Note 16 - Fair Value of Assets & Liabilities

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

•

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

•

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

•

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.

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

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of September 30, 2011:


	September 30, 2011
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Trading securities - capital markets:
U.S. treasuries		$-		$102,054		$-		$102,054
Government agency issued MBS		-		374,691		-		374,691
Government agency issued CMO		-		189,044		-		189,044
Other U.S. government agencies		-		193,021		-		193,021
States and municipalities		-		28,229		-		28,229
Corporate and other debt		-		312,399		5		312,404
Total trading securities - capital markets		-		1,199,438		5		1,199,443

Trading securities - mortgage banking
Principal only		-		8,585		-		8,585
Interest only		-		-		19,168		19,168
Total trading securities - mortgage banking		-		8,585		19,168		27,753

Loans held for sale		-		10,468		206,852		217,320

Securities available for sale:
U.S. treasuries		-		40,189		-		40,189
Government agency issued MBS		-		1,514,960		-		1,514,960
Government agency issued CMO		-		1,510,175		-		1,510,175
Other U.S. government agencies		-		11,565		6,366		17,931
States and municipalities		-		17,865		1,500		19,365
Corporate and other debt		528		-		-		528
Venture capital		-		-		13,179		13,179
Equity, mutual funds, and other		13,260		-		-		13,260
Total securities available for sale		13,788		3,094,754		21,045		3,129,587

Mortgage servicing rights		-		-		150,803		150,803

Other assets:
Deferred compensation assets		24,414		-		-		24,414
Derivatives, forwards and futures		37,431		-		-		37,431
Derivatives, interest rate contracts		-		347,266		-		347,266
Derivatives, other		-		62		-		62
Total other assets		61,845		347,328		-		409,173
Total assets		$75,633		$4,660,573		$397,873		$5,134,079

Trading liabilities - capital markets:
U.S. treasuries		$-		$281,174		$-		$281,174
Government agency issued MBS		-		13		-		13
Government agency issued CMO				1,604		-		1,604
Other U.S. government agencies		-		1,649		-		1,649
States and municipalities		-		1,379		-		1,379
Corporate and other debt		-		185,301		-		185,301
Total trading liabilities - capital markets		-		471,120		-		471,120

Other short-term borrowings and commercial paper		-		-		15,814		15,814

Other liabilities:
Derivatives, forwards and futures		18,377		-		-		18,377
Derivatives, interest rate contracts		-		242,871		-		242,871
Derivatives, other		-		-		3,656		3,656
Total other liabilities		18,377		242,871		3,656		264,904
Total liabilities		$18,377		$713,991		$19,470		$751,838

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis at September 30, 2010:


	September 30, 2010
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Trading securities - capital markets:
U.S. treasuries		$ -		$43,969		$ -		$43,969
Government agency issued MBS		-		397,287		-		$397,287
Government agency issued CMO		-		214,966		-		$214,966
Other U.S. government agencies		-		124,736		-		$124,736
States and municipalities		-		28,430		-		$28,430
Corporate and other debt		-		366,864		34		$366,898
Equity, mutual funds, and other		-		1,479		-		$1,479
Total trading securities - capital markets		-		1,177,731		34		1,177,765

Trading securities - mortgage banking
Principal only		-		10,721		-		10,721
Interest only		-		-		26,108		26,108
Total trading securities - mortgage banking		-		10,721		26,108		36,829

Loans held for sale		-		63,929		215,713		279,642

Securities available for sale:
U.S. treasuries		-		68,585		-		68,585
Government agency issued MBS		-		1,000,035		-		1,000,035
Government agency issued CMO		-		1,161,636		-		1,161,636
Other U.S. government agencies		-		16,687		87,895		104,582
States and municipalities		-		40,160		1,500		41,660
Corporate and other debt		552		-		-		552
Venture capital		-		-		13,179		13,179
Equity, mutual funds, and other		13,638		9,360		-		22,998
Total securities available for sale		14,190		2,296,463		102,574		2,413,227

Mortgage servicing rights		-		-		191,943		191,943

Other assets:
Deferred compensation assets		25,362		-		-		25,362
Derivatives, forwards and futures		9,903		-		-		9,903
Derivatives, interest rate contracts		-		349,633		-		349,633
Total other assets		35,265		349,633		-		384,898
Total assets		$49,455		$3,898,477		$536,372		$4,484,304

