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 June 30, 2012:

			June 30, 2012
(Dollars in thousands)			Level 1		Level 2		Level 3		Total
Trading securities - capital markets:
	U.S. treasuries		$	-	$	115,210	$	-	$	115,210
	Government agency issued MBS			-		469,805		-		469,805
	Government agency issued CMO			-		125,404		-		125,404
	Other U.S. government agencies			-		275,756		-		275,756
	States and municipalities			-		46,596		-		46,596
	Corporate and other debt			-		295,051		5		295,056
	Equity, mutual funds, and other			-		9,732		-		9,732
		Total trading securities - capital markets		-		1,337,554		5		1,337,559
Trading securities - mortgage banking
	Principal only			-		5,667		-		5,667
	Interest only			-		-		14,900		14,900
		Total trading securities - mortgage banking		-		5,667		14,900		20,567
Loans held-for-sale				-		8,923		214,560		223,483
Securities available for sale:
	U.S. treasuries			-		39,996		-		39,996
	Government agency issued MBS			-		1,383,724		-		1,383,724
	Government agency issued CMO			-		1,589,376		-		1,589,376
	Other U.S. government agencies			-		8,492		4,661		13,153
	States and municipalities			-		16,470		1,500		17,970
	Corporate and other debt			521		-		-		521
	Venture capital			-		-		9,000		9,000
	Equity, mutual funds, and other			13,263		-		-		13,263
		Total securities available-for-sale		13,784		3,038,058		15,161		3,067,003
Mortgage servicing rights				-		-		129,291		129,291
Other assets:
	Deferred compensation assets			22,645		-		-		22,645
	Derivatives, forwards and futures			22,523		-		-		22,523
	Derivatives, interest rate contracts			-		318,287		-		318,287
		Total other assets		45,168		318,287		-		363,455
		Total assets	$	58,952	$	4,708,489	$	373,917	$	5,141,358
Trading liabilities - capital markets:
	U.S. treasuries		$	-	$	260,547	$	-	$	260,547
	Government agency issued MBS			-		473		-		473
	Other U.S. government agencies			-		27,152		-		27,152
	Corporate and other debt			-		182,209		-		182,209
	Other			-		250		-		250
		Total trading liabilities - capital markets		-		470,631		-		470,631
Other short-term borrowings				-		-		12,439		12,439

Other liabilities:
	Derivatives, forwards and futures			7,430		-		-		7,430
	Derivatives, interest rate contracts			-		224,546		-		224,546
	Derivatives, other			-		9		3,505		3,514
		Total other liabilities		7,430		224,555		3,505		235,490
		Total liabilities	$	7,430	$	695,186	$	15,944	$	718,560

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

			June 30, 2011
(Dollars in thousands)			Level 1		Level 2		Level 3		Total
Trading securities - capital markets:
	U.S. treasuries		$	-	$	218,302	$	-	$	218,302
	Government agency issued MBS			-		361,421		-		361,421
	Government agency issued CMO			-		133,841		-		133,841
	Other U.S. government agencies			-		192,643		-		192,643
	States and municipalities			-		19,093		-		19,093
	Corporate and other debt			-		239,205		5		239,210
	Equity, mutual funds, and other			-		247		-		247
		Total trading securities - capital markets		-		1,164,752		5		1,164,757
Trading securities - mortgage banking
	Principal only			-		8,775		-		8,775
	Interest only			-		-		22,848		22,848
		Total trading securities - mortgage banking		-		8,775		22,848		31,623
Loans held-for-sale				-		9,372		215,870		225,242
Securities available for sale:
	U.S. treasuries			-		46,250		-		46,250
	Government agency issued MBS			-		1,501,767		-		1,501,767
	Government agency issued CMO			-		1,423,894		-		1,423,894
	Other U.S. government agencies			-		13,246		6,681		19,927
	States and municipalities			-		17,865		1,500		19,365
	Corporate and other debt			540		-		-		540
	Venture capital			-		-		13,179		13,179
	Equity, mutual funds, and other			7,279		-		-		7,279
		Total securities available-for-sale		7,819		3,003,022		21,360		3,032,201
Mortgage servicing rights				-		-		186,958		186,958
Other assets:
	Deferred compensation assets			25,356		-		-		25,356
	Derivatives, forwards and futures			12,200		-		-		12,200
	Derivatives, interest rate contracts			-		292,476		-		292,476
		Total other assets		37,556		292,476		-		330,032
		Total assets	$	45,375	$	4,478,397	$	447,041	$	4,970,813
Trading liabilities - capital markets:
	U.S. treasuries		$	-	$	331,864	$	-	$	331,864
	Government agency issued MBS			-		238		-		238
	Government agency issued CMO			-		122		-		122
	Other U.S. government agencies			-		6,026		-		6,026
	Corporate and other debt			-		160,665		-		160,665
		Total trading liabilities - capital markets		-		498,915		-		498,915
Other short-term borrowings				-		-		23,645		23,645
Other liabilities:
	Derivatives, forwards and futures			16,509		-		-		16,509
	Derivatives, interest rate contracts			-		194,504		-		194,504
	Derivatives, other			-		6		1,270		1,276
		Total other liabilities		16,509		194,510		1,270		212,289
		Total liabilities	$	16,509	$	693,425	$	24,915	$	734,849

