<Page>
FINANCIAL INFORMATION AND DISCUSSION
TABLE OF CONTENTS
<Table>
Selected Financial and Operating Data 2
Management's Discussion and Analysis of Results of
Operations and Financial Condition 3
General Information 3
Forward Looking Statements 4
Financial Summary 4
Business Line Review 5
Income Statements Analysis -- 2004 compared to 2003 7
Income Statements Analysis -- 2003 compared to 2002 16
Statements of Condition Review 17
Risk Management 23
Critical Accounting Policies 38
Quarterly Financial Information 47
Accounting Changes 48
Subsequent Events 48
Glossary 49
Report of Management on Internal Control over Financial
Reporting 53
Reports of Independent Registered Public Accounting Firm 54
Consolidated Statements of Condition 56
Consolidated Statements of Income 57
Consolidated Statements of Shareholders' Equity 58
Consolidated Statements of Cash Flows 59
Notes to Consolidated Financial Statements 60
Consolidated Average Balance Sheets and Related Yields and
Rates 112
Consolidated Historical Statements of Income 114
</Table>
First Horizon National Corporation 1
<Page>
SELECTED FINANCIAL AND OPERATING DATA
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------
(Dollars in millions except per share
data) 2004 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE CUMULATIVE ADJUSTMENT* $ 454.4 $ 473.3 $ 376.5 $ 326.4 $ 232.6 $ 247.5
NET INCOME 454.4 473.3 376.5 318.2 232.6 247.5
- ---------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA
Earnings per share before cumulative
adjustment* $ 3.64 $ 3.73 $ 2.97 $ 2.55 $ 1.79 $ 1.90
Earnings per share 3.64 3.73 2.97 2.49 1.79 1.90
Diluted earnings per share before
cumulative adjustment* 3.54 3.62 2.89 2.48 1.77 1.85
Diluted earnings per share 3.54 3.62 2.89 2.42 1.77 1.85
Cash dividends declared per share 1.63 1.30 1.05 .91 .88 .79
Year-end book value per share 16.39 15.01 13.35 11.66 10.70 9.52
Closing price of common stock per share:
High 48.01 47.98 40.45 37.25 29.06 45.19
Low 41.59 36.14 30.05 27.38 16.06 27.56
Year-end 43.11 44.10 35.94 36.26 28.94 28.50
Dividends per share/year-end closing
price 3.8% 2.9% 2.9% 2.5% 3.0% 2.8%
Dividends per share/diluted earnings per
share 46.0 35.9 36.3 36.7 49.7 42.7
Price/earnings ratio 12.2X 12.2x 12.4x 15.0x 16.3x 15.4x
Market capitalization $ 5,368.0 $ 5,552.0 $ 4,553.9 $ 4,597.0 $ 3,744.7 $ 3,715.1
Average shares (thousands) 124,731 126,765 126,714 127,777 129,865 130,573
Period-end shares outstanding
(thousands) 123,532 124,834 125,600 125,865 128,745 129,878
Volume of shares traded (thousands) 173,177 176,528 139,946 110,154 99,469 96,207
- -----------------------------------------------------------------------------------------------------------------
SELECTED AVERAGE BALANCES
Total assets $27,305.8 $25,133.6 $20,704.0 $19,227.2 $19,325.3 $18,625.3
Total loans** 15,384.6 12,656.3 10,634.5 10,104.3 9,932.0 8,818.8
Investment securities 2,449.1 2,544.9 2,466.4 2,595.3 2,862.7 2,702.7
Earning assets 23,718.3 21,328.9 17,397.4 16,125.4 16,095.5 15,583.7
Deposits 17,635.5 16,111.6 13,674.8 12,540.6 12,932.0 12,409.6
Term borrowings 2,248.0 1,342.9 685.5 521.5 384.3 371.1
Shareholders' equity 1,905.5 1,800.4 1,568.3 1,401.3 1,276.6 1,186.8
- -----------------------------------------------------------------------------------------------------------------
SELECTED PERIOD-END BALANCES
Total assets $29,771.7 $24,506.7 $23,823.1 $20,621.6 $18,559.6 $18,378.0
Total loans** 16,427.7 13,990.5 11,345.4 10,283.1 10,239.5 9,363.2
Investment securities 2,681.0 2,470.4 2,700.3 2,525.9 2,839.0 3,101.3
Earning assets 25,952.3 20,621.1 19,999.8 17,085.7 15,193.3 14,944.2
Deposits 19,782.2 15,871.3 16,126.5 13,854.6 12,308.0 11,488.2
Term borrowings 2,616.4 1,726.8 929.7 550.4 409.7 358.7
Shareholders' equity 2,041.0 1,890.3 1,691.2 1,477.8 1,384.2 1,241.5
- -----------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average shareholders' equity
before cumulative adjustment* 23.85% 26.29% 24.00% 23.29% 18.22% 20.86%
Return on average shareholders' equity 23.85 26.29 24.00 22.71 18.22 20.86
Return on average assets before
cumulative adjustment* 1.66 1.88 1.82 1.70 1.20 1.33
Return on average assets 1.66 1.88 1.82 1.66 1.20 1.33
Net interest margin 3.62 3.78 4.35 4.29 3.75 3.82
Allowance for loan losses to loans** .96 1.15 1.27 1.46 1.36 1.44
Net charge-offs to average loans** .27 .54 .93 .80 .62 .59
Average shareholders' equity to average
assets 6.98 7.16 7.58 7.29 6.61 6.37
Average tangible equity to average
tangible assets 6.24 6.37 6.70 6.66 5.98 5.70
Average shareholders' equity to average
net loans 12.52 14.41 14.96 14.07 13.04 13.67
- -----------------------------------------------------------------------------------------------------------------
RETURN TO SHAREHOLDERS
Stock appreciation (2.2)% 22.7% (.9)% 25.3% 1.5% (25.1)%
Dividend yield 3.7 3.6 2.9 3.1 3.1 2.1
Total return 1.5 26.3 2.0 28.4 4.6 (23.0)
- -----------------------------------------------------------------------------------------------------------------
</Table>
* Cumulative adjustment reflects the effect of changes in accounting principles
related to derivatives.
** Net of unearned income.
See accompanying notes to consolidated financial statements.
Certain previously reported amounts have been reclassified to agree with current
presentation.
2 First Horizon National Corporation
<Page>
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 nationwide, financial services
institution founded in 1864. From a small community bank, FHN has grown to be
one of the top 30 largest bank holding companies in the United States in terms
of asset size and market capitalization.
Approximately 12,400 employees provide a broad array of financial services to
individual and business customers through hundreds of offices located in 47
states.
FHN has been recognized as one 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.
FHN provides a broad array of financial services to its customers through three
national business segments. The combined strengths of these businesses create an
extensive range of financial products and services. In addition, the corporate
segment provides essential support within the corporation.
In 2004 FHN 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 offers financial products and services,
including traditional lending and deposit taking, to 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 second-lien mortgage and construction loans originated by
First Horizon Home Loans, which were previously in the mortgage segment,
and correspondent services, which was previously in Capital Markets.
Mortgage Banking helps provide home ownership through First Horizon Home
Loans, which operates offices in more than 40 states and is one of the top
15 mortgage servicers and top 20 originators of mortgage loans to
consumers. This segment consists of core mortgage banking elements
including originations and servicing and the associated ancillary revenues
related to these businesses.
Capital Markets provides a broad spectrum of financial services for the
investment and banking communities through the integration of capital
markets securities activities, research and investment banking.
Corporate 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.
For the purpose of this management 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.
First Horizon National Corporation 3
<Page>
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis may contain 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; expectations of and actual timing and amount of interest rate
movements (which can have a significant impact on a financial services
institution); market and monetary fluctuations; inflation or deflation; the
financial condition of borrowers and other counterparties; competition within
and outside the financial services industry; geo-political developments
including possible terrorist activity; effectiveness of FHN's hedging practices;
technology; and new products and services in the industries in which FHN
operates. Other factors are those inherent in originating 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, 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.
FINANCIAL SUMMARY
Retail/Commercial Banking pre-tax earnings grew 68 percent to $412.6
million
Loans grew 22 percent and asset quality continued to improve
Mortgage Banking origination revenue reflected a substantially lower
level of industry-wide refinance activity
Capital Markets' fixed revenues declined as the demand for fixed income
securities lessened
Corporate segment earnings improved due to securities gains and reduced
discretionary spending
Return on equity was 23.9 percent and return on assets was 1.66 percent
FHN's diverse business mix, while subject to short-term favorable and
unfavorable volatility in earnings, provides a balance that has produced at a
level consistent with high performing growth and maintained a return on equity
at industry-leading levels. The benefit of this diverse and balanced business
mix was evidenced through the execution of FHN's strategies in 2004's difficult
economic environment.
Generally, FHN's performance in 2004 was negatively impacted by the unfavorable
interest rate environment experienced during the second half of the year.
Mortgage banking and capital markets were unfavorably affected while
retail/commercial banking achieved substantial growth, rebalancing FHN's
business mix. In addition, the adoption of SAB No. 105, which prohibited the
inclusion of estimated servicing cash flows within the valuation of interest
rate lock commitments, lowered pre-tax earnings by $8.4 million and diluted
earnings per share by $0.04. FHN previously included a portion of
4 First Horizon National Corporation
<Page>
the value of the associated servicing cash flows when recognizing loan
commitments at inception and throughout their lives. This impact was a one-time
accounting change and does not affect the ongoing economic value of this
business.
The performance of retail/commercial banking, which represented 62 percent of
pre-tax earnings for 2004 compared to 34 percent in 2003, was positively
impacted by national expansion strategies. These strategies focus on
cross-selling banking products to existing customers within FHN's national
markets. During 2004, FHN further expanded First Horizon Bank in northern
Virginia and plans to replicate this strategy in 2005 in two additional markets
- -Texas and Georgia. Retail/commercial banking continues to benefit from
cross-selling within the national customer base as an increasing number of
customers have purchased multiple financial services.
Retail/commercial banking benefited from strong growth in retail lending, which
was particularly successful across FHN's national footprint, and from an
improved market for commercial loan growth. Also favorably impacting
retail/commercial banking were improved asset quality, which resulted in a lower
provision, and reduced discretionary spending in 2004. Deposit growth, achieved
through strategies focused on convenient hours, free checking and targeted
financial center expansions positively impacted retail/commercial banking's
performance.
Following a record year in 2003, capital markets experienced lower fixed income
securities sales in 2004 due to uncertainties within the investment community
regarding interest rates and other economic factors. However, the 2005
acquisition of the fixed income division of Spear, Leeds & Kellogg (SLK) will
provide an enhanced sales force, product offerings and execution capabilities
for FTN Financial and is expected to be accretive to FHN's earnings per share
during 2005.
Mortgage banking also felt negative effects from the interest rate environment
during 2004 as origination revenue declined due to a sharp drop in refinancings
from 2003's record levels and from lower margins on loans sold due to
competitive pricing pressures. However, net servicing revenues improved as the
servicing portfolio grew 26 percent and refinance activity declined.
Earnings for 2004 were $454.4 million, or $3.54 diluted earnings per share. This
compares to 2003 earnings of $473.3 million, or $3.62 diluted earnings per
share. Return on average shareholders' equity and return on average assets for
2004 were 23.9 percent and 1.66 percent, respectively, and were 26.3 percent and
1.88 percent in 2003. Total assets were $29.8 billion and shareholders' equity
was $2.0 billion on December 31, 2004, compared to $24.5 billion and $1.9
billion, respectively, on December 31, 2003.
BUSINESS LINE REVIEW
RETAIL/COMMERCIAL BANKING
Pre-tax earnings grew from $245.6 million to $412.6 million, or 68 percent over
2003. This growth resulted from national expansion initiatives, improved asset
quality, fee income growth and efficiency improvements. Total loan growth of
21 percent consisted of 30 percent growth in retail loans and 12 percent growth
in commercial loans. Retail loan growth primarily came from leveraging FHN's
national platform and commercial loan growth resulted from the national
expansion of single-family residential construction lending and improvements in
general economic conditions. Deposit account balances grew 3 percent compared to
2003; however, that growth was negatively impacted by the divestiture of First
National Bank of Springdale (Springdale), which had total deposits of
approximately $300 million in 2003. As a result of this product growth, net
interest income related to retail/commercial banking activities grew 17 percent
over 2003.
First Horizon National Corporation 5
<Page>
Noninterest income grew 9 percent to $483.1 million and represented 41 percent
of revenues. Contributing to this growth were net gains of $23.1 million in 2004
from the securitization of home equity lines of credit (HELOC) and second-lien
mortgages as FHN continues to utilize securitizations to manage liquidity and
fund new loan growth. Merchant processing fees grew 30 percent due to
transaction growth from new and existing clients. Included in 2004's performance
are $7.0 million of divestiture gains compared to $22.5 million of divestiture
gains in 2003 as FHN continues to divest non-strategic activities.
Net charge-offs fell to 27 basis points in 2004 from 54 basis points in 2003,
reflecting the reduced risk in the loan portfolio due to a change in the loan
mix and further economic recovery, which resulted in a $36.7 million reduction
in provision for loan losses. Noninterest expense increased $12.0 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 has
consistently shown improvement over the last five quarters as discretionary
spending has been reduced and 2003's investments and operational improvements
continue to produce returns.
MORTGAGE BANKING
Pre-tax earnings decreased from $387.0 million in 2003 to $180.1 million in
2004, primarily driven by declining originations as refinancing activity fell
and competitive pricing pressures increased. Partially offsetting the decline in
originations was improvement in servicing profitability due to reduced
impairment expense and growth in the servicing portfolio coupled with a more
efficient servicing operation.
Mortgage origination volume fell $16.6 billion, or 35 percent to $30.5 billion,
as refinancing volume declined from 72 percent of total originations in 2003 to
45 percent in 2004. In addition, loans delivered during the period decreased by
$20.2 billion. This decrease, combined with other market factors, reduced
origination revenue by approximately $180 million. Additionally, margins on
loans sold decreased as competitive pressures in the market unfavorably impacted
origination revenue by approximately $82 million. Overall, origination revenues
decreased $262.4 million. Although total origination volumes were down, the
large reduction in refinancings was partially offset by improved home purchase
originations. Home purchase originations increased 26 percent as the focus of
the sales force shifted from refinance to purchase business and growth in the
sales force continued.
Net servicing revenues improved $75.6 million from $8.2 million in 2003 to $83.8
million in 2004. Total fees associated with mortgage servicing increased
23 percent to $230.4 million due to growth in the servicing portfolio and the
favorable impact of lower prepayment activity. The mortgage-servicing portfolio
(which includes servicing for ourselves and others) was $86.6 billion on
December 31, 2004, an increase of 26 percent from $68.9 billion on December 31,
2003. This increase includes approximately $11 billion of loans for which the
servicing rights were acquired in 2004. MSR net hedge gains decreased
58 percent to $47.9 million from $115.1 million; however, MSR impairment
decreased $121.3 million, triggered by the impact that rising interest rates had
on mortgage prepayments in the servicing portfolio.
Noninterest expense improved $27.8 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
16 percent reduction of servicing costs per loan compared to year-end 2003.
CAPITAL MARKETS
Pre-tax earnings declined from $154.6 million in 2003 to $83.2 million in 2004
primarily due to a reduction in fixed income securities sales, net of a related
decline in commissions and incentives.
6 First Horizon National Corporation
<Page>
Significant uncertainties within the investment community regarding interest
rates and other economic factors have caused fixed income investors to delay
their purchases. In addition, 2003 was favorably impacted by higher cash flows
from the prepayments of mortgage-backed products and agency calls. As a result,
revenues from fixed income sales to depository and non-depository investors fell
$133.6 million. Revenues from other fee sources include fee income from
activities such as investment banking, equity research, portfolio advisory and
the sale of various financial products. These revenues decreased 16 percent from
2003's revenues primarily as a result of lower revenue in structured finance
transactions.
Noninterest expense decreased 24 percent or $95.9 million, primarily due to
lower personnel expense, reflecting the decline in commissions and incentives.
CORPORATE
The Corporate segment improved from a $68.2 million pre-tax loss in 2003 to a
$9.1 million pre-tax loss in 2004. Reduced discretionary spending helped lower
expenses by $47.6 million to $43.8 million. Net security gains for 2004 include
$18.4 million of gains from sales of investment securities compared to net
security losses of $6.9 million in 2003. Net gains from equity investments of
$5.3 million were realized in 2004 primarily due to the liquidation of a holding
company investment. This compares to net gains of $8.5 million in 2003 primarily
resulting from the sale of a venture capital investment. In addition, a loss of
$3.9 million was recognized in 2004 related to other-than-temporary impairment
of an investment in Freddie Mac equity securities. Net interest income decreased
$9.3 million since 2003 as a result of the temporary reduction in the investment
portfolio, the paydown of REMIC securities in 2003, and a decline in the
earnings credit on allocated capital.
INCOME STATEMENTS ANALYSIS - 2004 COMPARED TO 2003
Total revenue decreased 10 percent to $2,219.4 million from $2,473.4 million in
2003, with a 6 percent increase in net interest income and an 18 percent
decrease in noninterest income. Paralleling the decrease in total revenue,
noninterest expense decreased 10 percent to $1,504.3 million from $1,667.7
million in 2003.
NET INTEREST INCOME
During 2004 net interest income increased 6 percent to $856.3 million from
$805.8 million in 2003. Net interest income was positively impacted by growth in
the retail and commercial lending portfolios, as loans now comprise 65 percent
of the earning asset base compared to 59 percent in 2003. Some of this positive
impact was offset by the divestiture of Springdale on December 31, 2003, which
contributed $10.5 million to net interest income in 2003. In addition, the
adoption of SFAS No. 150 on July 1, 2003, resulted in FHN classifying its
mandatorily redeemable preferred stock of subsidiary to term borrowings. As
required by SFAS No. 150, the distributions on these instruments have been
classified as interest expense on a prospective basis resulting in increased
interest expense in 2004. The December 31, 2003, adoption of FIN 46 which
required the deconsolidation of First Tennessee Capital I (see
Note 11 -- Guaranteed Preferred Beneficial Interests in First Horizon's Junior
Subordinated Debentures) and consequently the guaranteed preferred securities
also had a negative impact on net interest income in 2004, as FHN's junior
subordinated debentures are no longer eliminated and the related expense is also
no longer eliminated in consolidation and is classified as interest expense in
2004. The combined impact of adopting these two standards on a prospective basis
was to increase interest expense by $10.4 million in 2004. An increase in
funding costs as noninterest-bearing deposits decreased 9 percent, primarily due
to lower escrow balances in mortgage banking also had a negative impact on net
interest income in 2004.
First Horizon National Corporation 7
<Page>
The net interest margin was 3.62 percent for 2004 compared to 3.78 percent for
2003. The net interest margin compressed 16 basis points as total funding costs
increased 11 basis points including the impact of the previously mentioned
accounting changes and the yield on average earning assets decreased two basis
points. The lower yield on earning assets reflects the repricing of assets to
lower yields that occurred throughout 2003 as accelerated prepayments were
reinvested at lower rates. Much of this negative impact began to diminish in the
latter part of 2004 as rates began to rise and the yield on loans improved due
to the change in the mix of the loan portfolio to an increased percentage of
floating rate products that also occurred during 2003.
The activity levels and related funding for FHN's mortgage production and
servicing and capital markets activities affect the 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 size of the mortgage warehouse, the time
it takes to deliver loans into the secondary market, the amount of escrow
balances, and the level of mortgage servicing rights (MSR). Capital markets
activities tend to compress the margin because of its strategy to reduce market
risk by hedging its inventory in the cash markets, which reduces the term and
accordingly the interest income earned on these positions. As a result, FHN's
consolidated margin cannot be readily compared to that of other bank holding
companies. Table 1 details the computation of the net interest margin for FHN
for the last three years.
TABLE 1 - NET INTEREST MARGIN
<Table>
<Caption>
2004 2003 2002
- ---------------------------------------------------------------------------------
CONSOLIDATED YIELDS AND RATES:
Investment securities 4.28% 4.40% 5.83%
Loans, net of unearned income 5.04 5.20 6.27
Other earning assets 4.90 4.65 5.43
- ---------------------------------------------------------------------------------
Yields on earning assets 4.92 4.94 6.00
- ---------------------------------------------------------------------------------
Interest-bearing core deposits 1.39 1.38 1.91
Certificates of deposit $100,000 and more 1.57 1.34 2.08
Federal funds purchased and securities sold under
agreements to repurchase 1.22 .99 1.45
Commercial paper and other short-term borrowings 3.69 3.82 4.13
Term borrowings 2.24 2.64 4.17
- ---------------------------------------------------------------------------------
Rates paid on interest-bearing liabilities 1.59 1.48 2.05
- ---------------------------------------------------------------------------------
NET INTEREST SPREAD 3.33 3.46 3.95
Effect of interest-free sources .29 .32 .40
- ---------------------------------------------------------------------------------
FHN - NIM 3.62% 3.78% 4.35%
=================================================================================
</Table>
Certain previously reported amounts have been reclassified to agree with current
presentation.
In the near-term, a modest compression of the net interest margin is expected as
an increase in short-term rates will negatively impact the spread on the
mortgage warehouse. In addition, the compression of the margin attributable to
capital markets activities will increase due to the acquisition of SLK. 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.
8 First Horizon National Corporation
<Page>
Table 2 shows how the changes in yields or rates and average balances compared
to the prior year affected net interest income.
TABLE 2 - ANALYSIS OF CHANGES IN NET INTEREST INCOME
<Table>
<Caption>
2004 Compared to 2003 2003 Compared to 2002
Increase/(Decrease) Due to* Increase/(Decrease) Due to*
(Fully taxable equivalent) ------------------------------ --------------------------------
(Dollars in thousands) Rate** Volume** Total Rate** Volume** Total
- ------------------------------------------------------------------------------------------------------
INTEREST INCOME - FTE:
Loans $(22,647) $139,657 $117,010 $(123,854) $115,334 $ (8,520)
Investment securities:
U.S. Treasury 22 54 76 (687) (272) (959)
U.S. government agencies 3,006 3,886 6,892 (33,354) 15,190 (18,164)
States and municipalities (63) (739) (802) (163) (876) (1,039)
Other (5,230) (8,084) (13,314) (1,095) (10,635) (11,730)
- ----------------------------------- -------- ---------
Total investment securities (3,165) (3,984) (7,148) (36,339) 4,447 (31,892)
- ----------------------------------- -------- ---------
Other earning assets:
Loans held for sale 10,240 (12,500) (2,260) (30,385) 75,438 45,053
Investment in bank time deposits 5 71 76 (21) (2) (23)
Federal funds sold and securities
purchased under agreements to
resell 2,162 541 2,703 (3,020) 2,515 (505)
Mortgage banking trading
securities 1,818 7,922 9,740 1,965 2,413 4,378
Capital markets securities
inventory (1,800) (5,038) (6,838) (3,849) 6,288 2,439
- ----------------------------------- -------- ---------
Total other earning assets 14,656 (11,235) 3,421 (37,362) 88,704 51,342
- ----------------------------------- -------- ---------
Total earning assets/total interest
income - FTE (7,145) 120,428 $113,283 (201,607) 212,537 $ 10,930
- ------------------------------------------------------------------- --------------------------------
INTEREST EXPENSE:
Interest-bearing deposits:
Savings $ (402) $ (32) $ (434) $ (1,379) $ 24 $ (1,355)
Checking interest and money market 54 1,224 1,278 (15,353) 1,036 (14,317)
Certificates of deposit under
$100,000 and other time 291 2,630 2,921 (11,589) (2,526) (14,115)
Certificates of deposit
$100,000 and more 12,972 25,696 38,668 (33,191) 22,683 (10,508)
- ----------------------------------- -------- ---------
Total interest-bearing deposits 13,723 28,710 42,433 (64,502) 24,207 (40,295)
- ----------------------------------- -------- ---------
Federal funds purchased and
securities sold under agreements
to repurchase 8,445 (274) 8,171 (15,966) 7,412 (8,554)
Commercial paper and other
short-term borrowings (878) (1,666) (2,544) (1,748) 4,776 3,028
Term borrowings (6,146) 20,991 14,845 (13,304) 20,130 6,826
- ----------------------------------- -------- ---------
Total interest-bearing
liabilities/total interest expense 18,827 44,078 $ 62,905 (88,251) 49,256 $(38,995)
- ------------------------------------------------------------------- --------------------------------
Net interest income - FTE $ 50,378 $ 49,925
======================================================================================================
</Table>
* The changes in interest due to both rate and volume have been allocated to
change due to rate and change due to volume in proportion to the absolute
amounts of the changes in each.
** Variances are computed on a line-by-line basis and are non-additive.
Certain previously reported amounts have been reclassified to agree with current
presentation.
First Horizon National Corporation 9
<Page>
NONINTEREST INCOME
Noninterest income provides the majority of FHN's revenue and contributed 61
percent to total revenue in 2004 compared with 67 percent in 2003. Noninterest
income decreased $304.5 million due to declines of $204.7 million in mortgage
banking and $162.4 million in capital markets, while all other categories of
noninterest income increased $62.6 million primarily due to growth in merchant
processing revenues and gains from asset securitizations, which is comprised of
the securitization of HELOC and second lien mortgages, included in all other
income. Table 3 provides six years of detailed information concerning FHN's
noninterest income. The following discussion provides additional information on
various line items reported in the table.
TABLE 3 - ANALYSIS OF NONINTEREST INCOME
<Table>
<Caption>
Compound
Annual
Growth
Rates (%)
-------------
(Dollars in thousands) 2004 2003 2002 2001 2000 1999 04/03 04/99
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking $ 444,758 $ 649,496 $ 436,706 $ 285,032 $122,454 $298,211 31.5 - 8.3 +
Capital markets 376,558 538,919 448,016 344,278 118,709 126,900 30.1 - 24.3 +
Deposit transactions and cash
management 148,514 146,701 143,315 133,631 116,080 106,240 1.2 + 6.9 +
Merchant processing 75,086 57,609 48,403 45,426 48,232 49,711 30.3 + 8.6 +
Insurance commissions 56,109 57,811 50,446 16,844 12,203 10,912 2.9 - 38.7 +
Trust services and investment
management 47,274 45,873 48,369 56,705 65,817 59,807 3.1 + 4.6 -
Gains on divestitures 7,000 22,498 4,550 80,357 157,635 4,246 NM NM
Equity securities gains/(losses),
net 2,040 8,491 (9,435) (3,290) 754 2,313 NM NM
Debt securities gains/(losses),
net 18,708 (6,113) 255 (1,041) (4,961) (56) NM NM
All other income:
Cardholder fees 25,075 22,698 20,145 20,137 29,666 25,579 10.5 + .4 -
Asset securitizations 23,115 - - - - - NM NM
Other service charges 19,709 19,810 21,204 24,932 23,199 17,430 .5 - 2.5 +
Remittance processing 19,515 23,666 26,016 22,820 24,314 16,683 17.5 - 3.2 +
Check clearing fees 10,052 11,839 13,180 11,615 11,129 11,143 15.1 - 2.0 -
Other 89,673 68,286 60,765 57,575 71,866 59,425 31.4 + 8.6 +
- -----------------------------------------------------------------------------------------------------------
Total other income 187,139 146,299 141,310 137,079 160,174 130,260 27.9 + 7.5 +
- -----------------------------------------------------------------------------------------------------------
Total noninterest income $1,363,186 $1,667,584 $1,311,935 $1,095,021 $797,097 $788,544 18.3 - 11.6 +
===========================================================================================================
</Table>
Certain previously reported amounts have been reclassified to agree with current
presentation.
NM - Due to the variable nature of these items the growth rate is considered to
be not meaningful.
MORTGAGE BANKING
First Horizon Home Loans, an indirect subsidiary of FHN, offers residential
mortgage banking products and services to customers, which consist primarily of
the origination or purchase of single-family residential mortgage loans for sale
to secondary market investors and the subsequent servicing of those loans. First
Horizon Home Loans originates mortgage loans through its retail and wholesale
operations and also purchases mortgage loans from third-party mortgage bankers
(correspondent brokers). Table 4 provides a summary of First Horizon Home Loans'
production/origination of mortgage loans during 2004, 2003 and 2002.
10 First Horizon National Corporation
<Page>
TABLE 4 - PRODUCTION/ORIGINATION OF MORTGAGE LOANS
<Table>
<Caption>
2004 2003 2002
- ------------------------------------------------------------------------------------------------
Retail channel 57% 56% 57%
Wholesale channel 36 35 33
Correspondent brokers 7 9 10
- ------------------------------------------------------------------------------------------------
</Table>
Origination income includes origination fees, net of costs, gains or losses
recognized on loans sold including the capitalized net present value of the MSR,
and the value recognized on loans in process. Origination fees, net of costs
(including incentives and other direct costs), are deferred and included in the
basis of the loans in calculating gains and losses upon sale. Gains or losses
from the sale of loans are recognized at the time a mortgage loan is sold into
the secondary market. A portion of the gain or loss is recognized at the time an
interest rate lock commitment is made to the customer. In second quarter 2004,
FHN adopted SAB No. 105, which prohibited the inclusion of estimated servicing
cash flows within the valuation of interest rate lock commitments under SFAS No.
133. Previously, FHN included a portion of the value of the associated servicing
cash flows when recognizing loan commitments at inception and throughout their
lives. The adoption of SAB No. 105, which lowered earnings by $8.4 million, was
a one-time change and does not affect the ongoing economic value of this
business.
Servicing income includes servicing fees, MSR net hedge gains/(losses), which
reflect the effects of hedging MSR including servicing rights net value changes,
amortization and impairment of MSR, and gains/(losses) related to market value
adjustments on retained interests classified as mortgage trading securities,
primarily interest-only strips, and associated hedges. First Horizon Home Loans
employs hedging strategies intended to counter changes in the value of MSR and
other retained interests due to changing interest rate environments (see
Critical Accounting Policies). Other income includes income from the GNMA
repurchase program, gains from a strategic risk management portfolio sale, and
other miscellaneous items. As shown in Table 5, total mortgage banking
noninterest income decreased 32 percent in 2004.
TABLE 5 - MORTGAGE BANKING
<Table>
<Caption>
Compound Annual
Growth Rates (%)
---------------------
(Dollars and volume in millions) 2004 2003 2002 04/03 04/02
- -------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Origination income - mortgage banking $ 339.8 $ 602.2 $ 412.9 43.6 - 9.3 -
Origination income - residential construction
lending 1.7 .6 .8 187.0 + 45.8 +
- ----------------------------------------------------------------------------------
Total origination income 341.5 602.8 413.7 43.3 - 9.1 -
- ----------------------------------------------------------------------------------
Servicing income 83.8 8.2 (10.2) 923.7 + NM
Other 19.5 38.5 33.2 49.5 - 23.4 -
- ----------------------------------------------------------------------------------
Total mortgage banking noninterest income $ 444.8 $ 649.5 $ 436.7 31.5 - .9 +
==================================================================================
Refinance originations - first lien $13,791 $33,811 $23,457 59.2 - 23.3 -
New loan originations - first lien 16,674 13,280 8,503 25.6 + 40.0 +
- ----------------------------------------------------------------------------------
Mortgage loan originations $30,465 $47,091 $31,960 35.3 - 2.4 -
- ----------------------------------------------------------------------------------
Servicing portfolio $86,587 $68,914 $55,993 25.6 + 24.4 +
- -------------------------------------------------------------------------------------------------------------
</Table>
Certain previously reported amounts have been reclassified to agree with current
presentation.
In 2004, origination income was $341.5 million compared to $602.8 million in
2003, primarily reflecting the decrease in refinance origination volume and
lower margins related to competitive pricing pressures and a change in the
relative mix of originations from a higher percentage of fixed rate to a
First Horizon National Corporation 11
<Page>
higher percentage of adjustable-rate mortgages. Total mortgage first-lien
originations decreased 35 percent to $30.5 billion compared to $47.1 billion in
2003. Refinance activity decreased to 45 percent of total originations in 2004
compared to 72 percent in 2003. Given the industry-wide decline in refinance
volume, the decrease in production volume was expected. However, home-purchase
related originations grew 26 percent in 2004 as the focus of the sales force
shifted from refinance to purchase business and growth in the sales force
continued. Loans securitized and sold into the secondary market decreased 41
percent to $29.3 billion as origination volume decreased.
The mortgage-servicing portfolio was $86.6 billion on December 31, 2004,
compared to $68.9 billion on December 31, 2003. The portfolio on December 31,
2004, includes approximately $11 billion of loans for which the servicing rights
were acquired in 2004. Servicing fees increased $43.6 million or 23 percent
primarily due to growth in the servicing portfolio. Amortization expense
increased $20.4 million or 15 percent also as a result of the growth in the
servicing portfolio. Total servicing income increased $75.6 million due to the
positive impact of the servicing fee growth combined with a decline in
impairment costs of $121.3 million, which resulted from the impact that rising
interest rates had on mortgage prepayments in the servicing portfolio. These
positive impacts were partially offset by the higher amortization costs and
lower net hedge gains, which fell $67.2 million reflecting the impacts of
interest rate volatility, the flattening of the yield curve and higher costs
associated with increased use of option-based hedge instruments.
Other mortgage income decreased 50 percent to $19.5 million for 2004 compared
with $38.5 million in 2003 primarily due to a decline in noninterest income from
the GNMA repurchase program under which First Horizon Home Loans repurchases
delinquent loans to reduce future foreclosure costs. Much of this decline
resulted from a reclassification at the end of 2003 of loans repurchased prior
to foreclosure to loans held for sale from other assets and the associated yield
on those assets being included in net interest income in 2004.
Going forward, revenue from refinance loan originations will depend on mortgage
interest rates. Over time, an increase in rates should reduce origination fees
and profit from the sale of loans, but should also reduce MSR impairment losses,
while a decrease in rates should increase this net revenue. Home-purchase
related originations should reflect the relative strength or weakness of the
economy and the growth of the sales force. Actual results could differ because
of several factors, including those presented in the Forward-Looking Statements
section of the MD&A discussion.
CAPITAL MARKETS
Capital markets noninterest income, the major component of revenue in the
Capital Markets segment, is primarily generated from the purchase and sale of
securities as both principal and agent, and from investment banking, portfolio
advisory and research services. Inventory positions are limited to the
procurement of securities solely for distribution to customers by the sales
staff. Inventory is hedged to protect against movements in fair value due to
changes in interest rates.
Capital markets noninterest income decreased 30 percent to $376.5 million from
$538.9 million in 2003, primarily due to a reduction in fixed income securities
sales. Uncertainties 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, 2003 was favorably impacted by higher
cash flows from 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 $133.6 million. Revenues from other fee sources
include fee income from activities such as investment banking, equity research,
portfolio advisory, and the sale of various financial products. These revenues
decreased 17 percent from 2003, primarily as a result of lower revenue in
structured finance transactions.
Going forward, capital markets noninterest income is expected to be positively
impacted by the acquisition of SLK and further development of the investment
banking business, while demand from the traditional customer base will fluctuate
based upon interest rate expectations.
12 First Horizon National Corporation
<Page>
TABLE 6 - CAPITAL MARKETS
<Table>
<Caption>
Compound Annual
Growth Rates (%)
------------------------
(Dollars in millions) 2004 2003 2002 04/03 04/02
- ----------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Fixed income - depository $134.3 $228.4 $182.2 41.2 - 14.1 -
Fixed income - non-depository 98.6 138.1 119.9 28.6 - 9.3 -
Other products and services 143.6 172.4 145.9 16.7 - .8 -
- -------------------------------------------------------------------------------
Total capital markets noninterest
income $376.5 $538.9 $448.0 30.1 - 8.3 -
===============================================================================
</Table>
DEPOSIT TRANSACTIONS AND CASH MANAGEMENT
Deposit transactions include services related to retail deposit products (such
as service charges on checking accounts), cash management products and services
such as electronic transaction processing (automated clearing house and
Electronic Data Interchange), account reconciliation services, cash vault
services, lockbox processing, and information reporting to large corporate
clients. Noninterest income from deposit transactions and cash management was
$148.5 million in 2004 compared to $146.7 million in 2003.
MERCHANT PROCESSING
Merchant processing involves converting transactions from plastic media such as
debit cards, credit cards, purchase cards, and private label credit cards into
cash for merchants that sell goods and services to consumers and businesses. Fee
income from merchant processing increased 30 percent in 2004 to $75.1 million
from $57.6 million in 2003, as new and existing clients experienced increases in
transaction activity.
INSURANCE COMMISSIONS
Insurance commissions are derived from the sale of insurance products and
annuities, including acting as an independent agent to provide commercial and
personal property and casualty, life, long-term care, and disability insurance.
Noninterest income from insurance commissions was $56.1 million in 2004 compared
to $57.8 million in 2003.
TRUST SERVICES AND INVESTMENT MANAGEMENT
Trust services and investment management fees include investment management,
personal trust, employee benefits, and custodial trust services and are
influenced by equity and fixed income market activity. Noninterest income from
trust services and investment management was $47.3 million in 2004 compared to
$45.9 million in 2003.
GAINS ON DIVESTITURES
Gains from divestitures totaled $7.0 million in 2004 and $22.5 million in 2003.
Divestiture gains in 2004 resulted primarily from the sale of certain merchant
relationships. The gain in 2003 reflects FHN's divestiture of substantially all
of the assets and liabilities of its wholly owned subsidiary, Springdale, as
well as the sale of certain merchant relationships referred by selected agent
banks within the merchant portfolio. See Note 2 - Acquisitions/Divestitures for
additional information.
SECURITIES GAINS/(LOSSES)
In 2004 there were $20.7 million of net securities gains compared to $2.4
million in 2003. Net securities gains for 2004 include $18.7 million of gains
from sales of investment securities compared
First Horizon National Corporation 13
<Page>
to net losses of $6.1 million in 2003. In 2004, net securities gains from equity
investments of $2.0 million include the impact of a $3.9 million loss recognized
related to other-than-temporary impairment of an investment in Freddie Mac
equity securities and a gain of $5.5 million resulting from the liquidation of a
holding company investment. In 2003, net securities gains from equity
investments of $8.5 million primarily resulted from the sale of a venture
capital investment from FHN's wholly-owned venture capital subsidiary, Hickory
Venture Capital Corporation.
ALL OTHER INCOME
All other income increased 28 percent to $187.1 million in 2004 from $146.3
million in 2003. This growth was led by $23.1 million net gains from the
securitization of HELOC and second-lien mortgages as FHN continues to utilize
securitizations to manage liquidity and fund new loan growth. In 2003, net
losses of $5.4 million resulted from the sale of equity lending loans.
NONINTEREST EXPENSE
Total noninterest expense for 2004 decreased 10 percent to $1,504.3 million from
$1,667.7 million in 2003. Based on the strong earnings experienced in 2003,
noninterest expense included $85.4 million of discretionary spending on
performance enhancing initiatives. Table 8 provides detail by category for the
past six years with growth rates.
Personnel expense decreased 8 percent to $915.0 million from $995.6 million in
2003 primarily due to lower activity levels in capital markets in 2004,
reflecting lower commissions and incentives. Included in personnel expense is
the net periodic benefit cost for FHN's pension plan of $7.1 million in 2004, as
compared to $5.5 million in 2003. FHN anticipates, based on current conditions
that net periodic benefit cost for the Pension Plan will increase by $2.3
million in 2005 as a result of additional participants in the supplemental
executive retirement plan, normal growth in the qualified pension plan and a
decrease in assumed earnings on assets in the qualified plan.
The declines in advertising, legal and professional fees, charitable
contributions, and other expenses are all primarily related to discretionary
spending reductions in 2004. The decline in travel and entertainment, contract
employment and foreclosed real estate are primarily related to the lower
activity levels in mortgage banking in 2004. The adoption of SFAS No. 150 on
July 1, 2003, resulted in the expense associated with distributions on preferred
stock of a subsidiary being included in interest expense subsequent to adoption,
and the adoption of FIN 46 on December 31, 2003, resulted in the expense
associated with distributions on guaranteed preferred securities being included
in interest expense subsequent to adoption. Additional information related to
expenses by business line is provided in Table 7.
TABLE 7 - NONINTEREST EXPENSE COMPOSITION
<Table>
<Caption>
(Dollars in millions) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------
Retail/Commercial Banking $ 721.2 $ 709.2 $ 651.3
Mortgage Banking 438.4 466.2 344.8
Capital Markets 300.9 396.8 326.8
Corporate 43.8 95.5 94.3
- ------------------------------------------------------------------------------------------------------------
Total noninterest expense $1,504.3 $1,667.7 $1,417.2
============================================================================================================
</Table>
Certain previously reported amounts have been reclassified to agree with current
presentation.
