Allowance for Loan Losses

3 Months Ended

Mar. 31, 2020

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

As discussed in Note 1 - Summary of Significant Accounting Policies, the ALLL estimation process was revised on January 1, 2020 to reflect the adoption of ASU 2016-13. All information contained in the following disclosures reflects the application of requirements from the adoption of ASU 2016-13 for periods after 2019. Information for periods prior to 2020 has been retained with the content consistent with prior disclosures.

Periods after 2019

The ALLL has been determined in accordance with ASC 326-20, which requires a recognition of current expected credit losses on the amortized cost basis of loans. During the first quarter of 2020, expected credit loss estimates were adversely affected across all portfolio segments due to the sudden, steep decline in macroeconomic forecasts due to the actual and projected effects of the COVID-19 pandemic. To a lesser extent, loan growth also resulted in a higher ALLL as those increased balances received a full life-of-loan allowance based on current macroeconomic projections.

For all portfolio segments, FHN has selected a 4-year reasonable and supportable forecast period which reflects a 3-year period during which macroeconomic variables are used to estimate expected credit losses. This is followed by a 1-year, time-weighted reversion to historical loss factors with weights assigned to macroeconomic variables diminishing, and weights assigned to historical loss averages increasing, pro rata as months lapse during the 1-year period. Thereafter, FHN immediately reverts to historical loss averages over the remaining estimated life of loans.

In developing credit loss estimates for its loan portfolio, FHN evaluated multiple macroeconomic forecasts provided by Moody’s. FHN selected Moody’s baseline forecast as the primary source for its macroeconomic inputs which are inclusive of the following assumptions related to the economic effects of the COVID-19 pandemic:


•	Passage and implementation of the CARES Act


•	Federal Reserve stimulus including open-ended quantitative easing and announced programs


•	Assumes passage of a fourth stimulus package in in fourth quarter 2020


•	Recession starts in the first 6 months of 2020


•	Unemployment peaks at 9 percent in second quarter 2020


•	The economy experiences a partial bounce back in third quarter 2020, which is followed by slow growth


•	GDP growth accelerates later in 2021


•	Return to full employment by 2023

FHN also utilized more stressed economic scenarios in evaluating certain components of its loan portfolio (industries) that are most exposed to the effects of the COVID-19 pandemic, including Franchise Finance, Energy and Hospitality within the C&I segment and CRE-Hospitality within the Commercial Real Estate segment. This analysis was utilized in developing qualitative adjustments to increase the recorded ALLL attributable to these components beyond the modeled results. 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.

Typically commercial loans in C&I and CRE have shorter expected lives, based on the contractual term of loan agreements, prepayment estimates and a limited amount of renewal or extension options that are not unconditionally cancellable by FHN. Estimated weighted average lives are normally under 3 years. TRUPs loans are an exception due to longer contractual lives, beneficial borrower terms and balloon payoff structure. Consumer HELOC and installment loans tend to have significantly longer lives based on their contractual terms which is reduced somewhat by estimated prepayments with estimated weighted average lives normally 5 years or less. Credit card loans have shorter estimated lives approximating 1 year based on customer payment trends and because the revolving lines are unconditionally cancellable by FHN.

As of March 31, 2020, FHN had General C&I loans with amortized cost of approximately $32 million that was based on the value of underlying collateral. At a minimum, the estimated value of the collateral for each loan equals the current book value. The collateral for these loans generally consists of business assets including land, buildings, equipment and financial assets. During the three months ended March 31, 2020, FHN recognized charge-offs of approximately $6 million on these loans related to reductions in estimated collateral values.

Consumer HELOC and installment loans with amortized cost based on the value of underlying real estate collateral were approximately $10 million and $23 million, respectively, as of March 31, 2020. At a minimum, the estimated value of the collateral for each loan equals the current book value. Charge offs during the three months

ended March 31, 2020 were not significant for either portfolio segment.

Unfunded Commitments

The measurement of expected credit losses for unfunded commitments mirrors that of loans with the additional estimate of future draw rates (timing and amount). Consistent with the ALLL, the decline in macroeconomic forecasts during March resulted in higher credit expense for unfunded commitments. However, this effect of higher loss forecasts was offset somewhat because many borrowers drew on available lines prior to the end of the quarter which resulted in higher loan balances (and ALLL). Total credit loss expense for unfunded commitments was $9.2 million for the three months ended March 31, 2020.

Periods prior to 2020

The ALLL included the following components: reserves for commercial loans evaluated based on pools of credit graded loans and reserves for pools of smaller-balance homogeneous consumer loans, both determined in accordance with ASC 450-20-50, and to a lesser extent, reserves determined in accordance with ASC 310-10-35 for loans determined by management to be individually impaired and an allowance associated with PCI loans.

