10-Q 1 g24773e10vq.htm FORM 10-Q e10vq
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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 September 30, 2010
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   (I.R.S. Employer Identification No.)
organization)    
     
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   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 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 September 30, 2010
     
Common Stock, $.625 par value   232,841,383
 
 

 


 


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PART I.
FINANCIAL INFORMATION
This financial information reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented.

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CONSOLIDATED CONDENSED STATEMENTS OF CONDITION
                         
    First Horizon National Corporation  
    September 30     December 31  
(Dollars in thousands except restricted and share amounts)(Unaudited)   2010     2009     2009  
Assets:
                       
Cash and due from banks
  $ 331,743     $ 328,150     $ 465,712  
Federal funds sold and securities purchased under agreements to resell
    602,407       622,733       452,883  
       
Total cash and cash equivalents
    934,150       950,883       918,595  
       
Interest-bearing cash
    266,469       166,352       539,300  
Trading securities
    1,214,595       701,151       699,900  
Loans held for sale
    414,259       502,687       452,501  
Securities available for sale (Note 3)
    2,611,460       2,645,922       2,694,468  
Loans, net of unearned income (Restricted — $.8 billion) (Note 4) (a)
    17,059,489       18,524,685       18,123,884  
Less: Allowance for loan losses (Restricted — $47.8 million) (a)
    719,899       944,765       896,914  
       
Total net loans
    16,339,590       17,579,920       17,226,970  
       
Mortgage servicing rights (Note 5)
    191,943       289,282       302,611  
Goodwill (Note 6)
    162,180       178,381       165,528  
Other intangible assets, net (Note 6)
    34,263       40,498       38,256  
Capital markets receivables
    564,879       797,949       334,404  
Premises and equipment, net
    311,947       321,788       313,824  
Real estate acquired by foreclosure
    139,359       111,389       125,190  
Other assets (Restricted — $19.1 million) (a)
    2,199,087       2,179,650       2,257,131  
       
Total assets (Restricted — $.8 billion) (a)
  $ 25,384,181     $ 26,465,852     $ 26,068,678  
       
Liabilities and equity:
                       
Deposits:
                       
Savings
  $ 5,436,451     $ 4,416,121     $ 4,847,709  
Time deposits
    1,473,622       2,156,768       1,895,992  
Other interest-bearing deposits
    3,088,224       2,162,059       3,169,474  
Certificates of deposit $100,000 and more
    584,516       1,263,331       559,944  
       
Interest-bearing
    10,582,813       9,998,279       10,473,119  
Noninterest-bearing (Restricted — $1.1 million) (a)
    4,393,107       4,236,704       4,394,096  
       
Total deposits (Restricted — $1.1 million) (a)
    14,975,920       14,234,983       14,867,215  
       
Federal funds purchased and securities sold under agreements to repurchase
    2,439,542       2,267,644       2,874,353  
Trading liabilities
    414,666       415,293       293,387  
Other short-term borrowings and commercial paper
    193,361       1,739,202       761,758  
Term borrowings (Restricted — $.8 billion) (a)
    2,805,731       2,368,381       2,190,544  
Other collateralized borrowings
          711,087       700,589  
       
Total long-term debt
    2,805,731       3,079,468       2,891,133  
       
Capital markets payables
    379,526       542,829       292,975  
Other liabilities (Restricted — $.1 million) (a)
    868,547       816,224       785,389  
       
Total liabilities (Restricted — $.8 billion) (a)
    22,077,293       23,095,643       22,766,210  
       
Equity:
                       
First Horizon National Corporation Shareholders’ Equity:
                       
Preferred stock — no par value (shares authorized — 5,000,000; shares issued — series CPP 866,540 on September 30, 2010, September 30, 2009, and December 31, 2009) (Note 12)
    810,974       794,630       798,685  
Common stock — $.625 par value (shares authorized — 400,000,000; shares issued — 232,841,383 on September 30, 2010; 231,840,673 on September 30, 2009; and 231,896,015 on December 31, 2009) (b)
    145,526       136,659       138,738  
Capital surplus
    1,344,307       1,170,916       1,208,649  
Capital surplus common stock warrant — CPP (Note 12)
    83,860       83,860       83,860  
Undivided profits
    737,014       1,005,244       891,580  
Accumulated other comprehensive loss, net
    (109,958 )     (116,265 )     (114,209 )
       
Total First Horizon National Corporation Shareholders’ Equity
    3,011,723       3,075,044       3,007,303  
       
Noncontrolling interest (Note 12)
    295,165       295,165       295,165  
       
Total equity
    3,306,888       3,370,209       3,302,468  
       
Total liabilities and equity
  $ 25,384,181     $ 26,465,852     $ 26,068,678  
       
See accompanying notes to consolidated condensed financial statements.
 
(a)   Restricted balances parenthetically presented are as of September 30, 2010.
 
(b)   Outstanding shares have been restated to reflect stock dividends distributed through October 1, 2010.

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CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                                 
    First Horizon National Corporation
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands except per share data)(Unaudited)   2010   2009   2010   2009
 
Interest income:
                               
Interest and fees on loans
  $ 176,392     $ 184,910     $ 523,207     $ 588,338  
Interest on investment securities
    26,838       33,495       87,085       110,057  
Interest on loans held for sale
    4,747       5,820       15,280       20,129  
Interest on trading securities
    14,349       11,780       35,513       41,502  
Interest on other earning assets
    839       355       1,941       1,922  
 
Total interest income
    223,165       236,360       663,026       761,948  
 
Interest expense:
                               
Interest on deposits:
                               
Savings
    7,975       7,553       23,488       31,821  
Time deposits
    9,354       13,980       29,842       48,493  
Other interest-bearing deposits
    1,959       1,316       7,131       3,280  
Certificates of deposit $100,000 and more
    3,324       5,809       10,112       23,236  
Interest on trading liabilities
    4,127       4,691       14,585       15,424  
Interest on short-term borrowings
    1,827       2,649       5,495       10,447  
Interest on long-term debt
    8,456       9,461       23,771       42,673  
 
Total interest expense
    37,022       45,459       114,424       175,374  
 
Net interest income
    186,143       190,901       548,602       586,574  
Provision for loan losses
    50,000       185,000       225,000       745,000  
 
Net interest income/(expense) after provision for loan losses
    136,143       5,901       323,602       (158,426 )
 
Noninterest income:
                               
Capital markets
    114,014       129,043       329,461       514,127  
Mortgage banking
    53,122       59,211       151,307       190,443  
Deposit transactions and cash management
    34,911       41,738       109,696       122,585  
Trust services and investment management
    7,137       7,347       22,246       21,818  
Brokerage management fees and commissions
    6,441       7,315       18,812       20,416  
Insurance commissions
    4,150       5,907       13,908       19,380  
Equity securities gains/(losses), net
    (2,928 )     65       (4,759 )     (267 )
All other income and commissions
    31,365       51,514       104,071       120,144  
 
Total noninterest income
    248,212       302,140       744,742       1,008,646  
 
Adjusted gross income after provision for loan losses
    384,355       308,041       1,068,344       850,220  
 
Noninterest expense:
                               
Employee compensation, incentives and benefits
    174,918       178,734       520,014       614,301  
Repurchase and foreclosure provision
    48,712       24,072       145,607       88,415  
Operations services
    14,952       15,392       44,882       47,439  
Occupancy
    14,555       16,207       45,030       47,465  
Legal and professional fees
    14,269       17,077       46,352       45,688  
Deposit insurance premiums
    10,123       8,796       27,812       37,777  
Computer software
    7,634       6,871       22,176       20,228  
Contract employment
    7,443       7,956       20,890       27,083  
Equipment rentals, depreciation, & maintenance
    7,233       8,696       20,970       25,561  
Foreclosed real estate
    5,159       21,221       20,766       53,053  
Communications and courier
    5,098       6,837       17,246       20,688  
Miscellaneous loan costs
    1,913       4,503       10,571       17,056  
Amortization of intangible assets
    1,382       1,445       4,144       4,590  
All other expense
    34,159       30,416       85,836       132,145  
 
Total noninterest expense
    347,550       348,223       1,032,296       1,181,489  
 
Income/(loss) before income taxes
    36,805       (40,182 )     36,048       (331,269 )
Provision/(benefit) for income taxes
    3,095       (15,368 )     (15,125 )     (136,834 )
 
Income/(loss) from continuing operations
    33,710       (24,814 )     51,173       (194,435 )
Loss from discontinued operations, net of tax
          (10,200 )     (6,877 )     (11,156 )
 
Net income/(loss)
  $ 33,710     $ (35,014 )   $ 44,296     $ (205,591 )
 
Net income attributable to noncontrolling interest
    2,875       2,969       8,563       8,563  
 
Net income/(loss) attributable to controlling interest
  $ 30,835     $ (37,983 )   $ 35,733     $ (214,154 )
 
Preferred stock dividends
    14,960       14,876       44,816       44,688  
 
Net income/(loss) available to common shareholders
  $ 15,875     $ (52,859 )   $ (9,083 )   $ (258,842 )
 
Earnings/(loss) per share from continuing operations (Note 8)
  $ 0.07     $ (0.19 )   $ (0.01 )   $ (1.07 )
 
Diluted earnings/(loss) per share from continuing operations (Note 8)
  $ 0.07     $ (0.19 )   $ (0.01 )   $ (1.07 )
 
Earnings/(loss) per share available to common shareholders (Note 8)
  $ 0.07     $ (0.23 )   $ (0.04 )   $ (1.12 )
 
Diluted earnings/(loss) per share available to common shareholders (Note 8)
  $ 0.07     $ (0.23 )   $ (0.04 )   $ (1.12 )
 
 
                               
Weighted average common shares (Note 8)
    230,461       230,285       230,380       230,248  
 
Diluted average common shares (Note 8)
    234,614       230,285       230,380       230,248  
 
See accompanying notes to consolidated condensed financial statements.
 
Certain previously reported amounts have been reclassified to agree with current presentation.

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CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
                                                 
    First Horizon National Corporation
    2010   2009
    Controlling   Noncontrolling           Controlling   Noncontrolling    
(Dollars in thousands)(Unaudited)   Interest   Interest   Total   Interest   Interest   Total
 
Balance, January 1
  $ 3,007,303     $ 295,165     $ 3,302,468     $ 3,279,467     $ 295,165     $ 3,574,632  
Adjustment to reflect adoption of amendments to ASC 810
    (10,562 )           (10,562 )                  
Net income/(loss)
    35,733       8,563       44,296       (214,154 )     8,563       (205,591 )
Other comprehensive income/(loss):
                                               
Unrealized fair value adjustments, net of tax:
                                               
Securities available for sale
    (3,089 )           (3,089 )     25,216             25,216  
Recognized pension and other employee benefit plans net periodic benefit costs
    7,339             7,339       10,350             10,350  
 
Comprehensive income/(loss)
    39,983       8,563       48,546       (178,588 )     8,563       (170,025 )
 
Preferred stock — (CPP) accretion
    12,289             12,289       11,950             11,950  
Preferred stock — (CPP) dividends
    (44,784 )           (44,784 )     (44,657 )           (44,657 )
Common stock repurchased
    (1,340 )           (1,340 )     (388 )           (388 )
Common stock issued for stock options and restricted stock
    177             177       1,681             1,681  
Stock-based compensation expense
    10,287             10,287       5,359             5,359  
Dividends paid to noncontrolling interest of subsidiary preferred stock
          (8,563 )     (8,563 )           (8,563 )     (8,563 )
Other changes in equity
    (1,630 )           (1,630 )     220             220  
 
Balance, September 30
  $ 3,011,723     $ 295,165     $ 3,306,888     $ 3,075,044     $ 295,165     $ 3,370,209  
 
See accompanying notes to consolidated condensed financial statements.

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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS    
                 
    First Horizon National Corporation
    Nine Months Ended September 30
(Dollars in thousands)(Unaudited)   2010   2009
 
Operating Activities
               
Net income/(loss)
  $ 44,296     $ (205,591 )
Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities:
               
Provision for loan losses
    225,000       745,000  
Provision/(benefit) for deferred income tax
    93,657       (95,169 )
Depreciation and amortization of premises and equipment
    22,703       24,663  
Amortization of intangible assets
    4,144       4,590  
Net other amortization and accretion
    33,400       33,183  
Decrease in derivatives, net
    12,980       151,077  
Market value adjustment on mortgage servicing rights
    57,885       (42,497 )
Repurchase and foreclosure provision
    145,607       88,415  
Fair value adjustment to foreclosed real estate
    13,938       29,831  
Goodwill impairment
    3,348       14,027  
Stock-based compensation expense
    10,287       5,359  
Excess tax provision from stock-based compensation arrangements
    17        
Equity securities losses, net
    4,759       267  
Gains on repurchases of debt
    (17,060 )     (12,860 )
Net losses on disposal of fixed assets
    2,443       5,907  
Net (increase)/decrease in:
               
Trading securities
    (527,043 )     184,481  
Loans held for sale
    38,242       63,967  
Capital markets receivables
    (230,475 )     380,983  
Interest receivable
    4,125       8,222  
Mortgage servicing rights due to sale
    (24,558 )     (87,273 )
Other assets
    152,580       16,668  
Net increase/(decrease) in:
               
Capital markets payables
    86,551       (572,599 )
Interest payable
    (2,317 )     (26,255 )
Other liabilities
    (138,037 )     (107,432 )
Trading liabilities
    121,279       55,791  
 
Total adjustments
    93,455       868,346  
 
Net cash provided by operating activities
    137,751       662,755  
 
Investing Activities
               
Available for sale securities:
               
Sales
    56,276       42,756  
Maturities
    761,922       552,043  
Purchases
    (745,792 )     (69,850 )
Premises and equipment:
               
Purchases
    (23,269 )     (18,427 )
Net decrease in:
               
Securitization retained interests classified as trading securities
    7,573       60,134  
Loans
    811,207       2,064,990  
Interest-bearing cash
    272,831       41,440  
 
Net cash provided by investing activities
    1,140,748       2,673,086  
 
Financing Activities
               
Common stock:
               
Exercise of stock options
    93       3  
Repurchase of shares
    (1,340 )     (388 )
Excess tax provision from stock-based compensation arrangements
    (17 )      
Cash dividends paid — preferred stock — CPP
    (32,495 )     (32,616 )
Cash dividends paid — preferred stock — noncontrolling interest
    (8,500 )     (9,803 )
Long-term debt:
               
Payments/maturities
    (238,342 )     (1,484,294 )
Net cash paid for repurchase of debt
    (87,840 )     (151,910 )
Net increase/(decrease) in:
               
Deposits
    108,705       (6,807 )
Short-term borrowings
    (1,003,208 )     (2,023,923 )
 
Net cash used by financing activities
    (1,262,944 )     (3,709,738 )
 
Net increase/(decrease) in cash and cash equivalents
    15,555       (373,897 )
 
Cash and cash equivalents at beginning of period
    918,595       1,324,780  
 
Cash and cash equivalents at end of period
  $ 934,150     $ 950,883  
 
Supplemental Disclosures
               
Total interest paid
  $ 116,220     $ 201,027  
Total income taxes paid
    738       106,886  
Transfer from loans to other real estate owned
    151,118       142,823  
 
See accompanying notes to consolidated condensed financial statements.
Certain previously reported amounts have been reclassified to agree with current presentation.

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Notes to Consolidated Condensed Financial Statements
Note 1 – Financial Information
The unaudited interim Consolidated Condensed Financial Statements of First Horizon National Corporation (“FHN”), including its subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which it operates. This preparation requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions are based on information available as of the date of the financial statements and could differ from actual results. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented. The operating results for the interim 2010 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 2009 Annual Report to shareholders.
FHN historically presented charges related to repurchase obligations for junior lien consumer mortgage loan sales in noninterest income while similar charges arising from first lien mortgage originations and sales through the legacy national mortgage banking business were reflected in noninterest expense. In order to present such charges consistently, FHN determined that charges relating to repurchase obligations should be reflected in noninterest expense in the line item called Repurchase and foreclosure provision on the Consolidated Condensed Statements of Income. Consequently, FHN retroactively applied this change which resulted in a reclassification of charges related to junior lien mortgage loan sales from noninterest income into noninterest expense. All applicable tables and associated narrative have been revised to reflect this change. This reclassification did not impact FHN’s net income and all effects are included in the non-strategic segment.
Principles of Consolidation and Basis of Presentation. The consolidated financial statements include the accounts of FHN and other entities in which it has a controlling financial interest. Variable Interest Entities (“VIE”) for which FHN or a subsidiary has been determined to be the primary beneficiary are also consolidated. Following adoption of the provisions of Financial Accounting Standards Board (“FASB“) Accounting Standards Update 2009-17 on January 1, 2010, the assets and liabilities of FHN’s consolidated residential mortgage securitization trusts have been parenthetically disclosed on the face of the Consolidated Condensed Statements of Condition as restricted in accordance with the presentation requirements of ASC 810, as amended, due to the assets being pledged to settle the trusts’ obligations and the trusts’ security holders having no recourse to FHN.
Loans Held for Sale and Securitization and Residual Interests. Prior to fourth quarter 2008, FHN originated first lien mortgage loans (“the warehouse”) for the purpose of selling them in the secondary market, through sales to agencies for securitization, proprietary securitizations, and to a lesser extent through other whole loan sales. In addition, FHN evaluated its liquidity position in conjunction with determining its ability and intent to hold loans for the foreseeable future and sold certain of the second lien mortgages and home equity lines of credit (“HELOC”) it produced in the secondary market through securitizations and whole loan sales through third quarter 2007. For periods ending prior to January 1, 2010, loan securitizations involved the transfer of the loans to qualifying special purpose entities (“QSPE”) that were not subject to consolidation in accordance with ASC 860, “Transfers and Servicing”. Upon the effective date of the provisions of FASB Accounting Standards Update 2009-16 and FASB Accounting Standards Update 2009-17 on January 1, 2010, the concept of a QSPE was removed from Generally Accepted Accounting Principles (“GAAP”) and the criteria in ASC 810, “Consolidation”, for determining the primary beneficiary of a VIE were amended, resulting in the re-evaluation of all securitization trusts to which FHN had previously transferred loans for consolidation under ASC 810’s revised consolidation criteria. Following the re-evaluation of the trusts for consolidation upon adoption of the amendments to ASC 810, the majority of the mortgage securitization trusts to which FHN transferred loans remains unconsolidated as FHN is deemed not to be the primary beneficiary based on the interests it retained in the trusts. Under ASC 810, as amended, continual reconsideration of conclusions reached regarding which interest holder is the primary beneficiary of a trust is required. See Note 14 – Variable Interest Entities for additional information regarding FHN’s consolidated and nonconsolidated mortgage securitization trusts.
Accounting Changes. Effective September 30, 2010, FHN adopted the provisions of FASB Accounting Standards Update 2010-11, “Scope Exception Related to Embedded Credit Derivatives” (“ASU 2010-11”). ASU 2010-11 amends ASC 815 to provide clarifying language regarding when embedded credit derivative features are not considered embedded derivatives subject to potential bifurcation and separate accounting. Upon adoption of the provisions of ASU 2010-11, re-evaluation of certain preexisting contracts is required to determine whether the accounting for such contracts is consistent with the amended guidance in ASC 815. If the fair value option is elected for an instrument upon adoption of the amendments to ASC 815, re-evaluation of such preexisting contracts is not required. As FHN does not have any preexisting contracts which require re-evaluation, the adoption of the Codification update to ASC 815 had no effect on FHN’s statement of condition, results of operations, or cash flows.

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Note 1 – Financial Information (continued)
Effective upon its issuance in February 2010, FHN adopted the provisions of FASB Accounting Standards Update 2010-09, “Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”). ASU 2010-09 amends ASC 855 to clarify that an entity must disclose the date through which subsequent events have been evaluated in both originally issued and restated financial statements unless the entity has a regulatory requirement to review subsequent events up through the filing or furnishing of financial statements with the Securities and Exchange Commission. Upon adoption of the provisions of ASU 2010-09, FHN revised its disclosures accordingly.
Effective January 1, 2010, FHN adopted the provisions of FASB Accounting Standards Update 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), with the exception of 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 which is effective for quarters beginning after December 15, 2010. ASU 2010-06 updates 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, FHN revised its disclosures accordingly.
Effective January 1, 2010, FHN adopted the provisions of FASB Accounting Standards Update 2009-16, “Accounting for Transfers of Financial Assets” (“ASU 2009-16”). ASU 2009-16 updates ASC 860 to provide for the removal of the QSPE concept from GAAP, resulting in the evaluation of all former QSPEs for consolidation in accordance with ASC 810 on and after the effective date of the amendments. The amendments to ASC 860 modify the criteria for achieving sale accounting for transfers of financial assets and define the term participating interest to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. The updated provisions of ASC 860 also provide that a transferor should recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. ASC 860, as amended, requires enhanced disclosures which are generally consistent with, and supersede, the disclosures previously required by the Codification update to ASC 810 and ASC 860 which was effective for periods ending after December 15, 2008. Upon adoption of the amendments to ASC 860, FHN applied the amended disclosure requirements to transfers that occurred both before and after the effective date of the Codification update, with comparative disclosures included only for periods subsequent to initial adoption for those disclosures not previously required. The adoption of the Codification update to ASC 860 had no material effect on FHN’s statement of condition, results of operations, or cash flows.
Effective January 1, 2010, FHN adopted the provisions of Accounting Standards Update 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”). ASU 2009-17 amends ASC 810 to revise the criteria for determining the primary beneficiary of a VIE by replacing the quantitative-based risks and rewards test previously required with a qualitative analysis. While ASC 810, as amended, retains the previous guidance in ASC 810 which requires a reassessment of whether an entity is a VIE only when certain triggering events occur, it adds an additional criteria which triggers a reassessment of an entity’s status when an event occurs such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. Additionally, the amendments to ASC 810 require continual reconsideration of conclusions regarding which interest holder is the VIE’s primary beneficiary. Under ASC 810, as amended, separate presentation is required on the face of the balance sheet of the assets of a consolidated VIE that can only be used to settle the VIE’s obligations and the liabilities of a consolidated VIE for which creditors or beneficial interest holders have no recourse to the general credit of the primary beneficiary. ASC 810, as amended, also requires enhanced disclosures which are generally consistent with, and supersede, the disclosures previously required by the Codification update to ASC 810 and ASC 860 which was effective for periods ending after December 15, 2008. Comparative disclosures are required only for periods subsequent to initial adoption for those disclosures not required under such previous guidance.
Upon adoption of the amendments to ASC 810, FHN re-evaluated all former QSPEs and entities already subject to ASC 810 under the revised consolidation methodology. Based on such re-evaluation, consumer loans with an aggregate unpaid principal balance of $245.2 million were prospectively consolidated as of January 1, 2010, along with secured borrowings of $236.3 million, as the retention of mortgage servicing rights (“MSR”) and other retained interests, including residual interests and subordinated bonds, resulted in FHN being considered the related trusts’ primary beneficiary under the qualitative analysis required by ASC 810, as amended. MSR and trading assets held in

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Note 1 – Financial Information (continued)
relation to the newly consolidated trusts were removed from the mortgage servicing rights and trading securities sections of the Consolidated Condensed Statements of Condition, respectively, upon adoption of the amendments to ASC 810. As the assets of FHN’s consolidated residential mortgage securitization trusts are pledged to settle the obligations due to the holders of the trusts’ securities and since the security holders have no recourse to FHN, the asset and liability balances have been parenthetically disclosed on the face of the Consolidated Condensed Statements of Condition as restricted in accordance with the presentation requirements of ASC 810, as amended. Since FHN determined that calculation of carrying values was not practicable, the unpaid principal balance measurement methodology was used upon adoption, with the allowance for loan losses (“ALLL”) related to the newly consolidated loans determined using FHN’s standard practices. FHN recognized a reduction to the opening balance of undivided profits of approximately $10.6 million for the cumulative effect of adopting the amendments to ASC 810, including the effect of the recognition of an adjustment to the ALLL of approximately $24.6 million ($15.6 million net of tax) in relation to the newly consolidated loans. Further, upon adoption of the amendments to ASC 810, the deconsolidation of certain small issuer trust preferred trusts for which First Tennessee Bank National Association (“FTBNA”) holds the majority of the mandatorily redeemable preferred capital securities (trust preferreds) issued but is not considered the primary beneficiary under the qualitative analysis required by ASC 810, as amended, resulted in reduction of loans net of unearned income and term borrowings on the Consolidated Condensed Statements of Condition by $30.5 million.
Effective January 1, 2010, FHN adopted the provisions of FASB Accounting Standards Update 2010-10, “Amendments for Certain Investment Funds” (“ASU 2010-10”). ASU 2010-10 delays the application of ASU 2009-17 for a reporting entity’s interest in an entity that has the attributes of an investment company or for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. For entities that do not qualify for the deferral, ASU 2010-10 clarifies that related parties should be considered when evaluating whether each of the criteria related to permitted levels of decision maker or service provider fees in ASC 810 are met. Additionally, ASU 2010-10 amends ASC 810 to provide that when evaluating whether a fee is a variable interest in situations in which a decision maker or servicer provider holds another interest in the related VIE, a quantitative calculation may be used but should not be the sole basis for evaluating whether the other variable interest is more than insignificant. The adoption of the Codification update to ASC 810 had no effect on FHN’s statement of condition, results of operations, or cash flows.
Accounting Changes Issued but Not Currently Effective. In July 2010, the FASB issued Accounting Standards Update 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”). 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. The provisions of ASU 2010-20 are effective for periods ending after December 15, 2010, with the exception of the amendments to the rollforward of the allowance for credit losses and the disclosures about modifications which are effective for periods beginning after December 15, 2010. Comparative disclosures are required only for periods ending subsequent to initial adoption. FHN is currently assessing the effects of adopting the provisions of ASU 2010-20.

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Note 2 – Acquisitions and Divestitures
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 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 were included within the Loss from discontinued operations, net of tax line on the Consolidated Condensed Statements of Income in first quarter 2010 related 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 Loss from discontinued operations, net of tax line on the Consolidated Condensed Statements of Income for all periods presented.
In fourth quarter 2009, FHN executed the sale and closure of its Atlanta insurance business and Louisville First Express Remittance Processing location (“FERP”). FHN recognized a loss of $7.5 million on the sale of the Atlanta insurance business and a $1.7 million loss on the FERP divestiture. These losses are reflected on the Consolidated Condensed Statements of Income as a loss on divestiture within noninterest income. The losses on divestitures primarily reflect goodwill write-offs associated with the sale. FHN continues to have an insurance business within its Tennessee banking footprint and continues to operate other remittance processing locations.
In addition to the divestitures mentioned above, FHN acquires or divests assets from time to time in transactions that are considered business combinations or divestitures but are not material to FHN individually or in the aggregate.

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Note 3 – Investment Securities
The following tables summarize FHN’s available for sale securities on September 30, 2010 and 2009:
                                 
    On September 30, 2010
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Fair
(Dollars in thousands)   Cost   Gains   Losses   Value
 
Securities available for sale:
                               
U.S. Treasuries
  $ 68,252     $ 333     $     $ 68,585  
Government agency issued MBS (a)
    945,290       54,758       (13 )     1,000,035  
Government agency issued CMO (a)
    1,124,596       37,040             1,161,636  
Other U.S. government agencies (a)
    95,891       8,691             104,582  
States and municipalities
    41,660                   41,660  
Equity (b)
    234,056       355             234,411  
Other
    511       40             551  
 
Total securities available for sale (c)
  $ 2,510,256     $ 101,217     $ (13 )   $ 2,611,460  
 
(a)   Includes securities issued by government sponsored entities.
 
(b)   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, $9.4 million is restricted pursuant to reinsurance contract agreements.
 
(c)   Includes $2.3 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes. As of September 30, 2010, FHN had pledged $1.1 billion of the $2.3 billion pledged available for sale securities as collateral for securities sold under repurchase agreements.
                                 
    On September 30, 2009
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Fair
(Dollars in thousands)   Cost   Gains   Losses   Value
 
Securities available for sale:
                               
U.S. Treasuries
  $ 47,964     $ 361     $     $ 48,325  
Government agency issued MBS (a)
    995,576       58,338             1,053,914  
Government agency issued CMO (a)
    1,029,977       45,776             1,075,753  
Other U.S. government agencies (a)
    116,019       5,753             121,772  
States and municipalities
    46,090                   46,090  
Equity (b)
    297,565       366       (65 )     297,866  
Other
    2,212       30       (40 )     2,202  
 
Total securities available for sale (c)
  $ 2,535,403     $ 110,624     $ (105 )   $ 2,645,922  
 
(a)   Includes securities issued by government sponsored entities.
 
(b)   Includes 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, $46.9 million is restricted pursuant to reinsurance contract agreements.
 
(c)   Includes $2.2 billion of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes. As of September 30, 2009, FHN had pledged $1.4 billion of the $2.2 billion 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.

