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Fair Value of Assets & Liabilities

9 Months Ended

Sep. 30, 2019

FHN groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. This hierarchy requires FHN to maximize the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Each fair value measurement is placed into the proper level based on the lowest level of significant input. These levels are:


•	Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.


•	Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.


•	Level 3—Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.

Recurring Fair Value Measurements

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of September 30, 2019:



	September 30, 2019
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Trading securities—fixed income:
U.S. treasuries	$	—	$	123,871	$	—	$	123,871
Government agency issued MBS	—		194,543		—		194,543
Government agency issued CMO	—		498,967		—		498,967
Other U.S. government agencies	—		159,720		—		159,720
States and municipalities	—		86,185		—		86,185
Corporate and other debt	—		329,440		—		329,440
Equity, mutual funds, and other	—		1,219		—		1,219
Total trading securities—fixed income	—		1,393,945		—		1,393,945
Trading securities—mortgage banking	—		—		1,098		1,098
Loans held-for-sale (elected fair value)	—		—		14,409		14,409
Securities available-for-sale:
U.S. treasuries	—		100		—		100
Government agency issued MBS	—		2,284,432		—		2,284,432
Government agency issued CMO	—		1,784,220		—		1,784,220
Other U.S. government agencies	—		241,333		—		241,333
States and municipalities	—		50,071		—		50,071
Corporate and other debt	—		40,440		—		40,440
Interest-Only Strip (elected fair value)	—		—		15,249		15,249
Total securities available-for-sale	—		4,400,596		15,249		4,415,845
Other assets:
Deferred compensation mutual funds	43,826		—		—		43,826
Equity, mutual funds, and other	22,442		—		—		22,442
Derivatives, forwards and futures	35,518		—		—		35,518
Derivatives, interest rate contracts	—		215,126		—		215,126
Derivatives, other	—		142		—		142
Total other assets	101,786		215,268		—		317,054
Total assets	$	101,786	$	6,009,809	$	30,756	$	6,142,351
Trading liabilities—fixed income:
U.S. treasuries	$	—	$	505,237	$	—	$	505,237
Other U.S.government agencies	—		11,357		—		11,357
States and municipalities	—		2,076		—		2,076
Government issued agency CMO	—		1,613		—		1,613
Corporate and other debt	—		199,494		—		199,494
Total trading liabilities—fixed income	—		719,777		—		719,777
Other liabilities:
Derivatives, forwards and futures	33,819		—		—		33,819
Derivatives, interest rate contracts	—		21,409		—		21,409
Derivatives, other	—		217		28,085		28,302
Total other liabilities	33,819		21,626		28,085		83,530
Total liabilities	$	33,819	$	741,403	$	28,085	$	803,307

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of December 31, 2018:



	December 31, 2018
(Dollars in thousands)	Level 1		Level 2			Level 3		Total
Trading securities—fixed income:
U.S. treasuries	$	—	$	169,799		$	—	$	169,799
Government agency issued MBS	—		133,373			—		133,373
Government agency issued CMO	—		330,456			—		330,456
Other U.S. government agencies	—		76,733			—		76,733
States and municipalities	—		54,234			—		54,234
Corporate and other debt	—		682,068			—		682,068
Equity, mutual funds, and other	—		(19		)	—		(19		)
Total trading securities—fixed income	—		1,446,644			—		1,446,644
Trading securities—mortgage banking	—		—			1,524		1,524
Loans held-for-sale (elected fair value)	—		—			16,273		16,273
Securities available-for-sale:
U.S. treasuries	—		98			—		98
Government agency issued MBS	—		2,420,106			—		2,420,106
Government agency issued CMO	—		1,958,695			—		1,958,695
Other U.S. government agencies	—		149,786			—		149,786
States and municipalities	—		32,573			—		32,573
Corporate and other debt	—		55,310			—		55,310
Interest-Only Strip (elected fair value)	—		—			9,902		9,902
Total securities available-for-sale	—		4,616,568			9,902		4,626,470
Other assets:
Deferred compensation mutual funds	37,771		—			—		37,771
Equity, mutual funds, and other	22,248		—			—		22,248
Derivatives, forwards and futures	28,826		—			—		28,826
Derivatives, interest rate contracts	—		52,214			—		52,214
Derivatives, other	—		435			—		435
Total other assets	88,845		52,649			—		141,494
Total assets	$	88,845	$	6,115,861		$	27,699	$	6,232,405
Trading liabilities—fixed income:
U.S. treasuries	$	—	$	207,739		$	—	$	207,739
Other U.S.government agencies	—		98			—		98
Corporate and other debt	—		127,543			—		127,543
Total trading liabilities—fixed income	—		335,380			—		335,380
Other liabilities:
Derivatives, forwards and futures	30,236		—			—		30,236
Derivatives, interest rate contracts	—		71,853			—		71,853
Derivatives, other	—		84			31,540		31,624
Total other liabilities	30,236		71,937			31,540		133,713
Total liabilities	$	30,236	$	407,317		$	31,540	$	469,093

Changes in Recurring Level 3 Fair Value Measurements

The changes in Level 3 assets and liabilities measured at fair value for the three months ended September 30, 2019 and 2018, on a recurring basis are summarized as follows:



	Three Months Ended September 30, 2019
(Dollars in thousands)	Trading securities				Interest- only strips- AFS				Loans held- for-sale				Net derivative liabilities
Balance on July 1, 2019	$	1,255			$	17,792			$	15,092			$	(26,545	)
Total net gains/(losses) included in:
Net income	(157		)		(1,421		)		443				(4,008		)
Purchases	—				—				—				—
Sales	—				(11,401		)		—				—
Settlements	—				—				(1,126		)		2,468
Net transfers into/(out of) Level 3	—				10,279			(b)	—			(d)	—
Balance on September 30, 2019	$	1,098			$	15,249			$	14,409			$	(28,085	)
Net unrealized gains/(losses) included in net income	$	—		(a)	$	(1,977	)	(c)	$	443		(a)	$	(4,008	)	(e)



	Three Months Ended September 30, 2018
(Dollars in thousands)	Trading securities				Interest-only-strips-AFS				Loans held-for-sale				Net derivative liabilities
Balance on July 1, 2018	$	1,724			$	5,787			$	16,718			$	(9,425	)
Total net gains/(losses) included in:
Net income	33				(456		)		277				(529		)
Purchases	—				—				—				(28,100		)	(f)
Sales	—				(2,034		)		—				—
Settlements	(165		)		—				(759		)		3,842
Net transfers into/(out of) Level 3	—				7,064			(b)	—			(d)	—
Balance on September 30, 2018	$	1,592			$	10,361			$	16,236			$	(34,212	)
Net unrealized gains/(losses) included in net income	$	(3	)	(a)	$	(215	)	(c)	$	277		(a)	$	(530	)	(e)


(a)	Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income.


(b)	Transfers into interest-only strips - AFS level 3 measured on a recurring basis reflect movements from loans held-for-sale (Level 2 nonrecurring).


(c)	Primarily included in fixed income on the Consolidated Condensed Statements of Income.


(d)	Transfers out of loans held-for-sale level 3 measured on a recurring basis generally reflect movements into OREO (level 3 nonrecurring).


(e)	Included in Other expense.


(f)	Increase associated with Visa-related derivatives executed in third quarter 2018, see Note 15 - Derivatives for additional discussion.

There were no net unrealized gains/(losses) for Level 3 assets and liabilities included in other comprehensive income as of September 30, 2019 and 2018.

Changes in Recurring Level 3 Fair Value Measurements

The changes in Level 3 assets and liabilities measured at fair value for the nine months ended September 30, 2019 and 2018, on a recurring basis are summarized as follows:



	Nine Months Ended September 30, 2019
(Dollars in thousands)	Trading securities				Interest- only strips- AFS				Loans held- for-sale				Net derivative liabilities
Balance on January 1, 2019	$	1,524			$	9,902			$	16,273			$	(31,540	)
Total net gains/(losses) included in:
Net income	(128		)		(2,820		)		1,259				(3,892		)
Purchases	—				86				10				—
Sales	—				(38,612		)		—				—
Settlements	(298		)		—				(3,133		)		7,347
Net transfers into/(out of) Level 3	—				46,693			(b)	—			(d)	—
Balance on September 30, 2019	$	1,098			$	15,249			$	14,409			$	(28,085	)
Net unrealized gains/(losses) included in net income	$	(66	)	(a)	$	(1,250	)	(c)	$	1,259		(a)	$	(3,892	)	(e)



	Nine Months Ended September 30, 2018
(Dollars in thousands)	Trading securities				Interest-only-strips- AFS				Loans held- for-sale				Net derivative liabilities
Balance on January 1, 2018	$	2,151			$	1,270			$	18,926			$	(5,645	)
Total net gains/(losses) included in:
Net income	173				840				986				(4,904		)
Purchases	—				—				62				(28,100		)	(f)
Sales	—				(11,227		)		—				—
Settlements	(732		)		—				(3,382		)		4,437
Net transfers into/(out of) Level 3	—				19,478			(b)	(356		)	(d)	—
Balance on September 30, 2018	$	1,592			$	10,361			$	16,236			$	(34,212	)
Net unrealized gains/(losses) included in net income	$	59		(a)	$	(279	)	(c)	$	986		(a)	$	(4,904	)	(e)


(a)	Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income.


(b)	Transfers into interest-only strips - AFS level 3 measured on a recurring basis reflect movements from loans held-for-sale (Level 2 nonrecurring).


(c)	Primarily included in fixed income on the Consolidated Condensed Statements of Income.


(d)	Transfers out of loans held-for-sale level 3 measured on a recurring basis generally reflect movements into OREO (level 3 nonrecurring).


(e)	Included in Other expense.


(f)	Increase associated with Visa-related derivatives executed in third quarter 2018, see Note 15 - Derivatives for additional discussion.

Nonrecurring Fair Value Measurements

From time to time, FHN may be required to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market (“LOCOM”) accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis which were still held on the Consolidated Condensed Statements of Condition at September 30, 2019, and December 31, 2018, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the related carrying value.



