• 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, derivative sales, and correspondent banking services.

• 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.

• 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 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, low income housing investment activities, and venture capital.

In second quarter 2009, FHN reviewed funds transfer pricing methodologies and cost allocations used to determine segment performance. As a result of this review, certain of these methodologies were revised affecting all segments. Additionally, activities related to Low Income Housing Investments were moved from Regional Banking to Corporate. For comparability, previously reported amounts have been revised to reflect these changes.
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 periods ended June 30, 2009.
FINANCIAL SUMMARY
In second quarter 2009, FHN reported a net loss available to common shareholders of $123.2 million, or $.58 diluted loss per share, compared to a net loss available to common shareholders of $19.1 million, or $.10 diluted loss per share in 2008. In 2009, net loss available to common shareholders reflected $14.8 million of dividends on the CPP preferred shares.
The results of operations for second quarter 2009 were negatively affected by increased provisioning for loan losses, charges related to repurchase and foreclosure reserves, and increased foreclosure losses. Additionally, mortgage banking results decreased significantly from 2008 due to the third quarter 2008 sale of the national mortgage origination and servicing platforms. Favorable market conditions in second quarter 2009 resulted in strong fixed income sales at Capital Markets. The sale of national mortgage banking operations contributed to a decline in operating expenses. Provisioning for loan losses increased $40.0 million from second quarter 2008 to $260.0 million due to the adverse economic conditions and prolonged weakness in the housing market. Earnings in second quarter 2008 were affected by charges of $26.0 million related to restructuring, repositioning, and efficiency initiatives and a $12.6 million gain on the repurchase of debt.
Return on average common equity and return on average assets for second quarter 2009 were a negative 20.96 percent and negative 1.46 percent, respectively, compared to negative 3.02 percent and negative .18 percent in second quarter 2008. Capital ratios improved as tier 1 capital ratio was 15.55 percent as of June 30, 2009 compared to 10.51 percent on June 30, 2008, and total capital was 20.77 percent compared with 15.15 percent in 2008.
Total assets declined to $28.8 billion on June 30, 2009 from $35.5 billion on June 30, 2008, while total equity increased to $3.4 billion on June 30, 2009 from $3.0 billion on June 30, 2008.

