FIRST HORIZON NATIONAL CORP | 2013 | FY | 3


Note 22Fair 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:

 

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 December 31, 2013: 
                
    December 31, 2013 
(Dollars in thousands)Level 1 Level 2 Level 3 Total 
Trading securities - capital markets:            
 U.S. treasuries$ - $ 70,472 $ - $ 70,472 
 Government agency issued MBS  -   231,398   -   231,398 
 Government agency issued CMO  -   55,515   -   55,515 
 Other U.S. government agencies  -   108,265   -   108,265 
 States and municipalities  -   30,814   -   30,814 
 Corporate and other debt  -   297,440   5   297,445 
 Equity, mutual funds, and other  -   614   -   614 
  Total trading securities - capital markets   -   794,518   5   794,523 
Trading securities - mortgage banking:            
 Principal only  -   -   5,110   5,110 
 Interest only  -   -   2,085   2,085 
  Total trading securities - mortgage banking  -   -   7,195   7,195 
Loans held-for-sale  -   -   230,456   230,456 
Securities available-for-sale:            
 U.S. treasuries  -   39,996   -   39,996 
 Government agency issued MBS  -   823,689   -   823,689 
 Government agency issued CMO  -   2,290,937   -   2,290,937 
 Other U.S. government agencies  -   -   2,326   2,326 
 States and municipalities  -   13,655   1,500   15,155 
 Venture capital  -   -   4,300   4,300 
 Equity, mutual funds, and other  23,259   -   -   23,259 
  Total securities available-for-sale  23,259   3,168,277   8,126   3,199,662 
Mortgage servicing rights  -   -   72,793   72,793 
Other assets:            
 Deferred compensation assets  23,880   -   -   23,880 
 Derivatives, forwards and futures  3,020   -   -   3,020 
 Derivatives, interest rate contracts   -   178,846   -   178,846 
  Total other assets  26,900   178,846   -   205,746 
  Total assets$ 50,159 $ 4,141,641 $ 318,575 $ 4,510,375 
Trading liabilities - capital markets:            
 U.S. treasuries$ - $ 210,096 $ - $ 210,096 
 Government agency issued MBS  -   854   -   854 
 Other U.S. government agencies  -   3,900   -   3,900 
 Corporate and other debt  -   153,498   -   153,498 
   Total trading liabilities - capital markets  -   368,348   -   368,348 
Other liabilities:            
 Derivatives, forwards and futures  4,343   -   -   4,343 
 Derivatives, interest rate contracts   -   147,021   -   147,021 
 Derivatives, other  -   1   2,915   2,916 
  Total other liabilities  4,343   147,022   2,915   154,280 
  Total liabilities$ 4,343 $ 515,370 $ 2,915 $ 522,628 

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of December 31, 2012: 
                
    December 31, 2012 
(Dollars in thousands)Level 1 Level 2 Level 3 Total 
Trading securities - capital markets:            
 U.S. treasuries$ - $ 97,965 $ - $ 97,965 
 Government agency issued MBS  -   360,400   -   360,400 
 Government agency issued CMO  -   209,869   -   209,869 
 Other U.S. government agencies  -   279,164   -   279,164 
 States and municipalities  -   35,178   -   35,178 
 Corporate and other debt  -   244,022   5   244,027 
 Equity, mutual funds, and other  -   18,130   -   18,130 
  Total trading securities - capital markets   -   1,244,728   5   1,244,733 
Trading securities - mortgage banking:            
  Principal only  -   -   5,480   5,480 
  Interest only  -   -   12,507   12,507 
  Total trading securities - mortgage banking  -   -   17,987   17,987 
Loans held-for-sale  -   2,349   221,094   223,443 
Securities available-for-sale:            
 U.S. treasuries  -   39,999   -   39,999 
 Government agency issued MBS  -   1,136,580   -   1,136,580 
 Government agency issued CMO  -   1,649,211   -   1,649,211 
 Other U.S. government agencies  -   -   3,753   3,753 
 States and municipalities  -   13,755   1,500   15,255 
 Corporate and other debt  510   -   -   510 
 Venture capital  -   -   4,300   4,300 
 Equity, mutual funds, and other  14,767   -   -   14,767 
  Total securities available-for-sale  15,277   2,839,545   9,553   2,864,375 
Mortgage servicing rights  -   -   114,311   114,311 
Other assets:            
 Deferred compensation assets  22,477   -   -   22,477 
 Derivatives, forwards and futures  1,850   -   -   1,850 
 Derivatives, interest rate contracts  -   290,617   -   290,617 
 Derivatives, other  -   5   -   5 
  Total other assets  24,327   290,622   -   314,949 
  Total assets$ 39,604 $ 4,377,244 $ 362,950 $ 4,779,798 
Trading liabilities - capital markets:            
 U.S. treasuries$ - $ 376,790 $ - $ 376,790 
 Government agency issued MBS  -   43   -   43 
 Other U.S. government agencies  -   21,887   -   21,887 
 States and municipalities  -   960   -   960 
 Corporate and other debt  -   164,749   -   164,749 
  Total trading liabilities - capital markets  -   564,429   -   564,429 
                
