Unassociated Document
FORM 10-Q

 SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark one)
(X)       QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

OR
  (  )         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from____ to ____

Commission file number  001-15185

CIK number 0000036966

    FIRST HORIZON NATIONAL CORPORATION
    (Exact name of registrant as specified in its charter)

Tennessee
62-0803242
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
165 Madison Avenue, Memphis, Tennessee
38103
(Address of principal executive offices)
(Zip Code)
 
(901) 523-4444
(Registrant's telephone number, including area code)

______________________________________________
 (Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No____ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer,” and “smaller reporting company”  in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer    x   Accelerated filer  ____ Non-accelerated filer ___ Smaller reporting company   ___
      (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes         No _ x    
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, $.625 par value
126,786,394
Class
Outstanding on March 31, 2008
 

 
FIRST HORIZON NATIONAL CORPORATION

INDEX




Part I. Financial Information

Part II. Other Information

Signatures

Exhibit Index
 
2

 
PART I.

FINANCIAL INFORMATION


Item 1.          Financial Statements

The Consolidated Condensed Statements of Condition

The Consolidated Condensed Statements of Income

The Consolidated Condensed Statements of Shareholders’ Equity

The Consolidated Condensed Statements of Cash Flows

The Notes to Consolidated Condensed Financial Statements

This financial information reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented.
 
3

CONSOLIDATED CONDENSED STATEMENTS OF CONDITION
First Horizon National Corporation
 
       
March 31
   
December 31
 
(Dollars in thousands)(Unaudited)
     
2008
   
2007
   
2007
 
Assets:
                     
Cash and due from banks
   
$
851,875
  $
861,534
  $
1,170,220
 
Federal funds sold and securities
                     
purchased under agreements to resell
     
898,615
   
1,757,365
   
1,089,495
 
Total cash and cash equivalents
     
1,750,490
   
2,618,899
   
2,259,715
 
Interest-bearing deposits with other financial institutions
   
46,382
   
15,739
   
39,422
 
Trading securities
     
1,553,053
   
2,443,342
   
1,768,763
 
Loans held for sale
     
3,616,018
   
2,921,629
   
3,461,712
 
Loans held for sale-divestiture
     
207,672
   
-
   
289,878
 
Securities available for sale
     
3,034,558
   
3,310,691
   
3,032,551
 
Securities held to maturity (fair value of $242 on March 31, 2008; $272 on
             
March 31, 2007; and $242 on December 31, 2007)
   
240
   
269
   
240
 
Loans, net of unearned income
     
21,932,020
   
22,268,190
   
22,103,516
 
Less: Allowance for loan losses
     
483,203
   
220,806
   
342,341
 
Total net loans
     
21,448,817
   
22,047,384
   
21,761,175
 
Mortgage servicing rights, net
     
895,923
   
1,540,041
   
1,159,820
 
Goodwill
     
192,408
   
275,582
   
192,408
 
Other intangible assets, net
     
52,017
   
61,672
   
56,907
 
Capital markets receivables
     
1,680,057
   
1,144,135
   
524,419
 
Premises and equipment, net
     
382,488
   
445,301
   
399,305
 
Real estate acquired by foreclosure
     
106,018
   
68,613
   
103,982
 
Discontinued assets
     
-
   
358
   
-
 
Other assets
     
2,293,045
   
1,935,111
   
1,949,308
 
Other assets-divestiture
     
8,759
   
-
   
15,856
 
Total assets
    $
37,267,945
  $
38,828,766
  $
37,015,461
 
                       
Liabilities and shareholders' equity:
                     
Deposits:
                     
Savings
    $
4,217,215
  $
3,607,674
  $
3,872,684
 
Time deposits
     
2,648,339
   
2,876,257
   
2,826,301
 
Other interest-bearing deposits
     
1,986,556
   
1,941,422
   
1,946,933
 
Interest-bearing deposits-divestiture
     
99,370
   
-
   
189,051
 
Certificates of deposit $100,000 and more
     
2,222,016
   
8,559,807
   
3,129,532
 
Certificates of deposit $100,000 and more-divestiture
   
1,153
   
-
   
12,617
 
Interest-bearing
     
11,174,649
   
16,985,160
   
11,977,118
 
Noninterest-bearing
     
4,995,696
   
5,506,791
   
5,026,417
 
Noninterest-bearing-divestiture
     
18,197
   
-
   
28,750
 
Total deposits
     
16,188,542
   
22,491,951
   
17,032,285
 
Federal funds purchased and securities
                     
sold under agreements to repurchase
     
3,678,217
   
3,173,476
   
4,829,597
 
Federal funds purchased and securities
                     
sold under agreements to repurchase - divestiture
   
11,572
   
-
   
20,999
 
Trading liabilities
     
531,259
   
678,796
   
556,144
 
Commercial paper and other short-term borrowings
   
4,753,582
   
819,768
   
3,422,995
 
Term borrowings
     
6,060,795
   
5,968,789
   
6,027,967
 
Other collateralized borrowings
     
809,273
   
559,226
   
800,450
 
Total long-term debt
     
6,870,068
   
6,528,015
   
6,828,417
 
Capital markets payables
     
1,688,870
   
1,088,340
   
586,358
 
Discontinued liabilities
     
-
   
32,608
   
-
 
Other liabilities
     
1,136,461
   
1,205,859
   
1,305,868
 
Other liabilities-divestiture
     
1,870
   
-
   
1,925
 
Total liabilities
     
34,860,441
   
36,018,813
   
34,584,588
 
Preferred stock of subsidiary
     
295,277
   
295,277
   
295,277
 
Shareholders' equity
                     
Preferred stock - no par value (5,000,000 shares authorized, but unissued)
 
-
   
-
   
-
 
Common stock - $.625 par value (shares authorized - 400,000,000;
                 
shares issued and outstanding - 126,786,394 on March 31, 2008;
                 
125,748,602 on March 31, 2007; and 126,366,177 on December 31, 2007)
 
79,242
   
78,593
   
78,979
 
Capital surplus
     
362,823
   
341,491
   
361,826
 
Undivided profits
     
1,704,559
   
2,155,007
   
1,742,892
 
Accumulated other comprehensive (loss)/ income, net
   
(34,397
)
 
(60,415
)
 
(48,101
)
Total shareholders' equity
     
2,112,227
   
2,514,676
   
2,135,596
 
Total liabilities and shareholders' equity
    $
37,267,945
  $
38,828,766
  $
37,015,461
 
See accompanying notes to consolidated condensed financial statements.
       
Certain previously reported amounts have been reclassified to agree with current presentation.
       
 
4

 
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
 
First Horizon National Corporation
 
   
Three Months Ended
 
   
March 31
 
(Dollars in thousands except per share data)(Unaudited)
 
2008
   
2007
 
Interest income:
           
Interest and fees on loans
  $ 331,676     $ 410,427  
Interest on investment securities
    40,735       54,270  
Interest on loans held for sale
    58,438       58,845  
Interest on trading securities
    35,896       40,563  
Interest on other earning assets
    9,698       19,080  
    Total interest income
    476,443       583,185  
Interest expense:
               
Interest on deposits:
               
  Savings
    25,888       26,031  
  Time deposits
    31,502       33,037  
  Other interest-bearing deposits
    5,906       6,889  
  Certificates of deposit $100,000 and more
    31,068       106,276  
Interest on trading liabilities
    9,615       16,361  
Interest on short-term borrowings
    70,049       67,164  
Interest on long-term debt
    74,323       90,008  
    Total interest expense
    248,351       345,766  
Net interest income
    228,092       237,419  
Provision for loan losses
    240,000       28,486  
Net interest (expense)/ income after provision for loan losses
    (11,908 )     208,933  
Noninterest income:
               
Capital markets
    131,457       87,113  
Deposit transactions and cash management
    42,553       39,358  
Mortgage banking
    158,712       73,097  
Trust services and investment management
    9,109       9,688  
Insurance commissions
    8,144       9,789  
Revenue from loan sales and securitizations
    (4,097 )     9,663  
Equity securities gains/(losses), net
    65,015       3,962  
Debt securities gains/(losses), net
    931       6,311  
Losses on divestitures
    (995 )     -  
All other income and commissions
    38,247       44,207  
    Total noninterest income
    449,076       283,188  
Adjusted gross income after provision for loan losses
    437,168       492,121  
Noninterest expense:
               
Employee compensation, incentives and benefits
    287,470       246,343  
Occupancy
    28,591       28,784  
Equipment rentals, depreciation and maintenance
    15,011       17,613  
Operations services
    18,964       17,821  
Communications and courier
    11,004       11,540  
Amortization of intangible assets
    2,440       2,825  
All other expense
    74,797       78,086  
    Total noninterest expense
    438,277       403,012  
(Loss)/income before income taxes
    (1,109 )     89,109  
(Benefit)/provision for income taxes
    (8,146 )     18,802  
Income from continuing operations
    7,037       70,307  
Income from discontinued operations, net of tax
    883       240  
Net income
  $ 7,920     $ 70,547  
Earnings per common share  (Note 7)
  $ .06     $ .56  
Diluted earnings per common share  (Note 7)
  $ .06     $ .55  
Weighted average common shares (Note 7)
    126,116       125,342  
Diluted average common shares (Note 7)
    126,660       128,704  
See accompanying notes to consolidated condensed financial statements.
Certain previously reported amounts have been reclassified to agree with current presentation.
 
