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, 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

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of December 31, 2011:

			December 31, 2011
(Dollars in thousands)			Level 1		Level 2		Level 3		Total
Trading securities - capital markets:
	U.S. treasuries		$	-	$	53,656	$	-	$	53,656
	Government agency issued MBS			-		314,002		-		314,002
	Government agency issued CMO			-		129,270		-		129,270
	Other U.S. government agencies			-		173,982		-		173,982
	States and municipalities			-		24,525		-		24,525
	Corporate and other debt			-		265,926		5		265,931
	Equity, mutual funds, and other			-		746		-		746
		Total trading securities - capital markets		-		962,107		5		962,112
Trading securities - mortgage banking
	Principal only			-		8,052		-		8,052
	Interest only			-		-		18,054		18,054
		Total trading securities - mortgage banking		-		8,052		18,054		26,106
Loans held-for-sale				-		10,902		210,487		221,389
Securities available for sale:
	U.S. treasuries			-		40,121		-		40,121
	Government agency issued MBS			-		1,410,228		-		1,410,228
	Government agency issued CMO			-		1,357,943		-		1,357,943
	Other U.S. government agencies			-		10,189		5,762		15,951
	States and municipalities			-		16,570		1,500		18,070
	Corporate and other debt			529		-		-		529
	Venture capital			-		-		12,179		12,179
	Equity, mutual funds, and other			13,261		-		-		13,261
		Total securities available-for-sale		13,790		2,835,051		19,441		2,868,282
Mortgage servicing rights				-		-		144,069		144,069
Other assets:
	Deferred compensation assets			22,796		-		-		22,796
	Derivatives, forwards and futures			39,733		-		-		39,733
	Derivatives, interest rate contracts			-		326,566		-		326,566
	Derivatives, other			-		2		-		2
		Total other assets		62,529		326,568		-		389,097
		Total assets	$	76,319	$	4,142,680	$	392,056	$	4,611,055
Trading liabilities - capital markets:
	U.S. treasuries		$	-	$	190,725	$	-	$	190,725
	Government agency issued MBS			-		736		-		736
	Corporate and other debt			-		155,824		-		155,824
		Total trading liabilities - capital markets		-		347,285		-		347,285

Other short-term borrowings				-		-		14,833		14,833
Other liabilities:
	Derivatives, forwards and futures			7,243		-		-		7,243
	Derivatives, interest rate contracts			-		234,204		-		234,204
	Derivatives, other			-		1		11,820		11,821
		Total other liabilities		7,243		234,205		11,820		253,268
		Total liabilities	$	7,243	$	581,490	$	26,653	$	615,386

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, 2012, 2011, and 2010, on a recurring basis are summarized as follows:

			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				liabilities				borrowings
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, net				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)

				Twelve Months Ended December 31, 2010
										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, 2010			$	56,132			$	206,227			$	99,173	$	15,743			$	302,611			$	-			$	(39,662)
Adjustment due to adoption of amendments to ASC 810				(4,776)				-				-		-				(2,293)				-				-
	Total net gains/(losses) included in:
		Net income		8,627				(17,991)				-		(2,962)				(31,146)				-				12,353
		Other comprehensive income		-				-				(2,302)		-				-				-				-
Purchases, sales, issuances, and settlements, net				(33,505)				19,396	(c)			(57,480)		398				(61,853)				(1,000)				-
Balance on December 31, 2010			$	26,478			$	207,632			$	39,391	$	13,179			$	207,319			$	(1,000)			$	(27,309)
Net unrealized gains/(losses) included in net income			$	5,467	(a)		$	(17,991)	(a)		$	-	$	(2,962)	(b)		$	(27,153)	(a)		$	(1,000)	(d)		$	(12,353)	(a)

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

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.