Other short-term borrowings  -   -   11,156   11,156 
Other liabilities:             
 Derivatives, forwards and futures  2,546   -   -   2,546 
 Derivatives, interest rate contracts  -   197,548   -   197,548 
 Derivatives, other  -   -   2,175   2,175 
  Total other liabilities  2,546   197,548   2,175   202,269 
  Total liabilities$ 2,546 $ 761,977 $ 13,331 $ 777,854 

Changes in Recurring Level 3 Fair Value Measurements
                              
The changes in Level 3 assets and liabilities measured at fair value for the twelve months ended December 31, 2013, 2012 and 2011, on a recurring basis are summarized as follows: 
                              
   Twelve Months Ended December 31, 2013  
           Securities available-for-sale Mortgage     Other   
   Trading Loans held- Investment  Venture servicing Net derivative short-term  
(Dollars in thousands)securities for-sale portfolio Capital rights, net liabilities borrowings  
Balance on January 1, 2013$ 17,992  $ 221,094  $ 5,253 $ 4,300  $ 114,311  $ (2,175)  $ (11,156)  
 Total net gains/(losses) included in:                           
  Net income  5,028    (4,387)    -   -    20,182    (2,013)    (3)  
  Other comprehensive income  -    -    (114)   -    -    -    -  
 Purchases  -    69,929    -   -    -    -    -  
 Issuances  -    -    -   -    -    -    -  
 Sales  (7,784)    -    -   -    (39,633)    -    11,159  
 Settlements  (8,036)    (40,369)    (1,313)   -    (22,067)    1,273    -  
 Net transfers into/(out of) Level 3  -    (15,811) (c)     -   -    -    -    -  
Balance on December 31, 2013$ 7,200  $ 230,456  $ 3,826 $ 4,300  $ 72,793  $ (2,915)  $ -  
Net unrealized gains/(losses) included in net income$ 1,237 (a)   $ (4,387) (a)   $ - $ - (b)   $ 17,394 (a)   $ 2,013 (d)   $ - (a) 

   Twelve Months Ended December 31, 2012 
           Securities available-for-sale Mortgage     Other   
   Trading Loans held- Investment  Venture servicing Net derivative short-term  
(Dollars in thousands)securities for-sale portfolio Capital rights, net liabilitiesborrowings  
Balance on January 1, 2012$ 18,059  $ 210,487  $ 7,262 $ 12,179  $ 144,069  $ (11,820)  $ (14,833)  
 Total net gains/(losses) included in:                           
  Net income  3,678    (2,618)    -   371    (5,075)    (1,757)    3,677  
  Other comprehensive income  -    -    (234)   -    -    -    -  
 Purchases  -    60,111    -   -    -    -    -  
 Issuances  -    -    -   -    -    -    -  
 Sales  -    -    -   (8,250)    -    -    -  
 Settlements  (9,225)    (27,032)    (1,775)   -    (24,683)    11,402    -  
 Net transfers into/(out of) Level 3   5,480    (19,854) (c)   -   -    -    -    -  
Balance on December 31, 2012$ 17,992  $ 221,094  $ 5,253 $ 4,300  $ 114,311  $ (2,175)  $ (11,156)  
Net unrealized gains/(losses) included in net income$ 2,084 (a) $ (2,618) (a) $ - $ (4,700) (b) $ (3,957) (a) $ (1,757) (d) $ 3,677 (a) 

