FHN Reports Financial Results for Third Quarter 2004
- Retail/Commercial Banking pre-tax earnings grew 55 percent - Loans grew 22 percent and asset quality continued to improve - Mortgage Banking origination revenue reflects a substantially lower level of industry-wide refinance activity - Capital Markets' fixed income sales declined due to anticipation of rising interest rates - Corporate segment earnings improved due to reduced discretionary spending and securities gains - Return on equity was 23.7 percent and return on assets was 1.63 percent
MEMPHIS, Oct. 21, 2004 (PRIMEZONE) -- First Horizon National Corporation (NYSE:FHN) announced earnings for third quarter 2004 of $113.6 million, or $.89 diluted earnings per share compared to earnings of $118.3 million, or $.91 diluted earnings per share for third quarter 2003. For the nine months ended September 30, 2004, earnings were $351.3 million, or $2.73 diluted earnings per share compared to $355.7 million, or $2.72 diluted earnings per share for 2003.
"Our third quarter earnings, relatively flat compared to last year's third quarter which was achieved during a robust environment, reflect our healthy business mix and rebalanced earnings stream," said Chairman and CEO Ken Glass. "This was most evident by the strong performance of Retail/Commercial Banking, which represented 61 percent of pretax earnings, helping to offset the expected decline in mortgage refinance activity and the unexpected continuation of the slow fixed income security business."
Return on average shareholders' equity and return on average assets were 23.7 percent and 1.63 percent, respectively, for third quarter 2004 compared to 25.9 percent and 1.71 percent for third quarter 2003. For the nine months ended September 30, 2004, return on average shareholders' equity and return on average assets were 24.9 percent and 1.76 percent, respectively, compared to 26.7 percent and 1.88 percent for 2003. Total assets were $28.3 billion, shareholders' equity was $2.0 billion and market capitalization was $5.4 billion on September 30, 2004, compared to $25.5 billion, $1.9 billion and $5.4 billion, respectively, on September 30, 2003.
Glass concluded, "We continue to implement our long-term strategy for growth and we are excited about the progress being made in our national expansion. We remain focused on generating long-term shareholder value consistent with our historic returns including an average EPS growth of 16 percent over the last 5 years."
QUARTERLY PERFORMANCE HIGHLIGHTS
Retail/Commercial Banking
Pre-tax earnings grew from $67.5 million to $104.6 million, or 55 percent over third quarter 2003. This growth resulted from our national expansion initiatives, increased penetration in our Tennessee markets, improved asset quality, fee income growth and efficiency improvements.
Loan growth of 22 percent reflected strength in consumer and single-family residential construction lending, which are leveraging FHN's national footprint, as well as commercial loan growth. Deposit account balances grew 5 percent compared to third quarter 2003; however, that growth was impacted by the divestiture of First National Bank of Springdale (FNB) on December 31, 2003, which had deposits of approximately $294 million in third quarter 2003. Compared to second quarter 2004, deposits grew at an annualized growth rate of 8 percent. As a result of this product growth net interest income related to retail/commercial banking activities grew 17 percent over third quarter last year.
Noninterest income grew 9 percent to $115.2 million and represented 39 percent of revenues. Merchant processing fees grew 26 percent primarily from an increase in travel activity due to an improving economy. As previously disclosed, the growth in noninterest income was lower than expected due to the delay of an anticipated third quarter loan securitization until fourth quarter. This delay was the result of a technical error in the documentation of certain home equity lines of credit within a delivery channel, which has been a source for loans securitized on a quarterly basis during 2004.
Net charge-offs fell to 22 basis points, reflecting the reduced risk in the loan portfolio due to a change in the loan mix and further economic recovery, which resulted in a $6.2 million reduction in provision for loan losses. Noninterest expense increased $5.1 million primarily due to development in the national markets including equity lending, single family residential construction lending and expansion in Middle Tennessee and Northern Virginia. The efficiency ratio for retail/commercial banking activities has consistently shown improvement over the last five quarters as discretionary spending has been reduced and the returns on last year's investments and operational improvements continue to pay off.
Mortgage Banking
Pre-tax earnings decreased from $102.4 million to $37.7 million, primarily driven by declining originations due to a drop in refinancing activity and competitive pricing pressures. Partially offsetting the decline in originations was an improvement in servicing profitability due to reduced impairment expense and the growth in the servicing portfolio coupled with a more efficient servicing operation.
