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Fair Value Of Assets And Liabilities
 6 Months Ended
Jun. 30, 2016
Fair Value Disclosures [Abstract]  
Fair Value Of Assets And Liabilities

Note 16 – Fair Value of Assets & Liabilities

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

  • Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
  • Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
  • Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.

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

Recurring Fair Value Measurements
The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of June 30, 2016:
June 30, 2016
(Dollars in thousands)Level 1  Level 2  Level 3  Total
Trading securities - fixed income:      
U.S. treasuries$-  $98,181  $-  $98,181  
Government agency issued MBS-  328,600  -  328,600  
Government agency issued CMO-  235,914  -  235,914  
Other U.S. government agencies-  110,354  -  110,354  
States and municipalities-  75,793  -  75,793  
Trading loans-10,643-10,643
Corporate and other debt-  295,322  5  295,327  
Equity, mutual funds, and other-  5,326  -  5,326  
Total trading securities - fixed income -  1,160,133  5  1,160,138  
Trading securities - mortgage banking-  -  2,821  2,821
Loans held-for-sale-  -  25,738  25,738  
Securities available-for-sale:      
U.S. treasuries-  100  -  100  
Government agency issued MBS-  1,946,222  -  1,946,222  
Government agency issued CMO-  1,874,816  -  1,874,816  
States and municipalities-  -  1,500  1,500  
Equity, mutual funds, and other25,055  -  -  25,055  
Total securities available-for-sale25,055  3,821,138  1,500  3,847,693  
Other assets:      
Mortgage servicing rights--1,4061,406
Deferred compensation assets31,221  -  -  31,221  
Derivatives, forwards and futures21,573  -  -  21,573  
Derivatives, interest rate contracts -  175,416  -  175,416  
Total other assets52,794  175,416  1,406  229,616  
Total assets$77,849  $5,156,687  $31,470  $5,266,006  
Trading liabilities - fixed income:      
U.S. treasuries$-  $549,739  $-  $549,739  
Government agency issued CMO-1,563-1,563
Other U.S. government agencies-  25,095  -  25,095  
States and municipalities-1,127-1,127
Corporate and other debt-  212,016  -  212,016  
Total trading liabilities - fixed income-  789,540  -  789,540  
Other liabilities:  
Derivatives, forwards and futures19,618  -  -  19,618  
Derivatives, interest rate contracts -  144,165  -  144,165  
Derivatives, other-  1  6,8356,836
Total other liabilities19,618144,1666,835170,619
Total liabilities$19,618  $933,706  $6,835  $960,159  

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of June 30, 2015:
  June 30, 2015
(Dollars in thousands)Level 1  Level 2  Level 3  Total
Trading securities - fixed income:      
U.S. treasuries$-  $109,998  $-  $109,998
Government agency issued MBS-  327,082  -  327,082
Government agency issued CMO-  146,675  -  146,675
Other U.S. government agencies-  83,416  -  83,416
States and municipalities-  64,597  -  64,597
Corporate and other debt-  393,191  5  393,196
Equity, mutual funds, and other-  3,602  -3,602
Total trading securities - fixed income -  1,128,561  5  1,128,566
Trading securities - mortgage banking-  -  4,924  4,924
Loans held-for-sale-  -  26,525  26,525
Securities available-for-sale:      
U.S. treasuries-  100  -  100
Government agency issued MBS-  830,640  -  830,640
Government agency issued CMO-  2,625,286  -  2,625,286
Other U.S. government agencies-  -  1,560  1,560
States and municipalities-  7,955  1,500  9,455
Equity, mutual funds, and other25,825  -  -  25,825
Total securities available-for-sale25,825  3,463,981  3,060  3,492,866
Other assets:
Mortgage servicing rights-  -  2,158  2,158
Deferred compensation assets27,341  -  -  27,341
Derivatives, forwards and futures5,299  -  -  5,299
Derivatives, interest rate contracts-  109,929  -  109,929
Derivatives, other-2-2
Total other assets32,640  109,931  2,158  144,729
Total assets$58,465  $4,702,473  $36,672  $4,797,610
Trading liabilities - fixed income:      
U.S. treasuries$-  $406,879  $-  $406,879
Government agency issued MBS-1,486-1,486
Other U.S. government agencies-25,036-25,036
Corporate and other debt-299,163-299,163
Total trading liabilities - fixed income-  732,564  -  732,564
Other liabilities:
Derivatives, forwards and futures4,788  -  -  4,788
Derivatives, interest rate contracts-  100,191  -  100,191
Derivatives, other-  26  4,810  4,836
Total other liabilities4,788  100,217  4,810  109,815
Total liabilities$4,788  $832,781  $4,810  $842,379

