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 March 31, 2014:

			March 31, 2014
(Dollars in thousands)			Level 1		Level 2		Level 3		Total
Trading securities - capital markets:
	U.S. treasuries		$	-	$	145,136	$	-	$	145,136
	Government agency issued MBS			-		412,994		-		412,994
	Government agency issued CMO			-		124,304		-		124,304
	Other U.S. government agencies			-		86,672		-		86,672
	States and municipalities			-		29,787		-		29,787
	Corporate and other debt			-		382,341		5		382,346
	Equity, mutual funds, and other			-		6,922		-		6,922
		Total trading securities - capital markets		-		1,188,156		5		1,188,161
Trading securities - mortgage banking:
	Principal only			-		-		4,764		4,764
	Interest only			-		-		339		339
	Subordinated bonds			-		-		1,485		1,485
		Total trading securities - mortgage banking		-		-		6,588		6,588
Loans held-for-sale				-		-		229,219		229,219
Securities available-for-sale:
	U.S. treasuries			-		39,990		-		39,990
	Government agency issued MBS			-		792,562		-		792,562
	Government agency issued CMO			-		2,531,770		-		2,531,770
	Other U.S. government agencies			-		-		2,182		2,182
	States and municipalities			-		13,655		1,500		15,155
	Venture capital			-		-		4,300		4,300
	Equity, mutual funds, and other			26,482		-		-		26,482
		Total securities available-for-sale		26,482		3,377,977		7,982		3,412,441
Mortgage servicing rights				-		-		4,687		4,687
Other assets:
	Deferred compensation assets			23,335		-		-		23,335
	Derivatives, forwards and futures			4,015		-		-		4,015
	Derivatives, interest rate contracts			-		162,450		-		162,450
		Total other assets		27,350		162,450		-		189,800
		Total assets	$	53,832	$	4,728,583	$	248,481	$	5,030,896
Trading liabilities - capital markets:
	U.S. treasuries		$	-	$	420,574	$	-	$	420,574
	Government agency issued MBS			-		1,083		-		1,083
	Government agency issued CMO			-		503		-		503
	Other U.S. government agencies			-		9,739		-		9,739
	States and municipalities			-		1,436		-		1,436
	Corporate and other debt			-		233,287		-		233,287
	Equity, mutual funds, and other			-		635		-		635
		Total trading liabilities - capital markets		-		667,257		-		667,257
Other liabilities:
	Derivatives, forwards and futures			2,738		-		-		2,738
	Derivatives, interest rate contracts			-		130,180		-		130,180
	Derivatives, other			-		-		4,945		4,945
		Total other liabilities		2,738		130,180		4,945		137,863
		Total liabilities	$	2,738	$	797,437	$	4,945	$	805,120

The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of March 31, 2013:

			March 31, 2013
(Dollars in thousands)			Level 1		Level 2		Level 3		Total
Trading securities - capital markets:
	U.S. treasuries		$	-	$	99,618	$	-	$	99,618
	Government agency issued MBS			-		385,351		-		385,351
	Government agency issued CMO			-		283,932		-		283,932
	Other U.S. government agencies			-		195,051		-		195,051
	States and municipalities			-		21,141		-		21,141
	Corporate and other debt			-		396,186		5		396,191
	Equity, mutual funds, and other			-		8		-		8
		Total trading securities - capital markets		-		1,381,287		5		1,381,292
Trading securities - mortgage banking:
	Principal only			-		-		5,293		5,293
	Interest only			-		-		11,161		11,161
		Total trading securities - mortgage banking		-		-		16,454		16,454
Loans held-for-sale				-		-		232,684		232,684
Securities available-for-sale:
	U.S. treasuries			-		39,994		-		39,994
	Government agency issued MBS			-		1,065,551		-		1,065,551
	Government agency issued CMO			-		1,849,353		-		1,849,353
	Other U.S. government agencies			-		-		3,276		3,276
	States and municipalities			-		13,755		1,500		15,255
	Venture capital			-		-		4,300		4,300
	Equity, mutual funds, and other			14,996		-		-		14,996
		Total securities available-for-sale		14,996		2,968,653		9,076		2,992,725
Mortgage servicing rights				-		-		109,102		109,102
Other assets:
	Deferred compensation assets			22,785		-		-		22,785
	Derivatives, forwards and futures			15,793		-		-		15,793
	Derivatives, interest rate contracts			-		258,539		-		258,539
		Total other assets		38,578		258,539		-		297,117
		Total assets	$	53,574	$	4,608,479	$	367,321	$	5,029,374
Trading liabilities - capital markets:
	U.S. treasuries		$	-	$	434,119	$	-	$	434,119
	Government agency issued MBS			-		26,121		-		26,121
	Government agency issued CMO			-		24,986		-		24,986
	Other U.S. government agencies			-		50,547		-		50,547
	Corporate and other debt			-		245,533		-		245,533
		Total trading liabilities - capital markets		-		781,306		-		781,306

