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First Tennessee Achieves Operating Earnings Per Share of $2.32 for 2001 and Reports $2.42 Diluted Earnings Per Common Share Including Non-Operating Items

MEMPHIS, Tenn., Jan 16, 2002 (BUSINESS WIRE) -- First Tennessee National Corporation (First Tennessee) (FTN) announced today that it achieved operating earnings of $305.3 million, or $2.32 operating earnings per share for 2001, compared with last year's operating earnings of $218.1 million, or $1.66 operating earnings per share. During fourth quarter 2001 operating earnings totaled $93.2 million, or $.71 operating earnings per share, compared with $57.3 million, or $.44 operating earnings per share for fourth quarter 2000.

Reported earnings differ from operating earnings due to the inclusion of various non-operating income and expense items identified on A-3. Reported earnings were $318.2 million, or $2.42 diluted earnings per common share for 2001, compared with last year's reported earnings of $232.6 million, or $1.77 diluted earnings per common share. During fourth quarter 2001, reported earnings totaled $89.2 million, or $.68 diluted earnings per common share, compared with $71.7 million, or $.55 diluted earnings per common share for fourth quarter 2000.

"The terrific performance in 2001 was the result of First Tennessee's ability to implement several strategic initiatives beginning in the second half of 2000," said Ralph Horn, chairman and chief executive officer of First Tennessee National Corporation. "It's gratifying to note that these outstanding results have put us back among the high-performing companies and allowed us to enjoy an average earnings per share growth rate of 12 percent over a five-year period. Of particular note is that this performance was achieved while including the negative earnings growth in 2000. We have publicly stated that our goal was to overcome the earnings dip in 2000, and we are delighted that this goal has been achieved. The initiatives included the right-sizing of our mortgage company, the continued expansion of our customer base and product offerings in our capital markets business and the sale of several business lines with slow growth potential. Also, we began an intensive and systematic attack on inefficiency, which has begun to produce results. These changes not only contributed to a great 2001, but have well positioned First Tennessee for future growth."

Based on "operating" earnings return on average shareholders' equity was 21.8 percent, and return on average assets was 1.59 percent for 2001 and 25.3 percent and 1.86 percent, respectively, for fourth quarter 2001. On a "reported" earnings basis, return on average shareholders' equity was 22.7 percent, and return on average assets was 1.66 percent for 2001 and 24.3 percent and 1.78 percent, respectively, for fourth quarter 2001.

Income Statement
There were several non-operating income and expense items that were excluded in management's determination of operating earnings for 2000 and 2001 (See A-3 for details). These excluded items totaled $20.7 million in net pre-tax income for 2001, $6.2 million in net pre-tax loss for fourth quarter 2001, and $23.0 million in net pre-tax income for 2000, all occurring in the fourth quarter. In the following discussion of business segment performance these non-operating items are excluded, but are separately disclosed on A-15, Business Segment Highlights. Several strategic divestitures occurred in 2000 and 2001 - the corporate and municipal trust business and MoneyBelt(R) ATM network in fourth quarter 2000; the single relationship credit card portfolio in fourth quarter 2000 and first quarter 2001; and the student loan portfolio, Peoples and Union Bank and a partnership interest in Check Solutions Company in second quarter 2001. In order to make the periods more comparable, in the following discussion of business segment performance the revenue and expenses of these divested businesses are excluded for 2000 and 2001 but are separately disclosed on A-15.

Regional Banking Group
Pre-tax operating income for the regional banking group was $263.8 million for 2001, compared to $234.0 million in operating income for 2000.

Net interest income increased 14 percent to $555.2 million in 2001 due primarily to lower funding costs. Net interest margin, which was positively impacted by the lower funding costs, increased to 5.04 percent in 2001 from 4.66 percent in 2000. Earning assets grew 9 percent in 2001 to $11.4 billion compared to $10.5 billion in 2000.

Fee income (noninterest income excluding securities gains and losses) from deposit transactions and cash management fees grew 22 percent to $121.5 million in 2001. Cardholder fees increased 24 percent to $19.6 million. Trust services and investment management fees decreased 7 percent to $56.5 million primarily due to the decrease in market values of managed portfolios. Other income and commissions increased 3 percent to $77.5 million.

