e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
(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, 2009
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 Charter)
     
TN
(State or Other Jurisdiction
of Incorporation)
  62-0803242
(IRS Employer
Identification No.)
     
165 MADISON AVENUE    
MEMPHIS, TENNESSEE   38103
(Address of Principal Executive Office)   (Zip Code)
Registrant’s telephone number, including area code - (901) 523-4444
(Former name or former address, if changed from 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes___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 the definitions of “large accelerated filer,” “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, 2009
Common Stock, $.625 par value
    218,653,769  

 


 

FIRST HORIZON NATIONAL CORPORATION
INDEX
     
  3
 
   
  100
 
   
  102
 
   
  103
 EX-10.8(b)
 EX-10.8(i)
 EX-31(a)
 EX-31(b)
 EX-32(a)
 EX-32(b)

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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 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.

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 CONSOLIDATED CONDENSED STATEMENTS OF CONDITION   First Horizon National Corporation  
    September 30     December 31
 (Dollars in thousands)(Unaudited)   2009     2008     2008
     
Assets:
                       
Cash and due from banks
  $328,150     $815,935     $552,423  
Federal funds sold and securities purchased under agreements to resell
    622,733       921,295       772,357  
       
Total cash and cash equivalents
    950,883       1,737,230       1,324,780  
       
Interest-bearing cash
    166,352       37,546       207,792  
Trading securities
    701,151       1,561,024       945,766  
Loans held for sale
    502,687       718,029       566,654  
Securities available for sale (Note 3)
    2,645,922       2,840,739       3,125,153  
Loans, net of unearned income (Note 4)
    18,524,685       21,601,898       21,278,190  
Less: Allowance for loan losses
    944,765       760,456       849,210  
       
Total net loans
    17,579,920       20,841,442       20,428,980  
       
Mortgage servicing rights (Note 5)
    289,282       798,491       376,844  
Goodwill (Note 6)
    178,381       192,408       192,408  
Other intangible assets, net (Note 6)
    40,498       46,887       45,082  
Capital markets receivables
    797,949       1,651,547       1,178,932  
Premises and equipment, net
    321,788       336,078       333,931  
Real estate acquired by foreclosure
    111,389       151,461       125,538  
Other assets
    2,179,650       1,891,494       2,170,120  
       
Total assets
  $26,465,852     $32,804,376     $31,021,980  
       
Liabilities and equity:
                       
Deposits:
                       
Savings
  $4,416,121     $4,350,832     $4,824,939  
Time deposits
    2,156,768       2,510,344       2,294,644  
Other interest-bearing deposits
    2,162,059       1,638,731       1,783,362  
Certificates of deposit $100,000 and more
    1,263,331       1,470,089       1,382,236  
       
Interest-bearing
    9,998,279       9,969,996       10,285,181  
Noninterest-bearing
    4,236,704       3,808,239       3,956,633  
       
Total deposits
    14,234,983       13,778,235       14,241,814  
       
Federal funds purchased and securities sold under agreements to repurchase
    2,267,644       1,890,681       1,751,079  
Trading liabilities
    415,293       380,896       359,502  
Other short-term borrowings and commercial paper
    1,739,202       6,149,073       4,279,689  
Term borrowings
    2,368,381       4,545,791       4,022,297  
Other collateralized borrowings
    711,087       749,797       745,363  
       
Total long-term debt
    3,079,468       5,295,588       4,767,660  
       
Capital markets payables
    542,829       1,645,118       1,115,428  
Other liabilities
    816,224       791,867       932,176  
       
Total liabilities
    23,095,643       29,931,458       27,447,348  
       
Equity:
                       
First Horizon National Corporation Shareholders’ Equity:
                       
Preferred stock - no par value (shares authorized - 5,000,000; shares issued - series CPP 866,540 on September 30, 2009 and December 31, 2008) (Note 12)
  794,630       -       782,680  
Common stock - $.625 par value (shares authorized - 400,000,000; shares issued -
218,653,769 on September 30, 2009; 217,503,590 on September 30, 2008;
and 217,488,665 on December 31, 2008) *
    136,659       125,996       128,302  
Capital surplus
    1,170,916       1,016,498       1,048,602  
Capital surplus common stock warrant - CPP (Note 12)
    83,860       -       83,860  
Accumulated other comprehensive loss, net
    (116,265 )     (48,037 )     (151,831 )
Undivided profits
    1,005,244       1,483,184       1,387,854  
       
Total First Horizon National Corporation Shareholders’ Equity
    3,075,044       2,577,641       3,279,467  
       
Noncontrolling interest (Note 12)
    295,165       295,277       295,165  
       
Total equity
    3,370,209       2,872,918       3,574,632  
       
Total liabilities and equity
  $26,465,852     $32,804,376     $31,021,980  
       
  See accompanying notes to consolidated financial statements.
  Certain previously reported amounts have been reclassified to agree with current presentation.
  * Outstanding shares have been restated to reflect stock dividends distributed through October 1, 2009.

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 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)   2009   2008   2009   2008
 
Interest income:
                               
Interest and fees on loans
  $ 184,910     $ 281,648     $ 588,338     $ 898,743  
Interest on investment securities
    33,495       38,733       110,057       118,681  
Interest on loans held for sale
    5,820       29,078       20,129       141,732  
Interest on trading securities
    11,780       27,586       41,502       93,665  
Interest on other earning assets
    355       6,198       1,922       22,350  
 
Total interest income
    236,360       383,243       761,948       1,275,171  
 
Interest expense:
                               
Interest on deposits:
                               
Savings
    7,553       17,005       31,821       60,957  
Time deposits
    13,980       22,443       48,493       79,216  
Other interest-bearing deposits
    1,316       2,849       3,280       11,573  
Certificates of deposit $100,000 and more
    5,809       15,184       23,236       63,552  
Interest on trading liabilities
    4,691       8,304       15,424       27,319  
Interest on short-term borrowings
    2,649       47,192       10,447       166,666  
Interest on long-term debt
    9,461       47,119       42,673       175,754  
 
Total interest expense
    45,459       160,096       175,374       585,037  
 
Net interest income
    190,901       223,147       586,574       690,134  
Provision for loan losses
    185,000       340,000       745,000       800,000  
 
Net interest income/(expense) after provision for loan losses
    5,901       (116,853 )     (158,426 )     (109,866 )
 
Noninterest income:
                               
Capital markets
    129,043       86,854       514,127       320,505  
Mortgage banking
    59,211       106,817       190,443       437,947  
Deposit transactions and cash management
    41,738       45,802       122,585       135,152  
Trust services and investment management
    7,347       8,154       21,818       26,146  
Insurance commissions
    5,907       7,332       19,380       22,298  
Gains/(losses) from loan sales and securitizations
    2,155       3,238       3,676       (7,843 )
Equity securities gains/(losses), net
    65       (210 )     (267 )     63,833  
Debt securities gains, net
    -       -       -       931  
Losses on divestitures
    -       (17,489 )     -       (18,913 )
All other income and commissions
    58,352       55,575       115,585       143,996  
 
Total noninterest income
    303,818       296,073       987,347       1,124,052  
 
Adjusted gross income after provision for loan losses
    309,719       179,220       828,921       1,014,186  
 
Noninterest expense:
                               
Employee compensation, incentives and benefits
    178,734       207,423       614,301       755,433  
Legal and professional fees
    17,077       16,556       45,688       44,710  
Occupancy
    16,207       26,854       47,465       84,786  
Operations services
    15,392       18,881       47,439       54,454  
Equipment rentals, depreciation and maintenance
    8,695       12,268       25,561       45,371  
Communications and courier
    6,837       9,243       20,688       30,780  
Amortization of intangible assets
    1,445       1,802       4,590       6,424  
All other expense
    105,514       94,488       354,458       237,815  
 
Total noninterest expense
    349,901       387,515       1,160,190       1,259,773  
 
Loss before income taxes
    (40,182 )     (208,295 )     (331,269 )     (245,587 )
Benefit for income taxes
    (15,368 )     (87,824 )     (136,834 )     (123,088 )
 
Loss from continuing operations
    (24,814 )     (120,471 )     (194,435 )     (122,499 )
Loss from discontinued operations, net of tax
    (10,200 )     (1,749 )     (11,156 )     (3,977 )
 
Net loss
  $ (35,014 )   $ (122,220 )   $ (205,591 )   $ (126,476 )
 
Net income attributable to noncontrolling interest
    2,969       2,875       8,563       9,780  
 
Net loss attributable to controlling interest
  $ (37,983 )   $ (125,095 )   $ (214,154 )   $ (136,256 )
 
Preferred stock dividends
    14,876       -       44,688       -  
 
Net loss available to common shareholders
  $ (52,859 )   $ (125,095 )   $ (258,842 )   $ (136,256 )
 
Loss per share from continuing operations (Note 8)
  $ (0.20 )   $ (0.57 )   $ (1.14 )   $ (0.72 )
 
Diluted loss per share from continuing operations (Note 8)
  $ (0.20 )   $ (0.57 )   $ (1.14 )   $ (0.72 )
 
Loss per share available to common shareholders (Note 8)
  $ (0.24 )   $ (0.58 )   $ (1.19 )   $ (0.74 )
 
Diluted loss per share available to common shareholders (Note 8)
  $ (0.24 )   $ (0.58 )   $ (1.19 )   $ (0.74 )
 
 
                               
Weighted average common shares outstanding - basic (Note 8)
    217,186       217,062       217,152       182,858  
 
Weighted average common shares outstanding - diluted (Note 8)
    217,186       217,062       217,152       182,858  
 
  See accompanying notes to consolidated condensed financial statements.
  Certain previously reported amounts have been reclassified to agree with current presentation.

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 CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
                                                 
    First Horizon National Corporation  
    2009     2008  
    Controlling     Noncontrolling             Controlling     Noncontrolling        
 (Dollars in thousands)(Unaudited)   Interest     Interest     Total     Interest     Interest     Total  
 
Balance, January 1
    $3,279,467       $295,165       $3,574,632       $2,135,596       $295,277       $2,430,873  
Adjustment to reflect adoption of measurement date provisions under the Fair Value Measurements and Disclosures topic (ASC 820)
    -          -          -          (12,502 )     -          (12,502 )
Adjustment to reflect change in accounting for split dollar life insurance arrangements (ASC 715-60)
    -          -          -          (8,530 )     -          (8,530 )
Net income/(loss)
    (214,154 )     8,563       (205,591 )     (136,256 )     9,780       (126,476 )
Other comprehensive income/(loss):
                                               
Unrealized fair value adjustments, net of tax:
                                               
Cash flow hedges
    -          -          -          (6 )     -          (6 )
Securities available for sale
    25,216       -          25,216       (2,679 )     -          (2,679 )
Recognized pension and other employee benefit plans net periodic benefit costs
    10,350       -          10,350       2,749       -          2,749  
 
Comprehensive income/(loss)
    (178,588 )     8,563       (170,025 )     (136,192 )     9,780       (126,412 )
 
Preferred stock - (CPP) accretion
    11,950       -          11,950       -          -          -     
Preferred stock - (CPP) dividends
    (44,657 )     -          (44,657 )     -          -          -     
Cash dividends declared
    -          -          -          (64,431 )     -          (64,431 )
Common stock issuance (69 million shares issued at $10 per share, net of offering costs)
  -          -          -          659,659       -          659,659  
Common stock repurchased
    (388 )     -          (388 )     (262 )     -          (262 )
Common stock issued for stock options and restricted stock
    1,681       -          1,681       572       -          572  
Excess tax benefit (shortfall) from stock-based compensation arrangements
  -          -          -          (1,531 )     -          (1,531 )
Stock-based compensation expense
    5,359       -          5,359       5,262       -          5,262  
Dividends paid to noncontrolling interest of subsidiary preferred stock
  -          (8,563 )     (8,563 )     -          (9,780 )     (9,780 )
Other changes in equity
    220       -          220       -          -          -     
 
Balance, September 30
    $3,075,044       $295,165       $3,370,209       $2,577,641       $295,277       $2,872,918  
 
  See accompanying notes to consolidated condensed financial statements.

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  CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS   First Horizon National Corporation  
    Nine Months Ended September 30  
 (Dollars in thousands)(Unaudited)     2009        2008
 
Operating Activities
               
Net loss
  $ (205,591 )   $ (126,476 )
Adjustments to reconcile net loss to net cash provided/(used) by operating activities:
               
Provision for loan losses
    745,000       800,000  
Benefit for deferred income tax
    (95,169 )     (221,764 )
Depreciation and amortization of premises and equipment
    24,663       31,995  
Amortization of intangible assets
    4,590       6,424  
Net other amortization and accretion
    33,183       34,236  
Decrease/(increase) in derivatives, net
    151,077       (33,393 )
Market value adjustment on mortgage servicing rights
    (42,662 )     63,769  
Provision for foreclosure losses
    94,775       10,432  
Goodwill impairment
    14,027       -  
Loss on divestitures
    -       18,913  
Stock-based compensation expense
    5,359       5,262  
Excess tax benefit from stock-based compensation arrangements
    -       1,531  
Equity securities (gains)/losses, net
    267       (63,833 )
Debt securities gains, net
    -       (931 )
Gains on repurchases of debt
    (12,860 )     (31,515 )
Net losses on disposal of fixed assets
    5,907       23,795  
Net (increase)/decrease in:
               
Trading securities
    184,481       76,639  
Loans held for sale
    63,967       2,775,183  
Capital markets receivables
    380,983       (1,127,128 )
Interest receivable
    8,222       24,753  
Other assets
    (70,440 )     122,709  
Net increase/(decrease) in:
               
Capital markets payables
    (572,599 )     1,058,760  
Interest payable
    (26,255 )     (38,792 )
Other liabilities
    (86,133 )     (300,074 )
Trading liabilities
    55,791       (175,248 )
 
Total adjustments
    866,174       3,061,723  
 
Net cash provided by operating activities
    660,583       2,935,247  
 
Investing Activities
               
Held to maturity securities:
               
Maturities
    -       240  
Available for sale securities:
               
Sales
    42,756       104,940  
Maturities
    552,043       503,984  
Purchases
    (69,850 )     (348,888 )
Premises and equipment:
               
Purchases
    (18,427 )     (37,050 )
Net (increase)/decrease in:
               
Securitization retained interests classified as trading securities
    60,134       43,237  
Loans
    2,067,162       272,115  
Interest-bearing cash
    41,440       1,876  
Cash payments related to divestitures
    -       (20,518 )
 
Net cash provided/(used) by investing activities
    2,675,258       519,936  
 
Financing Activities
               
Common stock:
               
Exercise of stock options
    3       511  
Cash dividends paid
    -       (64,069 )
Repurchase of shares
    (388 )     (261 )
Issuance of common shares
    -       659,660  
Excess tax benefit from stock-based compensation arrangements
    -       (1,531 )
Cash dividends paid - preferred stock - CPP
    (32,616 )     -  
Cash dividends paid - preferred stock - noncontrolling interest
    (9,803 )     (11,584 )
Long-term debt:
               
Issuance
    -       25,002  
Payments/Maturities
    (1,484,294 )     (1,354,261 )
Cash paid for repurchase of debt
    (151,910 )     (212,260 )
Net increase/(decrease) in:
               
Deposits
    (6,807 )     (2,785,070 )
Short-term borrowings
    (2,023,923 )     (233,805 )
 
Net cash used by financing activities
    (3,709,738 )     (3,977,668 )
 
Net decrease in cash and cash equivalents
    (373,897 )     (522,485 )
 
Cash and cash equivalents at beginning of period
    1,324,780       2,259,715  
 
Cash and cash equivalents at end of period
  $ 950,883     $ 1,737,230  
 
Total interest paid
    201,027       621,812  
Total income taxes paid
  $ 106,886     $ 183,536  
 
  See accompanying notes to consolidated condensed financial statements.
  Certain previously reported amounts have been reclassified to agree with current presentation.

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Notes to Consolidated Condensed Financial Statements
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 2009 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 2008 Annual Report to shareholders.
Subsequent Events. Events occurring after the date of the Consolidated Condensed Statements of Condition but before the issuance of the financial statements included in this filing have been evaluated through the time of this filing.
Investment Securities. Securities that FHN has the ability and positive intent to hold to maturity are classified as securities held to maturity and are carried at amortized cost. The amortized cost of all securities is adjusted for amortization of premium and accretion of discount to maturity, or earlier call date if appropriate, using the level yield method. Such amortization and accretion is included in interest income from securities. Investment securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the degree of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and FHN’s intent and ability to hold the security. Securities that may be sold prior to maturity and equity securities are classified as securities available for sale and are carried at fair value. The unrealized gains and losses on securities available for sale, including debt securities for which no credit impairment exists, are excluded from earnings and are reported, net of tax, as a component of other comprehensive income within shareholders’ equity.
Upon adoption of the provisions of the FASB Codification update to FASB Accounting Standards Codification (ASC) 320-10-35 for the quarter ended March 31, 2009, the “intent and ability to hold to recovery” indicator was replaced for debt securities with a requirement that an entity’s management assess whether it intends to sell a security or if it is more-likely-than-not that it will be required to sell the security prior to recovery for the debt security when determining other-than-temporary impairment. Realized gains and losses for investment securities are determined by the specific identification method and reported in noninterest income. Declines in value judged to be other-than-temporary based on FHN’s analysis of the facts and circumstances related to an individual investment, including securities that FHN has the intent to sell, are also determined by the specific identification method, and reported in noninterest income. After adoption of the amendments to ASC 320-10-35, for impaired debt securities that FHN does not intend to sell and will not be required to sell prior to recovery but for which credit losses exist, the other-than-temporary impairment recognized has been separated between the total impairment related to credit losses which is reported in noninterest income, and the impairment related to all other factors which is excluded from earnings and reported, net of tax, as a component of other comprehensive income within shareholders’ equity. Currently, FHN does not have other than temporarily impaired debt securities for which credit losses exist.
Loans Held for Sale and Securitization. In conjunction with the adoption of the provisions of the FASB Codification update to ASC 820-10, FHN revised its methodology for determining the fair value of certain loans within its mortgage warehouse. FHN now determines the fair value of the applicable loans using a discounted cash flow model using observable inputs, including current mortgage rates for similar products, with adjustments for differences in loan characteristics reflected in the model’s discount rates. This change in methodology had a minimal effect on the valuation of the applicable loans. Previously, fair values of these loans were determined through reference to recent security trade prices for similar products, published third party bids or observable whole loan sale prices with adjustments for differences in loan characteristics.
Accounting Changes. Effective September 30, 2009, FHN adopted the provisions of FASB Codification Update 2009-01 which creates ASC 105, “Generally Accepted Accounting Principles”. ASC 105 establishes the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, other than guidance issued by the SEC. Under ASC 105, all guidance contained in the FASB Accounting Standards Codification carries an equal level of authority, with ASC 105 superseding all non-SEC accounting and reporting standards which existed as of its effective date. The effect of adopting the provisions of ASC 105 was immaterial to

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FHN. In accordance with ASC 105, all references to authoritative accounting standards have been revised to reflect their Codification citation.
Effective June 30, 2009, FHN adopted the provisions of the FASB Codification update to ASC 825-10-50, which requires disclosures about fair value of financial instruments in interim financial statements. ASC 825-10-50, as amended, requires that disclosures be included in both interim and annual financial statements of the methods and significant assumptions used to estimate the fair value of financial instruments. Comparative disclosures are required only for periods ending subsequent to initial adoption. Upon adoption of the amendments to ASC 825-10-50, FHN revised its disclosures accordingly.
Effective June 30, 2009, FHN adopted ASC 855-10 which provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. ASC 855-10-50 requires disclosure of the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. An assessment of subsequent events must be performed for both interim and annual reporting periods. FHN initially applied the guidance of ASC 855-10 when assessing subsequent events through the time of the filing of the financial statements for the quarter ended June 30, 2009, and the effects of adoption were not material.
In April 2009, the FASB issued a Codification update to ASC 320-10-35 which replaces the “intent and ability to hold to recovery” indicator of other-than-temporary impairment in ASC 320-10-35 for debt securities. The updated provisions of ASC 320-10-35 specify that a debt security is considered other-than-temporarily impaired when an entity’s management intends to sell the security or that it is more-likely-than-not that the entity will be required to sell the security prior to recovery of its cost basis. ASC 320-10-35, as amended, requires that for impaired held-to-maturity and available-for-sale debt securities that an entity does not intend to sell and will not be required to sell prior to recovery but for which credit losses exist, the other-than-temporary impairment should be separated between the total impairment related to credit losses, which should be recognized in current earnings, and the amount of impairment related to all other factors, which should be recognized in other comprehensive income. ASC 320-10-35, as amended, discusses the proper interaction of its guidance with SEC Staff Accounting BulletinTopic 5M, which provides additional factors that must be considered in an other-than-temporary impairment analysis. ASC 320-10-35, as amended, also provides that in periods in which other-than-temporary impairments are recognized, the total impairment must be presented in the investor’s income statement with an offset for the amount of total impairment that is recognized in other comprehensive income. ASC 320-10-35 requires additional disclosures including a rollforward of amounts recognized in earnings for debt securities for which an other-than-temporary impairment has been recognized and the noncredit portion of the other-than-temporary impairment that has been recognized in other comprehensive income. FHN initially applied the guidance provided in the Codification update to ASC 320-10-35 when assessing debt securities for other-than-temporary impairment as of March 31, 2009 and the effects of adoption were not material.
In April 2009, the FASB issued a Codification update to ASC 820-10 which provides factors that an entity should consider when determining whether a market for an asset is not active. If after evaluating the relevant factors, the evidence indicates that a market is not active, ASC 820-10 provides an additional list of factors that an entity must consider when determining whether events and circumstances indicate that a transaction which occurred in such inactive market is orderly. ASC 820-10, as amended, requires that entities place more weight on observable transactions determined to be orderly and less weight on transactions for which there is insufficient information to determine whether the transaction is orderly when determining the fair value of an asset or liability. The Codification update to ASC 820-10 requires enhanced disclosures, including disclosure of a change in valuation technique which results from its application and disclosure of fair value measurements for debt and equity securities by major security types. FHN initially applied the guidance provided in the Codification update to ASC 820-10 in its fair value measurements as of March 31, 2009 and the effects of adoption were not significant.
Effective January 1, 2009, FHN adopted the provisions of the Codification update to ASC 820 for existing fair value measurement requirements related to non-financial assets and liabilities which are recognized at fair value on a non-recurring basis. The effective date for the application of ASC 820’s measurement framework to such non-financial assets and liabilities was previously delayed under transitional guidance issued by the FASB. ASC 820, as amended, establishes a hierarchy to be used in performing measurements of fair value. Additionally, the updated provisions of ASC 820 emphasize 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. ASC 820, as amended, also provides expanded disclosure requirements regarding the effects of fair value measurements on the financial statements. The effect of adopting the updated provisions of ASC 820 for non-financial assets and liabilities which are recognized at fair value on a non-recurring basis on January 1, 2009, was not significant to FHN. Effective January 1, 2008, FHN adopted

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ASC 820’s Codification update 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. Upon the adoption of the updated provisions of ASC 820 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 ASC 815-10-45. 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 the guidance of ASC 815-10-45 until delivery of the associated loans. Second quarter 2008 earnings were positively impacted by a net of $13.7 million as (1) FHN continued to deliver loans that had been commitments upon adoption of the amendments to ASC 820, (2) some commitments existing at March 31, 2008 were delivered as loans during the second quarter 2008 and (3) additional commitments that would have been deferred under the guidance of ASC 815-10-45 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 the amendments to ASC 820, (2) some commitments existing at June 30, 2008 were delivered as loans during the third quarter 2008 and (3) additional commitments that would have been deferred under ASC 815-10-45 were made. Substantially all commitments existing at August 31, 2008 were sold to MetLife Bank, N.A (MetLife).
Effective January 1, 2009, FHN adopted the provisions of the Codification update to ASC 805 and ASC 810. ASC 805, as amended, 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, the updated provisions of ASC 805 provide that an acquirer cannot specify an effective date for a business combination that is separate from the acquisition date. ASC 805, as amended, 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. ASC 810, as amended, requires that acquired assets and liabilities be measured at full fair value without consideration to ownership percentage. Under the updated provisions of ASC 810, any noncontrolling interests in an acquiree should be presented as a separate component of equity rather than on a mezzanine level. Additionally, ASC 810, as amended, 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. The retrospective application of ASC 810’s presentation and disclosure requirements resulted in an increase to consolidated net income of $2.9 million for third quarter 2008, and $9.8 million for the nine months ended September 30, 2008. FHN also recognized an increase of total shareholders’ equity of $295.2 million upon adoption of the amendments to ASC 810 as a result of reclassifying the noncontrolling interest previously recognized on the Consolidated Condensed Statements of Condition as “Preferred stock of subsidiary” as a separate component of equity.
Effective January 1, 2009, FHN adopted the provisions of an additional Codification update to ASC 805 which requires that an acquirer recognize at fair value as of the acquisition date an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of the asset or liability can be determined during the measurement period. ASC 805, as amended, provides that if the acquisition-date fair value of an asset acquired or liability assumed in a business combination that arises from a contingency cannot be determined during the measurement period, the asset or liability should be recognized at the acquisition date if information available before the end of the measurement period indicates that it is probable that an asset existed or a liability had been incurred at the acquisition date and the amount of the asset or liability can be reasonably estimated. Additionally, ASC 805, as amended, requires enhanced disclosures regarding assets and liabilities arising from contingencies which are recognized at the acquisition date of a business combination, including the nature of the contingencies, the amounts recognized at the acquisition date and the measurement basis applied. The adoption of the Codification update to ASC 805 had no effect on FHN’s statement of condition or results of operations.
Effective January 1, 2009, FHN adopted the provisions of the Codification update to ASC 815-10-50 which provides amendments that enhance disclosures related to derivatives accounted for in accordance with ASC 815 and reconsiders existing disclosure requirements for such derivatives and any related hedging items. The additional disclosures provided in ASC 815-10-50, as amended, are required for both interim and annual reporting periods. Upon adoption of the Codification update to ASC 815-10-50, FHN revised its disclosures accordingly.
FHN also adopted the provisions of the Codification update to ASC 860-10 as of January 1, 2009, for initial transfers of financial assets executed after such date. The Codification update amends ASC 860-10 to permit 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. ASC 860-10, as amended, requires that the two

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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. The effect of adopting the Codification update to ASC 860-10 was immaterial to FHN.
Effective December 31, 2008, FHN adopted the provisions of the Codification update to ASC 325 which aligns its impairment model for beneficial interests in securitized financial assets with the impairment model in ASC 320, resulting in a consistent determination of whether other-than-temporary impairments of available for sale or held to maturity debt securities have occurred. Since FHN recognizes all retained interests from securitization transactions at fair value as trading securities and as all of its beneficial interests classified as available for sale securities are outside the scope of ASC 325, the effect of adopting the Codification update to ASC 325 was immaterial to FHN.
Effective December 31, 2008, FHN adopted the provisions of the Codification update to ASC 810 and ASC 860 which require additional disclosures related to transfers of financial assets as well as FHN’s involvement with variable interest entities and qualifying special purpose entities. Upon adoption of the Codification update to ASC 810 and ASC 860, FHN revised its disclosures accordingly.
Effective December 31, 2008, FHN adopted the provisions of the Codification update to ASC 815-10-50 which 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. Since FHN is not a seller of credit derivatives or similar financial guarantees, the effect of adopting the Codification update to ASC 815-10-50 was immaterial to FHN.
Effective January 1, 2008, FHN adopted the provisions of the Codification update to ASC 825 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 ASC 825, 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, ASC 825 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. ASC 825 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. ASC 825 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. Upon adoption of the updated provisions of ASC 825, 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 ASC 825’s amendment of ASC 320, 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 ValueThrough 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 ASC 825. FHN did not elect fair value accounting for any other loan commitments under ASC 825. The prospective application of SAB No. 109 and the prospective election to recognize substantially all new mortgage loan originations at fair value under ASC 825 resulted in a positive impact of $58.1 million on first quarter 2008 pre-tax earnings. Second quarter 2008 earnings were negatively impacted by $20.9 million related to the adoption of SAB No. 109 and the updated provisions of ASC 825 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 the updated provisions of ASC 825 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 the provisions of the Codification update which amended ASC 820 to exclude ASC 840, “Leases”, from its scope. The adoption of the Codification update to ASC 820 had no effect on FHN’s statement of condition or results of operations.
Effective January 1, 2008, FHN adopted the provisions of the Codification update to ASC 715 which 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 the amendments to ASC 715.