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Note 3 – Investment Securities (continued)
Provided below are the amortized cost and fair value by contractual maturity for the available for sale securities portfolio on September 30, 2010:
                         
      Available for Sale
        Amortized   Fair
(Dollars in thousands)       Cost   Value
 
Within 1 year
          $ 43,111     $ 43,180  
After 1 year; within 5 years
            41,167       42,092  
After 5 years; within 10 years
            82,805       90,835  
After 10 years
            38,720       38,720  
 
Subtotal
            205,803       214,827  
 
Government agency issued MBS and CMO
            2,069,886       2,161,671  
Equity and other securities
            234,567       234,962  
 
Total
          $ 2,510,256     $ 2,611,460  
 
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.
For the three months ended September 30, 2010 and 2009, recognized gains and losses from the sale of available for sale securities were immaterial.
The following tables provide information on investments within the available for sale portfolio that have unrealized losses on September 30, 2010 and 2009:
                                                 
    On September 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
 
Government agency issued MBS
  $ 50,012     $ (13 )   $     $     $ 50,012     $ (13 )
 
Total temporarily impaired securities
  $ 50,012     $ (13 )   $     $     $ 50,012     $ (13 )
 
 
    On September 30, 2009
    Less than 12 months   12 Months or Longer   Total
    Fair   Unrealized   Fair   Unrealized   Fair   Unrealized
(Dollars in thousands)   Value   Losses   Value   Losses   Value   Losses
 
Other
  $     $     $ 140     $ (40 )   $ 140     $ (40 )
 
Total debt securities
                140       (40 )     140       (40 )
Equity
                166       (65 )     166       (65 )
 
Total temporarily impaired securities
  $     $     $ 306     $ (105 )   $ 306     $ (105 )
 
FHN has reviewed investment securities that are in unrealized loss positions in accordance with its accounting policy for other-than-temporary impairment and does not consider them other-than-temporarily impaired. FHN does not intend to sell the debt securities and it is more-likely-than-not that FHN will not be required to sell the securities prior to recovery. The decline in value is primarily attributable to interest rates and not credit losses. For the three and nine months ended September 30, 2010 and 2009, there were no realized gains or losses related to debt securities within the available for sale securities portfolio. 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 for the three months ended September 30, 2010 and 2009. For the nine months ended September 30, 2010 and 2009, other-than-temporary impairments were recognized of $.2 million and $.5 million, respectively.

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Note 4 – Loans
The composition of the loan portfolio is detailed below:
                         
    September 30     December 31  
(Dollars in thousands)   2010     2009     2009  
     
Commercial:
                       
Commercial, financial and industrial
  $ 7,336,460     $ 6,920,916     $ 7,159,370  
Real estate commercial
    1,386,627       1,537,099       1,479,888  
Real estate construction
    456,566       1,130,710       924,475  
Retail:
                       
Real estate residential
    6,756,942       7,590,699       7,362,458  
Real estate construction
    30,375       361,930       229,487  
Other retail
    104,772       124,376       121,526  
Credit card receivables
    191,218       189,452       192,036  
Restricted real estate loans
    796,529       669,503       654,644  
     
Loans, net of unearned income
    17,059,489       18,524,685       18,123,884  
Less: Allowance for loan losses (Restricted — $47.8 million) (a)
    719,899       944,765       896,914  
     
Total net loans
  $ 16,339,590     $ 17,579,920     $ 17,226,970  
     
(a)   Restricted balances parenthetically presented are as of September 30, 2010.
FHN has a concentration of loans secured by residential real estate (47 percent of total loans), the majority of which is in the retail real estate residential portfolio (39 percent of total loans). This portfolio is primarily comprised of home equity lines and loans. Restricted real estate loans, which is primarily HELOC but also includes some first and second mortgages, is 5 percent of total loans. The remaining residential real estate loans are primarily in the construction portfolios (3 percent of total loans) with national exposures being significantly reduced since 2008. Additionally, on September 30, 2010, FHN had bank-related and trust preferred loans (including loans to bank and insurance-related businesses) totaling $.7 billion (4 percent of total loans) that are included within the Commercial, Financial, and Industrial portfolio. Due to higher credit losses experienced throughout the financial services industry and the limited availability of market liquidity, these loans have experienced stress during the economic downturn. On September 30, 2010, FHN did not have any concentrations of Commercial, Financial, and Industrial loans in any single industry of 10 percent or more of total loans.
On September 30, 2010 and 2009, FHN had loans classified as troubled debt restructurings of $253.7 million and $67.6 million, respectively. Additionally, FHN had restructured $46.3 million of loans held for sale as of September 30, 2010. For restructured loans in the portfolio, FHN had loan loss reserves of $47.7 million or 19 percent as of September 30, 2010. On September 30, 2010 and 2009, there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured.
Nonperforming loans consist of loans which management has identified as individually impaired, other nonaccrual loans, and loans which have been restructured. Generally, classified nonaccrual commercial loans over $1 million are deemed to be individually impaired. The following table presents information concerning nonperforming loans:
                         
    September 30     December 31  
(Dollars in thousands)   2010     2009     2009  
     
Individually impaired commercial loans
  $ 471,553     $ 603,960     $ 509,073  
Other nonaccrual loans (a)
    324,219       515,759       428,611  
     
Total nonperforming loans (b)
  $ 795,772     $ 1,119,719     $ 937,684  
     
(a)   On September 30, 2010 and 2009, and on December 31, 2009, other nonaccrual loans included $60.6 million, $32.3 million, and $38.3 million, respectively, of loans held for sale.
 
(b)   On September 30, 2010, total nonperforming loans (inclusive of nonperforming loans held-for-sale) included $128.7 million of loans that have been restructured.

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Note 4 – Loans (continued)
It is our policy that interest payments received on impaired and nonaccrual loans are applied to principal. Once all principal has been received, additional payments are recognized as interest income on a cash basis. The following table presents information concerning impaired loans:
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2010   2009   2010   2009
 
Total interest recognized on impaired loans
  $ 335     $ 454     $ 519     $ 1,118  
Average balance of impaired loans
    469,168       575,829       501,054       538,007  
 
Activity in the allowance for loan losses related to non-impaired and impaired loans for the nine months ended September 30, 2010 and 2009 is summarized as follows:
                         
(Dollars in thousands)   Non-impaired   Impaired   Total
 
Balance on December 31, 2008
  $ 836,907     $ 12,303     $ 849,210  
Provision for loan losses
    510,164       234,836       745,000  
Charge-offs
    (441,523 )     (238,530 )     (680,053 )
Recoveries
    26,764       3,844       30,608  
 
Net charge-offs
    (414,759 )     (234,686 )     (649,445 )
 
Balance on September 30, 2009
  $ 932,312     $ 12,453     $ 944,765  
 
Balance on December 31, 2009
  $ 876,121     $ 20,793     $ 896,914  
Adjustment for adoption of amendments to ASC 810
    24,578             24,578  
Provision for loan losses
    26,845       198,155       225,000  
Charge-offs
    (320,912 )     (144,832 )     (465,744 )
Recoveries
    38,435       716       39,151  
 
Net charge-offs
    (282,477 )     (144,116 )     (426,593 )
 
Balance on September 30, 2010
  $ 645,067     $ 74,832     $ 719,899  
 

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Note 5 – Mortgage Servicing Rights
FHN recognizes all classes of mortgage servicing rights (“MSR”) at fair value. Classes of MSR are determined in accordance with FHN’s risk management practices and market inputs used in determining the fair value of the servicing asset. See Note 16 – Fair Value, the “Determination of Fair Value” section for a discussion of FHN’s MSR valuation methodology. The balance of MSR included on the Consolidated Condensed Statements of Condition represents the rights to service approximately $31.0 billion of mortgage loans on September 30, 2010, 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 rollfoward below.
In third quarter 2009, FHN reviewed the allocation of fair value between MSR and excess interest from prior first lien loan sales and securitizations and as a result, $11.1 million was reclassified from trading securities to MSR. The reclassification had no effect on FHN’s Consolidated Condensed Statements of Income as excess interest and MSR are highly correlated in valuation and both are recognized at fair value with changes in fair value being included within mortgage banking income. The reclassification to MSR is reflected in the rollforward below. Following is a summary of changes in capitalized MSR for the nine months ended September 30, 2010 and 2009:
                         
    First   Second    
(Dollars in thousands)   Liens   Liens   HELOC
 
Fair value on January 1, 2009
  $ 354,394     $ 13,558     $ 8,892  
Addition of mortgage servicing rights
    189             11  
Reductions due to loan payments
    (48,257 )     (4,101 )     (1,705 )
Reductions due to sale
    (77,591 )     (8,134 )     (1,548 )
Reclassification from trading securities
    11,077              
Changes in fair value due to:
                       
Changes in valuation model inputs or assumptions
    42,617       45        
Other changes in fair value
    (1,384 )     482       737  
 
Fair value on September 30, 2009
  $ 281,045     $ 1,850     $ 6,387  
 
Fair value on January 1, 2010
  $ 296,115     $ 1,174     $ 5,322  
Adjustment due to adoption of amendments to ASC 810
    (197 )     (928 )     (1,168 )
Reductions due to loan payments
    (24,783 )     (24 )     (1,125 )
Reductions due to sale
    (24,558 )            
Changes in fair value due to:
                       
Changes in valuation model inputs or assumptions
    (57,981 )            
Other changes in fair value
    (199 )     28       267  
 
Fair value on September 30, 2010
  $ 188,397     $ 250     $ 3,296  
 
Servicing, late, and other ancillary fees recognized within mortgage banking income were $21.4 million and $29.7 million for the three months ended September 30, 2010 and 2009, respectively, and $75.0 million and $92.6 million for the nine months ended September 30, 2010 and 2009, respectively. Servicing, late, and other ancillary fees recognized within other income and commissions were $.9 million and $3.5 million for the three months ended September 30, 2010 and 2009, respectively, and $3.1 million and $10.9 million for the nine months ended September 30, 2010 and 2009, respectively.
FHN services a portfolio of mortgage loans related to transfers performed 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 $4.1 million and $7.2 million at September 30, 2010 and 2009, respectively. The aggregate principal balance serviced by FHN for these transactions was $.7 billion and $1.0 billion at September 30, 2010 and 2009, 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 September 30, 2010, FHN had $21.8 million 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 as of September 30, 2010 and 2009.

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Note 6 – Intangible Assets
The following is a summary of intangible assets, net of accumulated amortization, included in the Consolidated Condensed Statements of Condition:
                 
            Other
            Intangible
(Dollars in thousands)   Goodwill   Assets (a)
 
December 31, 2008
  $ 192,408     $ 45,082  
Amortization expense
          (4,590 )
Impairment (b) (c)
    (14,027 )     (341 )
Additions
          347  
 
September 30, 2009
  $ 178,381     $ 40,498  
 
December 31, 2009
  $ 165,528     $ 38,256  
Amortization expense
          (4,144 )
Impairment (b) (c)
    (3,348 )      
Additions
          151  
 
September 30, 2010
  $ 162,180     $ 34,263  
 
(a)   Represents customer lists, acquired contracts, premium on purchased deposits, and covenants not to compete.
 
(b)   See Note 17 — Restructuring, Repositioning, and Efficiency for further details related to goodwill impairments.
 
(c)   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 $125.8 million on September 30, 2010, net of $91.5 million of accumulated amortization. Estimated aggregate amortization expense is expected to be $1.4 million for the remainder of 2010, and $5.3 million, $4.3 million, $3.9 million, $3.6 million, and $3.4 million for the twelve-month periods of 2011, 2012, 2013, 2014, and 2015, respectively.
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 December 31, 2009. 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 being amortized.
                                 
            Regional   Capital    
(Dollars in thousands)   Non-Strategic   Banking   Markets   Total
 
Gross goodwill
  $ 168,032     $ 64,759     $ 97,421     $ 330,212  
Accumulated impairments
    (98,380 )                 (98,380 )
Accumulated divestiture related write-offs
    (66,304 )                 (66,304 )
 
December 31, 2009
  $ 3,348     $ 64,759     $ 97,421     $ 165,528  
 
Certain previously reported amounts have been reclassified to agree with current presentation.
There is no goodwill associated with the Corporate segment.
The following is a summary of goodwill detailed by reportable segments for the nine months ended September 30:
                                 
            Regional   Capital    
(Dollars in thousands)   Non-Strategic   Banking   Markets   Total
 
December 31, 2008
  $ 30,228     $ 64,759     $ 97,421     $ 192,408  
 
September 30, 2009
  $ 16,201     $ 64,759     $ 97,421     $ 178,381  
 
December 31, 2009
  $ 3,348     $ 64,759     $ 97,421     $ 165,528  
Impairment
    (3,348 )                 (3,348 )
 
September 30, 2010
  $     $ 64,759     $ 97,421     $ 162,180  
 
Certain previously reported amounts have been reclassified to agree with current presentation.
There is no goodwill associated with the Corporate segment.

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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 September 30, 2010. 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.
                                 
            Regional   Capital    
(Dollars in thousands)   Non-Strategic   Banking   Markets   Total
 
Gross goodwill
  $ 168,032     $ 64,759     $ 97,421     $ 330,212  
Accumulated impairments
    (101,728 )                 (101,728 )
Accumulated divestiture related write-offs
    (66,304 )                 (66,304 )
 
September 30, 2010
  $     $ 64,759     $ 97,421     $ 162,180  
 
Certain previously reported amounts have been reclassified to agree with current presentation.
There is no goodwill associated with the Corporate segment.

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Note 7 – Regulatory Capital
FHN is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on FHN’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative measures of assets, liabilities, and certain derivatives as calculated under regulatory accounting practices must be met. Capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require FHN to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets (leverage). Management believes, as of September 30, 2010, that FHN met all capital adequacy requirements to which it was subject.
The actual capital amounts and ratios of FHN and FTBNA are presented in the table below. In addition, FTBNA must also calculate its capital ratios after excluding financial subsidiaries as defined by the Gramm-Leach-Bliley Act of 1999. Based on this calculation, FTBNA’s Total Capital, Tier 1 Capital, and Leverage ratios were 19.97 percent, 16.34 percent, and 13.13 percent, respectively, on September 30, 2010, and were 19.51 percent, 15.08 percent, and 12.47 percent, respectively, on September 30, 2009.
                                 
    First Horizon   First Tennessee Bank
    National Corporation   National Association
(Dollars in thousands)   Amount   Ratio   Amount   Ratio
 
On September 30, 2010:
                               
Actual:
                               
Total Capital
  $ 4,466,899       21.97 %   $ 4,322,143       21.48 %
Tier 1 Capital
    3,526,115       17.34       3,424,071       17.01  
Leverage
    3,526,115       13.76       3,424,071       13.47  
 
                               
For Capital Adequacy Purposes:
Total Capital
    1,626,589   ³     8.00       1,610,114   ³     8.00  
Tier 1 Capital
    813,294   ³     4.00       805,057   ³     4.00  
Leverage
    1,025,010   ³     4.00       1,016,829   ³     4.00  
 
                               
To Be Well Capitalized Under Prompt Corrective Action Provisions:
Total Capital
                    2,012,643   ³     10.00  
Tier 1 Capital
                    1,207,586   ³     6.00  
Leverage
                    1,271,036   ³     5.00  
 
On September 30, 2009:
                               
Actual:
                               
Total Capital
  $ 4,754,979       21.61 %   $ 4,532,949       20.82 %
Tier 1 Capital
    3,563,650       16.20       3,404,528       15.63  
Leverage
    3,563,650       13.34       3,404,528       12.85  
 
                               
For Capital Adequacy Purposes:
Total Capital
    1,759,961   ³     8.00       1,742,115   ³     8.00  
Tier 1 Capital
    879,981   ³     4.00       871,058   ³     4.00  
Leverage
    1,068,442   ³     4.00       1,059,832   ³     4.00  
 
                               
To Be Well Capitalized Under Prompt Corrective Action Provisions:
Total Capital
                    2,177,644   ³     10.00  
Tier 1 Capital
                    1,306,587   ³     6.00  
Leverage
                    1,324,790   ³     5.00  
 

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Note 8 – Earnings per Share
The following tables show a reconciliation of the numerators used in calculating basic and diluted earnings per share attributable to common shareholders:
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2010   2009   2010   2009
 
Income/(loss) from continuing operations
  $ 33,710     $ (24,814 )   $ 51,173     $ (194,435 )
Loss from discontinued operations, net of tax
          (10,200 )     (6,877 )     (11,156 )
 
Net income/(loss)
  $ 33,710     $ (35,014 )   $ 44,296     $ (205,591 )
Net income attributable to noncontrolling interest
    2,875       2,969       8,563       8,563  
 
Net income/(loss) attributable to controlling interest
  $ 30,835     $ (37,983 )   $ 35,733     $ (214,154 )
Preferred stock dividends
    14,960       14,876       44,816       44,688  
 
Net income/(loss) available to common shareholders
  $ 15,875     $ (52,859 )   $ (9,083 )   $ (258,842 )
 
 
                               
Income/(loss) from continuing operations
  $ 33,710     $ (24,814 )   $ 51,173     $ (194,435 )
Net income attributable to noncontrolling interest
    2,875       2,969       8,563       8,563  
Preferred stock dividends
    14,960       14,876       44,816       44,688  
 
Net income/(loss) from continuing operations available to common shareholders
  $ 15,875     $ (42,659 )   $ (2,206 )   $ (247,686 )
 
The following table provides a reconciliation of weighted average common shares to diluted average common shares:
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(In thousands)   2010   2009   2010   2009
 
Weighted average common shares outstanding — basic (a)
    230,461       230,285       230,380       230,248  
Effect of dilutive securities (a)
    4,153                    
 
Weighted average common shares outstanding — diluted (a)
    234,614       230,285       230,380       230,248  
 
(a)   All share data has been restated to reflect stock dividends distributed through October 1, 2010.
The following table provides a reconciliation of earnings/(losses) per common and diluted share:
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
  2010   2009   2010   2009
 
Earnings/(loss) per common share:
Earnings/(loss) per share from continuing operations available to common shareholders
  $ 0.07     $ (0.19 )   $ (0.01 )   $ (1.07 )
Earnings/(loss) per share from discontinued operations, net of tax
          (0.04 )     (0.03 )     (0.05 )
 
Earnings/(loss) per share available to common shareholders
  $ 0.07     $ (0.23 )   $ (0.04 )   $ (1.12 )
 
 
                               
Diluted earnings/(loss) per common share:
                               
 
Diluted earnings/(loss) per share from continuing operations available to common shareholders
  $ 0.07     $ (0.19 )   $ (0.01 )   $ (1.07 )
Diluted earnings/(loss) per share from discontinued operations, net of tax
          (0.04 )     (0.03 )     (0.05 )
 
Diluted earnings/(loss) per share available to common shareholders
  $ 0.07     $ (0.23 )   $ (0.04 )   $ (1.12 )
 
For the three months ended September 30, 2009 and the nine months ended September 30, 2010 and 2009, all outstanding potential common shares were antidilutive due to the net loss attributable to common shareholders for those periods. Stock options of 11.5 million and 14.6 million with a weighted average exercise price of $27.56 and $28.07 per share for the three months ended September 30, 2010 and 2009, respectively, were excluded from diluted shares. Stock options of 12.3 million and 15.4 million with a weighted average exercise price of $27.58 and $28.24 per share for the nine months ended September 30, 2010 and 2009, respectively, were excluded from diluted shares. Other equity awards of .3 million and 2.0 million for the three months ended September 30, 2010 and 2009, respectively, were excluded from diluted shares, while other equity awards of 3.4 million and 1.8 million for the nine months ended September 30, 2010 and 2009, respectively, were excluded from diluted shares. Additionally, 14.6 million potentially dilutive common shares related to the CPP common stock warrant were excluded from the computation of diluted loss per common share for the three months ended September 30, 2009, and the nine months ended September 30, 2010 and 2009, because such shares would have been antidilutive.

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Note 9 – Contingencies and Other Disclosures
Contingencies. Contingent liabilities arise in the ordinary course of business, including those related to litigation. Various claims and lawsuits are pending against FHN and its subsidiaries. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories or involve a large number of parties, FHN cannot reasonably determine what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss or impact related to each pending matter may be. FHN establishes loss contingency reserves for litigation matters when estimated loss is both probable and reasonably estimable as prescribed by applicable financial accounting guidance. A reserve generally is not established when a loss contingency either is not probable or its amount is not 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 reserve to be established at the low end of the range. Based on current knowledge, and after consultation with counsel, management is of the opinion that loss contingencies related to pending matters should not have a material adverse effect on the consolidated financial condition of FHN, but may be material to FHN’s operating results for any particular reporting period depending, in part, on the results from that period.
Two subsidiaries of FHN, FTN Financial Securities Corp. (“FTNFS”) and First Tennessee Bank National Association, along with an executive, a current employee, and a former employee, 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 FTNFS customer, Sentinel Management Group, Inc., in violations of the federal securities laws. This matter is discussed in Note 9 of FHN’s Quarterly Report on Form 10-Q for the period ended March 31, 2010, and in Note 18 of FHN’s Annual Report to shareholders for the year 2009. There have been no material developments in this matter since the March 31 Quarterly Report was issued.
During the second quarter of 2010, a shareholder, Cranston Reid, filed a putative derivative lawsuit in the U.S. District Court for the Western District of Tennessee 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. FHN believes 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.
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 of $55.7 million within noninterest expense in fourth quarter 2007 related to this contingent obligation.
In March 2008, Visa completed its initial public offering (“IPO”). Visa funded an escrow account from its IPO proceeds to be used to make payments related to the Visa litigation matters. Upon funding of the escrow, FHN reversed $30.0 million of the contingent liability previously recognized with a corresponding credit to noninterest expense for its proportionate share of the escrow account. A portion of FHN’s Class B shares of Visa were redeemed as part of the IPO resulting in $65.9 million of equity securities gains in first quarter 2008.
In October 2008, Visa announced that it had agreed to settle litigation with Discover Financial Services for $1.9 billion. Of this settlement amount, $1.7 billion was funded from the escrow account established as part of Visa’s IPO. In connection with this settlement, FHN recognized additional expense of $11.0 million within noninterest expense in third quarter 2008. In December 2008, Visa deposited additional funds into the escrow account and FHN recognized a corresponding credit to noninterest expense of $11.0 million for its proportionate share of the amount funded.
In July 2009, Visa deposited an additional $700 million into the escrow account. Accordingly, FHN reduced its contingent liability by $7.0 million through a credit to noninterest expense.
In May 2010, Visa deposited an additional $500 million into the escrow account and FHN recognized a corresponding reduction of its contingent liability and a credit to noninterest expense of $5.0 million for its proportionate share of the amount funded. Visa deposited an additional $800 million into the escrow account during October 2010. FHN will reduce its contingent liability by $8.0 million through a credit to noninterest expense during fourth quarter 2010. After the partial share redemption in conjunction with the IPO, FHN holds approximately 2.4 million Class B shares of Visa, which are included in the Consolidated Condensed Statements of Condition at their historical cost of $0. Conversion of these shares into Class A shares of Visa and, with limited exceptions, transfer of these shares 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 is currently estimated to approximate 51 percent, will fluctuate based on the ultimate settlement of the Visa litigation matters for which FHN has a proportionate contingent obligation. Future funding of the escrow will dilute this exchange rate by an amount that is yet to be determined.
Other Disclosures – Indemnification Agreements and Guarantees. In the ordinary course of business, FHN enters into indemnification agreements for legal proceedings against its directors and officers and standard representations and warranties for underwriting agreements, merger and acquisition agreements, loan sales, contractual commitments, and various other business transactions or arrangements. The extent of FHN’s obligations under these agreements depends upon the occurrence of future events; therefore, it is not possible to estimate a maximum potential amount of payouts that could be required with such agreements.

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Note 9 – Contingencies and Other Disclosures (continued)
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, through a sub-servicer, a predominately first lien mortgage loan portfolio of $31.0 billion as of September 30, 2010, a significant portion of which is held by FNMA and private security holders, with less significant portions held by GNMA and FHLMC. In connection with its servicing activities, FHN collects and remits the principal and interest payments on the underlying loans for the account of the appropriate investor. In the event of 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. For servicer advances of P&I under the terms of private and GSE securitizations, FHN can utilize payments of P&I received from other prepaid loans within a particular loan pool in order to advance P&I to the trustee for the benefit of the investors. 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 September 30, 2010, FHN has recognized servicing advances of $239.9 million. Servicing 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, 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. Sometimes the loans were sold with full or limited recourse, but much more often the loans were sold without recourse. For loans sold with recourse, FHN has indemnity and repurchase exposure if the loans default. For loans sold without recourse, FHN has exposure for repurchase of loans arising from claims that FHN breached its representations and warranties made to the purchasers at closing, and exposure for investment rescission or damages arising from claims that the offering documents under which the loans were securitized were materially deficient. From 2005 through 2008, FHN originated and sold $69.5 billion of first lien mortgage loans 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 $40.8 billion of such loans without recourse in proprietary transactions.
Loans Sold With Full or Limited Recourse. FHN has sold certain government 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, FHA insurance, or VA guaranty. On September 30, 2010 and 2009, the current UPB of single-family residential loans that were sold on a full recourse basis with servicing retained was $60.7 million and $71.6 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 continues to absorb losses due to uncollected interest and foreclosure costs and/or 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 September 30, 2010 and 2009, 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 $3.2 billion and $3.3 billion, respectively. Additionally, on September 30, 2010 and 2009, $.8 billion and $1.1 billion, respectively, of mortgage loans were outstanding which were sold under limited recourse arrangements where the risk is limited to interest and servicing advances.
The reserve for foreclosure losses for loans sold with full or limited recourse is based upon a historical progression model using a rolling 12-month average, which predicts the frequency of a mortgage loan entering foreclosure. In addition, other factors are considered, including qualitative and quantitative factors (e.g., current economic conditions, past collection experience, risk characteristics of the current portfolio, and other factors), which are not defined by historical loss trends or severity of losses.
Loans Sold Without Recourse – GSE Whole Loan Sales. For loans sold without recourse to GSEs, FHN generally has obligations to either repurchase the loan for the unpaid principal balance or make the purchaser whole for the economic benefits of a loan if it is determined that the loans sold were in violation of representations or warranties made by FHN at closing.

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Note 9 – Contingencies and Other Disclosures (continued)
The estimated inherent losses that result from these obligations are derived from loss severities that are reflective of default and delinquency trends in residential real estate loans and declining housing prices, which result in fair value marks below par for repurchased loans when the loans are recorded on FHN’s balance sheet within loans held for sale upon repurchase. FHN utilizes multiple techniques in assessing the adequacy of its repurchase and foreclosure reserve for loans sold without recourse for which it has continuing obligations under representations and warranties. FHN tracks actual repurchase or make-whole losses by GSE, loan pool, and vintage (year loan was sold) and this historical data is applied to more recent sale vintages to estimate inherent loss content observed within its vintages of loan sales. Due to the historical nature of this calculation, as well as the increasing volume of requests from GSEs, FHN performs additional analyses of repurchase and make-whole obligations. Management then applies qualitative adjustments to the initial baseline to incorporate known current trends in repurchase and make-whole requests, loss severity trends, alternative resolutions, primary mortgage insurance (“PMI”) cancellation notices, and rescission rates (successful resolutions) in the determination of the appropriate reserve level. Currently, FHN services only $12 billion in UPB of the loans sold to GSEs which limits visibility into the current status (i.e. current UPB, delinquency, refinance activity, etc.) of the loans that were sold. This presents an additional level of uncertainty in estimating inherent loss content because it is difficult to predict future repurchase requests from GSEs.
Loans Sold Without Recourse – Proprietary Securitizations. Securitized loans generally were sold indirectly to investors as interests, commonly knows as certificates, in trusts or other vehicles. In most cases, the certificates were tiered into different risk classes, with subordinated classes exposed to trust losses first and senior classes exposed only after subordinated classes were exhausted. Representations and warranties were made to the trustees for the benefit of investors. The certificates were sold to a variety of investors, including GSEs in some cases, through securities offerings under a prospectus or other offering documents. 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. The remaining outstanding certificated balance for these classes was $99.2 million as of September 30, 2010.
For loans sold in proprietary securitizations, 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 September 30, 2010, the repurchase request pipeline contained no repurchase requests related to securitized loans based on representations and warranties.
FHN has been subpoenaed by the conservator for two GSE investors in six securitizations in connection with an ongoing investigation which may or may not result in claims based on representations and warranties. Since the investigation is neither a repurchase claim nor litigation, the associated loans are not considered part of the repurchase pipeline and FHN is unable to estimate any liability for this matter. At the time this report is filed, FHN was a defendant in lawsuits by three investors in securitizations which claim that the offering documents under which certificates were sold to them were materially deficient. Although these suits are in very early stages, FHN intends to defend itself vigorously. These lawsuit matters have been analyzed and treated as litigation matters under applicable accounting standards. At September 30, 2010 and at the time this report was filed, FHN was unable to determine a probable loss or estimate a range of loss due to the uncertainty related to these matters and no reserve had been established. Similar claims may be pursued by other investors.
At September 30, 2010, FHN had not reserved for exposure for repurchase of loans arising from claims that FHN breached its representations and warranties made 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.
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 service 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 retained 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 September 30, 2010, 15 percent of the active repurchase pipeline (inclusive of PMI cancellation notices and all other claims) were claims from 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 having a loan-to-value ratio at origination of greater than 80 percent that were sold to GSEs or securitized. 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 rescinded or cancelled for all loan sales and securitizations. In determining adequacy of the repurchase reserve, FHN considered $87.2 million in UPB of loans sold where PMI coverage was rescinded or cancelled for all loan sales and securitizations. To date, a majority of PMI cancellation notices have involved loans sold to GSEs. At September 30, 2010, all estimated loss content arising from PMI rescission and cancellation matters related to loans sold to GSEs.