Mortgage origination volume fell $7.6 billion, or 52 percent to $6.8 billion, as refinancing volume declined from 72 percent of total originations in third quarter 2003 to 31 percent this quarter. In addition, loans delivered during the period decreased by $10.8 billion. This decrease, combined with other market factors, reduced origination revenue by approximately $93 million. Additionally, margins on loans sold decreased as competitive pressures in the market unfavorably impacted origination revenue by approximately $8 million. Overall, origination revenues decreased $100.7 million. Although total origination volumes were down, the large reduction in refinancings was partially offset by improved home purchase originations. Home purchase originations increased 18 percent as the housing market continued to improve.
Net servicing revenues improved $51.7 million from a loss of $26.1 million in 2003 to $25.6 million net revenue in 2004. Total fees associated with mortgage servicing increased 33 percent to $59.7 million due to growth in the servicing portfolio and the favorable impact of lower prepayment activity. The mortgage-servicing portfolio was $81.6 billion on September 30, 2004, an increase of 21 percent from $67.6 billion on September 30, 2003. The portfolio at September 30, 2004, includes approximately $8 billion of servicing rights acquired in third quarter 2004. MSR net hedge gains decreased 18 percent to $16.3 million from $19.9 million; however, MSR impairment decreased $34.4 million, triggered by the impact that rising interest rates had on mortgage prepayments in the servicing portfolio.
Noninterest expense improved $6.0 million reflecting the overall decline in activity levels. Additionally, as a result of reduced refinancing activity and improvements in processes and technology, productivity improved resulting in a 24 percent reduction of servicing costs per loan.
Capital Markets
Pre-tax earnings declined from $34.5 million to $16.9 million primarily due to a reduction in fixed income securities sales, net of a related decline in commissions and incentives. Significant doubts and uncertainty within the investment community regarding interest rates and other economic factors have caused fixed income investors to delay their purchases. In addition to this impact, last year's third quarter was favorably impacted by higher cash flows from the prepayments of mortgage-backed products and agency calls. As a result of these impacts, revenues from fixed income sales to depository and non-depository investors fell $36.0 million. Revenues from other fee sources include fee income from activities such as investment banking, equity research, portfolio advisory and the sale of bank owned life insurance. These revenues decreased 16 percent from last year's third quarter revenues primarily as a result of lower revenue in structured finance transactions.
Revenues from depository institutions represented 33 percent of capital markets noninterest income in 2004 compared to 43 percent in 2003, and revenues from non-depository institutions represented 25 percent of income in 2004 compared to 24 percent in 2003. Revenues from other products and services represented 42 percent of capital markets noninterest income in 2004 compared to 33 percent in 2003.
Noninterest expense decreased 29 percent or $26.1 million, primarily due to lower personnel expense, reflecting the decline in commissions and incentives.
Corporate
The Corporate segment improved from a $24.2 million pre-tax loss last year to an $11.0 million pre-tax gain this quarter. Reduced discretionary spending helped lower expenses by $17.3 million to $11.4 million. Third quarter 2004 net security gains include $14.9 million of gains from sales of investment securities as the investment portfolio size was reduced to balance an increase in loans held for sale resulting from a delay in the closing of a securitization. In third quarter 2003 sales of lower-yielding securities in the investment portfolio resulted in net losses of $5.9 million. Net gains from equity investments of $4.8 million were realized in third quarter 2004 primarily due to the liquidation of a holding company investment. This compares to net gains of $10.1 million last year primarily resulting from the sale of a venture capital investment. Net interest income improved $3.0 million since last year's third quarter due to balance sheet restructurings.
INCOME STATEMENT
Revenue
Total revenue decreased 10 percent to $545.9 million in third quarter 2004 from $606.4 million in third quarter 2003. Noninterest income provides the majority of FHN's revenue and contributed 60 percent to total revenue in third quarter 2004 compared to 65 percent in third quarter 2003.
Net Interest Income
During third quarter 2004 net interest income increased 2 percent to $218.3 million from $214.1 million in 2003. Net interest income was positively impacted by growth in the retail and commercial lending portfolios, as loans now comprise 66 percent of the earning asset base compared to 56 percent in third quarter 2003. Some of this positive impact was offset by an increase in funding costs as noninterest-bearing deposits decreased 20 percent, primarily due to lower custodial balances in mortgage banking. In addition, FNB, which was divested on December 31, 2003, contributed $2.3 million to net interest income in third quarter 2003. The net interest margin was 3.60 percent for third quarter 2004 compared to 3.68 percent for third quarter 2003. The net interest margin compressed 8 basis points as the increase in total funding costs (22 basis points) more than offset the increase in the yield on average earning assets (18 basis points).
