TABLE OF ITEM 2 TOPICS General Information 78 Forward-Looking Statements 80 Financial Summary 81 Statement of Condition Review 88 Capital 91 Asset Quality 94 Risk Management 106
Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations
111
Market Uncertainties and Prospective Trends
112
Critical Accounting Policies 115 Non-GAAP Information 115FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 77
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General Information
First Horizon National Corporation ("FHN") began as a community bank chartered in 1864. FHN's sole class of common stock,$.625 par value, is listed and trades on theNew York Stock Exchange LLC under the symbol FHN. FHN is the parent company ofFirst Horizon Bank . FirstHorizon Bank's principal divisions and subsidiaries operate under the brands ofFirst Horizon Bank ,First Horizon Advisors , and FHN Financial. FHN offers regional banking, wealth management and capital market services through the First Horizon family of companies. FirstHorizon Bank andFirst Horizon Advisors provide consumer and commercial banking and wealth management services. FHN Financial, which operates partly through a division ofFirst Horizon Bank and partly through subsidiaries, is an industry leader in fixed income sales, trading, and strategies for institutional clients in theU.S. and abroad. FirstHorizon Bank has over 270 banking offices in seven southeasternU.S. states, and FHN Financial has 29 offices in 18 states across theU.S. Segments 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 primarily in the southeast
Regional banking also provides investments, wealth management, financial
planning, trust services and asset management, mortgage banking, 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
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, acquisition- and integration-related costs, expenses associated with
rebranding initiatives, and various charges related to restructuring, repositioning, and efficiency efforts. • Non-strategic segment consists of run-off consumer lending activities,
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. Significant Pending Transactions OnNovember 4, 2019 ,FHN and IBERIABANK Corporation ("IBKC") announced that they had entered into an agreement and plan of merger under which IBKC will merge with FHN in a merger-of-equals transaction. IBKC, headquartered inLafayette, Louisiana , has 319 offices in 12 states, mostly in the southern and southeasternU.S. , and has reported$32.2 billion of total assets,$24.5 billion in loans, and$25.5 billion in deposits, atMarch 31, 2020 . IBKC's common stock is listed onThe NASDAQ Stock Market, LLC under the symbol IBKC. Under the merger agreement, each share of IBKC common stock will be converted into 4.584 shares of FHN common stock. After closing, FHN expects IBKC common shares will be converted into approximately 44 percent of the then-outstanding shares of FHN common stock. The merger agreement requires FHN to expand its board of directors to seventeen persons; after closing, eight board positions will be held by current IBKC directors, and nine will be held by current FHN directors. FHN expects the transaction to close in second quarter, subject to regulatory approvals and other customary closing conditions. OnNovember 8, 2019 , FHN announced an agreement forFirst Horizon Bank to purchase 30 branches fromSunTrust Bank in conjunction withSunTrust Banks, Inc.'s merger withBB&T Corporation , which created Truist Financial Corp. As part of the agreement, FHN will assume approximately$2.4 billion of branch deposits for a 3.40 percent deposit premium and purchase approximately$410 million of branch loans. The branches are in communities inNorth Carolina (20 branches),Virginia (8 branches), andGeorgia (2 branches). FHN expects the purchase to close in third quarter 2020, subject to customary closing conditions. In second quarter 2019, FHN sold a subsidiary acquired as part of theCapital Bank Financial Corporation ("CBF") merger (in 2017), that did not fit within FHN's risk profile. The sale resulted in the removal of approximately$25 million UPB of subprime consumer loans from Loans held-for-sale on FHN's Consolidated Condensed Statements of Condition. In relation to all acquisitions, FHN's operating results include the operating results of the acquired assets andFIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q
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assumed liabilities subsequent to the acquisition date. Refer to Note 2 - Acquisitions and Divestitures in this report and in Item 7 to FHN's Annual Report on Form 10-K for the year endedDecember 31, 2019 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 unaudited Consolidated Condensed Financial Statements and Notes in this report. Additional information including the 2019 financial statements, notes, and MD&A is provided in Item 7 and 8 to FHN's Annual Report on Form 10-K for the year endedDecember 31, 2019 . ADOPTION OF ACCOUNTING UPDATES EffectiveJanuary 1, 2020 FHN adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," (CECL); which resulted in a$106.4 million increase to the allowance for loan losses ("ALLL") and a$24.0 million increase to the reserve for unfunded commitments, resulting in a$96.1 million decrease of retained earnings (net of taxes). See Note 1- Financial Information for additional information. Non-GAAP Measures Certain measures are included in the narrative and tables in this MD&A that are "non-GAAP", meaning (underU.S. financial reporting rules) they are not presented in accordance with generally accepted accounting principles ("GAAP") in theU.S. and also are not codified inU.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" underU.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 measure presented in this filing is return on average tangible common equity ("ROTCE"). Refer to table 23 for a reconciliation of the non-GAAP to GAAP measure and presentation of the most comparable GAAP item.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q
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Forward-Looking Statements
This MD&A contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 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. 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: general economic and financial market conditions, including expectations of and actual timing and amount of interest rate movements including the slope of the yield curve, competition, customer and investor responses to these conditions, ability to execute business plans, geopolitical developments, recent and future legislative and regulatory developments, natural disasters, the potential impacts on FHN's businesses of the coronavirus COVID-19 pandemic, including negative impacts from quarantines, market declines and volatility, and changes in customer behavior related to COVID-19, 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 inU.S. housing and other real estate prices, fluctuation of collateral values, and changes in customer profiles. Additionally, the actions of theSecurities and Exchange Commission ("SEC"), theFinancial Accounting Standards Board ("FASB"), theTennessee Department of Financial Institutions ("TDFI") and its Commissioner, theBoard of Governors of theFederal Reserve System ("Federal Reserve" or "Fed"), theFederal Deposit Insurance Corporation ("FDIC"), theFinancial Industry Regulatory Authority ("FINRA"), theU.S. Department of the Treasury ("U.S. Treasury "), theMunicipal Securities Rulemaking Board ("MSRB"), theConsumer Financial Protection Bureau ("CFPB"), theOffice of the Comptroller of the Currency ("OCC"), theFinancial Stability Oversight Council ("Council"), thePublic 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 Quarterly Report 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 and exhibits to this Quarterly Report on Form 10-Q for the period endedMarch 31, 2020 , and in documents incorporated into this Quarterly Report.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 80
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Financial Summary
As previously mentioned, effectiveJanuary 1, 2020 , FHN adopted ASU 2016-13, (CECL). Application of CECL methodology creates larger immediate impacts on credit loss estimates in unanticipated rapid declines in economic projections when compared to the prior incurred loss estimation methodology. The sudden, steep decline in the economic forecast associated with the Coronavirus Disease 2019 ("COVID-19") pandemic late in first quarter 2020 resulted in a significant increase in loan loss provision expense and the reserve for unfunded commitments, negatively impacting FHN's operating results in first quarter 2020. In first quarter 2020, FHN reported net income available to common shareholders of$12.1 million , or$.04 per diluted share, compared to net income available to common of$99.0 million , or$.31 per diluted share in first quarter 2019. The decline in results in first quarter 2020 relative to the prior year was driven by a significant increase in loan loss provision expense and an increase in the reserve for unfunded commitments, somewhat offset by higher revenue. Total revenue increased 10 percent to$477.6 million in first quarter 2020 from$435.6 million in first quarter 2019. NII increased to$302.8 million in first quarter 2020 from$294.5 million in first quarter 2019 primarily due to strong loan and deposit growth, favorable deposit costs, and the maturity of$400 million of senior debt in fourth quarter 2019. Lower loan yields compared to first quarter 2019 negatively impacted NII in first quarter 2020, offsetting a portion of the overall increase in NII. Noninterest income increased 24 percent, or$33.7 million , in first quarter 2020 driven by higher fixed income revenue, somewhat offset by a decrease in deferred compensation income relative to first quarter 2019. Noninterest expense increased 5 percent to$311.9 million in first quarter 2020 from$296.1 million in first quarter 2019. The expense increase in first quarter 2020, was due in large part to an increase in credit expense on unfunded commitments associated with economic uncertainty attributable to the COVID-19 pandemic, as well as higher personnel-related expenses, somewhat offset by lower restructuring and rebranding related expenses. Asset quality trends in first quarter 2020 were relatively consistent with trends in first quarter 2019. The NPL ratio and 30+ delinquencies improved from .65 percent and .23 percent, respectively in first quarter 2019 to .57 percent and .19 percent, respectively in first quarter 2020. Net charge offs increased from .07 percent in first quarter 2019 to .10 percent in first quarter 2020 primarily driven by two credits. Return on average common equity ("ROCE") and ROTCE were 1.05 percent and 1.59 percent, respectively, in first quarter 2020 compared to 9.09 percent and 14.17 percent, respectively, in first quarter 2019. Return on average assets ("ROA") declined to .15 percent in first quarter 2020 from 1.03 percent in first quarter 2019. Key financial ratios were negatively impacted in first quarter 2020 by the large increase in loan loss provision expense. Common Equity Tier 1, Tier 1, Total Capital, and Leverage ratios were 8.54 percent, 9.52 percent, 10.78 percent, and 9.00 percent, respectively, in first quarter 2020 down from 9.62 percent, 10.65 percent, 11.78 percent, and 9.02 percent, respectively, in first quarter 2019 driven by an increase in risk-weighted assets due to higher loan balances and an increase in fixed income market risk assets. Average assets increased to$43.6 billion in first quarter 2020 from$40.9 billion in first quarter 2019. Average loans and average deposits increased to$30.5 billion and$32.9 billion , respectively, in first quarter 2020, up 12 percent and 1 percent from first quarter 2019. Period-end Shareholders' equity increased to$5.1 billion in first quarter 2020 from$4.8 billion in first quarter 2019. Average Shareholders' equity increased to$5.0 billion in first quarter 2020 from$4.8 billion in first quarter 2019. Business Line Review Regional Banking Pre-tax income within the regional banking segment was$25.6 million in first quarter 2020, down from$147.0 million in first quarter 2019. The decrease in pre-tax income was primarily driven by an increase in loan loss provision expense, and higher credit expense on unfunded commitments somewhat offset by increase in revenue. Total revenue increased 6 percent to$382.0 million in first quarter 2020 from$359.1 million in first quarter 2019, driven by increases in NII and noninterest income. The increase in NII was primarily due to strong loan and deposit growth and favorable deposit costs, which more than offset lower loan yields compared to first quarter 2019. Noninterest income increased 12 percent or$8.8 million to$81.9 million in first quarter 2020 from$73.0 million in the prior year. The increase in noninterest income was primarily driven by an increase in fees from derivative sales, higher brokerage, management fees and commissions, and an increase in other service charges revenue, partially offset by lower fees from deposit transactions and cash management activities relative to first quarter 2019.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 81
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Provision expense increased to$145.4 million in first quarter 2020 from$13.4 million in first quarter 2019, primarily driven by the application of CECL methodology and a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic. Noninterest expense was$211.0 million in first quarter 2020, up from$198.6 million in first quarter 2019. The increase in expense was primarily driven by a$8.8 million increase in the credit expense on unfunded commitments largely associated with the application of CECL methodology with a sudden, steep decline in economic forecast attributable to the COVID-19 pandemic. An increase inFDIC premium expense due to balance sheet growth and expected loss severity ratios as well as$1.0 million of additional credit risk adjustments related to Regional Banking interest rate derivatives and swap participations also contributed to the overall increase in expenses in first quarter 2020 compared to the prior year. Fixed Income Pre-tax income in the fixed income segment more than doubled to$25.6 million in first quarter 2020 from$10.6 million in first quarter 2019. The increase in pre-tax income in first quarter 2020 was driven by higher revenue, somewhat offset by an increase in expenses. Noninterest income increased 78 percent, or$41.9 million to$95.7 million in first quarter 2020 from$53.8 million in first quarter 2019. Average daily revenue ("ADR") increased to$1.3 million in first quarter 2019 from$729 thousand in first quarter 2019, due to elevated levels of commissionable revenues, partially offset by elevated levels of trading losses driven by extreme market volatility as compared to first quarter 2019. Other product revenue was$17.4 million in first quarter 2020, up from$9.3 million in the prior year, primarily driven by increases in fees from derivative sales. NII was$10.9 million in first quarter 2020, up from$7.3 million in first quarter 2019, primarily due to higher spreads on inventory positions in addition to higher inventory balances compared to prior year. Noninterest expense was$81.1 million in first quarter 2020 compared to$50.5 million in first quarter 2019, primarily driven by higher variable compensation due to increased commissionable revenues. Corporate The pre-tax loss for the corporate segment was$32.5 million in first quarter 2020 compared to$36.3 million in first quarter 2019. Net interest expense was$13.4 million and$7.9 million in first quarter 2020 and 2019, respectively. Net interest expense was negatively impacted by lower average balances of excess cash at the Federal reserve ("Fed") and AFS securities, somewhat offset by the maturity of$400 million of senior debt in fourth quarter 2019. Noninterest income/(loss)(including securities gain/losses) in first quarter 2020 was negative$3.7 million compared to$13.4 million in first quarter 2019, primarily due to a$15.0 million decrease in deferred compensation income driven by negative equity market valuations relative to the prior year. Noninterest expense decreased 63 percent or$26.3 million from$41.8 million in first quarter 2019 to$15.5 million in first quarter 2020. The decrease in expense for first quarter 2020 was primarily driven by decreases in deferred compensation expense, restructuring costs associated with efficiency initiatives and rebranding expenses relative to first quarter 2019. This expense decrease was somewhat offset by an increase in pension expense. Non-Strategic The non-strategic segment had pre-tax income of$2.6 million in first quarter 2020 compared to$9.2 million in first quarter 2019. The decrease in results for first quarter 2020 was driven by a smaller provision credit and a decline in NII relative to first quarter 2019 somewhat offset by a decrease in expenses. Total revenue was$6.0 million in first quarter 2020 down from$9.9 million in first quarter 2019. NII decreased to$5.1 million in first quarter 2020 from$9.1 million in first quarter 2019, primarily due to continued run-off of the loan portfolios. Noninterest income was$.9 million in first quarter 2020 and 2019. The provision for loan losses within the non-strategic segment was a provision credit of$.4 million in first quarter 2020 compared to a provision credit of$4.4 million in the prior year. The reduction in provision credit in first quarter 2020 was due to additional consumer reserves associated with a sudden, steep decline in economic forecast attributable to the COVID-19 pandemic. Noninterest expense decreased 27 percent to$3.8 million in first quarter 2020 from$5.2 million in first quarter 2019.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 82
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Income Statement Review
Total consolidated revenue was$477.6 million in first quarter 2020, up 10 percent from$435.6 million in first quarter 2019 driven by a 24 percent increase in noninterest income and a 3 percent increase in NII. Provision expense increased significantly from$9.0 million in first quarter 2019 to$145.0 million in first quarter 2020 primarily driven by a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic. Total consolidated expenses increased 5 percent to$311.3 million in first quarter 2020 from$296.1 million in first quarter 2019, driven by an increase in expense on unfunded commitments and higher personnel-related expenses, somewhat offset by lower restructuring and rebranding related expenses. Net Interest Income Net interest income was$302.8 million in first quarter 2020, up from$294.5 million in first quarter 2019. The increase in NII was primarily attributable to strong loan and deposit growth, favorable deposit costs, and the maturity of$400 million of senior debt in fourth quarter 2019, somewhat offset by lower loan yields compared to first quarter 2019. Average earning assets increased to$38.8 billion in first quarter 2020 from$36.3 billion in first quarter 2019. The increase in average earning assets was primarily driven by increases in loans, securities purchased under agreement to resell ("asset repos"), and fixed income inventory, somewhat offset by decreases in interest-bearing cash. 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 was 3.16 percent in first quarter 2020 down 15 basis points from 3.31 percent in first quarter 2019. The net interest spread was 2.89 percent in first quarter 2020, down 3 basis points from 2.92 percent in first quarter 2019. The decrease in NIM in first quarter 2020 was primarily the result of the negative impact of interest rates (including LIBOR and Prime) relative to first quarter 2019. Additionally, higher balances of trading securities negatively impacted NIM in first quarter 2020, but was somewhat mitigated by loan and deposit growth, lower balances of cash held at the Fed, and the maturity of$400 million of senior debt in fourth quarter 2019.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 83
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Table 1-Net Interest Margin Three Months Ended March 31 2020 2019 Assets: Earning assets: Loans, net of unearned income: Commercial loans 4.33 % 5.08 % Consumer loans 4.33
4.59
Total loans, net of unearned income 4.33 4.96 Loans held-for-sale 4.67 5.89 Investment securities: U.S. government agencies 2.32 2.68 States and municipalities 3.35 4.33 Corporates and other debt 4.67 4.37 Other 33.76 34.56 Total investment securities 2.51 2.79 Trading securities 2.91 3.80 Other earning assets: Federal funds sold 1.05 2.63 Securities purchased under agreements to resell 1.13 2.21 Interest-bearing cash 1.13 2.41 Total other earning assets 1.13 2.38 Interest income / total earning assets 3.94 % 4.49 % Liabilities: Interest-bearing liabilities: Interest-bearing deposits: Savings 0.87 % 1.36 % Other interest-bearing deposits 0.65
1.05
Time deposits 1.67
1.91
Total interest-bearing deposits 0.90
1.35
Federal funds purchased 1.19
2.50
Securities sold under agreements to repurchase 1.36
2.06
Fixed income trading liabilities 1.76 3.04 Other short-term borrowings 1.20 3.40 Term borrowings 4.01 4.89
Interest expense / total interest-bearing liabilities 1.05
1.57
Net interest spread 2.89 % 2.92 % Effect of interest-free sources used to fund earning assets 0.27 0.39 Net interest margin (a) 3.16 % 3.31 %
(a) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 21 percent and, where applicable, state income taxes.
