Notes to the Consolidated Financial Statements (Unaudited)
Note 1—Basis of Presentation and Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and notes necessary for complete financial statements in accordance with GAAP. In the opinion of management, the accompanying unaudited consolidated financial statements contain all significant adjustments, consisting of normal and recurring items, considered necessary for fair presentation. These interim financial statements should be read in conjunction with FHN's audited consolidated financial statements and notes in FHN's Annual Report on Form 10-K for the year ended December 31, 2022. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.
All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts reported in prior years have been reclassified to conform to the current period presentation. See the Glossary of Acronyms and Terms included in this Report for terms used herein.
TD Transaction
As previously disclosed, 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.
Merger and integration planning expenses related to the transactions associated with the TD Merger Agreement are recorded in FHN’s Corporate segment. Expenses recognized during the three months ended March 31, 2023 and 2022 were $21 million and $9 million, respectively.
Accounting Changes With Extended Transition Periods
In March 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 (or recognizing the effects of) reference rate reform on financial reporting. The provisions of ASU 2020-04 primarily affect 1) contract modifications (e.g., loans, leases, debt, and derivatives) made in anticipation that a reference rate (e.g., LIBOR) will be discontinued and 2) the application of hedge accounting for existing relationships affected by those modifications. The provisions of ASU
2020-04 are effective upon release and apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Including the adoption of ASU 2022-06 (discussed below), the expedients and exceptions provided by ASU 2020-04 do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2024, except for hedging relationships existing as of December 31, 2024, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.
FHN has identified contracts affected by reference rate reform and developed modification plans for those contracts. FHN has elected to utilize the optional expedients and exceptions provided by ASU 2020-04 for certain contract modifications that have already been implemented. For cash flow hedges that reference 1-Month USD LIBOR, FHN has applied expedients related to 1) the assumption of probability of cash flows when reference rates are changed on hedged items 2) avoiding de-designation when critical terms (i.e., reference rates) change and 3) the allowed assumption of shared risk exposure for hedged items. For its 2022 and 2023 cash flow hedges that reference 1-Month Term SOFR, FHN has applied expedients related to 1) the allowed assumption of shared risk exposure for hedged items and 2) multiple allowed assumptions of conformity between hedged items and the hedging instrument when assessing effectiveness. FHN anticipates that it will continue to utilize the expedients and exceptions for future modifications in situations where they mitigate potential accounting outcomes that do not faithfully represent management’s intent or risk management activities, consistent with the purpose of the standard.
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.
In January 2021, the FASB issued ASU 2021-01, "Scope" to expand the scope of ASU 2020-04 to apply to certain contract modifications that were implemented in October 2020 by derivative clearinghouses for the use of Secure Overnight Funding Rate (SOFR) in discounting, margining and price alignment for centrally cleared derivatives, including derivatives utilized in hedging relationships. ASU 2021-01 also applies to derivative contracts affected by the change in discounting convention regardless of whether they are centrally cleared (i.e., bi-lateral
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 1—BASIS OF PRESENTATION & ACCOUNTING POLICIES | |
contracts can also be modified) and regardless of whether they reference LIBOR. ASU 2021-01 was effective immediately upon issuance with retroactive application permitted. FHN elected to retroactively apply the provisions of ASU 2021-01 because FHN's centrally cleared derivatives were affected by the change in discounting convention and because FHN has other bi-lateral derivative contracts that may be modified to conform to the use of SOFR for discounting. Adoption did not have a significant effect on FHN's reported financial condition or results of operations.
Summary of Accounting Changes
ASU 2022-01
In March 2022, the FASB issued ASU 2022-01, "Fair Value Hedging - Portfolio Layer Method", which will expand FHN's ability to hedge the benchmark interest rate risk of portfolios of financial interests (or beneficial interests) in a fair value hedge. The provisions of ASU 2022-01 also permit FHN to apply the same portfolio hedging method to both prepayable and non-prepayable financial assets, namely by expanding the use of the "portfolio layer" method to non-prepayable financial assets. ASU 2022-01 also permits multiple hedged layers to be designated as a single closed portfolio to achieve hedge accounting. Additionally, the ASU requires that basis adjustments must be maintained on the closed portfolio of assets as a whole, and not allocated to individual assets for active portfolio layer method hedges. ASU 2022-01 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. FHN may utilize the provisions of ASU 2022-01 in its future hedging strategies.
ASU 2022-02
In March 2022, the FASB issued ASU 2022-02, “Troubled Debt Restructurings and Vintage Disclosures” that eliminates current TDR recognition and measurement guidance and instead requires the Company to evaluate whether the modification represents a new loan or a continuation of an existing loan (which is consistent with the accounting for other loan modifications). The provisions of ASU 2022-02 also enhance existing disclosure requirements and introduces new disclosures related to certain modifications made to borrowers experiencing financial difficulty. The provisions of this ASU also require FHN to disclose current period gross write-offs of loans and leases by year of origination.
ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For the transition method related to the recognition and measurement of TDRs, FHN elected to apply the modified retrospective transition effective January 1, 2023, resulting in a cumulative-effect reduction in ALLL of $6 million and an increase to retained earnings of $4 million, net of tax. The disclosure provisions of ASU
2022-02 are applied prospectively and presented in Note 3 – Loans and Leases and Note 4 – Allowance for Credit Losses.
Accounting Changes Issued But Not Currently Effective
ASU 2023-02
In March 2023, the FASB issued ASU 2023-02, “Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method” which permits investors to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of income tax provision (benefit). Prior to ASU 2023-02, the proportional amortization method was only available to qualifying low income housing equity investments. An investor is required to make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis. An investor that applies the proportional amortization method to qualifying tax equity investments must account for the receipt of the investment tax credits using the flow-through method, even if the entity applies the deferral method for other investment tax credits received. ASU 2023-02 also requires specific disclosures that must be applied to all investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method.
ASU 2023-02 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. If ASU 2023-02 is adopted in an interim period, it must be adopted as of the beginning of the fiscal year that includes that interim period. Adoption of ASU 2023-02 is applied on either a modified retrospective (cumulative catch up) or a retrospective (representment of prior years) basis. FHN is assessing 1) the applicability of ASU 2023-02 to its tax credit investments and 2) whether to elect the proportional amortization method for qualifying investments.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 2—INVESTMENT SECURITIES | |
Note 2—Investment Securities
The following tables summarize FHN’s investment securities as of March 31, 2023 and December 31, 2022:
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INVESTMENT SECURITIES AT MARCH 31, 2023 |
| | March 31, 2023 |
(Dollars in millions) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities available for sale: | | | | | | | | |
| | | | | | | | |
Government agency issued MBS | | $ | 5,416 | | | $ | 2 | | | $ | (622) | | | $ | 4,796 | |
Government agency issued CMO | | 2,650 | | | — | | | (336) | | | 2,314 | |
Other U.S. government agencies | | 1,374 | | | 6 | | | (141) | | | 1,239 | |
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States and municipalities | | 650 | | | 2 | | | (47) | | | 605 | |
Total securities available for sale (a) | | $ | 10,090 | | | $ | 10 | | | $ | (1,146) | | | $ | 8,954 | |
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Securities held to maturity: | | | | | | | | |
Government agency issued MBS | | $ | 889 | | | $ | — | | | $ | (95) | | | $ | 794 | |
Government agency issued CMO | | 473 | | | — | | | (53) | | | 420 | |
Total securities held to maturity | | $ | 1,362 | | | $ | — | | | $ | (148) | | | $ | 1,214 | |
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(a)Includes $6.9 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes.
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INVESTMENT SECURITIES AT YE 2022 |
| | December 31, 2022 |
(Dollars in millions) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Securities available for sale: | | | | | | | | |
| | | | | | | | |
Government agency issued MBS | | $ | 5,457 | | | $ | 1 | | | $ | (695) | | | $ | 4,763 | |
Government agency issued CMO | | 2,682 | | | — | | | (369) | | | 2,313 | |
Other U.S. government agencies | | 1,325 | | | — | | | (162) | | | 1,163 | |
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States and municipalities | | 658 | | | 1 | | | (62) | | | 597 | |
Total securities available for sale (a) | | $ | 10,122 | | | $ | 2 | | | $ | (1,288) | | | $ | 8,836 | |
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Securities held to maturity: | | | | | | | | |
Government agency issued MBS | | $ | 897 | | | $ | — | | | $ | (109) | | | $ | 788 | |
Government agency issued CMO | | 474 | | | — | | | (53) | | | 421 | |
Total securities held to maturity | | $ | 1,371 | | | $ | — | | | $ | (162) | | | $ | 1,209 | |
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(a)Includes $6.5 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 2—INVESTMENT SECURITIES | |
The amortized cost and fair value by contractual maturity for the debt securities portfolio as of March 31, 2023 is provided below:
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DEBT SECURITIES PORTFOLIO MATURITIES | |
| Held to Maturity | | Available for Sale | |
(Dollars in millions) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | |
Within 1 year | $ | — | | | $ | — | | | $ | 9 | | | $ | 9 | | |
After 1 year through 5 years | — | | | — | | | 127 | | | 123 | | |
After 5 years through 10 years | — | | | — | | | 391 | | | 357 | | |
After 10 years | — | | | — | | | 1,497 | | | 1,355 | | |
Subtotal | — | | | — | | | 2,024 | | | 1,844 | | |
Government agency issued MBS and CMO (a) | 1,362 | | | 1,214 | | | 8,066 | | | 7,110 | | |
Total | $ | 1,362 | | | $ | 1,214 | | | $ | 10,090 | | | $ | 8,954 | | |
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(a)Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Gross gains and losses on sales of AFS securities for the three months ended March 31, 2023 and 2022 were insignificant. Cash proceeds from sales of AFS securities were insignificant for the three months ended March 31, 2023 and March 31, 2022.
The following tables provide information on investments within the available-for-sale portfolio that had unrealized losses as of March 31, 2023 and December 31, 2022:
AFS INVESTMENT SECURITIES WITH UNREALIZED LOSSES
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| | As of March 31, 2023 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in millions) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | | | | | | | | | | |
Government agency issued MBS | | $ | 700 | | | $ | (20) | | | $ | 3,996 | | | $ | (602) | | | $ | 4,696 | | | $ | (622) | |
Government agency issued CMO | | 309 | | | (15) | | | 2,006 | | | (321) | | | 2,315 | | | (336) | |
Other U.S. government agencies | | 265 | | | (10) | | | 733 | | | (131) | | | 998 | | | (141) | |
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States and municipalities | | 53 | | | (2) | | | 451 | | | (45) | | | 504 | | | (47) | |
Total | | $ | 1,327 | | | $ | (47) | | | $ | 7,186 | | | $ | (1,099) | | | $ | 8,513 | | | $ | (1,146) | |
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| | As of December 31, 2022 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in millions) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | | | | | | | | | | |
Government agency issued MBS | | $ | 2,314 | | | $ | (249) | | | $ | 2,350 | | | $ | (446) | | | $ | 4,664 | | | $ | (695) | |
Government agency issued CMO | | 1,104 | | | (123) | | | 1,209 | | | (246) | | | 2,313 | | | (369) | |
Other U.S. government agencies | | 643 | | | (67) | | | 424 | | | (95) | | | 1,067 | | | (162) | |
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States and municipalities | | 493 | | | (48) | | | 54 | | | (14) | | | 547 | | | (62) | |
Total | | $ | 4,554 | | | $ | (487) | | | $ | 4,037 | | | $ | (801) | | | $ | 8,591 | | | $ | (1,288) | |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 2—INVESTMENT SECURITIES | |
FHN has evaluated all AFS debt securities that were in unrealized loss positions in accordance with its accounting policy for recognition of credit losses. No AFS debt securities were determined to have credit losses. Total AIR not included in the fair value or amortized cost basis of AFS debt securities was $30 million and $32 million as of March 31, 2023 and December 31, 2022, respectively. Consistent with FHN's review of the related securities, there were no credit-related write downs of AIR for AFS debt securities during the reporting periods. Additionally, for AFS debt securities with unrealized losses, FHN does not intend to sell them, and it is more likely than not that FHN will not be required to sell them prior to recovery. Therefore, no write downs of these investments to fair value occurred during the reporting periods.
For HTM securities, an allowance for credit losses is required to absorb estimated lifetime credit losses. Total AIR not included in the fair value or amortized cost basis of HTM debt securities was $3 million as of both March 31, 2023 and December 31, 2022. FHN has assessed the risk of credit loss and has determined that no allowance for credit losses for HTM securities was necessary as of March 31, 2023 and December 31, 2022. The evaluation of credit risk includes consideration of third-party and government guarantees (both explicit and implicit), senior or subordinated status, credit ratings of the issuer, the effects of interest rate changes since purchase and observable market information such as issuer-specific credit spreads.
The carrying amount of equity investments without a readily determinable fair value was $80 million and $79 million at March 31, 2023 and December 31, 2022, respectively. The year-to-date 2023 and 2022 gross amounts of upward and downward valuation adjustments were not significant.
Unrealized gains of $2 million and $4 million were recognized in the three months ended March 31, 2023 and 2022, respectively, for equity investments with readily determinable fair values.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
Note 3—Loans and Leases
The loans and leases portfolio is disaggregated into portfolio segments and then further disaggregated into classes for certain disclosures. GAAP defines a portfolio segment as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. A class is generally a disaggregation of a portfolio segment and is generally determined based on risk characteristics of the loan and FHN’s method for monitoring and assessing credit risk and performance. FHN's loan and lease portfolio segments are commercial and consumer. The classes of loans and leases are: (1) commercial, financial, and industrial, which
includes commercial and industrial loans and leases and loans to mortgage companies, (2) commercial real estate, (3) consumer real estate, which includes both real estate installment and home equity lines of credit, and (4) credit card and other.
The following table provides the amortized cost basis of loans and leases by portfolio segment and class as of March 31, 2023 and December 31, 2022, excluding accrued interest of $227 million and $226 million, respectively, which is included in other assets in the Consolidated Balance Sheets.
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LOANS AND LEASES BY PORTFOLIO SEGMENT | | |
(Dollars in millions) | | March 31, 2023 | | December 31, 2022 | | |
Commercial: | | | | | | |
Commercial and industrial (a) (b) | | $ | 30,132 | | | $ | 29,523 | | | |
Loans to mortgage companies | | 2,040 | | | 2,258 | | | |
Total commercial, financial, and industrial | | 32,172 | | | 31,781 | | | |
Commercial real estate | | 13,398 | | | 13,228 | | | |
Consumer: | | | | | | |
HELOC | | 2,114 | | | 2,028 | | | |
Real estate installment loans | | 10,554 | | | 10,225 | | | |
Total consumer real estate | | 12,668 | | | 12,253 | | | |
Credit card and other | | 807 | | | 840 | | | |
Loans and leases | | $ | 59,045 | | | $ | 58,102 | | | |
Allowance for loan and lease losses | | (715) | | | (685) | | | |
Net loans and leases | | $ | 58,330 | | | $ | 57,417 | | | |
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(a)Includes equipment financing leases of $1.1 billion for March 31, 2023 and December 31, 2022.
(b)Includes PPP loans fully guaranteed by the SBA of $53 million and $76 million as of March 31, 2023 and December 31, 2022, respectively.
Restrictions
Loans and leases with carrying values of $39.6 billion and $38.3 billion were pledged as collateral for borrowings at March 31, 2023 and December 31, 2022, respectively.
Concentrations of Credit Risk
Most of FHN’s business activity is with clients located in the southern United States. FHN’s lending activity is concentrated in its market areas within those states. As of March 31, 2023, FHN had loans to mortgage companies of $2.0 billion and loans to finance and insurance companies of $4.2 billion. As a result, 19% of the C&I portfolio is sensitive to impacts on the financial services industry.
Credit Quality Indicators
FHN employs a dual grade commercial risk grading methodology to assign an estimate for the probability of default and the loss given default for each commercial loan using factors specific to various industry, portfolio, or product segments that result in a rank ordering of risk and
the assignment of grades PD 1 to PD 16. This credit grading system is intended to identify and measure the credit quality of the loan and lease portfolio by analyzing the migration between grading categories. It is also integral to the estimation methodology utilized in determining the ALLL since an allowance is established for pools of commercial loans based on the credit grade assigned. Each PD grade corresponds to an estimated one-year default probability percentage. PD grades are continually evaluated but require a formal scorecard annually.
PD 1 through PD 12 are “pass” grades. PD grades 13-16 correspond to the regulatory-defined categories of special mention (13), substandard (14), doubtful (15), and loss (16). Special mention loans and leases have potential weaknesses that, if left uncorrected, may result in deterioration of FHN's credit position at some future date. Substandard commercial loans and leases have well-defined weaknesses and are characterized by the distinct possibility that FHN will sustain some loss if the
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
deficiencies are not corrected. Doubtful commercial loans and leases have the same weaknesses as substandard loans and leases with the added characteristics that the probability of loss is high, and collection of the full amount is improbable.
The following tables provide the amortized cost basis of the commercial loan portfolio by year of origination and credit quality indicator as of March 31, 2023 and December 31, 2022:
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C&I PORTFOLIO |
| | March 31, 2023 |
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(Dollars in millions) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior to 2019 | | LMC (a) | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
Credit Quality Indicator: | | | | | | | | | | | | | | | | | | | | |
Pass (PD grades 1 through 12) (b) | | $ | 893 | | | $ | 5,814 | | | $ | 3,977 | | | $ | 1,800 | | | $ | 1,995 | | | $ | 4,717 | | | $ | 2,040 | | | $ | 9,411 | | | $ | 351 | | | $ | 30,998 | |
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Special Mention (PD grade 13) | | 1 | | | 24 | | | 59 | | | 17 | | | 128 | | | 87 | | | — | | | 177 | | | 1 | | | 494 | |
Substandard, Doubtful, or Loss (PD grades 14,15, and 16) | | 36 | | | 34 | | | 57 | | | 132 | | | 43 | | | 189 | | | — | | | 104 | | | 85 | | | 680 | |
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Total C&I loans | | $ | 930 | | | $ | 5,872 | | | $ | 4,093 | | | $ | 1,949 | | | $ | 2,166 | | | $ | 4,993 | | | $ | 2,040 | | | $ | 9,692 | | | $ | 437 | | | $ | 32,172 | |
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| | December 31, 2022 |
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(Dollars in millions) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior to 2018 | | LMC (a) | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
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Credit Quality Indicator: | | | | | | | | | | | | | | | | | | | | |
Pass (PD grades 1 through 12) (b) | | $ | 5,856 | | | $ | 4,040 | | | $ | 1,980 | | | $ | 2,099 | | | $ | 1,229 | | | $ | 3,710 | | | $ | 2,258 | | | $ | 9,165 | | | $ | 371 | | | $ | 30,708 | |
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Special Mention (PD grade 13) | | 19 | | | 63 | | | 19 | | | 141 | | | 9 | | | 90 | | | — | | | 126 | | | — | | | 467 | |
Substandard, Doubtful, or Loss (PD grades 14,15, and 16) | | 41 | | | 54 | | | 51 | | | 38 | | | 67 | | | 124 | | | — | | | 134 | | | 97 | | | 606 | |
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Total C&I loans | | $ | 5,916 | | | $ | 4,157 | | | $ | 2,050 | | | $ | 2,278 | | | $ | 1,305 | | | $ | 3,924 | | | $ | 2,258 | | | $ | 9,425 | | | $ | 468 | | | $ | 31,781 | |
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(a) LMC includes non-revolving 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. The loans are of short duration with maturities less than one year.
(b) Balances include PPP loans.
