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Fair Value Of Assets And Liabilities
 3 Months Ended
Mar. 31, 2015
Fair Value Disclosures [Abstract]  
Fair Value Of Assets And Liabilities

Note 16 – Fair Value of Assets & Liabilities

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.

Transfers between fair value levels are recognized at the end of the fiscal quarter in which the associated change in inputs occurs.

Recurring Fair Value Measurements
The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of March 31, 2015:
March 31, 2015
(Dollars in thousands)Level 1  Level 2  Level 3  Total
Trading securities - capital markets:      
U.S. treasuries$-  $108,199  $-  $108,199  
Government agency issued MBS-  547,569  -  547,569  
Government agency issued CMO-  312,086  -  312,086  
Other U.S. government agencies-  161,317  -  161,317  
States and municipalities-  57,181  -  57,181  
Corporate and other debt-  339,560  5  339,565  
Equity, mutual funds, and other-  1,225  -  1,225  
Total trading securities - capital markets -  1,527,137  5  1,527,142  
Trading securities - mortgage banking:      
Principal only-  -  4,013  4,013  
Interest only-  -  83  83  
Subordinated bonds--1,2251,225
Total trading securities - mortgage banking-  -  5,321  5,321  
Loans held-for-sale-  -  26,700  26,700  
Securities available-for-sale:      
U.S. treasuries-  100  -  100  
Government agency issued MBS-  762,850  -  762,850  
Government agency issued CMO-  2,716,147  -  2,716,147  
Other U.S. government agencies-  -  1,691  1,691  
States and municipalities-  8,405  1,500  9,905  
Equity, mutual funds, and other25,870  -  -  25,870  
Total securities available-for-sale25,870  3,487,502  3,191  3,516,563  
Other assets:      
Mortgage servicing rights--2,3422,342
Deferred compensation assets26,440  -  -  26,440  
Derivatives, forwards and futures6,910  -  -  6,910  
Derivatives, interest rate contracts -  140,976  -  140,976  
Derivatives, other-267-267
Total other assets33,350  141,243  2,342  176,935  
Total assets$59,220  $5,155,882  $37,559  $5,252,661  
Trading liabilities - capital markets:      
U.S. treasuries$-  $514,886  $-  $514,886  
Government agency issued CMO-1-1
Other U.S. government agencies-  17,863  -  17,863  
States and municipalities-1,643-1,643
Corporate and other debt-  276,748  -  276,748  
Equity, mutual funds, and other-2,000-2,000
Total trading liabilities - capital markets-  813,141  -  813,141  
Other liabilities:  
Derivatives, forwards and futures7,828  -  -  7,828  
Derivatives, interest rate contracts -  120,440  -  120,440  
Derivatives, other-  -  5,0055,005
Total other liabilities7,828120,4405,005133,273
Total liabilities$7,828  $933,581  $5,005  $946,414  

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of March 31, 2014:
  March 31, 2014
(Dollars in thousands)Level 1  Level 2  Level 3  Total
Trading securities - capital markets:      
U.S. treasuries$-  $145,136  $-  $145,136
Government agency issued MBS-  412,994  -  412,994
Government agency issued CMO-  124,304  -  124,304
Other U.S. government agencies-  86,672  -  86,672
States and municipalities-  29,787  -  29,787
Corporate and other debt-  382,341  5  382,346
Equity, mutual funds, and other-  6,922  -6,922
Total trading securities - capital markets -  1,188,156  5  1,188,161
Trading securities - mortgage banking:      
Principal only-  -  4,764  4,764
Interest only-  -  339  339
Subordinated bonds--1,4851,485
Total trading securities - mortgage banking-  -  6,588  6,588
Loans held-for-sale-  -  229,219  229,219
Securities available-for-sale:      
U.S. treasuries-  39,990  -  39,990
Government agency issued MBS-  792,562  -  792,562
Government agency issued CMO-  2,531,770  -  2,531,770
Other U.S. government agencies-  -  2,182  2,182
States and municipalities-  13,655  1,500  15,155
Venture capital-  -  4,300  4,300
Equity, mutual funds, and other26,482  -  -  26,482
Total securities available-for-sale26,482  3,377,977  7,982  3,412,441
Other assets:      
Mortgage servicing rights--4,6874,687
Deferred compensation assets23,335  -  -  23,335
Derivatives, forwards and futures4,015  -  -  4,015
Derivatives, interest rate contracts-  162,450  -  162,450
Total other assets27,350  162,450  4,687  194,487
Total assets$53,832  $4,728,583  $248,481  $5,030,896
Trading liabilities - capital markets:      
U.S. treasuries$-  $420,574  $-  $420,574
Government agency issued MBS-  1,083  -  1,083
Government agency issued CMO-  503  -  503
Other U.S. government agencies-  9,739  -  9,739
States and municipalities-1,436-1,436
Corporate and other debt-233,287-233,287
Equity, mutual funds, and other-635-635
Total trading liabilities - capital markets-  667,257  -  667,257
Other liabilities:
Derivatives, forwards and futures2,738  -  -  2,738
Derivatives, interest rate contracts-  130,180  -  130,180
Derivatives, other-  -  4,945  4,945
Total other liabilities2,738  130,180  4,945  137,863
Total liabilities$2,738  $797,437  $4,945  $805,120

