FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

(Mark one)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

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 000-4491

CIK number 0000036966

FIRST TENNESSEE NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

Tennessee
(State or other jurisdiction of
incorporation or organization)

62-0803242
(I.R.S. Employer
Identification No.)

165 Madison Avenue, Memphis, Tennessee
(Address of principal executive offices)

38103
(Zip Code)

(901) 523-4444
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes x No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.625 par value
Class

125,507,234
Outstanding on October 31, 2003

FIRST TENNESSEE NATIONAL CORPORATION

INDEX

Part I. Financial Information

Part II. Other Information

Signatures

Certifications

Exhibit Index

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

The Consolidated Statements of Condition

The Consolidated Statements of Income

The Consolidated Statements of Shareholders’ Equity

The Consolidated Statements of Cash Flows

The Notes to Consolidated Financial Statements

This financial information reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented.

CONSOLIDATED STATEMENTS OF CONDITION	First Tennessee National Corporation

	September 30						December 31

(Dollars in thousands)(Unaudited)	2003			2002			2002

Assets:
Cash and due from banks	$	858,925		$	1,136,062		$	1,068,110
Federal funds sold and securities
purchased under agreements to resell		529,420			392,276			260,607

Total cash and cash equivalents		1,388,345			1,528,338			1,328,717

Investment in bank time deposits		983			2,030			1,906
Trading securities		1,028,135			876,052			893,997
Loans held for sale		2,896,741			3,792,082			4,797,565
Securities available for sale		2,568,527			2,219,615			2,419,908
Securities held to maturity (market value of
$153,247 on September 30, 2003; $337,110 on
September 30, 2002; and $284,510 on December 31, 2002)		153,913			328,452			280,377
Loans, net of unearned income		13,349,056			10,922,628			11,345,445
Less: Allowance for loan losses		161,401			143,749			144,298

Total net loans		13,187,655			10,778,879			11,201,147

Premises and equipment, net		334,353			243,121			254,132
Real estate acquired by foreclosure		23,989			19,782			11,451
Mortgage servicing rights, net		692,481			398,968			440,482
Goodwill		184,605			163,277			164,617
Other intangible assets, net		41,005			31,498			29,648
Capital markets receivables and other assets		2,988,606			2,362,483			1,999,148

Total assets	$	25,489,338		$	22,744,577		$	23,823,095


Liabilities and shareholders’ equity:
Deposits:
Interest-bearing	$	11,736,142		$	9,448,477		$	10,564,489
Noninterest-bearing		4,819,770			4,342,944			5,149,414

Total deposits		16,555,912			13,791,421			15,713,903

Federal funds purchased and securities
sold under agreements to repurchase		2,200,923			3,880,615			3,126,350
Commercial paper and other short-term borrowings		460,487			295,492			361,208
Capital markets payables and other liabilities		2,723,058			2,350,476			1,856,347
Term borrowings		1,597,045			654,533			929,715

Total liabilities		23,537,425			20,972,537			21,987,523

Guaranteed preferred beneficial interests in
First Tennessee’s junior subordinated debentures		100,000			100,000			100,000
Preferred stock of subsidiary		347			44,261			44,392

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 - 125,381,867 on September 30, 2003;
125,663,582 on September 30, 2002; and 125,600,024 on
December 31, 2002)		78,364			78,540			78,500
Capital surplus		140,314			123,393			119,318
Undivided profits		1,632,236			1,396,297			1,461,946
Accumulated other comprehensive income		626			25,807			26,487
Deferred compensation on restricted stock incentive plans		(11,908	)		(6,389	)		(5,796	)
Deferred compensation obligation		11,934			10,131			10,725

Total shareholders’ equity		1,851,566			1,627,779			1,691,180

Total liabilities and shareholders’ equity	$	25,489,338		$	22,744,577		$	23,823,095

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME	First Tennessee National Corporation

	Three Months Ended September 30						Nine Months Ended September 30

(Dollars in thousands except per share data)(Unaudited)	2003			2002			2003			2002

Interest income:
Interest and fees on loans	$	165,942		$	168,230		$	482,513		$	501,515
Interest on investment securities:
Taxable		24,253			34,565			80,683			106,966
Tax-exempt		78			181			291			673
Interest on loans held for sale		71,412			46,136			192,795			118,599
Interest on trading securities		13,368			10,129			37,046			35,035
Interest on other earning assets		1,205			1,336			3,668			4,469

Total interest income		276,258			260,577			796,996			767,257

Interest expense:
Interest on deposits:
Savings		137			579			699			1,736
Checking interest and money market account		5,076			9,253			17,558			29,292
Certificates of deposit under $100,000 and other time		13,755			17,736			43,563			54,670
Certificates of deposit $100,000 and more		17,909			19,259			53,222			58,638
Interest on short-term borrowings		15,994			17,911			47,871			51,956
Interest on term borrowings		10,409			7,198			27,931			20,806

Total interest expense		63,280			71,936			190,844			217,098

Net interest income		212,978			188,641			606,152			550,159
Provision for loan losses		16,355			20,180			71,306			69,388

Net interest income after provision for loan losses		196,623			168,461			534,846			480,771

Noninterest income:
Mortgage banking		282,022			158,811			830,432			409,994
Capital markets		122,876			124,151			421,149			321,926
Deposit transactions and cash management		37,328			36,730			108,730			105,547
Trust services and investment management		12,011			10,768			34,219			38,181
Insurance premiums and commissions		14,465			10,765			44,113			36,678
Merchant processing		15,295			12,998			41,731			35,838
Divestitures		—			2,250			—			2,250
Equity securities gains/(losses), net		10,057			8			8,491			(2,188	)
Debt securities losses, net		(5,879	)		(19	)		(6,121	)		(174	)
All other income and commissions		37,328			35,483			109,529			105,406

Total noninterest income		525,503			391,945			1,592,273			1,053,458

Adjusted gross income after provision for loan losses		722,126			560,406			2,127,119			1,534,229

Noninterest expense:
Employee compensation, incentives and benefits		348,974			258,061			1,030,296			698,218
Occupancy		22,620			19,883			62,014			55,470
Equipment rentals, depreciation and maintenance		17,210			18,493			51,016			51,005
Operations services		17,700			15,387			52,788			44,770
Communications and courier		15,960			13,331			46,625			38,873
Amortization of intangible assets		2,065			1,676			5,577			4,631
All other expense		117,381			94,547			345,409			235,684

Total noninterest expense		541,910			421,378			1,593,725			1,128,651

Pretax income		180,216			139,028			533,394			405,578
Applicable income taxes		61,933			43,457			177,730			132,461

Net income	$	118,283		$	95,571		$	355,664		$	273,117

Earnings per common share (Note 3)		.93			.75			2.80			2.16

Diluted earnings per common share (Note 3)		.91			.73			2.72			2.09

Weighted average shares outstanding		126,636,999			126,698,671			126,853,581			126,721,080

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY	First Tennessee National Corporation

(Dollars in thousands)(Unaudited)	2003			2002

Balance, January 1	$	1,691,180		$	1,477,762
Net income		355,664			273,117
Other comprehensive income:
Unrealized loss on cash flow hedge, net of tax		137			(1,030	)
Unrealized market adjustments, net of tax		(25,998	)		3,559

Comprehensive income		329,803			275,646

Cash dividends declared		(113,230	)		(94,296	)
Common stock issued for exercise of stock options		68,478			48,125
Tax benefit from non-qualified stock options		22,336			10,109
Common stock repurchased		(162,072	)		(103,907	)
Amortization on restricted stock incentive plans		1,911			1,906
Other		13,160			12,434

Balance, September 30	$	1,851,566		$	1,627,779

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS	First Tennessee National Corporation

		Nine Months Ended September 30

(Dollars in thousands)(Unaudited)		2003			2002

Operating	Net income	$	355,664		$	273,117
Activities	Adjustments to reconcile net income to net cash (used)/provided
	by operating activities:
	Provision for loan losses		71,306			69,388
	Provision for deferred income tax		34,714			71,727
	Depreciation and amortization of premises and equipment		44,909			41,431
	Amortization and impairment of mortgage servicing rights		259,714			186,618
	Amortization of intangible assets		5,577			4,631
	Net other amortization and accretion		53,384			16,191
	Net increase in net derivative product assets		(35,516	)		(234,562	)
	Market value adjustment on foreclosed property		9,643			17,665
	Equity securities (gains)/losses		(8,491	)		2,188
	Debt securities losses		6,121			174
	Net losses on disposal of fixed assets		1,263			946
	Gains on divestitures		—			(2,250	)
	Loss on debt repurchase		5,766			—
	Net (increase)/decrease in:
	Trading securities		(142,271	)		(229,873	)
	Loans held for sale		1,900,824			(392,773	)
	Capital markets receivables		(1,123,470	)		(207,802	)
	Interest receivable		(2,968	)		11,203
	Other assets		(435,463	)		(103,188	)
	Net increase/(decrease) in:
	Capital markets payables		1,001,000			305,073
	Interest payable		8,348			(7,220	)
	Other liabilities		(65,374	)		432,440

	Total adjustments		1,589,016			(17,993	)

	Net cash provided by operating activities		1,944,680			255,124

Investing	Maturities of held to maturity securities		125,289			131,915
Activities	Available for sale securities:
	Sales		934,498			162,616
	Maturities		1,358,399			764,020
	Purchases		(2,480,937	)		(1,073,175	)
	Premises and equipment:
	Sales		46			7,432
	Purchases		(115,954	)		(32,795	)
	Net increase in loans		(2,111,531	)		(950,721	)
	Net decrease/(increase) in investment in bank time deposits		923			(290	)
	Proceeds from divestitures		—			206,664
	Acquisitions, net of cash and cash equivalents		(1,930	)		(1,433	)

	Net cash used by investing activities		(2,291,197	)		(785,767	)

Financing	Common stock:
Activities	Exercise of stock options		68,287			48,147
	Cash dividends		(113,208	)		(94,268	)
	Repurchase of shares		(162,179	)		(103,907	)
	Term borrowings:
	Issuance		725,902			106,485
	Payments		(128,581	)		(2,589	)
	Issuance of preferred stock of subsidiary		155			—
	Net increase/(decrease) in:
	Deposits		841,917			185,077
	Short-term borrowings		(826,148	)		805,413

	Net cash provided by financing activities		406,145			944,358

	Net increase in cash and cash equivalents		59,628			413,715

	Cash and cash equivalents at beginning of period		1,328,717			1,114,623

	Cash and cash equivalents at end of period	$	1,388,345		$	1,528,338

	Total interest paid	$	181,847		$	223,759
	Total income taxes paid		152,072			65,321

See accompanying notes to consolidated financial statements.

Note 1 — Financial Information

The unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented. The operating results for the three-month and nine-month periods ended September 30, 2003 and September 30, 2002, are not necessarily indicative of the results that may be expected going forward. For further information, refer to the audited consolidated financial statements and footnotes included in the financial appendix to the 2003 Proxy Statement.

Stock options. First Tennessee National Corporation (FTNC) 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, FTNC’s net income and earnings per share would have been reduced to the following pro forma amounts:

	Three Months Ended September 30				Nine Months Ended September 30
(Dollars in thousands except per share data)	2003		2002		2003		2002

Net income, as reported	$	118,283	$	95,571	$	355,664	$	273,117
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		1,031		1,325		5,893		5,150
Less: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects		5,322		5,218		21,294		17,955

Pro forma net income	$	113,992	$	91,678	$	340,263	$	260,312

Earnings per share, as reported	$	.93	$	.75	$	2.80	$	2.16
Pro forma earnings per share		.90		.72		2.68		2.05
Diluted earnings per share, as reported		.91		.73		2.72		2.09
Pro forma diluted earnings per share		.87		.70		2.60		2.00

Other disclosures — Indemnification agreements and guarantees. In the ordinary course of business, FTNC 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 Loan Corporation (FHHLC) services a mortgage loan portfolio of approximately $67.6 billion as of September 30, 2003, a significant portion of which is held by Government Sponsored Enterprises (GSE’s) or private security holders. In connection with its servicing activities, FHHLC guarantees the receipt of the scheduled principal and interest payments on the underlying loans. In the event of customer non-performance on the loan, FHHLC is obligated to make the payment to the security holder. Under the terms of the servicing agreements, FHHLC can utilize payments received from other prepaid loans in order to make the security holder whole. In the event payments are ultimately made by FHHLC to satisfy this obligation, for loans sold with no recourse, all funds are recoverable from the GSE’s at foreclosure sale.

FHHLC 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, FHHLC has exposure on all loans sold with recourse. FHHLC has various claims for reimbursement, repurchase obligations, and/or indemnification requests outstanding with government agencies or private investors. FHHLC has evaluated all of its exposure under recourse obligations based on factors, which include loan delinquency status, foreclosure expectancy rates and claims outstanding. Accordingly, FHHLC had an allowance for losses on the mortgage servicing portfolio of approximately $29.5 million and $37.8 million as of September 30, 2003 and 2002, respectively. FHHLC has sold certain mortgage loans with an agreement to repurchase the loans upon default. As of September 30, 2003 and 2002, FHHLC had single-family residential loans with outstanding balances of $156.9 million and $200.3 million, respectively, that were sold on a recourse basis. For the single-family residential loans, in the event of borrower nonperformance, FHHLC would assume losses to the extent they exceed the value of the collateral and private mortgage insurance, FHA insurance or VA guarantees.

