<PAGE> 1
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 March 31, 1998
--------------
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 0-4491
-------
FIRST TENNESSEE NATIONAL CORPORATION
----------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-0803242
- ---------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
165 Madison Avenue, Memphis, Tennessee 38103
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(901) 523-4027
---------------------------------------------------
(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
----- ---
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 127,809,119
- ----------------------------- ----------------------------
Class Outstanding at April 30, 1998
<PAGE> 2
FIRST TENNESSEE NATIONAL CORPORATION
INDEX
Part I. Financial Information
Part II. Other Information
Signatures
Exhibit Index
Exhibit 10(i)
Exhibit 27
<PAGE> 3
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 which are, in the
opinion of management, necessary for a fair presentation of the financial
position and results of operations for the interim periods presented.
<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION First Tennessee National Corporation
- -----------------------------------------------------------------------------------------------------------------------
March 31 December 31
------------------------------- -----------
(Dollars in thousands)(Unaudited) 1998 1997 1997
- --------------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 758,601 $ 525,059 $ 775,760
Federal funds sold and securities
purchased under agreements to resell 89,850 234,045 225,861
- --------------------------------------------------------------------------------------------------- -----------
Total cash and cash equivalents 848,451 759,104 1,001,621
- --------------------------------------------------------------------------------------------------- -----------
Investment in bank time deposits 12,711 1,963 2,522
Capital markets inventory 368,727 286,371 253,240
Mortgage loans held for sale 2,248,053 698,800 1,240,648
Securities available for sale 1,914,152 2,137,711 2,133,303
Securities held to maturity (market value of
$53,203 at March 31, 1998; $63,454 at
March 31, 1997; and $54,323 at December 31, 1997) 52,127 63,068 53,230
Loans, net of unearned income 8,488,358 7,764,724 8,311,350
Less: Allowance for loan losses 130,026 121,688 125,859
- --------------------------------------------------------------------------------------------------- -----------
Total net loans 8,358,332 7,643,036 8,185,491
- --------------------------------------------------------------------------------------------------- -----------
Premises and equipment, net 207,634 191,029 206,895
Real estate acquired by foreclosure 11,575 14,631 12,202
Mortgage servicing rights, net 456,837 305,620 408,921
Intangible assets, net 127,925 115,682 112,411
Capital markets receivables and other assets 1,291,038 758,498 777,413
- --------------------------------------------------------------------------------------------------- -----------
TOTAL ASSETS $ 15,897,562 $ 12,975,513 $14,387,897
=================================================================================================== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest bearing $ 8,041,821 $ 7,030,948 $ 7,135,733
Noninterest bearing 2,772,951 2,160,270 2,536,046
- --------------------------------------------------------------------------------------------------- -----------
Total deposits 10,814,772 9,191,218 9,671,779
- --------------------------------------------------------------------------------------------------- -----------
Federal funds purchased and securities
sold under agreements to repurchase 1,685,000 1,517,706 2,085,679
Commercial paper and other short-term borrowings 802,122 394,640 702,388
Capital markets payables and other liabilities 1,251,451 721,818 705,062
Term borrowings 266,577 208,269 168,893
- --------------------------------------------------------------------------------------------------- -----------
Total liabilities 14,819,922 12,033,651 13,333,801
- --------------------------------------------------------------------------------------------------- -----------
Guaranteed preferred beneficial interests in
First Tennessee's junior subordinated debentures 100,000 100,000 100,000
- --------------------------------------------------------------------------------------------------- -----------
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 - 128,197,715 at
March 31, 1998; 127,878,044 at March 31, 1997;
and 128,209,142 at December 31, 1997) 80,123 79,924 80,131
Capital surplus 53,975 44,574 49,536
Undivided profits 830,453 729,141 811,396
Accumulated other comprehensive income 15,093 (8,564) 15,333
Deferred compensation on restricted stock incentive plans (2,004) (3,213) (2,300)
- --------------------------------------------------------------------------------------------------- -----------
Total shareholders' equity 977,640 841,862 954,096
- --------------------------------------------------------------------------------------------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,897,562 $ 12,975,513 $14,387,897
=================================================================================================== ===========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME First Tennessee National Corporation
- ---------------------------------------------------------------------------------------------
Three Months Ended
March 31
-------------------------------
(Dollars in thousands except per share data)(Unaudited) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 182,831 $ 166,958
Interest on investment securities:
Taxable 33,209 34,588
Tax-exempt 991 1,206
Interest on mortgage loans held for sale 30,850 14,875
Interest on capital markets inventory 6,242 2,579
Interest on other earning assets 2,918 2,120
- ---------------------------------------------------------------------------------------------
Total interest income 257,041 222,326
- ---------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Savings 1,821 2,096
Checking interest and money market account 29,015 22,252
Certificates of deposit under $100,000 and other time 37,709 40,491
Certificates of deposit $100,000 and more 17,653 10,585
Interest on short-term borrowings 40,045 26,956
Interest on term borrowings 3,658 4,437
- ---------------------------------------------------------------------------------------------
Total interest expense 129,901 106,817
- ---------------------------------------------------------------------------------------------
NET INTEREST INCOME 127,140 115,509
Provision for loan losses 13,515 12,526
- ---------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 113,625 102,983
- ---------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 92,557 64,714
Capital markets 37,997 20,465
Deposit transactions and cash management 20,035 19,224
Trust services and investment management 12,121 9,270
Merchant processing 7,209 6,749
Cardholder fees 4,512 4,524
Equity securities gains 7 23
Debt securities gains 22 6
All other income and commissions 15,517 14,101
- ---------------------------------------------------------------------------------------------
Total noninterest income 189,977 139,076
- ---------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 303,602 242,059
- ---------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives, and benefits 113,643 93,896
Operations services 14,035 10,961
Occupancy 11,395 10,663
Equipment rentals, depreciation, and maintenance 9,736 9,158
Amortization of mortgage servicing rights 17,300 8,835
Communications and courier 9,331 8,686
Advertising and public relations 5,689 4,932
Amortization of intangible assets 2,640 2,407
All other 47,139 30,788
- ---------------------------------------------------------------------------------------------
Total noninterest expense 230,908 180,326
- ---------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 72,694 61,733
Applicable income taxes 26,339 23,170
- ---------------------------------------------------------------------------------------------
NET INCOME $ 46,355 $ 38,563
=============================================================================================
EARNINGS PER SHARE $ .36 $ .30
- ---------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ .35 $ .29
- ---------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 128,148,972 129,165,314
- ---------------------------------------------------------------------------------------------
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
<PAGE> 6
<TABLE>
<CAPTION>
CONSOLIDATED
STATEMENTS OF
SHAREHOLDERS' EQUITY First Tennessee National Corporation
- -----------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, JANUARY 1 $ 954,096 $ 954,526
Comprehensive income:
Net income 46,355 38,563
Other comprehensive income, net of tax:
Unrealized market adjustments, net of
reclassification adjustment (240) (11,261)
------------ ------------
Comprehensive income 46,115 27,302