14 First Horizon National Corporation
<Page>
TABLE 8 - ANALYSIS OF NONINTEREST EXPENSE
<Table>
<Caption>
Compound Annual
Growth Rates (%)
----------------
(Dollars in thousands) 2004 2003 2002 2001 2000 1999 04/03 04/99
- -----------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation,
incentives and benefits $ 914,947 $ 995,609 $ 830,672 $ 670,934 $508,335 $488,759 8.1 - 13.4 +
Occupancy 89,402 83,583 76,669 69,069 80,453 73,052 7.0 + 4.1 +
Equipment rentals, depreciation
and maintenance 72,695 68,973 68,736 74,106 68,230 57,807 5.4 + 4.7 +
Operations services 67,523 67,948 60,238 59,635 70,875 64,545 .6 - .9 +
Communications and courier 49,590 50,535 45,085 42,191 41,892 45,311 1.9 - 1.8 +
Amortization of intangible
assets 9,541 7,980 6,200 10,805 11,738 10,492 19.6 + 1.9 -
All other expense:
Advertising and public
relations 39,961 43,955 35,982 35,508 26,693 30,187 9.1 - 5.8 +
Legal and professional fees 37,730 60,001 37,340 32,087 26,794 22,492 37.1 - 10.9 +
Travel and entertainment 30,794 37,432 22,501 17,489 13,891 18,698 17.7 - 10.5 +
Computer software 28,906 28,828 26,140 25,107 19,205 15,410 .3 + 13.4 +
Contract employment 23,714 33,790 28,987 30,082 28,157 40,804 29.8 - 10.3 -
Supplies 17,591 18,783 15,145 13,765 16,411 19,087 6.3 - 1.6 -
Fed service fees 8,838 9,195 9,597 7,761 7,112 6,471 3.9 - 6.4 +
Foreclosed real estate 5,834 13,137 21,479 25,452 16,080 6,585 55.6 - 2.4 -
Deposit insurance premium 3,024 2,703 2,393 2,463 2,589 1,790 11.9 + 11.1 +
Charitable contributions 1,497 13,370 48,337 1,745 1,188 1,335 88.8 - 2.3 +
Distributions on guaranteed
preferred securities - 8,070 8,070 8,070 8,070 8,070 100.0 - 100.0 -
Distributions on preferred
stock of subsidiary - 2,282 4,564 4,535 1,178 - 100.0 - NM
Other 102,753 121,498 69,171 71,348 44,636 32,511 15.4 - 25.9 +
- ----------------------------------------------------------------------------------------------------------
Total other expense 300,642 393,044 329,706 275,412 212,004 203,440 23.5 - 8.1 +
- ----------------------------------------------------------------------------------------------------------
Total noninterest expense $1,504,340 $1,667,672 $1,417,306 $1,202,152 $993,527 $943,406 9.8 - 9.8 +
==========================================================================================================
</Table>
NM - not meaningful
Certain previously reported amounts have been reclassified to agree with current
presentation.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the charge to earnings that management
determines to be necessary to maintain the allowance for loan losses at an
adequate level reflecting management's estimate of probable incurred losses in
the loan portfolio. An analytical model based on historical loss experience
adjusted for current events, trends and economic conditions is used by
management to assess the adequacy of the loan loss allowance and to determine
the amount of provision to be recognized. The provision for loan losses
decreased 44 percent in 2004 to $48.3 million from $86.7 million in 2003. The
improvement in 2004's provision is related to the positive shift in the mix of
the loan portfolio and the reduction in specific allocations related to large
commercial credits. The risk profile of the retail loan portfolio has continued
to improve as successful cross-sell efforts to mortgage banking customers have
shifted the mix of the portfolio to a greater concentration of loans to high
credit score borrowers, which require lower reserves. As the economic
environment strengthened, the risk profile of the commercial loan portfolio
improved as indicated by current lower levels of watch list and classified
loans.
First Horizon National Corporation 15
<Page>
INCOME TAXES
The effective tax rate for 2004 was 31.9 percent compared to 34.2 percent for
2003. Lower state taxes in 2004 contributed to the reduction in the effective
tax rate. In addition, the decline in the tax rate was affected by the sale of
Springdale in 2003 which increased taxes during 2003 as $4.9 million of tax
expense was recognized from the gain on the sale and an additional $4.9 million
of tax expense was recognized primarily due to the difference in the book value
and the tax basis of goodwill (a total of $9.8 million tax expense).
Springdale's assets were recorded at fair value for book purposes but not for
tax purposes when acquired by FHN in 1995.
INCOME STATEMENTS ANALYSIS - 2003 COMPARED TO 2002
Earnings in 2003 were $473.3 million, an increase of 26 percent from $376.5
million earned in 2002. Diluted earnings per common share increased 25 percent
to $3.62 in 2003 from $2.89 in 2002. Return on average assets was 1.88 percent
in 2003 compared with 1.82 percent in 2002, and return on average shareholders'
equity was 26.3 percent in 2003 compared with 24.0 percent in 2002.
During 2003 net interest income increased 7 percent to $805.8 million from
$755.6 million, reflecting a larger portfolio of mortgage warehouse loans, which
grew 46 percent on average to $4.4 billion from $3.0 billion in 2002. This
positive impact on net interest income was largely offset by compression in the
net interest margin resulting from the repricing of assets to lower yields as
liability rates became less sensitive to rate movements in a historically low
interest rate environment, and as the mix of the loan portfolio shifted to a
higher percentage of floating rate products. Investment yields declined as
accelerated prepayments of investments in mortgage-backed securities resulted in
increased amortization of premiums and the proceeds from the prepaid investments
were reinvested at lower rates. The consolidated net interest margin decreased
to 3.78 percent for 2003 compared with 4.35 percent for 2002. See Table 1 for a
detailed computation of the net interest margin for FHN.
Noninterest income increased 27 percent during 2003, to $1,667.6 million from
$1,311.9 million and contributed 67 percent to total revenue in 2003 compared to
63 percent in 2002. During 2003 mortgage banking noninterest income increased 49
percent to $649.5 million from $436.7 million, due to increased origination
volumes. This increased activity resulted in higher net fees from the mortgage
origination process which increased 46 percent to $602.8 million in 2003. While
growth in refinance activity produced increased origination fee income, it also
substantially increased actual and projected MSR prepayment speeds, which was
the primary reason for the $132.3 million, or 12 percent, increase in MSR
amortization expense, and a $158.3 million impairment loss in 2003 compared to a
$150.2 million loss in 2002. The decrease in fair value of MSR attributed to
declining interest rates was significantly offset by an expected increase in the
value of the derivative financial instruments used to hedge the change in fair
value of the hedged MSR. MSR net hedge gains were $115.2 million in 2003
compared to $100.8 million in 2002 (both years represent an increase in the
value of hedges offset by a decrease in the value of hedged MSR). See Table 5
for detail of mortgage banking noninterest income. In 2003 capital markets
noninterest income increased 20 percent to $538.9 million from $448.0 million.
This increase reflected continued growth and penetration into the targeted
institutional customer base through enhanced product and service lines.
Additionally, revenue was favorably impacted in 2003 by increased liquidity of
depository institution customers as well as a continued marketing focus on
developing capital markets' non-depository account base. During 2003 deposit
transactions and cash management fees increased 2 percent to $146.7 million from
$143.3 million primarily due to an increase in returned check charges. During
2003 insurance commissions increased 15 percent to $57.8 million from $50.4
million primarily due to Synaxis, a wholly owned insurance broker, which
experienced increased revenues from internal expansion and an acquisition.
Merchant processing fees increased 19 percent to $57.6 million from $48.4
million in 2002 primarily due to portfolio acquisitions. During 2003 total
noninterest income from trust services and investment management decreased 5
percent to $45.9 million from $48.4 million as difficult equity market
conditions negatively impacted results. Gains from divestitures totaled $22.5
million and $4.6 million in 2003 and 2002, respectively. The gains in 2003
reflect FHN's divestiture of substantially all of the
16 First Horizon National Corporation
<Page>
assets and liabilities of Springdale and the sale of certain merchant
relationships. The gain in 2002 reflects First Horizon Money Centers' loan
portfolio sale and an adjustment to the gain recognized on the sale of Check
Solutions Company in 2001. In 2003 there were $2.4 million of net securities
gains compared with $9.2 million of net securities losses for 2002. In 2003 net
securities gains from equity investments of $8.5 million primarily resulted from
the sale of a venture capital investment from FHN's wholly-owned venture capital
subsidiary, Hickory Venture Capital Corporation, and net losses of $6.1 million
were related to sales of investment securities. In 2002 the losses were
primarily related to impairment of equity investments held by FHN's venture
capital subsidiaries. All other noninterest income increased 4 percent in 2003,
to $146.3 million from $141.3 million, with the growth being spread over several
categories.
Total noninterest expense for 2003 increased 18 percent to $1,667.7 million from
$1,417.2 million in 2002. Employee compensation, incentives and benefits
increased 20 percent to $995.6 million from $830.6 million in 2002 primarily due
to higher activity levels in capital markets and mortgage banking. Occupancy
expense increased 9 percent to $83.6 million compared to $76.7 million in 2002
primarily due to costs associated with the opening of new offices related to
increased origination volumes. Operations services increased 13 percent to $67.9
million from $60.2 million in 2002, primarily due to business expansion and
costs related to transitioning to a new information technology provider.
Communications and courier expense increased 12 percent to $50.5 million in 2003
from $45.1 million primarily due to the increased activity levels of mortgage
banking and capital markets. All other expense increased 19 percent to $393.1
million from $329.7 million in 2002. Contributing to this increase were
investments in initiatives focused on benefiting future performance, including
professional fees, debt restructuring and marketing programs. Also contributing
to the increase was a loss of $16.3 million related to the termination of a
lease arrangement with a single-purpose entity for First Horizon Home Loans'
main office headquarters, the growth in expense associated with higher activity
levels in First Horizon, an increase of $5.3 million related to insuring certain
real estate residential loans, and a $9.8 million contribution to First Horizon
Foundation, a non-profit entity dedicated to supporting charitable causes in the
diverse communities where FHN does business. Partially offsetting these
increases was a decline in foreclosure losses. In 2002 charitable contributions
included $45.0 million in contributions to First Horizon Foundation.
The provision for loan losses decreased 6 percent, to $86.7 million in 2003
compared with $92.2 million in 2002. The decline in provision would have been
greater except for the transfer of certain retail loans to held for sale which
increased 2003's provision. The improvement in 2003's provision is related to
the positive shift in the mix of the loan portfolio and improvement in specific
allocations related to large commercial credits.
STATEMENTS OF CONDITION REVIEW
On December 31, 2004, FHN reported total assets of $29.8 billion compared with
$24.5 billion at the end of 2003 and $23.8 billion at the end of 2002. Average
assets were $27.3 billion in 2004 compared with $25.1 billion in 2003 and $20.7
billion in 2002. In 2004 an increase in earning assets accounted for 110 percent
of the growth in average assets.
EARNING ASSETS
Earning assets primarily consist of loans, loans held for sale and investment
securities. During 2004, earning assets averaged $23.7 billion compared with
$21.3 billion and $17.4 billion for 2003 and 2002, respectively. Average earning
assets were 87 percent of total average assets in 2004, compared with 85 percent
and 84 percent in 2003 and 2002, respectively.
LOANS
Average loans increased 22 percent to $15.4 billion during 2004 as retail loans
grew 30 percent and commercial loans grew 12 percent. Average loans grew 19
percent to $12.7 billion during 2003. Average loans represented 65 percent of
average earning assets in 2004; 59 percent in 2003; and
First Horizon National Corporation 17
<Page>
61 percent in 2002. In 2004, FHN transferred approximately $1.6 billion of real
estate residential loans to available for sale as a result of management's
ongoing evaluation of alternative sources of funding, including securitizations,
as loan growth exceeded core deposit growth. On December 31, 2003, FHN sold
substantially all of the assets and liabilities of Springdale which had average
loans of approximately $175 million in 2003. In prior years, FHN securitized
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 2003, FHN elected to repurchase 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. Additional loan information is provided in Table 9 and Note 4 - Loans.
TABLE 9 - AVERAGE LOANS
<Table>
<Caption>
2004 2003
PERCENT GROWTH Percent Growth Percent
(Dollars in millions) 2004 OF TOTAL RATE 2003 of Total Rate 2002 of Total
- ----------------------------------------------------------------------------------------------------------------------
Commercial:
Commercial, financial and
industrial $ 4,845.6 31% 12.6% $ 4,304.6 34% 8.0% $ 3,986.6 37%
Real estate commercial 959.3 6 (9.2) 1,056.4 8 2.7 1,028.7 10
Real estate construction 895.6 6 41.5 632.9 5 22.4 516.7 5
- ----------------------------------------------------- -------------------- ---------------------
Total commercial 6,700.5 43 11.8 5,993.9 47 8.3 5,532.0 52
- ----------------------------------------------------- -------------------- ---------------------
Retail:
Real estate residential 7,533.0 49 31.8 5,716.9 45 36.6 4,185.1 39
Real estate construction 714.6 5 68.5 424.0 4 61.9 261.9 2
Other retail 186.3 1 (28.2) 259.5 2 (33.6) 390.7 4
Credit card receivables 250.2 2 (4.5) 262.0 2 (1.1) 264.8 3
- ----------------------------------------------------- -------------------- ---------------------
Total retail 8,684.1 57 30.3 6,662.4 53 30.6 5,102.5 48
- ----------------------------------------------------- -------------------- ---------------------
Total loans, net of unearned $ 15,384.6 100% 21.6% $12,656.3 100% 19.0% $ 10,634.5 100%
===================================================== ==================== =====================
</Table>
Commercial loans consist of commercial, financial and industrial; commercial
real estate; and commercial construction loans. Commercial, financial and
industrial loans continued as the single largest loan category within commercial
loans and represented 72 percent of the commercial loan portfolio in 2004, 2003
and 2002. Commercial, financial and industrial loans increased 13 percent, or
$541.0 million, in 2004 as general economic conditions improved. Commercial
construction loans grew 42 percent in 2004 or $262.7 million, after increasing
22 percent or $116.2 million in 2003. The increase in commercial construction
lending is primarily from growth in loans to single-family residential builders
made through First Horizon Home Loans, reflecting the strong demand for single-
family housing and expansion of the sales force and geographic reach. Commercial
real estate loans decreased 9 percent or $97.1 million primarily due to the
divestiture of Springdale. Additional commercial loan information is provided in
Table 10.
18 First Horizon National Corporation
<Page>
TABLE 10 - CONTRACTUAL MATURITIES OF COMMERCIAL LOANS ON DECEMBER 31, 2004
<Table>
<Caption>
After 1 Year
(Dollars in thousands) Within 1 Year Within 5 Years After 5 Years Total
- -------------------------------------------------------------------------------------------------------------
Commercial, financial and industrial $3,274,160 $2,072,353 $214,223 $5,560,736
Real estate commercial 361,937 488,718 109,523 960,178
Real estate construction 809,100 367,291 32,312 1,208,703
- -------------------------------------------------------------------------------------------------------------
Total commercial loans, net of unearned income $4,445,197 $2,928,362 $356,058 $7,729,617
=============================================================================================================
For maturities over one year:
Interest rates - floating $1,729,898 $140,683 $1,870,581
Interest rates - fixed 1,198,464 215,375 1,413,839
- -------------------------------------------------------------------------------------------------------------
Total $2,928,362 $356,058 $3,284,420
=============================================================================================================
</Table>
The retail loan portfolio consists of residential real estate (principally
secured by first and/or second liens on residential property), other retail
(automobile and other retail installment loans requiring periodic payments of
principal and interest), credit card, and retail construction loans. Residential
real estate loans accounted for 87 percent of the retail loan portfolio in 2004,
86 percent in 2003 and 82 percent in 2002. The residential real estate loan
portfolio grew 32 percent or $1.8 billion in 2004, and grew 37 percent or $1.5
billion in 2003, primarily due to growth in HELOC. The retail real estate
construction portfolio increased 69 percent or $290.6 million in 2004, after
growing 62 percent or $162.1 million in 2003. Retail real estate residential
construction loans are made to individuals for the purpose of constructing a
home where First Horizon Home Loans is committed to make the permanent mortgage.
The increase in these loans reflects the favorable housing environment and
expansion of the sales force and geographic reach. Other retail loans decreased
28 percent or $73.2 million in 2004, and decreased 34 percent or $131.2 million
in 2003 largely due to a decline in automobile lending.
Going forward, FHN expects loan growth to reflect the relative strength of the
economy and the continued success of the sales force and national expansion
efforts. FHN will continue to evaluate alternative sources of funding which may
include loan sales, securitizations, syndications, equity offerings and debt
offerings.
INVESTMENT SECURITIES
The investment portfolio of FHN consists principally of debt securities used as
a source of income, liquidity and collateral for repurchase agreements or public
fund deposits. Additionally, the investment portfolio is used as a tool to
manage risk from movements in interest rates. On December 31, 2004, the
investment portfolio totaled $2.7 billion. The investment portfolio is
classified into two categories: securities available for sale (AFS) and
securities held to maturity (HTM). Table 11 shows information pertaining to the
composition, yields and contractual maturities of the investment securities
portfolio.
First Horizon National Corporation 19
<Page>
TABLE 11 - CONTRACTUAL MATURITIES OF INVESTMENT SECURITIES ON DECEMBER 31, 2004
(AMORTIZED COST)
<Table>
<Caption>
After 1 Year After 5 Years
Within 1 Year Within 5 Years Within 10 Years After 10 Years
--------------- ---------------- --------------- ---------------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY (HTM):
States and municipalities* $ 35 9.63% $ 406 7.66% $ - -% $ - -%
- ---------------------------------------------------------------------------------------------------------------------
Total $ 35 9.63% $ 406 7.66% $ - -% $ - -%
=====================================================================================================================
SECURITIES AVAILABLE FOR SALE (AFS):
Government agency issued MBS and CMO** $ 32 9.40% $ 99,382 4.33% $50,567 4.52% $2,252,995 4.34%
U.S. Treasuries 40,857 2.05 202 3.10 364 4.27 - -
Other U.S. government agencies 1,000 6.08 - - 39,794 4.19 - -
States and municipalities* 994 7.87 - - - - 6,710 7.93
Other 2,824 8.00 3,197 5.52 1,251 5.10 191,994*** 3.73
- ---------------------------------------------------------------------------------------------------------------------
Total $45,707 2.64% $102,781 4.36% $91,976 4.38% $2,451,699 4.30%
=====================================================================================================================
</Table>
* Weighted average yields on tax-exempt obligations have been computed by
adjusting allowable tax-exempt income to a fully taxable equivalent basis
using a tax rate of 29 percent.
** Represents government agency issued mortgage-backed securities and
collateralized mortgage obligations which, when adjusted for early paydowns,
have an estimated average life of 3.6 years.
*** Represents equity securities with no stated maturity.
Investment securities averaged $2.4 billion in 2004 and $2.5 billion in 2003.
Investment securities represented 10 percent of earning assets in 2004, 12
percent in 2003 and 14 percent in 2002.
On December 31, 2004, AFS securities totaled $2.7 billion and consisted
primarily of mortgage-backed securities (MBS), collateralized mortgage
obligations (CMO), U.S. Treasuries, U.S. government agencies, and equities. On
December 31, 2004, these securities had $11.6 million of net unrealized losses
that resulted in a decrease in book equity of $7.1 million, net of $4.5 million
of deferred income taxes. See Note 3 - Investment Securities for additional
detail. On December 31, 2003, AFS securities totaled $2.5 billion and had $5.2
million of net unrealized gains that resulted in an increase in book equity of
$3.2 million, net of $2.0 million of deferred income taxes.
LOANS HELD FOR SALE
Loans held for sale consist of the mortgage warehouse, HELOC, second-lien
mortgages, student loans, small issuer trust preferred securities and credit
card receivables. The mortgage warehouse accounts for the majority of loans held
for sale. Loans held for sale represented 18 percent of total earning assets in
2004 compared with 21 percent in 2003 and 17 percent in 2002. During 2004 loans
held for sale averaged $4.2 billion a decrease of 5 percent or $241.3 million
from 2003. During 2003 loans held for sale averaged $4.4 billion and increased
46 percent or $1.4 billion from 2002 as a result of a higher level of
originations. Since mortgage warehouse loans and other loans held for sale are
generally held in inventory for a short period of time, there may be significant
differences between average and period-end balances. At year-end 2004, loans
held for sale totaled $5.2 billion compared to $3.0 billion at the end of 2003
due to an increase in HELOC held for sale.
DEPOSITS AND OTHER SOURCES OF FUNDS
DEPOSITS
During 2004 core deposits decreased 2 percent, or $185.8 million, and averaged
$10.8 billion. This decrease reflects the divestiture of Springdale which had
core deposits of approximately $245 million
20 First Horizon National Corporation
<Page>
in 2003 and a decline in escrow balances due to lower mortgage refinance
originations in 2004. In 2003 core deposits increased 11 percent, or $1.1
billion, to an average balance of $10.9 billion from $9.8 billion in 2002 as
escrow balances increased due to the high refinance origination volume.
Interest-bearing core deposits increased 4 percent or $254.9 million to an
average balance of $6.1 billion in 2004 from $5.8 billion in 2003 and 2002. This
growth rate was negatively impacted by the divestiture of Springdale, which had
interest-bearing core deposits of approximately $200 million in 2003. Growth in
interest-bearing core deposits is attributable to expansion strategies which
emphasize a focus on convenient hours, free checking and targeted financial
center expansions. Noninterest-bearing core deposits, which averaged $4.7
billion in 2004, decreased 9 percent or $440.6 million primarily due to lower
escrow balances in mortgage banking. Noninterest-bearing core deposits averaged
$5.1 billion in 2003 and grew 27 percent or $1.1 billion. This growth was
largely due to an increase in mortgage escrow and clearing accounts resulting
from the strong mortgage origination volume experienced in 2003 and an increase
in corporate deposits. In 2002, noninterest-bearing core deposits averaged $4.0
billion. Going forward, FHN expects to implement strategic growth initiatives
including offering financial services, such as deposit-taking, in key markets
where FHN already has an established mortgage-banking customer base.
OTHER SOURCES OF FUNDS
Short-term purchased funds (certificates of deposit greater than $100,000,
federal funds purchased, securities sold under agreements to repurchase,
commercial paper, and other short-term borrowings) averaged $11.2 billion for
2004, up 17 percent or $1.6 billion from the previous year. The increase in
short-term purchased funds was used to fund earning asset growth of 11 percent
or $2.4 billion in 2004. Short-term purchased funds increased 27 percent or $2.0
billion in 2003 and averaged $9.5 billion and $7.5 billion during 2003 and 2002,
respectively. Short-term purchased funds accounted for 46 percent of FHN's
funding (core deposits plus purchased funds and term borrowings) in 2004, 44
percent in 2003, and 42 percent in 2002. See Note 9 - Short-Term Borrowings
for additional information.
Term borrowings included senior and subordinated borrowings and advances with
original maturities greater than one year. Term borrowings increased 67 percent
or $905.1 million and averaged $2.2 billion in 2004 compared to $1.3 billion in
2003, which increased 96 percent from $.7 billion in 2002. The increase in term
borrowings was also utilized in funding earning asset growth. Term borrowings on
December 31, 2004, were $2.6 billion, an increase of 52 percent, or $.9 billion
from 2003 year-end. See Note 10 - Term Borrowings for additional information.
CAPITAL
Capital adequacy is an important indicator of financial stability and
performance. Management's objectives are to maintain a level of capitalization
that is sufficient to sustain asset growth, take advantage of profitable growth
opportunities and promote depositor and investor confidence. Overall, FHN's
capital position remained strong as shown in Table 12. Unrealized market
valuations had no material effect on the ratios.
TABLE 12 - CAPITAL RATIOS
<Table>
<Caption>
2004 2003 2002
- ------------------------------------------------------------------------------------------------
Average shareholders' equity to average assets 6.98% 7.16% 7.58%
Period-end shareholders' equity to assets 6.86 7.71 7.10
FHN's tier 1 risk-based capital 8.62 9.22 8.93
FHN's total risk-based capital 13.18 13.19 11.54
FHN's leverage 7.16 7.19 6.91
- ------------------------------------------------------------------------------------------------
</Table>
First Horizon National Corporation 21
<Page>
Banking regulators define minimum capital ratios for bank holding companies and
their bank subsidiaries. Based on the capital rules and definitions prescribed
by the banking regulators, should any depository institution's capital ratios
decline below predetermined levels, it would become subject to a series of
increasingly restrictive regulatory actions. The system categorizes a depository
institution's capital position into one of five categories ranging from
well-capitalized to critically under-capitalized. For an institution to qualify
as well-capitalized, Tier 1 Capital, Total Capital and Leverage capital ratios
must be at least 6 percent, 10 percent and 5 percent, respectively. As of
December 31, 2004, FHN and FTBNA had sufficient capital to qualify as
well-capitalized institutions as shown in Note 13 - Regulatory Capital.
Shareholders' equity was $2.0 billion at year-end 2004, up 8 percent from 2003,
which increased 12 percent from year-end 2002. The increase in shareholders'
equity during 2004 and 2003 came from retention of net income after dividends
and the effects of stock option exercises reduced by shares repurchased. The
Consolidated Statements of Shareholders' Equity highlight the changes in equity
since December 31, 2001.
On December 31, 2004, the closing sales price of FHN's common stock was $43.11
per share. The annual dividend yield for 2004 was 3.7 percent based on dividends
declared in 2004 and the closing market price of $44.10 on December 31, 2003. On
October 19, 2004, the board of directors extended the authorization, originally
announced in 2000, for the non-stock option plan-related repurchase of shares
from December 31, 2004, until December 31, 2007. Approximately 5.7 million
shares remain available under this authority. Repurchases, if any, are made in
the open market or through privately negotiated transactions and are subject to
market conditions, accumulation of excess equity and prudent capital management.
Pursuant to previously granted board authority, FHN may repurchase shares from
time to time for its stock option and other compensation plans and will evaluate
the level of capital and take action designed to generate or use capital as
appropriate for the interests of the shareholders.
TABLE 13 - ISSUER PURCHASES OF EQUITY SECURITIES
<Table>
<Caption>
Total Number of Maximum Number of
Total Shares Purchased as Shares that May
Number of Average Price Part of Yet Be Purchased
Shares Paid per Publicly Announced Under the Plans or
(Volume in thousands) Purchased Share Plans or Programs Programs
- ---------------------------------------------------------------------------------------------------------------
2004
October 1 to October 31 - - - 30,021
November 1 to November 30 - - - 30,021
December 1 to December 31 - - - 30,021
- --------------------------------------------------------------------------------------
TOTAL - - -
======================================================================================
</Table>
Compensation Plan Programs:
- A consolidated compensation plan share purchase program was approved on
July 20, 2004 and was announced on August 6, 2004. This plan consolidates
into a single share purchase program all of the previously authorized
compensation plan share programs as well as the renewal of the authorization
to purchase shares for use in connection with two compensation plans for
which the share purchase authority had expired. The total amount authorized
under this consolidated compensation plan share purchase program is 25.1
million shares which may be purchased over the option exercise period of the
various compensation plans on or before December 31, 2023. Stock options
granted after January 2, 2004, must be exercised no later than the tenth
anniversary of the grant date.
Other Programs:
- A non-stock option plan-related authority was announced on October 18, 2000,
authorizing the purchase of up to 9.5 million shares. On October 16, 2001,
it was announced that FHN's board of directors extended the expiration date
of this program from June 30, 2002, until December 31, 2004. On October 19,
2004, the board of directors extended the authorization until December 31,
2007. On December 31, 2004, 5.7 million shares remained available for
purchase under this program.
On December 31, 2004, book value per common share was $16.39 compared to $15.01
for 2003 and $13.35 for 2002. Average shares for the three-year period were
124.7 million in 2004, 126.8 million in 2003 and 126.7 million in 2002.
Period-end shares outstanding for this same three-year period were 123.5
million, 124.8 million and 125.6 million, respectively. The decline in shares
22 First Horizon National Corporation
<Page>
outstanding in 2004 was primarily related to share repurchases made to offset
the impact of the issuance of trust preferred securities and the divestiture of
Springdale. The decline in shares outstanding in 2003 was primarily related to
the repurchase of shares in connection with the divestiture of Springdale. FHN's
shares are traded on The New York Stock Exchange under the symbol FHN. The sales
price ranges, net income per share and dividends declared by quarter, for each
of the last two years, are presented in Table 25.
While FHN may repurchase shares from time to time based upon factors described
above, in order to maintain FHN's well-capitalized status while sustaining the
strong balance sheet growth anticipated for 2005 through loan growth and the
impact of the SLK acquisition, management currently is not repurchasing shares
and is considering capital generation alternatives.
RISK MANAGEMENT
FHN has an enterprise-wide approach to risk governance, measurement, management,
and reporting including an economic capital allocation process that is tied to
risk profiles used to measure risk-adjusted returns. The Enterprise-wide
Risk/Return Management Committee oversees risk management governance. Committee
membership includes the CEO and other executive officers of FHN. The Executive
Vice President (EVP) of Risk Management oversees reporting for the committee.
Risk management objectives include evaluating risks inherent in business
strategies, monitoring proper balance of risks and returns, and managing risks
to minimize the probability of future negative outcomes. The Enterprise-wide
Risk/Return Management Committee oversees and receives regular reports from the
Senior Credit Policy Committee, Asset/Liability Committee (ALCO), and
Operational Risk Committee. The EVP and Chief Credit Officer, EVP of Interest
Rate Risk Management, and EVP of Risk Management chair these committees,
respectively. Reports regarding Credit, Asset/Liability, Market, and Operational
Risks are provided to the Executive and Audit Committees of the Board and to the
full Board.
Risk management practices include key elements such as independent checks and
balances, formal authority limits, policies and procedures, and portfolio
management all executed through experienced personnel. The internal audit
department also evaluates risk management activities. These activities include
performing internal audits, the results of which are reviewed with management
and the Audit Committee, as appropriate.
INTEREST RATE RISK MANAGEMENT
The primary purpose of managing interest rate risk is to minimize the volatility
to earnings from changes in interest rates and preserve the value of FHN's
capital. ALCO, a committee consisting of senior management that meets regularly,
is responsible for coordinating the financial management of interest rate risk.
Interest rate risk is managed by structuring the balance sheet to attempt to
maintain the desired level of net interest income and other revenue while
managing interest sensitivity risk and liquidity. Derivative financial
instruments are used to aid in managing the exposure of the balance sheet and
related net interest income and noninterest income to changes in interest rates.
Interest rate sensitivity risk is defined as the risk that future changes in
interest rates will adversely impact income.
FHN's net interest income and its financial condition are affected by changes in
the level of market interest rates as the repricing characteristics of its loans
and other assets do not necessarily match those of its deposits and other
borrowings. To the extent that the interest rates on earning assets reprice less
quickly than liabilities, this position will benefit net interest income in a
declining interest rate environment and will negatively impact net interest
income in a rising interest rate environment. In the case of floating rate
assets and liabilities, FHN may also be exposed to basis risk, which results
from changing spreads between loan and deposit rates.
FHN uses simulation analysis as its primary tool to evaluate interest rate risk
exposure. This type of analysis computes net interest income at risk under a
variety of market interest rate scenarios to
First Horizon National Corporation 23
<Page>
dynamically identify interest rate risk exposures. This simulation, which
considers forecasted balance sheet changes, prepayment speeds, deposit mix,
pricing impacts, and other changes in the net interest spread, provides an
estimate of the annual net interest income at risk for given changes in interest
rates. The results help FHN develop strategies for managing exposure to interest
rate risk. Like any forecasting technique, interest rate simulation modeling is
based on a number of assumptions and judgments. In this case, the assumptions
relate primarily to loan and deposit growth, asset and liability prepayments,
interest rates, and on- and off-balance sheet management strategies. Management
believes the assumptions used in its simulations are reasonable. Nevertheless,
simulation modeling provides only a sophisticated estimate, not a precise
calculation of exposure to changes in interest rates.
The simulation models used to analyze the retail/commercial bank's net interest
income create various at-risk scenarios looking at increases and/or decreases in
interest rates from an instantaneous movement or a staggered movement over a
certain time period. In addition, the risk of changes in the yield curve is
estimated by flattening and steepening the yield curve to historical levels.
Management reviews these different scenarios to determine alternative strategies
and executes based on that evaluation. The models are continuously updated to
incorporate management action. Any scenarios that indicate a net interest income
at risk of 3 percent or more are presented to the Board quarterly. A 300 basis
point staggered increase or decrease in interest rates over a one-year period is
a key scenario analyzed. These moves are used to estimate net interest income
exposure to historically extreme movements in interest rates. Due to the current
abnormally low level of rates, the federal funds overnight rate was modeled into
the simulation analysis using a floor of 25 basis points. The bank's rate
sensitivity position shows a risk to scenarios that project declining rates.
This position is driven by floating rate assets that have increased in yield and
now have further to decline; while non-maturity deposit costs have increased
slightly and are still very close to their floors. Based on the rate sensitivity
position on December 31, 2004, net interest income exposure over the next 12
months to a staggered decrease in interest rates of 200 basis points is
estimated to be approximately five percent of base net interest income. A
staggered increase of 300 basis points results in a favorable variance in net
interest income of approximately three percent. A 300 basis point staggered
increase and a 200 basis point staggered decrease in interest rates are
hypothetical rate scenarios. These scenarios are used as one estimate of risk,
and do not necessarily represent management's current view of future interest
rates or market developments. Actual results will differ from simulated results
due to timing, magnitude and frequency of interest rate changes and changes in
market conditions, and management's strategies, among other factors, including
those presented in the Forward-Looking Statements section of this MD&A.
Other than the impact related to the immediate change in value of balance sheet
accounts, such as MSR, these simulation models and related hedging strategies
exclude the dynamics related to how fee income and noninterest expense may be
affected by actual changes in interest rates or expectations of changes.
Mortgage banking revenue, which is generated from originating, selling and
servicing residential mortgage loans, is highly sensitive to changes in interest
rates due to the direct effect changes in interest rates have on loan demand. In
general, low or declining interest rates typically lead to increased origination
and sales income but potentially lower servicing-related income due to the
impact of higher loan prepayments on the value of mortgage servicing assets.
Conversely, high or rising interest rates typically reduce mortgage loan demand
and hence origination and sales income while servicing-related income may rise
due to lower prepayments. The effect on origination and sales income to total
earnings is more significant than servicing related income. In addition, net
interest income earned on loans held for sale and on swaps and similar
derivative instruments used to protect the value of MSR increases when the yield
curve steepens and decreases when the yield curve flattens. Capital markets
revenue from fixed income securities sales is negatively affected when, as in
2004, significant uncertainties regarding changes, including the timing of
changes, in interest rates cause fixed income investors to delay their
purchases.
To determine the amount of interest rate risk and market value exposure of loan
commitments in the pipeline, loans in the mortgage warehouse and MSR, mortgage
banking uses multiple scenario rate shock analysis, including the magnitude and
direction of interest rate changes, prepayment speeds, and other factors that
could affect mortgage banking. As discussed in Critical Accounting Policies,
derivative financial instruments are used by mortgage banking for two purposes.
First, forward
24 First Horizon National Corporation
<Page>
contracts and option contracts are used to protect the value of the pipeline and
mortgage warehouse against rises in interest rates between the time an interest
rate is committed to the customer and the mortgage is sold into the secondary
market. Second, interest rate contracts are utilized to protect against MSR
prepayment risk that generally accompanies declining interest rates. As interest
rates fall, the value of MSR should decrease and the value of the servicing
hedge should increase. The converse is also true. Ineffectiveness in these
hedging strategies (when changes in the value of the derivative instruments do
not match changes in the value of the hedged portion of our MSR for any given
change in long-term interest rates) is reflected in noninterest income.
Derivative instruments are also used to protect against the risk of loss arising
from adverse changes in the fair value of capital markets' securities inventory
due to changes in interest rates.
FHN does not use derivative instruments to protect against the prepayment risk
(due to interest rate changes or other factors) of loans or loans held for sale
(other than mortgage warehouse).
Management uses the results of interest rate exposure models to formulate
strategies to improve balance sheet positioning, earnings, or both, within FHN's
interest rate risk, liquidity and capital guidelines.
The derivative financial instruments listed in Table 14 are shown at both
notional and fair values. Table 14 also details FHN's interest rate sensitivity
profile on December 31, 2004, based on projected cash flows using anticipated
sale date on loans held for sale, contractual maturity for loans and expected
repayment dates for securities. The information provided in this section
including the discussion regarding simulation analysis and rate shock analysis
is forward-looking. Actual results could differ because of interest rate
movements, the ability of management to execute its business plans and other
factors, including those presented in the Forward-Looking Statements section of
this MD&A.
TABLE 14 - RISK SENSITIVITY ANALYSIS
<Table>
<Caption>
HELD FOR TRADING Fair
(Dollars in millions) 2005 2006 2007 2008 2009 2010+ Total Value
- ----------------------------------------------------------------------------------------------------------------
ASSETS:
Trading securities:
Floating $ 698 - - - - $ 290 $ 988 $988
Average interest rate 3.57% - - - - 13.11% 6.37%
- ----------------------------------------------------------------------------------------------------------------
INTEREST RATE DERIVATIVES (NOTIONAL VALUE):
CAPITAL MARKETS:
Forward contracts:
Commitments to buy $2,001 - - - - - $2,001 $ (1)
Weighted average settlement price 93.16% - - - - - 93.16%
Commitments to sell $2,106 - - - - - $2,106 $ 1
Weighted average settlement price 93.68% - - - - - 93.68%
Caps purchased $ 60 - - - - - $ 60 $ (1)
Weighted average strike price 5.67% - - - - - 5.67%
Caps written $ (60) - - - - - $ (60) $ 1
Weighted average strike price 5.67% - - - - - 5.67%
Swap contracts - $ 8 $ 29 $ 29 - $ 38 $ 104 $ (4)
Average pay rate (floating) - 5.19% 5.35% 4.63% - 2.78% 4.21%
Average receive rate (fixed) - 6.48% 6.42% 4.95% - 5.77% 5.78%
Swap contracts - $ (8) $ (29) $ (29) - $ (38) $ (104) $ 4
Average pay rate (fixed) - 6.48% 6.42% 4.95% - 5.77% 5.78%
Average receive rate (floating) - 5.19% 5.35% 4.63% - 2.78% 4.21%
- ----------------------------------------------------------------------------------------------------------------
</Table>
First Horizon National Corporation
25
<Page>
TABLE 14 - RISK SENSITIVITY ANALYSIS (CONTINUED)
<Table>
<Caption>
HELD FOR PURPOSES OTHER THAN TRADING Fair
(Dollars in millions) 2005 2006 2007 2008 2009 2010+ Total Value
- ------------------------------------------------------------------------------------------------------------------
ASSETS:
Loans, net of unearned income*:
Floating $4,910 $ 877 $ 389 $ 260 $ 227 $5,159 $11,822 $11,822
Average interest rate 5.38% 4.78% 4.66% 4.41% 5.01% 4.99% 5.11%
Fixed $ 691 $ 532 $ 527 $ 602 $ 474 $1,739 $ 4,565 $ 4,556
Average interest rate 5.67% 5.90% 5.83% 5.54% 5.92% 6.38% 5.99%
Loans held for sale - floating $3,165 - - - - - $ 3,165 $ 3,178
Average interest rate 6.02% - - - - - 6.02%
Loans held for sale - fixed $2,003 - - - - - $ 2,003 $ 2,017
Average interest rate 6.15% - - - - - 6.15%
Investment securities - fixed $ 390 $ 412 $ 460 $ 289 $ 216 $ 827 $ 2,594 $ 2,594
Average interest rate 3.92% 4.24% 4.25% 4.31% 4.30% 4.29% 4.22%
Investment securities - floating - - $ 4 - - $ 83 $ 87 $ 87
Average interest rate - - 5.00% - - 4.25% 4.28%
Liquid assets - floating** $ 688 - - - - - $ 688 $ 688
Average interest rate 1.74% - - - - - 1.74%
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Interest-bearing deposits:
Defined maturity
Floating $ 712 $ 414 $ 8 $ 5 $ 200 - $ 1,339 $ 1,339
Average interest rate 2.35% 2.33% 1.22% 1.22% 2.64% - 2.38%
Fixed $7,733 $ 391 $ 251 $ 81 $ 158 $ 324 $ 8,938 $ 8,972
Average interest rate 2.32% 3.23% 4.19% 3.86% 4.19% 5.02% 2.56%
Undefined maturity
Floating - - - - - $2,541 $ 2,541 $ 2,541
Average interest rate - - - - - 1.11% 1.11%
Fixed - - - - - $1,969 $ 1,969 $ 1,969
Average interest rate - - - - - .40% .40%
Short-term borrowings:
Floating $3,719 - - - - - $ 3,719 $ 3,719
Average interest rate 2.16% - - - - - 2.16%
Fixed $ 24 - - - - $ 10 $ 34 $ 34
Average interest rate 1.18% - - - - 5.78% 2.55%
Term borrowings - floating $1,050 $ 150 $ 50 - - - $ 1,250 $ 1,250
Average interest rate 2.33% 2.38% 2.67% - - - 2.35%
Term borrowings - fixed $ 25 - - $ 231 - $1,110 $ 1,366 $ 1,397
Average interest rate 6.65% - - 6.00% - 5.57% 5.66%
- ------------------------------------------------------------------------------------------------------------------
</Table>
* Excludes nonaccrual loans.
** Consists of federal funds sold, securities purchased under agreements to
resell and investments in time deposits.
