FINANCIAL INFORMATION AND DISCUSSION
TABLE OF CONTENTS

SELECTED FINANCIAL AND OPERATING DATA

 * Cumulative adjustment reflects the effect of changes in accounting principles related to derivatives.

** Net of unearned income.

See accompanying notes to consolidated financial statements.

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

FIRST HORIZON NATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

GENERAL INFORMATION

First Horizon National Corporation (FHN) is a nationwide, financial services institution founded in 1864. From a small community bank, FHN has grown to be one of the top 30 largest bank holding companies in the United States in terms of asset size and market capitalization.

Approximately 12,400 employees provide a broad array of financial services to individual and business customers through hundreds of offices located in 47 states.

FHN has been recognized as one of the nation's best employers by AARP, Working Mother, Business Week and Fortune magazines. FHN also was named one of the nation's 100 best corporate citizens by Business Ethics magazine.

FHN provides a broad array of financial services to its customers through three national business segments. The combined strengths of these businesses create an extensive range of financial products and services. In addition, the corporate segment provides essential support within the corporation.

In 2004 FHN adapted its segments to reflect the common activities and operations of aggregated business segments across the various delivery channels. Prior periods have been restated for comparability. The new segments are:

      • Retail/Commercial Banking offers financial products and services, including traditional lending and deposit taking, to retail and commercial customers. Additionally, the retail/commercial bank provides investments, insurance, financial planning, trust services and asset management, credit card, cash management, merchant services, check clearing, and correspondent services. Retail/Commercial Banking now includes Equity Lending, and second-lien mortgage and construction loans originated by First Horizon Home Loans, which were previously in the mortgage segment, and correspondent services, which was previously in Capital Markets.

      • Mortgage Banking helps provide home ownership through First Horizon Home Loans, which operates offices in more than 40 states and is one of the top 15 mortgage servicers and top 20 originators of mortgage loans to consumers. This segment consists of core mortgage banking elements including originations and servicing and the associated ancillary revenues related to these businesses.

      • Capital Markets provides a broad spectrum of financial services for the investment and banking communities through the integration of capital markets securities activities, research and investment banking.

      • Corporate consists of unallocated corporate expenses, expense on certain subordinated debt issuances and certain preferred stock, bank-owned life insurance, unallocated interest income associated with excess capital, funds management and venture capital.

For the purpose of this management discussion and analysis (MD&A), earning assets have been expressed as averages, and loans have been disclosed net of unearned income. The following financial discussion should be read with the accompanying consolidated financial statements and notes. A glossary is included at the end of the MD&A to assist with terminology.

FORWARD-LOOKING STATEMENTS

Management's discussion and analysis may contain forward-looking statements with respect to FHN's beliefs, plans, goals, expectations, and estimates. Forward-looking statements are statements that are not a representation of historical information but rather are related to future operations, strategies, financial results or other developments. The words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “should”, “is likely”, “will”, “going forward”, and other expressions that indicate future events and trends identify forward-looking statements. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, operational, economic and competitive uncertainties and contingencies, many of which are beyond a company's control, and many of which, with respect to future business decisions and actions (including acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors, general and local economic and business conditions; expectations of and actual timing and amount of interest rate movements (which can have a significant impact on a financial services institution); market and monetary fluctuations; inflation or deflation; the financial condition of borrowers and other counterparties; competition within and outside the financial services industry; geo-political developments including possible terrorist activity; effectiveness of FHN's hedging practices; technology; and new products and services in the industries in which FHN operates. Other factors are those inherent in originating and servicing loans including prepayment risks, pricing concessions, fluctuation in U.S. housing prices, fluctuation of collateral values, and changes in customer profiles. Additionally, the actions of the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and other regulators; regulatory and judicial proceedings and changes in laws and regulations applicable to FHN; and FHN's success in executing its business plans and strategies and managing the risks involved in the foregoing, could cause actual results to differ. FHN assumes no obligation to update any forward-looking statements that are made from time to time.

