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, 2018:



	September 30, 2018
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Trading securities—fixed income:
U.S. treasuries	$	—	$	121,490	$	—	$	121,490
Government agency issued MBS	—		235,403		—		235,403
Government agency issued CMO	—		568,344		—		568,344
Other U.S. government agencies	—		43,642		—		43,642
States and municipalities	—		54,669		—		54,669
Corporates and other debt	—		866,128		—		866,128
Equity, mutual funds, and other	—		39,723		—		39,723
Total trading securities—fixed income	—		1,929,399		—		1,929,399
Trading securities—mortgage banking	—		—		1,592		1,592
Loans held-for-sale (elected fair value)	—		182		16,236		16,418
Securities available-for-sale:
U.S. treasuries	—		98		—		98
Government agency issued MBS	—		2,414,877		—		2,414,877
Government agency issued CMO	—		1,991,184		—		1,991,184
Other U.S. government agencies	—		113,088		—		113,088
States and municipalities	—		23,701		—		23,701
Corporates and other debt	—		55,074		—		55,074
Interest-only strips (elected fair value)	—		—		10,361		10,361
Total securities available-for-sale	—		4,598,022		10,361		4,608,383
Other assets:
Deferred compensation mutual funds	40,912		—		—		40,912
Equity, mutual funds, and other	22,141		—		—		22,141
Derivatives, forwards and futures	20,013		—		—		20,013
Derivatives, interest rate contracts	—		34,333		—		34,333
Derivatives, other	—		130		—		130
Total other assets	83,066		34,463		—		117,529
Total assets	$	83,066	$	6,562,066	$	28,189	$	6,673,321
Trading liabilities—fixed income:
U.S. treasuries	$	—	$	574,897	$	—	$	574,897
States and municipalities	—		110		—		110
Corporates and other debt	—		164,687		—		164,687
Total trading liabilities—fixed income	—		739,694		—		739,694
Other liabilities:
Derivatives, forwards and futures	18,770		—		—		18,770
Derivatives, interest rate contracts	—		117,236		—		117,236
Derivatives, other	—		106		34,212		34,318
Total other liabilities	18,770		117,342		34,212		170,324
Total liabilities	$	18,770	$	857,036	$	34,212	$	910,018

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of December 31, 2017:



	December 31, 2017
(Dollars in thousands)	Level 1		Level 2			Level 3		Total
Trading securities—fixed income:
U.S. treasuries	$	—	$	128,995		$	—	$	128,995
Government agency issued MBS	—		227,038			—		227,038
Government agency issued CMO	—		275,014			—		275,014
Other U.S. government agencies	—		54,699			—		54,699
States and municipalities	—		34,573			—		34,573
Corporates and other debt	—		693,877			—		693,877
Equity, mutual funds, and other	—		(2		)	—		(2		)
Total trading securities—fixed income	—		1,414,194			—		1,414,194
Trading securities—mortgage banking	—		—			2,151		2,151
Loans held-for-sale	—		1,955			18,926		20,881
Securities available-for-sale:
U.S. treasuries	—		99			—		99
Government agency issued MBS	—		2,577,376			—		2,577,376
Government agency issued CMO	—		2,269,858			—		2,269,858
Corporates and other debt	—		55,782			—		55,782
Interest-only strips	—		—			1,270		1,270
Equity, mutual funds, and other	27,017		—			—		27,017
Total securities available-for-sale	27,017		4,903,115			1,270		4,931,402
Other assets:
Deferred compensation assets	39,822		—			—		39,822
Derivatives, forwards and futures	10,161		—			—		10,161
Derivatives, interest rate contracts	—		71,473			—		71,473
Total other assets	49,983		71,473			—		121,456
Total assets	$	77,000	$	6,390,737		$	22,347	$	6,490,084
Trading liabilities—fixed income:
U.S. treasuries	$	—	$	506,679		$	—	$	506,679
Corporates and other debt	—		131,836			—		131,836
Total trading liabilities—fixed income	—		638,515			—		638,515
Other liabilities:
Derivatives, forwards and futures	9,535		—			—		9,535
Derivatives, interest rate contracts	—		69,842			—		69,842
Derivatives, other	—		39			5,645		5,684
Total other liabilities	9,535		69,881			5,645		85,061
Total liabilities	$	9,535	$	708,396		$	5,645	$	723,576