Note 1 – Financial Information (continued)

As of September 30, 2003 and 2002, the outstanding principal balance of loans sold with limited recourse and serviced by FHHLC was $3.8 billion and $4.7 billion, respectively.

Standby letters of credit are conditional commitments issued by FTNC 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 the facilities would result in a loan being funded to the customer. Standby letters of credit outstanding as of September 30, 2003 and 2002, were $479.1 million and $467.2 million, respectively.

Accounting changes. On July 1, 2003, FTNC adopted certain provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” which requires certain financial instruments with both liability and equity characteristics to be classified as liabilities on the Statement of Condition. Upon adoption of this statement, FTNC classified its mandatorily redeemable preferred stock of subsidiary ($45.1 million on July 1, 2003) in “Term borrowings” (See Note 8 – 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. FASB Staff Position (FSP) No. FAS 150-3, issued November 7, 2003, deferred indefinitely the effective date for applying the provisions of SFAS No. 150 to certain manditorily redeemable noncontrolling interests. As a result of this deferral, FTNC did not classify it's guaranteed preferred beneficial interests in FTNC's junior subordinated debentures ($100.0 million on September 30, 2003) as liabilities. In addition, the related distributions of this instrument ($8.0 million annually) remain classified as noninterest expense.

On July 1, 2003, FTNC 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, “Accounting for Derivative Instruments and Hedging Activities”. The impact of adopting this standard was immaterial to FTNC.

On January 1, 2003, FTNC 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 FTNC.

On January 1, 2003, FTNC 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 Financial Accounting Standards Board (FASB) Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others”, which is superceded. The impact of adopting this statement was immaterial to FTNC.

In December 2002, FTNC 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. FTNC continues to account for stock-based employee compensation under APB 25.

On October 1, 2002, FTNC 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 FTNC.

Note 1 – Financial Information (continued)

On October 1, 2002, FTNC 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.

On January 1, 2002, FTNC 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 FTNC.

On January 1, 2002, FTNC 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. FTNC has not recognized any impairment of the goodwill currently on its books during 2003 or 2002.

On January 1, 2002, FTNC 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 FTNC.

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 a deterioration in credit quality since origination. SOP 03-3 does not apply to loans recorded at fair value 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 should be immaterial to the results of future operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, which requires consolidation by a business enterprise of variable interest entities. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies at the end of the first fiscal year or interim period ending after December 15, 2003 (as of December 31, 2003 for FTNC), to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. While certain implementation issues related to this standard continue to undergo interpretation, the impact at implementation of adopting this standard will be immaterial to the results of future operations.

Note 2 – Acquisitions/Divestitures

On October 8, 2003, First Tennessee National Corporation (FTNC) announced that it has entered into a definitive agreement with First Security Bank of Searcy, Arkansas for First Security to acquire substantially all of the assets ($344.4 million on September 30, 2003) and assume substantially all of the liabilities ($304.3 million on September 30, 2003) of FTNC’s wholly owned subsidiary, First National Bank of Springdale (FNB) of Springdale, Arkansas. FTNC expects to complete the divestiture by March 31, 2004, with an after-tax gain, net of expenses, ranging between $1 million and $2 million. This transaction is immaterial to FTNC.

On August 1, 2003, First Horizon Merchant Services, Inc., a wholly owned subsidiary of First Tennessee Bank National Association (FTBNA), 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 FTNC.

On September 16, 2002, First Tennessee Bank National Association (FTBNA), the primary banking subsidiary of FTNC, 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 Loan Corporation (FHHLC), a wholly owned subsidiary of FTBNA, acquired certain assets and assumed certain liabilities of Real Estate Financial Services (REFS), a mortgage lending company based in Alpharetta, Georgia, for approximately $2.2 million in cash. This transaction was immaterial to FTNC.

On April 1, 2002, FTNC 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., a wholly owned subsidiary of FTBNA. The acquisition was immaterial to FTNC.

On June 6, 2001, FTBNA completed the sale of its interests in Check Solutions Company to Carreker Corporation of Dallas, Texas. FTNC recognized a divestiture gain of $42.7 million in 2001. An additional gain of $2.3 million was recognized in 2002.

Note 3 – Earnings Per Share

The following table shows a reconciliation of earnings per share to diluted earnings per share:

	Three Months Ended September 30				Nine Months Ended September 30

(Dollars in thousands, except per share data)	2003		2002		2003		2002

Net income	$	118,283	$	95,571	$	355,664	$	273,117

Earnings per common share:
Weighted average common shares outstanding		125,565,417		125,623,723		125,768,814		125,707,484
Shares attributable to deferred compensation		1,071,582		1,074,948		1,084,767		1,013,596

Total weighted average shares		126,636,999		126,698,671		126,853,581		126,721,080

Earnings per common share	$	.93	$	.75	$	2.80	$	2.16


Diluted earnings per common share:
Weighted average shares outstanding		126,636,999		126,698,671		126,853,581		126,721,080
Dilutive effect due to stock options		3,956,991		3,528,077		4,063,195		3,659,626

Total weighted average shares, as adjusted		130,593,990		130,226,748		130,916,776		130,380,706

Diluted earnings per common share:	$	.91	$	.73	$	2.72	$	2.09

Note 4 – Loans

The composition of the loan portfolio on September 30 is detailed below:

(Dollars in thousands)	2003		2002

Commercial:
Commercial, financial and industrial	$	4,444,138	$	4,095,708
Real estate commercial		1,051,389		1,045,327
Real estate construction		648,504		521,700
Retail:
Real estate residential		6,224,859		4,385,514
Real estate construction		467,110		301,509
Other retail		248,401		308,923
Credit card receivables		264,655		263,947

Loans, net of unearned income		13,349,056		10,922,628
Allowance for loan losses		161,401		143,749

Total net loans	$	13,187,655	$	10,778,879

The following table presents information concerning nonperforming loans on September 30:

(Dollars in thousands)	2003		2002

Impaired loans	$	39,128	$	48,214
Other nonaccrual loans		20,669		23,766

Total nonperforming loans	$	59,797	$	71,980

Nonperforming loans consist of impaired loans and other nonaccrual loans. An impaired loan is a loan that management believes the contractual amount due probably will not be collected. Impaired loans are generally carried on a nonaccrual status. Nonaccrual loans are loans on which interest accruals have been discontinued due to the borrower’s financial difficulties. 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.

Generally, interest payments received on impaired loans are applied to principal. Once all principal has been received, additional payments are recognized as interest income on a cash basis. The following table presents information concerning impaired loans:

	Three Months Ended September 30				Nine Months Ended September 30

(Dollars in thousands)	2003		2002		2003		2002

Total interest on impaired loans	$	285	$	116	$	557	$	321
Average balance of impaired loans		43,772		43,401		48,471		41,320

An allowance for loan losses is maintained for all impaired loans. Activity in the allowance for loan losses related to non-impaired loans, impaired loans, and for the total allowance for the nine months ended September 30, 2003 and 2002, 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		45,750			23,638			69,388
Charge-offs		(56,986	)		(29,627	)		(86,613	)
Loan recoveries		9,544			816			10,360

Net charge-offs		(47,442	)		(28,811	)		(76,253	)

Balance on September 30, 2002	$	131,976		$	11,773		$	143,749


Balance on December 31, 2002	$	129,229		$	15,069		$	144,298
Provision for loan losses		59,669			11,637			71,306
Charge-offs		(50,390	)		(14,767	)		(65,157	)
Loan recoveries		9,692			1,262			10,954

Net charge-offs		(40,698	)		(13,505	)		(54,203	)

Balance on September 30, 2003	$	148,200		$	13,201		$	161,401

Note 5 – Business Segment Information

FTNC provides traditional retail/commercial banking and other financial services to its customers through various regional and national business lines, including First Tennessee Banking Group (previously referred to as FTN Banking Group), First Horizon, FTN Financial, Transaction Processing, and Corporate. First Tennessee Banking Group includes the Retail/Commercial Bank, Investments, Insurance, Financial Planning, Trust Services and Asset Management, Credit Card and Cash Management. This segment offers traditional banking financial services and products, commercial insurance and also promotes comprehensive financial planning to address customer needs and desires for investments, insurance, estate planning, education funding, cash reserves and retirement goals. First Horizon includes First Horizon Home Loans, First Horizon Equity Lending and First Horizon Money Centers. During third quarter 2002, FTNC sold the loan portfolio and closed the offices of First Horizon Money Centers as part of an ongoing plan to improve long-term growth by enhancing overall business mix. FTN Financial includes Capital Markets, Equity Research, Investment Banking, Strategic Alliances, and Correspondent Services. Transaction Processing includes credit card merchant processing, nationwide bill payment processing, check clearing operations and other products and services. The Corporate segment includes unallocated corporate expenses, expense on trust preferred and REIT preferred stock, and select components of SFAS 133 hedge ineffectiveness (see also Note 1 — Financial Information).

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 months and nine months ending September 30:

	Three Months Ended September 30				Nine Months Ended September 30

(Dollars in thousands)	2003		2002		2003		2002

Consolidated
Net interest income, FTE*	$	213,280	$	189,026	$	607,092	$	551,316
Other revenues		525,503		391,945		1,592,273		1,053,458
Other expenses**		558,265		441,558		1,665,031		1,198,039

Pre-tax income, FTE*		180,518		139,413		534,334		406,735
Income taxes, FTE*		62,235		43,842		178,670		133,618

Net income	$	118,283	$	95,571	$	355,664	$	273,117

Average assets	$	27,436,834	$	20,601,144	$	25,303,147	$	19,994,001

*Fully taxable-equivalent adjustment	$	302	$	385	$	940	$	1,157



First Tennessee Banking Group
Net interest income, FTE*	$	98,302	$	111,688	$	299,718	$	345,710
Other revenues		86,005		74,005		239,524		223,167
Other expenses**		137,484		131,035		430,640		385,950

Pre-tax income, FTE*		46,823		54,658		108,602		182,927
Income taxes, FTE*		12,829		11,975		20,583		50,065

Net income	$	33,994	$	42,683	$	88,019	$	132,862

Average assets	$	11,123,002	$	10,252,225	$	10,832,112	$	10,379,421

*	Fully taxable-equivalent basis.

**	Includes loan loss provision.

Note 5 – Business Segment Information (continued)

	Three Months Ended September 30						Nine Months Ended September 30

(Dollars in thousands)	2003			2002			2003			2002

First Horizon
Net interest income, FTE*	$	99,872		$	61,895		$	259,246		$	162,645
Other revenues		287,933			166,279			845,819			433,770
Other expenses**		272,450			169,664			760,156			452,362

Pre-tax income, FTE*		115,355			58,510			344,909			144,053
Income taxes, FTE*		42,651			21,894			127,546			53,246

Net income	$	72,704		$	36,616		$	217,363		$	90,807

Average assets	$	12,298,350		$	7,749,267		$	10,958,381		$	6,958,201


FTN Financial
Net interest income, FTE*	$	10,607		$	8,928		$	30,365		$	25,626
Other revenues		124,702			125,650			427,716			326,962
Other expenses**		93,239			91,684			317,143			236,265

Pre-tax income, FTE*		42,070			42,894			140,938			116,323
Income taxes, FTE*		15,979			16,300			53,542			44,203

Net income	$	26,091		$	26,594		$	87,396		$	72,120

Average assets	$	3,265,817		$	1,852,156		$	2,715,201		$	1,941,024


Transaction Processing
Net interest income, FTE*	$	4,191		$	4,988		$	13,086		$	14,621
Other revenues		27,383			26,011			79,540			75,337
Other expenses**		27,745			25,280			79,532			72,666

Pre-tax income, FTE*		3,829			5,719			13,094			17,292
Income taxes, FTE*		1,469			2,173			5,033			6,571

Net income	$	2,360		$	3,546		$	8,061		$	10,721

Average assets	$	642,354		$	646,764		$	656,344		$	655,842


Corporate
Net interest income, FTE*	$	308		$	1,527		$	4,677		$	2,714
Other revenues		(520	)		--			(326	)		(5,778	)
Other expenses		27,347			23,895			77,560			50,796

Pre-tax income, FTE*		(27,559	)		(22,368	)		(73,209	)		(53,860	)
Income taxes, FTE*		(10,693	)		(8,500	)		(28,034	)		(20,467	)

Net income	$	(16,866	)	$	(13,868	)	$	(45,175	)	$	(33,393	)

Average assets	$	107,311		$	100,732		$	141,109		$	59,513

*	Fully taxable-equivalent basis.

**	Includes loan loss provision.

Note 6 – Intangible Assets

Following is a summary of intangible assets, net of accumulated amortization, included in the Consolidated Statements of Condition:

(Dollars in thousands)	Goodwill		Other Intangibles*

Balance on December 31, 2001	$	143,147	$	41,857
Amortization expense		—		(4,631	)
Reclass**		12,573		(12,573	)
Acquisitions**		7,557		6,845

Balance on September 30, 2002	$	163,277	$	31,498

Balance on December 31, 2002	$	164,617	$	29,648
Amortization expense		—		(5,577	)
Divestitures		—		(19	)
Acquisitions**		19,988		16,953

Balance on September 30, 2003	$	184,605	$	41,005

*	Represents premium on purchased deposits, covenants not to compete and non-mortgage servicing rights.

