<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
FIRST TENNESSEE NATIONAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
--------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
--------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------
(5) Total fee paid:
--------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
(1) Amount previously paid:
--------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------
(3) Filing party:
-------------------------------------------------------
(4) Dated filed:
--------------------------------------------------------
<PAGE> 2
[LOGO](sm)
FIRST TENNESSEE
All Things Financial(sm)
FIRST TENNESSEE NATIONAL CORPORATION
1999 PROXY STATEMENT & 1998 FINANCIAL INFORMATION
<PAGE> 3
March 17, 1999
Dear Shareholders:
You are cordially invited to attend First Tennessee National Corporation's 1999
annual meeting of shareholders. We will hold the meeting on April 20, 1999, in
the Auditorium, First Tennessee Building, 165 Madison Avenue, Memphis,
Tennessee, at 10:00 a.m. We have enclosed the formal notice of the annual
meeting, our 1999 proxy statement, and a form of proxy.
At the meeting, we will ask you to elect four Class III directors and ratify the
appointment of Arthur Andersen LLP as our independent auditors for 1999. The
attached proxy statement contains information about these matters.
An appendix to this proxy statement contains detailed financial information
relating to our activities and operating performance during 1998. We have also
enclosed a Summary Annual Report for those of you that did not receive this
document previously.
Your vote is important. You may vote by telephone, over the Internet or by mail.
A postage-paid envelope has been provided if you choose to vote by mail. If you
want to vote your shares at the meeting, then prior to the balloting you should
request that your form of proxy be withheld from voting. We request that you
vote as soon as possible.
Sincerely yours,
/s/ Ralph Horn
-------------------------------------
Ralph Horn
Chairman of the Board,
President and Chief Executive Officer
<PAGE> 4
FIRST TENNESSEE NATIONAL CORPORATION
165 Madison Avenue
Memphis, Tennessee 38103
NOTICE OF ANNUAL SHAREHOLDERS' MEETING
April 20, 1999
The annual meeting of shareholders of First Tennessee National Corporation will
be held on April 20, 1999, at 10:00 a.m., CDT, in the Auditorium, First
Tennessee Building, 165 Madison Avenue, Memphis, Tennessee.
The items of business are:
1. Election of four Class III directors to serve until the 2002 annual
meeting of shareholders, or until their successors are duly elected
and qualified.
2. Ratification of appointment of auditors.
These items are described more fully in the following pages, which are made a
part of this notice. The close of business February 26, 1999, is the record date
for the meeting. All shareholders of record at that time are entitled to vote at
the meeting.
Management requests that you vote by telephone or over the Internet (following
the instructions on the enclosed form of proxy) or that you sign and return the
form of proxy promptly, so that if you are unable to attend the meeting your
shares can nevertheless be voted. You may revoke a proxy at any time before it
is exercised at the annual meeting in the manner described on page 1 of the
proxy statement.
/s/ Lenore S. Creson
--------------------
Lenore S. Creson
Corporate Secretary
Memphis, Tennessee
March 17, 1999
- --------------------------------------------------------------------------------
IMPORTANT NOTICE
PLEASE (1) VOTE BY TELEPHONE OR (2) OVER THE INTERNET OR (3) MARK, DATE,
SIGN AND PROMPTLY MAIL THE ENCLOSED FORM OF PROXY IN THE ENCLOSED ENVELOPE
SO THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING.
- --------------------------------------------------------------------------------
1
<PAGE> 5
<TABLE>
PROXY STATEMENT
FIRST TENNESSEE NATIONAL CORPORATION
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
GENERAL MATTERS...................................................................3
STOCK OWNERSHIP INFORMATION AND TABLE.............................................4
VOTE ITEM NO. 1 - ELECTION OF DIRECTORS...........................................5
Nominees For Director.......................................................5
Continuing Directors........................................................6
The Board Of Directors And Its Committees...................................7
VOTE ITEM NO. 2 - RATIFICATION OF APPOINTMENT OF AUDITORS.........................7
OTHER MATTERS.....................................................................8
SHAREHOLDER PROPOSAL DEADLINES....................................................8
EXECUTIVE COMPENSATION............................................................8
Summary Compensation Table..................................................9
Option/SAR Grants in 1998..................................................11
Aggregated Option/SAR Exercises in 1998 and Year End Values................12
Pension Plan Table.........................................................13
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements............................................................14
Compensation Committee Interlocks and Insider Participation................15
Certain Relationships and Related Transactions.............................15
Board Compensation Committee Report on Executive Compensation..............16
Total Shareholder Return Performance Graph.................................20
Compensation of Directors..................................................21
Section 16(a) Beneficial Ownership Reporting Compliance....................22
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K.......................................22
APPENDIX - FINANCIAL INFORMATION AND DISCUSSION..................................
</TABLE>
2
<PAGE> 6
PROXY STATEMENT
FIRST TENNESSEE NATIONAL CORPORATION
165 Madison Avenue
Memphis, Tennessee 38103
GENERAL MATTERS
The following proxy statement is being mailed to shareholders beginning on or
about March 17, 1999. The Board of Directors is soliciting proxies to be used at
our annual meeting of the shareholders to be held on April 20, 1999, at 10:00
a.m., CDT, in the Auditorium, First Tennessee Building, 165 Madison Avenue,
Memphis, Tennessee, and at any adjournment or adjournments thereof.
The accompanying form of proxy is for use at the meeting if you will be unable
to attend in person. You may revoke your proxy at any time before it is
exercised by writing to the Corporate Secretary, by timely delivery of a
properly executed, later-dated proxy (including a telephone or Internet vote) or
by voting by ballot at the meeting. All shares represented by valid proxies
received pursuant to this solicitation, and not revoked before they are
exercised, will be voted in the manner specified therein. If no specification is
made, the proxies will be voted in favor of:
1. Election of four Class III directors to serve until the 2002 annual
meeting of shareholders or until their successors are duly elected
and qualified.
2. Ratification of appointment of auditors.
We will bear the entire cost of soliciting the proxies. In following up the
original solicitation of the proxies by mail, we may request brokers and others
to send proxies and proxy material to the beneficial owners of the shares and
may reimburse them for their expenses in so doing. If necessary, we may also use
several of our regular employees to solicit proxies from the shareholders,
either personally or by telephone or by special letter, for which they will
receive no compensation in addition to their normal compensation.
Our common stock is the only class of voting securities. There were 129,809,484
shares of common stock outstanding and entitled to vote as of February 26, 1999,
the record date for the annual shareholders' meeting. Each share is entitled to
one vote. A quorum of the shares must be represented at the meeting to take
action on any matter at the meeting. A majority of the votes entitled to be cast
constitutes a quorum for purposes of the annual meeting. A plurality of the
votes cast is required to elect the nominees as directors. To approve the
ratification of the appointment of auditors, the votes cast in favor of the item
must exceed the votes cast in opposition to it. Both "abstentions" and broker
"non-votes" will be considered present for quorum purposes, but will not
otherwise have any effect on either of the vote items.
3
<PAGE> 7
STOCK OWNERSHIP INFORMATION AND TABLE
We know of no person who owned beneficially, as that term is defined by Rule
13d-3 of the Securities Exchange Act of 1934, more than five percent of our
common stock on December 31, 1998.
The following table sets forth certain information as of December 31, 1998,
concerning beneficial ownership of our common stock by each director and
nominee, each executive officer named in the Summary Compensation Table, and
directors and executive officers as a group:
<TABLE>
<CAPTION>
Name of Shares Beneficially Stock Units in Total and Percent
Beneficial Owner Owned (1) Deferral Accounts (2) of Class (3)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert C. Blattberg 50,084(4) -- 50,084
Carlos H. Cantu 27,645(4) -- 27,645
George E. Cates 37,701(4) -- 37,701
J. Kenneth Glass 315,591(5) 45,340 360,931
James A. Haslam, III 36,031(4) -- 36,031
Ralph Horn 1,043,880(5) 44,229 1,088,109
John C. Kelley, Jr. 288,348(5) 77,501 365,849
George P. Lewis 424,792(5) -- 424,792
R. Brad Martin 44,582(4) -- 44,582
Joseph Orgill, III 237,281(4) -- 237,281
Vicki R. Palmer 49,916(4) -- 49,916
Michael D. Rose 49,109(4) -- 49,109
William B. Sansom 62,665(4) -- 62,665
Elbert L. Thomas, Jr. 201,402(5) 7,226 208,628
Directors and Executive Officers
as a Group (19 persons) 3,679,822(5) 222,934 3,902,756
3.0%
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) All share amounts have been adjusted to reflect the two-for-one stock
split that was paid February 20, 1998. The respective directors and
officers have sole voting and investment powers with respect to all of
such shares except as specified in note (4) and note (5). Amounts in the
second column do not include stock units in the next column.
(2) The Board of Directors and Human Resources Committee approved amendments
to our stock option program in 1997 that permit participants to defer
receipt of shares upon the exercise of options and amendments to our
restricted stock incentive plan in 1998 that permit participants to defer
receipt of shares prior to the lapsing of restrictions imposed on
restricted stock awards. Amounts in the third column reflect the number of
shares deferred that a participant has the vested right to receive on a
future date. These shares are not currently issued and are not considered
to be beneficially owned for purposes of Rule 13d-3, but are reflected in
a deferral account on our books as phantom stock units or restricted stock
units.
(3) No individual director or executive officer beneficially owns 1% or more
of our common stock that is outstanding. The percentage of class owned by
the director and executive officer group (3.0%) includes stock units. The
percentage would be 2.8% with stock units excluded.
(4) Includes 2,400 shares of restricted stock (as to each of Messrs.
Blattberg, Orgill, Rose and Sansom), 4,800 shares (as to each of Messrs.
Cantu, Cates and Haslam), 3,600 shares (as to Mr. Martin), and 3,000
shares (as to Mrs. Palmer) with respect to which the nonemployee director
possesses sole voting power, but no investment power. Includes the
following shares as to which the named nonemployee directors have the
right to acquire beneficial ownership through the exercise of stock
options granted under our director plan, all of which are 100% vested:
4
<PAGE> 8
Dr. Blattberg - 43,724; Mr. Cantu - 21,583; Mr. Cates - 25,639; Mr. Haslam
- 20,489; Mr. Martin - 17,139; Mr. Orgill - 47,351; Mrs. Palmer - 43,808;
Mr. Rose - 39,949; and Mr. Sansom - 54,744.
(5) Includes the following shares of restricted stock with respect to which
the named person or group has sole voting power but no investment power:
Mr. Glass - 24,237; Mr. Horn - 60,000; Mr. Kelley - 24,237; Mr. Lewis -
21,676; Mr. Thomas - 14,450; and the director and executive officer group
- 220,594. Includes the following shares as to which the named person or
group has the right to acquire beneficial ownership within 60 days through
the exercise of stock options granted under our stock option plans: Mr.
Glass - 130,316; Mr. Horn - 494,319; Mr. Kelley - 130,658; Mr. Lewis -
49,768; Mr. Thomas - 144,818; and the director and executive officer group
- 1,536,415. Also includes shares held at December 31, 1998, for 401(k)
Savings Plan accounts.
VOTE ITEM NO. 1 - ELECTION OF DIRECTORS
The Board of Directors is divided into three Classes. The term of office of each
Class expires in successive years. The term of Class III directors expires at
this annual meeting. The terms of Class I and Class II directors expire at the
2000 and 2001 annual meetings, respectively. The Board of Directors proposes the
election of four Class III directors. Each director elected at the meeting will
hold office until the specified annual meeting of shareholders and until his or
her successor is elected and qualified.
If any nominee proposed by the Board of Directors is unable to accept election,
which the Board of Directors has no reason to anticipate, the persons named in
the enclosed form of proxy will vote for the election of such other persons as
management may recommend, unless the Board decides to reduce the number of
directors pursuant to the Bylaws.
We have provided below certain information about the nominees and directors
(including age, current principal occupation which has continued for at least
five years unless otherwise indicated, name and principal business of the
organization in which his or her occupation is carried on, directorships in
other reporting companies, and year first elected to our Board). All of our
directors are also directors of First Tennessee Bank National Association (the
"Bank" or "FTB"). The Bank is our principal operating subsidiary.
NOMINEES FOR DIRECTOR
Class III
For a Three-Year Term Expiring at 2002 Annual Meeting
CARLOS H. CANTU (65) is President and Chief Executive Officer of The
ServiceMaster Company, Downers Grove, Illinois, a company that provides consumer
services and supportive management services. Mr. Cantu is a director of two
other public companies, The ServiceMaster Company and Unicom Corporation. Mr.
Cantu has been a director since 1996 and is a member of the Human Resources
Committee.
GEORGE E. CATES (61) is Chairman of the Board and Chief Executive Officer of
Mid-America Apartment Communities, Inc., ("Mid-America") Memphis, Tennessee, a
real estate investment trust. Mr. Cates is a director of one other public
company, Mid-America Apartment Communities, Inc. Mr. Cates has been a director
of the Corporation since 1996.
JAMES A. HASLAM, III (44) is Chief Executive Officer and Chief Operating Officer
of Pilot Corporation, Knoxville, Tennessee, a national retail operator of
convenience stores and travel centers. Mr. Haslam is a director of one other
public company, Plasti-Line, Inc. Mr. Haslam has been a director since 1996 and
is a member of the Audit Committee.
5
<PAGE> 9
RALPH HORN (57) is Chairman of the Board, President, and Chief Executive Officer
of First Tennessee and the Bank. Mr. Horn has served as President of First
Tennessee since 1991, Chief Executive Officer since 1994, and Chairman of the
Board since 1996. Mr. Horn is a director of two other public companies, Harrah's
Entertainment, Inc. and Mid-America Apartment Communities, Inc. Mr. Horn has
been a director since 1991.
CONTINUING DIRECTORS
Class I
Term Expiring at 2000 Annual Meeting
R. BRAD MARTIN (47) is Chairman of the Board and Chief Executive Officer of Saks
Incorporated (formerly, Proffitt's, Inc.), Birmingham, Alabama, a retail
merchandising company. Mr. Martin is a director of two other public companies,
Saks Incorporated and Harrah's Entertainment, Inc. He has been a director since
1994 and is Chairman of the Human Resources Committee.
JOSEPH ORGILL, III (61) is Chairman of the Board of Orgill, Inc., Memphis,
Tennessee, wholesale hardware distributors. Prior to January 1996, Orgill, Inc.,
was a subsidiary of West Union Corporation, Memphis, Tennessee, of which Mr.
Orgill remains Chairman of the Board. Mr. Orgill has been a director since 1969.
VICKI R. PALMER (45) is Corporate Vice President and Treasurer of Coca-Cola
Enterprises Inc., Atlanta, Georgia, a bottler of soft drink products. Mrs.
Palmer has been a director since 1993 and is Chairperson of the Audit Committee.
WILLIAM B. SANSOM (57) is Chairman of the Board and Chief Executive Officer of
The H. T. Hackney Co., Knoxville, Tennessee, a diversified wholesale
distribution firm serving the food, gas, oil and industrial markets in the
Southeast. He is a director of two other public companies, Martin Marietta
Materials, Inc. and Astec Industries, Inc. Mr. Sansom has been a director since
1984 and is a member of the Human Resources Committee.
Class II
Term Expiring at 2001 Annual Meeting
ROBERT C. BLATTBERG (56) is the Polk Brothers Distinguished Professor of
Retailing, J. L. Kellogg Graduate School of Management, Northwestern University,
Evanston, Illinois. Dr. Blattberg is a director of one other public company,
Factory Card Outlet Corp. Dr. Blattberg has been a director since 1984 and is a
member of the Audit Committee.
J. KENNETH GLASS (52) is President-Tennessee Banking Group of the Bank and
Executive Vice President of First Tennessee. Mr. Glass has been President of the
Tennessee Banking Group since 1993 and Executive Vice President of First
Tennessee since 1995. Mr. Glass has been a director since 1996.
JOHN C. KELLEY, JR. (55) is President-Memphis Banking Group of the Bank and
Executive Vice President of First Tennessee. Mr. Kelley has been President of
the Memphis Banking Group since 1993 and Executive Vice President of First
Tennessee since 1995. Mr. Kelley has been a director since 1996.
MICHAEL D. ROSE (57) is a private investor. Prior to December 19, 1997, he was
Chairman of the Board of Promus Hotel Corporation, Memphis, Tennessee, a
franchiser and operator of hotel brands. Prior to January 1997, Mr. Rose was
also Chairman of the Board of Harrah's Entertainment, Inc. Prior to June 30,
1995, Mr. Rose was Chairman of The Promus Companies Incorporated, and prior to
April 1994, its Chief Executive Officer. Mr. Rose is a director of six other
public companies, Ashland, Inc., Darden Restaurants, Inc., FelCor Lodging Trust,
6
<PAGE> 10
Inc., General Mills, Inc., ResortQuest International, Inc., and Stein Mart, Inc.
Mr. Rose has been a director since 1984 and is a member of the Human Resources
Committee.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
-----------------------------------------
During 1998 the Board of Directors held five meetings. The average attendance at
Board and committee meetings exceeded 90 percent. No director attended fewer
than 75 percent of the meetings of the Board and the committees of the Board on
which he or she served, except for Mr. Cantu and Mr. Haslam.
The Board has several standing committees, including the Audit Committee and the
Human Resources Committee. The Human Resources Committee serves as both a
nominating committee and a compensation committee. The Audit Committee and the
Human Resources Committee are each composed of directors who are not First
Tennessee employees. Currently, Messrs. Blattberg and Haslam and Mrs. Palmer
serve on the Audit Committee and Messrs. Cantu, Martin, Rose and Sansom serve on
the Human Resources Committee.
The Audit Committee is responsible for causing corporate audits and examinations
to be made by independent auditors and supervising our internal audit program.
The Committee approves, subject to shareholder ratification, the engagement of
our independent auditors and reviews the scope and results of their examination.
Other committee functions include review of our internal controls and our annual
report to the SEC and proxy materials. During 1998 the Audit Committee held four
meetings.
As a nominating committee, the Human Resources Committee primarily considers
recommendations for nominees to the Board of Directors, reviews the performance
of incumbent directors and senior officers in determining whether to recommend
them to the Board of Directors for reappointment, reviews succession plans, and
between annual meetings appoints persons to offices except the offices of
Chairman, CEO, President, Auditor and any office in which the incumbent has been
designated by the Board as an Executive Officer. As a compensation committee,
the Human Resources Committee's primary functions include recommending to the
Board major policies concerning compensation, periodically reviewing corporate
compensation and management of human resources, fixing the compensation of
executive officers, reviewing remuneration structures for non-executive
officers, and making recommendations to the Board concerning compensation
arrangements for directors and adoption or amendment of employee benefit and
management compensation plans. During 1998 the Human Resources Committee held
six meetings.
It is our practice to encourage communication between management and
shareholders. Management in turn communicates appropriate information to the
Board. The Human Resources Committee, as a committee of the Board, follows this
procedure in considering nominations for directorships and does not receive
nominations directly from shareholders.
VOTE ITEM NO. 2 - RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed, subject to ratification by the
shareholders at the annual meeting, the firm of Arthur Andersen LLP, independent
accountants, to be our auditors for the year 1999. Representatives of Arthur
Andersen LLP are expected to be present at the annual meeting of shareholders
with the opportunity to make a statement and to respond to appropriate
questions.
7
<PAGE> 11
OTHER MATTERS
The Board of Directors, at the time of the preparation and printing of this
proxy statement, knew of no other business to be brought before the meeting
other than the matters described in this proxy statement. If any other business
properly comes before the meeting, the persons named in the enclosed proxy will
have discretionary authority to vote all proxies in accordance with their best
judgment.
SHAREHOLDER PROPOSAL DEADLINES
If you intend to present a shareholder proposal at the 2000 annual meeting, it
must be received by the Corporate Secretary, First Tennessee National
Corporation, P. O. Box 84, Memphis, Tennessee, 38101, not later than November
18, 1999, for inclusion in the proxy statement and form of proxy relating to
that meeting.
In addition, Sections 2.8 and 3.6 of our Bylaws provide that a shareholder who
wishes to nominate a person for election to the Board or submit a proposal at a
shareholder meeting must comply with certain procedures whether or not the
matter is included in our proxy statement. These procedures require written
notification to us, generally not less than 90 days nor more than 120 days prior
to the date of the shareholder meeting. If, however, we give fewer than 100 days
notice or public disclosure of the shareholder meeting date to shareholders,
then we must receive the shareholder notification not later than 10 days after
the earlier of the date notice of the shareholder meeting was mailed or publicly
disclosed. The shareholder must disclose certain information about the nominee
or item proposed, the shareholder and any other shareholders known to support
the nominee or proposal. Section 2.4 of our Bylaws provides that the date and
time of the annual meeting will be the third Tuesday in April (or if that day is
a legal holiday, on the next succeeding business day that is not a legal
holiday) at 10:00 a.m. Memphis time or such other date and/or such other time as
our Board may fix by resolution. The meeting date for 2000, determined according
to the Bylaws, is April 18, 2000. Thus, shareholder proposals submitted outside
the process that permits them to be included in our proxy statement must be
submitted to the Corporate Secretary between December 20, 1999, and January 19,
2000, or the proposals will be considered untimely. Untimely proposals may be
excluded by the Chairman or our proxies may exercise their discretion and vote
on these matters in a manner they determine to be appropriate.
EXECUTIVE COMPENSATION
The Summary Compensation Table provides information for the last three years
about the Chief Executive Officer (CEO) and our other four most highly
compensated executive officers. The amounts include all compensation earned
during each year, including amounts deferred, by the named officers for all
services rendered in all capacities to us and our subsidiaries. Information is
provided for each entire year in which an individual served during any portion
of the year as an executive officer. Additional information is provided in
tabular form below about option grants and exercises in 1998, year-end option
values, and pension benefits, along with a report of the Board's Human Resources
Committee on executive compensation and certain other information concerning
compensation of executive officers and directors.
8
<PAGE> 12
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------------
Annual Compensation Awards (3) Payouts
--------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Number of
Other Securities
Annual Underlying All Other
Compen- Restricted Options/ LTIP Compen-
Name and Salary Bonus sation (6) Stock (1) SARs (2) Payouts sation (7)
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ralph Horn 1998 $ 683,654 $ 512,741(5) $ 10,806 $ - 65,536(5) $ - $ 149,231
Chairman, President 1997 523,077(4) 313,846 10,806 - 113,872(4) - 138,930
& CEO 1996 497,866(4) 224,040 10,850 - 108,026(4) - 146,322
FTNC and FTB
J. Kenneth Glass 1998 387,634(4) 232,580 6,720 - 21,911(4) - 106,042
President-Tennessee 1997 343,577(4) 186,549 6,720 - 55,632(4) - 96,426
Banking Grp.-FTB 1996 316,461 123,040 6,720 536,796 31,076 - 88,310
John C. Kelley, Jr. 1998 381,923 226,862 6,720 - 16,169 - 129,012
President-Memphis 1997 338,077 181,294 6,720 - 48,608 - 116,175
Banking Grp.-FTB 1996 310,961 120,902 6,720 536,796 30,542 - 105,483
George P. Lewis 1998 239,066 119,533 - - 6,681 - 27,951
Exec. Vice Pres., 1997 215,795 104,661 - - 10,310 - 27,117
Manager Money 1996 205,519 74,912 - 320,046 13,408 - 26,735
Mgmt. Grp.-FTB
Elbert L. Thomas, Jr. 1998 226,983(4) 113,492(5) - - 41,206(4)(5) - 18,064
Exec. Vice Pres. & CFO 1997 202,277(4) 101,139(5) - - 45,764(4)(5) - 17,621
FTNC and FTB 1996 190,000(4) 76,950(5) - 320,046 69,720(4)(5) - 10,716
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Restricted stock awards are valued on the basis of the fair market value
of a share of stock on the date of the award: $14.77 (1-16-96), adjusted
for stock splits. On December 31, 1998, the named officers held the
following shares of restricted stock with market values as indicated: Mr.