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Note 9 – Contingencies and Other Disclosures (continued)
Repurchase Obligations Related to 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 HELOC from one of the purchasers of these branches. On September 30, 2010, the unpaid principal balance of unresolved repurchase requests related to this sale was $28.9 million. These amounts are not included in the repurchase pipeline. Those unresolved repurchase requests are the subject of an arbitration proceeding. Based on an analysis of the circumstances, FHN has established an immaterial reserve at September 30, 2010 based on its interpretation of the sale agreement. Because of the uncertainty of the potential outcome of the arbitration proceedings, and also due to uncertainties regarding potential remedies that are within the discretion of the arbitration panel, FHN otherwise cannot determine probable loss or estimate a range of losses at this time that may result from these arbitration proceedings. FHN expects to re-assess the reserve each quarter as the arbitration progresses.
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 $177.6 million and $63.9 million as of September 30, 2010 and 2009, 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 liability are included within Repurchase and foreclosure provision on the Consolidated Condensed Statements of Income. Refer to the Repurchase and Related Obligations from Loans Originated for Sale and Critical Accounting Policies sections of MD&A for additional discussion related to FHN’s repurchase obligations.
Other.
Foreclosure Practices. The current focus on foreclosure practices of financial institutions nationwide could impact FHN through increased operational and legal costs and could have compliance and reputational impacts. FHN owns and services residential loans. In addition, FHN’s national mortgage and servicing platforms were sold in August 2008 and the related servicing activities, including foreclosure proceedings, of the still-owned portion of FHN’s mortgage servicing portfolio is outsourced through a subservicing arrangement with the platform buyer. FHN has reviewed its processes relating to foreclosure on loans it owns and services, and has instructed its subservicer to undertake a similar review. FHN’s review is completed and no material issues were identified. The subservicer review, covering many more mortgages, is expected to be completed in the fourth quarter of 2010. If compliance issues are discovered with respect to the subservicer, under the subservicing agreement FHN may be financially responsible in some cases, and the subservicer may be in others. FHN can not predict the amount of operating costs, costs for foreclosure delays (including costs connected with servicing advances), legal expenses, or other costs (including title company indemnification) that may be incurred as a result of the internal reviews or external actions, nor can FHN determine presently that any such expenses are probable in material amounts; accordingly, no reserve for these matters has been established. Refer to the Market Uncertainties and Prospective Trends – Foreclosure Practices section of MD&A for additional discussion related to FHN’s foreclosure practices and subservicing arrangement.
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 private mortgage insurance premiums paid by borrowers (i.e., reinsurance arrangements). The loss corridors vary for each primary insurer for each contract year. The estimation of FHN’s exposure to losses under these arrangements involves 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 performs an estimation of total loss content within each insured pool of loans to determine the degree to which its loss corridor has been penetrated. Management obtains the assistance of a third party actuarial firm in developing its estimation of loss content. This process includes consideration of factors such as delinquency trends, default rates, and housing prices which are used to estimate both the frequency and severity of losses. By the end of second quarter 2009, substantially all of FHN’s reinsurance corridors had been fully reflected within its reinsurance reserve for the 2005 through 2008 loan vintages. No new reinsurance arrangements have been initiated after 2008.
In 2009 and 2010, FHN agreed to settle certain of its reinsurance obligations with primary insurers through termination of the related reinsurance agreements, which resulted in a decrease in the reserve balance totaling $48.7 million and the transfer of the associated trust assets. As of September 30, 2010, FHN has accrued $11.5 million for its estimated liability under the reinsurance arrangements. The accrued liability is reflected in Other Liabilities on the Consolidated Condensed Statements of Condition. In accordance with the terms of the contracts with the primary insurers, as of September 30, 2010, FHN has placed $9.4 million of prior premium collections in trust for payment of claims arising under the reinsurance arrangements.
2008 Sale of National Origination and Servicing Platforms. In conjunction with the sale of its servicing platform in August 2008, FHN entered into a three year subservicing arrangement with the purchaser for the unsold portion of FHN’s servicing portfolio. As part of the subservicing agreement, FHN has agreed to a make-whole arrangement whereby if the number of loans subserviced by the purchaser falls below specified levels and the direct servicing cost per loan is greater than a specified amount (determined using loans serviced on behalf of both FHN and the purchaser), FHN will make a payment according to a contractually specified formula. The make-whole payment is subject to a cap, which is $15.0 million if triggered during the eight quarters following the first anniversary of the divestiture. As part of the 2008 transaction, FHN recognized a contingent liability of $1.2 million representing the estimated fair value of its performance obligation under the make-whole arrangement.

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Note 10 – Pension, 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, excluding certain employees of FHN’s insurance subsidiaries. Pension benefits are based on years of service, average compensation near retirement, and estimated social security benefits at age 65. The contributions are based upon actuarially determined amounts necessary to fund the total benefit obligation. FHN contributed $50 million to the qualified pension plan in 2009. At this time, FHN does not expect to make a contribution to the qualified pension plan in 2010.
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 were $4.3 million for 2009, and FHN anticipates this amount will be $4.6 million in 2010.
In 2009, FHN’s Board of Directors determined that the accrual of benefits under the qualified pension plan and the supplemental retirement plan would cease as of December 31, 2012. After that date employees currently in the pension plan, and those currently in the Employee Non-voluntary Elective Contribution (“ENEC”) program, will be able to participate in the FHN savings plan with a profit sharing feature and an increased company match rate. After that time pension status will not affect a person’s ability to participate in any savings plan feature.
Savings plan. The 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 this plan in 2010 related to the 2009 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 2012.
The components of net periodic benefit cost for the three months ended September 30 are as follows:
                                 
    Pension Benefits   Other Benefits
(Dollars in thousands)   2010   2009   2010   2009
 
Components of net periodic benefit cost
                               
Service cost
  $ 3,863     $ 1,816     $ 114     $ 50  
Interest cost
    7,908       8,008       518       414  
Expected return on plan assets
    (11,892 )     (11,582 )     (295 )     (291 )
Amortization of unrecognized:
                               
Transition obligation
                247       (1,076 )
Prior service cost/(credit)
    181       190       (2 )     1,166  
Actuarial (gain)/loss
    3,535       2,224       (355 )     (380 )
 
Net periodic benefit cost
  $ 3,595     $ 656     $ 227     $ (117 )
 

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Note 10 – Pension, Savings, and Other Employee Benefits (continued)
The components of net periodic benefit cost for the nine months ended September 30 are as follows:
                                 
    Pension Benefits   Other Benefits
(Dollars in thousands)   2010   2009   2010   2009
 
Components of net periodic benefit cost
                               
Service cost
  $ 11,419     $ 10,619     $ 386     $ 728  
Interest cost
    23,581       23,860       1,708       2,396  
Expected return on plan assets
    (35,651 )     (34,745 )     (871 )     (850 )
Amortization of unrecognized:
                               
Transition obligation
                740       740  
Prior service cost/(credit)
    314       569       (6 )     1,078  
Actuarial (gain)/loss
    11,078       6,170       (786 )     (627 )
 
Net periodic benefit cost
  $ 10,741     $ 6,473     $ 1,171     $ 3,465  
 

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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 2010, FHN revised its operating segments to better align with its strategic direction, representing a focus on its regional banking franchise and capital markets business. Key changes include the addition of the non-strategic segment which combines the former mortgage banking and national specialty lending segments, the movement of correspondent banking from capital markets to regional banking, and the shift of first lien mortgage production in the Tennessee footprint to the regional banking segment. For comparability, previously reported items have been revised to reflect these changes.
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, insurance services, financial planning, trust services and asset management, health savings accounts, 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 repurchase of debt, unallocated corporate expenses, expense on subordinated debt issuances and preferred stock, bank-owned life insurance, unallocated interest income associated with excess equity, net impact of raising incremental capital, revenue and expense associated with deferred compensation plans, funds management, low income housing investment activities, and various charges related to restructuring, repositioning, and efficiency. The non-strategic segment consists of the wind-down 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 periods ended September 30:
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2010   2009   2010   2009
 
Consolidated
                               
Net interest income
  $ 186,143     $ 190,901     $ 548,602     $ 586,574  
Provision for loan losses
    50,000       185,000       225,000       745,000  
Noninterest income
    248,212       302,140       744,742       1,008,646  
Noninterest expense
    347,550       348,223       1,032,296       1,181,489  
 
Income/(loss) before income taxes
    36,805       (40,182 )     36,048       (331,269 )
Provision/(benefit) for income taxes
    3,095       (15,368 )     (15,125 )     (136,834 )
 
Income/(loss) from continuing operations
    33,710       (24,814 )     51,173       (194,435 )
Loss from discontinued operations, net of tax
          (10,200 )     (6,877 )     (11,156 )
 
Net income/(loss)
  $ 33,710     $ (35,014 )   $ 44,296     $ (205,591 )
 
Average assets
  $ 25,757,640     $ 26,847,829     $ 25,639,935     $ 28,734,936  
 
Certain previously reported amounts have been reclassified to agree with current presentation.

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Note 11 – Business Segment Information (continued)
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2010   2009   2010   2009
 
Regional Banking
                               
Net interest income
  $ 142,568     $ 137,772     $ 413,624     $ 417,959  
Provision for loan losses
    10,304       96,431       90,326       259,628  
Noninterest income
    77,479       83,117       232,696       249,919  
Noninterest expense
    161,424       172,409       482,577       521,443  
 
Income/(loss) before income taxes
    48,319       (47,951 )     73,417       (113,193 )
Provision/(benefit) for income taxes
    17,540       (18,202 )     26,248       (42,957 )
 
Net income/(loss)
  $ 30,779     $ (29,749 )   $ 47,169     $ (70,236 )
 
Average assets
  $ 11,565,464     $ 11,867,389     $ 11,426,314     $ 12,444,712  
 
 
                               
Capital Markets
                               
Net interest income
  $ 8,535     $ 3,009     $ 15,636     $ 11,633  
Noninterest income
    114,088     129,106     329,669     514,884  
Noninterest expense
    79,522     80,278     241,654     311,183  
 
Income before income taxes
    43,101       51,837       103,651       215,334  
Provision for income taxes
    16,176     19,488     38,845     81,006  
 
Net income
  $ 26,925     $ 32,349     $ 64,806     $ 134,328  
 
Average assets
  $ 2,354,060     $ 1,826,371     $ 2,108,803     $ 2,093,794  
 
 
                               
Corporate
                               
Net interest income/(expense)
  $ (2,373 )   $ 8,494     $ 5,245     $ 18,695  
Noninterest income
    7,908       24,669       37,405       37,769  
Noninterest expense
    19,463       17,820       51,443       61,318  
 
Income/(loss) before income taxes
    (13,928 )     15,343       (8,793 )     (4,854 )
Provision/(benefit) for income taxes
    (15,290 )     5,732       (30,395 )     (13,403 )
 
Net income
  $ 1,362     $ 9,611     $ 21,602     $ 8,549  
 
Average assets
  $ 4,913,676     $ 4,467,428     $ 4,763,756     $ 4,808,702  
 
 
                               
Non-Strategic
                               
Net interest income
  $ 37,413     $ 41,626     $ 114,097     $ 138,287  
Provision for loan losses
    39,696       88,569       134,674       485,372  
Noninterest income
    48,737       65,248       144,972       206,074  
Noninterest expense
    87,141       77,716       256,622       287,545  
 
Loss before income taxes
    (40,687 )     (59,411 )     (132,227 )     (428,556 )
Benefit for income taxes
    (15,331 )     (22,386 )     (49,823 )     (161,480 )
 
Loss from continuing operations
    (25,356 )     (37,025 )     (82,404 )     (267,076 )
Loss from discontinued operations, net of tax
          (10,200 )     (6,877 )     (11,156 )
 
Net loss
  $ (25,356 )   $ (47,225 )   $ (89,281 )   $ (278,232 )
 
Average assets
  $ 6,924,440     $ 8,686,641     $ 7,341,062     $ 9,387,728  
 
Certain previously reported amounts have been reclassified to agree with current presentation.

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Note 12 – Preferred Stock and Other Capital
FHN Preferred Stock and Warrant
On November 14, 2008, FHN issued and sold 866,540 preferred shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series CPP, along with a Warrant to purchase common stock. The issuance occurred in connection with, and is governed by, the Treasury Capital Purchase Program (“Capital Purchase Program”) administered by the U.S. Treasury (“UST”) under the Troubled Asset Relief Program (“TARP”). The Preferred Shares have an annual 5 percent cumulative preferred dividend rate, payable quarterly. The dividend rate increases to 9 percent after five years. If a dividend payment is missed it is not a default; however, dividends compound if they accrue in arrears. Preferred Shares have a liquidation preference of $1,000 per share plus accrued dividends. The Preferred Shares have no mandatory redemption date and are not subject to any sinking fund. The Preferred Shares carry certain restrictions. The Preferred Shares have a senior rank and also provide limitations on certain compensation arrangements of executive officers along with the twenty most highly compensated employees. During the first three years following the issuance, FHN may not reinstate a cash dividend on its common shares nor purchase equity shares without the approval of the UST, subject to certain limited exceptions. If preferred dividends are missed, FHN may not reinstate a cash dividend on its common shares to the extent preferred dividends remain unpaid. Generally, the Preferred Shares are non-voting. However, should FHN fail to pay six quarterly dividends, the holder may elect two directors to FHN’s Board of Directors until such dividends are paid. In connection with the issuance of the Preferred Shares, a Warrant to purchase 12,743,235 common shares was issued with an exercise price of $10.20 per share. The Warrant is immediately exercisable and expires ten years after issuance. The Warrant is subject to proportionate anti-dilution adjustment in the event of stock dividends or splits, among other things. As a result of the stock dividends distributed through October 1, 2010, the Warrant was adjusted to cover 14,578,136 common shares at a purchase price of $8.916 per share.
The Preferred Shares and Warrant qualify as Tier 1 capital and are presented in permanent equity on the Consolidated Condensed Statements of Condition as of September 30, 2010, in the amounts of $811.0 million and $83.9 million, respectively. Proceeds received were allocated between the common stock warrant and preferred shares based on their relative fair values. The fair value of the preferred shares was determined by calculating the present value of expected cash flows using a 9.40 percent discount rate. The fair value of the common stock warrant was determined using the Black Scholes Options Pricing Model. Both fair value determinations assumed redemption prior to the increase in dividend rate on the five year anniversary of the issuance. The preferred shares discount is being amortized over the initial five-year period using the constant yield method. FHN will work with regulators to determine the appropriate timing and method for redeeming the preferred shares and resolving the common stock warrant issued to the UST.
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 September 30, 2010 and 2009, 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.

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Note 12 – Preferred Stock and Other Capital (continued)
On March 23, 2005, FTBNA issued 300,000 shares of Class A Non-Cumulative Perpetual Preferred Stock (“Class A Preferred Stock”) with a liquidation preference of $1,000 per share. These securities qualify as Tier 1 capital. On September 30, 2010 and 2009, $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 have been attributed solely to FHN as the controlling interest holder. The table below presents the amounts included in the Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2010 and 2009, which are attributable to FHN as controlling interest holder:
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2010   2009   2010   2009
 
Net income/(loss) from continuing operations (a)
  $ 30,835     $ (27,783 )   $ 42,610     $ (202,998 )
Loss from discontinued operations, net of tax
          (10,200 )     (6,877 )     (11,156 )
 
Net income/(loss) attributable to controlling interest (a)
  $ 30,835     $ (37,983 )   $ 35,733     $ (214,154 )
 
(a)   Net income/(loss) from continuing operations adjusted for net income attributable to the noncontrolling interest holder.

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Note 13 – Loan Sales and Securitizations
Historically, FHN utilized loan sales and securitizations as a significant source of liquidity for its mortgage banking operations. With FHN’s shift to originations of mortgages within its regional banking footprint following the sale of national mortgage origination offices, loan sale and securitization activity has significantly decreased. Generally, FHN no longer retains financial interests in any loans it transfers to third parties. During third quarter 2010, FHN transferred $191.6 million of single-family residential mortgage loans in whole loan sales resulting in $1.8 million of net pre-tax gains. In third quarter 2009, FHN transferred $259.0 million of residential mortgage loans and HELOC in whole loan sales or proprietary securitizations resulting in net pre-tax gains of $2.4 million. During the nine months ended September 30, 2010, FHN transferred $545.4 million of single-family residential mortgage loans in whole loan sales resulting in $4.8 million of net pre-tax gains. During the nine months ended September 30, 2009, FHN transferred $1.1 billion of residential mortgage loans and HELOC in whole loan sales or proprietary securitizations resulting in net pre-tax gains of $13.8 million.
Retained Interests
Interests retained from prior loan sales, including Government-Sponsored Enterprises (“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. Generally, FHN received annual servicing fees approximating .29 percent in third quarter 2010 and .28 percent in third quarter 2009, of the outstanding balance of underlying single-family residential mortgage loans. FHN received annual servicing fees approximating .50 percent in third quarter 2010 and 2009, 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 significant additions to MSR in either comparative period.
Other financial assets retained in proprietary or GSE securitizations may include certificated residual interests, excess interest (structured as interest-only strips), interest-only strips, principal-only strips, or subordinated bonds. Residual interests represent rights to receive earnings to the extent of excess income generated by the underlying loans. Excess interest represents rights to receive interest from serviced assets that exceed contractually specified rates. Principal-only strips are principal cash flow tranches and interest-only strips are interest cash flow tranches. Subordinated bonds are bonds with junior priority. All financial assets retained from 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 noninterest income on the Consolidated Condensed Statements of Income. In first quarter 2010, in conjunction with the adoption of amendments to ASC 810, FHN consolidated certain proprietary securitization trusts for which residual interests and subordinated bonds were held. Accordingly, these amounts were removed from the Consolidated Condensed Statements of Condition as of January 1, 2010.

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Note 13 – Loan Sales and Securitizations (continued)
The sensitivity of the fair value of all retained or purchased MSR to immediate 10 percent and 20 percent adverse changes in assumptions on September 30, 2010 and 2009 are as follows:
                                                 
    September 30, 2010   September 30, 2009
(Dollars in thousands   First   Second           First   Second    
except for annual cost to service)   Liens   Liens   HELOC   Liens   Liens   HELOC
 
Fair value of retained interests
  $ 188,397     $ 250     $ 3,296     $ 281,045     $ 1,850     $ 6,387  
Weighted average life (in years)
    3.7       2.5       2.4       3.8       1.7       2.3  
 
                                               
Annual prepayment rate
    23.2 %     30.0 %     32.1 %     21.5 %     43.4 %     31.0 %
Impact on fair value of 10% adverse change
  $ (11,238 )   $ (22 )   $ (262 )   $ (16,887 )   $ (1,083 )   $ (313 )
Impact on fair value of 20% adverse change
    (21,442 )     (43 )     (500 )     (32,112 )     (2,060 )     (598 )
 
                                               
Annual discount rate on servicing cash flows
    11.6 %     14.0 %     18.0 %     12.8 %     14.0 %     18.0 %
Impact on fair value of 10% adverse change
  $ (4,924 )   $ (7 )   $ (96 )   $ (7,470 )   $ (202 )   $ (250 )
Impact on fair value of 20% adverse change
    (9,563 )     (13 )     (185 )     (14,505 )     (395 )     (470 )
 
                                               
Annual cost to service (per loan)
  $ 117     $ 50     $ 50     $ 113     $ 50     $ 50  
Impact on fair value of 10% adverse change
    (4,773 )     (5 )     (53 )     (6,544 )     (189 )     (85 )
Impact on fair value of 20% adverse change
    (9,521 )     (11 )     (106 )     (13,054 )     (378 )     (170 )
 
                                               
Annual earnings on escrow
    1.6 %                 2.3 %     3.3 %     3.3 %
Impact on fair value of 10% adverse change
  $ (1,706 )               $ (4,456 )   $ (16 )   $ (80 )
Impact on fair value of 20% adverse change
    (3,412 )                 (8,916 )     (33 )     (159 )
 

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Note 13 – Loan Sales and Securitizations (continued)
The sensitivity of the fair value of other retained interests to immediate 10 percent and 20 percent adverse changes in assumptions on September 30, 2010 and 2009 are as follows:
                                                 
                                    Residual   Residual
    Excess                           Interest   Interest
(Dollars in thousands   Interest   Certificated           Subordinated   Certificates   Certificates
except for annual cost to service)   IO   PO   IO   Bonds   2nd Liens   HELOC
 
September 30, 2010
                                               
Fair value of retained interests
  $ 25,902     $ 10,721     NM     N/A       N/A       N/A  
Weighted average life (in years)
    3.6       4.7     NM     N/A       N/A       N/A  
 
                                               
Annual prepayment rate
    21.4 %     27.1 %   NM     N/A       N/A       N/A  
Impact on fair value of 10% adverse change
  $ (1,349 )   $ (342 )   NM     N/A       N/A       N/A  
Impact on fair value of 20% adverse change
    (2,595 )     (665 )   NM     N/A       N/A       N/A  
 
                                               
Annual discount rate on residual cash flows
    13.2 %     18.4 %   NM     N/A       N/A       N/A  
Impact on fair value of 10% adverse change
  $ (979 )   $ (423 )   NM     N/A       N/A       N/A  
Impact on fair value of 20% adverse change
    (1,881 )     (844 )   NM     N/A       N/A       N/A  
 
September 30, 2009
                                               
Fair value of retained interests
  $ 92,210     $ 12,142     $ 238     $ 1,405     $ 2,488     $ 2,462  
Weighted average life (in years)
    3.8       4.6       7.8       2.0       2.7       2.3  
 
                                               
Annual prepayment rate
    21.0 %     33.2 %     10.2 %     6.3 %     26.3 %     28.2 %
Impact on fair value of 10% adverse change
  $ (4,887 )   $ (366 )   $ (10 )   $ (24 )   $ (32 )   $ (294 )
Impact on fair value of 20% adverse change
    (9,381 )     (730 )     (21 )     (49 )     (59 )     (539 )
 
                                               
Annual discount rate on residual cash flows
    10.8 %     22.6 %     34.7 %     142.5 %     34.9 %     32.9 %
Impact on fair value of 10% adverse change
  $ (3,734 )   $ (535 )   $ (19 )   $ (83 )   $ (117 )   $ (305 )
Impact on fair value of 20% adverse change
    (7,154 )     (1,026 )     (39 )     (157 )     (221 )     (559 )
 
NM — Amount is not meaningful.
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 nine months ended September 30, 2010 and 2009, cash flows received and paid related to loan sales and securitizations were as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2010   2009   2010   2009
 
Proceeds from initial sales and securitizations
  $ 193,381     $ 260,745     $ 550,147     $ 1,113,073  
Servicing fees retained*
    22,253       33,121       78,143       103,429  
Purchases of GNMA guaranteed mortgages
    16,810       6,121       53,416       7,880  
Purchases of delinquent or foreclosed assets
    44,516       13,562       88,061       49,351  
Other cash flows received on retained interests
    2,590       6,350       7,573       60,133  
 
Certain previously reported amounts have been reclassified to agree with current presentation.
 
* Includes servicing fees on MSR associated with loan sales and purchased MSR.

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Note 13 – Loan Sales and Securitizations (continued)
As of September 30, 2010, the principal amount of loans transferred through loan sales and securitizations and other loans managed with them, the principal amount of delinquent loans, and the net credit losses during the three and nine months ended September 30, 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     Nine Months Ended  
    On September 30, 2010     September 30, 2010     September 30, 2010  
Type of loan:
                               
Real estate residential
  $ 22,634,349     $ 1,025,506     $ 137,760     $ 432,367  
           
Total loans managed or transferred (c)
  $ 22,634,349     $ 1,025,506     $ 137,760     $ 432,367  
                 
Loans sold
    (14,711,540 )                        
Loans held for sale
    (369,339 )                        
                         
Loans held in portfolio
  $ 7,553,470                          
                         
 
Certain previously reported amounts have been reclassified to agree with current presentation.
 
(a)   Loans 90 days or more past due include $0.6 million of GNMA guaranteed mortgages.
 
(b)   Principal amount of loans securitized and sold includes $10.8 billion of loans securitized through GNMA, FNMA, or FHLMC. FHN retains interests other than servicing rights on a portion of these securitized loans. No delinquency or net credit loss data is included for the loans securitized through FNMA or FHMLC because these agencies retain credit risk. The remainder of loans securitized and sold were securitized through proprietary trusts, where FHN retained interests other than servicing rights.
 
(c)   Transferred loans are real estate residential loans in which FHN has a retained interest other than servicing rights.
As of September 30, 2009, the principal amount of loans transferred through loan sales and securitizations and other loans managed with them, the principal amount of delinquent loans, and the net credit losses during the three and nine months ended September 30, 2009 are as follows:
                                 
    Total Principal     Principal Amount     Net Credit  
(Dollars in thousands)   Amount of Loans     of Delinquent Loans (a)     Losses (b)  
                    Three Months Ended     Nine Months Ended  
    On September 30, 2009     September 30, 2009     September 30, 2009  
Type of loan:
                               
Real estate residential
  $ 32,298,124     $ 835,913     $ 131,006     $ 303,131  
           
Total loans managed or transferred (c)
  $ 32,298,124     $ 835,913     $ 131,006     $ 303,131  
                 
Loans sold
    (23,668,626 )                        
Loans held for sale
    (369,296 )                        
                         
Loans held in portfolio
  $ 8,260,202                          
                         
Certain previously reported amounts have been reclassified to agree with current presentation.
 
(a)   Loans 90 days or more past due include $.2 million of GNMA guaranteed mortgages.
 
(b)   Principal amount of loans securitized and sold includes $19.5 billion of loans securitized through GNMA, FNMA, or FHLMC. FHN retains interests other than servicing rights on a portion of these securitized loans. No delinquency or net credit loss data is included for the loans securitized through FNMA or FHMLC because these agencies retain credit risk. The remainder of loans securitized and sold were securitized through proprietary trusts, where FHN retained interests other than servicing rights.
 
(c)   Transferred loans are real estate residential loans in which FHN has a retained interest other than servicing rights.

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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 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 ASC’s Transfers and Servicing Topic (“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. On September 30, 2009, FTBNA recognized $669.5 million of loans net of unearned income and $661.3 million of other collateralized borrowings on the Consolidated Condensed Statements of Condition related to consolidated proprietary securitizations of retail real estate residential loans.
In 2007, FTBNA executed a securitization of certain small issuer trust preferred 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 September 30, 2010, FTBNA had $112.5 million of loans net of unearned income, $1.7 million of trading securities, and $51.0 million of term borrowings on the Consolidated Condensed Statements of Condition related to this transaction. On September 30, 2009, FTBNA had $143.0 million of loans net of unearned income, $1.7 million of trading securities, and $49.8 million of other collateralized borrowings on the Consolidated Condensed Statements of Condition related to this transaction. See Note 14 – Variable Interest Entities for additional information.

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Note 14 – Variable Interest Entities
Effective January 1, 2010, FHN adopted the provisions of ASU 2009-16 and ASU 2009-17. The provisions of ASU 2009-16 updates ASC 860, “Transfers and Servicing,” to provide for the removal of the qualifying special purpose entity (“QSPE”) concept from GAAP, resulting in these entities being considered variable interest entities (“VIE”) which must be evaluated for consolidation on and after its effective date. The provisions of ASU 2009-17 amends ASC 810, “Consolidation,” to revise the criteria for determining the primary beneficiary of a VIE by replacing the quantitative-based risks and rewards test previously required with a qualitative analysis. The updated provisions of ASC 810 clarify that a VIE exists when 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. As amended, ASC 810, requires continual reconsideration of conclusions reached regarding which interest holder is a VIE’s primary beneficiary. The consolidation methodology provided in this footnote for the three and nine months ended September 30, 2010, has been prepared in accordance with ASC 810 as amended by ASU 2009-17.
Prior to the adoption of the provisions of the Codification update to ASC 810 in first quarter 2010, FHN was deemed to be the primary beneficiary and required to consolidate a VIE if it had a variable interest that would absorb the majority of the VIE’s expected losses, receive the majority of expected residual returns, or both. A VIE existed when equity investors did not have the characteristics of a controlling financial interest or did not have sufficient equity at risk for the entity to finance its activities by itself. Expected losses and expected residual returns were measures of variability in the expected cash flow of a VIE. Reconsideration of conclusions reached regarding which interest holder was a VIE’s primary beneficiary was required only upon the occurrence of certain specified events. The consolidation methodology provided in this footnote for the three and nine months ended September 30, 2009, has been prepared in accordance with the provisions of ASC 810 prior to its amendment by ASU 2009-17.
Three and Nine Months Ended September 30, 2010
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 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. 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.