**	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 $108.9 million on September 30, 2003, net of $67.9 million of accumulated amortization. Estimated aggregate amortization expense for the remainder of 2003 is expected to be $2.2 million and is expected to be $8.2 million, $6.4 million, $4.9 million and $4.8 million for the twelve-month periods of 2004, 2005, 2006 and 2007, respectively.

The following is a summary of goodwill detailed by reportable segments for the nine months ended September 30:

(Dollars in thousands)	First Tennessee Banking Group			First Horizon			FTN Financial		Transaction Processing		Total

December 31, 2001		$	75,462	$	51,353		$	12,968	$	3,364	$	143,147
Reclass*			12,573		—			—		—		12,573
Acquisitions*			249		1,092			326		5,890		7,557

September 30, 2002		$	88,284	$	52,445		$	13,294	$	9,254	$	163,277

December 31, 2002		$	88,070	$	52,378		$	13,294	$	10,875	$	164,617
Acquisitions*			8,794		(1,526	)		—		12,720		19,988

September 30, 2003		$	96,864	$	50,852		$	13,294	$	23,595	$	184,605

*	Purchase price allocations on acquisitions are based upon estimates of fair value and are subject to change.

Note 7 – Mortgage Servicing Rights

Following is a summary of changes in capitalized mortgage servicing rights (MSR’s), net of accumulated amortization, included in the Consolidated Statements of Condition:

(Dollars in thousands)

Balance on December 31, 2001	$	665,005
Addition of mortgage servicing rights		257,984
Amortization		(87,791	)
Market value adjustments		(337,515	)
Sales of mortgage servicing rights		112
Impairment		(98,827	)

Balance on September 30, 2002	$	398,968

Balance on December 31, 2002	$	440,482
Addition of mortgage servicing rights		469,096
Amortization		(97,157	)
Market value adjustments		48,892
Sales of mortgage servicing rights		(6,275	)
Impairment		(162,557	)

Balance on September 30, 2003	$	692,481

The MSR’s on September 30, 2003 and 2002, had estimated market values of approximately $720.9 million and $423.8 million, respectively. These balances represent the rights to service approximately $63.5 billion and $47.1 billion of mortgage loans on September 30, 2003 and 2002. On September 30, 2003 and 2002, valuation allowances due to impairment of $57.5 million and $34.4 million were required, respectively.

Estimated MSR’s amortization expense for the twelve month periods ending September 30, 2004, 2005, 2006, 2007 and 2008, are $113.1 million, $96.4 million, $81.8 million, $68.2 million and $56.7 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’s are stratified based on the predominant risk characteristics of the underlying loans. These strata currently include adjustable and fixed-rate loans. The MSR’s 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.

Note 8 – Term Borrowings

The following table presents information pertaining to term borrowings (debt with original maturities greater than one year) for FTNC and its subsidiaries on September 30:

(Dollars in thousands)	2003		2002

First Tennessee Bank National Association:
Subordinated notes (qualifies for total capital under the Risk-Based Capital guidelines):
Matures on May 15, 2013 — 4.625%	$	263,442	$	—
Matures on December 1, 2008 — 5.75%		140,842		140,691
Matures on April 1, 2008 — 6.40%		89,683		89,613
Bank notes:*
Matures on June 30, 2004 — 1.09%		174,980		—
Matures on October 6, 2003 — 1.09%		150,000		—
Matures on October 8, 2004 — 1.19%		149,970		—
Matures on January 21, 2004 — 1.07%		100,000		—
Matures on June 30, 2005 — 1.18%		99,983		—
Matures on November 26, 2004 — 1.22%		74,983		—
Matures on July 6, 2004 — 1.31% and 2.06% on
September 30, 2003 and 2002, respectively		59,978		59,950
Matures on July 9, 2004 — 1.31% and 2.06% on
September 30, 2003 and 2002, respectively		50,000		50,000
Matures on March 6, 2007 — 1.38% and 2.01% on
September 30, 2003 and 2002, respectively		49,934		49,915
Matured on April 17, 2003 — 1.82% on
September 30, 2002		—		50,000
Matured on May 23, 2003 — 1.90% on
September 30, 2002		—		69,986
Federal Home Loan Bank borrowings**		3,969		54,252
Other***		6,692		6,692
First Tennessee National Corporation:
Subordinated capital notes (qualifies for total capital under the Risk-Based Capital guidelines):
Matures on May 15, 2013 — 4.50%		105,370		—
Matures on November 15, 2005 — 6.75%		22,844		74,744
FT Real Estate Securities Company, Inc.
Cumulative preferred stock (qualifies for total capital under the Risk-Based Capital guidelines):****
Matures on March 31, 2031 — 9.50%		45,132		—
First National Bank of Springdale:
Federal Home Loan Bank borrowings**		9,243		8,690

Total	$	1,597,045	$	654,533

FTBNA has an ongoing bank note program under which the bank may offer an aggregate principal amount of up to $3.0 billion. Bank notes with original maturities of one year or less are included in other short-term borrowings. Bank notes with original maturities greater than one year are classified as term borrowings. On September 30, 2003, unused term-borrowing capacity under this program was $1.2 billion. See also Liquidity Management Section of Management's Discussion and Analysis of Results of Operations and Financial Condition.

The Federal Home Loan Bank (FHLB) borrowings were issued with fixed interest rates and terms of 2 to 26 years. These borrowings had weighted average interest rates of 4.33 percent and 4.17 percent for FTBNA and 4.41 percent and 4.64 percent for Springdale on September 30, 2003 and September 30, 2002, respectively.

***	Other long-term debt is comprised of unsecured obligations issued with fixed interest rates and terms of 1 to 2 years. These borrowings had a weighted average interest rate of 4.60 percent on September 30, 2003 and September 30, 2002.

****	Subsequent to the adoption of SFAS No. 150, FTNC classified its cumulative preferred stock to term borrowings.

Note 8 – Term Borrowings (continued)

Annual principal repayment requirements as of September 30, 2003, are as follows:

(Dollars in thousands)

2003	$	154,626
2004		612,612
2005		125,222
2006		3,915
2007		51,738
2008 and after		633,313

All subordinated notes are unsecured and are subordinate to other present and future senior indebtedness. These notes qualify as Tier 2 risk-based capital under the Federal Reserve Board and Office of the Comptroller of the Currency guidelines for assessing capital adequacy. Certain of the subordinated bank notes may require prior regulatory approval to be prepaid prior to maturity.

Note 9 – Regulatory Capital

FTNC 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 FTNC’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 FTNC 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 September 30, 2003, that FTNC met all capital adequacy requirements to which it was subject.

The actual capital amounts and ratios of FTNC, FTBNA (the primary banking subsidiary of FTNC) and First National Bank of Springdale 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 12.59 percent, 9.09 percent and 6.22 percent, respectively, on September 30, 2003, and were 11.03 percent, 8.66 percent and 7.31 percent, respectively, on September 30, 2002.

	First Tennessee National Corporation						First Tennessee Bank National Association						First National Bank of Springdale

(Dollars in thousands)	Amount			Ratio			Amount			Ratio			Amount			Ratio

On September 30, 2003:
Actual:
Total Capital	$	2,490,926			13.50	%	$	2,360,392			12.85	%	$	29,049			13.48	%
Tier 1 Capital		1,702,397			9.23			1,683,731			9.17			26,376			12.24
Leverage		1,702,397			6.26			1,683,731			6.29			26,376			7.92

For Capital Adequacy Purposes:
Total Capital		1,475,819	>		8.00			1,469,346	>		8.00			17,238	>		8.00
Tier 1 Capital		737,909	>		4.00			734,673	>		4.00			8,619	>		4.00
Leverage		1,087,552	>		4.00			1,070,531	>		4.00			13,327	>		4.00

To Be Well Capitalized Under Prompt
Corrective Action Provisions:
Total Capital		1,844,774	>		10.00			1,836,682	>		10.00			21,548	>		10.00
Tier 1 Capital		1,106,864	>		6.00			1,102,009	>		6.00			12,929	>		6.00
Leverage		1,359,440	>		5.00			1,338,164	>		5.00			16,659	>		5.00

On September 30, 2002:
Actual:
Total Capital	$	1,966,418			11.51	%	$	1,891,631			11.24	%	$	28,328			12.83	%
Tier 1 Capital		1,496,718			8.76			1,469,848			8.73			25,565			11.58
Leverage		1,496,718			7.36			1,469,848			7.37			25,565			7.58

For Capital Adequacy Purposes:
Total Capital		1,366,757	>		8.00			1,346,233	>		8.00			17,658	>		8.00
Tier 1 Capital		683,378	>		4.00			673,116	>		4.00			8,829	>		4.00
Leverage		813,660	>		4.00			797,902	>		4.00			13,490	>		4.00

To Be Well Capitalized Under Prompt
Corrective Action Provisions:
Total Capital		1,708,446	>		10.00			1,682,791	>		10.00			22,072	>		10.00
Tier 1 Capital		1,025,068	>		6.00			1,009,675	>		6.00			13,243	>		6.00
Leverage		1,017,075	>		5.00			997,377	>		5.00			16,862	>		5.00

Note 10 – Contingencies

Contingent liabilities arise in the ordinary course of business, including those related to litigation. Various claims and lawsuits, in addition to those listed below, are pending against FTNC and its subsidiaries. Although FTNC cannot predict the outcome of these lawsuits, after consulting with counsel, it is management’s opinion that when resolved, these lawsuits will not have a material adverse effect on the consolidated financial statements of FTNC.

Three cases alleging that FTNC engaged in unfair and deceptive practices in connection with the financing of satellite dish television systems are pending in Mississippi courts. FTNC has reached an agreement to settle one of these cases filed by fifty plaintiffs and pending in federal court. In fourth quarter 2003, FTNC reached an agreement to settle the remaining two cases, each filed by one plaintiff and pending in Choctaw Tribal Court, for an immaterial amount relative to its financial statements.

Many mortgage lenders, including a FTNC subsidiary, have been sued in putative class actions on the theory that yield spread premiums paid to mortgage brokers are referral fees banned by the Real Estate Settlement Practices Act (RESPA). In June 2001, the Eleventh Circuit Court of Appeals upheld certification of a class in a yield spread premium case against a lender unaffiliated with FTNC. In October 2001, the U.S. Department of Housing and Urban Development (HUD) published a policy statement disagreeing with the Eleventh Circuit’s decision. Subsequently, applying HUD’s policy statement, the Eleventh Circuit reversed class certification in a case against another unaffiliated lender, overruled its prior opinion, and followed its most recent decision in two related cases. The U.S. Supreme Court has also declined to review two similar cases from the Eighth and Ninth Circuits, where class certification had been denied. FTNC believes its subsidiary’s yield spread premium payments are consistent with industry practices, are lawful, and intends to defend vigorously the lawsuits against it.

ITEM 2. FIRST TENNESSEE NATIONAL CORPORATION – MANAGEMENT’S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

GENERAL INFORMATION

First Tennessee National Corporation (FTNC) is headquartered in Memphis, Tennessee, and is a premier nationwide, diversified financial services institution that provides a broad array of financial services to its customers through various regional and national business lines. FTNC’s segments are First Tennessee Banking Group (previously referred to as FTN Banking Group), First Horizon, FTN Financial, Transaction Processing, and Corporate. First Tennessee Banking Group includes the Retail/Commercial Bank, Investments, Insurance, Financial Planning, Trust Services and Asset Management, Credit Card and Cash Management. This segment offers traditional banking financial services and products, commercial insurance and also promotes comprehensive financial planning to address customer needs and desires for investments, insurance, estate planning, education funding, cash reserves and retirement goals. First Horizon includes First Horizon Home Loans, First Horizon Equity Lending and First Horizon Money Centers. During third quarter 2002, FTNC sold the loan portfolio and closed the offices of First Horizon Money Centers as part of an ongoing plan to improve long-term growth by enhancing overall business mix. FTN Financial includes Capital Markets, Equity Research, Investment Banking, Strategic Alliances and Correspondent Services. Transaction Processing includes credit card merchant processing, nationwide bill payment processing, check clearing operations and other products and services. The Corporate segment includes unallocated corporate expenses, expense on trust preferred securities and REIT preferred stock, and select components of SFAS 133 hedge ineffectiveness (see Note 1 – Financial Information).

Based on management’s best estimates, certain revenue and expenses are allocated and equity is assigned to the various segments to reflect the inherent risk in each business line. These allocations are periodically reviewed and may be revised from time to time to more accurately reflect current business conditions and risks; the previous history is restated to ensure comparability.

For the purpose of this management discussion and analysis (MD&A), earning assets, including loans, have been expressed as averages, net of unearned income. First Tennessee Bank National Association, the primary bank subsidiary, is also referred to as FTBNA in this discussion.