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 84
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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. For 2020, NIM will also depend on potentially modest loan growth, rate impact from the elevated spread of LIBOR to Fed Funds, widening credit spreads, PPP fees, Fixed Income trading inventory and the extent of assets moving to nonaccrual status. 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 expected credit losses in the loan portfolio. Provision expense was$145.0 million in first quarter 2020 calculated under the CECL methodology adoptedJanuary 1, 2020 , compared to$9.0 million in first quarter 2019 calculated under the "incurred loss" methodology. The increase in provision expense was primarily the result of a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic, and to a much less extent associated with loan growth. 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 the Asset Quality section in this MD&A. NONINTEREST INCOME Noninterest income (including securities gains/(losses)) was$174.8 million in first quarter 2020 and represented 37 percent of total revenue compared to$141.0 million in first quarter 2019 and 32 percent. The increase in noninterest income in first quarter 2020 was primarily driven by higher fixed income revenue, somewhat offset by a decrease in deferred compensation income relative to first quarter 2019. Fixed Income Noninterest Income Fixed income noninterest income was$95.6 million in first quarter 2020, a 78 percent increase from$53.7 million in first quarter 2019. The increase in first quarter 2020 was largely driven by elevated levels of commissionable revenues, partially offset by elevated levels of trading losses driven by extreme market volatility inMarch 2020 . Revenue from other products increased 86 percent to$17.3 million in first quarter 2020 from$9.3 million in first quarter 2019, primarily driven by increases in derivative sales. The following table summarizes FHN's fixed income noninterest income for the three months endedMarch 31, 2020 and 2019. Table 2-Fixed Income Noninterest Income Three Months Ended March 31 (Dollars in thousands) 2020 2019 Percent Change Noninterest income: Fixed income$ 78,354 $ 44,472 76 % Other product revenue 17,281 9,277 86 % Total fixed income noninterest income$ 95,635 $ 53,749
78 %
Brokerage, Management Fees and Commissions Noninterest income from brokerage, management fees and commissions increased 22 percent or$2.8 million from$12.6 million in first quarter 2019 to$15.4 million in first quarter 2020. The increase in first quarter 2020 was primarily driven by higher advisory revenue and annuity income as a result of increased transaction volume. Deposit Transactions and Cash Management Fees from deposit transactions and cash management activities were$30.3 million in first quarter 2020, down 4 percent from$31.6 million in first quarter 2019. The decrease in first quarter 2020 is largely due to lower debit card transaction fees as a result of volume incentives received in 2019 and lower NSF/overdraft fee income driven by changes in consumer behavior relative to first quarter 2019, somewhat offset by an increase in fees from cash management activities. Other Noninterest Income Other income includes revenues related to other service charges, ATM and interchange fees, mortgage banking (primarily within the non-strategic and regional banking segments), letters of credit fees, dividend income, electronic banking fees, insurance commissions, gain/(loss)FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q
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on the extinguishment of debt, deferred compensation plans (which are mirrored by changes in noninterest expense) and various other fees. Revenue from all other income and commissions decreased to$14.4 million in first quarter 2020 from$24.6 million in first quarter 2019. The decrease in all other income and commissions in first quarter 2020 was largely due to a$15.0 million decrease in deferred compensation income driven by negative equity market valuations. Deferred compensation income fluctuates with changes in the market value of the underlying investments and is mirrored by changes in deferred compensation expense which is included in personnel expense. An increase in other service charges and higher fees from derivative sales relative to first quarter 2019 offset a portion of the overall decline in other noninterest income. The following table provides detail regarding FHN's other income. Table 3-Other Income Three Months Ended March 31 Percent (Dollars in thousands) 2020 2019 Change Other income: Other service charges$ 5,219 $ 3,869 35 % ATM and interchange fees 4,212 3,241 30 % Mortgage banking 2,431 1,886 29 % Letter of credit fees 1,462 1,368 7 % Dividend income (a) 1,130 2,313 (51 )% Electronic banking fees 1,030 1,271 (19 )% Insurance commissions 789 624 26 % Gain/(loss) on extinguishment of debt - (1 ) NM Deferred compensation (b) (9,507 ) 5,474 NM Other 7,598 4,586 66 % Total$ 14,364 $ 24,631 (42 )% Certain previously reported amounts have been reclassified to agree with current presentation. NM - Not meaningful (a) Represents dividend income fromFederal Reserve Bank ("FRB") and Federal Home
(b) Amounts are driven by market conditions and are mirrored by changes in
deferred compensation expense which is included in employee compensation
expense. First quarter 2020 decrease was driven by negative equity market
valuations. NONINTEREST EXPENSE Total noninterest expense increased to$311.3 million in first quarter 2020 from$296.1 million in first quarter 2019. The increase in noninterest expense in first quarter 2020 was primarily driven by an increase in credit expense on unfunded commitments associated with a sudden, steep decline in economic forecast attributable to the COVID-19 pandemic. To a lesser extent, higher personnel-related expense also contributed to the increase in noninterest expense, somewhat offset by restructuring costs associated with the identification of efficiency opportunities within the organization, strategic initiatives and rebranding expenses recognized in first quarter 2019. Employee Compensation, Incentives, and Benefits Employee compensation, incentives, and benefits (personnel expense), the largest component of noninterest expense, increased 3 percent in first quarter 2020 to$183.5 million from$177.9 million in first quarter 2019. The increase in personnel expense in first quarter 2020 was primarily driven by higher variable compensation due to increased commissionable revenues within Fixed Income. These expense increases were somewhat offset by a$16.6 million decrease in deferred compensation expense driven by negative equity market valuations in first quarter 2020 and a$6.4 million decrease in restructuring costs associated with the identification of efficiency opportunities within the organization.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 86
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Professional Fees Professional fees decreased 43 percent or$5.3 million from$12.3 million in first quarter 2019 to$7.0 million in first quarter 2020. The decrease in professional fees was primarily driven by lower restructuring costs associated with the identification of efficiency opportunities within the organization. Additionally, strategic investments recognized in first quarter 2019 to analyze growth potential and product mix for new markets also contributed to the year-over-year decline in professional fees.FDIC premium expenseFDIC premium expense increased 58 percent from$4.3 million in first quarter 2019 to$6.7 million in first quarter 2020 driven by balance sheet growth and expected loss severity ratios. Contract employment and outsourcing Expenses associated with contract employment and outsourcing increased 46 percent or$1.6 million to$4.9 million in first quarter 2020 compared to$3.4 million in first quarter 2019, primarily driven by merger and acquisition related projects. Other Noninterest Expense Other expense includes expenses associated with unfunded commitments, travel and entertainment, other insurance and tax expenses, expenses associated with the non-service components of net periodic pension and post-retirement cost, supplies, customer relation expenses, costs associated with employee training and dues, miscellaneous loan costs, tax credit investments expenses, losses from litigation and regulatory matters, expenses associated with OREO, and various other expenses. All other expenses increased 72 percent to$33.2 million in first quarter 2020 from$19.3 million in first quarter 2019. The increase was primarily driven by an$8.8 million increase in credit expense on unfunded commitments largely associated with the application of CECL methodology with a sudden, steep decline in economic forecast attributable to the COVID-19 pandemic. Additionally, a$2.1 million increase in pension-related costs and$1.0 million of additional credit risk adjustments on Regional Banking interest rate derivatives and swap participations also contributed to the overall increase in all other expenses in first quarter 2020 related to prior year. The following table provides detail regarding FHN's other expense. Table 4-Other Expense Three Months Ended March 31 Percent (Dollars in thousands) 2020 2019 Change Other expense: Credit expense on unfunded commitments (a)$ 9,230 $ 396 NM Travel and entertainment 2,709 2,712 * Other insurance and taxes 2,679 2,694 (1 )% Non-service components of net periodic pension and post-retirement cost 2,508 432 NM Supplies 2,411 1,804 34 % Customer relations 2,004 1,599 25 % Employee training and dues 1,341 1,457 (8 )% Miscellaneous loan costs 1,094 1,027 7 % Tax credit investments 346 675 (49 )% Litigation and regulatory matters 13 13 * OREO (184 ) (366 ) 50 % Other 9,075 6,888 32 % Total$ 33,226 $ 19,331 72 % Certain previously reported amounts have been reclassified to agree with current presentation. NM - Not meaningful * Amount is less than one percent. (a) First quarter 2020 increase largely associated with a sudden, steep decline
in economic forecast attributable to the COVID-19 pandemic.
INCOME TAXES
FHN recorded an income tax provision of
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quarter 2019. The effective tax rate for the three months endedMarch 31, 2020 was approximately 22 percent compared to 21 percent for the three months endedMarch 31, 2019 . The Company's effective tax rate is favorably affected by recurring items such as bank-owned life insurance, tax-exempt income, and credits and other tax benefits from affordable housing investments. The effective rate is unfavorably affected by the non-deductibility of a portion of the Company'sFDIC premium and executive compensation expenses. 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 ofMarch 31, 2020 , FHN's gross DTA (net of a valuation allowance) and gross DTL were$292.8 million and$207.6 million , respectively, resulting in a net DTA of$85.2 million atMarch 31, 2020 , compared with a net DTA of$69.0 million atDecember 31, 2019 . As ofMarch 31, 2020 , FHN had deferred tax asset balances related to federal and state income tax carryforwards of$37.5 million and$1.2 million , respectively, which will expire at various dates. FHN believes that it will be able to realize the value of its DTA and that no valuation allowance is needed. FHN monitors its DTA and the need for a valuation allowance on a quarterly basis. RESTRUCTURING, REPOSITIONING, AND EFFICIENCY INITIATIVES Beginning in 2019, FHN initiated a company-wide review of business practices with the goal of optimizing its expense base to improve profitability and create capacity to reinvest savings into technology and revenue production activities. The net charges for restructuring, repositioning, and efficiency initiatives were immaterial in first quarter 2020 compared to$12.2 million in first quarter 2019. These expenses are primarily associated with severance and other employee costs and professional fees. Due to the broad nature of the actions being taken, many components of expense are expected to benefit from the current efficiency initiatives. See Note 17 - Restructuring, Repositioning, and Efficiency for additional information. Statement of Condition Review Total period-end assets were$47.2 billion onMarch 31, 2020 , up 9 percent from$43.3 billion onDecember 31, 2019 . The increase in period-end assets was primarily driven by strong loan growth. Additionally, a net increase in other earning assets (primarily trading securities), derivative assets and FHLB stock also contributed to the increase in period-end assets. These increases were somewhat offset by an increase in the allowance for loan losses due to the Adoption of ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," or ("CECL") and all related ASUs onJanuary 1, 2020 and additional reserves recognized in first quarter 2020 due to a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic. Average assets increased 2 percent to$43.6 billion in first quarter 2020 from$42.9 billion in fourth quarter 2019. The increase in average assets was driven by higher balances of trading securities and securities purchased under agreements to resell ("asset repos"), somewhat offset by lower average loan balances and an increase in the ALLL due to the adoption of CECL. Total period-end liabilities were$42.1 billion onMarch 31, 2020 , a 10 percent increase from$38.2 billion onDecember 31, 2019 . The net increase in period-end liabilities was primarily due to increases in deposits and higher balances of short-term borrowings. In first quarter 2020, average liabilities increased to$38.5 billion from$37.8 billion in fourth quarter 2019. The increase in average liabilities was largely driven by higher balances of short-term borrowings somewhat offset by a decrease in federal funds purchased ("FFP") relative to fourth quarter 2019. EARNING ASSETS Earning assets consist of loans, investment securities, loans HFS, and other earning assets such as trading securities and interest-bearing cash. Average earning assets increased 1 percent and 7 percent to$38.8 billion in first quarter 2020 from$38.2 billion and$36.3 billion , respectively, in fourth quarter 2019 and first quarter 2019. A more detailed discussion of the major line items follows. Loans Period-end loans increased 7 percent and 19 percent to$33.4 billion as ofMarch 31, 2020 from$31.1 billion onDecember 31, 2019 and$28.0 billion as ofMarch 31, 2019 . The increase is period-end loan balances compared toDecember 31, 2019 was primarily due to an increase inFIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q
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loans to mortgage companies during the end of March and additional commercial line draws. Average loans for first quarter 2020 were$30.5 billion compared to$30.7 billion in fourth quarter 2019 and$27.3 billion in first quarter 2019. The following table summarizes FHN's average deposits for quarters-endedMarch 31, 2020 andDecember 31, 2019 . Table 5-Average Loans Quarter Ended Quarter Ended March 31, 2020 December 31, 2019 (Dollars in thousands) Amount Percent of total Amount Percent of total Growth Rate Commercial: Commercial, financial, and industrial$ 19,469,572 64 %$ 19,739,937 64 % (1 )% Commercial real estate 4,421,913 14 4,263,597 14 4 Total commercial 23,891,485 78 24,003,534 78 *
Consumer:
Consumer real estate (a) (b) 6,134,390 20 6,194,134 20 (1 ) Credit card, OTC and other 498,290 2 508,651 2 (2 ) Total consumer 6,632,680 22 6,702,785 22 (1 ) Total loans, net of unearned income$ 30,524,165 100 %$ 30,706,319 100 % (1 )%
* Amount is less than one percent.