Changes in Recurring Level 3 Fair Value Measurements

The changes in Level 3 assets and liabilities measured at fair value for the three months ended June 30, 2012 and 2011, on a recurring basis are summarized as follows:

			Three Months Ended June 30, 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 April 1, 2012			$	17,386		$	214,603		$	6,594	$	12,179		$	142,956		$	(2,960)		$	(15,073)
	Total net gains/(losses) included in:
		Net income		(99)			1,078			-		5,071			(6,914)			(869)			2,634
		Other comprehensive income		-			-			(4)		-			-			-			-
	Purchases			-			7,740			-		-			-			-			-
	Issuances			-			-			-		-			-			-			-
	Sales			-			-			-		(8,250)			-			-			-
	Settlements			(2,382)			(8,108)			(428)		-			(6,751)			324			-
	Net transfers into/(out of) Level 3			-			(753)	(c)		-		-			-			-			-
Balance on June 30, 2012			$	14,905		$	214,560		$	6,162	$	9,000		$	129,291		$	(3,505)		$	(12,439)
Net unrealized gains/(losses) included in net income			$	(518)	(a)	$	1,078	(a)	$	-	$	-	(b)	$	(6,831)	(a)	$	(869)	(d)	$	2,634	(a)

			Three Months Ended June 30, 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 April 1, 2011			$	25,370		$	209,863			$	8,428	$	13,179		$	207,748		$	(2,100)		$	(27,991)
	Total net gains/(losses) included in:
		Net income		733			(4,069)				-		-			(15,006)			(32)			4,346
		Other comprehensive income		-			-				58		-			-			-			-
	Purchases			-			23,079				-		-			-			-			-
	Issuances			-			-				-		-			-			-			-
	Sales			(132)			-				-		-			-			-			-
	Settlements			(3,118)			(10,519)				(305)		-			(5,784)			862			-
	Net transfers into/(out of) Level 3			-			(2,484)	(c)			-		-			-			-			-
Balance on June 30, 2011			$	22,853		$	215,870			$	8,181	$	13,179		$	186,958		$	(1,270)		$	(23,645)
Net unrealized gains/(losses) included in net income			$	286	(a)	$	(4,069)	(a)		$	-	$	-	(b)	$	(14,802)	(a)	$	(32)	(d)	$	4,346	(a)

Changes in Recurring Level 3 Fair Value Measurements

The changes in Level 3 assets and liabilities measured at fair value for the six months ended June 30, 2012 and 2011, on a recurring basis are summarized as follows:

			Six Months Ended June 30, 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		1,779			1,950			-		5,071			(2,443)			(1,611)			2,394
		Other comprehensive income		-			-			(170)		-			-			-			-
	Purchases			-			19,182			-		-			-			-			-
	Issuances			-			-			-		-			-			-			-
	Sales			-			-			-		(8,250)			-			-			-
	Settlements			(4,933)			(16,160)			(930)		-			(12,335)			9,926			-
	Net transfers into/(out of) Level 3			-			(899)	(c)		-		-			-			-			-
Balance on June 30, 2012			$	14,905		$	214,560		$	6,162	$	9,000		$	129,291		$	(3,505)		$	(12,439)
Net unrealized gains/(losses) included in net income			$	888	(a)	$	1,950	(a)	$	-	$	-	(b)	$	(1,618)	(a)	$	(1,611)	(d)	$	2,394	(a)