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, 2016 and 2015, on a recurring basis are summarized as follows:
Three Months Ended June 30, 2016
SecuritiesMortgage
TradingLoans held-available-servicingNet derivative
(Dollars in thousands)securitiesfor-salefor-salerights, netliabilities
Balance on April 1, 2016$3,057  $26,287  $1,500$1,725$(4,620)
Total net gains/(losses) included in:
Net income55  429  -31(2,514)
Other comprehensive income /(loss)-  -  ---  
Purchases-  327  ---  
Issuances-  -  ---  
Sales-  -  -(205)-  
Settlements(286)(1,132)-(145)299  
Net transfers into/(out of) Level 3-  (173) (b)  ---  
Balance on June 30, 2016$2,826  $25,738  $1,500$1,406$(6,835)
Net unrealized gains/(losses) included in net income$(5) (a)  $429 (a)  $-$-$(2,514) (c)

Three Months Ended June 30, 2015
SecuritiesMortgage
TradingLoans held-available-servicingNet derivative
(Dollars in thousands)securitiesfor-salefor-salerights, netliabilities
Balance on April 1, 2015$5,326  $26,700  $3,191$2,342  $(5,005)
Total net gains/(losses) included in:
Net income69  248--  (107)
Other comprehensive income /(loss)-  -  (14)-  -
Purchases-  324  --  -
Issuances-  -  --  -
Sales-  -  --  -
Settlements(466)(329)(117)(184)302
Net transfers into/(out of) Level 3 -  (418) (b)--  -
Balance on June 30, 2015$4,929  $26,525  $3,060$2,158  $(4,810)
Net unrealized gains/(losses) included in net income$69 (a)$248 (a)$-$-$(107) (c)

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

Changes in Recurring Level 3 Fair Value Measurements
The changes in Level 3 assets and liabilities measured at fair value for the six months ended June 30, 2016 and 2015, on a recurring basis are summarized as follows:
  Six Months Ended June 30, 2016
SecuritiesMortgage
  TradingLoans held-available-servicingNet derivative
(Dollars in thousands)securitiesfor-salefor-salerights, netliabilities
Balance on January 1, 2016$4,377  $27,418  $1,500$1,841  $(4,810)
Total net gains/(losses) included in:
  Net income202  771  -31  (2,623)
  Other comprehensive income / (loss)-  -  --  -  
Purchases-  475  --  -  
Issuances-  -  --  -  
Sales-  -  -(205)  -  
Settlements(1,753)(2,497)-(261)598  
Net transfers into/(out of) Level 3-  (429) (b)  --  -  
Balance on June 30, 2016$2,826  $25,738  $1,500$1,406  $(6,835)
Net unrealized gains/(losses) included in net income$79 (a)  $771 (a)  $-$-$(2,623) (c)

Six Months Ended June 30, 2015
SecuritiesMortgage
TradingLoans held-available-servicingNet derivative
(Dollars in thousands)securitiesfor-salefor-salerights, netliabilities
Balance on January 1, 2015$5,642  $27,910  $3,307$2,517$(5,240)  
Total net gains/(losses) included in:
Net income239  1,390--(164)  
Other comprehensive income /(loss)-  -  (28)--  
Purchases-  1,178  ---  
Issuances-  -  ---  
Sales-  -  ---  
Settlements(952)(2,819)(219)(359)594
Net transfers into/(out of) Level 3 -  (1,134) (b)---  
Balance on June 30, 2015$4,929  $26,525  $3,060$2,158$(4,810)  
Net unrealized gains/(losses) included in net income$239 (a)$1,390 (a)$-$-$(164) (c)