Horn - 90,000 shares ($3,425,400); Mr. Glass - 36,356 shares ($1,383,709);
Mr. Kelley - 36,356 shares ($1,383,709); Mr. Lewis - 21,676 shares
($824,989); Mr. Thomas - 21,676 shares ($824,989). The number of shares
disclosed includes restricted stock units (RSU's), described in note (2)
to the Stock Ownership Table, with respect to which restrictions had not
lapsed at December 31, 1998, as follows: Mr. Horn - 30,000 RSU's; Mr.
Glass - 12,119 RSU's; Mr. Kelley - 12,119 RSU's; Mr. Lewis - 0 RSU's; and
Mr. Thomas - 7,226 RSU's. Dividends are paid on restricted stock (and
dividend equivalents are paid on RSU's) at the same rate as all other
shares of our common stock. Dividend equivalents on RSU's accrue interest
at a 10-year Treasury rate and are settled only in cash.
(2) All amounts represent shares subject to option. No stock appreciation
rights (SAR's) were awarded.
(3) All share amounts and share values have been revised to reflect the
two-for-one stock splits, distributed 2-20-98 and 2-16-96.
(4) In both 1996 and 1995 Mr. Horn elected to receive a deferred compensation
stock option in lieu of $100,000 of salary earned for the following year.
The amounts in column (c) include this amount, in lieu of which options
for 27,700 shares and 43,384 shares (included in the amounts in column
(g)) were granted on 7-1-97 and 7-1-96. In 1997 and 1996 Mr. Glass elected
to receive a deferred compensation stock option in lieu of $30,000 of
salary earned for the following year. The amounts in column (c) include
this amount, in lieu of which options for 2,758 shares, 2,984 shares,
9
<PAGE> 13
3,018 shares and 4,156 shares (included in the amounts in column (g)) were
granted on 1-4-99, 7-1-98, 1-2-98 and 7-1-97, respectively. In 1997, 1996
and 1995 Mr. Thomas elected to receive a deferred compensation stock option
in lieu of $80,000 of 1998 salary, $60,000 of 1997 salary and $90,000 of
1996 salary. The amount in column (c) include these amounts, in lieu of
which options for 7,355 shares, 7,958 shares, 6,036 shares, 8,310 shares,
16,804 shares and 18,742 shares (included in the amounts in column (g))
were granted on 1-4-99, 7-1-98,1-2-98, 7-1-97, 1-2-97 and 7-1-96.
(5) In 1997 Mr. Horn elected to receive a deferred compensation stock option in
lieu of $100,000 of his annual bonus for the following year. The amount in
column (d) for 1998 includes this amount, in lieu of which an option for
17,153 shares (included in the amounts in column (g)) was granted on
2-23-99. In 1997, 1996 and 1995 Mr. Thomas elected to receive a deferred
compensation stock option in lieu of his annual bonus for the following
year. The amount in column (d) for 1998 includes a bonus of $113,492, for
1997 includes a bonus of $101,139, and for 1996 includes a bonus of
$76,950, in lieu of which options for 19,467 shares, 21,704 shares and
21,892 shares (included in the amounts in column (g)) were granted on
2-23-99, 2-19-98, and 2-24-97, respectively.
(6) The amounts in column (e) for all years represent automobile allowance tax
gross-up payments.
(7) Elements of "All Other Compensation" for 1998 consist of the following:
<TABLE>
<CAPTION>
Mr. Horn Mr. Glass Mr. Kelley Mr. Lewis Mr. Thomas
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Above Market Rate $ 68,764 $ 68,475 $ 76,820 $ 2,907 $ -
Survivor Benefits/SERP 55,297 17,397 32,022 14,524 7,935
Flex $ 5,720 5,720 5,720 5,720 5,720
401(k) Match 4,800 4,800 4,800 4,800 4,409
Auto Allowance 14,650 9,650 9,650 - -
- -------------------------------------------------------------------------------------
Total $ 149,231 $ 106,042 $ 129,012 $ 27,951 $ 18,064
=====================================================================================
</TABLE>
"Above Market Rate" represents above-market interest accrued on deferred
compensation.
"Survivor Benefits/SERP" represents insurance premiums with respect to our
supplemental life insurance and excess pension plans. Under our Survivor
Benefits Plan a benefit of 2 1/2 times final annual base salary is paid upon the
participant's death prior to retirement (or 2 times final salary upon death
after retirement).
"Flex $" represents First Tennessee's contribution to the Flexible Benefits
Plan, based on salary, service and corporate performance.
"401(k) Match" represents First Tennessee's 50% matching contribution to the
401(k) Savings Plan, which is based on the amount contributed by the
participant, up to 6% of compensation.
10
<PAGE> 14
The following table provides information about stock options granted to the
officers named in the Summary Compensation Table during 1998. No stock
appreciation rights (SAR's) were granted during 1998.
Option/SAR Grants in 1998
-------------------------
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------------
(a) (b) (c) (d) (e) (h)
Number of Percentage
Securities of Total Alternatives to
Underlying Options/SARs (f) and (g): Grant
Options/SARs Granted to Exercise Date Value. Grant
Granted (1) Employees Price (1) Expiration Date Present Value (4)
Name (#) in 1998 ($ Per Share) Date ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mr. Horn 48,383 1.21% $ 34.88 4-21-08 $ 387,473
Mr. Glass 3,018 (2) .08 28.16 1-2-18 32,405
16,169 .41 34.88 4-21-08 129,489
2,984 (3) .07 27.41 7-1-18 31,007
Mr. Kelley 16,169 .41 34.88 4-21-08 129,489
Mr. Lewis 6,681 .17 34.88 4-21-08 53,504
Mr. Thomas 6,036 (2) .15 28.16 1-2-18 64,811
21,704 (2) .54 26.41 2-19-18 215,180
6,426 .16 34.88 4-21-08 51,462
7,958 (3) .20 27.41 7-1-18 82,693
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The amount of shares and the stock prices reflect the two-for-one stock
split, distributed 2-20-98. All options except those marked with footnote
(2) or (3) were granted 4-21-98 and vest 50% after four years from the
date of grant and 100% after five years, with accelerated vesting if
certain performance criteria (our stock price equals or exceeds $47.70 on
4-20-01 or on 5 consecutive days before 4-22-01) are met. No SAR's were
granted. The exercise price per share equals the fair market value of one
share of our common stock on the date of grant. Under the terms of all
options, including those marked with footnote (2) and (3), participants
are permitted to pay the exercise price of the options with our stock;
participants are permitted to defer receipt of shares upon an exercise and
thereby defer gain; options exercised more than one year prior to the end
of their term are eligible for a reload option grant when the exercise
price is paid with our stock, with the reload option grant for the number
of shares surrendered and having an exercise price equal to fair market
value at the time of the first exercise and a term equal to the remainder
of the first option's term; the option plan provides for tax withholding
rights upon approval of the plan committee; and upon a Change in Control
(as defined in the subsection entitled "Employment Contracts and
Termination of Employment and Change-in-Control Arrangements"), all
options vest.
(2) Options indicated by footnote (2) that were granted during 1998 were
granted in lieu of compensation earned during 1997. Mr. Glass's and Mr.
Thomas's options were granted on 1-2-98 in lieu of $15,000 of Mr. Glass's
1997 salary and $30,000 of Mr. Thomas's 1997 salary and vest 100% at the
time of grant. No SAR's were granted. The exercise price per share equals
85% of the fair market value of $33.16 of one share of Corporation common
stock on the grant date. Mr. Thomas's other option was granted 2-19-98 in
lieu of his bonus of $101,139 for 1997 and contains the same terms as
described for his option granted in lieu of salary. Fair market value on
the grant date was $31.06.
11
<PAGE> 15
(3) Options indicated by footnote (3) were granted in lieu of compensation
earned during 1998 and contain the same terms as described generally in
footnote (2). Mr. Glass's and Mr. Thomas's options were granted on 7-1-98
in lieu of $14,444 of Mr. Glass's 1998 salary and $38,518 of Mr. Thomas's
1998 salary. Fair market value on the grant date was $32.25.
(4) A variation of the Black-Scholes option pricing model has been used. The
following assumptions were made for purposes of calculating the Grant Date
Value of the options granted 1-2-98, 2-19-98, 4-21-98, and 7-1-98,
respectively: an exercise price of $28.16, $26.41, $34.88 and $27.41; an
option term of 20 years, 20 years, 10 years, and 20 years; an interest
rate of 5.54%, 5.57%, 5.64%, and 5.46%; volatility of 26.49%, 26.68%,
25.07%, and 26.89%; a dividend yield of 1.99%, 2.12%, 1.89%, and 2.05%; a
reduction of 0%, 0%, 24.18%, and 0% to reflect the probability of
forfeiture due to termination prior to vesting; and reduction of 16.07%,
14.84%, 13.15% and 15.26% to reflect the probability of a shortened option
term due to termination prior to the option expiration date. The actual
value, if any, realized by a participant upon the exercise of an option
may differ and will depend on the future market value of our common stock.
The following table provides information about stock options and SAR's held at
December 31, 1998, and exercises during 1998 by the officers named in the
Summary Compensation Table. The values in column (e) reflect the spread between
the market value at December 31, 1998, of the shares underlying the option and
the exercise price of the option.
Aggregated Option/SAR Exercises in 1998
---------------------------------------
And Year End Option Values
--------------------------
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Underlying Value of Unexercised
Unexercised Options/ In-the-Money
Number of SARs at 12/31/98 (1)(2) Options/SARs at 12/31/98 (1)
Shares Acquired Value ------------------------- ----------------------------
On Exercise (2) Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($) (#) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Horn 16,276 (3) $ 469,563 494,319 56,990 $ 12,786,806 $ 361,075
Mr. Glass 74,788 (3) 2,123,145 130,316 18,217 2,857,161 97,971
Mr. Kelley 74,788 (3) 2,157,634 130,658 18,217 3,078,768 97,971
Mr. Lewis 15,276 403,590 49,768 8,319 1,251,065 62,175
Mr. Thomas - - 144,818 7,654 2,809,518 50,281
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) No SAR's are attached to any of the options in the table. Option values
are based on $37.47 per share, the average of the high and low sales price
on December 31, 1998.
(2) All share amounts reflect the two-for-one stock split distributed 2-20-98.
(3) Exercises identified with footnote (3) include the following shares whose
receipt was deferred by the officer to a future date subsequent to the
exercise date: Mr. Horn - 14,229 shares, Mr. Glass - 33,221 shares, and Mr.
Kelley - 65,382 shares. The value realized is the difference between the
fair market value of the shares on the exercise date and the exercise price
of the option. The actual value ultimately realized will depend on the
future market value of the shares at the termination of the deferral
period.
12
<PAGE> 16
The following table provides information about estimated combined benefits under
both our Pension Plan and our Pension Restoration Plan.
Pension Plan Table
------------------
<TABLE>
<CAPTION>
Years of Service(*)
Covered -------------------------------------------------------------------------
Compensation 15 Yrs 20 Yrs 25 Yrs 30 Yrs 35 Yrs 40 Yrs
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $ 42,728 $ 51,607 $ 60,482 $ 64,419 $ 68,360 $ 72,300
150,000 57,530 71,345 85,155 91,556 97,964 104,371
200,000 72,332 91,083 109,827 118,693 127,568 136,442
250,000 87,134 110,821 134,500 145,830 157,172 168,513
300,000 101,936 130,559 159,172 172,967 186,776 200,584
350,000 116,738 150,297 183,845 200,104 216,380 232,655
400,000 131,540 170,035 208,517 227,241 245,984 264,726
450,000 146,342 189,773 233,190 254,378 275,588 296,797
500,000 161,144 209,511 257,862 281,515 305,192 328,868
550,000 175,946 229,249 282,535 308,652 334,796 360,939
600,000 190,748 248,987 307,207 335,789 364,400 393,010
650,000 205,550 268,725 331,880 362,926 394,004 425,081
- ------------------------------------------------------------------------------------------
</TABLE>
*Benefit shown is subject to limitations fixed by the Secretary of the
Treasury pursuant to Section 415 of the Internal Revenue Code of 1986, as
amended. The limitation is $130,000 for 1998 or 100% of the employee's
average income in his three highest paid years, whichever is less.
However, a benefit as high as $136,425 could be accrued prior to 1983 and
such higher benefit may be paid to the employee who attained that level
prior to 1983.
Our Pension Plan is integrated with social security under an "offset" formula,
applicable to all participants. Retirement benefits are based upon a
participant's average base salary for the highest 60 consecutive months of the
last 120 months of service ("Covered Compensation"), service, and social
security benefits. Benefits are normally payable in monthly installments after
age 65. The normal form of benefit payment for a married participant is a
qualified joint and survivor annuity with the surviving spouse receiving for
life 50 percent of the monthly amount the participant received. The normal form
of benefit payment for an unmarried participant is an annuity payable for life
and 10 years certain. For purposes of the plan "compensation" is defined as the
total cash remuneration reportable on the employee's IRS form W-2, plus pre-tax
contributions under the Savings Plan and employee contributions under the
Flexible Benefits Plan, excluding bonuses, commissions, and incentive and
contingent compensation. Our Pension Restoration Plan is an unfunded plan
covering employees in the highest salary grades, including Messrs. Horn, Glass,
and Kelley, whose benefits under the Pension Plan have been limited under Tax
Code Section 415, as described in the note to the Pension Table, and Tax Code
Section 401(a)(17), which limits compensation to $160,000 for purposes of
certain benefit calculations. "Compensation" is defined in the same manner as it
is for purposes of the Pension Plan. Under the Pension Restoration Plan
participants receive the difference between the monthly pension payable if tax
code limitations did not apply and the actual pension payable. The estimated
credited years of service and the compensation covered by the plans for each of
the individuals named in the Summary Compensation Table are as follows: Mr.
Horn, 35 ($496,738); Mr. Glass, 25 ($290,984); Mr. Kelley, 29 ($297,461); Mr.
Lewis, 38 ($208,440); and Mr. Thomas, 9 ($134,992).
13
<PAGE> 17
Employment Contracts and Termination of Employment and Change-in-Control
------------------------------------------------------------------------
Arrangements
------------
We have entered into contracts with 64 officers, including each of the named
executive officers, which may be terminated upon three years prior notice. These
contracts provide generally for a payment (which, for the named executive
officers is equal to three times annual base salary plus annual target bonus) in
the event of a termination of the officer's employment by us other than "for
cause" or by the employee for "good reason" (as such terms are defined in the
contracts) within 36 months after a Change-in-Control (as defined below) or the
officer's termination of employment for any reason (other than "cause") during
the 30-day period commencing one year after a Change-in-Control. The contracts
provide generally for an excise tax gross-up with respect to any taxes incurred
under Internal Revenue Code Section 4999 following a Change-in-Control and for
three years continued welfare benefits. The term Change-in-Control is defined to
include:
- a merger or other business combination, unless (i) more than 50
percent of the voting power of the corporation resulting from the
business combination is represented by our voting securities
outstanding immediately prior thereto, (ii) no person or other
entity beneficially owns 20 percent or more of the resulting
corporation, and (iii) at least a majority of the members of the
board of directors of the resulting corporation were our directors
at the time of board approval of the business combination (solely
for purposes of the severance contracts, but not for purposes of
their 30-day termination period, the "50%" test in clause (i) is
changed to "60%" and the "majority of the board" test in clause
(iii) is changed to "two-thirds of the board"),
- the acquisition by a person or other entity of 20 percent or more of
our outstanding voting stock,
- a change in a majority of the Board of Directors, or
- shareholder approval of a plan of complete liquidation or a sale of
substantially all of our assets.
A Change-in-Control has the following effect on certain benefit plans in which
the named executive officers participate:
- Target annual bonuses are prorated through the date of the
Change-in-Control and paid.
- Restricted stock, restricted stock units, phantom stock units and
unvested stock options vest.
- Under our Pension Restoration Plan, a lump sum payout is made to
participants of the present value, using a discount rate of 4.2
percent, of the participant's scheduled projected benefits, assuming
periodic distributions of the participant's accrued benefit in the
normal form under the plan, actuarially adjusted according to a
formula for the participant's age at the time of the
Change-in-Control.
- Excess funding in the pension plan is allocated, according to a
formula, to participants and retirees.
- Deferred compensation under individual deferral agreements which
accrue interest based on the 10-year Treasury rate and certain other
benefits are paid over to previously established rabbi trusts. Funds
in such trusts will remain available for the benefit of our general
creditors prior to distribution.
- Our Survivor Benefits Plan generally cannot be amended to reduce
benefits.
14
<PAGE> 18
- Under the Directors and Executives Deferred Compensation Plan, a
lump sum payout is made to participating employees and certain
terminated employees of the present value, using a discount rate of
4.2 percent, of the participant's scheduled projected distributions,
assuming employment through normal retirement date and continued
interest accruals at above-market rates, described in the
"Compensation of Directors" section below.
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
Messrs. Cantu, Martin, Rose, and Sansom, all of whom are nonemployee directors,
served as members of the Board of Director's Human Resources Committee
(Committee), which is our compensation committee, during all or a portion of
1998. No interlocking relationships existed with respect to any of the members
of the Committee. Mr. Horn, Chairman, President and CEO of First Tennessee, was,
however, during 1998 Chairman of the compensation committee of Mid-America
Apartment Communities, Inc., of which Mr. Cates, a director of First Tennessee,
is Chairman and CEO.
Certain Relationships and Related Transactions
----------------------------------------------
Our banking subsidiaries have had banking transactions in the ordinary course of
business with our executive officers, directors, nominees, and their associates
which are reported in a note to our financial statements, and they expect to
have such transactions in the future. Such transactions, which at December 31,
1998, amounted to 6.4 percent of our shareholders' equity, have been on
substantially the same terms, including interest rates, except for one
individual as described below, and collateral on loans, as those prevailing at
the same time for comparable transactions with others and have not involved more
than normal risk of collectibility or presented other unfavorable features. Two
loans were made to a person not named in the Summary Compensation Table, who has
now retired, aggregating an amount less than $40,000 under an employee program
which provided a below market interest rate at a time prior to that person
becoming an executive officer.
--------------------------------------
15
<PAGE> 19
Notwithstanding anything to the contrary set forth in any of our previous
filings under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, that might incorporate future filings by reference,
including this proxy statement, in whole or in part, the following Board
Compensation Committee Report on Executive Compensation and the Total
Shareholder Return Performance Graph shall not be incorporated by reference into
any such filings.
Board Compensation Committee Report on Executive Compensation
-------------------------------------------------------------
Our Bylaws require the Board of Directors or a Board committee to determine the
compensation of executive officers. The Board has designated the Human Resources
Committee (Committee) to perform this function. The Committee is composed
entirely of independent, nonemployee directors who have no interlocking
relationships with us. The Committee has set forth below its report on the
compensation policies applicable to executive officers and the basis for the
compensation of the Chief Executive Officer (CEO) during 1998.
Our executive compensation programs are designed to align the interests of the
executive officers with our performance and the interests of our shareholders.
Approximately 70 percent of the executive officers' annual compensation
potential is at risk based on corporate performance and total shareholder return
(defined below). Compensation programs have been designed to reward executive
officers in both cash and our stock based on performance that also rewards
shareholders. When corporate performance does not meet criteria established by
the Committee, incentive compensation is reduced accordingly. In addition, the
executive compensation program has been designed to attract and retain qualified
executive officers. Executive compensation consists generally of the following
components:
- base salary
- annual incentive bonus
- long-term incentive awards
- deferral of compensation at above-market rates or through stock
option grants
- customary employee and other benefits typically offered to similarly
situated executives
Base salary and annual bonus are based on an evaluation of the individual's
position and responsibilities based on independent criteria and external market
data and personal and corporate performance. The Committee does not assign a
specific weight to any of the factors but places greater emphasis on corporate
and personal performance in the overall mix.
Long-term incentive awards consist of restricted stock awards containing
provisions for acceleration of vesting upon achievement of corporate performance
criteria and stock options. It is not our practice to "reprice" stock options or
to price them at less than fair market value on the date of grant. Although
deferred compensation options have an exercise price of 85 percent of fair
market value on the grant date, to receive the option the participant must
forego the right to receive cash compensation. Under our option plans the amount
of the foregone cash compensation plus the option exercise price must equal or
exceed 100 percent of fair market value. We have offered deferred compensation
at above-market rates and deferrals through the use of stock options with
deferrals since 1995 limited to stock options or a 10-year Treasury rate of
interest. As a result of plan amendments adopted by the Committee and the Board
during 1997 and 1998, executive officers may also defer the receipt of shares
upon the exercise of stock options and defer the receipt of restricted stock
prior to the lapse of restrictions. Except for our stock fund within our 401(k)
plan, other benefits provided to the executive officers are not tied to
corporate performance.
The Committee reviewed external market data provided by an independent
consulting firm from thirteen highest-performing companies in the American
Banker Top 50, a peer group of banking organizations against which we measure
our strategic performance. We selected the highest-performing companies
16
<PAGE> 20
based generally on the following one and five-year return measures: return on
assets, return on equity, earnings per share growth, and total shareholder
return.
The purpose of the review was to determine compensation practices of these
companies. The Committee also reviewed available compensation data on the other
banking organizations in the American Banker Top 50. The compensation peer group
used by the independent consulting firm did not include all of the banking
organizations listed in the Total Shareholder Return Performance Graph (TSR
graph) for the 1998 peer group because compensation data on every organization
included in the TSR graph was not available. The median asset size of the
compensation highest-performing peer group was $30.0 billion. The median asset
size of the American Banker Top 50 was $54.7 billion. In actual practice the
compensation of executive officers approximates the median of the compensation
highest-performing peer group. We do not, however, have a specific policy that
mandates how our compensation practices will compare to the peer group.
All compensation paid to executive officers during 1998 is fully deductible on
our corporate federal income tax return. Section 162(m) of the Tax Code
generally disallows a tax deduction to public companies, including us, for
compensation exceeding $1 million paid during the year to the CEO and the four
other highest paid executive officers at year end. Certain performance-based
compensation is not, however, subject to the deduction limit. Under Tax Code
regulations the salary and TARSAP (defined below) portions of compensation do
not meet the performance-based compensation criteria of Section 162(m). The
Committee and Board approved amendments to the restricted stock plan permitting
deferral by participants of the receipt of restricted stock prior to the lapse
of restrictions. Any such deferral does not represent compensation paid during
the year, and thus, is not currently subject to the Section 162(m) limitation.
The Committee's practice is to continue to consider ways to maximize the
deductibility of executive compensation while retaining the discretion deemed
necessary to compensate executive officers in a manner commensurate with
performance and the competitive market of executive talent.
(i) The CEO's Compensation
--------------------------
Base Salary: The Committee establishes the CEO's base salary annually based on
corporate performance, achievement of objectives in his individualized written
personal plan and competitive practices within the industry.
The CEO develops his personal plan and submits it to the Committee for review
and recommendation. The Board of Directors approves the plan, which generally
contains strategic, quality and financial goals. A salary increase of 28.6
percent for Mr. Horn was approved in February of 1998 based on achievement of
1997 corporate return on common equity (ROE) objectives, Bank return on assets
(ROA) objectives, personal plan objectives, and competitive practices. Although
no specific weight is assigned to these factors, the Committee places greater
emphasis on corporate and personal performance than on competitive practices
within the industry. Base salary is intended to represent approximately 25
percent of the CEO's total compensation potential.
Annual Bonus: The CEO's annual bonus is based entirely on our corporate
performance against financial objectives established by the Committee at the
beginning of each year. The financial objectives for 1998 were based on ROE and
earnings per share (EPS). The CEO may be awarded an annual bonus of a maximum of
75 percent of his salary dollars earned during the year. This percentage was
increased from 60 percent in 1997, based on an analysis of competitive practices
within the industry. The degree of our success in reaching the corporate targets
determines a payout of zero percent to 100 percent of the CEO's annual bonus
potential. During 1998, our corporate performance resulted in a payout of 100
percent of the maximum.
