ (0.45   $ 0.71      $ (0.11
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings/(loss) per share (Note 10)

   $ 0.19      $ (0.45   $ 0.70      $ (0.11
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares (Note 10)

     235,329        236,895        235,437        238,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted average common shares (Note 10)

     236,862        236,895        237,169        238,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

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

 

(a) Due to the nature of the preferred stock issued by FHN and its subsidiaries, all components of Income/(loss) from discontinued operations, net of tax have been attributed solely to FHN as the controlling interest holder.

 

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Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

     First Horizon National Corporation  
     Three Months Ended
September 30
    Nine Months Ended
September 30
 

(Dollars in thousands) (Unaudited)

   2014     2013     2014      2013  

Net income/(loss)

   $ 49,749      $ (103,026   $ 180,159       $ (12,821

Other comprehensive income/(loss), net of tax:

         

Unrealized fair value adjustments:

         

Securities available-for-sale

     (11,288     1,714        15,549         (44,097

Recognized pension and other employee benefit plans net periodic benefit costs

     564        10,560        1,625         14,049   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income/(loss)

     (10,724     12,274        17,174         (30,048
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income/(loss)

     39,025        (90,752     197,333         (42,869
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income attributable to noncontrolling interest

     2,875        2,875        8,547         8,531   
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income/(loss) attributable to controlling interest

   $ 36,150      $ (93,627   $ 188,786       $ (51,400
  

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

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Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

 

     First Horizon National Corporation  
     2014     2013  

(Dollars in thousands except per share data)(Unaudited)

   Controlling
Interest
    Noncontrolling
Interest
    Total     Controlling
Interest
    Noncontrolling
Interest
    Total  

Balance, January 1

   $ 2,205,320      $ 295,431      $ 2,500,751      $ 2,214,041      $ 295,165      $ 2,509,206   

Net income/(loss)

     171,612        8,547        180,159        (21,352     8,531        (12,821

Other comprehensive income/(loss) (a)

     17,174        —          17,174        (30,048     —          (30,048
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income/(loss)

     188,786        8,547        197,333        (51,400     8,531        (42,869
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock issuance (1,000 shares issued at $100,000 per share net of offering costs)

     —          —          —          95,624        —          95,624   

Cash dividends declared:

            

Preferred stock ($4,650 per share and $4,288 per share for the nine months ended September 30, 2014 and 2013, respectively)

     (4,650     —          (4,650     (4,288     —          (4,288

Common stock ($.15 per share)

     (35,560     —          (35,560     (36,345     —          (36,345

Common stock repurchased (b)

     (28,903     —          (28,903     (91,395     —          (91,395

Common stock issued for:

            

Stock options and restricted stock—equity awards

     935        —          935        608        —          608   

Stock-based compensation expense

     8,355        —          8,355        12,452        —          12,452   

Dividends declared—noncontrolling interest of subsidiary preferred stock

     —          (8,547     (8,547     —          (8,531     (8,531

Tax benefit reversals—stock-based compensation plans

     (7,773     —          (7,773     (1,509     —          (1,509

Real estate investment trust (“REIT”) preferred stock issuance

     —          —          —          —          92        92   

Acquired noncontrolling interest-REIT

     —          —          —          —          174        174   

Other changes in equity

     —          —          —          74        —          74   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30

   $ 2,326,510      $ 295,431      $ 2,621,941      $ 2,137,862      $ 295,431      $ 2,433,293   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

(a) Due to the nature of the preferred stock issued by FHN and its subsidiaries, all components of Other comprehensive income/(loss) have been attributed solely to FHN as the controlling interest holder.
(b) 2014 includes $24.0 million repurchased under the share repurchase program launched in January 2014. 2013 includes $87.6 million repurchased under the share repurchase program launched in 2011.

 

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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

     First Horizon National Corporation  
     Nine Months Ended September 30  

(Dollars in thousands)(Unaudited)

   2014     2013  

Operating Activities

    

Net income/(loss)

   $ 180,159      $ (12,821

Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities:

    

Provision for loan losses

     21,000        40,000   

Provision/(benefit) for deferred income taxes

     1,557        (26,779

Depreciation and amortization of premises and equipment

     26,791        26,507   

Amortization of intangible assets

     2,945        2,784   

Net other amortization and accretion

     12,586        26,387   

Net (increase)/decrease in derivatives

     2,887        (7,858

Fair value adjustment on mortgage servicing rights

     (1,265     (20,267

Repurchase and foreclosure provision

     (4,300     200,000   

Fair value adjustment to foreclosed real estate

     2,098        3,278   

Litigation and regulatory matters

     (2,720     6,299   

(Gains)/losses on divestitures

     —          (638

Stock-based compensation expense

     8,355        12,452   

Tax benefit reversals stock-based compensation plans

     7,773        1,509   

Equity securities (gains)/losses, net

     (2,872     (28

Debt securities (gains)/losses, net

     —          451   

(Gains)/losses on extinguishment of debt

     4,350        —     

Loss on deconsolidation of debt

     1,960        —     

Net (gains)/losses on sale/disposal of fixed assets

     3,256        1,050   

Proceeds from sale of mortgage servicing rights

     70,071        —     

Net (increase)/decrease in:

    

Trading securities

     (535,921     (84,502

Loans held-for-sale

     218,237        30,297   

Capital markets receivables

     (152,252     34,618   

Interest receivable

     (2,547     890   

Other assets

     319,017        87,022   

Net increase/(decrease) in:

    

Capital markets payables

     308,787        (56,545

Interest payable

     7,171        5,810   

Other liabilities

     (75,434     (177,245

Trading liabilities

     163,886        21,540   
  

 

 

   

 

 

 

Total adjustments

     405,416        127,032   
  

 

 

   

 

 

 

Net cash provided/(used) by operating activities

     585,575        114,211   
  

 

 

   

 

 

 

Investing Activities

    

Available-for-sale securities:

    

Sales

     7,829        63,787   

Maturities

     497,144        783,033   

Purchases

     (620,329     (977,723

Premises and equipment:

    

Sales

     1,283        —     

Purchases

     (21,919     (18,949

Net (increase)/decrease in:

    

Loans

     (449,223     1,461,678   

Interests retained from securitizations classified as trading securities

     1,176        4,088   

Interest-bearing cash

     454,812        196,178   

Cash receipts related to divestitures

     —          1,638   

Cash received for acquisition

     —          50,934   
  

 

 

   

 

 

 

Net cash provided/(used) by investing activities

     (129,227     1,564,664   
  

 

 

   

 

 

 

Financing Activities

    

Common stock:

    

Stock options exercised

     944        608   

Cash dividends paid

     (35,659     (26,467

Repurchase of shares (a)

     (28,903     (91,395

Tax benefit reversals stock-based compensation plans

     (7,773     (1,509

Preferred stock issuance

     —          95,624   

Cash dividends paid—preferred stock—noncontrolling interest

     (8,531     (8,531

Cash dividends paid—Series A preferred stock

     (4,650     (2,738

Term borrowings:

    

Payments/maturities

     (231,913     (411,027

Increases in restricted and secured term borrowings

     2,089        4,411   

Net increase/(decrease) in:

    

Deposits

     (591,185     (707,898

Short-term borrowings

     531,055        (611,399
  

 

 

   

 

 

 

Net cash provided/(used) by financing activities

     (374,526     (1,760,321
  

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

     81,822        (81,446
  

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

     827,909        1,106,262   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 909,731      $ 1,024,816   
  

 

 

   

 

 

 

Supplemental Disclosures

    

Total interest paid

   $ 52,785      $ 65,750   

Total taxes paid

     54,540        5,044   

Total taxes refunded

     1,966        26,035   

Transfer from loans to other real estate owned

     17,010        14,481   
  

 

 

   

 

 

 

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

See accompanying notes to consolidated condensed financial statements.

 

(a) 2014 includes $24.0 million repurchased under the share repurchase program launched in January 2014. 2013 includes $87.6 million repurchased under the share repurchase program launched in 2011.

 

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Notes to the Consolidated Condensed Financial Statements (Unaudited)

Note 1 – Financial Information

Basis of Accounting. The unaudited interim consolidated condensed financial statements of First Horizon National Corporation (“FHN”), including its subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which it operates. This preparation requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions are based on information available as of the date of the financial statements and could differ from actual results. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented. These adjustments are of a normal recurring nature unless otherwise disclosed in this Quarterly Report on Form 10-Q. The operating results for the interim 2014 periods are not necessarily indicative of the results that may be expected going forward. For further information, refer to the audited consolidated financial statements in the 2013 Annual Report to shareholders, which were filed as Exhibit 13 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2013.