In the near-term, a modest compression of the net interest margin is expected as the proceeds of the planned fourth quarter securitization of loans are reinvested in the investment portfolio. Over the long-term, FHN's strategies to manage the interest rate sensitivity of the balance sheet position are designed to allow the net interest margin to improve in a higher interest rate environment.
Noninterest Income
Third quarter 2004 noninterest income decreased 17 percent to $327.6 million from $392.3 million in 2003. The decline in noninterest income primarily resulted from the contraction in mortgage banking and capital markets revenues, which fell $89.6 million in total. All other noninterest income categories grew 21 percent, or $24.9 million. This growth was led by an increase of $16.2 million in securities gains and an increase of $4.0 million in merchant processing noninterest income.
Noninterest Expense
Total noninterest expense for third quarter 2004 decreased 11 percent to $365.6 million from $409.9 million in 2003. Noninterest expense in third quarter 2003 included $22.6 million of discretionary spending on performance enhancing initiatives.
Personnel expense decreased 11 percent to $210.1 million from $235.5 million in 2003 primarily due to lower activity levels in Capital Markets in third quarter 2004.
Other noninterest expense decreased 21 percent to $80.8 million in 2004 from $101.9 million in 2003. The improvement in other noninterest expense primarily reflects $18.7 million of discretionary spending on performance enhancing initiatives in third quarter 2003.
Provision for Loan Losses/Asset Quality
The provision for loan losses decreased 39 percent to $10.1 million in 2004 compared to $16.3 million in 2003. An analytical model based on historical loss experience adjusted for current events, trends and economic conditions is used by management to determine the amount of provision to be recognized and to assess the adequacy of the loan loss allowance. The improvement in third quarter 2004's provision is related to the positive shift in the mix of the loan portfolio and specific allocations related to large commercial credits. The risk profile of the retail loan portfolio improved as the mix shifted to a greater concentration of high credit score products. The risk profile of the commercial loan portfolio improved as indicated by current lower levels of watch and classified loans. Net charge-offs decreased to $8.6 million in third quarter 2004 compared to $14.0 million in third quarter 2003. Net charge-offs were impacted by improvement in both the retail and commercial loan portfolios. Nonperforming loans in the loan portfolio were $45.6 million on September 30, 2004, compared to $48.4 million on September 30, 2003. (See the table on A-5 for an analysis of the allowance for loan losses and details on nonperforming assets and the table on A-6 for asset quality ratios).
AVERAGE BALANCE SHEET
Total average assets increased 1 percent to $27.7 billion for third quarter 2004. Total loans increased 22 percent to $15.9 billion as retail loans increased 30 percent and commercial loans grew 12 percent. Loans held for sale decreased 29 percent to $4.0 billion. Interest-bearing core deposits increased 6 percent to $6.1 billion. Total core deposits decreased 7 percent primarily due to lower mortgage escrow balances and the divestiture of FNB, while Retail/Commercial Banking core deposits increased 5 percent. Purchased funds increased 10 percent to $11.5 billion, and term borrowings increased 47 percent to $2.3 billion. Average shareholders' equity increased 5 percent in third quarter 2004, as compared to the third quarter of 2003. (See A-8 for additional information on the balance sheet impact of certain transactions and new accounting standards.)
OUTLOOK
"Even with the significant transition we have undergone, the current disruptions in the demand for fixed income securities and the pricing pressures on mortgage originations; we believe that we will be able to maintain earnings per share for the full year consistent with what we reported for 2003 and profitability levels among industry leaders," said Chief Financial Officer, Marty Mosby. "As our earnings mix has rebalanced toward more historic levels with Retail/Commercial Banking representing approximately 60 percent of pre-tax earnings and coupled with our national expansion initiatives, we expect to resume earnings per share growth in 2005. Looking forward while we may experience short term volatility in our earnings stream, we believe over the long term we will operate at a level consistent with our historic high performing growth."
OTHER INFORMATION
This press release contains forward-looking statements involving significant risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking information. Those factors include general economic and financial market conditions, including expectations of and actual timing and amount of interest rate movements, competition, investor responses to these conditions, ability to execute business plans, geo-political developments, items already mentioned in this press release, and other factors described in FHN's recent filings with the SEC. FHN disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements included herein to reflect future events or developments.