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Effective January 1, 2008, FHN adopted the provisions of the Codification update to ASC 815 which 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 the amendments to ASC 815, 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. ASC 815, as amended, 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 the updated provisions of ASC 815, and has revised its disclosures accordingly.
FHN also adopted the provisions of the Codification update to ASC 815-20-25 as of January 1, 2008, for hedging relationships designated on or after such date. The updated provisions of ASC 815-20-25 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 ASC 820. Additionally, ASC 815-20-25, as amended, 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 the adoption date of the amendments to ASC 815-20-25 to determine whether they complied with the revised shortcut criteria at their inception or should be dedesignated prospectively. The adoption of the updated provisions of ASC 815-20-25 had no effect on FHN’s financial position or results of operations as all of FHN’s preexisting hedging relationships met the requirements of ASC 815-20-25, as amended, at their inception.
Accounting Changes Issued but Not Currently Effective. In August 2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value” (ASU 09-05). ASU 09-05 updates ASC 820 to clarify that a quoted price for the identical liability, when traded as an asset in an active market, is a Level 1 measurement for that liability when no adjustment to the quoted price is required. ASU 09-05 further amends ASC 820 to provide that if a quoted price for an identical liability does not exist in an active market, the fair value of the liability should be measured using an approach that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. Under the updated provisions of ASC 820, for such liabilities fair value will be measured using either a valuation technique that uses the quoted price of the identical liability when traded as an asset, a valuation technique that uses the quoted price for similar liabilities or similar liabilities when traded as an asset, or another valuation technique that is consistent with the principles of ASC 820. The update to ASC 820 is effective for the first reporting period beginning after the issuance of ASU 09-05. The adoption of the Codification update to ASC 820 will not have a material effect on FHN’s statement of condition or results of operations.
In June 2009, the FASB issued a Codification update to ASC 860 which provides for the removal of the qualifying special purpose entity (QSPE) concept from GAAP, resulting in the evaluation of all former QSPEs for consolidation on and after January 1, 2010 in accordance with ASC 810. The amendments to ASC 860 modify the criteria for achieving sale accounting for transfers of financial assets and define the term participating interest to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. The updated provisions of ASC 860 also provide that a transferor should recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. ASC 860, as amended, requires enhanced disclosures which are generally consistent with, and supersede, the disclosures previously required by the Codification update to ASC 810 and ASC 860 which was effective for periods ending after December 15, 2008. The provisions of the Codification update to ASC 860 are effective prospectively for new transfers of financial assets occurring in fiscal years beginning after November 15, 2009, and in interim periods within those fiscal years. ASC 860’s amended disclosure requirements should be applied to transfers that occurred both before and after the effective date of the Codification update, with comparative disclosures required only for periods subsequent to initial adoption for those disclosures not previously required under the Codification update to ASC 810 and ASC 860 which was effective for periods ending after December 15, 2008. FHN is currently assessing the effects of adopting the provisions of the Codification update to ASC 860.
In June 2009, the FASB issued a Codification update to ASC 810 which revises the criteria for determining the primary beneficiary of a variable interest entity (VIE) by replacing the quantitative-based risks and rewards test previously required with a qualitative analysis. While ASC 810, as amended, retains the previous guidance in ASC 810 which requires a reassessment of whether an entity is a VIE only when certain triggering events occur, it adds an additional criteria which triggers a reassessment of an entity’s status when an event occurs such

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that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. Additionally, the amendments to ASC 810 require continual reconsideration of conclusions regarding which interest holder is the VIE’s primary beneficiary. Following the Codification update, ASC 810 will require separate presentation on the face of the balance sheet of the assets of a consolidated VIE that can only be used to settle the VIE’s obligations and the liabilities of a consolidated VIE for which creditors or beneficial interest holders have no recourse to the general credit of the primary beneficiary (e.g., consolidated residential mortgage securitization trusts). ASC 810, as amended, also requires enhanced disclosures which are generally consistent with, and supersede, the disclosures previously required by the Codification update to ASC 810 and ASC 860 which was effective for periods ending after December 15, 2008. The provisions of the Codification update to ASC 810 are effective for periods beginning after November 15, 2009 and require reevaluation under ASC 810’s amended consolidation requirements of all QSPEs and entities currently subject to ASC 810 as of the beginning of the first annual period that begins after November 15, 2009. If consolidation of a VIE is required upon initial adoption, the assets, liabilities, and noncontrolling interests of the VIE should be measured at their carrying amounts as if ASC 810, as amended, had been applied from inception of the VIE, with any difference between the net amounts recognized and the amount of any previously recognized interests reflected as a cumulative effect adjustment to undivided profits. However, if determining the carrying amounts is not practicable, the assets, liabilities, and noncontrolling interests of the VIE may be measured at fair value. Further, if determining the carrying amounts is not practicable, and if the activities of the VIE are primarily related to securitizations or other forms of asset-backed financings and the assets of the VIE can be used only to settle obligations of the entity, then the assets and liabilities of the VIE may be measured at their unpaid principal balances. The fair value option provided under ASC 825 may also be elected for financial assets and financial liabilities requiring consolidation as a result of initial adoption, provided that the election is made for all eligible financial assets and financial liabilities of the VIE. If initial application of the amendments to ASC 810 results in deconsolidation of a VIE, any retained interest in the VIE should be measured at its carrying value as if ASC 810, as amended, had been applied from inception of the VIE. Comparative disclosures are required only for periods subsequent to initial adoption for those disclosures not previously required under the Codification update to ASC 810 and ASC 860 which was effective for periods ending after December 15, 2008.
FHN is continuing to assess the effects of adopting the Codification Update to ASC 810 on all of its proprietary residential mortgage securitization trusts based on the size and priority of interests retained. Presented below by the total percentage of denominated financial interests retained in a trust are the aggregate unpaid principal balances as of September 30, 2009, of loans held by FHN’s off balance sheet proprietary first lien securitization trusts and off balance sheet HELOC and home equity loan securitization trusts, as well as the nature of FHN’s retained interests in such trusts.
             
    Aggregate Unpaid     Nature of Financial Interests
  Dollars in thousands   Principal Balance     Retained (a)
 
 
           
First Lien:
           
Less than 1%
  $17,339,132     MSR & excess interest
Between 1% and 2%
    1,275,366     (b)
Between 2% and 5%
    336,082     (c)
Over 5%
    35,680     (d)
 
           
HELOC and Home Equity Loans:
           
N/A
  $    222,836     MSR & residual interest
 
  (a)   In addition to the financial interests retained, which are listed in the table above, FHN also retained non-financial interests including repurchase obligations, clean up calls, and required servicing advances for all proprietary securitization trusts.
 
  (b)   Interests retained include MSR and excess interest, as well as principal-only strips.
 
  (c)   Interests retained include MSR and excess interest, as well as interest-only strips, principal-only strips, and/or subordinated bonds for certain securitizations.
 
  (d)   Interests retained include MSR and excess interest, as well as subordinated bonds.
Based on its current level of involvement, upon adoption of the Codification update to ASC 810 proprietary first lien securitization trusts for which FHN retains over 5% of the denominated financial interests will be consolidated by FHN as the retention of MSR and other retained interests, including subordinated bonds, results in FHN being considered the trust’s primary beneficiary under the qualitative analysis required by ASC 810, as amended. Additionally, FHN believes that upon adoption of the amendments to ASC 810 it is possible that it will

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consolidate certain proprietary first lien securitization trusts where FHN and its consolidated subsidiaries retain between 2% and 5% of the denominated financial interests, based on the size and priority of the interests retained. Further, the previously off balance sheet HELOC and home equity loan securitization trusts will be consolidated upon adoption of the amendments to ASC 810 as FHN will be considered the primary beneficiary of those trusts based on its retention of MSR and non-denominated residual interests.
In December 2008, the FASB issued a Codification Update to ASC 715 which provides detailed disclosure requirements to enhance the disclosures about an employer’s postretirement benefit plan assets currently required by ASC 715-20-50. The amendments to ASC 715 are effective prospectively for annual periods ending after December 15, 2009. FHN is currently assessing the effects of adopting the Codification update to ASC 715.

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Note 2 - Acquisitions/Divestitures
Continuing the efforts to refocus on core businesses, a definitive agreement was reached with Point Capital Partners LLC in third quarter 2009 for the sale of FTN Equity Capital Markets Corp. (“FTN ECM”), the institutional equity research division of FTN Financial. While the sale is expected to close in fourth quarter 2009 subject to regulatory approval and customary closing conditions, FHN incurred a pre-tax goodwill impairment of $14.0 million (approximately $9 million after taxes) in third quarter 2009. The financial results of FTN ECM, including the third quarter goodwill impairment, are reflected in the Income/loss from discontinued operations, net of tax line on the Consolidated Condensed Statements of Income for all periods presented.
Effective August 31, 2008, FHN sold more than 230 retail and wholesale mortgage origination offices nationwide, the loan origination and servicing platform, substantially all of FHN’s mortgage origination pipeline and related hedges, certain fixed assets and other associated assets to MetLife. MetLife did not acquire any portion of FHN’s mortgage loan warehouse. FHN retained its mortgage operations in and around Tennessee, continuing to originate home loans for customers in its regional banking market footprint. FHN also sold servicing assets, and related hedges, on $19.1 billion of first lien mortgage loans and associated custodial deposits. Additionally, FHN 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. 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 ended June 30, 2008. FHN recognized a loss on divestiture of $17.5 million in the third quarter 2008 and a gain on divestiture of $0.9 million in the fourth quarter of 2008. Gains and losses related to this transaction were included in the noninterest income section of the Consolidated Condensed Statements of Income as gains/losses on divestitures.
Due to efforts initiated by FHN in 2007 to improve profitability, FHN sold 34 branches in Atlanta, Baltimore, Dallas, and Northern Virginia which were outside the Regional Bank’s footprint. The First Horizon Bank branch sales were completed in 2008 resulting in losses of $1.0 million, $0.4 million, and $1.0 million in the first, second, and fourth quarters of 2008, respectively. Aggregate gains of $15.7 million were recognized in fourth quarter 2007 from the disposition of 15 of the 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 ended prior to June 30, 2008. The gains and losses realized on the disposition of First Horizon Bank branches were included in the noninterest income section of the Consolidated Condensed Statements of Income as gains and 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.

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Note 3 - Investment Securities
The following tables summarize FHN’s available for sale securities on September 30, 2009, and 2008:
                                 
    On September 30, 2009
            Gross     Gross      
    Amortized     Unrealized     Unrealized   Fair  
 (Dollars in thousands)   Cost     Gains     Losses   Value  
 
Securities available for sale:
                               
U.S. Treasuries
  $ 47,964     $      361     $ -     $ 48,325  
Government agency issued MBS (a)
    995,576       58,338       -       1,053,914  
Government agency issued CMO (a)
    1,029,977       45,776       -       1,075,753  
Other U.S. government agencies (a)
    116,019       5,753       -       121,772  
States and municipalities
    46,090       -       -       46,090  
Other
    2,212       30       (40 )     2,202  
Equity (b)
    297,565       366       (65 )     297,866  
 
Total securities available for sale (c)
  $ 2,535,403     $ 110,624     $ (105 )   $ 2,645,922  
 
  (a)   Includes securities issued by government sponsored entities.
 
  (b)   Includes investments in FHLB stock of $125.5 million, FRB stock of $66.2 million, remainder is venture capital, money market, and cost method investments.
 
  (c)   Includes $2.2 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes. As of September 30, 2009, FHN had pledged $1.4 billion of the $2.2 billion of available for sale securities as collateral for securities sold under repurchase agreements. Additionally, $46.9 million is restricted pursuant to reinsurance contract agreements.
                                 
    On September 30, 2008
            Gross     Gross    
    Amortized     Unrealized     Unrealized   Fair
 (Dollars in thousands)   Cost     Gains     Losses   Value
 
Securities available for sale:
                               
U.S. Treasuries
  $ 47,897     $ 134     $ -     $ 48,031  
Government agency issued MBS (a)
    1,247,796       13,408       (340 )     1,260,864  
Government agency issued CMO (a)
    1,080,662       14,617       (491 )     1,094,788  
Other U.S. government agencies (a)
    133,402       2,118       (200 )     135,320  
States and municipalities
    31,630       44       -       31,674  
Other
    2,374       -       (239 )     2,135  
Equity (b)
    267,876       51       -       267,927  
 
Total securities available for sale (c)
  $   2,811,637     $ 30,372     $ (1,270 )   $ 2,840,739  
 
  (a)   Includes securities issued by government sponsored entities.
 
  (b)   Includes investments in FHLB stock of $124.0 million, FRB stock of $26.0 million, remainder is venture capital, money market, and cost method investments.
 
  (c)   Includes $2.5 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes. As of September 30, 2008, FHN had pledged $1.4 billion of available for sale securities as collateral for securities sold under repurchase agreements. Additionally, $50.7 million is restricted pursuant to reinsurance contract agreements.

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Note 3 - Investment Securities (continued)
Provided below are the amortized cost and fair value by contractual maturity for the available for sale securities portfolio on September 30, 2009:
                 
    Available for Sale
    Amortized   Fair
 (Dollars in thousands)   Cost   Value
 
Within 1 year
  $ 41,509     $ 41,838  
After 1 year; within 5 years
    28,382       29,575  
After 5 years; within 10 years
    99,032       103,625  
After 10 years
    1,036,725       1,095,063  
 
Subtotal
    1,205,648       1,270,101  
 
Government agency issued MBS and CMO
    1,029,978       1,075,753  
Equity and other securities
    299,777       300,068  
 
Total
  $ 2,535,403     $ 2,645,922  
 
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The table below provides information on realized gross gains and realized gross losses on sales from the available for sale portfolio for the nine months ended September 30:
                         
    Available for Sale  
(Dollars in thousands)   Debt     Equity     Total  
 
September 30, 2009
                       
Gross gains on sales
  $ -     $ 2,209     $ 2,209  
Gross losses on sales
    -       (403 )     (403 )
 
September 30, 2008
                       
Gross gains on sales
    230       65,939       66,169  
Gross losses on sales
    -       -       -  
 
Proceeds from the sale of AFS securities generating gains or losses in the first nine months of 2009 and 2008 were $3.9 million and $67.2 million, respectively.
Losses totaling $.5 million and $1.5 million for the nine months ended September 30, 2009 and 2008, respectively, were recognized for securities that, in the opinion of management have been other-than-temporarily impaired. The other-than-temporarily impaired securities are related to cost method investment securities.

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Note 3 - Investment Securities (continued)
The following tables provide information on investments within the available for sale portfolio that have unrealized losses on September 30, 2009, and 2008:
                                                 
    On September 30, 2009  
    Less than 12 months     12 Months or Longer     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
 (Dollars in thousands)   Value     Losses     Value     Losses     Value     Losses  
 
Other
    -       -       140       (40 )     140       (40 )
 
Total debt securities
    -       -       140       (40 )     140       (40 )
Equity
    -       -       166       (65 )     166       (65 )
 
Total temporarily impaired securities
  $ -     $ -     $    306     $    (105 )   $    306     $    (105 )
 
 
    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 )
 
FHN has reviewed investment securities that are in unrealized loss positions in accordance with its accounting policy for other-than-temporary impairment and does not consider them other-than-temporarily impaired. FHN does not intend to sell the debt securities and it is more-likely-than-not that FHN will not be required to sell the securities prior to recovery. Additionally, the decline in value is not attributable to credit losses. For equity securities, FHN has both the ability and intent to hold these securities for the time necessary to recover the amortized cost.

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Note 4 - Loans
The composition of the loan portfolio is detailed below:
                         
    September 30     December 31  
 (Dollars in thousands)   2009     2008     2008  
       
Commercial:
                       
Commercial, financial and industrial
  $ 6,920,916     $ 7,642,684     $  7,863,727  
Real estate commercial
    1,537,099       1,492,323       1,454,040  
Real estate construction
    1,130,710       2,020,455       1,778,140  
Retail:
                       
Real estate residential
    7,590,699       8,192,926       8,161,435  
Real estate construction
    361,930       1,201,911       980,798  
Other retail
    124,376       139,441       135,779  
Credit card receivables
    189,452       194,966       189,554  
Real estate loans pledged against other collateralized borrowings
    669,503       717,192       714,717  
       
Loans, net of unearned income
    18,524,685       21,601,898       21,278,190  
Allowance for loan losses
    944,765       760,456       849,210  
       
Total net loans
  $ 17,579,920     $ 20,841,442     $ 20,428,980  
       
FHN has a significant concentration of loans secured by residential real estate (51 percent of total loans) primarily in three portfolios. The retail real estate residential portfolio including real estate loans pledged against other collateralized borrowings (45 percent of total loans) is primarily comprised of home equity lines and loans. While this portfolio has been stressed by the downturn in the housing market and rising unemployment, it contains loans extended to strong borrowers with high credit scores and is geographically diversified. The Residential CRE portfolio, included in Commercial Real Estate Construction, (4 percent of total loans) has also been negatively impacted by the housing industry downturn as builder liquidity has been severely stressed. The One-Time Close (OTC) portfolio, included in Retail Residential Construction (2 percent of total loans) has been negatively impacted by the downturn in the housing industry, certain discontinued product types, and the decreased availability of permanent mortgage financing. The size of the Residential CRE and OTC portfolios has significantly declined as FHN continues to wind down the national construction portfolios.
Additionally, on September 30, 2009, FHN had bank-related and trust preferred loans (including loans to bank and insurance-related businesses) totaling $.7 billion (4 percent of total loans) that are included within the Commercial, Financial, and Industrial portfolio. Due to higher credit losses experienced throughout the financial services industry and the limited availability of market liquidity, these loans have experienced stress during the economic downturn.
On September 30, 2009, FHN did not have any concentrations of Commercial, Financial and Industrial loans in any single industry of 10 percent or more of total loans.
Nonperforming loans consist of loans which management has identified as impaired, other nonaccrual loans, and loans which have been restructured. On September 30, 2009 and 2008, there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured. The following table presents nonperforming loans on:
                         
    September 30     December 31  
(Dollars in thousands)   2009     2008     2008  
       
Impaired loans
  $ 603,960     $ 404,458     $    474,090  
Other nonaccrual loans*
    515,759       495,518       579,558  
       
Total nonperforming loans
  $ 1,119,719     $ 899,976     $ 1,053,648  
       
  *   On September 30, 2009 and 2008, and on December 31, 2008, other nonaccrual loans included $32.3 million, $9.1 million, and $8.5 million, respectively, of loans held for sale.

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Note 4 - Loans (continued)
Generally, interest payments received on impaired and nonaccrual 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)   2009     2008     2009     2008  
 
Total interest on impaired loans
  $ 454     $ 167     $ 1,118     $ 427  
Average balance of impaired loans
    575,829       388,476       538,007       291,809  
 
Activity in the allowance for loan losses related to non-impaired and impaired loans for the nine months ended September 30, 2009 and 2008, is summarized as follows:
                         
 (Dollars in thousands)   Non-impaired   Impaired   Total
 
Balance on December 31, 2007
  $ 325,883     $ 16,458     $ 342,341  
Provision for loan losses
    626,612       173,388       800,000  
Divestitures/acquisitions/transfers
    (382 )     -       (382 )
Charge-offs
    (219,760 )     (173,581 )     (393,341 )
Recoveries
    10,392       1,446       11,838  
 
Net charge-offs
    (209,368 )     (172,135 )     (381,503 )
 
Balance on September 30, 2008
  $ 742,745     $ 17,711     $ 760,456  
 
 
                       
Balance on December 31, 2008
  $ 836,907     $ 12,303     $ 849,210  
Provision for loan losses
    510,164       234,836       745,000  
Charge-offs
    (441,523 )     (238,530 )     (680,053 )
Recoveries
    26,764       3,844       30,608  
 
Net charge-offs
    (414,759 )     (234,686 )     (649,445 )
 
Balance on September 30, 2009
  $ 932,312     $ 12,453     $ 944,765  
 

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Note 5 - Mortgage Servicing Rights
FHN recognizes all 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. See Note 16 – Fair Value, the “Determination of Fair Value” section for a discussion of FHN’s MSR valuation methodology. The balance of MSR included on the Consolidated Condensed Statements of Condition represents the rights to service approximately $43.1 billion of mortgage loans on September 30, 2009, for which a servicing right has been capitalized.
In third quarter 2009, FHN reviewed the allocation of fair value between MSR and excess interest from prior first lien loan sales and securitizations. As a result, $11.9 million was reclassified from trading securities to MSR retained from securitizations and $.8 million was reclassified from MSR retained from prior loan sales to trading securities. This reclassification is reflected in the rollforwards below.
Following is a summary of changes in capitalized MSR related to proprietary securitization activities utilizing qualifying special purpose entities (QSPEs) as of September 30, 2009, and 2008:
                         
    First   Second    
(Dollars in thousands)   Liens   Liens   HELOC
 
Fair value on January 1, 2008
  $ 230,311     $ 1,429     $ 2,260  
Addition of mortgage servicing rights
    -       -       144  
Reductions due to loan payments
    (20,079 )     (223 )     (311 )
Changes in fair value due to:
                       
Changes in valuation model inputs or assumptions
    (12,130 )     (9 )     (362 )
Other changes in fair value
    -       -       14  
 
Fair value on September 30, 2008
  $ 198,102     $ 1,197     $ 1,745  
 
Fair value on January 1, 2009
  $ 102,993     $ 981     $ 1,471  
Addition of mortgage servicing rights
    -       -       11  
Reductions due to loan payments
    (12,489 )     (98 )     (241 )
Reclassification from/(to) trading securities
    11,853       -       -  
Changes in fair value due to:
                       
Changes in valuation model inputs or assumptions
    4,270       45       -  
 
Fair value on September 30, 2009
  $ 106,627     $928     $ 1,241  
 
Servicing, late, and other ancillary fees recognized within mortgage banking income were $16.0 million and $20.9 million for the three months ended September 30, 2009, and 2008, respectively, related to securitization activity and $49.7 million and $64.1 million for the nine months ended September 30, 2009, and 2008, respectively. Servicing, late, and other ancillary fees recognized within revenue from loan sales and securitizations were $.2 million and $.3 million for the three months ended September 30, 2009, and 2008, respectively, related to securitization activity and $.7 million and $.9 million for the nine months ended September 30, 2009, and 2008, respectively.

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Note 5 - Mortgage Servicing Rights (continued)
Following is a summary of changes in capitalized MSR related to loan sale activity as of September 30, 2009, and 2008:
                         
    First     Second        
 (Dollars in thousands)   Liens     Liens     HELOC  
 
Fair value on January 1, 2008
  $ 892,104     $ 24,403     $ 9,313  
Addition of mortgage servicing rights
    240,676       -       1,001  
Reductions due to loan payments
    (76,058 )     (4,745 )     (1,370 )
Reductions due to sale
    (436,595 )     -       -  
Changes in fair value due to:
                       
Changes in valuation model inputs or assumptions
    (48,376 )     (3,334 )     (1,803 )
Other changes in fair value
    768       6       1,457  
 
Fair value on September 30, 2008
  $572,519     $16,330     $8,598  
 
Fair value on January 1, 2009
  $ 251,404     $ 12,576     $ 7,419  
Addition of mortgage servicing rights
    189       -       -  
Reductions due to loan payments
    (35,768 )     (4,003 )     (1,464 )
Reductions due to sale
    (77,591 )     (8,134 )     (1,548 )
Reclassification from/(to) trading securities
    (776 )     -       -  
Changes in fair value due to:
                       
Changes in valuation model inputs or assumptions
    38,347       -       -  
Other changes in fair value
    (1,387 )     483       739  
 
Fair value on September 30, 2009
  $174,418     $922     $5,146  
 
Servicing, late, and other ancillary fees recognized within mortgage banking income were $13.6 million and $29.2 million for the three months ended September 30, 2009, and 2008, respectively, related to loan sale activity and $42.8 million and $123.7 million for the nine months ended September 30, 2009, and 2008, respectively. Servicing, late, and other ancillary fees recognized within revenue from loan sales and securitizations were $3.3 million and $3.8 million for the three months ended September 30, 2009, and 2008, respectively, related to loan sale activity and $10.2 million and $12.1 million for the nine months ended September 30, 2009, and 2008, respectively.
FHN services a portfolio of mortgage loans related to transfers performed by other parties utilizing QSPEs. FHN’s servicing assets represent its sole interest in these transactions. The total MSR recognized by FHN related to these transactions was $7.2 million and $47.9 million at September 30, 2009, and 2008, respectively. The aggregate principal balance serviced by FHN for these transactions was $1.0 billion and $3.4 billion at September 30, 2009, and 2008, respectively. FHN has no obligation to provide financial support and has not provided any form of support to the related trusts. The MSR recognized by FHN has been included in the first lien mortgage loans column within the rollforward of MSR resulting from loan sales activity.
As of September 30, 2009, FHN had transferred $34.1 million of MSR to third parties in transactions that did not qualify for sales treatment due to certain recourse provisions that were included within the sale agreements. These MSR are included within the first liens mortgage loans column within the rollforward of MSR resulting from loan sales activity. The proceeds from these transfers have been recognized within other short term borrowings and commercial paper in the Consolidated Condensed Statements of Condition as of September 30, 2009.

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Note 6 - 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, 2007
  $ 192,408     $ 56,907  
Amortization expense
    -       (6,424 )
Impairment
    -       (4,034 )
Divestitures
    -       (32 )
Additions
    -       470  
 
September 30, 2008
  $ 192,408     $ 46,887  
 
December 31, 2008
  $ 192,408     $ 45,082  
Impairment **
    (14,027 )     (341 )
Additions
    -       347  
Amortization expense
    -       (4,590 )
 
September 30, 2009
  $ 178,381     $ 40,498  
 
  *   Represents customer lists, acquired contracts, premium on purchased deposits, and covenants not to compete.
 
  **   See Note 2 - Acquisitions/Divestitures for further details regarding goodwill impairment.
The gross carrying amount of other intangible assets subject to amortization is $126.4 million on September 30, 2009, net of $85.9 million of accumulated amortization. Estimated aggregate amortization expense is expected to be $1.5 million for the remainder of 2009, and $5.9 million, $5.7 million, $4.3 million, $3.9 million, and $3.6 million for the twelve-month periods of 2010, 2011, 2012, 2013, and 2014, respectively.
The following is a summary of goodwill detailed by reportable segments for the nine months ended September 30:
                           
    Regional        Capital        
 (Dollars in thousands)   Banking        Markets       Total  
 
December 31, 2007
  $ 77,342     $ 115,066     $ 192,408  
 
September 30, 2008
  $ 77,342     $ 115,066     $ 192,408  
 
December 31, 2008
  $ 77,342     $ 115,066     $ 192,408  
Impairment
    -       (14,027 )     (14,027 )
 
September 30, 2009
  $ 77,342     $ 101,039     $ 178,381  
 
  There is no goodwill associated with the Mortgage Banking, National Specialty Lending, and Corporate segments.

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Note 7 - 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 September 30, 2009, 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 19.51 percent, 15.08 percent, and 12.47 percent, respectively, on September 30, 2009, and were 14.65 percent, 10.43 percent, and 8.46 percent, respectively, on September 30, 2008.
                                 