------------ ------------
Cash dividends declared (21,158) (19,758)
Common stock issued
for exercise of stock options 3,900 6,588
Tax benefit from non-qualified stock options 1,245 --
Common stock repurchased (12,117) (128,298)
Amortization of deferred compensation
on restricted stock incentive plans 295 362
Other 5,264 1,140
- ---------------------------------------------------------------------------------------------
BALANCE, MARCH 31 $ 977,640 $ 841,862
=============================================================================================
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
<PAGE> 7
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation
- ---------------------------------------------------------------------------------------------
Three Months Ended March 31
-------------------------------
(Dollars in thousands)(Unaudited) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 46,355 $ 38,563
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Provision for loan losses 13,515 12,526
Provision for deferred income tax 8,976 7,811
Depreciation and amortization of premises
and equipment 8,634 7,803
Amortization of mortgage servicing rights 17,300 8,835
Amortization of intangible assets 2,640 2,407
Net other amortization and accretion 2,325 1,171
Market value adjustment on foreclosed property 5,700 --
Equity securities gains (7) (23)
Debt securities gains (22) (6)
Net (gain)/loss on disposal of fixed assets (309) 19
Net (increase)/decrease in:
Capital markets securities inventory (115,487) (135,969)
Mortgage loans held for sale (1,007,405) 88,562
Capital markets receivables (379,449) (168,582)
Interest receivable (16,211) (3,863)
Other assets (195,578) (42,760)
Net increase/(decrease) in:
Capital markets payables 345,208 166,278
Interest payable 19,138 9,706
Other liabilities 180,056 (31,233)
- ---------------------------------------------------------------------------------------------
Total adjustments (1,110,976) (77,318)
- ---------------------------------------------------------------------------------------------
Net cash used by operating activities (1,064,621) (38,755)
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Held to maturity securities:
Maturities 1,101 2,830
Purchases -- --
Available for sale securities:
Sales 4,775 22,706
Maturities 226,701 104,012
Purchases (11,753) (108,684)
Premises and equipment:
Sales 891 111
Purchases (9,060) (12,862)
Net increase in loans (191,686) (51,463)
Increase in investment in bank time deposits (10,189) (41)
Acquisitions, net of cash and cash equivalents acquired (9,719) --
- ---------------------------------------------------------------------------------------------
Net cash provided/(used) by investing activities 1,061 (43,391)
- ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Common stock:
Exercise of stock options 3,994 6,183
Cash dividends (21,165) (20,131)
Repurchase shares (12,127) (128,298)
Term Borrowings:
Issuance 99,218
Payments (1,578) (26,419)
Issuance of guaranteed preferred beneficial interests
in First Tennessee's junior subordinated debentures -- 100,000
Net increase/(decrease) in:
Deposits 1,142,993 158,156
Short-term borrowings (300,945) (346,210)
- ---------------------------------------------------------------------------------------------
Net cash provided/(used) by financing activities 910,390 (256,719)
- ---------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents (153,170) (338,865)
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 1,001,621 1,097,969
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 848,451 $ 759,104
=============================================================================================
Total interest paid $ 110,679 $ 97,025
Total income taxes paid 2,500 15,359
- ---------------------------------------------------------------------------------------------
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
<PAGE> 8
NOTE 1 - FINANCIAL INFORMATION
The unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles. 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 period ended March 31,
1998, 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 1998 Proxy Statement & 1997 Financial
Information.
Earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding for each period. Diluted earnings
per share is computed by dividing net income by the weighted average number of
common shares outstanding adjusted to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares
resulting from options granted under First Tennessee's stock option plans had
been issued. First Tennessee utilizes the treasury stock method in this
calculation. All per share amounts have been restated for the effect of the
February 20, 1998, two-for-one stock split.
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting comprehensive income
and its components in the financial statements. Comprehensive income is the
total of net income and all other nonowner changes in equity. The only component
of comprehensive income for First Tennessee is unrealized holding gains/(losses)
on available-for-sale securities. First Tennessee adopted this standard
beginning with the first quarter of 1998. Comparative financial statements for
earlier periods have been adjusted to reflect application of the provisions of
this statement.
In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The new Statement revises the required disclosures for employee
benefit plans, but it does not change the measurement or recognition of such
plans. First Tennessee will adopt this standard in the 1998 annual financial
statements.
<PAGE> 9
NOTE 2 -- COMPONENTS OF OTHER COMPREHENSIVE INCOME AND RELATED TAX
<TABLE>
<CAPTION>
Gain/(Loss)
Before-Tax Tax (Expense) Net-of-Tax
(Dollars in thousands) Amount or Benefit Amount
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other comprehensive income:
Unrealized market adjustments for the period $(18,408) $ 7,165 $(11,243)
Less: reclassification adjustment for gains
included in net income 29 (11) 18
- -----------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME FOR THE QUARTER
ENDING MARCH 31, 1997 $(18,437) $ 7,176 $(11,261)
===============================================================================================
Other comprehensive income:
Unrealized market adjustments for the period $ (365) $ 143 $ (222)
Less: reclassification adjustment for gains
included in net income 29 (11) 18
- -----------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME FOR THE QUARTER
ENDING MARCH 31, 1998 $ (394) $ 154 $ (240)
===============================================================================================
</TABLE>
<PAGE> 10
NOTE 3 - EARNINGS PER SHARE
The following table shows a reconciliation of earnings per share to diluted
earnings per share. All share and per share data have been adjusted to
reflect the 1998 two-for-one stock split.
<TABLE>
<CAPTION>
Three Months Ended March 31
-------------------------------
(Dollars in thousands, except per share data) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
EARNINGS PER SHARE COMPUTATION:
Net income $ 46,355 $ 38,563
Weighted average shares outstanding 128,148,972 129,165,314
Earnings per share $ .36 $ .30
- ---------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE COMPUTATION:
Net income $ 46,355 $ 38,563
Weighted average shares outstanding 128,148,972 129,165,314
Dilutive effect due to stock options 4,052,867 3,344,752
- ---------------------------------------------------------------------------------------------
Weighted average shares outstanding, as adjusted 132,201,839 132,510,066
Diluted earnings per share $ .35 $ .29
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 11
NOTE 4 -- LOANS
The composition of the loan portfolio at March 31 is detailed below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 3,900,827 $ 3,558,389
Consumer 2,912,412 2,710,766
Permanent mortgage 676,584 636,384
Credit card receivables 551,059 529,197
Real estate construction 407,279 287,266
Nonaccrual - Regional banking group 10,914 11,613
Nonaccrual - Mortgage banking 29,283 31,109
- ---------------------------------------------------------------------------------------------
Loans, net of unearned income 8,488,358 7,764,724
Allowance for loan losses 130,026 121,688
- ---------------------------------------------------------------------------------------------
Total net loans $ 8,358,332 $ 7,643,036
=============================================================================================
</TABLE>
The following table presents information concerning nonperforming loans at
March 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans $ 10,405 $ 12,424
Other nonaccrual loans 29,792 30,298
- ---------------------------------------------------------------------------------------------
Total nonperforming loans $ 40,197 $ 42,722
=============================================================================================
</TABLE>
[FN]
Restructured impaired loans at March 31, 1998 and 1997, were $117,000 and
$196,000, respectively.