The following is a discussion and analysis of the financial condition and results of operations of FTNC for the three-month and nine-month periods ended September 30, 2003, compared to the three-month and nine-month periods ended September 30, 2002. To assist the reader in obtaining a better understanding of FTNC and its performance, this discussion should be read in conjunction with FTNC’s unaudited consolidated financial statements and accompanying notes appearing in this report. Additional information including the 2002 financial statements, notes, and management’s discussion and analysis is provided in the 2002 Annual Financial Disclosures included as an appendix to the 2003 Proxy Statement.

FORWARD-LOOKING STATEMENTS

Management’s discussion and analysis contains forward-looking statements with respect to FTNC’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; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geo-political developments including possible terrorist activity; technology; and new products and services in the industries in which FTNC operates. Other factors are those inherent in originating and servicing loans, including prepayment risks and 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 FTNC; and FTNC’s success in executing its business plans and strategies and managing the risks involved in the foregoing, could cause actual results to differ. FTNC assumes no obligation to update any forward-looking statements that are made from time to time.

FINANCIAL SUMMARY (Comparison of third quarter 2003 to third quarter 2002)

Earnings for third quarter 2003 were $118.3 million, an increase of 24 percent from last year’s third quarter earnings of $95.6 million. Diluted earnings per common share increased 25 percent to $.91 in 2003 compared to $.73 in 2002. Return on average shareholders’ equity was 25.9 percent and return on average assets was 1.71 percent for third quarter 2003. Return on average shareholders’ equity was 23.8 percent and return on average assets was 1.84 percent for third quarter 2002.

On September 30, 2003, FTNC was ranked as one of the top 50 bank holding companies nationally in market capitalization ($5.4 billion) and total assets ($25.5 billion). On September 30, 2002, market capitalization was $4.4 billion and total assets were $22.7 billion.

Total revenue grew 27 percent from third quarter 2002, with a 34 percent increase in noninterest income and a 13 percent increase in net interest income.

BUSINESS LINE REVIEW

First Horizon

Pre-tax income for First Horizon increased 97 percent to $115.3 million for third quarter 2003, compared to $58.6 million for third quarter 2002. Total revenues were $387.8 million, an increase of 70 percent from $228.3 million in 2002, reflecting a 133 percent increase in loans securitized and sold into the secondary market.

Net interest income increased 61 percent to $99.9 million in 2003 from $62.0 million in 2002. Net interest income in First Horizon Equity Lending increased $9.7 million primarily due to an increase of 109 percent in home equity lines of credit, which averaged $2.3 billion in third quarter 2003 compared to $1.1 billion in 2002. The remaining increase of $28.2 million in net interest income reflects the impact of a larger portfolio of warehouse loans (mortgage loans that are awaiting sale and delivery into the secondary market), which grew 90 percent to $5.7 billion from $3.0 billion in third quarter 2002. Net interest spread on the warehouse, however, was negatively impacted by lower mortgage rates.

Total noninterest income increased 73 percent to $287.9 million in 2003 compared to $166.3 million in 2002. Noninterest income consists primarily of mortgage banking-related fees from the origination process, fees from mortgage servicing and mortgage servicing rights (MSR’s) net hedge gains or losses. Total noninterest income is net of amortization, impairment and other expenses related to MSR’s and related hedges.

Origination activity increased 59 percent to $14.6 billion compared to $9.2 billion in 2002. However, due to the large overhang of $5.9 billion of mortgage loans held for sale on June 30, 2003, loans securitized and sold into the secondary market increased 133 percent to $17.4 billion. Fees derived from the mortgage origination process (generally driven by either origination volumes or loans securitized and sold) increased 81 percent in 2003, to $299.5 million from $165.7 million in 2002. Driven by low mortgage interest rates, refinance activity increased 75 percent to $10.5 billion and represented 72 percent of total originations during 2003 compared to 66 percent in 2002. Home purchase related originations grew 29 percent in 2003, demonstrating First Horizon Home Loans’ success in penetrating the purchase market. First Horizon Home Loans’ access to the purchase market should help production levels as mortgage rates rise. Secondary marketing activities increased $63.9 million as revenues from MSR’s created grew $123.5 million (to $193.8 million) due to the increased volume of loans securitized and sold while net secondary marketing trading losses increased $56.6 million (from a gain of $33.8 million to a loss of $22.8 million) primarily due to the increase in interest rates experienced during third quarter.

While the growth in refinance activity produced increased origination fee income, it also increased actual and projected MSR’s prepayment speeds, resulting in a 19 percent increase, to $33.5 million in MSR’s amortization expense compared to $28.2 million in 2002. In addition, MSR’s impairment loss increased 12 percent to $47.8 million from $42.5 million due primarily to lower interest rates and changes in short-term prepayment expectations. The decrease in fair value of MSR’s was partially offset by an increase in the value of the derivative financial instruments used to hedge the change in fair value of the hedged MSR’s. MSR’s net hedge gains (excluding the effect of SFAS 133 hedge ineffectiveness which is included in the Corporate segment – see also Further Interpretations of SFAS No. 133) were $20.5 million in 2003 compared to $18.7 million in 2002 (both years represent a net increase in the value of hedges over the decrease in the value of hedged MSR’s).

possible, in part, by the recapture of refinances from the existing servicing portfolio. Servicing fees increased 23 percent as a result of this increase in the servicing portfolio. However, total fees associated with mortgage servicing increased only 6 percent to $44.9 million in third quarter 2003 due to the unfavorable impact of early payoffs. Primarily as a result of the strong originations, there was an increase in capitalized MSR’s during third quarter 2003 of $212.4 million, net of sales (see Note 7 – Mortgage Servicing Rights for information summarizing changes in MSR’s).

The provision for loan losses was $7.1 million in 2003 compared to $4.3 million in 2002. 2002 included a $7.4 million reduction in provision resulting from a change in risk profile due to the sale of Money Center loans. This improvement in asset quality is related to strengthening customer demographics and a positive shift in the mix of the loan portfolio.

Total noninterest expense increased 60 percent to $265.4 million in 2003 compared to $165.4 million in 2002. The growth was primarily the result of a 79 percent increase in employee compensation, incentives and benefits (personnel expense), the largest component of noninterest expense, that includes the impact of increased salary and commission expense related to the increased mortgage origination volume produced during 2003. The impact of First Horizon’s initiative to grow the retail sales force is also reflected in this expense growth. In addition to the increased personnel expense, the higher activity levels also impacted various other categories of noninterest expense.

Going forward, fee income from refinance loan originations will generally 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’s amortization expense and impairment losses, while a decrease in rates should increase this net revenue. Flat to rising interest rates should reduce net secondary marketing trading gains, while falling rates should increase this net revenue. If total origination volume increases and/or the yield curve steepens, net interest income from the warehouse should increase, while if volume decreases and/or the yield curve flattens, this revenue should decrease. In third quarter 2003, mortgage interest rates began to rise from recent historically low levels, and refinance origination volumes are expected to decline in fourth quarter. Home purchase-related originations should reflect the relative strength or weakness of the economy and will also be influenced by the size of the sales force. Continued success of national cross-sell strategies should increase revenues from products other than traditional mortgage origination and servicing. Actual results could differ because of various factors, including those presented in the Forward-Looking Statements section of the MD&A discussion.

First Tennessee Banking Group

Pre-tax income for First Tennessee Banking Group decreased 14 percent to $46.9 million for third quarter 2003, compared to $54.6 million for third quarter 2002. This decline was driven by a $13.4 million drop in net interest income; however, balance sheet leveraging capacity which is normally used within First Tennessee Banking Group has been employed by the First Horizon segment as the growth in the mortgage warehouse produced $28.2 million net interest income growth over last year. Total revenues for the segment were $184.4 million, a decrease of 1 percent from $185.6 million in 2002 due to compression in the net interest margin (NIM).

Net interest income decreased to $98.3 million in 2003 or 12 percent, compared to $111.7 million in 2002. The decline in net interest income was related to compression in the net interest margin primarily due to the repricing of assets to lower yields while liability rates have become less sensitive to rate movements in this historically low interest rate environment. It also was due to a change in the mix of the loan portfolio to floating rate products. Investment yields have declined as accelerated prepayments of investments in mortgage-backed securities have resulted in increased amortization of premiums in addition to the effect of proceeds from these prepaid investments being reinvested at lower rates. As a result of these impacts, NIM (based on net interest income of $98.3 million and earning assets of $10.5 billion for third quarter 2003 compared to $111.7 million and $9.6 billion, respectively, for third quarter 2002) fell to 3.76 percent in 2003 from 4.64 percent in 2002. Typically, balance sheet leveraging would have been utilized to offset this drop in NIM and net interest income. However, the strong growth in mortgage warehouse volume allowed this tactic to be delayed until a more favorable rate environment was present.

Noninterest income increased 16 percent to $86.1 million compared to $73.9 million in 2002. This increase was due, in part, to improvement in insurance revenue and trust and investment management fees. Also impacting this increase were net securities gains of $4.2 million in third quarter 2003. Included in this amount were net gains of $10.1 million from FTNC’s wholly-owned venture capital subsidiary, Hickory Venture Capital Corporation, primarily resulting from the sale of a venture capital investment and net losses of $5.9 million primarily resulting from sales of lower-yielding securities in the investment portfolio.

The provision for loan losses was $8.1 million in third quarter 2003 compared to $15.1 million in third quarter last year, primarily due to improvement in specific reserve allocations related to large commercial credits. Going forward the level of provision for loan losses should fluctuate primarily with the strength or weakness of the national or Tennessee economy.

Total noninterest expense increased 12 percent in 2003 to $129.4 million from $115.9 million last year. Contributing to this increase were increased personnel costs primarily related to growth in Synaxis, a wholly owned insurance broker, incentives associated with the sale of a

venture capital investment and increased benefit costs. Also impacting expense growth were costs related to the settlement of an employee separation dispute and initiatives promoting expense efficiencies and enhancing revenue growth.

FTN Financial

Pre-tax income for FTN Financial decreased 2 percent to $42.2 million for third quarter 2003, compared to $42.9 million for third quarter 2002.

Total revenues were $135.4 million compared to $134.6 million in third quarter 2002. Fee income was $124.7 million in 2003 compared to $125.7 million in 2002. Revenues in fixed income products were lower, primarily due to the impact this quarter’s market volatility had on delaying customers’ purchasing decisions. These decreases were partially offset by higher revenues in lending through correspondent services and other revenues, which include investment banking, equity research and sales, and portfolio advisory services. Capital markets business with depository customers increased 8 percent and represented 39 percent of revenue while business with non-depository customers decreased 20 percent and represented 22 percent of revenue. Other revenue sources increased 9 percent and contributed 39 percent of revenue.

Total noninterest expense increased 1 percent to $92.1 million compared to $90.9 million in 2002.

Going forward, revenues will fluctuate based on factors which include the expansion or contraction of the customer base, the volume of investment banking transactions and the introduction of new products, as well as the strength of loan growth in the U.S. economy and volatility in the interest rate environment and the equity markets. Actual results could differ because of various factors, including those presented in the Forward-Looking Statements section of the MD&A discussion.

Transaction Processing

Pre-tax income for Transaction Processing decreased 33 percent to $3.8 million in 2003, compared to $5.7 million in 2002 primarily due to a drop in express processing transactions. Express processing revenues decreased 8 percent as the volume of transactions processed for customers declined 11 percent compared to third quarter 2002. The volume has declined as the current low interest rate environment has reduced the benefit for customers to clear checks quickly, resulting in decreased demand. In addition, the low interest rate environment has depressed the value of free funding for balances customers have with FTNC. Volumes have also been impacted by the loss of a couple of low return customers. On the other hand, the volume of merchant transactions processed grew 12 percent over third quarter 2002 creating growth in merchant revenues of 15 percent. These increases were primarily due to recent acquisitions and some recovery in the hospitality industry. Noninterest expense increased 10 percent to $27.7 million from $25.3 million in third quarter 2002. Expense levels in merchant processing were influenced by recent acquisitions.

Corporate

The Corporate segment’s results showed a pre-tax loss of $27.6 million in third quarter 2003, compared to a loss of $22.4 million in third quarter 2002. 2003's pre-tax loss included costs of $8.7 million associated with management’s initiatives to develop an infrastructure to support business expansion. This included enhancements to business processes such as the design of systems and workflow that provide added flexibility and increased management information support. In tandem with these investments, management has implemented programs to curtail costs including restructuring debt, which resulted in a loss of $5.8 million in third quarter. Additionally, expenditures of $2.8 million were made in a non-management performance award to build employee value. Included in the pre-tax loss for third quarter 2002 is a $13.0 million contribution to First Tennessee Foundation, a non-profit entity dedicated to supporting charitable causes in the diverse communities where FTNC does business.

INCOME STATEMENT REVIEW

NONINTEREST INCOME

Noninterest income provides the majority of FTNC’s revenue and contributed 71 percent to total revenue in third quarter 2003 compared to 68 percent in third quarter 2002. Third quarter 2003 noninterest income increased 34 percent to $525.4 million from $392.0 million in 2002. A more detailed discussion of the major line items follows.

Mortgage Banking

First Horizon Home Loans, an indirect subsidiary of FTNC and the major component of the First Horizon business segment, 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 (known as “correspondent brokers”).