FINANCIAL SUMMARY

      • Retail/Commercial Banking pre-tax earnings grew 68 percent to $412.6 million

      • Loans grew 22 percent and asset quality continued to improve

      • Mortgage Banking origination revenue reflected a substantially lower level of industry-wide refinance activity

      • Capital Markets' fixed revenues declined as the demand for fixed income securities lessened

      • Corporate segment earnings improved due to securities gains and reduced discretionary spending

      • Return on equity was 23.9 percent and return on assets was 1.66 percent

FHN's diverse business mix, while subject to short-term favorable and unfavorable volatility in earnings, provides a balance that has produced at a level consistent with high performing growth and maintained a return on equity at industry-leading levels. The benefit of this diverse and balanced business mix was evidenced through the execution of FHN's strategies in 2004's difficult economic environment.

Generally, FHN's performance in 2004 was negatively impacted by the unfavorable interest rate environment experienced during the second half of the year. Mortgage banking and capital markets were unfavorably affected while retail/commercial banking achieved substantial growth, rebalancing FHN's business mix. In addition, the adoption of SAB No. 105, which prohibited the inclusion of estimated servicing cash flows within the valuation of interest rate lock commitments, lowered pre-tax earnings by $8.4 million and diluted earnings per share by $0.04. FHN previously included a portion of the value of the associated servicing cash flows when recognizing loan commitments at inception and

throughout their lives. This impact was a one-time accounting change and does not affect the ongoing economic value of this business.

The performance of retail/commercial banking, which represented 62 percent of pre-tax earnings for 2004 compared to 34 percent in 2003, was positively impacted by national expansion strategies. These strategies focus on cross-selling banking products to existing customers within FHN's national markets. During 2004, FHN further expanded First Horizon Bank in northern Virginia and plans to replicate this strategy in 2005 in two additional markets - Texas and Georgia. Retail/commercial banking continues to benefit from cross-selling within the national customer base as an increasing number of customers have purchased multiple financial services.

Retail/commercial banking benefited from strong growth in retail lending, which was particularly successful across FHN's national footprint, and from an improved market for commercial loan growth. Also favorably impacting retail/commercial banking were improved asset quality, which resulted in a lower provision, and reduced discretionary spending in 2004. Deposit growth, achieved through strategies focused on convenient hours, free checking and targeted financial center expansions positively impacted retail/commercial banking's performance.

Following a record year in 2003, capital markets experienced lower fixed income securities sales in 2004 due to uncertainties within the investment community regarding interest rates and other economic factors. However, the 2005 acquisition of the fixed income division of Spear, Leeds & Kellogg (SLK) will provide an enhanced sales force, product offerings and execution capabilities for FTN Financial and is expected to be accretive to FHN's earnings per share during 2005.

Mortgage banking also felt negative effects from the interest rate environment during 2004 as origination revenue declined due to a sharp drop in refinancings from 2003's record levels and from lower margins on loans sold due to competitive pricing pressures. However, net servicing revenues improved as the servicing portfolio grew 26 percent and refinance activity declined.

Earnings for 2004 were $454.4 million, or $3.54 diluted earnings per share. This compares to 2003 earnings of $473.3 million, or $3.62 diluted earnings per share. Return on average shareholders' equity and return on average assets for 2004 were 23.9 percent and 1.66 percent, respectively, and were 26.3 percent and 1.88 percent in 2003. Total assets were $29.8 billion and shareholders' equity was $2.0 billion on December 31, 2004, compared to $24.5 billion and $1.9 billion, respectively, on December 31, 2003.

BUSINESS LINE REVIEW

Retail/Commercial Banking

Pre-tax earnings grew from $245.6 million to $412.6 million, or 68 percent over 2003. This growth resulted from national expansion initiatives, improved asset quality, fee income growth and efficiency improvements. Total loan growth of 21 percent consisted of 30 percent growth in retail loans and 12 percent growth in commercial loans. Retail loan growth primarily came from leveraging FHN's national platform and commercial loan growth resulted from the national expansion of single-family residential construction lending and improvements in general economic conditions. Deposit account balances grew 3 percent compared to 2003; however, that growth was negatively impacted by the divestiture of First National Bank of Springdale (Springdale), which had total deposits of approximately $300 million in 2003. As a result of this product growth, net interest income related to retail/commercial banking activities grew 17 percent over 2003.