An analytical model based on historical loss experience, current trends and economic conditions, and reasonably foreseeable events is used to test the adequacy of the loan loss reserve and to determine the amount of provision to be recognized. The provision for loan losses increased 31 percent to $88.3 million in 2001 reflecting economic conditions. Nonperforming assets increased to $49.9 million on December 31, 2001, from $45.0 million on December 31, 2000, but decreased from $54.9 million on September 30, 2001. Net charge-offs increased to $76.7 million or .82 percent of total loans in 2001 compared to $55.8 million or .60 percent of total loans in 2000. (See the table on A-11 for an analysis of the allowance for loan losses and details on nonperforming assets and the table on A-12 for asset quality ratios).

Total noninterest expense increased 6 percent to $478.4 million in 2001. Employee compensation, incentives and benefits (personnel expense), the largest component of noninterest expense, increased 6 percent to $241.5 million in 2001. Occupancy expense (occupancy, equipment rentals, depreciation and maintenance) increased 9 percent to $74.4 million for 2001. Other expense increased 5 percent to $162.5 million in 2001.

Pre-tax operating income for fourth quarter 2001 was $67.0 million, an increase of 11 percent from the $60.6 million in operating income for fourth quarter 2000. Net interest income was up 18 percent to $147.7 million. Fee income increased 13 percent to $74.7 million. Provision for loan losses increased 119 percent to $32.8 million. Noninterest expense increased 6 percent to $122.6 million. The reasons for these quarter-to-quarter trends are similar to the annual trends discussed above.

Going forward, if short-term rates remain at current levels and the slope of the yield curve does not decrease, the net interest margin is likely to remain stable (see A-13 for fourth quarter margin); and fee income and the provision for loan losses will be affected by the relative strength or weakness of the economy.

Capital Markets
Pre-tax operating income for capital markets was $110.6 million for 2001, compared to $30.1 million in operating income for 2000.

Fee income increased 194 percent to $348.9 million in 2001. Securities bought and sold increased 74 percent to $1.395 trillion in 2001. This increased activity reflects continued growth and penetration into our targeted institutional customer base and change in product mix. New product initiatives, including portfolio advisory, underwriting for financial institutions, investment banking services, and the acquisition of MidWest Research Group, added $95.1 million to revenues in 2001, compared to $9.0 million in 2000. Additionally, capital markets 2001 fee income has benefited from an improvement from last year's distressed market conditions.

Total noninterest expense increased 166 percent to $244.5 million in 2001 primarily due to the increase in personnel expense, the largest component of noninterest expense, resulting from commissions and incentives associated with the higher fee income this year.

Pre-tax operating income for fourth quarter 2001 was $33.9 million, an increase of 226 percent from the $10.4 million in operating income for fourth quarter 2000. The reasons for this quarter-to-quarter trend are similar to the annual trends discussed above.

Going forward, while market conditions are likely to eventually stabilize, the extension of new products and services to capital markets' customer base will continue to increase revenue sources from nontraditional businesses.

Mortgage Banking
Pre-tax operating income for mortgage banking was $95.1 million for 2001, compared to a $6.5 million operating loss for 2000.

Net interest income increased 154 percent to $107.9 million in 2001 primarily due to lower funding costs. Net interest spread on mortgage loans held for sale, which was positively impacted by the lower funding costs, increased to 3.19 percent in 2001 from 1.62 percent in 2000.

Total fee income increased 29 percent to $460.0 million in 2001. Fee income consists primarily of fees from the origination process, fees from the mortgage servicing portfolio and mortgage servicing rights (MSR) net hedge gains or losses and is net of amortization, impairment and other expenses related to MSR and related hedges.

Fees from the mortgage origination process increased 92 percent to $469.9 million in 2001 due to increased origination volume (see further discussion below), improved margin management, an improvement in the results in pipeline hedging and other loan sale activities and the recognition this year of the value of interest rate lock commitments.

Fees associated with the mortgage servicing portfolio were $157.1 million in 2001, compared to $161.5 million in 2000.

Total origination volume increased 77 percent to $26.3 billion in 2001 primarily due to the impact that declining mortgage interest rates had on refinance mortgage activity. While this growth in refinance activity produced increased origination fee income, it also substantially increased actual and projected MSR prepayment speeds. This increase in prepayment speeds was the primary reason for the 34 percent increase, to $109.3 million, in MSR amortization; and the increase to $115.4 million in MSR impairment loss compared to a $21.2 million loss in 2000. The effect of this increased impairment was reduced by MSR net hedge gains of $43.0 million in 2001 compared to $2.2 million in 2000.

