EX-13 5 c92653_ex13.htm Document



Section 5: EX-13                                                Exhibit 13
FINANCIAL INFORMATION AND DISCUSSION

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





SELECTED FINANCIAL AND OPERATING DATA

(Dollars in millions except per share data)
2018
 
2017
 
2016
 
2015
 
2014
 
Net income
$
556.5

 
$
177.0

 
$
238.5

 
$
97.3

 
$
234.0

 
Income available to common shareholders
538.8

 
159.3

 
220.8

 
79.7

 
216.3

 
Common Stock Data
 
 
 
 
 
 
 
 
 
 
Earnings per common share
$
1.66

 
$
0.66

 
$
0.95

 
$
0.34

 
$
0.92

 
Diluted earnings per common share
1.65

 
0.65

 
0.94

 
0.34

 
0.91

 
Cash dividends declared per common share
0.48

 
0.36

 
0.28

 
0.24

 
0.20

 
Book value per common share
13.79

 
12.82

 
9.90

 
9.42

 
9.35

 
Closing price of common stock per share:
 
 
 
 
 
 
 
 
 
 
 
High
20.61

 
20.76

 
20.61

 
16.20

 
13.91

 
 
Low
12.40

 
16.05

 
11.62

 
12.31

 
11.18

 
 
Year-end
13.16

 
19.99

 
20.01

 
14.52

 
13.58

 
Cash dividends per common share/year-end closing price
3.6

%
1.8

%
1.4

%
1.7

%
1.5

%
Cash dividends per common share/diluted earnings per common share
29.1

%
55.4

%
29.8

%
70.6

%
22.0

%
Year-end price/earnings ratio
8.0

x
30.8

x
21.3

x
42.7

x
14.9

x
Market capitalization
$
4,192.4

 
$
6,531.5

 
$
4,674.8

 
$
3,464.3

 
$
3,180.7

 
Average shares (thousands)
324,375

 
241,436

 
232,700

 
234,189

 
234,997

 
Average diluted shares (thousands)
327,445

 
244,453

 
235,292

 
236,266

 
236,735

 
Period-end shares outstanding (thousands)
318,573

 
326,736

 
233,624

 
238,587

 
234,220

 
Volume of shares traded (thousands)
898,276

 
790,153

 
574,196

 
562,553

 
592,399

 
Selected Average Balances
 
 
 
 
 
 
 
 
 
 
Total assets
$
40,225.5

 
$
29,924.8

 
$
27,427.2

 
$
25,636.0

 
$
23,993.0

 
Total loans, net of unearned income
27,213.8

 
20,104.0

 
18,303.9

 
16,624.4

 
15,521.0

 
Securities available-for-sale
4,718.3

 
4,021.6

 
4,002.1

 
3,692.3

 
3,548.4

 
Earning assets
35,676.6

 
27,461.0

 
25,180.1

 
23,456.2

 
21,825.2

 
Total deposits
30,903.1

 
23,072.1

 
20,898.8

 
18,753.7

 
16,401.7

 
Total term borrowings
1,211.9

 
1,077.3

 
1,130.2

 
1,557.2

 
1,591.0

 
Common equity
4,226.5

 
2,579.3

 
2,300.4

 
2,190.1

 
2,200.9

 
Total equity
4,617.5

 
2,970.3

 
2,691.5

 
2,581.2

 
2,592.0

 
Selected Period-End Balances
 
 
 
 
 
 
 
 
 
 
Total assets
$
40,832.3

 
$
41,423.4

 
$
28,555.2

 
$
26,192.6

 
$
25,665.4

 
Total loans, net of unearned income
27,535.5

 
27,658.9

 
19,589.5

 
17,686.5

 
16,230.2

 
Securities available-for-sale
4,626.5

 
5,170.3

 
3,943.5

 
3,929.8

 
3,556.6

 
Earning assets
36,201.0

 
36,953.5

 
26,280.2

 
23,971.5

 
23,470.9

 
Total deposits
32,683.0

 
30,620.4

 
22,672.4

 
19,967.5

 
18,068.9

 
Total term borrowings
1,171.0

 
1,218.1

 
1,040.7

 
1,312.7

 
1,877.3

 
Common equity
4,394.3

 
4,189.4

 
2,314.0

 
2,248.5

 
2,190.5

 
Total equity
4,785.4

 
4,580.5

 
2,705.1

 
2,639.6

 
2,581.6

 
Selected Ratios
 
 
 
 
 
 
 
 
 
 
Return on average common equity (a)
12.75

%
6.18

%
9.60

%
3.64

%
9.83

%
Return on average tangible common equity (b) (c)
20.28

 
7.23

 
10.59

 
3.97

 
10.62

 
Return on average assets (d)
1.38

 
0.59

 
0.87

 
0.38

 
0.98

 
Net interest margin (e)
3.45

 
3.12

 
2.94

 
2.83

 
2.92

 
Allowance for loan losses to loans
0.66

 
0.69

 
1.03

 
1.19

 
1.43

 
Net charge-offs to average loans
0.06

 
0.06

 
0.10

 
0.19

 
0.31

 
Total period-end equity to period-end assets
11.72

 
11.06

 
9.47

 
10.08

 
10.06

 
Tangible common equity to tangible assets (c)
7.15

 
6.57

 
7.42

 
7.82

 
7.91

 
Common equity tier 1 ratio
9.77

 
8.88

 
9.94

 
10.45

 
       N/A
 
See accompanying notes to consolidated financial statements.
Numbers may not add due to rounding.
N/A- Not applicable
(a) Calculated using net income/(loss) available to common shareholders divided by average common equity.
(b) Calculated using adjusted tangible common equity divided by risk weighted assets.
(c) Represents a non-GAAP measure which is reconciled in the non-GAAP to GAAP reconciliation in table 32.
(d) Calculated using net income divided by average assets.
(e) Net interest margin is computed using total net interest income adjusted to a FTE basis assuming a statutory federal income tax rate of 21 percent in 2018 and 35 percent prior to 2018, and, where applicable, state income taxes.


2





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, 2018, was one of the 30 largest publicly traded banking organizations in the United States in terms of asset size. FHN's sole class of common stock, $.625 par value, is listed and trades on the New York Stock Exchange, Inc. under the symbol FHN. As of December 31, 2018, there were approximately 8,900 common shareholders of record.
FHN is the parent company of First Tennessee Bank National Association ("FTBNA"). FTBNA's principal divisions and subsidiaries operate under the brands of First Tennessee Bank, Capital Bank, FTB Advisors, and FTN Financial. FHN offers regional banking, wealth management and capital market services through the First Horizon family of companies. First Tennessee Bank, Capital Bank, and FTB Advisors provide consumer and commercial banking and wealth management services. FTN Financial ("FTNF"), which operates partly through a division of FTBNA and partly through subsidiaries, is an industry leader in fixed income sales, trading, and strategies for institutional clients in the U.S. and abroad. FTBNA has approximately 300 banking offices in eight southeastern U.S. states, and FTNF has 28 offices in 18 states across the U.S.
FHN is composed of the following operating segments:
 
Regional banking segment offers financial products and services, including traditional lending and deposit taking, to consumer and commercial customers in Tennessee, North Carolina, South Carolina, Florida and other selected markets. Regional banking also provides investments, wealth management, financial planning, trust services and asset management, 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.

Fixed income segment consists of fixed income securities sales, trading, underwriting, and strategies for institutional clients in the U.S. and abroad, as well as loan sales, portfolio advisory services, and derivative sales.

Corporate segment consists of unallocated corporate expenses, expense on subordinated debt issuances, bank-owned life insurance, 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, derivative valuation adjustments related to prior sales of Visa Class B shares, gain/(loss) on extinguishment of debt, and acquisition- and integration-related costs.

Non-strategic segment consists of run-off consumer lending activities, legacy (pre-2009) mortgage banking elements, and the associated ancillary revenues and expenses related to these businesses. Non-strategic also includes the wind-down trust preferred loan portfolio and exited businesses.

On November 30, 2017, FHN completed its merger with Capital Bank Financial Corporation ("CBF") for an aggregate of 92,042,232 shares of FHN common stock and $423.6 million in cash in a transaction valued at $2.2 billion. In second quarter 2018, FHN canceled 2,373,220 FHN common shares which had been issued but set aside for certain CBF shareholders who have commenced a dissenter appraisal process. That process is discussed more fully in this MD&A at "Capital--Cancellation of Dissenters' Shares."
On March 23, 2018, FHN divested two branches, including approximately $30 million of deposits and $2 million of loans. The branches, both in Greeneville, Tennessee, were divested in connection with First Horizon's agreement with the U.S. Department of Justice and commitments to the Board of Governors of the Federal Reserve System, which were entered into in connection with a customary review of FHN's merger with CBF.

In second quarter 2018, FHN sold approximately $120 million UPB of its subprime auto loans. These loans, originally acquired as part of the CBF acquisition, did not fit within FHN's risk profile.


