EX-13 6 c80076_ex13.htm 3B2 EDGAR HTML -- c80076_ex13.htm

Exhibit 13

 

FINANCIAL INFORMATION AND DISCUSSION

TABLE OF CONTENTS

 

 

 

Selected Financial and Operating Data

 

 

 

2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

3

 

General Information

 

 

 

3

 

Forward-Looking Statements

 

 

 

4

 

Financial Summary – 2014 compared to 2013

 

 

 

5

 

Business Line Review – 2014 compared to 2013

 

 

 

6

 

Income Statement Review

 

 

 

8

 

Restructuring, Repositioning, and Efficiency Initiatives

 

 

 

19

 

Statement of Condition Review

 

 

 

20

 

Capital

 

 

 

23

 

Asset Quality – Trend Analysis of 2014 compared to 2013

 

 

 

26

 

Risk Management

 

 

 

42

 

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

 

 

 

51

 

Market Uncertainties and Prospective Trends

 

 

 

59

 

Critical Accounting Policies

 

 

 

61

 

Quarterly Financial Information

 

 

 

68

 

Non-GAAP Information

 

 

 

69

 

Glossary of Selected Financial Terms and Acronyms

 

 

 

70

 

Report of Management on Internal Control over Financial Reporting

 

 

 

77

 

Reports of Independent Registered Public Accounting Firm

 

 

 

78

 

Consolidated Statements of Condition

 

 

 

80

 

Consolidated Statements of Income

 

 

 

81

 

Consolidated Statements of Comprehensive Income

 

 

 

82

 

Consolidated Statements of Equity

 

 

 

83

 

Consolidated Statements of Cash Flows

 

 

 

85

 

Notes to Consolidated Financial Statements

 

 

 

86

 

Consolidated Historical Statements of Income

 

 

 

191

 

Consolidated Average Balance Sheets and Related Yields and Rates

 

 

 

192

 

Total Shareholder Return Performance Graph

 

 

 

194

 

FIRST HORIZON NATIONAL CORPORATION


 

SELECTED FINANCIAL AND OPERATING DATA

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions except per share data)

 

2014

 

2013

 

2012

 

2011

 

2010

 

Income/(loss) from continuing operations

 

 

$

 

231.1

 

 

 

$

 

40.6

 

 

 

$

 

(16.4

)

 

 

 

$

 

134.0

 

 

 

$

 

72.9

 

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

 

 

 

-

 

 

 

 

0.5

 

 

 

 

0.1

 

 

 

 

8.6

 

 

 

 

(11.3

)

 

Net income/(loss)

 

 

 

231.1

 

 

 

 

41.1

 

 

 

 

(16.3

)

 

 

 

 

142.6

 

 

 

 

61.6

 

Income/(loss) available to common shareholders

 

 

 

213.3

 

 

 

 

23.8

 

 

 

 

(27.8

)

 

 

 

 

131.2

 

 

 

 

(57.8

)

 

 

Common Stock Data

 

 

 

 

 

 

 

 

 

 

Earnings/(loss) per common share from continuing operations

 

 

$

 

0.91

 

 

 

$

 

0.10

 

 

 

$

 

(0.11

)

 

 

 

$

 

0.47

 

 

 

$

 

(0.20

)

 

Earnings/(loss) per common share

 

 

 

0.91

 

 

 

 

0.10

 

 

 

 

(0.11

)

 

 

 

 

0.50

 

 

 

 

(0.25

)

 

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

 

 

 

0.90

 

 

 

 

0.10

 

 

 

 

(0.11

)

 

 

 

 

0.47

 

 

 

 

(0.20

)

 

Diluted earnings/(loss) per common share

 

 

 

0.90

 

 

 

 

0.10

 

 

 

 

(0.11

)

 

 

 

 

0.50

 

 

 

 

(0.25

)

 

Cash dividends declared per common share

 

 

 

0.20

 

 

 

 

0.20

 

 

 

 

0.04

 

 

 

 

0.04

 

 

 

 

-

 

Book value per common share

 

 

 

9.39

 

 

 

 

8.93

 

 

 

 

9.09

 

 

 

 

9.28

 

 

 

 

9.05

 

Closing price of common stock per share:

 

 

 

 

 

 

 

 

 

 

High

 

 

 

13.91

 

 

 

 

12.55

 

 

 

 

10.89

 

 

 

 

12.53

 

 

 

 

14.83

 

Low

 

 

 

11.18

 

 

 

 

9.72

 

 

 

 

7.55

 

 

 

 

5.63

 

 

 

 

9.24

 

Year-end

 

 

 

13.58

 

 

 

 

11.65

 

 

 

 

9.91

 

 

 

 

8.00

 

 

 

 

11.78

 

Cash dividends per common share/year-end closing price

 

 

 

1.5

%

 

 

 

 

1.7

%

 

 

 

 

0.4

%

 

 

 

 

0.5

%

 

 

 

 

N/A

 

Cash dividends per common share/diluted earnings per common share

 

 

 

22.2

%

 

 

 

 

200.0

%

 

 

 

 

(36.4

)%

 

 

 

 

8.0

%

 

 

 

 

N/A

 

Compound stock dividend rate declared per share

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

6.3601

%

 

Price/earnings ratio

 

 

 

15.1

x

 

 

 

 

116.5

x

 

 

 

 

NM

 

 

 

 

16.0

x

 

 

 

 

NM

 

Market capitalization

 

 

$

 

3,180.7

 

 

 

$

 

2,753.7

 

 

 

$

 

2,414.1

 

 

 

$

 

2,059.7

 

 

 

$

 

3,102.5

 

Average shares (thousands)

 

 

 

234,997

 

 

 

 

237,972

 

 

 

 

248,349

 

 

 

 

260,574

 

 

 

 

235,699

 

Average diluted shares (thousands)

 

 

 

236,735

 

 

 

 

239,794

 

 

 

 

248,349

 

 

 

 

262,861

 

 

 

 

235,699

 

Period-end shares outstanding (thousands)

 

 

 

234,220

 

 

 

 

236,370

 

 

 

 

243,598

 

 

 

 

257,468

 

 

 

 

263,366

 

Volume of shares traded (thousands)

 

 

 

592,399

 

 

 

 

787,295

 

 

 

 

1,221,242

 

 

 

 

1,049,982

 

 

 

 

1,009,113

 

 

Selected Average Balances

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

$

 

23,999.0

 

 

 

$

 

24,409.7

 

 

 

$

 

25,053.3

 

 

 

$

 

24,719.6

 

 

 

$

 

25,659.8

 

Total loans, net of unearned income

 

 

 

15,521.0

 

 

 

 

15,726.4

 

 

 

 

16,205.4

 

 

 

 

16,056.8

 

 

 

 

17,131.8

 

Securities available-for-sale

 

 

 

3,548.4

 

 

 

 

3,180.4

 

 

 

 

3,145.5

 

 

 

 

3,182.9

 

 

 

 

2,650.9

 

Earning assets

 

 

 

21,825.2

 

 

 

 

21,772.0

 

 

 

 

22,224.8

 

 

 

 

21,959.1

 

 

 

 

22,960.2

 

Total deposits

 

 

 

16,401.7

 

 

 

 

16,340.2

 

 

 

 

16,212.0

 

 

 

 

15,527.0

 

 

 

 

15,204.3

 

Total term borrowings

 

 

 

1,592.9

 

 

 

 

1,944.7

 

 

 

 

2,326.8

 

 

 

 

2,582.6

 

 

 

 

2,915.1

 

Common equity

 

 

 

2,211.7

 

 

 

 

2,146.8

 

 

 

 

2,312.6

 

 

 

 

2,409.9

 

 

 

 

2,211.6

 

Total equity

 

 

 

2,602.7

 

 

 

 

2,529.9

 

 

 

 

2,607.8

 

 

 

 

2,705.1

 

 

 

 

3,292.0

 

 

Selected Period-End Balances

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

$

 

25,672.9

 

 

 

$

 

23,789.8

 

 

 

$

 

25,334.0

 

 

 

$

 

24,710.6

 

 

 

$

 

24,683.4

 

Total loans, net of unearned income

 

 

 

16,230.2

 

 

 

 

15,389.1

 

 

 

 

16,708.6

 

 

 

 

16,397.1

 

 

 

 

16,782.6

 

Securities available-for-sale

 

 

 

3,556.6

 

 

 

 

3,398.5

 

 

 

 

3,061.8

 

 

 

 

3,066.3

 

 

 

 

3,031.9

 

Earning assets

 

 

 

23,470.9

 

 

 

 

21,168.4

 

 

 

 

22,424.8

 

 

 

 

21,762.0

 

 

 

 

21,901.7

 

Total deposits

 

 

 

18,068.9

 

 

 

 

16,735.0

 

 

 

 

16,629.7

 

 

 

 

16,213.0

 

 

 

 

15,208.2

 

Total term borrowings

 

 

 

1,880.1

 

 

 

 

1,739.9

 

 

 

 

2,226.5

 

 

 

 

2,481.7

 

 

 

 

3,228.1

 

Common equity

 

 

 

2,199.9

 

 

 

 

2,109.7

 

 

 

 

2,214.0

 

 

 

 

2,389.5

 

 

 

 

2,382.8

 

Total equity

 

 

 

2,591.0

 

 

 

 

2,500.8

 

 

 

 

2,509.2

 

 

 

 

2,684.6

 

 

 

 

2,678.0

 

 

Selected Ratios

 

 

 

 

 

 

 

 

 

 

Return on average common equity (a)

 

 

 

9.65

%

 

 

 

 

1.11

%

 

 

 

 

(1.20

)%

 

 

 

 

5.44

%

 

 

 

 

(2.61

)%

 

Return on average assets (b)

 

 

 

0.96

 

 

 

 

0.17

 

 

 

 

(0.07

)

 

 

 

 

0.58

 

 

 

 

0.24

 

Net interest margin (c) (d)

 

 

 

2.92

 

 

 

 

2.96

 

 

 

 

3.13

 

 

 

 

3.22

 

 

 

 

3.20

 

Allowance for loan and lease losses to loans

 

 

 

1.43

 

 

 

 

1.65

 

 

 

 

1.66

 

 

 

 

2.34

 

 

 

 

3.96

 

Net charge-offs to average loans

 

 

 

0.31

 

 

 

 

0.50

 

 

 

 

1.14

 

 

 

 

2.02

 

 

 

 

3.07

 

Total period-end equity to period-end assets

 

 

 

10.09

 

 

 

 

10.51

 

 

 

 

9.90

 

 

 

 

10.86

 

 

 

 

10.85

 

Tangible common equity to tangible assets (d)

 

 

 

7.94

 

 

 

 

8.24

 

 

 

 

8.17

 

 

 

 

9.08

 

 

 

 

8.93

 

 

N/A - not applicable
NM - not meaningful

See accompanying notes to consolidated financial statements.

 

(a)

 

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

 

(b)

 

Calculated using net income divided by average assets.

 

(c)

 

Net interest margin is computed using total net interest income adjusted to a FTE basis assuming a statutory federal income tax rate of 35 percent and, where applicable, state income taxes.

 

(d)

 

Represents a non-GAAP measure. Refer to table 31 for the non-GAAP to GAAP reconciliation.

2

FIRST HORIZON NATIONAL CORPORATION


 

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

GENERAL INFORMATION

First Horizon National Corporation (“FHN”) began as a community bank chartered in 1864 and as of December 31, 2014, was one of the 40 largest publicly traded banking organizations in the United States in terms of asset size.

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

FHN is composed of the following operating segments:

 

 

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

 

 

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

 

 

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

 

 

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

On May 27, 2014, First Tennessee Bank National Association (“FTBNA”), a subsidiary of FHN, entered into an agreement to purchase thirteen bank branches in Middle and East Tennessee. The purchase of the branches closed on October 17, 2014. The fair value of the acquired assets totaled $437.6 million, including $413.4 million in cash, $7.5 million in fixed assets, and $15.7 million of goodwill and intangible assets. FTBNA also assumed $437.2 million of deposits associated with these branches. FTBNA paid a deposit premium of 3.32 percent and 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. On December 16, 2014 the parties signed an amendment to the merger agreement. In the transaction, approximately 75 percent of the shares of TrustAtlantic Financial will be converted into shares of FHN common stock at an exchange ratio of 1.3261 FHN shares for each TrustAtlantic Financial share, and approximately 25 percent of the shares of TrustAtlantic Financial will be converted into cash. The aggregate transaction value was estimated to be approximately $85 million (inclusive of TrustAtlantic warrants that FHN is assuming will be exercised and converted into TrustAtlantic shares before the transaction closes), based on FHN’s common stock value of $12.82 at the time the amended agreement was signed. At December 31, 2014, TrustAtlantic Financial reported on a consolidated basis, approximately $469 million of total assets and approximately $411 million of total deposits. 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.

3

FIRST HORIZON NATIONAL CORPORATION


 

On June 7, 2013, FTBNA, acquired substantially all of the assets and assumed substantially all of the liabilities of Mountain National Bank (“MNB”) from the Federal Deposit Insurance Corporation (“FDIC”), as receiver. The fair value of the acquired assets totaled $424.4 million, including $215.9 million in loans. FHN assumed $364.1 million of MNB deposits. Refer to Note 2 – Acquisitions and Divestitures for additional information.

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

Non-GAAP Measures

Certain ratios are included in the narrative and tables in MD&A that are non-GAAP, meaning they are not presented in accordance with generally accepted accounting principles (“GAAP”) in the U.S. FHN’s management believes such measures are relevant to understanding the capital position and results of the company. The non-GAAP ratios presented in this filing are tangible common equity to tangible assets, adjusted tangible common equity to risk weighted assets, and the tier 1 common capital ratio. These measures are reported to FHN’s management and board of directors through various internal reports. Additionally, disclosure of the non-GAAP capital ratios provide a meaningful base for comparability to other financial institutions as several of these ratios have become an important measure of the capital strength of banks as demonstrated by their use by banking regulators in reviewing capital adequacy of financial institutions. Non-GAAP measures are not formally defined by GAAP or codified in currently effective federal banking regulations, and other entities may use calculation methods that differ from those used by FHN. Tier 1 Capital is a regulatory term and is generally defined as the sum of core capital (including common equity and certain instruments that cannot be redeemed at the option of the holder) adjusted for certain items under risk-based capital regulations. Risk-weighted assets is a regulatory term which includes total assets adjusted for credit and market risk and is used to determine regulatory capital ratios. Refer to Table 31 for a reconciliation of non-GAAP to GAAP measures and presentation of the most comparable GAAP items.

FORWARD-LOOKING STATEMENTS

This MD&A contains forward-looking statements with respect to FHN’s beliefs, plans, goals, expectations, and estimates. Forward-looking statements are statements that are not a representation of historical information but rather are related to future operations, strategies, financial results, or other developments. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “should,” “is likely,” “will,” “going forward,” and other expressions that indicate future events and trends identify forward-looking statements. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond FHN’s control, and many of which, with respect to future business decisions and actions (including acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors, global, general and local economic and business conditions, including economic recession or depression; the pace, consistency, and extent of recovery of values and activity in the residential housing and commercial real estate markets; potential requirements for FHN to repurchase, or compensate for losses from, previously sold or securitized mortgages or securities based on such mortgages; potential claims relating to the foreclosure process; potential claims relating to participation in government programs, especially lending or other financial services programs; expectations of and actual timing and amount of interest rate movements, including the slope and shape of the yield curve, which can have a significant impact on a financial services institution; market and monetary fluctuations, including fluctuations in mortgage markets; inflation or deflation; customer, investor, regulatory, and legislative responses to any or all of these conditions; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geopolitical developments including possible terrorist activity; natural disasters; effectiveness and cost-efficiency of FHN’s hedging practices; technological changes; fraud, theft, or other incursions through conventional, electronic, or other means affecting FHN directly or affecting its customers, business counterparties or competitors; demand for FHN’s product offerings; new products and services in the industries in which FHN operates; the increasing use of new technologies to interact with customers and others; and critical accounting estimates. Other factors are those inherent in originating, selling, servicing, and holding loans and loan-based assets, including prepayment risks, pricing concessions, fluctuation in U.S. housing and

4

FIRST HORIZON NATIONAL CORPORATION


 

other real estate prices, fluctuation of collateral values, and changes in customer profiles. Additionally, the actions of the Securities and Exchange Commission (“SEC”), the Financial Accounting Standards Board (“FASB”), the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”), Financial Industry Regulatory Authority (“FINRA”), the Municipal Securities Rulemaking Board (“MSRB”), the Consumer Financial Protection Bureau (“CFPB”), the Financial Stability Oversight Council (“Council”), and other regulators and agencies; pending, threatened, or possible future regulatory, administrative, and judicial outcomes, actions, and proceedings; changes in laws and regulations applicable to FHN; and FHN’s success in executing its business plans and strategies and managing the risks involved in the foregoing, could cause actual results to differ, perhaps materially, from those contemplated by the forward-looking statements. FHN assumes no obligation to update or revise, whether as a result of new information, future events, or otherwise, any forward-looking statements that are made in the Annual Report to shareholders for the period ended December 31, 2014 of which this MD&A is a part, or otherwise from time to time. Actual results could differ and expectations could change, possibly materially, because of one or more factors, including those presented in this Forward-Looking Statements section, in other sections of this MD&A, in other parts of the Annual Report, in the annual report on Form 10-K to which the Annual Report is an exhibit, in other exhibits to the Form 10-K, and in documents incorporated into the Form 10-K.

FINANCIAL SUMMARY – 2014 COMPARED TO 2013

FHN reported net income available to common shareholders of $213.3 million or $.90 per diluted share in 2014 compared to $23.8 million or $.10 per diluted share in 2013. The increase in FHN’s net income in 2014 was the result of lower expenses and a decline in the provision for loan losses which more than offset a decline in revenue. Reported earnings are directly and significantly affected by a number of factors including strategic transactions and initiatives expected to boost growth and profitability occurring in both 2014 and 2013, the completion of transactions that expedited the wind-down of legacy businesses, and the economic environment.

FHN executed on strategic initiatives in 2014 including continued expense reductions throughout the organization, a bank-wide focus on economically profitable products, services, and customers, and investing in growth areas like Middle Tennessee, the Carolinas, Houston and FHN’s wealth management business. FHN strengthened its market share in middle and eastern Tennessee through the acquisition of 13 bank branches which added approximately $440 million in deposits. In fourth quarter, FHN announced the execution of an agreement to acquire TrustAtlantic Financial located in North Carolina which is expected to close in the first half of 2015.

As it relates to further winding down legacy businesses, in 2014 FHN sold approximately $315 million in UPB of held-for-sale (“HFS”) mortgage loans, resulting in the recognition of $39.7 million of gains, primarily due to positive fair value adjustments, that were recorded in mortgage banking income. FHN also completed sales of mortgage servicing rights (“MSR”) that were initiated in late 2013. As a result, FHN recognized approximately $20 million of previously unrecognized servicing fees in conjunction with mortgage servicing sales in 2014 and significantly reduced the balance of MSR from a year ago. FHN also made significant strides on certain legal matters in 2014 including settlements with Federal Home Loan Mortgage Corporation (“FHLMC”, “Freddie Mac”, or “Freddie”) and Federal Housing Finance Agency (“FHFA”) and moving forward with other matters which resulted in $110.9 million in pre-tax loss accruals. During 2014, FHN recognized $75.0 million in expense reversals related to agreements reached with insurance companies for the recovery of expenses FHN incurred in prior years related to legal matters.

Expenses in 2013 included $170.0 million of repurchase and foreclosure provision as result of obtaining new information after reaching definitive resolution agreements (“DRA”) with two GSE’s. In late 2013, FHN reached a DRA with the Federal National Mortgage Association (“FNMA”, “Fannie Mae”, or “Fannie”) resolving certain selling representation and warranty repurchase obligations associated with loans originated from 2000 to 2008 excluding certain loans that FHN no longer serviced at the time of the DRA. The 2013 charges included consideration of the February 2014 DRA with Freddie Mac. In 2014, FHN reversed $4.3 million of repurchase and foreclosure provision in conjunction with certain repurchase claims.

The economy continued to show signs of improvement during 2014 although the operating environment for the industry remained challenging. The competitive landscape remained tough as there was considerable competition

5

FIRST HORIZON NATIONAL CORPORATION


 

for creditworthy borrowers. Despite the challenging operating environment, both average loans and core deposits within the regional bank grew during 2014, mitigating the impact of the wind-down of the non-strategic loan portfolios. Because of the uneven improvement of economic conditions, the Federal Reserve remained cautious during 2014 and held interest rates at historically low levels. The low interest rates and uncertainty around Fed policy put pressure on FHN’s net interest income (“NII”) and the net interest margin and also muted activity of Capital Markets’ customers. The net interest margin was 2.92 percent in 2014 compared to 2.96 percent in 2013. NII also declined in 2014 with lower interest income and little opportunity to further reduce deposit rates.

