EX-99 3 a4433524ex99.txt EXHIBIT 99.1 PRESS RELEASE Exhibit 99.1 FTNC Reports 31 Percent Growth with Earnings of $118.4 Million for Second Quarter 2003 MEMPHIS, Tenn.--(BUSINESS WIRE)--July 17, 2003--First Tennessee National Corporation (NYSE: FTN) (FTNC) announced today earnings for second quarter 2003 of $118.4 million, or $.90 diluted earnings per share, compared with last year's earnings of $90.4 million, or $.69 diluted earnings per share. This represents 31 percent growth from second quarter 2002 earnings. Return on average shareholders' equity and return on average assets for second quarter 2003 were 26.5 percent and 1.89 percent, respectively, and were 23.7 percent and 1.87 percent for second quarter 2002, respectively. Total assets were $27.9 billion, shareholders' equity was $1.8 billion and market capitalization was $5.6 billion on June 30, 2003, compared to $19.8 billion, $1.6 billion and $4.8 billion, respectively, on June 30, 2002. For the first six months of 2003, earnings totaled $237.4 million or $1.81 diluted earnings per share. For the same period in 2002, earnings were $177.5 million or $1.36 diluted earnings per share. Return on average shareholders' equity was 27.1 percent and return on average assets was 1.98 percent for the first six months of 2003 compared to 23.7 percent and 1.82 percent, respectively, for the first six months of 2002. "Our business-mix balance continues to produce industry-leading growth and returns. This record of growth was produced at the same time we were making investments that will improve our ability to maintain high performing results as the economic climate changes," said President and CEO Ken Glass. "At the current level of earnings and with the expectation for a continuation of low interest rates and a strong housing market, the First Call consensus estimate continues to discount our earnings potential." First Horizon's national businesses achieved their third best quarter of earnings while producing $15.3 billion in home loan originations and continuing successful cross-sell efforts. First Horizon capitalized on the strength of the housing market as well as the current refinancing activity through continued expansion of the sales force and efficient back office operations. Additionally, FTN Financial achieved record earnings with a strengthened platform of products and services and expansion of the customer base. Due to the exceptional earnings, this quarter's expenses throughout FTNC include investments in initiatives promoting expense efficiencies and enhancing revenue growth. As expected in this current low interest rate environment, First Tennessee Banking Group's revenues were impacted by compression in the net interest margin. Total revenues increased 46 percent in second quarter 2003 to $748.5 million compared to $513.7 million in second quarter 2002. Noninterest income provides the majority of FTNC's revenue and contributed 73 percent to total revenue in second quarter 2003 compared to 66 percent in second quarter 2002. Second quarter 2003 noninterest income increased 63 percent to $548.7 million from $336.6 million in 2002. Noninterest expense increased 55 percent to $549.3 million from $354.6 million in 2002. Contributing to this increase was a $9.8 million contribution made to the First Tennessee Foundation, a non-profit entity dedicated to supporting charitable causes in the diverse communities where FTNC does business. The effective tax rate decreased to 31.0 percent for second quarter 2003 compared to 33.4 percent for the same period in 2002. This decline reflects a decrease of $6.2 million, or $9.8 million on a pre-tax equivalent basis, related to the settlement of prior years' tax returns. For the first six months of 2003, total revenues were $1,460.0 million, an increase of 43 percent from 2002. Noninterest income for the sixth-month period was $1,066.8 million and contributed 73 percent to total revenue as compared to $661.5 million, or 65 percent of total revenues, in 2002. Noninterest expense for the six months was $1,051.8 million in 2003 compared to $707.3 million in 2002. A more detailed discussion by segment follows. Business Segments First Horizon Pre-tax income for First Horizon increased 149 percent to $110.4 million for second quarter 2003, compared to $44.3 million for second quarter 2002. Total revenues were $365.4 million in second quarter 2003, an increase of 96 percent from $186.0 million in 2002. Net interest income increased 78 percent to $86.0 million in 2003 from $48.1 million. Net interest income in First Horizon Equity Lending increased $7.2 million primarily due to an increase of 132 percent in home equity lines of credit, which averaged $1.9 billion in second quarter 2003 compared to $.8 billion in 2002. The remaining increase of $30.7 million in net interest income reflects the impact of a larger portfolio of loans held for sale (warehouse), which grew 156 percent on average to $5.2 billion from $2.0 billion in second quarter 2002. Net interest spread on the warehouse, however, was negatively impacted by lower mortgage rates. Noninterest income increased 103 percent to $279.4 million in 2003 compared to $137.9 million in 2002. Noninterest income consists primarily of mortgage banking-related fees from the origination process, fees from mortgage servicing and mortgage servicing rights (MSR) net hedge gains or losses. Total noninterest income is net of amortization, impairment and other expenses related to MSR and related hedges. Loan origination volumes increased 177 percent in 2003 to $15.3 billion. In addition, loans securitized and sold into the secondary market increased 171 percent to $14.1 billion. Driven by low mortgage interest rates, refinance activity represented 76 percent of total originations during second quarter 2003 compared to 47 percent in second quarter 2002. Home purchase related originations grew 26 percent in 2003, demonstrating First Horizon's success in penetrating the purchase market. Due to the more stable nature of this market, which is not as vulnerable to interest rates, First Horizon's access to the purchase market should help support production levels when mortgage rates rise. Fees from the origination process increased 149 percent to $293.0 million compared to $117.5 million in 2002. This increase reflects growth in origination fees, in revenue recognized on loans sold, in the value recognized on loans in process, and higher net secondary marketing trading gains, which were influenced by the favorable interest rate environment experienced during the year. The mortgage-servicing portfolio was $64.0 billion on June 30, 2003, an increase of 31 percent compared to $48.7 billion on June 30, 2002. The sustained growth of this asset in a period of historically high prepayment levels was made possible, in part, by the recapture of refinances from the existing servicing portfolio. Servicing fees increased 17 percent as a result of this increase in the servicing portfolio. However, total fees associated with mortgage servicing decreased 1 percent to $43.0 million in second quarter 2003 due to the unfavorable impact of early payoff interest expense. MSR amortization was $32.6 million in second quarter 2003 compared with $29.9 million in second quarter 2002. In 2003 there was a MSR impairment loss of $72.3 million compared to a $24.9 million loss in 2002. Net MSR hedging gains (including the effect of time decay) were $38.3 million in 2003 compared to $23.7 million net gains in 2002. The interest rate environment in 2003 impacted increased net hedge gains and increased MSR amortization and impairment losses. The provision for loan losses was $7.8 million in 2003 compared to $9.3 million in 2002. The decreased provision reflects the impact of improvements in the risk profile of the retail loan portfolio due to the sale of Money Center loans in 2002, certain classified and nonperforming loans being transferred to available for sale and whole-loan insurance being provided for a segment of the retail loan portfolio. Noninterest expense increased 87 percent in 2003 to $247.2 million compared to $132.4 million in 2002. The growth was primarily the result of an increase of 109 percent in personnel expense resulting from higher commission expense related to the increased mortgage origination volume produced during 2003. For the first six months of 2003, pre-tax income increased 168 percent to $229.6 from $85.5 million in 2002. Total revenues for the six-month period were $717.3 million, an increase of 95 percent from $368.2 million in 2002. Total noninterest expense for the six-month period increased 79 percent to $468.1 million from $262.1 million in 2002 for the same reasons discussed earlier. Going forward, the existing level of loans in process (pipeline) due to an as yet unabated surge in applications currently indicates a continuation of record origination levels. Excluding the impact of the pipeline, fee income from refinance loan originations will generally depend on mortgage interest rates. An increase in rates should reduce origination fees and profit from the sale of loans, but should also reduce MSR amortization expense and impairment losses, while a decrease in rates should increase this net revenue. Flat to rising interest rates should reduce net secondary marketing trading gains, while falling rates should increase this net revenue. If total origination volume increases and/or the yield curve steepens, net interest income from the warehouse should increase, while if volume decreases and/or the yield curve flattens, this revenue should decrease. Continued success in our national cross-sell strategies should increase revenues from products other than traditional mortgage origination and servicing. First Tennessee Banking Group Pre-tax income for First Tennessee Banking Group (previously referred to as FTN Banking Group) decreased 59 percent to $26.1 million in second quarter 2003, compared to $63.4 million for the same period in 2002. Total revenues for the segment were $177.3 million, a decrease of 7 percent from $191.5 million in second quarter 2002. Net interest income decreased 16 percent to $96.9 million from $116.0 million in 2002. The decline in net interest income was related to compression in the net interest margin primarily due to the repricing of assets to lower yields while liability rates have become less sensitive to rate movements in this historically low interest rate environment and due to a change in the mix of the loan portfolio to floating rate products. Noninterest income increased 7 percent to $80.4 million compared to $75.5 million in 2002. This increase was due to improvement in insurance revenue, higher deposit account service charges , and growth in cash management fees. The positive impact of these items was partially offset by a decrease in trust and investment management fees. Noninterest expense increased 16 percent in 2003 to $132.0 million from $114.2 million last year. Contributing to this increase were expenses associated with initiatives focused on generating future earnings including marketing programs, severance and professional fees. The provision for loan losses was $19.2 million in second quarter 2003 compared to $13.9 million in second quarter of last year primarily due to an increase in historical loss factors on commercial loans used in the allowance model and due to loan growth. (Further discussion of asset quality trends is included in the Asset Quality section below.) Going forward the level of provision for loan losses should fluctuate primarily with the strength or weakness of the Tennessee economy. For the first six months of 2003, pre-tax income decreased 52 percent to $61.7 million from $128.3 million in 2002. Total revenues for the sixth-month period were $354.9 million, a decrease of 7 percent from $383.2 million in 2002. Total noninterest expense for the sixth-month period increased 14 percent to $258.1 million from $225.6 for the same period in 2002. FTN Financial Pre-tax income for FTN Financial increased 52 percent to a record $52.5 million for second quarter 2003, compared to $34.5 million for second quarter 2002. Total revenues were a record level of $171.7 million, an increase of 59 percent from $108.1 million in second quarter 2002. Fee income increased 61 percent to $161.1 million in 2003. This increased revenue reflects continued growth and penetration into FTN Financial's targeted institutional customer base through strengthened product and service lines. Revenue growth has also been influenced by the increased liquidity that capital markets' depository customers have experienced, as well as continued growth in the capital markets' non-depository account base. FTN Financial's enhanced institutional product and service lines, which include investment banking, equity research and sales, correspondent services and portfolio advisory services, increased 36 percent compared to 2002. Noninterest expense increased 61 percent in second quarter 2003 to $118.6 million compared to $73.5 million for the same period last year. This growth was primarily due to an increase of 64 percent in personnel expense, the largest component of noninterest expense, resulting from commissions and incentives associated with the higher fee income this year. For the first six months of 2003, pre-tax income increased 35 percent to $98.8 million from $73.4 million in 2002. Total revenues for the period were $322.7 million, an increase of 48 percent from $218.0 million in 2002. Total noninterest expense for the six-month period increased 54 percent to $223.6 million from $145.3 million in 2002. Going forward, revenues will fluctuate based on factors which include the expansion or contraction of the customer base, the volume of investment banking transactions and the introduction of new products, as well as the strength of loan growth in the U.S. economy and volatility in the interest rate environment and the equity markets. Transaction Processing Pre-tax income for Transaction Processing decreased 11 percent to $5.0 million in 2003, compared to $5.7 million in 2002. Total revenues were $31.3 million, an increase of 2 percent from $30.8 million in 2002. The volume of merchant transactions processed grew 20 percent over second quarter 2002. Both revenue and expense levels were influenced by recent acquisitions. For the first six months of 2003, pre-tax income decreased 20 percent to $9.3 million from $11.6 million in 