Noninterest income grew 9 percent to $483.1 million and represented 41 percent of revenues. Contributing to this growth were net gains of $23.1 million in 2004 from the securitization of home equity lines of credit (HELOC) and second-lien mortgages as FHN continues to utilize securitizations to manage liquidity and fund new loan growth. Merchant processing fees grew 30 percent due to

transaction growth from new and existing clients. Included in 2004's performance are $7.0 million of divestiture gains compared to $22.5 million of divestiture gains in 2003 as FHN continues to divest non-strategic activities.

Net charge-offs fell to 27 basis points in 2004 from 54 basis points in 2003, reflecting the reduced risk in the loan portfolio due to a change in the loan mix and further economic recovery, which resulted in a $36.7 million reduction in provision for loan losses. Noninterest expense increased $12.0 million primarily due to development in the national markets including equity lending, single-family residential construction lending and expansion in Middle Tennessee and Northern Virginia. The efficiency ratio for retail/commercial banking has consistently shown improvement over the last five quarters as discretionary spending has been reduced and 2003's investments and operational improvements continue to produce returns.

Mortgage Banking

Pre-tax earnings decreased from $387.0 million in 2003 to $180.1 million in 2004, primarily driven by declining originations as refinancing activity fell and competitive pricing pressures increased. Partially offsetting the decline in originations was improvement in servicing profitability due to reduced impairment expense and growth in the servicing portfolio coupled with a more efficient servicing operation.

Mortgage origination volume fell $16.6 billion, or 35 percent to $30.5 billion, as refinancing volume declined from 72 percent of total originations in 2003 to 45 percent in 2004. In addition, loans delivered during the period decreased by $20.2 billion. This decrease, combined with other market factors, reduced origination revenue by approximately $180 million. Additionally, margins on loans sold decreased as competitive pressures in the market unfavorably impacted origination revenue by approximately $82 million. Overall, origination revenues decreased $262.4 million. Although total origination volumes were down, the large reduction in refinancings was partially offset by improved home purchase originations. Home purchase originations increased 26 percent as the focus of the sales force shifted from refinance to purchase business and growth in the sales force continued.

Net servicing revenues improved $75.6 million from $8.2 million in 2003 to $83.8 million in 2004. Total fees associated with mortgage servicing increased 23 percent to $230.4 million due to growth in the servicing portfolio and the favorable impact of lower prepayment activity. The mortgage-servicing portfolio (which includes servicing for ourselves and others) was $86.6 billion on December 31, 2004, an increase of 26 percent from $68.9 billion on December 31, 2003. This increase includes approximately $11 billion of loans for which the servicing rights were acquired in 2004. MSR net hedge gains decreased 58 percent to $47.9 million from $115.1 million; however, MSR impairment decreased $121.3 million, triggered by the impact that rising interest rates had on mortgage prepayments in the servicing portfolio.

Noninterest expense improved $27.8 million reflecting the overall decline in activity levels. Additionally, as a result of reduced refinancing activity and improvements in processes and technology, productivity improved resulting in a 16 percent reduction of servicing costs per loan compared to year-end 2003.

Capital Markets

Pre-tax earnings declined from $154.6 million in 2003 to $83.2 million in 2004 primarily due to a reduction in fixed income securities sales, net of a related decline in commissions and incentives. Significant uncertainties within the investment community regarding interest rates and other economic factors have caused fixed income investors to delay their purchases. In addition, 2003 was favorably impacted by higher cash flows from the prepayments of mortgage-backed products and agency calls. As a result, revenues from fixed income sales to depository and non-depository investors fell $133.6 million. Revenues from other fee sources include fee income from activities such as investment banking, equity research, portfolio advisory and the sale of various financial products. These revenues

decreased 16 percent from 2003's revenues primarily as a result of lower revenue in structured finance transactions.