Capital markets’ results, while lower in 2014 relative to 2013, continued to contribute to FHN’s overall fee income in 2014 with fixed income average daily revenue of $.7 million compared to $.9 million in 2013. Expenses within Capital Markets were down because of lower variable compensation costs as well as a $47.1 million expense reversal related to agreements reached with insurance companies for litigation losses and legal fees associated with a lawsuit FHN settled in 2011 involving the bankruptcy trustee for Sentinel Management Group Inc.

Capital remained strong during 2014 while FHN continued returning capital to shareholders and prepared for more stringent capital requirements with the BASEL III rule phase-in beginning for FHN in 2015. Quarterly dividends in 2014 were consistent with 2013 at $.05 per share although FHN recently announced an increase of the quarterly cash dividend to $.06 per share. Shares repurchased under the 2014 share repurchase program were approximately $38 million compared to share repurchases of approximately $88 million in 2013 repurchased under an earlier share repurchase program that was terminated in January 2014.

FHN saw consistent progress in asset quality trends during 2014, as modestly improved market conditions and a focus on relationship-oriented loans led to loan growth within the regional bank replacing run-off of the higher-risk non-strategic loan balances. The allowance for loan losses declined 8 percent in 2014, driven by management’s proactive approach to managing asset quality as well as borrowers adapting to the current operating environment and a modestly improved economic environment. Additionally, loan loss provisioning and net charge-offs declined 51 percent and 38 percent, respectively, year-over-year.

Return on average common equity and return on average assets for 2014 were 9.65 percent and .96 percent, respectively, compared to 1.11 percent and .17 percent in 2013. The tangible common equity to tangible assets ratio was 7.94 percent in 2014 compared to 8.24 percent in 2013. Total capital and Tier 1 ratios were 16.18 percent and 14.46 percent, respectively on December 31, 2014, compared to 16.23 percent and 13.87 percent, respectively on December 31, 2013. Total period-end assets were $25.7 billion on December 31, 2014, an 8 percent increase from $23.8 billion on December 31, 2013. Total period- end equity was $2.6 billion and $2.5 billion as of December 31, 2014 and 2013, respectively.

BUSINESS LINE REVIEW – 2014 COMPARED TO 2013

Regional Banking

Pre-tax income within the regional banking segment was $286.7 million during 2014 compared to $288.8 million in 2013.

Total revenue increased 2 percent from $839.0 million in 2013 to $856.8 million in 2014, driven by an increase in both NII and fee income. In 2014 NII was $602.1 million compared to $591.3 million in 2013. The increase in NII was primarily because of improved deposit pricing compared to 2013. Noninterest income increased to $254.7 million in 2014 from $247.7 million in 2013. The increase in noninterest income was primarily driven by a 16 percent increase in wealth management income, a 17 percent increase in bankcard income, and a 5 percent increase in trust fee income in 2014 compared to 2013. Wealth management income increased to $49.1 million in 2014 from $42.3 million in 2013 driven by FHN’s strategic focus on growing these businesses with new products and offerings, an expanded sales force, and a refined advisory team strategy. Bankcard income increased largely due to $2.8 million of Visa volume incentives recognized in 2014 and the increase in trust fee income was primarily due to improved market conditions and strong new account activity. These increases were somewhat offset by deposit fee income which decreased from $110.7 million in 2013 to $108.3 million in 2014 primarily due to lower cash management fees on commercial deposit products and overall lower managed balances.

6

FIRST HORIZON NATIONAL CORPORATION


 

Provision expense during 2014 was $29.2 million compared to $18.5 million in 2013. The increase was partially driven by the consumer credit card portfolio as a result of trends in delinquencies, net charge-offs, and certain asset quality ratios for the smaller balance portion of the portfolio. Additionally, provision expense associated with the commercial portfolios increased to $3.4 million compared to a provision credit of $2.1 million in 2013.

Noninterest expense was $540.8 million in 2014 compared to $531.8 million in 2013. The increase in expense was largely attributable to wealth management incentives and strategic hires and retention in growth markets, as well as increases in contract employment, professional fees, and computer software expenses due to a FHN’s focus on technology-related projects in 2014. These increases in noninterest expense were partially offset by lower FDIC premium costs, a reduction in allocated personnel expenses, as well as a reduction in advertising and public relations expense compared to 2013 due to branding initiatives last year associated with FTB Advisors.

Capital Markets

Pre-tax income in the capital markets segment was $68.6 million during 2014 compared to $52.2 million in 2013. Fixed income revenue was $170.3 million 2014, down from $231.9 million in 2013, as average daily revenue (“ADR”) decreased from $.9 million in 2013 to $.7 million in 2014. The decline in fixed income revenue reflects less favorable market conditions in 2014 relative to the prior year, as ADR levels continue to be muted due to low rates, low market volatility and uncertainty around the Fed’s monetary policy. Other product revenue decreased to $32.4 million in 2014 from $36.6 million in 2013. The decline in other product revenue is largely because of a decrease in revenues from derivative sales and loan trading and related activities. Noninterest expense was $146.8 million in 2014 compared to $232.4 million in 2013. In second quarter 2014, FHN recognized $47.1 million in expense reversals related to agreements reached with insurance companies for litigation losses and legal fees associated with a lawsuit FHN settled in 2011 involving the bankruptcy trustee for Sentinel Management Group Inc. Of this amount $38.6 million was recorded as a reduction to losses from litigation and regulatory matters and $8.5 million was recorded as a reduction to legal and professional fees. In addition to the Sentinel-related expense reversals, lower variable compensation expenses, as a result of lower fixed income revenues in 2014, also contributed to the reduction in noninterest expense in 2014.

Corporate

The pre-tax loss for the corporate segment was $97.6 million in 2014 compared to $95.3 million in 2013. Net interest expense increased $8.0 million in 2014 due to the effect of the third quarter loan sale on funds transfer pricing (“FTP”) and the issuance of $400 million of senior notes, partially offset by a larger average available-for-sale (“AFS”) securities portfolio in 2014 relative to 2013. Noninterest income (including securities gain/losses) increased from $26.1 million in 2013 to $27.0 million in 2014. The increase in noninterest income was driven by a $5.6 million gain associated with the sale of a cost method investment in 2014, partially offset by lower deferred compensation income from a year ago. 2013 included $1.7 million of net gains primarily associated with the sale of a cost method investment.

Noninterest expense decreased $4.8 million to $70.5 million in 2014 from $75.3 million in 2013. The decline in noninterest expense was largely driven by a decline in severance-related costs, deferred compensation expenses, and salaries. Expenses associated with tax credit investments and professional fees associated with various consulting projects also declined from a year ago. These declines were partially offset by an efficiency-related lease abandonment expense of $4.7 million recognized in 2014, a $4.0 million net increase in negative valuation adjustments related to Visa-related derivatives relative to 2013, and elevated advertising costs related to FTBNA’s 150th anniversary celebration campaign.

Non-Strategic

The non-strategic segment had pre-tax income of $51.8 million in 2014 compared to a pre-tax loss of $237.3 million in 2013. A significant decline in expenses, including provision for loan losses, coupled with an increase in fee income contributed to the year-over-year improved results.

Total revenue was $132.7 million and $118.4 million in 2014 and 2013, respectively, with NII declining 12 percent to $67.1 million in 2014 from $76.0 million in 2013, consistent with the run-off of the non-strategic loan portfolios.

7

FIRST HORIZON NATIONAL CORPORATION


 

Noninterest income (including securities gains/losses) was $65.7 million in 2014 compared to $42.4 million in 2013. Mortgage banking income, the primary component of fee income within non-strategic, was $71.3 million in 2014, compared to $33.1 million in 2013. This increase was largely driven by a $39.7 million valuation gain recognized in 2014 as a result of the sale of approximately $315 million in unpaid principal balance of mortgage loans held-for-sale and $12.1 million of favorable valuation adjustments on loans primarily because of the loan sale, partially offset by a decline in servicing income. In 2013, FHN signed a definitive agreement to sell substantially all remaining legacy mortgage servicing, and as a result servicing income declined in 2014 from the prior year. Servicing fees were $21.1 million in 2014, down $20.8 million from $41.9 million in 2013, and primarily comprised of approximately $20.0 million in previously unrecognized servicing fees recognized in conjunction with transfers of servicing in first quarter 2014. The negative impact of runoff on the value of MSR was not material in 2014 compared with $20.9 million in 2013. Additionally net hedging results were not material in 2014 compared to positive $18.1 million in 2013. Hedging results in 2013 reflect the terms of the agreement to sell servicing. Mortgage banking income in 2013 also includes $4.4 million of negative valuation adjustments.

Other noninterest income in 2014 compared to 2013 was negatively affected by a number of transactions including a $4.2 million loss on the extinguishment of debt associated with the collapse of two HELOC securitization trusts, a $2.0 million loss on the deconsolidation of a securitization trust, and $3.0 million in securities losses. Additionally, 2013 included $3.5 million of gains from the reversals of previously established lower of cost or market (“LOCOM”) adjustments associated with trust preferred (“TRUP”) loan payoffs.

The provision for loan losses within the non-strategic segment was a provision credit of $2.2 million in 2014 compared to a provision expense of $36.5 million in 2013. The decline in provision for loan losses was the result of improvement in and runoff of the consumer real estate portfolio, as well as improvement in the C&I portfolio due to dispositions and payoffs of a number of trust preferred (TRUP) loans that were on interest deferral in prior periods.

Noninterest expense declined 74 percent to $83.1 million in 2014 from $319.1 million in 2013, primarily because of significantly lower repurchase and foreclosure provision and a decline in loss accruals related to legal matters. 2013 included $170.0 million of repurchase and foreclosure provision stemming from the resolution of certain legacy representation and warranty mortgage loan repurchase obligations to GSEs. In 2014, $4.3 million of repurchase and foreclosure provision was reversed because of a settlement of certain repurchase claims. Loss accruals related to litigation matters were $110.4 million in 2014, but were somewhat offset by $75.0 million of expense reversals associated with agreements with insurance companies for the recovery of expenses FHN incurred related to litigation losses and expenses in prior periods. Loss accruals related to litigation matters were $63.3 million in 2013. Contract employment, which primarily includes mortgage subservicing costs, declined $22.3 million to $3.9 million in 2014 as a result of the mortgage servicing sales mentioned above. Generally, most other expense categories declined given the continued wind-down of the legacy businesses.

INCOME STATEMENT REVIEW

Total consolidated revenue decreased $44.2 million to $1.2 billion in 2014, due in large part to declines in capital markets fixed income sales revenue and net interest income, but partially mitigated by increases in mortgage banking income. Total expenses declined 27 percent to $841.2 million in 2014 from $1.2 billion in 2013 primarily driven by declines in the mortgage repurchase provision, litigation loss accruals, and personnel expenses. In 2013, total consolidated revenue was $1.2 billion, down 10 percent from $1.4 billion in 2012, largely driven by lower capital markets fixed income sales revenue, net interest income, and mortgage banking income. Total expenses in 2013 were $1.2 billion compared to $1.4 billion in 2012. The decrease in expenses was driven by a decline in the mortgage repurchase provision and lower personnel expenses in 2013 relative to 2012.

NET INTEREST INCOME

Net interest income was $627.7 million in 2014, a 2 percent decline from $637.4 million in 2013. As detailed in Table 2 – Analysis of Changes in Net Interest Income, the decrease in NII was primarily attributable to continued run-off of the non-strategic loan portfolios, lower yielding commercial loans, and lower balances of loans to mortgage companies, somewhat mitigated by commercial loan growth, improved deposit pricing, and a larger

8

FIRST HORIZON NATIONAL CORPORATION


 

securities portfolio. Average earning assets were $21.8 billion in 2014 and 2013 as continued run-off on the non-strategic loan portfolios and the resolution of several on-balance sheet structures were offset by loan growth within the regional bank and an increase in the investment securities portfolio.

For purposes of computing yields and the net interest margin, FHN adjusts net interest income to reflect tax exempt income on an equivalent pre-tax basis which provides comparability of net interest income arising from both taxable and tax-exempt sources. The consolidated net interest margin decreased to 2.92 percent in 2014 from 2.96 percent in 2013. The net interest spread was 2.78 percent in 2014, down 5 basis points from 2.83 percent in 2013 and the impact of free funding was 14 basis points in 2014 up from 13 basis points in 2013. The decrease in NIM was driven by lower yielding commercial loans and run- off of the non-strategic loan portfolios, partially offset by declining funding costs.

Net interest income was $637.4 million in 2013, down 7 percent from $688.7 million in 2012, primarily attributable to run-off of the non-strategic loan portfolio, lower yielding fixed rate loans, and a lower yielding securities portfolio, somewhat mitigated by improved deposit pricing. In 2013, average earning assets decreased 3 percent to $24.4 billion from $25.1 billion due to run-off in the non-strategic loan portfolios, but somewhat mitigated by loan growth within the regional bank. The consolidated net interest margin was 2.96 percent in 2013 compared to 3.13 percent in 2012. The decline in NIM in 2013 compared to 2012 was primarily driven by declining yields on the investment portfolio, lower yielding fixed rate loans, run-off of the non-strategic loan portfolios, and a decline in loans to mortgage companies, partially offset by improved pricing on deposits.

The activity levels and related funding for FHN’s capital markets activities affect the net interest margin. Capital markets activities tend to compress the margin, especially when there are elevated levels of trading inventory, because of the strategy to reduce market risk by economically hedging a portion of its inventory on the balance sheet. As a result, FHN’s consolidated margin cannot be readily compared to that of other bank holding companies. Table 1 details the computation of the net interest margin for FHN for the past three years.

9

FIRST HORIZON NATIONAL CORPORATION


 

Table 1   Net Interest Margin

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

 

Assets:

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

Loans, net of unearned income:

 

 

 

 

 

 

Commercial loans

 

 

 

3.56

%

 

 

 

 

3.68

%

 

 

 

 

3.86

%

 

Retail loans

 

 

 

4.01

 

 

 

 

4.10

 

 

 

 

4.28

 

 

Total loans, net of unearned income

 

 

 

3.74

 

 

 

 

3.86

 

 

 

 

4.04

 

 

Loans held-for-sale

 

 

 

3.77

 

 

 

 

3.40

 

 

 

 

3.58

 

Investment securities:

 

 

 

 

 

 

U.S. treasuries

 

 

 

0.06

 

 

 

 

0.08

 

 

 

 

0.30

 

U.S. government agencies

 

 

 

2.57

 

 

 

 

2.56

 

 

 

 

3.10

 

States and municipalities (a)

 

 

 

2.72

 

 

 

 

0.59

 

 

 

 

1.17

 

Other

 

 

 

4.23

 

 

 

 

4.19

 

 

 

 

4.30

 

 

Total investment securities

 

 

 

2.64

 

 

 

 

2.64

 

 

 

 

3.13

 

 

Capital markets securities inventory

 

 

 

2.89

 

 

 

 

2.71

 

 

 

 

2.67

 

Mortgage banking trading securities

 

 

 

9.09

 

 

 

 

10.25

 

 

 

 

10.62

 

Other earning assets:

 

 

 

 

 

 

Federal funds sold

 

 

 

1.00

 

 

 

 

1.00

 

 

 

 

1.01

 

Securities purchased under agreements to resell (b)

 

 

 

(0.15

)

 

 

 

 

(0.06

)

 

 

 

 

0.04

 

Interest bearing cash

 

 

 

0.22

 

 

 

 

0.22

 

 

 

 

0.22

 

 

Total other earning assets

 

 

 

0.06

 

 

 

 

0.08

 

 

 

 

0.14

 

 

Interest income / total earning assets

 

 

 

3.29

%

 

 

 

 

3.40

%

 

 

 

 

3.63

%

 

 

Liabilities:

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

Savings

 

 

 

0.18

%

 

 

 

 

0.22

%

 

 

 

 

0.31

%

 

Other interest-bearing deposits

 

 

 

0.08

 

 

 

 

0.10

 

 

 

 

0.17

 

Time deposits

 

 

 

1.07

 

 

 

 

1.59

 

 

 

 

1.93

 

 

Total interest-bearing core deposits

 

 

 

0.21

 

 

 

 

0.31

 

 

 

 

0.43

 

 

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

 

 

 

0.63

 

 

 

 

1.01

 

 

 

 

1.37

 

 

Federal funds purchased

 

 

 

0.25

 

 

 

 

0.25

 

 

 

 

0.25

 

Securities sold under agreements to repurchase

 

 

 

0.08

 

 

 

 

0.14

 

 

 

 

0.18

 

Capital markets trading liabilities

 

 

 

2.43

 

 

 

 

2.05

 

 

 

 

1.77

 

Other short-term borrowings

 

 

 

0.30

 

 

 

 

0.27

 

 

 

 

0.15

 

Term borrowings

 

 

 

2.17

 

 

 

 

1.87

 

 

 

 

1.69

 

 

Interest expense / total interest-bearing liabilities

 

 

 

0.51

 

 

 

 

0.57

 

 

 

 

0.66

 

 

Net interest spread

 

 

 

2.78

%

 

 

 

 

2.83

%

 

 

 

 

2.97

%

 

Effect of interest-free sources used to fund earning assets

 

 

 

0.14

 

 

 

 

0.13

 

 

 

 

0.16

 

 

Net interest margin (d)

 

 

 

2.92

%

 

 

 

 

2.96

%

 

 

 

 

3.13

%

 

 

 

(a)

 

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

 

(b)

 

2014 and 2013 driven by negative market rates on reverse repurchase agreements.

 

(c)

 

2014 rate includes the effect of amortizing the valuation adjustment for acquired time deposits related to the branch and MNB acquisitions.

 

(d)

 

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

FHN’s net interest margin is expected to remain under pressure during 2015 due to declining loan yields from historically low interest rates and competitive pricing dynamics. Additionally, changes to the balance sheet mix associated with interest-bearing cash, deposit balances, and trading inventory balances could also affect NIM, especially during the first half of 2015. NIM pressure could be mitigated if interest rates rise in the latter half of 2015.