Summary of Accounting Changes. Effective January 2014, FHN adopted provisions of FASB ASU 2013-11“Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Generally, ASU 2013-11 requires that an unrecognized tax benefit should reduce a deferred tax asset (“DTA”) that has been established for a net operating loss (“NOL”), a tax credit carryforward, or other similar tax losses. However, if a filer does not have such carryforwards or similar tax losses at the reporting date, the uncertain tax position should be recorded as a liability. If a filer does have a DTA, but is not required by tax law of the applicable jurisdiction to use the DTA to settle additional taxes from the disallowance of a tax position and that is the filer’s intent, the uncertain tax position should be recognized as a liability in that situation as well and not netted with the DTA. The assessment of whether a DTA is available is based on the unrecognized tax benefit and DTA that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The adoption of provisions of ASU 2013-11, did not have a material effect on FHN’s statement of condition, results of operations, or cash flows.

Accounting Changes Issued but Not Currently Effective. In January 2014, the FASB issued ASU 2014-01, “Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects.” ASU 2014-01 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using a proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense/(benefit). A reporting entity should evaluate whether the conditions have been met to apply the proportional amortization method to an investment in a qualified affordable housing project through a limited liability entity at the time of initial investment on the basis of facts and circumstances that exist at that time. A reporting entity should reevaluate the conditions upon the occurrence of certain specified events. An investment in a qualified affordable housing project through a limited liability entity should be tested for impairment when there are events or changes in circumstances indicating that it is more likely than not that the carrying amount of the investment will not be realized. For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment. The decision to apply the proportional amortization method of accounting is an accounting policy decision that should be applied consistently to all qualifying affordable housing project investments rather than a decision to be applied to individual investments. The provisions of ASU 2014-01 are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014, and will be applied retrospectively to all periods presented. Early adoption is permitted. FHN is evaluating the effects of ASU 2014-01 on its portfolio of low income housing investments.

In January 2014, the FASB issued ASU 2014-04, “Receivables—Troubled Debt Restructurings by Creditors: Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” ASU 2014-04 clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 2014-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt ASU 2014-04 using either a modified retrospective transition method or a prospective transition method. Under the modified retrospective transition method, an entity should apply ASU 2014-04 by means of a cumulative-effect adjustment to residential consumer mortgage loans and foreclosed residential real estate properties existing as of the beginning of the annual period for which the amendments are effective. Early adoption is permitted. FHN is evaluating the requirements of ASU 2014-04 with respect to its current foreclosure accounting practices.

 

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Table of Contents

Note 1 – Financial Information (Continued)

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 does not change revenue recognition for financial instruments. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This is accomplished through a five-step recognition framework involving 1) the identification of contracts with customers, 2) identification of performance obligations, 3) determination of the transaction price, 4) allocation of the transaction price to the performance obligations and 5) recognition of revenue as performance obligations are satisfied. Additionally, qualitative and quantitative information is required for disclosure regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. Transition to the new requirements may be made by retroactively revising prior financial statements (with certain practical expedients permitted) or by a cumulative effect through retained earnings. If the latter option is selected, additional disclosures are required for comparability. FHN is evaluating the effects of ASU 2014-09 on its revenue recognition practices.

In June 2014, the FASB issued ASU 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU 2014-11 makes two changes to accounting for repurchase agreements. First, it requires secured borrowing accounting for repurchase-to-maturity transactions. Second, it requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. ASU 2014-11 also requires additional disclosures for repurchase transactions that are recognized as secured borrowings, including disaggregation by class of collateral, the remaining contractual tenor of the arrangements and the risks inherent in the agreements. Adoption of ASU 2014-11 will only affect FHN’s disclosures as it does not execute repurchase-to maturity or repurchase financing transactions. These disclosure revisions are effective for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition in determining expense recognition for the award. Thus, compensation cost is recognized over the requisite service period based on the probability of achievement of the performance condition. Expense is adjusted after the requisite service period for changes in the probability of achievement. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The adoption of ASU 2014-12 will have no effect on FHN.

In August 2014, the FASB issued ASU 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loan upon Foreclosure.” ASU 2014-14 requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if 1) the loan has a government guarantee that it not separable from the loan before foreclosure, 2) at the time of foreclosure the creditor has the intent to convey the real estate to the guarantor and make a recoverable claim on the guarantee and 3) at the time of foreclosure any amount of the claim that is based on the fair value of the real estate is fixed. For qualifying foreclosures, the amount of the receivable recognized should be measured based on the amount of the loan balance expected to be recovered from the guarantor. ASU 2014-14 is effective for annual and interim periods beginning after December 15, 2014 and may be adopted through either a prospective only approach or through a reclassification from other real estate owned to other receivable on the effective date. FHN currently classifies foreclosed properties with government guarantees within other real estate owned and is evaluating the transition alternatives.

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. If such events or conditions exist, additional disclosures are required and management should evaluate whether its plans sufficiently alleviate the substantial doubt. ASU 2014-15 is effective for the annual period ending after December 15, 2015 and all interim and annual periods thereafter. The provisions of ASU 2014-15 are not anticipated to affect FHN.

 

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Table of Contents

Note 2 – Acquisitions and Divestitures

On June 7, 2013, First Tennessee Bank National Association (“FTBNA”) acquired substantially all of the assets and liabilities of Mountain National Bank (“MNB”) a community bank headquartered in Sevierville, Tennessee from the Federal Deposit Insurance Corporation (“FDIC”), as receiver, pursuant to a purchase and assumption agreement. Prior to the acquisition, MNB operated 12 branches in Sevier and Blount counties in eastern Tennessee.

Excluding purchase accounting adjustments, FHN acquired approximately $452 million in assets, including approximately $249 million in loans, and assumed approximately $362 million of MNB deposits. There was no premium associated with the acquired deposits and assets were acquired at a discount of $33 million from book value. FHN did not enter into a loss-sharing agreement with the FDIC associated with the MNB purchase. In relation to the acquisition FHN recorded $7.7 million in goodwill, representing the excess of the estimated fair value of liabilities assumed over the estimated fair value of the assets acquired.

See Note 2—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements on Form 10-K for the year ended December 31, 2013, for additional information about the MNB acquisition.

On May 27, 2014, FTBNA entered into an agreement to purchase thirteen bank branches. The purchase of the branches closed on October 17, 2014. The branches are in communities in Middle and East Tennessee including Waverly, Columbia, Lawrenceburg, Lewisburg, Sparta, Rockwood, Greeneville, Kingston, Bristol, Johnson City, and Kingsport. FTBNA paid a deposit premium of 3.32 percent based on deposit balances near the time the transaction closed; those balances approximated $440 million. FTBNA acquired an immaterial amount of loans as part of the transaction.

On October 21, 2014, FHN entered into an agreement with TrustAtlantic Financial Corporation (“TrustAtlantic Financial”) by which TrustAtlantic Financial will merge into a subsidiary of FHN. TrustAtlantic Financial owns all the capital stock of TrustAtlantic Bank. Trust Atlantic Financial and TrustAtlantic Bank are headquartered in Raleigh, North Carolina. TrustAtlantic Bank has five branches located in North Carolina in the communities of Raleigh, Cary and Greenville. At September 30, 2014, TrustAtlantic Financial reported on a consolidated basis approximately $453 million of total assets and approximately $395 million of total deposits. The aggregate transaction value is estimated to be approximately $80 million, based on FHN’s common stock value at the time the agreement was signed. The transaction is expected to close in the first half of 2015, subject to the approval of the shareholders of TrustAtlantic Financial as well as regulatory approvals and other customary conditions to closing.

FHN acquires or divests assets from time to time in transactions that are considered business combinations or divestitures but are not material to FHN individually or in the aggregate.

 

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Table of Contents

Note 3 – Investment Securities

The following tables summarize FHN’s investment securities on September 30, 2014 and 2013:

 

     September 30, 2014  

(Dollars in thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Securities available-for-sale (“AFS”):

          

U.S. treasuries

   $ 100       $ —         $ —        $ 100   

Government agency issued mortgage-backed securities (“MBS”)

     685,426         33,820         (2,381     716,865   

Government agency issued collateralized mortgage obligations (“CMO”)

     2,648,047         15,637         (39,999     2,623,685   

Other U.S. government agencies

     1,859         70         —          1,929   

States and municipalities

     10,205         —           —          10,205   

Equity and other (a)

     182,119         —           (232     181,887   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available-for-sale (b)

   $ 3,527,756       $ 49,527       $ (42,612   $ 3,534,671   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities held-to-maturity (“HTM”):

          

States and municipalities

   $ 4,286       $ 1,094       $ —        $ 5,380   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities held-to-maturity

   $ 4,286       $ 1,094       $ —        $ 5,380   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $66.0 million. The remainder is money market and cost method investments.
(b) Includes $3.2 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes.