17
<PAGE> 21
Long-term Awards: The CEO's long-term incentive compensation consists of
restricted stock and stock options.
Our restricted stock program has since 1990 included performance criteria as a
condition to early vesting of awards to executive officers. The objective of
this time accelerated restricted stock award plan (TARSAP) feature is to
associate more closely the long-term compensation of executive officers with
shareholder interests. Under the TARSAP feature, restricted stock is granted
with accelerated vesting if performance criteria established by the Committee
are met with respect to specified performance periods. Performance periods are
for three years and overlap: e.g., 1996-1998, 1997-1999, 1998-2000. Performance
criteria since inception have been based, for all participants, including the
CEO, on total shareholder return (appreciation in the market value of our stock
with dividends reinvested-"TSR") targets established at the beginning of each
performance period. Targets are based on our percentile ranking in a peer group
(the "100-bank peer group") of approximately the 100 largest banking
organizations by asset size traded on U.S. exchanges, including the Nasdaq Stock
Market's National Market System, with the condition that TSR must be a positive
number. The 100-bank peer group is different from the peer group used to compare
shareholder returns. The 100-bank peer group was originally selected in 1990,
prior to the adoption of SEC rules requiring disclosure of a shareholder return
performance graph, because the Committee believed that it was an appropriate
index with which to associate more closely long-term compensation of executives
with shareholder interests. The restricted stock program which contains the
100-bank peer group has produced the desired results, and thus, the Committee
has continued to use it for the restricted stock program. In January of 1999,
the Committee approved vesting the TARSAP shares for the 1996-1998 performance
period. The Committee's decision was based on a TSR for the period January 1,
1996 through December 31, 1998 of 169 percent, which exceeded the target and
ranked us in the top 23 percent of the peer group. The restrictions on these
shares will lapse on April 21, 1999. In addition to the TSR targets, the
Committee adopted alternative criteria for the accelerated vesting of TARSAP
awards made in 1996 and future years based upon our percentile ranking within
the 100-bank peer group with respect to operating EPS growth rate (or exceeding
a minimum operating EPS growth rate) and average operating ROE, with the
condition that TSR must be a positive number.
In addition to performance-based restricted stock awards, the Committee
generally awards stock options to executive officers, including the CEO, as a
part of a broad-based stock option program under which awards are made to all of
our employees, both full-time and part-time. The CEO's option award (which is
disclosed in the "Option/SAR Grants in 1998" table) was based on an estimated
value of the option which in combination with the restricted stock award
provides the basis for a competitive long-term incentive package. Because the
value of the option to the CEO is a function of the price growth of our stock,
the amount realized by the CEO is tied directly to increases in shareholder
value. In addition, the option grant contained a performance-based, accelerated
vesting feature, which is described in part (ii) of this report.
Other Benefits: The CEO's compensation reported in the Summary Compensation
Table also includes accrual of above-market rates of interest on compensation
deferred prior to 1996 and the cost of insurance to fund a supplemental
retirement plan and life insurance benefit, which are not directly based on
corporate performance. Above-market rates are accrued for deferred compensation
of the CEO and other named executive officers to retain key officers. Generally,
the plan under which this benefit is offered requires that the amount deferred
be automatically recalculated at market rates if termination occurs prior to
retirement.
(ii) Other Executive Officer Compensation
-----------------------------------------
Base Salary: The CEO recommends and the Committee approves the base salary for
executive officers other than the CEO. Recommendations are generally based on
corporate performance (as measured by financial, quality and strategic
18
<PAGE> 22
objectives), individual overall performance during the prior year, and
competitiveness in the market place. Corporate performance objectives for 1997,
which were achieved, were the same for executive officers as the CEO: corporate
ROE and Bank ROA objectives. It is our policy to maintain a competitive salary
commensurate with the duties and responsibilities of the executive officers.
Salary is intended to represent approximately 40 percent of an executive
officer's potential annual compensation.
Annual Bonus: Executive officers' annual bonus is based on achievement of
corporate financial objectives and performance against personal objectives for
the year, which are recorded in individualized written personal plans.
Individual objectives must include financial, quality and strategic goals. The
degree of completion of goals determines the award. Financial objectives for
1998 were based on ROE and EPS. Although Mr. Horn has an individualized personal
plan, his annual bonus is based entirely on corporate financial performance as
described above for the CEO, and the Chief Credit Officer's annual bonus is
based solely on his individualized personal plan. The maximum annual bonus of
executive officers other than the CEO is between 45 percent and 60 percent of
salary dollars during the year, based on salary grade.
Long-term Awards: The executive officers named in the Summary Compensation Table
and all but one of the other executive officers participate in the TARSAP
program described above with respect to the CEO. The performance criteria are
identical. The number of shares awarded for a three-year performance period is
generally 50 percent of the participant's salary grade mid-point, based on
market value of the shares at the time of the award. We do not provide a federal
income tax gross-up to executive officers at the vesting of restricted stock.
In addition to performance-based restricted stock awards, the Committee
generally awards stock options annually on our stock to executive officers,
including the CEO, as a part of the option program discussed in part (i) of this
report. The number of shares awarded to executive officers is equal to a
percentage of salary (ranging from 100 percent to 200 percent depending on
salary grade, with 200 percent used for the CEO) divided by the market value of
one share of our stock at the time of grant. Executive officers may also be
awarded shares in addition to those calculated as a percent of salary if in the
opinion of the Committee additional shares are required to ensure a competitive
compensation opportunity. The exercise price is the market value at the time of
grant. Options are awarded based on personal performance and to encourage future
performance as well as for retention purposes (with a ten-year term and vesting
at 50 percent after four years and 100 percent after five years). The April 1998
grant's exercise price is $34.88. This grant contains a provision for
accelerated vesting if the closing market price per share equals at least $47.70
for five consecutive days in the three years following the grant or at the end
of the three-year period. Options are not granted based on prior corporate
performance.
Other Benefits: We have adopted certain broad-based employee benefit plans in
which executive officers participate and certain other retirement, life and
health insurance plans and we provide customary personal benefits. Except for
our stock fund within our 401(k) plan, the benefits under these plans are not
tied to corporate performance. The executive officers named in the Summary
Compensation Table participate in the other benefits described above with
respect to the CEO.
Human Resources Committee
-------------------------
R. Brad Martin, Chairman
Carlos H. Cantu
Michael D. Rose
William B. Sansom
-----------------
19
<PAGE> 23
The following graph compares the yearly percentage change in our cumulative
total shareholder return with returns based on the Standard and Poor's 500 index
and a peer group index, which is described below and in a footnote to the graph.
It should be noted that the "total shareholder return" reflected in the graph is
not comparable to the "total shareholder return" described in the Compensation
Committee Report because the former has a different measurement period and it
has been adjusted and weighted for the market capitalization of the companies in
the peer group, as required by SEC regulations. Our peer group consists of the
American Banker Top 50 banking organizations (excluding First Tennessee) as
measured by market capitalization as of the end of the most recent fiscal year.
Total Shareholder Return Performance Graph
------------------------------------------
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Tennessee $ 100 $ 110 $ 170 $ 218 $ 397 $ 463
S & P 500 100 101 139 171 228 293
1998 Peer Group 100 92 144 198 303 327
- ---------------------------------------------------------------------------
</TABLE>
The graph assumes $100 is invested on December 31, 1993, and dividends are
reinvested. Returns are market-capitalization weighted.
The 1998 peer group consists of the following: AmSouth Bancorporation, Banc One
Corporation, BankAmerica Corporation, BankBoston Corporation, Bankers Trust New
York Corporation, Bank of New York, Branch Banking and Trust Company, CCB
Financial Corporation, The Chase Manhattan Corporation, Citigroup Inc., Comerica
Incorporated, Commerce Bancshares, Inc., Compass Bancshares, Crestar Financial
Corporation, Fifth Third Bancorp, First American Corporation [TN], First
Virginia Banks, Inc., Firstar Corporation, First Security Corporation [DE],
First Union Corporation, Fleet Financial Group, Hibernia Corporation, Huntington
Bancshares Incorporated, J.P. Morgan, KeyCorp, M & T Bank Corporation, Marshall
& Ilsley Corporation, Mellon Bank Corporation, Mercantile Bankshares
Corporation, Mercantile Bancorporation, Inc., National City Corporation, North
Fork Bancorporation, Northern Trust Corporation, Old Kent Financial Corporation,
PNC Bank Corp, Popular Inc., Regions Financial Corporation, Republic New York
Corporation, SouthTrust Corporation, State Street Corporation, Summit Bancorp,
SunTrust Banks, Inc., Synovus Financial Corporation, UnionBanCal Corporation,
Union Planters Corporation, U.S. Bancorp [DE], Wachovia Corporation, Wells Fargo
and Co., and Zions Bancorporation.
20
<PAGE> 24
Compensation of Directors
-------------------------
During 1998, each nonemployee director was paid a retainer quarterly at an
annual rate of $22,000 plus a fee of $1,000 for each Board and each committee
meeting attended. The chairpersons of the Audit and Human Resources Committees
were paid monthly an additional retainer at an annual rate of $3,000 each. Our
practice is to hold Board and committee meetings jointly with the Bank's Board
and committees. All of our directors are also directors of the Bank. Directors
are not separately compensated for Bank Board or committee meetings except for
those infrequent meetings that do not occur jointly. Directors who are officers
are not separately compensated for their services as directors. Under the terms
of our 1992 Restricted Stock Incentive Plan, which was approved by the
shareholders, all nonemployee directors received an automatic, nondiscretionary
award of 6,000 shares (adjusted for stock splits) of restricted stock on May 1,
1992, and all new nonemployee directors will receive such award upon election to
the Board. Restrictions lapse at the rate of 10 percent annually. Such shares
are forfeited if the director terminates for any reason other than death,
disability, retirement, or the acquisition by a person of 20 percent of the
voting power of our stock. Upon termination for any of the four listed reasons,
all shares vest. Directors may elect to defer their retainers and fees. Under
the Nonemployee Directors' Deferred Compensation Stock Option Plan, all
nonemployee directors have elected, and new nonemployee directors are permitted
to elect, to receive stock options in lieu of fees through 1999. The exercise
price per share is 85 percent of fair market value of one share of our common
stock on the date of grant, and the number of shares subject to option granted
equals the amount of fees deferred divided by 15 percent of the fair market
value of one share on the date of grant. Under the Directors and Executives
Deferred Compensation Plan, not offered with respect to compensation earned
since 1995, under which up to six annual deferrals may be elected, amounts
deferred accrue interest at rates ranging from 17 to 22 percent annually, based
on age at the time of deferral, with a reduction to a guaranteed rate based on
10-year Treasury obligations if a participant terminates prior to a
change-in-control for a reason other than death, disability or retirement.
Interim distributions in an amount between 85 percent and 100 percent of the
amount originally deferred are made in the eighth through the eleventh years
following the year of deferral, with the amount remaining in a participant's
account and accrued interest generally paid monthly over the 15 years following
retirement at age 65. Certain restrictions and limitations apply on payments and
distributions. Under other deferral agreements, nonemployee directors have
deferred and may defer amounts which generally accrue interest at a rate tied to
10-year Treasury obligations.
21
<PAGE> 25
Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended (Exchange Act)
requires our directors and officers to file with the SEC initial reports of
ownership and reports of changes in ownership of our common stock and to furnish
us with copies of all forms filed.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the past fiscal year all Section 16(a) filing requirements applicable to
our officers and directors were complied with, except that one report covering
two transactions, involving two employee stock option exercises, payment of the
exercise price with our stock, and deferral of receipt of the option shares, was
filed late by G. Robert Vezina, a retired executive officer, and one report
covering one transaction, an employee option exercise for cash, was filed late
by James F. Keen, an executive officer. In each case the officer's transaction
was exempt from short-swing profitability.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
A COPY OF OUR ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS AND
SCHEDULES THERETO, WHICH IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
IS AVAILABLE FREE OF CHARGE TO EACH SHAREHOLDER OF RECORD UPON WRITTEN REQUEST
TO THE TREASURER, FIRST TENNESSEE NATIONAL CORPORATION, P. O. BOX 84, MEMPHIS,
TENNESSEE, 38101. Each such written request must set forth a good faith
representation that as of the record date specified in the notice of annual
shareholders' meeting the person making the request was a beneficial owner of a
security entitled to vote at the annual meeting of shareholders.
The exhibits to the Annual Report on Form 10-K will also be supplied upon
written request to the Treasurer and payment to us of the cost of furnishing the
requested exhibit or exhibits. A document containing a list of each exhibit to
Form 10-K, as well as a brief description and the cost of furnishing each such
exhibit, will accompany the Annual Report on Form 10-K.
BY ORDER OF THE
BOARD OF DIRECTORS
/s/ Lenore S. Creson
- -------------------------
Corporate Secretary
March 17, 1999
22
<PAGE> 26
FINANCIAL INFORMATION
&
DISCUSSION
(APPENDIX TO PROXY STATEMENT)
<PAGE> 27
FINANCIAL INFORMATION AND DISCUSSION
TABLE OF CONTENTS
SELECTED FINANCIAL AND OPERATING DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL HIGHLIGHTS OF 1998
INCOME STATEMENT ANALYSIS (1998 COMPARED TO 1997)
INCOME STATEMENT ANALYSIS (1997 COMPARED TO 1996)
BALANCE SHEET REVIEW
RISK MANAGEMENT
OTHER
GLOSSARY
CONSOLIDATED STATEMENTS OF CONDITION
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONSOLIDATED HISTORICAL STATEMENTS OF INCOME
CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
CORPORATE OFFICERS AND BOARDS OF DIRECTORS
<PAGE> 28
<TABLE>
FIRST TENNESSEE NATIONAL CORPORATION
ANNUAL FINANCIAL STATEMENTS AND REVIEW OF OPERATIONS
SELECTED FINANCIAL AND OPERATING DATA
<CAPTION>
(Dollars in millions except per share data) 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY Interest income $ 1,133.8 $ 941.3 $ 896.5 $ 822.5
INCOME Less interest expense 593.3 458.2 445.3 431.8
STATEMENTS ---------------------------------------------------------------------------------------------------------
Net interest income 540.5 483.1 451.2 390.7
Provision for loan losses 51.3 51.1 35.7 20.6
---------------------------------------------------------------------------------------------------------
Net interest income after provision 489.2 432.0 415.5 370.1
Noninterest income 985.5 668.1 571.2 492.6
---------------------------------------------------------------------------------------------------------
Adjusted gross income after provision 1,474.7 1,100.1 986.7 862.7
Noninterest expense 1,121.8 785.0 704.5 609.7
---------------------------------------------------------------------------------------------------------
Income before income taxes 352.9 315.1 282.2 253.0
Applicable income taxes 126.5 117.6 102.3 88.1
---------------------------------------------------------------------------------------------------------
Net income $ 226.4 $ 197.5 $ 179.9 $ 164.9
========================================================================================================================
COMMON Basic earnings per share $ 1.77 $ 1.54 $ 1.34 $ 1.21
STOCK Diluted earnings per share 1.72 1.50 1.32 1.20
DATA Cash dividends declared per share .685 .615 .5475 .485
Year-end book value per share 8.50 7.44 7.14 6.50
Closing price of common stock per share:
High 38 1/16 33 3/4 19 5/16 15 7/16
Low 23 13/16 18 3/8 14 7/16 9 13/16
Year-end 38 1/16 33 3/8 18 3/4 15 1/8
Dividends per share/year-end closing price 1.8% 1.8% 2.9% 3.2%
Dividends/earnings (payout ratio) 38.8 40.2 40.9 39.8
Closing price/diluted earnings per share 22.1x 22.3x 14.2x 12.6x
Market capitalization $ 4,920.8 $ 4,279.0 $ 2,507.2 $ 2,032.1
Average shares outstanding (thousands) 128,235 128,365 134,393 136,050
Period-end shares outstanding (thousands) 128,974 128,209 133,715 134,356
Volume of shares traded (thousands) 107,837 135,205 109,038 131,296
- ------------------------------------------------------------------------------------------------------------------------
SELECTED Total assets $ 16,720.7 $ 13,280.6 $ 12,588.3 $ 11,359.5
AVERAGE Total loans* 8,242.1 7,945.1 7,472.1 6,887.2
BALANCES Investment securities 2,425.8 2,139.4 2,203.2 2,161.0
Earning assets 14,320.5 11,512.1 11,062.0 10,094.7
Deposits 10,996.4 9,207.1 8,945.5 8,132.4
Term borrowings 252.7 185.5 253.7 208.9
Shareholders' equity 996.0 878.8 897.5 822.8
- ------------------------------------------------------------------------------------------------------------------------
SELECTED Total assets $ 18,734.0 $ 14,387.9 $ 13,058.9 $ 12,076.9
PERIOD-END Total loans* 8,557.1 8,311.4 7,728.2 7,333.3
BALANCES Investment securities 2,426.3 2,186.5 2,239.5 2,111.4
Earning assets 15,694.6 12,220.2 11,045.8 10,483.6
Deposits 11,723.0 9,671.8 9,033.1 8,582.2
Term borrowings 414.5 168.9 234.6 260.0
Shareholders' equity 1,099.5 954.1 954.5 873.2
- ------------------------------------------------------------------------------------------------------------------------
SELECTED Return on average shareholders' equity 22.73% 22.47% 20.05% 20.04%
RATIOS Return on average assets 1.35 1.49 1.43 1.45
Net interest margin 3.80 4.23 4.13 3.92
Allowance for loan losses to loans* 1.59 1.51 1.52 1.54
Net charge-offs to average loans* .46 .54 .41 .30
Average total capital to average assets** 6.55 7.36 7.13 7.24
Average shareholders' equity to average assets 5.96 6.62 7.13 7.24
Average tangible equity to average tangible assets 5.23 5.81 6.20 6.36
Average shareholders' equity to average net loans 12.28 11.24 12.20 12.15
- ------------------------------------------------------------------------------------------------------------------------
RETURN TO Stock appreciation 14.0% 78.0% 24.0% 48.5%
SHAREHOLDERS Dividend yield 2.1 3.3 3.6 4.8
Annual return 16.1 81.3 27.6 53.3
- ------------------------------------------------------------------------------------------------------------------------
<FN>
* Net of unearned income.
** Total capital includes shareholders' equity and guaranteed preferred
beneficial interests in First Tennessee's junior subordinated debentures.
See accompanying notes to consolidated financial statements. Common stock data
reflects the 1998 and 1996 two-for-one stock splits.
</FN>
</TABLE>
<PAGE> 29
<TABLE>
FIRST TENNESSEE NATIONAL CORPORATION
ANNUAL FINANCIAL STATEMENTS AND REVIEW OF OPERATIONS
SELECTED FINANCIAL AND OPERATING DATA
<CAPTION>
(Dollars in millions except per share data) 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUMMARY Interest income $ 701.1 $ 652.2
INCOME Less interest expense 306.6 276.1
STATEMENTS -------------------------------------------------------------------------------
Net interest income 394.5 376.1
Provision for loan losses 17.2 36.5
-------------------------------------------------------------------------------
Net interest income after provision 377.3 339.6
Noninterest income 456.2 388.1
-------------------------------------------------------------------------------
Adjusted gross income after provision 833.5 727.7
Noninterest expense 625.7 552.6
-------------------------------------------------------------------------------
Income before income taxes 207.8 175.1
Applicable income taxes 60.7 65.4
-------------------------------------------------------------------------------
Net income $ 147.1 $ 109.7
==============================================================================================
COMMON Basic earnings per share $ 1.07 $ .81
STOCK Diluted earnings per share 1.07 .80
DATA Cash dividends declared per share .435 .375
Year-end book value per share 5.69 5.26
Closing price of common stock per share:
High 11 15/16 11 3/4
Low 9 5/16 9
Year-end 10 3/16 9 5/8
Dividends per share/year-end closing price 4.3% 3.9%
Dividends/earnings (payout ratio) 38.0 39.7
Closing price/diluted earnings per share 9.5x 12.0x
Market capitalization $ 1,388.5 $ 1,319.8
Average shares outstanding (thousands) 136,884 136,292
Period-end shares outstanding (thousands) 136,296 137,120
Volume of shares traded (thousands) 93,384 101,944
- ----------------------------------------------------------------------------------------------
SELECTED Total assets $ 10,579.8 $ 9,982.4
AVERAGE Total loans* 5,984.4 4,996.4
BALANCES Investment securities 2,248.7 3,015.3
Earning assets 9,406.2 8,953.6
Deposits 7,714.4 7,186.0
Term borrowings 101.8 102.8
Shareholders' equity 759.5 684.1
- ----------------------------------------------------------------------------------------------
SELECTED Total assets $ 10,932.9 $ 10,800.7
PERIOD-END Total loans* 6,498.0 5,560.3
BALANCES Investment securities 2,170.9 2,364.3
Earning assets 9,610.1 9,511.8
Deposits 7,880.3 7,602.7
Term borrowings 113.8 92.0
Shareholders' equity 774.9 721.1
- ----------------------------------------------------------------------------------------------
SELECTED Return on average shareholders' equity 19.36% 16.04%
RATIOS Return on average assets 1.39 1.10
Net interest margin 4.25 4.27
Allowance for loan losses to loans* 1.69 1.99
Net charge-offs to average loans* .30 .60
Average total capital to average assets** 7.18 6.85
Average shareholders' equity to average assets 7.18 6.85
Average tangible equity to average tangible assets 6.38 6.28
Average shareholders' equity to average net loans 12.94 14.00
- ----------------------------------------------------------------------------------------------
RETURN TO Stock appreciation 5.8% 4.8%
SHAREHOLDERS Dividend yield 4.5 4.1
Annual return 10.3 8.9
- ----------------------------------------------------------------------------------------------
<FN>
* Net of unearned income.
** Total capital includes shareholders' equity and guaranteed preferred
beneficial interests in First Tennessee's junior subordinated debentures.
See accompanying notes to consolidated financial statements. Common stock data
reflects the 1998 and 1996 two-for-one stock splits.
</FN>
</TABLE>
<PAGE> 30
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 regional and national 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 the purpose of this management discussion and analysis (MD&A), noninterest
income (also called fee 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 financial discussion should be read with the accompanying
consolidated financial statements and notes. A glossary is included at the end
of this section to assist with terminology.
Management's discussion and analysis may contain forward-looking statements with
respect to First Tennessee's beliefs, plans, goals, expectations, and estimates.
These statements are contained in certain sections that follow such as Net
Interest Income, Interest Rate Risk Management, Credit Risk Management/Asset
Quality, and Year 2000. Forward-looking statements are statements that are not
based on historical information but rather are related to future operations,
strategies, financial results or other developments. Forward-looking statements
are necessarily based upon estimates and assumptions that are inherently subject
to significant business, 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, are subject to change. Examples of
uncertainties and contingencies include, among other important factors, general
and local economic and business conditions; interest rate, market and monetary
fluctuations; inflation; competition within and without the financial services
industry; and new products and services in the industries in which First
Tennessee operates. Other factors are those inherent in originating loans,
including prepayment risks and fluctuating collateral values and changes in
customer profiles. Uncertainties regarding changes in technology, within First
Tennessee and by third-party vendors of First Tennessee and future acquisitions,
can also affect results. Additionally, the policies of the Office of the
Comptroller of the Currency and the Board of Governors of the Federal Reserve
System, unanticipated regulatory and judicial proceedings, and changes in laws
and regulations applicable to First Tennessee and First Tennessee's success in
managing the risks involved in the foregoing, could cause actual results to
differ. First Tennessee assumes no obligation to update any forward-looking
statements that are made from time to time.