</FN>
Nonperforming loans consist of impaired loans, other nonaccrual loans
and certain restructured 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:
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Total interest on impaired loans $ 132 $ 151
Average balance of impaired loans 9,384 11,849
- ---------------------------------------------------------------------------------------------
</TABLE>
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 three months ended March 31,
1998 and 1997, is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Non-impaired Impaired Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $114,217 $ 3,531 $117,748
Provision for loan losses 10,908 1,618 12,526
Charge-offs 10,227 426 10,653
Less loan recoveries 2,057 10 2,067
- -----------------------------------------------------------------------------------------------
Net charge-offs 8,170 416 8,586
- -----------------------------------------------------------------------------------------------
Balance at March 31, 1997 $116,955 $ 4,733 $121,688
===============================================================================================
Balance at December 31, 1997 $122,107 $ 3,752 $125,859
Provision for loan losses 12,896 619 13,515
Charge-offs 11,776 600 12,376
Less loan recoveries 2,579 449 3,028
- -----------------------------------------------------------------------------------------------
Net charge-offs 9,197 151 9,348
- -----------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 $125,806 $ 4,220 $130,026
===============================================================================================
</TABLE>
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
First Tennessee National Corporation (First Tennessee) is headquartered in
Memphis, Tennessee, and is a nationwide, diversified financial services
institution which provides banking and other financial services to its customers
through various national and regional business lines. The Regional Banking Group
includes the retail/commercial bank, the credit card division and the trust
division. The National Lines of Business include FT Mortgage Companies and
affiliates (also referred to as mortgage banking), First Tennessee Capital
Markets (also referred to as capital markets) and transaction processing (credit
card merchant processing, automated teller machine network and check clearing
operations).
Certain revenues and expenses are allocated and equity is assigned to the
various business lines to reflect the inherent risk in each business line, based
on management's best estimates. These allocations are periodically reviewed and
may be revised from time to time to more accurately reflect current business
conditions and risks. In addition, certain reclassifications of accounts may
occur to reflect current reporting standards within the industry. In each case
the previous history is restated to ensure comparability. For purposes of this
discussion, noninterest income and total revenues exclude securities gains and
losses. Net interest income has been adjusted to a fully taxable equivalent
(FTE) basis for certain tax-exempt loans and investments included in earning
assets. Earning assets, including loans, have been expressed as averages, net of
unearned income.
The following is a discussion and analysis of the financial condition and
results of operations of First Tennessee for the three month period ended March
31, 1998, compared to the three month period ended March 31, 1997. To assist the
reader in obtaining a better understanding of First Tennessee and its
performance, this discussion should be read in conjunction with First
Tennessee's unaudited consolidated financial statements and accompanying notes
appearing in this report. Additional information including the 1997 financial
statements, notes, and management's discussion and analysis is provided as an
appendix to the 1998 proxy statement.
OVERVIEW (1998 FIRST QUARTER COMPARED WITH 1997 FIRST QUARTER)
* Earnings for 1998 were $46.4 million, up 20 percent from last year's
earnings of $38.6 million.
* Diluted earnings per share (adjusted for the 1998 two-for-one stock split)
were $.35 in 1998, up 21 percent over the $.29 earned in 1997. Earnings per
share were $.36 in 1998 and $.30 in 1997, an increase of 20 percent.
* Return on average shareholders' equity was 19.6 percent in 1998 compared
with a return of 18.1 percent in 1997 and return on average assets was 1.26
percent in 1998 compared with 1.23 percent in 1997.
* Total revenues grew 25 percent with growth in fee income of 37 percent and
growth in net interest income of 10 percent. Mortgage banking and capital
markets led the increase in fee income with growth of 43 percent and 86
percent, respectively.
* The consolidated net interest margin was 4.03 percent in 1998.
* Asset quality remained strong with improvement in nonperforming assets from
the prior year.
* At March 31, 1998, First Tennessee was ranked in the top 50 bank holding
companies nationally in market capitalization ($4.1 billion) and assets
($15.9 billion).
INCOME STATEMENT ANALYSIS
NONINTEREST INCOME
- ------------------
Noninterest income, also called fee income, provides the majority of First
Tennessee's revenue. During the first quarter of 1998, fee income increased 37
percent (from $139.0 million to $189.9 million) and contributed 60 percent to
total revenue. Fee income contributed 55 percent to total revenue for the first
quarter of 1997.
<PAGE> 13
Mortgage banking fee income, First Tennessee's largest contributing business
line to noninterest income, grew 43 percent (from $64.7 million to $92.6
million) from the first quarter of 1997 as shown in Table 1. The increase came
primarily from mortgage origination (loan origination and secondary marketing)
activity which surged during the quarter.
Table 1 - Mortgage Banking
<TABLE>
<CAPTION>
1st Quarter
------------------------- Growth
(Dollars in millions) 1998 1997 Rate (%)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest income:
Loan origination fees $ 22.5 $ 17.7 26.8
Secondary marketing activities 40.7 21.2 92.3
Servicing fees 25.3 23.7 6.7
Sale of mortgage servicing rights -- 1.6 (100.0)
Miscellaneous 4.1 .5 673.6
- ----------------------------------------------------------------------
Total noninterest income $ 92.6 $ 64.7 43.0
======================================================================
Mortgage loan originations $ 4,676.7 $ 1,949.5 139.9
Servicing portfolio $29.452.0 $ 23,383.5 26.0
- ----------------------------------------------------------------------------------
</TABLE>
Income derived from the loan origination process (loan origination fees plus
secondary marketing activities) increased 62 percent from the first quarter of
1997 (from $38.9 million to $63.2 million), as FT Mortgage Companies originated
a record $4.7 billion of mortgage loans in the first quarter of 1998. This level
of originations ranked FT Mortgage Companies as one of the top retail mortgage
originators in the nation. During the first quarter of 1997, $1.9 billion of
mortgage loans were originated. A more favorable interest rate environment led
to the increased mortgage refinance activity, accounting for approximately 60
percent of total loan originations in the first quarter of 1998, as compared
with 28 percent in the first quarter of 1997.
