First Horizon Corp: Form 10-Q for the period ended Jun 30, 2023

Analysis of Financial Condition and Results of Operations

TABLE OF ITEM 2 TOPICS

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Introduction

First Horizon Corporation (NYSE common stock trading symbol “FHN”) is a financial holding company headquartered in Memphis, Tennessee. FHN’s principal subsidiary, and only banking subsidiary, is First Horizon Bank. Through the Bank and other subsidiaries, FHN offers regional banking, mortgage lending, specialized commercial lending, commercial leasing and equipment financing, brokerage, wealth management, capital markets, and other financial services to commercial, consumer, and governmental clients throughout the U.S.

At June 30, 2023, FHN had over 450 business locations in 24 states, including over 400 banking centers in 12 states, and employed approximately 7,300 associates.

This MD&A should be read in conjunction with the accompanying unaudited Consolidated Financial Statements and Notes to Consolidated Financial Statements in Part I, Item 1, as well as other information contained in this document and FHN's 2022 Annual Report on Form 10-K.

Executive Overview

Significant Events and Transactions

TD Merger Termination

On February 27, 2022, FHN entered into an Agreement and Plan of Merger (the TD Merger Agreement) with The Toronto-Dominion Bank, a Canadian chartered bank (TD), and certain TD subsidiaries. On May 4, 2023, FHN and TD mutually terminated the TD Merger Agreement. Under the terms of the termination agreement, TD made a $200 million cash payment to FHN, in addition to the $25 million fee reimbursement due to FHN pursuant to the TD Merger Agreement. As part of the $200 million cash payment received, FHN contributed $50 million to the First Horizon Foundation.

On February 28, 2022, in connection with the execution of the TD Merger Agreement, FHN issued $494 million of Series G Perpetual Convertible Preferred Stock (the Series G Convertible Preferred Stock). The Series G Convertible Preferred Stock was convertible into up to 4.9% of the outstanding shares of FHN common stock in certain

circumstances, including termination of the TD Merger Agreement. Because regulatory approval of the TD Transaction was not obtained, conversion occurred at a fixed rate of 4,000 shares of common stock for each share of Series G Convertible Preferred Stock (19,742,776 common shares) which reflected a conversion price of $25 per share. Following conversion to common stock, the Series G represented 3.5% of FHN's common shares outstanding as of June 30, 2023.

Other Transactions

On May 26, 2023, FHN retired $450 million in senior notes and recorded $1 million in gain on debt extinguishment.

On August 3, 2023, FHN announced a five-year employment agreement with Chairman, President and Chief Executive Officer D. Bryan Jordan. A copy of the agreement has been filed with a recent Current Report on Form 8-K, and is listed as exhibit 10.2 to this report.

Financial Performance Summary

Second Quarter 2023 Highlights

FHN reported second quarter 2023 net income available to common shareholders of $317 million, or $0.56 per diluted share, compared to $243 million, or $0.43 per diluted share, in first quarter 2023 and $166 million, or $0.29 per diluted share, in second quarter 2022.

Net interest income of $630 million declined $58 million from first quarter 2023 as the benefit of higher rates and loan balances was more than offset by higher funding costs. Compared to second quarter 2022, net interest income increased $88 million, driven by higher earning asset yields, loan growth, and higher average investment portfolio balances, partially offset by higher funding costs.

Provision for credit losses remained stable at $50 million in second quarter 2023 compared to first quarter 2023 reflecting the impact of loan growth and a modest increase in net charge-offs. The provision for credit losses increased $20 million compared to $30 million in second

quarter 2022, reflecting the impact of loan growth and potential economic instability projected in the macroeconomic forecast.

Noninterest income of $400 million increased $229 million compared to first quarter 2023 largely driven by a $225 million gain on the TD merger agreement termination. Noninterest income increased $199 million compared to second quarter 2022 largely driven by the gain on merger termination and higher deferred compensation income, partially offset by lower fixed income and mortgage banking and title income.

Noninterest expense of $555 million increased $77 million from first quarter 2023, largely reflecting the impact of a $50 million contribution to the First Horizon Foundation, higher personnel expense, and $15 million in derivative valuation adjustments on prior Visa Class-B share sales. Compared with second quarter 2022, noninterest expense increased $67 million largely attributable to the $50

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million contribution and higher personnel expense. Merger and integration planning expenses related to the TD Transaction totaled $30 million for second quarter 2023 compared to $21 million in first quarter 2023. Merger and integration expenses related to the TD Transaction and the IBKC Merger totaled $38 million in second quarter 2022.

Year-to-Date and Period End Highlights

For the six months ended June 30, 2023, net income available to common shareholders was $560 million, or $1.00 per diluted share, compared to $352 million, or $0.63 per diluted share, for the six months ended June 30, 2022.

Net interest income increased $297 million largely driven by higher earning asset yields, loan growth, and higher investment portfolio balances, partially offset by higher funding costs. Provision for credit losses increased $110 million largely from loan growth and potential economic instability projected in the macroeconomic forecast. Noninterest income increased $141 million, or 33%, primarily from the gain on merger agreement termination, partially offset by lower fixed income and mortgage banking and title income. Noninterest expense increased

$51 million, or 5%, largely attributable to the $50 million contribution made to the First Horizon Foundation.

Period-end loans and leases of $61.3 billion increased $3.2 billion, or 5%, from December 31, 2022 driven by commercial loan growth of $2.0 billion and consumer loan growth of $1.2 billion.

Period-end deposits of $65.4 billion increased $1.9 billion, or 3%, from December 31, 2022 driven by a $6.6 billion increase in interest-bearing deposits partially offset by a $4.7 billion decrease in noninterest-bearing deposits.

Tier 1 risk-based capital and total risk-based capital ratios at June 30, 2023 were 12.09% and 13.58%, an improvement from 11.92% and 13.33% at December 31, 2022, respectively. The CET1 ratio was 11.08% at June 30, 2023 compared to 10.17% at December 31, 2022.

The following portions of this MD&A focus in more detail on the results of operations for the three and six months ended June 30, 2023, the three months ended March 31, 2023, and the three and six months ended June 30, 2022 and on information about FHN's financial condition, loan and lease portfolio, liquidity, funding sources, capital and other matters.

Table I.2.1

KEY PERFORMANCE INDICATORS

(Dollars in millions, except per share data)

(a) Represents a non-GAAP measure which is reconciled in the non-GAAP to GAAP reconciliation in Table I.2.25.

(b) Calculated using annualized net income divided by average assets.

(c) Calculated using annualized net income available to common shareholders divided by average common equity.

(d) Calculated using annualized net income available to common shareholders divided by average tangible common equity.

(e) Net interest margin is computed using total net interest income adjusted to an FTE basis assuming a statutory federal income tax rate of 21% and, where applicable, state income taxes.

(f) Ratio is noninterest income excluding securities gains (losses) to total revenue excluding securities gains (losses).

(g) Ratio is noninterest expense to total revenue excluding securities gains (losses).

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Results of Operations

Net Interest Income

Net interest income is FHN's largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans, leases and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). The level of net interest income is primarily a function of the difference between the effective yield on average interest-earning assets and the effective cost of interest-bearing liabilities. These factors are influenced by the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the FRB and market interest rates.

The following tables present the major components of net interest income and net interest margin:

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Table I.2.2

QUARTER-TO-DATE AVERAGE BALANCES, NET INTEREST INCOME & YIELDS/RATES

(Dollars in millions)

(a) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 21% and, where applicable, state income taxes.

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Second Quarter 2023 versus First Quarter 2023

Net interest income of $630 million in second quarter 2023 decreased $58 million from first quarter 2023 and the net interest margin declined 50 basis points to 3.38%. The benefit of higher rates and loan growth was more than offset by higher funding costs driven by increased competition. Loan yield increased 25 basis points while the cost of interest-bearing deposits increased 82 basis points.

Average earning assets of $75.3 billion in second quarter 2023 increased $3.3 billion from first quarter 2023 largely due to a $1.9 billion increase in average loans and leases, driven by a $1.2 billion increase in commercial loans and a $647 million increase in consumer loans, and a $1.6 billion increase in average interest-bearing cash.

Second Quarter 2023 versus Second Quarter 2022

Net interest income increased $88 million from second quarter 2022 driven by higher earning asset yields, loan growth, and higher investment portfolio balances partially offset by higher funding costs.

Second quarter 2023 net interest margin increased 64 basis points from 2.74% in second quarter 2022, driven by the impact of higher yields on earning assets, partially offset by higher funding costs.

Average earning assets decreased $4.4 billion from second quarter 2022 largely driven by a $7.9 billion decrease in average interest-bearing deposits with banks, offset by a $4.3 billion increase in loans and leases and a $411 million increase in investment securities.

