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Fair Value Of Assets And Liabilities
 9 Months Ended
Sep. 30, 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 September 30, 2015:
September 30, 2015
(Dollars in thousands)Level 1  Level 2  Level 3  Total
Trading securities - fixed income:      
U.S. treasuries$-  $97,211  $-  $97,211  
Government agency issued MBS-  265,290  -  265,290  
Government agency issued CMO-  283,927  -  283,927  
Other U.S. government agencies-  113,739  -  113,739  
States and municipalities-  65,255  -  65,255  
Trading Loans-16,943-16,943
Corporate and other debt-  381,470  5  381,475  
Equity, mutual funds, and other-  742  -  742  
Total trading securities - fixed income -  1,224,577  5  1,224,582  
Trading securities - mortgage banking-  -  4,598  4,598
Loans held-for-sale-  -  26,789  26,789  
Securities available-for-sale:      
U.S. treasuries-  100  -  100  
Government agency issued MBS-  945,951  -  945,951  
Government agency issued CMO-  2,535,436  -  2,535,436  
Other U.S. government agencies-  -  1,446  1,446  
States and municipalities-  7,655  1,500  9,155  
Equity, mutual funds, and other25,840  -  -  25,840  
Total securities available-for-sale25,840  3,489,142  2,946  3,517,928  
Other assets:      
Mortgage servicing rights--1,9931,993
Deferred compensation assets25,972  -  -  25,972  
Derivatives, forwards and futures16,335  -  -  16,335  
Derivatives, interest rate contracts -  136,121  -  136,121  
Derivatives, other-92-92
Total other assets42,307  136,213  1,993  180,513  
Total assets$68,147  $4,849,932  $36,331  $4,954,410  
Trading liabilities - fixed income:      
U.S. treasuries$-  $478,759  $-  $478,759  
Government agency issued MBS-1,481-1,481
Other U.S. government agencies-  6,482  -  6,482  
Corporate and other debt-  301,841  -  301,841  
Total trading liabilities - fixed income-  788,563  -  788,563  
Other liabilities:  
Derivatives, forwards and futures15,921  -  -  15,921  
Derivatives, interest rate contracts -  120,234  -  120,234  
Derivatives, other-  -  4,8104,810
Total other liabilities15,921120,2344,810140,965
Total liabilities$15,921  $908,797  $4,810  $929,528  

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of September 30, 2014:
  September 30, 2014
(Dollars in thousands)Level 1  Level 2  Level 3  Total
Trading securities - fixed income:      
U.S. treasuries$-  $247,796  $-  $247,796
Government agency issued MBS-  301,559  -  301,559
Government agency issued CMO-  201,016  -  201,016
Other U.S. government agencies-  108,874  -  108,874
States and municipalities-  42,900  -  42,900
Corporate and other debt-  379,768  5  379,773
Equity, mutual funds, and other-  49,986  -49,986
Total trading securities - fixed income -  1,331,899  5  1,331,904
Trading securities - mortgage banking-  -  6,118  6,118
Loans held-for-sale-  -  31,443  31,443
Securities available-for-sale:      
U.S. treasuries-  100  -  100
Government agency issued MBS-  716,865  -  716,865
Government agency issued CMO-  2,623,685  -  2,623,685
Other U.S. government agencies-  -  1,929  1,929
States and municipalities-  8,705  1,500  10,205
Equity, mutual funds, and other26,080  -  -  26,080
Total securities available-for-sale26,080  3,349,355  3,429  3,378,864
Other assets:
Mortgage servicing rights-  -  2,880  2,880
Deferred compensation assets24,901  -  -  24,901
Derivatives, forwards and futures3,181  -  -  3,181
Derivatives, interest rate contracts-  134,561  -  134,561
Total other assets28,082  134,561  2,880  165,523
Total assets$54,162  $4,815,815  $43,875  $4,913,852
Trading liabilities - fixed income:      
U.S. treasuries$-  $278,306  $-  $278,306
Other U.S. government agencies-4,964-4,964
States and municipalities-543-543
Corporate and other debt-248,421-248,421
Total trading liabilities - fixed income-  532,234  -  532,234
Other liabilities:
Derivatives, forwards and futures2,895  -  -  2,895
Derivatives, interest rate contracts-  112,907  -  112,907
Derivatives, other-  -  7,640  7,640
Total other liabilities2,895  112,907  7,640  123,442
Total liabilities$2,895  $645,141  $7,640  $655,676
Certain previously reported amounts have been reclassified to agree with current presentation.