2002. Corporate The Corporate segment's results showed a pre-tax loss of $22.2 million in second quarter 2003, compared to a loss of $11.7 million in second quarter 2002. Included in the pre-tax loss for 2003 is the $9.8 million contribution made to First Tennessee Foundation, a non-profit entity dedicated to supporting charitable causes in the communities where FTNC does business. FTNC has made contributions to the Foundation in three of the last four quarters. These contributions, which are discretionary, have been made and may continue to be made when a favorable economic environment or other favorable factor (such as the second quarter tax settlement discussed above) enables FTNC to produce strong earnings. They should have the effect of reducing noninterest expense in future periods because the Foundation's contributions are likely to reduce FTNC's direct charitable contributions. Asset Quality An analytical model based on historical loss experience adjusted for current events, trends and economic conditions is used by management to determine the amount of provision to be recognized and to assess the adequacy of the loan loss allowance. Total FTNC provision for loan losses increased to $27.6 million in second quarter 2003 compared to $23.3 million in second quarter 2002. This increase is primarily due to higher historical loss factors on commercial loans, resulting from the impact an extended period of slow economic growth has had on our customer base, coupled with rapid growth in retail loans. These negative impacts were partially offset by improvement in asset quality of retail loans due to a change in risk profile, including the effects of whole-loan insurance being provided for a segment of the loan portfolio and the sale of the Money Center loans. Net charge-offs decreased to $12.9 million in second quarter 2003 compared to $24.5 million last year. Net charge-offs were impacted in second quarter 2003 by improvement in both the consumer and commercial loan portfolios. Nonperforming assets remained flat at $83.1 million on June 30, 2003, compared to $81.1 million on June 30, 2002. The ratio of allowance for loan losses to loans decreased to 1.25 percent on June 30, 2003, compared to 1.40 percent on June 30, 2002, primarily reflecting improvement in the retail loan portfolio's risk profile, including the effects of the whole loan insurance, the sale of the Money Center loans and the transfer of certain loans to held for sale. (See the table on A-12 for an analysis of the allowance for loan losses and details on nonperforming assets and the table on A-13 for asset quality ratios). Average Balance Sheet Total FTNC average assets increased 29 percent in second quarter 2003 to $25.1 billion. Total loans increased 18 percent to $12.3 billion. Loans held for sale increased 155 percent to $5.2 billion due to the increased origination volume. Interest-bearing core deposits decreased 1 percent in 2003 while total core deposits increased 16 percent and purchased funds increased 40 percent. Average shareholders' equity increased 17 percent in second quarter 2003. The consolidated margin decreased to 3.72 percent for second quarter 2003 compared to 4.36 percent for the same period in 2002 primarily due to the repricing of assets to lower yields while liability rates have become less sensitive to rate movements in this historically low interest rate environment and due to a change in the mix of the loan portfolio to floating rate products. Going forward, in the near-term, net interest margin should decline further as term assets continue to reprice to lower rates (see A-14 for second quarter margin). The adoption of SFAS No. 150 in third quarter 2003 will also result in further compression of the consolidated net interest margin. Historically, the expense associated with FTNC's trust preferred and REIT preferred stock have been classified as noninterest expense, but upon adoption of SFAS No. 150 will be classified as interest expense on a prospective basis. Over the long-term, FTNC's asset sensitive balance sheet position should allow the net interest margin to improve when interest rates begin to rise. Other Information This press release contains forward-looking statements involving significant risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking information. Those factors include general economic and financial market conditions, including expectations of and actual timing and amount of interest rate movements, competition, ability to execute business plans, geo-political developments, items already mentioned in this press release, and other factors described in our recent filings with the Securities and Exchange Commission (SEC). FTNC disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements included herein to reflect future events or developments. In compliance with the SEC's regulations concerning fair disclosure, FTNC provides additional disclosure and discussion related to First Tennessee's earnings and business segment performance through a toll-free prerecorded disclosure available by dialing 1-888-203-1112 and entering the access code 770154 (outside the United States dial 1-719-457-0820 and enter the access code 770154). This message will be available from 8:00 a.m. CDT Thursday, July 17, 2003, through 11:00 p.m. CDT Wednesday, July 23, 2003. For three weeks from the press release date, FTNC will respond to individual requests for clarification of the provided disclosures. However, we will make every effort not to provide, and you should not expect to receive, material non-public information as that term is defined in the SEC Regulation FD. Without limiting the foregoing, we will not provide any additional earnings guidance, directly or indirectly, express or implied. GENERAL INFORMATION The First Tennessee National Corporation (NYSE:FTN) family of companies provides financial services to individuals and business customers through First Tennessee Bank, which has earned one of the highest customer retention rates of any bank in the country; First Horizon Home Loans, which earned a top-five ranking in customer satisfaction from J.D. Power and Assoc.; FTN Financial, one of the nation's top underwriters of U.S. government agency securities; and First Horizon Merchant Services, one of the most successful processors of credit card payments for the travel industry. More than 10,000 FTN employees provide financial services through hundreds of offices located in more than 30 states. FTN companies have been recognized as some of the nation's best employers by Working Mother, Business Week and Fortune magazines. More information can be found at www.FirstTennessee.com. Description -- FTNC is a nationwide, diversified financial services institution. -- One of the 50 largest bank holding companies in the United States in asset size and market capitalization. -- Included in the Standard and Poor's 500 Index Banking and other financial services are provided through: -- First Tennessee Banking Group (includes Retail/Commercial Bank, Investments, Financial Planning, Trust Services, Credit Card, and Cash Management) -- Three national lines of business - -- First Horizon (includes First Horizon Home Loans and First Horizon Equity Lending) -- FTN