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 September 30, 2013:

			September 30, 2013
(Dollars in thousands)			Level 1		Level 2		Level 3		Total
Trading securities - capital markets:
	U.S. treasuries		$	-	$	86,986	$	-	$	86,986
	Government agency issued MBS			-		407,876		-		407,876
	Government agency issued CMO			-		90,420		-		90,420
	Other U.S. government agencies			-		149,867		-		149,867
	States and municipalities			-		17,828		-		17,828
	Trading Loans			-		145,505		-		145,505
	Corporate and other debt			-		427,559		5		427,564
	Equity, mutual funds, and other			-		1,374		-		1,374
		Total trading securities - capital markets		-		1,327,415		5		1,327,420
Trading securities - mortgage banking:
	Principal only			-		-		5,096		5,096
	Interest only			-		-		10,618		10,618
		Total trading securities - mortgage banking		-		-		15,714		15,714
Loans held-for-sale				-		-		229,760		229,760
Securities available-for-sale:
	U.S. treasuries			-		39,996		-		39,996
	Government agency issued MBS			-		875,452		-		875,452
	Government agency issued CMO			-		2,025,121		-		2,025,121
	Other U.S. government agencies			-		-		2,528		2,528
	States and municipalities			-		13,655		1,500		15,155
	Venture capital			-		-		4,300		4,300
	Equity, mutual funds, and other			20,267		-		-		20,267
		Total securities available-for-sale		20,267		2,954,224		8,328		2,982,819
Mortgage servicing rights				-		-		116,686		116,686
Other assets:
	Deferred compensation assets			23,193		-		-		23,193
	Derivatives, forwards and futures			16,877		-		-		16,877
	Derivatives, interest rate contracts			-		198,239		-		198,239
		Total other assets		40,070		198,239		-		238,309
		Total assets	$	60,337	$	4,479,878	$	370,493	$	4,910,708
Trading liabilities - capital markets:
	U.S. treasuries		$	-	$	312,315	$	-	$	312,315
	Government agency issued MBS			-		521		-		521
	Government agency issued CMO			-		1,024		-		1,024
	Other U.S. government agencies			-		30,253		-		30,253
	States and municipalities			-		335		-		335
	Corporate and other debt			-		237,953		-		237,953
	Equity, mutual funds, and other			-		3,568		-		3,568
		Total trading liabilities - capital markets		-		585,969		-		585,969

Other short-term borrowings				-		-		11,715		11,715

Other liabilities:
	Derivatives, forwards and futures			9,770		-		-		9,770
	Derivatives, interest rate contracts			-		153,402		-		153,402
	Derivatives, other			-		1		2,745		2,746
		Total other liabilities		9,770		153,403		2,745		165,918
		Total liabilities	$	9,770	$	739,372	$	14,460	$	763,602

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of September 30, 2012:

			September 30, 2012
(Dollars in thousands)			Level 1		Level 2		Level 3		Total
Trading securities - capital markets:
	U.S. treasuries		$	-	$	124,722	$	-	$	124,722
	Government agency issued MBS			-		564,425		-		564,425
	Government agency issued CMO			-		72,340		-		72,340
	Other U.S. government agencies			-		82,736		-		82,736
	States and municipalities			-		31,817		-		31,817
	Corporate and other debt			-		308,309		5		308,314
	Equity, mutual funds, and other			-		811		-		811
		Total trading securities - capital markets		-		1,185,160		5		1,185,165
Trading securities - mortgage banking:
	Principal only			-		5,462		-		5,462
	Interest only			-		-		13,739		13,739
		Total trading securities - mortgage banking		-		5,462		13,739		19,201
Loans held-for-sale				-		10,996		213,639		224,635
Securities available-for-sale:
	U.S. treasuries			-		54,996		-		54,996
	Government agency issued MBS			-		1,271,450		-		1,271,450
	Government agency issued CMO			-		1,554,741		-		1,554,741
	Other U.S. government agencies			-		-		4,202		4,202
	States and municipalities			-		16,470		1,500		17,970
	Corporate and other debt			517		-		-		517
	Venture capital			-		-		9,000		9,000
	Equity, mutual funds, and other			13,277		-		-		13,277
		Total securities available-for-sale		13,794		2,897,657		14,702		2,926,153
Mortgage servicing rights				-		-		120,537		120,537
Other assets:
	Deferred compensation assets			23,301		-		-		23,301
	Derivatives, forwards and futures			14,862		-		-		14,862
	Derivatives, interest rate contracts			-		319,163		-		319,163
		Total other assets		38,163		319,163		-		357,326
		Total assets	$	51,957	$	4,418,438	$	362,622	$	4,833,017
Trading liabilities - capital markets:
	U.S. treasuries		$	-	$	350,434	$	-	$	350,434
	Government agency issued MBS			-		5,125		-		5,125
	Government agency issued CMO			-		8,096		-		8,096
	Other U.S. government agencies			-		4,439		-		4,439
	States and municipalities			-		1,109		-		1,109
	Corporate and other debt			-		146,750		-		146,750
	Equity, mutual funds, and other			-		1,017		-		1,017
		Total trading liabilities - capital markets		-		516,970		-		516,970