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Table I.2.3

YEAR-TO-DATE AVERAGE BALANCES, NET INTEREST INCOME & YIELDS/RATES

(Dollars in millions)

(a) Calculated using total net interest income adjusted for FTE assuming a statutory federal income tax rate of 21% and, where applicable, state income taxes.

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For the six months ended June 30, 2023, net interest income of $1.3 billion increased $297 million from the same period one year ago largely driven by higher earning asset yields, loan growth, and higher investment portfolio balances partially offset by higher funding costs.

Total average earning assets decreased $7.2 billion in the first six months of 2023 largely due to lower levels of interest-bearing cash offset by loan growth.

The year-to-date net interest margin of 3.62% increased 107 basis points compared to 2.55% for the same period of 2022 as earning asset yields increased 257 basis points and the cost of interest-bearing liabilities increased 226 basis points.

Provision for Credit Losses

Provision for credit losses includes the provision for loan and lease losses and the provision for unfunded lending commitments. The provision for credit losses is the expense necessary to maintain the ALLL and the accrual for unfunded lending commitments at levels appropriate to absorb management’s estimate of credit losses expected over the life of the loan and lease portfolio and the portfolio of unfunded loan commitments.

For the second quarter 2023, provision for credit losses of $50 million was consistent with first quarter 2023, largely

reflecting the impact of loan growth and a modest increase in net charge-offs. The second quarter 2023 provision increased $20 million compared to second quarter 2022 and the year-to-date provision increased $110 million compared to the same period one year ago, largely from loan growth and potential economic instability projected in the macroeconomic forecast.

For additional information about general asset quality trends, refer to the Asset Quality section in this MD&A.

Noninterest Income

The following table presents the significant components of noninterest income for each of the periods presented:

Table I.2.4

NONINTEREST INCOME

(Dollars in millions)

NM – Not meaningful

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Second Quarter 2023 versus First Quarter 2023

Noninterest income of $400 million increased $229 million, or 134%, from first quarter 2023, primarily as a result of the $225 million gain resulting from the TD merger agreement termination.

Fixed income of $30 million decreased $9 million from the prior quarter. Fixed income average daily revenue of $348 thousand decreased from $437 thousand in first quarter 2023, a decrease of 20% reflecting continued challenging market conditions.

Mortgage banking and title income of $6 million increased $1 million driven by higher volume and gain on sale spreads.

Deferred compensation income of $8 million increased $5 million and is largely offset in noninterest expense.

Second Quarter 2023 versus Second Quarter 2022

Noninterest income for second quarter 2023 increased $199 million, or 99%, compared to second quarter 2022, primarily driven by the gain on merger agreement termination, offset by lower fixed income and mortgage banking and title income. Second quarter 2023 results were also impacted by a $25 million increase in deferred compensation income, reflecting fluctuations in equity market valuations relative to the prior year.

Fixed income of $30 million decreased $21 million from second quarter 2022, largely reflecting less favorable market conditions.

Mortgage banking and title income decreased $28 million reflecting the impact of a $12 million gain recognized on the sale of mortgage servicing rights in second quarter 2022 and a decline in mortgage sales volume.

Table I.2.5

NONINTEREST INCOME

(Dollars in millions)

For the six months ended June 30, 2023, noninterest income of $571 million increased $141 million, or 33%, compared to the same period in 2022, primarily from the gain on merger agreement termination, partially offset by lower fixed income and mortgage banking and title income.

Fixed income product revenue of $49 million decreased $50 million largely driven by less favorable market conditions. Revenue from other products of $20 million

decreased $5 million primarily driven by lower fees from loan and derivative sales.

Mortgage banking and title income of $11 million decreased $45 million driven by lower origination volume given the impact of higher long-term rates.

Deferred compensation income increased $32 million for the year-to-date period of 2023 reflecting fluctuations in equity market valuations relative to the prior year.

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Noninterest Expense

The following tables present the significant components of noninterest expense for each of the periods presented:

Table I.2.6

NONINTEREST EXPENSE

(Dollars in millions)

Second Quarter 2023 versus First Quarter 2023

Noninterest expense of $555 million increased $77 million, or 16%, compared with first quarter 2023, largely driven by a $50 million contribution made to the First Horizon Foundation as part of the $200 million received from the TD merger termination. Personnel expense increased $14 million largely reflecting higher incentive-based compensation and deferred compensation expense. Other expense increased $8 million, primarily from derivative valuation adjustments related to prior Visa Class-B share sales. Results also reflect a $4 million increase in legal and professional fees largely attributable to higher merger and integration related costs.

Second Quarter 2023 versus Second Quarter 2022

Noninterest expense of $555 million increased $67 million, or 14%, from second quarter 2022, largely driven by the $50 million contribution made to the First Horizon Foundation in second quarter 2023. Personnel expense increased $20 million largely attributable to higher deferred compensation expense partially offset by lower incentive-based compensation. The $7 million increase in advertising and public relations expense was partially attributable to a new-to-bank deposit campaign and brand awareness initiatives. Legal and professional fees decreased $5 million from second quarter 2022 largely attributable to lower merger and integration related costs.

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Table I.2.7

NONINTEREST EXPENSE

(Dollars in millions)

For the six months ended June 30, 2023, noninterest expense increased $51 million, or 5%, largely attributable to the $50 million contribution made to the First Horizon Foundation.

Personnel expense of $556 million increased $11 million reflecting higher deferred compensation expense partially offset by lower incentive-based compensation expense.

Deposit insurance expense of $26 million increased $11 million largely due to an increase in the FDIC initial base deposit insurance assessment rate that went into effect in first quarter 2023 for all insured depository institutions.

Advertising and public relations expense increased $10 million partially attributable to a new-to-bank deposit campaign and brand awareness initiatives.

Legal and professional fees decreased $20 million largely attributable to lower merger and integration related expense.

Total merger and integration related expense was $51 million for the first six months of 2023 compared to $75 million for the same period of 2022.

Income Taxes

FHN recorded income tax expense of $96 million in second quarter 2023 compared to $76 million in first quarter 2023 and $48 million in second quarter 2022. For the six months ended June 30, 2023 and 2022, FHN recorded income tax expense of $171 million and $105 million, respectively.

The effective tax rate was approximately 22.6%, 22.7%, and 21.3% for the three months ended June 30, 2023, March 31, 2023 and June 30, 2022, respectively. The effective tax rate was approximately 22.7% and 21.9% for the six months ended June 30, 2023 and 2022, respectively.

FHN’s effective tax rate is favorably affected by recurring items such as bank-owned life insurance, tax-exempt income, and tax credits and other tax benefits from tax credit investments. The effective rate is unfavorably affected by the non-deductibility of portions of: FDIC

premium, executive compensation and merger expenses. FHN’s effective tax rate also may be affected by items that may occur in any given period but are not consistent from period to period, such as changes in unrecognized tax benefits. The rate also may be affected by items resulting from business combinations.

A deferred tax asset or deferred tax liability 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 current enacted statutory tax rates to these temporary differences in future years. As of June 30, 2023, FHN’s gross DTA and gross DTL were $760 million and $452 million, respectively, resulting in a net DTA of $308 million at June 30, 2023, compared with a net DTA of $313 million at December 31, 2022.

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As of June 30, 2023, FHN had deferred tax asset balances related to federal and state income tax carryforwards of $31 million and $2 million, respectively, which will expire at various dates.

Based on current analysis, FHN believes that its ability to realize the DTA is more likely than not. FHN monitors its

DTA and the need for a valuation allowance on a quarterly basis. A significant adverse change in FHN’s taxable earnings outlook could result in the need for a valuation allowance.

Business Segment Results

FHN's reportable segments include Regional Banking, Specialty Banking and Corporate. See Note 12 - Business Segment Information for additional disclosures related to FHN's segments.

Regional Banking

The Regional Banking segment generated pre-tax income of $356 million for second quarter 2023, an increase of $26 million compared to first quarter 2023, largely driven by an increase in net interest income. Net interest income of $612 million increased $26 million reflecting the benefit of higher interest rates and average loan balances, partially offset by higher funding costs.

Pre-tax income for second quarter 2023 increased $128 million compared to $228 million for second quarter 2022. Net interest income increased $147 million from second quarter 2022 driven by higher earning asset yields and loan growth partially offset by higher funding costs. The provision for credit losses decreased $9 million. Noninterest income decreased $6 million and noninterest expense increased $22 million compared to second quarter 2022.

Pre-tax income of $687 million for the six months ended June 30, 2023 increased $193 million compared to the same period of 2022, largely from a $293 million increase in revenue primarily driven by higher net interest income. Results also reflect a $63 million increase in provision for credit losses and a $37 million increase in noninterest expense.