(a) Balance as
real estate loans.
(b) In first quarter 2020, the Permanent Mortgage portfolio was combined into
Consumer Real Estate portfolio, all prior periods were revised for comparability. C&I loans are the largest component of the loan portfolio comprising 64 percent of total loans in both first quarter 2020 and fourth quarter 2019. C&I loans declined 1 percent, from fourth quarter 2019 largely driven by lower balances within mortgage warehouse lending, partially mitigated by strong loan growth within other commercial portfolios of Regional Banking. Growth in other specialty lending areas, such as franchise finance, private client, asset based lending, and healthcare also offset a portion of the overall decline in average C&I loans in first quarter 2020 compared to fourth quarter 2019.Commercial real estate loans experienced a net increase of 4 percent to$4.4 billion in first quarter 2020. Average consumer loans declined 1 percent from fourth quarter 2019 to$6.6 billion in first quarter 2020, largely driven by the continued wind-down of portfolios within the Non-strategic segment and declines in home equity lines of credit within the Regional Banking segment.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. Period-end investment securities were$4.6 billion onMarch 31, 2020 compared to$4.5 billion onDecember 31, 2019 . Average investment securities were$4.5 billion in first quarter 2020 and$4.4 billion in fourth quarter 2019, representing 12 percent of average earning assets in first quarter 2020 and fourth quarter 2019. The increase in period-end and average investment securities was driven by FHN's reinvestment strategy in 2020. FHN manages the size and mix of the investment portfolio to assist in asset liability management, provide liquidity, and optimize risk adjusted returns. Loans Held-for-Sale Loans HFS consists of small business, other consumer loans, the mortgage warehouse,USDA , student, and home equity loans. OnMarch 31, 2020 , loans HFS were$595.6 million and$593.8 million , respectively. The average balance of loans HFS increased to$590.5 million in first quarter 2020 from$581.8 million in fourth quarter 2019. The increase in period-end and average loans HFS was primarily driven by an increase in small business loans, somewhat offset by a decrease inUSDA 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$3.2 billion in first quarter 2020, a 28 percent increase from$2.5 billion in fourth quarter 2019. The increase in average other earning assets was primarily driven by increases in fixed income trading inventory and asset repos relative to fourth quarter 2019. Fixed income's trading inventory fluctuates daily based on customer demand. Asset repos are used in fixed income trading activity and generally fluctuate with the level of fixed income trading liabilities (short-positions) as securities collateral from asset repo transactions are used to fulfill trades. Other earning assets were$3.1 billion onMarch 31, 2020 , up from$2.5 billion onDecember 31, 2019 , primarily driven by increases in fixed income trading inventory and interest-bearing cash.
The following table summarizes FHN's average other earning assets for
quarters-ended
Quarter Ended Quarter Ended March 31, 2020 December 31, 2019 (Dollars in thousands) Amount Percent of total Amount Percent of total Growth Rate Other earning assets Trading securities$ 1,831,492 57 %$ 1,263,633 50 % 45 % Securities purchased under agreements to resell 816,794 25 645,979 26 26 Interest-bearing cash 548,036 17 586,495 23 (7 ) Federal funds sold 10,192 1 9,700 1 5 Total other earning assets$ 3,206,514 100 %$ 2,505,807 100 % 28 % FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 89
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Non-earning assets Period-end non-earning assets were$5.5 billion and$4.7 billion onMarch 31, 2020 andDecember 31, 2019 , respectively, driven largely by increases in derivative assets, equity investments (primarily FHLB stock), and fixed income receivables, partially offset by an increase in the ALLL and a decrease in cash balances. Derivative assets and fixed income receivable balances were higher as a result of extreme market volatility during first quarter 2020 and an increase in required margin posting. The increase in the ALLL was due to the adoption of ASU 2016-13 (CECL) onJanuary 1, 2020 and additional reserves established during first quarter 2020 associated with a sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic. Deposits Average deposits increased to$32.9 billion during first quarter 2020 from$32.8 billion in fourth quarter 2019 and$32.5 billion in first quarter 2019. The increase in average deposits from fourth quarter 2019 was driven by a seasonal influx of consumer deposits (both non-interest bearing and interest bearing), coupled with an increase in market-indexed deposits, partially offset by lower commercial interest deposits. The increase in first quarter 2020 relative to first quarter 2019 was driven by increases in non-interest bearing and consumer interest deposits as a result of FHN's strategic focus on growing deposits during 2019, partially offset by decreases in commercial interest and market-indexed deposits. FHN's mix of interest-bearing deposits and noninterest-bearing deposits remained relatively consistent between periods. Period-end deposits increased 6 percent to$34.4 billion onMarch 31, 2020 , from$32.4 billion onDecember 31, 2019 and$32.5 billion onMarch 31, 2019 . The increase in deposits fromDecember 31, 2019 andMarch 31, 2019 was largely the result of management's decision to increase market-indexed deposits (given the favorable benefits of this funding source in lower interest-rate environments) to fund loan growth, as well as significant deposit inflows inMarch 2020 as brokerage customers exited equity markets to move in cash positions given the market volatility associated with the COVID-19 pandemic. The following table summarizes FHN's average deposits for quarters-endedMarch 31, 2020 andDecember 31, 2019 . Table 7-Average Deposits Quarter Ended Quarter Ended March 31, 2020 December 31, 2019 (Dollars in thousands) Amount Percent of total Amount Percent of total Growth Rate Interest-bearing deposits: Consumer$ 13,760,968 42 %$ 13,718,820 42 % * Commercial 6,006,364 18 6,145,681 19 (2 ) Market-indexed (a) 4,448,587 14 4,370,025 13 2 Total interest-bearing deposits 24,215,919 74 24,234,526 74 * Noninterest-bearing deposits 8,666,087 26 8,542,521 26 1 Total deposits$ 32,882,006 100 %$ 32,777,047 100 % *
* Amount is less than one percent. (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$4.0 billion in first quarter 2020, up 20 percent from$3.3 billion in fourth quarter 2019. As noted in the table below, the increase in short-term borrowings between first quarter 2020 and fourth quarter 2019 was primarily driven by increases in other short-term borrowings and trading liabilities, partially offset by a decrease in FFP. Other short-term borrowings balances fluctuate largely based on
the level of FHLB borrowing as a result of loan demand, deposit levels and
balance sheet funding strategies. Trading liabilities fluctuates based on
expectations of customer demand. FFP fluctuates depending on the amount of
excess funding of FHN's correspondent bank customers. Period-end short-term
borrowings increased 44 percent to
FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 90
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Table 8-Average Short-Term Borrowings
Quarter Ended Quarter Ended March 31, 2020 December 31, 2019 (Dollars in thousands) Amount Percent of total Amount Percent of total Growth Rate Short-term borrowings: Securities sold under agreements to repurchase$ 777,692 20 %$ 701,213 21 % 11 % Trading liabilities 750,520 19 585,889 18 28 Federal funds purchased 746,686 19 1,163,701 35 (36 ) Other short-term borrowings 1,686,690 42 844,558 26 NM Total short-term borrowings$ 3,961,588 100 %$ 3,295,361 100 % 20 % NM - Not meaningful Term Borrowings Term borrowings include senior and subordinated borrowings with original maturities greater than one year. Average term borrowings were$.8 billion in first quarter 2020 and$.9 billion in fourth quarter 2019. Period-end term borrowings were$.8 billion onMarch 31, 2020 andDecember 31, 2019 . InApril 2020 ,First Horizon Bank issued$450 million of subordinated notes. Other Liabilities Period-end other liabilities were$1.2 billion onMarch 31, 2020 , up from$1.0 billion onDecember 31, 2019 , primarily driven by increases in derivative liabilities and fixed income payables. 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. Period-end equity decreased$20.4 million from$5.1 billion onDecember 31, 2019 to$5.1 billion onMarch 31, 2020 . Average equity decreased$37.5 million to$5.0 billion in first quarter 2020 from$5.0 billion in fourth quarter 2019. The decrease in period-end and average equity was largely attributable to the adoption impact of ASU 2016-13 (CECL) which resulted in a net decrease to retained earnings of$96.1 million onJanuary 1, 2020 , coupled with common and preferred dividends paid, somewhat offset by net income recognized since fourth quarter 2019. A decrease in accumulated other comprehensive income ("AOCI"), largely the result of an increase in unrealized gains associated with AFS debt securities partially mitigated the decrease in period-end and average equity. FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 91
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The following tables provide a reconciliation of Shareholders' equity from the Consolidated Condensed Statements of Condition to Common Equity Tier 1, Tier 1 andTotal Regulatory Capital as well as certain selected capital ratios: Table 9-Regulatory Capital and Ratios (Dollars in thousands) March 31, 2020 December 31, 2019 Shareholders' equity$ 4,760,149 $ 4,780,577 Modified CECL transitional amount (a) 132,811 - FHN non-cumulative perpetual preferred (95,624 ) (95,624 ) Common equity$ 4,797,336 $ 4,684,953 Regulatory adjustments: Disallowed goodwill and other intangibles (1,501,286 ) (1,505,971 ) Net unrealized (gains)/losses on securities available-for-sale (119,357 ) (31,079 )
Net unrealized (gains)/losses on pension and other postretirement plans
271,809 273,914 Net unrealized (gains)/losses on cash flow hedges (16,288 ) (3,227 ) Disallowed deferred tax assets (9,502 ) (8,610 ) Other deductions from common equity tier 1 (949 ) (1,044 ) Common equity tier 1$ 3,421,763 $ 3,408,936 FHN non-cumulative perpetual preferred 95,624 95,624 Qualifying noncontrolling interest-First Horizon Bank preferred stock 294,816 255,890 Tier 1 capital$ 3,812,203 $ 3,760,450 Tier 2 capital 507,181 394,435 Total regulatory capital$ 4,319,384 $ 4,154,885 Risk-Weighted Assets First Horizon National Corporation$ 40,055,114 $ 37,045,782 First Horizon Bank 39,670,943
36,626,993
Average Assets for Leverage First Horizon National Corporation 42,348,418 41,583,446 First Horizon Bank 41,632,972 40,867,365 March 31, 2020 December 31, 2019 Ratio Amount Ratio Amount Common Equity Tier 1 First Horizon National Corporation 8.54 %$ 3,421,763 9.20 %$ 3,408,936 First Horizon Bank 8.70 3,450,974 9.38
3,433,867
Tier 1 First Horizon National Corporation 9.52 3,812,203 10.15 3,760,450 First Horizon Bank 9.44 3,745,790 10.18
3,728,683
Total
10.37 4,113,057 10.77
3,944,613
Tier 1 Leverage First Horizon National Corporation 9.00 3,812,203 9.04 3,760,450 First Horizon Bank 9.00 3,745,790 9.12 3,728,683
(a) The modified CECL transitional amount is calculated as defined in the CECL
interim final rule issued by the banking regulators on
includes the full amount of the impact to retained earnings from the initial
adoption of CECL plus 25 percent of the change in the adjusted allowance for
credit losses ("AACL") since FHN's initial adoption of CECL through
2020. Banking regulators define minimum capital ratios for bank holding companies and their bank subsidiaries. Based on the capital rules and definitions prescribed by the banking regulators, should any depository institution's capital ratios decline below predetermined levels, it would become subject to a series of increasingly restrictive regulatory actions. The system categorizes a depository institution's capital position into one of five categories ranging from well-capitalized to critically under-capitalized. For an institution the size of FHN to qualify as well-capitalized, Common Equity Tier 1, Tier 1 Capital, Total Capital, and Leverage capital ratios must be at least 6.5 percent, 8 percent, 10 percent, and 5 percent, respectively. Furthermore, beginningJanuary 1, 2019 , a capital conservation buffer of 50 basis points above these levelsFIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 92
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must be maintained on the Common Equity Tier 1, Tier 1 Capital and Total Capital ratios to avoid restrictions on dividends, share repurchases and certain discretionary bonuses. As ofMarch 31, 2020 , each ofFHN and First Horizon Bank had sufficient capital to qualify as well-capitalized institutions. FHN also had sufficient capital to meet the capital conservation buffer requirement whileFirst Horizon Bank fell slightly below based on its Total Capital Ratio. (See discussion on dividend limitations forFirst Horizon Bank in the "Liquidity Risk Management" section of this MD&A.) InApril 2020 ,First Horizon Bank generated additional Tier 2 capital through the issuance of$450 million of subordinated notes. The first quarter 2020 capital ratios for bothFHN and First Horizon Bank are calculated under the interim final rule issued by the banking regulators in lateMarch 2020 to delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period. For bothFHN and First Horizon Bank , the risk-based regulatory capital ratios decreased in first quarter 2020 relative to fourth quarter 2019 primarily due to increased risk-weighted assets due to period-end commercial loan growth (primarily loans to mortgage companies) and higher draw activity in March, coupled with an increase in market risk assets driven by a spike in VaR due to extreme volatility in March. During 2020, capital ratios are expected to remain above well-capitalized standards. Common Stock Purchase Programs 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. Two common stock purchase programs currently authorized are discussed below. FHN's board has not authorized a preferred stock purchase program. General Authority OnJanuary 23, 2018 , FHN announced a$250 million share purchase authority with an expiration date ofJanuary 31, 2020 . OnJanuary 29, 2019 , FHN announced a$250 million increase in that authority along with an extension of the expiration date toJanuary 31, 2021 . 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. As ofMarch 31, 2020 ,$229.3 million in purchases had been made under this authority at an average price per share of$15.09 ,$15.07 excluding commissions. Management currently does not anticipate purchasing a material number of shares under this authority during the first half of 2020 due to the pending merger of equals with IBKC. Table 10a-Issuer Purchases of Common Stock - General Authority Total number of Maximum approximate (Dollar values and volume Total number shares purchased dollar value that may in thousands, except per of shares Average price as part of publicly yet be purchased under share data) purchased paid per share (a) announced programs the programs 2020 January 1 to January 31 - NA - $ 270,654 February 1 to February 29 - NA - 270,654 March 1 to March 31 - NA - 270,654 Total - N/A -
(a) Represents total costs including commissions paid.