Other short-term borrowings				-		-		11,585		11,585
Other liabilities:
	Derivatives, forwards and futures			12,424		-		-		12,424
	Derivatives, interest rate contracts			-		210,320		-		210,320
	Derivatives, other			-		-		2,340		2,340
		Total other liabilities		12,424		210,320		2,340		225,084
		Total liabilities	$	12,424	$	727,290	$	13,925	$	753,639

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, 2013 and 2012, on a recurring basis are summarized as follows:

			Three Months Ended September 30, 2013
										Securities available-for-sale						Mortgage								Other
			Trading			Loans held-				Investment			Venture			servicing				Net derivative				short-term
(Dollars in thousands)			securities			for-sale				portfolio			Capital			rights, net				liabilities				borrowings
Balance on July 1, 2013			$	15,877			$	235,080			$	4,354	$	4,300			$	113,853			$	(2,195)			$	(12,349)
	Total net gains/(losses) included in:
		Net income		1,944				(1,805)				-		-				8,932				(871)				634
		Other comprehensive income /(loss)		-				-				(17)		-				-				-				-
	Purchases			-				12,338				-		-				-				-				-
	Issuances			-				-				-		-				-				-				-
	Sales			-				-				-		-				-				-				-
	Settlements			(2,102)				(11,390)				(309)		-				(6,099)				321				-
	Net transfers into/(out of) Level 3			-				(4,463)	(c)			-		-				-				-				-
Balance on September 30, 2013			$	15,719			$	229,760			$	4,028	$	4,300			$	116,686			$	(2,745)			$	(11,715)
Net unrealized gains/(losses) included in net income			$	1,540	(a)		$	(1,805)	(a)		$	-	$	-	(b)		$	9,107	(a)		$	(871)	(d)		$	634	(a)

			Three Months Ended September 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 July 1, 2012			$	14,905			$	214,560			$	6,162	$	9,000			$	129,291			$	(3,505)			$	(12,439)
	Total net gains/(losses) included in:
		Net income		1,068				(2,799)				-		-				(2,098)				10				854
		Other comprehensive income /(loss)		-				-				(25)		-				-				-				-
	Purchases			-				23,561				-		-				-				-				-
	Issuances			-				-				-		-				-				-				-
	Sales			-				-				-		-				-				-				-
	Settlements			(2,229)				(11,107)				(435)		-				(6,656)				1,155				-
	Net transfers into/(out of) Level 3			-				(10,576)	(c)			-		-				-				-				-
Balance on September 30, 2012			$	13,744			$	213,639			$	5,702	$	9,000			$	120,537			$	(2,340)			$	(11,585)
Net unrealized gains/(losses) included in net income			$	707	(a)		$	(2,799)	(a)		$	-	$	-	(b)		$	(2,181)	(a)		$	10	(d)		$	854	(a)

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

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, 2013 and 2012, on a recurring basis are summarized as follows:

			Nine Months Ended September 30, 2013
											Securities available-for-sale					Mortgage								Other
			Trading			Loans held-				Investment			Venture			servicing				Net derivative				short-term
(Dollars in thousands)			securities			for-sale				portfolio			Capital			rights, net				liabilities				borrowings
Balance on January 1, 2013			$	17,992			$	221,094			$	5,253	$	4,300			$	114,311			$	(2,175)			$	(11,156)
	Total net gains/(losses) included in:
		Net income		4,474				(3,940)				-		-				20,267				(1,522)				(559)
		Other comprehensive income /(loss)		-				-				(93)		-				-				-				-
	Purchases			-				49,847				-		-				-				-				-
	Issuances			-				-				-		-				-				-				-
	Sales			-				-				-		-				-				-				-
	Settlements			(6,747)				(25,990)				(1,132)		-				(17,892)				952				-
	Net transfers into/(out of) Level 3			-				(11,251)	(c)			-		-				-				-				-
Balance on September 30, 2013			$	15,719			$	229,760			$	4,028	$	4,300			$	116,686			$	(2,745)			$	(11,715)
Net unrealized gains/(losses) included in net income			$	3,127	(a)		$	(3,940)	(a)		$	-	$	-	(b)		$	20,424	(a)		$	(1,523)	(d)		$	(559)	(a)

			Nine Months Ended September 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		2,847				(849)				-		5,071				(4,541)				(1,601)				3,248
		Other comprehensive income /(loss)		-				-				(195)		-				-				-				-
	Purchases			-				41,313				-		-				-				-				-
	Issuances			-				-				-		-				-				-				-
	Sales			-				-				-		(8,250)				-				-				-
	Settlements			(7,162)				(21,733)				(1,365)		-				(18,991)				11,081				-
	Net transfers into/(out of) Level 3			-				(15,579)	(c)			-		-				-				-				-
Balance on September 30, 2012			$	13,744			$	213,639			$	5,702	$	9,000			$	120,537			$	(2,340)			$	(11,585)
Net unrealized gains/(losses) included in net income			$	1,595	(a)		$	(849)	(a)		$	-	$	-	(b)		$	(3,800)	(a)		$	(1,601)	(d)		$	3,248	(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 September 30, 2013 and 2012, 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 2013 and third quarter 2012, FHN exercised clean-up calls on first lien mortgage proprietary securitization trusts. In accordance with accounting requirements, FHN initially recognized the associated loans at fair value. Fair value was primarily determined through reference to observable inputs, including current market prices for similar loans. Since these loans were from the 2003 vintage, adjustments were made for the higher yields associated with the loans in comparison to more currently originated loans being sold. This resulted in recognition of an immaterial premium for these transactions.

Level 3 Measurements

The following tables provide information regarding the unobservable inputs utilized in determining the fair value of level 3 recurring and non-recurring measurements as of September 30, 2013 and 2012:

(Dollars in Thousands)
	Fair Value at
Level 3 Class	September 30, 2013		Valuation Techniques	Unobservable Input	Values Utilized
Trading securities - mortgage	$	15,714	Discounted cash flow	(a)	(a)
Loans held-for-sale - mortgages		239,392	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		116,686	Discounted cash flow	(a)	(a)
Other short-term borrowings		11,715	Discounted cash flow	(b)	(b)
Derivative liabilities, other		2,745	Discounted cash flow	Visa covered litigation resolution amount	$4.4 billion - $5.0 billion
				Probability of resolution scenarios	10% - 50%
				Time until resolution	6 - 30 months
Loans, net of unearned income (c)		85,665	Appraisals from comparable properties	Marketability adjustments for specific properties	0% - 10% of appraisal
			Other collateral valuations	Borrowing base certificates adjustment	20% - 50% of gross value
				Financial Statements/Auction Values adjustment	0% - 25% of reported value
Real estate acquired by foreclosure (d)		50,030	Appraisals from comparable properties	Adjustment for value changes since appraisal	0% - 10% of appraisal
Other assets (e)		69,115	Discounted cash flow	Adjustments to current sales yields for specific properties	0% - 15% adjustment to yield
			Appraisals from comparable properties	Marketability adjustments for specific properties	0% - 25% of appraisal

