Fair Value of Assets & Liabilities

6 Months Ended

Jun. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value of Assets & Liabilities

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.

Recurring Fair Value Measurements

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of June 30, 2020: 

	June 30, 2020
(Dollars in thousands)	Level 1		Level 2			Level 3		Total
Trading securities—fixed income:
U.S. treasuries	$	—	$	119,121		$	—	$	119,121
Government agency issued MBS	—		431,765			—		431,765
Government agency issued CMO	—		226,732			—		226,732
Other U.S. government agencies	—		91,203			—		91,203
States and municipalities	—		17,467			—		17,467
Corporate and other debt	—		229,556			—		229,556
Equity, mutual funds, and other	—		(22		)	—		(22		)
Total trading securities—fixed income	—		1,115,822			—		1,115,822
Trading securities—mortgage banking	—		—			628		628
Loans held-for-sale (elected fair value)	—		—			13,263		13,263
Securities available-for-sale:
U.S. treasuries	—		999,975			—		999,975
Government agency issued MBS	—		2,487,382			—		2,487,382
Government agency issued CMO	—		1,415,265			—		1,415,265
Other U.S. government agencies	—		417,292			—		417,292
States and municipalities	—		90,383			—		90,383
Corporate and other debt	—		40,413			—		40,413
Interest-Only Strip (elected fair value)	—		—			25,446		25,446
Total securities available-for-sale	—		5,450,710			25,446		5,476,156
Other assets:
Deferred compensation mutual funds	48,572		—			—		48,572
Equity, mutual funds, and other	22,692		—			—		22,692
Derivatives, forwards and futures	35,408		—			—		35,408
Derivatives, interest rate contracts	—		563,866			—		563,866
Derivatives, other	—		260			170		430
Total other assets	106,672		564,126			170		670,968
Total assets	$	106,672	$	7,130,658		$	39,507	$	7,276,837
Trading liabilities—fixed income:
U.S. treasuries	$	—	$	195,753		$	—	$	195,753
Other U.S.government agencies	—		578			—		578
States and municipalities	—		756			—		756
Corporate and other debt	—		35,655			—		35,655
Total trading liabilities—fixed income	—		232,742			—		232,742
Other liabilities:
Derivatives, forwards and futures	30,483		—			—		30,483
Derivatives, interest rate contracts	—		44,722			—		44,722
Derivatives, other	—		369			18,815		19,184
Total other liabilities	30,483		45,091			18,815		94,389
Total liabilities	$	30,483	$	277,833		$	18,815	$	327,131

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of December 31, 2019: 

	December 31, 2019
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Trading securities—fixed income:
U.S. treasuries	$	—	$	134,844	$	—	$	134,844
Government agency issued MBS	—		268,024		—		268,024
Government agency issued CMO	—		250,652		—		250,652
Other U.S. government agencies	—		124,972		—		124,972
States and municipalities	—		120,744		—		120,744
Corporate and other debt	—		445,253		—		445,253
Equity, mutual funds, and other	—		777		—		777
Total trading securities—fixed income	—		1,345,266		—		1,345,266
Trading securities—mortgage banking	—		—		941		941
Loans held-for-sale (elected fair value)	—		—		14,033		14,033
Securities available-for-sale:
U.S. treasuries	—		100		—		100
Government agency issued MBS	—		2,348,517		—		2,348,517
Government agency issued CMO	—		1,670,492		—		1,670,492
Other U.S. government agencies	—		306,092		—		306,092
States and municipalities	—		60,526		—		60,526
Corporate and other debt	—		40,540		—		40,540
Interest-Only Strip (elected fair value)	—		—		19,136		19,136
Total securities available-for-sale	—		4,426,267		19,136		4,445,403
Other assets:
Deferred compensation mutual funds	46,815		—		—		46,815
Equity, mutual funds, and other	22,643		—		—		22,643
Derivatives, forwards and futures	20,640		—		—		20,640
Derivatives, interest rate contracts	—		162,413		—		162,413
Derivatives, other	—		62		—		62
Total other assets	90,098		162,475		—		252,573
Total assets	$	90,098	$	5,934,008	$	34,110	$	6,058,216
Trading liabilities—fixed income:
U.S. treasuries	$	—	$	406,380	$	—	$	406,380
Other U.S. government agencies	—		88		—		88
Government agency issued MBS	—		33		—		33
Corporate and other debt	—		99,080		—		99,080
Total trading liabilities—fixed income	—		505,581		—		505,581
Other liabilities:
Derivatives, forwards and futures	19,807		—		—		19,807
Derivatives, interest rate contracts	—		24,412		—		24,412
Derivatives, other	—		466		22,795		23,261
Total other liabilities	19,807		24,878		22,795		67,480
Total liabilities	$	19,807	$	530,459	$	22,795	$	573,061