3




In January 2019, FHN signed an agreement to sell Superior Financial Services, Inc., a subsidiary acquired as part of the CBF acquisition. The sale will result in the removal of approximately $25 million UPB of subprime consumer loans from Loans held-for-sale on FHN's Consolidated Statements of Condition and is expected to close in the first half of 2019.
On April 3, 2017, FTNF acquired substantially all of the assets and assumed substantially all of the liabilities of Coastal Securities, Inc. (“Coastal”), a national leader in the trading, securitization, and analysis of Small Business Administration (“SBA”) loans, for approximately $131 million in cash. Coastal, which was based in Houston, TX, also traded United States Department of Agriculture (“USDA”) loans and fixed income products and provided municipal underwriting and municipal advisory services to its clients. Coastal’s government-guaranteed loan products were combined with FTNF's existing SBA trading activities to establish an additional major product sector for FTNF.
On September 16, 2016, FTBNA acquired $537.4 million of unpaid principal balance ("UPB") in restaurant franchise loans from GE Capital. The acquired loans were combined with existing FTBNA relationships to establish a franchise finance specialty banking business.
In relation to all acquisitions, FHN's operating results include the operating results of the acquired assets and assumed liabilities subsequent to the acquisition date. Refer to Note 2 - Acquisitions and Divestitures for additional information.
For the purpose of this management’s discussion and analysis (“MD&A”), earning assets have been expressed as averages, unless otherwise noted, and loans have been disclosed net of unearned income. The following financial discussion should be read with the accompanying audited Consolidated Financial Statements and Notes in this report.
ADOPTION OF ACCOUNTING UPDATES
Effective January 1, 2018, FHN retroactively adopted the provisions of ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which resulted in the reclassification of $1.9 million of non-service components of net periodic pension and post-retirement costs and $.8 million of non-service components of net periodic pension and post-retirement benefits from Employee compensation, incentives, and benefits to Other expense for the years ended December 31, 2017 and 2016, respectively. All prior periods and associated narrative have been revised to reflect this change. For additional information, see Note 1 – Summary of Significant Accounting Policies in this report.


Non-GAAP Measures
Certain measures are included in the narrative and tables in this MD&A that are “non-GAAP”, meaning (under U.S. financial reporting rules) they are not presented in accordance with generally accepted accounting principles (“GAAP”) in the U.S. and also are not codified in U.S. banking regulations currently applicable to FHN. Although other entities may use calculation methods that differ from those used by FHN for non-GAAP measures, FHN’s management believes such measures are relevant to understanding the capital position or financial results of FHN. Non-GAAP measures are reported to FHN’s management and Board of Directors through various internal reports.
Presentation of regulatory measures, even those which are not GAAP, provide a meaningful base for comparability to other financial institutions subject to the same regulations as FHN, as demonstrated by their use by banking regulators in reviewing capital adequacy of financial institutions. Although not GAAP terms, these regulatory measures are not considered “non-GAAP” under U.S. financial reporting rules as long as their presentation conforms to regulatory standards. Regulatory measures used in this MD&A include: common equity tier 1 capital, generally defined as common equity less goodwill, other intangibles, and certain other required regulatory deductions; tier 1 capital, generally defined as the sum of core capital (including common equity and instruments that cannot be redeemed at the option of the holder) adjusted for certain items under risk based capital regulations; and risk-weighted assets (“RWA”), which is a measure of total on- and off-balance sheet assets adjusted for credit and market risk, used to determine regulatory capital ratios.
The non-GAAP measures presented in this filing are return on average tangible common equity (“ROTCE”), tangible common equity to tangible assets and adjusted tangible common equity to risk-weighted assets. Refer to table 32 for a reconciliation of the 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 not a representation of historical information but instead pertain to future operations, strategies, financial results, or other developments. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “should,” “is likely,” “will,” “going forward,” and other expressions that indicate future events and trends identify forward-looking statements.


4




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 stability or volatility of values and activity in the residential housing and commercial real estate markets; potential requirements for FHN to repurchase, or compensate for losses from, previously sold or securitized mortgages or securities based on such mortgages; potential claims alleging mortgage servicing failures, individually, on a class basis, or as master servicer of securitized loans; potential claims relating to participation in government programs, especially lending or other financial services programs; expectations of and actual timing and amount of interest rate movements, including the slope and shape of the yield curve, which can have a significant impact on a financial services institution; market and monetary fluctuations, including fluctuations in mortgage markets; inflation or deflation; customer, investor, competitor, regulatory, and legislative responses to any or all of these conditions; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geopolitical developments including possible terrorist activity; natural disasters; effectiveness and cost-efficiency of FHN’s hedging practices; technological changes; fraud, theft, or other incursions through conventional, electronic, or other means directly or indirectly affecting FHN or its customers, business counterparties or competitors; demand for FHN’s product offerings; new products and services in the industries in which FHN operates; the increasing use of new technologies to interact with customers and others; and critical accounting estimates. Other factors are those inherent in originating, selling, servicing, and holding loans and loan-based assets, including prepayment risks, pricing concessions, fluctuation in U.S. housing and other real estate prices, fluctuation of collateral values, and changes in customer profiles. Additionally, the actions of the Securities and Exchange Commission (“SEC”), the Financial Accounting Standards Board (“FASB”), the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System (“Federal Reserve” or “Fed”), the Federal Deposit Insurance Corporation (“FDIC”), the Financial Industry Regulatory Authority (“FINRA”), the U.S. Department of the Treasury (“U.S. Treasury”), the Municipal Securities Rulemaking Board (“MSRB”), the Consumer Financial Protection Bureau (“CFPB”), the Financial Stability Oversight Council (“Council”), the Public Company Accounting Oversight Board (“PCAOB”), and other regulators and agencies; pending, threatened, or possible future regulatory, administrative, and judicial outcomes, actions, and proceedings; current or future Executive orders; changes in laws and regulations applicable to FHN; and FHN’s success in executing its business plans and strategies and managing the risks involved in the foregoing, could cause actual results to differ, perhaps materially, from those contemplated by the forward-looking statements.
FHN assumes no obligation to update or revise any forward-looking statements that are made in this Annual Report to Shareholders for the period ended December 31, 2018 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 this Annual Report to Shareholders, or in FHN's Annual Report on Form 10-K for the period ended December 31, 2018 into which this MD&A has been incorporated, and in exhibits to and documents incorporated into the Form 10-K.
FINANCIAL SUMMARY - 2018 COMPARED TO 2017
FHN reported net income available to common shareholders of $538.8 million, or $1.65 per diluted share, compared to net income of $159.3 million, or $.65 per diluted share in 2017. The increase in net income available to common shareholders in 2018 was due to increases in net interest income and noninterest income, somewhat offset by higher noninterest expense. Various factors significantly impacted reported earnings in 2018 including inclusion of Capital Bank and other strategic transactions expected to boost growth, returns and profitability. Additional factors affecting reported results were the strong economic environment, increased interest rates, and prudent investments to profitably grow in key markets.

The economic environment remained strong in 2018 with GDP growth throughout the year, low unemployment rates, and muted inflation. The full-year impact of loans and deposits added through the CBF acquisition in late 2017, organic loan and deposit growth, as well as increases in short-term interest rates bolstered FHN's net interest income ("NII") and net interest margin ("NIM"). These factors favorably impacted revenues in 2018 relative to the prior year. While the economic strength positively impacted FHN's consolidated NII in 2018, higher rate expectations and a lack of interest rate volatility led to lower fixed income sales revenue in 2018, negatively impacting fee income from FTNF.
In third quarter 2018, FHN sold its remaining shares of Visa Class B shares resulting in a $212.9 million pre-tax gain and strengthening its capital position. Noninterest income was also favorably impacted in 2018 by the inclusion of Capital Bank, as well as the accelerated execution of revenue synergies from the CBF acquisition.


5




During 2018, FHN executed on strategic priorities by maintaining and increasing its leading market share in Tennessee, profitably growing key markets and specialty businesses, transforming the customer experience and optimizing the expense base. FHN invested in its core businesses by focusing on higher-return specialty lending areas; making strategic hires in expansion areas; and selectively making needed investments in technology and infrastructure to enhance its competitive position. In both 2017 and 2018, FHN recognized elevated acquisition- and integration-related expenses associated with the CBF acquisition, but was able to successfully complete the integration activities on schedule during 2018, reducing the existing expense base by approximately $50 million.
Tax legislation enacted by Congress in December 2017 reduced the federal statutory tax rate from 35 percent to 21 percent for FHN. This rate reduction favorably impacted FHN's operating results in 2018. In 2017 the enactment of the rate reduction affected FHN's deferred tax balances and negatively impacted FHN's 2017 operating results. Earlier in 2017, FHN recognized favorable effective tax rate adjustments primarily associated with the reversal of a capital loss deferred tax valuation allowance which somewhat offset the overall increase in provision for income taxes in the prior year.

Asset quality trends were stable in 2018 reflecting continued strong underwriting standards, strong economic conditions, and credit risk management. Allowance for loan losses continued to decline, decreasing 5 percent in 2018 as a result of the run-off of non-strategic loan balances, partially offset by organic loan growth. Annual net charge-offs as a percent of average loans remained at .06 percent in 2018 and 30+ delinquencies declined 19 percent over prior year.
Return on average common equity (“ROCE”) and ROTCE for 2018 were 12.75 percent and 20.28 percent, respectively, compared to 6.18 percent and 7.23 percent in 2017. Return on average assets (“ROA”) was 1.38 percent in 2018 compared to .59 percent in 2017. The 2018 metrics were favorably impacted by the third quarter 2018 gain on the sale of FHN's remaining Visa Class B shares previously mentioned. The tangible common equity to tangible assets ratio was 7.15 percent in 2018 compared to 6.57 percent in 2017. Common equity tier 1, Tier 1, Total capital, and Leverage ratios were 9.77 percent, 10.80 percent, 11.94 percent, and 9.09 percent on December 31, 2018, compared to 8.88 percent, 9.83 percent, 11.10 percent, and 10.31 percent, respectively, on December 31, 2017. Total period-end assets were $40.8 billion on December 31, 2018 compared to $41.4 billion on December 31, 2017. Total period-end equity was $4.8 billion on December 31, 2018, up from $4.6 billion on December 31, 2017.
BUSINESS LINE REVIEW - 2018 COMPARED TO 2017
Regional Banking

Pre-tax income within the regional banking segment increased 45 percent to $661.6 million in 2018 from $457.6 million in 2017. The increase in pre-tax income was primarily driven by higher revenue which more than offset an increase in expenses.