Specialty Banking

Pre-tax income in the Specialty Banking segment of $79 million for second quarter 2023 increased $1 million compared to first quarter 2023, driven by a $3 million decrease in noninterest expense offset by a $2 million decrease in revenue.

Fixed income of $31 million decreased $8 million, driven by continuing challenging market conditions. Mortgage banking and title income of $6 million increased $1 million reflecting higher volume and gain on sale spreads.

Pre-tax income in the Specialty Banking segment decreased $62 million compared to second quarter 2022 largely driven by lower revenue and higher provision for credit losses, partially offset by lower noninterest expense. The decline in revenue was primarily attributable

to lower fixed income and mortgage banking and title income, as well as a decline in net interest income. The decline in noninterest expense was largely driven by lower incentive-based compensation expense tied to the decline in fixed income and mortgage banking and title income.

Pre-tax income of $155 million for the six months ended June 30, 2023 decreased $105 million from the same period of 2022 largely reflecting a $100 million decrease in noninterest income tied to lower fixed income and mortgage banking and title income.

Corporate

Pre-tax loss for the Corporate segment was $10 million for second quarter 2023 compared to $77 million for first quarter 2023, reflecting a $233 million increase in noninterest income offset by an $87 million decrease in net interest income and an $81 million increase in noninterest expense. The increase in noninterest income was largely driven by the $225 million gain on the TD merger termination. The decline in net interest income was attributable to the impact of funds transfer pricing. The increase in noninterest expense was largely attributable to a $50 million contribution to the First Horizon Foundation, higher personnel expense, and $15 million in derivative valuation adjustments from prior Visa Class-B share sales. Merger and integration expenses were $30 million compared to $21 million in the prior quarter.

Pre-tax loss in the Corporate segment improved $134 million compared to second quarter 2022. Noninterest income increased $253 million, largely from the gain on the TD merger termination. Net interest income decreased $47 million from the impact of funds transfer pricing. Noninterest expense increased $71 million compared to the second quarter 2022, largely reflecting a $50 million contribution to the First Horizon Foundation and higher personnel expense. Merger and integration expenses were $30 million compared to $38 million in second quarter 2022.

Pre-tax loss of $86 million for the six months ended June 30, 2023 improved $189 million compared to the same period of 2022 largely driven by the $225 million gain on the TD merger agreement termination offset by the $50 million contribution to the First Horizon Foundation. Results also reflect a $24 million decrease in merger and integration related expense.

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Analysis of Financial Condition

Total period-end assets were $85.1 billion as of June 30, 2023 compared to $79.0 billion at December 31, 2022. The increase in total assets during 2023 was largely driven by a $3.1 billion increase in interest-bearing deposits with banks, driven by higher FHLB borrowings and deposit growth, and a $3.2 billion increase in loans and leases.

Earning assets consist of loans and leases, loans held for sale, investment securities, and other earning assets, such as trading securities and interest-bearing deposits with banks. A detailed discussion of the major components of earning assets is provided in the following sections.

Loans and Leases

Period-end loans and leases of $61.3 billion as of June 30, 2023 increased $3.2 billion, or 5%, compared to December 31, 2022. Year-to-date loan growth included a $2.0 billion increase in commercial loans and leases primarily from C&I loan growth and a $1.2 billion increase

in consumer loans primarily from consumer real estate loan growth.

The following table provides detail regarding FHN's loans and leases as of June 30, 2023 and December 31, 2022.

Table I.2.8

LOANS & LEASES

(Dollars in millions)

(a) Includes equipment financing loans and leases.

Loans Held for Sale

In 2020, FHN obtained IBKC's mortgage banking operations which includes origination and servicing of residential first lien mortgages that conform to standards established by GSEs that are major investors in U.S. home mortgages but can also consist of junior lien and jumbo loans secured by residential property. These loans are primarily sold to private companies that are unaffiliated with the GSEs on a servicing-released basis. For further detail, see Note 5 - Mortgage Banking Activity.

The legacy FHN loans HFS portfolio consists of small business, other consumer loans, mortgage warehouse, USDA and home equity loans.

On June 30, 2023 and December 31, 2022, loans HFS were $789 million and $590 million, respectively. Held-for-sale consumer mortgage loans secured by residential real estate in process of foreclosure totaled $1 million and $3 million at June 30, 2023 and December 31, 2022, respectively.

Asset Quality

Loan and Lease 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 and leases are composed of C&I loans and leases and CRE loans. Consumer loans are composed of consumer real estate loans and credit card and other

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loans. FHN has a concentration of residential real estate loans (22% and 21% of total loans at June 30, 2023 and December 31, 2022, respectively). Industry concentrations are discussed under the C&I heading below.

Credit underwriting guidelines are outlined in Item 7 of FHN’s Annual Report on Form 10-K for the year ended December 31, 2022 in the Asset Quality Section within the

Analysis of Financial Condition discussion. FHN’s credit underwriting guidelines and loan product offerings as of June 30, 2023 are generally consistent with those reported and disclosed in FHN’s Form 10-K for the year ended December 31, 2022.

Commercial Loan and Lease Portfolios

C&I

C&I loans are the largest component of the loan portfolio, comprising 54% and 55% of total loans as of June 30, 2023 and December 31, 2022, respectively. The C&I portfolio increased $1.3 billion to $33.1 billion as of June 30, 2023 compared to December 31, 2022 and is comprised of loans and leases used for general business purposes. Products offered in the C&I portfolio include term loan financing of owner-occupied real estate and fixed assets, direct financing and sales-type leases, working capital lines of credit, and trade credit enhancement through letters of credit.

The increase in C&I loans from December 31, 2022 was largely driven by growth in loans to mortgage companies

and real estate rental & leasing. The largest geographical concentrations of balances in the C&I portfolio as of June 30, 2023 were in Tennessee (21%), Florida (13%), Texas (11%), North Carolina (7%), Louisiana (7%), Georgia (5%), and California (5%). No other state represented more than 5% of the portfolio.

The following table provides the composition of the C&I portfolio by industry as of June 30, 2023, and December 31, 2022. For purposes of this disclosure, industries are determined based on the North American Industry Classification System (NAICS) industry codes used by Federal statistical agencies in classifying business establishments for the collection, analysis, and publication of statistical data related to the U.S. business economy.

Table I.2.9

C&I PORTFOLIO BY INDUSTRY

(Dollars in millions)

(a) Leasing, rental of real estate, equipment, and goods.

(b) Industries in this category each comprise less than 5% as of June 30, 2023.

Industry Concentrations

Loan concentrations exist when there are loans to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Loans to mortgage companies and borrowers in the finance and insurance industry were 20% of FHN’s C&I loan portfolio as of both June 30, 2023 and December 31, 2022, and as a result could be affected by

items that uniquely impact the financial services industry. Loans to borrowers in the real estate rental and leasing industry were 11% and 10% of FHN's C&I portfolio as of June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, FHN did not have any other concentrations of C&I loans in any single industry of 10% or more of total loans.

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Loans to Mortgage Companies

Loans to mortgage companies were 8% of the C&I portfolio as of June 30, 2023 and 7% as of December 31, 2022. This portfolio 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 and generally fluctuates with mortgage rates and seasonal factors. Generally, new loan originations to mortgage lenders increase when there is a decline in mortgage rates and decrease when rates rise; in 2023, rates rose. In periods of economic uncertainty, this trend may not occur even if interest rates are declining. In second quarter 2023, 89% of the loan originations were home purchases and 11% were refinance transactions.

Finance and Insurance

The finance and insurance component represented 12% of the C&I portfolio as of June 30, 2023 and 13% as of December 31, 2022, and includes TRUPs (i.e., long-term unsecured loans to bank and insurance-related businesses), loans to bank holding companies, and asset-based lending to consumer finance companies. As of June 30, 2023, asset-based lending to consumer finance companies represented approximately $2.0 billion of the finance and insurance component.

Paycheck Protection Program

In 2020, Congress created the Paycheck Protection Program (PPP) in response to the economic disruption associated with the COVID-19 pandemic. Under the PPP, qualifying businesses could receive loans from private lenders, such as FHN, that are fully guaranteed by the Small Business Administration. These loans potentially are partly or fully forgivable, depending upon the borrower’s

use of the funds and maintenance of employment levels. To the extent forgiven, the borrower is relieved from payment while the lender is still paid from the program.

As of June 30, 2023 and December 31, 2022, the C&I portfolio included PPP loans of $44 million and $76 million, respectively, which are fully government guaranteed with the SBA. Due to the government guarantee and forgiveness provisions, PPP loans are considered to have no credit risk and do not affect the amount of provision and ALLL recorded. As a result, no ALLL is recorded for PPP loans as of June 30, 2023, and FHN has assigned a risk weight of zero to PPP loans for regulatory capital purposes.