Financial (includes Capital Markets, Equity Research, Investment Banking, Strategic Alliances, and Correspondent Services) -- Transaction Processing (includes First Horizon Merchant Services (credit card merchant processing) and Express Processing (nationwide payment processing operation)) FIRST TENNESSEE NATIONAL CORPORATION PER SHARE DATA AND FINANCIAL RATIOS (Unaudited) ---------------------------------------------------------------------- YEAR-TO-DATE ---------------------------------------------------------------------- Year-to-date June 30 --------------- Growth 2003 2002 Rate (%) ---------------------------------------------------------------------- EARNINGS DATA: -------------- Net income $237.4 $177.5 33.7 + Diluted earnings per common share 1.81 1.36 33.1 + Dividends declared .60 .50 Diluted shares outstanding (millions) 131.1 130.5 SELECTED FINANCIAL RATIOS: -------------------------- Return on average assets 1.98 1.82 Return on average shareholders' equity 27.1 23.7 ---------------------------------------------------------------------- ---------------------------------------------------------------------- QUARTERLY ---------------------------------------------------------------------- Growth 2Q03 2Q02 Rate (%) ---------------------------------------------------------------------- EARNINGS DATA: -------------- Net income (millions) $118.4 $90.4 30.8 + Diluted earnings per common share .90 .69 30.4 + Dividends declared .30 .25 Diluted shares outstanding (millions) 131.9 130.6 SELECTED FINANCIAL RATIOS: -------------------------- Return on average assets 1.89% 1.87% Return on average shareholders' equity 26.5 23.7 ---------------------------------------------------------------------- ---------------------------------------------------------------------- QUARTERLY INFORMATION ---------------------------------------------------------------------- 2Q03 1Q03 4Q02 3Q02 2Q02 ---------------------------------------------------------------------- EARNINGS DATA: -------------- Net income (millions) $118.4 $119.0 $103.4 $95.6 $90.4 Diluted earnings per common share .90 .91 .80 .73 .69 Dividends declared .30 .30 .30 .25 .25 Diluted shares outstanding (millions) 131.9 130.3 129.7 130.2 130.6 SELECTED FINANCIAL RATIOS: -------------------------- Return on average assets 1.89% 2.07% 1.80% 1.84% 1.87% Return on average shareholders' equity 26.5 27.7 24.8 23.8 23.7 ---------------------------------------------------------------------- A-1 FIRST TENNESSEE NATIONAL CORPORATION STATEMENTS OF INCOME Yearly Growth (Unaudited) ---------------------------------------------------------------------- Year-to-date June 30 --------------------- Growth (Thousands) 2003 2002 Rate (%) ---------------------------------------------------------------------- Interest income $ 520,738 $506,680 2.8 + Less interest expense 127,564 145,162 12.1 -- ---------------------------------------------------------------------- Net interest income 393,174 361,518 8.8 + Provision for loan losses 54,951 49,208 11.7 + ---------------------------------------------------------------------- Net interest income after provision for loan losses 338,223 312,310 8.3 + Noninterest income: Mortgage banking 548,410 251,183 118.3 + Capital markets 298,273 197,775 50.8 + Deposit transactions and cash management 71,402 68,817 3.8 + Insurance premiums and commissions 29,648 25,913 14.4 + Merchant processing 26,436 22,840 15.7 + Trust services and investment management 22,208 27,413 19.0 -- Securities gains/(losses) (1,808) (2,351) 23.1 + Other 72,201 69,923 3.3 + ---------------------------------------------------------------------- Total noninterest income 1,066,770 661,513 61.3 + ---------------------------------------------------------------------- Adjusted gross income after provision for loan losses 1,404,993 973,823 44.3 + Noninterest expense: Employee compensation, incentives and benefits 681,322 440,157 54.8 + Occupancy 39,394 35,587 10.7 + Operations services 35,088 29,383 19.4 + Equipment rentals, depreciation, and maintenance 33,806 32,512 4.0 + Communications and courier 30,665 25,542 20.1 + Amortization of intangible assets 3,512 2,955 18.8 + Other 228,028 141,137 61.6 + ---------------------------------------------------------------------- Total noninterest expense 1,051,815 707,273 48.7 + ---------------------------------------------------------------------- Pretax income 353,178 266,550 32.5 + Applicable income taxes 115,797 89,004 30.1 + ---------------------------------------------------------------------- Net income $ 237,381 $177,546 33.7 + ==================== ---------------------------------------------------------------------- A-2 FIRST TENNESSEE NATIONAL CORPORATION OTHER INCOME AND OTHER EXPENSE Yearly Growth (Unaudited) ---------------------------------------------------------------------- Year-to-date June 30 ---------------- Growth (Thousands) 2003 2002 Rate (%) ---------------------------------------------------------------------- All other income and commissions: Other service charges $10,049 $11,391 11.8 -- Cardholder fees 10,728 9,695 10.7 + Check clearing fees 6,107 6,440 5.2 -- Other 45,317 42,397 6.9 + ---------------------------------------------------------------------- Total $72,201 $69,923 3.3 + ---------------------------------------------------------------------- All other expense: Advertising and public relations $24,172 $14,569 65.9 + Contract employment 21,728 14,304 51.9 + Legal and professional fees 25,044 14,890 68.2 + Travel and entertainment 17,339 10,186 70.2 + Computer software 13,252 12,147 9.1 + Supplies 11,406 8,118 40.5 + Foreclosed real estate 7,646 9,282 17.6 -- Fed services fees 4,799 4,855 1.2 -- Distributions on guaranteed preferred securities 4,035 4,035 - Contributions 12,390 1,244 NM Distributions on preferred stock of subsidiary 2,282 2,282 - Deposit insurance premium 1,339 1,199 11.7 + Other 82,596 44,026 87.6 + ---------------------------------------------------------------------- Total $228,028 $141,137 61.6 + ---------------------------------------------------------------------- A-3 FIRST TENNESSEE NATIONAL CORPORATION STATEMENTS OF INCOME Quarterly Growth (Unaudited) ---------------------------------------------------------------------- Quarter Ended June 30 Growth (Thousands) 2003 2002 Rate (%) ---------------------------------------------------------------------- Interest income $265,799 $248,700 6.9 + Less interest expense 66,048 71,534 7.7 -- ---------------------------------------------------------------------- Net interest income 199,751 177,166 12.7 + Provision for loan losses 27,501 23,286 18.1 + ---------------------------------------------------------------------- Net interest income after provision for loan losses 172,250 153,880 11.9 + Noninterest income: Mortgage banking 276,562 129,926 112.9 + Capital markets 158,598 98,289 61.4 + Deposit transactions and cash management 38,626 36,393 6.1 + Insurance premiums and commissions 15,185 12,393 22.5 + Merchant processing 13,860 12,627 9.8 + Trust services and investment management 10,825 13,324 18.8 -- Securities gains/(losses) (752) (2,317) 67.5 + Other 35,716 35,946 .6 -- ---------------------------------------------------------------------- Total noninterest