For commercial loans, ASC 450-20-50 reserves were established using historical net loss factors by grade level, loan product, and business segment. The ALLL for smaller-balance homogeneous consumer loans was determined based on pools of similar loan types that have similar credit risk characteristics. ASC 450-20-50 reserves for the consumer portfolio were determined using segmented roll-rate models that incorporated various factors including historical delinquency trends, experienced loss frequencies, and experienced loss severities. Generally, reserves for consumer loans reflected inherent losses in the portfolio that were expected to be recognized over the following twelve months. The historical net loss factors for both commercial and consumer ASC 450-20-50 reserve models were subject to qualitative adjustments by management to reflect current events, trends, and conditions (including economic considerations and trends), which were not fully captured in the historical net loss factors. The pace of the economic recovery, performance of the housing market,

unemployment levels, labor participation rate, the regulatory environment, regulatory guidance, and portfolio segment-specific trends, were examples of additional factors considered by management in determining the ALLL. Additionally, management considered the inherent uncertainty of quantitative models that were driven by historical loss data. Management evaluated the periods of historical losses that were the basis for the loss rates used in the quantitative models and selected historical loss periods that were believed to be the most reflective of losses inherent in the loan portfolio as of the balance sheet date. Management also periodically reviewed an analysis of the loss emergence period which was the amount of time required for a loss to be confirmed (initial charge-off) after a loss event had occurred. FHN performed extensive studies related to the historical loss periods used in the model and the loss emergence period and model assumptions were adjusted accordingly.

Impairment related to individually impaired loans was measured in accordance with ASC 310-10. For all commercial portfolio segments, commercial TDRs and other individually impaired commercial loans were measured based on the present value of expected future payments discounted at the loan’s effective interest rate (“the DCF method”), observable market prices, or for loans that are solely dependent on the collateral for repayment, the net realizable value (collateral value less estimated costs to sell). Impaired loans also included consumer TDRs. Generally, the allowance for TDRs in all consumer portfolio segments was determined by estimating the expected future cash flows using the modified interest rate (if an interest rate concession), incorporating payoff and net charge-off rates specific to the TDRs within the portfolio segment being assessed, and discounted using the pre-modification interest rate. The discount rates of variable rate TDRs were adjusted to reflect changes in the interest rate index to which the rates are tied. The discounted cash flows were then compared to the outstanding principal balance in order to determine required reserves. Residential real estate loans discharged through bankruptcy were considered collateral-dependent and were charged down to net realizable value (collateral value less estimated costs to sell).

The following table provides a rollforward of the allowance for loan losses by portfolio segment for the three months ended March 31, 2020 and 2019:



(Dollars in thousands)	C&I			Commercial Real Estate			Consumer Real Estate (a)			Credit Card and Other			Total
Balance as of January 1, 2020	$	122,486		$	36,112		$	28,443		$	13,266		$	200,307
Adoption of ASU 2016-13	18,782			(7,348		)	92,992			1,968			106,394
Charge-offs	(6,751		)	(581		)	(2,310		)	(3,811		)	(13,453		)
Recoveries	935			573			3,555			1,179			6,242
Provision for loan losses	119,064			18,869			342			6,725			145,000
Balance as of March 31, 2020	254,516			47,625			123,022			19,327			444,490
Allowance - individually evaluated for impairment	11,401			—			13,394			468			25,263
Allowance - collectively evaluated for impairment	243,115			47,625			109,628			18,859			419,227
Loans, net of unearned as of March 31, 2020:
Individually evaluated for impairment	100,092			163			152,393			699			253,347
Collectively evaluated for impairment	22,024,338			4,639,529			5,966,990			494,099			33,124,956
Total loans, net of unearned income	$	22,124,430		$	4,639,692		$	6,119,383		$	494,798		$	33,378,303
Balance as of January 1, 2019	$	98,947		$	31,311		$	37,439		$	12,727		$	180,424
Charge-offs	(3,101		)	(434		)	(2,804		)	(4,188		)	(10,527		)
Recoveries	829			57			4,041			1,087			6,014
Provision/(provision credit) for loan losses	7,038			3,448			(4,522		)	3,036			9,000
Balance as of March 31, 2019	103,713			34,382			34,154			12,662			184,911
Allowance - individually evaluated for impairment	3,437			—			23,923			446			27,806
Allowance - collectively evaluated for impairment	98,135			34,382			9,108			12,067			153,692
Allowance - purchased credit-impaired loans	2,141			—			1,123			149			3,413
Loans, net of unearned as of March 31, 2019:
Individually evaluated for impairment	83,253			1,879			189,332			684			275,148
Collectively evaluated for impairment	17,056,034			3,936,727			6,141,585			504,271			27,638,617
Purchased credit-impaired loans	36,825			8,337			29,846			1,275			76,283
Total loans, net of unearned income	$	17,176,112		$	3,946,943		$	6,360,763		$	506,230		$	27,990,048

Certain previously reported amounts have been reclassified to agree with current presentation.

a) In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability.

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.

The total amount of interest reversals from loans placed on nonaccrual status during the three months ended March 31, 2020 was not material. In addition, the amount of income recognized on nonaccrual loans for the three months ended in March 31, 2020 was not material.