UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from __________ to__________
Commission File Number 001-15185
FIRST HORIZON NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
TENNESSEE 62-0803242 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 165 Madison Avenue, Memphis, Tennessee 38103 (Address of principal executive offices) (Zip Code) |
Registrant's telephone number, including Area Code: 901-523-4444
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on which Registered ------------------- ------------------------------------ $0.625 Par Value Common Capital Stock New York Stock Exchange, Inc. (including rights attached thereto) |
Securities registered pursuant to Section 12(g) of the Act: None
At June 30, 2004, the aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates of the registrant was approximately $5.5 billion.
At February 25, 2005, the registrant had 123,900,266 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of Proxy Statement to be furnished to shareholders in connection with Annual Meeting of Shareholders scheduled for 4/19/05 - Parts I, II, III and IV.
PART I
ITEM 1
BUSINESS
General.
First Horizon National Corporation (the "Corporation") is a Tennessee corporation headquartered in Memphis, Tennessee and incorporated in 1968. The Corporation is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is a financial holding company under the provisions of the Gramm-Leach-Bliley Act. At December 31, 2004, the Corporation had total assets of $29.8 billion and ranked 1st in terms of total assets among Tennessee-headquartered bank holding companies and ranked 28th nationally.
Through its principal subsidiary, First Tennessee Bank National
Association (the "Bank"), and its other banking-related subsidiaries, the
Corporation provides diversified financial services through four business
segments. The segments reflect the common activities and operations of
aggregated business segments across the various delivery channels:
Retail/Commercial Banking, Mortgage Banking, and Capital Markets. In addition,
the Corporate segment provides essential support within the Corporation. The
percentage of consolidated revenues (for this purpose, the sum of net interest
income and noninterest income) ascribed to each of our segments for the past
three years was: Retail/Commercial Banking, 53% (2004), 42% (2003), and 46%
(2002); Mortgage Banking, 28% (2004), 35% (2003), and 29% (2002); Capital
Markets, 17% (2004), 22% (2003), and 22% (2002); and Corporate, 2% (2004), 1%
(2003), and 3% (2002). Financial and other additional information concerning our
segments appears in the response to Item 7 of Part II hereof and Note 22 to the
Consolidated Financial Statements contained in the Corporation's 2004 Annual
Report to shareholders. During 2004 approximately 61% of revenues were provided
by fee income and approximately 39% of revenues were provided by net interest
income. As a financial holding company, the Corporation coordinates the
financial resources of the consolidated enterprise and maintains systems of
financial, operational and administrative control intended to coordinate
selected policies and activities, including as described in Item 9A of Part II
hereto.
The Bank is a national banking association with principal offices in Memphis, Tennessee. It received its charter in 1864. During 2004 through its various business lines, including consolidated subsidiaries, the Bank generated gross revenue (net interest income plus noninterest income) of approximately $2.2 billion and contributed substantially all of consolidated net income from continuing operations. At December 31, 2004, the Bank had $29.5 billion in total assets, $19.8 billion in total deposits, and $16.3 billion in total net loans. Among Tennessee headquartered banks, the Bank ranked 1st in Tennessee deposit market share at June 30, 2004. On December 31, 2004, the Bank had 496 banking locations (187 financial centers and 309 off-premises ATMs) in 18 Tennessee counties, including all of the major metropolitan areas of the state, 13 banking locations (7 financial centers and 6 off-premises ATMs) in Mississippi, one off premises ATM in Arkansas, and 7 financial centers in Virginia. At December 31, 2004, First Horizon Home Loan Corporation, a subsidiary of the Bank with principal offices in the Dallas, Texas metropolitan area, and its affiliates provided mortgage banking services through 357 offices, including satellite branches, in 44 states and, at September 30, 2004, ranked in the top 20 nationally in retail mortgage loan originations and top 15 nationally in mortgage loan servicing, as reported by Inside Mortgage Finance. FTN Financial products and services, at December 31, 2004, were offered through 14 offices in 11 states, and FTN Financial Capital Markets, a division of the Bank, ranked as one of the leading underwriters of U.S. agency debt.
The Corporation provides the following services through its subsidiaries:
o general banking services for consumers, businesses, financial institutions, and governments
o mortgage banking services
o through FTN Financial-sales and underwriting of bank-eligible securities and securities eligible for underwriting by financial subsidiaries, mortgage loans and advisory services, and equity research
o transaction processing - credit card merchant processing, nationwide check clearing services, and remittance processing
o trust, fiduciary, and agency services
o credit card products
o discount brokerage and full-service brokerage
o venture capital
o equipment finance
o investment and financial advisory services, including investment advisor to First Funds, a proprietary family of mutual funds
o mutual fund sales as agent
o retail and commercial insurance sales as agent
o private mortgage reinsurance
o consumer lending
An element of the Corporation's business strategy is to seek acquisitions and consider divestitures that would enhance long-term shareholder value. The Corporation has a department charged with this responsibility which is constantly reviewing and developing opportunities to achieve this element of the Corporation's strategy. Acquisitions and divestitures which closed during the past three years are described in Note 2 to the Consolidated Financial Statements.
All of the Corporation's subsidiaries are listed in Exhibit 21. The Bank has filed notice with the Comptroller of the Currency ("Comptroller") as a government securities broker/dealer. The FTN Financial Capital Markets division of the Bank is registered with the Securities and Exchange Commission ("SEC") as a municipal securities dealer. The Bank is supervised and regulated as described below. Highland Capital Management Corp., Martin and Company, Inc., First Tennessee Advisory Services, a separately identifiable department of the Bank, and First Tennessee Brokerage, Inc. are registered with the SEC as investment advisers. Hickory Venture Capital Corporation is licensed as a Small Business Investment Company. First Tennessee Brokerage, Inc., FTN Financial Securities Corporation and FTN Midwest Securities Corporation are registered as broker-dealers with the SEC and all states where they conduct business for which registration is required. First Horizon Home Loan Corporation is licensed as a mortgage lender (or exempt from licensing) in all states where it does business and is regulated by the Comptroller. First Tennessee Insurance Services, Inc. ("FTIS") and First Horizon Insurance Services, Inc. ("FHIS") are licensed as insurance agencies in all states where they do business for which licensing is required. FT Reinsurance Company is licensed by the state of South Carolina as a monoline insurance company. FT Insurance Corporation is licensed as an insurance agency in Alabama. Synaxis Group, Inc.'s subsidiaries, which include Polk & Sullivan Group, Inc., Synaxis Risk Services, Inc., Merritt & McKenzie, Inc., and Van Meter Insurance, Inc., are licensed as insurance agencies in all states where they do business for which licensing is required. FTN Financial Securities Corporation, FTN Midwest Securities Corporation, FHIS, and FTIS and all of the subsidiaries listed in the preceding sentence are financial subsidiaries under the Gramm-Leach-Bliley Act. First Tennessee
Brokerage, Inc. is licensed as an insurance agency in the states where it does business for which licensing is required for the sale of annuity products.
Expenditures for research and development activities were not material in any of the last three fiscal years.
Neither the Corporation nor any of its significant subsidiaries is dependent upon a single customer or very few customers.
At December 31, 2004, the Corporation and its subsidiaries had 12,825 employees and 12,470 full-time-equivalent employees, not including contract labor for certain services.
For additional information on the business of the Corporation, refer to the Management's Discussion and Analysis and Glossary sections contained in pages 3 through 52 of the Corporation's 2004 Annual Report to shareholders, which sections are incorporated herein by reference.
The Corporation's current internet address is www.firsthorizon.com. The Corporation plans to launch a new corporate website in the first quarter of 2005 at www.fhnc.com. The Corporation makes available free of charge on its Internet website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments thereto as soon as reasonably practicable after the Corporation files such material with, or furnishes such material to, the Securities and Exchange Commission, as applicable.
Corporate Governance and NYSE Disclosures.
The Corporation's Board of Directors has adopted Corporate Governance Guidelines, along with a Code of Business Conduct and Ethics, a Code of Ethics for Senior Financial Officers, and the charters of the Board's Audit Committee, Nominating and Corporate Governance Committee, and Compensation (previously named Human Resources) Committee. All of those documents are available on the Corporation's website. To access the information at the current website address (www.firsthorizon.com), click on "About Us," then "Investor Relations," and then "Corporate Governance." The information is expected to be accessible in the "Investor Relations" area of the Corporation's planned new corporate website (www.fhnc.com). Paper copies of any of those documents are available to shareholders upon request to the Corporate Secretary.
The Corporation's Code of Business Conduct and Ethics includes a number of policies and guidelines that have been in place over the years. Any waiver of this Code for an executive officer or director will be promptly disclosed to shareholders by posting such information on the Corporation's website.
See Item 10 of Part III below for additional information concerning the Corporation's Code of Ethics for Senior Financial Officers.
The Corporation's Chief Executive Officer is required to certify annually to the New York Stock Exchange ("NYSE") that the Chief Executive Officer is unaware of any violation by the Corporation of NYSE corporate governance listing standards, and this certification will be disclosed annually (commencing in 2005) in the Corporation's annual report to shareholders or by another method authorized by the NYSE.
Supervision and Regulation.
The following summary sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and financial holding companies and their subsidiaries and to companies engaged in securities and insurance activities and provides certain specific information about the Corporation. The bank regulatory framework is intended primarily for the protection of depositors and the Federal Deposit Insurance Funds and not for the protection of security holders. In addition, certain activities of the Corporation and its subsidiaries are subject to various securities and insurance laws and are regulated by the Securities and Exchange Commission and the state insurance departments of the states in which they operate. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by express reference to each of the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on the business of the Corporation.
General
The Corporation is a bank holding company and financial holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHCA") and is registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Corporation is subject to the regulation and supervision of and examination by the Federal Reserve under the BHCA. The Corporation is required to file with the Federal Reserve annual reports and such additional information as the Federal Reserve may require pursuant to the BHCA.
Under the BHCA, prior to March 13, 2000, bank holding companies could not in general directly or indirectly acquire the ownership or control of more than 5% of the voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve, and a bank holding company and its subsidiaries were generally limited to engaging in banking and activities found by the Federal Reserve to be so closely related to banking as to be a proper incident thereto. Since March 13, 2000, eligible bank holding companies that elect to become financial holding companies may affiliate with securities firms and insurance companies and engage in activities that are "financial in nature" generally without the prior approval of the Federal Reserve. See "Gramm-Leach-Bliley Act" below.
In addition, the BHCA permits the Federal Reserve to approve an application by a bank holding company to acquire a bank located outside the acquirer's principal state of operations without regard to whether the transaction is prohibited under state law. See "Interstate Banking and Branching Legislation." The Tennessee Bank Structure Act of 1974, among other things, prohibits (subject to certain exceptions) a bank holding company from acquiring a bank for which the home state is Tennessee (a "Tennessee bank") if, upon consummation, the company would directly or indirectly control 30% or more of the total deposits in insured depository institutions in Tennessee. As of June 30, 2004, the Corporation estimates that it held approximately 17% of such deposits. Subject to certain exceptions, the Tennessee Bank Structure Act prohibits a bank holding company from acquiring a bank in Tennessee which has been in operation for less than five years. Tennessee law permits a Tennessee bank to establish branches in any county in Tennessee. See also "- Interstate Banking and Branching Legislation" below.
The Bank is a national banking association subject to regulation, examination and supervision by the Comptroller as its primary federal regulator. In addition, the Bank is insured by, and subject to regulation by, the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon and limitations on the types of investments that may be made,
activities that may be engaged in, and types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve as it attempts to control the money supply and credit availability in order to influence the economy.
Payment of Dividends
The Corporation is a legal entity separate and distinct from its banking and other subsidiaries. The principal source of cash flow of the Corporation, including cash flow to pay dividends on its stock or principal (premium, if any) and interest on debt securities, is dividends from the Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank to the Corporation, as well as by the Corporation to its shareholders.
As a national bank, the Bank is required by federal law to obtain the prior approval of the Comptroller for the payment of dividends if the total of all dividends declared by the board of directors of the Bank in any year will exceed the total of (i) its net profits (as defined and interpreted by regulation) for that year plus (ii) the retained net profits (as defined and interpreted by regulation) for the preceding two years, less any required transfers to surplus. A national bank also can pay dividends only to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation).
If, in the opinion of the applicable federal bank regulatory authority, a depository institution or a holding company is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the depository institution or holding company, could include the payment of dividends), such authority may require that such institution or holding company cease and desist from such practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution's or holding company's capital base to an inadequate level would be such an unsafe and unsound banking practice. Moreover, the Federal Reserve, the Comptroller and the FDIC have issued policy statements which provide that bank holding companies and insured depository institutions generally should only pay dividends out of current operating earnings.
In addition, under the Federal Deposit Insurance Act ("FDIA"), an FDIC-insured depository institution may not make any capital distributions (including the payment of dividends) or pay any management fees to its holding company or pay any dividend if it is undercapitalized or if such payment would cause it to become undercapitalized.
At December 31, 2004, under dividend restrictions imposed under applicable federal laws, the Bank, without obtaining regulatory approval, could legally declare aggregate dividends of approximately $807.6 million.
Under Tennessee law, the Corporation is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due in the usual course of business or the Corporation's total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if the Corporation was dissolving.
The payment of dividends by the Corporation and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines and debt covenants.
Transactions with Affiliates
There are various legal restrictions on the extent to which the Corporation and its nonbank subsidiaries (including for purposes of this paragraph, in certain situations, subsidiaries of the Bank) can borrow or otherwise obtain credit from the Bank. There are also legal restrictions on the Bank's purchases of or investments in the securities of and purchases of assets from the Corporation and its nonbank subsidiaries, the Bank's loans or extensions of credit to third parties collateralized by the securities or obligations of the Corporation and its nonbank subsidiaries, the issuance of guaranties, acceptances and letters of credit on behalf of the Corporation and its nonbank subsidiaries, and certain bank transactions with the Corporation and its nonbank subsidiaries, or with respect to which the Corporation and its nonbank subsidiaries act as agent, participate or have a financial interest. Subject to certain limited exceptions, the Bank (including for purposes of this paragraph all subsidiaries of the Bank) may not extend credit to the Corporation or to any other affiliate (other than another subsidiary bank and certain exempted affiliates) in an amount which exceeds 10% of the Bank's capital stock and surplus and may not extend credit in the aggregate to all such affiliates in an amount which exceeds 20% of its capital stock and surplus. Further, there are legal requirements as to the type, amount and quality of collateral which must secure such extensions of credit by the Bank to the Corporation or to such other affiliates. Also, extensions of credit and other transactions between the Bank and the Corporation or such other affiliates must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the Bank as those prevailing at the time for comparable transactions with non-affiliated companies. Also, the Bank and certain of its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services.
Capital Adequacy
The Federal Reserve has adopted risk-based capital guidelines for bank holding companies. The minimum guideline for the ratio of total capital ("Total Capital") to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8%, and the minimum ratio of Tier 1 Capital (defined below) to risk-weighted assets is 4%. At least half of the Total Capital must be composed of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets ("Tier 1 Capital"). The remainder may consist of qualifying subordinated debt, certain types of mandatory convertible securities and perpetual debt, other preferred stock and a limited amount of loan loss reserves. At December 31, 2004, the Corporation's consolidated Tier 1 Capital and Total Capital ratios were 8.62% and 13.18%, respectively.
The Federal Reserve Board, the FDIC and the OCC have adopted rules to incorporate market and interest-rate risk components into their risk-based capital standards and that explicitly identify concentration of credit risk and certain risks arising from non-traditional activities, and the management of such risks, as important factors to consider in assessing an institution's overall capital adequacy. Under the market risk requirements, capital is allocated to support the amount of market risk related to a financial institution's ongoing trading activities for banks with relatively large trading activities. Institutions will be able to satisfy this additional requirement, in part, by issuing short-term subordinated debt that qualifies as Tier 3 capital. Based on present practices and activity levels, those trading related market risk rules have no significant impact on the Corporation's regulatory capital requirements.
In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to quarterly average assets, less goodwill and certain other intangible assets (the "Leverage Ratio"), of 3% for bank holding companies that meet certain specific criteria, including having the highest regulatory rating. All other
bank holding companies generally are required to maintain a Leverage Ratio of at least 3%, plus an additional cushion of 100 to 200 basis points. The Corporation's Leverage Ratio at December 31, 2004 was 7.16%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a "tangible Tier 1 Capital leverage ratio" (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities.
The Bank is subject to risk-based and leverage capital requirements similar to those described above adopted by the Comptroller. The Corporation believes that the Bank was in compliance with applicable minimum capital requirements as of December 31, 2004. Neither the Corporation nor the Bank has been advised by any federal banking agency of any specific minimum Leverage Ratio requirement applicable to it.
Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business and in certain circumstances to the appointment of a conservator or receiver. See "--Prompt Corrective Action."
In June 1999, the Basel Committee on Banking Supervision launched its efforts to develop an improved capital adequacy framework by issuing its proposals to revise the 1988 Capital Accord. The new capital framework would consist of minimum capital requirements, a supervisory review process and the effective use of market discipline. In its proposal for minimum capital requirements, the Committee set out options from which banks could choose depending on the complexity of their business and the quality of their risk management. A standardized approach would refine the current measurement framework and introduce the use of external credit assessments to determine a bank's capital charge. Banks with more advanced risk management capabilities could make use of an internal risk-rating based approach. Under this approach, some of the key elements of credit risk, such as the probability of default of the borrower, would be estimated internally by a bank. The Committee also proposes an explicit capital charge for operational risk to provide for problems like internal systems failure.
The supervisory review aspect of the new framework would seek to ensure that a bank's capital position is consistent with its overall risk profile and strategy. The supervisory review process would also encourage early supervisory intervention when a bank's capital position deteriorates. The third aspect of the new framework, market discipline, would call for detailed disclosure of a bank's capital adequacy in order to encourage high disclosure standards and to enhance the role of market participants in encouraging banks to hold adequate capital. Banks would also be required to disclose how they evaluate their own capital adequacy.
In June, 2004, the Basel Committee issued its final framework. The U.S. Regulators are expected to issue a Notice of Proposed Rulemaking in 2005. That Notice is expected to require implementation of the advanced measurement methods for large internationally active banks (core banks) and allows for other banks to opt-in should they so choose. Under the proposed rules the Corporation would not be considered a core bank that would be required to implement the new rules but could evaluate whether to opt in. For those banks that do not opt in, the current capital rules are expected to continue to apply. A final U.S. rule is expected in 2006 with implementation expected in 2008. The Corporation cannot predict at this time the final form the U.S. Regulators' rules will take, or the effect they would have on the financial condition or results of operations of the Bank or the Corporation. The Corporation intends to continue to monitor the evolution of the proposed rulemaking and its potential impacts to the Corporation and the industry.
Holding Company Structure and Support of Subsidiary Banks
Because the Corporation is a holding company, its right to participate in the assets of any subsidiary upon the latter's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors (including depositors in the case of the Bank) except to the extent that the Corporation may itself be a creditor with recognized claims against the subsidiary. In addition, depositors of a bank, and the FDIC as their subrogee, would be entitled to priority over the creditors in the event of liquidation of a bank subsidiary.
Under Federal Reserve policy, the Corporation is expected to act as a source of financial strength to, and to commit resources to support, the Bank. This support may be required at times when, absent such Federal Reserve policy, the Corporation may not be inclined to provide it. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Cross-Guarantee Liability
Under the FDIA, a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default." "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. The FDIC's claim for damages is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution. The Bank is currently the only depository institution owned by the Corporation. In the event that the Corporation established or acquired another depository institution, any loss suffered by the FDIC in respect of one subsidiary bank would likely result in assertion of the cross-guarantee provisions, the assessment of such estimated losses against the Corporation's other subsidiary bank(s), and a potential loss of the Corporation's investment in such subsidiary bank.
Prompt Corrective Action
The FDIA requires, among other things, the federal banking regulators to take "prompt corrective action" in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. Under the FDIA, insured depository institutions are divided into five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Under applicable regulations, an institution is defined to be well capitalized if it maintains a Leverage Ratio of at least 5%, a Tier 1 Capital ratio of at least 6% and a Total Capital ratio of at least 10% and is not subject to a directive, order or written agreement to meet and maintain specific capital levels. An institution is defined to be adequately capitalized if it meets all of its minimum capital requirements as described above. An institution will be considered undercapitalized if it fails to meet any minimum required measure, significantly undercapitalized if it has a Total Risk-Based Capital ratio of less than 6%, a Tier 1 Risk-Based Capital ratio of less than 3% or a Leverage Ratio of less than 3% and critically undercapitalized if it fails to maintain a level of tangible equity equal to at least 2% of total assets. An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating.
The FDIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. An insured depository institution's holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan, for the plan to be accepted by the applicable federal regulatory authority. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator, generally within 90 days of the date on which they become critically undercapitalized.
The Corporation believes that at December 31, 2004 the Bank had sufficient capital to qualify as "well capitalized" under the regulatory capital requirements discussed above.
Interstate Banking and Branching Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "IBBEA") authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. In addition, a bank may merge with a bank in another state as long as neither of the states has opted out of interstate branching prior to May 31, 1997. Tennessee did not opt out of interstate branching. A bank may establish and operate a de novo branch in a state in which the bank does not maintain a branch if that state explicitly permits de novo branching. Tennessee permits de novo branching on a reciprocity basis. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opts out of interstate branching within the specified time period, no bank in any other state may establish a branch in the opting out of state, whether through an acquisition or de novo.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act repealed or modified a number of significant provisions of then-current laws, including the Glass-Steagall Act and the Bank Holding Company Act of 1956, which imposed restrictions on banking organizations' ability to engage in certain types of activities. The Act generally allows bank holding companies such as the Corporation broad authority to engage in activities that are financial in nature or incidental to such a financial activity, including insurance underwriting and brokerage; merchant banking; securities underwriting, dealing and market-making; real estate development; and such additional activities as the Federal Reserve in consultation with the Secretary of the Treasury determines to be financial in nature or incidental thereto. A bank holding company may engage in these activities directly or through subsidiaries by qualifying as a "financial holding company."
To qualify a bank holding company must file a declaration with the Federal Reserve and certify that all of its subsidiary depository institutions are well-managed and well-capitalized. The Act also permits national banks such as the Bank to engage in certain of these activities through financial subsidiaries. To control or hold an interest in a financial subsidiary, a national bank must meet the following requirements: (1) the national bank must receive approval from the Comptroller for the financial subsidiary to engage in the activities, (2) the national bank and its depository institution affiliates must each be well-capitalized and well-managed, (3) the aggregate consolidated total assets of all of the national bank's financial subsidiaries must not exceed 45% of the national bank's consolidated total assets or, if less, $50 billion, (4) the national bank must have in place adequate policies and procedures to identify and manage financial and operational risks and to preserve the separate identities and limited liability of the national bank and the financial subsidiary, and (5) if the financial subsidiary will engage in principal transactions and the national bank is one of the one hundred largest banks, the national bank must have outstanding at least one issue of unsecured long-term debt that is currently rated in one of the three highest investment grade rating categories (or if in the second fifty largest banks, an alternative requirement is that the national bank has a current long-term issuer credit rating within the three highest investment grade rating categories). No new financial activity may be commenced under the Act unless the national bank and all of its depository institution affiliates have at least "satisfactory" CRA ratings. Certain restrictions apply if the bank holding company or the national bank fails to continue to meet one or more of the requirements listed above. In addition, the Act contains a number of other provisions that may affect the Bank's operations, including functional regulation of the Bank's securities and investment management operations by the SEC and the Bank's insurance operations by the States and limitations on the use and disclosure to third parties of customer information. The Act generally became effective March 11, 2000, although certain provisions took effect later, such as functional regulation (May 12, 2001, except for certain matters), and compliance with privacy regulations was required by July 1, 2001. The Corporation is a financial holding company and currently, the Bank has 9 financial subsidiaries. The Corporation cannot predict at this time the potential effect that the Act will have on its business and operations, although the Corporation expects that the general effect of the Act will be to increase competition in the financial services industry generally.
FDIC Insurance Assessments; DIFA
The FDIC insurance premium charged on bank deposits insured by the Bank Insurance Fund ("BIF") and on deposits insured by the Savings Association Insurance Fund ("SAIF"), including savings association deposits acquired by banks, ranges from 0 to 27 cents per $100 of deposits, depending on the institution's risk classification, based on capital and supervisory risk factors. The Deposit Insurance Funds Act of 1996 ("DIFA") provides for assessments to be imposed on insured depository institutions with respect to deposits insured by the BIF (in addition to any assessments imposed on depository institutions with respect to SAIF-insured deposits) to pay for the cost of Financing Corporation ("FICO") bonds. All banks are assessed to pay the interest due on FICO bonds. The cost to the Corporation on an annual basis is immaterial.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a federal bank regulatory agency.
Depositor Preference
Federal law provides that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general
unsecured claims against such an institution, including federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver.
Securities Regulation
Certain of the Corporation's subsidiaries are subject to various securities laws and regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the jurisdictions in which they operate.
The Corporation's registered broker-dealer subsidiaries are subject to the SEC's net capital rule, Rule 15c3-1. That rule requires the maintenance of minimum net capital and limits the ability of the broker-dealer to transfer large amounts of capital to a parent company or affiliate. Compliance with the rule could limit operations that require intensive use of capital, such as underwriting and trading.
Certain of the Corporation's subsidiaries and a division of the Bank are registered investment advisers who are regulated under the Investment Advisers Act of 1940. Among other activities, certain of these investment advisers provide investment advice to investment companies regulated under the Investment Company Act of 1940. Advisory contracts with these investment companies automatically terminate under these laws upon an assignment of the contract by the investment adviser unless appropriate consents are obtained. Subsidiaries of the Corporation are subject to certain restrictions in their dealings with investment companies advised by these affiliated investment advisers.
Insurance Activities
Subsidiaries of the Corporation sell various types of insurance as agent in a number of the states. Insurance activities are subject to regulation by the states in which such business is transacted. Although most of such regulation focuses on insurance companies and their insurance products, insurance agents and their activities are also subject to regulation by the states, including, among other things, licensing and marketing and sales practices.
Competition.
The Corporation and its subsidiaries face substantial competition in all aspects of the businesses in which they engage from national and state banks located in Tennessee and large out-of-state banks as well as from savings and loan associations, credit unions, other financial institutions, consumer finance companies, trust companies, investment counseling firms, money market mutual funds, insurance companies, securities firms, mortgage banking companies and others. For certain information on the competitive position of the Corporation and the Bank, refer to the "General" subsection above of this Item 1. Also, refer to the subsections entitled "Supervision and Regulation" and "Effect of Governmental Policies," both of which are relevant to an analysis of the Corporation's competitors. Due to the intense competition in the financial industry, the Corporation makes no representation that its competitive position has remained constant, nor can it predict whether its position will change in the future.
Sources and Availability of Funds.
Specific reference is made to the Management's Discussion and Analysis and Glossary sections, including the subsections entitled "Deposits and Other Sources of Funds," and "Liquidity Risk Management," contained in pages 20 through 21 and pages 28 through 30 of the Corporation's 2004 Annual Report to shareholders, which sections are incorporated herein by reference.
Effect of Governmental Policies.
The Bank is affected by the policies of regulatory authorities, including the Federal Reserve System and the Comptroller. An important function of the Federal Reserve System is to regulate the national money supply.
Among the instruments of monetary policy used by the Federal Reserve are: purchases and sales of U.S. Government securities in the marketplace; changes in the discount rate, which is the rate any depository institution must pay to borrow from the Federal Reserve; and changes in the reserve requirements of depository institutions. These instruments are effective in influencing economic and monetary growth, interest rate levels and inflation.
The monetary policies of the Federal Reserve System and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national economy and in the money market, as well as the result of actions by monetary and fiscal authorities, it is not possible to predict with certainty future changes in interest rates, deposit levels, loan demand or the business and earnings of the Corporation and the Bank or whether the changing economic conditions will have a positive or negative effect on operations and earnings.
Various bills are from the time to time introduced in the United States Congress and the Tennessee General Assembly and other state legislatures, and regulations are proposed by the regulatory agencies which could affect the business of the Corporation and its subsidiaries. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the business of the Corporation and its subsidiaries may be affected thereby.
Statistical Information Required by Guide 3.