5

 
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
 
First Horizon National Corporation
 
(Dollars in thousands)(Unaudited)
 
2008
   
2007
 
Balance, January 1
  $ 2,135,596     $ 2,462,390  
Adjustment to reflect change in accounting for tax benefits (FIN 48)
    -       (862 )
Adjustment to reflect adoption of measurement date provisions for SFAS No. 158
    -       6,233  
Adjustment to reflect change in accounting for purchases of life insurance
               
     (EITF Issue No. 06-5)
    -       (548 )
Adjustment to reflect adoption of measurement date provisions for SFAS No. 157
    (12,502 )     -  
Adjustment to reflect change in accounting for split dollar life insurance arrangements
               
     (EITF Issue No. 06-4)
    (8,530 )     -  
                 
Net income
    7,920       70,547  
Other comprehensive income:
               
  Unrealized fair value adjustments, net of tax:
               
    Cash flow hedges
    (6 )     (124 )
    Securities available for sale
    13,179       2,567  
    Recognized pension and other employee benefit plans net periodic benefit costs
    531       1,281  
Comprehensive income
    21,624       74,271  
Cash dividends declared
    (25,220 )     (56,337 )
Common stock repurchased
    (68 )     (457 )
Common stock issued for:
               
  Stock options and restricted stock
    1,120       24,987  
Excess tax benefit from stock-based compensation arrangements
    (1,531 )     3,685  
Stock-based compensation expense
    1,738       1,283  
Other
    -       31  
Balance, March 31
  $ 2,112,227     $ 2,514,676  
See accompanying notes to consolidated condensed financial statements.
 
6

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 
  First Horizon National Corporation
 
     
Three Months Ended March 31
 
(Dollars in thousands)(Unaudited)
 
2008
   
2007
 
Operating
Net income
  $ 7,920     $ 70,547  
Activities Adjustments to reconcile net income to net cash provided/(used) by operating activities:                
 
    Provision for loan losses
    240,000       28,486  
 
    (Benefit)/ provision for deferred income tax
    (8,146 )     18,802  
 
    Depreciation and amortization of premises and equipment
    11,815       13,712  
 
    Amortization of intangible assets
    2,440       2,825  
 
    Net other amortization and accretion
    12,809       18,094  
 
    Decrease in derivatives, net
    (372,772 )     (60,205 )
 
    Market value adjustment on mortgage servicing rights
    259,041       17,888  
 
    Provision for foreclosure reserve
    2,759       3,440  
 
    Loss on divestiture
    995       -  
 
    Stock-based compensation expense
    1,738       1,283  
 
    Excess tax benefit from stock-based compensation arrangements
    1,531       (3,685 )
 
    Equity securities gains, net
    (65,015 )     (3,962 )
 
    Debt securities gains, net
    (931 )     (6,311 )
 
    Net losses on disposal of fixed assets
    3,827       378  
 
    Net (increase)/decrease in:
               
 
      Trading securities
    200,493       (212,597 )
 
      Loans held for sale
    (122,806 )     (48,052 )
 
      Capital markets receivables
    (1,155,638 )     (411,853 )
 
      Interest receivable
    13,929       3,068  
 
      Other assets
    167,879       (186,912 )
 
    Net increase/(decrease) in:
               
 
      Capital markets payables
    1,102,512       288,851  
 
      Interest payable
    (11,387 )     26,035  
 
      Other liabilities
    (279,676 )     (106,979 )
 
      Trading liabilities
    (24,885 )     (111,161 )
 
        Total adjustments
    (19,488 )     (728,855 )
 
Net cash used by operating activities
    (11,568 )     (658,308 )
Investing
Available for sale securities:
               
Activities
  Sales
    80,590       612,606  
 
  Maturities
    237,946       195,713  
 
  Purchases
    (230,535 )     (176,961 )
 
Premises and equipment:
               
 
  Purchases
    (8,019 )     (7,896 )
 
Net decrease in securitization retained interests classified as trading securities
    14,889       -  
 
Net decrease/(increase) in loans
    88,162       (205,134 )
 
Net (increase)/decrease in interest-bearing deposits with other financial institutions
    (6,960 )     2,302  
 
Proceeds from divestitures, net of cash and cash equivalents
    (15,656 )     -  
 
Net cash provided by investing activities
    160,417       420,630  
Financing
Common stock:
               
Activities
  Exercise of stock options
    511       24,769  
 
  Cash dividends paid
    (25,220 )     (55,821 )
 
  Repurchase of shares
    (68 )     (457 )
 
  Excess tax benefit from stock-based compensation arrangements
    (1,531 )     3,685  
 
Long-term debt:
               
 
  Issuance
    4,502       769,909  
 
  Payments
    (47,264 )     (83,258 )
 
Issuance of preferred stock of subsidiary
    -       8  
 
Repurchase of preferred stock of subsidiary
    -       (1 )
 
Net increase/(decrease) in:
               
 
  Deposits
    (758,816 )     2,278,719  
 
  Short-term borrowings
    169,812       (2,227,068 )
 
Net cash (used)/provided by financing activities
    (658,074 )     710,485  
 
Net (decrease)/ increase in cash and cash equivalents
    (509,225 )     472,807  
 
Cash and cash equivalents at beginning of period
    2,259,715       2,146,092  
 
Cash and cash equivalents at end of period
  $ 1,750,490     $ 2,618,899  
 
Total interest paid
    258,300       319,282  
 
Total income taxes paid
    146,027       12,152  
See accompanying notes to consolidated condensed financial statements.
Certain previously reported amounts have been reclassified to agree with current presentation.
 
7

Note 1 - Financial Information

The unaudited interim consolidated condensed financial statements of First Horizon National Corporation (FHN), including its subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which it operates.  This preparation requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  These estimates and assumptions are based on information available as of the date of the financial statements and could differ from actual results. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented.  The operating results for the interim 2008 periods are not necessarily indicative of the results that may be expected going forward.  For further information, refer to the audited consolidated financial statements in the 2007 Annual Report to shareholders.

Investment Securities.  Venture capital investments are classified as securities available for sale and are carried at fair value.  Upon adoption of Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS No. 157) on January 1, 2008, unrealized gains and losses on such securities are recognized prospectively in noninterest income.  Prior to FHN’s adoption of SFAS No. 157, venture capital investments were initially valued at cost based on their unmarketable nature. Subsequently, these investments were adjusted to reflect changes in valuation as a result of public offerings or other-than-temporary declines in value.

Loans Held for Sale and Securitization and Residual Interests.  Loans originated or purchased for resale, together with mortgage loans previously sold which may be unilaterally called by FHN, are included in loans held for sale in the consolidated statements of condition.  Effective January 1, 2008, upon adoption of Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159), FHN elected the fair value option on a prospective basis for almost all types of mortgage loans originated for sale purposes including mortgage loan originations for which an active secondary market and readily available market prices currently exist to reliably support fair value pricing models used for such loans.  Such loans are carried at fair value, with changes in the fair value of these loans recognized in the mortgage banking noninterest income section of the Consolidated Condensed Statements of Income.  For mortgage loans originated for sale for which the fair value option is elected, loan origination fees are recorded by FHN when earned and related direct loan origination costs are recognized when incurred.   Interests retained from the securitization of such loans are included as a component of trading securities on the Consolidated Condensed Statements of Condition, with related cash receipts and payments classified prospectively in investing activities on the Consolidated Condensed Statements of Cash Flows based on the purpose for which such financial assets were retained.  See Note 13 – Fair Values of Assets and Liabilities for additional information.

FHN continues to account for all mortgage loans held for sale which were originated prior to 2008 and for mortgage loans held for sale for which fair value accounting has not been elected at the lower of cost or market value.  For such loans, net origination fees and costs are deferred and included in the basis of the loans in calculating gains and losses upon sale.  Gains and losses realized from the sale of these assets are included in noninterest income.    

Accounting Changes. Effective January 1, 2008, FHN adopted SFAS No. 159 which allows an irrevocable election to measure certain financial assets and liabilities at fair value on an instrument-by-instrument basis, with unrealized gains and losses recognized currently in earnings.  Under SFAS No. 159, the fair value option may only be elected at the time of initial recognition of a financial asset or liability or upon the occurrence of certain specified events.  Additionally, SFAS No. 159 provides that application of the fair value option must be based on the fair value of an entire financial asset or liability and not selected risks inherent in those assets or liabilities.  SFAS No. 159 requires that assets and liabilities which are measured at fair value pursuant to the fair value option be reported in the financial statements in a manner that separates those fair values from the carrying amounts of similar assets and liabilities which are measured using another measurement attribute.  SFAS No. 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements.  Upon adoption of SFAS No. 159, FHN elected the fair value option on a prospective basis for almost all types of mortgage loans originated for sale purposes.  Additionally, in accordance with SFAS No. 159’s amendment of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, FHN began prospectively classifying cash flows associated with its retained interests in securitizations recognized as trading securities within investing activities in the Consolidated Condensed Statements of Cash Flows.

Effective January 1, 2008, FHN adopted SEC Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (SAB No. 109) prospectively for derivative loan commitments issued or modified after that date.  SAB No. 109 rescinds SAB No. 105’s prohibition on inclusion of expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment.  SAB No. 109 also applies to any loan commitments for which fair value accounting is elected under SFAS No. 159.  FHN did not elect fair value accounting for any other loan commitments under SFAS No. 159.
 
8

Note 1 - Financial Information (continued)

The prospective application of SAB No. 109 and the prospective election to recognize substantially all new mortgage loan originations at fair value under SFAS No. 159 resulted in a positive impact of $58.1 million on first quarter 2008 pre-tax earnings.  This represents the estimated value of mortgage servicing rights included in (1) interest rate lock commitments entered into in first quarter 2008 that remained on the balance sheet at quarter end and (2) mortgage warehouse loans originated in first quarter 2008 accounted for at elected fair value which remained on the balance sheet at quarter end.