The secondary market for mortgages allows First Horizon Home Loans to sell mortgage loans to investors, including government-sponsored enterprises (GSE’s), such as Fannie Mae (FNMA), Ginnie Mae (GNMA), and Freddie Mac (FHLMC). 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’s. 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).

Origination fees and 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 (IRLC) is made to the customer. Secondary marketing activities include gains or losses from secondary marketing trading gains, product pricing decisions, and gains or losses from the sale of loans into the secondary market including the capitalized net present value of the MSR’s. As discussed under Critical Accounting Policies, First Horizon Home Loans employs hedging strategies intended to counter a change in the value of its MSR’s through changing interest rate environments. MSR’s hedge gains/(losses) reflect effects of hedging including servicing rights net value changes (see Other — Accounting for Derivative Instruments and Hedging Activities). Other income includes income from the foreclosure repurchase program, bulk sales of MSR’s, and other miscellaneous items. Mortgage trading securities gains/(losses) relate to market value adjustments primarily on interest-only strips that are classified as trading securities and related hedges. As shown in Table 1, total mortgage banking fee income increased 78 percent in 2003.

Table 1 – Mortgage Banking

	Three Months Ended September 30						Percent			Nine Months Ended September 30						Percent
(Dollars and volumes in millions)	2003			2002			Change (%)			2003			2002			Change (%)

Noninterest income:
Loan origination fees	$	131.5		$	61.6			113.8	+	$	328.8		$	153.0			115.0	+
Secondary marketing activities		168.0			104.1			61.3	+		508.7			255.7			98.9	+
Mortgage servicing fees		44.9			42.3			6.0	+		133.3			127.1			4.9	+
MSR’s net hedge results*		19.9			18.7			6.2	+		96.2			51.6			86.3	+
Other income		8.5			8.3			1.6	+		33.2			22.3			48.6	+
Mortgage trading securities net losses		(9.5	)		(5.5	)		73.1	+		(10.0	)		(13.1	)		23.5	–
Amortization of MSR’s		(33.5	)		(28.2	)		18.6	+		(97.2	)		(87.8	)		10.7	+
MSR’s impairment loss		(47.8	)		(42.5	)		12.4	+		(162.6	)		(98.8	)		64.5	+

Total mortgage noninterest income	$	282.0		$	158.8			77.6	+	$	830.4		$	410.0			102.5	+

Refinance originations	$	10,533.8		$	6,026.7			74.8	+	$	31,195.8		$	11,890.3			162.4	+
New loan originations		4,059.8			3,145.8			29.1	+		10,155.4			8,086.7			25.6	+

Mortgage loan originations	$	14,593.6		$	9,172.5			59.1	+	$	41,351.2		$	19,977.0			107.0	+

Servicing portfolio	$	67,624.7		$	52,109.5			29.8	+	$	67,624.7		$	52,109.5			29.8	+

*	MSR’s net hedge results represent the net gain or loss resulting from the change in value of the hedged component of MSR’s and the offsetting change in value of servicing hedges.

Certain previously reported amounts have been reclassified to agree with current presentation.

Origination activity increased 59 percent to $14.6 billion compared to $9.2 billion in third quarter 2002. However, due to the large overhang of $5.9 billion of mortgage loans held for sale on June 30, 2003, loans securitized and sold into the secondary market increased 133 percent to $17.4 billion in 2003 compared to last year. Fees derived from the mortgage origination process (generally driven by either origination volumes or loans securitized and sold) increased 81 percent in 2003, to $299.5 million from $165.7 million in 2002. Driven by low mortgage interest rates, refinance activity increased 75 percent to $10.5 billion and represented 72 percent of total originations during third quarter 2003 compared to 66 percent in third quarter 2002. Home purchase related originations grew 29 percent in 2003, demonstrating First Horizon Home Loans’ success in penetrating the purchase market. First Horizon Home Loans’ access to the purchase market should help production levels as mortgage rates rise. Secondary marketing activities increased $63.9 million as revenues from MSR’s created grew $123.5 million (to $193.8 million) primarily due to the increased volume of loans securitized and sold while net secondary marketing trading losses increased $56.6 million (from a gain of $33.8 million to a loss of $22.8 million) primarily due to the increase in interest rates experienced during third quarter.

While the growth in refinance activity produced increased origination fee income, it also increased actual and projected MSR’s prepayment speeds, resulting in a 19 percent increase, to $33.5 million in MSR’s amortization expense compared to $28.2 million in 2002. In addition, MSR’s impairment loss increased 12 percent to $47.8 million from $42.5 million due primarily to lower interest rates and changes in short-term prepayment expectations. The decrease in fair value of MSR’s was partially offset by an increase in the value of the derivative financial instruments used to hedge the change in fair value of the hedged MSR’s. MSR’s net hedge gains were $19.9 million in 2003 compared to $18.7 million in 2002 (both quarters represent a net increase in the value of hedges over the decrease in the value of hedged MSR’s).

The mortgage-servicing portfolio (which includes servicing for ourselves and others) totaled $67.6 billion on September 30, 2003, compared to $52.1 billion on September 30, 2002. The sustained growth of this asset in a period of historically high prepayment levels was made possible, in part, by the recapture of refinances from the existing servicing portfolio. Servicing fees increased 23 percent as a result of this increase in the servicing portfolio. However, total fees associated with mortgage servicing increased only 6 percent to $44.9 million in third quarter 2003 due to the unfavorable impact of early payoffs. Primarily as a result of the strong originations, there was an increase in capitalized MSR’s during third quarter 2003 of $212.4 million, net of sales (see Note 7 – Mortgage Servicing Rights for information summarizing changes in MSR’s).

Capital Markets

Capital markets fee income, the major component of revenue in the FTN Financial segment, is primarily generated from the purchase and sale of securities as both principal and agent and from investment banking, portfolio advisory and equity 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 interest rates.

For third quarter 2003, capital markets fee income decreased 1 percent to $122.9 million from $124.1 million in 2002. Revenues from fixed income products were lower, primarily due to the impact this quarter’s market volatility had on delaying customers’ purchasing decisions. These decreases were partially offset by higher revenues in lending through correspondent services and other revenues, which include investment banking, equity research and sales, and portfolio advisory services. As shown in Table 2, capital markets business with depository and non-depository customers decreased 4 percent and represented 43 percent and 24 percent of noninterest income, respectively. Revenue from other products and services increased 6 percent and contributed to 33 percent of noninterest income.

Table 2 – Capital Markets

	Three Months Ended September 30				Growth			Nine Months Ended September 30				Growth
(Dollars in millions)	2003		2002		Rate (%)			2003		2002		Rate (%)

Noninterest income:
Fixed income - depository	$	53.0	$	49.2		7.7	+	$	189.6	$	126.8		49.5	+
Fixed income - non-depository		29.8		37.2		19.9	–		110.0		88.9		23.7	+
Other products/services		40.1		37.7		6.4	+		121.6		106.2		14.5	+

Total capital markets noninterest income	$	122.9	$	124.1		1.0	–	$	421.2	$	321.9		30.8	+

Certain previously reported amounts have been reclassified to agree with current presentation.

Other Noninterest Income

Fee income from deposit transactions and cash management for third quarter 2003 increased 2 percent to $37.3 million compared to $36.8 million in 2002 due to growth in return check charges. Total noninterest income from insurance premiums and commissions increased 34 percent, to $14.4 million from $10.8 million in 2002, due in part to growth in revenues from Synaxis, a commercial insurance broker. Trust services and investment management fees increased 12 percent to $12.0 million from $10.8 million in 2002 due to an increase in the market value of managed portfolios which grew to $7.3 billion on September 30, 2003, from $6.9 billion on September 30, 2002. Third quarter 2003 fee income from merchant processing increased 18 percent to $15.3 million from $13.0 million in 2002 primarily due to portfolio acquisitions. Net security gains were $4.2 million in 2003 compared to net security losses of $.1 million in 2002. Included in this amount were net gains of $10.1 million from FTNC’s wholly-owned venture capital subsidiary, Hickory Venture Capital Corporation, primarily resulting from the sale of a venture capital investment and net losses of $5.9 million primarily resulting from sales of lower-yielding securities in the investment portfolio. All other income and commissions increased 5 percent to $37.3 million for third quarter 2003 from $35.5 million in 2002.

Going forward, other noninterest income should fluctuate primarily with the strength or weakness of the economy.

NET INTEREST INCOME

Net interest income increased 13 percent to $213.0 million from $188.7 million in third quarter 2002, reflecting a larger portfolio of mortgage warehouse loans, which grew 89 percent to $5.7 billion from $3.0 billion in third quarter 2002. Also impacting the growth in net interest income was an increase of 21 percent in the loan portfolio primarily due to growth in equity lending. These positive impacts on net interest income were largely offset by compression in the net interest margin resulting from the repricing of assets to lower yields while liability rates have become less sensitive to rate movements in this historically low interest rate environment and due to a change in the mix of the loan portfolio to a higher percentage of floating rate products. Investment yields have declined as accelerated prepayments of investments in mortgage-backed securities have resulted in increased amortization of premiums in addition to the effect of proceeds from these prepaid investments being reinvested at lower rates. The adoption of the effective provisions of Statement of Financial Accounting Standard (SFAS) No. 150, "Accounting for Certain Financial Instruments with characteristics of both Liabilities and Equity," in third quarter 2003 further compressed the consolidated net interest margin by two basis points. Historically, the expense associated with FTNC’s preferred stock of subsidiary was classified as noninterest expense, but upon adoption of SFAS No. 150 is now classified as interest expense on a prospective basis. The consolidated margin decreased to 3.66 percent in third quarter 2003 compared 4.34 percent for the same period in 2002. The activity levels and related funding for FTNC’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

custodial balances, and the level of MSR’s. 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 effectively eliminates net interest income on these positions. As a result, FTNC’s consolidated margin cannot be readily compared to that of other bank holding companies.

Table 3 – Net Interest Margin

	Three Months Ended September 30

	2003			2002

Consolidated Yields and Rates:
Investment securities		3.76	%		5.83	%
Loans, net of unearned		4.96			6.06
Other earning assets		4.55			5.50

Yields on earning assets		4.69			5.89

Interest bearing core deposits		1.30			1.90
CD’s over $100,000		1.22			2.09
Fed funds purchased and repos		.92			1.55
Commercial paper and other short-term borrowings		3.86			3.98
Long-term debt		2.61			4.41

Rates paid on interest-bearing liabilities		1.40			2.06

Net interest spread		3.29			3.83
Effect of interest-free sources		.32			.41
Loan fees		.05			.10

FTNC - NIM		3.66	%		4.34	%

Going forward, in the near-term, a recent decline in prepayment volume and a slowdown in the repricing of the commercial and retail loan portfolios coupled with steps management has taken to manage the interest rate sensitivity position of the company should result in a more stable net interest margin. Over the long-term, FTNC’s strategies to manage the interest rate sensitivity of the balance sheet position should allow the net interest margin to remain stable when interest rates rise.

NONINTEREST EXPENSE

Total noninterest expense for third quarter 2003 increased 29 percent to $541.9 million from $421.4 million in 2002. Expenses in First Horizon and FTN Financial fluctuate based on the type and level of activity. Going forward, FTN Financial and First Horizon will continue to influence the level of noninterest expense (see also Business Line Review for additional information). Based on the strong earnings experienced in recent quarters, noninterest expense also has been impacted by investments made to enhance FTNC’s ability to produce future earnings.

Personnel expense increased 35 percent to $349.0 million compared to $258.0 million in third quarter 2002, primarily due to higher activity levels in First Horizon. Occupancy expense increased 14 percent to $22.6 million compared to $19.9 million in 2002 primarily due to investment initiatives designed to curtail future costs by consolidating consumer-lending functions in First Horizon. Operations services increased 15 percent to $17.7 million from $15.4 million in 2002, primarily due to costs related to transitioning to a new information technology provider. Equipment rentals, depreciation and maintenance expenses decreased 7 percent to $17.2 million compared to $18.5 million in third quarter 2002, primarily due to losses on disposals of fixed assets in 2002, including those related to the Money Centers office closings. Communications and courier expense increased 20 percent to $15.9 million in 2003 from $13.4 million in 2002 primarily due to increased expenses related to higher activity levels in First Horizon. All other expense increased 24 percent to $117.4 million in 2003 from $94.6 million in 2002. Contributing to this increase were investments in initiatives to enhance future performance including costs associated with management’s development of an infrastructure designed to support business expansion. This included enhancements to business processes such as the design of systems and related workflow that provide added flexibility and increased management information support ($8.7 million). In tandem with these investments, management has implemented programs to curtail costs including restructuring debt ($5.8 million). Additionally, expenditures were made in increased advertising to enhance market perception and customer acquisition, especially in the Middle Tennessee marketplace. Also contributing to the increase in all other expense was the growth in expense associated with higher

activity levels in First Horizon. Partially offsetting these increases were declines in foreclosure losses. In 2002, all other expense includes a $13.0 million contribution to First Tennessee Foundation, a non-profit entity dedicated to supporting charitable causes in the diverse communities where FTNC does business.