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, 2012, 2011, and 2010, 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, 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)


									Twelve Months Ended
	Carrying value at December 31, 2010								December 31, 2010
(Dollars in thousands)	Level 1		Level 2		Level 3		Total		Net gains/(losses)
Loans held-for-sale - SBAs	$	-	$	10,456	$	-	$	10,456	$	60
Loans held-for-sale - first mortgages		-		-		15,289		15,289		(7,249)
Loans, net of unearned income (a)		-		-		213,974		213,974		(156,572)
Real estate acquired by foreclosure (b)		-		-		110,536		110,536		(18,097)
Other assets (c)		-		-		87,667		87,667		(11,145)
									$	(193,003)

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 non-observable 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 third quarter 2012, second quarter 2011, and fourth quarter 2010, 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 2002 and 2003 vintages, 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 each transaction.

Level 3 Measurements
The following table provides information regarding the unobservable inputs utilized in determining the fair value of level 3 recurring and non-recurring measurements as of December 31, 2012:

(Dollars in Thousands)
	Fair Value at
Level 3 Class	December 31, 2012		Valuation Techniques	Unobservable Input	Values Utilized
Trading securities - mortgage	$	17,987	Discounted cash flow	(a)	(a)
Loans held-for-sale - mortgages		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 and delinquency penalty adjustments are significant unobservable inputs used in the fair value measurement of FHN's 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. 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 function and the Credit Risk Management Committee reviews valuation 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 expected 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.

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.

In second quarter 2010, capital markets acquired a pool of conforming mortgage loans having a fair value carrying amount of $621.6 million with the intent to transfer the loans to a counterparty during third quarter of 2010. As part of this transaction, capital markets entered into forward delivery contracts to economically hedge the value of the loans. FHN elected to recognize the loans at fair value and classified them as trading loans within trading securities in the Consolidated Statements of Condition as of June 30, 2010. For the loans acquired in second quarter 2010, delivery of the loans and the related settlement of the forward delivery contracts occurred in third quarter 2010.

Prior to 2010, FHN transferred certain servicing assets in transactions that did not qualify for sale treatment due to certain recourse provisions. The associated proceeds are recognized within other short-term borrowings in the Consolidated Statements of Condition for all periods presented. Since the servicing assets are recognized at fair value and changes in the fair value of the related financing liabilities will exactly mirror 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 have already been delivered to the buyer, the fair value of the financing liabilities associated with the transaction does not reflect any instrument-specific credit risk.

The following tables reflect the differences between the fair value carrying amount of mortgages 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, 2012
(Dollars in thousands)		Fair value carrying amount		Aggregate unpaid principal		Fair value carrying amount less aggregate unpaid principal
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)

		December 31, 2011
(Dollars in thousands)		Fair value carrying amount		Aggregate unpaid principal		Fair value carrying amount less aggregate unpaid principal
Loans held-for-sale reported at fair value:
	Total loans	$	221,389	$	307,990		$	(86,601)
	Nonaccrual loans		42,471		93,997			(51,526)
	Loans 90 days or more past due and still accruing		11,486		24,755			(13,269)

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)				2012		2011		2010
Changes in fair value included in net income:
	Capital markets noninterest income
		Trading loans	$	-	$	-	$	11,752
	Mortgage banking noninterest income
		Loans held-for-sale		(2,618)		(368)		(17,991)
		Other short-term borrowings		3,677		12,476		(12,353)

For the twelve months ended December 31, 2012, 2011, and 2010, the amounts for loans held-for-sale include losses of $1.8 million, $6.2 million, and $19.5 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 mortgage 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.

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 securities also include retained interests in prior securitizations that qualify as financial assets, which primarily include excess interest (structured as 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.