 

     September 30, 2013  

(Dollars in thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Securities available-for-sale: 

          

U.S. treasuries

   $ 39,993       $ 3       $ —        $ 39,996   

Government agency issued MBS

     838,077         40,944         (3,570     875,451   

Government agency issued CMO

     2,043,803         17,420         (36,102     2,025,121   

Other U.S. government agencies

     2,381         147         —          2,528   

States and municipalities

     15,155         —           —          15,155   

Equity and other (a)

     228,709         —           (17     228,692   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available-for-sale (b)

   $ 3,168,118       $ 58,514       $ (39,689   $ 3,186,943   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Includes restricted investments in FHLB-Cincinnati stock of $128.0 million and FRB stock of $66.0 million. The remainder is money market, venture capital, and cost method investments.
(b) Includes $2.9 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes.

The amortized cost and fair value by contractual maturity for the available-for-sale and held-to-maturity securities portfolios on September 30, 2014, are provided below:

 

     Held-to-Maturity      Available-for-Sale  

(Dollars in thousands)

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Within 1 year

   $ —         $ —         $ —         $ —     

After 1 year; within 5 years

     —           —           3,459         3,529   

After 5 years; within 10 years

     —           —           —           —     

After 10 years

     4,286         5,380         8,705         8,705   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     4,286         5,380         12,164         12,234   
  

 

 

    

 

 

    

 

 

    

 

 

 

Government agency issued MBS and CMO

     —           —           3,333,473         3,340,550   

Equity and other

     —           —           182,119         181,887   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,286       $ 5,380       $ 3,527,756       $ 3,534,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

12


Table of Contents

Note 3 – Investment Securities (Continued)

 

The table below provides information on gross gains and gross losses from investment securities for the three and nine months ended September 30:

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 

(Dollars in thousands) 

   2014     2013     2014     2013  

Gross gains on sales of securities

   $ 133      $ 728      $ 5,867      $ 770   

Gross losses on sales of securities

     —          (824     —          (1,193
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     133        (96     5,867        (423
  

 

 

   

 

 

   

 

 

   

 

 

 

Venture capital investments (b)

     (995     —          (2,995     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total securities gain/(loss), net

   $ (862   $ (96   $ 2,872      $ (423
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Proceeds from sales for the three months ended September 30, 2014 were $3.3 million. Proceeds for the nine months ended September 30, 2014 were $9.2 million, inclusive of $1.4 million of equity securities. Proceeds from the three and nine months ended September 30, 2013, were $44.9 million and $63.8 million, respectively.
(b) Includes losses on sales, write-offs and /or unrealized fair value adjustments related to venture capital investments.

The following tables provide information on investments within the available-for-sale portfolio that had unrealized losses as of September 30, 2014 and 2013:

 

     As of September 30, 2014  
     Less than 12 months     12 months or longer     Total  

(Dollars in thousands)

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Government agency issued CMO

   $ 724,834       $ (5,113   $ 949,556       $ (34,886   $ 1,674,390       $ (39,999

Government agency issued MBS

     32,621         (244     103,858         (2,137     136,479         (2,381
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities

     757,455         (5,357     1,053,414         (37,023     1,810,869         (42,380
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Equity

     849         (198     10         (34     859         (232
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 758,304       $ (5,555   $ 1,053,424       $ (37,057   $ 1,811,728       $ (42,612
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     As of September 30, 2013  
     Less than 12 months     12 months or longer     Total  

(Dollars in thousands)

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Government agency issued CMO

   $ 1,241,836       $ (36,025   $ 12,018       $ (77   $ 1,253,854       $ (36,102

Government agency issued MBS

     154,299         (3,570     —           —          154,299         (3,570
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Debt Securities

     1,396,135         (39,595     12,018         (77     1,408,153         (39,672
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Equity

     43         (17     —           —          43         (17
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,396,178       $ (39,612   $ 12,018       $ (77   $ 1,408,196       $ (39,689
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

FHN has reviewed investment securities that were in unrealized loss positions in accordance with its accounting policy for other than temporary impairment “(OTTI”) and does not consider them other-than-temporarily impaired. For debt securities with unrealized losses, FHN does not intend to sell them and it is more-likely-than-not that FHN will not be required to sell them prior to recovery. The decline in value is primarily attributable to interest rates and not credit losses. For equity securities, FHN has both the ability and intent to hold these securities for the time necessary to recover the amortized cost.

 

13


Table of Contents

Note 4 – Loans

The following table provides the balance of loans by portfolio segment as of September 30, 2014 and 2013, and December 31, 2013:

 

     September 30      December 31  
(Dollars in thousands)    2014      2013      2013  

Commercial:

        

Commercial, financial, and industrial

   $ 8,477,329       $ 7,746,942       $ 7,923,576   

Commercial real estate

     1,278,394         1,173,711         1,133,279   

Retail:

        

Consumer real estate (a)

     5,130,988         5,458,047         5,333,371   

Permanent mortgage (b)

     572,789         697,694         662,242   

Credit card & other

     352,517         332,162         336,606   
  

 

 

    

 

 

    

 

 

 

Loans, net of unearned income

   $ 15,812,017       $ 15,408,556       $ 15,389,074   

Allowance for loan losses

     238,641         255,710         253,809   
  

 

 

    

 

 

    

 

 

 

Total net loans

   $ 15,573,376       $ 15,152,846       $ 15,135,265   
  

 

 

    

 

 

    

 

 

 

 

(a) Balances as of September 30, 2014 and 2013, and December 31, 2013 include $81.1 million, $349.3 million, and $333.8 million of restricted and secured real estate loans, respectively. See Note 14—Variable Interest Entities for additional information.
(b) Balances as of September 30, 2013, and December 31, 2013 include $11.7 million and $11.2 million of restricted and secured real estate loans, respectively. See Note 14—Variable Interest Entities for additional information.

COMPONENTS OF THE LOAN PORTFOLIO

The loan portfolio is disaggregated into segments and then further disaggregated into classes for certain disclosures. GAAP defines a portfolio segment as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. A class is generally determined based on the initial measurement attribute (i.e., amortized cost or purchased credit-impaired (“PCI”)), risk characteristics of the loan, and FHN’s method for monitoring and assessing credit risk. Commercial loan portfolio segments include commercial, financial and industrial (“C&I”) and commercial real estate (“CRE”). Commercial classes within C&I include general C&I, loans to mortgage companies, the trust preferred loans (“TRUPS”) (i.e. long-term unsecured loans to bank and insurance—related businesses) portfolio and PCI loans. Loans to mortgage companies includes commercial lines of credit to qualified mortgage companies exclusively for the temporary warehousing of eligible mortgage loans prior to the borrower’s sale of those mortgage loans to third party investors. Commercial classes within commercial real estate include income CRE, residential CRE and PCI loans. Retail loan portfolio segments include consumer real estate, permanent mortgage, and the credit card and other portfolio. Retail classes include HELOC, real estate (“R/E”) installment and PCI loans within the consumer real estate segment, permanent mortgage (which is both a segment and a class), and credit card and other.

Concentrations

FHN has a concentration of residential real estate loans (36 percent of total loans), the majority of which is in the consumer real estate portfolio (32 percent of total loans). Loans to finance and insurance companies total $1.9 billion (22 percent of the C&I portfolio, or 12 percent of the total loans). FHN had loans to mortgage companies totaling $1.0 billion (11 percent of the C&I portfolio, or 6 percent of total loans) as of September 30, 2014. As a result, 33 percent of the C&I category was sensitive to impacts on the financial services industry.

Acquisition

On June 7, 2013, FHN acquired substantially all of the assets and liabilities of MNB from the FDIC. The acquisition included approximately $249 million of loans. These loans were initially recorded at fair value which incorporates expected credit losses, among other things, in accordance with ASC 805 resulting in no carryover of allowance for loan loss (“ALLL”) from the acquiree. At acquisition, FHN designated certain loans as PCI (see discussion below) with the remaining loans accounted for under ASC 310-20, “Nonrefundable Fees and Other Costs”. For loans accounted for under ASC 310-20, the difference between the loans’ book value to MNB and the estimated fair value at the time of the acquisition will be accreted back into interest income over the remaining contractual life and the subsequent accounting and reporting will be similar to FHN’s originated loan portfolio.

PCI Loans

ASC 310-30, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” provides guidance for acquired loans that have experienced 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, prior partial charge-offs, as well as both originated versus refreshed credit scores and ratios when available.