PROVISION FOR LOAN LOSSES / ASSET QUALITY

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 a three-year moving average of historical loss experience adjusted for current events, trends and economic conditions, is used by management to determine the amount of provision to be recognized and to assess the adequacy of the loan loss allowance. The provision for loan losses decreased 19 percent in 2003 to $16.3 million from $20.2 million in 2002, which included a $7.4 million reduction in provision resulting from a change in risk profile due to the sale of Money Center loans. This decrease is primarily due to improvement in specific allocations related to large commercial credits, a change in the mix of the retail loan portfolio to loans with lower risk factors, and the effect of providing whole-loan insurance for a segment of the loan portfolio. Additional asset quality information is provided in Table 4 – Asset Quality Information and Table 5 – Charge-off Ratios.

Net charge-offs decreased to $14.0 million in 2003 compared to $23.8 million last year. Net charge-offs were impacted in third quarter 2003 by improvement in both the consumer and commercial loan portfolios and third quarter 2002 net charge-offs included $3.5 million related to the sale of the Money Center loans.

Nonperforming loans were $59.8 million on September 30, 2003, compared to $72.0 million on September 30, 2002. The ratio of nonperforming loans in the loan portfolio to total loans was .36 percent on September 30, 2003, compared to .66 percent on September 30, 2002. Nonperforming assets totaled $84.2 million on September 30, 2003, compared to $91.9 million on September 30, 2002. On September 30, 2003, FTNC had no concentrations of 10 percent or more of total loans in any single industry.

Going forward, the level of provision for loan losses should fluctuate primarily with the strength or weakness of the economy. Currently, economic forecasting trends are beginning to show positive signs of improvement. In addition, asset quality indicators could be affected by balance sheet strategies and shifts in loan mix to and from products with different risk/reward profiles. Actual results could differ because of several factors, including those presented in the Forward-Looking Statements section of the MD&A discussion.

Table 4 – Asset Quality Information

	September 30

(Dollars in thousands)	2003			2002

*Lending Activities:**
Nonperforming loans	$	47,102		$	53,691
Foreclosed real estate		13,029			7,799
Other assets		365			112

Total Lending Activities		60,496			61,602

*Mortgage Production Activities:**
Nonperforming loans - held for sale		11,658			—
Nonperforming loans - loan portfolio		1,037			18,289
Foreclosed real estate		10,960			11,983

Total Mortgage Production Activities		23,655			30,272

Total nonperforming assets	$	84,151		$	91,874

Loans and leases 30 to 89 days past due	$	74,252		$	101,526
Loans and leases 90 days past due		28,459			33,838
Potential problem assets**		122,381			132,866

Total loans, net of unearned income	$	13,349,056		$	10,922,628
Insured loans		(717,708	)		(449,106	)

Loans excluding insured loans	$	12,631,348		$	10,473,522

Off-balance sheet commitments***	$	4,637,593		$	2,538,424

	Third Quarter

	2003			2002

Allowance for loan losses:
Beginning balance on June 30	$	159,080		$	147,417
Provision for loan losses		16,355			20,180
Charge-offs		(17,913	)		(27,436	)
Loan recoveries		3,879			3,588

Ending balance on September 30	$	161,401		$	143,749

Reserve for off-balance sheet commitments		6,997			4,653

Total reserve for allowance for loan losses and off-balance sheet commitments	$	168,398		$	148,402

	September 30

	2003			2002

Allowance to total loans		1.21	%		1.32	%
Allowance to loans excluding insured loans		1.28			1.37
Allowance to nonperforming loans in the loan portfolio		335			200
Nonperforming assets to total loans, foreclosed real estate
and other assets (Lending Activities only)		.47			.59
Nonperforming assets to unpaid principal balance of
servicing portfolio (Mortgage Production Activities only)		.03			.06

*	Lending activities include all activities associated with the loan portfolio. Mortgage production includes activities associated with the mortgage warehouse. During fourth quarter 2002, certain nonperforming residential loans were transferred to held for sale.

**	Includes loans and leases 90 days past due.

***	This increase was primarily related to growth in home equity lines of credit.

Certain previously reported amounts have been adjusted to agree with current presentation.

Table 5 – Net Charge-off Ratios *

	Three Months Ended September 30

	2003			2002

Commercial		.34	%		.57	%
Retail real estate **		.32			.53
Other retail ***		1.41			4.25
Credit card receivables		4.21			3.89
Total net charge-offs		.43			.89

*	Table 6 provides information on the relative size of each loan portfolio.

**	Excludes $3.2 million in 2002 related to loans classified as nonperforming from the warehouse and the repurchase of loans originated and previously sold by, First Horizon Home Loans. Similar net charge-offs in third quarter 2003 were negligible.

***	Excluding the impact of the Money Center’s loan portfolio, which was divested in third quarter 2002, the other retail net charge-off ratio would have been 2.19 percent for third quarter 2002.

INCOME TAXES

The effective tax rate increased to 34.4 percent for third quarter 2003 compared to 31.3 percent for the same period in 2002. Third quarter 2002's expense reflected a $3.7 million benefit resulting from a change in the tax status of a subsidiary of First Tennessee Bank National Association which had a one-time effect on 2002 in the third and fourth quarters.

BALANCE SHEET REVIEW

Effective July 1, 2003, FTNC adopted the effective provisions of SFAS No. 150 and classified its mandatorily redeemable preferred stock of subsidiary ($45.1 million on July 1, 2003) as term borrowings.

Earning assets

Earning assets primarily consist of loans, loans held for sale and investment securities. For third quarter 2003, earning assets averaged $23.2 billion compared with $17.3 billion for third quarter 2002. The 34 percent increase in earning assets was primarily due to growth in the mortgage warehouse of 89 percent and a 21 percent increase in loans. Average total assets increased 33 percent to $27.4 billion from $20.6 billion in third quarter 2002.

Loans

Average total loans increased 21 percent for third quarter 2003 to $13.0 billion primarily due to an increase of 32 percent in retail loans principally from growth in equity lending. Commercial loans increased 11 percent to $6.1 billion. Additional loan information is provided in Table 6.

Table 6 – Average Loans

	Three Months Ended September 30

(Dollars in millions)	2003		Percent of Total			Growth Rate			2002		Percent of Total

Commercial:
Commercial, financial and industrial	$	4,442.5		34	%		12.7	%	$	3,941.9		36	%
Real estate commercial		1,025.9		8			(2.9	)		1,056.6		10
Real estate construction		652.1		5			29.2			504.8		5
Retail:
Real estate residential		5,951.2		46			37.9			4,316.8		40
Real estate construction		446.5		3			60.5			278.2		3
Other retail		259.1		2			(34.7	)		396.8		4
Credit card receivables		261.5		2			(.1	)		261.8		2

Total loans, net of unearned	$	13,038.8		100	%		21.2	%	$	10,756.9		100	%

Loans Held for Sale / Investment Securities

Loans held for sale, consisting primarily of mortgage loans, increased 90 percent to $5.7 billion in 2003 from $3.0 billion in 2002 due to the high level of originations in 2003. Average investment securities increased 9 percent to $2.6 billion from $2.4 billion in 2002.

Deposits / Other Sources of Funds

Since third quarter 2002, average core deposits increased 18 percent to $11.3 billion from $9.6 billion while interest-bearing core deposits remained relatively flat at $5.8 billion. Noninterest-bearing deposits increased 43 percent in third quarter 2003 to $5.5 billion from $3.8 billion due to growth in mortgage escrow accounts and a cash management product. Short-term purchased funds increased 40 percent to $10.5 billion from $7.5 billion for the previous year. Short-term purchased funds accounted for 45 percent of FTNC’s funding (core deposits plus purchased funds and term borrowings) for third quarter 2003 compared to 42 percent for third quarter 2002. Term borrowings increased to $1.6 billion for third quarter 2003 compared to $.7 billion for third quarter 2002. This increase reflects the issuance in second quarter 2003 of $250 million of unsecured, subordinated notes by FTBNA and $100 million of unsecured, subordinated notes by FTNC; The third quarter 2003 repurchase of $52.1 million of subordinated notes issued by FTNC; and the previously mentioned impact of adopting SFAS No. 150 (see Note 8 – Term Borrowings for additional information).

LIQUIDITY MANAGEMENT

The objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors, other creditors and borrowers. The Asset/Liability Committee, a committee consisting of senior management that meets regularly, 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. Core deposits are FTNC’s primary 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 third quarter 2003, the average total loan to core deposit ratio was 115 percent compared with 112 percent in third quarter 2002.

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 our customers. Substantially all of these mortgage loans are exchanged for securities, which are issued through GNMA for federally insured loans and FNMA and FHLMC for conventional loans, and then sold in the secondary markets. In most cases First Horizon Home Loans retains the right to service and receive servicing fees on these loans. After sale, these loans are not reflected on the Consolidated Statements of Condition. Each of these GSE’s has specific guidelines and criteria for sellers and servicers of loans backing their respective securities. During third quarter 2003, approximately

$14.6 billion of conventional and federally insured mortgage loans were securitized and sold by First Horizon Home Loans through these GSE’s. FTNC’s use of these GSE’s as an efficient outlet for mortgage loan production is an essential source of liquidity for FTNC and other participants in the housing industry.

Certain of First Horizon Home Loans’ originated loans do not conform to the requirements for sale or securitization by FNMA and FHLMC due to exceeding the maximum loan size of approximately $323 thousand (jumbo loans). First Horizon Home Loans pools and securitizes these jumbo loans in proprietary transactions. After securitization and sale, these loans are not reflected on the Consolidated Statements of Condition except as described hereafter. These transactions, which are conducted through single-purpose business trusts, are the most efficient way for First Horizon Home Loans and other participants in the housing industry to monetize these assets. In most cases First Horizon Home Loans retains the right to service and receive servicing fees on these loans and, on occasion, has retained senior principal-only certificates or interest-only strips that are classified on the Consolidated Statements of Condition as trading securities. On September 30, 2003, the outstanding principal amount of loans in these off-balance sheet business trusts was $5.9 billion. Given the significance of First Horizon Home Loans’ origination of non-conforming loans, the use of single-purpose business trusts to securitize these loans is an important source of liquidity to FTNC.

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 September 30, 2003, approximately $1.2 billion was available under the bank note program as a long-term (greater than one year) funding source. From September 30, 2002, to September 30, 2003, bank note borrowings increased $630.0 million in order to better match the increased liquidity needs related to strong loan growth.

In addition to these transactions, liquidity has been obtained in prior years through issuance of guaranteed preferred beneficial interests in FTNC’s junior subordinated debentures through a Delaware business trust wholly owned by FTNC ($100.0 million on September 30, 2003) and through preferred stock issued by an indirect wholly owned subsidiary of FTNC ($45.1 million on September 30, 2003). FTNC also evaluates alternative sources of funding, including loan sales, securitizations, syndications, and debt offerings in its management of liquidity.

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 debtholders. 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 Securities and Exchange Commission (SEC), FTNC may offer from time to time at its discretion, debt securities, and common and preferred stock aggregating up to $125 million. In addition, FTNC also has an effective capital securities shelf registration statement on file with the SEC under which up to $200 million of capital securities is available for issuance.

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.

Shareholders’ equity was $1.9 billion on September 30, 2003, an increase of 14 percent from $1.6 billion on September 30, 2002. The increase in capital was primarily due to the retention of net income after dividends. The change in capital was reduced by share repurchases, primarily related to stock option exercises, which totaled $169.4 million, or 4.0 million shares since September 30, 2002. Pursuant to board authority, FTNC plans to continue to 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. On October 16, 2001, the board of directors extended from June 30, 2002, until December 31, 2004, the non-stock option plan-related repurchases of up to 9.5 million shares, previously approved in October 2000. Repurchases will be made in the open market or through privately negotiated transactions and will be subject to market conditions, accumulation of excess equity and prudent capital management. Through September 30, 2003, 2.5 million shares have been repurchased pursuant to this authority.

Average shareholders’ equity increased 14 percent since third quarter 2002 to $1.8 billion from $1.6 billion, reflecting internal capital generation. The average shareholders’ equity to average assets ratio was 6.62 percent for third quarter 2003 compared to 7.74 percent for third quarter 2002. Unrealized market valuations had no material effect on the ratios during third quarter 2003.

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 September 30, 2003, FTNC and all of its banking affiliates had sufficient capital to qualify as well-capitalized institutions as shown in Note 9 – Regulatory Capital.

FINANCIAL SUMMARY (Comparison of first nine months of 2003 to first nine months of 2002)

For the first nine months of 2003, earnings totaled $355.7 million an increase of 30 percent from 273.1 million in 2002. Diluted earnings per share increased 30 percent to $2.72 from $2.09 in 2002. Return on average shareholders’ equity was 26.7 percent and return on average assets was 1.88 percent for the first nine months of 2003 compared to 23.7 percent and 1.83 percent, respectively, for the first nine months of 2002.

For the first nine months of 2003, total revenues were $2,198.4 million, an increase of 37 percent from $1,603.7 million in 2002. Noninterest expense increased 41 percent to $1,593.7 million for the nine-month period in 2003 compared to $1,128.7 million in 2002. A more detailed discussion by segment and by major line items follows. Unless otherwise noted, the reasons for the year-to-date trends were similar to the quarterly trend information already discussed.