Total revenue increased 37 percent, or $406.4 million, to $1.5 billion in 2018, from $1.1 billion in 2017, driven by an increase in NII. NII increased to $1.2 billion in 2018 from $846.6 million in 2017 largely due to loans (including accretion) and deposits added through the CBF acquisition. To a much lesser extent, the favorable impact of higher interest rates on loans, higher average balances of loans to mortgage companies, and an increase in cash basis interest income also favorably impacted NII in 2018 relative to the prior year. Noninterest income was $309.3 million and $258.6 million in 2018 and 2017, respectively. The increase in noninterest income was largely driven by a $21.7 million increase in deposit transactions and cash management fee income primarily as a result of higher fee income associated with the inclusion of Capital Bank. Additionally, a $6.2 million increase in brokerage, management fees, and commission income, $5.5 million in collections from CBF loans that were fully charged off prior to acquisition, and a $5.1 million increase in mortgage banking activities also contributed to the increase in noninterest income in 2018. The increase in fees from brokerage, management fees, and commissions was driven by the continued growth of FHN's advisory business and favorable market conditions, coupled with an increase in the sales of structured products. To a lesser extent, bankcard income and other service charges also increased in 2018 due in large part to the inclusion of Capital Bank activity.

Provision expense was $25.3 million in 2018 compared to $21.3 million in 2017. The net increase in provision in 2018 compared to the prior year was primarily driven by charge-offs associated with two credits within the C&I portfolio. The provision in 2018 was favorably affected by historically lower net charge-offs which continue to drive lower loss rates.

Noninterest expense increased 32 percent to $824.7 million in 2018 from $626.3 million in 2017. The increase in expense was primarily driven by a full-year inclusion of Capital Bank, which led to higher personnel-related expenses, and increases in amortization expense, occupancy expense, and operations services. FDIC premium expense, advertising and public relation


6




expense, equipment rentals, depreciation and maintenance expense, computer software and communication expenses increased in 2018 relative to the prior year also driven by the full-year inclusion of Capital Bank. Additionally, a $15 hourly wage floor, strategic hires in expansion markets and specialty areas, and higher incentive expense associated with loan and deposit growth, also contributed to an increase in personnel expense in 2018. A $4.3 million decrease in loss accruals for legal matters somewhat offset the overall increase in noninterest expense.
Fixed Income

Pre-tax income in the fixed income segment was $9.0 million in 2018 compared to $26.2 million in 2017. The decline in results in 2018 was driven by lower noninterest income, somewhat offset by an increase in NII and a decrease in expenses.
NII increased from $18.1 million in 2017 to $35.7 million in 2018, primarily due to an increase in trading securities and loans held-for-sale largely associated with government-guaranteed loan products. Fixed income product revenue decreased 24 percent to $132.3 million in 2018 from $173.9 million in 2017, as average daily revenue (“ADR”) declined to $531 thousand in 2018 from $696 thousand in 2017. This decline reflects lower activity due to challenging market conditions (expected interest rate increases, a flattening yield curve, and low levels of market volatility). Other product revenue was $32.5 million in 2018, down from $43.2 million in the prior year, primarily driven by lower fees from loan sales, partially offset by increases in fees from derivative sales.
Noninterest expense decreased 8 percent, or $17.4 million, to $191.5 million in 2018 from $208.9 million in 2017. The expense decline during 2018 was primarily driven by lower variable compensation associated with the decrease in fixed income product revenue and a decrease in legal fees relative to 2017, somewhat offset by the full-year inclusion of Coastal.
Corporate

The pre-tax loss for the corporate segment was $2.7 million and $194.8 million for 2018 and 2017, respectively.
Net interest expense was $64.1 million in 2018 compared to $59.4 million in 2017. Noninterest income (including securities gain/losses) increased to $239.3 million in 2018, from $8.9 million in 2017, primarily driven by a $212.9 million pre-tax gain from the sale of FHN's remaining Visa Class B shares. To a lesser extent, a $14.3 million loss from the repurchase of equity securities previously included in a financing transaction recognized in 2017 also contributed to the year-over-year increase in noninterest income. In 2018, FHN adopted ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" which resulted in dividend income being recognized in Other income rather than Interest income where it was recognized prior to adoption. This change, along with $4.2 million of gains on the sales of buildings recognized in 2018 and an increase of $3.8 million in BOLI gains also contributed to the increase in noninterest income in 2018. Deferred compensation income decreased $9.5 million in 2018, offsetting a portion of the overall increase in noninterest income. Deferred compensation income fluctuates with changes in the market value of the underlying investments and is mirrored by changes in deferred compensation expense which is included in personnel expense.
Noninterest expense was $177.8 million in 2018 compared to $144.3 million in 2017. The increase in expense for 2018 was primarily driven by a $35.8 million increase of acquisition- and integration-related expenses primarily associated with the CBF acquisition. A $4.1 million increase in valuation adjustments associated with derivatives related to prior sales of Visa Class B shares also contributed to the increase in noninterest expense in 2018. These expense increases were somewhat offset by lower personnel expense in 2018 and $8.8 million of charitable contributions made to the First Tennessee Foundation in 2017; a similar contribution was not made in 2018. The decrease in personnel expense was largely driven by lower deferred compensation expense and $9.9 million of special bonuses recognized in 2017, which more than offset an increase in salary expense due to the full-year inclusion of Capital Bank.
Non-Strategic

The non-strategic segment had pre-tax income of $46.2 million in 2018 compared to $19.8 million in 2017. The improvement in results was primarily driven by lower expenses, an increase in net interest income and an increase in noninterest income in 2018 relative to the prior year.
Total revenue increased $13.2 million to $55.9 million in 2018 from $42.6 million in 2017. NII increased 25 percent to $46.4 million in 2018, largely driven by higher rates and loans held-for-sale added through the CBF acquisition. Noninterest income


7




increased to $9.5 million in 2018 from $5.6 million in 2017. The increase in noninterest income was largely due to $4.1 million of gains on the reversals of previous valuation adjustments due to the sales and payoff of TRUPS loans.
The provision for loan losses within the non-strategic segment was a provision credit of $18.3 million in 2018 compared to a provision credit of $21.3 million in the prior year. Overall, the non-strategic segment continued to reflect stable performance combined with lower loan balances resulting in an $11.1 million decline in reserves to $24.3 on December 31, 2018. Losses remain historically low as the non-strategic segment had net recoveries of $7.2 million in 2018 compared to net recoveries of $8.9 million a year ago.
Noninterest expense was $27.9 million in 2018, down from $44.2 million in 2017. The decline in noninterest expense was primarily due to a $35.3 million decrease in loss accruals related to legal matters and lower legal fees in 2018 compared to the prior year. In 2017, noninterest expense was favorably impacted by a $22.5 million net expense reversal related to the settlement of certain repurchase claims, compared to a net expense reversal of $1.0 million in 2018. Additionally, an increase in personnel expense in 2018 negatively impacted expenses, offsetting a portion of the overall expense decline in the non-strategic segment.
INCOME STATEMENT REVIEW - 2018 COMPARED TO 2017; 2017 COMPARED TO 2016
Total consolidated revenue increased 46 percent, or $610.6 million to $1.9 billion in 2018, driven by a 45 percent increase in net interest income due to the full-year inclusion of Capital Bank and rate increases and a 47 percent increase in noninterest income primarily due to the gain on the sale of Visa Class B shares. Total consolidated expenses increased 19 percent to $1.2 billion in 2018 from $1.0 billion in 2017. The expense increase was primarily driven by a full-year inclusion of Capital Bank and an increase in acquisition- and integration-related expenses associated with the CBF acquisition.
In 2017, total consolidated revenue increased 4 percent, or $51.0 million to $1.3 billion, driven by a 16 percent increase in net interest income, which more than offset lower fee income from fixed income product revenue compared to 2016. Total consolidated expense increased 11 percent to $1.0 billion in 2017 from $925.2 million in 2016 primarily driven by an increase in acquisition- and integration-related expenses associated with the CBF and Coastal acquisitions, and to a lesser extent an increase in accruals related to loss contingencies and litigation matters in 2017 compared to 2016.
NET INTEREST INCOME
Net interest income increased 45 percent to $1.2 billion in 2018 from $842.3 million in 2017. On a fully taxable equivalent (“FTE”) basis, NII increased 44 percent to $1.2 billion in 2018 from $855.9 million in 2017. As detailed in Table 1 - Analysis of Changes in Net Interest Income, the increase in NII was largely due to loans added through the CBF acquisition including CBF loan accretion. Additionally, the favorable impact of higher interest rates on loans, higher average balances of available-for-sale securities and trading securities also contributed to the increase in NII, but were somewhat offset by the negative impact of higher market interest rates on deposits and other funding sources. Average earning assets increased 30 percent to $35.7 billion in 2018 from $27.5 billion in 2017. The increase in average earning assets in 2018 was primarily due to the full-year inclusion of Capital Bank, organic loan growth within FHN’s regional banking activities, a larger securities portfolio, higher average balances of fixed income trading securities and increases in loans held-for-sale ("HFS"). These increases were somewhat offset by continued run-off of the non-strategic loan portfolios.
Net interest income was $842.3 million in 2017, a 16 percent increase from $729.1 million in 2016. On an FTE basis, NII increased to $855.9 million in 2017 from $740.7 million in 2016. The increase in NII was primarily driven by organic loan growth within the regional banking commercial loan portfolio, the positive impact of higher market rates on loans and other earning assets, and commercial and consumer loans added through the CBF acquisition, somewhat offset by lower average balances of consumer loans and loans to mortgage companies. An increase in loans HFS added through the Coastal and CBF acquisitions also improved NII in 2017 relative to 2016. The negative impact of higher market rates on deposits and other funding sources and the continued run-off of the non-strategic loan portfolios negatively impacted NII in 2017.