The statistical information required to be displayed under Item I pursuant to Guide 3, "Statistical Disclosure by Bank Holding Companies," of the Exchange Act Industry Guides is incorporated herein by reference to the Consolidated Financial Statements and the notes thereto and the Management's Discussion and Analysis and Glossary sections set forth at pages 3 through 52 of the Corporation's 2004 Annual Report to shareholders. Certain information not contained in the 2004 Annual Report to shareholders, but required by Guide 3, is contained in the tables immediately following:
FIRST HORIZON NATIONAL CORPORATION
ADDITIONAL GUIDE 3 STATISTICAL INFORMATION
ON DECEMBER 31
(Unaudited)
Investment Portfolio
(Dollars in thousands) 2004 2003 2002
------------------------------------------------------------------------------------
Mortgage-backed securities &
collateralized mortgage
obligations $ 2,391,162 $ 2,200,862 $ 2,396,530
U.S. Treasury 41,244 47,977 57,367
U.S. government agencies 40,959 1,164 27,208
States and political subdivisions 8,268 14,423 28,890
Other 199,364 205,944 190,290
-------------- ------------- --------------
Total $ 2,680,997 $ 2,470,370 $ 2,700,285
-------------- ------------- --------------
-------------- ------------- --------------
|
Loan Portfolio
(Dollars in thousands) 2004 2003 2002 2001 2000
----------------------------------------------------------------------------------------------------------------
Commercial:
Commercial, financial and
industrial $ 5,560,736 $ 4,502,917 $ 4,134,158 $ 4,176,738 $ 3,964,396
Real estate commercial 960,178 968,064 1,037,341 929,036 946,903
Real estate construction 1,208,703 690,402 551,449 492,531 415,713
Retail:
Real estate residential 7,244,716 6,817,122 4,721,307 3,732,767 3,573,260
Real estate construction 1,035,562 527,260 342,127 211,429 179,515
Other retail 168,806 212,362 286,069 459,510 840,228
Credit card receivables 248,972 272,398 272,994 281,132 319,435
------------- ------------- ------------- ------------- -------------
Total $ 16,427,673 $ 13,990,525 $ 11,345,445 $ 10,283,143 $ 10,239,450
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
|
Short-Term Borrowings
(Dollars in thousands) 2004 2003 2002
----------------------------------------------------------------------------
Federal funds purchased and
securities sold under
agreements to repurchase $ 3,247,048 $ 3,079,248 $ 3,126,350
Commercial paper 23,712 31,793 25,695
Other short-term borrowings 482,044 196,183 335,513
------------- ------------- -------------
Total $ 3,752,804 $ 3,307,224 $ 3,487,558
------------- ------------- -------------
------------- ------------- -------------
|
Maturities of Short-Term Purchased Funds on December 31, 2004
0-3 3-6 6-12 Over 12
(Dollars in thousands) Months Months Months Months Total
-----------------------------------------------------------------------------------------------------------
Certificates of deposit
$100,000 and more $ 6,518,095 $ 319,171 $ 555,510 $ 823,400 $ 8,216,176
Federal funds purchased and
securities sold under
agreements to repurchase 3,247,048 -- -- -- 3,247,048
Commercial paper and
other short-term borrowings 495,756 -- -- 10,000 505,756
-----------------------------------------------------------------------------------------------------------
Total $ 10,260,899 $ 319,171 $ 555,510 $ 833,400 $ 11,968,980
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
|
Contractual Maturities of Commercial & Real Estate Construction Loans on December 31, 2004
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
Commercial real estate construction 809,100 367,291 32,312 1,208,703
Retail real estate construction 1,025,755 9,807 -- 1,035,562
-----------------------------------------------------------------------------------------------------------
Total $5,470,952 $2,938,169 $356,058 $8,765,179
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
For maturities over one year:
Interest rates - floating $1,739,705 $140,683 $1,880,388
Interest rates - fixed 1,198,464 215,375 1,413,839
------------------------------------------------------------------------------------------------------------
Total $2,938,169 $356,058 $3,294,227
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
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ITEM 2
PROPERTIES
The Corporation has no properties that it considers materially important to its financial statements.
ITEM 3
LEGAL PROCEEDINGS
The Corporation is a party to no material pending legal proceedings the nature of which are required to be disclosed pursuant to the Instructions contained in the Form of this Report.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of 2004 to a vote of security holders, through the solicitation of proxies or otherwise.
ITEM 4A
EXECUTIVE OFFICERS OF REGISTRANT
The following is a list of executive officers of the Corporation as of March 1, 2005. The executive officers are elected at the April meeting of the Corporation's Board of Directors following the annual meeting of shareholders for a term of one year and until their successors are elected and qualified.
Name and Age Offices and Positions (Year First Elected to Office) ------------ ---------------------------------------------------- Gerald L. Baker President - First Horizon Financial Services and Executive Vice Age: 61 President of the Corporation and the Bank (2004) Charles G. Burkett President - First Tennessee Financial Services and Executive Age: 53 Vice President of the Corporation and the Bank (2004) J. Kenneth Glass Chairman of the Board (1/1/04), President (2001) and Chief Age: 58 Executive Officer (2002) of the Corporation and the Bank John H. Hamilton Executive Vice President - Bank Services Group (2004) Age: 55 Herbert H. Hilliard Executive Vice President, Risk Management (2001) and Government Relations and Age: 57 CRA (1988) of the Corporation and the Bank Jim L. Hughes President - FTN Financial and Executive Vice President of the Corporation Age: 63 (2004) and President - FTN Financial of the Bank (1999) Harry A. Johnson, III Executive Vice President (1990) and General Counsel (1988) of the Corporation Age: 56 and the Bank James F. Keen Executive Vice President (2003), Corporate Controller of the Corporation (1988) Age: 54 and the Bank (2001) and principal accounting officer Larry B. Martin Chief Operating Officer - First Tennessee Financial Services of the Corporation Age: 57 and the Bank (2004) Marlin L. Mosby, III Executive Vice President (2002) and Chief Financial Officer (2003) of the Age: 41 Corporation and the Bank Sarah L. Meyerrose Executive Vice President, Corporate (2002) and Employee Services (1998) of the Age: 49 Corporation and the Bank John P. O'Connor, Jr. Executive Vice President of the Corporation (1990) and the Bank (1987) and Age: 61 Chief Credit Officer (1988) Elbert L. Thomas, Jr. Executive Vice President (1995) and Interest Rate Risk Manager (2003) of the Age: 56 Corporation and the Bank |
Each of the executive officers has been employed by the Corporation or its subsidiaries during each of the last five years. Mr. Baker also is President and Chief Executive Officer of First Horizon Home Loan Corporation. Prior to April 2004, Mr. Burkett was President - Retail Financial Services/Memphis Financial Services, and prior to July of 2001, he was Executive Vice President, Manager Affluent Market of the Bank. Prior to July of 2002, Mr. Glass was President and Chief Operating Officer of the Corporation and the Bank, and prior to July 2001, he was President-Retail Financial Services of the Corporation and the Bank. Prior to April of 2000, Mr. Glass was Executive Vice President of the Corporation and prior to April of 1999, he was President-Tennessee Banking Group of the Bank.
Prior to April 2004, Mr. Hamilton was Executive Vice President - Product Management and Delivery Services. Prior to June 2002, Mr. Hamilton was Executive Vice President, Manager Bank Services Group and prior to April 2002, he was Executive Vice President-Corporate Financial Services. Prior to April 2004, Mr. Martin was President - Business Financial Services/Tennessee Financial Services, and prior to July of 2001, he was Chairman and CEO - Knoxville of the Bank. From July 2001 to July 2002, Ms. Meyerrose was also Executive Vice President, Wealth Management. Prior to November 2003, Mr. Mosby was Executive Vice President-Strategic Planning and Investor Relations and prior to April 2002, he was Senior Vice President, Strategic Planning. Mr. Thomas was appointed Executive Vice President-Interest Rate Risk Manager in October 2003 following his return after a disability leave which commenced December 1, 2002. Prior to December 1, 2002, Mr. Thomas was Chief Financial Officer of the Company and the Bank. Mr. Keen was appointed Chief Financial Officer on an interim basis, from December 1, 2002 until November 17, 2003.
PART II
ITEM 5
MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market for the Corporation's Common Stock:
The Corporation's common stock, $0.625 par value, is listed and trades on the New York Stock Exchange, Inc. under the symbol FHN. As of December 31, 2004, there were 8,313 shareholders of record of the Corporation's common stock. Additional information called for by this Item is incorporated herein by reference to the Summary of Quarterly Financial Information Table (Table 25), the Selected Financial and Operating Data Table, and the "Deposits and Other Sources of Funds" and "Liquidity Risk Management" subsections of the Management's Discussion and Analysis section contained in the Corporation's 2004 Annual Report to shareholders, Note 18 to the Consolidated Financial Statements contained in the 2004 Annual Report, and to the "Payment of Dividends" and "Transactions with Affiliates" subsections contained in Item 1 of Part I of this Form 10-K, which are incorporated herein by reference.
(b) Sale of Unregistered Securities:
During 2004 the Corporation sold no equity securities without registration under the Securities Act of 1933, as amended.
(c) Issuer Repurchases:
Repurchases 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, the Corporation 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. Additional information concerning repurchase activity during the final three months of 2004 is presented in Table 13, and the surrounding notes and other text, of the Management's Discussion and Analysis section appearing on pages 22-23 of the Corporation's 2004 Annual Report to shareholders, which information is incorporated herein by this reference.
ITEM 6
SELECTED FINANCIAL DATA
The information called for by this Item is incorporated herein by reference to the Selected Financial and Operating Data table appearing on page 2 of the Corporation's 2004 Annual Report to shareholders.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The information called for by this Item is incorporated herein by reference to the Management's Discussion and Analysis section, Glossary section, and the Consolidated Historical Statements of Income and Consolidated Average Balance Sheets and Related Yields and Rates tables appearing on pages 3-114 of the Corporation's 2004 Annual Report to shareholders.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this Item is incorporated herein by reference to the "Interest Rate Risk Management" subsection of Note 1 to the Consolidated Financial Statements, and to the "Risk Management-Interest Rate Risk Management" subsection of the Management's Discussion and Analysis section, both of which appear, respectively, on page 66 and on pages 23-27 of the Corporation's 2004 Annual Report to shareholders.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is incorporated herein by reference to the Consolidated Financial Statements and the notes thereto and to the Summary of Quarterly Financial Information table appearing, respectively, on pages 56-111 and on page 47 of the Corporation's 2004 Annual Report to shareholders.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Corporation's management, with the participation of the Corporation's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Corporation's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by the annual report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Corporation's disclosure controls and procedures are effective to ensure that material information relating to the Corporation and the Corporation's consolidated subsidiaries is made known to such officers by others within these entities, particularly during the period this annual report was prepared, in order to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting. The report of management required by Item 308(a) of Regulation S-K, and the attestation report required by Item 308(b) of Regulation S-K, appear at pages 53-54 of the Corporation's 2004 Annual Report to shareholders and are incorporated herein by this reference.
Changes in Internal Control over Financial Reporting. There have not been any changes in the Corporation's internal control over financial reporting during the Corporation's fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting.
ITEM 9B
OTHER INFORMATION
There is no information required to have been disclosed in a report on Form 8-K during the fourth quarter of 2004 that has not been reported.
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item as it relates to directors and nominees for director of the Corporation, audit committee financial expert, and members of the Audit Committee of the Corporation's Board of Directors is incorporated herein by reference to the "Corporate Governance and Board Matters" section and the "Election of Directors" section of the Corporation's 2005 Proxy Statement (excluding the Audit Committee Report and the statements regarding the independence of members of the Audit Committee). The information required by this Item as it relates to executive officers of the Corporation is incorporated herein by reference to Item 4A in Part I of this Report. The information required by this Item as it relates to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the "Section 16(a) Beneficial Ownership Reporting Compliance" section of the 2005 Proxy Statement.
The Corporation's Board of Directors has adopted a Code of Ethics for Senior Financial Officers that applies to the Chief Executive Officer, Chief Financial Officer and Controller and also applies to all professionals serving in the financial, accounting or audit areas of the Corporation and its subsidiaries. A copy of the Code has been filed as Exhibit 14 to this report and is posted on the Corporation's current internet website (www.firsthorizon.com). (Click on "About Us," then "Investor Relations," and then "Corporate Governance.") The Code is expected to be accessible in the "Investor Relations" area of the Corporation's planned new corporate website (www.fhnc.com). There have been no amendments to, or waivers from, provisions of the Code that apply to the Chief Executive Officer, Chief Financial Officer or Controller and that relate to elements of the Code identified in Item 406(b) of SEC Regulation S-K since the Code was adopted, and the Corporation intends to satisfy its disclosure obligations under Item 5.05 of Form 8-K related thereto by posting such information on the Corporation's Internet website, the address for which is listed above.
ITEM 11
EXECUTIVE COMPENSATION
The information called for by this Item is incorporated herein by
reference to the following sections of the Corporation's 2005 Proxy Statement:
"Compensation of Directors" and "Executive Compensation", but excluding the
sub-section captioned "Total Shareholder Return Performance Graph", which
sub-section is not "filed" with the Commission and is not incorporated into this
Form 10-K.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table provides information as of December 31, 2004 with respect to shares of First Horizon common stock that may be issued under our existing equity compensation plans, including the 1990 Stock Option Plan (the "1990 Plan"), the 1995 Employee Stock Option Plan (the "1995 Plan"), the 1997 Employee Stock Option Plan (the "1997 Plan"), the 2000 Employee Stock Option Plan (the "Executive Plan"), 2003 Equity Compensation Plan, (the "2003 Plan"), the 2000 Non-employee Directors' Deferred Compensation Stock Option Plan (the "Directors' Plan"), the 1995 Non-employee Directors' Deferred Compensation Stock Option Plan (the "1995 Directors' Plan"), the 1991, 1997 and 2002 Bank Director and Advisory Board Member Deferral Plans (the "Advisory Board Plans") and the 2002 Management Incentive Plan (the "MIP"). Of the 20,432,234 options outstanding, approximately 38 percent were issued in connection with employee and director cash deferral elections. The Corporation received approximately $50,887,000 in employee cash deferrals and $4,213,000 in non-employee directors and advisory board retainer and meeting fee deferrals.
The table includes information with respect to shares subject to outstanding options granted under equity compensation plans that are no longer in effect. Footnotes (4) and (5) to the table set forth the total number of shares of First Horizon common stock issuable upon the exercise of options under the expired plans as of December 31, 2004. No additional options may be granted under those expired plans.
Equity Compensation Plan Information
A B C
-------------------- ---------------- ------------------------------
Number of Securities
Remaining Available for Future
Number of Securities Weighted Average Issuance Under Equity
to be Issued upon Exercise Price Compensation Plans
Exercise of of Outstanding (Excluding Securities
Plan Category Outstanding Options Options Reflected in Column A)
------------- ------------------- ------- ----------------------
Equity Compensation Plans Approved by
Shareowners(1)..................... 4,738,586 (4) $ 29.58 3,687,648 (2)
Equity Compensation Plans Not
Approved by Shareowners(3)......... 15,693,648 (5) $ 32.35 848,049
---------- ---------
Total*................................ 21,267,851 (6) $ 31.71 4,687,159 (7)
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* "Total" exceeds sum of column elements as explained in notes (6) and (7).
(1) Consists of the Executive Plan, Directors' Plan, 1995 Directors' Plan, 1995 Plan, 1990 Plan, the 2003 Plan and the MIP.
(2) Includes shares available for future issuance under the MIP and an additional 1,000,000 shares under the 2003 Plan approved by shareholders in 2004. As of December 31, 2004, an aggregate of 200,000 shares of First Horizon common stock were available for issuance under the MIP. As of December 31, 2004, an aggregate of 1,076,712 shares were available for restricted stock grants under the 2003 Plan.
(3) Consists of the 1997 Plan and the Advisory Board Plans.
(4) Includes 1,303,070 outstanding options issued in connection with employee and non-employee director cash deferrals of approximately $9,600,000. Also includes information for equity compensation plans that have expired. The Directors' Plan and the 1990 Plan were approved by shareholders in 1995 and 1990, respectively. The plans expired June 1999 and April 2000. As of December 31, 2004, a total of 640,990 shares of First Horizon common stock were issuable upon the exercise of outstanding options under these expired plans. No additional options may be granted under these expired plans.
(5) Includes 6,527,221 outstanding options issued in connection with employee and advisory board cash deferrals of approximately $45,500,000. Also includes information for equity compensation plans that have expired. The 1997 Bank Director and Advisory Board Member Deferral Plan and the 1991 Bank Director and Advisory Board Member Deferral Plan expired in January 2002 and January 1997, respectively. As of December 31, 2004, a total of 99,270 shares of First Horizon common stock were issuable upon the exercise of outstanding options under the expired plans. No additional options may be granted under these expired plans.
(6) Includes 835,617 shares of First Horizon common stock to be issued at the end of specified deferral periods set forth in individual deferral agreements.
(7) Includes 151,462 shares of First Horizon common stock underlying restricted stock units granted under the 1992 Restricted Stock Plan.
Description of Equity Compensation Plans Not Approved by Shareholders
The 1997 Plan. The 1997 Plan was adopted by the Board of Directors on April 16, 1996 and will expire in April 2006. The 1997 Plan provides for granting of nonqualified stock options.
Options granted under the 1997 Plan have been granted to all employees of the Corporation under our FirstShare and management option programs. The FirstShare program is a broad-based employee plan, where all employees of the Corporation receive a stock option award annually, except for management level employees who receive annual stock option awards under the management option program. The FirstShare options vest 100 percent after three years and have a term of 10 years. The management options vest 50 percent after 3 years and 50 percent after 4 years, unless a specified stock price is achieved within the 3 year period. The management options have a term of 7 years.
In addition to the above, certain employees could elect to defer a portion of their annual compensation into stock options. These options vest after 6 months and have a term of 20 years for grants made prior to February 2004. The options vest on an accelerated basis in the event of a change in control of First Horizon. All options granted under the 1997 Plan have an exercise price equal to the fair market value on the date of grant. Notwithstanding the above, the option price per share could have been less than 100 percent of the fair market value of the share at the time the option was granted if the employee entered into an agreement with the Corporation to receive a stock option grant in lieu of compensation and the amount of compensation foregone when added to the cash exercise price of the options equaled at least the fair market value of the shares on the date of grant. In January 2005, the Compensation Committee of the Board of Directors terminated the employee option deferral program; however, previously granted deferral options were unaffected by that termination.
As of December 31, 2004, options covering 15,572,848 shares of First Horizon common stock were outstanding under the 1997 Plan, 672,397 shares remained available for future option grants, and options covering 2,106,581 shares had been exercised during the year. Of the options outstanding, approximately 41 percent were issued in connection with employee cash deferral elections. The Corporation received approximately $44,020,000 in cash deferrals to offset a portion of the exercise price. Of the 672,397 shares remaining available for future option grants, approximately all are expected to be granted with an option term of 10 years or less.
The 1997 Plan has been filed as Exhibit 10(c) in the Corporation's Form 10-Q for the quarter ended September 30, 2002.
The Advisory Board Plans. The Advisory Board Plans were adopted by the Board of Directors in October 2001, January 1997 and January 1991. The 2002 Advisory Board Plan will expire on January 1, 2007 and the 1997 and 1991 plans expired in 2002 and 1997, respectively. The 2002 Advisory Board Plan provides granting of nonqualified stock options to bank regional and advisory board members who choose to forego board fees and retainers in exchange for stock options on shares of the Corporation's common stock.
Options granted under the Advisory Board Plans are granted only to regional and advisory board members who are not employees. The options are granted in lieu of the participants receiving retainers or attendance fees for bank board and advisory board meetings. The number of shares subject to grant will be the amount of fees/retainers earned divided by one half of the fair market value of one share of common stock on the date of option grant. The exercise price plus the amount of fees foregone will equal the fair market value of the stock on the date of the grant. The options vest after 6 months and have a term of 20 years for grants made prior to February 2004, and a term of 10 years for grants made subsequent to January 2004. In January 2005, the Compensation Committee approved the termination of the deferral stock option program generally; as a consequence of that action, it is anticipated that the 2002 Advisory Board Plan will be terminated by formal Board action in 2005.
As of December 31, 2004, options covering 120,800 shares of First Horizon common stock were outstanding under the Advisory Board Plans, 175,652 shares remained available for future option grants, and options covering 14,025 shares had been exercised during the year.
The Advisory Board Plans have been filed as Exhibit 10(s) to the Corporation's Form 10-Q for the quarter ended June 30, 2004, and Exhibits 10(t) and 10(u) to the Corporation's Form 10-K for the year 2002.
Beneficial Ownership of Corporation Stock
The information required by this Item pursuant to Item 403(a) and (b) of Regulation S-K is incorporated herein by reference to the "Stock Ownership Information and Table" section of the Corporation's 2005 Proxy Statement.
Change in Control Arrangements
The Corporation is unaware of any arrangements which may result in a change in control of the Corporation.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is incorporated herein by reference to the "Certain Relationships and Related Transactions" section of the 2005 Proxy Statement.
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee of the Board of Directors has adopted an Audit and Non-Audit Services Pre-Approval Policy, a copy of which is set forth as part of Appendix B to the Corporation's 2005 Proxy Statement (pages B-6 - B-8) and is incorporated herein by reference.
Information regarding fees billed to the Corporation by KPMG LLC for the two most recent fiscal years is incorporated herein by reference to the "Vote Item No. 2"section of the 2005 Proxy Statement. No services were approved by the Audit Committee pursuant to Rule 2-01(c)(7)(i)(c) of Regulation S-X.
PART IV
ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Report:
Financial Statements:
Page 56* 1. Consolidated Statements of Condition as of
December 31, 2004 and 2003.
Page 57* 2. Consolidated Statements of Income for the years
ended December 31, 2004, 2003 and 2002.
Page 58* 3. Consolidated Statements of Shareholders' Equity for
the years ended December 31, 2004, 2003, and 2002.
Page 59* 4. Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002.
Pages 60-111* 5. Notes to the Consolidated Financial Statements
Pages 54-55* 6. Reports of Independent Registered Public Accounting
Firm
|
*The consolidated financial statements of the Corporation, the notes thereto, and the reports of independent public accountants, as listed above, are incorporated herein by reference to the indicated pages of the Corporation's 2004 Annual Report to shareholders.
Financial Statement Schedules: Not applicable.
Exhibits:
Exhibits marked with an "*" represent a management contract or compensatory plan or arrangement required to be identified and filed as an exhibit.
Exhibits marked with a "+" are filed herewith.
3.1 Amended and Restated Charter of the Corporation, incorporated herein
by reference to Exhibit 3(i) to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended 3-31-04.
3.2+ Bylaws of the Corporation, as amended and restated as of 1-18-05.
4.1 Shareholder Protection Rights Agreement, dated as of October 20,
1998, between the Corporation and First Tennessee Bank National
Association, as Rights Agent, including as Exhibit A the forms of
Rights Certificate and Election to Exercise and as Exhibit B the
form of Articles of Amendment designating Participating Preferred
Stock, incorporated herein by reference to Exhibits 1, 2, and 3 to
the Corporation's Registration Statement on Form 8-A filed 10-23-98.
4.2 The Corporation and certain of its consolidated subsidiaries have
outstanding certain long-term debt. See Note 10 in the Corporation's
2004 Annual Report to shareholders. At December 31, 2004, none of
such debt exceeded 10% of the total assets of the Corporation and
its consolidated subsidiaries. Thus, copies of constituent
instruments defining the rights of holders of such debt are not
required to be included as exhibits. The Corporation agrees to
furnish copies of such instruments to the Securities and Exchange
Commission upon request.
4.3 Three principal agreements related to a note program for First
Tennessee Bank National Association (the "Bank"): (i) form of
Distribution Agreement dated February 18, 2005 among the registrant,
the Bank, and the agents therein named; (ii) form of Fiscal and
Paying Agency Agreement dated as of February 18, 2005 between the
Bank and JPMorgan Chase Bank, National Association; and (iii) form
of Interest Calculation Agreement dated as of February 18, 2005
between the Bank and JPMorgan Chase Bank, National Association. All
such agreements are incorporated herein by reference to Exhibit 4(c)
to the Corporation's Current Report on Form 8-K filed February 25,
2005.
|
*Deferral Plans and Related Exhibits
*10.1(a) Directors and Executives Deferred Compensation Plan, as amended and restated, incorporated herein by reference to Exhibit 10(h) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended 6-30-03 and form of individual agreement, incorporated herein by reference to Exhibit 10(h) to the Corporation's 1996 Annual report on Form 10-K.
*10.1(b) Director Deferral Agreements with schedule, incorporated herein by reference to Exhibit 10(k) to the Corporation's 1992 Annual Report on Form 10-K and Exhibit 10(j) to the Corporation's 1995 Annual Report on Form 10-K.
*10.1(c) First Tennessee National Corporation Nonqualified Deferred Compensation Plan, incorporated herein by reference to Exhibit 10(a) to the Corporation's 2003 Annual Report on Form 10-K.
*10.1(d) Non-Employee Directors' Deferred Compensation Stock Option Plan, as amended and restated, incorporated herein by reference to Exhibit 10(m) to the Corporation's 1997 Annual Report on Form 10-K.
*10.1(e) 2000 Non-Employee Directors' Deferred Compensation Stock Option Plan, as amended and restated 4-20-04, incorporated herein by reference to Exhibit 10(n) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended 6-30-04.
*10.1(f) [1991] Bank Advisory Director Deferral Plan, incorporated herein by reference to Exhibit 10(u) to the Corporation's 2002 Annual Report on Form 10-K.
*10.1(g) [1997] Bank Director and Advisory Board Member Deferral Plan, incorporated herein by reference to Exhibit 10(t) to the Corporation's 2002 Annual Report on Form 10-K.
*10.1(h) 2002 Bank Director and Advisory Board Member Deferral Plan, as amended and restated 4-20-04, incorporated herein by reference to Exhibit 10(s) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended 6-30-04.
*10.1(i) First Horizon Nonqualified Deferred Compensation Plan, incorporated herein by reference to Exhibit 4(c) to the Corporation's Registration Statement on Form S-8 (No. 333-106015), filed June 11, 2003.
*10.1(j) FTN Financial Deferred Compensation Plan, incorporated herein by reference to Exhibit 4.3 to the Corporation's Registration Statement on Form S-8 (No. 333-110845), filed December 1, 2003.
*10.1(k) Form of Deferred Compensation Agreement used under the registrant's 2003 Equity Compensation Plan and First Tennessee National Corporation Non-Qualified Deferred Compensation Plan, along with form of Salary, Commission, and Annual Bonus Deferral Programs Overview, form of Deferred Stock Option ("DSO") Program Summary, and description of share receipt deferral feature, incorporated herein by reference to Exhibit 10(z) to the Corporation's Current Report on Form 8-K dated January 3, 2005.
*Stock-Based Incentive Plans
*10.2(a) 1990 Stock Option Plan, as amended, and 1-21-97, 10-22-97, and 10-18-00 amendments, incorporated herein by reference to Exhibit 10(f) to the Corporation's 1992, 1996, 1997 and 2000 Annual Reports on Form 10-K.
*10.2(b) 1992 Restricted Stock Incentive Plan, as amended and restated, incorporated herein by reference to Exhibit 10(d) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended 3-31-99.
*10.2(c) 1995 Employee Stock Option Plan, as amended and restated, incorporated herein by reference to Exhibit 10(l) to the Corporation's 2000 Annual Report on Form 10-K.
*10.2(d) 1997 Employee Stock Option Plan, as amended and restated, incorporated herein by reference to Exhibit 10(c) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended 9-30-02.
*10.2(e) 2000 Employee Stock Option Plan, as amended and restated, incorporated herein by reference to Exhibit 10(b) to the Corporation's 2000 Annual Report on Form 10-K.
*10.2(f) 2003 Equity Compensation Plan, incorporated herein by reference to Appendix A to the Corporation's Proxy Statement furnished to shareholders in connection with the annual meeting held on April 20, 2004, filed March 10, 2004.
*TARSAP/PARSAP Restricted Stock Agreements and Related Documents
*10.3(a)+ Form of accelerated (performance based) Restricted Stock Agreement under the 1992 Restricted Stock Incentive Plan
*10.3(b)+ Form of accelerated (performance based) Restricted Stock Agreement under the 2003 Equity Compensation Plan
*10.3(c)+ Description of performance criteria related to TARSAP/PARSAP awards granted prior to 2005
*LTIP Documents
*10.4(a)+ Form of Notice of 2003 LTIP award under the 2003 Equity Compensation Plan, with form of related Restricted Stock Agreement. Messrs. Burkett, Hughes, and Baker are the executive officers whose bonuses are based on a measure of business unit earnings, as described in the bracketed text in Section 5.0 of the Notice and in Exhibit A to the Restricted Stock Agreement; however, Messrs. Hughes and Baker received no Restricted Stock Agreement in connection with their 2003 LTIP awards.
*10.4(b)+ Form of Notice of 2004 LTIP award under the 2003 Equity Compensation Plan. Messrs. Burkett, Hughes, and Baker are the executive officers whose bonuses are based on a measure of business unit earnings, as described in the bracketed text in Section 5.0 of the Notice.
*10.4(c)+ Form of Notice of 2005 LTIP award under the 2003 Equity Compensation Plan. Messrs. Burkett, Hughes, Baker, and Martin are the executive officers whose bonuses are based on a measure of business unit earnings, as noted in the exhibit.
*Other Stock-Based Incentive Plan Agreements and Related Documents
*10.5(a) Form of Restricted Stock Agreement for Non-Employee Director used under the 2003 Equity Compensation Plan, incorporated herein by reference to Exhibit 10(aa) to the Corporation's Current Report on Form 8-K dated January 18, 2005.
*10.5(b)+ April 2003 Restricted Stock Agreement under the 2003 Equity Compensation Plan with J. Kenneth Glass.
*10.5(c)+ Form of Agreement To Defer Receipt Of Shares Following Option Exercise.
*10.5(d)+ Form of Agreement to Exchange Shares for RSUs and Defer Receipt of Shares [relating to Restricted Stock]
*10.5(e)+ Form of Stock Option Grant Notice
*10.5(f)+ Form of Stock Option Reload Grant Notification
*Management Cash Incentive Plan Documents
*10.6(a) 2002 Management Incentive Plan, incorporated herein by reference to Exhibit 10(q) to the Corporation's 2001 Annual Report on Form 10-K.
*10.6(b) Description of target payouts and performance criteria approved for 2005 annual cash bonuses to executive officers under the 2002 Management Incentive Plan, incorporated
herein by reference to the third paragraph under the caption "Salary
and Annual Bonus Action" reported under Item 1.01 of the
Corporation's Current Report on Form 8-K filed February 28, 2005.
Other Material Contract Exhibits
*10.7 Form of Severance Agreements dated 1-28-97, incorporated herein by
reference to Exhibit 10(k) to the Corporation's 1996 Annual Report
on Form 10-K.
*10.8 Survivor Benefits Plan, as amended and restated, incorporated herein
by reference to Exhibit 10(g) to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended 9-30-03.