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Note 14 – Variable Interest Entities (continued)
The following table summarizes VIE consolidated by FHN as of September 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
  $ 796,529       N/A
Less: Allowance for loan losses
    47,840       N/A
 
Total net loans
    748,689       N/A
 
Other assets
    19,078     $ 60,340
 
Total assets
  $ 767,767     $ 60,340
 
Noninterest-bearing deposits
  $ 1,058       N/A
Term borrowings
    796,120       N/A
Other liabilities
    96     $ 54,439
 
Total liabilities
  $ 797,274     $ 54,439
 
Nonconsolidated Variable Interest Entities. Since 1997, First Tennessee Housing Corporation (“FTHC”), a wholly-owned subsidiary, makes equity investments as a limited partner in various partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital and to support FHN’s community reinvestment initiatives. The activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants generally within FHN’s primary geographic region. LIHTC partnerships are considered 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 success 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, it has determined that it 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 as of September 30, 2010. FTBNA has no contractual requirement to provide financial support to the trust.

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Note 14 – Variable Interest Entities (continued)
FHN has previously issued junior subordinated debt totaling $309.0 million to First Tennessee Capital I (“Capital I”) and First Tennessee Capital II (“Capital II”). Both Capital I 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.
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 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. 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 potentially participate in significant portions of a securitization trust’s cash flows, it is not considered the primary beneficiary of the trust. Thus, such 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.
FHN holds collateralized debt obligations (“CDOs”) from various trusts related to FTNF’s efforts to pool and securitize small issuer trust preferreds. FHN has no voting rights for the trusts’ activities. The trusts’ only assets are trust preferreds of the issuing banks’ trusts. The trusts associated with the CDOs acquired by FHN as market maker meet the definition of a VIE as there are no holders of an equity investment at risk with adequate power to direct the trusts’ activities that most significantly impact the trusts’ economic performance. While FHN could potentially receive benefits or absorb losses that are significant to the trusts, as FHN does not have decision making rights over whether interest deferral is elected by the issuing banks on the junior subordinated debentures that underlie the small issuer trust preferreds, it does not have the power to direct the activities that most significantly impact the trusts’ economic performance. Accordingly, FHN has determined that it is not the primary beneficiary of the associated trusts. FHN has no contractual requirements to provide financial support to the trusts.

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Note 14 – Variable Interest Entities (continued)
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 the 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 cannot be the trusts’ primary beneficiary. FHN has no contractual requirements to provide financial support to the trusts.

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Note 14 – Variable Interest Entities (continued)
The following table summarizes VIE that are not consolidated by FHN:
                     
As of September 30, 2010            
(Dollars in thousands)   Maximum   Liability    
Type   Loss Exposure   Recognized   Classification
 
Low Income Housing Partnerships (a) (b)
  $ 94,702     $     Other assets
Small Issuer Trust Preferred Holdings (c)
    465,350           Loans, net of unearned income
On Balance Sheet Trust Preferred Securitization
    63,186       50,988     (d)
Proprietary Trust Preferred Issuances (e)
    N/A       309,000     Term borrowings
Proprietary & Agency Residential Mortgage Securitizations
    330,053           (f)
Holdings of Agency Mortgage-Backed Securities (c)
    2,773,925           (g)
Short Positions in Agency Mortgage-Backed Securities (e)
    N/A       11,357     Trading liabilities
Pooled Trust Preferred Securities (c)
    34           Trading securities
Commercial Loan Troubled Debt Restructurings (h) (i)
    127,699           Loans, net of unearned income
Managed Discretionary Trusts (e)
    N/A       N/A     N/A
 
(a)   Maximum loss exposure represents $93.4 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 classified as Loans, net of unearned income, and $1.7 million classified as Trading securities which are offset by $51.0 million classified as Term borrowings.
 
(e)   No exposure to loss due to the nature of FHN’s involvement.
 
(f)   Includes $99.2 million and $67.0 million classified as Mortgage servicing rights and $16.1 million and $20.8 million classified as Trading securities related to proprietary and agency residential mortgage securitizations, respectively. Aggregate servicing advances of $239.9 million are classified as Other assets and is offset by aggregate custodial balances of $112.9 million classified as Noninterest-bearing deposits.
 
(g)   Includes $612.3 million classified as Trading securities and $2.2 billion classified as Securities available for sale.
 
(h)   Maximum loss exposure represents $123.1 million of current receivables and $4.6 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.
Three and Nine Months Ended September 30, 2009
Consolidated Variable Interest Entities. In 2007 and 2006, FTBNA established several Delaware statutory trusts (“Trusts”), for the purpose of engaging in secondary market financing. Except for recourse due to breaches of standard representations and warranties made by FTBNA in connection with the sale of the retail real estate residential loans by FTBNA to the Trusts, the creditors of the Trusts hold no recourse to the assets of FTBNA. Additionally, FTBNA has no contractual requirements to provide financial support to the Trusts. Since the Trusts did not qualify as QSPE, FTBNA treated the proceeds as secured borrowings in accordance with ASC 860. FTBNA determined that the Trusts were VIE because the holders of the equity investment at risk did not have adequate decision making ability over the trusts’ activities. Thus, FTBNA assessed whether it was the primary beneficiary of the associated trusts. Since there was an overcollateralization of the Trusts, any excess of cash flows received on the transferred loans above the amounts passed through to the security holders would revert to FTBNA. Accordingly, FTBNA determined that it was the primary beneficiary of the Trusts because it absorbed a majority of the expected losses of the Trusts.

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Note 14 – Variable Interest Entities (continued)
FTBNA holds variable interests in trusts which have issued mandatorily redeemable trust preferreds for smaller banking and insurance enterprises. FTBNA has no voting rights for the trusts’ activities. The trusts’ only assets are junior subordinated debentures of the issuing enterprises. The creditors of the trusts hold no recourse to the assets of FTBNA. These trusts met the definition of a VIE because the holders of the equity investment at risk do not have adequate decision making ability over the trusts’ activities. In situations where FTBNA holds a majority of the trust preferreds issued by a trust, it was considered the primary beneficiary of that trust because FTBNA will absorb a majority of the trust’s expected losses. FTBNA has no contractual requirements to provide financial support to the trusts. In situations where FTBNA holds a majority, but less than all, of the trust preferreds for a trust, consolidation of the trust resulted in recognition of amounts received from other parties as debt.
FHN has established certain rabbi trusts related to deferred compensation plans offered to its employees. FHN contributes employee cash compensation deferrals to the trusts and directs the underlying investments made by the trusts. The assets of these trusts are available to FHN’s creditors only in the event that FHN becomes insolvent. These trusts are considered 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. Given that the trusts were created in exchange for the employees’ services, FHN is considered the primary beneficiary of the rabbi trusts because it is most closely related to their purpose and design. FHN has the obligation to fund any liabilities to employees that are in excess of a rabbi trust’s assets.
The following table summarizes VIE consolidated by FHN as of September 30, 2009:
                         
    Assets   Liabilities
(Dollars in thousands)   Carrying
Value
  Classification   Carrying
Value
  Classification
 
On balance sheet consumer loan securitizations
  $ 669,503     Loans, net of unearned income   $ 661,291     Other collateralized borrowings
Small issuer trust preferred holdings
    452,850     Loans, net of unearned income     30,500     Term borrowings
Rabbi trusts used for deferred compensation plans
    94,830     Other assets     57,099     Other liabilities
 
Nonconsolidated Variable Interest Entities. Since 1997, First Tennessee Housing Corporation (“FTHC”), a wholly-owned subsidiary, makes equity investments as a limited partner, in various partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital and to support FHN’s community reinvestment initiatives. The activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants generally within FHN’s primary geographic region. LIHTC partnerships were considered VIE because FTHC, as the holder of the equity investment at risk, does not have the ability to significantly affect the success of the entity through voting rights. FTHC was not considered the primary beneficiary of the LIHTC partnerships because an agent relationship existed between FTHC and the general partners, whereby the general partners cannot sell, transfer or otherwise encumber their ownership interest without the approval of FTHC. Because this resulted in a de facto agent relationship between the partners, the general partners were considered the primary beneficiaries because their operations were most closely associated with the LIHTC partnerships’ operations. FTHC has no contractual requirements to provide financial support to the LIHTC partnerships beyond its initial funding commitments.
FTBNA holds variable interests in trusts which have issued mandatorily redeemable trust preferreds for smaller banking and insurance enterprises. FTBNA has no voting rights for the trusts’ activities. The trusts’ only assets are junior subordinated debentures of the issuing enterprises. These trusts met the definition of a VIE because the holders of the equity investment at risk do not have adequate decision making ability over the trusts’ activities. In situations where FTBNA did not hold a majority of the trust preferreds issued by a trust, it was not considered the primary beneficiary of that trust because FTBNA does not absorb a majority of the expected losses of the trust. FTBNA has no contractual requirements to provide financial support to the trusts.

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Note 14 – Variable Interest Entities (continued)
In third quarter 2007, FTBNA executed a securitization of certain small issuer trust preferreds for which the underlying trust did not qualify as a QSPE under ASC 860. This trust was determined to be a VIE because the holders of the equity investment at risk do not have adequate decision making ability over the trust’s activities. FTBNA determined that it was not the primary beneficiary of the trust due to the size and priority of the interests it retained in the securities issued by the trust. Accordingly, FTBNA accounted for the funds received through the securitization as a collateralized borrowing in its Consolidated Condensed Statement of Condition. FTBNA has no contractual requirement to provide financial support to the trust.
FHN has previously issued junior subordinated debt to Capital I and Capital II totaling $309.0 million. Both Capital I and Capital II were considered VIE because FHN’s capital contributions to these trusts are not considered “at risk” in evaluating whether the equity investments at risk in the trusts have adequate decision making ability over the trusts’ activities. Capital I and Capital II were not consolidated by FHN because the holders of the securities issued by the trusts absorb a majority of expected losses and residual returns.
Prior to September 30, 2009, wholly-owned subsidiaries of FHN served as investment advisors and administrators of certain “fund of funds” investment vehicles, whereby the subsidiaries received fees for management of the funds’ operations and through revenue sharing agreements based on the funds’ performance. The funds were considered VIE because the holders of the equity at risk did not have voting rights or the ability to control the funds’ operations. The subsidiaries did not make any investment in the funds. Further, the subsidiaries were not obligated to provide any financial support to the funds. The funds were not consolidated by FHN because its subsidiaries did not absorb a majority of expected losses or residual returns.
The following table summarizes VIE that are not consolidated by FHN as September 30, 2009:
                         
(Dollars in thousands)   Maximum   Liability    
Type   Loss Exposure   Recognized   Classification
 
Low Income Housing Partnerships (a) (b)
  $ 115,321     $     Other assets
Small Issuer Trust Preferred Holdings
    43,000           Loans, net of unearned income
On Balance Sheet Trust Preferred Securitization
    64,377       49,797       (c)
Proprietary Trust Preferred Issuances
    N/A       309,000     Term borrowings
 
(a)   Maximum loss exposure represents $112.5 million of current investments and $2.8 million of contractual funding commitments. Only the current investment amount is included in Other assets.
 
(b)   A liability is not recognized because investments are written down over the life of the related tax credit.
 
(c)   $112.5 million classified as Loans, net of unearned income and $1.7 million classified as Trading securities which are offset by $49.8 million classified as Other collateralized borrowings.

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Note 15 – Derivatives
In the normal course of business, FHN utilizes various financial instruments (including derivative contracts and credit-related agreements) through its 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 September 30, 2010 and 2009, respectively, FHN had approximately $212.6 million and $125.8 million of cash receivables and $130.0 million and $106.5 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 that require that FTBNA’s debt maintain minimum credit ratings from specified credit rating agencies. If FTBNA’s debt were to fall below these minimums, these provisions would be triggered, and the counterparties could terminate the agreements and request immediate settlement of all derivative contracts under the agreements. The net fair value, determined by individual counterparty, of all derivative instruments with credit-risk-related contingent accelerated termination provisions was $33.9 million of liabilities on September 30, 2010 and $20.0 million of assets and $14.1 million of liabilities on September 30, 2009. FHN had posted collateral of $34.0 million as of September 30, 2010 in the normal course of business related to these contracts. As of September 30, 2009, FHN had received collateral of $14.6 million and posted collateral of $12.6 million in the normal course of business related to these contracts.

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Note 15 – Derivatives (continued)
Additionally, certain of FHN’s derivative agreements contain provisions whereby the collateral posting thresholds under the agreements adjust based on the credit ratings of both counterparties. If the credit rating of FHN and/or FTBNA is lowered, FHN would be required to post additional collateral with the counterparties. The net fair value, determined by individual counterparty, of all derivative instruments with adjustable collateral posting thresholds was $146.7 million of assets and $208.1 million of liabilities on September 30, 2010 and was $154.9 million of assets and $100.3 million of liabilities on September 30, 2009. As of September 30, 2010 and 2009, FHN had received collateral of $130.0 million and $117.5 million and posted collateral of $209.8 million and $96.7 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 tables summarize FHN’s derivatives associated with legacy mortgage servicing activities for the three and nine months ended September 30, 2010 and 2009:
                                         
                            Gains/(Losses)
(Dollars in thousands)                           Three Months Ended   Nine Months Ended
Description   Notional   Assets   Liabilities   September 30, 2010   September 30, 2010
Retained Interests Hedging
                                       
Hedging Instruments:
                                       
Forwards and Futures (a) (b)
  $ 5,999,000     $ 5,572     $ 4,631     $ 17,236     $ 57,856  
Interest Rate Swaps and Swaptions (a) (b)
  $ 2,669,000     $ 11,177     $ 5,416     $ 10,460     $ 66,881  
 
                                       
Hedged Items:
                                       
Mortgage Servicing Rights (c) (b)
    N/A     $ 187,969       N/A     $ 3,880     $ (41,177 )
Other Retained Interests (d) (b)
    N/A     $ 36,829       N/A     $ 248     $ 3,269  
 
(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.

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Note 15 – Derivatives (continued)
                                         
                            Gains/(Losses)
(Dollars in thousands)                           Three Months Ended   Nine Months Ended
Description   Notional   Assets   Liabilities   September 30, 2009   September 30, 2009
Retained Interests Hedging
                                       
Hedging Instruments:
                                       
Forwards and Futures (a) (b)
  $ 2,220,000     $ 6,130     $ 979     $ 24,848     $ 21,024  
Interest Rate Swaps and Swaptions (a) (b)
  $ 2,215,000     $ 42,032     $ 1,082     $ 38,567     $ 25,491  
 
                                       
Hedged Items:
                                       
Mortgage Servicing Rights (c) (b)
    N/A     $ 281,235       N/A     $ (30,682 )   $ 40,828  
Other Retained Interests (d) (b)
    N/A     $ 108,579       N/A     $ (1,951 )   $ 34,320  
 
(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 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 and the Credit Risk Management Committees 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 $113.2 million and $127.3 million for the three months ended September 30, 2010 and 2009, respectively, and $325.8 million and $508.6 million for the nine months ended September 30, 2010 and 2009, respectively. Total revenues are inclusive of both derivative and non-derivative financial instruments. Trading revenues are included in capital markets noninterest income.
The following table summarizes FHN’s derivatives associated with capital markets trading activities as of September 30, 2010 and 2009:
                         
(Dollars in thousands)   September 30, 2010
Description   Notional   Assets   Liabilities
Customer Interest Rate Contracts
  $ 1,684,689     $ 106,042     $ 5,342  
Offsetting Upstream Interest Rate Contracts
  $ 1,684,689     $ 5,342     $ 106,043  
Forwards and Futures Purchased
  $ 3,762,902     $ 2,191     $ 2,407  
Forwards and Futures Sold
  $ 4,296,069     $ 2,140     $ 4,987  
 
                         
(Dollars in thousands)   September 30, 2009
Description   Notional   Assets   Liabilities
Customer Interest Rate Contracts
  $ 1,601,966     $ 50,512     $ 10,233  
Offsetting Upstream Interest Rate Contracts
  $ 1,601,966     $ 10,236     $ 50,518  
Forwards and Futures Purchased
  $ 8,407,380     $ 2,049     $ 22,603  
Forwards and Futures Sold
  $ 8,500,599     $ 21,384     $ 3,543  
 

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Note 15 – Derivatives (continued)
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 long-term debt obligations totaling $1.0 billion and $1.1 billion on September 30, 2010 and 2009, respectively. These swaps have been accounted for as fair value hedges under the shortcut method. The balance sheet impact of these swaps was $129.7 million and $107.2 million in other assets on September 30, 2010 and 2009, 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. In first quarter 2010, FHN repurchased $96.0 million of debt that was being hedged in these arrangements and terminated the related interest rate swap and hedging relationship.
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 $.2 billion on both September 30, 2010 and 2009. There was no balance sheet impact of these swaps as of September 30, 2010. The balance sheet impact of these swaps was $2.6 million in other liabilities on September 30, 2009. 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 $.2 billion 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. FHN subsequently re-hedged the subordinated debt with a new interest rate swap using the long-haul method of effectiveness assessment. In first quarter 2009, FHN’s counterparty called the swap associated with $.1 billion of subordinated debt. Accordingly, hedge accounting was discontinued on the date of settlement and the cumulative basis adjustments to the associated subordinated debt are being prospectively amortized as an adjustment to interest expense over its remaining term.

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Note 15 – Derivatives (continued)
The following tables summarize FHN’s derivatives associated with interest rate risk management activities for the three and nine months ended September 30, 2010 and 2009:
                                         
                            Gains/(Losses)
(Dollars in thousands)                           Three Months Ended   Nine Months Ended
Description   Notional   Assets   Liabilities   September 30, 2010   September 30, 2010
Customer Interest Rate Contracts Hedging
                                       
Hedging Instruments and Hedged Items:
                                       
Customer Interest Rate Contracts (a)
  $ 1,167,907     $ 97,040     $ 368     $ 8,386     $ 31,730  
Offsetting Upstream Interest Rate Contracts (a)
  $ 1,167,907     $ 368     $ 101,837     $ (8,584 )   $ (33,028 )
 
                                       
Debt Hedging
                                       
Hedging Instruments:
                                       
Interest Rate Swaps (b)
  $ 1,104,000     $ 129,664       N/A     $ 13,249     $ 52,678  
 
                                       
Hedged Items:
                                       
Long-Term Debt (b)
    N/A       N/A     $ 1,104,000  (c)   $ (13,249 ) (d)   $ (52,678)  (d)
 
(a)   Gains/losses included in the Other expense section of the Consolidated Condensed Statements of Income.
 
(b)   Gains/losses included in the All other income and commissions section of the Consolidated Condensed Statements of Income.
 
(c)   Represents par value of long term debt being hedged.
 
(d)   Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships.
                                         
                            Gains/(Losses)
(Dollars in thousands)                           Three Months Ended   Nine Months Ended
Description   Notional   Assets   Liabilities   September 30, 2009   September 30, 2009
Customer Interest Rate Contracts Hedging
                                       
Hedging Instruments and Hedged Items:
                                       
Customer Interest Rate Contracts (a)
  $ 1,187,275     $ 82,338     $ 367     $ 3,151     $ (41,118 )
Offsetting Upstream Interest Rate Contracts (a)
  $ 1,187,275     $ 367     $ 85,538     $ (8,262 )   $ 34,215  
 
                                       
Debt Hedging
                                       
Hedging Instruments:
                                       
Interest Rate Swaps (b)
  $ 1,200,000     $ 107,192     $ 2,604     $ 16,792     $ (41,374 )
 
                                       
Hedged Items:
                                       
Long-Term Debt (b)
    N/A       N/A     $ 1,200,000  (c)   $ (16,792 ) (d)   $ 41,374  (d)
 
Certain previously reported amounts have been reclassified to agree with current presentation.
(a)   Gains/losses included in the Other expense section of the Consolidated Condensed Statements of Income.
 
(b)   Gains/losses included in the All other income and commissions section of the Consolidated Condensed Statements of Income.
 
(c)   Represents par value of long term debt being hedged.
 
(d)   Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships.
FHN hedges held-to-maturity trust preferred loans with a principal balance of $211.6 million and $233.1 million as of September 30, 2010 and 2009, 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 those swaps was $20.2 million and $21.5 million in Other liabilities on the Consolidated Condensed Statements of Income as of September 30, 2010 and 2009, 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.

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Note 15 – Derivatives (continued)
The following tables summarize FHN’s derivative activities associated with these loans for the three and nine months ended September 30, 2010 and 2009:
                                         
                            Gains/(Losses)
(Dollars in thousands)                           Three Months Ended   Nine Months Ended
Description   Notional   Assets   Liabilities   September 30, 2010   September 30, 2010
Loan Portfolio Hedging
                                       
Hedging Instruments:
                                       
Interest Rate Swaps
  $ 211,583       N/A     $ 20,161     $ (164 )   $ (940 )
 
                                       
Hedged Items:
                                       
Trust Preferred Loans (a)
    N/A     $ 211,583  (b)     N/A     $ 178  (c)   $ 960  (c)
 
(a)   Assets included in Loans, net of unearned income section of the Consolidated Condensed Statements of Condition.
 
(b)   Represents principal balance being hedged.
 
(c)   Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships.
                                         
                            Gains/(Losses)
(Dollars in thousands)                           Three Months Ended   Nine Months Ended
Description   Notional   Assets   Liabilities   September 30, 2009   September 30, 2009
Loan Portfolio Hedging
                                       
Hedging Instruments:
                                       
Interest Rate Swaps
  $ 233,083       N/A     $ 21,499     $ (2,271 )   $ 4,362  
 
                                       
Hedged Items:
                                       
Trust Preferred Loans (a)
    N/A     $ 233,083  (b)     N/A     $ 2,166  (c)   $ (4,479  )(c)
 
(a)   Assets included in Loans, net of unearned income section of the Consolidated Condensed Statements of Condition.
 
(b)   Represents principal balance being hedged.
 
(c)   Represents gains and losses attributable to changes in fair value due to interest rate risk as designated in ASC 815-20 hedging relationships.

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Note 16 – Fair Value of Assets & Liabilities
FHN elected the fair value option on a prospective basis for almost all types of mortgage loans originated for sale purposes in accordance with the Financial Instruments Topic of the FASB Accounting Standards Codification (“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. FHN accounts for mortgage loans held for sale that were originated prior to 2008 at the lower of cost or market value. Mortgage loans originated for sale are included in loans held for sale on the Consolidated Condensed Statements of Condition. Other interests retained in relation to residential loan sales and securitizations are included in trading securities on the Consolidated Condensed Statements of Condition. Effective January 1, 2009, FHN adopted the provisions of ASC 820-10 for existing fair value measurement requirements related to non-financial assets and liabilities which are recognized at fair value on a non-recurring basis.
FHN groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. This hierarchy requires FHN to maximize the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Each fair value measurement is placed into the proper level based on the lowest level of significant input. These levels are:
    Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.
 
    Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
 
    Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect 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.

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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 September 30, 2010:
                                 
    September 30, 2010
(Dollars in thousands)   Level 1   Level 2   Level 3   Total
 
Trading securities — capital markets:
                               
U.S. Treasuries
  $     $ 43,969     $     $ 43,969  
Government agency issued MBS
          397,287             397,287  
Government agency issued CMO
          214,966             214,966  
Other U.S. government agencies
          124,736             124,736  
States and municipalities
          28,430             28,430  
Corporate and other debt
          366,864       34       366,898  
Equity, mutual funds, and other
          1,479             1,479  
 
Total trading securities — capital markets
          1,177,731       34       1,177,765  
 
                               
Trading securities — mortgage banking
                               
Principal only
          10,721             10,721  
Interest only
                26,108       26,108  
 
Total trading securities — mortgage banking
          10,721       26,108       36,829  
 
                               
Loans held for sale
          63,929       215,713       279,642  
 
                               
Securities available for sale:
                               
U.S. Treasuries
          68,585             68,585  
Government agency issued MBS
          1,000,035             1,000,035  
Government agency issued CMO
          1,161,636             1,161,636  
Other U.S. government agencies
          16,687       87,895       104,582  
States and municipalities
          40,160       1,500       41,660  
Corporate and other debt
    552                   552  
Venture capital
                13,179       13,179  
Equity, mutual funds, and other
    13,638       9,360             22,998  
 
Total securities available for sale
    14,190       2,296,463       102,574       2,413,227  
 
                               
Mortgage servicing rights
                191,943       191,943  
 
                               
Other assets:
                               
Deferred compensation assets
    25,362                   25,362  
Derivatives, forwards and futures
    9,903                   9,903  
Derivatives, interest rate contracts
          349,633             349,633  
 
Total other assets
    35,265       349,633             384,898  
 
Total assets
  $ 49,455     $ 3,898,477     $ 536,372     $ 4,484,304  
 
 
                               
Trading liabilities — capital markets:
                               
U.S. Treasuries
  $     $ 231,249     $     $ 231,249  
Government agency issued MBS
          5,542             5,542  
Government agency issued CMO
          5,815             5,815  
Other U.S. government agencies
          1,736             1,736  
Corporate and other debt
          170,324             170,324  
 
Total trading liabilities — capital markets
          414,666             414,666  
 
                               
Other short-term borrowings and commercial paper
                21,812       21,812  
 
                               
Other liabilities:
                               
Derivatives, forwards and futures
    12,025                   12,025  
Derivatives, interest rate contracts
          239,167             239,167  
 
Total other liabilities
    12,025       239,167             251,192  
 
Total liabilities
  $ 12,025     $ 653,833     $ 21,812     $ 687,670  
 

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

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Note 16 – Fair Value of Assets & Liabilities (continued)
Changes in Recurring Level 3 Fair Value Measurements
In third quarter 2009, FHN reviewed the allocation of fair value between MSR and excess interest from prior first lien loan sales and securitizations. As a result, $11.1 million was reclassified from trading securities to MSR within level 3 assets measured at fair value on a recurring basis. The reclassification had no effect on FHN’s Consolidated Condensed Statements of Income as excess interest and MSR are highly correlated in valuation and as both excess interest and MSR are recognized at elected fair value with changes in fair value being included within Mortgage Banking income.
In first quarter 2009, FHN changed the fair value methodology for certain loans held for sale. The methodology change had a minimal effect on the valuation of the applicable loans. Consistent with this change, the applicable amount is presented as a transfer into Level 3 loans held for sale in the following rollforward for the nine months ended September 30, 2009. See Determination of Fair Value for a detailed discussion of the changes in valuation methodology.
The changes in Level 3 assets and liabilities measured at fair value for the three months ended September 30, 2010 and 2009, on a recurring basis are summarized as follows:
                                                 
    Three Months Ended September 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 June 30, 2010
  $ 28,898     $ 209,748     $ 90,995     $ 16,141     $ 201,746     $ 25,886  
Total net gains/(losses) included in:
                                               
Net income
    1,110       (5,789 )           (2,962 )     (529 )     (4,074 )
Other comprehensive income
                3,073                    
Purchases, sales, issuances, and settlements, net
    (3,866 )     11,754       (4,673 )           (9,274 )      
 
Balance on September 30, 2010
  $ 26,142     $ 215,713     $ 89,395     $ 13,179     $ 191,943     $ 21,812  
 
 
                                               
 
Net unrealized gains/(losses) included in net income
  $ 248  (c)   $ (5,789 ) (c)   $     $ (2,962 ) (d)   $ (299 ) (c)   $ (4,074 ) (c)
 
                                                 
    Three Months Ended September 30, 2009
                    Securities available for sale   Mortgage   Other short-term
    Trading   Loans held   Investment   Venture   servicing   borrowings and
(Dollars in thousands)   securities (a)   for sale   portfolio (b)   Capital   rights, net   commercial paper
 
Balance on June 30, 2009
  $ 125,502     $ 224,372     $ 104,658     $ 18,771     $ 337,096     $ 39,720  
Total net gains/(losses) included in:
                                               
Net income/(loss)
    (1,345 )     2,484             37       (35,993 )     (5,670 )
Other comprehensive income
                1,718                    
Purchases, sales, issuances, and settlements, net
    (14,135 )     (7,567 )     (4,652 )     (1,640 )     (22,898 )      
Net transfers into/(out of) Level 3
    (11,077 )                       11,077        
 
Balance on September 30, 2009
  $ 98,945     $ 219,289     $ 101,724     $ 17,168     $ 289,282     $ 34,050  
 
 
                                               
 
Net unrealized gains/(losses) included in net income
  $ (4,242 ) (e)   $ 2,484  (c)   $     $ 37  (d)   $ (36,650 ) (f)   $ (5,670 ) (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.
 