Amortization and time decay expenses of MSR option-based hedges decreased 63 percent to $14.2 million primarily due to new SFAS No. 133 accounting for hedges and the decreased use of option-based hedges this year.

Total noninterest expense increased 15 percent to $467.8 million in 2001. Personnel expense, the largest component of noninterest expense, increased 25 percent to $279.4 million in 2001 primarily due to the commissions and incentives associated with the higher origination volume this year. Even with the higher origination volume, other noninterest expenses increased only 3 percent to $188.3 million reflecting efficiency and overhead reduction initiatives.

Pre-tax operating income for fourth quarter 2001 was $44.2 million, compared to $3.2 million in operating income for fourth quarter 2000. The reasons for this quarter-to-quarter trend are similar to the annual trends discussed above.

Going forward, if mortgage interest rates remain at current levels, the origination volume from refinanced mortgages is expected to decline along with the current expense levels associated with amortization and write-off of existing MSR. Home purchase-related mortgage originations should reflect the relative strength or weakness of the economy. If short-term rates remain at current levels and the slope of the yield curve does not flatten, the net interest margin on mortgage loans held for sale is likely to remain close to current levels.

Transaction Processing
Pre-tax operating income for transaction processing was $14.7 million in 2001, compared to $18.9 million in operating income in 2000. This decrease was primarily due to the 5 percent decrease, to $45.2 million, in merchant processing fee income, which reflects the slowdown in the hospitality industry.

Average Balance Sheet
Total First Tennessee average assets decreased 1 percent to $19.2 billion in 2001. Total loans increased 2 percent to $10.1 billion in 2001 due to an increase of 8 percent in commercial loans. Retail loans decreased 4 percent due to the divestitures of the student loan and the single-relationship credit card portfolios and Peoples & Union Bank. Excluding the impact of these divestitures, retail loans grew 11 percent in 2001 and total loans grew 9 percent. Mortgage loans held for sale declined 3 percent to $2.4 billion despite the significant increase in originations this year due to process improvements. Interest-bearing core deposits decreased 1 percent in 2001 primarily due to the divestiture of Peoples & Union Bank, while total core deposits increased 4 percent. Purchased funds decreased 13 percent in 2001. Average shareholders' equity increased 10 percent in 2001.


MortgageDaily.com
Other Information
This press release contains forward-looking statements involving significant risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking information. Those factors include general economic and financial market conditions, including expectations of and actual timing and amount of interest rate movements, competition, ability to execute business plans, items already mentioned in this press release, and other factors described in our recent filings with the Securities and Exchange Commission (SEC). First Tennessee disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements included herein to reflect future events or developments.

In compliance with the SEC's regulations concerning fair disclosure, First Tennessee provides additional disclosure and discussion related to First Tennessee's earnings and business segment performance through First Tennessee's Web site at www.FirstTennessee.com and through a toll-free prerecorded disclosure available by dialing 1-888-203-1112 and entering the access code 559605 (outside the United States dial 1-719-457-0820 and enter the access code 559605). This message will be available from 8:00 a.m. CDT Wednesday, January 16, 2002, through 11:00 p.m. CDT Thursday, January 24, 2002. For three weeks from the press release date, First Tennessee will respond to individual requests for clarification of the provided disclosures. However, we will make every effort not to provide, and you should not expect to receive, material non-public information as that term is defined in the SEC Regulation FD. Without limiting the foregoing, we will not provide any earnings guidance, directly or indirectly, express or implied.

GENERAL INFORMATION
Description -- First Tennessee is a nationwide, diversified financial services institution. -- One of the 50 largest bank holding companies in the United States in asset size and market capitalization. Banking and other financial services are provided through: -- The regional banking group (includes trust services and credit card) -- Three national lines of business - -- First Horizon Home Loans -- First Tennessee Capital Markets -- Transaction processing includes First Horizon Merchant Services (credit card merchant processing) and Express Processing (nationwide payment processing operation) Stock Information -- Our common stock is traded on the New York Stock Exchange under the symbol FTN -- Included in the Standard and Poor's MidCap 400 Index
Note: A Spreadsheet is available at URL: http://www.businesswire.com/photowire/pw.011602/snr1.xls

CONTACT:
First Tennessee National Corporation, Memphis
Financial Information:
Eb Thomas
901.523.4212

Media Information:
Kim Cherry
901.523.4726

Investor Relations:
Marty Mosby
901.523.5620

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