Compensation Authority A consolidated compensation plan share purchase program was announced onAugust 6, 2004 . This program consolidated into a single share purchase program all of the previously authorized compensation plan share programs as well as the renewal of the authorization to purchase shares for use in connection with two compensation plans for which the share purchase authority had expired. The total amount authorized under this consolidated compensation plan share purchase program, inclusive of a program amendment onApril 24, 2006 , is 29.6 million shares calculated before adjusting for stock dividends distributed throughJanuary 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 beforeDecember 31, 2023 . Purchases may be made in theFIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 93
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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. As of
maximum number of shares that may be purchased under the program was 24.3 million shares. Management currently does not anticipate purchasing a material number of shares under this authority during 2020.
Table 10b-Issuer Purchase of Common Stock - Compensation Authority
Total
number of Maximum number
Total number shares purchased of shares that may (Volume in thousands, of shares Average price as part of publicly yet be purchased except per share data) purchased paid per share announced programs under the programs 2020 January 1 to January 31 26 $ 16.81 26 24,431 February 1 to February 29 7 16.30 7 24,424 March 1 to March 31 108 14.05 108 24,316 Total 141 $ 14.67 141 Asset Quality Loan Portfolio Composition FHN groups its loans into portfolio segments based on internal classifications reflecting the manner in which the ALLL is established and how credit risk is measured, monitored, and reported. From time to time, and if conditions are such that certain subsegments are uniquely affected by economic or market conditions or are experiencing greater deterioration than other components of the loan portfolio, management may determine the ALLL at a more granular level. Commercial loans are composed of commercial, financial, and industrial ("C&I") and commercial real estate ("CRE"). Consumer loans are composed of consumer real estate; and credit card and other. In first quarter 2020, FHN consolidated its permanent mortgage portfolio into consumer real estate. Loans previously classified in permanent mortgage included primarily jumbo mortgages and one-time-close ("OTC") completed construction loans in the non-strategic segment that were originated through pre-2009 mortgage businesses. FHN has a concentration of residential real estate loans (19 percent of total loans). Industry concentrations are discussed under the heading C&I below. Consolidated key asset quality metrics for each of these portfolios can be found in Table 17 - Asset Quality by Portfolio. Credit underwriting guidelines are outlined in Exhibit 13 to FHN's Annual Report on Form 10-K for the year endedDecember 31, 2019 , in the Loan Portfolio Composition discussion in the Asset Quality Section beginning on page 67 and continuing to page 87. FHN's credit underwriting guidelines and loan product offerings as ofMarch 31, 2020 , are generally consistent with those reported and disclosed in the Company's Form 10-K for the year endedDecember 31, 2019 . COMMERCIAL LOAN PORTFOLIOS C&I The C&I portfolio was$22.1 billion onMarch 31, 2020 , and is comprised of loans used for general business purposes. Typical products include working capital lines of credit, term loan financing of owner-occupied real estate and fixed assets, and trade credit enhancement through letters of credit. The largest geographical concentrations of balances as ofMarch 31, 2020 , are inTennessee (29 percent),North Carolina (10 percent),California (9 percent),Texas (6 percent),Florida (6 percent),Georgia (4 percent),South Carolina (3 percent), andVirginia (3 percent), with no other state representing more than 3 percent of the portfolio. The following table provides the composition of the C&I portfolio by industry as ofMarch 31, 2020 , andDecember 31, 2019 . For purposes of this disclosure, industries are determined based on the North American Industry Classification System ("NAICS") industry codes used by Federal statistical agencies in classifying business establishments for the collection, analysis, and publication of statistical data related to theU.S. business economy. Table 11-C&I Loan Portfolio by Industry FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 94
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March 31, 2020 December 31, 2019 (Dollars in thousands) Amount Percent Amount Percent Industry: Loans to mortgage companies$ 5,713,914 26 %$ 4,410,883 22 % Finance & insurance 2,797,370 13 2,778,411 14 Real estate rental & leasing (a) 1,584,095 7 1,454,336 7 Health care & social assistance 1,527,531 7 1,499,178 8 Accommodation & food service 1,504,690 7 1,364,833 7 Wholesale trade 1,464,847 6 1,372,147 7 Manufacturing 1,343,586 6 1,150,701 6 Other (education, arts, entertainment, etc) (b) 6,188,397 28 6,020,602 29 Total C&I loan portfolio$ 22,124,430 100 %$ 20,051,091 100 %
(a) Leasing, rental of real estate, equipment, and goods.
(b) Industries in this category each comprise less than 5 percent for 2020.
Industry Concentrations Loan concentrations are considered to exist for a financial institution when there are loans to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. 39 percent of FHN's C&I portfolio (Finance and insurance plus Loans to mortgage companies) could be affected by items that uniquely impact the financial services industry. Except "Finance and Insurance" and "Loans to Mortgage Companies", as discussed below, onMarch 31, 2020 , FHN did not have any other concentrations of C&I loans in any single industry of 10 percent or more of total loans. Loans to Mortgage Companies The balance of loans to mortgage companies was 26 percent of the C&I portfolio as ofMarch 31, 2020 , 22 percent as ofDecember 31, 2019 and 13 percent as ofMarch 31, 2019 , and includes balances related to both home purchase and refinance activity. This portfolio class, which generally fluctuates with mortgage rates and seasonal factors, includes commercial lines of credit to qualified mortgage companies primarily for the temporary warehousing of eligible mortgage loans prior to the borrower's sale of those mortgage loans to third party investors. Generally, lending to mortgage lenders increases when there is a decline in mortgage rates and decreases when rates rise. In periods of economic uncertainty, this trend may not occur even if interest rates are declining. In first quarter 2020, 46 percent of the loans funded were home purchases and 54 percent were refinance transactions. Finance and Insurance The finance and insurance component represents 13 percent of the C&I portfolio as ofMarch 31, 2020 compared to 14 percent as ofDecember 31, 2019 , and includes TRUPS (i.e., long-term unsecured loans to bank and insurance-related businesses), loans to bank holding companies, and asset-based lending to consumer finance companies. As ofMarch 31, 2020 , asset-based lending to consumer finance companies represents approximately$1.2 billion of the finance and insurance component. TRUPS lending was originally extended as a form of "bridge" financing to participants in the pooled trust preferred securitization program offered primarily to smaller banking (generally less than$15 billion in total assets) and insurance institutions through FHN's fixed income business. Origination of TRUPS lending ceased in early 2008. Individual TRUPS are re-graded at least quarterly as part of FHN's commercial loan review process. The terms of these loans generally include a scheduled 30 year balloon payoff and include an option to defer interest for up to 20 consecutive quarters. As ofMarch 31, 2020 , no TRUP relationship was on interest deferral. As ofMarch 31, 2020 , the unpaid principal balance ("UPB") of trust preferred loans totaled$234.2 million ($173.6 million of bank TRUPS and$60.7 million of insurance TRUPS) with the UPB of other bank-related loans totaling$282.3 million . Inclusive of a valuation allowance on TRUPS of$18.9 million , total reserves (ALLL plus the valuation allowance) for TRUPS and other bank-related loans were$29.9 million or 6 percent of outstanding UPB. C&I Asset Quality Trends The C&I portfolio trends remained stable in first quarter 2020; however, the impact of economic uncertainty attributable to the COVID-19 pandemic could negatively impact future trends. The C&I ALLL increased$132.0 million fromDecember 31, 2019 , to$254.5 million as ofMarch 31, 2020 , primarily due to the sudden, steep declineFIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 95
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in the economic forecast attributable to the COVID-19 pandemic and the adoption of ASU 2016-13. The allowance as a percentage of period-end loans increased 54 basis points to 1.15 percent as ofMarch 31, 2020 , compared to .61 percent as of year-end 2019. Nonperforming C&I loans increased$21.8 million fromDecember 31, 2019 , to$96.1 million onMarch 31, 2020 . The nonperforming loan ("NPL") ratio increased to .43 percent of C&I loans as ofMarch 31, 2020 , from .37 percent as ofDecember 31, 2019 . The increase in NPLs was primarily driven by one credit. The 30+ delinquency ratio increased 3 basis points to .08 percent as ofMarch 31, 2020 . First quarter 2020 experienced net charge-offs of$5.8 million compared to$3.3 million and$2.3 million of net charge-offs in fourth quarter 2019 and first quarter 2019, respectively. First quarter 2020 net charge-offs were primarily driven by one credit. The following table shows C&I asset quality trends by segment. Table 12-C&I Asset Quality Trends by Segment 2020 Three months ended (Dollars in thousands) Regional Bank Non-Strategic Consolidated Allowance for loan losses as of January 1$ 122,426 $ 60$ 122,486 ASU Adoption 2016-13 9,086 9,696 18,782 Charge-offs (6,751 ) - (6,751 ) Recoveries 931 4 935 Provision/(provision credit) for loan losses 118,970 94 119,064 Allowance for loan losses as of March 31$ 244,662 $ 9,854 $ 254,516 Net charge-offs % (qtr. annualized) 0.12 % NM 0.12 % Allowance / net charge-offs 10.45 x NM 10.88 x As of March 31 Period-end loans$ 21,798,168 $ 326,262 $ 22,124,430 Nonperforming loans 96,081 - 96,081 Troubled debt restructurings 40,439 - 40,439 30+ Delinq. % (a) 0.07 % 0.50 % 0.08 % NPL % 0.44 - 0.43 Allowance / loans % 1.12 3.02 1.15 2019 Three months ended (Dollars in thousands) Regional Bank Non-Strategic Consolidated Allowance for loan losses as of January 1$ 97,617 $ 1,330 $ 98,947 Charge-offs (3,101 ) - (3,101 ) Recoveries 801 28 829 Provision/(provision credit) for loan losses 7,076 (38 ) 7,038 Allowance for loan losses as of March 31$ 102,393 $ 1,320 $ 103,713 Net charge-offs % (qtr. annualized) 0.06 % NM 0.06 % Allowance / net charge-offs 10.98 x NM 11.26 x As of December 31 Period-end loans$ 19,721,457 $ 329,634 $ 20,051,091 Nonperforming loans 74,312 - 74,312 Troubled debt restructurings 42,199 - 42,199 30+ Delinq. % (a) 0.05 % - % 0.05 % NPL % 0.38 - 0.37 Allowance / loans % 0.62 0.02 0.61 NM-Not meaningful Loans are expressed net of unearned income. (a) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 96
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Commercial Real Estate The CRE portfolio was$4.6 billion onMarch 31, 2020 . The CRE portfolio includes both financings for commercial construction and nonconstruction loans. The largest geographical concentrations of balances as ofMarch 31, 2020 are inNorth Carolina (28 percent),Tennessee (20 percent),Florida (13 percent),South Carolina (8 percent),Texas (8 percent),Georgia (6 percent), andKentucky (3 percent), with no other state representing more than 3 percent of the portfolio. This portfolio is segregated between the income-producing CRE class which contains loans, draws on lines and letters of credit to commercial real estate developers for the construction and mini-permanent financing of income-producing real estate, and the residential CRE class. Subcategories of income CRE consist of office (27 percent), multi-family (22 percent), retail (19 percent), industrial (13 percent), hospitality (12 percent), land/land development (1 percent), and other (6 percent). The residential CRE class includes loans to residential builders and developers for the purpose of constructing single-family homes, condominiums, and town homes, and on a limited basis, for developing residential subdivisions. After the fulfillment of existing commitments over the near term, the residential CRE class will be in a wind-down state with the expectation of full runoff in the foreseeable future. CRE Asset Quality Trends The CRE portfolio as ofMarch 31, 2020 was not significantly affected by the global COVID-19 pandemic, with nonperforming loans up$.4 million fromDecember 31, 2019 . However, economic uncertainty attributable to COVID-19 could impact future CRE portfolio trends. The allowance increased to$47.6 million as ofMarch 31, 2020 , from$36.1 million as ofDecember 31, 2019 primarily due to COVID-19. Allowance as a percentage of loans increased 20 basis points from .83 percent as ofDecember 31, 2019 , to 1.03 percent as ofMarch 31, 2020 . Nonperforming loans as a percentage of total CRE loans increased 1 basis point fromDecember 31, 2019 , to .05 percent as ofMarch 31, 2020 . Accruing delinquencies as a percentage of period-end loans decreased to .01 percent as ofMarch 31, 2020 , from .02 percent as ofDecember 31, 2019 . Net charge-offs were not significant in first quarter 2020 and were$377 thousand in first quarter 2019. The following table shows commercial real estate asset quality trends by segment.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 97
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Table 13-Commercial Real Estate Asset Quality Trends by Segment
2020 Three months ended (Dollars in thousands) Regional Bank Non-Strategic Consolidated Allowance for loan losses as of January 1$ 33,729 $ 2,383 $ 36,112 ASU Adoption 2016-13 (5,191 ) (2,157 ) (7,348 ) Charge-offs (581 ) - (581 ) Recoveries 573 - 573 Provision/(provision credit) for loan losses 18,399 470 18,869
Allowance for loan losses as of
696$ 47,625 Net charge-offs % (qtr. annualized) - % - - % Allowance / net charge-offs NM NM NM As of March 31 Period-end loans$ 4,608,103 $ 31,589 $ 4,639,692 Nonperforming loans 2,190 - 2,190 Troubled debt restructurings 1,153 - 1,153 30+ Delinq. % (a) 0.01 % - % 0.01 % NPL % 0.05 - 0.05 Allowance / loans % 1.02 2.20 1.03 2019 Three months ended (Dollars in thousands) Regional Bank Non-Strategic Consolidated Allowance for loan losses as of January 1$ 31,311 $ -$ 31,311 Charge-offs (434 ) - (434 ) Recoveries 57 - 57 Provision/(provision credit) for loan losses 3,448 - 3,448
Allowance for loan losses as of
-$ 34,382 Net charge-offs % (qtr. annualized) 0.04 % NM 0.04 % Allowance / net charge-offs 22.50 x NM 22.50 x As of December 31 Period-end loans$ 4,292,199 $ 44,818 $ 4,337,017 Nonperforming loans 1,825 - 1,825 Troubled debt restructurings 1,200 - 1,200 30+ Delinq. % (a) 0.02 % - % 0.02 % NPL % 0.04 - 0.04 Allowance / loans % 0.79 5.32 0.83 NM-Not meaningful Loans are expressed net of unearned income. (a) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 98
