FINANCIAL INFORMATION AND DISCUSSION

TABLE OF CONTENTS

FIRST HORIZON NATIONAL CORPORATION

SELECTED FINANCIAL AND OPERATING DATA

NM – not meaningful
* Net of unearned income.
See accompanying notes to consolidated financial statements.
Certain previously reported amounts have been reclassified to agree with current presentation.

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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) is a national financial services institution. From a small community bank chartered in 1864, FHN has grown to be one of the top 30 largest bank holding companies in the United States in terms of asset size.

FHN’s 10,000 employees provide a broad array of financial services to individual and business customers through hundreds of offices located across the United States.

AARP and Working Mother magazine have recognized FHN as one of the nation’s best employers. FHN also was named one of the nation’s 100 best corporate citizens by CRO magazine.

FHN provides a broad array of financial services to its customers through three national businesses. The combined strengths of our businesses create an extensive range of financial products and services. In addition, the corporate segment provides essential support within the corporation.

For the purpose of this management’s discussion and analysis (MD&A), earning assets have been expressed as averages, and loans have been disclosed net of unearned income. The following financial discussion should be read with the accompanying consolidated financial statements and notes. A glossary is included at the end of the MD&A to assist with terminology.

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

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economic and business conditions; recession or other economic downturns, expectations of and actual timing and amount of interest rate movements, including the slope of the yield curve (which can have a significant impact on a financial services institution); market and monetary fluctuations; inflation or deflation; customer and investor responses to these conditions; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geopolitical developments including possible terrorist activity; natural disasters; effectiveness of FHN’s hedging practices; technology; demand for FHN’s product offerings; new products and services in the industries in which FHN operates; and critical accounting estimates. Other factors are those inherent in originating, selling and servicing loans including prepayment risks, pricing concessions, fluctuation in U.S. housing prices, fluctuation of collateral values, and changes in customer profiles. Additionally, the actions of the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), Financial Industry Regulatory Authority (FINRA), and other regulators; regulatory and judicial proceedings and changes in laws and regulations applicable to FHN; and FHN’s success in executing its business plans and strategies and managing the risks involved in the foregoing, could cause actual results to differ. FHN assumes no obligation to update any forward-looking statements that are made from time to time. Actual results could differ because of several factors, including those presented in this Forward-Looking Statements section, in other sections of this MD&A, in Item 1A of FHN’s 2007 annual report on Form 10-K, and in other parts of that annual report.

FINANCIAL SUMMARY

For 2007 FHN reported a loss of $170.1 million, or $1.35 diluted loss per share compared to earnings of $462.9 million, or $3.62 diluted earnings per share in 2006.

Comparisons between reported earnings are directly and significantly affected by a number of factors in both 2007 and 2006. Several significant items including housing and credit market disruptions, increased provisioning, restructuring, repositioning and efficiency initiatives, and goodwill impairment impacted FHN’s performance in 2007. The sale of FHN’s national merchant processing business and related transactions had a significant impact on 2006 results. Further details on these and other items of significance impacting 2006 are presented below.

Assessment of the results of operations for 2007 requires an understanding of the causes and effects of dislocations within credit markets which existed during the latter half of the year. As higher levels of borrower defaults on adjustable rate loans were experienced throughout the industry in 2007 (primarily occurring upon repricing of the loans to higher interest rates), investor appetite for all types of credit structures was severely curtailed. As a result of increasing credit risk aversion by investors, coupon rates for all credit structures increased and FHN was adversely impacted by spread widening. Additionally, a combination of credit risk aversion and an increased supply of available residential real estate triggered a decline in collateral values within certain housing markets.

Within Mortgage Banking operations, the widening of credit spreads resulted in declines in gain on sale margins. For assets that remained on the Consolidated Statements of Condition which are accounted for at fair value or the lower of cost or market, the wider credit spreads were utilized in valuation methodologies and produced lower asset values in comparison to prior periods, including lower of cost or market adjustments to the loan warehouse. Further, estimated market values for less liquid retained interests declined due to the higher discount rates and more emphasis on broker price discovery in valuations.

Similarly, the Retail/Commercial Banking segment experienced limited demand for consumer loan sales. This segment also recognized adjustments to reflect the market value of consumer loans held for sale and lower values of residual interests related to prior securitizations. Additionally, given the market’s reduced appetite for credit products, structured finance fees, including fees from pooled trust preferred transactions, within the Capital Markets segment were adversely affected by lower transaction volumes and wider credit spreads.