(Dollars in Thousands)
	Fair Value at
Level 3 Class	September 30, 2012		Valuation Techniques	Unobservable Input	Values Utilized
Interest only trading securities	$	13,739	Discounted cash flow	(a)	(a)
Loans held-for-sale - mortgages		227,106	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		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		120,537	Discounted cash flow	(a)	(a)
Other short-term borrowings		11,585	Discounted cash flow	(b)	(b)
Derivative liabilities, other		2,340	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)		128,626	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)		50,589	Appraisals from comparable properties	Adjustment for value changes since appraisal	0% - 10% of appraisal
Other assets (e)		76,822	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 adjustment factors are significant unobservable inputs used in the fair value measurement of FHN's mortgage 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 and Loan Servicing functions (primarily consumer) and the Credit Risk Management Committee reviews valuation methodologies and loss information for reasonableness. Back testing is performed during the year through comparison to ultimate disposition values and is reviewed quarterly within the Credit Risk Management function. Other collateral (receivables, inventory, equipment, etc.) is valued through borrowing base certificates, financial statements and/or auction valuations. These valuations are discounted based on the quality of reporting, knowledge of the marketability/collectability of the collateral and historical disposition rates.

Other assets – tax credit investments. The estimated fair value of tax credit investments is generally determined in relation to the 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.

In third quarter 2013, capital markets acquired a pool of $145.5 million conforming mortgage loans with the intent to transfer the loans to a counterparty during the quarter following the quarter of acquisition. 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 September 30, 2013.

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 tables reflect the differences between the fair value carrying amount of mortgages and trading loans held-for-sale measured at fair value in accordance with management’s election and the aggregate unpaid principal amount FHN is contractually entitled to receive at maturity.
		September 30, 2013
(Dollars in thousands)		Fair value carrying amount		Aggregate unpaid principal		Fair value carrying amount less aggregate unpaid principal
Mortgage loans held-for-sale reported at fair value:
	Total loans	$	229,760	$	379,123		$	(149,363)
	Nonaccrual loans		69,116		147,116			(78,000)
	Loans 90 days or more past due and still accruing		9,046		19,402			(10,356)
Trading loans reported at fair value:
	Total loans		145,505		142,311			3,194

		September 30, 2012
(Dollars in thousands)		Fair value carrying amount		Aggregate unpaid principal		Fair value carrying amount less aggregate unpaid principal
Mortgage loans held-for-sale reported at fair value:
	Total loans	$	224,635	$	330,900		$	(106,265)
	Nonaccrual loans		43,398		92,831			(49,433)
	Loans 90 days or more past due and still accruing		10,481		21,329			(10,848)

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				Nine Months Ended
			September 30				September 30
(Dollars in thousands)			2013		2012		2013		2012
Changes in fair value included in net income:
	Mortgage banking noninterest income
		Loans held-for-sale	$	(1,805)	$	(2,799)	$	(3,940)	$	(849)
		Other short-term borrowings		634		854		(559)		3,248
Changes in fair value included in net income:
	Capital market noninterest income
		Trading loans		1,867		-		1,867		-

For the three months ended September 30, 2013 and 2012, the amounts for mortgage loans held-for-sale include losses of $1.4 million and $.9 million, respectively, included in pretax earnings that are attributable to changes in instrument-specific credit risk. For the nine months ended September 30, 2013 and 2012, the amounts for mortgage loans held-for-sale include immaterial gain and loss of $.4 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 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.

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

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

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

Investments in the stock of the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical cost in the Consolidated 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 industry comparables and discounted cash flows analysis.

Loans held-for-sale. FHN determines the fair value of mortgage loans held-for-sale using a discounted cash flow model which incorporates both observable and unobservable inputs. Typical inputs include contractual cash flow requirements, current mortgage rates for similar products, estimated prepayment rates, credit spreads and delinquency penalty adjustments. Adjustments for delinquency and other differences in loan characteristics are typically reflected in the model's discount rates. Loss severity trends and the value of underlying collateral are also considered in assessing the appropriate fair value for severely delinquent loans and loans in foreclosure.