 

14


Table of Contents

Note 4 – Loans (Continued)

 

PCI loans were initially recorded at fair value which was estimated by discounting expected cash flows at acquisition date. The expected cash flow includes all contractually expected amounts and incorporates an estimate for future expected credit losses, pre-payment assumptions, and yield requirement for a market participant, among other things. To the extent possible, certain PCI loans were aggregated into pools with composite interest rate and cash flows expected to be collected for the pool. Aggregation into loan pools is based on common risk characteristics that include similar credit risk or risk ratings, and one or more predominant risk characteristics. Generally, FHN pooled loans with smaller balances and common internal loan grades and portfolio types. Subsequent to the initial accounting at acquisition, each PCI pool is accounted for as a single unit.

Accretable yield is initially established at acquisition and is the excess of cash flows expected to be collected over the initial investment in the loan and is recognized in interest income over the remaining life of the loan, or pool of loans. Nonaccretable difference is the difference between the contractually required payments at acquisition and the cash flows expected to be collected at acquisition. FHN estimates expected cash flows for PCI loans on a quarterly basis. Increases in expected cash flows from the last measurement will result in reversal of any nonaccretable difference (or allowance for loan losses to the extent any has been recorded) with a prospective positive impact on interest income. Decreases to the expected cash flows will result in an increase in the allowance for loan losses through increased provision expense.

FHN does not report PCI loans as nonperforming loans due to the accretion of interest income. Additionally, PCI loans that have been pooled and subsequently modified will not be reported as troubled debt restructurings since the pool is the unit of measurement.

The following table presents a rollforward of the accretable yield for the three and nine months ended September 30, 2014 and 2013:

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 

(Dollars in thousands)

   2014     2013     2014     2013  

Balance, beginning of period

   $ 16,509      $ 6,432      $ 13,490      $ —     

Additions

     —          —          335        6,650   

Accretion

     (1,829     (821     (5,413     (1,039

Adjustment for payoffs

     (828     (40     (1,550     (40

Adjustment for charge-offs

     (10     —          (79     —     

Increase in accretable yield (a)

     2,231        —          9,290        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 16,073      $ 5,571      $ 16,073      $ 5,571   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Includes changes in the accretable yield due to both transfers from the nonaccretable difference and the impact of changes in the expected timing of the cash flows.

At September 30, 2014, the ALLL related to PCI loans was $2.8 million and loan loss provision recognized during the three and nine months ended September 30, 2014 was $.4 million and $2.1 million, respectively. The following table reflects the outstanding principal balance and carrying amounts of the PCI loans as of September 30, 2014, and 2013, and December 31, 2013:

 

     September 30, 2014      September 30, 2013      December 31, 2013  

(Dollars in thousands)

   Carrying value      Unpaid balance      Carrying value      Unpaid balance      Carrying value      Unpaid balance  

Commercial, financial and industrial (a)

   $ 5,028       $ 6,155       $ 7,712       $ 9,509       $ 7,077       $ 9,169   

Commercial real estate (a)

     31,660         42,890         39,645         55,789         38,042         53,648   

Consumer real estate (a)

     585         875         888         1,300         878         1,291   

Credit card and other (a)

     11         16         15         22         12         21   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 37,284       $ 49,936       $ 48,260       $ 66,620       $ 46,009       $ 64,129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) September 30, 2013 balances by portfolio have been re-presented to agree with current presentation.

 

15


Table of Contents

Note 4 – Loans (Continued)

 

Impaired Loans

The following tables provide information at September 30, 2014 and 2013, by class related to individually impaired loans and consumer TDR’s. Recorded investment is defined as the amount of the investment in a loan, before valuation allowance but which does reflect any direct write-down of the investment. For purposes of this disclosure, PCI loans and LOCOM have been excluded.

 

     September 30, 2014      Three Months Ended
September 30, 2014
     Nine Months Ended
September 30, 2014
 

(Dollars in thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Impaired loans with no related allowance recorded:

                    

Commercial:

                    

General C&I

   $ 15,594       $ 17,185       $ —         $ 15,542       $ —         $ 16,910       $ —     

TRUPS

     —           —           —           —           —           1,083         —     

Income CRE

     6,819         14,379         —           6,829         —           7,670         —     

Residential CRE

     1,148         1,827         —           1,148         —           574         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,561       $ 33,391       $ —         $ 23,519       $ —         $ 26,237       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail:

                    

HELOC (a)

   $ 14,036       $ 34,693       $ —         $ 15,713       $ —         $ 16,324       $ —     

R/E installment loans (a)

     5,640         7,221         —           6,552         —           8,729         —     

Permanent mortgage (a)

     7,616         10,023         —           7,739         —           7,918         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,292       $ 51,937       $ —         $ 30,004       $ —         $ 32,971       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with related allowance recorded:

                    

Commercial:

                    

General C&I

   $ 18,393       $ 22,579       $ 2,229       $ 25,394       $ 79       $ 25,895       $ 236   

TRUPS

     13,490         13,700         3,810         8,505         —           13,540         —     

Income CRE

     8,735         10,107         481         8,789         62         10,406         226   

Residential CRE

     5,663         11,111         623         5,846         59         6,233         183   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,281       $ 57,497       $ 7,143       $ 48,534       $ 200       $ 56,074       $ 645   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail:

                    

HELOC

   $ 81,422       $ 82,813       $ 17,061       $ 79,352       $ 448       $ 75,476       $ 1,339   

R/E installment loans

     73,434         74,690         24,431         74,091         306         73,783         872   

Permanent mortgage

     110,921         124,429         17,329         111,263         709         112,518         2,138   

Credit card & other

     548         548         255         536         5         614         21   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 266,325       $ 282,480       $ 59,076       $ 265,242       $ 1,468       $ 262,391       $ 4,370   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

   $ 69,842       $ 90,888       $ 7,143       $ 72,053       $ 200       $ 82,311       $ 645   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

   $ 293,617       $ 334,417       $ 59,076       $ 295,246       $ 1,468       $ 295,362       $ 4,370   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 363,459       $ 425,305       $ 66,219       $ 367,299       $ 1,668       $ 377,673       $ 5,015   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) All discharged bankruptcy loans are charged down to an estimate of net realizable value and do not carry any allowance.

 

16


Table of Contents

Note 4 – Loans (Continued)

 

     September 30, 2013      Three Months Ended
September 30, 2013
     Nine Months Ended
September 30, 2013
 

(Dollars in thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Impaired loans with no related allowance recorded:

                    

Commercial:

                    

General C&I

   $ 34,193       $ 43,677       $ —         $ 40,812       $ —         $ 51,845       $ 108   

TRUPS

     6,500         6,500         —           6,500         —           10,583         —     

Income CRE

     12,939         24,219         —           17,959         —           24,828         168   

Residential CRE

     —           182         —           5,483         —           10,860         122   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 53,632       $ 74,578       $ —         $ 70,754       $ —         $ 98,116       $ 398   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail:

                    

HELOC (a)

   $ 18,323       $ 40,867       $ —         $ 19,016       $ —         $ 20,032       $ —     

R/E installment loans (a)

     11,632         15,102         —           11,913         —           12,166         —     

Permanent mortgage (a)

     11,120         14,531         —           11,127         —           10,690         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 41,075       $ 70,500       $ —         $ 42,056       $ —         $ 42,888       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with related allowance recorded:

                    

Commercial:

                    

General C&I

   $ 31,672       $ 38,075       $ 2,447       $ 27,944       $ 71       $ 16,319       $ 108   

TRUPS

     33,610         33,610         13,255         38,655         —           39,185         —     

Income CRE

     10,274         11,330         765         7,552         70         3,859         96   

Residential CRE

     7,053         12,383         816         4,567         68         1,869         84   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 82,609       $ 95,398       $ 17,283       $ 78,718       $ 209       $ 61,232       $ 288   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail:

                    

HELOC

   $ 68,903       $ 71,708       $ 15,702       $ 68,287       $ 483       $ 65,005       $ 1,373   

R/E installment loans

     71,543         72,686         22,724         75,084         336         72,571         1,025   

Permanent mortgage

     117,004         129,702         18,646         114,501         776         111,880         2,164   

Credit card & other

     648         648         212         682         7         732         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 258,098       $ 274,744       $ 57,284       $ 258,554       $ 1,602       $ 250,188       $ 4,585   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

   $ 136,241       $ 169,976       $ 17,283       $ 149,472       $ 209       $ 159,348       $ 686   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

   $ 299,173       $ 345,244       $ 57,284       $ 300,610       $ 1,602       $ 293,076       $ 4,585   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 435,414       $ 515,220       $ 74,567       $ 450,082       $ 1,811       $ 452,424       $ 5,271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

(a) All discharged bankruptcy loans are charged down to an estimate of net realizable value and do not carry any allowance.