  First Horizon   First Tennessee Bank
  National Corporation   National Association
 (Dollars in thousands)     Amount     Ratio       Amount     Ratio    
 
On September 30, 2009:
                               
Actual:
                               
Total Capital
  $ 4,754,979     21.61%   $ 4,532,949     20.82%
Tier 1 Capital
    3,563,650       16.20       3,404,528       15.63  
Leverage
    3,563,650       13.34       3,404,528       12.85  
 
                               
For Capital Adequacy Purposes:
                               
Total Capital
    1,759,961   ³     8.00       1,742,115   ³     8.00  
Tier 1 Capital
    879,981   ³     4.00       871,058   ³     4.00  
Leverage
    1,068,442   ³     4.00       1,059,832   ³     4.00  
 
                               
To Be Well Capitalized Under Prompt Corrective Action Provisions:
                               
Total Capital
                    2,177,644   ³     10.00  
Tier 1 Capital
                    1,306,587   ³     6.00  
Leverage
                    1,324,790   ³     5.00  
 
On September 30, 2008:
                               
Actual:
                               
Total Capital
  $ 4,247,691     16.07%   $ 4,076,009     15.54%
Tier 1 Capital
    2,933,984       11.10       2,844,757       10.84  
Leverage
    2,933,984       8.84       2,844,757       8.64  
 
                               
For Capital Adequacy Purposes:
                               
Total Capital
    2,114,211   ³     8.00       2,098,531   ³     8.00  
Tier 1 Capital
    1,057,105   ³     4.00       1,049,264   ³     4.00  
Leverage
    1,327,049   ³     4.00       1,317,648   ³     4.00  
 
                               
To Be Well Capitalized Under Prompt Corrective Action Provisions:
                               
Total Capital
                    2,623,163   ³     10.00  
Tier 1 Capital
                    1,573,898   ³     6.00  
Leverage
                    1,647,060   ³     5.00  
 

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Note 8 - Earnings per Share
The following tables show a reconciliation of the numerators used in calculating earnings per share attributable to common shareholders:
                                  
    Three Months Ended   Nine Months Ended
    September 30   September 30
 (In thousands, except per share data)   2009     2008       2009     2008  
 
Loss from continuing operations
    (24,814 )     (120,471 )     (194,435 )     (122,499 )
Loss from discontinued operations, net of tax
    (10,200 )     (1,749 )     (11,156 )     (3,977 )
 
Net loss
    (35,014 )     (122,220 )     (205,591 )     (126,476 )
Net income attributable to noncontrolling interest
    2,969       2,875       8,563       9,780  
 
Net loss attributable to controlling interest
    (37,983 )     (125,095 )     (214,154 )     (136,256 )
Preferred stock dividends
    14,876       -       44,688       -  
 
Net loss available to common shareholders
    (52,859 )     (125,095 )     (258,842 )     (136,256 )
 
 
                               
Loss from continuing operations
    (24,814 )     (120,471 )     (194,435 )     (122,499 )
Net income attributable to noncontrolling interest
    2,969       2,875       8,563       9,780  
Preferred stock dividends
    14,876       -       44,688       -  
 
Net loss from continuing operations available to common shareholders
    (42,659 )     (123,346 )     (247,686 )     (132,279 )
 
The following table provides a reconciliation of weighted average common shares to diluted average common shares:
                                  
    Three Months Ended   Nine Months Ended
    September 30   September 30
 (In thousands, except per share data)     2009     2008       2009     2008  
 
Weighted average common shares outstanding - basic (a)
    217,186       217,062       217,152       182,858  
Effect of dilutive securities (a)
    -       -       -       -  
 
Weighted average common shares outstanding - diluted (a)
    217,186       217,062       217,152       182,858  
 
(a)   All share data has been restated to reflect stock dividends distributed through October 1, 2009.
The following table provides a reconciliation of earnings/(loss) per common and diluted share:
                                  
    Three Months Ended   Nine Months Ended
    September 30   September 30
 Earnings/(loss) per share common share:     2009     2008       2009     2008  
 
Loss per share from continuing operations available to common shareholders
    (0.20 )     (0.57 )     (1.14 )     (0.72 )
Loss per share from discontinued operations, net of tax
    (0.04 )     (0.01 )     (0.05 )     (0.02 )
 
Net loss per share available to common shareholders
    (0.24 )     (0.58 )     (1.19 )     (0.74 )
 
 
                               
Diluted earnings/(loss) per share common share:
                               
 
Loss per share from continuing operations available to common shareholders
    (0.20 )     (0.57 )     (1.14 )     (0.72 )
Loss per share from discontinued operations, net of tax
    (0.04 )     (0.01 )     (0.05 )     (0.02 )
 
Net loss per share available to common shareholders
    (0.24 )     (0.58 )     (1.19 )     (0.74 )
 
Due to the net loss attributable to common shareholders for the three and nine months ended September 30, 2009, no potentially dilutive shares were included in the loss per share calculations as including such shares would have been antidilutive. Stock options of 13.8 million and 18.1 million with a weighted average exercise price of $29.16 and $30.03 per share for the three months ended September 30, 2009, and 2008, respectively, were excluded. For the nine months ended September 30, 2009, and 2008, stock options of 14.4 million and 18.8 million with a weighted average exercise price of $29.33 and $30.53 per share were also excluded from diluted shares. Other equity awards of 3.5 million and 1.7 million for the three months ended September 30, 2009, and 2008, respectively, and other equity awards of 3.0 million and 1.6 million for the nine months ended September 30, 2009, and 2008, respectively, were also excluded from diluted shares.

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Note 8 - Earnings per Share (continued)
Additionally, 13.7 million potentially dilutive shares related to the CPP common stock warrant were also excluded from the three and nine months ended September 30, 2009, computation of diluted loss per common share because such shares would have been antidilutive.

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Note 9 - 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. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories or involve a large number of parties, FHN cannot state with confidence what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss or impact related to each pending matter may be. FHN establishes loss contingency reserves for litigation matters when estimated loss is both probable and estimable as prescribed by applicable financial accounting guidance. A reserve generally is not established when a loss contingency either is not probable or its amount is not estimable. If loss for a matter is probable and a range of possible loss outcomes is the best estimate available, accounting guidance generally requires a reserve to be established at the low end of the range. Based on current knowledge, and after consultation with counsel, management is of the opinion that loss contingencies related to pending matters should not have a material adverse effect on the consolidated financial condition of FHN, but may be material to FHN’s operating results for any particular reporting period.
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.
In October 2008, Visa announced that it had agreed to settle litigation with Discover Financial Services (Discover) for $1.9 billion. $1.7 billion of this settlement amount was funded from the escrow account established as part of Visa’s IPO. In connection with this settlement, FHN recognized additional expense of $11.0 million within noninterest expense in third quarter 2008. In December 2008, Visa deposited additional funds into the escrow account and FHN recognized a corresponding credit to noninterest expense of $11.0 million for its proportionate share of the amount funded.
In July 2009, Visa deposited an additional $700 million into the escrow account. Accordingly, FHN reduced its contingent liability by $7.0 million through a credit to noninterest expense.
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 Statements of Condition at their historical cost of $0. Conversion of these shares into Class A shares of Visa and, with limited exceptions, transfer of these shares are restricted until the later of the third anniversary of the IPO and the final resolution of the covered litigation. The final conversion ratio, which was estimated to approximate 58 percent as of September 30, 2009, will fluctuate based on the ultimate settlement of the Visa litigation matters for which FHN has a proportionate contingent obligation. Future funding of the escrow will dilute this exchange rate by an amount that is yet to be determined.
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 subject to potential liabilities and losses in relation to loans that it services, and in relation to loans that it originated and sold. FHN evaluates those potential liabilities and maintains reserves for potential losses. In addition, FHN has arrangements with the purchaser of its national home loan origination and servicing platforms that create obligations and potential liabilities.
Servicing. FHN services a mortgage loan portfolio of $43.1 billion as of September 30, 2009, a significant portion of which is held by FNMA and private security holders, with less significant portions held by GNMA and FHLMC. In connection with its servicing activities, FHN collects and remits the principal and interest payments on the underlying loans for the account of the appropriate investor. In the event of delinquent or non -payment on a loan in a private or agency securitization: (1) the terms of the private securities agreements require FHN, as servicer, to continue to make monthly advances of principal and interest (P&I) to the trustee for the benefit of the investors; and (2) the terms of the

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Note 9 - Contingencies and Other Disclosures (continued)
majority of the agency agreements may require the servicer to make advances of P&I, or to repurchase the delinquent or defaulted loan out of the trust pool. For servicer advances of P&I under the terms of private and FNMA (and GNMA pools) securitizations, FHN can utilize payments of P&I received from other prepaid loans within a particular loan pool in order to advance P&I to the trustee. In the event payments are ultimately made by FHN to satisfy this obligation, P&I advances and servicer advances are recoverable from: (1) in the case of private securitizations, the liquidation proceeds of the property securing the loan and (2) in the case of agency loans, from the proceeds of the foreclosure sale by the Government Agency. See Note 13 – Loan Sales and Securitizations for additional information on loans sold with recourse.
FHN is also subject to losses in its loan servicing portfolio due to loan foreclosures. Foreclosure exposure arises from certain agency agreements which limit the agency’s repayment guarantees on foreclosed loans, resulting in certain foreclosure costs being borne by servicers. Foreclosure exposure also includes real estate costs, marketing costs, and costs to maintain properties, especially during protracted resale periods in geographic areas of the country hard hit by declining home values.
FHN is also subject to losses due to under-compensated servicing expenditures made in connection with the administration of current governmental and/or regulatory loss mitigation and loan modification programs. Additionally, FHN is required to repurchase GNMA loans prior to modification.
Loans Originated and Sold. For many years FHN originated loans, primarily first and second lien home loans, with the intention of selling them. Sometimes the loans were sold with full or limited recourse, but much more often the loans were sold without recourse. For loans sold with recourse, FHN has indemnity and repurchase exposure if the loans default. For loans sold without recourse, FHN has repurchase exposure primarily for defaults occurring within a specified period following the sale, and for claims that FHN breached its representations and warranties made to the purchasers at the time of sale.
FHN has various claims outstanding with government agencies and private investors for cure of loan defects, such as missing title insurance, and for repurchase and/or indemnification. FHN has evaluated its exposure under these obligations based on factors such as breach of representations and warranties, early loan delinquency and default status, foreclosure expectancy rates and indemnification claims and accordingly, reserved for losses of approximately $60.9 million and $36.7 million on September 30, 2009 and 2008, respectively.
FHN has sold certain agency mortgage loans with full recourse under agreements to repurchase the loans upon default. For mortgage insured single-family residential loans, in the event of borrower nonperformance, FHN would assume losses to the extent they exceed the value of the collateral and private mortgage insurance, FHA insurance, or VA guaranty. On September 30, 2009 and 2008, FHN had single-family residential loans with outstanding balances of $71.6 million and $83.4 million, respectively, that were serviced on a full recourse basis. On September 30, 2009 and 2008, the outstanding principal balance of loans sold with limited recourse arrangements where some portion of the principal is at risk and serviced by FHN was $3.3 billion at the end of both periods. Additionally, on September 30, 2009 and 2008, $1.1 billion and $.7 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 September 30, 2009, the outstanding principal balance of these loans was $180.4 million and $42.4 million, respectively. On September 30, 2008, the outstanding principal balance of securitized and sold HELOC and second-lien mortgages was $219.7 million and $57.9 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 $5.0 million and $7.4 million on September 30, 2009 and 2008, 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.
FHN has also sold HELOC and second-lien mortgages without recourse through whole loan sales. In third quarter 2009, FHN settled a substantial portion of its repurchase obligations through an agreement with the primary purchaser of HELOC and second lien loans that were previously transferred through whole loan sales. This settlement included the transfer of retained servicing rights associated with the applicable prior second lien and HELOC loan sales. On September 30, 2008, the outstanding principal balance of HELOC and second-lien mortgages sold without recourse through whole loan sales was $1.0 billion and $2.0 billion, respectively. FHN does not guarantee the receipt of the scheduled principal and interest payments on the underlying loans but does have an obligation to repurchase the loans excluded from the above settlement for which there is a breach of representations and warranties provided to the buyers. The remaining repurchase obligation is minimal reflecting the settlement discussed above.

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Note 9 - Contingencies and Other Disclosures (continued)
A wholly-owned subsidiary of FHN has agreements with several providers of private mortgage insurance whereby the subsidiary has agreed to accept insurance risk for specified loss corridors for loans originated in each contract year in exchange for a portion of the private mortgage insurance premiums paid by borrowers (i.e., reinsurance arrangements). The loss corridors vary for each primary insurer for each contract year. No new reinsurance arrangements have been initiated after 2008. In third quarter 2009, FHN agreed to settle certain of its reinsurance obligations with a primary insurer, resulting in a decrease in the reserve balance and the associated trust assets. As of September 30, 2009, FHN has reserved $44.5 million for its estimated liability under the reinsurance arrangements. In accordance with the terms of the contracts with the primary insurers, as of September 30, 2009, FHN has placed $46.9 million of prior premium collections in trust for payment of claims arising under the reinsurance arrangements.
2008 Sale of National Origination and Servicing Platforms. In conjunction with the sale of its servicing platform in August 2008, FHN entered into a three year subservicing arrangement with the purchaser for the unsold portion of FHN’s servicing portfolio. As part of the subservicing agreement, FHN has agreed to a make-whole arrangement whereby if the number of loans subserviced by the purchaser falls below specified levels and the direct servicing cost per loan is greater than a specified amount (determined using loans serviced on behalf of both FHN and the purchaser), FHN will make a payment according to a contractually specified formula. The make-whole payment is subject to a cap, which was $19.4 million if determined in the four quarters immediately following the transaction, and which declined to $15.0 million if triggered in the following eight quarters. As part of the 2008 transaction, FHN recognized a contingent liability of $1.2 million representing the estimated fair value of its performance obligation under the make-whole arrangement.

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Note 10 – Pension and Other Employee Benefits
Pension plan. FHN closed participation in the noncontributory, qualified defined benefit pension plan to employees hired or re-hired on September 1, 2007 or later. This did not impact the benefits of employees currently participating in the plan. Certain employees of FHN’s 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. FHN contributions are based upon actuarially determined amounts necessary to fund the total benefit obligation. FHN is likely to make a contribution to the qualified pension plan in December 2009 attributable to the 2009 plan year. This decision will be based upon pension funding requirements under the Pension Protection Act, the maximum deductible under the Internal Revenue Code, and the actual performance of plan assets during 2009. Given these uncertainties, we cannot estimate the amount of a future contribution at this time. The non-qualified pension plans and other postretirement benefit plans are unfunded. Contributions to these plans cover all benefits paid under the non-qualified plans. This amount was $6.2 million for 2008 and will be $6.5 million by the end of 2009.
FHN also maintains nonqualified plans including a supplemental retirement plan that covers certain employees whose benefits under the pension plan have been limited. Additionally, a program was added under the FHN savings plan that is provided only to employees who are not eligible for the pension plan. FHN made a contribution of $.5 million for this plan in 2009 related to the 2008 plan year.
Other employee benefits. FHN provides post-retirement life insurance benefits to certain employees. FHN also provides post-retirement medical insurance to retirement-eligible employees. The post-retirement medical plan is contributory with retiree contributions adjusted annually and is based on criteria that are a combination of the employee’s age and years of service. For any employee retiring on or after January 1, 1995, FHN contributes a fixed amount based on years of service and age at the time of retirement. FHN’s post-retirement benefits include prescription drug benefits. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) introduced a prescription drug benefit under Medicare Part D as well as a federal subsidy to sponsors of retiree health care that provide a benefit that is actuarially equivalent to Medicare Part D. FHN anticipates receiving a prescription drug subsidy under the Act through 2012.
The components of net periodic benefit cost for the three months ended September 30 are as follows:
                                   
    Pension Benefits   Other Benefits
 (Dollars in thousands)     2009     2008       2009     2008  
 
Components of net periodic benefit cost
                               
Service cost
  $ 1,816     $ 3,448     $ 50     $ 67  
Interest cost
    8,008       7,432       414       560  
Expected return on plan assets
    (11,582 )     (11,621 )     (291 )     (436 )
Amortization of unrecognized:
                               
Transition obligation
    -       -       (1,076 )     247  
Prior service cost/(credit)
    190       215       1,166       (44 )
Actuarial loss/(gain)
    2,224       845       (380 )     (126 )
 
Net periodic benefit cost
  $ 656     $ 319     $ (117 )   $ 268  
 
ASC 715 Settlement Expense
  $ -     $ 111     $ -     $ -  
 
Total ASC 715 Expense
  $ 656     $ 430     $ (117 )   $ 268  
 

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Note 10 – Pension and Other Employee Benefits (continued)
The components of net periodic benefit cost for the nine months ended September 30 are as follows:
                                   
    Pension Benefits   Other Benefits
 (Dollars in thousands)     2009     2008       2009     2008  
 
Components of net periodic benefit cost
                               
Service cost
  $ 10,619     $ 11,862     $ 728     $ 210  
Interest cost
    23,860       22,117       2,396       1,780  
Expected return on plan assets
    (34,745 )     (35,204 )     (850 )     (1,314 )
Amortization of unrecognized:
                               
Transition obligation
    -       -       740       741  
Prior service cost/(credit)
    569       648       1,078       (132 )
Actuarial loss/(gain)
    6,170       1,831       (627 )     (242 )
 
Net periodic benefit cost
  $ 6,473     $ 1,254     $ 3,465     $ 1,043  
 
ASC 715 Settlement Expense
  $ -     $ 826     $ -     $ -  
 
Total ASC 715 Expense
  $ 6,473     $ 2,080     $ 3,465     $ 1,043  
 
In third quarter 2009, FHN revised its estimate of annual pension and postretirement expense resulting in a $2.8 million reduction of net periodic benefit cost. The revised estimate and adjustment are reflected in the three and nine months ended September 30, 2009, in the above tables.
The 2009 net periodic benefit costs of Other Benefits includes the first quarter 2009 expense related to company-paid life insurance benefits offered to certain employees beyond retirement. A liability for these benefits was not previously recorded as premiums but was expensed when incurred. A $10.7 million cumulative adjustment related to prior periods is not included in the 2009 net periodic benefit cost presented above. Post-retirement benefits payable to active employees under this plan were modified in third quarter 2009. As a result of this change, FHN recognized a reduction in its benefit liability of $17.1 million with an offset, net of tax, to accumulated other comprehensive income.
In 2008, distributions from a non-qualified post-retirement plan in conjunction with an early retirement triggered settlement accounting. In accordance with its practice, FHN performed a remeasurement of the plan in conjunction with the settlement and recognized $.8 million in settlement expense.

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Note 11 – 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, loan sales, portfolio advisory, derivative sales, correspondent banking, and equity research. The operational results of Capital Markets’ institutional equity research business, FTN ECM, is inlcuded in Capital Markets’ discontinued operations, net of tax, line item for a all periods presented. Restructuring, repositioning, and efficiency charges from this business are included in discontinued operations within the Corporate segment. 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. In August 2008, FHN completed the divestiture of certain mortgage banking operations to MetLife. FHN continues to originate loans in and around the Tennessee banking footprint and to service the remaining servicing portfolio. The Corporate segment consists of restructuring, repositioning and efficiency initiatives, gains on the repurchase of debt, 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, low income housing investment activities, and venture capital.
Periodically, FHN adapts its segments to reflect changes in expense allocations among segments. For comparability, previously reported items have been revised to reflect these changes. 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 and nine months ended September 30:
                                   
    Three Months Ended   Nine Months Ended
    September 30   September 30
 (Dollars in thousands)   2009     2008     2009     2008  
 
Consolidated
                               
Net interest income
  $ 190,901     $ 223,147     $ 586,574     $ 690,134  
Provision for loan loss
    185,000       340,000       745,000       800,000  
Noninterest income
    303,818       296,073       987,347       1,124,052  
Noninterest expense
    349,901       387,515       1,160,190       1,259,773  
 
Loss before income taxes
    (40,182 )     (208,295 )     (331,269 )     (245,587 )
Benefit for income taxes
    (15,368 )     (87,824 )     (136,834 )     (123,088 )
 
Loss from continuing operations
    (24,814 )     (120,471 )     (194,435 )     (122,499 )
Loss from discontinued operations, net of tax
    (10,200 )     (1,749 )     (11,156 )     (3,977 )
 
Net loss
  $ (35,014 )   $ (122,220 )   $ (205,591 )   $ (126,476 )
 
Average assets
  $ 26,847,829     $ 33,381,495     $ 28,734,936     $ 35,555,364  
 
 
                               
Regional Banking
                               
Net interest income
  $ 124,010     $ 128,170     $ 372,480     $ 378,967  
Provision for loan loss
    63,066       58,200       211,908       222,942  
Noninterest income
    81,369       88,031       239,057       267,920  
Noninterest expense
    169,810       153,926       506,474       446,854  
 
Income/(loss) before income taxes
    (27,497 )     4,075       (106,845 )     (22,909 )
Provision/(benefit) for income taxes
    (10,474 )     1,454       (40,489 )     (8,872 )
 
Income/(loss) from continuing operations
    (17,023 )     2,621       (66,356 )     (14,037 )
Income from discontinued operations, net of tax
    -       1       548       884  
 
Net income/(loss)
  $ (17,023 )   $ 2,622     $ (65,808 )   $ (13,153 )
 
Average assets
  $  10,685,376     $  11,786,649     $  11,142,230     $  11,956,404  
 
  Certain previously reported amounts have been reclassified to agree with current presentation.

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Note 11 – Business Segment Information (continued)
                                   
    Three Months Ended   Nine Months Ended
    September 30   September 30
 (Dollars in thousands)   2009     2008     2009     2008  
 
Capital Markets
                               
Net interest income
  $ 20,241     $ 19,603     $ 69,188     $ 58,877  
Provision for loan loss
    54,196       38,451       89,309       72,004  
Noninterest income
    130,876       89,414       520,536       327,808  
Noninterest expense
    86,555       76,215       334,057       268,057  
 
Income/(loss) before income taxes
    10,366       (5,649 )     166,358       46,624  
Provision/(benefit) for income taxes
    3,840       (2,264 )     62,476       17,162  
 
Income(loss) from continuing operations
    6,526       (3,385 )     103,882       29,462  
Loss from discontinued operations, net of tax
    (1,189 )     (1,496 )     (2,600 )     (4,501 )
 
Net income/(loss)
  $ 5,337     $ (4,881 )   $ 101,282     $ 24,961  
 
Average assets
  $ 3,763,121     $ 4,867,776     $ 4,157,615     $ 5,345,696  
 
 
                               
National Specialty Lending
                               
Net interest income
  $ 29,608     $ 45,200     $ 94,312     $ 152,869  
Provision for loan loss
    79,530       240,471       444,460       497,953  
Noninterest income/(loss)
    6,121       4,122       (9,627 )     (9,924 )
Noninterest expense
    28,189       26,043       101,091       82,066  
 
Loss before income taxes
    (71,990 )     (217,192 )     (460,866 )     (437,074 )
Benefit for income taxes
    (27,125 )     (81,838 )     (173,654 )     (164,689 )
 
Net loss
  $ (44,865 )   $ (135,354 )   $ (287,212 )   $ (272,385 )
 
Average assets
  $ 6,028,911     $ 8,292,693     $ 6,577,679     $ 8,839,768  
 
 
                               
Mortgage Banking
                               
Net interest income
  $ 7,817     $ 25,423     $ 29,612     $ 93,825  
Provision/(benefit) for loan loss
    (11,792 )     2,878       (677 )     7,101  
Noninterest income
    60,775       112,323       201,209       464,048  
Noninterest expense
    48,128       90,485       159,164       389,655  
 
Income before income taxes
    32,256       44,383       72,334       161,117  
Provision for income taxes
    12,154       16,723       27,255       60,709  
 
Net income
  $ 20,102     $ 27,660     $ 45,079     $ 100,408  
 
Average assets
  $ 1,867,979     $ 4,534,579     $ 2,023,103     $ 5,418,911  
 
 
                               
Corporate
                               
Net interest income
  $ 9,225     $ 4,751     $ 20,982     $ 5,596  
Noninterest income
    24,677       2,183       36,172       74,200  
Noninterest expense
    17,219       40,846       59,404       73,141  
 
Income/(loss) before income taxes
    16,683       (33,912 )     (2,250 )     6,655  
Provision/(benefit) for income taxes
    6,237       (21,899 )     (12,422 )     (27,398 )
 
Income/(loss) from continuing operations
    10,446       (12,013 )     10,172       34,053  
Loss from discontinued operations, net of tax
    (9,011 )     (254 )     (9,104 )     (360 )
 
Net income/(loss)
  $ 1,435     $ (12,267 )   $ 1,068     $ 33,693  
 
Average assets
  $  4,502,442     $  3,899,798     $  4,834,309     $  3,994,585  
 
  Certain previously reported amounts have been reclassified to agree with current presentation.

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Note 12 - Preferred Stock and Other Capital
FHN Preferred Stock and Warrant
On November 14, 2008, FHN issued and sold 866,540 preferred shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series CPP (“Capital Purchase Program”), along with a Warrant to purchase common stock. The issuance occurred in connection with, and is governed by, the Treasury Capital Purchase Program administered by the U.S. Treasury under the Troubled Asset Relief Program (“TARP”). The Preferred Shares have an annual 5% cumulative preferred dividend rate, payable quarterly. The dividend rate increases to 9% after five years. Dividends compound if they accrue in arrears. Preferred Shares have a liquidation preference of $1,000 per share plus accrued dividends. The Preferred Shares have no redemption date and are not subject to any sinking fund. The Preferred Shares carry certain restrictions. The Preferred Shares have a senior rank and also provide limitations on certain compensation arrangements of executive officers. Subsequent UST regulations have expanded limitations on compensation agreements to include the twenty most highly compensated employees. During the first three years following the issuance, FHN may not reinstate a cash dividend on its common shares nor purchase equity shares without the approval of the U.S. Treasury, subject to certain limited exceptions. FHN may not reinstate a cash dividend on its common shares to the extent preferred dividends remain unpaid. Generally, the Preferred Shares are non-voting. However, should FHN fail to pay six quarterly dividends, the holder may elect two directors to FHN’s Board of Directors until such dividends are paid. In connection with the issuance of the Preferred Shares, a Warrant to purchase 12,743,235 common shares was issued with an exercise price of $10.20 per share. The Warrant is immediately exercisable and expires in ten years. The Warrant is subject to proportionate anti-dilution adjustment in the event of stock dividends or splits, among other things. As a result of the stock dividends distributed year to date as of October 1, 2009, the Warrant was adjusted to cover 13,748,944 common shares at a purchase price of $9.45 per share.
The Preferred Shares and Warrant qualify as Tier 1 capital and are presented in permanent equity on the Consolidated Condensed Statements of Condition as of September 30, 2009, in the amounts of $794.6 million and $83.9 million, respectively.
Subsidiary Preferred Stock
On September 14, 2000, FT Real Estate Securities Company, Inc. (FTRESC), an indirect subsidiary of FHN, issued 50 shares of 9.50% Cumulative Preferred Stock, Class B (Class B Preferred Shares), with a liquidation preference of $1.0 million per share. An aggregate total of 47 Class B Preferred Shares have been sold privately to nonaffiliates. These securities qualify as Tier 2 capital and are presented in the Consolidated Condensed Statements of Condition as “Long-term debt”. FTRESC is a real estate investment trust (REIT) established for the purpose of acquiring, holding and managing real estate mortgage assets. Dividends on the Class B Preferred Shares are cumulative and are payable semi-annually.
The Class B Preferred Shares are mandatorily redeemable on March 31, 2031, and redeemable at the discretion of FTRESC in the event that the Class B Preferred Shares cannot be accounted for as Tier 2 regulatory capital or there is more than an insubstantial risk that dividends paid with respect to the Class B Preferred Shares will not be fully deductible for tax purposes. They are not subject to any sinking fund and are not convertible into any other securities of FTRESC, FHN or any of its subsidiaries. The shares are, however, automatically exchanged at the direction of the Office of the Comptroller of the Currency for preferred stock of FTBNA, having substantially the same terms as the Class B Preferred Shares in the event FTBNA becomes undercapitalized, insolvent or in danger of becoming undercapitalized.
Effective January 1, 2009, FHN adopted the FASB Accounting Standards Codification Topic relating to Consolidation (ASC 810-10-45) which provides that noncontrolling interests should be presented as a separate component of equity rather than on a mezzanine level. In accordance with ASC 810-10-45, the balance for noncontrolling interests associated with preferred stock previously issued by the following indirect, wholly-owned subsidiaries of FHN has been included in the equity section of the Consolidated Condensed Statements of Condition for all periods presented.
First Horizon Preferred Funding, LLC and First Horizon Preferred Funding II, LLC have each issued $1.0 million of Class B Units of preferred stock. On September 30, 2009 and 2008, the amount of Class B Preferred Shares and Units that are perpetual in nature that was recognized as “Noncontrolling interest” on the Consolidated Condensed Statements of Condition was $.3 million and $.5 million, respectively. The remaining balance has been eliminated in consolidation. Prior to the adoption of ASC 810-10-45, the balance for these preferred shares was recognized as “Preferred stock of subsidiary” on the Consolidated Condensed Statements of Condition.
On March 23, 2005, FTBNA issued 300,000 shares of Class A Non-Cumulative Perpetual Preferred Stock (Class A Preferred Stock) with a liquidation preference of $1,000 per share. These securities qualify as Tier 1 capital. On September 30, 2009 and 2008, $294.8 million of Class A Preferred Stock was recognized as “Noncontrolling interest” on the Consolidated Condensed Statements of Condition. Prior to the adoption of ASC 810-10-45, the balance of FTBNA’s Class A Preferred Stock was recognized as “Preferred stock of subsidiary” on the Consolidated Condensed Statements of Condition.

