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 September  30, 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   (I.R.S. Employer
incorporation or organization)    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.
  
Class
Outstanding on September 30, 2008
Common Stock, $.625 par value
201,593,623.521(a)
 
(a) Includes 5,986,902.521 stock dividend shares distributed on October 1, 2008 to shareholders of record on September 12, 2008
 
1

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
   
September 30
   
December 31
 
(Dollars in thousands)(Unaudited)
 
2008
   
2007
   
2007
 
Assets:
                 
Cash and due from banks
  $ 815,935     $ 936,707     $ 1,170,220  
Federal funds sold and securities
                       
  purchased under agreements to resell
    921,295       1,096,624       1,089,495  
    Total cash and cash equivalents
    1,737,230       2,033,331       2,259,715  
Interest-bearing deposits with other financial institutions
    37,546       30,993       39,422  
Trading securities
    1,561,024       1,734,653       1,768,763  
Loans held for sale
    718,029       2,900,464       3,461,712  
Loans held for sale - divestiture
    -       565,492       289,878  
Securities available for sale
    2,840,739       3,076,120       3,032,551  
Securities held to maturity (fair value of $- on September 30, 2008; $240 on
         
   September 30, 2007; and $240 on December 31, 2007)
    -       240       240  
Loans, net of unearned income
    21,601,898       21,973,004       22,103,516  
  Less:  Allowance for loan losses
    760,456       236,611       342,341  
    Total net loans
    20,841,442       21,736,393       21,761,175  
Mortgage servicing rights, net
    798,491       1,470,589       1,159,820  
Goodwill
    192,408       267,228       192,408  
Other intangible assets, net
    46,887       58,738       56,907  
Capital markets receivables
    1,651,547       1,219,720       524,419  
Premises and equipment, net
    336,078       411,515       399,305  
Real estate acquired by foreclosure
    151,461       75,656       103,982  
Other assets
    1,891,494       1,874,497       1,949,308  
Other assets - divestiture
    -       22,623       15,856  
Total assets
  $ 32,804,376     $ 37,478,252     $ 37,015,461  
                         
Liabilities and shareholders' equity:
                       
Deposits:
                       
  Savings
  $ 4,350,832     $ 3,592,732     $ 3,872,684  
  Time deposits
    2,510,344       2,822,792       2,826,301  
  Other interest-bearing deposits
    1,638,731       1,674,624       1,946,933  
  Interest-bearing deposits-divestiture
    -       361,368       189,051  
  Certificates of deposit $100,000 and more
    1,470,089       5,142,169       3,129,532  
  Certificates of deposit $100,000 and more - divestiture
    -       41,037       12,617  
     Interest-bearing
    9,969,996       13,634,722       11,977,118  
  Noninterest-bearing
    3,808,239       4,928,233       5,026,417  
  Deposits - divestiture
    -       72,404       28,750  
     Total deposits
    13,778,235       18,635,359       17,032,285  
Federal funds purchased and securities
                       
  sold under agreements to repurchase
    1,890,681       4,039,827       4,829,597  
Federal funds purchased and securities
                       
  sold under agreements to repurchase - divestiture
    -       -       20,999  
Trading liabilities
    380,896       543,060       556,144  
Other short-term borrowings and commercial paper
    6,149,073       2,396,316       3,422,995  
Term borrowings
    4,545,791       6,015,954       6,027,967  
Other collateralized borrowings
    749,797       784,599       800,450  
  Total long-term debt
    5,295,588       6,800,553       6,828,417  
Capital markets payables
    1,645,118       1,053,349       586,358  
Other liabilities
    791,867       1,253,295       1,305,868  
Other liabilities-divestiture
    -       39,389       1,925  
    Total liabilities
    29,931,458       34,761,148       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 - 201,593,624 on September 30, 2008;
                 
  130,257,225 on September 30, 2007; and 130,234,884 on December 31, 2007) (a)
    125,996       78,992       78,979  
Capital surplus
    1,016,498       360,016       361,826  
Undivided profits
    1,483,184       2,048,689       1,742,892  
Accumulated other comprehensive (loss)/income, net
    (48,037 )     (65,870 )     (48,101 )
    Total shareholders' equity
    2,577,641       2,421,827       2,135,596  
Total liabilities and shareholders' equity
  $ 32,804,376     $ 37,478,252     $ 37,015,461  
See accompanying notes to consolidated condensed financial statements.
Certain previously reported amounts have been reclassified to agree with current presentation.
(a) Outstanding shares have been restated to reflect October 1, 2008 stock dividend.