income 548,620 336,581 63.0 + ---------------------------------------------------------------------- Adjusted gross income after provision for loan losses 720,870 490,461 47.0 + Noninterest expense: Employee compensation, incentives and benefits 362,340 222,558 62.8 + Occupancy 19,789 18,452 7.2 + Operations services 17,330 14,867 16.6 + Equipment rentals, depreciation, and maintenance 16,616 16,594 .1 + Communications and courier 15,876 12,215 30.0 + Amortization of intangible assets 1,738 1,357 28.1 + Other 115,647 68,554 68.7 + ---------------------------------------------------------------------- Total noninterest expense 549,336 354,597 54.9 + ---------------------------------------------------------------------- Pretax income 171,534 135,864 26.3 + Applicable income taxes 53,182 45,399 17.1 + ---------------------------------------------------------------------- Net income $118,352 $ 90,465 30.8 + ================== ---------------------------------------------------------------------- A-4 FIRST TENNESSEE NATIONAL CORPORATION OTHER INCOME AND OTHER EXPENSE Quarterly Growth (Unaudited) ---------------------------------------------------------------------- Quarter Ended June 30 ------------------ Growth (Thousands) 2003 2002 Rate (%) ---------------------------------------------------------------------- All other income and commissions: Other service charges $4,925 $6,007 18.0 -- Cardholder fees 5,600 4,956 13.0 + Check clearing fees 2,955 3,280 9.9 -- Other 22,236 21,703 2.5 + ---------------------------------------------------------------------- Total $35,716 $35,946 .6 -- ---------------------------------------------------------------------- All other expense: Advertising and public relations $11,486 $6,932 65.7 + Contract employment 11,230 6,719 67.1 + Legal and professional fees 14,896 7,574 96.7 + Travel and entertainment 9,072 5,574 62.8 + Computer software 6,836 6,638 3.0 + Supplies 6,039 4,001 50.9 + Foreclosed real estate 2,692 5,214 48.4 -- Fed services fees 2,359 2,425 2.7 -- Distributions on guaranteed preferred securities 2,017 2,017 - Contributions 10,440 634 NM Distributions on preferred stock of subsidiary 1,141 1,141 - Deposit insurance premium 701 632 10.9 + Other 36,738 19,053 92.8 + ---------------------------------------------------------------------- Total $115,647 $68,554 68.7 + ---------------------------------------------------------------------- A-5 FIRST TENNESSEE NATIONAL CORPORATION STATEMENTS OF INCOME Quarterly (Unaudited) ---------------------------------------------------------------------- (Thousands) 2Q03 1Q03 4Q02 3Q02 2Q02 ---------------------------------------------------------------------- Interest income $265,799 $254,939 $271,836 $260,577 $248,700 Less interest expense 66,048 61,516 69,483 71,936 71,534 ---------------------------------------------------------------------- Net interest income 199,751 193,423 202,353 188,641 177,166 Provision for loan losses 27,501 27,450 22,796 20,180 23,286 ---------------------------------------------------------------------- Net interest income after provision for loan losses 172,250 165,973 179,557 168,461 153,880 Noninterest income: Mortgage banking 276,562 271,848 255,843 158,811 129,926 Capital markets 158,598 139,675 126,090 124,151 98,289 Deposit transactions and cash management 38,626 32,776 37,768 36,730 36,393 Insurance premiums and commissions 15,185 14,463 13,768 10,765 12,393 Merchant processing 13,860 12,576 12,565 12,998 12,627 Trust services and investment management 10,825 11,383 10,188 10,768 13,324 Divestitures - - 2,300 2,250 - Securities gains/(losses) (752) (1,056) (6,818) (11) (2,317) Other 35,716 36,485 35,903 35,483 35,946 ---------------------------------------------------------------------- Total noninterest income 548,620 518,150 487,607 391,945 336,581 ---------------------------------------------------------------------- Adjusted gross income after provision for loan losses 720,870 684,123 667,164 560,406 490,461 Noninterest expense: Employee compensation, incentives and benefits 362,340 318,982 300,344 258,061 222,558 Occupancy 19,789 19,605 21,199 19,883 18,452 Operations services 17,330 17,758 15,468 15,387 14,867 Equipment rentals, depreciation, and maintenance 16,616 17,190 17,731 18,493 16,594 Communications and courier 15,876 14,789 14,575 13,331 12,215 Amortization of intangible assets 1,738 1,774 1,569 1,676 1,357 Other 115,647 112,381 143,797 94,547 68,554 ---------------------------------------------------------------------- Total noninterest expense 549,336 502,479 514,683 421,378 354,597 ---------------------------------------------------------------------- Pretax income 171,534 181,644 152,481 139,028 135,864 Applicable income taxes 53,182 62,615 49,147 43,457 45,399 ---------------------------------------------------------------------- Net income $118,352 $119,029 $103,334 $95,571 $90,465 ================================================= ---------------------------------------------------------------------- A-6 FIRST TENNESSEE NATIONAL CORPORATION OTHER INCOME AND OTHER EXPENSE Quarterly (Unaudited) ---------------------------------------------------------------------- (Thousands) 2Q03 1Q03 4Q02 3Q02 2Q02 ---------------------------------------------------------------------- All other income and commissions: Other service charges $4,925 $5,124 $5,049 $4,764 $6,007 Cardholder fees 5,600 5,128 5,324 5,126 4,956 Check clearing fees 2,955 3,152 3,390 3,350 3,280 Other 22,236 23,081 22,140 22,243 21,703 ---------------------------------------------------------------------- Total $35,716 $36,485 $35,903 $35,483 $35,946 ---------------------------------------------------------------------- All other expense: Advertising and public relations $11,486 $12,686 $14,646 $6,767 $6,932 Contract employment 11,230 10,498 11,230 7,265 6,719 Legal and professional fees 14,896 10,148 13,250 9,200 7,574 Travel and entertainment 9,072 8,267 6,616 5,699 5,574 Computer software 6,836 6,416 7,884 6,109 6,638 Supplies 6,039 5,367 5,482 4,346 4,001 Foreclosed real estate 2,692 4,954 2,547 9,650 5,214 Fed services fees 2,359 2,440 2,411 2,331 2,425 Distributions on guaranteed preferred securities 2,017 2,018 2,017 2,018 2,017 Contributions 10,440 1,950 33,512 13,581 634 Distributions on preferred stock of subsidiary 1,141 1,141 1,141 1,141 1,141 Deposit insurance premium 701 638 580 614 632 Other 36,738 45,858 42,481 25,826 19,053 ---------------------------------------------------------------------- Total $115,647 $112,381 $143,797 $94,547 $68,554 ---------------------------------------------------------------------- A-7 FIRST TENNESSEE NATIONAL CORPORATION AVERAGE STATEMENTS OF CONDITION Yearly Growth (Unaudited) ---------------------------------------------------------------------- Year-to-date June 30 ------------------------- Growth (Thousands) 2003 2002 Rate (%) ---------------------------------------------------------------------- Loans, net of unearned income: Commercial: Commercial, financial and industrial $4,160,444 $3,994,469 4.2 + Real estate commercial 1,076,672 1,001,397 7.5 + Real estate construction 602,746 506,447 19.0 + Retail: Real estate residential 5,173,117 3,934,155 31.5 + Real estate construction 376,153 222,115 