Asset Quality Indicators

FHN employs a dual grade commercial risk grading methodology to assign an estimate for the probability of default (“PD”) and the loss given default (“LGD”) for each commercial loan using factors specific to various industry, portfolio, or product segments that result in a rank ordering of risk and the assignment of grades PD 1 to PD 16. Each PD grade corresponds to an estimated one-year default probability percentage; a PD 1 has the lowest expected default probability, and probabilities increase as grades progress down the scale. PD 1 through PD 12 are “pass” grades. PD grades 13-16 correspond to the regulatory-defined categories of special mention (13), substandard (14), doubtful (15), and loss (16). Pass loan grades are required to be reassessed annually or earlier whenever there has been a material change in the financial condition of the borrower or risk characteristics of the relationship. All commercial loans over $1 million and certain commercial loans over $500,000 that are graded 13 or worse are reassessed on a quarterly basis. LGD grades are assigned based on a scale of 1-12 and represent FHN’s expected recovery based on collateral type in the event a loan defaults. See Note 5—Allowance for Loan Losses for further discussion on the credit grading system.

 

17


Table of Contents

Note 4 – Loans (Continued)

 

The following tables provide the balances of commercial loan portfolio classes with associated allowance, disaggregated by PD grade as of September 30, 2014 and 2013.

 

    September 30, 2014  
(Dollars in thousands)   General
C&I
    Loans to
Mortgage
Companies
    TRUPS (a)     Income
CRE
    Residential
CRE
    Total     Percentage
of Total
    Allowance
for Loan
Losses
 

PD Grade:

               

1

  $ 441,590      $ —        $ —        $ 221      $ 63      $ 441,874        5   $ —     

2

    355,805        —          —          2,854        244        358,903        4        338   

3

    412,110        46,838        —          28,750        93        487,791        5        264   

4

    446,092        148,852        —          28,815        296        624,055        6        671   

5

    947,041        177,435        —          239,166        4,717        1,368,359        14        2,741   

6

    1,090,900        275,710        —          184,961        5,579        1,557,150        16        1,790   

7

    1,178,283        193,667        —          262,318        6,405        1,640,673        17        2,777   

8

    747,305        88,114        —          183,145        4,195        1,022,759        10        2,339   

9

    540,472        18,251        —          107,636        2,619        668,978        7        4,559   

10

    291,984        8,774        —          39,306        1,216        341,280        3        4,001   

11

    314,927        —          —          33,214        2,825        350,966        4        7,538   

12

    106,550        —          —          29,250        928        136,728        1        1,383   

13

    115,198        —          325,882        8,085        1,938        451,103        5        6,716   

14,15,16

    153,611        —          —          37,882        4,915        196,408        2        40,279   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment

    7,141,868        957,641        325,882        1,185,603        36,033        9,647,027        99        75,396   

Individually evaluated for impairment

    33,987        —          12,875        15,554        6,811        69,227        1        7,143   

Purchased credit-impaired loans

    5,076        —          —          32,588        1,805        39,469        —          2,781   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans

  $ 7,180,931      $ 957,641      $ 338,757      $ 1,233,745      $ 44,649      $ 9,755,723        100   $ 85,320   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

Note 4 – Loans (Continued)

 

     September 30, 2013  

(Dollars in thousands)

   General
C&I
     Loans to
Mortgage
Companies
     TRUPS (a)      Income
CRE
     Residential
CRE
     Total      Percent of
Total
    Allowance
for Loan
Losses
 

PD Grade:

                      

1

   $ 228,555       $ —         $ —         $ —         $ —         $ 228,555         3 %   $ 81   

2

     179,955         —           —           —           —           179,955         2        79   

3

     194,880         —           —           2,687         —           197,567         2        224   

4

     311,097         —           —           —           —           311,097         4        517   

5

     790,748         —           —           11,823         216         802,787         9        1,363   

6

     938,609         40,200         —           44,311         286         1,023,406         12        1,973   

7

     1,125,031         202,128         —           228,814         9,978         1,565,951         17        3,377   

8

     881,668         308,282         —           202,417         5,058         1,397,425         16        4,895   

9

     615,180         152,275         —           203,308         1,499         972,262         11        7,981   

10

     451,318         29,008         —           139,026         1,066         620,418         7        8,640   

11

     399,082         473         —           69,945         277         469,777         5        10,338   

12

     124,916         —           —           57,534         1,224         183,674         2        2,425   

13

     159,675         —           332,707         33,439         1,324         527,145         6        8,596   

14,15,16

     172,346         335         3,335         73,737         10,033         259,786         3        34,601   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Collectively evaluated for impairment

     6,573,060         732,701         336,042         1,067,041         30,961         8,739,805         99        85,090   

Individually evaluated for impairment

     65,865         —           36,864         23,213         7,053         132,995         1        17,283   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial loans (b)

   $ 6,638,925       $ 732,701       $ 372,906       $ 1,090,254       $ 38,014       $ 8,872,800         100 %   $ 102,373   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Balances as of September 30, 2014 and 2013, presented net of $26.2 million and $29.4 million, respectively, in lower of cost or market (“LOCOM”) valuation allowance. Based on the underlying structure of the notes, the highest possible internal grade is “13”.
(b) September 30, 2013 table excludes PCI loans.

The retail portfolio is comprised primarily of smaller-balance loans which are very similar in nature in that most are standard products and are backed by residential real estate. Because of the similarities of retail loan-types, FHN is able to utilize the Fair Isaac Corporation (“FICO”) score, among other attributes, to assess the quality of consumer borrowers. FICO scores are refreshed on a quarterly basis in an attempt to reflect the recent risk profile of the borrowers. Accruing delinquency amounts are indicators of asset quality within the credit card and other retail portfolio.

 

19


Table of Contents

Note 4 – Loans (Continued)

 

The following tables reflect period end balances and average FICO scores by origination vintage for the HELOC, real estate installment, and permanent mortgage classes of loans as of September 30, 2014 and 2013:

 

HELOC    September 30, 2014      September 30, 2013  

(Dollars in thousands)

Origination Vintage

   Period End
Balance
     Average
Origination
FICO
     Average
Refreshed
FICO
     Period End
Balance
     Average
Origination
FICO
     Average
Refreshed
FICO
 

pre-2003

   $ 61,659         708         703       $ 88,416         711         702   

2003

     111,031         722         709         163,576         728         714   

2004

     312,590         724         711         421,542         727         717   

2005

     476,226         732         722         548,756         733         720   

2006

     351,818         740         727         400,023         741         725   

2007

     369,635         744         729         421,964         744         728   

2008

     200,908         753         748         233,642         754         747   

2009

     105,576         752         743         121,555         750         744   

2010

     100,727         754         749         120,022         753         750   

2011

     100,842         759         753         119,553         758         754   

2012

     121,149         759         757         145,507         759         759   

2013

     158,256         759         760         111,976         762         761   

2014

     87,878         761         761         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,558,295         741         732       $ 2,896,532         741         730   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
R/E Installment Loans    September 30, 2014      September 30, 2013  
(Dollars in thousands)    Period End      Average
Origination
     Average
Refreshed
     Period End      Average
Origination
     Average
Refreshed
 

Origination Vintage

   Balance      FICO      FICO      Balance      FICO      FICO  

pre-2003

   $ 16,278         680         684       $ 26,603         682         684   

2003

     55,361         715         724         81,915         716         725   

2004

     44,484         700         697         58,244         701         699   

2005

     132,276         715         713         170,742         717         711   

2006

     143,601         714         701         183,847         716         701   

2007

     211,780         723         709         264,851         725         709   

2008

     67,730         721         715         91,883         723         720   

2009

     31,524         739         728         39,549         742         736   

2010

     107,417         748         755         131,004         747         754   

2011

     296,440         760         759         347,315         761         761   

2012

     628,622         764         765         707,972         764         764   

2013

     486,553         756         757         457,590         758         754   

2014

     350,627         755         754         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,572,693         748         746       $ 2,561,515         746         742   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Permanent Mortgage    September 30, 2014      September 30, 2013  
(Dollars in thousands)    Period End     

Average

Origination

     Average
Refreshed
     Period End      Average
Origination
     Average
Refreshed
 

Origination Vintage

   Balance      FICO      FICO      Balance      FICO      FICO  

pre-2004

   $ 161,037         724         723       $ 205,111         725         725   

2004

     18,190         713         713         24,595         712         693   

2005

     35,503         737         733         41,643         738         712   

2006

     65,722         731         734         81,932         731         711   

2007

     201,640         734         735         236,819         733         710   

2008

     90,697         742         736         107,594         741         714   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 572,789         730         731       $ 697,694         731         713   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

Note 4 – Loans (Continued)

 

Nonaccrual and Past Due Loans

For all portfolio segments and classes other than PCI loans, loans are placed on nonaccrual status 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, or on a case-by-case basis if FHN continues to receive payments, but there are atypical loan structures or other borrower-specific issues. PCI loans are classified in the table below as accruing because of the accretion of interest. FHN has a meaningful portion of loans that are classified as nonaccrual even though loan payments are being received; these include residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy, and also current second lien loans behind first lien loans with performance issues. The determination of whether a TDR is placed on nonaccrual status generally follows the same internal policies and procedures as other portfolio loans. However, FHN will typically place a consumer real estate loan on nonaccrual status if it is 30 or more days delinquent at the time of modification and is determined to be a TDR, except for residential real estate secured loans discharged in bankruptcy (“discharged bankruptcies”) that are placed on nonaccrual regardless of delinquency status. Current stand-alone second liens are placed on nonaccrual status if they are junior to first liens that are 90 days or more past due or the first lien has been modified into a TDR.