 
4

 

CONSOLIDATED CONDENSED STATEMENTS OF INCOME
   First Horizon National Corporation
   
Three Months Ended
   
Nine Months Ended
 
   
September 30
   
September 30
 
(Dollars in thousands except per share data)(Unaudited)
 
2008
   
2007
   
2008
   
2007
 
Interest income:
                       
Interest and fees on loans
  $ 281,648       413,275     $ 898,743       1,236,956  
Interest on investment securities
    38,733       44,990       118,681       146,365  
Interest on loans held for sale
    29,078       66,570       141,732       191,338  
Interest on trading securities
    27,586       41,898       93,665       132,530  
Interest on other earning assets
    6,198       16,002       22,350       53,634  
    Total interest income
    383,243       582,735       1,275,171       1,760,823  
Interest expense:
                               
Interest on deposits:
                               
  Savings
    16,707       29,140       60,957       85,090  
  Time deposits
    22,174       34,745       79,216       101,337  
  Other interest-bearing deposits
    3,478       6,179       12,940       19,876  
  Certificates of deposit $100,000 and more
    15,123       92,557       63,552       309,463  
Interest on trading liabilities
    8,304       10,295       27,319       40,928  
Interest on short-term borrowings
    47,192       75,114       166,666       211,210  
Interest on long-term debt
    47,118       96,901       174,387       278,264  
    Total interest expense
    160,096       344,931       585,037       1,046,168  
Net interest income
    223,147       237,804       690,134       714,655  
Provision for loan losses
    340,000       43,352       800,000       116,246  
Net interest income/(loss) after provision for loan losses
    (116,853 )     194,452       (109,866 )     598,409  
Noninterest income:
                               
Capital markets
    95,954       63,722       349,749       235,889  
Deposit transactions and cash management
    45,802       44,863       135,152       127,300  
Mortgage banking
    106,817       39,022       437,947       183,419  
Trust services and investment management
    8,154       9,922       26,146       30,238  
Insurance commissions
    7,332       6,747       22,298       24,210  
Gains/(losses) from loan sales and securitizations
    3,238       4,774       (7,843 )     24,052  
Equity securities gains/(losses), net
    (210 )     -       63,833       2,967  
Debt securities gains, net
    -       -       931       6,292  
Losses on divestitures
    (17,489 )     -       (18,913 )     -  
All other income and commissions
    55,575       34,425       143,995       132,595  
    Total noninterest income
    305,173       203,475       1,153,295       766,962  
Adjusted gross income after provision for loan losses
    188,320       397,927       1,043,429       1,365,371  
Noninterest expense:
                               
Employee compensation, incentives and benefits
    215,498       236,683       780,046       741,217  
Occupancy
    27,210       34,778       85,819       96,964  
Equipment rentals, depreciation and maintenance
    12,336       17,270       45,615       56,674  
Operations services
    20,041       18,774       58,129       54,052  
Communications and courier
    9,628       10,959       32,109       33,245  
Amortization of intangible assets
    1,802       2,647       6,424       8,095  
Goodwill impairment
    -       13,010       -       13,010  
All other expense
    115,759       87,501       298,252       278,617  
    Total noninterest expense
    402,274       421,622       1,306,394       1,281,874  
Income/(loss) before income taxes
    (213,954 )     (23,695 )     (262,965 )     83,497  
Provision/(benefit) for income taxes
    (88,859 )     (9,330 )     (125,826 )     5,611  
Income/(loss) from continuing operations
    (125,095 )     (14,365 )     (137,139 )     77,886  
Income from discontinued operations, net of tax
    -       209       883       628  
Net income/(loss)
  $ (125,095 )   $ (14,156 )   $ (136,256 )   $ 78,514  
Earnings/(loss) per common share  (Note 8)
  $ (.62 )   $ (.11 )   $ (.80 )   $ .61  
Diluted earnings/(loss) per common share  (Note 8)
  $ (.62 )   $ (.11 )   $ (.80 )   $ .60  
Weighted average common shares (Note 8)
    201,184       129,917       169,482       129,611  
Diluted average common shares (Note 8)
    201,184       129,917       169,482       131,760  
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/(loss)
    (136,256 )     78,514  
Other comprehensive income/(loss):
               
  Unrealized fair value adjustments, net of tax:
               