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 March 31, 2015 and 2014, on a recurring basis are summarized as follows:
Three Months Ended March 31, 2015
SecuritiesMortgage
TradingLoans held-available-servicingNet derivative
(Dollars in thousands)securitiesfor-salefor-salerights, netliabilities
Balance on January 1, 2015$5,643  $27,910  $3,307$2,517$(5,240)
Total net gains/(losses) included in:
Net income170  1,142  --(57)
Other comprehensive income /(loss)-  -  (14)--  
Purchases-  854  ---  
Issuances-  -  ---  
Sales-  -  ---  
Settlements(487)(3,922)(102)(175)292  
Net transfers into/(out of) Level 3-  716 (b)  ---  
Balance on March 31, 2015$5,326  $26,700  $3,191$2,342$(5,005)
Net unrealized gains/(losses) included in net income$171 (a)  $1,142 (a)  $-$-$(57) (c)  

Three Months Ended March 31, 2014
AFS SecuritiesMortgage
TradingLoans held-Investment VentureservicingNet derivative
(Dollars in thousands)securitiesfor-saleportfolio Capitalrights, netliabilities
Balance on January 1, 2014$7,200  $230,456  $3,826$4,300$72,793  $(2,915)
Total net gains/(losses) included in:
Net income(85)  1,187--1,133  (2,341)
Other comprehensive income /(loss)-  -  (17)--  -
Purchases1,559  4,106  ---  -
Issuances-  -  ---  -
Sales(1,715)  -  --(68,519)  -
Settlements(366)(4,193)(127)-(720)311
Net transfers into/(out of) Level 3 -  (2,337) (b)---  -
Balance on March 31, 2014$6,593  $229,219  $3,682$4,300$4,687  $(4,945)
Net unrealized gains/(losses) included in net income$40 (a)$1,187 (a)$-$-$73 (a)$(2,341) (c)

  • Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income.
  • Transfers out of recurring loans held-for-sale level 3 balances reflect movements out of loans held-for-sale and into real estate acquired by foreclosure (level 3 nonrecurring).
  • Included in Other expense.

In third quarter 2014, FHN completed sales of first lien mortgage loans from its loans held-for-sale portfolio. The sale populations primarily represented loans that had been originated with the intent to sell to FNMA or FHLMC and consisted of repurchased loans as well as loans that remained after FHN’s exit of mortgage origination activities in 2008. Smaller amounts of jumbo loans were also included in the sale, along with some loans insured under government programs. Almost all of these loans had been accounted for at elected fair value (a recurring measurement) with a small amount having been accounted for as LOCOM loans (a nonrecurring measurement). The contracted sale values for the loans reflected a substantial improvement in pricing for pre-2009 vintage first lien mortgages in comparison to FHN’s historical methodologies used to estimate fair value, which incorporate significant Level 3 inputs within a discounted cash flow model. Accordingly, the loans being sold were marked to the revised estimate of fair value during the quarter and the pricing evidence from the sale transactions was considered a Level 2 input within the valuation process for the remaining non-governmental guaranteed portion of first lien mortgage loans held-for-sale.