Effective January 1, 2008, FHN adopted SFAS No. 157 for existing fair value measurement requirements related to financial assets and liabilities as well as to non-financial assets and liabilities which are remeasured at least annually.  In February 2008, the FASB staff issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP FAS 157-2), which delayed the effective date of SFAS No. 157 until fiscal years beginning after November 15, 2008, for non-financial assets and liabilities which are recognized at fair value on a non-recurring basis.  SFAS No. 157 establishes a hierarchy to be used in performing measurements of fair value.  Additionally, SFAS No. 157 emphasizes that fair value should be determined from the perspective of a market participant while also indicating that valuation methodologies should first reference available market data before using internally developed assumptions.  SFAS No. 157 also provides expanded disclosure requirements regarding the effects of fair value measurements on the financial statements. Upon the adoption of the provisions of SFAS No. 157 for financial assets and liabilities as well as non-financial assets and liabilities remeasured at least annually on January 1, 2008, a negative after-tax cumulative-effect adjustment of $12.5 million was made to the opening balance of undivided profits for interest rate lock commitments which FHN previously measured under the guidance of EITF 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” (EITF 02-3).   The effect of the change in accounting for these interest rate lock commitments produced a $15.7 million negative effect on first quarter 2008 pre-tax earnings as the $14.2 million positive effect of delivering the loans associated with the commitments existing at the beginning of the quarter was more than offset by a negative impact of $29.9 million for commitments remaining on the balance sheet at quarter end that was previously deferred under EITF 02-3 until delivery of the associated loans.  FHN continues to assess the financial impacts of applying the provisions of SFAS No. 157 to non-financial assets and liabilities which are recognized at fair value on a non-recurring basis.

Effective January 1, 2008, FHN adopted FASB Staff Position No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (FSP FAS 157-1), which amends SFAS No. 157 to exclude Statement of Financial Accounting Standards No. 13, “Accounting for Leases” (SFAS No. 13), and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS No. 13 from its scope.  The adoption of FSP FAS 157-1 had no effect on FHN’s statement of condition or results of operations.

Effective January 1, 2008, FHN adopted EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (EITF 06-4).  EITF 06-4 requires that a liability be recognized for contracts written to employees which provide future postretirement benefits that are covered by endorsement split-dollar life insurance arrangements because such obligations are not considered to be effectively settled upon entering into the related insurance arrangements.  FHN recognized a decrease to undivided profits of $8.5 million, net of tax, upon adoption of EITF 06-4.

Effective January 1, 2008, FHN adopted FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39” (FSP FIN 39-1).  FSP FIN 39-1 permits the offsetting of fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement.  Upon adoption of FSP FIN 39-1, entities were permitted to change their previous accounting policy election to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements.  FSP FIN 39-1 requires additional disclosures for derivatives and collateral associated with master netting arrangements, including the separate disclosure of amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting arrangements as of the end of each reporting period for entities that made an accounting policy decision to not offset fair value amounts.  FHN retained its previous accounting policy election to not offset fair value amounts recognized for derivative instruments under master netting arrangements upon adoption of FSP FIN 39-1.

FHN also adopted FASB Statement 133 Implementation Issue No. E23, “Issues Involving the Application of the Shortcut Method under Paragraph 68” (DIG E23) as of January 1, 2008, for hedging relationships designated on or after such date.  DIG E23 amends SFAS No. 133 to explicitly permit use of the shortcut method for hedging relationships in which an interest rate swap has a nonzero fair value at inception of the hedging
 
9

Note 1 - Financial Information (continued)

relationship which is attributable solely to the existence of a bid-ask spread in the entity’s principal market under SFAS No. 157.  Additionally, DIG E23 allows an entity to apply the shortcut method to a qualifying fair value hedge when the hedged item has a trade date that differs from its settlement date because of generally established conventions in the marketplace in which the transaction to acquire or issue the hedged item is executed.  Preexisting shortcut hedging relationships were analyzed as of DIG E23’s adoption date to determine whether they complied with the revised shortcut criteria at their inception or should be dedesignated prospectively.  The adoption of DIG E23 had no effect on FHN’s financial position or results of operations as all of FHN’s preexisting hedging relationships met the requirements of DIG E23 at their inception.

Effective January 1, 2007, FHN adopted Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments” (SFAS No. 155), which permits fair value remeasurement for hybrid financial instruments that contain an embedded derivative that otherwise would require bifurcation. Additionally, SFAS No. 155 clarifies the accounting guidance for beneficial interests in securitizations. Under SFAS No. 155, all beneficial interests in a securitization require an assessment in accordance with SFAS No. 133 to determine if an embedded derivative exists within the instrument. In addition, effective January 1, 2007, FHN adopted Derivatives Implementation Group Issue B40, “Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets” (DIG B40). DIG B40 provides an exemption from the embedded derivative test of paragraph 13(b) of SFAS No. 133 for instruments that would otherwise require bifurcation if the test is met solely because of a prepayment feature included within the securitized interest and prepayment is not controlled by the security holder. Since FHN presents all retained interests in its proprietary securitizations as trading securities and due to the clarifying guidance of DIG B40, the impact of adopting SFAS No. 155 was immaterial to the results of operations.

Effective January 1, 2007, FHN adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) which provides guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on the classification and disclosure of uncertain tax positions in the financial statements.  Upon adoption of FIN 48, FHN recognized a cumulative effect adjustment to the beginning balance of undivided profits in the amount of $.9 million for differences between the tax benefits recognized in the statements of condition prior to the adoption of FIN 48 and the amounts reported after adoption.

Effective January 1, 2007, FHN adopted EITF Issue No. 06-5, “Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” (EITF 06-5).  EITF 06-5 provides that in addition to cash surrender value, the asset recognized for a life insurance contract should consider certain other provisions included in a policy’s contractual terms with additional amounts being discounted if receivable beyond one year.  Additionally, EITF 06-5 requires that the determination of the amount that could be realized under an insurance contract be performed at the individual policy level.  FHN recognized a reduction of undivided profits in the amount of $.5 million as a result of adopting EITF 06-5.

Effective January 1, 2007, FHN elected early adoption of the final provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS No. 158), which required that the annual measurement date of a plan’s assets and liabilities be as of the date of the financial statements. As a result of adopting the measurement date provisions of SFAS No. 158, total equity was increased by $6.2 million on January 1, 2007, consisting of a reduction to undivided profits of $2.1 million and a credit to accumulated other comprehensive income of $8.3 million.

Accounting Changes Issued but Not Currently Effective. In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, "Disclosure about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" (SFAS No. 161). SFAS No. 161 requires enhanced disclosures related to derivatives accounted for in accordance with SFAS No. 133 and reconsiders existing disclosure requirements for such derivatives and any related hedging items. The disclosures provided in SFAS No. 161 will be required for both interim and annual reporting periods. SFAS No. 161 is effective prospectively for periods beginning after November 15, 2008. FHN is currently assessing the effects of adopting SFAS No. 161.

In February 2008, FASB Staff Position No. FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (FSP FAS 140-3), was issued.  FSP FAS 140-3 permits a transferor and transferee to separately account for an initial transfer of a financial asset and a related repurchase financing that are entered into contemporaneously with, or in contemplation of, one another if certain specified conditions are met at the inception of the transaction.  FSP FAS 140-3 requires that the two transactions have a valid and distinct business or economic purpose for being entered into separately and that the repurchase financing not result in the initial transferor regaining control over the previously transferred financial asset.  FSP FAS 140-3 is effective prospectively for initial transfers executed in reporting periods beginning on or after November 15, 2008.   FHN is currently assessing the financial impact of adopting FSP FAS 140-3.
 
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141-R, “Business Combinations” (SFAS No. 141-R) and Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51” (SFAS No. 160).  SFAS No. 141-R requires that an acquirer recognize the assets acquired and liabilities assumed in a business
 
10

Note 1 - Financial Information (continued)

combination, as well as any noncontrolling interest in the acquiree, at their fair values as of the acquisition date, with limited exceptions.  Additionally, SFAS No. 141-R provides that an acquirer cannot specify an effective date for a business combination that is separate from the acquisition date.  SFAS No. 141-R also provides that acquisition-related costs which an acquirer incurs should be expensed in the period in which the costs are incurred and the services are received.  SFAS No. 160 requires that acquired assets and liabilities be measured at full fair value without consideration to ownership percentage.  Under SFAS No. 160, any non-controlling interests in an acquiree should be presented as a separate component of equity rather than on a mezzanine level.  Additionally, SFAS No. 160 provides that net income or loss should be reported in the consolidated income statement at its consolidated amount, with disclosure on the face of the consolidated income statement of the amount of consolidated net income which is attributable to the parent and noncontrolling interests, respectively.  SFAS No. 141-R and SFAS No. 160 are effective prospectively for periods beginning on or after December 15, 2008, with the  exception of SFAS No. 160’s presentation and disclosure requirements which should be retrospectively applied to all periods presented.  FHN is currently assessing the financial impact of adopting SFAS No. 141-R and SFAS No. 160.

In June 2007, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (SOP 07-1), which provides guidance for determining whether an entity is within the scope of the AICPA’s Investment Companies Guide.  Additionally, SOP 07-1 provides certain criteria that must be met in order for investment company accounting applied by a subsidiary or equity method investee to be retained in the financial statements of the parent company or an equity method investor.  SOP 07-1 also provides expanded disclosure requirements regarding the retention of such investment company accounting in the consolidated financial statements.  In May 2007, FASB Staff Position No. FIN 46(R)- 7, “Application of FASB Interpretation No. 46(R) to Investment Companies” (FSP FIN 46(R)-7) was issued.  FSP FIN 46(R)-7 amends FIN 46(R) to provide a permanent exception to its scope for companies within the scope of the revised Investment Companies Guide under SOP 07-1.  In February 2008, the FASB issued FASB Staff Position No. SOP 07-1-1, “The Effective Date of AICPA Statement of Position 07-1” which indefinitely defers the effective date of SOP 07-1 and FSP FIN 46(R)-7.
 