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CRE PORTFOLIO |
| | March 31, 2023 |
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(Dollars in millions) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior to 2019 | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
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Credit Quality Indicator: | | | | | | | | | | | | | | | | | | |
Pass (PD grades 1 through 12) | | $ | 240 | | | $ | 2,846 | | | $ | 3,442 | | | $ | 1,386 | | | $ | 1,704 | | | $ | 3,251 | | | $ | 233 | | | $ | 19 | | | $ | 13,121 | |
Special Mention (PD grade 13) | | — | | | — | | | 1 | | | 2 | | | 85 | | | 57 | | | — | | | — | | | 145 | |
Substandard, Doubtful, or Loss (PD grades 14,15, and 16) | | — | | | 1 | | | 4 | | | 11 | | | 48 | | | 59 | | | 9 | | | — | | | 132 | |
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Total CRE loans | | $ | 240 | | | $ | 2,847 | | | $ | 3,447 | | | $ | 1,399 | | | $ | 1,837 | | | $ | 3,367 | | | $ | 242 | | | $ | 19 | | | $ | 13,398 | |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
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| | December 31, 2022 |
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(Dollars in millions) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior to 2018 | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
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Credit Quality Indicator: | | | | | | | | | | | | | | | | | | |
Pass (PD grades 1 through 12) | | $ | 2,637 | | | $ | 3,324 | | | $ | 1,488 | | | $ | 1,855 | | | $ | 808 | | | $ | 2,565 | | | $ | 274 | | | $ | 20 | | | $ | 12,971 | |
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Special Mention (PD grade 13) | | — | | | 3 | | | 3 | | | 37 | | | 68 | | | 5 | | | 1 | | | — | | | 117 | |
Substandard, Doubtful, or Loss (PD grades 14,15, and 16) | | 1 | | | 4 | | | 12 | | | 50 | | | 31 | | | 31 | | | 11 | | | — | | | 140 | |
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Total CRE loans | | $ | 2,638 | | | $ | 3,331 | | | $ | 1,503 | | | $ | 1,942 | | | $ | 907 | | | $ | 2,601 | | | $ | 286 | | | $ | 20 | | | $ | 13,228 | |
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The consumer portfolio is comprised primarily of smaller-balance loans which are very similar in nature in that most are standard products and are backed by residential real estate. Because of the similarities of consumer loan types, FHN is able to utilize the FICO score, among other attributes, to assess the credit quality of consumer borrowers. FICO scores are refreshed on a quarterly basis in an attempt to reflect the recent risk profile of the borrowers. Accruing delinquency amounts are indicators of asset quality within the credit card and other consumer portfolio.
The following table reflects the amortized cost basis by year of origination and refreshed FICO scores for
consumer real estate loans as of March 31, 2023 and December 31, 2022. Within consumer real estate, classes include HELOC and real estate installment loans. HELOCs are loans which during their draw period are classified as revolving loans. Once the draw period ends and the loan enters its repayment period, the loan converts to a term loan and is classified as a revolving loan converted to a term loan. All loans classified in the following tables as revolving loans or revolving loans converted to term loans are HELOCs. Real estate installment loans are originated as fixed term loans and are classified below in their vintage year. All loans in the following tables classified in a vintage year are real estate installment loans.
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CONSUMER REAL ESTATE PORTFOLIO |
| | March 31, 2023 |
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(Dollars in millions) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior to 2019 | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
FICO score 740 or greater | | $ | 397 | | | $ | 2,157 | | | $ | 1,822 | | | $ | 800 | | | $ | 512 | | | $ | 1,516 | | | $ | 1,383 | | | $ | 60 | | | $ | 8,647 | |
FICO score 720-739 | | 45 | | | 292 | | | 245 | | | 114 | | | 97 | | | 258 | | | 184 | | | 17 | | | 1,252 | |
FICO score 700-719 | | 34 | | | 241 | | | 202 | | | 92 | | | 54 | | | 249 | | | 151 | | | 21 | | | 1,044 | |
FICO score 660-699 | | 42 | | | 207 | | | 136 | | | 88 | | | 55 | | | 328 | | | 192 | | | 21 | | | 1,069 | |
FICO score 620-659 | | 1 | | | 21 | | | 24 | | | 25 | | | 40 | | | 120 | | | 45 | | | 8 | | | 284 | |
FICO score less than 620 | | 2 | | | 15 | | | 19 | | | 31 | | | 12 | | | 261 | | | 18 | | | 14 | | | 372 | |
Total | | $ | 521 | | | $ | 2,933 | | | $ | 2,448 | | | $ | 1,150 | | | $ | 770 | | | $ | 2,732 | | | $ | 1,973 | | | $ | 141 | | | $ | 12,668 | |
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| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
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| | December 31, 2022 |
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(Dollars in millions) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior to 2018 | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
FICO score 740 or greater | | $ | 2,154 | | | $ | 1,847 | | | $ | 819 | | | $ | 523 | | | $ | 278 | | | $ | 1,294 | | | $ | 1,297 | | | $ | 63 | | | $ | 8,275 | |
FICO score 720-739 | | 292 | | | 246 | | | 116 | | | 98 | | | 34 | | | 238 | | | 183 | | | 18 | | | 1,225 | |
FICO score 700-719 | | 242 | | | 206 | | | 93 | | | 55 | | | 35 | | | 226 | | | 142 | | | 22 | | | 1,021 | |
FICO score 660-699 | | 214 | | | 137 | | | 90 | | | 55 | | | 62 | | | 278 | | | 192 | | | 23 | | | 1,051 | |
FICO score 620-659 | | 21 | | | 24 | | | 25 | | | 41 | | | 20 | | | 105 | | | 47 | | | 9 | | | 292 | |
FICO score less than 620 | | 15 | | | 19 | | | 32 | | | 12 | | | 23 | | | 256 | | | 16 | | | 16 | | | 389 | |
Total | | $ | 2,938 | | | $ | 2,479 | | | $ | 1,175 | | | $ | 784 | | | $ | 452 | | | $ | 2,397 | | | $ | 1,877 | | | $ | 151 | | | $ | 12,253 | |
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The following tables reflect the amortized cost basis by year of origination and refreshed FICO scores for credit card and other loans as of March 31, 2023 and December 31, 2022.
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CREDIT CARD & OTHER PORTFOLIO |
| | March 31, 2023 |
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(Dollars in millions) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior to 2019 | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
FICO score 740 or greater | | $ | 8 | | | $ | 31 | | | $ | 14 | | | $ | 6 | | | $ | 7 | | | $ | 28 | | | $ | 252 | | | $ | 8 | | | $ | 354 | |
FICO score 720-739 | | 1 | | | 3 | | | 2 | | | 2 | | | 1 | | | 4 | | | 33 | | | 1 | | | 47 | |
FICO score 700-719 | | 1 | | | 3 | | | 3 | | | 1 | | | 1 | | | 4 | | | 28 | | | — | | | 41 | |
FICO score 660-699 | | — | | | 3 | | | 1 | | | 1 | | | 1 | | | 8 | | | 31 | | | 1 | | | 46 | |
FICO score 620-659 | | — | | | 1 | | | 2 | | | — | | | — | | | 2 | | | 14 | | | — | | | 19 | |
FICO score less than 620 | | 2 | | | 7 | | | 6 | | | 6 | | | 10 | | | 85 | | | 183 | | | 1 | | | 300 | |
Total | | $ | 12 | | | $ | 48 | | | $ | 28 | | | $ | 16 | | | $ | 20 | | | $ | 131 | | | $ | 541 | | | $ | 11 | | | $ | 807 | |
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| | December 31, 2022 |
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(Dollars in millions) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior to 2018 | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
FICO score 740 or greater | | $ | 36 | | | $ | 14 | | | $ | 10 | | | $ | 10 | | | $ | 4 | | | $ | 25 | | | $ | 291 | | | $ | 6 | | | $ | 396 | |
FICO score 720-739 | | 3 | | | 2 | | | 2 | | | 1 | | | — | | | 4 | | | 30 | | | 1 | | | 43 | |
FICO score 700-719 | | 3 | | | 3 | | | 1 | | | 1 | | | — | | | 4 | | | 33 | | | 1 | | | 46 | |
FICO score 660-699 | | 3 | | | 2 | | | 1 | | | 1 | | | 2 | | | 7 | | | 30 | | | 1 | | | 47 | |
FICO score 620-659 | | 1 | | | 3 | | | 1 | | | — | | | — | | | 3 | | | 18 | | | — | | | 26 | |
FICO score less than 620 | | 7 | | | 6 | | | 6 | | | 10 | | | 7 | | | 71 | | | 174 | | | 1 | | | 282 | |
Total | | $ | 53 | | | $ | 30 | | | $ | 21 | | | $ | 23 | | | $ | 13 | | | $ | 114 | | | $ | 576 | | | $ | 10 | | | $ | 840 | |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
Nonaccrual and Past Due Loans and Leases
Loans and leases are placed on nonaccrual if it becomes evident that full collection of principal and interest is at risk, impairment has been recognized as a partial charge-off of principal balance due to insufficient collateral value and past due status, or on a case-by-case basis if FHN continues to receive payments but there are other borrower-specific issues. Included in nonaccrual 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.
Past due loans are loans contractually past due as to interest or principal payments, but which have not yet been put on nonaccrual status.
The following table reflects accruing and non-accruing loans and leases by class on March 31, 2023 and December 31, 2022:
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ACCRUING & NON-ACCRUING LOANS AND LEASES |
| | March 31, 2023 |
| | Accruing | | Non-Accruing | | |
(Dollars in millions) | | Current | | 30-89 Days Past Due | | 90+ Days Past Due | | Total Accruing | | Current | | 30-89 Days Past Due | | 90+ Days Past Due | | Total Non- Accruing | | Total Loans and Leases |
Commercial, financial, and industrial: | | | | | | | | | | | | | | | | | | |
C&I (a) | | $ | 29,902 | | | $ | 26 | | | $ | — | | | $ | 29,928 | | | $ | 127 | | | $ | 6 | | | $ | 71 | | | $ | 204 | | | $ | 30,132 | |
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Loans to mortgage companies | | 2,040 | | | — | | | — | | | 2,040 | | | — | | | — | | | — | | | — | | | 2,040 | |
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Total commercial, financial, and industrial | | 31,942 | | | 26 | | | — | | | 31,968 | | | 127 | | | 6 | | | 71 | | | 204 | | | 32,172 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
CRE (b) | | 13,330 | | | 5 | | | — | | | 13,335 | | | 19 | | | 26 | | | 18 | | | 63 | | | 13,398 | |
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Consumer real estate: | | | | | | | | | | | | | | | | | | |
HELOC (c) | | 2,049 | | | 15 | | | 5 | | | 2,069 | | | 33 | | | 5 | | | 7 | | | 45 | | | 2,114 | |
Real estate installment loans (d) | | 10,415 | | | 27 | | | 2 | | | 10,444 | | | 56 | | | 12 | | | 42 | | | 110 | | | 10,554 | |
Total consumer real estate | | 12,464 | | | 42 | | | 7 | | | 12,513 | | | 89 | | | 17 | | | 49 | | | 155 | | | 12,668 | |
Credit card and other: | | | | | | | | | | | | | | | | | | |
Credit card | | 286 | | | 4 | | | 5 | | | 295 | | | — | | | — | | | — | | | — | | | 295 | |
Other | | 508 | | | 2 | | | — | | | 510 | | | 1 | | | 1 | | | — | | | 2 | | | 512 | |
Total credit card and other | | 794 | | | 6 | | | 5 | | | 805 | | | 1 | | | 1 | | | — | | | 2 | | | 807 | |
Total loans and leases | | $ | 58,530 | | | $ | 79 | | | $ | 12 | | | $ | 58,621 | | | $ | 236 | | | $ | 50 | | | $ | 138 | | | $ | 424 | | | $ | 59,045 | |
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| | December 31, 2022 |
| | Accruing | | Non-Accruing | | |
(Dollars in millions) | | Current | | 30-89 Days Past Due | | 90+ Days Past Due | | Total Accruing | | Current | | 30-89 Days Past Due | | 90+ Days Past Due | | Total Non- Accruing | | Total Loans and Leases |
Commercial, financial, and industrial: | | | | | | | | | | | | | | | | | | |
C&I (a) | | $ | 29,309 | | | $ | 50 | | | $ | 11 | | | $ | 29,370 | | | $ | 64 | | | $ | 10 | | | $ | 79 | | | $ | 153 | | | $ | 29,523 | |
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Loans to mortgage companies | | 2,258 | | | — | | | — | | | 2,258 | | | — | | | — | | | — | | | — | | | 2,258 | |
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Total commercial, financial, and industrial | | 31,567 | | | 50 | | | 11 | | | 31,628 | | | 64 | | | 10 | | | 79 | | | 153 | | | 31,781 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
CRE (b) | | 13,208 | | | 11 | | | — | | | 13,219 | | | 7 | | | — | | | 2 | | | 9 | | | 13,228 | |
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Consumer real estate: | | | | | | | | | | | | | | | | | | |
HELOC (c) | | 1,967 | | | 12 | | | 5 | | | 1,984 | | | 32 | | | 4 | | | 8 | | | 44 | | | 2,028 | |
Real estate installment loans (d) | | 10,079 | | | 25 | | | 13 | | | 10,117 | | | 56 | | | 5 | | | 47 | | | 108 | | | 10,225 | |
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Total consumer real estate | | 12,046 | | | 37 | | | 18 | | | 12,101 | | | 88 | | | 9 | | | 55 | | | 152 | | | 12,253 | |
Credit card and other: | | | | | | | | | | | | | | | | | | |
Credit card | | 287 | | | 5 | | | 4 | | | 296 | | | — | | | — | | | — | | | — | | | 296 | |
Other | | 540 | | | 2 | | | — | | | 542 | | | 1 | | | — | | | 1 | | | 2 | | | 544 | |
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Total credit card and other | | 827 | | | 7 | | | 4 | | | 838 | | | 1 | | | — | | | 1 | | | 2 | | | 840 | |
Total loans and leases | | $ | 57,648 | | | $ | 105 | | | $ | 33 | | | $ | 57,786 | | | $ | 160 | | | $ | 19 | | | $ | 137 | | | $ | 316 | | | $ | 58,102 | |
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(a) $204 million and $147 million of C&I loans are nonaccrual loans that have been specifically reviewed for impairment with no related allowance in 2023 and 2022, respectively.
(b) $55 million and $5 million of CRE loans are nonaccrual loans that have been specifically reviewed for impairment with no related allowance in 2023 and 2022, respectively.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
(c) $7 million and $5 million of HELOC loans are nonaccrual loans that have been specifically reviewed for impairment with no related allowance in 2023 and 2022, respectively.
(d) $10 million and $7 million of real estate installment loans are nonaccrual loans that have been specifically reviewed for impairment with no related allowance in 2023 and 2022, respectively.
Collateral-Dependent Loans
Collateral-dependent loans are defined as loans for which repayment is expected to be derived substantially through the operation or sale of the collateral and where the borrower is experiencing financial difficulty. At a minimum, the estimated value of the collateral for each loan equals the current book value.
As of March 31, 2023 and December 31, 2022, FHN had commercial loans with amortized cost of approximately $256 million and $124 million, respectively, that were based on the value of underlying collateral. Collateral-dependent C&I and CRE loans totaled $199 million and $57 million, respectively, at March 31, 2023. The collateral for these loans generally consists of business assets including land, buildings, equipment and financial assets. During the three months ended March 31, 2023, FHN recognized charge-offs of $12 million on these loans related to reductions in estimated collateral values.
Consumer HELOC and real estate installment loans with amortized cost based on the value of underlying real estate collateral were approximately $7 million and $29 million, respectively, as of March 31, 2023 and $7 million and $26 million, respectively, as of December 31, 2022. Charge-offs during the three months ended March 31, 2023 and March 31, 2022 were not significant for collateral-dependent consumer loans.
Loan Modifications to Troubled Borrowers
As part of FHN’s ongoing risk management practices, FHN attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Modifications could include extension of the maturity date, reductions of the interest rate, reduction or forgiveness of accrued interest, or principal forgiveness. Combinations of these modifications may also be made for individual loans. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Principal reductions may be made in limited circumstances, typically for specific commercial loan workouts, and in the event of borrower bankruptcy. Each occurrence is unique to the borrower and is evaluated separately.
Troubled loans are considered those in which the borrower is experiencing financial difficulty. The assessment of whether a borrower is experiencing financial difficulty can be subjective in nature and management’s judgment may be required in making this determination. FHN may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that a borrower may default in the foreseeable future absent a
modification. Many aspects of a borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty.
Troubled commercial loans are typically modified through forbearance agreements which could include reduced interest rates, reduced payments, term extension, or entering into short sale agreements. Principal reductions may occur in specific circumstances.
Modifications for troubled consumer loans are generally structured using parameters of U.S. government-sponsored programs. For HELOC and real estate installment loans, troubled loans are typically modified by an interest rate reduction and a possible maturity date extension to reach an affordable housing debt-to-income ratio. Despite the absence of a loan modification by FHN, the discharge of personal liability through bankruptcy proceedings is considered a court-imposed modification.
For the credit card portfolio, troubled loan modifications are typically enacted 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 six months to one year. In the credit card workout program, borrowers are granted a rate reduction to 0% and a term extension for up to five years.
Modifications to Borrowers Experiencing Financial Difficulty
For periods subsequent to December 31, 2022, information regarding loans modified when a borrower is experiencing financial difficulty are included in the tables below.
The following tables present the amortized cost basis at the end of the reporting period of loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of modification made, as well as the financial effect of the modifications made as of March 31, 2023.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
LOAN MODIFICATIONS TO BORROWERS EXPERIENCING FINANCIAL DIFFICULTY
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| | March 31, 2023 |
| | | Term Extension |
(Dollars in millions) | | | | | Balance | | % of Total Class | | Financial Effect |
C&I | | | | $ | 63 | | | 0.2 | % | | Added a weighted-average 1 year to the life of loans, which reduced monthly payment amounts for the borrowers |
CRE | | | | 32 | | | 0.2 | | | Added a weighted-average 0.6 years to the life of loans, which reduced monthly payment amounts for the borrowers |
Consumer Real Estate | | | | 1 | | | — | | | Added a weighted-average 14.9 years to the life of loans, which reduced monthly payment amounts for the borrowers |
Credit Card and Other | | | | — | | | — | | | N/A |
Total | | | | $ | 96 | | | 0.2 | % | | |
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| | March 31, 2023 | | | | |
| | | Payment Deferrals | | |
(Dollars in millions) | | | | | Balance | | % of Total Class | | Financial Effect | | | | |
C&I | | | | | $ | — | | | — | % | | N/A | | | |
CRE | | | | | — | | | — | | | N/A | | | |
Consumer Real Estate | | | | | 4 | | | — | | | Payment deferral for 11 months, with a balloon payment at the end of the term | | | |
Credit Card and Other | | | | | — | | | — | | | N/A | | | |
Total | | | | | $ | 4 | | | — | % | | | | | |
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| March 31, 2023 | | | | |
| Combination - Term Extension and Interest Rate Reduction | | |
(Dollars in millions) | Balance | | % of Total Class | | Financial Effect | | | | |
C&I | $ | — | | | — | % | | N/A | | | | |
CRE | — | | | — | | | N/A | | | | |
Consumer Real Estate | 2 | | | — | | | Added a weighted-average 8.8 years to the life of loans and reduced weighted-average contractual interest rate from 5.0% to 4.9% | | | | |
Credit Card and Other | — | | | — | | | N/A | | | | |
Total | $ | 2 | | | — | % | | | | | | |
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| March 31, 2023 |
| Combination - Principal Forgiveness and Term Extension |
(Dollars in millions) | Balance | | % of Total Class | | Financial Effect |
C&I | $ | 18 | | | 0.1 | % | | Reduced the balance of the loans by $2 million and added a weighted-average 6.2 years to the life of loans |
CRE | — | | | — | | | N/A |
Consumer Real Estate | — | | | — | | | N/A |
Credit Card and Other | — | | | — | | | N/A |
Total | $ | 18 | | | — | % | | |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
Loan modifications to borrowers experiencing financial difficulty that had a payment default during the period were insignificant as of March 31, 2023. FHN closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.