8




Table 1 - Analysis of Changes in Net Interest Income

 
 
2018 Compared to 2017
 
2017 Compared to 2016
(Fully taxable equivalent ("FTE"))
 
Increase / (Decrease) Due to (a)
 
Increase / (Decrease) Due to (a)
(Dollars in thousands)
 
Rate (b)

 
Volume (b)
 
 Total
 
Rate (b)

 
Volume (b)
 
 Total
Interest income - FTE:
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
140,951

 
$
324,564

 
$
465,515

 
$
69,059

 
$
70,022

 
$
139,081

Loans held-for-sale
 
6,901

 
20,690

 
27,591

 
408

 
11,603

 
12,011

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
 
5,392

 
21,921

 
27,313

 
6,167

 
230

 
6,397

States and municipalities
 
(91
)
 
430

 
339

 
63

 
(365
)
 
(302
)
Corporates and other debt
 
(9
)
 
2,157

 
2,148

 

 
223

 
223

Other (c)
 
(3,431
)
 
(1,014
)
 
(4,445
)
 
1,063

 
662

 
1,725

Total investment securities
 
6,345

 
19,010

 
25,355

 
7,660

 
383

 
8,043

Trading securities
 
8,992

 
14,014

 
23,006

 
4,559

 
(507
)
 
4,052

Other earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold
 
280

 
206

 
486

 
137

 
47

 
184

Securities purchased under agreements to resell
 
7,039

 
(45
)
 
6,994

 
4,681

 
(53
)
 
4,628

Interest-bearing cash
 
6,685

 
(4,314
)
 
2,371

 
3,902

 
2,046

 
5,948

Total other earning assets
 
13,357

 
(3,506
)
 
9,851

 
10,011

 
749

 
10,760

Total change in interest income - earning assets - FTE
 
 
 
 
 
$
551,318

 
 
 
 
 
$
173,947

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Savings
 
$
53,109

 
$
12,120

 
$
65,229

 
$
21,039

 
$
1,872

 
$
22,911

Time Deposits
 
11,479

 
28,505

 
39,984

 
1,741

 
1,349

 
3,090

Other interest-bearing deposits
 
22,039

 
9,187

 
31,226

 
12,891

 
1,233

 
14,124

Total interest-bearing deposits
 
98,135

 
38,304

 
136,439

 
35,827

 
4,298

 
40,125

Federal funds purchased
 
3,425

 
(481
)
 
2,944

 
2,536

 
(884
)
 
1,652

Securities sold under agreements to repurchase
 
4,693

 
1,154

 
5,847

 
3,664

 
161

 
3,825

Trading liabilities
 
3,958

 
(67
)
 
3,891

 
2,245

 
(1,777
)
 
468

Other short-term borrowings
 
3,839

 
8,118

 
11,957

 
1,958

 
3,828

 
5,786

Term borrowings
 
12,103

 
4,906

 
17,009

 
8,359

 
(1,424
)
 
6,935

Total change in interest expense - interest-bearing liabilities
 
 
 
 
 
$
178,087

 
 
 
 
 
$
58,791

Net interest income - FTE
 
 
 
 
 
$
373,231

 
 
 
 
 
$
115,156

(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 and amounts of the changes in each.
(b) Variances are computed on a line-by-line basis and are non-additive.
(c) The decrease is driven by the adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" which resulted in the reclassification of interest and dividend income on equity securities to noninterest income on a prospective basis.
For purposes of computing yields and the net interest margin, FHN adjusts net interest income to reflect tax exempt income on an equivalent pre-tax basis which provides comparability of net interest income arising from both taxable and tax-exempt sources. The consolidated net interest margin improved to 3.45 percent in 2018 from 3.12 percent in 2017. The net interest spread increased to 3.15 percent in 2018 from 2.91 percent in 2017, and the impact of free funding was 30 basis points and 21 basis points in 2018 and 2017, respectively. The improvement in NIM in 2018 relative to 2017 was largely the result of CBF loan accretion, the positive impact of higher market rates and an increase in average deposits which allowed for reduction in higher cost funding.
The consolidated net interest margin improved to 3.12 percent in 2017 from 2.94 percent in 2016, largely driven by the positive impact of higher market interest rates and an increase in average deposits, somewhat offset by an increase in average excess cash held at the Fed during 2018.


9




The activity levels and related funding for FHN’s fixed income activities affect the net interest margin. Generally, fixed income activities compress the margin, especially where there are elevated levels of trading inventory, because of the strategy to reduce market risk by economically hedging a portion of its inventory on the balance sheet. As a result, FHN’s consolidated margin cannot be readily compared to that of other bank holding companies. Table 2 - Net Interest Margin details the computation of the net interest margin for the past three years.
Table 2—Net Interest Margin
 
2018
 
2017
 
2016
Assets:
 
 
 
 
 
Earning assets:
 
 
 
 
 
Loans, net of unearned income:
 
 
 
 
 
Commercial loans
4.84
%
 
4.08
%
 
3.64
%
Consumer loans
4.51

 
4.23

 
4.07

Total loans, net of unearned income
4.76

 
4.12

 
3.77

Loans held-for-sale
6.23

 
4.73

 
4.43

Investment securities:
 
 
 
 
 
U.S. government agencies
2.70

 
2.56

 
2.40

States and municipalities
4.03

 
9.36

 
7.95

Corporates and other debt
4.42

 
4.98

 
5.25

Other (a)
31.65

 
3.49

 
2.67

Total investment securities
2.77

 
2.62

 
2.43

Trading securities
3.70

 
3.04

 
2.66

Other earning assets:
 
 
 
 
 
Federal funds sold
2.47

 
1.63

 
1.11

Securities purchased under agreements to resell
1.63

 
0.69

 
0.06

Interest bearing cash
1.89

 
0.96

 
0.51

Total other earning assets
1.77

 
0.85

 
0.28

Interest income / total earning assets
4.36
%
 
3.65
%
 
3.29
%
Liabilities:
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
Savings
0.95
%
 
0.47
%
 
0.23
%
Other interest-bearing deposits
0.70

 
0.40

 
0.19

Time deposits
1.44

 
0.90

 
0.77

Total interest-bearing deposits
0.95

 
0.48

 
0.26

Federal funds purchased
1.89

 
1.06

 
0.52

Securities sold under agreements to repurchase
1.40

 
0.72

 
0.08

Fixed income trading liabilities
2.83

 
2.26

 
1.95

Other short-term borrowings
1.82

 
1.28

 
0.67

Term borrowings
4.38

 
3.35

 
2.58

Interest expense / total interest-bearing liabilities
1.21

 
0.74

 
0.49

Net interest spread
3.15
%
 
2.91
%
 
2.80
%
Effect of interest-free sources used to fund earning assets
0.30

 
0.21

 
0.14

Net interest margin (b)
3.45
%
 
3.12
%
 
2.94
%
(a) 2018 increase driven by the adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" which resulted in the reclassification of interest and dividend income on equity securities to noninterest income on a prospective basis. The remaining balance is primarily comprised of higher-yielding SBA IO strips.
(b) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 21 percent in 2018 and 35 percent prior to 2018, and where applicable, state income taxes.



10




FHN’s net interest margin is primarily impacted by its balance sheet mix including the levels of fixed and floating rate loans, rate sensitive and non-rate sensitive liabilities, cash levels, trading inventory levels as well as loan fees and cash basis income. FHN’s balance sheet is positioned to benefit from a rise in short-term interest rates. For 2019, NIM will also depend on the extent of Fed interest rate increases, loan accretion levels, and the competitive pricing environment for core deposits.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the charge to earnings that management determines to be necessary to maintain the ALLL at a sufficient level reflecting management's estimate of probable incurred losses in the loan portfolio. The provision for loan losses was $7.0 million in 2018 compared to $0 million in 2017 and $11.0 million in 2016. For 2018 and 2017, FHN's asset quality metrics remained strong. Year-to-date net charge-offs as a percentage of average loans were .06 percent for the year ended December 31, 2018 and 2017. The ALLL decreased $9.1 million from year-end 2017 to $180.4 million as of December 31, 2018. For additional information about the provision for loan losses refer to the Regional Banking and Non-Strategic sections of the Business Line Review section in this MD&A. For additional information about general asset quality trends refer to Asset Quality - Trend Analysis of 2018 Compared to 2017 in this MD&A.
NONINTEREST INCOME
Noninterest income (including securities gains/(losses)) was $722.8 million in 2018, up from $490.2 million in 2017 and $552.4 million in 2016. Noninterest income was 37 percent of total revenue in 2018 and 2017, and 43 percent of total revenue in 2016. For 2018, the increase in noninterest income was primarily driven by a gain on the sale of FHN's remaining Visa Class B shares in third quarter 2018. To a lesser extent, the full-year inclusion of Capital Bank in 2018 and a $14.3 million loss from the repurchase of equity securities previously included in a financing transaction recognized in 2017 also contributed to the year-over-year increase in noninterest income. These increases were partially offset by a decrease in fixed income sales revenue in 2018. The decrease in noninterest income in 2017 relative to 2016 was primarily driven by a decrease in fixed income sales revenue, as well as the $14.3 million loss from the repurchase of equity securities previously included in a financing transaction previously mentioned. FHN’s noninterest income for the last three years is provided in Table 3 - Noninterest Income. The following discussion provides additional information about various line items reported in the following table.