11

Note 2 - Acquisitions/Divestitures

Due to efforts initiated by FHN in 2007 to improve profitability, in July 2007 management decided to pursue the sale, closure, or consolidation of 34 full-service First Horizon Bank branches in Atlanta, Baltimore, Dallas and Northern Virginia.  In September 2007, it was announced that agreements for the sale of all 34 of the branches had been reached.  Aggregate gains of $15.7 million were recognized in fourth quarter 2007 from the disposition of 15 of the branches.  Additionally, losses of $1.0 million were recognized in first quarter 2008 from the disposition of the First Horizon Bank branches.  Sale of the remaining nine branches in Atlanta closed in May 2008 and resulted in a minimal effect on earnings.  This resulted in the transfer of certain fixed assets, including branch locations, and assumption of all the deposit relationships of the First Horizon Bank branches being purchased.  The assets and liabilities related to the remaining nine branches to be sold, which are included in the Regional Banking segment, are reflected as held-for-sale on the Consolidated Condensed Statements of Condition.  The aggregate carrying amounts of loans, deposits, other assets and other liabilities held for divestiture were $208 million, $119 million, $9 million, and $13 million, respectively, as of March 31, 2008.  The losses realized in the first quarter of 2008 from the disposition of First Horizon Bank branches are included in the noninterest income section of the Consolidated Condensed Statements of Income as losses on divestitures.

In addition to the divestitures mentioned above, FHN acquires or divests assets from time to time in transactions that are considered business combinations or divestitures but are not material to FHN individually or in the aggregate.
 
12

Note 3 - Loans
 
The composition of the loan portfolio is detailed below:
 
   
March 31
   
December 31
 
(Dollars in thousands)
 
2008
   
2007
   
2007
 
Commercial:
                 
   Commercial, financial and industrial
  $ 7,238,630     $ 7,371,873     $ 7,140,087  
   Real estate commercial
    1,345,526       1,144,086       1,294,922  
   Real estate construction
    2,602,968       2,931,183       2,753,475  
Retail:
                       
   Real estate residential
    7,858,109       7,856,197       7,791,885  
   Real estate construction
    1,814,863       2,073,293       2,008,289  
   Other retail
    138,253       151,959       144,019  
   Credit card receivables
    191,119       187,658       204,812  
   Real estate loans pledged against other collateralized
                       
     borrowings
    742,552       551,941       766,027  
  Loans, net of unearned income
    21,932,020       22,268,190       22,103,516  
Allowance for loan losses
    483,203       220,806       342,341  
Total net loans
  $ 21,448,817     $ 22,047,384     $ 21,761,175  
 
Nonperforming loans consist of loans which management has identified as impaired, other nonaccrual loans and loans which have been restructured.  On March 31, 2008 and 2007, there were no outstanding commitments to advance additional funds to customers whose loans had been restructured.  The following table presents nonperforming loans on:
 
   
March 31
   
December 31
 
(Dollars in thousands)
 
2008
   
2007
   
2007
 
Impaired loans
  $ 263,671     $ 26,096     $ 126,612  
Other nonaccrual loans*
    273,581       57,871       180,475  
Total nonperforming loans
  $ 537,252     $ 83,967     $ 307,087  
* On March 31, 2008 and 2007, and on December 31, 2007, other nonaccrual loans included $9.7 million, $10.3 million, and $23.8 million,
   respectively, of loans held for sale.
Certain previously report amounts have been reclassified to agree with current presentation.
 
Generally, interest payments received on impaired loans are applied to principal.  Once all principal has been received, additional payments are recognized as interest income on a cash basis.  The following table presents information concerning impaired loans:
 
   
Three Months Ended
 
   
March 31
 
(Dollars in thousands)
 
2008
   
2007
 
Total interest on impaired loans
  $ 62     $ 340  
Average balance of impaired loans
    222,034       42,321  
Certain previously report amounts have been reclassified to agree with current presentation.
 
Activity in the allowance for loan losses related to non-impaired loans, impaired loans, and for the total allowance for the three months ended March 31, 2008 and 2007, is summarized as follows:
 
(Dollars in thousands)
 
Non-impaired
   
Impaired
   
Total
 
Balance on December 31, 2006
  $ 206,292     $ 9,993     $ 216,285  
Provision for loan losses
    21,145       7,341       28,486  
Divestitures/acquisitions/transfers
    2,655       -       2,655  
Charge-offs
    (18,759 )     (10,906 )     (29,665 )
Recoveries
    3,045       -       3,045  
    Net charge-offs
    (15,714 )     (10,906 )     (26,620 )
Balance on March 31, 2007
  $ 214,378     $ 6,428     $ 220,806  
                         
Balance on December 31, 2007
  $ 325,297     $ 17,044     $ 342,341  
Provision for loan losses
    200,202       39,798       240,000  
Charge-offs
    (50,678 )     (51,078 )     (101,756 )
Recoveries
    2,609       9       2,618  
    Net charge-offs
    (48,069 )     (51,069 )     (99,138 )
Balance on March 31, 2008
  $ 477,430     $ 5,773     $ 483,203  
Certain previously reported amounts have been reclassified to agree with current presentation.
 
13

Note 4 - Mortgage Servicing Rights

FHN recognizes all its classes of mortgage servicing rights (MSR) at fair value.  Classes of MSR are determined in accordance with FHN’s risk management practices and market inputs used in determining the fair value of the servicing asset.  The balance of MSR included on the Consolidated Condensed Statements of Condition represents the rights to service approximately $99.2 billion of mortgage loans on March 31, 2008, for which a servicing right has been capitalized.

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, like other participants in the mortgage banking business, FHN relies primarily 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, and recent market activity and against its own experience.  Due to ongoing disruptions in the mortgage market, since third quarter 2007, more emphasis has been placed on third party broker price discovery and, when available, observable market trades in valuation modeling for MSR.


Following is a summary of changes in capitalized MSR as of March 31, 2008 and 2007:
 
   
First
   
Second
       
(Dollars in thousands)
 
Liens
   
Liens
   
HELOC
 
Fair value on January 1, 2007
  $ 1,495,215     $ 24,091     $ 14,636  
Addition of mortgage servicing rights
    84,707       3,998       1,041  
Reductions due to loan payments
    (61,698 )     (2,378 )     (1,683 )
Changes in fair value due to:
                       
  Changes in current market interest rates
    (17,833 )     (1 )     -  
  Other changes in fair value
    (54 )     -       -  
Fair value on March 31, 2007
  $ 1,500,337     $ 25,710     $ 13,994  
Fair value on January 1, 2008
  $ 1,122,415     $ 25,832     $ 11,573  
Addition of mortgage servicing rights
    78,871       -       887  
Reductions due to loan payments
    (37,448 )     (2,617 )     (707 )
Reductions due to sale
    (43,842 )     -       -  
Changes in fair value due to:
                       
  Changes in valuation model inputs
                       
    or assumptions
    (254,076 )     (3,089 )     (1,935 )
  Other changes in fair value
    (65 )     -       124  
Fair value on March 31, 2008
  $ 865,855     $ 20,126     $ 9,942  
 
14

Note 5 - Intangible Assets

The following is a summary of intangible assets, net of accumulated amortization, included in the Consolidated Condensed Statements of Condition:
 
         
Other
 
         
Intangible
 
(Dollars in thousands)
 
Goodwill
   
Assets*
 
December 31, 2006
  $ 275,582     $ 64,530  
Amortization expense
    -       (2,825 )
Divestitures
    -       (33 )
March 31, 2007
  $ 275,582     $ 61,672  
December 31, 2007
  $ 192,408     $ 56,907  
Amortization expense
    -       (2,440 )
Impairment
    -       (2,434 )
Divestitures
    -       (16 )
March 31, 2008
  $ 192,408     $ 52,017  
  * Represents customer lists, acquired contracts, premium on purchased deposits, and covenants not to compete.
 
The gross carrying amount of other intangible assets subject to amortization is $133.2 million on March 31, 2008, net of $81.2 million of accumulated amortization.  Estimated aggregate amortization expense for the remainder of 2008 is expected to be $6.4 million and is expected to be, $6.9 million, $6.0 million, $5.6 million and $4.1 million for the twelve-month periods of 2009, 2010, 2011 and 2012, respectively.

The following is a summary of goodwill detailed by reportable segments for the three months ended March 31:
 
   
Regional
   
Mortgage
   
Capital
       
(Dollars in thousands)
 
Banking
   
Banking
   
Markets
   
Total
 
December 31, 2006
  $ 94,276     $ 66,240     $ 115,066     $ 275,582  
March 31, 2007
  $ 94,276     $ 66,240     $ 115,066     $ 275,582  
December 31, 2007
  $ 77,342     $ -     $ 115,066     $ 192,408  
March 31, 2008
  $ 77,342     $ -     $ 115,066     $ 192,408  
 
15

Note 6 - Regulatory Capital

FHN is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on FHN's financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative measures of assets, liabilities and certain derivatives as calculated under regulatory accounting practices must be met.  Capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings and other factors.  Quantitative measures established by regulation to ensure capital adequacy require FHN to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets (leverage).  Management believes, as of March 31, 2008, that FHN met all capital adequacy requirements to which it was subject.

The actual capital amounts and ratios of FHN and FTBNA are presented in the table below.  In addition, FTBNA must also calculate its capital ratios after excluding financial subsidiaries as defined by the Gramm-Leach-Bliley Act of 1999.  Based on this calculation FTBNA’s Total Capital, Tier 1 Capital and Leverage ratios were 11.69 percent, 7.61 percent and 6.24 percent, respectively, on March 31, 2008, and were 11.84 percent, 8.18 percent and 6.85 percent, respectively, on March 31, 2007.
 
