Attached files

file filename
EX-32.A - EX-32.A - FIRST HORIZON NATIONAL CORPg27473exv32wa.htm
EX-32.B - EX-32.B - FIRST HORIZON NATIONAL CORPg27473exv32wb.htm
EX-31.A - EX-31.A - FIRST HORIZON NATIONAL CORPg27473exv31wa.htm
EX-31.B - EX-31.B - FIRST HORIZON NATIONAL CORPg27473exv31wb.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
Or
     
o   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
First Horizon National Corporation
(Exact name of registrant as specified in its charter)
     
Tennessee   62-0803242
     
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
165 Madison Avenue
Memphis, Tennessee
  38103
     
(Address of principal executive offices)   (Zip Code)
(Registrant’s telephone number, including area code) (901) 523-4444
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o 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). þ Yes o 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 þ   Accelerated filer o   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
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 June 30, 2011
     
Common Stock, $.625 par value   263,698,516
 
 

 


 

FIRST HORIZON NATIONAL CORPORATION
INDEX
         
    2  
    2  
    69  
    128  
    128  
 
       
    129  
    129  
    129  
    130  
    130  
    130  
    130  
    131  
 
       
    133  
 
       
    134  
 EX-31.A
 EX-31.B
 EX-32.A
 EX-32.B

1


Table of Contents

PART I.
FINANCIAL INFORMATION
         
Item 1. Financial Statements
    2  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
    7  
    10  
    11  
    13  
    21  
    22  
    24  
    25  
    26  
    35  
    37  
    39  
    40  
    44  
    49  
    55  
    67  
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.

2


Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF CONDITION
                         
    First Horizon National Corporation  
    June 30     December 31  
(Dollars in thousands except restricted and share amounts)(Unaudited)   2011     2010     2010  
       
Assets:
                       
Cash and due from banks (Restricted — $1.8 million on June 30, 2011; $0 on June 30, 2010; and $3.1 million on December 31, 2010)
  $ 313,416     $ 364,857     $ 344,384  
Federal funds sold and securities purchased under agreements to resell
    598,000       602,910       424,390  
       
Total cash and cash equivalents (Restricted — $1.8 million on June 30, 2011; $0 on June 30, 2010; and $3.1 million on December 31, 2010)
    911,416       967,767       768,774  
       
Interest-bearing cash
    263,441       275,148       517,739  
Trading securities
    1,196,380       1,806,789       769,750  
Loans held for sale
    397,931       505,237       375,289  
Securities available for sale (Note 3)
    3,230,477       2,489,819       3,031,930  
Loans, net of unearned income (Restricted — $.7 billion on June 30, 2011; $.8 billion on June 30, 2010; and $.8 billion on December 31, 2010) (Note 4)
    16,061,646       17,154,050       16,782,572  
Less: Allowance for loan losses (Restricted — $33.0 million on June 30, 2011; $50.1 million on June 30, 2010; and $47.5 million on December 31, 2010) (Note 4)
    524,091       781,269       664,799  
       
Total net loans (Restricted — $.7 billion on June 30, 2011; $.8 billion on June 30, 2010; and $.7 billion on December 31, 2010)
    15,537,555       16,372,781       16,117,773  
       
Mortgage servicing rights (Note 5)
    186,958       201,746       207,319  
Goodwill (Note 6)
    135,683       162,180       162,180  
Other intangible assets, net (Note 6)
    28,384       35,645       32,881  
Capital markets receivables
    625,243       828,866       146,091  
Premises and equipment, net
    330,392       307,452       322,319  
Real estate acquired by foreclosure
    92,662       122,548       125,401  
Other assets (Restricted — $13.9 million on June 30, 2011; $24.7 million on June 30, 2010; and $19.7 million on December 31, 2010)
    2,117,544       2,178,248       2,121,506  
       
Total assets (Restricted — $.7 billion on June 30, 2011; $.8 billion on June 30, 2010; and $.7 billion on December 31, 2010)
  $ 25,054,066     $ 26,254,226     $ 24,698,952  
       
Liabilities and equity:
                       
Deposits:
                       
Savings
  $ 6,382,963     $ 5,385,698     $ 6,036,895  
Time deposits
    1,277,905       1,545,475       1,390,995  
Other interest-bearing deposits
    2,784,787       3,237,183       2,842,306  
Certificates of deposit $100,000 and more
    513,269       623,955       561,750  
       
Interest-bearing
    10,958,924       10,792,311       10,831,946  
Noninterest-bearing (Restricted — $.9 million on June 30, 2011; $.9 million on June 30, 2010; and $1.2 million on December 31, 2010)
    4,937,103       4,409,505       4,376,285  
       
Total deposits (Restricted — $.9 million on June 30, 2011; $.9 million on June 30, 2010; and $1.2 million on December 31, 2010)
    15,896,027       15,201,816       15,208,231  
       
Federal funds purchased and securities sold under agreements to repurchase
    2,005,999       2,278,890       2,114,908  
Trading liabilities
    498,915       481,477       361,920  
Other short-term borrowings and commercial paper
    187,902       487,449       180,735  
Term borrowings (Restricted — $.7 billion on June 30, 2011; $.8 billion on June 30, 2010; and $.8 billion on December 31, 2010)
    2,502,517       2,926,675       3,228,070  
Capital markets payables
    464,993       754,079       65,506  
Other liabilities (Restricted — $0 million on June 30, 2011; $.1 million on June 30, 2010; and $.1 million on December 31, 2010)
    816,331       836,607       861,577  
       
Total liabilities (Restricted — $.7 billion on June 30, 2011; $.8 billion on June 30, 2010; and $.8 billion on December 31, 2010)
    22,372,684       22,966,993       22,020,947  
       
Equity:
                       
First Horizon National Corporation Shareholders’ Equity:
                       
Preferred stock — no par value (shares authorized - 5,000,000; no shares issued on June 30, 2011 or December 31, 2010; shares issued — series CPP 866,540 on June 30, 2010) (Note 12)
          806,856        
Common stock — $.625 par value (shares authorized - 400,000,000; shares issued - 263,698,516 on June 30, 2011; 236,839,568 on June 30, 2010; and 263,366,429 on December 31, 2010) (a)
    164,812       143,021       164,604  
Capital surplus
    1,638,423       1,296,484       1,630,210  
Capital surplus common stock warrant — CPP (Note 12)
          83,860       83,860  
Undivided profits
    691,490       767,769       631,712  
Accumulated other comprehensive loss, net
    (108,508 )     (105,922 )     (127,546 )
       
Total First Horizon National Corporation Shareholders’ Equity
    2,386,217       2,992,068       2,382,840  
       
Noncontrolling interest (Note 12)
    295,165       295,165       295,165  
       
Total equity
    2,681,382       3,287,233       2,678,005  
       
Total liabilities and equity
  $ 25,054,066     $ 26,254,226     $ 24,698,952  
       
See accompanying notes to consolidated condensed financial statements.
 
 
(a)   Outstanding shares have been restated to reflect stock dividends distributed through January 1, 2011.

3


Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                                 
    First Horizon National Corporation  
    Three Months Ended     Six Months Ended  
    June 30     June 30  
(Dollars in thousands except per share data)(Unaudited)   2011     2010     2011     2010  
 
Interest income:
                               
Interest and fees on loans
  $ 160,928     $ 173,472     $ 324,431     $ 346,815  
Interest on investment securities
    31,250       29,092       60,442       60,247  
Interest on loans held for sale
    3,267       5,565       6,924       10,533  
Interest on trading securities
    11,224       11,450       22,068       21,164  
Interest on other earning assets
    88       786       497       1,102  
 
Total interest income
    206,757       220,365       414,362       439,861  
 
Interest expense:
                               
Interest on deposits:
                               
Savings
    7,019       8,095       14,269       15,513  
Time deposits
    7,783       9,894       15,815       20,488  
Other interest-bearing deposits
    1,638       2,654       3,190       5,172  
Certificates of deposit $100,000 and more
    2,613       3,414       5,322       6,788  
Interest on trading liabilities
    4,102       5,043       7,893       10,458  
Interest on short-term borrowings
    1,468       1,747       3,009       3,669  
Interest on term borrowings
    9,274       7,454       19,249       15,314  
 
Total interest expense
    33,897       38,301       68,747       77,402  
 
Net interest income
    172,860       182,064       345,615       362,459  
Provision for loan losses
    1,000       70,000       2,000       175,000  
 
Net interest income after provision for loan losses
    171,860       112,064       343,615       187,459  
 
Noninterest income:
                               
Capital markets
    77,921       100,876       167,978       215,447  
Mortgage banking
    32,101       63,301       59,827       98,185  
Deposit transactions and cash management
    35,060       39,018       67,697       74,785  
Trust services and investment management
    6,684       6,850       13,044       13,173  
Brokerage management fees and commissions
    6,139       6,006       13,028       12,345  
Insurance commissions
    835       1,358       1,591       2,511  
Debt securities gains/(losses), net
    1             772        
Equity securities gains/(losses), net
    -       75       27       (1,831 )
All other income and commissions (Note 7)
    30,031       26,453       62,350       72,571  
 
Total noninterest income
    188,772       243,937       386,314       487,186  
 
Adjusted gross income after provision for loan losses
    360,632       356,001       729,929       674,645  
 
Noninterest expense:
                               
Employee compensation, incentives, and benefits
    151,880       161,381       309,059       338,374  
Repurchase and foreclosure provision
    24,563       56,188       61,767       96,894  
Operations services
    13,973       15,310       27,901       29,907  
Occupancy
    13,110       15,367       28,020       29,829  
Legal and professional fees
    20,624       18,083       39,182       32,010  
FDIC premium expense
    8,839       9,196       16,894       17,689  
Computer software
    8,380       7,337       16,470       14,419  
Contract employment
    8,177       7,274       15,098       13,448  
Equipment rentals, depreciation, and maintenance
    8,503       7,572       16,419       13,534  
Foreclosed real estate
    5,803       5,137       12,592       15,607  
Communications and courier
    5,084       5,835       10,331       12,024  
Miscellaneous loan costs
    859       4,546       2,351       8,658  
Amortization of intangible assets
    1,032       1,078       2,064       2,156  
All other expense (Note 7)
    74,999       23,007       102,825       50,741  
 
Total noninterest expense
    345,826       337,311       660,973       675,290  
 
Income/(loss) before income taxes
    14,806       18,690       68,956       (645 )
Provision/(benefit) for income taxes
    (4,242)       (1,659 )     7,866       (18,177 )
 
Income from continuing operations
    19,048       20,349       61,090       17,532  
Income/(loss) from discontinued operations, net of tax
    3,788       129       4,748       (6,947 )
 
Net income
  $ 22,836     $ 20,478     $ 65,838     $ 10,585  
 
Net income attributable to noncontrolling interest
    2,844       2,844       5,688       5,688  
 
Net income attributable to controlling interest
  $ 19,992     $ 17,634     $ 60,150     $ 4,897  
 
Preferred stock dividends
    -       14,938             29,856  
 
Net income/(loss) available to common shareholders
  $ 19,992     $ 2,696     $ 60,150     $ (24,959 )
 
Basic earnings/(loss) per share from continuing operations (Note 8)
  $ 0.06     $ 0.01     $ 0.21     $ (0.08 )
 
Diluted earnings/(loss) per share from continuing operations (Note 8)
  $ 0.06     $ 0.01     $ 0.21     $ (0.08 )
 
Basic earnings/(loss) per share available to common shareholders (Note 8)
  $ 0.08     $ 0.01     $ 0.23     $ (0.11 )
 
Diluted earnings/(loss) per share available to common shareholders (Note 8)
  $ 0.08     $ 0.01     $ 0.23     $ (0.11 )
 
Weighted average common shares (Note 8)
    261,289       234,556       261,233       234,513  
 
Diluted average common shares (Note 8)
    262,756       240,968       263,690       234,513  
 
See accompanying notes to consolidated condensed financial statements.
Certain previously reported amounts have been reclassified to agree with current presentation.

4


Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
                                                 
    First Horizon National Corporation  
    2011     2010  
(Dollars in thousands except per share data)(Unaudited)   Controlling
Interest
    Noncontrolling
Interest
    Total     Controlling
Interest
    Noncontrolling
Interest
    Total  
 
Balance, January 1
  $ 2,382,840     $ 295,165     $ 2,678,005     $ 3,007,303     $ 295,165     $ 3,302,468  
Adjustment to reflect adoption of amendments to ASC 810
                      (10,562 )           (10,562 )
Net income
    60,150       5,688       65,838       4,897       5,688       10,585  
Other comprehensive income:
                                               
Unrealized fair value adjustments, net of tax:
                                               
Securities available for sale
    12,702             12,702       3,264             3,264  
Recognized pension and other employee benefit plans net periodic benefit costs
    6,336             6,336       5,022             5,022  
 
Comprehensive income
    79,188       5,688       84,876       13,183       5,688       18,871  
 
Preferred stock — (CPP) accretion
                      8,172             8,172  
Preferred stock — (CPP) dividends
                      (29,835 )           (29,835 )
Common stock repurchased
    (887 )           (887 )     (481 )           (481 )
Cash dividends declared ($.01/share)
    (5,151 )           (5,151 )                  
Common stock issued related to stock-based compensation arrangements
                      179             179  
Stock-based compensation expense
    5,147             5,147       4,116             4,116  
Dividends paid to noncontrolling interest of subsidiary preferred stock
          (5,688 )     (5,688 )           (5,688 )     (5,688 )
Repurchase of common stock warrant — CPP
    (79,700 )           (79,700 )                  
Other changes in equity
    4,780             4,780       (7 )           (7 )
 
Balance, June 30
  $ 2,386,217     $ 295,165     $ 2,681,382     $ 2,992,068     $ 295,165     $ 3,287,233  
 
See accompanying notes to consolidated condensed financial statements.

5


Table of Contents

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                 
    First Horizon National Corporation  
    Six Months Ended June 30  
(Dollars in thousands)(Unaudited)   2011     2010  
 
Operating Activities
               
Net income
  $ 65,838     $ 10,585  
Adjustments to reconcile net income to net cash used by operating activities:
               
Provision for loan losses
    2,000       175,000  
Provision for deferred income tax
    27,290       134,163  
Depreciation and amortization of premises and equipment
    17,166       15,054  
Amortization of intangible assets
    2,368       2,762  
Net other amortization and accretion
    25,289       21,232  
Increase in derivatives, net
    (394 )     (21,757 )
Market value adjustment on mortgage servicing rights
    7,359       57,356  
Repurchase and foreclosure provision
    61,767       96,894  
Fair value adjustment to foreclosed real estate
    9,651       9,376  
Goodwill impairment
    10,100       3,348  
Loss accruals from litigation and regulatory matters
    40,585       1,270  
Gains on divestitures (a)
    (753 )      
Stock-based compensation expense
    5,147       4,116  
Excess tax provision from stock-based compensation arrangements
          17  
Equity securities (gains)/losses, net
    (27 )     1,831  
Debt securities gains, net
    (772 )      
Gains on extinguishment of debt
    (5,761 )     (17,060 )
Net losses on disposal of fixed assets
    152       1,107  
Net (increase)/decrease in:
               
Trading securities
    (430,692 )     (1,116,647 )
Loans held for sale
    (22,642 )     (52,736 )
Capital markets receivables
    (479,152 )     (494,462 )
Interest receivable
    3,305       2,583  
Mortgage servicing rights — bulk sales
          24,558  
Other assets
    (31,880 )     60,442  
Net increase/(decrease) in:
               
Capital markets payables
    399,487       461,104  
Interest payable
    (4,712 )     (3,351 )
Other liabilities
    (135,160 )     (82,037 )
Trading liabilities
    136,995       188,090  
 
Total adjustments
    (363,284 )     (527,747 )
 
Net cash used by operating activities
    (297,446 )     (517,162 )
 
Investing Activities
               
Available for sale securities:
               
Sales
    458,414       56,240  
Maturities
    410,961       554,320  
Purchases
    (1,049,026 )     (401,747 )
Premises and equipment:
               
Purchases
    (25,543 )     (9,789 )
Net (increase)/decrease in:
               
Interests retained from securitizations classified as trading securities
    4,062       4,983  
Loans
    596,708       853,278  
Interest-bearing cash
    254,298       264,152  
Cash receipts related to divestitures
    16,368        
 
Net cash provided by investing activities
    666,242       1,321,437  
 
Financing Activities
               
Common stock:
               
Exercise of stock options
          93  
Cash dividends paid
    (2,712 )      
Repurchase of shares
    (887 )     (481 )
Repurchase of common stock warrant — CPP
    (79,700 )      
Excess tax provision from stock-based compensation arrangements
          (17 )
Cash dividends paid — preferred stock — CPP
          (21,664 )
Cash dividends paid — preferred stock — noncontrolling interest
    (5,556 )     (5,688 )
Term borrowings:
               
Payments/maturities
    (623,353 )     (104,335 )
Net cash paid for extinguishment of debt
    (100,000 )     (87,840 )
Net increase/(decrease) in:
               
Deposits
    687,796       334,601  
Short-term borrowings
    (101,742 )     (869,772 )
 
Net cash used by financing activities
    (226,154 )     (755,103 )
 
Net increase in cash and cash equivalents
    142,642       49,172  
 
Cash and cash equivalents at beginning of period
    768,774       918,595  
 
Cash and cash equivalents at end of period
  $ 911,416     $ 967,767  
 
Supplemental Disclosures
               
Total interest paid
  $ 73,144     $ 80,405  
Total income taxes paid
    13,527       716  
Transfer from loans to other real estate owned
    33,118       100,551  
 
See accompanying notes to consolidated condensed financial statements.
Certain previously reported amounts have been reclassified to agree with current presentation.
(a) Net of tax, gains on divestitures are $4.2 million for 2011.

6


Table of Contents

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. These adjustments are of a normal recurring nature unless otherwise disclosed in this filing. The operating results for the interim 2011 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 2010 Annual Report to shareholders.
Accounting Changes. Effective January 1, 2011, FHN adopted the provisions of FASB Accounting Standards Update 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”), for certain disclosures about activity that occurs during a reporting period. Effective December 31, 2010, FHN adopted the provisions of ASU 2010-20 related to disclosures as of the end of a reporting period, and the amendments to the rollforward of the allowance for credit losses. Additionally, in January 2011, FASB Accounting Standards Update 2011-01, “Deferral of the Effective Date of Disclosures About Troubled Debt Restructurings in Update No. 2010-20”, was issued which temporarily delays the disclosure requirements related to modifications to be effective concurrent with the effective date of Accounting Standards Update 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”. ASU 2010-20 provides enhanced disclosures related to the credit quality of financing receivables and the allowance for credit losses, and provides that new and existing disclosures should be disaggregated based on how an entity develops its allowance for credit losses and how it manages credit exposures. Under the provisions of ASU 2010-20, additional disclosures required for financing receivables include information regarding the aging of past due receivables, credit quality indicators, and modifications of financing receivables. Comparative disclosures are required only for periods ending subsequent to initial adoption. Upon adoption of the provisions of ASU 2010-20 for certain disclosures about activity that occurs during a reporting period on January 1, 2011, and related to disclosures as of the end of a reporting period, and the amendments to the rollforward of the allowance for credit losses, on December 31, 2010, FHN revised its disclosures accordingly.
Effective January 1, 2011, FHN adopted the provisions of FASB Accounting Standards Update 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), related to the requirement to provide the activity of purchases, sales, issuances, and settlements related to recurring Level 3 measurements on a gross basis in the Level 3 reconciliation. Effective January 1, 2010, FHN adopted all other provisions of ASU 2010-06. ASU 2010-06 updates FASB Accounting Standards Codification 820, “Fair Value Measurements and Disclosures” (“ASC 820”) to require disclosure of significant transfers into and out of Level 1 and Level 2 of the fair value hierarchy, as well as disclosure of an entity’s policy for determining when transfers between all levels of the hierarchy are recognized. The updated provisions of ASC 820 also require that fair value measurement disclosures be provided by each “class” of assets and liabilities, and that disclosures providing a description of the valuation techniques and inputs used to measure fair value be included for both recurring and nonrecurring fair value measurements classified as either Level 2 or Level 3. Under ASC 820, as amended, separate disclosure is required in the Level 3 reconciliation of total gains and losses recognized in other comprehensive income. Comparative disclosures are required only for periods ending subsequent to initial adoption. Upon adoption of the amendments to ASC 820 on January 1, 2011 and January 1, 2010, respectively, FHN revised its disclosures accordingly.
Accounting Changes Issued but Not Currently Effective. In June 2011, the FASB issued Accounting Standards Update 2011-05, “Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 requires that net income and other comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 also provides that regardless of the method used to present comprehensive income, presentation is required on the face of the financial statements of reclassification adjustments for items that are reclassified from other comprehensive income to net income. ASU 2011-05 does not change the current option for entities to present components of other comprehensive income gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which other comprehensive income is presented or disclosed in the notes to the financial statements. The provisions of ASU 2011-05 are effective for periods beginning after December 15, 2011, with retrospective application to all periods presented in the financial statements required. Early adoption of the provisions in ASU 2011-05 is permitted, and no transition disclosures are required upon adoption. FHN is currently assessing the effects of adopting the provisions of ASU 2011-05.

7


Table of Contents

Note 1 — Financial Information (continued)
In May 2011, the FASB issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). ASU 2011-04 provides that the highest-and-best use and valuation-premise concepts included in ASC 820 are only relevant when measuring the fair value of nonfinancial assets, thereby prohibiting the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. However, under ASU 2011-04 an exception is permitted which allows an entity to measure the fair value of financial instruments that are managed on the basis of the entity’s net exposure to a particular market risk, or to the credit risk of a particular counterparty, on a net basis when certain criteria are met. Such criteria include that there is evidence that the entity manages its financial instruments in that way, the entity applies such accounting policy election consistently from period to period, and the entity is required or has elected to measure those financial assets and financial liabilities at fair value in the statement of financial position at the end of each reporting period. Additionally, to qualify for the exception to the valuation premise, the market risks that are being offset must be substantially the same. ASU 2011-04 also extends ASC 820’s prohibition on the use of blockage factors in fair value measurements to all three levels of the fair value hierarchy except for fair value measurements of Level 2 and 3 measurements when market participants would incorporate the premium or discount into the measurement at the level of the unit of account specified in other guidance. ASU 2011-04 also provides that an entity should measure the fair value of its own equity instruments from the perspective of a market participant that holds the instruments as assets. Under ASC 820, as amended, expanded disclosures are required including disclosure of quantitative information about significant unobservable inputs used in Level 3 fair value measurements, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. Additional disclosures required under ASU 2011-04 include disclosure of fair value by level for each class of assets and liabilities not recorded at fair value but for which fair value is disclosed, and disclosure of any transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for those transfers. The provisions of ASU 2011-04 are effective for periods beginning after December 15, 2011, with disclosure of the change, if any, in valuation technique and related inputs resulting from application of the amendments to ASC 820 required upon adoption, along with quantification of the total effect of the change, if practicable. FHN is currently assessing the effects of adopting the provisions of ASU 2011-04.
In April 2011, the FASB issued Accounting Standards Update 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”). For entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity, ASU 2011-03 removes from the assessment of effective control under ASC 860, “Transfers and Servicing”, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, as well as the collateral maintenance implementation guidance related to that criterion. Under ASC 860-10, as amended, the remaining criteria related to whether effective control over transferred financial assets has been maintained would still need to be evaluated, including whether the financial assets to be repurchased or redeemed are the same or substantially the same as those transferred, the agreement is to repurchase or redeem them before maturity at a fixed or determinable price, and whether the agreement is entered into contemporaneously with, or in contemplation of, the transfer. The provisions of ASU 2011-03 are effective for periods beginning after December 15, 2011, with prospective application to transactions or modifications of existing transactions that occur on or after the effective date. Since FHN accounts for all of its repurchase agreements as secured borrowings, adopting the provisions of ASU 2011-03 will not have an effect on FHN’s statement of condition, results of operations, or cash flows.
In April 2011, the FASB issued Accounting Standards Update 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring” (“ASU 2011-02”). ASU 2011-02 provides that a situation in which a market rate is not readily available is an indicator of a troubled debt restructuring, but not a determinative factor, and that an assessment should consider all modified terms of the restructuring when making a final determination regarding a troubled debt restructuring designation. ASU 2011-02 also provides that a modification that results in a temporary or permanent increase to the contractual interest rate cannot be presumed to be a rate that is at or above market. ASU 2011-02 explicitly precludes creditors from using the borrower’s effective rate test in FASB Accounting Standards Codification 470-60, “Debt-Troubled Debt Restructuring by Debtors” (“ASC 470-60”) in its evaluation of whether a modification was executed at a market rate. Under the provisions of ASU 2011-02, a borrower that is not currently in default may still be considered to be experiencing financial difficulty when default is probable in the foreseeable future. ASU 2011-02 provides factors that an entity should consider when determining whether a delay in amount of payments is significant, as insignificant delays in cash flows would not be considered a concession to a borrower under its provisions. The provisions of ASU 2011-02 are effective for periods beginning after June 15, 2011, with retrospective application to the beginning of the annual period of adoption for identification and disclosure purposes, and prospective application for impairment purposes.