  • Primarily included in mortgage banking income on the Consolidated Condensed Statements of Income.
  • Transfers out of recurring loans held-for-sale level 3 balances reflect movements out of recurring loans held-for-sale and into real estate acquired by foreclosure (level 3 nonrecurring).
  • 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 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 June 30, 2016 and 2015, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment, the related carrying value, and the fair value adjustments recorded during the respective periods.

    Three Months EndedSix Months Ended
Carrying value at June 30, 2016June 30, 2016June 30, 2016
(Dollars in thousands)  Level 1  Level 2  Level 3  Total   Net gains/(losses)Net gains/(losses)
Loans held-for-sale - first mortgages$-  $-  $721  $721  $2$7
Loans, net of unearned income (a)-  -  35,314  35,314  353(4,319)
Real estate acquired by foreclosure (b)-  -  14,150  14,150  (314)(850)
Other assets (c)-  -  28,588  28,588  (831)(1,537)
$(790)$(6,699)

Three Months EndedSix Months Ended
Carrying value at June 30, 2015June 30, 2015June 30, 2015
(Dollars in thousands)  Level 1  Level 2  Level 3  Total   Net gains/(losses)Net gains/(losses)
Loans held-for-sale - first mortgages  $-  $-  $849  $849  $-$38
Loans, net of unearned income (a)-  -  38,913  38,913  (479)(1,841)
Real estate acquired by foreclosure (b)-  -  29,109  29,109  (1,284)(1,660)
Other assets (c)-  -  28,265  28,265  (549)(944)
          $(2,312)$(4,407)
Certain previously reported amounts have been reclassified to agree with current presentation.

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

 

In first quarter 2016, FHN’s Regional Banking segment recognized $3.7 million of impairments on long-lived assets associated with efforts to more efficiently utilize its bank branch locations. 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 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.

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, 2016 and 2015:
(Dollars in Thousands)
Fair Value at
Level 3 ClassJune 30, 2016Valuation TechniquesUnobservable InputValues Utilized
Trading securities - mortgage$2,821Discounted cash flowPrepayment speeds 38% - 47%
Discount rate28% - 68%
Loans held-for-sale - residential real estate26,459Discounted cash flowPrepayment speeds - First mortgage2% - 20%
Prepayment speeds - HELOC5% - 15%
Foreclosure losses47% - 58%
Loss severity trends - First mortgage5% - 70% of UPB
Loss severity trends - HELOC35% - 100% of UPB
Draw rate - HELOC5% - 12%
Derivative liabilities, other6,835Discounted cash flowVisa covered litigation resolution amount$4.4 billion - $5.2 billion
Probability of resolution scenarios10% - 30%
Time until resolution30 - 60 months
Loans, net of unearned income (a)35,314Appraisals from comparable propertiesMarketability adjustments for specific properties0% - 10% of appraisal
Other collateral valuationsBorrowing base certificates adjustment20% - 50% of gross value
Financial Statements/Auction values adjustment0% - 25% of reported value
Real estate acquired by foreclosure (b)14,150Appraisals from comparable propertiesAdjustment for value changes since appraisal0% - 10% of appraisal
Other assets (c)28,588Discounted cash flowAdjustments to current sales yields for specific properties0% - 15% adjustment to yield
Appraisals from comparable propertiesMarketability adjustments for specific properties0% - 25% of appraisal