   
First Horizon National
   
First Tennessee Bank
   
Corporation
   
National Association
(Dollars in thousands)
 
   Amount
 
Ratio
   
          Amount
 
Ratio
On March 31, 2008:
                 
Actual:
                 
Total Capital
 
$3,864,902
 
13.01%
   
$3,667,303
 
12.42%
Tier 1 Capital
 
 2,443,900
 
8.23%
   
 2,348,599
 
7.95%
Leverage
 
 2,443,900
 
6.62%
   
 2,348,599
 
6.41%
                   
For Capital Adequacy Purposes:
                 
Total Capital
 
 2,376,745
>
  8.00
   
 2,362,202
>
      8.00
Tier 1 Capital
 
 1,188,373
>
  4.00
   
 1,181,101
>
      4.00
Leverage
 
 1,476,794
>
  4.00
   
 1,466,461
>
      4.00
                   
To Be Well Capitalized Under Prompt
       
    Corrective Action Provisions:
               
Total Capital
           
 2,952,753
>
     10.00
Tier 1 Capital
           
 1,771,652
>
      6.00
Leverage
           
 1,833,076
>
      5.00
On March 31, 2007:
             
 
 
Actual:
                 
Total Capital
 
$4,063,128
 
   12.95%
   
$3,828,139
 
       12.34%
Tier 1 Capital
 
 2,739,064
 
  8.73
   
 2,604,141
 
      8.40
Leverage
 
 2,739,064
 
  7.15
   
 2,604,141
 
      6.85
                   
For Capital Adequacy Purposes:
                 
Total Capital
 
 2,509,438
>
  8.00
   
 2,481,042
>
      8.00
Tier 1 Capital
 
 1,254,719
>
  4.00
   
 1,240,521
>
      4.00
Leverage
 
 1,532,304
>
  4.00
   
 1,520,784
>
      4.00
                   
To Be Well Capitalized Under Prompt
       
    Corrective Action Provisions:
               
Total Capital
           
 3,101,303
>
     10.00
Tier 1 Capital
           
 1,860,782
>
      6.00
Leverage
           
 1,900,980
>
      5.00
 
16

Note 7 - Earnings Per Share
 
The following table shows a reconciliation of earnings per common share to diluted earnings per common share:
 
     
Three Months Ended
     
March 31
(In thousands, except per share data)
   
            2008
            2007
Net income from continuing operations
  $
7,037
 $  70,307
Income from discontinued operations, net of tax
   
             883
                  240
Net income
  $
7,920
 $  70,547
         
Weighted average common shares
   
      126,116
           125,342
Effect of dilutive securities
   
             544
               3,362
Diluted average common shares
   
      126,660
           128,704
         
Earnings per common share
  $
.06
 $         .56
         
Diluted earnings per common share
  $
.06
 $         .55
Equity awards of 16,083 and 3,815 with a weighted average exercise price of $35.71 and $43.81 per share for the three months ended March 31, 2008 and 2007, respectively, were not included in the computation of diluted earnings per common share because such shares would have had an antidilutive effect on earnings per common share.
 
17

Note 8 - Contingencies and Other Disclosures
 
Contingencies. Contingent liabilities arise in the ordinary course of business, including those related to litigation. Various claims and lawsuits are pending against FHN and its subsidiaries. Although FHN cannot predict the outcome of these lawsuits, after consulting with counsel, management is of the opinion that when resolved, these lawsuits will not have a material adverse effect on the consolidated financial statements of FHN.
 
In November 2000, a complaint was filed in state court in Jackson County, Missouri against FHN’s subsidiary, First Horizon Home Loans. The case generally concerned the charging of certain loan origination fees, including fees permitted by Kansas and federal law but allegedly restricted or not permitted by Missouri law, when First Horizon Home Loans or its predecessor, McGuire Mortgage Company, made certain second-lien mortgage loans. Among other relief, plaintiffs sought a refund of fees, a repayment and forgiveness of loan interest, prejudgment interest, punitive damages, loan rescission, and attorneys’ fees. As a result of mediation, FHN entered into a final settlement agreement related to the McGuire lawsuit. The settlement has received final approval by the court, the court has entered its order making the settlement final, there have been no appeals, and the time for any appeals has expired. In connection with this settlement, FHN agreed to pay, under agreed circumstances using an agreed methodology, an aggregate of up to approximately $36 million. The period during which claims under the settlement can be made ended in 2007. Claims have been evaluated and objections made pursuant to the agreed upon challenge process. The challenge process has not yet concluded. Unchallenged claims have been paid, and as claims are paid, the reserve is reduced. At March 31, 2008, claims paid have totaled approximately $27 million and the total reserve remaining for this matter, based on the claims received and FHN’s evaluation of them to date, is approximately $4 million.
 
The loss reserve for this matter reflects an estimate of the amount that ultimately would be paid under the settlement. The amount reserved reflects the amount and value of claims actually received by the claims deadline plus fees and expenses that the settlement requires FHN to pay, all of which together are less than the maximum amount possible under the settlement. The ultimate amount paid under the settlement agreement is not expected to be higher than the amount reserved at present, and may be lower in the event some of the claims are reduced or rejected for reasons set forth in the settlement, and in any event cannot exceed the settlement amount.
 
In February 2008, a complaint was filed by Fifth Third Financial Corporation against FHN and its subsidiary FTBNA in the Chancery Court for Davidson County, Tennessee. The complaint alleged breach of a contract for the sale of nine bank branches in the Atlanta, Georgia metropolitan area. On March 26, 2008 FHN announced that the parties reached agreement on terms for the completion of the sale of nine branches by FTBNA to Fifth Third. This transaction was completed in May 2008.  Under the terms of the purchase agreement, Fifth Third is required to promptly file for dismissal of the litigation.  Fifth Third acquired the nine branches and assumed the related deposits. First Horizon retained all loans held at the branches.

Other disclosures – Indemnification agreements and guarantees.  In the ordinary course of business, FHN enters into indemnification agreements for legal proceedings against its directors and officers and standard representations and warranties for underwriting agreements, merger and acquisition agreements, loan sales, contractual commitments, and various other business transactions or arrangements.  The extent of FHN’s obligations under these agreements depends upon the occurrence of future events; therefore, it is not possible to estimate a maximum potential amount of payouts that could be required with such agreements.
 
FHN is a member of the Visa USA network. On October 3, 2007, the Visa organization of affiliated entities completed a series of global restructuring transactions to combine its affiliated operating companies, including Visa USA, under a single holding company, Visa Inc. (“Visa”).  Upon completion of the reorganization, the members of the Visa USA network remained contingently liable for certain Visa litigation matters.  Based on its proportionate membership share of Visa USA, FHN recognized a contingent liability of $55.7 million within noninterest expense in fourth quarter 2007 related to this contingent obligation.
 
In March 2008, Visa completed its initial public offering (IPO). Visa funded an escrow account from IPO proceeds that will be used to make payments related to the Visa litigation matters.  Upon funding of the escrow, FHN reversed $30.0 million of the contingent liability previously recognized with a corresponding credit to noninterest expense for its proportionate share of the escrow account.  A portion of FHN’s Class B shares of Visa were redeemed as part of the IPO resulting in $65.9 million of equity securities gains in first quarter 2008.
 
After the partial share redemption in conjunction with the IPO, FHN holds approximately 2.4 million Class B shares of Visa, which are included in the Consolidated Condensed Statement of Condition at their historical cost of $0.  Transfer of these shares is restricted for a minimum of three years with the shares ultimately being converted into Class A shares of Visa.  The final conversion ratio will fluctuate based on the ultimate settlement of the Visa litigation matters for which FHN has a proportionate contingent obligation.

First Horizon Home Loans, a division of First Tennessee Bank National Association, services a mortgage loan portfolio of $106.8 billion on March 31, 2008, a significant portion of which is held by GNMA, FNMA, FHLMC or private security holders.  In connection with its servicing activities, First Horizon Home Loans guarantees the receipt of the scheduled principal and interest payments on the underlying loans.  In the event of customer non-performance on the loan, First Horizon Home Loans is obligated to make the payment to the security holder.  Under the terms of the servicing agreements, First Horizon Home Loans can utilize payments received from other prepaid loans in order to make the security holder whole.  In the event payments are ultimately made by First Horizon Home Loans to satisfy this obligation, for loans sold with no recourse, all funds are recoverable from the government agency at foreclosure sale.

First Horizon Home Loans is also subject to losses in its loan servicing portfolio due to loan foreclosures and other recourse obligations. Certain agencies have the authority to limit their repayment guarantees on foreclosed loans resulting in certain foreclosure costs being borne
by servicers. In addition, First Horizon Home Loans has exposure on all loans sold with recourse. First Horizon Home Loans has various claims for reimbursement, repurchase obligations, and/or indemnification requests outstanding with government agencies or private investors. First Horizon Home Loans has evaluated all of its exposure under recourse obligations based on factors, which include loan delinquency status, foreclosure expectancy rates and claims outstanding.  Accordingly, First Horizon Home Loans had an allowance for losses on the mortgage servicing
 
18

Note 8 - Contingencies and Other Disclosures (continued)

portfolio of $20.6 million and $15.5 million on March 31 2008 and 2007, respectively.  First Horizon Home Loans has sold certain mortgage loans with an agreement to repurchase the loans upon default.  For the single-family residential loans, in the event of borrower nonperformance, First Horizon Home Loans would assume losses to the extent they exceed the value of the collateral and private mortgage insurance, FHA insurance or VA guarantees.  On March 31, 2008 and 2007, First Horizon Home Loans had single-family residential loans with outstanding balances of $99.0 million and $115.5 million, respectively, that were serviced on a full recourse basis. On March 31, 2008 and 2007, the outstanding principal balance of loans sold with limited recourse arrangements where some portion of the principal is at risk and serviced by First Horizon Home Loans was $3.6  billion and $3.1 billion, respectively.  Additionally, on March 31, 2008 and 2007, $5.7 billion and $4.9 billion, respectively, of mortgage loans were outstanding which were sold under limited recourse arrangements where the risk is limited to interest and servicing advances.