	Carrying value at September 30, 2019
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Loans held-for-sale—SBAs and USDA	$	—	$	448,166	$	945	$	449,111
Loans held-for-sale—first mortgages	—		—		519		519
Loans, net of unearned income (a)	—		—		54,092		54,092
OREO (b)	—		—		17,816		17,816
Other assets (c)	—		—		13,777		13,777



	Carrying value at December 31, 2018
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Loans held-for-sale—other consumer	$	—	$	18,712	$	—	$	18,712
Loans held-for-sale—SBAs and USDA	—		577,280		1,011		578,291
Loans held-for-sale—first mortgages	—		—		541		541
Loans, net of unearned income (a)	—		—		48,259		48,259
OREO (b)	—		—		22,387		22,387
Other assets (c)	—		—		8,845		8,845


(a)	Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell.


(b)	Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages.


(c)	Represents tax credit investments accounted for under the equity method.

For assets measured on a nonrecurring basis which were still held on the Consolidated Condensed Statements of Condition at period end, the following table provides information about the fair value adjustments recorded during the three and nine months ended September 30, 2019 and 2018:



	Net gains/(losses) Three Months Ended September 30						Net gains/(losses) Nine Months Ended September 30
(Dollars in thousands)	2019			2018			2019			2018
Loans held-for-sale—SBAs and USDA	$	(977	)	$	(1,213	)	$	(1,208	)	$	(2,464	)
Loans held-for-sale—first mortgages	2			3			27			7
Loans, net of unearned income (a)	(15,559		)	363			(16,036		)	1,020
OREO (b)	(282		)	(776		)	(256		)	(2,198		)
Other assets (c)	(407		)	(1,370		)	(1,349		)	(3,586		)
	$	(17,223	)	$	(2,993	)	$	(18,822	)	$	(7,221	)


(a)	Write-downs on these loans are recognized as part of provision for loan losses.


(b)	Represents losses of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages.


(c)	Represents tax credit investments accounted for under the equity method.

In third quarter 2019, FHN recognized $2.4 million of impairments and $.4 million impairment reversals, respectively, related to dispositions of acquired properties. Also in third quarter 2019, FHN recognized $1.0 million of impairments and $.7 million of impairment reversals, respectively, for lease assets related to its restructuring, repositioning and efficiency efforts.

Related to its restructuring, repositioning, and efficiency efforts, FHN recognized $11.4 million and $.5 million of impairments for tangible long-lived assets in second and first quarter 2019, respectively. FHN also recognized $.3 million and $.8 million of impairments for lease assets in second and first quarter 2019, respectively, related to these efforts. These amounts primarily related to branch optimization and were recognized in the Corporate segment.

In second quarter 2019, FHN recognized $7.1 million of impairments within the Corporate segment for long-lived tangible assets, primarily signage, related to the company's rebranding initiative. Also in second quarter 2019, FHN recognized $1.5 million of impairments for lease assets related to continuing acquisition integration efforts associated with reduction of leased office space. In second quarter 2019 FHN recognized $.8 million of impairments and $.3 million of impairment reversals, respectively, related to dispositions of acquired properties. These amounts were recognized in the Corporate segment.

In fourth, third, and second quarters of 2018, FHN recognized $1.9 million, $.7 million, and $1.3 million, respectively, of impairments of long-lived assets in its Corporate segment primarily related to optimization efforts for its facilities. In fourth and third quarter 2018 $.5 million and $1.0 million, respectively, of impairment charges previously recognized in 2017 in the Corporate segment were reversed based on the disposition price for the applicable location.

Lease asset impairments recognized in 2019 represent the reduction in value of the right-of-use assets associated with leases that are being exited in advance of the contractual lease expiration. Impairments are measured using a discounted cash flow methodology, which is considered a Level 3 valuation.

For all periods, impairments of long-lived tangible assets reflect locations where the associated land and building are either owned or leased. The fair values of owned sites were determined using estimated sales prices from appraisals and broker opinions less estimated costs to sell with adjustments upon final disposition. The fair values of owned assets in leased sites (e.g., leasehold improvements) were determined using a discounted cash flow approach, based on the revised estimated useful lives of the related assets. Both measurement methodologies are considered Level 3 valuations. Impairment adjustments recognized upon disposition of a location are considered Level 2 valuations.

Level 3 Measurements

The following tables provide information regarding the unobservable inputs utilized in determining the fair value of Level 3 recurring and non-recurring measurements as of September 30, 2019 and December 31, 2018:

(Dollars in thousands)

Values Utilized

Level 3 Class

Fair Value at
September 30, 2019

Valuation Techniques

Unobservable Input

Range

Weighted Average (d)

Available-for-sale- securities SBA-interest only strips

15,249

Discounted cash flow

Constant prepayment rate

12%

Bond equivalent yield

15% - 16%

15%

Loans held-for-sale - residential real estate

14,928

Discounted cash flow

Prepayment speeds - First mortgage

3% - 14%

4.3%

Prepayment speeds - HELOC

0% - 12%

7.6%

Foreclosure losses

50% - 66%

64%

Loss severity trends - First mortgage

4% - 23% of UPB

14.8%

Loss severity trends - HELOC

0% - 72% of UPB

50%

Loans held-for-sale- unguaranteed interest in SBA loans

945

Discounted cash flow

Constant prepayment rate

8% - 12%

10%

Bond equivalent yield

Derivative liabilities, other

28,085

Discounted cash flow

Visa covered litigation resolution amount

$5.4 billion - $6.0 billion

$5.8 billion

Probability of resolution scenarios

10% - 50%

16%

Time until resolution

18 - 42 months

32 months

Loans, net of unearned
income (a)