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Note 12 - Preferred Stock and Other Capital (continued)
Due to the nature of the subsidiary preferred stock issued by First Horizon Preferred Funding, LLC, First Horizon Preferred Funding II, LLC, and FTBNA, all components of other comprehensive income/(loss) included in the Consolidated Condensed Statements of Equity have been attributed solely to FHN as the controlling interest holder. The table below presents the amounts included in the Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2009 and 2008 which are attributable to FHN as controlling interest holder for the following:
                                   
    Three Months Ended   Nine Months Ended
    September 30   September 30
 (Dollars in thousands)   2009     2008     2009     2008  
 
Net loss from continuing operations
  $ (27,783 )   $ (123,346 )   $ (202,998 )   $ (132,279 )
Loss from discontinued operations, net of tax
    (10,200 )     (1,749 )     (11,156 )     (3,977 )
 
Net loss
  $ (37,983 )   $ (125,095 )   $ (214,154 )   $ (136,256 )
 

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Note 13 - Loan Sales and Securitizations
Historically, FHN utilized loan sales and securitizations as a significant source of liquidity for its mortgage banking operations. With FHN’s current focus on origination of mortgages within its regional banking footprint and the related sale of national mortgage origination offices to MetLife, loan sale and securitization activity has significantly decreased. Subsequent to the MetLife transaction, FHN generally no longer retains financial interests in loans it transfers to third parties. For classification purposes, all loans transferred to GSE (e.g., FNMA, FHLMC, and GNMA), including those subsequently securitized by an agency, are considered loan sales while transfers attributed to securitizations consist solely of proprietary securitizations executed by FHN.
During third quarter 2009 and 2008, FHN transferred $.3 billion and $4.9 billion, respectively, of single-family residential mortgage loans in sales that were not securitizations. During the nine months ended September 30, 2009, and 2008, FHN transferred $1.1 billion and $19.3 billion, respectively, of single-family residential mortgage loans in sales that were not securitizations. In 2008, the transactions primarily reflect sales to GSE. In third quarter 2009 and 2008, FHN recognized net pre-tax gains of $1.7 million and $19.9 million from the sale of single-family residential mortgage loans which includes gains recognized on the capitalization of MSR associated with these loans. During the nine months ended September 30, 2009, and 2008, FHN recognized net pre-tax gains of $13.0 million and $236.4 million, respectively, from the sale of single-family residential mortgage loans which include gains recognized on the capitalization of MSR associated with these loans.
During third quarter 2009 and 2008, FHN transferred $3.9 million and $4.4 million, respectively, of HELOC related to proprietary securitization transactions. During the nine months ended September 30, 2009, and 2008, FHN has transferred $10.4 million and $15.3 million, respectively, of HELOC related to proprietary securitization transactions. In third quarter 2009 and 2008, FHN recognized net pre-tax gains $.1 million related to HELOC securitizations which include gains recognized on the capitalization of MSR associated with these loans. During the nine months ended September 30, 2009, and 2008, FHN has recognized net pre-tax gains of $.2 million and $.3 million, respectively, related to HELOC securitizations which include gains recognized on the capitalization of MSR associated with these loans.
Retained Interests
Interests retained from loan sales, including GSE securitizations, include MSR and excess interest. Interests retained from proprietary securitizations include MSR and various financial assets (see discussion below). MSR are initially valued at fair value, and the remaining retained interests are initially valued by allocating the remaining cost basis of the loan between the security or loan sold and the remaining retained interests based on their relative fair values at the time of sale or securitization.
In certain cases, FHN continues to service and receive servicing fees related to the transferred loans. Generally, FHN received annual servicing fees approximating .28 percent in third quarter 2009 and .27 percent in third quarter 2008 of the outstanding balance of underlying single-family residential mortgage loans. FHN received annual servicing fees approximating .50 percent in third quarter 2009 and 2008 of the outstanding balance of underlying loans for HELOC and home equity loans transferred. MSR related to loans transferred and serviced by FHN, as well as MSR related to loans serviced by FHN and transferred by others, are discussed further in Note 5 – Mortgage Servicing Rights. During third quarter 2009, there were no significant additions to MSR.
Other financial assets retained in a proprietary or GSE securitization may include certificated residual interests, excess interest (structured as interest-only strips), interest-only strips, principal-only strips, or subordinated bonds. Residual interests represent rights to receive earnings to the extent of excess income generated by the underlying loans. Excess interest represents rights to receive interest from serviced assets that exceed contractually specified rates. Principal-only strips are principal cash flow tranches, and interest-only strips are interest cash flow tranches. Subordinated bonds are bonds with junior priority. All financial assets retained from a securitization are recognized on the Consolidated Condensed Statements of Condition in trading securities at fair value with realized and unrealized gains and losses included in current earnings as a component of noninterest income on the Consolidated Condensed Statements of Income.
As of September 30, 2009, and 2008, $52.2 million and $112.3 million, respectively, of excess interest IO are associated with proprietary securitization transactions while the remainder is associated with loan sales. All other retained interests relate to securitization activity.

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Note 13 - Loan Sales and Securitizations (continued)
The sensitivity of the fair value of all retained or purchased MSR to immediate 10 percent and 20 percent adverse changes in assumptions on September 30, 2009, and 2008 are as follows:
                                                  
  On September 30, 2009   On September 30, 2008
 (Dollars in thousands   First     Second             First     Second        
 except for annual cost to service)   Liens     Liens     HELOC     Liens     Liens     HELOC  
 
Fair value of retained interests
  $   281,046     $   1,850     $   6,387     $   770,621     $   17,527     $   10,343  
Weighted average life (in years)
    3.8       1.7       2.3       5.2       2.3       2.3  
 
                                               
Annual prepayment rate
    21.5%       43.4%       31.0%       16.9%       34.7%       35.0%  
Impact on fair value of 10% adverse change
  $ (16,887 )   $ (1,083 )   $ (313 )   $ (31,588 )   $ (1,317 )   $ (705 )
Impact on fair value of 20% adverse change
    (32,112 )     (2,060 )     (598 )     (60,398 )     (2,501 )     (1,345 )
 
                                               
Annual discount rate on servicing cash flows
    12.8%       14.0%       18.0%       10.4%       14.0%       18.0%  
Impact on fair value of 10% adverse change
  $ (7,470 )   $ (202 )   $ (250 )   $ (16,260 )   $ (436 )   $ (301 )
Impact on fair value of 20% adverse change
    (14,505 )     (395 )     (470 )     (32,520 )     (851 )     (584 )
 
                                               
Annual cost to service (per loan)
  $ 113     $ 50     $ 50     $ 53     $ 50     $ 50  
Impact on fair value of 10% adverse change
    (6,544 )     (189 )     (85 )     (7,549 )     (365 )     (290 )
Impact on fair value of 20% adverse change
    (13,054 )     (378 )     (170 )     (15,098 )     (728 )     (581 )
 
                                               
Annual earnings on escrow
    2.3%       3.3%       3.3%       3.6%       2.2%       2.1%  
Impact on fair value of 10% adverse change
  $ (4,456 )   $ (16 )   $ (80 )   $ (23,103 )   $ (308 )   $ (174 )
Impact on fair value of 20% adverse change
    (8,916 )     (33 )     (159 )     (44,635 )     (617 )     (348 )
 

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Note 13 - Loan Sales and Securitizations (continued)
The sensitivity of the fair value of other retained interests to immediate 10 percent and 20 percent adverse changes in assumptions on September 30, 2009, and 2008 are as follows:
                                                  
                                    Residual     Residual  
    Excess                             Interest     Interest  
 (Dollars in thousands   Interest     Certificated             Subordinated     Certificates     Certificates  
 except for annual cost to service)   IO     PO     IO     Bonds     2nd Liens     HELOC  
 
September 30, 2009
                                               
Fair value of retained interests
  $ 92,210     $ 12,142     $ 238     $ 1,405     $ 2,488     $ 2,462  
Weighted average life (in years)
    3.8       4.6       7.8       2.0       2.7       2.3  
 
                                               
Annual prepayment rate
    21.0%       33.2%       10.2%       6.3%       26.3%       28.2%  
Impact on fair value of 10% adverse change
  $ (4,887 )   $ (366 )   $ (10 )   $ (24 )   $ (32 )   $ (294 )
Impact on fair value of 20% adverse change
    (9,381 )     (730 )     (21 )     (49 )     (59 )     (539 )
 
                                               
Annual discount rate on residual cash flows
    10.8%       22.6%       34.7%       142.5%       34.9%       32.9%  
Impact on fair value of 10% adverse change
  $ (3,734 )   $ (535 )   $ (19 )   $ (83 )   $ (117 )   $ (305 )
Impact on fair value of 20% adverse change
    (7,154 )     (1,026 )     (39 )     (157 )     (221 )     (559 )
 
                                               
 
September 30, 2008
                                               
Fair value of retained interests
  $ 251,305     $ 14,335     $ 418     $ 12,511     $ 3,711     $ 3,713  
Weighted average life (in years)
    5.6       3.9       5.8       5.9       2.6       2.2  
 
                                               
Annual prepayment rate
    14.3%       23.1%       15.3%       14.3%       30.0%       28.0%  
Impact on fair value of 10% adverse change
  $ (12,649 )   $ (566 )   $ (23 )   $ (519 )   $ (38 )   $ (390 )
Impact on fair value of 20% adverse change
    (24,290 )     (1,198 )     (45 )     (1,020 )     (72 )     (731 )
 
                                               
Annual discount rate on residual cash flows
    12.3%       16.3%       12.3%       33.5%       35.0%       33.0%  
Impact on fair value of 10% adverse change
  $ (9,556 )   $ (490 )   $ (17 )   $ (500 )   $ (142 )   $ (403 )
Impact on fair value of 20% adverse change
    (18,418 )     (948 )     (32 )     (961 )     (269 )     (746 )
 
These sensitivities are hypothetical and should not be considered to be predictive of future performance. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions cannot necessarily be extrapolated because the relationship between the change in assumption and the change in fair value may not be linear. Also, in this table, the effect on the fair value of the retained interest caused by a particular assumption variation is calculated independently from all other assumption changes. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Furthermore, the estimated fair values as disclosed should not be considered indicative of future earnings on these assets.
FHN uses assumptions and estimates in determining the fair value allocated to retained interests at the time of initial securitization. Subsequent to the MetLife sale, FHN generally no longer retains interests related to loan sales or securitizations. During the three and nine months ended September 30, 2009, additions to MSR were immaterial. The key economic assumptions used to measure the fair value of MSR at the date of securitization or loan sale were as follows during the third quarter 2008.
                         
    First     Second        
    Liens     Liens     HELOC  
 
September 30, 2008
                       
Weighted average life (in years)
    4.1-6.3       2.7 - 3.1       1.7 - 1.8  
Annual prepayment rate
    13.4% - 21.4%       26.0% - 30.0%       43.0% - 44.0%  
Annual discount rate
    9.8%-11.0%       14.0%       18.0%  
Annual cost to service (per loan)
    $56 - $66       $50       $50  
Annual earnings on escrow
    3.5%-3.7%       3.8% - 5.3%       5.3%  
 

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Note 13 - Loan Sales and Securitizations (continued)
There were no securitizations in which FHN retained an interest during the three or nine months ended September 30, 2009. The key economic assumptions used to measure the fair value of other retained interests at the date of securitization were as follows during third quarter 2008.
                          
    Interest     Certificated     Subordinated  
    IO     PO     Bond  
 
September 30, 2008
                       
Weighted average life (in years)
    5.8       N/A       N/A  
Annual prepayment rate
    12.4%       N/A       N/A  
Annual discount rate
    11.8%       N/A       N/A  
 
Cash flows received and paid related to loan sales were as follows:
                                  
 
    Three Months Ended   Nine Months Ended
    September 30   September 30
 (Dollars in thousands)   2009     2008     2009     2008  
 
Proceeds from initial sales
  $ 256,758     $ 4,956,106     $ 1,102,402     $ 19,505,914  
Servicing fees retained*
    16,891       32,970       53,046       135,837  
Purchases of GNMA guaranteed mortgages
    6,121       42,208       7,880       103,436  
Purchases of delinquent or foreclosed assets
    13,562       9,559       49,351       23,507  
Other cash flows received on retained interests
    2,082       4,042       25,252       28,271  
 
  Certain previously reported amounts have been reclassified to agree with current presentation.
  *   Includes servicing fees on MSR associated with loan sales and purchased MSR.
Cash flows received and paid related to securitizations were as follows:
                                  
 
    Three Months Ended   Nine Months Ended
    September 30   September 30
 (Dollars in thousands)   2009     2008     2009     2008  
 
Proceeds from initial securitizations
    $3,987     $4,462       $10,671       $15,574  
Servicing fees retained
    16,230       21,132       50,383       65,005  
Purchases of delinquent or foreclosed assets
    -       -       -       3,148  
Other cash flows received on retained interests
    4,268       3,919       34,881       14,967  
 
  Certain previously reported amounts have been reclassified to agree with current presentation.

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Note 13 - Loan Sales and Securitizations (continued)
As of September 30, 2009, the principal amount of loans transferred through loan sales and securitizations and other loans managed with them, the principal amount of delinquent loans, and the net credit losses during the three and nine months ended September 30, 2009, are as follows:
                                 
    Total Principal   Principal Amount   Net Credit
 (Dollars in thousands)   Amount of Loans   of Delinquent Loans (a)   Losses (b) (c)
                    Three months ended   Nine months ended
    On September 30, 2009   September 30, 2009   September 30, 2009
         
Type of loan:
                               
Real estate residential
  $ 32,298,124     $ 835,913     $ 131,006     $ 303,131  
           
Total loans managed or transferred (d)
  $ 32,298,124     $ 835,913     $ 131,006     $ 303,131  
             
Loans sold (e)
    (23,668,626 )                        
Loans held for sale (e)
    (369,296 )                        
Loans held in portfolio
  $ 8,260,202                          
                         
(a)   Loans 90 days or more past due include $.2 million of GNMA guaranteed mortgages. $614.0 million of delinquent loans have been securitized while $32.3 million have been sold.
 
(b)   Principal amount of loans securitized and sold includes $19.5 billion of loans securitized through GNMA, FNMA or FHLMC. FHN retains interests other than servicing rights on a portion of these securitized loans. No delinquency or net credit loss data is included for the loans securitized through FNMA or FHMLC because these agencies retain credit risk. The remainder of loans securitized and sold were securitized through proprietary trusts, where FHN retained interests other than servicing rights.
 
(c)   For the three months ended September 30, 2009, $46.3 million associated with securitizations and $12.4 million associated with loan sales; for the nine months ended September 30, 2009, $67.2 million associated with securitizations and $29.4 million associated with loan sales.
 
(d)   Transferred loans are real estate residential loans in which FHN has a retained interest other than servicing rights.
 
(e)   $4.2 billion associated with securitizations and $19.8 billion associated with loan sales.

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Note 13 - Loan Sales and Securitizations (continued)
As of September 30, 2008, the principal amount of loans transferred through loan sales and securitizations and other loans managed with them, the principal amount of delinquent loans, and the net credit losses during the three and nine months ended September 30, 2008, are as follows:
                                 
    Total Principal   Principal Amount   Net Credit
 (Dollars in thousands)   Amount of Loans   of Delinquent Loans (a)   Losses (b) (c)
                    Three months ended   Nine months ended
    On September 30, 2008   September 30, 2008   September 30, 2008
         
Type of loan:
                               
Real estate residential
  $ 73,657,580     $ 400,301     $ 53,151     $ 129,150  
         
Total loans managed or transferred (d)
  $ 73,657,580     $ 400,301     $ 53,151     $ 129,150  
             
Loans sold (e)
    (64,206,682 )                        
Loans held for sale (e)
    (540,780 )                        
                         
Loans held in portfolio
  $ 8,910,118                          
                         
(a)   Loans 90 days or more past due include $.2 million of GNMA guaranteed mortgages. $311.0 million of delinquent loans have been securitized while $9.1 million have been sold.
 
(b)   Principal amount of loans securitized and sold includes $59.2 billion of loans securitized through GNMA, FNMA or FHLMC. FHN retains interests other than servicing rights on a portion of these securitized loans. No delinquency or net credit loss data is included for the loans securitized through FNMA or FHMLC because these agencies retain credit risk. The remainder of loans securitized and sold were securitized through proprietary trusts, where FHN retained interests other than servicing rights.
 
(c)   For the three months ended September 30, 2008, $7.3 million associated with securitizations and $18.6 million associated with loan sales; for the nine months ended September 30, 2008, $16.0 million associated with securitizations and $28.2 million associated with loan sales.
 
(d)   Transferred loans are real estate residential loans in which FHN has a retained interest other than servicing rights.
 
(e)   $5.0 billion associated with securitizations and $59.7 billion associated with loan sales.
Secured Borrowings. In 2007 and 2006, FTBNA executed several securitizations of retail real estate residential loans for the purpose of engaging in secondary market financing. Since the related trusts did not qualify as QSPE and since the cash flows on the loans are pledged to the holders of the trusts’ securities, FTBNA recognized the proceeds as secured borrowings in accordance with the ASC’s Transfers and Servicing Topic (ASC 860-10-50). As of September 30, 2009, FTBNA had recognized $669.5 million of loans net of unearned income and $661.3 million of other collateralized borrowings in its Consolidated Condensed Statement of Condition related to these transactions. As of September 30, 2008, FTBNA had recognized $717.2 million of loans net of unearned income and $701.2 million of other collateralized borrowings in its Consolidated Condensed Statement of Condition related to these transactions. See Note 14 – Variable Interest Entities for additional information.

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Note 14 - Variable Interest Entities
Under the provisions of ASC’s Consolidation Topic (ASC 860-10-50), FHN is deemed to be the primary beneficiary and required to consolidate a variable interest entity (VIE) if it has a variable interest that will absorb the majority of the VIE’s expected losses, receive the majority of expected residual returns, or both. A VIE exists when equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities by itself. A variable interest is a contractual, ownership, or other interest that changes with changes in the fair value of the VIE’s net assets or the VIE’s cash flows. Expected losses and expected residual returns are measures of variability in the expected fair value or cash flow of a VIE.
Consolidated Variable Interest Entities. In 2007 and 2006, FTBNA established several Delaware statutory trusts (Trusts), for the purpose of engaging in secondary market financing. Except for recourse due to breaches of standard representations and warranties made by FTBNA in connection with the sale of the retail real estate residential loans by FTBNA to the Trusts, the creditors of the Trusts hold no recourse to the assets of FTBNA. Additionally, FTBNA has no contractual requirements to provide financial support to the Trusts. Since the Trusts did not qualify as QSPE, FTBNA treated the proceeds as secured borrowings in accordance with ASC 860-10-50. FTBNA determined that the Trusts were VIE’s because the holders of the equity investment at risk did not have adequate decision making ability over the trusts’ activities. Thus, FTBNA assessed whether it was the primary beneficiary of the associated trusts. Since there was an overcollateralization of the Trusts, any excess of cash flows received on the transferred loans above the amounts passed through to the security holders would revert to FTBNA. Accordingly, FTBNA determined that it was the primary beneficiary of the Trusts because it absorbed a majority of the expected losses of the Trusts.
FTBNA holds variable interests in trusts which have issued mandatorily redeemable preferred capital securities (trust preferreds) for smaller banking and insurance enterprises. FTBNA has no voting rights for the trusts’ activities. The trusts’ only assets are junior subordinated debentures of the issuing enterprises. The creditors of the trusts hold no recourse to the assets of FTBNA. These trusts meet the definition of a VIE because the holders of the equity investment at risk do not have adequate decision making ability over the trusts’ activities. In situations where FTBNA holds a majority of the trust preferreds issued by a trust, it is considered the primary beneficiary of that trust because FTBNA will absorb a majority of the trust’s expected losses. FTBNA has no contractual requirements to provide financial support to the trusts. In situations where FTBNA holds a majority, but less than all, of the trust preferreds for a trust, consolidation of the trust results in recognition of amounts received from other parties as debt.
FHN has established certain rabbi trusts related to deferred compensation plans offered to its employees. FHN contributes employee cash compensation deferrals to the trusts and directs the underlying investments made by the trusts. The assets of these trusts are available to FHN’s creditors only in the event that FHN becomes insolvent. These trusts are considered VIEs because either there is no equity at risk in the trusts or because FHN provided the equity interest to its employees in exchange for services rendered. Given that the trusts were created in exchange for the employees’ services, FHN is considered the primary beneficiary of the rabbi trusts because it is most closely related to their purpose and design. FHN has the obligation to fund any liabilities to employees that are in excess of a rabbi trust’s assets.
The following table summarizes VIEs consolidated by FHN:
                                 
 As of September 30, 2009            
 (Dollars in thousands)   Assets   Liabilities
    Carrying             Carrying        
 Type   Value     Classification     Value     Classification  
 
On balance sheet consumer loan securitizations
  $ 669,503     Loans, net of unearned income   $ 661,291     Other collateralized borrowings
Small issuer trust preferred holdings
    452,850     Loans, net of unearned income     30,500     Term borrowings
Rabbi trusts used for deferred compensation plans
    94,830     Other assets     57,099     Other liabilities
 
                                 
 As of September 30, 2008            
 (Dollars in thousands)   Assets   Liabilities
    Carrying             Carrying        
 Type   Value     Classification     Value     Classification  
 
On balance sheet consumer loan securitizations
  $ 717,192     Loans, net of unearned income   $ 701,150     Other collateralized borrowings
Small issuer trust preferred holdings
    465,350     Loans, net of unearned income     30,500     Term borrowings
Rabbi trusts used for deferred compensation plans
    143,269     Other assets     88,226     Other liabilities
 
Nonconsolidated Variable Interest Entities. Since 1997, First Tennessee Housing Corporation (FTHC), a wholly-owned subsidiary, makes equity investments as a limited partner, in various partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital and to support FHN’s community reinvestment initiatives. The activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants generally within FHN’s primary geographic region. LIHTC partnerships are considered VIEs because FTHC, as the holder of the equity investment at risk, does not have the ability to significantly affect the success of the entity through voting rights. FTHC is not considered the primary beneficiary of the LIHTC partnerships because an agent relationship exists between FTHC and the general partners, whereby the general partners cannot sell, transfer or otherwise encumber their ownership interest without

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Note 14 - Variable Interest Entities – (continued)
the approval of FTHC. Because this results in a de facto agent relationship between the partners, the general partners are considered the primary beneficiaries because their operations are most closely associated with the LIHTC partnerships’ operations. FTHC has no contractual requirements to provide financial support to the LIHTC partnerships beyond its initial funding commitments.
FTBNA holds variable interests in trusts which have issued mandatorily redeemable trust preferreds for smaller banking and insurance enterprises. FTBNA has no voting rights for the trusts’ activities. The trusts’ only assets are junior subordinated debentures of the issuing enterprises. These trusts meet the definition of a VIE because the holders of the equity investment at risk do not have adequate decision making ability over the trusts’ activities. In situations where FTBNA did not hold a majority of the trust preferreds issued by a trust, it is not considered the primary beneficiary of that trust because FTBNA does not absorb a majority of the expected losses of the trust. FTBNA has no contractual requirements to provide financial support to the trusts.
In third quarter 2007, FTBNA executed a securitization of certain small issuer trust preferreds for which the underlying trust did not qualify as a QSPE under ASC 860-10-50. This trust was determined to be a VIE because the holders of the equity investment at risk do not have adequate decision making ability over the trust’s activities. FTBNA determined that it was not the primary beneficiary of the trust due to the size and priority of the interests it retained in the securities issued by the trust. Accordingly, FTBNA has accounted for the funds received through the securitization as a collateralized borrowing in its Consolidated Condensed Statement of Condition. FTBNA has no contractual requirement to provide financial support to the trust.
In 1996 FHN issued junior subordinated debt to Capital I and Capital II totaling $309.0 million. Both Capital I and Capital II are considered VIEs because FHN’s capital contributions to these trusts are not considered “at risk” in evaluating whether the equity investments at risk in the trusts have adequate decision making ability over the trusts’ activities. Capital I and Capital II are not consolidated by FHN because the holders of the securities issued by the trusts absorb a majority of expected losses and residual returns.
Prior to September 30, 2009, wholly-owned subsidiaries of FHN served as investment advisor and administrator of certain “fund of funds” investment vehicles, whereby the subsidiaries received fees for management of the funds’ operations and through revenue sharing agreements based on the funds’ performance. The funds were considered VIEs because the holders of the equity at risk did not have voting rights or the ability to control the funds’ operations. The subsidiaries did not make any investment in the funds. Further, the subsidiaries were not obligated to provide any financial support to the funds. The funds were not consolidated by FHN because its subsidiaries did not absorb a majority of expected losses or residual returns.
The following table summarizes VIEs that are not consolidated by FHN:
                         
 As of September 30, 2009                  
 (Dollars in thousands)   Maximum     Liability        
 Type   Loss Exposure     Recognized     Classification  
 
Low Income Housing Partnerships (a) (b)
    $ 115,321        $ -        Other assets
Small Issuer Trust Preferred Holdings
    43,000       -        Loans, net of unearned income
On Balance Sheet Trust Preferred Securitization
    64,377       49,797       (c)  
Proprietary Trust Preferred Issuances
    N/A       309,000     Term borrowings
 
(a)   Maximum loss exposure represents $112.5 million of current investments and $2.8 million of contractual funding commitments. Only the current investment amount is included in Other Assets.
 
(b)   A liability is not recognized because investments are written down over the life of the related tax credit.
 
(c)   $112.5 million was classified as Loans, net of unearned income and $1.7 million was classified as Trading securities which are offset by $49.8 million classified as Other collateralized borrowings.
                         
 As of September 30, 2008                  
 (Dollars in thousands)   Maximum     Liability        
 Type   Loss Exposure     Recognized     Classification  
 
Low Income Housing Partnerships (a) (b)
  $ 138,776     $ -        Other assets
Small Issuer Trust Preferred Holdings
    43,000       -        Loans, net of unearned income
On Balance Sheet Trust Preferred Securitization
    65,528       48,646       (c)  
Proprietary Trust Preferred Issuances
    N/A       309,000     Term borrowings
Management of Fund of Funds
    N/A       N/A       N/A  
 
(a)   Maximum loss exposure represents $120.0 million of current investments and $18.8 million of contractual funding commitments. Only the current investment amount is included in Other Assets.
 
(b)   A liability is not recognized because investments are written down over the life of the related tax credit.
 
(c)   $112.5 million was classified as Loans, net of unearned income and $1.7 million was classified as Trading securities which are offset by $48.6 million classified as Other collateralized borrowings.

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Note 15 – Derivatives
In the normal course of business, FHN utilizes various financial instruments (including derivative contracts and credit-related agreements) through its mortgage banking, capital markets, and risk management operations, 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 required by GAAP. 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 and master netting agreements whenever possible to limit potential exposure. FHN also maintains collateral posting requirements with its counterparties to limit credit risk. 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 specified 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 September 30, 2009 and 2008, respectively, FHN had approximately $125.8 million and $32.2 million of cash receivables and $106.5 million and $59.0 million of cash payables related to collateral posting under master netting arrangements with derivative counterparties. Certain of FHN’s agreements with derivative counterparties contain provisions that require that FTBNA’s debt maintain minimum credit ratings from specified credit rating agencies. If FTBNA’s debt were to fall below these minimums, these provisions would be triggered, and the counterparties could terminate the agreements and request immediate settlement of all derivative contracts under the agreements. The net fair value, determined by individual counterparty, of all derivative instruments with credit-risk-related contingent accelerated termination provisions were $20.2 million of assets and $14.1 million of liabilities on September 30, 2009. As of September 30, 2009, FHN had received collateral of $14.6 million posted collateral of $12.6 million in the normal course of business related to these contracts.

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Note 15 – Derivatives (continued)
Additionally, certain of FHN’s derivative agreements contain provisions whereby the collateral posting thresholds under the agreements adjust based on the credit ratings of both counterparties. If the credit rating of FHN and/or FTBNA is lowered, FHN would be required to post additional collateral with the counterparties. The net fair value, determined by individual counterparty, of all derivative instruments with adjustable collateral posting thresholds were $154.9 million of assets and $100.3 million of liabilities on September 30, 2009. As of September 30, 2009, FHN had received collateral of $117.5 million and posted collateral of $96.7 million in the normal course of business related to these agreements.
Mortgage Banking
Retained Interests
FHN revalues MSR to current fair value each month with changes in fair value included in servicing income in mortgage banking noninterest income. FHN hedges 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. FHN enters into interest rate contracts (potentially 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.
FHN utilizes derivatives as an economic hedge (potentially including swaps, swaptions, and mortgage forward sales contracts) to protect the value of its interest-only securities that change in value inversely to the movement of interest rates. Interest-only securities are included in trading securities. Changes in the fair value of these derivatives and the hedged interest-only securities are recognized currently in earnings in mortgage banking noninterest income as a component of servicing income.
Mortgage Warehouse and Pipeline
As a result of the MetLife transaction, mortgage banking origination activity was significantly reduced in the periods after third quarter 2008 as FHN focuses on origination within its regional banking footprint. Accordingly, the following discussion of warehouse and pipeline related derivatives is primarily applicable to reporting periods occurring through the third quarter 2008. During 2009, FHN attempted economic hedging for only a small portion of the warehouse loans and pipeline. Additionally, the fair value of interest rate lock commitments was immaterial as of September 30, 2009.
FHN’s 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, FHN enters into forward sales 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. Upon adoption of the Financial Instruments Topic (ASC 825-10-50), 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 ASC 815-10-45 hedging relationships for all subsequent originations.
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, FHN has the risk that interest rates will change from the rate quoted to the borrower. FHN enters into forward sales contracts with respect to fixed rate loan commitments and futures contracts with respect to adjustable rate loan commitments as economic hedges designed to protect the value of the interest rate lock commitments from changes in value due to changes in interest rates. Interest rate lock commitments qualify as derivative financial instruments and as such do not qualify for hedge accounting treatment. As a result, the interest rate lock commitments were 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. 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.