The following table depicts the performance of loans that have been modified in the last 12 months:
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PERFORMANCE OF LOANS THAT HAVE BEEN MODIFIED IN THE LAST 12 MONTHS |
| | March 31, 2023 |
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(Dollars in millions) | | Current | | 30-89 Days Past Due | | 90+ Days Past Due | | Non-Accruing |
C&I | | $ | 63 | | | $ | — | | | $ | — | | | $ | 18 | |
CRE | | 32 | | | — | | | — | | | — | |
Consumer Real Estate | | 1 | | | — | | | — | | | 6 | |
Credit Card and Other | | — | | | — | | | — | | | — | |
Total | | $ | 96 | | | $ | — | | | $ | — | | | $ | 24 | |
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| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 3—LOANS & LEASES | |
Troubled Debt Restructurings
Prior to January 1, 2023, a modification was classified as a TDR if the borrower was experiencing financial difficulty and it was determined that FHN granted a concession to the borrower. Concessions represented modifications that FHN would not otherwise consider if a borrower had not been experiencing financial difficulty. Evaluation of whether a concession was granted, was subjective in nature and management’s judgment was required in making the determination of whether a modification was
classified as a TDR. All non-reaffirmed residential real estate loans discharged in Chapter 7 bankruptcy were considered concessions and classified as nonaccruing TDRs.
On December 31, 2022, FHN had $180 million of portfolio loans classified as TDRs. Additionally, $30 million of loans held for sale as of December 31, 2022 were classified as TDRs.
The following table presents the end of period balance for loans modified in a TDR during the year ended December 31, 2022:
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LOANS MODIFIED IN A TDR | | | | | | |
| | | | Year Ended December 31, 2022 | | |
(Dollars in millions) | | | | | | | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | | | | | |
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C&I | | | | | | | | 6 | | | $ | 30 | | | $ | 24 | | | | | | | |
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CRE | | | | | | | | 1 | | | 1 | | | 1 | | | | | | | |
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HELOC | | | | | | | | 98 | | | 7 | | | 7 | | | | | | | |
Real estate installment loans | | | | | | | | 181 | | | 41 | | | 41 | | | | | | | |
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Credit card and other | | | | | | | | 81 | | | 12 | | | 12 | | | | | | | |
Total TDRs | | | | | | | | 367 | | | $ | 91 | | | $ | 85 | | | | | | | |
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The following table presents TDRs which re-defaulted during 2022 and as to which the modification occurred 12 months or less prior to the re-default. For purposes of this disclosure, FHN generally defines payment default as 30 or more days past due.
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LOANS MODIFIED IN A TDR THAT RE-DEFAULTED | | | | |
| | | | Year Ended December 31, 2022 | | |
(Dollars in millions) | | | | | | Number | | Recorded Investment | | | | |
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C&I | | | | | | 5 | | | $ | — | | | | | |
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CRE | | | | | | — | | | — | | | | | |
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HELOC | | | | | | 22 | | | 1 | | | | | |
Real estate installment loans | | | | | | 54 | | | 15 | | | | | |
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Credit card and other | | | | | | 17 | | | — | | | | | |
Total TDRs | | | | | | 98 | | | $ | 16 | | | | | |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 4—ALLOWANCE FOR CREDIT LOSSES | |
Note 4—Allowance for Credit Losses
Management's estimate of expected credit losses in the loan and lease portfolios is recorded in the ALLL and the reserve for unfunded lending commitments, collectively referred to as the Allowance for Credit Losses, or the ACL. The ALLL and the reserve for unfunded lending commitments are reported on the Consolidated Balance Sheets in the allowance for loan and lease losses and in other liabilities, respectively. Provision for credit losses related to the loans and leases portfolio and the unfunded lending commitments are reported in the Consolidated Statements of Income as provision for credit losses.
The ACL is maintained at a level management believes to be appropriate to absorb expected lifetime credit losses over the contractual life of the loan and lease portfolio and unfunded lending commitments. The determination of the ACL is based on periodic evaluation of the loan and lease portfolios and unfunded lending commitments considering a number of relevant underlying factors, including key assumptions and evaluation of quantitative and qualitative information.
The expected loan losses are the product of multiplying FHN’s estimates of probability of default (PD), loss given default (LGD), and individual loan level exposure at default (EAD), including amortization and prepayment assumptions, on an undiscounted basis. FHN uses models or assumptions to develop the expected loss forecasts, which incorporate multiple macroeconomic forecasts over a four-year reasonable and supportable forecast period. After the reasonable and supportable forecast period, the Company immediately reverts to its historical loss averages, evaluated over the historical observation period, for the remaining estimated life of the loans. In order to capture the unique risks of the loan portfolio within the PD, LGD, and prepayment models, FHN segments the portfolio into pools, generally incorporating loan grades for commercial loans. As there can be no certainty that actual economic performance will precisely follow any specific macroeconomic forecast, FHN uses qualitative adjustments where current loan characteristics or current or forecasted economic conditions differ from historical periods.
The evaluation of quantitative and qualitative information is performed through assessments of groups of assets that share similar risk characteristics and certain individual loans and leases that do not share similar risk characteristics with the collective group. As described in Note 3 - Loans and Leases, loans are grouped generally by product type and significant loan portfolios are assessed for credit losses using analytical or statistical models. The quantitative component utilizes economic forecast information as its foundation and is primarily based on analytical models that use known or estimated data as of the balance sheet date and forecasted data over the reasonable and supportable period. The ACL is also
affected by qualitative factors that FHN considers to reflect current judgment of various events and risks that are not measured in the quantitative calculations, including alternative economic forecasts.
In accordance with its accounting policy elections, FHN does not recognize a separate allowance for expected credit losses for AIR and records reversals of AIR as reductions of interest income. FHN reverses previously accrued but uncollected interest when an asset is placed on nonaccrual status. AIR and the related allowance for expected credit losses is included as a component of other assets. The total amount of interest reversals from loans placed on nonaccrual status and the amount of income recognized on nonaccrual loans during the three months ended March 31, 2023 and 2022 were not material.
Expected credit losses for unfunded commitments are estimated for periods where the commitment is not unconditionally cancellable. The measurement of expected credit losses for unfunded commitments mirrors that of loans and leases with the additional estimate of future draw rates (timing and amount).
Prior to January 1, 2023, TDRs were reflected in FHN’s estimate of expected credit losses as described in Note 1 - Significant Accounting Policies, in its 2022 Form 10-K. Subsequent to December 31, 2022, in accordance with the provisions of ASU 2022-02, FHN has ceased recognition of TDRs and no longer performs discounted cash flow calculations for these loans to estimate expected credit losses. As described in Note 3 – Loans and Leases, FHN now monitors and discloses information associated with modifications to borrowers experiencing financial difficulty. For both commercial and consumer portfolio segments, an adjustment to the ACL is generally not recorded at the time of modification because FHN includes these modified loans in its quantitative loss estimation processes. In the event of principal forgiveness, which primarily occurs for commercial loan workouts and consumer loans experiencing bankruptcy, FHN records the reduction in expected collectible principal balance as a charge-off against the ALLL.
The increase in the ACL balance as of March 31, 2023 as compared to December 31, 2022 largely reflects potential economic instability projected in the macroeconomic forecasts resulting from inflation and interest rate increases. In developing credit loss estimates for its loan and lease portfolios, FHN utilized two Moody’s forecast scenarios for its macroeconomic inputs. As of March 31, 2023, FHN's scenario selection process focused on key economic drivers such as unemployment and economic activity including recession risk. Risks considered include: the effects of inflation, rising interest rates, supply chain disruptions, labor/wage constraints, and international conflict. FHN selected one scenario as its base case, which
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 4—ALLOWANCE FOR CREDIT LOSSES | |
was the Moody's baseline growth scenario. The heaviest weight was placed on the FHN-selected downside scenario. A smaller weight was placed on the baseline forecast which assumed positive real GDP growth over the forecast horizon. No weighting was applied to the more positive macroeconomic scenario.
Management also made qualitative adjustments to reflect estimated recoveries based on a review of prior charge-off and recovery levels, for default risk associated with large
balances with individual borrowers, for estimated loss amounts not reflected in historical factors due to specific portfolio risk, and for instances where limited data for acquired loans is considered to affect modeled results.
The following table provides a rollforward of the ALLL and the reserve for unfunded lending commitments by portfolio type for the three months ended March 31, 2023 and 2022:
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ROLLFORWARD OF ALLL & RESERVE FOR UNFUNDED LENDING COMMITMENTS |
(Dollars in millions) | | Commercial, Financial, and Industrial (a) | | Commercial Real Estate | | Consumer Real Estate | | Credit Card and Other | | Total |
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Allowance for loan and lease losses: | | | | | | | | | | |
Balance as of January 1, 2023 | | $ | 308 | | | $ | 146 | | | $ | 200 | | | $ | 31 | | | $ | 685 | |
Adoption of ASU 2022-02 | | 1 | | | — | | | (7) | | | — | | | (6) | |
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Charge-offs | | (14) | | | (2) | | | (1) | | | (5) | | | (22) | |
Recoveries | | 3 | | | — | | | 2 | | | 1 | | | 6 | |
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Provision for loan and lease losses | | 27 | | | 6 | | | 15 | | | 4 | | | 52 | |
Balance as of March 31, 2023 | | $ | 325 | | | $ | 150 | | | $ | 209 | | | $ | 31 | | | $ | 715 | |
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Reserve for remaining unfunded commitments: | | | | | | | | | | |
Balance as of January 1, 2023 | | 55 | | | 22 | | | 10 | | | — | | | 87 | |
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Provision for remaining unfunded commitments | | (2) | | | (1) | | | 1 | | | — | | | (2) | |
Balance as of March 31, 2023 | | 53 | | | 21 | | | 11 | | | — | | | 85 | |
Allowance for credit losses as of March 31, 2023 | | $ | 378 | | | $ | 171 | | | $ | 220 | | | $ | 31 | | | $ | 800 | |
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Allowance for loan and lease losses: | | | | | | | | | | |
Balance as of January 1, 2022 | | $ | 334 | | | $ | 154 | | | $ | 163 | | | $ | 19 | | | $ | 670 | |
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Charge-offs | | (13) | | | — | | | (1) | | | (5) | | | (19) | |
Recoveries | | 3 | | | — | | | 5 | | | 1 | | | 9 | |
Provision for loan and lease losses | | (37) | | | (3) | | | (3) | | | 5 | | | (38) | |
Balance as of March 31, 2022 | | $ | 287 | | | $ | 151 | | | $ | 164 | | | $ | 20 | | | $ | 622 | |
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Reserve for remaining unfunded commitments: | | | | | | | | | | |
Balance as of January 1, 2022 | | $ | 46 | | | $ | 12 | | | $ | 8 | | | $ | — | | | $ | 66 | |
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Provision for remaining unfunded commitments | | (3) | | | — | | | 1 | | | — | | | (2) | |
Balance as of March 31, 2022 | | 43 | | | 12 | | | 9 | | | — | | | 64 | |
Allowance for credit losses as of March 31, 2022 | | $ | 330 | | | $ | 163 | | | $ | 173 | | | $ | 20 | | | $ | 686 | |
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(a) C&I loans as of March 31, 2023 and 2022 include $53 million and $642 million in PPP loans, respectively, which due to the government guarantee and forgiveness provisions are considered to have no credit risk and therefore have no allowance for loan and lease losses.
The table below presents gross charge-offs by year of origination as of March 31, 2023:
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GROSS CHARGE-OFFS |
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(Dollars in millions) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior to 2019 | | Revolving Loans | | Total |
C&I | | $ | — | | | $ | 5 | | | $ | — | | | $ | 1 | | | $ | — | | | $ | 6 | | | $ | 2 | | | $ | 14 | |
CRE | | — | | | — | | | — | | | — | | | 2 | | | — | | | — | | | 2 | |
Consumer Real Estate | | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Credit Card and Other | | — | | | — | | | — | | | — | | | — | | | 3 | | | 2 | | | 5 | |
Total | | $ | — | | | $ | 5 | | | $ | — | | | $ | 1 | | | $ | 2 | | | $ | 10 | | | $ | 4 | | | $ | 22 | |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 5—MORTGAGE BANKING ACTIVITY | |
Note 5—Mortgage Banking Activity
FHN originates mortgage loans for sale into the secondary market. These loans primarily consist 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. Gains and losses on these mortgage loans are included in mortgage banking and title income on the Consolidated Statements of Income.
Prior to the IBKC merger, FHN’s mortgage banking operations were not significant. At March 31, 2023, FHN
had approximately $38 million of loans that remained from pre-2009 mortgage business operations of legacy First Horizon. Activity related to the pre-2009 mortgage loans was primarily limited to payments and write-offs in 2023 and 2022, with no new originations or loan sales, and only an insignificant amount of repurchases. These loans are excluded from the disclosure below.
The following table summarizes activity relating to residential mortgage loans held for sale as of and for the three months ended March 31, 2023 and the year ended December 31, 2022.
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MORTGAGE LOAN ACTIVITY |
(Dollars in millions) | | March 31, 2023 | | December 31, 2022 |
Balance at beginning of period | | $ | 44 | | | $ | 250 | |
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Originations and purchases | | 120 | | | 1,275 | |
Sales, net of gains | | (103) | | | (1,481) | |
Mortgage loans transferred from (to) held for investment | | — | | | — | |
Balance at end of period | | $ | 61 | | | $ | 44 | |
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Mortgage Servicing Rights
FHN records mortgage servicing rights at the lower of cost or market value and amortizes them over the remaining servicing life of the loans, with consideration given to prepayment assumptions.
Mortgage servicing rights are included in other assets on the Consolidated Balance Sheets. Mortgage servicing rights had the following carrying values as of the periods indicated.
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MORTGAGE SERVICING RIGHTS |
| | March 31, 2023 | | December 31, 2022 | |
(Dollars in millions) | | Gross Carrying Amount | | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | | | | | |
Mortgage servicing rights | | $ | 21 | | | | $ | (5) | | | $ | 16 | | | $ | 21 | | | $ | (5) | | | $ | 16 | | | | | | | |
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In addition, there was an insignificant amount of non-mortgage and commercial servicing rights as of March 31, 2023 and December 31, 2022. Total mortgage servicing fees included in mortgage banking and title income were $1 million and $2 million for the three months ended March 31, 2023 and 2022, respectively.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 6—GOODWILL & OTHER INTANGIBLE ASSETS | |
Note 6—Goodwill and Other Intangible Assets
Goodwill
The following is a summary of goodwill by reportable segment included in the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022.
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GOODWILL |
(Dollars in millions) | | Regional Banking | | Specialty Banking | | Total |
December 31, 2021 | | $ | 880 | | | $ | 631 | | | $ | 1,511 | |
Additions | | — | | | — | | | — | |
December 31, 2022 | | $ | 880 | | | $ | 631 | | | $ | 1,511 | |
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Additions | | — | | | — | | | — | |
March 31, 2023 | | $ | 880 | | | $ | 631 | | | $ | 1,511 | |
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FHN performed the required annual goodwill impairment test as of October 1, 2022. The annual impairment test did not indicate impairment in any of FHN’s reporting units as of the testing date. Following the testing date, management evaluated the events and circumstances that could indicate that goodwill might be impaired and concluded that it is not more likely than not that goodwill was impaired.
Accounting estimates and assumptions were made about FHN's future performance and cash flows, as well as other prevailing market factors (e.g., interest rates, economic trends, etc.) when determining fair value as part of the
goodwill impairment test. While management used the best information available to estimate future performance for each reporting unit, future adjustments to management's projections may be necessary if conditions differ substantially from the assumptions used in making the estimates.
Other intangible assets
The following table, which excludes fully amortized intangibles, presents other intangible assets included in the Consolidated Balance Sheets:
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OTHER INTANGIBLE ASSETS |
| | March 31, 2023 | | December 31, 2022 |
(Dollars in millions) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value |
Core deposit intangibles | | $ | 371 | | | $ | (181) | | | $ | 190 | | | $ | 371 | | | $ | (171) | | | $ | 200 | |
Client relationships | | 32 | | | (14) | | | 18 | | | 32 | | | (13) | | | 19 | |
Other (a) | | 27 | | | (13) | | | 14 | | | 27 | | | (12) | | | 15 | |
Total | | $ | 430 | | | $ | (208) | | | $ | 222 | | | $ | 430 | | | $ | (196) | | | $ | 234 | |
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(a)Includes non-compete covenants and purchased credit card intangible assets. Also includes state banking licenses which are not subject to amortization.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 7—PREFERRED STOCK | |
Note 7—Preferred Stock
The following table presents a summary of FHN's non-cumulative perpetual preferred stock:
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PREFERRED STOCK |
(Dollars in millions) | | | | | | | | | | | | | | | | March 31, 2023 | | December 31, 2022 |
| | Issuance Date | | Earliest Redemption Date (a) | | | | | | Annual Dividend Rate | | Dividend Payments | | Shares Outstanding | | Liquidation Amount | | Carrying Amount | | Carrying Amount |
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Series B | | 7/2/2020 | | 8/1/2025 | | | | | | 6.625% | (b) | Semi-annually | | 8,000 | | | $ | 80 | | | $ | 77 | | | $ | 77 | |
Series C | | 7/2/2020 | | 5/1/2026 | | | | | | 6.600% | (c) | Quarterly | | 5,750 | | | 58 | | | 59 | | | 59 | |
Series D | | 7/2/2020 | | 5/1/2024 | | | | | | 6.100% | (d) | Semi-annually | | 10,000 | | | 100 | | | 94 | | | 94 | |
Series E | | 5/28/2020 | | 10/10/2025 | | | | | | 6.500% | | Quarterly | | 1,500 | | | 150 | | | 145 | | | 145 | |
Series F | | 5/3/2021 | | 7/10/2026 | | | | | | 4.700% | | Quarterly | | 1,500 | | | 150 | | | 145 | | | 145 | |
Series G | | 2/28/2022 | | 2/28/2027 | | | | | | N/A | | N/A | | 4,936 | | | 494 | | | 494 | | | 494 | |
| | | | | | | | | | | | | | 31,686 | | | $ | 1,032 | | | $ | 1,014 | | | $ | 1,014 | |
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N/A - not applicable
(a) Denotes earliest optional redemption date. Earlier redemption is possible, at FHN's election, if certain regulatory capital events occur.
(b) Fixed dividend rate will reset on August 1, 2025 to three-month CME Term SOFR plus 4.52361% (0.26161% plus 4.262%).
(c) Fixed dividend rate will reset on May 1, 2026 to three-month CME Term SOFR plus 5.18161% (0.26161% plus 4.920%).
(d) Fixed dividend rate will reset on May 1, 2024 to three-month CME Term SOFR plus 4.12061% (0.26161% plus 3.859%).
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 will occur at a fixed rate of 4,000 shares of common stock for each share of Series G Convertible Preferred Stock. For more information on the impact of the convertible features on diluted earnings per share, see Note 9 - Earnings Per Share.
The $494 million carrying value of the Series G Convertible Preferred Stock qualified as Tier 1 Capital as of March 31, 2023. When conversion occurs, the Series G Convertible Preferred Stock will also qualify for Common Equity Tier 1 Capital.
Subsidiary Preferred Stock
First Horizon Bank has issued 300,000 shares of Class A Non-Cumulative Perpetual Preferred Stock (Class A Preferred Stock) with a liquidation preference of $1,000 per share. Dividends on the Class A Preferred Stock, if declared, accrue and are payable each quarter, in arrears, at a floating rate equal to the greater of three-month LIBOR plus 0.85% or 3.75% per annum. After June 30, 2023, that floating rate will be the greater of three-month CME Term SOFR plus 1.11161% (0.26161% plus 0.85%) or 3.75% per annum. These securities qualify fully as Tier 1 capital for both First Horizon Bank and FHN. On March 31, 2023 and December 31, 2022, $295 million of Class A
Preferred Stock was recognized as noncontrolling interest on the Consolidated Balance Sheets.
LIBOR Change to SOFR
On March 5, 2021, the U.K.'s Financial Conduct Authority announced that all tenors of LIBOR would cease publication or no longer be representative after June 30, 2023. On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act was enacted in the U.S. The LIBOR Act provides that LIBOR will transition to a replacement benchmark based on the Secured Overnight Financing Rate (SOFR), plus a spread adjustment, in such covered contracts. Subsequently, the FRB adopted Regulation ZZ that identified CME Term SOFR, a forward term rate based on SOFR administered by CME Group Benchmark Administration, Ltd., plus a spread adjustment, as the replacement rate for securities for any interest rate calculations after June 30, 2023.
