† Capital Markets provides a broad spectrum of financial services for the investment and banking communities through the integration of traditional capital markets securities activities, equity research, loan sales, portfolio advisory services, structured finance, and correspondent banking services.

† National Specialty Lending consists of 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 through its First Horizon Construction Lending offices.

† Mortgage Banking now consists of the origination of mortgage loans in and around the regional banking footprint and servicing activities related to the remaining portfolio. Prior to the August 31, 2008, sale of its servicing platform and origination offices outside Tennessee to MetLife Bank, N.A., (MetLife), this division provided mortgage loans and servicing to consumers and operated in approximately 40 states.

† 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, 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 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), 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 period ended March 31, 2009.
FINANCIAL SUMMARY
In the first quarter 2009, FHN reported a net loss available to common shareholders of $82.8 million, or $.39 diluted loss per share compared to net income available to common shareholders of $7.9 million, or $.06 diluted earnings per share in 2008. In 2009, net income available to common shareholders reflected $15.0 million of dividends on the CPP preferred shares.
The results of operations for the first quarter 2009 were negatively affected by increased provisioning for loan losses, charges related to repurchase and foreclosure reserves, expenses for PMI reinsurance reserves, charges related to an employee life insurance obligation, and expenses related to restructuring, repositioning, and efficiency initiatives. Results were positively impacted by strong fixed income sales in Capital Markets and positive hedging results within Mortgage Banking. Market volatility resulted in higher Capital Markets fixed income sales and a favorable interest rate environment positively impacted MSR hedging gains in 2009 compared to 2008. Provisioning for loan losses increased $60.0 million from first quarter 2008 to $300.0 million due to downward credit grading and deterioration in the commercial portfolio and continued deterioration in the national consumer lending portfolio. Earnings in the first quarter 2008 were positively affected by the adoption of new accounting standards and the completion of Visa's IPO which resulted in a $95.9 million benefit in 2008 from the redemption of shares totaling $65.9 million and the reversal of $30.0 million of the contingent liability for certain Visa litigation matters. First quarter 2008 was also negatively affected by a $36.2 million LOCOM adjustment on the trust preferred warehouse. Additionally, net charges related to restructuring, repositioning and efficiency efforts were $21.3 million in the first quarter of 2008 compared to $4.7 million in the first quarter of 2009.
Return on average common equity and return on average assets for first quarter 2009 was (13.44) percent and (.87) percent, respectively, compared to 1.47 percent and .13 percent in first quarter 2008. Tier 1 capital ratio was 14.97 percent as of March 31, 2009 compared to 8.23 percent on March 31, 2008. Total assets were $31.2 billion and total equity was $3.5 billion on March 31, 2009, compared to $37.3 billion and $2.4 billion, respectively, on March 31, 2008.

BUSINESS LINE REVIEW
Regional Banking
The Regional Banking segment had a pre-tax loss of $89.3 million in the first quarter 2009 compared to a pre-tax loss of $18.7 million in the first quarter 2008. Total revenues decreased 12 percent, or $25.4 million, in first quarter 2009. The provision for loan losses increased to $97.8 million in the first quarter 2009 from $75.3 million in the first quarter 2008. This increase primarily reflects deterioration and downward credit grading of the commercial loan portfolio.
Net interest income decreased 12 percent to $106.0 million in first quarter 2009 from $120.5 million in first quarter 2008. Net interest margin was 3.88 percent in first quarter 2009 compared to 4.39 percent in first quarter 2008. The decrease in net interest income and NIM was primarily attributable to a decline in deposit spreads from the low interest rate environment.
Noninterest income declined 13 percent, or $10.9 million, in first quarter 2009 to $76.3 million. Deposit fees were down $3.8 million mainly due to a decline in retail NSF fees while trust income decreased by $2.3 million due to a decline in market value of managed trust assets. Noninterest expense increased to $173.7 million in first quarter 2009 from $151.2 million in first quarter 2008. The increase is primarily due to the Regional Bank's proportionate share of the adjustment to an employee life insurance reserve, higher technology and credit-related costs, and an increase in FDIC premiums. Capital Markets
Pre-tax income increased from $22.8 million in first quarter 2008 to $74.3 million in first quarter 2009. Total revenues were $240.1 million in the first quarter 2009 compared to $153.7 million in the first quarter 2008. Net interest income was $23.4 million in the first quarter 2009 compared to $19.8 million in the first quarter 2008. This increase is primarily attributable to wider spreads on the trading portfolio due to the steeper yield curve. Income from fixed income sales increased to $197.0 million in the first quarter 2009 from $152.2 million in the first quarter 2008, resulting from Capital Markets' extensive distribution network combined with market volatility and illiquidity experienced in the first quarter 2009. Other product revenues increased to $19.7 million in the first quarter 2009 compared to a loss of $18.3 million in first quarter 2008 as the prior year included a $36.2 million LOCOM adjustment on the trust preferred warehouse. The trust preferred loans were transferred to the portfolio in the second quarter of 2008. Revenues from other products include fee income from activities such as equity research, loan sales, portfolio advisory, structured finance, and correspondent banking services. Provision expense decreased slightly to $14.0 million in first quarter 2009 compared to $15.0 million in the first quarter 2008. Provision expense reflects deterioration of commercial loans, including loans to banks, and trust preferred loans as the housing market and general economic decline impacted financial institutions and businesses to which FHN extended credit.
Noninterest expense increased by $36.0 million, to $151.8 million in first quarter 2009, primarily due to increased personnel costs related to higher production levels in the first quarter 2009 as compared to the first quarter 2008.
Mortgage Banking
Effective August 31, 2008, FHN completed the sale of Mortgage Banking's servicing operations and national mortgage 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.