Noninterest expense decreased 24 percent or $95.9 million, primarily due to lower personnel expense, reflecting the decline in commissions and incentives.

Corporate

The Corporate segment improved from a $68.2 million pre-tax loss in 2003 to a $9.1 million pre-tax loss in 2004. Reduced discretionary spending helped lower expenses by $47.6 million to $43.8 million. Net security gains for 2004 include $18.4 million of gains from sales of investment securities compared to net security losses of $6.9 million in 2003. Net gains from equity investments of $5.3 million were realized in 2004 primarily due to the liquidation of a holding company investment. This compares to net gains of $8.5 million in 2003 primarily resulting from the sale of a venture capital investment. In addition, a loss of $3.9 million was recognized in 2004 related to other-than-temporary impairment of an investment in Freddie Mac equity securities. Net interest income decreased $9.3 million since 2003 as a result of the temporary reduction in the investment portfolio, the paydown of REMIC securities in 2003, and a decline in the earnings credit on allocated capital.

INCOME STATEMENTS ANALYSIS – 2004 COMPARED TO 2003

Total revenue decreased 10 percent to $2,219.4 million from $2,473.4 million in 2003, with a 6 percent increase in net interest income and an 18 percent decrease in noninterest income. Paralleling the decrease in total revenue, noninterest expense decreased 10 percent to $1,504.3 million from $1,667.7 million in 2003.

NET INTEREST INCOME

During 2004 net interest income increased 6 percent to $856.3 million from $805.8 million in 2003. Net interest income was positively impacted by growth in the retail and commercial lending portfolios, as loans now comprise 65 percent of the earning asset base compared to 59 percent in 2003. Some of this positive impact was offset by the divestiture of Springdale on December 31, 2003, which contributed $10.5 million to net interest income in 2003. In addition, the adoption of SFAS No. 150 on July 1, 2003, resulted in FHN classifying its mandatorily redeemable preferred stock of subsidiary to term borrowings. As required by SFAS No. 150, the distributions on these instruments have been classified as interest expense on a prospective basis resulting in increased interest expense in 2004. The December 31, 2003, adoption of FIN 46 which required the deconsolidation of First Tennessee Capital I (see Note 11—Guaranteed Preferred Beneficial Interests in First Horizon's Junior Subordinated Debentures) and consequently the guaranteed preferred securities also had a negative impact on net interest income in 2004, as FHN's junior subordinated debentures are no longer eliminated and the related expense is also no longer eliminated in consolidation and is classified as interest expense in 2004. The combined impact of adopting these two standards on a prospective basis was to increase interest expense by $10.4 million in 2004. An increase in funding costs as noninterest-bearing deposits decreased 9 percent, primarily due to lower escrow balances in mortgage banking also had a negative impact on net interest income in 2004.

The net interest margin was 3.62 percent for 2004 compared to 3.78 percent for 2003. The net interest margin compressed 16 basis points as total funding costs increased 11 basis points including the impact of the previously mentioned accounting changes and the yield on average earning assets decreased two basis points. The lower yield on earning assets reflects the repricing of assets to lower yields that occurred throughout 2003 as accelerated prepayments were reinvested at lower rates. Much of this negative impact began to diminish in the latter part of 2004 as rates began to rise and the yield on loans improved due to the change in the mix of the loan portfolio to an increased percentage of floating rate products that also occurred during 2003.

The activity levels and related funding for FHN's mortgage production and servicing and capital markets activities affect the margin. These activities typically produce different margins than traditional banking activities. Mortgage production and servicing activities can affect the overall margin based on a number of factors, including the size of the mortgage warehouse, the time it takes to deliver loans into the secondary market, the amount of escrow balances, and the level of mortgage servicing rights (MSR). Capital markets activities tend to compress the margin because of its strategy to reduce market risk by hedging its inventory in the cash markets, which reduces the term and accordingly the interest income earned on these positions. As a result, FHN's consolidated margin cannot be readily compared to that of other bank holding companies. Table 1 details the computation of the net interest margin for FHN for the last three years.