On April 25, 2023, FHN announced that each reference to LIBOR in each applicable securities contract (which term includes preferred stock and related depositary shares) will transition to CME Term SOFR, plus a tenor-based spread adjustment, on the first business day after June 30, 2023 pursuant to the LIBOR Act and the implementing regulations. The information presented in this Note reflects that transition.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 8—COMPONENTS OF OTHER COMPREHENSIVE INCOME (LOSS) | |
Note 8—Components of Other Comprehensive Income (Loss)
The following table provides the changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended March 31, 2023 and 2022:
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ACCUMULATED OTHER COMPREHENSIVE INCOME |
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(Dollars in millions) | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total |
Balance as of January 1, 2023 | | $ | (973) | | | $ | (127) | | | $ | (268) | | | $ | (1,368) | |
Net unrealized gains (losses) | | 114 | | | 33 | | | — | | | 147 | |
Amounts reclassified from AOCI | | — | | | 11 | | | 2 | | | 13 | |
Other comprehensive income (loss) | | 114 | | | 44 | | | 2 | | | 160 | |
Balance as of March 31, 2023 | | $ | (859) | | | $ | (83) | | | $ | (266) | | | $ | (1,208) | |
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(Dollars in millions) | | Securities AFS | | Cash Flow Hedges | | Pension and Post-retirement Plans | | Total |
Balance as of January 1, 2022 | | $ | (36) | | | $ | 3 | | | $ | (255) | | | $ | (288) | |
Net unrealized gains (losses) | | (404) | | | (20) | | | — | | | (424) | |
Amounts reclassified from AOCI | | — | | | (1) | | | 1 | | | — | |
Other comprehensive income (loss) | | (404) | | | (21) | | | 1 | | | (424) | |
Balance as of March 31, 2022 | | $ | (440) | | | $ | (18) | | | $ | (254) | | | $ | (712) | |
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Reclassifications from AOCI, and related tax effects, were as follows:
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RECLASSIFICATIONS FROM AOCI |
(Dollars in millions) | | Three Months Ended March 31, | | | | |
Details about AOCI | | 2023 | | 2022 | | | | | | Affected line item in the statement where net income is presented |
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Cash Flow Hedges: | | | | | | | | | | |
Realized (gains) losses on cash flow hedges | | $ | 15 | | | $ | (1) | | | | | | | Interest and fees on loans and leases |
Tax expense (benefit) | | (4) | | | — | | | | | | | Income tax expense |
| | 11 | | | (1) | | | | | | | |
Pension and Postretirement Plans: | | | | | | | | | | |
Amortization of prior service cost and net actuarial (gain) loss | | 3 | | | 1 | | | | | | | Other expense |
Tax expense (benefit) | | (1) | | | — | | | | | | | Income tax expense |
| | 2 | | | 1 | | | | | | | |
Total reclassification from AOCI | | $ | 13 | | | $ | — | | | | | | | |
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| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 9—EARNINGS PER SHARE | |
Note 9—Earnings Per Share
The computations of basic and diluted earnings per common share were as follows:
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EARNINGS PER SHARE COMPUTATIONS |
| Three Months Ended March 31, | | |
(Dollars in millions, except per share data; shares in thousands) | 2023 | | 2022 | | | | |
Net income | $ | 255 | | | $ | 198 | | | | | |
Net income attributable to noncontrolling interest | 4 | | | 3 | | | | | |
Net income attributable to controlling interest | 251 | | 195 | | | | |
Preferred stock dividends | 8 | | 8 | | | | |
Net income available to common shareholders | $ | 243 | | | $ | 187 | | | | | |
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Weighted average common shares outstanding—basic | 536,938 | | | 533,218 | | | | | |
Effect of dilutive restricted stock, performance equity awards and options | 7,541 | | | 6,809 | | | | | |
Effect of dilutive convertible preferred stock (a) | 27,512 | | | 9,782 | | | | | |
Weighted average common shares outstanding—diluted | 571,991 | | | 549,809 | | | | | |
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Basic earnings per common share | $ | 0.45 | | | $ | 0.35 | | | | | |
Diluted earnings per common share | $ | 0.43 | | | $ | 0.34 | | | | | |
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(a) On February 28, 2022, FHN issued $494 million of Series G Convertible Preferred Stock, which will be converted into common stock following the termination of the TD Merger Agreement. For more information on the convertible features, including the conversion rate, see Note 7 - Preferred Stock.
The following table presents average outstanding options and other equity awards that were excluded from the calculation of diluted earnings per share because they were either anti-dilutive (the exercise price was higher
than the weighted-average market price for the period) or the performance conditions have not been met:
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ANTI-DILUTIVE EQUITY AWARDS |
| | Three Months Ended March 31, | | |
(Shares in thousands) | | 2023 | | 2022 | | | | |
Stock options excluded from the calculation of diluted EPS | | — | | | 72 | | | | | |
Weighted average exercise price of stock options excluded from the calculation of diluted EPS | | $ | 24.36 | | | $ | 24.86 | | | | | |
Other equity awards excluded from the calculation of diluted EPS | | 3,803 | | | 791 | | | | | |
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| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 10—CONTINGENCIES & OTHER DISCLOSURES | |
Note 10—Contingencies and Other Disclosures
Contingencies
Contingent Liabilities Overview
Contingent liabilities arise in the ordinary course of business. Often, they are related to lawsuits, arbitration, mediation, and other forms of litigation. Various litigation matters currently are threatened or pending against FHN and its subsidiaries. Also, FHN at times receives requests for information, subpoenas, or other inquiries from federal, state, and local regulators, from other government authorities, and from other parties concerning various matters relating to FHN’s current or former businesses. Certain matters of that sort are pending at most times, and FHN generally cooperates when those matters arise. Pending and threatened litigation matters sometimes are settled by the parties, and sometimes pending matters are resolved in court or before an arbitrator, or are withdrawn. Regardless of the manner of resolution, frequently the most significant changes in status of a matter occur over a short time period, often following a lengthy period of little substantive activity. In view of the inherent difficulty of predicting the outcome of these matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories or involve a large number of parties, or where claims or other actions may be possible but have not been brought, FHN cannot reasonably determine what the eventual outcome of the matters will be, what the timing of the ultimate resolution of these matters may be, or what the eventual loss or impact related to each matter may be. FHN establishes a loss contingency liability for a litigation matter when loss is both probable and reasonably estimable as prescribed by applicable financial accounting guidance. If loss for a matter is probable and a range of possible loss outcomes is the best estimate available, accounting guidance requires a liability to be established at the low end of the range.
Based on current knowledge, and after consultation with counsel, management is of the opinion that loss contingencies related to threatened or pending litigation matters should not have a material adverse effect on the consolidated financial condition of FHN but may be material to FHN’s operating results for any particular reporting period depending, in part, on the results from that period.
Material Loss Contingency Matters
As used in this Note, except for matters that are reported as having been substantially settled or otherwise substantially resolved, FHN's “material loss contingency matters” generally fall into at least one of the following categories: (i) FHN has determined material loss to be probable and has established a material loss liability in accordance with applicable financial accounting guidance;
(ii) FHN has determined material loss to be probable but is not reasonably able to estimate an amount or range of material loss liability; or (iii) FHN has determined that material loss is not probable but is reasonably possible, and the amount or range of that reasonably possible material loss is estimable. As defined in applicable accounting guidance, loss is reasonably possible if there is more than a remote chance of a material loss outcome for FHN. FHN provides contingencies note disclosures for certain pending or threatened litigation matters each quarter, including all matters mentioned in categories (i) or (ii) and, occasionally, certain matters mentioned in category (iii). In addition, in this Note, certain other matters, or groups of matters, are discussed relating to FHN’s pre-2009 mortgage origination and servicing businesses. In all litigation matters discussed in this Note, unless settled or otherwise resolved, FHN believes it has meritorious defenses and intends to pursue those defenses vigorously.
FHN reassesses the liability for litigation matters each quarter as the matters progress. At March 31, 2023, the aggregate amount of liabilities established for all such loss contingency matters was $3 million. These liabilities are separate from those discussed under the heading Mortgage Loan Repurchase and Foreclosure Liability below.
In each material loss contingency matter, except as otherwise noted, there is more than a remote chance that any of the following outcomes will occur: the plaintiff will substantially prevail; the defense will substantially prevail; the plaintiff will prevail in part; or the matter will be settled by the parties. At March 31, 2023, FHN estimates that for all material loss contingency matters, estimable reasonably possible losses in future periods in excess of currently established liabilities could aggregate in a range from zero to less than $1 million.
As a result of the general uncertainties discussed above and the specific uncertainties discussed for each matter mentioned below, it is possible that the ultimate future loss experienced by FHN for any particular matter may materially exceed the amount, if any, of currently established liability for that matter.
Exposures from pre-2009 Mortgage Business
FHN is contending with indemnification claims related to "other whole loans sold," which were mortgage loans originated by FHN before 2009 and sold outside of a securitization organized by FHN. These claims generally assert that FHN-originated loans contributed to losses in connection with mortgage loans securitized by the buyer of the loans. The claims generally do not include specific deficiencies for specific loans sold by FHN. Instead, the claims generally assert that FHN is liable for a share of the claimant's loss estimated by assessing the totality of the
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 10—CONTINGENCIES & OTHER DISCLOSURES | |
other whole loans sold by FHN to claimant in relation to the totality of the larger number of loans securitized by claimant. FHN is unable to estimate an RPL range for these matters due to significant uncertainties regarding: the number of, and the facts underlying, the loan originations which claimants assert are indemnifiable; the applicability of FHN’s contractual indemnity covenants to those facts and originations; and, in those cases where an indemnity claim may be supported, whether any legal defenses, counterclaims, other counter-positions, or third-party claims might eliminate or reduce claims against FHN or their impact on FHN.
FHN also has indemnification claims related to servicing obligations. The most significant is from Nationstar Mortgage LLC, currently doing business as “Mr. Cooper.” Nationstar was the purchaser of FHN’s mortgage servicing obligations and assets in 2013 and 2014 and, was FHN’s subservicer. Nationstar asserts several categories of indemnity obligations in connection with mortgage loans under the subservicing arrangement and under the purchase transaction. This matter currently is not in litigation, but litigation in the future is possible. FHN is unable to estimate an RPL range for this matter due to significant uncertainties regarding: the exact nature of each of Nationstar’s claims and its position in respect of each; the number of, and the facts underlying, the claimed instances of indemnifiable events; the applicability of FHN’s contractual indemnity covenants to those facts and events; and, in those cases where the facts and events might support an indemnity claim, whether any legal defenses, counterclaims, other counter-positions, or third-party claims might eliminate or reduce claims against FHN or their impact on FHN.
FHN has additional potential exposures related to its pre-2009 mortgage businesses. A few of those matters have become litigation which FHN currently estimates are immaterial, some are non-litigation claims or threats, some are mere subpoenas or other requests for information, and in some areas FHN has no indication of any active or threatened dispute. Some of those matters might eventually result in settlements, and some might eventually result in adverse litigation outcomes, but none are included in the material loss contingency liabilities mentioned above or in the RPL range mentioned above.
Mortgage Loan Repurchase and Foreclosure Liability
FHN’s repurchase and foreclosure liability, primarily related to its pre-2009 mortgage businesses, is comprised of accruals to cover estimated loss content in the active pipeline (consisting of mortgage loan repurchase, make-whole, foreclosure/servicing demands and certain related exposures), estimated future inflows, and estimated loss content related to certain known claims not currently included in the active pipeline. 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.
Based on currently available information and experience to date, FHN has evaluated its loan repurchase, make-whole, foreclosure, and certain related exposures and has accrued for losses of $15 million and $16 million as of March 31, 2023 and December 31, 2022, respectively. Accrued liabilities for FHN’s estimate of these obligations are reflected in other liabilities on the Consolidated Balance Sheets. Charges/expense reversals to increase/decrease the liability are included within other income on the Consolidated Statements of Income. The estimates are based upon currently available information and fact patterns that exist as of each balance sheet date and could be subject to future changes. Changes to any one of these factors could significantly impact the estimate of FHN’s liability.
Other Disclosures
Indemnification Agreements and Guarantees
In the ordinary course of business, FHN enters into indemnification agreements for legal proceedings against its directors and officers and standard representations and warranties for underwriting agreements, merger and acquisition agreements, loan sales, contractual commitments, and various other business transactions or arrangements.
The extent of FHN’s obligations under these agreements depends upon the occurrence of future events; therefore, it is not possible to estimate a maximum potential amount of payouts that could be required by such agreements.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 11—RETIREMENT PLANS | |
Note 11—Retirement Plans
FHN sponsors a noncontributory, qualified defined benefit pension plan to employees hired or re-hired on or before September 1, 2007. Pension benefits are based on years of service, average compensation near retirement or other termination, and estimated social security benefits at age 65. Benefits under the plan are “frozen” so that years of service and compensation changes after 2012 do not affect the benefit owed. Minimum contributions are based upon actuarially determined amounts necessary to fund the total benefit obligation. Decisions to contribute to the plan are based upon pension funding requirements under the Pension Protection Act, the maximum amount deductible under the Internal Revenue Code, the actual performance of plan assets, and trends in the regulatory environment. FHN made no contributions to the qualified pension plan in 2022. Management does not currently anticipate that FHN will make a contribution to the qualified pension plan in 2023.
FHN also maintains non-qualified plans including a supplemental retirement plan that covers certain
employees whose benefits under the qualified pension plan have been limited by tax rules. These other non-qualified plans are unfunded, and contributions to these plans cover all benefits paid under the non-qualified plans. Payments made under the non-qualified plans were $5 million for 2022. FHN anticipates making benefit payments under the non-qualified plans of $5 million in 2023. Service cost is included in personnel expense in the Consolidated Statements of Income. All other components of net periodic benefit cost are included in other expense.
For more information on FHN's pension plan and other postretirement benefit plans, see Note 17 - Retirement Plans and Other Employee Benefits in FHN's 2022 Annual Report on Form 10-K.
The components of net periodic benefit cost for the three months ended March 31 were as follows:
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COMPONENTS OF NET PERIODIC BENEFIT COST |
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(Dollars in millions) | | | 2023 | | 2022 |
Components of net periodic benefit cost | | | | | |
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Interest cost | | | $ | 8 | | | $ | 5 | |
Expected return on plan assets | | | (8) | | | (6) | |
Amortization of unrecognized: | | | | | |
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Actuarial (gain) loss | | | 3 | | | 2 | |
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Net periodic benefit cost | | | $ | 3 | | | $ | 1 | |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 12—BUSINESS SEGMENT INFORMATION | |
Note 12—Business Segment Information
FHN's operating segments are composed of the following:
•Regional Banking segment offers financial products and services, including traditional lending and deposit taking, to consumer and commercial clients primarily in the southern U.S. and other selected markets. Regional Banking also provides investment, wealth management, financial planning, trust and asset management services for consumer clients.
•Specialty Banking segment consists of lines of business that deliver product offerings and services with specialized industry knowledge. Specialty Banking’s lines of business include asset-based lending, mortgage warehouse lending, commercial real estate, franchise finance, correspondent banking, equipment finance, mortgage, and title insurance. In addition to traditional lending and deposit taking, Specialty Banking also delivers treasury management solutions, loan syndications, and international banking. Additionally, Specialty Banking has a line of business focused on fixed income securities sales, trading, underwriting, and strategies for institutional clients in the U.S. and abroad, as well as loan sales, portfolio advisory services, and derivative sales.
•Corporate segment consists primarily of corporate support functions including risk management, audit, accounting, finance, executive office, and corporate
communications. Shared support services such as human resources, properties, technology, credit risk and bank operations are allocated to the activities of Regional Banking, Specialty Banking and Corporate. Additionally, the Corporate segment includes centralized management of capital and funding to support the business activities of the company including management of wholesale funding, liquidity, and capital management and allocation. The Corporate segment also includes the revenue and expense associated with run-off businesses such as pre-2009 mortgage banking elements, run-off consumer and trust preferred loan portfolios, and other exited businesses.
Periodically, FHN adapts its segments to reflect managerial or strategic changes. FHN may also modify its methodology of allocating expenses and equity among segments which could change historical segment results. Business segment revenue, expense, asset, and equity levels reflect those which are specifically identifiable or which are allocated based on an internal allocation method. Because the allocations are based on internally developed assignments and allocations, to an extent they are subjective. Generally, all assignments and allocations have been consistently applied for all periods presented.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 12—BUSINESS SEGMENT INFORMATION | |
The following tables present financial information for each reportable business segment for the three months ended March 31, 2023 and 2022:
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SEGMENT FINANCIAL INFORMATION |
| Three Months Ended March 31, 2023 |
(Dollars in millions) | Regional Banking | | Specialty Banking | | Corporate | | Consolidated |
Net interest income (expense) | $ | 586 | | | $ | 126 | | | $ | (24) | | | $ | 688 | |
Provision for credit losses | 41 | | | 10 | | | (1) | | | 50 | |
Noninterest income | 107 | | | 53 | | | 11 | | | 171 | |
Noninterest expense (a) | 322 | | | 91 | | | 65 | | | 478 | |
Income (loss) before income taxes | 330 | | | 78 | | | (77) | | | 331 | |
Income tax expense (benefit) | 78 | | | 19 | | | (21) | | | 76 | |
Net income (loss) | $ | 252 | | | $ | 59 | | | $ | (56) | | | $ | 255 | |
Average assets | $ | 44,487 | | | $ | 19,436 | | | $ | 14,918 | | | $ | 78,841 | |
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| Three Months Ended March 31, 2022 |
(Dollars in millions) | Regional Banking | | Specialty Banking | | Corporate | | Consolidated |
Net interest income (expense) | $ | 427 | | | $ | 144 | | | $ | (92) | | | $ | 479 | |
Provision for credit losses | (30) | | | (3) | | | (7) | | | (40) | |
Noninterest income | 114 | | | 105 | | | 10 | | | 229 | |
Noninterest expense (a) | 306 | | | 132 | | | 55 | | | 493 | |
Income (loss) before income taxes | 265 | | | 120 | | | (130) | | | 255 | |
Income tax expense (benefit) | 62 | | | 29 | | | (34) | | | 57 | |
Net income (loss) | $ | 203 | | | $ | 91 | | | $ | (96) | | | $ | 198 | |
Average assets | $ | 40,544 | | | $ | 20,246 | | | $ | 27,797 | | | $ | 88,587 | |
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(a) 2023 includes $21 million in merger and integration expenses related to the TD Transaction and 2022 includes $37 million in merger and integration expenses related to the IBKC merger and TD Transaction in the Corporate segment.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 12—BUSINESS SEGMENT INFORMATION | |
The following tables reflect a disaggregation of FHN’s noninterest income by major product line and reportable segment for the three months ended March 31, 2023 and 2022:
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NONINTEREST INCOME DETAIL BY SEGMENT |
| Three months ended March 31, 2023 |
(Dollars in millions) | Regional Banking | | Specialty Banking | | Corporate | | Consolidated |
Noninterest income: | | | | | | | |
Deposit transactions and cash management | $ | 38 | | | $ | 2 | | | $ | 2 | | | $ | 42 | |
Fixed income (a) | — | | | 39 | | | — | | | 39 | |
Brokerage, management fees and commissions | 22 | | | — | | | — | | | 22 | |
Card and digital banking fees | 17 | | | 1 | | | 2 | | | 20 | |
Other service charges and fees | 8 | | | 5 | | | — | | | 13 | |
Trust services and investment management | 11 | | | — | | | — | | | 11 | |
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Mortgage banking and title income | — | | | 5 | | | — | | | 5 | |
Other income (c) | 11 | | | 1 | | | 7 | | | 19 | |
Total noninterest income | $ | 107 | | | $ | 53 | | | $ | 11 | | | $ | 171 | |
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| Three months ended March 31, 2022 |
(Dollars in millions) | Regional Banking | | Specialty Banking | | Corporate | | Consolidated |
Noninterest income: | | | | | | | |
Deposit transactions and cash management | $ | 39 | | | $ | 3 | | | $ | 2 | | | $ | 44 | |
Fixed income (a) | — | | | 73 | | | — | | | 73 | |
Brokerage, management fees and commissions | 24 | | | — | | | — | | | 24 | |
Card and digital banking fees | 17 | | | 1 | | | 2 | | | 20 | |
Other service charges and fees | 8 | | | 5 | | | — | | | 13 | |
Trust services and investment management | 13 | | | — | | | — | | | 13 | |
Mortgage banking and title income | — | | | 22 | | | — | | | 22 | |
Securities gains (losses), net (b) | — | | | — | | | 6 | | | 6 | |
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Other income (c) | 13 | | | 1 | | | — | | | 14 | |
Total noninterest income | $ | 114 | | | $ | 105 | | | $ | 10 | | | $ | 229 | |
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(a)2023 and 2022 includes $10 million of underwriting, portfolio advisory, and other noninterest income in scope of ASC 606, "Revenue From Contracts With Customers."