     Twelve Months Ended December 31, 2011  
           Securities available-for-sale Mortgage     Other  
    Trading Loans held- Investment Venture servicing  Net derivative short-term  
(Dollars in thousands)securities for-sale portfolio capital rights liabilities borrowings  
Balance on January 1, 2011$ 26,478  $ 207,632  $ 39,391 $ 13,179  $ 207,319  $ (1,000)  $ (27,309)  
Total net gains/(losses) included in:                           
  Net income  3,796    (368)    -   -    (41,260)    (9,414)    12,476  
  Other comprehensive income  -    -    (1,688)   -    -    -    -  
 Purchases  -    49,323    -   -    -    -    -  
 Issuances  -    -    -   -    -    (2,500)    -  
 Sales  (132)    -    (29,217)   (1,000)    -    -    -  
 Settlements  (12,083)    (37,198)    (1,224)   -    (21,990)    1,094    -  
 Net transfers into/(out of) Level 3   -    (8,902) (c)   -   -    -    -    -  
Balance on December 31, 2011$ 18,059  $ 210,487  $ 7,262 $ 12,179  $ 144,069  $ (11,820)  $ (14,833)  
Net unrealized gains/(losses) included in net income$ 2,205 (a) $ (368) (a) $ - $ - (b) $ (40,076) (a) $ (9,414) (d) $ 12,476 (a) 

In fourth quarter 2012, FHN determined that the level of market information on prepayment speeds and discount rates associated with its principal only trading securities had become more limited. In response, FHN increased its use of unobservable inputs and transferred these balances to Level 3.

 

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 December 31, 2013, 2012, and 2011, 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.

 

             Twelve Months Ended 
 Carrying value at December 31, 2013 December 31, 2013 
(Dollars in thousands)Level 1 Level 2 Level 3 Total Net gains/(losses) 
Loans held-for-sale - SBAs$ - $ 6,185 $ - $ 6,185 $ (122) 
Loans held-for-sale - first mortgages  -   -   9,457   9,457   139 
Loans, net of unearned income (a)  -   -   62,839   62,839   (3,109) 
Real estate acquired by foreclosure (b)  -   -   45,753   45,753   (4,987) 
Other assets (c)  -   -   66,128   66,128   (4,902) 
             $ (12,981) 
                
                
             Twelve Months Ended 
 Carrying value at December 31, 2012 December 31, 2012 
(Dollars in thousands)Level 1 Level 2 Level 3 Total Net gains/(losses) 
Loans held-for-sale - SBAs$ - $ 23,902 $ - $ 23,902 $ 15 
Loans held-for-sale - first mortgages  -   -   12,054   12,054   (436) 
Loans, net of unearned income (a)  -   -   117,064   117,064   (55,948) 
Real estate acquired by foreclosure (b)  -   -   41,767   41,767   (9,422) 
Other assets (c)  -   -   76,501   76,501   (8,248) 
             $ (74,039) 
                
                
             Twelve Months Ended 
 Carrying value at December 31, 2011 December 31, 2011 
(Dollars in thousands)Level 1 Level 2 Level 3 Total Net gains/(losses) 
Loans held-for-sale - SBAs$ - $ 66,730 $ - $ 66,730 $ (2) 
Loans held-for-sale - first mortgages  -   -   11,980   11,980   (5,947) 
Loans, net of unearned income (a)  -   -   125,297   125,297   (48,330) 
Real estate acquired by foreclosure (b)  -   -   68,884   68,884   (18,358) 
Other assets (c)  -   -   91,243   91,243   (12,192) 
             $ (84,829) 

 

In first quarter 2011, FHN recognized goodwill impairment of $10.1 million related to the contracted sale of FHI. In accordance with accounting requirements, FHN allocated a portion of the goodwill from the applicable reporting unit to the asset group held-for-sale in determining the carrying value of the disposal group. In determining the amount of impairment, FHN compared the carrying value of the disposal group to the estimated value of the contracted sale price, which primarily included observable inputs in the form of financial asset values but which also included certain nonobservable inputs related to the estimated values of post-closing events and contingencies. Thus, this measurement was considered a Level 3 valuation. Impairment of goodwill was recognized for the excess of the carrying amount over the fair value of the disposal group.