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, 2015 and 2014, on a recurring basis are summarized as follows:
Three Months Ended September 30, 2015
SecuritiesMortgage
TradingLoans held-available-servicingNet derivative
(Dollars in thousands)securitiesfor-salefor-salerights, netliabilities
Balance on July 1, 2015$4,929  $26,525  $3,060$2,158$(4,810)
Total net gains/(losses) included in:
Net income57  803  --(302)
Other comprehensive income /(loss)-  -  (16)--  
Purchases-  1,902  ---  
Issuances-  -  ---  
Sales-  -  ---  
Settlements(383)(1,664)(98)(165)302  
Net transfers into/(out of) Level 3-  (777) (b)  ---  
Balance on September 30, 2015$4,603  $26,789  $2,946$1,993$(4,810)
Net unrealized gains/(losses) included in net income$57 (a)  $803 (a)  $-$-$(302) (c)

Three Months Ended September 30, 2014
AFS SecuritiesMortgage
TradingLoans held-Investment VentureservicingNet derivative
(Dollars in thousands)securitiesfor-saleportfolio Capitalrights, netliabilities
Balance on July 1, 2014$6,421  $232,487  $3,561$2,300$3,197  $(4,725)
Total net gains/(losses) included in:
Net income191  41,757-(995)19  (3,236)
Other comprehensive income /(loss)-  -  (16)--  -
Purchases-  522  ---  -
Issuances-  -  ---  -
Sales-  (236,975)  -(5)(152)  -
Settlements(489)(5,967)(116)(1,300)(184)321
Net transfers into/(out of) Level 3 -  (381) (b)---  -
Balance on September 30, 2014$6,123  $31,443  $3,429$-$2,880  $(7,640)
Net unrealized gains/(losses) included in net income$191 (a)$1,828 (a)$-$-$17 (a)$(3,236) (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.

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, 2015 and 2014, on a recurring basis are summarized as follows:
  Nine Months Ended September 30, 2015
SecuritiesMortgage
  TradingLoans held-available-servicingNet derivative
(Dollars in thousands)securitiesfor-salefor-salerights, netliabilities
Balance on January 1, 2015$5,642  $27,910  $3,307$2,517  $(5,240)
Total net gains/(losses) included in:
  Net income296  2,193  --  (466)
  Other comprehensive income / (loss)-  -  (44)-  -  
Purchases-  3,080  --  -  
Issuances-  -  --  -  
Sales-  -  --  -  
Settlements(1,335)(4,483)(317)(524)896  
Net transfers into/(out of) Level 3-  (1,911) (b)  --  -  
Balance on September 30, 2015$4,603  $26,789  $2,946$1,993  $(4,810)
Net unrealized gains/(losses) included in net income$296 (a)  $2,193 (a)  $-$-$(466) (c)

Nine Months Ended September 30, 2014
Securities available-for-saleMortgage
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 income149  51,158-(2,995)1,265  (5,678)
Other comprehensive income /(loss)-  -  (48)--  -  
Purchases1,559  5,104  ---  -  
Issuances-  -  ---  -  
Sales(1,715)  (236,975)  -(5)(70,071)  -  
Settlements(1,070)(14,767)(349)(1,300)(1,107)953  
Net transfers into/(out of) Level 3 -  (3,533) (b)---  -  
Balance on September 30, 2014$6,123  $31,443  $3,429$-$2,880  $(7,640)
Net unrealized gains/(losses) included in net income$225 (a)$1,828 (a)$-$-$50 (a)$(5,678) (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 September 30, 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 EndedNine Months Ended
Carrying value at September 30, 2015September 30, 2015September 30, 2015
(Dollars in thousands)  Level 1  Level 2  Level 3  Total   Net gains/(losses)Net gains/(losses)
Loans held-for-sale - first mortgages$-  $-  $726  $726  $10$48
Loans, net of unearned income (a)-  -  27,898  27,898  1,1952,729
Real estate acquired by foreclosure (b)-  -  25,872  25,872  (706)(2,366)
Other assets (c)-  -  27,825  27,825  (439)(1,383)
$60$(972)