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 June 30, 2020 and 2019, on a recurring basis are summarized as follows: 

	Three Months Ended June 30, 2020
(Dollars in thousands)	Trading securities				Interest- only strips- AFS				Loans held- for-sale				Net  derivative liabilities
Balance on April 1, 2020	$	785			$	23,104			$	13,584			$	(20,890	)
Total net gains/(losses) included in:
Net income	(157		)		(1,233		)		422				(201		)
Purchases	—				—				—				—
Sales	—				—				—				—
Settlements	—				—				(743		)		2,446
Net transfers into/(out of) Level 3	—				3,575			(b)	—				—
Balance on June 30, 2020	$	628			$	25,446			$	13,263			$	(18,645	)
Net unrealized gains/(losses) included in net income	$	—		(a)	$	(959	)	(c)	$	422		(a)	$	(201	)	(d)

	Three Months Ended June 30, 2019
(Dollars in thousands)	Trading securities				Interest-only-strips-AFS				Loans held-for-sale				Net  derivative liabilities
Balance on April 1, 2019	$	1,397			$	13,195			$	15,751			$	(28,970	)
Total net gains/(losses) included in:
Net income	8				(141		)		321				(19		)
Purchases	—				—				10				—
Sales	—				(14,199		)		—				—
Settlements	(150		)		—				(990		)		2,444
Net transfers into/(out of) Level 3	—				18,937			(b)	—				—
Balance on June 30, 2019	$	1,255			$	17,792			$	15,092			$	(26,545	)
Net unrealized gains/(losses) included in net income	$	(36	)	(a)	$	(543	)	(c)	$	321		(a)	$	(19	)	(d)

(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) Included in Other expense.

The changes in Level 3 assets and liabilities measured at fair value for the six months ended June 30, 2020 and 2019, on a recurring basis are summarized as follows: 

	Six Months Ended June 30, 2020
(Dollars in thousands)	Trading securities				Interest- only strips- AFS				Loans held- for-sale				Net  derivative liabilities
Balance on January 1, 2020	$	941			$	19,136			$	14,033			$	(22,795	)
Total net gains/(losses) included in:
Net income	(313		)		(2,528		)		751				(712		)
Purchases	—				5,481				—				—
Sales	—				(8,703		)		—				—
Settlements	—				—				(1,521		)		4,862
Net transfers into/(out of) Level 3	—				12,060			(b)	—				—
Balance on June 30, 2020	$	628			$	25,446			$	13,263			$	(18,645	)
Net unrealized gains/(losses) included in net income	$	—		(a)	$	(1,813	)	(c)	$	751		(a)	$	(712	)	(d)

	Six Months Ended June 30, 2019
(Dollars in thousands)	Trading securities				Interest-only-strips-AFS				Loans held-for-sale				Net  derivative liabilities
Balance on January 1, 2019	$	1,524			$	9,902			$	16,273			$	(31,540	)
Total net gains/(losses) included in:
Net income	29				(1,399		)		816				116
Purchases	—				86				10				—
Sales	—				(27,211		)		—				—
Settlements	(298		)		—				(2,007		)		4,879
Net transfers into/(out of) Level 3	—				36,414			(b)	—				—
Balance on June 30, 2019	$	1,255			$	17,792			$	15,092			$	(26,545	)
Net unrealized gains/(losses) included in net income	$	(66	)	(a)	$	(1,435	)	(c)	$	816		(a)	$	116		(d)

(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) Included in Other expense.

There were no net unrealized gains/(losses) for Level 3 assets and liabilities included in other comprehensive income as of June 30, 2020 and 2019.

Nonrecurring Fair Value Measurements

From time to time, FHN may be required to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market (“LOCOM”) accounting or write-downs of individual assets. For assets measured at fair value on a

nonrecurring basis which were still held on the Consolidated Condensed Statements of Condition at June 30, 2020, and December 31, 2019, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the related carrying value.

