Income Taxes

12 Months Ended

Dec. 31, 2020

The aggregate amount of income taxes included in the Consolidated Statements of Income and the Consolidated Statements of Changes in Equity for the years ended December 31, were as follows:


(Dollars in millions)	2020		2019		2018
Consolidated Statements of Income:
Income tax expense	$	76	$	134	$	157
Consolidated Statements of Changes in Equity:
Income tax expense (benefit) related to:
Net unrealized gains on pension and other postretirement plans	3		5		—
Net unrealized gains (losses) on securities available for sale	25		35		(16)
Net unrealized gains (losses) on cash flow hedges	3		5		(1)

Total	$	107	$	179	$	140

The components of income tax expense (benefit) for the years ended December 31, were as follows:


(Dollars in millions)	2020		2019		2018
Current:
Federal	$	80	$	106	$	43
State	14		14		10

Deferred:
Federal	(15)		5		82
State	(3)		9		22

Total	$	76	$	134	$	157

The TCJA was signed into law at the end of 2017 and companies were provided up to a year to complete their assessment of its effects. In 2018, FHN

recorded a tax benefit of $7 million related to the finalization of tax items for the 2017 tax return.

A reconciliation of expected income tax expense (benefit) at the federal statutory rate of 21% for 2020, 2019, and 2018, respectively to the total income tax expense follows:


(Dollars in millions)	2020		2019		2018
Federal income tax rate	21%		21%		21%
Tax computed at statutory rate	$	196	$	123	$	151
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit	9		15		25
Bank-owned life insurance	(6)		(5)		(4)
401(k) – employee stock ownership plan	(1)		(1)		(1)
Tax-exempt interest	(8)		(6)		(7)
Non-deductible expenses	13		11		8
LIHTC credits and benefits, net of amortization	(9)		(4)		(7)
Other tax credits	(5)		—		(3)

Other changes in unrecognized tax benefits	(9)		4		6
Purchase accounting gain	(112)		—		—
Effect of TCJA	—		—		(7)
Other	8		(3)		(4)
Total	$	76	$	134	$	157

As of December 31, 2020, FHN had net deferred tax asset balances related to federal and state income tax carryforwards of $47 million and $9 million, respectively, which will expire at various dates as follows:


(Dollars in millions)	Expiration Dates	Net Deferred Tax Asset Balance
Losses - federal	2026 - 2035	$	44

Net operating losses - states	2026 - 2040	9
Credits - federal	2040	3

A DTA or DTL is recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax consequence is calculated by applying enacted statutory tax rates, applicable to future years, to these temporary differences. In order to support the recognition of the DTA, FHN’s management must believe that the realization of the DTA is more likely than not. FHN evaluates the likelihood of realization of the DTA based on both positive and negative evidence available at the time, including (as appropriate) scheduled reversals of DTLs, projected future taxable income, tax planning strategies, and recent financial performance. Realization is dependent on generating sufficient taxable income prior to the expiration of the carryforwards attributable to the DTA. In projecting

future taxable income, FHN incorporates assumptions including the estimated amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates used to manage the underlying business.

As of December 31, 2020, FHN's net DTA was less than $1 million compared to $69 million at December 31, 2019. At December 31, 2020, FHN's gross DTA (net of a valuation allowance) and gross DTL were $471 million and $471 million, respectively. Although realization is not assured, FHN believes that it meets the more-likely-than-not requirement with respect to the net DTA after valuation allowance.

Temporary differences which gave rise to deferred tax assets and deferred tax liabilities on December 31, 2020 and 2019 were as follows:


(Dollars in millions)	2020		2019
Deferred tax assets:
Loss reserves	$	205	$	58
Employee benefits	86		68

Accrued expenses	7		4


Lease liability	100		56
Federal loss carryforwards	44		44
State loss carryforwards	9		1

Other	20		19
Gross deferred tax assets	471		250


Deferred tax liabilities:
Depreciation and amortization	$	83	$	51
Investment in debt securities (ASC 320) (a)	35		10
Equity investments	11		4
Other intangible assets	93		56
Prepaid expenses	15		10

ROU lease asset	89		50
Leasing	135		—
Other	10		—
Gross deferred tax liabilities	471		181
Net deferred tax assets	$	—	$	69

(a) Tax effects of unrealized gains and losses are tracked on a security-by-security basis.

The total unrecognized tax benefits at December 31, 2020 and 2019, was $70 million and $24 million, respectively. To the extent such unrecognized tax benefits as of December 31, 2020 are subsequently recognized, $29 million of tax benefits could impact tax expense and FHN’s effective tax rate in future periods.

FHN is currently in audit in several jurisdictions. It is reasonably possible that the unrecognized tax benefits related to federal and state exposures could decrease by $44 million and $7 million, respectively, during 2021 if audits are completed and settled and if

the applicable statutes of limitations expire as scheduled.

FHN recognizes interest accrued and penalties related to unrecognized tax benefits within income tax expense. FHN had approximately $11 million and $3 million accrued for the payment of interest as of December 31, 2020 and 2019, respectively. The total amount of interest and penalties recognized in the Consolidated Statements of Income during 2020 and 2019 was an expense of $8 million and $1 million, respectively.

The rollforward of unrecognized tax benefits is shown below:


(Dollars in millions)
Balance at December 31, 2018	$	20
Increases related to prior year tax positions	3
Increases related to current year tax positions	2

Lapse of statutes	(1)
Balance at December 31, 2019	$	24
Increases related to prior year tax positions	56
Increases related to current year tax positions	1
Settlements	(10)
Lapse of statutes	(1)
Balance at December 31, 2020	$	70

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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