The following table reflects accruing and non-accruing loans by class on September 30, 2014:

 

     Accruing      Non-Accruing         

(Dollars in thousands)

   Current      30-89
Days
Past Due
     90+
Days
Past Due
     Total
Accruing
     Current      30-89
Days
Past Due
     90+
Days
Past Due
     Total
Non-
Accruing
     Total
Loans
 

Commercial (C&I):

                          

General C&I

   $ 7,140,246       $ 5,515       $ 1,717       $ 7,147,478       $ 5,603       $ 1,469       $ 21,305       $ 28,377       $ 7,175,855   

Loans to mortgage companies

     956,861         650         —           957,511         —           —           130         130         957,641   

TRUPS (a)

     325,882         —           —           325,882         12,875         —           —           12,875         338,757   

Purchased credit-impaired loans

     4,710         366         —           5,076         —           —           —           —           5,076   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial (C&I)

     8,427,699         6,531         1,717         8,435,947         18,478         1,469         21,435         41,382         8,477,329   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate:

                          

Income CRE

     1,186,595         2,781         —           1,189,376         217         1,068         10,496         11,781         1,201,157   

Residential CRE

     40,249         189         —           40,438         1,254         —           1,152         2,406         42,844   

Purchased credit-impaired loans

     33,185         669         539         34,393         —           —           —           —           34,393   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     1,260,029         3,639         539         1,264,207         1,471         1,068         11,648         14,187         1,278,394   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer real estate:

                          

HELOC

     2,437,982         23,816         11,645         2,473,443         68,785         5,784         10,283         84,852         2,558,295   

R/E installment loans

     2,515,705         12,721         4,965         2,533,391         29,306         2,585         6,768         38,659         2,572,050   

Purchased credit-impaired loans

     643         —           —           643         —           —           —           —           643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate

     4,954,330         36,537         16,610         5,007,477         98,091         8,369         17,051         123,511         5,130,988   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Permanent mortgage

     523,150         7,635         8,030         538,815         15,215         4,063         14,696         33,974         572,789   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit card & other

                          

Credit card

     184,650         1,900         1,822         188,372         —           —           —           —           188,372   

Other

     162,088         1,190         164         163,442         —           —           692         692         164,134   

Purchased credit-impaired loans

     11         —           —           11         —           —           —           —           11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit card & other

     346,749         3,090         1,986         351,825         —           —           692         692         352,517   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned

   $ 15,511,957       $ 57,432       $ 28,882       $ 15,598,271       $ 133,255       $ 14,969       $ 65,522       $ 213,746       $ 15,812,017   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Total TRUPS includes LOCOM valuation allowance of $26.2 million.

 

21


Table of Contents

Note 4 – Loans (Continued)

 

The following table reflects accruing and non-accruing loans by class on September 30, 2013:

 

    Accruing     Non-Accruing        

(Dollars in thousands)

  Current     30-89
Days
Past Due
    90+
Days
Past Due
    Total
Accruing
    Current     30-89
Days
Past Due
    90+
Days
Past Due
    Total
Non-
Accruing
    Total
Loans
 

Commercial (C&I):

                 

General C&I

  $ 6,560,688      $ 7,314      $ 95      $ 6,568,097      $ 33,582      $ 3,610      $ 28,334      $ 65,526      $ 6,633,623   

Loans to mortgage companies

    731,684        682        —          732,366        —          —          335        335        732,701   

TRUPS (a)

    336,042        —          —          336,042        —          —          36,864        36,864        372,906   

Purchased credit-impaired loans

    7,092        468        152        7,712        —          —          —          —          7,712   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial (C&I)

    7,635,506        8,464        247        7,644,217        33,582        3,610        65,533        102,725        7,746,942   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate:

                 

Income CRE

    1,071,839        5,438        435        1,077,712        6,791        —          13,802        20,593        1,098,305   

Residential CRE

    31,189        177        —          31,366        285        —          4,110        4,395        35,761   

Purchased credit-impaired loans

    38,595        637        413        39,645        —          —          —          —          39,645   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    1,141,623        6,252        848        1,148,723        7,076        —          17,912        24,988        1,173,711   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer real estate:

                 

HELOC

    2,778,336        24,072        12,641        2,815,049        61,733        5,521        14,229        81,483        2,896,532   

R/E installment loans

    2,499,522        14,156        6,475        2,520,153        29,549        3,048        7,877        40,474        2,560,627   

Purchased credit-impaired loans

    888        —          —          888        —          —          —          —          888   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer real estate

    5,278,746        38,228        19,116        5,336,090        91,282        8,569        22,106        121,957        5,458,047   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Permanent mortgage

    643,385        5,097        12,239        660,721        13,518        1,321        22,134        36,973        697,694   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit card & other

                 

Credit card

    186,749        1,480        1,258        189,487        —          —          —          —          189,487   

Other

    140,320        803        138        141,261        1,399        —          —          1,399        142,660   

Purchased credit-impaired loans

    15        —          —          15        —          —          —          —          15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit card & other

    327,084        2,283        1,396        330,763        1,399        —          —          1,399        332,162   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unearned

  $ 15,026,344      $ 60,324      $ 33,846      $ 15,120,514      $ 146,857      $ 13,500      $ 127,685      $ 288,042      $ 15,408,556   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Total TRUPS includes LOCOM valuation allowance of $29.4 million.

Troubled Debt Restructurings

As part of FHN’s ongoing risk management practices, FHN attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. FHN considers regulatory guidelines when restructuring loans to ensure that prudent lending practices are followed. As such, qualification criteria and payment terms consider the borrower’s current and prospective ability to comply with the modified terms of the loan.

A modification is classified as a TDR if the borrower is experiencing financial difficulty and it is determined that FHN has granted a concession to the borrower. FHN may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that a borrower may default in the foreseeable future. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of loan structures, business/industry risk, and borrower/guarantor structures. Concessions could include extension of the maturity date, reductions of the interest rate (which may make the rate lower than current market for a new loan with similar risk), reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, FHN also considers whether the borrower has provided additional collateral or guarantors, among other things, and whether such additions adequately compensate FHN for the restructured terms. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is classified as a TDR.

For all classes within the commercial portfolio segment, TDRs are typically modified through forbearance agreements (generally 6 to 12 months). Forbearance agreements could include reduced interest rates, reduced payments, release of guarantor, or entering into short sale agreements. FHN’s proprietary modification programs for consumer loans are generally structured using parameters of U.S. government-sponsored programs such as Home Affordable Modification Program (“HAMP”). Within the HELOC and R/E installment loans classes of the consumer portfolio segment, TDRs are typically modified by reducing the interest rate (in increments

 

22


Table of Contents

Note 4 – Loans (Continued)

 

of 25 basis points to a minimum of 1 percent for up to 5 years) and a possible maturity date extension to reach an affordable housing debt ratio. Permanent mortgage TDRs are typically modified by reducing the interest rate (in increments of 25 basis points to a minimum of 2 percent for up to 5 years) and a possible maturity date extension to reach an affordable housing debt ratio. After 5 years the interest rate steps up 1 percent every year thereafter until it reaches the Federal Home Loan Mortgage Corporation (“Freddie Mac,” “Freddie,” or “FHLMC”) Weekly Survey Rate cap. Contractual maturities may be extended to 40 years on permanent mortgages and to 30 years for consumer real estate loans. Within the credit card class of the consumer portfolio segment, TDRs are typically modified through either a short-term credit card hardship program or a longer-term credit card workout program. In the credit card hardship program, borrowers may be granted rate and payment reductions for 6 months to 1 year. In the credit card workout program, customers are granted a rate reduction to 0 percent and term extensions for up to 5 years to pay off the remaining balance.