(b)Represents noninterest income excluded from the scope of ASC 606. Amount is presented for informational purposes to reconcile total noninterest income.
(c)Includes letter of credit fees and insurance commissions in scope of ASC 606.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 13—VARIABLE INTEREST ENTITIES | |
Note 13—Variable Interest Entities
FHN makes equity investments in various entities that are considered VIEs, as defined by GAAP. A VIE typically does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. The Company’s variable interest arises from contractual, ownership or other monetary interests in the entity, which change with fluctuations in the fair value of the entity's net assets. FHN consolidates a VIE if FHN is the primary beneficiary of the entity. FHN is the primary beneficiary of a VIE if FHN's variable interest provides it with the power to direct the activities that most significantly impact the VIE and the right to receive benefits (or the obligation to absorb losses) that could potentially be significant to the VIE. To determine whether or not a variable interest held could potentially be significant to the VIE, FHN considers both qualitative and quantitative factors regarding the nature, size and form of its involvement with the VIE. FHN assesses whether or not it is the primary beneficiary of a VIE on an ongoing basis.
Consolidated Variable Interest Entities
FHN has established certain rabbi trusts related to deferred compensation plans offered to its employees.
FHN contributes employee cash compensation deferrals to the trusts and directs the underlying investments made by the trusts. The assets of these trusts are available to FHN’s creditors only in the event that FHN becomes insolvent. These trusts are considered VIEs as there is no equity at risk in the trusts since FHN provided the equity interest to its employees in exchange for services rendered. FHN is considered the primary beneficiary of the rabbi trusts as it has the power to direct the activities that most significantly impact the economic performance of the rabbi trusts through its ability to direct the underlying investments made by the trusts. Additionally, FHN could potentially receive benefits or absorb losses that are significant to the trusts due to its right to receive any asset values in excess of liability payoffs and its obligation to fund any liabilities to employees that are in excess of a rabbi trust’s assets.
The following table summarizes the carrying value of assets and liabilities associated with rabbi trusts used for deferred compensation plans which are consolidated by FHN as of March 31, 2023 and December 31, 2022:
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CONSOLIDATED VIEs |
(Dollars in millions) | | | | March 31, 2023 | | | | December 31, 2022 |
Assets: | | | | | | | | |
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Other assets | | | | $ | 168 | | | | | $ | 181 | |
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Liabilities: | | | | | | | | |
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Other liabilities | | | | $ | 139 | | | | | $ | 150 | |
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Nonconsolidated Variable Interest Entities
Low Income Housing Tax Credit Partnerships
Through designated wholly-owned subsidiaries, First Horizon Bank makes equity investments as a limited partner in various partnerships that sponsor affordable housing projects utilizing the LIHTC. The purpose of these investments is to achieve a satisfactory return on capital and to support FHN’s community reinvestment initiatives. LIHTC partnerships are managed by unrelated general partners that have the power to direct the activities which most significantly affect the performance of the partnerships. FHN is therefore not the primary beneficiary of any LIHTC partnerships. Accordingly, FHN does not
consolidate these VIEs and accounts for these investments in other assets on the Consolidated Balance Sheets.
FHN accounts for all qualifying LIHTC investments under the proportional amortization method. Under this method an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance as a component of income tax expense. LIHTC investments that do not qualify for the proportional amortization method are accounted for using the equity method. Expenses associated with non-qualifying LIHTC investments were not material for the three months ended March 31, 2023 and 2022.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 13—VARIABLE INTEREST ENTITIES | |
The following table summarizes the impact to income tax expense on the Consolidated Statements of Income for the three months ended March 31, 2023 and 2022 for LIHTC investments accounted for under the proportional amortization method.
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LIHTC IMPACTS ON TAX EXPENSE |
| | Three Months Ended March 31, | | |
(Dollars in millions) | | 2023 | | 2022 | | | | |
Income tax expense (benefit): | | | | | | | | |
Amortization of qualifying LIHTC investments | | $ | 13 | | | $ | 12 | | | | | |
Low income housing tax credits | | (14) | | | (12) | | | | | |
Other tax benefits related to qualifying LIHTC investments | | (3) | | | (2) | | | | | |
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Other Tax Credit Investments
Through designated subsidiaries, First Horizon Bank periodically makes equity investments as a non-managing member in various LLCs that sponsor community development projects utilizing the NMTC. First Horizon Bank also makes equity investments as a limited partner or non-managing member in entities that receive solar and historic tax credits. The purposes of these investments are to achieve a satisfactory return on capital and to support FHN’s community reinvestment initiatives. These entities are considered VIEs as First Horizon Bank's subsidiaries represent the holders of the equity investment at risk, but do not have the ability to direct the activities that most significantly affect the performance of the entities.
Small Issuer Trust Preferred Holdings
First Horizon Bank holds variable interests in trusts which have issued mandatorily redeemable preferred capital securities (“trust preferreds”) for smaller banking and insurance enterprises. First Horizon Bank has no voting rights for the trusts’ activities. The trusts’ only assets are junior subordinated debentures of the issuing enterprises. The creditors of the trusts hold no recourse to the assets of First Horizon Bank. Since First Horizon Bank is solely a holder of the trusts’ securities, it has no rights which would give it the power to direct the activities that most significantly impact the trusts’ economic performance and thus it is not considered the primary beneficiary of the trusts. First Horizon Bank has no contractual requirements to provide financial support to the trusts.
On-Balance Sheet Trust Preferred Securitization
In 2007, First Horizon Bank executed a securitization of certain small issuer trust preferreds for which the underlying trust meets the definition of a VIE as the holders of the equity investment at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entity’s economic performance. Since First Horizon Bank did not retain servicing or other decision-making rights, First Horizon Bank is not the primary beneficiary as it does not have the power to direct the activities that most
significantly impact the trust’s economic performance. Accordingly, First Horizon Bank has accounted for the funds received through the securitization as a term borrowing in its Consolidated Balance Sheets. First Horizon Bank has no contractual requirements to provide financial support to the trust.
Holdings in Agency Mortgage-Backed Securities
FHN holds securities issued by various Agency securitization trusts. Based on their restrictive nature, the trusts meet the definition of a VIE since the holders of the equity investments at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entities’ economic performance. FHN could potentially receive benefits or absorb losses that are significant to the trusts based on the nature of the trusts’ activities and the size of FHN’s holdings. However, FHN is solely a holder of the trusts’ securities and does not have the power to direct the activities that most significantly impact the trusts’ economic performance and is not considered the primary beneficiary of the trusts. FHN has no contractual requirements to provide financial support to the trusts.
Commercial Loan Modifications to Borrowers Experiencing Financial Difficulty
For certain troubled commercial loans, First Horizon Bank modifies the terms of the borrower’s debt in an effort to increase the probability of receipt of amounts contractually due. Following a modification to borrowers experiencing financial difficulty, the borrower entity typically meets the definition of a VIE as the initial determination of whether an entity is a VIE must be reconsidered as events have proven that the entity’s equity is not sufficient to permit it to finance its activities without additional subordinated financial support or a restructuring of the terms of its financing. As First Horizon Bank does not have the power to direct the activities that most significantly impact such troubled commercial borrowers’ operations, it is not considered the primary beneficiary even in situations where, based on the size of the financing provided, First Horizon Bank is exposed to potentially significant benefits and losses of the borrowing
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 13—VARIABLE INTEREST ENTITIES | |
entity. First Horizon Bank has no contractual requirements to provide financial support to the borrowing entities beyond certain funding commitments established upon restructuring of the terms of the debt that allows for preparation of the underlying collateral for sale.
Proprietary Trust Preferred Issuances
In conjunction with its acquisitions, FHN acquired junior subordinated debt underlying multiple issuances of trust preferred debt. All of the trusts are considered VIEs because the ownership interests from the capital contributions to these trusts are not considered “at risk”
in evaluating whether the holders of the equity investments at risk in the trusts have the ability to direct the activities that most significantly impact the entities’ economic performance. Thus, FHN cannot be the trusts’ primary beneficiary because its ownership interests in the trusts are not considered variable interests as they are not considered “at risk”. Consequently, none of the trusts are consolidated by FHN. The following tables summarize FHN’s nonconsolidated VIEs as of March 31, 2023 and December 31, 2022:
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NONCONSOLIDATED VIEs AT MARCH 31, 2023 |
(Dollars in millions) | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | |
Low income housing partnerships | | $ | 462 | | | $ | 150 | | | (a) |
Other tax credit investments (b) | | 84 | | | 67 | | | Other assets |
Small issuer trust preferred holdings (c) | | 173 | | | — | | | Loans and leases |
On-balance sheet trust preferred securitization | | 27 | | | 87 | | | (d) |
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Holdings of agency mortgage-backed securities (c) | | 8,724 | | | — | | | (e) |
Commercial loan modifications to borrowers experiencing financial difficulty (f) | | 113 | | | — | | | Loans and leases |
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Proprietary trust preferred issuances (g) | | — | | | 167 | | | Term borrowings |
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(a)Maximum loss exposure represents $312 million of current investments and $150 million of accrued contractual funding commitments. Accrued funding commitments represent unconditional contractual obligations for future funding events and are also recognized in other liabilities. FHN currently expects to be required to fund these accrued commitments by the end of 2024.
(b)Maximum loss exposure represents the value of current investments.
(c)Maximum loss exposure represents the value of current investments. A liability is not recognized as FHN is solely a holder of the trusts’ securities.
(d)Includes $112 million classified as loans and leases and $2 million classified as trading securities, which are offset by $87 million classified as term borrowings.
(e)Includes $251 million classified as trading securities, $1.4 billion classified as held to maturity and $7.1 billion classified as securities available for sale.
(f)Maximum loss exposure represents $113 million of current receivables with no additional contractual funding commitments on loans related to commercial loan modifications to borrowers experiencing financial difficulty.
(g)No exposure to loss due to nature of FHN's involvement.
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NONCONSOLIDATED VIEs AT DECEMBER 31, 2022 |
(Dollars in millions) | | Maximum Loss Exposure | | Liability Recognized | | Classification |
Type | | | | | | |
Low income housing partnerships | | $ | 463 | | | $ | 154 | | | (a) |
Other tax credit investments (b) | | 85 | | | 67 | | | Other assets |
Small issuer trust preferred holdings (c) | | 171 | | | — | | | Loans and leases |
On-balance sheet trust preferred securitization | | 27 | | | 87 | | | (d) |
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Holdings of agency mortgage-backed securities (c) | | 8,652 | | | — | | | (e) |
Commercial loan troubled debt restructurings (f) | | 53 | | | — | | | Loans and leases |
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Proprietary trust preferred issuances (g) | | — | | | 167 | | | Term borrowings |
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(a)Maximum loss exposure represents $309 million of current investments and $154 million of accrued contractual funding commitments. Accrued funding commitments represent unconditional contractual obligations for future funding events and are also recognized in other liabilities. FHN currently expects to be required to fund these accrued commitments by the end of 2024.
(b)Maximum loss exposure represents current investments.
(c)Maximum loss exposure represents the value of current investments. A liability is not recognized as FHN is solely a holder of the trusts’ securities.
(d)Includes $112 million classified as loans and leases and $2 million classified as trading securities, which are offset by $87 million classified as term borrowings.
(e)Includes $205 million classified as trading securities, $1.4 billion classified as held to maturity and $7.1 billion classified as securities available for sale.
(f)Maximum loss exposure represents $53 million of current receivables with no additional contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring.
(g)No exposure to loss due to nature of FHN's involvement.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 14—DERIVATIVES | |
Note 14—Derivatives
In the normal course of business, FHN utilizes various financial instruments (including derivative contracts and credit-related agreements) through its fixed income and risk management operations, as part of its risk management strategy and as a means to meet clients’ needs. Derivative instruments are subject to credit and market risks in excess of the amount recorded on the balance sheet as required by GAAP. The contractual or notional amounts of these financial instruments do not necessarily represent the amount of credit or market risk. However, they can be used to measure the extent of involvement in various types of financial instruments. Controls and monitoring procedures for these instruments have been established and are routinely reevaluated. The ALCO controls, coordinates, and monitors the usage and effectiveness of these financial instruments.
Credit risk represents the potential loss that may occur if a party to a transaction fails to perform according to the terms of the contract. The measure of credit exposure is the replacement cost of contracts with a positive fair value. FHN manages credit risk by entering into financial instrument transactions through national exchanges, primary dealers or approved counterparties, and by using mutual margining and master netting agreements whenever possible to limit potential exposure. FHN also maintains collateral posting requirements with certain counterparties to limit credit risk. Daily margin posted or received with central clearinghouses is considered a legal settlement of the related derivative contracts which results in a net presentation for each contract in the Consolidated Balance Sheets. Treatment of daily margin as a settlement has no effect on hedge accounting or gains/losses for the applicable derivative contracts. On March 31, 2023 and December 31, 2022, respectively, FHN had $136 million and $159 million of cash receivables and $26 million and $42 million of cash payables related to collateral posting under master netting arrangements, inclusive of collateral posted related to contracts with adjustable collateral posting thresholds and over-collateralized positions, with derivative counterparties. With exchange-traded contracts, the credit risk is limited to the clearinghouse used. For non-exchange traded instruments, credit risk may occur when there is a gain in the fair value of the financial instrument and the counterparty fails to perform according to the terms of the contract and/or when the collateral proves to be of insufficient value. See additional discussion regarding master netting agreements and collateral posting requirements later in this note under the heading “Master Netting and Similar Agreements.” Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates or the prices of debt instruments. FHN manages market risk by establishing and monitoring limits on the types and degree of risk that may be undertaken.
FHN continually measures this risk through the use of models that measure value-at-risk and earnings-at-risk.
Derivative Instruments
FHN enters into various derivative contracts both to facilitate client transactions and as a risk management tool. Where contracts have been created for clients, FHN enters into upstream transactions with dealers to offset its risk exposure. Contracts with dealers that require central clearing are novated to a clearing agent who becomes FHN’s counterparty. Derivatives are also used as a risk management tool to hedge FHN’s exposure to changes in interest rates or other defined market risks.
Forward contracts are over-the-counter contracts where two parties agree to purchase and sell a specific quantity of a financial instrument at a specified price, with delivery or settlement at a specified date. Futures contracts are exchange-traded contracts where two parties agree to purchase and sell a specific quantity of a financial instrument at a specified price, with delivery or settlement at a specified date. Interest rate option contracts give the purchaser the right, but not the obligation, to buy or sell a specified quantity of a financial instrument, at a specified price, during a specified period of time. Caps and floors are options that are linked to a notional principal amount and an underlying indexed interest rate. Interest rate swaps involve the exchange of interest payments at specified intervals between two parties without the exchange of any underlying principal. Swaptions are options on interest rate swaps that give the purchaser the right, but not the obligation, to enter into an interest rate swap agreement during a specified period of time.
Trading Activities
FHNF trades U.S. Treasury, U.S. Agency, government-guaranteed loan, mortgage-backed, corporate and municipal fixed income securities, and other securities for distribution to clients. When these securities settle on a delayed basis, they are considered forward contracts. FHNF also enters into interest rate contracts, including caps, swaps, and floors, for its clients. In addition, FHNF enters into futures and option contracts to economically hedge interest rate risk associated with a portion of its securities inventory. These transactions are measured at fair value, with changes in fair value recognized in noninterest income. Related assets and liabilities are recorded on the Consolidated Balance Sheets as derivative assets and derivative liabilities within other assets and other liabilities. The FHNF Risk Committee and the Credit Risk Management Committee collaborate to mitigate credit risk related to these transactions. Credit risk is controlled through credit approvals, risk control limits, and ongoing monitoring procedures. Total trading revenues were $27 million and $61 million for the three months ended March 31, 2023 and 2022, respectively.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 14—DERIVATIVES | |
Trading revenues are inclusive of both derivative and non-derivative financial instruments and are included in fixed income on the Consolidated Statements of Income.
The following table summarizes derivatives associated with FHNF's trading activities as of March 31, 2023 and December 31, 2022:
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DERIVATIVES ASSOCIATED WITH TRADING |
| | March 31, 2023 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Customer interest rate contracts | | $ | 3,312 | | | $ | 11 | | | $ | 207 | |
Offsetting upstream interest rate contracts | | 3,312 | | | 94 | | | 15 | |
Option contracts written | | 110 | | | — | | | 1 | |
Forwards and futures purchased | | 1,607 | | | 9 | | | 1 | |
Forwards and futures sold | | 1,757 | | | 1 | | | 10 | |
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| | December 31, 2022 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Customer interest rate contracts | | $ | 3,076 | | | $ | 3 | | | $ | 270 | |
Offsetting upstream interest rate contracts | | 3,076 | | | 91 | | | 6 | |
Option contracts purchased | | 40 | | | — | | | — | |
Forwards and futures purchased | | 1,127 | | | 5 | | | 2 | |
Forwards and futures sold | | 1,256 | | | 4 | | | 5 | |
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Interest Rate Risk Management
FHN’s ALCO focuses on managing market risk by controlling and limiting earnings volatility attributable to changes in interest rates. Interest rate risk exists to the extent that interest-earning assets and interest-bearing liabilities have different maturity or repricing characteristics. FHN uses derivatives, primarily swaps, that are designed to moderate the impact on earnings as interest rates change. Interest paid or received for swaps utilized by FHN to hedge the fair value of long-term debt is recognized as an adjustment of the interest expense of the liabilities whose risk is being managed. FHN’s interest rate risk management policy is to use derivatives to hedge interest rate risk or market value of assets or liabilities,
not to speculate. In addition, FHN has entered into certain interest rate swaps and caps as a part of a product offering to commercial clients that includes customer derivatives paired with upstream offsetting market instruments that, when completed, are designed to mitigate interest rate risk. These contracts do not qualify for hedge accounting and are measured at fair value with gains or losses included in current earnings in noninterest expense on the Consolidated Statements of Income.
The following tables summarize FHN’s derivatives associated with interest rate risk management activities as of March 31, 2023 and December 31, 2022:
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DERIVATIVES ASSOCIATED WITH INTEREST RATE RISK MANAGEMENT |
| | March 31, 2023 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | |
Customer interest rate contracts | | $ | 8,424 | | | $ | 16 | | | $ | 423 | |
Offsetting upstream interest rate contracts | | 8,424 | | | 413 | | | 21 | |
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| | December 31, 2022 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | |
Customer interest rate contracts | | $ | 8,377 | | | $ | 3 | | | $ | 570 | |
Offsetting upstream interest rate contracts | | 8,377 | | | 351 | | | 5 | |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 14—DERIVATIVES | |
The following table summarizes gains (losses) on FHN’s derivatives associated with interest rate risk management activities for the three months ended March 31, 2023 and 2022:
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DERIVATIVE GAINS (LOSSES) ASSOCIATED WITH INTEREST RATE RISK MANAGEMENT | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
(Dollars in millions) | | Gains (Losses) | | Gains (Losses) | | | | |
Customer Interest Rate Contracts Hedging | | | | | | |
Hedging Instruments and Hedged Items: | | | | | | | | |
Customer interest rate contracts (a) | | $ | 160 | | | $ | 353 | | | | | |
Offsetting upstream interest rate contracts (a) | | (160) | | | (353) | | | | | |
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(a)Gains (losses) included in other expense within the Consolidated Statements of Income.