26 First Horizon National Corporation
<Page>
TABLE 14 - RISK SENSITIVITY ANALYSIS (CONTINUED)
<Table>
<Caption>
HELD FOR PURPOSES OTHER THAN TRADING Fair
(Dollars in millions) 2005 2006 2007 2008 2009 2010+ Total Value
- ---------------------------------------------------------------------------------------------------------------------
DERIVATIVES (NOTIONAL VALUE):
MORTGAGE BANKING:
Pipeline and warehouse hedging
Forward contracts to sell $3,399 - - - - - $ 3,399 $ (6)
Weighted average settlement price 100.79% - - - - - 100.79%
Future contracts sold $3,616 $2,176 $1,632 $1,039 $1,465 - $ 9,928 $ (1)
Weighted average strike price 96.90% 96.10% 95.57% 95.11% 94.90% - 96.02%
Interest rate lock commitments $3,309 - - - - - $ 3,309 $ 16
Average interest rate 5.82% - - - - - 5.82%
Put options purchased $ (500) - - - - - $ (500) $ (1)
Weighted average strike price 99.37% - - - - - 99.37%
Call options written $ 250 - - - - - $ 250 *
Weighted average strike price 99.73% - - - - - 99.73%
Servicing portfolio hedging
Swaptions $3,400 - - - - - $ 3,400 $ 13
Weighted average strike price 4.36% - - - - - 4.36%
Swaps - - - - - $2,805 $ 2,805 $ 79
Average pay rate (floating) - - - - - 2.32% 2.32%
Average receive rate (fixed) - - - - - 4.83% 4.83%
INTEREST RATE RISK MANAGEMENT:
Swaps $ 176 $ 47 $ 9 $ 196 $ 26 $1,051 $ 1,505 $ 5
Average pay rate (floating) 2.46% 2.03% 2.32% 2.39% 2.40% 2.66% 2.58%
Average receive rate (fixed) 3.23% 3.96% 3.73% 4.09% 3.99% 5.41% 4.90%
Swaps $ 26 $ 47 $ 9 $ 54 $ 26 $ 1 $ 163 $ (3)
Average pay rate (fixed) 5.20% 3.84% 3.54% 4.93% 3.87% 5.10% 4.42%
Average receive rate (floating) 2.41% 2.03% 2.32% 2.37% 2.40% 2.41% 2.28%
Caps purchased $ 7 $ 4 $ 10 - - $ 2 $ 23 *
Weighted average strike price 4.00% 3.00% 4.00% - - 8.00% 4.17%
Caps written $ (7) $ (4) $ (10) - - - $ (21) *
Weighted average strike price 4.00% 3.00% 4.00% - - - 3.81%
- ---------------------------------------------------------------------------------------------------------------------
</Table>
* Amount is less than $500,000
First Horizon National Corporation 27
<Page>
LIQUIDITY RISK MANAGEMENT
Liquidity risk is the risk of being unable to fund assets with liabilities of
the appropriate duration and interest rate, as well as the risk of not being
able to meet unexpected cash needs. The objective of liquidity management is to
ensure the continuous availability of funds to meet the demands of depositors,
other creditors and borrowers, and the requirements of ongoing operations. This
objective is met by maintaining liquid assets in the form of trading securities
and securities available for sale, maintaining sufficient unused borrowing
capacity in the national money markets, growing core deposits, and the repayment
of loans and the capability to sell or securitize loans. ALCO is responsible for
managing these needs by taking into account the marketability of assets; the
sources, stability and availability of funding; and the level of unfunded
commitments. See Note 18 - Restrictions, Contingencies, Commitments, and Other
Disclosures for additional information. Funds are available from a number of
sources, including core deposits, the securities available for sale portfolio,
the Federal Home Loan Bank, the Federal Reserve Board, access to capital markets
through issuance of senior or subordinated bank notes and institutional
certificates of deposit, availability to the overnight and term Federal Funds
markets, access to retail brokered certificates of deposit, dealer and
commercial customer repurchase agreements, and through the sale or
securitization of loans.
Core deposits are a significant source of funding and have been a stable source
of liquidity for banks. These deposits are insured by the Federal Deposit
Insurance Corporation to the maximum extent authorized by law. For 2004, the
average total loans, excluding loans held for sale, to core deposit ratio was
143 percent compared with 116 percent and 108 percent in 2003 and 2002,
respectively. As loan growth currently exceeds core deposit growth, alternative
sources of funding loan growth may be necessary in order to maintain an adequate
liquidity position. One means of maintaining a stable liquidity position is to
sell loans either through whole loan sales or loan securitizations. FHN
periodically evaluates its liquidity position in conjunction with determining
its ability and intent to hold loans to maturity.
FTBNA has a bank note program available for additional liquidity under which the
bank may borrow funds from time to time at maturities of 30 days to 30 years. On
December 31, 2004, $.1 billion was available under current conditions through
the bank note program as a long-term (greater than one year) funding source
compared to $1.0 billion in 2003. In February 2005, FTBNA established a new bank
note program providing additional liquidity of $5.0 billion (see also Subsequent
Events). Borrowings under the old bank note program increased $290.1 million
during 2004 in order to meet increased liquidity needs related to strong loan
growth. FTBNA also has the ability to enhance its liquidity position by issuing
preferred equity or incurring other debt. FHN also evaluates alternative sources
of funding, including loan sales, securitizations, syndications, Federal Home
Loan Bank borrowings, debt offerings and equity offerings in its management of
liquidity. Due to considerable growth of the HELOC portfolio, securitization of
this loan type was an important funding source in 2004 and should grow in
significance in future years.
In addition, liquidity has been obtained through the issuance of $300.0 million
of guaranteed preferred beneficial interest in FHN's junior subordinated
debentures through two Delaware business trusts wholly owned by FHN and through
preferred stock issued by an indirect wholly-owned subsidiary of FHN ($45.7
million and $45.6 million on December 31, 2004 and 2003, respectively). See Note
10 - Term Borrowings, Note 11 - Guaranteed Preferred Beneficial Interests in
First Horizon's Junior Subordinated Debentures and Note 12 - Preferred Stock
of Subsidiary for additional information.
The Consolidated Statements of Cash Flows provide information on cash flows from
operating, investing and financing activities for each of the three years ending
December 31, 2004. In 2004, cash flows from operating activities were negative
primarily due to funding increased levels of HELOC held for sale and growth in
MSR and other retained interests resulting from securitization activities. In
2003, cash flows from operating activities were positive as the mortgage
warehouse decreased from 2002 levels due to a rising mortgage interest rate
environment. In 2002, growth in the mortgage warehouse resulted in negative cash
flows from operating activities. Earnings represent a significant source of
liquidity, consistently providing positive cash flows in each of the three
years. In 2004, strong deposit growth provided a significant portion of FHN's
positive cash flows from financing activities and was utilized to meet increased
liquidity needs related to strong loan growth as reflected in negative cash
28 First Horizon National Corporation
<Page>
flows from investing activities. The issuance of term borrowings is an essential
source of cash flows, and term borrowings were also utilized to better match the
increased liquidity needs related to strong loan growth during the three-year
period. Deposit growth also provided considerable positive cash flows in 2002.
Sales and maturities of investment securities largely offset purchases in each
of the three years.
Parent company liquidity is maintained by cash flows stemming from dividends and
interest payments collected from subsidiaries, which represent the primary
source of funds to pay dividends to shareholders and interest to debt holders.
The amount of dividends from FTBNA is subject to certain regulatory restrictions
that are described in Note 18 - Restrictions, Contingencies, Commitments, and
Other Disclosures. The parent company statements are presented in Note
26 - Parent Company Financial Information. The parent company also has the
ability to enhance its liquidity position by raising equity or incurring debt.
Under an effective shelf registration statement on file with the SEC, FHN, as of
December 31, 2004, may offer from time to time at its discretion, debt
securities and common and preferred stock aggregating up to $125 million.
OFF-BALANCE SHEET ARRANGEMENTS AND OTHER CONTRACTUAL OBLIGATIONS
First Horizon Home Loans originates conventional conforming and federally
insured single-family residential mortgage loans. Likewise, FTN Financial
Capital Assets Corporation frequently purchases the same types of loans from
customers. Substantially all of these mortgage loans are exchanged for
securities, which are issued through investors, including Government Sponsored
Entities (GSE), such as GNMA for federally insured loans and FNMA and FHLMC for
conventional loans, and then sold in the secondary markets. After sale, these
loans are not reflected on the Consolidated Statements of Condition. Each of the
GSE has specific guidelines and criteria for sellers and servicers of loans
backing their respective securities. FHN's use of GSE as an efficient outlet for
mortgage loan production is an essential source of liquidity for FHN and other
participants in the housing industry. During 2004 and 2003, approximately $19.3
billion and $40.9 billion, respectively, of conventional and federally insured
mortgage loans were securitized and sold by First Horizon Home Loans through
these GSE. See also Note 18 - Restrictions, Contingencies, Commitments and
Other Disclosures.
Certain of FHN's originated loans do not conform to the requirements for sale or
securitization by FNMA and FHLMC. FHN pools and securitizes these non-conforming
loans in proprietary transactions. After securitization and sale, these loans
are not reflected on the Consolidated Statements of Condition except as
described hereafter (see Credit Risk Management - Mortgage Banking). These
transactions, which are conducted through single-purpose business trusts, are
the most efficient way for FHN and other participants in the housing industry to
monetize these assets. On December 31, 2004 and 2003, the outstanding principal
amount of loans in these off-balance sheet business trusts was $11.3 billion and
$6.0 billion, respectively. Given the significance of FHN's origination of
non-conforming loans, the use of single-purpose business trusts to securitize
these loans is an important source of liquidity to FHN. See Note
24 - Securitizations for additional information.
Pension obligations are funded by FHN to provide current and future benefit to
participants in FHN's noncontributory, defined benefit pension plan. On
September 30, 2004, the annual measurement date, pension obligations were $333.4
million with $348.1 million of assets in the trust to fund those obligations.
All qualified plans are generally funded to the amounts of accumulated benefit
obligations. FHN expects to contribute the maximum tax deductible contribution
to the pension plan in 2005, which is estimated to be approximately $15 million
to $17 million. In 2004, FHN contributed $57.0 million to the pension plan. The
discount rate for 2004 of 6.47 percent was determined by using a hypothetical AA
yield curve represented by a series of annualized individual discount rates from
one-half to thirty years. The discount rate for the pension plan is selected
based on data specific to FHN's plans and employee population. See Note
20 - Savings, Pension and Other Employee Benefits for additional information.
FHN has various other financial obligations, which may require future cash
payments. Table 15 sets forth contractual obligations representing required and
potential cash outflows as of December 31, 2004. Purchase obligations represent
obligations under agreements to purchase goods or services that are enforceable
and legally binding on FHN and that specify all significant terms, including
fixed or minimum quantities to be purchased, fixed, minimum or variable price
provisions, and the approximate
First Horizon National Corporation 29
<Page>
timing of the transaction. In addition, FHN enters into commitments to extend
credit to borrowers, including loan commitments, standby letters of credit, and
commercial letters of credit. These commitments do not necessarily represent
future cash requirements, in that these commitments often expire without being
drawn upon. See Note 18 - Restrictions, Contingencies, Commitments and Other
Disclosures for additional information.
TABLE 15 - CONTRACTUAL OBLIGATIONS
<Table>
<Caption>
Payments due by period
-------------------------------------------------------------
Less than 1-3 4-5 After 5
(Dollars in thousands) 1 year years years years Total
- -----------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS:
Time deposit maturities* $8,445,181 $1,064,189 $443,389 $ 324,679 $10,277,438
Term borrowings** 1,074,490 200,668 232,276 1,109,343 2,616,777
Annual rental commitments under
noncancelable leases*** 59,084 95,622 49,943 40,471 245,120
Purchase obligations 25,311 20,693 7,013 17,326 70,343
- -----------------------------------------------------------------------------------------------------
Total contractual obligations $9,604,066 $1,381,172 $732,621 $1,491,819 $13,209,678
=====================================================================================================
</Table>
* See Note 8 - Time Deposit Maturities for further details.
** See Note 10 - Term Borrowings for further details.
*** See Note 5 - Premises, Equipment and Leases for further details.
CREDIT RATINGS
Maintaining adequate credit ratings on debt issues is critical to liquidity
because it affects the ability of FHN to attract funds from various sources,
such as brokered deposits or wholesale borrowings of which FHN had $6.2 billion
and $3.6 billion on December 31, 2004 and 2003, respectively, on a
cost-competitive basis (see also Liquidity Risk Management). The various credit
ratings are detailed in Table 16. The availability of funds other than core
deposits is also dependent upon marketplace perceptions of the financial
soundness of FHN, which include such issues as capital levels, asset quality and
reputation. The availability of core deposit funding is dependent upon federal
deposit insurance, which can be removed only in extraordinary circumstances, but
may also be influenced to some extent by the same factors that affect other
funding sources.
TABLE 16 - CREDIT RATINGS
<Table>
<Caption>
Standard & Poor's Moody's Fitch
- ---------------------------------------------------------------------------------------------------------
FIRST HORIZON NATIONAL CORPORATION
Overall credit rating A-/Stable A2/Stable A/Stable/F1
Subordinated debt BBB+ A3 A-
Capital securities* BBB A3 A-
- ---------------------------------------------------------------------------------------------------------
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
Overall credit rating A/Stable/A-1 A1/Stable A/Stable/F1
Long-term/short-term deposits A/A-1 A1/P-1 A+/F1
Other long-term/short-term funding** A A1/P-1 A
Subordinated debt A- A2 A-
- ---------------------------------------------------------------------------------------------------------
FT REAL ESTATE SECURITIES COMPANY, INC.
Preferred stock BBB+ A3
- ---------------------------------------------------------------------------------------------------------
</Table>
* Guaranteed preferred beneficial interests in First Horizon's junior
subordinated debentures issued through a wholly-owned unconsolidated business
trust.
** Other funding includes senior bank notes.
A rating is not a recommendation to buy, sell or hold securities and is subject
to revision or withdrawal at any time and should be evaluated independently of
any other rating.
30 First Horizon National Corporation
<Page>
MARKET RISK MANAGEMENT
Capital markets buys and sells various types of securities for its customers.
When these securities settle on a delayed basis, they are considered forward
contracts. Inventory positions are limited to the procurement of securities
solely for distribution to customers by the sales staff, and ALCO policies and
guidelines have been established with the objective of limiting the risk in
managing this inventory.
CREDIT RISK MANAGEMENT
Credit risk is the risk of loss due to adverse changes in a borrower's ability
to meet its financial obligations under agreed upon terms. FHN is subject to
credit risk in lending, trading, investing, liquidity/funding and asset
management activities. The nature and amount of credit risk depend on the types
of transactions, the structure of those transactions and the parties involved.
In general, credit risk is incidental to trading, liquidity/funding and asset
management activities, while it is central to the profit strategy in lending. As
a result, the majority of credit risk is associated with lending activities.
FHN has processes and management committees in place that are designed to assess
and monitor credit risks. Management's Asset Quality Committee has the
responsibility to evaluate its assessment of current asset quality for each
lending product. In addition, the Asset Quality Committee evaluates the
projected changes in classified loans, non-performing assets and charge-offs. A
primary objective of this committee is to provide information about changing
trends in asset quality by region or loan product, and to provide to senior
management a current assessment of credit quality as part of the estimation
process for determining the allowance for loan losses. The Senior Credit Watch
Committee has primary responsibility to enforce proper loan risk grading, to
identify credit problems, and to monitor actions to rehabilitate certain
credits. Management also has a Senior Credit Policy Committee that is
responsible for enterprise-wide credit risk oversight and provides a forum for
addressing management issues. The committee also develops credit policies, which
are approved by the Executive Committee of the Board, and underwriting
guidelines to manage the level and composition of credit risk in its loan
portfolio and review performance relative to these policies. In addition, the
Financial Counterparty Credit Committee, composed of senior managers, assesses
the credit risk of financial counterparties and sets limits for exposure based
upon the credit quality of the counterparty. FHN's goal is to manage risk and
price loan products based on risk management decisions and strategies.
Management strives to identify potential problem loans and nonperforming loans
early enough to correct the deficiencies. It is management's objective that both
charge-offs and asset write-downs are recorded promptly, based on management's
assessments of current collateral values and the borrower's ability to repay.
FHN has a significant concentration in loans secured by real estate. In 2004, 66
percent of total loans are secured by real estate compared to 62 percent in 2003
(see Table 9). Three lending products have contributed to this increased level
of real estate lending - (1) significant growth in second mortgages identified
as HELOC which grew 50 percent; (2) commercial construction lending which grew
42 percent led by growth in loans to single-family builders; and (3) retail real
estate construction which grew 69 percent. FHN's commercial real estate lending
is well-diversified by product type and industry. On December 31, 2004, FHN did
not have any concentrations of 10 percent or more of total commercial, financial
and industrial loans in any single industry.
ALLOWANCE FOR LOAN LOSSES AND CHARGE-OFFS
Management's policy is to maintain the allowance for loan losses at a level
sufficient to reflect the estimated probable incurred losses in the loan
portfolio. The allowance for loan losses is increased by the provision for loan
losses and recoveries and is decreased by charged-off loans. The adequacy of the
allowance for loan losses is analyzed quarterly. The Chief Credit Officer has
the responsibility for performing a comprehensive review of the allowance for
loan losses and making a recommendation to the Executive Committee of the Board
for approval of the allowance for loan losses at each quarterly reporting
period. An analytical model based on historical loss experience, adjusted for
current events, trends and economic conditions is used to assess the adequacy of
the allowance for loan losses. This methodology determines an estimated loss
percentage (reserve rate), which is applied against the balance of loans in each
segment of the loan portfolio at the evaluation date. The nature of the
First Horizon National Corporation 31
<Page>
process by which FHN determines the appropriate allowance for loan losses
requires the exercise of considerable judgment. After review of all relevant
factors, management believes the allowance for loan losses is adequate and
reflects its best estimate of probable incurred losses.
The total allowance for loan losses decreased to $158.2 million on December 31,
2004, from $160.3 million at year-end 2003, which was up $16.0 million since
year-end 2002. Period-end loans increased 17 percent in 2004 after increasing 23
percent in 2003. The ratio of allowance for loan losses to loans, net of
unearned income, decreased to .96 percent on December 31, 2004, from
1.15 percent on December 31, 2003, primarily reflecting improvement in the
retail loan portfolio's risk profile as the mix shifted to a higher
concentration of loans to high credit score borrowers. The risk profile of the
commercial loan portfolio also improved due to a stronger economy, as evidenced
by current lower levels of watch list and classified loans. The ratio of
allowance for loan losses to loans was 1.27 percent on December 31, 2002.
Table 18 summarizes by category loans charged off and recoveries of loans
previously charged off. This table also shows the additions to the reserve
(provision), which have been charged against operating earnings. Table 17 shows
net charge-off ratios. Net charge-offs decreased to $42.1 million for the year
ended December 31, 2004 down from $68.0 million in 2003 and $98.5 million in
2002. The decrease in the 2004 level of net charge-offs was impacted by
improvement in both the retail and commercial loan portfolios. Total commercial
and commercial real estate related loan net charge-offs decreased to $11.9
million in 2004 from $20.6 million in 2003. The commercial loan net charge-offs,
which were not concentrated in any one industry or region, decreased as the
economy improved. Residential real estate loan net charge-offs decreased to
$16.8 million in 2004 from $31.0 million in 2003 as successful cross-sell
efforts to mortgage banking customers led to an improvement in the mix of the
portfolio as evidenced by an overall increase in credit scores and reduced loan
to value ratios. Credit card receivables net charge-offs decreased to $10.6
million from $12.2 million in 2003, and other retail loan net charge-offs
decreased to $2.9 million in 2004 from $4.3 million in 2003. The ratio of net
charge-offs to average loans decreased to .27 percent for 2004 from .54 percent
for 2003 and .93 percent for 2002.
TABLE 17 - NET CHARGE-OFF RATIOS*
<Table>
<Caption>
2004 2003 2002
- ----------------------------------------------------------------------------------------------
Commercial .18% .34% .75%
Retail real estate** .20 .48 .64
Other retail 1.55 1.64 3.47
Credit card receivables 4.25 4.65 4.35
Total net charge-offs .27 .54 .93
- ----------------------------------------------------------------------------------------------
</Table>
Loans are averages expressed net of unearned income.
* Table 9 provides information on the relative size of each loan portfolio.
** Excludes ($.1) million, $1.6 million and $3.6 million of net
charge-offs/(recoveries) for 2004, 2003 and 2002, respectively, related to
loans classified as nonperforming from the warehouse and the repurchase of
loans originated and previously sold by First Horizon Home Loans.
Within the course of normal mortgage banking activities, a small percentage of
mortgage loan originations are classified as nonperforming assets when FHA/VA
borrowers are delinquent in their monthly payments prior to the completion of
the insuring process. Additionally, loans that have been sold may be required to
be repurchased if they are found not to meet an investor's origination criteria.
From this pool, there were net recoveries of $.1 million in 2004, down from net
charge-offs of $1.6 million in 2003 due to changes in the disposition of these
assets.
Going forward, asset quality indicators should reflect the relative strength of
the economy and the early recognition and resolution of asset quality issues. In
addition, asset quality ratios could be affected by balance sheet strategies and
shifts in loan mix to and from products with different risk/return profiles.
Actual results could differ because of several factors, including those
presented in the Forward-Looking Statements section of this MD&A discussion.
32 First Horizon National Corporation
<Page>
TABLE 18 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<Table>
<Caption>
(Dollars in thousands) 2004 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES:
Beginning balance $ 160,333 $ 144,298 $ 150,614 $ 139,210 $ 134,979 $ 131,906
Provision for loan losses 48,348 86,698 92,184 93,220 67,491 57,406
Divestitures/transfers to
held for sale (8,382) (2,652) - (1,337) (2,173) (2,683)
Charge-offs:
Commercial:
Commercial, financial and
industrial 11,925 12,460 37,241 22,596 6,583 9,714
Real estate commercial 2,690 3,067 2,966 4,156 857 510
Real estate construction 779 7,642 3,367 968 47 -
Retail:
Real estate residential* 21,271 35,809 36,726 30,532 17,348 9,742
Other retail 7,094 9,920 19,979 20,603 20,868 17,392
Credit card receivables 12,870 13,538 12,862 13,369 25,485 22,867
- --------------------------------------------------------------------------------------------------------------------
Total charge-offs 56,629 82,436 113,141 92,224 71,188 60,225
- --------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial:
Commercial, financial and
industrial 3,473 2,438 2,136 1,991 2,903 2,082
Real estate commercial 51 166 41 280 480 228
Real estate construction 10 1 - - - 8
Retail:
Real estate residential* 4,517 4,820 4,693 2,788 857 510
Other retail 4,211 5,653 6,419 4,953 3,937 3,725
Credit card receivables 2,227 1,347 1,352 1,733 1,924 2,022
- --------------------------------------------------------------------------------------------------------------------
Total recoveries 14,489 14,425 14,641 11,745 10,101 8,575
- --------------------------------------------------------------------------------------------------------------------
Net charge-offs 42,140 68,011 98,500 80,479 61,087 51,650
- --------------------------------------------------------------------------------------------------------------------
Ending balance $ 158,159 $ 160,333 $ 144,298 $ 150,614 $ 139,210 $ 134,979
====================================================================================================================
Reserve for off-balance sheet
commitments $ 7,904 $ 7,804 $ 5,368 $ 4,759 $ 4,486 $ 4,624
Total of allowance for loan
losses and reserve for off-
balance sheet commitments $ 166,063 $ 168,137 $ 149,666 $ 155,373 $ 143,696 $ 139,603
- --------------------------------------------------------------------------------------------------------------------
LOANS AND COMMITMENTS:
Period end loans, net of
unearned $16,427,673 $13,990,525 $11,345,445 $10,283,143 $10,239,450 $9,363,158
Insured loans 665,909 862,675 785,270 - - -
- --------------------------------------------------------------------------------------------------------------------
Loans excluding insured loans $15,761,764 $13,127,850 $10,560,175 $10,283,143 $10,239,450 $9,363,158
====================================================================================================================
Off-balance sheet
commitments** $ 6,226,245 $ 5,464,097 $ 3,398,534 $ 2,895,681 $ 2,069,143 $1,679,237
- --------------------------------------------------------------------------------------------------------------------
Average loans, net of
unearned $15,384,650 $12,656,318 $10,634,530 $10,104,277 $ 9,931,955 $8,818,766
- --------------------------------------------------------------------------------------------------------------------
RATIOS***:
Allowance to loans .96% 1.15% 1.27% 1.46% 1.36% 1.44%
Allowance to loans excluding
insured loans 1.00 1.22 1.37 1.46 1.36 1.44
Allowance to net charge-offs 3.75X 2.36x 1.46x 1.87x 2.28x 2.61x
Net charge-offs to average
loans .27 .54 .93 .80 .62 .59
- --------------------------------------------------------------------------------------------------------------------
</Table>
* Real estate residential net charge-offs/(recoveries) include ($.1) million,
$1.6 million, $3.6 million, $3.2 million, $5.2 million and $2.1 million of
net charge-offs/(recoveries) for the years 2004 through 1999, respectively,
related to loans classified as nonperforming from the warehouse and the
repurchase of loans originated and previously sold by First Horizon Home
Loans.
** Amount of off-balance sheet commitments for which a reserve has been
provided. See Note 18 - Restrictions, Contingencies, Commitments and Other
Disclosures for further details on off-balance sheet commitments.
*** Net of unearned income.
First Horizon National Corporation 33
<Page>
TABLE 19 - LOANS AND FORECLOSED REAL ESTATE ON DECEMBER 31
<Table>
<Caption>
2004 2003
--------------------------------------------------------------------- ---------------------------
Construction % Allowance % Allowance
and Commercial of for Loan of for Loan
(Dollars in millions) Commercial Development Real Estate TOTAL Total Losses Total Total Losses
- -------------------------------------------------------------------------------------------------------------------------------
Internal grades:
1 $ 269 $ - $ - $ 269 2% $ 1 $ 276 2% $ 1
2 481 - 48 529 3 4 446 3 4
3 657 2 15 674 4 8 421 3 6
4 3,206 782 668 4,656 28 56 3,616 26 44
5 810 401 208 1,419 9 20 1,179 9 18
6 55 11 8 74 1 3 106 1 4
7 47 3 3 53 - 5 43 - 5
8,9,10 (Classifieds) 15 - 5 20 - 3 40 - 9
- -------------------------------------------------------------------------------------------------------------------------------
5,540 1,199 955 7,694 47 100 6,127 44 91
Impaired loans:
Contractually past due 19 10 5 34 - 10 32 - 10
Contractually current 1 - - 1 - - 2 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total commercial and
commercial real estate
loans 5,560 1,209 960 7,729 47 110 6,161 44 101
- -------------------------------------------------------------------------------------------------------------------------------
Retail:
Real estate residential 7,245 44 30 6,819 49 39
Real estate construction 1,036 6 3 527 4 2
Other retail 169 1 5 212 1 5
Credit card receivables 249 2 10 272 2 13
- -------------------------------------------------------------------------------------------------------------------------------
Total retail loans 8,699 53 48 7,830 56 59
- -------------------------------------------------------------------------------------------------------------------------------
Total loans $16,428 100% $158 $13,991 100% $160
===============================================================================================================================
Foreclosed real estate:
Commercial $ 12 $ - $ 3 $ 15 $ 9
Retail 4 5
Mortgage banking 9 10
- -------------------------------------------------------------------------------------------------------------------------------
Total foreclosed real estate $ 28 $ 24
===============================================================================================================================
</Table>
<Table>
Loans are expressed net of unearned income. All amounts in the
Allowance for Loan Losses columns have been rounded to the nearest
million dollars. All data is based on internal loan classifications.
Certain previously reported amounts have been reclassified to agree
with current presentation. Definitions of each credit grade are
provided below:
Grade 1: Firmly established, stable companies with excellent
earnings, liquidity, and capital. Possess many of the same
characteristics as Standard & Poor's (S&P) AA rated
companies.
Grade 2: Well-established, stable companies with good to very good
earnings, liquidity, and capital. Possess many of the same
characteristics as S&P A rated companies.
Grade 3: Reasonably well-established, stable companies with above
average to good earnings, liquidity, and capital and with
consistent, positive trends relative to industry norms.
Grade 4: Reasonably well-established, stable companies with average
earnings, liquidity, and capital.
Grade 5: New and established companies with some potential weakness.
Capital considered less than average and history of average
to below average earnings without consistent positive
trends. Overall acceptable credits with minor weaknesses
which warrant additional servicing.
Grade 6: Financial condition adversely affected by temporary lack of
earnings or liquidity or changes in the operating
environment. An action plan is required to rehabilitate the
credit or have it refinanced elsewhere.
Grade 7: Significant developing weaknesses or adverse trends in
earnings, liquidity, capital, or operating environment.
Limited alternate financing is available.
Grade 8: Significantly higher than normal probability that: (1) legal
action will be required; (2) liquidation of collateral will
be required; (3) there will be a loss; or all three will
occur. This grade is believed to be substantially equivalent
to the regulators' classification of substandard.
Grade 9: Excessive degree of risk. Financial and management
deficiencies are well defined and make the obligor's ability
to repay from anticipated sources under existing terms and
conditions uncertain. Collateral shortfall and/or
undeterminable collateral values exist. Timing and amount of
loss are uncertain. This grade is believed to be
substantially equivalent to the regulators' classification
of doubtful.
Grade 10: Borrowers are deemed incapable of repayment and debt is
deemed uncollectible. Loans should no longer be carried as
an active bank asset. This grade is believed to be
substantially equivalent to the regulators' classification
of loss.
Impaired: A loan for which it is probable that all amounts due,
according to the contractual terms of the loan agreement,
will not be collected and the loan is placed on non-accrual
status. Reserves for impaired loans are based on the value
of the collateral or the cash flow of the entity compared to
the outstanding balance.
</Table>
34 First Horizon National Corporation
<Page>
COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is composed of the following components: reserves
for individually impaired commercial loans, reserves for commercial loans
evaluated based on pools of credit graded loans, and reserves for pools of
smaller-balance homogeneous retail and commercial loans. Reserves for
individually impaired commercial loans are computed in accordance with SFAS
No. 114, and are based on either the estimated collateral value less selling
costs (if the loan is a collateral dependent loan), or the present value of
expected future cash flows discounted at the loan's effective interest rate.
Reserves for commercial loans evaluated based on pools of credit graded loans
and reserves for pools of smaller-balance homogeneous retail and commercial
loans are determined in accordance with SFAS No. 5. The reserve factors applied
to these pools are an estimate of probable incurred losses based on management's
evaluation of historical losses from loans with similar characteristics,
adjusted for current economic factors and trends. Table 19 gives a breakdown of
the allowance allocation by major loan types and commercial loan grades on
December 31, 2004, compared with December 31, 2003.
To assess the quality of individual commercial loans, all commercial loans are
internally assigned a credit grading, ranging from grades 1 to 10. The credit
grading system is intended to identify and measure the credit quality of lending
relationships by analyzing the migration of loans between grading categories. It
is also integral to the estimation methodology utilized in determining the
allowance for loan losses since an allowance is established for pools of
commercial loans based on the credit grade assigned. The appropriate
relationship manager performs the process of classifying commercial loans into
the appropriate credit grades initially as a component of the approval of the
loan and has responsibility for insuring that the loan is properly graded
throughout the life of the loan. The proper loan grade for all commercial loans
in excess of $1 million is confirmed by a senior credit officer in the approval
process. To determine the most appropriate credit grade for each loan, based on
the size of the loan, credit officers examine and consider both financial and
non-financial data as discussed in the credit grade definitions disclosed in
Table 19. Loan grades are frequently reviewed by commercial loan review to
determine if any changes in the circumstances of the loan require a different
risk grade.
A reserve rate is established for each loan grade based on a historical
three-year moving average of actual charge-offs. The reserve rate is then
adjusted for current events, trends, and economic conditions that affect the
asset quality of the loan portfolio. Some of the factors considered in making
these adjustments include: levels of and trends in delinquencies; classified
loans and nonaccrual loans; trends in outstandings and maturities; effects of
changes in lending policies and underwriting guidelines; introduction of new
loan products with different risk characteristics; experience, ability and depth
of lending management and staff; migration trends of loan grades; and charge-off
trends that may skew the historical three-year moving average. Finally, the
reserve rates for each loan grade are reviewed quarterly to reflect local,
regional and national economic trends; concentrations of cyclical industries;
and the economic prospects for industry concentrations. To supplement
management's process in setting these additional adjustments, an economic model
is used that evaluates the correlation between historical charge-offs and a
number of state and national economic indicators. Also, all classified loans $1
million and greater are reviewed individually in accordance with SFAS No. 114,
and a specific reserve is set based on the exposure (the difference between the
outstanding loan amount and either the present value of expected future cash
flows or the estimated net realizable value of the collateral) and the
probability of loss.
Table 20 shows the reserve rates (percentage of allowance for loan losses to
outstanding balances) by loan category. The average reserve rate for all
commercial loans decreased to 1.30 percent in 2004 from 1.49 percent in 2003 and
1.29 percent in 2002. This decrease is due to improvement in watch list and
classified loans and improvement in commercial economic factors.
First Horizon National Corporation 35
<Page>
TABLE 20 - AVERAGE RESERVE RATES
<Table>
<Caption>
LOANS Loans Loans Loans Loans
% OF % of % of % of % of
2004 TOTAL 2003 Total 2002 Total 2001 Total 2000 Total
- ----------------------------------------------------------------------------------------------------------------
Commercial, commercial real
estate and commercial
construction* 1.30% 46.9 1.49% 43.8 1.29% 50.0 1.31% 54.1 1.29% 51.6
Impaired 28.57 .2 29.41 .2 30.61 .5 44.74 .4 36.59 .4
Retail real estate .40 50.4 .56 52.5 .77 44.6 .99 38.3 .69 36.7
Other retail 2.96 1.0 2.35 1.5 1.05 2.5 1.96 4.5 1.67 8.2
Credit card receivables 4.02 1.5 4.76 2.0 5.13 2.4 4.63 2.7 5.02 3.1
- ----------------------------------------------------------------------------------------------------------------
</Table>
* Excludes impaired loans.
The allowance for loan losses for smaller-balance homogenous loans (retail
loans) is determined based on pools of similar loan types that have similar
credit risk characteristics, which is consistent with industry practice. FHN
manages retail loan credit risk on a portfolio basis. Reserve rates are
established for each segment of the retail loan portfolio based on historical
loss experience and are adjusted to reflect current events, trends and economic
conditions. Some of the factors for making these adjustments include: changes in
underwriting guidelines or credit scoring models; trends in consumer payment
patterns, delinquencies and personal bankruptcies; changes in the mix of loan
products outstanding; experience, ability and depth of lending management and
staff; value of underlying collateral; and charge-off trends.
The average reserve rate for retail real estate loans was .40 percent in 2004 as
compared to .56 percent in 2003 and .77 percent in 2002. The decrease in the
retail real estate loan reserve rate for 2004 was impacted primarily by the
improvement in the retail loan portfolio's risk profile. The reserve rate for
other retail loans, a diminishing portfolio of loans which represented only 1
percent of total loans in 2004, increased to 2.96 percent in 2004 from 2.35
percent in 2003 primarily due to the changing risk profile of this mature
portfolio of loans. The other retail loans reserve rate was 1.05 percent in
2002. The average reserve rate for credit card receivables improved to 4.02
percent in 2004 from 4.76 percent in 2003 due to the transfer of a portfolio of
credit card receivables to held for sale.
NONPERFORMING ASSETS
Nonperforming loans consist of impaired, other nonaccrual and restructured
loans. These, along with foreclosed real estate and other assets, represent
nonperforming assets. 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. Restructured loans
generally take the form of an extension of the original repayment period and/or
a reduction or deferral of interest or principal because of deterioration in the
financial position of the borrower.
Overall, nonperforming assets remained stable, totaling $77.3 million on
December 31, 2004, compared to $76.2 million on December 31, 2003. Nonperforming
assets in retail/commercial banking were $65.2 million for 2004 compared to
$62.9 million for 2003. However, the retail/commercial banking nonperforming
assets ratio decreased to .40 percent from .45 percent as loans increased 17
percent. The increase in nonperforming assets is primarily due to higher levels
of foreclosed real estate which is indicative of FHN's greater exposure in real
estate lending. Mortgage banking nonperforming assets were also stable at $12.1
million for 2004 compared to $13.3 million for 2003.
Information regarding nonperforming assets and past-due loans is presented in
Table 22. Table 21 gives additional information related to changes in
nonperforming assets for 2002 through 2004.
36 First Horizon National Corporation
<Page>
TABLE 21 - CHANGES IN NONPERFORMING ASSETS
<Table>
<Caption>
(Dollars in millions) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Beginning balance $ 76.2 $ 75.7 $ 85.1
Additional nonperforming assets 77.0 111.0 165.5
Payments, sales and other dispositions (61.9) (88.2) (130.6)
Charge-offs (14.0) (22.3) (44.3)
- ------------------------------------------------------------------------------------------------------------------------
Ending balance $ 77.3 $ 76.2 $ 75.7
========================================================================================================================
</Table>
TABLE 22 - NONPERFORMING ASSETS ON DECEMBER 31
<Table>
<Caption>
(Dollars in thousands) 2004 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
RETAIL/COMMERCIAL BANKING:
Nonperforming loans* $ 41,102 $ 43,228 $ 58,454 $ 41,671 $ 41,541 $ 7,789
Foreclosed real estate 24,092 19,365 8,188 9,924 3,997 5,777
Other assets - 336 33 130 97 91
- ------------------------------------------------------------------------------------------------------------------------
Total Retail/Commercial Banking 65,194 62,929 66,675 51,725 45,635 13,657
- ------------------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING:
Nonperforming loans 8,458 8,556 5,733 21,285 19,761 21,329
Foreclosed real estate 3,686 4,710 3,263 12,065 12,293 12,093
- ------------------------------------------------------------------------------------------------------------------------
Total Mortgage Banking 12,144 13,266 8,996 33,350 32,054 33,422
- ------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 77,338 $ 76,195 $ 75,671 $ 85,075 $ 77,689 $47,079
========================================================================================================================
Loans 30 to 89 days past due** $120,306 $152,481 $104,084 $117,298 $105,705 $88,389
Guaranteed portion of loans 30 to 89 days
past due** 44,415 62,955 3,202 4,388 19,966 21,698
Loans 90 days past due** 213,596 226,194 37,083 37,665 42,606 29,849
Guaranteed portion of loans 90 days past
due** 185,353 204,574 5,986 6,076 16,987 11,180
Potential problem assets*** 100,000 119,083 128,657 123,535 107,605 75,001
- ------------------------------------------------------------------------------------------------------------------------
RATIOS:
Allowance to nonperforming loans in the loan
portfolio 385% 371% 247% 239% 227% 464%
Nonperforming assets to loans, foreclosed
real estate and other assets
(Retail/Commercial Banking) .40 .45 .59 .50 .45 .15
Nonperforming assets to unpaid principal
balance of servicing portfolio (Mortgage
Banking) .01 .02 .02 .07 .07 .07
- ------------------------------------------------------------------------------------------------------------------------
</Table>
* Total impaired loans included in nonperforming loans were $34.8 million,
$34.4 million, $49.3 million, $37.8 million, $41.2 million and $7.5 million
for the years 2004 through 1999, respectively.
** Prior to 2003 government guaranteed loans repurchased through GNMA's
repurchase program were classified as receivables in 'Capital markets
receivables and other assets' on the Consolidated Statements of Condition
and are not included in past due loan statistics. Guaranteed loans include
FHA, VA, student and GNMA loans repurchased under the repurchase program.
*** Includes loans and leases 90 days past due exclusive of guaranteed loans
obtained through the GNMA repurchase program.
Certain previously reported amounts have been reclassified to agree with current
presentation.
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.
Past due loans excluding guaranteed loans increased $6.6 million in 2004 to
$28.2 million. However, while these total past due balances increased, the ratio
of past due loans in the loan portfolio to total loans was relatively flat at
..21 percent on December 31, 2004 compared to .19 percent on December 31, 2003.
In addition, loans 30 to 89 days past due, excluding guaranteed loans decreased
$13.6 million to $75.9 million while the ratio of loans 30 to 89 days past due
in the loan portfolio improved to .47 percent of total loans on December 31,
2004 compared to .66 percent on December 31, 2003. Additional historical past
due loan information can be found in Table 22.
First Horizon National Corporation 37
<Page>
Potential problem assets in the loan portfolio, which are not included in
nonperforming assets, decreased to $100.0 million, or .61 percent of total
loans, on December 31, 2004, from $119.1 million, or .85 percent of total loans,
on December 31, 2003. 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 for
loans classified substandard.
MORTGAGE BANKING
First Horizon Home Loans originates mortgage loans through its retail and
wholesale operations and also purchases mortgage loans from third-party mortgage
bankers (known as correspondent brokers) for sale to secondary market investors
and subsequently services the majority of those loans. The secondary market for
mortgages allows First Horizon Home Loans to sell mortgage loans to investors,
including GSE, such as FNMA, FHLMC and GNMA. Many private investors are also
active in the secondary market as issuers and investors. The majority of First
Horizon Home Loans' mortgage loans are sold through transactions with GSE. The
risk of credit loss with regard to the principal amount of the loans sold is
generally transferred to investors upon sale to the secondary market. To the
extent that transferred mortgage loans are subsequently determined not to meet
the agreed-upon qualifications or criteria, the purchaser has the right to
return those loans to First Horizon Home Loans. In addition, certain mortgage
loans are sold to investors with limited or full recourse in the event of
mortgage foreclosure (refer to discussion of foreclosure reserves under Critical
Accounting Policies).
OPERATIONAL RISK MANAGEMENT
Operational risk is the risk of loss from inadequate or failed internal
processes, people, and systems or from external events. This risk is inherent in
all businesses. Management, measurement, and reporting of operational risk are
overseen by the Operational Risk Committee, which is chaired by the EVP of Risk
Management. Key representatives from the business segments, legal, shared
services, risk management, and insurance are represented on the committee.
Subcommittees manage and report on business continuity planning, data security,
insurance, compliance, records management, product and system development and
reputation risks. Summary reports of the committee's activities and decisions
are provided to the Enterprise-wide Risk/Return Management Committee.
Significant emphasis is dedicated to refinement of processes and tools to aid in
measuring and managing material operational risks and providing for a culture of
awareness and accountability.
CRITICAL ACCOUNTING POLICIES
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
FHN's accounting policies are fundamental to understanding management's
discussion and analysis of financial condition and results of operations. The
consolidated financial statements of FHN are 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. The
preparation of the financial statements requires management to make certain
judgments and assumptions in determining accounting estimates. Accounting
estimates are considered critical if (a) the estimate requires management to
make assumptions about matters that were highly uncertain at the time the
accounting estimate was made, and (b) different estimates reasonably could have
been used in the current period, or changes in the accounting estimate are
reasonably likely to occur from period to period, that would have a material
impact on the presentation of FHN's financial condition, changes in financial
condition or results of operations.
It is management's practice to discuss critical accounting policies with the
Board of Directors' Audit Committee including the development, selection and
disclosure of the critical accounting estimates. Management believes the
following critical accounting policies are both important to the portrayal of
the company's financial condition and results of operations and require
subjective or complex
38 First Horizon National Corporation
<Page>
judgments. These judgments about critical accounting estimates are based on
information available as of the date of the financial statements.