Despite the absence of a loan modification, the discharge of personal liability through bankruptcy proceedings is considered a concession and as a result, FHN classifies all non-reaffirmed residential real estate loans after bankruptcy as nonaccruing TDRs.

On September 30, 2014 and 2013, FHN had $346.0 million and $369.4 million portfolio loans classified as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reserves of $60.9 million and $61.3 million, or 18 percent as of September 30, 2014, and 17 percent as of September 30, 2013. Additionally, $83.1 million and $133.9 million of loans held-for-sale as of September 30, 2014 and 2013, respectively were classified as TDRs.

The following table reflects portfolio loans that were classified as TDRs during the three and nine months ended September 30, 2014 and 2013:

 

    Three Months Ended September 30, 2014     Nine Months Ended September 30, 2014  

(Dollars in thousands)

  Number     Pre-Modification
Outstanding
Recorded

Investment
    Post-Modification
Outstanding
Recorded

Investment
    Number     Pre-Modification
Outstanding
Recorded

Investment
    Post-Modification
Outstanding
Recorded

Investment
 

Commercial (C&I):

           

General C&I

    2      $ 1,031      $ 970        4      $ 1,767      $ 1,492   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial (C&I)

    2        1,031        970        4        1,767        1,492   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate:

           

Income CRE

    —          —          —          2        421        421   

Residential CRE

    —          —          —          1        976        960   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    —          —          —          3        1,397        1,381   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer real estate:

           

HELOC

    89        6,930        6,883        253        20,999        21,208   

R/E installment loans

    21        1,269        1,255        138        9,544        9,450   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer real estate

    110        8,199        8,138        391        30,543        30,658   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Permanent mortgage

    6        1,639        1,672        30        8,314        7,839   

Credit card & other

    16        107        103        50        254        245   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total troubled debt restructurings

    134      $ 10,976      $ 10,883        478      $ 42,275      $ 41,615   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Three Months Ended September 30, 2013     Nine Months Ended September 30, 2013  

(Dollars in thousands)

  Number     Pre-Modification
Outstanding
Recorded
Investment
    Post-Modification
Outstanding
Recorded
Investment
    Number     Pre-Modification
Outstanding
Recorded
Investment
    Post-Modification
Outstanding
Recorded
Investment
 

Commercial (C&I):

       

General C&I

    2      $ 1,161      $ 1,134        10      $ 17,350      $ 17,313   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial (C&I)

    2        1,161        1,134        10        17,350        17,313   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real estate:

       

Income CRE

    —          —          —          1        288        288   

Residential CRE

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    —          —          —          1        288        288   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consumer real estate:

       

HELOC

    72        5,212        5,194        279        21,729        21,479   

R/E installment loans

    70        4,589        4,541        346        24,264        24,100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer real estate

    142        9,801        9,735        625        45,993        45,579   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Permanent mortgage

    15        3,864        4,074        41        16,907        17,311   

Credit card & other

    13        44        39        41        198        187   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total troubled debt restructurings

    172      $ 14,870      $ 14,982        718      $ 80,736      $ 80,678   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

Note 4 – Loans (Continued)

 

The following table presents TDRs which re-defaulted during the three and nine months ended September 30, 2014 and 2013, and as to which the modification occurred 12 months or less prior to the re-default. Financing receivables that became classified as TDRs within the previous 12 months and for which there was a payment default during the period are calculated by first identifying TDRs that defaulted during the period and then determining whether they were modified within the 12 months prior to the default. For purposes of this disclosure, FHN generally defines payment default as 30 or more plus days past due.

 

     Three Months Ended
September 30, 2014
     Nine Months Ended
September 30, 2014
 

(Dollars in thousands)

   Number      Recorded
Investment
     Number      Recorded
Investment
 

Commercial (C&I):

           

General C&I

     2       $ 59         4       $ 512   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial (C&I)

     2         59         4         512   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate:

           

Income CRE

     1         2,570         3         2,959   

Residential CRE

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     1         2,570         3         2,959   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer real estate:

           

HELOC

     2         212         6         374   

R/E installment loans

     1         132         8         500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate

     3         344         14         874   
  

 

 

    

 

 

    

 

 

    

 

 

 

Permanent mortgage

     1         347         3         1,128   

Credit card & other

     —           —           2         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructurings

     7       $ 3,320         26       $ 5,477   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended
September 30, 2013
     Nine Months Ended
September 30, 2013
 

(Dollars in thousands)

   Number      Recorded
Investment
     Number      Recorded
Investment
 

Commercial (C&I):

           

General C&I

     6       $ 1,870         8       $ 5,977   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial (C&I)

     6         1,870         8         5,977   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate:

           

Income CRE

     3         750         4         1,548   

Residential CRE

     —           —           1         33   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     3         750         5         1,581   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer real estate:

           

HELOC

     1         35         10         512   

R/E installment loans

     3         229         6         350   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer real estate

     4         264         16         862   
  

 

 

    

 

 

    

 

 

    

 

 

 

Permanent mortgage

     4         2,071         14         6,507   

Credit card & other

     8         34         15         61   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructurings

                 25       $     4,989                     58       $     14,988   
  

 

 

    

 

 

    

 

 

    

 

 

 

The determination of whether a TDR is placed on nonaccrual status generally follows the same internal policies and procedures as other portfolio loans. However, FHN will typically place a consumer real estate loan on nonaccrual status if it is 30 or more days delinquent upon modification into a TDR. For commercial loans, nonaccrual TDRs that are reasonably assured of repayment according to their modified terms may be returned to accrual status by FHN upon a detailed credit evaluation of the borrower’s financial condition and prospects for repayment under the revised terms. For consumer loans, FHN’s evaluation supporting the decision to return a modified loan to accrual status includes consideration of the borrower’s sustained historical repayment performance for a reasonable period prior to the date on which the loan is returned to accrual status, which is generally a minimum of six months. FHN may also consider a borrower’s sustained historical repayment performance for a reasonable time prior to the restructuring in assessing whether the borrower can meet the restructured terms, as it may indicate that the borrower is capable of servicing the level of debt under the modified terms. Otherwise, FHN will continue to classify restructured loans as nonaccrual. Consistent with regulatory guidance, upon sustained performance and classification as a TDR over FHN’s year-end, the loan will be removed from TDR status as long as the modified terms were market-based at the time of modification.

 

24


Table of Contents

Note 5 – Allowance for Loan Losses

The ALLL includes the following components: reserves for commercial loans evaluated based on pools of credit graded loans and reserves for pools of smaller-balance homogeneous retail loans, both determined in accordance with ASC 450-20-50. The reserve factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics and are subject to qualitative adjustments by management to reflect current events, trends, and conditions (including economic considerations and trends). The slow economic recovery, performance of the housing market, unemployment levels, labor participation rate, the regulatory environment, regulatory guidance, and both positive and negative portfolio segment-specific trends, are examples of additional factors considered by management in determining the ALLL. Additionally, management considers the inherent uncertainty of quantitative models that are driven by historical loss data. The ALLL also includes reserves determined in accordance with ASC 310-10-35 for loans determined by management to be individually impaired and an allowance associated with PCI loans.

Commercial

For commercial loans, reserves are established using historical net loss factors by grade level, loan product, and business segment. An assessment of the quality of individual commercial loans is made utilizing credit grades assigned internally based on a dual grading system which estimates both the PD and loss severity in the event of default. PD grades range from 1-16 while estimated loss severities, or LGD grades, range from 1-12. This credit grading system is intended to identify and measure the credit quality of the loan portfolio by analyzing the migration of loans between grading categories. It is also integral to the estimation methodology utilized in determining the allowance for loan losses since an allowance is established for pools of commercial loans based on the credit grade assigned. The appropriate relationship team performs the process of categorizing commercial loans into the appropriate credit grades, initially as a component of the approval of the loan, and subsequently throughout the life of the loan as part of the servicing regimen. The proper loan grade for larger exposures is confirmed by a senior credit officer in the approval process. To determine the most appropriate credit grade for each loan, the credit risk grading system employs scorecards for particular categories of loans that consist of a number of objective and subjective measures that are weighted in a manner that produces a rank ordering of risk within pass-graded credits. Loan grading discipline is regularly reviewed by Credit Risk Assurance to determine if the process continues to result in accurate loan grading across the portfolio. FHN may utilize availability of guarantors/sponsors to support lending decisions during the credit underwriting process and when determining the assignment of internal loan grades.