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 LOCOM accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis which were still held on the balance sheet at March 31, 2015 and 2014, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment, the related carrying value, and the fair value adjustments recorded during the respective periods.

    Three Months Ended
Carrying value at March 31, 2015March 31, 2015
(Dollars in thousands)  Level 1  Level 2  Level 3  Total   Net gains/(losses)
Loans held-for-sale - SBAs  $-  $3,211  $-  $3,211  $3
Loans held-for-sale - first mortgages  -  -  858  858  38
Loans, net of unearned income (a)-  -  40,386  40,386  (1,541)
Real estate acquired by foreclosure (b)-  -  29,681  29,681  (376)
Other assets (c)-  -  28,265  28,265  (395)
          $(2,271)

Three Months Ended
Carrying value at March 31, 2014March 31, 2014
(Dollars in thousands)  Level 1  Level 2  Level 3  Total   Net gains/(losses)
Loans held-for-sale - SBAs  $-  $3,494  $-  $3,494  $42
Loans held-for-sale - first mortgages  -  -  9,191  9,191  (17)
Loans, net of unearned income (a)-  -  57,035  57,035  (488)
Real estate acquired by foreclosure (b)-  -  42,970  42,970  (858)
Other assets (c)-  -  30,445  30,445  (325)
          $(1,646)
Certain previously reported amounts have been revised to reflect the retroactive effect of the adoption of ASU 2014-01, "Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects." See Note 1 - Financial Information for additional information.

  • Represents carrying value of loans for which adjustments are required to be based on the appraised value of the collateral. Write-downs on these loans are recognized as part of provision.
  • Represents the fair value and related losses of foreclosed properties that were measured subsequent to their initial classification as foreclosed assets. Balance excludes foreclosed real estate related to government insured mortgages.
  • Represents tax credit investments accounted for under the equity method.

 

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 March 31, 2015 and 2014:
(Dollars in Thousands)
Fair Value at
Level 3 ClassMarch 31, 2015Valuation TechniquesUnobservable InputValues Utilized
Trading securities - mortgage (a)$5,321Discounted cash flowPrepayment speeds 42% - 46%
Discount rate6% - 55%
Loans held-for-sale - residential real estate27,558Discounted cash flowPrepayment speeds - First mortgage2% - 22%
Prepayment speeds - HELOC5% - 15%
Foreclosure losses50% - 60%
Loss severity trends - First mortgage10% - 70% of UPB
Loss severity trends - HELOC45% - 100% of UPB
Draw rate - HELOC5% - 12%
Derivative liabilities, other5,005Discounted cash flowVisa covered litigation resolution amount$4.5 billion - $5.6 billion
Probability of resolution scenarios10% - 25%
Time until resolution6 - 48 months
Loans, net of unearned income (b)40,386Appraisals from comparable propertiesMarketability adjustments for specific properties0% - 10% of appraisal
Other collateral valuationsBorrowing base certificates adjustment20% - 50% of gross value
Financial Statements/Auction values adjustment0% - 25% of reported value
Real estate acquired by foreclosure (c)29,681Appraisals from comparable propertiesAdjustment for value changes since appraisal0% - 10% of appraisal
Other assets (d)28,265Discounted cash flowAdjustments to current sales yields for specific properties0% - 15% adjustment to yield
Appraisals from comparable propertiesMarketability adjustments for specific properties0% - 25% of appraisal

  • The unobservable inputs for principal-only and interest-only trading securities and subordinated bonds are discussed in the Trading securities-mortgage paragraph.
  • 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.
  • Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as foreclosed assets. Balance excludes foreclosed real estate related to government insured mortgages.
  • Represents tax credit investments accounted for under the equity method.