BUSINESS LINE REVIEW
Regional Banking
The Regional Banking segment had a pre-tax loss of $12.6 million in the second quarter 2009 compared to a pre-tax loss of $17.4 million in second quarter 2008. Total revenues decreased 5 percent to $206.8 million in second quarter 2009. The provision for loan losses decreased to $51.0 million in second quarter 2009 from $89.5 million in second quarter 2008 primarily due to proactive recognition and management of problem assets.
Net interest income was flat at $125.5 million in second quarter 2009 from $125.7 million in second quarter 2008 as net interest margin increased to 4.71 percent in second quarter 2009 compared to 4.58 percent in second quarter 2008. The increase in margin was primarily a result of increased loan spreads due to lower cost funding.
Noninterest income declined $11.3 million in second quarter 2009 to $81.4 million. Deposit fees were down $5.2 million mainly due to a decline in retail non-sufficient funds (NSF) fees. Annuity income decreased $1.7 million due to a decrease in sales and a shift in product mix. Trust income decreased by $1.2 million as the market value of managed trust assets declined. Other miscellaneous income also declined as second quarter 2008 included a $2.3 million gain on the sale of foreclosed assets. Noninterest expense increased to $168.4 million in second quarter 2009 from $146.3 million in second quarter 2008. The increase is primarily a result of the Regional Bank's proportionate share of Federal Deposit Insurance Corporation (FDIC) premiums, including the special assessment, credit-related costs, foreclosure losses, and technology costs.
Capital Markets
Pre-tax income increased from $24.4 million in second quarter 2008 to $79.0 million in second quarter 2009 with total revenues of $214.5 million in the second quarter 2009 compared to $143.7 million in the second quarter 2008. Net interest income was $24.9 million in second quarter 2009 compared to $19.1 million in the second quarter 2008 as the net interest margin improved to 2.70 percent from 1.60 percent last year. The increase is primarily attributable to higher spreads on the correspondent banking portfolio.
Income from fixed income sales increased to $170.1 million in the second quarter 2009 from $105.0 million in the second quarter 2008 reflecting the benefits of Capital Markets' extensive distribution network combined with continued market volatility and illiquidity. Other product revenues were $19.5 million in the second quarter 2009 compared to $19.6 million in second quarter 2008. Revenues from other products include fee income from activities such as equity research, loan sales, portfolio advisory, derivative sales, structured finance, and correspondent banking services. Provision expense increased slightly to $21.1 million in second quarter 2009 which primarily reflected deterioration in the trust preferred loan portfolio.
Noninterest expense increased by $13.6 million to $114.4 million in second quarter 2009. Personnel costs increased $7.1 million as the effect of increased production levels more than offset a decline in expenses due to a reduced rate of incentive provisioning in second quarter 2009. 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 second quarter 2009 pre-tax loss was $44.7 million compared to pre-tax income of $68.2 million in the second quarter 2008. Total revenues decreased by $192.4 million to $30.0 million in second quarter 2009. Net interest income decreased to $10.8 million in second quarter 2009 from $35.1 million in the second 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.
Noninterest income was $19.2 million in the second quarter 2009 compared to $187.3 million in the second quarter 2008. Total servicing income decreased $26.4 million to $16.2 million in the second 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 $35.5 million consistent with the decline in the size of the servicing portfolio. Net hedging gains were $7.0 million in 2009 compared to $16.5 million in 2008 due to a narrowing of spreads between mortgage and swap rates. Net revenue from origination activity decreased to a loss of $1.3 million in the second quarter 2009 from income of $134.1 million in the second quarter 2008. Second quarter 2009 origination income was affected by a $10 million unhedged negative fair value adjustment to the mortgage warehouse. Origination activity has significantly declined in comparison to second quarter 2008 due to the sale of national mortgage origination platform.
Noninterest expense was $63.2 million in the second quarter 2009 compared to $150.2 million in the second quarter 2008. The decline is mostly a result of the divestiture of certain mortgage banking operations in the third quarter 2008. These broad declines were somewhat diminished by an increase in expense of $16.8 million to increase the foreclosure and repurchase reserve from prior loan sales related to the legacy origination platform and an $8.1 million charge to increase the private mortgage insurance reserves due to increasing mortgage default expectations.
National Specialty Lending
National Specialty Lending's pre-tax loss increased to $195.3 million in the second quarter 2009 compared to a pre-tax loss of $98.2 million in the second quarter 2008 primarily due to increased provisioning. Provision for loan losses increased $68.3 million to $176.3 million in the second quarter 2009 as a result of deterioration in the national construction and the national home equity loan portfolios.
Net interest income declined to $31.2 million in the second quarter 2009 compared to $53.5 million in the second quarter 2008 as a result of the increase in nonaccrual loans and the wind-down of national construction and consumer lending.
Noninterest income was a loss of $9.1 million in the second quarter 2009 compared to a loss of $14.6 million in the second quarter 2008. Second quarter 2009 included a $12.0 million charge to increase repurchase reserves compared to $8.7 million in 2008. Additionally, 2008 included a $9.4 million negative fair value adjustment to the residual interest retained from prior consumer loan sales. Noninterest expense increased to $41.0 million from $29.0 million in 2008 primarily from higher foreclosure costs. Operating-related expenses declined due to the wind-down of operations. However, foreclosure losses increased to $11.2 million from $2.1 million primarily as a result of Other real estate owned (OREO) fair value adjustments and net losses on dispositions. Additionally, costs to manage and resolve problem loans have increased $5.0 million to $6.1 million in the second quarter 2009. Corporate
The Corporate segment's pre-tax loss was $7.0 million in the second quarter 2009 compared to a loss $22.1 million in the second quarter 2008. Noninterest income was $11.1 million in second quarter 2009 compared to $9.0 million in the second quarter 2008. Other income increased $1.4 million due to an increase in deferred compensation income which was partially offset by a lower earnings rate for bank-owned life insurance (BOLI). Other income in 2008 included a $12.6 million gain on the repurchase of debt and restructuring costs of $9.7 million. Noninterest expense decreased $11.8 million to $24.9 million in the second quarter 2009 from $36.6 million in 2008. Charges within noninterest expense that related to restructuring, repositioning, and efficiency initiatives decreased by $16.0 million from 2008 while FDIC premiums increased to $1.5 million due to the allocation of the special assessment.
Net interest income increased to $6.8 million in the second quarter 2009 from $5.5 million in 2008 as net interest margin was flat compared to second quarter 2008.