Retail

The ALLL for smaller-balance homogenous retail loans is determined based on pools of similar loan types that have similar credit risk characteristics. FHN manages retail loan credit risk on a class basis. Reserves by portfolio are determined using segmented roll-rate models that incorporate various factors including historical delinquency trends, experienced loss frequencies, and experienced loss severities. Generally, reserves for retail loans reflect inherent losses in the portfolio that are expected to be recognized over the following twelve months.

Individually Impaired

Generally, classified nonaccrual commercial loans over $1 million and all commercial and consumer loans classified as TDRs are deemed to be impaired and are individually assessed for impairment measurement in accordance with ASC 310-10-35. For all commercial portfolio segments, TDRs and other individually impaired commercial loans are measured based on the present value of expected future payments discounted at the loan’s effective interest rate (the “DCF method”), observable market prices, or for loans that are solely dependent on the collateral for repayment, the net realizable value. For loans measured using the DCF method or by observable market prices, if the recorded investment in the impaired loan exceeds this amount, a specific allowance is established as a component of the ALLL until such time as a loss is expected and recognized; for impaired collateral-dependent loans, FHN will charge off the full difference between the book value and the best estimate of net realizable value.

Generally, the allowance for TDRs in all consumer portfolio segments is determined by estimating the expected future cash flows using the modified interest rate (if an interest rate concession), incorporating payoff and net charge-off rates specific to the TDRs within the portfolio segment being assessed, and discounted using the pre-modification interest rate. The discount rates of variable rate TDRs are adjusted to reflect changes in the interest rate index to which the rates are tied. The discounted cash flows are then compared to the outstanding principal balance in order to determine required reserves. Residential real estate loans discharged through bankruptcy are collateral-dependent and are charged down to net realizable value.

 

25


Table of Contents

Note 5 – Allowance for Loan Losses (Continued)

 

The following table provides a rollforward of the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2014 and 2013:

 

(Dollars in thousands)

   C&I     Commercial
Real Estate
    Consumer
Real Estate
    Permanent
Mortgage
    Credit Card
and Other
    Total  

Balance as of July 1, 2013

   $ 93,502      $ 13,931      $ 120,848      $ 27,103      $ 6,550      $ 261,934   

Charge-offs

     (4,869     (515     (16,412     (1,366     (2,884     (26,046

Recoveries

     3,242        587        4,398        841        754        9,822   

Provision

     (495     (3,010     11,992        (1,022     2,535        10,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

     91,380        10,993        120,826        25,556        6,955        255,710   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of January 1, 2013

   $ 96,191      $ 19,997      $ 128,949      $ 24,928      $ 6,898      $ 276,963   

Charge-offs

     (16,201     (2,612     (58,792     (6,577     (8,236     (92,418

Recoveries

     9,839        2,703        14,932        1,609        2,082        31,165   

Provision

     1,551        (9,095     35,737        5,596        6,211        40,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

     91,380        10,993        120,826        25,556        6,955        255,710   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance—individually evaluated for impairment

     15,702        1,581        38,426        18,646        212        74,567   

Allowance—collectively evaluated for impairment

     75,678        9,412        82,400        6,910        6,743        181,143   

Loans, net of unearned as of September 30, 2013:

            

Individually evaluated for impairment

     102,729        30,266        170,401        128,124        648        432,168   

Collectively evaluated for impairment

     7,636,501        1,103,800        5,286,758        569,570        331,499        14,928,128   

Purchased credit-impaired loans (a)

     7,712        39,645        888        —          15        48,260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unearned

   $ 7,746,942      $ 1,173,711      $ 5,458,047      $ 697,694      $ 332,162      $ 15,408,556   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of July 1, 2014

   $ 68,591      $ 15,821      $ 118,037      $ 23,727      $ 17,452      $ 243,628   

Charge-offs

     (3,741     (1,789     (13,465     (1,047     (3,642     (23,684

Recoveries

     5,219        312        5,669        686        811        12,697   

Provision

     (199     1,106        8,154        (3,145     84        6,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2014

     69,870        15,450        118,395        20,221        14,705        238,641   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of January 1, 2014

   $ 86,446      $ 10,603      $ 126,785      $ 22,491      $ 7,484      $ 253,809   

Charge-offs

     (14,997     (3,163     (33,803     (4,144     (11,033     (67,140

Recoveries

     8,338        2,323        16,113        1,958        2,240        30,972   

Provision

     (9,917     5,687        9,300        (84     16,014        21,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2014

     69,870        15,450        118,395        20,221        14,705        238,641   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance—individually evaluated for impairment

     6,039        1,104        41,492        17,329        255        66,219   

Allowance—collectively evaluated for impairment

     63,783        11,613        76,845        2,892        14,450        169,583   

Allowance—purchased credit-impaired loans

     48        2,733        58        —          —          2,839   

Loans, net of unearned as of September 30, 2014:

            

Individually evaluated for impairment

     46,862        22,365        174,532        118,537        548        362,844   

Collectively evaluated for impairment

     8,425,391        1,221,636        4,955,813        454,252        351,958        15,409,050   

Purchased credit-impaired loans

     5,076        34,393        643        —          11        40,123   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unearned

   $ 8,477,329      $ 1,278,394      $ 5,130,988      $ 572,789      $ 352,517      $ 15,812,017   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

(a) September 30, 2013 balances by portfolio have been re-presented to agree with current presentation.

 

26


Table of Contents

Note 6 – Mortgage Servicing Rights

FHN recognizes all classes of mortgage servicing rights (“MSR”) at fair value. Classes of MSR are established based on market inputs used to determine the fair value of the servicing asset and FHN’s risk management practices. See Note 17 – Fair Value of Assets & Liabilities, the “Determination of Fair Value” section for a discussion of FHN’s MSR valuation methodology. In third quarter 2013, FHN agreed to sell substantially all remaining legacy mortgage servicing which resulted in de-recognition of substantially all first lien MSR by the end of first quarter 2014. Accordingly the rollforward of MSR is presented for the comparative period only. See Note 15 – Derivatives for a discussion of how FHN hedged the fair value of MSR prior to signing the definitive sales agreement. The balance of MSR included on the Consolidated Condensed Statements of Condition represented the rights to service approximately $15 billion of mortgage loans on September 30, 2013, for which a servicing right had been capitalized.

Following is a summary of changes in capitalized MSR as of September 30, 2013:

 

(Dollars in thousands)

   First Liens     Second
Liens
    HELOC     Total  

Fair value on January 1, 2013

   $ 111,314      $ 196      $ 2,801      $ 114,311   

Reductions due to loan payments

     (16,980     (75     (342     (17,397

Reductions due to exercise of cleanup calls

     (495     —          —          (495

Changes in fair value due to:

        

Changes in valuation model inputs or assumptions

     20,267        —          —          20,267   

Other changes in fair value

     (89     45        44        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value on September 30, 2013

   $ 114,017      $ 166      $ 2,503      $ 116,686   
  

 

 

   

 

 

   

 

 

   

 

 

 

The ending balance of MSR as of September 30, 2014 was $2.9 million. In first quarter 2014, FHN sold $68.5 million of first lien MSR. Servicing, late, and other ancillary fees recognized within mortgage banking income were not material for the three months ended September 30, 2014. For the nine months ended September 30, 2014, servicing, late, and other ancillary fees recognized within mortgage banking income were $20.9 million and primarily represent previously unrecognized servicing fees in conjunction with servicing sales. Servicing, late, and other ancillary fees recognized within mortgage banking income were $10.9 million and $35.3 million for the three and nine months ended September 30, 2013, respectively. During third quarter 2013, FHN received annual servicing fees approximating .29 percent of the outstanding balance of underlying single-family residential mortgage loans and .34 percent inclusive of income related to excess interest.

In prior periods, FHN transferred MSR to third parties in transactions that did not qualify for sales treatment due to certain recourse provisions that were included within the sale agreements. In fourth quarter 2013, FHN determined that these provisions had lapsed and the balances related to these transactions were removed from FHN’s Consolidated Condensed Statements of Condition. On September 30, 2013, FHN had $11.7 million of MSR related to these transactions, which were included within the first liens mortgage loans column of the rollforward of MSR. The proceeds from these transfers were recognized within Other short-term borrowings in the Consolidated Condensed Statements of Condition.

 

27


Table of Contents

Note 7 – Intangible Assets

The following is a summary of intangible assets, net of accumulated amortization, included in the Consolidated Condensed Statements of Condition:

 

(Dollars in thousands)

   Goodwill      Other
Intangible
Assets (a)
 

December 31, 2012

   $ 134,242       $ 22,700   

Amortization expense

     —           (2,784