MORTGAGE SERVICING RIGHTS AND OTHER RELATED RETAINED INTERESTS
When First Horizon Home Loans sells mortgage loans in the secondary market to
investors, it generally retains the right to service the loans sold in exchange
for a servicing fee that is collected over the life of the loan as the payments
are received from the borrower. An amount is capitalized as MSR on the
Consolidated Statements of Condition based on the expected present value of the
anticipated cash flows received for servicing the loan, net of the estimated
costs of servicing the loan. During 2004, First Horizon Home Loans originated or
purchased $438.0 million of MSR in connection with sales of first-lien mortgage
loans in the secondary market and acquisition of servicing rights from third
parties compared to $536.7 million in 2003. On December 31, 2004 and 2003, the
total outstanding principal amount of First Horizon Home Loans' first-lien
servicing portfolio aggregated $86.6 billion and $68.9 billion, respectively.
MSR ESTIMATED FAIR VALUE
The fair value of MSR typically rises as market interest rates increase and
declines as market interest rates decrease; however, the extent to which this
occurs depends in part on (1) the magnitude of changes in market interest rates,
and (2) the differential between the then current market interest rates for
mortgage loans and the mortgage interest rates included in the mortgage
servicing portfolio.
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, like
other participants in the mortgage banking business, First Horizon Home Loans
relies primarily on a discounted cash flow model to estimate the fair value of
its MSR. This model calculates estimated fair value of the MSR using numerous
tranches of MSR, which share similar key characteristics, such as interest
rates, type of product (fixed vs. variable), age (new, seasoned, moderate),
agency type and other factors. First Horizon Home Loans uses assumptions in the
model that it believes are comparable to those used by other participants in the
mortgage banking business and reviews estimated fair values and assumptions with
third-party brokers and other service providers on a quarterly basis. First
Horizon Home Loans also compares its estimates of fair value and assumptions to
recent market activity and against its own experience.
Estimating the cash flow components of net servicing income from the loan and
the resultant fair value of the MSR requires First Horizon Home Loans to make
several critical assumptions based upon current market and loan production data.
Prepayment speeds: Generally, when market interest rates decline and other
factors favorable to prepayments occur there is a corresponding increase in
actual and expected borrower prepayments as customers refinance existing
mortgages under more favorable interest rate terms. When a mortgage loan is
prepaid, or is expected to prepay faster than originally expected, the
anticipated cash flows associated with servicing that loan are terminated or
reduced, resulting in a reduction, or impairment, to the fair value of the
capitalized MSR. To estimate prepayment speeds, First Horizon Home Loans
utilizes a third-party prepayment model, which is based upon statistically
derived data linked to certain key principal indicators involving historical
borrower prepayment activity associated with mortgage loans in the secondary
market, current market interest rates and other factors. For purposes of model
valuation, estimates are made for each product type within the MSR portfolio on
a monthly basis.
Discount rate: Represents the rate at which the expected cash flows are
discounted to arrive at the net present value of servicing income. Estimated
discount rates will change with market conditions (i.e., supply vs. demand) and
be reflective of the yields expected to be earned by market participants
investing in MSR.
Cost to service: Expected costs to service are estimated based upon the costs
that a market participant would use in evaluating the potential acquisition of
MSR.
First Horizon National Corporation 39
<Page>
Float income: Estimated float income is driven by expected float balances
(principal and interest payments that are held pending remittance to the
investor) and current market interest rates, including the thirty-day London
Inter-Bank Offered Rate (LIBOR) and five-year swap interest rates, which are
updated on a monthly basis for purposes of estimating the fair market value of
MSR.
First Horizon Home Loans engages in a process referred to as 'price discovery'
on a monthly basis to assess the reasonableness of the estimated fair value of
MSR. Price discovery is conducted through a process of obtaining the following
information: (a) monthly informal valuation of the servicing portfolio by a
prominent mortgage-servicing broker, and (b) a collection of surveys and
benchmarking data available through third party participants in the mortgage
banking business. Although there is no single source of market information that
can be relied upon to assess the fair value of MSR, First Horizon Home Loans
reviews all information obtained during price discovery to determine whether the
estimated fair value of MSR is reasonable when compared to market information.
On December 31, 2004, 2003 and 2002, based upon the information obtained through
price discovery, First Horizon Home Loans determined that its MSR valuations and
assumptions were reasonable based on the price discovery process.
The First Horizon Risk Management Committee (FHRMC) submits the overall
assessment of the estimated fair value of MSR monthly for review. The FHRMC is
responsible for approving the critical assumptions used by management to
determine the estimated fair value of First Horizon Home Loans' MSR. Each
quarter, FHN's MSR Committee reviews the initial capitalization rates for newly
originated MSR and the analysis of value impairment related to the total
servicing portfolio. In addition, the Executive Committee of FHN's board of
directors reviews the initial capitalization rates and approves the amortization
expense.
MSR are included on the Consolidated Statements of Condition, net of accumulated
amortization. The changes in fair value of MSR are included as a component of
Mortgage Banking - Noninterest Income on the Consolidated Statements of Income.
HEDGING THE FAIR VALUE OF MSR ON FIRST-LIEN MORTGAGES
In order to provide protection from a decline in the fair value of MSR due to
changes in the benchmark interest rate, First Horizon Home Loans employs a
hedging strategy. This strategy uses derivative financial instruments expected
to change in fair value in response to changes in a certain benchmark interest
rate (specifically, the 10-year LIBOR) in amounts, which will substantially
offset the change in fair value of certain MSR. On December 31, 2004 and 2003,
hedged MSR approximated 98 percent and 95 percent of the total MSR portfolio, as
measured on a dollar at risk basis.
In order to substantially hedge the change in fair value of the hedged MSR,
First Horizon Home Loans generally maintains a coverage ratio (the ratio of
expected change in fair value of derivatives to expected change in fair value of
MSR) approximating 100 percent of the hedged MSR portfolio. As noted above, to
the extent that actual borrower prepayments do not react as anticipated by the
prepayment model (i.e., the historical data observed in the model does not
correspond to actual market activity), it is possible that the prepayment model
could fail to accurately predict mortgage prepayments and could result in
significant earnings volatility. Pursuant to SFAS No. 133, in any hedge period
the difference between the change in fair value of the hedged MSR, attributed to
the change in the benchmark interest rate, and the change in fair value of the
derivatives used to hedge the change in fair value of the MSR is recognized as
gains or losses in current earnings. First Horizon Home Loans generally attempts
to hedge 100 percent of the exposure to a change in the fair value of the hedged
MSR attributed to a change in the benchmark interest rate, which requires a
regular assessment of the amount of derivative financial instruments required to
maintain a 100 percent hedge ratio.
Certain components of the fair value of derivatives used to hedge certain MSR
are excluded from the assessment of hedge effectiveness. Although those amounts
are excluded from the assessment of hedge effectiveness, they are included as a
component of current earnings in the Consolidated
40 First Horizon National Corporation
<Page>
Statements of Income. The derivative financial instruments used to hedge the
change in fair value of hedged MSR primarily include forward contracts, interest
rate swaps and swaptions.
First Horizon Home Loans generally experiences increased loan origination and
production in periods of low interest rates, which at the time of sale, result
in the capitalization of new MSR associated with new production. This provides
for a 'natural hedge' in the mortgage banking business cycle. The 'replenishment
rate' during 2004 - meaning the ratio of new loan volume originated for every
existing customer mortgage loan that prepays - was approximately 175 percent,
which includes the retention of existing First Horizon Home Loans' customers who
prepay their mortgage loans. First Horizon Home Loans capitalized $438.0 million
of MSR during 2004. New production and origination does not prevent First
Horizon Home Loans from recognizing impairment expense on existing servicing
rights as a result of prepayments; rather, the new production volume results in
loan origination fees and the capitalization of MSR as a component of realized
gains related to the sale of such loans in the secondary market, thus the
'natural hedge' which tends to offset a portion of the MSR impairment charges
during a period of low interest rates. In a period of increased borrower
prepayments, impairment can be significantly offset by a strong replenishment
rate and strong net margins on new loan originations. To the extent that First
Horizon Home Loans is unable to maintain a strong replenishment rate, or in the
event that the net margin on new loan originations declines from historical
experience, the value of the natural hedge may diminish, thereby significantly
impacting the results of operations in a period of increased borrower
prepayments.
First Horizon Home Loans does not specifically hedge the change in fair value of
MSR attributed to other risks, including unanticipated prepayments (representing
the difference between actual prepayment experience and estimated prepayments
derived from the model, as described above), basis risk (meaning, the risk that
changes in the benchmark interest rates may not correlate to changes in the
mortgage market interest rates), discount rates, cost to service and other
factors. To the extent that these other factors result in changes to the fair
value of MSR, First Horizon experiences volatility in current earnings due to
the fact that these risks are not currently hedged.
ACTUAL VS. ESTIMATED MSR CRITICAL ASSUMPTIONS
As discussed above, the estimate of the cash flow components of net servicing
income associated with MSR requires management to make several critical
assumptions based upon current market and loan production data, including
prepayment speeds, discount rate, cost to service and float income. Inherent in
estimating such assumptions are uncertainties associated with the mortgage
banking business (primarily, the change in market interest rates which vary
significantly due to multiple economic and non-economic factors) as well as the
composition of the MSR portfolio, which is not static and changes significantly
based upon the production and sale of new loans, customer prepayment experience
and other factors. As a result, the estimated assumptions used to value MSR -
particularly the estimate of prepayment speeds - can vary significantly from
actual experience, resulting in the recognition of additional impairment charges
in current earnings. Table 23 provides a summary of actual and
estimated-weighted average prepayment speeds and float income used in
determining the estimated fair value of MSR for the years ended December 31,
2004, 2003 and 2002. Although the estimates of discount rates and cost to
service assumptions used in determining the estimated fair value of MSR can vary
from actual experience, such differences have not been material for the years
ended December 31, 2004, 2003, and 2002.
During 2004, 2003 and 2002, impairment charges associated with MSR of $37.1
million, $158.3 million and $150.2 million, respectively, were recognized, which
were principally associated with differences between actual and estimated
prepayment speeds and other factors, including basis risk associated with
benchmark interest rates and actual float income earnings. The decrease in value
of MSR was partially offset by an increase in fair value of the derivative
financial instruments used to hedge the change in fair value of the hedged MSR.
Table 23 summarizes First Horizon Home Loans' MSR activity and critical
assumptions for the years ended December 31, 2004, 2003 and 2002.
First Horizon National Corporation 41
<Page>
TABLE 23 - MORTGAGE BANKING MSR ACTIVITY AND CRITICAL ASSUMPTIONS
<Table>
<Caption>
(Dollars in millions) 2004 2003 2002
- ------------------------------------------------------------------------------------------
Mortgage servicing income $ 230.4 $ 186.7 $ 168.0
Originated and purchased mortgage servicing rights, net 438.0 530.4 401.9
Amortization (152.7) (132.3) (117.8)
Impairment (37.1) (158.3) (150.2)
MSR hedge ineffectiveness, net* 47.9 115.2 100.8
- ------------------------------------------------------------------------------------------
Prepayment speeds
Actual 27.8% 55.3% 42.7%
Estimated** 23.8 67.0 42.9
Float income
Actual $ 30.8 $ 35.1 $ 41.7
Estimated 22.5 40.0 36.8
- ------------------------------------------------------------------------------------------
</Table>
* MSR hedge ineffectiveness is expressed net of time decay of MSR hedges.
** Estimated prepayment speeds represent monthly average prepayment speed
estimates for each of the years presented.
INTEREST-ONLY CERTIFICATES FAIR VALUE - RESIDENTIAL MORTGAGE LOANS
Consistent with MSR, the fair value of an interest-only certificate typically
rises as market interest rates increase and declines as market interest rates
decrease. Additionally, similar to MSR, the market for interest-only
certificates is limited, and the precise terms of transactions involving
interest-only certificates are not typically readily available. Accordingly,
First Horizon Home Loans relies primarily on a discounted cash flow model to
estimate the fair value of its interest-only certificates.
Estimating the cash flow components and the resultant fair value of the
interest-only certificates requires First Horizon Home Loans to make certain
critical assumptions based upon current market and loan production data. The
primary critical assumptions used by First Horizon Home Loans to estimate the
fair value of interest-only securities include prepayment speeds and discount
rates, as discussed above. First Horizon Home Loans' interest-only certificates
are included as a component of trading securities on the Consolidated Statements
of Condition, with realized and unrealized gains and losses included in current
earnings as a component of mortgage banking income on the Consolidated
Statements of Income.
HEDGING THE FAIR VALUE OF INTEREST-ONLY CERTIFICATES
First Horizon Home Loans employs an economic hedging strategy for interest-only
certificates, which uses derivative financial instruments expected to change in
fair value in response to changes in a certain benchmark interest rate
(specifically, the 10-year LIBOR) in amounts which will substantially offset the
change in fair value of certain interest-only certificates. Realized and
unrealized gains and losses associated with the change in fair value of
derivatives used in the economic hedge of interest-only securities are included
in current earnings on the Consolidated Statements of Income. The extent to
which the change in fair value of interest-only securities is offset by the
change in fair value of the derivatives used to hedge these instruments depends
primarily on the hedge coverage ratio maintained by First Horizon Home Loans.
Also, as noted above, to the extent that actual borrower prepayments do not
react as anticipated by the prepayment model (i.e., the historical data observed
in the model does not correspond to actual market activity), it is possible that
the prepayment model could fail to accurately predict mortgage prepayments,
which could significantly impact First Horizon Home Loans' ability to
effectively hedge certain components of the change in fair value of
interest-only certificates and could result in significant earnings volatility.
The derivative financial instruments used to hedge the change in fair value of
hedged interest-only certificates primarily include forward contracts, interest
rate swaps and swaptions.
42 First Horizon National Corporation
<Page>
RESIDUAL-INTEREST CERTIFICATES FAIR VALUE - HELOC AND SECOND-LIEN MORTGAGES
The fair value of a residual-interest certificate typically changes based on the
differences between modeled prepayment speeds and credit losses and actual
experience. Additionally, similar to MSR and interest-only certificates, the
market for residual-interest certificates is limited, and the precise terms of
transactions involving residual-interest certificates are not typically readily
available. Accordingly, FHN relies primarily on a discounted cash flow model to
estimate the fair value of its residual-interest certificates.
Estimating the cash flow components and the resultant fair value of the
residual-interest certificates requires FHN to make certain critical assumptions
based upon current market and loan production data. The primary critical
assumptions used by FHN to estimate the fair value of residual-interest
securities include prepayment speeds, credit losses and discount rates, as
discussed above. FHN's residual-interest certificates are included as a
component of trading securities on the Consolidated Statements of Condition,
with realized and unrealized gains and losses included in current earnings as a
component of other income on the Consolidated Statements of Income.
PIPELINE AND WAREHOUSE
During the period of loan origination, and prior to the sale of mortgage loans
in the secondary market, First Horizon Home Loans has exposure to mortgage loans
that are in the 'mortgage pipeline' and the 'mortgage warehouse'. The mortgage
pipeline consists of loan applications that have been received, but have not yet
closed as loans. Pipeline loans are either 'floating' or 'locked'. A floating
pipeline loan is one on which an interest rate has not been locked by the
borrower. A locked pipeline loan is one on which the potential borrower has set
the interest rate for the loan by entering into an interest rate lock commitment
resulting in interest rate risk to First Horizon Home Loans. Once a mortgage
loan is closed and funded, it is included within the mortgage warehouse, or the
'inventory' of mortgage loans that are awaiting sale and delivery (currently an
average of approximately 30 days) into the secondary market. First Horizon Home
Loans is exposed to credit risk while a mortgage loan is in the warehouse.
An interest rate lock commitment binds First Horizon Home Loans to lend funds to
the potential borrower at the set interest rate, which expires on a fixed date
regardless of whether or not interest rates change in the market. Interest rate
lock commitments generally have a term of up to 60 days before the closing of
the loan. The interest rate lock commitment, however, does not bind the
potential borrower to entering into the loan, nor does it guarantee that First
Horizon Home Loans will approve the potential borrower for the loan. Therefore,
First Horizon Home Loans makes estimates of expected 'fallout' (locked pipeline
loans not expected to close), using models, which consider cumulative historical
fallout rates and other factors. Fallout can occur for a variety of reasons
including falling rate environments when a borrower will abandon an interest
rate lock commitment at one lender and enter into a new lower interest rate lock
commitment at another, when a borrower is not approved as an acceptable credit
by the lender, or for a variety of other non-economic reasons. Note that once a
loan is closed, the risk of fallout is eliminated and the associated mortgage
loan is included in the mortgage loan warehouse. Under SFAS No. 133, interest
rate lock commitments qualify as derivative financial instruments and,
therefore, the changes in fair value of interest rate lock commitments are
included in current earnings in the Consolidated Statements of Income. Third
party models are also used to manage interest rate risk related to price
movements on loans in the pipeline and the warehouse.
For periods ending before April 1, 2004, like other participants in the mortgage
banking business, First Horizon Home Loans relied primarily on an internal
valuation model and one of several industry valuation techniques to estimate the
fair value of interest rate lock commitments and the mortgage warehouse. This
model calculated the estimated fair value using tranches of mortgage loans that
are determined to share similar price behavior, which is determined by
historical relationships of various product types, terms and interest rates. For
purposes of determining the market values for forward commitments to sell
mortgage loans in the secondary market, First Horizon Home Loans obtained market
prices from independent third parties, which represent actual trade activity in
the secondary
First Horizon National Corporation 43
<Page>
market. For purposes of determining the fair value of interest rate lock
commitments, management utilized the median broker price information obtained in
the secondary market, resulting in an asset with an estimated fair value of
$21.3 million on December 31, 2003.
For the period after March 31, 2004, the valuation model utilized to estimate
the fair value of interest rate lock commitments assumes a zero fair value on
the date of the lock with the borrower. Subsequent to the lock date, the model
calculates the change in value due solely to the change in interest rates
resulting in an asset with an estimated fair value of $16.5 million on
December 31, 2004.
To hedge against changes in fair value of the mortgage pipeline and warehouse
due to changes in interest rates, First Horizon Home Loans utilizes various
derivative financial instruments, which management expects will experience
changes in fair value opposite to the change in fair value of the loans in the
pipeline and warehouse, thus minimizing earnings volatility. The instruments and
techniques used to hedge the pipeline and warehouse include forward sales
commitments and other interest rate derivatives. The extent to which First
Horizon Home Loans is able to economically hedge changes in the mortgage
pipeline depends largely on the hedge coverage ratio that is maintained relative
to mortgage loans in the pipeline. The hedge coverage ratio can change
significantly due to changes in market interest rates and the associated forward
commitment prices for sales of mortgage loans in the secondary market. Increases
or decreases in the hedge coverage ratio can result in significant earnings
volatility to FHN. First Horizon Home Loans does not specifically hedge the
change in fair value of the mortgage pipeline attributed to other risks,
including basis risk and other factors.
FORECLOSURE RESERVES
As discussed above, First Horizon Home Loans typically originates mortgage loans
with the intent to sell those loans to GSE and other private investors in the
secondary market. Certain of the mortgage loans are sold with limited or full
recourse in the event of foreclosure. On December 31, 2004 and 2003, $3.4
billion and $3.7 billion of mortgage loans were outstanding which were sold
under limited recourse arrangements. On December 31, 2004 and 2003, $150.8
million and $199.3 million of mortgage loans were outstanding which were sold
under full recourse arrangements.
Loans sold with limited recourse include loans sold under government guaranteed
mortgage loan programs including Department of Housing and Urban Development
(HUD), Federal Housing Administration (FHA) and Veterans Administration (VA).
First Horizon Home Loans continues to absorb 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 First Horizon
Home Loans may be required to fund any deficiency in excess of the VA guarantee
if the loan goes to foreclosure.
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.
Management closely monitors historical experience, borrower payment activity,
current economic trends and other risk factors, and establishes a reserve for
foreclosure losses for loans sold with limited and full recourse which
management believes is sufficient to cover incurred foreclosure losses in the
portfolio. The reserve for foreclosure losses is based upon a historical
progression model using a rolling 12-month average, which predicts the
probability or 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. Table 24 provides a
summary of reserves for foreclosure losses for the years ended December 31,
2004, 2003 and 2002.
44 First Horizon National Corporation
<Page>
TABLE 24 - RESERVES FOR FORECLOSURE LOSSES
<Table>
<Caption>
(Dollars in millions) 2004 2003 2002
- --------------------------------------------------------------------------------------------
Beginning balance $ 22.3 $ 33.0 $ 25.2
Provision for foreclosure losses 3.6 10.0 19.1
Charge-offs (11.4) (22.7) (17.5)
Recoveries 4.0 2.0 6.2
- --------------------------------------------------------------------------------------------
Ending balance $ 18.5 $ 22.3 $ 33.0
============================================================================================
</Table>
ALLOWANCE FOR LOAN LOSSES
Management's policy is to maintain the allowance for loan losses at a level
sufficient to absorb estimated probable incurred losses in the loan portfolio.
Management performs periodic and systematic detailed reviews of its loan
portfolio to identify trends and to assess the overall collectibility of the
loan portfolio. Accounting standards require that loan losses be recorded when
management determines it is probable that a loss has been incurred and the
amount of the loss can be reasonably estimated. Management believes the
accounting estimate related to the allowance for loan losses is a 'critical
accounting estimate' because: changes in it can materially affect the provision
for loan losses and net income, it requires management to predict borrowers'
likelihood or capacity to repay, and it requires management to distinguish
between losses incurred as of a balance sheet date and losses expected to be
incurred in the future. Accordingly, this is a highly subjective process and
requires significant judgment since it is often difficult to determine when
specific loss events may actually occur. The allowance for loan losses is
increased by the provision for loan losses and recoveries and is decreased by
charged-off loans. This critical accounting estimate applies primarily to the
Retail/Commercial Banking segment. The Executive Committee of FHN's board of
directors approves the level of the allowance for loan losses.
FHN's methodology for estimating the allowance for loan losses is not only
critical to the accounting estimate, but to the credit risk management function
as well. Key components of the estimation process are as follows: (1) commercial
loans determined by management to be individually impaired loans are evaluated
individually and specific reserves are determined based on the difference
between the outstanding loan amount and the estimated net realizable value of
the collateral (if collateral dependent) or the present value of expected future
cash flows; (2) individual commercial loans not considered to be individually
impaired are segmented based on similar credit risk characteristics and
evaluated on a pool basis; (3) retail loans are segmented based on loan types
and credit score bands and loan to value; (4) reserve rates for each portfolio
segment are calculated based on historical charge-offs and are adjusted by
management to reflect current events, trends and conditions (including economic
factors and trends); and (5) management's estimate of probable incurred losses
reflects the reserve rate applied against the balance of loans in each segment
of the loan portfolio.
Principal loan amounts are charged off against the allowance for loan losses in
the period in which the loan or any portion of the loan is deemed to be
uncollectible.
FHN believes that the critical assumptions underlying the accounting estimate
made by management include: (1) the commercial loan portfolio has been properly
risk graded based on information about borrowers in specific industries and
specific issues with respect to single borrowers; (2) borrower specific
information made available to FHN is current and accurate; (3) the loan
portfolio has been segmented properly and individual loans have similar credit
risk characteristics and will behave similarly; (4) known significant loss
events that have occurred were considered by management at the time of assessing
the adequacy of the allowance for loan losses; (5) the economic factors utilized
in the allowance for loan losses estimate are used as a measure of actual
incurred losses; (6) the period of history used for historical loss factors is
indicative of the current environment; and (7) the reserve rates, as well as
other adjustments estimated by management for current events, trends, and
First Horizon National Corporation 45
<Page>
conditions, utilized in the process reflect an estimate of losses that have been
incurred as of the date of the financial statements.
While management uses the best information available to establish the allowance
for loan losses, future adjustments to the allowance for loan losses and
methodology may be necessary if economic or other conditions differ
substantially from the assumptions used in making the estimates or, if required
by regulators, based upon information at the time of their examinations. Such
adjustments to original estimates, as necessary, are made in the period in which
these factors and other relevant considerations indicate that loss levels vary
from previous estimates.
GOODWILL AND ASSESSMENT OF IMPAIRMENT
FHN's policy is to assess goodwill for impairment at the reporting unit level on
an annual basis or between annual assessments if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. Impairment is the condition that
exists when the carrying amount of goodwill exceeds its implied fair value.
Accounting standards require management to estimate the fair value of each
reporting unit in making the annual assessment of impairment. The valuation as
of October 1, 2004, indicated no goodwill impairment for any of the reporting
units.
Management believes the accounting estimates associated with determining fair
value as part of the goodwill impairment test is a 'critical accounting
estimate' because estimates and assumptions are made about FHN's future
performance and cash flows, as well as other prevailing market factors (interest
rates, economic trends, etc.). FHN's policy allows management to make the
determination of fair value using internal cash flow models or by engaging
independent third parties. If a charge to operations for impairment results,
this amount would be reported separately as a component of noninterest expense.
This critical accounting estimate applies to the Retail/Commercial Banking,
Mortgage Banking and Capital Markets business segments. Reporting units have
been defined as the same level as the operating business segments.
The impairment testing process conducted by FHN begins by assigning net assets
and goodwill to each reporting unit. FHN then completes 'step one' of the
impairment test by comparing the fair value of each reporting unit (as
determined based on the discussion below) with the recorded book value (or
'carrying amount') of its net assets, with goodwill included in the computation
of the carrying amount. If the fair value of a reporting unit exceeds its
carrying amount, goodwill of that reporting unit is not considered impaired, and
'step two' of the impairment test is not necessary. If the carrying amount of a
reporting unit exceeds its fair value, step two of the impairment test is
performed to determine the amount of impairment. Step two of the impairment test
compares the carrying amount of the reporting unit's goodwill to the 'implied
fair value' of that goodwill. The implied fair value of goodwill is computed by
assuming all assets and liabilities of the reporting unit would be adjusted to
the current fair value, with the offset as an adjustment to goodwill. This
adjusted goodwill balance is the implied fair value used in step two. An
impairment charge is recognized for the amount by which the carrying amount of
goodwill exceeds its implied fair value.
As noted above, a key estimate made by management during the assessment of
impairment is the fair value of each reporting unit. As of October 1, 2004, FHN
engaged an independent valuation firm to compute the fair value estimates of
each reporting unit as part of its annual impairment assessment. The independent
valuation utilized three separate valuation methodologies and applied a weighted
average to each methodology in order to determine fair value for each reporting
unit.
In connection with obtaining the independent valuation, management provided
certain data and information that was utilized by the third party in their
determination of fair value. This information included budgeted and forecasted
earnings of FHN at the reporting unit level. Management believes that this
information is a critical assumption underlying the estimate of fair value. The
independent third party made other assumptions critical to the process,
including discount rates, asset and liability growth rates, and other income and
expense estimates, through discussions with management.
46 First Horizon National Corporation
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While management uses the best information available to estimate future
performance for each reporting unit, future adjustments to management's
projections may be necessary if economic conditions differ substantially from
the assumptions used in making the estimates.
CONTINGENT LIABILITIES
A liability is contingent if the amount is not presently known, but may become
known in the future as a result of the occurrence of some uncertain future
event. FHN estimates its contingent liabilities based on management's estimates
about the probability of outcomes and their ability to estimate the range of
exposure. Accounting standards require that a liability be recorded if
management determines that it is probable that a loss has occurred and the loss
can be reasonably estimated. In addition, it must be probable that the loss will
be confirmed by some future event. As part of the estimation process, management
is required to make assumptions about matters that are by their nature highly
uncertain.
The assessment of contingent liabilities, including legal contingencies and
income tax liabilities, involves the use of critical estimates, assumptions and
judgments. Management's estimates are based on their belief that future events
will validate the current assumptions regarding the ultimate outcome of these
exposures. However, there can be no assurance that future events, such as court
decisions or I.R.S. positions, will not differ from management's assessments.
Whenever practicable, management consults with third party experts (attorneys,
accountants, claims administrators, etc.) to assist with the gathering and
evaluation of information related to contingent liabilities. Based on internally
and/or externally prepared evaluations, management makes a determination whether
the potential exposure requires accrual in the financial statements.
Note 18 - Restrictions, Contingencies, Commitments and Other Disclosures
provides additional information.
QUARTERLY FINANCIAL INFORMATION
TABLE 25 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION
<Table>
<Caption>
2004 2003
------------------------------------- -------------------------------------
(Dollars in millions except FOURTH THIRD SECOND FIRST Fourth Third Second First
per share data) QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
----------------------------------------------------------------------------------------------------------------
SUMMARY INCOME INFORMATION:
Interest income $334.8 $300.2 $277.8 $254.0 $253.3 $277.4 $266.9 $255.8
Interest expense 106.4 81.9 64.2 58.0 56.8 63.3 66.0 61.5
Provision for loan losses 11.7 10.1 12.3 14.2 15.4 16.3 27.5 27.5
Noninterest income 313.1 327.6 352.3 370.1 386.5 392.3 446.6 442.2
Noninterest expense 382.7 365.6 384.0 372.0 382.0 409.9 448.4 427.4
Net income 103.1 113.6 118.4 119.3 117.6 118.3 118.4 119.0
----------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE $ .83 $ .91 $ .95 $ .95 $ .93 $ .93 $ .93 $ .94
DILUTED EARNINGS PER COMMON SHARE .81 .89 .92 .92 .90 .91 .90 .91
----------------------------------------------------------------------------------------------------------------
COMMON STOCK INFORMATION:
Closing price per share:
High $44.23 $45.72 $48.01 $47.91 $46.60 $44.98 $47.98 $39.96
Low 41.59 42.82 43.00 42.70 42.37 38.97 39.05 36.14
Period-end 43.11 43.36 45.47 47.70 44.10 42.46 43.91 39.71
Dividends declared per share .43 .40 .40 .40 .40 .30 .30 .30
----------------------------------------------------------------------------------------------------------------
</Table>
First Horizon National Corporation 47
<Page>
ACCOUNTING CHANGES
In October 2003, the FASB approved the AICPA's issuance of SOP 03-3, 'Accounting
for Loans or Certain Debt Securities Acquired in a Transfer', which modifies the
accounting for certain loans that are acquired with evidence of deterioration in
credit quality since origination. SOP 03-3 does not apply to loans recorded at
fair value, to revolving loans, or to mortgage loans classified as held for
sale. SOP 03-3 limits the yield that may be accreted on applicable loans to the
excess of the cash flows expected, at acquisition, to be collected over the
investor's initial investment in the loan. SOP 03-3 also prohibits the 'carrying
over' of valuation allowances on applicable loans. SOP 03-3 is effective for
fiscal years beginning after December 15, 2004. The impact at implementation of
adopting SOP 03-3 is expected to be immaterial to the results of future
operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), 'Share-Based
Payment' (SFAS No. 123-R), which requires recognition of expense over the
requisite service period for awards of share-based compensation to employees.
SFAS No. 123-R must be adopted no later than July 1, 2005, with earlier adoption
permitted. As permitted by the original SFAS No. 123, FHN has accounted for its
equity awards under the provisions of APB No. 25. Upon adoption of SFAS
No. 123-R, the grant date fair value of an award will be used to measure the
compensation expense recognized for the award. For unvested awards granted prior
to the adoption of SFAS 123-R, the fair values utilized will equal the values
used in preparation of the disclosures required under the original SFAS 123.
Compensation expense recognized after adoption of SFAS 123-R will incorporate an
estimate of awards expected to ultimately vest, which requires estimation of
forfeitures as well as projections related to the satisfaction of performance
conditions that determine vesting. Upon initial adoption of SFAS 123-R, FHN is
required to reclassify deferred compensation debit balances to capital surplus
and to make a cumulative effect entry for outstanding unvested awards that are
not expected to vest due to anticipated forfeiture. SFAS 123-R permits
restatement of prior period financial statements using the amounts from prior
SFAS 123 disclosures. FHN expects to adopt SFAS No 123-R on July 1, 2005, and
restate prior period financial statements. The adoption of SFAS No. 123-R,
without considering any plan modifications, is estimated to result in a
reduction of net income for the last six months of 2005 between $8 million and
$12 million, which represents $.04 to $.06 per share. For the full year 2005,
including the effect of restating earnings for the first six months upon
adoption, the impact is estimated to result in a reduction of net income between
$16 million and $20 million, which represents $.08 to $.10 per share.
SUBSEQUENT EVENTS
On January 7, 2005, FHN's capital markets division, FTN Financial, completed the
acquisition of the assets and operations of the fixed income business of SLK, a
division of Goldman Sachs & Co. The acquisition is expected to be accretive to
FHN's earnings per share during 2005.
In February 2005, FTBNA entered into a $5.0 billion bank note program. The bank
note program provides FTBNA with a facility under which it may continuously
issue and offer short- and medium-term unsecured notes. An existing bank note
program under which FTBNA had nearly exhausted its ability to issue and sell
longer-term notes has been terminated in connection with the establishment of
the new program. That termination does not affect any previously-issued notes
outstanding. Net proceeds from the notes are expected to be used by FTBNA for
general purposes in the ordinary course of banking business. For additional
information see also Liquidity Risk Management.
48 First Horizon National Corporation
<Page>
GLOSSARY
ALLOWANCE FOR LOAN LOSSES - Valuation reserve representing the amount
considered by management to be adequate to cover estimated probable incurred
losses in the loan portfolio.
BASIS POINT - The equivalent of one-hundredth of one percent (0.01). One
hundred basis points equals one percent. This unit is generally used to measure
movements in interest yields and rates.
BASIS RISK - Refers to changes in the relationship between various interest
rate segments (e.g. the difference between the Prime and the Fed Funds Rates).
BOOK VALUE PER COMMON SHARE - A ratio determined by dividing shareholders'
equity at the end of a period by the number of common shares outstanding at the
end of that period.
CHARGE-OFFS - The amount charged against the allowance for loan losses to
reduce specific loans to their net realizable value.
CLASSIFIED LOAN - A loan that has caused management to have serious doubts
about the borrower's ability to comply with present repayment terms. Included in
this category are grades 8, 9 and 10 performing and nonperforming loans. In
compliance with the standards established by the Office of the Comptroller of
the Currency (OCC) these loans are classified as substandard, doubtful, and loss
depending on the severity of the loan's deterioration.
COMMERCIAL PAPER - A short-term unsecured debt obligation of the parent
company with maturities typically of 30 days to 270 days.
COMMERCIAL AND STANDBY LETTERS OF CREDIT - Commercial letters of credit are
issued or confirmed by an entity to ensure the payment of its customers'
payables and receivables. Standby letters of credit are issued by an entity to
ensure its customers' performance in dealing with others.
COMMITMENT TO EXTEND CREDIT - Agreements to make or acquire a loan or lease as
long as agreed-upon terms (e.g., expiration date, covenants, or notice) are met.
Generally these commitments have fixed expiration dates or other termination
clauses and may require payment of a fee.
CORE DEPOSITS - Core deposits consist of all interest-bearing and
noninterest-bearing deposits, except certificates of deposit over $100,000. They
include checking interest deposits, money market deposit accounts, time and
other savings, plus demand deposits.
DERIVATIVE FINANCIAL INSTRUMENT - A contract or agreement whose value is
derived from changes in interest rates, foreign exchange rates, prices of
securities or commodities, or financial or commodity indices.
DILUTED EARNINGS PER COMMON SHARE - Net income, divided by average shares
outstanding plus the number of shares that would be outstanding if all dilutive
common shares had been issued. Dilutive common shares, for example, would
represent outstanding options where the average stock price exceeds the price at
which the option was granted.
EARNING ASSETS - Assets that generate interest or dividend income or
yield-related fee income, such as loans and investment securities.
EARNINGS PER COMMON SHARE - Net income, divided by the average number of
common shares outstanding in the period. (See also diluted earnings per share)
FEDERAL FUNDS SOLD/PURCHASED - Excess balances of depository institutions
which are loaned to each other, generally on an overnight basis.
First Horizon National Corporation 49
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FLOW SALES - Refers to sales of loans where the servicing right is released at
the time the related loan is sold.
FULLY TAXABLE EQUIVALENT (FTE) - Reflects the rate of tax-exempt income
adjusted to a level that would yield the same after-tax income had that income
been subject to taxation.
HEDGE - An instrument used to reduce risk by entering into a transaction which
offsets existing or anticipated exposures to changes in interest rates or fair
value of assets or liabilities.
INTEREST FREE SOURCES - Noninterest bearing liabilities (such as demand
deposits, other liabilities, and shareholders' equity) net of nonearning assets
(such as cash, fixed assets, and other assets).
INTEREST ONLY STRIP - Mortgage security consisting of the interest rate
portion of a stripped mortgage backed security.
INTEREST RATE CAPS AND FLOORS - Contracts with notional principal amounts that
require the seller, in exchange for a fee, to make payments to the purchaser if
a specified market interest rate exceeds a fixed upper 'capped' level or falls
below a fixed lower 'floor' level on specified future dates.
INTEREST RATE FORWARD CONTRACTS - Contracts representing commitments either to
purchase or sell at a specified future date a specified security or financial
instrument at a specified price, and may be settled in cash or through delivery.
These obligations are generally short-term in nature.
INTEREST RATE OPTION - A contract that grants the holder (purchaser), for a
fee, the right to either purchase or sell a financial instrument at a specified
price within a specified period of time or on a specified date from or to the
writer (seller) of the option.
INTEREST RATE SENSITIVITY - The relationship of changes in interest income and
interest expense to fluctuations in interest rates over a defined period of
time.
INTEREST RATE SWAP - An agreement in which two entities agree to exchange, at
specified intervals, interest payment streams calculated on an agreed upon
notional principal amount with at least one stream based on a floating rate
index.
LEVERAGE RATIO - Ratio consisting of Tier 1 capital divided by quarterly
average assets adjusted for certain unrealized gains/(losses) on available for
sale securities, goodwill, certain other intangible assets, the disallowable
portion of mortgage servicing rights and other disallowed assets.
LIQUIDITY - The ability of a corporation to generate adequate funds to meet
its cash flow requirements. It is measured by the ability to quickly convert
assets into cash with minimal exposure to interest rate risk, by the size and
stability of the core deposit base, and by additional borrowing capacity within
the money markets.
MARKET CAPITALIZATION - Market value of a company computed by multiplying the
number of shares outstanding by the current stock price.
MORTGAGE BACKED SECURITIES - Investment securities backed by a pool of
mortgages or trust deeds. Principal and interest payments on the underlying
mortgages are used to pay principal and interest on the securities.
MORTGAGE PIPELINE - Interest rate commitments made to customers on mortgage
loans that have not yet been closed and funded.
MORTGAGE WAREHOUSE - A mortgage loan that has been closed and funded and is
awaiting sale and delivery into the secondary market.
50 First Horizon National Corporation
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MORTGAGE SERVICING RIGHTS (MSR) - The right to service mortgage loans,
generally owned by someone else, for a fee. Loan servicing includes collecting
payments; remitting funds to investors, insurance companies, and taxing
authorities; collecting delinquent payments; and foreclosing on properties when
necessary.
NET INTEREST INCOME (NII) - Interest income less interest expense.
NET INTEREST MARGIN (NIM) - Expressed as a percentage, net interest margin is
a measure of the profitability of earning assets. It is computed by dividing
fully taxable equivalent net interest income by average earning assets.
NET INTEREST SPREAD - The difference between the average yield earned on
earning assets on a fully taxable equivalent basis and the average rate paid for
interest-bearing liabilities.
NONACCRUAL LOANS - Loans on which interest accruals have been discontinued due
to the borrower's financial difficulties. Interest income on these loans is
reported on a cash basis as it is collected after recovery of principal.
NONPERFORMING ASSETS - Interest earning assets on which interest income is not
being accrued, restructured loans on which interest rates or terms of repayment
have been materially revised, real estate properties acquired through
foreclosure, and repossessed assets.
NOTIONAL PRINCIPAL AMOUNT - An amount on which payments for interest rate
swaps and interest rate options, caps and floors are based. The 'notional
amount' is not paid or received.
PRINCIPAL ONLY STRIP - Mortgage security consisting of the principal portion
of a stripped mortgage backed security.
PROVISION FOR LOAN LOSSES - The periodic charge to earnings for potential
losses in the loan portfolio.
PURCHASE OBLIGATION - An agreement to purchase goods or services that is
enforceable and legally binding and that specifies all significant terms,
including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction.
PURCHASED FUNDS - The combination of certificates of deposit greater than
$100,000, federal funds purchased, securities sold under agreement to
repurchase, bank notes, commercial paper, and other short-term borrowings.
RECOVERIES - The amount added to the allowance for loan losses when funds are
received on a loan which was previously charged off.
REPURCHASE AGREEMENT - A method of short-term financing where one party agrees
to buy back, at a future date (generally overnight) and an agreed-upon price, a
security it sells to another party.
RESTRUCTURED LOANS - Loans where the institution, for economic or legal
reasons related to the debtor's financial difficulties, grants a concession to
the debtor that it would not otherwise consider.
RETURN ON AVERAGE ASSETS (ROA) - A measure of profitability that indicates how
effectively an institution utilized its assets. It is calculated by dividing net
income by total average assets.
RETURN ON AVERAGE EQUITY (ROE) - A measure of profitability that indicates
what an institution earned on its shareholders' investment. ROE is calculated by
dividing net income by total average shareholders' equity.
RISK-ADJUSTED ASSETS - A regulatory risk-based calculation that takes into
account the broad differences in risks among a banking organization's assets and
off-balance sheet instruments.
First Horizon National Corporation 51
<Page>
SECURITIZED ASSETS OR SECURITIZATION - The process by which financial assets
are packaged, underwritten and sold as securities.
TIER 1 CAPITAL RATIO - Ratio consisting of shareholders' equity adjusted for
certain unrealized gains/(losses) on available for sale securities, reduced by
goodwill, certain other intangible assets, the disallowable portion of mortgage
servicing rights and other disallowed assets divided by risk-adjusted assets.
TOTAL CAPITAL RATIO - Ratio consisting of Tier 1 capital plus the allowable
portion of the allowance for loan losses and qualifying subordinated debt
divided by risk-adjusted assets.
TOTAL REVENUE - The sum of net interest income and noninterest income.