 

In first quarter 2013, third quarter 2012 and second quarter 2011, FHN exercised clean-up calls on first lien mortgage proprietary securitization trusts. In accordance with accounting requirements, FHN initially recognized the associated loans at fair value. Fair value was primarily determined through reference to observable inputs, including current market prices for similar loans. Since these loans were from the 2003 vintage, adjustments were made for the higher yields associated with the loans in comparison to more currently originated loans being sold. This resulted in recognition of an immaterial premium for these transactions.

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 December 31, 2013 and 2012: 
           
(Dollars in Thousands)         
  Fair Value at        
Level 3 Class December 31, 2013Valuation TechniquesUnobservable InputValues Utilized 
Trading securities - mortgage $7,195 Discounted cash flow (a) (a) 
Loans held-for-sale - residential real estate  239,913 Discounted cash flow Prepayment speeds - First mortgage 6% - 10% 
       Prepayment speeds - Heloc 3% - 12% 
       Credit spreads 2% - 4% 
       Delinquency adjustment factor 15% - 25% added to credit spread 
       Loss severity trends - First mortgage 50% - 60% of UPB 
       Loss severity trends - Heloc 35% - 100% of UPB 
       Draw Rate - Heloc 2% - 11% 
Venture capital investments  4,300 Industry comparables Adjustment for minority interest and small business status 40% - 50% discount 
     Discounted cash flow Discount rate 25% - 30% 
       Earnings capitalization rate 20% - 25% 
Mortgage servicing rights  72,793 Discounted cash flow (a) (a) 
Derivative liabilities, other  2,915 Discounted cash flow Visa covered litigation resolution amount $4.4 billion - $5.0 billion 
       Probability of resolution scenarios 15% - 45% 
       Time until resolution 6 - 30 months 
Loans, net of unearned income (b)   62,839 Appraisals from comparable properties Marketability adjustments for specific properties 0% - 10% of appraisal 
     Other collateral valuations Borrowing base certificates adjustment 20% - 50% of gross value 
       Financial Statements/Auction Values adjustment 0% - 25% of reported value 
Real estate acquired by foreclosure (c)  45,753 Appraisals from comparable properties Adjustment for value changes since appraisal 0% - 10% of appraisal 
Other assets (d)  66,128 Discounted cash flow Adjustments to current sales yields for specific properties 0% - 15% adjustment to yield 
     Appraisals from comparable properties Marketability adjustments for specific properties 0% - 25% of appraisal 

(Dollars in Thousands)         
  Fair Value at        
Level 3 Class December 31, 2012Valuation TechniquesUnobservable InputValues Utilized 
Trading securities - mortgage $17,987 Discounted cash flow (a) (a) 
Loans held-for-sale - residential real estate  233,148 Discounted cash flow Prepayment speeds 6% - 10% 
       Credit spreads 2% - 4% 
       Delinquency adjustment factor 15% - 25% added to credit spread 
       Loss severity trends 50% - 60% of UPB 
Venture capital investments  4,300 Industry comparables Adjustment for minority interest and small business status 40% - 50% discount 
     Discounted cash flow Discount Rate 25% - 30%  
       Earnings capitalization rate 20% - 25% 
Mortgage servicing rights  114,311 Discounted cash flow (a) (a) 
Other short-term borrowings  11,156 Discounted cash flow (b) (b) 
Derivative liabilities, other  2,175 Discounted cash flow Visa covered litigation resolution amount $4.4 billion - $5.0 billion 
       Probability of resolution scenarios 10% - 50% 
       Time until resolution 9 - 18 months 
Loans, net of unearned income (c)   117,064 Appraisals from comparable properties Adjustment for value changes since appraisal 0% - 10% of appraisal 
     Other collateral valuations Borrowing base certificates 20% - 50% of gross value 
       Financial Statements/Auction Values 0% - 25% of reported value 
Real estate acquired by foreclosure (d)  41,767 Appraisals from comparable properties Adjustment for value changes since appraisal 0% - 10% of appraisal 
Other assets (e)  76,501 Discounted cash flow Adjustments to current sales yields for specific properties 0% - 15% adjustment to yield 
     Appraisals from comparable properties Marketability adjustments for specific properties 0% - 25% of appraisal 

Loans held-for-sale. Prepayment rates, credit spreads, delinquency adjustment factors and draw 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 monthly. Increases (decreases) in the draw rate estimates for HELOCs would increase (decrease) their fair value. Fair value measurements are reviewed at least monthly by FHN's Corporate Accounting Department.