8


Table of Contents

Note 1 — Financial Information (continued)
Disclosure of the total amount of loans and the associated reserves related to those loans that are considered impaired under ASC 310, “Receivables”, as a result of the clarification in guidance is required upon initial application. FHN is currently assessing the effects of adopting the provisions of ASU 2011-02.

9


Table of Contents

Note 2 — Acquisitions and Divestitures
In first quarter 2011, FHN contracted to sell First Horizon Insurance, Inc. (“FHI”), the former subsidiary of First Tennessee Bank, a property and casualty insurance agency that serves customers in over 40 states and Highland Capital Management Corporation (“Highland”), the former subsidiary of First Horizon National Corporation which provides trust and asset management services. Both divestitures closed in second quarter 2011. In connection with the agreement to sell FHI, FHN incurred a pre-tax goodwill impairment of $10.1 million which was more than offset by $11.1 million of tax benefits recognized in first quarter. Upon closing of the FHI and Highland sales in second quarter 2011, FHN recognized $4.2 million after-tax gains on the sales. The financial results of these businesses, the goodwill impairment, the gains on sales, and associated tax effects are reflected in the Income/(loss) from discontinued operations, net of tax line on the Consolidated Condensed Statements of Income for all periods presented.
In first quarter 2010, FHN exited its institutional research business, FTN Equity Capital Markets (“FTN ECM”), and incurred a pre-tax goodwill impairment of $3.3 million (approximately $2.0 million after taxes). FHN exited this business through an immediate cessation of operations on February 1, 2010. Additional charges, primarily representing severance and contract terminations, of $6.1 million are included within the Income/(loss) from discontinued operations, net of tax line on the Consolidated Condensed Statements of Income in first quarter 2010 and relate to the effects of closing FTN ECM. These charges are included with the amounts described in Note 17 — Restructuring, Repositioning, and Efficiency. FHN had initially reached an agreement for the sale of this business which resulted in a pre-tax goodwill impairment of $14.3 million (approximately $9 million after taxes) in 2009; however, the contracted sale failed to close and was terminated in early 2010. The financial results of this business, including the goodwill impairments, are reflected in the Income/(loss) from discontinued operations, net of tax line on the Consolidated Condensed Statements of Income for all periods presented.
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.

10


Table of Contents

Note 3 — Investment Securities
The following tables summarize FHN’s available for sale (“AFS”) securities on June 30, 2011 and 2010:
                                 
    On June 30, 2011  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
(Dollars in thousands)   Cost     Gains     Losses     Value  
 
Securities available for sale:
                               
U.S. Treasuries
  $ 46,073     $ 177     $     $ 46,250  
Government agency issued mortgage-backed securities (“MBS”)
    1,445,021       56,746             1,501,767  
Government agency issued collateralized mortgage obligations (“CMO”)
    1,386,962       36,932             1,423,894  
Other U.S. government agencies
    18,791       1,136             19,927  
States and municipalities
    19,365                   19,365  
Equity (a)
    218,715       19             218,734  
Other
    511       29             540  
 
Total securities available for sale (b)
  $ 3,135,438     $ 95,039     $     $ 3,230,477  
 
(a)   Includes restricted investments in FHLB-Cincinnati stock of $125.5 million and FRB stock of $66.1 million. The remainder is money market, venture capital, and cost method investments.
 
(b)   Includes $2.9 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes. As of June 30, 2011, FHN had pledged $1.1 billion of the $2.9 billion pledged available for sale securities as collateral for securities sold under repurchase agreements.
                                 
    On June 30, 2010  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
(Dollars in thousands)   Cost     Gains     Losses     Value  
 
Securities available for sale:
                               
U.S. Treasuries
  $ 68,315     $ 253     $     $ 68,568  
Government agency issued MBS
    852,915       62,686             915,601  
Government agency issued CMO
    1,054,579       41,927             1,096,506  
Other U.S. government agencies
    101,355       6,268             107,623  
States and municipalities
    41,875                   41,875  
Equity (a)
    258,667       437       (4 )     259,100  
Other
    511       35             546  
 
Total securities available for sale (b)
  $ 2,378,217     $ 111,606     $ (4 )   $ 2,489,819  
 
(a)   Includes restricted investments in FHLB-Cincinnati stock of $125.5 million and FRB stock of $66.2 million. The remainder is money market, venture capital, and cost method investments. Additionally, $31.2 million is restricted pursuant to reinsurance contract agreements.
 
(b)   Includes $2.1 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes. As of June 30, 2010, FHN had pledged $1.3 billion of the $2.1 billion pledged available for sale securities as collateral for securities sold under repurchase agreements.
National banks chartered by the federal government are, by law, members of the Federal Reserve System. Each member bank is required to own stock in its regional Federal Reserve Bank (“FRB”). Given this requirement, Federal Reserve stock may not be sold, traded, or pledged as collateral for loans. Membership in the Federal Home Loan Bank (“FHLB”) network requires ownership of capital stock. Member banks are entitled to borrow funds from the FHLB and are required to pledge mortgage loans as collateral. Investments in the FHLB are non-transferable and, generally, membership is maintained primarily to provide a source of liquidity as needed.

11


Table of Contents

Note 3 — Investment Securities (continued)
The amortized cost and fair value by contractual maturity for the available for sale securities portfolio on June 30, 2011 are provided below:
                 
    Available for Sale  
    Amortized     Fair  
(Dollars in thousands)   Cost     Value  
 
Within 1 year
  $ 46,073     $ 46,250  
After 1 year; within 5 years
    18,791       19,927  
After 5 years; within 10 years
    2,795       2,795  
After 10 years
    16,570       16,570  
 
Subtotal
    84,229       85,542  
 
Government agency issued MBS and CMO
    2,831,983       2,925,661  
Equity and other securities
    219,226       219,274  
 
Total
  $ 3,135,438     $ 3,230,477  
 
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 three and six months ended June 30, 2011 and 2010:
                                 
    Three Months Ended   Six Months Ended
(Dollars in thousands)   2011   2010   2011   2010
 
Gross gains on sales of securities
  $ 1     $ 76     $ 9,422     $ 196  
Gross (losses) on sales of securities
    -       (1 )     (8,623 )     (1 )
 
Net gain/(loss) on sales of securities (a)
  $ 1     $ 75     $ 799     $ 195  
Venture capital investments (b)
                      (1,838 )
Net other than temporary impairment (“OTTI”) recorded (c)
                      (188 )
 
Total securities gain/(loss)
  $ 1     $ 75     $ 799     $ (1,831 )
 
(a)   Proceeds related to these sales were $35.4 million for the three months ended June 30, 2010, and were $458.3 million and $35.7 million for the six months ended June 30, 2011 and 2010, respectively. Proceeds from sales during second quarter 2011 were immaterial.
 
(b)   Generally includes write-offs and/or unrealized fair value adjustments related to venture capital investments.
 
(c)   OTTI recorded in 2010 is related to equity securities.
There were no unrealized losses within the available for sale portfolio on June 30, 2011. The following table provides information on investments within the available for sale portfolio that have unrealized losses on June 30, 2010:
                                                 
    On June 30, 2010  
    Less than 12 months     12 months or longer     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
(Dollars in thousands)   Value     Losses     Value     Losses     Value     Losses  
 
Equity
  $ 40     $ (4 )   $     $     $ 40     $ (4 )
 
Total temporarily impaired securities
  $ 40     $ (4 )   $     $     $ 40     $ (4 )
 
FHN has reviewed investment securities that are in unrealized loss positions in accordance with its accounting policy for OTTI 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. The decline in value is primarily attributable to interest rates and not 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. There were no other-than-temporary impairments of debt securities for the three months ended June 30, 2011 and 2010, or for the six months ended June 30, 2011. FHN recognized a $.2 million other-than-temporary impairment of an equity investment for the six months ended June 30, 2010.

12


Table of Contents

Note 4- Loans
The following table provides the balance of loans by portfolio on June 30, 2011, June 30, 2010, and December 31, 2010:
                         
    June 30   December 31
(Dollars in thousands)   2011   2010   2010
 
Commercial:
                       
Commercial, financial, and industrial
  $ 7,180,261     $ 7,003,798     $ 7,338,155  
Commercial real estate
                       
Income CRE
    1,310,779       1,609,835       1,406,646  
Residential CRE
    182,857       396,934       263,878  
Retail:
                       
Consumer real estate
    5,383,223       5,935,536       5,617,619  
Permanent mortgage
    1,015,122       1,018,887       1,086,859  
Credit card & other
    295,373       355,230       311,924  
Restricted real estate loans (a)
    694,031       833,830       757,491  
         
Loans, net of unearned income
  $ 16,061,646     $ 17,154,050     $ 16,782,572  
Allowance for loan losses
    524,091       781,269       664,799  
         
Total net loans
  $ 15,537,555     $ 16,372,781     $ 16,117,773  
         
 
(a)   Balances as of June 30, 2011 and 2010, and December 30, 2010, include $649.2 million, $770.3 million, and $701.8 million of consumer real estate loans and $44.9 million, $63.5 million, and $55.7 million of permanent mortgage loans, respectively.
FHN has a concentration of loans secured by residential real estate (45 percent of total loans), the majority of which is in the consumer real estate portfolio (34 percent of total loans). Additionally, on June 30, 2011, FHN had bank-related and trust preferred loans (“TRUPs”) (i.e., loans to bank and insurance-related businesses) totaling $.7 billion (10 percent of the C&I portfolio, or 4 percent of total loans). Due to the higher credit losses encountered throughout the financial services industry, limited availability of market liquidity, and the impact from economic conditions on these borrowers these loans have experienced stress throughout the economic downturn.
Components of the Loan Portfolio. For purposes of the disclosures required pursuant to the adoption of amendments to ASC 310, the loan portfolio was disaggregated into segments and then further disaggregated into classes for certain disclosures. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. A class is generally determined based on the initial measurement attribute (i.e., amortized cost or purchased credit impaired), risk characteristics of the loan, and an entity’s method for monitoring and assessing credit risk. Commercial loan portfolio segments include commercial, financial, and industrial (“C&I”) and commercial real estate (“CRE”). Commercial classes within C&I include general C&I, loans to mortgage companies, and the TRUPs portfolio. Loans to mortgage companies includes commercial lines of credit to qualified mortgage companies exclusively for the temporary warehousing of eligible mortgage loans prior to the borrower’s sale of those mortgage loans to third party investors. Commercial classes within commercial real estate include income CRE and residential CRE. Retail loan portfolio segments include consumer real estate, permanent mortgage, and the combined credit card and other portfolios. Retail classes include HELOC and real estate (“R/E”) installment loans within the consumer real estate segment, permanent mortgage (which is both a segment and a class), and credit card and other. Restricted real estate loans include HELOCs that were previously securitized on balance sheet as well as HELOC and some permanent mortgages that were consolidated on January 1, 2010 in conjunction with the adoption of amendments to ASC 810. Due to the winding down nature and decreasing size of the OTC residential construction portfolio, in most cases the remaining balances and activity of this portfolio has been combined with and included within the other retail class.
Allowance for Loan Losses. The allowance for loan losses (“ALLL”) includes the following components: reserves for commercial loans evaluated based on pools of credit graded loans and reserves for pools of smaller-balance homogeneous retail loans, both determined in accordance with the ASC Topic related 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 and are subject to adjustment by management to reflect current events, trends, and conditions (including economic considerations and trends). The slow economic recovery, weak housing market, and elevated unemployment levels are examples of additional factors considered by management in determining the allowance for loan losses. Also included are reserves, determined in accordance with the Receivables Topic (ASC 310-10-45), for loans determined by management to be individually impaired.
Key components of the estimation process are as follows: (1) commercial loans determined by management to be individually impaired loans are evaluated individually and specific reserves are determined based on the difference between the outstanding loan amount and the estimated net realizable value of the collateral (if collateral dependent) or the present value of expected future cash flows; (2) individual

13


Table of Contents

Note 4 — Loans (continued)
commercial loans not considered to be individually impaired are segmented based on similar credit risk characteristics and evaluated on a pool basis; (3) reserve rates for the commercial segment are calculated based on historical net charge-offs and are subject to adjustment by management to reflect current events, trends, and conditions (including economic considerations and trends); (4) management’s estimate of probable incurred losses reflects the reserve rate applied against the balance of loans in the commercial segment of the loan portfolio; (5) retail loans are segmented based on loan type; (6) reserve amounts for each retail portfolio segment are calculated using analytical models based on net loss experience and are subject to adjustment by management to reflect current events, trends, and conditions (including economic considerations and trends); and (7) the reserve amount for each retail portfolio segment reflects management’s estimate of probable incurred losses in the retail segment of the loan portfolio.
Commercial. For commercial loans, reserves are established using historical net loss factors by grade level, loan product, and business segment. An assessment of the quality of individual commercial loans is made utilizing credit grades assigned internally based on a dual grading system which estimates both the probability of default (“PD”) and loss severity in the event of default. PD grades range from 1-16 while estimated loss severities, or loss given default (“LGD”), grades range from 1-12. This credit grading system is intended to identify and measure the credit quality of the loan portfolio by analyzing the migration of loans between grading categories. It is also integral to the estimation methodology utilized in determining the allowance for loan losses since an allowance is established for pools of commercial loans based on the credit grade assigned. The appropriate relationship team performs the process of categorizing commercial loans into the appropriate credit grades, initially as a component of the approval of the loan, and subsequently throughout the life of the loan as part of our servicing regimen. The proper loan grade for larger exposures is confirmed by a senior credit officer in the approval process. To determine the most appropriate credit grade for each loan, the credit risk grading system employs scorecards for particular categories of loans that consist of a number of objective and subjective measures that are weighted in a manner that produces a rank ordering of risk within pass-graded credits. Loan grades are frequently reviewed by Credit Risk Assurance to determine if the process continues to result in accurate loan grading across the portfolio.
FHN may utilize availability of guarantors/sponsors to support lending decisions during the credit underwriting process and when determining the assignment of internal loan grades. Where guarantor contributions are determined to be a source of repayment, an assessment of the guarantee is made. This guarantee assessment would include but not be limited to factors such as type and feature of the guarantee, consideration for the guarantee, key provisions of the guarantee agreement, and ability of the guarantor to be a viable secondary source of repayment.
Reliance on the guarantee as a viable secondary source of repayment is a function of an analysis proving capability to pay factoring in, among other things, liquidity, and direct/indirect debt cash flows. Therefore, a proper evaluation of each guarantor is critical. FHN establishes a guarantor’s ability (financial wherewithal) to support a credit based on an analysis of recent information on the guarantor’s financial condition. This would generally include income and asset information from sources such as recent tax returns, credit reports, and personal financial statements. In analyzing this information FHN seeks to assess a combination of liquidity, global cash flow, cash burn rate, and contingent liabilities to demonstrate the guarantor’s capacity to sustain support for the credit and fulfill the obligation. FHN also considers the volume and amount of guarantees provided for all global indebtedness and the likelihood of realization. Guarantor financial information is periodically updated throughout the life of the loan. FHN presumes a guarantor’s willingness to perform until financial support becomes necessary or if there is any current or prior indication or future expectation that the guarantor may not willingly and voluntarily perform under the terms of the guarantee.
In FHN’s risk grading approach, it is deemed that financial support becomes necessary generally at a point when the loan would otherwise be graded substandard, reflecting a well-defined weakness. At that point, provided willingness is appropriately demonstrated, a strong, legally enforceable guarantee can mitigate the risk of default or loss, justify a less severe rating, and consequently reduce the level of allowance or charge-off that might otherwise be deemed appropriate. FHN establishes guarantor willingness to support the credit through documented evidence of previous and ongoing support of the credit. Previous performance under a guarantor’s obligation to pay is not considered if the performance was involuntary.
Retail. The ALLL for smaller-balance homogenous retail loans is determined based on pools of similar loan types that have similar credit risk characteristics. FHN manages retail loan credit risk on a class basis. Reserves by portfolio are determined using segmented roll-rate models that incorporate various factors including historical delinquency trends, experienced loss frequencies, and experienced loss severities. Generally, reserves for retail loans reflect inherent losses in the portfolio that are expected to be recognized over the following twelve months.

14


Table of Contents

Note 4 — Loans (continued)
Individually Impaired. Under ASC 310-10, individually impaired loans are measured based on the present value of expected future payments discounted at the loan’s effective interest rate (“the DCF method”), observable market prices, or for loans that are solely dependent on the collateral for repayment, the estimated fair value of the collateral less estimated costs to sell (net realizable value). For loans measured using the DCF method or by observable market prices, if the recorded investment in the impaired loan exceeds this amount, a specific allowance is established as a component of the allowance for loan and lease losses; however, for impaired collateral-dependent loans, FHN will charge off the full difference between the book value and the best estimate of net realizable value.
The following table provides a rollforward of the allowance for loan losses by portfolio segment for the first six months of 2011 and 2010:
                                                 
                                             
            Commercial Real     Consumer     Permanent     Credit Card and        
(Dollars in thousands)   C&I     Estate     Real Estate     Mortgage     Other (a)     Total  
 
Balance as of January 1, 2010
  $ 276,648     $ 205,724     $ 215,087     $ 123,897     $ 75,558     $ 896,914  
Adjustment due to amendments of ASC 810
                16,106       8,472             24,578  
Charge-offs
    (54,941 )     (89,307 )     (114,399 )     (46,903 )     (34,393 )     (339,943 )
Recoveries
    7,213       5,793       7,990       776       2,948       24,720  
Provision
    48,115       76,137       80,968       (8,929 )     (21,291 )     175,000  
 
Balance as of June 30, 2010 (b) (c)
    277,035       198,347       205,752       77,313       22,822       781,269  
 
Allowance — individually evaluated for impairment
    52,091       28,158       11,873       8,922       1,163       102,207  
Allowance — collectively evaluated for impairment
    224,944       170,189       193,879       68,391       21,659       679,062  
Loans, net of unearned as of June 30, 2010:
                                               
Individually evaluated for impairment
    171,947       294,836       41,337       64,384       634       573,138  
Collectively evaluated for impairment
    6,831,851       1,711,933       6,664,513       1,018,019       354,596       16,580,912  
 
Total loans, net of unearned (b) (c)
  $ 7,003,798     $ 2,006,769     $ 6,705,850     $ 1,082,403     $ 355,230     $ 17,154,050  
 
 
                                               
Balance as of January 1, 2011
  $ 239,469     $ 155,085     $ 192,350     $ 65,009     $ 12,886     $ 664,799  
Charge-offs
    (24,852 )     (23,711 )     (91,764 )     (20,784 )     (9,584 )     (170,695 )
Recoveries
    8,837       5,066       8,436       3,534       2,114       27,987  
Provision
    (17,176 )     (36,973 )     53,633       (1,157 )     3,673       2,000  
 
Balance as of June 30, 2011 (b) (c)
    206,278       99,467       162,655       46,602       9,089       524,091  
 
Allowance — individually evaluated for impairment
    50,673       9,797       23,656       14,586       752       99,464  
Allowance — collectively evaluated for impairment
    155,605       89,670       138,999       32,016       8,337       424,627  
 
Loans, net of unearned as of June 30, 2011:
                                               
Individually evaluated for impairment
    222,896       174,379       91,117       111,979       1,186       601,557  
Collectively evaluated for impairment
    6,957,365       1,319,257       5,941,284       947,996       294,187       15,460,089  
 
Total loans, net of unearned (b) (c)
  $ 7,180,261     $ 1,493,636     $ 6,032,401     $ 1,059,975     $ 295,373     $ 16,061,646  
 
 
(a)   Includes OTC.
 
(b)   Q2 2011 and Q2 2010 include $29.9 million and $43.0 million of reserves, respectively, and $649.2 million and $770.3 million of balances in restricted consumer real estate loans, respectively.
 
(c)   Q2 2011 and Q2 2010 include $3.1 million and $7.1 million of reserves, respectively, and $44.9 million and $63.5 million of balances in restricted permanent mortgage loans, respectively.
Impaired Loans. Generally, classified non-accrual commercial loans over $1 million are deemed to be impaired and are assessed for impairment measurement in accordance with ASC 310-10. Also, all commercial and retail consumer loans classified as troubled debt restructurings are deemed to be impaired and are assessed for impairment measurement in accordance with ASC 310-10.
When a loan is placed on nonaccrual status, accrued interest is reversed through interest income. FHN’s policy is that interest payments received on impaired and nonaccrual loans are recognized as a payment of principal. Once all principal has been received, additional payments are recognized as interest income on a cash basis.