			Six Months Ended June 30, 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		2,933			(8,194)			-		-			(7,359)			(1,132)			3,664
		Other comprehensive income		-			-			(1,688)		-			-			-			-
	Purchases			-			39,120			-		-			-			-			-
	Issuances			-			-			-		-			-			-			-
	Sales			(132)			-			(29,217)		-			-			-			-
	Settlements			(6,426)			(19,869)			(305)		-			(13,002)			862			-
	Net transfers into/(out of) Level 3			-			(2,819)	(c)		-		-			-			-			-
Balance on June 30, 2011			$	22,853		$	215,870		$	8,181	$	13,179		$	186,958		$	(1,270)		$	(23,645)
Net unrealized gains/(losses) included in net income			$	2,059	(a)	$	(8,194)	(a)	$	-	$	-	(b)	$	(7,048)	(a)	$	(667)	(d)	$	3,664	(a)

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

From time to time, FHN may be required to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of LOCOM accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis which were still held on the balance sheet at June 30, 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.

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.

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 June 30, 2012:

(Dollars in Thousands)
	Fair Value at
Level 3 Class	June 30, 2012		Valuation Techniques	Unobservable Input	Values Utilized
Interest only trading securities	$	14,900	Discounted cash flow	(a)	(a)
Loans held-for-sale - mortgages		229,251	Discounted cash flow	Prepayment speeds	6% - 10%
Loans held-for-sale - mortgages				Credit spreads	2% - 4%
				Delinquency adjustment factor	15% - 25% added to credit spread
				Loss severity trends	50% - 60% of UPB
Venture capital investments		9,000	Recent purchase offers	Adjustment for preferences in equity tranches	0% - 10% discount
			Recent capitalization transactions	Adjustment for preferences in equity tranches	0% - 10% discount
Mortgage servicing rights		129,291	Discounted cash flow	(a)	(a)
Other short-term borrowings		12,439	Discounted cash flow	(b)	(b)
Derivative liabilities, other		3,505	Discounted cash flow	Visa covered litigation resolution amount	$4.3 billion - $5.1 billion
				Probability of resolution scenarios	10%-30%
				Time until resolution	3 - 12 months
Loans, net of unearned income (c)		106,864	Appraisals from comparable properties	Adjustment for value changes since appraisal	5% - 15% 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)		48,916	Appraisals from comparable properties	Adjustment for value changes since appraisal	0% - 10% of appraisal
Other assets (e)		82,287	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 Asset Liability Committee.

Venture capital investments. The unobservable inputs used in the estimation of fair value for Venture capital investments are adjustments to recent purchase offers and adjustments to recently observed capitalization transactions. For both inputs, the adjustments are made to reflect the nature of equity tranches held by FHN in relation to the overall valuation as well as for changes in economic events occurring since the time of the offer or transaction. Given the status of FHN's priority in the equity tranches of its venture capital investments, adjustments are made to decrease the estimated fair value of the investments in relation to the observed offer or transaction. 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 investments in low income housing partnerships and new market tax credit LLCs 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.

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 Condensed 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 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.
		June 30, 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	$	223,483	$	311,724	$	(88,241)
	Nonaccrual loans		40,114		87,022		(46,908)
	Loans 90 days or more past due and still accruing		10,350		22,460		(12,110)

		June 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	$	225,242	$	298,681	$	(73,439)
	Nonaccrual loans		40,927		83,372		(42,445)
	Loans 90 days or more past due and still accruing		10,866		21,587		(10,721)

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				Six Months Ended
			June 30				June 30
(Dollars in thousands)			2012		2011		2012		2011
Changes in fair value included in net income:
	Mortgage banking noninterest income
		Loans held-for-sale	$	1,078	$	(4,069)	$	1,950	$	(8,194)
		Other short-term borrowings		2,634		4,346		2,394		3,664

For the three months ended June 30, 2012, and 2011, the amounts for loans held-for-sale include losses of $0.7 million, and $2.8 million, respectively, included in pretax earnings that are attributable to changes in instrument-specific credit risk. For the six months ended June 30, 2012, and 2011, the amounts for loans held-for-sale include gains of $0.4 million and losses of $5.3 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.

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 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. 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 recent capitalization transactions, recent purchase offers, 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, 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 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. 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 counter parties. 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 a portion 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 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, new market tax credit LLCs and deferred compensation assets that are considered financial assets. Investments in low income housing partnerships and new market tax credit LLCs 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 June 30, 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 Condensed Statements of Condition as well as unfunded commitments as of June 30, 2012 and 2011. As of June 30, 2012, the table includes disclosure of fair value by level for each class of asset and liability not recorded at fair value.