10

FIRST HORIZON NATIONAL CORPORATION


 

Table 2   Analysis of Changes in Net Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

2013 Compared to 2012
Increase / (Decrease) Due to (a)

 

Rate (b)

 

Volume (b)

 

Total

 

Rate (b)

 

Volume (b)

 

Total

 

Interest income – FTE:

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

$

 

(18,528

)

 

 

 

$

 

(7,853

)

 

 

 

$

 

(26,381

)

 

 

 

$

 

(28,282

)

 

 

 

$

 

(19,702

)

 

 

 

$

 

(47,984

)

 

Loans held-for-sale

 

 

 

1,323

 

 

 

 

(3,135

)

 

 

 

 

(1,812

)

 

 

 

 

(700

)

 

 

 

 

(1,225

)

 

 

 

 

(1,925

)

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury

 

 

 

(6

)

 

 

 

 

(10

)

 

 

 

 

(16

)

 

 

 

 

(92

)

 

 

 

 

(2

)

 

 

 

 

(94

)

 

U.S. government agencies

 

 

 

35

 

 

 

 

10,640

 

 

 

 

10,675

 

 

 

 

(15,389

)

 

 

 

 

1,151

 

 

 

 

(14,238

)

 

States and municipalities

 

 

 

375

 

 

 

 

16

 

 

 

 

391

 

 

 

 

(93

)

 

 

 

 

(27

)

 

 

 

 

(120

)

 

Other

 

 

 

108

 

 

 

 

(1,290

)

 

 

 

 

(1,182

)

 

 

 

 

(248

)

 

 

 

 

(7

)

 

 

 

 

(255

)

 

 

   

 

 

   

 

 

Total investment securities

 

 

 

52

 

 

 

 

9,816

 

 

 

 

9,868

 

 

 

 

(15,769

)

 

 

 

 

1,062

 

 

 

 

(14,707

)

 

 

   

 

 

   

 

 

Capital markets securities inventory

 

 

 

2,133

 

 

 

 

(3,437

)

 

 

 

 

(1,304

)

 

 

 

 

527

 

 

 

 

(805

)

 

 

 

 

(278

)

 

Mortgage banking trading securities

 

 

 

(163

)

 

 

 

 

(842

)

 

 

 

 

(1,005

)

 

 

 

 

(72

)

 

 

 

 

(660

)

 

 

 

 

(732

)

 

Other earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

 

 

(2

)

 

 

 

 

41

 

 

 

 

39

 

 

 

 

(1

)

 

 

 

 

19

 

 

 

 

18

 

Securities purchased under agreements to resell

 

 

 

(579

)

 

 

 

 

4

 

 

 

 

(575

)

 

 

 

 

(672

)

 

 

 

 

25

 

 

 

 

(647

)

 

Interest-bearing deposits with other financial institutions

 

 

 

43

 

 

 

 

237

 

 

 

 

280

 

 

 

 

8

 

 

 

 

(32

)

 

 

 

 

(24

)

 

 

   

 

 

   

 

 

Total other earning assets

 

 

 

(336

)

 

 

 

 

80

 

 

 

 

(256

)

 

 

 

 

(734

)

 

 

 

 

81

 

 

 

 

(653

)

 

 

   

 

 

   

 

 

Total change in interest income – earning assets – FTE

 

 

$

 

(22,695

)

 

 

 

$

 

1,805

 

 

 

$

 

(20,890

)

 

 

 

$

 

(49,596

)

 

 

 

$

 

(16,683

)

 

 

 

$

 

(66,279

)

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

 

$

 

(3,011

)

 

 

 

$

 

(189

)

 

 

 

$

 

(3,200

)

 

 

 

$

 

(5,788

)

 

 

 

$

 

806

 

 

 

$

 

(4,982

)

 

Time deposits

 

 

 

(4,639

)

 

 

 

 

(2,164

)

 

 

 

 

(6,803

)

 

 

 

 

(3,564

)

 

 

 

 

(1,821

)

 

 

 

 

(5,385

)

 

Other interest-bearing deposits

 

 

 

(876

)

 

 

 

 

208

 

 

 

 

(668

)

 

 

 

 

(2,441

)

 

 

 

 

290

 

 

 

 

(2,151

)

 

 

   

 

 

   

 

 

Total interest-bearing core deposits

 

 

 

(10,580

)

 

 

 

 

(91

)

 

 

 

 

(10,671

)

 

 

 

 

(13,973

)

 

 

 

 

1,455

 

 

 

 

(12,518

)

 

 

   

 

 

   

 

 

Certificates of deposit $100,000 and more

 

 

 

(1,950

)

 

 

 

 

(602

)

 

 

 

 

(2,552

)

 

 

 

 

(2,071

)

 

 

 

 

(599

)

 

 

 

 

(2,670

)

 

Federal funds purchased

 

 

 

(13

)

 

 

 

 

(410

)

 

 

 

 

(423

)

 

 

 

 

7

 

 

 

 

(733

)

 

 

 

 

(726

)

 

Securities sold under agreements to repurchase

 

 

 

(251

)

 

 

 

 

(52

)

 

 

 

 

(303

)

 

 

 

 

(178

)

 

 

 

 

167

 

 

 

 

(11

)

 

Capital markets trading liabilities

 

 

 

2,429

 

 

 

 

(664

)

 

 

 

 

1,765

 

 

 

 

1,755

 

 

 

 

1,419

 

 

 

 

3,174

 

Other short-term borrowings

 

 

 

95

 

 

 

 

692

 

 

 

 

787

 

 

 

 

430

 

 

 

 

(274

)

 

 

 

 

156

 

Term borrowings

 

 

 

5,379

 

 

 

 

(7,129

)

 

 

 

 

(1,750

)

 

 

 

 

3,909

 

 

 

 

(6,922

)

 

 

 

 

(3,013

)

 

 

   

 

 

   

 

 

Total change in interest expense – interest-bearing liabilities

 

 

$

 

(10,636

)

 

 

 

$

 

(2,511

)

 

 

 

$

 

(13,147

)

 

 

 

$

 

(13,461

)

 

 

 

$

 

(2,147

)

 

 

 

$

 

(15,608

)

 

 

 

 

Net interest income – FTE

 

 

 

 

 

 

$

 

(7,743

)

 

 

 

 

 

 

 

$

 

(50,671

)

 

 

 

(a)

 

The changes in interest due to both rate and volume have been allocated to change due to rate and change due to volume in proportion to the absolute amounts of the changes in each.

 

(b)

 

Variances are computed on a line-by-line basis and are non-additive.

PROVISION FOR LOAN LOSSES

The provision for loan losses is the charge to earnings that management determines to be necessary to maintain the ALLL at a sufficient level reflecting management’s estimate of probable incurred losses in the loan portfolio. Analytical models based on loss experience subject to qualitative adjustment to reflect current events, trends, and conditions (including economic considerations and trends) are used by management to determine the amount of provision to be recognized and to assess the adequacy of the ALLL. The provision for loan losses was $27.0 million in 2014 compared to $55.0 million in 2013, and $78.0 million in 2012. In 2014 and 2013 FHN experienced continued overall improvement in the loan portfolio which resulted in declines of 8 percent in the allowance for loan losses (on a period end basis) each year. Additionally, net charge offs decreased 38 percent and 58 percent, respectively, during 2014 and 2013 relative to the prior years. In 2012, FHN recognized approximately $23 million of incremental loan loss provisioning related to charging down discharged bankruptcies to net realizable value. For additional information about general asset quality trends refer to Asset Quality – Trend Analysis of 2014 Compared to 2013 in this MD&A.

11

FIRST HORIZON NATIONAL CORPORATION


 

NONINTEREST INCOME

Noninterest income (including securities gains/(losses)) was $550.0 million in 2014 compared to $584.6 million in 2013 and $671.3 million in 2012. In 2014 noninterest income was 47 percent of total revenue compared to 48 percent and 49 percent in 2012 and 2013, respectively. The decrease in noninterest income in 2014 relative to 2013 largely resulted from a decrease in capital markets fixed income revenue partially offset by an increase in mortgage banking income. The decline in noninterest income in 2013 relative to 2012 was primarily due to decreases in capital markets fixed income revenue and mortgage banking income. FHN’s noninterest income for the last three years is provided in Table 3. The following discussion provides additional information about various line items reported in the following table.

Table 3   Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2014

 

2013

 

2012

 

Compound
Annual Growth
Rates

 

14/13

 

14/12

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

Capital markets

 

 

$

 

200,595

   

$272,364

 

 

$

 

334,912

 

 

 

 

(26

)%

 

 

 

 

(23

)%

 

Deposit transactions and cash management

 

 

 

111,951

 

 

 

 

114,383

 

 

 

 

120,168

 

 

 

 

(2

)%

 

 

 

 

(3

)%

 

Mortgage banking

 

 

 

71,257

 

 

 

 

33,275

 

 

 

 

51,890

 

 

 

 

NM

 

 

 

 

17

%

 

Brokerage, management fees and commissions

 

 

 

49,099

 

 

 

 

42,261

 

 

 

 

34,934

 

 

 

 

16

%

 

 

 

 

19

%

 

Trust services and investment management

 

 

 

27,777

 

 

 

 

26,523

 

 

 

 

24,319

 

 

 

 

5

%

 

 

 

 

7

%

 

Bankcard income

 

 

 

23,697

 

 

 

 

20,482

 

 

 

 

22,384

 

 

 

 

16

%

 

 

 

 

3

%

 

Bank-owned life insurance

 

 

 

16,394

 

 

 

 

16,614

 

 

 

 

18,805

 

 

 

 

(1

)%

 

 

 

 

(7

)%

 

Other service charges

 

 

 

11,882

 

 

 

 

13,440

 

 

 

 

12,935

 

 

 

 

(12

)%

 

 

 

 

(4

)%

 

Equity securities gains/(losses), net

 

 

 

2,872

 

 

 

 

2,211

 

 

 

 

365

 

 

 

 

30

%

 

 

 

 

NM

 

Insurance commissions

 

 

 

2,257

 

 

 

 

3,023

 

 

 

 

3,148

 

 

 

 

(25

)%

 

 

 

 

(15

)%

 

Debt securities gains/(losses), net

 

 

 

-

 

 

 

 

(451

)

 

 

 

 

328

 

 

 

 

NM

 

 

 

 

NM

 

Gain on divestitures

 

 

 

-

 

 

 

 

111

 

 

 

 

200

 

 

 

 

NM

 

 

 

 

NM

 

All other income and commissions:

 

 

 

 

 

 

 

 

 

 

ATM interchange fees

 

 

 

10,943

 

 

 

 

10,412

 

 

 

 

10,528

 

 

 

 

5

%

 

 

 

 

2

%

 

Electronic banking fees

 

 

 

6,190

 

 

 

 

6,289

 

 

 

 

6,537

 

 

 

 

(2

)%

 

 

 

 

(3

)%

 

Letter of credit fees

 

 

 

4,864

 

 

 

 

5,081

 

 

 

 

5,158

 

 

 

 

(4

)%

 

 

 

 

(3

)%

 

Deferred compensation (a)

 

 

 

2,042

 

 

 

 

4,685

 

 

 

 

4,461

 

 

 

 

(56

)%

 

 

 

 

(32

)%

 

Gain/(loss) on extinguishment of debt

 

 

 

(4,166

)

 

 

 

 

-

 

 

 

 

-

 

 

 

 

NM

 

 

 

 

NM

 

Other (b)

 

 

 

12,390

 

 

 

 

13,874

 

 

 

 

20,257

 

 

 

 

(11

)%

 

 

 

 

(22

)%

 

 

Total all other income and commissions

 

 

 

32,263

 

 

 

 

40,341

 

 

 

 

46,941

 

 

 

 

(20

)%

 

 

 

 

(17

)%

 

 

Total noninterest income

 

 

$

 

550,044

 

 

 

$

 

584,577

 

 

 

$

 

671,329

 

 

 

 

(6

)%

 

 

 

 

(9

)%

 

 

NM - not meaningful

 

(a)

 

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

 

(b)

 

2012 includes $3.4 million of gains on the sale of bank properties, a $2.3 million gain related to the resolution of a legal matter, and $1.0 million of interest associated with a tax refund.

Capital Markets Noninterest Income

The major component of capital markets income is generated from the purchase and sale of fixed income securities as both principal and agent. Other noninterest revenues consist principally of fees from loan sales, portfolio advisory, and derivative sales. Securities inventory positions are procured for distribution to customers by the sales staff. Capital markets noninterest income declined 26 percent in 2014 to $200.6 million in 2014 from $272.4 million in 2013, reflecting less favorable market conditions in 2014 relative to the prior year due to low rates, low market volatility and uncertainty around the Fed’s monetary policy. Other noninterest revenue decreased $10.2 million to $30.3 million in 2014. The decline in other noninterest revenue was largely due to $3.5 million of gains recognized in 2013 within the non-strategic segment from the reversal of previously established LOCOM valuation adjustments associated with TRUP loan payoffs, as well as decreases in revenues from derivative sales and loan trading and related activities in 2014 relative to 2013.

12

FIRST HORIZON NATIONAL CORPORATION


 

Capital markets noninterest income was $272.4 million in 2013 down from $334.9 million in 2012. Less favorable market conditions in 2013, relative to 2012, including market volatility, an increase in interest rates, and uncertainty surrounding potential actions of the Fed, contributed to a decline in revenue from fixed income sales. A portion of the decrease was partially offset by an increase in other noninterest revenue in 2013 relative to 2012, including the $3.5 million of gains associated with TRUP loan payoffs previously mentioned.

Table 4   Capital Markets Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2014

 

2013

 

2012

 

Compound
Annual Growth
Rates

 

14/13

 

14/12

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

Fixed income

 

 

$

 

170,317

 

 

 

$

 

231,853

 

 

 

$

 

307,559

 

 

 

 

(27

)%

 

 

 

 

(26

)%

 

Other noninterest revenue

 

 

 

30,278

 

 

 

 

40,511

 

 

 

 

27,353

 

 

 

 

(25

)%

 

 

 

 

5

%

 

 

Total capital markets noninterest income

 

 

$

 

200,595

 

 

 

$

 

272,364

 

 

 

$

 

334,912

 

 

 

 

(26

)%

 

 

 

 

(23

)%

 

 

Deposit Transactions and Cash Management

Fees from deposit transactions and cash management include services related to retail and commercial deposit products (such as service charges on checking accounts), cash management products and services such as electronic transaction processing (Automated Clearing House and Electronic Data Interchange), account reconciliation services, cash vault services, lockbox processing, and information reporting to large corporate clients. Deposit transactions and cash management income declined 2 percent to $112.0 million in 2014 from $114.4 million in 2013. The decrease was primarily the result of lower cash management fees on commercial deposit products due to price reductions and discounting resulting from increased market competitive price pressure and overall lower managed balances.

In 2013, deposit transactions and cash management income declined $5.8 million to $114.4 million from $120.2 million in 2012 largely due to lower non-sufficient funds (“NSF”) fee income which was driven by lower volume from a decrease in small balance deposit accounts, a refinement of sort order processes, and overall changes in consumer behavior.

Mortgage Banking Noninterest Income

Mortgage banking income has been primarily comprised of servicing income related to legacy mortgage banking operations and fair value adjustments to the mortgage warehouse. Prior to 2013, mortgage banking income also included fees from mortgage origination activity in the regional banking footprint. In third quarter 2013, FHN signed a definitive agreement to sell substantially all remaining legacy mortgage servicing, with the sales occurring primarily in fourth quarter 2013 and first quarter 2014 which resulted in substantially diminished fees from mortgage servicing. Mortgage banking income was $71.3 million in 2014 compared to $33.3 million and $51.9 million in 2013 and 2012, respectively.

The increase in mortgage banking income during 2014 relative to 2013 was primarily due to the $39.7 million gain on the sale of HFS mortgage loans in third quarter 2014, and in second quarter 2014, $8.2 million of positive fair value adjustments to the mortgage warehouse reflecting new information on market pricing for similar assets primarily related to the non-performing portion of the HFS portfolio. Servicing income, which includes fees for servicing mortgage loans, changes in the value of servicing assets, results of hedging servicing assets, and the negative impact of runoff on the value of MSR, historically was the largest component of mortgage banking income. Total servicing income was $20.8 million in 2014 from $39.1 million in 2013 because of lower servicing fees due to the 2013 and 2014 MSR sales. The decrease was partially offset by the receipt of approximately $20 million in previously unrecognized servicing fees in conjunction with servicing sales. During 2013, total servicing income was $39.1 million and was comprised of $41.9 million of servicing fees and $18.1 million of net hedging results, partially offset by $20.9 million of negative impact to the value of MSR that was attributable to runoff. Other mortgage banking income in 2014 included a $2.0 million loss associated with the deconsolidation of a

13

FIRST HORIZON NATIONAL CORPORATION


 

securitization trust. 2013 included a $2.2 million charge associated with estimated costs for obligations related to the agreement to sell mortgage servicing.

In 2013 total servicing income decreased to $39.1 million from $52.6 million in 2012, largely driven by a decline in servicing fees consistent with the mortgage servicing portfolio decline. Net hedging results were $18.1 million in 2013 and reflect the terms of the servicing sales agreement mentioned above, which more than offset more narrow spreads between swap and mortgage rates in 2013 relative to 2012. The negative impact to the value of MSR that is attributable to runoff was $20.9 million and $23.8 million in 2013 and 2012, respectively. Negative fair value adjustments to the mortgage warehouse were $4.4 million in 2013 compared to $3.1 million in 2012. The negative fair value adjustments in 2013 were primarily driven by higher interest rates on mortgages in 2013. Elevated levels of modifications within loans HFS negatively impacted the fair value of the mortgage warehouse in 2012. Origination income in 2013 declined 84 percent as FHN shifted from originations to a referral fee-based model. In 2013, other mortgage banking income included the $2.2 million charge associated with estimated costs for obligations related to the MSR sale previously mentioned and in 2012 it included charges associated with contingencies related to prior servicing sales.

Table 5   Mortgage Banking Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

   

2014

 

2013

 

2012

 

Compound
Annual Growth
Rates

 

14/13

 

14/12

 

Noninterest income (thousands):

 

 

 

 

 

 

 

 

 

 

Origination income

 

 

$

 

-

 

 

 

$

 

771

 

 

 

$

 

4,734

 

 

 

 

NM

 

 

 

 

NM

 

Mortgage warehouse valuation (a)

 

 

 

51,785

 

 

 

 

(4,355

)

 

 

 

 

(3,053

)

 

 

 

 

NM

 

 

 

 

NM

 

Servicing income/(expense):

 

 

 

 

 

 

 

 

 

 

Servicing fees

 

 

 

21,082

 

 

 

 

41,905

 

 

 

 

58,931

 

 

 

 

(50

)%

 

 

 

 

(40

)%

 

Change in MSR value – runoff

 

 

 

(833

)

 

 

 

 

(20,937

)

 

 

 

 

(23,804

)

 

 

 

 

96

%

 

 

 

 

81

%

 

Net hedging results (b)

 

 

 

528

 

 

 

 

18,083

 

 

 

 

17,481

 

 

 

 

(97

)%

 

 

 

 

(83

)%

 

 

Total servicing income

 

 

 

20,777

 

 

 

 

39,051

 

 

 

 

52,608

 

 

 

 

(47

)%

 

 

 

 

(37

)%

 

Other (c)

 

 

 

(1,305

)

 

 

 

 

(2,192

)

 

 

 

 

(2,399

)

 

 

 

 

40

%

 

 

 

 

26

%

 

 

Total mortgage banking noninterest income

 

 

$

 

71,257

 

 

 

$

 

33,275

 

 

 

$

 

51,890

 

 

 

 

NM

 

 

 

 

17

%

 

 

Mortgage banking statistics (millions):

 

 

 

 

 

 

 

 

 

 

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

 

 

$

 

83

 

 

 

$

 

8,512

 

 

 

$

 

16,487

 

 

 

 

(99

)%

 

 

 

 

(93

)%

 

 

NM - not meaningful

 

(a)

 

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

 

(b)

 

2014 includes a $2.0 million loss associated with the deconsolidation of a securitization trust. 2013 includes an increase in net hedging results reflecting the terms of the mortgage servicing sale agreement.

 

(c)

 

2013 includes a negative adjustment as a result of estimated costs for obligations associated with the agreement to sell servicing. 2012 includes $2.4 million negative adjustment related to contingencies for prior servicing sales.

 

(d)

 

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

Brokerage, Management Fees and Commissions

Brokerage, management fees and commissions include fees for portfolio management, trade commission, and annuity and mutual funds sales. Noninterest income from brokerage and management fees increased 16 percent or $6.8 million to $49.1 million in 2014 due in large part to FHN’s strategic focus on growing these businesses with new products and offerings, an expanded sales force, and a refined advisory team strategy. In 2013, noninterest income from brokerage, management fees and commissions was $42.3 million compared to $34.9 million in 2012 driven by a focus on growing these businesses through customer growth and expanding services for existing customers.

14

FIRST HORIZON NATIONAL CORPORATION


 

Trust Services and Investment Management

Trust services and investment management fees include investment management, personal trust, employee benefits, and custodial trust services and are primarily influenced by equity and fixed income market activity. In 2014, noninterest income from trust services and investment management activities increased 5 percent to $27.8 million primarily due to improved market conditions and strong new account activity in Trust, FTB Advisory, and Retirement Services.

Noninterest income from trust services and investment management was $26.5 million in 2013 compared to $24.3 million in 2012 driven by new initiatives in 2013 and general market increases, as well as FHN’s strategic focus on growing these business products through new customers and also referrals from wealth management for trust services.

Bankcard Income

Bankcard income is derived from fees charged for processing and supporting credit card transactions including interchange, late charges, membership fees, miscellaneous merchant fees, cash advance fees, currency conversion, speed pay, and research fees. Bankcard income increased 16 percent or $3.2 million to $23.7 million in 2014, primarily due to incentives received from Visa due to higher transaction volume in 2014 relative to the prior year. In 2013, bankcard income was $20.5 million compared to $22.4 million in 2012. The decline in bankcard income in 2013 relative to 2012 was driven by the receipt of Visa volume incentives in 2012.

Bank Owned Life Insurance

BOLI income was $16.4 million in 2014 compared to $16.6 million and $18.8 million in 2013 and 2012, respectively, reflecting the receipt of lower policy benefits in 2014 and 2013 compared to 2012.

Other Service Charges

Income from other service charges includes international income (foreign exchange and wire transfer fees), other retail fees, check order income, and other service charges including check cashing, safe deposit, wire transfers, and money orders. Income from other service charges decreased to $11.9 million in 2014 from $13.4 million and $12.9 million in 2013 and 2012, respectively.

Securities Gains/Losses

In 2014, FHN recognized net securities gains of $2.9 million compared to $1.8 million and $.7 million in 2013 and 2012, respectively. The 2014 net gain was primarily the result of a $5.6 million gain on the sale of a cost method investment partially offset by $2.0 million of negative fair value adjustments related to an investment and a $.9 million loss on the sale of an investment. The 2013 net gain was primarily the result of a $3.3 million gain on the sale of a cost method investment, partially offset by a $1.1 million other-than-temporary impairment adjustment. In 2012, FHN recognized a net gain of $.4 million related to venture capital investments as a gain on sale of $5.1 million was partially offset by a $4.7 million negative fair value adjustment.

Insurance Commissions

Insurance commissions are derived from the sale of insurance products, including acting as an independent agent to provide life, long-term care, and disability insurance. Noninterest income from insurance commissions was $2.3 million in 2014, $3.0 million in 2013, and $3.1 million in 2012.

Other Noninterest Income

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

15

FIRST HORIZON NATIONAL CORPORATION


 

Other income decreased $8.1 million to $32.3 million in 2014 primarily driven by a $4.2 million loss on the extinguishment of debt associated with the collapse of two HELOC securitization trusts recognized in 2014 and a $2.6 million decrease in deferred compensation income, which is driven by changes in the market value of the underlying investments.