Venture capital investments. The unobservable inputs used in the estimation of fair value for Venture capital investments are adjustments for minority interest and small business status when compared to industry comparables and the discount rate and earnings capitalization rate for a discounted cash flow analysis. For both valuation techniques, the inputs are intended to reflect the nature of the small business and the status of equity tranches held by FHN in relation to the overall valuation. The valuation of venture capital investments is reviewed at least quarterly by FHN's Equity Investment Review Committee. Changes in valuation are discussed with respect to the appropriateness of the adjustments in relation to the associated triggering events.

Derivative liabilities. The determination of fair value for FHN's derivative liabilities associated with its prior sales of Visa Class B shares include estimation of both the resolution amount for Visa's Covered Litigation matters as well as the length of time until the resolution occurs. Significant increases (decreases) in either of these inputs in isolation would result in significantly higher (lower) fair value measurements for the derivative liabilities. Additionally, FHN performs a probability weighted multiple resolution scenario to calculate the estimated fair value of these derivative liabilities. Assignment of higher (lower) probabilities to the larger potential resolution scenarios would result in an increase (decrease) in the estimated fair value of the derivative liabilities. The valuation inputs and process are discussed with senior and executive management when significant events affecting the estimate of fair value occur. Inputs are compared to information obtained from the public issuances and filings of Visa, Inc. as well as public information released by other participants in the applicable litigation matters.

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

Other assets – tax credit investments. The estimated fair value of tax credit investments is generally determined in relation to the yield (i.e., future tax credits to be received) an acquirer of these investments would expect in relation to the yields experienced on current new issue and/or secondary market transactions. Thus, as tax credits are recognized, the future yield to a market participant is reduced, resulting in consistent impairment of the individual investments. Individual investments are reviewed for impairment quarterly, which may include the consideration of additional marketability discounts related to specific investments. Unusual valuation adjustments, and the associated triggering events, are discussed with senior and executive management, when appropriate. A portfolio review is conducted annually, with the assistance of a third party, to assess the reasonableness of current valuations.

Fair Value Option

FHN elected the fair value option on a prospective basis for almost all types of mortgage loans originated for sale purposes under the Financial Instruments Topic (“ASC 825”). FHN determined that the election reduced certain timing differences and better matched changes in the value of such loans with changes in the value of derivatives used as economic hedges for these assets at the time of election. After the 2008 divestiture of certain mortgage banking operations and the significant decline of mortgage loans originated for sale, FHN discontinued hedging the mortgage warehouse.

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.

Prior to 2010, FHN transferred certain servicing assets in transactions that did not qualify for sale treatment due to certain recourse provisions. In fourth quarter 2013, these recourse provisions expired and the transaction was recognized as a sale. The associated proceeds were recognized within other short-term borrowings in the Consolidated Statements of Condition. Since the servicing assets were recognized at fair value and changes in the fair value of the related financing liabilities mirrored the change in fair value of the associated servicing assets, management elected to account for the financing liabilities at fair value. Since the servicing assets had already been delivered to the buyer, the fair value of the financing liabilities associated with the transaction did not reflect any instrument-specific credit risk.

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. 
  December 31, 2013 
(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$230,456 $378,326  $ (147,870) 
 Nonaccrual loans 64,231  137,301    (73,070) 
 Loans 90 days or more past due and still accruing 7,765  15,854    (8,089) 
            
  December 31, 2012 
(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$223,443 $343,450  $ (120,007) 
 Nonaccrual loans 51,203  110,386    (59,183) 
 Loans 90 days or more past due and still accruing 9,111  20,839    (11,728) 

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: 
            
    Twelve Months Ended 
    December 31 
(Dollars in thousands) 2013  2012  2011 
Changes in fair value included in net income:         
 Mortgage banking noninterest income         
  Loans held-for-sale$ (4,387) $ (2,618) $ (368) 
  Other short-term borrowings  (3)   3,677   12,476 
            
            

For the twelve months ended December 31, 2013 , 2012, and 2011, the amounts for residential real estate loans held-for-sale include losses of $1.5 million, $1.8 million, and $6.2 million, respectively, included 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 both a quality adjustment for delinquencies and the full credit spread on the non-conforming loans. 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 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 and MSR recorded at fair value in the Consolidated Statements of Condition and for estimating the fair value of financial instruments for which fair value is disclosed under ASC 825-10-50.

