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 the ACL. See Note 1 - Significant Accounting Policies for further discussion of FHN's ACL methodology.

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 underling 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 as 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 to adjust historical loss information in situations where current loan characteristics differ from those in the historical loss information and for differences in economic conditions and other factors.

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 4 - 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 evaluation of the adequacy of the ACL utilizes a weighting approach for multiple economic forecast scenarios 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 may also be affected by a variety of qualitative factors that FHN considers to reflect current judgment of various events and risks that are not measured in the quantitative calculations.

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 December 31, 2021 and 2020, FHN recognized approximately $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 below. 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 year ended December 31, 2021 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).

The decrease in the ACL as of December 31, 2021 as compared to December 31, 2020 reflects an improvement in the macroeconomic outlook, positive grade migration, and lower loan balances, which was offset slightly by higher C&I loan balances excluding PPP loans.

In developing credit loss estimates for its loan and lease portfolios, FHN utilized multiple Moody’s forecast scenarios for its macroeconomic inputs. Each scenario included assumptions around the COVID-19 pandemic and its impact on various sections of the economy. The heaviest weight was placed on the baseline forecast, which assumed positive real GDP growth over the forecast horizon and return to full employment by year-end 2022.

During the years ended December 31, 2021 and 2020, FHN also considered stressed loan portfolios or industries that are most exposed to the effects of the COVID-19

pandemic and added qualitative adjustments, where needed, to account for the risks not captured in 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.

The following table provides a rollforward of the allowance for loan and lease losses and the reserve for unfunded lending commitments by portfolio type for December 31, 2021, 2020 and 2019:

Table 8.5.1

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
Allowance for loan and lease losses:
Balance as of January 1, 2021	$	453	$	242	$	242	$	26	$	963


Charge-offs	(34)		(5)		(5)		(15)		(59)
Recoveries	21		5		27		4		57

Provision for loan and lease losses	(106)		(88)		(101)		4		(291)
Balance as of December 31, 2021	334		154		163		19		670

Reserve for remaining unfunded commitments:
Balance as of January 1, 2021	65		10		10		—		85



Provision for unfunded lending commitments	(19)		2		(2)		—		(19)
Balance as of December 31, 2021	46		12		8		—		66

Allowance for credit losses as of December 31, 2021	$	380	$	166	$	171	$	19	$	736

Allowance for loan and lease losses:
Balance as of January 1, 2020	$	123	$	36	$	28	$	13	$	200
Adoption of ASU 2016-13	19		(7)		93		2		107
Balance as of January 1, 2020, as adjusted	142		29		121		15		307

Charge-offs (b)	(129)		(5)		(8)		(14)		(156)
Recoveries	9		4		18		5		36
Initial allowance on loans purchased with credit deterioration (b)	138		100		44		5		287
Provision for loan and lease losses (c)	293		114		67		15		489
Balance as of December 31, 2020	453		242		242		26		963

Reserve for remaining unfunded commitments:
Balance as of January 1, 2020	4		2		—		—		6
Adoption of ASU 2016-13	17		1		6		—		24
Balance as of January 1, 2020, as adjusted	21		3		6		—		30
Initial reserve on loans acquired	12		26		3		—		41
Provision for unfunded lending commitments	32		(19)		1		—		14
Balance as of December 31, 2020	65		10		10		—		85

Allowance for credit losses as of December 31, 2020	$	518	$	252	$	252	$	26	$	1,048

Allowance for loan losses
Balance as of January 1, 2019	$	99	$	31	$	37	$	13	$	180
Charge-offs	(34)		(1)		(8)		(16)		(59)
Recoveries	7		1		20		4		32
Provision for loan losses	51		5		(21)		12		47
Balance as of December 31, 2019	123		36		28		13		200

Reserve for remaining unfunded commitments:
Balance as of January 1, 2019	4		3		—		—		7
Provision for unfunded lending commitments	—		(1)		—		—		(1)
Balance as of December 31, 2019	4		2		—		—		6

Allowance for credit losses as of December 31, 2019	$	127	$	38	$	28	$	13	$	206

(a) C&I loans as of December 31, 2021 and 2020 include $1.0 billion and $4.1 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 year ended December 31, 2020 excludes day 1 charge-offs and the related initial allowance on PCD loans is net of these amounts. Under ASC 326, the initial ALLL recognized on PCD assets included an additional $237 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 $287 million of additional ALLL for PCD loans.

(c) Provision for loan and lease losses for the year ended December 31, 2020 includes $147 million recognized on non-PCD loans from the IBKC merger and Truist branch acquisition.