Business context and reporting period
First Horizon Corporation (NYSE: FHN) is a Memphis-based bank holding company whose principal subsidiary is First Horizon Bank. This Form 10-K covers the fiscal year ended December 31, 2023; figures are for full-year 2023 unless stated otherwise, not fourth-quarter-only results. The company reported $81.7 billion in assets and operated banking and financial-services businesses across the U.S.
Financial performance and condition
- Revenue and earnings: Total revenue was $3.467 billion, comprising $2.540 billion of net interest income and $927 million of noninterest income. Net income was $916 million; net income available to common shareholders was $865 million, or $1.54 per diluted share. The comparable 2022 figures were $912 million, $868 million, and $1.53, respectively.
- Net interest income and margins: Net interest income rose 6% from 2022. Net interest margin increased to 3.42% from 3.10%, while net interest spread declined to 2.44% from 2.85%. Higher earning-asset yields and loan growth were partly offset by higher funding costs.
- Expenses and profitability: Noninterest expense increased 6% to $2.079 billion. The efficiency ratio improved to 59.90% from 61.24%; return on average assets was 1.12% versus 1.08%, while return on average common equity declined to 11.01% from 11.81%.
- Credit: Provision for credit losses rose to $260 million from $95 million. Net charge-offs were $170 million, or 0.28% of average loans, versus $59 million, or 0.11%, in 2022. A $72 million charge-off on one commercial relationship was a significant contributor. The allowance for loan and lease losses was $773 million, 1.26% of loans, at year-end.
- Loans and asset quality: Loans and leases increased 5% to $61.3 billion. Nonperforming assets rose to $469 million from $327 million, largely reflecting nonaccrual commercial real estate loans, especially office-related exposure. Nonperforming loans were 0.75% of loans, compared with 0.54% a year earlier.
- Deposits and liquidity: Deposits increased 4% to $65.8 billion. Interest-bearing deposits rose $8.6 billion while noninterest-bearing deposits fell $6.3 billion. Estimated uninsured deposits were $26.8 billion, or 41% of deposits, down from 48%. The loans-to-deposits ratio was 93%. Reported available liquidity sources totaled $35.6 billion at year-end, including Federal Reserve and FHLB borrowing capacity; availability is subject to collateral and program terms.
- Debt and capital: Term borrowings were $1.15 billion, down from $1.60 billion, following repayment of $450 million of senior notes. Short-term borrowings were $2.55 billion on the balance sheet. The CET1 ratio was 11.40%, Tier 1 capital 12.42%, and total risk-based capital 13.96%, all higher than in 2022. Total equity was $9.3 billion.
- Cash flow: Operating activities provided $1.299 billion, compared with $2.291 billion in 2022. Investing activities used $2.605 billion, while financing activities provided $1.494 billion; cash and cash equivalents increased $188 million to $1.731 billion. Bank cash flows reflect movements in loans, deposits, securities, and other balance-sheet items and should not be read as operating earnings.
Material changes versus 2022
- TD’s proposed acquisition was terminated in May 2023 after regulatory approval was not obtained in time. FHN received a $200 million termination payment plus $25 million in fee reimbursement; $225 million was recorded as merger-termination income, and $50 million of the payment was contributed to the First Horizon Foundation.
- Noninterest income increased 14% to $927 million, principally due to the termination-related gain. Excluding that unusual item, fixed income and mortgage banking/title income were weaker. Fixed income revenue fell 35% to $133 million; mortgage banking and title income declined to $23 million from $68 million.
- Noninterest expense increased 6%, including a $68 million FDIC special assessment recognized in the fourth quarter and the $50 million charitable contribution. Merger and integration expense declined to $51 million from $136 million.
- Deposit acquisition following regional-bank turmoil supported deposit growth and allowed FHN to reduce reliance on some borrowings, but required higher deposit pricing. Noninterest-bearing balances declined materially as funds shifted to interest-bearing accounts.
- Series G preferred stock issued in connection with the TD transaction converted into common stock in June 2023, adding approximately 19.7 million shares. The common-share repurchase moratorium ended in first-quarter 2024; a new $650 million authorization was announced in January 2024.
Outlook, risks, contingencies, and unusual items
Management described 2024 as an uncertain inflection year, with results sensitive to Federal Reserve rate decisions, the yield curve, inflation, and the possibility of recession. The company indicated that net interest margins may remain below late-2022 levels while the curve is inverted; management expected capital ratios to remain above well-capitalized standards plus the required buffer during 2024. No specific full-year earnings or revenue guidance is provided in the supplied filing text.
- Funding and liquidity: Deposit outflows and heightened pricing competition remain risks. Promotional deposit rates began to normalize late in 2023, but retaining acquired balances at acceptable costs is an ongoing challenge. The Bank Term Funding Program was scheduled to expire March 11, 2024.
- Credit and real estate: Management cited normalization in credit losses, uncertain macroeconomic conditions, and potential further effects of prior rate increases. Office vacancies and higher interest rates pressured CRE cash flows and valuations; CRE nonperforming loans rose to $136 million from $9 million.
- Interest rates and businesses sensitive to markets: An inverted yield curve can pressure lending margins and fixed-income revenues. Higher mortgage rates continued to weigh on mortgage origination and mortgage-company lending, while fixed-income and capital-markets activity remained subdued.
- Regulation and operating risk: FHN was below the $100 billion asset threshold for enhanced prudential standards but stated that compliance costs would rise as it approached that level. The filing also emphasizes cybersecurity, fraud, vendor, technology, competition, and severe-weather risks in its southern and coastal markets.
- Contingencies: The company reported $2 million of accrued liabilities for specified material litigation contingencies and estimated reasonably possible losses in excess of recorded liabilities of less than $1 million in aggregate for those matters. The separate pre-2009 mortgage repurchase and foreclosure liability was $16 million; a significant servicing-indemnification claim remains difficult to estimate.
- Securities and accounting sensitivities: Available-for-sale securities had $1.112 billion of gross unrealized losses at year-end; management said it did not intend, and was not more likely than not required, to sell them before recovery. The allowance for credit losses is a critical estimate: management’s alternative forecast weightings produced an 8% lower or 24% higher ALLL than reported.
Important facts for investors to verify
- Assess earnings excluding the $225 million termination-related gain and the one-time $68 million FDIC assessment and $50 million charitable contribution.
- Track deposit retention, pricing, uninsured-deposit levels, and the shift from noninterest-bearing to interest-bearing accounts.
- Review subsequent credit performance, especially the office CRE portfolio, criticized/problem assets, and whether elevated charge-offs extend beyond the single large relationship.
- Evaluate the sensitivity of net interest income and capital to rate and yield-curve scenarios, and confirm 2024 capital and liquidity trends.
- Review the full audited financial statements and notes for securities valuation, pre-2009 mortgage claims, litigation developments, and regulatory changes. KPMG issued an unqualified opinion on the financial statements and internal controls.