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

(Dollars in Thousands)
Fair Value at
Level 3 ClassJune 30, 2015Valuation TechniquesUnobservable InputValues Utilized
Trading securities - mortgage$4,924Discounted cash flowPrepayment speeds42% - 43%
Discount rate5% - 56%
Loans held-for-sale - residential real estate27,374Discounted cash flowPrepayment speeds - First mortgage2% - 20%
Prepayment speeds - HELOC5% - 15%
Foreclosure Losses50% - 60%
Loss severity trends - First mortgage10% - 70% of UPB
Loss severity trends - HELOC35% - 100% of UPB
Draw Rate - HELOC5% - 12%
Derivative liabilities, other4,810Discounted cash flowVisa covered litigation resolution amount$4.5 billion - $5.5 billion
Probability of resolution scenarios5% - 25%
Time until resolution6 - 42 months
Loans, net of unearned income (a)38,913Appraisals from comparable propertiesMarketability adjustments for specific properties0% - 10% of appraisal
Other collateral valuationsBorrowing base certificates adjustment20% - 50% of gross value
Financial Statements/Auction Values adjustment0% - 25% of reported value
Real estate acquired by foreclosure (b)29,109Appraisals from comparable propertiesAdjustment for value changes since appraisal0% - 10% of appraisal
Other assets (c)28,265Discounted cash flowAdjustments to current sales yields for specific properties0% - 15% adjustment to yield
Appraisals from comparable propertiesMarketability adjustments for specific properties0% - 25% of appraisal

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

Trading securities-mortgage. Prepayment rates and credit spreads (part of the discount rate) are significant unobservable inputs used in the fair value measurement of FHN’s mortgage trading securities which include interest-only strips and principal-only strips. Subordinated bonds were also included in mortgage trading securities prior to their payoff in first quarter 2016. Increases in prepayment rates and credit spreads in isolation would result in significantly lower fair value measurements for the associated assets. Conversely, decreases in prepayment rates and credit spreads in isolation would result in significantly higher fair value measurements for the associated assets. Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayment rates as customers are expected to refinance existing mortgages under more favorable interest rate terms. Generally, changes in discount rates directionally mirror the changes in market interest rates. FHN’s Corporate Accounting Department monitors changes in the fair value of these securities monthly.

Loans held-for-sale. Foreclosure losses 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. Draw rates are an additional significant unobservable input for HELOCs. Increases (decreases) in the draw rate estimates for HELOCs would increase (decrease) their fair value. All observable and unobservable inputs are re-assessed quarterly. Fair value measurements are reviewed at least quarterly by FHN’s Corporate Accounting Department.

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

Loans, net of unearned income and Real estate acquired by foreclosure. Collateral-dependent loans and Real estate acquired by foreclosure are primarily valued using appraisals based on sales of comparable properties in the same or similar markets. Multiple appraisal firms are utilized to ensure that estimated values are consistent between firms. This process occurs within FHN’s Credit Risk Management (commercial) and Default Servicing functions (primarily consumer) and the Credit Risk Management Committee reviews valuation methodologies and loss information for reasonableness. Back testing is performed during the year through comparison to ultimate disposition values and is reviewed quarterly within the Credit Risk Management function. Other collateral (receivables, inventory, equipment, etc.) is valued through borrowing base certificates, financial statements and/or auction valuations. These valuations are discounted based on the quality of reporting, knowledge of the marketability/collectability of the collateral and historical disposition rates.

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

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

The following tables reflect the differences between the fair value carrying amount of residential real estate loans held-for-sale measured at fair value in accordance with management’s election and the aggregate unpaid principal amount FHN is contractually entitled to receive at maturity.
June 30, 2016
(Dollars in thousands)Fair value carrying amountAggregate unpaid principalFair value carrying amount less aggregate unpaid principal
Residential real estate loans held-for-sale reported at fair value:    
Total loans$25,738  $39,202  $(13,464)
Nonaccrual loans6,923  13,837  (6,914)
Loans 90 days or more past due and still accruing136  214  (78)
June 30, 2015
(Dollars in thousands)Fair value carrying amountAggregate unpaid principalFair value carrying amount less aggregate unpaid principal
Residential real estate loans held-for-sale reported at fair value:    
Total loans$26,525  $40,577  $(14,052)
Nonaccrual loans6,238  12,316  (6,078)
Loans 90 days or more past due and still accruing1,622  2,056  (434)