(d)   Represents recognized gains and losses attributable to venture capital investments classified within securities available for sale that are included in Securities gains/(losses) in noninterest income.
 
(e)   Represents recognized gains/(losses) of $(.2) million included in Capital markets noninterest income, $(3.2) million included in Mortgage banking noninterest income, and $(.8) million included in Other income and commissions.
 
(f)   Represents recognized gains/(losses) of $(36.4) million included in Mortgage banking noninterest income and $(.2) million included in Other income and commissions.

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Note 16 – Fair Value of Assets & Liabilities (continued)
The changes in Level 3 assets and liabilities measured at fair value for the nine months ended September 30, 2010 and 2009, on a recurring basis are summarized as follows:
                                                 
    Nine Months Ended September 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
    4,272       (10,630 )           (2,962 )     (57,885 )     (17,850 )
Other comprehensive income
                3,024                    
Purchases, sales, issuances, and settlements, net
    (29,486 )     20,116       (12,802 )     398       (50,490 )      
 
Balance on September 30, 2010
  $ 26,142     $ 215,713     $ 89,395     $ 13,179     $ 191,943     $ 21,812  
 
 
                                               
 
Net unrealized gains/(losses) included in net income
  $ 2,934  (c)   $ (10,630 ) (c)   $     $ (2,962 ) (d)   $ (55,066 ) (c)   $ (17,850 ) (c)
 
                                                         
    Nine Months Ended September 30, 2009
                    Securities available for sale   Mortgage   Net derivative   Other short-term
    Trading   Loans held   Investment   Venture   servicing   assets and   borrowings and
(Dollars in thousands)   securities (a)   for sale   portfolio (b)   Capital   rights, net   liabilities   commercial paper
 
Balance on January 1, 2009
  $ 153,542     $ 11,330     $ 111,840     $ 25,307     $ 376,844     $ 233     $ 27,957  
Total net gains/(losses) included in:
                                                       
Net income
    38,200       (5,844 )           (1,556 )     42,498             2,792  
Other comprehensive income
                3,173                          
Purchases, sales, issuances, and settlements, net
    (81,720 )     (27,743 )     (13,289 )     (6,583 )     (141,137 )     (233 )     3,301  
Net transfers into/(out of) Level 3
    (11,077 )     241,546                   11,077              
 
Balance on September 30, 2009
  $ 98,945     $ 219,289     $ 101,724     $ 17,168     $ 289,282     $     $ 34,050  
 
 
                                                       
 
Net unrealized gains/(losses) included in net income
  $ 21,679  (e)   $ (5,844 ) (c)   $     $ (1,556 ) (d)   $ 43,830  (f)   $     $ 2,792  (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.
 
(d)   Represents recognized gains and losses attributable to venture capital investments classified within securities available for sale that are included in Securities gains/(losses) in noninterest income.
 
(e)   Represents recognized gains/(losses) of $(2.2) million included in Capital markets noninterest income, $26.3 million included in Mortgage banking noninterest income, and $(2.4) million included in Other income and commissions.
 
(f)   Represents recognized gains/(losses) of $45.0 million included in Mortgage banking noninterest income and $(1.2) million included in Other income and commissions.

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Note 16 – Fair Value of Assets & Liabilities (continued)
Nonrecurring Fair Value Measurements
From time to time, FHN may be required to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of LOCOM accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis which were still held on the balance sheet at September 30, 2010 and 2009, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment, the related carrying value, and the fair value adjustments recorded during the respective periods.
                                                 
                                    Three Months Ended     Nine Months Ended  
    Carrying value at September 30, 2010     September 30, 2010     September 30, 2010  
(Dollars in thousands)   Level 1     Level 2     Level 3     Total     Net gains/(losses)     Net gains/(losses)  
             
Loans held for sale — SBAs
  $     $ 12,000     $     $ 12,000     $ 12     $ 60  
Loans held for sale — first mortgages
                17,887       17,887       (1,032 )     (4,560 )
Loans, net of unearned income (a)
                222,577       222,577       (27,535 )     (127,983 )
Real estate acquired by foreclosure (b)
                139,359       139,359       (4,562 )     (13,938 )
Other assets (c)
                93,446       93,446       (2,687 )     (7,905 )
             
 
                                  $ (35,804 )   $ (154,326 )
 
                                           
                                                 
                                    Three Months Ended     Nine Months Ended  
    Carrying value at September 30, 2009     September 30, 2009     September 30, 2009  
(Dollars in thousands)   Level 1     Level 2     Level 3     Total     Net gains/(losses)     Net gains/(losses)  
             
Loans held for sale
  $     $ 35,888     $ 24,303     $ 60,191     $ 2,683     $ 3,793  
Securities available for sale
                                  (516 ) (d)
Loans, net of unearned income (a)
                515,101       515,101       (59,992 )     (214,299 )
Real estate acquired by foreclosure (b)
                111,389       111,389       (10,429 )     (29,831 )
Other assets (c)
                112,505       112,505       (2,489 )     (6,670 )
             
 
                                  $ (70,227 )   $ (247,523 )
 
                                           
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.
 
(c)   Represents low income housing investments.
 
(d)   Represents recognition of other than temporary impairment for cost method investments classified within securities available for sale.
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.
Prior to 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 September 30, 2010 and 2009. 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.

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Note 16 – Fair Value of Assets & Liabilities (continued)
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.
                         
    September 30, 2010
                    Fair value carrying
    Fair value   Aggregate   amount less aggregate
(Dollars in thousands)   carrying amount   unpaid principal   unpaid principal
 
Loans held for sale reported at fair value:
                       
Total loans
  $ 279,642     $ 337,525     $ (57,883 )
Nonaccrual loans
    28,195       55,486       (27,291 )
Loans 90 days or more past due and still accruing
    17,007       40,264       (23,257 )
 
                         
    September 30, 2009
                    Fair value carrying
    Fair value   Aggregate   amount less aggregate
(Dollars in thousands)   carrying amount   unpaid principal   unpaid principal
 
Loans held for sale reported at fair value:
                       
Total loans
  $ 254,895     $ 297,608     $ (42,713 )
Nonaccrual loans
    12,727       28,406       (15,679 )
Loans 90 days or more past due and still accruing
    5,521       12,257       (6,736 )
 
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
September 30
  Nine Months Ended
September 30
(Dollars in thousands)   2010   2009   2010   2009
 
Changes in fair value included in net income:
                               
Mortgage banking noninterest income
                               
Loans held for sale
  $ (5,789 )   $ 1,523     $ (10,630 )   $ (6,805 )
Other short-term borrowings and commercial paper
    (4,074 )     (5,670 )     (17,850 )     2,792  
Estimated changes in fair value due to credit risk (loans held for sale)
    (3,468 )     2,177       (6,221 )     (10,871 )
 
For the three months ended September 30, 2010 and 2009, the amounts for loans held for sale include approximately $3.5 million of losses and $2.2 million of gains, respectively, included in pretax earnings that are attributable to changes in instrument-specific credit risk. For the nine months ended September 30, 2010 and 2009, the amounts for loans held for sale include approximately $6.2 million and $10.9 million, respectively, of losses 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.

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Note 16 – Fair Value of Assets & Liabilities (continued)
Short-term financial assets. Federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with other financial institutions are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Trading securities and trading liabilities. Trading securities and trading liabilities are recognized at fair value through current earnings. Trading inventory held for broker-dealer operations is included in trading securities and trading liabilities. Broker-dealer long positions are valued at bid price in the bid-ask spread. Short positions are valued at the ask price. Inventory positions are valued using observable inputs including current market transactions, LIBOR and U.S. treasury curves, credit spreads, and consensus prepayment speeds. Trading loans are valued using observable inputs including current market transactions, swap rates, mortgage rates, and consensus prepayment speeds.
Trading securities also include retained interests in prior securitizations that qualify as financial assets, which may include certificated residual interests, excess interest (structured as interest-only strips), principal-only strips, or subordinated bonds. Residual interests represent rights to receive earnings to the extent of excess income generated by the underlying loans. Excess interest represents rights to receive interest from serviced assets that exceed contractually specified rates. Principal-only strips are principal cash flow tranches, and interest-only strips are interest cash flow tranches. Subordinated bonds are bonds with junior priority. All financial assets retained from a securitization are recognized on the Consolidated Condensed Statements of Condition in trading securities at fair value with realized and unrealized gains and losses included in current earnings as a component of noninterest income on the Consolidated Condensed Statements of Income.
The fair 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.
The fair value of certificated residual interests was determined using a valuation model that calculates the present value of estimated future cash flows. Inputs utilized in valuing residual interests are generally consistent with those used to value the related MSR. However, due to the lack of market information for residual interests, at September 30, 2009, FHN applied an internally-developed assumption about the yield that a market participant would require in determining the discount rate for its residual interests. The fair value of residual interests typically changes based on changes in the discount rate and differences between modeled prepayment speeds and credit losses and actual experience. All residual interests were removed from the balance sheet upon adoption of ASU 2009-17 on January 1, 2010.
In some instances, FHN retained interests in the loans it securitized by retaining certificated principal only strips or subordinated bonds. Subsequent to the August 2008 reduction of mortgage banking operations, 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. Previously, FHN used the market prices from comparable assets such as publicly traded FNMA trust principal only strips that were adjusted to reflect the relative risk difference between readily marketable securities and privately issued securities in valuing the principal only strips. The fair value of subordinated bonds was determined using the best available market information, which included trades of comparable securities, independently provided spreads to other marketable securities, and published market research. Where no market information was available, the company utilized an internal valuation model. As of September 30, 2009, no market information was available, and the subordinated bonds were valued using an internal discounted cash flow model, which included assumptions about timing, frequency and severity of loss, prepayment speeds of the underlying collateral, and the yield that a market participant would require. All subordinated bonds were removed from the balance sheet upon adoption of ASU 2009-17 on January 1, 2010.
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.

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Note 16 – Fair Value of Assets & Liabilities (continued)
Stock held in the Federal Reserve Bank and Federal Home Loan Banks are recognized at historical cost in the Consolidated Condensed Statements of Condition which is considered to approximate fair value. Short-term investments in mutual funds are measured at the funds’ reported closing net asset values. Venture capital investments are typically measured using significant internally generated inputs including adjustments to referenced transaction values and discounted cash flows analysis.
Loans held for sale. In conjunction with the adoption of the provisions of the FASB codification update to ASC 820-10 in second quarter 2009, FHN revised its methodology for determining the fair value of certain loans within its mortgage warehouse. FHN now determines the fair value of the applicable loans using a discounted cash flow model using observable inputs, including current mortgage rates for similar products, with adjustments for differences in loan characteristics reflected in the model’s discount rates. For all other loans held in the warehouse (and in prior periods for the loans converted to the discounted cash flow methodology), the fair value of loans whose principal market is the securitization market is based on recent security trade prices for similar products with a similar delivery date, with necessary pricing adjustments to convert the security price to a loan price. Loans whose principal market is the whole loan market are priced based on recent observable whole loan trade prices or published 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.
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.

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Note 16 – Fair Value of Assets & Liabilities (continued)
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 and the mortgage warehouse are based on current transactions involving identical securities. These contracts are exchange-traded and thus have no credit risk factor assigned as the risk of non-performance is limited to the clearinghouse used.
Valuations of other derivatives (primarily interest rate related swaps, swaptions, caps, and collars) are based on inputs observed in active markets for similar instruments. Typical inputs include the LIBOR curve, option volatility, and option skew. Credit risk is mitigated for these instruments through the use of mutual margining and master netting agreements as well as collateral posting requirements. Any remaining credit risk related to interest rate derivatives is considered in determining fair value through evaluation of additional factors such as customer loan grades and debt ratings.
Real estate acquired by foreclosure. Real estate acquired by foreclosure primarily consists of properties that have been acquired in satisfaction of debt. These properties are carried at the lower of the outstanding loan amount or estimated fair value less estimated costs to sell the real estate. Estimated fair value is determined using appraised values with subsequent adjustments for deterioration in values that are not reflected in the most recent appraisal. Real estate acquired by foreclosure also includes properties acquired in compliance with HUD servicing guidelines which are carried at the estimated amount of the underlying government assurance or guarantee.
Nonearning assets. For disclosure purposes, nonearning assets include cash and due from banks, accrued interest receivable, and capital markets receivables. Due to the short-term nature of cash and due from banks, accrued interest receivable, and capital markets receivables, the fair value is approximated by the book value.
Other assets. For disclosure purposes, other assets consist of investments in low income housing partnerships and deferred compensation assets that are considered financial assets. Investments in low income housing partnerships are written down to estimated fair value quarterly based on the estimated value of the associated tax credits. Deferred compensation assets are recognized at fair value, which is based on quoted prices in active markets.
Defined maturity deposits. The fair value is estimated by discounting future cash flows to their present value. Future cash flows are discounted by using the current market rates of similar instruments applicable to the remaining maturity. For disclosure purposes, defined maturity deposits include all certificates of deposit and other time deposits.
Undefined maturity deposits. In accordance with ASC 825, the fair value is approximated by the book value. For the purpose of this disclosure, undefined maturity deposits include demand deposits, checking interest accounts, savings accounts, and money market accounts.
Short-term financial liabilities. The fair value of federal funds purchased, securities sold under agreements to repurchase, commercial paper, and other short-term borrowings 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. Commercial paper and short-term borrowings includes a liability associated with transfers of mortgage servicing rights that did not qualify for sale accounting. This liability is accounted for at elected fair value, which is measured consistent with the related MSR, as previously described.

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Note 16 – Fair Value of Assets & Liabilities (continued)
Long-term debt. The fair value is based on quoted market prices or dealer quotes for the identical liability when traded as an asset. When pricing information for the identical liability is not available, relevant prices for similar debt instruments are used with adjustments being made to the prices obtained for differences in characteristics of the debt instruments. If no relevant pricing information is available, the fair value is approximated by the present value of the contractual cash flows discounted by the investor’s yield which considers FHN’s and FTBNA’s debt ratings.
Other noninterest-bearing liabilities. For disclosure purposes, other noninterest-bearing liabilities include accrued interest payable and capital markets payables. Due to the short-term nature of these liabilities, the book value is considered to approximate fair value.
Loan commitments. Fair values are based on fees charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Other commitments. Fair values are based on fees charged to enter into similar agreements.
The following fair value estimates are determined as of a specific point in time utilizing various assumptions and estimates. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. Due to market illiquidity, the fair values for loans, net of unearned income, loans held for sale, and long-term debt as of September 30, 2010 and 2009, 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.

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Note 16 – Fair Value of Assets & Liabilities (continued)
The following table summarizes the book value and estimated fair value of financial instruments recorded in the Consolidated Condensed Statements of Condition as well as off-balance sheet commitments as of September 30, 2010 and 2009.
                                 
    September 30, 2010   September 30, 2009
    Book   Fair   Book   Fair
(Dollars in thousands)   Value   Value   Value   Value
     
Assets:
                               
Loans, net of unearned income and allowance for loan losses
  $ 16,339,590     $ 15,570,548     $ 17,579,921     $ 16,161,268  
Short-term financial assets
    868,876       868,876       789,085       789,085  
Trading securities
    1,214,595       1,214,595       701,151       701,151  
Loans held for sale
    414,259       414,259       502,687       502,687  
Securities available for sale
    2,611,460       2,611,460       2,645,922       2,645,922  
Derivative assets
    359,535       359,535       322,239       322,239  
Other assets
    118,808       118,808       142,359       142,359  
Nonearning assets
    985,308       985,308       1,225,749       1,225,749  
Liabilities:
                               
Deposits:
                               
Defined maturity
  $ 2,058,138     $ 2,126,749     $ 3,420,099     $ 3,481,190  
Undefined maturity
    12,917,782       12,917,782       10,814,884       10,814,884  
 
Total deposits
    14,975,920       15,044,531       14,234,983       14,296,074  
Trading liabilities
    414,666       414,666       415,293       415,293  
Short-term financial liabilities
    2,632,903       2,632,903       4,006,846       4,006,846  
Long-term debt
    2,805,732       2,486,425       3,079,468       2,441,129  
Derivative liabilities
    251,192       251,192       198,965       198,965  
Other noninterest-bearing liabilities
    422,395       422,395       592,904       592,904  
 
                                 
    Contractual   Fair   Contractual   Fair
    Amount   Value   Amount   Value
     
Off-Balance Sheet Commitments:
                               
Loan commitments
  $ 7,737,043     $ 1,134     $ 8,875,202     $ 1,258  
Other commitments
    503,926       5,891       564,018       4,893  
 
Certain previously reported amounts have been reclassified to agree with current presentation.

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Note 17 – Restructuring, Repositioning, and Efficiency
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.
In 2009, FHN contracted to sell its institutional equity research business, a division of FTN Financial. During first quarter 2010, the sale failed to close and FHN incurred an additional goodwill impairment, severance and contract terminations costs, and asset write-offs. 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 during the nine months ended September 30, 2010, related to restructuring, repositioning, and efficiency activities were $11.8 million. Of this amount, $7.1 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 2010 resulted from the following actions:
  §   Severance and other employee costs of $3.3 million primarily related to the exit of the institutional equity research business and the 2009 sale of Louisville remittance processing operations.
 
  §   Goodwill impairment of $3.3 million and lease abandonment expense of $2.4 million primarily related to the closure of the institutional equity research business.
 
  §   Loss of $1.0 million related to asset impairments.
Net cost recognized by FHN during the nine months ended September 30, 2009, related to restructuring, repositioning, and efficiency activities were $20.7 million. Of this amount, $4.6 million represented exit costs that were accounted for in accordance with ASC 420.
Significant expenses recognized year to date 2009 resulted from the following actions.
  §   Severance and related employee costs of $4.2 million related to discontinuation of national lending operations.
 
  §   Transaction costs of $1.1 million from the sale of mortgage servicing rights.
 
  §   Expense of $1.0 million related to asset impairments from branch closures.
 
  §   Goodwill impairment of $14.0 million related to agreement to sell FTN ECM.
The financial results of FTN ECM (the institutional equity research business) including goodwill impairment are reflected in the Loss from discontinued operations, net of tax line on the Consolidated Condensed Statements of Income for all periods presented. Transaction costs recognized in the periods presented from selling mortgage servicing rights are recorded as a reduction of mortgage banking income in the noninterest income section of the Consolidated Condensed Statements of Income. All other costs associated with the restructuring, repositioning, and efficiency initiatives implemented by the management are included in the noninterest expense section of the Consolidated Condensed Statements of Income, including severance and other employee-related cost recognized in relation to such initiatives which are recorded in employee compensation, incentives, and benefits; facilities consolidation costs and related asset impairment costs are included in occupancy; cost associated with the impairment of premises and equipment are included in equipment rentals; depreciation and maintenance and other costs associated with such initiatives, including professional fees, and intangible asset impairment costs are included in all other expense.
Activity in the restructuring and repositioning liability for the nine months ended September 30, 2010 and 2009, is presented in the following table, along with other restructuring and repositioning expenses recognized. For repositioning actions initiated prior to 2010, costs associated with the reduction of national operations and termination of product and service offerings are included within the non-strategic segment while costs associated with efficiency initiatives affecting multiple segments and initiatives that occurred within regional banking and capital markets are included in the corporate segment. For repositioning actions initiated in 2010, the related costs are included in the segment that has decision-making responsibility.

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Note 17 – Restructuring, Repositioning, and Efficiency (continued)
                                                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2010   2009   2010   2009
    Expense   Liability   Expense   Liability   Expense   Liability   Expense   Liability
 
Beginning Balance
  $     $ 11,837     $     $ 18,383     $     $ 15,903     $     $ 24,167  
Severance and other employee related costs
    778       778       867       867       3,318       3,318       4,243       4,243  
Facility consolidation costs
    39       39       711       711       2,350       2,350       711       711  
Other exit costs, professional fees, and other
    1       1       94       94       1,462       1,462       (374 )     (374 )
 
Total Accrued
    818       12,655       1,672       20,055       7,130       23,033       4,580       28,747  
Payments related to:
                                                               
Severance and other employee related costs
            403               2,436               6,106               8,280  
Facility consolidation costs
            1,819               952               3,215               3,164  
Other exit costs, professional fees, and other
            11               94               1,388               208  
Accrual reversals
                          25               1,902               547  
 
Restructuring and Repositioning Reserve Balance
          $ 10,422             $ 16,548             $ 10,422             $ 16,548  
 
Other Restructuring and Repositioning Expense:
                                                               
Mortgage banking expense on servicing sales
                                1,532               1,142          
All other income and commissions
                                27                        
Impairment of premises and equipment
    325                             1,031               973          
Impairment of intangible assets
                  14,027               3,348               14,027          
Impairment of other assets
                                267                        
Other
                                (1,493 )                      
 
Total Other Restructuring and Repositioning Expense
    325               14,027               4,712               16,142          
 
Total Restructuring and Repositioning
  $ 1,143             $ 15,699             $ 11,842             $ 20,722          
 
FHN began initiatives related to restructuring in second quarter 2007. Consequently, the following table presents cumulative amounts incurred to date as of September 30, 2010, for costs associated with FHN’s restructuring, repositioning, and efficiency initiatives:
         
    Charged to
(Dollars in thousands)   Expense
 
Severance and other employee related costs*
  $ 58,862  
Facility consolidation costs
    38,743  
Other exit costs, professional fees, and other
    18,940  
Other restructuring and repositioning (income) and expense:
       
Loan portfolio divestiture
    7,672  
Mortgage banking expense on servicing sales
    21,175  
Net loss on divestitures
    12,535  
Impairment of premises and equipment
    18,842  
Impairment of intangible assets
    38,131  
Impairment of other assets
    40,492  
Other
    (1,493 )
 
Total Restructuring and Repositioning Charges Incurred to Date as of September 30, 2010
  $ 253,899  
 
*   Includes $1.2 million of deferred severance-related payments that will be paid after 2010.

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FIRST HORIZON NATIONAL CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL INFORMATION
First Horizon National Corporation (“FHN”) began as a community bank chartered in 1864 and as of June 30, 2010, was one of the 50 largest bank holding companies in the United States in terms of asset size.
Approximately 5,500 FHN employees provide financial services through more than 180 bank locations in and around Tennessee and 18 capital markets offices in the U.S. and abroad.
The corporation’s two major brands — First Tennessee and FTN Financial — provide customers with a broad range of products and services. First Tennessee has the leading combined deposit market share in the 21 counties in Tennessee and surrounding metropolitan areas where it does business and one of the highest customer retention rates of any bank in the country. FTN Financial (“FTNF”) is an industry leader in fixed income sales, trading, and strategies for institutional clients in the U.S. and abroad.
In first quarter 2010, FHN revised its operating segments to better align with its strategic direction, representing a focus on its regional banking franchise and capital markets business. Key changes include the addition of the non-strategic segment that combines the former mortgage banking and national specialty lending segments, the movement of correspondent banking from capital markets to regional banking, and the shift of first lien mortgage production in the Tennessee footprint to the regional banking segment. Exited businesses were moved to the new non-strategic segment.
Consistent with the treatment of exited operations and product lines, FHN has also revised its presentation of historical charges incurred related to its restructuring, repositioning, and efficiency initiatives. Past charges that resulted from the reduction of national operations and termination of product and service offerings have been included within the non-strategic segment. Additionally, past charges affecting multiple segments and initiatives that occurred within regional banking and capital markets have been included in the corporate segment to reflect the corporate-driven emphasis on execution of the repositioning efforts.
FHN is composed of the following operating segments:
    Regional banking offers financial products and services including traditional lending and deposit-taking to retail and commercial customers in Tennessee and surrounding markets. Additionally, regional banking provides investments, insurance, financial planning, trust services and asset management, credit card, cash management, check clearing services, and correspondent banking services.
 
    Capital markets provides financial services for the investment and banking communities through the integration of traditional capital markets securities activities, loan sales, portfolio advisory services, and derivative sales.
 
    Corporate consists of unallocated corporate income/expenses including gains and losses on repurchases of debt, expense on subordinated debt issuances and preferred stock, bank-owned life insurance, unallocated interest income associated with excess equity, net impact of raising incremental capital, revenue and expense associated with deferred compensation plans, funds management, low income housing investment activities, and certain charges related to restructuring, repositioning, and efficiency initiatives.
 
    Non-strategic includes the former mortgage banking and national specialty lending segments, exited businesses and loan portfolios, other discontinued products and service lines, and certain charges related to restructuring, repositioning, and efficiency initiatives.
For the purpose of this management’s discussion and analysis (“MD&A”), earning assets have been expressed as averages, unless otherwise noted, and loans have been disclosed net of unearned income. The following is a discussion and analysis of

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the financial condition and results of operations of FHN for the three and nine-month periods ended September 30, 2010, compared to the three and nine-month periods ended September 30, 2009. To assist the reader in obtaining a better understanding of FHN and its performance, the following discussion should be read with the accompanying unaudited Consolidated Condensed Financial Statements and Notes in this report. Additional information including the 2009 financial statements, notes, and MD&A is provided in the 2009 Annual Report.
FHN historically presented charges related to repurchase obligations for junior lien consumer mortgage loan sales in noninterest income while similar charges arising from first lien mortgage originations and sales through the legacy national mortgage banking business were reflected in noninterest expense. In order to present such charges consistently, FHN determined that charges relating to repurchase obligations should be reflected in noninterest expense in the line item called Repurchase and foreclosure provision on the Consolidated Condensed Statements of Income. Consequently, FHN retroactively applied this change which resulted in a reclassification of charges related to junior lien mortgage loan sales from noninterest income into noninterest expense. All applicable tables and associated narrative have been revised to reflect this change. This reclassification did not impact FHN’s net income and all effects are included in the non-strategic segment.
FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements with respect to FHN’s beliefs, plans, goals, expectations, and estimates. Forward-looking statements are statements that are not a representation of historical information but rather are related to future operations, strategies, financial results, or other developments. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “should,” “is likely,” “will,” “going forward,” and other expressions that indicate future events and trends identify forward-looking statements. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond a company’s control, and many of which, with respect to future business decisions and actions (including acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors, general and local economic and business conditions; recession or other economic downturns; expectations of and actual timing and amount of interest rate movements, including the slope of the yield curve (which can have a significant impact on a financial services institution); market and monetary fluctuations; inflation or deflation; customer and investor responses to these conditions; the level and length of deterioration in the residential housing and commercial real estate markets; potential requirements for FHN to repurchase previously sold or securitized mortgage loans; potential claims relating to foreclosure processes; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geopolitical developments including possible terrorist activity; recent and future legislative and regulatory developments; natural disasters; effectiveness of FHN’s hedging practices; technology; demand for FHN’s product offerings; new products and services in the industries in which FHN operates; and critical accounting estimates. Other factors are those inherent in originating, selling, and servicing loans including prepayment risks, pricing concessions, fluctuation in U.S. housing prices, fluctuation of collateral values, and changes in customer profiles. Additionally, the actions of the Securities and Exchange Commission (“SEC”), the Financial Accounting Standards Board (“FASB”), the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”), Financial Industry Regulatory Authority (“FINRA”), U.S. Department of the Treasury, the Bureau of Consumer Financial Protection, the Financial Stability Oversight Council, and other regulators and agencies; regulatory and judicial proceedings and changes in laws and regulations applicable to FHN; and FHN’s success in executing its business plans and strategies and managing the risks involved in the foregoing, could cause actual results to differ. FHN assumes no obligation to update any forward-looking statements that are made from time to time. Actual results could differ, possibly materially, because of several factors, including those presented in this Forward-Looking Statements section, in other sections of this MD&A, in other parts of and exhibits to this Quarterly Report on Form 10-Q for the period ended September 30, 2010, and in documents incorporated into this Quarterly Report.
FINANCIAL SUMMARY (Comparison of third quarter 2010 to third quarter 2009)
For third quarter 2010, FHN reported net income available to common shareholders of $15.9 million, or $.07 diluted earnings per share compared to a loss of $52.9 million, or $.23 diluted loss per share in third quarter 2009. The prior year included $10.2

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million of losses from discontinued operations related to a contracted sale of FTN Equity Capital Markets (“FTN ECM); the sale was abandoned in the first quarter 2010 and this business was closed.
Results in third quarter 2010 were primarily driven by a $135.0 million decline in the loan loss provision with lower revenues and flat expenses. Provision expense was lower in third quarter 2010 reflecting reduced inherent loss content of the loan portfolio as a result of lower period-end balances. Loan balances continued to decline because of continued efforts to wind down the higher-risk non-strategic construction portfolios and weak loan demand. Additionally, FHN saw some improvement in certain components of the C&I portfolio and performance stabilized in the consumer portfolios when compared to third quarter 2009. Overall, revenue was down as net interest income declined $4.8 million to $186.1 million, consistent with shrinkage of the balance sheet and noninterest income was down $53.9 million to $248.2 million. While still strong compared to historical levels, fixed income sales revenue declined $13.6 million, reflecting normalizing of market conditions that were very favorable in 2009. Other noninterest income declined as 2009 included gains on the repurchase of bank debt and miscellaneous fee income associated with exited businesses decreased from the prior year. While the low interest rate environment continues to facilitate positive net hedging results, mortgage banking income declined $6.1 million on lower servicing fees due to shrinkage of the servicing portfolio. Regulation E, which became effective in third quarter 2010, negatively affected deposit-related fee income as retail customers must now elect to recieve certain overdraft protection services that have historically been routinely provided to all retail customers.
Noninterest expense was flat at $347.6 million in third quarter 2010 when compared with third quarter 2009. Losses related to foreclosed assets declined $16.1 million as collateral values stabilized in certain markets. Numerous other expenses declined as FHN continues to wind-down non-strategic businesses. However, these declines in noninterest expense were partially offset by charges associated with repurchase obligations which increased $24.6 million from last year as elevated repurchase requests and rising mortgage insurance (“MI”) cancellation notices drove expenses higher. Restructuring, repositioning and efficiency charges were minimal in both periods and did not significantly contribute to quarter-over-quarter results.
Return on average common equity and return on average assets for third quarter 2010 were 2.86 percent and .52 percent, respectively, compared to negative 9.02 percent and negative .52 percent in 2009. Tier 1 capital ratio was 17.34 percent as of September 30, 2010, compared to 16.20 percent on September 30, 2009. Total assets were $25.4 billion and shareholders’ equity was $3.3 billion on September 30, 2010, compared to $26.5 billion and $3.4 billion, respectively, on September 30, 2009.