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

In third quarter 2013, FHN agreed to sell substantially all of its remaining legacy mortgage servicing. FHN used the price in the definitive agreement, as adjusted for the portion of pricing that was not specific to the MSR, as a third-party pricing source in the valuation of the MSR held at September 30, 2013.

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

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

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

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

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

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

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

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

Short-term financial liabilities. The fair value of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings are approximated by the book value. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization. Other short-term borrowings include a liability associated with transfers of MSR 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, 2013 and 2012, involve the use of significant internally-developed pricing assumptions for certain components of these line items. These assumptions are considered to reflect inputs that market participants would use in transactions involving these instruments as of the measurement date. Assets and liabilities that are not financial instruments (including MSR) have not been included in the following table such as the value of long-term relationships with deposit and trust customers, premises and equipment, goodwill and other intangibles, deferred taxes, and certain other assets and other liabilities. Accordingly, the total of the fair value amounts does not represent, and should not be construed to represent, the underlying value of the Company.

The following tables summarize the book value and estimated fair value of financial instruments recorded in the Consolidated Condensed Statements of Condition as well as unfunded commitments as of September 30, 2013 and 2012.

			September 30, 2013
			Book		Fair Value
(Dollars in thousands)			Value		Level 1		Level 2		Level 3		Total
Assets:
Loans, net of unearned income and allowance for loan losses
	Commercial:
		Commercial, financial and industrial	$	7,655,562	$	-	$	-	$	7,502,354	$	7,502,354
		Commercial real estate		1,162,718		-		-		1,115,304		1,115,304
	Retail:
		Consumer real estate		5,337,221		-		-		4,859,306		4,859,306
		Permanent mortgage		672,138		-		-		589,999		589,999
		Credit card & other		325,207		-		-		327,075		327,075
Total loans, net of unearned income and allowance for loan losses				15,152,846		-		-		14,394,038		14,394,038

Short-term financial assets
	Total interest-bearing cash			184,179		184,179		-		-		184,179
	Federal funds sold			52,830		-		52,830		-		52,830
	Securities purchased under agreements to resell			576,355		-		576,355		-		576,355
Total short-term financial assets				813,364		184,179		629,185		-		813,364

Trading securities (a)				1,343,134		-		1,327,415		15,719		1,343,134
Loans held-for-sale (a)				371,640		-		-		371,640		371,640
Securities available-for-sale (a) (b)				3,186,943		20,267		2,954,224		212,452		3,186,943
Derivative assets (a)				215,116		16,877		198,239		-		215,116

Other assets
	Tax credit investments			69,115		-		-		69,115		69,115
	Deferred compensation assets			23,193		23,193		-		-		23,193
Total other assets				92,308		23,193		-		69,115		92,308

Nonearning assets
	Cash & due from banks			395,631		395,631		-		-		395,631
	Capital markets receivables			417,743		-		417,743		-		417,743
	Accrued interest receivable			71,889		-		71,889		-		71,889
Total nonearning assets				885,263		395,631		489,632		-		885,263
Total assets			$	22,060,614	$	640,147	$	5,598,695	$	15,062,964	$	21,301,806

Liabilities:
Deposits:
	Defined maturity		$	1,573,405	$	-	$	1,591,314	$	-	$	1,591,314
	Undefined maturity			14,710,504		-		14,710,504		-		14,710,504
Total deposits				16,283,909		-		16,301,818		-		16,301,818

Trading liabilities (a)				585,969		-		585,969		-		585,969

Short-term financial liabilities
	Federal funds purchased			1,062,901		-		1,062,901		-		1,062,901
	Securities sold under agreements to repurchase			427,232		-		427,232		-		427,232
	Total other borrowings			303,686		-		291,971		11,715		303,686
Total short-term financial liabilities				1,793,819		-		1,782,104		11,715		1,793,819