Other income was $40.3 million in 2013, down from $46.9 million in 2012. Significant drivers of the decrease relate to $3.4 million gains on the sales of bank properties, a $2.3 million gain related to the resolution of a legal matter, and $1.0 million of interest associated with a tax refund which were all recognized in 2012.

NONINTEREST EXPENSE

Total noninterest expense decreased 27 percent or $317.4 million to $841.2 million in 2014, primarily driven by declines in expenses associated with the repurchase and foreclosure provision, litigation expenses, and personnel expenses. Total noninterest expense decreased 16 percent or $225.1 million to $1.2 billion in 2013 from $1.4 billion in 2012, primarily driven by decreases in repurchase and foreclosure provision expense and personnel expenses. Table 6 provides noninterest expense detail by category for the last three years with growth rates.

Table 6   Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2014

 

2013

 

2012

 

Compound
Annual Growth
Rates

 

14/13

 

14/12

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

Employee compensation, incentives and benefits

 

 

$

 

478,159

 

 

 

$

 

529,041

 

 

 

$

 

640,857

 

 

 

 

(10

)%

 

 

 

 

(14

)%

 

Occupancy

 

 

 

54,018

 

 

 

 

50,565

 

 

 

 

49,027

 

 

 

 

7

%

 

 

 

 

5

%

 

Legal and professional fees

 

 

 

44,205

 

 

 

 

53,359

 

 

 

 

38,750

 

 

 

 

(17

)%

 

 

 

 

7

%

 

Computer software

 

 

 

42,931

 

 

 

 

40,327

 

 

 

 

40,018

 

 

 

 

6

%

 

 

 

 

4

%

 

Operations services

 

 

 

35,247

 

 

 

 

35,215

 

 

 

 

35,429

 

 

 

 

*

 

 

 

 

*

 

Equipment rentals, depreciation, and maintenance

 

 

 

29,964

 

 

 

 

31,738

 

 

 

 

31,246

 

 

 

 

(6

)%

 

 

 

 

(2

)%

 

Contract employment and outsourcing

 

 

 

19,420

 

 

 

 

35,920

 

 

 

 

41,198

 

 

 

 

(46

)%

 

 

 

 

(31

)%

 

Advertising and public relations

 

 

 

18,683

 

 

 

 

18,239

 

 

 

 

17,439

 

 

 

 

2

%

 

 

 

 

4

%

 

Communications and courier

 

 

 

16,074

 

 

 

 

17,958

 

 

 

 

18,318

 

 

 

 

(10

)%

 

 

 

 

(6

)%

 

FDIC premium expense

 

 

 

11,464

 

 

 

 

20,156

 

 

 

 

27,968

 

 

 

 

(43

)%

 

 

 

 

(36

)%

 

Amortization of intangible assets

 

 

 

4,170

 

 

 

 

3,912

 

 

 

 

3,910

 

 

 

 

7

%

 

 

 

 

3

%

 

Foreclosed real estate

 

 

 

2,503

 

 

 

 

4,299

 

 

 

 

11,041

 

 

 

 

(42

)%

 

 

 

 

(52

)%

 

Repurchase and foreclosure provision

 

 

 

(4,300

)

 

 

 

 

170,000

 

 

 

 

299,256

 

 

 

 

NM

 

 

 

 

NM

 

All other expense:

 

 

 

 

 

 

 

 

 

 

Other insurance and taxes

 

 

 

12,900

 

 

 

 

12,598

 

 

 

 

10,734

 

 

 

 

2

%

 

 

 

 

10

%

 

Tax credit investments

 

 

 

10,767

 

 

 

 

12,103

 

 

 

 

18,655

 

 

 

 

(11

)%

 

 

 

 

(24

)%

 

Travel and entertainment

 

 

 

9,095

 

 

 

 

8,959

 

 

 

 

8,366

 

 

 

 

2

%

 

 

 

 

4

%

 

Customer relations

 

 

 

5,726

 

 

 

 

4,916

 

 

 

 

4,578

 

 

 

 

16

%

 

 

 

 

12

%

 

Employee training and dues

 

 

 

4,518

 

 

 

 

5,054

 

 

 

 

4,525

 

 

 

 

(11

)%

 

 

 

 

*

 

Supplies

 

 

 

3,745

 

 

 

 

3,800

 

 

 

 

3,752

 

 

 

 

(1

)%

 

 

 

 

*

 

Miscellaneous loan costs

 

 

 

2,690

 

 

 

 

4,209

 

 

 

 

4,126

 

 

 

 

(36

)%

 

 

 

 

(19

)%

 

Litigation and regulatory matters

 

 

 

(2,720

)

 

 

 

 

63,654

 

 

 

 

33,313

 

 

 

 

NM

 

 

 

 

NM

 

Other

 

 

 

41,952

 

 

 

 

32,579

 

 

 

 

41,195

 

 

 

 

29

%

 

 

 

 

1

%

 

 

Total all other expense

 

 

 

88,673

 

 

 

 

147,872

 

 

 

 

129,244

 

 

 

 

(40

)%

 

 

 

 

(17

)%

 

 

Total noninterest expense

 

 

$

 

841,211

 

 

 

$

 

1,158,601

 

 

 

$

 

1,383,701

 

 

 

 

(27

)%

 

 

 

 

(22

)%

 

 

NM - not meaningful

* Amount is less than one percent.

2014 compared to 2013

During 2014 FHN recorded a $4.3 million reversal of repurchase and foreclosure provision compared to expense of $170.0 million in 2013. The expense reversal in 2014 relates to the settlement of certain repurchase claims,

16

FIRST HORIZON NATIONAL CORPORATION


 

and the $170.0 million expense recorded in 2013 stems from the resolution of certain legacy representations and warranty mortgage loan repurchase obligations to government-sponsored entities.

Employee compensation, incentives, and benefits (personnel expense), which is generally the largest component of noninterest expense, declined $50.9 million to $478.2 million in 2014. The decline in personnel expense was largely driven by a decline in variable compensation associated with lower fixed income sales revenue within capital markets. Additionally, lower pension-related expenses, deferred compensation expense and several small favorable adjustments related to employee performance equity awards, employee benefit plans, and deferred compensation BOLI benefits in 2014 also contributed to the decline in personnel expense from 2013.

Contract employment expenses decreased 46 percent, or $16.5 million, to $19.4 million in 2014 due to lower mortgage sub-servicing costs associated with the sales of servicing, but partially offset by increases in contract employment associated with technology-related projects within the regional bank. Legal and professional fees and FDIC premium expense declined $9.2 million and $8.7 million, respectively, during 2014 relative to 2013. The decline in legal and professional fees was largely due to an $8.5 million legal fee expense reversal associated with the Sentinel legal matter. The decline in FDIC premium expense was due in part to $3.3 million of FDIC premium refunds received in 2014.

A portion of the decline in expenses previously mentioned was offset by increases in occupancy and computer software expenses. Occupancy expense increased $3.5 million to $54.0 million during 2014, which was largely the result of $4.7 million of lease abandonment expense related to efficiency initiatives. Computer software increased $2.6 million to $42.9 million during 2014 relative to the prior year driven by a focus on technology-related projects. The remaining expense categories remained relatively flat or declined slightly during 2014 relative to 2013 as FHN continues to focus on controlling expenses.

All other expenses were $88.7 million and $147.9 million in 2014 and 2013, respectively. The decrease in all other expenses was primarily due to a $66.4 million net decline in losses from litigation and regulatory matters as $113.6 million of expense reversals associated with agreements with insurance companies for the recovery of expenses FHN incurred related to litigation losses in previous periods more than offset a $47.2 million net increase in loss accruals related to legal matters. Other expenses include $5.9 million of negative valuation adjustments associated with the derivatives related to prior sales of Visa Class B shares compared to $1.9 million in 2013.

2013 compared to 2012

Personnel expense declined $111.8 million during 2013 to $529.0 million. The decrease in personal expenses relative to 2012 is largely driven by a $39.4 million reduction in pension costs resulting from the freeze of the pension plans on December 31, 2012, a decline in variable compensation associated with lower fixed income sales revenue in capital markets, and a decrease in severance-related costs associated with restructuring, repositioning, and efficiency initiatives. Additionally, headcount reductions relative to the prior year also contributed to lower personnel expenses.

During 2013 repurchase and foreclosure provision expense was $170.0 million compared to $299.3 million in 2012. In 2012 FHN recorded $250.0 million of repurchase and foreclosure provision expense reflecting a change in estimate of FHN’s repurchase obligations for alleged breaches of representations and warranties related to mortgage loans sold to Fannie Mae and Freddie Mac. In 2013, FHN recorded $170.0 million of repurchase and foreclosure provision expense based principally upon additional information obtained in connection with the DRAs previously mentioned. The provision included the impact of each DRA, estimates for future loss not included in the DRAs, and estimates for future loss related to certain other loan sales.

Foreclosed real estate expenses were $4.3 million in 2013 compared to $11.0 million in 2012 due to declines in negative valuation adjustments and lower property preservation costs. Contract employment expenses decreased $5.3 million to $35.9 million during 2013 due to lower sub-servicing costs consistent with the run-off of the servicing portfolio. FDIC premium expense was $20.2 million in 2013, down from $28.0 million in 2012.

Legal and professional fees increased $14.6 million to $53.4 million in 2013 driven by an increase in costs related to litigation matters and also various consulting projects throughout the organization compared to the prior year.

17

FIRST HORIZON NATIONAL CORPORATION


 

All other expenses were $147.9 million and $129.2 million in 2013 and 2012, respectively. The increase in all other expense was primarily the result of a $30.3 million increase in litigation-related charges in 2013 relative to 2012, partially offset by a $6.6 million decrease due to a decline in expense from tax credit investments. Additionally, during 2012 FHN had favorable adjustments which affected trends for the comparative period including a $1.8 million favorable adjustment to franchise taxes and a $1.8 million gain related to clean-up calls for first lien securitizations. Other expenses in 2012 included $3.4 million in ancillary expenses associated with legacy mortgage wind-down activities and a $2.8 million charge related to the write-off of unrecoverable servicing advances.

INCOME TAXES

FHN recorded an income tax provision of $78.5 million in 2014, compared to an income tax benefit of $32.2 million in 2013. The effective tax rate for 2014 was approximately 25 percent. Due to the large increase in pre-tax income during 2014, the comparison of the tax rate from period to period will not provide meaningful information. The company’s effective tax rate is favorably affected by recurring items such as affordable housing credits, bank-owned life insurance and tax-exempt income. The company’s effective tax rate also may be affected by items that may occur in any given period but are not consistent from period to period, such as changes in the deferred tax asset valuation allowance and changes in unrecognized tax benefits.

A deferred tax asset (“DTA”) or deferred tax liability (“DTL”) is recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax consequence is calculated by applying enacted statutory tax rates, applicable to future years, to these temporary differences. As of December 31, 2014, FHN’s gross DTA (net of a valuation allowance) and gross DTL were $370.4 million and $86.0 million, respectively, resulting in a net DTA of $284.4 million at December 31, 2014, compared with $275.7 million at December 31, 2013.

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

As of December 31, 2014, FHN had federal tax credit carryforwards which will expire in varying amounts between 2031 and 2034, state income tax net operating loss (“NOL”) carryforwards which will expire in varying amounts between 2016 and 2032, and federal capital loss carryforwards, which will expire in 2017. As of December 31, 2014 and 2013, FHN established a valuation allowance of $.1 million and $5.9 million, respectively, against its state NOL carryforwards and $44.4 million and $51.9 million, respectively, against its capital loss carryforwards. FHN’s DTA after valuation allowance was $370.4 million and $405.7 million as of December 31, 2014 and 2013, respectively. Based on current analysis, FHN believes that its ability to realize the remaining DTA is more likely than not. FHN monitors its DTA and the need for a valuation allowance on a quarterly basis. A significant adverse change in FHN’s taxable earnings outlook could result in the need for further valuation allowances. In the event FHN is able to determine that the deferred tax assets are realizable in the future in excess of their net recorded amount, FHN would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.

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

The total balance of unrecognized tax benefits on December 31, 2014, was $5.2 million compared with $6.6 million as of the end of 2013. On December 31, 2014 there were no tax positions included in the balance of unrecognized tax benefits for which the ultimate deductibility is highly certain but for which there is uncertainty

18

FIRST HORIZON NATIONAL CORPORATION


 

about the timing of such deductibility. To the extent such unrecognized tax benefits as of December 31, 2014 are subsequently recognized, $3.4 million of tax benefits would impact tax expense and FHN’s effective tax rate.

FHN’s policy under ASC 740 is to recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. Interest accrued as of December 31, 2014 was $.9 million compared to $2.0 million in 2013. The total amount of interest and penalties recognized in the Consolidated Statements of Income during 2014 and 2013 was a benefit of $1.1 million and $2.5 million, respectively.

FHN and its eligible subsidiaries are included in a consolidated federal income tax return. FHN files separate returns for subsidiaries that are not eligible to be included in a consolidated federal income tax return. Based on the laws of the applicable states where it conducts business operations, FHN either files consolidated, combined, or separate returns. With few exceptions, FHN is no longer subject to federal or state and local tax examinations by tax authorities for years before 2010. During 2013 the IRS completed a limited issue focused examination (“LIFE”) for the years ending December 31, 2011 and 2010. All proposed adjustments with respect to the examination of those years have been settled. FHN is currently under audit in several states.

See also Note 16 – Income Taxes for additional information.

RESTRUCTURING, REPOSITIONING, AND EFFICIENCY INITIATIVES

FHN continues to refine its business mix in order to focus on higher-return core businesses and explore opportunities to reduce operating costs.

Generally, restructuring, repositioning, and efficiency charges related to exited businesses are included in the non-strategic segment while charges related to corporate-driven actions are included in the corporate segment. The net charge from restructuring, repositioning, and efficiency activities was $7.0 million in 2014 compared to $5.3 million in 2013 and $24.9 million in 2012. Significant charges recognized during 2014 primarily related to efficiency initiatives within corporate and bank services functions and include $4.7 million of lease abandonment expenses and $2.6 million of severance and other employee costs.

Significant restructuring amounts recognized during 2013 include $3.7 million of severance costs primarily related to efficiency initiatives within corporate and bank services functions and $2.2 million related to estimated costs for obligations associated with a definitive agreement to sell substantially all remaining legacy mortgage servicing.

A majority of the restructuring charges in 2012 related to severance associated with an employee separation program. Additionally, in 2012 FHN recognized a $2.6 million negative adjustment related to prior servicing sales.

Charges related to restructuring, repositioning, and efficiency initiatives for the years ended December 31, 2014, 2013, and 2012 are presented in the following table based on the income statement line item affected. See Note 26 – Restructuring, Repositioning, and Efficiency for additional information.

Table 7   Restructuring, Repositioning, and Efficiency Initiatives

 

 

 

 

 

 

 

(Dollars in thousands)

 

2014

 

2013

 

2012

 

Noninterest income:

 

 

 

 

 

 

Mortgage banking

 

 

$

 

553

 

 

 

$

 

(2,192

)

 

 

 

$

 

(2,635

)

 

Gain on divestiture

 

 

 

-

 

 

 

 

111

 

 

 

 

200

 

 

Total noninterest income/(loss)

 

 

 

553

 

 

 

 

(2,081

)

 

 

 

 

(2,435

)

 

 

Noninterest expense:

 

 

 

 

 

 

Employee compensation, incentives, and benefits

 

 

 

2,641

 

 

 

 

3,691

 

 

 

 

22,897

 

Occupancy

 

 

 

4,696

 

 

 

 

131

 

 

 

 

46

 

Legal and professional fees

 

 

 

-

 

 

 

 

-

 

 

 

 

15

 

All other expense

 

 

 

222

 

 

 

 

385

 

 

 

 

34

 

 

Total noninterest expense

 

 

 

7,559

 

 

 

 

4,207

 

 

 

 

22,992

 

 

Loss before income taxes

 

 

 

(7,006

)

 

 

 

 

(6,288

)

 

 

 

 

(25,427

)

 

Income/(loss) from discontinued operations

 

 

 

-

 

 

 

 

985

 

 

 

 

569

 

 

Net impact resulting from restructuring, repositioning, and efficiency initiatives

 

 

$

 

(7,006

)

 

 

 

$

 

(5,303

)

 

 

 

$

 

(24,858

)

 

 

19

FIRST HORIZON NATIONAL CORPORATION


 

STATEMENT OF CONDITION REVIEW

Total period-end assets were $25.7 billion on December 31, 2014, compared to $23.8 billion on December 31, 2013. Average assets decreased to $24.0 billion in 2014 from $24.4 billion in 2013. The decrease in average assets is primarily attributable to declines in non-earning assets, loan balances, and trading securities, partially offset by increases in AFS securities and interest-bearing cash. The increase in period-end assets was driven by increases in interest-bearing cash, loan balances, trading securities, and securities purchased under agreements to resell, somewhat offset by a decline in non-earning assets and loans HFS.

EARNING ASSETS

Earning assets consist of loans, loans HFS, investment securities, and other earning assets such as trading securities and interest-bearing cash. Average earning assets were $21.8 billion in 2014, a $53.2 million increase from a year earlier. A more detailed discussion of the major line items follows.

Loans

Period-end loans increased to $16.2 billion as of December 31, 2014 from $15.4 billion on December 31, 2013. Average loans for 2014 were $15.5 billion compared to $15.7 billion for 2013. The increase in period-end loan balances was due to loan growth within the regional bank which more than offset balance declines within FHN’s run-off portfolios within the non-strategic segment. Loan growth was largely within the regional bank’s commercial portfolios while the decline in balances within non-strategic were largely within the consumer real estate and permanent mortgage portfolios. The decline in average loan balances in 2014 relative to the prior year was driven by run-off of the non-strategic portfolios which outpaced average loan growth within the Regional Bank.

Table 8   Average Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2014

 

Percent
of Total

 

2014
Growth
Rate

 

2013

 

Percent
of Total

 

2013
Growth
Rate

 

2012

 

Percent
of Total

 

2012
Growth
Rate

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial, and industrial

 

 

$

 

8,156,750

 

 

 

 

52

%

 

 

 

 

2

%

 

 

 

$

 

7,972,875

 

 

 

 

51

%

 

 

 

 

*

 

 

 

$

 

7,994,102

 

 

 

 

49

%

 

 

 

 

12

%

 

Commercial real estate

 

 

 

1,223,487

 

 

 

 

8

 

 

 

 

5

 

 

 

 

1,170,618

 

 

 

 

7

 

 

 

 

(10

)%

 

 

 

 

1,307,001

 

 

 

 

8

 

 

 

 

(15

)

 

 

   

 

 

   

 

 

Total commercial

 

 

 

9,380,237

 

 

 

 

60

 

 

 

 

3

 

 

 

 

9,143,493

 

 

 

 

58

 

 

 

 

(2

)

 

 

 

 

9,301,103

 

 

 

 

57

 

 

 

 

7

 

 

   

 

 

   

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate (a)

 

 

 

5,198,304

 

 

 

 

34

 

 

 

 

(6

)

 

 

 

 

5,526,386

 

 

 

 

35

 

 

 

 

(5

)

 

 

 

 

5,829,089

 

 

 

 

36

 

 

 

 

(4

)

 

Permanent mortgage (b)

 

 

 

594,450

 

 

 

 

4

 

 

 

 

(20

)

 

 

 

 

742,793

 

 

 

 

5

 

 

 

 

(7

)

 

 

 

 

795,014

 

 

 

 

5

 

 

 

 

(22

)

 

Credit card and other

 

 

 

347,981

 

 

 

 

2

 

 

 

 

11

 

 

 

 

313,702

 

 

 

 

2

 

 

 

 

12

 

 

 

 

280,197

 

 

 

 

2

 

 

 

 

(5

)

 

 

   

 

 

   

 

 

Total retail

 

 

 

6,140,735

 

 

 

 

40

 

 

 

 

(7

)

 

 

 

 

6,582,881

 

 

 

 

42

 

 

 

 

(5

)

 

 

 

 

6,904,300

 

 

 

 

43

 

 

 

 

(6

)

 

 

   

 

 

   

 

 

Total loans, net of unearned

 

 

$

 

15,520,972

 

 

 

 

100

%

 

 

 

 

(1

)%

 

 

 

$

 

15,726,374

 

 

 

 

100

%

 

 

 

 

(3

)%

 

 

 

$

 

16,205,403

 

 

 

 

100

%

 

 

 

 

1

%

 

 

   

 

 

   

 

 

 

(a)

 

2014, 2013, and 2012 include $140.7 million, $369.3 million, and $473.5 million of restricted and secured real estate loans, respectively.

 

(b)

 

2014, 2013, and 2012 include $.4 million, $12.4 million, and $22.6 million of restricted and secured real estate loans, respectively.