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CONSUMER LOAN PORTFOLIOSConsumer Real Estate The consumer real estate portfolio was$6.1 billion onMarch 31, 2020 , and is primarily composed of home equity lines and installment loans including restricted balances (loans consolidated under ASC 810). The largest geographical concentrations of balances as ofMarch 31, 2020 , are inTennessee (55 percent),North Carolina (15 percent),Florida (14 percent), andCalifornia (3 percent), with no other state representing more than 3 percent of the portfolio. As ofMarch 31, 2020 , approximately 85 percent of the consumer real estate portfolio was in a first lien position. At origination, weighted average FICO score of this portfolio was 755 and refreshed FICO scores averaged 754 onMarch 31, 2020 . Generally, performance of this portfolio is affected by life events that affect borrowers' finances, the level of unemployment, and home prices. Home equity lines of credit ("HELOCs") comprise$1.3 billion of the consumer real estate portfolio as ofMarch 31, 2020 . FHN's HELOCs typically have a 5 or 10 year draw period followed by a 10 or 20 year repayment period, respectively. During the draw period, a borrower is able to draw on the line and is only required to make interest payments. The line is automatically frozen if a borrower becomes 45 days or more past due on payments. Once the draw period has concluded, the line is closed and the borrower is required to make both principal and interest payments monthly until the loan matures. The principal payment generally is fully amortizing, but payment amounts will adjust when variable rates reset to reflect changes in the prime rate. As ofMarch 31, 2020 , approximately 78 percent of FHN's HELOCs are in the draw period compared to approximately 76 percent as ofDecember 31, 2019 . Based on when draw periods are scheduled to end per the line agreement, it is expected that$306.7 million , or 32 percent of HELOCs currently in the draw period, will enter the repayment period during the next 60 months. Delinquencies and charge-off rates for HELOCs that have entered the repayment period are initially higher than HELOCs still in the draw period because of the increased minimum payment requirement; however, after some seasoning, performance of these loans usually begins to stabilize. The home equity lines of the consumer real estate portfolio are being monitored closely for those nearing the end of the draw period and borrowers are initially being contacted at least 24 months before the repayment period begins to remind the customer of the terms of their agreement and to inform them of options. The following table shows the HELOCs currently in the draw period and expected timing of conversion to the repayment period. Table 14-HELOC Draw To Repayment Schedule March 31, 2020 December 31, 2019 Repayment Repayment (Dollars in thousands) Amount Percent Amount Percent Months remaining in draw period: 0-12$ 46,788 5 %$ 47,455 5 % 13-24 59,132 6 58,843 6 25-36 64,613 7 65,833 7 37-48 60,114 6 67,692 7 49-60 76,089 8 75,246 7 >60 665,293 68 666,001 68 Total$ 972,029 100 %$ 981,070 100 % Consumer Real Estate Asset Quality Trends Overall, performance of the consumer real estate portfolio remained stable in first quarter 2020. Economic uncertainty attributable to COVID-19 could impact future trends. The non-strategic segment is a run-off portfolio and while the absolute dollars of delinquencies and nonaccruals as well as the 30+ accruing delinquencies ratio improved from year-end, nonperforming loans ratios deteriorated. That trend of increasing deterioration of ratios in the non-strategic segment is likely to continue and may become more skewed as the portfolio shrinks and some of the stronger borrowers payoff or refinance elsewhere. NPLs as a percentage of loans increased 10 basis point from year-end to 1.49 percent as ofMarch 31, 2020 . The ALLL increased$94.6 million fromDecember 31, 2019 , to$123.0 million as ofMarch 31, 2020 , primarily due to the adoption of ASU 2016-13. The allowance as a percentage of loans increased 155 basis points to 2.01 percent as ofMarch 31, 2020 , compared to year-end. The balance of nonperforming loans increased$5.5 million to$91.2 FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q
REPORT 99
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million as ofMarch 31, 2020 . Loans delinquent 30 or more days and still accruing declined from$42.9 million as ofDecember 31, 2019 , to$40.1 million as ofMarch 31, 2020 . The portfolio realized net recoveries of$1.2 million in first quarter 2020 compared to net recoveries of$3.3 million in fourth quarter 2019 and net recoveries of$1.2 million in first quarter 2019. The following table shows consumer real estate asset quality trends by segment. Table 15-Consumer Real Estate Asset Quality Trends by Segment 2020 Three months ended (Dollars in thousands) Regional Bank Corporate Non-Strategic Consolidated Allowance for loan losses as of January 1$ 13,340 N/A$ 15,103 $ 28,443 ASU Adoption 2016-13 88,004 N/A 4,988 92,992 Charge-offs (488 ) N/A (1,822 ) (2,310 ) Recoveries 690 N/A 2,865 3,555 Provision/(provision credit) for loan losses 1,412 N/A (1,070 ) 342 Allowance for loan losses as of March 31$ 102,958 N/A$ 20,064 $ 123,022 Net charge-offs % (qtr. annualized) NM N/A NM NM Allowance / net charge-offs NM N/A NM NM As of March 31 Period-end loans$ 5,716,888 $ 30,613 $ 371,882 $ 6,119,383 Nonperforming loans 44,536 1,302 45,344 91,182 Troubled debt restructurings 43,360 2,041 106,992 152,393 30+ Delinq. % (a) 0.51 % 5.39 % 2.56 % 0.66 % NPL % 0.78 4.25 12.19 1.49 Allowance / loans % 1.80 N/A 5.40 2.01 2019 Three months ended (a) (Dollars in thousands) Regional Bank Corporate Non-Strategic Consolidated Allowance for loan losses as of January 1$ 14,555 N/A$ 22,884 $ 37,439 Charge-offs (1,641 ) N/A (1,163 ) (2,804 ) Recoveries 1,036 N/A 3,005 4,041 Provision/(provision credit) for loan losses 1,253 N/A (5,775 ) (4,522 ) Allowance for loan losses as of March 31$ 15,203 N/A$ 18,951 $ 34,154 Net charge-offs % (qtr. annualized) 0.04 % N/A NM NM Allowance / net charge-offs 6.20 x N/A NM NM As of December 31 (a) Period-end loans$ 5,738,455 $ 31,473 $ 407,211 $ 6,177,139 Nonperforming loans 37,014 1,327 47,353 85,694 Troubled debt restructurings 46,031 2,457 113,758 162,246 30+ Delinq. % (b) 0.50 % 5.29 % 3.10 % 0.70 % NPL % 0.65 4.22 11.63 1.39 Allowance / loans % 0.23 N/A 3.71 0.46 NM-Not meaningful Loans are expressed net of unearned income. (a) In first quarter 2020, the Permanent Mortgage portfolio was combined into
comparability.
(b) 30+ Delinquency % includes all accounts delinquent more than one month and
still accruing interest.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 100
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Credit Card and Other The credit card and other portfolio, which is primarily within the regional banking segment, was$.5 billion as ofMarch 31, 2020 , and primarily includes credit card receivables, other consumer-related credits, and automobile loans. The allowance increased to$19.3 million as ofMarch 31, 2020 , from$13.3 million asDecember 31, 2019 , primarily driven by the sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic and the adoption of ASU 2016-13. Loans 30 days or more delinquent and accruing as a percentage of loans increased 6 basis points fromDecember 31, 2019 , to .99 percent as ofMarch 31, 2020 . Net charge-offs were$2.6 million in first quarter 2020 compared to$3.1 million in first quarter 2019. Table 16-Credit Card and Other Asset Quality Trends by Segment 2020 Three months ended (Dollars in thousands) Regional Bank Non-Strategic Consolidated Allowance for loan losses as of January 1$ 13,235 $ 31$ 13,266 ASU Adoption 2016-13 1,607 361 1,968 Charge-offs (3,408 ) (403 ) (3,811 ) Recoveries 915 264 1,179 Provision/(provision credit) for loan losses 6,654 71 6,725
Allowance for loan losses as of
324$ 19,327 Net charge-offs % (qtr. annualized) 2.14 % 1.82 % 2.12 % Allowance / net charge-offs 1.89 x 0.58 x 1.83 x As of March 31 Period-end loans$ 468,183 $ 26,615 $ 494,798 Nonperforming loans 109 251 360 Troubled debt restructurings 667 32 699 30+ Delinq. % (a) 0.90 % 2.60 % 0.99 % NPL % 0.02 0.94 0.07 Allowance / loans % 4.06 1.21 3.91 2019 Three months ended (Dollars in thousands) Regional Bank Non-Strategic Consolidated Allowance for loan losses as of January 1$ 12,595 $ 132$ 12,727 Charge-offs (3,002 ) (1,186 ) (4,188 ) Recoveries 745 342 1,087 Provision/(provision credit) for loan losses 2,179 857 3,036
Allowance for loan losses as of
145$ 12,662 Net charge-offs % (qtr. annualized) 2.10 % 4.35 % 2.44 % Allowance / net charge-offs 1.37 x 0.04 x 1.01 x As of December 31 Period-end loans$ 460,742 $ 35,122 $ 495,864 Nonperforming loans 36 298 334 Troubled debt restructurings 615 38 653 30+ Delinq. % (a) 0.69 % 4.05 % 0.93 % NPL % 0.01 0.85 0.07 Allowance / loans % 2.87 0.09 2.68 NM-Not meaningful Loans are expressed net of unearned income. (a) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest. FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 101
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The following table provides additional asset quality data by loan portfolio: Table 17-Asset Quality by Portfolio
March 31 December 31 2020 2019 Key Portfolio Details C&I Period-end loans ($ millions)$ 22,124 $ 20,051 30+ Delinq. % (a) 0.08 % 0.05 % NPL % 0.43 0.37 Charge-offs % (qtr. annualized) 0.12 0.07 Allowance / loans % 1.15 % 0.61 % Allowance / net charge-offs 10.88 x 9.25 xCommercial Real Estate Period-end loans ($ millions)$ 4,640 $ 4,337 30+ Delinq. % (a) 0.01 % 0.02 % NPL % 0.05 0.04 Charge-offs % (qtr. annualized) - NM Allowance / loans % 1.03 % 0.83 % Allowance / net charge-offs NM NMConsumer Real Estate (b) Period-end loans ($ millions)$ 6,119 $ 6,177 30+ Delinq. % (a) 0.66 % 0.70 % NPL % 1.49 1.39 Charge-offs % (qtr. annualized) NM NM Allowance / loans % 2.01 % 0.46 % Allowance / net charge-offs NM NM Credit Card and Other Period-end loans ($ millions)$ 495 $ 496 30+ Delinq. % (a) 0.99 % 0.93 % NPL % 0.07 0.07 Charge-offs % (qtr. annualized) 2.12 2.29 Allowance / loans % 3.91 % 2.68 % Allowance / net charge-offs 1.83 x 1.14 x NM - Not meaningful Loans are expressed net of unearned income. (a) 30+ Delinquency % includes all accounts delinquent more than one month and
still accruing interest.
(b) In first quarter 2020, the Permanent Mortgage portfolio was combined into
Consumer Real Estate portfolio, all prior periods were revised for comparability.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 102
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Allowance for Loan Losses Management's policy is to maintain the ALLL at a level sufficient to recognize current expected credit losses on the amortized cost basis of the loan portfolio. The total allowance for loan losses increased to$444.5 million onMarch 31, 2020 , from$200.3 million onDecember 31, 2019 . The ALLL as ofMarch 31, 2020 , reflects the adoption of ASU 2016-13 onJanuary 1, 2020 and the sudden, steep decline in the economic forecast attributable to the COVID-19 pandemic. The ratio of allowance for credit losses to total loans, net of unearned income, increase 69 basis points to 1.33 percent onMarch 31, 2020 , compared to .64 percent onDecember 31, 2019 . The provision for loan losses is the charge to or release of earnings necessary to maintain the ALLL at a sufficient level reflecting management's estimate of current expected losses on the amortized cost basis of the loan portfolio. Provision expense was$145.0 million in first quarter 2020, compared to$9.0 million provision expense in first quarter 2019. The increase is primarily attributable to the declining economic forecast attributable to the COVID-19 pandemic. FHN expects asset quality trends to be impacted by the economic uncertainty attributable to the COVID-19 pandemic. The C&I portfolio reflects a broad mix of categories with the heaviest concentration in loans to mortgage companies which carry minimal credit risk. The CRE portfolio metrics could be impacted by the COVID-19 pandemic due to travel and occupancy restrictions set by state and local governments affecting CRE- Hospitality and CRE-Retail. The consumer portfolio could be impacted by the COVID-19 pandemic if consumer unemployment continues to rise and customers are unable to continue making loan payments. The consumer portfolio however is high quality with no subprime and minimal exposure to high risk lending. The remaining non-strategic consumer real estate should continue to steadily wind down; however, it could be impacted if unemployment continues to rise and borrowers have difficulty making loan payments. Asset quality metrics within non-strategic have become skewed as the portfolio continues to shrink. Consolidated Net Charge-offs In first quarter 2020, FHN experienced net charge-offs of$7.2 million compared to$4.5 million of net charge-offs in first quarter 2019. The commercial portfolio experienced$5.8 million of net charge-offs in first quarter 2020 compared to$2.6 million in net charge-offs in first quarter 2019. In addition, the consumer real estate portfolio experienced net recoveries of$1.2 million in both first quarter 2020 and first quarter 2019. Credit card and other consumer experienced net charge-offs of$2.6 million in first quarter 2020 compared to$3.1 million a year ago. Nonperforming Assets Nonperforming loans are loans placed on nonaccrual if it becomes evident that full collection of principal and interest is at risk, impairment has been recognized as a partial charge-off of principal balance due to insufficient collateral value and past due status, or on a case-by-case basis if FHN continues to receive payments but there are other borrower-specific issues. Included in nonaccruals are loans in which FHN continues to receive payments including residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy, and second liens, regardless of delinquency status, behind first liens that are 90 or more days past due, are bankruptcies, or are TDRs. These, along with OREO, excluding OREO from government insured mortgages, represent nonperforming assets ("NPAs"). Total nonperforming assets (including NPLs HFS) increased to$207.3 million onMarch 31, 2020 , from$181.9 million onDecember 31, 2019 . The nonperforming assets ratio (nonperforming assets excluding NPLs HFS to total period-end loans plus OREO and other assets) increased to .61 percent as ofMarch 31, 2020 , from .57 percent as ofDecember 31, 2019 . Portfolio nonperforming loans increased to$189.8 million as ofMarch 31, 2020 , from$162.2 million as ofDecember 31, 2019 . The increase in nonperforming loans was driven by the C&I portfolio. The ratio of the ALLL to NPLs in the loan portfolio was 2.34 times as ofMarch 31, 2020 , compared to 1.24 times as ofDecember 31, 2019 . Certain nonperforming loans in both the commercial and consumer portfolios are deemed collateral-dependent and are charged down to an estimate of collateral value less costs to sell. Because loss content has been recognized through a partial charge-off, typically reserves are not recorded. Table 19 provides an activity rollforward of OREO balances forMarch 31, 2020 and 2019. The balance of OREO, exclusive of inventory from government insured mortgages, decreased to$13.9 million as ofMarch 31, 2020 , from$20.7 million as ofMarch 31, 2019 , driven by the sale of OREO. Moreover, property values have stabilized which also affects the balance of OREO.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q
REPORT 103
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Table 18-Rollforward of OREO Three Months Ended March 31 (Dollars in thousands) 2020 2019 Beginning balance$ 15,660 $ 22,387 Valuation adjustments (27 ) 35 New foreclosed property 928 1,607 Disposal (2,680 ) (3,353 ) Ending balance, March 31 (a)$ 13,881 $ 20,676
(a) Excludes OREO and receivables related to government insured mortgages of
million and
The following table provides consolidated asset quality information for the
three months ended
Three Months Ended March 31 (Dollars in thousands) 2020 2019 Allowance for loan losses: Beginning balance on January 1$ 200,307 $
180,424
ASU Adoption 2016-13 106,394 - Provision/(provision credit) for loan losses 145,000 9,000 Charge-offs (13,453 ) (10,527 ) Recoveries 6,242 6,014 Ending balance on March 31$ 444,490 $ 184,911 Reserve for remaining unfunded commitments 39,303
8,014
Total allowance for loan losses and reserve for unfunded commitments$ 483,793 $
192,925
Key ratios Allowance / net charge-offs (a) 15.33 x 10.10 x Net charge-offs % (b) 0.10 % 0.07 % As of March 31 As of December 31 Nonperforming Assets by Segment 2020 2019 Regional Banking: Nonperforming loans (c)$ 142,916 $ 113,187 OREO (e) 10,278 12,347 Total Regional Banking 153,194 125,534 Non-Strategic: Nonperforming loans (c) 45,595 47,651 Nonperforming loans held-for-sale net of fair value adjustment (c) 3,611 4,047 OREO (e) 3,603 3,313 Total Non-Strategic 52,809 55,011 Corporate: Nonperforming loans (c) 1,302 1,327 Total Corporate 1,302 1,327 Total nonperforming assets (c) (d)$ 207,305 $
181,872
NM - Not meaningful. (a) Ratio is total allowance divided by annualized net charge-offs. (b) Ratio is annualized net charge-offs divided by quarterly average loans, net of unearned income.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 104
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(c) Excludes loans that are 90 or more days past due and still accruing interest.