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Note 15 – Derivatives (continued)
The following table summarizes FHN’s derivatives associated with Mortgage Banking activities for the three and nine months ended September 30, 2009:
                                         
                            Gains/(Losses)
 (Dollars in thousands)                           Three Months Ended   Nine Months Ended
 Description   Notional   Assets   Liabilities   September 30, 2009   September 30, 2009
Retained Interests Hedging
                                       
Hedging Instruments:
                                       
Forwards and Futures (a) (b)
  $ 2,220,000     $ 6,130     $ 979     $ 24,848     $ 21,024  
Interest Rate Swaps and Swaptions (a) (b)
  $ 2,215,000     $ 42,032     $ 1,082     $ 38,567     $ 25,491  
 
                                       
Hedged Items:
                                       
Mortgage Servicing Rights (c) (b)
    N/A     $ 281,235       N/A     $ (30,682 )   $ 40,828  
Other Retained Interests (d) (b)
    N/A     $ 108,579       N/A     $ (1,951 )   $ 34,320  
 
Pipeline and Warehouse Hedging
                                       
Hedging Instruments:
                                       
Forwards and Futures (b)
    N/A       N/A       N/A     $ -     $ 510  
 
                                       
Hedged Items:
                                       
Mortgage Warehouse (e) (b)
    N/A     $ 272,248       N/A     $ 2,484     $ (5,845 ) (g)
Mortgage Pipeline (b)
    N/A       (f )     (f )   $ -     $ (233 ) (g)
 
                                       
 
 (a)   Assets included in the other assets section of the Consolidated Condensed Statements of Condition. Liabilities included in the other liabilities section of the Consolidated Condensed Statements of Condition.
 
 (b)   Gains/Losses included in the mortgage banking income section of the Consolidated Condensed Statements of Income.
 
 (c)   Assets included in the mortgage servicing rights section of the Consolidated Condensed Statements of Condition.
 
 (d)   Assets included in the trading securities section of the Consolidated Condensed Statements of Condition.
 
 (e)   Assets included in the loans held for sale section of the Consolidated Condensed Statements of Condition.
 
 (f)   Due to the reduction of mortgage banking origination operations after the MetLife transaction, the fair value of interest rate lock commitments was immaterial as of September 30, 2009.
 
 (g)   Economic hedging is attempted for only a small portion of warehouse loans and pipeline.
Capital Markets
Capital Markets trades U.S. Treasury, U.S. Agency, mortgage-backed, corporate and municipal fixed income securities, and other securities principally for distribution to customers. When these securities settle on a delayed basis, they are considered forward contracts. Capital Markets also enters into interest rate contracts, including options, caps, swaps, and floors for its customers. In addition, Capital Markets enters into futures contracts to economically hedge interest rate risk associated with a portion of 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. Total trading revenues related to fixed income sales, which constitutes substantially all of FHN’s trading activities, were $120.5 million and $487.6 million for the three and nine months ended September 30, 2009, inclusive of both derivative and non-derivative financial instruments. Trading revenues are included in capital markets noninterest income.

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Note 15 – Derivatives (continued)
The following table summarizes FHN’s derivatives associated with Capital Markets trading activities as of September 30, 2009:
                         
 (Dollars in thousands)                  
 Description   Notional   Assets   Liabilities
Customer Interest Rate Contracts
  $    1,601,966     $    50,512     $    10,233  
Offsetting Upstream Interest Rate Contracts
  $ 1,601,966     $ 10,236     $ 50,518  
Forwards and Futures Purchased
  $ 8,407,380     $ 2,049     $ 22,603  
Forwards and Futures Sold
  $ 8,500,599     $ 21,384     $ 3,543  
 
Capital Markets hedges held-to-maturity trust preferred loans with a principal balance of $233.1 and $244.6 million as of September 30, 2009 and 2008, respectively, 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. These hedge relationships qualify as fair value hedges under ASC 815-10-45. The balance sheet impact of those swaps was $21.5 million and $9.3 million in other liabilities on September 30, 2009 and 2008, respectively. Interest paid or received for these swaps was recognized as an adjustment of the interest income of the assets whose risk is being hedged. The following table summarizes FHN’s derivative activities associated with these loans for the three and nine months ended September 30, 2009.
                                         
                            Gains/(Losses)
 (Dollars in thousands)                           Three Months Ended   Nine Months Ended
 Description   Notional   Assets   Liabilities   September 30, 2009   September 30, 2009
Loan Portfolio Hedging
                                       
Hedging Instruments:
                                       
Interest Rate Swaps
  $ 233,083       N/A     $ 21,499     $ (2,271 )   $ 4,362  
 
                                       
Hedged Items:
                                       
Trust Preferred Loans (a) (b)
    N/A     $ 233,083  (c)     N/A     $ 2,166  (b)   $ (4,479 ) (b)
 
 (a)   Assets included in loans, net of unearned section of the Consolidated Condensed Statements of Condition.
 
 (b)   Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-10-45 hedging relationships.
 
 (c)   Represents principal balance 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 to hedge interest rate risk or market value of assets or liabilities, not to speculate. 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 mitigate 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 expense.
FHN has entered into pay floating, receive fixed interest rate swaps to hedge the interest rate risk of certain long-term debt obligations, totaling $1.1 billion and $1.2 billion on September 30, 2009 and 2008, respectively. These swaps have been accounted for as fair value hedges under the shortcut method. The balance sheet impact of these swaps was $107.2 million and $38.7 million in other assets on September 30, 2009 and 2008, respectively. 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 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 ASC 815-10-45 using the long haul method. FHN entered into pay floating, receive fixed interest rate swaps to hedge the interest rate risk of certain subordinated debt totaling $.2 billion on September 30, 2009, and $.3 billion on September 30, 2008. The balance sheet impact of these swaps was $2.6 million and $13.6 million in other liabilities on September 30, 2009 and 2008, respectively. There was no ineffectiveness related to these hedges. Interest paid or received for these swaps was

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Note 15 – Derivatives (continued)
recognized as an adjustment of the interest expense of the liabilities whose risk is being managed. In first quarter 2009, FHN’s counterparty called the swap associated with $.1 billion of subordinated debt. Accordingly, hedge accounting was discontinued on the date of settlement and the cumulative basis adjustments to the associated subordinated debt are being prospectively amortized as an adjustment to yield over its remaining term.
The following table summarizes FHN’s derivatives associated with interest rate risk management activities:
                                         
                            Gains/(Losses)
 (Dollars in thousands)                           Three Months Ended   Nine Months Ended
 Description   Notional   Assets   Liabilities   September 30, 2009   September 30, 2009
Customer Interest Rate Contracts Hedging
                                       
Hedging Instruments and Hedged Items:
                                       
Customer Interest Rate Contracts (a)
  $ 1,187,275     $ 82,338     $ 367     $ 3,151     $ (41,118 )
Offsetting Upstream Interest Rate Contracts (a)
  $ 1,187,275     $ 367     $ 85,538     $ (8,262 )   $ 34,215  
 
                                       
 
Debt Hedging
                                       
Hedging Instruments:
                                       
Interest Rate Swaps (b)
  $ 1,200,000     $ 107,192     $ 2,604     $ 16,792     $ (41,374 )
 
                                       
Hedged Items:
                                       
Long-Term Debt (b)
    N/A       N/A     $ 1,200,000  (c)   $ (16,792 ) (d)   $ 41,374  (d)
 
 (a)   Gains/Losses included in the other expense section of the Consolidated Condensed Statements of Income.
 
 (b)   Gains/Losses included in the all other income and commissions section of the Consolidated Condensed Statements of Income.
 
 (c)   Represents par value of long term debt being hedged.
 
 (d)   Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-10-45 hedging relationships.

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Note 16 - Fair Value of Assets & Liabilities
Effective January 1, 2008, FHN elected the fair value option on a prospective basis for almost all types of mortgage loans originated for sale purposes upon adoption of the Financial Instruments Topic of the FASB Accounting Standards Codification (ASC 825-10-50). FHN determined that the election reduced certain timing differences and better matched changes in the value of such loans with changes in the value of derivatives used as economic hedges for these assets. No transition adjustment was required upon adoption of ASC 825-10-50 as FHN continued 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 the FASB Accounting Standards Codification Topic for Fair Value Measurements and Disclosures (ASC 820-10-50) 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. Effective January 1, 2009, FHN adopted the provisions of ASC 820-10-50 for existing fair value measurement requirements related to non-financial assets and liabilities which are recognized at fair value on a non-recurring basis.
FHN groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. This hierarchy requires FHN to maximize the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Each fair value measurement is placed into the proper level based on the lowest level of significant input. These levels are:
    Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
 
    Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
 
    Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.
For applicable periods, all divestiture-related line items in the Consolidated Condensed Statements of Condition have been combined with the related non-divestiture line items in preparation of the disclosure tables in this footnote. Derivatives in an asset position are included within Other Assets while derivatives in a liability position are included within Other Liabilities. Derivative positions constitute the only recurring Level 3 measurements within Other Assets and Other Liabilities.

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Note 16 - Fair Value of Assets & Liabilities (continued)
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2009, and 2008:
                                 
  September 30, 2009
 (Dollars in thousands)   Level 1     Level 2     Level 3     Total  
 
Trading securities - Capital Markets:
                               
U.S. Treasuries
  $ -     $ 93,238     $ -     $ 93,238  
Government agency issued MBS
    -       120,713       -       120,713  
Government agency issued CMO
    -       34,395       -       34,395  
Other U.S. government agencies
    -       45,095       -       45,095  
States and municipalities
    -       17,871       -       17,871  
Corporate and other debt
    -       277,817       34       277,851  
Equity, mutual funds and other
    11       925       12       948  
 
Total trading securities - Capital Markets
    11       590,054       46       590,111  
 
                               
Trading securities - Mortgage Banking
    -       12,142       98,899       111,041  
Loans held for sale
    -       35,606       219,289       254,895  
Securities available for sale:
                               
U.S. Treasuries
    -       48,325       -       48,325  
Government agency issued MBS
    -       1,053,914       -       1,053,914  
Government agency issued CMO
    -       1,075,753       -       1,075,753  
Other U.S. government agencies
    -       21,548       100,224       121,772  
States and municipalities
    -       44,590       1,500       46,090  
Corporate and other debt
    837       -       1,365       2,202  
Equity, mutual funds and other
    36,742       46,900       15,803       99,445  
 
Total securities available for sale
    37,579       2,291,030       118,892       2,447,501  
 
                               
Mortgage servicing rights
    -       -       289,282       289,282  
Other assets
    35,984       316,109       -       352,093  
 
Total assets
  $   73,574     $   3,244,941     $   726,408     $   4,044,923  
 
 
                               
Trading liabilities — Capital Markets:
                               
U.S. Treasuries
  $ -     $ 246,532     $ -     $ 246,532  
Government agency issued MBS
    -       1,137       -       1,137  
Other U.S. government agencies
    -       3,338       -       3,338  
Corporate and other debt
    -       164,286       -       164,286  
 
Total trading liabilities — Capital Markets
    -       415,293       -       415,293  
 
                               
Other short-term borrowings and commercial paper
    -       -       34,050       34,050  
Other liabilities
    979       197,987       -       198,966  
 
Total liabilities
  $ 979     $ 613,280     $ 34,050     $ 648,309  
 

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Note 16 - Fair Value of Assets & Liabilities (continued)
                                 
  September 30, 2008
 (Dollars in thousands)   Level 1     Level 2     Level 3     Total  
 
Trading securities
  $ 2,159     $ 1,272,453     $ 286,412     $ 1,561,024  
Loans held for sale
    -       334,112       10,117       344,229  
Securities available for sale
    35,800       2,507,114       147,820       2,690,734  
Mortgage servicing rights
    -       -       798,491       798,491  
Other assets
    83,133       257,814       329       341,276  
 
Total assets
  $   121,092     $   4,371,493     $   1,243,169     $   5,735,754  
 
 
                               
Trading liabilities
  $ 114     $ 380,782     $ -     $ 380,896  
Commercial paper and other short-term borrowings
    -       -       107,266       107,266  
Other liabilities
    14,328       136,488       61       150,877  
 
Total liabilities
  $ 14,442     $ 517,270     $ 107,327     $ 639,039  
 

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Note 16 - Fair Value of Assets & Liabilities (continued)
Changes in Recurring Level 3 Fair Value Measurements
In third quarter 2009, FHN reviewed the allocation of fair value between MSR and excess interest from prior first lien loan sales and securitizations. As a result, $11.1 million was reclassified from trading securities to MSR within level 3 assets measured at fair value on a recurring basis.
In first quarter 2009, FHN changed the fair value methodology for certain loans held for sale. The methodology change had a minimal effect on the valuation of the applicable loans. Consistent with this change, the applicable amounts are presented as a transfer into Level 3 loans held for sale in the following rollforwards. See Determination of Fair Value for a detailed discussion of the changes in valuation methodology.
In third quarter 2008, FHN revised its methodology for valuing hedges of MSR and excess interest that were retained from prior securitizations. Consistent with this change, the applicable amounts are presented as a transfer out of net derivative assets and liabilities in the following rollforwards for the three and nine month periods ended September 30, 2008. See Determination of Fair Value for a detailed discussion of the changes in valuation methodology.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
                                                 
  Three Months Ended September 30, 2009
                    Securities available for sale     Mortgage     Other short-term
    Trading     Loans held     Investment     Venture     servicing     borrowings and
 (Dollars in thousands)   securities (a)   for sale     portfolio     Capital     rights, net     commercial paper
 
Balance on June 30, 2009
  $ 125,502     $ 224,372     $ 104,658     $ 18,771     $ 337,096     $ 39,720  
Total net gains/(losses) included in:
                                               
Net income
    (1,345 )     2,484       -       37       (35,993 )     (5,670 )
Other comprehensive income
    -       -       1,718       -       -       -  
Purchases, sales, issuances, and settlements, net
    (14,135 )     (7,567 )     (4,652 )     (1,640 )     (22,898 )     -  
Net transfers into/(out of) Level 3
    (11,077 )     -       -       -       11,077       -  
 
Balance on September 30, 2009
  $ 98,945     $ 219,289     $ 101,724     $ 17,168     $ 289,282     $ 34,050  
 
 
                                               
 
Net unrealized gains/(losses) included in net income
  $ (4,414 ) (b)   $ 2,484  (c)   $ -     $ 37  (d)   $ (35,993 ) (e)   $ (5,670 ) (c)
 
   
  Three Months Ended September 30, 2008
                    Securities     Mortgage     Net derivative     Other short-term
    Trading     Loans held     available     servicing     assets and     borrowings and
 (Dollars in thousands)   securities     for sale     for sale     rights, net     liabilities     commercial paper
 
Balance on June 30, 2008
  $ 429,017     $ 3,712     $ 146,871     $ 1,139,395     $ 95,520     $ 205,412  
Total net gains/(losses) included in:
                                               
Net income
    (19,023 )     (50 )     (373 )     (61,806 )     92,577       (24,360 )
Other comprehensive income
    -       -       3,900       -       -       -  
Purchases, sales, issuances, and settlements, net
    (123,582 )     (608 )     (2,578 )     (279,098 )     (72,158 )     (73,786 )
Net transfers into/(out of) Level 3
    -       7,063       -       -       (115,671 )     -  
 
Balance on September 30, 2008
  $ 286,412     $ 10,117     $ 147,820     $ 798,491     $ 268     $ 107,266  
 
 
                                               
 
Net unrealized gains/(losses) included in net income
  $ (34,403 ) (f)   $ (5,760 ) (c)   $ (304 ) (d)   $ (31,470 ) (g)   $ 97,856  (c)   $ (24,360 ) (c)
 
Certain previously reported amounts have been reclassified to agree with current presentation.
(a)   Primarily represents Mortgage Banking trading securities. Capital Markets Level 3 trading securities are not significant.
 
(b)   Includes $(.2) million included in Capital Markets noninterest income, $(3.3) million included in Mortgage Banking noninterest income, and $(.9) million included in Revenue from loan sales and securitizations.
 
(c)   Included in Mortgage Banking noninterest income.
 
(d)   Represents recognized gains and losses attributable to venture capital investments classified within securities available for sale that are included in Securities gains/(losses) in noninterest income.
 
(e)   Includes $(35.8) million included in Mortgage Banking noninterest income and $(.2) million included in Revenue from loan sales and securitizations.
 
(f)   Includes $(12.2) million included in Capital Markets noninterest income, $(21.7) million included in Mortgage Banking noninterest income, and $(.5) million in Revenue from loan sales and securitizations.
 
(g)   Includes $(31.2) million in Mortgage Banking noninterest income and $(.2) million included in Revenue from loan sales and securitizations.

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Note 16 - Fair Value of Assets & Liabilities (continued)
                                                         
  Nine Months Ended September 30, 2009
                    Securities available for sale     Mortgage     Net derivative     Other short-term
    Trading     Loans held     Investment     Venture     servicing     assets and     borrowings and
 (Dollars in thousands)   securities(a)     for sale     portfolio     Capital     rights, net     liabilities     commercial paper
 
Balance on December 31, 2008
  $ 153,542     $ 11,330     $ 111,840     $ 25,307     $ 376,844     $ 233     $ 27,957  
Total net gains/(losses) included in:
                                                       
Net income
    44,757       (5,844 )     -       (1,556 )     42,498       -       2,792  
Other comprehensive income
    -       -       3,173       -       -       -       -  
Purchases, sales, issuances, and settlements, net
    (88,277 )     (27,743 )     (13,289 )     (6,582 )     (141,137 )     (233 )     3,301  
Net transfers into/(out of) Level 3
    (11,077 )     241,546       -       -       11,077       -       -  
 
Balance on September 30, 2009
  $ 98,945     $ 219,289     $ 101,724     $ 17,169     $ 289,282     $ -     $ 34,050  
 
 
                                                       
 
Net unrealized gains/(losses) included in net income
  $ 26,108  (b)   $ (5,844 ) (c)   $ -     $ (1,556 ) (d)   $ 42,498  (e)   $ -     $ 2,792  (c)
 
                                                 
  Nine Months Ended September 30, 2008
                    Securities     Mortgage     Net derivative     Other short-term  
    Trading     Loans held     available     servicing     assets and     borrowings and  
 (Dollars in thousands)   securities     for sale     for sale     rights, net     liabilities     commercial paper  
 
Balance on December 31, 2007
  $ 476,404     $ -     $ 159,301     $ 1,159,820     $ 81,517     $ -  
Total net gains/(losses) included in:
                                               
Net income
    1,054       (221 )     (304 )     (69,905 )     146,844       (7,675 )
Other comprehensive income
    -       -       (3,278 )     -       -       -  
Purchases, sales, issuances, and settlements, net
    (212,985 )     (1,457 )     (7,899 )     (291,424 )     (119,998 )     114,941  
Net transfers into/(out of) Level 3
    21,939       11,795       -       -       (108,095 )     -  
 
Balance on September 30, 2008
  $ 286,412     $ 10,117     $ 147,820     $ 798,491     $ 268     $ 107,266  
 
 
                                               
 
Net unrealized gains/(losses) included in net income
  $ (48,560 ) (f)   $ (8,401 ) (c)   $ (304 ) (d)   $ (59,668 ) (g)   $ 21,301 (c)   $ (7,675 ) (c)
 
Certain previously reported amounts have been reclassified to agree with current presentation.
(a)   Primarily represents Mortgage Banking trading securities. Capital Markets Level 3 trading securities are not significant.
 
(b)   Includes $(2.2) million included in Capital Markets noninterest income, $31.2 million included in Mortgage Banking noninterest income, and $(2.9) million included in Revenue from loan sales and securitizations.
 
(c)   Included in Mortgage Banking noninterest income.
 
(d)   Represents recognized gains and losses attributable to venture capital investments classified within securities available for sale that are included in Securities gains/(losses) in noninterest income.
 
(e)   Includes $46.9 million included in Mortgage Banking noninterest income and $(4.4) million included in Revenue from loan sales and securitizations.
 
(f)   Includes $(14.9) million included in Capital Markets noninterest income, $(22.9) million included in Mortgage Banking noninterest income, and $(10.7) million included in Revenue from loan sales and securitizations.
 
(g)   Includes $(49.7) million included in Mortgage Banking noninterest income and $(10.0) million included in Revenue from loan sales and securitizations.

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Note 16 - Fair Value of Assets & Liabilities (continued)
Nonrecurring Fair Value Measurements
From time to time, FHN may be required to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of LOCOM accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis which were still held on the balance sheet at September 30, 2009, and 2008, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment, the related carrying value, and the fair value adjustments recorded during the respective periods.
                                                 
                                    Three Months Ended     Nine Months Ended  
    Carrying value at September 30, 2009     September 30, 2009     September 30, 2009  
 (Dollars in thousands)   Level 1     Level 2     Level 3     Total     Total losses/(gains)     Total losses/(gains)  
     
Loans held for sale
  $ -     $   35,888     $ 24,303     $ 60,191     $ (2,367 )   $ (3,827 )
Securities available for sale
    -       -       -       -       -       516   (c)
Loans, net of unearned income (a)
    -       -         515,101         515,101       59,992       214,299  
Real estate acquired by foreclosure (b)
    -       -       111,389       111,389       8,767       27,659  
Other assets
    -       -       112,505       112,505       2,489       6,670  
     
 
                                  $ 68,881     $ 245,317  
                                     
                                                 
                                    Three Months Ended     Nine Months Ended  
    Carrying value at September 30, 2008     September 30, 2008     September 30, 2008  
 (Dollars in thousands)   Level 1     Level 2     Level 3     Total     Total losses     Total losses  
     
Loans held for sale
  $ -     $ 55,149     $ 45,052     $ 100,201     $ 1,767     $ 27,070  
Securities available for sale
    -       17       -       17       85       1,480   (c)
Loans, net of unearned income (a)
    -       -       364,097       364,097       67,400       142,683  
Other assets
    -       -       119,979       119,979       10,205       14,445  
     
 
                                  $ 79,457     $ 185,678  
                                     
(a)   Represents carrying value of loans for which adjustments are based on the appraised value of the collateral. Writedowns on these loans are recognized as part of provision.
 
(b)   Represents the fair value and related losses of foreclosed properties that were measured subsequent to their initial classification as foreclosed assets.
 
(c)   Represents recognition of other than temporary impairment for cost method investments classified within securities available for sale.
In first quarter 2008, FHN recognized a lower of cost or market reduction in value of $36.2 million on its warehouse of trust preferred loans, which was classified within level 3 for loans held for sale at March 31, 2008. The determination of estimated market value for the warehouse was based on a hypothetical securitization transaction for the warehouse as a whole. FHN used observable data related to prior securitization transactions as well as changes in credit spreads in the collateralized debt obligation (CDO) market since the most recent transaction. FHN also incorporated significant internally developed assumptions within its valuation of the warehouse, including estimated prepayments and estimated defaults. In accordance with ASC 820-10-50, FHN excluded transaction costs related to the hypothetical securitization in determining fair value.
In second quarter 2008, FHN designated its trust preferred warehouse as held to maturity. Accordingly, these loans were excluded from loans held for sale in the nonrecurring measurements table as of September 30, 2008. In conjunction with the transfer of these loans to held to maturity status, FHN performed a lower of cost or market analysis on the date of transfer. This analysis was based on the pricing of market transactions involving securities similar to those held in the trust preferred warehouse with consideration given, as applicable, to any differences in characteristics of the market transactions, including issuer credit quality, call features and term. As a result of the lower of cost or market analysis, FHN determined that its existing valuation of the trust preferred warehouse was appropriate.
In first quarter 2008, FHN recognized a lower of cost or market reduction in value of $17.0 million relating to mortgage warehouse loans. Approximately $10.5 million was attributable to increased delinquencies or aging of loans. The market values for these loans were estimated using historical sales prices for these type loans, adjusted for incremental price concessions that a third party investor is assumed to require due to tightening credit markets and deteriorating housing prices. These assumptions were based on published information about actual and

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Note 16 - Fair Value of Assets & Liabilities (continued)
projected deteriorations in the housing market as well as changes in credit spreads. The remaining reduction in value of $6.5 million was attributable to lower investor prices, due primarily to credit spread widening. This reduction was calculated by comparing the total fair value of loans (using the same methodology that is used for fair value option loans) to carrying value for the aggregate population of loans that were not delinquent or aged.
FHN recognized a lower of cost or market reduction in value of $8.3 million relating to mortgage warehouse loans during second quarter of 2008. Approximately $7.1 million was attributable to increased repurchases and delinquencies or aging of warehouse loans; the remaining reduction in value was attributable to lower investor prices, due primarily to credit spread widening. The market values for these loans were estimated using historical sales prices for these types of loans, adjusted for incremental price concessions that a third party investor was assumed to require due to tightening credit markets and deteriorating housing prices. These assumptions were based on published information about actual and projected deteriorations in the housing market as well as changes in credit spreads.
FHN recognized a lower of cost or market reduction in value of $1.3 million relating to mortgage warehouse loans during third quarter of 2008. This was primarily attributable to increased repurchases and delinquencies of warehouse loans with some reduction in value attributable to lower investor prices, due primarily to credit spread widening. The market values for these loans were estimated using historical sales prices for similar type loans, adjusted for incremental price concessions that a third party investor is assumed to require due to tightening credit markets and deteriorating housing prices. These assumptions were based on published information about actual and projected deteriorations in the housing market as well as changes in credit spreads.
Fair Value Option
FHN elected the fair value option on a prospective basis for almost all types of mortgage loans originated for sale purposes under the Financial Instruments Topic (ASC 825-10-50). FHN determined that the election reduced certain timing differences and better matched changes in the value of such loans with changes in the value of derivatives used as economic hedges for these assets.
In 2009 and 2008, FHN transferred certain servicing assets in transactions that did not qualify for sale treatment due to certain recourse provisions. The associated proceeds are recognized within Other Short Term Borrowings and Commercial Paper in the Consolidated Condensed Statements of Condition as of September 30, 2009, and 2008. Since the servicing assets are recognized at fair value and changes in the fair value of the related financing liabilities will exactly mirror the change in fair value of the associated servicing assets, management elected to account for the financing liabilities at fair value. Since the servicing assets have already been delivered to the buyer, the fair value of the financing liabilities associated with the transaction does not reflect any instrument-specific credit risk.
The following table reflects the differences between the fair value carrying amount of mortgages held for sale measured at fair value in accordance with management’s election and the aggregate unpaid principal amount FHN is contractually entitled to receive at maturity.

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Note 16 - Fair Value of Assets & Liabilities (continued)
                         
  September 30, 2009
                    Fair value carrying
    Fair value carrying   Aggregate unpaid   amount less aggregate
 (Dollars in thousands)   amount   principal   unpaid principal
 
Loans held for sale reported at fair value:
                       
Total loans
  $ 254,895     $ 297,608     $ (42,713)  
Nonaccrual loans
    12,727       28,406       (15,679)  
Loans 90 days or more past due and still accruing
    5,521       12,257       (6,736)  
 
                         
  September 30, 2008
                    Fair value carrying
    Fair value carrying   Aggregate unpaid   amount less aggregate
 (Dollars in thousands)   Amount   principal   unpaid principal
 
Loans held for sale reported at fair value:
                       
Total loans
  $ 344,229     $ 363,085     $ (18,856)  
Loans 90 days or more past due and still accruing
    1,845       3,410       (1,565)  
 
Assets and liabilities accounted for under ASC 825-10-50 are initially measured at fair value with subsequent changes in fair value recognized in earnings. Such changes in the fair value of assets and liabilities for which FHN elected the fair value option are included in current period earnings with classification in the income statement line item reflected in the following table:
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
 (Dollars in thousands)   2009   2008   2009   2008
 
Changes in fair value included in net income:
                               
Mortgage banking noninterest income
                               
Loans held for sale
  $ 1,523     $ (14,951 )   $ (6,805 )   $ (20,423 )
Commercial paper and other short-term borrowings
    (5,670 )     (24,360 )     2,792       (7,675 )
Estimated changes in fair value due to credit risk (loans held for sale)
    2,177       (8,849 )     (10,871 )     (18,310 )
 
For the three and nine months periods ended September 30, 2009, the amounts for loans held for sale includes approximately $4.2 million and $13.0 million, respectively, of losses included in earnings that are attributable to changes in instrument-specific credit risk. For the three and nine month periods ended September 30, 2008, the amounts for loans held for sale includes approximately $8.8 million and $18.3 million, respectively, of losses included in earnings that are attributable to changes in instrument-specific credit risk. The portion of the fair value adjustments related to credit risk was determined based on both a quality adjustment for delinquencies and the full credit spread on the non-conforming loans.
Interest income on mortgage loans held for sale measured at fair value is calculated based on the note rate of the loan and is recorded in the interest income section of the Consolidated Condensed Statements of Income as interest on loans held for sale.
Determination of Fair Value
In accordance with ASC 820-10-50, fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following describes the assumptions and methodologies used to estimate the fair value of financial instruments and MSR recorded at fair value in the Consolidated Condensed Statements of Condition and for estimating the fair value of financial instruments for which fair value is disclosed under ASC 825-10-65.