SECURITIZATION ACTIVITY
During 1998, First Tennessee Bank National Association (FTBNA) securitized
approximately $73 million of direct automobile loan receivables. Also during
1998, FTBNA securitized $711 million of its consumer real estate loans from the
consumer loan and permanent mortgage portfolios through the use of a Real Estate
Mortgage Investment Conduit (REMIC). All of the interests in the REMIC are owned
by subsidiaries of First Tennessee, including FTBNA. This transaction affects
categorization of individual line items on the balance sheet. Consequently,
loans have been reduced and investment securities have been increased.
<PAGE> 31
For a more complete understanding, where significant, these transactions are
discussed and identified as "Managed" information, which adds data on these
securitized loans to "Reported" data for loans. "Reported" information has been
prepared in conformity with generally accepted accounting principles. "Managed"
information treats loans securitized and sold with servicing retained and loans
securitized through the REMIC as if they had not been securitized and/or sold.
"Managed" information does not include the mortgage banking servicing portfolio.
FINANCIAL HIGHLIGHTS OF 1998
A detailed discussion follows these highlights.
* Earnings for 1998 reflect the eighth consecutive year of RECORD EARNINGS for
First Tennessee.
* Net income for the year INCREASED 15 PERCENT to $226.4 million from $197.5
million earned in 1997.
* Diluted earnings per share (adjusted for the 1998 two-for-one stock split)
were $1.72 in 1998, UP 15 PERCENT over the $1.50 earned in 1997. Basic
earnings per share were $1.77 in 1998, up 15 percent over the $1.54 earned in
1997.
* RETURN ON AVERAGE SHAREHOLDERS' EQUITY was 22.7 percent in 1998 ranking First
Tennessee fifth in this ratio among the top 50 bank holding companies. In
1997, the return on average shareholders' equity was 22.5 percent. RETURN ON
AVERAGE ASSETS was 1.35 percent in 1998 compared with 1.49 percent in 1997.
The decline in the return on average assets was attributable to the 26 percent
growth in average assets of which 55 percent was caused by growth in the
mortgage warehouse, a lower earning asset, from a record year of originations.
* Total revenues for 1998 GREW 32 PERCENT with growth in fee income of 47
percent and growth in net interest income of 12 percent. Mortgage banking and
capital markets led the increase in fee income with growth of 69 percent and
50 percent, respectively.
* The consolidated net interest margin was 3.80 percent in 1998 compared with
4.23 percent in 1997. The lower margin was primarily related to the growth in
the mortgage warehouse which has a lower spread than the regional banking
group. The consolidated net interest margin compression was partially offset
by the 16 basis points improvement in the regional banking group's margin.
* Asset quality remained stable with a lower level of charge-offs and a lower
percentage of nonperforming assets for the year.
* At December 31, 1998, First Tennessee RANKED in the ninth 50 bank holding
companies nationally in market capitalization ($4.9 billion) and assets ($18.7
billion). FT Mortgage Companies RANKED ninth nationally in retail mortgage
originations and ranked in the top 20 in servicing, and First Tennessee
Capital Markets was again ONE OF THE TOP FIVE UNDERWRITERS of U.S. agency
debt.
INCOME STATEMENT ANALYSIS - 1998 COMPARED TO 1997
NONINTEREST INCOME
- ------------------
Noninterest income, also called fee income, provides the majority of First
Tennessee's revenue. During 1998, fee income increased 47 percent, to a record
$981.5 million from $668.8 million, and contributed 64 percent to total revenue
in 1998 compared with 58 percent in 1997. This high contribution level ranks
First Tennessee sixth among the largest 50 bank holding companies in the nation
for this ratio. Table 1 - Analysis of Noninterest Income provides six years of
detail by category with growth rates.
<PAGE> 32
<TABLE>
TABLE 1 - ANALYSIS OF NONINTEREST INCOME
<CAPTION>
Compound Annual
Growth Rates (%)
----------------
(Dollars in thousands) 1998 1997 1996 1995 1994 1993 98/97 98/93
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NONINTEREST INCOME:
Mortgage banking $ 558,366 $ 330,131 $ 275,406 $ 213,563 $ 188,270 $ 139,542 69.1 + 32.0 +
Capital markets 147,353 98,310 85,871 82,814 77,478 91,525 49.9 + 10.0 +
Deposit transactions and
cash management 90,444 86,047 78,228 74,124 65,797 59,580 5.1 + 8.7 +
Trust services and
investment management 51,198 40,941 34,704 34,435 27,895 25,556 25.1 + 14.9 +
Merchant processing 37,462 32,111 24,185 19,164 14,699 12,021 16.7 + 25.5 +
Cardholder 21,046 19,833 17,155 14,885 15,572 15,769 6.1 + 5.9 +
Equity securities gains/(losses) 3,940 (854) (2,495) 3,195 24,251 (479) N/A N/A
Debt securities gains/(losses) 36 141 (186) (751) (4,298) 1,371 74.5 - 51.7 -
All other income and
commissions:
Other service charges 14,863 10,474 9,891 7,709 7,334 9,296 41.9 + 9.8 +
Check clearing fees 9,199 13,043 16,873 17,585 16,124 14,569 29.5 - 8.8 -
Insurance premiums and
commissions 8,725 6,457 5,644 6,606 5,797 4,077 35.1 + 16.4 +
Other 42,871 31,496 25,873 19,282 17,247 15,275 36.1 + 22.9 +
- ----------------------------------------------------------------------------------------------------------------
Total other income 75,658 61,470 58,281 51,182 46,502 43,217 23.1 + 11.9 +
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income $ 985,503 $ 668,130 $ 571,149 $ 492,611 $ 456,166 $ 388,102 47.5 + 20.5 +
================================================================================================================
<FN>
Certain previously reported amounts have been reclassified to agree with current
presentation.
</FN>
</TABLE>
MORTGAGE BANKING
FT Mortgage Companies, an affiliate of FTBNA, originates and services
residential mortgage loans. Following origination, the first-lien mortgage loans
are sold to investors in the secondary market while the rights to service such
loans are usually retained. Various hedging strategies are used to mitigate
changes in the market value of the loan during the time period beginning with a
price commitment to the customer and ending with the delivery of the loan to the
investor. Gains or losses from these hedging activities are reflected as
secondary marketing gains or losses (secondary marketing activities). Secondary
marketing activities also include pricing concessions as well as the capitalized
value of the mortgage servicing rights. Servicing rights permit the collection
of fees for gathering and processing monthly mortgage payments for the owner of
the mortgage loans. FT Mortgage employs hedging strategies to mitigate the risk
of prepayment and loss of value of its servicing portfolio due to interest rate
changes. Any gains or losses due to the early termination of mortgage servicing
hedges are reported in miscellaneous income.
As shown in Table 2 - Mortgage Banking, total mortgage banking fee income
increased 69 percent in 1998, due primarily to growth in the mortgage
origination function (loan origination fees and secondary marketing activities).
<TABLE>
TABLE 2 - MORTGAGE BANKING
<CAPTION>
Compound Annual
Growth Rates (%)
-----------------
(Dollars and volume in millions) 1998 1997 1996 98/97 98/96
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NONINTEREST INCOME:
Secondary marketing activities $ 223.4 $ 128.8 $ 104.4 73.3 + 46.3 +
Loan origination fees 159.7 83.5 85.6 91.3 + 36.6 +
Servicing fees 117.9 94.4 69.2 24.9 + 30.5 +
Sale of mortgage servicing rights (.5) 9.1 15.1 NM NM
Miscellaneous 57.9 14.3 1.1 304.1 + 618.1 +
- ------------------------------------------------------------------------------------------------------------
Total noninterest income $ 558.4 $ 330.1 $ 275.4 69.1 + 42.4 +
============================================================================================================
Mortgage loan originations $ 23,251 $ 10,624 $ 10,396 118.9 + 49.6 +
Servicing portfolio 39,738 26,929 22,288 47.6 + 33.5 +
- ------------------------------------------------------------------------------------------------------------
<FN>
Certain previously reported amounts have been adjusted to agree with current
presentation.
NM = not meaningful
</FN>
</TABLE>
<PAGE> 33
Income derived from the mortgage origination function increased 80 percent in
1998, from $212.3 million to $383.1 million, as FT Mortgage Companies originated
a record $23.3 billion of mortgage loans in 1998, and ranked as the ninth
largest retail mortgage loan originator in the nation.
Origination volume, consisting of refinances and home purchases, increased 119
percent during 1998. Refinance activity increased 317 percent and accounted for
56 percent of the origination volume during 1998 as borrowers seized the
opportunity to lower the interest rates on their mortgages. In 1997, refinance
activity accounted for 29 percent of the origination volume. Lower interest
rates, a strong real estate market and the effect of increased market share by
FT Mortgage Companies also contributed to the 37 percent increase in home
purchase-related mortgages. The higher volume of originations, coupled with more
profitable execution of loan sales stemming from more favorable interest rates,
accounted for most of the increase in income from secondary marketing
activities.
Mortgage servicing fee income increased 25 percent in 1998, from $94.4 million
to $117.9 million. The mortgage servicing portfolio (which includes servicing
for ourselves and others) totaled $39.7 billion at December 31, 1998, as
compared with $26.9 billion at December 31, 1997. This growth was generated
through FT Mortgage's origination network and no servicing was purchased. The
favorable relationship between the origination capacity and the size of the
servicing portfolio contributed to the 48 percent growth in the servicing
portfolio. The change in the portfolio during 1998 resulted from originations of
$23.3 billion less $1.2 billion in sales of servicing released originations and
principal reductions of $9.3 billion from payments and payoffs received in the
normal course of business. Sales of servicing rights of $25 million were
transacted during 1998 compared with sales of $475 million in 1997.
The growth in miscellaneous income relates primarily to recognized gains from
the termination of hedge positions on the servicing portfolio. Recognized gains
from hedge activities will vary from period to period depending on the interest
rate environment and market conditions. Servicing hedges are used to
counterbalance the loss in value of the servicing portfolio that occurs when
declining interest rates accelerate expected prepayments. During 1998 and 1997,
$38.1 million and $6.4 million, respectively, of miscellaneous income came from
gains on the termination of certain mortgage servicing hedges. In addition,
income of $12.5 million was received related to a program where First Tennessee
buys delinquent loans to reduce future foreclosure costs.
CAPITAL MARKETS
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 1998, noninterest income increased 50 percent from $98.3 million in 1997
to $147.4 million. Total securities bought and sold by the capital markets
division increased 88 percent in 1998, from $226.6 billion to $427.0 billion.
The increased core volume growth, paralleling the growth in revenue, came from
continued expansion of the customer base, additional product penetration, and
strong performance in all of the offices including the recently opened New York
office, and an entire year of operations for the Chicago office. The majority of
the remaining volume growth was due to additional emphasis on short-term U.S.
agency notes. Total underwritings during 1998 were $52.6 billion, an increase of
81 percent from $29.0 billion underwritten in 1997. For 1998, First Tennessee
Capital Markets ranked as the top underwriter of U.S. government agency debt
greater than one year.
DEPOSIT TRANSACTIONS AND CASH MANAGEMENT
Deposit transaction fees are received for services related to retail deposit
products (such as service charges on checking accounts) and cash management
<PAGE> 34
fees are generated by products and services such as electronic transaction
processing (automated clearing house (ACH) and Electronic Data Interchange
(EDI)), account reconciliation services, cash vault services, lockbox processing
and information reporting (Prime Connection).
Noninterest income from deposit transactions and cash management increased 5
percent in 1998, from $86.1 million to $90.4 million. The increase in 1998 was
led by growth in cash management fees from ACH processing and retail and
wholesale lockbox processing.
TRUST SERVICES AND INVESTMENT MANAGEMENT
Trust services generates fees from the asset management product lines of
investment management accounts, personal trusts, employee benefits, and
custodial and corporate trust services. During 1998, noninterest income from
trust services grew 25 percent, from $40.9 million to $51.2 million. The growth
was principally due to acquisition activity, increased assets under management
and strong market performance. The acquisition of Martin & Company, Inc.
(Martin) during 1998, accounted for 45 percent, or $4.7 million, of the growth
in noninterest income. Assets under management grew from $6.6 billion at
December 31, 1997, to $8.9 billion at December 31, 1998, with the acquisition of
Martin accounting for 50 percent, or $1.2 billion, of this growth. The growth in
fee income was led by the asset management business lines with fee growth of 77
percent in investment management, 7 percent in employee benefits and 6 percent
in personal trust. Noninterest income from corporate trust services, an
indenture trustee business that acts as trustee on public bond issues, increased
9 percent.
Highland Capital Management Corp. (Highland Capital) and Martin, both wholly
owned subsidiaries, provide investment advisory services to the managed asset
segments. Highland Capital manages the First Funds Growth and Income Portfolio
and the First Funds Bond Portfolio. Martin manages the First Funds Tennessee
Tax-Free Portfolio and the First Funds Intermediate Bond Portfolio. First Funds
is a family of mutual funds managed by FTBNA. The Growth and Income Portfolio
gained national recognition during 1998 by achieving the five-star Morningstar
rating in the Equity (Large Blend) category for both the retail and
institutional classes for the three-year period ending December 31, 1998.
MERCHANT PROCESSING
Credit card merchant processing involves converting transactions from plastic
media such as check cards, debit cards, credit cards, purchase cards, and
private label credit cards into cash for merchants selling goods and services to
consumers and businesses.
Fee income from merchant processing grew 17 percent in 1998, from $32.1 million
to $37.5 million. Merchant transaction volume grew 25 percent, from 125 million
transactions processed in 1997 to a record 157 million transactions processed in
1998, due to the addition of new merchants and higher activity levels. The
increase in revenues was partially negated by the effect of a new outsourcing
agreement for equipment sales and leases. Fees and expenses related to the
outsourcing had previously been recorded separately, but upon execution of the
new agreement in the fourth quarter of 1997, began to be recorded as net
revenue. Revenues were also positively impacted by a special assessment received
from a large customer during the fourth quarter of 1998.
CARDHOLDER
Cardholder fees result from issuing and servicing credit cards and include the
collection of late charges and annual fees, as well as interchange fees received
for accepting a credit card payment.
Cardholder noninterest income increased 6 percent in 1998, from $19.8 million to
$21.0 million. The credit card portfolio grew moderately during 1998, consistent
with the industry, with growth of 3 percent (from $544.7 million to $563.5
million). This moderate growth, coupled with strong purchasing volume led to
higher interchange collections the effect of which was diminished by the
collection of fewer late fees due to lower delinquencies.
<PAGE> 35
SECURITIES GAINS/(LOSSES)
In 1998, there were $3.9 million of net equity securities gains compared with
$.8 million of net equity securities losses for 1997. The gains in 1998 were
from the investment subsidiary, Hickory Venture Capital Corporation.
ALL OTHER NONINTEREST INCOME
All other noninterest income grew 23 percent in 1998, from $61.5 million to
$75.7 million. Other service charges are generated from banking services
performed, but are not directly related to deposit transactions, such as fees
for money orders, travelers' checks, savings bonds, safe deposit box rentals,
mutual fund services and safekeeping. Other service charges also include
servicing fees collected from securitized transactions. During 1998, other
service charges grew 42 percent, from $10.5 million to $14.9 million, primarily
from growth in investment/mutual fund sales and the securitization transactions
completed during the year. Check clearing fees declined 29 percent (from $13.0
million to $9.2 million) from the previous year primarily due to the continuing
impact of industry consolidations. Insurance premiums and commissions increased
35 percent (from $6.5 million to $8.7 million) from 1997 due to increased sales
efforts throughout the year. The other category increased 36 percent, from $31.5
million to $42.9 million. This growth was spread over several areas including
fees received from flood zone certifications, earnings from First Tennessee's
investment in bank owned life insurance, and gains related to foreclosures.
NET INTEREST INCOME
- -------------------
During 1998, net interest income increased 12 percent, from $487.4 million to
$544.3 million, principally from the growth in earning assets. Earning assets
increased 24 percent, from $11.5 billion to $14.3 billion. The major factor for
this growth in earning assets was the mortgage warehouse which produced 68
percent of the increase in earning assets.
The increase in earning assets, combined with the narrower spread earned on the
mortgage warehouse, led to the decline in the consolidated net interest margin
(margin) from 4.23 percent in 1997 to 3.80 percent in 1998. The margin's
compression was partially compensated for by the improvement in the regional
banking group's margin from 4.71 percent in 1997 to 4.87 percent in 1998. This
improvement was primarily due to lower cost funding.
The margin is affected by the activity levels and related funding for First
Tennessee's national lines of business in addition to mortgage banking, as these
nonbank business lines typically produce different margins than traditional
banking activities. 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 details the computation of the net interest margin for the regional
banking group and the impact that the other business lines had on the
consolidated margin for the years 1996 through 1998.
<PAGE> 36
<TABLE>
TABLE 3 - NET INTEREST MARGIN COMPOSITION
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REGIONAL BANKING GROUP:
Yields on earning assets 8.20% 8.25% 8.15%
Rates paid on interest-bearing liabilities 4.36 4.54 4.67
- --------------------------------------------------------------------------------------------------------
Net interest spread 3.84 3.71 3.48
- --------------------------------------------------------------------------------------------------------
Effect of interest-free sources .89 .89 .88
Loan fees .14 .11 .11
- --------------------------------------------------------------------------------------------------------
Net interest margin-Regional Banking Group 4.87% 4.71% 4.47%
- --------------------------------------------------------------------------------------------------------
MORTGAGE BANKING (.92) (.37) (.22)
CAPITAL MARKETS (.17) (.12) (.09)
TRANSACTION PROCESSING .02 .01 .03
BASIS SWAP IMPACT -- -- (.06)
- --------------------------------------------------------------------------------------------------------
Consolidated net interest margin 3.80% 4.23% 4.13%
========================================================================================================
</TABLE>
Interest rate sensitivity is primarily a function of the repricing structure of
First Tennessee's balance sheet (Statement of Condition). Table 4 - Rate
Sensitivity Analysis at December 31, 1998, shows the assets and liabilities as
of year-end, subject to repricing in specified time intervals with each maturity
interval referring to the earliest repricing opportunity (i.e., the earlier of
scheduled contractual maturity or repricing date) for each asset and liability
category. The resulting gap is one tool, though not a predominant management
tool, used to measure the sensitivity of earnings to changes in interest rates.
It should be noted that the required gap analysis does not take into account
future management actions that could be undertaken to alter the simulated
results, the effect of interest-free sources, or a change in the slope of the
yield curve. (For additional information see Risk Management-Interest Rate Risk
Management.)
In order to reflect more appropriately the repricing structure of First
Tennessee's balance sheet, management has made certain adjustments to the
balances shown in the table. Based on historical and industry data, an estimate
of the expected prepayments on consumer loans and investment securities is
reflected in the balances in the table. Changes in the economic and interest
rate environments may also affect these expected prepayments.
Similarly, an adjustment to deposits is made to reflect the behavioral
characteristics of certain core deposits that do not have specified contractual
maturities (i.e., interest checking, savings and money market deposit accounts).
Historically, balances on these deposit accounts have remained relatively stable
despite changes in market interest rates. Management has classified certain of
these accounts as non-interest sensitive based on management's historical
pricing practices and runoff experience. Approximately 86 percent of interest
checking and 91 percent of savings balances were classified as over one year at
December 31, 1998. At December 31, 1998, the balance sheet was asset sensitive
to interest rate movements and within internal guideline limits, with $629
million more assets than liabilities scheduled to reprice within one year (4
percent of earning assets). The requirements of Table 4 do not take into account
the effect of interest-free sources which can be significant to First Tennessee.
When the interest-free sources are added to the rate sensitivity analysis, the
balance sheet is relatively neutral with $54 million of assets repricing faster
than liabilities within one year (.3 percent of earning assets).
<PAGE> 37
The primary tool used by First Tennessee to manage the exposure of net interest
income and margin to volatile interest rates, changing market spreads,
forecasted changes in balance sheet mix, and rate sensitivity is simulation
analysis. This type of analysis computes the amount of earnings at risk from
dynamic changes in the market place and related rate, pricing and balance sheet
movements. The simulation models create various earnings at risk scenarios
looking at increases and/or decreases in interest rates from an instantaneous
movement, or a staggered movement over a certain time period. Management reviews
these different scenarios to determine probable actions. The models are then
updated to incorporate management action. A level of acceptable earnings at risk
based on a staggered increase or decrease in interest rates of 300 basis points
is a component of internal guidelines. Using these models and based on First
Tennessee's rate sensitivity position, there were no earnings at risk in 1998
from a decrease in rates and the earnings at risk from a staggered increase
averaged less than 2.4 percent of projected 1998 net interest income. Based on
the rate sensitivity position at December 31, 1998, earnings exposure over the
next 12 months to an increase in interest rates is estimated to be less than 2.0
percent of projected 1999 net interest income. There is projected to be no
earnings exposure to a decline in interest rates. A 300 basis point staggered
increase or decrease in interest rates is a hypothetical rate scenario. This
scenario is used as one estimate of risk, and does not necessarily represent
management's current view of future interest rates or market developments and
may well vary from actual results for a number of reasons, including those
presented at the beginning of this MD&A discussion.
With First Tennessee's existing balance sheet mix and the current interest rate
environment, the regional banking group's margin is expected to be relatively
stable. Going forward, the consolidated margin will continue to be influenced by
the activity levels in the nonbanking lines of business, especially from
mortgage banking as this business line experiences fluctuations in origination
volume strongly tied to refinance activity. The following statements are forward
looking. Actual results could differ because of several factors, including those
presented at the beginning of this MD&A discussion.
Table 5 - Analysis of Changes in Net Interest Income provides rate and volume
changes in interest income and interest expense for earning assets and
interest-bearing liabilities for the past three years.
<TABLE>
TABLE 4 - RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1998
<CAPTION>
----------------------------------------------------------------------------------
Within 3 After 3 Months After 6 Months After 1 Year After
(Dollars in millions) Months Within 6 Months Within 12 Months Within 5 Years 5 Years Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans $4,616 $ 348 $535 $2,350 $ 708 $ 8,557
Investment securities 292 267 425 1,200 242 2,426
Mortgage loans held for sale 4,228 -- -- -- -- 4,228
Federal funds sold and securities
purchased under agreements to resell 124 -- -- -- -- 124
Other earning assets 360 -- -- -- -- 360
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets $9,620 $ 615 $960 $3,550 $ 950 $15,695
================================================================================================================================
EARNING ASSET FUNDING:
Savings $ 32 $ -- $ -- $ 258 $ 50 $ 340
Checking interest 185 -- -- 715 459 1,359
Money market 2,032 -- -- -- 263 2,295
CD's under $100,000 and other time 532 582 668 659 40 2,481
CD's $100,000 and more 1,793 200 113 74 11 2,191
Short-term borrowed funds 4,147 126 66 -- -- 4,339
Term borrowings 15 75 -- 1 323 414
- --------------------------------------------------------------------------------------------------------------------------------
Total earning asset funding $8,736 $ 983 $847 $1,707 $1,146 $13,419
================================================================================================================================
RATE SENSITIVITY GAP:
Period $ 884 $(368) $113 $1,843 $ (196)
Cumulative 884 516 629 2,472 2,276
- -------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY GAP ADJUSTED FOR INTEREST
RATE FUTURES AND INTEREST RATE SWAPS:
Period $ 592 $(142) $179 $1,843 $ (196)
Cumulative 592 450 629 2,472 2,276
- -------------------------------------------------------------------------------------------------------------------
ADJUSTED GAP AS A PERCENTAGE OF TOTAL
EARNING ASSETS:
Period 3.8% (.9)% 1.1% 11.7% (1.2)%
Cumulative 3.8 2.9 4.0 15.7 14.5
- -------------------------------------------------------------------------------------------------------------------
<FN>
Interest-sensitive categories represent ranges in which assets and liabilities
can be repriced, not necessarily their actual maturities. The 'After 5 Years'
column includes assets and liabilities with interest sensitivity of more than
five years or with indefinite repricing schedules. Noninterest earning/bearing
balances have been excluded from this analysis.