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BUSINESS LINE REVIEW
Regional Banking
The regional banking segment had pre-tax income of $48.3 million in third quarter 2010 compared to a pre-tax loss of $48.0 million in third quarter 2009. Improvement in pretax results was primarily due to an $86.1 million decline in loan loss provisioning. Total revenues were $220.0 million in 2010 and were relatively flat when compared to third quarter 2009.
The provision for loan losses decreased to $10.3 million in third quarter 2010 from $96.4 million in third quarter 2009. The decrease in provision was primarily driven by the more recent stabilization experienced in the C&I portfolio.
Net interest income increased 3 percent to $142.6 million in third quarter 2010 from $137.8 million in third quarter 2009. The increase in net interest income was primarily attributable to growth in mortgage warehouse lending in third quarter 2010 and improved commercial loan pricing. Net interest margin in regional banking improved to 5.11 percent in third quarter 2010 from 4.74 percent in third quarter 2009. The margin expansion is primarily attributable to improved commercial loan pricing combined with lower loan balances.
Noninterest income declined 7 percent, or $5.6 million, to $77.5 million in third quarter 2010. Deposit transactions and cash management fees were down $6.6 million from third quarter 2009 primarily due the negative effect of Regulation E which was effective beginning in third quarter 2010. Regulation E requires retail customers to elect to recieve overdraft protection for debit card and ATM transactions. Prior to the effective date of Regulation E, retain customers automatically recieved this service which generated fee income for the regional bank. Insurance commissions and mortgage banking income each declined $.8 million from third quarter 2009. In third quarter 2010, FHN executed a sale of student loans generating a $2.7 million gain which partially offset declines in noninterest income.
Noninterest expense decreased to $161.4 million in third quarter 2010 from $172.4 million in third quarter 2009. Foreclosure losses decreased $9.2 million in third quarter 2010, primarily due to higher negative valuation adjustments recognized in third quarter 2009 as the rate of decline in property values stabilized in 2010 in certain markets. Additionally, in third quarter 2010, FHN recognized minimal credit losses on customer derivatives compared to $5.1 million credit losses recognized in third quarter 2009.
Capital Markets
Pre-tax income in the capital markets segment decreased from $51.8 million in third quarter 2009 to $43.1 million in third quarter 2010 due to a decline in fixed income sales revenue. Revenue from fixed income sales decreased to $106.9 million in third quarter 2010 from $120.5 million in third quarter 2009. While still strong compared to historical levels, this decrease in fixed income sales revenue reflects normalizing market conditions which were very favorable in 2009. Average daily revenue was $1.7 million in third quarter 2010 compared with $1.9 million in 2009. Revenue from other products, including fee income from activities such as loan sales, portfolio advisory, and derivative sales decreased from $8.6 million in third quarter 2009 to $7.1 million in third quarter 2010. Noninterest expense was relatively flat at $79.5 million in third quarter 2010 compared with $80.3 million in 2009: the decline in revenue from third quarter 2009 to 2010 did not result in lower variable compensation expense because of a reduced rate of incentive provisioning in third quarter 2009.
Corporate
The corporate segment’s pre-tax loss was $13.9 million in third quarter 2010 compared to pre-tax income of $15.3 million in third quarter 2009. The corporate segment recognized net interest expense of $2.4 million in third quarter 2010 compared to net interest income of $8.5 million in third quarter 2009 primarily due to lower yielding, smaller investment portfolio and changing balance sheet mix. Noninterest income was $7.9 million in third quarter 2010 compared to $24.7 million in third quarter 2009. The decline in noninterest income was primarily due to $12.8 million of gains recognized on the repurchase of bank debt in third quarter 2009. Additionally, deferred compensation income decreased $3.9 million, which is mirrored by a decline in deferred compensation expense. Noninterest expense increased to $19.5 million in third quarter 2010 from $17.8 million in third quarter 2009. In 2009, FHN reversed $7.0 million of the contingent liability for certain Visa legal matters which contributed to the increase in noninterest expense. This increase was partially offset by a decline in deferred compensation expense and legal and professional fees.

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Non-Strategic
The pre-tax loss for the non-strategic segment was $40.7 million in 2010 compared with $59.4 million in 2009. Net interest income declined $4.2 million to $37.4 million as the wind-down of the national construction portfolios was the primary source of the lower net interest income from 2009. Provision expense declined $48.9 million from third quarter 2009 primarily due to reduced exposure from the national construction portfolios and stabilization in the consumer portfolios.
Noninterest income decreased $13.5 million from $65.2 million in third quarter 2009 primarily due to a decline in mortgage banking. Servicing income, which comprises the majority of mortgage banking income, declined by $5.3 million as servicing fees decreased $8.3 million, net hedging results increased slightly, and the value of MSR was more adversely affected by runoff in 2009. Servicing fees declined consistent with the continued reduction in the size of the servicing portfolio and hedging results continue to be favorable due to the interest rate environment. Remittance processing income and insurance commissions declined a combined $4.1 million as a result of the exit of Louisville remittance processing and the Atlanta insurance businesses in fourth quarter 2009.
Noninterest expense was $87.1 million in 2010 compared with $77.7 million 2009. The provision for repurchase and foreclosure losses increased $24.7 million from third quarter 2009 to $48.7 million during 2010. The increase in repurchase obligations is primarily the result of elevated repurchase requests and rise of MI cancellation notices related to loans originated and sold through the legacy mortgage banking business. See the Repurchase and Related Obligations from Loans Originated for Sale section of MD&A for additional discussion of these repurchase obligations. This rise in expenses was mitigated by a reduction in expenses primarily due to the continued wind down of businesses in this operating segment. Additionally, losses related to foreclosed real estate declined $7.0 million from $11.6 million in third quarter 2009 as the rate of decline in property values stabilized in certain markets.
INCOME STATEMENT
Total consolidated revenue decreased 12 percent to $434.4 million from $493.0 million in third quarter 2009 as nearly all revenue categories contributed to the decline.
NET INTEREST INCOME
Net interest income declined to $186.1 million in third quarter 2010 from $190.9 million in 2009 as average earning assets declined 5 percent to $23.0 billion and average interest-bearing liabilities declined 6 percent to $17.1 billion in third quarter 2010. The decline in net interest income is primarily attributable to a decrease in the size of the loan portfolio and lower returns on the investment securities portfolio. This decline in net interest income from third quarter 2009 was partially mitigated by improved pricing on commercial loans and certain deposit products.
The consolidated net interest margin improved to 3.23 percent for third quarter 2010 compared to 3.14 percent for 2009. The widening in the margin occurred as the net interest spread increased to 3.01 percent from 2.89 percent in third quarter 2009 and the impact of free funding decreased from 25 basis points to 22 basis points. The increase in the margin is primarily attributable to an overall decline in lower-rate earning assets, improved deposit pricing, and lower wholesale funding costs. These favorable impacts were offset by a significant increase in excess deposits at the Federal Reserve Bank.

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Table 1 — Net Interest Margin
                 
    Three Months Ended
    September 30
    2010   2009
 
Consolidated yields and rates:
               
Loans, net of unearned income
    4.14 %     3.86 %
Loans held for sale
    3.95       4.95  
Investment securities
    4.21       4.90  
Capital markets securities inventory
    4.03       3.72  
Mortgage banking trading securities
    9.90       12.46  
Other earning assets
    0.20       0.14  
 
Yields on earning assets
    3.87       3.89  
 
Interest-bearing core deposits
    0.74       1.03  
Certificates of deposit $100,000 and more
    2.14       1.66  
Federal funds purchased and securities sold under agreements to repurchase
    0.24       0.21  
Capital markets trading liabilities
    3.15       3.89  
Short-term borrowings and commercial paper
    0.61       0.29  
Long-term debt
    1.16       1.22  
 
Rates paid on interest-bearing liabilities
    0.86       1.00  
 
Net interest spread
    3.01       2.89  
Effect of interest-free sources
    0.22       0.25  
 
FHN — NIM
    3.23 %     3.14 %
 
NONINTEREST INCOME
Noninterest income was 57 percent of total revenue in third quarter 2010 compared to 61 percent in 2009 as total noninterest income decreased by $53.9 million to $248.2 million in third quarter 2010. In third quarter 2010, FHN recognized $2.9 million of net equity securities losses due to valuation adjustments of venture capital investments.
Capital Markets Noninterest Income
The major component of revenue in the capital markets segment is generated from the purchase and sale of securities as both principal and agent, and from other fee sources including loan sales, portfolio advisory, and derivative sales. Securities inventory positions are generally procured for distribution to customers by the sales staff. A portion of the inventory is hedged to protect against movements in fair value due to changes in interest rates. Capital markets noninterest income decreased to $114.0 million in third quarter 2010 from $129.0 million in 2009. Although revenue was still solid and favorable market conditions persisted, revenues from fixed income sales decreased $13.6 million to $106.9 million in 2010.
Table 2 — Capital Markets Noninterest Income
                                                 
    Three Months Ended           Nine Months Ended    
    September 30   Percent   September 30   Percent
(Dollars in thousands)   2010   2009   Change (%)   2010   2009   Change (%)
 
Noninterest income:
                                               
Fixed income
  $ 106,908     $ 120,528       11.3   -   $ 304,027     $ 487,619       37.7   -
Other product revenue
    7,106       8,515       16.5   -     25,434       26,508       4.1   -
                     
Total capital markets noninterest income
  $ 114,014     $ 129,043       11.6   -   $ 329,461     $ 514,127       35.9   -
 
Mortgage Banking Noninterest Income
Mortgage banking income consisted primarily of fees from mortgage servicing, changes in the fair value of servicing assets net of hedge gains or losses, fair value adjustments to the remaining warehouse, and origination income through the regional banking footprint. Mortgage banking income decreased to $53.1 million in third quarter 2010 from $59.2 million in 2009.
Servicing income, which comprises the majority of mortgage banking income, decreased by $4.0 million in third quarter 2010 with servicing fees declining by $8.3 million. Net hedging results, which include the change in fair value of mortgage servicing

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rights (“MSR”) and related hedges, were $31.8 million in 2010 compared with $30.8 million in third quarter 2009. The positive net hedging results in both periods were primarily due to the low interest rate environment causing wider spreads between mortgage and swap rates. Servicing fees declined $8.3 million consistent with the continued decline of the size of the servicing portfolio. The change in the fair value of MSR attributable to runoff was $8.7 million compared to $12.0 million. Origination income declined slightly in third quarter 2010 primarily due to fair value adjustments of the remaining mortgage warehouse.
All Other Noninterest Income and Commissions
Deposit transactions and cash management income declined $6.8 million to $34.9 million primarily due to the negative impact on non-sufficient fund (“NSF”) fee income of Regulation E, which became effective during third quarter 2010. Insurance commission income was down $1.8 million primarily due to income attributable to the Atlanta insurance business in 2009, which was sold in fourth quarter 2009. Table 3 — Other Income provides additional detail of the Other income line item on the Consolidated Condensed Statements of Income. All other income and commissions decreased $20.1 million in third quarter 2010 from $51.5 million in 2009. The decline in other noninterest income was primarily due to $12.8 million of gains recognized on the repurchase of bank debt in third quarter 2009. Deferred compensation income, which is driven by market conditions, declined $3.9 million. Deferred compensation income is mirrored by changes in deferred compensation expense, which is reflected as a component of personnel expense. Additionally, remittance processing income declined $2.5 million to $.5 million because FHN sold the Louisville remittance processing in fourth quarter 2009.
Table 3 — Other Income
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2010   2009   2010   2009
     
Other income:
                               
Bank owned life insurance
  $ 5,913     $ 6,066     $ 18,166     $ 14,492  
Bankcard income
    4,965       5,173       14,784       15,145  
ATM interchange fees
    3,532       2,704       10,421       7,638  
Other service charges
    2,832       2,645       7,597       9,196  
Electronic banking fees
    1,870       1,465       5,483       4,592  
Letter of credit fees
    1,544       1,476       4,985       4,204  
Deferred compensation
    1,118       5,006       1,385       7,220  
Remittance processing
    512       2,968       1,708       9,485  
Reinsurance fees
    344       1,760       1,794       7,344  
Gain on repurchases of debt
          12,800       17,060       12,860  
Other
    8,735       9,451       20,688       27,968  
 
Total
  $ 31,365     $ 51,514     $ 104,071     $ 120,144  
 
NONINTEREST EXPENSE
Total noninterest expense was relatively flat at $347.6 million in third quarter 2010 compared with $348.2 million in third quarter 2009.
Employee compensation, incentives, and benefits (personnel expense), the largest component of noninterest expense, decreased to $174.9 million from $178.7 million in third quarter 2009. This decline was primarily attributable to the continued wind-down of non-strategic businesses. Expenses related to foreclosed properties declined by $16.0 million to $5.2 million as property values stabilized in certain markets, lessening the amount of negative fair value adjustments when compared with prior year. Various expense categories (including occupancy, communication and courier, equipment rental, maintenance, and depreciation) declined primarily due to the continued wind-down of non-strategic businesses. These declines in expense were diminished by a $24.6 million increase in the repurchase and foreclosure provision to $48.7 million in third quarter 2010. The increase is primarily driven by increased repurchase requests and PMI cancellation notices related to the legacy mortgage banking business. Charges to increase the repurchase reserve for prior junior lien consumer mortgage loan sales were minimal, in both periods. Table 4 - Other Expense provides additional detail of the Other expense line item on the Consolidated Condensed Statements of Income. All other expenses increased to $34.2 million from $30.4 million in third quarter 2009. The

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increase is primarily due to FHN’s reversal of $7.0 million of the contingent liability for certain Visa legal matters in 2009, which reduced 2009 other noninterest expense.
Table 4 — Other Expense
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2010   2009   2010   2009
 
Other expense:
                               
Advertising and public relations
  $ 6,587     $ 5,465     $ 17,464     $ 16,507  
Low income housing expense
    5,513       5,833       16,343       16,467  
Other insurance and taxes
    3,012       2,924       9,941       9,062  
Travel and entertainment
    2,560       2,139       7,695       7,164  
Customer relations
    1,545       1,610       5,350       5,858  
Employee training and dues
    1,166       1,282       3,660       4,244  
Supplies
    1,149       1,570       3,417       3,352  
Bank examination costs
    1,147       1,194       3,431       3,690  
Loan insurance expense
    903       1,988       (1,289 )     5,957  
Federal services fees
    520       1,307       2,139       4,034  
Other
    10,057       5,104       17,685       55,810  
 
Total
  $ 34,159     $ 30,416     $ 85,836     $ 132,145  
 
INCOME TAXES
During the third quarter of 2010, there were several items which positively affected the effective tax rate. Tax credits reduced taxes by $5.9 million and non-taxable gains resulting from the increase in the cash surrender value of life insurance reduced taxes by $2.3 million.
A deferred tax asset (“DTA”) or deferred tax liability (“DTL”) is recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax consequence is calculated by applying enacted statutory tax rates, applicable to future years, to these temporary differences. In order to support the recognition of the DTA, FHN’s management must believe that the realization of the DTA is more likely than not.
In third quarter 2010, FHN’s net DTA was $294 million. FHN evaluates the likelihood of realization of the net DTA based on both positive and negative evidence available at the time. FHN’s three-year cumulative loss position at September 30, 2010, is significant negative evidence in determining whether the realizability of the DTA is more likely than not. However, FHN believes that the negative evidence of the three-year cumulative loss is overcome by sufficient positive evidence that the DTA will ultimately be realized. The positive evidence includes several different factors. First, a significant amount of the cumulative losses occurred in businesses that FHN has exited or is in the process of exiting. Secondly, FHN forecasts substantially more taxable income in the carryforward period, exclusive of potential tax planning strategies, even under conservative assumptions. Additionally, FHN has sufficient carryback positions, reversing DTL, and potential tax planning strategies to fully realize its DTA. FHN believes that it will realize the net DTA within a significantly shorter period of time than the twenty year carryforward period allowed under the tax rules. Based on current analysis, FHN believes that its ability to realize the recognized $294 million net DTA is more likely than not.

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ADOPTION OF ACCOUNTING UPDATES
Effective January 1, 2010, FHN adopted the provisions of Accounting Standards Update 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”). ASU 2009-17 amends ASC 810 to revise the criteria for determining the primary beneficiary of a VIE by replacing the quantitative-based risks and rewards test previously required with a qualitative analysis. ASC 810 adds additional criteria which triggers a reassessment of an entity’s status when an event occurs such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. Additionally, the amendments to ASC 810 require continual reconsideration of conclusions regarding which interest holder is the VIE’s primary beneficiary. Under ASC 810, as amended, separate presentation is required on the face of the balance sheet of the assets of a consolidated VIE that can only be used to settle the VIE’s obligations and the liabilities of a consolidated VIE for which creditors or beneficial interest holders have no recourse to the general credit of the primary beneficiary.
Upon adoption of the amendments to ASC 810, FHN re-evaluated all former QSPEs and entities already subject to ASC 810 under the revised consolidation methodology. Based on such re-evaluation, consumer loans with an aggregate unpaid principal balance (“UPB”) of approximately $245.2 million were prospectively consolidated as of January 1, 2010, along with secured borrowings of $236.3 million, as the retention of MSR and other retained interests, including residual interests and subordinated bonds, results in FHN being considered the related trusts’ primary beneficiary under the qualitative analysis required by ASC 810, as amended. MSR and trading assets held in relation to the newly consolidated trusts were removed from the mortgage servicing rights and trading securities sections of the Consolidated Condensed Statements of Condition, respectively, upon adoption of the amendments to ASC 810. As the assets of FHN’s consolidated residential mortgage securitization trusts are pledged to settle the obligations due to the holders of the trusts’ securities and since the security holders have no recourse to FHN, the asset and liability balances have been parenthetically disclosed on the face of the Consolidated Condensed Statements of Condition as restricted in accordance with the presentation requirements of ASC 810, as amended. Since FHN determined that calculation of carrying values was not practicable, the UPB measurement methodology was used upon adoption, with the allowance for loan losses (“ALLL”) related to the newly consolidated loans determined using FHN’s standard practices.
FHN recognized a reduction to the opening balance of undivided profits of approximately $10.6 million for the cumulative effect of adopting the amendments to ASC 810, including the effect of the recognition of an adjustment to the ALLL of approximately $24.6 million ($15.6 million net of tax) in relation to the newly consolidated loans. Further, upon adoption of the amendments to ASC 810, the deconsolidation of certain small issuer trust preferred trusts for which FTBNA holds the majority of the mandatorily redeemable preferred capital securities (“trust preferreds”) issued but is not considered the primary beneficiary under the qualitative analysis required by ASC 810, as amended, resulted in reduction of loans net of unearned income and term borrowings on the Consolidated Condensed Statements of Condition by $30.5 million.
See Note 1 — Financial Information for a complete discussion of all accounting updates adopted during 2010.
STATEMENT OF CONDITION REVIEW
Total period-end assets were $25.4 billion in third quarter 2010, compared to $26.5 billion in third quarter 2009. Average assets decreased to $25.8 billion in third quarter 2010 from $26.8 billion in third quarter 2009.
EARNING ASSETS
Earning assets consist of loans, loans held for sale, investment securities, trading securities, and other earning assets. Earning assets averaged $23.0 billion and $24.2 billion for third quarter 2010 and 2009, respectively. A more detailed discussion of the major line items follows.
Loans
Average loans declined 11 percent from third quarter 2009 as a result of the continued wind-down of the non-strategic portfolios combined with weak loan demand. In first quarter 2010, FHN prospectively adopted amendments to ASC 810 which resulted in

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the consolidation of $245.2 million of loans, primarily home equity lines of credit (“ HELOC”), that were securitized in which FHN retained a significant interest subsequent to the securitization. These loans, along with HELOC that were already recognized on FHN’s balance sheet which collateralize borrowings of securitization trusts, are reflected as Restricted Real Estate Loans below. Additionally, these loans are presented parenthetically on the Consolidated Condensed Statements of Condition.
Table 5 — Average Loans
                                         
    Three Months Ended September 30
            Percent   Percent           Percent
(Dollars in millions)   2010   of Total   Change   2009   of Total
 
Commercial:
                                       
Commercial, financial, and industrial
  $ 7,012.1       42 %     1.5   -   $ 7,116.0       37 %
Real estate commercial (a)
    1,392.2       8       9.4   -     1,536.0       8  
Real estate construction (b)
    545.3       3       56.2   -     1,245.6       7  
             
Total commercial
    8,949.6       53       9.6   -     9,897.6       52  
             
Retail:
                                       
Real estate residential (c)
    6,859.1       40       10.6   -     7,674.4       40  
Real estate construction (d)
    41.2       *       91.1   -     460.7       2  
Other retail
    108.6       1       14.8   -     127.5       1  
Credit card receivables
    189.2       1       1.3   +     186.8       1  
Restricted real estate loans (e)
    818.1       5       21.0   +     676.3       4  
             
Total retail
    8,016.2       47       12.2   -     9,125.7       48  
             
Total loans, net of unearned
  $ 16,965.8       100 %     10.8   -   $ 19,023.3       100 %
             
*   Amount less than one percent.
 
(a)   Includes nonconstruction income property loans and land loans not involving development.
 
(b)   Includes homebuilder, condominium, income property construction, and land development loans.
 
(c)   Includes primarily home equity loans and lines of credit (average HELOC in third quarter 2010 and 2009 were $3.5 billion and $3.7 billion, respectively).
 
(d)   One-time close product.
 
(e)   Prior to 2010, includes on balance sheet securitizations of home equity lines. Beginning first quarter 2010, also includes loans consolidated due to the adoption of amendments to ASC 810.
Total commercial loans declined $.9 billion to $8.9 billion in third quarter 2010 with a majority of this decline attributable to a $.7 billion decrease in commercial real estate construction loans. This decline is attributable to the strategic reduction of the national component of this portfolio as well as the decrease of active commercial construction lending within the regional banking segment. Total retail loans declined 12 percent, or $1.1 billion, to $8.0 billion in third quarter 2010. The Real Estate Residential Portfolio (home equity loans and permanent mortgages) declined $.8 billion while $.4 billion of the decline is attributable to the Residential Construction Portfolio (“OTC”). The non-strategic component of the home equity lines and loans continue to gradually wind down and the OTC portfolio has been significantly reduced since third quarter 2009. See the Loan Portfolio Composition discussion within the Asset Quality section for further description of these loan portfolios.
Loans Held for Sale
Loans held for sale consists of the mortgage warehouse (the majority of this line item), student, small business, and home equity loans. The average balance of Loans held for sale increased $10.7 million since third quarter 2009 and averaged $.5 billion in both periods. The increase is primarily attributable to a rise in student loans held for sale between the third quarter 2009 and 2010. Despite the increase in the average amount of loans held for sale, period-end balances declined $88.4 million as FHN executed a sale of approximately $120 million of student loans late in third quarter 2010.
Other Earning Assets
All other earning assets, including investment securities, capital markets and mortgage trading securities, interest-bearing cash, and federal funds sold increased a combined $.9 billion since third quarter 2009. Interest-bearing cash increased $.7 billion from 2009 to $1.1 billion as FHN held excess cash balances with the Federal Reserve Bank (“Fed”) during third quarter 2010. On September 30, 2010, period-end Fed deposits were $.3 billion. The average increase from last year is due to a rise in customer deposits in excess of current funding needs primarily because of continued weak loan demand. Average trading securities increased $.4 billion from third quarter 2009 primarily due to an increase in capital markets trading inventory. More

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than half of the increase is attributable to approximately $.6 billion of trading loans that were sold during third quarter 2010 with the remainder of the increase due to customer demand and market conditions. Mortgage trading securities continued to decline as FHN reduced retained interests from prior securitizations primarily through sales and natural runoff. The investment securities portfolio declined $.2 billion primarily due to natural run-off of mortgage-backed securities.
Funds
Total deposits increased $.7 billion to $15.4 billion as average core deposits increased $1.5 billion driven by efforts to increase customer deposits within the wealth management group during 2009 and 2010, growth in middle Tennessee (Metropolitan Nashville) deposits, and an increase in insured network deposits. The increase in core deposits permitted FHN to reduce higher-cost purchased certificates of deposit by $.8 billion since third quarter 2009. The contracting balance sheet and growth in core deposits also limited funding needs from other sources as Other borrowed funds declined by $1.6 billion from $1.8 billion in 2009. A majority of this decrease is because FHN utilized the Federal Reserve Term Auction Facility (“TAF”) during 2009 and balances were fully repaid in first quarter 2010. In third quarter 2009, average TAF borrowings were $1.6 billion. Funding from long-term debt decreased $.2 billion and averaged $2.9 billion during third quarter 2010. The decline in term borrowings was due to a decrease in funding from long-term bank notes since third quarter 2009.
FINANCIAL SUMMARY (Comparison of first nine months of 2010 to first nine months of 2009)
FHN reported a net loss available to common shareholders of $9.1 million or $.04 loss per diluted share for the nine months ended September 30, 2010. The net loss available to common shareholders was $258.8 million or $1.12 loss per diluted share in 2009. For the nine months ended September 30, 2010, return on average common equity was negative .55 percent and return on average assets was negative .23 percent. Return on average common equity and return on average assets were negative 14.46 percent and .96 percent, respectively, for the nine months ended September 30, 2009.
For the first nine months of 2010, total revenues were $1.3 billion; a decrease of 19 percent from $1.6 billion for the nine months ended 2009. Net interest income declined $38.0 million to $548.6 million as average earning assets declined $3.0 billion, or 11 percent, from 2009. Provision expense for loan losses decreased by $520.0 million for the nine months ended September 30, 2010, from $745.0 million in 2009 reflecting success of winding down the national construction portfolios, and stabilization of commercial and consumer portfolios.
Noninterest income for the first nine months of 2010 decreased to $744.7 million from $1.0 billion in 2009 primarily due to a decline in capital markets income. Capital markets noninterest income decreased by 36 percent to $329.5 million for the first nine months of 2010 from $514.1 million a year ago. This decrease in capital markets noninterest income reflects normalizing market conditions which were very favorable in 2009.
Mortgage banking income was $151.3 million for the nine months ended September 30, 2010, compared to $190.4 million for nine months ended September 30, 2009. Servicing income, which accounts for the majority of mortgage banking income, decreased to $137.0 million in the first nine months of 2010 from $165.2 million. While the size of the servicing portfolio declined 33 percent, the decline in servicing income is primarily attributable to a decrease in positive net hedging gains. Positive net hedging gains during the first nine months of 2010 were $86.8 million compared to $121.7 million during 2009 as the interest rate environment contributed to favorable hedge results in both periods. However, in 2009, wider spreads between mortgage and swap rates contributed to the notably larger positive net hedge results. Servicing fees were $75.0 million during 2010 compared to $92.6 million consistent with the decline in the size of the mortgage servicing portfolio. The decrease in the fair value of MSR attributable to runoff declined to $24.8 million in 2010 from $49.0 million in 2009. Origination income decreased to $13.0 million for the nine months ended September 30, 2010, from $23.4 million. In the first nine months of 2010, income from origination activity within the regional banking footprint was $11.1 million compared to $20.1 million as the first half of 2009 was higher due to elevated refinance volumes. The decrease in refinance volumes from 2009 is linked to the decline in the size of the servicing portfolio which has reduced the pool of eligible borrowers likely to refinance with FHN. Unhedged fair value adjustments of the remaining mortgage warehouse were positive $1.6 million in 2010 compared to net negative fair value adjustments of $3.7 million in 2009.