The servicing portfolio totaled $29.5 billion at March 31, 1998, up 26 percent
from March 31, 1997, when the portfolio totaled $23.4 billion. Due to the
favorable balance between mortgage loan origination capacity and the mortgage
servicing portfolio, the servicing portfolio grew 9 percent from the year-end
period, despite heavy prepayments during the quarter. Since the first quarter of
1997, the portfolio has grown due to originations of $13.4 billion, reduced by
servicing released sales of $2.2 billion and principal reductions of $5.1
billion from payments received in the normal course of business. Mortgage
servicing fees increased 7 percent from the first quarter of 1997 (from $23.7
million to $25.3 million). Servicing fees were negatively impacted by the
increase in payoffs and resulting disbursements to investors, as many investors
require a full month's interest on loans paid off during the month. Servicing
income was also affected by an accounting change adopted in the first quarter of
1997 which converted late fees to an accrual basis adding approximately $2
million to mortgage servicing income. No servicing rights were sold during the
first quarter of 1998 and only a minimal amount was sold in the first quarter of
1997.
The growth in mortgage miscellaneous income related to gains from repositioning
servicing hedges and income generated from a strategy of early repurchase of
delinquent loans.
First Tennessee Capital Markets generates fee income primarily from the purchase
and sale of securities as both principal and agent. 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. During the first quarter of 1998, capital markets achieved a record level
of fee income, an 86 percent increase over first quarter of 1997 (from $20.5
million to $38.0 million). Total securities bought and sold increased 79 percent
over the same period in 1997 (from $47.3 billion to $84.7 billion). Total
underwritings during the first quarter of 1998 were $11.3 billion compared with
$6.0 billion for the same period in 1997. For the first quarter of 1998, capital
markets ranked in the top ten in underwriting U.S. government agency debt. The
increase in fee income came from a slowdown in national loan growth resulting in
increased investment needs by customers, and strong underwriting activity which
led to a record level of customer transactions. In addition, increases in the
customer base through market expansion as well as increased activity through
First Tennessee Capital Assets Corporation, a subsidiary that deals primarily in
whole loan transactions, were contributing factors to this fee income growth.
<PAGE> 14
Noninterest income from deposit transactions and cash management increased 4
percent from the first quarter of 1997 (from $19.2 million to $20.0 million).
Since the first quarter of 1997, trust and investment management fees grew 31
percent. This growth was primarily due to the acquisition of Martin & Company,
L.P. in the first quarter of 1998 which added approximately $.9 billion to
assets under management and the strong performance in the managed accounts at
Highland Capital Management Corp., a wholly owned subsidiary. Fee income from
merchant processing grew 7 percent from the first quarter of 1997 (from $6.7
million to $7.2 million) and cardholder fees remained relatively flat at $4.5
million.
All Other noninterest income increased 10 percent from the first quarter of 1997
(from $14.1 million to $15.5 million). Check clearing fees declined 46 percent
(from $4.0 million to $2.2 million) due to the continuing impact of industry
consolidations. Other service charges increased 12 percent (from $2.6 million to
$2.9 million), insurance premiums and commissions increased 14 percent (from
$1.5 million to $1.7 million) and the other category increased 45 percent (from
$6.0 million to $8.7 million) from the first quarter of 1997 and was spread over
several categories.
NET INTEREST INCOME
- -------------------
Net interest income increased 10 percent (from $116.6 million to $128.2 million)
from the first quarter of 1997, primarily due to the 16 percent increase in
earning assets (from $11.1 billion to $12.8 billion). The consolidated net
interest margin (margin) declined from 4.24 percent in the first quarter of 1997
to 4.03 percent in the first quarter of 1998, primarily from the build-up of the
mortgage warehouse which produced 54 percent of the increase in earning assets.
Table 2 details the computation of the net interest margin for the first
quarters of 1998 and 1997.
Table 2 - Net Interest Margin Computation
<TABLE>
<CAPTION>
First Quarter
-----------------------
1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Yields on earning assets 8.05% 8.06%
Rates paid on interest-bearing liabilities 4.85 4.65
- --------------------------------------------------------------------------
Net interest spread 3.20 3.41
- --------------------------------------------------------------------------
Effect of interest-free sources .74 .77
Loan fees .11 .09
FRB(F1) interest and penalties (.02) (.03)
- --------------------------------------------------------------------------
Net interest margin 4.03% 4.24%
==========================================================================
</TABLE>
[FN]
(F1) Federal Reserve Bank
</FN>
The margin is affected by the activity levels and related funding for First
Tennessee's specialty lines of business, as these nonbank business lines
typically produce different margins than traditional banking activities. For
example, in mortgage banking because the spread between the rates on mortgage
loans temporarily in the warehouse and the related short-term funding rates is
less than the comparable spread earned in the regional banking group, the
overall margin is compressed. Consequently, as the warehouse volume increases,
the margin also compresses. Capital markets tends 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, First Tennessee's consolidated margin cannot be readily compared to
that of other bank holding companies. Table 3 - Net Interest Margin Composition
provides a breakdown by business line of the consolidated margin for the first
quarters of 1998 and 1997. The regional banking group's margin improved from
4.60 percent for the first quarter of 1997 to 4.77 percent for the first quarter
of 1998 as earning asset growth was primarily funded with low cost deposits.
<PAGE> 15
Table 3 - Net Interest Margin Composition
<TABLE>
<CAPTION>
First Quarter
---------------------
1998 1997
- ---------------------------------------------------------
<S> <C> <C>
Regional banking group 4.77% 4.60%
Mortgage banking (.61) (.28)
Capital markets (.13) (.09)
Transaction processing -- .01
- ---------------------------------------------------------
Net interest margin 4.03% 4.24%
=========================================================
</TABLE>
NONINTEREST EXPENSE
- -------------------
Total noninterest expense (operating expense) for the first quarter of 1998
increased 28 percent (from $180.3 million to $230.9 million) over the same
period in 1997. Employee compensation, incentives, and benefits (personnel
expense), the largest category increased 21 percent (from $93.9 million to
$113.6 million). Personnel expense includes commissions paid in several lines of
business such as capital markets and mortgage banking. As sales and/or
origination volumes increase or decrease or the product mix changes in these
business lines, the commissions change accordingly. Table 4 provides a breakdown
of total expenses by business line.