(Dollars in Thousands)
Fair Value at
Level 3 ClassMarch 31, 2014Valuation TechniquesUnobservable InputValues Utilized
Trading securities - mortgage (a)$6,588Discounted cash flowPrepayment speeds40% - 46%
Discount rate47% - 49%
Loans held-for-sale - residential real estate238,410Discounted cash flowPrepayment speeds - First mortgage6% - 10%
Prepayment speeds - HELOC3% - 12%
Credit spreads2% - 4%
Delinquency adjustment factor15% - 25% added to credit spread
Loss severity trends - First mortgage50% - 60% of UPB
Loss severity trends - HELOC35% - 100% of UPB
Draw Rate - HELOC2% - 11%
Derivative liabilities, other4,945Discounted cash flowVisa covered litigation resolution amount$4.4 billion - $5.2 billion
Probability of resolution scenarios10% - 30%
Time until resolution12 - 48 months
Loans, net of unearned income (b)57,035Appraisals from comparable propertiesMarketability adjustments for specific properties0% - 10% of appraisal
Other collateral valuationsBorrowing base certificates adjustment20% - 50% of gross value
Financial Statements/Auction Values adjustment0% - 25% of reported value
Real estate acquired by foreclosure (c)42,970Appraisals from comparable propertiesAdjustment for value changes since appraisal0% - 10% of appraisal
Other assets (d)30,445Discounted cash flowAdjustments to current sales yields for specific properties0% - 15% adjustment to yield
Appraisals from comparable propertiesMarketability adjustments for specific properties0% - 25% of appraisal

Certain previously reported amounts have been revised to reflect the retroactive effect of the adoption of ASU 2014-01, “Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects.” See Note 1 – Financial Information for additional information.

  • The unobservable inputs for principal-only and interest-only trading securities and subordinated bonds are discussed in the Trading securities-mortgage paragraph.
  • 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.
  • Represents the fair value of foreclosed properties that were measured subsequent to their initial classification as foreclosed assets. Balance excludes foreclosed real estate related to government insured mortgages.
  • Represents tax credit investments accounted for under the equity method.

Trading securities-mortgage. Prepayment rates and credit spreads (part of the discount rate) are significant unobservable inputs used in the fair value measurement of FHN’s mortgage trading securities which include interest-only strips, principal-only strips, and subordinated bonds. Increases in prepayment rates and credit spreads in isolation would result in significantly lower fair value measurements for the associated assets. Conversely, decreases in prepayment rates and credit spreads in isolation would result in significantly higher fair value measurements for the associated assets. Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayment rates as customers are expected to refinance existing mortgages under more favorable interest rate terms. Generally, changes in discount rates directionally mirror the changes in market interest rates. FHN’s Corporate Accounting Department monitors sale activity and changes in the fair value of excess interest monthly.

Loans held-for-sale. Prepayment rates, foreclosure losses (2015), credit spreads (2014), and delinquency adjustment factors (2014) 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. Draw rates are an additional significant unobservable input for HELOCs. Increases (decreases) in the draw rate estimates for HELOCs would increase (decrease) their fair value. All observable and unobservable inputs are re-assessed monthly. Fair value measurements are reviewed at least monthly by FHN’s Corporate Accounting Department.

Derivative liabilities. The determination of fair value for FHN’s derivative liabilities associated with its prior sales of Visa Class B shares include 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. The valuation inputs and process are discussed with senior and executive management when significant events affecting the estimate of fair value occur. Inputs are compared to information obtained from the public issuances and filings of Visa, Inc. as well as public information released by other participants in the applicable litigation matters.

Loans, net of unearned income and Real estate acquired by foreclosure. Collateral-dependent loans and Real estate acquired by foreclosure are primarily valued using appraisals based on sales of comparable properties in the same or similar markets. Multiple appraisal firms are utilized to ensure that estimated values are consistent between firms. This process occurs within FHN’s Credit Risk Management and Loan Servicing functions (primarily consumer) and the Credit Risk Management Committee reviews valuation methodologies and loss information for reasonableness. Back testing is performed during the year through comparison to ultimate disposition values and is reviewed quarterly within the Credit Risk Management function. 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. Unusual valuation adjustments and the associated triggering events are discussed with senior and executive management when appropriate. A portfolio review is conducted annually, with the assistance of a third party, to assess the reasonableness of current valuations.