52 First Horizon National Corporation
<Page>
FIRST HORIZON NATIONAL CORPORATION
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of First Horizon National Corporation is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. First
Horizon National Corporation's internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Even effective internal controls, no matter how well designed, have inherent
limitations such as the possibility of human error or of circumvention or
overriding of controls, and consideration of cost in relation to benefit of a
control. Moreover, effectiveness must necessarily be considered according to the
existing state of the art of internal control. Further, because of changes in
conditions, the effectiveness of internal controls may diminish over time.
Management assessed the effectiveness of First Horizon National Corporation's
internal control over financial reporting as of December 31, 2004. In making
this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment and those criteria, management believes that First
Horizon National Corporation maintained effective internal control over
financial reporting as of December 31, 2004.
First Horizon National Corporation's independent auditors have issued an
attestation report on management's assessment of First Horizon National
Corporation's internal control over financial reporting. That report appears on
the following page.
First Horizon National Corporation 53
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
First Horizon National Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that First
Horizon National Corporation (the Company) maintained effective internal control
over financial reporting as of December 31, 2004, based on criteria established
in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that First Horizon National Corporation
maintained effective internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material respects, based on criteria
established in Internal Control -- Integrated Framework issued by COSO. Also, in
our opinion, First Horizon National Corporation maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal
Control -- Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
First Horizon National Corporation as of December 31, 2004 and 2003, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2004, and our
report dated March 11, 2005 expressed an unqualified opinion on those
consolidated financial statements.
[Signature of KPMG LLP]
Memphis, Tennessee
March 11, 2005
54 First Horizon National Corporation
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
First Horizon National Corporation:
We have audited the accompanying consolidated statements of condition of First
Horizon National Corporation (the Company) as of December 31, 2004 and 2003, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the years in the three year period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Horizon
National Corporation as of December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of First Horizon
National Corporation's internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 11, 2005 expressed an unqualified
opinion on management's assessment of, and the effective operation of, internal
control over financial reporting.
[Signature of KPMG LLP]
Memphis, Tennessee
March 11, 2005
First Horizon National Corporation 55
<Page>
CONSOLIDATED STATEMENTS OF CONDITION
<Table>
<Caption>
December 31
-----------------------------
(Dollars in thousands) 2004 2003
- -------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks (Note 18) $ 638,189 $ 773,294
Federal funds sold and securities purchased under agreements
to resell 682,310 381,500
- -------------------------------------------------------------------------------------------
Total cash and cash equivalents 1,320,499 1,154,794
- -------------------------------------------------------------------------------------------
Investment in bank time deposits 5,329 498
Trading securities 988,015 800,490
Loans held for sale 5,167,981 2,977,723
Securities available for sale (Note 3) 2,680,556 2,469,342
Securities held to maturity (fair value of $457 on
December 31, 2004, and $1,077 on December 31, 2003)
(Note 3) 441 1,028
Loans, net of unearned income (Note 4) 16,427,673 13,990,525
Less: Allowance for loan losses 158,159 160,333
- -------------------------------------------------------------------------------------------
Total net loans 16,269,514 13,830,192
- -------------------------------------------------------------------------------------------
Premises and equipment, net (Note 5) 379,359 350,202
Real estate acquired by foreclosure 27,777 24,075
Mortgage servicing rights, net (Note 6) 1,036,458 795,938
Goodwill (Note 7) 187,200 174,807
Other intangible assets, net (Note 7) 34,769 38,742
Capital markets receivables and other assets 1,673,785 1,888,859
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $29,771,683 $24,506,690
===========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing (Note 8) $14,787,645 $11,139,758
Noninterest-bearing 4,994,522 4,731,564
- -------------------------------------------------------------------------------------------
Total deposits 19,782,167 15,871,322
- -------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements
to repurchase (Note 9) 3,247,048 3,079,248
Commercial paper and other short-term borrowings (Note 9) 505,756 227,976
Capital markets payables and other liabilities 1,578,903 1,710,608
Term borrowings (Note 10) 2,616,368 1,726,766
- -------------------------------------------------------------------------------------------
Total liabilities 27,730,242 22,615,920
- -------------------------------------------------------------------------------------------
Preferred stock of subsidiary (Note 12) 458 452
- -------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock - no par value (5,000,000 shares
authorized, but unissued) - -
Common stock - $.625 par value (shares
authorized - 400,000,000; shares issued -
123,531,904 on December 31, 2004 and 124,834,272 on
December 31, 2003) 77,207 78,021
Capital surplus 173,872 145,817
Undivided profits 1,795,853 1,662,699
Accumulated other comprehensive (loss)/income, net
(Note 15) (9,928) 682
Deferred compensation on restricted stock incentive plans (8,181) (9,044)
Deferred compensation obligation 12,160 12,143
- -------------------------------------------------------------------------------------------
Total shareholders' equity 2,040,983 1,890,318
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $29,771,683 $24,506,690
===========================================================================================
</Table>
See accompanying notes to consolidated financial statements.
Certain previously reported amounts have been reclassified to agree with
current presentation.
56 First Horizon National Corporation
<Page>
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
Year Ended December 31
----------------------------------------------
(Dollars in thousands except per share data) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 774,688 $ 657,546 $ 665,980
Interest on investment securities 104,144 111,257 143,009
Interest on loans held for sale 226,832 229,091 184,038
Interest on trading securities 53,398 50,515 43,679
Interest on other earning assets 7,740 4,961 5,489
- ------------------------------------------------------------------------------------------------------------
Total interest income 1,166,802 1,053,370 1,042,195
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Savings 399 832 2,187
Checking interest and money market 24,017 22,739 37,055
Certificates of deposit under $100,000 and other time 60,060 57,139 71,254
Certificates of deposit $100,000 and more 108,003 69,336 79,844
Interest on short-term borrowings 67,757 62,130 67,657
Interest on term borrowings 50,255 35,410 28,584
- ------------------------------------------------------------------------------------------------------------
Total interest expense 310,491 247,586 286,581
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 856,311 805,784 755,614
Provision for loan losses 48,348 86,698 92,184
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 807,963 719,086 663,430
- ------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 444,758 649,496 436,706
Capital markets 376,558 538,919 448,016
Deposit transactions and cash management 148,514 146,701 143,315
Merchant processing 75,086 57,609 48,403
Insurance commissions 56,109 57,811 50,446
Trust services and investment management 47,274 45,873 48,369
Gains on divestitures 7,000 22,498 4,550
Equity securities gains/(losses), net 2,040 8,491 (9,435)
Debt securities gains/(losses), net 18,708 (6,113) 255
All other income (Note 14) 187,139 146,299 141,310
- ------------------------------------------------------------------------------------------------------------
Total noninterest income 1,363,186 1,667,584 1,311,935
- ------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 2,171,149 2,386,670 1,975,365
- ------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives and benefits 914,947 995,609 830,672
Occupancy 89,402 83,583 76,669
Equipment rentals, depreciation and maintenance 72,695 68,973 68,736
Operations services 67,523 67,948 60,238
Communications and courier 49,590 50,535 45,085
Amortization of intangible assets 9,541 7,980 6,200
All other expense (Note 14) 300,642 393,044 329,706
- ------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,504,340 1,667,672 1,417,306
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 666,809 718,998 558,059
Provision for income taxes (Note 16) 212,401 245,689 181,608
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 454,408 $ 473,309 $ 376,451
============================================================================================================
EARNINGS PER COMMON SHARE (Note 17) $ 3.64 $ 3.73 $ 2.97
- ------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE (Note 17) $ 3.54 $ 3.62 $ 2.89
- ------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES (Note 17) 124,730,571 126,765,423 126,714,413
- ------------------------------------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE SHARES (Note 17) 128,436,342 130,876,041 130,221,169
- ------------------------------------------------------------------------------------------------------------
</Table>
Certain previously reported amounts have been reclassified to agree with current
presentation.
See accompanying notes to consolidated financial statements.
First Horizon National Corporation 57
<Page>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<Table>
<Caption>
Accumulated Deferred
Other Deferred Compen-
Common Common Capital Undivided Comprehensive Compen- sation
(Amounts in thousands) Shares Total Stock Surplus Profits (Loss)/Income sation Obligation
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 125,865 $1,477,762 $78,666 $106,682 $1,263,649 $ 23,278 $(2,126) $ 7,613
Net income - 376,451 - - 376,451 - - -
Other comprehensive income:
Unrealized market
adjustments on cash flow
hedges, net of tax - (137) - - - (137) - -
Unrealized market
adjustments on securities
available for sale, net
of tax - 4,735 - - - 4,735 - -
Minimum pension liability,
net of tax (1,389) (1,389)
--------------------------------------------------------------------------------------------------
Comprehensive income - 379,660 - - 376,451 3,209 - -
--------------------------------------------------------------------------------------------------
Cash dividends declared
($1.05/share) - (131,982) - - (131,982) - - -
Common stock issued for
exercise of stock options 2,613 50,700 1,633 45,955 - - - 3,112
Tax benefit from
non-qualified stock
options - 11,395 - 11,395 - - - -
Common stock repurchased (3,053) (111,187) (1,909) (63,106) (46,172) - - -
Amortization on restricted
stock incentive plans - 2,499 - - - - 2,499 -
Other 175 12,333 110 18,392 - - (6,169) -
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 125,600 1,691,180 78,500 119,318 1,461,946 26,487 (5,796) 10,725
Net income - 473,309 - - 473,309 - - -
Other comprehensive income:
Unrealized market
adjustments on cash flow
hedges, net of tax - 137 - - - 137 - -
Unrealized market
adjustments on securities
available for sale, net
of tax - (24,813) - - - (24,813) - -
Minimum pension liability,
net of tax (1,129) (1,129)
--------------------------------------------------------------------------------------------------
Comprehensive income - 447,504 - - 473,309 (25,805) - -
--------------------------------------------------------------------------------------------------
Cash dividends declared
($1.30/share) - (163,452) - - (163,452) - - -
Common stock issued for
exercise of stock options 3,889 77,876 2,431 74,027 - - - 1,418
Tax benefit from
non-qualified stock
options - 27,842 - 27,842 - - - -
Common stock repurchased (4,855) (209,125) (3,035) (96,972) (109,118) - - -
Amortization on restricted
stock incentive plans - 5,121 - - - - 5,121 -
Other 200 13,372 125 21,602 14 - (8,369) -
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 124,834 1,890,318 78,021 145,817 1,662,699 682 (9,044) 12,143
Net income - 454,408 - - 454,408 - - -
Other comprehensive income:
Unrealized market
adjustments on securities
available for sale, net
of tax - (10,291) - - - (10,291) - -
Minimum pension liability,
net of tax (319) (319)
--------------------------------------------------------------------------------------------------
Comprehensive income - 443,798 - - 454,408 (10,610) - -
--------------------------------------------------------------------------------------------------
Cash dividends declared
($1.63/share) - (201,316) - - (201,316) - - -
Common stock issued for
exercise of stock options 2,809 67,068 1,756 65,295 - - - 17
Tax benefit from
non-qualified stock
options - 15,502 - 15,502 - - - -
Common stock repurchased (4,134) (184,102) (2,584) (61,577) (119,941) - - -
Amortization on restricted
stock incentive plans - 1,845 - - - - 1,845 -
Other 23 7,870 14 8,835 3 - (982) -
---------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 123,532 $2,040,983 $77,207 $173,872 $1,795,853 $ (9,928) $(8,181) $12,160
===========================================================================================================================
</Table>
See accompanying notes to consolidated financial statements.
58 First Horizon National Corporation
<Page>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
Year Ended December 31
---------------------------------------------
(Dollars in thousands) 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
OPERATING Net income $ 454,408 $ 473,309 $ 376,451
ACTIVITIES Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Provision for loan losses 48,348 86,698 92,184
Provision for deferred income tax 41,472 113,716 42,248
Depreciation and amortization of premises and equipment 48,731 45,087 41,851
Amortization and impairment of mortgage servicing rights 191,363 290,597 268,003
Amortization of intangible assets 9,541 7,980 6,200
Net other amortization and accretion 74,950 81,567 37,618
Decrease/(increase) in derivatives, net 159,123 58,298 (186,734)
Market value adjustment on foreclosed property 4,022 11,644 18,811
Loss on early retirement of debt - 5,766 3,724
Equity securities (gains)/losses, net (2,040) (8,491) 9,435
Debt securities (gains)/losses, net (18,708) 6,113 (255)
Net (gains)/losses on disposals of fixed assets (589) 1,437 936
Net (increase)/decrease in:
Trading securities (187,525) 85,374 (247,818)
Loans held for sale (566,337) 1,819,842 (1,398,256)
Capital markets receivables 321,123 (327,190) 137,820
Interest receivable (19,528) (8,369) 8,535
Other assets (724,706) (450,432) (264,564)
Net increase/(decrease) in:
Capital markets payables (314,578) 282,070 (7,732)
Interest payable 12,504 579 (6,799)
Other liabilities 150,341 28,110 125,565
- ---------------------------------------------------------------------------------------------------------------------
Total adjustments (772,493) 2,130,396 (1,319,228)
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used)/provided by operating activities (318,085) 2,603,705 (942,777)
- ---------------------------------------------------------------------------------------------------------------------
INVESTING Maturities of held to maturity securities 589 142,723 179,628
ACTIVITIES Available for sale securities:
Sales 1,298,485 992,017 170,819
Maturities 415,647 1,546,914 1,247,002
Purchases (1,920,053) (2,745,032) (1,768,354)
Premises and equipment:
Sales 1,048 847 8,032
Purchases (78,763) (149,600) (56,794)
Net increase in loans (4,165,896) (2,808,349) (1,394,641)
Net (increase)/decrease in investment in bank time deposits (4,831) 1,346 (166)
Proceeds from divestitures, net of cash and cash equivalents - 21,577 206,664
Acquisitions, net of cash and cash equivalents acquired - (1,930) (13,433)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (4,453,774) (2,999,487) (1,421,243)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING Common stock:
ACTIVITIES Exercise of stock options 67,935 77,591 51,015
Cash dividends paid (198,495) (150,863) (125,736)
Repurchase of shares (184,224) (209,263) (111,187)
Term borrowings:
Issuance 1,506,605 925,887 481,816
Payments (610,585) (287,207) (106,569)
Issuance of preferred stock of subsidiary - 260 -
Net increase/(decrease) in:
Deposits 3,910,748 45,770 2,271,911
Short-term borrowings 445,580 (180,316) 116,864
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,937,564 221,859 2,578,114
- ---------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 165,705 (173,923) 214,094
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 1,154,794 1,328,717 1,114,623
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,320,499 $ 1,154,794 $ 1,328,717
=====================================================================================================================
Total interest paid $ 297,089 $ 246,136 $ 292,618
- ---------------------------------------------------------------------------------------------------------------------
Total income taxes paid 182,255 159,188 123,071
- ---------------------------------------------------------------------------------------------------------------------
</Table>
See accompanying notes to consolidated financial statements.
Certain previously reported amounts have been reclassified to agree with
current presentation.
First Horizon National Corporation 59
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING. The consolidated financial statements of First Horizon
National Corporation (FHN), including its subsidiaries, are 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.
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. Affiliates that FHN does not have a
controlling financial interest in are accounted for by the equity method. All
significant intercompany transactions and balances have been eliminated. For
purposes of comparability, certain prior period amounts have been reclassified
to conform to current year presentation. None of these reclassifications had any
effect on net income or earnings per share for any of the periods presented.
Business combinations accounted for as purchases are included in the financial
statements from the respective dates of acquisition.
REVENUE RECOGNITION. FHN derives a significant portion of its revenues from fee
based services. Noninterest income from transaction based fees is generally
recognized when the transactions are completed. Noninterest income from service
based fees is generally recognized over the period in which FHN provides the
service.
DEPOSIT TRANSACTIONS AND CASH MANAGEMENT. Deposit transactions include services
related to retail deposit products (such as service charges on checking
accounts), cash management products and services such as electronic transaction
processing (automated clearing house and Electronic Data Interchange), account
reconciliation services, cash vault services, lockbox processing, and
information reporting to large corporate clients.
MERCHANT PROCESSING. Merchant processing involves converting transactions from
plastic media such as debit cards, credit cards, purchase cards, and private
label credit cards into cash for merchants that sell goods and services to
consumers and businesses.
INSURANCE COMMISSIONS. Insurance commissions are derived from the sale of
insurance products and annuities, including acting as an independent agent to
provide commercial and personal property and casualty, life, long-term care, and
disability insurance.
TRUST SERVICES AND INVESTMENT MANAGEMENT. Trust services and investment
management fees include investment management, personal trust, employee
benefits, and custodial trust services.
STATEMENTS OF CASH FLOWS. For purposes of these statements, cash and due from
banks, federal funds sold, and securities purchased under agreements to resell
are considered cash and cash equivalents. Federal funds are usually sold for
one-day periods, and securities purchased under agreements to resell are
short-term, highly liquid investments.
TRADING SECURITIES. Securities purchased in connection with underwriting or
dealer activities are carried at market value. Gains and losses, both realized
and unrealized, on these securities are reflected in noninterest income as
capital markets income. In addition, retained interests, in the form of
interest-only and principal-only strips, from mortgage banking securitizations
are recognized at fair value with gains and losses both realized and unrealized,
recognized in mortgage banking income.
60 First Horizon National Corporation
<Page>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES. Securities that FHN has the ability and positive intent
to hold to maturity are classified as securities held to maturity and are
carried at amortized cost. The amortized cost of all securities is adjusted for
amortization of premium and accretion of discount to maturity, or earlier call
date if appropriate, using the level yield method. Such amortization and
accretion is included in interest income from securities. Realized gains and
losses and declines in value judged to be other than temporary are determined by
the specific identification method and reported in noninterest income.
Securities that may be sold prior to maturity and equity securities are
classified as securities available for sale and are carried at fair value. The
unrealized gains and losses on securities available for sale are excluded from
earnings and are reported, net of tax, as a component of other comprehensive
income within shareholders' equity. Venture capital investments for which there
are not active market quotes are initially valued at cost. Subsequently, these
investments are adjusted to reflect changes in valuation as a result of initial
public offerings or other-than-temporary declines in value.
SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS. Capital Markets (see Note 22 - Business Segment
Information) enters into short-term purchases of securities under agreements to
resell which are accounted for as collateralized financings except where FHN
does not have an agreement to sell the same or substantially the same securities
before maturity at a fixed or determinable price. Securities delivered under
these transactions are delivered to either the dealer custody account at the
Federal Reserve Bank or to the applicable counterparty. Collateral is valued
daily and FHN may require counterparties to deposit additional collateral or
return collateral pledged when appropriate.
Securities sold under agreements to repurchase (securities sold) are offered to
cash management customers as an automated, collateralized investment account.
Securities sold are also used by Retail/Commercial Banking (see Note 22 -
Business Segment Information) to obtain favorable borrowing rates on its
purchased funds.
LOANS HELD FOR SALE AND SECURITIZATION AND RESIDUAL INTERESTS. Loans held for
sale are recorded at the lower of aggregate cost or market value. The carrying
value of loans held for sale is net of deferred origination fees and costs. Net
origination fees and costs are deferred on loans held for sale and included in
the basis of the loans in calculating gains and losses upon sale. Also included
in the lower of cost or market analysis are the estimated costs and market
values of first-lien mortgage loan commitments. The prospective adoption of
Staff Accounting Bulletin (SAB) No. 105 (see Accounting Changes section)
resulted in lower market values attributed to mortgage loan commitments in 2004
compared to 2003. Gains and losses realized from the sale of these assets,
whether sold directly or through securitization, and adjustments to market value
are included in noninterest income. Some of these loans are sold with provisions
of recourse.
FHN's mortgage lenders originate first-lien mortgage loans primarily for the
purpose of selling them in the secondary market. As of December 31, 2004 and
2003, respectively, the outstanding principal amount of these single-family
residential loans that were sold on a recourse basis was $150.8 million and
$199.3 million. In the event of borrower nonperformance, FHN would assume losses
to the extent they exceed the value of the collateral and private mortgage
insurance, Federal Housing Administration (FHA) insurance or Veterans
Administration (VA) guarantees. In addition, FHN originates, sells and services
loans guaranteed by the VA. In the event of foreclosure, FHN, as a servicer of
VA loans, has credit risk to the extent that the outstanding loan balance
exceeds the VA guarantee and the value of the underlying real estate. As of
December 31, 2004 and 2003, the outstanding principal balance of VA loans
serviced was $3.4 billion and $3.7 billion, respectively. These loans are
reviewed on a regular basis, and a reserve has been established to cover
estimated probable incurred losses.
First Horizon Home Loan Corporation (First Horizon Home Loans), an indirect
wholly-owned subsidiary of FHN, has also completed proprietary securitizations
of loans from the warehouse through its subsidiary, First Horizon Asset
Securities, Inc. The resulting securities are sold as senior and
First Horizon National Corporation 61
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
subordinated bonds. Mortgage servicing rights (MSR) and in certain cases
residual interests or other financal assets have been retained. The retained
interests are initially valued by allocating the total cost basis of the
securitized assets between the assets sold and the retained interests based on
their relative fair values at the time of securitization. The retained
interests, other than MSR, are carried at fair value as a component of trading
securities on the Consolidated Statements of Condition, with realized and
unrealized gains and losses included in current earnings as a component of
noninterest income on the Consolidated Statements of Income.
Retained interests in a securitization may include certificated residual
interests, or financial assets including excess interest (structured as
interest-only strips), interest-only strips, principal-only strips, or
subordinated bonds. Residual interests are financial assets which represent
rights to receive earnings to the extent of excess income generated by the
underlying loans. Excess interest is a financial asset that represents rights to
receive cash flows from serviced assets that exceed contractually specified
servicing fees. Principal-only strips are financial assets which represent
principal cash flow tranches retained as a result of FHN's securitization
transactions. Interest-only strips are financial assets which represent interest
cash flow tranches retained as a result of FHN's securitization transactions.
Subordinated bonds are bonds with junior priority. All retained interests are
recognized on the balance sheet in trading securities at fair value. The fair
values of the certificated residual interests, the excess interest, and the
interest-only strips are determined using market 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. To
determine the fair value of the principal-only strips, FHN uses the market
prices from comparable assets such as publicly traded FNMA trust principal-only
strips that are adjusted to reflect the relative risk difference between readily
marketable securities and privately issued securities. The fair value of
subordinated bonds is determined using a spread to an interpolated Treasury rate
which is supplied by broker dealers. The fair value of these retained interests
typically changes based on changes in the discount rate and differences between
modeled prepayment speeds and credit losses and actual experience.
FHN periodically securitizes and sells home equity lines of credit (HELOC) for
funding and other strategic reasons. HELOC held for sale are recorded at the
lower of aggregate cost or market value. The carrying value of HELOC held for
sale is net of deferred origination fees and costs, which are included in the
basis of the loans in calculating gains and losses upon sale. Gains and losses
realized from the sale of these assets and adjustments to market value are
included in noninterest income.
In certain cases when First Horizon Equity Lending securitizes and sells HELOC
in the secondary market, it retains an interest in the loans sold primarily
through a residual-interest certificate. The retained interests are initially
valued by allocating the cost basis of the securitized assets between the assets
sold and the retained interests based on their relative fair values at the time
of securitization. Residual-interest certificates are financial assets, which
represent rights to receive earnings to the extent of excess income generated by
the underlying HELOC collateral of certain mortgage-backed securities, which is
not needed to meet contractual obligations of senior security holders.
The fair value of a residual-interest certificate typically changes based on
changes in the discount rate and differences between modeled prepayment speeds
and credit losses and actual experience. Additionally, similar to MSR and
interest-only certificates, the market for residual-interest certificates is
limited, and the precise terms of transactions involving residual-interest
certificates are not typically readily available. Accordingly, First Horizon
Equity Lending relies primarily on a discounted cash flow model to estimate the
fair value of its residual-interest certificates.
Estimating the cash flow components and the resultant fair value of the
residual-interest certificates requires First Horizon Equity Lending to make
certain critical assumptions based upon current market and loan production data.
The primary critical assumptions used by First Horizon Equity Lending to
estimate the fair value of residual-interest securities include prepayment
speeds, credit losses and discount rates, as discussed above. First Horizon
Equity Lending's residual-interest certificates are included as a component of
trading securities on the Consolidated Statements of Condition, with
62 First Horizon National Corporation
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
realized and unrealized gains and losses included in current earnings as a
component of net interest income on the Consolidated Statements of Income.
MSR are initially valued by allocating the total cost between the loan and the
servicing right based on their relative fair values. 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, like other participants in the
mortgage banking business, First Horizon Home Loans relies primarily on a
discounted cash flow model to estimate the fair value of its MSR. This model
calculates estimated fair value of the MSR using numerous tranches of MSR, which
share similar key characteristics such as interest rates, type of product (fixed
vs. variable), age (new, seasoned, moderate), agency type and other factors.
First Horizon Home Loans uses assumptions in the model that it believes are
comparable to those used by brokers and other service providers on a quarterly
basis. First Horizon Home Loans also compares its estimates of fair value and
assumptions to recent market activity and against its own experience.
For purposes of impairment evaluation and measurement, the MSR are stratified
based on the predominant risk characteristics of the underlying loans. These
strata currently include adjustable and fixed rate loans. The MSR are amortized
over the period of and in proportion to the estimated net servicing revenues. A
quarterly value impairment analysis is performed using a discounted cash flow
methodology that is disaggregated by predominant risk characteristics.
Impairment, if any, is recognized through a valuation allowance for individual
strata. However, if the impairment is determined to be other than temporary, a
direct write-off of the asset is made.
LOANS. Loans are stated at principal amounts outstanding, net of unearned
income. Interest on loans is recognized on an accrual basis at the applicable
interest rate on the principal amount outstanding. Loan origination fees and
direct costs as well as premiums and discounts are amortized as level yield
adjustments over the respective loan terms. Unamortized net fees or costs are
recognized upon early repayment of the loans. Loan commitment fees are generally
deferred and amortized on a straight-line basis over the commitment period.
Impaired loans are generally carried on a nonaccrual status. Loans are
ordinarily placed on nonaccrual status when, in management's opinion, the
collection of principal or interest is unlikely, the loan has been classified as
'doubtful', or when the collection of principal or interest is 90 days or more
past due.
Accrued but uncollected interest is reversed and charged against interest income
when the loan is placed on nonaccrual status. On retail loans, accrued but
uncollected interest is reversed when the loan is fully or partially charged
off. Management may elect to continue the accrual of interest when the estimated
net realizable value of collateral is sufficient to recover the principal
balance and accrued interest. Interest payments received on nonaccrual and
impaired loans are normally applied to principal. Once all principal has been
received, additional interest payments are recognized on a cash basis as
interest income.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained at a
level that management determines is adequate to absorb estimated probable
incurred losses in the loan portfolio. Management's evaluation process to
determine the adequacy of the allowance utilizes an analytical model based on
historical loss experience, adjusted for current events, trends and economic
conditions. The actual amounts realized could differ in the near term from the
amounts assumed in arriving at the allowance for loan losses reported in the
financial statements.
All losses of principal are charged to the allowance for loan losses in the
period in which the loan is deemed to be uncollectible. Additions are made to
the allowance through periodic provisions charged to current operations and
recovery of principal on loans previously charged off.
PREMISES AND EQUIPMENT. Premises and equipment are carried at cost less
accumulated depreciation and amortization and include additions that materially
extend the useful lives of existing premises and
First Horizon National Corporation 63
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
equipment. All other maintenance and repair expenditures are expensed as
incurred. Gains and losses on dispositions are reflected in noninterest income
and expense.
Depreciation and amortization are computed on the straight-line method over the
estimated useful lives of the assets and are recorded as noninterest expense.
Leasehold improvements are amortized over the lesser of the lease periods or the
estimated useful lives using the straight-line method. Useful lives utilized in
determining depreciation for furniture, fixtures and equipment and buildings are
three to fifteen and seven to forty-five years, respectively.
REAL ESTATE ACQUIRED BY FORECLOSURE. Real estate acquired by foreclosure
consists of properties that have been acquired in satisfaction of debt. These
properties are carried at the lower of the outstanding loan amount or the
estimated fair market value minus the estimated cost to sell the real estate.
Losses arising at foreclosure are charged to the allowance for loan losses.
Required developmental costs associated with foreclosed property under
construction are capitalized and included in determining the estimated net
realizable value of the property, which is reviewed periodically, and any
write-downs are charged against current earnings. During the normal course of
business, FHN may purchase real estate at foreclosure sale. Losses arising from
the purchase of real estate at foreclosure sale are charged to the foreclosure
reserve.
INTANGIBLE ASSETS. Intangible assets consist of 'Other intangible assets' and
'Goodwill.' The 'Other intangible assets' represents identified intangible
assets, including customer lists, covenants not to compete and premium on
purchased deposits, which are amortized over their estimated useful lives,
except for those assets related to deposit bases that are primarily amortized
over 10 years. Management evaluates whether events or circumstances have
occurred that indicate the remaining useful life or carrying value of amortizing
intangibles should be revised. 'Goodwill' represents the excess of cost over net
assets of acquired subsidiaries less identifiable intangible assets. On an
annual basis, FHN tests goodwill for impairment. For the three year period ended
December 31, 2004, no impairment of 'Other intangible assets' or 'Goodwill' was
recognized.
DERIVATIVE FINANCIAL INSTRUMENTS. FHN utilizes, through its mortgage banking,
capital markets and risk management operations, various derivative financial
instruments, which include interest rate forward contracts, interest rate floors
and caps, options and interest rate swap agreements, as part of its risk
management strategy and as a means to meet customers' needs. These instruments
are subject to credit and market risks. Controls and monitoring procedures for
these instruments have been established and are routinely reevaluated. The
Asset/Liability Committee (ALCO) monitors the usage and effectiveness of these
derivative financial instruments. ALCO, in conjunction with credit officers,
also periodically reviews counterparty creditworthiness.
Credit risk represents the maximum potential loss due to possible
non-performance by obligors and counterparties under the terms of contracts. FHN
manages credit risk by entering into financial instrument transactions through
national exchanges, primary dealers or approved counterparties, and using mutual
margining agreements whenever possible to limit potential exposure. 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.
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 specific price, with
delivery or
64 First Horizon National Corporation
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Notional amounts are used in such
contracts to calculate interest payments and do not represent credit exposure.
Exposure to interest rate contracts will increase or decrease as interest rates
fluctuate.
Derivative instruments are recorded on the Consolidated Statements of Condition
as either an asset or liability measured at its fair value. Fair value is
defined as the amount FHN would receive or pay in the market to replace the
derivatives as of the valuation date. Fair value is determined using available
market information and appropriate valuation methodologies. Changes in the
instrument's fair value are recognized currently in earnings or other
comprehensive income. If certain criteria are met, changes in the fair value of
the asset or liability being hedged are also recognized currently in earnings.
Mortgage Banking
Mortgage banking interest rate lock commitments, which have been determined to
be derivative instruments, are recorded at fair value with changes in fair value
recorded currently in earnings and are not a hedgable asset under SFAS No. 133.
See Accounting Changes section for impact of SAB No. 105 on the valuation of
interest rate lock commitments. First Horizon Home Loans enters into forward
sales commitments as fair value hedges to protect the value of mortgage
banking's short-term commitments to fund mortgage loan applications in process
(the pipeline) and first-lien mortgage loans held for sale (the warehouse) from
changes in fair value due to fluctuations in interest rates. First Horizon Home
Loans also enters into futures contracts as fair value hedges to hedge against
interest rate risk associated with adjustable rate mortgages in the pipeline and
warehouse. These forward and futures contracts are derivatives that are recorded
at fair value. Forward and futures contracts used by mortgage banking operations
to hedge against interest rate risk in the warehouse are reviewed periodically
for correlation with expected changes in value. For 2004, 2003, and 2002, gains
of $.8 million, gains of $1.2 million, and losses of $9.8 million, respectively,
that represent the amount of hedge ineffectiveness for these fair value hedges
were recognized in mortgage banking noninterest income.
First Horizon Home Loans also enters into interest rate contracts (including
swaps, swaptions, and mortgage forward sales) to hedge against the effects of
changes in fair value of its MSR due solely to changes in the benchmark rate
(10-year LIBOR). For purposes of measuring effectiveness of the hedge,
volatility and time decay are excluded from the effectiveness measurement of
option-based derivatives. Interest rate derivative contracts used to hedge
against interest rate risk in the servicing portfolio are designated to specific
risk tranches of servicing. First Horizon Home Loans enters into hedges of 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. Hedges are reset at least
monthly and more frequently, as needed, to respond to changes in interest rates
or hedge composition. For purposes of measuring hedge effectiveness, increases
in values of hedge instruments exceeded the change in value of hedged MSR by
$81.3 million, $131.7 million and $122.0 million in 2004, 2003 and 2002,
respectively. This amount, after reductions of $33.4 million, $16.5 million and
$21.2 million in 2004, 2003 and 2002, respectively, representing the component
of the derivative instruments' losses excluded from the assessment of hedge
effectiveness, was recognized in mortgage banking noninterest income. First
Horizon Home Loans utilizes financial instruments that change in value inversely
to the movement of interest rates to protect the value of its interest-only
securities. Interest-only securities do not qualify for hedge accounting and,
therefore, gains and losses are recognized currently in earnings.
First Horizon National Corporation 65
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capital Markets
Capital markets buys and sells treasuries, agencies, mortgage securities,
municipal bonds and other securities for resale 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, futures and floors for its customers. These transactions are
measured at fair value, with changes in fair value recognized currently in
capital markets noninterest income. Related assets are recorded on the balance
sheet as capital markets securities inventory or receivables and any liabilities
are recognized as capital markets payables. Credit risk related to these
transactions is controlled through credit approvals, risk control limits and
ongoing monitoring procedures through ALCO.
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 not to speculate but to hedge interest rate risk or market value of
assets or liabilities.
Interest rate risk management uses interest rate swaps to hedge the interest
rate risk of certain liabilities that qualify as fair value and cash flow
hedges. Interest paid or received for swaps is recognized as an adjustment of
the interest expense of the liabilities whose risk is being managed. For 2004
and 2003, there was no hedge ineffectiveness for qualifying fair value or cash
flow hedges. Interest rate swaps and caps not designated as hedging instruments
are also used to moderate the impact on earnings as interest rates change. Any
contracts that fail to qualify for hedge accounting are measured at fair value
with any gains or losses included in current earnings in noninterest income. For
derivatives designated as cash flow hedges, the effective portion of the gain or
loss on derivatives is reported as a component of accumulated other
comprehensive income.
Cash flows from derivative contracts are reported as operating activities on the
Consolidated Statements of Cash Flows.
ADVERTISING AND PUBLIC RELATIONS. Advertising and public relations costs are
generally expensed as incurred.
INCOME TAXES. FHN accounts for income taxes using the liability method pursuant
to SFAS No. 109, 'Accounting for Income Taxes.' Under this method, FHN's
deferred tax assets and liabilities are determined by applying the applicable
federal and state income tax rates to its cumulative temporary differences.
These temporary differences represent differences between financial statement
carrying amounts and the corresponding tax bases of certain assets and
liabilities. Deferred taxes are provided as a result of such temporary
differences.
FHN and its eligible subsidiaries are included in a consolidated federal income
tax return. FHN files separate returns for subsidiaries that are not eligible to
be included in a consolidated federal income tax return. Based on the laws of
the applicable state where it conducts business operations, FHN either files
consolidated, combined or separate returns.
FHN's federal and state income tax returns are subject to examination by
governmental authorities. Various examinations are currently in progress. FHN
believes that the resolution of both the examinations in progress and the
examination of years not currently in progress will not have a significant
impact on FHN's consolidated financial position or results of operations.
66 First Horizon National Corporation
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE. Earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for each period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding adjusted to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares resulting from options granted under FHN's stock option plans and
deferred compensation arrangements had been issued. FHN utilizes the treasury
stock method in this calculation.
STOCK OPTIONS. FHN accounts for its employee stock-based compensation plans
under the intrinsic value based method in accordance with Accounting Principles
Board Opinion No. 25, 'Accounting for Stock Issued to Employees.' Had
compensation cost for these plans been determined consistent with SFAS No. 123,
FHN's net income and earnings per share would have been reduced to the following
pro forma amounts:
<Table>
<Caption>
December 31
-------------------------------
(Dollars in thousands except per share data) 2004 2003 2002
- ---------------------------------------------------------------------------------------------
Net income, as reported $454,408 $473,309 $376,451
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 3,414 6,402 7,548
Less: Total stock-based employee compensation expense
determined under the fair value method for all awards, net
of related tax effects 12,114 27,139 22,087
- ---------------------------------------------------------------------------------------------
Pro forma net income $445,708 $452,572 $361,912
=============================================================================================
Earnings per share, as reported $ 3.64 $ 3.73 $ 2.97
Pro forma earnings per share 3.57 3.57 2.86
Diluted earnings per share, as reported 3.54 3.62 2.89
Pro forma diluted earnings per share 3.47 3.46 2.78
- ---------------------------------------------------------------------------------------------
</Table>
ACCOUNTING CHANGES. On July 1, 2004, FHN adopted FASB Staff Position (FSP) FAS
106-2, 'Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003'. FSP FAS 106-2
requires a plan sponsor to determine if benefits offered through a
postretirement health care plan are actuarially equivalent to Medicare Part D.
If benefits are determined to be actuarially equivalent, the resulting effect on
the plan's obligations should be reflected as an actuarial gain in determining
the plan's accumulated postretirement benefit obligation. The impact of adopting
FSP FAS 106-2 was immaterial to FHN.
In April 2004, FHN adopted SAB No. 105 'Application of Accounting Principles to
Loan Commitments'. SAB No. 105 prohibits the inclusion of estimated servicing
cash flows and internally-developed intangible assets within the valuation of
interest rate lock commitments under SFAS No. 133, 'Accounting for Derivative
Instruments and Hedging Activities.' SAB No. 105 also requires disclosure of a
registrant's methods of accounting for interest rate lock commitments recognized
under SFAS No. 133 and associated hedging strategies, if applicable. SAB No. 105
was effective for disclosures and interest rate lock commitments initiated after
March 31, 2004. The adoption of SAB No. 105 resulted in an accounting change in
second quarter 2004 and lowered pre-tax earnings by $8.4 million. Since prior
periods are not restated, this accounting change results in a varying impact on
comparability with prior periods. However, the ongoing economic value of FHN's
business is not affected.
On March 31, 2004, FHN adopted FASB Interpretation No. 46 (FIN 46-R),
'Consolidation of Variable Interest Entities (revised December 2003)'. FIN 46-R
clarifies certain aspects of FIN 46 and provides certain entities with
exemptions from the requirements of FIN 46. Additionally, FIN 46-R incorporates
the guidance found in eight final FSPs that had been issued prior to its
release. FIN 46-R requires the consolidation by a business enterprise of
variable interest entities (VIE) in which it is the primary beneficiary. FIN
46-R also required the adoption of FIN 46, as of December 31, 2003, for all
entities
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
previously considered as special purpose entities and for all VIE created after
January 31, 2003. Upon adoption of FIN 46-R, FHN reassessed certain of its
nonconsolidated interests as VIE but did not meet the criteria of primary
beneficiary and, therefore, did not consolidate any of its VIE, including First
Tennessee Capital I (Capital I) and First Tennessee Capital II (Capital II) (See
Note 11 - Guaranteed Preferred Beneficial Interests in First Horizon's Junior
Subordinated Debentures).
On December 31, 2003, FHN adopted FIN 46, 'Consolidation of Variable Interest
Entities'. Upon adoption of this standard, FHN deconsolidated its subsidiary,
First Tennessee Capital I (Capital I), which had 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 not included on FHN's
Statement of Condition. However, $103.0 million of junior subordinated
debentures issued by FHN to Capital I are included in term borrowings. FHN
identified certain of its nonconsolidated interests as VIE but did not meet the
criteria of primary beneficiary and, therefore, did not consolidate any of its
VIE. See Note 25 - Variable Interest Entities for additional information.
On December 31, 2003, FHN adopted SFAS No. 132 (revised 2003), 'Employers'
Disclosures about Pensions and Other Postretirement Benefits'. This standard
does not change the measurement or recognition of those plans required by SFAS
No. 87 and SFAS No. 106.
Additionally, the disclosure requirements of the original SFAS No. 132 have been
retained. SFAS No. 132 (revised 2003) requires additional disclosure about the
assets, obiligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. The
adoption of SFAS 132 (revised 2003) did not have an impact on the results of
operations.
On December 31, 2003, FHN adopted certain disclosure requirements of Emerging
Issues Task Force (EITF) Issue No. 03-1, 'The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments'. These disclosures
concerned unrealized losses related to investments in debt and marketable equity
securities that are accounted for under SFAS No. 115. Disclosures include the
length of time investments have been in a loss position and discussion
pertaining to the nature of the impairment. In September 2004, the FASB approved
issuance of Staff Position (FSP) EITF 03-1-1, 'Effective Date of Paragraphs 10
through 20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments' (EITF 03-1). FSP EITF
03-1-1 delays the effective date of paragraphs 10 through 20 of EITF 03-1 as
they relate to recognition of other-than-temporary impairment for cost method
and marketable investments. This deferral will extend until the FASB provides
clarification of the guidance presented in paragraphs 10 through 20. Effective
July 1, 2004, FHN adopted all remaining provisions of EITF Issue 03-1, including
measurement guidance for evaluating whether impairment has occurred for
marketable securities and cost method investments. Effective December 31, 2004,
cost method investments are subject to similar disclosures as those made for
marketable securities in 2003. The effect of implementing the final provisions
of paragraphs 10 through 20 cannot currently be estimated due to the pending
implementation issues. The adoption of all other provisions of EITF Issue No.
03-1 did not have an impact on the results of operations.
On July 1, 2003, FHN adopted SFAS No. 150, 'Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity', and classified
its mandatorily redeemable preferred stock of subsidiary ($45.1 million on
July 1, 2003) as term borrowings. Historically, the related distribution on
these instruments ($4.6 million annually) were classified as noninterest expense
on the Consolidated Statements of Income, but as of July 1, 2003, are classified
as interest expense on a prospective basis. As required by SFAS No. 150, prior
periods were not restated.