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 EndedSix Months Ended
June 30June 30
(Dollars in thousands)2016201520162015
Changes in fair value included in net income:
Mortgage banking noninterest income
Loans held-for-sale$429$248$771$1,390

For the three months ended June 30, 2016, and 2015, the amounts for residential real estate loans held-for-sale include gains of $.2 million and $.3 million, respectively, in pretax earnings that are attributable to changes in instrument-specific credit risk. For the six months ended June 30, 2016, and 2015, the amounts for loans held-for-sale include gains of $.3 million and $.7 million, respectively, in pretax earnings that are attributable to changes in instrument-specific credit risk. The portion of the fair value adjustments related to credit risk was determined based on estimated default rates and estimated loss severities. Interest income on residential real estate loans held-for-sale measured at fair value is calculated based on the note rate of the loan and is recorded in the interest income section of the Consolidated Condensed Statements of Income as interest on loans held-for-sale.

Determination of Fair Value

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

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

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

Trading securities also include retained interests in prior securitizations that qualify as financial assets, which include interest-only strips and principal-only strips. Subordinated bonds were included in mortgage trading securities prior to payoff in first quarter 2016. FHN uses inputs including yield curves, credit spreads, and prepayment speeds to determine the fair value of interest-only and principal-only strips. Subordinated bonds are bonds with junior priority and were valued using an internal model which included contractual terms, frequency and severity of loss (credit spreads), prepayment speeds of the underlying collateral, and the yield that a market participant would require.

Securities available-for-sale. Securities available-for-sale includes the investment portfolio accounted for as available-for-sale under ASC 320-10-25, federal bank stock holdings, and short-term investments in mutual funds. Valuations of available-for-sale securities are performed using observable inputs obtained from market transactions in similar securities. Typical inputs include LIBOR and U.S. treasury curves, consensus prepayment estimates, and credit spreads. When available, broker quotes are used to support these valuations. Prior to disposition in fourth quarter 2015, certain government agency debt obligations with limited trading activity were valued using a discounted cash flow model that incorporated a combination of observable and unobservable inputs. Primary observable inputs included contractual cash flows and the treasury curve. Significant unobservable inputs included estimated trading spreads and estimated prepayment speeds.

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

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

Loans held-for-sale. Residential real estate loans held-for-sale are valued using current transaction prices and/or values on similar assets when available. Uncommitted bids may be adjusted based on other available market information. For all other loans FHN determines the fair value of residential real estate loans held-for-sale using a discounted cash flow model which incorporates both observable and unobservable inputs. 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 estimates of loan draw rates as well as estimated cancellation rates for loans expected to become delinquent.

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

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

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

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

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

Individually impaired loans are measured using either a discounted cash flow methodology or the estimated fair value of the underlying collateral less costs to sell, if the loan is considered collateral-dependent. In accordance with accounting standards, the discounted cash flow analysis utilizes the loan’s effective interest rate for discounting expected cash flow amounts. Thus, this analysis is not considered a fair value measurement in accordance with ASC 820. However, the results of this methodology are considered to approximate fair value for the applicable loans. Expected cash flows are derived from internally-developed inputs primarily reflecting expected default rates on contractual cash flows. For loans measured using the estimated fair value of collateral less costs to sell, fair value is estimated using appraisals of the collateral. Collateral values are monitored and additional write-downs are recognized if it is determined that the estimated collateral values have declined further. Estimated costs to sell are based on current amounts of disposal costs for similar assets. Carrying value is considered to reflect fair value for these loans.

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

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

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

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

Nonearning assets. For disclosure purposes, 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 and deferred compensation assets that are considered financial assets. Tax credit investments accounted for under the equity method are written down to estimated fair value quarterly based on the estimated value of the associated tax credits which incorporates estimates of required yield for hypothetical investors. The fair value of all other tax credit investments is estimated using recent transaction information with adjustments for differences in individual investments. Deferred compensation assets are recognized at fair value, which is based on quoted prices in active markets.