(d) Excludes OREO from government-insured mortgages.
As of March 31 As of December 31 2020 2019 Loans and commitments: Total period-end loans, net of unearned income$ 33,378,303 $ 31,061,111 Potential problem assets (a) 411,122 346,896 Loans 30 to 89 days past due 48,498 36,052 Loans 90 days past due (b) (c) 14,144 21,859 Loans held-for-sale 30 to 89 days past due (c) 4,164 3,732 Loans held-for-sale 30 to 89 days past due-guaranteed portion (c) (d) 4,049 3,424 Loans held-for-sale 90 days past due (c) 5,397 6,484 Loans held-for-sale 90 days past due-guaranteed portion (c) (d) 5,165 6,417 Remaining unfunded commitments$ 10,966,768 $ 12,355,220 Key ratios Allowance / loans % 1.33 % 0.64 % Allowance / NPL 2.34 x 1.24 x NPA % (e) 0.61 % 0.57 % NPL % 0.57 % 0.52 %
(a) Includes past due loans.
(b) Excludes loans classified as held-for-sale.
(c) Amounts are not included in nonperforming/nonaccrual loans.
(d) Guaranteed loans include FHA,
through the GNMA buyout program.
(e) Ratio is non-performing assets related to the loan portfolio to total loans
plus OREO and other assets.
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 were$14.1 million onMarch 31, 2020 , compared to$21.9 million onDecember 31, 2019 . Loans 30 to 89 days past due were$48.5 million onMarch 31, 2020 , compared to$36.1 million onDecember 31, 2019 . The increase was primarily driven by the C&I portfolio. 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 and includes loans past due 90 days or more and still accruing. This definition is believed to be substantially consistent with the standards established by Federal banking regulators for loans classified as substandard. Potential problem assets in the loan portfolio were$411.1 million onMarch 31, 2020 ,$346.9 million onDecember 31, 2019 , and$270.4 million onMarch 31, 2019 . The increase in potential problem assets compared toDecember 31, 2019 was due to net increase in classified commercial loans within the C&I portfolio. 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. 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"). See Note 4 - Loans for further discussion regarding TDRs and loan modifications. OnMarch 31, 2020 andDecember 31, 2019 , FHN had$194.7 million and$206.3 million portfolio loans classified as TDRs, respectively. For TDRs in the loan portfolio, FHN had loan loss reserves of$13.9 million and$19.7 million , or 7 percent and 10 percent of TDR balances, as ofMarch 31, 2020 andDecember 31, 2019 , respectively. Additionally, FHN had$50.5 million and$51.1 million of HFS loans classified as TDRs as ofMarch 31, 2020 andDecember 31, 2019 , respectively.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 105
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The following table provides a summary of TDRs for the periods endedMarch 31, 2020 andDecember 31, 2019 : Table 20-Troubled Debt Restructurings As of As of (Dollars in thousands) March 31, 2020 December 31, 2019 Held-to-maturity: Consumer real estate (a): Current 98,965 105,525 Delinquent 4,871 4,634 Non-accrual (b) 48,557 52,087 Total consumer real estate 152,393 162,246 Credit card and other: Current 654 615 Delinquent 45 38 Non-accrual - - Total credit card and other 699 653 Commercial loans: Current 10,401 10,558 Delinquent - - Non-accrual 31,191 32,841 Total commercial loans 41,592 43,399 Total held-to-maturity$ 194,684 $ 206,298 Held-for-sale: Current $ 38,914 $ 39,014 Delinquent 7,555 8,008 Non-accrual 4,042 4,106 Total held-for-sale 50,511 51,128
Total troubled debt restructurings
(a) In first quarter 2020, the Permanent Mortgage portfolio was combined into
comparability.
(b) Balances as of
and
Risk Management
There have been no significant changes to FHN's risk management practices as described under "Risk Management" beginning on page 88 of Item 7 to FHN's Annual Report on Form 10-K for the year endedDecember 31, 2019 . MARKET RISK MANAGEMENT There have been no significant changes to FHN's market risk management practices as described under "Market Risk Management" beginning on page 89 of Item 7 to FHN's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Value-at-Risk ("VaR") and Stress Testing VaR is a statistical risk measure used to estimate the potential loss in value from adverse market movements over an assumed fixed holding period within a stated confidence level. FHN employs a model to compute daily VaR measures for its trading securities inventory. FHN computes VaR using historical simulation with a 1-year lookback period at a 99 percent confidence level and 1-day and 10-day time horizons. Additionally, FHN computes a Stressed VaR ("SVaR") measure. The SVaR computation uses the same model but with model inputs reflecting historical data from a continuous 12-month period that reflects a period of significant financial stress appropriate for our trading securities portfolio.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 106
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A summary of FHN's VaR and SVaR measures for 1-day and 10-day time horizons is as follows: Table 21-VaR and SVaR Measures Three Months Ended As of March 31, 2020 March 31, 2020 (Dollars in thousands) Mean High Low 1-day VaR$ 2,291 $ 6,783 $ 1,023 $ 4,970 SVaR 8,526 17,727 4,592 4,970 10-day VaR 6,940 24,880 1,807 18,568 SVaR 26,510 43,221 15,887 18,568 Three Months Ended As of March 31, 2019 March 31, 2019 (Dollars in thousands) Mean High Low 1-day VaR$ 1,433 $ 1,907 $ 1,018 $ 1,307 SVaR 8,243 9,629 6,242 8,144 10-day VaR 3,390 4,280 2,592 3,046 SVaR 21,757 28,086 16,032 21,812 Year Ended As of December 31, 2019 December 31, 2019 (Dollars in thousands) Mean High Low 1-day VaR$ 1,068 $ 1,907 $ 503 $ 1,325 SVaR 6,198 9,629 3,157 4,579 10-day VaR 2,824 7,000 1,499 2,233 SVaR 17,367 28,086 8,803 14,975 First quarter 2020 VaR and SVaR increased due to extreme volatility as a result of economic uncertainty associated with the COVID-19 pandemic. FHN's overall VaR measure includes both interest rate risk and credit spread risk. Separate measures of these component risks are as follows: Table 22-Schedule of Risks Included in VaR As of March 31, 2020 As of March 31, 2019 As of December 31, 2019 (Dollars in thousands) 1-day 10-day 1-day 10-day 1-day 10-day Interest rate risk$ 1,255 $ 2,628 $ 560 $ 1,412 $ 693 $ 3,929 Credit spread risk 2,301 11,758 398 726 417 828 First quarter 2020 VaR and SVaR increased due to extreme volatility as a result of economic uncertainty associated with the COVID-19 pandemic. The potential risk of loss reflected by FHN's VaR measures assumes the trading securities inventory is static. Because FHN's Fixed Income division procures fixed income securities for purposes of distribution to customers, its trading securities inventory turns over regularly.
Additionally, Fixed Income traders actively manage the trading securities inventory continuously throughout each trading day. Accordingly, FHN's trading securities inventory is highly dynamic, rather than static. As a result, it would be rare for Fixed Income to incur a negative
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revenue day in its fixed income activities of the level indicated by its VaR measurements. In addition to being used in FHN's daily market risk management process, the VaR and SVaR measures are also used by FHN in computing its regulatory market risk capital requirements in accordance with theMarket Risk Capital rules. For additional information regarding FHN's capital adequacy refer to the "Capital" section of this MD&A. FHN also performs stress tests on its trading securities portfolio to calculate the potential loss under various assumed market scenarios. Key assumed stresses used in those tests are: Down 25 bps - assumes an instantaneous downward move in interest rates of 25 basis points at all points on the interest rate yield curve. Up 25 bps - assumes an instantaneous upward move in interest rates of 25 basis points at all points on the interest rate yield curve. Curve flattening - assumes an instantaneous flattening of the interest rate yield curve through an increase in short-term rates and a decrease in long-term rates. The 2-year point on theTreasury yield curve is assumed to increase 15 basis points and the 10-year point on theTreasury yield curve is assumed to decrease 15 basis points. Shifts in other points on the yield curve are predicted based on their correlation to the 2-year and 10-year points. Curve steepening - assumes an instantaneous steepening of the interest rate yield curve through a decrease in short-term rates and an increase in long-term rates. The 2-year point on theTreasury yield curve is assumed to decrease 15 basis points and the 10-year point on theTreasury yield curve is assumed to increase 15 basis points. Shifts in other points on the yield curve are predicted based on their correlation to the 2-year and 10-year points. Credit spread widening - assumes an instantaneous increase in credit spreads (the difference between yields onTreasury securities and non-Treasury securities) of 25 basis points. Model Validation Trading risk management personnel within Fixed Income have primary responsibility for model risk management with respect to the model used by FHN to compute its VaR measures and perform stress testing on the trading inventory. Among other procedures, these personnel monitor model results and perform periodic backtesting as part of an ongoing process of validating the accuracy of the model. These model risk management activities are subject to annual review byFHN's Model Validation Group , an independent assurance group charged with oversight responsibility for FHN's model risk management. INTEREST RATE RISK MANAGEMENT There have been no significant changes to FHN's interest rate risk management practices as described under "Interest Rate Risk Management" beginning on page 90 of Item 7 to FHN's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Net Interest Income Simulation Analysis The information provided in this section, including the discussion regarding the outcomes of simulation analysis and rate shock analysis, is forward-looking. Actual results, if the assumed scenarios were to occur, could differ because of interest rate movements, the ability of management to execute its business plans, and other factors, including those presented in the Forward-Looking Statements section of this MD&A. Management uses a simulation model to measure interest rate risk and to formulate strategies to improve balance sheet positioning, earnings, or both, within FHN's interest rate risk, liquidity, and capital guidelines. Interest rate exposure is measured by forecasting 12 months of NII under various interest rate scenarios and comparing the percentage change in NII for each scenario to a base case scenario where interest rates remain unchanged. Assumptions are made regarding future balance sheet composition, interest rate movements, and loan and deposit pricing. In addition, assumptions are made about the magnitude of asset prepayments and earlier than anticipated deposit withdrawals. The results of these scenarios help FHN develop strategies for managing exposure to interest rate risk. While management believes the assumptions used and scenarios selected in its simulations are reasonable, simulation modeling provides only an estimate, not a precise calculation, of exposure to any given change in interest rates. Based on a static balance sheet as ofMarch 31, 2020 , NII exposures over the next 12 months assuming rate shocks of plus 25 basis points, 50 basis points, 100 basis points, and 200 basis points are estimated to have favorable variances of 2.2 percent, 3.5 percent, 5.1 percent, and 6.5 percent, respectively compared to base NII. A steepening yield curve scenario where long-term rates increase by 50 basis points and short-term rates are static, results in a favorable NII variance of 1.7 percent. A flattening yield curve scenario where long-term rates decrease by 50 basis points and short-term rates are static, results in an unfavorable NII variance of 1.9 percent. Rate shocks of minus 25 basis points and 50 basis points result in unfavorable NII variances of 4.1 percent and 8.7 percent. These hypothetical scenarios are used to create a risk measurement framework, and do not necessarily represent management's current view of future interest rates or market developments. DuringMarch 2020 , theFederal Reserve lowered the Fed Funds range to 0.00% - 0.25%. However, due toFIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 108
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dislocation in the short end of the curve, LIBOR has remained elevated compared to the Fed Funds rate. As most of FHN's assets are indexed to LIBOR while most of FHN's floating liabilities are indexed to Fed Funds, this has a material impact on the shock scenarios. FHN's net interest income may be impacted by the disruption from the recent COVID-19 crisis. The increase in the unemployment rate, customer loan deferral requests, the impact of government assistance programs, and other developments could influence net interest income results. FHN is monitoring the current economic situation and potential exposures closely. CAPITAL RISK MANAGEMENT AND ADEQUACY There have been no significant changes to FHN's capital management practices as described under "Capital Risk Management and Adequacy" on page 91 of Item 7 to FHN's Annual Report on Form 10-K for the year endedDecember 31, 2019 . OPERATIONAL RISK MANAGEMENT There have been no significant changes to FHN's operational risk management practices as described under "Operational Risk Management" beginning on page 91 of Item 7 to FHN's Annual Report on Form 10-K for the year endedDecember 31, 2019 . COMPLIANCE RISK MANAGEMENT There have been no significant changes to FHN's compliance risk management practices as described under "Compliance Risk Management" on page 92 of Item 7 to FHN's Annual Report on Form 10-K for the year endedDecember 31, 2019 . CREDIT RISK MANAGEMENT There have been no significant changes to FHN's credit risk management practices as described under "Credit Risk Management" beginning on page 92 of Item 7 to FHN's Annual Report on Form 10-K for the year endedDecember 31, 2019 . LIQUIDITY RISK MANAGEMENT ALCO also focuses on liquidity management: the funding of assets with liabilities of appropriate duration, while mitigating the risk of unexpected cash needs. ALCO and the Board of Directors have adopted a Liquidity Policy. The objective of the Liquidity Policy is to ensure that FHN meets its cash and collateral obligations promptly, in a cost-effective manner and with the highest degree of reliability. The maintenance of adequate levels of asset and liability liquidity should provide FHN with the ability to meet both expected and unexpected cash and collateral needs. Key liquidity ratios, asset liquidity levels and the amount available from funding sources are reported to ALCO on a regular basis. FHN's Liquidity Policy establishes liquidity limits