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, 2018 and 2017, on a recurring basis are summarized as follows:



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



	Three Months Ended September 30, 2017
(Dollars in thousands)	Trading securities				Interest-only strips-AFS				Loans held-for-sale				Net derivative liabilities
Balance on July 1, 2017	$	2,464			$	1,163			$	20,587			$	(5,700	)
Total net gains/(losses) included in:
Net income	92				(160		)		390				(129		)
Purchases	—				—				43				—
Settlements	(251		)		—				(939		)		299
Net transfers into/(out of) Level 3	—				2,120			(b)	—			(d)	—
Balance on September 30, 2017	$	2,305			$	3,123			$	20,081			$	(5,530	)
Net unrealized gains/(losses) included in net income	$	62		(a)	$	(72	)	(c)	$	390		(a)	$	(129	)	(f)


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


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


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


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


(e)	Increase related to newly executed Visa-related derivatives, see Note 14- Derivatives for additional discussion.


(f)	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, 2018 and 2017, on a recurring basis are summarized as follows:



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



	Nine Months Ended September 30, 2017
(Dollars in thousands)	Trading securities				Interest-only-strips- AFS				Loans held- for-sale				Net derivative liabilities
Balance on January 1, 2017	$	2,573			$	—			$	21,924			$	(6,245	)
Total net gains/(losses) included in:
Net income	380				107				1,722				(179		)
Purchases	—				1,413				118				—
Sales	—				(3,291		)		—				—
Settlements	(648		)		—				(3,340		)		894
Net transfers into/(out of) Level 3	—				4,894			(b)	(343		)	(d)	—
Balance on September 30, 2017	$	2,305			$	3,123			$	20,081			$	(5,530	)
Net unrealized gains/(losses) included in net income	$	264		(a)	$	(122	)	(c)	$	1,722		(a)	$	(179	)	(f)


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


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


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


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


(e)	Increase related to newly executed Visa-related derivatives, see Note 14- Derivatives for additional discussion.


(f)	Included in Other expense.

Nonrecurring Fair Value Measurements

From time to time, FHN may be required to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market (“LOCOM”) accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis which were still held on the balance sheet at September 30, 2018, and December 31, 2017, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the related carrying value.



	Carrying value at September 30, 2018
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Loans held-for-sale—SBAs and USDA	$	—	$	618,142	$	1,018	$	619,160
Loans held-for-sale—first mortgages	—		—		542		542
Loans, net of unearned income (a)	—		—		26,995		26,995
OREO (b)	—		—		25,726		25,726
Other assets (c)	—		—		23,329		23,329



	Carrying value at December 31, 2017
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Loans held-for-sale—SBAs and USDA	$	—	$	465,504	$	1,473	$	466,977
Loans held-for-sale—first mortgages	—		—		618		618
Loans, net of unearned income (a)	—		—		26,666		26,666
OREO (b)	—		—		39,566		39,566
Other assets (c)	—		—		26,521		26,521


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


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


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

For assets measured on a nonrecurring basis which were still held on the consolidated balance sheet at period end, the following table provides information about the fair value adjustments recorded during the three and nine months ended September 30, 2018 and 2017:



	Net gains/(losses) Three Months Ended September 30						Net gains/(losses) Nine months ended September 30
(Dollars in thousands)	2018			2017			2018			2017
Loans held-for-sale—SBAs and USDA	$	(1,213	)	$	(86	)	$	(2,464	)	$	(1,259	)
Loans held-for-sale—first mortgages	3			6			7			22
Loans, net of unearned income (a)	363			(2,388		)	1,020			(1,456		)
OREO (b)	(776		)	(41		)	(2,198		)	(662		)
Other assets (c)	(1,370		)	(762		)	(3,586		)	(2,646		)
	$	(2,993	)	$	(3,271	)	$	(7,221	)	$	(6,001	)


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


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


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

In third and second quarters of 2018, FHN recognized $.7 million and $1.3 million, respectively, of impairments of long-lived assets in its corporate segment primarily related to optimization efforts for its facilities. In fourth quarter 2017, FHN recognized $3.0 million and $.8 million of impairments on long-lived assets in its Corporate and Regional Banking segments, respectively, associated with efforts to utilize its branch locations more efficiently, including integration with branches acquired from CBF. $1.0 million of the fourth quarter 2017 impairments in the corporate segment were reversed in third quarter 2018 based on the disposition price for the applicable location. The affected branch locations represented a mixture of owned and leased sites. The fair values of owned sites were determined using estimated sales prices from sales contract or appraisals less estimated costs to sell. The fair values of leased sites were determined using a discounted cash flow approach, based on the revised estimated useful lives of the related assets. Both measurement methodologies are considered Level 3 valuations.