54,092

Appraisals from comparable properties

Marketability adjustments for specific properties

0% - 10% of appraisal

Other collateral valuations

Borrowing base certificates adjustment

20% - 50% of gross value

Financial Statements/Auction values adjustment

0% - 25% of reported value

OREO (b)

17,816

Appraisals from comparable properties

Adjustment for value changes since appraisal

0% - 10% of appraisal

Other assets (c)

13,777

Discounted cash flow

Adjustments to current sales yields for specific properties

0% - 15% adjustment to yield

Appraisals from comparable properties

Marketability adjustments for specific properties

0% - 25% of appraisal

NM - Not meaningful.


(a)	Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for loan losses.


(b)	Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages.


(c)	Represents tax credit investments accounted for under the equity method.


(d)	Weighted averages are determined by the relative fair value of the instruments or the relative contribution to an instrument's fair value.

(Dollars in thousands)

Values Utilized

Level 3 Class

Fair Value at
December 31, 2018

Valuation Techniques

Unobservable Input

Range

Weighted Average (d)

Available-for-sale- securities SBA-interest only strips

9,902

Discounted cash flow

Constant prepayment rate

11% - 12%

11%

Bond equivalent yield

14% - 15%

14%

Loans held-for-sale - residential real estate

16,815

Discounted cash flow

Prepayment speeds - First mortgage

2% - 10%

Prepayment speeds - HELOC

5% - 12%

7.5%

Foreclosure losses

50% - 66%

63%

Loss severity trends - First mortgage

2% - 25% of UPB

17%

Loss severity trends - HELOC

50% - 100% of UPB

50%

Loans held-for-sale- unguaranteed interest in SBA loans

1,011

Discounted cash flow

Constant prepayment rate

8% - 12%

10%

Bond equivalent yield

Derivative liabilities, other

31,540

Discounted cash flow

Visa covered litigation resolution amount

$5.0 billion - $5.8 billion

$5.6 billion

Probability of resolution scenarios

10% - 25%

23%

Time until resolution

18 - 48 months

36 months

Loans, net of unearned
income (a)

48,259

Appraisals from comparable properties

Marketability adjustments for specific properties

0% - 10% of appraisal

Other collateral valuations

Borrowing base certificates adjustment

20% - 50% of gross value

Financial Statements/Auction values adjustment

0% - 25% of reported value

OREO (b)

22,387

Appraisals from comparable properties

Adjustment for value changes since appraisal

0% - 10% of appraisal

Other assets (c)

8,845

Discounted cash flow

Adjustments to current sales yields for specific properties

0% - 15% adjustment to yield

Appraisals from comparable properties

Marketability adjustments for specific properties

0% - 25% of appraisal

NM - Not meaningful.


(a)	Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral less estimated costs to sell. Write-downs on these loans are recognized as part of provision for loan losses.


(b)	Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as OREO. Balance excludes OREO related to government insured mortgages.


(c)	Represents tax credit investments accounted for under the equity method.


(d)	Weighted averages are determined by the relative fair value of the instruments or the relative contribution to an instrument's fair value.

Securities AFS. Increases (decreases) in estimated prepayment rates and bond equivalent yields negatively (positively) affect the value of SBA interest only strips. Management additionally considers whether the loans underlying related SBA-interest only strips are delinquent, in default or prepaying, and adjusts the fair value down 20 - 100% depending on the length of time in default.

Loans held-for-sale. Foreclosure losses and prepayment rates are significant unobservable inputs used in the fair value measurement of FHN’s residential real estate loans held-for-sale. Loss severity trends are also assessed to evaluate the reasonableness of fair value estimates resulting from discounted cash flows methodologies as well as to estimate fair value for newly repurchased loans and loans that are near foreclosure. Significant increases (decreases) in any of these inputs in isolation would result in significantly lower (higher) fair value measurements. All observable and unobservable inputs are re-assessed quarterly.

Increases (decreases) in estimated prepayment rates and bond equivalent yields negatively (positively) affect the value of unguaranteed interests in SBA loans. Unguaranteed interest in SBA loans held-for-sale are carried at less than the outstanding balance due to credit risk estimates. Credit risk adjustments may be reduced if prepayment is likely or as consistent payment history is realized. Management also considers other factors such as delinquency or default and adjusts the fair value accordingly.

Derivative liabilities. In conjunction with the sales of portions of its Visa Class B shares, FHN and the purchasers entered into derivative transactions whereby FHN will make, or receive, cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. FHN uses a discounted cash flow methodology in order to estimate the fair value of FHN’s derivative liabilities associated with its prior sales of Visa Class B shares. The methodology includes estimation of both the resolution amount for Visa’s Covered Litigation matters as well as the length of time until the resolution occurs. Significant increases (decreases) in either of these inputs in isolation would result in significantly higher (lower) fair value measurements for the derivative liabilities. Additionally, FHN performs a probability weighted multiple resolution scenario to calculate the estimated fair value of these derivative liabilities. Assignment of higher (lower) probabilities to the larger potential resolution scenarios would result in an increase (decrease) in the estimated fair value of the derivative liabilities. Since this estimation process requires application of judgment in developing significant unobservable inputs used to determine the possible outcomes and the probability weighting assigned to each scenario, these derivatives have been classified within Level 3 in fair value measurements disclosures.