Three Months EndedNine Months Ended
Carrying value at September 30, 2014September 30, 2014September 30, 2014
(Dollars in thousands)  Level 1  Level 2  Level 3  Total   Net gains/(losses)Net gains/(losses)
Loans held-for-sale - SBAs  $-  $7,552  $-  $7,552  $(4)$39
Loans held-for-sale - first mortgages  -  -  981  981  (351)(361)
Loans, net of unearned income (a)-  -  46,634  46,634  (736)(1,064)
Real estate acquired by foreclosure (b)-  -  35,261  35,261  (707)(2,098)
Other assets (c)-  -  29,166  29,166  (311)(1,498)
          $(2,109)$(4,982)

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 September 30, 2015 and 2014:
(Dollars in Thousands)
Fair Value at
Level 3 ClassSeptember 30, 2015Valuation TechniquesUnobservable InputValues Utilized
Trading securities - mortgage$4,598Discounted cash flowPrepayment speeds 43% - 45%
Discount rate6% - 59%
Loans held-for-sale - residential real estate27,515Discounted cash flowPrepayment speeds - First mortgage2% - 20%
Prepayment speeds - HELOC5% - 15%
Foreclosure losses45% - 55%
Loss severity trends - First mortgage20% - 70% of UPB
Loss severity trends - HELOC35% - 100% of UPB
Draw rate - HELOC5% - 12%
Derivative liabilities, other4,810Discounted cash flowVisa covered litigation resolution amount$4.5 billion - $5.5 billion
Probability of resolution scenarios5% - 25%
Time until resolution6 - 42 months
Loans, net of unearned income (a)27,898Appraisals 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 (b)25,872Appraisals from comparable propertiesAdjustment for value changes since appraisal0% - 10% of appraisal
Other assets (c)27,825Discounted cash flowAdjustments to current sales yields for specific properties0% - 15% adjustment to yield
Appraisals from comparable propertiesMarketability adjustments for specific properties0% - 25% of appraisal

  • 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.
  • 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 ClassSeptember 30, 2014Valuation TechniquesUnobservable InputValues Utilized
Trading securities - mortgage$6,118Discounted cash flowPrepayment speeds42% - 46%
Discount rate42% - 69%
Loans held-for-sale - residential real estate32,424Discounted cash flowPrepayment speeds - First mortgage6% - 10%
Prepayment speeds - HELOC5% - 15%
Credit spreads2% - 4%
Delinquency adjustment factor15% - 25% added to credit spread
Loss severity trends - First mortgage50% - 60% of UPB
Loss severity trends - HELOC50% - 100% of UPB
Draw Rate - HELOC5% - 12%
Derivative liabilities, other7,640Discounted cash flowVisa covered litigation resolution amount$4.9 billion - $5.7 billion
Probability of resolution scenarios10% - 30%
Time until resolution12 - 48 months
Loans, net of unearned income (a)46,634Appraisals 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 (b)35,261Appraisals from comparable propertiesAdjustment for value changes since appraisal0% - 10% of appraisal
Other assets (c)29,166Discounted 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.

  • 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.
  • 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 changes in the fair value of these securities monthly.

Loans held-for-sale. Foreclosure losses in 2015, credit spreads and delinquency adjustment factors in 2014, and prepayment rates in 2015 and 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 quarterly. Fair value measurements are reviewed at least quarterly by FHN’s Corporate Accounting Department.