</FN>
</TABLE>
<PAGE> 38
<TABLE>
TABLE 5 - ANALYSIS OF CHANGES IN NET INTEREST INCOME
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Increase / (Decrease) Due to* Increase / (Decrease) Due to*
(Fully taxable equivalent) -------------------------------------------------------------
(Dollars in thousands) Rate** Volume** Total Rate** Volume** Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME - FTE:
Loans:
Commercial $(4,538) $ 27,874 $ 23,336 $ 2,349 $19,268 $21,617
Consumer 6,184 3,128 9,312 5,596 13,203 18,799
Permanent mortgage 237 (12,580) (12,343) 1,128 (1,792) (664)
Credit card receivables (2,479) 2,304 (175) (1,359) 1,712 353
Real estate construction (626) 6,535 5,909 (29) 6,021 5,992
Nonaccrual 294 (218) 76 (1,775) 1,118 (657)
- -------------------------------------------------------- -------- -------
Total loans (97) 26,212 26,115 5,307 40,133 45,440
- -------------------------------------------------------- -------- -------
Investment securities:
U.S. Treasury and other U.S. government agencies (482) (11,037) (11,519) 2,940 (4,639) (1,699)
States and municipalities (213) (1,094) (1,307) 66 (1,180) (1,114)
Other 174 32,025 32,199 120 1,218 1,338
- -------------------------------------------------------- -------- -------
Total investment securities 298 19,075 19,373 2,950 (4,425) (1,475)
- -------------------------------------------------------- -------- -------
Other earning assets:
Mortgage loans held for sale (6,199) 135,013 128,814 (925) (4,281) (5,206)
Investment in bank time deposits (25) 1,493 1,468 3 (244) (241)
Federal funds sold and securities
purchased under agreements to resell (297) (724) (1,021) 77 6,047 6,124
Capital markets securities inventory (1,266) 18,468 17,202 16 (949) (933)
- -------------------------------------------------------- -------- -------
Total other earning assets (5,162) 151,625 146,463 (3,079) 2,823 (256)
- -------------------------------------------------------- -------- -------
Total earning assets (32,040) 223,991 191,951 8,778 34,931 43,709
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income - FTE $191,951 $43,709
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest-bearing deposits:
Savings $ (466) $ (609) $ (1,075) $ (193) $(1,066) $(1,259)
Checking interest and money market 3,517 14,531 18,048 (5,502) 7,977 2,475
Certificates of deposit under $100,000 and other time (3,860) (11,783) (15,643) (595) (5,417) (6,012)
Certificates of deposit $100,000 and more (575) 64,317 63,742 1,078 369 1,447
- -------------------------------------------------------- -------- -------
Total interest-bearing deposits 4,039 61,033 65,072 (8,423) 5,074 (3,349)
- -------------------------------------------------------- -------- -------
Federal funds purchased and securities
sold under agreements to repurchase (450) 33,248 32,798 1,879 9,914 11,793
Commercial paper and other short-term borrowings (2,902) 36,050 33,148 642 8,737 9,379
Term borrowings (1,378) 5,401 4,023 933 (5,868) (4,935)
- -------------------------------------------------------- -------- -------
Total interest-bearing liabilities 4,795 130,246 135,041 (5,078) 17,966 12,888
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense $135,041 $12,888
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income - FTE $ 56,910 $30,821
===================================================================================================================================
<FN>
* 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.
</FN>
</TABLE>
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses is the charge to operating earnings that
management determines to be necessary to maintain the allowance for loan losses
at an adequate level reflecting management's estimate of the risk of loss
inherent in the loan portfolio. The provision for loan losses was $51.3 million
in 1998 compared with $51.1 million in 1997. The provision for loan losses
remained relatively stable in 1998 due to improvements in mortgage banking and
credit card asset quality, which was principally negated by the increased
inherent risk in the loan portfolio from loan growth and a change in loan mix
partially due to securitizations. A more detailed discussion follows in the
Risk Management-Credit Risk Management/Asset Quality section.
NONINTEREST EXPENSE
- -------------------
Noninterest expense, also called operating expense, increased 43 percent in
1998, from $785.0 million to $1,121.8 million, primarily because of growth in
the commission-based business lines. Table 6 - Analysis of Noninterest Expense
provides detail by category for the past six years with growth rates. Table 7 -
Operating Expense Composition gives a breakdown of total expenses by business
line for the prior three years.
<PAGE> 39
<TABLE>
TABLE 6 - ANALYSIS OF NONINTEREST EXPENSE
<CAPTION>
Compound Annual
Growth Rates (%)
----------------
(Dollars in thousands) 1998 1997 1996 1995 1994 1993 98/97 98/93
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NONINTEREST EXPENSE:
Employee compensation,
incentives and benefits $ 563,576 $409,783 $385,380 $340,508 $349,769 $308,601 37.5 + 12.8 +
Amortization of mortgage
servicing rights 95,507 37,452 26,041 14,980 14,936 25,478 155.0 + 30.2 +
Operations services 58,505 49,879 44,109 38,798 33,679 28,705 17.3 + 15.3 +
Occupancy 51,421 42,848 39,815 37,867 34,102 27,673 20.0 + 13.2 +
Equipment rentals, depreciation
and maintenance 45,771 40,093 34,121 31,845 29,202 22,246 14.2 + 15.5 +
Communications and courier 41,468 34,899 32,981 29,880 30,653 24,775 18.8 + 10.9 +
Advertising and public relations 25,184 18,722 17,629 12,972 10,678 7,987 34.5 + 25.8 +
Amortization of intangible assets 11,114 9,631 9,491 8,100 6,406 5,871 15.4 + 13.6 +
All other expense:
Contract employment 35,937 17,420 11,288 5,744 5,323 5,631 106.3 + 44.9 +
Foreclosed real estate 31,019 10,827 7,533 4,962 3,862 1,542 186.5 + 82.3 +
Legal and professional fees 24,551 13,999 12,050 13,403 13,747 11,274 75.4 + 16.8 +
Supplies 20,195 15,267 14,383 11,866 11,472 10,312 32.3 + 14.4 +
Travel and entertainment 19,485 13,802 10,394 8,211 10,144 8,868 41.2 + 17.1 +
Amortization of hedge
instruments 13,345 4,867 -- -- -- -- 174.2 + N/A
Computer software 11,629 6,731 4,076 3,004 2,619 2,334 72.8 + 37.9 +
Distribution on guaranteed
preferred securities 8,070 8,070 -- -- -- -- -- N/A
Fed service fees 5,307 5,799 7,814 9,489 8,544 7,778 8.5 - 7.4 -
Deposit insurance premium 1,578 1,485 5,129 9,957 16,923 16,585 6.3 + 37.5 -
Contribution to charitable
foundation -- -- -- -- 9,379 -- N/A N/A
Other 58,107 43,470 42,252 28,129 34,245 36,899 33.7 + 9.5 +
- ------------------------------------------------------------------------------------------------------
Total other expense 229,223 141,737 114,919 94,765 116,258 101,223 61.7 + 17.8 +
- ------------------------------------------------------------------------------------------------------
Total noninterest expense $1,121,769 $785,044 $704,486 $609,715 $625,683 $552,559 42.9 + 15.2 +
======================================================================================================
<FN>
Certain previously reported amounts have been reclassified to agree with current
presentation.
</FN>
</TABLE>
<TABLE>
TABLE 7 - OPERATING EXPENSE COMPOSITION
<CAPTION>
(Dollars in millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Regional banking group $ 403.5 $352.3 $322.9
Mortgage banking 536.9 292.7 256.0
Capital markets 111.0 74.2 66.7
Transaction processing 62.3 57.7 55.1
Corporate 8.1 8.1 3.8
- ------------------------------------------------------------------------------------------------------
Total operating expense $1,121.8 $785.0 $704.5
======================================================================================================
</TABLE>
Operating expense in the mortgage banking division increased 83 percent, from
$292.7 million to $536.9 million, and accounted for 73 percent of the overall
expense growth. Mortgage banking expense growth was driven by increased mortgage
origination volume and a larger servicing portfolio. Higher volumes also led to
the 50 percent increase in operating expense in capital markets which accounted
for 11 percent of the overall expense growth. Excluding mortgage banking and
capital markets, overall operating expenses increased 13 percent during 1998.
Investments to expand consumer lending beyond our traditional markets, growth in
the insurance business, consolidation expenses of the merchant processing
operation, and investments in marketing and technology contributed to this
growth rate.
Employee compensation, incentives and benefits (personnel expense), the largest
component of noninterest expense, increased 38 percent in 1998, from $409.8
million to $563.6 million. Personnel expense includes commissions paid in
several lines of business, such as capital markets and mortgage banking. As the
revenues increase or decrease and/or as the product mix changes in these
business lines, the amount of commissions changes accordingly. Excluding these
two business lines, personnel expense increased 13 percent due in part to market
expansion in our other business lines.
<PAGE> 40
Amortization of capitalized mortgage servicing rights increased 155 percent,
from $37.4 million to $95.5 million. This increase came as a result of a larger
servicing portfolio and additional prepayments.
All other expense consists of other expense categories such as contract
employment, foreclosed real estate expenses, legal and professional fees,
supplies, travel and entertainment, and other. During 1998, all other expense
increased 62 percent, from $141.8 million to $229.2 million. Mortgage banking
accounted for approximately 84 percent of the growth in these expense
categories. Contract employment increased $18.5 million, or 106 percent, over
1997. Foreclosed real estate increased $20.2 million in 1998, or 187 percent
over last year. Excluding mortgage banking, all other expense increased 18
percent from 1997 with the growth being spread out over a number of categories.
INCOME STATEMENT ANALYSIS - 1997 COMPARED TO 1996
Earnings in 1997 were $197.5 million, the seventh consecutive year of record
earnings, and an increase of 10 percent from $179.9 million earned in 1996.
Basic earnings per share increased 15 percent from $1.34 in 1996 to $1.54 in
1997. Diluted earnings per share increased 14 percent from $1.32 in 1996 to
$1.50 in 1997. The difference between the net income growth and the earnings per
share growth reflects the positive effect of share repurchase programs on the
computation of earnings per share. Return on average shareholder's equity was
22.5 percent in 1997 compared with 20.0 percent in 1996. Return on average
assets was 1.49 percent in 1997 and 1.43 percent in 1996.
Noninterest income increased 17 percent during 1997, from $573.9 million to
$668.8 million and contributed 56 percent to total revenue. During 1997,
mortgage banking fees increased 20 percent, from $275.4 million to $330.1
million, from growth in the servicing portfolio and improved profitability in
the loan origination process. During 1997, originations were a record $10.6
billion compared with $10.4 billion in 1996, and the servicing portfolio was
$26.9 billion at December 31, 1997, compared with $22.3 billion at December 31,
1996. See Table 2 for a breakout of noninterest income. Capital markets' fee
income increased 14 percent in 1997, from $85.9 million to $98.3 million and
securities bought and sold increased 4 percent, from $217.8 billion to $226.6
billion. This growth was due to market expansion with the opening of a new
office in Chicago and other customer base expansion initiatives. During 1997,
deposit transactions and cash management fees grew 10 percent, from $78.2
million to $86.1 million; trust services and investment management fees
increased 18 percent, from $34.7 million to $40.9 million; merchant processing
fees grew 33 percent, from $24.2 million to $32.1 million; and cardholder fees
grew 16 percent, from $17.2 million to $19.8 million. All other noninterest
income grew 5 percent in 1997, from $58.3 million to $61.5 million.
In 1997, there were $.8 million of equity securities losses and $.1 million of
debt securities gains compared with $2.5 million of equity securities losses and
$.2 million of debt securities losses in 1996.
During 1997, net interest income increased 7 percent, from $456.6 million to
$487.4 million. The consolidated net interest margin improved from 4.13 percent
to 4.23 percent. See Table 3 for the detailed computation of the net interest
margin for the regional banking group and the impact that the other business
lines had on the consolidated margin.
The provision for loan losses was $51.1 million in 1997 compared with $35.7
million in 1996. The increase was primarily related to a higher estimate of
inherent losses in the credit card portfolio reflecting the national trend in
credit card asset quality; commercial loans associated with a more normal credit
cycle; and mortgages repurchased by mortgage banking during 1997.
During 1997, noninterest expense increased 11 percent, from $704.5 million to
$785.0 million, primarily because of growth in mortgage banking. Table 7 gives a
breakdown of expenses by business line. Mortgage banking accounted for 46
percent of the overall expense growth in 1997 and was driven by a larger
servicing portfolio, increased production costs and additional expenses incurred
to correct loan document deficiencies. Personnel expense, the largest component,
increased 6 percent overall, from $385.4 million in 1996 to $409.8 million in
1997, and increased 2 percent in mortgage banking and 12 percent in capital
markets, two commission-based businesses. Amortization of mortgage servicing
rights increased 44 percent, from $26.0 million in 1996 to $37.4 million in 1997
as a result of a larger capitalized servicing portfolio and the implementation
of a new accounting standard which led to reclassification of certain
amortization-related accounts. All other expense increased 23 percent, from
$115.0 million in 1996 to $141.8 million in 1997, with the growth in mortgage
banking accounting for 62 percent of this increase. Deposit insurance premiums
decreased 71 percent, from $5.1 million in 1996 to $1.5 million in 1997, as a
result of the reduction in the FDIC premium to zero on Bank Insurance Fund
(BIF)-insured deposits at the beginning of 1996, partially offset in that year
by the one-time Savings Association Insurance Fund (SAIF) assessment.
<PAGE> 41
BALANCE SHEET REVIEW
At December 31, 1998, First Tennessee reported total assets of $18.7 billion
compared with $14.4 billion at the end of 1997 and $13.1 billion at the end of
1996. Average assets were $16.7 billion in 1998 compared with $13.3 billion in
1997 and $12.6 billion in 1996. The large increase in period-end and average
balances from 1997 to 1998 was principally driven by the growth in the mortgage
warehouse. (The mortgage warehouse accounted for 69 percent of the growth in
period-end assets and 55 percent of the growth in average assets.)
EARNING ASSETS
- --------------
Loans, investment securities and mortgage loans held for sale are the primary
earning assets. For 1998, earning assets averaged $14.3 billion compared with
$11.5 billion for 1997 and $11.1 billion for 1996. Average earning assets were
86 percent of total average assets in 1998, 87 percent in 1997 and 88 percent in
1996.
LOANS
As previously discussed, First Tennessee securitized certain loans in 1998. For
a more complete understanding of loan growth trends it is helpful to analyze
information on a "reported" as well as a "managed" basis. "Reported" information
is derived from consolidated financial statements that have been prepared in
conformity with generally accepted accounting principles. "Managed" information
treats consumer loans securitized and sold with servicing retained and loans
securitized through the REMIC and held by First Tennessee as if they had not
been securitized and/or sold. "Managed" information does not include the
mortgage banking servicing portfolio. Table 8 - Selected Loans includes
information for reported and managed loans.
For 1998, total loans were $8.2 billion but on a managed basis averaged $8.6
billion. This compares with total loans of $7.9 billion for 1997 and $7.5
billion for 1996. Loans grew 4 percent, or $297.0 million, during 1998 and 6
percent, or $473.0 million during 1997. However, on a managed basis, loans grew
10 percent during 1998. Loans represented 58 percent of earning assets in 1998;
69 percent of earning assets in 1997 and 68 percent in 1996. This ratio was
lower in 1998 due to the securitization activity. Additional loan information is
provided in Note 4 - Loans.
<TABLE>
TABLE 8 - SELECTED LOANS
<CAPTION>
1998 1998 1998
AS Growth 1998 Growth
(Dollars in millions) REPORTED 1997 Rate (%) MANAGED* Rate (%)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31 PERIOD-END
Consumer loans $ 3,018.8 $ 2,855.2 5.7 $ 3,342.5 17.1
Permanent mortgages 423.2 663.5 (36.2) 683.6 3.0
Total loans 8,557.1 8,311.4 3.0 9,141.2 10.0
- --------------------------------------------------------------------------------------------------------------
YEAR-TO-DATE AVERAGES
Consumer loans $ 2,794.4 $ 2,760.0 1.2 $ 3,055.0 10.7
Permanent mortgages 481.6 638.4 (24.6) 679.8 6.5
Total loans 8,242.1 7,945.1 3.7 8,700.9 9.5
- --------------------------------------------------------------------------------------------------------------
<FN>
* Excludes managed loans in the mortgage banking servicing portfolio.
</FN>
</TABLE>
Commercial loans continued as the single largest loan category and represented
48 percent of total loans for 1998. These loans represented approximately 46
percent of total managed loans between 1996 and 1998 (46 percent in both 1998
and 1997 and 45 percent in 1996). For 1998, commercial loans averaged $4.0
billion compared with $3.6 billion for 1997 and $3.4 billion for 1996. During
1998, commercial loans grew 9 percent, or $341.4 million, compared with 7
percent growth, or $241.3 million, in 1997. The increase in commercial loans,
influenced by strong economic growth in Tennessee, came from acquisitions of new
relationships in our targeted markets as a result of new sales support systems
and training programs implemented in 1997 and 1998. Additional commercial loan
information is provided in Table 9 - Contractual Maturities of Commercial Loans
at December 31, 1998.
<PAGE> 42
<TABLE>
TABLE 9 - CONTRACTUAL MATURITIES OF COMMERCIAL LOANS AT DECEMBER 31, 1998
<CAPTION>
After 1 Year
(Dollars in thousands) Within 1 Year Within 5 Years After 5 Years Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $2,262,296 $1,478,304 $376,318 $4,116,918
Real estate construction 264,322 83,587 27,981 375,890
Commercial nonaccrual 9,970 1,416 42 11,428
- ----------------------------------------------------------------------------------------------------------
Total commercial loans, net of unearned income $2,536,588 $1,563,307 $404,341 $4,504,236
==========================================================================================================
For maturities over one year:
Interest rates - floating $1,074,604 $269,577 $1,344,181
Interest rates - fixed 488,703 134,764 623,467
- ----------------------------------------------------------------------------------------------------------
Total $1,563,307 $404,341 $1,967,648
==========================================================================================================
</TABLE>
The consumer loan portfolio consists of real estate, automobile, student and
other consumer installment loans that require periodic payments of principal and
interest. Consumer loans represented 34 percent of total loans for 1998 and
managed consumer loans represented 35 percent of total managed loans for 1998,
1997 and 1996. For 1998 and 1997, consumer loans averaged $2.8 billion compared
with $2.6 billion for 1996. However, on a managed basis, consumer loans averaged
$3.1 billion for 1998. During 1998, managed consumer loans grew 11 percent, or
$295.0 million, compared with 6 percent growth, or $152.5 million in 1997. Lower
interest rates and a favorable economy contributed to this increase. Real estate
loans, principally secured by first and/or second liens on residential property,
led the increase in consumer loans and accounted for 68 percent of the consumer
loan portfolio in 1998. Gulf Pacific Mortgage, a division of FTBNA, is active in
originating second mortgages and originated $131.2 million to the managed
consumer loan portfolio in 1998. Unsecured consumer loans increased
approximately $50 million in 1998 due to targeted promotional campaigns.
The permanent mortgage portfolio includes certain mortgage loans that First
Tennessee periodically decides to retain. The permanent mortgage portfolio
represented 6 percent of total loans for 1998 and managed permanent mortgages
represented approximately 8 percent of total managed loans for the three-year
period (8 percent in both 1998 and 1997 and 9 percent in 1996). For 1998,
permanent mortgage loans averaged $481.6 million but on a managed basis,
averaged $679.8 million. This compares with $638.4 million for 1997 and $660.0
million for 1996. Managed permanent mortgage loans increased 6 percent, or $41.4
million in 1998 compared to a decline of 3 percent or $21.6 million in 1997. The
majority of the growth in 1998 was from second mortgage loans originated by
mortgage banking.
From 1996 to 1998, credit card receivables (i.e., outstanding balances on credit
card accounts) represented approximately 7 percent of total loans. For 1998,
credit card receivables averaged $563.5 million compared with $544.7 million for
1997 and $530.2 million for 1996. Credit card receivables increased 3 percent,
or $18.8 million, in 1998 and increased 3 percent, or $14.5 million, during
1997. Visa/Mastercard balances grew 5 percent due to the acquisition of a credit
card portfolio (approximately $11 million), increased use of debt by consumers,
as well as targeted promotional campaigns to regional banking customers. The
overall growth rate was impacted by the planned decline in private label
receivable balances.
The real estate construction loan portfolio represented approximately 4 percent
of total loans from 1996 through 1998 (5 percent in 1998 and 4 percent in both
1997 and 1996). For 1998, real estate construction loans averaged $405.3 million
compared with $337.4 million for 1997 and $275.1 million for 1996. During 1998,
this portfolio grew 20 percent, or $67.9 million, compared with 23 percent
growth, or $62.3 million, in 1997. The increase is reflective of economic growth
in Tennessee, favorable market conditions, and growth in residential
construction loans primarily originated by mortgage banking.
Going forward First Tennessee expects moderate loan growth due to the
anticipated slower growth in the national and regional economies. In the
consumer-related loan portfolios, the opening of new finance company offices and
targeted promotional programs are expected to help sustain and generate growth.
As loan growth continues to outpace deposit growth, First Tennessee will
continue to evaluate alternative sources of funding which may include loan
sales, securitizations, syndications, and debt offerings.
<PAGE> 43
INVESTMENT SECURITIES
The investment portfolio of First Tennessee consists principally of debt
securities used as a source of income, liquidity and collateral for repurchase
agreements or public fund deposits. Additionally, the investment portfolio is
used as a tool to manage risk from movements in interest rates. Table 10 -
Investment Securities includes reported information and information excluding
the securitizations. Table 11 - Contractual Maturities of Investment Securities
at December 31, 1998, shows information pertaining to the composition, yields
and maturities of the investment securities portfolio.
<TABLE>
TABLE 10 - INVESTMENT SECURITIES
<CAPTION>
1998
1998 1998 EXCLUDING 1998
AS Growth SECURITIZATION Growth
(Dollars in millions) REPORTED 1997 Rate (%) ACTIVITY Rate (%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31 period-end $2,426.3 $2,186.5 11.0 $1,857.0 (15.1)
Year-to-date averages 2,425.8 2,139.4 13.4 1,985.7 (7.2)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
TABLE 11 - CONTRACTUAL MATURITIES OF INVESTMENT SECURITIES AT DECEMBER 31, 1998
(AMORTIZED COST)
<CAPTION>
After 1 Year After 5 Years
Within 1 Year Within 5 Years Within 10 Years After 10 Years
------------------- ------------------ ------------------ ---------------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
States and municipalities* $11,759 5.11% $ 14,990 6.29% $ 8,851 6.86% $ 5,232 8.02%
Private issued CMOs -- -- -- -- 371,930 7.00 197,042 7.73
- ------------------------------------------------------------------------------------------------------------------------
Total $11,759 5.11% $ 14,990 6.29% $ 380,781 7.00% $ 202,274 7.74%
========================================================================================================================
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities
and collateralized
mortgage obligations** $26,993 6.81% $ 58,087 7.00% $ 101,166 6.84% $ 1,304,989 6.49%
U.S. Treasury and other U.S.
government agencies 25,121 4.94 106,221 6.45 16,824 6.01 1,346 6.47
States and municipalities* 1,986 5.37 6,826 5.89 10,012 6.05 300 9.66
Other 1,192 7.15 4,863 7.03 5,346 6.50 124,294 *** 6.23
- ------------------------------------------------------------------------------------------------------------------------
Total $55,292 5.92% $175,997 6.63% $ 133,348 6.66% $ 1,430,929 6.46%
========================================================================================================================
<FN>
* Weighted average yields on tax-exempt obligations have been computed by
adjusting allowable tax-exempt income to a fully taxable equivalent basis
using a tax rate of 35 percent.
** Includes $1,490.2 million of government agency issued mortgage-backed
securities and collateralized mortgage obligations which, when adjusted for
early paydowns, have an estimated average life of 2.7 years.