    Cash flow hedges
    (6 )     (268 )
    Securities available for sale
    (2,679 )     (5,591 )
    Recognized pension and other employee benefit plans net periodic benefit costs
    2,749       4,127  
Comprehensive income/(loss)
    (136,192 )     76,782  
Cash dividends declared
    (64,431 )     (170,620 )
Common stock issuance (69 million shares issued at $10 per share
    659,659       -  
    net of offering costs)
               
Common stock repurchased
    (261 )     (1,099 )
Common stock issued for:
               
  Stock options and restricted stock
    572       34,243  
Excess tax benefit from stock-based compensation arrangements
    (1,531 )     6,261  
Stock-based compensation expense
    5,262       9,016  
Other
    -       31  
Balance, September 30
  $ 2,577,642     $ 2,421,827  
See accompanying notes to consolidated condensed financial statements.
               

 
6

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
  First Horizon National Corporation
     
Nine Months Ended September 30
 
(Dollars in thousands)(Unaudited)
 
2008
   
2007
 
Operating
Net (loss)/income
  $ (129,451 )   $ 78,514  
Activities
Adjustments to reconcile net (loss)/income to net cash provided/(used) by operating activities:
         
 
    Provision for loan losses
    800,000       116,246  
 
    (Benefit)/provision for deferred income tax
    (221,764 )     5,611  
 
    Depreciation and amortization of premises and equipment
    31,995       44,286  
 
    Amortization of intangible assets
    6,424       8,095  
 
    Net other amortization and accretion
    34,236       48,978  
 
    Decrease in derivatives, net
    (33,393 )     (103,163 )
 
    Market value adjustment on mortgage servicing rights
    63,769       258  
 
    Provision for foreclosure reserve
    10,432       4,144  
 
    Loss on divestitures
    18,913       -  
 
    Stock-based compensation expense
    5,262       9,016  
 
    Excess tax benefit from stock-based compensation arrangements
    1,531       (6,261 )
 
    Equity securities gains, net
    (63,833 )     (2,967 )
 
    Debt securities gains, net
    (931 )     (6,292 )
 
    Gains on repurchases of debt
    (31,515 )     -  
 
    Net losses on disposal of fixed assets
    23,795       1,093  
 
    Net (increase)/decrease in:
               
 
      Trading securities
    76,639       496,092  
 
      Loans held for sale
    2,775,183       (26,887 )
 
      Capital markets receivables
    (1,127,128 )     (487,438 )
 
      Interest receivable
    24,753       3,466  
 
      Other assets
    122,709       24,965  
 
    Net increase/(decrease) in:
               
 
      Capital markets payables
    1,058,760       253,860  
 
      Interest payable
    (38,792 )     4,984  
 
      Other liabilities
    (308,683 )     (74,502 )
 
      Trading liabilities
    (175,248 )     (246,897 )
 
        Total adjustments
    3,053,114       66,687  
 
Net cash provided by operating activities
    2,923,663       145,201  
Investing
Held to maturity securities:
               
Activities
  Maturities
    240       29  
 
Available for sale securities:
               
 
  Sales
    104,940       636,188  
 
  Maturities
    503,984       765,601  
 
  Purchases
    (348,888 )     (543,545 )
 
Premises and equipment:
               
 
  Purchases/(Sales)
    (37,050 )     (24,194 )
 
Net decrease in securitization retained interests classified as trading securities
    43,237       -  
 
Net increase/(decrease) in loans
    272,115       (581,368 )
 
Net increase/(decrease) in interest-bearing deposits with other financial institutions
    1,876       (12,952 )
 
Cash payments related to divestitures
    (20,518 )     -  
 
Net cash provided by investing activities
    519,936       239,759  
Financing
Common stock:
               
Activities
  Exercise of stock options
    511       34,450  
 
  Cash dividends paid
    (64,069 )     (168,506 )
 
  Repurchase of shares
    (261 )     (1,099 )
 
  Issuance of shares
    659,660       -  
 
  Excess tax benefit from stock-based compensation arrangements
    (1,531 )     6,261  
 
Long-term debt:
               
 
  Issuance
    25,002       1,222,431  
 
  Payments
    (1,354,261 )     (265,056 )
 
  Cash paid for repurchase of debt
    (212,260 )     -  
 
Issuance of preferred stock of subsidiary
    -       8  
 
Repurchase of preferred stock of subsidiary
    -       (1 )
 
Net increase/(decrease) in:
               
 
  Deposits
    (2,785,070 )     (1,577,872 )
 
  Short-term borrowings
    (233,805 )     251,663  
 
Net cash (used)/provided by financing activities
    (3,966,084 )     (497,721 )
 
Net decrease in cash and cash equivalents
    (522,485 )     (112,761 )
 
Cash and cash equivalents at beginning of period
    2,259,715       2,146,092  
 
Cash and cash equivalents at end of period
  $ 1,737,230     $ 2,033,331  
 
Total interest paid
    621,812       1,039,828  
 
Total income taxes paid
    183,536       14,016  
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.  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 14 – Fair Values of Assets and Liabilities for additional information.
 