FHN has securitized and sold HELOC and second-lien mortgages which are held by private security holders, and on March 31, 2008, the outstanding principal balance of these loans was $247.8 million and $66.7 million, respectively.  On March 31, 2007, the outstanding principal balance of securitized and sold HELOC and second-lien mortgages was $335.3 million and $89.9 million, respectively.  In connection with its servicing activities, FTBNA does not guarantee the receipt of the scheduled principal and interest payments on the underlying loans but does have residual interests of $17.1 million and $42.9 million on March 31, 2008 and 2007, respectively, which are available to make the security holder whole in the event of credit losses. FHN has projected expected credit losses in the valuation of the residual interest.
 
19

Note 9 – Pension and Other Employee Benefits

Pension plan.  FHN provides pension benefits to employees retiring under the provisions of a noncontributory, defined benefit pension plan.  Employees of FHN’s mortgage division and certain insurance subsidiaries are not covered by the pension plan.  Pension benefits are based on years of service, average compensation near retirement and estimated social security benefits at age 65.  The annual funding is based on an actuarially determined amount using the entry age cost method.  The Pension Plan was closed to new participants on September 1, 2007.

FHN also maintains nonqualified pension plans for certain employees.  These plans are intended to provide supplemental retirement income to the participants including situations where benefits under the pension plan have been limited under the tax code.  All benefits provided under these plans are unfunded and payments to plan participants are made by FHN.

Other employee benefits.  FHN provides postretirement medical insurance to full-time employees retiring under the provisions of the FHN Pension Plan.  The postretirement medical plan is contributory with retiree contributions adjusted annually.  The plan is based on criteria that are a combination of the employee’s age and years of service and utilizes a two-step approach.  For any employee retiring on or after January 1, 1995, FHN contributes a fixed amount based on years of service and age at time of retirement. FHN’s postretirement benefits include prescription drug benefits.  The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) introduces a prescription drug benefit under Medicare Part D as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D  FHN anticipates the plan to be actuarially equivalent through 2012.

Effective January 1, 2007, FHN adopted the final provisions of SFAS No. 158, which required that the annual measurement date of a plan’s assets and liabilities be as of the date of the financial statements. As a result of adopting the measurement provisions of SFAS No. 158, undivided profits were reduced by $2.1 million, net of tax, and accumulated other comprehensive income was credited by $8.3 million, net of tax.

The components of net periodic benefit cost for the three months ended March 31 are as follows:
 
   
Pension Benefits
 
Postretirement Benefits
(Dollars in thousands)
 
2008
 
2007
 
2008
 
2007
Components of net periodic benefit cost/(benefit)
                       
Service cost
  $ 4,208     $ 4,327     $ 72     $ 75  
Interest cost
    7,340       6,154       390       278  
Expected return on plan assets
    (11,791 )     (10,637 )     (439 )     (441 )
Amortization of prior service cost/(benefit)
    216       220       (44 )     (44 )
Recognized losses/(gains)
    493       1,810       (58 )     (178 )
Amortization of transition obligation
    -       -       247       247  
Net periodic cost/(benefit)
  $ 466     $ 1,874     $ 168     $ (63 )
 
 FHN expects to make no additional contributions to the pension plan or to the other employee benefit plan in 2008.
 
20

Note 10 – Business Segment Information
 
FHN has five business segments, Regional Banking, Capital Markets, National Specialty Lending, Mortgage Banking and Corporate. The Regional Banking segment offers financial products and services, including traditional lending and deposit taking, to retail and commercial customers in Tennessee and surrounding markets. Additionally, Regional Banking provides investments, insurance, financial planning, trust services and asset management, credit card, cash management, and check clearing services.  The Capital Markets segment consists of traditional capital markets securities activities, structured finance, equity research, investment banking, loan sales, portfolio advisory, and correspondent banking. The National Specialty Lending segment consists of traditional consumer and construction lending activities in other national markets.  The Mortgage Banking segment consists of core mortgage banking elements including originations and servicing and the associated ancillary revenues related to these businesses.  The Corporate segment consists of restructuring, repositioning and efficiency initiatives, unallocated corporate expenses, expense on subordinated debt issuances and preferred stock, bank- owned life insurance, unallocated interest income associated with excess equity, net impact of raising incremental capital, revenue and expense associated with deferred compensation plans, funds management, and venture capital. Periodically, FHN adapts its segments to reflect changes in expense allocations among segments. Previously reported amounts have been reclassified to agree with current presentation.
 
In first quarter 2008, FHN revised its business line segments to better align with its strategic direction, representing a focus on its regional banking franchise and capital markets business.  To implement this change, the prior Retail/Commercial Banking segment was split into its major components with the national portions of consumer lending and construction lending assigned to a new National Specialty Lending segment that more appropriately reflects the ongoing wind down of these businesses.  Additionally, correspondent banking was shifted from Retail/Commercial Banking to the Capital Markets segment to better represent the complementary nature of these businesses.  To reflect its geographic focus, the remaining portions of the Retail/Commercial Banking segment now represent the new Regional Banking segment.  All prior period information has been revised to conform to the current segment structure.
 
Total revenue, expense and asset levels reflect those which are specifically identifiable or which are allocated based on an internal allocation method. Because the allocations are based on internally developed assignments and allocations, they are to an extent subjective. This assignment and allocation has been consistently applied for all periods presented. The following table reflects the amounts of consolidated revenue, expense, tax, and assets for each segment for the three months ended March 31:
 
   
Three Months Ended
 
   
March 31
 
(Dollars in thousands)
 
2008
   
2007
 
Total Consolidated
           
Net interest income
  $ 228,092     $ 237,419  
Provision for loan losses
    240,000       28,486  
Noninterest income
    449,076       283,188  
Noninterest expense
    438,277       403,012  
     Pre-tax (loss)/ income
    (1,109 )     89,109  
(Benefit)/ provision for income taxes
    (8,146 )     18,802  
Income from continuing operations
    7,037       70,307  
Income from discontinued operations, net of tax
    883       240  
Net income
  $ 7,920     $ 70,547  
Average assets
  $ 37,162,385     $ 38,647,044  
                 
Regional Banking
               
Net interest income
  $ 120,560     $ 138,927  
Provision for loan losses
    75,264       14,204  
Noninterest income
    87,068       88,629  
Noninterest expense
    150,520       156,319  
     Pre-tax (loss)/ income
    (18,156 )     57,033  
(Benefit)/ provision for income taxes
    (13,542 )     14,620  
(Loss)/ income from continuing operations
    (4,614 )     42,413  
Income from discontinued operations, net of tax
    883       240  
Net (loss)/ income
  $ (3,731 )   $ 42,653  
Average assets
  $ 12,230,813     $ 12,270,186  
Certain previously reported amounts have been reclassified to agree with current presentation.
 
21

Note 10 – Business Segment Information (continued)
 
   
Three Months Ended
 
   
March 31
 
(Dollars in thousands)
 
2008
   
2007
 
Capital Markets
           
Net interest income
  $ 19,649     $ 10,729  
Provision for loan losses
    15,031       1,162  
Noninterest income
    133,930       91,308  
Noninterest expense
    115,728       86,619  
     Pre-tax income
    22,820       14,256  
Provision for income taxes
    8,437       5,287  
Net income
  $ 14,383     $ 8,969  
Average assets
  $ 5,825,472     $ 6,072,481  
                 
National Specialty Lending
               
Net interest income
  $ 53,840     $ 64,556  
Provision for loan losses
    149,483       13,127  
Noninterest income
    654       11,999  
Noninterest expense
    25,149       35,179  
     Pre-tax (loss)/ income
    (120,138 )     28,249  
(Benefit)/ provision for income taxes
    (46,589 )     9,882  
Net (loss)/ income
  $ (73,549 )   $ 18,367  
Average assets
  $ 9,298,726     $ 9,677,039  
                 
Mortgage Lending
               
Net interest income
  $ 31,012     $ 20,596  
Provision for loan losses
    222       (7 )
Noninterest income
    168,014       76,709  
Noninterest expense
    147,543       105,240  
     Pre-tax income/ (loss)
    51,261       (7,928 )
Provision/ (benefit) for income taxes
    18,513       (10,433 )
Net income
  $ 32,748     $ 2,505  
Average assets
  $ 6,146,256     $ 6,214,864  
                 
Corporate
               
Net interest income
  $ 3,031     $ 2,611  
Noninterest income
    59,410       14,543  
Noninterest expense
    (663 )     19,655  
     Pre-tax income/ (loss)
    63,104       (2,501 )
Provision/ (benefit) for income taxes
    25,035       (554 )
Net income/ (loss)
  $ 38,069     $ (1,947 )
Average assets
  $ 3,661,118     $ 4,412,476  
Certain previously reported amounts have been reclassified to agree with current presentation.
 
22

Note 11 – Derivatives

In the normal course of business, FHN utilizes various financial instruments, through its mortgage banking, capital markets and risk management operations, which include derivative contracts and credit-related arrangements, as part of its risk management strategy and as a means to meet customers’ needs.  These instruments are subject to credit and market risks in excess of the amount recorded on the balance sheet in accordance with generally accepted accounting principles.  The contractual or notional amounts of these financial instruments do not necessarily represent credit or market risk.  However, they can be used to measure the extent of involvement in various types of financial instruments. Controls and monitoring procedures for these instruments have been established and are routinely reevaluated.  The Asset/Liability Committee (ALCO) monitors the usage and effectiveness of these financial instruments.