69.4 + Other retail 270,143 434,918 37.9 -- Credit card receivables 260,648 266,701 2.3 -- ---------------------------------------------------------------------- Total loans, net of unearned income 11,919,923 10,360,202 15.1 + Investment securities 2,229,230 2,033,239 9.6 + REMIC securities 234,553 397,530 41.0 -- Loans held for sale 4,654,988 2,267,268 105.3 + Other earning assets 1,583,690 1,356,649 16.7 + ---------------------------------------------------------------------- Total earning assets 20,622,384 16,414,888 25.6 + Cash and due from banks 753,192 775,626 2.9 -- Other assets 2,843,045 2,494,884 14.0 + ---------------------------------------------------------------------- Total assets $24,218,621 $19,685,398 23.0 + ========================= Certificates of deposit under $100,000 and other time $1,885,436 $1,926,295 2.1 -- Other interest-bearing deposits 3,919,114 3,934,920 .4 -- ---------------------------------------------------------------------- Total interest-bearing core deposits 5,804,550 5,861,215 1.0 -- Certificates of deposit $100,000 and more 4,833,233 3,639,694 32.8 + Short-term borrowed funds 4,294,928 3,434,455 25.1 + Term borrowings 1,107,302 603,713 83.4 + ---------------------------------------------------------------------- Total interest-bearing liabilities 16,040,013 13,539,077 18.5 + Demand deposits 1,812,240 1,638,468 10.6 + Other noninterest-bearing deposits 2,933,701 1,845,434 59.0 + Other liabilities 1,522,038 1,005,818 51.3 + Qualifying capital securities (a) 100,000 100,000 - Preferred stock of subsidiary 44,417 44,212 .5 + Shareholders' equity 1,766,212 1,512,389 16.8 + ---------------------------------------------------------------------- Total liabilities and shareholders' equity $24,218,621 $19,685,398 23.0 + ========================= ---------------------------------------------------------------------- (a) Guaranteed preferred beneficial interests in First Tennessee's junior subordinated debentures A-8 FIRST TENNESSEE NATIONAL CORPORATION AVERAGE STATEMENTS OF CONDITION Quarterly Growth (Unaudited) ---------------------------------------------------------------------- Quarter Ended June 30 ------------------------- Growth (Thousands) 2003 2002 Rate (%) ---------------------------------------------------------------------- Loans, net of unearned income: Commercial: Commercial, financial and industrial $4,274,582 $3,926,211 8.9 + Real estate commercial 1,091,319 1,021,479 6.8 + Real estate construction 616,385 508,810 21.1 + Retail: Real estate residential 5,409,717 4,056,932 33.3 + Real estate construction 396,412 234,037 69.4 + Other retail 265,311 425,389 37.6 -- Credit card receivables 260,560 264,693 1.6 -- ---------------------------------------------------------------------- Total loans, net of unearned income 12,314,286 10,437,551 18.0 + Investment securities 2,199,188 2,073,175 6.1 + REMIC securities 213,349 374,727 43.1 -- Loans held for sale 5,160,628 2,024,350 154.9 + Other earning assets 1,676,703 1,388,564 20.8 + ---------------------------------------------------------------------- Total earning assets 21,564,154 16,298,367 32.3 + Cash and due from banks 732,895 750,534 2.4 -- Other assets 2,814,801 2,387,522 17.9 + ---------------------------------------------------------------------- Total assets $25,111,850 $19,436,423 29.2 + ========================= --------- Certificates of deposit under $100,000 and other time $1,872,108 $1,961,918 4.6 -- Other interest-bearing deposits 3,942,533 3,898,698 1.1 + ---------------------------------------------------------------------- Total interest-bearing core deposits 5,814,641 5,860,616 .8 -- Certificates of deposit $100,000 and more 4,987,649 3,371,961 47.9 + Short-term borrowed funds 4,567,897 3,458,612 32.1 + Term borrowings 1,205,718 641,074 88.1 + ---------------------------------------------------------------------- Total interest-bearing liabilities 16,575,905 13,332,263 24.3 + Demand deposits 1,807,457 1,638,402 10.3 + Other noninterest-bearing deposits 3,195,766 1,841,936 73.5 + Other liabilities 1,597,315 950,784 68.0 + Qualifying capital securities (a) 100,000 100,000 - Preferred stock of subsidiary 44,429 44,224 .5 + Shareholders' equity 1,790,978 1,528,814 17.1 + ---------------------------------------------------------------------- Total liabilities and shareholders' equity $25,111,850 $19,436,423 29.2 + ========================= ---------------------------------------------------------------------- (a) Guaranteed preferred beneficial interests in First Tennessee's junior subordinated debentures A-9 FIRST TENNESSEE NATIONAL CORPORATION AVERAGE STATEMENTS OF CONDITION Quarterly (Unaudited) ---------------------------------------------------------------------- (Millions) 2Q03 1Q03 4Q02 3Q02 2Q02 ---------------------------------------------------------------------- Loans, net of unearned income: Commercial: Commercial, financial and industrial $4,274.6 $4,045.0 $4,016.0 $3,941.9 $3,926.2 Real estate commercial 1,091.3 1,061.9 1,054.5 1,056.6 1,021.5 Real estate construction 616.4 589.0 548.6 504.8 508.8 Retail: Real estate residential 5,409.7 4,933.9 4,547.1 4,316.8 4,056.9 Real estate construction 396.4 355.7 324.0 278.2 234.0 Other retail 265.3 275.0 297.6 396.8 425.4 Credit card receivables 260.6 260.7 264.1 261.8 264.7 ---------------------------------------------------------------------- Total loans, net of unearned income 12,314.3 11,521.2 11,051.9 10,756.9 10,437.5 Investment securities 2,199.2 2,259.6 2,300.6 2,056.5 2,073.2 REMIC securities 213.4 256.0 303.9 341.9 374.7 Loans held for sale 5,160.6 4,143.7 4,527.0 3,010.5 2,024.4 Other earning assets 1,676.7 1,489.7 1,201.8 1,176.7 1,388.6 ---------------------------------------------------------------------- Total earning assets 21,564.2 19,670.2 19,385.2 17,342.5 16,298.4 Cash and due from banks 732.9 773.7 806.1 743.9 750.5 Other assets 2,814.8 2,871.6 2,619.6 2,514.7 2,387.5 ---------------------------------------------------------------------- Total assets $25,111.9 $23,315.5 $22,810.9 $20,601.1 $19,436.4 ===================================================== Certificates of deposit under $100,000 and other time $1,872.1 $1,898.9 $1,924.2 $1,971.2 $1,961.9 Other interest- bearing deposits 3,942.5 3,895.5 3,794.8 3,778.7 3,898.7 ---------------------------------------------------------------------- Total interest- bearing core deposits 5,814.6 5,794.4 5,719.0 5,749.9 5,860.6 Certificates of deposit $100,000 and more 4,987.7 4,677.1 4,428.6 3,657.4 3,372.0 Short-term borrowed funds 4,567.9 4,018.9 4,003.1 3,807.3 3,458.6 Term borrowings 1,205.7 1,007.8 878.4 653.4 641.1 ---------------------------------------------------------------------- Total interest- bearing liabilities 16,575.9 15,498.2 15,029.1 13,868.0 13,332.3 Demand deposits 1,807.5 1,817.1 1,861.9 1,668.7 1,638.4 Other noninterest- bearing deposits 3,195.8 2,668.7 2,728.3 2,180.7 1,841.9 Other liabilities 1,597.3 1,445.9 1,394.0 1,146.0 950.8 Qualifying capital securities (a) 100.0 100.0 100.0 100.0 100.0 Preferred stock of subsidiary 44.4 44.4 44.4 44.2 44.2 Shareholders' equity 1,791.0 1,741.2 1,653.2 1,593.5 1,528.8 ---------------------------------------------------------------------- Total liabilities and