After adoption of SFAS No. 159, FHN continued 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 was not elected at the lower of cost or market value.  For such loans, net origination fees and costs were 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 were included in noninterest income.  Interests retained from the sale of such loans are included as a component of trading securities on the Consolidated Condensed Statements of Condition.
 
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.  Second quarter 2008 earnings were negatively impacted by $20.9 million related to the adoption of SAB No. 109 and SFAS No. 159 as loans and commitments remaining on the balance sheet at the end of first quarter 2008 were sold.  Third quarter 2008 earnings were negatively affected by $35.2 million related to the adoption of SAB No. 109 and SFAS No. 159 as  remaining loans and commitments on the balance sheet were sold either as part of the transaction with MetLife Bank, N.A. or through subsequent deliveries of the mortgage warehouse.
 
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.
 
Second quarter 2008 earnings were positively impacted by a net of $13.7 million related to the adoption of SFAS No. 157 as (1) FHN continued to deliver loans that had been commitments upon adoption of SFAS No. 157, (2) some commitments existing at March 31, 2008 were delivered as loans during the second quarter and (3) additional commitments that would have been deferred under EITF 02-3 were made.  Third quarter 2008 earnings were positively impacted by a net $20.8 million as (1) FHN continued to deliver loans that had been commitments upon adoption of SFAS No. 157, (2) some commitments existing at June 30, 2008 were delivered as loans during the third quarter and (3) additional commitments that would have been deferred under EITF 02-3 were made.  Substantially all commitments existing at August 31, 2008 were sold to MetLife Bank, N. A.  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.
 
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (FSP FAS 157-3).  FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active.  FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued.  FHN applied the guidance of FSP FAS 157-3 in its fair value measurements as of September 30, 2008 and the effects of adoption were not material.
 
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
 
9

 
Note 1 - Financial Information (continued)
 
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 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
 
10

 
Note 1 - Financial Information (continued)
 
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 September 2008, the FASB issued FASB Staff Position No. FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP FAS 133-1).  FSP FAS 133-1 requires sellers of credit derivatives and similar guarantee contracts to make disclosures regarding the nature, term, fair value, potential losses and recourse provisions for those contracts.  FSP FAS 133-1 is effective for reporting periods ending after November 15, 2008.  Since FHN is not a seller of credit derivatives or similar financial guarantees, the effect of adopting FSP FAS 133-1 will not be material to FHN.
 
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162).  SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States.  As the GAAP hierarchy will reside in accounting literature established by the FASB upon adoption of SFAS No. 162, it will become explicitly and directly applicable to preparers of financial statements.  SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”.  The adoption of SFAS No. 162 will have no effect on FHN’s statement of condition or results of operations.
 
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures 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 quarterly interim 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.   The effect of adopting FSP FAS 140-3 will not be material to FHN.
 
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 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
 
11

 
Note 1 - Financial Information (continued)
 
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.
 
 
12

 
 
Note 2 - Acquisitions/Divestitures
 
In June 2008, FHN announced that it had reached a definitive agreement with MetLife Bank, N.A. (MetLife), a wholly-owned subsidiary of MetLife, Inc., for the sale of more than 230 retail and wholesale mortgage origination offices nationwide as well as its loan origination and servicing platform.  Effective August 31, 2008, the parties completed the initial settlement for MetLife’s acquisition of substantially all of FHN’s mortgage origination pipeline, related hedges, certain fixed assets and other associated assets.  MetLife did not acquire any portion of FHN’s mortgage loan warehouse.  First Horizon retained its mortgage operations in and around Tennessee, continuing to originate home loans for customers in its banking market footprint.  FHN also agreed with MetLife for the sale of servicing assets, and related hedges, on $19.1 billion of first lien mortgage loans and associated custodial deposits.  Additionally, FHN has entered into a subservicing agreement with MetLife for the remainder of FHN’s servicing portfolio.  MetLife generally paid book value for the assets and liabilities it acquired, less a purchase price reduction of approximately $10.0 million.  The assets and liabilities related to the mortgage operations divested were included in the Mortgage Banking segment and were reflected as “divestiture” on the Consolidated Condensed Statements of Condition for the reporting period ending June 30, 2008.  In third quarter 2008, FHN recognized a loss on divestiture of $17.5 million related to this transaction which is included in the noninterest income section of the Consolidated Condensed Statements of Income as losses on divestitures.  The purchase price is subject to a post-closing true up which FHN currently expects to occur in fourth quarter 2008.
 