FHN continues to work with its clients that have applied for and received PPP loan forgiveness.

Commercial Real Estate

The CRE portfolio totaled $13.9 billion as of June 30, 2023 and $13.2 billion as of December 31, 2022. The CRE portfolio reflects financings for both commercial construction and nonconstruction loans. The largest geographical concentrations of CRE loan balances as of June 30, 2023 were in Florida (25%), Texas (13%), North Carolina (11%), Georgia (11%), Tennessee (9%), Louisiana (9%), and Alabama (5%). No other state represented more than 5% of the portfolio. This portfolio 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. Subcategories of the CRE portfolio consist of multi-family (29%), office (21%), retail (17%), industrial (17%), hospitality (10%), land/land development (2%), and other (4%).

Consumer Loan Portfolios

Consumer Real Estate

The consumer real estate portfolio totaled $13.5 billion and $12.3 billion as of June 30, 2023 and December 31, 2022, respectively, and is primarily composed of home equity lines and installment loans. The largest geographical concentrations of balances as of June 30, 2023 were in Florida (29%), Tennessee (22%), Texas (10%), Louisiana (8%), North Carolina (7%), New York (5%) and Georgia (5%). No other state represented more than 5% of the portfolio.

As of June 30, 2023, approximately 89% of the consumer real estate portfolio was in a first lien position. At origination, the weighted average FICO score of this portfolio was 758 and the refreshed FICO scores averaged 756 as of June 30, 2023, no significant change from FICO scores of 757 and 754, respectively, as of December 31, 2022. Generally, performance of this portfolio is affected by life events that affect borrowers’ finances, the level of unemployment, and home prices.

As of June 30, 2023 and December 31, 2022, FHN had held-for-investment consumer mortgage loans secured by real estate that were in the process of foreclosure totaling $22 million and $42 million, respectively.

HELOCs comprised $2.2 billion and $2.0 billion of the consumer real estate portfolio as of June 30, 2023 and December 31, 2022, respectively. 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 frozen if a borrower becomes past due on payments. Once the draw period has ended, 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.

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As of June 30, 2023, approximately 93% of FHN's HELOCs were in the draw period compared to 92% at December 31, 2022. It is expected that $543 million, or 26%, of HELOCs currently in the draw period will enter the repayment period during the next 60 months, based on current terms. Generally, delinquencies 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, over time, performance of these loans usually begins to stabilize. HELOCs nearing the end of the draw period are closely monitored.

The following table presents HELOCs currently in the draw period, broken down by months remaining in the draw period.

Table I.2.10

HELOC DRAW TO REPAYMENT SCHEDULE

(Dollars in millions)

Credit Card and Other

The credit card and other portfolio, which is primarily within the Regional Banking segment, totaled $813 million as of June 30, 2023 and $840 million as of December 31, 2022. This portfolio primarily consists of consumer-related

credits, including home equity and other personal consumer loans, credit card receivables, and automobile loans. The $27 million decrease was driven by net repayments in credit cards and other installment loans, partially offset by an increase in consumer construction loans.

Allowance for Credit Losses

The ACL is maintained at a level sufficient to provide appropriate reserves to absorb estimated future credit losses in accordance with GAAP. For additional information regarding the ACL, see Note 4 of this Report and "Critical Accounting Policies and Estimates" and Note 4 in FHN's 2022 Form 10-K.

The ALLL increased to $737 million as of June 30, 2023 from $685 million as of December 31, 2022. The increase

in the ALLL balance as of June 30, 2023 reflects the impact of loan growth and an uncertain macroeconomic forecast. The ALLL to total loans and leases ratio increased 2 basis points to 1.20%. The ACL to total loans and leases ratio increased to 1.35% as of June 30, 2023 from 1.33% as of December 31, 2022.

Consolidated Net Charge-offs

Net charge-offs in second quarter 2023 were $23 million, or an annualized 16 basis points of total loans and leases, compared to net charge-offs of $12 million, or 9 basis points of total loans and leases, in second quarter 2022. The $11 million increase in net charge-offs was driven by a $12 million increase in the commercial loan portfolio offset by a $1 million decrease in the consumer loan portfolio.

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Table I.2.11

ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES AND CHARGE-OFFS

(Dollars in millions)

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NM - not meaningful

Nonperforming Assets

Nonperforming loans are loans placed on nonaccrual if it becomes evident that full collection of principal and interest is at risk, if 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 for which FHN continues to receive payments, including residential real estate loans where the borrower has been discharged of personal obligation through bankruptcy. NPAs consist of nonperforming loans and

OREO (excluding OREO from government insured mortgages).

Total NPAs (including NPLs HFS) increased to $410 million as of June 30, 2023 from $327 million as of December 31, 2022, largely driven by commercial loans. The nonperforming loans and leases ratio increased 12 basis points to 0.66% as of June 30, 2023.

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Table I.2.12

NONACCRUAL/NONPERFORMING LOANS, FORECLOSED ASSETS, & OTHER DISCLOSURES

(Dollars in millions)

(a) Excludes loans and leases that are 90 or more days past due and still accruing interest.

(b) Balances do not include government-insured foreclosed real estate. Foreclosed real estate from GNMA loans totaled less than $1 million as of both June 30, 2023 and December 31, 2022.

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The following table provides nonperforming assets by business segment:

Table I.2.13

NONPERFORMING ASSETS BY SEGMENT

(Dollars in millions)

(a) Excludes loans and leases that are 90 or more days past due and still accruing interest.

(b) Excludes loans classified as held for sale.

(c) Excludes foreclosed real estate and receivables related to government insured mortgages of less than $1 million for both June 30, 2023 and December 31, 2022.

(d) Ratio is non-performing assets to total loans and leases plus foreclosed real estate.

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 90 days or more past due and still accruing were $14 million as of June 30, 2023 compared to $33 million as of December 31, 2022. Loans 30 to 89 days past due were

$86 million as of June 30, 2023 compared to $105 as of December 31, 2022. C&I loans past due 30 to 89 days decreased $21 million and past due CRE loans decreased $5 million while past due consumer real estate loans increased $8 million.

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Table I.2.14

ACCRUING DELINQUENCIES & OTHER CREDIT DISCLOSURES

(Dollars in millions)

(a) Excludes loans classified as held for sale.

(b) Amounts are not included in nonperforming/nonaccrual loans.

(c) Amounts are also included in accruing loans and leases 30+ days past due.

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

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 $623 million on June 30, 2023 and $492 million on December 31, 2022. 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 and lease losses.

Modifications to Borrowers Experiencing Financial Difficulty

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. 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. See

Note 1 - Basis of Presentation and Accounting Policies, Note 3 - Loans and Leases and Note 4 - Allowance for Credit Losses for further discussion regarding troubled loan modifications.

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Commercial Loan Modifications

As part of FHN’s credit risk management governance processes, the Loan Rehab and Recovery Department (LRRD) is responsible for managing most commercial relationships with borrowers whose financial condition has deteriorated to such an extent that the credits are individually reviewed for expected credit losses, classified as substandard or worse, placed on nonaccrual status, foreclosed or in process of foreclosure, or in active or contemplated litigation. LRRD has the authority and responsibility to enter into workout and/or rehabilitation agreements with troubled commercial borrowers in order to mitigate and/or minimize the amount of credit losses recognized from these problem assets. While every circumstance is different, LRRD will generally use forbearance agreements (generally 6-12 months) as an element of commercial loan workouts, which might include reduced interest rates, reduced payments, release of guarantor, term extensions or entering into short sale agreements. Principal forgiveness may be granted in specific workout circumstances.

The individual expected credit loss assessments completed on commercial loans are used in evaluating the appropriateness of qualitative adjustments to quantitatively modeled loss expectations for loans that are not considered collateral dependent. If a loan is collateral dependent, the carrying amount of a loan is written down to the net realizable value of the collateral. Each assessment considers any modified terms and is comprehensive to ensure appropriate assessment of expected credit losses.

Consumer Loan Modifications

FHN does not currently participate in any of the loan modification programs sponsored by the U.S. government but does generally structure modified consumer loans

using the parameters of the former Home Affordable Modification Program.