Fair Value Option

FHN 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”). FHN determined that the election reduced certain timing differences and better matched changes in the value of such loans with changes in the value of derivatives 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.
March 31, 2015
(Dollars in thousands)Fair value carrying amountAggregate unpaid principalFair value carrying amount less aggregate unpaid principal
Residential real estate loans held-for-sale reported at fair value:    
Total loans$26,700  $40,762  $(14,062)
Nonaccrual loans6,780  13,023  (6,243)
Loans 90 days or more past due and still accruing1,343  1,686  (343)
March 31, 2014
(Dollars in thousands)Fair value carrying amountAggregate unpaid principalFair value carrying amount less aggregate unpaid principal
Residential real estate loans held-for-sale reported at fair value:    
Total loans$229,219  $374,401  $(145,182)
Nonaccrual loans61,842  133,600  (71,758)
Loans 90 days or more past due and still accruing7,260  15,010  (7,750)

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
March 31
(Dollars in thousands)20152014
Changes in fair value included in net income:
Mortgage banking noninterest income
Loans held-for-sale$1,142$1,187

For the three months ended March 31, 2015, and 2014, the amounts for residential real estate loans held-for-sale include gains of $.4 million and $1.8 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.

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 securities also include retained interests in prior securitizations that qualify as financial assets, which primarily include interest-only strips, principal-only strips and subordinated bonds. FHN uses the price in the third quarter 2013 servicing sale definitive agreement, as adjusted for the portion of pricing that was not specific to the excess interest, as a third-party pricing source in the valuation of the excess interest. FHN uses inputs including yield curves, credit spreads, and prepayment speeds to determine the fair value of principal-only strips. Subordinated bonds are bonds with junior priority and are valued using an internal model which includes contractual terms, frequency and severity of loss (credit spreads), prepayment speeds of the underlying collateral, and the yield that a market participant would require.

Securities available-for-sale. Securities available-for-sale includes the investment portfolio accounted for as available-for-sale under ASC 320-10-25, federal bank stock holdings, short-term investments in mutual funds, and prior to third quarter 2014, venture capital investments. 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. Certain government agency debt obligations with limited trading activity are valued using a discounted cash flow model that incorporates a combination of observable and unobservable inputs. Primary observable inputs include contractual cash flows and the treasury curve. Significant unobservable inputs include estimated trading spreads and estimated prepayment speeds.

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. Short-term investments in mutual funds are measured at the funds’ reported closing net asset values. Investments in equity securities are valued using quoted market prices. Prior to third quarter 2014, venture capital investments were typically measured using significant internally generated inputs including adjustments to industry comparables and discounted cash flows analysis.

Securities held-to-maturity. Securities held-to-maturity reflects debt securities for which management has the positive intent and ability to hold to maturity. To the extent possible, valuations of held-to-maturity securities are performed using observable inputs obtained from market transactions in similar securities. Typical inputs include LIBOR and U.S. treasury curves and credit spreads. Debt securities with limited trading activity are valued using a discounted cash flow model that incorporates a combination of observable and unobservable inputs. Primary observable inputs include contractual cash flows, the treasury curve and credit spreads from similar instruments. Significant unobservable inputs include estimated credit spreads for individual issuers and instruments as well as prepayment speeds, as applicable.

Loans held-for-sale. For applicable loans current transaction prices and /or bid values on similar assets are used in valuing residential real estate loans held-for-sale. 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. Commencing in fourth quarter 2014, inputs include current mortgage rates for similar products, estimated prepayment rates, foreclosure losses, and various loan performance measures (delinquency, LTV, credit score). Prior to fourth quarter 2014, typical inputs included contractual cash flow requirements, current mortgage rates for similar products, estimated prepayment rates, credit spreads and delinquency penalty adjustments. 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 estimates of loan draw rates as well as estimated cancellation rates for loans expected to become delinquent.

Loans held-for-sale also includes loans made by the Small Business Administration (“SBA”), which are accounted for at LOCOM. The fair value of SBA loans is determined using an expected cash flow model that utilizes observable inputs such as the spread between LIBOR and prime rates, consensus prepayment speeds, and the treasury curve. The fair value of other non-residential real estate loans held-for-sale is approximated by their carrying values based on current transaction values.