11




Table 3—Noninterest Income
 
 
 
 
 
 
 
 
Compound Annual Growth Rates
(Dollars in thousands)
 
2018
 
2017
 
2016
 
18/17
 
18/16
Noninterest income:
 
 
 
 
 
 
 
 
 
 
Fixed income
 
$
167,882

 
$
216,625

 
$
268,561

 
(23
)%
 
(21
)%
Deposit transactions and cash management
 
133,281

 
110,592

 
108,553

 
21
 %
 
11
 %
Brokerage, management fees and commissions
 
54,803

 
48,514

 
42,911

 
13
 %
 
13
 %
Trust services and investment management
 
29,806

 
28,420

 
27,727

 
5
 %
 
4
 %
Bankcard income
 
26,718

 
25,467

 
24,430

 
5
 %
 
5
 %
Bank-owned life insurance
 
18,955

 
15,124

 
14,687

 
25
 %
 
14
 %
Debt securities gains/(losses), net
 
52

 
483

 
1,485

 
(89
)%
 
(81
)%
Equity securities gains/(losses), net (a)
 
212,896

 
109

 
(144
)
 
NM

 
NM

All other income and commissions:
 
 
 
 
 
 
 
 
 
 
Other service charges

 
15,122

 
12,532

 
11,731

 
21
 %
 
14
 %
ATM and interchange fees
 
13,354

 
12,425

 
11,965

 
7
 %
 
6
 %
Mortgage banking
 
10,587

 
4,649

 
10,215

 
NM

 
2
 %
Dividend Income (b)
 
10,555

 

 

 
NM

 
NM

Letter of credit fees
 
5,298

 
4,661

 
4,103

 
14
 %
 
14
 %
Electronic banking fees
 
5,134

 
5,082

 
5,477

 
1
 %
 
(3
)%
Insurance commissions
 
2,096

 
2,514

 
2,981

 
(17
)%
 
(16
)%
Gain/(loss) on extinguishment of debt (c)
 
(15
)
 
(14,329
)
 

 
NM

 
NM

Deferred compensation (d)
 
(3,224
)
 
6,322

 
3,025

 
NM

 
NM

Other
 
19,488

 
11,029

 
14,734

 
77
 %
 
15
 %
Total all other income and commissions
 
78,395

 
44,885

 
64,231

 
75
 %
 
10
 %
Total noninterest income
 
$
722,788

 
$
490,219

 
$
552,441

 
47
 %
 
14
 %
NM – Not meaningful
(a)
Equity securities gains/(losses) for 2018 relates to the gain on the sale of FHN's remaining Visa Class B shares.
(b)
Effective January 1, 2018, FHN adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” and began recording dividend income from FRB and FHLB holdings in Other income. Prior to 2018, these amounts were included in Interest income on the Consolidated Statements of Income.
(c)
Loss on extinguishment of debt for 2017 relates to the repurchase of equity securities previously included in a financing transaction.
(d)
Amounts are driven by market conditions and are mirrored by changes in deferred compensation expense which is included in employee compensation expense.

Fixed Income Noninterest Income
The major component of fixed income revenue is generated from the purchase and sale of fixed income securities as both principal and agent. Other noninterest revenues within this line item consist principally of fees from loan sales, portfolio advisory services, and derivative sales. Securities inventory positions are procured for distribution to customers by the sales staff. Fixed income noninterest income decreased 23 percent in 2018 to $167.9 million from $216.6 million in 2017, reflecting lower activity due to challenging market conditions (expected interest rate increases, a flattening yield curve, and low levels of market volatility). Revenue from other products decreased 17 percent, or $7.1 million, to $35.6 million from $42.7 million in 2017, largely driven by a decline in fee income from loan sales, somewhat offset by $4.1 million of gains on the sales and payoff of TRUPS loans in the non-strategic segment and increases in fees from derivative sales.
Fixed income noninterest income was $216.6 million in 2017, down from $268.6 million in 2016, reflecting lower activity due to challenging market conditions. Revenue from other products increased $3.8 million to $42.7 million in 2017, driven by increases in fees from loan sales, which more than offset declines in fees from derivative sales and portfolio advisory services compared to 2016.


12




Table 4—Fixed Income Noninterest Income
 
 
 
 
 
 
 
 
Compound Annual Growth Rates
(Dollars in thousands)
 
2018
 
2017
 
2016
 
18/17
 
18/16
Noninterest income:
 
 
 
 
 
 
 
 
 
 
Fixed income
 
$
132,283

 
$
173,910

 
$
229,659

 
(24
)%
 
(24
)%
Other product revenue
 
35,599

 
42,715

 
38,902

 
(17
)%
 
(4
)%
Total fixed income noninterest income
 
$
167,882

 
$
216,625

 
$
268,561

 
(23
)%
 
(21
)%

Deposit Transactions and Cash Management

Fees from deposit transactions and cash management include fees for services related to consumer and commercial deposit products (such as service charges on checking accounts), cash management products and services such as electronic transaction processing (Automated Clearing House and Electronic Data Interchange), account reconciliation services, cash vault services, lockbox processing, and information reporting to large corporate clients. Deposit transactions and cash management activities increased to $133.3 million in 2018 from $110.6 million in 2017, largely associated with the inclusion of Capital Bank. Fees from deposit transactions and cash management activities were negatively impacted in first quarter 2017 due to changes in consumer behavior and a modification of billing practices, which further contributed to the year-over-year increase in fees from deposit transactions and cash management activities in 2018. In 2017, deposit transactions and cash management income increased to $110.6 million from $108.6 million in 2016, primarily related to higher fee income associated with cash management activities, which offset a decline in NSF/overdraft fees driven by changes in consumer behavior and a modification of billing practices.
Brokerage, Management Fees and Commissions

Brokerage, management fees and commissions include fees for portfolio management, trade commissions, and annuity and mutual funds sales. Noninterest income from brokerage, management fees and commissions increased to $54.8 million in 2018, up from $48.5 million and $42.9 million in 2017 and 2016, respectively. The increase was due in large part to the continued growth of FHN's advisory business and favorable market conditions. An increase in the sales of structured products also contributed to the increase in 2018.
Bank-owned Life Insurance
Income from bank-owned life insurance ("BOLI") increased to $19.0 million in 2018 from $15.1 million and $14.7 million in 2017 and 2016, respectively. The increase in 2018 was driven by higher BOLI policy gains recognized in 2018.

Securities Gains/(Losses)
In 2018, FHN recognized net securities gains of $212.9 million compared to $.6 million and $1.3 million in 2017 and 2016, respectively. The 2018 net gain was primarily related to FHN's sale of its remaining holdings of Visa Class B shares. The 2017 net gain was primarily the result of the call of a $4.4 million held-to-maturity municipal bond within the regional banking segment. The 2016 net gain was largely driven by a $1.5 million net gain from the exchanges of approximately $736 million of AFS debt securities, partially offset by $.2 million of other-than-temporary impairment (“OTTI”) adjustments.
Other Noninterest Income
All other income and commissions includes revenues from other service charges, ATM and interchange fees, mortgage banking (primarily within the non-strategic and regional banking segments), dividend income (subsequent to 2017), letter of credit fees, electronic banking fees, insurance commissions, gains/(losses) on the extinguishment of debt, revenue related to deferred compensation plans (which are mirrored by changes in noninterest expense), and various other fees.
Revenue from all other income and commissions increased to $78.4 million in 2018 from $44.9 million in 2017. In 2017, FHN recognized a $14.3 million loss from the repurchase of equity securities previously included in a financing transaction which contributed to the year-over-year increase in other noninterest income in 2018. Additionally, effective January 1, 2018, FHN


13




adopted ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" and began recording dividend income from FRB and FHLB holdings in other income which also contributed to the increase in other noninterest income in 2018 relative to the prior year, as previously these amounts were included in Interest income. Increases in mortgage banking income and other service charges related to the full-year inclusion of Capital Bank, $5.5 million in collections from CBF loans that were fully charged off prior to acquisition, and $5.0 million of gains on the sales of properties recognized in 2018 also contributed to the increase in other noninterest income. For 2018, all other income and commissions was unfavorably impacted by a $9.5 million decrease in deferred compensation income. Deferred compensation income fluctuates with changes in the market value of the underlying investments and are mirrored by changes in deferred compensation expense which is included in employee compensation expense.

Revenue from all other income and commissions was $44.9 million in 2017 compared to $64.2 million in 2016. The decrease in all other income and commissions was primarily driven by the $14.3 million loss from the repurchase of equity securities previously included in a financing transaction recognized previously mentioned, a $5.6 million decrease in mortgage banking income, and a $2.1 million decrease in gains on the sales of properties. The decline in mortgage banking income was due in large part to $4.4 million of recoveries recognized in 2016 associated with prior legacy mortgage servicing sales and a $1.5 million gain related to the reversal of a contingency accrual associated with prior sales of MSR, but was somewhat mitigated by a $1.7 million increase in new originations within the regional banking segment related to CRA initiatives. For 2017, all other income and commissions was favorably impacted by a $3.3 million increase in deferred compensation income, offsetting a portion of the overall decline in revenues from all other income and commissions.

NONINTEREST EXPENSE

Total noninterest expense increased 19 percent, or $198.3 million, to $1.2 billion in 2018 from $1.0 billion in 2017. The increase in noninterest expenses in 2018 is primarily due to the full-year inclusion of Capital Bank expenses compared to one month of expenses included in 2017. Higher acquisition- and integration-related expenses primarily associated with the CBF acquisition, higher personnel-related expenses, and a smaller repurchase and foreclosure provision expense reversal related to the settlement of certain repurchase claims in 2018 relative to 2017, also contributed to the expense increase in 2018. A decrease in loss accruals related to legal matters in 2018 favorably impacted expense relative to 2017, offsetting a portion of the overall expense increase.