In compliance with the SEC's regulations concerning fair disclosure, FHN provides additional disclosure and discussion related to FHN's earnings and business segment performance through a financial supplement which is available on FHN's website at www.FirstHorizon.com. Management will also host a conference call at 9:00 a.m. Eastern Time October 21, 2004, to review earnings and performance trends. Callers wishing to participate in the call may dial toll-free starting at 8:45 a.m. Eastern Time October 21, 2004, at 1-800-441-0022. The conference will be webcast live through the investor relations section of FHN's website. To access the webcast, visit http://www.shareholder.com/ftb/medialist.cfm. A replay of the call will be available until Thursday, Nov. 4, by calling (888)203-1112 or (719)457-0820 for international participants. The passcode is 887153. The event will be archived and made available by noon Eastern Time Oct. 21 on First Horizon's Web site at www.FirstHorizon.com. For three weeks from the press release date, FHN will respond to individual requests for clarification of the provided disclosures. However, we will make every effort not to provide, and you should not expect to receive, material non-public information as that term is defined in the SEC Regulation FD. Without limiting the foregoing, after the conference call and except for the guidance provided herein, we will not provide any earnings guidance, directly or indirectly, express or implied.
GENERAL INFORMATION
About First Horizon
The 12,000 employees of First Horizon National Corp. (NYSE: FHN) provide financial services to individual and business customers through hundreds of offices located in more than 40 states. The corporation's three major brands - FTN Financial, First Horizon, and First Tennessee - provide customers with a broad range of products and services including:
- - Capital Markets, with one of the nation's top underwriters of U.S. government agency securities
- - Mortgage Banking, with one of the nation's top 15 mortgage originators and servicers, which earned a top-10 ranking in customer satisfaction from J.D. Power and Associates
- - Retail/Commercial Banking, with the largest market share in Tennessee and one of the highest customer retention rates of any bank in the country
FHN companies have been recognized as some of the nation's best employers by AARP, Working Mother, Business Week and Fortune magazines. FHN also was named one of the nation's 100 best corporate citizens by Business Ethics magazine. More information can be found at www.FirstHorizon.com.
FIRST HORIZON NATIONAL CORPORATION STATEMENTS OF INCOME Quarterly Growth (Unaudited) --------------------------------------------------------------------- Quarter Ended September 30 ------------------- Growth (Thousands) 2004 2003 Rate (%) --------------------------------------------------------------------- Interest income $300,183 $277,436 8.2 + Less interest expense 81,933 63,280 29.5 + --------------------------------------------------------------------- Net interest income 218,250 214,156 1.9 + Provision for loan losses 10,044 16,355 38.6 -- --------------------------------------------------------------------- Net interest income after provision for loan losses 208,206 197,801 5.3 + Noninterest income: Mortgage banking 105,155 151,830 30.7 -- Capital markets 79,913 122,876 35.0 -- Deposit transactions and cash management 38,624 37,328 3.5 + Merchant processing 19,299 15,295 26.2 + Insurance premiums and commissions 13,962 14,465 3.5 -- Trust services and investment management 11,838 12,011 1.4 -- Securities gains/(losses) 20,383 4,178 NM Other 38,440 34,366 11.9 + --------------------------------------------------------------------- Total noninterest income 327,614 392,349 16.5 -- --------------------------------------------------------------------- Adjusted gross income after provision for loan losses 535,820 590,150 9.2 -- Noninterest expense: Employee compensation, incentives and benefits 210,089 235,495 10.8 -- Occupancy 23,865 22,620 5.5 + Equipment rentals, depreciation, and maintenance 18,713 17,210 8.7 + Operations services 17,801 17,700 .6 + Communications and courier 12,118 12,917 6.2 -- Amortization of intangible assets 2,165 2,065 4.8 + Other 80,845 101,927 20.7 -- --------------------------------------------------------------------- Total noninterest expense 365,596 409,934 10.8 -- --------------------------------------------------------------------- Pretax income 170,224 180,216 5.5 -- Applicable income taxes 56,623 61,933 8.6 -- --------------------------------------------------------------------- Net income $113,601 $118,283 4.0 -- =================== --------------------------------------------------------------------- Diluted