Loans, net of unearned income. Loans, net of unearned income are recognized at the amount of funds advanced, less charge-offs and an estimation of credit risk represented by the allowance for loan losses. The fair value estimates for disclosure purposes differentiate loans based on their financial characteristics, such as product classification, vintage, loan category, pricing features, and remaining maturity.

The fair value of floating rate loans is estimated through comparison to recent market activity in loans of similar product types, with adjustments made for differences in loan characteristics. In situations where market pricing inputs are not available, fair value is considered to approximate book value due to the monthly repricing for commercial and consumer loans, with the exception of floating rate 1-4 family residential mortgage loans which reprice annually and will lag movements in market rates. The fair value for floating rate 1-4 family mortgage loans is calculated by discounting future cash flows to their present value. Future cash flows are discounted to their present value by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same time period.

Prepayment assumptions based on historical prepayment speeds and industry speeds for similar loans have been applied to the floating rate 1-4 family residential mortgage portfolio.

The fair value of fixed rate loans is estimated through comparison to recent market activity in loans of similar product types, with adjustments made for differences in loan characteristics. In situations where market pricing inputs are not available, fair value is estimated by discounting future cash flows to their present value. Future cash flows are discounted to their present value by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same time period. Prepayment assumptions based on historical prepayment speeds and industry speeds for similar loans have been applied to the fixed rate mortgage and installment loan portfolios.

For all loan portfolio classes, adjustments are made to reflect liquidity or illiquidity of the market. Such adjustments reflect discounts that FHN believes are consistent with what a market participant would consider in determining fair value given current market conditions.

Individually impaired loans are measured using either a discounted cash flow methodology or the estimated fair value of the underlying collateral less costs to sell, if the loan is considered collateral-dependent. In accordance with accounting standards, the discounted cash flow analysis utilizes the loan’s effective interest rate for discounting expected cash flow amounts. Thus, this analysis is not considered a fair value measurement in accordance with ASC 820. However, the results of this methodology are considered to approximate fair value for the applicable loans. Expected cash flows are derived from internally-developed inputs primarily reflecting expected default rates on contractual cash flows. 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.

Mortgage servicing rights. FHN recognizes all classes of MSR at fair value. In third quarter 2013, FHN agreed to sell substantially all of its remaining legacy mortgage servicing. Since that time FHN has used the price in the definitive agreement, as adjusted for the portion of pricing that was not specific to the MSR, as a third-party pricing source in the valuation of the MSR.

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, swaptions, caps, and collars) 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. 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.

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. The fair value of these derivatives has been determined using a discounted cash flow methodology for estimated future cash flows determined through use of probability weighted scenarios for multiple estimates of Visa’s aggregate exposure to covered litigation matters, which include consideration of amounts funded by Visa into its escrow account for the covered litigation matters. Since this estimation process required 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.

Real estate acquired by foreclosure. Real estate acquired by foreclosure 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. Real estate acquired by foreclosure during periods prior to January 1, 2015 also includes properties acquired in compliance with HUD servicing guidelines which are carried at the estimated amount of the underlying government insurance or guarantee.

Nonearning assets. For disclosure purposes, nonearning assets include cash and due from banks, accrued interest receivable, and capital markets receivables. Due to the short-term nature of cash and due from banks, accrued interest receivable, and capital markets receivables, the fair value is approximated by the book value.

Other assets. For disclosure purposes, other assets consist of tax credit investments and deferred compensation assets that are considered financial assets. 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 assets are recognized at fair value, which is based on quoted prices in active markets. Beginning in first quarter 2015, Other assets also includes property acquired in connection with foreclosures of loans that have government insurance or guarantees. These receivables are valued at the expected amounts recoverable for the insurance or guarantees.

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 certificates of deposit and other time deposits.

Undefined maturity deposits. In accordance with ASC 825, the fair value of these deposits is approximated by the book value. For the purpose of this disclosure, undefined maturity deposits include demand deposits, checking interest accounts, savings accounts, and money market accounts.

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.

Term borrowings. The fair value of term borrowings is based on quoted market prices or dealer quotes for the identical liability when traded as an asset. When pricing information for the identical liability is not available, relevant prices for similar debt instruments are used with adjustments being made to the prices obtained for differences in characteristics of the debt instruments. If no relevant pricing information is available, the fair value is approximated by the present value of the contractual cash flows discounted by the investor’s yield which considers FHN’s and FTBNA’s debt ratings.

