FIRST HORIZON CORP

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.

Net interest income of $2.5 billion in 2023 increased $148 million, or 6%, from 2022. The increase was largely driven by higher earning asset yields and loan growth partially offset by higher funding costs.

FHN's net interest margin increased 32 basis points to 3.42% in 2023 compared to 2022 while the net interest spread decreased 41 basis points to 2.44% over the same period. The net interest margin was favorably impacted by a 203 basis point increase in earning asset yields, largely reflecting the impact of higher interest rates and lower levels of excess cash. In addition, the tax-equivalent adjustment was favorably impacted by higher rates on floating rate tax-free commercial loans. The cost of interest-bearing liabilities increased 244 basis points largely driven by higher deposit costs.

Total average earning assets decreased $2.8 billion in 2023 largely from a decrease in interest-bearing deposits with banks partially offset by an increase in loans and leases. Total average interest-bearing liabilities increased $4.3 billion driven by increases in short-term borrowings and interest-bearing deposits.

The following table presents the major components of net interest income and net interest margin:

ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)

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Table 7.2

AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS/RATES

(a) Negative yield is driven by negative market rates on reverse repurchase agreements.

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

ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)

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The following table presents the change in interest income and interest expense due to changes in both average volume and average rate.

Table 7.3

ANALYSIS OF CHANGES IN NET INTEREST INCOME

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

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

(c) Reflects taxable-equivalent adjustments, using the statutory federal income tax rate of 21%, and where applicable, state income taxes.

ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)

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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.

Provision for credit losses increased to $260 million in 2023, compared to $95 million in 2022. The increase in

provision during 2023 was reflective of loan growth, macroeconomic uncertainty, and modest grade migration. Net charge-offs were $170 million in 2023 compared to $59 million in 2022. The higher level of net charge-offs in 2023 largely reflects the impact of a $72 million idiosyncratic credit loss on a single relationship in the third quarter.

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 7.4

NONINTEREST INCOME

NM – Not meaningful

Noninterest income of $927 million increased $112 million from $815 million in 2022, largely driven by the gain on merger termination partially offset by declines in fixed income and mortgage banking and title income. Noninterest income represented 27% and 25% of total revenue for 2023 and 2022, respectively.

Fixed income declined $72 million, or 35%, for 2023 compared to 2022. Fixed income product revenue decreased $62 million, largely driven by less favorable market conditions. Revenue from other products decreased $10 million, largely driven by lower fees from loan and derivative sales in addition to lower fees from investment advisory services.

Mortgage banking and title income of $23 million decreased $45 million from $68 million in 2022 largely driven by the divestiture of the title services business in

third quarter 2022 and lower origination volume given the impact of higher long-term rates. Results in 2022 also reflected a $12 million gain on sale of mortgage servicing rights.

Deferred compensation income (included in other income) increased $35 million in 2023, reflecting fluctuations in equity market valuations relative to the prior year. This increase is largely offset in noninterest expense.

In addition, other income included a gain of $9 million on the disposition of FHN Financial Main Street Advisors assets in 2023 and a gain of $22 million from the sale of the title services business in 2022.

Noninterest income results also reflect securities losses of $4 million in 2023 compared to gains of $18 million in 2022.

ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)

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Noninterest Expense

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

Table 7.5

NONINTEREST EXPENSE

Noninterest expense of $2.1 billion increased $126 million, or 6%, from 2022, largely driven by higher deposit insurance expense and contributions.

Personnel expense of $1.1 billion declined negligibly in 2023, reflecting lower incentive-based compensation expense offset by higher deferred compensation and regular salaries and benefits expense.

In November 2023, the FDIC approved a special assessment on banks to replenish the deposit insurance fund in connection with the three large bank failures in 2023. The special assessment will be collected at an annual rate of approximately 13.4 basis points imposed on certain deposits over an anticipated total of eight quarters, starting with the first quarterly assessment period of 2024. FHN recognized the entire assessment of

$68 million as an expense in the fourth quarter of 2023 when the FDIC published its final action.

The increase in contributions in 2023 was primarily related to the $50 million contribution made to the First Horizon Foundation from the $200 million cash payment received for the TD Merger termination.

Advertising and public relations expense increased $21 million from 2022, driven by a deposit campaign in the second quarter of 2023 and brand awareness initiatives.