In third quarter 2017, FHN’s Corporate segment recognized $2.0 million of impairments on long-lived technology assets associated with the transition to expanded processing capacity that will be required upon completion of the merger with CBF. The fair values of the assets impaired were determined using a discounted cash flow approach which reflected short estimated remaining lives and considered estimated salvage values. The measurement methodologies are considered Level 3 valuations.

Level 3 Measurements

The following tables provide information regarding the unobservable inputs utilized in determining the fair value of level 3 recurring and non-recurring measurements as of September 30, 2018 and December 31, 2017:



(Dollars in thousands)
Level 3 Class	Fair Value at September 30, 2018		Valuation Techniques	Unobservable Input	Values Utilized
Available-for-sale- securities SBA-interest only strips	$	10,361	Discounted cash flow	Constant prepayment rate	11%
				Bond equivalent yield	13%- 18%
Loans held-for-sale - residential real estate	16,778		Discounted cash flow	Prepayment speeds - First mortgage	2% - 11%
				Prepayment speeds - HELOC	5% - 12%
				Foreclosure losses	50% - 70%
				Loss severity trends - First mortgage	2% - 25% of UPB
				Loss severity trends - HELOC	50% - 100% of UPB
Loans held-for-sale- unguaranteed interest in SBA loans	1,018		Discounted cash flow	Constant prepayment rate	8% - 12%
				Bond equivalent yield	9%
Derivative liabilities, other	34,212		Discounted cash flow	Visa covered litigation resolution amount	$5.2 billion - $5.8 billion
				Probability of resolution scenarios	20% - 30%
				Time until resolution	24- 48 months
Loans, net of unearned income (a)	26,995		Appraisals from comparable properties	Marketability adjustments for specific properties	0% - 10% of appraisal
			Other collateral valuations	Borrowing base certificates adjustment	20% - 50% of gross value
				Financial Statements/Auction values adjustment	0% - 25% of reported value
OREO (b)	25,726		Appraisals from comparable properties	Adjustment for value changes since appraisal	0% - 10% of appraisal
Other assets (c)	23,329		Discounted cash flow	Adjustments to current sales yields for specific properties	0% - 15% adjustment to yield
			Appraisals from comparable properties	Marketability adjustments for specific properties	0% - 25% of appraisal


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


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


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



(Dollars in thousands)
Level 3 Class	Fair Value at December 31, 2017		Valuation Techniques	Unobservable Input	Values Utilized
Available-for-sale- securities SBA-interest only strips	$	1,270	Discounted cash flow	Constant prepayment rate	10% - 11%
				Bond equivalent yield	17%
Loans held-for-sale - residential real estate	19,544		Discounted cash flow	Prepayment speeds - First mortgage	2% - 12%
				Prepayment speeds - HELOC	5% - 12%
				Foreclosure losses	50% - 70%
				Loss severity trends - First mortgage	5% - 30% of UPB
				Loss severity trends - HELOC	15% - 100% of UPB
Loans held-for-sale- unguaranteed interest in SBA loans	1,473		Discounted cash flow	Constant prepayment rate	8% - 12%
				Bond equivalent yield	9% - 10%
Derivative liabilities, other	5,645		Discounted cash flow	Visa covered litigation resolution amount	$4.4 billion - $5.2 billion
				Probability of resolution scenarios	10% - 30%
				Time until resolution	18 - 48 months
Loans, net of unearned income (a)	26,666		Appraisals from comparable properties	Marketability adjustments for specific properties	0% - 10% of appraisal
			Other collateral valuations	Borrowing base certificates adjustment	20% - 50% of gross value
				Financial Statements/Auction values adjustment	0% - 25% of reported value
OREO (b)	39,566		Appraisals from comparable properties	Adjustment for value changes since appraisal	0% - 10% of appraisal
Other assets (c)	26,521		Discounted cash flow	Adjustments to current sales yields for specific properties	0% - 15% adjustment to yield
			Appraisals from comparable properties	Marketability adjustments for specific properties	0% - 25% of appraisal