Table 4 - Operating Expense Composition
<TABLE>
<CAPTION>
1st Quarter
-------------------- Growth
(Dollars in millions) 1998 1997 Rate (%)
- ---------------------------------------------------------------
<S> <C> <C> <C>
Regional banking group $ 91.7 $ 85.8 6.9
Mortgage banking 95.4 62.3 53.1
Capital markets 27.8 16.1 73.0
Transaction processing 14.0 14.1 (1.2)
Corporate 2.0 2.0 --
- ------------------------------------------------------
Total operating expense $ 230.9 $ 180.3 28.1
======================================================
</TABLE>
Operating expense in the mortgage banking division increased 53 percent (from
$62.3 million to $95.4 million) and accounted for 65 percent of the overall
expense growth. Mortgage banking expense growth was driven by a larger servicing
portfolio and increased loan production volume. In capital markets, operating
expense increased 73 percent (from $16.1 million to $27.8 million) and accounted
for 23 percent of the overall expense growth. Excluding mortgage banking and
capital markets, overall operating expenses increased 6 percent from the first
quarter of 1997. Personnel expense increased 16 percent in mortgage banking and
94 percent in capital markets comparing the first quarter of 1997 to the first
quarter of 1998.
As a result of a larger servicing portfolio and increased payoffs, amortization
of capitalized mortgage servicing rights increased 96 percent (from $8.8 million
to $17.3 million). All Other expense consists of many smaller expense categories
such as contract employment, supplies, travel and entertainment, Fed service
fees, foreclosed real estate expenses, deposit insurance premiums,
contributions, and other. Since the first quarter of 1997, All Other expense
increased 53 percent (from $30.8 million to $47.1 million), and all of this
growth was related to mortgage banking.
PROVISION FOR LOAN LOSSES/ASSET QUALITY
The provision for loan losses increased 8 percent (from $12.5 million to $13.5
million) from March 31, 1997. The increase in provision reflected a higher
amount of allowance for loan losses commensurate with loan growth; inherent
losses in the consumer loan portfolios reflecting the national trend in consumer
asset quality; and inherent losses in the commercial loan portfolio. The ratio
of allowance for loan losses to loans, was 1.53 percent at March 31, 1998,
compared with 1.57 percent at March 31, 1997. The ratio of net charge-offs to
average loans increased slightly from .44 percent for the first quarter of 1997
to .45 percent for the first quarter of 1998, however, the credit card net
charge-offs ratio improved from 4.59 percent at March 31, 1997, to 4.29 percent
at March 31, 1998. At March 31, 1998, First Tennessee had no concentrations of
10 percent or more of total loans in any single industry. Additional asset
quality information is provided in Table 5 and Table 6.
<PAGE> 16
Table 5 - Asset Quality Information
<TABLE>
<CAPTION>
March 31
-----------------------------
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Nonperforming loans (F1) $ 40,197 $ 42,722
Foreclosed real estate(F2) 11,575 14,631
Other assets 225 194
- ---------------------------------------------------------------------------
Total nonperforming assets $ 51,997 $ 57,547
===========================================================================
Loans and leases 90 days past due $ 29,062 $ 36,038
Potential problem assets(F3) $ 70,652 $ 80,719
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance at December 31 $ 125,859 $ 117,748
Provision for loan losses 13,515 12,526
Charge-offs (12,376) (10,653)
Loan recoveries 3,028 2,067
- ---------------------------------------------------------------------------
Ending balance at March 31 $ 130,026 $ 121,688
===========================================================================
Allowance to total loans .53% 1.57%
Nonperforming loans to total loans .47% .55%
Nonperforming assets to total loans,
foreclosed real estate and other assets .61% .74%
Allowance to nonperforming assets 250% 211%
- ---------------------------------------------------------------------------
</TABLE>
[FN]
(F1) Includes $29.3 million and $31.1 million in 1998 and 1997, respectively, in
mortgage banking
(F2) Includes $7.3 million and $8.8 million in 1998 and 1997, respectively, in
mortgage banking
(F3) Includes loans and leases 90 days past due
</FN>
Table 6 - Charge-off Ratios
<TABLE>
<CAPTION>
First Quarter
---------------
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Total net charge-offs excluding repurchased mortgages .41% .44%
Impact of repurchased mortgages .04 --
- -----------------------------------------------------------------------------
Total net charge-offs .45 .44
=============================================================================
Breakdown by loan category:
Commercial and commercial real estate (.03)% --%
Consumer .39 .35
Credit card receivables 4.29 4.59
Permanent mortgage(F1) (.02) (.02)
- ------------------------------------------------------------------------------
</TABLE>
[FN]
(F1) Excludes repurchased mortgages
</FN>
BALANCE SHEET
LOANS AND DEPOSITS
- ------------------
At March 31, 1998, First Tennessee reported total assets of $15.9 billion
compared with $13.0 billion at March 31, 1997. Period end loans increased 9
percent (from $7.8 billion to $8.5 billion); mortgage loans held for sale
(mortgage warehouse) increased 222 percent (from $.7 billion to $2.2 billion);
and investment securities decreased 11 percent (from $2.2 billion to $2.0
billion). The growth in the period end balance sheet was funded by an increase
in core deposits of 10 percent (from $8.4 billion to $9.2 billion) and a 47
percent increase in purchased funds (from $3.0 billion to $4.4 billion).
Comparing average balances to first quarter 1997, total assets grew 17 percent
(from $12.8 billion to $14.9 billion) and loans grew 8 percent (from $7.7
billion to $8.4 billion). Commercial loans increased 8 percent (from $3.5
billion to $3.8 billion) and consumer loans grew 7 percent (from $2.7 billion to
$2.9 billion). Commercial loans represented 46 percent and consumer loans
represented 34 percent of total loans during the first quarter of 1998. The 38
percent increase (from $.3 billion to $.4 billion) in real estate construction
loans was reflective of economic growth in Tennessee, favorable market
conditions, and growth in residential construction loans primarily originated
<PAGE> 17
by mortgage banking. The permanent mortgage portfolio increased 6 percent (from
$.6 billion to $.7 billion) from the first quarter of 1997.
Average investment securities declined 5 percent from the first quarter of 1997.
With the surge in mortgage origination activity, the mortgage warehouse grew 122
percent (from $.8 billion to $1.7 billion) during this same period.
Since the first quarter of 1997, average core deposits grew 7 percent (from $8.3
billion to $8.9 billion) and interest-bearing core deposits grew 4 percent (from
$6.2 billion to $6.4 billion). Noninterest-bearing deposits grew 16 percent
(from $2.1 billion to $2.5 billion) over this same period. Purchased funds were
up 44 percent (from $3.1 billion to $4.4 billion) from the previous year. This
increase was primarily due to loan growth continuing to outpace deposit growth
and a higher balance of nonearning assets.