	Carrying value at June 30, 2020
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Loans held-for-sale—SBAs and USDA	$	—	$	643,445	$	774	$	644,219
Loans held-for-sale—first mortgages	—		—		504		504
Loans, net of unearned income (a)	—		—		66,062		66,062
OREO (b)	—		—		13,177		13,177
Other assets (c)	—		—		9,835		9,835

	Carrying value at December 31, 2019
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Loans held-for-sale—SBAs and USDA	$	—	$	492,595	$	929	$	493,524
Loans held-for-sale—first mortgages	—		—		516		516
Loans, net of unearned income (a)	—		—		42,208		42,208
OREO (b)	—		—		15,660		15,660
Other assets (c)	—		—		10,608		10,608

 

(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 and related 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.

For assets measured on a nonrecurring basis which were still held on the Consolidated Condensed Statements of Condition at period end, the following table provides information about the fair value adjustments recorded during the three and six months ended June 30, 2020 and 2019:

	Net gains/(losses) Three Months Ended June 30						Net gains/(losses) Six Months Ended June 30
(Dollars in thousands)	2020			2019			2020			2019
Loans held-for-sale—SBAs and USDA	$	(1,247	)	$	(1,074	)	$	(2,208	)	$	(1,293	)
Loans held-for-sale—first mortgages	(4		)	10			1			25
Loans, net of unearned income (a)	(1,274		)	(4,639		)	(6,113		)	(4,436		)
OREO (b)	(142		)	(9		)	(169		)	26
Other assets (c)	(426		)	(267		)	(772		)	(942		)
	$	(3,093	)	$	(5,979	)	$	(9,261	)	$	(6,620	)

(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 2019, FHN recognized $4.6 million of impairments and $.7 million of impairment reversals, respectively, related to dispositions of acquired properties and $1.5 million of impairments for lease assets related to continuing acquisition integration efforts associated with reduction of leased office space and branch optimization. Related to its restructuring, repositioning, and efficiency efforts, FHN recognized $14.0 million of impairments and $1.4 million of impairment reversals, respectively, for tangible long-lived assets and lease assets. Related to the Company's rebranding initiative, FHN recognized $7.1 million of impairments within the Corporate segment for long-lived tangible assets, primarily signage, related to the company's rebranding initiative. These amounts were recognized in the Corporate segment.

Lease asset impairments recognized in 2019 represent the reduction in value of the right-of-use assets associated with leases that are being exited in advance of the contractual lease expiration.

Impairments are measured using a discounted cash flow methodology, which is considered a Level 3 valuation.

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

Level 3 Measurements

The following tables provide information regarding the unobservable inputs utilized in determining the fair value of Level 3 recurring and non-recurring measurements as of June 30, 2020 and December 31, 2019: 

(Dollars in thousands)
					Values Utilized
Level 3 Class	Fair Value at June 30, 2020		Valuation Techniques	Unobservable Input	Range	Weighted Average (d)
Available-for-sale- securities SBA-interest only strips	$	25,446	Discounted cash flow	Constant prepayment rate	12%	12%
				Bond equivalent yield	14% - 15%	15%
Loans held-for-sale - residential real estate	13,767		Discounted cash flow	Prepayment speeds - First mortgage	5% - 15%	5.8%
				Foreclosure losses	50% - 65%	63%
				Loss severity trends - First mortgage	4% - 21% of UPB	13.6%
Loans held-for-sale- unguaranteed interest in SBA loans	774		Discounted cash flow	Constant prepayment rate	8% - 12%	10%
				Bond equivalent yield	8%	8%
Derivative liabilities, other	18,645		Discounted cash flow	Visa covered litigation resolution amount	$5.4 billion - $6.0 billion	$5.8 billion
				Probability of resolution scenarios	10% - 50%	16%
				Time until resolution	9 - 33 months	24 months
Loans, net of unearned income (a)	66,062		Appraisals from comparable properties	Marketability adjustments for specific properties	0% - 10% of appraisal	NM
			Other collateral valuations	Borrowing base certificates adjustment	20% - 50% of gross value	NM
				Financial Statements/Auction values adjustment	0% - 25% of reported value	NM
OREO (b)	13,177		Appraisals from comparable properties	Adjustment for value changes since appraisal	0% - 10% of appraisal	NM
Other assets (c)	9,835		Discounted cash flow	Adjustments to current sales yields for specific properties	0% - 15% adjustment to yield	NM
			Appraisals from comparable properties	Marketability adjustments for specific properties	0% - 25% of appraisal	NM

 

NM - Not meaningful.