BUSINESS LINE REVIEW

First Horizon

For the first nine months of 2003, pre-tax income increased 139 percent to $344.9 million from $144.1 million in 2002. Total revenues for the nine-month period were $1,105.1 million, an increase of 85 percent from $596.5 million in 2002. During this period, fees from the mortgage origination process increased $428.8 million reflecting growth in origination fees, in revenue recognized on loans sold, in the value recognized on loans in process, and higher net secondary marketing trading gains, which were influenced by the favorable interest rate environment experienced during the year. Net MSR’s hedging gains (including the effect of time decay and excluding SFAS 133 hedge ineffectiveness which is included in the Corporate segment – see also Further Interpretations of SFAS No. 133) increased $39.4 million compared to the first nine months of 2002. Amortization of capitalized MSR’s was $97.2 million compared to $87.8 million in 2002 and MSR’s impairment loss in 2003 increased to $162.6 million from $98.8 million in 2002. See Table 1 – Mortgage Banking for a breakout of noninterest income as well as mortgage banking origination volume and servicing portfolio levels. Total noninterest expense for the nine-month period increased 72 percent to $733.5 million from $427.5 million in 2002. Total noninterest expense increased primarily due to an 85 percent increase in personnel expense primarily due to increased origination volume. In addition, a $16.3 million loss was incurred related to the termination of a lease arrangement with a single purpose entity for First Horizon’s main office headquarters.

First Tennessee Banking Group

For the first nine months of 2003, pre-tax income decreased 41 percent to $108.6 million from $182.9 million. Total revenues for the nine-month period were $539.3 million, a decrease of 5 percent from $568.8 million in 2002. The decline was primarily due to reduced net interest income, which resulted from the compression in the net interest margin as balance sheet leveraging capacity which is normally used within First Tennessee Banking Group has been employed by the First Horizon Segment. On a year-to-date basis noninterest income was negatively impacted by trust and investment management fees, which declined as difficult equity market conditions experienced earlier in the year impacted results. Total noninterest expense for the nine-month period increased 13 percent to $387.5 million from $341.5 million in 2002. On a year-to-date basis expense growth was impacted by expenses associated with initiatives promoting expense efficiencies and enhancing revenue growth.

FTN Financial

For the first nine months of 2003, pre-tax income increased 21 percent to $141.0 million from $116.3 million in 2002. Total revenues for the nine-month period were $458.1 million, an increase of 30 percent from $352.6 million in 2002. On a year-to-date basis, revenue growth in fixed income products has been positively influenced by the increased liquidity that capital markets’ depository customers experienced during the first half of the year. Total noninterest expense for the nine-month period increased 34 percent to $315.7 million from $236.2 million in 2002 primarily due to an increase of 32 percent in personnel expense resulting from commissions and incentives associated with the higher fee income this year.

Transaction Processing

For the first nine months of 2003, pre-tax income decreased 24 percent to $13.1 million from $17.3 million in 2002. Total revenues were $92.6 million, an increase of 3 percent from $90.0 million in 2002. Noninterest expense increased 9 percent to $79.5 million from $72.7 million.

Corporate

For the first nine months of 2003, Corporate had a pre-tax loss of $73.2 million compared to a pre-tax loss of $53.9 million in 2002. 2003’s pre-tax loss included costs of $8.7 million associated with management’s initiatives to develop an infrastructure to support business expansion. This included enhancements to business processes such as the design of systems and workflow that provide added flexibility and increased management information support. In tandem with these investments, management has implemented programs to curtail costs including restructuring debt, which resulted in a loss of $5.8 million in third quarter. Additionally, expenditures of $2.8 million were made in a non-management performance award to build employee value. Also included is a $9.8 million contribution made to First Tennessee Foundation in second quarter and $12.4 million of expense related to modifications in and funding of an old deferred compensation plan, primarily for retirees in first quarter. In 2002, the pretax loss included a $13.0 million contribution to First Tennessee Foundation; $6.6 million of expenses related to a specific litigation matter; and a net loss of $5.8 million related to select components of SFAS 133 hedge ineffectiveness.

INCOME STATEMENT REVIEW

Noninterest income for the first nine months of 2003 was $1,592.2 million and contributed 72 percent to total revenue as compared to $1,053.5 million, or 66 percent of total revenue in 2002. Mortgage banking fee income increased 103 percent to $830.4 million from $410.0 million. During this period, fees from the mortgage origination process increased $428.8 million reflecting growth in origination fees, in revenue recognized on loans sold, in the value recognized on loans in process, and higher net secondary marketing trading gains, which were influenced by the favorable interest rate environment experienced during the year. Net MSR’s hedging gains (including the effect of time decay) increased $44.6 million compared to the first nine months of 2002. Amortization of capitalized MSR’s increased 11 percent to $97.2 million from $87.8 million in 2002 and MSR’s impairment loss in 2003 was $162.6 million compared to $98.8 million in 2002. See Table 1 – Mortgage Banking for a breakout of noninterest income as well as mortgage banking origination volume and servicing portfolio levels. Fee income from capital markets increased 31 percent to $421.2 million from $321.9 million for 2002. See Table 2 – Capital Markets for a breakout of noninterest income. For the first nine months of 2003, fee income in deposit transactions and cash management grew 3 percent to $108.7 million from $105.6 million. Insurance premiums and commissions increased 20 percent to $44.1 million from $36.7 million in 2002. Trust services and investment management fees decreased 10 percent to $34.2 million from $38.2 million as difficult equity market conditions experienced earlier in the year impacted results. Merchant processing fees increased 16 percent to $41.7 million from $35.8 million. Net security gains were $2.4 million compared to net security losses of $2.4 million in 2002. All other income and commissions increased 4 percent to $109.5 million from $105.4 million.

Net interest income increased 10 percent to $606.2 million from $550.2 million for the first nine months of 2002 while earning assets increased 28 percent to $21.5 billion from $16.7 billion in 2002. Year-to-date consolidated margin decreased to 3.77 percent in 2003 from 4.40 percent in 2002.

Total noninterest expense for the first nine months of 2003 increased 41 percent to $1,593.7 million from $1,128.7 million in 2002. Personnel expense increased $332.1 million or 48 percent in 2003 primarily due to higher activity levels in First Horizon and FTN Financial. This increase also includes $11.7 million of expense related to modifications in and funding of an old deferred compensation plan, primarily for retirees, and the $2.8 million non-management award. Occupancy expense increased 12 percent in 2003 to $62.0 million from $55.5 million in 2002 due to higher costs in First Horizon associated with the opening of new offices related to increased origination volumes, higher realty taxes and investment initiatives designed to curtail future costs by consolidating consumer-lending functions in First Horizon. Equipment rentals, depreciation and maintenance expense remained flat in 2003 at $51.0 million. Communications and courier expense increased 20 percent to $46.6 million in 2003 from $38.9 million in 2002 primarily due to the increased activity levels of First Horizon and FTN Financial. Operations services increased 18 percent to $52.8 million from $44.8 million in 2002 primarily due to business expansion and costs related to transitioning to a new information technology provider. Amortization of intangible assets increased 20 percent to $5.6 million from $4.6 million in 2002 due to acquisitions. All other expense increased 47 percent to $345.4 million in 2003 from $235.7 million. On a year-to-date basis, expenses associated with initiatives focused on benefiting future earnings, including professional fees, debt restructuring and marketing programs impacted this growth rate. Also contributing to the increase in all other expense was a loss of $16.3 million related to the termination of a lease arrangement with a single purpose entity for First Horizon’s main office headquarters, the growth in expense associated with higher activity levels in First Horizon, and the $9.8 million contribution to First Tennessee Foundation. Partially offsetting these increases was a decline in foreclosure losses. In 2002, all other expense includes a $13.0 million contribution to First Tennessee Foundation. The provision for loan losses increased 3 percent to $71.3 million from $69.4 million in the first nine months of 2002. The effective tax rate increased to 33.3 percent compared to 32.7 percent. See also Business Line Review for additional information.

BALANCE SHEET REVIEW

For the first nine months of 2003, total assets averaged $25.3 billion compared with $20.0 billion in 2002. Average loans grew 17 percent to $12.3 billion from $10.5 billion for the first nine months of 2002. Average commercial loans increased 8 percent to $5.9 billion compared to $5.5 billion in 2002. Retail loans increased 28 percent to $6.4 billion in 2003 compared to $5.0 billion in 2002. Average investment securities increased 4 percent to $2.5 billion from $2.4 billion for 2002. Loans held for sale, consisting primarily of mortgage loans, increased 99 percent for the nine-month period to $5.0 billion from $2.5 billion in 2002.

For the first nine months of 2003, average core deposits increased 15 percent to $10.8 billion from $9.4 billion. While interest-bearing core deposits remained flat at $5.8 billion, noninterest-bearing deposits increased 39 percent to $5.0 billion from $3.6 billion in 2002. Short-term purchased funds increased 33 percent for the nine-month period to $9.6 billion from $7.2 billion.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

FTNC’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations. The consolidated financial statements of FTNC are prepared in conformity with accounting principles generally accepted in the United States 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 FTNC’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 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. The expected present value of the anticipated cash flows received for servicing the loan, net of the estimated costs of servicing the loan, is capitalized as MSR’s on the Consolidated Statements of Condition. In certain cases, when First Horizon Home Loans sells mortgage loans in the secondary market, it retains an interest in the mortgage loans sold primarily through interest-only certificates. Interest-only certificates are financial assets, which represent rights to receive earnings from serviced assets that exceed contractually specified servicing fees.

MSR’s Estimated Fair Value

The fair value of MSR’s 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’s 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’s. 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’s. This model calculates estimated fair value of the MSR’s using numerous tranches of MSR’s, 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’s 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’s. 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’s 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’s.

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’s.

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’s.

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’s. 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’s, First Horizon Home Loans reviews all information obtained during price discovery to determine whether the estimated fair value of MSR’s is reasonable when compared to market information. On September 30, 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 overall assessment of the estimated fair value of MSR’s is submitted monthly for review by the First Horizon Risk Management Committee (FHRMC). The FHRMC is responsible for approving the critical assumptions used by management to determine the estimated fair value of First Horizon Home Loans’ MSR’s. Each quarter, FTNC’s MSR’s Committee reviews the original valuation, impairment, and the initial capitalization rates for newly originated MSR’s. In addition, the Executive Committee of FTNC’s board of directors reviews the initial capitalization rates and approves the calculation of amortization expense.

MSR’s are included on the Consolidated Statements of Condition, net of accumulated amortization. The changes in fair value of MSR’s are included as a component of Mortgage Banking – Noninterest Income on the Consolidated Statements of Income.

Hedging the Fair Value of MSR’s

In order to provide protection from a decline in the fair value of MSR’s, 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’s. On September 30, 2003 and 2002, hedged MSR’s approximated 94 percent and 84 percent of the total MSR’s portfolio, as measured on a dollar at risk basis.

In order to substantially hedge the change in fair value of the hedged MSR’s, First Horizon Home Loans generally maintains a coverage ratio (the ratio of the notional amount of derivatives to the carrying amount of the hedged MSR’s) approximating 100 percent of the hedged MSR’s 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’s, 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’s 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’s 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. On September 30, 2003 and 2002, the hedge coverage ratio was approximately 100 percent of the hedged MSR’s portfolio.

Certain components of the fair value of derivatives used to hedge certain MSR’s 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 Statements of Income.

The derivative financial instruments used to hedge the change in fair value of hedged MSR’s primarily include interest rate floors, interest rate swaps, swaptions and forward purchase contracts of mortgage backed securities (known as “to be announced” mortgage backed securities, or TBA’s).

First Horizon Home Loans generally experiences increased loan origination and production in periods of low interest rates, which result in the capitalization of new MSR’s associated with new production – this provides for a “natural hedge” in the mortgage banking business cycle. The “replenishment rate” during 2003 – meaning the ratio of new loans originated for every existing customer mortgage loan that prepays – was greater than one to one, which includes the retention of existing First Horizon Home Loans customers who prepay their mortgage loans. First Horizon Home Loans capitalized $212.4 million of MSR’s during third quarter 2003, thereby providing a significant offset to the impairment charges recognized related to MSR’s. This new production volume contributed significantly to the overall positive results experienced during 2003, despite significant prepayments and MSR’s impairment charges. 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’s 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’s 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’s attributed to other risks, including anticipated 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 rate 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’s, First Horizon Home Loans experiences volatility in current earnings due to the fact that these risks are not currently hedged.

Actual vs. Estimated MSR’s Critical Assumptions

As discussed above, the estimate of the cash flow components of net servicing income associated with MSR’s 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’s 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’s – particularly the estimate of prepayment speeds – can vary significantly from actual experience, resulting in the recognition of additional impairment charges in current earnings. Table 7 provides a summary of actual and estimated weighted average prepayment speeds and float income used in determining the estimated fair value of MSR’s for the quarters ended September 30, 2003 and 2002. Although the estimates of discount rates and cost to service assumptions used in determining the estimated fair value of MSR’s can vary from actual experience, such differences have not been material for the quarters ended September 30, 2003 and 2002.