Other short-term borrowings				-		-		10,984		10,984
Other liabilities:
	Derivatives, forwards and futures			16,580		-		-		16,580
	Derivatives, interest rate contracts			-		181,364		-		181,364
	Derivatives, other			-		5		2,050		2,055
		Total other liabilities		16,580		181,369		2,050		199,999
		Total liabilities	$	16,580	$	962,675	$	13,034	$	992,289

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 March 31, 2014 and 2013, on a recurring basis are summarized as follows:

			Three Months Ended March 31, 2014
										Securities available-for-sale					Mortgage
			Trading			Loans held-				Investment			Venture		servicing				Net derivative
(Dollars in thousands)			securities			for-sale				portfolio			Capital		rights, net				liabilities
Balance on January 1, 2014			$	7,200			$	230,456			$	3,826	$	4,300		$	72,793			$	(2,915)
	Total net gains/(losses) included in:
		Net income		(85)				1,187				-		-			1,133				(2,341)
		Other comprehensive income /(loss)		-				-				(17)		-			-				-
	Purchases			1,559				4,106				-		-			-				-
	Issuances			-				-				-		-			-				-
	Sales			(1,715)				-				-		-			(68,519)				-
	Settlements			(366)				(4,193)				(127)		-			(720)				311
	Net transfers into/(out of) Level 3			-				(2,337)	(b)			-		-			-				-
Balance on March 31, 2014			$	6,593			$	229,219			$	3,682	$	4,300		$	4,687			$	(4,945)
Net unrealized gains/(losses) included in net income			$	(40)	(a)		$	1,187	(a)		$	-	$	-		$	73	(a)		$	(2,341)	(c)

			Three Months Ended March 31, 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		921				175				-		-			833				(186)				172
		Other comprehensive income /(loss)		-				-				(37)		-			-				-				-
	Purchases			-				18,467				-		-			-				-				-
	Issuances			-				-				-		-			-				-				-
	Sales			-				-				-		-			-				-				-
	Settlements			(2,454)				(4,228)				(440)		-			(6,042)				311				-
	Net transfers into/(out of) Level 3			-				(2,824)	(b)			-		-			-				-				-
Balance on March 31, 2013			$	16,459			$	232,684			$	4,776	$	4,300		$	109,102			$	(2,050)			$	(10,984)
Net unrealized gains/(losses) included in net income			$	431	(a)		$	175	(a)		$	-	$	-		$	925	(a)		$	(186)	(c)		$	172	(a)

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 March 31, 2014 and 2013, 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, 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 March 31, 2014 and 2013:

(Dollars in Thousands)
	Fair Value at
Level 3 Class	March 31, 2014		Valuation Techniques	Unobservable Input	Values Utilized
Trading securities - mortgage	$	6,588	Discounted cash flow	Prepayment speeds	40% - 46%
				Discount rate	47% - 49%
Loans held-for-sale - residential real estate		238,410	Discounted cash flow	Prepayment speeds - First mortgage	6% - 10%
				Prepayment speeds - Heloc	3% - 12%
				Credit spreads	2% - 4%
				Delinquency adjustment factor	15% - 25% added to credit spread
				Loss severity trends - First mortgage	50% - 60% of UPB
				Loss Severity trends - Heloc	35% - 100% of UPB
				Draw rate - Heloc	2% - 11%
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		4,687	Discounted cash flow	Prepayment speeds	15.2 CPR
				Discount rate	9.8%
				Cost to service	$141.40/Loan
				Earnings on escrow	1.385%
Derivative liabilities, other		4,945	Discounted cash flow	Visa covered litigation resolution amount	$4.4 billion - $5.2 billion
				Probability of resolution scenarios	10% - 30%
				Time until resolution	12 - 48 months
Loans, net of unearned income (a)		57,035	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 (b)		42,970	Appraisals from comparable properties	Adjustment for value changes since appraisal	0% - 10% of appraisal
Other assets (c)		64,210	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	March 31, 2013		Valuation Techniques	Unobservable Input	Values Utilized
Trading securities - mortgage	$	16,454	Discounted cash flow	Prepayment speeds	32%
				Discount rate	46%
Loans held-for-sale - residential real estate		244,317	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		109,102	Discounted cash flow	Prepayment speeds	20.7 CPR
				Discount rate	11.8%
				Cost to service	$118.10/Loan
				Earnings on escrow	1.385%
Other short-term borrowings		10,984	Discounted cash flow	(a)	(a)
Derivative liabilities, other		2,050	Discounted cash flow	Visa covered litigation resolution amount	$4.4 billion - $5.0 billion
				Probability of resolution scenarios	10% - 60%
				Time until resolution	6 - 18 months
Loans, net of unearned income (b)		125,223	Appraisals from comparable properties	Marketability adjustments for specific properties	0% - 10% of appraisal
			Other collateral valuations	Borrowing base certificates	20% - 50% of gross value
				Financial Statements/Auction Values	0% - 25% of reported value
Real estate acquired by foreclosure (c)		32,655	Appraisals from comparable properties	Adjustment for value changes since appraisal	0% - 10% of appraisal
Other assets (d)		74,109	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

Mortgage servicing rights and other retained interests. Prepayment rates and credit spreads (part of the discount rate) are significant unobservable inputs used in the fair value measurement of FHN's MSR, principal only strips, excess interest IO, and subordinated bonds. Cost to service and earnings on escrow are additional unobservable inputs included in the valuation of MSR. Increases in prepayment rates, credit spreads and costs to service in isolation would result in significantly lower fair value measurements for the associated assets. Conversely, decreases in prepayment rates, credit spreads and costs to service in isolation would result in significantly higher fair value measurements for the associated assets. An increase/(decrease) in earnings on escrow in isolation would be accompanied by an increase/(decrease) in the value of the related MSR. Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayment rates as customers are expected to refinance existing mortgages under more favorable interest rate terms. Generally, changes in discount rates directionally mirror the changes in market interest rates. In third quarter 2013, FHN agreed to sell substantially all its remaining legacy mortgage servicing. Sales commenced in fourth quarter 2013 and were substantially completed in first quarter 2014. FHN used the price in the definitive agreement, as adjusted for the portion of pricing that was not specific to the MSR and excess interest, as a third-party pricing source in the valuation of the remaining servicing assets as of March 31, 2014.

Prior to the contracted servicing sale, the MSR Hedging Working Group reviewed the overall assessment of the estimated fair value of MSR and excess interests weekly and was responsible for approving the critical assumptions used by management to determine the estimated fair value of FHN's retained interests. In addition, this working group reviewed the source of significant changes to the carrying values each quarter and was responsible for hedges and approving hedging strategies during periods when the MSR was hedged. Hedges were terminated upon execution of the definitive agreement to sell servicing. Subsequent to the contracted servicing sale, FHN's Corporate Accounting monitors sale activity and changes in the fair value of MSR and excess interest monthly.