15


Table of Contents

Note 4 — Loans (continued)
The average balance of impaired loans was $610.5 million and $612.2 million for the three and six months ended June 30, 2011, and $1.8 million and $3.1 million of interest income was recognized during the respective periods related to such impaired loans. The average balance of impaired loans was $613.4 million and $568.7 million for the three and six months ended June 30, 2010, and $.7 million and $1.3 million of interest income was recognized during the respective periods related to such impaired loans. The following tables provide loan classes with the period-end and quarterly average amount of recorded investment in impaired loans for which there is a related allowance for loan loss, the period-end and quarterly average amount of recorded investment in impaired loans where there is no related allowance for loan loss, the total unpaid principal balance of the impaired loans, and amount of interest income recognized on the impaired loans:
                                                         
                            Three Months Ended   Six Months Ended
    June 30, 2011   June 30, 2011   June 30, 2011
    Recorded   Unpaid Principal   Related   Average Recorded   Interest Income   Average Recorded   Interest Income
(Dollars in thousands)   Investment   Balance   Allowance   Investment   Recognized   Investment   Recognized
 
Impaired loans with no related allowance recorded:
                                                       
Commercial:
                                                       
General C&I
  $ 96,198     $ 117,608     $     $ 89,618     $ 232     $ 70,328     $ 489  
TRUPs
    52,742       57,000             43,857             39,074        
Income CRE
    96,935       173,878             110,102       392       102,411       531  
Residential CRE
    42,920       93,746             53,571       269       51,161       344  
 
Total
  $ 288,795     $ 442,232     $     $ 297,148     $ 893     $ 262,974     $ 1,364  
 
 
                                                       
Impaired loans with related allowance recorded:
                                                       
Commercial:
                                                       
General C&I
  $ 46,690     $ 53,258     $ 23,980     $ 57,790     $ 81     $ 81,482     $ 140  
TRUPs
    27,266       30,000       26,693       27,266             27,266        
Income CRE
    12,129       12,314       3,550       11,866       11       23,335       11  
Residential CRE
    22,395       22,631       6,247       22,351             31,354        
 
Total
  $ 108,480     $ 118,203     $ 60,470     $ 119,273     $ 92     $ 163,437     $ 151  
 
 
                                                       
Retail:
                                                       
HELOC
  $ 36,617     $ 36,617     $ 11,818     $ 33,507     $ 180     $ 30,996     $ 321  
R/E Installment Loans
    54,500       54,500       11,837       51,337       182       49,450       344  
Permanent Mortgage
    111,979       111,979       14,586       107,935       434       104,372       914  
Credit Card & Other
    1,186       1,186       752       1,250       12       975       24  
 
Total
  $ 204,282     $ 204,282     $ 38,993     $ 194,029     $ 808     $ 185,793     $ 1,603  
 
Total commercial
  $ 397,275     $ 560,435     $ 60,470     $ 416,421     $ 985     $ 426,411     $ 1,515  
 
Total retail
  $ 204,282     $ 204,282     $ 38,993     $ 194,029     $ 808     $ 185,793     $ 1,603  
 
Total impaired loans
  $ 601,557     $ 764,717     $ 99,463     $ 610,450     $ 1,793     $ 612,204     $ 3,118  
 
                         
    June 30, 2010
    Recorded   Unpaid Principal   Related
(Dollars in thousands)   Investment   Balance   Allowance
 
Impaired loans with no related allowance recorded:
                       
Commercial:
                       
General C&I
  $ 25,552     $ 32,233     $  
TRUPs
    36,756       42,700        
Income CRE
    98,816       190,519        
Residential CRE
    96,584       202,797        
 
Total
  $ 257,708     $ 468,249     $  
 
 
                       
Impaired loans with related allowance recorded:
                       
Commercial:
                       
General C&I
  $ 82,373     $ 118,120     $ 38,069  
TRUPs
    27,266       30,000       14,022  
Income CRE
    45,841       52,735       12,107  
Residential CRE
    53,595       60,319       16,051  
 
Total
  $ 209,075     $ 261,174     $ 80,249  
 
 
                       
Retail:
                       
HELOC
  $ 17,493     $ 17,493     $ 5,025  
R/E Installment Loans
    23,844       23,844       6,849  
Permanent Mortgage
    64,384       64,384       9,793  
OTC, Credit Card, & Other
    634       634       292  
 
Total
  $ 106,355     $ 106,355     $ 21,959  
 
Total commercial
  $ 466,783     $ 729,423     $ 80,249  
 
Total retail
  $ 106,355     $ 106,355     $ 21,959  
 
Total impaired loans
  $ 573,138     $ 835,778     $ 102,208  
 

16


Table of Contents

Note 4 — Loans (continued)
Asset Quality Indicators. As previously discussed, FHN employs a dual-grade commercial risk grading methodology to assign an estimate for PD and the LGD for each commercial loan. FHN utilizes these grades to measure, monitor, and assess credit risk within the commercial loan portfolio. The methodology utilizes multiple scorecards that have been developed using a combination of objective and subjective factors specific to various industry, portfolio, or product segments that result in a rank ordering of risk and the assignment of grades PD 1 to PD 16. Each PD grade corresponds to an estimated one-year default probability percentage; a PD 1 has the lowest expected default probability, and probabilities increase as grades progress down the scale. PD 1 through PD 12 are “pass” grades. Prior to second quarter 2011, all loans with an assigned PD grade of “12” which is the lowest pass grade were included on the Watch list. In second quarter 2011, FHN implemented an enhanced process for determining which loans warrant additional oversight and monitoring. The identification of Watch List loans is now determined by the appropriate relationship team and is generally driven by specific events that may impact borrowers, rather than being driven solely by the assigned PD grade. This process enhancement did not have a material impact on the allowance for loan and lease losses. PD grades 13-16 corresponds to the regulatory-defined categories of special mention (13), substandard (14), doubtful (15), and loss (16). Pass loan grades are required to be re-assessed annually or whenever there has been a material change in the financial condition of the borrower or structure of the relationship. Loans graded 13 or worse are re-assessed on a quarterly basis. LGD grades are assigned based on a scale of 1-12 and represent FHN’s expected recovery based on collateral type in the event a loan defaults.
The following table provides the balances of commercial loan portfolio classes, disaggregated by PD grade as of June 30, 2011:
                                                 
    June 30, 2011  
    General     Loans to Mortgage             Income     Residential        
(Dollars in millions)   C&I     Companies     TRUPS (a)     CRE     CRE     Total  
 
PD Grade:
                                               
1
  $ 110     $     $     $     $     $ 110  
2
    125                   3             128  
3
    169                   13             182  
4
    184                   7             191  
5
    300                   17             317  
6
    798       62             70       1       931  
7
    852       179             111       3       1,145  
8
    1,128       256             174       7       1,565  
9
    542       84             119       3       748  
10
    435                   146       2       583  
11
    530                   111       1       642  
12
    99                   17       5       121  
13
    348             329       125       10       812  
14,15,16
    406       1       20       289       86       802  
 
Total loans collectively evaluated for impairment
    6,026       582       349       1,202       118       8,277  
Total loans individually evaluated for impairment
    143             80       109       65       397  
 
Total commercial loans
  $ 6,169     $ 582     $ 429     $ 1,311     $ 183     $ 8,674  
 
 
(a)   Presented net of a $35.6 million lower of cost or market (“LOCOM”) valuation allowance. Based on the underlying structure of the notes, the highest possible internal grade is “13”. Portfolio reserve estimate considers recent financial performance of individual borrowers and other factors.
The retail portfolio is comprised primarily of smaller balance loans which are very similar in nature in that most are standard products and are backed by residential real estate. Because of the similarities of retail loan-types, FHN is able to utilize the Fair Isaac’s (“FICO”) score, among other attributes, to assess the quality of consumer borrowers. FICO scores are refreshed on a quarterly basis and attempt to reflect the recent risk profile of the borrowers. Accruing delinquency amounts are also other indicators of retail portfolio asset quality.

17


Table of Contents

Note 4 — Loans (continued)
The following tables reflect period-end balances and various asset quality indicators by origination vintage for the HELOC, real estate installment, and permanent mortgage classes of loans as of June 30, 2011. Beginning with the first quarter Form 10-Q filing, the permanent mortgage asset quality indicators have been updated to allow a consistent presentation of the retail real estate loan portfolios.
HELOC
                                                         
            Origination Characteristics     Avg  
Origination   Period End                     %     %     %     Refreshed  
Vintage   Balance(a)     Avg orig CLTV     Avg orig FICO     Broker     TN     1st Lien     FICO  
 
pre-2003
  $ 206       75.4 %     723       14.6 %     41.4 %     22.8 %     720  
2003
    298       76.1 %     733       24.0 %     25.8 %     16.0 %     726  
2004
    637       79.6 %     728       32.0 %     17.4 %     19.1 %     720  
2005
    789       79.5 %     734       16.1 %     16.7 %     12.1 %     721  
2006
    593       76.6 %     742       6.9 %     23.6 %     13.8 %     726  
2007
    599       77.5 %     746       13.4 %     29.3 %     14.8 %     732  
2008
    307       74.0 %     755       8.7 %     69.7 %     36.5 %     749  
2009
    192       71.6 %     755       0.0 %     86.3 %     44.9 %     755  
2010
    192       73.2 %     756       0.0 %     94.9 %     45.8 %     758  
2011
    72       72.7 %     756       0.0 %     94.4 %     46.9 %     758  
 
Total
  $ 3,885       77.0 %     740       14.9 %     34.7 %     20.6 %     730  
 
(a)   Includes $649.2 million of restricted loan balances.
R/E Installment Loans
                                                         
            Origination Characteristics     Avg  
Origination   Period End                     %     %     %     Refreshed  
Vintage   Balance     Avg orig CLTV     Avg orig FICO     Broker     TN     1st Lien     FICO  
 
pre-2003
  $ 69       77.5 %     693       17.9 %     62.4 %     67.1 %     689  
2003
    192       72.5 %     723       3.2 %     44.4 %     77.6 %     732  
2004
    113       74.0 %     712       7.3 %     50.9 %     72.1 %     712  
2005
    304       83.0 %     721       25.9 %     21.1 %     27.7 %     716  
2006
    334       78.9 %     722       4.6 %     24.6 %     25.1 %     707  
2007
    465       81.9 %     731       15.8 %     24.0 %     24.6 %     715  
2008
    182       77.1 %     737       5.7 %     77.8 %     79.2 %     733  
2009
    118       71.4 %     752       0.0 %     89.2 %     82.2 %     754  
2010
    212       85.0 %     748       0.0 %     89.1 %     97.2 %     749  
2011
    160       85.1 %     757       0.0 %     91.5 %     97.0 %     755  
 
Total
  $ 2,149       79.8 %     731       9.5 %     47.7 %     54.0 %     724  
 
Permanent Mortgage
                                                         
            Origination Characteristics     Avg  
Origination   Period End                     %     %     %     Refreshed  
Vintage   Balance(a)     Avg orig CLTV     Avg orig FICO     Broker     TN     1st Lien     FICO  
 
pre-2004
  $ 196       67.6 %     726       50.9 %     8.9 %     100.0 %     732  
2004
    14       82.6 %     724       18.5 %     26.0 %     100.0 %     700  
2005
    71       79.8 %     740       36.2 %     3.0 %     98.8 %     720  
2006
    142       77.9 %     732       40.1 %     2.1 %     96.9 %     686  
2007
    407       76.9 %     731       55.5 %     0.9 %     95.6 %     678  
2008
    230       80.0 %     736       55.3 %     0.4 %     100.0 %     679  
 
Total
  $ 1,060       76.4 %     732       50.8 %     2.9 %     97.9 %     691  
 
(a)   Includes $44.9 million of restricted loan balances and first lien mortgages recognized through the exercise of cleanup calls for certain proprietary first lien securitization trusts.
The following table reflects accruing delinquency amounts for the credit card and other portfolio classes.
                 
    June 30, 2011  
(Dollars in millions)   Credit Card     Other  
 
Accruing delinquent balances:
               
30-89 days past due
  $ 1.4     $ 0.9  
90+ days past due
    1.1        
 
Total
  $ 2.5     $ 0.9  
 

18


Table of Contents

Note 4 — Loans (continued)
Non-accrual and Past Due Loans. Loans are placed on non-accrual status if it becomes evident that full collection of principal and interest is at risk, impairment has been recognized as a partial charge-off of principal balance, or if the terms of a loan have been modified through troubled debt restructuring efforts. When a loan is placed on nonaccrual status, FHN applies the entire amount of any subsequent payments (including interest) to the outstanding principal balance.
The following table reflects accruing and non-accruing loans by class on June 30, 2011:
                                                                         
    Accruing     Non-Accruing        
(Dollars in thousands)   Current     30-89 Days Past Due     90 + Days Past Due     Total Accruing     Current     30-89 Days Past Due     90 + Days Past Due     Total Non-Accruing     Total Loans  
 
Commercial (C&I) :
                                                                       
General C&I
  $ 5,999,416     $ 36,859     $ 398     $ 6,036,673     $ 70,532     $ 8,229     $ 52,773     $ 131,534     $ 6,168,207  
Loans to mortgage companies
    581,871                   581,871                   656       656       582,527  
TRUPS (a)
    349,519                   349,519                   80,008       80,008       429,527  
 
Total commercial (C&I)
    6,930,806       36,859       398       6,968,063       70,532       8,229       133,437       212,198       7,180,261  
 
 
                                                                       
Commercial real estate:
                                                                       
Income CRE
    1,184,361       14,322       181       1,198,864       35,221       6,552       70,142       111,915       1,310,779  
Residential CRE
    103,254       9,392             112,646       30,430       1,105       38,676       70,211       182,857  
 
Total commercial real estate
    1,287,615       23,714       181       1,311,510       65,651       7,657       108,818       182,126       1,493,636  
 
 
                                                                       
Consumer real estate:
                                                                       
HELOC (b)
    3,794,849       41,577       25,909       3,862,335       13,332       1,550       7,542       22,424       3,884,759  
R/E installment loans
    2,099,708       22,627       10,656       2,132,991       10,429       1,168       3,054       14,651       2,147,642  
 
Total consumer real estate
    5,894,557       64,204       36,565       5,995,326       23,761       2,718       10,596       37,075       6,032,401  
 
 
                                                                       
Permanent mortgage (b)
    877,922       20,865       20,674       919,461       27,813       2,537       110,164       140,514       1,059,975  
 
 
                                                                       
Credit card & other
                                                                       
Credit card
    189,180       1,480       1,141       191,801                               191,801  
Other (c)
    93,173       908       10       94,091       6             9,475       9,481       103,572  
 
Total credit card & other
    282,353       2,388       1,151       285,892       6             9,475       9,481       295,373  
 
Total loans, net of unearned
  $ 15,273,253     $ 148,030     $ 58,969     $ 15,480,252     $ 187,763     $ 21,141     $ 372,490     $ 581,394     $ 16,061,646  
 
 
(a)   Includes LOCOM valuation allowance $35.6 million.
 
(b)   Includes restricted loans.
 
(c)   Includes OTC and non real estate installment loans.

19


Table of Contents

Note 4 — Loans (continued)
The following table reflects accruing and non-accruing loans by class on June 30, 2010:
                                                                         
    Accruing     Non-Accruing        
(Dollars in thousands)   Current     30-89 Days Past Due     90 + Days Past Due     Total Accruing     Current     30-89 Days Past Due     90 + Days Past Due     Total Non-Accruing     Total Loans  
 
Commercial (C&I) :
                                                                       
General C&I
  $ 5,548,007     $ 69,396     $ 2,125     $ 5,619,528     $ 67,980     $ 19,035     $ 52,184     $ 139,199     $ 5,758,727  
Loans to mortgage companies
    813,457                   813,457                   2,083       2,083       815,540  
TRUPS (a)
    365,700                   365,700                   63,831       63,831       429,531  
 
Total commercial (C&I)
    6,727,164       69,396       2,125       6,798,685       67,980       19,035       118,098       205,113       7,003,798  
 
 
                                                                       
Commercial real estate:
                                                                       
Income CRE
    1,431,439       20,394       633       1,452,466       25,131       4,777       127,461       157,369       1,609,835  
Residential CRE
    210,329       4,239       5,633       220,201       32,340       659       143,734       176,733       396,934  
 
Total commercial real estate
    1,641,768       24,633       6,266       1,672,667       57,471       5,436       271,195       334,102       2,006,769  
 
 
                                                                       
Consumer real estate:
                                                                       
HELOC (b)
    4,188,397       65,836       33,548       4,287,781       5,509       1,279       5,360       12,148       4,299,929  
R/E installment loans
    2,336,231       39,585       19,405       2,395,221       5,556       958       4,186       10,700       2,405,921  
 
Total consumer real estate
    6,524,628       105,421       52,953       6,683,002       11,065       2,237       9,546       22,848       6,705,850  
 
 
                                                                       
Permanent mortgage (b)
    907,103       23,734       27,582       958,419       12,732       1,509       109,743       123,984       1,082,403  
 
 
                                                                       
Credit card & other
                                                                       
Credit card
    185,222       2,091       1,840       189,153                               189,153  
Other (c)
    111,867       651       98       112,616                   53,461       53,461       166,077  
 
Total credit card & other
    297,089       2,742       1,938       301,769                   53,461       53,461       355,230  
 
Total loans, net of unearned
  $ 16,097,752     $ 225,926     $ 90,864     $ 16,414,542     $ 149,248     $ 28,217     $ 562,043     $ 739,508     $ 17,154,050  
 
 
(a)   Includes LOCOM valuation allowance $35.6 million.
 
(b)   Includes restricted loans.
 
(c)   Includes OTC. All nonaccruing balances reflect OTC.
On June 30, 2011 and 2010, FHN had loans classified as troubled debt restructurings of $306.2 million and $142.4 million, respectively. Additionally, FHN had restructured $70.1 million and $34.7 million of loans held for sale as of June 30, 2011 and 2010, respectively. For restructured loans in the portfolio, FHN had loan loss reserves of $45.2 million, or 15 percent of the recorded investment amount, as of June 30, 2011. On June 30, 2011 and 2010, there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured.

20


Table of Contents

Note 5 — Mortgage Servicing Rights
FHN recognizes all classes of mortgage servicing rights (“MSR”) at fair value. Classes of MSR are established based on market inputs used to determine the fair value of the servicing asset and FHN’s risk management practices. See Note 16 — Fair Value, the “Determination of Fair Value” section for a discussion of FHN’s MSR valuation methodology and Note 15 — Derivatives for a discussion of how FHN hedges the fair value of MSR. The balance of MSR included on the Consolidated Condensed Statements of Condition represents the rights to service approximately $26 billion of mortgage loans on June 30, 2011, for which a servicing right has been capitalized.
In first quarter 2010, FHN adopted the amendments to ASC 810 which resulted in the consolidation of loans FHN previously sold through proprietary securitizations but retained MSR and significant subordinated interests subsequent to the transfer. In conjunction with the consolidation of these loans, FHN derecognized the associated servicing assets which are reflected in the rollforward below. Following is a summary of changes in capitalized MSR for the six months ended June 30, 2011 and 2010:
                                 
    First     Second              
(Dollars in thousands)   Liens     Liens     HELOC     Total  
 
Fair value on January 1, 2010
  $ 296,115     $ 1,174     $ 5,322     $ 302,611  
Adjustment due to adoption of amendments to ASC 810
    (197 )     (928 )     (1,168 )     (2,293 )
Reductions due to loan payments
    (16,031 )     (16 )     (611 )     (16,658 )
Reductions due to sale
    (24,558 )                 (24,558 )
Changes in fair value due to:
                               
Changes in valuation model inputs or assumptions
    (58,366 )                 (58,366 )
Other changes in fair value
    990       12       8       1,010  
 
Fair value on June 30, 2010
  $ 197,953     $ 242     $ 3,551     $ 201,746  
 
Fair value on January 1, 2011
  $ 203,812     $ 262     $ 3,245     $ 207,319  
Reductions due to loan payments
    (12,685 )     (21 )     (101 )     (12,807 )
Reductions due to exercise of cleanup calls
    (195 )                 (195 )
Changes in fair value due to:
                               
Changes in valuation model inputs or assumptions
    (7,418 )                 (7,418 )
Other changes in fair value
    16       10       33       59  
 
Fair value on June 30, 2011
  $ 183,530     $ 251     $ 3,177     $ 186,958  
 
Servicing, late, and other ancillary fees recognized within mortgage banking income were $19.2 million and $26.0 million for the three months ended June 30, 2011 and 2010, respectively, and $40.1 million and $53.7 million for the six months ended June 30, 2011 and 2010, respectively. Servicing, late, and other ancillary fees recognized within other income and commissions were $.6 million and $1.1 million for the three months ended June 30, 2011 and 2010, respectively, and $1.3 million and $2.2 million for the six months ended June 30, 2011 and 2010, respectively.
FHN services a portfolio of mortgage loans related to transfers by other parties utilizing securitization trusts. The servicing assets represent FHN’s sole interest in these transactions. The total MSR recognized by FHN related to these transactions was $3.6 million and $5.1 million at June 30, 2011 and 2010, respectively. The aggregate principal balance serviced by FHN for these transactions was $.5 billion and $.7 billion at June 30, 2011 and 2010, 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.
In prior periods, FHN transferred 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. On June 30, 2011 and 2010, FHN had $23.6 million and $25.9 million, respectively, of MSR related to these transactions. These MSR are included within the first liens mortgage loans column within the rollforward of MSR. The proceeds from these transfers have been recognized within Other short term borrowings and commercial paper in the Consolidated Condensed Statements of Condition.

21


Table of Contents

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 (a)  
 
December 31, 2009
  $ 165,528     $ 38,256  
Amortization expense (b)
          (2,762 )
Impairment (c)(d)
    (3,348 )      
Additions
          151  
 
June 30, 2010
  $ 162,180     $ 35,645  
 
December 31, 2010
  $ 162,180     $ 32,881  
Amortization expense (b)
          (2,368 )
Impairment (c)(d)
    (10,100 )      
Divestitures
    (16,397 )     (2,129 )
 
June 30, 2011
  $ 135,683     $ 28,384  
 
Certain previously reported amounts have been reclassified to agree with current presentation.
 
(a)   Represents customer lists, acquired contracts, premium on purchased deposits, and covenants not to compete.
 
(b)   Amortization expense of $.3 million related to First Horizon Insurance is included in Income/(loss) from discontinued operations, net of tax on the Consolidated
 
    Condensed Statements of Income.
 
(c)   See Note 17 — Restructuring, Repositioning, and Efficiency for further details related to goodwill impairments.
 
(d)   See Note 2 — Acquisitions and Divestitures for further details regarding goodwill related to divestitures.
The gross carrying amount of other intangible assets subject to amortization is $106.8 million on June 30, 2011, net of $78.4 million of accumulated amortization. Estimated aggregate amortization expense is expected to be $2.1 million for the remainder of 2011, and $3.9 million, $3.7 million, $3.5 million, $3.3 million, and $3.1 million for the twelve-month periods of 2012, 2013, 2014, 2015, and 2016, respectively.
The agreement to sell FHI resulted in a pre-tax goodwill impairment of $10.1 million in first quarter 2011. In second quarter 2011, the remaining $16.4 million of goodwill was removed in conjunction with the divestiture. In first quarter 2010, FHN exited its institutional research business, FTN Equity Capital Markets (“FTN ECM”), and incurred a pre-tax goodwill impairment of $3.3 million. The recognition of intangible asset impairment losses will have no effect on FHN’s debt covenants.

22


Table of Contents

Note 6 — Intangible Assets (continued)
The following is a summary of gross goodwill and accumulated impairment losses and write-offs detailed by reportable segments included in the Consolidated Condensed Statements of Condition through June 30, 2011. Gross goodwill and accumulated impairments and divestiture-related write-offs were determined beginning on January 1, 2002, when a change in accounting requirements resulted in goodwill being assessed for impairment rather than being amortized. Consistent with historical practices, FHN moved FHI’s historical goodwill activity to the non-strategic segment in first quarter 2011.
                                 
            Regional     Capital        
(Dollars in thousands)   Non-Strategic     Banking     Markets     Total  
 
Gross goodwill
  $ 197,971     $ 38,262     $ 97,421     $ 333,654  
Accumulated impairments
    (100,675 )                 (100,675 )
Accumulated divestiture related write-offs
    (67,451 )                 (67,451 )
 
December 31, 2009
  $ 29,845     $ 38,262     $ 97,421     $ 165,528  
 
Additions
                       
Impairments
    (3,348 )                 (3,348 )
Divestitures
                       
 
Net change in goodwill during 2010
    (3,348 )                 (3,348 )
 
Gross goodwill
  $ 197,971     $ 38,262     $ 97,421     $ 333,654  
Accumulated impairments
    (104,023 )                 (104,023 )
Accumulated divestiture related write-offs
    (67,451 )                 (67,451 )
 
June 30, 2010
  $ 26,497     $ 38,262     $ 97,421     $ 162,180  
 
 
                               
Gross goodwill
  $ 197,971     $ 38,262     $ 97,421     $ 333,654  
Accumulated impairments
    (104,023 )                 (104,023 )
Accumulated divestiture related write-offs
    (67,451 )                 (67,451 )
 
December 31, 2010
  $ 26,497     $ 38,262     $ 97,421     $ 162,180  
 
Additions
                       
Impairments
    (10,100 )                 (10,100 )
Divestitures
    (16,397 )                 (16,397 )
 
Net change in goodwill during 2011
    (26,497 )                 (26,497 )
 
Gross goodwill
  $ 197,971     $ 38,262     $ 97,421     $ 333,654  
Accumulated impairments
    (114,123 )                 (114,123 )
Accumulated divestiture related write-offs
    (83,848 )                 (83,848 )
 
June 30, 2011
  $     $ 38,262     $ 97,421     $ 135,683  
 
Certain previously reported amounts have been reclassified to agree with current presentation.