Credit risk represents the potential loss that may occur because a party to a transaction fails to perform according to the terms of the contract. The measure of credit exposure is the replacement cost of contracts with a positive fair value.  FHN manages credit risk by entering into financial instrument transactions through national exchanges, primary dealers or approved counterparties, and using mutual margining agreements whenever possible to limit potential exposure.  With exchange-traded contracts, the credit risk is limited to the clearinghouse used.  For non-exchange traded instruments, credit risk may occur when there is a gain in the fair value of the financial instrument and the counterparty fails to perform according to the terms of the contract and/or when the collateral proves to be of insufficient value.  Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates, mortgage loan prepayment speeds or the prices of debt instruments.  FHN manages market risk by establishing and monitoring limits on the types and degree of risk that may be undertaken. FHN continually measures this risk through the use of models that measure value-at-risk and earnings-at-risk.

Derivative Instruments. FHN enters into various derivative contracts both in a dealer capacity, to facilitate customer transactions, and also as a risk management tool. Where contracts have been created for customers, FHN enters into transactions with dealers to offset its risk exposure. Derivatives are also used as a risk management tool to hedge FHN’s exposure to changes in interest rates or other defined market risks.

Derivative instruments are recorded on the Consolidated Condensed Statements of Condition as other assets or other liabilities measured at fair value.  Fair value is defined as the price that would be received to sell a derivative asset or paid to transfer a derivative liability in an orderly transaction between market participants on the transaction date. Fair value is determined using available market information and appropriate valuation methodologies. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability are recognized currently in earnings.  For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in accumulated other comprehensive income and subsequently reclassified to earnings as the hedged transaction impacts net income.  Any ineffective portion of a cash flow hedge is recognized currently in earnings.  For freestanding derivative instruments, changes in fair value are recognized currently in earnings.  Cash flows from derivative contracts are reported as operating activities on the Consolidated Condensed Statements of Cash Flows.

Interest rate forward contracts are over-the-counter contracts where two parties agree to purchase and sell a specific quantity of a financial instrument at a specified price, with delivery or settlement at a specified date.  Futures contracts are exchange-traded contracts where two parties agree to purchase and sell a specific quantity of a financial instrument at a specific price, with delivery or settlement at a specified date.  Interest rate option contracts give the purchaser the right, but not the obligation, to buy or sell a specified quantity of a financial instrument, at a specified price, during a specified period of time.  Caps and floors are options that are linked to a notional principal amount and an underlying indexed interest rate.  Interest rate swaps involve the exchange of interest payments at specified intervals between two parties without the exchange of any underlying principal.  Swaptions are options on interest rate swaps that give the purchaser the right, but not the obligation, to enter into an interest rate swap agreement during a specified period of time.

On March 31, 2008, FHN had approximately $36.3 million of cash receivables and $238.8 million of cash payables related to collateral posting under master netting arrangements with derivative counterparties.

Mortgage Banking

Mortgage banking interest rate lock commitments are short-term commitments to fund mortgage loan applications in process (the pipeline) for a fixed term at a fixed price. During the term of an interest rate lock commitment, First Horizon Home Loans has the risk that interest rates will change from the rate quoted to the borrower. First Horizon Home Loans enters into forward sales and futures contracts as economic hedges designed to protect the value of the interest rate lock commitments from changes in value due to changes in interest rates. Under SFAS No. 133, interest rate lock commitments qualify as derivative financial instruments and as such do not qualify for hedge accounting treatment. As a result,
 
23

Note 11 – Derivatives (continued)

the interest rate lock commitments are recorded at fair value with changes in fair value recorded in current earnings as gain or loss on the sale of loans in mortgage banking noninterest income.  Prior to adoption of SAB No.109 fair value excluded the value of associated servicing rights. Additionally, on January 1, 2008, FHN adopted SFAS No. 157 which affected the valuation of interest rate lock commitments previously measured under the guidance of the EITF 02-03 by requiring recognition of concessions upon entry into the lock.  Changes in the fair value of the derivatives that serve as economic hedges of interest rate lock commitments are also included in current earnings as a component of gain or loss on the sale of loans in mortgage banking noninterest income.

First Horizon Home Loans’ warehouse (mortgage loans held for sale) is subject to changes in fair value, due to fluctuations in interest rates from the loan closing date through the date of sale of the loan into the secondary market. Typically, the fair value of the warehouse declines in value when interest rates increase and rises in value when interest rates decrease. To mitigate this risk, First Horizon Home Loans enters into forward sales contracts and futures contracts to provide an economic hedge against those changes in fair value on a significant portion of the warehouse. These derivatives are recorded at fair value with changes in fair value recorded in current earnings as a component of the gain or loss on the sale of loans in mortgage banking noninterest income.

FHN adopted SFAS No. 159 on January 1, 2008.  As discussed below, prior to adoption of SFAS No. 159, all warehouse loans were carried at the lower of cost or market, where carrying value was adjusted for successful hedging under SFAS No. 133 and the comparison of carrying value to market was performed for aggregate loan pools.  To the extent that these interest rate derivatives were designated to hedge specific similar assets in the warehouse and prospective analyses indicate that high correlation was expected, the hedged loans were considered for hedge accounting under SFAS No. 133.  Anticipated correlation was determined by projecting a dollar offset relationship for each tranche based on anticipated changes in the fair value of the hedged mortgage loans and the related derivatives, in response to various interest rate shock scenarios.  Hedges were reset daily and the statistical correlation was calculated using these daily data points. Retrospective hedge effectiveness was measured using the regression correlation results. First Horizon Home Loans generally maintained a coverage ratio (the ratio of expected change in the fair value of derivatives to expected change in the fair value of hedged assets) of approximately 100 percent on warehouse loans hedged under SFAS No. 133. Effective SFAS No. 133 hedging resulted in adjustments to the recorded value of the hedged loans. These basis adjustments, as well as the change in fair value of derivatives attributable to effective hedging, were included as a component of the gain or loss on the sale of loans in mortgage banking noninterest income. Warehouse loans qualifying for SFAS No. 133 hedge accounting treatment totaled $2.0 billion on March 31, 2007.  The balance sheet impact of the related derivatives were net assets of $.2 million on March 31, 2007. Net losses of $.7 million representing the ineffective portion of these fair value hedges were recognized as a component of gain or loss on sale of loans for the three months ended March 31, 2007.

Upon adoption of SFAS No. 159, FHN elected to prospectively account for substantially all of its mortgage loan warehouse products at fair value upon origination and correspondingly discontinued the application of SFAS No. 133 hedging relationships for all new originations.  First Horizon Home Loans enters into forward sales and futures contracts to provide an economic hedge against changes in fair value on a significant portion of the warehouse.

In accordance with SFAS No. 156, First Horizon revalues MSR to current fair value each month.  Changes in fair value are included in servicing income in mortgage banking noninterest income. First Horizon Home Loans also enters into economic hedges of the MSR to minimize the effects of loss in value of MSR associated with increased prepayment activity that generally results from declining interest rates. In a rising interest rate environment, the value of the MSR generally will increase while the value of the hedge instruments will decline.  First Horizon Home Loans enters into interest rate contracts (including swaps, swaptions, and mortgage forward sales contracts) to hedge against the effects of changes in fair value of its MSR.  Substantially all capitalized MSR are hedged for economic purposes.

First Horizon Home Loans utilizes derivatives (including swaps, swaptions, and mortgage forward sales contracts) that change in value inversely to the movement of interest rates to protect the value of its interest-only securities as an economic hedge.  Changes in the fair value of these derivatives are recognized currently in earnings in mortgage banking noninterest income as a component of servicing income.

Interest-only securities are included in trading securities with changes in fair value recognized currently in earnings in mortgage banking noninterest income as a component of servicing income.

Capital Markets

Capital Markets trades U.S. Treasury, U.S. Agency, mortgage-backed, corporate and municipal fixed income securities, and other securities for distribution to customers.  When these securities settle on a delayed basis, they are considered forward contracts.  Capital Markets also
 
24

Note 11 – Derivatives (continued)

enters into interest rate contracts, including options, caps, swaps, futures and floors for its customers.  In addition, Capital Markets enters into futures contracts to economically hedge interest rate risk associated with its securities inventory.  These transactions are measured at
fair value, with changes in fair value recognized currently in capital markets noninterest income. Related assets and liabilities are recorded on the balance sheet as other assets and other liabilities.  Credit risk related to these transactions is controlled through credit approvals, risk control limits and ongoing monitoring procedures through the Credit Risk Management Committee.

In third quarter 2007, Capital Markets hedged $47.5 million of held-to-maturity trust preferred securities, which have an initial fixed rate term of five years before conversion to a floating rate.  Capital Markets has entered into pay fixed, receive floating interest rate swaps to hedge the interest rate risk associated with this initial five year term.  The balance sheet impact of those swaps was $3.6 million in other liabilities on March 31, 2008. Interest paid or received for these swaps was recognized as an adjustment of the interest income of the assets whose risk is being hedged.

Interest Rate Risk Management

FHN’s ALCO focuses on managing market risk by controlling and limiting earnings volatility attributable to changes in interest rates.  Interest rate risk exists to the extent that interest-earning assets and liabilities have different maturity or repricing characteristics.  FHN uses derivatives, including swaps, caps, options, and collars, that are designed to moderate the impact on earnings as interest rates change. FHN’s interest rate risk management policy is to use derivatives not to speculate but to hedge interest rate risk or market value of assets or liabilities.  In addition, FHN has entered into certain interest rate swaps and caps as a part of a product offering to commercial customers with customer derivatives paired with offsetting market instruments that, when completed, are designed to eliminate market risk.  These contracts do not qualify for hedge accounting and are measured at fair value with gains or losses included in current earnings in noninterest income.

FHN had entered into pay floating, receive fixed interest rate swaps to hedge the interest rate risk of certain large institutional certificates of deposit, totaling $61.7 million on March 31, 2007. These swaps matured in first quarter 2008 and had been accounted for as fair value hedges under the shortcut method.  The balance sheet impact of these swaps was $.8 million in other liabilities on March 31, 2007. Interest paid or received for these swaps was recognized as an adjustment of the interest expense of the liabilities whose risk was being managed.