*** Represents equity securities with no stated maturity.
</FN>
</TABLE>
Average investment securities increased 13 percent, or $286.3 million, in 1998,
and Table 10 shows the impact the securitization activity had on this growth
rate. During 1997, average investment securities decreased 3 percent, or $63.8
million. Investment securities represented 17 percent of earning assets in 1998
compared with 19 percent in 1997 and 20 percent in 1996.
The investment portfolio is classified into two categories: securities available
for sale (AFS) and securities held to maturity (HTM). The securities portfolio
totaled $2.4 billion at December 31, 1998. The majority of these securities were
classified as AFS with an average life of 2.4 years. These securities consisted
primarily of mortgage-backed securities, collateralized mortgage obligations
(CMOs), U.S. Treasuries, U.S. government agencies and equities. At December 31,
1998, these securities had approximately $20.9 million of net unrealized gains
that resulted in an increase in book equity of approximately $12.9 million, net
of $8.0 million of deferred income taxes. At December 31, 1997, the AFS
securities portfolio totaled $2.1 billion and had approximately $25.3 million of
net unrealized gains that resulted in an increase in book equity of
approximately $15.6 million, net of $9.7 million of deferred income taxes. At
December 31, 1996, the AFS securities portfolio totaled $2.2 billion and had
approximately $5.9 million of net unrealized gains that resulted in an increase
in book equity of approximately $3.7 million, net of $2.2 million of deferred
income taxes.
<PAGE> 44
At December 31, 1998, the HTM securities totaled $609.8 million and had an
average life of 5.2 years. The REMIC securities accounted for 93 percent ($569.0
million) of this category and had an average life of 5.0 years. Municipal bonds
made up the remainder of this classification and had an average life of 7.3
years. The HTM securities portfolio had a net unrealized gain at December 31,
1998, of $.6 million. At December 31, 1997, the HTM securities totaled $53.2
million and had a net unrealized gain of $1.1 million, and at December 31, 1996,
the HTM securities portfolio totaled $65.9 million and had a net unrealized gain
of $.8 million.
Internal corporate guidelines require all securities purchased for the
investment portfolio to be rated investment grade by Moody's Investors Service
or Standard & Poor's. Because of the structure of the REMIC transaction, a
rating was not obtained for the REMIC securities. Excluding the REMIC
securities, First Tennessee was in compliance with its internal guidelines at
December 31, 1998. Securities backed by the U.S. government or its agencies,
both on a direct and indirect basis, represented 89 percent of the investment
portfolio at December 31, 1998, excluding the REMIC securities.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale (mortgage warehouse) are loans that have been
originated and are awaiting securitization and/or delivery. In 1998 these
mortgages represented approximately 20 percent of total earning assets up from
the 1997 and 1996 ratios of 10 percent and 9 percent, respectively, due to
record originations during 1998. During 1998, the mortgage warehouse averaged
$2.9 billion and increased 189 percent, or $1.9 billion, from 1997. During 1997,
the mortgage warehouse averaged $1.0 billion and decreased 5 percent, or $53.5
million, from 1996. Since the mortgage warehouse loans are generally held in
inventory for a short period of time (30 to 60 days), there may be significant
differences between average and period-end balances. At year-end 1998, the
mortgage warehouse totaled $4.2 billion compared with $1.2 billion and $787.4
million at year-end 1997 and 1996, respectively. The higher balance at year-end
1998 was comparable to the average balance for the fourth quarter, which was
$4.3 billion.
DEPOSITS, OTHER SOURCES OF FUNDS, AND LIQUIDITY MANAGEMENT
- ----------------------------------------------------------
DEPOSITS
During 1998, core deposits grew 8 percent, or $639.8 million, and averaged $9.0
billion with the majority of the growth in noninterest-bearing accounts which
included growth in mortgage escrow balances. Excluding the growth in mortgage
escrow accounts, core deposit accounts would have grown 5 percent during 1998.
This compares with growth of 3 percent, or $254.4 million, and an average
balance of $8.4 billion in 1997. In 1996, these deposits averaged $8.1 billion.
Growth in 1998 was comparable to regional market growth and came primarily from
expansion of First Tennessee's targeted customer base.
Interest-bearing core deposits grew 3 percent, or $201.7 million, during 1998
and averaged $6.3 billion compared with 2 percent growth, or $112.8 million, and
an average balance of $6.1 billion in 1997. Interest-bearing core deposits
averaged $6.0 billion in 1996. Noninterest-bearing deposits grew 20 percent, or
$438.1 million, during 1998 from growth in mortgage escrow accounts, a cash
management investment product and demand deposits, and averaged $2.7 billion. In
comparison, noninterest-bearing deposits grew 7 percent, or $141.6 million, and
averaged $2.2 billion in 1997. Noninterest-bearing deposits averaged $2.1
billion in 1996.
OTHER SOURCES OF FUNDS
Purchased funds averaged $5.7 billion for 1998, up 74 percent, or $2.4 billion,
from the previous year. This increase was primarily used to fund the growth in
the mortgage warehouse. Purchased funds increased 12 percent, or $352.1 million
in 1997, and averaged $3.3 billion and $2.9 billion during 1997 and 1996,
respectively. Purchased funds accounted for 38 percent of First Tennessee's
funding (core deposits plus purchased funds and term borrowings) in 1998, 28
percent in 1997, and 26 percent in 1996. See Note 9 - Short-Term Borrowings for
additional information.
Term borrowings include senior and subordinated borrowings and advances with
maturities greater than one year. Term borrowings increased $67.2 million during
1998 and averaged $252.7 million compared with a decrease of 27 percent, or
$68.2 million, and an average balance of $185.5 million in 1997. The increase in
1998 was primarily due to $100 million of subordinated debt issued in March and
$150 million of subordinated debt issued in December. Term borrowings averaged
$253.7 million in 1996. See Note 10 - Term Borrowings for additional
information.
LIQUIDITY MANAGEMENT
The objective of liquidity management is to ensure the continuous availability
of funds to meet the demands of depositors and borrowers. The Asset/Liability
Committee, a committee consisting of senior management that meets regularly, is
responsible for managing these needs by taking into account the marketability of
assets; the sources, stability and availability of funding; and the level of
unfunded commitments. Core deposits are First Tennessee's primary source of
funding and one of the most stable sources of liquidity for a bank. In 1998,
core deposits funded 63 percent of earning assets compared with 73 percent in
both 1997 and 1996. This ratio fell in 1998 due to the build-up in the mortgage
<PAGE> 45
warehouse which was primarily funded with purchased funds. FTBNA has a $3
billion bank note program available for additional liquidity. Under this
program, the bank may borrow funds from time to time, at maturities of 30 days
to 30 years. At December 31, 1998, approximately $2.2 billion was available
under the bank note program as a long-term (greater than one year) funding
source.
Parent company liquidity is maintained by cash flows stemming from dividends and
interest payments collected from subsidiaries, which represent the primary
source of funds to pay dividends to shareholders and interest to debtholders.
The amount of dividends from bank subsidiaries is subject to certain regulatory
restrictions which are described in Note 17 - Restrictions, Contingencies and
Other Disclosures. The parent company statements are presented in Note 24 -
Parent Company Financial Information. The parent company also has the ability to
enhance its liquidity position by raising equity or incurring debt. Under an
effective shelf registration statement on file with the Securities and Exchange
Commission (SEC), First Tennessee, as of December 31, 1998, may offer from time
to time at its discretion, debt securities, and common and preferred stock
aggregating up to $225 million. In addition, First Tennessee also has an
effective capital securities shelf registration statement on file with the SEC
under which up to $200 million of capital securities is available for issuance.
Maintaining adequate credit ratings on debt issues is critical to liquidity
because it affects the ability of First Tennessee to attract funds from various
sources on a cost-competitive basis. The various credit ratings are detailed in
Table 12 - Credit Ratings at December 31, 1998.
<TABLE>
TABLE 12 - CREDIT RATINGS AT DECEMBER 31, 1998
<CAPTION>
Thomson Fitch
Standard & Poor's Moody's BankWatch IBCA
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIRST TENNESSEE NATIONAL CORPORATION
Overall rating B
Subordinated capital notes due 1999 BBB+ Baa1
Subordinated capital notes due 2005 BBB+ Baa1
Capital securities due 2027* BBB A3 A-
Commercial paper TBW-1
- -------------------------------------------------------------------------------------------------------------
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
Short-term/long-term deposits A-1/A P-1/A1 TBW-1 F1/A+
Other short-term/long-term funding** A-1/A P-1/A1
Subordinated bank notes A- A3
Counterparty credit rating A A1
- -------------------------------------------------------------------------------------------------------------
<FN>
* Guaranteed preferred beneficial interests in First Tennessee's subordinated
debentures.
** Other funding includes certificates of deposit and senior bank notes.
</FN>
</TABLE>
CAPITAL
- -------
Total capital (shareholders' equity plus qualifying capital securities) at
December 31, 1998, was $1.2 billion, up 14 percent, or $145.4 million, from
December 31, 1997. Shareholders' equity (excluding the qualifying capital
securities) was $1.1 billion at year-end 1998, up 15 percent from year-end 1997
which remained relatively flat with year-end 1996. The increase in total
capital in 1998 came from retention of net income after dividends, equity issued
for acquisitions and stock option exercises, reduced by shares repurchased. The
increase in total capital in 1997 was primarily due to the issuance of
qualifying capital securities and the retention of net income after dividends,
reduced by share repurchase programs during the year. The Consolidated
Statements of Shareholders' Equity highlights the changes in equity since
December 31, 1995.
Capital adequacy is an important indicator of financial stability and
performance. Management's objectives are to maintain a level of capitalization
that is sufficient to sustain asset growth, take advantage of profitable growth
opportunities and promote depositor and investor confidence. Overall, First
Tennessee's capital position remained strong as shown in Table 13 - Capital
Ratios. However, despite the increase in shareholders' equity, the capital
ratios declined as a result of the 26 percent increase in average assets driven
by the 189 percent growth in the mortgage warehouse. Unrealized market
valuations had no material effect on the ratios during the three year period.
However, in 1998, excluding the effects of unrealized market valuations would
have lowered the period-end equity to assets ratio to 5.81 percent.
<PAGE> 46
<TABLE>
TABLE 13 - CAPITAL RATIOS
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average total capital to average assets* 6.55% 7.36% 7.13%
Average shareholders' equity to average assets 5.96 6.62 7.13
Period-end shareholders' equity to assets 5.87 6.63 7.31
Period-end double leverage 112.5 113.2 107.6
- -------------------------------------------------------------------------------------------------------------
<FN>
* Total capital includes shareholders' equity and guaranteed preferred
beneficial interests in First Tennessee's junior subordinated debentures.
</FN>
</TABLE>
Banking regulators define minimum capital ratios for bank holding companies and
their subsidiaries. Based on the risk-based capital rules and definitions
prescribed by the banking regulators, should an institution's capital ratios
decline below predetermined levels, it would become subject to a series of
increasingly restrictive regulatory actions. The system categorizes a financial
institution's capital position into one of five categories ranging from
well-capitalized to critically under-capitalized. For an institution to qualify
as well-capitalized, Tier 1 Capital, Total Capital and Leverage capital ratios
must be at least 6 percent, 10 percent and 5 percent, respectively. As of
December 31, 1998, First Tennessee and all of its banking affiliates had
sufficient capital to qualify as well-capitalized institutions as shown in Note
12 - Regulatory Capital.
At the January 1998 meeting of the board of directors, a two-for-one stock split
was approved. The stock split was effective February 20, 1998, and changed the
par value of First Tennessee's common stock from $1.25 to $.625 per share and
the shares of authorized common stock increased from 200 million to 400 million.
All share-related information has been restated in this document to reflect the
stock split.
At December 31 book value per common share was $8.50 in 1998 compared with $7.44
in 1997 and $7.14 in 1996. Average shares outstanding for the three year period
were: 128.2 million in 1998, 128.4 million in 1997 and 134.4 million in 1996.
Period-end shares outstanding for this same three year period were: 129.0
million, 128.2 million and 133.7 million, respectively. First Tennessee's shares
are traded on The Nasdaq Stock Market national market system under the symbol
FTEN, and are listed in the financial section of most newspapers as FstTN Ntl.
The sales price ranges, net income per share and dividends by quarter for each
of the last two years are presented in Table 20 - Summary of Quarterly Financial
Information.
At December 31, 1998, the closing sales price of First Tennessee's common stock
was $38.0625 per share. This price was 448 percent of year-end book value per
share, and the annual dividend yield was 2.1 percent for 1998 based on dividends
declared in 1998 and the closing market price of $33.375 on December 31, 1997.
The quarterly dividend was last increased at the October 15, 1998, board of
directors' meeting to $.19 per share, payable January 1, 1999, up 15 percent
from $.165 per share.
The board of directors has authorized management to repurchase common stock from
time to time, for various purposes. At December 31, 1997, management had
remaining authority to purchase up to $46.7 million of stock prior to December
31, 1998. During 1998, no shares were purchased pursuant to this authority, and
as a result the authority expired December 31, 1998. Had shares been purchased
under this authority, these shares would have been considered tainted for
purposes of pooling-of-interests accounting rules.
Management also has authority to repurchase common stock from time to time, for
the various benefit programs. During 1998, 1.9 million shares were repurchased
while 2.1 million were issued for benefit plans and .5 million were issued for
acquisitions. During 1997, First Tennessee repurchased 7.5 million shares of its
common stock (of which 3.8 million shares, at a cost of $83.3 million, were
purchased under an accelerated purchase program) and issued 1.9 million shares
for benefit plans. During 1996, 1.7 million shares were repurchased with 1.0
million shares being issued for benefit plans. Pursuant to board authority,
First Tennessee plans to continue to purchase shares from time to time for its
stock option plans, and will evaluate the level of capital and take action
designed to generate or use capital as appropriate for the interest of the
shareholders.
<PAGE> 47
RISK MANAGEMENT
INTEREST RATE RISK MANAGEMENT
- -----------------------------
The primary purpose of managing interest rate risk is to effectively invest
First Tennessee's capital to manage and preserve the value created by its
banking and nonbanking businesses. This is done by managing the structure of the
balance sheet to maximize overall profitability, increasing revenues, and
achieving the desired level of net interest income while managing interest
sensitivity risk and liquidity. Derivative financial instruments are used to aid
in managing the exposure of the balance sheet, net interest income, fee income
and expenses, to changes in interest rates. Interest sensitivity risk is defined
as the risk that future changes in interest rates will reduce income.
Interest rate risk occurs when assets and liabilities reprice at different times
as interest rates change. First Tennessee uses a variety of measurement tools to
monitor and control the overall interest rate risk exposure of both its on- and
off-balance sheet positions. One way to gauge the impact that future changes in
interest rates may have on earnings is through an interest rate sensitivity
analysis. This analysis examines the net position of assets, liabilities and
derivative instruments subject to repricing within specified time periods. Table
14 - Risk Sensitivity Analysis details First Tennessee's interest rate
sensitivity profile at December 31, 1998. As required, Table 14 is based on
projected cashflows using contractual maturity for loans and expected repayment
dates for securities. This methodology does not necessarily reflect management's
evaluation of interest rate risk as these instruments may reprice more
frequently than at contractual maturity.
First Tennessee's net interest income and its financial condition are affected
by changes in the level of market interest rates as the repricing
characteristics of its loans and other assets do not necessarily match those of
its deposits, other borrowings and capital. For example, a portion of fixed-rate
assets that reprice within one year are funded with floating-rate debt. This
position will benefit net interest income in a declining interest rate
environment and will negatively impact net interest income in a rising interest
rate environment. In the case of floating-rate assets and liabilities, First
Tennessee may also be exposed to basis risk, which results from changing spreads
between loans and deposit rates.
Because the interest rate sensitivity analysis does not fully capture the impact
of changes in the balance sheet mix, administered rates (such as the prime
lending rate), embedded options, or lagged interest rate changes, it cannot be
used in isolation to determine the level of interest rate risk exposure.
Accordingly, First Tennessee uses simulation analysis as its primary tool to
manage interest rate risk exposure. This type of analysis computes earnings at
risk under a variety of market interest rate scenarios to identify more dynamic
interest rate risk exposures. This simulation, which considers forecasted
balance sheet changes, prepayment speeds, deposit mix, pricing impacts and other
changes in the net interest spread, provides an estimate of the annual earnings
at risk for given changes in interest rates. (See Net Interest Income discussion
for additional assumptions and information.) The information provided in the
simulation analysis is forward looking. Actual results could differ because of
several factors, including those presented at the beginning of this MD&A
discussion.
The derivative financial instruments listed in Table 14 are shown at the
notional and fair values. Note 23 - Financial Instruments with Off-Balance Sheet
Risk should be referred to for additional information. The notional amount of
derivative financial instruments used by the mortgage company grew significantly
during 1998. This growth was due to the record pipeline volume, a larger
servicing portfolio and a change in hedging strategy to greater use of corridors
(where purchase and written options are used, thereby doubling the notional
amount). The increased activity in capital markets also led to greater use of
derivative financial instruments in 1998.
<PAGE> 48
<TABLE>
TABLE 14 - RISK SENSITIVITY ANALYSIS
<CAPTION>
CAPITAL MARKETS
Fair
(Dollars in millions) 1999 2000 2001 2002 2003 2004+ Total Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Capital markets securities
inventory:
Floating $ 358 $ -- $ -- $ -- $ -- $ -- $ 358 $ 358
Average interest rate 5.47% -- -- -- -- -- 5.47%
- ------------------------------------------------------------------------------------------------------------------------
INTEREST RATE DERIVATIVES:
Interest rate forward contracts:
Commitments to buy $ 2,495 $ -- $ -- $ -- $ -- $ -- $ 2,495 $ (2)
Weighted average settlement
price 99.97% -- -- -- -- -- 99.97%
Commitments to sell $ 2,487 $ -- $ -- $ -- $ -- $ -- $ 2,487 *
Weighted average settlement
price 100.05% -- -- -- -- -- 100.05%
- ------------------------------------------------------------------------------------------------------------------------
<FN>
* Amount is less than $500,000.
</FN>
HELD FOR PURPOSES OTHER THAN TRADING
<CAPTION>
Fair
(Dollars in millions) 1999 2000 2001 2002 2003 2004+ Total Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans, net of unearned income*:
Floating $ 3,402 $ 198 $ 98 $ 118 $ 101 $ 165 $ 4,082 $ 4,082
Average interest rate 8.22% 8.70% 6.99% 7.22% 7.51% 8.19% 8.16%
Fixed $ 2,083 $ 566 $ 444 $ 283 $ 531 $ 540 $ 4,447 $ 4,432
Average interest rate 8.58% 9.07% 8.79% 8.80% 7.81% 8.12% 8.53%
Mortgage loans held for sale
Floating $ 4,228 $ -- $ -- $ -- $ -- $ -- $ 4,228 $ 4,220
Average interest rate 7.03% -- -- -- -- -- 7.03%
Investment securities:
Fixed $ 984 $ 493 $ 231 $ 154 $ 322 $ 242 $ 2,426 $ 2,427
Average interest rate 6.92% 6.65% 6.76% 6.92% 6.62% 7.06% 6.82%
Liquid assets**:
Floating $ 126 $ -- $ -- $ -- $ -- $ -- $ 126 $ 126
Average interest rate 3.57% -- -- -- -- -- 3.57%
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Interest-bearing deposits:
Fixed $ 6,137 $ 649 $ 365 $ 373 $ 319 $ 823 $ 8,666 $ 8,674
Average interest rate 4.70% 4.01% 2.72% 2.75% 2.16% 2.59% 4.18%
Short-term borrowings:
Floating $ 4,316 $ -- $ -- $ -- $ -- $ -- $ 4,316 $ 4,317
Average interest rate 4.98% -- -- -- -- -- 4.98%
Fixed $ 23 $ -- $ -- $ -- $ -- $ -- $ 23 $ 23
Average interest rate 4.12% -- -- -- -- -- 4.12%
Term borrowings:
Fixed $ 90 $ 1 $ -- $ -- $ -- $ 323 $ 414 $ 420
Average interest rate 9.33% 6.45% -- -- -- 6.48% 7.10%
- ------------------------------------------------------------------------------------------------------------------------
<FN>
* Excludes nonaccrual loans.
** Consists of federal funds sold, securities purchased under agreements to
resell and investments in time deposits.
</FN>
</TABLE>
<PAGE> 49
<TABLE>
TABLE 14 - RISK SENSITIVITY ANALYSIS (CONTINUED)
<CAPTION>
Fair
(Dollars in millions) 1999 2000 2001 2002 2003 2004+ Total Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE DERIVATIVES - (notional value)
Mortgage banking:
Forward contracts:
Commitments to sell $ 3,926 $-- $ -- $ -- $ -- $ -- $ 3,926 $ (3)
Weighted average settlement
price 99.98% -- -- -- -- -- 99.98%
Option contracts**:
Call options purchased $ 150 $-- $ -- $ -- $ -- $ -- $ 150 $ 1
Weighted average strike price 132.00% -- -- -- -- -- 132.00%
Call options written $ 150 $-- $ -- $ -- $ -- $ -- $ 150 $ (1)
Weighted average strike price 98.61% -- -- -- -- -- 98.61%
Floors purchased $ -- $-- $4,350 $ 400 $11,400 $ 600 $16,750 $264
Weighted average strike price -- -- 4.81% 5.97% 4.66% 4.88% 4.74%
Floors written $ -- $-- $ -- $ -- $ 4,800 $ 600 $ 5,400 $(80)
Weighted average strike price -- -- -- -- 4.43% 4.13% 4.39%
Caps purchased $ 1,000 $-- $ -- $ -- $ 250 $ -- $ 1,250 $ 4
Weighted average strike price 6.50% -- -- -- 6.38% -- 6.48%
Caps written $ 1,000 $-- $ -- $ -- $ 250 $ -- $ 1,250 $ (9)
Weighted average strike price 6.00% -- -- -- 5.75% -- 5.95%
Interest rate risk management:
Swaps $ 432 $-- $ -- $ -- $ -- $ -- $ 432 $ 1
Average pay rate (floating) 5.27% -- -- -- -- -- 5.27%
Average receive rate (fixed) 5.84% -- -- -- -- -- 5.84%
Swaps $ 150 $-- $ -- $ -- $ -- $ -- $ 150 *
Average pay rate (floating) 5.30% -- -- -- -- -- 5.30%
Average receive rate (floating) 4.94% -- -- -- -- -- 4.94%
Caps:
Purchased $ -- $-- $ -- $ 20 $ -- $ -- $ 20 *
Weighted average strike price -- -- -- 8.00% -- -- 8.00%
Written $ -- $-- $ -- $ 20 $ -- $ -- $ 20 *
Weighted average strike price -- -- -- 8.00% -- -- 8.00%
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
* Amount is less than $500,000.
** Option contracts in total had a book value of $174 million at December 31,
1998.
</FN>
</TABLE>
CREDIT RISK MANAGEMENT / ASSET QUALITY
- --------------------------------------
First Tennessee manages credit risk and asset quality through diversification in
the loan portfolio and adherence to its credit policy process. First Tennessee's
goal is not to avoid risk but to manage it and include it in the pricing
decision. To assess the quality of individual commercial loans, all commercial
loans are internally assigned a credit rating, ranging from grades A to F, to
assist in the credit risk management of these loans. In addition, management
strives to identify loans experiencing difficulty early enough to correct the
deficiencies. Nonperforming loans are recognized in a timely manner, and
charge-offs are recorded promptly, based on realistic assessments of current
collateral values and the borrower's ability to repay. The adequacy of reserves
is assessed for the purpose of maintaining coverage of estimated losses inherent
in the loan portfolio.
At December 31, 1998, First Tennessee did not have any concentrations of 10
percent or more of total loans in any single industry.