On July 1, 2003, FHN adopted SFAS No. 149, 'Amendment of Statement 133 on
Derivative Instruments', which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133. The
impact of adopting this standard was immaterial to FHN.
68 First Horizon National Corporation
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 1, 2003, FHN adopted SFAS No. 146, 'Accounting for Costs Associated
with Exit or Disposal Activities'. This statement requires that a liability for
the cost associated with an exit or disposal activity be recognized and measured
initially at fair value in the period in which the liability is incurred. Prior
to the effective date of this statement, costs associated with an exit or
disposal plan were recognized at the date of commitment, as required under EITF
Issue 94-3. This statement does not apply to costs associated with an exit
activity that involves an entity newly acquired in a business combination or
with a disposal activity covered by SFAS No. 144. The impact of adopting this
statement was immaterial to FHN.
On January 1, 2003, FHN adopted the final provisions of Interpretation No. 45,
'Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others'. This interpretation elaborates
on the disclosures to be made by a guarantor in interim and annual financial
statements about obligations assumed under certain guarantees it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This interpretation does not prescribe a specific
approach for subsequently measuring the guarantor's liability over the term of
the related guarantee. This interpretation also incorporates, without change,
the guidance in FASB Interpretation No. 34, 'Disclosure of Indirect Guarantees
of Indebtedness of Others', which is superseded. The impact of adopting this
statement was immaterial to FHN.
In December 2002, FHN adopted SFAS No. 148, 'Accounting for Stock-Based
Compensation - Transition and Disclosure'. This statement amends SFAS No. 123,
'Accounting for Stock-Based Compensation', to provide alternative methods for
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. As
FHN continues to account for stock-based employee compensation under APB 25, the
adoption of this statement did not have a material impact on the financial
statements or results of operations.
On October 1, 2002, FHN adopted SFAS No. 147, 'Acquisitions of Certain Financial
Institutions (an amendment of FASB Statement No. 72 and 144 and FASB
Interpretation No. 9)'. This statement requires acquisitions of all or part of a
financial institution meeting the definition of a business combination to be
accounted for by the purchase method in accordance with SFAS No. 141. Any
previously recorded unidentified intangible asset related to the acquisition of
a financial institution must now be classified as goodwill and is subject to the
impairment testing provisions of SFAS No. 142. Impairment testing of previously
identified long-term customer-relationship intangible assets will be subject to
the impairment testing provisions of SFAS No. 144. Provisions of this statement
were effective for acquisitions on or after October 1, 2002. The impact of
adopting this statement was immaterial to FHN.
On October 1, 2002, FHN adopted SFAS No. 145, 'Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections'.
SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from
extinguishment of debt to be classified as an extraordinary item, net of related
income tax effect, if material in the aggregate. Due to the rescission of SFAS
No. 4, the criteria in Opinion 30 are now used to classify those gains and
losses. SFAS No. 64 amended SFAS No. 4, and is no longer necessary because of
the rescission of SFAS No. 4. SFAS No. 44, is no longer necessary because the
transition of the Motor Carrier Act of 1980 has been completed. SFAS No. 145
also amends SFAS No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. In addition this statement also
makes technical corrections to existing pronouncements which are generally not
substantive in nature. The adoption of this standard resulted in a loss of $5.1
million related to a 2001 debt restructuring being reclassified as noninterest
expense. This item had previously been presented, net of taxes ($1.9 million),
as an
First Horizon National Corporation 69
<Page>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
extraordinary item on the Consolidated Statements of Income. In 2002, a debt
restructuring resulted in a $3.7 million pre-tax loss.
On January 1, 2002, FHN adopted SFAS No. 144, 'Accounting for the Impairment or
Disposal of Long-Lived Assets'. SFAS No. 144 addresses accounting and reporting
issues related to the impairment of long-lived assets and for long-lived assets
to be disposed of. The impact of adopting this statement was immaterial to FHN.
On January 1, 2002, FHN adopted SFAS No. 142, 'Goodwill and Other Intangible
Assets'. Under SFAS No. 142, goodwill is no longer subject to amortization over
its estimated useful life, but is subject to an assessment for impairment using
a fair-value-based test at least annually. FHN has not recognized any impairment
of the goodwill currently on its books during 2004, 2003, or 2002.
On January 1, 2002, FHN adopted the final provisions of SFAS No. 141, 'Business
Combinations' which requires that all business combinations initiated after June
30, 2001, be accounted for using the purchase method. The impact of adopting
this statement was immaterial to FHN.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), 'Share-Based
Payment' (SFAS No. 123-R), which requires recognition of expense over the
requisite service period for awards of share-based compensation to employees.
SFAS No. 123-R must be adopted no later than July 1, 2005 with earlier adoption
permitted. As permitted by the original SFAS No. 123, FHN has accounted for its
equity awards under the provisions of APB No. 25. Upon adoption of SFAS No.
123-R, the grant date fair value of an award will be used to measure the
compensation expense recognized for the award. For unvested awards granted prior
to the adoption of SFAS 123-R, the fair values utilized will equal the values
used in preparation of the disclosures required under the original SFAS 123.
Compensation expense recognized after adoption of SFAS 123-R will incorporate an
estimate of awards expected to ultimately vest, which requires estimation of
forfeitures as well as projections related to the satisfaction of performance
conditions that determine vesting. Upon initial adoption of SFAS 123-R, FHN is
required to reclassify deferred compensation debit balances to capital surplus
and to make a cumulative effect entry for outstanding unvested awards that are
not expected to vest due to anticipated forfeiture. SFAS 123-R permits
restatement of prior period financial statements using the amounts from prior
SFAS 123 disclosures.
In October 2003, the FASB approved the AICPA's issuance of SOP 03-3, 'Accounting
for Loans or Certain Debt Securities Acquired in a Transfer', which modifies the
accounting for certain loans that are acquired with evidence of deterioration in
credit quality since origination. SOP 03-3 does not apply to loans recorded at
fair value, to revolving loans, or to mortgage loans classified as held for
sale. SOP 03-3 limits the yield that may be accreted on applicable loans to the
excess of the cash flows expected, at acquisition, to be collected over the
investor's initial investment in the loan. SOP 03-3 also prohibits the 'carrying
over' of valuation allowances on applicable loans. SOP 03-3 is effective for
fiscal years beginning after December 15, 2004. The impact at implementation of
adopting SOP 03-3 is expected to be immaterial to the results of future
operations.
NOTE 2 - ACQUISITIONS/DIVESTITURES
On January 7, 2005, FHN's capital markets division, FTN Financial, completed the
acquisition of the assets and operations of the fixed income business of Spear,
Leeds & Kellogg (SLK), a division of Goldman Sachs & Co. for approximately
$150.0 million in cash. The acquisition is expected to be accretive to FHN's
earnings per share during 2005.
On December 31, 2004, Synaxis Group, Inc., a subsidiary of FTBNA, completed the
sale of substantially all the assets of Mann, Smith & Cummings, Inc. of
Clarksville, TN. This transaction resulted in a divestiture gain of $1.2
million.
70 First Horizon National Corporation
<Page>
NOTE 2 - ACQUISITIONS/DIVESTITURES (CONTINUED)
On September 23, 2004, FTN Midwest Securities Corp., a wholly-owned subsidiary
of FTBNA, acquired certain assets and assumed certain liabilities of Alterity
Partners, LLC, a mergers and acquisitions advisory services company based in New
York, New York, for approximately $8.0 million in cash. The acquisition was
immaterial to FHN.
On June 29, 2004, First Horizon Merchant Services, Inc., a wholly owned
subsidiary of FTBNA, recognized a divestiture gain of $1.8 million resulting
from the sale of certain merchant relationships to Humboldt Merchant Services,
LP, of Eureka, California (an affiliate of First National Bank of Nevada, Reno,
Nevada).
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.
On December 31, 2003, First Horizon Merchant Services, Inc. recognized a
divestiture gain of $10.0 million resulting from the sale of certain merchant
relationships referred by selected agent banks within the merchant portfolio to
NOVA Information Systems, Inc., a subsidiary of U.S. Bancorp. During 2004,
divestiture gains of $4.0 million resulted from an earn-out on the 2003 sale of
merchant relationships.
On August 1, 2003, First Horizon Merchant Services, Inc. acquired Global Card
Services, Inc., a merchant processing company based in Orlando, Florida, for
approximately $15.8 million in cash. The acquisition was immaterial to FHN.
On September 16, 2002, FTBNA, the primary banking subsidiary of FHN, sold a
portfolio of loans originated through First Horizon Money Centers totaling
$208.3 million to American General Finance, Inc. of Evansville, Indiana and
closed the related Money Center offices. This transaction resulted in a
divestiture gain of $2.3 million.
On June 1, 2002, First Horizon Home Loans, a wholly owned subsidiary of FTBNA,
acquired certain assets and assumed certain liabilities of Real Estate Financial
Services, a mortgage lending company based in Alpharetta, Georgia, for
approximately $2.2 million in cash. The acquisition was immaterial to FHN.
On April 1, 2002, First Horizon Merchant Services, Inc. acquired First Premier
Financial Services, Inc. (First Premier), a South Dakota based merchant
processor, for approximately $11.9 million in cash. First Premier was merged
into First Horizon Merchant Services, Inc. The acquisition was immaterial to
FHN.
In addition to the acquisitions mentioned above, FHN also acquires assets from
time to time in transactions that are considered business combinations but are
not material to FHN individually or in the aggregate.
First Horizon National Corporation 71
<Page>
NOTE 3 - INVESTMENT SECURITIES
The following tables summarize FHN's securities held to maturity and available
for sale on December 31, 2004 and 2003:
<Table>
<Caption>
ON DECEMBER 31, 2004*
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
States and municipalities $ 441 $ 16 $ - $ 457
- ---------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 441 $ 16 $ - $ 457
===============================================================================================================
SECURITIES AVAILABLE FOR SALE:
U.S. Treasuries $ 41,423 $ 11 $ (190) $ 41,244
Government agency issued MBS** 881,888 668 (7,937) 874,619
Government agency issued CMO** 1,521,088 1,505 (6,050) 1,516,543
Other U.S. government agencies** 40,794 165 - 40,959
States and municipalities 7,704 125 (2) 7,827
Other 7,272 105 (7) 7,370
Equity 191,994 8 (8) 191,994
- ---------------------------------------------------------------------------------------------------------------
Total securities available for sale $2,692,163 $2,587 $(14,194) $2,680,556
===============================================================================================================
</Table>
* Includes $2.4 billion of securities pledged to secure public deposits,
securities sold under agreements to repurchase and for other purposes.
** Includes securities issued by government sponsored entities which are not
backed by the full faith and credit of the U.S. government.
<Table>
<Caption>
On December 31, 2003*
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
States and municipalities $ 1,028 $ 49 $ - $ 1,077
- ---------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 1,028 $ 49 $ - $ 1,077
===============================================================================================================
SECURITIES AVAILABLE FOR SALE:
U.S. Treasuries $ 47,769 $ 219 $ (11) $ 47,977
Government agency issued MBS** 957,236 6,234 (9,449) 954,021
Government agency issued CMO** 1,239,596 11,234 (3,989) 1,246,841
Other U.S. government agencies** 1,092 72 - 1,164
States and municipalities 13,076 321 (2) 13,395
Other 16,600 754 (13) 17,341
Equity 188,793 227 (417) 188,603
- ---------------------------------------------------------------------------------------------------------------
Total securities available for sale $2,464,162 $19,061 $(13,881) $2,469,342
===============================================================================================================
</Table>
* Includes $2.1 billion of securities pledged to secure public deposits,
securities sold under agreements to repurchase and for other purposes.
** Includes securities issued by government sponsored entities which are not
backed by the full faith and credit of the U.S. government.
Certain previously reported amounts have been reclassified to agree with current
presentation.
72 First Horizon National Corporation
<Page>
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
Provided below are the amortized cost and fair value by contractual maturity for
the securities portfolios on December 31, 2004:
<Table>
<Caption>
Held to Maturity Available for Sale
----------------- -----------------------
Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------
Within 1 year $ 35 $ 35 $ 45,675 $ 45,550
After 1 year; within 5 years 406 422 3,399 3,449
After 5 years; within 10 years - - 41,409 41,572
After 10 years - - 6,710 6,829
- ---------------------------------------------------------------------------------------------------------
Subtotal 441 457 97,193 97,400
- ---------------------------------------------------------------------------------------------------------
Government agency issued MBS and CMO - - 2,402,976 2,391,162
Equity securities - - 191,994 191,994
- ---------------------------------------------------------------------------------------------------------
Total $441 $457 $2,692,163 $2,680,556
=========================================================================================================
</Table>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
The table below provides information on realized gross gains and realized gross
losses on sales from the available for sale portfolio for the years ended
December 31:
<Table>
<Caption>
(Dollars in thousands) AFS Debt* AFS Equity* Total
- -----------------------------------------------------------------------------------------------
2004
Gross gains on sales $18,712 $ 6,593 $25,305
Gross losses on sales (4) (653) (657)
- -----------------------------------------------------------------------------------------------
2003
Gross gains on sales $ 847 $11,444 $12,291
Gross losses on sales (6,973) - (6,973)
- -----------------------------------------------------------------------------------------------
2002
Gross gains on sales $ 1,309 $ 43 $ 1,352
Gross losses on sales (1,056) - (1,056)
- -----------------------------------------------------------------------------------------------
</Table>
* AFS - Available for sale
Losses totaling $3.9 million, $3.0 million and $9.5 million for the years 2004,
2003 and 2002, respectively, were recognized for securities that, in the opinion
of management, have been other-than-temporarily impaired.
First Horizon National Corporation 73
<Page>
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
The following table provides information on investments that have unrealized
losses on December 31, 2004:
<Table>
<Caption>
ON DECEMBER 31, 2004
---------------------------------------------------------------------------
Less than 12 months 12 Months or Longer Total
----------------------- ----------------------- -----------------------
Unrealized Unrealized Unrealized
(Dollars in thousands) Fair Value Losses Fair Value Losses Fair Value Losses
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Treasuries $ 34,901 $ (181) $ 170 $ (9) $ 35,071 $ (190)
Government agency issued MBS 832,535 (7,655) 16,192 (282) 848,727 (7,937)
Government agency issued CMO 908,590 (6,050) - - 908,590 (6,050)
State and municipalities 663 (2) - - 663 (2)
Other 861 (7) - - 861 (7)
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 1,777,550 (13,895) 16,362 (291) 1,793,912 (14,186)
Equity 226 (8) - - 226 (8)
- ---------------------------------------------------------------------------------------------------------------------------
Total temporarily impaired securities $1,777,776 $(13,903) $16,362 $(291) $1,794,138 $(14,194)
===========================================================================================================================
</Table>
On December 31, 2004, FHN held two investment securities having continuous
unrealized loss positions for more than 12 months. The unrealized losses were
related to changes in interest rates. FHN has both the intent and ability to
hold these securities for the time necessary to recover the amortized cost. FHN
has not recognized any other-than-temporary impairment in connection with these
securities.
On December 31, 2004, FHN had $124.0 million of cost method investments
including $94.1 million of Federal Reserve Bank and Federal Home Loan Bank
stock. These investments, which do not have a readily determinable market and
for which it is not practicable to estimate a fair value, are evaluated for
impairment only if there are identified events or changes in circumstances that
may have had a significant adverse effect on the fair value of the investment.
74 First Horizon National Corporation
<Page>
NOTE 4 - LOANS
A summary of the major categories of loans outstanding on December 31 is shown
below:
<Table>
<Caption>
(Dollars in thousands) 2004 2003
- -------------------------------------------------------------------------------------------
Commercial:
Commercial, financial and industrial $ 5,560,736 $ 4,502,917
Real estate commercial 960,178 968,064
Real estate construction 1,208,703 690,402
Retail:
Real estate residential 7,244,716 6,817,122
Real estate construction 1,035,562 527,260
Other retail 168,806 212,362
Credit card receivables 248,972 272,398
- -------------------------------------------------------------------------------------------
Loans, net of unearned income 16,427,673 13,990,525
Allowance for loan losses 158,159 160,333
- -------------------------------------------------------------------------------------------
Total net loans $16,269,514 $13,830,192
===========================================================================================
</Table>
On December 31, 2004, $1.4 billion of real estate residential qualifying loans
were pledged to secure potential Federal Home Loan Bank borrowings. Qualifying
loans are comprised of residential mortgage loans secured by first and second
liens and home equity lines of credit. In addition, $2.9 billion of commercial,
financial and industrial loans were pledged to secure potential discount window
borrowings from the Federal Reserve Bank.
Nonperforming loans consist of loans which management has identified as
impaired, other nonaccrual loans and loans which have been restructured. On
December 31, 2004 and 2003, there were no outstanding commitments to advance
additional funds to customers whose loans had been restructured. The following
table presents nonperforming loans on December 31:
<Table>
<Caption>
(Dollars in thousands) 2004 2003
- -------------------------------------------------------------------------------------------
Impaired loans $ 34,831 $ 34,369
Other nonaccrual loans* 14,729 17,415
- -------------------------------------------------------------------------------------------
Total nonperforming loans $ 49,560 $ 51,784
===========================================================================================
</Table>
* On December 31, 2004 and 2003, other nonaccrual loans included $8.5 million
and $8.8 million, respectively, of loans held for sale.
Interest income received during 2004 for impaired loans was $.5 million and for
other nonaccrual loans was $.1 million. Under their original terms, interest
income would have been approximately $2.6 million for the impaired loans and
$1.0 million for the other nonaccrual loans outstanding on December 31, 2004.
Interest income received during 2003 for impaired loans was $.4 million and for
other nonaccrual loans was $14,000. Under their original terms, interest income
would have been approximately $2.9 million for the impaired loans and $.7
million for the other nonaccrual loans outstanding on December 31, 2003.
Interest income received during 2002 for impaired loans was $1.6 million and for
other nonaccrual loans was $.4 million. Under their original terms, interest
income would have been approximately $4.7 million for the impaired loans and
$1.3 million for the other nonaccrual loans outstanding on December 31, 2002.
The average balance of impaired loans was approximately $36.9 million for 2004,
$45.4 million for 2003 and $44.1 million for 2002. All impaired loans have an
associated allowance for loan loss.
First Horizon National Corporation 75
<Page>
NOTE 4 - LOANS (CONTINUED)
Activity in the allowance for loan losses related to non-impaired and impaired
loans for years ended December 31 is summarized as follows:
<Table>
<Caption>
(Dollars in thousands) Non-impaired Impaired Total
- -------------------------------------------------------------------------------------------------
Balance on December 31, 2001 $ 133,668 $ 16,946 $ 150,614
Provision for loan losses 54,955 37,229 92,184
Charge-offs (72,973) (40,168) (113,141)
Loan recoveries 13,579 1,062 14,641
- -------------------------------------------------------------------------------------------------
Net charge-offs (59,394) (39,106) (98,500)
- -------------------------------------------------------------------------------------------------
Balance on December 31, 2002 129,229 15,069 144,298
- -------------------------------------------------------------------------------------------------
Adjustment due to divestiture (2,652) - (2,652)
Provision for loan losses 73,249 13,449 86,698
Charge-offs (63,113) (19,323) (82,436)
Loan recoveries 12,440 1,985 14,425
- -------------------------------------------------------------------------------------------------
Net charge-offs (50,673) (17,338) (68,011)
- -------------------------------------------------------------------------------------------------
Balance on December 31, 2003 149,153 11,180 160,333
- -------------------------------------------------------------------------------------------------
Loans transferred to held for sale (8,382) - (8,382)
Provision for loan losses 40,402 7,946 48,348
Charge-offs (45,772) (10,857) (56,629)
Loan recoveries 12,271 2,218 14,489
- -------------------------------------------------------------------------------------------------
Net charge-offs (33,501) (8,639) (42,140)
- -------------------------------------------------------------------------------------------------
BALANCE ON DECEMBER 31, 2004 $ 147,672 $ 10,487 $ 158,159
=================================================================================================
</Table>
Included in other assets and in other liabilities on the Consolidated Statements
of Condition are amounts due from customers on acceptances and bank acceptances
outstanding of $9.2 million and $3.0 million on December 31, 2004 and 2003,
respectively. In 2004, FHN transferred approximately $1.6 billion of real estate
residential loans to held for sale.
76 First Horizon National Corporation
<Page>
NOTE 5 - PREMISES, EQUIPMENT AND LEASES
Premises and equipment on December 31 are summarized below:
<Table>
<Caption>
(Dollars in thousands) 2004 2003
- ---------------------------------------------------------------------------------
Land $ 51,253 $ 48,391
Buildings 267,362 239,353
Leasehold improvements 58,999 52,770
Furniture, fixtures and equipment 316,082 307,067
- ---------------------------------------------------------------------------------
Premises and equipment, at cost 693,696 647,581
Less accumulated depreciation and amortization 314,337 297,379
- ---------------------------------------------------------------------------------
Premises and equipment, net $379,359 $350,202
=================================================================================
</Table>
FHN is obligated under a number of noncancelable operating leases for premises
and equipment with terms up to 25 years, which may include the payment of taxes,
insurance and maintenance costs.
Minimum future lease payments for noncancelable operating leases on premises and
equipment on December 31, 2004, are shown below:
<Table>
<Caption>
(Dollars in thousands)
- ----------------------------------------------------------------------
2005 $ 59,084
2006 52,427
2007 43,195
2008 30,049
2009 19,894
2010 and after 40,471
- ----------------------------------------------------------------------
Total minimum lease payments $245,120
======================================================================
</Table>
Payments required under capital leases are not material.
Aggregate minimum income under sublease agreements for these periods is $7.3
million.
Rent expense incurred under all operating lease obligations was as follows for
the years ended December 31:
<Table>
<Caption>
(Dollars in thousands) 2004 2003 2002
- -----------------------------------------------------------------------------------------
Rent expense, gross $69,581 $64,260 $67,457
Rent income (3,217) (4,543) (5,959)
- -----------------------------------------------------------------------------------------
Rent expense, net $66,364 $59,717 $61,498
=========================================================================================
</Table>
First Horizon National Corporation 77
<Page>
NOTE 6 - MORTGAGE SERVICING RIGHTS
Following is a summary of changes in capitalized mortgage servicing rights
(MSR), net of accumulated amortization, included in the Consolidated Statements
of Condition:
<Table>
<Caption>
(Dollars in thousands)
- ------------------------------------------------------------------------
December 31, 2001 $ 665,005
Addition of mortgage servicing rights 401,972
Amortization (117,841)
Market value adjustments (358,492)
Permanent impairment (131,695)
Increase in valuation allowance (18,467)
- ------------------------------------------------------------------------
December 31, 2002 440,482
Addition of mortgage servicing rights 536,655
Amortization (132,273)
Market value adjustments 115,673
Sales of mortgage servicing rights (6,275)
Permanent impairment (155,586)
Increase in valuation allowance (2,738)
- ------------------------------------------------------------------------
December 31, 2003 795,938
Addition of mortgage servicing rights 450,826
Amortization (154,301)
Market value adjustments (18,943)
Permanent impairment (69,299)
Decrease in valuation allowance 32,237
- ------------------------------------------------------------------------
DECEMBER 31, 2004 $1,036,458
========================================================================
</Table>
MSR on December 31, 2004, 2003 and 2002 had estimated market values of
approximately $1,049.7 million, $838.5 million and $464.1 million, respectively.
These balances represent the rights to service approximately $83.6 billion,
$65.1 billion and $50.0 billion of mortgage loans on December 31, 2004, 2003 and
2002, respectively. On December 31, 2004, 2003 and 2002 valuation allowances due
to impairment of $4.2 million, $36.5 million and $33.7 million were required,
respectively. Following is a rollforward of the valuation allowance:
<Table>
<Caption>
(Dollars in thousands)
- ----------------------------------------------------------------------
Balance on December 31, 2001 $ 15,263
Permanent impairment (131,695)
Servicing valuation provision 150,162
- ----------------------------------------------------------------------
Balance on December 31, 2002 $ 33,730
Permanent impairment (155,586)
Servicing valuation provision 158,324
- ----------------------------------------------------------------------
Balance on December 31, 2003 $ 36,468
Permanent impairment (69,299)
Servicing valuation provision 37,062
- ----------------------------------------------------------------------
BALANCE ON DECEMBER 31, 2004 $ 4,231
======================================================================
</Table>
78 First Horizon National Corporation
<Page>
NOTE 6 - MORTGAGE SERVICING RIGHTS (CONTINUED)
Estimated MSR amortization expense for the years ending 2005, 2006, 2007, 2008
and 2009 are $163.2 million, $140.6 million, $119.0 million, $99.8 million, and
$82.9 million, respectively. The assumptions underlying these estimates are
subject to modification based on changes in market conditions and portfolio
behavior (such as prepayment speeds). As a result, these estimates are subject
to change in a manner and amount that is not presently determinable by
management.
For purposes of impairment evaluation and measurement, the MSR are stratified
based on the predominant risk characteristics of the underlying loans. These
strata currently include adjustable and fixed rate loans. The MSR are amortized
over the period of and in proportion to the estimated net servicing revenues. A
quarterly impairment analysis is performed using a discounted cash flow
methodology that is disaggregated by predominant risk characteristics.
Impairment, if any, is recognized through a valuation allowance for individual
strata. However, if the impairment is determined to be other-than-temporary, a
direct write-off of the asset is made.
First Horizon National Corporation 79
<Page>
NOTE 7 - INTANGIBLE ASSETS
Following is a summary of intangible assets, net of accumulated amortization,
included in the Consolidated Statements of Condition:
<Table>
<Caption>
Other
Intangible
(Dollars in thousands) Goodwill Assets*
- ---------------------------------------------------------------------------------------
December 31, 2001 $143,147 $ 41,857
Amortization expense - (6,200)
Reclass** 12,359 (12,359)
Minimum pension liability adjustment - 1,124
Acquisitions** 9,111 5,226
- ---------------------------------------------------------------------------------------
December 31, 2002 164,617 29,648
- ---------------------------------------------------------------------------------------
Amortization expense - (7,980)
Minimum pension liability adjustment - (89)
Divestitures (13,303) (1,632)
Acquisitions** 23,493 18,795
- ---------------------------------------------------------------------------------------
December 31, 2003 174,807 38,742
- ---------------------------------------------------------------------------------------
Amortization expense - (9,541)
Minimum pension liability adjustment - (129)
Divestitures (810) (359)
Acquisitions** 13,203 6,056
- ---------------------------------------------------------------------------------------
DECEMBER 31, 2004 $187,200 $ 34,769
=======================================================================================
</Table>
* Represents customer lists, premium on purchased deposits, covenants not to
compete and assets related to the minimum pension liability.
** Preliminary purchase price allocations on acquisitions are based upon
estimates of fair value and are subject to change.
The gross carrying amount of other intangible assets subject to amortization is
$104.0 million on December 31, 2004, net of $69.2 million of accumulated
amortization. Estimated aggregate amortization expense is expected to be $8.7
million, $6.2 million, $5.8 million, $4.8 million, and $3.5 million for 2005,
2006, 2007, 2008 and 2009, respectively.
The following is a summary of goodwill, net of accumulated amortization,
detailed by reportable segments for the three years ended December 31, 2004:
<Table>
<Caption>
Retail/
Commercial Mortgage Capital
(Dollars in thousands) Banking Banking Markets Total
- --------------------------------------------------------------------------------------------------------
December 31, 2001 $ 78,826 $51,353 $12,968 $143,147
Reclass* 12,359 - - 12,359
Acquisitions* 7,760 1,025 326 9,111
- --------------------------------------------------------------------------------------------------------
December 31, 2002 98,945 52,378 13,294 164,617
- --------------------------------------------------------------------------------------------------------
Divestitures (13,303) - - (13,303)
Acquisitions* 23,883 (390) - 23,493
- --------------------------------------------------------------------------------------------------------
December 31, 2003 109,525 51,988 13,294 174,807
- --------------------------------------------------------------------------------------------------------
Divestitures (810) - - (810)
Acquisitions* 5,626 3,226 4,351 13,203
- --------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004 $114,341 $55,214 $17,645 $187,200
========================================================================================================
</Table>
* Preliminary purchase price allocations on acquisitions are based upon
estimates of fair value and are subject to change.
80 First Horizon National Corporation
<Page>
NOTE 8 - TIME DEPOSIT MATURITIES
Following is a table of maturities for time deposits outstanding on December 31,
2004, which include 'Certificates of deposit under $100,000 and other time' and
'Certificates of deposit $100,000 and more'. 'Certificates of deposit $100,000
and more' totaled $8.2 billion on December 31, 2004. Time deposits are included
in 'Interest-bearing' deposits on the Consolidated Statements of Condition.
<Table>
<Caption>
(Dollars in thousands)
- -------------------------------------------------------------------------
2005 $ 8,445,181
2006 805,582
2007 258,607
2008 85,520
2009 357,869
2010 and after 324,679
- -------------------------------------------------------------------------
Total $10,277,438
=========================================================================
</Table>
NOTE 9 - SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased and securities sold under
agreements to repurchase, commercial paper, and other borrowed funds which
include short sale borrowings.
Federal funds purchased and securities sold under agreements to repurchase and
commercial paper generally have maturities of less than 90 days. Other
short-term borrowings have original maturities of one year or less.
The detail of these borrowings for the years 2004, 2003 and 2002 is presented in
the following table:
<Table>
<Caption>
Federal Funds
Purchased and
Securities Sold Other
Under Agreements Commercial Short-term
(Dollars in thousands) to Repurchase Paper Borrowings
- ----------------------------------------------------------------------------------------------------------------
2004
Average balance $3,685,153 $20,385 $593,745
Year-end balance 3,247,048 23,712 482,044
Maximum month-end outstanding 4,387,946 30,885 947,002
Average rate for the year 1.22% .89% 3.79%
Average rate at year-end 1.87 1.18 3.44
- ----------------------------------------------------------------------------------------------------------------
2003
Average balance $3,712,768 $20,902 $638,961
Year-end balance 3,079,248 31,793 196,183
Maximum month-end outstanding 4,703,454 31,793 988,855
Average rate for the year .99% .93% 3.92%
Average rate at year-end .79 .78 4.07
- ----------------------------------------------------------------------------------------------------------------
2002
Average balance $3,134,379 $19,899 $517,499
Year-end balance 3,126,350 25,695 335,513
Maximum month-end outstanding 4,283,364 26,461 625,299
Average rate for the year 1.45% 1.31% 4.24%
Average rate at year-end .99 .98 3.14
- ----------------------------------------------------------------------------------------------------------------
</Table>
On December 31, 2004, $50 million of borrowings under unsecured lines of credit
from non-affiliated banks were available to the parent company to provide for
general liquidity needs at an annual facility fee of .10 percent.
First Horizon National Corporation 81
<Page>
NOTE 10 - TERM BORROWINGS
The following table presents information pertaining to term borrowings (debt
with original maturities greater than one year) for FHN and its subsidiaries on
December 31:
<Table>
<Caption>
(Dollars in thousands) 2004 2003
- -------------------------------------------------------------------------------------
FIRST TENNESSEE BANK NATIONAL ASSOCIATION:
Subordinated notes (qualifies for total capital under the
Risk-Based Capital guidelines):
Matures on January 15, 2015 - 5.05% $ 400,872 $ -
Matures on May 15, 2013 - 4.625% 258,837 257,529
Matures on December 1, 2008 - 5.75% 140,402 141,191
Matures on April 1, 2008 - 6.40% 89,771 89,701
Bank notes* 1,249,950 959,847
Federal Home Loan Bank borrowings** 4,717 3,897
Other*** 1,259 280
FIRST HORIZON NATIONAL CORPORATION:
Subordinated capital notes (qualifies for total capital
under the Risk-Based Capital guidelines):
Matures on May 15, 2013 - 4.50% 103,601 103,229
Matures on November 15, 2005 - 6.75% 22,875 22,850
Subordinated notes (Note 11):
Matures on January 6, 2027 - 8.07% 101,064 103,093
Matures on April 15, 2034 - 6.30% 197,803 -
FT REAL ESTATE SECURITIES COMPANY, INC.
Cumulative preferred stock (qualifies for total capital
under the Risk-Based Capital guidelines) (Note 12):
Matures on March 31, 2031 - 9.50% 45,217 45,149
- -------------------------------------------------------------------------------------
Total $2,616,368 $1,726,766
=====================================================================================
</Table>
* The bank notes were issued with variable interest rates and have remaining
terms of 1 to 3 years. These bank notes had weighted average interest rates
of 2.35 percent and 1.21 percent on December 31, 2004 and 2003,
respectively.
** The Federal Home Loan Bank (FHLB) borrowings were issued with fixed interest
rates and have remaining terms of 4 to 25 years. These borrowings had
weighted average interest rates of 3.57 percent and 4.29 percent on December
31, 2004 and 2003, respectively.
*** Other long-term debt is comprised of unsecured obligations issued with fixed
interest rates and have remaining terms of approximately one year. These
borrowings had a weighted average interest rate of 5.00 percent on December
31, 2004 and 2003.
Annual principal repayment requirements as of December 31, 2004, are as follows:
<Table>
<Caption>
(Dollars in thousands)
- ------------------------------------------------------------------------
2005 $1,074,490
2006 150,334
2007 50,334
2008 231,959
2009 317
2010 and after 1,109,343
- ------------------------------------------------------------------------
</Table>
All subordinated notes are unsecured and are subordinate to other present and
future senior indebtedness. FTBNA's subordinated notes and FHN's subordinated
capital notes qualify as Tier 2 risk-based capital under the Office of the
Comptroller of the Currency and Federal Reserve Board guidelines for assessing
capital adequacy. FTBNA's subordinated and bank notes may not be redeemed or
prepaid prior to maturity. FTBNA has an ongoing bank note program under which
the bank may offer an aggregate principal amount of up to $3.0 billion. On
December 31, 2004, unused term-
82 First Horizon National Corporation
<Page>
NOTE 10 - TERM BORROWINGS (CONTINUED)
borrowing capacity under this program was $.1 billion. In February 2005, FTBNA
entered into a $5.0 billion bank note program. This bank note program provides
FTBNA with a facility under which it may continuously issue and offer short- and
medium-term unsecured notes. The existing bank note program has been terminated
in connection with the establishment of the new program. That termination does
not affect any previously-issued notes outstanding.
NOTE 11 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN FIRST HORIZON'S JUNIOR
SUBORDINATED DEBENTURES
On December 30, 1996, FHN, through its underwriters, sold to institutional
investors $100 million of capital securities. First Tennessee Capital I (Capital
I), a Delaware business trust wholly owned by FHN, issued $100 million of
Capital Securities, Series A at 8.07 percent. The proceeds were loaned to FHN as
junior subordinated debt. FHN has, through various contractual arrangements,
fully and unconditionally guaranteed all of Capital I's obligations with respect
to the capital securities. The sole asset of Capital I is $103 million of junior
subordinated debentures issued by FHN. These junior subordinated debentures also
carry an interest rate of 8.07 percent. Both the capital securities of Capital I
and the junior subordinated debentures of FHN will mature on January 6, 2027;
however, under certain circumstances, the maturity of both may be shortened to a
date not earlier than January 6, 2017. The capital securities qualify as Tier 1
capital. The junior subordinated debentures are included in the Consolidated
Statements of Condition in 'Term borrowings' (see Note 10 - Term Borrowings).
During first quarter 2004, FHN, through its underwriter, sold $200 million of
capital securities. First Tennessee Capital II (Capital II), a Delaware business
trust wholly owned by FHN, issued $200 million of Capital Securities, Series B
at 6.30 percent. The proceeds were loaned to FHN as junior subordinated debt.
FHN has, through various contractual arrangements, fully and unconditionally
guaranteed all of Capital II's obligations with respect to the capital
securities. The sole asset of Capital II is $206 million of junior subordinated
debentures issued by FHN. These junior subordinated debentures also carry an
interest rate of 6.30 percent. Both the capital securities of Capital II and the
junior subordinated debentures of FHN will mature on April 15, 2034, however,
under certain circumstances, the maturity of both may be shortened to a date not
earlier than April 15, 2009. The capital securities qualify as Tier 1 capital.
The junior subordinated debentures are included in the Consolidated Statements
of Condition in 'Term borrowings' (see Note 10 - Term Borrowings).
NOTE 12 - PREFERRED STOCK OF SUBSIDIARY
On September 14, 2000, FT Real Estate Securities Company, Inc. (FTRESC), an
indirect subsidiary of FHN, issued 50 shares of 9.50% 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 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 National Corporation 83
<Page>
NOTE 12 - PREFERRED STOCK OF SUBSIDIARY (CONTINUED)
On July 1, 2003, FHN adopted certain provisions of SFAS No. 150, which require
certain financial instruments with both liability and equity characteristics to
be classified as liabilities on the statement of condition. Upon adoption of
this statement, FHN classified its mandatorily redeemable preferred stock of
subsidiary in 'Term borrowings' (See Note 10 - Term Borrowings). Historically,
the related distributions on these instruments ($4.6 million annually) were
classified as noninterest expense on the Consolidated Statements of Income, but
as of July 1, 2003, are classified as interest expense on a prospective basis.
Restatement of prior periods was not permitted.
The following indirect, wholly-owned subsidiaries of FHN have also issued
preferred stock. First Horizon Mortgage Loan Corporation has issued $1.0 million
of Class B Preferred Shares. Additionally, FHRIII, LLC and FHRIV, LLC have each
issued $1.0 million of Class B Preferred Units. On December 31, 2004 and 2003,
$.5 million of preferred stock that is perpetual in nature and not subject to
the provisions of SFAS No. 150 was recognized as 'Preferred stock of subsidiary'
on the Consolidated Statements of Condition. The remaining balance has been
eliminated in consolidation.
NOTE 13 - 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
December 31, 2004, that FHN met all capital adequacy requirements to which it
was subject.
The actual capital amounts and ratios of FHN and FTBNA (the banking subsidiary
of FHN) 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 12.37 percent, 8.41 percent and 7.04
percent, respectively, on December 31, 2004, and were 12.12 percent, 8.94
percent and 7.16 percent, respectively, on December 31, 2003.
84 First Horizon National Corporation
<Page>
NOTE 13 - REGULATORY CAPITAL (CONTINUED)
<Table>
<Caption>
First Tennessee Bank
First Horizon National National
Corporation Association
---------------------- ----------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------
ON DECEMBER 31, 2004:
Actual:
Total Capital $3,182,733 13.18% $3,064,060 12.79%
Tier 1 Capital 2,080,237 8.62 2,061,564 8.61
Leverage 2,080,237 7.16 2,061,564 7.15
For Capital Adequacy Purposes:
Total Capital 1,931,256 >= 8.00 1,916,456 >= 8.00
Tier 1 Capital 965,628 >= 4.00 958,228 >= 4.00
Leverage 1,162,155 >= 4.00 1,152,831 >= 4.00
To Be Well Capitalized Under Prompt Corrective Action
Provisions:
Total Capital 2,395,570 >= 10.00
Tier 1 Capital 1,437,342 >= 6.00
Leverage 1,441,039 >= 5.00
- ------------------------------------------------------------------------------------------------------------
On December 31, 2003:
Actual:
Total Capital $2,509,835 13.19% $2,384,981 12.63%
Tier 1 Capital 1,754,367 9.22 1,734,092 9.18
Leverage 1,754,367 7.19 1,734,092 7.25
For Capital Adequacy Purposes:
Total Capital 1,522,301 >= 8.00 1,510,952 >= 8.00
Tier 1 Capital 761,151 >= 4.00 755,476 >= 4.00
Leverage 975,794 >= 4.00 956,384 >= 4.00
To Be Well Capitalized Under Prompt Corrective Action
Provisions:
Total Capital 1,888,690 >= 10.00
Tier 1 Capital 1,133,214 >= 6.00
Leverage 1,195,480 >= 5.00
- ------------------------------------------------------------------------------------------------------------
</Table>
First Horizon National Corporation 85
<Page>
NOTE 14 - OTHER INCOME AND OTHER EXPENSE
Following is detail concerning 'All other income' and 'All other expense' as
presented in the Consolidated Statements of Income:
<Table>
<Caption>
(Dollars in thousands) 2004 2003 2002
- ----------------------------------------------------------------------------------------------------
ALL OTHER INCOME:
Cardholder fees $ 25,075 $ 22,698 $ 20,145
Asset securitizations 23,090 - -
Other service charges 19,709 19,810 21,204
Remittance processing 19,515 23,666 26,016
Check clearing fees 10,052 11,839 13,180
Other 89,698 68,286 60,765
- ----------------------------------------------------------------------------------------------------
Total $187,139 $146,299 $141,310
====================================================================================================
ALL OTHER EXPENSE:
Advertising and public relations $ 39,961 $ 43,955 $ 35,982
Legal and professional fees 37,730 60,001 37,340
Travel and entertainment 30,794 37,432 22,501
Computer software 28,906 28,828 26,140
Contract employment 23,714 33,790 28,987
Supplies 17,591 18,783 15,145
Fed service fees 8,838 9,195 9,597
Foreclosed real estate 5,834 13,137 21,479
Deposit insurance premium 3,024 2,703 2,393
Charitable contributions 1,497 13,370 48,337
Distributions on guaranteed preferred securities - 8,070 8,070
Distributions on preferred stock of subsidiary - 2,282 4,564
Other 102,753 121,498 69,171
- ----------------------------------------------------------------------------------------------------
Total $300,642 $393,044 $329,706
====================================================================================================
</Table>
Certain previously reported amounts have been reclassified to agree with current
presentation.