that are deemed appropriate for FHN's risk profile. In accordance with the Liquidity Policy, ALCO manages FHN's exposure to liquidity risk through a dynamic, real time forecasting methodology. Base liquidity forecasts are reviewed by ALCO and are updated as financial conditions dictate. In addition to the baseline liquidity reports, robust stress testing of assumptions and funds availability are periodically reviewed. FHN maintains a contingency funding plan that may be executed, should unexpected difficulties arise in accessing funding that affects FHN, the industry as a whole, or both. Subject to market conditions and compliance with applicable regulatory requirements from time to time, funds are available from a number of sources including the available-for-sale securities portfolio, dealer and commercial customer repurchase agreements, access to the overnight and term Federal Funds markets, incremental borrowing capacity at the FHLB ($2.1 billion was available atMarch 31, 2020 ), brokered deposits, loan sales, syndications, and access to theFederal Reserve Bank . Core deposits are a significant source of funding and have historically been a stable source of liquidity for banks. Generally, core deposits represent funding from a financial institution's customer base which provide inexpensive, predictable pricing. TheFederal Deposit Insurance Corporation insures these deposits to the extent authorized by law. Generally, these limits are$250 thousand per account owner for interest bearing and non-interest bearing accounts. The ratio of total loans, excluding loans HFS and restricted real estate loans, to core deposits was 100 percent onMarch 31, 2020 compared to 98 percent onDecember 31, 2019 . FHN also may use unsecured short-term borrowings as a source of liquidity. Currently, the largest concentration of unsecured borrowings is federal funds purchased from correspondent bank customers. These funds are considered to be substantially more stable than funds purchased in the national broker markets for federal funds due to the long, historical, and reciprocal nature of banking services provided by FHN to these correspondent banks. The remainder of FHN's wholesale short-term borrowings is securities sold under agreements to repurchase transactions accounted for as secured borrowings with Regional Banking's business customers or Fixed Income's broker dealer counterparties. BothFHN and First Horizon Bank may access the debt markets in order to provide funding through the issuance of senior or subordinated unsecured debt subject to market conditions and compliance with applicable regulatory requirements. InApril 2020 ,First Horizon Bank issued$450 million of subordinated notes. These subordinated notes qualify as Tier 2 capital forFirst Horizon Bank as well as FHN, up to certain regulatory limits for minority interest capital instruments.FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 109
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BothFHN and First Horizon Bank have the ability to generate liquidity by issuing preferred equity, and (for FHN) by issuing common equity, subject to market conditions and compliance with applicable regulatory requirements. InJanuary 2013 , FHN issued$100 million of Non-Cumulative Perpetual Preferred Stock, Series A. As ofMarch 31, 2020 ,First Horizon Bank and subsidiaries had outstanding preferred shares of$295.4 million , which are reflected as noncontrolling interest on the Consolidated Condensed Statements of Condition. Parent company liquidity is primarily provided by cash flows stemming from dividends and interest payments collected from subsidiaries. These sources of cash represent the primary sources of funds to pay cash dividends to shareholders and principal and interest to debt holders of FHN. The amount paid to the parent company throughFirst Horizon Bank common dividends is managed as part of FHN's overall cash management process, subject to applicable regulatory restrictions. Certain regulatory restrictions exist regarding the ability ofFirst Horizon Bank to transfer funds to FHN in the form of cash, common dividends, loans, or advances. At any given time, the pertinent portions of those regulatory restrictions allowFirst Horizon Bank to declare preferred or common dividends without prior regulatory approval in an aggregate amount equal toFirst Horizon Bank's retained net income for the two most recent completed years plus the current year to date. For any period,First Horizon Bank's 'retained net income' generally is equal toFirst Horizon Bank's regulatory net income reduced by the preferred and common dividends declared byFirst Horizon Bank . Applying the dividend restrictions imposed under applicable federal and state rules as outlined above, the Bank's total amount available for dividends was$294.7 million as ofApril 1, 2020 . Additionally, a capital conservation buffer of 50 basis points above well-capitalized levels (equal to an extra 2.5 percent above minimum levels) must be maintained on the Common Equity Tier 1, Tier 1 Capital and Total Capital ratios to avoid restrictions on dividends. Since the Total Capital ratio forFirst Horizon Bank fell slightly below the required buffer as ofMarch 31, 2020 , these capital conservation buffer rules limit the amount of dividends that the Bank can declare in second quarter 2020 to its sole common stockholder, FHN, or to its preferred shareholders without prior regulatory approval at$70.9 million . FirstHorizon Bank declared and paid common dividends to the parent company in the amount of$65 million in first quarter 2020 and$345.0 million in 2019. FirstHorizon Bank declared and paid preferred dividends in first quarter 2020 and each quarter of 2019. Additionally,First Horizon Bank declared preferred dividends in second quarter 2020, payable inJuly 2020 . Payment of a dividend to shareholders of FHN is dependent on several factors which are considered by the Board. These factors include FHN's current and prospective capital, liquidity, and other needs, applicable regulatory restrictions, and also availability of funds to FHN through a dividend fromFirst Horizon Bank . FHN is subject to the capital conservation buffer requirements as described in the above paragraph forFirst Horizon Bank . Additionally, banking regulators generally require insured banks and bank holding companies to pay cash dividends only out of current operating earnings. Consequently, the decision of whether FHN will pay future dividends and the amount of dividends will be affected by current operating results. FHN paid a cash dividend of$.15 per common share onApril 1, 2020 , and inApril 2020 the Board approved a$.15 per common share cash dividend payable onJuly 1, 2020 , to shareholders of record onJune 12, 2020 . FHN paid a cash dividend of$1,550.00 per preferred share onApril 10, 2020 , and inApril 2020 the Board approved a$1,550.00 per preferred share cash dividend payable onJuly 10, 2020 , to shareholders of record onJune 25, 2020 . CASH FLOWS The Consolidated Condensed Statements of Cash Flows provide information on cash flows from operating, investing, and financing activities for the three months endedMarch 31, 2020 and 2019. The level of cash and cash equivalents decreased$136.8 million during first quarter 2020 and$192.5 million in first quarter 2019. Net cash provided in financing activities was$3.7 billion in first quarter 2020, largely driven by an inflow of deposits and higher short-term borrowings (primarily FHLB stock). Net cash used by investing activities was$2.5 billion in first quarter 2020, driven by strong loan growth and an increase in interest-bearing cash. Net cash used by operating activities was$1.4 billion in first quarter 2020 primarily due to net cash outflows of$407.9 million related to loans held-for-sale as purchases and originations outpaced proceeds from sales and settlements,$285.4 million related to fixed income trading activities and$323.8 million related to an increase in derivatives. Net cash used in financing activities was$222.2 million in first quarter 2019, largely driven by a decrease in deposits, share repurchases and cash dividends paid during first quarter 2019, somewhat offset by an increase in other short-term borrowings, primarily FFP. Net cash used by investing activities was$92.7 million in first quarter 2019, largely driven by increases in loan balances somewhat offset by a decrease in interest-bearing cash and a net decrease in AFS debt securities, as maturities and sales outpaced purchases. Net cash provided by operating activities was$122.5 million in first quarter 2019 primarily due to net cash inflows of$369.2 million related to fixed income trading activities and favorably driven cash-relatedFIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q
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net income items, somewhat offset by outflows of$358.6 million related to loans held-for-sale. Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations Obligations from Pre-2009 Mortgage Businesses Prior toSeptember 2008 FHN originated loans through its pre-2009 mortgage business, primarily first lien home loans, with the intention of selling them. Sales typically were effected either as non-recourse whole loan sales or through non-recourse proprietary securitizations. Conventional conforming single-family residential mortgage loans were sold predominately to two government-sponsored entities, or "GSEs": Fannie Mae and Freddie Mac. Also, federally insured or guaranteed whole loans were pooled, and payments to investors were guaranteed throughGinnie Mae . Many mortgage loan originations, especially nonconforming mortgage loans, were sold to investors, or certificate-holders, predominantly through First Horizon proprietary securitizations but also, to a lesser extent, through other whole loans sold to private non-Agency purchasers. FHN used only one trustee for all of its First Horizon proprietary securitizations. In addition to First Horizon proprietary securitization and other whole loan sales activities, FHN also originated and sometimes sold or securitized second-lien, line of credit, and government-insured mortgage loans. From these pre-2009 activities, FHN has incurred substantial losses stemming from obligations to repurchase loans, pay make-whole amounts, or otherwise resolve claims that loans which FHN originated, or FHN's servicing of those loans, were deficient in a manner for which FHN was liable. Many years ago, FHN established a repurchase and foreclosure liability, or reserve, in connection with those claims. FHN has settled many claims, and the reserve is reduced each time a claim is settled. As discussed in Note 10 - Contingencies and Other Disclosures, FHN's principal remaining exposures for those activities relate to (i) indemnification claims by underwriters, loan purchasers, and other parties which assert that FHN-originated loans caused or contributed to losses which FHN is legally obliged to indemnify, and (ii) indemnification or other claims related to FHN's servicing of pre-2009 mortgage loans. Servicing Obligations FHN's national servicing business was sold as part of the platform sale in 2008. A significant amount of mortgage servicing rights ("MSR") was sold at that time, and a significant amount was retained. The related servicing activities, including foreclosure and loss mitigation practices, not sold in 2008 were outsourced including a subservicing arrangement initiated in 2011 (the "2011 subservicer"). In fourth quarter 2013 and first quarter 2014, FHN sold and transferred a substantial majority of its remaining servicing obligations and servicing assets (including advances) to the 2011 subservicer. The servicing still retained by FHN is not significant and continues to be subserviced. As servicer, FHN had contractual obligations to the owners of the loans (primarily GSEs) and securitization trustees to handle billing, custodial, and other tasks related to each loan. Each subservicer undertook to perform those obligations on FHN's behalf during the applicable subservicing period, although FHN legally remained the servicer of record for those loans that were subserviced. As mentioned in Note 10 - Contingencies and Other Disclosures - FHN has received a notice of indemnification claims from its 2011 subservicer,Nationstar Mortgage LLC , currently doing business as "Mr. Cooper." The notice asserts several categories of indemnity obligations by FHN to Nationstar in connection with mortgage loans under the subservicing arrangement and under the purchase transaction. This matter currently is not in formal litigation, but litigation in the future is possible. Repurchase Accrual Methodology FHN's approach for determining the adequacy of the repurchase and foreclosure reserve has evolved, sometimes substantially, based on changes in information available. Repurchase/make-whole rates vary based on purchaser, vintage, and claim type. For those loans repurchased or covered by a make-whole payment, cumulative average loss severities range between 50 and 60 percent of the UPB. Repurchase Accrual Approach In determining potential loss content, claims are analyzed by purchaser, vintage, and claim type. FHN considers various inputs including claim rate estimates, historical average repurchase and loss severity rates, mortgage insurance cancellations, and mortgage insurance curtailment requests. Inputs are applied to claims in the active pipeline, as well as to historical average inflows to estimate loss content related to potential future inflows. Management also evaluates the nature of claims from purchasers and/or servicers of loans sold to determine if qualitative adjustments are appropriate. Repurchase and Foreclosure Liability The repurchase and foreclosure liability is comprised of accruals to cover estimated loss content in the active pipeline (consisting of mortgage loan repurchase, make-whole, foreclosure/servicing demands and certain related exposures), estimated future inflows, and estimated loss content related to certain known claims not currentlyFIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q
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included in the active pipeline. The liability contemplates repurchase/make-whole and damages obligations and estimates for probable incurred losses associated with loan populations excluded from the settlements with the GSEs, as well as other whole loans sold, mortgage insurance cancellations rescissions, and loans included in bulk servicing sales effected prior to the settlements with the GSEs. FHN compares the estimated probable incurred losses determined under the applicable loss estimation approaches for the respective periods with current reserve levels. Changes in the estimated required liability levels are recorded as necessary through the repurchase and foreclosure provision. The repurchase and foreclosure liability decreased to$13.5 million onMarch 31, 2019 from$14.5 million onDecember 31, 2019 .