shareholders' equity $25,111.9 $23,315.5 $22,810.9 $20,601.1 $19,436.4 ===================================================== Diluted shares outstanding 131.9 130.3 129.7 130.2 130.6 ---------------------------------------------------------------------- (a) Guaranteed preferred beneficial interests in First Tennessee's junior subordinated debentures A-10 FIRST TENNESSEE NATIONAL CORPORATION PERIOD-END STATEMENTS OF CONDITION (Unaudited) ---------------------------------------------------------------------- June 30 Growth (Thousands) 2003 2002 Rate (%) ---------------------------------------------------------------------- Loans, net of unearned income: Commercial: Commercial, financial and industrial $ 4,473,933 $ 3,901,851 14.7 + Real estate commercial 1,007,811 1,023,200 1.5 -- Real estate construction 638,664 504,963 26.5 + Retail: Real estate residential 5,678,988 4,177,188 36.0 + Real estate construction 433,766 256,884 68.9 + Consumer 270,077 419,629 35.6 -- Credit card receivables 263,650 260,942 1.0 + ---------------------------------------------------------------------- Total loans, net of unearned income 12,766,889 10,544,657 21.1 + Investment securities 2,271,527 2,053,081 10.6 + REMIC securities 189,657 353,847 46.4 -- Loans held for sale 5,851,079 2,243,146 160.8 + Other earning assets 1,167,073 860,144 35.7 + ---------------------------------------------------------------------- Total earning assets 22,246,225 16,054,875 38.6 + Cash and due from banks 922,268 890,972 3.5 + Other assets 4,770,741 2,870,425 66.2 + ---------------------------------------------------------------------- Total assets $27,939,234 $19,816,272 41.0 + ======================== Certificates of deposit under $100,000 and other time $ 1,847,687 $ 1,991,787 7.2 -- Other interest-bearing deposits 3,936,820 3,794,696 3.7 + ---------------------------------------------------------------------- Total interest-bearing core deposits 5,784,507 5,786,483 - Certificates of deposit $100,000 and more 3,933,071 3,088,942 27.3 + Short-term borrowed funds 4,923,608 3,446,148 42.9 + Term borrowings 1,584,789 650,968 143.5 + ---------------------------------------------------------------------- Total interest-bearing liabilities 16,225,975 12,972,541 25.1 + Demand deposits 2,357,532 1,944,822 21.2 + Other noninterest-bearing deposits 3,417,696 1,575,833 116.9 + Other liabilities 3,999,825 1,615,453 147.6 + Qualifying capital securities (a) 100,000 100,000 - Preferred stock of subsidiary 44,442 44,236 .5 + Shareholders' equity 1,793,764 1,563,387 14.7 + ---------------------------------------------------------------------- Total liabilities and shareholders' equity $27,939,234 $19,816,272 41.0 + ======================== ---------------------------------------------------------------------- (a) Guaranteed preferred beneficial interests in First Tennessee's junior subordinated debentures A-11 FIRST TENNESSEE NATIONAL CORPORATION ASSET QUALITY HIGHLIGHTS (Unaudited) ---------------------------------------------------------------------- (Thousands) 2Q03 1Q03 4Q02 3Q02 2Q02 ---------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES: Beginning Reserve $144,484 $144,298 $143,749 $147,417 $148,602 Provision (a) 27,501 27,450 22,796 20,180 23,286 Charge-offs (16,383) (30,861) (26,528) (27,436) (27,842) Loan recoveries 3,478 3,597 4,281 3,588 3,371 ---------------------------------------------------------------------- Ending Balance $159,080 $144,484 $144,298 $143,749 $147,417 ================================================= NONPERFORMING ASSETS: Lending Activities: Nonperforming loans $57,324 $52,690 $55,060 $53,691 $40,300 Foreclosed real estate 8,000 9,684 7,891 7,799 7,493 Other assets 52 57 33 112 99 ---------------------------------------------------------------------- Total Lending Activities 65,376 62,431 62,984 61,602 47,892 ---------------------------------------------------------------------- Mortgage Production Activities: Nonperforming loans - held for sale 7,245 7,139 5,733 - - Nonperforming loans - loan portfolio 2,026 4,550 3,394 18,289 19,152 Foreclosed real estate 8,414 4,245 3,560 11,983 14,006 ---------------------------------------------------------------------- Total Mortgage Production Activities 17,685 15,934 12,687 30,272 33,158 ---------------------------------------------------------------------- Total nonperforming assets $83,061 $78,365 $75,671 $91,874 $81,050 ================================================= Loans and leases past due 90 days or more $32,208 $36,794 $37,301 $33,838 $34,710 ---------------------------------------------------------------------- (a) Provision was reduced by $7.4 million in third quarter 2002 related to the change in First Tennessee's risk profile after the sale of a portfolio of loans originated through First Horizon Money Centers. A-12 FIRST TENNESSEE NATIONAL CORPORATION ASSET QUALITY HIGHLIGHTS (Unaudited) ---------------------------------------------------------------------- (Thousands) 2Q03 1Q03 4Q02 3Q02 2Q02 ---------------------------------------------------------------------- FTNC CONSOLIDATED: Nonperforming loans ratio (a) .46% .48% .52% .66% .56% Nonperforming assets ratio (b) .59 .60 .62 .84 .77 Allowance to total loans 1.25 1.21 1.27 1.32 1.40 Allowance to nonperforming loans (c) 268.04 252.42 246.86 199.71 247.96 Allowance to nonperforming assets (d) 209.82 202.85 206.32 156.46 181.88 Net charge-off ratio (e) .42 .95 .81 .89 .94 LENDING ACTIVITIES: Nonperforming loans ratio (a) .45% .44% .49% .49% .38% Nonperforming assets ratio (b) .51 .52 .56 .56 .45 Allowance to total loans 1.31 1.22 1.27 1.31 1.37 Allowance to nonperforming loans 273.64 274.22 260.51 265.66 358.00 Allowance to nonperforming assets 239.90 231.43 227.73 231.55 301.25 Net charge-off ratio (e) .42 .90 .85 .77 .94 MORTGAGE PRODUCTION ACTIVITIES: Nonperforming assets ratio (f) .03% .03% .02% .06% .07% ---------------------------------------------------------------------- (a) Ratio is nonperforming loans in the loan portfolio to total loans (b) Ratio is nonperforming assets in the loan portfolio to total loans plus foreclosed real estate and other assets (c) Ratio is allowance to nonperforming loans in the loan portfolio (d) Ratio is allowance to nonperforming assets in the loan portfolio (e) Ratio is net charge-offs to average total loans (f) Ratio is nonperforming assets to unpaid principal balance of servicing portfolio A-13 FIRST TENNESSEE NATIONAL CORPORATION NET INTEREST MARGIN (NIM) HIGHLIGHTS (Unaudited) ---------------------------------------------------------------------- 2Q03 1Q03 4Q02 3Q02 2Q02 ---------------------------------------------------------------------- Consolidated Yields and Rates: Investment securities 4.26% 4.97% 5.46% 5.83% 6.01% Loans, net of unearned 5.13 5.42 5.66 6.06 6.22 Other earning assets 4.70 4.77 5.24 5.50 5.37 ---------------------------------------------------------------------- Yields on earning assets 4.90 5.18 5.51 5.89 6.01 ---------------------------------------------------------------------- Interest bearing core deposits 1.46 1.52 1.72 1.90 1.98 CD's over $100,000 1.41 1.54 1.90 2.09 2.18 Fed funds purchased and repos 1.11 1.09 1.28 1.55 1.52 Commercial paper and other short-term borrowings 