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Note 16 - Fair Value of Assets & Liabilities (continued)
Short-term financial assets. Federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with other financial institutions are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Trading securities and trading liabilities. Trading securities and trading liabilities are recognized at fair value through current earnings. Trading inventory held for broker-dealer operations is included in trading securities and trading liabilities. Broker-dealer long positions are valued at bid price in the bid-ask spread. Short positions are valued at the ask price. Inventory positions are valued using observable inputs including current market transactions, LIBOR and U.S. treasury curves, credit spreads, and consensus prepayment speeds. Trading loans are valued using observable inputs including current market transactions, swap rates, mortgage rates, and consensus prepayment speeds.
Trading securities also include retained interests in prior securitizations that qualify as financial assets which may include certificated residual interests, excess interest (structured as interest-only strips), interest-only strips, principal-only strips, or subordinated bonds. Residual interests represent rights to receive earnings to the extent of excess income generated by the underlying loans. Excess interest represents rights to receive interest from serviced assets that exceed contractually specified rates. Principal-only strips are principal cash flow tranches, and interest-only strips are interest cash flow tranches. Subordinated bonds are bonds with junior priority. All financial assets retained from a securitization are recognized on the Consolidated Condensed Statements of Condition in trading securities at fair value with realized and unrealized gains and losses included in current earnings as a component of noninterest income on the Consolidated Condensed Statements of Income.
The fair values of the certificated residual interests and the excess interest are determined using market prices from closely comparable assets such as MSR that are tested against prices determined using a valuation model that calculates the present value of estimated future cash flows. The fair value of these retained interests typically changes based on changes in the discount rate and differences between modeled prepayment speeds and credit losses and actual experience. In some instances, FHN retains interests in the loans it securitized by retaining certificated principal only strips or subordinated bonds. Subsequent to the MetLife transaction, FHN uses observable inputs such as trades of similar instruments, yield curves, credit spreads and consensus prepayment speeds to determine the fair value of principal only strips. Prior to the MetLife transaction, FHN used the market prices from comparable assets such as publicly traded FNMA trust principal only strips that are adjusted to reflect the relative risk difference between readily marketable securities and privately issued securities in valuing the principal only strips. The fair value of subordinated bonds is determined using the best available market information, which may include trades of comparable securities, independently provided spreads to other marketable securities, and published market research. Where no market information is available, the company utilizes an internal valuation model. As of September 30, 2009, no market information was available, and the subordinated bonds were valued using an internal model which includes assumptions about timing, frequency and severity of loss, prepayment speeds of the underlying collateral, and the yield that a market participant would require.
Securities available for sale. Securities available for sale includes the investment portfolio accounted for as available-for-sale under ASC 320-10-45, federal bank stock holdings, short-term investments in mutual funds, and venture capital investments. Valuations of available-for-sale securities are performed using observable inputs obtained from market transactions in similar securities. Typical inputs include LIBOR and U.S. treasury curves, consensus prepayment estimates, and credit spreads. When available, broker quotes are used to support these valuations.
Stock held in the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical cost in the Consolidated Condensed Statements of Condition which is considered to approximate fair value. Short-term investments in mutual funds are measured at the funds’ reported closing net asset values. Venture capital investments are typically measured using significant internally generated inputs including adjustments to referenced transaction values and discounted cash flows analysis.
Loans held for sale. In conjunction with the adoption of ASC 820-10-65 in first quarter 2009, FHN revised its methodology for determining the fair value of certain loans within its mortgage warehouse. FHN now determines the fair value of the applicable loans using a discounted cash flow model using observable inputs, including current mortgage rates for similar products, with adjustments for differences in loan characteristics reflected in the model’s discount rates. For all other loans held in the warehouse (and in prior periods for the loans converted to the discounted cash flow methodology), the fair value of loans whose principal market is the securitization market is based on recent security trade prices for similar products with a similar delivery date, with necessary pricing adjustments to convert the security price to a loan price. Loans whose principal market is the whole loan market are priced based on recent observable whole loan trade prices or published

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Note 16 - Fair Value of Assets & Liabilities (continued)
third party bid prices for similar product, with necessary pricing adjustments to reflect differences in loan characteristics. Typical adjustments to security prices for whole loan prices include adding the value of MSR to the security price or to the whole loan price if the price is servicing retained, adjusting for interest in excess of (or less than) the required coupon or note rate, adjustments to reflect differences in the characteristics of the loans being valued as compared to the collateral of the security or the loan characteristics in the benchmark whole loan trade, adding interest carry, reflecting the recourse obligation that will remain after sale, and adjusting for changes in market liquidity or interest rates if the benchmark security or loan price is not current. Additionally, loans that are delinquent or otherwise significantly aged are discounted to reflect the less marketable nature of these loans.
The fair value of non-mortgage loans held for sale is approximated by their carrying values based on current transaction values.
Loans, net of unearned income. Loans, net of unearned income are recognized at the amount of funds advanced, less charge offs and an estimation of credit risk represented by the allowance for loan losses. The fair value estimates for disclosure purposes differentiate loans based on their financial characteristics, such as product classification, loan category, pricing features, and remaining maturity.
The fair value of floating rate loans is estimated through comparison to recent market activity in loans of similar product types, with adjustments made for differences in loan characteristics. In situations where market pricing inputs are not available, fair value is considered to approximate book value due to the monthly repricing for commercial and consumer loans, with the exception of floating rate 1-4 family residential mortgage loans which reprice annually and will lag movements in market rates. The fair value for floating rate 1-4 family mortgage loans is calculated by discounting future cash flows to their present value. Future cash flows are discounted to their present value by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same time period. Prepayment assumptions based on historical prepayment speeds and industry speeds for similar loans have been applied to the floating rate 1-4 family residential mortgage portfolio.
The fair value of fixed rate loans is estimated through comparison to recent market activity in loans of similar product types, with adjustments made for differences in loan characteristics. In situations where market pricing inputs are not available, fair value is estimated by discounting future cash flows to their present value. Future cash flows are discounted to their present value by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same time period. Prepayment assumptions based on historical prepayment speeds and industry speeds for similar loans have been applied to the fixed rate mortgage and installment loan portfolios.
Mortgage servicing rights. FHN recognizes all classes of MSR at fair value. Since sales of MSR tend to occur in private transactions and the precise terms and conditions of the sales are typically not readily available, there is a limited market to refer to in determining the fair value of MSR. As such, FHN primarily relies on a discounted cash flow model to estimate the fair value of its MSR. This model calculates estimated fair value of the MSR using predominant risk characteristics of MSR such as interest rates, type of product (fixed vs. variable), age (new, seasoned, or moderate), agency type and other factors. FHN uses assumptions in the model that it believes are comparable to those used by brokers and other service providers. FHN also periodically compares its estimates of fair value and assumptions with brokers, service providers, recent market activity, and against its own experience. Due to ongoing disruptions in the mortgage market, more emphasis has been placed on third party broker price discovery and, when available, observable market trades in valuing MSR.
Derivative assets and liabilities. The fair value for forwards and futures contracts used to hedge the value of servicing assets and the mortgage warehouse are based on current transactions involving identical securities. These contracts are exchange-traded and thus have no credit risk factor assigned as the risk of non-performance is limited to the clearinghouse used.
Valuations of other derivatives (primarily interest rate related swaps, swaptions, caps and collars) are based on inputs observed in active markets for similar instruments. Typical inputs include the LIBOR curve, option volatility, and option skew. Credit risk is mitigated for these instruments through the use of mutual margining and master netting agreements as well as collateral posting requirements. Any remaining credit risk related to interest rate derivatives is considered in determining fair value through evaluation of additional factors such as customer loan grades and debt ratings.
In third quarter 2008, FHN revised its methodology for valuing hedges of MSR and excess interest that were retained from prior securitizations. FHN now determines the fair value of the interest rate derivatives used to hedge MSR and excess interests using inputs observed in active markets for similar instruments with typical inputs including the LIBOR curve, option volatility, and option skew. Previously,

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Note 16 - Fair Value of Assets & Liabilities (continued)
fair values of these derivatives were obtained through proprietary pricing models which were compared to market value quotes received from third party broker-dealers in the derivative markets.
Real estate acquired by foreclosure. Real estate acquired by foreclosure primarily consists of properties that have been acquired in satisfaction of debt. These properties are carried at the lower of the outstanding loan amount or estimated fair value less estimated costs to sell the real estate. Estimated fair value is determined using appraised values with subsequent adjustments for deterioration in values that are not reflected in the most recent appraisal. Real estate acquired by foreclosure also includes properties acquired in compliance with HUD servicing guidelines which are carried at the estimated amount of the underlying government assurance or guarantee.
Nonearning assets. For disclosure purposes, nonearning assets include cash and due from banks, accrued interest receivable, and capital markets receivables. Due to the short-term nature of cash and due from banks, accrued interest receivable and capital markets receivables, the fair value is approximated by the book value.
Other assets. For disclosure purposes, other assets consist of investments in low income housing partnerships and deferred compensation assets that are considered financial assets. Investments in low income housing partnerships are written down to estimated fair value quarterly based on the estimated value of the associated tax credits. Deferred compensation assets are recognized at fair value, which is based on quoted prices in active markets.
Defined maturity deposits. The fair value is estimated by discounting future cash flows to their present value. Future cash flows are discounted by using the current market rates of similar instruments applicable to the remaining maturity. For disclosure purposes, defined maturity deposits include all certificates of deposit and other time deposits.
Undefined maturity deposits. In accordance with ASC 825-10-65, the fair value is approximated by the book value. For the purpose of this disclosure, undefined maturity deposits include demand deposits, checking interest accounts, savings accounts, and money market accounts.
Short-term financial liabilities. The fair value of federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term borrowings is approximated by the book value. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization. Commercial paper and short-term borrowings includes a liability associated with transfers of mortgage servicing rights that did not qualify for sale accounting. This liability is accounted for at elected fair value, which is measured consistent with the related MSR, as described above.
Long-term debt. The fair value is based on quoted market prices or dealer quotes for the identical liability when traded as an asset. When pricing information for the identical liability is not available, relevant prices for similar debt instruments are used with adjustments being made to the prices obtained for differences in characteristics of the debt instruments. If no relevant pricing information is available, the fair value is approximated by the present value of the contractual cash flows discounted by the investor’s yield which considers FHN’s and FTBNA’s debt ratings.
Other noninterest-bearing liabilities. For disclosure purposes, other noninterest-bearing liabilities include accrued interest payable and capital markets payables. Due to the short-term nature of these liabilities, the book value is considered to approximate fair value.
Loan Commitments. Fair values are based on fees charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Other Commitments. Fair values are based on fees charged to enter into similar agreements.
The following fair value estimates are determined as of a specific point in time utilizing various assumptions and estimates. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. Due to market illiquidity, the fair values for loans, net of

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Note 16 - Fair Value of Assets & Liabilities (continued)
unearned income, loans held for sale, and long-term debt as of September 30, 2009, involved the use of significant internally-developed pricing assumptions for certain components of these line items. These assumptions are considered to reflect inputs that market participants would use in transactions involving these instruments as of the measurement date. We have not included assets and liabilities that are not financial instruments (including MSR) in the following table such as the value of long-term relationships with deposit and trust customers, premises and equipment, goodwill and other intangibles, deferred taxes, and certain other assets and other liabilities. Accordingly, the total of the fair value amounts does not represent, and should not be construed to represent, the underlying value of the company.
The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Condensed Statements of Condition as well as off-balance sheet commitments as of September 30, 2009.
                 
  September 30, 2009
    Book     Fair  
 (Dollars in thousands)   Value     Value  
 
Assets:
               
Loans, net of unearned income and allowance for loan losses
  $ 17,579,921     $ 16,161,268  
Short-term financial assets
    789,085       789,085  
Trading securities
    701,151       701,151  
Loans held for sale
    502,687       502,687  
Securities available for sale
    2,645,922       2,645,922  
Derivative assets
    322,239       322,239  
Other assets
    142,359       142,359  
Nonearning assets
    1,225,749       1,225,749  
 
Liabilities:
               
Deposits:
               
Defined maturity
  $ 3,420,099     $ 3,481,190  
Undefined maturity
    10,814,884       10,814,884  
Total deposits
    14,234,983       14,296,074  
Trading liabilities
    415,293       415,293  
Short-term financial liabilities
    4,006,846       4,006,846  
Long-term debt
    3,079,468       2,441,129  
Derivative liabilities
    198,965       198,965  
Other noninterest-bearing liabilities
    592,904       592,904  
 
                 
    Contractual     Fair  
    Amount     Value  
 
Off-Balance Sheet Commitments:
               
Loan commitments
  $ 8,883,484     $ 1,258  
Other commitments
    564,018       4,893  
 
  Certain previously reported amounts have been reclassified to agree with current presentation.

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Note 17 - Restructuring, Repositioning, and Efficiency
In 2007, FHN began conducting a company-wide review of business practices with the goal of improving its overall profitability and productivity. In order to redeploy capital to higher-return businesses, FHN concluded the sale of 34 full-service First Horizon Bank branches in its national banking markets in the second quarter 2008 while also taking actions to right size First Horizon Home Loans’ mortgage banking operations and to downsize FHN’s national lending operations. Additionally, in January 2008, FHN discontinued national homebuilder and commercial real estate lending through its First Horizon Construction Lending offices. FHN also repositioned First Horizon Home Loans’ mortgage banking operations through various MSR sales.
Additionally, on August 31, 2008, FHN and MetLife completed the sale 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. FHN 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. FHN also 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.
Continuing the efforts to refocus on core businesses, a definitive agreement was reached in third quarter 2009 for the sale of FTN ECM, the institutional equity research division of FTN Financial. While the sale is expected to close in fourth quarter 2009 subject to regulatory approval and customary closing conditions, FHN incurred a pre-tax goodwill impairment of $14.0 million (approximately $9 million net of taxes) in third quarter 2009. This impairment and other restructuring, repositioning and efficiency charges incurred by FTN ECM are included with the other operating results for FTN ECM in the Loss from discontinued operations, net of tax line on the Consolidated Condensed Statements of Income for all periods presented.
Net costs recognized by FHN in the nine months ended September 30, 2009, related to restructuring, repositioning, and efficiency activities were $20.7 million. Of this amount, $4.6 million represented exit costs that were accounted for in accordance with the Exit or Disposal Cost Obligations Topic of the FASB Accounting Standards Codification (ASC 420-10-45).
Significant expenses recognized year to date 2009 resulted from the following actions:
  Severance and related employee costs of $4.2 million related to discontinuation of national lending operations.
  Transaction costs of $1.1 million from the sale of mortgage servicing rights.
  Loss of $1.0 million related to asset impairments from branch closures.
  Goodwill impairment of $14.0 million related to agreement to sell FTN ECM.
Net costs recognized by FHN in the nine months ended September 30, 2008, related to restructuring, repositioning, and efficiency activities were $81.1 million. Of this amount, $39.4 million represented exit costs that were accounted for in accordance with ASC 420-10-45.
Significant expenses recognized in year to date 2008 resulted from the following actions:
  Expense of $39.4 million associated with organizational and compensation changes due to right sizing operating segments, the divestiture of certain First Horizon Bank branches, the divestiture of certain mortgage banking operations and consolidating functional areas.
  Loss of $17.5 million on the divestiture of mortgage banking operations.
  Loss of $1.4 million from the sales of certain First Horizon Bank branches.
  Transaction costs of $12.7 million from the contracted sales of mortgage servicing rights.
  Expense of $10.1 million for the write-down of certain premises and equipment, intangibles and other assets resulting from FHN’s divestiture of certain mortgage operations and from the change in FHN’s national banking strategy.
The financial results of FTN ECM, including the third quarter goodwill impairment, are reflected in the Loss from discontinued operations, net of tax line on the Consolidated Condensed Statements of Income for all periods presented. Losses from the disposition of certain First Horizon Bank branches incurred during the periods presented are included in losses on divestitures in the noninterest income section of the Consolidated Condensed Statements of Income. Transaction costs recognized in the periods presented 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

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Note 17 - Restructuring, Repositioning, and Efficiency (continued)
consolidation costs and related asset impairment costs are included in occupancy; costs associated with the impairment of premises and equipment are included in equipment rentals; depreciation and maintenance and other costs associated with such initiatives, including professional fees, and intangible asset impairment costs are included in all other expense.
Activity in the restructuring and repositioning liability for the three and nine months ended September 30, 2009 and 2008, is presented in the following table, along with other restructuring and repositioning expenses recognized. All costs associated with the restructuring, repositioning, and efficiency initiatives are recorded as unallocated corporate charges within the Corporate segment.
                                                                 
    Three Months Ended     Nine Months Ended  
    September 30     September 30  
(Dollars in thousands)   2009     2008     2009     2008  
    Charged to             Charged to             Charged to             Charged to        
    Expense     Liability     Expense     Liability     Expense     Liability     Expense     Liability  
 
Beginning Balance
  $ -     $    18,383     $ -     $    17,945     $ -     $    24,167     $ -     $    19,675  
Severance and other employee related costs
    867       867       10,704       10,704       4,243       4,243       23,826       23,826  
Facility consolidation costs
    711       711       4,176       4,176       711       711       8,030       8,030  
Other exit costs, professional fees, and other
    94       94       (906 )     (906 )     (374 )     (374 )     7,578       7,578  
 
Total Accrued
    1,672       20,055       13,974       31,919       4,580       28,747       39,434       59,109  
Payments related to:
                                                               
Severance and other employee related costs
            2,436               8,590               8,280               19,483  
Facility consolidation costs
            952               1,612               3,164               5,513  
Other exit costs, professional fees, and other
            94               (2,052 )             208               7,158  
Accrual reversals
            25               67               547               3,253  
 
Restructuring and Repositioning Reserve Balance
          $ 16,548             $ 23,702             $ 16,548             $ 23,702  
 
Other Restructuring and Repositioning Expense:
                                                               
Mortgage banking expense on servicing sales
    -               656               1,142               12,667          
Loss on divestitures
    -               17,489               -               18,913          
Impairment of premises and equipment
    -               922               973               5,108          
Impairment of intangible assets
    14,027               -               14,027               4,030          
Impairment of other assets
    -               862               -               993          
 
Total Other Restructuring and Repositioning Expense
    14,027               19,929               16,142               41,711          
 
Total Restructuring and Repositioning Charges
  $ 15,699             $ 33,903             $ 20,722             $ 81,145          
 

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Note 17 - Restructuring, Repositioning, and Efficiency (continued)
Cumulative amounts incurred to date as of September 30, 2009, 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*
  $ 54,175  
Facility consolidation costs
    30,593  
Other exit costs, professional fees, and other
    16,782  
Other restructuring & repositioning (income) and expense:
       
Loan portfolio divestiture
    7,672  
Mortgage banking expense on servicing sales
    20,237  
Net loss on divestitures
    3,325  
Impairment of premises and equipment
    15,911  
Impairment of intangible assets
    32,057  
Impairment of other assets
    30,101  
 
Total Restructuring and Repositioning Charges Incurred to Date as of September 30, 2009
  $ 210,853  
 
*Includes $1.2 million of deferred severance-related payments that will be paid after 2009.

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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL INFORMATION
First Horizon National Corporation (FHN) began as a small community bank chartered in 1864 and is now one of the 40 largest bank holding companies in the United States in terms of asset size.
Approximately 6,000 FHN employees provide financial services through more than 180 bank locations in and around Tennessee and 21 capital markets offices in the U.S. and abroad.
The corporation’s two major brands – First Tennessee and FTN Financial - provide customers with a broad range of products and services. First Tennessee has the leading combined deposit market share in the 17 Tennessee counties where it does business and one of the highest customer retention rates of any bank in the country. FTN Financial (FTNF) is an industry leader in fixed income sales, trading, and strategies for institutional clients in the U.S. and abroad.
AARP and Working Mother magazine have recognized FHN as one of the nation’s best employers.
FHN is composed of the following operating segments:
  §   Regional Banking 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.
 
  §   Capital Markets provides a broad spectrum of financial services for the investment and banking communities through the integration of traditional capital markets securities activities, loan sales, portfolio advisory services, derivative sales, correspondent banking services, and equity research.
 
  §   Mortgage Banking now consists of the origination of mortgage loans in and around the regional banking footprint and legacy servicing. Prior to the August 31, 2008, sale of its servicing platform and origination offices outside Tennessee, this division provided mortgage loans and servicing to consumers and operated in approximately 40 states.
 
  §   National Specialty Lending consists of legacy traditional consumer and construction lending activities outside the regional banking footprint. In January 2008, FHN announced the discontinuation of national home builder and commercial real estate lending.
 
  §   Corporate consists of unallocated corporate expenses including restructuring, repositioning, and efficiency initiatives, gains and losses on repurchases of debt, 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, low income housing investment activities, and venture capital.
For the purpose of this management’s discussion and analysis (MD&A), earning assets have been expressed as averages, unless otherwise noted, and loans have been disclosed net of unearned income. The following financial discussion should be read with the accompanying unaudited Consolidated Condensed Financial Statements and notes.
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements with respect to FHN’s beliefs, plans, goals, expectations, and estimates. Forward-looking statements are statements that are not a representation of historical information but rather are related to future operations, strategies, financial results, or other developments. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “should,” “is likely,” “will,” “going forward,” and other expressions that indicate future events and trends identify forward-looking statements. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond a company’s control, and many of which, with respect to future business decisions and actions (including acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors, general and local economic and business conditions; recession or other economic downturns; expectations of and actual timing and amount of interest rate movements, including the slope of the yield curve (which can have a significant impact on a financial services institution); market and monetary fluctuations; inflation or deflation; customer and investor responses to these conditions; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geopolitical

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developments including possible terrorist activity; recent and future legislative and regulatory developments; natural disasters; effectiveness of FHN’s hedging practices; technology; demand for FHN’s product offerings; new products and services in the industries in which FHN operates; and critical accounting estimates. Other factors are those inherent in originating, selling, and servicing loans including prepayment risks, pricing concessions, fluctuation in U.S. housing prices, fluctuation of collateral values, and changes in customer profiles. Additionally, the actions of the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), Financial Industry Regulatory Authority (FINRA), U.S. Department of the Treasury (UST), and other regulators and agencies; regulatory and judicial proceedings and changes in laws and regulations applicable to FHN; and FHN’s success in executing its business plans and strategies and managing the risks involved in the foregoing, could cause actual results to differ. FHN assumes no obligation to update any forward-looking statements that are made from time to time. Actual results could differ because of several factors, including those presented in this Forward-Looking Statements section, in other sections of this MD&A, and other parts of this Quarterly Report on Form 10-Q for the periods ended September 30, 2009.
FINANCIAL SUMMARY
In third quarter 2009, FHN reported a net loss available to common shareholders of $52.9 million, or $.24 diluted loss per share, compared to a net loss available to common shareholders of $125.1 million, or $.58 diluted loss per share in 2008. In third quarter 2009, net loss available to common shareholders reflected $14.9 million of dividends on the CPP preferred shares. In third quarter, FHN contracted to sell Capital Market’s institutional equity research group, FTN ECM. The results of FTN ECM operations, including a third quarter goodwill impairment, are reported in discontinued operations, net of tax on the Consolidated Condensed Statements of Income.
The results of operations for third quarter 2009 were positively affected by a decrease in provisioning for loan losses and restructuring related costs, and increased capital markets income. Provisioning for loan losses decreased $155.0 million from third quarter 2008 to $185.0 million. While adverse economic conditions persisted into third quarter 2009, overall asset quality began to stabilize as the size of the national construction portfolios declined significantly from the prior year. Favorable market conditions in third quarter 2009 contributed to strong fixed income sales at Capital Markets in comparison with 2008. Restructuring charges in third quarter 2009 were $15.7 million and consisted primarily of a $14.0 million goodwill impairment. Earnings in third quarter 2008 were affected by charges of $33.9 million related to restructuring, repositioning, and efficiency initiatives. Mortgage banking results decreased significantly from 2008 due to the third quarter 2008 sale of the national mortgage origination and servicing platforms. In addition, foreclosure losses and provision for mortgage foreclosure and repurchase obligations increased significantly from 2008.
Return on average common equity and return on average assets for third quarter 2009 were negative 9.02 percent and negative 0.52 percent, respectively, compared to negative 18.30 percent and negative 1.46 percent in third quarter 2008. Capital ratios improved as tier 1 capital ratio was 16.20 percent as of September 30, 2009 compared to 11.10 percent on September 30, 2008, and total capital was 21.61 percent compared with 16.07 percent in 2008.
Total period-end assets declined to $26.5 billion on September 30, 2009 from $32.8 billion on September 30, 2008, while total equity increased to $3.4 billion on September 30, 2009, from $2.9 billion on September 30, 2008. While most balance sheet items declined, the contraction was primarily driven by a $3.1 billion decrease in the loan portfolio.
BUSINESS LINE REVIEW
Regional Banking
The Regional Banking segment had a pre-tax loss of $27.5 million in third quarter 2009 compared to pre-tax income of $4.1 million in third quarter 2008. Total revenues decreased $10.8 million to $205.4 million in third quarter 2009. The provision for loan losses increased to $63.1 million in third quarter 2009 from $58.2 million in third quarter 2008 primarily due to deterioration in the Income CRE portfolio.
Net interest income decreased slightly to $124.0 million in third quarter 2009 from $128.2 million in third quarter 2008 as net interest margin increased to 4.80 percent in third quarter 2009 compared to 4.64 percent in third quarter 2008. The increase in margin was primarily a result of increased loan spreads due to lower cost funding and a decline in loans.
Noninterest income declined $6.7 million in third quarter 2009 to $81.4 million. Deposit fees were down $4.3 million mainly due to a decline in retail non-sufficient funds (NSF) fees. Noninterest expense increased to $169.8 million in third quarter 2009 from $153.9 million in third quarter 2008. The increase is primarily the result of increased foreclosure losses from fair value adjustments and losses on dispositions.

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Additionally, in third quarter 2009, FHN recognized $5.1 million in credit losses on customer derivatives. Additionally, credit and technology-related costs, and FDIC premiums resulted in higher expenses in third quarter 2009.
Capital Markets
Pre-tax income increased from a loss of $5.6 million in third quarter 2008 to income of $10.4 million in third quarter 2009 with total revenues of $151.1 million in third quarter 2009 compared to $109.0 million in third quarter 2008. In third quarter, FHN contracted to sell Capital Market’s institutional equity research group. Accordingly, results of these operations are reflected in discontinued operations, net of tax for all periods presented. In third quarter 2009, Capital Markets reported an after-tax net loss from discontinued operations of $1.2 million compared with a loss of $1.5 million in the prior year.
Net interest income was $20.2 million in third quarter 2009 compared to $19.6 million in third quarter 2008, despite a decline of $1.1 billion in earning assets, as the net interest margin improved to 2.41 percent from 1.78 percent last year. The increase is primarily attributable to increased mortgage warehouse lending volume.
Income from fixed income sales increased to $120.5 million in third quarter 2009 from $80.1 million in third quarter 2008 reflecting the benefits of Capital Markets’ extensive distribution network combined with favorable market conditions. Other product revenues were $10.3 million in third quarter 2009 compared to $9.3 million in third quarter 2008. Revenues from other products include fee income from activities such as loan sales, portfolio advisory, derivative sales, and correspondent banking services.
Provision expense increased to $54.2 million in third quarter 2009 from $38.5 million which primarily reflects incremental deterioration in the bank holding company and trust preferred loan portfolios.
Noninterest expense increased by $10.3 million to $86.6 million in third quarter 2009. This increase is primarily related to personnel costs which increased $7.8 million consistent with the effect of increased production levels. Additionally, legal and professional fees increased compared with third quarter 2008.
Mortgage Banking
Effective August 31, 2008, FHN completed the sale of Mortgage Banking’s servicing operations and origination offices outside Tennessee to MetLife. Additionally, in an effort to reduce balance sheet risk, FHN has reduced the size of the servicing portfolio through bulk and flow sales beginning in 2007. As a result of these transactions, components of origination activity, servicing fees, and operating expenses for 2009 are significantly lower when compared to 2008.
The third quarter 2009 pre-tax income was $32.3 million compared with $44.4 million in third quarter 2008 and total revenues decreased by $69.2 million to $68.6 million in third quarter 2009. Net interest income decreased to $7.8 million in third quarter 2009 from $25.4 million in third quarter 2008 due to the large decline in the average balance of the mortgage warehouse as a result of the sale of national mortgage origination offices to MetLife. The provision for loan losses decreased $14.7 million as performance in Mortgage Banking’s permanent mortgage portfolio improved.
Noninterest income was $60.8 million in third quarter 2009 compared to $112.3 million in third quarter 2008. Total servicing income decreased $32.2 million to $48.4 million in third quarter 2009 primarily from a decline in the size of the servicing portfolio and volatility associated with hedging the Mortgage Servicing Rights (MSR). Servicing fees were down $20.2 million consistent with the decline in the size of the servicing portfolio. Net hedging gains were $30.8 million in 2009 compared to $50.8 million in 2008 due to a narrowing of spreads between mortgage and swap rates and a smaller MSR asset. Net revenue from origination activity decreased to $9.7 million in third quarter 2009 from $19.8 million in third quarter 2008. Third quarter 2009 origination income included a $5 million positive fair value adjustment to the legacy mortgage warehouse. Origination activity has significantly declined in comparison to third quarter 2008 due to the sale of national mortgage origination platform. Currently, FHN only originates mortgage loans in and around its Tennessee market.
Noninterest expense was $48.1 million in third quarter 2009 compared to $90.5 million in third quarter 2008. The decline is mostly a result of the divestiture of certain mortgage banking operations in third quarter 2008. These broad declines were somewhat diminished due to a third quarter 2009 provision for foreclosure and repurchase reserve from prior loan sales related to the legacy origination platform of $25.8 million. Foreclosure and repurchase provisioning was minimal in third quarter 2008.