Loans, net of unearned income and Other Real Estate Owned. Collateral-dependent loans and OREO are primarily valued using appraisals based on sales of comparable properties in the same or similar markets. Other collateral (receivables, inventory, equipment, etc.) is valued through borrowing base certificates, financial statements and/or auction valuations. These valuations are discounted based on the quality of reporting, knowledge of the marketability/collectability of the collateral and historical disposition rates.

Other assets – tax credit investments. The estimated fair value of tax credit investments accounted for under the equity method is generally determined in relation to the yield (i.e., future tax credits to be received) an acquirer of these investments would expect in relation to the yields experienced on current new issue and/or secondary market transactions. Thus, as tax credits are recognized, the future yield to a market participant is reduced, resulting in consistent impairment of the individual investments. Individual investments are reviewed for impairment quarterly, which may include the consideration of additional marketability discounts related to specific investments which typically includes consideration of the underlying property’s appraised value.

Fair Value Option

FHN has elected the fair value option on a prospective basis for almost all types of mortgage loans originated for sale purposes under the Financial Instruments Topic (“ASC 825”) except for mortgage origination operations which utilize the platform acquired from CBF. FHN determined that the election reduces certain timing differences and better matches changes in the value of such loans with changes in the value of derivatives and forward delivery commitments used as economic hedges for these assets at the time of election.

Repurchased loans are recognized within loans held-for-sale at fair value at the time of repurchase, which includes consideration of the credit status of the loans and the estimated liquidation value. FHN has elected to continue recognition of these loans at fair value in periods subsequent to reacquisition. Due to the credit-distressed nature of the vast majority of repurchased loans and the related loss severities experienced upon repurchase, FHN believes that the fair value election provides a more timely recognition of changes in value for these loans that occur subsequent to repurchase. Absent the fair value election, these loans would be subject to valuation at the LOCOM value, which would prevent subsequent values from exceeding the initial fair value, determined at the time of repurchase, but would require recognition of subsequent declines in value. Thus, the fair value election provides for a more timely recognition of any potential future recoveries in asset values while not affecting the requirement to recognize subsequent declines in value.

The following tables reflect the differences between the fair value carrying amount of residential real estate loans held-for-sale measured at fair value in accordance with management’s election and the aggregate unpaid principal amount FHN is contractually entitled to receive at maturity.



	September 30, 2019
(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Fair value carrying amount less aggregate unpaid principal
Residential real estate loans held-for-sale reported at fair value:
Total loans	$	14,409	$	20,247	$	(5,838	)
Nonaccrual loans	3,679		6,794		(3,115		)
Loans 90 days or more past due and still accruing	—		—		—
	December 31, 2018
(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Fair value carrying amount less aggregate unpaid principal
Residential real estate loans held-for-sale reported at fair value:
Total loans	$	16,273	$	23,567	$	(7,294	)
Nonaccrual loans	4,536		8,128		(3,592		)
Loans 90 days or more past due and still accruing	171		281		(110		)

Assets and liabilities accounted for under the fair value election are initially measured at fair value with subsequent changes in fair value recognized in earnings. Such changes in the fair value of assets and liabilities for which FHN elected the fair value option are included in current period earnings with classification in the income statement line item reflected in the following table:



	Three Months Ended September 30				Nine Months Ended September 30
(Dollars in thousands)	2019		2018		2019		2018
Changes in fair value included in net income:
Mortgage banking noninterest income
Loans held-for-sale	$	443	$	277	$	1,259	$	986

For the three months ended September 30, 2019, and 2018, the amounts for residential real estate loans held-for-sale included $.1 million and an insignificant amount, respectively, of gains in pretax earnings that are attributable to changes in instrument-specific credit risk. For the nine months ended September 30, 2019, and 2018, the amounts for residential real estate loans held-for-sale included gains of $.4 million and $.3 million, respectively, in pretax earnings that are attributable to changes in instrument-specific credit risk. The portion of the fair value adjustments related to credit risk was determined based on estimated default rates and estimated loss severities. Interest income on residential real estate loans held-for-sale measured at fair value is calculated based on the note rate of the loan and is recorded in the interest income section of the Consolidated Condensed Statements of Income as interest on loans held-for-sale.

FHN has elected to account for retained interest-only strips from guaranteed SBA loans recorded in available-for-sale securities at fair value through earnings. Since these securities are subject to the risk that prepayments may result in FHN not recovering all or a portion of its recorded investment, the fair value election results in a more timely recognition of the effects of estimated prepayments through earnings rather than being recognized through other comprehensive income with periodic review for other-than-temporary impairment. Gains or losses are recognized through fixed income revenues and are presented in the recurring measurements table.