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


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


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

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

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

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

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

Loans, net of unearned income and Other Real Estate Owned. Collateral-dependent loans and OREO are primarily valued using appraisals based on sales of comparable properties in the same or similar markets. 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). The Credit Risk Management Committee reviews dispositions and additions of OREO annually. Back testing is performed during the year through comparison to ultimate disposition values. Other collateral (receivables, inventory, equipment, etc.) is valued through borrowing base certificates, financial statements and/or auction valuations. These valuations are discounted based on the quality of reporting, knowledge of the marketability/collectability of the collateral and historical disposition rates.

Other assets – tax credit investments. The estimated fair value of tax credit investments accounted for under the equity method is generally determined in relation to the yield (i.e., future tax credits to be received) an acquirer of these investments would expect in relation to the yields experienced on current new issue and/or secondary market transactions. Thus, as tax credits are recognized, the future yield to a market participant is reduced, resulting in consistent impairment of the individual investments. Individual investments are reviewed for impairment quarterly, which may include the consideration of additional marketability discounts related to specific investments which typically includes consideration of the underlying property’s appraised value. 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 has elected the fair value option on a prospective basis for almost all types of mortgage loans originated for sale purposes under the Financial Instruments Topic (“ASC 825”) except for mortgage origination operations which utilize the platform acquired from CBF. FHN determined that the election reduces certain timing differences and better matches changes in the value of such loans with changes in the value of derivatives and forward delivery commitments used as economic hedges for these assets at the time of election.

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

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



	September 30, 2018
(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Fair value carrying amount less aggregate unpaid principal
Residential real estate loans held-for-sale reported at fair value:
Total loans	$	16,418	$	23,897	$	(7,479	)
Nonaccrual loans	4,483		8,360		(3,877		)
Loans 90 days or more past due and still accruing	—		—		—
	December 31, 2017
(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Fair value carrying amount less aggregate unpaid principal
Residential real estate loans held-for-sale reported at fair value:
Total loans	$	20,881	$	29,755	$	(8,874	)
Nonaccrual loans	5,783		10,881		(5,098		)
Loans 90 days or more past due and still accruing	—		—		—

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



	Three Months Ended September 30				Nine months ended September 30
(Dollars in thousands)	2018		2017		2018		2017
Changes in fair value included in net income:
Mortgage banking noninterest income
Loans held-for-sale	$	277	$	390	$	986	$	1,722

For the three months ended September 30, 2018, residential real estate loans held-for-sale included an insignificant amount of gains in pretax earnings that are attributable to change in instruments-specific credit risk. For the three months ended September 30, 2017, the amount for residential real estate loans held-for-sale included gains of $.1 million, in pretax earnings that are attributable to changes in instruments-specific credit risk. For the nine months ended September 30, 2018, and 2017, the amounts for the real estate loans held-for-sale included gains of $.3 million and $.5 million, respectively, in pretax earnings that are attributable to changes in instruments-specific credit risk. The portion of the fair value adjustments related to credit risk was determined based on estimated default rates and estimated loss severities. Interest income on residential real estate loans held-for-sale measured at fair value is calculated based on the note rate of the loan and is recorded in the interest income section of the Consolidated Condensed Statements of Income as interest on loans held-for-sale.

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

Determination of Fair Value

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

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

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

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

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

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

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

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

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

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

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

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

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

Nonearning assets. For disclosure purposes, for periods prior to 2018, nonearning financial 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, FRB and FHLB Stock, deferred compensation mutual funds and equity investments (including other mutual funds) with readily determinable fair values. Tax credit investments accounted for under the equity method are written down to estimated fair value quarterly based on the estimated value of the associated tax credits which incorporates estimates of required yield for hypothetical investors. The fair value of all other tax credit investments is estimated using recent transaction information with adjustments for differences in individual investments. Deferred compensation mutual funds are recognized at fair value, which is based on quoted prices in active markets.

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

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

Undefined maturity deposits. For periods prior to 2018, 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.