CAPITAL
- -------
Total capital (shareholders' equity plus qualifying capital securities) at March
31, 1998, was $1,077.6 million, up 14 percent from March 31, 1997. Shareholders'
equity (excluding the qualifying capital securities) was $977.6 million at March
31, 1998, an increase of 16 percent from $841.9 million at March 31, 1997.
Average shareholders' equity increased 11 percent (from $864.5 million to $957.0
million) since the first quarter of 1997. The average total capital to average
assets ratio was 7.08 percent and the average shareholders' equity to average
assets ratio was 6.41 percent for the first quarter of 1998. This compares with
7.52 percent and 6.78 percent, respectively for the first quarter of 1997.
Excluding the effects of unrealized market valuations the average total capital
to average assets ratio would have been 6.98 percent and the average
shareholders' equity to average assets ratio would have been 6.31 percent for
the first quarter of 1998.
At March 31, 1998, the corporation's Tier 1 capital ratio was 8.50 percent, the
total capital ratio was 11.88 percent and the leverage ratio was 6.44 percent.
On March 31, 1998, First Tennessee's bank affiliates had sufficient capital to
qualify as well-capitalized institutions.
OFF-BALANCE SHEET ACTIVITY
In the normal course of business, First Tennessee is a party to financial
instruments that are not required to be reflected on a balance sheet. First
Tennessee enters into transactions involving these instruments to meet the
financial needs of its customers and manage its own exposure to fluctuations in
interest rates. These instruments are categorized into "Lending related,"
"Mortgage banking," "Interest rate risk management" and "Capital markets" as
noted in Table 7.
<PAGE> 18
Table 7 - Off-Balance Sheet Financial Instruments at March 31, 1998
<TABLE>
<CAPTION>
(Dollars in billions) Notional Value
- --------------------------------------------------------------------------------------
<S> <C>
LENDING RELATED:
Commitments to extend credit:
Consumer credit card lines $1,901.8
Consumer home equity 460.5
Commercial real estate and construction and land development 317.3
Mortgage banking 1,657.0
Other 1,817.1
Other commitments:
Commercial and standby letters of credit 516.1
Foreign exchange contracts - net position .1
MORTGAGE BANKING:
Mortgage pipeline and warehouse hedging:
Interest rate contracts:
Forward contracts - commitments to sell 3,204.8
Option contracts - put options purchased (F1) 56.0
Servicing portfolio hedging:
Interest rate contracts:
Floors - purchased(F1) 6,000.0
Options contracts - call options purchased(F1) 400.0
Caps - purchased (F1) 400.0
Caps - written 400.0
INTEREST RATE RISK MANAGEMENT:
Interest rate contracts:
Swaps - receive fixed/pay floating 435.0
Swaps - receive floating/pay floating 100.0
Caps:
Purchased 20.0
Written 20.0
CAPITAL MARKETS:
Forward contracts:
Commitments to buy 3,036.7
Commitments to sell 3,262.4
Securities underwriting commitments .9
- ------------------------------------------------------------------------------------
</TABLE>
[FN]
(F1) Mortgage banking purchased interest rate contracts had a value of $35.2
million recognized in the Consolidated Statements of Condition at March 31,
1998.
</FN>
<PAGE> 19
Part II.
-----------------
OTHER INFORMATION
Items 1, 2, 3, 4, and 5.
- ------------------------
As of the end of the first quarter, 1998, 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 furnished in accordance with the provisions of the Exhibit Table
of Item 601 of Regulation S-K are included as described in the Exhibit
Index which is a part of this report. Exhibits not listed in the Exhibit
Index are omitted because they are inapplicable.
(b) No reports on Form 8-K were filed during the first quarter of 1998.
<PAGE> 20
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: 5/13/98 By: Elbert L. Thomas Jr.
--------------------- --------------------------
Elbert L. Thomas Jr.
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description Page No.
- ----------- ------------------- --------
<S> <C> <C>
3(i) Restated Charter of the Corporation, as amended, attached as Exhibit
3(i) to the Corporation's Annual Report on Form 10-K for the year ended
12-31-97, and incorporated herein by reference.
3(ii) Bylaws of the Corporation, as amended and restated, attached as Exhibit
3(ii) to the Corporation's Annual Report on Form 10-K for the year
ended 12-31-97, and incorporated herein by reference.
10(i) Amended and Restated Pension Restoration Plan. Filed Herewith
27 Financial Data Schedule (for SEC use only). Filed Herewith
</TABLE>
<PAGE> 1
EXHIBIT 10(i)
FIRST TENNESSEE NATIONAL CORPORATION
AMENDED AND RESTATED PENSION RESTORATION PLAN
ADOPTED OCTOBER 25, 1995
(As Amended and Restated 4-21-98)
I. PURPOSE
This Plan is established by First Tennessee National Corporation and
any successor thereto and its subsidiaries (herein collectively
referred to as "the Company") for the purpose of encouraging and
enabling the Company to attract, motivate and retain key executives and
for the purpose of providing benefits for certain members of the First
Tennessee National Corporation Pension Plan (hereinafter called "the
Program") in excess of the limitations of benefits and contributions
imposed in respect to such Program by Section 415 and any excess that
may result from any limitation on compensation that may be considered
by the Program pursuant to Section 401(a)(17), of the Internal Revenue
Code of 1986 ("IRC"), as amended.
II. EFFECTIVE DATE
The original effective date of the Pension Restoration Plan
(hereinafter referred to as the "Plan") was January 1, 1984. The
effective date of this Amended and Restated Pension Restoration Plan
shall be October 25, 1995.
III. ADMINISTRATION AND ELIGIBILITY
A. The Plan will be administered by the Administration Committee
(hereinafter referred to as the "Committee") consisting of the
Executive Vice President, Division Manager-Personnel and the
Vice-President, Division Manager-Personnel and the
Vice-President, Manager Compensation. The executives of the
Company who will participate will be a select group of
management or highly compensated employees and occupy a
position in salary grades 1 through 6, as determined by the
Human Resources Committee of the Board of Directors, and will
receive benefits in accordance with the provisions of the
Plan.
B. The Committee will have the discretion, authority and
responsibility (1) of interpreting the Plan and any agreement
evidencing benefits granted hereunder, and (2) making all
other determinations in connection with the administration of
the Plan, all of which shall be final and conclusive.
IV. PAYMENT OF BENEFITS
A. In order to qualify to receive the benefits set forth in
Paragraph VI, below, a participant must remain employed until
age 65, unless an early retirement date is approved by the
Human Resources Committee of the Board of Directors.
B. Benefits payable pursuant to the terms of the Plan shall be
paid directly from the general assets of the Company. Should
the Company establish any advance reserve, such reserve or
fund shall not under any circumstances be deemed to be an
asset of the Plan nor a source of payment of any claims under
the Plan but, at all times, shall remain a part of the general
assets of the Company.