In 2017, total noninterest expense increased 11 percent, or $98.5 million, to $1.0 billion in 2017 from $925.2 million in 2016. The increase in expense was primarily driven by higher acquisition- and integration-related expense associated with the CBF and Coastal acquisitions. To a lesser extent, a smaller repurchase and foreclosure provision expense reversal related to the settlement of certain repurchase claims in 2017 relative to 2016, a net increase in loss accruals related to litigation and regulatory matters, and an increase in personnel expense also contributed to the expense increase in 2017. Legal fees decreased in 2017, favorably impacting expense relative to 2016. FHN’s noninterest expense for the last three years is provided in Table 5 - Noninterest Expense. The following discussion provides additional information about various line items reported in the following table.


14




Table 5—Noninterest Expense
 
 
 
 
 
 
 
 
Compound Annual Growth Rates
(Dollars in thousands)
 
2018
 
2017
 
2016
 
18/17
 
18/16
Noninterest expense:
 
 
 
 
 
 
 
 
 
 
Employee compensation, incentives and benefits
 
$
658,223

 
$
587,465

 
$
563,791

 
12
 %
 
8
 %
Occupancy
 
85,009

 
54,646

 
50,880

 
56
 %
 
29
 %
Computer software
 
60,604

 
48,234

 
45,122

 
26
 %
 
16
 %
Operations services
 
56,280

 
43,823

 
41,852

 
28
 %
 
16
 %
Professional fees
 
45,799

 
47,929

 
19,169

 
(4
)%
 
55
 %
Equipment rentals, depreciation and maintenance
 
39,132

 
29,543

 
27,385

 
32
 %
 
20
 %
FDIC premium expense
 
31,642

 
26,818

 
21,585

 
18
 %
 
21
 %
Communications and courier
 
30,032

 
17,624

 
14,265

 
70
 %
 
45
 %
Amortization of intangible assets
 
25,855

 
8,728

 
5,198

 
NM

 
NM

Advertising and public relations
 
24,752

 
19,214

 
21,612

 
29
 %
 
7
 %
Contract employment and outsourcing
 
18,522

 
14,954

 
10,061

 
24
 %
 
36
 %
Legal fees
 
11,149

 
12,076

 
21,558

 
(8
)%
 
(28
)%
Repurchase and foreclosure provision/(provision credit)
 
(1,039
)
 
(22,527
)
 
(32,722
)
 
95
 %
 
82
 %
All other expense:
 
 
 
 
 
 
 
 
 
 
Travel and entertainment

 
16,442

 
11,462

 
10,275

 
43
 %
 
26
 %
Other insurance and taxes
 
9,684

 
9,686

 
10,891

 
*

 
(6
)%
Employee training and dues
 
7,218

 
5,551

 
5,691

 
30
 %
 
13
 %
Supplies
 
6,917

 
4,106

 
4,434

 
68
 %
 
25
 %
Customer relations
 
5,583

 
5,750

 
6,255

 
(3
)%
 
(6
)%
Non-service components of net periodic pension and post-retirement cost
 
5,251

 
2,144

 
(666
)
 
NM

 
NM

Tax credit investments
 
4,712

 
3,468

 
3,349

 
36
 %
 
19
 %
Miscellaneous loan costs
 
3,732

 
2,751

 
2,586

 
36
 %
 
20
 %
OREO
 
2,630

 
1,006

 
773

 
NM

 
84
 %
Litigation and regulatory matters
 
644

 
40,517

 
30,469

 
(98
)%
 
(85
)%
Other (a)
 
73,223

 
48,693

 
41,391

 
50
 %
 
33
 %
Total all other expense
 
136,036

 
135,134

 
115,448

 
1
 %
 
9
 %
Total noninterest expense
 
$
1,221,996

 
$
1,023,661

 
$
925,204

 
19
 %
 
15
 %
Certain previously reported amounts have been revised to reflect the retroactive effect of the adoption of ASU 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” See Note 1 - Summary of Significant Accounting Policies for additional information.
NM-Not Meaningful
*Amount is less than one percent.
(a)
Expense increase for 2018 largely attributable to an increase in acquisition- and integration-related expense primarily associated with the CBF acquisition. See Note 2 - Acquisitions and Divestitures for additional information.

Employee Compensation, Incentives, and Benefits

Employee compensation, incentives, and benefits (personnel expense), the largest component of noninterest expense, increased 12 percent, or $70.8 million, to $658.2 million in 2018 from $587.5 million in 2017. The increase in personnel expense was primarily the result of a 30 percent increase in headcount in connection with the CBF acquisition. Within the regional banking segment, personnel expense increased due to a $15 hourly wage floor, strategic hires in expansion markets and specialty areas, and higher incentive expense associated with loan and deposit growth. Personnel expense within the fixed income segment decreased in 2018, largely driven by lower variable compensation associated with lower fixed income sales revenue relative to 2017, offsetting a portion of the overall increase in personnel expense. Additionally, a $10.3 million decrease in deferred compensation expense in 2018, $9.9 million of special bonuses recognized in 2017 and a $6.4 million decrease in acquisition- and integration-related personnel expenses also offset a portion of the increase in personnel expense.


15





Personnel expense increased 4 percent, or $23.7 million, to $587.5 million in 2017 from $563.8 million in 2016. Within the regional banking segment, personnel expense increased due to strategic hires in expansion markets and specialty areas, higher incentive expense associated with loan and deposit growth, retention initiatives, and $19.1 million attributable to CBF activities ($10.7 million of which relates to a 27 percent increase in headcount for one month). In 2017, FHN recognized $9.9 million of special bonuses, $3.0 million related to higher deferred compensation expense, and a $2.6 million increase in pension fund expense which also contributed to the increase in personnel expense compared to 2016. Personnel expense within the fixed income segment decreased in 2017, largely driven by a decline in variable compensation associated with lower fixed income sales revenue relative to the prior year, offsetting a portion of the overall increase in personnel expense. Additionally, personnel expense was favorably impacted by $6.5 million of deferred compensation BOLI gains recognized in 2017.

Occupancy

Occupancy expense increased to $85.0 million in 2018 from $54.6 million in 2017, primarily driven by higher rental expense due to the full-year inclusion of Capital Bank. Additionally, FHN recognized $5.3 million of acquisition- and integration-related expenses primarily associated with lease abandonment expenses in 2018. Occupancy expense increased to $54.6 million in 2017 from $50.9 in 2016, primarily driven by higher rental expense due to the CBF and Coastal acquisitions as well as an increase in depreciation expense due to the completion of space-consolidating renovations made to FHN's headquarters and other locations completed during 2017.

Computer Software

Computer software expense was $60.6 million, $48.2 million, and $45.1 million in 2018, 2017, and 2016, respectively. The increase in computer software expense in both periods was the result of the inclusion of Capital Bank (twelve months in 2018; one month in 2017), as well as FHN’s focus on technology-related projects. To a lesser extent, acquisition- and integration-related expenses primarily associated with the CBF acquisition also contributed to the increase in computer software expense for 2018.

Operations Services

Operations services expense increased 28 percent, or $12.5 million to $56.3 million in 2018. The increase in operations services expense was primarily related to an increase in third party fees associated with the inclusion of Capital Bank operating expenses, as well as higher acquisition- and integration-related expenses primarily related to the CBF acquisition. In 2017, expenses from operations services were $43.8 million compared to $41.9 million in 2016, primarily related to an increase in third party fees associated with the CBF and Coastal acquisitions.
Professional Fees
Professional fees decreased to $45.8 million in 2018 from $47.9 million in 2017. In 2018, the decrease in professional fees was due to lower acquisition- and integration-related expenses primarily associated with the CBF acquisition relative to 2017, somewhat offset by strategic investments to analyze growth potential and product mix for new markets. Professional fees was $47.9 million in 2017 compared to $19.2 million in 2016. In 2017, the increase in professional fees was primarily driven by higher acquisition- and integration-related expenses primarily associated with the CBF and Coastal acquisitions.

Equipment Rentals, Depreciation, and Maintenance

Equipment rentals, depreciation, and maintenance expense increased 32 percent, or $9.6 million, to $39.1 million in 2018. The increase in equipment rentals, depreciation, and maintenance expense in was due in large part to the full-year inclusion of Capital Bank in 2018 and higher acquisition- and integration-related expenses primarily related to the CBF acquisition. Equipment rentals, depreciation, and maintenance expense was $29.5 million and $27.4 million in 2017 and 2016, respectively.

FDIC Premium Expense
FDIC premium expense increased to $31.6 million in 2018 from $26.8 million in 2017 primarily due to the CBF acquisition, as well as organic growth. In fourth quarter 2018, the FDIC assessment surcharge initiated in third quarter 2016 expired offsetting a portion of the overall increase in FDIC premium expense for 2018. FDIC premium expense was $26.8 million in 2017 and $21.6 million in 2016. The increase in FDIC premium expense was due in large part to balance sheet growth, both organically


16




and with the CBF and Coastal acquisitions for 2017. Additionally, the net loss recognized in fourth quarter 2017 also contributed to the increase in FDIC premium expense.

Communication and Courier

Expenses associated with communications and courier increased to $30.0 million in 2018 from $17.6 million in 2017, primarily driven by the full-year inclusion of Capital Bank in 2018. To a lesser extent, an increase in acquisition- and integration-related expenses also contributed to the expense increase in 2018. Expenses associated with communication and courier were $17.6 million and $14.3 million in 2017 and 2016, respectively. The increase in communication and courier expense was primarily related to acquisition- and integration- related projects primarily associated with the CBF acquisition in 2017.