Cash Flow Hedges
Prior to 2021, FHN entered into pay floating, receive fixed interest rate swaps designed to manage its exposure to the variability in cash flows related to interest payments on debt instruments. In conjunction with the IBKC merger, FHN acquired interest rate contracts (floors and collars) which have been re-designated as cash flow hedges. The debt instruments primarily consist of held-to-maturity commercial loans that have variable interest payments based on 1-month LIBOR.
In 2022, FHN entered into interest rate contracts (floors and swaps) which have been designated as cash flow hedges. These hedges reference 1-month Term SOFR and FHN has made certain elections under ASU 2020-04 to
facilitate qualification for hedge accounting during the time that hedged items transition away from 1-Month LIBOR.
In a cash flow hedge, the entire change in the fair value of the interest rate derivatives included in the assessment of hedge effectiveness is initially recorded in OCI and is subsequently reclassified from OCI to current period earnings (interest income or interest expense) in the same period that the hedged item affects earnings.
The following tables summarize FHN’s derivative activities associated with cash flow hedges as of March 31, 2023 and December 31, 2022:
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DERIVATIVES ASSOCIATED WITH CASH FLOW HEDGES |
| | March 31, 2023 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate contracts | | $ | 5,350 | | | $ | — | | | $ | 20 | |
Hedged Items: | | | | | | |
Variability in cash flows related to debt instruments (primarily loans) | | N/A | | $ | 5,350 | | | N/A |
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| | December 31, 2022 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | |
Interest rate contracts | | $ | 5,350 | | | $ | — | | | $ | 71 | |
Hedged Items: | | | | | | |
Variability in cash flows related to debt instruments (primarily loans) | | N/A | | $ | 5,350 | | | N/A |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 14—DERIVATIVES | |
The following table summarizes gains (losses) on FHN’s derivatives associated with cash flow hedges for the three months ended March 31, 2023 and 2022:
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DERIVATIVE GAINS (LOSSES) ASSOCIATED WITH CASH FLOW HEDGES | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
(Dollars in millions) | | Gains (Losses) | | Gains (Losses) | | | | |
Cash Flow Hedges | | | | | | |
Hedging Instruments: | | | | | | | | |
Interest rate contracts (a) | | $ | 53 | | | $ | (32) | | | | | |
Gain (loss) recognized in other comprehensive income (loss) | | 33 | | | (20) | | | | | |
Gain (loss) reclassified from AOCI into interest income | | 11 | | | (1) | | | | | |
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(a)Approximately $10 million of pre-tax losses are expected to be reclassified into earnings in the next twelve months.
Other Derivatives
FHN has mortgage banking operations that include the origination and sale of loans into the secondary market. As part of the origination of loans, FHN enters into interest rate lock commitments with borrowers. Additionally, FHN
enters into forward sales contracts with buyers for delivery of loans at a future date. Both of these contracts qualify as freestanding derivatives and are recognized at fair value through earnings. The notional and fair values of these contracts are presented in the table below.
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DERIVATIVES ASSOCIATED WITH MORTGAGE BANKING HEDGES |
| | March 31, 2023 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Mortgage Banking Hedges | | | | | | |
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Option contracts written | | $ | 60 | | | $ | 1 | | | $ | — | |
Forward contracts written | | 144 | | | — | | | 1 | |
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| | December 31, 2022 |
(Dollars in millions) | | Notional | | Assets | | Liabilities |
Mortgage Banking Hedges | | | | | | |
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Option contracts written | | $ | 35 | | | $ | — | | | $ | — | |
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Forward contracts written | | 61 | | | — | | | — | |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 14—DERIVATIVES | |
The following table summarizes gains (losses) on FHN's derivatives associated with mortgage banking activities for the three months ended March 31, 2023 and 2022:
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DERIVATIVE GAINS (LOSSES) ASSOCIATED WITH MORTGAGE BANKING HEDGES | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
(Dollars in millions) | | Gains (Losses) | | Gains (Losses) | | | | |
Mortgage Banking Hedges | | | | | | | | |
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Option contracts written | | $ | (1) | | | $ | (4) | | | | | |
Forward contracts written | | (1) | | | 18 | | | | | |
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In conjunction with pre-2020 sales of Visa Class B shares, FHN entered into derivative transactions whereby FHN will make or receive cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. As of March 31, 2023 and December 31, 2022, the derivative liabilities associated with the sales of Visa Class B shares were $21 million and $27 million, respectively. FHN recognized $22 million in derivative valuation adjustments related to prior sales of Visa Class B shares for the year ended December 31, 2022. See Note 16 - Fair Value of Assets and Liabilities for discussion of the valuation inputs and processes for these Visa-related derivatives.
FHN utilizes cross currency swaps and cross currency interest rate swaps to economically hedge its exposure to foreign currency risk and interest rate risk associated with non-U.S. dollar denominated loans. As of March 31, 2023 and December 31, 2022, these loans were valued at $14 million and $9 million, respectively. The balance sheet amount and the gains/losses associated with these derivatives were not significant.
Related to its loan participation/syndication activities, FHN enters into risk participation agreements, under which it assumes exposure for, or receives indemnification for, borrowers’ performance on underlying interest rate derivative contracts. FHN's counterparties in these contracts are other lending institutions involved in the loan participation/syndication arrangements for which the underlying interest rate derivative contract is intended to hedge interest rate risk for the borrower. FHN will make (other institution is the lead bank) or receive (FHN is the lead bank) payments for risk participations if the borrower defaults on its obligation to perform under the terms of its interest rate derivative agreement with the lead bank in the participation.
As of March 31, 2023 and December 31, 2022, the notional values of FHN’s risk participations were $312 million and $242 million of derivative assets and $831 million and $742 million of derivative liabilities, respectively. The notional value for risk participation/syndication agreements is consistent with the percentage of participation in the lending arrangement. FHN's
maximum exposure or benefit in the risk participation agreements is contingent on the fair value of the underlying interest rate derivative contracts for which the borrower is in a liability position at the time of default. FHN monitors the credit risk associated with the borrowers to which the risk participations relate through the same credit risk assessment process utilized for establishing credit loss estimates for its loan portfolio. These credit risk estimates are included in the determination of fair value for the risk participations. Assuming all underlying third-party customers referenced in the swap contracts defaulted at March 31, 2023 and December 31, 2022, the exposure from these agreements would not be material based on the fair value of the underlying swaps.
FHN holds certain certificates of deposit with the rate of return based on an equity index which is considered an embedded derivative as a written option that must be separately recognized. The risks of the written option are offset by purchasing an option with terms that mirror the written option, which is also carried at fair value on the Company’s Consolidated Balance Sheets. As of March 31, 2023 and December 31, 2022, FHN recognized an insignificant amount of assets and liabilities associated with these contracts.
Master Netting and Similar Agreements
FHN uses master netting agreements, mutual margining agreements and collateral posting requirements to minimize credit risk on derivative contracts. Master netting and similar agreements are used when counterparties have multiple derivatives contracts that allow for a “right of setoff,” meaning that a counterparty may net offsetting positions and collateral with the same counterparty under the contract to determine a net receivable or payable. The following discussion provides an overview of these arrangements which may vary due to the derivative type and market in which a derivative transaction is executed.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 14—DERIVATIVES | |
Interest rate derivatives are subject to agreements consistent with standard agreement forms of the ISDA. Currently, all interest rate derivative contracts are entered into as over-the-counter transactions and collateral posting requirements are based on the net asset or liability position with each respective counterparty. For contracts that require central clearing, novation to a counterparty with access to a clearinghouse occurs and initial margin is posted.
Cash margin received (posted) that is considered settlements for the derivative contracts is included in the respective derivative asset (liability) value. Cash margin that is considered collateral received (posted) for interest rate derivatives is recognized as a liability (asset) on FHN’s Consolidated Balance Sheets.
Interest rate derivatives with clients that are smaller financial institutions typically require posting of collateral by the counterparty to FHN. This collateral is subject to a threshold with daily adjustments based upon changes in the level or fair value of the derivative position. Positions and related collateral can be netted in the event of default. Collateral pledged by a counterparty is typically cash or securities. The securities pledged as collateral are not recognized within FHN’s Consolidated Balance Sheets. Interest rate derivatives associated with lending arrangements share the collateral with the related loan(s). The derivative and loan positions may be netted in the event of default. For disclosure purposes, the entire collateral amount is allocated to the loan.
Interest rate derivatives with larger financial institutions entered into prior to required central clearing typically contain provisions whereby the collateral posting thresholds under the agreements adjust based on the credit ratings of both counterparties. If the credit rating of FHN and/or First Horizon Bank is lowered, FHN could be required to post additional collateral with the counterparties. Conversely, if the credit rating of FHN and/or First Horizon Bank is increased, FHN could have collateral released and be required to post less collateral in the future. Also, if a counterparty’s credit ratings were to decrease, FHN and/or First Horizon Bank could require the posting of additional collateral; whereas if a counterparty’s credit ratings were to increase, the counterparty could require the release of excess collateral. Collateral for these arrangements is adjusted daily based on changes in the net fair value position with each counterparty.
The net fair value, determined by individual counterparty, of all derivative instruments with adjustable collateral
posting thresholds was $7 million of assets and $201 million of liabilities on March 31, 2023, and $5 million of assets and $268 million of liabilities on December 31, 2022. As of March 31, 2023 and December 31, 2022, FHN had received collateral of $94 million and $106 million and posted collateral of $94 million and $61 million, respectively, in the normal course of business related to these agreements.
Certain agreements entered into prior to required central clearing also contain accelerated termination provisions, inclusive of the right of offset, if a counterparty’s credit rating falls below a specified level. If a counterparty’s debt rating (including FHN’s and First Horizon Bank’s) were to fall below these minimums, these provisions would be triggered, and the counterparties could terminate the agreements and require immediate settlement of all derivative contracts under the agreements. The net fair value, determined by individual counterparty, of all interest rate derivative instruments with credit-risk-related contingent accelerated termination provisions was $476 million of assets and $201 million of liabilities on March 31, 2023, and $378 million of assets and $268 million of liabilities on December 31, 2022. As of March 31, 2023 and December 31, 2022, FHN had received collateral of $574 million and $479 million and posted collateral of $94 million and $61 million, respectively, in the normal course of business related to these contracts.
FHNF buys and sells various types of securities for its clients. When these securities settle on a delayed basis, they are considered forward contracts, and are generally not subject to master netting agreements. For futures and options, FHN transacts through a third party, and the transactions are subject to margin and collateral maintenance requirements. In the event of default, open positions can be offset along with the associated collateral.
For this disclosure, FHN considers the impact of master netting and other similar agreements which allow FHN to settle all contracts with a single counterparty on a net basis and to offset the net derivative asset or liability position with the related securities and cash collateral. The application of the collateral cannot reduce the net derivative asset or liability position below zero, and therefore any excess collateral is not reflected in the following tables.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 14—DERIVATIVES | |
The following table provides details of derivative assets and collateral received as presented on the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
DERIVATIVE ASSETS & COLLATERAL RECEIVED |
| | | | | | | | Gross amounts not offset in the Balance Sheets | | |
(Dollars in millions) | | Gross amounts of recognized assets | | Gross amounts offset in the Balance Sheets | | Net amounts of assets presented in the Balance Sheets (a) | | Derivative liabilities available for offset | | Collateral received | | Net amount |
Derivative assets: | | | | | | | | | | | | |
March 31, 2023 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 535 | | | $ | — | | | $ | 535 | | | $ | (45) | | | $ | (481) | | | $ | 9 | |
Forward contracts | | 11 | | | — | | | 11 | | | (7) | | | (2) | | | 2 | |
| | $ | 546 | | | $ | — | | | $ | 546 | | | $ | (52) | | | $ | (483) | | | $ | 11 | |
| | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 449 | | | $ | — | | | $ | 449 | | | $ | (58) | | | $ | (378) | | | $ | 13 | |
Forward contracts | | 9 | | | — | | | 9 | | | (6) | | | (2) | | | 1 | |
| | $ | 458 | | | $ | — | | | $ | 458 | | | $ | (64) | | | $ | (380) | | | $ | 14 | |
| | | | | | | | | | | | |
(a)Included in other assets on the Consolidated Balance Sheets. As of March 31, 2023 and December 31, 2022, $2 million and $2 million, respectively, of derivative assets have been excluded from these tables because they are generally not subject to master netting or similar agreements.
The following table provides details of derivative liabilities and collateral pledged as presented on the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
DERIVATIVE LIABILITIES & COLLATERAL PLEDGED |
| | | | | | | | Gross amounts not offset in the Balance Sheets | | |
(Dollars in millions) | | Gross amounts of recognized liabilities | | Gross amounts offset in the Balance Sheets | | Net amounts of liabilities presented in the Balance Sheets (a) | | Derivative assets available for offset | | Collateral pledged | | Net amount |
Derivative liabilities: | | | | | | | | | | | | |
March 31, 2023 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 687 | | | $ | — | | | $ | 687 | | | $ | (45) | | | $ | (194) | | | $ | 448 | |
Forward contracts | | 11 | | | — | | | 11 | | | (7) | | | (3) | | | 1 | |
| | $ | 698 | | | $ | — | | | $ | 698 | | | $ | (52) | | | $ | (197) | | | $ | 449 | |
| | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | |
Interest rate derivative contracts | | $ | 921 | | | $ | — | | | $ | 921 | | | $ | (58) | | | $ | (175) | | | $ | 688 | |
Forward contracts | | 8 | | | — | | | 8 | | | (6) | | | (1) | | | 1 | |
| | $ | 929 | | | $ | — | | | $ | 929 | | | $ | (64) | | | $ | (176) | | | $ | 689 | |
| | | | | | | | | | | | |
(a)Included in other liabilities on the Consolidated Balance Sheets. As of March 31, 2023 and December 31, 2022, $24 million and $29 million, respectively, of derivative liabilities (primarily Visa-related derivatives) have been excluded from these tables because they are generally not subject to master netting or similar agreements.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 15—MASTER NETTING & SIMILAR AGREEMENTS | |
Note 15—Master Netting and Similar Agreements—Repurchase, Reverse Repurchase, and Securities Borrowing Transactions
For repurchase, reverse repurchase and securities borrowing transactions, FHN and each counterparty have the ability to offset all open positions and related collateral in the event of default. Due to the nature of these transactions, the value of the collateral for each transaction approximates the value of the corresponding receivable or payable. For repurchase agreements through FHN’s fixed income business (securities purchased under agreements to resell and securities sold under agreements to repurchase), transactions are collateralized by securities and/or government guaranteed loans which are delivered on the settlement date and are maintained throughout the term of the transaction. For FHN’s repurchase agreements through banking activities (securities sold under agreements to repurchase), securities are typically pledged at settlement and not released until maturity. For asset positions, the collateral is not included on FHN’s Consolidated Balance Sheets. For liability positions, securities collateral pledged by FHN is generally represented within FHN’s trading or available-for-sale securities portfolios.
For this disclosure, FHN considers the impact of master netting and other similar agreements that allow FHN to settle all contracts with a single counterparty on a net basis and to offset the net asset or liability position with the related securities collateral. The application of the collateral cannot reduce the net asset or liability position below zero, and therefore any excess collateral is not reflected in the tables below.
Securities purchased under agreements to resell is included in federal funds sold and securities purchased under agreements to resell in the Consolidated Balance Sheets. Securities sold under agreements to repurchase is included in short-term borrowings.
The following table provides details of securities purchased under agreements to resell and collateral pledged by counterparties as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL |
| | | | | | | | Gross amounts not offset in the Balance Sheets | | |
(Dollars in millions) | | Gross amounts of recognized assets | | Gross amounts offset in the Balance Sheets | | Net amounts of assets presented in the Balance Sheets | | Offsetting securities sold under agreements to repurchase | | Securities collateral (not recognized on FHN’s Balance Sheets) | | Net amount |
Securities purchased under agreements to resell: | | | | | | | | | | | | |
March 31, 2023 | | $ | 168 | | | $ | — | | | $ | 168 | | | $ | — | | | $ | (166) | | | $ | 2 | |
December 31, 2022 | | 353 | | | — | | | 353 | | | (10) | | | (340) | | | 3 | |
| | | | | | | | | | | | |
The following table provides details of securities sold under agreements to repurchase and collateral pledged by FHN as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE |
| | | | | | | | Gross amounts not offset in the Balance Sheets | | |
(Dollars in millions) | | Gross amounts of recognized liabilities | | Gross amounts offset in the Balance Sheets | | Net amounts of liabilities presented in the Balance Sheets | | Offsetting securities purchased under agreements to resell | | Securities/ government guaranteed loans collateral | | Net amount |
Securities sold under agreements to repurchase: | | | | | | | | | | | | |
March 31, 2023 | | $ | 1,174 | | | $ | — | | | $ | 1,174 | | | $ | — | | | $ | (1,174) | | | $ | — | |
December 31, 2022 | | 1,013 | | | — | | | 1,013 | | | (10) | | | (1,003) | | | — | |
| | | | | | | | | | | | |
Due to the short duration of securities sold under agreements to repurchase and the nature of collateral involved, the risks associated with these transactions are considered minimal.
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 15—MASTER NETTING & SIMILAR AGREEMENTS | |
The following table provides details, by collateral type, of the remaining contractual maturity of securities sold under agreements to repurchase as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
MATURITIES OF SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE |
| | March 31, 2023 |
(Dollars in millions) | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | |
| | | | | | |
Government agency issued MBS | | $ | 1,088 | | | $ | — | | | $ | 1,088 | |
Government agency issued CMO | | 86 | | | — | | | 86 | |
| | | | | | |
| | | | | | |
Total securities sold under agreements to repurchase | | $ | 1,174 | | | $ | — | | | $ | 1,174 | |
| | | | | | |
| | December 31, 2022 |
(Dollars in millions) | | Overnight and Continuous | | Up to 30 Days | | Total |
Securities sold under agreements to repurchase: | | | | | | |
U.S. treasuries | | $ | 10 | | | $ | — | | | $ | 10 | |
Government agency issued MBS | | 851 | | | — | | | 851 | |
Government agency issued CMO | | 122 | | | — | | | 122 | |
Other U.S. government agencies | | 30 | | | — | | | 30 | |
| | | | | | |
Total securities sold under agreements to repurchase | | $ | 1,013 | | | $ | — | | | $ | 1,013 | |
| | | | | | |
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
Note 16—Fair Value of Assets and Liabilities
FHN groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. This hierarchy requires FHN to maximize the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Each fair value measurement is placed into the proper level based on the lowest level of significant input. These levels are:
•Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.
•Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for
which all significant assumptions are observable in the market.
•Level 3—Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.
