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First Horizon Mortgage Unit to Either Be Sold or Closed

Morgan Keegan issue report on investor meeting

May 15, 2008

By staff

Executives of First Horizon National Corp. told investors they were committed to either selling or shutting down the mortgage unit this year.

Morgan Keegan & Co. Inc. said it hosted a "well-attended" investor meeting with First Horizon management in Memphis, where the company is headquartered. Executives of the lender provided updates on credit, focusing on the ongoing performance of the troubled home-builder finance and home-equity portfolios.

Analysts at Morgan Keegan said First Horizon has been among the most-aggressive banks in charging off and writing down non-performing loans. Around $90 million in one-time close holding have been charged off, and deterioration has been concentrated in California and Florida.

The portfolio of one-time close loans is around 5,000 loans for $1.8 billion, and it expected to be reduced to around $0.6 billion by the end of this year.

The $5.5 billion HEL portfolio as of March 31 is project to fall by $0.7 billion by Dec. 31, 2008.

Morgan Keegan analyst Bob Patten noted the company is expected to either announce a sale of the mortgage unit at any time or accelerate a shutdown over the next four to six months.

A source inside First Horizon has indicated that Metropolitan Life Insurance Co. has recently performed due diligence at First Horizon Home Loans headquarters in Irving, Texas.

In the event of a shutdown, the origination platform would be quickly disbanded while the dismantling of the servicing platform would take place over a longer period, Patten wrote. Severance packages are estimated at between $80 million to $100 million.

"Management is 100 percent committed to this objective and we do not think the market has factored in what a sale of the mortgage company could mean in terms of accretion to earnings, liquidity and capital.," the report stated.

The report indicated a sale would include 230 "footprint offices," the origination platform and some of the company's mortgage servicing rights. First Horizon would likely maintain 21 "in footprint Tennessee offices,"

Around 2,200 employees out of a total mortgage work force of 3,650 would reportedly by impacted by a move.

"We believe that exiting the mortgage company makes [First Horizon National] a much simpler company to analyze and value," Patten wrote in the report. "We reiterate our outperform recommendation."

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