Prior to the contracted servicing sale, FHN also engaged in a process referred to as “price discovery” on a quarterly basis to assess the reasonableness of the estimated fair value of retained interests. Price discovery was conducted through a process of obtaining the following information: (1) quarterly informal (and an annual formal) valuation of the servicing portfolio by prominent independent mortgage-servicing brokers and (2) a collection of surveys and benchmarking data made available by independent third parties that include peer participants in the mortgage banking business. Although there was no single source of market information that could be relied upon to assess the fair value of MSR or excess interests, FHN reviewed all information obtained during price discovery to determine whether the estimated fair value of MSR was reasonable when compared to market information.

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 residential real estate 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. Draw rates are an additional significant unobservable input for HELOCs. Increases (decreases) in the draw rate estimates for HELOCs would increase (decrease) their fair value. 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 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. In fourth quarter 2013, these recourse provisions expired and the transaction was recognized as a sale. The associated proceeds were recognized within other short-term borrowings in the Consolidated Statements of Condition. Since the servicing assets were recognized at fair value and changes in the fair value of the related financing liabilities mirrored 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 had already been delivered to the buyer, the fair value of the financing liabilities associated with the transaction did not reflect any instrument-specific credit risk.

The following tables reflect the differences between the fair value carrying amount of residential real estate 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.
		March 31, 2014
(Dollars in thousands)		Fair value carrying amount		Aggregate unpaid principal		Fair value carrying amount less aggregate unpaid principal
Residential real estate loans held-for-sale reported at fair value:
	Total loans	$	229,219	$	374,401		$	(145,182)
	Nonaccrual loans		61,842		133,600			(71,758)
	Loans 90 days or more past due and still accruing		7,260		15,010			(7,750)

		March 31, 2013
(Dollars in thousands)		Fair value carrying amount		Aggregate unpaid principal		Fair value carrying amount less aggregate unpaid principal
Residential real estate loans held-for-sale reported at fair value:
	Total loans	$	232,684	$	367,952		$	(135,268)
	Nonaccrual loans		59,494		128,601			(69,107)
	Loans 90 days or more past due and still accruing		8,179		18,370			(10,191)
Certain previously reported amounts have been reclassified to agree with current presentation.

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
			March 31
(Dollars in thousands)			2014		2013
Changes in fair value included in net income:
	Mortgage banking noninterest income
		Loans held-for-sale	$	1,187	$	175
		Other short-term borrowings		-		172

For the three months ended March 31, 2014 and 2013, the amounts for residential real estate loans held-for-sale include gains of $1.8 million and $1.9 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 residential real estate 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 interest-only strips, principal-only strips, subordinated bonds and excess interest. In third quarter 2013, FHN agreed to sell substantially all of its remaining legacy mortgage servicing, including excess interest. Since that time FHN has 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. FHN uses inputs including yield curves, credit spreads, and prepayment speeds to determine the fair value of principal-only strips. Subordinated bonds are bonds with junior priority and are valued using an internal model which includes, contractual terms, frequency and severity of loss (credit spreads), prepayment speeds of the underlying collateral, and the yield that a market participant would require.

The fair value of excess interest was 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.

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. Investments in equity securities are valued using quoted market prices. Venture capital investments are typically measured using significant internally generated inputs including adjustments to industry comparables and discounted cash flows analysis.

Securities held-to-maturity. Securities held-to-maturity reflects debt securities for which management has the positive intent and ability to hold to maturity. To the extent possible, valuations of held-to-maturity securities are performed using observable inputs obtained from market transactions in similar securities. Typical inputs include LIBOR and U.S. treasury curves and credit spreads. Debt securities 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, the treasury curve and credit spreads from similar instruments. Significant unobservable inputs include estimated credit spreads for individual issuers and instruments as well as prepayment speeds, as applicable.

Loans held-for-sale. FHN determines the fair value of residential real estate 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. The valuation of HELOCs also incorporates estimates of loan draw rates as well as estimated cancellation rates for loans expected to become delinquent.