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National Specialty Lending
National Specialty Lending’s pre-tax loss improved to $72.0 million in third quarter 2009 compared to a pre-tax loss of $217.2 million in third quarter 2008. Results improved due to a $160.9 million decrease in loan loss provision as the national residential construction portfolios have contracted significantly during 2009.
Net interest income declined to $29.6 million in third quarter 2009 compared to $45.2 million in third quarter 2008 as a result of the increase in nonaccrual loans and the wind-down of national residential construction portfolios.
Noninterest income increased slightly to $6.1 million in third quarter 2009 compared to $4.1 million in third quarter 2008. Noninterest expense was $28.2 million from $26.0 million in 2008 primarily from higher foreclosure costs. Personnel expenses declined due to the wind-down of operations.
Corporate
Corporate reported pre-tax income of $16.7 million in third quarter 2009 compared to a pre-tax loss $33.9 million in third quarter 2008. Noninterest income was $24.7 million in third quarter 2009 compared to $2.2 million in third quarter 2008. Deferred compensation income increased $10.2 million, which is mirrored by a corresponding increase in personnel expense. Both periods included gains on the repurchase of bank notes. Gains in third quarter 2009 were $12.8 million compared with $18.9 million in 2008. In 2008, restructuring charges recorded in noninterest income included a $17.5 million loss on the sale of the national mortgage origination and servicing platform.
Noninterest expense decreased $23.6 million to $17.2 million in third quarter 2009 from $40.8 million in 2008. Charges within noninterest expense related to restructuring, repositioning, and efficiency initiatives decreased by $13.8 million from 2008. Additionally, $14.2 million of restructuring charges (primarily includes a $14.0 million goodwill impairment) are included in discontinued operations and relates to the agreement to sell Capital Markets’ institutional equity research business. Third quarter 2008 included an $11.0 million increase to the contingent liability for certain Visa legal matters while $7.0 million of the liability was reversed in third quarter 2009.
RESTRUCTURING, REPOSITIONING, AND EFFICIENCY INITIATIVES
Beginning in 2007, FHN began conducting a company-wide review of business practices with the goal of improving its overall profitability and productivity. In order to redeploy capital to higher-return businesses, FHN concluded the sale of 34 full-service First Horizon Bank branches in its national banking markets in third quarter 2008 while also taking actions to right size First Horizon Home Loans’ mortgage banking operations and to downsize FHN’s national lending operations. Additionally, in January 2008, FHN discontinued national homebuilder and commercial real estate lending through its First Horizon Construction Lending offices. FHN also repositioned First Horizon Home Loans’ mortgage banking operations through various MSR sales.
On August 31, 2008, FHN and MetLife completed the sale 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. FHN retained its mortgage operations in and around Tennessee, continuing to originate home loans for customers in its regional banking market footprint. As part of this transaction, 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. FHN also 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.
Continuing the efforts to refocus on core businesses, a definitive agreement was reached in third quarter 2009 for the sale of FTN ECM, the institutional equity research division of FTN Financial. While the sale is expected to close in fourth quarter 2009 subject to regulatory approval and customary closing conditions, FHN incurred a pre-tax goodwill impairment of $14.0 million (approximately $9 million net of taxes) in third quarter 2009. This impairment and other restructuring, repositioning, and efficiency charges incurred by FTN ECM are included with the other operating results for FTN ECM in the Loss from discontinued operations, net of tax line on the Consolidated Condensed Statements of Income for all periods presented.
Net costs recognized by FHN during the nine months ended September 30, 2009, related to restructuring, repositioning, and efficiency activities were $20.7 million. Of this amount, $4.6 million represented exit costs that were accounted for in accordance with the FASB Accounting Standards Codification for Exit or Disposal Activities Cost Obligations (ASC 420-10-45). Significant expenses recognized year to date 2009, including items presented in discontinued operations, net of tax, resulted from the following actions:
    Severance and related employee costs of $4.2 million related to discontinuation of national lending operations.
    Transaction costs of $1.1 million from the contracted sale of mortgage servicing rights.
    Loss of $1.0 million related to asset impairments from branch closures.

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    Goodwill impairment of $14.0 million related to agreement to sell FTN ECM.
Net costs recognized by FHN during the nine months ended September 30, 2008, related to restructuring, repositioning, and efficiency activities were $81.1 million. Of this amount, $39.4 million represented exit costs that were accounted for in accordance with ASC 420-10-45. Significant expenses recognized year to date 2008 resulted from the following actions:
    Expense of $39.4 million associated with organizational and compensation changes due to right-sizing operating segments, the divestiture of certain mortgage banking operations and First Horizon Bank branches, and consolidating functional areas.
    Losses of approximately $17.5 million on the divestiture of certain mortgage banking operations.
    Losses of approximately $1.4 million from the sales of certain First Horizon Bank branches.
    Transaction costs of $12.7 million from the contracted sales of mortgage servicing rights.
    Expense of $10.1 million for the write-down of certain intangibles and other assets resulting from FHN’s divestiture of certain mortgage operations and from the change in FHN’s national banking strategy.
Settlement of the obligations arising from current initiatives will be funded from operating cash flows. The effect of suspending depreciation on assets held for sale was immaterial to FHN’s results of operations for all periods. As a result of the change in FHN’s national banking strategy, a write-down of other intangibles of $2.4 million was recognized in first quarter 2008 related to certain banking licenses. Additionally, as FHN focuses on core businesses, the agreement to sell FTN ECM resulted in a $14.0 million goodwill impairment. The recognition of these impairment losses will have no effect on FHN’s debt covenants. The impairment losses were recorded as an unallocated corporate charge within the corporate segment and are included in all other expense on the Consolidated Condensed Statements of Income. Due to the broad nature of the actions being taken, all components of income and expense are affected from the efficiency benefits.
Charges related to restructuring, repositioning, and efficiency initiatives for the three and nine months ended September 30, 2009, and 2008 are presented in the following table based on the income statement line item affected. See Note 17 – Restructuring, Repositioning, and Efficiency Charges and Note 2 – Acquisitions/Divestitures for additional information.
Table 1 - Restructuring, Repositioning, and Efficiency Initiatives
                                 
    Three Months Ended     Nine Months Ended  
    September 30     September 30  
(Dollars in thousands)   2009     2008     2009     2008  
 
Noninterest income:
                               
Mortgage banking
  $     -         $     (656 )   $     (1,142 )   $     (12,667 )
Losses on divestitures
    -           (17,489 )     -           (18,913 )
 
Total noninterest income
    -           (18,145 )     (1,142 )     (31,580 )
 
Noninterest expense:
                               
Employee compensation, incentives, and benefits
    742       10,333       4,125       23,471  
Occupancy
    798       3,960       232       8,309  
Equipment rentals, depreciation and maintenance
    -           76       -           4,257  
Legal and professional fees
    (2 )     (142 )     74       4,029  
Communications and courier
    4       -           16       42  
All other expense
    3       1,160       994       9,113  
 
Total noninterest expense
    1,545       15,387       5,441       49,221  
 
Loss before income taxes
    (1,545 )     (33,532 )     (6,583 )     (80,801 )
Loss from discontinued operations
    (14,154 )     (371 )     (14,139 )     (344 )
 
Net loss from restructuring, repositioning, and efficiency initiatives
  $ (15,699 )   $ (33,903 )   $ (20,722 )   $ (81,145 )
 
Certain previously reported amounts have been reclassified to agree with current presentation.

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Activity in the restructuring and repositioning liability for the three and nine months ended September  30, 2009, and 2008 is presented in the following table:
                                                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2009     2008     2009     2008  
 
    Charged to             Charged to             Charged to             Charged to        
    Expense     Liability     Expense     Liability     Expense     Liability     Expense     Liability  
 
Beginning Balance
  $ -     $ 18,383     $ -     $ 17,945     $ -     $ 24,167     $ -     $ 19,675  
Severance and other employee related costs
    867       867       10,704       10,704       4,243       4,243       23,826       23,826  
Facility consolidation costs
    711       711       4,176       4,176       711       711       8,030       8,030  
Other exit costs, professional fees, and other
    94       94       (906 )     (906 )     (374 )     (374 )     7,578       7,578  
 
Total Accrued
    1,672       20,055       13,974       31,919       4,580       28,747       39,434       59,109  
Payments related to:
                                                               
Severance and other employee related costs
            2,436               8,590               8,280               19,483  
Facility consolidation costs
            952               1,612               3,164               5,513  
Other exit costs, professional fees, and other
            94               (2,052 )             208               7,158  
Accrual reversals
            25               67               547               3,253  
 
Restructuring and Repositioning Reserve Balance
          $ 16,548             $ 23,702             $ 16,548             $ 23,702  
 
Other Restructuring and Repositioning Expense:
                                                               
Mortgage banking expense on servicing sales
    -               656               1,142               12,667          
Loss on divestitures
    -               17,489               -               18,913          
Impairment of premises and equipment
    -               922               973               5,108          
Impairment of intangible assets
    14,027               -               14,027               4,030          
Impairment of other assets
    -               862               -               993          
 
Total Other Restructuring and Repositioning Expense
    14,027               19,929               16,142               41,711          
 
Total Restructuring and Repositioning Charges
  $ 15,699             $ 33,903             $ 20,722             $ 81,145          
 

INCOME STATEMENT
Total consolidated revenues decreased 5 percent to $494.7 million from $519.2 million in third quarter 2008 primarily from decreases in mortgage banking income and net interest income, although somewhat mitigated by increased capital markets income and lower restructuring charges.
NET INTEREST INCOME
Net interest income declined to $190.9 million in third quarter 2009 compared to $223.1 million in third quarter 2008 as average earning assets declined 18 percent to $24.2 billion and average interest-bearing liabilities declined 23 percent to $22.6 billion in third quarter 2009. The decline in net interest income was driven by the wind down of the national loan portfolios and the Mortgage Banking business.
The consolidated net interest margin was 3.14 percent for third quarter 2009 compared to 3.01 percent for third quarter 2008. A widening in the margin occurred as the net interest spread increased to 2.89 percent from 2.65 percent in third quarter 2009 while the impact of free funding decreased from 36 basis points to 25 basis points. The increase in the margin from 2008 is largely attributable to a $1.1 billion reduction in Capital Market’s lower yielding earning assets.

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Table 2 - Net Interest Margin
                 
    Three Months Ended  
    September 30  
    2009     2008  
 
Consolidated yields and rates:
               
Loans, net of unearned income
    3.86 %     5.16 %
Loans held for sale
    4.95       5.96  
Investment securities
    4.90       5.41  
Capital markets securities inventory
    3.72       4.69  
Mortgage banking trading securities
    12.46       12.86  
Other earning assets
    0.14       1.97  
 
Yields on earning assets
    3.89       5.17  
 
Interest-bearing core deposits
    1.03       2.06  
Certificates of deposit $100,000 and more
    1.66       3.28  
Federal funds purchased and securities sold under agreements to repurchase
    0.21       1.64  
Capital markets trading liabilities
    3.89       4.66  
Short-term borrowings and commercial paper
    0.29       2.39  
Long-term debt
    1.22       3.17  
 
Rates paid on interest-bearing liabilities
    1.00       2.52  
 
Net interest spread
    2.89       2.65  
Effect of interest-free sources
    .25       .36  
 
FHN - NIM
    3.14 %     3.01 %
 
In the short term, the net interest margin is expected to improve modestly due to a focus on loan and deposit pricing and as a result of the winding down of our national business. In the longer term, FHN anticipates stronger margins presuming a more normalized credit and interest rate environment.
NONINTEREST INCOME
Capital Markets Noninterest Income
The major component of capital markets’ revenue is generated from the purchase and sale of securities as both principal and agent, and from other fee sources including loan sales, portfolio advisory activities, and derivative sales. Securities inventory positions are generally procured for distribution to customers by the sales staff. A portion of the inventory is hedged to protect against movements in fair value due to changes in interest rates.
Capital markets noninterest income increased to $129.0 million in third quarter 2009 from $86.9 million in third quarter 2008. Revenues from fixed income sales increased by $40.4 million to $120.5 million reflecting the benefits of Capital Markets’ extensive distribution network combined with favorable market conditions. Other product revenues were $8.5 million in third quarter 2009 compared to $6.7 million third quarter 2008.
Table 3 - Capital Markets Noninterest Income
                                                 
    Three Months Ended             Nine Months Ended      
    September 30     Growth   September 30     Growth
(Dollars in thousands)   2009     2008     Rate (%)   2009     2008     Rate (%)
   
Noninterest income:
                                               
Fixed income
  $ 120,528     $ 80,104       50.5 +     $ 487,619     $ 337,314       44.6 +  
Other product revenue
    8,515       6,750       26.1 +       26,508       (16,809 )   NM     
                     
Total capital markets noninterest income
  $ 129,043     $ 86,854       48.6 +     $ 514,127     $ 320,505       60.4 +  
                     
NM - not meaningful
                                               
Mortgage Banking Noninterest Income
Effective August 31, 2008, FHN completed the sale of Mortgage Banking’s servicing operations and origination offices outside Tennessee to MetLife. Additionally, in an effort to reduce balance sheet risk, FHN has reduced the size of the servicing portfolio through bulk sales which

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began in 2007. As a result of these transactions, components of origination activity, servicing fees, and operating expenses for 2009 are significantly lower when compared to 2008.
Mortgage banking noninterest income decreased by $47.6 million in third quarter 2009 to $59.2 million as shown in Table 4.
Table 4 - Mortgage Banking Noninterest Income
                                                 
    Three Months Ended     Percent     Nine Months Ended     Percent  
    September 30     Change     September 30     Change  
    2009     2008             2009     2008          
     
Noninterest income (thousands):
                                               
Origination income
  $   9,688     $   19,828       51.1  -     $   22,879     $   237,979       90.4  -  
Servicing income
    48,422       80,603       39.9  -       165,080       192,560       14.3  -  
Other
    1,101       6,386       82.8  -       2,484       7,408       66.5  -  
                     
Total mortgage banking noninterest income
  $ 59,211     $ 106,817       44.6  -     $ 190,443     $ 437,947       56.5  -  
                     
Mortgage banking statistics (millions):
                                               
Refinance originations
  $ 173.7     $ 907.1       80.8  -     $ 947.5     $ 8,975.9       89.4  -  
Home-purchase originations
    59.8       2,199.4       97.3  -       139.3       8,465.9       98.4  -  
                     
Mortgage loan originations
  $ 233.5     $ 3,106.5       92.5  -     $ 1,086.8     $ 17,441.8       93.8  -  
                     
Servicing portfolio - owned
  $ 41,757.3     $ 65,345.3       36.1  -     $ 41,757.3     $ 65,345.3       36.1  -  
                     
Total servicing income decreased $32.2 million to $48.4 million in third quarter 2009 primarily from a decline in the size of the servicing portfolio and volatility associated with hedging the Mortgage Servicing Rights (MSR). Servicing fees were down $20.2 million consistent with the decline in the size of the servicing portfolio. Net hedging gains were $30.8 million in 2009 compared to $50.8 million in 2008 due to a narrowing of spreads between mortgage and swap rates and smaller MSR asset. Net revenue from origination activity decreased to $9.7 million in third quarter 2009 from income of $19.8 million in third quarter 2008. Third quarter 2009 origination income included a $5 million positive fair value adjustment to the legacy mortgage warehouse. Origination activity has significantly declined in comparison to third quarter 2008 due to the sale of national mortgage origination platform. Currently, FHN only originates mortgage loans in and around its Tennessee market.
Other Noninterest Income
All other noninterest income includes deposit transactions and cash management fees, revenue from loan sales and securitizations, insurance commissions, trust services and investment management fees, net securities gains and losses and other noninterest income. Fees from deposit transactions and cash management were down $4.1 million primarily due to a volume decline in transactions resulting in lower retail NSF fees. A loss related to the divestiture of certain mortgage banking operations resulted in a charge of $17.5 million in 2008 and is reflected in restructuring charges. Additionally, both quarters included gains on the repurchase of debt with $12.8 million in 2009 and $18.9 million in 2008. Deferred compensation income varied from a $5.1 million loss in 2008 to a $5.0 million gain in 2009. This is largely mirrored by a corresponding increase in deferred compensation expense. Trust fees, insurance premiums, and revenue from loan sales and securitizations decreased slightly from the prior year, a combined $3.3 million decline.
The following table provides detail on the other noninterest income caption on the consolidated condensed statements of condition.

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Table 5 - Other Income
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2009   2008   2009   2008
 
Other income:
                               
Gain on repurchases of debt
  $ 12,800     $ 18,919     $12,860     $31,515  
Brokerage management fees and commissions
    7,315       7,824       20,416       24,927  
Bank owned life insurance
    6,066       6,731       14,492       20,036  
Bankcard income
    5,173       5,587       15,145       16,855  
Deferred compensation
    5,006       (5,145 )     7,220       (10,370 )
Remittance processing
    2,968       3,314       9,485       9,793  
ATM interchange fees
    2,704       2,263       7,638       6,739  
Other service charges
    2,645       3,043       9,196       9,628  
Reinsurance fees
    1,760       2,830       7,344       9,295  
Consumer loan repurchases
    1,760       (1,660 )     (20,173 )     (11,699 )
Letter of credit fees
    1,476       1,603       4,204       4,335  
Electronic banking fees
    1,465       1,535       4,592       4,725  
Check clearing fees
    418       837       1,182       2,587  
Federal flood certification fees
    -       911       -       3,869  
Other
    6,796       6,983       21,984       21,761  
 
Total
  $ 58,352     $ 55,575     $ 115,585     $ 143,996  
 
NONINTEREST EXPENSE
Total noninterest expense for third quarter 2009 decreased 10 percent to $349.9 million from $387.5 million in third quarter 2008. In 2008, noninterest expense included $15.4 million of costs related to restructuring, repositioning, and efficiency initiatives compared with only $1.5 million in third quarter 2009.
Employee compensation, incentives and benefits (personnel expense), the largest component of noninterest expense, decreased $28.7 million from $207.4 million in third quarter 2008 primarily as a result of headcount reduction from the sale of national origination and servicing platforms to MetLife in third quarter 2008. The full impact of the headcount decline on personnel expense was somewhat counteracted by increased Capital Markets’ variable personnel costs as fixed income revenue was higher in third quarter 2009. Additionally, 2008 included $10.3 million of costs related to restructuring, repositioning, and efficiency initiatives. These costs were minimal in third quarter 2009.
Occupancy, equipment rental, communications, and operations services expenses declined a combined $20.1 million primarily as a result of the 2008 mortgage divestiture and a decline in costs related to restructuring, repositioning, and efficiency initiatives. The following table provides detail of the other noninterest expense caption on the consolidated condensed statements of income. All other expense only increased $11.0 million but includes several significant items. Provisioning related to the Mortgage Banking foreclosure and repurchase reserve from the legacy origination platform increased to $25.8 million from $.8 million in 2008 due to higher repurchase activity and higher inherent loss content. Losses on foreclosed property increased $17.1 million to $21.2 million primarily as a result of fair value adjustments of OREO and net losses on dispositions. FDIC premiums increased $4.7 million to $8.8 million in third quarter 2009. All other noninterest expense declined $23.2 million primarily due to the Visa contingent liability. In 2008, FHN recorded an additional $11.0 million as Visa settled a legal dispute, and in 2009, FHN reversed $7.0 million in conjunction with Visa funding the escrow account for legal settlements. Generally, all other expense categories decreased consistent with FHN’s focus on reduction of non-core businesses.

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Table 6 - Other Expense
                                 
    Three Months Ended     Nine Months Ended  
    September 30     September 30  
(Dollars in thousands)          2009   2008     2009     2008  
 
Other expense:
                               
Mortgage banking foreclosure and repurchase provision
  $25,751     $849     $67,116     $8,779  
Foreclosed real estate
    21,221       4,130       53,053       13,282  
Deposit insurance premium
    8,796       4,146       37,777       10,376  
Contract employment
    7,956       9,033       27,083       21,948  
Computer software
    6,871       7,144       20,228       23,184  
Low income housing expense
    5,833       5,064       16,467       14,445  
Advertising and public relations
    5,465       9,040       16,507       25,454  
Loan closing costs
    4,503       10,314       17,056       35,092  
Other insurance and taxes
    2,924       1,383       9,062       5,867  
Travel and entertainment
    2,139       2,785       7,164       12,303  
Loan insurance expense
    1,988       1,477       5,957       3,788  
Customer relations
    1,610       2,727       5,858       6,976  
Supplies
    1,570       2,686       3,352       8,566  
Federal services fees
    1,307       1,975       4,034       5,527  
Employee training and dues
    1,282       1,463       4,244       4,439  
Bank examination costs
    1,194       1,523       3,690       3,630  
Complimentary check expense
    796       1,259       2,852       3,711  
Other
    4,308       27,490       52,958       30,448  
 
Total
  $ 105,514     $ 94,488     $ 354,458     $ 237,815  
 
INCOME TAXES
The effective tax rate for third quarter 2009 was 38.2 percent reflecting tax benefits due to the reported loss in 2009. The rate cannot be compared to third quarter 2008 due to the level of net income reported in third quarter 2008. The positive impact of favorable permanent tax differences in the amount of $9.0 million during third quarter 2009 was offset by $8.4 million negative tax effect due to the surrender of a BOLI contract. Third quarter 2008 included $8.3 million of favorable permanent differences.
No valuation allowance related to deferred tax assets has been recorded as of September 30, 2009, other than a full valuation reserve related to state net operating losses that are not expected to be realized. The valuation reserve is primarily a result of FHN’s strategy of exiting the national mortgage business. The company has considered all available evidence, both positive and negative, in making its determination with respect to the need for a valuation allowance. This evidence includes, but is not limited to, a large carryback position that can absorb a significant portion of the deferred tax assets, future projected taxable income, projected future reversals of existing deferred tax liabilities, and potential tax planning strategies. The large carryback position primarily results from the sale of mortgage servicing rights during 2007 and 2008 which generated a current tax liability that had been carried on our balance sheet as a deferred tax liability. Additionally, federal taxes paid in excess of $90 million and $260 million in 2007 and 2008, respectively, also contributed to the carryback.
DISCONTINUED OPERATIONS
In conjunction with the third quarter agreement to sell Capital Markets’ institutional equity research group, FHN determined results, net of taxes, related to this business should be reflected as a discontinued operation on the consolidated condensed statements of income for all periods presented. Consistent with historical procedures, the component of discontinued operations that meet the definition of restructuring charges are reflected in the corporate segment while those amounts related to the standard operations is reflected in the capital markets segment. In third quarter 2009, a $10.2 million loss was included in discontinued operations compared with a $1.7 million loss in 2008. Discontinued operations in third quarter 2009 primarily includes a $14.0 million pre-tax ($9.0 million after-tax) goodwill impairment.
ASSET QUALITY
Allowance for Loan Losses
Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb estimated probable incurred losses in the loan portfolio. The allowance for loan losses includes the following components: reserves for commercial loans evaluated based on pools of

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credit graded loans and reserves for pools of smaller-balance homogeneous retail and commercial loans, both determined in accordance with the Topic relating to Contingencies (ASC 450-20-50). The reserve factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics. Also included are reserves, determined in accordance with the Receivables Topic (ASC 310-10-45), for loans determined by management to be individually impaired.
The provision for loan losses is the charge to earnings that management determines to be necessary to maintain the allowance for loan and lease losses (ALLL) at a sufficient level reflecting management’s estimate of probable incurred losses in the loan portfolio. Analytical models based on loss experience adjusted for current events, trends, and economic conditions are used by management to determine the amount of provision to be recognized and to assess the adequacy of the loan loss allowance. The provision for loan losses decreased 46 percent to $185.0 million in third quarter 2009 from $340.0 million in third quarter 2008 primarily as result of the wind down of the national portfolios.
Net Charge-Offs
Net charge offs increased to $201.7 million in third quarter 2009 from $154.7 million in 2008 and the net charge off ratio was 424 basis points in 2009 compared to 284 basis points in 2008. All portfolios reflected increased net charge-offs compared to third quarter 2008 with the exception of the Residential CRE (Homebuilder and Condominium Construction) and One-time Close (OTC) construction portfolios which have experienced improvement as FHN continues to wind down the national portion of these portfolios.
While total charge-offs increased due to adverse economic conditions, FHN’s methodology of charging down collateral dependent commercial loans to net realizable value (NRV) also impacted charge-off trends, especially in comparison to applicable ALLL. Generally, classified nonaccrual loans over $1 million are deemed to be individually impaired in accordance with ASC 310-10-45 and are assessed for impairment measurement. A majority of these loans (generally commercial loans over $1 million that are not expected to pay all contractually due principal and interest) are included in the Commercial Real Estate portfolios. When impairment is detected, loans are then written down to the fair value of the underlying collateral, less costs to sell (net realizable value). Fair value is based on recent appraisals of collateral. Collateral values are monitored and further charge-offs are taken if it is determined that the collateral values have continued to decline.
Also impacting increased charge-offs related to individually impaired loans are the significant declines in collateral values experienced due to the prevailing real estate market conditions. Therefore, charge-offs are not only higher due to the increased credit deterioration related to these loans, but also due to the increased rate at which loans are charged down to net realizable value because of rapidly declining collateral values. Net charge-offs related to collateral dependent individually impaired loans were $60.0 million or 30 percent of total net charge-offs during the third quarter of 2009. Because of the accelerated recognition of impairment of these loans, the elevated charge-offs decrease the ALLL. Compression occurs in the ALLL to net charge-offs ratio as the ALLL is generally not replenished for charge-offs related to individually impaired collateral dependent loans because reserves are not carried for these loans.
Additionally, OTC loans are generally written down to appraised value if, when the loan becomes 90 days past due or is considered substandard, recently obtained appraisals indicate a decline in fair value. Subsequent charge downs are taken thereafter in accordance with regulatory guidelines. In third quarter 2009, net charge-offs related to OTC loans were $34.4 million, approximately 17 percent of total net charge-offs.
Nonperforming Assets
As included in Table 7, nonperforming loans (NPLs) in the loan portfolio were $1.1 billion on September 30, 2009, compared to $.9 billion on September 30, 2008. The ratio of NPLs to total loans was 5.87 percent on September 30, 2009, and 4.12 percent on September 30, 2008. In the commercial portfolio, the increase in NPLs is primarily attributable to deterioration Income-producing Commercial Real Estate (income CRE) portfolios. NPLs in the Income CRE portfolio increased $124.7 million to $200.5 million, accounting for over half of the increase. NPLs in the Commercial and Industrial (C&I) portfolio increased $67.1 million to $147.1 million. Generally, the continued adverse economic conditions have affected the Income CRE and C&I portfolios.
For the consumer portfolios, nonperforming permanent mortgages increased $64.4 million to $96.2 million and OTC nonperforming loans experienced a decrease of $67.8 million to $280.0 million. Both portfolios are under stress due to the prolonged downturn in the housing market, however, OTC’s improvement primarily relates to the proactive efforts of management to address problem asset resolution in construction lending.
Nonperforming assets were $1.2 billion on September 30, 2009, compared to $1.0 billion on September 30, 2008. The nonperforming assets ratio was 6.38 percent on September 30, 2009 and 4.63 percent last year. Foreclosed assets declined when compared to third quarter 2008 as 2009 included higher levels of overall asset reductions from disposition activity as well as fair value adjustments to reflect current market conditions. Foreclosed assets are recognized at net realizable value, including estimated costs of disposal at foreclosure.