Term borrowings
	Real estate investment trust-preferred			45,811		-		-		47,000		47,000
	Term borrowings - tax credit investments			18,000		-		-		18,025		18,025
	Borrowings secured by residential real estate			329,574		-		-		194,905		194,905
	Other long term borrowings			1,377,903		-		1,365,535		-		1,365,535
Total term borrowings				1,771,288		-		1,365,535		259,930		1,625,465

Derivative liabilities (a)				165,918		9,770		153,403		2,745		165,918

Other noninterest-bearing liabilities
	Capital markets payables			388,373		-		388,373		-		388,373
	Accrued interest payable			33,924		-		33,924		-		33,924
Total other noninterest-bearing liabilities				422,297		-		422,297		-		422,297
Total liabilities			$	21,023,200	$	9,770	$	20,611,126	$	274,390	$	20,895,286

			September 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	$	8,359,909	$	-	$	-	$	8,138,108	$	8,138,108
		Commercial real estate		1,202,506		-		-		1,146,620		1,146,620
	Retail:
		Consumer real estate		5,619,955		-		-		5,287,039		5,287,039
		Permanent mortgage		779,954		-		-		722,087		722,087
		Credit card & other		279,715		-		-		280,344		280,344
Total loans, net of unearned income and allowance for loan losses				16,242,039		-		-		15,574,198		15,574,198

Short-term financial assets
	Total interest-bearing cash			440,916		440,916		-		-		440,916
	Federal funds sold			12,425		-		12,425		-		12,425
	Securities purchased under agreements to resell			517,263		-		517,263		-		517,263
Total short-term financial assets				970,604		440,916		529,688		-		970,604

Trading securities (a)				1,204,366		-		1,190,622		13,744		1,204,366
Loans held-for-sale (a)				410,550		-		48,425		362,125		410,550
Securities available-for-sale (a) (b)				3,123,629		13,794		2,897,657		212,178		3,123,629
Derivative assets (a)				334,025		14,862		319,163		-		334,025

Other assets
	Tax credit investments			76,822		-		-		76,822		76,822
	Deferred compensation assets			23,301		23,301		-		-		23,301
Total other assets				100,123		23,301		-		76,822		100,123

Nonearning assets
	Cash & due from banks			355,978		355,978		-		-		355,978
	Capital markets receivables			791,190		-		791,190		-		791,190
	Accrued interest receivable			85,042		-		85,042		-		85,042
Total nonearning assets				1,232,210		355,978		876,232		-		1,232,210
Total assets			$	23,617,546	$	848,851	$	5,861,787	$	16,239,067	$	22,949,705

Liabilities:
Deposits:
	Defined maturity		$	1,582,097	$	-	$	1,618,019	$	-	$	1,618,019
	Undefined maturity			14,646,014		-		14,646,014		-		14,646,014
Total deposits				16,228,111		-		16,264,033		-		16,264,033

Trading liabilities (a)				516,970		-		516,970		-		516,970

Short-term financial liabilities
	Federal funds purchased			1,350,806		-		1,350,806		-		1,350,806
	Securities sold under agreements to repurchase			443,370		-		443,370		-		443,370
	Total other borrowings			856,958		-		845,373		11,585		856,958
Total short-term financial liabilities				2,651,134		-		2,639,549		11,585		2,651,134

Term borrowings
	Real estate investment trust-preferred			45,743		-		-		42,300		42,300
	Term borrowings - new market tax credit investment			15,301		-		-		16,280		16,280
	Borrowings secured by residential real estate			415,975		-		-		353,578		353,578
	Other long term borrowings			1,786,219		-		1,716,741		-		1,716,741
Total term borrowings				2,263,238		-		1,716,741		412,158		2,128,899

Derivative liabilities (a)				225,084		12,424		210,320		2,340		225,084

Other noninterest-bearing liabilities
	Capital markets payables			574,201		-		574,201		-		574,201
	Accrued interest payable			43,184		-		43,184		-		43,184
Total other noninterest-bearing liabilities				617,385		-		617,385		-		617,385
Total liabilities			$	22,501,922	$	12,424	$	21,964,998	$	426,083	$	22,403,505

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