23


Table of Contents

Note 7 — Other Income and Other Expense
Following is detail of All other income and commissions and All other expense as presented in the Consolidated Condensed Statements of Income:
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
(Dollars in thousands)   2011     2010     2011     2010  
 
All other income and commissions:
                               
Bankcard income
  $ 5,151     $ 5,271     $ 9,871     $ 9,819  
Bank owned life insurance
    4,920       5,784       9,735       12,253  
ATM interchange fees
    3,791       3,232       7,326       6,889  
Other service charges
    2,821       2,382       5,675       4,765  
Letter of credit fees
    1,869       1,802       3,645       3,441  
Electronic banking fees
    1,536       1,887       3,070       3,612  
Deferred compensation
    221       (771 )     1,200       239  
Gains on extinguishment of debt
                5,761       17,060  
Other
    9,722       6,866       16,067       14,493  
 
Total
  $ 30,031     $ 26,453     $ 62,350     $ 72,571  
 
All other expense:
                               
Losses from litigation and regulatory matters
  $ 38,260     $ 1,270     $ 40,585     $ 1,270  
Low income housing expense
    4,973       5,364       9,670       10,830  
Advertising and public relations
    3,631       5,574       7,493       10,824  
Other insurance and taxes
    3,511       3,589       6,986       6,742  
Travel and entertainment
    2,178       2,627       3,979       4,998  
Employee training and dues
    1,350       965       2,601       2,407  
Customer relations
    1,155       1,838       2,425       3,805  
Bank examination costs
    1,117       1,142       2,235       2,284  
Supplies
    801       1,083       1,782       2,231  
Loan insurance expense (a)
    706       682       1,487       (2,192 )
Federal services fees
    291       712       755       1,619  
Other (b)
    17,026       (1,839 )     22,827       5,923  
 
Total
  $ 74,999     $ 23,007     $ 102,825     $ 50,741  
 
(a)   First quarter 2010 includes the cancellation of an HLTV insurance contract and return of $3.8 million of premiums.
 
(b)   Second quarter 2011 includes $9.0 million charge to terminate a technology services contract. Second quarter 2010 includes $5.0 million expense reversal related to the Visa contingent liability.

24


Table of Contents

Note 8 — Earning per Share
The following tables show a reconciliation of the numerators used in calculating basic and diluted earnings/(loss) per share attributable to common shareholders:
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
(Dollars in thousands)   2011     2010     2011     2010  
 
Income from continuing operations
  $ 19,048     $ 20,349     $ 61,090     $ 17,532  
Income/(loss) from discontinued operations, net of tax
    3,788       129       4,748       (6,947 )
 
Net income
    22,836       20,478       65,838       10,585  
Net income attributable to noncontrolling interest
    2,844       2,844       5,688       5,688  
 
Net income attributable to controlling interest
    19,992       17,634       60,150       4,897  
Preferred stock dividends
          14,938             29,856  
 
Net income/(loss) available to common shareholders
  $ 19,992     $ 2,696     $ 60,150     $ (24,959 )
 
 
                               
Income from continuing operations
  $ 19,048     $ 20,349     $ 61,090     $ 17,532  
Net income attributable to noncontrolling interest
    2,844       2,844       5,688       5,688  
Preferred stock dividends
          14,938             29,856  
 
Net income/(loss) from continuing operations available to common shareholders
  $ 16,204     $ 2,567     $ 55,402     $ (18,012 )
 
The following table provides a reconciliation of weighted average common shares to diluted average common shares:
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
(In thousands)   2011     2010     2011     2010  
 
Weighted average common shares outstanding — basic (a)
    261,289       234,556       261,233       234,513  
Effect of dilutive securities (a)
    1,467       6,412       2,457        
 
Weighted average common shares outstanding — diluted (a)
    262,756       240,968       263,690       234,513  
 
(a)   All share data has been restated to reflect stock dividends distributed through January 1, 2011.
The following table provides a reconciliation of earnings/(loss) per common and diluted shares:
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
Earnings/(loss) per common share:
  2011     2010     2011     2010  
 
Earnings/(loss) per share from continuing operations available to common shareholders
  $ 0.06     $ 0.01     $ 0.21     $ (0.08 )
Earnings/(loss) per share from discontinued operations, net of tax
    0.02             0.02       (0.03 )
 
Net earnings/(loss) per share available to common shareholders
  $ 0.08     $ 0.01     $ 0.23     $ (0.11 )
 
 
                               
Diluted earnings/(loss) per common share:
                               
 
Diluted earnings/(loss) per share from continuing operations available to common shareholders
  $ 0.06     $ 0.01     $ 0.21     $ (0.08 )
Diluted earnings/(loss) per share from discontinued operations, net of tax
    0.02             0.02       (0.03 )
 
Net diluted earnings/(loss) per share available to common shareholders
  $ 0.08     $ 0.01     $ 0.23     $ (0.11 )
 
For the three and six months ended June 30, 2011, the dilutive effect for all potential common shares was 1.5 million and 2.5 million, respectively. For the three months ended June 30, 2010, the dilutive effect for all potential common shares was 6.4 million. For the six months ended June 30, 2010, all potential common shares were antidilutive due to the net loss attributable to common shareholders for that period. Stock options of 10.8 million and 10.9 million with a weighted average exercise price of $24.44 and $28.23 per share for the three months ended June 30, 2011 and 2010, respectively, were excluded from diluted shares because including such shares would have been antidilutive. Stock options of 10.2 million and 12.8 million with a weighted average exercise price of $26.12 and $26.74 per share for the six months ended June 30, 2011 and 2010, respectively, were excluded also from diluted shares. Other equity awards of .4 million and .3 million for the three months ended June 30, 2011 and 2010, respectively, were excluded from diluted shares, while other equity awards of .2 million and 3.5 million for the six months ended June 30, 2011 and 2010, respectfully, were excluded from diluted shares because including such shares would have been antidilutive. Additionally, 14.8 million potential common shares related to the capital purchase program (“CPP”) common stock warrant were excluded from the computation of diluted loss per common share for the six months ended June 30, 2010, because such shares would have been antidilutive. The CPP common stock warrant was repurchased in first quarter 2011. The warrant resulted in .9 million dilutive shares for the six-month period ended June 30, 2011. There was no impact on diluted shares for the three months ended June 30, 2011.

25


Table of Contents

Note 9 — Contingencies and Other Disclosures
Contingencies. Contingent liabilities arise in the ordinary course of business, including those related to lawsuits, arbitration, mediation, and other forms of litigation. Various litigation matters are pending against FHN and its subsidiaries. In view of the inherent difficulty of predicting the outcome of these 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 reasonably determine what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters may be, or what the eventual loss or impact related to each pending matter may be. FHN establishes loss contingency liabilities for litigation matters when loss is both probable and reasonably estimable as prescribed by applicable financial accounting guidance. A liability generally is not established when a loss contingency either is not probable or its amount is not reasonably 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 liability 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 depending, in part, on the results from that period.
Set forth below are discussions of certain pending matters which fall into three categories: matters as to which material loss is probable; matters as to which material loss is not probable but as to which there is a more than slight chance of a material loss outcome; and matters as to which material loss is not probable but which could be viewed as material primarily for non-financial reasons. As mentioned above, most pending or threatened litigation matters fall into none of these categories.
Matters as to which Material Loss is Probable. At June 30, 2011, based on the foregoing, there were no pending or threatened litigation matters as to which FHN had determined that material loss was probable or had established a material loss liability in accordance with applicable financial accounting guidance except for the following matter.
  The Chapter 11 Liquidation Trustee (the “Trustee”) of Sentinel Management Group, Inc. (“Sentinel”) has filed two complaints in the U.S. District Court for the Northern District of Illinois, Eastern Division (Case Nos. 1:08-cv-06587 and 1:09-cv-02258) against two subsidiaries, First Tennessee Bank National Association (“FTBNA”) and FTN Financial Securities Corp. (“FTN”), and two former FTN employees. The Trustee’s claims related to Sentinel’s purchases of Preferred Term Securities Limited (“PreTSL”) products and other securities from FTN and/or the FTN Financial Capital Markets division of FTBNA from March 2005 to August 2007. On July 28, 2011 the parties reached an agreement to settle the dispute, subject to court approval. Under the terms of the settlement the Trustee would receive a total of $38.5 million dollars. After considering the terms of the settlement, First Horizon has recognized a pre-tax expense of $36.7 million for the second quarter of 2011 related to this settlement. Although First Horizon believes that certain insurance policies provide coverage for this expense, the insurers have denied coverage. First Horizon has brought suit against the insurers to enforce the policies. The case is in U.S. District Court for the Western District of Tennessee styled as First Horizon National Corporation, et al. v. Certain Underwriters at Lloyd’s Syndicate Nos. 2987, et al., No. 2:11-cv-02608. As a result of the uncertainties arising from this dispute, insurance coverage has not been taken into consideration in determining the amount of the expense recognized in the second quarter for the Sentinel settlement.
Matters as to which Material Loss is Not Probable but as to which there is a More than Slight Chance of a Material Loss Outcome. Set out below are discussions of certain pending or threatened litigation matters. Except as mentioned specifically for a particular matter, as to these matters FHN has determined, under applicable financial accounting guidance, that although material loss is not probable there is more than a slight chance of a material loss outcome for FHN in excess of currently established loss liabilities. FHN cannot determine probable loss or estimate a range of reasonably possible losses in excess of established liabilities, if any, at this time that may result from these matters because of the uncertainty of the potential outcomes of the legal proceedings associated with these matters and also due to significant uncertainties regarding: amounts claimed in cases as to which claims are noted as unspecified; potential remedies that might be available or awarded; the value of assets FHN may be required to repurchase for those cases involving asset repurchase demands; and the incomplete status of the discovery process for those cases where discovery is not substantially complete. In all such matters that involve claims in active litigation, and in those matters not in litigation where possible allegations can be anticipated, FHN believes it has meritorious defenses and intends to pursue those defenses vigorously. For the foregoing reasons, in each matter mentioned below except as otherwise noted, there is a more than slight chance that: the plaintiff will substantially prevail; the defense will substantially prevail; the plaintiff will prevail in part; or the matter will be settled by the parties. FHN expects to reassess the liability for these matters each quarter as they progress.
  Manufacturers & Traders Trust Company (“M&T”) has filed an arbitration claim against FTBNA. The claim arises out of FTBNA’s sale of certain branch assets to M&T in 2007. The original demand for arbitration claims that FTBNA violated its obligations to repurchase home equity lines of credit (“HELOCs”) that it sold to M&T as part of the asset sale agreement. M&T alleges that the loans either are not in conformity with FTBNA’s representations about them or are insured and sold due to mutual mistake or both. At this time, as a result of rulings to date, the claim has become a demand that FTBNA repurchase certain HELOCs having an original principal balance

26


Table of Contents

Note 9 — Contingencies and Other Disclosures (continued)
    of $45.5 million. At June 30, 2011, the HELOCs at issue included loans with an unpaid principal balance of $24.8 million and also included charged-off loans of $9.9 million.
  FTN and FTBNA, along with a former executive officer and two former employees, have received written “Wells” notices from the Staff of the United States Securities and Exchange Commission (the “SEC”) stating that the Staff intends to recommend that the SEC bring enforcement actions for allegedly aiding and abetting a former FTN customer, Sentinel, in violations of the federal securities laws. The subject of the Wells notices is a 2006 year-end securities repurchase transaction entered into by FTN with Sentinel. A Wells notice by the SEC Staff is neither a formal allegation of wrongdoing nor a determination by the SEC that there has been wrongdoing. A Wells notice generally provides the recipient with an opportunity to provide his, her, or its perspective to address the Staff’s concerns prior to enforcement action being taken by the SEC. FHN is actively engaged in working within the Wells process to try to resolve this matter. Based on the current status of discussions, FHN has determined that resolution of this matter with the SEC is probable and that the loss outcome amount is reasonably estimable. Accordingly, FHN established a liability in the first quarter 2011 in an amount that is not material to the financial statements. Any settlement that results from these discussions is subject to SEC review and approval and judicial review and approval. If FHN is unable to resolve this matter and enforcement action is brought, FHN believes there are meritorious defenses and intends to advance those defenses vigorously.
Matters as to which Material Loss is Not Probable but which could be viewed as Material Primarily for Non-Financial Reasons.The following are pending litigation matters as to which directors or senior executives of FHN are named as defendants in connection with the performance of their duties on behalf of FHN.
  A shareholder, Cranston Reid, has filed a putative derivative lawsuit in the U.S. District Court for the Western District of Tennessee, Western Division (Case No. 2:10cv02413-STA-cgc) against various former and current officers and directors of FHN. FHN is named as a nominal defendant, though no relief is sought against it. The complaint alleges the following causes of action: breach of fiduciary duty, abuse of control, gross mismanagement, and unjust enrichment. The claimed breach of fiduciary duty and other causes of action stem from a number of alleged events, including: certain litigation matters, both pending and previously disposed, unrelated to this plaintiff; certain matters that allegedly could become litigation matters, unrelated to this plaintiff; a matter that previously had been investigated and concluded, unrelated to this plaintiff; and an alleged general use of allegedly unlawful and high-risk banking practices. In March 2011 the court dismissed all claims. The plaintiff has appealed the dismissal. FHN continues to believe the defendants have meritorious defenses to this complaint — including that the complaint fails to state any legally cognizable claim — and intends to advance those defenses vigorously on appeal.
  A shareholder, Troy Sims, has filed a class action lawsuit in the U.S. District Court for the Western District of Tennessee, Western Division (Case No. 2:08-cv-02293-STA-cgc) against FHN and various former and current officers and directors of FHN. The complaint alleges causes of action under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), related to FHN’s Savings Plan, which is a 401(k) savings plan offered to eligible employees. Specifically, the complaint alleges that defendants breached fiduciary duties owed to Plan participants by: (1) failure to prudently and loyally manage the Plan’s investment in First Horizon stock and certain proprietary mutual funds; (2) failure to provide accurate information to participants and beneficiaries; (3) failure to monitor other Plan fiduciaries; and (4) breach of co-fiduciary obligations. For these alleged violations, plaintiffs seek to require defendants to pay Plan participants unspecified damages resulting from the decline in value of First Horizon stock between January 2006 and July 14, 2008 and associated with participants’ investment in proprietary mutual funds offered by the Plan between May 2002 and January 2006. FHN believes the defendants have meritorious defenses to this complaint and intends to advance those defenses vigorously.
Visa Matters. 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 in fourth quarter 2007 related to this contingent obligation. In March 2008, Visa completed its initial public offering (“IPO”) and funded an escrow account from its IPO proceeds to be used to make payments related to the Visa litigation matters. FHN received approximately 2.4 million Class B shares in conjunction with Visa’s IPO.
FHN sold 440,000 of its shares, reducing its holdings to approximately 2.0 million shares in December 2010. FHN’s Visa shares 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 is restricted until the later of the third anniversary of the IPO or the final resolution of the covered litigation. The final conversion ratio, which was estimated to approximate 49 percent as of June 30, 2011, will fluctuate based on the

27


Table of Contents

Note 9 — Contingencies and Other Disclosures (continued)
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.
In conjunction with the sale of a portion of its Visa class B shares in December 2010, FHN and the purchaser entered into a derivative transaction whereby FHN will make, or receive, cash payments whenever the conversion ratio of the Visa class B shares into Visa class A shares is adjusted. FHN determined that the initial fair value of the derivative was equal to a pro rata portion of the previously accrued contingent liability for Visa litigation matters attributable to the Visa class B shares sold in 2010. This amount was determined to be a liability of $1.0 million as of December 31, 2010.
In March 2011, Visa deposited an additional $400 million into the escrow account. Accordingly, FHN reduced its contingent liability by $3.3 million to $1.4 million through a credit to noninterest expense in first quarter 2011. The associated decline in the conversion ratio to 49 percent resulted in FHN making a payment to the counterparty of $.7 million in second quarter 2011. As of June 30, 2011, the derivative liability was $1.3 million.
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 agreements with the purchaser of its national home loan origination and servicing platforms that create obligations and potential liabilities.
Servicing. FHN services a predominately first lien mortgage loan portfolio with an unpaid principal balance of approximately $26 billion as of June 30, 2011. A substantial portion of the first lien portfolio is serviced through a subservicer. The first lien portfolio is held primarily by Fannie Mae (“FNMA”) and private security holders, with less significant portions held by Ginnie Mae (“GNMA”) and Freddie Mac (“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 delinquency 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 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. In the event payments are ultimately made by FHN to satisfy this obligation, P&I advances and servicer advances are recoverable from: (1) the liquidation proceeds of the property securing the loan, in the case of private securitizations and (2) the proceeds of the foreclosure sale by the government agency, in the case of government agency-owned loans. As of June 30, 2011, FHN has recognized servicing and P&I advances of $281.3 million. Servicing and P&I advances are included in Other assets on the Consolidated Condensed Statements of Condition.
FHN is also subject to losses in its loan servicing portfolio due to loan foreclosures. Foreclosure exposure arises from certain government 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 negatively impacted by declining home values.
FHN is also subject to losses due to unreimbursed servicing expenditures made in connection with the administration of current loss mitigation and loan modification programs. Additionally, FHN is required to repurchase GNMA loans prior to modification in connection with its modification program.
Other Disclosures — Home Loans Originated and Sold. Prior to 2009, as a means to provide liquidity for its legacy mortgage banking business, FHN originated loans through its legacy mortgage business, primarily first lien home loans, with the intention of selling them. Sales typically were effected either as non-recourse whole loan sales or through non-recourse proprietary securitizations. Conventional conforming and federally insured single-family residential mortgage loans were sold predominately to government sponsored enterprises (“GSEs”). Many mortgage loan originations, especially those that did not meet criteria for whole loan sales to GSEs (nonconforming mortgage loans) were sold to investors predominantly through proprietary securitizations but also, to a lesser extent, through whole loan sales to private non-GSE purchasers. In addition, FHN originated with the intent to sell and sold HELOCs and second lien mortgages through whole loan sales to private purchasers and, to a lesser extent, through proprietary securitizations. Regarding these past loan sale activities, FHN has exposure to potential loss primarily through two avenues. First, investors/purchasers of these mortgage loans may request that FHN repurchase loans or make the

28


Table of Contents

Note 9 — Contingencies and Other Disclosures (continued)
investor whole for economic losses incurred if it is determined that FHN violated certain contractual representations and warranties made at the time of these sales. Contractual representations and warranties differ based on deal structure and counterparty. Second, investors in securitizations may attempt to achieve rescission of their investments or damages through litigation by claiming that the applicable offering documents were materially deficient.
From 2005 through 2008, FHN originated and sold $69.5 billion of such loans without recourse to GSEs. Although additional GSE sales occurred in earlier years, a substantial majority of GSE repurchase requests have come from that period. In addition, from 2000 through 2007, FHN securitized $47.0 billion of such loans without recourse in proprietary transactions. Of the amount originally securitized, $36.7 billion relates to securitization trusts that are still active as approximately 30 securitization trusts have become inactive due to clean-up calls exercised by FHN. The exercise of clean-up calls results in termination of the Pooling and Servicing Agreements and reacquisition of the related mortgage loans remaining unpaid.
Loans Sold With Full or Limited Recourse. FHN has sold certain agency mortgage loans with full recourse under agreements to repurchase the loans upon default. Loans sold with full recourse generally include mortgage loans sold to investors in the secondary market which are uninsurable under government guaranteed mortgage loan programs due to issues associated with underwriting activities, documentation, or other concerns. 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, Federal Housing Administration (“FHA”) insurance, or The Veteran’s Administration (“VA”) guaranty. On June 30, 2011 and 2010, the current UPB of single-family residential loans that were sold on a full recourse basis with servicing retained was $52.3 million and $64.2 million, respectively.
Loans sold with limited recourse include loans sold under government guaranteed mortgage loan programs including the Federal Housing Administration and Veterans Administration. FHN may absorb losses due to uncollected interest and foreclosure costs but has limited risk of credit losses in the event of foreclosure of the mortgage loan sold. Generally, the amount of recourse liability in the event of foreclosure is determined based upon the respective government program and/or the sale or disposal of the foreclosed property collateralizing the mortgage loan. Another instance of limited recourse is the VA/No bid. In this case, the VA guarantee is limited and FHN may be required to fund any deficiency in excess of the VA guarantee if the loan goes to foreclosure. On June 30, 2011 and 2010, 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 $3.1 billion and $3.2 billion, respectively (primarily VA loans). Additionally, on June 30, 2011 and 2010, $.7 billion and $.9 billion, respectively, of mortgage loans (primarily FHA insured) were outstanding which were sold under limited recourse arrangements where the risk is limited to interest and servicing advances.
Loans Sold Without Recourse — GSE Whole Loan Sales. Substantially all of the conforming mortgage loans were sold to GSE such as Government National Mortgage Association (“GNMA” or “Ginnie Mae”) for federally insured loans and Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) for conventional loans. Each GSE has specific guidelines and criteria for sellers and servicers of loans backing their respective securities, and the risk of credit loss with regard to the principal amount of the loans sold was generally transferred to investors upon sale to the secondary market.
Generally these loans were sold without recourse. However, if it is determined that the loans sold were in breach of representations or warranties required by the GSE and made by FHN at the time of sale, FHN has obligations to either repurchase the loan for the UPB or make the purchaser whole for the economic loss experienced by the purchaser for such loan. Such representations and warranties required by the GSEs typically include those made regarding the existence and sufficiency of file documentation and the absence of fraud by borrowers or other third parties such as appraisers in connection with obtaining the loan.
At the time of sale, FHN retained servicing rights to a majority of these mortgage loans sold. However, FHN has since sold (through the 2008 divestiture and various bulk sales) servicing rights on a significant amount of the loans that were sold to GSEs. As of June 30, 2011, FHN services only $9.7 billion of loans sold to GSEs (primarily Fannie Mae and Freddie Mac). A substantial amount of FHN’s existing repurchase obligations from outstanding requests relate to conforming conventional mortgage loans that were sold to GSEs. Since the divestiture of the national mortgage banking business in third quarter 2008 through June 30, 2011, GSEs (primarily Fannie Mae and Freddie Mac) have accounted for the vast majority of repurchase/make-whole claims received.
Loans Sold Without Recourse — Proprietary Securitizations. FHN originated and sold certain non-agency, nonconforming mortgage loans, Jumbo and Alternative-A (“Alt A”) first lien mortgage loans, to private investors through over 140 proprietary securitization trusts. Over 110 of these proprietary securitization trusts were active as of June 30, 2011. FHN also originated six HELOC securitizations and one second lien installment securitization, all of which were active as of June 30, 2011, discussed in “Other Proprietary Securitizations” below. Securitized loans generally were sold indirectly to investors as interests, commonly known as certificates, in trusts or other vehicles. The certificates