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Deposit transactions and cash management fee income was $109.7 million in 2010 compared with $122.6 million in 2009. This decline is primarily due to a change in the consumer NSF fee structure and the negative impact of Regulation E, which became effective in third quarter 2010. In January 2010, FHN voluntarily implemented changes to the NSF fee structure which limited the number of daily overdraft charges and also waives overdraft charges if a deposit account is only minimally overdrawn. Insurance commissions were $13.9 million in 2010 compared to $19.4 million in 2009 as 2009 included revenues from the Atlanta insurance business, which was sold in fourth quarter 2009. Net securities losses were $4.8 million in 2010 compared to $.3 million in 2009 which were primarily driven by negative fair value adjustments to venture capital investments during 2010.
Other noninterest income and commissions was $104.1 million in 2010 compared with $120.1 million in 2009. The net decrease in other noninterest income and commissions is attributable to several factors. Remittance processing income declined $7.8 million as the Louisville operation was sold in fourth quarter 2009. Reinsurance premium income declined $5.6 million from 2009 as FHN has settled with a majority of the private mortgage insurance providers resulting in insurance premium income being fully allocated to the primary insurer. Deferred compensation income decreased $5.8 million which is mirrored by and a decrease in personnel expense. In 2010, FHN recognized $17.1 million gain on the repurchase of bank debt compared with $12.9 million in 2009 and income from bank-owned life insurance increased $3.7 million due to death benefits received during 2010.
Total noninterest expense decreased $149.2 million for the nine months ended September 30, 2010, from $1.2 billion in 2009, primarily due to a decline in personnel costs, expenses related to foreclosed real estate, and other noninterest expenses. In the first nine months of 2010, personnel expense was $520.0 million compared to $614.3 million in the first nine months of 2009. The decrease was primarily the result of the decline in capital markets’ fixed income sales revenue in 2010. Foreclosure expenses were down $32.3 million primarily due to a lesser amount of negative fair value adjustments recognized in 2010. The 2009 FDIC special assessment contributed to a decline in noninterest expense as FDIC premium costs decreased to $27.8 million in 2010 from $37.8 million in 2009. Various other expense categories declined as a result of continued wind-down of national businesses and exit of non-strategic businesses. The repurchase and foreclosure provision increased $57.2 million in 2010 from $88.4 million in 2009 primarily due to a rise in repurchase requests from GSEs and mortgage insurance cancellation notices related to loans originated and sold by FHN’s legacy mortgage banking business. In 2009, FHN accrued $22.0 million to increase the repurchase reserve related to junior lien consumer mortgage loan sales; in 2010, these charges were immaterial.
Other noninterest expense decreased $46.3 million to $85.8 million during 2010. See Table 4 — Other Expense for additional detail regarding other noninterest expenses. High loan-to-value (“HLTV”) insurance expense decreased $7.2 million from 2009. A portion of the decline in HLTV insurance expense is attributable to a settlement reached by FHN in first quarter 2010 which resulted in the cancellation of an HLTV insurance contract and return of $3.8 million of premiums. The remainder of the decline, $38.1 million, is attributable to all other expenses. This decline is primarily the result of $23.4 million in expenses recognized in 2009 to increase the private mortgage reinsurance reserve and in 2010, these charges were minimal. The provision for off-balance sheet commitments declined $9.3 million consistent with overall improvement in asset quality and operations costs associated with the regional bank mortgage origination business declined by $6.6 million compared to 2009 primarily due to decline in refinance volumes Additionally In 2010, FHN reversed $5.0 million of the contingent liability related to visa litigation matters compared with $7.0 million last year.
Income taxes for the nine months ended September 30, 2010 were primarily affected by the level of permanent tax credits in relation to pre-tax income. The tax rate for 2009 cannot be compared to that of 2010 due to the level of pre-tax income.

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DISCONTINUED OPERATIONS
As a result of the first quarter 2010 closure of the institutional equity research business, the results of operations, net of tax, for FTN ECM are classified as discontinued operations on the Consolidated Condensed Statements of Income for all periods presented within the non-strategic segment. During 2010, loss from discontinued operations was $6.9 million and includes a pre-tax goodwill impairment of $3.3 million, severance and contract terminations costs, and asset write-offs.
BUSINESS LINE REVIEW
Regional Banking
The regional banking segment had pre-tax income of $73.4 million through third quarter 2010 compared to a pre-tax loss of $113.2 million in 2009. The improvement in pre-tax income results through third quarter 2010 compared to 2009 is primarily due to a $169.3 million decline in the provision for loan losses. Total revenues through third quarter 2010 were $646.3 million, a decrease of 3 percent from $667.9 million in 2009. Net interest income decreased to $413.6 million in the first nine months of 2010 from $418.0 million in 2009. The decrease in net interest income was primarily attributable to a decline in loan demand and the effects of the historically low interest rate environment which was partially offset by improved commercial loan pricing. Noninterest income decreased $17.2 million to $232.7 million during the first nine months of 2010. Total service charges on deposits declined $12.2 million resulting from overdraft policy changes made in early 2010 and also the negative impact of Regulation E, which became effective in third quarter 2010. Mortgage banking origination income declined by $9.3 million to $11.2 million in the first nine months of 2010 as mortgage refinance volume was elevated in early 2009. The decrease in refinance volumes from 2009 is linked to the decline in the size of the servicing portfolio.
Provision expense for loan losses decreased $169.3 million in 2010 from $259.6 million in 2009. The decrease in provision was primarily driven by the more recent stabilization experienced in the C&I portfolio. Total noninterest expense decreased to $482.6 million in 2010 compared to $521.4 million in 2009. The decrease is primarily attributable to an $11.9 million decline in losses associated with foreclosed assets in the first nine months of 2010 compared to 2009. The decline in expenses related to foreclosed real estate is primarily related to stabilization in collateral values which have resulted in lower negative fair value adjustments. Provision for unfunded commitments decreased $10.2 million reflecting improved overall credit quality and variable operational costs associated with mortgage origination through the regional bank declined $6.6 million consistent with a reduction in refinance volume from last year.
Capital Markets
Pre-tax income in the capital markets segment decreased to $103.7 million for the nine months ended September 30, 2010, from $215.3 million through third quarter 2009 due to a decline in fixed income sales revenue. Total revenues for the first nine months of 2010 decreased to $345.3 million from $526.5 million in 2009. While still strong compared to historical levels, fixed income sales revenue decreased to $304.0 million in the first nine months of 2010 from $487.6 million in 2009 reflecting normalizing market conditions which were very favorable in 2009. Other product revenue decreased slightly to $25.6 million from $27.3 million in 2009. Noninterest expense was $241.7 million, a decrease of $69.5 million from $311.2 million in 2009. The decrease is primarily driven by lower fixed income sales revenues resulting in lower variable compensation costs in the first nine months of 2010 compared to 2009.
Corporate
The pre-tax loss for the corporate segment was $8.8 million during 2010 compared with $4.9 million in 2009. Total revenues for the nine months ended September 30, 2010, were $42.7 million compared to $56.5 million in 2009. Net interest income declined $13.5 million to $5.2 million in 2010. The decrease in net interest income is primarily a result of lower yielding, smaller investment portfolio and also a changing balance sheet mix.
Noninterest income was relatively flat at $37.4 million through third quarter 2010. An increase in bank-owned life insurance income, which is attributable to death benefits received during 2010, and an increase in gains on the repurchase of bank debt offset a decline in deferred compensation income. Noninterest expense decreased to $51.4 million in the first nine months of 2010 from $61.3 million in the first half of 2009. This decrease is the result of decreased deferred compensation expense as

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well as a reduction in legal fees. The first nine months of 2010 included a $5.0 million reversal of a portion of the contingent liability previously established for certain Visa legal matters compared with a $7.0 million reversal during 2009.
Non-strategic
The pre-tax loss for the nine months ended September 30, 2010, for the non-strategic segment was $132.2 million compared to $428.6 million during 2009. The pre-tax loss decreased as the provision for loan losses decreased to $134.7 million in 2010 from $485.4 million in 2009 reflecting the wind-down of the higher-risk national construction portfolios. Total revenues for the nine months ended September 30, 2010, were $259.1 million compared to $344.4 million in 2009 with net interest income declining to $114.1 million in 2010 from $138.3 million in 2009. The decline in net interest income is primarily due to an increase in nonaccrual loans and the wind-down of the national loan portfolios.
Noninterest income decreased to $145.0 million in 2010 compared to $206.1 million in 2009 primarily because of a $29.9 million decline in mortgage banking income. The decline in mortgage banking income is primarily due to a decline in servicing income, as positive net hedging results were less favorable in 2010. Additionally, servicing fees declined $17.6 million consistent with the decline in the reduction in size of the mortgage servicing portfolio. The decline in base servicing fees and net hedging results was mitigated as the value of MSR was more adversely affected by runoff in 2009 than compared with 2010. A $12.5 million decline in fee income is attributable to revenues from the Atlanta insurance business and Louisville remittance processing which were both exited in fourth quarter 2009. Premiums from private mortgage insurance declined since 2009 in connection with settlements made with primary insurers.
Noninterest expense decreased to $256.6 million in 2010 compared to $287.5 million in 2009. Noninterest expense declined despite a $57.2 million increase in repurchase-related expenses compared with 2009. Repurchase requests and increased MI cancellation notices in 2010 resulted in a $78.5 million increase in repurchase losses to the legacy mortgage banking business. Repurchase charges to increase the repurchase reserve for prior junior lien consumer mortgage loan sales were $21.3 million in 2009, but were immaterial during 2010. Foreclosure costs were down $21.8 million primarily due to a decline in negative fair value adjustments from last year as collateral values in certain markets have stabilized. During 2009, FHN recognized $23.4 million to increase the reserve related to reinsurance contracts while these charges were minimal in 2010. Declines in personnel expenses, contract labor costs, and various other expenses are attributable to the continued wind-down of businesses within the segment.
RESTRUCTURING, REPOSITIONING, AND EFFICIENCY INITIATIVES
FHN has been conducting a company-wide review of business practices with the goal of improving its overall profitability and productivity. In order to redeploy capital to higher-return businesses, FHN implemented numerous actions since 2007 including, but not limited to the following:
  §   Sold 34 full-service First Horizon Bank branches in national banking markets.
 
  §   Discontinued national homebuilder and commercial real estate lending through First Horizon Construction Lending.
 
  §   Sold components of national mortgage banking business including origination pipeline, related hedges, certain fixed assets, servicing assets, and associated custodial deposits.
 
  §   Exited the institutional equity research business.
 
  §   Sold various other non-strategic businesses including Louisville remittance processing operations (“FERP”) and the Atlanta insurance business.
Net costs recognized by FHN during the nine months ended September 30, 2010, related to restructuring, repositioning, and efficiency activities were $11.8 million. Of this amount, $7.1 million represented exit costs that were accounted for in accordance with the FASB Accounting Standards Codification Topic for Exit or Disposal Activities Cost Obligations (“ASC 420”). Significant expenses recognized during 2010 resulted from the following actions:
  §   Severance and related employee costs of $3.3 million primarily related to the institutional equity research business and the 2009 sale of Louisville remittance processing operations.

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  §   Goodwill impairment of $3.3 million and lease abandonment expense of $2.4 million primarily related to the closure of the institutional equity research business.
 
  §   Loss of $1.0 million related to asset impairments.
Net costs recognized by FHN during the nine months ended September 30, 2009, related to restructuring, repositioning, and efficiency activities were $20.7 million. Of this amount, $4.6 million represented exit costs that were accounted for in accordance with the FASB Accounting Standards Codification Topic for Exit or Disposal Activities Cost Obligations (“ASC 420”). Significant expenses recognized during 2009 resulted from the following actions:
  §   Severance and related employee costs of $4.2 million related to discontinuation of national lending operations.
 
  §   Transaction costs of $1.1 million from the contracted sale of mortgage servicing rights.
 
  §   Loss of $1.0 million related to asset impairments from branch closures.
 
  §   Goodwill impairment of $14.0 million related to agreement to sell FTN ECM.
Gains or losses from divestitures are included in gains/(losses) on divestitures in the noninterest income section of the Consolidated Condensed Statements of Income. Transaction costs related to transfers of mortgage servicing rights are recorded as a reduction of mortgage banking income in the noninterest income section of the Consolidated Condensed Statements of Income. Except for amounts reflected in discontinued operations, net of tax, all other costs associated with the restructuring, repositioning, and efficiency initiatives implemented by management are included in the noninterest expense section of the Consolidated Condensed Statements of Income, including severance and other employee-related costs which are recorded in employee compensation, incentives, and benefits; facilities consolidation costs and related asset impairment costs which are included in occupancy; and costs associated with the impairment of premises and equipment which are included in equipment rentals, depreciation, and maintenance. Other costs associated with such initiatives including intangible asset impairment costs are included in all other expense and goodwill impairment.
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. In first quarter 2010, FHN incurred a charge of $3.3 million to write off remaining goodwill associated with the closure of the institutional equity research business. This impairment charge is reflected in discontinued operations, net of tax on the Consolidated Condensed Statements of Income and within the non-strategic segment. The recognition of this impairment loss will have no effect on FHN’s debt covenants. Due to the broad nature of the actions being taken, all components of income and expense are expected to benefit from the efficiency initiatives.
Charges related to restructuring, repositioning, and efficiency initiatives for the three and nine month periods ended September 30, 2010 and 2009, are presented in the following table based on the income statement line item affected. See Note 17 — Restructuring, Repositioning, and Efficiency Charges and Note 2 — Acquisitions and Divestitures for additional information.

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Table 6 — Restructuring, Repositioning, and Efficiency Initiatives
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2010   2009   2010   2009
 
Noninterest income:
                               
Mortgage banking
  $     $     $ (1,532 )   $ (1,142 )
All other income and commissions
                (27 )      
 
Total noninterest income
                (1,559 )     (1,142 )
 
Noninterest expense:
                               
Employee compensation, incentives, and benefits
    778       742       830       4,125  
Occupancy
    39       798       948       232  
Legal and professional fees
          (2 )     119       74  
All other expense
    326       7       (899 )     1,010  
 
Total noninterest expense
    1,143       1,545       998       5,441  
 
Income/(loss) before income taxes
    (1,143 )     (1,545 )     (2,557 )     (6,583 )
Loss from discontinued operations
          (14,154 )     (9,285 )     (14,139 )
 
Net charges from restructuring, repositioning, and efficiency initiatives
  $ (1,143 )   $ (15,699 )   $ (11,842 )   $ (20,722 )
 
Certain previously reported amounts have been reclassified to agree with current presentation.
Activity in the restructuring and repositioning liability for the three and nine month periods ended September 30, 2010 and 2009 is presented in the following table:
Table 7 — Restructuring, Repositioning, and Efficiency Reserve
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2010   2009   2010   2009
 
Beginning Balance
  $ 11,837     $ 18,383     $ 15,903     $ 24,167  
Severance and other employee related costs
    778       867       3,318       4,243  
Facility consolidation costs
    39       711       2,350       711  
Other exit costs, professional fees, and other
    1       94       1,462       (374 )
 
Total Accrued
    12,655       20,055       23,033       28,747  
Payments related to:
                               
Severance and other employee related costs
    403       2,436       6,106       8,280  
Facility consolidation costs
    1,819       952       3,215       3,164  
Other exit costs, professional fees, and other
    11       94       1,388       208  
Accrual Reversals
          25       1,902       547  
 
Restructuring and Repositioning Reserve Balance
  $ 10,422     $ 16,548     $ 10,422     $ 16,548  
 
ASSET QUALITY
Loan Portfolio Composition
FHN groups its loans into seven different portfolios based on internal classifications. Asset quality data is measured and reviewed for each of these portfolios and the ALLL is also assessed at this individual portfolio level. Commercial loans are composed of the Commercial, Financial, and Industrial (“C&I”), the Income-Producing Commercial Real Estate (“Income CRE”), and the Residential Commercial Real Estate (“Residential CRE”) portfolios. Retail loans are composed of Consumer Real Estate; Permanent Mortgage; One-time Close (“OTC”), Credit Card, and Other; and Restricted Real Estate Loans. Key asset quality metrics for each of these portfolios can be found in Table 12 - Asset Quality by Portfolio.
Starting in 2007, FHN’s underwriting and credit policies and guidelines evolved through a series of enhancements through which FHN has responded to dramatic changes in economic and real estate conditions in the U.S. As economic and real estate conditions develop, further enhancements to our underwriting and credit policies and guidelines may be necessary or desirable.

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The following is a description of each portfolio:
Commercial Loan Portfolios
FHN’s commercial and real estate loan approval process grants lending authority based upon job description, experience, and performance. The lending authority is delegated to the business line (Market Managers, Departmental Managers, Regional Presidents, Relationship Managers (RM) and Portfolio Managers (PM)) and to credit administration. While individual limits vary, the predominant amount of approval authority is vested with the Credit Risk Manager function. Portfolio concentration limits for the various portfolios are established by executive management and approved by the Executive and Risk Committee of the Board.
C&I
The C&I portfolio was $7.3 billion on September 30, 2010. This portfolio is comprised of loans used for general business purposes, diversified by industry type, and primarily composed of relationship customers in Tennessee and certain neighboring states that are managed within the regional bank. Typical products include working capital lines of credit, term loan financing of owner-occupied real estate and fixed assets, and trade credit enhancement through letters of credit.
C&I loans are underwritten in accordance with a well-defined credit origination process. This process includes applying minimum underwriting standards as well as separation of origination and credit approval roles. Underwriting typically includes due diligence of the borrower and the applicable industry of the borrower, analysis of the borrower’s available financial information, identification and analysis of the various sources of repayment, and identification of the primary risk attributes. Stress testing the borrower’s financial capacity, adherence to loan documentation requirements, and assigning credit risk grades using internally developed scorecards are also used to help quantify the risk when appropriate. Underwriting parameters also include loan-to-value ratios (“LTVs”) which vary depending on collateral type, use of guaranties, loan agreement requirements, and other recommended terms such as equity requirements, amortization, and maturity. Approval decisions also consider various financial ratios and performance measures, such as cash flow and balance sheet leverage, liquidity, coverage of fixed charges, and working capital. Approval decisions also consider the capital structure of the borrower, sponsorship, and quality/value of collateral. Generally, guideline and policy exceptions are identified and mitigated during the approval process. Pricing of C&I loans is based upon the determined credit risk specific to the individual borrower. These loans are typically based upon variable rates tied to the London Inter-Bank Offered Rate (“LIBOR”) or the prime rate of interest plus or minus the appropriate margin.
C&I loan policies and guidelines are approved by several management risk committees that consist of business line managers and credit administration professionals to ensure that the resulting guidance addresses the attendant risks and establishes reasonable underwriting criteria that appropriately mitigate risk. Policies and guidelines are reviewed, revised, and re-issued periodically at established review dates or earlier if changes in the economic environment, portfolio performance, the size of portfolio or industry concentrations, or regulatory guidance warrant an earlier review. During the past three years, policies and guidelines have been enhanced with more specific guidance particularly for industries and portfolios that have concentrations or elevated credit risk. Underwriting metrics have been enhanced for mortgage warehouse and asset based lending, small business loans, leveraged finance, and loans to financial institutions, to include more front-end due diligence, a reduction in our tolerance for leverage, modification of advance rates based on collateral type, and financial performance.
In fourth quarter 2009, FHN enhanced the lending process by implementing a concept that incorporates a RM and PM for each commercial loan. The PM is responsible for assessing the credit quality of the borrower beginning with the initial underwriting and continuing through the servicing period while the RM is primarily responsible for communications with the customer and maintaining the relationship. The RM/PM concept was then expanded to include other specialists who were organized into units called Deal Teams. Deal Teams are constructed with specific job attributes that should improve FHN’s ability to identify, mitigate, document, and manage ongoing risk. Portfolio managers and credit analysts provide enhanced analytical support during loan origination and servicing, including monitoring of the financial condition of the borrower and tracking compliance with loan agreements. Loan closing officers and the construction loan management unit specialize in loan documentation and the management of the construction lending process. In addition to these changes, early identification of problem loan assets has

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been strengthened by training on problem loan identification, more comprehensive policies and guidelines, targeted portfolio reviews, a greater emphasis on more frequent grading, as well as enhancements to the problem loan management process.
Significant loan concentrations are considered to exist for a financial institution when there are loans to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At September 30, 2010, no significant concentration existed in the C&I portfolio in excess of 10 percent of total loans; however FHN has sizable portfolios in categories of manufacturing, finance and insurance, wholesale trade, mortgage warehouse lending, and construction. The finance and insurance subsection of this portfolio, including bank-related and trust preferred loans (“TRUPs”) (i.e., loans to bank and insurance-related businesses), has experienced stress 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. On September 30, 2010, approximately 9 percent of the C&I portfolio, or 4 percent of total loans, was composed of bank-related and TRUPs. Origination of trust preferred loans was suspended in second quarter 2008 and underwriting of loans to financial institutions has been enhanced. Changes incorporated into the underwriting analysis include increased levels of onsite due diligence review of the customer’s policies and strategies, assessment of management, assessment of the relevant markets, a comprehensive assessment of the loan portfolio, and a review of ALLL. Additionally, the underwriting analysis includes a focus on the customer’s capital ratios, profitability, loan loss coverage ratios, and regulatory status.
Income CRE
The Income CRE portfolio was $1.5 billion on September 30, 2010. This portfolio contains loans, lines, and letters of credit to commercial real estate developers for the construction and mini-permanent financing of income-producing real estate. Major subcategories of Income CRE include retail (23 percent), apartments (20 percent), office (14 percent), industrial (12 percent), land/land development (11 percent), hospitality (9 percent), and other (11 percent).
Income CRE loans are underwritten in accordance with credit policies and underwriting guidelines that are reviewed annually and changed as necessary based on market conditions. Income CRE loan policies and guidelines are approved by management risk committees that consist of business line managers and credit administration professionals to ensure that the resulting guidance addresses the attendant risks and establishes reasonable underwriting criteria that appropriately mitigate risk. Loans are underwritten based upon project type, size, location, sponsorship, and other market-specific data. Generally, minimum requirements for equity, debt service coverage ratios (“DSCRs”), and level of pre-leasing activity are established based on perceived risk in each subcategory. Loan-to-value (value is defined as the lower of cost or market) limits are set below regulatory prescribed ceilings and generally range between 50 and 80 percent depending on underlying product set. Term and amortization requirements are set based on prudent standards for interim real estate lending. Equity requirements are established based on the quantity, quality, and liquidity of the primary source of repayment. For example, more equity would be required for a speculative construction project or land loan than for a property fully leased to a credit tenant or a roster of tenants. Typically, a borrower must have at least 10 percent of cost invested in a project before FHN will fund loan dollars. All income properties are required to achieve a DSCR greater than or equal to 120 percent at inception or stabilization of the project based on loan amortization and a minimum underwriting (interest) rate refreshed quarterly. Some product types require a higher DSCR ranging from 125 percent to 150 percent of the debt service requirement. Variability depends on credit versus non-credit tenancy, lease structure, property type, and quality. A proprietary minimum underwriting interest rate is used to calculate compliance with underwriting standards. Generally, specific levels of pre-leasing must be met for construction loans on income properties. A global cash flow analysis is performed at the borrower and guarantor level. The majority of the portfolio is on a floating rate basis tied to appropriate spreads over LIBOR.
The credit administration and ongoing monitoring consists of multiple internal control processes. Construction loans are closed and administered by a centralized control unit. Internal Audit tests for adherence to loan documentation requirements. Credit grades are assigned utilizing internally developed scorecards to help quantify the level of risk in the transaction. Underwriters and credit approval personnel stress the borrower’s/project’s financial capacity utilizing numerous economic attributes such as interest rates, vacancy, and discount rates. Key Information is captured from the various portfolios and then stressed at the aggregate level. Results are utilized to assist with the assessment of the adequacy of the allowance for loan losses and to steer

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portfolio management strategies. As discussed in the C&I portfolio section, Income CRE also employs the RM/PM model and the “Deal Team” concept.
Approximately 89 percent of the Income CRE portfolio was originated through the regional bank. Weakening market conditions will likely continue to affect this portfolio through increased vacancies, slower stabilization rates, decreased rental rates, lack of readily available financing in the industry, and declining property valuations; however, stressed performance could be somewhat mitigated by strong sponsors and cash flows. FHN proactively manages problem projects and maturities to regulatory standards.
Residential CRE
The Residential CRE portfolio was $.3 billion on September 30, 2010. This portfolio includes loans to residential builders and developers for the purpose of constructing single-family detached homes, condominiums, and town homes. FHN lends to finance vertical construction of these properties as well as the acquisition and development of the related land. Performance of this portfolio has been severely strained due to the stressed housing market.
Residential CRE loans are underwritten in accordance with credit policies and underwriting guidelines that are reviewed annually and changed as necessary based on market conditions. Loans are underwritten based on project-type, size, location, sponsorship, and other market-specific data that vary by product type. Generally, minimum requirements for equity injections, speculative exposure, and project sales pace are established based on perceived risk in each subcategory. Loan-to-value limits are set below regulatory prescribed ceilings and generally range between 50 and 75 percent depending on underlying product set. Term is limited to the typical construction or development period for the underlying property-type including appropriate absorption time as set by the appraisal. Maximum outside term limits are set to avoid stale project performance. Equity requirements are established based on the quantity, quality, and liquidity of the primary source of repayment. For example, more equity would be required for a speculative construction project or land loan than for a construction loan on a pre-sold house. Generally, a borrower must have at least 10 percent of cost invested in a project before FHN will fund loan dollars.
In response to the collapse of the housing market and the deterioration in the quality of the Residential CRE portfolio, FHN made several changes to its credit policy including lowering advance rates for land, land development, and construction loans; establishing more restrictive guidelines for interest carry; lowering maximum loan amounts; and increasing minimum release prices. In addition, portfolio strategy was modified to limit lending on speculative construction and land/land development. The construction loan administration process was also enhanced to ensure that all construction loans are administered by a centralized loan administration unit.
Originations through national construction lending ceased in early 2008 and balances have steadily decreased since that time. Active lending in the regional banking footprint has been significantly reduced with new originations limited to tactical advances to facilitate workout strategies. When active lending was occurring, the majority of the portfolio was on a floating rate basis tied to appropriate spreads over LIBOR or the prime rate.
Retail Loan Portfolios
Consumer Real Estate
The Consumer Real Estate portfolio was $5.8 billion on September 30, 2010, and is primarily composed of home equity lines and installment loans. FHN also has home equity lines and installment loans that were consolidated on January 1, 2010 with the adoption of amendments to ASC 810. These loans are discussed in the “Restricted Real Estate Loans” paragraph at the conclusion of the Loan Portfolio Composition section. The Consumer Real Estate portfolio is geographically diverse with strong borrower Fair Isaac Corporation (“FICO”) scores. The largest concentrations of September 30, 2010 balances are in Tennessee (36 percent) and California (14 percent) with no other state representing greater than 5 percent of the portfolio. At origination, the weighted average FICO score of this portfolio was 736; refreshed FICO scores averaged 727 as of September 30, 2010. Deterioration is most acute in areas with significant home price depreciation and is affected by poor economic conditions — primarily unemployment. Approximately two-thirds of this portfolio was originated through national channels.

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Underwriting
To obtain a consumer real estate loan, among other loan approval requirements, the loan applicant(s) in most cases must first meet a minimum qualifying FICO score. Applicants must also have the financial capacity (or available income) to service the debt by not exceeding a calculated Debt-to-Income (“DTI”) ratio. The amount of the loan is limited to a percentage of the lesser of the current value or sales price of the collateral.
In response to the downturn in the housing market, FHN completed a number of initiatives for the purpose of reducing risk and exposure to the Consumer Real Estate portfolio. In first quarter 2009, lending authority was redirected from more than 200 lenders in various markets, and for the majority of loans in this portfolio, underwriting decisions are now made through a centralized loan underwriting center. Minimum FICO score requirements are established by management for both loans secured by real estate as well as non-real estate secured loans. Management also establishes maximum loan amounts, loan-to-value ratios, and debt-to-income ratios for each consumer real estate product. Identified guideline and policy exceptions require established mitigating factors that have been approved for use by Credit Risk Management. In conjunction with the sale of the national mortgage banking business, FHN significantly reduced lending in markets outside of our regional banking footprint. Minimum loan qualifications were tightened along with other changes made to underwriting standards and lending authority for HELOCs and installment loans in the Consumer Real Estate portfolio.
Prior to the third quarter 2008, a borrower could qualify with a minimum FICO score of 620. Beginning in third quarter 2008 and continuing into 2009, FHN raised minimum qualifying FICO scores for all consumer real estate products. During this timeframe, the minimum allowable FICO score was increased to the upper 600’s and minimum FICO scores for reduced documentation and stated-income relationship loans (loans whereby FHN already maintained a customer relationship with the borrower) was also increased. Also in second quarter 2009, FHN reduced the maximum CLTV from 100 percent to 89.9 percent for most consumer real estate loans. The potential loan amount and CLTVs (maximum is 89.9 percent) varies with a borrower’s FICO score. Maximum DTI was lowered to 45 percent in second quarter 2009 for almost all real estate loans. Prior to that time, some consumer real estate loan products allowed a 50 percent DTI.
The following table provides origination statistics of the Consumer Real Estate portfolio as of September 30, 2010:
Table 8 — Origination Statistics — Consumer Real Estate Portfolio (a)
                                                 
 
                            % Originated            
    % of Outstanding                   Through Broker           % First
Vintage   Balance   CLTV (b)   FICO (b)   Channel (c)   % TN   Liens
 
pre-2003
    5 %     76 %     718       15 %     48 %     35 %
2003
    9 %     75 %     730       15 %     34 %     41 %
2004
    13 %     79 %     727       27 %     23 %     27 %
2005
    20 %     80 %     731       19 %     19 %     17 %
2006
    16 %     77 %     735       6 %     25 %     18 %
2007
    19 %     79 %     740       15 %     27 %     19 %
2008
    9 %     75 %     749       7 %     74 %     54 %
2009
    5 %     72 %     755             88 %     60 %
2010
    4 %     77 %     754             91 %     68 %
 
Total
    100 %     78 %     736       14 %     36 %     29 %
 
(a)   Statistics include $735.8 million of restricted real estate loans.
 