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While nonperforming asset levels are expected to flatten or slightly decrease over the next few quarters, the NPA ratio will continue to remain elevated throughout the current economic downturn as total loan balances continue to decline.
The ratio of ALLL to NPLs in the loan portfolio increased to 0.87 times in third quarter 2009 compared to 0.85 times in third quarter of 2008. While nonperforming loans increased from the same period last year, a portion of these loans does not carry reserves. As of September 30, 2009, the total amount of individually impaired commercial loans was $604.0 million. The individually impaired loans carried at NRV and that do not carry reserves were $559.8 million on September 30, 2009. The individually impaired loans mentioned above that are charged down to NRV represent 51 percent of nonperforming loans in the loan portfolio as of September 30, 2009. This approach compresses the ALLL to nonperforming loans ratio because individually impaired loans are included in nonperforming loans, but reserves for these loans are not carried in the ALLL. Residential CRE loans were $307.4 million or 51 percent of all individually impaired loans while the remainder is included in the C&I and Income CRE portfolios. Additionally, charged-down OTC loans are included in nonperforming loans. As of September 30, 2009, OTC loans accounted for 25 percent of nonperforming loans in the loan portfolio. The ALLL related to OTC loans was $109.3 million which provides a coverage ratio of 30 percent for inherent losses in the remainder of that portfolio. Because of the methodologies described above, the ALLL to NPL ratio is negatively impacted. Nonperforming loans in the loan portfolio for which reserves are actually carried were approximately $361.0 million as of September 30, 2009.
Potential Problem Assets
Potential problem assets in the loan portfolio, which are not included in nonperforming assets, represent those assets where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the OCC for loans classified substandard. Potential problem assets were $1.7 billion on September 30, 2009, up from $1.0 billion on September 30, 2008. The significant increase in potential problem assets primarily reflects downward credit grading and deterioration in the commercial portfolio largely due to the current economic environment. Also, loans 90 days past due increased $61.6 million to $126.8 million driven by increases in problem loans in the consumer real estate portfolios. However, loans 30 to 89 days past due decreased to $308.3 million on September 30, 2009, from $423.6 million on September 30, 2008. Commercial loans 30-89 days past due decreased 38 percent as a result of more effective portfolio management and consumer loans 30-89 days past due decreased 14 percent, lead by a reduction in the OTC portfolio. The current expectation of losses from both potential problem assets and loans 30 to 89 days past due has been included in management’s analysis for assessing the adequacy of the allowance for loan losses.
While asset quality is expected to remain stressed in the near term due to the expectation that economic conditions and the housing industry will remain weakened for the foreseeable future, overall asset quality performance has begun to stabilize. Actual results could differ because of several factors, including those presented in the Forward-Looking Statements section of this MD&A discussion. Table 7, Asset Quality Information, provides summary asset quality data referred to in the previous paragraphs and Table 8, Asset Quality by Portfolio, provides various asset statistics based on FHN’s internal loan classification.

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Table 7 - Asset Quality Information
                 
  Three months ended September 30
(Dollars in thousands)   2009     2008  
 
Allowance for loan losses:
               
Beginning balance on June 30
  $ 961,482     $ 575,149  
Provision for loan losses
    185,000       340,000  
Charge-offs
    (212,561 )     (160,200 )
Recoveries
    10,844       5,507  
 
Ending balance on September 30
  $ 944,765     $ 760,456  
 
Reserve for off-balance sheet commitments
    20,308       19,109  
Total allowance for loan losses and reserve for off-balance sheet commitments
  $ 965,073     $ 779,565  
 
 
    September 30  
Nonperforming Assets by Segment   2009     2008  
 
Regional Banking:
               
Nonperforming loans
  $ 252,763     $ 133,138  
Foreclosed real estate
    16,189       32,078  
 
Total Regional Banking
    268,952       165,216  
 
Capital Markets:
               
Nonperforming loans
    103,463       27,284  
Foreclosed real estate
    1,516       600  
 
Total Capital Markets
    104,979       27,884  
 
National Specialty Lending:
               
Nonperforming loans
    662,695       718,624  
Foreclosed real estate
    60,605       57,251  
 
Total National Specialty Lending
    723,300       775,875  
 
Mortgage Banking:
               
Nonperforming loans including held for sale (a)
    100,799       20,930  
Foreclosed real estate
    22,459       25,589  
 
Total Mortgage Banking
    123,258       46,519  
 
Total nonperforming assets
  $ 1,220,489     $ 1,015,494  
 
Total loans, net of unearned income
  $ 18,524,685     $ 21,601,898  
Insured loans
    (398,937 )     (652,051 )
 
Loans excluding insured loans
  $ 18,125,748     $ 20,949,847  
 
Foreclosed real estate from GNMA loans
    10,619       35,943  
Potential problem assets (b)
    1,693,310       1,023,065  
Loans 30 to 89 days past due
    308,337       423,593  
Loans 30 to 89 days past due - guaranteed portion (c)
    148       67  
Loans 90 days past due
    126,843       65,233  
Loans 90 days past due - guaranteed portion (c)
    198       232  
Loans held for sale 30 to 89 days past due
    32,987       45,959  
Loans held for sale 30 to 89 days past due - guaranteed portion (c)
    32,987       45,959  
Loans held for sale 90 days past due
    46,792       54,354  
Loans held for sale 90 days past due - guaranteed portion (c)
    42,073       50,187  
Off-balance sheet commitments (d)
  $ 5,537,238     $ 6,746,309  
 
Allowance to total loans
    5.10%       3.52%  
Allowance to nonperforming loans in the loan portfolio
    0.87x       0.85x  
Allowance to loans excluding insured loans
    5.21%       3.63%  
Allowance to annualized net charge-offs
    1.17x       1.23x  
Nonperforming assets to loans and foreclosed real estate (e)
    6.38%       4.63%  
Nonperforming loans in the loan portfolio to total loans, net of unearned income
    5.87%       4.12%  
Total commercial net charge-offs (f)
    3.68%       2.88%  
Retail real estate net charge-offs (f)
    4.84%       2.72%  
Other retail net charge-offs (f)
    3.71%       6.42%  
Credit card receivables net charge-offs (f)
    6.15%       4.70%  
Total annualized net charge-offs to average loans (f)
    4.24%       2.84%  
 
(a) Third quarter 2009 and 2008 includes $68,507 and $11,829 of loans held-to-maturity, respectively.
(b) Includes 90 days past due loans.
(c) Guaranteed loans include FHA, VA, student, and GNMA loans repurchased through the GNMA repurchase program.
(d) Amount of off-balance sheet commitments for which a reserve has been provided.
(e) Ratio is non-performing assets related to the loan portfolio to total loans plus foreclosed real estate and other assets.
(f) Net charge-off ratio is annualized net charge offs divided by quarterly average loans, net of unearned income.

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Table 8 - Asset Quality by Portfolio
                 
    September 30
    2009   2008
 
Key Portfolio Details
               
Commercial (C&I & Other)
               
Period-end loans ($ millions)
  $ 6,899     $ 7,618  
 
30+ Delinq. % (a)
    1.25 %     1.15 %
NPL %
    2.13       1.05  
Charge-offs % (qtr. annualized)
    2.48       1.64  
 
Allowance / Loans %
    3.78 %     2.29 %
Allowance / Charge-offs
    1.48 x     1.41 x
 
 
               
Income CRE (Income-producing Commercial Real Estate)
               
Period-end loans ($ millions)
  $ 1,845     $ 2,038  
 
30+ Delinq. % (a)
    2.19 %     3.47 %
NPL %
    10.87       3.72  
Charge-offs % (qtr. annualized)
    3.46       0.24  
 
Allowance / Loans %
    8.29 %     3.73 %
Allowance / Charge-offs
    2.37 x     15.48 x
 
 
               
Residential CRE (Homebuilder and Condominium Construction)
               
Period-end loans ($ millions)
  $ 835     $ 1,480  
 
30+ Delinq. % (a)
    4.15 %     5.73 %
NPL %
    42.35       23.64  
Charge-offs % (qtr. annualized)
    13.41       11.95  
 
Allowance / Loans %
    9.17 %     7.55 %
Allowance / Charge-offs
    0.62 x     0.58 x
 
 
               
Consumer Real Estate (Home Equity Installment and HELOC)
               
Period-end loans ($ millions)
  $ 7,148     $ 7,830  
 
30+ Delinq. % (a)
    2.28 %     1.49 %
NPL %
    0.14       0.07  
Charge-offs % (qtr. annualized)
    3.04       1.41  
 
Allowance / Loans %
    3.21 %     1.58 %
Allowance / Charge-offs
    1.04 x     1.12 x
 
 
               
OTC (Consumer Residential Construction Loans)
               
Period-end loans ($ millions)
  $ 362     $ 1,202  
 
30+ Delinq. % (a)
    4.00 %     4.92 %
NPL %
    77.37       28.94  
Charge-offs % (qtr. annualized)
    29.87       12.29  
 
Allowance / Loans %
    30.21 %     20.16 %
Allowance / Charge-offs
    0.79 x     1.46 x
 
 
               
Permanent Mortgage
               
Period-end loans ($ millions)
  $ 1,113     $ 1,080  
 
30+ Delinq. % (a)
    8.09 %     7.38 %
NPL %
    8.65       2.94  
Charge-offs % (qtr. annualized)
    6.27       0.22  
 
Allowance / Loans %
    9.06 %     1.17 %
Allowance / Charge-offs
    1.46 x     5.48 x
 
 
               
Credit Card and Other
               
Period-end loans ($ millions)
  $ 323     $ 354  
 
30+ Delinq. % (a)
    2.13 %     2.08 %
NPL %
    -     -
Charge-offs % (qtr. annualized)
    5.00       5.30  
 
Allowance / Loans %
    4.57 %     5.52 %
Allowance / Charge-offs
    0.91 x     1.06 x
 
Loans are expressed net of unearned income. All data is based on internal loan classification.
(a) 30+ Delinquency % includes all accounts delinquent more than one month and still accruing interest.

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STATEMENT OF CONDITION REVIEW
EARNING ASSETS
Earning assets consists of loans, investment securities, trading securities, loans held for sale, and other earning assets. Earning assets averaged $24.2 billion and $29.6 billion in third quarter 2009 and third quarter 2008, respectively.
Loans
Average loans were $19.0 billion in third quarter 2009 compared to $21.8 billion in third quarter 2008, a decline of 13 percent from last year. The decrease was primarily driven by declines in both commercial and consumer construction portfolios as FHN discontinued loan origination through its national lending channel. C&I loans declined $.4 billion from prior year as new loan demand has been soft. Average commercial and consumer real estate construction portfolios each declined by $.9 billion. The commercial real estate portfolio (Income CRE) was relatively flat compared with 2008. Additionally, consumer real estate loans (mainly HELOC and home equity loans) declined $.5 billion driven by effort to reduce national portfolios. Average loans represented 79 percent of average earning assets in third quarter 2009 and 74 percent in third quarter 2008. Additional loan information is provided in Table 9 – Average Loans and Note 4 – Loans.
The commercial and consumer construction and national home equity portfolios are expected to continue to contract due to conditions in the housing market and FHN’s strategic goal to reduce real estate concentrations in general. It is expected that average loans will continue to decline in the near-term due to limited loan demand and as the national portfolios continue to wind-down.
Table 9 - Average Loans
                                         
    Three months ended September 30  
            Percent     Percent             Percent  
(Dollars in millions)   2009     of Total     Change     2008     of Total  
 
Commercial:
                                       
Commercial, financial and industrial
  7,116.0       37 %     (5.5 )%   7,530.7       35 %
Real estate commercial (a)
    1,536.0       8       2.6       1,497.8       6  
Real estate construction (b)
    1,245.6       7       (42.4 )     2,162.8       10  
             
Total commercial
    9,897.6       52       (11.6 )     11,191.3       51  
             
Retail:
                                       
Real estate residential (c)
    7,674.4       40       (6.0 )     8,166.3       38  
Real estate construction (d)
    460.7       2       (65.9 )     1,350.1       6  
Other retail
    127.5       1       (8.1 )     138.8       1  
Credit card receivables
    186.8       1       (3.5 )     193.5       1  
Real estate loans pledged
against other collateralized borrowings (e)
    676.3       4       (6.3 )     721.8       3  
             
Total retail
    9,125.7       48       (13.7 )     10,570.5       49  
             
Total loans, net of unearned
  19,023.3       100 %     (12.6 )%   21,761.8       100 %
             
(a) Includes nonconstruction income property loans and land loans not involving development.
(b) Includes homebuilder, condominium, and income property construction and land development loans.
(c) Includes home equity lines of credit (average for third quarter 2009 and 2008 - $3.7 billion and $3.8 billion, respectively).
(d) Includes one-time close product.
(e) Includes on-balance sheet securitizations of home equity loans.
Loans Held for Sale
Loans held for sale consists of the mortgage warehouse, student, small business, and home equity loans. During third quarter 2009 loans held for sale averaged $470.6 million, a decrease of 76 percent, or $1.5 billion from third quarter 2008. The majority of the decrease relates to the mortgage warehouse which contracted by $1.5 billion as a result of the sale of the national mortgage origination platform to MetLife in third quarter 2008.

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Other Earning Assets
Trading securities decreased from $1.7 billion in 2008 to $1.0 billion in 2009 primarily as a result of capital markets’ continued efforts to manage trading portfolio levels and also due to current market conditions. Additionally federal funds sold and securities repurchase agreements decreased $.7 billion from $1.2 billion in third quarter 2008. Average federal funds sold declined as result of a reduction in short-term lending to correspondent banks and securities repurchase agreements declined consistent with capital markets’ trading portfolio. Interest-bearing cash increased $.4 billion as Federal Reserve deposits converted to interest-bearing accounts in the fourth quarter 2008.
Noninterest-Bearing Assets
The strategic balance sheet reduction also contributed to a $.7 billion decline in MSR. In third quarter 2008, FHN sold servicing rights on $19.1 billion of first lien mortgage loans representing approximately $.2 billion of MSR. Additionally, FHN has completed a series of bulk sales to further reduce the amount of servicing rights on the balance sheet.
Deposits/Other Sources of Funds
Core deposits increased 9 percent or $1.1 billion and averaged $13.3 billion as FHN has focused on growing this low cost funding source, Average short-term purchased funds decreased to $6.2 billion in third quarter 2009 from $11.2 billion in third quarter 2008 driven by a $3.4 billion decline in Federal Home Loan Bank borrowings primarily as a result of the contracting balance sheet. Federal Reserve Bank borrowings declined $.5 billion and federal funds borrowings were relatively flat when compared with third quarter 2008. Average long-term borrowings decreased by $2.8 billion consistent with balance sheet contraction as long term bank notes matured or were repurchased and extendable notes were not renewed.
Financial Summary (Comparison of first nine months of 2009 to first nine months of 2008)
FHN reported a net loss available to common shareholders of $258.8 million or $1.19 per diluted share for the nine months ended September 30, 2009. The net loss available to common shareholders was $136.3 million or $.74 per diluted share in 2008. For the nine months ended September 30, 2009, return on average common equity and return on average assets were negative 14.46 percent and negative 0.96 percent, respectively. Return on average common equity and return on average assets were negative 7.35 percent and negative 0.48 percent for the nine months ended September 30, 2008.
For the first nine months of 2009, total revenues were $1.6 billion; a decrease of 13 percent compared to $1.8 billion for the nine months ended 2008. Net interest income declined $103.6 million to $586.6 million primarily as average earning assets declined $5.4 billion from 2008. Noninterest income for the first nine months of 2009 decreased to $987.3 million from $1.1 billion in 2008.
Capital markets noninterest income increased by 60 percent to $514.1 million in 2009 from $320.5 million a year ago due to increased demand for fixed income securities resulting from market volatility and illiquidity during the first nine months of 2009. A $36.2 million LOCOM adjustment taken on the trust preferred warehouse in 2008 also contributed to the year over year increase in capital markets noninterest income. These loans were transferred to the loan portfolio in the second quarter of 2008.
Loan sale and securitization income increased from a loss of $7.8 million for the nine months ended September 30, 2008, to a gain of $3.7 million in 2009. A decline in residual values from prior consumer loan securitizations of $7.2 million negatively impacted loan sale and securitization income in 2008.
In 2008, FHN incurred an $18.9 million loss on divestitures, $17.5 million of which was related to the divestiture of certain mortgage banking operations in third quarter 2008. There were no similar repositioning charges that reduced 2009 noninterest income.
Mortgage banking income was $190.4 million for the nine months ended September 30, 2009, compared to $437.9 million for nine months ended September 30, 2008. In third quarter 2008, FHN sold the national mortgage origination and servicing platform to MetLife. As a result, origination and servicing income is significantly lower in 2009 when compared to the first nine months of 2008. The nine-month period ended September 30, 2009, included $1.1 million of transaction costs related to MSR bulk sales considered restructuring charges while the same period in 2008 included $12.7 million.
Servicing income decreased to $165.1 million in the nine months of 2009 from $192.6 million primarily due to a decline in gross servicing fees as a result of a decline in the size of the mortgage servicing portfolio. Positive net hedging results were higher in 2009 when compared with 2008 as a result of wider spreads between swap and mortgage rates due to positive convexity in the first quarter 2009. Additionally, the negative effect of MSR runoff was less significant in 2009.

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Origination income declined significantly to $22.9 million for the nine months ended September 30, 2009, a decrease from $238.0 million. In 2009, origination income primarily includes origination activity related to the regional banking footprint and fair value adjustments on the remaining warehouse. In 2009, income from origination activity within the regional banking footprint was $20.4 million and unhedged negative fair value adjustments to the remaining mortgage warehouse were approximately $5 million.
The net securities loss in 2009 was $.3 million compared to a net gain of $64.8 million gain in 2008. The net securities gain in 2008 was due to the redemption of shares in connection with Visa Inc.’s initial public offering. Fees from deposit and cash management activities declined $12.6 million driven by a decrease in the retail NSF fees as a result of lower transaction volumes. Trust fees were down $4.3 million from 2008 as market values of the managed trust accounts declined and insurance commissions were down $2.9 million.
Other noninterest income declined $28.4 million to $115.6 million in 2009. In 2008, debt repurchase gains were $31.5 million compared with $12.9 million in 2009. Generally, all other noninterest income categories declined from 2008 reflecting decreases in BOLI income and brokerage commission consistent with general market declines and other declines resulting from FHN’s focus on core businesses. $8.5 million of the decline in other noninterest income is the result of higher repurchase losses related to prior HELOC and second lien loan sales when compared with 2008. The exception was deferred compensation income which increased $17.6 million from the prior year. Deferred compensation is affected by market conditions and is mirrored by an increase in deferred compensation expense.
Provision expense for loan losses decreased by $55.0 million for the nine months ended September 30, 2009, from $800.0 million in the nine months of 2008 reflecting asset quality improvements as the national portfolios continue to wind down.
Noninterest expense decreased to $1.2 billion for the nine months ended September 30, 2009, from $1.3 billion in 2008. In the nine-month period ended September 30, 2009, personnel expense was $614.3 million compared to $755.4 million in 2008, a reduction of $141.1 million. The decline was driven by mortgage banking headcount reduction from the sale of the national mortgage and servicing platforms to MetLife which was partially negated by an increase in capital market’s production. Additionally, severance costs included in restructuring, repositioning, and efficiency initiatives declined by $19.3 million from the prior year.
Occupancy, equipment rental and depreciation, communications and courier, and other operational costs decreased a combined $74.2 million from 2008 as a result of the sale of national mortgage origination and servicing platforms to MetLife including a $12.3 million decline related to restructuring, repositioning, and efficiency initiatives.
Partially offsetting the decreases noted above was an increase of $116.6 million in other expenses. This increase is a result of a combination of various items. Provision for mortgage banking foreclosure and repurchases related to legacy originations increased $58.3 million and losses on OREO valuation adjustments and dispositions increased $39.8 million from 2008. FDIC premiums, including the 2009 special assessment were up $27.4 million in 2009. Other expenses increased by $22.5 million during the nine month period ended September 30, 2009, compared to September 30, 2008. The increase in other expense was affected by processing costs related to the regional banking mortgage origination business, charges related to the increase in reinsurance reserves, and a decline in net reversals of the Visa contingent liability from 2008.
Income taxes for the nine months ended September 30, 2009, were primarily affected by the effective tax rate as well as permanent tax credits. The tax rate for the nine-month period ended September 30, 2008, cannot be compared to that of 2009 due to the level of pre-tax income. 2008 was positively impacted by favorable state tax settlements while 2009 was affected by the surrender of a BOLI contract resulting in a negative $8.4 million tax effect.
BUSINESS LINE REVIEW
Regional Banking
Total revenues for the nine-month period were $611.5 million, a decrease of 5 percent from $646.9 million in 2008. Net interest income decreased slightly to $372.5 million through September 30, 2009, from $379.0 million in 2008. Noninterest income decreased $28.9 million to $239.1 million during the first nine months of 2009. Generally, there were broad-based declines in all fee income items including trust fees, insurance premium, and annuity income. However, income from deposit service charges experienced the largest decline as fees were down $13.3 million from the prior year primarily from lower consumer NSF fees due to a decrease in transaction volumes.
Provision expense for loan losses decreased $11.0 million in 2009 from $222.9 million in 2008 reflecting proactive recognition and management of problem assets. Noninterest expense increased to $506.5 million in 2009 compared to $446.9 million in 2008. The increase is primarily a result of expenses including higher FDIC premiums, including the 2009 special assessment, increased credit and technology-related costs, and a charge related to employee life insurance benefits.

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Capital Markets
Total revenues for 2009 increased to $589.7 million compared to $386.7 million for same period in 2008. Net interest income was $69.2 million in 2009, an increase of $10.3 million from 2008. The increase in net interest income is largely due to higher spreads on the correspondent banking loan portfolio.
Fixed income revenue increased to $487.6 million in 2009 from $337.3 million in 2008 as production increased reflecting the benefits of Capital Markets’ extensive distribution network combined with favorable market conditions and illiquidity experienced during 2009. Other revenue increased to $32.9 million from a loss of $9.5 million in 2008 as the prior year included a $36.2 million LOCOM negative adjustment on the trust preferred warehouse. Provision for loan losses was $89.3 million in 2009 compared to $72.0 million in 2008 reflecting incremental deterioration in the bank holding company and trust preferred loan portfolios. Noninterest expense was $334.1 million, an increase of $66.0 million from $268.1 million in 2008. The increase is primarily driven by higher variable personnel costs as a result of increased fixed income revenue in 2009.
National Specialty Lending
Total revenues for the nine months ended September 30, 2009 were $84.7 million compared to $142.9 million in 2008. Net interest income was $94.3 million in 2009 compared to $152.9 million in 2008, contributing to substantially all of the decline in revenues. The drop in net interest income is primarily due to an increase in nonaccrual loans and the wind-down of the national construction and home equity portfolios. Provision for loan losses decreased to $444.5 million in 2009 compared to $498.0 million in 2008, reflecting the effect of the wind-down of the national residential construction portfolios.
Noninterest income was a loss of $9.6 million for 2009 compared to a loss of $9.9 million in 2008. The nine months of 2009 reflected increased charges related to higher estimated repurchase activity from prior consumer loan sales. Repurchase costs were lower in 2008 but the prior year reflected a negative fair value adjustment to the residual interests retained from prior consumer loan sales. Noninterest expense rose to $101.1 million in 2009 compared to $82.1 million in 2008. The increase was attributable to an increase in foreclosure losses, the 2009 FDIC special assessment, and credit-related costs. These increases were partially mitigated by declines in personnel, occupancy, and other operational costs as a result of the wind down of operations.
Mortgage Banking
Total revenues for the nine months ended September 30, 2008, were $230.8 million compared to $557.9 million in 2008. Net interest income declined $64.2 million to $29.6 million consistent with the decline in the size of the mortgage warehouse. Noninterest income was $201.2 million in 2009 compared to $464.0 million in 2008 principally from decreased origination income. Provision for loan losses was minimal in 2009 compared with $7.1 million in 2008 reflecting improved performance of the permanent mortgage portfolio in this segment.
Servicing income decreased to $165.1 million in the nine months of 2009 from $192.6 million primarily due to a decline in gross servicing fees as a result of a decline in the size of the mortgage servicing portfolio. Positive net hedging results were higher in 2009 when compared with 2008 as a result of wider spreads between swap and mortgage rates due to positive convexity in the first quarter 2009. Additionally, the negative effect of MSR runoff was less significant in 2009.
Origination income declined significantly to $22.9 million for the nine months ended September 30, 2009, a decrease from $238.0 million. In 2009, origination income primarily includes origination activity related to the regional banking footprint and fair value adjustments on the remaining warehouse. In 2009, income from origination activity within the regional banking footprint was $20.4 million and unhedged positive fair value adjustments to the remaining mortgage warehouse were approximately $5 million.
Noninterest expense in 2009 was $159.2 million compared to $389.7 million for the nine months ended September 30, 2008. Nearly all noninterest expense categories decreased as a result of the sale of national mortgage origination and servicing platforms in 2008. The exceptions were increased foreclosure and repurchase provision related to legacy originations, a rise in charges to increase the reserve related to reinsurance contracts, and an increase in contract employment expenses to facilitate transition of remaining operational tasks after the sale to MetLife. In 2009, the provision for foreclosure and repurchase obligations was $67.1 million compared with $8.8 million in 2008. Additionally, losses related to reinsurance contracts were $23.4 million in 2009 compared with $10.1 million in 2008 and contract employment costs increased $5.8 million to $17.5 million in 2009.
Corporate
Total revenues for the nine months ended September 30, 2009, were $57.2 million compared to $79.8 million in 2008, primarily a result of the Visa securities gain in the prior year. Net interest income for 2009 was $21.0 million, a $15.4 million increase over 2008. The increase in net interest income is primarily a result of a decrease in funding costs.

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Noninterest income, excluding net securities gains, increased to $36.4 million in 2009 compared to $9.5 million in 2008. Gains on the repurchase of debt were $12.9 million in 2009 compared with $31.5 million in 2008. Also, deferred compensation income increased $17.6 million which is mirrored by an offset in personnel expense. Noninterest income in 2008 included $12.7 million in transaction costs related to mortgage servicing sales that are reflected in restructuring charges.
Noninterest expense declined to $59.4 million in the first nine months of 2009 compared to $73.1 million in the nine months of 2008. Charges recorded in noninterest expense related to restructuring, repositioning, and efficiency initiatives decreased $43.8 million to $5.4 million in 2009 compared to $49.2 million in 2008. The decline in restructuring charges was somewhat offset by an increase in deferred compensation expense (mirrored by increase in deferred compensation income) and a decline in net reversals in the Visa contingent liability. Additionally, $14.2 million of restructuring charges (primarily includes a $14.0 million goodwill impairment) are included in discontinued operations and relates to the agreement to sell Capital Markets’ institutional equity research business.
CAPITAL
Management’s objectives are to provide capital sufficient to cover the risks inherent in FHN’s businesses, to maintain excess capital to well-capitalized standards, and to assure ready access to the capital markets.
Average equity increased to $3.4 billion in third quarter 2009 from $3.0 billion in third quarter 2008. Period-end equity was $3.4 billion on September 30, 2009, an increase of 17 percent from third quarter 2008. The increase in average and period-end equity is primarily a result of FHN’s participation in the UST’s Capital Purchase Program (CPP) that generated $866.5 million of proceeds through the issuance of preferred stock and a common stock warrant. The capital increase due to participation in the CPP more than offset the negative effect of net losses reflected in retained earnings. Pursuant to board authority, FHN may repurchase shares from time to time and will evaluate the level of capital and take action designed to generate or use capital, as appropriate, for the interests of the shareholders, subject to legal, regulatory, and CPP constraints.

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Table 10 - Issuer Purchases of Equity Securities
                                 
                    Total Number of     Maximum Number  
    Total Number             Shares Purchased     of Shares that May  
    of Shares     Average Price     as Part of Publicly     Yet Be Purchased  
(Volume in thousands)   Purchased     Paid per Share     Announced Programs     Under the Programs  
 
2009
                               
July 1 to July 31
    2       $12.05       2       39,698  
August 1 to August 31
    -     NA       -       39,698  
September 1 to September 30
    -     NA       -