29


Table of Contents

Note 9 — Contingencies and Other Disclosures (continued)
were sold to a variety of investors, including GSEs in some cases, through securities offerings under a prospectus or other offering documents. In most cases, the certificates were tiered into different risk classes, with junior classes exposed to trust losses first and senior classes exposed only after junior classes were exhausted. Unlike servicing on loans sold to GSEs, FHN still services substantially all of the remaining loans sold through proprietary securitizations. As of June 30, 2011, the remaining UPB balance in active proprietary securitizations was $13.2 billion consisting of $7.7 billion Alt-A mortgage loans and $5.5 billion Jumbo mortgage loans. Representations and warranties were made to the trustees for the benefit of investors. As such, FHN has exposure for repurchase of loans arising from claims that FHN breached its representations and warranties made at closing, and exposure for investment rescission or damages arising from claims by investors that the offering documents under which the loans were securitized were materially deficient. As of June 30, 2011, the repurchase request pipeline contained no repurchase requests related to securitized loans based on representations and warranties.
Unlike loans sold to GSEs, contractual representations and warranties for proprietary securitizations do not include general representations regarding the absence of third party fraud or negligence in the underwriting or origination of the mortgage loans. Securitization documents typically provide the investors with a right to request that the trustee investigate and initiate repurchase of a mortgage loan if FHN breached certain representations and warranties made at the time the securitization closed and such breach materially and adversely affects the interests of the investors in such mortgage loan. However, the securitization documents do not require the trustee to make an investigation into the facts or matters stated in any request or notice unless requested in writing to do so by the holders of certificates evidencing not less than 25 percent of the voting rights allocated to each class of certificates. The certificate holders may also be required to indemnify the trustee for its costs related to investigations made in connection with repurchase actions. FHN has no knowledge of any investor requests to the trustee to investigate mortgage loans for possible breach of representations and warranties. GSEs were among the purchasers of certificates in securitizations. As such, they are entitled to the benefits of the same representations and warranties as other investors. However, the GSEs, acting through their conservator under federal law, are permitted to undertake, independently of other investors, reviews of FHN’s mortgage loan origination and servicing files. Such reviews are commenced using a subpoena process. If, because of such reviews, the GSEs determine there has been a breach of a representation or warranty that has had a material and adverse affect on the interests of the investors in any mortgage loan, the GSEs may seek to cause the Trustee to enforce a repurchase obligation against FHN.
Also unlike loans sold to GSEs through nonrecourse whole loan sales, interests in securitized loans were sold as securities under prospectuses or other offering documents subject to the disclosure requirements of applicable federal and state securities laws. As an alternative to pursuing a claim for breach of representations and warranties through the trustee as mentioned above, investors could pursue a claim alleging that the prospectus or other disclosure documents were deficient by containing materially false or misleading information or by omitting material information. Claims for such disclosure deficiencies typically could be brought under applicable federal or state securities statutes, and the statutory remedies typically could include rescission of the investment or monetary damages measured in relation to the original investment made. If a plaintiff properly made and proved its allegations, the plaintiff might attempt to claim that damages could include loss of market value on the investment even if there were little or no credit loss in the underlying loans. Claims based on alleged disclosure deficiencies also could be brought as traditional fraud or negligence claims with a wider scope of damages possible. Each investor could bring such a claim individually, without acting through the trustee to pursue a claim for breach of representations and warranties, and investors could attempt joint claims or attempt to pursue claims on a class-action basis. Claims of this sort are likely to be resolved in a litigation context in most cases, unlike most of the GSE repurchase requests. The analysis of loss content and establishment of appropriate reserves in those cases would follow principles and practices associated with litigation matters, including an analysis of available procedural and substantive defenses in each particular case and an estimation of the probability of ultimate loss, if any. FHN expects most litigation claims to take much longer to resolve than repurchase requests typically have taken.
None of FHN’s proprietary first lien securitizations involved the use of monoline insurance for the benefit of all classes of security holders. Monoline insurance is a form of credit enhancement provided to a securitization by a third party insurer. Subject to the terms and conditions of the policy, the insurer guarantees payments of accrued interest and principal due to the investors. In certain limited situations, insurance was provided for a specific senior retail class of holders within individual securitizations. The aggregate insured certificates totaled $128.4 million of original certificate balance. FHN’s exercise of cleanup calls contained some of these insured certificates; therefore, the original certificate balance of insured certificates related to active securitization trusts was $103.4 million as of June 30, 2011. The trustee statement dated June 27, 2011 reported to FHN that the remaining outstanding certificate balance for these classes was $98.3 million. FHN understands that some monoline insurers have commenced lawsuits against others in the industry seeking to rescind policies of this sort due to alleged misrepresentations as to the quality of the loan portfolio insured. FHN has not received notice of a lawsuit from the monoline insurers of the senior retail level classes.
FHN, among others, has been subpoenaed by the FHFA, Conservator for Fannie Mae and Freddie Mac, related to investments made by the two GSEs in six Alt-A proprietary securitizations issued in 2005 and early 2006. The subpoenas relate to ongoing reviews which may result in claims against FHN. The original and current (as of the June 27, 2011 trust statements) combined certificate balances of the related pools

30


Table of Contents

Note 9 — Contingencies and Other Disclosures (continued)
in which Fannie Mae invested were $443.2 million and $176.3 million, respectively. The original and current (as of the June 27, 2011 trust statements) combined certificate balances of the related pools in which Freddie Mac invested were $842.0 million and $367.2 million, respectively. Since the reviews at this time are neither repurchase claims nor litigation, the associated loans are not considered part of the repurchase pipeline. As of June 30, 2011, and at the time this report is filed, FHN is unable to determine a probable loss or estimate a range of reasonably possible loss due to the uncertainty related to these matters; no liability has been established.
FHN, among others, has been subpoenaed by the federal regulator of credit unions, the National Credit Union Administration (“NCUA”), related to investments by two federal credit unions in three first lien and one HELOC securitization. The subpoenas relate to ongoing reviews which may result in claims against FHN. The original and current (as of the June 27, 2011 trust statements) combined first lien certificate balances of the related pools in which the two credit unions invested were $321.6 million and $162.7 million, respectively. The original and current (as of the June 27, 2011 trust statements) combined HELOC certificate balances of the related pools in which the two credit unions invested were $299.8 million and $129.9 million, respectively. Since the reviews at this time are neither repurchase claims nor litigation, the associated loans are not considered part of the repurchase pipeline. As of June 30, 2011, and at the time this report is filed, FHN is unable to determine a probable loss or estimate a range of reasonably possible loss due to the uncertainty related to these matters; no liability has been established.
At the time this report is filed, FHN is one of multiple defendants in three lawsuits brought by investors in seven securitizations which claim that the offering documents under which certificates were sold to them were materially deficient. The plaintiffs in these suits are Charles Schwab Corp., Federal Home Loan Bank of Chicago, and Western & Southern Life Insurance Co, among others. Two of those investors brought suit in the second half of 2010. FHN received notice on July 20, 2011 of the Western & Southern suit. A fourth investor, Federal Home Loan Bank of Indianapolis, filed a suit against FHN and others in 2010 but withdrew the suit as to FHN in July 2011. The plaintiffs in the three pending suits claim to have purchased a total of $216.6 million of certificates in seven separate securitizations and demand that FHN repurchase their investments, among other remedies sought. Details concerning the original dollar amounts of the investments at issue are set forth below. “Senior” and “Junior” refer to the ranking of the investments in broad terms; in many cases the securitization provided for sub-classifications within the Senior or Junior groups.
                                 
    Alt-A     Jumbo  
(Dollars in thousands)   Senior     Junior     Senior     Junior  
 
Vintage
                               
2005
  $     $     $ 60,000     $  
2006
                84,659       9,793  
2007
    5,050             50,000       7,084  
 
Total
  $ 5,050     $     $ 194,659     $ 16,877  
 
Although these suits are in early stages, FHN intends to defend itself vigorously. These lawsuit matters have been analyzed and treated as litigation matters under applicable accounting standards. As of June 30, 2011, and at the time this report was filed, FHN is unable to determine a probable loss or estimate a range of reasonably possible loss due to the uncertainty related to these matters; no liability has been established. Similar claims may be pursued by other investors.
At June 30, 2011, FHN had not recognized a liability for exposure for repurchase of loans arising from claims that FHN breached its representations and warranties made in securitizations at closing, nor for exposure for investment rescission or damages arising from claims by investors that the offering documents under which the loans were securitized were materially deficient.
Other Proprietary Securitizations. FHN also originated and sold home equity lines and loans through seven proprietary securitization trusts. The trusts issued notes backed by the loans and publicly offered the asset-backed notes to investors pursuant to a prospectus. FHN services all of the loans backing the notes in these proprietary securitizations pursuant to the terms of the sale and servicing agreements. The Trustee statements dated June 27, 2011, reported that the cumulative original and current outstanding note balances of the HELOC securitizations were $2.5 billion and $.6 billion, respectively. The original and current outstanding balance of the closed-end second lien securitization was $236.3 million and $26.3 million, respectively.
These securitization trusts have been consolidated; consequently, these loans and the associated credit risk are reflected in FHN’s consolidated financial statements. As of June 30, 2011, the loans and associated ALLL are reflected as “restricted” on the Consolidated Condensed Statements of Condition.

31


Table of Contents

Note 9 — Contingencies and Other Disclosures (continued)
The asset-backed notes issued in the HELOC securitizations were “wrapped” by monoline insurers. FHN understands that some monoline insurers have commenced lawsuits against other originators of asset-backed securities seeking to cancel policies of this sort due to alleged misrepresentations as to the quality of the loan portfolio insured. FHN has not received notice from a monoline insurer of any such lawsuit. The monoline insurers also have certain contractual rights to pursue repurchase and indemnification. In response to unreimbursed insurance draws resulting from insufficient investor remittances, the monoline insurer of two of FHN’s HELOC securitizations exercised its rights to review the performance of these HELOC securitizations and, with respect to charged off loans, to review loan origination and servicing files, underwriting guidelines and payment histories. The demands were made pursuant to the terms of the applicable insurance and indemnity and sale and servicing agreements. This review of FHN’s HELOC loan files at this time is neither a repurchase claim nor litigation. As of June 30, 2011, and at the time this report is filed, FHN is unable to determine a probable loss or estimate a range of reasonably possible loss due to the uncertainty related to these matters; no liability has been established for amounts other than for advances made by monoline insurers. Advances made by monoline insurers for the benefit of security holders have been recognized within restricted term borrowings in the Consolidated Condensed Statements of Condition.
Loans Sold Without Recourse — Other Whole Loan Sales. FHN originated through its former national retail and wholesale channels and subsequently sold HELOC and second lien mortgages through whole loan sales. These loans were underwritten to the guidelines of that channel as either combination transactions with first lien mortgages or stand alone transactions. The whole loan sales were generally done on a servicing retained basis and contained representations and warranties customary to such loan sales and servicing agreements in the industry with specific reference to seller’s underwriting and servicing guidelines. Loans were subject to repurchase in the event of early payment defaults and for breaches of representations and warranties. In 2009, FHN settled a substantial portion of its repurchase obligations for these loans through an agreement with the primary purchaser of HELOC and second lien loans. This settlement included the transfer of servicing rights associated with the applicable second lien and HELOC loan sales. 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 reserve for these loans is minimal, reflecting the settlement discussed above.
FHN has also sold first lien mortgages without recourse through whole loan sales to non-GSE purchasers. As of June 30, 2011, 2 percent of repurchase/make-whole claims relate to private whole loan sales. These claims are included in FHN’s liability methodology and the assessment of the adequacy of the repurchase and foreclosure liability.
Private Mortgage Insurance. PMI was required by GSE rules for certain of the loans sold to GSEs and was also provided for certain of the loans that were securitized. PMI generally was provided for the first lien loans sold or securitized having a loan-to-value ratio at origination of greater than 80 percent. Although unresolved PMI cancellation notices are not formal repurchase requests, FHN includes these in the active repurchase request pipeline when analyzing and estimating loss content in relation to the loans sold to GSEs. For purposes of estimating loss content, FHN also considers reviewed PMI cancellation notices where coverage has been cancelled for all loan sales and securitizations. In determining the adequacy of the repurchase reserve, FHN considered $208.9 million in UPB of loans sold where PMI coverage was cancelled for all loan sales and securitizations. To date, a majority of PMI cancellation notices have involved loans sold to GSEs. At June 30, 2011, all estimated loss content arising from PMI cancellation matters related to loans sold to GSEs.
Repurchase Obligations Related to M&T Branch Sale. FHN also sold loans as part of branch sales that were executed during 2007 as part of a strategic decision to exit businesses in markets FHN considered non-strategic. Unlike the loans sold to GSEs or sold privately as discussed above, these loans were originated to be held to maturity as part of the loan portfolio. FHN has received repurchase requests related to HELOCs from M&T, one of the purchasers of these branches. These HELOCs are not included in the repurchase pipeline as potential repurchase obligations are evaluated separately based on specific facts and circumstances related to this loan sale. These requests currently are the subject of an arbitration proceeding. Additional information concerning this matter is presented in this Note above under the caption “Contingencies” and concerns arbitration claims filed by M&T.
Repurchase and Foreclosure Liability. Based on its experience to date, FHN has evaluated its loan repurchase exposure as mentioned above and has accrued for losses of $171.9 million and $164.6 million as of June 30, 2011 and 2010, respectively. A vast majority of this liability relates to obligations associated with the sale of first lien mortgages to GSEs through the legacy mortgage banking business. Accrued liabilities for FHN’s estimate of these obligations are reflected in Other liabilities on the Consolidated Condensed Statements of Condition. Charges to increase the repurchase and foreclosure liability are included within Repurchase and foreclosure provision on the Consolidated Condensed Statements of Income.
Other Disclosures — Foreclosure Practices. The focus on judicial foreclosure practices of financial institutions nationwide has expanded to include non-judicial foreclosure and loss mitigation practices including the effective coordination by servicers of foreclosure and loss

32


Table of Contents

Note 9 — Contingencies and Other Disclosures (continued)
mitigation activities, which could impact FHN through increased operational and legal costs. FHN owns and services residential loans. By the end of 2010, FHN had reviewed its processes relating to foreclosure on loans it owns and services and no material issues were identified. FHN has continued to review and revise, as appropriate, its foreclosure processes in coordination with loss mitigation practices and to continue to monitor these processes with the goal of conforming them to changing servicing requirements. FHN’s national mortgage and servicing platforms were sold in August 2008 and the related servicing activities, including foreclosure and loss mitigation practices, of the still-owned portion of FHN’s mortgage servicing portfolio has been outsourced through a three year subservicing arrangement (the “2008 subservicing agreement”) with the platform buyer (the “2008 subservicer”). The 2008 subservicing agreement expires in August 2011. FHN has entered into a replacement agreement (the “2011 subservicing agreement”) with a new subservicer (the “2011 subservicer”). The transition from the 2008 to the 2011 subservicer is expected to be substantially completed by August 2011.
By the end of first quarter 2011, federal banking regulators had completed examinations of foreclosure and loss mitigation practices of large, federally regulated mortgage servicers, including FHN’s 2008 subservicer, and more recently have entered into consent decrees with several of the institutions requiring comprehensive revision of loan modification and foreclosure processes, including the remediation of borrowers that have experienced financial harm. The 2008 subservicer is subject to a consent decree and has advised FHN that it has implemented or is in the process of implementing the new standards. As a result of the above examinations, on June 30, 2011 the OCC issued Supervisory Guidance relating to Foreclosure Management in OCC Bulletin 2011-29 setting forth the OCC’s expectations for the oversight and management of mortgage foreclosure activities for national banks, and requiring self-assessments of foreclosure management practices including compliance with legal requirements, and testing and file reviews. FHN is reviewing the Supervisory Guidance and anticipates utilizing a third party for its self-assessment of its foreclosure management process relating to all its mortgage servicing, including that conducted by the 2011 subservicer. Also in connection with the 2008 subservicer’s self-assessment, FHN will cooperate with the 2008 subservicer to identify any servicing deficiencies in foreclosure or loss mitigation that might impact FHN’s subserviced loans.
Under FHN’s 2008 subservicing agreement, the 2008 subservicer has the contractual right to follow FHN’s prior servicing practice as they existed 180 days prior to August 2008 until subservicer becomes aware that such practices do not comply with applicable servicing requirements, subject to subservicer’s obligation to follow accepted servicing practices, applicable law, and new requirements, including evolving interpretations of such practices, law and requirements. FHN cannot predict the amount of additional operating costs related to foreclosure delays, including required process changes, increased default services, extended periods of servicing advances and the recoverability of such advances, legal expenses, or other costs that may be incurred as a result of the internal reviews or external actions. In the event of a dispute between FHN and subservicer over any liabilities for subservicer’s servicing and management of foreclosure processes, FHN cannot predict the costs that maybe incurred. Accordingly, FHN is unable to determine a probable loss or estimate a range of reasonably possible loss due to uncertainty related to these matters. No liability has been established.
Other Disclosures — Reinsurance Arrangements. A wholly-owned subsidiary of FHN entered into agreements with several providers of private mortgage insurance whereby the subsidiary agreed to accept insurance risk for specified loss corridors for pools of loans originated in each contract year in exchange for a portion of the PMI premiums paid by borrowers (i.e., reinsurance arrangements). The loss corridors varied for each primary insurer for each contract year. The estimation of FHN’s exposure to losses under these arrangements involved the determination of FHN’s maximum loss exposure by applying the low and high ends of the loss corridor range to a fixed amount that is specified in each contract. FHN then performed an estimation of total loss content within each insured pool of loans to determine the degree to which its loss corridor had been penetrated. Management obtained the assistance of a third-party actuarial firm in developing its estimation of loss content. This process included consideration of factors such as delinquency trends, default rates, and housing prices which were used to estimate both the frequency and severity of losses. No new reinsurance arrangements were initiated after 2008. As of June 30, 2011, FHN had settled all of its reinsurance obligations with primary insurers through termination of the related reinsurance agreement and transfer of the associated trust assets.
Other Disclosures — 2008 Sale of National Origination and Servicing Platforms. In conjunction with the sale of its servicing platform in August 2008, FHN entered into the 2008 subservicing agreement with the 2008 subservicer for the unsold portion of FHN’s servicing portfolio. As part of the 2008 subservicing agreement, FHN agreed to a make-whole arrangement whereby if the number of loans subserviced by the 2008 subservicer 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 2008 subservicer), FHN will make a payment according to a contractually specified formula. The make-whole payment is subject to a cap, which is $15.0 million if triggered during the eight quarters following the first anniversary of the agreement. 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. The 2008 subservicing agreement will expire in August 2011 and FHN has entered into the 2011 subservicing agreement with the 2011 subservicer that will take over the servicing of these mortgage loans for FHN. As FHN expects to continue compliance with all thresholds under the make-whole arrangement through August 2011,

33


Table of Contents

Note 9 — Contingencies and Other Disclosures (continued)
FHN expects to reverse the $1.2 million contingent liability associated with the make-whole provisions of the 2008 subservicing agreement in third quarter 2011.

34


Table of Contents

Note 10 — Pension, Savings, and Other Employee Benefits
Pension plan. FHN sponsors a noncontributory, qualified defined benefit pension plan to employees hired or re-hired on or before September 1, 2007. Pension benefits are based on years of service, average compensation near retirement or other termination, and estimated social security benefits at age 65. The contributions are based upon actuarially determined amounts necessary to fund the total benefit obligation. FHN did not make any contributions to the qualified pension plan in 2010 or the first two quarters of 2011. Future decisions 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. At this time, FHN does not expect to make a contribution to the qualified pension plan in 2011.
FHN also maintains non-qualified plans including a supplemental retirement plan that covers certain employees whose benefits under the pension plan have been limited. These other non-qualified pension plans are unfunded, and contributions to these plans cover all benefits paid under the non-qualified plans. Contributions to non-qualified plans were $4.5 million for 2010, and FHN anticipates making a $5.1 million contribution in 2011.
Savings plan. Effective January 1, 2008, a special Employee Non-voluntary Elective Contribution (“ENEC”) program was added under the FHN savings plan and is provided only to employees who are not eligible for the pension plan. With the ENEC program, FHN will generally make contributions to eligible employees’ savings plan accounts based upon company performance. Contribution amounts will be a percentage of each employee’s base salary (as defined in the savings plan) earned the prior year. FHN contributed $1.2 million for the plan in 2010 related to the 2009 plan year, and FHN expects to contribute $1.3 million for the plan in 2011 related to the 2010 plan year.
Other employee benefits. FHN provides postretirement life insurance benefits to certain employees and also provides postretirement medical insurance to retirement-eligible employees. The postretirement 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 postretirement 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 currently anticipates receiving a prescription drug subsidy under the Act through 2015.
The components of net periodic benefit cost for the three months ended June 30 are as follows:
                                 
    Pension Benefits     Other Benefits  
(Dollars in thousands)   2011     2010     2011     2010  
 
Components of net periodic benefit cost
                               
Service cost
  $ 4,301     $ 3,778     $ 144     $ 136  
Interest cost
    8,147       7,836       552       595  
Expected return on plan assets
    (11,724 )     (11,879 )     (297 )     (287 )
Amortization of unrecognized:
                               
Transition obligation
                246       247  
Prior service cost/(credit)
    104       67       (2 )     (2 )
Actuarial (gain)/loss
    5,027       3,772       (260 )     (216 )
 
Net periodic benefit cost
  $ 5,855     $ 3,574     $ 383     $ 473  
 

35


Table of Contents

Note 10 — Pension, Savings, and Other Employee Benefits (continued)
The components of net periodic benefit cost for the six months ended June 30 are as follows:
                                 
    Pension Benefits     Other Benefits  
(Dollars in thousands)   2011     2010     2011     2010  
 
Components of net periodic benefit cost
                               
Service cost
  $ 8,602     $ 7,556     $ 288     $ 272  
Interest cost
    16,294       15,673       1,104       1,190  
Expected return on plan assets
    (23,446 )     (23,759 )     (596 )     (575 )
Amortization of unrecognized:
                               
Transition obligation
                492       494  
Prior service cost/(credit)
    208       134       (4 )     (4 )
Actuarial (gain)/loss
    10,054       7,543       (520 )     (431 )
 
Net periodic benefit cost
  $ 11,712     $ 7,147     $ 764     $ 946  
 

36


Table of Contents

Note 11 — Business Segment Information
Periodically, FHN adapts its segments to reflect managerial or strategic changes. FHN may also modify its methodology of allocating expenses among segments which could change historical segment results. In first quarter 2011, FHN agreed to sell First Horizon Insurance, Inc. (“FHI”), the former subsidiary of First Tennessee Bank, which provided property and casualty insurance to customers in over 40 states, and Highland Capital Management Corporation (“Highland”), the former subsidiary of First Horizon National Corporation, which provided asset management services. The results of operations for both businesses have been included in the Income/(loss) from discontinued operations, net of tax line on the Consolidated Condensed Statements of Income for all periods presented. Consistent with historical practice, these businesses were moved to the non-strategic segment with other exited businesses and discontinued products. For comparability, previously reported items have been revised to reflect these changes. Both divestitures closed in second quarter 2011.
FHN has four business segments: regional banking, capital markets, corporate, and non-strategic. 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. Regional banking provides investments, financial planning, trust services and asset management, health savings accounts, credit card, cash management, and first lien mortgage originations within the Tennessee footprint. Additionally, the regional banking segment includes correspondent banking which provides credit, depository, and other banking related services to other financial institutions. The capital markets segment consists of fixed income sales, trading, and strategies for institutional clients in the U.S. and abroad, as well as loan sales, portfolio advisory, and derivative sales. The corporate segment consists of gains on the extinguishment 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 various charges related to restructuring, repositioning, and efficiency. The non-strategic segment consists of the wind-down national consumer and construction lending activities, legacy mortgage banking elements including servicing fees, and the associated ancillary revenues and expenses related to these businesses. Non-strategic also includes the wind-down trust preferred loan portfolio and exited businesses along with the associated restructuring, repositioning, and efficiency charges.
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 six month periods ended June 30:
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
(Dollars in thousands)   2011     2010     2011     2010  
 
Consolidated
                               
Net interest income
  $ 172,860     $ 182,064     $ 345,615     $ 362,459  
Provision for loan losses
    1,000       70,000       2,000       175,000  
Noninterest income
    188,772       243,937       386,314       487,186  
Noninterest expense
    345,826       337,311       660,973       675,290  
 
Income/(loss) before income taxes
    14,806       18,690       68,956       (645 )
Provision/(benefit) for income taxes
    (4,242 )     (1,659 )     7,866       (18,177 )
 
Income from continuing operations
    19,048       20,349       61,090       17,532  
Income/(loss) from discontinued operations, net of tax
    3,788       129       4,748       (6,947 )
 
Net income
  $ 22,836     $ 20,478     $ 65,838     $ 10,585  
 
Average assets
  $ 24,518,015     $ 25,600,578     $ 24,543,948     $ 25,580,107  
 
Certain previously reported amounts have been reclassified to agree with current presentation.