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

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

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

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

Other noninterest-bearing liabilities. For disclosure purposes, other noninterest-bearing 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 June 30, 2016 and 2015, involve the use of significant internally-developed pricing assumptions for certain components of these line items. The assumptions and valuations utilized for this disclosure are considered to reflect inputs that market participants would use in transactions involving these instruments as of the measurement date. The valuations of legacy assets, particularly consumer loans within the non-strategic segment and TRUP loans, are influenced by 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 our internal estimates of the intrinsic value of these assets.

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

The following tables summarize the book value and estimated fair value of financial instruments recorded in the Consolidated Condensed Statements of Condition as well as unfunded loan commitments and stand by and other commitments as of June 30, 2016 and 2015.

  June 30, 2016
BookFair Value
(Dollars in thousands)  Value  Level 1  Level 2  Level 3  Total
Assets:          
Loans, net of unearned income and allowance for loan losses          
Commercial:          
Commercial, financial and industrial  $11,098,473  $-  $-  $11,003,089  $11,003,089  
Commercial real estate  1,939,148  -  -  1,915,942  1,915,942
Consumer:          
Consumer real estate 4,581,698  -  -  4,424,739  4,424,739  
Permanent mortgage 421,414  -  -  391,879  391,879  
Credit card & other  348,797  -  -  350,036  350,036  
Total loans, net of unearned income and allowance for loan losses  18,389,530  -  -  18,085,685  18,085,685  
Short-term financial assets:          
Interest-bearing cash  321,743  321,743  -  -  321,743  
Federal funds sold  40,570  -  40,570  -  40,570  
Securities purchased under agreements to resell  881,732  -  881,732  -  881,732  
Total short-term financial assets1,244,045321,743922,302-1,244,045
Trading securities (a)1,162,959  -  1,160,133  2,826  1,162,959  
Loans held-for-sale 117,976  -  5,478  112,498  117,976  
Securities available-for-sale (a) (b)4,009,243  25,055  3,821,138  163,050  4,009,243  
Securities held-to-maturity14,333  -  -  15,101  15,101  
Derivative assets (a)196,989  21,573  175,416  -  196,989
  
Other assets:  
Tax credit investments  90,053--83,50683,506  
Deferred compensation assets31,22131,221--31,221
Total other assets  121,274  31,221  -  83,506  114,727
Nonearning assets:    
Cash & due from banks  283,648  283,648  -  -  283,648  
Fixed income receivables  219,939  -  219,939  -  219,939  
Accrued interest receivable  55,746  -  55,746  -  55,746  
Total nonearning assets  559,333  283,648  275,685  -  559,333
Total assets  $25,815,682  $683,240  $6,360,152  $18,462,666  $25,506,058
          
Liabilities:    
Deposits:    
Defined maturity$1,264,635  $-  $1,274,663  $-  $1,274,663  
Undefined maturity19,365,542-19,365,542-19,365,542
Total deposits20,630,177  -20,640,205-20,640,205  
Trading liabilities (a)789,540  -  789,540  -  789,540
Short-term financial liabilities:    
Federal funds purchased508,669-508,669-508,669
Securities sold under agreements to repurchase  451,129  -  451,129  -  451,129  
Other short-term borrowings543,033-543,033-543,033
Total short-term financial liabilities  1,502,831  -  1,502,831  -  1,502,831
Term borrowings:    
Real estate investment trust-preferred  45,998  -  -  49,350  49,350  
Term borrowings - new market tax credit investment  18,000  -  -  18,213  18,213  
Borrowings secured by residential real estate30,956--26,71526,715
Other long term borrowings981,989-955,542-955,542
Total term borrowings1,076,943  -  955,542  94,278  1,049,820  
Derivative liabilities (a)170,619  19,618  144,166  6,835  170,619
  
Other noninterest-bearing liabilities:    
Fixed income payables  90,400  -  90,400  -  90,400  
Accrued interest payable  9,846  -  9,846  -  9,846  
Total other noninterest-bearing liabilities100,246  -  100,246  -100,246
Total liabilities$24,270,356  $19,618  $24,132,530  $101,113$24,253,261

  • Classes are detailed in the recurring and nonrecurring measurement tables.
  • Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $68.6 million.