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. 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 (commercial) and Default 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.
September 30, 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$26,789  $41,350  $(14,561)
Nonaccrual loans7,206  13,712  (6,506)
Loans 90 days or more past due and still accruing2,677  3,822  (1,145)
September 30, 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$31,443  $49,145  $(17,702)
Nonaccrual loans7,742  14,893  (7,151)
Loans 90 days or more past due and still accruing2,685  4,990  (2,305)

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 EndedNine Months Ended
September 30September 30
(Dollars in thousands)2015201420152014
Changes in fair value included in net income:
Mortgage banking noninterest income
Loans held-for-sale$803$41,757$2,193$51,158

For the three months ended September 30, 2015, and 2014, the amounts for residential real estate loans held-for-sale include a loss of $.2 million and a gain of $.6 million, respectively, in pretax earnings that are attributable to changes in instrument-specific credit risk. For the nine months ended September 30, 2015, and 2014, the amounts for loans held-for-sale include gains of $.5 million and $3.2 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 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 securitizations that qualify as financial assets, which primarily include interest-only strips, principal-only strips and subordinated bonds. 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, and short-term investments in mutual funds. 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.

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. Residential real estate loans held-for-sale are valued using current transaction prices and/or values on similar assets when available. 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. 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.

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 fixed income receivables. Due to the short-term nature of cash and due from banks, accrued interest receivable, and fixed income 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 fixed income 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 September 30, 2015 and 2014, 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 TRUP loans, are influenced by the challenging economic conditions experienced during the past several years, including housing price declines and the effect on estimated collateral values, elevated unemployment or underemployment and risk perceptions of the financial sector. These considerations affect the estimate of a potential acquirer’s cost of capital assumption and cash flow volatility from these assets and the resulting fair value measurements may depart significantly from our 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 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 September 30, 2015 and 2014.

  September 30, 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  $9,538,832  $-  $-  $9,473,702  $9,473,702  
Commercial real estate  1,462,696  -  -  1,447,848  1,447,848
Retail:          
Consumer real estate 4,731,464  -  -  4,601,406  4,601,406  
Permanent mortgage 443,817  -  -  413,188  413,188  
Credit card & other  337,869  -  -  339,527  339,527  
Total loans, net of unearned income and allowance for loan losses  16,514,678  -  -  16,275,671  16,275,671  
Short-term financial assets          
Interest-bearing cash  596,689  596,689  -  -  596,689  
Federal funds sold  64,438  -  64,438  -  64,438  
Securities purchased under agreements to resell  793,098  -  793,098  -  793,098  
Total short-term financial assets1,454,225596,689857,536-1,454,225
Trading securities (a)1,229,180  -  1,224,577  4,603  1,229,180  
Loans held-for-sale (a)124,308  -  -  124,308  124,308  
Securities available-for-sale (a) (b)3,673,641  25,840  3,489,142  158,659  3,673,641  
Securities held-to-maturity4,313  -  -  5,404  5,404  
Derivative assets (a)152,548  16,335  136,213  -  152,548
  
Other assets  
Tax credit investments  98,341--58,03058,030  
Deferred compensation assets25,97225,972--25,972
Total other assets  124,313  25,972  -  58,030  84,002
Nonearning assets    
Cash & due from banks  256,342  256,342  -  -  256,342  
Fixed income receivables  83,547  -  83,547  -  83,547  
Accrued interest receivable  65,956  -  65,956  -  65,956  
Total nonearning assets  405,845  256,342  149,503  -  405,845
Total assets  $23,683,051  $921,178  $5,856,971  $16,626,675  $23,404,824
          
Liabilities:    
Deposits:    
Defined maturity$1,033,896  $-  $1,039,007  $-  $1,039,007  
Undefined maturity17,831,324-17,831,324-17,831,324
Total deposits18,865,220  -18,870,331-18,870,331  
Trading liabilities (a)788,563  -  788,563  -  788,563
Short-term financial liabilities    
Federal funds purchased520,992-520,992-520,992
Securities sold under agreements to repurchase  332,329  -  332,329  -  332,329  
Other short-term borrowings99,887-99,887-99,887
Total short-term financial liabilities  953,208  -  953,208  -  953,208
Term borrowings    
Real estate investment trust-preferred  45,947  -  -  49,350  49,350  
Term borrowings - new market tax credit investment  18,000  -  -  18,158  18,158  
Borrowings secured by residential real estate48,491--41,84841,848
Other long term borrowings1,228,748-1,214,410-1,214,410
Total term borrowings1,341,186  -  1,214,410  109,356  1,323,766  
Derivative liabilities (a)140,965  15,921  120,234  4,810  140,965
  
Other noninterest-bearing liabilities    
Fixed income payables  95,346  -  95,346  -  95,346  
Accrued interest payable  25,358  -  25,358  -  25,358  
Total other noninterest-bearing liabilities120,704  -  120,704  -120,704
Total liabilities$22,209,846  $15,921  $22,067,450  $114,166$22,197,537

  • 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 $65.8 million.