The increase in provision for loan losses in 2007 compared to 2006 was largely attributable to recognition of inherent losses within its residential construction portfolios – one-time close and homebuilder – from discontinued product structures and higher-risk national markets such as Florida, California, Virginia, Georgia and Nevada.

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Following an updated valuation based on strategic cash flow projections and market-to-book values, FHN incurred a fourth quarter 2007 non-cash pre-tax impairment charge of $71.1 million for the write- down of goodwill associated with the Mortgage Banking business segment. FHN engaged an independent valuation firm to assist in computing the fair value estimate for the impairment assessment by utilizing two separate valuation methodologies and applying a weighted average to each methodology in order to determine fair value for the Mortgage Banking business segment. The valuation methodologies utilized included a discounted cash flow valuation technique and a comparison of the average price to book value of comparable businesses.

Throughout 2007, FHN conducted an ongoing, company-wide review of business practices with the goal of improving overall profitability and productivity. Management announced its intention to sell 34 full- service First Horizon Bank branches in its national banking markets, as well as plans to right size First Horizon Home Loans’ mortgage banking operations and balance sheet utilization and to downsize national lending operations, in order to redeploy capital to higher-return businesses. Total net charges of $98.7 million were recognized in 2007 related to restructuring, repositioning and efficiency initiatives. See Table 1 for further details.

Also impacting results in 2007 were $55.7 million of expenses related to the recognition of a contingent guarantee related to VISA’s litigation matters. Any expense recognized related to this contingent guarantee is expected to reverse upon VISA’s anticipated completion of its initial public offering.

Return on average shareholders’ equity and return on average assets for 2007 were (7.02) percent and (.45) percent, respectively, compared to 19.1 percent and 1.19 percent in 2006. Total assets were $37.0 billion and shareholders’ equity was $2.1 billion on December 31, 2007, compared to $37.9 billion and $2.5 billion, respectively, on December 31, 2006.

FHN’s performance in 2006 was impacted by a gain related to the divestiture of merchant processing operations and transactions through which the incremental capital provided by the divestiture was utilized. Additionally, performance in 2006 was impacted by estimated settlement costs related to a class action lawsuit, various other transactions and accounting matters.

On March 1, 2006, FHN sold its national merchant processing business for an after-tax gain of $209 million. This divestiture was accounted for as a discontinued operation, and accordingly, current and prior periods were adjusted to exclude the impact of merchant operations from the results of continuing operations. In tandem with the merchant sale, FHN purchased 4 million shares of its common stock to minimize the potentially dilutive effect of the merchant divestiture on future earnings per share. Also included in results from continuing operations are net securities losses of $65.6 million, predominantly related to repositioning approximately $2.3 billion of investment securities, net of gains from the sale of MasterCard, Inc. securities and venture capital investments.

Various other items impacted results from continuing operations in 2006, including estimated settlement costs of $21.9 million for a class action lawsuit (see also Note 18 – Restrictions, Contingencies and Other Disclosures for additional detail). In addition, revenues in 2006 were negatively impacted by a $15.6 million cumulative adjustment related to derivative transactions used in hedging strategies to manage interest rate risk that management determined did not qualify for hedge accounting under the “short cut” method (see also Note 25 – Derivatives and Off-Balance Sheet Arrangements for additional detail). A pre-tax loss of $12.7 million was recognized from the sale of home equity lines of credit (HELOC) upon which the borrowers had not drawn funds. The loss represented deferred loan origination costs, generally recognized over the life of the loan, which were recognized when the line of credit was sold. Retail/Commercial banking experienced losses due to certain misrepresentations within the construction lending business and due to a customer initiated deposit scheme in the full-service banking markets. Mortgage banking experienced foreclosure losses and other expenses related to nonprime mortgage loans. In addition, expenses associated with devaluing collectible coin related inventories, consolidating operations and closing offices, incremental expenditures on technology and compensation expense related to early retirement, severance and retention were recognized in 2006.

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BUSINESS LINE REVIEW

Retail/Commercial Banking

Pre-tax income decreased 52 percent to $208.4 million in 2007 compared to $434.4 million in 2006. Total revenues decreased 7 percent, or $98.6 million, in 2007.