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

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

Trading securities also include retained interests in prior securitizations that qualify as financial assets, which primarily include excess interest, interest-only strips and principal-only strips.

The fair value of excess interest is determined using prices from closely comparable assets such as MSR that are tested against prices determined using a valuation model that calculates the present value of estimated future cash flows. Inputs utilized in valuing excess interest are consistent with those used to value the related MSR. The fair value of excess interest typically changes based on changes in the discount rate and differences between modeled prepayment speeds and credit losses and actual experience. FHN uses assumptions in the model that it believes are comparable to those used by brokers and other service providers. FHN also periodically compares its estimates of fair value and assumptions with brokers, service providers, recent market activity, and against its own experience. FHN uses inputs including yield curves, credit spreads, and prepayment speeds to determine the fair value of principal-only strips.

In third quarter 2013, FHN agreed to sell substantially all of its remaining legacy mortgage servicing, including excess interest. FHN used the price in the definitive agreement, as adjusted for the portion of pricing that was not specific to the excess interest, as a third-party pricing source in the valuation of the excess interest.

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

Investments in the stock of the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical cost in the Consolidated 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. Venture capital investments are typically measured using significant internally generated inputs including adjustments to industry comparables and discounted cash flows analysis.

Loans held-for-sale. 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. Typical inputs include contractual cash flow requirements, current mortgage rates for similar products, estimated prepayment rates, credit spreads and delinquency penalty adjustments. Adjustments for delinquency and other differences in loan characteristics are typically reflected in the model's discount rates. Loss severity trends and the value of underlying collateral are also considered in assessing the appropriate fair value for severely delinquent loans and loans in foreclosure. The valuation of HELOCs also incorporates estimates of loan draw rates as well as estimated cancellation rates for loans expected to become delinquent.

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

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

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

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

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

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

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

Mortgage servicing rights. FHN recognizes all classes of MSR at fair value. Since sales of MSR tend to occur in private transactions and the precise terms and conditions of the sales are typically not readily available, there is a limited market to refer to in determining the fair value of MSR. As such, FHN primarily relies on a discounted cash flow model to estimate the fair value of its MSR. This model calculates estimated fair value of the MSR using predominant risk characteristics of MSR such as interest rates, type of product (fixed vs. variable), age (new, seasoned, or moderate), agency type and other factors. FHN uses assumptions in the model that it believes are comparable to those used by brokers and other service providers. FHN also periodically compares its estimates of fair value and assumptions with brokers, service providers, recent market activity, and against its own experience.

In third quarter 2013, FHN agreed to sell substantially all of its remaining legacy mortgage servicing. FHN 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 held at December 31, 2013.

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

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

In conjunction with the sales of portions of its Visa Class B shares, FHN and the purchasers entered into derivative transactions whereby FHN will make, or receive, cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. The fair value of these derivatives has been determined using a discounted cash flow methodology for estimated future cash flows determined through use of probability weighted scenarios for multiple estimates of Visa's aggregate exposure to covered litigation matters, which include consideration of amounts funded by Visa into its escrow account for the covered litigation matters. Since this estimation process required application of judgment in developing significant unobservable inputs used to determine the possible outcomes and the probability weighting assigned to each scenario, these derivatives have been classified within Level 3 in fair value measurements disclosures.

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

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

Other assets. For disclosure purposes, other assets consist of tax credit investments and deferred compensation assets that are considered financial assets. Tax credit investments are written down to estimated fair value quarterly based on the estimated value of the associated tax credits. Deferred compensation assets are recognized at fair value, which is based on quoted prices in active markets.

Defined maturity deposits. The fair value 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 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. Prior to fourth quarter 2013, Other short-term borrowings included a liability associated with transfers of MSR that did not qualify for sale accounting. This liability was accounted for at elected fair value, which was measured consistent with the related MSR, as previously described.

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

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

Loan commitments. Fair values 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 are based on fees charged to enter into similar agreements.