  June 30, 2015
BookFair Value
(Dollars in thousands)  Value  Level 1  Level 2  Level 3  Total
Assets:          
Loans, net of unearned income and allowance for loan losses          
Commercial:          
Commercial, financial and industrial$9,753,813  $-  $-  $9,716,906  $9,716,906  
Commercial real estate  1,379,223  -  -  1,362,420  1,362,420
Consumer:          
Consumer real estate4,784,814  -  -  4,567,129  4,567,129  
Permanent mortgage465,302  -  -  434,145  434,145  
Credit card & other  332,269  -  -  333,921  333,921  
Total loans, net of unearned income and allowance for loan losses16,715,421  -  -  16,414,521  16,414,521  
Short-term financial assets:          
Interest-bearing cash  344,944  344,944  -  -  344,944  
Federal funds sold77,039-77,039-77,039
Securities purchased under agreements to resell  816,991  -  816,991  -  816,991  
Total short-term financial assets  1,238,974  344,944  894,030  -  1,238,974  
Trading securities (a)1,133,490  -  1,128,561  4,929  1,133,490  
Loans held-for-sale (a)127,196  -  -  127,196  127,196  
Securities available-for-sale (a) (b)3,648,860  25,825  3,463,981  159,054  3,648,860  
Securities held-to-maturity4,306--5,3565,356
Derivative assets (a)115,230  5,299  109,931  -  115,230  
Other assets:          
Tax credit investments  90,095  -  -  60,619  60,619  
Deferred compensation assets  27,341  27,341  -  -  27,341  
Total other assets  117,436  27,341  -  60,619  87,960  
Nonearning assets:          
Cash & due from banks  274,256  274,256  -  -  274,256  
Fixed income receivables  91,069  -  91,069  -  91,069  
Accrued interest receivable  57,346  -  57,346  -  57,346  
Total nonearning assets  422,671  274,256  148,415  -  422,671  
Total assets$23,523,584  $677,665  $5,744,918  $16,771,675  $23,194,258  
          
Liabilities:          
Deposits:          
Defined maturity  $1,169,153  $-  $1,173,899  $-  $1,173,899  
Undefined maturity  17,505,320  -  17,505,320  -  17,505,320  
Total deposits  18,674,473  -  18,679,219  -  18,679,219  
Trading liabilities (a)732,564  -  732,564  -  732,564  
Short-term financial liabilities:          
Federal funds purchased556,862-556,862-556,862
Securities sold under agreements to repurchase  311,760  -  311,760  -  311,760  
Other short-term borrowings  150,350  -  150,350  -  150,350  
Total short-term financial liabilities  1,018,972  -  1,018,972  -  1,018,972  
Term borrowings:          
Real estate investment trust-preferred  45,930  -  -  49,350  49,350  
Term borrowings - new market tax credit investment  18,000  -  -  17,983  17,983  
Borrowings secured by residential real estate  55,679  -  -  48,051  48,051  
Other long term borrowings  1,435,663  -  1,411,226  -  1,411,226  
Total term borrowings1,555,272-1,411,226115,3841,526,610
Derivative liabilities (a)109,815  4,788  100,217  4,810  109,815  
Other noninterest-bearing liabilities:          
Fixed income payables  54,301  -  54,301  -  54,301  
Accrued interest payable  16,382  -  16,382  -  16,382  
Total other noninterest-bearing liabilities  70,683  -  70,683  -  70,683  
Total liabilities  $22,161,779  $4,788  $22,012,881  $120,194  $22,137,863  

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

  • Classes are detailed in the recurring and nonrecurring measurement tables.
  • Level 3 includes restricted investments in FHLB-Cincinnati stock of $87.9 million and FRB stock of $65.8 million.

Contractual AmountFair Value
(Dollars in thousands)June 30, 2016June 30, 2015June 30, 2016June 30, 2015
Unfunded Commitments:  
Loan commitments$7,516,141  $7,507,315$2,058  $2,761
Standby and other commitments293,319  304,8604,340  4,846