earnings per common share $ .89 $ .91 2.2 -- Dividends declared per common share $ .40 $ .30 SELECTED FINANCIAL RATIOS: -------------------------- Return on average assets 1.63% 1.71% Return on average shareholders' equity 23.7 25.9 --------------------------------------------------------------------- Certain previously reported amounts have been reclassified to agree with current presentation. A-1 FIRST HORIZON NATIONAL CORPORATION STATEMENTS OF INCOME Yearly Growth (Unaudited) --------------------------------------------------------------------- Year-to-date September 30 ----------------------- Growth (Thousands) 2004 2003 Rate (%) --------------------------------------------------------------------- Interest income $ 832,013 $ 800,186 4.0 + Less interest expense 204,148 190,844 7.0 + --------------------------------------------------------------------- Net interest income 627,865 609,342 3.0 + Provision for loan losses 36,565 71,306 48.7 -- --------------------------------------------------------------------- Net interest income after provision for loan losses 591,300 538,036 9.9 + Noninterest income: Mortgage banking 349,987 522,166 33.0 -- Capital markets 300,036 421,149 28.8 -- Deposit transactions and cash management 110,819 108,730 1.9 + Merchant processing 55,407 41,731 32.8 + Insurance premiums and commissions 44,460 44,113 .8 + Trust services and investment management 35,533 34,219 3.8 + Gains on divestitures 3,800 -- NM Securities gains/(losses) 24,482 2,370 NM Other 125,514 106,548 17.8 + --------------------------------------------------------------------- Total noninterest income 1,050,038 1,281,026 18.0 -- --------------------------------------------------------------------- Adjusted gross income after provision for loan losses 1,641,338 1,819,062 9.8 -- Noninterest expense: Employee compensation, incentives and benefits 686,741 776,641 11.6 -- Occupancy 66,527 62,014 7.3 + Equipment rentals, depreciation, and maintenance 54,062 51,016 6.0 + Operations services 49,144 52,788 6.9 -- Communications and courier 37,144 37,211 .2 -- Amortization of intangible assets 6,527 5,577 17.0 + Other 221,507 300,421 26.3 -- --------------------------------------------------------------------- Total noninterest expense 1,121,652 1,285,668 12.8 -- --------------------------------------------------------------------- Pretax income 519,686 533,394 2.6 -- Applicable income taxes 168,430 177,730 5.2 -- --------------------------------------------------------------------- Net income $ 351,256 $ 355,664 1.2 -- ======================= --------------------------------------------------------------------- Diluted earnings per common share $ 2.73 $ 2.72 .4 + Dividends declared $ 1.20 $ .90 SELECTED FINANCIAL RATIOS: -------------------------- Return on average assets 1.76% 1.88% Return on average shareholders' equity 24.9 26.7 --------------------------------------------------------------------- Certain previously reported amounts have been reclassified to agree with current presentation. A-2 FIRST HORIZON NATIONAL CORPORATION AVERAGE STATEMENTS OF CONDITION Quarterly Growth (Unaudited) --------------------------------------------------------------------- Quarter Ended September 30 ------------------------- Growth (Thousands) 2004 2003 Rate (%) --------------------------------------------------------------------- Loans, net of unearned income: Commercial: Commercial, financial and industrial $ 4,935,308 $ 4,442,516 11.1 + Real estate commercial 960,210 1,025,846 6.4 -- Real estate construction 945,102 652,125 44.9 + --------------------------------------------------------------------- Total commercial loans 6,840,620 6,120,487 11.8 + Retail: Real estate residential 7,852,584 5,951,230 31.9 + Real estate construction 746,144 446,521 67.1 + Other retail 180,037 259,109 30.5 -- Credit card receivables 239,256 261,470 8.5 -- --------------------------------------------------------------------- Total retail loans 9,018,021 6,918,330 30.3 + --------------------------------------------------------------------- Total loans, net of unearned income 15,858,641 13,038,817 21.6 + Investment securities 2,625,717 2,435,754 7.8 + REMIC securities (a) -- 172,180 100.0 -- Loans held for sale 4,036,714 5,707,743 29.3 -- Other earning assets 1,687,628 1,846,153 8.6 -- --------------------------------------------------------------------- Total earning assets 24,208,700 23,200,647 4.3 + Cash and due from banks 739,980 740,811 .1 -- Other assets 2,767,927 3,495,376 20.8 -- --------------------------------------------------------------------- Total assets $27,716,607 $27,436,834 1.0 + =========================------------ Certificates of deposit under $100,000 and other time $ 2,015,030 $ 1,839,091 9.6 + Other interest-bearing