(b)   Determined based on weighted average.
 
(c)   Correspondent and Wholesale.
Although FICO score minimum guidelines were in the 600’s throughout this time period, the origination statistics illustrate that much of our Consumer Real Estate portfolio was originated well above the minimum requirements. The average FICO score at origination was 718 in vintages prior to 2003. In vintage years 2004 through 2007, which comprise a majority of the outstanding loan balances, the average FICO scores ranged between 727 and 740. Additionally, the average CLTV ratios of loans originated during these periods was less than the revised allowable maximum of 89.9 percent.

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HELOCs can pose risk of default when applicable interest rates change - particularly in a rising interest rate environment potentially stressing borrower capacity to repay the loan at the higher interest rate. While FHN is unable to predict future interest rate movements, interest rates presently are quite low by historical standards; therefore, at some point in the future, FHN believes that rates are much more likely to rise than to fall. In response to the 2008 regulatory guidance, FHN implemented a change to its underwriting practice requiring HELOC borrowers to qualify based on a fully indexed, fully amortized payment methodology. If the first mortgage loan is a non-traditional mortgage, the debt-to-income calculation is based on a fully amortizing first mortgage payment. Prior to this change, FHN’s underwriting guidelines required borrowers to qualify at an interest rate that was 200 basis points above the note rate. This mitigated risk to FHN in the event of a sharp rise in interest rates over a relatively short time horizon. FHN does not penalize borrowers (reset the rate) based on delinquency or any other factor during the life of the loan. HELOC interest rates are variable but only adjust in connection with movements to which the index rate is tied. FHN’s HELOC products typically have a 5 or 10 year draw period with repayment periods ranging between 10 and 20 years.
HELOC Portfolio Management
In 2008, an extensive review of HELOC accounts was conducted whereby these loans were analyzed using certain selection criteria focused on declines in collateral value as well as other characteristics. As a result of this analysis, and in accordance with our interpretation of regulatory guidance, thousands of accounts were frozen or line of credit limits were lowered. Also in 2008, the volume of HELOC originations was reduced due to the divestiture of the national mortgage origination and servicing platforms and cessation of national consumer lending operations.
FHN also responded to the collapse of the housing market by strengthening and expanding its continuous HELOC account review processes in order to more proactively target and identify higher-risk home equity loans and initiate preventative and corrective actions. The reviews considered a number of account activity patterns and characteristics such as reduction in available equity, significant declines in property value, the number of times delinquent within recent periods, changes in credit bureau score since origination, score degradation, and account utilization. In accordance with our interpretation of regulatory guidance, FHN blocked future draws on accounts and/or lowered account limits. Historically, the account review process was focused on the higher-risk loans within the non-strategic portfolio; however, beginning in 2009, management began including HELOCs originated through the regional bank in its reviews. Management has assigned additional resources to this effort and enhancements are being made to the process in order to further increase the volume of account reviews.
Whereas certain management actions and initiatives have reduced the amount of HELOC exposure in our non-strategic business segment, depressed real estate values and soft loan demand has also recently impacted HELOC origination volume within our regional banking footprint. HELOC origination within the regional banking footprint is expected to normalize as overall real estate values stabilize and loan demand improves.
Low or Reduced Documentation Origination
From time to time, FHN may originate consumer loans with low or reduced documentation. FHN generally defines low or reduced documentation loans as any loan originated with anything less than pay stubs, personal financial statements, and tax returns from potential borrowers. A similar term also utilized to reflect reduced income documentation loans has been “stated-income” or “stated.”
Prior to 2008, FHN generally offered three types of stated-income consumer real estate loan products to customers: stated-income/stated-assets, stated-income/verified-assets and existing customer relationship based stated-income loans. A reduction in stated-income originations was primarily due to substantial changes in the market for such loans followed by our exit from the national origination channel when substantially all of the mortgage banking operations was sold in third quarter 2008. Beginning in early 2008, FHN began tightening minimum loan qualification criteria for all stated-income consumer real estate loan products and has since made numerous changes to product offerings and requirements. For example, in early second quarter 2008 FHN terminated the offering of the stated-income/stated-assets product to customers and lowered the maximum CLTV on the stated-income/verified-assets product from 95 percent to 89.9 percent. Continuing into the third and fourth quarters of 2008, the minimum FICO score for all real estate loans was raised and the maximum CLTV on the stated-income/verified-assets product

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was lowered again to 80 percent. FHN further tightened the stated-income product offering in first quarter 2009 as the stated-income/verified-assets product was eliminated and the relationship based product was modified and made available for non-purchase transactions only.
Currently, stated-income or low or reduced documentation loans are limited to existing customers of FHN who may have deposit accounts, other borrowings, or various other business relationships, and such loans are currently only available for qualified non-purchase transactions. Currently, full income documentation would typically require (for example) copies of W-2s, pay stubs, and verification of employment. This exception is provided to loan applicants that are also existing deposit customers of the bank who have recurring consistent direct DDA deposit amounts from their employers; however, in accordance with our policies and procedures, certain restrictions apply. For example, self-employed customers are not eligible, deposits made directly by the borrower are not considered, direct deposits must indicate the employer’s name depositing the funds, and recurring deposits must be consistent per period and may not vary by more than 10 percent. If these and other conditions are not met, full income documentation is required. In accordance with our policies and procedures, a verbal verification of employment is required in either situation.
As of September 30, 2010, $1.9 billion, or 29 percent, of the consumer real estate portfolio consisted of home equity lines and installment loans originated using stated-income compared to $2.2 billion, or 30 percent, as of September 30, 2009. These stated-income loans were 11 percent of the total loan portfolio at September 30, 2010, and 12 percent last year. As of September 30, 2010, approximately three-fourths of the stated-income home equity loans in our portfolio were originated through legacy businesses that have been exited and these loan balances should continue to decline.
Stated-income loans were 29 percent of the balance of the consumer real estate portfolio and accounted for nearly 39 percent of the net charge-offs for this portfolio during the third quarter 2010. Net charge-offs of stated-income home equity lines and installment loans were $23.1 million during third quarter 2010 and $23.2 million during third quarter 2009. Of the $1.9 billion stated-income loans, less than 1 percent were nonperforming as of the end of third quarter 2010 and 3 percent were more than 30 days delinquent. Of the $2.2 billion stated-income loans at September 30, 2009, less than 1 percent were nonperforming and 2 percent were more than 30 days delinquent.
Permanent Mortgage
The permanent mortgage portfolio was $1.0 billion on September 30, 2010. This portfolio is primarily composed of jumbo mortgages and OTC completed construction loans. Inflows from OTC modifications have significantly declined and are expected to be immaterial going forward. While nonperforming loans (“NPLs”) have increased, delinquencies and reserves were down as performance has begun to stabilize. The portfolio is somewhat geographically diverse; however 23 percent of loan balances are in California. Performance has been affected by economic conditions, primarily depressed retail real estate values and elevated unemployment.
OTC, Credit Card, and Other
The OTC, Credit Card, and Other portfolios were $.3 billion on September 30, 2010, and primarily include credit card receivables, automobile loans, OTC construction, and other consumer related credits. Balances of OTC product have declined 99 percent since the end of 2007 to $30.4 million as of September 30, 2010. Originations of OTC loans ceased in early 2008.
The OTC portfolio consisted of a permanent mortgage product which combined construction and permanent financing into a single loan which was originated by the legacy mortgage banking business. Upon completion of construction of the home and conversion of the construction financing for the home into permanent financing, the legacy mortgage banking business anticipated that such permanent financing loans would be sold. OTC loan underwriting consisted of a three-step process in which a review of the builder (including experience and credit worthiness) and a review of the collateral (including analysis of construction plans and verification of expected sales price) were performed by the Construction Lending Department. Credit underwriting of the borrower was performed only at the time of construction loan funding and was completed through the normal channels of the mortgage branch.

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Prior to first quarter 2008, OTC loans eligible for automated underwriting qualified with a minimum FICO score of 660. Loans requiring manual underwriting procedures qualified with a score of 700 or greater. Stated-income loans could be underwritten with FICO scores greater than 700. For fully documented loans, the CLTV was required to be less than 89.9 percent or 75 percent for stated-income loans with value determined based on the lesser of current appraised value or acquisition cost (construction). In first quarter 2008, originations of OTC loans ceased and construction lending through the legacy national mortgage banking business was discontinued.
Restricted Real Estate Loans
The Restricted Real Estate Loan portfolio includes HELOC that were previously securitized on balance sheet as well as HELOC and some first and second lien mortgages that were consolidated on January 1, 2010, in conjunction with the adoption of amendments to ASC 810. The adoption of these amendments resulted in the consolidation of additional variable interest entities and this loan category was created to include all loans, primarily HELOC, that had previously been securitized but for which FHN retains servicing and other significant interests. As of September 30, 2010, this portfolio totaled $.8 billion and included $735.8 million of HELOC and $60.7 million of first and second lien mortgage loans.
Payment-Option ARM Loans (Payment Choice Product)
Historically, FHN originated through its legacy mortgage banking business first lien adjustable rate mortgage loans with borrower payment options. Payment options provided the borrower with the option to pay a minimum payment (which in most cases increased principal balance), interest only, or varying amounts of principal and interest. These loans were originated with the intent to sell. Originations of these loans were discontinued in third quarter 2007. While most of the loans were sold, a small amount remained unsold and was subsequently moved from loans HFS to the loan portfolio. Only $21.0 million of these loans remain in our consumer portfolio as of September 30, 2010. Because only a small portion remains in the HTM portfolio, the impact on the ALLL and on other loan portfolio asset quality metrics is immaterial.
Sub-prime Lending
Sub-prime loans are broadly defined as all lending that would not qualify using traditional borrowing channels or underwriting practices. While sub-prime loans do not have a precise definition, they may be identified by a combination of characteristics of the borrower and structure of the loan. Sub-prime or non-prime loans generally have characteristics of lower FICO scores than prime borrowers combined with various levels of reduced documentation and higher initial LTV ratios. Generally, under FHN’s practices at that time for FHN-originated sub-prime loans, as FICO scores increased and the LTV ratio decreased, the extent of loan documentation requirements decreased; similarly, loan documentation requirements generally would increase as FICO scores decreased or the LTV ratio increased.
Prior to first quarter 2007, FHN originated through its legacy mortgage banking business first lien mortgage and home equity loans with the intent to sell with servicing released, that were considered sub-prime. Origination of these loans was entirely discontinued in early 2007 with the last sale of these loans into the secondary market occurring shortly thereafter. All sub-prime originations were initially classified as loans HFS on the consolidated balance sheet and were generally sold within 45 days of origination. At the time these originations discontinued, characteristics of sub-prime loans originated and sold by FHN would have had FICO scores ranging between 580 and 680 with LTV ratios ranging between 80 and 100 percent.
Since FHN originated sub-prime loans with the intent to sell and because originations ceased more than 3 years ago, as of September 30, 2010, only $867.9 thousand of these loans remain within the consumer loan portfolio. Because a majority of these loans were classified as HFS and subsequently sold and only a small portion remains in the HTM portfolio, the impact on the ALLL and on other loan portfolio asset quality metrics is immaterial.
Loan Portfolio Concentrations
FHN has a concentration of loans secured by residential real estate (47 percent of total loans), the majority of which is in the retail real estate residential portfolio (39 percent of total loans). This portfolio is primarily comprised of home equity lines and loans. Restricted real estate loans, which is primarily HELOC but also includes some first and second mortgages, is 5 percent of total loans. The remaining residential real estate loans are primarily in the construction portfolios (3 percent of total loans) with national exposures being significantly reduced since 2008.
On September 30, 2010, FHN did not have any concentrations of C&I loans in any single industry of 10 percent or more of total loans.
Allowance for Loan Losses
Management’s policy is to maintain the allowance for loan losses (“ALLL”) at a level sufficient to absorb estimated probable incurred losses in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses and loan recoveries and is decreased by charged-off loans. Reserves are determined in accordance with the ASC Contingencies Topic (“ASC 450-20”) and are composed of reserves for commercial loans evaluated based on pools of credit graded loans and reserves for pools of smaller-balance homogeneous retail and commercial loans. 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. Additionally, the ALLL includes reserves for loans determined by management to be individually impaired. Reserves for individually impaired loans are established in accordance with the ASC Receivables Topic (“ASC 310-10”). Management uses analytical models based on loss experience subject to adjustment to reflect current events, trends, and conditions (including economic considerations and trends) to assess the adequacy of the ALLL as of the end of each reporting period. The nature of the process by which FHN determines the appropriate ALLL requires the exercise of considerable judgment. See Critical Accounting Policies for more detail.
The total allowance for loan losses decreased to $719.9 million on September 30, 2010, from $944.8 million at September 30, 2009. The overall balance decrease observed when comparing the year-over-year periods has been mostly impacted by the reduction of loan portfolios from exited businesses (especially non-strategic construction lending). This portfolio shrinkage has had a direct impact on the composition of the loan portfolio from one balance sheet date to the next and thus, has had an impact on the levels of estimated probable incurred losses within the portfolio as of the end of the reporting periods. As loans with higher levels of inherent loss content have been removed from the portfolio, this has influenced the allowance estimate resulting in lower required reserves. Although the total allowance for loan losses decreased 24 percent from third quarter 2009, incremental deterioration and a resultant reserve increase was experienced for TRUPS and bank-related loans within the C&I portfolio. The ratio of allowance for loan losses to total loans, net of unearned income, decreased to 4.22 percent on September 30, 2010, from 5.10 percent on September 30, 2009.

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Also, as noted previously the total allowance for loan losses is determined in accordance with both ASC 450-10 and ASC 310-10. 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, a majority of the time, charge off the full difference between the book value and the best estimate of net realizable value.
The amount of the allowance attributable to individually impaired commercial loans was $74.8 million and $12.5 million on September 30, 2010 and 2009, respectively. This notable increase in reserves for individually impaired loans is primarily due to a changing mix of individually impaired loan types resulting in a higher proportion of impaired loans being measured using a DCF methodology than through assessment of underlying collateral values in comparison to prior periods.
The provision for loan losses is the charge to earnings that management determines to be necessary to maintain the ALLL at a sufficient level reflecting management’s estimate of probable incurred losses in the loan portfolio. The provision for loan losses decreased 73 percent to $50.0 million in third quarter 2010 from $185.0 million in 2009.
The commercial portion of the provision for loan losses decreased $122.1 million to $2.7 million for third quarter 2010 from $124.8 million for third quarter 2009. This decrease was driven by recent stabilization of certain components in the C&I portfolio as well as lower remaining Residential CRE loans at the end of third quarter 2010 which have historically demonstrated higher loss severities.
The consumer portion of the provision for loan losses decreased $12.9 million to $47.3 million for third quarter 2010 from $60.2 million for third quarter 2009. This decrease was driven by recent performance stabilization of the Consumer Real Estate portfolio and significantly lower OTC loans remaining at the end of the third quarter which had historically demonstrated higher loss severities. Additionally, the stabilization of the Permanent Mortgage portfolio can be attributed to aging of the origination vintages, significantly less inflow from OTC modifications, and improved total delinquencies.
Overall, asset quality trends are expected to improve for the remainder of 2010 when compared to 2009. Assuming current portfolio performance trends continue, the allowance for loan losses and total net charge-offs are expected to decrease when compared to 2009. This expected decrease should result from the continued reduction of loans with historically high inherent loss content as the non-strategic portfolios should continue to decline. The C&I portfolio is expected to continue to show positive trends as there has been recent aggregate improvement in the risk profile of commercial borrowers; however, volatility is possible in the short term as TRUPs and bank-related loans could deteriorate further. The Income CRE portfolio is likely to remain stressed with an expectation that net charge-offs could increase in 2011. The remaining non-strategic construction portfolios and permanent mortgages should continue to wind down and will have less of an impact on overall credit metrics in the future. Continued improvement in performance of the home equity portfolio assumes an ongoing economic recovery as consumer delinquency and loss rates are highly correlated with unemployment trends. Based on the expectations above, management believes the provision for loan losses should be relatively stable in the fourth quarter 2010.
Net Charge-offs
Net charge-offs were $111.4 million in third quarter 2010 compared with $201.7 million in third quarter 2009. The ALLL was 1.62 times annualized net charge-offs for third quarter 2010 compared with 1.17 times annualized net charge-offs for third quarter 2009. The annualized net charge-offs to average loans ratio decreased from 4.24 percent to 2.63 percent in third quarter 2010 due to a 45 percent drop in net charge-offs and an 11 percent decrease in average loans from third quarter 2009. The decrease in the level of net charge-offs from 2009 is primarily attributable to the continued reduction in problem assets within the non-strategic construction portfolios. The restricted real estate loans that were consolidated at the beginning of 2010 in conjunction with the adoption of amendments to ASC 810, contributed an additional $11.9 million of net charge-offs in third quarter 2010. Third quarter 2010 net charge-offs included the effect of an operational process change which accelerated the

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recognition of charge-offs of certain delinquent home equity loans and the charge-off of an $11 million external fraud-related loan within the C&I portfolio.
While still elevated, C&I net charge-offs declined to $23.6 million (including the $11 million external fraud-related charge-off mentioned above) in third quarter 2010 from $44.0 million in third quarter 2009 as the slow economic recovery is beginning to positively affect certain components of the C&I book. Commercial real estate construction and real estate commercial net charge-offs decreased $34.7 million in third quarter 2010 from $47.0 million in third quarter 2009. The Residential CRE portfolio accounted for a majority of the decline in net charge-offs as the non-strategic period-end balances have declined nearly 75 percent since third quarter 2009.
Performance of the retail real estate portfolios, which include home equity lines and installment loans (home equity and permanent mortgages — including restricted balances) showed some improvement in third quarter 2010 as net charge-offs declined from last year. Installment loans (including permanent mortgages) net charge-offs decreased to $35.5 million in third quarter 2010 from $41.0 million in third quarter 2009 and HELOC net charge-offs increased to $36.0 million in third quarter 2010 from $31.2 million in third quarter 2009. Some improvement in the performance of the permanent mortgage portfolio can be attributed to the aging of this portfolio and also less inflow from OTC modifications. The increase in HELOC net charge-offs is primarily due to $11.7 million of charge-offs recognized in the third quarter 2010 on loans that were consolidated on January 1, 2010 as a result of the prospective adoption of ASC 810. Generally, HELOC and home equity installment loans originated through the regional bank have performed better than those originated through the legacy national platform. The restricted real estate loans that were consolidated added an additional $11.9 million of net charge-offs in 2010. Net charge-offs of OTC, credit card receivables, and all other consumer loans decreased to $4.1 million in third quarter 2010 from $38.5 million. This decline was primarily the result of the continued wind-down of the OTC portfolio. As previously noted, the remaining period-end balance for OTC was $30.4 million as of September 30, 2010, down from $361.9 million a year ago.
While total charge-offs remain elevated due to adverse economic conditions, FHN’s methodology of charging down collateral-dependent commercial loans to net realizable value (“NRV”), fair value less costs to sell, affected charge-off trends, especially in comparison to applicable ALLL. The negative effect on charge-off trends was more significant in prior periods when FHN had a greater percentage of collateral-dependent commercial loans. Generally, classified nonaccrual commercial loans over $1 million are deemed to be individually impaired in accordance with ASC 310-10 and are assessed for impairment measurement. While the mix of individually impaired assets is shifting towards loans for which impairment is assessed using a discounted cash flow methodology (which typically hold reserves), on September 30, 2010, 47 percent of individually impaired commercial loans are considered to be collateral dependent, and therefore, are generally immediately written down to NRV with the amount of any impairment charged off instead of carrying reserves. In 2009, 93 percent of individually impaired commercial loans were collateral-dependent and carried at NRV. Collateral values are monitored and further charge-offs are taken if it is determined that the collateral values have continued to decline.
A decline in collateral values experienced due to real estate market conditions has also affected charge-off trends. Therefore, charge-offs are not only elevated (as compared to historical levels) due to the increased credit deterioration related to these loans, but also due to the increased rate at which loans are charged down to NRV because of declining collateral values. Net charge-offs related to collateral-dependent individually impaired loans were $27.5 million, or 25 percent, of total net charge-offs during third quarter 2010. Compression occurs in the ALLL to net charge-offs ratio because the ALLL is generally not replenished for charge-offs related to individually impaired collateral-dependent loans because reserves are not carried for these loans.
Nonperforming Assets
Nonperforming loans (“NPLs”) consist of impaired, other nonaccrual, and restructured loans. These, along with foreclosed real estate, excluding foreclosed real estate from government insured mortgages, represent nonperforming assets (“NPAs”). Impaired loans are those loans for which it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected and for which recognition of interest income has been discontinued. Other nonaccrual loans are residential and other retail loans on which recognition of interest income has been discontinued. Foreclosed assets are recognized at fair value less estimated costs of disposal at foreclosure.

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Nonperforming assets decreased to $919.2 million on September 30, 2010, from $1.2 billion on September 30, 2009. The nonperforming assets ratio (nonperforming assets to period-end loans and foreclosed real estate) decreased to 5.00 percent in third quarter 2010 from 6.38 percent in third quarter 2009 due to a significant decline of troubled assets from the non-strategic construction portfolios.
Nonperforming loans in the loan portfolio were $.7 billion on September 30, 2010, compared to $1.1 billion on September 30, 2009. The $.4 billion decline from 2009 resulted from a decrease in NPLs within the non-strategic construction portfolios which was partially offset by higher nonperforming loans in both the C&I and permanent mortgage portfolios.
C&I nonperforming loans increased to $245.1 million in third quarter 2010 from $147.1 million in 2009 and much of this increase is attributable to deterioration of bank-related and trust preferred loans. This component of the C&I portfolio has experienced stress 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. Nonperforming permanent mortgages increased $27.5 million from third quarter 2009 to $123.7 million. A substantial portion of these loans are jumbo product or mortgages that converted from OTC construction loans upon completion. Nonperforming held for sale loans, which were $60.6 million on September 30, 2010, are written down to lower of cost or market and have risen since 2009 because of increased repurchase activity from prior loan sales or securitizations.
The ratio of ALLL to NPLs in the loan portfolio increased to .98 times in third quarter 2010 compared to .87 times in third quarter 2009. Although this ratio increased from 2009, this ratio continues to be depressed due to FHN’s methodology of charging down individually impaired collateral dependent loans. The individually impaired collateral dependent loans that do not carry reserves were $222.6 million on September 30, 2010. Charged down individually impaired collateral-dependent loans represented 30 percent of nonperforming loans in the loan portfolio as of September 30, 2010. This methodology compresses the ALLL to nonperforming loans ratio because individually impaired loans are included in nonperforming loans, but reserves for these loans are typically not carried in the ALLL as any impairment has been charged off and the assets are carried at net realizable value. Nonperforming loans in the loan portfolio for which reserves are actually carried were $485.6 million as of September 30, 2010.
The balance of foreclosed real estate, exclusive of inventory from government insured mortgages, increased to $123.5 million as of September 30, 2010 from $100.8 million in 2009. Table 9 below provides an activity rollforward of foreclosed real estate balances for the three and nine months ended September 30, 2010 and 2009. Inflows of assets into foreclosure status and the amount disposed declined in third quarter 2010 when compared with 2009. Stabilization of collateral values in certain markets resulted in less negative valuation adjustments to existing foreclosed real estate inventory as property values were experiencing more deterioration during the 2009 as compared to a somewhat more stable aggregate environment observed during the first nine months of 2010. FHN also utilized bulk sales and auctions more in 2009 in order to liquidate older asset inventory.
Table 9 — Rollforward of Foreclosed Real Estate
                                 
    Three Months Ended   Nine Months Ended
    September 30   September 30
(Dollars in thousands)   2010   2009   2010   2009
 
Beginning balance (a)
  $ 109,287     $ 106,128     $ 113,723     $ 104,309  
Valuation adjustments
    (4,562 )     (10,429 )     (13,938 )     (29,831 )
New foreclosed property
    50,564       65,159       151,118       142,823  
Capitalized expenses
    738       3,986       3,262       4,456  
Disposals:
                               
Single transactions
    (31,104 )     (49,580 )     (127,213 )     (90,678 )
Bulk sales
    (1,453 )     (6,014 )     (3,482 )     (16,609 )
Auctions
          (8,467 )           (13,687 )
 
Ending balance, September 30 (a)
  $ 123,470     $ 100,783     $ 123,470     $ 100,783  
 
Certain previously reported amounts have been reclassified to agree with current presentation.
(a)   Excludes foreclosed real estate related to government insured mortgages.

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The level of nonperforming asset levels could fluctuate somewhat in the future as the mix of NPAs shifts from being driven by non-strategic construction loans to relationship-oriented C&I loans.
Past Due Loans and Potential Problem Assets
Past due loans are loans contractually past due 90 days or more as to interest or principal payments, but which have not yet been put on nonaccrual status. Loans in the portfolio 90 days or more past due decreased to $96.8 million on September 30, 2010, from $126.8 million on September 30, 2009, primarily led by reductions in the consumer real estate loans. Loans 30 to 89 days past due decreased $97.7 million to $210.7 million on September 30, 2010 with the decrease primarily driven by the construction portfolios.
Potential problem assets represent those assets where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Office of the Comptroller of the Currency (“OCC”) for loans classified substandard. Potential problem assets in the loan portfolio, which includes loans past due 90 days or more but excludes nonperforming assets, decreased to $1.2 billion, or 7 percent of total loans, on September 30, 2010, from $1.7 billion on September 30, 2009. The current expectation of losses from potential problem assets has been included in management’s analysis for assessing the adequacy of the allowance for loan losses.
Troubled Debt Restructuring and Loan Modifications
As part of our ongoing risk management practices, FHN attempts to work with borrowers when necessary, to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. In a situation where an economic concession has been granted to a borrower that is experiencing financial difficulty, FHN identifies and reports that loan as a Troubled Debt Restructuring (“TDR”). FHN considers regulatory guidelines when restructuring loans to ensure that prudent lending practices are followed. As such, qualification criteria and payment terms consider the borrower’s current and prospective ability to comply with the modified terms of the loan. Additionally, FHN structures loan modifications to amortize the debt within a reasonable period of time.
As part of our credit risk management governance processes, our Loan Rehab and Recovery Department (“LRRD”) is responsible for managing most commercial and commercial real estate relationships with borrowers whose financial condition has deteriorated to such an extent that the credits are being considered for impairment, classified as substandard or worse, placed on nonaccrual status, foreclosed or in process of foreclosure, or in active or contemplated litigation. LRRD has the authority and responsibility to enter into workout and/or rehabilitation agreements with troubled commercial borrowers in order to mitigate and/or minimize the amount of credit losses recognized from these problem assets. In accordance with ASC 310-40-15, no single characteristic or factor, taken alone, determines whether a modification is a TDR and each commercial workout situation is unique and is evaluated on a case-by-case basis. During 2009, continued housing value declines and economic stress impacted our commercial portfolios which experienced higher levels of losses. Broad-based economic pressures, including further reductions in spending by consumers and businesses, also continued to impact other commercial credit quality indicators. The volume of commercial workout strategies utilized by LRRD to mitigate the likelihood of loan losses has increased commensurate with the commercial credit quality deterioration experienced during this recent economic downturn and housing crisis. While every circumstance is different, LRRD will generally use forbearance agreements for commercial loan workouts. Other workout strategies utilized by LRRD include principal paydowns/payoffs, obtaining additional collateral, modification of interest payments or entering into short sale agreements. Each commercial workout situation is unique and evaluated on a case-by-case basis.
Senior credit management tracks loans classified as Watch or worse (internally assigned probability of default grades 12 through 16) and performs periodic reviews of such assets to understand FHN’s financial position, the most recent financial results of the borrower, and the associated loss mitigation approaches and/or exit plans that the loan relationship and/or loan workout/rehab officer has developed for those relationships. After initial identification, relationship managers prepare regular updates for review and discussion by more senior business line and credit officers.

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The ultimate effectiveness of rehab and workout effo