V. RETIREMENT DATE
A participant shall be retired under this Plan on the same Retirement
Date applicable for him/her under the Program.
Page 1 of 5
<PAGE> 2
VI. CALCULATION OF BENEFITS
Commencing with the first month immediately following retirement, each
Participant shall receive a monthly payment equal to the difference
between (A) and (B) below:
A. The monthly pension that would have been payable from the
Program; determined under its rules on the Participant's
Retirement Date, but as if the limitations imposed by IRC
Section 415 and Section 401(a)(17) did not apply.
B. The actual monthly pension payable to the Participant from the
Program.
Any monthly payment under the Plan shall be payable in the same manner
and under the same terms and conditions as payments due from the
Program.
VII. CLAIMS PROCEDURES
All claims for benefits under the Plan shall be submitted in writing to
the Committee. A Participant whose claim for benefits is denied shall
have the right to a written explanation of the specific reasons for
such denial and may request the Committee to reconsider such denial.
Upon such a request for reconsideration the Committee shall review its
decision with the Participant who may submit in writing such facts and
issues, and may review such documents as may be pertinent. The
Committee shall render its decision in writing within sixty days. The
Committee's decision shall then be final and conclusive.
VIII. MISCELLANEOUS
A. Nonalienability. No benefit payable at any time hereunder
shall be subject in any manner to alienation, sale, transfer,
assignment, pledge, attachment or other legal process, or
encumbrances of any kind. Any attempt to alienate, sell,
transfer, assign, pledge or otherwise encumber any such
benefit, whether currently or hereafter payable, shall be
void. Except as otherwise specifically provided by law, no
such benefit shall, in any manner, be liable for or subject to
the debts or liabilities of any participant or any other
person entitled to such benefit.
B. No Rights to Employment. The Plan shall not be construed as
providing any participant with the right to be retained in the
Company's employ or to receive any benefit not specifically
provided hereunder.
C. Amendment and Termination. The Company shall have the right,
at any time and from time to time, to amend in whole or in
part, or to terminate any of the provisions of the Plan, and
such amendment or termination shall be binding upon all
participants and parties interest. Notwithstanding the
foregoing, the benefits payable hereunder may not be reduced
or terminated for those participants who have attained age 65,
or for whom an early retirement date has been approved by the
Human Resources Committee of the Board of Directors, acting
pursuant to Section IV(A) hereof.
D. Governing Law. The Plan shall be governed by and construed in
accordance with the Employee Retirement Income Security Act of
1974 (P.L. 93-406) and to the extent not pre-empted thereby,
by the laws of the State of Tennessee.
E. Successors. This Plan shall bind any successor of the Company,
its assets or its businesses (whether direct or indirect, by
purchase, merger, consolidation or otherwise), in the same
manner and to the same extent that the Company would be
obligated under this Plan if no succession had taken place. In
the case of any transaction in which a successor would not by
the foregoing provision or by operation of law be bound by
this Plan, the Company shall require such successor expressly
and unconditionally to assume and agree to perform the
Company's obligations under this Plan, in the same manner and
to the same extent that the Company would be required to
perform if no such succession had taken place. The term
"Company," as used in the Plan, shall mean the Company as
hereinbefore defined and any successor or assignee to the
business or assets which by reason hereof becomes bound by
this Plan.
Page 2 of 5
<PAGE> 3
IX. CHANGE IN CONTROL
A. "Change in Control" means the occurrence of any one of the
following events:
(i) individuals who, on January 21, 1997, constitute the Board
(the "Incumbent Directors") cease for any reason to constitute
at least a majority of the Board, provided that any person
becoming a director subsequent to January 21, 1997, whose
election or nomination for election was approved by a vote of
at least three-fourths (3/4) of the Incumbent Directors then
on the Board (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named
as a nominee for director, without written objection to such
nomination) shall be an Incumbent Director; provided, however,
that no individual elected or nominated as a director of the
Company initially as a result of an actual or threatened
election contest with respect to directors or as a result of
any other actual or threatened solicitation of proxies or
consents by or on behalf of any person other than the Board
shall be deemed to be an Incumbent Director;
(ii) any "Person" (as defined under Section 3(a)(9) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act") and as used in Section 13(d) or Section 14(d) of the
Exchange Act) is or becomes a "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding
securities eligible to vote for the election of the Board (the
"Company Voting Securities"); provided, however, that the
event described in this paragraph (ii) shall not be deemed to
be a change in control by virtue of any of the following
acquisitions: (A) by the Company or any entity in which the
Company directly or indirectly beneficially owns more than 50%
of the voting securities or interests (a "Subsidiary"), (B) by
an employee stock ownership or employee benefit plan or trust
sponsored or maintained by the Company or any Subsidiary, (C)
by any underwriter temporarily holding securities pursuant to
an offering of such securities, or (D) pursuant to a
Non-Qualifying Transaction (as defined in paragraph (iii));
(iii) consummation of a merger, consolidation, share exchange
or similar form of corporate transaction involving the Company
or any of its Subsidiaries that requires the approval of the
Company's shareholders, whether for such transaction or the
issuance of securities in the transaction (a "Business
Combination"), unless immediately following such Business
Combination: (A) more than 50% of the total voting power of
(x) the corporation resulting from such Business Combination
(the "Surviving Corporation"), or (y) if applicable, the
ultimate parent corporation that directly or indirectly has
beneficial ownership of 100% of the voting securities eligible
to elect directors of the Surviving Corporation (the "Parent
Corporation"), is represented by Company Voting Securities
that were outstanding immediately prior to the consummation of
such Business Combination (or, if applicable, is represented
by shares into which such Company Voting Securities were
converted pursuant to such Business Combination), and such
voting power among the holders thereof is in substantially the
same proportion as the voting power of such Company Voting
Securities among the holders thereof immediately prior to the
Business Combination, (B) no person (other than any employee
benefit plan sponsored or maintained by the Surviving
Corporation or the Parent Corporation), is or becomes the
beneficial owner, directly or indirectly, of 20% or more of
the total voting power of the outstanding voting securities
eligible to elect directors of the Parent Corporation (or, if
there is no Parent Corporation, the Surviving Corporation) and
(C) at least a majority of the members of the board of
directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation) were Incumbent
Directors at the time of the Board's approval of the execution
of the initial agreement providing for such Business
Combination (any Business Combination which satisfies all of
the criteria specified in (A), (B) and (C) above shall be
deemed to be a "Non-Qualifying Transaction"); or
(iv) the shareholders of the Company approve a plan of
complete liquidation or dissolution of the Company or a sale
of all or substantially all of the Company's assets.