deposits 4,128,600 3,962,033 4.2 + --------------------------------------------------------------------- Total interest-bearing core deposits 6,143,630 5,801,124 5.9 + Demand deposits 1,590,827 1,800,013 11.6 -- Other noninterest-bearing deposits 2,800,576 3,717,556 24.7 -- --------------------------------------------------------------------- Total core deposits 10,535,033 11,318,693 6.9 -- Certificates of deposit $100,000 and more 6,971,121 5,809,623 20.0 + --------------------------------------------------------------------- Total deposits 17,506,154 17,128,316 2.2 + Short-term borrowed funds 4,550,319 4,659,584 2.3 -- Term borrowings (a) 2,340,558 1,597,232 46.5 + Other liabilities 1,413,644 2,136,474 33.8 -- Qualifying capital securities (a)(b) -- 100,000 100.0 -- Preferred stock of subsidiary (a) 454 271 67.5 + Shareholders' equity 1,905,478 1,814,957 5.0 + --------------------------------------------------------------------- Total liabilities and shareholders' equity $27,716,607 $27,436,834 1.0 + ========================= --------------------------------------------------------------------- (a) See A-8 for additional information on the impact of certain transactions and new accounting standards. (b) Guaranteed preferred beneficial interests in FHN's junior subordinated debentures A-3 FIRST HORIZON NATIONAL CORPORATION PERIOD-END STATEMENTS OF CONDITION (Unaudited) --------------------------------------------------------------------- September 30 ------------------------- Growth (Thousands) 2004 2003 Rate (%) --------------------------------------------------------------------- Loans, net of unearned income: Commercial: Commercial, financial and industrial $ 5,097,027 $ 4,444,138 14.7 + Real estate commercial 931,450 1,051,389 11.4 -- Real estate construction 1,027,206 648,504 58.4 + --------------------------------------------------------------------- Total commercial loans 7,055,683 6,144,031 14.8 + Retail: Real estate residential 8,081,420 6,224,859 29.8 + Real estate construction 845,442 467,110 81.0 + Consumer 175,605 248,401 29.3 -- Credit card receivables 245,159 264,655 7.4 -- --------------------------------------------------------------------- Total retail loans 9,347,626 7,205,025 29.7 + --------------------------------------------------------------------- Total loans, net of unearned income 16,403,309 13,349,056 22.9 + Investment securities 1,772,303 2,572,726 31.1 -- REMIC securities (a) -- 149,714 100.0 -- Loans held for sale 3,893,279 2,896,741 34.4 + Other earning assets 1,549,576 1,558,538 .6 -- --------------------------------------------------------------------- Total earning assets 23,618,467 20,526,775 15.1 + Cash and due from banks 810,541 858,925 5.6 -- Other assets 3,865,717 4,103,638 5.8 -- --------------------------------------------------------------------- Total assets $28,294,725 $25,489,338 11.0 + ========================= Certificates of deposit under $100,000 and other time $ 2,051,760 $ 1,839,159 11.6 + Other interest-bearing deposits 4,113,040 3,955,275 4.0 + --------------------------------------------------------------------- Total interest-bearing core deposits 6,164,800 5,794,434 6.4 + Demand deposits 2,108,611 2,318,845 9.1 -- Other noninterest-bearing deposits 2,538,881 2,500,925 1.5 + --------------------------------------------------------------------- Total core deposits 10,812,292 10,614,204 1.9 + Certificates of deposit $100,000 and more 7,801,248 5,941,708 31.3 + --------------------------------------------------------------------- Total deposits 18,613,540 16,555,912 12.4 + Short-term borrowed funds 2,595,048 2,661,410 2.5 -- Term borrowings (a) 2,453,510 1,597,045 53.6 + Other liabilities 2,649,493 2,723,058 2.7 -- Qualifying capital securities (a)(b) -- 100,000 100.0 -- Preferred stock of subsidiary (a) 454 347 30.8 + Shareholders' equity 1,982,680 1,851,566 7.1 + --------------------------------------------------------------------- Total liabilities and shareholders' equity $28,294,725 $25,489,338 11.0 + ========================= --------------------------------------------------------------------- (a) See A-8 for additional information on the impact of certain transactions and new accounting standards. (b) Guaranteed preferred beneficial interests in FHN's junior subordinated debentures A-4 FIRST HORIZON NATIONAL CORPORATION ASSET QUALITY HIGHLIGHTS (Unaudited) --------------------------------------------------------------------- (Thousands) 3Q04 2Q04 1Q04 4Q03 3Q03 --------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES: Beginning Reserve $160,757 $160,685 $160,333 $161,401 $159,080 Provision 10,044 12,292 14,229 15,392 16,355 Loans transferred to held for sale (351) (1,239) (2,087) -- -- Divestiture -- -- -- (2,652) -- Charge-offs (12,497) (14,305) (16,085) (17,279) (17,913) Recoveries 3,903 3,324 4,295 3,471 3,879 --------------------------------------------------------------------- Ending Balance $161,856 $160,757 $160,685 $160,333 $161,401 --------------------================================================= Reserve for off- balance sheet commitments $ 8,259 $ 7,883 $ 7,001 $ 7,804 $ 6,997 Total of allowance for loan losses and reserve for off-balance sheet commitments $170,115 $168,640 $167,686 $168,137 $168,398 --------------------------------------------------------------------- NONPERFORMING ASSETS: Retail/Commercial Banking: Nonperforming loans $ 45,633 $ 45,671 $ 38,243 $ 43,228 $ 48,390 Foreclosed real estate 27,428 28,833 25,355 19,365 18,284 Other assets -- -- 336 336 365 --------------------------------------------------------------------- Total Retail/ Commercial Banking 73,061 74,504 63,934 62,929 67,039 --------------------------------------------------------------------- Mortgage Banking: Nonperforming loans - held for sale 7,279 11,118 9,003 8,556 11,408 Foreclosed real estate 5,044 4,417 4,523 4,710 5,704 --------------------------------------------------------------------- Total Mortgage Banking 12,323 15,535 13,526 13,266 17,112 --------------------------------------------------------------------- Total nonper- forming assets $ 85,384 $ 90,039 $ 77,460 $ 76,195 $ 84,151 ================================================ Loans and leases past due 90 days or more $ 29,644 $ 25,516 $ 31,167 $ 27,240 $ 28,459 Period end loans, net of unearned (millions) $ 16,403 $ 15,301 $ 14,212 $ 13,990 $ 13,349 Insured loans 560 620 632 863 718 --------------------------------------------------------------------- Loans excluding insured loans $ 15,843 $ 14,681 $ 13,580 $ 13,127 $ 12,631 ================================================ Off-balance sheet commitments (millions) (a) $ 5,848 $ 5,607 $ 5,294 $ 5,464 $ 4,639 --------------------------------------------------------------------- (a) Amount of off-balance sheet commitments for which a reserve has been provided. A-5 FIRST HORIZON NATIONAL CORPORATION ASSET QUALITY HIGHLIGHTS (Unaudited) --------------------------------------------------------------------- (Thousands) 3Q04 2Q04 1Q04 4Q03 3Q03 --------------------------------------------------------------------- FHN CONSOLIDATED: Nonperforming loans ratio (a) .28% .30% .27% .31% .36% Nonperforming assets ratio (b) .48 .51 .48 .48 .54 Allowance to total loans .99 1.05 1.13 1.15 1.21 Allowance to loans ex- cluding insured loans 1.02 1.10 1.18 1.22 1.28 Allowance to non- performing loans (c) 354.69 351.99 420.17 370.90 333.54 Allowance to nonper- forming assets (d) 207.23 203.69 234.72 237.04 221.88 Net charge-off ratio (e) .22 .30 .34 .40 .43 RETAIL/COMMERCIAL BANKING: Nonperforming assets ratio (b) .44 .49 .45 .45 .50 Allowance to nonper- forming assets 221.54 215.77 251.33 254.78 240.76 MORTGAGE BANKING: Nonperforming assets ratio (f) .02% .02% .02% .02% .03% --------------------------------------------------------------------- (a) Ratio is nonperforming loans in the loan portfolio to total loans (b) Ratio is nonperforming assets in the loan portfolio to total loans plus foreclosed real estate and other assets (c) Ratio is allowance to nonperforming loans in the loan portfolio (d) Ratio is allowance to nonperforming assets in the loan portfolio (e) Ratio is net charge-offs to average total loans (f) Ratio is nonperforming assets to unpaid principal balance of servicing portfolio A-6 FIRST HORIZON NATIONAL CORPORATION BUSINESS SEGMENT HIGHLIGHTS (Unaudited) --------------------------------------------------------------------- (Thousands) 3Q04 2Q04 1Q04 4Q03 3Q03 --------------------------------------------------------------------- RETAIL/COMMERCIAL BANKING Total Revenues $294,960 $288,841 $274,084 $288,886 $259,204 Loan Loss Provision 10,044 12,310 14,249 15,333 16,319 Noninterest Expenses 180,250 177,235 172,224 186,280 175,347 ------------------------------------------------ Pre-Tax Income $104,666 $ 99,296 $ 87,611 $ 87,273 $ 67,538 Taxes 33,608 25,990 27,219 31,953 21,420 ------------------------------------------------ Net Income $ 71,058 $ 73,306 $ 60,392 $ 55,320 $ 46,118 MORTGAGE BANKING Total Revenues $146,984 $167,409 $163,242 $162,840 $217,694 Loan Loss Provision -- (18) (20) 59 36 Noninterest Expenses 109,255 118,711 99,664 95,020 115,191 ------------------------------------------------ Pre-Tax Income $ 37,729 $ 48,716 $ 63,598 $ 67,761 $102,467 Taxes 13,716 17,766 23,368 25,870 37,774 ------------------------------------------------ Net Income $ 24,013 $ 30,950 $ 40,230 $ 41,891 $ 64,693 CAPITAL MARKETS Total Revenues $ 81,562 $103,004 $119,564 $120,633 $125,120 Noninterest Expenses 