Net interest income decreased 5 percent to $870.4 million in 2007 from $920.0 million in 2006. The decrease in net interest income is primarily attributable to additional nonaccrual construction loans and the contracting housing market which created competitive pricing pressure. Net interest margin in Retail/Commercial Banking was 3.89 percent in 2007 compared to 4.21 percent in 2006 primarily driven by additional nonaccrual construction loans and higher deposit rates.

Noninterest income declined 11 percent, or $49.0 million, in 2007. Fees from deposit service charges increased 4 percent, or $6.7 million, primarily reflecting increased NSF charges and corporate cash management fees as well as deposit growth. Revenue from loan sales and securitizations decreased $22.7 million as the volume of loans delivered into the secondary markets declined. Also impacting noninterest income in 2007 were $15.7 million of unfavorable incremental market adjustments primarily related to consumer lending activities. Noninterest income from insurance commissions declined $15.1 million primarily due to the sale of two insurance subsidiaries in 2006.

The provision for loan losses increased to $265.2 million in 2007 from $83.2 million in 2006. This increase primarily reflects deterioration in national homebuilder and one-time close construction loans.

Noninterest expense was $795.5 million in 2007 compared to $850.1 million in 2006. In 2007 noninterest expense declined from a combination of reduced variable compensation costs on loan originations as well as the effects of efficiency initiatives. Prior year expense reflected costs associated with inventory valuation and closing of retail sites in the coin commodity business; incremental costs associated with national businesses; losses due to certain misrepresentations within the construction lending business and due to a customer initiated deposit scheme in the full-service banking markets, consolidation of remittance processing operations and office closings; and early retirement and severance costs.

Mortgage Banking

Pre-tax loss was $336.0 million in 2007 compared to pre-tax income of $3.2 million in 2006. Total revenues decreased 65 percent or $311.0 million in 2007 to $167.7 million.

Net interest income decreased 18 percent to $76.5 million in 2007 from $93.4 million in 2006. Net interest income was negatively impacted by a 7 percent decline in the average warehouse and the flattening and inversion of the yield curve which resulted in compression of the spread on the warehouse. Spread on the warehouse was 1.28 percent in 2007 compared to 1.42 percent for 2006. Also negatively impacting net interest income was the cost to fund a larger balance sheet and a decrease in borrower funds held as servicer. Net interest income was favorably impacted by $15.7 million due to the reclassification of $175 million from excess mortgage servicing rights to trading securities in second quarter 2007. This reclassification was the outcome of capital management initiatives which resulted in modification of the Pooling and Servicing Agreements (PSA) for private (non-GSE) securitizations which were active as of March 31, 2007. The modifications separated master servicing from retained yield. Offsetting the increase in net interest income was a decline in servicing fees and a decline in the change of mortgage servicing rights (MSR) value due to runoff.

Noninterest income decreased 76 percent to $91.2 million in 2007 compared to $385.3 million in 2006. Noninterest income consists primarily of mortgage banking-related revenue, net of costs, from the origination and sale of mortgage loans, fees from mortgage servicing and changes in fair value of MSR net of hedge gains or losses.

Mortgage loan origination volumes increased 1 percent to $27.4 billion in 2007 from $27.1 billion in 2006, as home purchase-related originations declined 2 percent, or $384.7 million, and refinance activity increased 6 percent, or $645.5 million. Loans delivered into the secondary market decreased 2 percent to $26.3 billion from $26.9 billion. Net revenue from origination activity decreased 62 percent to $118.4 million from $308.1 million in

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2006 reflecting declines on gain on sale margins experienced in 2007 as a result of secondary market disruptions causing significant spread-widening on ARM and nonagency eligible production throughout the second half of the year.

Including the sale of approximately $7 billion of the servicing portfolio in fourth quarter 2007, the servicing portfolio grew 2 percent to $103.7 billion on December 31, 2007, from $101.4 billion on December 31, 2006. The sale reduced servicing assets by approximately $121 million. Total fees associated with mortgage servicing decreased 5 percent to $311.4 million from $328.3 million as the change in PSA reduced income by $36.2 million offset by an increase in the average servicing portfolio. Servicing hedging activities and changes in MSR value other than runoff negatively impacted net servicing revenues by $133.5 million in 2007 as compared to 2006. In 2007, there was a reduction of approximately $135 million in the carrying value of servicing assets. The ongoing disruptions in the mortgage market resulted in more emphasis on third party broker price discovery and, when available, observable market trades in valuation modeling. Additionally, the change in the value of MSR due to runoff increased net revenues by $43.9 million in 2007 as compared to 2006 of which $19.7 million is attributable to the change in PSA mentioned above.