37


Table of Contents

Note 11 — Business Segment Information (continued)
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
(Dollars in thousands)   2011     2010     2011     2010  
 
Regional Banking
                               
Net interest income
  $ 137,080     $ 138,179     $ 272,582     $ 272,036  
Provision for loan losses
    (13,743 )     27,975       (26,143 )     80,022  
Noninterest income
    68,881       74,652       136,251       145,577  
Noninterest expense
    146,892       153,964       298,013       310,587  
 
Income before income taxes
    72,812       30,892       136,963       27,004  
Provision for income taxes
    26,680       11,213       50,135       9,427  
 
Net income
  $ 46,132     $ 19,679     $ 86,828     $ 17,577  
 
Average assets
  $ 11,090,295     $ 11,237,708     $ 11,073,610     $ 11,264,974  
 
 
Capital Markets
                               
Net interest income
  $ 5,564     $ 4,824     $ 11,140     $ 7,188  
Noninterest income
    77,925       100,975       168,005       215,559  
Noninterest expense
    103,383       78,066       176,946       161,943  
 
Income/(loss) before income taxes
    (19,894 )     27,733       2,199       60,804  
Provision/(benefit) for income taxes
    (7,736 )     10,384       698       22,766  
 
Net income/(loss)
  $ (12,158 )   $ 17,349     $ 1,501     $ 38,038  
 
Average assets
  $ 2,249,831     $ 2,077,434     $ 2,150,290     $ 1,979,558  
 
 
Corporate
                               
Net interest income
  $ 445     $ 1,113     $ 175     $ 6,670  
Provision for loan losses
    N/A       N/A       N/A       N/A  
Noninterest income
    9,007       4,925       21,878       29,832  
Noninterest expense
    36,286       11,833       56,957       32,322  
 
Income/(loss) before income taxes
    (26,834 )     (5,795 )     (34,904 )     4,180  
Benefit for income taxes
    (18,843 )     (10,392 )     (29,375 )     (15,466 )
 
Net income/(loss)
  $ (7,991 )   $ 4,597     $ (5,529 )   $ 19,646  
 
Average assets
  $ 5,086,989     $ 4,940,675     $ 5,098,012     $ 4,748,205  
 
 
Non-Strategic
                               
Net interest income
  $ 29,771     $ 37,948     $ 61,718     $ 76,565  
Provision for loan losses
    14,743       42,025       28,143       94,978  
Noninterest income
    32,959       63,385       60,180       96,218  
Noninterest expense
    59,265       93,448       129,057       170,438  
 
Loss before income taxes
    (11,278 )     (34,140 )     (35,302 )     (92,633 )
Benefit for income taxes
    (4,343 )     (12,864 )     (13,592 )     (34,904 )
 
Loss from continuing operations
    (6,935 )     (21,276 )     (21,710 )     (57,729 )
Income/(loss) from discontinued operations, net of tax
    3,788       129       4,748       (6,947 )
 
Net loss
  $ (3,147 )   $ (21,147 )   $ (16,962 )   $ (64,676 )
 
Average assets
  $ 6,090,900     $ 7,344,761     $ 6,222,036     $ 7,587,370  
 
Certain previously reported amounts have been reclassified to agree with current presentation.
N/A — Not applicable

38


Table of Contents

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, along with a Warrant to purchase common stock. The issuance occurred in connection with, and was governed by, the Treasury Capital Purchase Program (“Capital Purchase Program”) administered by the U.S. Treasury (“UST”) under the Troubled Asset Relief Program (“TARP”). In connection with the issuance of the Preferred Shares, FHN also issued a Warrant to purchase 12,743,235 common shares with an exercise price of $10.20 per share. The Warrant was immediately exercisable and was set to expire ten years after issuance. As a result of the stock dividends distributed through January 1, 2011, the Warrant was adjusted to cover 14,842,321 common shares at a purchase price of $8.757 per share. On December 22, 2010, subsequent to offerings of common equity and senior debt which raised more than $750 million, FHN repurchased all of the Preferred Shares and remitted the accrued and unpaid dividends. In first quarter 2011, FHN completed the purchase and cancellation of the Warrant to purchase common stock. FHN paid the UST $79.7 million to purchase the Warrant. The UST no longer holds any securities of FHN under the Capital Purchase Program.
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 percent 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 Term borrowings. 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.
First Horizon Preferred Funding, LLC and First Horizon Preferred Funding II, LLC have each issued $1.0 million of Class B Preferred Shares. On June 30, 2011 and 2010, the amount of Class B Preferred Shares that are perpetual in nature that was recognized as Noncontrolling interest on the Consolidated Condensed Statements of Condition was $.3 million for both periods. The remaining balance has been eliminated in consolidation.
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 June 30, 2011 and 2010, $294.8 million of Class A Preferred Stock was recognized as Noncontrolling interest on the Consolidated Condensed Statements of Condition for both periods.
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 and Income/(loss) from discontinued operations, net of tax included in the Consolidated Condensed Statements of Income, have been attributed solely to FHN as the controlling interest holder. The component of Income from continuing operations attributable to FHN as the controlling interest holder for the three months ended June 30, 2011 and 2010 is $16.2 million and $17.5 million, respectively, and $55.4 million and $11.8 million for the six months ended June 30, 2011 and 2010, respectively.

39


Table of Contents

Note 13 — Loan Sales and Securitizations
Prior to 2009, FHN utilized loan sales and securitizations as a significant source of liquidity for its mortgage banking operations. Since that time FHN has focused the originations of mortgages within its regional banking footprint. FHN no longer retains financial interests in loans it transfers to third parties. During second quarter 2011, FHN transferred $54.4 million of single-family residential mortgage loans in whole loan sales resulting in $.3 million of net pre-tax gains. During second quarter 2010, FHN transferred $178.9 million of single-family residential mortgage loans in whole loan sales resulting in $1.5 million of net pre-tax gains. During the six months ended June 30, 2011, FHN transferred $192.6 million of single-family residential mortgage loans in whole loan sales resulting in $1.2 million of net pre-tax gains. During the six months ended June 30, 2010, FHN transferred $353.8 million of single-family residential mortgage loans in whole loan sales resulting in $3.0 million of net pre-tax gains.
Retained Interests
Interests retained from prior loan sales, including GSE securitizations, typically included MSR and excess interest. Interests retained from proprietary securitizations included MSR and various financial assets (see discussion below). MSR were initially valued at fair value and the remaining retained interests were 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. In second quarter 2011 and 2010, FHN received annual servicing fees approximating .29 percent of the outstanding balance of underlying single-family residential mortgage loans and .34 percent inclusive of income related to excess interest. In second quarter 2011 and 2010, FHN received annual servicing fees approximating .50 percent 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. There were no additions to MSR in 2011 or 2010.
Other financial assets retained in proprietary or GSE securitizations may include excess interest (structured as interest-only strips), interest-only strips, or principal-only strips. 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. All financial assets retained from off balance sheet securitizations 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 Mortgage banking noninterest income on the Consolidated Condensed Statements of Income.
The sensitivity of the fair value of all retained or purchased MSR to immediate 10 percent and 20 percent adverse changes in assumptions on June 30, 2011 and 2010, are as follows:
                                                 
    June 30, 2011     June 30, 2010  
(Dollars in thousands   First     Second             First     Second        
except for annual cost to service)   Liens     Liens     HELOC     Liens     Liens     HELOC  
 
Fair value of retained interests
  $ 183,530     $ 251     $ 3,177     $ 197,953     $ 242     $ 3,551  
Weighted average life (in years)
    4.3       2.9       2.6       3.7       2.3       2.5  
 
Annual prepayment rate
    20.0 %     26.0 %     29.4 %     22.6 %     33.0 %     31.6 %
Impact on fair value of 10% adverse change
  $ (9,109 )   $ (16 )   $ (229 )   $ (11,766 )   $ (24 )   $ (446 )
Impact on fair value of 20% adverse change
    (17,448 )     (31 )     (439 )     (22,425 )     (47 )     (854 )
 
Annual discount rate on servicing cash flows
    11.6 %     14.0 %     18.0 %     11.8 %     14.0 %     18.0 %
Impact on fair value of 10% adverse change
  $ (5,304 )   $ (7 )   $ (96 )   $ (5,189 )   $ (7 )   $ (173 )
Impact on fair value of 20% adverse change
    (10,273 )     (14 )     (187 )     (10,071 )     (13 )     (336 )
 
Annual cost to service (per loan)
  $ 118     $ 50     $ 50     $ 115     $ 50     $ 50  
Impact on fair value of 10% adverse change
    (3,830 )     (6 )     (51 )     (4,975 )     (5 )     (113 )
Impact on fair value of 20% adverse change
    (7,633 )     (11 )     (101 )     (9,922 )     (10 )     (226 )
 
Annual earnings on escrow
    1.4 %                 2.0 %            
Impact on fair value of 10% adverse change
  $ (1,727 )               $ (2,484 )            
Impact on fair value of 20% adverse change
    (3,454 )                 (4,968 )            
 

40


Table of Contents

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 June 30, 2011 and 2010, are as follows:
                 
    Excess        
(Dollars in thousands   Interest     Certificated  
except for annual cost to service)   IO     PO  
 
June 30, 2011
               
Fair value of retained interests
  $ 22,643     $ 8,775  
Weighted average life (in years)
    4.5       4.9  
Annual prepayment rate
    17.1 %     25.6 %
Impact on fair value of 10% adverse change
  $ (978 )   $ (303 )
Impact on fair value of 20% adverse change
    (1,893 )     (594 )
 
               
Annual discount rate on residual cash flows
    13.1 %     18.7 %
Impact on fair value of 10% adverse change
  $ (926 )   $ (439 )
Impact on fair value of 20% adverse change
    (1,773 )     (872 )
 
June 30, 2010
               
Fair value of retained interests
  $ 28,611     $ 11,340  
Weighted average life (in years)
    3.7       4.6  
 
               
Annual prepayment rate
    20.7 %     25.4 %
Impact on fair value of 10% adverse change
  $ (1,493 )   $ (336 )
Impact on fair value of 20% adverse change
    (2,875 )     (668 )
 
               
Annual discount rate on residual cash flows
    13.6 %     21.3 %
Impact on fair value of 10% adverse change
  $ (1,101 )   $ (449 )
Impact on fair value of 20% adverse change
    (2,113 )     (900 )
 
These sensitivities are hypothetical and should not be considered 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, 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.
For the three and six months ended June 30, 2011 and 2010, cash flows received and paid related to loan sales and securitizations were as follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
(Dollars in thousands)   2011     2010     2011     2010  
 
Proceeds from initial sales and securitizations
  $ 54,621     $ 180,430     $ 193,823     $ 356,766  
Servicing fees retained (a)
    19,843       27,074       41,335       55,890  
Purchases of GNMA guaranteed mortgages
    15,704       18,462       37,911       36,606  
Purchases of previously transferred financial assets (b) (c)
    88,444       66,314       141,636       187,405  
Other cash flows received on retained interests
    1,859       2,412       4,062       4,983  
 
Certain previously reported amounts have been reclassified to agree with current presentation.
     
(a)   Includes servicing fees on MSR associated with loan sales and purchased MSR.
 
(b)   Includes repurchases of both delinquent and performing loans, foreclosed assets, and make-whole payments for economic losses incurred by purchaser. Also includes buyouts from GSEs in order to facilitate foreclosures.
 
(c)   2011 includes $32.7 million related to clean-up calls exercised by FHN in second quarter.

41


Table of Contents

Note 13 — Loan Sales and Securitizations (continued)
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 six months ended June 30, 2011, are as follows:
                                 
    Total Principal     Principal Amount     Net Credit  
(Dollars in thousands)   Amount of Loans     of Delinquent Loans (a)     Losses (b)  
              Three Months Ended     Six Months Ended  
    On June 30, 2011     June 30, 2011     June 30, 2011  
Type of loan:
                               
Real estate residential
  $ 19,703,040     $ 926,851     $ 127,649     $ 255,998  
                   
Total loans managed or transferred (c)
  $ 19,703,040     $ 926,851     $ 127,649     $ 255,998  
 
                         
Loans sold
    (12,291,777 )                        
Loans held for sale
    (318,888 )                        
                         
Loans held in portfolio
  $ 7,092,375                          
                         
     
(a)   Loans 90 days or more past due include $39.9 million of GNMA guaranteed mortgages.
 
(b)   Principal amount of loans securitized and sold includes $8.9 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. See Note 9 — Contingencies and Other Disclosures for discussion related to repurchase obligations for loans transferred to GSEs and private investors.
 
(c)   Amount represents real estate residential loans transferred in proprietary securitizations and whole loan sales in which FHN has a retained interest other than servicing rights. For loans transferred to GSEs, includes all loans with retained interests.
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 six months ended June 30, 2010, are as follows:
                                 
    Total Principal     Principal Amount     Net Credit  
(Dollars in thousands)   Amount of Loans     of Delinquent Loans (a)     Losses (b)  
                    Three months ended     Six months ended  
    On June 30, 2010     June 30, 2010     June 30, 2010  
Type of loan:
                               
Real estate residential
  $ 24,237,368     $ 1,011,894     $ 151,686     $ 294,607  
 
                       
Total loans managed or transferred (c)
  $ 24,237,368     $ 1,011,894     $ 151,686     $ 294,607  
 
                       
Loans sold
    (16,110,053 )                        
Loans held for sale
    (339,062 )                        
                         
Loans held in portfolio
  $ 7,788,253                          
                         
     
(a)   Loans 90 days or more past due include $35.8 million of GNMA guaranteed mortgages.
 
(b)   Principal amount of loans securitized and sold includes $11.7 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. See Note 9 — Contingencies and Other Disclosures for discussion related to repurchase obligations for loans transferred to GSEs and private investors.
 
(c)   Amount represents real estate residential loans transferred in proprietary securitizations and whole loan sales in which FHN has a retained interest other than servicing rights. For loans transferred to GSEs, includes all loans with retained interests.

42


Table of Contents

Note 13 — Loan Sales and Securitizations (continued)
Secured Borrowings. 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 Qualified Special Purpose Entities (“QSPE”) under the applicable accounting rules at that time 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 Accounting Standards Codification 860-10-50, “Transfers and Servicing” (“ASC 860-10-50”). With the prospective adoption of ASU 2009-17 in first quarter 2010, all amounts related to consolidated proprietary securitization trusts have been included in restricted balances on the Consolidated Condensed Statements of Condition.
In 2007, FTBNA executed a securitization of certain small issuer trust preferreds for which the underlying trust did not qualify as a sale under ASC 860. Therefore, FTNBA has accounted for the funds received through the securitization as a secured borrowing. On June 30, 2011, FTBNA had $112.5 million of loans, net of unearned income, $1.7 million of trading securities, and $51.8 million of term borrowings on the Consolidated Condensed Statements of Condition related to this transaction. On June 30, 2010, FTBNA had $112.5 million of loans, net of unearned income, $1.7 million of trading securities, and $50.7 million of term borrowings on the Consolidated Condensed Statements of Condition related to this transaction. See Note 14 — Variable Interest Entities for additional information.

43


Table of Contents

Note 14 — Variable Interest Entities
ASC 810 defines a Variable Interest Entities (“VIE”) as an entity where the equity investors, as a group, lack either (1) the power through voting rights, or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance, (2) the obligation to absorb the expected losses of the entity, (3) the right to receive the expected residual returns of the entity, or (4) when the equity investors, as a group, 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 fluctuates with changes in the fair value of the VIE’s net assets exclusive of variable interests. Under ASC 810, as amended, FHN is deemed to be the primary beneficiary and required to consolidate a VIE if it has a variable interest in the VIE that provides it with a controlling financial interest. For such purposes, the determination of whether a controlling financial interest exists is based on whether a single party has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant.
Consolidated Variable Interest Entities. FHN holds variable interests in proprietary residential mortgage securitization trusts it established prior to 2008 as a source of liquidity for its mortgage banking and consumer lending operations. Except for recourse due to breaches of representations and warranties made by FHN in connection with the sale of the loans to the trusts, the creditors of the trusts hold no recourse to the assets of FHN. Additionally, FHN has no contractual requirements to provide financial support to the trusts. Based on their restrictive nature, the trusts are considered VIE as the holders of equity at risk do not have the power through voting rights or similar rights to direct the activities that most significantly impact the trusts’ economic performance. In situations where the retention of MSR and other retained interests, including residual interests and subordinated bonds, results in FHN potentially absorbing losses or receiving benefits that are significant to the trusts, FHN is considered the primary beneficiary, as it is also assumed to have the power as servicer to most significantly impact the activities of such VIE. Consolidation of the trusts results in the recognition of the trusts’ proceeds as restricted borrowings since the cash flows on the securitized loans can only be used to settle the obligations due to the holders of the trusts’ securities.
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 VIE 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. FHN is considered the primary beneficiary of the rabbi trusts as it has the power to direct the activities that most significantly impact the economic performance of the rabbi trusts through its ability to direct the underlying investments made by the trusts. Additionally, FHN could potentially receive benefits or absorb losses that are significant to the trusts due to its right to receive any asset values in excess of liability payoffs and its obligation to fund any liabilities to employees that are in excess of a rabbi trust’s assets.
The following table summarizes VIE consolidated by FHN as of June 30, 2011 and 2010:
                 
    June 30, 2011  
    On-Balance Sheet     Rabbi Trusts Used for Deferred  
    Consumer Loan Securitizations     Compensation Plans  
(Dollars in thousands)   Carrying Value     Carrying Value  
Assets:
               
Cash and due from banks
  $ 1,805       N/A  
Loans, net of unearned income
    694,031       N/A  
Less: Allowance for loan losses
    33,030       N/A  
 
Total net loans
    661,001       N/A  
 
Other assets
    13,983     $ 62,207  
 
Total assets
  $ 676,789     $ 62,207  
 
Noninterest-bearing deposits
  $ 903       N/A  
Term borrowings
    682,764       N/A  
Other liabilities
    49     $ 55,387  
 
Total liabilities
  $ 683,716     $ 55,387  
 

44


Table of Contents

Note 14 — Variable Interest Entities (continued)
                 
    June 30, 2010  
    On-Balance Sheet     Rabbi Trusts Used for Deferred  
    Consumer Loan Securitizations     Compensation Plans  
(Dollars in thousands)   Carrying Value     Carrying Value  
 
Assets:
               
Loans, net of unearned income
  $ 833,830       N/A  
Less: Allowance for loan losses
    50,143       N/A  
 
Total net loans
    783,687       N/A  
 
Other assets
    24,662     $ 59,804  
 
Total assets
  $ 808,349     $ 59,804  
 
Noninterest-bearing deposits
  $ 880       N/A  
Term borrowings
    830,356       N/A  
Other liabilities
    121     $ 55,341  
 
Total liabilities
  $ 831,357     $ 55,341  
 
Nonconsolidated Variable Interest Entities. 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 VIE because FTHC, as the holder of the equity investment at risk, does not have the ability to direct the activities that most significantly affect the performance of the entity through voting rights or similar rights. While FTHC could absorb losses that are significant to the LIHTC partnerships as it has a risk of loss for its initial capital contributions and funding commitments to each partnership, it is not considered the primary beneficiary of the LIHTC partnerships. The general partners are considered the primary beneficiaries because managerial functions give them the power to direct the activities that most significantly impact the partnerships’ economic performance and the general partners are exposed to all losses beyond FTHC’s initial capital contributions and funding commitments.
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 the power through voting rights, or similar rights, to direct the activities that most significantly impact the trusts’ economic performance. Based on the nature of the trusts’ activities and the size of FTBNA’s holdings, FTBNA could potentially receive benefits or absorb losses that are significant to the trusts regardless of whether a majority of a trust’s securities are held by FTBNA. However, since FTBNA is solely a holder of the trusts’ securities, it has no rights which would give it the power to direct the activities that most significantly impact the trusts’ economic performance and thus it cannot be considered the primary beneficiary of the trusts. FTBNA has no contractual requirements to provide financial support to the trusts.
In 2007, FTBNA executed a securitization of certain small issuer trust preferreds for which the underlying trust meets the definition of a VIE because the holders of the equity investment at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entity’s economic performance. FTBNA could potentially receive benefits or absorb losses that are significant to the trust based on the size and priority of the interests it retained in the securities issued by the trust. However, since FTBNA did not retain servicing or other decision making rights, FTBNA is not the primary beneficiary as it does not have the power to direct the activities that most significantly impact the trust’s economic performance. Accordingly, FTBNA has accounted for the funds received through the securitization as a term borrowing in its Consolidated Condensed Statements of Condition. FTBNA has no contractual requirement to provide financial support to the trust.
FHN has previously issued junior subordinated debt totaling $309.3 million to First Tennessee Capital I (“Capital I”) and First Tennessee Capital II (“Capital II”). In first quarter 2011, FHN redeemed all $103.1 million of the subordinated debentures issued to Capital I leaving balances of Capital II outstanding as of June 30, 2011. Capital I (as of June 30, 2010 only) and Capital II are considered VIE because FHN’s capital contributions to these trusts are not considered “at risk” in evaluating whether the holders of the equity investments at risk in the trusts have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entities’ economic performance. FHN cannot be the trusts’ primary beneficiary because FHN’s capital contributions to the trusts are not considered variable interests as they are not “at risk”. Consequently, Capital I and Capital II are not consolidated by FHN.