Other noninterest-bearing liabilities. For disclosure purposes, other noninterest-bearing liabilities include accrued interest payable and capital markets payables. Due to the short-term nature of these liabilities, the book value is considered to approximate fair value.

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, will likely reduce 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 March 31, 2015 and 2014, involve the use of significant internally-developed pricing assumptions for certain components of these line items. These assumptions are considered to reflect inputs that market participants would use in transactions involving these instruments as of the measurement date. 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. Accordingly, the total of the fair value amounts does not represent, and should not be construed to represent, the underlying value of the Company.

The following tables summarize the book value and estimated fair value of financial instruments recorded in the Consolidated Condensed Statements of Condition as well as unfunded loan commitments and stand by and other commitments as of March 31, 2015 and 2014.

  March 31, 2015
BookFair Value
(Dollars in thousands)  Value  Level 1  Level 2  Level 3  Total
Assets:          
Loans, net of unearned income and allowance for loan losses          
Commercial:          
Commercial, financial and industrial  $9,570,703  $-  $-  $9,523,767  $9,523,767  
Commercial real estate  1,303,232  -  -  1,285,775  1,285,775
Retail:          
Consumer real estate 4,813,572  -  -  4,640,351  4,640,351  
Permanent mortgage 491,522  -  -  458,133  458,133  
Credit card & other  324,766  -  -  326,506  326,506  
Total loans, net of unearned income and allowance for loan losses  16,503,795  -  -  16,234,532  16,234,532  
Short-term financial assets          
Interest-bearing cash  438,633  438,633  -  -  438,633  
Federal funds sold  43,052  -  43,052  -  43,052  
Securities purchased under agreements to resell  831,541  -  831,541  -  831,541  
Total short-term financial assets1,313,226438,633874,593-1,313,226
Trading securities (a)1,532,463  -  1,527,137  5,326  1,532,463  
Loans held-for-sale (a)133,958  -  3,211  130,747  133,958  
Securities available-for-sale (a) (b)3,672,331  25,870  3,487,502  158,959  3,672,331  
Securities held-to-maturity4,299  -  -  5,451  5,451  
Derivative assets (a)148,153  6,910  141,243  -  148,153
  
Other assets  
Tax credit investments  80,331--62,76862,768  
Deferred compensation assets26,44026,440--26,440
Total other assets  106,771  26,440  -  62,768  89,208
Nonearning assets    
Cash & due from banks  282,800  282,800  -  -  282,800  
Capital markets receivables  190,662  -  190,662  -  190,662  
Accrued interest receivable  72,716  -  72,716  -  72,716  
Total nonearning assets  546,178  282,800  263,378  -  546,178
Total assets  $23,961,174  $780,653  $6,297,064  $16,597,783  $23,675,500
          
Liabilities:    
Deposits:    
Defined maturity$1,210,417  $-  $1,216,398  $-  $1,216,398  
Undefined maturity17,428,137-17,428,137-17,428,137
Total deposits18,638,554  -18,644,535-18,644,535  
Trading liabilities (a)813,141  -  813,141  -  813,141
Short-term financial liabilities    
Federal funds purchased703,352-703,352-703,352
Securities sold under agreements to repurchase  309,297  -  309,297  -  309,297  
Other short-term borrowings158,745-158,745-158,745
Total short-term financial liabilities  1,171,394  -  1,171,394  -  1,171,394
Term borrowings    
Real estate investment trust-preferred  45,913  -  -  49,350  49,350  
Term borrowings - new market tax credit investment  18,000  -  -  18,208  18,208  
Borrowings secured by residential real estate60,914--52,56852,568
Other long term borrowings1,448,388-1,426,924-1,426,924
Total term borrowings1,573,215  -  1,426,924  120,126  1,547,050  
Derivative liabilities (a)133,273  7,828  120,440  5,005  133,273
  
Other noninterest-bearing liabilities    
Capital markets payables  91,176  -  91,176  -  91,176  
Accrued interest payable  31,745  -  31,745  -  31,745  
Total other noninterest-bearing liabilities122,921  -  122,921  -122,921
Total liabilities$22,452,498  $7,828  $22,299,355  $125,131$22,432,314

  • Classes are detailed in the recurring and nonrecurring measurement tables.
  • Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $66.0 million.