Within the HELOC and real estate installment loans classes of the consumer portfolio segment, troubled loans are typically modified by reducing the interest rate (in increments of 25 basis points to a minimum of 1% for up to 5 years) and a possible maturity date extension to reach an affordable housing debt-to-income ratio. After 5 years, the interest rate generally returns to the original interest rate prior to modification; for certain modifications, the modified interest rate increases 2% per year until the original interest rate prior to modification is achieved. Permanent mortgage troubled loans are typically modified by reducing the interest rate (in increments of 25 basis points to a minimum of 2% for up to 5 years) and a possible maturity date extension to reach an affordable housing debt-to-income ratio. After 5 years, the interest rate steps up 1 percent every year until it reaches the Federal Home Loan Mortgage Corporation Weekly Survey Rate cap. Contractual maturities may be extended to 40 years on permanent mortgages and to 30 years for consumer real estate loans. Within the credit card class of the consumer portfolio segment, troubled loans are typically modified through either a short-term credit card hardship program or a longer-term credit card workout program. In the credit card hardship program, borrowers may be granted rate and payment reductions for 6 months to 1 year. In the credit card workout program, clients are granted a rate reduction to 0% and term extensions for up to 5 years to pay off the remaining balance. Consumer loans may also be modified through court-imposed principal reductions in bankruptcy proceedings, which FHN is required to honor unless a borrower reaffirms the related debt.

Investment Securities

FHN’s investment securities portfolio consists principally of debt securities available for sale. FHN maintains a highly-rated securities portfolio consisting primarily of government agency issued mortgage-backed securities and collateralized mortgage obligations. The securities portfolio provides a source of income and liquidity and is an important tool used to balance the interest rate risk of the loan and deposit portfolios. The securities portfolio is periodically evaluated in light of established ALM objectives, changing market conditions that could affect

the profitability of the portfolio, the regulatory environment, and the level of interest rate risk to which FHN is exposed. These evaluations may result in steps taken to adjust the overall balance sheet positioning.

Investment securities were $9.9 billion and $10.2 billion on June 30, 2023 and December 31, 2022, representing 12% and 13% of total assets, respectively. See Note 2 - Investment Securities for more information about the securities portfolio.

Deposits

Total deposits of $65.4 billion as of June 30, 2023 increased $1.9 billion from December 31, 2022 as a result of a $6.6 billion increase in interest-bearing deposits partially offset by a $4.7 billion decrease in noninterest-bearing deposits. Deposit growth in the first half of 2023 reflects continued positive momentum from FHN's first

post-pandemic new-to-bank deposit marketing campaign which was launched in February, as well as increased marketing investments to deepen relationships among existing customers.

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FHN continues to maintain a well-diversified and stable funding mix across its footprint:

• At June 30, 2023, commercial deposits were $32.5 billion, or 49% of total deposits, consumer deposits were $29.2 billion, or 45% of total deposits, and brokered deposits were $3.7 billion, or 6% of total deposits.
• At June 30, 2023, 37% of deposits were associated with Tennessee, 19% with Florida, 12% with Louisiana, and 12% with North Carolina, with no other state above 10%.
• Total estimated uninsured deposits were $25.5 billion and $30.3 billion as of June 30, 2023 and

December 31, 2022, representing 39% and 48% of total deposits, respectively.

• Of the uninsured deposits at June 30, 2023, $4.5 billion, or 7% of total deposits, were collateralized.

See Table I.2.2 and I.2.3 - Average Balances, Net Interest Income and Yields/Rates in this Report for information on average deposits including average rates paid.

The following table summarizes the major components of deposits as of June 30, 2023 and December 31, 2022.

Table I.2.15

DEPOSITS

(Dollars in millions)

Short-Term Borrowings

Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, trading liabilities, and other short-term borrowings. Total short-term borrowings increased to $7.1 billion as of June 30, 2023 compared to $2.8 billion as of December 31, 2022, largely from an increase in FHLB borrowings.

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 fluctuate based on various factors, including levels of trading securities and hedging strategies. Federal funds purchased fluctuates depending on the amount of excess funding of FHN’s correspondent bank customers. Balances of securities sold under agreements to repurchase fluctuate based on cost attractiveness relative to FHLB borrowing levels and the ability to pledge securities toward such transactions.

Term Borrowings

Term borrowings include senior and subordinated borrowings with original maturities greater than one year. Total term borrowings were $1.2 billion as of June 30, 2023 compared to $1.6 billion at December 31, 2022. The decrease in term borrowings was attributable to the retirement of $450 million in senior notes on May 26, 2023.

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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. Total equity was $9.0 billion at June 30, 2023 and $8.5 billion at December 31, 2022. Significant changes included net income of $585 million offset by $180 million in common and preferred dividends.

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

Table I.2.16

REGULATORY CAPITAL DATA

(Dollars in millions)

Table I.2.17

REGULATORY RATIOS & AMOUNTS

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(a) The modified CECL transitional amount includes the impact to retained earnings from the initial adoption of CECL plus 25% of the change in the adjusted allowance for credit losses since FHN’s initial adoption of CECL through December 31, 2021. For June 30, 2023 and December 31, 2022, 50% and 25%, respectively, of the full amount is phased out and not included in Common Equity Tier 1 capital.

(b) The $94 million carrying value of the Series D preferred stock does not qualify as Tier 1 capital because the earliest redemption date is less than five years from the issuance date, which was re-set to July 1, 2020 when the IBKC merger closed.

(c) Tangible common equity to tangible assets and adjusted tangible common equity to risk-weighted assets are non-GAAP measures and are reconciled to total equity to total assets (GAAP) in the Non-GAAP to GAAP Reconciliation - Table I.2.25.

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 6.50%, 8.00%, 10.00%, and 5.00%, respectively. Furthermore, a capital conservation buffer of 50 basis points above these levels 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 of June 30, 2023, each of FHN and First Horizon Bank had sufficient capital to qualify as well-capitalized institutions and to meet the capital conservation buffer requirement. Capital ratios for both FHN and First Horizon Bank are calculated under the final rule issued by the banking regulators in 2020 to delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period.

FHN and First Horizon Bank's risk-based regulatory capital ratios increased in second quarter 2023 relative to year-end 2022 primarily from the impact of net income less dividends during the first six months of 2023. The increase in the Common Equity Tier 1 ratio for FHN was largely driven by the conversion of the Series G Preferred Stock to common stock.

During 2023, capital ratios are expected to remain above well-capitalized standards plus the required capital conservation buffer.

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. FHN's Board has authorized two common stock purchase programs, described below. FHN’s Board has not authorized a preferred stock purchase program.

General Purchase Program

On January 27, 2021, FHN announced that its Board of Directors approved a new $500 million common share purchase program that was to expire on January 31, 2023. On October 26, 2021, FHN announced that the 2021 program had been increased by $500 million and extended to October 31, 2023.

The 2021 program is not tied to any compensation plan. Purchases may be made in the open market or through privately negotiated transactions, including under Rule

10b5-1 plans as well as accelerated share repurchase and other structured transactions. The timing and exact amount of common share repurchases are subject to various factors, including FHN's capital position, financial performance, expected capital impacts of strategic initiatives, market conditions, business conditions, and regulatory considerations. FHN does not purchase shares under this program during blackout periods when senior executives are prohibited from purchasing FHN stock on the open market.

As of June 30, 2023, $401 million in purchases had been made life-to-date under the 2021 program at an average price per share of $16.60, or $16.58 excluding commissions. The pendency of the TD Transaction resulted in no purchases under the 2021 program since the Transaction was announced in 2022. With the Transaction terminated, FHN expects to utilize the program in a more normal fashion.

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Table I.2.18

COMMON STOCK PURCHASES—GENERAL PROGRAM

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

(a) Represents total costs including commissions paid.

Compensation Plans Purchase Program

A consolidated compensation plan share purchase program was announced on August 6, 2004. This program consolidated into a single share purchase program all of the previously authorized compensation plan share programs as well as the renewal of the authorization to purchase shares for use in connection with compensation plans for which the share purchase authority had expired. The primary objectives of this program are to mitigate dilution resulting from shares issued in connection with FHN's various stock-based compensation plans, and to implement automatic stock purchases related to tax withholding obligations associated with stock-based awards. For many years, the program has been used entirely for the second objective.

The total amount authorized under this consolidated compensation plan share purchase program is 29.6 million shares calculated before adjusting for stock dividends distributed through January 1, 2011. The authorization has been reduced for that portion which relates to compensation plans for which no stock option awards

remain outstanding. The shares may be purchased over the option exercise periods of the various compensation plans on or before December 31, 2023. Purchases may be made in the open market or through privately negotiated transactions and are subject to various factors including FHN's capital position, financial performance, capital impacts of strategic initiatives, market conditions and regulatory considerations. Shares that are withheld from vested or paid awards for withholding tax purposes are withheld automatically at the applicable time, without regard to whether a trading blackout is in place. If FHN were to resume general program use, such purchases would not occur during blackout periods.

As of June 30, 2023, the maximum number of shares that may be purchased under the program was 21.8 million shares. Management currently does not anticipate purchasing a material number of shares under this authority during 2023.