Amortization of Intangibles

Amortization expense increased to $25.9 million in 2018 from $8.7 million in 2017, primarily due to the full-year inclusion of intangibles related to the Capital Bank acquisition in 2018 compared to one-month inclusion in 2017. Amortization expense was $8.7 million in 2017 and $5.2 million in 2016, primarily the result of the CBF and Coastal acquisitions.

Advertising and Public Relations

Expenses associated with advertising and public relations increased to $24.8 million in 2018 from $19.2 million in 2017. In 2018, FHN recognized higher advertising expense due in large part to promotional branding campaigns and targeted marketing in new markets. Expenses associated with advertising and public relations decreased to $19.2 million in 2017 from $21.6 million in 2016. In 2016, FHN recognized higher advertising and public relations expense due in large part to a promotional branding campaign and higher expenses associated with CRA initiatives compared to 2017.

Contract Employment and Outsourcing

Expenses associated with contract employment and outsourcing increased 24 percent, or $3.6 million, to $18.5 million in 2018, primarily driven by acquisition- and integration-related projects primarily associated with the CBF acquisition. Expenses associated with contract employment and outsourcing increased 49 percent to $15.0 million in 2017 compared to $10.1 million in 2016, also due in large part to acquisition- and integration-related projects primarily associated with the CBF acquisition.

Legal Fees

Legal fees decreased to $11.1 million in 2018 from $12.1 million in 2017 and $21.6 million in 2016. Legal fees fluctuate primarily based on the status, timing, type, and composition of cases or other projects.

Repurchase and Foreclosure Provision

During 2018, 2017, and 2016, FHN recognized a $1.0 million, $22.5 million and $32.7 million pre-tax expense reversal of mortgage repurchase and foreclosure provision, respectively, primarily as a result of the settlement/recoveries of certain repurchase claims. These expense reversals favorably impacted expenses in all periods.
Other Noninterest Expense
Other expense includes travel and entertainment expense, other insurance and tax expense, employee training and dues, supplies, customer relations expense, expenses associated with the non-service components of net periodic pension and post-retirement cost, tax credit investments, miscellaneous loan costs, expenses associated with OREO, losses from litigation and regulatory matters, and various other expenses.
All other expense was $136.0 million in 2018 compared to $135.1 million in 2017. The increase was primarily due to a $35.8 million increase of acquisition- and integration-related costs primarily associated with the CBF acquisition, including contract termination charges, costs of shareholder matters and asset impairments related to the integration, as well as other miscellaneous expenses. Additionally, a $4.1 million increase in Visa derivative valuation adjustments recognized in 2018, higher expenses associated with travel and entertainment, supplies, and employee training and dues largely due to the inclusion of Capital Bank, higher pension expense and an increase in the reserve for unfunded commitments also contributed to the increase in other noninterest expense relative to the prior year. These expense increases were largely offset by a $39.9 million


17




net decrease in loss accruals related to legal matters and $8.8 million of charitable contributions made to the First Tennessee Foundation in 2017.
All other expense increased 17 percent, or $19.7 million, to $135.1 million in 2017 from $115.4 million in 2016. The increase was primarily driven by a $10.0 million increase in pre-tax loss accruals related to legal matters and $8.8 million of charitable contributions to the First Tennessee Foundation. Additionally, FHN recognized $9.0 million in acquisition-and integration-related costs in 2017 and a $2.0 million vendor payment adjustment which also contributed to the expense increase in 2017. Offsetting a portion of the expense increase, FHN experienced a $2.0 million decrease in negative valuation adjustments associated with derivatives related to prior sales of Visa Class B shares, as well as a $1.2 million decrease in other insurance and taxes driven by favorable adjustments to franchise taxes related to community reinvestment efforts.
INCOME TAXES

FHN recorded an income tax provision of $157.6 million in 2018, compared to $131.9 million in 2017 and $106.8 million in 2016. The effective tax rates for 2018, 2017, and 2016 were approximately 22.1 percent, 42.7 percent, and 30.9 percent, respectively.

The decrease in the effective tax rates in 2018 compared to 2017 and 2016 was primarily driven by the reduction in the federal corporate income tax rate under the Tax Cuts and Jobs Act “Tax Act,” which lowered the rate to 21 percent from 35 percent effective January 1, 2018. Additionally, $7.5 million in net discrete tax benefits were realized during 2018. The tax rate in 2017 was adversely affected by approximately $82 million of tax expense primarily related to the revaluation of the net deferred tax asset based on a 21 percent tax rate as a result of the passage of the Tax Act in 2017. This was partially offset by the reversal of a capital loss valuation allowance which decreased federal and state taxes by $40.4 million.

The company’s effective tax rate is favorably affected by recurring items such as bank-owned life insurance, tax-exempt income, and tax credits and other tax benefits from affordable housing investments. The company’s effective tax rate also may be affected by items that may occur in any given period but are not consistent from period to period, such as changes in 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, 2018, FHN’s net DTA was $127.9 million compared with $221.8 million at December 31, 2017 and $199.6 million at December 31, 2016.

As of December 31, 2018, FHN had deferred tax asset balances related to federal and state income tax carryforwards of $49.8 million and $7.2 million, which will expire at various dates. Refer to Note 15 - Income Taxes for additional information.

FHN’s gross DTA after valuation allowance was $254.6 million and $353.2 million as of December 31, 2018 and 2017, 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 a valuation allowance.

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. The federal tax returns for Capital Bank Financial Corporation for 2010 - 2012 are under examination by the IRS. With few exceptions, FHN returns are no longer subject to federal or state and local tax examinations by tax authorities for years before 2013. FHN is currently under federal audit for 2013 - 2015 and is under examination in several states.

See also Note 15 - Income Taxes for additional information.



18




STATEMENT OF CONDITION REVIEW - 2018 COMPARED TO 2017
Total period-end assets were $40.8 billion and $41.4 billion on December 31, 2018 and 2017, respectively. Average assets increased 34 percent to $40.2 billion in 2018 from $29.9 billion in 2017. The increase in average assets was primarily driven by the timing of the CBF acquisition on November 30, 2017; 2018 includes the full-year average impact of balances compared with one month in 2017. The increase was largely due to net increases in the loan portfolios, increases in goodwill and other intangible assets, and a larger investment securities portfolio. On a period-end basis, the decrease was primarily due to net decreases in the available-for-sale ("AFS") securities portfolio and securities purchased under agreements to resell, offset partially by increases in federal funds sold and interest bearing cash.
Total period-end liabilities were $36.0 billion and $36.8 billion on December 31, 2018 and 2017, respectively. Average liabilities increased 32 percent to $35.6 billion in 2018, from $27.0 billion in 2017. The net increase in average liabilities relative to 2017 was also the result of the timing of the CBF acquisition in late fourth quarter 2017 and was primarily attributable to deposits. The decrease in period-end liabilities was largely due to a decrease in other short-term borrowings and trading liabilities, somewhat offset by an increase in deposits.
EARNING ASSETS
Earning assets consist of loans, investment securities, other earning assets such as trading securities, interest-bearing cash, and loans HFS. Average earning assets increased to $35.7 billion in 2018 from $27.5 billion in 2017. A more detailed discussion of the major line items follows.
Loans
Period-end loans were $27.5 billion on December 31, 2018 compared to $27.7 billion on December 31, 2017. Average loans for 2018 were $27.2 billion compared to $20.1 billion for 2017. The increase in average loan balances was primarily due to the timing of the CBF acquisition, as 2018 includes an average impact of twelve months compared to one month in 2017. The decrease in period-end loans was driven by run-off of lower spread loans within the Regional Banking portfolios, coupled with sales and run-off within the Non-Strategic portfolios, somewhat mitigated by net loan growth within several of the Regional Banking loan portfolios. The following table provides detail regarding FHN's average loans.
Table 6—Average Loans
 
(Dollars in thousands)
 
2018
 
Percent of total
 
2018 Growth Rate
 
2017
 
Percent of total
 
2017 Growth Rate
 
2016
 
Percent of total
 
2016 Growth Rate
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial, and industrial
 
$
15,872,929

 
58
%
 
28
 %
 
$
12,367,420

 
61
%
 
13
 %
 
$
10,932,679

 
60
%
 
15
%
Commercial real estate
 
4,206,206

 
16

 
78

 
2,365,763

 
12

 
22

 
1,938,939

 
11

 
36

Total commercial
 
20,079,135

 
74

 
36

 
14,733,183

 
73

 
14

 
12,871,618

 
71

 
18

Consumer:
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
Consumer real estate (a)
 
6,328,936

 
23

 
35

 
4,678,569

 
23

 

 
4,673,517

 
25

 
(4
)
Permanent mortgage
 
253,122

 
1

 
(20
)
 
317,816

 
2

 
(20
)
 
399,220

 
2

 
(18
)
Credit card and other
 
552,635

 
2

 
48

 
374,474

 
2

 
4

 
359,515

 
2

 
2

Total consumer
 
7,134,693

 
26

 
33

 
5,370,859

 
27

 
(1
)
 
5,432,252

 
29

 
(5
)
Total loans, net of unearned income
 
$
27,213,828

 
100
%
 
35
 %
 
$
20,104,042

 
100
%
 
10
 %
 
$
18,303,870

 
100
%
 
10
%
Certain previously reported amounts have been reclassified to agree with current presentation.
(a) 2018, 2017, and 2016 include $19.3 million, $29.3 million, and $43.4 million of restricted and secured real estate loans, respectively.