  March 31, 2014
BookFair Value
(Dollars in thousands)  Value  Level 1  Level 2  Level 3  Total
Assets:          
Loans, net of unearned income and allowance for loan losses          
Commercial:          
Commercial, financial and industrial$7,680,262  $-  $-  $7,595,334  $7,595,334  
Commercial real estate  1,136,895  -  -  1,093,796  1,093,796
Retail:          
Consumer real estate5,134,606  -  -  4,824,384  4,824,384  
Permanent mortgage599,721  -  -  540,843  540,843  
Credit card & other  320,731  -  -  322,690  322,690  
Total loans, net of unearned income and allowance for loan losses14,872,215  -  -  14,377,047  14,377,047  
Short-term financial assets          
Interest-bearing cash  685,540  685,540  -  -  685,540  
Federal funds sold16,555-16,555-16,555
Securities purchased under agreements to resell  605,276  -  605,276  -  605,276  
Total short-term financial assets  1,307,371  685,540  621,831  -  1,307,371  
Trading securities (a)1,194,749  -  1,188,156  6,593  1,194,749  
Loans held-for-sale (a)361,359  -  3,494  357,865  361,359  
Securities available-for-sale (a) (b)3,571,179  26,482  3,377,977  166,720  3,571,179  
Securities held-to-maturity4,274--5,4545,454
Derivative assets (a)166,465  4,015  162,450  -  166,465  
Other assets          
Tax credit investments  85,901  -  -  73,344  73,344  
Deferred compensation assets  23,335  23,335  -  -  23,335  
Total other assets  109,236  23,335  -  73,344  96,679  
Nonearning assets          
Cash & due from banks  450,270  450,270  -  -  450,270  
Capital markets receivables  51,082  -  51,082  -  51,082  
Accrued interest receivable  73,010  -  73,010  -  73,010  
Total nonearning assets  574,362  450,270  124,092  -  574,362  
Total assets$22,161,210  $1,189,642  $5,478,000  $14,987,023  $21,654,665  
          
Liabilities:          
Deposits:          
Defined maturity  $1,436,657  $-  $1,448,362  $-  $1,448,362  
Undefined maturity  15,236,086  -  15,236,086  -  15,236,086  
Total deposits  16,672,743  -  16,684,448  -  16,684,448  
Trading liabilities (a)667,257  -  667,257  -  667,257  
Short-term financial liabilities          
Federal funds purchased1,135,665-1,135,665-1,135,665
Securities sold under agreements to repurchase  411,795  -  411,795  -  411,795  
Other short-term borrowings  204,023  -  204,023  -  204,023  
Total short-term financial liabilities  1,751,483  -  1,751,483  -  1,751,483  
Term borrowings          
Real estate investment trust-preferred  45,845  -  -  49,350  49,350  
Term borrowings - new market tax credit investment  18,000  -  -  17,810  17,810  
Borrowings secured by residential real estate  77,119  -  -  66,554  66,554  
Other long term borrowings  1,366,084  -  1,362,408  -  1,362,408  
Total term borrowings1,507,048-1,362,408133,7141,496,122
Derivative liabilities (a)137,863  2,738  130,180  4,945  137,863  
Other noninterest-bearing liabilities          
Capital markets payables  39,510  -  39,510  -  39,510  
Accrued interest payable  33,244  -  33,244  -  33,244  
Total other noninterest-bearing liabilities  72,754  -  72,754  -  72,754  
Total liabilities  $20,809,148  $2,738  $20,668,530  $138,659  $20,809,927  

  • Classes are detailed in the recurring and nonrecurring measurement tables.
  • Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $66.0 million.

Contractual AmountFair Value
(Dollars in thousands)March 31, 2015March 31, 2014March 31, 2015March 31, 2014
Unfunded Commitments:  
Loan commitments$7,073,470  $7,543,821$2,439  $1,805
Standby and other commitments374,173  316,3995,229  5,642