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

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

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

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

(Dollars in thousands)
					Values Utilized
Level 3 Class	Fair Value at December 31, 2019		Valuation Techniques	Unobservable Input	Range	Weighted Average (d)
Available-for-sale- securities SBA-interest only strips	$	19,136	Discounted cash flow	Constant prepayment rate	12%	12%
				Bond equivalent yield	16% - 17%	16%
Loans held-for-sale - residential real estate	14,549		Discounted cash flow	Prepayment speeds - First mortgage	3% - 14%	4.1%
				Prepayment speeds - HELOC	0% - 12%	7.6%
				Foreclosure losses	50% - 66%	64%
				Loss severity trends - First mortgage	3% - 24% of UPB	14.3%
				Loss severity trends - HELOC	0% - 72% of UPB	50%
Loans held-for-sale- unguaranteed interest in SBA loans	929		Discounted cash flow	Constant prepayment rate	8% - 12%	10%
				Bond equivalent yield	9%	9%
Derivative liabilities, other	22,795		Discounted cash flow	Visa covered litigation resolution amount	$5.4 billion - $6.0 billion	$5.8 billion
				Probability of resolution scenarios	10% - 50%	16%
				Time until resolution	15 - 39 months	29 months
Loans, net of unearned income (a)	42,208		Appraisals from comparable properties	Marketability adjustments for specific properties	0% - 10% of appraisal	NM
			Other collateral valuations	Borrowing base certificates adjustment	20% - 50% of gross value	NM
				Financial Statements/Auction values adjustment	0% - 25% of reported value	NM
OREO (b)	15,660		Appraisals from comparable properties	Adjustment for value changes since appraisal	0% - 10% of appraisal	NM
Other assets (c)	10,608		Discounted cash flow	Adjustments to current sales yields for specific properties	0% - 15% adjustment to yield	NM
			Appraisals from comparable properties	Marketability adjustments for specific properties	0% - 25% of appraisal	NM

NM - Not meaningful.

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

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

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

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

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

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

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

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

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

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

Fair Value Option

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

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

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

	June 30, 2020
(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	$	13,263	$	17,857	$	(4,594	)
Nonaccrual loans	2,740		5,774		(3,034		)
Loans 90 days or more past due and still accruing	186		322		(136		)
	December 31, 2019
(Dollars in thousands)	Fair value carrying amount		Aggregate unpaid principal		Fair value carrying amount less aggregate unpaid principal
Residential real estate loans held-for-sale reported at fair value:
Total loans	$	14,033	$	19,278	$	(5,245	)
Nonaccrual loans	3,532		6,646		(3,114		)
Loans 90 days or more past due and still accruing	163		268		(105		)

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 June 30				Six Months Ended June 30
(Dollars in thousands)	2020		2019		2020		2019
Changes in fair value included in net income:
Mortgage banking noninterest income
Loans held-for-sale	$	422	$	321	$	751	$	816

For the three and six months ended June 30, 2020 and 2019, the amount for residential real estate loans held-for-sale included an insignificant amount of gain in pretax earnings that is attributable to changes in instrument-specific credit risk. The portion of the fair value adjustments related to credit risk was determined based on estimated default rates and estimated loss severities. Interest income on residential real estate loans held-for-sale measured at fair value is calculated based on the note rate of the loan and is recorded in the interest income section of the Consolidated Condensed Statements of Income as interest on loans held-for-sale.

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

recognized through fixed income revenues and are presented in the recurring measurements table.

Determination of Fair Value

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

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

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

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

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

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

Loans held-for-sale. Residential real estate loans held-for-sale are valued using current transaction prices and/or values on similar assets when available, including committed bids for specific loans or loan portfolios. Uncommitted bids may be adjusted based on other available market information. For all other loans FHN determines the fair value of residential real estate loans held-for-sale using a discounted cash flow model which incorporates both observable and unobservable inputs. Inputs include current mortgage rates for similar products, estimated prepayment rates, foreclosure losses, and various loan performance measures (delinquency, LTV, credit score). Adjustments for delinquency and other differences

in loan characteristics are typically reflected in the model’s discount rates. Loss severity trends and the value of underlying collateral are also considered in assessing the appropriate fair value for severely delinquent loans and loans in foreclosure. The valuation of HELOCs also incorporates estimated cancellation rates for loans expected to become delinquent.