*10.9 Non-employee Director Benefits, incorporated herein by reference to
Exhibit 10(p) to the Corporation's 2003 Annual Report on Form 10-K.
The benefit described in this exhibit relating to the possible
repurchase of shares of the Corporation's common stock is available
to the Corporation's executive officers as well as to its directors.
*10.10 Long-Term Disability Program, incorporated herein by reference to
Exhibit 10(v) to the Corporation's 2003 Annual Report on Form 10-K.
*10.11 Amended and Restated Pension Restoration Plan, as amended and
restated 4-20-04, incorporated herein by reference to Exhibit 10(i)
to the Corporation's Quarterly Report on Form 10-Q for the quarter
ended 6-30-04.
*10.12 Jim L. Hughes employment agreement, incorporated herein by reference
to Exhibit 10(w) to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended 6-30-04.
*10.13+ Form of Indemnity Agreement between the Corporation and its
directors and executive officers.
*10.14 Description of salaries approved for executive officers for 2005,
incorporated herein by reference to the first paragraph under the
caption "Salary and Annual Bonus Action" reported under Item 1.01 of
the Corporation's Current Report on Form 8-K filed February 28,
2005.
13+ Pages 2 through 114 of the First Horizon National Corporation 2004
Annual Report to shareholders, a copy of which is furnished for the
information of the Securities and Exchange Commission. Portions of
the Annual Report not incorporated herein by reference are deemed
not to be "filed" with the Commission.
14 Code of Ethics for Senior Financial Officers, incorporated herein by
reference to Exhibit 14 to the Corporation's 2003 Annual Report on
Form 10-K
21+ Subsidiaries of the Corporation.
23+ Accountant's Consents.
24+ Powers of Attorney.
|
31(a)+ Rule 13a-14(a) Certifications of CEO (pursuant to Section 302 of
Sarbanes-Oxley Act of 2002)
31(b)+ Rule 13a-14(a) Certifications of CFO (pursuant to Section 302 of
Sarbanes-Oxley Act of 2002)
32(a)+ 18 USC 1350 Certifications of CEO (pursuant to Section 906 of
Sarbanes-Oxley Act of 2002)
32(b)+ 18 USC 1350 Certifications of CFO (pursuant to Section 906 of
Sarbanes-Oxley Act of 2002)
|
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST HORIZON NATIONAL CORPORATION
Date: March 11, 2005 By: /s/ Marlin L. Mosby, III
-----------------------
Marlin L. Mosby, III, Executive Vice President,
and Chief Financial Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
J. Kenneth Glass* Chairman of the Board, President, March 11, 2005
-------------------------- Chief Executive Officer
J. Kenneth Glass and a Director (principal executive
officer)
Marlin L. Mosby, III* Executive Vice President and Chief March 11, 2005
--------------------------- Financial Officer (principal
Marlin L. Mosby, III financial officer)
James F. Keen* Executive Vice President and March 11, 2005
---------------------------- Corporate Controller (principal
James F. Keen accounting officer)
Robert C. Blattberg* Director March 11, 2005
--------------------------
Robert C. Blattberg
Director
--------------------------
George E. Cates
Simon F. Cooper* Director March 11, 2005
-------------------------
Simon F. Cooper
James A. Haslam, III* Director March 11, 2005
------------------------
James A. Haslam, III
R. Brad Martin* Director March 11, 2005
--------------------------
R. Brad Martin
Vicki R. Palmer * Director March 11, 2005
-------------------------
Vicki R. Palmer
Michael D. Rose* Director March 11, 2005
------------------------
Michael D. Rose
Mary F. Sammons* Director March 11, 2005
-----------------------
Mary F. Sammons
|
William B. Sansom* Director March 11, 2005
-----------------------
William B. Sansom
Jonathan P. Ward* Director March 11, 2005
------------------------
Jonathan P. Ward
Luke Yancy III* Director March 11, 2005
------------------------
Luke Yancy III
*By: /s/ Clyde A. Billings, Jr. March 11, 2005
-------------------------------
Clyde A. Billings, Jr.
As Attorney-in-Fact
|
EXHIBIT INDEX
Exhibits marked with an "*" represent a management contract or compensatory plan or arrangement required to be identified and filed as an exhibit.
Exhibits marked with a "+" are filed herewith.
3.1 Amended and Restated Charter of the Corporation, incorporated herein
by reference to Exhibit 3(i) to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended 3-31-04.
3.2+ Bylaws of the Corporation, as amended and restated as of 1-18-05.
4.1 Shareholder Protection Rights Agreement, dated as of October 20,
1998, between the Corporation and First Tennessee Bank National
Association, as Rights Agent, including as Exhibit A the forms of
Rights Certificate and Election to Exercise and as Exhibit B the
form of Articles of Amendment designating Participating Preferred
Stock, incorporated herein by reference to Exhibits 1, 2, and 3 to
the Corporation's Registration Statement on Form 8-A filed 10-23-98.
4.2 The Corporation and certain of its consolidated subsidiaries have
outstanding certain long-term debt. See Note 10 in the Corporation's
2004 Annual Report to shareholders. At December 31, 2004, none of
such debt exceeded 10% of the total assets of the Corporation and
its consolidated subsidiaries. Thus, copies of constituent
instruments defining the rights of holders of such debt are not
required to be included as exhibits. The Corporation agrees to
furnish copies of such instruments to the Securities and Exchange
Commission upon request.
4.3 Three principal agreements related to a note program for First
Tennessee Bank National Association (the "Bank"): (i) form of
Distribution Agreement dated February 18, 2005 among the registrant,
the Bank, and the agents therein named; (ii) form of Fiscal and
Paying Agency Agreement dated as of February 18, 2005 between the
Bank and JPMorgan Chase Bank, National Association; and (iii) form
of Interest Calculation Agreement dated as of February 18, 2005
between the Bank and JPMorgan Chase Bank, National Association. All
such agreements are incorporated herein by reference to Exhibit 4(c)
to the Corporation's Current Report on Form 8-K filed February 25,
2005.
|
*Deferral Plans and Related Exhibits
*10.1(a) Directors and Executives Deferred Compensation Plan, as amended and restated, incorporated herein by reference to Exhibit 10(h) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended 6-30-03 and form of individual agreement, incorporated herein by reference to Exhibit 10(h) to the Corporation's 1996 Annual report on Form 10-K.
*10.1(b) Director Deferral Agreements with schedule, incorporated herein by reference to Exhibit 10(k) to the Corporation's 1992 Annual Report on Form 10-K and Exhibit 10(j) to the Corporation's 1995 Annual Report on Form 10-K.
*10.1(c) First Tennessee National Corporation Nonqualified Deferred Compensation Plan, incorporated herein by reference to Exhibit 10(a) to the Corporation's 2003 Annual Report on Form 10-K.
*10.1(d) Non-Employee Directors' Deferred Compensation Stock Option Plan, as amended and restated, incorporated herein by reference to Exhibit 10(m) to the Corporation's 1997 Annual Report on Form 10-K.
*10.1(e) 2000 Non-Employee Directors' Deferred Compensation Stock Option Plan, as amended and restated 4-20-04, incorporated herein by reference to Exhibit 10(n) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended 6-30-04.
*10.1(f) [1991] Bank Advisory Director Deferral Plan, incorporated herein by reference to Exhibit 10(u) to the Corporation's 2002 Annual Report on Form 10-K.
*10.1(g) [1997] Bank Director and Advisory Board Member Deferral Plan, incorporated herein by reference to Exhibit 10(t) to the Corporation's 2002 Annual Report on Form 10-K.
*10.1(h) 2002 Bank Director and Advisory Board Member Deferral Plan, as amended and restated 4-20-04, incorporated herein by reference to Exhibit 10(s) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended 6-30-04.
*10.1(i) First Horizon Nonqualified Deferred Compensation Plan, incorporated herein by reference to Exhibit 4(c) to the Corporation's Registration Statement on Form S-8 (No. 333-106015), filed June 11, 2003.
*10.1(j) FTN Financial Deferred Compensation Plan, incorporated herein by reference to Exhibit 4.3 to the Corporation's Registration Statement on Form S-8 (No. 333-110845), filed December 1, 2003.
*10.1(k) Form of Deferred Compensation Agreement used under the registrant's 2003 Equity Compensation Plan and First Tennessee National Corporation Non-Qualified Deferred Compensation Plan, along with form of Salary, Commission, and Annual Bonus Deferral Programs Overview, form of Deferred Stock Option ("DSO") Program Summary, and description of share receipt deferral feature, incorporated herein by reference to Exhibit 10(z) to the Corporation's Current Report on Form 8-K dated January 3, 2005.
*Stock-Based Incentive Plans
*10.2(a) 1990 Stock Option Plan, as amended, and 1-21-97, 10-22-97, and 10-18-00 amendments, incorporated herein by reference to Exhibit 10(f) to the Corporation's 1992, 1996, 1997 and 2000 Annual Reports on Form 10-K.
*10.2(b) 1992 Restricted Stock Incentive Plan, as amended and restated, incorporated herein by reference to Exhibit 10(d) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended 3-31-99.
*10.2(c) 1995 Employee Stock Option Plan, as amended and restated, incorporated herein by reference to Exhibit 10(l) to the Corporation's 2000 Annual Report on Form 10-K.
*10.2(d) 1997 Employee Stock Option Plan, as amended and restated, incorporated herein by reference to Exhibit 10(c) to the Corporation's Quarterly Report on Form 10-Q for the quarter ended 9-30-02.
*10.2(e) 2000 Employee Stock Option Plan, as amended and restated, incorporated herein by reference to Exhibit 10(b) to the Corporation's 2000 Annual Report on Form 10-K.
*10.2(f) 2003 Equity Compensation Plan, incorporated herein by reference to Appendix A to the Corporation's Proxy Statement furnished to shareholders in connection with the annual meeting held on April 20, 2004, filed March 10, 2004.
*TARSAP/PARSAP Restricted Stock Agreements and Related Documents
*10.3(a)+ Form of accelerated (performance based) Restricted Stock Agreement under the 1992 Restricted Stock Incentive Plan
*10.3(b)+ Form of accelerated (performance based) Restricted Stock Agreement under the 2003 Equity Compensation Plan
*10.3(c)+ Description of performance criteria related to TARSAP/PARSAP awards granted prior to 2005
*LTIP Documents
*10.4(a)+ Form of Notice of 2003 LTIP award under the 2003 Equity Compensation Plan, with form of related Restricted Stock Agreement. Messrs. Burkett, Hughes, and Baker are the executive officers whose bonuses are based on a measure of business unit earnings, as described in the bracketed text in Section 5.0 of the Notice and in Exhibit A to the Restricted Stock Agreement; however, Messrs. Hughes and Baker received no Restricted Stock Agreement in connection with their 2003 LTIP awards.
*10.4(b)+ Form of Notice of 2004 LTIP award under the 2003 Equity Compensation Plan. Messrs. Burkett, Hughes, and Baker are the executive officers whose bonuses are based on a measure of business unit earnings, as described in the bracketed text in Section 5.0 of the Notice.
*10.4(c)+ Form of Notice of 2005 LTIP award under the 2003 Equity Compensation Plan. Messrs. Burkett, Hughes, Baker, and Martin are the executive officers whose bonuses are based on a measure of business unit earnings, as noted in the exhibit.
*Other Stock-Based Incentive Plan Agreements and Related Documents
*10.5(a) Form of Restricted Stock Agreement for Non-Employee Director used under the 2003 Equity Compensation Plan, incorporated herein by reference to Exhibit 10(aa) to the Corporation's Current Report on Form 8-K dated January 18, 2005.
*10.5(b)+ April 2003 Restricted Stock Agreement under the 2003 Equity Compensation Plan with J. Kenneth Glass.
*10.5(c)+ Form of Agreement To Defer Receipt Of Shares Following Option Exercise.
*10.5(d)+ Form of Agreement to Exchange Shares for RSUs and Defer Receipt of Shares [relating to Restricted Stock]
*10.5(e)+ Form of Stock Option Grant Notice
*10.5(f)+ Form of Stock Option Reload Grant Notification
*Management Cash Incentive Plan Documents
*10.6(a) 2002 Management Incentive Plan, incorporated herein by reference to Exhibit 10(q) to the Corporation's 2001 Annual Report on Form 10-K.
*10.6(b) Description of target payouts and performance criteria approved for 2005 annual cash bonuses to executive officers under the 2002 Management Incentive Plan, incorporated
herein by reference to the third paragraph under the caption "Salary
and Annual Bonus Action" reported under Item 1.01 of the
Corporation's Current Report on Form 8-K filed February 28, 2005.
Other Material Contract Exhibits
*10.7 Form of Severance Agreements dated 1-28-97, incorporated herein by
reference to Exhibit 10(k) to the Corporation's 1996 Annual Report
on Form 10-K.
*10.8 Survivor Benefits Plan, as amended and restated, incorporated herein
by reference to Exhibit 10(g) to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended 9-30-03.
*10.9 Non-employee Director Benefits, incorporated herein by reference to
Exhibit 10(p) to the Corporation's 2003 Annual Report on Form 10-K.
The benefit described in this exhibit relating to the possible
repurchase of shares of the Corporation's common stock is available
to the Corporation's executive officers as well as to its directors.
*10.10 Long-Term Disability Program, incorporated herein by reference to
Exhibit 10(v) to the Corporation's 2003 Annual Report on Form 10-K.
*10.11 Amended and Restated Pension Restoration Plan, as amended and
restated 4-20-04, incorporated herein by reference to Exhibit 10(i)
to the Corporation's Quarterly Report on Form 10-Q for the quarter
ended 6-30-04.
*10.12 Jim L. Hughes employment agreement, incorporated herein by reference
to Exhibit 10(w) to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended 6-30-04.
*10.13+ Form of Indemnity Agreement between the Corporation and its
directors and executive officers.
*10.14 Description of salaries approved for executive officers for 2005,
incorporated herein by reference to the first paragraph under the
caption "Salary and Annual Bonus Action" reported under Item 1.01 of
the Corporation's Current Report on Form 8-K filed February 28,
2005.
13+ Pages 2 through 114 of the First Horizon National Corporation 2004
Annual Report to shareholders, a copy of which is furnished for the
information of the Securities and Exchange Commission. Portions of
the Annual Report not incorporated herein by reference are deemed
not to be "filed" with the Commission.
14 Code of Ethics for Senior Financial Officers, incorporated herein by
reference to Exhibit 14 to the Corporation's 2003 Annual Report on
Form 10-K
21+ Subsidiaries of the Corporation.
23+ Accountant's Consents.
24+ Powers of Attorney.
|
31(a)+ Rule 13a-14(a) Certifications of CEO (pursuant to Section 302 of
Sarbanes-Oxley Act of 2002)
31(b)+ Rule 13a-14(a) Certifications of CFO (pursuant to Section 302 of
Sarbanes-Oxley Act of 2002)
32(a)+ 18 USC 1350 Certifications of CEO (pursuant to Section 906 of
Sarbanes-Oxley Act of 2002)
32(b)+ 18 USC 1350 Certifications of CFO (pursuant to Section 906 of
Sarbanes-Oxley Act of 2002)
|
STATEMENT OF DIFFERENCES
The greater-than-or-equal-to sign shall be expressed as.......................>=
Exhibit 3.2
BYLAWS OF
FIRST HORIZON NATIONAL CORPORATION
(As Amended and Restated January 18, 2005)
ARTICLE ONE
OFFICES
1.1 Principal Office. The principal office of First Horizon National Corporation (the "Corporation") shall be 165 Madison Avenue, Memphis, Tennessee.
1.2 Other Offices. The Corporation may have offices at such other places, either within or without the State of Tennessee, as the Board of Directors may from time to time designate or as the business of the Corporation may from time to time require.
1.3 Registered Office. The registered office of the Corporation required to be maintained in the State of Tennessee shall be the same as its principal office and may be changed from time to time as provided by law.
ARTICLE TWO
SHAREHOLDERS
2.1 Place of Meetings. Meetings of the shareholders of the Corporation may be held either in the State of Tennessee or elsewhere; but in the absence of notice to the contrary, shareholders' meetings shall be held at the principal office of the Corporation in Memphis, Tennessee.
2.2 Quorum and Adjournments. The holders of a majority of the shares issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite, and shall constitute a quorum at all meetings of the shareholders, for the transaction of business, except as otherwise provided by law, the Restated Charter of the Corporation, as amended from time to time (the "Charter"), or these Bylaws. In the event a quorum is not obtained at the meeting, the holders of a majority of the shares entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time and, whether or not a quorum is obtained at the meeting, the Chairman of the meeting shall have the power to adjourn the meeting from time to time, in either case without notice, except as otherwise provided by law, other than announcement at the meeting. At such adjourned meeting at which the requisite amount of voting shares shall be represented, any business may be transacted which might have been transacted at the meeting as originally notified.
2.3 Notice of Meetings. Unless otherwise required by applicable law, written notice of the annual and each special meeting stating the date, time and place of the meeting shall be mailed, postage prepaid, or otherwise delivered to each shareholder entitled to vote thereat at such address as appears on the records of shareholders of the Corporation, at least ten (10) days, but not more than two (2) months, prior to the meeting date. In addition, notice of any special meeting shall state the purpose or purposes for which the meeting is called and the person or persons calling the meeting. In the event of an adjournment of a meeting to a date more than four months after the date fixed for the original meeting or the Board of Directors fixes a new record date for the adjourned meeting, a new notice of the adjourned meeting must be given to shareholders as of the new record date. Any previously scheduled meeting may be postponed, and any special meeting may be canceled, by resolution of the Board of Directors upon public notice given prior to the date scheduled for such meeting.
2.4 Annual Meetings. The annual meeting of shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year on the third Tuesday in April, or if that day is a legal holiday, on the next succeeding business day not a legal holiday, at 11:00 a.m. Memphis time or on such other date and/or at such other time as the Board of Directors may fix by resolution by vote of a majority of the entire Board of Directors. At the meeting, the shareholders shall elect by ballot, by plurality vote, directors to succeed directors in the class of directors whose term expires at the meeting and directors elected by the Board of Directors to fill vacancies in other classes of directors and may transact such other business as may properly come before the meeting.
2.5 Special Meetings. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by statute, may be called by Chairman of the Board and shall be called by the Chairman of the Board or the Secretary at the request in writing of a majority of the Board of Directors. Only such business within the purpose or purposes described in the notice of the meeting may be conducted at the meeting.
2.6 Waiver of Notice. Any shareholder may waive in writing notice of any meeting either before, at or after the meeting. Attendance by a shareholder in person or by proxy at a meeting shall constitute a waiver of objection to lack of notice or defective notice and a waiver of objection to consideration of a matter that was not described in the meeting notice unless the shareholder objects in the manner required by law.
2.7 Voting. Unless otherwise required by the Charter, at each meeting of shareholders, each shareholder shall have one vote for each share of stock having voting power registered in the shareholder's name on the records of the Corporation on the record date for that meeting, and every shareholder having the right to vote shall be entitled to vote in person or by proxy appointed by instrument in writing or any other method permitted by law.
2.8 Procedures for Bringing Business before Shareholder Meeting. At an
annual or special meeting of shareholders, only such business shall be
conducted, and only such proposals shall be acted upon, as shall have been
properly brought before an annual or special meeting of shareholders. To be
properly brought before an annual or special meeting of shareholders, business
must be (i) in the case of a special meeting called by the Chairman of the Board
or at the request of the Board of Directors, specified in the notice of the
special meeting (or any supplement thereto), or (ii) in the case of an annual
meeting properly brought before the meeting by or at the direction of the Board
of Directors or (iii) otherwise properly brought before the annual or special
meeting by a shareholder. For business to be properly brought before such a
meeting of shareholders by a shareholder, the shareholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 90 days nor more
than 120 days prior to the date of the meeting; provided, however, that if fewer
than 100 days' notice or prior public disclosure of the date of the meeting is
given or made to shareholders, notice by the shareholders to be timely must be
so delivered or received not later than the close of business on the 10th day
following the earlier of (i) the day on which such notice of the date of such
meeting was mailed or (ii) the day on which such public disclosure was made. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before a meeting of shareholders (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and address,
as they appear on the Corporation's books, of the shareholder proposing such
business and any other shareholders known by such shareholder to be supporting
such proposal, (iii) the class and number of shares of the Corporation which are
beneficially owned by such shareholder on the date of such shareholder's notice
and by any other shareholders known by such shareholder to be supporting such
proposal on the date of such shareholder's notice, and (iv) any material
interest of the shareholder in such proposal. Notwithstanding anything in these
Bylaws to the contrary, no business shall be conducted at a meeting of
shareholders except in accordance with the procedures set forth in this Section
2.8. The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that the business was not properly brought before the
meeting in accordance with the procedures prescribed by these Bylaws, and if the
Chairman should so determine, the Chairman shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted.
2.9 SEC Proxy Rules. In addition to complying with the provisions of
Section 2.8, a shareholder shall also comply with all applicable requirements of
the Securities Exchange Act of 1934 and the rules and regulations thereunder
with respect to the matters set forth in Section 2.8. Nothing in Section 2.8
shall be deemed to affect any rights of shareholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to rules of the
Securities and Exchange Commission. For such proposals to be acted upon at a
meeting, however, compliance with the notice provisions of Section 2.8 is also
required.
ARTICLE THREE
DIRECTORS
3.1 Powers of Directors. The business and affairs of the Corporation shall be managed under the direction of and all corporate powers shall be exercised by or under the authority of the Board of Directors.
3.2 Number and Qualifications. The Board of Directors shall consist of eleven [twelve prior to 11:00 a.m. on April 19, 2005] members. The Board of Directors has the power to change from time to time the number of directors specified in the preceding sentence. Any such change in the number of directors constituting the Corporation's Board Directors must be made exclusively by means of an amendment to these Bylaws adopted by a majority of the entire Board of Directors then in office. Directors need not be shareholders of the Corporation nor residents of the State of Tennessee.
3.3 Term of Office. Except as otherwise provided by law or by the Charter, the term of each director hereafter elected shall be from the time of his or her election and qualification until the third annual meeting next following such election and until a successor shall have been duly elected and qualified; subject, however, to the right of the removal of any director as provided by law, by the Charter or by these Bylaws.
3.4 Compensation. The directors shall be paid for their services on the Board of Directors and on any Committee thereof such compensation (which may include cash, shares of stock of the Corporation and options thereon) and benefits together with reasonable expenses, if any, at such times as may, from time to time, be determined by resolution adopted by a majority of the entire Board of Directors; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and being compensated therefor.
3.5 Committees. The directors, by resolution adopted by a majority of the entire Board of Directors, may designate an executive committee and other committees, consisting of two or more directors, and may delegate to such committee or committees all such authority of the Board of Directors that it deems desirable, including, without limitation, authority to appoint corporate officers, fix their salaries, and, to the extent such is not provided by law, the Charter or these Bylaws, to establish their authority and responsibility, except that no such committee or committees shall have and exercise the authority of the Board of Directors to:
(a) authorize distributions (which include dividend declarations), except according to a formula or method prescribed by the Board of Directors,
(b) fill vacancies on the Board of Directors or on any of its committees,
(c) adopt, amend or repeal bylaws,
(d) authorize or approve the reacquisition of shares, except according to a formula or method prescribed by the Board of Directors, or
(e) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board of Directors may authorize a committee to do so within limits specifically prescribed by the Board of Directors.
3.6 Procedures for Director Nominations. Except as provided in Section 3.7 with respect to vacancies on the Board of Directors, only persons nominated in accordance with the procedures set forth in this Section 3.6 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors may be made at a meeting of shareholders (i) by or at the direction of the Board of Directors, or (ii) by any shareholder of the Corporation entitled to vote for the election of directors at such meeting who complies with the notice procedures set forth in this Section 3.6. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the
Corporation not less than 90 days nor more than 120 days prior to the date of a
meeting; provided, however, that if fewer than 100 days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders, notice
by the shareholder to be timely must be so delivered or received not later than
the close of business on the 10th day following the earlier of (i) the day on
which such notice of the date of such meeting was mailed or (ii) the day on
which such public disclosure was made. A shareholder's notice to the Secretary
shall set forth (i) as to each person whom the shareholder proposes to nominate
for election or reelection as a director (a) the name, age, business address and
residence address of such person, (b) the principal occupation or employment of
such person, (c) the class and number of shares of the Corporation which are
beneficially owned by such person on the date of such shareholder's notice and
(d) any other information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors or, is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including, without limitation, such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); and (ii) as to the shareholder giving the notice (a) the
name and address, as they appear on the Corporation's books, of such shareholder
and any other shareholders known by such shareholder to be supporting such
nominees and (b) the class and number of shares of the Corporation which are
beneficially owned by such shareholder on the date of such shareholder's notice
and by any other shareholders known by such shareholder to be supporting such
nominees on the date of such shareholder's notice. No person shall be eligible
for election as a director of the Corporation unless nominated in accordance
with the procedures set forth in this Section 3.6. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if the Chairman should so determine, the Chairman shall so declare
to the meeting and the defective nomination shall be disregarded.
3.7 Vacancies; Removal from Office. Except as otherwise provided by law or by the Charter, newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification or any other cause (except removal from office) shall be filled only by the Board of Directors, provided that a quorum is then in office and present, or only by a majority of the directors then in office, if less than a quorum is then in office or by the sole remaining director. Any vacancies on the Board of Directors resulting from removal from office may be filled by the affirmative vote of the holders of at least a majority of the voting power of all outstanding voting stock or, if the shareholders do not so fill such a vacancy, by a majority of the directors then in office. Directors elected to fill a newly created directorship or other vacancy shall hold office for a term expiring at the next shareholders' meeting at which directors are elected and until such director's successor has been duly elected and qualified. The directors of any class of directors of the Corporation may be removed by the shareholders only for cause by the affirmative vote of the holders of at least a majority of the voting power of all outstanding voting stock.
3.8 Place of Meetings. The directors may hold meetings of the Board of Directors or of a committee thereof at the principal office of the Corporation in Memphis, Tennessee, or at such other place or places, either in the State of Tennessee or elsewhere, as the Board of Directors or the members of the committee, as applicable, may from time to time determine by resolution or by written consent or as may be specified in the notice of the meeting.
3.9 Quorum. A majority of the directors shall constitute a quorum for the transaction of business, but a smaller number may adjourn from time to time, without further notice, if the time and place to which the meeting is adjourned are fixed at the meeting at which the adjournment is taken and if the period of adjournment does not exceed thirty (30) days in any one (1) adjournment. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the vote of a greater number is required by law, the Charter, or these Bylaws.
3.10 Regular Meetings. Following each annual meeting of shareholders, the newly elected directors, together with the incumbent directors whose terms do not expire at such meeting, shall meet for the purpose of organization, the appointment of officers and the transaction of other business, and, if a majority of the directors be present at such place, day and hour, no prior notice of such meeting shall be required to be given to the directors. The place, day and hour of such meeting may also be fixed by resolution or by written consent of the directors. In addition, the Board of Directors may approve an annual schedule for additional regular meetings of the Board of Directors and of committees thereof.
3.11 Special Meetings. Special meetings of the directors may be called by the Chairman of the Board, the Chief Executive Officer, or the President (or as to any committee of the Board of Directors, by the person or persons specified in the resolution of the Board of Directors establishing the committee) on two days' notice by mail or on one day's notice by telegram or cablegram, or on two hours' notice given personally or by telephone or facsimile transmission to each director (or member of the committee, as appropriate), and shall be called by the Chairman of the Board or Secretary in like manner on the written request of a majority of directors then in office. The notice shall state the day and hour of the meeting and the place where the meeting is to be held. Special meetings of the directors may be held at any time on written waiver of notice or by consent of all the directors, either of which may be given either before, at or after the meeting.
3.12 Action without a Meeting. The directors may (whether acting in lieu of a meeting of the Board of Directors or of a committee thereof) take action which they are required or permitted to take, without a meeting, on written consent setting forth the action so taken, signed by all of the directors entitled to vote thereon. If all the directors entitled to vote consent to taking such action without a meeting, the affirmative vote of the number of directors necessary to authorize or take such action at a meeting is the act of the Board of Directors or committee, as appropriate.
3.13 Telephone Meetings. Directors may participate in a meeting of the Board of Directors or of a committee thereof by, or conduct a meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director so participating is deemed to be present in person at such meeting.
ARTICLE FOUR
OFFICERS
4.1 Designated Officers. The officers of the Corporation shall consist of a Chairman of the Board, a Chief Executive Officer, a President, such number of Vice Chairmen as the Board may from time to time determine and appoint, an Auditor, a Chief Credit Officer, a Chief Financial Officer, a Controller, a General Counsel, an Executive Vice President-Risk Management, an Executive Vice President-Corporate and Employee Services, a President-First Tennessee Financial Services, a Chief Operating Officer-First Tennessee Financial Services, an Executive Vice President-Interest Rate Risk Management, an Executive Vice President-Banking Services Group, a President-FTN Financial, a President-First Horizon Financial Services, a Secretary, and a Treasurer, and such number of Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents and Vice Presidents and such other Officers and assistant Officers as may be from time to time determined and appointed in accordance with the provisions of this Article Four. The title of any officer may include any additional descriptive designation determined to be appropriate. Any person may hold two or more offices, except that the President shall not also be the Secretary or an Assistant Secretary. The officers, other than the Chairman of the Board, need not be directors, and officers need not be shareholders.