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 certain loans within the mortgage warehouse using a discounted cash flow model using observable inputs, including current mortgage rates for similar products, with adjustments for differences in loan characteristics reflected in the model's discount rates. For all other loans held in the warehouse, the fair value of loans whose principal market is the securitization market is based on recent security trade prices for similar products with a similar delivery date, with necessary pricing adjustments to convert the security price to a loan price. Loans whose principal market is the whole loan market are priced based on recent observable whole loan trade prices or published third party bid prices for similar product, with necessary pricing adjustments to reflect differences in loan characteristics. Typical adjustments to security prices for whole loan prices include adding the value of MSR to the security price or to the whole loan price if FHN's mortgage loan is servicing retained, adjusting for interest in excess of (or less than) the required coupon or note rate, adjustments to reflect differences in the characteristics of the loans being valued as compared to the collateral of the security or the loan characteristics in the benchmark whole loan trade, adding interest carry, reflecting the recourse obligation that will remain after sale, and adjusting for changes in market liquidity or interest rates if the benchmark security or loan price is not current. Additionally, loans that are delinquent or otherwise significantly aged are discounted to reflect the less marketable nature of these loans.

Loans held-for-sale also includes loans made by the Small Business Administration (“SBA”). 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-mortgage 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.

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, 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. Other short-term borrowings include a liability associated with transfers of mortgage servicing rights that did not qualify for sale accounting. This liability is accounted for at elected fair value, which is 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, 2012 and 2011, 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 table summarizes 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, 2012 and 2011. As of December 31, 2012, the table includes disclosure of fair value by level for each class of asset and liability not recorded at fair value.

				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
			Income CRE		1,094,020		-		-		1,059,979		1,059,979
			Residential CRE		54,218		-		-		54,208		54,208
	Retail:
		Consumer real estate (a)			5,559,754		-		-		4,993,192		4,993,192
		Permanent mortgage (a)			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
	Total federal funds sold & securities purchased under agreements to resell				636,383		-		636,383		-		636,383
Total short-term financial assets					989,756		353,373		636,383		-		989,756

Trading securities (b)					1,262,720		-		1,244,728		17,992		1,262,720
Loans held-for-sale (b)					401,937		-		26,251		375,686		401,937
Securities available-for-sale (b)(c)					3,061,808		15,277		2,839,545		206,986		3,061,808
Derivative assets (b)					292,472		1,850		290,622		0		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				303,893		-		303,893		-		303,893
	Accrued interest receivable				72,779		-		72,779		-		72,779
Total nonearning assets					846,551		469,879		376,672		-		846,551
Total assets				$	23,385,841	$	862,856	$	5,414,201	$	16,232,205	$	22,509,262

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 (b)					564,429		-		564,429		-		564,429

Short-term financial liabilities
	Total federal funds purchased & securities sold under agreements to repurchase				1,906,461		-		1,906,461		-		1,906,461
	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 (b)					202,269		2,546		197,548		2,175		202,269

Other noninterest-bearing liabilities
	Capital markets payables				296,450		-		296,450		-		296,450
	Accrued interest payable				28,114		-		28,114		-		28,114
Total other noninterest-bearing liabilities					324,564		-		324,564		-		324,564
Total liabilities				$	22,295,115	$	2,546	$	21,814,875	$	305,507	$	22,122,928

		December 31, 2011
		Book		Fair
(Dollars in thousands)		Value		Value
Assets:
Loans, net of unearned income and allowance for loan losses		$	16,012,776	$	15,210,592
Short-term financial assets			896,444		896,444
Trading securities			988,217		988,217
Loans held-for-sale			431,897		431,897
Securities available-for-sale			3,066,272		3,066,272
Derivative assets			366,301		366,301
Other assets			114,039		114,039
Nonearning assets			628,440		628,440
Liabilities:
Deposits:
	Defined maturity	$	1,781,893	$	1,821,457
	Undefined maturity		14,431,116		14,431,116
Total deposits			16,213,009		16,252,573
Trading liabilities			347,285		347,285
Short-term financial liabilities			2,059,602		2,059,602
Term borrowings			2,481,660		2,182,061
Derivative liabilities			253,268		253,268
Other noninterest-bearing liabilities			195,208		195,208