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

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

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

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

Valuations of other derivatives (primarily interest rate related swaps) are based on inputs observed in active markets for similar instruments. Typical inputs include the LIBOR curve, Overnight Indexed Swap (“OIS”) curve, option volatility, and option skew. In measuring the fair value of these derivative assets and liabilities, FHN has elected to consider credit risk based on the net exposure to individual counterparties. Credit risk is mitigated for these instruments through the use of mutual margining and master netting agreements as well as collateral posting requirements. For derivative contracts with daily cash margin requirements that are considered settlements, the

daily margin amount is netted within derivative assets or liabilities. Any remaining credit risk related to interest rate derivatives is considered in determining fair value through evaluation of additional factors such as customer loan grades and debt ratings. Foreign currency related derivatives also utilize observable exchange rates in the determination of fair value. The determination of fair value for FHN’s derivative liabilities associated with its prior sales of Visa Class B shares are classified within Level 3 in the fair value measurements disclosure as previously discussed in the unobservable inputs discussion.

The fair value of risk participations is determined in reference to the fair value of the related derivative contract between the borrower and the lead bank in the participation structure, which is determined consistent with the valuation process discussed above. This value is adjusted for the pro rata portion of the reference derivative’s notional value and an assessment of credit risk for the referenced borrower.

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

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

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

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

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

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

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

The following fair value estimates are determined as of a specific point in time utilizing various assumptions and estimates. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, reduces the comparability of fair value disclosures between financial institutions. Due to market illiquidity, the fair values for loans, net of unearned income, loans held-for-sale, and term borrowings as of June 30, 2020 and December 31, 2019, 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 June 30, 2020:

	June 30, 2020
	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	$	21,075,171	$	—	$	—	$	21,216,054	$	21,216,054
Commercial real estate	4,756,056		—		—		4,768,706		4,768,706
Consumer:
Consumer real estate (a)	5,908,636		—		—		6,085,159		6,085,159
Credit card & other	431,193		—		—		438,644		438,644
Total loans, net of unearned income and allowance for loan losses	32,171,056		—		—		32,508,563		32,508,563
Short-term financial assets:
Interest-bearing cash	3,135,844		3,135,844		—		—		3,135,844
Federal funds sold	113,000		—		113,000		—		113,000
Securities purchased under agreements to resell	302,267		—		302,267		—		302,267
Total short-term financial assets	3,551,111		3,135,844		415,267		—		3,551,111
Trading securities (b)	1,116,450		—		1,115,822		628		1,116,450
Loans held-for-sale
Mortgage loans (elected fair value) (b)	13,263		—		—		13,263		13,263
USDA & SBA loans- LOCOM	644,219		—		648,383		792		649,175
Other consumer loans- LOCOM	4,758		—		4,758		—		4,758
Mortgage loans- LOCOM	83,415		—		—		83,415		83,415
Total loans held-for-sale	745,655		—		653,141		97,470		750,611
Securities available-for-sale (b)	5,476,156		—		5,450,710		25,446		5,476,156
Securities held-to-maturity	10,000		—		—		9,881		9,881
Derivative assets (b)	599,704		35,408		564,126		170		599,704
Other assets:
Tax credit investments	257,547		—		—		257,705		257,705
Deferred compensation mutual funds	48,572		48,572		—		—		48,572
Equity, mutual funds, and other (c)	343,825		22,692		—		321,133		343,825
Total other assets	649,944		71,264		—		578,838		650,102
Total assets	$	44,320,076	$	3,242,516	$	8,199,066	$	33,220,996	$	44,662,578
Liabilities:
Defined maturity deposits	$	2,655,702	$	—	$	2,695,759	$	—	$	2,695,759
Trading liabilities (b)	232,742		—		232,742		—		232,742
Short-term financial liabilities:
Federal funds purchased	778,529		—		778,529		—		778,529
Securities sold under agreements to repurchase	1,482,585		—		1,482,585		—		1,482,585
Other short-term borrowings	130,583		—		130,583		—		130,583
Total short-term financial liabilities	2,391,697		—		2,391,697		—		2,391,697
Term borrowings:
Real estate investment trust-preferred	46,270		—		—		47,000		47,000
Secured borrowings	15,370		—		—		15,370		15,370
Junior subordinated debentures	145,262		—		—		138,950		138,950
Other long term borrowings	1,825,574		—		1,877,080		—		1,877,080
Total term borrowings	2,032,476		—		1,877,080		201,320		2,078,400
Derivative liabilities (b)	94,389		30,483		45,091		18,815		94,389
Total liabilities	$	7,407,006	$	30,483	$	7,242,369	$	220,135	$	7,492,987