The following fair value estimates are determined as of a specific point in time utilizing various assumptions and estimates. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. Due to market illiquidity, the fair values for loans, net of unearned income, loans held-for-sale, and term borrowings as of December 31, 2013 and 2012, involve the use of significant internally-developed pricing assumptions for certain components of these line items. These assumptions are considered to reflect inputs that market participants would use in transactions involving these instruments as of the measurement date. Assets and liabilities that are not financial instruments (including MSR) have not been included in the following table such as the value of long-term relationships with deposit and trust customers, premises and equipment, goodwill and other intangibles, deferred taxes, and certain other assets and other liabilities. Accordingly, the total of the fair value amounts does not represent, and should not be construed to represent, the underlying value of the Company.

The following tables summarize the book value and estimated fair value of financial instruments recorded in the Consolidated Statements of Condition as well as unfunded commitments as of December 31, 2013 and 2012.

      December 31, 2013 
    Book Fair Value 
(Dollars in thousands)  Value Level 1 Level 2 Level 3 Total 
Assets:                 
Loans, net of unearned income and allowance for loan losses                 
 Commercial:                 
  Commercial, financial and industrial  $7,837,130 $ - $ - $ 7,759,902 $ 7,759,902 
  Commercial real estate   1,122,676   -   -   1,075,385   1,075,385 
 Retail:                 
  Consumer real estate  5,206,586   -   -   4,858,031   4,858,031 
  Permanent mortgage  639,751   -   -   606,038   606,038 
  Credit card & other   329,122   -   -   331,088   331,088 
Total loans, net of unearned income and allowance for loan losses   15,135,265   -   -   14,630,444   14,630,444 
          
Short-term financial assets                 
 Total interest-bearing cash    730,297   730,297   -   -   730,297 
 Federal funds sold    66,079   -   66,079   -   66,079 
 Securities purchased under agreements to resell    412,614   -   412,614   -   412,614 
Total short-term financial assets  1,208,990   730,297   478,693   -   1,208,990 
                   
Trading securities (a)  801,718   -   794,518   7,200   801,718 
Loans held-for-sale (a)  370,152   -   6,185   363,967  370,152 
Securities available-for-sale (a) (b)  3,398,457   23,259   3,168,277   206,921  3,398,457 
Derivative assets (a)  181,866   3,020   178,846   -  181,866 
          
Other assets                 
 Tax credit investments   66,128   -   -   66,128   66,128 
 Deferred compensation assets   23,880   23,880   -   -   23,880 
Total other assets   90,008   23,880   -   66,128   90,008 
          
Nonearning assets                 
 Cash & due from banks    349,216   349,216   -   -   349,216 
 Capital markets receivables    45,255   -   45,255   -   45,255 
 Accrued interest receivable    69,208   -   69,208   -   69,208 
Total nonearning assets    463,679   349,216   114,463   -   463,679 
Total assets  $ 21,650,135 $ 1,129,672 $ 4,740,982 $ 15,274,660 $ 21,145,314 
                     
Liabilities:                 
Deposits:                 
 Defined maturity  $1,505,712 $ - $ 1,520,950 $ - $ 1,520,950 
 Undefined maturity   15,229,244   -   15,229,244   -   15,229,244 
Total deposits   16,734,956   -   16,750,194   -   16,750,194 
                   
Trading liabilities (a) 368,348   -   368,348   -  368,348 
                   
Short-term financial liabilities                 
 Federal funds purchased   1,042,633   -   1,042,633   -   1,042,633 
 Securities sold under agreements to repurchase   442,789   -   442,789   -   442,789 
 Total other borrowings 181,146   -   181,146   -   181,146 
Total short-term financial liabilities   1,666,568   -   1,666,568   -   1,666,568 
                   
Term borrowings                 
 Real estate investment trust-preferred   45,828   -   -   47,000   47,000 
 Term borrowings - new market tax credit investment   18,000   -   -   17,685   17,685 
 Borrowings secured by residential real estate   310,833   -   -   268,249   268,249 
 Other long term borrowings   1,365,198   -   1,372,646   -   1,372,646 
Total term borrowings 1,739,859   -   1,372,646   332,934   1,705,580 
                   
Derivative liabilities (a) 154,280   4,343  147,022  2,915  154,280 
          
Other noninterest-bearing liabilities                 
 Capital markets payables    21,173   -   21,173   -   21,173 
 Accrued interest payable    23,813   -   23,813   -   23,813 
Total other noninterest-bearing liabilities    44,986   -   44,986   -   44,986 
Total liabilities  $ 20,708,997 $ 4,343 $ 20,349,764 $ 335,849 $ 20,689,956 