C&I loans are the largest component of the commercial portfolio comprising 87 percent of average commercial loans in both 2014 and 2013. C&I loans increased 2 percent, or $183.9 million, from 2013 due to net loan growth within the regional bank’s general commercial portfolio and also an increase in asset-based lending. This loan growth was partially offset by declines in the average balance of loans to mortgage companies and C&I loans within the non-strategic segment which was driven by sales and payoffs of nonaccruing trust preferred loans since 2013. Commercial real estate loans increased 5 percent or $52.9 million to $1.2 billion in 2014 because of growth in expansion markets and opportunities with new and existing customers within the regional bank which outpaced the continued wind-down of the non-strategic components.

Average retail loans declined 7 percent, or $442.1 million, from a year ago, to $6.1 billion in 2014. The consumer real estate portfolio (home equity lines and installment loans) declined $328.1 million, to $5.2 billion as the continued wind-down of portfolios within the non-strategic segment outpaced a $101.5 million increase in real estate installment loans from new originations within the regional bank. The permanent mortgage portfolio declined $148.3 million to $594.5 million in 2014 largely driven by runoff of the legacy assets. Credit Card and Other increased $34.3 million to $348.0 million in 2014 due to strategic focus on growing the credit card and other consumer portfolios.

20

FIRST HORIZON NATIONAL CORPORATION


 

Table 9   Contractual Maturities of Commercial Loans on December 31, 2014

 

 

 

 

 

 

 

 

 

(Period-end)
(Dollars in thousands)

 

Within 1 Year

 

After 1 Year
Within 5 Years

 

After 5 Years

 

Total

 

Commercial, financial, and industrial

 

 

$

 

3,387,086

 

 

 

$

 

4,160,379

 

 

 

$

 

1,459,821

 

 

 

$

 

9,007,286

 

Commercial real estate

 

 

 

370,009

 

 

 

 

825,801

 

 

 

 

81,907

 

 

 

 

1,277,717

 

 

Total commercial loans

 

 

$

 

3,757,095

 

 

 

$

 

4,986,180

 

 

 

$

 

1,541,728

 

 

 

$

 

10,285,003

 

 

For maturities over one year:

 

 

 

 

 

 

 

 

Interest rates - floating

 

 

 

 

$

 

3,816,212

 

 

 

$

 

850,612

 

 

 

$

 

4,666,824

 

Interest rates - fixed

 

 

 

 

 

1,169,968

 

 

 

 

691,116

 

 

 

 

1,861,084

 

 

Total maturities over one year

 

 

 

 

$

 

4,986,180

 

 

 

$

 

1,541,728

 

 

 

$

 

6,527,908

 

 

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

Investment Securities

FHN’s investment portfolio consists principally of debt securities including government agency issued mortgage-backed securities (“MBS”) and government agency issued collateralized mortgage obligations (“CMO”), substantially all of which are classified as available-for-sale (“AFS”). FHN utilizes the securities portfolio as a source of income, liquidity and collateral for repurchase agreements, for public funds, and as a tool for managing risk of interest rate movements. Table 10 shows information pertaining to the composition, yields, and contractual maturities of the investment securities portfolio. Investment securities increased 5 percent from $3.4 billion on December 31, 2013 to $3.6 billion on December 31, 2014. Average investment securities were $3.6 billion in 2014 and $3.2 billion in 2013, representing 16 percent of earning assets in 2014 compared to 15 percent in 2013. The amount of securities purchased for the investment portfolio is largely driven by the desire to protect the value of non-rate sensitive liabilities and equity and maximize yield on FHN’s excess liquidity without negatively affecting future yields while operating in this historically low interest rate environment.

Government agency issued MBS and CMO, and other agencies averaged $3.3 billion and $2.9 billion in 2014 and 2013, respectively. U.S. treasury securities and municipal bonds averaged $44.7 million in 2014 compared to $56.8 million in 2013. Investments in equity securities averaged $191.9 million in 2014 compared with $222.4 million in 2013. A majority of these balances include restricted investments in the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) which averaged over $160 million and $190 million in 2014 and 2013, respectively. On December 31, 2014, AFS investment securities had $30.1 million of net unrealized gains that resulted in an increase in shareholders’ equity of $18.6 million, net of $11.6 million of deferred income tax benefits. See Note 3 – Investment Securities for additional detail.

21

FIRST HORIZON NATIONAL CORPORATION


 

Table 10   Contractual Maturities of Investment Securities on December 31, 2014 (Amortized Cost)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Period-end)
(Dollars in thousands)

 

Within 1 Year

 

After 1 Year
Within 5 Years

 

After 5 Years
Within 10 Years

 

After 10 Years

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

Government agency issued MBS and CMO (a)

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

3

 

 

 

 

7.14

%

 

 

 

$

 

4,606

 

 

 

 

5.04

%

 

 

 

$

 

3,327,629

 

 

 

 

2.49

%

 

U.S. treasuries

 

 

 

-

 

 

 

 

-

 

 

 

 

100

 

 

 

 

0.98

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

Other U.S. government agencies

 

 

 

1,755

 

 

 

 

5.51

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

State and municipalities (b)

 

 

 

-

 

 

 

 

-

 

 

 

 

1,500

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

8,705

 

 

 

 

0.12

 

Other (c)

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

182,184

 

 

 

 

4.07

 

 

Total securities available-for-sale

 

 

$

 

1,755

 

 

 

 

5.51

%

 

 

 

$

 

1,603

 

 

 

 

0.07

%

 

 

 

$

 

4,606

 

 

 

 

5.04

%

 

 

 

$

 

3,518,518

 

 

 

 

2.57

%

 

 

Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

State and municipalities

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

4,292

 

 

 

 

6.71

%

 

 

Total securities held-to-maturity

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

-

 

 

 

 

-

%

 

 

 

$

 

4,292

 

 

 

 

6.71

%

 

 

 

(a)

 

Represents government agency-issued mortgage-backed securities and collateralized mortgage obligations which, when adjusted for early pay downs, have an estimated average life of 4.0 years.

 

(b)

 

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

 

(c)

 

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

Loans Held-for-Sale

Loans HFS consists of the mortgage warehouse (primarily repurchased government-guaranteed loans), student, small business, and home equity loans. The average balance of loans HFS decreased $85.9 million from 2013 and averaged $296.1 million in 2014. On December 31, 2014 and 2013, loans HFS were $141.3 million and $370.2 million, respectively. The lower balances of both average and period-end loans HFS reflect the third quarter 2014 sales of loans with approximately $315 million in unpaid principal balance.

Other Earning Assets

All other earning assets include trading securities, securities purchased under agreements to resell, federal funds sold (“FFS”), and interest-bearing deposits with the Federal Reserve Bank (“FRB”) and other financial institutions. All other earning assets decreased $27.7 million and averaged $2.5 billion in 2014 and 2013, as a $131.1 million decrease in trading securities was partially offset by a $106.5 million increase in interest-bearing cash. Period-end earning assets were $3.5 billion on December 31, 2014 up from $2.0 billion on December 31, 2013. The increase in period-end other earning assets was primarily due to an $891.7 million increase in interest-bearing cash, driven by an inflow of deposits and proceeds from the issuance of $400 million of senior notes in fourth quarter 2014. Additionally, a $392.7 million and $246.5 million increase in trading securities and securities purchased under agreements to resell (“asset repos”), respectively, also contributed to the increase in other earning assets year over year. Capital markets’ trading inventory fluctuates daily based on customer demand, while asset repos are used in capital markets fixed income trading activity and generally correlate with the level of capital markets trading liabilities (short-positions) as securities collateral from repo transactions is used to fulfill trades.

Non-earning assets

Non-earning assets averaged $2.2 billion in 2014, an 18 percent decline from $2.6 billion in 2013. Period-end balances were also $2.2 billion and $2.6 billion on December 31, 2014 and 2013, respectively. The decline in non-earning assets is primarily due to declines in servicing advances and MSR due to the sales of substantially all remaining legacy mortgage servicing in fourth quarter 2013 and first quarter 2014, as well as a decline in derivative assets.

22

FIRST HORIZON NATIONAL CORPORATION


 

Core Deposits

Core deposits were $17.6 billion on December 31, 2014, up 9 percent from $16.2 billion on December 31, 2013. The increase in period-end core deposits was primarily driven by the addition of approximately $440 million of deposits associated with the fourth quarter branch acquisition, an inflow of commercial customer deposits, and FHN’s decision to increase Insured Network Deposits. Insured Network Deposits are an FDIC-insured deposit sweep program where financial institutions can receive unsecured deposits for the long-term (several years) and in larger-dollar increments. Average core deposits increased $127.0 million to $15.9 billion in 2014 from $15.8 billion in 2013.

Short-Term Funds

Average short-term funds (certificates of deposit greater than $100,000, federal funds purchased (“FFP”), securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings) decreased 2 percent, or $66.0 million, to $3.2 billion in 2014. The decrease was driven by declines in FFP, jumbo certificates of deposits, securities sold under agreements to repurchase, and trading liabilities, partially offset by higher levels of borrowings from the Federal Home Loan Bank (“FHLB”). Average FFP, which currently is composed primarily of funds from correspondent banks, was $1.1 billion in 2014 compared to $1.3 billion in 2013. FFP fluctuates depending on the amount of excess funding of FHN’s correspondent bank customers while capital markets’ trading liabilities fluctuate based on expectations of customer demand. The increased level of FHLB borrowings was primarily because of deposit fluctuations combined with loan growth. On average, short-term purchased funds accounted for 15 percent of FHN’s funding (core deposits plus short-term purchased funds and term borrowings) in 2014 compared to 16 percent in 2013. Period-end short-term funds increased $207.2 million from $2.6 billion on December 31, 2013 to $2.8 billion on December 31, 2014. The increase in period-end balances reflects higher balances of trading liabilities and securities sold under agreement to repurchase which more than offset lower jumbo CD’s and FHLB borrowings. See Note 10–Short-Term Borrowings for additional information.

Term Borrowings

Term borrowings include senior and subordinated borrowings and advances with original maturities greater than one year. Term borrowings averaged $1.6 billion in 2014, compared to $1.9 billion in 2013. The decrease in average term borrowings primarily relates to a decline in restricted/secured borrowings due to the collapse/deconsolidation of three previously consolidated on-balance sheet consumer loan securitizations in first quarter 2014 and $350.0 million of subordinated notes that matured during the second quarter of 2013. On December 31, 2014, term borrowings were $1.9 billion compared to $1.7 billion on December 31, 2013. The increase in period-end balances is due to the issuance of $400 million of senior notes in fourth quarter 2014. See Note 11–Term Borrowings for additional information.

Other Liabilities

Average other liabilities declined $192.6 million from 2013 to $686.2 million in 2014. The largest declines were within the net pension funding status driven by changes resulting from the annual measurement between 2012 and 2013, the repurchase and foreclosure reserve due to losses charged against the liability since 2013, derivative liabilities, and capital markets’ payables. These decreases were partially offset by an increase in other accrued liabilities–mainly because of litigation accruals. Period-end other liabilities increased $2.7 million to $782.1 million on December 31, 2014 from a year earlier. The declines described above that affected the average balances also affected period-end balances with the exception of the net pension funding status, which increased $111.4 million primarily driven by a change in the discount rate between 2013 and 2014 and other accrued liabilities which were relatively flat between period end 2014 and 2013.

CAPITAL

Management’s objectives are to provide capital sufficient to cover the risks inherent in FHN’s businesses, to maintain excess capital to well-capitalized standards, and to assure ready access to the capital markets. Average equity was $2.6 billion in 2014 compared to $2.5 billion in 2013. The increase in average equity between periods was primarily due to the impact of net income on retained earnings and a favorable decline in the effects of pensions within other comprehensive income, partially offset by a decrease in capital surplus and common stock because of shares that were purchased under the 2014 share repurchase program mentioned below. Period-end equity was $2.6 billion in 2014 compared to $2.5 billion in 2013.The increase in period-end equity was primarily driven by the impact of net income on retained earnings and an increase in unrealized gains associated with the

23

FIRST HORIZON NATIONAL CORPORATION


 

AFS securities portfolio within accumulated other comprehensive income, somewhat offset by an increase in the effects of net pension funding status within other comprehensive income largely due to a decline in the discount rate, as well as share repurchases.

In fourth quarter 2011, FHN launched a share repurchase program which enabled FHN to repurchase its common stock in the open market or in privately negotiated transactions, subject to certain conditions. As of December 31, 2013, this program had authorized total purchases of up to $300 million and FHN had repurchased $262.7 million of common shares under this program. In January 2014, FHN’s board of directors terminated this share repurchase program and approved a new share repurchase program which enables FHN to repurchase its common stock in the open market or in privately negotiated transactions, again subject to certain conditions. The current program authorizes total purchases of up to $100 million and expires on January 31, 2016. During 2014, FHN repurchased $38.5 million of common shares under this program.

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

Table 11   Regulatory Capital and Ratios

 

 

 

 

 

(Dollars in thousands)

 

2014

 

2013

 

Shareholders’ equity

 

 

$

 

2,295,537

 

 

 

$

 

2,205,320

 

Regulatory adjustments:

 

 

 

 

Goodwill and other intangibles

 

 

 

(141,831

)

 

 

 

 

(133,013

)

 

Net unrealized (gains)/losses on AFS securities

 

 

 

(18,651

)

 

 

 

 

11,228

 

Minimum pension liability

 

 

 

206,827

 

 

 

 

138,768

 

Noncontrolling interest – FTBNA preferred stock

 

 

 

294,816

 

 

 

 

294,816

 

Trust preferred

 

 

 

200,000

 

 

 

 

200,000

 

Disallowed servicing assets

 

 

 

(225

)

 

 

 

 

(4,638

)

 

Disallowed deferred tax assets

 

 

 

(22,862

)

 

 

 

 

(93,399

)

 

Other

 

 

 

(108

)

 

 

 

 

(106

)

 

 

Tier 1 capital

 

 

$

 

2,813,503

 

 

 

$

 

2,618,976

 

Tier 2 capital

 

 

 

334,833

 

 

 

 

444,655

 

 

Total regulatory capital

 

 

$

 

3,148,336

 

 

 

$

 

3,063,631

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Tier 1

 

 

 

 

 

 

 

 

First Horizon National Corporation

 

 

 

14.46

%

 

 

 

$

 

2,813,503

 

 

 

 

13.87

%

 

 

 

$

 

2,618,976

 

First Tennessee Bank National Association (a)

 

 

 

16.12

 

 

 

 

3,107,407

 

 

 

 

15.99

 

 

 

 

2,991,866

 

Total

 

 

 

 

 

 

 

 

First Horizon National Corporation

 

 

 

16.18

 

 

 

 

3,148,336

 

 

 

 

16.23

 

 

 

 

3,063,631

 

First Tennessee Bank National Association (a)

 

 

 

17.86

 

 

 

 

3,441,315

 

 

 

 

18.36

 

 

 

 

3,434,410

 

Tier 1 Common (b)

 

 

 

 

 

 

 

 

First Horizon National Corporation

 

 

 

11.43

 

 

 

 

2,223,063

 

 

 

 

10.75

 

 

 

 

2,028,536

 

Other Capital Ratios

 

 

 

 

 

 

 

 

Total period-end equity to period-end assets

 

 

 

10.09

 

 

 

 

 

 

10.51

 

 

 

FHN’s Tier 1 Leverage

 

 

 

11.43

 

 

 

 

 

 

11.04

 

 

 

Adjusted tangible common equity to risk weighted assets (b)

 

 

 

10.31

 

 

 

 

 

 

10.37

 

 

 

Tangible common equity to tangible assets (b)

 

 

 

7.94

 

 

 

 

 

 

8.24

 

 

 

 

 

(a)

 

Excluding financial subsidiaries, FTBNA’s Tier 1 and Total Capital ratios were 15.77 percent and 16.59 percent, respectively, at December 31, 2014.

 

(b)

 

Refer to the Non-GAAP to GAAP Reconciliation – Table 31.

Banking regulators define minimum capital ratios for bank holding companies and their bank subsidiaries. Based on the capital rules and definitions prescribed by the banking regulators, should any depository institution’s capital

24

FIRST HORIZON NATIONAL CORPORATION


 

ratios decline below predetermined levels, it would become subject to a series of increasingly restrictive regulatory actions. The system categorizes a depository institution’s capital position into one of five categories ranging from well-capitalized to critically under-capitalized. In 2014, for an institution the size of FHN to qualify as well-capitalized, Tier 1 Capital, Total Capital, and Leverage capital ratios must be at least 6 percent, 10 percent, and 5 percent, respectively. As of December 31, 2014, FHN and FTBNA had sufficient capital to qualify as well-capitalized institutions. Tier 1, Tier 1 Common, and Tier 1 Leverage capital ratios increased in 2014 relative to 2013 primarily due to the impact of net income less dividends on retained earnings and a favorable decline in the regulatory adjustment for disallowed DTAs. Total Capital ratios for both FHN and FTBNA were negatively impacted by a reduction in the amount of Tier 2 qualifying subordinated debt as that debt approaches maturity. Through 2015, capital ratios are expected to remain significantly above well-capitalized standards. Refer to the discussion of rules that will impact capital ratios for the industry in the Market Uncertainties and Prospective Trends section of MD&A.

Pursuant to board authority, FHN may repurchase shares of its common stock from time to time and will evaluate the level of capital and take action designed to generate or use capital, as appropriate, for the interests of the shareholders, subject to legal and regulatory restrictions. FHN’s board has not authorized a preferred stock purchase program. The following tables provide information related to securities repurchased by FHN during fourth quarter 2014:

Table 12   Issuer Purchases of Common Stock

Compensation Plan-Related Repurchase Authority:

 

 

 

 

 

 

 

 

 

(Volume in thousands,
except per share data)

 

Total number
of shares
purchased

 

Average price
paid per share

 

Total number of
shares purchased
as part of publicly
announced programs

 

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

 

2014

 

 

 

 

 

 

 

 

October 1 to October 31

 

 

 

16

 

 

 

$

 

11.61

 

 

 

 

16

 

 

 

 

31,337

 

Noverber 1 to November 30

 

 

 

1

 

 

 

$

 

12.75

 

 

 

 

1

 

 

 

 

31,336

 

December 1 to December 31

 

 

 

-

 

 

 

 

N/A

 

 

 

 

-

 

 

 

 

31,336

 

 

Total

 

 

 

17

 

 

 

$

 

11.67

 

 

 

 

17

 

 

 

 

N/A – Not applicable
Compensation Plan Programs:

 

 

A consolidated compensation plan share purchase program was announced on August 6, 2004. This action consolidated into a single share purchase program all of the previously authorized compensation plan share programs as well as the renewal of the authorization to purchase shares for use in connection with two compensation plans for which the share purchase authority had expired. The total amount authorized under this consolidated compensation plan share purchase program, inclusive of a program amendment on April 24, 2006, is 29.6 million shares calculated before adjusting for stock dividends distributed through January 1, 2011. The authorization has been reduced for that portion which relates to compensation plans for which no options remain outstanding. The shares may be purchased over the option exercise period of the various compensation plans on or before December 31, 2023. On December 31, 2014, the maximum number of shares that may be purchased under the program was 31.3 million shares. Purchases may be made in the open market or through privately negotiated transactions and are subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions. Management currently does not anticipate purchasing a material number of shares under this authority during 2015.

Other Repurchase Authority:

 

 

 

 

 

 

 

 

 

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

 

Total number
of shares
purchased

 

Average price
paid per share (a)

 

Total number of
shares purchased
as part of publicly
announced programs

 

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

 

2014

 

 

 

 

 

 

 

 

October 1 to October 31

 

 

 

-

 

 

 

 

N/A

 

 

 

 

-

 

 

 

$

 

75,974

 

November 1 to November 30

 

 

 

559

 

 

 

$

 

12.85

 

 

 

 

559

 

 

 

$

 

68,800

 

December 1 to December 31

 

 

 

561

 

 

 

 

13.00

 

 

 

 

561

 

 

 

$

 

61,501

 

 

Total

 

 

 

1,120

 

 

 

$

 

12.92

 

 

 

 

1,120

 

 

 

 

N/A – Not applicable

 

(a)

 

Represents total costs including commissions paid.

Other Programs:

 

  On January 22, 2014, FHN announced a $100 million share purchase authority that expires on January 31, 2016. As of December 31, 2014, $38.5 million in purchases had been made under this authority at an average price per share of $12.35, $12.33 excluding commissions. Purchases may be made in the open market or through privately negotiated transactions and will be subject to market conditions, accumulation of excess equity, prudent capital management, and legal and regulatory restrictions.