Other noninterest-bearing liabilities. For disclosure purposes, for periods prior to 2018, other noninterest-bearing financial 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, reduces the comparability of fair value disclosures between financial institutions. Due to market illiquidity, the fair values for loans, net of unearned income, loans held-for-sale, and term borrowings as of September 30, 2018 and December 31, 2017, involve the use of significant internally-developed pricing assumptions for certain components of these line items. The assumptions and valuations utilized for this disclosure are considered to reflect inputs that market participants would use in transactions involving these instruments as of the measurement date. The valuations of legacy assets, particularly consumer loans within the Non-Strategic segment and TRUPs loans, are influenced by changes in economic conditions since origination and risk perceptions of the financial sector. These considerations affect the estimate of a potential acquirer’s cost of capital and cash flow volatility assumptions from these assets and the resulting fair value measurements may depart significantly from FHN’s internal estimates of the intrinsic value of these assets.

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

The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Condensed Statements of Condition as of September 30, 2018:



	September 30, 2018
	Book Value		Fair Value
(Dollars in thousands)	Book Value		Level 1		Level 2		Level 3		Total
Assets:
Loans, net of unearned income and allowance for loan losses
Commercial:
Commercial, financial and industrial	$	15,943,831	$	—	$	—	$	15,941,049	$	15,941,049
Commercial real estate	4,203,121		—		—		4,198,110		4,198,110
Consumer:
Consumer real estate	6,164,646		—		—		6,114,607		6,114,607
Permanent mortgage	333,574		—		—		338,736		338,736
Credit card & other	519,083		—		—		520,074		520,074
Total loans, net of unearned income and allowance for loan losses	27,164,255		—		—		27,112,576		27,112,576
Short-term financial assets:
Interest-bearing cash	531,681		531,681		—		—		531,681
Federal funds sold	113,722		—		113,722		—		113,722
Securities purchased under agreements to resell	687,437		—		687,437		—		687,437
Total short-term financial assets	1,332,840		531,681		801,159		—		1,332,840
Trading securities (a)	1,930,991		—		1,929,399		1,592		1,930,991
Loans held-for-sale
Mortgage loans (elected fair value) (a)	16,418		—		182		16,236		16,418
USDA & SBA loans- LOCOM	619,160		—		623,863		1,023		624,886
Other consumer loans- LOCOM	28,843		—		6,704		22,139		28,843
Mortgage loans- LOCOM	61,230		—		—		61,230		61,230
Total loans held-for-sale	725,651		—		630,749		100,628		731,377
Securities available-for-sale (a)	4,608,383		—		4,598,022		10,361		4,608,383
Securities held-to-maturity	10,000		—		—		9,756		9,756
Derivative assets (a)	54,476		20,013		34,463		—		54,476
Other assets:
Tax credit investments	139,983		—		—		136,984		136,984
Deferred compensation mutual funds	40,912		40,912		—		—		40,912
Equity, mutual funds, and other (b)	240,667		22,141		—		218,526		240,667
Total other assets	421,562		63,053		—		355,510		418,563
Total assets	$	36,248,158	$	614,747	$	7,993,792	$	27,590,423	$	36,198,962
Liabilities:
Defined maturity deposits	$	4,056,184	$	—	$	4,024,544	$	—	$	4,024,544
Trading liabilities (a)	739,694		—		739,694		—		739,694
Short-term financial liabilities:
Federal funds purchased	437,474		—		437,474		—		437,474
Securities sold under agreements to repurchase	678,510		—		678,510		—		678,510
Other short-term borrowings	1,069,912		—		1,069,912		—		1,069,912
Total short-term financial liabilities	2,185,896		—		2,185,896		—		2,185,896
Term borrowings:
Real estate investment trust-preferred	46,151		—		—		47,470		47,470
Term borrowings—new market tax credit investment	18,000		—		—		17,915		17,915
Secured borrowings	16,621		—		—		16,499		16,499
Junior subordinated debentures	177,974		—		—		177,974		177,974
Other long term borrowings	941,388		—		957,647		—		957,647
Total term borrowings	1,200,134		—		957,647		259,858		1,217,505
Derivative liabilities (a)	170,324		18,770		117,342		34,212		170,324
Total liabilities	$	8,352,232	$	18,770	$	8,025,123	$	294,070	$	8,337,963