Pre-tax income was $83.3 million in the first quarter 2009 compared to $48.3 million in first quarter 2008. Total revenues decreased by $67.6 million to $130.5 million in first quarter 2009.
Net interest income decreased to $7.6 million in first quarter 2009 from $30.0 million in the first 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.
Subsequent to the sale of certain mortgage banking operations to MetLife in the third quarter 2008, noninterest income consists primarily of servicing-related income such as servicing fees, adjustment to the fair value of servicing assets, and gains or losses from hedging servicing assets. Origination income primarily consists of fees from originating mortgages through the regional banking footprint and secondary marketing income from loans that were originated through the national platform.
Noninterest income decreased to $122.9 million in the first quarter 2009 from $168.0 million in the first quarter 2008. Total servicing income increased $31.9 million to $101.2 million in the first quarter 2009 primarily from positive net hedging results. Servicing fees were down $37.1 million consistent with the decline in the size of the servicing portfolio. Hedging gains were $84.7 million in 2009 compared to $32.7 million in 2008 due to a widening of spreads between mortgage and swap rates. Net revenue from origination activity decreased to $14.5 million in the first quarter 2009 from $84.1 million in the first quarter 2008 due to the sale of national mortgage origination offices. Noninterest expense was $47.6 million in the first quarter 2009 compared to $149.6 million in the first quarter 2008. The decline is a result of the divestiture of certain mortgage banking operations in the third quarter 2008. Offsetting the broad declines was $14.3 million in charges to increase the private mortgage insurance reserves due to increasing mortgage default expectations, expenses of $12.3 million to increase the foreclosure reserve due to higher repurchase activity, and a $4.5 million increase in contract employment expenses from costs related to the transition service agreement between FHN and MetLife.
National Specialty Lending
National Specialty Lending had a pre-tax loss of $192.5 million in the first quarter 2009 compared to a pre-tax loss of $121.2 million in the first quarter 2008. Provision for loan losses increased $39.1 million to $188.6 million in the first quarter 2009 as a result of deterioration in the national construction and the national home equity loan portfolios.
Net interest income declined to $33.4 million in the first quarter 2009 as compared to $54.2 million in the first quarter 2008 as a result of the increase in nonaccrual and charged-off construction loans.
Noninterest income was a loss of $6.7 million in the first quarter 2009 compared to a gain of $.6 million in the first quarter 2008. Noninterest expense increased $4.1 million from $26.5 million in 2008 primarily from higher foreclosure costs.
Corporate
The Corporate segment's pre-tax income was $11.4 million in the first quarter 2009 compared to $71.8 million in the first quarter 2008. Net interest income was $26.3 million in the first quarter 2009 compared to $3.6 million in the first quarter 2008 principally due to the effect of excess capital in the corporate segment. Noninterest income was negative $1.4 million in first quarter 2009 compared to positive $59.4 million in the first quarter 2008 as 2008 included a $65.9 million securities gain from redemption of Visa Inc. shares in connection with the IPO. Noninterest expense increased $22.4 million to $13.6 million in the first quarter 2009. First quarter 2008 was positively impacted by the reversal of $30.0 million of the contingent liability related to Visa litigation matters. Charges within noninterest expense that related to restructuring, repositioning, and efficiency initiatives decreased by $14.0 million from 2008.

RESTRUCTURING, REPOSITIONING, AND EFFICIENCY INITIATIVES
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.
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. 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.
Net costs recognized by FHN in the quarter ended March 31, 2009 related to restructuring, repositioning, and efficiency activities were $4.7 million. Of this amount, $2.8 million represented exit costs that were accounted for in accordance with Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS No. 146). Significant expenses recognized in first quarter 2009 resulted from the following actions:
• Transaction costs of $1.1 million from the contracted sale of mortgage servicing rights.