Market Uncertainties and Prospective Trends
FHN's future results could be affected both positively and negatively by several known trends. Key among those are changes in theU.S. and global economy and outlook, government actions affecting interest rates, availability and the administration of stimulus relief for the economy and FHN's customers related to the recent global COVID-19 pandemic, political uncertainty, potential changes in federal policies and the potential impact to our customers, and FHN's strategic initiatives. In addition, pre-2009 mortgage business matters in the Non-strategic segment could continue to impact FHN's quarterly results in ways which are both difficult to predict and unrelated to current operations. Performance by FHN, and the entireU.S. financial services industry, is affected considerably by the overall health of theU.S. and global economy and outlook. Furthermore, FHN may be directly or indirectly impacted by global events that impact our customers and their businesses. The recent global COVID-19 pandemic has led to periods of significant volatility in financial commodities (including oil and gas) and other markets, has adversely affected FHN's ability to conduct normal business, has adversely affected FHN customers, and is likely to harm FHN's business and future results of operations. InMarch 2020 theFederal Reserve lowered short-term interest rates twice and started a "quantitative easing" program intended to lower longer-term interest rates and foster access to credit. The effective yields of 10-year and 30-yearU.S. Treasury securities achieved record low rates and theU.S. Congress enacted relief legislation which, among other things, is intended to provide emergency credit to businesses at risk for failure from government and public actions related to the COVID-19 pandemic, and to mitigate an economic recession. These changes in interest rates and the volatility in the market are likely to negatively impact FHN's net interest margin. In the near term, amortization of net processing fees related to government relief programs, including the Paycheck Protection Program ("PPP"), may offset a portion of the net interest margin decline. In addition, credit spreads have widened. For new loans, wider spreads should help mitigate net interest margin compression. However, FHN will not be able to capture the widened spreads quickly for outstanding floating-rate loans. The economic effects of the COVID-19 pandemic have significantly altered business in theU.S. and globally leading to partial or full business closures, individuals being furloughed or laid off, significant increases in unemployment, and workers being partially or wholly ordered to work from home. Disruption to FHN's customers due to governmental and societal responses to COVID-19 are likely to adversely affect FHN's loan and deposit fee income as well as create downward loan migration and a corresponding increase in loan loss expense and reserves. In addition, loan charge-offs likely will increase over time, especially if economic disruption related to COVID-19 continues for more than a few months. Furthermore, government programs under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and other guidance intended to provide relief to customers through temporary modifications and deferrals, may in some instances mask or postpone reporting of credit problems and potential defaults. In these circumstances, current credit quality indicators may not be reflective of the underlying health of FHN's portfolios. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on the businesses of FHN for the remainder of 2020 or afterward. In 2017, the Chief Executive of theUnited Kingdom Financial Conduct Authority , which regulates the London InterBank Offered Rate ("LIBOR"), announced that it intends to halt persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, LIBOR as currently operated may not continue after 2021. FHN is not currently able to predict the impact that the transition from LIBOR will have on the Company; however, because FHN has instruments with floating rate terms based on LIBOR, FHN may experience increases in interest, dividends, and other costs relative to these instruments subsequent to 2021. Additionally, the transition from LIBOR could impact or change FHN's hedge accounting practices. FHN has initiated efforts to 1) develop an inventory of affected loans, securities, and derivatives, 2) evaluate and draft modifications as needed to address loans outstanding at the time of LIBOR retirement, 3) obtain an understanding of the potentialFIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q
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effects for applicable securities and derivatives and 4) assess revisions to product pricing structures based on alternative reference rates. InMarch 2020 , the FASB issued ASU 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides several optional expedients and exceptions to ease the potential burden in accounting for reference rate reform. Refer to the Accounting Changes Issued but Not Currently Effective section of Note 1 - Financial Information for additional information. Additionally, theIRS has released a proposal that is intended to facilitate the transition of existing contracts from LIBOR to new reference rates without triggering modification accounting or taxable exchange treatment for those contracts. This proposal contains specific guidance that must be met in order to qualify for the beneficial transition approach and FHN is considering this guidance in its transition plans. FHN has prioritized expense discipline to include reducing or controlling certain expenses including realization of expense efficiencies from its 2017 merger with CBF and investing in revenue-producing activities, customer-facing technology, and critical infrastructure. FHN remains committed to organic growth through customer retention, key hires, targeted incentives, and other traditional means. When FHN closes its proposed merger with IBKC, under applicable accounting guidance FHN will be required to record IBKC's loans at estimated fair value as of the closing date. In addition, FHN will be required to assess the current (at that time) expected credit losses associated with IBKC loans. That credit loss assessment will be separate from the fair value estimation, and will result in a charge to FHN's income for certain loans for the period in which closing occurs. FHN is not able make that assessment at this time, but believes that the associated charge to income will be substantial to quarterly income. Lastly, while FHN has resolved most matters from the pre-2009 mortgage business, some remain unresolved. The timing or financial impact of resolution of these matters cannot be predicted with accuracy. Accordingly, the non-strategic segment may occasionally and unexpectedly impact FHN's overall quarterly results negatively or positively with reserve accruals or releases. Also, although new pre-2009 mortgage business matters of significance arise at a much slower pace than in years past and some formerly common legal claims no longer can be made due to the passage of time, potential for new pre-2009 mortgage business matters remains. Foreclosure Practices FHN retains exposure for potential deficiencies in servicing related to its pre-2009 mortgage servicing business and subservicing arrangements. Further details regarding these matters are provided in "Obligations from Pre-2009 Mortgage Businesses - Servicing Obligations" under "Repurchase Obligations, Off-Balance Sheet Arrangements, and Other Contractual Obligations." FHN response to the COVID-19 pandemic As previously mentioned, the COVID-19 pandemic has, and will continue, to directly and indirectly impact FHN and our customers. FHN has adapted many operations to help ensure the health and safety of employees and customers during these uncertain times. Among other things, FHN has implemented remote work policies, branch activities handled by appointment or via drive-through only, as well as additional sick time and child care assistance for employees. Additionally, FHN's foundation has donated$2.5 million to support community relief efforts. Loans FHN is actively monitoring the COVID-19 pandemic and its impact on customers and FHN's credit quality. In response, FHN is proactively reaching out to customers to discuss challenges and solutions, is providing line draws and new extensions to existing customers, is providing support for small businesses through the PPP (discussed in more detail below) and other stimulus programs, as well as providing lending and deposit assistance through deferrals and waived fees. Additionally, in certain sectors, FHN has reduced or stopped new lending. Paycheck Protection Program OnMarch 27, 2020 , the CARES Act was signed into law. Sections 1102 and 1106 of the CARES Act include a PPP that made$349 billion of funds available for qualifying businesses to receive fully-guaranteed loans via theSmall Business Administration's Section 7(a) lending program. These loans are potentially fully forgivable, depending upon the borrower's use of the funds and maintenance of employment levels. PPP loans are intended to provide cash-flow assistance to nonprofit and small business employers for expenses incurred betweenFebruary 15, 2020 , andJune 30, 2020 . Generally, the maximum loan amount per qualified borrower is the lesser of 1) 250 percent of average monthly payroll costs (e.g., salaries and wages up to$100,000 and benefits) during the previous one-year period plus the outstanding amount of any existing SBA Economic Injury Disaster Loan made fromJanuary 1, 2020 throughApril 3, 2020 , that is being refinanced under the PPP and 2)$10 million . Eligible borrowers include any of the following that were in operation onFebruary 15, 2020 :
• Businesses, including nonprofit organizations under Internal Revenue Code
("IRC") Section 501(c)(3), veterans' organizations under IRC Section 501(c)(19), and tribal organizations, thatFIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 113
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have 500 or fewer employees (or the
• Businesses in the food and accommodations industry (as defined in NAICS 724) with 500 or fewer employees per location.
• Sole proprietors, independent contractors, and self-employed individuals.
All PPP loans carry the same terms which are as follows:
• Fixed interest rate of 1 percent per annum
• Maturity date of two years, with the ability to prepay earlier with no fees
• First payment deferred for six months
• Waiver of "credit elsewhere" SBA 7(a) requirement
• No collateral or personal guarantees required
• No borrower fees charged to obtain such loans
Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on PPP loans to the extent that the proceeds are used to cover eligible payroll, interest, rent, and utility costs over the eight-week period after the loan is made as long as the borrower retains its employees and their compensation levels. However, no more than 25 percent of loan forgiveness may be attributable to eligible rent, utilities and interest. In addition, loans qualifying for forgiveness will not be included in the borrower's taxable income. Lenders making these PPP loans are paid a fee by theSmall Business Administration on the date the loans are made. Lender fees are based on the following sliding scale.
• Loans
• Loans greater than
• Loans greater than
Borrowers can use agents to assist in the preparation of their PPP applications. Those agents are paid from the SBA fees received from the originating bank. Additionally, originating banks have certain internal costs of originating PPP loans. For applicable loans, agent fees are paid by originating banks based on the following scale.
• Loans
• Loans greater than
• Loans greater than
The SBA provides a 100 percent guarantee on PPP loans, which is an increase to the existing guarantee percentages under current SBA loan programs. In the event that a lender sells a PPP loan on the secondary market, the guarantee will transfer with the loan. Lenders are not required to conduct any verification regarding loan forgiveness provided that a borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the eligibility of the expenditures made. Lenders will be held harmless if they rely on such documentation. Lenders must make a decision on the forgiveness within 60 days. Section 1106 of the CARES Act indicates that any lender or purchaser of PPP loans may report to the SBA an expected forgiveness amount, and the SBA will purchase the expected forgiveness amounts, plus any interest accrued to date, within 15 days after such requests are received. Requests for forgiveness may occur as early as seven weeks after the loan is originated. As part of FHN's efforts to support customers through various stimulus programs, FHN originated 6,761 of PPP loans with an aggregate principal of$1.7 billion inApril 2020 . For these loans, FHN anticipates recognizing net origination fees of approximately$45 to$50 million . Additional lower origination volumes are anticipated in May. FHN has decided to hold its PPP loans for investment. Therefore, the net amount of SBA fees and total direct origination costs are deferred as a discount to the recorded carrying value of the PPP loans. This discount is being amortized prospectively to interest income. SBA loan forgiveness payments are considered prepayments of the related loans. Under existing accounting principles, amortization of net origination fees can reflect expected prepayment activity if prepayments are determined to be probable and both the timing and volume can be reasonably estimated. Based on the terms of the PPP loans, including the expected end of the payment deferral period, FHN estimates that substantially all of the prepayment-eligible portions of PPP loans will be prepaid in 2020 as these loans are forgiven. These estimated prepayments will result in a similar amount of the net fees being recognized in interest income in 2020. Since PPP loans carry a full SBA guarantee, they do not have any credit risk and will not affect the amount of provision and ALLL recorded. Consistent with this view, the CARES Act indicates that investors should assign a risk weight of zero to PPP loans for regulatory capital purposes.
The initial funding for the
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Lending Assistance for Borrowers Other customer support initiatives include incremental lending assistance for borrowers through delayed payment programs and fee waivers. The following table provides the UPB of loans related to deferrals granted to FHN's customers that have been processed throughApril 30, 2020 . (Dollars in thousands) As of April 30, 2020 Commercial: General C&I $ 1,582,903 Loans to mortgage companies - TRUPS - Income CRE 1,061,452 Residential CRE 1,715 Total Commercial $ 2,646,070 Consumer: HELOC $ 69,531 R/E installment loans 494,205 Credit Card & Other 3,279 Total Consumer 567,015 Total $ 3,213,085 Commercial deferrals processed are comprised primarily of general commercial (39 percent or$1.0 billion ), commercial real estate (28 percent or$731.3 million - primarily within our Mid-Atlantic,Southeast Tennessee , and Middle Tennessee markets), franchise finance (13 percent or$334.9 million ), business banking (8 percent or$208.9 million ), and private client (6 percent -$152.0 million ). Deposits Deposit levels were also significantly impacted in April due to the impacts of COVID-19 pandemic which resulted in an increase in period-end deposits of$3.7 billion , or 11 percent, fromMarch 31, 2020 levels. This increase was due to an increase in commercial deposits as FHN saw many firms deposit funds (from lines of credit, PPP loans, operational revenues, etc.) into non-interest bearing operating accounts in order to increase their liquidity positions. Additionally, as various government stimulus programs were rolled out FHN saw increases in deposits from the Healthcare industry as Medicare reimbursements related to COVID-19 became available and a jump in deposits in Correspondent banking due to stimulus and PPP funds deposited into client banks. Consumer deposit inflows were also impacted by approximately$300 million in initial stimulus payments in mid-April.
Critical Accounting Policies
Except for the changes to the following Allowance for Loan Losses section, there have been no significant changes to FHN's critical accounting policies as described in "Critical Accounting Policies" beginning on page 99 of Item 7 to FHN's Annual Report on Form 10-K for the year endedDecember 31, 2019 . ALLOWANCE FOR LOAN LOSSES Management's policy is to maintain the ALLL at a level sufficient to absorb expected credit losses in the loan portfolio. Management performs periodic and systematic detailed reviews of its loan portfolio to identify trends and to assess the overall collectability of the loan portfolio. Management believes the accounting estimate related to the ALLL is a "critical accounting estimate" as: (1) changes in it can materially affect the provision for loan losses and net income, (2) it requires management to predict borrowers' likelihood or capacity to repay, including evaluation of inherently uncertain future economic conditions, (3) prepayment activity must be projected to estimate of the life of loans that often are shorter than contractual terms, (4) it requires estimation of a reasonable and supportable forecast period for credit losses for loan portfolio segments before reversion to historical loss levels over the remaining life of a loan and (5) expected future recoveries of amounts previously charged off must be estimated. Accordingly, this is a highly subjective process and requires significant judgment since it is difficult to evaluate current and future economic conditions in relation to an overall credit cycle and estimate the timing and extent of loss events that are expected to occur prior to end of a loan's estimated life. The ALLL is increased by the provision for loan losses and recoveries and is decreased by charged-off loans. Principal loan amounts are charged off against the ALLL in the period in which the loan or any portion of the loan is deemed to be uncollectible. This critical accounting estimate applies to the regional banking, non-strategic, and corporate segments. A management committee comprised of representatives from Risk Management, Finance, Credit, andTreasury performs a quarterly review of the assumptions used in FHN's ALLL analytical models, makes qualitative assessments of the loan portfolio, and determines if qualitative adjustments should be recommended to the modeled results. On a quarterly basis, as a part of Enterprise Risk reporting and discussion, management addresses credit reserve adequacy and credit losses with theExecutive and Risk Committee of FHN's Board of Directors. FHN believes that the critical assumptions underlying the accounting estimates made by management include: (1) the commercial loan portfolio has been properly risk graded based on information about borrowers in specific industries and specific issues with respect to single borrowers; (2) borrower specific information made available to FHN is current and accurate; (3) the loan portfolio has been segmented properly and individual loans have similar credit risk characteristics and will behave similarly; (4) the lives for loan portfolio pools have been estimated properly, including consideration of expected prepayments; (5) the economic forecasts utilized in the modeling of expected credit losses are reflective of future economic conditions; (6) entity-specific historical loss information has been properly assessed for all loan portfolio segments as the initial basis for estimating expected credit losses; (7) the reasonable and supportable periods for loan portfolio segments have been properly determined; (8) the reversion methodologies and timeframes for migration from the reasonable and supportable period to the use of historical loss rates are reasonable; (9) expected recoveries of prior charge off amounts have been properly estimated; and (10) qualitative adjustments to modeled loss results reasonably reflect expected future credit losses as of the date of the financial statements. While management uses the best information available to establish the ALLL, future adjustments to the ALLL and methodology may be necessary if economic or other conditions differ substantially from the assumptions used in making the estimates. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels vary from previous estimates. See Note 1 - Summary of Significant Accounting Policies and Note 5 - Allowance for Loan Losses for detail regarding FHN's processes, models, and methodology for determining the ALLL. ACCOUNTING CHANGES ISSUED BUT NOT CURRENTLY EFFECTIVE Refer to Note 1 - Financial Information for a detail of accounting standards that have been issued but are not currently effective, which section is incorporated into MD&A by this reference. Non-GAAP Information
The following table provides a reconciliation of non-GAAP items presented in this MD&A to the most comparable GAAP presentation:
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Table 23-Non-GAAP to GAAP Reconciliation
Three Months Ended March 31 (Dollars in thousands) 2020 2019 Average Tangible Common Equity (Non-GAAP) Average total equity (GAAP)$ 5,002,394 $ 4,809,235 Less: Average noncontrolling interest (a) 295,431
295,431
Less: Average preferred stock (a) 95,624
95,624
(A) Total average common equity$ 4,611,339 $ 4,418,180 Less: Average intangible assets (GAAP) (b) 1,560,340
1,584,694
(B) Average Tangible Common Equity (Non-GAAP)$ 3,050,999 $ 2,833,486 Net Income Available to Common Shareholders (C) Net income available to common shareholders (annualized) (GAAP)$ 48,545 $ 401,642 Ratios (C)/(A) Return on average common equity ("ROCE") (GAAP) (c) 1.05 % 9.09 % (C)/(B) Return on average tangible common equity ("ROTCE") (Non-GAAP) (d) 1.59 14.17 (a)Included in Total equity on the Consolidated Condensed Statements of Condition. (b)Includes Goodwill and other intangible assets, net of amortization. (c)Ratio is annualized net income available to common shareholders to average common equity. (d)Ratio is annualized net income available to common shareholders to average tangible common equity. FIRST HORIZON NATIONAL CORP. 1Q20 FORM 10-Q REPORT 116
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