 

(a) In first quarter 2020, the Permanent Mortgage portfolio was combined into Consumer Real Estate portfolio, all prior periods were revised for comparability.

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

(c) Level 1 primarily consists of mutual funds with readily determinable fair values. Level 3 includes restricted investments in FHLB-Cincinnati stock of $190.4 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, 2019: 

	December 31, 2019
	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	$	19,928,605	$	—	$	—	$	20,096,397	$	20,096,397
Commercial real estate	4,300,905		—		—		4,300,489		4,300,489
Consumer:
Consumer real estate	6,148,696		—		—		6,334,187		6,334,187
Credit card & other	482,598		—		—		487,079		487,079
Total loans, net of unearned income and allowance for loan losses	30,860,804		—		—		31,218,152		31,218,152
Short-term financial assets:
Interest-bearing cash	482,405		482,405		—		—		482,405
Federal funds sold	46,536		—		46,536		—		46,536
Securities purchased under agreements to resell	586,629		—		586,629		—		586,629
Total short-term financial assets	1,115,570		482,405		633,165		—		1,115,570
Trading securities (a)	1,346,207		—		1,345,266		941		1,346,207
Loans held-for-sale
Mortgage loans (elected fair value) (a)	14,033		—		—		14,033		14,033
USDA & SBA loans- LOCOM	493,525		—		495,323		947		496,270
Other consumer loans- LOCOM	5,197		—		5,197		—		5,197
Mortgage loans- LOCOM	81,035		—		—		81,035		81,035
Total loans held-for-sale	593,790		—		500,520		96,015		596,535
Securities available-for-sale (a)	4,445,403		—		4,426,267		19,136		4,445,403
Securities held-to-maturity	10,000		—		—		10,001		10,001
Derivative assets (a)	183,115		20,640		162,475		—		183,115
Other assets:
Tax credit investments	247,075		—		—		244,755		244,755
Deferred compensation assets	46,815		46,815		—		—		46,815
Equity, mutual funds, and other (b)	229,352		22,643		—		206,709		229,352
Total other assets	523,242		69,458		—		451,464		520,922
Total assets	$	39,078,131	$	572,503	$	7,067,693	$	31,795,709	$	39,435,905
Liabilities:
Deposits:
Defined maturity	$	3,618,337	$	—	$	3,631,090	$	—	$	3,631,090
Trading liabilities (a)	505,581		—		505,581		—		505,581
Short-term financial liabilities:
Federal funds purchased	548,344		—		548,344		—		548,344
Securities sold under agreements to repurchase	716,925		—		716,925		—		716,925
Other short-term borrowings	2,253,045		—		2,253,045		—		2,253,045
Total short-term financial liabilities	3,518,314		—		3,518,314		—		3,518,314
Term borrowings:
Real estate investment trust-preferred	46,236		—		—		47,000		47,000
Secured Borrowings	21,975		—		—		21,975		21,975
Junior subordinated debentures	144,593		—		—		142,375		142,375
Other long term borrowings	578,564		—		574,287		—		574,287
Total term borrowings	791,368		—		574,287		211,350		785,637
Derivative liabilities (a)	67,480		19,807		24,878		22,795		67,480
Total liabilities	$	8,501,080	$	19,807	$	8,254,150	$	234,145	$	8,508,102

Certain previously reported amounts have been reclassified to agree with current presentation.

(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 $76.0 million and FRB stock of $130.7 million.

The following table presents the contractual amount and fair value of unfunded loan commitments and standby and other commitments as of June 30, 2020 and December 31, 2019:

	Contractual Amount				Fair Value
(Dollars in thousands)	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Unfunded Commitments:
Loan commitments	$	12,945,839	$	12,355,220	$	2,492	$	3,656
Standby and other commitments	469,567		459,268		6,112		5,513