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 and $0.4 million were recognized in the first and second quarters of 2008, respectively, from the disposition of the remaining First Horizon Bank branches.  These transactions resulted in the transfer of certain loans, certain fixed assets (including branch locations) and assumption of all the deposit relationships of the First Horizon Bank branches that were divested.  The assets and liabilities related to the First Horizon Bank branches were included in the Regional Banking segment and were reflected as “divestiture” on the Consolidated Condensed Statements of Condition for reporting periods ending prior to June 30, 2008.  The losses realized in the first and second quarters 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.

 
13

 

Note 3 – Investment Securities
The following tables summarize FHN's investment securities as of September 30, 2008 and 2007:
   
On September 30, 2008
     
Gross
 
Gross
   
   
       Amortized
Unrealized
 
Unrealized
 
Fair
(Dollars in thousands)
            Cost
Gains
 
Losses
 
Value
Total securities held to maturity
 $           -
  $          -
 
  $           -
 
  $           -
Securities available for sale:
           
U.S. Treasuries
 $     47,897
 $      134
 
 $           -
 
 $     48,031
Government agency issued MBS*
           1,247,796
                13,408
 
                   (340)
 
           1,260,864
Government agency issued CMO*
           1,080,662
                14,617
 
                   (491)
 
           1,094,788
Other U.S. government agencies*
              133,402
                  2,118
 
                   (200)
 
              135,320
States and municipalities
                31,630
                       44
 
                          -
 
                31,674
Other
                  2,374
                          -
 
                   (239)
 
                  2,135
Equity**
              267,876
                       51
 
                          -
 
              267,927
Total securities available for sale***
 $2,811,637
 $30,372
 
 $ (1,270)
 
 $2,840,739
*
Includes securities issued by government sponsored entities which are not backed by the full faith and credit of the U.S. government.
**
Includes FHLB and FRB stock, venture capital, money market, and cost method investments.
***
Includes $2.5 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes.
               
   
On September 30, 2007
     
Gross
 
Gross
   
   
Amortized
Unrealized
 
Unrealized
 
Fair
(Dollars in thousands)
Cost
Gains
 
Losses
 
Value
Securities held to maturity:
           
States and municipalities
 $          240
 $           -
 
 $           -
 
 $          240
Total securities held to maturity
 $          240
 $           -
 
 $           -
 
 $          240
               
Securities available for sale:
           
U.S. Treasuries
 $     34,891
 $       120
 
 $           -
 
 $     35,011
Government agency issued MBS*
           1,343,123
                  2,840
 
                (6,189)
 
           1,339,774
Government agency issued CMO*
           1,236,325
                  7,367
 
                (3,208)
 
           1,240,484
Other U.S. government agencies*
              225,335
                  2,100
 
                   (957)
 
              226,478
States and municipalities
                  1,500
                          -
 
                          -
 
                  1,500
Other
                  9,070
                         8
 
                     (26)
 
                  9,052
Equity**
              223,965
                          -
 
                   (144)
 
              223,821
Total securities available for sale***
 $3,074,209
 $12,435
 
 $ (10,524)
 
 $3,076,120
*
Included securities issued by government sponsored entities which are not backed by the full faith and credit of the U.S. government.
 **
Included FHLB and FRB stock, venture capital, money market, and cost method investments.
***
Included $2.8 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes.
 