  September 30, 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$8,407,459  $-  $-  $8,348,656  $8,348,656  
Commercial real estate  1,262,944  -  -  1,243,925  1,243,925
Retail:          
Consumer real estate5,012,593  -  -  4,875,939  4,875,939  
Permanent mortgage552,568  -  -  492,930  492,930  
Credit card & other  337,812  -  -  339,667  339,667  
Total loans, net of unearned income and allowance for loan losses15,573,376  -  -  15,301,117  15,301,117  
Short-term financial assets          
Interest-bearing cash  275,485  275,485  -  -  275,485  
Federal funds sold55,242-55,242-55,242
Securities purchased under agreements to resell  561,802  -  561,802  -  561,802  
Total short-term financial assets  892,529  275,485  617,044  -  892,529  
Trading securities (a)1,338,022  -  1,331,899  6,123  1,338,022  
Loans held-for-sale (a)151,915  -  7,552  144,363  151,915  
Securities available-for-sale (a) (b)3,534,671  26,080  3,349,355  159,236  3,534,671  
Securities held-to-maturity4,286--5,3805,380
Derivative assets (a)137,742  3,181  134,561  -  137,742  
Other assets          
Tax credit investments  85,998  -  -  67,634  67,634  
Deferred compensation assets  24,901  24,901  -  -  24,901  
Total other assets  110,899  24,901  -  67,634  92,535  
Nonearning assets          
Cash & due from banks  292,687  292,687  -  -  292,687  
Fixed income receivables  197,507  -  197,507  -  197,507  
Accrued interest receivable  71,755  -  71,755  -  71,755  
Total nonearning assets  561,949  292,687  269,262  -  561,949  
Total assets$22,305,389  $622,334  $5,709,673  $15,683,853  $22,015,860  
          
Liabilities:          
Deposits:          
Defined maturity  $1,214,637  $-  $1,220,109  $-  $1,220,109  
Undefined maturity  14,930,134  -  14,930,134  -  14,930,134  
Total deposits  16,144,771  -  16,150,243  -  16,150,243  
Trading liabilities (a)532,234  -  532,234  -  532,234  
Short-term financial liabilities          
Federal funds purchased928,159-928,159-928,159
Securities sold under agreements to repurchase  479,384  -  479,384  -  479,384  
Other short-term borrowings  790,080  -  790,080  -  790,080  
Total short-term financial liabilities  2,197,623  -  2,197,623  -  2,197,623  
Term borrowings          
Real estate investment trust-preferred  45,879  -  -  49,350  49,350  
Term borrowings - new market tax credit investment  18,000  -  -  17,880  17,880  
Borrowings secured by residential real estate  70,720  -  -  61,031  61,031  
Other long term borrowings  1,356,539  -  1,346,281  -  1,346,281  
Total term borrowings1,491,138-1,346,281128,2611,474,542
Derivative liabilities (a)123,442  2,895  112,907  7,640  123,442  
Other noninterest-bearing liabilities          
Fixed income payables  329,960  -  329,960  -  329,960  
Accrued interest payable  30,984  -  30,984  -  30,984  
Total other noninterest-bearing liabilities  360,944  -  360,944  -  360,944  
Total liabilities  $20,850,152  $2,895  $20,700,232  $135,901  $20,839,028  

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

  • 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)September 30, 2015September 30, 2014September 30, 2015September 30, 2014
Unfunded Commitments:  
Loan commitments$7,962,431  $7,344,614$2,694  $2,368
Standby and other commitments281,740  320,2864,424  4,879
Certain previously reported amounts have been reclassified to agree with current presentation.