4.2 Appointment of Officers. Except as otherwise provided in this
Section 4.2, the officers of the Corporation shall be appointed by the Board of
Directors at the annual organizational meeting of the Board of Directors
following the annual meeting of shareholders. The Board of Directors may
delegate to a committee of the Board of Directors the power to create corporate
offices, define the authority and responsibility of such offices, except to the
extent such authority or responsibility would not be consistent with the law or
the Charter, and to appoint persons to any office of the Corporation except the
offices of the Chairman of the Board, Chief Executive Officer, and President,
any office the incumbent in which is designated by the Board as an Executive
Officer (as defined in Section 4.5 hereof), and, upon the recommendation of the
Audit Committee, the Auditor. In addition, the Board of Directors may delegate
to the officers appointed to the Corporation's personnel committee, acting as a
committee, the authority to appoint persons to any offices of the Corporation of
the level of Vice President and below annually at the personnel committee
meeting following the annual meeting of shareholders and to appoint persons to
any office of the Corporation of the level of Executive Vice President and below
during the period of time between the annual appointment of officers by the
Board of Directors or pursuant to this section 4.2 of the Bylaws.
Notwithstanding the delegation of authority pursuant to this section 4.2 of the
Bylaws, the Board of Directors retains the authority to appoint all officers and
such other officers and agents as it shall deem necessary,
who shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.
4.3 Term. The officers of the Corporation shall be appointed for a term of one (1) year and until their successors are appointed and qualified, subject to the right of removal specified in Section 4.4 of these Bylaws. The designation of a specified term does not grant to any officer any contract rights.
4.4 Vacancies, Resignations and Removal. If the office of any officer or officers becomes vacant for any reason, the vacancy may be filled by the Board of Directors or, if such officer was appointed by a committee, by the committee appointing such officer. Any officer may resign at any time by delivering a written notice to the Chairman of the Board, Chief Executive Officer, President, Secretary, or Executive Vice President-Employee Services of the Corporation, or the designee of any of them, which shall be effective upon delivery unless it specifies a later date acceptable to the Corporation. Any officer designated by the Board as an Executive Officer shall be subject to removal at any time with or without cause only by the affirmative vote of a majority of the Board of Directors. The Auditor shall be subject to removal at any time with or without cause only by the affirmative vote of a majority of the Board of Directors, upon the recommendation of the Audit Committee. Any other officer shall be subject to removal at any time with or without cause by the affirmative vote of a majority of the Board of Directors, and in the event the officer was, or could have been, appointed by a committee, then by the affirmative vote of a majority of either such committee or the Board of Directors.
4.5 Compensation. The Board of Directors, or a committee thereof, shall fix the compensation of Executive Officers (as defined herein) of the Corporation. "Executive Officers" shall be those officers of the Corporation identified as such from time to time in a resolution or resolutions of the Board of Directors. The compensation of officers who are not Executive Officers shall be fixed by the Board of Directors, by a committee thereof, or by management under such policies and procedures as shall be established by the Board of Directors or a committee thereof.
4.6 Delegation of Officer Duties. In case of the absence of any officer of the Corporation, or for any reason that the Board of Directors (or, in addition, in the case of any officer appointed by a committee, such committee or any other committee which could appoint such officer pursuant to Section 4.2 of these Bylaws) may deem sufficient, the Board of Directors (or committee, as applicable) may delegate, for the time being, the powers or duties, or any of them, of such officer to any other officer, or to any director.
4.7 Chairman of the Board. The Chairman of the Board shall preside at all meetings of the shareholders and of the Board of Directors and shall have such powers and perform such duties as may be provided for herein and as are normally incident to the office and as may be assigned by the Board of Directors. If and at such times as the Board of Directors so determines, the Chairman of the Board may also serve as the Chief Executive Officer of the Corporation.
4.8 Chief Executive Officer. The Chief Executive Officer, in the absence of the Chairman of the Board, shall preside at all meetings of the shareholders and of the Board of Directors. The Chief Executive Officer shall be responsible for carrying out the orders of and the resolutions and policies adopted by the Board of Directors and shall have general management of the business of the Corporation and shall exercise general supervision over all of its affairs. In addition, the Chief Executive Officer shall have such powers and perform such duties as may be provided for herein and as are normally incident to the office and as may be prescribed by the Board of Directors. If and at such time as the Board of Directors so determines, the Chief Executive Officer may also serve as the President of the Corporation.
4.9 President. The President, in the absence of the Chairman of the Board and the Chief Executive Officer, shall preside at all meetings of the shareholders and of the Board of Directors. The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors has appointed another person to such office, in which case the President shall be the Chief Operating Officer of the Corporation and shall have such powers and perform such duties as may be provided for herein and as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer.
4.10 Vice Chairmen. Vice Chairmen shall perform such duties and exercise such powers as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer.
4.11 Chief Financial Officer. The Chief Financial Officer shall be the principal financial officer of the Corporation. The Chief Financial Officer is authorized to sign any document filed with the Securities and Exchange Commission or any state securities commission on behalf of the Corporation and shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer.
4.12 Chief Credit Officer. The Chief Credit Officer shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer.
4.13 General Counsel. The General Counsel shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer.
4.14 Executive Vice President-Corporate and Employee Services. The Executive Vice President-Employee Services shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer.
4.15 President-First Tennessee Financial Services. The President-First Tennessee Financial Services shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer.
4.16 Chief Operating Officer-First Tennessee Financial Services. The Chief Operating Officer-First Tennessee Financial Services shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer.
4.17 Executive Vice President-Risk Management. The Manager of Risk Management Executive Vice President-Risk Management shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer.
4.18 Executive Vice President-Bank Services Group. The Executive Vice President-Bank Services Group shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer.
4.19 Executive Vice President-Interest Rate Risk Management. The Executive Vice President-Interest Rate Risk Management shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer.
4.20 President-FTN Financial. The President-FTN Financial shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, Chairman of the Board, or Chief Executive Officer.
4.21 President-First Horizon Financial Services. The President-First Horizon Financial Services shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, Chairman of the Board, or Chief Executive Officer.
4.22 Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents and Vice Presidents. Senior Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents and Vice Presidents shall perform such duties and exercise such powers as may be prescribed by the Board of Directors, a committee thereof, the personnel committee, the Chairman of the Board, or the Chief Executive Officer.
4.23 Secretary. The Secretary shall attend all sessions of the Board of Directors and of the shareholders and record all votes and the minutes of all proceedings in books to be kept for that purpose. The Secretary shall give or cause to be given notice of all meetings of the shareholders and of the Board of Directors, shall authenticate records of the Corporation, and shall perform such other duties as are incident to the office or as may be prescribed by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. In the absence or disability of the Secretary, the Assistant Secretary or such other officer or officers as may be authorized by the Board of Directors or Executive Committee thereof shall perform all the duties and exercise all of the powers of the Secretary and shall perform such other duties as the Board of Directors, Chairman of the Board or the Chief Executive Officer shall prescribe.
4.24 Treasurer. The Treasurer shall have the custody of the funds and securities of the Corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, or the President, taking proper vouchers for such disbursements, and shall render to the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, or the President, whenever they may require it, an account of all of his or her transactions as Treasurer and of the financial condition of the Corporation, and at a regular meeting of the Board of Directors preceding the annual shareholders' meeting, a like report for the preceding year. The Treasurer shall keep or cause to be kept an account of stock registered and transferred in such manner and subject to such regulations as the Board of Directors may prescribe. The Treasurer shall give the Corporation a bond, if required by the Board of Directors, in such a sum and in form and with security satisfactory to the Board of Directors for the faithful performance of the duties of the office and the restoration to the Corporation, in case of his or her death, resignation or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession, belonging to the Corporation. The Treasurer shall perform such other duties as the Board of Directors may from time to time prescribe or require. In the absence or disability of the Treasurer, the Assistant Treasurer shall perform all the duties and exercise all of the powers of the Treasurer and shall perform such other duties as the Board of Directors, the Chairman of the Board, or the Chief Executive Officer shall prescribe.
4.25 Auditor. The Auditor shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors or the Chairman of the Audit Committee.
4.26 Controller. The Controller shall be the principal accounting officer of the Corporation. The Controller is authorized to sign any document filed with the Securities and Exchange Commission or any state securities commission on behalf of the Corporation and shall assist the management of the Corporation in setting the financial goals and policies of the Corporation, shall provide financial and statistical information to the shareholders and to the management of the Corporation and shall perform such other duties and exercise such other powers as may be prescribed by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President. In the absence or disability of the Controller, the Assistant Controller shall perform all the duties and exercise all powers of the Controller and shall perform such duties as the Board of Directors or the Chairman of the Board or the Chief Executive Officer shall prescribe.
4.27 Other Officers. Officers holding such other offices as may be created pursuant to Sections 4.1 and 4.2 of these Bylaws shall have such authority and perform such duties and exercise such powers as may be prescribed by the Board of Directors, a committee thereof, the personnel committee, the Chairman of the Board or the Chief Executive Officer.
4.28 Officer Committees. The directors, by resolution adopted by a majority of the entire Board of Directors, may designate one or more committees, consisting of two or more officers, and may delegate to such committee or committees all such authority that the Board of Directors deems desirable that is permitted by law. Members of such committees may take action without a meeting and may participate in meetings to the same extent and in the same manner that directors may take action and may participate pursuant to Sections 3.12 and 3.13 of these Bylaws.
ARTICLE FIVE
SHARES OF STOCK
5.1 Certificates. The certificates representing shares of stock of the Corporation shall be numbered, shall be entered in the books or records of the Corporation as they are issued, and shall be signed by the Chairman of the Board or the Chief Executive Officer and any one of the following: the President, the Treasurer, or the Secretary. Either or both of the signatures upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar other than an officer or employee of the Corporation. Each certificate shall include the following upon the face thereof:
(a) A statement that the Corporation is organized under the laws of the State of Tennessee;
(b) The name of the Corporation;
(c) The name of the person to whom issued;
(d) The number and class of shares, and the designation of the series, if any, which such certificate represents;
(e) The par value of each share represented by such certificate; or a statement that the shares are without par value; and
(f) Such other provisions as the Board of Directors may from time to time require.
5.2 Shares Not Represented by Certificates. Notwithstanding the provisions of Section 5.1 of these Bylaws, the Board of Directors may authorize the issuance of some or all of the shares of any class without certificates. The Corporation shall send to each shareholder to whom such shares have been issued or transferred at the appropriate time any written statement providing information about such shares, which is required by law.
5.3 Stock Transfers and Record Dates. Transfers of shares of stock shall be made upon the books of the Corporation by the record owner or by an attorney, lawfully constituted in writing, and upon surrender of any certificate therefor. The Board of Directors may appoint suitable agents in Memphis, Tennessee, and elsewhere to facilitate transfers by shareholders under such regulations as the Board of Directors may from time to time prescribe. The transfer books may be closed by the Board of Directors for such period, not to exceed 40 days, as may be deemed advisable for dividend or other purposes, or in lieu of closing the books, the Board of Directors may fix in advance a date as the record date for determining shareholders entitled notice of and to vote at a meeting of shareholders, or entitled to payment of any dividend or other distribution. The record date for voting or taking other action as shareholders shall not be less than 10 days nor more than 70 days prior to the meeting date or action requiring such determination of shareholders. The record date for dividends and other distributions shall not be less than 10 days prior to the payment date of the dividend or other distribution. All certificates surrendered to the Corporation for transfer shall be canceled, and no new certificate shall be issued until the former certificate for like number of shares shall have been surrendered and canceled, except that in case of a lost or destroyed certificate a new one may be issued on the terms prescribed by Section 5.5 of these Bylaws.
5.4 Record Owners. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof; and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as required by applicable law.
5.5 Lost, Destroyed, Stolen or Mutilated Certificates. The agent for transfer of the Corporation's stock may issue new share certificates in place of certificates represented to have been lost, destroyed, stolen or mutilated upon receiving an indemnity satisfactory to the agent and the Secretary or Treasurer of the Corporation, without further action of the Board of Directors.
ARTICLE SIX
INDEMNIFICATION
6.1 Indemnification of Officers When Wholly Successful. If any current or former officer of the Corporation [including for purposes of this Article an individual who, while an officer, is or was serving another corporation or other enterprise (including an employee benefit plan and a political action committee, which serves the interests of the employees of the Corporation or any of its subsidiaries) in any capacity at the request of the Corporation and unless the context requires otherwise the estate or personal representative of such officer] is wholly successful, on the merits or otherwise, in the defense of any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal ("Proceeding"), to which the officer was a party because he or she is or was an officer of the Corporation, the officer shall be indemnified by the Corporation against all reasonable expenses, including attorney fees, incurred in connection with such Proceeding, or any appeal therein. As used in this Article, "Proceeding" shall include, but is not limited to, any threatened, pending or contemplated action, suit or proceeding, whether civil, criminal, administrative, or investigative, and whether formal or informal, arising out of or alleging any acts, errors, or omissions by the officer in the rendering or failure to render professional services, including legal and accounting services, for or at the request of the Corporation or any of its subsidiaries; provided such professional services are within the reasonably anticipated scope of the officer's duties. Additionally, as used in this Article, "Proceeding" shall include, but is not limited to, any threatened, pending or contemplated action, suit or proceeding arising out of or alleging negligence on the part of the Officer.
6.2 Indemnification of Officers When Not Wholly Successful. If any current or former officer of the Corporation has not been wholly successful on the merits or otherwise, in the defense of a Proceeding, to which the officer was or was threatened to be made a party because he or she was or is an officer, the officer shall be indemnified by the Corporation against any judgment, settlement, penalty, fine (including any excise tax assessed with respect to an employee benefit plan), or other liability and any reasonable expenses, including attorney fees, incurred as a result of such Proceeding, or any appeal therein, if authorized in the specific case after a determination has been made that indemnification is permissible because the following standard of conduct has been met:
(a) The officer conducted himself or herself in good faith, and
(b) The officer reasonably believed: (i) in the case of conduct in the
officer's official capacity as an officer of the Corporation that
the officer's conduct was in the Corporation's best interest; and
(ii) in all other cases that the officer's conduct was at least
not opposed to its best interests; and
(c) In the case of any criminal proceeding, the officer had no reasonable cause to believe his or her conduct was unlawful;
provided, however, the Corporation may not indemnify an officer in connection with a Proceeding by or in the right of the Corporation in which the officer was adjudged liable to the Corporation or in connection with any other proceeding charging improper benefit to the officer, whether or not involving action in his or her official capacity, in which the officer was adjudged liable on the basis that personal benefit was improperly received by the officer.
6.3 Procedures for Indemnification Determinations. The determination required by Section 6.2 herein shall be made as follows:
(a) By the Board of Directors by a majority vote of a quorum consisting of directors not at the time parties to the Proceeding;
(b) If a quorum cannot be obtained, by majority vote of a committee duly designated by the Board of Directors (in which designation directors who are parties may participate) consisting solely of two or more directors not at the time parties to the Proceeding;
(c) By independent special legal counsel: (i) selected by the Board of
Directors or its committee in the manner prescribed in subsection
(a) or (b); or (ii) if a quorum of the Board of Directors cannot
be
obtained under subsection (a) and a committee cannot be designated under subsection (b), selected by majority vote of the full Board of Directors (in which selection directors who are parties may participate); or, if a determination pursuant to subsections (a), (b), or (c) of this Section 6.3 cannot be obtained, then
(d) By the shareholders, but shares owned by or voted under the control of directors who are at the time parties to the Proceeding may not be voted on the determination.
6.4 Serving at the Request of the Corporation. An officer of the Corporation shall be deemed to be serving another corporation or other enterprise or employee benefit plan or political action committee at the request of the Corporation only if such request is reflected in the records of the Board of Directors or a committee appointed by the Board of Directors for the purpose of making such requests. Approval by the Board of Directors, or a committee thereof, may occur before or after commencement of such service by the officer.
6.5 Advancement of Expenses. The Corporation shall pay for or reimburse reasonable expenses, including attorney fees, incurred by an officer who is a party to a Proceeding in advance of the final disposition of the Proceeding if:
(a) The officer furnishes to the Corporation a written affirmation of the officer's good faith belief that the officer has met the standard of conduct described in Section 6.2 herein;
(b) The officer furnishes to the Corporation a written undertaking, executed personally or on behalf of the officer, to repay the advance if it is ultimately determined that the officer is not entitled to indemnification; and
(c) A determination is made that the facts then known to those making the determination would not preclude indemnification under this bylaw.
6.6 Undertaking Required for Expenses. The undertaking required by
Section 6.5 herein must be an unlimited general obligation of the officer but
need not be secured and may be accepted without reference to financial ability
to make repayment.
6.7 Procedures for Expense Determinations. Determinations and authorizations of payments under Section 6.5 herein shall be made in the same manner as is specified in Section 6.3 herein.
6.8 Indemnification of Employees and Former Directors. Every employee and every former director of the Corporation shall be indemnified by the Corporation to the same extent as officers of the Corporation.
6.9 Nonexclusivity of Right of Indemnification. The right of indemnification set forth above shall not be deemed exclusive of any other rights, including, but not limited to, rights created pursuant to Section 6.11 of these Bylaws, to which an officer, employee, or former director seeking indemnification may be entitled. No combination of rights shall permit any officer, employee or former director of the Corporation to receive a double or greater recovery.
6.10 Mandatory Indemnification of Directors and Designated Officers. The Corporation shall indemnify each of its directors and such of the non-director officers of the Corporation or any of its subsidiaries as the Board of Directors may designate, and shall advance expenses, including attorney's fees, to each director and such designated officers, to the maximum extent permitted (or not prohibited) by law, and in accordance with the foregoing, the Board of Directors is expressly authorized to enter into individual indemnity agreements on behalf of the Corporation with each director and such designated officers which provide for such indemnification and expense advancement and to adopt resolutions which provide for such indemnification and expense advancement.
6.11 Insurance. Notwithstanding anything in this Article Six to the contrary, the Corporation shall have the additional power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation, or who, while a director, officer, employee or agent of the
Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, political action committee, or other enterprise, against liability asserted against or incurred by the person in that capacity or arising from the person's status as a director, officer, employee, or agent, whether or not the Corporation would have the power to indemnify the person against the same liability.
ARTICLE SEVEN
RETIREMENT
7.1 Non-Employee Directors. Directors who are not also officers of the Corporation or its affiliates shall be retired from the Board of Directors as follows:
(a) Any director who shall attain the age of sixty-five (65) on or before the last day of the term for which he or she was elected shall not be nominated for re-election and shall be retired from the Board of Directors at the expiration of such term; provided, however, any director first elected to the Board of Directors prior to April 17, 1996, may serve a minimum of two three-year terms.
(b) For the purpose of maintaining boards of active business and professional persons, directors leaving the occupation or the position held at their last election (by retirement or otherwise) will be expected to tender their resignation for consideration at the next regularly scheduled meeting of the Board of Directors. A resignation will be accepted unless the Board in its judgment determines (i) the director has assumed another position deemed to be appropriate, (ii) the director is so engaged in a specific project for the Board as to make his or her resignation detrimental to the Corporation, or (iii) it is beneficial to the Board and in the best interests of the Corporation for the director to continue for such period of time as the Board deems appropriate.
Directors who are also officers of the Corporation or any of its affiliates will be retired from the Board of Directors on the date of the annual meeting coincident with or next following the date of the director's retirement from or other discontinuation of active service with the Corporation and its affiliates.
7.2 Officers and Employees. Except as provided in the following sentence, the Corporation has no compulsory retirement age for its officers or employees. Each officer or employee who has attained 65 years of age and who, for the two-year period immediately before attaining such age, has been employed in a "bona fide executive" or a "high policy-making" position as those terms are used and defined in the Age Discrimination in Employment Act, Section 12(c), and the regulations relating to that section prescribed by the Equal Employment Opportunity Commission, all as amended from time to time (collectively, the "ADEA"), shall automatically be terminated by way of compulsory retirement and his or her salary discontinued on the first day of the month coincident with or immediately following the 65th birthday, provided such employee is entitled to an immediate nonforfeitable annual retirement benefit, as specified in the ADEA, in the aggregate amount of at least $44,000. Notwithstanding the prior sentence, the Board of Directors, in its discretion, may continue any such officer or employee in service and designate the capacity in which he or she shall serve, and shall fix the remuneration he or she shall receive. The Board of Directors may also re-employ any former officer who had theretofore been retired.
ARTICLE EIGHT
EXECUTION OF DOCUMENTS
8.1 Definition of "Document." For purposes of this Article Eight of the Bylaws, the term "document" shall mean a document of any type, including, but not limited to, an agreement, contract, instrument, power of attorney, endorsement, assignment, transfer, stock or bond power, deed, mortgage, deed of trust, lease, indenture, conveyance, proxy, waiver, consent, certificate, declaration, receipt, discharge, release, satisfaction, settlement, schedule, account, affidavit, security, bill, acceptance, bond, undertaking, check, note or other evidence of indebtedness, draft, guaranty, letter of credit, and order.
8.2 Execution of Documents. Except as expressly provided in Section 5.1 of these Bylaws (with respect to signatures on certificates representing shares of stock of the Corporation), the Chairman of the Board, the
Chief Executive Officer, the President, any Vice Chairman, any Senior Executive Vice President, any Executive Vice President, any Senior Vice President, any Vice President, the Chief Financial Officer, the Chief Credit Officer, the General Counsel, the Executive Vice President-Corporate and Employee Services, the President-First Tennessee Financial Services, the Chief Operating Officer-First Tennessee Financial Services, the Executive Vice President-Risk Management, the Executive Vice President-Interest Rate Risk Management, the Executive Vice President-Bank Services Group, the President-FTN Financial, the President-First Horizon Financial Services, the Controller, the Treasurer, the Secretary, and any other officer, or any of them acting individually, may (i) execute and deliver in the name and on behalf of the Corporation or in the name and on behalf of any division or department of the Corporation any document pertaining to the business, affairs, or property of the Corporation or any division or department of the Corporation, and (ii) delegate to any other officer, employee or agent of the Corporation the power to execute and deliver any such document.
8.3 Method of Execution by Secretary. Unless otherwise required by law, the signature of the Secretary on any document may be a facsimile.
ARTICLE NINE
EMERGENCY BYLAWS
9.1 Definition of "Emergency." The provisions of this Article Nine shall be effective only during an "emergency." An "emergency" shall be deemed to exist whenever any two of the officers identified in Section 9.2 of these Bylaws in good faith determine that a quorum of the directors cannot readily be assembled because of a catastrophic event.
9.2 Notice of Meeting. A meeting of the Board of Directors may be called by any one director or by any one of the following officers: Chairman of the Board, Chief Executive Officer, President, any Vice Chairman, any Senior Executive Vice President, any Executive Vice President, Chief Credit Officer, Chief Financial Officer, Controller, General Counsel, Executive Vice President-Risk Management, Executive Vice President-Corporate and Employee Services, President-First Tennessee Financial Services, Chief Operating Officer-First Tennessee Financial Services, Executive Vice President-Interest Rate Risk Management, Executive Vice President-Bank Services Group, President-FTN Financial, President-First Horizon Financial Services, or Secretary. Notice of such meeting need be given only to those directors whom it is practical to reach by any means the person calling the meeting deems feasible, including, but not limited to, by publication and radio. Such notice shall be given at least two hours prior to commencement of the meeting.
9.3 Quorum and Substitute Directors.. If a quorum has not been obtained, then one or more officers of the Corporation or the Bank present at the emergency meeting of the Board of Directors, as are necessary to achieve a quorum, shall be considered to be substitute directors for purposes of the meeting, and shall serve in order of rank, and within the same rank in order of seniority determined by hire date by the Corporation, the Bank or any of their subsidiaries. In the event that less than a quorum of the directors (including any officers who serve as substitute directors for the meeting) are present, those directors present (including such officers serving as substitute directors) shall constitute a quorum.
9.4 Action at Meeting. The Board as constituted pursuant to Section 9.3
and after notice has been provided pursuant to Section 9.2 may take any of the
following actions: (i) prescribe emergency powers of the Corporation, (ii)
delegate to any officer or director any of the powers of the Board of Directors,
(iii) designate lines of succession of officers and agents in the event that any
of them are unable to discharge their duties, (iv) relocate the principal office
or designate alternative or multiple principal offices, and (v) take any other
action that is convenient, helpful, or necessary to carry on the business of the
Corporation.
9.5 Effectiveness of Non-emergency Bylaws. All provisions of these Bylaws not contained in this Article Nine, which are consistent with the emergency bylaws contained in Article Nine, shall remain effective during the emergency.
9.6 Termination of Emergency. Any emergency causing this Article Nine to become operative shall be deemed to be terminated whenever either of the following conditions is met: (i) the directors and any substitute
directors determine by a majority vote at a meeting that the emergency is over or (ii) a majority of the directors elected pursuant to the provisions of these Bylaws other than this Article Nine hold a meeting and determine that the emergency is over.
9.7 Action Taken in Good Faith. Any corporate action taken in good faith in accordance with the provisions of this Article Nine binds the Corporation and may not be used to impose liability on any director, substitute director, officer, employee or agent of the Corporation.
ARTICLE TEN
MISCELLANEOUS PROVISIONS
10.1 Fiscal Year. The Board of Directors of the Corporation shall have authority from time to time to determine whether the Corporation shall operate upon a calendar year basis or upon a fiscal year basis, and if the latter, said Board of Directors shall have power to determine when the said fiscal year shall begin and end.
10.2 Dividends. Dividends on the capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting pursuant to law. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends or for repairing or maintaining any property of the Corporation, or for such other purposes as the directors shall think conducive to the interest of the Corporation.
10.3 Seal. This Corporation shall have a Corporate Seal which shall consist of an imprint of the name of the Corporation, the state of its incorporation, the year of incorporation and the words "Corporate Seal." The Corporate Seal shall not be required to establish the validity or authenticity of any document executed in the name and on behalf of the Corporation.
10.4 Notices. Whenever notice is required to be given to any director, officer or shareholder under any of the provisions of the law, the Charter, or these Bylaws (except for notice required by Sections 2.8 and 3.6 of these Bylaws), it shall not be construed to require personal notice, but such notice may be given in writing by depositing the same in the United States mail, postage prepaid, or by telegram, teletype, facsimile transmission or other form of wire, wireless, or other electronic communication or by private carrier addressed to such shareholder at such address as appears on the Corporation's current record of shareholders, and addressed to such director or officer at such address as appears on the records of the Corporation. If mailed as provided above, notice to a shareholder shall be deemed to be effective at the time when it is deposited in the mail.
10.5 Bylaw Amendments. The Board of Directors shall have power to make, amend and repeal the Bylaws or any Bylaw of the Corporation by vote of not less than a majority of the directors then in office, at any regular or special meeting of the Board of Directors. The shareholders may make, amend and repeal the Bylaws or any Bylaw of this Corporation at any annual meeting or at a special meeting called for that purpose only by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all outstanding voting stock, and all Bylaws made by the directors may be amended or repealed by the shareholders only by the vote of the holders of at least eighty percent (80%) of the voting power of all outstanding voting stock. Without further authorization, at any time the Bylaws are amended, the Secretary is authorized to restate the Bylaws to reflect such amendment, and the Bylaws, as so restated, shall be the Bylaws of the Corporation.
10.6 Authority to Vote Shares. The Chief Executive Officer, President-First Tennessee Financial Services, President-First Horizon Financial Services and President-FTN Financial, or the designee or designees of them or any of them, are authorized, jointly or severally, to vote all shares (or other indicia of ownership) beneficially owned by the Company for any purposes and to take any action on behalf of the Company that is required to be taken by the Company as a shareholder or other beneficial owner of any entity whose shares (or other indicia of ownership) are beneficially owned by the Company, which they, or any of them, deem appropriate at meetings, annual or special, or without a meeting.
EXHIBIT 10.3(a)
FORM OF PERFORMANCE-ACCELERATED RESTRICTED STOCK AGREEMENT
UNDER 1992 RESTRICTED STOCK INCENTIVE PLAN
* * * * * * * * * * *
RESTRICTED STOCK AGREEMENT
Restricted Stock Agreement ("Agreement") made as of the date specified above by and between First Tennessee National Corporation (the "Company"), acting with the prior approval of the Human Resources Committee (the "Committee") of the Board of Directors and the employee whose name is specified above, who is an employee of the Company, or one or more of its subsidiaries, (the "Participant").
In consideration of the covenants hereinafter set forth, the Company and the Participant agree as follows:
1. Award. Pursuant to the terms of the First Tennessee National Corporation 1992 Restricted Stock Incentive Plan (the "Plan"), the Company hereby grants to the Participant the number of shares specified above (the "Shares") of common stock of the Company, par value $0.625 per share (the "Common Stock"), subject to the Restrictions and other conditions hereinafter set forth. So long as any Shares are subject to the Restrictions set forth in Section 4 hereof, such Shares shall be deemed to be, and shall be referred to herein as, Restricted Shares.
2. Certificates. Each certificate evidencing Restricted Shares shall be deposited with the Treasurer of the Company, accompanied by a stock power in blank executed by the Participant, and shall bear the following legend:
"This certificate and the shares of stock represented hereby are subject to the terms and conditions (including the risk of forfeiture and restrictions on transfer) contained in the First Tennessee National Corporation 1992 Restricted Stock Incentive Plan and a Restricted Stock Agreement entered into between the registered owner and First Tennessee National Corporation. Release from such terms and conditions shall occur only in accordance with the provisions of such Plan and Agreement, a copy of each of which is filed with the Secretary of First Tennessee National Corporation."
3. Adjustments in Restricted Shares. In the event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Committee shall make equitable adjustments in the Restricted Shares corresponding to adjustments made by the Committee in the number and class of shares of Common Stock which may be issued under the Plan. Any new, additional or different shares to which the Participant shall be entitled in respect of Restricted Shares by reason of such adjustment shall be deemed to be Restricted Shares and shall be subject to the same terms, conditions, and restrictions as the Restricted Shares so adjusted.