Table 1 – Net Interest Margin

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

In the near-term, a modest compression of the net interest margin is expected as an increase in short-term rates will negatively impact the spread on the mortgage warehouse. In addition, the compression of the margin attributable to capital markets activities will increase due to the acquisition of SLK. Over the long term, FHN's strategies to manage the interest rate sensitivity of the balance sheet position are designed to allow the net interest margin to improve in a higher interest rate environment.

Table 2 shows how the changes in yields or rates and average balances compared to the prior year affected net interest income.

Table 2 - Analysis of Changes in Net Interest Income

 *  The changes in interest due to both rate and volume have been allocated to change due to rate and change due to volume in proportion to the absolute amounts of the changes in each.

**  Variances are computed on a line-by-line basis and are non-additive.

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

NONINTEREST INCOME

Noninterest income provides the majority of FHN's revenue and contributed 61 percent to total revenue in 2004 compared with 67 percent in 2003. Noninterest income decreased $304.5 million due to declines of $204.7 million in mortgage banking and $162.4 million in capital markets, while all other categories of noninterest income increased $62.6 million primarily due to growth in merchant processing revenues and gains from asset securitizations, which is comprised of the securitization of HELOC and second lien mortgages, included in all other income. Table 3 provides six years of detailed information concerning FHN's noninterest income. The following discussion provides additional information on various line items reported in the table.

Table 3 - Analysis of Noninterest Income

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

NM - Due to the variable nature of these items the growth rate is considered to be not meaningful.

Mortgage Banking

First Horizon Home Loans, an indirect subsidiary of FHN, offers residential mortgage banking products and services to customers, which consist primarily of the origination or purchase of single-family residential mortgage loans for sale to secondary market investors and the subsequent servicing of those loans. First Horizon Home Loans originates mortgage loans through its retail and wholesale operations and also purchases mortgage loans from third-party mortgage bankers (correspondent brokers). Table 4 provides a summary of First Horizon Home Loans' production/origination of mortgage loans during 2004, 2003 and 2002.

Table 4 - Production/Origination of Mortgage Loans

Origination income includes origination fees, net of costs, gains or losses recognized on loans sold including the capitalized net present value of the MSR, and the value recognized on loans in process. Origination fees, net of costs (including incentives and other direct costs), are deferred and included in the basis of the loans in calculating gains and losses upon sale. Gains or losses from the sale of loans are recognized at the time a mortgage loan is sold into the secondary market. A portion of the gain or loss is recognized at the time an interest rate lock commitment is made to the customer. In second quarter 2004, FHN adopted SAB No. 105, which prohibited the inclusion of estimated servicing cash flows within the valuation of interest rate lock commitments under SFAS No. 133. Previously, FHN included a portion of the value of the associated servicing cash flows when recognizing loan commitments at inception and throughout their lives. The adoption of SAB No. 105, which lowered earnings by $8.4 million, was a one-time change and does not affect the ongoing economic value of this business.

Servicing income includes servicing fees, MSR net hedge gains/(losses), which reflect the effects of hedging MSR including servicing rights net value changes, amortization and impairment of MSR, and gains/(losses) related to market value adjustments on retained interests classified as mortgage trading securities, primarily interest-only strips, and associated hedges. First Horizon Home Loans employs hedging strategies intended to counter changes in the value of MSR and other retained interests due to changing interest rate environments (see Critical Accounting Policies). Other income includes income from the GNMA repurchase program, gains from a strategic risk management portfolio sale, and other miscellaneous items. As shown in Table 5, total mortgage banking noninterest income decreased 32 percent in 2004.