Table I.2.19

COMMON STOCK PURCHASES—COMPENSATION PLANS PROGRAM

(Volume in thousands, except per share data)

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Risk Management

There have been no significant changes to FHN’s risk management practices as described under “Risk Management” included in Item 7 of FHN’s 2022 Annual Report on Form 10-K.

Market Risk Management

Value-at-Risk 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% confidence level with 1-day and 10-day time horizons. Additionally, FHN computes a

Stressed VaR 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.

A summary of FHN’s VaR and SVaR measures for 1-day and 10-day time horizons is presented in the following table:

Table I.2.20

VaR & SVaR MEASURES

(Dollars in millions)

(Dollars in millions)

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FHN’s overall VaR measure includes both interest rate risk and credit spread risk. Separate measures of these component risks are as follows:

Table I.2.21

SCHEDULE OF RISKS INCLUDED IN VaR

(Dollars in millions)

The potential risk of loss reflected by FHN’s VaR measures assumes the trading securities inventory is static. Because FHN Financial procures fixed income securities for purposes of distribution to clients, its trading securities inventory turns over regularly. Additionally, FHNF traders actively manage the trading securities inventory continuously throughout each trading day. Accordingly, FHNF’s trading securities inventory is highly dynamic, rather than static. As a result, it would be rare for FHNF to incur a negative revenue day in its fixed income activities at the levels indicated by its VaR measures.

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 the Market 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 the Treasury yield curve is assumed to increase 15 basis points and the 10-year point on the Treasury 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 the Treasury yield curve is assumed to decrease 15 basis points and the 10-year point on the Treasury 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 on Treasury securities and non-Treasury securities) of 25 basis points.

Model Validation

Trading risk management personnel within FHN Financial 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 by FHN’s Model Validation Group, an independent assurance group charged with oversight responsibility for FHN’s model risk management.

Interest Rate Risk Management

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 Report.

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

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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 of June 30, 2023, NII exposures over the next 12 months assuming rate shocks of plus/minus 25 basis points, plus/minus 50 basis points, plus/minus 100 basis points, and plus 200 basis points are estimated to have variances as shown in the table below.

Table I.2.22

INTEREST RATE SENSITIVITY

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 0.4%. 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 0.5%. 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.

Short-term interest rates have reached their highest levels in 15 years, which coupled with market disruption from recent high profile bank failures, has increased competitive pressures on deposit costs.

The yield curve was inverted for much of the last half of 2022, which has continued into 2023. The inverted yield curve indicates market expectations that short-term rates are likely to peak and then decline in future periods. Market participants are divided in their opinions regarding the timing and magnitude of further short-term rate increases or subsequent rate cuts. FHN continues to monitor current economic trends and potential exposures closely. For additional information, see "Yield Curve" within "Market Uncertainties and Prospective Trends" below.

Liquidity Risk Management

Among other things, ALCO is responsible for 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 of which the objective 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, 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 ($10.9 billion was available as of June 30, 2023), brokered deposits, loan sales, syndications, and access to the Federal Reserve Bank.

Generally, a primary source of funding for a bank is core deposits from the bank's client base. The ratio of average loans, excluding loans HFS and restricted real estate loans, to average core deposits was 99% for June 30, 2023 and 82% for December 31, 2022.

FHN may also use unsecured short-term borrowings as a source of liquidity. Federal funds purchased from correspondent bank clients 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 consists of securities sold under agreements to repurchase transactions accounted for as secured borrowings with business clients or broker dealer counterparties.

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Both FHN and First Horizon Bank have the ability to generate liquidity by issuing senior or subordinated unsecured debt, preferred equity, and common equity, subject to market conditions and compliance with applicable regulatory requirements. As of June 30, 2023, FHN had outstanding $873 million in senior and subordinated unsecured debt and $520 million in non-cumulative perpetual preferred stock. As of June 30, 2023, First Horizon Bank and subsidiaries had outstanding preferred shares of $295 million, which are reflected as noncontrolling interest on the Consolidated Balance Sheets.

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. Applying the dividend restrictions imposed under applicable federal and state rules as outlined above, the Bank’s total amount available for dividends was $1.1 billion as of July 1, 2023.

In March 2022, FHN agreed to suspend the Dividend Reinvestment Plan in connection with the TD Transaction. During the suspension period, dividend payments of FHN are not automatically reinvested in additional shares of FHN common stock and participants in the Plan are not able to purchase shares of FHN common stock through optional cash investments under the Plan.

First Horizon Bank declared and paid common dividends to the parent company in the amount of $110 million in both first and second quarter 2023 and $435 million in 2022. First Horizon Bank declared and paid preferred dividends in first and second quarter 2023 and in each quarter of 2022. Additionally, First Horizon Bank declared preferred dividends in third quarter 2023, payable in October 2023.

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 (including capital conservation buffer requirements) and availability of funds to FHN through a dividend from First 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 $0.15 per common share on July 3, 2023. FHN paid cash dividends of $1,625 per Series E preferred share and $1,175 per Series F preferred share on July 10, 2023 and $331.25 per Series B preferred share and $165 per Series C preferred share on August 1, 2023. In addition, in July 2023, the Board approved cash dividends per share in the following amounts:

Table I.2.23

CASH DIVIDENDS

APPROVED BUT NOT PAID

Off-Balance Sheet Arrangements

In the normal course of business, FHN is a party to a number of activities that contain credit, market and operational risk that are not reflected in whole or in part in the consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments. FHN enters into commitments to extend credit to borrowers, including loan commitments, lines of credit, standby letters of credit, and commercial letters of credit. Many of the commitments are expected to expire unused or be only partially used; therefore, the total amount of commitments does not necessarily represent future cash requirements. Based on its available liquidity and available borrowing capacity, FHN anticipates it will continue to have sufficient funds to meet its current commitments.

Repurchase Obligations

Prior to September 2008, legacy First Horizon originated loans through its pre-2009 mortgage business, primarily first lien home loans, with the intention of selling them. 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.

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.

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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

As discussed in Note 10 - Contingencies and Other Disclosures, FHN’s repurchase and foreclosure liability, primarily related to its pre-2009 mortgage origination, sale, securitization, and servicing businesses, is comprised of accruals to cover estimated loss content in the active pipeline, estimated future inflows, and estimated loss content related to certain known claims not currently included in the active pipeline. The active pipeline consists of mortgage loan repurchase and make-whole demands from loan purchasers or securitization participants, foreclosure/servicing demands from borrowers, and certain related exposures. 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 cancellation 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 was $16 million as of both June 30, 2023 and December 31, 2022.

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 the U.S. and global economy and outlook, government actions affecting interest rates, and government actions and proposals which could have positive or negative impacts on the economy at large or on certain businesses, industries, or sectors.

Additional risks relate to political uncertainty, changes in federal policies (including those publicly discussed, formally proposed, or recently implemented) and the potential impacts of those changes on our businesses and clients, and whether FHN’s strategic initiatives will succeed.

Inflation, Recession, and Federal Reserve Policy

Economic Overview

The year 2022 and first half of 2023 were marked by: strong inflation which began in 2021, and which has been abating slowly in 2023; the Federal Reserve implementing a "tightening" policy in 2022 to contain inflation by rapidly increasing short-term interest rates and ending asset purchases; low unemployment rates despite moderate economic growth; and a profoundly inverted yield curve. Key aspects were:

• Although the U.S. economy flirted with recession in 2022, it did not officially enter one. In 2023 recession risk remains high but growth has remained positive.
• Although recessionary expectations were and remain high, consumption and employment have been robust.
• The rise in short-term interest rates by the Federal Reserve was both rapid and substantial, taking the overnight Fed Funds rate from 0.20% in March 2022 to 4.65% a year later. Hikes since first quarter 2023 have been much more modest and gradual.
• In response to 2022's extremely rapid and vigorous tightening of monetary policy, the inflation rate in the U.S. has fallen but remains high in relation to the decade preceding the COVID-19 pandemic, and in relation to the Federal Reserve's stated long-term goal of 2%.
• Monetary tightening often creates yield curve inversion for a time. In the current cycle, traditional inversion (when ten-year treasury rates are below two-year rates) has been both very deep and unusually sustained, with the current inversion having begun in the summer of 2022.

Key events and circumstances are noted in the following discussions.

Federal Reserve and Rates

The Federal Reserve raised short-term rates several times in 2022, and four times in 2023. All but one of the raises in 2022 were 75 and 50 basis points each—aggressive by historical standards—while the 2023 raises were the

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more-typical 25 basis points each. The Federal Reserve has expressed its intent to bring inflation under control even at the risk of creating or deepening an economic recession. Recently the Federal Reserve has indicated that future decisions to raise rates further, or to hold them steady, cannot be forecast. FHN expects future decisions will be heavily impacted by economic data, especially inflation-rate and -trend data, available at each decision point.