Trading liabilities - capital markets:
U.S. treasuries		$ -		$231,249		$ -		$231,249
Government agency issued MBS		-		5,542		-		5,542
Government agency issued CMO		-		5,815				5,815
Other U.S. government agencies		-		1,736		-		1,736
Corporate and other debt		-		170,324		-		170,324
Total trading liabilities - capital markets		-		414,666		-		414,666

Other short-term borrowings and commercial paper		-		-		21,812		21,812

Other liabilities:
Derivatives, forwards and futures		12,025		-		-		12,025
Derivatives, interest rate contracts		-		239,167		-		239,167
Total other liabilities		12,025		239,167		-		251,192
Total liabilities		$12,025		$653,833		$21,812		$687,670

Changes in Recurring Level 3 Fair Value Measurements

The changes in Level 3 assets and liabilities measured at fair value for the three months ended September 30, 2011 and 2010, on a recurring basis are summarized as follows:


	Three Months Ended September 30, 2011
							Securities available for sale
(Dollars in thousands)	Trading securities ^(a)			Loans held for sale			Investment portfolio ^(b)			Venture Capital			Mortgage servicing rights, net			Net derivative liabilities			Other short-term borrowings and commercial paper
Balance on July 1, 2011		$22,853			$215,870			$8,181			$13,179			$186,958			$(1,270	)		$23,645
Total net gains/(losses) included in:
Net income/(loss)		(750	)		(3,195	)		-			-			(30,800	)		-			(7,831	)
Other comprehensive income		-			-			87			-			-			-			-
Purchases		-			3,408			-			-			-			-			-
Issuances		-			-			-			-			-			(2,500	)		-
Sales		-			-			-			-			-			-			-
Settlements		(2,930	)		(8,586	)		(402	)		-			(5,355	)		114			-
Net transfers in/(out) level 3		-			(645	) ^(f)		-			-			-			-			-
Balance September 30, 2011		$19,173			$206,852			$7,866			$13,179			$150,803			$(3,656	)		$15,814

Net unrealized gains/(losses) included in net income		$ (1,116	) ^(c)		$ (3,195	) ^(c)		$ -			$-	^(d)		$ (30,330	) ^(c)		$-	^(e)		$ (7,831	) ^(c)

	Three Months Ended September 30, 2010
							Securities available for sale
(Dollars in thousands)	Trading securities ^(a)			Loans held for sale			Investment portfolio ^(b)			Venture Capital			Mortgage servicing rights, net			Other short-term borrowings and commercial paper
Balance on July 1, 2010		$28,898			$209,748			$90,995			$16,141			$201,746			$25,886
Total net gains/(losses) included in:
Net income/(loss)		1,110			4,524			-			(2,962	)		(529	)		(4,074)
Other comprehensive income		-			-			3,073			-			-			-
Purchases, sales, issuances, and settlements, net		(3,866	)		1,441			(4,673	)		-			(9,274	)		-
Balance September 30, 2010		$26,142			$215,713			$89,395			$13,179			$191,943			$21,812

Net unrealized gains/(losses) included in net income		$248	^(c)		$4,524	^(c)		$ -			$ (2,962	) ^(d)		$ (299	) ^(c)		$(4,074	) ^(c)

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

(a)	Primarily represents certificated interest only strips and excess interest mortgage banking trading securities. Capital markets Level 3 trading securities are not significant.

(b)	Primarily represents other U.S. government agencies. States and municipalities are not significant.

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

(d)	Represents recognized gains and losses attributable to venture capital investments classified within securities AFS that are included in securities gains/(losses) in noninterest income.

(e)	Included in Other expense.

(f)	Transfers out of recurring level 3 balances reflect movements out of loans held for sale and into real estate acquired by foreclosure (level 3 nonrecurring).