Loans held-for-sale also includes loans made by the Small Business Administration (“SBA”), which are accounted for at 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-residential real estate 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. In third quarter 2013, FHN agreed to sell substantially all of its remaining legacy mortgage servicing. Since that time FHN has 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 March 31, 2014.

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 relied on a discounted cash flow model to estimate the fair value of its MSR. This model calculates estimated fair value of the MSR using predominant risk characteristics of MSR such as interest rates, type of product (fixed vs. variable), age (new, seasoned, or moderate), agency type and other factors. FHN uses assumptions in the model that it believes are comparable to those used by brokers and other service providers. FHN also periodically compares its estimates of fair value and assumptions with brokers, service providers, recent market activity, and against its own experience.

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

Valuations of other derivatives (primarily interest rate related swaps, swaptions, caps, and collars) are based on inputs observed in active markets for similar instruments. Typical inputs include the LIBOR curve, Overnight Indexed Swap ("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 of these deposits 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 of these deposits 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. Prior to fourth quarter 2013, Other short-term borrowings included a liability associated with transfers of MSR that did not qualify for sale accounting. This liability was accounted for at elected fair value, which was measured consistent with the related MSR, as previously described.

Term borrowings. The fair value of term borrowings 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 of these commitments 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 of these commitments 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 March 31, 2014 and 2013, 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 March 31, 2014 and 2013.

			March 31, 2014
			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	$	7,680,262	$	-	$	-	$	7,595,334	$	7,595,334
		Commercial real estate		1,136,895		-		-		1,093,796		1,093,796
	Retail:
		Consumer real estate		5,134,606		-		-		4,824,384		4,824,384
		Permanent mortgage		599,721		-		-		540,843		540,843
		Credit card & other		320,731		-		-		322,690		322,690
Total loans, net of unearned income and allowance for loan losses				14,872,215		-		-		14,377,047		14,377,047

Short-term financial assets
	Total interest-bearing cash			685,540		685,540		-		-		685,540
	Federal funds sold			16,555		-		16,555		-		16,555
	Securities purchased under agreements to resell			605,276		-		605,276		-		605,276
Total short-term financial assets				1,307,371		685,540		621,831		-		1,307,371

Trading securities (a)				1,194,749		-		1,188,156		6,593		1,194,749
Loans held-for-sale (a)				361,359		-		3,494		357,865		361,359
Securities available-for-sale (a) (b)				3,571,179		26,482		3,377,977		166,720		3,571,179
Securities held-to-maturity				4,274		-		-		5,454		5,454
Derivative assets (a)				166,465		4,015		162,450		-		166,465

Other assets
	Tax credit investments			64,210		-		-		64,210		64,210
	Deferred compensation assets			23,335		23,335		-		-		23,335
Total other assets				87,545		23,335		-		64,210		87,545

Nonearning assets
	Cash & due from banks			450,270		450,270		-		-		450,270
	Capital markets receivables			51,082		-		51,082		-		51,082
	Accrued interest receivable			73,010		-		73,010		-		73,010
Total nonearning assets				574,362		450,270		124,092		-		574,362
Total assets			$	22,139,519	$	1,189,642	$	5,478,000	$	14,977,889	$	21,645,531

Liabilities:
Deposits:
	Defined maturity			1,436,657		-		1,448,362		-		1,448,362
	Undefined maturity		$	15,236,086	$	-	$	15,236,086	$	-	$	15,236,086
Total deposits				16,672,743		-		16,684,448		-		16,684,448

Trading liabilities (a)				667,257		-		667,257		-		667,257

Short-term financial liabilities
	Federal funds purchased			1,135,665		-		1,135,665		-		1,135,665
	Securities sold under agreements to repurchase			411,795		-		411,795		-		411,795
	Total other borrowings			204,023		-		204,023		-		204,023
Total short-term financial liabilities				1,751,483		-		1,751,483		-		1,751,483