Determination of Fair Value

In accordance with ASC 820-10-35, fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following describes the assumptions and methodologies used to estimate the fair value of financial instruments recorded at fair value in the Consolidated Condensed Statements of Condition and for estimating the fair value of financial instruments for which fair value is disclosed under ASC 825-10-50.

Short-term financial assets. Federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with other financial institutions and the Federal Reserve are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Trading securities and trading liabilities. Trading securities and trading liabilities are recognized at fair value through current earnings. Trading inventory held for broker-dealer operations is included in trading securities and trading liabilities. Broker-dealer long positions are valued at bid price in the bid-ask spread. Short positions are valued at the ask price. Inventory positions are valued using observable inputs including current market transactions, LIBOR and U.S. treasury curves, credit spreads, and consensus prepayment speeds. Trading loans are valued using observable inputs including current market transactions, swap rates, mortgage rates, and consensus prepayment speeds.

Trading securities also include retained interests in prior mortgage securitizations that qualify as financial assets, which include primarily principal-only strips. FHN uses inputs including yield curves, credit spreads, and prepayment speeds to determine the fair value of principal-only strips.

Securities available-for-sale. Securities available-for-sale includes the investment portfolio accounted for as available-for-sale under ASC 320-10-25. Valuations of available-for-sale securities are performed using observable inputs obtained from market transactions in similar securities. Typical inputs include LIBOR and U.S. treasury curves, consensus prepayment estimates, and credit spreads. When available, broker quotes are used to support these valuations.

Interest only strips are valued at elected fair value based on an income approach using an internal valuation model. The internal valuation model includes assumptions regarding projections of future cash flows, prepayment rates, default rates and interest only strip terms. These securities bear the risk of loan prepayment or default that may result in the Company not recovering all or a portion of its recorded investment. When appropriate, valuations are adjusted for various factors including default or prepayment status of the underlying SBA loans. Because of the inherent uncertainty of valuation, those estimated values may be higher or lower than the values that would have been used had a ready market for the securities existed, and may change in the near term.

Loans held-for-sale. Residential real estate loans held-for-sale are valued using current transaction prices and/or values on similar assets when available, including committed bids for specific loans or loan portfolios. Uncommitted bids may be adjusted based on other available market information. For all other loans FHN determines the fair value of residential real estate loans held-for-sale using a discounted cash flow model which incorporates both observable and unobservable inputs. Inputs include current mortgage rates for similar products, estimated prepayment rates, foreclosure losses, and various loan performance measures (delinquency, LTV, credit score). Adjustments for delinquency and other differences in loan characteristics are typically reflected in the model’s discount rates. Loss severity trends and the value of underlying collateral are also considered in assessing the appropriate fair value for severely delinquent loans and loans in foreclosure. The valuation of HELOCs also incorporates estimated cancellation rates for loans expected to become delinquent.

Non-mortgage consumer loans held-for-sale are valued using committed bids for specific loans or loan portfolios or current market pricing for similar assets with adjustments for differences in credit standing (delinquency, historical default rates for similar loans), yield, collateral values and prepayment rates. If pricing for similar assets is not available, a discounted cash flow methodology is utilized, which incorporates all of these factors into an estimate of investor required yield for the discount rate.

The Company utilizes quoted market prices of similar instruments or broker and dealer quotations to value the SBA and USDA guaranteed loans. The Company values SBA-unguaranteed interests in loans held-for-sale based on individual loan characteristics, such as industry type and pay history which generally follows an income approach. Furthermore, these valuations are adjusted for changes in prepayment estimates and are reduced due to restrictions on trading. The fair value of other non-residential real estate loans held-for-sale is approximated by their carrying values based on current transaction values.

Collateral-Dependent loans. For loans measured using the estimated fair value of collateral less costs to sell, fair value is estimated using appraisals of the collateral. Collateral values are monitored and additional write-downs are recognized if it is determined that the estimated collateral values have declined further. Estimated costs to sell are based on current amounts of disposal costs for similar assets. Carrying value is considered to reflect fair value for these loans.

Derivative assets and liabilities. The fair value for forwards and futures contracts is based on current transactions involving identical securities. Futures contracts are exchange-traded and thus have no credit risk factor assigned as the risk of non-performance is limited to the clearinghouse used.

Valuations of other derivatives (primarily interest rate related swaps) are based on inputs observed in active markets for similar instruments. Typical inputs include the LIBOR curve, Overnight Indexed Swap (“OIS”) curve, option volatility, and option skew. In measuring the fair value of these derivative assets and liabilities, FHN has elected to consider credit risk based on the net exposure to individual counterparties. Credit risk is mitigated for these instruments through the use of mutual margining and master netting agreements as well as collateral posting requirements. For derivative contracts with daily cash margin requirements that are considered settlements, the daily margin amount is netted within derivative assets or liabilities. Any remaining credit risk related to interest rate derivatives is considered in determining fair value through evaluation of additional factors such as customer loan grades and debt ratings. Foreign currency related derivatives also utilize observable exchange rates in the determination of fair value. The determination of fair value for FHN’s derivative liabilities associated with its prior sales of Visa Class B shares are classified within Level 3 in the fair value measurements disclosure as previously discussed in the unobservable inputs discussion.