Changes in Recurring Level 3 Fair Value Measurements

The changes in Level 3 assets and liabilities measured at fair value for the nine months ended September 30, 2011 and 2010, on a recurring basis are summarized as follows:


	Nine Months Ended September 30, 2011
							Securities available for sale
(Dollars in thousands)	Trading securities ^(a)			Loans held for sale			Investment portfolio ^(b)			Venture Capital			Mortgage servicing rights, net			Net derivative liabilities			Other short-term borrowings and commercial paper
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/(loss)		2,183			1,928			-			-			(38,159	)		(1,132	)		(11,495	)
Other comprehensive income		-			-			(1,601	)		-			-			-			-
Purchases		-			42,528			-			-			-			-			-
Issuances		-			-			-			-			-			(2,500	)		-
Sales		(132	)		-			(29,217	)		-			-			-			-
Settlements		(9,356	)		(42,509	)		(707	)		-			(18,357	)		976			-
Net transfers in/(out) level 3		-			(2,727	) ^(f)		-			-			-			-			-
Balance September 30, 2011		$19,173			$206,852			$7,866			$13,179			$150,803			$(3,656)			$15,814

Net unrealized gains/(losses) included in net income		$944	^(c)		$1,928	^(c)		$-			$-	^(d)		$ (37,378	) ^(c)		$ (1,132	) ^(e)		$ (11,495	) ^(c)

	Nine Months Ended September 30, 2010
							Securities available for sale
(Dollars in thousands)	Trading securities ^(a)			Loans held for sale			Investment portfolio ^(b)			Venture Capital			Mortgage servicing rights, net			Other short-term borrowings and commercial paper
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/(loss)		4,272			6,166			-			(2,962	)		(57,885	)		(17,850	)
Other comprehensive income		-			-			3,024			-			-			-
Purchases, sales, issuances, and settlements, net		(29,486	)		3,320			(12,802	)		398			(50,490	)		-
Balance on September 30, 2010		$26,142			$215,713			$89,395			$13,179			$191,943			$21,812

Net unrealized gains/(losses) included in net income		$2,934	^(c)		$ 6,166	^(c)		$ -			$ (2,962	) ^(d)		$ (55,066	) ^(c)		$ (17,850	) ^(c)

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

(a)	Primarily represents certificated interest only strips and excess interest mortgage banking trading securities. Capital markets Level 3 trading securities are not significant.

(b)	Primarily represents other U.S. government agencies. States and municipalities are not significant.

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

(d)	Represents recognized gains and losses attributable to venture capital investments classified within securities AFS that are included in securities gains/(losses) in noninterest income.

(e)	Included in Other expense.

(f)	Transfers out of recurring level 3 balances reflect movements out of loans held for sale and into real estate acquired by foreclosure (level 3 nonrecurring).

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 September 30, 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.


	Carrying value at September 30, 2011								Three Months Ended September 30, 2011			Nine Months Ended September 30, 2011
(Dollars in thousands)	Level 1		Level 2		Level 3		Total		Net gains/(losses)			Net gains/(losses)
Loans held for sale - SBAs		$-		$46,592		$-		$46,592		$-			$(2	)
Loans held for sale - first mortgages		-		-		13,160		13,160		(3,889	)		(8,506	)
Loans, net of unearned income ^(a)		-		-		135,667		135,667		(20,130	)		(37,890	)
Real estate acquired by foreclosure ^(b)		-		-		80,055		80,055		(4,350	)		(14,001	)
Other assets^(c)		-		-		75,129		75,129		(3,434	)		(7,790	)
										$(31,803	)		$(68,189	)

	Carrying value at September 30, 2010								Three Months Ended September 30, 2010			Nine Months Ended September 30, 2010
(Dollars in thousands)	Level 1		Level 2		Level 3		Total		Net gains/(losses)			Net gains/(losses)
Loans held for sale - SBAs		$-		$12,000		$-		$12,000		$12			$60
Loans held for sale - first mortgages		-		-		17,887		17,887		(1,032	)		(4,560	)
Loans, net of unearned income ^(a)		-		-		222,577		222,577		(27,535	)		(127,983	)
Real estate acquired by foreclosure ^(b)		-		-		139,359		139,359		(4,562	)		(13,938	)
Other assets^(c)		-		-		93,446		93,446		(2,687	)		(7,905	)
										$(35,804	)		$(154,326	)

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

(a)	Represents carrying value of loans for which adjustments are based on the appraised value of the collateral. Write-downs on these loans are recognized as part of provision.

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

(c)	Represents low income housing investments.

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 second quarter 2011, FHN exercised a clean up call on a first lien mortgage proprietary securitization trust. 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 and lower credit risk associated with the loans in comparison to more currently originated loans being sold. This resulted in recognition of an immaterial premium for the called loans.