Table 7 – MSR’s Critical Assumptions

	Three Months Ended September 30

(Dollars in millions)	2003			2002

Prepayment speeds
Actual		66.3	%		37.7	%
Estimated*		74.2			35.8
Float income
Actual		9.9			7.8
Estimated		8.2			8.6

*	Estimated prepayment speeds represent monthly average prepayment speed estimates for each of the periods presented.

During the quarter ended September 30, 2003 and 2002, impairment charges associated with MSR’s of $47.8 million and $42.5 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’s 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’s (see Table 1 – Mortgage Banking).

Interest-Only Certificates Fair Value

Consistent with MSR’s, 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’s, 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 certificates 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 interest rate floors, interest rate swaps, swaptions and TBA’s.

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 (IRLC) 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 during the short period a mortgage loan is in the warehouse.

An IRLC 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. IRLC’s generally have a term of up to 60-days before the closing of the loan. The IRLC, 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 IRLC at one lender and enter into a new lower IRLC 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, IRLC’s qualify as derivative financial instruments and, therefore, the changes in fair value of IRLC’s 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.

Like other participants in the mortgage banking business, First Horizon Home Loans relies primarily on an internal valuation model and one of several industry valuation techniques to estimate the fair value of IRLC’s and the mortgage warehouse. This model calculates the estimated fair value using tranches of mortgage loans that are determined to share similar key characteristics, including product type and interest rate bands. For purposes of determining the market interest rates for forward commitments to sell mortgage loans in the secondary market, First Horizon Home Loans obtains market interest rates from independent third parties, which represent actual trade activity in the secondary market. For purposes of determining the fair value of IRLC’s, management utilizes the median broker price information obtained in the secondary market, resulting in assets with estimated fair values of $50.8 million and $61.1 million on September 30, 2003 and 2002, respectively.

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 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 First Horizon Home Loans. 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’s 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 September 30, 2003 and 2002, approximately $3.8 billion and $4.7 billion of mortgage loans were outstanding which were sold under limited recourse arrangements. On September 30, 2003 and 2002, approximately $156.9 million and $200.3 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 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. On September 30, 2003 and 2002, the foreclosure reserve was $29.5 million and $37.8 million, respectively.

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. This critical accounting estimate applies primarily to the First Tennessee Banking Group, First Horizon and FTN Financial business segments.

FTNC’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; (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.

FTNC believes that the critical assumptions underlying the accounting estimate made by management include: (i) 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; (ii) borrower specific information made available to FTNC is current and accurate; (iii) the loan portfolio has been segmented properly and individual loans have similar credit risk characteristics and will behave similarly; (iv) all known significant loss events have been considered at the time of assessing the adequacy of the allowance for loan losses; (v) the economic factors utilized in the allowance for loan losses estimate are used as a measure of actual incurred losses; (vi) the period of history used for historical loss factors is indicative of the current environment; and (vii) the reserve rates, as well as other adjustments estimated by management for current events, trends, and 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.

In first quarter 2002, management allocated as a component of its allowance for loan losses a general reserve to reflect management’s estimate of additional probable losses that have been incurred but not specifically identified in the commercial portfolio. This reserve helped to minimize the risks related to the margin of imprecision inherent in the estimation of the allowance for loan losses and provided for other factors not considered in computation of reserve rates applied to loan pools. As of December 31, 2002, management decided to specifically quantify risks previously identified and provided for by the general reserve and adjust reserve rates accordingly to reserve for these items in the appropriate pools, and no longer separately presents a general reserve as a component of the allowance for loan losses. As a result of this decision, management has presented the prior period reserves to reflect this methodology change. Except as noted in this paragraph, there have been no significant changes to the methodology for the quarters ended September 30, 2003 and 2002.

Goodwill and Assessment of Impairment

FTNC’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. Upon adoption of the new accounting standards on January 1, 2002, goodwill is no longer amortized with a periodic charge to earnings. FTNC performed the initial impairment test as of January 1, 2002. Subsequent to the initial evaluation, the annual impairment test will be performed each year as of October 1. The valuations as of January 1, 2002, and October 1, 2002, 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 FTNC’s future performance and cash flows, as well as other prevailing market factors (interest rates, economic trends, etc.). FTNC’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 First Tennessee Banking

Group, First Horizon, FTN Financial, and Transaction Processing business segments. Reporting units have been defined as the same level as the operating business segments.

The impairment testing process conducted by FTNC begins by assigning net assets and goodwill to each reporting unit. FTNC 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. During first quarter 2002, FTNC engaged an independent valuation firm to compute the fair value estimates of each reporting unit as part of its initial impairment assessment as of January 1, 2002. 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. As of October 1, 2002, FTNC performed an internal analysis of each reporting unit to determine whether impairment existed at that date.

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 the 2002 budget and forecasted earnings of FTNC. 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.

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. FTNC 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.

OTHER

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

SFAS No. 133, which was adopted on January 1, 2001, establishes accounting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. It requires that changes in the instrument’s fair value be recognized currently in earnings (or other comprehensive income). If certain criteria are met, changes in the fair value of the asset or

liability being hedged are also recognized currently in earnings. The initial impact of adopting SFAS No. 133 resulted in a net transition adjustment that was recognized as the cumulative effect of a change in accounting principle.

Fair value is determined on the last business day of a reporting period. This point in time measurement of derivative fair values and the related hedged item fair values may be well suited to the measurement of hedge effectiveness, as well as reported earnings, when hedge time horizons are short. The same measurement however may not consistently reflect the effectiveness of longer-term hedges and, in FTNC’s view, can distort short-term measures of reported earnings. FTNC uses a combination of derivative financial instruments to hedge certain components of the interest rate risk associated with its portfolio of capitalized MSR’s, which currently have an average life of approximately nine years. Over this long-term time horizon this combination of derivatives can be effective in significantly mitigating the effects of interest rate changes on the value of the servicing portfolio. However, these derivative financial instruments can and do demonstrate significant price volatility depending upon prevailing conditions in the financial markets. If a reporting period ends during a period of volatile financial market conditions, the effect of such point in time conditions on reported earnings does not reflect the underlying economics of the transactions or the true value of the hedges to FTNC over their estimated lives. The fact that the fair value of a particular derivative is unusually low or high on the last day of the reporting period is meaningful in evaluating performance during the period only if FTNC sells the derivative within the period of time before fair value changes and does not replace the hedge coverage with another derivative. FTNC believes the effect of such volatility on short-term measures of earnings is not indicative of the expected long-term performance of this hedging practice.

FTNC believes a review of the trend, if any, of the servicing rights net value changes under SFAS No. 133 over a long period of time, preferably over an interest rate business cycle, is a more meaningful measure to determine the effectiveness of hedging strategies.

For its internal evaluation of performance, for an applicable period, FTNC reclassifies select components of SFAS 133 hedge ineffectiveness from the reported net income of the First Horizon segment to the Corporate segment. The internal evaluation of long-term performance will include the long-term trend, if any, in these select components of SFAS 133 hedge ineffectiveness.

FURTHER INTERPRETATIONS OF SFAS NO. 133

Certain provisions of SFAS No. 133 continue to undergo significant discussion and debate by the Financial Accounting Standards Board (FASB). One such potential issue involves the determination of the fair value of mortgage banking IRLC’s accounted for as derivatives and if IRLC’s can be reported as assets. Another such potential issue involves the assessment of hedge effectiveness (and its impact on qualifying for hedge accounting) when hedging fair value changes of prepayable assets due to changes in the benchmark interest rate. As the FASB continues to deliberate interpretation of the new rules, the potential exists for a difference between FTNC’s interpretation and that of the FASB, the effects of which cannot presently be anticipated but failure to obtain hedge accounting treatment could be significant to results of operations.

ACCOUNTING CHANGES

On July 1, 2003, FTNC adopted certain provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” which requires certain financial instruments with both liability and equity characteristics to be classified as liabilities on the Statement of Condition. Upon adoption of this statement, FTNC classified its mandatorily redeemable preferred stock of subsidiary ($45.1 million on July 1, 2003) in “Term borrowings” (See Note 8 – 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. FASB Staff Position (FSP) No. FAS 150-3, issued November 7, 2003, deferred indefinitely the effective date for applying the provisions of SFAS No. 150 to certain mandatorily redeemable noncontrolling interests. As a result of this deferral, FTNC did not classify its guaranteed preferred beneficial interests in FTNC's junior subordinated debentures ($100 million on September 30, 2003) as liabilities. In addition, the related distributions on this instrument ($8.0 million annually) remain classified as noninterest expense.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The information called for by this Item is contained in (a) Management’s Discussion and Analysis of Results of Operations and Financial Condition in Item 2 of this report at pages 22 through 44, (b) the Section entitled “Risk Management-Interest Rate Risk Management” of the Management’s Discussion and Analysis of Results of Operations and Financial Condition section of the Financial Appendix to First Tennessee’s 2003 Proxy Statement at pages F-38 through F-42 and (c) the “Interest Rate Risk Management” subsection of Note 1 to FTNC’s consolidated financial statements at pages F-65 through F-66 of the Financial Appendix to FTNC’s 2003 Proxy Statement, and which information is incorporated herein by reference.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. FTNC’s management, with the participation of FTNC’s chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of FTNC’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and chief financial officer have concluded that FTNC’s disclosure controls and procedures are effective to ensure that material information relating to FTNC and FTNC’s consolidated subsidiaries is made known to such officers by others within these entities, particularly during the period this quarterly report was prepared, in order to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting. There have not been any changes in FTNC’s internal control over financial reporting during FTNC’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, FTNC’s internal control over financial reporting.

Part II.

OTHER INFORMATION

Items 1, 2, 3, 4 and 5

As of the end of the third quarter 2003, the answers to Items 1, 2, 3, 4 and 5 were either inapplicable or negative, and therefore, these items are omitted.

Item 6 Exhibits and Reports on Form 8-K.

(a) Exhibits.

Exhibit No.

Description

3(ii)

Bylaws of the Corporation, as amended and restated

Instruments defining the rights of security holders, including indentures*

**10(g)

Survivor Benefits Plan, as amended and restated

**10(i)

Amended and restated Pension Restoration Plan, as amended and restated

**10(w)

First Tennessee Non-Qualified Deferred Compensation Plan, incorporated herein by reference to Exhibit 4.3 to the Corporation’s Registration Statement on Form S-8 (No. 333-108738), filed 9/12/03.

31(a)

Rule 13a-14(a) Certifications of CEO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)

31(b)

Rule 13a-14(a) Certifications of CFO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)

32(a)

Rule 1350 Certifications of CEO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

32(b)

Rule 1350 Certifications of CFO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

99(a)

The “Risk Management-Interest Rate Risk Management” subsection of the Management’s Discussion and Analysis of Results of Operations and Financial Condition section and the “Interest Rate Risk Management” subsection of Note 1 to FTNC’s consolidated financial statements, contained, respectively, at pages F-38 through F-42 and pages F-65 through F-66, in the Financial Appendix to FTNC’s 2003 Proxy Statement furnished to shareholders in connection with the Annual Meeting of Shareholders on April 15, 2003, filed March 18, 2003, and incorporated herein by reference.

*	The Corporation agrees to furnish copies of the instruments, including indentures, defining the rights of the holders of the long-term debt of the Corporation and its consolidated subsidiaries to the Securities and Exchange Commission upon request.

**	This is a management contract or compensatory plan required to be filed as an exhibit.

(b) Reports on Form 8-K.

The following reports on Form 8-K, with the Date of Report as indicated, were filed during third quarter 2003:

1.	7-17-03 — Item 9: earnings release for second quarter 2003 was furnished.

2.	7-30-03 — Item 5: announcement of tender offer to purchase the Corporation’s 6.75% November 2005 subordinated notes.

SIGNATURES

Pursuant to the requirements 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 TENNESSEE NATIONAL CORPORATION
(Registrant)

DATE: 11/14/03

By: /s/ James F. Keen
       ———————————
  James F. Keen
  Executive Vice President, Chief
  Financial Officer and Corporate
  Controller (Duly Authorized Officer
  and Principal Financial Officer)

EXHIBIT INDEX

Exhibit No.

Description

3(ii)

Bylaws of the Corporation, as amended and restated

Instruments defining the rights of security holders, including indentures*

**10(g)

Survivor Benefits Plan, as amended and restated

**10(i)

Amended and restated Pension Restoration Plan, as amended and restated

**10(w)

First Tennessee Non-Qualified Deferred Compensation Plan, incorporated herein by reference to Exhibit 4.3 to the Corporation’s Registration Statement on Form S-8 (No. 333-108738), filed 9/12/03.

31(a)

Rule 13a-14(a) Certifications of CEO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)

31(b)

Rule 13a-14(a) Certifications of CFO (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)

32(a)

Rule 1350 Certifications of CEO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

32(b)

Rule 1350 Certifications of CFO (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

99(a)

*	The Corporation agrees to furnish copies of the instruments, including indentures, defining the rights of the holders of the long term debt of the Corporation and its consolidated subsidiaries to the Securities and Exchange Commission upon request.

**	This is a management contract or compensatory plan required to be filed as an exhibit.