OREO. OREO primarily consists of properties that have been acquired in satisfaction of debt. These properties are carried at the lower of the outstanding loan amount or estimated fair value less estimated costs to sell the real estate. Estimated fair value is determined using appraised values with subsequent adjustments for deterioration in values that are not reflected in the most recent appraisal.

Other assets. For disclosure purposes, other assets consist of tax credit investments, FRB and FHLB Stock, deferred compensation mutual funds and equity investments (including other mutual funds) with readily determinable fair values. Tax credit investments accounted for under the equity method are written down to estimated fair value quarterly based on the estimated value of the associated tax credits which incorporates estimates of required yield for hypothetical investors. The fair value of all other tax credit investments is estimated using recent transaction information with adjustments for differences in individual investments. Deferred compensation mutual funds are recognized at fair value, which is based on quoted prices in active markets.

Investments in the stock of the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical cost in the Consolidated Condensed Statements of Condition which is considered to approximate fair value. Investments in mutual funds are measured at the funds’ reported closing net asset values. Investments in equity securities are valued using quoted market prices when available.

Defined maturity deposits. The fair value of these deposits is estimated by discounting future cash flows to their present value. Future cash flows are discounted by using the current market rates of similar instruments applicable to the remaining maturity. For disclosure purposes, defined maturity deposits include all time deposits.

Short-term financial liabilities. The fair value of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings are approximated by the book value. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.

Loan commitments. Fair values of these commitments are based on fees charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Other commitments. Fair values of these commitments are based on fees charged to enter into similar agreements.

The following fair value estimates are determined as of a specific point in time utilizing various assumptions and estimates. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, reduces the comparability of fair value disclosures between financial institutions. Due to market illiquidity, the fair values for loans, net of unearned income, loans held-for-sale, and term borrowings as of September 30, 2019 and December 31, 2018, involve the use of significant internally-developed pricing assumptions for certain components of these line items. The assumptions and valuations utilized for this disclosure are considered to reflect inputs that market participants would use in

transactions involving these instruments as of the measurement date. The valuations of legacy assets, particularly consumer loans within the Non-Strategic segment and TRUPS loans, are influenced by changes in economic conditions since origination and risk perceptions of the financial sector. These considerations affect the estimate of a potential acquirer’s cost of capital and cash flow volatility assumptions from these assets and the resulting fair value measurements may depart significantly from FHN’s internal estimates of the intrinsic value of these assets.

Assets and liabilities that are not financial instruments have not been included in the following table such as the value of long-term relationships with deposit and trust customers, premises and equipment, goodwill and other intangibles, deferred taxes, and certain other assets and other liabilities. Additionally, these measurements are solely for financial instruments as of the measurement date and do not consider the earnings potential of our various business lines. Accordingly, the total of the fair value amounts does not represent, and should not be construed to represent, the underlying value of FHN.

The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Condensed Statements of Condition as of September 30, 2019:



	September 30, 2019
	Book Value		Fair Value
(Dollars in thousands)	Book Value		Level 1		Level 2		Level 3		Total
Assets:
Loans, net of unearned income and allowance for loan losses
Commercial:
Commercial, financial and industrial	$	20,179,800	$	—	$	—	$	20,373,976	$	20,373,976
Commercial real estate	4,192,973		—		—		4,203,482		4,203,482
Consumer:
Consumer real estate	6,040,992		—		—		6,100,503		6,100,503
Permanent mortgage	173,630		—		—		188,433		188,433
Credit card & other	480,289		—		—		484,498		484,498
Total loans, net of unearned income and allowance for loan losses	31,067,684		—		—		31,350,892		31,350,892
Short-term financial assets:
Interest-bearing cash	364,412		364,412		—		—		364,412
Federal funds sold	48,747		—		48,747		—		48,747
Securities purchased under agreements to resell	697,214		—		697,214		—		697,214
Total short-term financial assets	1,110,373		364,412		745,961		—		1,110,373
Trading securities (a)	1,395,043		—		1,393,945		1,098		1,395,043
Loans held-for-sale
Mortgage loans (elected fair value) (a)	14,409		—		—		14,409		14,409
USDA & SBA loans- LOCOM	449,111		—		452,889		961		453,850
Other consumer loans- LOCOM	5,479		—		5,479		—		5,479
Mortgage loans- LOCOM	85,844		—		—		85,844		85,844
Total loans held-for-sale	554,843		—		458,368		101,214		559,582
Securities available-for-sale (a)	4,415,845		—		4,400,596		15,249		4,415,845
Securities held-to-maturity	10,000		—		—		9,987		9,987
Derivative assets (a)	250,786		35,518		215,268		—		250,786
Other assets:
Tax credit investments	196,451		—		—		194,226		194,226
Deferred compensation mutual funds	43,826		43,826		—		—		43,826
Equity, mutual funds, and other (b)	226,146		22,442		—		203,704		226,146
Total other assets	466,423		66,268		—		397,930		464,198
Total assets	$	39,270,997	$	466,198	$	7,214,138	$	31,876,370	$	39,556,706
Liabilities:
Defined maturity deposits	$	4,176,267	$	—	$	4,200,490	$	—	$	4,200,490
Trading liabilities (a)	719,777		—		719,777		—		719,777
Short-term financial liabilities:
Federal funds purchased	936,837		—		936,837		—		936,837
Securities sold under agreements to repurchase	735,226		—		735,226		—		735,226
Other short-term borrowings	2,276,139		—		2,276,139		—		2,276,139
Total short-term financial liabilities	3,948,202		—		3,948,202		—		3,948,202
Term borrowings:
Real estate investment trust-preferred	46,219		—		—		47,000		47,000
Term borrowings—new market tax credit investment	2,699		—		—		2,696		2,696
Secured borrowings	24,432		—		—		24,432		24,432
Junior subordinated debentures	144,259		—		—		138,947		138,947
Other long term borrowings	977,487		—		973,506		—		973,506
Total term borrowings	1,195,096		—		973,506		213,075		1,186,581
Derivative liabilities (a)	83,530		33,819		21,626		28,085		83,530
Total liabilities	$	10,122,872	$	33,819	$	9,863,601	$	241,160	$	10,138,580