Page 3 of 5
<PAGE> 4
Notwithstanding the foregoing, a Change in Control of the Company shall
not be deemed to occur solely because any person acquires beneficial
ownership of more than 20% of the Company Voting Securities as a result
of the acquisition of Company Voting Securities by the Company which
reduces the number of Company Voting Securities outstanding; provided,
that if after such acquisition by the Company such person becomes the
beneficial owner of additional Company Voting Securities that increases
the percentage of outstanding Company Voting Securities beneficially
owned by such person, a change in control of the Company shall then
occur.
B. Notwithstanding anything herein to the contrary, the benefits
payable under the Plan (both benefits that have accrued at the
time of a Change in Control and those that accrue thereafter)
may not be reduced or terminated after a Change in Control for
any individual who was a participant in the Plan at the time
of the Change in Control.
C. (1) Notwithstanding anything in the Plan to the contrary, in
the event a Change in Control or the "Pre- Change in Control
Date" (as defined below) occurs, the Company shall make a lump
sum payment ("Payment") to each Participant (including any
Participant currently receiving benefits under the Plan) on a
date (the "Distribution Date") no later than 2 business days
after the Change in Control has occurred (or, if an agreement
to effectuate a Change in Control pursuant to a Business
Combination has been executed, on the date (the "Pre-Change in
Control Date") that is the third business day prior to the
date the Chief Executive Officer of the Company believes in
good faith will be the effective date of such Change in
Control, but in any event prior to the effective date of such
Change in Control).
(2) The Payment shall be in an amount equal to the accrued
benefit (the "Accrued Benefit") under the Plan as of the
Distribution Date converted into an Actuarially Equivalent
lump sum (in accordance with the provisions of paragraphs (3)
through (6) below). For purposes of determining the
Actuarially Equivalent lump sum of an Accrued Benefit, the
mortality table specified under the Program for actuarial
equivalence and an interest rate of 4.2% shall be used.
(3) If a Participant is age 65 or older as of the Distribution
Date, the Accrued Benefit shall be converted to an Actuarially
Equivalent lump sum assuming that such Participant (a) retired
on the Distribution Date and (b) immediately commenced receipt
of the Accrued Benefit in the normal form of benefit under the
Program.
(4) If a Participant has not attained age 65 as of the
Distribution Date, but is at least age 55, the Accrued Benefit
shall be converted to an Actuarially Equivalent lump sum
assuming that (a) such Participant retired on the Distribution
Date, (b) the Accrued Benefit was reduced for early
commencement using the reduction factors specified in the
Program and (c) such Participant immediately commenced receipt
of such reduced Accrued Benefit in the normal form of benefit
under the Program.
(5) If a Participant has not attained age 55 as of the
Distribution Date, the Accrued Benefit shall first be
converted to an Actuarially Equivalent lump sum assuming that
(a) such Participant was age 55 on the Distribution Date, (b)
the Accrued Benefit was reduced for early commencement using
the reduction factors specified in the Program for a
Participant retiring at age 55 and (c) such Participant
commenced receipt at age 55 of such reduced Accrued Benefit in
the normal form of benefit under the Program. Such Actuarially
Equivalent lump sum shall then be further reduced from age 55
to such Participant's actual age as of the Distribution Date,
using an interest rate of 4.2% but without any reduction for
mortality.
(6) Notwithstanding anything to the contrary in this Section
IX.C, in the event any Participant (or any Participant's
beneficiary) is receiving benefit payments under the Plan as
of the Distribution Date (such Participant or beneficiary, a
"Retiree"), the amount of the Payment payable to such Retiree
shall be the Actuarially Equivalent lump sum value of such
remaining benefit payments that would otherwise be payable to
such Retiree.
(7) With respect to any Retiree, the Payment payable under
this Section IX.C shall be in lieu of, and in
Page 4 of 5
<PAGE> 5
full settlement of, any other remaining amounts that would
have been payable to such Retiree had a Change in Control (or
the Pre-Change in Control Date) not occurred, and the Company
shall have no further obligations to such Retiree after such
Payment is made. With respect to any Participant other than a
Retiree, in the event the Plan is continued and not terminated
following a Change in Control, any amount finally determined
under Section VI of the Plan upon such Participant's actual
retirement shall be offset by the amount of the Accrued
Benefit (as converted to the applicable form of benefit)
determined under this Section IX.C.
Page 5 of 5
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
TENNESSEE NATIONAL CORPORATION'S MARCH 31, 1998, FINANCIAL STATEMENTS FILED IN
ITS 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 758,601
<INT-BEARING-DEPOSITS> 12,711
<FED-FUNDS-SOLD> 89,850
<TRADING-ASSETS> 368,727
<INVESTMENTS-HELD-FOR-SALE> 1,914,152
<INVESTMENTS-CARRYING> 52,127
<INVESTMENTS-MARKET> 53,203
<LOANS> 10,736,411
<ALLOWANCE> 130,026
<TOTAL-ASSETS> 15,897,562
<DEPOSITS> 10,814,772
<SHORT-TERM> 2,487,122
<LIABILITIES-OTHER> 1,251,451
<LONG-TERM> 266,577
100,000
0
<COMMON> 80,123
<OTHER-SE> 897,517
<TOTAL-LIABILITIES-AND-EQUITY> 15,897,562
<INTEREST-LOAN> 213,681
<INTEREST-INVEST> 34,200
<INTEREST-OTHER> 9,160
<INTEREST-TOTAL> 257,041
<INTEREST-DEPOSIT> 86,198
<INTEREST-EXPENSE> 129,901
<INTEREST-INCOME-NET> 127,140
<LOAN-LOSSES> 13,515
<SECURITIES-GAINS> 29
<EXPENSE-OTHER> 230,908
<INCOME-PRETAX> 72,694
<INCOME-PRE-EXTRAORDINARY> 72,694
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,355
<EPS-PRIMARY> 0.36<F1>
<EPS-DILUTED> 0.35<F1>
<YIELD-ACTUAL> 4.03
<LOANS-NON> 40,080
<LOANS-PAST> 30,311
<LOANS-TROUBLED> 117
<LOANS-PROBLEM> 40,341
<ALLOWANCE-OPEN> 125,859
<CHARGE-OFFS> 12,376
<RECOVERIES> 3,028
<ALLOWANCE-CLOSE> 130,026
<ALLOWANCE-DOMESTIC> 130,026
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>FIRST TENNESSEE NATIONAL CORPORATION EFFECTED A TWO-FOR-ONE STOCK SPLIT ON
FEBRUARY 20, 1998. THIS CURRENT FINANCIAL DATA SCHEDULE AND THE DECEMBER 31,
1997 FINANCIAL DATA SCHEDULE FILED WITH THE 1997 FORM 10-K REFLECT THIS STOCK
SPLIT. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED TO REFLECT THE
STOCK SPLIT.
</FN>
</TABLE>