ALLOWANCE FOR LOAN LOSSES AND CHARGE-OFFS
Management's policy is to maintain the allowance for loan losses at a level
sufficient to absorb the estimated losses inherent in the loan portfolio. The
allowance for loan losses is increased by the provision for loan losses and
recoveries and is decreased by charged-off loans. The evaluation process used to
determine the adequacy of the allowance for loan losses combines three factors:
historical loss experience derived from analytical models, current trends, and
reasonably foreseeable events. This methodology determines an estimated loss
percentage (reserve rate) which is applied against the balance of loans in each
segment of the loan portfolio at the evaluation date.
<PAGE> 50
COMMERCIAL AND COMMERCIAL REAL ESTATE LOANS
For the commercial loan portfolio, the reserve rate is based on a three-year,
moving average of actual charge-offs for each loan grade. The reserve rate is
then adjusted for current trends, both internal and external, that may affect
the loan portfolio. Some of the factors considered in making these adjustments
include: levels of, and trends in delinquencies, classified loans and nonaccrual
loans; trends in volume and maturity; effects of changes in lending policies and
underwriting guidelines; introduction of new loan products; experience, ability
and depth of lending management and staff; migration of loans from watchlist
loans to classified assets; and recent charge-off trends that may skew the
three-year moving average. Finally, the reserve rates for each loan grade are
reviewed quarterly to reflect local, regional and national economic trends,
concentration of cyclical industries, and the economic prospects for industry
concentrations. To supplement management's process in setting these additional
adjustments, an economic model is used that measures the correlation between
historical charge-offs and a number of state and national economic indicators.
All classified loans over $1 million are evaluated separately, and a specific
reserve is set based on the exposure (the difference between the outstanding
loan amount and the estimated net realizable value of the collateral) and the
probability of loss.
Table 15 - Reserve Rates shows the percentage of allowance for loan losses to
outstanding balances by loan category. Table 16 - Loans and Foreclosed Real
Estate at December 31 gives a breakdown of the allowance allocation by major
loan types and commercial loan grades at December 31, 1998, compared with the
same period in 1997. This table also shows the amount of the general reserve. A
general reserve is maintained on the commercial loan portfolio based on
management's judgment regarding the risk of error in the specific allowances for
individual loans or pools of loans. Table 17 - Analysis of Allowance for Loan
Losses summarizes by category, loans charged off and recoveries of loans
previously charged off. This table also shows the additions to the reserve which
have been charged against operating earnings. Table 18 - Net Charge-off Ratios
provides charge-off information by loan type.
<TABLE>
TABLE 15 - RESERVE RATES
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial and commercial real estate* 1.01% 1.02% 1.14%
Impaired** 50.00 33.33 36.36
Consumer 1.13 .91 .89
Credit card receivables 3.87 4.65 4.25
- --------------------------------------------------------------------------------
<FN>
* Excludes impaired and nonaccrual loans.
** Includes nonaccrual loans.
</FN>
</TABLE>
The reserve rate (see Table 15) and the charge-off ratio (see Table 18) for
commercial loans in 1998 was relatively flat to 1997. The decline in the reserve
rate from 1.14 percent in 1996 to 1.01 percent in 1998 reflected the improvement
in charge-offs. Commercial loan recoveries were approximately 60 percent of
gross charge-offs and contributed to the low charge-off ratio of .05 percent in
1998. In 1996, commercial loan recoveries exceeded charge-offs. The reserve rate
for impaired loans increased from 33.33 percent in 1997 to 50.00 percent in 1998
following a decline from 36.36 percent in 1996. The adjustment to the reserve
rates for economic conditions increased during 1998 reflecting the slower growth
in the economy.
CONSUMER LOANS
Reserve rates are also established for each segment of the consumer portfolio
based on historical loss trends and are adjusted to reflect current trends. Some
of the factors for making these adjustments include: changes in underwriting
guidelines or credit scoring models; trends in consumer payment patterns,
delinquencies and personal bankruptcy; staffing levels in the collection area;
change in the mix of loan products outstanding; value of underlying collateral;
and recent charge-off trends. The reserve rates are also adjusted for changing
economic conditions and the adequacy of the reserves to cover inherent loss in
case of error.
<PAGE> 51
The reserve rate for consumer loans increased from .91 percent in 1997 to 1.13
percent in 1998, following an increase from .89 percent in 1996. During this
period, the reserve rates declined for residential real estate and direct and
indirect auto lending due to the improvement in charge-off trends for these
pools of loans as demonstrated in Table 17 and Table 18. The overall increase in
the consumer loan portfolio reserve rate was driven by two pools of loans with
higher reserve rates - unsecured consumer debt and revolving home equity lines
of credit. This unsecured consumer debt primarily relates to an installment loan
product that receives a higher reward (wider spread) commensurate with the
higher risk, and consequently higher reserve rate. The majority of these loans
were originated in the latter part of 1998. The revolving home equity line of
credit has a higher reserve rate due to the charge-off experience of
higher-yielding/higher loan-to-value loan products.
CREDIT CARD
The establishment of the reserve rate for the credit card portfolio follows a
process similar to the consumer loan portfolio. As shown in Table 15, the
reserve rate declined in 1998 to 3.87 percent following an increase to 4.65
percent in 1997, and paralleled the charge-off trend for this same period (see
Table 18). The credit card receivables net charge-off ratio decreased 80 basis
points between 1998 and 1997 and reached its lowest level since 1995. The credit
card charge-off ratio was again favorable to the industry average in 1998. A
significant part of the increase in charge-offs in 1997 was due to continuing
losses from a private label program discontinued the previous year.
TOTAL LOANS
The total allowance for loan losses increased 8 percent, or $10.2 million, in
1998 and 7 percent, or $8.1 million, in 1997. Period-end loans grew 3 percent in
1998 and 8 percent in 1997. The ratio of allowance for loan losses to loans, net
of unearned income, was 1.59 percent at December 31, 1998, compared with 1.51
percent at December 31, 1997, and 1.52 percent at December 31, 1996. The
increase in this coverage ratio in 1998 was primarily due to higher inherent
risk in the loan portfolio due to the increase in the reserve rate in the
consumer loan portfolio and the effect of securitizations. The securitizations
completed during 1998 removed loans with a lower reserve rate from the loan
portfolio, thus changing the risk mix.
Net charge-offs decreased to $37.8 million for the year ended December 31, 1998.
Net charge-offs were $43.0 million for 1997 and $30.5 million for 1996. The
decrease in the level of net charge-offs was due to improved asset quality in
credit card receivables where net charge-offs decreased $3.6 million from $25.7
million for 1997 to $22.1 million for 1998. Consumer loan net charge-offs also
decreased in 1998 from $11.7 million for 1997 to $10.0 million, while commercial
loan and permanent mortgage net charge-offs remained relatively flat to 1997
levels.
The ratio of net charge-offs to average loans decreased to .46 percent for 1998
from .54 percent for 1997 and .41 percent for 1996. Excluding the repurchased
mortgages (described in the Repurchased Mortgage Loans section), the ratio of
net charge-offs to average loans would have decreased to .42 percent in 1998.
The permanent mortgage net charge-off ratio decreased 6 basis points in 1998 to
a net recovery position.
Going forward, in light of current economic conditions, anticipated trends and
First Tennessee's loan portfolio mix, management believes overall asset quality
will remain stable and net charge-offs as a percentage of average loans should
remain relatively consistent with the levels experienced in 1998. Commercial
loan charge-offs will continue to rise and will approach a more normal
charge-off level as the amount of potential recoveries declines. As
securitizations, loan sales or other balance sheet management tools are employed
which could result in a change in the mix of consumer loans, consumer loan
charge-offs will potentially be at a higher level commensurate with the inherent
risk of the portfolio. This is forward-looking information. Actual results could
differ because of several factors, including those presented at the beginning of
this MD&A discussion.
<PAGE> 52
<TABLE>
TABLE 16 - LOANS AND FORECLOSED REAL ESTATE AT DECEMBER 31
<CAPTION>
1998 1997
------------------------------------------------------------ ----------------------
Construction Allowance Allowance
and Commercial for Loan for Loan
(Dollars in millions) Commercial Development Real Estate TOTAL Loss Total Loss
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Internal grades*:
A $ 251 $ -- $ 1 $ 252 $ -- $ 251 $ 1
B 644 -- 89 733 1 656 2
C 2,097 227 448 2,772 24 2,518 22
C- 412 40 128 580 7 574 6
D 68 5 8 81 4 90 4
E 20 -- 6 26 3 15 1
F 15 1 4 20 6 20 6
- --------------------------------------------------------------------------------------------------------------------------
3,507 273 684 4,464 45 4,124 42
Impaired loans:
Contractually past due 4 -- 1 5 2 7 3
Contractually current 6 -- 1 7 4 1 --
Nonaccrual loans:
Contractually past due -- -- -- -- -- 1 --
Contractually current -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total commercial and
commercial real estate loans $3,517 $273 $686 $4,476 $ 51 $4,133 $ 45
- --------------------------------------------------------------------------------------------------------------------------
Retail:
Consumer 3,019 34 2,855 26
Credit card 594 23 581 27
Permanent mortgages 423 2 664 3
Mortgage banking nonaccrual 16 3 29 3
- --------------------------------------------------------------------------------------------------------------------------
Total retail loans 4,052 62 4,129 59
- --------------------------------------------------------------------------------------------------------------------------
Other/Unfunded commitments 29 2 49 3
General reserve -- 21 -- 19
- --------------------------------------------------------------------------------------------------------------------------
Total loans $8,557 $136 $8,311 $126
==========================================================================================================================
Foreclosed real estate:
Foreclosed property $ 2 $ 1 $ 2 $ 5 $ 4
Foreclosed property -
mortgage banking 11 8
- --------------------------------------------------------------------------------------------------------------------------
Total foreclosed real estate $ 16 $ 12
==========================================================================================================================
<FN>
Loans are expressed net of unearned income. All amounts in the Allowance for
Loan Loss columns have been rounded to the nearest million dollars. Grade A
loans have reserve amounts of less than $500,000.
*Based on internal loan classifications. Definitions of each credit grade are
provided below:
GRADE A: Established, stable companies with excellent earnings, liquidity,
and capital. Possess many of the same characteristics as Standard &
Poor's (S&P) AA rated companies.
GRADE B: Established, stable companies with good earnings, liquidity,
rated companies.
GRADE C: Established, stable companies with satisfactory earnings,
liquidity, and capital and with consistent, positive trends
relative to industry norms.
GRADE C-: Established, stable companies with either inconsistent and/or
marginal earnings, or liquidity, or capital. Overall acceptable
credits with minor weaknesses which warrant additional servicing.
GRADE D: Financial condition adversely affected by temporary lack of
earnings or liquidity or changes in the operating environment. An
action plan is required to rehabilitate the credit or have it
refinanced elsewhere.
GRADE E: Significant developing weaknesses or adverse trends in
earnings, liquidity, capital, or operating environment. No
discernible market for refinancing is available.
GRADE F: Significantly higher than normal probability that: (1) legal
action or liquidation of collateral is required; (2) there will be
a loss; or (3) both will occur. This grade is believed to be
substantially equivalent to the regulators' classifications of
substandard or doubtful.
IMPAIRED: A loan for which it is probable that all amounts due,
according to the contractual terms of the loan agreement, will not
be collected.
NONACCRUAL: A loan that is placed on nonaccrual status is not included in
any of these six grades, but is placed in a separate nonaccrual
category. Commercial and real estate loans are placed on nonaccrual
status automatically once they become 90 days or more past due.
</FN>
</TABLE>
<PAGE> 53
<TABLE>
TABLE 17 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<CAPTION>
(Dollars in thousands) 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Beginning balance $ 125,859 $ 117,748 $ 112,567 $ 109,859 $ 110,720 $ 103,223
Provision for loan losses 51,351 51,115 35,677 20,592 17,182 36,461
Allowance from acquisitions 140 -- -- 2,632 -- 971
Securitization adjustment (3,575) -- -- -- -- --
Charge-offs:
Commercial 5,379 6,388 3,355 5,614 6,458 16,905
Consumer 14,976 16,574 15,531 12,373 9,180 8,909
Credit card receivables 24,242 27,420 22,964 16,874 12,674 13,357
Real estate construction 442 245 10 44 -- 2,320
Permanent mortgage* 3,483 3,648 522 326 884 1,170
- ------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 48,522 54,275 42,382 35,231 29,196 42,661
- ------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 3,372 4,340 3,712 6,728 4,001 6,266
Consumer 4,938 4,919 5,720 5,732 4,415 3,590
Credit card receivables 2,179 1,689 2,112 2,022 1,890 2,262
Real estate construction 148 171 171 59 373 159
Permanent mortgage 123 152 171 174 474 449
- ------------------------------------------------------------------------------------------------------------------------------
Total recoveries 10,760 11,271 11,886 14,715 11,153 12,726
- ------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 37,762 43,004 30,496 20,516 18,043 29,935
- ------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 136,013 $ 125,859 $ 117,748 $ 112,567 $ 109,859 $ 110,720
==============================================================================================================================
LOANS, OUTSTANDING AT
DECEMBER 31** $8,557,064 $8,311,350 $7,728,203 $7,333,283 $6,498,042 $5,560,348
- ------------------------------------------------------------------------------------------------------------------------------
Average loans, outstanding
during the year** $8,242,135 $7,945,143 $7,472,095 $6,887,218 $5,984,424 $4,996,339
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS**:
Allowance to loans 1.59% 1.51% 1.52% 1.54% 1.69% 1.99%
Net charge-offs to average
loans .46 .54 .41 .30 .30 .60
Net charge-offs to allowance 27.8 34.2 25.9 18.2 16.4 27.0
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
* Permanent mortgage charge-offs include $3,421,000 and $3,170,000 of
charge-offs for 1998 and 1997, respectively, related to the mortgage loans
repurchased since the beginning of 1997 (for further information on
repurchased mortgages see discussion in Repurchased Mortgage Loans section).
** Net of unearned income.
</FN>
</TABLE>
<TABLE>
TABLE 18 - NET CHARGE-OFF RATIOS
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BREAKDOWN BY LOAN CATEGORY:
Commercial and commercial real estate .05% .05% (.01)%
Consumer .36 .42 .38
Credit card receivables 3.92 4.72 3.93
Permanent mortgage* (.01) .05 .05
===========================================================================================================
Total net charge-offs excluding repurchased mortgages .42% .50% .41%
Impact of repurchased mortgages .04 .04 --
- -----------------------------------------------------------------------------------------------------------
Total net charge-offs .46% .54% .41%
===========================================================================================================
<FN>
* Excludes mortgage loans repurchased beginning 1997 to correct file
documentation in order to certify loan pools. This occurred principally from
the consolidation of six separate mortgage operations during 1996.
A negative ratio indicates that recoveries exceeded charge-offs. Loans are
averages expressed net of unearned income.
</FN>
</TABLE>
<PAGE> 54
NONPERFORMING ASSETS
Nonperforming loans consist of impaired, other nonaccrual and restructured
loans. These, along with foreclosed real estate and other assets, represent
nonperforming assets. Impaired loans are those loans for which it is probable
that all amounts due, according to the contractual terms of the loan agreement,
will not be collected and for which recognition of interest income has been
discontinued. Nonaccrual loans are those loans on which recognition of interest
income has been discontinued. Restructured loans generally take the form of an
extension of the original repayment period and/or a reduction or deferral of
interest or principal because of a deterioration in the financial position of
the borrower.
Nonperforming assets decreased 13 percent, or $6.6 million, in 1998 following an
increase of 89 percent, or $23.9 million, in 1997. Total nonperforming loans
decreased 28 percent, or $10.6 million, in 1998 compared to an increase of 103
percent, or $19.5 million, in 1997. Mortgage loans, repurchased for
documentation problems, are considered nonperforming loans (see discussion in
Repurchased Mortgage Loans section). With the inception of this repurchase
program in 1997, nonperforming assets and nonperforming loans increased. As
these documentation deficiencies were cured these nonperforming balances
declined in 1998. At December 31, 1998, foreclosed properties amounted to $16.2
million, an increase of 33 percent from the $12.2 million of foreclosed
properties reported in 1997. Of the $4.0 million increase, $3.4 million came
from mortgage banking due to the repurchased mortgage loans.
Information regarding nonperforming assets and loans is presented in Table 19 -
Nonperforming Assets at December 31. As shown in the table, the ratio of
nonperforming assets to total loans was .52 percent at December 31, 1998. In the
regional banking group, the ratio of nonperforming assets to total loans was .20
percent. Table 20 - Changes in Nonperforming Assets gives additional information
related to nonperforming assets for 1996 through 1998.
<TABLE>
TABLE 19 - NONPERFORMING ASSETS AT DECEMBER 31
<CAPTION>
(Dollars in thousands) 1998 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNTS:
Impaired loans* $ 12,111 $ 8,712 $ 10,322 $ 11,865
Other nonaccrual loans 15,696 29,703 8,604 7,175
- -------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 27,807 38,415 18,926 19,040 $ 16,853 $ 27,599
Restructured loans - - - - 158 1,195
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 27,807 38,415 18,926 19,040 17,011 28,794
Foreclosed real estate 16,242 12,202 7,823 11,794 19,215 35,048
Other assets 199 235 196 1,022 2,055 1,292
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 44,248 $ 50,852 $ 26,945 $ 31,856 $ 38,281 $ 65,134
=========================================================================================================================
Non-government guaranteed
past due loans** $ 21,745 $ 21,015 $ 20,011 $ 19,796 $ 11,213 $ 13,634
Government guaranteed past
due loans** 9,858 11,059 10,736 10,820 10,030 11,024
- -------------------------------------------------------------------------------------------------------------------------
RATIOS***:
Nonperforming loans to total
loans .32% .46% .24% .26% .26% .52%
Nonperforming assets to total
loans plus foreclosed
real estate and other
assets .52 .61 .35 .43 .59 1.16
Nonperforming assets and
non-government guaranteed
past due loans to total
loans plus foreclosed
real estate and other
assets .77 .86 .61 .70 .76 1.41
- -------------------------------------------------------------------------------------------------------------------------
<FN>
* For the years 1997, 1996 and 1995 impaired loans included $196,000,
$279,000 and $303,000 of restructured loans, respectively.
** Loans that are 90 days or more past due as to principal and/or interest
and not yet impaired or on nonaccrual status.
*** Total loans are net of unearned income.
Certain previously reported amounts have been adjusted to agree with current
presentation.
</FN>
</TABLE>
<PAGE> 55
<TABLE>
TABLE 20 - CHANGES IN NONPERFORMING ASSETS
<CAPTION>
(Dollars in millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 50.9 $ 26.9 $ 31.9
Additional nonperforming assets 124.5 104.2 22.6
Payments (123.0) (71.5) (24.9)
Charge-offs (8.2) (8.7) (2.7)
- -------------------------------------------------------------------------------------------------------------
Ending balance $ 44.2 $ 50.9 $ 26.9
=============================================================================================================
</TABLE>
PAST DUE LOANS AND POTENTIAL PROBLEM ASSETS
Past due loans are loans contractually past due 90 days or more as to interest
or principal payments, but which have not yet been put on nonaccrual status. The
ratio of past due loans to total loans was .37 percent at year-end 1998,
essentially unchanged from 1997. Past due loans were $31.6 million at December
31, 1998, compared with $32.1 million for 1997. Additional historical past due
loan information can be found in Table 19.
Potential problem assets, which are not included in nonperforming assets,
decreased to $63.3 million at December 31, 1998, from $70.3 million at December
31, 1997, and were 1 percent of total loans in 1998 and 1997. Potential problem
assets represent those assets where information about possible credit problems
of borrowers has caused management to have serious doubts about the borrower's
ability to comply with present repayment terms. This definition is believed to
be substantially consistent with the standards established by the Office of the
Comptroller of the Currency for loans classified substandard or doubtful.
REPURCHASED MORTGAGE LOANS
Within the course of normal mortgage banking activities, a small percentage of
nonperforming assets is created when FHA/VA borrowers are delinquent in their
monthly payments prior to the completion of the insuring process. Additionally,
loans that have been sold may be found not to meet an investors' origination
criteria and could be required to be repurchased. In the first quarter of 1997,
these nonperforming assets increased $28.3 million to $39.9 million as several
events led to a backlog in the documentation and insuring operations. The
consolidation of the six independent mortgage companies into Dallas, combined
with the 1996 production volume surge during which refinancing activity was more
than double expected origination levels, created a document flow problem. As a
result, some loans became delinquent prior to being insured. The insuring
process is unique to government (FHA/VA) loans which are pooled (packaged) and
sold as mortgage-backed securities called GNMA securities. When a loan becomes
more than 90 days past due, the originator has the option of repurchasing the
loan out of the GNMA pool then, or waiting until the loan has been foreclosed.
When a repurchase does occur, the loan is classified as a nonperforming asset if
it has not been previously insured. Management of the nonperforming assets,
through curing the delinquencies or sale of foreclosed properties, has resulted
in a reduction in these assets, bringing the balance to $27.5 million at
year-end 1998 compared with a balance of $36.7 million at year-end 1997.
Additionally, First Tennessee participates in FNMA's REO management and
liquidation program. Through this relationship, which includes the use of FNMA's
nationwide network of residential real estate service providers, First Tennessee
is able to efficiently liquidate certain foreclosed properties.
OTHER
YEAR 2000
- ---------
Many computer programs were originally designed to store and process data using
two digits rather than four to define a calendar year. This could cause programs
that have date sensitive software to recognize a date using "00" as the year
<PAGE> 56
1900 rather than the year 2000. The "Year 2000 computer issue" can create risk
for a company from unforeseen problems in its own computer systems and from the
company's vendors and customers.
First Tennessee began planning its Year 2000 remediation strategy to fix this
computer issue in 1995. Among other things, the process included the formation
of a company-wide project team that meets regularly to coordinate and review the
status of conversion initiatives. The main phases involved in the Year 2000
project are assessment, renovation, validation, and implementation. A
comprehensive review to assess the systems affected by this issue has been
completed, estimated cost projections have been determined and an implementation
plan has been compiled. As a result of the assessment review, First Tennessee is
in the process of modifying or replacing certain existing systems. New systems
being acquired will provide new functionality to meet the expanding needs of
customers and will be Year 2000 compliant.
Modifications to systems are made in the renovation phase. These modifications
are then subjected to current and future date testing during the next phase, the
validation phase. Finally, after systems are thoroughly tested, the
implementation phase begins. Training and product integration occur during this
final phase to aid in assuring a smooth transition to the normal day-to-day
operations. The completion of these phases is expected to occur by the second
quarter of 1999. As of December 31, 1998, First Tennessee had completed
approximately 92 percent of renovation, 76 percent of validation and 65 percent
of implementation for mission critical systems. For all systems, the completion
status was approximately 94 percent renovated, 86 percent validated and 84
percent implemented. Management believes the efforts described above will
provide reasonable assurance that its systems will be adequately prepared for
the Year 2000.
Costs of new systems will be capitalized and amortized, and spending for
maintenance and modification associated with Year 2000 will be expensed as
incurred. The total gross cost of Year 2000 compliance is estimated to range
from $40 million to $45 million, of which approximately $25 million had been
incurred as of December 31, 1998, with approximately 60 percent of this being
capitalized. Consistent with current corporate accounting policy, the
capitalized costs will be amortized on a straight-line basis over a maximum
period of five years once the systems project is substantially complete and
ready for its intended use.