• Severance and related employee costs of $2.7 million related to discontinuation of national lending operations.

• Loss of $.8 million related to asset impairments from branch closures.

Net costs recognized by FHN in the quarter ended March 31, 2008 related to restructuring, repositioning, and efficiency activities were $21.3 million. Of this amount, $15.1 million represented exit costs that were accounted for in accordance with Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS No. 146). Significant expenses recognized in first quarter 2008 resulted from the following actions:
• Expense of $15.1 million associated with organizational and compensation changes due to right sizing operating segments, the divestiture of certain First Horizon Bank branches, and consolidating functional areas.

• Losses of approximately $1.0 million from the sales of certain First Horizon Bank branches.

• Transaction costs of $2.7 million from the sale of mortgage servicing rights.

• Expense of $2.5 million for the write-down of certain intangibles and other assets resulting 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. The recognition of these impairment losses will have no effect on FHN's debt covenants. The impairment loss related to the intangible asset was recorded as an unallocated corporate charge within the Corporate segment and is 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 will be affected from the efficiency benefits. Charges related to restructuring, repositioning, and efficiency initiatives for the three months ended March 31, 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
                                                                 March 31
       (Dollars in thousands)                               2009         2008

       Noninterest income:
       Mortgage banking                                  $ (1,142 )   $  (2,667 )
       Losses on divestitures                                   -          (995 )

       Total noninterest income                            (1,142 )      (3,662 )

       Noninterest expense:
       Employee compensation, incentives and benefits       2,702         7,412
       Occupancy                                                -           981
       Equipment rentals, depreciation and maintenance          -            83
       Legal and professional fees                             62         3,080
       Communications and courier                               -             6
       All other expense                                      833         6,062

       Total noninterest expense                            3,597        17,624

       Loss before income taxes                          $ (4,739 )   $ (21,286 )

Activity in the restructuring and repositioning liability for the three months ended March 31, 2009 and 2008 is presented in the following table:

                                                     Three Months Ended                     Three Months Ended
                                                       March 31, 2009                         March 31, 2008
                                               Charged to                             Charged to
(Dollars in thousands)                          Expense             Liability           Expense           Liability

Beginning Balance                             $          -         $    24,167        $         -        $    19,675
Severance and other employee related
costs                                                2,702               2,702              7,390              7,390
Facility consolidation costs                             -                   -                891                891
Other exit costs, professional fees and
other                                                   64                  64              6,832              6,832

Total Accrued                                        2,766              26,933             15,113             34,788
Payments*                                                                5,707                                11,475
Accrual reversals                                                            -                                   623

Restructuring and Repositioning Reserve
Balance                                                            $    21,226                           $    22,690

Other Restructuring & Repositioning
(Income) and Expense:
Mortgage banking expense on servicing
sales                                                1,142                                  2,667
Loss on divestitures                                     -                                    995
Impairment of premises and equipment                   831                                     82
Impairment of intangible assets                          -                                  2,429

Total Other Restructuring and
Repositioning Income and Expense                     1,973                                  6,173

Total Restructuring, Repositioning
Charges                                       $      4,739                            $    21,286

* Includes payments related to:

                                                                  Three Months Ended          Three Months Ended
                                                                    March 31, 2009              March 31, 2008
Severance and other employee related costs                        $             4,074        $              6,655
Facility consolidation costs                                                    1,560                       1,234
Other exit costs, professional fees and other                                      73                       3,586

                                                                  $             5,707        $             11,475

INCOME STATEMENT
Total consolidated revenue decreased 11 percent to $604.5 million from $677.2 million in the first quarter 2008, primarily from decreases in mortgage banking income, securities gains, and net interest income.
NET INTEREST INCOME
Net interest income declined to $196.6 million in the first quarter 2009 compared to $228.1 million in the first quarter 2008 as average earning assets declined 16 percent to $27.4 billion and average interest-bearing liabilities declined 22 percent to $25.9 billion in the first quarter 2009.
The consolidated net interest margin was 2.89 percent for first quarter 2009 compared to 2.81 percent for first quarter 2008. The widening in the margin occurred as the net interest spread increased to 2.60 percent from 2.35 percent in the first quarter 2009 while the impact of free funding decreased from 46 basis points to 29 basis points. The increase in the margin is largely attributable to a decrease in interest-bearing assets, increased spreads on capital markets trading inventory, and a reduced need for higher cost short-term funding. The positive effects more than offset the negative impact of an increase in nonaccrual loans.