NOTE 15 - COMPONENTS OF OTHER COMPREHENSIVE (LOSS)/INCOME
Following is detail of 'Accumulated other comprehensive (loss)/income' as
presented in the Consolidated Statements of Condition:
<Table>
<Caption>
Tax Accumulated Other
Before-Tax (Expense)/ Comprehensive
(Dollars in thousands) Amount Benefit (Loss)/Income
- ---------------------------------------------------------------------------------------------------------
December 31, 2001 $ 23,278
Other comprehensive income:
Unrealized market adjustments on cash flow hedge $ (224) $ 87 (137)
Minimum pension liability (2,196) 807 (1,389)
Unrealized market adjustments on securities available for
sale (1,613) 739 (874)
Adjustment for net losses included in net income 9,180 (3,571) 5,609
- ------------------------------------------------------------------------------------- -----------------
December 31, 2002 $ 5,147 $(1,938) 26,487
=====================================================================================
Other comprehensive income:
Unrealized market adjustments on cash flow hedge $ 224 $ (87) 137
Minimum pension liability (1,786) 657 (1,129)
Unrealized market adjustments on securities available for
sale (37,988) 14,637 (23,351)
Adjustment for net gains included in net income (2,378) 916 (1,462)
- ------------------------------------------------------------------------------------- -----------------
December 31, 2003 $(41,928) $16,123 682
=====================================================================================
Other comprehensive income:
Minimum pension liability $ (505) $ 186 (319)
Unrealized market adjustments on securities available for
sale 3,961 (1,533) 2,428
Adjustment for net gains included in net income (20,748) 8,029 (12,719)
- ------------------------------------------------------------------------------------- -----------------
DECEMBER 31, 2004 $(17,292) $ 6,682 $ (9,928)
===================================================================================== =================
</Table>
86 First Horizon National Corporation
<Page>
NOTE 16 - INCOME TAXES
The components of income tax expense/(benefit) are as follows:
<Table>
<Caption>
(Dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------------
Current:
Federal $169,158 $134,793 $119,258
State 1,771 (2,820) 20,102
Deferred:
Federal 29,855 80,779 44,191
State 11,617 32,937 (1,943)
- --------------------------------------------------------------------------------------------
Total $212,401 $245,689 $181,608
============================================================================================
</Table>
The effective tax rates for 2004, 2003 and 2002 were 31.85 percent, 34.17
percent and 32.54 percent, respectively. Income tax expense was different than
the amounts computed by applying the statutory federal income tax rate to income
before income taxes because of the following:
<Table>
<Caption>
(Dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------------
Federal income tax rate 35% 35% 35%
- --------------------------------------------------------------------------------------------
Tax computed at statutory rate $233,383 $251,649 $195,321
Increase/(decrease) resulting from:
State income taxes 8,702 19,582 11,936
Tax credits (17,201) (14,703) (9,219)
Other (12,483) (10,839) (16,430)
- --------------------------------------------------------------------------------------------
Total $212,401 $245,689 $181,608
============================================================================================
</Table>
A deferred tax asset or liability 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. Temporary differences which gave rise to deferred tax
(assets)/liabilities on December 31, 2004 and 2003, were as follows:
<Table>
<Caption>
(Dollars in thousands) 2004 2003
- -----------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Loss reserves $ (67,307) $ (68,952)
Employee benefits (47,556) (42,929)
Accrued expenses (8,326) (13,404)
Other (19,109) (19,775)
- -----------------------------------------------------------------------------------
Gross deferred tax assets (142,298) (145,060)
- -----------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Capitalized mortgage servicing rights 348,258 355,167
Asset securitizations 24,943 -
Depreciation and amortization 33,803 23,460
Federal Home Loan Bank stock 12,265 10,867
Deferred fees and expenses 39,754 36,763
Other intangible assets 16,200 14,299
Other 17,063 14,353
- -----------------------------------------------------------------------------------
Gross deferred tax liabilities 492,286 454,909
- -----------------------------------------------------------------------------------
Net deferred tax liabilities $ 349,988 $ 309,849
===================================================================================
</Table>
The deferred tax assets above are net of an insignificant valuation allowance
due to capital losses. Other than these capital losses, no valuation allowance
related to deferred tax assets has been recorded on December 31, 2004 and 2003,
as management believes it is more likely than not that the remaining deferred
tax assets will be fully realized.
First Horizon National Corporation 87
<Page>
NOTE 17 - EARNINGS PER SHARE
The following table shows a reconciliation of earnings per common share to
diluted earnings per common share.
<Table>
<Caption>
(Dollars in thousands, except per share data) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------
Net income $ 454,408 $ 473,309 $ 376,451
EARNINGS PER COMMON SHARE:
Weighted average common shares outstanding 123,641,035 125,686,999 125,682,766
Shares attributable to deferred compensation 1,089,536 1,078,424 1,031,647
- ------------------------------------------------------------------------------------------------------
Total weighted average shares 124,730,571 126,765,423 126,714,413
Earnings per common share $ 3.64 $ 3.73 $ 2.97
======================================================================================================
DILUTED EARNINGS PER COMMON SHARE:
Weighted average shares outstanding 124,730,571 126,765,423 126,714,413
Dilutive effect due to stock options 3,705,771 4,110,618 3,506,756
- ------------------------------------------------------------------------------------------------------
Total weighted average shares, as adjusted 128,436,342 130,876,041 130,221,169
Diluted earnings per common share $ 3.54 $ 3.62 $ 2.89
======================================================================================================
</Table>
Outstanding stock options of 2,807,746, 1,257,236 and 2,265,352 with weighted
average exercise prices of $45.70, $40.73 and $38.09 per share for the years
ended December 31, 2004, 2003 and 2002, respectively, were not included in the
computation of diluted earnings per share because such shares would have had an
antidilutive effect on earnings per share.
88 First Horizon National Corporation
<Page>
NOTE 18 - RESTRICTIONS, CONTINGENCIES, COMMITMENTS AND OTHER DISCLOSURES
RESTRICTIONS ON CASH AND DUE FROM BANKS. The commercial banking subsidiaries of
FHN are required to maintain average reserve and clearing balances with the
Federal Reserve Bank under the Federal Reserve Act and Regulation D. The
balances required on December 31, 2004 and 2003, were $225.2 million and $221.0
million, respectively. These reserves are included in 'Cash and due from banks'
on the Consolidated Statements of Condition.
RESTRICTIONS ON DIVIDENDS. Dividends are paid by FHN from its assets, which are
mainly provided by dividends from its subsidiaries. Certain regulatory
restrictions exist regarding the ability of FTBNA to transfer funds to FHN in
the form of cash, dividends, loans or advances. As of December 31, 2004, FTBNA
had undivided profits of $1,930.7 million of which $807.6 million was available
for distribution to FHN as dividends without prior regulatory approval.
RESTRICTIONS ON INTERCOMPANY TRANSACTIONS. Under Federal banking law, banking
subsidiaries may not extend credit to the parent company in excess of 10 percent
of the bank's capital stock and surplus, as defined, or $303.2 million on
December 31, 2004. The parent company had covered transactions of $49.3 million
from FTBNA on December 31, 2004. In addition the aggregate amount of covered
transactions with all affiliates, as defined, is limited to 20 percent of the
bank's capital stock and surplus, or $606.3 million on December 31, 2004.
FTBNA's total covered transactions with all affiliates on December 31, 2004 were
$191.3 million. Certain loan agreements also define other restricted
transactions related to additional borrowings.
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. Although FHN cannot predict the outcome of
these lawsuits, after consulting with counsel, management has been able to form
an opinion on the effect all of these lawsuits, except the matter mentioned in
the paragraph below, will have on the consolidated financial statements. It is
management's opinion that when resolved, these lawsuits will not have a material
adverse effect on the consolidated financial statements of FHN.
In November 2000, a complaint was filed in Missouri state court against FHN's
subsidiary, First Horizon Home Loans. The case concerns the charging of certain
loan origination fees, permitted by Kansas law but allegedly restricted or not
permitted by Missouri law, when First Horizon Home Loans or its predecessor,
McGuire Mortgage Company, made certain second mortgage loans in Kansas which
were secured by Missouri property. Among other relief, plaintiffs seek fees,
loan interest, punitive damages, statutory penalties, and loan rescission. In
response to pre-trial motions, the court has ruled that Missouri law governs the
loan transactions and has certified a statewide class action; plaintiffs contend
the class involves approximately 4,600 loans, but the exact size is in dispute.
Discovery is ongoing and additional pre-trial motions are pending. Trial is
currently scheduled for June 2005. FHN believes that it has meritorious defenses
and intends to continue to protect its rights and defend this lawsuit
vigorously, through trial and appeal, if necessary.
LOAN COMMITMENTS. FHN enters into fixed and variable loan commitments with
customers. When these commitments have contract rate adjustments that lag
changes in market rates, the financial instruments have characteristics similar
to option contracts. FHN follows the same credit policies and underwriting
practices in making commitments as it does for on-balance sheet instruments.
Each counterparty's creditworthiness is evaluated on a case-by-case basis. The
amount of collateral obtained, if any, is based on management's credit
evaluation of the counterparty.
Commitments to extend credit are contractual obligations to lend to a customer
as long as all established contractual conditions are met. These commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The majority of FHN's loan commitments have maturities
less than one year and reflect the prevailing market rates at the time of the
commitment. Since commitments may expire without being fully drawn upon, the
total contract amount does not necessarily represent future cash requirements.
First Horizon National Corporation 89
<Page>
NOTE 18 - RESTRICTIONS, CONTINGENCIES, COMMITMENTS AND OTHER DISCLOSURES
(CONTINUED)
Other commitments include standby and commercial letters of credit and other
credit enhancements. Standby and commercial letters of credit and other credit
enhancements are conditional commitments issued by FHN to guarantee the
performance and/or payment of a customer to a third party in connection with
specified transactions. The credit risk involved in issuing these commitments is
essentially the same as that involved in extending loan facilities to customers,
as performance under any of these facilities would result in a loan being funded
to the customer.
The following is a summary of the maximum credit exposure of each class of
lending related off-balance sheet financial instruments outstanding on
December 31:
<Table>
<Caption>
(Dollars in millions) 2004 2003
- -----------------------------------------------------------------------------------
Commitments to extend credit:
Consumer credit card lines $ 2,002.3 $ 1,668.9
Consumer home equity 5,868.7 4,119.9
Commercial real estate and construction and land
development 2,489.0 1,453.4
Commercial and other 3,262.3 2,839.2
- ------------------------------------------------------------------------------------
Total loan commitments 13,622.3 10,081.4
Other commitments:
Standby letters of credit 618.8 522.4
Other 84.4 48.1
- ------------------------------------------------------------------------------------
Total loan and other commitments $14,325.5 $10,651.9
====================================================================================
</Table>
OTHER DISCLOSURES - COMPANY OWNED LIFE INSURANCE. FHN has purchased life
insurance on certain of its employees and is the beneficiary on these policies.
On December 31, 2004, the cash surrender value of these policies, which is
included in 'Capital markets receivables and other assets' on the Consolidated
Statements of Condition, was $378.7 million. There are no restrictions on the
proceeds from these benefits, and FHN has not borrowed against the cash
surrender value of these policies.
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 representation
warranties for underwriting agreements, merger and acquisition agreements, sold
loans and other similar types of arrangements. It is not possible to estimate a
maximum potential amount of payouts that could be required with such agreements.
First Horizon Home Loans services a first-lien mortgage loan portfolio of
approximately $86.6 billion as of December 31, 2004, a significant portion of
which is held by Government Sponsored Enterprises (GSE) or private security
holders. In connection with its servicing activities, First Horizon Home Loans
guarantees the receipt of the scheduled principal and interest payments on the
underlying loans. In the event of customer non-performance on the loan, First
Horizon Home Loans is obligated to make the payment to the security holder.
Under the terms of the servicing agreements, First Horizon Home Loans can
utilize payments received from other prepaid loans in order to make the security
holder whole. In the event payments are ultimately made by First Horizon Home
Loans to satisfy this obligation, for loans sold with no recourse, all funds are
recoverable from the GSE at foreclosure sale. See Note 24 - Securitizations
for additional information on loans sold with recourse.
First Horizon Home Loans is also subject to losses in its loan servicing
portfolio due to loan foreclosures and other recourse obligations. Certain
agencies have the authority to limit their repayment guarantees on foreclosed
loans resulting in certain foreclosure costs being borne by servicers. In
addition, First Horizon Home Loans has exposure on all loans sold with recourse.
First Horizon Home Loans has various claims for reimbursement, repurchase
obligations, and/or indemnification requests outstanding with government
agencies or private investors. First Horizon Home Loans has evaluated all of its
exposure under recourse obligations based on factors, which include loan
delinquency status, foreclosure expectancy rates and claims outstanding.
Accordingly, First
90 First Horizon National Corporation
<Page>
NOTE 18 - RESTRICTIONS, CONTINGENCIES, COMMITMENTS AND OTHER DISCLOSURES
(CONTINUED)
Horizon Home Loans had an allowance for losses on the mortgage servicing
portfolio of approximately $18.5 million and $22.3 million as of December 31,
2004 and 2003, respectively. First Horizon Home Loans has sold certain mortgage
loans with an agreement to repurchase the loans upon default. As of
December 31, 2004 and 2003, First Horizon Home Loans had single-family
residential loans with outstanding balances of $150.8 million and $199.3
million, respectively that were sold on a recourse basis. For the single-family
residential loans, in the event of borrower nonperformance, First Horizon Home
Loans would assume losses to the extent they exceed the value of the collateral
and private mortgage insurance, FHA insurance or VA guarantees. As of
December 31, 2004 and 2003, the outstanding principal balance of loans sold with
limited recourse and serviced by First Horizon Home Loans was $3.4 billion and
$3.7 billion, respectively.
In 2004, FTBNA securitized and sold home equity lines of credit and second-lien
mortgages which are held by private security holders, and on December 31, 2004,
the outstanding principal balance of loans was $1.3 billion and $.2 billion,
respectively. In connection with its servicing activities, FTBNA does not
guarantee the receipt of the scheduled principal and interest payments on the
underlying loans but does have a residual interest of $55.0 million on December
31, 2004, which is available to make the security holder whole in the event of
credit losses. FTBNA has projected expected credit losses in the valuation of
the residual interest.
NOTE 19 - SHAREHOLDER PROTECTION RIGHTS AGREEMENT
On October 20, 1998, FHN adopted a Shareholder Protection Rights Agreement (the
'Agreement') and declared a dividend of one right on each outstanding share of
common stock held on November 2, 1998, or issued thereafter and prior to the
time the rights separate and thereafter pursuant to options and convertible
securities outstanding at the time the rights separate.
The Agreement provides that until the earlier of the tenth business day (subject
to certain adjustments by the board of directors) after a person or group
commences a tender or exchange offer that will, subject to certain exceptions,
result in such person or group owning 10 percent or more of FHN's common stock,
or the tenth business day (subject to certain adjustments by the board) after
the public announcement by FHN that a person or group owns 10 percent or more of
FHN's common stock, the rights will be evidenced by the common stock
certificates, will automatically trade with the common stock, and will not be
exercisable. Thereafter, separate rights certificates will be distributed, and
each right will entitle its holder to purchase one one-hundredth of a share of
participating preferred stock having economic and voting terms similar to those
of one share of common stock for an exercise price of $150.
If any person or group acquires 10 percent or more of FHN's common stock, then
each right (other than rights beneficially owned by holders of 10 percent or
more of the common stock or affiliates, associates or transferees thereof, which
rights become void) will entitle its holder to purchase, for the exercise price,
a number of shares of FHN common stock or participating preferred stock having a
market value of twice the exercise price. Also, if there is a 10 percent
shareholder and FHN is involved in certain significant transactions, each right
will entitle its holder to purchase, for the exercise price, a number of shares
of common stock of the other party having a market value of twice the exercise
price. If any person or group acquires 10 percent or more (but not more than 50
percent) of FHN's common stock, FHN's board of directors may, at its option,
exchange one share of FHN common stock or one one-hundredth of a share of
participating preferred stock for each right (other than rights which have
become void). The board of directors may amend the Agreement in any respect
prior to the tenth business day after announcement by FHN that a person or group
has acquired 10 percent or more of FHN's common stock. The rights will expire on
the earliest of the following times: the time of the exchange described in the
second preceding sentence; December 31, 2009; or the date the rights are
redeemed as described in the following sentence. The rights may be redeemed by
the board of directors for $0.001 per right until 10 business days after FHN
announces that any person or group owns 10 percent or more of FHN's common
stock.
First Horizon National Corporation 91
<Page>
NOTE 20 - SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS
SAVINGS PLAN. Substantially all employees of FHN are covered by a contributory
savings plan in conjunction with a flexible benefits plan. During the year, FHN
makes contributions to each employee's flexible benefits plan account. These
contributions are based on length of service and a percentage of the employee's
salary. The employees have the option to direct a portion or all of the
contribution into their savings plan accounts. Employees may also make pre-tax
and after-tax personal contributions to the savings plan. FHN matches the
majority of employee pre-tax contributions invested in FHN's common stock fund
(or for employees of First Horizon Home Loans, contributions made to any savings
plan fund) at a rate of $.50 for each $1.00 invested up to 6 percent of the
employee's qualifying salary. Contributions made by FHN to the flexible benefits
plan were $26.8 million for 2004, $24.4 million for 2003 and $20.4 million for
2002. A feature of the savings plan allows employees to choose to invest their
savings in one or more of ten various component funds, including a nonleveraged
employee stock ownership plan (ESOP). Compensation cost related to the ESOP is
measured as the amount allocated from matching contributions and discretionary
contributions contributed to the ESOP and is included in the contributions
amount above. Dividends on shares held by the ESOP are charged to retained
earnings and shares held by the ESOP are treated as outstanding in computing
earnings per share. The number of allocated shares held by the ESOP totaled
8,200,173 on December 31, 2004.
PENSION PLAN. FHN provides pension benefits to employees retiring under the
provisions of a noncontributory, defined benefit pension plan. Pension benefits
are based on years of service, average compensation near retirement and
estimated social security benefits at age 65. The annual funding is based on an
actuarially determined amount using the entry age cost method. FHN also
maintains a nonqualified supplemental executive retirement plan. All benefits
provided under this plan are unfunded and payments to plan participants are made
by FHN.
OTHER EMPLOYEE BENEFITS. FHN provides postretirement medical insurance to
full-time employees retiring under the provisions of the FTNC Pension Plan. The
postretirement medical plan is contributory with retiree contributions adjusted
annually. The plan is based on criteria that are a combination of the employee's
age and years of service and utilizes a two-step approach. For any employee
retiring on or after January 1, 1995, FHN will contribute a fixed amount based
on years of service and age at time of retirement. FHN's postretirement benefits
include prescription drug benefits. The Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (the Act) introduces a prescription drug benefit
under Medicare Part D as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. In May 2004, the FASB approved issuance of FSP
FAS 106-2, 'Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003'. FSP FAS 106-2
requires a plan sponsor to determine if benefits offered through a
postretirement health care plan are actuarially equivalent to Medicare Part D.
If benefits are determined to be actuarially equivalent, the resulting effect on
the plan's obligations should be reflected as an actuarial gain in determining
the plan's accumulated postretirement benefit obligation. FHN adopted the
provisions of FSP FAS 106-2 effective July 1, 2004. The impact of adopting FSP
FAS 106-2 was immaterial to FHN.
92 First Horizon National Corporation
<Page>
NOTE 20 - SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
ACTUARIAL ASSUMPTIONS. The actuarial assumptions used in the defined benefit
pension plan and the other employee benefit plan were as follows:
<Table>
<Caption>
Pension Benefits Postretirement Benefits
------------------ -----------------------
2004 2003 2002 2004 2003 2002
------------------- -----------------------
- -----------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT
OBLIGATIONS AS OF SEPTEMBER 30 MEASUREMENT DATE
Discount rate 6.47% 6.25% 6.75% 6.07% 6.25% 6.75%
Rate of compensation increase 4.00 4.00 4.00 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC
BENEFIT COST FOR THE FISCAL YEAR
Discount rate 6.25% 6.75% 7.25% 6.25% 6.75% 7.25%
Expected return on plan assets 8.75 8.75 10.00 8.75 8.75 10.00
Expected return on plan assets dedicated to employees who
retired prior to January 1, 1993 N/A N/A N/A 5.75 5.75 6.50
Rate of compensation increase 4.00 4.00 4.00 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------
</Table>
To develop the expected long-term rate of return on assets assumption, FHN
considered the current level of expected returns on risk free investments
(primarily government bonds), the historical level of the risk premium
associated with the other asset classes in which the portfolio is invested and
the expectations for future returns of each asset class. Since FHN's investment
policy is to actively manage certain asset classes where the potential exists to
outperform the broader market, the expected returns for those asset classes were
adjusted to reflect the expected additional returns. The expected return for
each asset class was then weighted based on the target asset allocation to
develop the expected long-term rate of return on assets assumption for the
portfolio. This resulted in the selection of an 8.70 percent assumption for 2005
and 8.75 percent for 2004.
The discount rates for 2004 of 6.47 percent for pension and 6.07 percent for
postretirement benefits were determined by using a hypothetical AA yield curve
represented by a series of annualized individual discount rates from one-half to
thirty years. The discount rate is selected based on data specific to FHN's
plans and employee population. For prior years, the discount rate was determined
by monitoring Moody's AA corporate rates as of the measurement date to establish
an annual discount rate. These rates were not based on FHN's specific
participant data but were intended to be reflective of the interest rate at
which pension liabilities could be settled. The rates as reflected by Moody's AA
corporate rates were rounded to the nearest .25 percent.
The assumed health care cost trend rates used in the defined benefit pension
plan and the other employee benefit plan were as follows:
<Table>
<Caption>
2004 2003
- -------------------------------------------------------------------------------------------------------------
ASSUMED HEALTH CARE COST TREND PARTICIPANTS PARTICIPANTS 65 Participants Participants 65
RATES ON SEPTEMBER 30 UNDER AGE 65 YEARS AND OLDER under age 65 years and older
-------------------------------------------------------------------
Health care cost trend rate assumed for
next year 9.0% 11.0% 9.5% 11.5%
Rate to which the cost trend rate is
assumed to decline (the ultimate trend
rate) 6.0 8.0 6.0 8.0
Year that the rate reaches the ultimate
trend rate 2010 2010 2010 2010
- -------------------------------------------------------------------------------------------------------------
</Table>
First Horizon National Corporation 93
<Page>
NOTE 20 - SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
The health care cost trend rate assumption has a significant effect on the
amounts reported. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
<Table>
<Caption>
(Dollars in thousands) 1% Increase 1% Decrease
- ------------------------------------------------------------------------------------------------
Adjusted total service and interest cost components $ 2,745 $ 2,573
Adjusted postretirement benefit obligation at end of plan
year 30,982 28,460
- ------------------------------------------------------------------------------------------------
</Table>
The components of net periodic benefit cost for the plan years 2004, 2003 and
2002 were as follows:
<Table>
<Caption>
Pension Benefits Postretirement Benefits
--------------------------- ------------------------
(Dollars in thousands) 2004 2003 2002 2004 2003 2002
- ------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $14,359 $12,832 $10,418 $ 723 $ 732 $ 949
Interest cost 19,335 17,950 16,210 1,932 1,750 1,941
Expected return on plan assets (30,940) (26,645) (29,387) (1,626) (1,376) (1,726)
Amortization of prior service cost 684 736 738 (176) (176) (176)
Recognized losses 3,711 637 184 - - -
Amortization of transition obligation/(asset) - (20) (460) 989 989 989
- ------------------------------------------------------------------------------------------------------
Net periodic cost/(benefit) $ 7,149 $ 5,490 $(2,297) $1,842 $1,919 $1,977
======================================================================================================
</Table>
94 First Horizon National Corporation
<Page>
NOTE 20 - SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
The following table sets forth the plans' funded status reconciled to the
amounts shown in the Consolidated Statements of Condition:
<Table>
<Caption>
Pension Benefits Postretirement Benefits
------------------- -----------------------
(Dollars in thousands) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of plan year $312,357 $270,143 $ 31,869 $ 26,947
Service cost 14,359 12,832 723 732
Interest cost 19,335 17,950 1,932 1,750
Actuarial (gain)/loss (1,174) 19,502 (3,257) 4,276
Benefits paid (11,469) (8,070) (1,599) (1,836)
- ---------------------------------------------------------------------------------------------------------
Benefit obligation at end of plan year $333,408 $312,357 $ 29,668 $ 31,869
=========================================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of plan year $288,059 $246,442 $ 20,803 $ 17,371
Actual return on plan assets 14,434 49,490 1,741 4,273
Employer contribution 57,041 197 615 995
Benefits paid (11,469) (8,070) (1,599) (1,836)
- ---------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of plan year $348,065 $288,059 $ 21,560 $ 20,803
=========================================================================================================
NET FUNDED STATUS ON SEPTEMBER 30 $ 14,657 $(24,298) $ (8,108) $(11,066)
Unrecognized net actuarial loss 109,765 98,144 (925) 2,447
Unrecognized net transitional obligation - - 7,906 8,895
Unrecognized prior service cost/(benefit) 5,760 6,444 (1,596) (1,772)
- ---------------------------------------------------------------------------------------------------------
Prepaid benefit cost on September 30 130,182 80,290 (2,723) (1,496)
Contributions paid from October 1 to December 31 145 28,835 - -
- ---------------------------------------------------------------------------------------------------------
Prepaid benefit cost on December 31 $130,327 $109,125 $ (2,723) $ (1,496)
=========================================================================================================
Amounts recognized in the Consolidated Statements of
Condition consist of the following:
Prepaid benefit cost $130,327 $109,125
Accrued benefit liability (5,393) (5,017)
Intangible asset 906 1,035
Accumulated other comprehensive income 4,487 3,982
- ---------------------------------------------------------------------------------------------------------
Net amount recognized $130,327 $109,125
=========================================================================================================
</Table>
The accumulated benefit obligation for the pension plan was $284.7 million and
$266.1 million on September 30, 2004 and 2003, respectively. FHN expects to
contribute the maximum tax deductible contribution to the pension plan, which is
estimated to be approximately $15 million to $17 million, and expects to make no
contribution to the other employee benefit plan in 2005. On September 30, 2004,
the qualified pension plan had $136.9 million in prepaid benefit cost, while the
supplemental executive retirement plan had $(6.7) million in benefit cost. The
accrued benefit liability, intangible asset and accumulated other comprehensive
income is attributable to the unfunded supplemental executive retirement plan.
First Horizon National Corporation 95
<Page>
NOTE 20 - SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
<Table>
<Caption>
Pension Benefits Postretirement Benefits
- ------------------------------------------------------------------------------------------------------------
2005 $ 10,396 $ 1,566
2006 11,574 1,703
2007 12,947 1,833
2008 14,447 1,957
2009 16,061 2,074
Years 2010 - 2014 110,221 11,980
- ------------------------------------------------------------------------------------------------------------
</Table>
The following provides the amount included within other comprehensive income for
the period arising from a change in the minimum pension liability:
<Table>
<Caption>
Pension Benefits
----------------
(Dollars in thousands) 2004 2003
- ------------------------------------------------------------------------------
Increase in minimum pension liability included in other
comprehensive income $ 505 $1,786
- ------------------------------------------------------------------------------
</Table>
The following table sets forth FHN's pension plan asset allocation on
September 30, 2004 and 2003:
<Table>
<Caption>
Percentage of
Plan Assets
on September 30
-----------------------------------
Targeted
Range 2004 2003
- ------------------------------------------------------------------------------------------------------
Equity securities 70% 68.1% 57.4%
Large capital equity 35% 39.0% 45.7%
Small capital equity 20 19.2 11.7
International equity 15 9.9 -
Other 30 31.9 42.6
Fixed income 31.3 41.7
Money market .6 .9
- ------------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
======================================================================================================
</Table>
The primary investment objective is to ensure, over the long-term life of the
pension plan, an adequate pool of sufficiently liquid assets to support the
benefit obligations to participants, retirees and beneficiaries. In meeting this
objective, the pension plan seeks to achieve a high level of investment return
consistent with a prudent level of portfolio risk. Investment objectives are
long-term in nature covering typical market cycles of three to five years. Any
shortfall of investment performance compared to investment objectives should be
explainable in terms of general economic and capital market conditions. In
addition, the investment objective will be implemented through traditional
long-term stock and bond strategies. It is not contemplated at this time that
any derivative instruments will be used to achieve investment objectives.
During 2004 FHN reviewed its pension portfolio investment strategy and decided
to increase its equity exposure to 70 percent of total plan assets in 2005. The
expected return on plan assets assumption for 2005 will be 8.70 percent.
96 First Horizon National Corporation
<Page>
NOTE 20 - SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
Risk Management Practices: The asset allocation policy and the associated risk
budget has been developed based on an evaluation of the organization's ability
and willingness to assume investment risk in light of the Retirement Investment
Committee's financial and benefits-related goals and objectives.
Frequency of Rebalancing: The Retirement Investment Committee will rebalance the
portfolio assets as necessary to maintain liquidity for benefit payments and/or
stay within the established target asset allocation ranges. At a minimum
rebalancing will take place on an annual basis.
The following table sets forth FHN's other benefit plan asset allocation on
September 30, 2004 and 2003:
<Table>
<Caption>
Percentage of
Plan Assets
on September 30
-----------------------------------
2004 2003
- -------------------------------------------------------------------------------------------------
Equity securities 55.5% 54.0%
Large capital equity 44.3% 43.3%
Small capital equity 11.2 10.7
Other 44.5 46.0
Fixed income 43.5 44.7
Money market 1.0 1.3
- -------------------------------------------------------------------------------------------------
Total 100.0% 100.0%
=================================================================================================
</Table>
The primary investment objective is to ensure, over the long-term life of the
retiree medical obligation, an adequate pool of sufficiently liquid assets to
partially support the obligations to retirees and beneficiaries. The allocation
utilizing a tactical blend of individual securities and registered funds across
the broad asset classes is designed to capture a reasonable balance of risk and
return based on historical averages and parameters of Trust policy. In meeting
this objective, the retiree medical plan seeks to achieve a high level of
investment return consistent with a prudent level of portfolio risk. Investment
objectives are long-term in nature (longer than 10 years). It is not
contemplated at this time that any derivative instruments will be used to
achieve investment objectives.
Tactical allocation within the broad strategic objective of 55/45 equity to
fixed blend is contemplated periodically with an attention to the likelihood of
improving the return potential coupled with a reduction of the risk level.
The following table sets forth the amounts and types of mutual funds managed by
FTBNA that are included in plan assets:
<Table>
<Caption>
Postretirement
Pension Benefits Benefits
------------------- ----------------
(Dollars in thousands) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------
First Funds Capital Appreciation Portfolio Class I $ 66,781 $ 33,795 $ 2,423 $2,220
First Funds Core Equity Portfolio Class I 106,722 103,504 7,106 6,463
First Funds Bond Portfolio Class I 108,624 119,615 7,049 6,833
- ----------------------------------------------------------------------------------------------------
</Table>
FHN provides benefits to former and inactive employees after employment but
before retirement. The obligation recognized was $2.0 million in 2004, $3.6
million in 2003 and $1.4 million in 2002.
First Horizon National Corporation 97
<Page>
NOTE 20 - SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS (CONTINUED)
Medical and group life insurance expenses incurred for active employees are
shown in the following table:
<Table>
<Caption>
(Dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------
Medical plan expense based on claims incurred $ 27,312 $23,919 $26,157
Participants 9,130 8,576 7,273
- ------------------------------------------------------------------------------------------
Group life insurance expense based on benefits incurred $ 2,992 $ 2,171 $ 1,649
Participants 12,709 11,653 10,679
- ------------------------------------------------------------------------------------------
</Table>
98 First Horizon National Corporation
<Page>
NOTE 21 - STOCK OPTION, RESTRICTED STOCK INCENTIVE, AND DIVIDEND REINVESTMENT
PLANS
STOCK OPTION PLANS. FHN issues non-qualified stock options under various plans
to employees, non-employee directors, and bank advisory board members. The plans
provide for the issuance of FHN common stock at a price equal to its fair market
value at the date of grant; however, the exercise price may be less than the
fair market value if the grantee has agreed to receive the options in lieu of
compensation. The foregone compensation plus the exercise price equals the fair
market value of the stock on the date of grant. All options vest within 3 to 5
years and expire 7 years or 10 years from the date of grant, except for those
options that were previously part of compensation deferral, which vest
immediately or after 6 months and expire 20 years from the date of grant. After
January 2, 2004, stock options granted that are part of the compensation
deferral vest immediately or after 6 months and expire 10 years from the date of
grant. There were 3,336,677 shares available for option plan grants on
December 31, 2004.
As a result of plan amendments adopted by the board of directors during 1997,
employees may defer the receipt of shares upon the exercise of stock options.
The summary of stock option activity is shown below:
<Table>
<Caption>
Weighted
Options Average
Outstanding Exercise Price
- ----------------------------------------------------------------------------------------------
January 1, 2002 21,111,090 $25.00
Options granted 4,908,512 33.12
Options exercised* (3,218,704) 20.55
Options canceled (502,155) 32.36
----------
December 31, 2002 22,298,743 27.26
==========
Options exercisable 15,916,332 24.96
- ----------------------------------------------------------------------------------------------
January 1, 2003 22,298,743 $27.26
Options granted 3,931,673 36.80
Options exercised* (4,688,153) 24.49
Options canceled (419,602) 34.56
----------
December 31, 2003 21,122,661 29.51
==========
Options exercisable 15,290,028 27.08
- ----------------------------------------------------------------------------------------------
January 1, 2004 21,122,661 $29.51
Options granted 2,961,967 42.67
Options exercised* (2,829,981) 25.24
Options canceled (822,413) 37.85
----------
DECEMBER 31, 2004 20,432,234 31.68
==========
Options exercisable 13,690,108 27.82
- ----------------------------------------------------------------------------------------------
</Table>
* Stock options exercised for 2004, 2003 and 2002 respectively, included 83,998,
178,747 and 332,305 options converted to stock equivalents as part of the
deferred compensation program.
The following table summarizes information about stock options outstanding on
December 31, 2004:
<Table>
<Caption>
Weighted Weighted
Weighted Average Average
Average Exercise Exercise
Remaining Price- Price-
Options Contractual Options Options Options
Exercise Price Range Outstanding Life Outstanding Exercisable Exercisable
- -----------------------------------------------------------------------------------------------------------------
$ 4.00 - $20.00 3,270,352 9.24 $ 16.05 3,266,602 $16.04
$20.01 - $30.00 4,272,235 11.87 25.07 4,112,133 25.15
$30.01 - $40.00 8,834,866 6.88 34.98 4,581,528 33.17
$40.01 - $50.00 4,054,781 7.07 44.20 1,729,845 42.23
- -----------------------------------------------------------------------------------------------------------------
</Table>
First Horizon National Corporation 99
<Page>
NOTE 21 - STOCK OPTION, RESTRICTED STOCK INCENTIVE, AND DIVIDEND REINVESTMENT
PLANS (CONTINUED)
FHN accounts for these plans under APB Opinion No. 25 pursuant to which
recognized compensation costs are negligible. Total additional compensation cost
that would have been recognized in income under SFAS No. 123 for all stock-based
compensation awards was $13.9 million for 2004, $32.9 million for 2003 and $23.8
million for 2002. See Note 1 - Summary of Significant Accounting Policies for
pro forma information.
FHN used the Black-Scholes Option Pricing Model to estimate the fair value of
stock options granted in 2004, 2003 and 2002, with the following assumptions:
<Table>
<Caption>
2004 2003 2002
- ----------------------------------------------------------------------------------------------------------
Expected dividend yield 3.51% 3.00% 2.81%
Expected option lives of options issued at market 4.93 YEARS 5.42 years 4.44 years
Expected option lives of options issued below market* 4.54 YEARS 4.68 years 4.54 years
Expected volatility 26.57% 30.63% 30.30%
Risk-free interest rates 3.04% 4.24% 4.10%
- ----------------------------------------------------------------------------------------------------------
</Table>
* Options are issued with an exercise price less than the fair market value on
the date of grant if the grantee has agreed to receive the options in lieu of
compensation. The foregone compensation plus the exercise price equals the
fair market value on the date of grant.
<Table>
<Caption>
Weighted
Average Fair
Number Value per Option
Issued at Grant Date
- ----------------------------------------------------------------------------------------------
2004:
Options issued at market on the date of grant 2,608,368 $ 8.61
Options issued below market on the date of grant* 353,599 22.42
- ----------------------------------------------------------------------------------------------
2003:
Options issued at market on the date of grant 3,258,924 $ 8.52
Options issued below market on the date of grant* 672,749 20.19
- ----------------------------------------------------------------------------------------------
2002:
Options issued at market on the date of grant 3,703,159 $ 8.28
Options issued below market on the date of grant* 1,205,353 13.47
- ----------------------------------------------------------------------------------------------
</Table>
* Options are issued with an exercise price less than the fair market value on
the date of grant if the grantee has agreed to receive the options in lieu of
compensation. The foregone compensation plus the exercise price equals the
fair market value on the date of grant.
RESTRICTED STOCK INCENTIVE PLANS. FHN has authorized the issuance of its common
stock for awards to executive employees who have a significant impact on the
profitability of FHN under restricted stock incentive plans. Additionally, one
of the plans allows stock awards to be granted to non-employee directors upon
approval by the board of directors. It has been the recent practice of the board
to grant 8,000 shares of restricted stock to each new non-employee director upon
election to the board, with restrictions lapsing at a rate of ten percent per
year. In 2004, FHN granted 22,844 restricted shares under the plans. In 2003,
200,444 restricted shares were granted and 175,559 shares were granted in 2002.
Compensation expense related to these plans was $1.8 million, $5.1 million and
$2.5 million for the years 2004, 2003 and 2002, respectively.
The board of directors approved amendments to the restricted stock plan during
1998 permitting deferral by participants of the receipt of restricted stock
prior to the lapse of restrictions.
DIVIDEND REINVESTMENT PLAN. The Dividend Reinvestment and Stock Purchase Plan
(the Plan), as amended in October 2002, authorizes the sale of FHN's common
stock from shares acquired on the open market to shareholders who choose to
invest all or a portion of their cash dividends and make optional cash payments
of $25 to $10,000 per quarter without paying commissions. Prior to the 2002
amendment, the Plan authorized the sale of FHN's common stock from authorized,
but unissued common stock or from shares acquired on the open market. In 2002,
shares for this plan were purchased on the open market. The price of shares
purchased on the open market is the average price paid.
100 First Horizon National Corporation
<Page>
NOTE 22 - BUSINESS SEGMENT INFORMATION
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 offers financial products and services, including traditional
lending and deposit taking, to retail and commercial customers. Additionally,
Retail/Commercial Banking 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 second-lien 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.
Total revenue, expense and asset levels reflect those which are specifically
identifiable or which are allocated based on an internal allocation method.
Because the allocations are based on internally developed assignments and
allocations, they are to an extent subjective. This assignment and allocation
has been consistently applied for all periods presented. The following table
reflects the amounts of consolidated revenue, expense, tax, and assets for each
segment for the three years ended December 31:
<Table>
<Caption>
(Dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED Net interest income $ 856,311 $ 805,784 $ 755,614
Provision 48,348 86,698 92,184
Noninterest income 1,363,186 1,667,584 1,311,935
Noninterest expense 1,504,340 1,667,672 1,417,306
---------------------------------------------------------------------------------------------
Pre-tax income 666,809 718,998 558,059
Income taxes 212,401 245,689 181,608
---------------------------------------------------------------------------------------------
Net income $ 454,408 $ 473,309 $ 376,451
=============================================================================================
Average assets $27,305,833 $25,133,612 $20,704,008
---------------------------------------------------------------------------------------------
Depreciation, amortization and MSR impairment $ 324,585 $ 425,231 $ 353,672
Expenditures for long-lived assets 78,763 149,600 56,794
- ------------------------------------------------------------------------------------------------------------------
RETAIL/COMMERCIAL Net interest income $ 699,181 $ 596,831 $ 551,292
BANKING Provision 48,401 85,130 89,530
Noninterest income 483,255 442,889 403,233
Noninterest expense 721,260 709,134 651,347
---------------------------------------------------------------------------------------------
Pre-tax income 412,775 245,456 213,648
Income taxes 123,433 74,590 55,122
---------------------------------------------------------------------------------------------
Net income $ 289,342 $ 170,866 $ 158,526
=============================================================================================
Average assets $17,498,468 $14,129,036 $12,182,293
---------------------------------------------------------------------------------------------
Depreciation, amortization and MSR impairment $ 93,527 $ 82,206 $ 59,367
Expenditures for long-lived assets 45,660 59,290 19,069
- ------------------------------------------------------------------------------------------------------------------
</Table>
Certain previously reported amounts have been reclassified to agree with current
presentation.
First Horizon National Corporation 101
<Page>
NOTE 22 - BUSINESS SEGMENT INFORMATION (CONTINUED)
<Table>
<Caption>
(Dollars in thousands) 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------
MORTGAGE Net interest income $ 153,368 $ 190,604 $ 133,652
BANKING Provision (53) 1,568 2,654
Noninterest income 464,975 664,248 456,186
Noninterest expense 438,366 466,244 344,815
------------------------------------------------------------------------------------------------
Pre-tax income 180,030 387,040 242,369
Income taxes 65,598 143,741 92,086
------------------------------------------------------------------------------------------------
Net income $ 114,432 $ 243,299 $ 150,283
================================================================================================
Average assets $5,295,501 $6,441,890 $4,859,846
------------------------------------------------------------------------------------------------
Depreciation and amortization $ 220,055 $ 317,946 $ 289,199
Expenditures for long-lived assets 25,148 79,120 22,148
- -------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS Net interest income $ 399 $ 5,621 $ 7,757
Noninterest income 383,690 545,787 452,487
Noninterest expense 300,918 396,802 326,863
------------------------------------------------------------------------------------------------
Pre-tax income 83,171 154,606 133,381
Income taxes 30,897 57,795 50,594
------------------------------------------------------------------------------------------------
Net income $ 52,274 $ 96,811 $ 82,787
================================================================================================
Average assets $1,675,445 $1,990,594 $1,353,211
------------------------------------------------------------------------------------------------
Depreciation and amortization $ 8,120 $ 4,444 $ 2,860
Expenditures for long-lived assets 3,922 7,562 5,573
- -------------------------------------------------------------------------------------------------------------------
CORPORATE Net interest income $ 3,363 $ 12,728 $ 62,913
Noninterest income 31,266 14,660 29
Noninterest expense 43,796 95,492 94,281
------------------------------------------------------------------------------------------------
Pre-tax income (9,167) (68,104) (31,339)
Income taxes (7,527) (30,437) (16,194)
------------------------------------------------------------------------------------------------
Net income $ (1,640) $ (37,667) $ (15,145)
================================================================================================
Average assets $2,836,419 $2,572,092 $2,308,658
------------------------------------------------------------------------------------------------
Depreciation and amortization $ 2,883 $ 20,635 $ 2,246
Expenditures for long-lived assets 4,033 3,628 10,004
- -------------------------------------------------------------------------------------------------------------------
</Table>
Certain previously reported amounts have been reclassified to agree with current
presentation.