FHN cannot predict exactly when or how much short-term rates will be further raised, when raises will halt entirely (a so-called "pause"), how market-driven long-term rates will behave, nor how those actions may affect financial markets, during the rest of 2023.

Yield Curve

During the past six quarters, the yield curve flattened and inverted many times. Unusual yield curve effects, including inversion, are common when monetary policy changes, and those effects are likely to continue. A traditional measure of inversion occurs when the two-year U.S. Treasury rate is higher than the ten-year rate. Traditional inversion has been sustained for the last half of 2022 and all of 2023 to date, an unusually long period. The degree of inversion has varied, but generally has been much deeper than is typically the case. Sustained traditional yield curve inversion is viewed, with statistical support, as a harbinger of economic recession.

The most recent period with deeper and longer-lasting inversion was over 40 years ago. That 4-5 year period was marked by stagflation (low economic growth coupled with high inflation), followed by extremely robust interest rate hikes and a strong recession.

Yield curve flattening and inversion generally reduces the profit FHN can make from lending by compressing FHN's net interest margin, and also generally reduces FHN's revenues from bond trading. Refer to Interest Rate & Yield Curve Risks, located in Item 1A. Risk Factors of FHN's Annual Report on Form 10-K for the year ended December 31, 2022, for a discussion of the risks to FHN associated with flattening and inversion. In 2022 FHN's net interest margin expanded somewhat as loan rates rose faster than funding costs, but that unusual result ended in 2023.

Recession

The U.S. economy contracted (experienced negative growth) during the first two quarters of 2022, in both cases modestly. Although two consecutive quarters of contraction often coincides with recession, in 2022 it did not. The economy expanded in each of the most recent four quarters. The rate of expansion fell during the first three of those quarters, but the most recent quarter reversed that trend.

Recession expectations in the U.S. were high in 2022 and first quarter 2023. They moderated in second quarter, despite consecutive quarters of falling growth rates. With

the announcement in late July that second quarter 2023 economic growth unexpectedly was stronger than first quarter, recession expectations may continue to moderate in third quarter. Stronger economic performance in second quarter may make further rate hikes more likely, however, which tend to heighten recession expectations.

Banking Crisis

In March 2023, two large regional U.S. banks failed after sudden large deposit outflows, and a major Swiss bank was acquired by another bank at the behest of regulators.

The two U.S. failures appear to have been caused in significant part by risky funds management practices exacerbated by a highly unusual deposit mix and 2022's sharp rise in rates. In the aftermath of these two failures, bank investors and clients across the U.S. became more focused on deposit mix, funding risk management, and other safety-soundness concerns. The market values of virtually all U.S. bank stocks fell quickly and strongly in March, with a few falling about 90%.

The media published stories about actual and possible bank runs by depositors. Most U.S. banks saw net outflows of deposits in 2022 and early 2023 as the impacts of COVID-19 crisis programs faded and rates available from non-bank-account investments improved. According to Federal Reserve data, starting in mid-March, the two failures triggered an abrupt net deposit outflow from all but the largest U.S. banks. Specifically, during the week of March 15, the 25 largest U.S. banks as a group saw net deposit inflows exceeding $100 billion, while all other (smaller) U.S. banks as a group saw net outflows of nearly $200 billion. The next week large and small U.S. banks experienced net outflows of roughly $100 and $50 billion, respectively. The March crisis shock was short-lived, however. During the final week of March both large and small U.S. banks collectively experienced net inflows of deposits, roughly mirroring the first week of March, before the crisis emerged. Since March, deposits at smaller banks have continued to rise slowly while the largest banks have reverted to pre-March trends, with slow net outflows.

The two U.S. bank failures resulted in Congressional calls for higher regulation of mid-sized regional banks, especially for those with $100 billion or more of assets. FHN cannot predict what, if any, legislative or regulatory outcomes will result from the crisis.

In early May a third large regional U.S. bank failed after experiencing very large deposit outflows in March. Although this failure was widely anticipated, volatility in regional bank stocks reappeared in May. By June bank-stock volatility had abated again, but with regional bank prices well below pre-crisis levels.

The three failed U.S. banks had a few characteristics that FHN believes were significant negative factors contributing to loss of confidence by depositors, in

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addition to having an unusual customer mix: well-above-median levels of deposits not covered by FDIC insurance; significant portions of the 2020-21 pandemic deposit inflows invested in longer-term fixed-rate debt securities; and very high (in relation to regulatory capital) market value losses on those investments when rates rose in 2022 and early 2023. These factors made them unusually susceptible to a cascade of negative effects when deposit levels diminished, for the entire industry, starting in 2022 as customers sought better returns in the rising rate environment.

War in Europe

The Russian military invaded Ukraine in February 2022. Over a year later, that conflict continues. Much of Europe and the rest of the world, including the U.S., imposed economic sanctions on Russia. The war and sanctions resulted in global oil and gas prices rising precipitously in early 2022. Oil prices have been volatile since then but, year to date in 2023, oil prices have oscillated in the roughly same price range as during the six-month period before the war.

Market Volatility & Valuations

As a result of the prospects for recession, coupled with the uncertainties associated with the war in eastern Europe, financial markets world-wide were volatile during much of 2022. Volatility overall moderated somewhat in late 2022 and continuing into 2023, but volatile episodes have continued.

Financial asset values broadly fell last year, especially during the second and third quarters. By mid-year 2023, broad stock indices largely had recovered from 2022's low points.

Impacts on FHN

In 2022, FHN benefited significantly from rising rates as the rise in lending rates outpaced the rise in deposit and other funding rates. In the first quarter of 2023, that outpacing ended, with FHN's net interest margin compressing slightly from fourth quarter 2022. That compression worsened in second quarter as FHN's funding rates, especially for deposits, rose more than lending rates.

In 2022 and early 2023, FHN experienced a normalization of deposit levels since first quarter 2020 as it allowed higher cost surge deposits resulting from economic stimulus programs to move off its balance sheet. Net deposit outflows ranged from roughly $2.0 to $4.0 billion in each of the last three quarters of 2022, and fell again by roughly $2.5 billion in first quarter 2023. That outflow trend ended in second quarter as FHN had net deposit inflows of $4.0 billion from March 31, 2023 to June 30, 2023. To mitigate net deposit outflows, FHN increased deposit rates appreciably over the past several quarters, particularly in 2023. In contrast, during this period FHN's total loans grew modestly each quarter. These impacts

resulted from a deliberate plan to allow deposits to return to more normal levels in relation to loans. FHN started raising deposit rates to more competitive levels during first quarter 2023, launched a major deposit-growth campaign in second quarter, and expects to continue to meet competitive pressures going forward. All of these actions have increased FHN's funding costs from deposits.

Although FHN cannot predict future actions of its depositors, FHN believes it has avoided key characteristics of the three failed U.S. banks. Specifically: FHN has a traditional customer mix for a bank its size; 61% of FHN's deposits at June 30, 2023 were FDIC insured, and another 7% were collateralized; and, because FHN kept a substantial portion of the pandemic deposit inflows in overnight and other "cash" investments, the market value losses embedded in FHN's investments, if fully realized, would not diminish FHN's regulatory capital levels appreciably in relation to regulatory requirements.

As mentioned above, in 2023 the Federal Reserve has slowed the rate of increase of interest rates, and FHN currently expects rate increases to pause at some point this year or early next year, depending primarily on inflation rate data. Increased stability in interest rates eventually may bring increased stability in funding, including deposits.

In addition, some of FHN's businesses have been negatively impacted by rising rates. Rate increases have pushed home mortgage rates in the U.S. much higher than in early 2022. FHN's direct mortgage lending and lending to mortgage companies saw business decline significantly in 2022. Moreover, FHN's revenues from bond trading and related activities fell significantly in 2022 due to rising rates coupled with elevated market volatility. These impacts have continued in 2023.

A recession, if one occurs, likely would have a significant negative impact on FHN's businesses overall. Demand for loans likely would fall, loan losses and provision expense likely would rise, many commercial activities that generate fee income likely would decline, and competition for clients likely would sharpen. FHN already has experienced some of these impacts. The deeper or longer a recession lasts, the more significant these negative impacts are likely to be for FHN. However, as mentioned above, in the past few months, recessionary expectations have abated somewhat. In late July it was unexpectedly reported that the U.S. economy grew more strongly in second quarter than in first quarter, which may further blunt recessionary expectations.

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LIBOR & Reference Rate Reform

Background

The London Inter-Bank Offered Rate (“LIBOR”) was for many years the most widely used reference rate in the world. About a decade ago, evidence emerged that some members of the panel that set LIBOR may have manipulated the published LIBOR rates rather than using strictly good-faith judgments. In 2017, the Financial Conduct Authority (“FCA”) – the United Kingdom’s regulator of LIBOR – set in motion a sequence of events that would ultimately lead to the cessation of LIBOR.