3.78 3.45 3.53 3.98 4.25 Long-term debt 3.30 3.01 3.54 4.41 4.37 ---------------------------------------------------------------------- Rates paid on interest- bearing liabilities 1.59 1.60 1.83 2.06 2.15 ---------------------------------------------------------------------- Net interest spread 3.31 3.58 3.68 3.83 3.86 Effect of interest-free sources .37 .34 .41 .41 .39 Loan fees .05 .06 .08 .10 .11 FRB interest and penalties (.01) (.01) - - - ---------------------------------------------------------------------- FTNC - NIM 3.72% 3.97% 4.17% 4.34% 4.36% ---------------------------------===================================== A-14 FIRST TENNESSEE NATIONAL CORPORATION CAPITAL HIGHLIGHTS (Dollars in millions except per share amounts, Unaudited) ---------------------------------------------------------------------- 2Q03 1Q03 4Q02 3Q02 2Q02 ---------------------------------------------------------------------- Tier 1 Capital (a) $1,665.8 $1,628.6 $1,558.5 $1,496.7 $1,409.4 Tier 2 Capital (a) 806.3 458.0 456.4 469.7 473.0 -------------------------------------------------- Total Capital (a) $2,472.1 $2,086.6 $2,014.9 $1,966.4 $1,882.4 ================================================== Risk-Adjusted Assets (a) $19,178.3 $17,603.3 $17,461.6 $17,084.5 $15,736.8 Tier 1 Ratio (a) 8.69% 9.25% 8.93% 8.76% 8.96% Tier 2 Ratio (a) 4.20 2.60 2.61 2.75 3.00 -------------------------------------------------- Total Capital Ratio (a) 12.89% 11.85% 11.54% 11.51% 11.96% ================================================== Leverage Ratio (a) 6.70% 7.06% 6.91% 7.36% 7.35% Shareholders' Equity/Assets Ratio (b) 7.13 7.47 7.25 7.74 7.87 Book Value $14.16 $13.91 $13.35 $12.84 $12.36 ---------------------------------------------------------------------- (a) Current quarter is an estimate (b) Calculated on average balances A-15 FIRST TENNESSEE NATIONAL CORPORATION BUSINESS SEGMENT HIGHLIGHTS (Unaudited - Fully Taxable Equivalent Basis) ---------------------------------------------------------------------- (Thousands) 2Q03 1Q03 4Q02 3Q02 2Q02 ---------------------------------------------------------------------- FIRST TENNESSEE BANKING GROUP Total Revenues $177,321 $177,614 $179,761 $185,693 $191,489 Loan Loss Provision 19,110 15,941 19,737 15,158 13,900 Noninterest Expenses 132,027 126,078 132,408 115,877 114,181 ------------------------------------------------ Pre-Tax Income $ 26,184 $ 35,595 $ 27,616 $ 54,658 $ 63,408 FIRST HORIZON Total Revenues $365,381 $351,879 $340,725 $228,174 $186,008 Loan Loss Provision 7,824 11,781 2,449 4,195 9,272 Noninterest Expenses 247,203 220,898 204,690 165,469 132,424 ------------------------------------------------ Pre-Tax Income $110,354 $119,200 $133,586 $ 58,510 $ 44,312 FTN FINANCIAL Total Revenues $171,757 $151,015 $137,480 $134,578 $108,151 Loan Loss Provision 567 (272) 610 827 114 Noninterest Expenses 118,616 104,993 93,419 90,857 73,469 ------------------------------------------------ Pre-Tax Income $ 52,574 $ 46,294 $ 43,451 $ 42,894 $ 34,568 TRANSACTION PROCESSING Total Revenues $ 31,288 $ 29,764 $ 30,454 $ 30,999 $ 30,780 Noninterest Expenses 26,267 25,520 35,318 25,280 25,110 ------------------------------------------------ Pre-Tax Income $ 5,021 $ 4,244 $ (4,864) $ 5,719 $ 5,670 CORPORATE (a) Total Revenues $ 2,929 $ 1,634 $ 1,886 $ 1,527 $ (2,305) Noninterest Expenses 25,223 24,990 48,848 23,895 9,413 ------------------------------------------------ Pre-Tax Income $(22,294) $(23,356) $(46,962) $(22,368) $(11,718) TOTAL CONSOLIDATED Total Revenues $748,676 $711,906 $690,306 $580,971 $514,123 Loan Loss Provision 27,501 27,450 22,796 20,180 23,286 Total Noninterest Expenses 549,336 502,479 514,683 421,378 354,597 ------------------------------------------------ Pre-Tax Income (FTE) $171,839 $181,977 $152,827 $139,413 $136,240 Fully Taxable Equivalent Adjustment 305 333 346 385 376 ------------------------------------------------ Consolidated Pretax Income $171,534 $181,644 $152,481 $139,028 $135,864 ---------------------------------------------------------------------- (a) Corporate includes certain corporate expenses, interest expense on trust preferred and REIT preferred stock, select components of SFAS 133 hedge ineffectiveness and other items not allocated or not specifically assigned to business segments. A-16 FIRST TENNESSEE NATIONAL CORPORATION SFAS No. 133 HIGHLIGHTS (Unaudited) FTNC uses derivative instruments primarily to hedge or protect the value of certain assets and liabilities recorded on its balance sheet from changes in interest rates. SFAS No. 133, which was adopted on January 1, 2001, establishes accounting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. It requires that changes in the instrument's fair value be 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. Fair value is determined on the last business day of a reporting period. This point in time measurement of derivative fair values and the related hedged item fair values may be well suited to the measurement of hedge effectiveness, as well as reported earnings, when hedge time horizons are short. The same measurement however may not consistently reflect the effectiveness of longer-term hedges and, in FTNC's view, can distort short-term measures of reported earnings. FTNC uses a combination of derivative financial instruments to hedge certain components of the interest rate risk associated with its portfolio of capitalized mortgage servicing rights, which currently have an average life of approximately three to four years. Over this long-term time horizon this combination of derivatives can be effective in significantly mitigating the effects of interest rate changes on the value of the servicing portfolio. However, these derivative financial instruments can and do demonstrate significant price volatility depending upon prevailing conditions in the financial markets. If a reporting period ends during a period of volatile financial market conditions, the effect of such point in time conditions on reported earnings does not reflect the underlying economics of the transactions or the true value of the hedges to FTNC over their estimated lives. The fact that the fair value of a particular derivative is unusually low or high on the last day of the reporting period is meaningful in evaluating performance during the period only if FTNC sells the derivative within the period of time before fair value changes and does not replace the hedge coverage with another derivative. FTNC believes the effect of such volatility on such short-term measures of earnings is not indicative of the expected long-term performance of this hedging practice. For its internal evaluation of performance for an applicable period, FTNC reclassifies select components of SFAS 133 hedge ineffectiveness from the reported net income of the First Horizon segment to the Corporate segment. The internal evaluation of First Horizon's long-term performance will include the long-term trend, if any, in these select components of SFAS 133 hedge ineffectiveness. A-17 Note: A spreadsheet is available at URL: CONTACT: First Tennessee National Corporation Financial Information: Jim Keen, 901-523-4212 or Media Information: Kim Cherry, 901-523-4726 or Investor Relations: Mark Yates, 901-523-4068