19




Table 7—Contractual Maturities of Commercial Loans on December 31, 2018
 
 
 
 
 
 
 
 
 
(Period-end)
(Dollars in thousands)
Within 1 Year
 
After 1 Year
Within 5 Years
 
After 5 Years
 
Total
Commercial, financial, and industrial
$
3,429,206

 
$
8,568,479

 
$
4,516,643

 
$
16,514,328

Commercial real estate
929,617

 
2,545,330

 
555,923

 
4,030,870

Total commercial loans
$
4,358,823

 
$
11,113,809

 
$
5,072,566

 
$
20,545,198

For maturities over one year:
 
 
 
 
 
 
 
 
Interest rates - floating
 
 
$
7,803,488

 
$
3,711,130

 
$
11,514,618

 
Interest rates - fixed
 
 
3,310,321

 
1,361,436

 
4,671,757

Total maturities over one year
 
 
$
11,113,809

 
$
5,072,566

 
$
16,186,375


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 repayment period, and a 10/20 loan has a 10 year draw period followed by a 20-year principal-and-interest repayment 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 a result, 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 AFS. FHN utilizes the securities portfolio as a source of income, liquidity and collateral for repurchase agreements, for public funds, and as a tool for managing risk of interest rate movements. Table 8 - Contractual Maturities of Investment Securities on December 31, 2018 (Amortized Cost) shows information pertaining to the composition, yields, and contractual maturities of the investment portfolio. Investment securities decreased to $4.6 billion on December 31, 2018 from $5.2 billion on December 31, 2017. The decrease in period-end investment securities was due in part to the adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities," on January 1, 2018, which resulted in the reclassification of equity securities from Investment securities to Other assets. FHN moderated its reinvestment strategy in 2018 which also contributed to the decrease in the investment securities balance on December 31, 2018. Additionally, an increase in unrealized losses as a result of higher rates also contributed to the decrease in AFS securities on December 31, 2018. Average investment securities were $4.7 billion and $4.0 billion in 2018 and 2017, representing 13 percent and 15 percent of average earning assets in 2018 and 2017, respectively. FHN manages the size and mix of the investment portfolio to assist in asset liability management, provide liquidity, and optimize risk adjusted returns.

Government agency issued MBS, CMO, and other agencies averaged $4.6 billion and $3.8 billion in 2018 and 2017, respectively. U.S. treasury securities and corporate and municipal bonds averaged $66.5 million in 2018 compared to $16.2 million in 2017. Investments in equity securities averaged $190.3 million in 2017, and were largely comprised of restricted investments in the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”). On December 31, 2018, AFS investment securities had $100.6 million of net unrealized losses compared to $35.7 million of net unrealized losses on December 31, 2017. See Note 3 - Investment Securities for additional detail.











20







Table 8—Contractual Maturities of Investment Securities on December 31, 2018 (Amortized Cost)
 
 
 
  
 
After 1 year
 
After 5 years
 
 
 
 
 
 
Within 1 year
 
Within 5 years
 
Within 10 years
 
After 10 years
 
(Period-end)(Dollars in thousands)
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency issued MBS and CMO (a)
$
13,642

 
2.18

%
$
126,450

 
2.35

%
$
305,029

 
3.18

%
$
4,035,054

 
2.63

%
U.S. treasuries

 

 
100

 
1.51

 

 

 

 

 
Other U.S. government agencies

 

 
149,050

 
2.77

 

 

 

 

 
States and municipalities

 

 

 

 
755

 
3.82

 
31,718

 
3.97

 
Corporates and other debt
15,125

 
3.15

 
40,258

 
4.61

 

 

 

 

 
Total securities available-for-sale
$
28,767

 
2.69

%
$
315,858

 
2.84

%
$
305,784

 
3.18

%
$
4,066,772

 
2.64

%
Securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$

 

%
$

 

%
$
10,000

 
5.25

%
$

 

%
Total securities held-to-maturity
$

 

%
$

 

%
$
10,000

 
5.25

%
$

 

%
(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 5.3 years.

Loans Held-for-Sale

Loans HFS consists of small business, other consumer loans, the mortgage warehouse, USDA, student, and home equity loans. The average balance of loans HFS increased to $724.0 million in 2018 from $370.6 million in 2017. The increase in average loans HFS was primarily due to an increase in small business loans and to a lesser extent other consumer loans acquired from the CBF acquisition. On December 31, 2018, loans HFS were $679.1 million compared to $699.4 million on December 31, 2017. The decrease in period-end balances is primarily related to the sale of approximately $120 million UPB of subprime auto loans originally acquired as part of the CBF acquisition, offset partially by an increase in small business loans.
Other Earning Assets

Other earning assets include trading securities, securities purchased under agreements to resell ("asset repos"), federal funds sold (“FFS”), and interest-bearing deposits with the Fed and other financial institutions. Other earning assets averaged $3.0 billion in 2018 and 2017, as increases in fixed income trading securities were largely offset by a decrease in interest-bearing cash. Fixed income's trading inventory fluctuates daily based on customer demand. Other earning assets were $3.3 billion and $3.4 billion on December 31, 2018 and 2017, respectively. The decline in other earning assets on a period-end basis was primarily driven by a decrease in asset repos, somewhat offset by increases in federal funds sold and interest-bearing cash. Asset repos are used in fixed income trading activity and generally fluctuate with the level of fixed income trading liabilities (short-positions) as securities collateral from asset repo transactions are used to fulfill trades.
Non-earning assets

Period-end non-earning assets increased to $4.6 billion on December 31, 2018 from $4.5 billion on December 31, 2017. The increase in non-earning assets was primarily due to the adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities," which resulted in the reclassification of equity securities from investment securities to other assets. Additionally, higher cash balances and an increase in goodwill also contributed to the increase in non-earning assets as of December 31, 2018, but were somewhat offset by a decrease in deferred tax assets.


21




Deposits
Average deposits were $30.9 billion during 2018, up 34 percent from $23.1 billion during 2017. The increase in average deposits was largely due to the timing of the CBF acquisition late in fourth quarter 2017, as well as FHN's strategic focus on growing deposits. FHN's composition of deposits shifted slightly in 2018, resulting in an increase in interest-bearing deposits, comprising 74 percent of total deposits. Market-indexed deposits as a percentage of total deposits decreased from 17 percent in 2017 to 15 percent in 2018, while commercial interest deposits increased as a percentage of total deposits.

Period-end deposits were $32.7 billion on December 31, 2018, up 7 percent from $30.6 billion on December 31, 2017. The increase in period-end deposits was largely the result of increase in savings and time deposits as a result of FHN's strategic focus on growing deposits. The following table summarizes FHN's average deposits for 2018, 2017 and 2016.

Table 9—Average Deposits
(Dollars in thousands)
 
2018
 
Percent of Total
 
2018 Growth Rate
 
2017
 
Percent of Total
 
2017 Growth Rate
 
2016
 
Percent of Total
 
2016 Growth Rate
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer interest
 
$
12,700,135

 
41
%
 
34
%
 
$
9,467,518

 
41
%
 
11
%
 
$
8,537,255

 
41
%
 
5
%
Commercial interest
 
5,660,480

 
18

 
78

 
3,187,034

 
14

 
13

 
2,812,222

 
13

 
3

Market-indexed (a)
 
4,541,835

 
15

 
14

 
3,986,095

 
17

 
5

 
3,788,420

 
18

 
48

Total interest-bearing deposits
 
22,902,450

 
74

 
38

 
16,640,647

 
72

 
10

 
15,137,897

 
72

 
13

Noninterest-bearing deposits
 
8,000,642

 
26

 
24

 
6,431,489

 
28

 
12

 
5,760,873

 
28

 
8

Total deposits
 
$
30,903,092

 
100
%
 
34
%
 
$
23,072,136

 
100
%
 
10
%
 
$
20,898,770

 
100
%
 
11
%
(a) Market-indexed deposits are tied to an index not administered by FHN and are comprised of insured network deposits, correspondent banking deposits, and trust/sweep deposits.
Short-Term Borrowings

Short-term borrowings (federal funds purchased (“FFP”), securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings) averaged $2.8 billion in 2018 and $2.3 billion in 2017. As noted in the table below, the increase in short-term borrowings was largely due to an increase in other short-term borrowings and securities sold under agreements to repurchase. Other short-term borrowings balances fluctuate largely based on the level of FHLB borrowing as a result of loan demand, deposit levels and balance sheet funding strategies. Securities sold under agreements to repurchase increased in 2018, as an additional source of wholesale funding for FHN's balance sheet activities. Period-end short-term borrowings were $1.5 billion on December 31, 2018 and $4.3 billion on December 31, 2017. The decrease in period-end short-term borrowings was primarily due to a decrease in FHLB borrowings. Additionally, decreases in trading liabilities and FFP also contributed to the decrease in short-term borrowings on December 31, 2018. FFP fluctuates depending on the amount of excess funding of FHN’s correspondent bank customers and trading liabilities fluctuate based on levels of trading securities and hedging strategies. See Note 9 - Short-Term Borrowings for additional information. The following table summarizes FHN's average short-term borrowings for 2018, 2017, and 2016.

Table 10—Average Short-Term Borrowings
(Dollars in thousands)
 
2018
 
Percent  of Total
 
2018 Growth Rate
 
2017
 
Percent of Total
 
2017 Growth Rate
 
2016
 
Percent of Total
 
2016 Growth Rate
Short-term borrowings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds purchased
 
$
405,110

 
14
%
 
(9
)%
 
$
447,137

 
20
%
 
(24
)%
 
$
589,223

 
30
%
 
(16
)%
Securities sold under agreements to repurchase
 
713,841

 
25

 
23

 
578,666

 
26

 
36

 
425,452

 
21

 
15

Trading liabilities
 
682,943

 
24

 
*

 
685,891

 
30

 
(11
)
 
771,039

 
39

 
5

Other short-term borrowings
 
1,046,585

 
37

 
89