64,640 77,945 88,806 84,879 90,762 ------------------------------------------------ Pre-Tax Income $ 16,922 $ 25,059 $ 30,758 $ 35,754 $ 34,358 Taxes 6,293 9,455 11,776 13,107 12,906 ------------------------------------------------ Net Income $ 10,629 $ 15,604 $ 18,982 $ 22,647 $ 21,452 CORPORATE Total Revenues $ 22,358 $ 6,651 $ 9,244 $ 10,641 $ 4,487 Noninterest Expenses 11,451 10,189 11,282 15,825 28,634 ------------------------------------------------ Pre-Tax Income $ 10,907 $ (3,538) $ (2,038) $ (5,184) $(24,147) Taxes 3,006 (2,062) (1,705) (2,971) (10,167) ------------------------------------------------ Net Income $ 7,901 $ (1,476) $ (333) $ (2,213) $(13,980) TOTAL CONSOLIDATED Total Revenues $545,864 $565,905 $566,134 $583,000 $606,505 Loan Loss Provision 10,044 12,292 14,229 15,392 16,355 Total Noninterest Expenses 365,596 384,080 371,976 382,004 409,934 ------------------------------------------------ Consolidated Pre- tax Income $170,224 $169,533 $179,929 $185,604 $180,216 Taxes 56,623 51,149 60,658 67,959 61,933 ------------------------------------------------ Net Income $113,601 $118,384 $119,271 $117,645 $118,283 ================================================ --------------------------------------------------------------------- See page A-8 for discussion of changes to FHN's business segments. Certain previously reported amounts have been reclassified to agree with current presentation. A-7 FIRST HORIZON NATIONAL CORPORATION OTHER HIGHLIGHTS (Unaudited) Balance Sheet: In prior years, FHN has securitized certain real estate loans through a real estate mortgage investment conduit (REMIC) and retained all of the securitized assets. The retained assets were classified on the Consolidated Statements of Condition in "Securities held to maturity". During fourth quarter 2003, FHN elected to purchase all of the mortgage loans remaining in the REMIC ($136.3 million at repurchase). Subsequent to the repurchase of the mortgage loans, these assets are classified as retail real estate residential loans. Effective December 31, 2003, FHN adopted FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", and deconsolidated its subsidiary, First Tennessee Capital I (Capital I), which has issued $100.0 million of capital securities that are fully and unconditionally guaranteed by FHN. As a result of this deconsolidation the capital securities are no longer included on FHN's balance sheet. However, $103.0 million of junior subordinated debentures issued by FHN to Capital I are no longer eliminated in consolidation and appear in term borrowings as of December 31, 2003. On December 31, 2003, FHN completed the sale of substantially all of the assets and liabilities of its wholly owned subsidiary, First National Bank of Springdale (FNB) of Springdale, Arkansas to First Security Bank of Searcy, Arkansas. This transaction resulted in a divestiture gain of $12.5 million. Immediately preceding the sale, FNB had investment securities of approximately $125 million, loans of approximately $165 million, deposits of approximately $300 million and equity of approximately $40 million. Segments: FHN has adapted its segments to reflect the common activities and operations of aggregated business segments across the various delivery channels. Prior periods have been restated for comparability. The new segments are Retail/Commercial Banking, Mortgage Banking, Capital Markets and Corporate. The Retail/Commercial Banking segment consists of Retail/Commercial Banking including traditional lending and deposit taking for retail and commercial customers. Additionally, the Retail/Commercial Bank provides Investments, Insurance, Financial Planning, Trust Services and Asset Management, Credit Card, Cash Management, Merchant Services, Check Clearing, and Correspondent Services. Retail/Commercial Banking now includes Equity Lending and held to maturity mortgage and construction loans originated by First Horizon Home Loans which were previously in the mortgage segment and Correspondent Banking which was previously in Capital Markets. The Mortgage Banking segment consists of core mortgage banking elements including Originations and Servicing and the associated ancillary revenues related to these businesses. The Capital Markets segment consists of traditional capital markets trading activities, Equity Research and Investment Banking. The Corporate segment consists of unallocated corporate expenses, expense on certain subordinated debt issuances and certain preferred stock, bank owned life insurance, unallocated interest income associated with excess capital, Funds Management and Venture Capital. A-8
CONTACT: First Horizon National Corp. Investor Relations: Mark Yates (901) 523-4068 Media Information: Kim Cherry, APR (901) 523-4726