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 lower of cost or market 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 Condensed 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.

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 and commercial paper in the Consolidated Condensed Statements of Condition as of September 30, 2011 and 2010. 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 table reflects 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.


	September 30, 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		$217,320		$294,411		$(77,091	)
Nonaccrual loans		40,178		84,216		(44,038	)
Loans 90 days or more past due and still accruing		12,205		27,260		(15,055	)


	September 30, 2010
(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		$279,642		$337,525		$(57,883	)
Nonaccrual loans		28,195		55,486		(27,291	)
Loans 90 days or more past due and still accruing		17,007		40,264		(23,257	)

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


	Three Months Ended September 30						Nine Months Ended September 30
(Dollars in thousands)	2011			2010			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		(3,195	)		4,524			1,928			6,166
Other short-term borrowings and commercial paper		(7,831	)		(4,074	)		(11,495	)		(17,850	)

For the three months ended September 30, 2011 and 2010, the amounts for loans held for sale include losses of $1.6 million and $3.5 million, respectively, included in pretax earnings that are attributable to changes in instrument-specific credit risk. For the nine months ended September 30, 2011 and 2010, the amounts for loans held for sale include losses of $6.9 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 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 Condensed Statements of Income as interest on loans held for sale.

Determination of Fair Value

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

Short-term financial assets. Federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with other financial institutions 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 (structured as interest-only strips) and principal-only strips. Excess interest represents rights to receive interest from serviced assets that exceed contractually specified rates and principal-only strips are principal cash flow tranches. All financial assets retained from a securitization are recognized on the Consolidated Condensed Statements of Condition in trading securities at fair value with realized and unrealized gains and losses included in current earnings as a component of noninterest income on the Consolidated Condensed Statements of Income.

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 observable inputs such as trades of similar instruments, yield curves, credit spreads, and consensus 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.

Stock held in the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical cost in the Consolidated Condensed Statements of Condition which is considered to approximate fair value. Short-term investments in mutual funds are measured at the funds' reported closing net asset values. Venture capital investments are typically measured using significant internally generated inputs including adjustments to referenced transaction values 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 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, 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.

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 are limited market data 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 used to hedge the value of servicing assets is based on current transactions involving identical securities. These 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. 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 sale of a portion of its Visa Class B shares in December 2010 and September 2011, FHN and the purchaser entered into derivative transactions whereby FHN will make, or receive, cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. 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 requires application of judgment in developing significant unobservable inputs used to determine the possible outcomes and the probability weighting assigned to each scenario, these derivatives have been classified within Level 3 in fair value measurements disclosures.

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 assurance 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 investments in low income housing partnerships and deferred compensation assets that are considered financial assets. Investments in low income housing partnerships 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 and commercial paper 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 and commercial paper includes 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 September 30, 2011 and 2010, 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 Condensed Statements of Condition as well as unfunded commitments as of September 30, 2011 and 2010.

September 30, 2011

September 30, 2010

(Dollars in thousands)

Book

Value

Fair

Value

Book

Value

Fair

Value

Assets:

Loans, net of unearned income and allowance for loan losses

$15,791,757

$15,083,851

$16,339,590

$15,570,548

Short-term financial assets

1,077,937

868,876

Trading securities

1,227,197

1,214,595

Loans held for sale

386,147

414,259

Securities available for sale

3,327,846

2,611,460

Derivative assets

384,759

359,535

Other assets

99,543

118,808

Nonearning assets

952,045

985,308

Liabilities:

Deposits:

Defined maturity

$1,721,882

$1,770,342

$2,058,138

$2,126,749

Undefined maturity

13,976,373

12,917,782

Total deposits

15,698,255

15,746,715

14,975,920

15,044,531

Trading liabilities

471,120

414,666

Short-term financial liabilities

2,723,951

2,632,903

Term borrowings

2,509,806

2,222,021

2,805,732

2,486,425

Derivative liabilities

264,904

251,192

Other noninterest-bearing liabilities

554,302

422,395

Contractual
Amount

Fair

Value

Contractual
Amount

Fair

Value

Unfunded Commitments:

Loan commitments

$7,417,606

$1,419

$7,737,043

$1,134

Standby and other commitments

373,335

6,370

503,926

5,891