45


Table of Contents

Note 14 — Variable Interest Entities (continued)
FHN holds variable interests in proprietary residential mortgage securitization trusts it established prior to 2008 as a source of liquidity for its mortgage banking operations. Except for recourse due to breaches of representations and warranties made by FHN in connection with the sale of the loans to the trusts, the creditors of the trusts hold no recourse to the assets of FHN. Additionally, FHN has no contractual requirements to provide financial support to the trusts. Based on their restrictive nature, the trusts are considered VIE as the holders of equity at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the trusts’ economic performance. While FHN is assumed to have the power as servicer to most significantly impact the activities of such VIE, in situations where FHN does not have the ability to participate in significant portions of a securitization trust’s cash flows, it is not considered the primary beneficiary of the trust. Therefore, these trusts are not consolidated by FHN.
Prior to third quarter 2008, FHN transferred first lien mortgages to government agencies, or GSE, for securitization and retained MSR and other various interests in certain situations. Except for recourse due to breaches of standard representations and warranties made by FHN in connection with the sale of the loans to the trusts, the creditors of the trusts hold no recourse to the assets of FHN. Additionally, FHN has no contractual requirements to provide financial support to the trusts. The agencies’ status as Master Servicer and the rights they hold consistent with their guarantees on the securities issued provide them with the power to direct the activities that most significantly impact the trusts’ economic performance. Thus, such trusts are not consolidated by FHN as it is not considered the primary beneficiary even in situations where it could potentially receive benefits or absorb losses that are significant to the trusts.
In relation to certain agency securitizations, FHN purchased the servicing rights on the securitized loans from the loan originator and holds other retained interests. Based on their restrictive nature, the trusts meet the definition of a VIE since the holders of the equity investments at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the trusts’ economic performance. As the agencies serve as Master Servicer for the securitized loans and hold rights consistent with their guarantees on the securities issued, they have the power to direct the activities that most significantly impact the trusts’ economic performance. Thus, FHN is not considered the primary beneficiary even in situations where it could potentially receive benefits or absorb losses that are significant to the trusts. FHN has no contractual requirements to provide financial support to the trusts.
FHN holds securities issued by various agency securitization trusts. Based on their restrictive nature, the trusts meet the definition of a VIE since the holders of the equity investments at risk do not have the power through voting rights, or similar rights, to direct the activities that most significantly impact the entities’ economic performance. FHN could potentially receive benefits or absorb losses that are significant to the trusts based on the nature of the trusts’ activities and the size of FHN’s holdings. However, FHN is solely a holder of the trusts’ securities and does not have the power to direct the activities that most significantly impact the trusts’ economic performance, and is not considered the primary beneficiary of the trusts. FHN has no contractual requirements to provide financial support to the trusts.
For certain troubled commercial loans, FTBNA restructures the terms of the borrower’s debt in an effort to increase the probability of receipt of amounts contractually due. Following a troubled debt restructuring, the borrower entity typically meets the definition of a VIE as the initial determination of whether an entity is a VIE must be reconsidered and economic events have proven that the entity’s equity is not sufficient to permit it to finance its activities without additional subordinated financial support or a restructuring of the terms of its financing. As FTBNA does not have the power to direct the activities that most significantly impact such troubled commercial borrowers’ operations, it is not considered the primary beneficiary even in situations where, based on the size of the financing provided, FTBNA is exposed to potentially significant benefits and losses of the borrowing entity. FTBNA has no contractual requirements to provide financial support to the borrowing entities beyond certain funding commitments established upon restructuring of the terms of the debt that allows for preparation of the underlying collateral for sale.
FHN serves as manager over certain discretionary trusts, for which it makes investment decisions on behalf of the trusts’ beneficiaries in return for a reasonable management fee. The trusts meet the definition of a VIE since the holders of the equity investments at risk do not have the power, through voting rights or similar rights, to direct the activities that most significantly impact the entities’ economic performance. The management fees FHN receives are not considered variable interests in the trusts as all of the requirements related to permitted levels of decision maker fees are met. Therefore, the VIE are not consolidated by FHN because it is not the trusts’ primary beneficiary. FHN has no contractual requirements to provide financial support to the trusts.

46


Table of Contents

Note 14 — Variable Interest Entities (continued)
The following table summarizes VIE that are not consolidated by FHN as of June 30, 2011 and 2010:
                     
    June 30, 2011
(Dollars in thousands)   Maximum     Liability      
Type   Loss Exposure     Recognized     Classification
 
Low Income Housing Partnerships (a) (b)
  $ 79,613     $     Other assets
Small Issuer Trust Preferred Holdings (c)
    465,157           Loans, net of unearned income
On-Balance Sheet Trust Preferred Securitizations
    62,411       51,750     (d)
Proprietary Trust Preferred Issuances (e)
    N/A       206,186     Term borrowings
Proprietary & Agency Residential Mortgage Securitizations
    375,669           (f)
Holdings of Agency Mortgage-Backed Securities (c)
    3,420,924           (g)
Short Positions in Agency Mortgage-Backed Securities (e)
    N/A       360     Trading liabilities
Commercial Loan Troubled Debt Restructurings (h) (i)
    105,482           Loans, net of unearned income
Managed Discretionary Trusts (e)
    N/A       N/A     N/A
 
     
(a)   Maximum loss exposure represents $79.1 million of current investments and $.6 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)   Maximum loss exposure represents the value of current investments. A liability is not recognized as FHN is solely a holder of the trusts’ securities.
 
(d)   $112.5 million classified as Loans, net of unearned income, and $1.7 million classified as Trading securities which are offset by $51.8 million classified as Term borrowings.
 
(e)   No exposure to loss due to the nature of FHN’s involvement.
 
(f)   Includes $94.1 million and $65.6 million classified as MSR and $12.8 million and $18.8 million classified as Trading securities related to proprietary and agency residential mortgage securitizations, respectively. Aggregate servicing advances of $281.3 million are classified as Other assets and is offset by aggregate custodial balances of $97.0 million classified as Noninterest-bearing deposits.
 
(g)   Includes $495.3 million classified as Trading securities and $2.9 billion classified as Securities available for sale.
 
(h)   Maximum loss exposure represents $101.9 million of current receivables and $3.6 million of contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring.
 
(i)   A liability is not recognized as the loans are the only variable interests held in the troubled commercial borrowers’ operations.

47


Table of Contents

Note 14 — Variable Interest Entities (continued)
                             
    June 30, 2010        
(Dollars in thousands)   Maximum     Liability              
Type   Loss Exposure     Recognized     Classification        
 
Low Income Housing Partnerships (a) (b)
  $ 100,057     $     Other assets        
Small Issuer Trust Preferred Holdings (c)
    465,350           Loans, net of unearned income        
On-Balance Sheet Trust Preferred Securitizations
    63,453       50,721     (d)        
Proprietary Trust Preferred Issuances (e)
    N/A       309,000     Term borrowings        
Proprietary & Agency Residential Mortgage Securitizations
    322,659           (f)        
Holdings of Agency Mortgage-Backed Securities (c)
    2,503,929           (g)        
Short Positions in Agency Mortgage-Backed Securities (e)
    N/A       732     Trading liabilities        
Commercial Loan Troubled Debt Restructurings (h) (i)
    36,686           Loans, net of unearned income        
Managed Discretionary Trusts (e)
    N/A       N/A     N/A        
 
     
(a)   Maximum loss exposure represents $98.7 million of current investments and $1.3 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)   Maximum loss exposure represents the value of current investments. A liability is not recognized as FHN is solely a holder of the trusts’ securities.
 
(d)   $112.5 million was classified as Loans, net of unearned income, and $1.7 million was classified as Trading securities which are offset by $50.7 million classified as Term borrowings.
 
(e)   No exposure to loss due to the nature of FHN’s involvement.
 
(f)   Includes $93.7 million and $77.8 million classified as Mortgage servicing rights and $17.4 million and $22.8 million classified as Trading securities related to proprietary and agency residential mortgage securitizations, respectively. Aggregate servicing advances of $227.1 million are classified as Other assets and is offset by aggregate custodial balances of $116.1 million classified as Noninterest-bearing deposits.
 
(g)   Includes $491.8 million classified as Trading securities and $2.0 billion classified as Securities available for sale.
 
(h)   Maximum loss exposure represents $36.1 million of current receivables and $.6 million of contractual funding commitments on loans related to commercial borrowers involved in a troubled debt restructuring.
 
(i)   A liability is not recognized as the loans are the only variable interests held in the troubled commercial borrowers’ operations.
See Other disclosures — Indemnification agreements and guarantees section of Note 9 — Contingencies and Other Disclosures for information regarding FHN’s repurchase exposure for claims that FHN breached its standard representations and warranties made in connection with the sale of loans to proprietary and agency residential mortgage securitization trusts.

48


Table of Contents

Note 15 — Derivatives
In the normal course of business, FHN utilizes various financial instruments (including derivative contracts and credit-related agreements) through its legacy mortgage servicing operations, 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 as 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 re-evaluated. 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 June 30, 2011 and 2010, respectively, FHN had $163.0 million and $168.5 million of cash receivables and $124.4 million and $120.3 million of cash payables related to collateral posting under master netting arrangements, inclusive of collateral posted related to contracts with adjustable collateral posting thresholds, with derivative counterparties. Certain of FHN’s agreements with derivative counterparties contain provisions which 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 was $126.8 million of assets and $37.0 million of liabilities on June 30, 2011, and $26.1 million of assets and $18.8 million of liabilities on June 30, 2010. As of June 30, 2011, FHN had received collateral of $118.9 million and had received no collateral as of June 30, 2010. As of June 30, 2011 and 2010, FHN posted collateral of $41.4 million and $24.7 million, respectively, in the normal course of business related to these contracts.

49


Table of Contents

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 was $134.8 million of assets and $154.7 million of liabilities on June 30, 2011 and was $158.2 million of assets and $173.2 million of liabilities on June 30, 2010. As of June 30, 2011 and 2010, FHN had received collateral of $124.4 million and $120.3 million and posted collateral of $161.8 million and $165.8 million, respectively, in the normal course of business related to these agreements.
Legacy Mortgage Servicing Operations
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 on the Consolidated Condensed Statements of 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 purchase 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 purchase 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 on the Consolidated Condensed Statements of Condition. 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 on the Consolidated Condensed Statements of Income.
The following table summarizes FHN’s derivatives associated with legacy mortgage servicing activities for the three and six months ended June 30, 2011:
                                         
                            Gains/(Losses)  
                            Three Months Ended     Six Months Ended  
(Dollars in thousands)   Notional     Assets     Liabilities     June 30, 2011     June 30, 2011  
Retained Interests Hedging
                                       
Hedging Instruments:
                                       
Forwards and Futures (a) (b)
  $ 2,925,000     $ 5,654     $ 6,311     $ 10,391     $ 6,348  
Interest Rate Swaps and Swaptions (a) (b)
  $ 6,221,000     $ 39,785     $ 26,934     $ 14,885     $ 22,224  
Hedged Items:
                                       
Mortgage Servicing Rights (b) (c)
    N/A     $ 183,364       N/A     $ (10,457 )   $ (3,325 )
Other Retained Interests (b) (d)
    N/A     $ 31,623       N/A     $ 597     $ 2,641  
 
     
(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.

50


Table of Contents

Note 15 — Derivatives (continued)
The following table summarizes FHN’s derivatives associated with legacy mortgage servicing activities for the three and six months ended June 30, 2010:
                                         
                            Gains/(Losses)  
                            Three Months Ended     Six Months Ended  
(Dollars in thousands)   Notional     Assets     Liabilities     June 30, 2010     June 30, 2010  
Retained Interests Hedging
                                       
Hedging Instruments:
                                       
Forwards and Futures (a) (b)
  $ 1,450,000     $ 13,950       N/A     $ 35,060     $ 40,620  
Interest Rate Swaps and Swaptions (a) (b)
  $ 2,775,000     $ 32,224     $ 6,333     $ 29,371     $ 56,421  
Hedged Items:
                                       
Mortgage Servicing Rights (b) (c)
    N/A     $ 197,378       N/A     $ (21,722 )   $ (45,057 )
Other Retained Interests (b) (d)
    N/A     $ 40,204       N/A     $ 1,390     $ 3,021  
 
     
(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.
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 and option 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 Consolidated Condensed Statements of Condition as Other assets and Other liabilities. The FTN Financial Risk Committee and the Credit Risk Management Committee collaborate to mitigate credit risk related to these transactions. Credit risk is controlled through credit approvals, risk control limits, and ongoing monitoring procedures. Total trading revenues were $71.2 million and $91.8 million for the three months ended June 30, 2011 and 2010, respectively, and $154.4 million and $197.1 million for the six months ended June 30, 2011 and 2010, respectively. Total revenues are inclusive of both derivative and non-derivative financial instruments. Trading revenues are included in Capital markets noninterest income.
The following tables summarize FHN’s derivatives associated with capital markets trading activities as of June 30, 2011 and 2010:
                         
    June 30, 2011  
(Dollars in thousands)   Notional     Assets     Liabilities  
Customer Interest Rate Contracts
  $ 1,458,306     $ 72,576     $ 1,537  
Offsetting Upstream Interest Rate Contracts
    1,458,306       1,537       72,576  
Forwards and Futures Purchased
    3,397,605       5,318       1,785  
Forwards and Futures Sold
    3,771,659       1,228       8,413  
 

51


Table of Contents

Note 15 — Derivatives (continued)
                         
    June 30, 2010  
(Dollars in thousands)   Notional     Assets     Liabilities  
Customer Interest Rate Contracts
  $ 1,679,157     $ 82,406     $ 4,687  
Offsetting Upstream Interest Rate Contracts
    1,679,157       4,687       82,406  
Forwards and Futures Purchased
    3,637,263       692       5,496  
Forwards and Futures Sold
    3,944,878       6,030       2,823  
 
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 interest rate 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 on the Consolidated Condensed Statements of Income.
FHN has entered into pay floating, receive fixed interest rate swaps to hedge the interest rate risk of certain term borrowings totaling $1.0 billion on both June 30, 2011 and 2010. These swaps have been accounted for as fair value hedges under the shortcut method. The balance sheet impact of these swaps was $101.7 million and $114.1 million in Other assets on June 30, 2011 and 2010, 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 has designated a derivative transaction in a hedging strategy to manage interest rate risk on its $500 million noncallable senior debt maturing in December 2015. This derivative qualifies for hedge accounting under ASC 815-20 using the long-haul method. FHN entered into a pay floating, receive fixed interest rate swap to hedge the interest rate risk on this debt. The balance sheet impact of this swap was $11.4 million in Other assets on June 30, 2011. There was no ineffectiveness related to this hedge. Interest paid or received for this swap was recognized as an adjustment of the interest expense of the liability 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 815-20 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 $200 million on both June 30, 2011 and 2010. This swap replaced the swap that was terminated in second quarter 2010 (see below) and re-hedged the subordinated debt with a new interest rate swap using the long-haul method of effectiveness assessment. The balance sheet impact of these swaps was $12.0 million in Other liabilities and $2.3 million in Other assets as of June 30, 2011 and 2010, respectively. There was no ineffectiveness related to these hedges. Interest paid or received for these swaps was recognized as an adjustment of the interest expense of the liabilities whose risk is being managed. In second quarter 2010, FHN’s counterparty called the swap associated with the $200 million of subordinated debt. Accordingly, hedge accounting was discontinued on the date of the settlement and the cumulative basis adjustments to the associated subordinated debt are being prospectively amortized as an adjustment to interest expense over its remaining term.

52


Table of Contents

Note 15 — Derivatives (continued)
The following tables summarize FHN’s derivatives associated with interest rate risk management activities for the three and six months ended June 30, 2011 and 2010:
                                         
                            Gains/(Losses)  
                            Three Months Ended     Six Months Ended  
(Dollars in thousands)   Notional     Assets     Liabilities     June 30, 2011     June 30, 2011  
Customer Interest Rate Contracts Hedging
                                       
Hedging Instruments and Hedged Items:
                                       
Customer Interest Rate Contracts (a)
  $ 980,417     $ 65,074     $ 414     $ 3,996     $ (6,894 )
Offsetting Upstream Interest Rate Contracts (a)
  $ 980,417     $ 414     $ 67,774     $ (4,596 )   $ 6,994  
Debt Hedging
                                       
Hedging Instruments:
                                       
Interest Rate Swaps (b)
  $ 1,604,000     $ 113,090     $ 12,023     $ 22,789     $ 3,362  
Hedged Items:
                                       
Term Borrowings (b)
    N/A       N/A     $ 1,604,000 (c)   $ (22,789 ) (d)   $ (3,362 ) (d)
 
                                         
                            Gains/(Losses)  
                            Three Months Ended     Six Months Ended  
(Dollars in thousands)   Notional     Assets     Liabilities     June 30, 2010     June 30, 2010  
Customer Interest Rate Contracts Hedging
                                       
Hedging Instruments and Hedged Items:
                                       
Customer Interest Rate Contracts (a)
  $ 1,168,042     $ 88,496     $ 210     $ 16,895     $ 23,344  
Offsetting Upstream Interest Rate Contracts (a)
  $ 1,168,042     $ 210     $ 93,095     $ (17,494 )   $ (24,444 )
Debt Hedging
                                       
Hedging Instruments:
                                       
Interest Rate Swaps (b)
  $ 1,104,000     $ 116,415       N/A     $ 26,145     $ 39,429  
Hedged Items:
                                       
Term Borrowings (b)
    N/A       N/A     $ 1,104,000 (c)   $ (26,145 ) (d)   $ (39,429 ) (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/losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships.
FHN hedges held-to-maturity trust preferred loans with a principal balance of $201.6 million and $215.6 million as of June 30, 2011 and 2010, respectively, which have an initial fixed rate term of five years before conversion to a floating rate. FHN 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 815-20. The impact of these swaps was $13.2 million and $20.0 million in Other liabilities on the Consolidated Condensed Statements of Condition as of June 30, 2011 and 2010, 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. Gain/(loss) is included in Other income and commissions on the Consolidated Condensed Statements of Income.

53


Table of Contents

Note 15 — Derivatives (continued)
The following tables summarize FHN’s derivative activities associated with these loans for the three and six months ended June 30, 2011 and 2010:
                                         
                            Gains/(Losses)  
                            Three Months Ended     Six Months Ended  
(Dollars in thousands)   Notional     Assets     Liabilities     June 30, 2011     June 30, 2011  
Loan Portfolio Hedging
                                       
Hedging Instruments:
                                       
Interest Rate Swaps
  $ 201,583       N/A     $ 13,246     $ 856     $ 3,952  
Hedged Items:
                                       
Trust Preferred Loans (a)
    N/A     $ 201,583 (b)     N/A     $ (842 ) (c)   $ (3,943 ) (c)
 
                                         
                            Gains/(Losses)  
                            Three Months Ended     Six Months Ended  
(Dollars in thousands)   Notional     Assets     Liabilities     June 30, 2010     June 30,2010  
Loan Portfolio Hedging
                                       
Hedging Instruments:
                                       
Interest Rate Swaps
  $ 215,583       N/A     $ 19,997     $ (361 )   $ (776 )
Hedged Items:
                                       
Trust Preferred Loans (a)
    N/A     $ 215,583 (b)     N/A     $ 384 (c)   $ 782 (c)
 
     
(a)   Assets included in the Loans, net of unearned income section of the Consolidated Condensed Statements of Condition.
 
(b)   Represents principal balance being hedged.
 
(c)   Represents gains/losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships.
Other Derivatives
In conjunction with the sale of a portion of its Visa Class B shares in December 2010, FHN and the purchaser entered into a derivative transaction whereby FHN will make, or receive, cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. As of December 31, 2010, the conversion ratio of Visa Class B shares to Visa Class A shares was approximately 51 percent. FHN determined that the initial fair value of the derivative was equal to a pro rata portion of the previously accrued contingent liability for Visa litigation matters attributable to the 440,000 Visa Class B shares sold. This amount was determined to be a liability of $1.0 million as of December 31, 2010. In March 2011, Visa deposited an additional $400 million into the litigation escrow account. As a result, the conversion ratio was adjusted to 49 percent and FHN made a cash payment to the counterparty of $.7 million in second quarter 2011. On June 30, 2011, the derivative liability was $1.3 million.
Starting in second quarter 2011, FHN uses cross currency swaps and cross currency interest rate swaps to economically hedge its exposure to foreign currency risk and interest rate risk associated with $1.2 million of non-U.S dollar denominated loans. For second quarter 2011, the balance sheet impact and the gains/losses associated with these derivatives were not material.

54


Table of Contents

Note 16 — Fair Value of Assets & Liabilities
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 management’s 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.
Transfers between fair value levels are recognized at the end of the fiscal quarter in which the associated change in inputs occurs.

55


Table of Contents

Note 16 — Fair Value of Assets & Liabilities (continued)
The following table presents the balance of assets and liabilities measured at fair value on a recurring basis as of June 30, 2011:
                                 
    June 30, 2011
(Dollars in thousands)   Level 1     Level 2     Level 3     Total  
 
Trading securities — capital markets:
                               
U.S. treasuries
  $     $ 218,302     $     $ 218,302  
Government agency issued MBS
          361,421             361,421  
Government agency issued CMO
          133,841             133,841  
Other U.S. government agencies
          192,643             192,643  
States and municipalities
          19,093             19,093  
Corporate and other debt
          239,205       5       239,210  
Equity, mutual funds, and other
          247             247  
 
Total trading securities — capital markets
          1,164,752       5       1,164,757  
 
 
                               
Trading securities — mortgage banking
                               
Principal only
          8,775             8,775  
Interest only
                22,848       22,848  
 
Total trading securities — mortgage banking
          8,775       22,848       31,623  
 
 
                               
Loans held for sale
          9,372       215,870       225,242  
 
                               
Securities available for sale:
                               
U.S. treasuries
          46,250             46,250  
Government agency issued MBS
          1,501,767             1,501,767  
Government agency issued CMO
          1,423,894             1,423,894  
Other U.S. government agencies
          13,246       6,681       19,927  
States and municipalities
          17,865       1,500       19,365  
Corporate and other debt
    540                   540  
Venture capital
                13,179       13,179  
Equity, mutual funds, and other
    7,279                   7,279  
 
Total securities available for sale
    7,819       3,003,022       21,360       3,032,201  
 
 
                               
Mortgage servicing rights
                186,958       186,958  
 
                               
Other assets:
                               
Deferred compensation assets
    25,356                   25,356  
Derivatives, forwards and futures
    12,200                   12,200  
Derivatives, interest rate contracts
          292,476             292,476  
 
Total other assets
    37,556       292,476             330,032  
 
Total assets
  $ 45,375     $ 4,478,397     $ 447,041     $ 4,970,813  
 
 
                               
Trading liabilities — capital markets:
                               
U.S. treasuries
  $     $ 331,864     $     $ 331,864  
Government agency issued MBS
          238             238  
Government agency issued CMO
          122             122  
Other U.S. government agencies
          6,026             6,026  
Corporate and other debt
          160,665             160,665  
 
Total trading liabilities — capital markets
          498,915             498,915  
 
 
                               
Other short-term borrowings and commercial paper
                23,645       23,645  
 
Other liabilities:
                               
Derivatives, forwards and futures
    16,509                   16,509  
Derivatives, interest rate contracts
          194,504             194,504  
Derivatives, other
          6       1,270       1,276  
 
Total other liabilities
    16,509       194,510       1,270       212,289  
 
Total liabilities
  $ 16,509     $ 693,425     $ 24,915     $ 734,849  
 

56


Table of Contents

Note 16 — Fair Value of Assets & Liabilities (continued)
The following table presents the balance of assets and liabilities measured at fair value on a recurring basis at June 30, 2010:
                                 
    June 30, 2010
(Dollars in thousands)   Level 1     Level 2     Level 3     Total  
 
Trading securities — capital markets:
                               
U.S. treasuries
  $     $ 105,796     $     $ 105,796  
Government agency issued MBS
          295,046             295,046  
Government agency issued CMO
          196,775             196,775  
Other U.S. government agencies
          161,993             161,993  
States and municipalities
          21,708             21,708  
Corporate and other debt
          361,168       34       361,202  
Trading loans
          621,626             621,626  
Equity, mutual funds, and other
          2,438             2,438  
 
Total trading securities — capital markets
          1,766,550       34       1,766,584  
 