4. Restrictions. During applicable periods of restriction determined in accordance with Section 6 of this Agreement, Restricted Shares, and the right to vote such Shares and to receive dividends thereon, may not be sold, assigned, transferred, exchanged, pledged, hypothecated or otherwise encumbered, and shall be subject to the risk of forfeiture contained in Section 5 of this Agreement (such limitations on transferability and risk of forfeiture being collectively called the "Restrictions"), but the Participant shall have all other rights of a stockholder, including, but not limited to, the right to vote and receive dividends on Restricted Shares.
5. Forfeiture of Restricted Shares. In the event that the Participant (a) voluntarily terminates his employment with the Company (including its
subsidiaries), (b) is discharged from employment with the Company (including its
subsidiaries) as a result of his failure (not caused by death or disability) to
perform the duties of his position faithfully and to the best of his ability, or
(c) is reassigned to a position which, in the opinion of the Committee, reduces
the Participant's opportunity to make an impact upon the profitability of the
Company through his/her decisions, actions and counsel (the events described in
the foregoing clauses (a), (b), and (c) being called herein "Events of
Forfeiture"), all Shares which at the time are Restricted Shares shall be
forfeited by the Participant to the Company without payment of any consideration
by the Company, and neither the Participant, nor any successor, heir, assign or
personal representative of the Participant, shall have any further right to or
interest in such Restricted Shares or the certificate or certificates evidencing
them. Notwithstanding anything herein to the contrary, if a Change in Control
(as defined in Section 9) occurs and if, prior to the date on which the Change
in Control occurs, the Participant's employment with the Company is terminated
or the Participant is reassigned to a position within the meaning of Section
5(c) and if it is reasonably demonstrated by the Participant that such
termination of employment or reassignment of position (i) was at the request of
a third party who has taken steps reasonably calculated to effect a Change in
Control or (ii) otherwise arose in connection with or in anticipation of a
Change in Control, then for all purposes of this Agreement no Shares which at
the time are Restricted Shares shall be forfeited by the Participant to the
Company upon such termination or reassignment, and all Restrictions with respect
to such Shares shall lapse upon the Change in Control.
6. Lapse of Restrictions.
(a) Subject to clauses (b) and (c) of this Section 6, the Restrictions shall lapse with respect to Restricted Shares in accordance with the following schedule:
Date Number of Shares ---- ---------------- [tenth anniversary of grant date] All Shares |
(b) If the Participant's employment with the Company (including its subsidiaries) ends as a result of any event other than an Event of Forfeiture, all Restrictions shall forthwith lapse as to all Restricted Shares.
(c) Notwithstanding the provisions of clause (a), but subject to clause (b) of this Section 6, the Restrictions shall lapse with respect to the Restricted Shares in accordance with the following schedule if the performance criteria established by the Committee for the performance period at the beginning of such period (or on the date hereof for the initial performance period) are achieved:
Performance Period Number of Shares Date of Lapse ------------------ ---------------- ------------- [three calendar years beginning year of grant] ____________ [April of year following perf. period] [three calendar years beginning 1st year after grant] ____________ [April of year following perf. period] [three calendar years beginning 2nd year after grant] ____________ [April of year following perf. period] |
Each lapse of Restrictions provided for in this clause (c) is noncumulative. In other words, if performance criteria for any performance period are not achieved, Restrictions with respect to the indicated Restricted Shares shall not lapse until the date specified in clause (a).
(d) Upon lapse of the Restrictions in accordance with this Section 6 or
Section 9, new certificates evidencing the Shares with respect to which the
Restrictions have lapsed, without the foregoing restrictive legend, shall be
issued to the Participant or his legal representative, against cancellation of
the legended certificates. Each such new certificate shall bear a legend
reflecting any restrictions upon the transferability of such Shares imposed by
law, such as the Securities Act of 1933.
7. Valuation of shares. For purposes of this Agreement, the fair market value of the Shares on any date (a "Valuation Date") shall be deemed to be the mean between the highest and lowest selling prices of the Common Stock on Valuation Date as quoted by NASDAQ's national list of over-the-counter securities as reported in The Wall Street Journal over-the-counter markets, or other authorized sources, or, in the event the common stock is not traded on a Valuation Date, the average of the mean between such highest and lowest prices on the last trading day preceding, and the first trading day following, the Valuation Date. Provided, however, if the Common Stock is listed on a national
securities exchange the fair market value of the Shares shall be deemed to be the mean between the highest and lowest selling prices of the Common Stock on the exchange on the Valuation Date, or, in the event the Common Stock is not traded on a Valuation Date, the average of the mean between such highest and lowest selling prices of the Common Stock on such exchange on the last trading day preceding, and the first trading day following, the Valuation Date.
8. Withholding Requirements. Whenever payments hereunder are to be made in cash, or Restrictions lapse with respect to Restricted Shares, the Company shall have the right to withhold from sums due to the Participant (or to require the Participant to remit to the Company) an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to making such payments or delivering any certificate evidencing such Shares.
9. Change in Control. Notwithstanding anything herein to the contrary, all Restrictions with respect to the Restricted Shares imposed by the Plan or this Agreement shall lapse immediately upon a Change in Control (as defined in the following sentence). A "Change in Control" means the occurrence of any one of the following events:
(I) individuals who, on January 21, 1997, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 21, 1997, whose election or nomination for election was approved by a vote of at least three-fourths (3/4) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;
(ii) any "Person" (as defined under Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and as used in
Section 13(d) or Section 14(d) of the Exchange Act) is or becomes a
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 20% or
more of the combined voting power of the Company's then outstanding
securities eligible to vote for the election of the Board (the "Company
Voting Securities"); provided, however, that the event described in this
paragraph (ii) shall not be deemed to be a change in control by virtue of
any of the following acquisitions: (A) by the Company or any entity in
which the Company directly or indirectly beneficially owns more than 50% of
the voting securities or interests (a "Subsidiary"), (B) by an employee
stock ownership or employee benefit plan or trust sponsored or maintained
by the Company or any Subsidiary, (C) by any underwriter temporarily
holding securities pursuant to an offering of such securities, or (D)
pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii));
(iii) the shareholders of the Company approve a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to the consummation of such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or
(iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets.
Computations required by paragraph (iii) shall be made on and as of the date of shareholder approval and shall be based on reasonable assumptions that will result in the lowest percentage obtainable.
Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a change in control of the Company shall then occur.
10. Tax Elections. The Participant agrees not to make an election in accordance with Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in his gross income for federal income tax purposes the value of the Restricted Shares in the year in which this Agreement is made.
11. Deferrals. Section 16 of the Plan permits certain participants, whose
Agreement so provides, to make deferral elections with respect to an award under
the Plan. Participant is eligible to make a deferral election pursuant to
Section 16 of the Plan with respect to one or more deferral periods by complying
with the provisions of Section 16.
12. Effect on Employment. Nothing contained in this Agreement shall confer upon the participant the right to continue in the employment of the Company (including its subsidiaries) or affect any right which the Company (including its subsidiaries) may have to terminate the employment of the Participant.
13. Amendment. This Agreement may not be amended except with the consent of the Committee and by a written instrument duly executed by the Participant and the Company.
14. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns.
IN WITNESS WHEREOF, each of the Company and the Participant has executed and delivered this Agreement as of the day and year first above written.
ATTEST FIRST TENNESSEE NATIONAL CORPORATION
By: By:
---------------------------------- ----------------------------------
, Secretary [Name of Authorized Officer]
-------------------- [Title of Authorized Officer]
--------------------------------------
Participant
|
EXHIBIT 10.3(b)
FORM OF PERFORMANCE-ACCELERATED RESTRICTED STOCK AGREEMENT
UNDER 2003 EQUITY COMPENSATION PLAN
* * * * * * * * * * *
RESTRICTED STOCK AGREEMENT
Restricted Stock Agreement ("Agreement") made as of the date specified above by and between First Horizon National Corporation (the "Company"), acting with the prior approval of the Compensation Committee (the "Committee") of the Board of Directors and the employee whose name is specified above, who is an employee of the Company, or one or more of its subsidiaries, (the "Participant").
In consideration of the covenants hereinafter set forth, the Company and the Participant agree as follows:
1. Award. Pursuant to the terms of the First Horizon National Corporation 2003 Equity Compensation Plan (the "Plan"), the Company hereby grants to the Participant the number of shares specified above (the "Shares") of common stock of the Company, par value $0.625 per share (the "Common Stock"), subject to the Restrictions and other conditions hereinafter set forth. So long as any Shares are subject to the Restrictions set forth in Section 3 hereof, such Shares shall be deemed to be, and shall be referred to herein as, Restricted Shares.
2. Certificates. Each certificate evidencing Restricted Shares shall be deposited with the Treasurer of the Company, accompanied by a stock power in blank executed by the Participant, or shall be held in book-entry form at the Company's transfer agent, and shall bear the following legend:
"This certificate and the shares of stock represented hereby are subject to the terms and conditions (including the risk of forfeiture and restrictions on transfer) contained in the First Horizon National Corporation 2003 Equity Compensation Plan and a Restricted Stock Agreement entered into between the registered owner and First Horizon National Corporation. Release from such terms and conditions shall occur only in accordance with the provisions of such Plan and Agreement, a copy of each of which is filed with the Secretary of First Horizon National Corporation."
3. Restrictions. During applicable periods of restriction determined in accordance with Section 5 of this Agreement, Restricted Shares, and the right to vote such Shares and to receive dividends thereon, may not be sold, assigned, transferred, exchanged, pledged, hypothecated or otherwise encumbered, and shall be subject to the risk of forfeiture contained in Section 4 of this Agreement (such limitations on transferability and risk of forfeiture being collectively called the "Restrictions"), but the Participant shall have all other rights of a stockholder, including, but not limited to, the right to vote and receive dividends on Restricted Shares.
4. Forfeiture of Restricted Shares. In the event that the Participant (a) voluntarily terminates his employment with the Company (including its subsidiaries), (b) is discharged from employment with the Company (including its subsidiaries) as a result of his failure (not caused by death or Disability (as defined in the Plan)) to perform the duties of his position faithfully and to the best of his ability, or (c) except in connection with a Change in Control as described below, is reassigned to a position which, in the opinion of the Committee, reduces the Participant's opportunity to make an impact upon the profitability of the Company through his/her decisions, actions and counsel (the events described in the foregoing clauses (a), (b), and (c) being called herein "Events of Forfeiture"), all Shares which at the time are Restricted Shares shall be forfeited by the Participant to the Company without payment of any consideration by the Company, and neither the Participant, nor any successor, heir, assign or personal representative of the Participant, shall have any further right to or interest in such Restricted Shares or any certificate or certificates evidencing them. Notwithstanding anything herein to the contrary, if a Change in Control
(as defined in the Plan) occurs and if, prior to the date on which the Change in Control occurs, the Participant's employment with the Company is terminated or the Participant is reassigned to a position within the meaning of Section 4(c) and if it is reasonably demonstrated by the Participant that such termination of employment or reassignment of position (I) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement such termination or reassignment shall not be deemed an Event of Forfeiture, no Shares which at the time are Restricted Shares shall be forfeited by the Participant to the Company upon such termination or reassignment, and all Restrictions with respect to such Shares shall lapse upon the Change in Control.
5. Lapse of Restrictions.
(a) Subject to clauses (b) and (c) of this Section 5, the Restrictions shall lapse with respect to Restricted Shares in accordance with the following schedule:
Date Number of Shares ---- ---------------- [tenth anniversary of grant date] All Shares |
(b) If the Participant's employment with the Company (including its subsidiaries) ends as a result of any event other than an Event of Forfeiture, all Restrictions shall forthwith lapse as to all Restricted Shares.
(c) Notwithstanding the provisions of clause (a), but subject to clause (b) of this Section 5, the Restrictions shall lapse with respect to the Restricted Shares in accordance with the following schedule if the performance criteria established by the Committee for the performance period at the beginning of such period (or on the date hereof for the first and second performance periods) are achieved:
Performance Period Number of Shares Date of Lapse ------------------ ---------------- ------------- [three calendar years beginning year of grant] __________ [April of year following perf. period] [three calendar years beginning 1st year after grant] __________ [April of year following perf. period] [three calendar years beginning 2nd year after grant] __________ [April of year following perf. period] |
Each lapse of Restrictions provided for in this clause (c) is noncumulative. In other words, if performance criteria for any performance period are not achieved, Restrictions with respect to the indicated Restricted Shares shall not lapse until the date specified in clause (a).
(d) Upon lapse of the Restrictions in accordance with this Section 5 or
Section 7, new certificates evidencing the Shares with respect to which the
Restrictions have lapsed, without the foregoing restrictive legend, shall be
issued to the Participant or his legal representative, against cancellation of
the legended certificates, or, if applicable, the Company's transfer agent shall
be directed to remove the legend from Shares held in book-entry form. Each such
new certificate, and any Shares held in book-entry form, shall bear a legend
reflecting any restrictions upon the transferability of such Shares imposed by
law, such as the Securities Act of 1933.
6. Withholding Requirements. Whenever payments hereunder are to be made in cash, or Restrictions lapse with respect to Restricted Shares, the Company shall have the right to withhold from sums due to the Participant (or to require the Participant to remit to the Company) an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to making such payments or delivering any certificate evidencing such Shares.
7. Change in Control. Notwithstanding anything herein to the contrary, all Restrictions with respect to the Restricted Shares imposed by the Plan or this Agreement shall lapse immediately upon a Change in Control (as defined in the Plan).
8. Tax Elections. The Participant agrees not to make an election in accordance with Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in his gross income for federal income tax purposes the value of the Restricted Shares in the year in which this Agreement is made.
9. Deferrals. Section 3(A)(vii) of the Plan permits certain participants,
whose Agreement so provides, to make deferral elections with respect to an award
under the Plan. Participant is eligible to make a deferral election pursuant to
Section 3(A)(vii) of the Plan with respect to one or more deferral periods by
complying with the procedures established by the Committee.
10. Effect on Employment. Nothing contained in this Agreement shall confer upon the participant the right to continue in the employment of the Company (including its subsidiaries) or affect any right which the Company (including its subsidiaries) may have to terminate the employment of the Participant.
11. Amendment. This Agreement may not be amended except with the consent of the Committee and by a written instrument duly executed by the Participant and the Company.
12. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns.
IN WITNESS WHEREOF, each of the Company and the Participant has executed and delivered this Agreement as of the day and year first above written.
ATTEST FIRST HORIZON NATIONAL CORPORATION
By: By:
---------------------------------- -----------------------------------
, Secretary Senior Vice President, Compensation
and Benefits
--------------------------------------
Participant
|
EXHIBIT 10.3(c)
The following is a description of the performance criteria used for performance-accelerated restricted stock (TARSAP and PARSAP) awards granted prior to 2005 under the 1992 Restricted Stock Incentive Plan and the 2003 Equity Compensation Plan:
The primary performance criteria are based on the Company's total shareholder return (TSR) targets established at the beginning of each performance period. Through 2004, TSR targets are based on the Company's percentile ranking in the 100-bank peer group discussed below, with the condition that TSR must be a positive number. If the TSR targets are not met, the award may still vest on an accelerated basis if certain alternative criteria are achieved. Those alternative criteria are based upon our percentile ranking within the 100-bank peer group with respect to a certain operating earnings per share (EPS) growth rate and a certain percentile ranking based on operating return on equity (ROE); however, vesting will not accelerate unless TSR is a positive number. The 100-bank peer group used for this purpose consists of approximately the 100 largest banking organizations by asset size traded on U.S. exchanges, measured at the time of each grant.
EXHIBIT 10.4(a)
NOTICE OF
2003 LONG-TERM INCENTIVE PLAN AWARD ("2003 LTIP AWARD")
UNDER 2003 EQUITY COMPENSATION PLAN
1.0 OBJECTIVE:
The purpose of the Long-Term Incentive Plan Award ("LTIP") pursuant to
Section 8 of First Horizon National Corporation's 2003 Equity Compensation
Plan (the "Plan") is to provide motivation for key executives to achieve
the Company's strategic objectives and ensure incentive rewards and
performance are linked to shareholder value.
2.0 LTIP PERFORMANCE PERIOD:
The LTIP performance period will be the Company's fiscal years beginning January 1, 2003 and ending December 31, 2005.
3.0 ELIGIBILITY:
o Eligibility for executive officers who are subject to Section 16 (as defined in the Plan) or who are Covered Officers (as defined in the Plan) is approved annually by the Compensation Committee ("Committee").
o Eligibility for all other executives is approved annually by the CEO.
4.0 FUNDING OF THE INCENTIVE POOL:
o As soon as possible following the end of the Performance Period, the Committee shall determine the 2003 LTIP Award earned by each Participant in the manner described in Sections 4.0 and 5.0 of this Notice (the "Earned Award").
o The amount by which the Company will fund the incentive pool from which all of the Participants' 2003 LTIP Awards will be paid will be determined based on the higher of the following two criteria established by the Compensation Committee: (1) the Company's price/earnings ratio ("P/E Ratio") relative to the Peer Group (as defined below) as of the Measurement Date or (2) the compound annual growth rate ("CAGR") in the Company's stock price.
o The Company's relative P/E Ratio measurement criterion is as follows:
o If the Company's P/E Ratio equals the ____th percentile of the P/E Ratio of the Peer Group, an incentive pool will be funded equal to 20% of the maximum aggregate potential 2003 LTIP Award of all the Participants. The "Peer Group" shall be the "Top 50 Banks" as identified by American Banker at the beginning of the Performance Period.
o If the Company's P/E Ratio equals the ____th percentile of the P/E Ratio of the Peer Group, an incentive pool will be funded equal to 100% of the maximum aggregate potential 2003 LTIP Award of all the Participants.
o Straight line interpolation will be used to fund the incentive pool when performance is between the ____th and ____th percentile of the Peer Group.
o Regardless of Company's relative performance, no incentives will be funded or paid unless the Company's P/E Ratio increases during the Performance Period.
o The P/E Ratio at the beginning of the Performance Period is 12.3.
o The initial Performance Period covers 3 years (2003 - 2005), and the Measurement Date for the initial Performance Period will be January 31, 2006.
o The numerator of the P/E Ratio will be based on the 60-trading-day average closing price for the period ending January 31, as reported by The Wall Street Journal, unless the Committee selects another period (e.g., due to market volatility or rumors of potential transactions).
o The denominator of the P/E Ratio will be the Company's actual earnings for the year ended 12/31/05, unless the Committee approves a different period.
o If, at the end of the Performance Period, the Committee determines that the Company's P/E Ratio is distorted (positively or negatively) by market volatility (e.g., due to speculation about potential business combinations), then the Committee may adjust the incentive pool. Alternatively, the Committee may direct the Company to calculate its relative P/E Ratio over a longer or shorter period of time (i.e., 90 days rather than 60 days) or otherwise determine a normalized P/E Ratio for comparison to the Peer Group.
o The stock price CAGR measurement criterion is as follows:
o Target based on 2003-2005 strategic plan as presented to the board in October, 2002.
o 100% payout earned only if stock price CAGR represents significant return to shareholders as indicated in the following grid:
CAGR => Payout % ---- -------- ___% 100% ___ 75 ___ 50 ___ 25 ___ -0- |
o The amount of the incentive pool funded may be reduced by the Committee in order to more accurately reflect the Company's total performance. In determining the amount, if any, by which the incentive pool will be reduced, the Committee may consider measures such as the following:
-------------------------------------- Factor Guideline -------------------------------------- Rating Agencies [guideline redacted] -------------------------------------- Regulatory [guideline redacted] -------------------------------------- Capitalization [guideline redacted] -------------------------------------- Governance [guideline redacted] -------------------------------------- |
Failure to meet the guideline for any one of the above factors may in the Committee's discretion result in a 20% reduction, up to a total reduction of 80%, of the incentive pool.
5.0 DETERMINATION OF INDIVIDUAL PARTICIPANT'S MAXIMUM EARNED AWARD AND PAYMENT OF AWARD:
The objective of the LTIP is to deliver a total annual award up to 75% of the maximum bonus potential for each individual Participant under his/her respective annual bonus plan for the Performance Period (MIP or FirstPower). The incentive pool available will be determined based on the applicable performance criteria outlined in Section 4.0 above. Each Participant's maximum Earned Award will be calculated as follows:
[Standard version formula:]
o Annual LTIP Value = Eligible Base Salary times Annual Bonus Plan Target Percentage times 0.75
[Formula applicable to executives whose bonuses are based on a measure of business unit earnings:]
o Annual LTIP Value = Eligible Base Salary times 0.75
The Annual LTIP Value will be determined for each calendar year during the Performance Period. At the end of the Performance Period, the maximum Earned Award will be determined as follows:
o Earned Award = (2003 Annual LTIP Value + 2004 Annual LTIP Value + 2005 Annual LTIP Value) times (percentage of incentive pool funded as described in Section 4.0 above).
o Notwithstanding anything to the contrary herein, the Committee may in its discretion choose to award a Participant less than his/her maximum Earned Award as calculated above, taking into account such factors as it may deem relevant, including but not limited to the Participant's achievement of his/her bonus objectives under his/her applicable annual bonus plan.
o Notwithstanding anything to the contrary herein, the Committee may delay the payment of any Earned Award for a period of up to a year after the Measurement Date.
6.0 TERMINATION OF EMPLOYMENT AND FORFEITURE OF AWARD:
Except as may otherwise be determined by the Committee, in the event that the Participant's employment with the Company (including its subsidiaries) terminates for any reason prior to the end of the Performance Period, the 2003 LTIP Award shall be forfeited, and neither the Participant, nor any successor, heir, assign or personal representative of the Participant, shall have any further right to or interest in the 2003 LTIP Award. Notwithstanding anything herein to the contrary, if a Change in Control (as defined in Section 7) occurs and if, prior to the date on which the Change in Control occurs, the Participant's employment with the Company is terminated or the Participant is reassigned to a position which in the opinion of the Committee reduces the Participant's ability to make an impact upon the profitability of the Company through his/her decisions, actions and counsel and if it is reasonably demonstrated by the Participant that such termination of employment or reassignment of position (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Notice the 2003 LTIP Award shall not be forfeited by the Participant to the Company upon such termination or reassignment, and the amount of the 2003 LTIP Award shall be determined by the Committee as described in Section 7.0 below and shall vest and be payable immediately upon the Change in Control.
7.0 CHANGE IN CONTROL:
Notwithstanding anything herein to the contrary, upon a Change in Control, the Committee shall determine the amount of the 2003 LTIP Award in the manner set forth in this Section 7.0 (the "CIC LTIP Award"). The CIC LTIP Award shall equal the maximum potential 2003 LTIP Award, prorated to reflect the percentage of the Performance Period that has elapsed between the beginning of the Performance Period and the date of the Change in Control. The CIC LTIP Award shall vest and be immediately payable upon a Change in Control. A "Change in Control" means the occurrence of any one of the following events.
(i) individuals who, on January 21, 1997, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 21, 1997, whose election or nomination for election was approved by a vote of at least three-fourths (3/4) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by
or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;
(ii) any "Person" (for purposes of this definition only, as defined under
Section 3(a)(9) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and as used in Section 13(d) or Section 14(d) of
the Exchange Act) is or becomes a "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined
voting power of the Company's then outstanding securities eligible to
vote for the election of the Board (the "Company Voting Securities")
provided, however, that the event described - in this paragraph (ii)
shall not be deemed to be a Change in Control by virtue of any of the
following acquisitions: (A) by the Company or any entity in which the
Company directly or indirectly beneficially owns more than 50% of the
voting securities or interest (a "Subsidiary"), (B) by an employee
stock ownership or employee benefit plan or trust sponsored or
maintained by the Company or any Subsidiary, (C) by any underwriter
temporarily holding securities pursuant to an offering of such
securities, or (D) pursuant to a Non-Qualifying Transaction (as
defined in paragraph (iii);
(iii) the shareholders of the Company approve a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to the consummation of such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no Person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which
satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or
(iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets.
Computations required by paragraph (iii) shall be made on and as of the date of shareholder approval and shall be based on reasonable assumptions that will result in the lowest percentage obtainable. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to have occurred solely because any Person acquires beneficial ownership of more than twenty percent (20%) of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such Person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such Person, a Change in Control of the Company shall then occur.
8.0 EFFECT ON EMPLOYMENT:
Nothing contained in the LTIP shall confer upon the Participant the right to continue in the employment of the Company (including its subsidiaries) or affect any right that the Company (including its subsidiaries) may have to terminate the employment of the Participant.
9.0 AMENDMENT:
The 2003 LTIP Awards may not be amended except with the consent of the Committee.
10.0 WITHHOLDING:
Whenever payments hereunder are to be made in cash, the Company shall have the right to withhold from sums due to the Participant (or to require the Participant to remit to the Company) an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to making such payments.
Restricted Stock Agreement ("Agreement") by and between First Horizon National Corporation (the "Company"), acting with the prior approval of the Compensation Committee (the "Committee") of the Board of Directors, and the employee whose name is specified above, who is an employee of the Company or one or more of its subsidiaries (the "Participant").
Whereas, the Participant has been granted an award (the "2003 LTIP Award") under
Section 8 of the First Tennessee National Corporation 2003 Equity Compensation
Plan (the "Plan"), contingent on the achievement of specified performance goals
over a three-year performance period beginning January 1, 2003 and ending on
December 31, 2005 (the "Performance Period").
Whereas, a portion of the 2003 LTIP Award will be paid in shares of common stock of the Company, par value $0.625 per share (the "Common Stock").
Now, therefore, in consideration of the covenants hereinafter set forth, the Company and the Participant agree as follows:
1. Award. Pursuant to the terms of the Plan, the Company hereby grants to the Participant the number of shares of Common Stock specified above (the "Shares"), subject to the Restrictions and other conditions set forth herein. So long as any Shares are subject to the Restrictions set forth in Section 4 hereof, such Shares shall be deemed to be, and shall be referred to herein as, Restricted Shares.
2. Certificates. Each certificate evidencing Restricted Shares shall be deposited with the Treasurer of the Company, accompanied by a stock power in blank executed by the Participant, and shall bear the following legend (or alternatively, in the discretion of the Company, shall be held in book entry form at the Company's transfer agent, subject to the same legend):
"This certificate and shares of stock represented hereby are subject to the terms and conditions (including the risk of forfeiture and restrictions on transfer) contained in a Restricted Stock Agreement entered into pursuant to the First Tennessee National Corporation 2003 Equity Compensation Plan between the registered owner and First Horizon National Corporation. Release from such terms and conditions shall occur only in accordance with the provisions of such Plan and Agreement, a copy of each of which is filed with the Secretary of First Horizon National Corporation."
3. Adjustments in Restricted Shares. The number of Restricted Shares covered by this Agreement shall be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, recapitalization, combination or reclassification of the Common Stock, and may be proportionately adjusted, as determined in the sole discretion of the Board of Directors of the Company, for any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company or to reflect any distributions to holders of shares of Common Stock other than regular cash dividends. Any new, additional or different shares to which the Participant shall be entitled in respect of Restricted Shares by reason of such adjustment shall be deemed to be Restricted Shares and shall be subject to the same terms, conditions, and restrictions as the Restricted Shares so adjusted.
4. Restrictions. During applicable periods of restriction determined in accordance with Section 6 of this Agreement, Restricted Shares, and the right to vote such Shares and to receive dividends thereon may not be sold, assigned, transferred, exchanged, pledged, hypothecated or otherwise encumbered, and shall be subject to the forfeiture provisions contained in Section 5 of this Agreement (such limitations on transferability and risk of forfeiture being collectively called the "Restrictions"), but the Participant shall have all other rights of a shareholder, including but not limited to, the right to vote and receive dividends on Restricted Shares; provided, however, that effective as of July 20, 2004, the Participant shall have no right to receive any dividends on the Restricted Shares for so long as they remain subject to the Restrictions.
5. Forfeiture of Restricted Shares. Except as may otherwise be determined
by the Committee, in the event that the Participant's employment with
the Company (including its subsidiaries) terminates for any reason
prior to the end of the Performance Period, all Shares which at the
time are Restricted Shares shall be forfeited by the Participant to
the Company without payment of any consideration by the Company, and
the cash portion (if any) of the 2003 LTIP Award shall be forfeited,
and neither the Participant, nor any successor, heir, assign or
personal representative of the Participant, shall have any further
right to or interest in such 2003 LTIP Award, Restricted Shares or the
certificate or certificates evidencing them. Notwithstanding anything
herein to the contrary, if a Change in Control (as defined in Section
9) occurs and if, prior to the date on which the Change in Control
occurs, the Participant's employment with the Company is terminated or
the Participant is reassigned to a position which in the opinion of
the Committee reduces the Participant's ability to make an impact upon
the profitability of the Company through his/her decisions, actions
and counsel and if it is reasonably demonstrated by the Participant
that such termination of employment or reassignment of position (i)
was at the request of a third party who has taken steps reasonably
calculated to effect a Change in Control or (ii) otherwise arose in
connection with or in anticipation of a Change in Control, then for
all purposes of this Agreement the amount of the 2003 LTIP Award shall
be determined by the Committee as described in Section 9 below and
shall vest and be payable immediately upon the Change in Control as
described in Section 9 below.
6. Lapse of Restrictions.
(a) As soon as practicable following the end of the Performance Period, the Committee shall determine the 2003 LTIP Award earned by the Participant in the manner described in Exhibit A (the "Earned Award"). If the fair market value of the Shares on the Measurement Date (as defined in Exhibit A) is less than the Earned Award, the Restrictions on all of the Shares will lapse and the difference will be paid in cash. If the fair market value of the Shares on the Measurement Date exceeds the Earned Award, then Restrictions will lapse only as to the number of Shares, the fair market value of which is equal to the amount necessary to fund the Earned Award (if any), and any remaining shares will be forfeited.
