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 ("RULC"), collectively the allowance for credit losses ("ACL"). The ALLL and the RULC 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.

As discussed in Note 1 - Financial Information, FHN adopted ASU 2016-13 effective January 1, 2020. Financial information at September 30, 2020 reflects this adoption and historical financial information disclosed is in accordance with previously applicable GAAP.

Allowance for Loan and Lease Losses

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 nine months of 2020, expected credit loss estimates were adversely affected across all portfolio segments due to the 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:

•Unemployment peak at 13% in 2Q20, with a baseline forecast of 9.5% for 4Q20 and dropping to 8.1% for 4Q21

•Annualized GDP growth rate of 2.8% in 4Q20

•V-shaped recovery for housing and some portions of consumer spending

•Fed funds rate near zero for at least the next two years.

Where macroeconomic forecast variables used in the models do not take into effect the impact of federal stimulus and bank-supported payment deferral and forbearance programs on the timing of grade migration and recognition of loss content, management adjusted model inputs qualitatively to account for this assistance.

During the nine months ended September 30, 2020, FHN also utilized targeted reviews of higher stressed loan portfolio (industries) that are most exposed to the effects of the COVID-19 pandemic, including Franchise Finance, Energy, Non-Profit, Arts & Entertainment, Restaurants outside of Franchise Finance, Nursing/Assisted Living and Hospitality within the C&I segment and CRE-Hospitality and CRE-Retail within the Commercial Real Estate segment. This analysis reviewed the level of impact from COVID-19 and the likelihood of additional financial assistance needed beyond 180 days. This analysis was utilized in developing qualitative adjustments to increase the recorded ALLL attributable to these components beyond the modeled results. FHN reviewed consumer deferrals and forbearance payment rates to analyze the likelihood customers will have difficulty making payments after the deferral or forbearance period ends. The analysis was utilized to develop an additional qualitative adjustment to increase the recorded ALLL for consumer real estate loans. 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.

Reserve for Unfunded Lending 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 the first nine months of 2020 resulted in higher credit expense for unfunded commitments. Excluding the acquired reserve for unfunded commitments, there was no significant change during the third quarter of 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.

The following table provides a rollforward of the ALLL and RULC by portfolio type for the three and nine months ended September 30, 2020 and 2019:


(Dollars in thousands)	Commercial, Financial, and Industrial (a)		Commercial Real Estate		Consumer Real Estate		Credit Card and Other		Total
Allowance for loan and lease losses:
Balance as of July 1, 2020	$	318,722	$	57,285	$	143,757	$	18,117	$	537,881
Charge-offs (b)	(69,448)		(3,540)		(1,834)		(3,519)		(78,341)
Recoveries	3,200		2,243		5,311		997		11,751
Initial allowance on loans purchased with credit deterioration (b)	137,702		100,123		44,141		4,845		286,811
Provision for loan and lease losses (c)	98,918		51,847		74,055		5,180		230,000
Balance as of September 30, 2020	489,094		207,958		265,430		25,620		988,102

Reserve for remaining unfunded commitments:
Balance as of July 1, 2020	36,388		6,359		7,714		—		50,461
Initial reserve on loans acquired	11,760		26,306		3,185		8		41,259
Provision/(provision credit) for remaining unfunded commitments	(1,509)		(1,671)		180		—		(3,000)
Balance as of September 30, 2020	46,639		30,994		11,079		8		88,720

Allowance for loan and lease losses:
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
Balance as of January 1, 2020, as adjusted	141,268		28,764		121,435		15,234		306,701
Charge-offs (b)	(94,400)		(4,182)		(6,112)		(10,007)		(114,701)
Recoveries	5,208		2,972		12,853		3,258		24,291
Initial allowance on loans purchased with credit deterioration (b)	137,702		100,123		44,141		4,845		286,811
Provision for loan and lease losses (c)	299,316		80,281		93,113		12,290		485,000
Balance as of September 30, 2020	$	489,094	$	207,958	$	265,430	$	25,620	$	988,102

Reserve for remaining unfunded commitments:
Balance as of January 1, 2020	3,590		2,356		16		139		6,101
Adoption of ASU 2016-13	16,512		1,276		6,323		(139)		23,972
Balance as of January 1, 2020, as adjusted	20,102		3,632		6,339		—		30,073
Initial reserve on loans acquired	11,760		26,306		3,185		8		41,259
Provision for remaining unfunded commitments	14,777		1,056		1,555		—		17,388
Balance as of September 30, 2020	$	46,639	$	30,994	$	11,079	$	8	$	88,720







Allowance for loan losses:
Balance as of July 1, 2019	$	116,096	$	32,953	$	31,532	$	12,168	$	192,749
Charge-offs	(18,598)		(369)		(1,473)		(3,897)		(24,337)
Recoveries	3,245		181		5,055		1,256		9,737


Provision/(provision credit) for loan losses	13,387		2,860		(4,440)		3,193		15,000
Balance as of September 30, 2019	114,130		35,625		30,674		12,720		193,149

Reserve for remaining unfunded commitments:
Balance as of July 1, 2019	4,231		3,149		20		125		7,525
Provision/(provision credit) for remaining unfunded commitments	(406)		(231)		(5)		7		(635)
Balance as of September 30, 2019	3,825		2,918		15		132		6,890

Allowance for loan losses:
Balance as of January 1, 2019	98,947		31,311		37,439		12,727		180,424
Charge-offs	(28,289)		(924)		(5,991)		(11,883)		(47,087)
Recoveries	4,593		150		14,621		3,448		22,812
Provision/(provision credit) for loan losses	38,879		5,088		(15,395)		8,428		37,000
Balance as of September 30, 2019	114,130		35,625		30,674		12,720		193,149

Reserve for remaining unfunded commitments:
Balance as of January 1, 2019	4,240		3,242		27		109		7,618
Provision/(provision credit) for remaining unfunded commitments	(415)		(324)		(12)		23		(728)
Balance as of September 30, 2019	$	3,825	$	2,918	$	15	$	132	$	6,890

(a) C&I loans as of September 30, 2020 include $4.2 billion in PPP loans 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.

(b) The three and nine month periods ended September 30, 2020 exclude day 1 charge-offs and the related initial allowance on PCD loans is net of these amounts. Under the new CECL standard, the initial ALLL recognized on PCD assets included an additional $237.3 million for charged-off loans that had been written off prior to acquisition (whether full or partial) or which met FHN's charge-off policy at the time of acquisition. After charging these amounts off immediately upon acquisition, the net impact was 286.8 million of additional ALLL for PCD loans.

(c) Provision for loan and lease losses for the three and nine month periods ended September 30, 2020 includes $147.0 million recognized on non-PCD loans from the IBKC merger and Truist branch acquisition.

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. As of September 30, 2020, FHN recognized approximately $1.1 million in allowance for expected credit losses on COVID-19 deferrals that do not qualify for the election which is not reflected in the table above. 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 during the three and nine months ended September 30, 2020 was not material. In addition, the amount of income recognized on nonaccrual loans for the three and nine months ended in September 30, 2020 was not material.