Recurring Fair Value Measurements
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCES OF ASSETS & LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS | | |
| | March 31, 2023 | | |
(Dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | |
Trading securities: | | | | | | | | | | |
U.S. treasuries | | $ | — | | | $ | 33 | | | $ | — | | | $ | 33 | | | |
Government agency issued MBS | | — | | | 81 | | | — | | | 81 | | | |
Government agency issued CMO | | — | | | 170 | | | — | | | 170 | | | |
Other U.S. government agencies | | — | | | 128 | | | — | | | 128 | | | |
States and municipalities | | — | | | 24 | | | — | | | 24 | | | |
Corporate and other debt | | — | | | 658 | | | — | | | 658 | | | |
Interest-only strips (elected fair value) | | — | | | — | | | 28 | | | 28 | | | |
Total trading securities | | — | | | 1,094 | | | 28 | | | 1,122 | | | |
| | | | | | | | | | |
Loans held for sale (elected fair value) | | — | | | 47 | | | 21 | | | 68 | | | |
| | | | | | | | | | |
Securities available for sale: | | | | | | | | | | |
| | | | | | | | | | |
Government agency issued MBS | | — | | | 4,796 | | | — | | | 4,796 | | | |
Government agency issued CMO | | — | | | 2,314 | | | — | | | 2,314 | | | |
Other U.S. government agencies | | — | | | 1,239 | | | — | | | 1,239 | | | |
States and municipalities | | — | | | 605 | | | — | | | 605 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total securities available for sale | | — | | | 8,954 | | | — | | | 8,954 | | | |
Other assets: | | | | | | | | | | |
Deferred compensation mutual funds | | 98 | | | — | | | — | | | 98 | | | |
Equity, mutual funds, and other | | 23 | | | — | | | — | | | 23 | | | |
Derivatives, forwards and futures | | 11 | | | — | | | — | | | 11 | | | |
Derivatives, interest rate contracts | | — | | | 536 | | | — | | | 536 | | | |
Derivatives, other | | — | | | 1 | | | — | | | 1 | | | |
Total other assets | | 132 | | | 537 | | | — | | | 669 | | | |
Total assets | | $ | 132 | | | $ | 10,632 | | | $ | 49 | | | $ | 10,813 | | | |
Trading liabilities: | | | | | | | | | | |
U.S. treasuries | | $ | — | | | $ | 96 | | | $ | — | | | $ | 96 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Corporate and other debt | | — | | | 48 | | | — | | | 48 | | | |
| | | | | | | | | | |
Total trading liabilities | | — | | | 144 | | | — | | | 144 | | | |
Other liabilities: | | | | | | | | | | |
Derivatives, forwards and futures | | 12 | | | — | | | — | | | 12 | | | |
Derivatives, interest rate contracts | | — | | | 687 | | | — | | | 687 | | | |
Derivatives, other | | — | | | 2 | | | 21 | | | 23 | | | |
Total other liabilities | | 12 | | | 689 | | | 21 | | | 722 | | | |
Total liabilities | | $ | 12 | | | $ | 833 | | | $ | 21 | | | $ | 866 | | | |
| | | | | | | | | | |
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
(Dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
Trading securities: | | | | | | | | |
U.S. treasuries | | $ | — | | | $ | 101 | | | $ | — | | | $ | 101 | |
Government agency issued MBS | | — | | | 144 | | | — | | | 144 | |
Government agency issued CMO | | — | | | 61 | | | — | | | 61 | |
Other U.S. government agencies | | — | | | 115 | | | — | | | 115 | |
States and municipalities | | — | | | 54 | | | — | | | 54 | |
Corporate and other debt | | — | | | 875 | | | — | | | 875 | |
Interest-only strips (elected fair value) | | — | | | — | | | 25 | | | 25 | |
Total trading securities | | — | | | 1,350 | | | 25 | | | 1,375 | |
| | | | | | | | |
Loans held for sale (elected fair value) | | — | | | 29 | | | 22 | | | 51 | |
| | | | | | | | |
Securities available for sale: | | | | | | | | |
| | | | | | | | |
Government agency issued MBS | | — | | | 4,763 | | | — | | | 4,763 | |
Government agency issued CMO | | — | | | 2,313 | | | — | | | 2,313 | |
Other U.S. government agencies | | — | | | 1,163 | | | — | | | 1,163 | |
States and municipalities | | — | | | 597 | | | — | | | 597 | |
| | | | | | | | |
Total securities available for sale | | — | | | 8,836 | | | — | | | 8,836 | |
Other assets: | | | | | | | | |
Deferred compensation mutual funds | | 112 | | | — | | | — | | | 112 | |
Equity, mutual funds, and other | | 22 | | | — | | | — | | | 22 | |
Derivatives, forwards and futures | | 9 | | | — | | | — | | | 9 | |
Derivatives, interest rate contracts | | — | | | 449 | | | — | | | 449 | |
Derivatives, other | | — | | | 2 | | | — | | | 2 | |
Total other assets | | 143 | | | 451 | | | — | | | 594 | |
Total assets | | $ | 143 | | | $ | 10,666 | | | $ | 47 | | | $ | 10,856 | |
Trading liabilities: | | | | | | | | |
U.S. treasuries | | $ | — | | | $ | 275 | | | $ | — | | | $ | 275 | |
| | | | | | | | |
Government agency issued MBS | | — | | | 2 | | | — | | | 2 | |
Corporate and other debt | | — | | | 58 | | | — | | | 58 | |
Total trading liabilities | | — | | | 335 | | | — | | | 335 | |
Other liabilities: | | | | | | | | |
Derivatives, forwards and futures | | 8 | | | — | | | — | | | 8 | |
Derivatives, interest rate contracts | | — | | | 922 | | | — | | | 922 | |
Derivatives, other | | — | | | 1 | | | 27 | | | 28 | |
Total other liabilities | | 8 | | | 923 | | | 27 | | | 958 | |
Total liabilities | | $ | 8 | | | $ | 1,258 | | | $ | 27 | | | $ | 1,293 | |
| | | | | | | | |
| | | | | | | | |
PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
| | |
Changes in Recurring Level 3 Fair Value Measurements
The changes in Level 3 assets and liabilities measured at fair value for the three months ended March 31, 2023 and 2022 on a recurring basis are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CHANGES IN LEVEL 3 ASSETS & LIABILITIES MEASURED AT FAIR VALUE |
| | | | | | Three Months Ended March 31, 2023 | | |
(Dollars in millions) | | | | | | Interest-only strips | | | | Loans held for sale | | | | | | Net derivative liabilities | | |
Balance on January 1, 2023 | | | | | | $ | 25 | | | | | $ | 22 | | | | | | | $ | (27) | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total net gains (losses) included in net income | | | | | | (3) | | | | | — | | | | | | | — | | | |
Purchases | | | | | | — | | | | | 1 | | | | | | | — | | | |
Sales | | | | | | (3) | | | | | (2) | | | | | | | — | | | |
Settlements | | | | | | — | | | | | — | | | | | | | 6 | | | |
Repayments | | | | | | — | | | | | — | | | | | | | — | | | |
Net transfers into (out of) Level 3 | | | | | | 9 | | | (b) | | — | | | | | | | — | | | |
Balance on March 31, 2023 | | | | | | $ | 28 | | | | | $ | 21 | | | | | | | $ | (21) | | | |
Net unrealized gains (losses) included in net income | | | | | | $ | (1) | | | (c) | | $ | — | | | (a) | | | | $ | — | | | (d) |
| | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended March 31, 2022 | | |
(Dollars in millions) | | | | | | Interest-only strips | | | | Loans held for sale | | | | | | Net derivative liabilities | | |
Balance on January 1, 2022 | | | | | | $ | 38 | | | | | $ | 28 | | | | | | | $ | (23) | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Purchases | | | | | | — | | | | | 1 | | | | | | | — | | | |
Sales | | | | | | (37) | | | | | — | | | | | | | — | | | |
Settlements | | | | | | — | | | | | (1) | | | | | | | 5 | | | |
Net transfers into (out of) Level 3 | | | | | | 11 | | | (b) | | 4 | | | | | | | — | | | |
Balance on March 31, 2022 | | | | | | $ | 12 | | | | | $ | 32 | | | | | | | $ | (18) | | | |
Net unrealized gains (losses) included in net income | | | | | | $ | (1) | | | (c) | | $ | — | | | (a) | | | | $ | — | | | (d) |
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(a)Primarily included in mortgage banking and title income on the Consolidated Statements of Income.
(b)Transfers into interest-only strips level 3 measured on a recurring basis reflect movements from loans held for sale (Level 2 nonrecurring).
(c)Primarily included in fixed income on the Consolidated Statements of Income.
(d)Included in other expense.
There were no net unrealized gains (losses) for Level 3 assets and liabilities included in other comprehensive income as of March 31, 2023 and 2022.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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Nonrecurring Fair Value Measurements
From time to time, FHN may be required to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market (LOCOM) accounting or write-downs of individual assets. For assets
measured at fair value on a nonrecurring basis which were still held on the Consolidated Balance Sheets at March 31, 2023, and December 31, 2022, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the related carrying value.
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LEVEL OF VALUATION ASSUMPTIONS FOR ASSETS MEASURED AT FAIR VALUE ON A NON-RECURRING BASIS |
| | Carrying value at March 31, 2023 |
(Dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
Loans held for sale—SBAs and USDA | | $ | — | | | $ | 551 | | | $ | — | | | $ | 551 | |
| | | | | | | | |
Loans and leases (a) | | — | | | — | | | 252 | | | 252 | |
OREO (b) | | — | | | — | | | 4 | | | 4 | |
Other assets (c) | | — | | | — | | | 43 | | | 43 | |
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| | Carrying value at December 31, 2022 |
(Dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
Loans held for sale—SBAs and USDA | | $ | — | | | $ | 506 | | | $ | — | | | $ | 506 | |
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Loans and leases (a) | | — | | | — | | | 135 | | | 135 | |
OREO (b) | | — | | | — | | | 3 | | | 3 | |
Other assets (c) | | — | | | — | | | 43 | | | 43 | |
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(a)Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for credit losses.
(b)Represents the fair value and related losses of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages.
(c)Represents tax credit investments accounted for under the equity method.
For assets measured on a nonrecurring basis which were still held on the Consolidated Balance Sheets at period end, the following table provides information about the fair value adjustments recorded during the three months ended March 31, 2023 and 2022:
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FAIR VALUE ADJUSTMENTS ON ASSETS MEASURED ON A NONRECURRING BASIS |
| Net gains (losses) Three Months Ended March 31, |
(Dollars in millions) | 2023 | | 2022 |
| | | |
Loans held for sale—SBAs and USDA | $ | (2) | | | $ | (3) | |
| | | |
Loans and leases (a) | (12) | | | (2) | |
| | | |
Other assets (b) | (1) | | | (1) | |
| $ | (15) | | | $ | (6) | |
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(a)Write-downs on these loans are recognized as part of provision for credit losses.
(b)Represents tax credit investments accounted for under the equity method.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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For the three months ended March 31, 2023, FHN recognized no fixed asset impairment and less than $1 million of leased asset impairments. These amounts were primarily recognized in the Corporate segment.
For the three months ended March 31, 2022, FHN recognized less than $1 million of fixed asset impairments and leased asset impairments primarily related to continuing merger and acquisition integration efforts associated with reduction of leased office space and banking center optimization. These amounts were primarily recognized in the Corporate segment.
Lease asset impairments recognized represent the reduction in value of the right-of-use assets associated with leases that are being exited in advance of the contractual lease expiration.
Impairments are measured using a discounted cash flow methodology, which is considered a Level 3 valuation.
Impairments of long-lived tangible assets reflect locations where the associated land and building are either owned
or leased. The fair values of owned sites were determined using estimated sales prices from appraisals and broker opinions less estimated costs to sell with adjustments upon final disposition. The fair values of owned assets in leased sites (e.g., leasehold improvements) were determined using a discounted cash flow approach, based on the revised estimated useful lives of the related assets. Both measurement methodologies are considered Level 3 valuations. Impairment adjustments recognized upon disposition of a location are considered Level 2 valuations.
Level 3 Measurements
The following table provides information regarding the unobservable inputs utilized in determining the fair value of Level 3 recurring and non-recurring measurements as of March 31, 2023 and December 31, 2022:
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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UNOBSERVABLE INPUTS USED IN LEVEL 3 FAIR VALUE MEASUREMENTS |
(Dollars in millions) | | | | | | | | Values Utilized |
Level 3 Class | | Fair Value at March 31, 2023 | | Valuation Techniques | | Unobservable Input | | Range | | Weighted Average (d) |
Trading securities - SBA interest-only strips | | $ | 28 | | | Discounted cash flow | | Constant prepayment rate | | 12% - 13% | | 12% |
| | | | | | Bond equivalent yield | | 15% - 16% | | 16% |
Loans held for sale - residential real estate | | $ | 21 | | | Discounted cash flow | | Prepayment speeds - First mortgage | | 2% - 8% | | 3% |
| | | | | | Foreclosure losses | | 63% - 76% | | 65% |
| | | | | | Loss severity trends - First mortgage | | 0% - 10% of UPB | | 5% |
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Derivative liabilities, other | | $ | 21 | | | Discounted cash flow | | Visa covered litigation resolution amount | | $5.6 billion - $6.1 billion | | $5.9 billion |
| | | | | | Probability of resolution scenarios | | 5% - 25% | | 20% |
| | | | | | Time until resolution | | 9 - 39 months | | 25 months |
Loans and leases (a) | | $ | 252 | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 10% of appraisal | | NM |
| | | | Other collateral valuations | | Borrowing base certificates adjustment | | 20% - 50% of gross value | | NM |
| | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value | | NM |
OREO (b) | | $ | 4 | | | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | NM |
Other assets (c) | | $ | 43 | | | Discounted cash flow | | Adjustments to current sales yields for specific properties | | 0% - 15% adjustment to yield | | NM |
| | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 25% of appraisal | | NM |
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NM - Not meaningful
(a)Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for credit losses.
(b)Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages.
(c)Represents tax credit investments accounted for under the equity method.
(d)Weighted averages are determined by the relative fair value of the instruments or the relative contribution to an instrument's fair value.
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| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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(Dollars in millions) | | | | | | | | Values Utilized |
Level 3 Class | | Fair Value at December 31, 2022 | | Valuation Techniques | | Unobservable Input | | Range | | Weighted Average (d) |
Trading securities - SBA interest-only strips | | $ | 25 | | | Discounted cash flow | | Constant prepayment rate | | 12% - 13% | | 12% |
| | | | | | Bond equivalent yield | | 17% | | 17% |
Loans held for sale - residential real estate | | $ | 22 | | | Discounted cash flow | | Prepayment speeds - First mortgage | | 2% - 8% | | 3% |
| | | | | | | | | | |
| | | | | | Foreclosure losses | | 63% - 75% | | 65% |
| | | | | | Loss severity trends - First mortgage | | 0% - 11% of UPB | | 5% |
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Derivative liabilities, other | | $ | 27 | | | Discounted cash flow | | Visa covered litigation resolution amount | | $5.6 billion - $6.0 billion | | $5.9 billion |
| | | | | | Probability of resolution scenarios | | 5% - 25% | | 20% |
| | | | | | Time until resolution | | 12 - 42 months | | 28 months |
Loans and leases (a) | | $ | 135 | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 10% of appraisal | | NM |
| | | | Other collateral valuations | | Borrowing base certificates adjustment | | 20% - 50% of gross value | | NM |
| | | | | | Financial Statements/Auction values adjustment | | 0% - 25% of reported value | | NM |
OREO (b) | | $ | 3 | | | Appraisals from comparable properties | | Adjustment for value changes since appraisal | | 0% - 10% of appraisal | | NM |
Other assets (c) | | $ | 43 | | | Discounted cash flow | | Adjustments to current sales yields for specific properties | | 0% - 15% adjustment to yield | | NM |
| | | | Appraisals from comparable properties | | Marketability adjustments for specific properties | | 0% - 25% of appraisal | | NM |
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NM - Not meaningful
(a)Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for credit losses.
(b)Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages.
(c)Represents tax credit investments accounted for under the equity method.
(d)Weighted averages are determined by the relative fair value of the instruments or the relative contribution to an instrument's fair value.
Trading Securities - SBA interest-only strips
Increases (decreases) in estimated prepayment rates and bond equivalent yields negatively (positively) affect the value of SBA interest-only strips. Management additionally considers whether the loans underlying related SBA interest-only strips are delinquent, in default or prepaying, and adjusts the fair value down 20 - 100% depending on the length of time in default.
Loans held for sale
Foreclosure losses and prepayment rates are significant unobservable inputs used in the fair value measurement of FHN’s residential real estate loans held for sale. Loss severity trends are also assessed to evaluate the reasonableness of fair value estimates resulting from
discounted cash flows methodologies as well as to estimate fair value for newly repurchased loans and loans that are near foreclosure. Significant increases (decreases) in any of these inputs in isolation would result in significantly lower (higher) fair value measurements. All observable and unobservable inputs are re-assessed quarterly.
Increases (decreases) in estimated prepayment rates and bond equivalent yields negatively (positively) affect the value of unguaranteed interests in SBA loans. Unguaranteed interest in SBA loans held for sale are carried at less than the outstanding balance due to credit risk estimates. Credit risk adjustments may be reduced if prepayment is likely or as consistent payment history is realized. Management also considers other factors such as
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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delinquency or default and adjusts the fair value accordingly.
Loans held for investment
Constant prepayment rate, constant default rate and loss severity trends are significant unobservable inputs used in the fair value measurement of loans held for investment. Increases (decreases) in each of these inputs in isolation result in negative (positive) effects on the valuation of the associated loans.
Derivative liabilities
In conjunction with pre-2020 sales of Visa Class B shares, FHN and the purchasers entered into derivative transactions whereby FHN will make, or receive, cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. FHN uses a discounted cash flow methodology in order to estimate the fair value of FHN’s derivative liabilities associated with its prior sales of Visa Class B shares. The methodology includes estimation of both the resolution amount for Visa’s Covered Litigation matters as well as the length of time until the resolution occurs. Significant increases (decreases) in either of these inputs in isolation would result in significantly higher (lower) fair value measurements for the derivative liabilities. Additionally, FHN performs a probability weighted multiple resolution scenario to calculate the estimated fair value of these derivative liabilities. Assignment of higher (lower) probabilities to the larger potential resolution scenarios would result in an increase (decrease) in the estimated fair value of the derivative liabilities. Since this estimation process requires application of judgment in developing significant unobservable inputs used to determine the possible outcomes and the probability weighting assigned to each scenario, these derivatives have been classified within Level 3 in fair value measurements disclosures.
Loans and leases and Other Real Estate Owned
Collateral-dependent loans and OREO are primarily valued using appraisals based on sales of comparable properties in the same or similar markets. Other collateral (receivables, inventory, equipment, etc.) is valued through borrowing base certificates, financial statements and/or auction valuations. These valuations are discounted based on the quality of reporting, knowledge of the marketability/collectability of the collateral and historical disposition rates.
Other assets – tax credit investments
The estimated fair value of tax credit investments accounted for under the equity method is generally
determined in relation to the yield (i.e., future tax credits to be received) an acquirer of these investments would expect in relation to the yields experienced on current new issue and/or secondary market transactions. Thus, as tax credits are recognized, the future yield to a market participant is reduced, resulting in consistent impairment of the individual investments. Individual investments are reviewed for impairment quarterly, which may include the consideration of additional marketability discounts related to specific investments which typically includes consideration of the underlying property’s appraised value.
Fair Value Option
FHN previously elected the fair value option on a prospective basis for substantially all types of mortgage loans originated for sale purposes except for mortgage origination operations which utilize the platform acquired from CBF. FHN determined that the election reduces certain timing differences and better matches changes in the value of such loans with changes in the value of derivatives and forward delivery commitments used as economic hedges for these assets at the time of election.
Repurchased loans relating to mortgage banking operations conducted prior to the IBKC merger are recognized within loans held for sale at fair value at the time of repurchase, which includes consideration of the credit status of the loans and the estimated liquidation value. FHN has elected to continue recognition of these loans at fair value in periods subsequent to reacquisition. Due to the credit-distressed nature of the vast majority of repurchased loans and the related loss severities experienced upon repurchase, FHN believes that the fair value election provides a more timely recognition of changes in value for these loans that occur subsequent to repurchase. Absent the fair value election, these loans would be subject to valuation at the LOCOM value, which would prevent subsequent values from exceeding the initial fair value, determined at the time of repurchase, but would require recognition of subsequent declines in value. Thus, the fair value election provides for a more timely recognition of any potential future recoveries in asset values while not affecting the requirement to recognize subsequent declines in value.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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The following table reflects the differences between the fair value carrying amount of residential real estate loans held for sale and held for investment measured at fair value in accordance with management’s election and the aggregate unpaid principal amount FHN is contractually entitled to receive at maturity.