				June 30, 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		$	7,870,720		-		-	$	7,649,105	$	7,649,105
		Commercial real estate
			Income CRE		1,195,608		-		-		1,129,205		1,129,205
			Residential CRE		77,013		-		-		69,380		69,380
	Retail:
		Consumer real estate (c)			5,722,144		-		-		5,230,876		5,230,876
		Permanent mortgage (c)			726,595		-		-		626,914		626,914
		Credit card & other			272,632		-		-		273,276		273,276
Total loans, net of unearned income and allowance for loan losses					15,864,712		-		-		14,978,756		14,978,756

Short-term financial assets
	Total interest-bearing cash				484,430		484,430		-		-		484,430
	Total federal funds sold & securities purchased under agreements to resell				525,504		-		525,504		-		525,504
Total short-term financial assets					1,009,934		484,430		525,504		-		1,009,934

Trading securities (a) (d)					1,361,717		-		1,343,221		18,496		1,361,717
Loans held-for-sale (a)					424,051		-		62,730		361,321		424,051
Securities available-for-sale (a) (b)					3,264,866		13,784		3,038,058		213,024		3,264,866
Derivative assets (a)					340,810		22,523		318,287		0		340,810

Other assets
	Low income housing and new market tax credit investments				82,287		-		-		82,287		82,287
	Deferred compensation assets				22,645		22,645		-		-		22,645
Total other assets					104,932		22,645		-		82,287		104,932

Nonearning assets
	Cash & due from banks				330,931		330,931		-		-		330,931
	Capital markets receivables				377,496		-		377,496		-		377,496
	Accrued interest receivable				75,958		-		75,958		-		75,958
Total nonearning assets					784,385		330,931		453,454		-		784,385
Total assets				$	23,155,407	$	874,313	$	5,741,254	$	15,653,884	$	22,269,451

Liabilities:
Deposits:
	Defined maturity			$	1,737,702	$	-	$	1,776,607	$	-	$	1,776,607
	Undefined maturity				14,379,741		-		14,379,741		-		14,379,741
Total deposits					16,117,443		-		16,156,348		-		16,156,348

Trading liabilities (a)					470,631		-		470,631		-		470,631

Short-term financial liabilities
	Total federal funds purchased & securities sold under agreements to repurchase				1,780,990		-		1,780,990		-		1,780,990
	Total other borrowings				1,094,179		-		1,081,740		12,439		1,094,179
Total short-term financial liabilities					2,875,169		-		2,862,730		12,439		2,875,169

Term borrowings
	Real estate investment trust-preferred				45,726		-		-		39,950		39,950
	Term borrowings - new market tax credit investment				15,301		-		-		16,253		16,253
	Borrowings secured by residential real estate				445,298		-		-		356,238		356,238
	Other long term borrowings				1,787,899		-		1,673,360		-		1,673,360
Total term borrowings					2,294,224		-		1,673,360		412,441		2,085,801

Derivative liabilities (a)					235,490		7,430		224,555		3,505		235,490

Other noninterest-bearing liabilities
	Capital markets payables				203,548		-		203,548		-		203,548
	Accrued interest payable				29,928		-		29,928		-		29,928
Total other noninterest-bearing liabilities					233,476		-		233,476		-		233,476
Total liabilities				$	22,226,433	$	7,430	$	21,621,100	$	428,385	$	22,056,915

		June 30, 2011
		Book		Fair
(Dollars in thousands)		Value		Value
Assets:
Loans, net of unearned income and allowance for loan losses		$	15,537,555	$	14,667,125
Short-term financial assets			861,441		861,441
Trading securities			1,196,380		1,196,380
Loans held-for-sale			397,931		397,931
Securities available-for-sale			3,230,477		3,230,477
Derivative assets			304,676		304,676
Other assets			104,409		104,409
Nonearning assets			1,019,589		1,019,589
Liabilities:
Deposits:
	Defined maturity	$	1,791,174	$	1,840,353
	Undefined maturity		14,104,853		14,104,853
Total deposits			15,896,027		15,945,206
Trading liabilities			498,915		498,915
Short-term financial liabilities			2,193,901		2,193,901
Term borrowings			2,502,517		2,301,311
Derivative liabilities			212,289		212,289
Other noninterest-bearing liabilities			498,726		498,726