Trading securities — mortgage banking
                               
Principal only
          11,340             11,340  
Interest only
                28,864       28,864  
 
Total trading securities — mortgage banking
          11,340       28,864       40,204  
 
Loans held for sale
          30,762       209,748       240,510  
Securities available for sale:
                               
U.S. treasuries
          68,568             68,568  
Government agency issued MBS
          915,601             915,601  
Government agency issued CMO
          1,096,506             1,096,506  
Other U.S. government agencies
          18,128       89,495       107,623  
States and municipalities
          41,875             41,875  
Corporate and other debt
    546                   546  
Venture capital
                16,141       16,141  
Equity, mutual funds, and other
    13,715       31,158             44,873  
 
Total securities available for sale
    14,261       2,171,836       105,636       2,291,733  
 
 
                               
Mortgage servicing rights
                201,746       201,746  
 
                               
Other assets:
                               
Deferred compensation assets
    25,365                   25,365  
Derivatives, forwards and futures
    20,672                   20,672  
Derivatives, interest rate contracts
          324,438             324,438  
 
Total other assets
    46,037       324,438             370,475  
 
Total assets
  $ 60,298     $ 4,304,926     $ 546,028     $ 4,911,252  
 
 
                               
Trading liabilities — capital markets:
                               
U.S. treasuries
  $     $ 224,951     $     $ 224,951  
Government agency issued MBS
          732             732  
Other U.S. government agencies
          1,010             1,010  
Corporate and other debt
          254,784             254,784  
 
Total trading liabilities — capital markets
          481,477             481,477  
 
Other short-term borrowings and commercial paper
                25,886       25,886  
 
                               
Other liabilities:
                               
Derivatives, forwards and futures
    8,319                   8,319  
Derivatives, interest rate contracts
          206,728             206,728  
 
Total other liabilities
    8,319       206,728             215,047  
 
Total liabilities
  $ 8,319     $ 688,205     $ 25,886     $ 722,410  
 

57


Table of Contents

Note 16 — Fair Value of Assets & Liabilities (continued)
Changes in Recurring Level 3 Fair Value Measurements
The changes in Level 3 assets and liabilities measured at fair value for the three months ended June 30, 2011 and 2010, on a recurring basis are summarized as follows:
                                                         
    Three Months Ended June 30, 2011
                    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 (b)     Capital     rights, net     liabilities     commercial paper  
 
Balance on April 1, 2011
  $ 25,370     $ 209,863     $ 8,428     $ 13,179     $ 207,748     $ (2,100 )   $ 27,991  
Total net gains/(losses) included in:
                                                       
Net income
    733       (4,069 )                 (15,006 )     (32 )     (4,346 )
Other comprehensive income
                58                          
Purchases
          23,079                                
Issuances
                                         
Sales
    (132 )                                    
Settlements
    (3,118 )     (10,519 )     (305 )           (5,784 )     862        
Net transfers in/(out) level 3
          (2,484 ) (f)                              
 
Balance June 30, 2011
  $ 22,853     $ 215,870     $ 8,181     $ 13,179     $ 186,958     $ (1,270 )   $ 23,645  
 
 
                                                       
 
Net unrealized gains/(losses) included in net income
  $ 286 (c)   $ (4,069 ) (c)   $     $ (d)   $ (14,802 ) (c)   $ (32 ) (e)   $ (4,346 ) (c)
 
                                                 
    Three Months Ended June 30, 2010
                    Securities available for sale     Mortgage     Other short-term  
    Trading     Loans held     Investment     Venture     servicing     borrowings and  
(Dollars in thousands)   securities (a)     for sale     portfolio (b)     Capital     rights, net     commercial paper  
 
Balance on April 1, 2010
  $ 47,411     $ 209,672     $ 94,328     $ 16,141     $ 264,959     $ 36,180  
Total net gains/(losses) included in:
                                               
Net income/(loss)
    1,145       (3,803 )                 (31,417 )     (10,294 )
Other comprehensive income
                350                    
Purchases, sales, issuances, and settlements, net
    (19,658 )     3,879       (3,683 )           (31,796 )      
 
Balance June 30, 2010
  $ 28,898     $ 209,748     $ 90,995     $ 16,141     $ 201,746     $ 25,886  
 
 
                                               
 
Net unrealized gains/(losses) included in net income
  $ 443 (c)   $ (3,803 ) (c)   $     $ (d)   $ (30,121 ) (c)   $ (10,294 ) (c)
 
Certain previously reported amounts have been reclassified to agree with current presentation.
(a)   Primarily represents certificated interest only strips and excess interest mortgage banking trading securities. Capital markets Level 3 trading securities are not significant.
 
(b)   Primarily represents other U.S. government agencies. States and municipalities are not significant.
 
(c)   Primarily included in Mortgage banking income on the Consolidated Condensed Statements of Income.
 
(d)   Represents recognized gains and losses attributable to venture capital investments classified within securities AFS that are included in securities gains/(losses) in noninterest income.
 
(e)   Included in Other expense.
 
(f)   Transfers out of recurring level 3 balances reflect movements out of loans held for sale and into real estate acquired by foreclosure (level 3 nonrecurring).

58


Table of Contents

Note 16 — Fair Value of Assets & Liabilities (continued)
Changes in Recurring Level 3 Fair Value Measurements
The changes in Level 3 assets and liabilities measured at fair value for the six months ended June 30, 2011 and 2010, on a recurring basis are summarized as follows:
                                                         
    Six Months Ended June 30, 2011
                    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 (b)     Capital     rights, net     liabilities     commercial paper  
 
Balance on January 1, 2011
  $ 26,478     $ 207,632     $ 39,391     $ 13,179     $ 207,319     $ (1,000 )   $ 27,309  
Total net gains/(losses) included in:
                                                       
Net income
    2,933       (8,194 )                 (7,359 )     (1,132 )     (3,664 )
Other comprehensive income
                (1,688 )                        
Purchases
          39,120                                
Issuances
                                         
Sales
    (132 )           (29,217 )                        
Settlements
    (6,426 )     (19,869 )     (305 )           (13,002 )     862        
Net transfers in/(out) level 3
          (2,819 ) (f)                              
 
Balance June 30, 2011
  $ 22,853     $ 215,870     $ 8,181     $ 13,179     $ 186,958     $ (1,270 )   $ 23,645  
 
 
                                                       
 
Net unrealized gains/(losses) included in net income
  $ 2,059 (c)   $ (8,194 ) (c)   $     $ - (d)   $ (7,048 ) (c)   $ (667 ) (e)   $ (3,664 )(c)
 
                                                 
    Six Months Ended June 30, 2010
                    Securities available for sale     Mortgage     Other short-term  
    Trading     Loans held     Investment     Venture     servicing     borrowings and  
(Dollars in thousands)   securities (a)     for sale     portfolio (b)     Capital     rights, net     commercial paper  
 
Balance on January 1, 2010
  $ 56,132     $ 206,227     $ 99,173     $ 15,743     $ 302,611     $ 39,662  
Adjustment due to adoption of amendments to ASC 810
    (4,776 )                       (2,293 )      
Total net gains/(losses) included in:
                                               
Net income
    3,162       (4,841 )                 (57,455 )     (13,776 )
Other comprehensive income
                1                    
Purchases, sales, issuances, and settlements, net
    (25,620 )     8,362       (8,179 )     398       (41,117 )      
 
Balance on June 30, 2010
  $ 28,898     $ 209,748     $ 90,995     $ 16,141     $ 201,746     $ 25,886  
 
 
                                               
 
Net unrealized gains/(losses) included in net income
  $ 964 (c)   $ (4,841) (c)   $     $ (d)   $ (54,767) (c)   $ (13,776) (c)
 
Certain previously reported amounts have been reclassified to agree with current presentation.
(a)   Primarily represents certificated interest only strips and excess interest mortgage banking trading securities. Capital markets Level 3 trading securities are not significant.
 
(b)   Primarily represents other U.S. government agencies. States and municipalities are not significant.
 
(c)   Primarily included in Mortgage banking income on the Consolidated Condensed Statements of Income.
 
(d)   Represents recognized gains and losses attributable to venture capital investments classified within securities AFS that are included in securities gains/(losses) in noninterest income.
 
(e)   Included in Other expense.
 
(f)   Transfers out of recurring level 3 balances reflect movements out of loans held for sale and into real estate acquired by foreclosure (level 3 nonrecurring).

59


Table of Contents

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 June 30, 2011 and 2010, 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     Six Months Ended  
    Carrying value at June 30, 2011     June 30, 2011     June 30, 2011  
(Dollars in thousands)   Level 1     Level 2     Level 3     Total     Net gains/(losses)     Net gains/(losses)  
             
Loans held for sale — SBAs
  $     $ 49,641     $     $ 49,641     $ (2 )   $ (2 )
Loans held for sale — first mortgages
                13,428       13,428       (3,458 )     (4,618 )
Loans, net of unearned income (a)
                169,448       169,448       (5,257 )     (17,759 )
Real estate acquired by foreclosure (b)
                78,792       78,792       (4,612 )     (9,651 )
Other assets (c)
                79,053       79,053       (1,809 )     (4,355 )
             
 
                                  $ (15,138 )   $ (36,385 )
 
                                           
                                                 
                                    Three Months Ended     Six Months Ended  
    Carrying value at June 30, 2010     June 30, 2010     June 30, 2010  
(Dollars in thousands)   Level 1     Level 2     Level 3     Total     Net gains/(losses)     Net gains/(losses)  
             
Loans held for sale — SBAs
  $     $ 10,707     $     $ 10,707     $ 7     $ 48  
Loans held for sale — first mortgages
                20,959       20,959       (834 )     (3,527 )
Loans, net of unearned income (a)
                215,198       215,198       (32,697 )     (100,448 )
Real estate acquired by foreclosure (b)
                109,272       109,272       (3,445 )     (9,376 )
Other assets (c)
                98,723       98,723       (2,684 )     (5,218 )
             
 
                                  $ (39,653 )   $ (118,521 )
 
                                           
Certain previously reported amounts have been reclassified to agree with current presentation.
(a)   Represents carrying value of loans for which adjustments are based on the appraised value of the collateral. Write-downs 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. Balance excludes foreclosed real estate related to government insured mortgages.
 
(c)   Represents low income housing investments.
In first quarter 2011, FHN recognized goodwill impairment of $10.1 million related to the contracted sale of FHI. In accordance with accounting requirements, FHN allocated a portion of the goodwill from the applicable reporting unit to the asset group held for sale in determining the carrying value of the disposal group. In determining the amount of impairment, FHN compared the carrying value of the disposal group to the estimated value of the contracted sale price, which primarily included observable inputs in the form of financial asset values but which also included certain non-observable inputs related to the estimated values of post-closing events and contingencies. Thus, this measurement was considered a Level 3 valuation. Impairment of goodwill was recognized for the excess of the carrying amount over the fair value of the disposal group.
In second quarter 2011, FHN exercised a clean-up call on a first lien mortgage proprietary securitization trust. In accordance with accounting requirements, FHN initially recognized the associated loans at fair value. Fair value was primarily determined through reference to observable inputs, including current market prices for similar loans. Since these loans were from the 2003 vintage, adjustments were made for the higher yields and lower credit risk associated with the loans in comparison to more currently originated loans being sold. This resulted in recognition of an immaterial premium for the called loans.

60


Table of Contents

Note 16 — Fair Value of Assets & Liabilities (continued)
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”). 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 at the time of election. After the 2008 divestiture of certain mortgage banking operations and the significant decline of mortgage loans originated for sale, FHN discontinued hedging the mortgage warehouse.
Repurchased loans are recognized within loans held-for-sale at fair value at the time of repurchase, which includes consideration of the credit status of the loans and the estimated liquidation value. FHN has elected to continue recognition of these loans at fair value in periods subsequent to reacquisition. Due to the credit-distressed nature of the vast majority of repurchased loans and the related loss severities experienced upon repurchase, FHN believes that the fair value election provides a more timely recognition of changes in value for these loans that occur subsequent to repurchase. Absent the fair value election, these loans would be subject to valuation at the lower of cost or market value, which would prevent subsequent values from exceeding the initial fair value, determined at the time of repurchase but would require recognition of subsequent declines in value. Thus, the fair value election provides for a more timely recognition of any potential future recoveries in asset values while not affecting the requirement to recognize subsequent declines in value.
In second quarter 2010, capital markets acquired a pool of conforming mortgage loans having a fair value carrying amount of $621.6 million with the intent to transfer the loans to a counterparty during the third quarter following the quarter of acquisition. As part of this transaction, capital markets entered into forward delivery contracts to economically hedge the value of the loans. FHN elected to recognize the loans at fair value and classified them as trading loans within trading securities in the Consolidated Condensed Statements of Condition as of June 30, 2010. For the loans acquired in second quarter 2010, delivery of the loans and the related settlement of the forward delivery contracts occurred in third quarter 2010.
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 June 30, 2011 and 2010. 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.
                         
    June 30, 2011  
                    Fair value carrying amount  
    Fair value     Aggregate     less aggregate unpaid  
(Dollars in thousands)   carrying amount     unpaid principal     principal  
 
Loans held for sale reported at fair value:
                       
Total loans
  $ 225,242     $ 298,681     $ (73,439 )
Nonaccrual loans
    40,927       83,372       (42,445 )
Loans 90 days or more past due and still accruing
    10,866       21,587       (10,721 )
 
                         
    June 30, 2010  
                    Fair value carrying amount  
    Fair value     Aggregate     less aggregate unpaid  
(Dollars in thousands)   carrying amount     unpaid principal     principal  
 
Trading loans reported at fair value:
                       
Total loans
  $ 621,626     $ 603,406     $ 18,220  
Nonaccrual loans
                 
Loans 90 days or more past due and still accruing
                 
Loans held for sale reported at fair value:
                       
Total loans
    240,510       292,605       (52,095 )
Nonaccrual loans
    22,506       45,495       (22,989 )
Loans 90 days or more past due and still accruing
    8,815       23,689       (14,874 )
 

61


Table of Contents

Note 16 — Fair Value of Assets & Liabilities (continued)
Assets and liabilities accounted for under the fair value election 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     Six Months Ended  
    June 30     June 30  
(Dollars in thousands)   2011     2010     2011     2010  
 
Changes in fair value included in net income:
                               
Capital markets noninterest income
                               
Trading loans
  $     $ 11,752     $     $ 11,752  
Mortgage banking noninterest income
                               
Loans held for sale
    (4,069 )     (3,803 )     (8,194 )     (4,841 )
Other short-term borrowings and commercial paper
    (4,346 )     (10,294 )     (3,664 )     (13,776 )
 
For the three months ended June 30, 2011 and 2010, the amounts for loans held for sale include losses of $2.8 million and $.1 million, respectively, included in pretax earnings that are attributable to changes in instrument-specific credit risk. For the six months ended June 30, 2011 and 2010, the amounts for loans held for sale include losses of $5.3 million and $5.8 million, respectively, included in pretax 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 820-10-35, 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 825-10-50.
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 primarily include excess interest (structured as interest-only strips) and principal-only strips. Excess interest represents rights to receive interest from serviced assets that exceed contractually specified rates and principal-only strips are principal cash flow tranches. 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 value of excess interest is determined using 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. Inputs utilized in valuing excess interest are consistent with those used to value the related MSR. The fair value of excess interest typically changes based on changes in the discount rate and differences between modeled prepayment speeds and credit losses and actual experience. 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. 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.

62


Table of Contents

Note 16 — Fair Value of Assets & Liabilities (continued)
Securities available for sale. Securities available for sale includes the investment portfolio accounted for as available for sale under ASC 320-10-25, 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. Certain government agency debt obligations with limited trading activity are valued using a discounted cash flow model that incorporates a combination of observable and unobservable inputs. Primary observable inputs include contractual cash flows and the treasury curve. Significant unobservable inputs include estimated trading spreads and estimated prepayment speeds.
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. FHN determines the fair value of certain loans within the mortgage warehouse 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, 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 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 FHN’s mortgage loan 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.
Loans held for sale includes loans made by the Small Business Administration (“SBA”). The fair value of SBA loans is determined using an expected cash flow model that utilizes observable inputs such as the spread between LIBOR and prime rates, consensus prepayment speeds, and the treasury curve. The fair value of other 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.

63


Table of Contents

Note 16 — Fair Value of Assets & Liabilities (continued)
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.
Individually impaired loans are measured using either a discounted cash flow methodology or the estimated fair value of the underlying collateral less costs to sell, if the loan is considered collateral-dependent. In accordance with accounting standards, the discounted cash flow analysis utilizes the loan’s effective interest rate for discounting expected cash flow amounts. Thus, this analysis is not considered a fair value measurement in accordance with ASC 820. However, the results of this methodology are considered to approximate fair value for the applicable loans. Expected cash flows are derived from internally-developed inputs primarily reflecting expected default rates on contractual cash flows. For loans measured using the estimated fair value of collateral less costs to sell, fair value is estimated using appraisals of the collateral. Collateral values are monitored and additional write-downs are recognized if it is determined that the estimated collateral values have declined further. Estimated costs to sell are based on current amounts of disposal costs for similar assets. Carrying value is considered to reflect fair value for these loans.
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.
Derivative assets and liabilities. The fair value for forwards and futures contracts used to hedge the value of servicing assets is 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. Foreign currency related derivatives also utilize observable exchange rates in the determination of fair value.
In conjunction with the sale of a portion of its Visa Class B shares in December 2010, FHN and the purchaser entered into a derivative transaction whereby FHN will make, or receive, cash payments whenever the conversion ratio of the Visa Class B shares into Visa Class A shares is adjusted. The fair value of this derivative has been determined using a discounted cash flow methodology for estimated future cash flows determined through use of probability weighted scenarios for multiple estimates of Visa’s aggregate exposure to covered litigation matters, which include consideration of amounts funded by Visa into its escrow account for the covered litigation matters. Since this estimation process requires application of judgment in developing significant unobservable inputs used to determine the possible outcomes and the probability weighting assigned to each scenario, this derivative has been classified within Level 3 in fair value measurements disclosures.
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.

64


Table of Contents

Note 16 — Fair Value of Assets & Liabilities (continued)
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, 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, and other short-term borrowings and commercial paper are 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. Other short-term borrowings and commercial paper 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 previously described.
Term borrowings. 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.

65


Table of Contents

Note 16 — Fair Value of Assets & Liabilities (continued)
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 unearned income, loans held for sale, and term borrowings as of June 30, 2011 and 2010, involve 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. Assets and liabilities that are not financial instruments (including MSR) have not been included 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 unfunded commitments as of June 30, 2011 and 2010.
                                 
    June 30, 2011     June 30, 2010  
    Book     Fair     Book     Fair  
(Dollars in thousands)   Value     Value     Value     Value  
     
Assets:
                               
Loans, net of unearned income and allowance for loan losses
  $ 15,537,555     $ 14,667,125     $ 16,372,781     $ 15,369,601  
Short-term financial assets
    861,441       861,441       878,058       878,058  
Trading securities
    1,196,380       1,196,380       1,806,789       1,806,789  
Loans held for sale
    397,931       397,931       505,237       505,237  
Securities available for sale
    3,230,477       3,230,477       2,489,819       2,489,819  
Derivative assets
    304,676       304,676       345,110       345,110  
Other assets
    104,409       104,409       124,088       124,088  
Nonearning assets
    1,019,589       1,019,589       1,283,951       1,283,951  
 
Liabilities:
                               
Deposits:
                               
Defined maturity
    1,791,174       1,840,353     $ 2,169,430     $ 2,258,257  
Undefined maturity
    14,104,853       14,104,853       13,032,386       13,032,386  
 
Total deposits
    15,896,027       15,945,206       15,201,816       15,290,643  
Trading liabilities
    498,915       498,915       481,477       481,477  
Short-term financial liabilities
    2,193,901       2,193,901       2,766,339       2,766,339  
Term borrowings
    2,502,517       2,301,311       2,926,675       2,570,179  
Derivative liabilities
    212,289       212,289       215,047       215,047  
Other noninterest-bearing liabilities
    498,726       498,726       795,914       795,914  
 
                                 
    Contractual     Fair     Contractual     Fair  
    Amount     Value     Amount     Value  
     
Unfunded Commitments:
                               
Loan commitments
  $ 7,938,091     $ 1,234     $ 7,950,124     $ 1,107  
Standby and other commitments
    391,539       6,534       513,936       6,133  
 

66


Table of Contents

Note 17 — Restructuring, Repositioning, and Efficiency
Beginning in 2007, FHN conducted 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 sold 34 full-service First Horizon Bank branches in its national banking markets, discontinued national homebuilder and commercial real estate lending through its First Horizon Construction Lending offices, and executed various MSR sales. In 2008, FHN sold its national mortgage origination and servicing platform including substantially all of its mortgage pipeline, related hedges, servicing assets, certain fixed assets, and other associated assets.
During first quarter 2011, FHN agreed to sell FHI and Highland. FHN has incurred goodwill impairment, severance costs, and asset write-offs related to the sale of FHI. Both sales closed in second quarter 2011.
In 2010, FHN exited its institutional research business and incurred a goodwill impairment, severance and contract terminations costs, and asset write-offs when exiting the business. Additionally, in late 2009, FHN sold and closed its Louisville remittance processing operations and the Atlanta insurance business and also cancelled a large services/consulting contract. Net costs recognized by FHN in the six months ended June 30, 2011, related to restructuring, repositioning, and efficiency activities were $29.7 million. Of this amount, $11.2 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”). Significant expenses recognized year to date 2011 resulted from the following actions:
    Severance and other employee costs of $10.2 million primarily related to efficiency initiatives within corporate and bank services functions which is classified as Employee compensation, incentives, and benefits within noninterest expense.
 
    Goodwill impairment of $10.1 million related to the contracted sale of FHI which is reflected in Income/(loss) from discontinued operations.
 
    Loss of $9.0 million related to cancellation of a technology services contract which is reflected in All other expense.
Net costs recognized by FHN in the six months ended June 30, 2010, related to restructuring, repositioning, and efficiency activities were $10.7 million. Of this amount, $6.3 million represented exit costs that were accounted for in accordance with ASC 420. Significant expenses recognized through June 30, 2010, resulted from the following actions:
    Severance and other employee costs of $2.5 million related to the exit of the institutional equity research business and the 2009 sale of Louisville remittance processing operations which is primarily included in Income/(loss) from discontinued operations, net of tax.
 
    Goodwill impairment of $3.3 million and lease abandonment expense of $2.3 million primarily related to the closure of the institutional equity research business which is classified within Income/(loss) from discontinued operations, net of tax.
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. Due to the broad nature of the actions being taken, substantially all components of expense have benefitted from past efficiency initiatives and are expected to benefit from the current efficiency initiatives.
Activity in the restructuring and repositioning liability for the six months ended June 30, 2011 and 2010, is presented in the following table, along with other restructuring and repositioning expenses recognized. Generally, restructuring, repositioning, and efficiency charges related to exited businesses are included in the non-strategic segment while charges related to corporate-driven actions are included in the corporate segment.
                                                                 
    Three Months Ended     Six Months Ended  
    June 30     June 30  
    2011     2010     2011     2010  
(Dollars in thousands)   Expense     Liability     Expense     Liability     Expense     Liability     Expense     Liability  
 
Beginning balance
  $     $ 8,643     $     $ 15,653     $     $ 9,108     $     $ 15,903  
Severance and other employee related costs
    7,740       7,740       (508 )     (508 )     10,236       10,236       2,540       2,540  
Facility consolidation costs
    44       44       21       21       839       839       2,311       2,311  
Other exit costs, professional fees, and other