(a)	Classes are detailed in the recurring and nonrecurring measurement tables.


(b)	Level 1 primarily consists of mutual funds with readily determinable fair values. Level 3 includes restricted investments in FHLB-Cincinnati stock of $73.0 million and FRB stock of $130.7 million.

The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Statements of Condition as of December 31, 2018:



	December 31, 2018
	Book Value		Fair Value
(Dollars in thousands)	Book Value		Level 1		Level 2		Level 3		Total
Assets:
Loans, net of unearned income and allowance for loan losses
Commercial:
Commercial, financial and industrial	$	16,415,381	$	—	$	—	$	16,438,272	$	16,438,272
Commercial real estate	3,999,559		—		—		3,997,736		3,997,736
Consumer:
Consumer real estate	6,223,077		—		—		6,194,066		6,194,066
Permanent mortgage	211,448		—		—		227,254		227,254
Credit card & other	505,643		—		—		507,001		507,001
Total loans, net of unearned income and allowance for loan losses	27,355,108		—		—		27,364,329		27,364,329
Short-term financial assets:
Interest-bearing cash	1,277,611		1,277,611		—		—		1,277,611
Federal funds sold	237,591		—		237,591		—		237,591
Securities purchased under agreements to resell	386,443		—		386,443		—		386,443
Total short-term financial assets	1,901,645		1,277,611		624,034		—		1,901,645
Trading securities (a)	1,448,168		—		1,446,644		1,524		1,448,168
Loans held-for-sale
Mortgage loans (elected fair value) (a)	16,273		—		—		16,273		16,273
USDA & SBA loans- LOCOM	578,291		—		582,476		1,015		583,491
Other consumer loans- LOCOM	25,134		—		6,422		18,712		25,134
Mortgage loans- LOCOM	59,451		—		—		59,451		59,451
Total loans held-for-sale	679,149		—		588,898		95,451		684,349
Securities available-for-sale (a)	4,626,470		—		4,616,568		9,902		4,626,470
Securities held-to-maturity	10,000		—		—		9,843		9,843
Derivative assets (a)	81,475		28,826		52,649		—		81,475
Other assets:
Tax credit investments	163,300		—		—		159,452		159,452
Deferred compensation assets	37,771		37,771		—		—		37,771
Equity, mutual funds, and other (b)	240,780		22,248		—		218,532		240,780
Total other assets	441,851		60,019		—		377,984		438,003
Total assets	$	36,543,866	$	1,366,456	$	7,328,793	$	27,859,033	$	36,554,282
Liabilities:
Deposits:
Defined maturity	$	4,105,777	$	—	$	4,082,822	$	—	$	4,082,822
Trading liabilities (a)	335,380		—		335,380		—		335,380
Short-term financial liabilities:
Federal funds purchased	256,567		—		256,567		—		256,567
Securities sold under agreements to repurchase	762,592		—		762,592		—		762,592
Other short-term borrowings	114,764		—		114,764		—		114,764
Total short-term financial liabilities	1,133,923		—		1,133,923		—		1,133,923
Term borrowings:
Real estate investment trust-preferred	46,168		—		—		47,000		47,000
Term borrowings—new market tax credit investment	2,699		—		—		2,664		2,664
Secured Borrowings	19,588		—		—		19,588		19,588
Junior subordinated debentures	143,255		—		—		134,266		134,266
Other long term borrowings	959,253		—		960,483		—		960,483
Total term borrowings	1,170,963		—		960,483		203,518		1,164,001
Derivative liabilities (a)	133,713		30,236		71,937		31,540		133,713
Total liabilities	$	6,879,756	$	30,236	$	6,584,545	$	235,058	$	6,849,839


(a)	Classes are detailed in the recurring and nonrecurring measurement tables.


(b)	Level 1 primarily consists of mutual funds with readily determinable fair values. Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $130.7 million.

The following table presents the contractual amount and fair value of unfunded loan commitments and standby and other commitments as of September 30, 2019 and December 31, 2018:



	Contractual Amount				Fair Value
(Dollars in thousands)	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Unfunded Commitments:
Loan commitments	$	11,397,521	$	10,884,975	$	3,187	$	2,551
Standby and other commitments	430,226		446,958		5,258		5,043