The cessation of LIBOR came in successive stages:

• In 2020, the Federal Reserve, the OCC, and the FDIC jointly encouraged U.S. banks to transition away from LIBOR for new contracts as soon as practicable and, in any event, by December 31, 2021. As such, that date became the deadline by which financial institutions and other market participants were required to cease origination of new LIBOR contracts.
• Two of LIBOR’s lesser-used U.S. dollar tenors (namely, 1-week and 2-month USD LIBOR) ceased to be published after December 31, 2021.
• The remaining U.S. dollar tenors of LIBOR (e.g., overnight, 1-month, 3-month, 6-month and 12-month tenors) ceased to be published after June 30, 2023.

In March 2022, Congress passed the Adjustable Interest Rate (LIBOR) Act. The legislation addresses loans that remained on LIBOR as of the June 30, 2023 cessation date, and that either have no fallback provisions or that contain fallback provisions that do not identify a specific benchmark replacement. Per the legislation, at the final cessation of USD LIBOR, banks may cause such loans to fall back to a SOFR-based benchmark rate, with such rate to be selected by the Federal Reserve Board. The LIBOR Act also provides safe harbor from liability for banks that select the Board-selected replacement benchmark rate at the cessation of LIBOR.

In December 2022, the Federal Reserve Board issued Regulation ZZ, its final rule to implement the Adjustable Interest Rate (LIBOR) Act.

FHN’s Cessation of the Use of LIBOR for New Contracts

In the fourth quarter of 2021, FHN ceased using LIBOR for new contracts. All required systems, processes, and reporting were updated to accommodate the transition, and FHN’s associates were trained on the use of the new benchmark rates that had been introduced as replacements for LIBOR.

Within FHN’s consumer portfolio, LIBOR had been referenced principally in adjustable-rate mortgages

(ARMs). Beginning in the fourth quarter of 2021, new ARMs referenced 30-day average SOFR, rather than LIBOR.

Within FHN’s commercial portfolio, LIBOR had been widely used in floating-rate loans. Additionally, many interest rate swaps referenced LIBOR. Beginning in the fourth quarter of 2021, FHN made available multiple benchmark rate options for floating-rate commercial loans. Most commercial clients who had previously used LIBOR-indexed floating-rate loans have since selected CME Term SOFR as their benchmark rate for new and renewing commercial loans. CME Term SOFR is also now the most prevalent rate used in FHN’s interest rate derivatives contracts with its clients.

Published by CME Group, Term SOFR is a forward-looking rate, with 1-month, 3-month, 6-month and 12-month tenors, and is based on SOFR futures contracts. The Alternative Reference Rates Committee (ARRC) recommended conventions for Term SOFR rates, recommended CME Group as the administrator for Term SOFR, and subsequently recommended CME Group's Term SOFR rates. Furthermore, Regulation ZZ identifies CME Term SOFR (plus a spread adjustment, as defined in the LIBOR Act) as the Board-selected replacement rate for the purposes of loans that are repriced in accordance with the LIBOR Act upon the June 2023 final cessation of LIBOR.

FHN’s Transition of Existing Contracts Away from LIBOR

As noted above, two of LIBOR’s lesser-used U.S. dollar tenors (namely, 1-week and 2-month USD LIBOR) ceased to be published after December 31, 2021. Prior to that date, FHN renegotiated terms with clients whose loans were based on 1-week or 2-month USD LIBOR. Only a small portion of FHN's clients had such loans.

For the remainder of FHN’s LIBOR-indexed commercial loans (i.e., those with overnight, 1-month, 3-month, 6-month and 12-month tenors), and for FHN’s LIBOR-indexed interest rate swaps, FHN began amending existing LIBOR-indexed contracts starting in the fourth quarter of 2021. The objective has been to amend all contracts that reference LIBOR, by the time of such contracts’ first interest-rate reset date that references a determination date after June 30, 2023. As such, the balance of commercial loans that reference LIBOR fell from $25 billion as of December 31, 2021, to $2 billion as of June 30, 2023. Additionally, the notional amount of interest rate swaps that reference LIBOR fell from $10 billion as of December 31, 2021, to $2 billion as of June 30, 2023.

FHN will amend approximately $600 million in LIBOR-indexed commercial loans, in accordance with the terms of the March 2022 LIBOR Act and Regulation ZZ, upon the first interest rate reset date after June 30, 2023, with the benchmark rate changing to CME Term SOFR. Most of these loans will amend in the third quarter of 2023.

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An additional $1.2 billion in LIBOR-indexed commercial loans are syndicated loans on which FHN is not the agent bank. Per conversations with many of the agent banks, their intent is to similarly amend the pricing on these loans, in accordance with the terms of the LIBOR Act and Regulation ZZ, upon the first interest rate reset date after June 30, 2023.

Similarly, the remaining $1 billion in LIBOR-indexed interest rate swaps will fall back to a SOFR-based rate, in accordance with the terms of the LIBOR Act and Regulation ZZ, prior to the end of 2023.

In accordance with the terms of the LIBOR Act and Regulation ZZ, the replacement benchmark rate for consumer loans will be a SOFR-based rate published by Refinitiv Limited, equal to CME Term SOFR plus a transition tenor spread adjustment. FHN’s remaining LIBOR-indexed consumer loans are residential ARMs. The borrowers have been notified that their ARMs will reference the SOFR-based Refinitiv rate upon the first interest rate reset that references a date after June 30, 2023. Because many of these existing LIBOR-indexed ARMs have a 6-month tenor, and because many of these loans have a 45-day lookback period, the last of these loans to be amended to the SOFR-based Refinitiv rate will be amended in the first quarter of 2024.

Table I.2.24

LIBOR EXPOSURES

(Dollars in billions)

(a) Amounts represent outstanding loan balances as of June 30, 2023.

(b) FHN has entered into offsetting upstream transactions with dealers to offset its market risk exposure.

In addition to the above-referenced loan and swap exposure, FHN has less than $1 billion in corporate exposures (including preferred stock, investment securities and balance sheet hedges) that will fall back to a SOFR-based rate in the coming months.

Financial Accounting Aspects

In 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. The scope of ASU 2020-04 was expanded in 2021 with ASU 2021-01, "Scope". Refer to the Accounting Changes With Extended Transition Periods section of Note 1 - Basis of Presentation and Accounting Policies for additional information.

In December 2022, the FASB issued ASU 2022-06, "Deferral of the Sunset Date of Topic 848" which extends the transition window for ASU 2020-04 from December 31, 2022 to December 31, 2024, consistent with key USD LIBOR tenors continuing to be published through June 30, 2023.

U.S. Tax Accommodation

On December 30, 2021, the IRS released final guidance 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 guidance specifies what must be met in order to qualify for the beneficial transition approach and FHN is considering this guidance in its transition plans.

Critical Accounting Policies and Estimates

FHN has made no significant changes in its critical accounting policies and estimates from those disclosed in its 2022 Annual Report on Form 10-K.

Accounting Changes

Refer to Note 1 – Basis of Presentation and Accounting Policies for a detail of accounting changes with extended transition periods, accounting changes adopted in the current year and accounting changes issued but not currently effective, which section is incorporated into MD&A by this reference.

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Non-GAAP Information

Table I.2.25

NON-GAAP TO GAAP RECONCILIATION

(Dollars in millions; shares in thousands)

(a) Included in total equity on the Consolidated Balance Sheets.

(b) Includes goodwill and other intangible assets, net of amortization.

(c) Defined by and calculated in conformity with bank regulations applicable to FHN.

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The information called for by this item is contained in

(a) Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 2 of Part I of this report, including in particular the section entitled “Risk Management” beginning on page 101 of this report and the subsections entitled “Market Risk Management” beginning on page 101 and “Interest Rate Risk Management” beginning on page 102 of this report, and

(b) Note 14 to the Consolidated Financial Statements appearing on pages 49-55 of this report, all of which materials are incorporated herein by reference. For additional information concerning market risk and our

management of it, refer to: Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in Item 7 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2022, including in particular the section entitled “Risk Management” beginning on page 86 of that Report and the subsections entitled “Market Risk Management” beginning on page 87 and “Interest Rate Risk Management” beginning on page 89 of that Report; and Note 21 to the Consolidated Financial Statements appearing on pages 176-182 of Item 8 to FHN’s Annual Report on Form 10-K for the year ended December 31, 2022.

(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and the chief financial officer have concluded that our disclosure controls and procedures

were effective as of the end of the period covered by this report.

(b) Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting during the second fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Material changes from risk factor disclosures in FHN's Annual Report on Form 10-K for the year ended December 31, 2022:

Not applicable.