The $13 million decline in legal and professional fees in 2023 was largely attributable to lower merger and integration related expense.

Total merger and integration expense was $51 million for 2023 compared to $136 million for 2022.

FHN recorded income tax expense of $212 million in 2023 compared to $247 million in 2022, resulting in an effective tax rate of 18.8% and 21.3% 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-deductible 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. The reduction in the rate from 2022 was primarily related to the benefit from the settlement of uncertain tax positions related to prior merger related items which was partially offset by the additional tax expense from the surrender of bank-owned life insurance policies.

ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)

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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. FHN’s net DTA were $215 million and $313 million at December 31, 2023 and 2022, respectively.

As of December 31, 2023, FHN had deferred tax asset balances related to federal and state income tax carryforwards of $32 million and $3 million, which will expire at various dates. Refer to Note 14 - Income Taxes for additional information.

FHN’s gross DTA after valuation allowance was $737 million and $761 million as of December 31, 2023 and 2022, respectively. 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.

FHN and its eligible subsidiaries are included in a consolidated federal income tax return. FHN files separate returns for subsidiaries that are not eligible to be included in a consolidated federal income tax return. Based on the laws of the applicable states where it conducts business operations, FHN either files consolidated, combined, or separate returns. The statute of limitations for FHN’s consolidated federal income tax returns remains open for tax years 2020 through 2022. IBKC’s federal consolidated tax returns for 2016 – 2018 were audited by the IRS. The statute of limitations for those years was extended through October 2024 for purposes of an appeal which was settled in 2023. On occasion, as federal or state auditors examine the tax returns of FHN and its subsidiaries, FHN may extend the statute of limitations for a reasonable period. Otherwise, the statutes of limitations remain open only for tax years in accordance with federal and state statutes. See Note 14 - Income Taxes for additional information.

Business Segment Results

FHN's reportable segments include Regional Banking, Specialty Banking, and Corporate. See Note 19 - Business Segment Information for additional disclosures related to FHN's segments.

Regional Banking

The Regional Banking segment generated pre-tax income of $1.3 billion in 2023 compared to $1.1 billion in 2022, an increase of $185 million, largely from a $390 million increase in revenue driven by higher net interest income. The increase in revenue was partially offset by a $130 million increase in provision for credit losses and a $75 million increase in noninterest expense.

Net interest income of $2.4 billion increased $400 million reflecting the benefit of higher interest rates and average loan balances, partially offset by higher funding costs.

The increase in the provision for credit losses largely reflected loan growth, macroeconomic uncertainty, and modest grade migration.

The increase in noninterest expense was largely driven by higher personnel, deposit insurance, advertising and public relations, and technology-related expenses.

Specialty Banking

Pre-tax income of $313 million in the Specialty Banking segment decreased $96 million compared to 2022 largely reflecting a $142 million decrease in revenue tied to lower fixed income, mortgage banking and title income, and net interest income. The decrease in revenue was partially offset by a decrease in noninterest expense.

Fixed income of $133 million decreased $72 million, largely driven by less favorable market conditions.

Mortgage banking and title income of $23 million decreased $45 million largely driven by the divestiture of the title services business in third quarter 2022 and lower origination volume given the impact of higher long-term rates. Results in 2022 also reflected a $12 million gain on sale of mortgage servicing rights.

Noninterest expense of $364 million decreased $82 million largely due to lower incentive-based compensation expense tied to the decline in fixed income and mortgage banking and title income.

Corporate

Pre-tax loss for the Corporate segment was $447 million for 2023 compared to $327 million for 2022.

Noninterest income increased $225 million largely driven by the gain on merger termination. Noninterest income results also reflect an increase of $35 million in deferred compensation income, lower securities gains of $22 million, and a $22 million gain on sale of the title business in 2022.

Noninterest expense of $414 million for 2023 increased $133 million compared to 2022 largely driven by higher deposit insurance expense, a $50 million contribution to the First Horizon Foundation, and higher personnel expense. Merger and integration expense was $51 million in 2023 compared to $136 million in 2022.

ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS (MD&A)

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For a description of FHN's results of operations for 2022, see Results of Operations - 2022 compared to 2021 in Item 7 in the 2022 Form 10-K which is incorporated herein by reference.