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DIFFERENCES BETWEEN FAIR VALUE CARRYING AMOUNTS AND CONTRACTUAL AMOUNTS OF RESIDENTIAL REAL ESTATE LOANS REPORTED AT FAIR VALUE |
| | March 31, 2023 |
(Dollars in millions) | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal |
Residential real estate loans held for sale reported at fair value: | | | | | | |
Total loans | | $ | 68 | | | $ | 76 | | | $ | (8) | |
Nonaccrual loans | | 3 | | | 7 | | | (4) | |
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| | December 31, 2022 |
(Dollars in millions) | | Fair value carrying amount | | Aggregate unpaid principal | | Fair value carrying amount less aggregate unpaid principal |
Residential real estate loans held for sale reported at fair value: | | | | | | |
Total loans | | $ | 51 | | | $ | 58 | | | $ | (7) | |
Nonaccrual loans | | 5 | | | 8 | | | (3) | |
Loans 90 days or more past due and still accruing | | 1 | | | 1 | | | — | |
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Assets and liabilities accounted for under the fair value election are initially measured at fair value with subsequent changes in fair value recognized in earnings. Such changes in the fair value of assets and liabilities for which FHN elected the fair value option are included in current period earnings with classification in the income statement line item reflected in the following table:
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CHANGES IN FAIR VALUE RECOGNIZED IN NET INCOME |
| Three Months Ended March 31, | |
(Dollars in millions) | 2023 | | 2022 | |
Changes in fair value included in net income: | | | | |
Mortgage banking and title noninterest income | | | | |
Loans held for sale | $ | 1 | | | $ | (8) | | |
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For the three months ended March 31, 2023 and 2022, the amount for residential real estate loans held for sale included an insignificant amount of gains in pretax earnings that are attributable to changes in instrument-specific credit risk. The portion of the fair value adjustments related to credit risk was determined based on estimated default rates and estimated loss severities. Interest income on residential real estate loans held for sale measured at fair value is calculated based on the note rate of the loan and is recorded in the interest income section of the Consolidated Statements of Income as interest on loans held for sale.
Determination of Fair Value
Fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following describes the
assumptions and methodologies used to estimate the fair value of financial instruments recorded at fair value in the Consolidated Balance Sheets and for estimating the fair value of financial instruments for which fair value is disclosed.
Short-term financial assets
Federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits with other financial institutions and the Federal Reserve are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Trading securities and trading liabilities
Trading securities and trading liabilities are recognized at fair value through current earnings. Trading inventory held for broker-dealer operations is included in trading
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| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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securities and trading liabilities. Broker-dealer long positions are valued at bid price in the bid-ask spread. Short positions are valued at the ask price. Inventory positions are valued using observable inputs including current market transactions, benchmark yields, credit spreads, and consensus prepayment speeds. Trading loans are valued using observable inputs including current market transactions, swap rates, mortgage rates, and consensus prepayment speeds.
Trading Securities - SBA interest-only strips
Interest-only strips are valued at elected fair value based on an income approach using an internal valuation model. The internal valuation model includes assumptions regarding projections of future cash flows, prepayment rates, default rates and interest-only strip terms. These securities bear the risk of loan prepayment or default that may result in FHN not recovering all or a portion of its recorded investment. When appropriate, valuations are adjusted for various factors including default or prepayment status of the underlying SBA loans. Because of the inherent uncertainty of valuation, those estimated values may be higher or lower than the values that would have been used had a ready market for the securities existed, and may change in the near term.
Securities available for sale and held to maturity
Valuations of debt securities are performed using observable inputs obtained from market transactions in similar securities. Typical inputs include benchmark yields, consensus prepayment speeds, and credit spreads. Trades from similar securities and broker quotes are used to support these valuations.
Loans held for sale
FHN determines the fair value of loans held for sale using either current transaction prices or discounted cash flow models. Fair values are determined using current transaction prices and/or values on similar assets when available, including committed bids for specific loans or loan portfolios. Uncommitted bids may be adjusted based on other available market information.
Fair value of residential real estate loans held for sale determined using a discounted cash flow model incorporates both observable and unobservable inputs. Inputs in the discounted cash flow model include current mortgage rates for similar products, estimated prepayment rates, foreclosure losses, and various loan performance measures (delinquency, LTV, credit score). Adjustments for delinquency and other differences in loan characteristics are typically reflected in the model’s discount rates. Loss severity trends and the value of underlying collateral are also considered in assessing the appropriate fair value for severely delinquent loans and loans in foreclosure. The valuation of HELOCs also incorporates estimated cancellation rates for loans expected to become delinquent.
Non-mortgage consumer loans held for sale are valued using committed bids for specific loans or loan portfolios or current market pricing for similar assets with adjustments for differences in credit standing (delinquency, historical default rates for similar loans), yield, collateral values and prepayment rates. If pricing for similar assets is not available, a discounted cash flow methodology is utilized, which incorporates all of these factors into an estimate of investor required yield for the discount rate.
FHN utilizes quoted market prices of similar instruments or broker and dealer quotations to value the SBA and USDA guaranteed loans. FHN values SBA-unguaranteed interests in loans held for sale based on individual loan characteristics, such as industry type and pay history which generally follows an income approach. Furthermore, these valuations are adjusted for changes in prepayment estimates and are reduced due to restrictions on trading. The fair value of other non-residential real estate loans held for sale is approximated by their carrying values based on current transaction values.
Mortgage loans held for investment at fair value option
The fair value of mortgage loans held for investment at fair value option is determined by a third party using a discounted cash flow model using various assumptions about future loan performance (constant prepayment rate, constant default rate and loss severity trends) and market discount rates.
Loans held for investment
The fair values of mortgage loans are estimated using an exit price methodology that is based on present values using the interest rate that would be charged for a similar loan to a borrower with similar risk, weighted for varying maturity dates and adjusted for a liquidity discount based on the estimated time period to complete a sale transaction with a market participant.
Other loans and leases are valued based on present values using the interest rate that would be charged for a similar instrument to a borrower with similar risk, applicable to each category of instruments, and adjusted for a liquidity discount based on the estimated time period to complete a sale transaction with a market participant.
For loans measured using the estimated fair value of collateral less costs to sell, fair value is estimated using appraisals of the collateral. Collateral values are monitored and additional write-downs are recognized if it is determined that the estimated collateral values have declined further. Estimated costs to sell are based on current amounts of disposal costs for similar assets. Carrying value is considered to reflect fair value for these loans.
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| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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Derivative assets and liabilities
The fair value for forwards and futures contracts is based on current transactions involving identical securities. Futures contracts are exchange-traded and thus have no credit risk factor assigned as the risk of non-performance is limited to the clearinghouse used.
Valuations of other derivatives (primarily interest rate contracts) are based on inputs observed in active markets for similar instruments. Typical inputs include benchmark yields, option volatility and option skew. Starting in October 2020, centrally cleared derivatives are discounted using SOFR as required by clearinghouses. In measuring the fair value of these derivative assets and liabilities, FHN has elected to consider credit risk based on the net exposure to individual counterparties. Credit risk is mitigated for these instruments through the use of mutual margining and master netting agreements as well as collateral posting requirements. For derivative contracts with daily cash margin requirements that are considered settlements, the daily margin amount is netted within derivative assets or liabilities. Any remaining credit risk related to interest rate derivatives is considered in determining fair value through evaluation of additional factors such as client loan grades and debt ratings. Foreign currency related derivatives also utilize observable exchange rates in the determination of fair value. The determination of fair value for FHN’s derivative liabilities associated with its prior sales of Visa Class B shares are classified within Level 3 in the fair value measurements disclosure as previously discussed in the unobservable inputs discussion.
The fair value of risk participations is determined in reference to the fair value of the related derivative contract between the borrower and the lead bank in the participation structure, which is determined consistent with the valuation process discussed above. This value is adjusted for the pro rata portion of the reference derivative’s notional value and an assessment of credit risk for the referenced borrower.
OREO
OREO primarily consists of properties that have been acquired in satisfaction of debt. These properties are carried at the lower of the outstanding loan amount or estimated fair value less estimated costs to sell the real estate. Estimated fair value is determined using appraised values with subsequent adjustments for deterioration in values that are not reflected in the most recent appraisal.
Other assets
For disclosure purposes, other assets consist of tax credit investments, FRB and FHLB Stock, deferred compensation mutual funds and equity investments (including other mutual funds) with readily determinable fair values. Tax credit investments accounted for under the equity method are written down to estimated fair value quarterly
based on the estimated value of the associated tax credits which incorporates estimates of required yield for hypothetical investors. The fair value of all other tax credit investments is estimated using recent transaction information with adjustments for differences in individual investments. Deferred compensation mutual funds are recognized at fair value, which is based on quoted prices in active markets.
Investments in the stock of the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical cost in the Consolidated Balance Sheets which is considered to approximate fair value. Investments in mutual funds are measured at the funds’ reported closing net asset values. Investments in equity securities are valued using quoted market prices when available.
Defined maturity deposits
The fair value of these deposits is estimated by discounting future cash flows to their present value. Future cash flows are discounted by using the current market rates of similar instruments applicable to the remaining maturity. For disclosure purposes, defined maturity deposits include all time deposits.
Short-term financial liabilities
The fair value of federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings are approximated by the book value. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Loan commitments
Fair values of these commitments are based on fees charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Other commitments
Fair values of these commitments are based on fees charged to enter into similar agreements.
The following fair value estimates are determined as of a specific point in time utilizing various assumptions and estimates. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, reduces the comparability of fair value disclosures between financial institutions. Due to market illiquidity, the fair values for loans and leases, loans held for sale, and term borrowings as of March 31, 2023 and December 31, 2022, involve the use of significant internally-developed pricing assumptions for certain components of these line items. The assumptions and valuations utilized for this disclosure are considered to reflect inputs that market participants would use in transactions involving these instruments as of the measurement date. The valuations of legacy assets,
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| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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particularly consumer loans and TRUPS loans within the Corporate segment, are influenced by changes in economic conditions since origination and risk perceptions of the financial sector. These considerations affect the estimate of a potential acquirer’s cost of capital and cash flow volatility assumptions from these assets and the resulting fair value measurements may depart significantly from FHN’s internal estimates of the intrinsic value of these assets.
Assets and liabilities that are not financial instruments have not been included in the following table such as the value of long-term relationships with deposit and trust clients, premises and equipment, goodwill and other
intangibles, deferred taxes, and certain other assets and other liabilities. Additionally, these measurements are solely for financial instruments as of the measurement date and do not consider the earnings potential of our various business lines. Accordingly, the total of the fair value amounts does not represent, and should not be construed to represent, the underlying value of FHN.
The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022:
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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BOOK VALUE AND ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS |
| | March 31, 2023 |
| | Book Value | | Fair Value |
(Dollars in millions) | | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | |
Loans and leases, net of allowance for loan and lease losses | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial, financial and industrial | | $ | 31,847 | | | $ | — | | | $ | — | | | $ | 31,880 | | | $ | 31,880 | |
Commercial real estate | | 13,248 | | | — | | | — | | | 13,109 | | | 13,109 | |
Consumer: | | | | | | | | | | |
Consumer real estate | | 12,459 | | | — | | | — | | | 12,330 | | | 12,330 | |
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Credit card and other | | 776 | | | — | | | — | | | 776 | | | 776 | |
Total loans and leases, net of allowance for loan and lease losses | | 58,330 | | | — | | | — | | | 58,095 | | | 58,095 | |
Short-term financial assets: | | | | | | | | | | |
Interest-bearing deposits with banks | | 2,488 | | | 2,488 | | | — | | | — | | | 2,488 | |
Federal funds sold | | 141 | | | — | | | 141 | | | — | | | 141 | |
Securities purchased under agreements to resell | | 168 | | | — | | | 168 | | | — | | | 168 | |
Total short-term financial assets | | 2,797 | | | 2,488 | | | 309 | | | — | | | 2,797 | |
Trading securities (a) | | 1,122 | | | — | | | 1,094 | | | 28 | | | 1,122 | |
Loans held for sale: | | | | | | | | | | |
Mortgage loans (elected fair value) (a) | | 68 | | | — | | | 47 | | | 21 | | | 68 | |
USDA & SBA loans - LOCOM | | 551 | | | — | | | 555 | | | — | | | 555 | |
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Mortgage loans - LOCOM | | 31 | | | — | | | — | | | 31 | | | 31 | |
Total loans held for sale | | 650 | | | — | | | 602 | | | 52 | | | 654 | |
Securities available for sale (a) | | 8,954 | | | — | | | 8,954 | | | — | | | 8,954 | |
Securities held to maturity | | 1,362 | | | — | | | 1,214 | | | — | | | 1,214 | |
Derivative assets (a) | | 548 | | | 11 | | | 537 | | | — | | | 548 | |
Other assets: | | | | | | | | | | |
Tax credit investments | | 545 | | | — | | | — | | | 541 | | | 541 | |
Deferred compensation mutual funds | | 98 | | | 98 | | | — | | | — | | | 98 | |
Equity, mutual funds, and other (b) | | 458 | | | 23 | | | — | | | 435 | | | 458 | |
Total other assets | | 1,101 | | | 121 | | | — | | | 976 | | | 1,097 | |
Total assets | | $ | 74,864 | | | $ | 2,620 | | | $ | 12,710 | | | $ | 59,151 | | | $ | 74,481 | |
Liabilities: | | | | | | | | | | |
Defined maturity deposits | | $ | 3,777 | | | $ | — | | | $ | 3,793 | | | $ | — | | | $ | 3,793 | |
Trading liabilities (a) | | 144 | | | — | | | 144 | | | — | | | 144 | |
Short-term financial liabilities: | | | | | | | | | | |
Federal funds purchased | | 447 | | | — | | | 447 | | | — | | | 447 | |
Securities sold under agreements to repurchase | | 1,174 | | | — | | | 1,174 | | | — | | | 1,174 | |
Other short-term borrowings | | 4,863 | | | — | | | 4,863 | | | — | | | 4,863 | |
Total short-term financial liabilities | | 6,484 | | | — | | | 6,484 | | | — | | | 6,484 | |
Term borrowings: | | | | | | | | | | |
Real estate investment trust-preferred | | 46 | | | — | | | — | | | 47 | | | 47 | |
Term borrowings—new market tax credit investment | | 65 | | | — | | | — | | | 60 | | | 60 | |
Secured borrowings | | 11 | | | — | | | — | | | 11 | | | 11 | |
Junior subordinated debentures | | 149 | | | — | | | — | | | 150 | | | 150 | |
Other long-term borrowings | | 1,334 | | | — | | | 1,300 | | | — | | | 1,300 | |
Total term borrowings | | 1,605 | | | — | | | 1,300 | | | 268 | | | 1,568 | |
Derivative liabilities (a) | | 722 | | | 12 | | | 689 | | | 21 | | | 722 | |
Total liabilities | | $ | 12,732 | | | $ | 12 | | | $ | 12,410 | | | $ | 289 | | | $ | 12,711 | |
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(a)Classes are detailed in the recurring and nonrecurring measurement tables.
(b)Level 1 primarily consists of mutual funds with readily determinable fair values. Level 3 includes restricted investments in FHLB-Cincinnati stock of $232 million and FRB stock of $203 million.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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| | December 31, 2022 |
| | Book Value | | Fair Value |
(Dollars in millions) | | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | |
Loans and leases and allowance for loan and lease losses | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial, financial and industrial | | $ | 31,473 | | | $ | — | | | $ | — | | | $ | 31,329 | | | $ | 31,329 | |
Commercial real estate | | 13,082 | | | — | | | — | | | 12,909 | | | 12,909 | |
Consumer: | | | | | | | | | | |
Consumer real estate | | 12,053 | | | — | | | — | | | 11,934 | | | 11,934 | |
Credit card and other | | 809 | | | — | | | — | | | 810 | | | 810 | |
Total loans and leases, net of allowance for loan and lease losses | | 57,417 | | | — | | | — | | | 56,982 | | | 56,982 | |
Short-term financial assets: | | | | | | | | | | |
Interest-bearing deposits with banks | | 1,384 | | | 1,384 | | | — | | | — | | | 1,384 | |
Federal funds sold | | 129 | | | — | | | 129 | | | — | | | 129 | |
Securities purchased under agreements to resell | | 353 | | | — | | | 353 | | | — | | | 353 | |
Total short-term financial assets | | 1,866 | | | 1,384 | | | 482 | | | — | | | 1,866 | |
Trading securities (a) | | 1,375 | | | — | | | 1,350 | | | 25 | | | 1,375 | |
Loans held for sale: | | | | | | | | | | |
Mortgage loans (elected fair value) (a) | | 51 | | | — | | | 29 | | | 22 | | | 51 | |
USDA & SBA loans - LOCOM | | 506 | | | — | | | 512 | | | — | | | 512 | |
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Mortgage loans - LOCOM | | 33 | | | — | | | — | | | 33 | | | 33 | |
Total loans held for sale | | 590 | | | — | | | 541 | | | 55 | | | 596 | |
Securities available for sale (a) | | 8,836 | | | — | | | 8,836 | | | — | | | 8,836 | |
Securities held to maturity | | 1,371 | | | — | | | 1,209 | | | — | | | 1,209 | |
Derivative assets (a) | | 460 | | | 9 | | | 451 | | | — | | | 460 | |
Other assets: | | | | | | | | | | |
Tax credit investments | | 547 | | | — | | | — | | | 542 | | | 542 | |
Deferred compensation mutual funds | | 112 | | | 112 | | | — | | | — | | | 112 | |
Equity, mutual funds, and other (b) | | 275 | | | 22 | | | — | | | 253 | | | 275 | |
Total other assets | | 934 | | | 134 | | | — | | | 795 | | | 929 | |
Total assets | | $ | 72,849 | | | $ | 1,527 | | | $ | 12,869 | | | $ | 57,857 | | | $ | 72,253 | |
Liabilities: | | | | | | | | | | |
Defined maturity deposits | | $ | 2,887 | | | $ | — | | | $ | 2,890 | | | $ | — | | | $ | 2,890 | |
Trading liabilities (a) | | 335 | | | — | | | 335 | | | — | | | 335 | |
Short-term financial liabilities: | | | | | | | | | | |
Federal funds purchased | | 400 | | | — | | | 400 | | | — | | | 400 | |
Securities sold under agreements to repurchase | | 1,013 | | | — | | | 1,013 | | | — | | | 1,013 | |
Other short-term borrowings | | 1,093 | | | — | | | 1,093 | | | — | | | 1,093 | |
Total short-term financial liabilities | | 2,506 | | | — | | | 2,506 | | | — | | | 2,506 | |
Term borrowings: | | | | | | | | | | |
Real estate investment trust-preferred | | 46 | | | — | | | — | | | 47 | | | 47 | |
Term borrowings—new market tax credit investment | | 66 | | | — | | | — | | | 59 | | | 59 | |
Secured borrowings | | 3 | | | — | | | — | | | 3 | | | 3 | |
Junior subordinated debentures | | 148 | | | — | | | — | | | 150 | | | 150 | |
Other long-term borrowings | | 1,334 | | | — | | | 1,301 | | | — | | | 1,301 | |
Total term borrowings | | 1,597 | | | — | | | 1,301 | | | 259 | | | 1,560 | |
Derivative liabilities (a) | | 958 | | | 8 | | | 923 | | | 27 | | | 958 | |
Total liabilities | | $ | 8,283 | | | $ | 8 | | | $ | 7,955 | | | $ | 286 | | | $ | 8,249 | |
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(a)Classes are detailed in the recurring and nonrecurring measurement tables.
(b)Level 1 primarily consists of mutual funds with readily determinable fair values. Level 3 includes restricted investments in FHLB-Cincinnati stock of $50 million and FRB stock of $203 million.
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 16—FAIR VALUE OF ASSETS & LIABILITIES | |
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The following table presents the contractual amount and fair value of unfunded loan commitments and standby and other commitments as of March 31, 2023 and December 31, 2022:
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UNFUNDED COMMITMENTS |
| | Contractual Amount | | Fair Value |
(Dollars in millions) | | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
Unfunded Commitments: | | | | | | | | |
Loan commitments | | $ | 24,964 | | | $ | 25,953 | | | $ | 1 | | | $ | 1 | |
Standby and other commitments | | 765 | | | 754 | | | 7 | | | 7 | |
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PART I, ITEM 1. FINANCIAL STATEMENTS |
| NOTE 17 - Other Events | |
Note 17 – Other Events
As previously disclosed, 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 Bank 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.
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 will occur at a fixed rate of 4,000 shares of common stock for each share of Series G Convertible Preferred Stock which reflects a conversion price of $25 per share. Following conversion to common stock, the Series G will represent 3.5% of FHN's common shares outstanding. The $494 million carrying value of the Series G Convertible Preferred Stock qualified as Tier 1 Capital as of March 31, 2023. The Series G Convertible Preferred Stock will also qualify for Common Equity Tier 1 Capital upon conversion to common stock.