(b) Notwithstanding the foregoing, the Committee may delay the vesting of the Shares and the payment of the cash portion (if any) of any Earned Award earned in accordance with paragraph (a) of this Section 6 for a period of up to a year after the Measurement Date.
(c) Upon lapse of the Restrictions in accordance with this Section 6 or Section 9, new certificates evidencing the Shares with respect to which the Restrictions have lapsed, without a restrictive legend, shall be issued to the Participant or his legal representative, against cancellation of the legended certificates. Each such new certificate shall bear a legend reflecting any restrictions upon the transferability of such shares imposed by law, such as the Securities Act of 1933.
7. Valuation of Shares. For purposes of this Agreement, the fair market value with respect to the Shares, shall mean, as of any date, (i) the mean between the high and low sales prices at which Shares were sold on the New York Stock Exchange, or, if the shares are not listed on the New York Stock Exchange, on any other such exchange on which the Shares are traded, on such date, or, in the absence of reported sales on such date, the mean between the high and low sales prices on the immediately preceding date on which sales were reported, or (ii) in the absence of such sales prices for the Shares on either of such dates, the fair market value as determined in good faith by the Committee in its sole discretion.
8. Withholding Requirements. Whenever payments hereunder are to be made in cash, or Restrictions lapse with respect to Restricted Shares, the Company shall have the right to withhold from sums due to the Participant (or to require the Participant to remit to the Company) an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to making such payments or delivering any certificate evidencing such shares.
9. Change in Control. Notwithstanding anything herein to the contrary, upon a Change in Control, the Committee shall determine the amount of the 2003 LTIP
Award in the manner set forth in this Section 9 (the "CIC LTIP Award"). The CIC LTIP Award shall equal the maximum potential 2003 LTIP Award, prorated to reflect the percentage of the Performance Period that has elapsed between the beginning of the Performance Period and the date of the Change in Control. Upon a Change in Control, the CIC LTIP Award shall immediately vest and become payable. If the fair market value of the Shares on the date of the Change in Control is less than the CIC LTIP Award, the Restrictions on all of the Shares will lapse immediately and the difference will be paid in cash. If the fair market value of the Shares on the date of the Change in Control exceeds the CIC LTIP Award, then Restrictions will lapse only as to the number of Shares, the fair market value of which is equal to the amount necessary to fund the CIC LTIP Award, and any remaining Shares will be forfeited. A "Change in Control" means the occurrence of any one of the following events.
(j) individuals who, on January 21, 1997, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 21, 1997, whose election or nomination for election was approved by a vote of at least three-fourths (3/4) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;
(ii) any "Person" (for purposes of this definition only, as defined
under Section 3(a)(9) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and as used in Section 13(d) or
Section 14(d) of the Exchange Act) is or becomes a "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing
20% or more of the combined voting power of the Company's then
outstanding securities eligible to vote for the election of the
Board (the "Company Voting Securities") provided, however, that
the event described in this paragraph (ii) shall not be deemed to
be a Change in Control by virtue of any of the following
acquisitions: (A) by the Company or any entity in which the
Company directly or indirectly beneficially owns more than 50% of
the voting securities or interest (a "Subsidiary"), (B) by an
employee stock ownership or employee benefit plan or trust
sponsored or maintained by the Company or any Subsidiary, (C) by
any underwriter temporarily holding securities pursuant to an
offering of such securities, or (D) pursuant to a Non-Qualifying
Transaction (as defined in paragraph (iii));
(iii) the shareholders of the Company approve a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to the consummation of such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no Person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or
(iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets.
Computations required by paragraph (iii) shall be made on and as of the date of shareholder approval and shall be based on reasonable assumptions that will result in the lowest percentage obtainable. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to have occurred solely because any Person acquires beneficial ownership of more than twenty percent (20%) of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such Person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such Person, a Change in Control of the Company shall then occur.
10. Tax Elections. The Participant agrees not to make an election in accordance with Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in his gross income for federal income tax purposes the value of the Restricted Shares in the year in which this Agreement is made.
11. Effect on Employment. Nothing contained in this Agreement shall confer upon the Participant the right to continue in the employment of the Company (including its subsidiaries) or affect any right that the Company (including its subsidiaries) may have to terminate the employment of the Participant.
12. Amendment. This Agreement may not be amended except with the consent of the Committee and by a written instrument duly executed by the Participant and the Company.
13. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns.
14. Choice of Law. This Agreement shall be governed by the law of the State of Tennessee without reference to the conflicts of laws provisions thereof.
IN WITNESS WHEREOF, the each of the Company and the Participant has executed and delivered this Agreement as of the ___ of August, 2004, but effective the day and year first above written.
FIRST HORIZON NATIONAL CORPORATION
ATTEST
PARTICIPANT
Exhibit A
o Funding of the Incentive Pool. The amount by which the Company will fund the incentive pool from which all of the Participants' 2003 LTIP Awards will be paid will be determined based on the higher of either one of the following two criteria established by the Compensation Committee: (1) the Company's Price/Earnings Ratio ("P/E Ratio") relative to the Peer Group (as defined below) as of the Measurement Date or (2) the Compound Annual Growth Rate ("CAGR") in the Company's stock price.
o The Company's relative P/E Ratio measurement criteria is as follows:
o If the Company's P/E Ratio equals the ____th percentile of the P/E Ratio of the Peer Group, an incentive pool will be funded equal to 20% of the maximum aggregate potential 2003 LTIP Award of all the Participants. The "Peer Group" shall be the "Top 50 Banks" as identified by American Banker at the beginning of the Performance Period.
o If the Company's P/E Ratio equals the ____th percentile of the P/E Ratio of the Peer Group, an incentive pool will be funded equal to 100% of the maximum aggregate potential 2003 LTIP Award of all the Participants.
o Straight line interpolation will be used to fund the incentive pool when performance is between the ____th and ____th percentile of the Peer Group.
o Regardless of Company's relative performance, no incentives will be funded or paid unless the Company's P/E Ratio increases during the Performance Period. The P/E ratio at the beginning of the performance period is 12.3.
o The initial Performance Period covers 3 years (2003 - 2005), and the Measurement Date for the initial Performance Period will be January 31, 2006.
o The numerator of the P/E Ratio will be based on the 60-trading-day average closing price for the period ending January 31, 2006 as reported by The Wall Street Journal, unless the Committee selects another period (e.g., due to market volatility or rumors of potential transactions).
o The denominator of the P/E Ratio will be the Company's actual earnings for the year ended 12/31/05, unless the Committee approves a different period.
o If, at the end of the Performance Period, the Committee determines that the Company's P/E Ratio is distorted (positively or negatively) by market volatility (e.g., due to speculation about potential business combinations), then the Committee may adjust the incentive pool. Alternatively, the Committee may direct the Company to calculate its relative P/E Ratio over a longer or shorter period of time (i.e., 90 days rather than 60 days) or otherwise determine a normalized P/E Ratio for comparison to the Peer Group.
o The stock price CAGR measurement criteria is as follows:
o Target based on 2003-2005 strategic plan as presented to the Board in October, 2002.
o 100% payout earned only if stock price CAGR represents significant return to shareholders as indicated in the following grid:
CAGR => Payout % ---- -------- ____% 100% ____ 75 ____ 50 ____ 25 ____ -0- |
o The amount of the incentive pool funded may be reduced by the Committee in order to more accurately reflect the Company's total performance. In determining the amount, if any, by which the incentive pool will be reduced, the Committee may consider measures such as the following:
-------------------------------------- Factor Guideline -------------------------------------- Rating Agencies [guideline redacted] -------------------------------------- Regulatory [guideline redacted] -------------------------------------- Capitalization [guideline redacted] -------------------------------------- Governance [guideline redacted] -------------------------------------- |
o Failure to meet the guideline for any one of the above factors may in the Committee's discretion result in a 20% reduction, up to a total reduction of 80%, of the incentive pool.
o Determination of Individual Participant's Earned Award. The objective of the LTIP is to deliver a total annual award up to 75% of the maximum bonus potential for each individual Participant under his/her respective annual bonus plan for the Performance Period (MIP or FirstPower). The incentive pool available will be determined based on the applicable performance criteria outlined above. Each Participant's maximum Earned Award will be calculated as follows:
[Standard version formula]
o Annual LTIP Value = Eligible Base Salary times Annual Bonus Plan Maximum Potential times 0.75
[Formula applicable to executives whose bonuses are based on a measure of business unit earnings:]
o Annual LTIP Value = Eligible Base Salary times 0.75
The Annual LTIP Value will be determined for each calendar year during the Performance Period. At the end of the Performance Period, the maximum Earned Award will be determined as follows:
o Maximum Earned Award = (2003 Annual LTIP Value + 2004 Annual LTIP Value + 2005 Annual LTIP Value) times (percentage of incentive pool funded as described above).
o Notwithstanding anything to the contrary herein, the Committee may in its discretion choose to award a Participant less than his/her maximum Earned Award as calculated above, taking into account such factors as it may deem relevant, including but not limited to the Participant's achievement of his/her bonus objectives under his/her applicable annual bonus plan.
EXHIBIT 10.4(b)
NOTICE OF
2004 LONG-TERM INCENTIVE PLAN AWARD ("2004 LTIP AWARD")
UNDER 2003 EQUITY COMPENSATION PLAN
1.0 OBJECTIVE:
The purpose of the Long-Term Incentive Plan Award ("LTIP") pursuant to
Section 8 of the First Horizon National Corporation's 2003 Equity
Compensation Plan (the "Plan") is to provide motivation for key executives
to achieve the Company's strategic objectives and ensure incentive rewards
and performance are linked to shareholder value.
2.0 LTIP PERFORMANCE PERIOD:
The LTIP performance period will be the Company's fiscal years beginning January 1, 2004 and ending December 31, 2006.
3.0 ELIGIBILITY:
o Eligibility for executive officers who are subject to Section 16 (as defined in the Plan) or who are Covered Officers (as defined in the Plan) is approved annually by the Compensation Committee ("Committee").
o Eligibility for all other executives is approved annually by the CEO.
4.0 FUNDING OF THE INCENTIVE POOL:
o As soon as possible following the end of the Performance Period, the Committee shall determine the 2004 LTIP Award earned by each Participant in the manner described in Sections 4.0 and 5.0 of this Notice (the "Earned Award").
o The amount by which the Company will fund the incentive pool from which all of the Participants' 2004 LTIP Awards will be paid will be determined by the Committee based on the following measurement criteria: (1) the Company's stock price compound annual growth rate (the "Stock Price CAGR"), (2) the Company's stock price compound annual growth rate relative to the "Top 50 Banks" as identified by American Banker at the beginning of the Performance Period (the "Peer Group") (the "Relative Stock Price CAGR") and (3) the Company's cumulative diluted earnings per share ("EPS") as reported in the Company's year-end audited financial statements, except that the calculation of EPS for purposes of determining achievement of the performance goal will exclude the negative effect of any nonrecurring items, extraordinary items, discontinued operations, or cumulative effects of accounting changes ("Cumulative Modified EPS").
o The threshold criterion to be used to determine funding of the incentive pool shall be the Company's Cumulative Modified EPS.
o Except as provided below, if the Company's Cumulative Modified EPS is equal to or greater than an amount established by the Committee at the beginning of the Performance Period, an incentive pool will be funded equal to 100% of the maximum aggregate potential 2004 LTIP Awards of all the Participants.
o Notwithstanding the Company's achievement of the Cumulative Modified EPS criterion, the Committee shall have complete discretion to reduce the incentive pool funding in accordance with the higher of the Stock Price CAGR measurement criterion or the Relative Stock Price CAGR measurement criterion as described below.
o The Stock Price CAGR measurement criterion is as follows:
o Target based on 2003-2005 strategic plan as presented to the Board in October, 2002.
o Payouts earned if stock price CAGR represents significant return to shareholders as indicated in the following grid:
CAGR => Payout% ---- ------- ___% 100% ___ 75 ___ 50 ___ 25 ___ -0- |
Beginning stock price at 12/31/2003 is $44.15.
o The Relative Stock Price CAGR measurement criterion is as follows:
o If the Company's Relative Stock Price CAGR is in the Top ___ of the Peer Group** and positive, 100% payout is achieved.
** Performance of individual companies in the Peer Group will be adjusted for down years.
Payout/Accrual Grid:
Peer Group Rank => Payout % --------------- -------- Top ___ 100% Top ___ 75 ___ Percentile 50 > ___ <___ 25 < ______ -0- |
o The amount of the incentive pool funded may be further reduced by the Committee in its discretion in order to more accurately reflect the Company's total performance. In determining the amount, if any, by which the incentive pool will be reduced, the Committee may consider measures such as the following:
-------------------------------------- Factor Guideline -------------------------------------- Rating Agencies [guideline redacted] -------------------------------------- Regulatory [guideline redacted] -------------------------------------- Capitalization [guideline redacted] -------------------------------------- Governance [guideline redacted] -------------------------------------- |
Failure to meet the guideline for any one of the above factors may in the Committee's discretion result in a 20% reduction, up to a total reduction of 80%, of the LTIP incentive pool.
5.0 DETERMINATION OF INDIVIDUAL PARTICIPANT'S MAXIMUM EARNED AWARD AND PAYMENT OF AWARD:
o The objective of the LTIP is to deliver a total annual award up to 75% of the maximum bonus potential for each individual Participant under his/her respective annual bonus plan for the Performance Period (MIP or FirstPower). The incentive pool available will be determined based on the applicable performance criteria outlined in Section 4.0 above. Each Participant's maximum Earned Award will be calculated as follows:
[Standard version formula:]
Annual LTIP Value = Eligible Base Salary times Annual Bonus Plan Target times 0.75
[Formula applicable to executives whose bonuses are based on a measure of business unit earnings:]
Annual LTIP Value = Eligible Base Salary times 0.75
The Annual LTIP Value will be determined for each calendar year during the Performance Period. At the end of the Performance Period, the maximum Earned Award will be determined as follows:
LTIP Incentive Award = (2004 Annual LTIP Value + 2005 Annual LTIP Value + 2006 Annual LTIP Value) times (percentage of incentive pool funded as described in Section 4.0 above)
o Notwithstanding anything to the contrary herein, the Committee may in its discretion choose to award a Participant less than his/her maximum Earned Award as calculated above, taking into account such factors as it may deem relevant, including but not limited to the Participant's achievement of his/her bonus objectives under his/her applicable annual bonus plan.
o Notwithstanding anything to the contrary herein, the Committee may delay the pay-ment of any Earned Award for a period of up to a year after the Measurement Date.
6.0 TERMINATION OF EMPLOYMENT AND FORFEITURE OF AWARD:
Except as may otherwise be determined by the Committee, in the event that the Participant's employment with the Company (including its subsidiaries) terminates for any reason prior to the end of the Performance Period, the 2004 LTIP Award shall be forfeited, and neither the Participant, nor any successor, heir, assign or personal representative of the Participant, shall have any further right to or interest in the 2004 LTIP Award. Notwithstanding anything herein to the contrary, if a Change in Control (as defined in Section 7) occurs and if, prior to the date on which the Change in Control occurs, the Participant's employment with the Company is terminated or the Participant is reassigned to a position which in the opinion of the Committee reduces the Participant's ability to make an impact upon the profitability of the Company through his/her decisions, actions and counsel and if it is reasonably demonstrated by the Participant that such termination of employment or reassignment of position (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Notice the 2004 LTIP Award shall not be forfeited by the Participant to the Company upon such termination or reassignment, and the amount of the 2004 LTIP Award shall be determined by the Committee as described in Section 7.0 below and shall vest and be payable immediately upon the Change in Control.
7.0 CHANGE IN CONTROL:
Notwithstanding anything herein to the contrary, upon a Change in Control, the Committee shall determine the amount of the 2004 LTIP Award in the manner set forth in this Section 7.0 (the "CIC LTIP Award"). The CIC LTIP Award shall equal the maximum potential 2004 LTIP Award, prorated to reflect the percentage of the Performance Period that has elapsed between the beginning of the Performance Period and the date of the Change in Control. The CIC LTIP Award shall vest and be immediately payable upon a Change in Control. A "Change in Control" means the occurrence of any one of the following events.
(i) individuals who, on January 21, 1997, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 21, 1997, whose election or nomination for election was approved by a vote of at least three-fourths (3/4) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no
individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;
(ii) any "Person" (for purposes of this definition only, as defined under
Section 3(a)(9) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and as used in Section 13(d) or Section 14(d) of
the Exchange Act) is or becomes a "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined
voting power of the Company's then outstanding securities eligible to
vote for the election of the Board (the "Company Voting Securities")
provided, however, that the event described in this paragraph (ii)
shall not be deemed to be a Change in Control by virtue of any of the
following acquisitions: (A) by the Company or any entity in which the
Company directly or indirectly beneficially owns more than 50% of the
voting securities or interest (a "Subsidiary"), (B) by an employee
stock ownership or employee benefit plan or trust sponsored or
maintained by the Company or any Subsidiary, (C) by any underwriter
temporarily holding securities pursuant to an offering of such
securities, or (D) pursuant to a Non-Qualifying Transaction (as
defined in paragraph (iii);
(iii) the shareholders of the Company approve a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to the consummation of such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no Person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is
no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or
(iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets.
Computations required by paragraph (iii) shall be made on and as of the date of shareholder approval and shall be based on reasonable assumptions that will result in the lowest percentage obtainable. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to have occurred solely because any Person acquires beneficial ownership of more than twenty percent (20%) of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such Person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such Person, a Change in Control of the Company shall then occur.
8.0 EFFECT ON EMPLOYMENT:
Nothing contained in the LTIP shall confer upon the Participant the right to continue in the employment of the Company (including its subsidiaries) or affect any right that the Company (including its subsidiaries) may have to terminate the employment of the Participant.
9.0 AMENDMENT:
The 2004 LTIP Awards may not be amended except with the consent of the Committee.
10.0 WITHHOLDING:
Whenever payments hereunder are to be made in cash, the Company shall have the right to withhold from sums due to the Participant (or to require the Participant to remit to the Company) an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to making such payments.
The following reflects action taken affecting this award, but is not part of the award document:
On February 22, 2005, the Compensation Committee of the Board of Directors, acting under authority delegated to it under the 2003 Equity Compensation Plan, combined two years of the
2004 LTIP awards with the 2005 LTIP awards. In connection with that action, the Committee limited the amount payable under the 2004 LTIP award to a single-year amount and granted 2005 LTIP awards with both a two-year performance period (2005-2006) and a three-year performance period (2005-2007).
EXHIBIT 10.4(c)
NOTICE OF
2005 LONG-TERM INCENTIVE PLAN AWARD ("2005 LTIP AWARD")
UNDER 2003 EQUITY COMPENSATION PLAN
1.0 OBJECTIVE:
The purpose of the Long-Term Incentive Plan Award ("LTIP") pursuant to
Section 8 of the First Horizon National Corporation's 2003 Equity
Compensation Plan (the "Plan") is to provide motivation for key executives
to achieve the Company's strategic objectives and ensure incentive rewards
and performance are linked to shareholder value.
2.0 LTIP PERFORMANCE PERIOD:
The LTIP performance period for 40% of the award will be the Company's fiscal years beginning January 1, 2005 and ending December 31, 2006 (the 2005-06 Performance Period) and the LTIP performance period for 60% of the award will be the Company's fiscal years beginning January 1, 2005 and ending December 31, 2007 (the 2005-07 Performance Period).
3.0 ELIGIBILITY:
o Eligibility for executive officers who are subject to Section 16 (as defined in the Plan) or who are Covered Officers (as defined in the Plan) is approved annually by the Compensation Committee ("Committee").
o Eligibility for all other executives is approved annually by the CEO.
4.0 AWARD:
2005 LTIP Awards will be granted effective March 4, 2005 in Performance Share Units using the following formula: The number of units awarded to each Participant will be equal to the Participant's base salary effective March 4, 2005 times the Participant's annual bonus target percentage* times 1.5 (for the 2005-07 Performance Period) and times 2.25 (for the 2005-07 Performance Period), with the resulting dollar amount for each Performance Period divided by the Fair Market Value of one share of the Company's common stock on March 4, 2005 to determine the number of Units. Awards will be rounded to the nearest whole Unit. Units will not earn dividends during the Performance Period.
*100% will be used for the annual bonus target percentage if the Participant's annual bonus is determined using a formula based on a percentage of the Officer's business unit pre-tax income.
5.0 DETERMINATION OF INDIVIDUAL PARTICIPANT'S EARNED AWARD AND PAYMENT OF AWARD:
The number of Units which are earned (vest) following the end of each Performance Period will be determined by the Committee based on the following measurement criteria:
100% of the Units will vest if average annual EPS equals or exceeds $___ per share.
o The Compensation Committee may use negative discretion to reduce the award based on EPS growth during the performance period. A basis for reducing the award may be competitive EPS growth results for the Performance Period relative to the "Top 30 Banks" as identified by American Banker at the beginning of the Performance Period (the "Peer Group") as follows (results in between the percentiles shown will be interpolated):
EPS Growth Percentile Percentage of Units Vesting
--------------------- ---------------------------
____ 100%
____ 67%
____ 33%
Below ____ Committee Discretion
|
The following adjustments may be made to evaluate performance subject to Compensation Committee negative discretion to determine final awards:
o One-time acquisition costs will be excluded.
o Material nonrecurring non-operating items (positive or negative) as required under accounting rules or by our auditors to be listed and discussed in company financial statements will be excluded.
o The number of Units earned (vested) may be reduced by the Committee in its discretion in order to more accurately reflect the Company's total performance. In determining the amount, if any, by which the number of Units will be reduced, the Committee may consider measures such as the following:
-------------------------------------- Factor Guideline -------------------------------------- Rating Agencies [guideline redacted] -------------------------------------- Regulatory [guideline redacted] -------------------------------------- Capitalization [guideline redacted] -------------------------------------- Governance [guideline redacted] -------------------------------------- |
o Notwithstanding the Company's achievement of the above criteria, the Committee shall have complete discretion to further reduce the number of Units earned (vested), including payment of no award.
o Vested Units will be paid in shares (one share for each vested Unit).
6.0 FAIR MARKET VALUE OF SHARES
The Fair Market Value of each share of common stock shall mean, as of any date, (i) the mean between the high and low sales prices at which shares were sold on the New York Stock Exchange, or, if the shares are not listed on the New York Stock Exchange, on any other such exchange on which the shares are traded, on such date, or in the absence of purported sales on such date, the mean between the high and low sales prices on the immediately preceding date on which sales were reported, or (ii) in the absence of such sales prices for the shares on either of such dates, the fair market value as determined in good faith by the Committee in its sole discretion.
7.0 TERMINATION OF EMPLOYMENT AND FORFEITURE OF AWARD:
Except as may otherwise be determined by the Committee, in the event that the Participant's employment with the Company (including its subsidiaries) terminates for any reason prior to the end of the Performance Period, the 2005 LTIP Award shall be forfeited, and neither the Participant, nor any successor, heir, assign or personal representative of the Participant, shall have any further right to or interest in the 2005 LTIP Award. Notwithstanding anything herein to the contrary, if a Change in Control (as defined in Section 7) occurs and if, prior to the date on which the Change in Control occurs, the Participant's employment with the Company is terminated or the Participant is reassigned to a position which in the opinion of the Committee reduces the Participant's ability to make an impact upon the profitability of the Company through his/her decisions, actions and counsel and if it is reasonably demonstrated by the Participant that such termination of employment or reassignment of position (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Notice the 2005 LTIP Award shall not be forfeited by the Participant to the Company upon such termination or reassignment, and the amount of the 2005 LTIP Award shall be determined by the Committee as described in Section 7.0 below and shall vest and be payable immediately upon the Change in Control.
8.0 CHANGE IN CONTROL:
Notwithstanding anything herein to the contrary, upon a Change in Control, the Committee shall determine the amount of the 2005 LTIP Award in the manner set forth in this Section 7.0 (the "CIC LTIP Award"). The CIC LTIP Award shall equal the maximum potential 2005 LTIP Award, prorated to reflect the percentage of the Performance Period that has elapsed between the beginning of the Performance Period and the date of the Change in Control. The CIC LTIP Award shall vest and be immediately payable upon a Change in Control. A "Change in Control" means the occurrence of any one of the following events.
(i) individuals who, on January 21, 1997, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 21, 1997, whose election or nomination for election was approved by a vote of at least three-fourths (3/4) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;
(ii) any "Person" (for purposes of this definition only, as defined under
Section 3(a)(9) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and as used in Section 13(d) or Section 14(d) of
the Exchange Act) is or becomes a "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined
voting power of the Company's then outstanding securities eligible to
vote for the election of the Board (the "Company Voting Securities")
provided, however, that the event described in this paragraph (ii)
shall not be deemed to be a Change in Control by virtue of any of the
following acquisitions: (A) by the Company or any entity in which the
Company directly or indirectly beneficially owns more than 50% of the
voting securities or interest (a "Subsidiary"), (B) by an employee
stock ownership or employee benefit plan or trust sponsored or
maintained by the Company or any Subsidiary, (C) by any underwriter
temporarily holding securities pursuant to an offering of such
securities, or (D) pursuant to a Non-Qualifying Transaction (as
defined in paragraph (iii);
(iii) the shareholders of the Company approve a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to the consummation of such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power
among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no Person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or
(iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets.
Computations required by paragraph (iii) shall be made on and as of the date of shareholder approval and shall be based on reasonable assumptions that will result in the lowest percentage obtainable. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to have occurred solely because any Person acquires beneficial ownership of more than twenty percent (20%) of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such Person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such Person, a Change in Control of the Company shall then occur.
9.0 EFFECT ON EMPLOYMENT:
Nothing contained in the LTIP shall confer upon the Participant the right to continue in the employment of the Company (including its subsidiaries) or affect any right that the Company (including its subsidiaries) may have to terminate the employment of the Participant.
10.0 AMENDMENT:
The 2005 LTIP Awards may not be amended except with the consent of the Committee.
11.0 WITHHOLDING:
The Company shall have the right to withhold shares from vested Units due to the Participant (or to require the Participant to remit cash to the Company) in an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to distribution of shares to the Participant.
EXHIBIT 10.5(b)
RESTRICTED STOCK AGREEMENT
Date: April 17, 2003
Participant: J. Kenneth Glass
Number of Shares: 50,000
Restricted Stock Agreement made as of the 15th day of April, 2003, by and between J. Kenneth Glass (the "Participant") and First Tennessee National Corporation (the "Company"), acting with the prior approval of the Board of Directors upon the recommendation of its Human Resources Committee (the "Committee").
In consideration of the covenants hereinafter set forth, the Company and the Participant agree as follows:
1. Award. Pursuant to the terms of the First Tennessee National Corporation 2003 Equity Compensation Plan (the "Plan"), the Company hereby grants to the Participant 50,000 shares (the "Shares") of common stock of the company, par value $0.625 per share (the "Common Stock"), subject to the Restrictions and other conditions hereinafter set forth. So long as any Shares are subject to the Restrictions set forth in Section 3 hereof, such Shares shall be deemed to be, and shall be referred to herein as, Restricted Shares.
2. Certificates. Each certificate evidencing Restricted Shares shall be deposited with the Treasurer of the Company, accompanied by a stock power in blank executed by the Participant, or shall be held in book-entry form at the Company's transfer agent, and shall bear the following legend:
"This certificate and the shares of stock represented hereby are subject to the terms and conditions (including the risk of forfeiture and restrictions on transfer) contained in the First Tennessee National Corporation 2003 Equity Compensation Plan and a Restricted Stock Agreement entered into between the registered owner and First Tennessee National Corporation. Release from such terms and conditions shall occur only in accordance with the provisions of such Plan and Agreement, a copy of each of which is filed with the Secretary of First Tennessee National Corporation."
3. Restrictions. During the applicable period of restriction determined in accordance with Section 5 of this Agreement, Restricted Shares, and the right to vote such Shares and to receive dividends thereon, may not be sold, assigned, transferred, exchanged, pledged, hypothecated or otherwise encumbered, and shall be subject to the risk of forfeiture contained in Section 4 of this Agreement (such limitations on transferability and risk of forfeiture being collectively called the "Restrictions"), but the Participant shall have all other rights of a stockholder, including, but not limited to, the right to vote and receive dividends on Restricted
Shares.
4. Forfeiture of Restricted Shares. In the event that the Participant (a)
voluntarily terminates his employment with the Company (including its
subsidiaries), (b) is discharged from employment with the Company (including its
subsidiaries) as a result of his failure (not caused by death or disability) to
perform the duties of his position faithfully and to the best of his ability or
(c) is reassigned to a position which, in the opinion of the Committee, reduces
the Participant's opportunity to make an impact upon the profitability of the
Company through his/her decisions, actions and counsel (the events described in
the foregoing clauses (a), (b), and (c) being called herein "Events of
Forfeiture"), all Shares which at the time are Restricted Shares shall be
forfeited by the Participant to the Company without payment of any consideration
by the Company, and neither the Participant, nor any successor, heir, assign or
personal representative of the Participant, shall have any further right to or
interest in such Restricted Shares or the certificate or certificates evidencing
them. Notwithstanding anything herein to the contrary, if a Change in Control
(as defined in the Plan) occurs and if, prior to the date on which the Change in
Control occurs, the Participant's employment with the Company is terminated or
the Participant is reassigned to a position within the meaning of Section 4(c)
and if it is reasonably demonstrated by the Participant that such termination of
employment or reassignment of position (I) was at the request of a third party
who has taken steps reasonably calculated to effect a Change in Control or (ii)
otherwise arose in connection with or in anticipation of a Change in Control,
then for all purposes of this Agreement such termination or reassignment shall
not be deemed an Event of Forfeiture, no Shares which at the time are Restricted
Shares shall be forfeited by the Participant to the Company upon such
termination or reassignment, and all Restrictions with respect to such Shares
shall lapse upon the Change in Control.