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


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

The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Statements of Condition as of December 31, 2017:



	December 31, 2017
	Book Value		Fair Value
(Dollars in thousands)			Level 1		Level 2		Level 3		Total
Assets:
Loans, net of unearned income and allowance for loan losses
Commercial:
Commercial, financial and industrial	$	15,959,062	$	—	$	—	$	15,990,991	$	15,990,991
Commercial real estate	4,186,268		—		—		4,215,367		4,215,367
Consumer:
Consumer real estate	6,330,384		—		—		6,320,308		6,320,308
Permanent mortgage	383,742		—		—		388,396		388,396
Credit card & other	609,918		—		—		607,955		607,955
Total loans, net of unearned income and allowance for loan losses	27,469,374		—		—		27,523,017		27,523,017
Short-term financial assets:
Interest-bearing cash	1,185,600		1,185,600		—		—		1,185,600
Federal funds sold	87,364		—		87,364		—		87,364
Securities purchased under agreements to resell	725,609		—		725,609		—		725,609
Total short-term financial assets	1,998,573		1,185,600		812,973		—		1,998,573
Trading securities (a)	1,416,345		—		1,414,194		2,151		1,416,345
Loans held-for-sale
Mortgage loans	88,173		—		6,902		81,271		88,173
USDA & SBA loans	466,977		—		467,227		1,510		468,737
Other consumer loans	144,227		—		9,965		134,262		144,227
Securities available-for-sale (a) (b)	5,170,255		27,017		4,903,115		240,123		5,170,255
Securities held-to-maturity	10,000		—		—		9,901		9,901
Derivative assets (a)	81,634		10,161		71,473		—		81,634
Other assets:
Tax credit investments	119,317		—		—		112,292		112,292
Deferred compensation assets	39,822		39,822		—		—		39,822
Total other assets	159,139		39,822		—		112,292		152,114
Nonearning assets:
Cash & due from banks	639,073		639,073		—		—		639,073
Fixed income receivables	68,693		—		68,693		—		68,693
Accrued interest receivable	97,239		—		97,239		—		97,239
Total nonearning assets	805,005		639,073		165,932		—		805,005
Total assets	$	37,809,702	$	1,901,673	$	7,851,781	$	28,104,527	$	37,857,981
Liabilities:
Deposits:
Defined maturity	$	3,322,921	$	—	$	3,293,650	$	—	$	3,293,650
Undefined maturity	27,297,441		—		27,297,431		—		27,297,431
Total deposits	30,620,362		—		30,591,081		—		30,591,081
Trading liabilities (a)	638,515		—		638,515		—		638,515
Short-term financial liabilities:
Federal funds purchased	399,820		—		399,820		—		399,820
Securities sold under agreements to repurchase	656,602		—		656,602		—		656,602
Other short-term borrowings	2,626,213		—		2,626,213		—		2,626,213
Total short-term financial liabilities	3,682,635		—		3,682,635		—		3,682,635
Term borrowings:
Real estate investment trust-preferred	46,100		—		—		48,880		48,880
Term borrowings—new market tax credit investment	18,000		—		—		17,930		17,930
Secured borrowings	18,642		—		—		18,305		18,305
Junior subordinated debentures	187,281		—		—		187,281		187,281
Other long term borrowings	948,074		—		966,292		—		966,292
Total term borrowings	1,218,097		—		966,292		272,396		1,238,688
Derivative liabilities (a)	85,061		9,535		69,881		5,645		85,061
Other noninterest-bearing liabilities:
Fixed income payables	48,996		—		48,996		—		48,996
Accrued interest payable	16,270		—		16,270		—		16,270
Total other noninterest-bearing liabilities	65,266		—		65,266		—		65,266
Total liabilities	$	36,309,936	$	9,535	$	36,013,670	$	278,041	$	36,301,246


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


(b)	Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $134.6 million.

The following table presents the contractual amount and fair value of unfunded loan commitments and standby and other commitments as of September 30, 2018 and December 31, 2017:



	Contractual Amount				Fair Value
(Dollars in thousands)	September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
Unfunded Commitments:
Loan commitments	$	10,829,303	$	10,678,485	$	2,871	$	2,617
Standby and other commitments	450,745		420,728		4,981		5,274