25

FIRST HORIZON NATIONAL CORPORATION


 

ASSET QUALITY   TREND ANALYSIS OF 2014 COMPARED TO 2013

Loan Portfolio Composition

FHN groups its loans into portfolio segments based on internal classifications reflecting the manner in which the ALLL is established and how credit risk is measured, monitored, and reported. From time to time, and if conditions are such that certain subsegments are uniquely affected by economic or market conditions or are experiencing greater deterioration than other components of the loan portfolio, management may determine the ALLL at a more granular level. Commercial loans are composed of commercial, financial, and industrial (“C&I”) and commercial real estate (“CRE”). Retail loans are composed of consumer real estate; permanent mortgage; and credit card and other. FHN has a concentration of residential real estate loans (34 percent of total loans), the majority of which is in the consumer real estate portfolio (31 percent of total loans). Industry concentrations are discussed under the heading C&I below. Key asset quality metrics for each of these portfolios can be found in Table 15 – Asset Quality by Portfolio.

As economic and real estate conditions develop, enhancements to underwriting and credit policies and guidelines may be necessary or desirable. In 2014, FHN adopted credit underwriting guidelines to enable a limited amount of energy lending within the C&I portfolio and non-recourse lending within the CRE portfolio. Other than described above, there were no other material changes to FHN’s credit underwriting guidelines or significant changes or additions to FHN’s product offerings in 2014. Loan policies and guidelines for all portfolios are approved by management risk committees that consist of business line managers and credit administration professionals. The committees strive to ensure that the resulting guidelines address the associated risks and establish reasonable underwriting criteria that appropriately mitigate risk. Policies and guidelines are reviewed, revised and re-issued periodically at established review dates or earlier if changes in the economic environment, portfolio performance, the size of portfolio or industry concentrations, or regulatory guidance warrant an earlier review.

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 in accordance with Accounting Standards Codification Topic related to Business Combinations (“ASC 805”) resulting in no carryover of allowance for loan loss from the acquiree. See Note 4 – Loans for additional information regarding the acquisition.

At acquisition, FHN designated certain loans as purchased credit-impaired (“PCI”) loans. PCI loans are 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 charge-offs, as well as both originated versus refreshed credit scores and ratios when available. On December 31, 2014, the unpaid principal balance and the carrying value of PCI loans were $49.9 million and $38.2 million, respectively. These loans were initially recorded at fair value which was estimated by discounting expected cash flows at acquisition date. The expected cash flows include all contractually expected amounts and incorporate an estimate for future expected credit losses, pre-payment assumptions, and yield requirement for a market participant, among other things. To the extent possible, certain PCI loans were aggregated with composite interest rate and cash flows expected to be collected for the pool. Aggregation into loan pools is based on common risk characteristics that include similar credit risk or risk ratings, and one or more predominant risk characteristics. Generally, FHN pooled loans with smaller balances and common internal loan grades and portfolio types. Subsequent to the initial accounting at acquisition, each PCI pool is accounted for as a single unit.

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

The following is a description of each portfolio:

26

FIRST HORIZON NATIONAL CORPORATION


 

COMMERCIAL LOAN PORTFOLIOS

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

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

FHN may utilize availability of guarantors/sponsors to support commercial lending decisions during the credit underwriting process and when determining the assignment of internal loan grades. Where guarantor contributions are determined to be a source of repayment, an assessment of the guarantee is made. This guarantee assessment would include but not be limited to factors such as type of the guarantee, consideration for the guarantee, key provisions of the guarantee agreement, and ability of the guarantor to be a viable secondary source of repayment. Reliance on the guarantee as a viable secondary source of repayment is a function of an analysis proving capability to pay, factoring in, among other things, liquidity and direct/indirect cash flows. Therefore, a proper evaluation of each guarantor is critical. FHN also considers the volume and amount of guarantees provided for all global indebtedness and the likelihood of realization. Guarantor financial information is periodically updated throughout the life of the loan. FHN presumes a guarantor’s willingness to perform until there is any current or prior indication or future expectation that the guarantor may not willingly and voluntarily perform under the terms of the guarantee. In FHN’s risk grading approach, it is deemed that financial support becomes necessary generally at a point when the loan would otherwise be graded substandard, reflecting a well-defined weakness. At that point, provided willingness and capacity to support are appropriately demonstrated, a strong, legally enforceable guarantee can mitigate the risk of default or loss, justify a less severe rating, and consequently reduce the level of allowance or charge-off that might otherwise be deemed appropriate. FHN establishes guarantor willingness to support the credit through documented evidence of previous and ongoing support of the credit. Previous performance under a guarantor’s obligation to pay is not considered if the performance was involuntary.

C&I

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

27

FIRST HORIZON NATIONAL CORPORATION


 

Pricing of C&I loans is based upon the determined credit risk specific to the individual borrower. These loans typically have variable rates tied to the London Inter-Bank Offered Rate (“LIBOR”) or the prime rate of interest plus or minus the appropriate margin.

The C&I portfolio was $9.0 billion on December 31, 2014, and is comprised of loans used for general business purposes and primarily composed of relationship customers in Tennessee and other selected markets that are managed within the regional bank. Typical products include working capital lines of credit, term loan financing of owner-occupied real estate and fixed assets, and trade credit enhancement through letters of credit.

The following table provides the composition of the C&I portfolio by industry as of December 31, 2014 and 2013. For purposes of this disclosure, industries are determined based on the North American Industry Classification System (“NAICS”) industry codes used by Federal statistical agencies in classifying business establishments for the collection, analysis, and publication of statistical data related to the U.S. business economy.

Table 13   C&I Loan Portfolio by Industry

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

December 31, 2014

 

December 31, 2013

 

Amount

 

Percent

 

Amount

 

Percent

 

Industry:

 

 

 

 

 

 

 

 

Finance & insurance

 

 

$

 

1,977,441

 

 

 

 

22

%

 

 

 

$

 

1,748,746

 

 

 

 

22

%

 

Loans to mortgage companies

 

 

 

1,163,018

 

 

 

 

13

 

 

 

 

790,609

 

 

 

 

10

 

Healthcare

 

 

 

773,622

 

 

 

 

9

 

 

 

 

789,088

 

 

 

 

10

 

Wholesale trade

 

 

 

733,262

 

 

 

 

8

 

 

 

 

637,371

 

 

 

 

8

 

Manufacturing

 

 

 

701,538

 

 

 

 

8

 

 

 

 

684,591

 

 

 

 

9

 

Public Administration

 

 

 

560,274

 

 

 

 

6

 

 

 

 

364,827

 

 

 

 

5

 

Real estate rental & leasing (a)

 

 

 

556,096

 

 

 

 

6

 

 

 

 

514,187

 

 

 

 

6

 

Retail trade

 

 

 

508,418

 

 

 

 

6

 

 

 

 

492,728

 

 

 

 

6

 

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

 

 

 

2,033,617

 

 

 

 

22

 

 

 

 

1,901,429

 

 

 

 

24

 

 

Total C&I loan portfolio

 

 

$

 

9,007,286

 

 

 

 

100

%

 

 

 

$

 

7,923,576

 

 

 

 

100

%

 

 

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

 

(a)

 

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

 

(b)

 

Industries in this category each comprise less than 5 percent for 2014 and 2013.

As of December 31, 2014, finance and insurance, the largest component, represents 22 percent of the C&I portfolio. The balances of loans to mortgage companies were 13 percent of the C&I portfolio and include volumes related to both home purchase and refinance activity. This portfolio class, which generally fluctuates with mortgage rates, 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. Generally, lending to mortgage lenders increases when there is a decline in mortgage rates and decreases when rates rise. Significant loan concentrations are considered to exist for a financial institution when there are loans to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. 35 percent of FHN’s C&I portfolio (Finance and Insurance plus Loans to Mortgage Companies) could be affected by items that uniquely impact the financial services industry. Except as discussed under “Finance and Insurance” or above, on December 31, 2014, FHN did not have any other concentrations of C&I loans in any single industry of 10 percent or more of total loans.

Finance and Insurance

The finance and insurance component of the C&I portfolio, which includes bank-related loans and TRUPs (i.e., long term unsecured loans to bank and insurance-related businesses), has been stressed over the last few years but has seen the stronger borrowers stabilize as there have been upgrades and payoffs within the TRUPs and bank stock portfolio. Finance and Insurance also includes approximately $923 million of asset-based lending to consumer financing companies which have accounted for the growth in the finance and insurance component in 2014.

28

FIRST HORIZON NATIONAL CORPORATION


 

TRUPs lending was originally extended as a form of “bridge” financing to participants in the pooled trust preferred securitization program offered primarily to smaller banking (generally less than $15 billion in total assets) and insurance institutions through FHN’s capital markets business. Origination of TRUPs lending ceased in early 2008. Individual TRUPs are re-graded at least quarterly as part of FHN’s commercial loan review process. Typically, the terms of these loans include a prepayment option after a 5 year initial term (with possible triggers of early activation), have a scheduled 30 year balloon payoff, and include an option to defer interest for up to 20 consecutive quarters. As of December 31, 2014, two TRUPs relationships (one bank and one insurance) were on interest deferral, down from five at year-end 2013, with the decrease due to both sales and payoffs.

Underwriting of other loans to financial institutions generally includes onsite due diligence, review of the customer’s policies and strategies, assessment of management, assessment of the relevant markets, a comprehensive assessment of the loan portfolio, and a review of the ALLL. Additionally, the underwriting analysis includes a focus on the customer’s capital ratios, profitability, loan loss coverage ratios, and regulatory status.

As of December 31, 2014, the UPB of trust preferred loans totaled $364.9 million ($208.6 million of bank TRUPs and $156.3 million of insurance TRUPs) with the UPB of other bank-related loans totaling $75.0 million. Inclusive of a remaining lower of cost or market (“LOCOM”) valuation allowance on TRUPs of $26.2 million, total reserves (ALLL plus the LOCOM) for TRUPs and other bank-related loans were $30.9 million or 7 percent of outstanding UPB.

C&I Asset Quality Trends

During 2014, performance of the C&I portfolio continued to improve although at a slower pace than in 2013, with continued positive shifts in the risk rating assignments and lower loss rates. Due to aggregate portfolio improvement, the ALLL declined $19.4 million to $67.0 million as of December 31, 2014, and the allowance as a percentage of period-end loans declined to .74 percent in 2014 from 1.09 percent in 2013. The decline was related to a lower ALLL because of aggregate improvement from a year ago within the regional bank and reduction of TRUPs loans within the non-strategic segment that were on interest deferral from a year ago. Net charge-offs in the C&I portfolio remained at historically low levels in both 2014 and 2013, with net charge-offs remaining relatively flat at $10.8 million for 2014 as compared to $10.4 million for 2013. Net charge-offs as a percentage of average loans remained at .13 percent for both 2014 and 2013. Nonperforming C&I loans decreased $47.2 million to $32.6 million as of December 31, 2014. Regional bank nonperforming C&I loans decreased $23.1 million or 53 percent in 2014 while non-strategic nonperforming C&I loans decreased $24.1 million or 67 percent in 2014 because of the resolution of four TRUPs loans in 2014 that were on interest deferral on December 31, 2013. Nonperforming loans as a percentage of period-end loans decreased to .36 percent in 2014 as compared to 1.01 percent in 2013. Accruing loans thirty or more days past due as a percentage of period-end loans improved to .05 percent in 2014 from .13 percent in 2013.

Commercial Real Estate

The CRE portfolio was $1.3 billion on December 31, 2014. The CRE portfolio includes both financings for commercial construction and nonconstruction loans. This portfolio is segregated between the income producing commercial real estate (“CRE”) class which contains loans, lines, and letters of credit to commercial real estate developers for the construction and mini-permanent financing of income-producing real estate, and the residential CRE class. Subcategories of income CRE consist of multi-family (30 percent), retail (24 percent), office (15 percent), industrial (12 percent), hospitality (8 percent), land/land development (4 percent), and other (7 percent). Nearly all of the income CRE class was originated through and continues to be managed by the regional bank. The income CRE portfolio continued showing improvement as property stabilization and strong sponsors have consistently affected positive performance. FHN does not capitalize interest or fund interest on distressed properties.

The residential CRE class includes loans to residential builders and developers for the purpose of constructing single-family detached homes, condominiums, and town homes. Active residential CRE lending within the regional banking footprint is minimal with nearly all new originations limited to tactical advances to facilitate workout strategies with existing clients and selected new transactions with “strategic” clients. FHN considers a “strategic”

29

FIRST HORIZON NATIONAL CORPORATION


 

residential CRE borrower as a homebuilder within the regional banking footprint who remained profitable during the down cycle.

Income CRE loans are underwritten in accordance with credit policies and underwriting guidelines that are reviewed at least annually and revised as necessary based on market conditions. Loans are underwritten based upon project type, size, location, sponsorship, and other market-specific data. Generally, minimum requirements for equity, debt service coverage ratios (“DSCRs”), and level of pre-leasing activity are established based on perceived risk in each subcategory. Loan-to-value (value is defined as the lower of cost or market) limits are set below regulatory prescribed ceilings and generally range between 50 and 80 percent depending on underlying product set. Term and amortization requirements are set based on prudent standards for interim real estate lending. Equity requirements are established based on the quality and liquidity of the primary source of repayment. For example, more equity would be required for a speculative construction project or land loan than for a property fully leased to a credit tenant or a roster of tenants. Typically, a borrower must have at least 10 percent of cost invested in a project before FHN will fund loan dollars. Income properties are required to achieve a DSCR greater than or equal to 120 percent at inception or stabilization of the project based on loan amortization and a minimum underwriting (interest) rate. Some product types require a higher DSCR ranging from 125 percent to 150 percent of the debt service requirement. Variability depends on borrower versus non-borrower tenancy, lease structure, property type, and quality. A proprietary minimum underwriting interest rate is used to calculate compliance with underwriting standards. Generally, specific levels of pre-leasing must be met for construction loans on income properties. A global cash flow analysis is performed at the borrower and guarantor level. The majority of the portfolio is on a floating rate basis tied to appropriate spreads over LIBOR.

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

CRE Asset Quality Trends

The CRE portfolio showed overall improvement in 2014 as market conditions continued to improve. Total CRE loans increased $144.4 million or 13 percent in 2014 while delinquencies decreased $8.4 million (83 percent) to $1.7 million as of December 31, 2014. Delinquencies as a percentage of period-end loans improved seventy-six basis points to .14 percent at December 31, 2014 from .90 percent at December 31, 2013. Nonperforming loans within the CRE portfolio improved to 1.20 percent in 2014 from 1.60 percent in 2013. In both 2014 and 2013, FHN recognized net recoveries as charge-offs were at historical lows. As of December 31, 2014 the allowance for the CRE portfolio included $3.1 million of reserves specifically allocated for PCI loans.

RETAIL LOAN PORTFOLIOS

Consumer Real Estate

The consumer real estate portfolio was $5.0 billion on December 31, 2014, and is primarily composed of home equity lines and installment loans including restricted balances (loans consolidated per amendments to ASC 810). The largest geographical concentrations of balances as of December 31, 2014, are in Tennessee (59 percent) and California (9 percent) with no other state representing greater than 3 percent of the portfolio. At December 31, 2014, approximately 56 percent of the consumer real estate portfolio was in a first lien position. At origination, the weighted average FICO score of this portfolio was 743 and refreshed FICO scores averaged 736 as of December 31, 2014. Generally, performance of this portfolio is affected by life events that affect borrowers’ finances, the level of unemployment and home prices.

HELOCs comprise $2.5 billion of the consumer real estate portfolio. FHN’s HELOCs typically have a 5 or 10 year draw period followed by a 15 or 10 year repayment period, respectively. During the draw period, a borrower is able to draw on the line and is only required to make interest payments. The line is automatically frozen if a borrower becomes 45 days or more past due on payments. Once the draw period has concluded, the line is closed and the

30

FIRST HORIZON NATIONAL CORPORATION


 

borrower is required to make both principal and interest payments monthly until the loan matures. The principal payment is fully amortizing, but payment amounts will adjust when variable rates reset to reflect changes in the prime rate.

As of December 31, 2014, approximately 74 percent of FHN’s HELOCs are in the draw period. Based on when draw periods are scheduled to end, it is expected that $1.3 billion, or 69 percent of HELOCs currently in the draw period will have entered the repayment period during the next 60 months. Delinquencies and charge-off rates for HELOCs that have entered the repayment period are initially higher than HELOCs still in the draw period because of the increased minimum payment requirement; however, after some seasoning, performance of these loans begins to stabilize. The home equity lines of the consumer real estate portfolio are being monitored closely for those nearing the end of the draw period and borrowers are being contacted proactively early in the process. The following table shows the HELOCs currently in the draw period and expected timing of conversion to the repayment period.

Table 14   HELOC Draw To Repayment Schedule

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

December 31, 2014

 

December 31, 2013

 

Repayment
Amount

 

Percent

 

Repayment
Amount

 

Percent

 

Months remaining in draw period:

 

 

 

 

 

 

 

 

0-12

 

 

$

 

386,598

 

 

 

 

21

%

 

 

 

$

 

258,889

 

 

 

 

12

%

 

13-24

 

 

 

275,842

 

 

 

 

15

 

 

 

 

422,729

 

 

 

 

20

 

25-36

 

 

 

310,206

 

 

 

 

17

 

 

 

 

303,030

 

 

 

 

14

 

37-48

 

 

 

179,020

 

 

 

 

10

 

 

 

 

346,977

 

 

 

 

16

 

49-60

 

 

 

100,428

 

 

 

 

6

 

 

 

 

200,680

 

 

 

 

9

 

>60

 

 

 

574,665

 

 

 

 

31

 

 

 

 

632,486

 

 

 

 

29

 

 

Total

 

 

$

 

1,826,759

 

 

 

 

100

%

 

 

 

$

 

2,164,791

 

 

 

 

100

%

 

 

Underwriting

To obtain a consumer real estate loan, the loan applicant(s) in most cases must first meet a minimum qualifying FICO score. Applicants must also have the financial capacity (or available income) to service the debt by not exceeding a calculated Debt-to-Income (“DTI”) ratio. The amount of the loan is limited to a percentage of the lesser of the current value or sales price of the collateral. For the majority of loans in this portfolio, underwriting decisions are made through a centralized loan underwriting center. Minimum FICO score requirements are established by management for both loans secured by real estate as well as non-real estate loans. Management also establishes maximum loan amounts, loan-to-value ratios, and DTI ratios for each consumer real estate product. Identified guideline and policy exceptions require established mitigating factors that have been approved for use by Credit Risk Management.

In the past, FHN originated real estate secured consumer loans with low or reduced documentation. FHN generally defines low or reduced documentation loans, sometimes called “stated income” or “stated” loans, as any loan originated with anything less than pay stubs, personal financial statements, and tax returns from potential borrowers. Beginning in 2012, FHN no longer originates stated income, or low or reduced documentation real estate secured loans except on an exception basis when mitigating factors are present.

HELOC interest rates are variable but only adjust in connection with movements in the index rate to which the line is tied. Such loans can have elevated risks of default–particularly in a rising interest rate environment potentially stressing borrower capacity to repay the loan at the higher interest rate. FHN’s current underwriting practice requires HELOC borrowers to qualify based on a fully indexed, fully amortized payment methodology. If the first mortgage loan is a non-traditional mortgage, the DTI calculation is based on a fully amortizing first mortgage payment. Prior to 2008, FHN’s underwriting guidelines required borrowers to qualify at an interest rate that was 200 basis points above the note rate. This mitigated risk to FHN in the event of a sharp rise in interest rates over a relatively short time horizon.

31

FIRST HORIZON NATIONAL CORPORATION


 

HELOC Portfolio Risk Management

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

Consumer Real Estate Asset Quality Trends

Overall, performance of the consumer real estate portfolio was relatively stable in 2014 when compared with 2013. The ALLL decreased $13.8 million to $113.0 million in 2014 as a $14.5 million decrease in the allowance within the non-strategic segment was partially offset by increased reserves within the regional bank, reflecting loan growth. The allowance as a percentage of loans was 2.24 percent of loans as of December 31, 2014 compared to 2.38 percent as of December 31, 2013. The balance of nonperforming loans was $120.6 million and $117.6 million as of December 31, 2014 and 2013, respectively. A majority of the increase in nonperforming loans is attributable to the non-strategic segment. Loans delinquent 30 or more days and still accruing declined to 1.10 percent of the consumer real estate portfolio in 2014 from 1.13 percent in 2013 primarily due to runoff of the non-strategic segment and new originations within the bank to stronger borrowers, loss mitigation activities and improved overall performance. The net charge-offs ratio decreased 52 basis points to .43 percent of average loans in 2014. The decline in net charge-offs was related to improved borrower performance as well as stronger underlying collateral values and enhanced recovery efforts.

Permanent Mortgage

The permanent mortgage portfolio was $.5 billion on December 31, 2014. This portfolio is primarily composed of jumbo mortgages and one-time-close (“OTC”) completed construction loans that were originated through legacy businesses. Approximately 25 percent of loan balances are in California, but the remainder of the portfolio is somewhat geographically diverse. Natural run-off contributed to a majority of the net $123.3 million decrease in portfolio balances from 2013.

