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

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.

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.

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.

• 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.

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
. . .