Table 5 - Mortgage Banking

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

In 2004, origination income was $341.5 million compared to $602.8 million in 2003, primarily reflecting the decrease in refinance origination volume and lower margins related to competitive pricing pressures and a change in the relative mix of originations from a higher percentage of fixed rate to a

higher percentage of adjustable-rate mortgages. Total mortgage first-lien originations decreased 35 percent to $30.5 billion compared to $47.1 billion in 2003. Refinance activity decreased to 45 percent of total originations in 2004 compared to 72 percent in 2003. Given the industry-wide decline in refinance volume, the decrease in production volume was expected. However, home-purchase related originations grew 26 percent in 2004 as the focus of the sales force shifted from refinance to purchase business and growth in the sales force continued. Loans securitized and sold into the secondary market decreased 41 percent to $29.3 billion as origination volume decreased.

The mortgage-servicing portfolio was $86.6 billion on December 31, 2004, compared to $68.9 billion on December 31, 2003. The portfolio on December 31, 2004, includes approximately $11 billion of loans for which the servicing rights were acquired in 2004. Servicing fees increased $43.6 million or 23 percent primarily due to growth in the servicing portfolio. Amortization expense increased $20.4 million or 15 percent also as a result of the growth in the servicing portfolio. Total servicing income increased $75.6 million due to the positive impact of the servicing fee growth combined with a decline in impairment costs of $121.3 million, which resulted from the impact that rising interest rates had on mortgage prepayments in the servicing portfolio. These positive impacts were partially offset by the higher amortization costs and lower net hedge gains, which fell $67.2 million reflecting the impacts of interest rate volatility, the flattening of the yield curve and higher costs associated with increased use of option-based hedge instruments.

Other mortgage income decreased 50 percent to $19.5 million for 2004 compared with $38.5 million in 2003 primarily due to a decline in noninterest income from the GNMA repurchase program under which First Horizon Home Loans repurchases delinquent loans to reduce future foreclosure costs. Much of this decline resulted from a reclassification at the end of 2003 of loans repurchased prior to foreclosure to loans held for sale from other assets and the associated yield on those assets being included in net interest income in 2004.

Going forward, revenue from refinance loan originations will depend on mortgage interest rates. Over time, an increase in rates should reduce origination fees and profit from the sale of loans, but should also reduce MSR impairment losses, while a decrease in rates should increase this net revenue. Home-purchase related originations should reflect the relative strength or weakness of the economy and the growth of the sales force. Actual results could differ because of several factors, including those presented in the Forward-Looking Statements section of the MD&A discussion.

Capital Markets

Capital markets noninterest income, the major component of revenue in the Capital Markets segment, is primarily generated from the purchase and sale of securities as both principal and agent, and from investment banking, portfolio advisory and research services. Inventory positions are limited to the procurement of securities solely for distribution to customers by the sales staff. Inventory is hedged to protect against movements in fair value due to changes in interest rates.

Capital markets noninterest income decreased 30 percent to $376.5 million from $538.9 million in 2003, primarily due to a reduction in fixed income securities sales. Uncertainties within the investment community regarding interest rates and other economic factors have caused fixed income investors to delay their purchases. In addition to this impact, 2003 was favorably impacted by higher cash flows from prepayments of mortgage-backed products and agency calls. As a result of these impacts, revenues from fixed income sales to depository and non-depository investors fell $133.6 million. Revenues from other fee sources include fee income from activities such as investment banking, equity research, portfolio advisory, and the sale of various financial products. These revenues decreased 17 percent from 2003, primarily as a result of lower revenue in structured finance transactions.

Going forward, capital markets noninterest income is expected to be positively impacted by the acquisition of SLK and further development of the investment banking business, while demand from the traditional customer base will fluctuate based upon interest rate expectations.

Table 6 - Capital Markets

Deposit Transactions and Cash Management

Deposit transactions include services related to retail deposit products (such as service charges on checking accounts), cash management products and services such as electronic transaction processing (automated clearing house and Electronic Data Interchange), account reconciliation services, cash vault services, lockbox processing, and information reporting to large corporate clients. Noninterest income from deposit transactions and cash management was $148.5 million in 2004 compared to $146.7 million in 2003.