Term borrowings
	Real estate investment trust-preferred			45,845		-		-		49,350		49,350
	Term borrowings - new market tax credit investment			18,000		-		-		17,810		17,810
	Borrowings secured by residential real estate			77,119		-		-		66,554		66,554
	Other long term borrowings			1,366,084		-		1,362,408		-		1,362,408
Total term borrowings				1,507,048		-		1,362,408		133,714		1,496,122

Derivative liabilities (a)				137,863		2,738		130,180		4,945		137,863

Other noninterest-bearing liabilities
	Capital markets payables			39,510		-		39,510		-		39,510
	Accrued interest payable			33,244		-		33,244		-		33,244
Total other noninterest-bearing liabilities				72,754		-		72,754		-		72,754
Total liabilities			$	20,809,148	$	2,738	$	20,668,530	$	138,659	$	20,809,927

			March 31, 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	$	8,005,081	$	-	$	-	$	7,854,761	$	7,854,761
		Commercial real estate		1,100,740		-		-		1,064,915		1,064,915
	Retail:
		Consumer real estate		5,458,763		-		-		4,916,105		4,916,105
		Permanent mortgage		767,835		-		-		644,070		644,070
		Credit card & other		292,033		-		-		293,746		293,746
Total loans, net of unearned income and allowance for loan losses				15,624,452		-		-		14,773,597		14,773,597

Short-term financial assets
	Total interest-bearing cash			431,182		431,182		-		-		431,182
	Federal funds sold			33,738		-		33,738		-		33,738
	Securities purchased under agreements to resell			732,696		-		732,696		-		732,696
Total short-term financial assets				1,197,616		431,182		766,434		-		1,197,616

Trading securities (a)				1,397,746		-		1,381,287		16,459		1,397,746
Loans held-for-sale (a)				390,874		-		8,156		382,718		390,874
Securities available-for-sale (a) (b)				3,190,219		14,996		2,968,653		206,570		3,190,219
Derivative assets (a)				274,332		15,793		258,539		-		274,332

Other assets
	Tax credit investments			74,109		-		-		74,109		74,109
	Deferred compensation assets			22,785		22,785		-		-		22,785
Total other assets				96,894		22,785		-		74,109		96,894

Nonearning assets
	Cash & due from banks			275,262		275,262		-		-		275,262
	Capital markets receivables			169,927		-		169,927		-		169,927
	Accrued interest receivable			82,711		-		82,711		-		82,711
Total nonearning assets				527,900		275,262		252,638		-		527,900
Total assets			$	22,700,033	$	760,018	$	5,635,707	$	15,453,453	$	21,849,178

Liabilities:
Deposits:
	Defined maturity		$	1,511,333	$	-	$	1,543,436	$	-	$	1,543,436
	Undefined maturity			14,693,134		-		14,693,134		-		14,693,134
Total deposits				16,204,467		-		16,236,570		-		16,236,570

Trading liabilities (a)				781,306		-		781,306		-		781,306

Short-term financial liabilities
	Federal funds purchased			1,361,670		-		1,361,670		-		1,361,670
	Securities sold under agreements to repurchase			488,010		-		488,010		-		488,010
	Total other borrowings			186,898		-		175,914		10,984		186,898
Total short-term financial liabilities				2,036,578		-		2,025,594		10,984		2,036,578

Term borrowings
	Real estate investment trust-preferred			45,777		-		-		47,000		47,000
	Term borrowings - new market tax credit investment			18,000		-		-		18,747		18,747
	Borrowings secured by residential real estate			375,261		-		-		221,809		221,809
	Other long term borrowings			1,758,826		-		1,731,763		-		1,731,763
Total term borrowings				2,197,864		-		1,731,763		287,556		2,019,319

Derivative liabilities (a)				199,999		16,580		181,369		2,050		199,999

Other noninterest-bearing liabilities
	Capital markets payables			97,954		-		97,954		-		97,954
	Accrued interest payable			43,437		-		43,437		-		43,437
Total other noninterest-bearing liabilities				141,391		-		141,391		-		141,391
Total liabilities			$	21,561,605	$	16,580	$	21,097,993	$	300,590	$	21,415,163