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 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 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.
Net costs recognized by FHN during the six months ended June 30, 2009 related to restructuring, repositioning, and efficiency activities were $5.0 million. Of this amount, $2.9 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 during the first half of 2009 resulted from the following actions:
• Severance and related employee costs of $3.4 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.

Net costs recognized by FHN during the six months ended June 30, 2008, related to restructuring, repositioning, and efficiency activities were $47.2 million. Of this amount, $25.5 million represented exit costs that were accounted for in accordance with SFAS No. 146. Significant expenses recognized during the first half of 2008 resulted from the following actions:
• Expense of $25.5 million associated with organizational and compensation changes due to right sizing operating segments, the divestiture of certain First Horizon Bank branches, the pending divestiture of certain mortgage banking operations and consolidating functional areas.

• Losses of approximately $1.4 million from the sales of certain First Horizon Bank branches.

• Transaction costs of $12.0 million from the contracted sales of mortgage servicing rights.

• Expense of $8.3 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 second 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 and six months ended June 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                   Six Months Ended
                                                          June 30                              June 30
(Dollars in thousands)                            2009              2008               2009              2008

Noninterest income:
Mortgage banking                                $     -          $  (9,344 )        $ (1,142 )        $ (12,011 )
Losses on divestitures                                -               (429 )               -             (1,424 )

Total noninterest income                              -             (9,773 )          (1,142 )          (13,435 )

Noninterest expense:
Employee compensation, incentives and
benefits                                            674              5,729             3,376             13,141
Occupancy                                          (573 )            3,338              (573 )            4,319
Equipment rentals, depreciation and
maintenance                                           -              4,181                 -              4,264
Legal and professional fees                          14              1,090                76              4,170
Communications and courier                           12                 36                12                 42
All other expense                                   157              1,809               990              7,871

Total noninterest expense                           284             16,183             3,881             33,807

Loss before income taxes                        $  (284 )        $ (25,956 )        $ (5,023 )        $ (47,242 )

Activity in the restructuring and repositioning liability for the three and six months ended June 30, 2009, and 2008 is presented in the following table:

                                   Three Months Ended                   Three Months Ended                    Six Months Ended                     Six Months Ended
(Dollars in thousands)                June 30, 2009                        June 30, 2008                       June 30, 2009                        June 30, 2008
                              Charged to                           Charged to                           Charged to                           Charged to
                               Expense            Liability          Expense          Liability          Expense           Liability          Expense           Liability
Beginning Balance            $          -        $    21,226       $         -       $    22,690       $          -       $    24,167       $          -       $    19,675
Severance and other
employee related costs                674                674             5,732             5,732              3,376             3,376             13,122            13,122
Facility consolidation
costs                                   -                  -             2,963             2,963                  -                 -              3,854             3,854
Other exit costs,
professional fees and
other                                (532 )             (532 )           1,652             1,652               (468 )            (468 )            8,484             8,484

Total Accrued                         142             21,368            10,347            33,037              2,908            27,075             25,460            45,135
Payments related to:
Severance and other
employee related costs                                 1,770                               4,238                                5,844                               10,893
Facility consolidation
costs                                                    652                               2,667                                2,212                                3,901
Other exit costs,
professional fees and
other                                                     41                               5,624                                  114                                9,210
Accrual reversals                                        522                               2,563                                  522                                3,186

Restructuring and
Repositioning Reserve
Balance                                          $    18,383                         $    17,945                          $    18,383                          $    17,945

Other Restructuring &
Repositioning (Income)
and Expense:
Mortgage banking expense
on servicing sales                      -                                9,344                                1,142                               12,011
Loss on divestitures                    -                                  429                                    -                                1,424
Impairment of premises
and equipment                         142                                4,104                                  973                                4,186
Impairment of intangible
assets                                  -                                1,732                                    -                                4,161

Total Other
Restructuring and
Repositioning Income and
Expense                               142                               15,609                                2,115                               21,782

Total Restructuring,
Repositioning Charges        $        284                          $    25,956                         $      5,023                         $     47,242

INCOME STATEMENT
Total consolidated revenue decreased 23 percent to $491.4 million from $637.9 million in the second quarter 2008 primarily from decreases in mortgage . . .