5. Lapse of Restrictions.
(a) Subject to clause (b) of this Section 5, the Restrictions shall lapse with respect to Restricted Shares in accordance with the following schedule:
-------------------------------- Date Number of Shares -------------------------------- July 17, 2007 25,000 -------------------------------- July 21, 2009 25,000 -------------------------------- |
(b) If the Participant's employment with the Company ends as a result of any event other than an Event of Forfeiture, all Restrictions shall forthwith lapse as to all Restricted Shares.
(c) Notwithstanding anything herein to the contrary, all Restrictions with respect to the Restricted Shares imposed by the Plan or this Agreement shall lapse immediately upon a Change in Control (as defined in the Plan).
Upon lapse of the Restrictions in accordance with this Section 5, new certificates
evidencing the Shares with respect to which the Restrictions have lapsed without the foregoing restrictive legend shall be issued to the Participant or his legal representative against cancellation of the legended certificates, or, if applicable, the Company's transfer agent shall be directed to remove the legend from Shares held in book-entry form. Each such new certificate, and any Shares held in book-entry form, shall, if applicable, bear a legend reflecting any restrictions upon the transferability of such Shares imposed by law, such as the Securities Act of 1933.
6. Withholding Requirements. Whenever payments hereunder are to be made in cash, or Restrictions lapse with respect to Restricted Shares, the Company shall have the right to withhold from sums due to the Participant (or to require the Participant to remit to the Company) an amount sufficient to satisfy any federal, state or local withholding tax requirements prior to making such payments or delivering any certificate evidencing such Shares.
7. Tax Elections. The Participant agrees not to make an election in accordance with Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in his gross income for federal income tax purposes the value of the Restricted Shares in the year in which this Agreement is made.
8. Effect on Employment. Nothing contained in this Agreement shall confer upon the Participant the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of the Participant.
9. Amendment. This agreement may not be amended except with the consent of the Committee and by a written instrument duly executed by the Participant and the Company.
10. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their heirs, personal representatives, successors and assigns.
IN WITNESS WHEREOF, each of the Company and the Participant has executed and delivered this Agreement as of the day and year first above written.
ATTEST FIRST TENNESSEE NATIONAL CORPORATION
By: By:
------------------------- --------------------------------------------
Clyde A. Billings Jr. William J. Schwindt
Senior Vice President, Compensation and
Benefits
PARTICIPANT:
------------------------------------------------
|
J. Kenneth Glass President and Chief Executive Officer
EXHIBIT 10.5(c)
AGREEMENT TO DEFER RECEIPT OF SHARES
FOLLOWING OPTION EXERCISE
Fill in all of the following blanks with respect to your election to defer receipt of shares following an option exercise. Please print. Complete a separate Agreement to Defer for each option grant for which you elect to defer.
This Agreement is made and entered into as of the date stated above by and between the individual named above (the "Participant") and First Tennessee National Corporation (the "Corporation").
WITNESSETH
WHEREAS, the Corporation has established a stock option enhancement program (the "Program") for certain employees of the Corporation and its subsidiaries pursuant to which the grantee of a stock option who complies with the terms and conditions of the Program is permitted to elect to defer receipt of shares covered by an option and thereby defer recognition of income for federal income tax purposes at the time of the option exercise; and
WHEREAS, Participant has been selected to participate in the Program, subject to the right of the Human Resources Committee of the Board of Directors to cancel the Program as to any unexercised options;
NOW, THEREFORE, in consideration of the promises made herein, Participant and the Corporation do agree as follows:
1. Subject to the terms and conditions of the Program described below, Participant hereby irrevocably elects to defer receipt of the shares specified following the exercise of the option, or portion thereof, specified for the period of time specified, and the Corporation agrees to deliver to Participant at the time specified the shares whose receipt has been deferred (adjusted to reflect any stock splits and stock dividends as described below) and an amount of cash equivalent to the dividends that would have been paid had Participant received the shares immediately following the exercise of the option plus interest on such dividend equivalents at a 10-year Treasury rate of interest, all as described below.
2. Participant is permitted to exercise the option covered by this Agreement at any time beginning at least 6 months after the date of this deferral agreement and ending on the last day of the term of the option.
3. If Participant has elected to defer receipt of a number of shares that is less than the number of shares that is exercisable under the option, then the receipt of shares will be deferred as follows: on the first (and, if necessary, subsequent) exercise of the option occurring at least 6 months following the date of this deferral agreement, receipt of shares will be deferred until the number of shares elected for deferral has been reached.
4. The option cannot be exercised by tendering cash in payment of the exercise price. Participant must pay the exercise price with Corporation common stock. Participant must use the "attestation" method of exercising the option. Under the attestation method, Participant (and, if applicable, Participant's broker or bank or other party) must sign an attestation form, which must be submitted at the time of the option exercise, certifying ownership of a sufficient number of shares of Corporation common stock to pay the exercise price. Actual share certificates are not to be delivered to the Corporation.
5. The shares attested to must be "mature" shares; that is, the shares must either have been purchased on the open market by Participant or if the shares were acquired directly from the Corporation pursuant to an employee benefit plan, the shares must have been owned without any restrictions on transfer for at least six months prior to the option exercise.
6. Participant must be a current employee of the Corporation or one of its subsidiaries both at the time of execution of this Agreement and at the time of the exercise of the option. If Participant's employment terminates for any reason prior to the exercise of the option, then this Agreement is canceled.
7. Participant must select a deferral period, at the end of which shares whose receipt has been deferred and earnings thereon will be paid to Participant, subject to Paragraph 12 herein. The payment date is referred to herein as the "Date of Distribution." Participant may specify any future date, not to exceed actual retirement plus five years, as the Date of Distribution. Alternatively, Participant may specify payment to be made "on retirement" or "on retirement plus ___________ years and __________ months." Under this alternative, the payment date may not exceed actual retirement plus five years. For all purposes hereof, the term "retirement" includes any retirement, whether it is a normal or an early retirement. If the Date of Distribution is not a business day, payment will be made on the next day that is a business day.
8. When Participant decides to exercise the option, Participant must exercise the option for all of the shares covered by this deferral election. Upon the exercise of the option, no shares will be transferred to Participant and a deferral account will be established by the Corporation, consisting of a subaccount reflecting phantom stock units and a subaccount representing cash equal to the earnings credited to the account with respect to dividend equivalents and interest thereon. Participant's phantom stock subaccount will be credited with phantom stock units, based on the number of shares covered by this deferral election with respect to which the option was exercised by Participant, net of the number of shares attested to in payment of the exercise price, with each phantom stock unit being equivalent to one share of the Corporation's common stock. (NOTE: The number of phantom stock units credited to Participant's account is equal to the number of shares covered by the deferral election minus the number of shares attested to in payment of the option exercise price.)
9. Any stock split and stock dividend that is declared with respect to the Corporation's common stock having a payment date that occurs after exercise of the option and before the deferral period has terminated will result in a corresponding stock split or stock dividend being made with respect to the phantom shares of the Corporation's common stock in Participant's deferral account. In other words, Participant will be issued that number of shares of the Corporation's common stock at the termination of the deferral period that Participant would have owned had he or she exercised the option without deferring receipt of the shares and then maintained ownership of such common stock through the payment date of the stock dividend or stock split.
10. Earnings will be credited to Participant's cash subaccount and accrued on the phantom stock units as follows: on each date on which the Corporation pays a dividend on its shares of common stock, an amount equal to such dividend will be credited to Participant's account with respect to each phantom stock unit. Then, as of January 1st of each year, an additional amount will be credited to Participant's account to reflect earnings on the dividend equivalents from the time they were credited to the account for the prior plan year. The rate of earnings credited for the year will be the rate disclosed under the caption "Annualized Ten Year Treasury Rate" in the Federal Reserve Statistical Release in January of the year following the
year with respect to which earnings are to be credited, and the amount will be computed by multiplying the dividend equivalent by the rate by a factor representing the fraction of the year (100% for a January 1 dividend equivalent, 75% for an April 1 dividend equivalent, 50% for a July 1 dividend equivalent, and 25% for a October 1 dividend equivalent) remaining after the dividend equivalent was credited to Participant's account. Interest will compound as follows: for any cash credited to the account that existed on the first day of the prior plan year (excluding any dividend equivalent that is credited to the account on such day), earnings will be credited in an amount equal to the amount of such cash multiplied by the applicable ten year treasury rate factor. For the portion of the Plan year in which the Date of Distribution occurs, earnings will be credited on any cash credited to the account during such year from the time such cash is credited through the Date of Distribution at the rate employed for the previous year.
11. Payment from Participant's deferral account will be made in a single lump sum, computed as follows: with respect to Participant's phantom stock subaccount, one share of the Corporation's common stock will be paid to Participant for each phantom stock unit credited to such subaccount, and with respect to Participant's cash subaccount, cash in the amount credited to the subaccount will be paid to Participant.
12. Payment from Participant's deferral account will be made to Participant (or, in the event of Participant's death, his or her beneficiary) on the earliest of the date selected by Participant as the Date of Distribution, the date of a change in control as defined in the Plan specified above or a date selected by the Corporation following Participant's death, disability, or termination of employment for any reason other than normal or early retirement that is no later than the last day of the month following the month in which there occurs the death, disability, or termination of employment of Participant for any reason other than normal or early retirement.
13. For any and all purposes of this deferral agreement and the Plan specified above, Participant designates the person specified above as his/her beneficiary under the Plan.
14. Participant is limited to one deferral agreement per option grant outstanding at any one time.
15. The Human Resources Committee of the Board of Directors retains the right to cancel the Program and prohibit deferral of receipt of shares following an option exercise with respect to any unexercised options then held by Participant upon notice to Participant.
16. The Human Resources Committee is authorized to interpret and administer the Program and the terms and provisions of this Agreement.
IN WITNESS WHEREOF, Participant has executed and the Corporation has caused
its duly
authorized officer to execute this Agreement, each as of the day and year first above written.
FIRST TENNESSEE NATIONAL CORPORATION
By:
----------------------------- ----------------------------------------
Executive Vice President, Participant
Division Manager Personnel,
or other authorized signatory
|
Risk Statement:
If the fair market value of Corporation common stock drops below the fair market value on the date of exercise of the option (with respect to which receipt of shares is deferred) and does not recover before the end of the deferral period, a portion of the value of such shares will be lost. Thereafter, the value of such shares may increase or decrease further.
If Participant does not exercise the option covered by this Agreement in accordance with all of the terms of this Agreement, the option will be forfeited by Participant and canceled by the Corporation.
EXHIBIT 10.5(d)
AGREEMENT TO EXCHANGE SHARES FOR RSU's AND
DEFER RECEIPT OF SHARES
Fill in all of the following blanks with respect to your election to exchange shares of restricted stock for restricted stock units ("RSU's") (as defined below) and thereby defer receipt of shares under the 1992 Restricted Stock Incentive Plan, as amended. Please print. Complete a separate Agreement for each amount of shares covered by a performance period that is subject to accelerated vesting for which you elect to defer.
Date: ________________
Performance Period Ending: ____________________
To be completed by Personnel Division:
Effective Date: ___________________
Number of Restricted Shares Covered by this Deferral Election: ______________ (See Paragraph 8 below.)
Date of Distribution:_______________________________________________________
(See Paragraph 6 below for instructions.)
Beneficiary designation:_____________________________________________________
(See Paragraphs 13 and 14 below.)
Dividend equivalents:________________________________________________________ (Insert "Pay Now" [See Paragraph 16 below] or "Defer" [See Paragraph 11 below].)
This Agreement is made and entered into as of the date stated above by and between the individual named above (the "Participant") and First Tennessee National Corporation (the "Corporation").
WITNESSETH
WHEREAS, the Corporation has established a deferral program (the "Program") for certain employees of the Corporation and its subsidiaries who are participants in the Corporation's 1992 Restricted Stock Incentive Plan, as amended (the "Plan"), pursuant to which the grantee of an award under the Plan who meets the eligibility requirements of the Program and who complies with the terms and conditions of the Program is permitted to elect to exchange shares of restricted stock for restricted stock units and thereby defer receipt of shares and defer recognition of income for federal income tax purposes; and
WHEREAS, Participant desires to make a deferral election under the Program;
NOW, THEREFORE, in consideration of the promises made herein, Participant and the Corporation do agree as follows:
1. Subject to the terms and conditions of the Program described below, Participant hereby irrevocably elects to exchange the number of shares of restricted stock identified above for
restricted stock units ("RSU's") and hereby defer receipt of shares for the period of time specified, and the Corporation agrees to deliver to Participant at the time specified the shares whose receipt has been deferred (adjusted to reflect any stock splits and stock dividends as described below) and an amount of cash equivalent to the dividends that would have been paid after the Effective Date (defined below) and prior to the Date of Distribution (defined below) had Participant not made a deferral election and continued to own the shares during the period specified plus interest on such dividend equivalents at a 10-year Treasury rate of interest, all as described below.
2. Participant must meet one of the following requirements: (a) Participant must have received an award under Section 5 of the Plan, at least some of the restrictions on which had not lapsed as of December 15, 1998 or (b) Participant must have received an award under Section 5 of the Plan after December 15, 1998 and Participant's restricted stock agreement ("Restricted Stock Agreement") provides that Participant may elect to defer under the Plan with respect to such award.
3. The Effective Date of this Agreement must occur before restrictions are scheduled to lapse on the Restricted Shares specified above and must be at least any minimum number of days before restrictions are scheduled to lapse that is required by the Committee.
4. Participants must tender certificates for the shares of restricted stock with respect to which this Agreement is being entered into at the time the Agreement is tendered, if the shares are not held in book-entry format by the Corporation's transfer agent. Participant agrees to execute any form that may be required by the transfer agent with respect to book-entry or certificated shares.
5. The Effective Date of the deferral election is the close of business on the business day on which the Manager of the Personnel Division, or her designee, receives the deferral election and, if the shares of restricted stock are not held in book-entry format, certificates for the shares of restricted stock with any properly completed and executed stock powers that may be requested by the Personnel Division.
6. Participant must select a deferral period, at the end of which shares whose receipt has been deferred and earnings thereon will be paid to Participant, subject to Paragraph 13 herein. The payment date is referred to herein as the "Date of Distribution." Participant may specify any future date, not to exceed actual retirement plus five years, as the Date of Distribution. Alternatively, Participant may specify payment to be made "on retirement" or "on retirement plus __ years and __ months." Under this alternative, the payment date may not exceed actual retirement plus five years. For all purposes hereof, the term "retirement" includes any retirement, whether it is a normal or an early retirement. If the Date of Distribution is not a business day, payment will be made on the next day that is a business day.
7. Until the accelerated lapse date approved by the Committee, or if accelerated performance criteria are not met, until the date specified in the participant's Restricted Stock Agreement as the date on which restrictions on the Restricted Shares will lapse, RSU's will remain subject to forfeiture in the same manner as Restricted Shares would have remained subject to forfeiture under the provisions of the Plan and related Restricted Stock Agreement, except as is provided below in the event of death, disability, retirement, other termination of employment, or Change in Control. In other words, RSU's will be subject to restrictions identical to the restrictions on Restricted Shares, and restrictions on RSU's will lapse, if at
all, at the same time that restrictions on Restricted Shares would have lapsed had Participant not made a deferral election. If accelerated performance criteria have been met, then RSU's will be fully vested and not subject to forfeiture.
8. Participant's deferral election must be for 100% percent of the shares of restricted stock with respect to which restrictions are scheduled to lapse if performance criteria are met for a performance period (generally 1/3 of the shares originally awarded). Participant may make a separate election for each of the three different accelerated performance criteria performance periods applicable to an award under the Plan, but any election must be for 100 percent of the shares with respect to which restrictions may lapse if performance criteria are met.
9. Upon the Effective Date, a deferral account will be established by the Corporation, consisting of a subaccount reflecting RSU's and, unless Participant has elected to receive earnings attributable to RSU's currently, and not on a deferred basis, pursuant to Paragraph 16, a subaccount representing cash equal to the earnings credited to the account with respect to dividend equivalents and interest thereon. Participant's RSU subaccount will be credited with RSU's, based on the number of shares of restricted stock covered by this deferral election, with each RSU being equivalent to one share of the Corporation's common stock. Additional RSU's will be credited to participant's RSU subaccount at the time of payment of any stock split or stock dividend on the Corporation's common stock, in accordance with Paragraph 10 herein.
10. Any stock split and stock dividend that is declared with respect to the Corporation's common stock having a payment date that occurs on or after the Effective Date and before the deferral period has terminated will result in a corresponding stock split or stock dividend being made with respect to the RSU's in Participant's deferral account with the result that Participant will be issued that number of shares of the Corporation's common stock at the termination of the deferral period that Participant would have owned had he or she received shares of restricted stock, without restriction, at the time of the lapsing of restrictions on the restricted stock had Participant not entered into this Agreement and had Participant then maintained ownership of such common stock through the payment date of the stock dividend or stock split.
11. Earnings will be credited to Participant's cash subaccount and accrued on the RSU's as follows: on each date on which the Corporation pays a dividend on its shares of common stock, an amount equal to such dividend will be credited to Participant's account with respect to each RSU. Then, as of January 1st of each year, an additional amount will be credited to Participant's account to reflect earnings on the dividend equivalents from the time they were credited to the account for the prior plan year. The rate of earnings credited for the year will be the rate disclosed under the caption "Annualized Ten Year Treasury Rate" in the Federal Reserve Statistical Release in January of the year following the year with respect to which earnings are to be credited, and the amount will be computed by multiplying the dividend equivalent by the rate by a factor representing the fraction of the year (e.g., 100% for a January 1st dividend equivalent, 75% for an April 1st dividend equivalent, 50% for a July 1st dividend equivalent, and 25% for a October 1 dividend equivalent) remaining after the dividend equivalent was credited to Participant's account. Interest will compound as follows: for any cash credited to the account that existed on the first day of the prior plan year (excluding any dividend equivalent that is credited to the account on such day), earnings will be credited in an amount equal to the amount of such cash multiplied by the applicable ten year treasury rate factor. For the portion of the year in which a distribution from the deferral
account is made to Participant, earnings will be credited on any cash credited to the account during such year from the time such cash is credited through the date of distribution at the rate employed for the previous year.
12. Payment from Participant's deferral account will be made in a single lump sum, computed as follows: with respect to Participant's RSU subaccount, one share of the Corporation's common stock will be paid to Participant for each RSU credited to such subaccount, and with respect to Participant's cash subaccount, cash in the amount credited to the subaccount will be paid to Participant.
13. Payment from Participant's deferral account will be made to
Participant (or, in the event of Participant's death, his or her
beneficiary) only at the following times: (1) if restrictions on the
RSU's have already lapsed at the time payment is scheduled to be
made, then on the earliest to occur of the following dates: the date
selected by Participant, the date of a Change in Control as defined
in the Plan, or a date selected by the Corporation following
Participant's death, disability, or termination of employment for
any reason other than normal or early retirement that is no later
than the last day of the month following the month in which there
occurs the death, disability, or termination of employment of
Participant for any reason other than normal or early retirement, or
(2) if restrictions on the RSU's have not lapsed at the time payment
is otherwise scheduled to be made and subject to the last two
sentences of this Paragraph 13, then on the earliest to occur of the
following dates: (i) the later of the date selected by Participant
or the date restrictions on the RSU's lapse, if the shares have not
been forfeited before such lapse date, (ii) the date of a Change in
Control as defined in the Plan, or (iii) a date selected by the
Corporation following Participant's death, or if the Committee
approves, the participant's retirement or disability that is no
later than the last day of the month following the month in which
there occurs the death or, if the Committee has approved, the
disability or retirement of Participant. The RSU's and any right to
receive Restricted Shares without restrictions will be forfeited by
Participant if there occurs a termination of the participant's
employment prior to the lapsing of restrictions on RSU's or if
Participant becomes disabled or retires prior to a lapsing of
restrictions on RSU's and the Committee has not acted to approve
payment to Participant in the event of disability or retirement.
Notwithstanding a forfeiture of RSU's, the balance in Participant's
cash subaccount within Participant's deferral account will be paid
to Participant immediately following the occurrence of such a
forfeiture.
14. For any and all purposes of this Agreement and the Plan, Participant designates the person specified above as his/her beneficiary under the Plan.
15. The Human Resources Committee is authorized to interpret and administer the Program and the terms and provisions of this Agreement.
16. Participant is permitted to elect to receive earnings attributable to Participant's RSU subaccount currently, and not on a deferred basis, by indicating such an election on Participant's irrevocable deferred agreement. If such an election is made, Participant will receive in cash on each date on which the Corporation pays a dividend on its shares of common stock an amount equal to such dividend with respect to each RSU in Participant's RSU account. Such payment will be made in lieu of crediting any amount to Participant's cash subaccount pursuant to Paragraph 11 and Participant's cash subaccount will be deemed to be "zero" for all purposes of the Plan and this Agreement.
IN WITNESS WHEREOF, Participant has executed and the Corporation has caused its duly authorized officer to execute this Agreement, each as of the day and year first above written.
FIRST TENNESSEE NATIONAL CORPORATION
By:__________________________________ _________________________
Executive Vice President, Participant
Division Manager Personnel,
or other authorized signatory
|
Risk Statement:
If the fair market value of Corporation common stock drops below the fair market value on the Effective Date and does not recover before the end of the deferral period, a portion of the value of such shares will be lost. Thereafter, the value of such shares may increase or decrease further.
If Participant's employment terminates for a reason other than death, or if the Committee approves, disability or retirement, before the restrictions on the RSU's lapse, the right to receive shares at the end of the deferral period will be forfeited by Participant and canceled by the Corporation.
EXHIBIT 10.5(e)
FORM OF STOCK OPTION GRANT NOTICE
Note: There is some variation from time to time in the forms used for grant notices. This exhibit reflects the substance of the notices used, without providing or describing the many immaterial variations.
* * * * * * * * * * * * * * * * *
[Name and ID of recipient]
You have been granted a management stock option to purchase First Horizon National Corporation stock as follows:
Date of Grant:
Stock Option Plan:
Option Price per Share: [fair market value on grant date]
Total Number of Shares:
Total Fair Market Value of Shares Granted:
[A vesting schedule is provided in the notice. Vesting varies with the grade level of the option recipient and vesting practices are subject to change over time. Specific vesting schedules are omitted.]
Date Option Expires: [seven or ten years after grant date]
[At the time this exhibit is filed, options granted to senior executive officers
have 7-year terms. Earlier options have had 7- and 10-year terms.]
This grant includes a performance accelerated feature that allows the grant to vest 100 percent in the first three years after grant if the company's closing stock price meets or exceeds the performance goal ($_____ for the [date] grant) for five consecutive business days.
Management stock options recognize your leadership and performance within the organization. This option is granted under and governed by the terms and conditions of FHN's [name of applicable plan].
EXHIBIT 10.5(f)
FORM OF STOCK OPTION RELOAD GRANT NOTIFICATION
Note: There is some variation from time to time in the forms used for grant notices. This exhibit reflects the substance of the reload notices used, without providing or describing the many immaterial variations. Also, the Company has discontinued the reload feature. This exhibit is provided because prior reload grants remain outstanding.
* * * * * * * * * * * * * * * * *
[Date]
[Name and address of recipient]
Pursuant to the terms and conditions of the company's [name of applicable plan], you have been granted a Non-Qualified Stock Option/Reload to purchase ________ shares (the "Option") of stock as outlined below:
Granted to: [Name and ID of recipient]
Grant Date:
Options Granted: [number]
Option Price per Share: [fair market value on reload grant date]
Total Cost to Exercise:
Expiration Date: [the expiration date of the original options on which the reload grant is based]
Vesting Schedule: [typically, reload options are fully vested at grant]
EXHIBIT 10.13
INDEMNITY AGREEMENT
This Agreement, effective as of January 20, 2004, is made and entered into between First Horizon National Corporation, a Tennessee corporation ("Corporation"), and _____________, a director or officer of Corporation or one of its subsidiaries ("Indemnitee").
WHEREAS, Corporation desires to attract and retain outstanding persons as directors and officers of it and its subsidiaries; and
WHEREAS, Corporation and Indemnitee recognize the increased risk of litigation and claims being asserted against directors and certain officers of public companies and their subsidiaries and the need for Corporation to provide protection against personal liability to enhance Indemnitee's effective service to Corporation; and
WHEREAS, Corporation desires to provide in this Agreement for the indemnification of and advancing of expenses to Indemnitee to the maximum extent permitted (or not prohibited) by law and as set forth in this Agreement and, to the extent such insurance is maintained by Corporation, for the continued coverage of Indemnitee under Corporation's directors and officers liability insurance policies;
NOW, THEREFORE, in consideration of the factors stated above, the promises contained herein, and Indemnitee's continuing to serve Corporation directly or, at its request, indirectly through a subsidiary, and intending to be legally bound hereby, the parties agree as follows:
1. Definitions.
(a) "Change in Control" means the occurrence of any one of the following events:
(i) individuals who, on January 21, 1997, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 21, 1997, whose election or nomination for election was approved by a vote of at least three-fourths (3/4) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;
(ii) any "Person" (as defined under Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and as used in
Section 13(d) or Section 14(d) of the Exchange Act) is or becomes a
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 20% or
more of the combined voting power of the Company's then outstanding
securities eligible to vote for the election of the Board (the "Company
Voting Securities"); provided, however, that the event described in this
paragraph (ii) shall not be deemed to be a change in control by virtue of
any of the following
acquisitions: (A) by the Company or any entity in which the Company directly or indirectly beneficially owns more than 50% of the voting securities or interests (a "Subsidiary"), (B) by an employee stock ownership or employee benefit plan or trust sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, or (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii));
(iii) the consummation of a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than 60% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to the consummation of such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least two-thirds (2/3) of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or
(iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets.
Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.
(b) "Claim" is defined as any threatened, pending or contemplated action, suit or proceeding, or any inquiry or investigation, whether conducted by Corporation or any other party, that Indemnitee believes might lead to the institution of any action, suit or proceeding, whether civil, criminal, administrative, investigative, or other, in any way arising out of or in connection with or related to any event or occurrence related to the fact that Indemnitee is or was a director or officer of Corporation or any of its subsidiaries, or
is or was serving at the request of Corporation or any of its subsidiaries as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, political action committee, trust or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity. As used herein, Claim shall include, but is not limited to, any threatened, pending or contemplated action, suit or proceeding, or any inquiry or investigation, in any way arising out of or alleging any act, error or omission by the Indemnitee in the rendering or failure to render professional services, including legal and accounting services, for or at the request of the Corporation or any of its subsidiaries; provided such professional services are within the reasonably anticipated scope of the Indemnitee's duties. Additionally, as used herein, "Claim" shall include, but is not limited to, any threatened, pending or contemplated action, suit or proceeding arising out of or alleging negligence on the part of the Indemnitee.
(c) "Expenses" is defined as attorney's fees and all other costs, expenses and obligations paid or incurred in connection with investigating, defending, being a witness in or participating in (including any appeals) or preparing to defend, be a witness in or participate in any Claim.
(d) "Losses" is defined as any judgments, fines, penalties and amounts paid in settlement or discharge, including all interest assessments and other charges paid or payable in connection therewith, of a Claim and for which Indemnitee has not been otherwise reimbursed.
(e) "Reviewing Party" is defined as (i) the directors of Corporation that are not parties to or interested in the Claim (provided that there shall be at least two such independent directors) or (ii) in the event that there are not at least two independent directors or there has been a Change in Control, special, independent counsel, selected in the manner provided in Section 6.
2. Basic Indemnification.
Subject to the limitations provided in the following sentence and Section 3 herein, Corporation shall indemnify and hold harmless Indemnitee in connection with any Claim against any and all Expenses and Losses to the maximum extent permitted (or not prohibited) by law and, if requested by Indemnitee, shall advance Expenses as soon as practicable but in any event no later than 30 days after written demand is presented to Corporation. Except as set forth in Section 4 herein, Indemnitee will not be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee against Corporation or any of its subsidiaries or any director or officer of it or of any of its subsidiaries except for a Claim in which Corporation has joined or the initiation of which the Corporation has consented to. In connection with any determination by Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified under any provision of this Agreement, the burden of proof shall be on Corporation to establish that Indemnitee is not so entitled.
3. Limitations on Indemnification.
Notwithstanding anything herein to the contrary (except for any additional rights contemplated by Section l0(b) herein), the obligations of Corporation to indemnify Indemnitee under Section 2 shall be subject to the condition that Reviewing Party shall not have determined that Indemnitee would not be permitted to be indemnified under applicable law. Corporation is obligated to advance Expenses within the time period specified in Section 2 herein unless, during such time period and prior to Expense
advancement, Reviewing Party determines that Indemnitee would not be permitted
to be so indemnified under applicable law. If Expenses are advanced and
Reviewing Party subsequently determines that Indemnitee would not be permitted
to be so indemnified under applicable law, Corporation shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse Corporation) for all
such amounts theretofore paid; provided, if Indemnitee has commenced legal
proceedings in a court of competent jurisdiction to secure a determination that
Indemnitee should be indemnified under applicable law, any determination made by
Reviewing Party that Indemnitee would not be permitted to be indemnified under
applicable law shall not be binding, and Indemnitee shall not be required to
reimburse Corporation for any Expenses advanced until a final judicial
determination is made with respect thereto as to which all rights of appeal
therefrom have been exhausted or lapsed. If there has been no determination by
Reviewing Party or Expenses are not advanced within the time frame provided in
Section 2 or if Reviewing Party determines that Indemnitee would not be
permitted to be indemnified in whole under applicable law, Indemnitee shall have
the right to commence litigation in any court in the state of Tennessee having
subject matter jurisdiction thereof and in which venue is proper seeking an
initial determination by the court or challenging any such determination by
Reviewing Party or any aspect thereof, and Corporation hereby consents to
service of process and to appear in any such proceeding. Any determination by
Reviewing Party otherwise shall be conclusive and binding on Corporation and
Indemnitee. Corporation shall have the burden of proving that Indemnitee is not
entitled to indemnification in any such legal proceeding.