The ALLL decreased $3.4 million to $19.1 million as of December 31, 2014. TDR reserves comprise a significant majority of the ALLL for the permanent mortgage portfolio. Accruing delinquencies decreased by $8.1 million to $9.3 million. NPLs decreased by $4.1 million to $34.1 million in 2014 from 2013, although NPLs as a percentage of loans increased to 6.32 percent from 5.76 percent. Net charge-offs decreased $3.9 million to $3.6 million during 2014.

Credit Card and Other

The credit card and other portfolios were $.4 billion on December 31, 2014, and primarily include credit card receivables, other consumer-related credits, and automobile loans. The allowance increased to $14.7 million as of December 31, 2014 from $7.5 million in 2013 and was largely to address trends in delinquencies, net charge-offs, and certain asset quality ratios compared to a year ago. In 2014, FHN charged-off $11.8 million of credit card and other consumer loans compared with $8.7 million during 2013. Loans 30 days or more delinquent increased from 1.35 percent in 2013 to 1.42 percent in 2014.

32

FIRST HORIZON NATIONAL CORPORATION


 

The following table provides additional asset quality data by loan portfolio:

Table 15   Asset Quality by Portfolio

 

 

 

 

 

 

 

 

 

December 31

 

2014

 

2013

 

2012

 

Key Portfolio Details

 

 

 

 

 

 

 

C&I

 

 

 

 

 

 

Period-end loans ($ millions)

 

 

$

 

9,007

 

 

 

$

 

7,924

 

 

 

$

 

8,797

 

 

30+ Delinq. % (a)

 

 

 

0.05

%

 

 

 

 

0.13

%

 

 

 

 

0.22

%

 

NPL %

 

 

 

0.36

 

 

 

 

1.01

 

 

 

 

1.39

 

Charge-offs %

 

 

 

0.13

 

 

 

 

0.13

 

 

 

 

0.25

 

 

Allowance / loans %

 

 

 

0.74

%

 

 

 

 

1.09

%

 

 

 

 

1.09

%

 

Allowance / charge-offs

 

 

 

6.19

x

 

 

 

 

8.27

x

 

 

 

 

4.87

x

 

 

Commercial Real Estate

 

 

 

 

 

 

Period-end loans ($ millions)

 

 

$

 

1,278

 

 

 

$

 

1,133

 

 

 

$

 

1,168

 

 

30+ Delinq. % (a)

 

 

 

0.14

%

 

 

 

 

0.90

%

 

 

 

 

0.39

%

 

NPL %

 

 

 

1.20

 

 

 

 

1.60

 

 

 

 

3.90

 

Charge-offs %

 

 

 

NM

 

 

 

 

NM

 

 

 

 

1.19

 

 

Allowance / loans %

 

 

 

1.45

%

 

 

 

 

0.94

%

 

 

 

 

1.71

%

 

Allowance / charge-offs

 

 

 

NM

 

 

 

 

NM

 

 

 

 

1.29

x

 

 

Consumer Real Estate

 

 

 

 

 

 

Period-end loans ($ millions) (b)

 

 

$

 

5,048

 

 

 

$

 

5,333

 

 

 

$

 

5,689

 

 

30+ Delinq. % (a)

 

 

 

1.10

%

 

 

 

 

1.13

%

 

 

 

 

1.36

%

 

NPL % (c)

 

 

 

2.39

 

 

 

 

2.20

 

 

 

 

1.13

 

Charge-offs %

 

 

 

0.43

 

 

 

 

0.95

 

 

 

 

2.23

 

 

Allowance / loans %

 

 

 

2.24

%

 

 

 

 

2.38

%

 

 

 

 

2.27

%

 

Allowance / charge-offs

 

 

 

5.01

x

 

 

 

 

2.43

x

 

 

 

 

0.99

x

 

 

Permanent Mortgage

 

 

 

 

 

 

Period-end loans ($ millions) (d)

 

 

$

 

539

 

 

 

$

 

662

 

 

 

$

 

766

 

 

30+ Delinq. % (a)

 

 

 

1.72

%

 

 

 

 

2.62

%

 

 

 

 

2.28

%

 

NPL %

 

 

 

6.32

 

 

 

 

5.76

 

 

 

 

4.27

 

Charge-offs %

 

 

 

0.60

 

 

 

 

1.00

 

 

 

 

1.33

 

 

Allowance / loans %

 

 

 

3.55

%

 

 

 

 

3.40

%

 

 

 

 

3.26

%

 

Allowance / charge-offs

 

 

 

5.34

x

 

 

 

 

3.01

x

 

 

 

 

2.36

x

 

 

Credit Card and Other

 

 

 

 

 

 

Period-end loans ($ millions)

 

 

$

 

358

 

 

 

$

 

337

 

 

 

$

 

289

 

 

30+ Delinq. % (a)

 

 

 

1.42

%

 

 

 

 

1.35

%

 

 

 

 

1.45

%

 

NPL %

 

 

 

0.21

 

 

 

 

0.42

 

 

 

 

0.59

 

Charge-offs %

 

 

 

3.39

 

 

 

 

2.78

 

 

 

 

3.36

 

 

Allowance / loans %

 

 

 

4.11

%

 

 

 

 

2.22

%

 

 

 

 

2.39

%

 

Allowance / charge-offs

 

 

 

1.25

x

 

 

 

 

0.86

x

 

 

 

 

0.73

x

 

 

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

NM - Not meaningful

Loans are expressed net of unearned income.

 

(a)

 

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

 

(b)

 

2014, 2013, and 2012, include $76.8 million, $333.8 million, and $402.4 million of restricted and secured real estate loans, respectively.

 

(c)

 

2013 NPL levels affected by the impact of placing second liens on nonaccrual based on third party data obtained on the performance status of non-FHN serviced first liens beginning in second quarter 2013. 2012 NPL levels affected by placing discharged bankruptcies and current second liens behind FHN-serviced first liens with performance issues on nonaccrual relative to 2011.

 

(d)

 

2013 and 2012, include $11.2 million, and $13.2 million of restricted and secured real estate loans, respectively.

33

FIRST HORIZON NATIONAL CORPORATION


 

Allowance for Loan Losses

Management’s policy is to maintain the ALLL at a level sufficient to absorb estimated probable incurred losses in the loan portfolio. The total allowance for loan losses decreased 8 percent to $232.4 million on December 31, 2014, from $253.8 million on December 31, 2013. The allowance attributable to individually impaired loans was $63.6 million compared to $77.3 million on December 31, 2014 and 2013, respectively. FHN also had $3.2 million of reserves associated with PCI loans as of December 31, 2014 compared to $0.8 million as of December 31, 2013. Continued aggregate improvement in borrowers’ financial conditions in 2014, improvement in economic conditions, run-off on the non-strategic portfolios, and proactive management of problem credits contributed to the decline in the ALLL from a year ago. The ratio of allowance for loan losses to total loans, net of unearned income, decreased to 1.43 percent on December 31, 2014, from 1.65 percent on December 31, 2013.

The provision for loan losses is the charge to earnings necessary to maintain the ALLL at a sufficient level reflecting management’s estimate of probable incurred losses in the loan portfolio. The provision for loan losses decreased 51 percent to $27.0 million in 2014 from $55.0 million in 2013. On a consolidated basis, credit quality continued to improve from a year ago due to overall improvement in the commercial portfolio and stabilization of consumer real estate portfolios although the smaller-balance credit card and other portfolio had higher delinquencies and net charge-offs in 2014.

FHN expects asset quality trends to be relatively stable in 2015. That expectation depends upon a continued economic recovery, among other things, which may or may not occur. The C&I portfolio is expected to continue to show stable trends but short-term variability (both positive and negative) is possible. The CRE portfolio should be relatively stable as FHN has observed property values stabilizing. The remaining non-strategic consumer real estate and permanent mortgage portfolios should continue to steadily wind down. Continued stabilization in performance of the consumer real estate portfolio assumes an ongoing economic recovery as consumer delinquency and loss rates are correlated with unemployment trends, and strength of the housing market.

Consolidated Net Charge-offs

Net charge-offs were $48.4 million in 2014 compared to $78.2 million in 2013. The ALLL was 4.81 times net charge-offs for 2014 compared with 3.25 times net charge-offs for 2013 and the net charge-offs to average loans ratio decreased from .50 percent in 2013 to .31 percent in 2014 due to a 38 percent decline in net charge-offs.

Commercial loan net charge-offs were $10.4 million in 2014 compared to $9.7 million in 2013 as commercial net charge-offs remain at historically low levels.

Consolidated net charge-offs in the retail portfolios declined $30.5 million in 2014. Net charge-offs of consumer real estate loans declined $29.7 million to $22.6 million in 2014, with all of the decline attributable to the non-strategic segment which more than offset a $2.0 million increase of net charge-offs within the regional bank. The decline was due in part to improvement in the portfolio, stabilizing collateral values, and enhanced recovery efforts. Permanent mortgage net charge-offs declined $3.9 million and credit card and other net charge-offs increased $3.1 million from a year ago.

34

FIRST HORIZON NATIONAL CORPORATION


 

The following table provides consolidated asset quality information for the years 2010 through 2014:

Table 16   Analysis of Allowance for Loan Losses and Charge-offs

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2014

 

2013

 

2012

 

2011

 

2010

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

$

 

253,809

 

 

 

$

 

276,963

 

 

 

$

 

384,351

 

 

 

$

 

664,799

 

 

 

$

 

896,914

 

Adjustment due to amendments of ASC 810

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

24,578

 

Provision for loan losses

 

 

 

27,000

 

 

 

 

55,000

 

 

 

 

78,000

 

 

 

 

44,000

 

 

 

 

270,000

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

Commercial, financial, and industrial

 

 

 

20,492

 

 

 

 

22,936

 

 

 

 

30,887

 

 

 

 

76,728

 

 

 

 

97,272

 

Commercial real estate

 

 

 

3,741

 

 

 

 

3,502

 

 

 

 

19,977

 

 

 

 

41,147

 

 

 

 

127,323

 

Consumer real estate

 

 

 

45,391

 

 

 

 

73,642

 

 

 

 

147,918

 

 

 

 

164,922

 

 

 

 

233,269

 

Permanent mortgage

 

 

 

5,891

 

 

 

 

9,934

 

 

 

 

13,604

 

 

 

 

75,218

 

 

 

 

71,113

 

OTC

 

 

 

3,895

 

 

 

 

-

 

 

 

 

452

 

 

 

 

5,236

 

 

 

 

30,609

 

Credit card and other

 

 

 

11,036

 

 

 

 

11,404

 

 

 

 

12,172

 

 

 

 

14,017

 

 

 

 

16,955

 

 

Total charge-offs

 

 

 

90,446

 

 

 

 

121,418

 

 

 

 

225,010

 

 

 

 

377,268

 

 

 

 

576,541

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

Commercial, financial, and industrial

 

 

 

9,666

 

 

 

 

12,487

 

 

 

 

11,151

 

 

 

 

16,562

 

 

 

 

11,630

 

Commercial real estate

 

 

 

4,150

 

 

 

 

4,275

 

 

 

 

4,475

 

 

 

 

11,047

 

 

 

 

13,030

 

Consumer real estate

 

 

 

22,824

 

 

 

 

21,360

 

 

 

 

17,770

 

 

 

 

16,019

 

 

 

 

16,300

 

Permanent mortgage

 

 

 

2,314

 

 

 

 

2,473

 

 

 

 

3,024

 

 

 

 

5,375

 

 

 

 

1,658

 

OTC

 

 

 

892

 

 

 

 

127

 

 

 

 

295

 

 

 

 

327

 

 

 

 

4,162

 

Credit card and other

 

 

 

2,239

 

 

 

 

2,542

 

 

 

 

2,907

 

 

 

 

3,490

 

 

 

 

3,068

 

 

Total recoveries

 

 

 

42,085

 

 

 

 

43,264

 

 

 

 

39,622

 

 

 

 

52,820

 

 

 

 

49,848

 

 

Net charge-offs

 

 

 

48,361

 

 

 

 

78,154

 

 

 

 

185,388

 

 

 

 

324,448

 

 

 

 

526,693

 

 

Ending balance

 

 

$

 

232,448

 

 

 

$

 

253,809

 

 

 

$

 

276,963

 

 

 

$

 

384,351

 

 

 

$

 

664,799

 

 

Reserve for unfunded commitments

 

 

$

 

4,770

 

 

 

$

 

3,017

 

 

 

$

 

4,145

 

 

 

$

 

6,945

 

 

 

$

 

14,253

 

Total of allowance for loan losses and reserve for unfunded commitments

 

 

 

237,218

 

 

 

 

256,826

 

 

 

 

281,108

 

 

 

 

391,296

 

 

 

 

679,052

 

 

Loans and commitments:

 

 

 

 

 

 

 

 

 

 

Total period end loans, net of unearned

 

 

$

 

16,230,166

 

 

 

$

 

15,389,074

 

 

 

$

 

16,708,582

 

 

 

$

 

16,397,127

 

 

 

$

 

16,782,572

 

Insured retail residential and construction loans (a)

 

 

 

5,674

 

 

 

 

18,147

 

 

 

 

40,672

 

 

 

 

99,024

 

 

 

 

174,621

 

 

Loans excluding insured loans

 

 

$

 

16,224,492

 

 

 

$

 

15,370,927

 

 

 

$

 

16,667,910

 

 

 

$

 

16,298,103

 

 

 

$

 

16,607,951

 

 

Remaining unfunded commitments

 

 

$

 

7,309,136

 

 

 

$

 

7,469,553

 

 

 

$

 

7,993,218

 

 

 

$

 

7,435,228

 

 

 

$

 

7,903,537

 

 

Average loans, net of unearned

 

 

$

 

15,520,972

 

 

 

$

 

15,726,374

 

 

 

$

 

16,205,403

 

 

 

$

 

16,056,818

 

 

 

$

 

17,131,798

 

 

Reserve Rates

 

 

 

 

 

 

 

 

 

 

Total commercial loans

 

 

 

 

 

 

 

 

 

 

Allowance/loans %

 

 

 

0.83

%

 

 

 

 

1.07

%

 

 

 

 

1.17

%

 

 

 

 

1.98

%

 

 

 

 

4.38

%

 

Period End Loans % of Total

 

 

 

63

 

 

 

 

59

 

 

 

 

60

 

 

 

 

57

 

 

 

 

54

 

Consumer real estate

 

 

 

 

 

 

 

 

 

 

Allowance/loans %

 

 

 

2.24

 

 

 

 

2.38

 

 

 

 

2.27

 

 

 

 

2.80

 

 

 

 

3.04

 

Period End Loans % of Total

 

 

 

31

 

 

 

 

35

 

 

 

 

34

 

 

 

 

36

 

 

 

 

38

 

Permanent mortgage

 

 

 

 

 

 

 

 

 

 

Allowance/loans %

 

 

 

3.55

 

 

 

 

3.40

 

 

 

 

3.26

 

 

 

 

3.16

 

 

 

 

5.69

 

Period End Loans % of Total

 

 

 

3

 

 

 

 

4

 

 

 

 

4

 

 

 

 

5

 

 

 

 

6

 

OTC (Consumer Residential Construction Loans)

 

 

 

 

 

 

 

 

 

 

Allowance/loans %

 

 

 

*

 

 

 

 

*

 

 

 

 

*

 

 

 

 

9.24

 

 

 

 

22.80

 

Period End Loans % of Total

 

 

 

*

 

 

 

 

*

 

 

 

 

*

 

 

 

 

*

 

 

 

 

*

 

Credit card and other

 

 

 

 

 

 

 

 

 

 

Allowance/loans %

 

 

 

4.11

 

 

 

 

2.23

 

 

 

 

2.40

 

 

 

 

2.44

 

 

 

 

2.90

 

Period End Loans % of Total

 

 

 

2

 

 

 

 

2

 

 

 

 

2

 

 

 

 

2

 

 

 

 

2

 

Allowance and net charge-off ratios

 

 

 

 

 

 

 

 

 

 

Allowance to total loans

 

 

 

1.43

 

 

 

 

1.65

 

 

 

 

1.66

 

 

 

 

2.34

 

 

 

 

3.96

 

Allowance to total loans excluding insured loans

 

 

 

1.43

 

 

 

 

1.65

 

 

 

 

1.66

 

 

 

 

2.36

 

 

 

 

4.00

 

Net charge-offs to average loans

 

 

 

0.31

 

 

 

 

0.50

 

 

 

 

1.14

 

 

 

 

2.02

 

 

 

 

3.07

 

Allowance to net charge-offs

 

 

 

4.81

x

 

 

 

 

3.25

x

 

 

 

 

1.49

x

 

 

 

 

1.18

x

 

 

 

 

1.26

x

 

 

* Amount is less than one percent.

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

 

(a)

 

Whole-loans insurance has been obtained on certain retail residential and construction loans.

35

FIRST HORIZON NATIONAL CORPORATION


 

Nonperforming Assets

Nonperforming loans are loans 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. Included in nonaccruals are loans in which FHN continues to receive payments, including residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy and second liens, regardless of delinquency status, behind first liens that are 90 or more days past due or are TDRs. These, along with foreclosed real estate, excluding foreclosed real estate from government insured mortgages, represent nonperforming assets (“NPAs”).

Total nonperforming assets (including NPLs HFS) decreased to $241.5 million on December 31, 2014, from $361.9 million on December 31, 2013. Nonperforming assets (excluding NPLs HFS) decreased to $233.9 million on December 31, 2014, from $300.8 million on December 31, 2013. The nonperforming assets ratio (nonperforming assets excluding NPLs HFS to total period-end loans plus foreclosed real estate and other assets) decreased to 1.44 percent in 2014 from 1.95 percent in 2013 due to a 22 percent decline in portfolio nonperforming assets in 2014. Portfolio nonperforming loans declined $51.6 million to $203.4 million on December 31, 2014, largely driven by improvement in the C&I portfolio.

Nonperforming C&I loans decreased to $32.6 million in 2014 from $79.8 million in 2013. Resolutions of TRUPS loans contributed $33.3 million of the year-over-year decline. The remaining decline was in the regional bank due to resolutions on larger loans and regular payments on smaller loans. The inflow into NPLs has also slowed down considerably. Commercial real estate NPLs decreased $2.7 million to $15.4 million in 2014. Consumer nonperforming loans decreased to $155.5 million from $157.2 million in 2013, mainly due to the decline in the permanent mortgage portfolio. Nonperforming loans classified as HFS decreased $53.5 million to $7.6 million on December 31, 2014 primarily due to the sale of mortgage loans HFS in 2014. Loans in HFS are recorded at elected fair value or lower of cost or market and do not carry reserves.

The ratio of ALLL to NPLs in the loan portfolio increased to 1.14 times in 2014 compared to 1.00 times in 2013, driven by lower nonperforming loans. Certain nonperforming loans in both the commercial and consumer portfolios are deemed collateral-dependent and are charged down to an estimate of collateral value less costs to sell. Because loss content has been recognized through a partial charge-off, typically reserves are not recorded. Additionally, a majority of FHN’s loans in held-for-sale are accounted for under the fair value option. As a result, losses related to nonperforming HFS loans have been recognized by FHN directly through the income statement.