FHN has entered into pay floating, receive fixed interest rate swaps to hedge the interest rate risk of certain long-term debt obligations, totaling $1.2 billion and $1.1 billion on March 31, 2008 and 2007, respectively. These swaps have been accounted for as fair value hedges under the shortcut method. The balance sheet impact of these swaps was $77.0 million in other assets on March 31, 2008, and $2.2 million in other assets and $14.9 million in other liabilities on March 31, 2007. Interest paid or received for these swaps was recognized as an adjustment of the interest expense of the liabilities whose risk was being managed.

FHN designates derivative transactions in hedging strategies to manage interest rate risk on subordinated debt related to its trust preferred securities. These qualify for hedge accounting under SFAS No. 133 using the long haul method.  FHN has entered into pay floating, receive fixed interest rate swaps to hedge the interest rate risk of certain subordinated debt totaling $.3 billion on March 31, 2008 and 2007. The balance sheet impact of these swaps was $6.2 million and $17.8 million in other liabilities on March 31, 2008 and 2007, respectively.  There was no ineffectiveness related to these hedges. Interest paid or received for these swaps was recognized as an adjustment of the interest expense of the liabilities whose risk is being managed.

FHN had utilized an interest rate swap as a cash flow hedge of the interest payment on floating-rate bank notes with a fair value of $100.4 million on March 31, 2007, and a maturity in first quarter 2009, which in first quarter 2008 was called early. The balance sheet impact of this swap was $.4 million in other assets and $.2 million, net of tax, in other comprehensive income on March 31, 2007. There was no ineffectiveness related to this hedge.
 
25

Note 12 - Restructuring, Repositioning, and Efficiency Charges

Throughout 2007, FHN conducted a company-wide review of business practices with the goal of improving its overall profitability and productivity.  In addition, during 2007 management announced its intention to sell 34 full-service First Horizon Bank branches in its national banking markets, as well as plans to right size First Horizon Home Loans’ mortgage banking operations and to downsize FHN’s national lending operations, in order to redeploy capital to higher-return businesses.  As part of its strategy to reduce its national real estate portfolio, FHN announced in January 2008 that it was discontinuing national homebuilder and commercial real estate lending through its First Horizon Construction Lending offices.  Additionally, FHN is continuing the repositioning of First Horizon Home Loans’ mortgage banking operations, including sales of MSR in fourth quarter 2007 and first quarter 2008.  Net costs recognized by FHN in the three months ended March 31, 2008 related to restructuring, repositioning, and efficiency activities were $21.3 million.  Of this amount, $15.1 million represents exit costs that have been accounted for in accordance with Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146).

Significant expenses in the first quarter of 2008 resulted from the following actions:
·  
Expense of $15.1 million associated with organizational and compensation changes due to right sizing operating segments, the divestiture of certain First Horizon Bank branches, and consolidating functional areas.
·  
Losses of approximately $1.0 million from the sales of certain First Horizon Bank branches.
·  
Transaction costs of $2.7 million from the sale of mortgage servicing rights.
·  
Expense of $2.5 million for the writedown of certain intangibles and other assets resulting from the change in FHN’s national banking strategy.

Losses from the disposition of certain First Horizon Bank branches in first quarter 2008 are included in losses on divestitures in the noninterest income section of the Consolidated Condensed Statements of Income.  Transaction costs recognized in the first quarter of 2008 from selling mortgage servicing rights are recorded as a reduction of mortgage banking income in the noninterest income section of the Consolidated Condensed Statements of Income.  All other costs associated with the restructuring, repositioning, and efficiency initiatives implemented by management are included in the noninterest expense section of the Consolidated Condensed Statements of Income, including severance and other employee-related costs recognized in relation to such initiatives which are recorded in employee compensation, incentives, and benefits, facilities consolidation costs and related asset impairment costs which are included in occupancy, costs associated with the impairment of premises and equipment which are included in equipment rentals, depreciation and maintenance and other costs associated with such initiatives, including professional fees, intangible asset impairment costs, and the accrual of amounts due in second quarter 2008 in relation to the divestiture of the remaining First Horizon bank branches to be sold, which are included in all other expense.  Additional amounts will be recognized in second quarter 2008 in relation to the conclusion of the First Horizon Bank branch divestitures and the reduction in mortgage banking operations.  However, at this time the exact amounts of these additional charges are still being determined.

Activity in the restructuring and repositioning liability for the three months ended March 31, 2008 is presented in the following table, along with other restructuring and repositioning expenses recognized.  All costs associated with FHN’s restructuring, repositioning, and efficiency initiatives in the first quarter of 2008 are recorded as unallocated corporate charges within the Corporate segment.
 
26

Note 12 - Restructuring, Repositioning, and Efficiency Charges (continued)
 
   
Three Months Ended
 
(Dollars in thousands)
 
March 31, 2008
 
             
   
Charged to
       
   
Expense
   
Liability
 
Beginning Balance
  $ -     $ 19,675  
Severance and other employee related costs
    7,390       7,390  
Facility consolidation costs
    891       891  
Other exit costs, professional fees and other
    6,832       6,832  
Total Accrued
    15,113       34,788  
Payments*
    -       11,475  
Accrual Reversals
    -       623  
    Restructuring & Repositioning Reserve Balance
  $ 15,113     $ 22,690  
Other Restructuring & Repositioning Expenses:
               
    Mortgage banking expense on servicing sale
    2,667          
    Loss on First Horizon Bank branch divestitures
    995          
    Impairment of premises and equipment
    82          
    Impairment of intangible assets
    2,429          
    Total Other Restructuring & Repositioning Expense
    6,173          
Total Restructuring, Repositioning Charges
  $ 21,286          
* Includes payments related to:
Three Months Ended
 
March 31, 2008
       Severance and other employee related costs
 $                 6,655 
       Facility consolidation costs
                    1,234 
       Other exit costs, professional fees and other
                    3,586 
 
 $               11,475 
 
Cumulative amounts incurred to date as of March 31, 2008, for costs associated with FHN’s restructuring, repositioning, and efficiency initiatives are presented in the following table:
 
   
Charged to
 
(Dollars in thousands)
 
Expense
 
Severance and other employee related costs*
  $ 32,922  
Facility consolidation costs
    14,022  
Other exit costs, professional fees and other
    16,087  
Other Restructuring & Repositioning (Income) and Expense:
       
    Loan portfolio divestiture
    7,672  
    Mortgage banking expense on servicing sales
    9,095  
    Net gain on First Horizon Bank branch divestitures
    (14,700 )
    Impairment of premises and equipment
    9,370  
    Impairment of intangible assets
    16,428  
    Impairment of other assets
    29,108  
Total Restructuring, Repositioning Charges Incurred to Date as of March 31, 2008
  $ 120,004  
*Includes $1.2 million of deferred severance-related payments that will be paid after 2008.
 
27

Note 13 – Fair Values of Assets and Liabilities

Effective January 1, 2008, upon adoption of SFAS No. 159, FHN elected the fair value option on a prospective basis for almost all types of mortgage loans originated for sale purposes including mortgage loan originations for which an active secondary market and readily available market prices currently exist to reliably support fair value pricing models used for such loans. FHN believes such election will reduce certain timing differences and better match changes in the value of such loans with changes in the value of derivatives used as economic hedges for these assets.  No transition adjustment was required upon adoption of SFAS No. 159 as FHN continues to account for mortgage loans held for sale which were originated prior to 2008 at the lower of cost or market value.  Mortgage loans originated for sale are included in loans held for sale on the Consolidated Condensed Statements of Condition.  Other interests retained in relation to residential loan sales and securitizations are included in trading securities on the Consolidated Condensed Statements of Condition. Additionally, effective January 1, 2008, FHN adopted SFAS No. 157 for existing fair value measurement requirements related to financial assets and liabilities as well as to non-financial assets and liabilities which are re-measured at least annually.  FSP FAS 157-2 delays the effective date of SFAS No. 157 until fiscal years beginning after November 15, 2008, for non-financial assets and liabilities which are recognized at fair value on a non-recurring basis.  Therefore, as of first quarter 2008, FHN has not applied the provisions of SFAS No. 157 for non-recurring fair value measurements prepared related to its non-financial long-lived assets under SFAS No. 144 (including real estate acquired by foreclosure) or its non-financial liabilities for exit or disposal activities initially measured at fair value under SFAS No. 146, as well as to goodwill and indefinite-lived intangible assets which are measured at fair value on a recurring basis for impairment assessment purposes but are not recognized in the financial statements at fair value.

In accordance with SFAS No. 157, FHN groups its assets and liabilities measured at fair value in three levels, based on the markets in which such assets and liabilities are traded and the reliability of the assumptions used to determine fair value. This hierarchy requires FHN to maximize the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.  Each fair value measurement is placed into the proper level based on the lowest level of significant input.  These levels are:

§  
Level 1 – Valuations based on observable inputs that reflect quoted prices for assets and liabilities traded in active markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

§  
Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets which are observable, either directly or indirectly. For example, mortgage loans held for sale are valued based on what securitization markets are currently offering for mortgage loans with similar characteristics. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

§  
Level 3 – Valuations for assets and liabilities that include significant unobservable inputs and are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.
 
28

Note 13 – Fair Values of Assets and Liabilities (continued)
 
   
March 31, 2008
 
(Dollars in thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
Trading securities
  $ 1,553,052     $ 2,269     $ 1,158,587     $ 392,196  
Loans held for sale
    2,302,261       -       2,297,508       4,753  
Securities available for sale
    2,910,971       39,218       2,718,377       153,376  
Mortgage servicing rights, net
    895,923       -       -       895,923  
Other assets
    811,373       121,861       207,840       481,672  
    Total
  $ 8,473,580