4. Indemnification for Additional Expenses.
Corporation shall indemnify Indemnitee against any and all expenses (including attorneys' fees and all other costs, expenses, and obligations of the same sort as contemplated by Section l(c)) and, if requested by Indemnitee, shall advance such expenses to Indemnitee within 30 days after written demand is presented to Corporation, which expenses are incurred by Indemnitee in connection with any claim asserted against or claim or action brought by Indemnitee for indemnification or advance payment of Expenses by Corporation under this Agreement or for recovery under any directors and officers liability insurance policies maintained by Corporation, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, expense advance or insurance recovery. [Note: The expenses provided in Section 4, which are not repayable to Corporation, are different from the Expenses permitted in Section 2, which must be repaid to Corporation in the situation described in Section 3.]
5. Insurance.
To the extent Corporation maintains insurance policies providing directors and officers liability insurance, Indemnitee shall be covered by such policies, in accordance with their terms, to the maximum extent of the coverage available for any Corporation director or officer.
6. Change in Control.
Corporation agrees that if there is a Change in Control, then with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity payments and Expense advances under this Agreement or any other agreement or Corporation Charter or Bylaw provision now in effect or hereafter adopted relating to Claims, Corporation shall seek legal advice only from special, independent counsel selected by Indemnitee and approved by Corporation (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to Corporation and Indemnitee as to
whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. Corporation agrees to pay the fees of the special, independent counsel referred to above and fully to indemnify such counsel against any and all expenses and losses of the same sort as contemplated by Sections l(c) and l(d) arising out of or relating to this Agreement or its engagement pursuant hereto.
7. Creation of Trust.
In the event of a Change in Control or if the Board determines that a
Change in Control is imminent, Corporation shall (and the appropriate officers
of Corporation are hereby authorized and directed to take all action deemed
necessary or desirable in connection herewith) upon the written request of
Indemnitee, create a trust or appropriately amend an existing trust for the
benefit of Indemnitee and from time to time upon written request of Indemnitee
shall fund such trust in an amount sufficient to satisfy any and all Expenses
reasonably anticipated at the time of each such request and any and all Losses
from time to time actually paid or claimed, reasonably anticipated or proposed
to be paid. The amount or amounts to be deposited in the trust pursuant to the
foregoing shall be determined by Reviewing Party. The trustee shall be chosen by
Corporation, but the trustee may not be a party to or interested in a Claim nor
may the trustee be any person or entity (or an affiliate thereof) whose direct
or indirect ownership of Corporation stock has triggered a Change in Control.
Any trust established or amended pursuant hereto shall provide, with respect to
the rights and obligations created under this Agreement, that upon a Change in
Control (i) the trust shall not be revoked or the principal thereof invaded
without the written consent of Indemnitee, (ii) the trustee shall advance any
and all Expenses to Indemnitee within thirty days after written demand is
presented to the trustee (and Indemnitee hereby agrees to reimburse the trust
under the circumstances under which Indemnitee would be required to do so under
Section 3 herein), (iii) the trust shall continue to be funded by Corporation in
accordance with the funding obligations set forth above, (iv) the trustee shall
promptly pay to Indemnitee all amounts for which Indemnitee shall be entitled to
indemnification pursuant to this Agreement or otherwise, and (v) all unexpended
funds in such trust attributable to a Claim, Expense or Loss of Indemnitee shall
revert to Corporation upon a final determination by Reviewing Party or a court
of competent jurisdiction that Indemnitee has been fully indemnified under this
Agreement. If Section 7(v) would otherwise be applicable, then notwithstanding
anything in Section 7(v) to the contrary, at any time a Claim is still pending
against a director or officer of Corporation or any of its subsidiaries who has
entered into an agreement with Corporation substantially similar to this
Agreement, any funds held by the trustee under this Section 7 shall be retained
by the trustee until a final determination is made with respect to such Claim
and such funds may be used to pay such Claim. Nothing in this Section shall
relieve Corporation of any of its obligations under this Agreement.
8. Partial Indemnity.
If Indemnitee is entitled under any provision of this Agreement to indemnification by Corporation for some or a portion of the Expenses or Losses but not for the total amount thereof, Corporation shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
9. Notification.
Promptly after receipt by Indemnitee of notice of the commencement of any Claim with respect to which Indemnitee may seek indemnification under this Agreement, Indemnitee will notify Corporation of the commencement thereof. The failure of Indemnitee promptly to notify Corporation hereunder shall not,
however, relieve Corporation of its obligations hereunder unless and to the
extent that Corporation was materially prejudiced by such failure to notify
promptly. Corporation will be entitled to participate in a Claim at its own
expense and to assume the defense thereof, with counsel satisfactory to
Indemnitee, unless Indemnitee shall have reasonably concluded that there may be
a conflict of interest between Corporation and Indemnitee in the conduct of the
defense of such action. Even if Indemnitee concludes that no conflict of
interest exists, Indemnitee shall retain the right to employ his or her own
counsel and participate in such action, suit or proceeding, but the fees and
expenses of such counsel incurred after notice from Corporation of its
assumption of the defense thereof shall be at the expense of Indemnitee unless
(i) the employment of counsel by Indemnitee has been authorized or the defense
of the Claim is not permitted to be undertaken by Corporation, or (ii)
Corporation shall not in fact have employed counsel to assume such defense.
Corporation shall not be liable to indemnify Indemnitee under this Agreement for
any amounts paid in settlement of any Claim effected without its written
consent. Corporation shall not settle any Claim in any manner which would impose
any penalty or limitation on Indemnitee without Indemnitee's written consent.
Neither Corporation nor Indemnitee will unreasonably withhold consent to any
proposed settlement.
10. Miscellaneous.
(a) Presumptions. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order or settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law.
(b) Nonexclusive Rights. The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under Corporation's Charter and Bylaws and the Tennessee Business Corporation Act or otherwise. To the extent that a change in the Tennessee Business Corporation Act (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under Corporation's Charter and Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by virtue of this Agreement the greater benefits so afforded by such change.
(c) Amendment. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
(d) Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including execution of such documents as may be necessary to enable Corporation effectively to bring suit to enforce such rights.
(e) Duplicate Payment. Corporation shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Charter provision, Bylaw, or otherwise) of the amounts otherwise indemnifiable hereunder.
(f) Binding Effect. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor or assign by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of Corporation), spouses, heirs, and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director or officer of Corporation or any of its subsidiaries or of any other entity at Corporation's request.
(g) Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the maximum extent permitted by law.
(h) Headings of Sections. Section and subsection headings are for convenience only and shall not affect the construction of this Agreement.
(i) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee.
IN WITNESS WHEREOF, Corporation has caused this Agreement to be executed by its duly authorized officers and Indemnitee has duly executed this Agreement, each as of the day first above written.
ATTEST: FIRST HORIZON NATIONAL CORPORATION
By:
------------------------------------- ------------------------------------
Name: [authorized officer]
Corporate Secretary Title:
----------------------------------------
(Indemnitee)
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FINANCIAL INFORMATION AND DISCUSSION
TABLE OF CONTENTS
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
|
First Horizon National Corporation 1
SELECTED FINANCIAL AND OPERATING DATA
----------------------------------------------------------------------------------------------------------------- (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) ----------------------------------------------------------------------------------------------------------------- |
* 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
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
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
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
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
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
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
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%
=================================================================================
|
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
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
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
======================================================================================================
|
* 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
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
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 +
===========================================================================================================
|
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
TABLE 4 - PRODUCTION/ORIGINATION OF MORTGAGE LOANS
2004 2003 2002
------------------------------------------------------------------------------------------------
Retail channel 57% 56% 57%
Wholesale channel 36 35 33
Correspondent brokers 7 9 10
------------------------------------------------------------------------------------------------
|
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
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 +
-------------------------------------------------------------------------------------------------------------
|
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
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
TABLE 6 - CAPITAL MARKETS
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 -
===============================================================================
|
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
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
(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 ============================================================================================================ |
Certain previously reported amounts have been reclassified to agree with current presentation.
14 First Horizon National Corporation
TABLE 8 - ANALYSIS OF NONINTEREST EXPENSE
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 +
==========================================================================================================
|
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
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
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
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
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%
===================================================== ==================== =====================
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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
TABLE 10 - CONTRACTUAL MATURITIES OF COMMERCIAL LOANS ON DECEMBER 31, 2004
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
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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
TABLE 11 - CONTRACTUAL MATURITIES OF INVESTMENT SECURITIES ON DECEMBER 31, 2004
(AMORTIZED COST)
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%
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* 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
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
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
------------------------------------------------------------------------------------------------
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First Horizon National Corporation 21
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
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 - - -
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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
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
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
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
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% ---------------------------------------------------------------------------------------------------------------- |
First Horizon National Corporation
TABLE 14 - RISK SENSITIVITY ANALYSIS (CONTINUED)
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% ------------------------------------------------------------------------------------------------------------------ |
* Excludes nonaccrual loans. ** Consists of federal funds sold, securities purchased under agreements to resell and investments in time deposits.
26 First Horizon National Corporation
TABLE 14 - RISK SENSITIVITY ANALYSIS (CONTINUED)
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% --------------------------------------------------------------------------------------------------------------------- |
* Amount is less than $500,000
First Horizon National Corporation 27
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
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
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
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
=====================================================================================================
|
* 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
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
---------------------------------------------------------------------------------------------------------
|
* 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
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
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 $4.3 million in 2003. The ratio of net charge-offs to average loans decreased to .27 percent for 2004 from .54 percent for 2003 and .93 percent for 2002.
TABLE 17 - NET CHARGE-OFF RATIOS*
2004 2003 2002
----------------------------------------------------------------------------------------------
Commercial .18% .34% .75%
Retail real estate** .20 .48 .64
Other retail 1.55 1.64 3.47
Credit card receivables 4.25 4.65 4.35
Total net charge-offs .27 .54 .93
----------------------------------------------------------------------------------------------
|
Loans are averages expressed net of unearned income.
* Table 9 provides information on the relative size of each loan portfolio.
** Excludes ($.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
TABLE 18 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(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 $8,818,766 -------------------------------------------------------------------------------------------------------------------- RATIOS***: Allowance to loans .96% 1.15% 1.27% 1.46% 1.36% 1.44% Allowance to loans excluding insured loans 1.00 1.22 1.37 1.46 1.36 1.44 Allowance to net charge-offs 3.75X 2.36x 1.46x 1.87x 2.28x 2.61x Net charge-offs to average loans .27 .54 .93 .80 .62 .59 -------------------------------------------------------------------------------------------------------------------- |
* Real estate residential net charge-offs/(recoveries) include ($.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
TABLE 19 - LOANS AND FORECLOSED REAL ESTATE ON DECEMBER 31
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
===============================================================================================================================
|
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.
|
34 First Horizon National Corporation
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
TABLE 20 - AVERAGE RESERVE RATES
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
----------------------------------------------------------------------------------------------------------------
|
* 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
TABLE 21 - CHANGES IN NONPERFORMING ASSETS
(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 22 - NONPERFORMING ASSETS ON DECEMBER 31
(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 ------------------------------------------------------------------------------------------------------------------------ |
* 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
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
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
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
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
TABLE 23 - MORTGAGE BANKING MSR ACTIVITY AND CRITICAL ASSUMPTIONS
(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 ------------------------------------------------------------------------------------------ |
* 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
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
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
TABLE 24 - RESERVES FOR FORECLOSURE LOSSES
(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 ============================================================================================ |
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
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
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
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
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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
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|
First Horizon National Corporation 47
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
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
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
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
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
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
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
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
CONSOLIDATED STATEMENTS OF CONDITION
December 31
-----------------------------
(Dollars in thousands) 2004 2003
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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
===========================================================================================
|
See accompanying notes to consolidated financial statements.
Certain previously reported amounts have been reclassified to agree with current presentation.
56 First Horizon National Corporation
CONSOLIDATED STATEMENTS OF INCOME
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
------------------------------------------------------------------------------------------------------------
|
Certain previously reported amounts have been reclassified to agree with current
presentation.
See accompanying notes to consolidated financial statements.
First Horizon National Corporation 57
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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
===========================================================================================================================
|
See accompanying notes to consolidated financial statements.
58 First Horizon National Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
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
---------------------------------------------------------------------------------------------------------------------
|
See accompanying notes to consolidated financial statements. Certain previously reported amounts have been reclassified to agree with current presentation.
First Horizon National Corporation 59
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
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
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
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
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
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
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
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:
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
---------------------------------------------------------------------------------------------
|
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
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
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
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
NOTE 3 - INVESTMENT SECURITIES
The following tables summarize FHN's securities held to maturity and available for sale on December 31, 2004 and 2003:
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
===============================================================================================================
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* 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.
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
===============================================================================================================
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* 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
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:
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
=========================================================================================================
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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:
(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) ----------------------------------------------------------------------------------------------- |
* 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
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
The following table provides information on investments that have unrealized losses on December 31, 2004:
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)
===========================================================================================================================
|
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
NOTE 4 - LOANS
A summary of the major categories of loans outstanding on December 31 is shown below:
(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 =========================================================================================== |
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:
(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 =========================================================================================== |
* 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
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:
(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 ================================================================================================= |
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
NOTE 5 - PREMISES, EQUIPMENT AND LEASES
Premises and equipment on December 31 are summarized below:
(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 ================================================================================= |
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:
(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 ====================================================================== |
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:
(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 ========================================================================================= |
First Horizon National Corporation 77
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:
(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 ======================================================================== |
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:
(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 ====================================================================== |
78 First Horizon National Corporation
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
NOTE 7 - INTANGIBLE ASSETS
Following is a summary of intangible assets, net of accumulated amortization, included in the Consolidated Statements of Condition:
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
=======================================================================================
|
* 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:
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
========================================================================================================
|
* Preliminary purchase price allocations on acquisitions are based upon estimates of fair value and are subject to change.
80 First Horizon National Corporation
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.
(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 ========================================================================= |
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:
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
----------------------------------------------------------------------------------------------------------------
|
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
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:
(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 ===================================================================================== |
* 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:
(Dollars in thousands) ------------------------------------------------------------------------ 2005 $1,074,490 2006 150,334 2007 50,334 2008 231,959 2009 317 2010 and after 1,109,343 ------------------------------------------------------------------------ |
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
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
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
NOTE 13 - REGULATORY CAPITAL (CONTINUED)
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
------------------------------------------------------------------------------------------------------------
|
First Horizon National Corporation 85
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:
(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 ==================================================================================================== |
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:
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)
===================================================================================== =================
|
86 First Horizon National Corporation
NOTE 16 - INCOME TAXES
The components of income tax expense/(benefit) are as follows:
(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 ============================================================================================ |
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:
(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 ============================================================================================ |
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:
(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 =================================================================================== |
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
NOTE 17 - EARNINGS PER SHARE
The following table shows a reconciliation of earnings per common share to diluted earnings per common share.
(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 ====================================================================================================== |
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
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
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:
(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 ==================================================================================== |
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
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
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
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:
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
-----------------------------------------------------------------------------------------------------------
|
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:
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
-------------------------------------------------------------------------------------------------------------
|
First Horizon National Corporation 93
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:
(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 ------------------------------------------------------------------------------------------------ |
The components of net periodic benefit cost for the plan years 2004, 2003 and 2002 were as follows:
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
======================================================================================================
|
94 First Horizon National Corporation
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:
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
=========================================================================================================
|
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
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:
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
------------------------------------------------------------------------------------------------------------
|
The following provides the amount included within other comprehensive income for the period arising from a change in the minimum pension liability:
Pension Benefits
----------------
(Dollars in thousands) 2004 2003
------------------------------------------------------------------------------
Increase in minimum pension liability included in other
comprehensive income $ 505 $1,786
------------------------------------------------------------------------------
|
The following table sets forth FHN's pension plan asset allocation on September 30, 2004 and 2003:
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%
======================================================================================================
|
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
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:
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%
=================================================================================================
|
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:
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
----------------------------------------------------------------------------------------------------
|
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
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:
(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 ------------------------------------------------------------------------------------------ |
98 First Horizon National Corporation
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:
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
----------------------------------------------------------------------------------------------
|
* 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:
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
-----------------------------------------------------------------------------------------------------------------
|
First Horizon National Corporation 99
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:
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%
----------------------------------------------------------------------------------------------------------
|
* 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.
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
----------------------------------------------------------------------------------------------
|
* 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
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:
(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
------------------------------------------------------------------------------------------------------------------
|
Certain previously reported amounts have been reclassified to agree with current presentation.
First Horizon National Corporation 101
NOTE 22 - BUSINESS SEGMENT INFORMATION (CONTINUED)
(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
-------------------------------------------------------------------------------------------------------------------
|
Certain previously reported amounts have been reclassified to agree with current presentation.
102 First Horizon National Corporation
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:
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
----------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------
|
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
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
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
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:
(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) --------------------------------------------------------------------------------------------------------------- |
106 First Horizon National Corporation
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:
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
------------------------------------------------------------------------------------------------------------------------------
|
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:
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
----------------------------------------------------------------------------------------------------
|
First Horizon National Corporation 107
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:
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
-------------------------------------------------------------------------------------------------------------------------
|
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:
(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 ----------------------------------------------------------------------------------------------------- |
* 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:
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
=============================================================================
|
* 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
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
NOTE 26 - PARENT COMPANY FINANCIAL INFORMATION
Following are condensed statements of the parent company:
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 ================================================================================================ |
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 ============================================================================================ |
110 First Horizon National Corporation
NOTE 26 - PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
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 -------------------------------------------------------------------------------------------- |
First Horizon National Corporation 111
CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------------
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%
================================================================================================================
|
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
------------------------------------------------------------------------------------------------------------------------
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%
========================================================================================================================
-------------------------------------------------------------------------------------------------------------------------------
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
CONSOLIDATED HISTORICAL STATEMENTS OF INCOME (UNAUDITED)
------------------------------------------------------------------------------------------------------------
(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
------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 +
-------------------------------------------
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* 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
Exhibit 21
PARENTS AND SUBSIDIARIES
The following is a list of all subsidiaries of First Horizon National Corporation ("FHNC") and information on unconsolidated entities at December 31, 2004. Each subsidiary is 100% owned by its immediate parent, except as described below in note (3), and all are included in the Consolidated Financial Statements:
Type of Jurisdiction of
Ownership Incorporation/
Subsidiary by FHNC Organization
---------- ---------- ---------------
First National Bank of Springdale* Direct United States
First Tennessee Bank National Association (1) Direct United States
Check Consultants, Incorporated* Indirect Tennessee
Community Leasing Corporation* Indirect Tennessee
Community Money Center, Inc.* Indirect Tennessee
East Tennessee Service Corporation* Indirect Tennessee
Upper East Tennessee Insurance Agency* Indirect Tennessee
First Express Remittance Processing, Inc. Indirect Tennessee
First Funds, Inc.* Indirect Tennessee
First Horizon Insurance Services, Inc. Indirect Tennessee
First Horizon Merchant Services, Inc. Indirect Tennessee
Global Card Services, Inc. Indirect Florida
First Horizon Mint Distribution, Inc. Indirect Tennessee
First Horizon Money Center, Inc.* Indirect Tennessee
First Tennessee ABS, Inc.* Indirect Delaware
First Tennessee Brokerage, Inc. Indirect Tennessee
First Tennessee Commercial Loan Management, Inc.* Indirect Tennessee
First Tennessee Equipment Finance Corporation Indirect Tennessee
First Tennessee Housing Corporation Indirect Tennessee
CC Community Development Holdings, Inc. Indirect Tennessee
First Tennessee Insurance Services, Inc. Indirect Tennessee
First Tennessee Merchant Equipment, Inc.* Indirect Tennessee
FT Building, LLC Indirect Tennessee
FT Insurance Corporation Indirect Alabama
FT Mortgage Holding Corporation Indirect Delaware
Federal Flood Certification Corporation Indirect Texas
FHEL, Inc. Indirect Delaware
FHRF, Inc. Indirect Delaware
First Horizon Mortgage Loan Corporation Indirect Delaware
FT Real Estate Securities Company, Inc. Indirect Arkansas
FHRIII, LLC Indirect Delaware
FHTRS, Inc. Indirect Delaware
FH-FF Mortgage Services, L.P. Indirect Delaware
FHR Holding, Inc. Indirect Delaware
FHRIV, LLC Indirect Delaware
FHRV, LLC Indirect Delaware
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FHRVI, LLC Indirect Delaware
First Horizon Home Loan Corporation (3) Indirect Kansas
First Tennessee Mortgage Services, Inc. Indirect Tennessee
First Horizon Asset Securities, Inc. Indirect Delaware
FT Real Estate Information Mortgage Solutions Holdings, Inc. Indirect Delaware
FT Real Estate Information Mortgage Solutions, Inc. Indirect Delaware
Total Mortgage Solutions, LP Indirect Delaware
FT Reinsurance Company Indirect South Carolina
FTN Financial Capital Assets Corporation Indirect Tennessee
FTN Financial Securities Corp. Indirect Tennessee
FTN Financial Securitization Corporation Indirect Delaware
FTN Investment Corp. Indirect Delaware
FTN Midwest Securities Corp. Indirect Delaware
FTN Premium Services, Inc. Indirect Tennessee
Hickory Venture Capital Corporation Indirect Alabama
JPO, Inc. Indirect Tennessee
JV Mortgage Solutions LLC Indirect Delaware
Synaxis Group, Inc. Indirect Delaware
SFSR, Inc. Indirect Tennessee
Employers Risk Services, Inc. Indirect Kentucky
Mann, Smith and Cummings, Inc.* Indirect Tennessee
Merritt & McKenzie, Inc. Indirect Georgia
Polk & Sullivan Group, Inc. Indirect Tennessee
Synaxis Risk Services, Inc. Indirect Tennessee
Van Meter Insurance, Inc. Indirect Kentucky
TSMM Corporation* Indirect Tennessee
FTB Futures Corporation* Direct Tennessee
FT Title Reinsurance Company, Inc. Direct South Carolina
Hickory Capital Corporation Direct Tennessee
Highland Capital Management Corp. Direct Tennessee
Martin & Company, Inc. Direct Tennessee
Mountain Financial Company* Direct Tennessee
Norlen Life Insurance Company Direct Arizona
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*Inactive.
(1) Divisions of this subsidiary do business in certain jurisdictions under the following names: First Express, First Horizon, First Horizon Bank, First Horizon Equity Lending, First Horizon Money Center, FTN Financial Capital Markets, Garland Trust, Gulf Pacific Mortgage.
(2) Divisions of this subsidiary do business in certain jurisdictions under the following names: First Horizon Home Loans, First Horizon Lending Center, McGuire Mortgage, OneLoan.
(3) The following subsidiaries are not wholly-owned by their immediate parent:
FT Mortgage Holding Corporation - FHNC owns <1% of the common stock with the balance owned by the subsidiary's immediate parent.
FT Real Estate Securities Company, Inc. - FHNC owns <1% of the common stock with the balance of the common stock owned by the subsidiary's immediate parent. Some preferred stock is not owned directly or indirectly by FHNC.
First Horizon Mortgage Loan Corporation - FHNC owns <1% of the common stock directly with the balance of the common stock owned by the subsidiary's immediate parent.
First Tennessee Mortgage Services, Inc. - FHNC owns <2% of the common stock directly with the balance of the common stock owned by the subsidiary's immediate parent.
FH-FF Mortgage Services, L.P. - FHTRS, Inc. owns a 99% limited partnership interest and First Tennessee Mortgage Services, Inc. owns a 1% general partnership interest.
FHRF, Inc. - First Tennessee Mortgage Services, Inc. owns 1.01% of the common stock with the balance owned by the subsidiary's immediate parent.
JV Mortgage Solutions, LLC - First Tennessee Bank National Association owns 50%.
Total Mortgage Solutions, LP - FT Real Estate Information Mortgage Solutions, Inc. owns 49.5% and JV Mortgage Solutions, LLC owns 1%.
In addition, FHNC owns 100% of the common securities of the following unconsolidated entities:
First Tennessee Capital I, a Delaware business trust.
First Tennessee Capital II, a Delaware business trust.
Exhibit 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors
First Horizon National Corporation:
We consent to the incorporation by reference into the previously filed registration statements Nos. 33-9846, 33-40398, 33-44142, 33-52561, 33-57241, 33-63809, 33-64471, 333-16225, 333-16227, 333-17457, 333-17457-01, 333-17457-02, 333-17457-03, 333-17457-04, 333-70075, 333-91137, 333-92145, 333-92147, 333-56052, 333-73440, 333-73442, 333-106015, 333-108738, 333-108750, 333-109862, and 333-110845 of First Horizon National Corporation (the Company) of our reports dated March 11, 2005, with respect to the Company's consolidated statements of condition 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, management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004, and the effectiveness of internal control over financial reporting as of December 31, 2004, which reports are incorporated by reference into the Company's 2004 Annual Report on Form 10-K, and to all references to our firm included therein.
/s/ KPMG LLP Memphis, Tennessee March 11, 2005 |
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint MARLIN L. MOSBY, III, JAMES F. KEEN, CLYDE A. BILLINGS, JR., and MILTON A. GUTELIUS, JR., jointly and each of them severally, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to execute and sign the Annual Report on Form 10-K for the fiscal year ended December 31, 2004 to be filed with the Securities and Exchange Commission, pursuant to the provisions of the Securities Exchange Act of 1934, by First Horizon National Corporation ("Corporation") and, further, to execute and sign any and all amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, or their or his or her substitute or substitutes, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ J. Kenneth Glass Chairman of the Board, President and March 4, 2005
---------------------------- Chief Executive Officer and a Director
J. Kenneth Glass (principal executive officer)
/s/ Marlin L. Mosby, III Executive Vice President and Chief March 4, 2005
---------------------------- Financial Officer (principal financial
Marlin L. Mosby, III officer)
/s/ James F. Keen Executive Vice President and Corporate March 4, 2005
---------------------------- Controller (principal accounting officer)
James F. Keen
/s/ Robert C. Blattberg Director March 4, 2005
----------------------------
Robert C. Blattberg
---------------------------- Director
George E. Cates
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/s/ Simon F. Cooper Director March 4, 2005 ---------------------------- Simon F. Cooper /s/ James A. Haslam, III Director March 4, 2005 ---------------------------- James A. Haslam, III /s/ R. Brad Martin Director March 4, 2005 ---------------------------- R. Brad Martin /s/ Vicki R. Palmer Director March 4, 2005 ---------------------------- Vicki R. Palmer /s/ Michael D. Rose Director March 4, 2005 ---------------------------- Michael D. Rose /s/ Mary F. Sammons Director March 4, 2005 ---------------------------- Mary F. Sammons /s/ William B. Sansom Director March 4, 2005 ---------------------------- William B. Sansom /s/ Jonathon P. Ward Director March 4, 2005 ---------------------------- Jonathan P. Ward /s/ Luke Yancy III Director March 4, 2005 ---------------------------- Luke Yancy III |
Exhibit 31(a)
FIRST HORIZON NATIONAL CORPORATION
RULE 13a - 14(a) CERTIFICATIONS OF CEO
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(ANNUAL REPORT)
CERTIFICATIONS
I, J. Kenneth Glass, Chairman of the Board, President and Chief Executive Officer of First Horizon National Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of First Horizon National Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date March 11, 2005
/s/ J. Kenneth Glass ------------------------------ J. Kenneth Glass Chairman of the Board, President and Chief Executive Officer |
Exhibit 31(b)
FIRST HORIZON NATIONAL CORPORATION
RULE 13a - 14(a) CERTIFICATIONS OF CFO
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(ANNUAL REPORT)
CERTIFICATIONS
I, Marlin L. Mosby, Executive Vice President and Chief Financial Officer of First Horizon National Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of First Horizon National Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date March 11, 2005
/s/ Marlin L. Mosby III ------------------------------------------- Marlin L. Mosby III Executive Vice President and Chief Financial Officer |
Exhibit 32(a)
CERTIFICATION OF PERIODIC REPORT
RULE 1350 CERTIFICATIONS OF CEO
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, As Codefied at 18 U.S.C. Section 1350
I, the undersigned J. Kenneth Glass, President and Chief Executive Officer of
First Horizon National Corporation ("Corporation"), hereby certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, as
follows:
1. The Corporation's Annual Report on Form 10-K for the year ended December 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
Dated: March 11, 2005
/s/ J. Kenneth Glass
-------------------------------------
J. Kenneth Glass
Chairman of the Board, President
and Chief Executive Officer
|
Exhibit 32(b)
CERTIFICATION OF PERIODIC REPORT
RULE 1350 CERTIFICATIONS OF CFO
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, As Codefied at 18 U.S.C. Section 1350
I, the undersigned Marlin L. Mosby, Executive Vice President and Chief Financial Officer of First Horizon National Corporation ("Corporation"), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, as follows:
1. The Corporation's Annual Report on Form 10-K for the year ended December 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.
Dated: March 11, 2005
/s/ Marlin L. Mosby III
---------------------------------------
Marlin L. Mosby III
Executive Vice President and Chief
Financial Officer
|