Merchant Processing

Merchant processing involves converting transactions from plastic media such as debit cards, credit cards, purchase cards, and private label credit cards into cash for merchants that sell goods and services to consumers and businesses. Fee income from merchant processing increased 30 percent in 2004 to $75.1 million from $57.6 million in 2003, as new and existing clients experienced increases in transaction activity.

Insurance Commissions

Insurance commissions are derived from the sale of insurance products and annuities, including acting as an independent agent to provide commercial and personal property and casualty, life, long-term care, and disability insurance. Noninterest income from insurance commissions was $56.1 million in 2004 compared to $57.8 million in 2003.

Trust Services and Investment Management

Trust services and investment management fees include investment management, personal trust, employee benefits, and custodial trust services and are influenced by equity and fixed income market activity. Noninterest income from trust services and investment management was $47.3 million in 2004 compared to $45.9 million in 2003.

Gains on Divestitures

Gains from divestitures totaled $7.0 million in 2004 and $22.5 million in 2003. Divestiture gains in 2004 resulted primarily from the sale of certain merchant relationships. The gain in 2003 reflects FHN's divestiture of substantially all of the assets and liabilities of its wholly owned subsidiary, Springdale, as well as the sale of certain merchant relationships referred by selected agent banks within the merchant portfolio. See Note 2 – Acquisitions/Divestitures for additional information.

Securities Gains/(Losses)

In 2004 there were $20.7 million of net securities gains compared to $2.4 million in 2003. Net securities gains for 2004 include $18.7 million of gains from sales of investment securities compared

to net losses of $6.1 million in 2003. In 2004, net securities gains from equity investments of $2.0 million include the impact of a $3.9 million loss recognized related to other-than-temporary impairment of an investment in Freddie Mac equity securities and a gain of $5.5 million resulting from the liquidation of a holding company investment. In 2003, net securities gains from equity investments of $8.5 million primarily resulted from the sale of a venture capital investment from FHN's wholly-owned venture capital subsidiary, Hickory Venture Capital Corporation.

All Other Income

All other income increased 28 percent to $187.1 million in 2004 from $146.3 million in 2003. This growth was led by $23.1 million net gains from the securitization of HELOC and second-lien mortgages as FHN continues to utilize securitizations to manage liquidity and fund new loan growth. In 2003, net losses of $5.4 million resulted from the sale of equity lending loans.

NONINTEREST EXPENSE

Total noninterest expense for 2004 decreased 10 percent to $1,504.3 million from $1,667.7 million in 2003. Based on the strong earnings experienced in 2003, noninterest expense included $85.4 million of discretionary spending on performance enhancing initiatives. Table 8 provides detail by category for the past six years with growth rates.

Personnel expense decreased 8 percent to $915.0 million from $995.6 million in 2003 primarily due to lower activity levels in capital markets in 2004, reflecting lower commissions and incentives. Included in personnel expense is the net periodic benefit cost for FHN's pension plan of $7.1 million in 2004, as compared to $5.5 million in 2003. FHN anticipates, based on current conditions that net periodic benefit cost for the Pension Plan will increase by $2.3 million in 2005 as a result of additional participants in the supplemental executive retirement plan, normal growth in the qualified pension plan and a decrease in assumed earnings on assets in the qualified plan.

The declines in advertising, legal and professional fees, charitable contributions, and other expenses are all primarily related to discretionary spending reductions in 2004. The decline in travel and entertainment, contract employment and foreclosed real estate are primarily related to the lower activity levels in mortgage banking in 2004. The adoption of SFAS No. 150 on July 1, 2003, resulted in the expense associated with distributions on preferred stock of a subsidiary being included in interest expense subsequent to adoption, and the adoption of FIN 46 on December 31, 2003, resulted in the expense associated with distributions on guaranteed preferred securities being included in interest expense subsequent to adoption. Additional information related to expenses by business line is provided in Table 7.

Table 7 - Noninterest Expense Composition

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

Table 8 - Analysis of Noninterest Expense