      December 31, 2012 
    Book Fair Value 
(Dollars in thousands)  Value Level 1 Level 2 Level 3 Total 
Assets:                 
Loans, net of unearned income and allowance for loan losses                 
 Commercial:                 
  Commercial, financial and industrial  $8,700,765 $ - $ - $ 8,546,446 $ 8,546,446 
  Commercial real estate   1,148,238   -   -   1,114,187   1,114,187 
 Retail:                 
  Consumer real estate 5,559,754   -   -   4,993,192   4,993,192 
  Permanent mortgage 740,655   -   -   617,385   617,385 
  Credit card & other   282,207   -   -   283,830   283,830 
Total loans, net of unearned income and allowance for loan losses   16,431,619   -   -   15,555,040   15,555,040 
          
Short-term financial assets                 
 Total interest-bearing cash    353,373   353,373   -   -   353,373 
 Federal funds sold  34,492   -   34,492   -   34,492 
 Securities purchased under agreements to resell   601,891   -   601,891   -   601,891 
Total short-term financial assets    989,756   353,373   636,383   -   989,756 
          
Trading securities (a) 1,262,720   -   1,244,728  17,992  1,262,720 
Loans held-for-sale (a) 401,937   -   26,251  375,686  401,937 
Securities available-for-sale (a) (b) 3,061,808   15,277   2,839,545  206,986  3,061,808 
Derivative assets (a) 292,472   1,850   290,622   -  292,472 
          
Other assets                 
 Tax credit investments   76,501   -   -   76,501   76,501 
 Deferred compensation assets   22,477   22,477   -   -   22,477 
Total other assets    98,978   22,477   -   76,501   98,978 
          
Nonearning assets                 
 Cash & due from banks    469,879   469,879   -   -   469,879 
 Capital markets receivables    117,772   -   117,772   -   117,772 
 Accrued interest receivable    72,779   -   72,779   -   72,779 
Total nonearning assets    660,430   469,879   190,551   -   660,430 
Total assets  $ 23,199,720 $ 862,856 $ 5,228,080 $ 16,232,205 $ 22,323,141 
                     
Liabilities:                 
Deposits:                 
 Defined maturity  $1,523,428 $ - $ 1,556,020 $ - $ 1,556,020 
 Undefined maturity   15,106,281   -   15,106,281   -   15,106,281 
Total deposits   16,629,709   -   16,662,301   -   16,662,301 
                   
Trading liabilities (a) 564,429   -   564,429   -  564,429 
                   
Short-term financial liabilities                 
 Federal funds purchased  1,351,023   -   1,351,023   -   1,351,023 
 Securities sold under agreements to repurchase   555,438   -   555,438   -   555,438 
 Total other borrowings   441,201   -   430,045   11,156   441,201 
Total short-term financial liabilities   2,347,662   -   2,336,506   11,156   2,347,662 
                   
Term borrowings                 
 Real estate investment trust-preferred   45,760   -   -   42,300   42,300 
 Term borrowings - new market tax credit investment   18,000   -   -   18,835   18,835 
 Borrowings secured by residential real estate   390,182   -   -   231,041   231,041 
 Other long term borrowings   1,772,540   -   1,729,527   -   1,729,527 
Total term borrowings 2,226,482   -   1,729,527   292,176   2,021,703 
                   
Derivative liabilities (a) 202,269  2,546  197,548  2,175  202,269 
          
Other noninterest-bearing liabilities                 
 Capital markets payables    110,329   -   110,329   -   110,329 
 Accrued interest payable    28,114   -   28,114   -   28,114 
Total other noninterest-bearing liabilities    138,443   -   138,443   -   138,443 
Total liabilities  $ 22,108,994 $ 2,546 $ 21,628,754 $ 305,507 $ 21,936,807 
                   
Certain previously reported amounts have been reclassified to agree with current presentations.  

 Contractual Amount Fair Value 
(Dollars in thousands)December 31, 2013 December 31, 2012 December 31, 2013 December 31, 2012 
Unfunded Commitments:            
Loan commitments$8,836,656 $7,993,218 $1,923 $1,765 
Standby and other commitments 318,149  367,785  4,653  4,933 

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