FHN recognizes all classes of mortgage servicing rights (“MSR”) at fair value. Classes of MSR are established based on market inputs used to determine the fair value of the servicing asset and FHN's risk management practices. See Note 17 – Fair Value of Assets & Liabilities, the “Determination of Fair Value” section for a discussion of FHN's MSR valuation methodology. In third quarter 2013, FHN agreed to sell substantially all remaining legacy mortgage servicing which resulted in de-recognition of substantially all first lien MSR by the end of first quarter 2014. Accordingly the rollforward of MSR is presented for the prior period only. See Note 15 – Derivatives for a discussion of how FHN hedged the fair value of MSR prior to signing the definitive sales agreement. The balance of MSR included on the Consolidated Condensed Statements of Condition represented the rights to service approximately $17 billion of mortgage loans on March 31, 2013, for which a servicing right had been capitalized.

Following is a summary of changes in capitalized MSR as of March 31, 2013:


(Dollars in thousands)	First Liens		Second Liens		HELOC		Total
Fair value on January 1, 2013	$	111,314	$	196	$	2,801	$	114,311
Reductions due to loan payments		(5,374)		(48)		(125)		(5,547)
Reductions due to exercise of cleanup calls		(495)		-		-		(495)
Changes in fair value due to:
Changes in valuation model inputs or assumptions		834		-		-		834
Other changes in fair value		(88)		45		42		(1)
Fair value on March 31, 2013	$	106,191	$	193	$	2,718	$	109,102

In first quarter 2014, FHN sold $68.5 million of first lien MSR, resulting in an ending balance of $4.7 million as of March 31, 2014. Servicing, late, and other ancillary fees recognized within mortgage banking income were $20.1 million for the three months ended March 31, 2014, and represent previously unrecognized servicing fees in conjunction with servicing sales, compared to $12.1 million for the three months ended March 31, 2013. During first quarter 2013, FHN received annual servicing fees approximating .29 percent of the outstanding balance of underlying single-family residential mortgage loans and .34 percent inclusive of income related to excess interest.

In prior periods, FHN transferred MSR to third parties in transactions that did not qualify for sales treatment due to certain recourse provisions that were included within the sale agreements. In fourth quarter 2013, FHN determined that these provisions had lapsed and the balances related to these transactions were removed from FHN's Consolidated Condensed Statements of Condition. On March 31, 2013, FHN had $11.0 million of MSR related to these transactions, which were included within the first liens mortgage loans column of the rollforward of MSR. The proceeds from these transfers were recognized within Other short-term borrowings in the Consolidated Condensed Statements of Condition.