102 First Horizon National Corporation
<Page>
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting standards require the disclosure of estimated fair values of all
asset, liability and off-balance sheet financial instruments. 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. In some cases, book value is a reasonable
estimate of fair value due to the relatively short period of time between
origination of the instrument and its expected realization. The following table
summarizes the book value and estimated fair value of financial instruments
recorded in the Consolidated Statements of Condition as well as off-balance
sheet commitments as of December 31, 2004 and 2003:
<Table>
<Caption>
ON DECEMBER 31, 2004 On December 31, 2003
------------------------- -------------------------
Book Fair Book Fair
(Dollars in thousands) Value Value Value Value
- ----------------------------------------------------------------------------------------------------
ASSETS:
Loans, net of unearned income:
Floating $11,821,969 $11,821,652 $ 9,188,478 $ 9,194,178
Fixed 4,564,602 4,556,283 4,759,017 4,815,890
Nonaccrual 41,102 41,102 43,030 43,030
Allowance for loan losses (158,159) (158,159) (160,333) (160,333)
- ----------------------------------------------------------------------------------------------------
Total net loans 16,269,514 16,260,878 13,830,192 13,892,765
Liquid assets 1,675,654 1,675,654 1,182,488 1,182,488
Loans held for sale 5,167,981 5,194,866 2,977,723 2,984,219
Securities available for sale 2,680,556 2,680,556 2,469,342 2,469,342
Securities held to maturity 441 457 1,028 1,077
Derivative assets 134,451 134,451 301,196 301,196
Nonearning assets 1,007,215 1,007,215 1,443,915 1,443,915
- ----------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Defined maturity $10,277,438 $10,311,409 $ 7,117,213 $ 7,143,619
Undefined maturity 9,504,729 9,504,729 8,754,109 8,754,109
- ----------------------------------------------------------------------------------------------------
Total deposits 19,782,167 19,816,138 15,871,322 15,897,728
Short-term borrowings 3,752,804 3,752,804 3,307,224 3,307,224
Term borrowings 2,616,368 2,647,367 1,726,766 1,748,412
Derivative liabilities 31,268 31,268 38,890 38,890
Other noninterest-bearing liabilities 444,924 444,924 746,947 746,947
Preferred stock of subsidiary 458 515 452 512
- ----------------------------------------------------------------------------------------------------
<Caption>
Contractual Fair Contractual Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET COMMITMENTS:
Loan commitments $13,622,394 $11,010 $10,081,353 $9,018
Other commitments 703,214 8,962 570,504 6,309
- ----------------------------------------------------------------------------------------------------
</Table>
The following describes the assumptions and methodologies used to estimate the
fair value for financial instruments:
FLOATING RATE LOANS. With the exception of floating rate 1-4 family residential
mortgage loans, the fair value is approximated by the book value. Floating rate
1-4 family residential mortgage loans reprice annually and will lag movements in
market rates; whereas, commercial and consumer loans typically reprice monthly.
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
First Horizon National Corporation 103
<Page>
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
industry speeds for similar loans have been applied to the floating rate 1-4
family residential mortgage portfolio.
FIXED RATE LOANS. The 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.
NONACCRUAL LOANS. The fair value is approximated by the book value.
ALLOWANCE FOR LOAN LOSSES. The fair value is approximated by the book value.
Additionally, the credit exposure known to exist in the loan portfolio is
embodied in the allowance for loan losses.
LIQUID ASSETS. The fair value is approximated by the book value. For the purpose
of this disclosure, liquid assets consist of federal funds sold, securities
purchased under agreements to resell, capital markets securities inventory,
mortgage banking trading securities, and investment in bank time deposits.
LOANS HELD FOR SALE. Fair value of mortgage loans held for sale is based
primarily on quoted market prices. Fair value of home equity lines of credit
held for sale is based upon market values as evidenced in prior securitizations.
Fair value of other loans held for sale is approximated by their carrying
values.
SECURITIES AVAILABLE FOR SALE. Fair values are based primarily on quoted market
prices.
SECURITIES HELD TO MATURITY. Fair values for marketable securities are based
primarily on quoted market prices.
DERIVATIVE ASSETS. Fair values are based primarily on quoted market prices.
NONEARNING ASSETS. The fair value is approximated by the book value. For the
purpose of this disclosure, nonearning assets include cash and due from banks,
accrued interest receivable and capital markets receivables.
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 the purpose of this disclosure, defined maturity deposits include
all certificates of deposit and other time deposits.
UNDEFINED MATURITY DEPOSITS. 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 BORROWINGS. The fair value of federal funds purchased, securities
sold under agreements to repurchase, commercial paper, bank notes and other
short-term borrowings is approximated by the book value. The fair value for
Federal Home Loan Bank borrowings is determined using discounted future cash
flows.
TERM BORROWINGS. 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.
DERIVATIVE LIABILITIES. Fair values are based primarily on quoted market prices.
104 First Horizon National Corporation
<Page>
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER NONINTEREST-BEARING LIABILITIES. For the purpose of this disclosure, other
noninterest-bearing liabilities include accrued interest payable and capital
markets payables. The fair value is approximated by the book value.
PREFERRED STOCK OF SUBSIDIARY. The fair value is approximated by the current
trade amount of similar instruments.
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.
First Horizon National Corporation 105
<Page>
NOTE 24 - SECURITIZATIONS
During 2004 and 2003, FHN securitized $26.4 billion and $46.1 billion,
respectively, of single-family residential loans in primarily proprietary and
agency securitization transactions, and the resulting securities were sold as
senior and subordinate certificates. In 2004 and 2003, FHN recognized net
pre-tax gains of $332.4 million and $566.9 million, respectively, from the sale
of securitized loans which includes gains recognized on the capitalization of
MSR associated with these loans. In 2004 and 2003, FHN capitalized approximately
$319.2 million and $536.7 million, respectively, in originated MSR. These MSR,
as well as other MSR held by FHN, are discussed further in Note 6 - Mortgage
Servicing Rights. In certain cases, FHN continues to service and receive
servicing fees related to the securitized loans, and has also retained residual
interest certificates or financial assets including excess interest (structured
as interest-only strips), principal-only strips, interest-only strips, or
subordinated bonds. FHN received annual servicing fees approximating .31 percent
in 2004 and .32 percent in 2003 of the outstanding balance of underlying
mortgage loans. FHN received annual servicing fees approximating .50 percent in
2004 of the outstanding balance of underlying loans for HELOC securitizations.
Additionally, FHN retained rights to future cash flows on the HELOC
securitizations arising after investors in the securitization trust have
received the return for which they contracted. The investors and the
securitization trusts have no recourse to other assets of First Horizon Home
Loans or FHN for failure of debtors to pay when due.
The sensitivity of the current fair value of retained interests for MSR to
immediate 10 percent and 20 percent adverse changes in assumptions on
December 31, 2004, are as follows:
<Table>
<Caption>
(Dollars in thousands MSR MSR MSR
except for annual cost to service) 1st Liens 2nd Liens HELOC
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004
Fair value of retained interests $1,038,967 $2,116 $8,638
Weighted average life (in years) 5.7 2.9 2.0
Annual prepayment rate 13.7% 30.0% 45.0%
Impact on fair value of 10% adverse change $ (47,235) $ (97) $ (612)
Impact on fair value of 20% adverse change (90,650) (184) (1,159)
Annual discount rate on residual cash flows 10.1% 14.0% 18.0%
Impact on fair value of 10% adverse change $ (37,084) $ (57) $ (196)
Impact on fair value of 20% adverse change (71,576) (111) (383)
Annual cost to service (per loan) $45 $50 $50
Impact on fair value of 10% adverse change $ (11,196) $ (61) $ (175)
Impact on fair value of 20% adverse change (22,392) (122) (351)
Annual earnings on escrow 3.4% 2.0% 2.0%
Impact on fair value of 10% adverse change $ (18,944) $ (29) $ (172)
Impact on fair value of 20% adverse change (37,888) (59) (343)
- ---------------------------------------------------------------------------------------------------------------
</Table>
106 First Horizon National Corporation
<Page>
NOTE 24 - SECURITIZATIONS (CONTINUED)
The sensitivity of the current fair value of retained interests for other
residuals to immediate 10 percent and 20 percent adverse changes in assumptions
on December 31, 2004, are as follows:
<Table>
<Caption>
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
- ------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004
Fair value of retained interests $199,595 $15,914 $4,690 $5,272 $9,321 $54,959
Weighted average life (in years) 6.0 4.8 3.4 6.0 2.9 2.1
Annual prepayment rate 11.0% 17.6% 25.0% 45.0% 30.0% 45.0%
Impact on fair value of 10% adverse change $ (8,098) $ (433) $ (339) $ 5 $ (536) $(3,819)
Impact on fair value of 20% adverse change (15,647) (927) (915) 15 (1,023) (7,272)
Annual discount rate on residual cash flows 11.5% 7.7% 13.0% 7.1% 20.0% 18.0%
Impact on fair value of 10% adverse change $ (7,673) $ (403) $ (133) $ (154) $ (561) $(1,969)
Impact on fair value of 20% adverse change (14,786) (785) (272) (303) (1,077) (3,820)
Annual cost to service N/A N/A N/A N/A N/A N/A
Impact on fair value of 10% adverse change N/A N/A N/A N/A N/A N/A
Impact on fair value of 20% adverse change N/A N/A N/A N/A N/A N/A
Annual earnings on escrow N/A N/A N/A N/A N/A N/A
Impact on fair value of 10% adverse change N/A N/A N/A N/A N/A N/A
Impact on fair value of 20% adverse change N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
These sensitivities are hypothetical and should not be considered to be
predictive of future performance. As the figures indicate, changes in fair value
based on a 10 percent variation in assumptions generally cannot necessarily be
extrapolated because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in this table, the effect of a variation
in a particular assumption on the fair value of the retained interest is
calculated independently from any change in another assumption. 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.
FHN uses assumptions and estimates in determining the fair value allocated to
retained interests at the time of initial securitization. The key economic
assumptions used to measure the fair value of the MSR at the date of
securitization were as follows:
<Table>
<Caption>
MSR MSR MSR
1st Liens 2nd Liens HELOC
- ----------------------------------------------------------------------------------------------------
2004
Weighted average life (in years) 5.0-6.5 2.9 1.7-2.0
Annual prepayment rate 11.3%-16.1% 30.0% 40%-45%
Annual discount rate 10.1%-10.2% 20.0% 18%-20%
Annual cost to service (per loan) $44-$45 $50 $50
Annual earnings on escrow 2.73%-3.76% 2.0% 2.0%
- ----------------------------------------------------------------------------------------------------
2003
Weighted average life (in years) 2.6-5.9 N/A N/A
Annual prepayment rate 12.4%-29.8% N/A N/A
Annual discount rate 10.3%-10.5% N/A N/A
Annual cost to service (per loan) $44-$45 N/A N/A
Annual earnings on escrow 2.3%-3.6% N/A N/A
- ----------------------------------------------------------------------------------------------------
</Table>
First Horizon National Corporation 107
<Page>
NOTE 24 - SECURITIZATIONS (CONTINUED)
The key economic assumptions used to measure the fair value of other retained
interests at the date of securitization were as follows:
<Table>
<Caption>
Excess Residual Interest Residual Interest
Interest Certificated Subordinated Certificates Certificates
IO PO IO Bond 2nd Liens HELOC
- -------------------------------------------------------------------------------------------------------------------------
2004
Weighted average life
(in years) 5.1-6.8 1.8-9.4 3.3-6.2 7.6 2.9 1.7-2.0
Annual prepayment rate 9.3%-14.4% 7.6%-40.0% 25.0% 40.0% 30.0% 40%-45%
Annual discount rate 11.5% 5.11%-17.93% 13.0% 6.1%-8.8% 20.0% 18%-20%
- -------------------------------------------------------------------------------------------------------------------------
2003
Weighted average life
(in years) 3.5-6.8 6.4-6.5 N/A N/A N/A N/A
Annual prepayment rate 12.4%-29.8% 15.0% N/A N/A N/A N/A
Annual discount rate 10.3%-10.5% 5.5%-6.9% N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</Table>
FTN Financial Capital Assets Corporation (FTNFCAC), an indirect wholly-owned
subsidiary of FHN, enters into transactions where mortgage loans are purchased,
pooled, securitized and sold. During 2004 and 2003, $154.6 million and $528.0
million of mortgage loans were sold for pre-tax gains of $3.3 million and $5.3
million, respectively, that were recognized in capital markets noninterest
income. FTNFCAC does not retain servicing rights or any other form of retained
interest on these securitizations.
FHN has also securitized certain real estate loans through a real estate
mortgage investment conduit (REMIC) in prior years and retained all of the
securitized assets. Fair value for these securities was based upon cash flows
discounted at a market yield. Market yields were computed by adding Treasury
yields at year-end plus an appropriate spread estimated by observing quotes on
similarly structured marketable securities and changes in swap spreads.
For the years ended December 31, 2004, 2003 and 2002, cash flows received and
paid related to securitizations were as follows:
<Table>
<Caption>
(Dollars in thousands) 2004 2003 2002
- -----------------------------------------------------------------------------------------------------
Proceeds from initial securitizations $26,834,087 $47,037,436 $30,338,111
Servicing fees received 232,566 186,728 168,028
Purchases of GNMA guaranteed mortgages 315,646 554,483 786,725
Purchases of delinquent or foreclosed assets 13,213 33,581 67,186
Other cash flows received on retained interests* 6,416 181,512 153,734
- -----------------------------------------------------------------------------------------------------
</Table>
* Other cash flows include all cash flows from other retained interests and
REMIC securities.
As of December 31, 2004, the principal amount of loans securitized and other
loans managed with them, and the principal amount of delinquent loans, in
addition to net credit losses during 2004 are as follows:
<Table>
<Caption>
Principal Amount
Total Principal of Delinquent Net Credit
(Dollars in thousands) Amount of Loans Loans* Losses
- ------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
ON DECEMBER 31, 2004 DECEMBER 31, 2004
-------------------------------------- ------------------
Type of loan:
Real estate residential $70,584,410 $295,257 $19,864
- ----------------------------------------------------------------------------- -------- -----------------
Total loans managed or securitized** 70,584,410 $295,257 $19,864
======== =================
Loans securitized and sold (58,302,285)
Loans held for sale or securitization (5,037,409)
- -----------------------------------------------------------------------------
Loans held in portfolio $ 7,244,716
=============================================================================
</Table>
* Nonaccrual loans and loans 90 days or more past due including $179.8
million of GNMA guaranteed mortgages.
** Securitized loans are real estate residential loans in which FHN has a
retained interest other than servicing rights.
108 First Horizon National Corporation
<Page>
NOTE 25 - VARIABLE INTEREST ENTITIES
On March 31, 2004, FHN adopted FASB Interpretation No. 46 (FIN 46-R),
'Consolidation of Variable Interest Entities (revised December 2003)'. FIN 46-R
clarifies certain aspects of FIN 46 and provides certain entities with
exemptions from the requirements of FIN 46. Additionally, FIN 46-R incorporates
the guidance found in eight final FASB Staff Positions (FSPs) that had been
issued prior to its release. FIN 46-R requires the consolidation by a business
enterprise of variable interest entities (VIE) in which it is the primary
beneficiary. FIN 46-R also required the adoption of FIN 46, as of December 31,
2003, for all entities previously considered as special purpose entities and for
all VIE created after January 31, 2003. Upon adoption of FIN 46-R, FHN
reassessed certain of its nonconsolidated interests as VIE but did not meet the
criteria of primary beneficiary and, therefore, has not consolidated any of its
VIE.
On December 31, 2003, FHN adopted FASB Interpretation No. 46 (FIN 46),
'Consolidation of Variable Interest Entities'. FHN identified certain of its
nonconsolidated interests as VIE but did not meet the criteria of primary
beneficiary and, therefore, has not consolidated any of its VIE. Upon adoption
of this standard, FHN deconsolidated its subsidiary, Capital I, which has issued
$100.0 million of capital securities that are fully and unconditionally
guaranteed by FHN.
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. On December 31, 2004 and 2003, FTHC's
maximum exposure to loss resulting from those LIHTC investments was $112.9
million and $118.9 million, respectively. This represents the investment value
of $106.3 million and $108.7 million included in 'Capital markets receivables
and other assets' on the Consolidated Statements of Condition and unfunded
commitments of $6.6 million and $10.2 million on December 31, 2004 and 2003,
respectively.
First Horizon National Corporation 109
<Page>
NOTE 26 - PARENT COMPANY FINANCIAL INFORMATION
Following are condensed statements of the parent company:
<Table>
<Caption>
STATEMENTS OF CONDITION December 31
- ------------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003
- ------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 46 $ -
Securities purchased from subsidiary bank under agreements to resell 148,393 34,239
- ------------------------------------------------------------------------------------------------
Total cash and cash equivalents 148,439 34,239
Investment in bank time deposits 30,777 153,967
Securities available for sale 32,976 50,485
Investments in subsidiaries:
Bank 2,306,458 1,953,985
Non-bank 34,239 35,136
Other assets 249,683 168,819
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,802,572 $2,396,631
================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Commercial paper and other short-term borrowings $ 23,712 $ 31,793
Accrued employee benefits and other liabilities 278,834 202,148
Term borrowings 459,043 272,372
- ------------------------------------------------------------------------------------------------
Total liabilities 761,589 506,313
Shareholders' equity 2,040,983 1,890,318
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,802,572 $2,396,631
================================================================================================
</Table>
<Table>
<Caption>
STATEMENTS OF INCOME Year Ended December 31
- --------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------------
Dividend income:
Bank $110,109 $272,987 $159,332
Non-bank 9,059 8,545 7,708
- --------------------------------------------------------------------------------------------
Total dividend income 119,168 281,532 167,040
Interest income 3,816 3,848 3,491
Other income 4,801 686 228
- --------------------------------------------------------------------------------------------
Total income 127,785 286,066 170,759
- --------------------------------------------------------------------------------------------
Interest expense:
Short-term debt 252 314 395
Term borrowings 13,581 15,352 16,061
- --------------------------------------------------------------------------------------------
Total interest expense 13,833 15,666 16,456
Compensation, employee benefits and other expense 28,944 59,863 25,685
- --------------------------------------------------------------------------------------------
Total expense 42,777 75,529 42,141
- --------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed net
income of subsidiaries 85,008 210,537 128,618
Applicable income taxes (20,899) (34,125) (18,375)
- --------------------------------------------------------------------------------------------
Income before equity in undistributed net income of
subsidiaries 105,907 244,662 146,993
Equity in undistributed net income of subsidiaries:
Bank 349,999 229,404 228,949
Non-bank (1,498) (757) 509
- --------------------------------------------------------------------------------------------
NET INCOME $454,408 $473,309 $376,451
============================================================================================
</Table>
110 First Horizon National Corporation
<Page>
NOTE 26 - PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
<Table>
<Caption>
STATEMENTS OF CASH FLOWS Year Ended December 31
- --------------------------------------------------------------------------------------------
(Dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $454,408 $473,309 $376,451
Less undistributed net income of subsidiaries 348,501 228,647 229,458
- --------------------------------------------------------------------------------------------
Income before undistributed net income of subsidiaries 105,907 244,662 146,993
Adjustments to reconcile income to net cash provided by
operating activities:
Deferred income tax benefit (10,657) (319) (575)
Depreciation and amortization 5,122 9,182 3,477
Loss on debt purchase - 5,766 -
(Gain)/loss on sale of securities (2,408) (284) 49
Net change in interest receivable and other assets (63,809) (116,934) (309)
Net change in interest payable and other liabilities 69,293 108,740 16,949
- --------------------------------------------------------------------------------------------
Total adjustments (2,459) 6,151 19,591
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 103,448 250,813 166,584
- --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Securities:
Sales and prepayments 20,926 356 212
Purchases (190) (362) (450)
Decrease/(increase) in investment in bank time deposits 123,190 (56,000) 14,000
Advances to subsidiaries - - (35)
Proceeds from sale of a subsidiary - 49,833 -
Return on investment in subsidiary 5,005 1,614 10,000
Cash investments in subsidiaries (10,000) (1,930) (1,945)
- --------------------------------------------------------------------------------------------
Net cash provided/(used) by investing activities 138,931 (6,489) 21,782
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Common stock:
Exercise of stock options 67,935 77,591 51,015
Cash dividends (198,495) (150,863) (125,736)
Repurchase of shares (184,224) (209,263) (111,187)
Term borrowings:
Payment (9,500) (57,739) -
Issuance 204,186 99,350 -
(Decrease)/increase in short-term borrowings (8,081) 4,098 3,422
- --------------------------------------------------------------------------------------------
Net cash used by financing activities (128,179) (236,826) (182,486)
- --------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 114,200 7,498 5,880
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 34,239 26,741 20,861
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $148,439 $ 34,239 $ 26,741
============================================================================================
Total interest paid $ 11,132 $ 15,326 $ 16,210
Total income taxes paid 159,700 133,950 120,740
- --------------------------------------------------------------------------------------------
</Table>
First Horizon National Corporation 111
<Page>
CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (UNAUDITED)
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------------
2004 2003 Average
------------------------------ ------------------------------ Balance
Interest Average Interest Average Growth (%)
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ ----------
(Dollars in millions) Balance Expense Rates Balance Expense Rates 04/03
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Earning assets:
Loans, net of unearned income** $15,384.6 $ 775.1 5.04% $12,656.3 $ 658.1 5.20% 21.6 +
Investment securities:
U.S. Treasuries 48.4 .8 1.67 45.3 .7 1.62 6.8 +
U.S. government agencies 2,194.9 95.6 4.35 2,107.6 88.7 4.21 4.1 +
States and municipalities 10.8 .7 6.52 22.1 1.5 6.80 51.1 -
Other 195.0 7.7 3.96 369.9 21.0 5.69 47.3 -
- ----------------------------------------------------------------------------------------------------------------
Total investment securities 2,449.1 104.8 4.28 2,544.9 111.9 4.40 3.8 -
- ----------------------------------------------------------------------------------------------------------------
Other earning assets:
Loans held for sale 4,179.4 226.8 5.43 4,420.7 229.1 5.18 5.5 -
Investment in bank time deposits 8.6 .1 1.04 1.7 .1 .82 405.9 +
Federal funds sold and securities purchased
under agreements to resell 722.2 7.6 1.06 656.3 4.9 .75 10.0 +
Mortgage banking trading securities 221.3 26.7 12.05 154.7 16.9 10.94 43.1 +
Capital markets securities inventory 753.1 26.8 3.56 894.3 33.7 3.76 15.8 -
- ----------------------------------------------------------------------------------------------------------------
Total other earning assets 5,884.6 288.0 4.90 6,127.7 284.7 4.65 4.0 -
- ----------------------------------------------------------------------------------------------------------------
Total earning assets 23,718.3 1,167.9 4.92 21,328.9 1,054.7 4.94 11.2 +
Allowance for loan losses (165.2) (160.3) 3.1 +
Cash and due from banks 739.2 748.3 1.2 -
Premises and equipment, net 364.4 300.7 21.2 +
Capital markets receivables and other assets 2,649.1 2,916.0 9.2 -
- ----------------------------------------------------------------------------------------------------------------
Total assets/Interest income $27,305.8 $1,167.9 $25,133.6 $1,054.7 8.6 +
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Savings $ 293.8 $ .4 .14% $ 306.1 $ .8 .27% 4.0 -
Checking interest and money market 3,846.1 24.0 .62 3,659.7 22.8 .62 5.1 +
Certificates of deposit under $100,000 and
other time 1,947.0 60.1 3.08 1,866.3 57.1 3.06 4.3 +
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing core deposits 6,086.9 84.5 1.39 5,832.1 80.7 1.38 4.4 +
Certificates of deposit $100,000 and more 6,875.3 108.0 1.57 5,165.5 69.4 1.34 33.1 +
Federal funds purchased and securities sold
under agreements to repurchase 3,685.2 45.1 1.22 3,712.7 36.9 .99 .7 -
Commercial paper and other short-term
borrowings 614.1 22.7 3.69 659.9 25.2 3.82 6.9 -
Term borrowings 2,248.0 50.2 2.24 1,342.9 35.4 2.64 67.4 +
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 19,509.5 310.5 1.59 16,713.1 247.6 1.48 16.7 +
Demand deposits 1,805.6 2,076.0 13.0 -
Other noninterest-bearing deposits 2,867.7 3,038.0 5.6 -
Capital markets payables and other liabilities 1,217.0 1,383.9 12.1 -
Guaranteed preferred beneficial interests in
First Horizon's junior subordinated debentures
(Note 11) - 100.0 100.0 -
Preferred stock of subsidiary (Note 12) .5 22.2 97.7 -
Shareholders' equity 1,905.5 1,800.4 5.8 +
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity/Interest expense $27,305.8 $ 310.5 $25,133.6 $ 247.6 8.6 +
================================================================================================================
Net interest income-tax equivalent basis/Yield $ 857.4 3.62% $ 807.1 3.78%
Fully taxable equivalent adjustment (1.1) (1.3)
- ----------------------------------------------------------------------------------------------------------------
Net interest income $ 856.3 $ 805.8
================================================================================================================
Net interest spread 3.33% 3.46%
Effect of interest-free sources used to fund
earning assets .29 .32
- ----------------------------------------------------------------------------------------------------------------
Net interest margin 3.62% 3.78%
================================================================================================================
</Table>
Certain previously reported amounts have been reclassified to agree with current
presentation.
Yields and corresponding income amounts are adjusted to a fully taxable
equivalent. Earning assets yields are expressed net of unearned income. Rates
are expressed net of unamortized debenture cost for long-term debt. Net interest
margin is computed using total net interest income.
112 First Horizon National Corporation
<Page>
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------------
2002 2001
----------------------------------- ------------------------------
Interest Average Interest Average
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/
(Dollars in millions) Balance Expense Rates Balance Expense Rates
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Earning assets:
Loans, net of unearned income** $10,634.5 $ 666.6 6.27% $10,104.3 $ 812.5 8.04%
Investment securities:
U.S. Treasuries 55.5 1.7 3.04 31.5 1.6 4.98
U.S. government agencies 1,819.7 106.8 5.87 1,781.0 116.5 6.54
States and municipalities 34.9 2.5 7.30 50.8 3.8 7.53
Other 556.3 32.8 5.89 732.0 47.5 6.49
- ------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,466.4 143.8 5.83 2,595.3 169.4 6.53
- ------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Loans held for sale 3,024.2 184.0 6.09 2,388.0 165.9 6.95
Investment in bank time deposits 1.8 .1 2.07 1.9 .1 6.56
Federal funds sold and securities purchased
under agreements to resell 404.8 5.5 1.35 226.5 7.0 3.07
Mortgage banking trading securities 131.3 12.5 9.55 127.5 12.1 9.48
Capital markets securities inventory 734.4 31.2 4.25 681.9 36.6 5.37
- ------------------------------------------------------------------------------------------------------------------------
Total other earning assets 4,296.5 233.3 5.43 3,425.8 221.7 6.47
- ------------------------------------------------------------------------------------------------------------------------
Total earning assets 17,397.4 1,043.7 6.00 16,125.4 1,203.6 7.46
Allowance for loan losses (151.2) (145.2)
Cash and due from banks 775.3 756.5
Premises and equipment, net 246.3 268.7
Capital markets receivables and other assets 2,436.2 2,221.8
- ------------------------------------------------------------------------------------------------------------------------
Total assets/Interest income $20,704.0 $1,043.7 $19,227.2 $1,203.6
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Savings $ 302.7 $ 2.2 .72% $ 304.4 $ 3.8 1.26%
Checking interest and money market 3,557.5 37.1 1.04 3,548.2 84.9 2.39
Certificates of deposit under $100,000 and
other time 1,937.1 71.2 3.68 2,092.3 111.1 5.31
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing core deposits 5,797.3 110.5 1.91 5,944.9 199.8 3.36
Certificates of deposit $100,000 and more 3,843.0 79.8 2.08 3,142.7 137.1 4.36
Federal funds purchased and securities sold
under agreements to repurchase 3,134.3 45.5 1.45 3,162.7 115.6 3.66
Commercial paper and other short-term
borrowings 537.4 22.2 4.13 565.3 29.9 5.30
Term borrowings 685.5 28.6 4.17 521.5 30.2 5.79
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 13,997.5 286.6 2.05 13,337.1 512.6 3.84
Demand deposits 1,882.0 1,660.7
Other noninterest-bearing deposits 2,152.5 1,792.3
Capital markets payables and other liabilities 959.4 891.8
Guaranteed preferred beneficial interests in
First Horizon's junior subordinated debentures
(Note 11) 100.0 100.0
Preferred stock of subsidiary (Note 12) 44.3 44.0
Shareholders' equity 1,568.3 1,401.3
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity/Interest expense $20,704.0 $ 286.6 $19,227.2 $ 512.6
========================================================================================================================
Net interest income-tax equivalent basis/Yield $ 757.1 4.35% $ 691.0 4.29%
Fully taxable equivalent adjustment (1.5) (2.1)
- ------------------------------------------------------------------------------------------------------------------------
Net interest income $ 755.6 $ 688.9
========================================================================================================================
Net interest spread 3.95% 3.62%
Effect of interest-free sources used to fund
earning assets .40 .67
- ------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.35% 4.29%
========================================================================================================================
<Caption>
- -------------------------------------------------------------------------------------------------------------------------------
2000 1999 Average
------------------------------ -------------------- ---------- Balance
Interest Average Interest Average Growth (%)
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ ------------
(Dollars in millions) Balance Expense Rates Balance Expense Rates 04/99*
- ------------------------------------------------------------------------------------------------------ ------------------------
ASSETS:
Earning assets:
Loans, net of unearned income** $ 9,932.0 $ 915.9 9.22% $ 8,818.8 $ 754.6 8.56% 11.8 +
Investment securities:
U.S. Treasuries 33.0 2.1 6.41 79.2 5.0 6.30 9.4 -
U.S. government agencies 1,734.7 117.7 6.78 1,631.9 105.5 6.46 6.1 +
States and municipalities 48.7 3.6 7.49 50.7 3.8 7.56 26.6 -
Other 1,046.3 76.8 7.34 940.9 66.2 7.04 27.0 -
- ------------------------------------------------------------------------------------------------------------------
Total investment securities 2,862.7 200.2 6.99 2,702.7 180.5 6.68 2.0 -
- ------------------------------------------------------------------------------------------------------------------
Other earning assets:
Loans held for sale 2,450.8 197.3 8.05 3,217.7 231.3 7.19 5.4 +
Investment in bank time deposits 2.1 .1 5.07 9.8 .5 4.76 2.6 -
Federal funds sold and securities purchased
under agreements to resell 328.4 20.0 6.10 292.6 13.9 4.75 19.8 +
Mortgage banking trading securities - - - - - - N/A
Capital markets securities inventory 519.5 34.7 6.68 542.1 31.6 5.82 6.8 +
- ------------------------------------------------------------------------------------------------------------------
Total other earning assets 3,300.8 252.1 7.64 4,062.2 277.3 6.82 7.7 +
- ------------------------------------------------------------------------------------------------------------------
Total earning assets 16,095.5 1,368.2 8.50 15,583.7 1,212.4 7.78 8.8 +
Allowance for loan losses (140.0) (136.7) 3.9 +
Cash and due from banks 815.8 779.3 1.1 -
Premises and equipment, net 294.6 288.5 4.8 +
Capital markets receivables and other assets 2,259.4 2,110.5 4.7 +
- ------------------------------------------------------------------------------------------------------------------
Total assets/Interest income $19,325.3 $1,368.2 $18,625.3 $1,212.4 8.0 +
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Savings $ 337.4 $ 5.5 1.64% $ 350.0 $ 5.8 1.65% 3.4 -
Checking interest and money market 3,371.5 110.8 3.29 3,551.2 104.3 2.94 1.6 +
Certificates of deposit under $100,000 and
other time 2,310.3 129.2 5.59 2,398.4 123.8 5.16 4.1 -
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing core deposits 6,019.2 245.5 4.08 6,299.6 233.9 3.71 .7 -
Certificates of deposit $100,000 and more 3,959.7 254.9 6.44 3,163.9 165.9 5.24 16.8 +
Federal funds purchased and securities sold
under agreements to repurchase 2,899.4 169.4 5.84 2,292.9 104.7 4.57 10.0 +
Commercial paper and other short-term
borrowings 1,050.4 70.6 6.72 1,631.4 88.4 5.42 17.8 -
Term borrowings 384.3 24.3 6.34 371.1 24.8 6.69 43.4 +
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 14,313.0 764.7 5.34 13,758.9 617.7 4.49 7.2 +
Demand deposits 1,759.2 1,974.1 1.8 -
Other noninterest-bearing deposits 1,193.9 972.0 24.2 +
Capital markets payables and other liabilities 675.1 633.5 13.9 +
Guaranteed preferred beneficial interests in
First Horizon's junior subordinated debentures
(Note 11) 100.0 100.0 100.0 -
Preferred stock of subsidiary (Note 12) 7.5 - N/A
Shareholders' equity 1,276.6 1,186.8 9.9 +
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity/Interest expense $19,325.3 $ 764.7 $18,625.3 $ 617.7 8.0 +
==================================================================================================================
Net interest income-tax equivalent basis/Yield $ 603.5 3.75% $ 594.7 3.82%
Fully taxable equivalent adjustment (2.6) (3.0)
- ------------------------------------------------------------------------------------------------------------------
Net interest income $ 600.9 $ 591.7
==================================================================================================================
Net interest spread 3.16% 3.29%
Effect of interest-free sources used to fund
earning assets .59 .53
- ------------------------------------------------------------------------------------------------------------------
Net interest margin 3.75% 3.82%
==================================================================================================================
* Compound annual growth rate
** Includes loans on nonaccrual status.
First Horizon National Corporation 113
<Page>
CONSOLIDATED HISTORICAL STATEMENTS OF INCOME (UNAUDITED)
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------
(Dollars in millions except per share data) 2004 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 774.7 $ 657.6 $ 666.0 $ 811.7 $ 915.0 $ 753.7
Investment securities 104.2 111.2 143.0 168.2 198.8 178.6
Loans held for sale 226.8 229.1 184.0 165.9 197.3 231.3
Trading securities inventory 53.4 50.5 43.7 48.6 34.4 31.4
Other earning assets 7.7 5.0 5.5 7.1 20.1 14.4
- ------------------------------------------------------------------------------------------------------------
Total interest income 1,166.8 1,053.4 1,042.2 1,201.5 1,365.6 1,209.4
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
Savings .4 .8 2.2 3.8 5.5 5.8
Checking interest and money market 24.0 22.8 37.0 84.9 110.8 104.3
Certificates of deposit under $100,000 and
other time 60.1 57.2 71.3 111.1 129.2 123.8
Certificates of deposit $100,000 and more 108.0 69.3 79.8 137.1 254.9 165.9
Short-term borrowings 67.7 62.1 67.7 145.5 240.0 193.1
Term borrowings 50.3 35.4 28.6 30.2 24.3 24.8
- ------------------------------------------------------------------------------------------------------------
Total interest expense 310.5 247.6 286.6 512.6 764.7 617.7
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 856.3 805.8 755.6 688.9 600.9 591.7
Provision for loan losses 48.3 86.7 92.2 93.2 67.5 57.4
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION 808.0 719.1 663.4 595.7 533.4 534.3
- ------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 444.8 649.5 436.7 285.0 122.5 298.2
Capital markets 376.5 538.9 448.0 344.3 118.7 126.9
Deposit transactions and cash management 148.5 146.7 143.3 133.6 116.1 106.2
Merchant processing 75.1 57.6 48.4 45.4 48.2 49.7
Insurance commissions 56.1 57.8 50.4 16.8 12.2 10.9
Trust services and investment management 47.3 45.9 48.4 56.7 65.8 59.8
Gains on divestitures 7.0 22.5 4.6 80.4 157.6 4.2
Equity securities gains/(losses), net 2.0 8.5 (9.4) (3.3) .8 2.3
Debt securities gains/(losses), net 18.7 (6.1) .2 (1.0) (5.0) -
All other income 187.1 146.3 141.3 137.1 160.2 130.3
- ------------------------------------------------------------------------------------------------------------
Total noninterest income 1,363.1 1,667.6 1,311.9 1,095.0 797.1 788.5
- ------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION 2,171.1 2,386.7 1,975.3 1,690.7 1,330.5 1,322.8
- ------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives and
benefits 915.0 995.6 830.6 670.9 508.3 488.7
Occupancy 89.4 83.6 76.7 69.1 80.5 73.1
Equipment rentals, depreciation and
maintenance 72.7 69.0 68.7 74.1 68.2 57.8
Operations services 67.5 67.9 60.2 59.6 70.9 64.6
Communications and courier 49.6 50.5 45.1 42.2 41.9 45.3
Amortization of intangible assets 9.5 8.0 6.2 10.8 11.7 10.5
All other expense 300.6 393.1 329.7 275.4 212.0 203.4
- ------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,504.3 1,667.7 1,417.2 1,202.1 993.5 943.4
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 666.8 719.0 558.1 488.6 337.0 379.4
Provision for income taxes 212.4 245.7 181.6 162.2 104.4 131.9
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES 454.4 473.3 376.5 326.4 232.6 247.5
Cumulative effect of changes in accounting
principles, net of tax - - - (8.2) - -
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 454.4 $ 473.3 $ 376.5 $ 318.2 $ 232.6 $ 247.5
============================================================================================================
FULLY TAXABLE EQUIVALENT ADJUSTMENT $ 1.1 $ 1.3 $ 1.5 $ 2.1 $ 2.6 $ 3.0
- ------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES $ 3.64 $ 3.73 $ 2.97 $ 2.55 $ 1.79 $ 1.90
- ------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE $ 3.64 $ 3.73 $ 2.97 $ 2.49 $ 1.79 $ 1.90
- ------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES $ 3.54 $ 3.62 $ 2.89 $ 2.48 $ 1.77 $ 1.85
- ------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 3.54 $ 3.62 $ 2.89 $ 2.42 $ 1.77 $ 1.85
- ------------------------------------------------------------------------------------------------------------
<Caption>
- --------------------------------------------------------------------------------
Growth Rates (%)
-----------------------------------
(Dollars in millions except per share data) 04/03 04/99*
- --------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans 17.8 + .6 +
Investment securities 6.3 - 10.2 -
Loans held for sale 1.0 - .4 -
Trading securities inventory 5.7 + 11.2 +
Other earning assets 54.0 + 11.8 -
- -------------------------------------------
Total interest income 10.8 + .7 -
- -------------------------------------------
INTEREST EXPENSE:
Deposits:
Savings 50.0 - 41.4 -
Checking interest and money market 5.3 + 25.5 -
Certificates of deposit under $100,000 and
other time 5.1 + 13.5 -
Certificates of deposit $100,000 and more 55.8 + 8.2 -
Short-term borrowings 9.0 + 18.9 -
Term borrowings 42.1 + 15.2 +
- -------------------------------------------
Total interest expense 25.4 + 12.9 -
- -------------------------------------------
NET INTEREST INCOME 6.3 + 7.7 +
Provision for loan losses 44.3 - 3.4 -
- -------------------------------------------
NET INTEREST INCOME AFTER PROVISION 12.4 + 8.6 +
- -------------------------------------------
NONINTEREST INCOME:
Mortgage banking 31.5 - 8.3 +
Capital markets 30.1 - 24.3 +
Deposit transactions and cash management 1.2 + 6.9 +
Merchant processing 30.3 + 8.6 +
Insurance commissions 2.9 - 38.7 +
Trust services and investment management 3.1 + 4.6 -
Gains on divestitures NM NM
Equity securities gains/(losses), net NM NM
Debt securities gains/(losses), net NM NM
All other income 27.9 + 7.5 +
- -------------------------------------------
Total noninterest income 18.3 - 11.6 +
- -------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION 9.0 - 10.4 +
- -------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives and
benefits 8.1 - 13.4 +
Occupancy 7.0 + 4.1 +
Equipment rentals, depreciation and
maintenance 5.4 + 4.7 +
Operations services .6 - .9 +
Communications and courier 1.9 - 1.8 +
Amortization of intangible assets 19.6 + 1.9 -
All other expense 23.5 - 8.1 +
- -------------------------------------------
Total noninterest expense 9.8 - 9.8 +
- -------------------------------------------
INCOME BEFORE INCOME TAXES 7.3 - 11.9 +
Provision for income taxes 13.6 - 10.0 +
- -------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES 4.0 - 12.9 +
Cumulative effect of changes in accounting
principles, net of tax - -
- -------------------------------------------
NET INCOME 4.0 - 12.9 +
===========================================
FULLY TAXABLE EQUIVALENT ADJUSTMENT 15.4 - 18.2 -
- -------------------------------------------
EARNINGS PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 2.4 - 13.9 +
- -------------------------------------------
EARNINGS PER COMMON SHARE 2.4 - 13.9 +
- -------------------------------------------
DILUTED EARNINGS PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES 2.2 - 13.9 +
- -------------------------------------------
DILUTED EARNINGS PER COMMON SHARE 2.2 - 13.9 +
- -------------------------------------------
</Table>
* Compound annual growth rate.
Certain previously reported amounts have been reclassified to agree with current
presentation.
NM - Due to the variable nature of these items the growth rate is considered to
be not meaningful.
114 First Horizon National Corporation