 
14

 
 
Note 3 – Investment Securities (continued)
               
The following tables provide information on investments within the available for sale portfolio that have unrealized losses as of
September 30, 2008 and 2007:
     
   
On September 30, 2008
   
Less than 12 months
   12 Months or Longer
Total
   
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in thousands)
Value
Losses
Value
Losses
Value
Losses
Government agency issued MBS
 $   67,057
 $   (340)
 $                       -
 $              -
 $   67,057
 $   (340)
Government agency issued CMO
                 81,425
                 (491)
                          -
                 -
                 81,425
              (491)
Other U.S. government agencies
                           -
                       -
                22,647
           (200)
                 22,647
              (200)
Other
                      355
                   (17)
                     411
           (222)
                      766
              (239)
Total debt securities
 148,837
    (848)
       23,058
    (422)
 171,895
    (1,270)
Equity
                           -
                       -
                          -
                 -
                           -
                    -
Total temporarily impaired securities
 $   148,837
 $   (848)
 $   23,058
 $   (422)
 $   171,895
 $   (1,270)
Gross unrealized losses as of September 30, 2008 were principally related to U.S. Government agencies and primarily caused by interest rate changes.  FHN has reviewed these securities in accordance with its accounting policy for other-than-temporary impairments and does not consider them other- than-temporarily impaired.  FHN has both the intent and ability to hold these securities for the time necessary to recover the amortized cost.
               
   
On September 30, 2007
   
Less than 12 months
   12 Months or Longer
Total
   
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in thousands)
Value
Losses
Value
Losses
Value
Losses
Government agency issued MBS
 $   785,791
 $   (6,189)
 $                       -
 $              -
 $   785,791
 $   (6,189)
Government agency issued CMO
               238,877
                 (671)
              132,705
        (2,537)
               371,582
           (3,208)
Other U.S. government agencies
                           -
                       -
                24,557
           (957)
                 24,557
              (957)
Other
                   1,398
                     (1)
                  2,894
             (25)
                   4,292
                (26)
Total debt securities
 1,026,066
    (6,861)
       160,156
    (3,519)
 1,186,222
    (10,380)
Equity
                      211
                   (20)
                       35
           (124)
                      246
              (144)
Total temporarily impaired securities
 $   1,026,277
 $   (6,881)
 $   160,191
 $   (3,643)
 $   1,186,468
 $   (10,524)
Gross unrealized losses as of September 30, 2007 were principally related to U.S. Government agencies and primarily caused by interest rate changes. FHN reviewed these securities in accordance with its accounting policy for other-than-temporary impairments and did not consider them other- than-temporarily impaired.  As of September 30, 2007, FHN had both the intent and ability to hold these securities for the time necessary to recover the amortized cost.
 
 
15

 
 
Note 4 - Loans
                       
                         
The composition of the loan portfolio is detailed below:
                       
         
September 30
   
December 31
 
(Dollars in thousands)
       
2008
   
2007
   
2007
 
Commercial:
                       
   Commercial, financial and industrial
        $ 7,642,684     $ 6,978,643     $ 7,140,087  
   Real estate commercial
          1,492,323       1,326,261       1,294,922  
   Real estate construction
          2,020,455       2,828,545       2,753,475  
Retail:
                             
   Real estate residential
          8,192,926       7,544,048       7,791,885  
   Real estate construction
          1,201,911       2,160,593       2,008,289  
   Other retail
          139,441       144,526       144,019  
   Credit card receivables
          194,966       196,967       204,812  
   Real estate loans pledged against other collateralized
                             
     borrowings
          717,192       793,421       766,027  
  Loans, net of unearned income
          21,601,898       21,973,004       22,103,516  
Allowance for loan losses
          760,456       236,611       342,341  
Total net loans
        $ 20,841,442     $ 21,736,393     $ 21,761,175  
                               
                               
Nonperforming loans consist of loans which management has identified as impaired, other nonaccrual loans and loans which have
 
been restructured. On September 30, 2008 and 2007, there were no significant outstanding commitments to advance additional funds to customers
 
whose loans had been restructured. The following table presents nonperforming loans:
                 
                               
           
September 30 
   
December 31
 
(Dollars in thousands)
       
2008
   
2007
   
2007
 
Impaired loans
        $ 404,458     $ 93,972     $ 126,612  
Other nonaccrual loans*
          495,518       114,334       180,475  
Total nonperforming loans
        $ 899,976     $ 208,306     $ 307,087  
* On September 30, 2008 and 2007, and on December 31, 2007, other nonaccrual loans included $9.1 million, $18.5 million, and $23.8 million, respectively, of
 
   loans held for sale.
                             
Certain previously reported 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
     
Nine Months Ended
 
   
September 30
     
September 30
 
(Dollars in thousands)
 
2008
   
2007
   
2008
   
2007
 
Total interest on impaired loans
  $ 167     $ 152