36

FIRST HORIZON NATIONAL CORPORATION


 

Table 17   Nonaccrual/Nonperforming Loans, Foreclosed Assets, and Other Disclosures (a)

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

December 31

 

2014

 

2013

 

2012

 

2011

 

2010

 

Consumer:

 

 

 

 

 

 

 

 

 

 

Consumer real estate

 

 

$

 

120,632

 

 

 

$

 

117,598

 

 

 

$

 

64,445

 

 

 

$

 

38,776

 

 

 

$

 

35,451

 

Permanent mortgage

 

 

 

34,078

 

 

 

 

38,171

 

 

 

 

32,721

 

 

 

 

35,989

 

 

 

 

125,718

 

Credit card & other (b)

 

 

 

763

 

 

 

 

1,397

 

 

 

 

1,698

 

 

 

 

2,141

 

 

 

 

19,276

 

 

Total consumer

 

 

 

155,473

 

 

 

 

157,166

 

 

 

 

98,864

 

 

 

 

76,906

 

 

 

 

180,445

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

Commercial, financial, and industrial

 

 

 

32,610

 

 

 

 

79,759

 

 

 

 

122,600

 

 

 

 

162,229

 

 

 

 

213,993

 

Commercial real estate

 

 

 

15,356

 

 

 

 

18,101

 

 

 

 

45,570

 

 

 

 

114,965

 

 

 

 

252,467

 

 

Total commercial

 

 

 

47,966

 

 

 

 

97,860

 

 

 

 

168,170

 

 

 

 

277,194

 

 

 

 

466,460

 

 

Total nonperforming loans (c) (d)

 

 

 

203,439

 

 

 

 

255,026

 

 

 

 

267,034

 

 

 

 

354,100

 

 

 

 

646,905

 

 

Nonperforming loans held-for-sale (d)

 

 

 

7,643

 

 

 

 

61,139

 

 

 

 

51,385

 

 

 

 

46,651

 

 

 

 

41,546

 

Foreclosed real estate and other assets

 

 

 

30,430

 

 

 

 

45,753

 

 

 

 

41,767

 

 

 

 

68,885

 

 

 

 

110,536

 

Foreclosed real estate from GNMA loans

 

 

 

9,492

 

 

 

 

25,809

 

 

 

 

18,923

 

 

 

 

16,360

 

 

 

 

14,865

 

 

Total foreclosed real estate and other assets

 

 

 

39,922

 

 

 

 

71,562

 

 

 

 

60,690

 

 

 

 

85,245

 

 

 

 

125,401

 

 

Total nonperforming assets (d) (e)

 

 

$

 

241,512

 

 

 

$

 

361,918

 

 

 

$

 

360,186

 

 

 

$

 

469,636

 

 

 

$

 

798,987

 

 

Troubled debt restructurings (f):

 

 

 

 

 

 

 

 

 

 

Accruing restructured loans

 

 

$

 

231,109

 

 

 

$

 

246,894

 

 

 

$

 

243,884

 

 

 

$

 

206,210

 

 

 

$

 

144,252

 

Nonaccruing restructured loans (d) (g)

 

 

 

100,152

 

 

 

 

105,409

 

 

 

 

114,138

 

 

 

 

72,798

 

 

 

 

116,191

 

 

Total troubled debt restructurings (f)

 

 

$

 

331,261

 

 

 

$

 

352,303

 

 

 

$

 

358,022

 

 

 

$

 

279,008

 

 

 

$

 

260,443

 

 

Ratios:

 

 

 

 

 

 

 

 

 

 

Allowance to nonperforming loans in the loan portfolio (d)

 

 

 

1.14

x

 

 

 

 

1.00

x

 

 

 

 

1.04

x

 

 

 

 

1.09

x

 

 

 

 

1.03

x

 

NPL % (d) (h)

 

 

 

1.25

%

 

 

 

 

1.66

%

 

 

 

 

1.60

%

 

 

 

 

2.16

%

 

 

 

 

3.85

%

 

NPA % (d) (i)

 

 

 

1.44

%

 

 

 

 

1.95

%

 

 

 

 

1.84

%

 

 

 

 

2.57

%

 

 

 

 

4.48

%

 

 

 

(a)

 

Balances do not include PCI loans even though the customer may be contractually past due. PCI loans were recorded at fair value upon acquisition and accrete interest income over the remaining life of the loan.

 

(b)

 

Nonperforming loans in this category are primarily one-time-close construction loans.

 

(c)

 

Under the original terms of the loans, estimated interest income would have been approximately $10 million, $14 million, and $14 million during 2014, 2013, and 2012, respectively.

 

(d)

 

Excludes loans that are 90 or more days past due and still accruing interest.

 

(e)

 

Balances do not include PCI loans or government-insured foreclosed real estate.

 

(f)

 

Excludes TDRs that are classified as held-for-sale nearly all of which are accounted for under the fair value option.

 

(g)

 

Amounts also included in nonperforming loans above.

 

(h)

 

Nonperforming loans in the loan portfolio to total period end loans.

 

(i)

 

Nonperforming assets related to the loan portfolio to total loans plus foreclosed assets exclusive of government-insured foreclosed real estate

The following table provides nonperforming loans both before and after partial charge-offs, LOCOM, and negative fair value adjustments previously taken as of December 31, 2014 and 2013.

Table 18   Nonperforming Loans

 

 

 

 

 

(Dollars in thousands)

 

December 31

 

2014

 

2013

 

Held-to-maturity:

 

 

 

 

Gross nonperforming loans

 

 

$

 

272,367

 

 

 

$

 

335,461

 

Less: Partial charge-offs

 

 

 

(68,314

)

 

 

 

 

(77,189

)

 

Less: LOCOM

 

 

 

(614

)

 

 

 

 

(3,246

)

 

 

Net nonperforming loans

 

 

$

 

203,439

 

 

 

$

 

255,026

 

 

Held-for-sale:

 

 

 

 

Gross nonperforming loans

 

 

$

 

14,211

 

 

 

$

 

136,079

 

Less: Fair value mark

 

 

 

(6,529

)

 

 

 

 

(73,070

)

 

Less: LOCOM

 

 

 

(39

)

 

 

 

 

(1,870

)

 

 

Net nonperforming loans

 

 

$

 

7,643

 

 

 

$

 

61,139

 

 

Total net nonperforming loans including held-for-sale

 

 

$

 

211,082

 

 

 

$

 

316,165

 

 

37

FIRST HORIZON NATIONAL CORPORATION


 

Table 19 provides an activity rollforward of foreclosed real estate balances for December 31, 2014 and 2013. The balance of foreclosed real estate, exclusive of inventory from government insured mortgages, decreased to $30.4 million as of December 31, 2014, from $45.8 million as of December 31, 2013 as FHN has continued efforts to avoid foreclosures by restructuring loans and working with borrowers while also executing sales of existing foreclosed assets. Additionally property values have stabilized which also affect the balance of foreclosed real estate. Negative adjustments to the fair value of foreclosed assets decreased $1.5 million between the periods to $3.5 million for December 31, 2014. See the discussion of Foreclosure Practices in the Market Uncertainties and Prospective Trends section of MD&A for information regarding the impact on FHN.

Table 19   Rollforward of Foreclosed Real Estate

 

 

 

 

 

(Dollars in thousands)

 

2014

 

2013

 

Beginning balance (a)

 

 

$

 

45,753

 

 

 

$

 

41,767

 

Valuation adjustments

 

 

 

(3,465

)

 

 

 

 

(4,987

)

 

New foreclosed property

 

 

 

20,877

 

 

 

 

23,340

 

Acquired foreclosed property (b)

 

 

 

-

 

 

 

 

22,364

 

Capitalized expenses

 

 

 

27

 

 

 

 

23

 

Disposals:

 

 

 

 

Single transactions

 

 

 

(31,440

)

 

 

 

 

(34,544

)

 

Bulk sales

 

 

 

(1,322

)

 

 

 

 

(2,210

)

 

 

Ending balance, December 31 (a)

 

 

$

 

30,430

 

 

 

$

 

45,753

 

 

 

(a)

 

Excludes foreclosed real estate related to government insured mortgages.

 

(b)

 

Foreclosed assets were acquired through the MNB acquisition in second quarter 2013.

Past Due Loans and Potential Problem Assets

Past due loans are loans contractually past due as to interest or principal payments, but which have not yet been put on nonaccrual status. Loans in the portfolio that are 90 days or more past due and still accruing decreased to $25.2 million on December 31, 2014, from $32.3 million on December 31, 2013. The decrease was driven primarily by consumer real estate and C&I. Loans 30 to 89 days past due decreased $19.8 million to $50.5 million on December 31, 2014. The decline in loans past due 30-89 days is largely attributable to the commercial real estate, C&I, and permanent mortgage portfolios because of aggregate improved performance and loss mitigation activities. These decreases were somewhat offset by an increase in delinquencies within the consumer real estate and credit card and other portfolios.

Potential problem assets represent those assets where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the OCC for loans classified as substandard. Potential problem assets in the loan portfolio, which includes loans past due 90 days or more and still accruing, were $267.8 million on December 31, 2014, and $343.4 million on December 31, 2013. The current expectation of losses from potential problem assets has been included in management’s analysis for assessing the adequacy of the allowance for loan losses.

38

FIRST HORIZON NATIONAL CORPORATION


 

Table 20   Accruing Delinquencies and Other Credit Disclosures

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

December 31

 

2014

 

2013

 

2012

 

2011

 

2010

 

Loans past due 90 days or more and still accruing (a) (b):

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

Consumer real estate

 

 

$

 

16,695

 

 

 

$

 

21,484

 

 

 

$

 

30,403

 

 

 

$

 

37,625

 

 

 

$

 

47,937

 

Permanent mortgage

 

 

 

5,640

 

 

 

 

6,129

 

 

 

 

9,592

 

 

 

 

12,415

 

 

 

 

29,367

 

Credit card & other

 

 

 

2,025

 

 

 

 

1,763

 

 

 

 

1,833

 

 

 

 

1,502

 

 

 

 

1,758

 

 

Total consumer

 

 

 

24,360

 

 

 

 

29,376

 

 

 

 

41,828

 

 

 

 

51,542

 

 

 

 

79,062

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

Commercial, financial, and industrial

 

 

 

770

 

 

 

 

1,810

 

 

 

 

422

 

 

 

 

234

 

 

 

 

182

 

Commercial real estate

 

 

 

115

 

 

 

 

1,078

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

Total commercial

 

 

 

885

 

 

 

 

2,888

 

 

 

 

422

 

 

 

 

234

 

 

 

 

182

 

 

Total loans past due 90 days or more and still accruing (a) (b)

 

 

$

 

25,245

 

 

 

$

 

32,264

 

 

 

$

 

42,250

 

 

 

$

 

51,776

 

 

 

$

 

79,244

 

 

Loans 30 to 89 days past due

 

 

$

 

50,531

 

 

 

$

 

70,298

 

 

 

$

 

80,893

 

 

 

$

 

110,813

 

 

 

$

 

173,233

 

Loans 30 to 89 days past due – guaranteed (c)

 

 

 

175

 

 

 

 

187

 

 

 

 

47

 

 

 

 

67

 

 

 

 

3,801

 

Loans held-for-sale 30 to 89 days past due

 

 

 

6,895

 

 

 

 

14,538

 

 

 

 

15,333

 

 

 

 

7,591

 

 

 

 

8,646

 

Loans held-for-sale 30 to 89 days past due – guaranteed portion (c)

 

 

 

6,013

 

 

 

 

11,660

 

 

 

 

12,986

 

 

 

 

6,108

 

 

 

 

3,490

 

Loans held-for-sale 90 days past due (b)

 

 

 

25,455

 

 

 

 

37,599

 

 

 

 

34,002

 

 

 

 

42,308

 

 

 

 

33,409

 

Loans held-for-sale 90 days past due – guaranteed portion (b) (c)

 

 

 

24,255

 

 

 

 

35,118

 

 

 

 

31,699

 

 

 

 

36,299

 

 

 

 

26,790

 

Potential problem assets (d)

 

 

$

 

267,797

 

 

 

$

 

343,359

 

 

 

$

 

496,308

 

 

 

$

 

729,421

 

 

 

$

 

1,144,185

 

 

 

(a)

 

Excludes loans classified as held-for-sale.

 

(b)

 

Amounts are not included in nonperforming/nonaccrual loans.

 

(c)

 

Guaranteed loans include FHA, VA, and GNMA loans repurchased through the GNMA buyout program.

 

(d)

 

Includes past due loans.

Troubled Debt Restructuring and Loan Modifications

As part of FHN’s ongoing risk management practices, FHN attempts to work with borrowers when appropriate 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. In a situation where an economic concession has been granted to a borrower that is experiencing financial difficulty, FHN identifies and reports that loan as a Troubled Debt Restructuring (“TDR”). 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. Additionally, FHN structures loan modifications to amortize the debt within a reasonable period of time. See Note 4 – Loans for further discussion regarding TDRs.

Commercial Loan Modifications

As part of FHN’s credit risk management governance processes, the Loan Rehab and Recovery Department (“LRRD”) is responsible for managing most commercial relationships with borrowers whose financial condition has deteriorated to such an extent that the credits are being considered for impairment, classified as substandard or worse, placed on nonaccrual status, foreclosed or in process of foreclosure, or in active or contemplated litigation. LRRD has the authority and responsibility to enter into workout and/or rehabilitation agreements with troubled commercial borrowers in order to mitigate and/or minimize the amount of credit losses recognized from these problem assets. The range of commercial workout strategies utilized by LRRD to mitigate the likelihood of loan losses is commensurate with the degree of commercial credit quality deterioration. While every circumstance is different, LRRD will generally use forbearance agreements (generally 6-12 months) as an element of commercial loan workouts, which include reduced interest rates, reduced payments, release of guarantor, or entering into short sale agreements. Senior credit management tracks classified loans and performs periodic reviews of such assets to understand FHN’s interest in the borrower, the most recent financial results of the borrower, and the associated loss mitigation approaches and/or exit plans that have been developed for those relationships. After initial identification, relationship managers prepare regular updates for review and discussion by more senior business line and credit officers.

39

FIRST HORIZON NATIONAL CORPORATION


 

The individual impairment assessments completed on commercial loans in accordance with the Accounting Standards Codification Topic related to Troubled Debt Restructurings (“ASC 310-40”) include loans classified as TDRs as well as loans that may have been modified yet not classified as TDRs by management. For example, a modification of loan terms that management would generally not consider to be a TDR could be a temporary extension of maturity to allow a borrower to complete an asset sale whereby the proceeds of such transaction are to be paid to satisfy the outstanding debt. Additionally, a modification that extends the term of a loan but does not involve reduction of principal or accrued interest, in which the interest rate is adjusted to reflect current market rates for similarly situated borrowers, is not considered a TDR. Nevertheless, each assessment will take into account any modified terms and will be comprehensive to ensure appropriate impairment assessment. If individual impairment is identified, management will either hold specific reserves on the amount of impairment, or, if the loan is collateral dependent, write down the carrying amount of the asset to the net realizable value of the collateral.

Consumer Loan Modifications

Although FHN does not currently participate in any of the loan modification programs sponsored by the U.S. government, FHN does modify consumer loans using the parameters of Home Affordable Modification Program (“HAMP”). Generally, a majority of loans modified under any such proprietary programs are classified as TDRs.

Within the HELOC and R/E installment loan classes of the consumer portfolio segment, TDRs are typically modified by reducing the interest rate (in increments 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 Freddie Mac 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.

Following classification as a TDR, modified loans within the consumer portfolio, which were previously evaluated for impairment on a collective basis determined by their smaller balances and homogenous nature, become subject to the impairment guidance in ASC 310-10-35, which requires individual evaluation of the debt for impairment. However, as applicable accounting guidance allows, FHN may aggregate certain smaller-balance homogeneous TDRs and use historical statistics, such as aggregated charge-off amounts and average amounts recovered, along with a composite effective interest rate to measure impairment when such impaired loans have risk characteristics in common.

On December 31, 2014 and 2013, FHN had $331.3 million and $352.3 million portfolio loans classified as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reserves of $59.0 million and $64.6 million, or 18 percent and 18 percent of TDR balances, as of December 31, 2014 and 2013, respectively. Additionally, FHN had $80.1 million and $135.6 million of loans HFS as of December 31, 2014 and 2013, respectively, that were classified as TDRs. The commercial and consumer portfolio TDRs decreased by $21.0 million. The HFS TDRs decreased by $55.5 million from a year ago mainly due to the sale of mortgage loans HFS in third quarter 2014.

40

FIRST HORIZON NATIONAL CORPORATION


 

The following table provides a summary of TDRs for the periods ended December 31, 2014 and 2013:

Table 21   Troubled Debt Restructurings

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

As of
December 31, 2014

 

As of
December 31, 2013

 

Number

 

Amount

 

Number

 

Amount

 

Held-to-maturity:

 

 

 

 

 

 

 

 

Permanent mortgage:

 

 

 

 

 

 

 

 

Current

 

 

 

182

 

 

 

$

 

88,364

 

 

 

 

174

 

 

 

$

 

89,930

 

Delinquent

 

 

 

9

 

 

 

 

3,085

 

 

 

 

12

 

 

 

 

7,890

 

Non-accrual (a)

 

 

 

86

 

 

 

 

22,010

 

 

 

 

131

 

 

 

 

23,638

 

 

 

 

 

 

Total permanent mortgage

 

 

 

277

 

 

 

 

113,459

 

 

 

 

317

 

 

 

 

121,458

 

 

Consumer real estate:

 

 

 

 

 

 

 

 

Current

 

 

 

1,017

 

 

 

 

107,829

 

 

 

 

1,159

 

 

 

 

120,805

 

Delinquent

 

 

 

53

 

 

 

 

4,401

 

 

 

 

44

 

 

 

 

3,958

 

Non-accrual (b)

 

 

 

1,239

 

 

 

 

60,995

 

 

 

 

1,222

 

 

 

 

45,659

 

 

 

 

 

 

Total consumer real estate

 

 

 

2,309

 

 

 

 

173,225

 

 

 

 

2,425

 

 

 

 

170,422

 

 

Credit card and other:

 

 

 

 

 

 

 

 

Current

 

 

 

179

 

 

 

 

456

 

 

 

 

229

 

 

 

 

518

 

Delinquent

 

 

 

17

 

 

 

 

77

 

 

 

 

16

 

 

 

 

27

 

Non-accrual

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

 

 

Total credit card and other

 

 

 

196

 

 

 

 

533

 

 

 

 

245

 

 

 

 

545

 

 

Commercial loans:

 

 

 

 

 

 

 

 

Current

 

 

 

22

 

 

 

 

25,897

 

 

 

 

28

 

 

 

 

23,676

 

Delinquent

 

 

 

1

 

 

 

 

1,000

 

 

 

 

1

 

 

 

 

90

 

Non-accrual

 

 

 

31

 

 

 

 

17,147

 

 

 

 

47

 

 

 

 

36,112

 

 

 

 

 

 

Total commercial loans

 

 

 

54

 

 

 

 

44,044

 

 

 

 

76

 

 

 

 

59,878

 

 

Total held-to-maturity

 

 

 

2,836

 

 

 

 

331,261

 

 

 

 

3,063

 

 

 

 

352,303

 

Held-for-sale: (c)

 

 

 

 

 

 

 

 

Current

 

 

 

369

 

 

 

 

54,383

 

 

 

 

482

 

 

 

 

79,260

 

Delinquent

 

 

 

146

 

 

 

 

21,748

 

 

 

 

199

 

 

 

 

30,607

 

Non-accrual

 

 

 

31

 

 

 

 

3,936

 

 

 

 

215

 

 

 

 

25,745

 

 

 

 

 

 

Total held-for-sale

 

 

 

546

 

 

 

 

80,067

 

 

 

 

896

 

 

 

 

135,612

 

 

Total troubled debt restructurings

 

 

 

3,382

 

 

 

$

 

411,328

 

 

 

 

3,959

 

 

 

$

 

487,915

 

 

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

 

(a)

 

Balances as of December 31, 2014 and 2013 include $7.3 million and $8.5 million, respectively, of discharged bankruptcies.

 

(b)

 

Balances as of December 31, 2014 and 2013 include $18.2 million and $27.8 million, respectively, of discharged bankruptcies.

 

(c)

 

Loans HFS are reported net of negative fair value adjustments.

41

FIRST HORIZON NATIONAL CORPORATION


 

RISK MANAGEMENT

FHN derives revenue from providing services and, in many cases, assuming and managing risk for profit which exposes the Company to business strategy and reputational, interest rate, liquidity, market, capital adequacy, operational, compliance, and credit risks that require ongoing oversight and management. FHN has an enterprise-wide approach to risk governance, measurement, management, and reporting including an economic capital allocation process that is tied to risk profiles used to measure risk-adjusted returns. Through an enterprise-wide risk governance structure and a statement of risk tolerance approved by the Board, management continually evaluates the balance of risk/return and earnings volatility with shareholder value.

FHN’s enterprise-wide risk governance structure begins with the Board. The Board, working with the Executive & Risk Committee of the Board, establishes the Company’s risk tolerance by approving policies and limits that provide standards for the nature and the level of risk the Company is willing to assume. The Board regularly receives reports on management’s performance against the Company’s risk tolerance primarily through the Board’s Executive & Risk and Audit Committees.

To further support the risk governance provided by the Board, FHN has established accountabilities, control processes, procedures, and a management governance structure designed to align risk management with risk-taking throughout the Company. The control procedures are aligned with FHN’s four components of risk governance: (1) Specific Risk Committees; (2) the Risk Management Organization; (3) Business Unit Risk Management; and (4) Independent Assurance Functions.

 

1.

 

Specific Risk Committees: The Board has delegated authority to the Chief Executive Officer (“CEO”) to manage Business Strategy and Reputation Risk, and the general business affairs of the Company under the Board’s oversight. The CEO utilizes the executive management team and the Executive Risk Management Committee to carry out these duties and to analyze existing and emerging strategic and reputation risks and determines the appropriate course of action. The Executive Risk Management Committee is comprised of the CEO and certain officers designated by the CEO. The Executive Risk Management Committee is supported by a set of specific risk committees focused on unique risk types (e.g. liquidity, credit, operational, etc). These risk committees provide a mechanism that assembles the necessary expertise and perspectives of the management team to discuss emerging risk issues, monitor the Company’s risk-taking activities, and evaluate specific transactions and exposures. These committees also monitor the direction and trend of risks relative to business strategies and market conditions and direct management to respond to risk issues.

 

2.

 

The Risk Management Organization: The Company’s risk management organization, led by the Chief Risk Officer and Chief Credit Officer, provides objective oversight of risk-taking activities. The risk management organization translates FHN’s overall risk tolerance into approved limits and formal policies and is supported by corporate staff functions, including the Corporate Secretary, Legal, Finance, Human Resources, and Te