Noninterest expense was $503.8 million in 2007 compared to $475.6 million in 2006. This increase includes goodwill impairment of $71.1 million recognized in 2007 due to an updated valuation based on strategic cash flow projections and market-to-book values. Additionally, noninterest expense was impacted by lower personnel costs, other efficiency initiatives and various legal matters.

Capital Markets

Pre-tax income decreased from $47.9 million in 2006 to $29.4 million in 2007. Total revenues were $330.6 million in 2007 compared to $380.0 million in 2006.

Revenues from products other than fixed income decreased $90.8 million to $124.4 million in 2007. Revenues from other products include fee income from activities such as structured finance, equity research, investment banking, loan sales and portfolio advisory. This decrease was primarily due to decreased fees from structured finance and equity research activities. Revenues from products other than fixed income represented 36 percent and 54 percent, respectively, of total product revenues in 2007 and 2006. Revenues from fixed income sales increased $37.5 million to $217.7 million in 2007 primarily reflecting the impact of Federal Reserve rate reductions in the second half of 2007.

Noninterest expense decreased 9 percent, or $30.9 million, to $301.2 million in 2007, primarily due to variable compensation related to the decrease in other product revenues.

Corporate

The Corporate segment’s results yielded a pre-tax loss of $217.4 million in 2007 compared to a pre-tax loss of $147.4 million in 2006. See restructuring, repositioning and efficiency initiatives for further details of the $98.7 million negative impact in 2007 for these initiatives. Noninterest expense also included $55.7 million associated with the recognition of a contingent guarantee related to VISA’s litigation matters. Any expense recognized is expected to reverse upon VISA’s anticipated completion of its IPO. Net security losses were $1.2 million in 2007, primarily related to changes in the investment portfolio that were made to compensate for loan growth in first quarter which were offset by impairment charges of $10.4 million related to securities that, in the opinion of management, have been other-than- temporarily impaired. Net security losses were $65.6 million in 2006, primarily resulting from the restructuring of the investment portfolio in first quarter 2006, net of gains from the sale of MasterCard Inc. securities and venture capital investments. Also impacting 2006 was the negative $15.6 million cumulative impact of derivative transactions used in hedging strategies to manage interest rate risk that management determined did not qualify for hedge accounting under the “short cut” method. In addition, revenue included $7.0 million in 2007 and $15.0 million in 2006 related to deferred compensation plans, which was offset by a related $11.0 million in 2007 and $20.4 million in 2006 in expense associated with these plans.

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RESTRUCTURING, REPOSITIONING, AND EFFICIENCY INITIATIVES

Throughout 2007, FHN conducted an ongoing, company-wide review of business practices with the goal of improving its overall profitability and productivity. In 2007 management announced its intention to sell 34 full-service First Horizon Bank branches in its national banking markets, as well as plans to right size First Horizon Home Loans’ mortgage banking operations and to downsize FHN’s national lending operations, in order to redeploy capital to higher-return businesses. Net costs recognized in the twelve months ended December 31, 2007 related to restructuring, repositioning, and efficiency activities were $98.7 million, including $52.4 million of losses related to asset impairments. Aggregate gains realized in 2007 in relation to the disposition of 15 First Horizon Bank branches of $15.7 million are included in noninterest income, while the transaction costs recognized in the fourth quarter of 2007 from selling mortgage servicing rights are recorded as a reduction of mortgage banking income in noninterest income. Provision for loan losses of $7.7 million were incurred during 2007 in relation to the divestiture of a non-strategic loan portfolio, while all other costs incurred in relation to the restructuring, repositioning, and efficiency initiatives implemented by management are included in noninterest expense. All costs associated with the initiatives implemented in 2007 are recorded as unallocated corporate charges within the Corporate segment. Significant expenses for 2007 resulted from the following actions:

In total, $.2 million in gains were recognized in first quarter 2008 in relation to the divestiture of ten First Horizon Bank branches in Texas. The remaining nine branches in Atlanta have not been sold; see Note 18 – Restrictions, Contingencies and Other Disclosures for additional information. Additionally, pre-tax expenses of approximately $5 to $10 million are anticipated to be recognized in relation to the continuing implementation of the existing restructuring, repositioning, and efficiency initiatives through first quarter 2008. Settlement of the obligations arising from current initiatives will primarily occur in 2008 and will be funded from operating cash flows. The assets and liabilities related to the remaining First Horizon Bank branches to be sold are reflected as held-for-sale on the Consolidated Statements of Condition. The aggregate carrying amounts of transferred loans, deposits, other assets and other liabilities were $290 million, $230 million, $16 million, and $23 million, respectively, as of December 31, 2007. The effect of suspending depreciation on assets held for sale was immaterial to FHN’s results of operations for 2007. As a result of impairment assessments completed in relation to two First Horizon Bank branches sold, a goodwill writedown of $13.0 million and a writedown of core deposit intangibles of $.9 million were recognized in 2007. The goodwill impairment loss was calculated using the sales price for the associated branches. The recognition of these impairment losses will have no effect on FHN’s debt covenants.

Additional asset impairment losses of approximately $9.3 million were recognized in 2007 for premises and equipment associated with facilities undergoing consolidation. The fair value of such property was determined based on appraised value or discounted cash flows as of the assessment date. Other asset impairment losses recognized in 2007 consisted of $11.7 million associated with the exit of the collectible coin merchandising business and $17.4 million in relation to the discontinuance of technology projects. The impairment losses related to such intangible assets, premises and equipment, and other assets, which are recorded as unallocated corporate

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charges within the Corporate segment, are included in goodwill impairment and all other expense on the Consolidated Statements of Income.

As part of its strategy to reduce its national real estate portfolio, FHN announced in January 2008 that it was discontinuing national homebuilder and commercial real estate lending through its First Horizon Construction Lending offices. In addition, management continues to explore additional initiatives for profitability improvement, including opportunities for balance sheet repositioning and the redeployment of capital which may include targeted reductions of MSR.

Charges related to restructuring, repositioning, and efficiency initiatives for the twelve months ended December 31, 2007, are presented in the following table based on the income statement line item affected. See Note 26 – Restructuring, Repositioning, and Efficiency and Note 2 – Acquisitions/Divestitures for additional information.

Table 1  -  Restructuring, Repositioning, and Efficiency Initiatives

INCOME STATEMENT REVIEW – 2007 COMPARED TO 2006

Total consolidated revenue decreased 17 percent to $1,800.6 million from $2,163.8 million in 2006, primarily due to the contraction in mortgage banking revenue and asset quality trends associated with the downturn experienced in the housing industry, as well as, the effects of restructuring, repositioning, and efficiency initiatives. A more detailed discussion of the major line items follows.

NET INTEREST INCOME

Net interest income declined to $940.6 million in 2007 compared to $996.9 million in 2006 as earning assets declined 2 percent to $33.4 billion and interest-bearing liabilities declined 1 percent to $28.9 billion in 2007. See also the Consolidated Average Balance Sheet and Related Yields and Rates table.

The activity levels and related funding for FHN’s mortgage production and servicing and capital markets activities affect the net interest margin. These activities typically produce different margins than traditional banking activities. Mortgage production and servicing activities can affect the overall margin based on a number of factors, including the shape of the yield curve, the size of the mortgage warehouse, the time it takes to deliver loans into the secondary market, the amount of custodial balances, and the level of MSR. Capital Markets’ activities tend to compress the margin because of its strategy to reduce market risk by economically hedging a portion of its inventory on the balance sheet. As a result of these impacts, FHN’s consolidated margin cannot be readily

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compared to that of other bank holding companies. Table 2 details the computation of the net interest margin for FHN for the last three years.

The consolidated net interest margin was 2.82 percent for 2007 compared to 2.93 percent for 2006. This compression in the margin occurred as the net interest spread decreased to 2.19 percent from 2.31 percent in 2006 while the impact of free funding increased from 62 basis points to 63 basis points. The decline in the margin is primarily attributable to competitive pricing pressure in a contracting national housing market, additional nonaccrual construction loans and higher deposit rates in Tennessee markets.

Table 2  -  Net Interest Margin

Certain previously reported amounts have been reclassified to agree with current presentation.

Going forward, the net interest margin is expected to remain relatively stable as the steepening yield curve favorably impacts the mortgage warehouse and lower-margin businesses, including the First Horizon Bank branches and national lending, are reduced while declining short-term rates adversely impact deposit spreads. The margin will remain dependent on FHN’s evolving business mix.

Table 3 shows how the changes in yields or rates and average balances compared to the prior year affected net interest income.

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Table 3  -  Analysis of Changes in Net Interest Income