As part of our Year 2000 preparedness, First Tennessee is also assessing
business risks that potentially could arise from customers, business partners,
vendors, and government agencies who may fail to successfully complete
renovation of their systems before January 1, 2000. The processes include
periodic assessments of Year 2000 readiness of material credit customers, funds
providers, financial market counterparties, and mission critical vendors. During
1998, First Tennessee initiated a review with its large commercial customers to
identify, assess and mitigate potential risks, including credit risk, associated
with customers' failure to adequately address their Year 2000 issues. This
process is expected to be completed by the second quarter of 1999. While First
Tennessee continues, when it deems appropriate, to discuss these matters with,
obtain written certification from, and test the systems of other companies as to
their Year 2000 compliance, there can be no assurance that any potential impact
associated with incompatible systems after December 31, 1999, would not have a
material adverse effect on First Tennessee's business, financial condition or
results of operations. However, our regular contingency planning processes will
be adapted to aid us in preparing for the most significant potential risks from
these external sources. The Office of the Comptroller of the Currency, which is
our primary bank regulator, includes a review of the risk assessments and
contingency plans in its quarterly examination of Year 2000 preparedness. Our
contingency plans will be adapted to include such items as outsourcing options,
business resumption plans for all of the business units, identification of
alternative sources of liquidity, and evaluation of alternative manual
processes. The adaptation and testing of these contingency plans should be
finalized by the second quarter of 1999.
The foregoing statements are forward looking. Actual results could differ
because of several factors, including those presented at the beginning of this
MD&A discussion.
<PAGE> 57
QUARTERLY FINANCIAL INFORMATION
- -------------------------------
<TABLE>
TABLE 21 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION
<CAPTION>
1998 1997
--------------------------------------------- --------------------------------------
(Dollars in millions except Fourth Third Second First Fourth Third Second First
per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY INCOME INFORMATION:
Interest income $ 312.4 $ 288.3 $ 276.1 $ 257.0 $ 246.3 $ 241.8 $ 230.9 $ 222.3
Interest expense 165.9 153.6 143.9 129.9 121.3 118.2 111.9 106.8
Provision for loan losses 11.9 13.1 12.8 13.5 13.3 12.8 12.5 12.5
Noninterest income before securities
transactions 303.8 267.9 219.9 190.0 195.4 180.4 154.0 139.0
Securities gains /(losses) 3.9 -- -- -- .1 -- (.8) --
Noninterest expense 339.8 292.7 258.4 230.9 214.6 204.1 186.0 180.3
Net income 65.5 61.8 52.7 46.4 57.8 54.7 46.4 38.6
- ----------------------------------------------------------------------------------- --------------------------------------
NET INCOME PER COMMON SHARE $ .51 $ .48 $ .41 $ .36 $ .45 $ .43 $ .36 $ .30
DILUTED NET INCOME
PER COMMON SHARE .50 .47 .40 .35 .44 .42 .35 .29
- ----------------------------------------------------------------------------------- --------------------------------------
COMMON STOCK INFORMATION:
Closing price per share:
High $38 1/16 $33 3/4 $35 3/4 $33 1/8 $33 3/4 $29 1/8 $24 7/8 $24 1/2
Low 25 1/2 23 13/16 29 29 15/64 28 24 1/16 21 18 3/8
Period-end 38 1/16 27 5/16 31 9/16 32 1/8 33 3/8 28 1/2 24 21 1/8
Dividends declared per share .19 .165 .165 .165 .165 .15 .15 .15
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
Per share data reflects the 1998 two-for-one stock split.
</FN>
</TABLE>
<PAGE> 58
GLOSSARY
ALLOWANCE FOR LOAN LOSSES - Valuation reserve representing the amount considered
by management to be adequate to cover estimated losses inherent in the loan
portfolio.
BASIS POINT - The equivalent of one-hundredth of one percent (0.01). One hundred
basis points equals one percent. This unit is generally used to measure
movements in interest yields and rates.
BASIS RISK - Refers to changes in the relationship between various interest rate
segments (e.g., the difference between the Prime and the Fed Funds Rates).
BASIS SWAP - A notional principle swap that was intended to hedge the basis risk
of the loan portfolio. First Tennessee's basis swap was terminated in 1995 in
order to restructure the rate sensitive position and limit the loss going
forward in a rising rate scenario.
BOOK VALUE PER SHARE - A ratio determined by dividing shareholders' equity at
the end of a period by the number of common shares outstanding at the end of
that period.
CHARGE-OFFS - The amount charged against the allowance for loan losses to reduce
specific loans to their collectible amount.
CLASSIFIED LOAN - A loan that has caused management to have serious doubts about
the borrower's ability to comply with present repayment terms. Included in this
category are grade F performing and nonperforming loans. In compliance with the
standards established by the Office of the Comptroller of the Currency (OCC),
these loans are classified as substandard, doubtful and loss depending on the
severity of the loan's deterioration.
COMMERCIAL PAPER - A short-term unsecured debt obligation of the parent company
with maturities typically of 30 days to 270 days.
COMMERCIAL AND STANDBY LETTERS OF CREDIT - Commercial letters of credit are
issued or confirmed by an entity to ensure the payment of its customers'
payables and receivables. Standby letters of credit are issued by an entity to
ensure its customers' performance in dealing with others.
COMMITMENT TO EXTEND CREDIT - Agreements to make or acquire a loan or lease as
long as agreed-upon terms (e.g., expiry, covenants or notice) are met.
Generally these commitments have fixed expiration dates or other termination
clauses and may require payment of a fee.
CORE DEPOSITS - Core deposits consist of all interest-bearing and noninterest-
bearing deposits, except certificates of deposit over $100,000. They include
checking interest deposits, money market deposit accounts, time and other
savings, plus demand deposits.
DERIVATIVE FINANCIAL INSTRUMENT - Futures, forwards, swaps, option contracts, or
other financial instruments with similar characteristics, such as interest rate
caps or floors, or fixed-rate loan commitments.
DILUTED EARNINGS PER SHARE - Net income, divided by average shares outstanding
plus the number of shares that would be outstanding if all dilutive common
shares had been issued. Dilutive common shares, for example, would be
outstanding options where the average stock price exceeds the price at which the
option was granted.
DOUBLE LEVERAGE RATIO - A ratio that measures the degree to which parent company
debt supports investments in subsidiaries. It is calculated by dividing the
parent company's investment in subsidiaries by total consolidated equity.
EARNING ASSETS - Assets that generate interest or dividend income or yield-
related fee income, such as loans and investment securities.
EARNINGS PER SHARE (ALSO CALLED BASIC EARNINGS OR BASIC NET INCOME PER SHARE) -
Net income, divided by the average number of common shares outstanding in the
period (see also diluted earnings per share).
FEDERAL FUNDS SOLD/PURCHASED - Excess balances of depository institutions which
are loaned to each other, generally on an overnight basis.
FULLY TAXABLE-EQUIVALENT INCOME (FTE) - Income that has been adjusted by
increasing tax-exempt income to a level that would yield the same after-tax
income had that income been subject to taxation.
HEDGE - An instrument used to reduce risk by entering into a transaction which
offsets existing or anticipated exposures to changes in interest rates.
INTEREST-FREE SOURCES - Noninterest-bearing liabilities (such as demand
deposits, other liabilities and shareholders' equity) net of nonearning assets
(such as cash, fixed assets and other assets).
<PAGE> 59
INTEREST RATE CAPS AND FLOORS - Contracts with notional principal amounts that
require the seller, in exchange for a fee, to make payments to the purchaser if
a specified market interest rate exceeds a fixed upper "capped" level or falls
below a fixed lower "floor" level on specified future dates.
INTEREST RATE FORWARD AND FUTURES CONTRACTS - Contracts representing commitments
either to purchase or sell at a specified future date a specified security or
financial instrument at a specified price, and may be settled in cash or through
delivery. These obligations are generally short term in nature.
INTEREST RATE OPTION (OPTIONS) - A contract that grants the holder (purchaser),
for a fee, the right to either purchase or sell a financial instrument at a
specified price within a specified period of time or on a specified date from
the writer (seller) of the option.
INTEREST RATE SENSITIVITY - The relationship of changes in interest income and
interest expense to fluctuations in interest rates over a defined period of
time.
INTEREST RATE SWAP (SWAP) - An agreement in which two entities agree to
exchange, at specified intervals, interest payment streams calculated on an
agreed upon notional principal amount with at least one stream based on a
floating rate index.
INTEREST SENSITIVITY GAP - The difference between interest-rate sensitive assets
and interest-rate sensitive liabilities over a designated time period. A net
asset exists when interest-rate sensitive assets exceed interest-rate sensitive
liabilities. A net liability position exists when liabilities exceed assets.
LEVERAGE RATIO - Tier 1 capital divided by quarterly average assets excluding
any adjustments for available for sale securities unrealized gains/(losses),
goodwill, and certain other intangible assets.
LIQUIDITY - The ability of a corporation to generate adequate funds to meet its
cash flow requirements. It is measured by the ability to quickly convert assets
into cash with minimal exposure to interest rate risk, by the size and stability
of the core deposit base, and by additional borrowing capacity within the money
markets.
MARKET CAPITALIZATION - Market value of a firm computed by multiplying the
amount of shares outstanding by the current stock price.
MORTGAGE SERVICING RIGHTS - The right to service mortgage loans, generally owned
by someone else, for a fee. Loan servicing includes collecting payments;
remitting funds to investors, insurance companies and taxing authorities;
collecting delinquent payments; and foreclosing on properties when necessary.
NET INTEREST INCOME (NII) - Interest income less interest expense.
NET INTEREST MARGIN - A measurement of how effectively the bank utilizes its
earning assets in relationship to the interest cost of funding them. It is
computed by dividing fully taxable-equivalent net interest income by average
interest earning assets.
NET INTEREST SPREAD - The difference between the average yield earned on earning
assets on a fully taxable-equivalent basis and the average rate paid for
interest-bearing liabilities.
NONACCRUAL LOANS - Loans on which interest accruals have been discontinued due
to the borrower's financial difficulties. Interest income on these loans is
reported on a cash basis as it is collected after recovery of principal.
NONPERFORMING ASSETS - Interest earning assets on which interest income is not
being accrued, restructured loans on which interest rates or terms of repayment
have been materially revised, real estate properties acquired through
foreclosure, and repossessed assets.
NOTIONAL PRINCIPAL AMOUNT - An amount on which payments for interest rate swaps
and interest rate options, caps and floors are based. The "notional amount" is
not paid or received.
OPERATING MARGIN (ALSO CALLED RETURN ON REVENUE - ROR) - A measure of
profitability that indicates operation efficiency and productivity. It is
calculated by dividing the fully taxable-equivalent pre-tax profit before loan
loss provision by the fully taxable-equivalent net interest income plus
noninterest income.
PRICE/EARNINGS RATIO - The relationship of the market price of a share of common
stock to the earnings per share of the stock, expressed as a multiple.
PROVISION FOR LOAN LOSSES - The periodic charge to earnings for potential losses
in the loan portfolio.
PURCHASED FUNDS - The combination of certificates of deposit greater than
$100,000, federal funds purchased, securities sold under agreement to
repurchase, bank notes, commercial paper, and other short-term borrowings.
<PAGE> 60
RECOVERIES - The amount added to the allowance for loan losses when funds are
received on a loan that was previously charged off.
REPURCHASE AGREEMENT - A method of short-term financing in which one party
agrees to buy back, at a future date (generally overnight) and an agreed-upon
price, a security it sells to another party.
RESTRUCTURED LOANS - Loans where the institution, for economic or legal reasons
related to the debtor's financial difficulties, grants a concession to the
debtor that it would not otherwise consider.
RETURN ON AVERAGE ASSETS (ROA) - A measure of profitability that indicates how
effectively an institution utilized its assets. It is calculated by dividing
annualized net income by total average assets.
RETURN ON AVERAGE EQUITY (ROE) - A measure of profitability that indicates what
an institution earned on its shareholders' investment. ROE is calculated by
dividing net income by total average shareholders' equity.
REVENUE - The sum of net interest income and noninterest income. For some
comparisons, securities gains/losses are excluded.
RISK-ADJUSTED ASSETS - A regulatory risk-based calculation that takes into
account the broad differences in risks among a banking organization's assets and
off-balance sheet instruments.
SECURITIZED ASSETS OR SECURITIZATION - The process by which financial assets are
packaged, underwritten and sold as securities.
SHAREHOLDER RETURN (ALSO CALLED TOTAL RETURN) - The sum of dividend income and
price appreciation of an equity security for a given period of time divided by
the price of the security at the beginning of the period.
TIER 1 CAPITAL RATIO - Ratio consisting of shareholders' equity before any
adjustments for available for sale securities unrealized gains/(losses) reduced
by goodwill, certain other intangible assets and the disallowable portion of
mortgage servicing rights divided by risk-adjusted assets.
TOTAL CAPITAL RATIO - Tier 1 capital plus the allowable portion of the allowance
for loan losses and qualifying subordinated debt divided by risk-adjusted
assets.
<PAGE> 61
<TABLE>
FIRST TENNESSEE NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
<CAPTION>
December 31
---------------------------------
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks (Note 17) $ 811,881 $ 775,760
Federal funds sold and securities purchased under agreements to resell 124,239 225,861
- ---------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 936,120 1,001,621
- ---------------------------------------------------------------------------------------------------------------------------
Investment in bank time deposits 1,211 2,522
Capital markets securities inventory 358,304 253,240
Mortgage loans held for sale 4,227,443 1,240,648
Securities available for sale (Note 3) 1,816,485 2,133,303
Securities held to maturity (market value of $610,364 at December 31, 1998,
and $54,323 at December 31, 1997) (Note 3) 609,804 53,230
Loans, net of unearned income (Note 4) 8,557,064 8,311,350
Less: Allowance for loan losses 136,013 125,859
- ---------------------------------------------------------------------------------------------------------------------------
Total net loans 8,421,051 8,185,491
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net (Note 5) 254,292 206,895
Real estate acquired by foreclosure 16,242 12,202
Mortgage servicing rights, net (Note 6) 664,438 408,921
Intangible assets, net (Note 7) 132,845 112,411
Capital markets receivables and other assets 1,295,726 777,413
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 18,733,961 $ 14,387,897
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing (Note 8) $ 8,665,175 $ 7,135,733
Noninterest-bearing 3,057,864 2,536,046
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 11,723,039 9,671,779
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase (Note 9) 2,912,018 2,085,679
Commercial paper and other short-term borrowings (Note 9) 1,427,274 702,388
Capital markets payables and other liabilities 1,057,646 705,062
Term borrowings (Note 10) 414,450 168,893
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 17,534,427 13,333,801
- ---------------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in First Tennessee's
junior subordinated debentures (Note 11) 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 - 128,974,362 at December 31, 1998 and 128,209,142 at December 31, 1997) 80,609 80,131
Capital surplus 96,778 49,536
Undivided profits 908,977 811,396
Accumulated other comprehensive income (Note 13) 12,872 15,333
Deferred compensation on restricted stock incentive plans (1,209) (2,300)
Deferred compensation obligation 1,507 --
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,099,534 954,096
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,733,961 $ 14,387,897
===========================================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 62
<TABLE>
FIRST TENNESSEE NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Year Ended December 31
-----------------------------------------------------
(Dollars in thousands except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 725,907 $ 699,617 $ 653,466
Interest on investment securities:
Taxable 155,956 135,321 135,969
Tax-exempt 3,658 4,502 5,146
Interest on mortgage loans held for sale 205,654 76,840 82,046
Interest on capital markets securities inventory 30,541 13,399 14,139
Interest on other earning assets 12,061 11,614 5,731
- --------------------------------------------------------------------------------------------------------------------
Total interest income 1,133,777 941,293 896,497
- --------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Savings 7,113 8,188 9,447
Checking interest and money market 113,171 95,123 92,648
Certificates of deposit under $100,000 and other time 144,879 160,522 166,534
Certificates of deposit $100,000 and more 111,472 47,730 46,283
Interest on short-term borrowings 196,665 130,719 109,547
Interest on term borrowings 19,938 15,915 20,850
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 593,238 458,197 445,309
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 540,539 483,096 451,188
Provision for loan losses 51,351 51,115 35,677
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 489,188 431,981 415,511
- --------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 558,366 330,131 275,406
Capital markets 147,353 98,310 85,871
Deposit transactions and cash management 90,444 86,047 78,228
Trust services and investment management 51,198 40,941 34,704
Merchant processing 37,462 32,111 24,185
Cardholder fees 21,046 19,833 17,155
Equity securities gains/(losses) 3,940 (854) (2,495)
Debt securities gains/(losses) 36 141 (186)
All other income and commissions (Note 14) 75,658 61,470 58,281
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income 985,503 668,130 571,149
- --------------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 1,474,691 1,100,111 986,660
- --------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives and benefits 563,576 409,783 385,380
Amortization of mortgage servicing rights 95,507 37,452 26,041
Operations services 58,505 49,879 44,109
Occupancy 51,421 42,848 39,815
Equipment rentals, depreciation and maintenance 45,771 40,093 34,121
Communications and courier 41,468 34,899 32,981
Advertising and public relations 25,184 18,722 17,629
Amortization of intangible assets 11,114 9,631 9,491
All other expense (Note 14) 229,223 141,737 114,919
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,121,769 785,044 704,486
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 352,922 315,067 282,174
Applicable income taxes (Note 15) 126,542 117,595 102,267
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 226,380 $ 197,472 $ 179,907
====================================================================================================================
EARNINGS PER SHARE (Note 16) $ 1.77 $ 1.54 $ 1.34
- --------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE (Note 16) $ 1.72 $ 1.50 $ 1.32
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 128,235,006 128,365,434 134,393,172
- --------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 63
<TABLE>
FIRST TENNESSEE NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Accumulated Deferred Deferred
Other Compen- Compen-
Common Common Capital Undivided Comprehensive sation sation
(Amounts in thousands) Shares Total Stock Surplus Profits Income Asset Liability
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 134,356 $ 873,224 $ 83,973 $ 63,610 $ 716,861 $ 10,582 $(1,802) $ --
Net income -- 179,907 -- -- 179,907 -- -- --
Other comprehensive income:
Unrealized market adjustments,
net of tax and reclassification
adjustment -- (7,885) -- -- -- (7,885) -- --
--------------------------------------------------------------------------------------------
Comprehensive income -- 172,022 -- -- 179,907 (7,885) -- --
--------------------------------------------------------------------------------------------
Cash dividends declared -- (73,593) -- -- (73,593) -- -- --
Common stock issued:
For exercise of stock options 789 5,569 493 5,076 -- -- -- --
Restricted:
Employee benefit plan 205 -- 128 2,890 -- -- (3,018) --
Incentive to non-employee
directors 18 -- 11 285 -- -- (296) --
Common stock repurchased (1,653) (28,356) (1,033) (27,323) -- -- -- --
Amortization on restricted
stock incentive plans -- 1,541 -- -- -- -- 1,541 --
Other -- 4,119 -- 4,119 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 133,715 954,526 83,572 48,657 823,175 2,697 (3,575) --
Net income -- 197,472 -- -- 197,472 -- -- --
Other comprehensive income:
Unrealized market adjustments,
net of tax and reclassification
adjustment -- 12,636 -- -- -- 12,636 -- --
--------------------------------------------------------------------------------------------
Comprehensive income -- 210,108 -- -- 197,472 12,636 -- --
--------------------------------------------------------------------------------------------
Cash dividends declared -- (79,362) -- -- (79,362) -- -- --
Common stock issued:
Federal Flood Certification
Corporation acquisition 74 1,362 47 1,315 -- -- -- --
For exercise of stock options 1,900 24,174 1,187 22,987 -- -- -- --
Tax benefit from non-qualified
stock options -- 4,962 -- 4,962 -- -- -- --
Common stock repurchased (7,480) (169,492) (4,675) (34,928) (129,889) -- -- --
Amortization on restricted
stock incentive plans -- 1,275 -- -- -- -- 1,275 --
Other -- 6,543 -- 6,543 -- -- -- --
- --------------------------------------------------------------------------------------------------------- -----------------------
BALANCE, DECEMBER 31, 1997 128,209 954,096 80,131 49,536 811,396 15,333 (2,300) --
Net income -- 226,380 -- -- 226,380 -- -- --
Other comprehensive income:
Unrealized market adjustments,
net of tax and reclassification
adjustment -- (2,461) -- -- -- (2,461) -- --
--------------------------------------------------------------------------------------------
Comprehensive income -- 223,919 -- -- 226,380 (2,461) -- --
--------------------------------------------------------------------------------------------
Cash dividends declared -- (87,768) -- -- (87,768) -- -- --
Common stock issued:
McGuire Mortgage Company
acquisition 351 8,951 219 8,732 -- -- -- --
Keystone Mortgage, Inc.
acquisition 190 5,164 119 5,045 -- -- -- --
For exercise of stock options 2,087 26,546 1,305 23,734 -- -- -- 1,507
Restricted employee
benefit plan 4 -- 2 119 -- -- (121) --
Tax benefit from non-qualified
stock options -- 17,135 -- 17,135 -- -- -- --
Common stock repurchased (1,867) (61,836) (1,167) (19,638) (41,031) -- -- --
Amortization on restricted
stock incentive plans -- 1,212 -- -- -- -- 1,212 --
Other -- 12,115 -- 12,115 -- -- -- --
- --------------------------------------------------------------------------------------------------------- -----------------------
BALANCE, DECEMBER 31, 1998 128,974 $ 1,099,534 $ 80,609 $ 96,778 $ 908,977 $ 12,872 $(1,209) $ 1,507
=================================================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 64
<TABLE>
FIRST TENNESSEE NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31
--------------------------------------------
(Dollars in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING Net income $ 226,380 $ 197,472 $ 179,907
ACTIVITIES Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Provision for loan losses 51,351 51,115 35,677
Provision for deferred income tax 83,454 45,521 39,274
Depreciation and amortization of premises and equipment 40,431 32,784 28,806
Amortization of mortgage servicing rights 95,507 37,452 26,041
Amortization of intangible assets 11,114 9,631 9,491
Net other amortization and accretion 15,283 5,916 14,453
Market value adjustment on foreclosed property 16,820 9,145 6,479
Gain on sale of securitized loans (643) -- --
Equity securities (gains)/losses (3,940) 854 2,495
Debt securities (gains)/losses (36) (141) 186
Net (gains)/losses on disposals of fixed assets (703) (698) 270
Gain on sale of bank branches (567) -- --
Net (increase)/decrease in:
Capital markets securities inventory (105,064) (102,838) 32,253
Mortgage loans held for sale (2,968,356) (453,286) 1,821
Capital markets receivables (143,893) (24,433) 29,174
Interest receivable (25,013) (7,609) (865)
Other assets (722,144) (343,697) (250,156)
Net increase/(decrease) in:
Capital markets payables 112,110 33,152 (39,643)
Interest payable (8,919) 2,977 (626)
Other liabilities 181,366 46,655 (16,211)
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments (3,371,842) (657,500) (81,081)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided/(used) by operating activities (3,145,462) (460,028) 98,826
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING Held to maturity securities:
ACTIVITIES Maturities 160,471 12,656 10,184
Purchases -- -- (1,462)
Available for sale securities:
Sales 53,643 104,067 391,795
Maturities 944,145 767,625 476,770
Purchases (675,358) (808,952) (1,016,553)
Premises and equipment:
Sales 2,733 4,212 1,856
Purchases (80,414) (56,099) (37,549)
Net increase in loans (1,102,674) (637,790) (424,844)
Proceeds from loan securitizations 72,756 -- --
Net (increase)/decrease in investment in bank time deposits 1,076 (600) 197
Sale of bank branches, net of cash and cash equivalents (7,654) -- --
Acquisitions, net of cash and cash equivalents acquired (9,243) (185) 400
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (640,519) (615,066) (599,206)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING Common stock:
ACTIVITIES Exercise of stock options 24,943 24,309 5,779
Cash dividends (84,521) (78,348) (71,310)
Repurchase of shares (61,854) (169,520) (28,356)
Term borrowings:
Issuance 247,613 -- --
Payments (2,301) (65,923) (25,544)
Issuance of guaranteed preferred beneficial interests
in First Tennessee's junior subordinated debentures -- 100,000 --
Net increase in:
Deposits 2,063,738 638,717 444,121
Short-term borrowings 1,532,862 529,511 497,811
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,720,480 978,746 822,501
- ---------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents (65,501) (96,348) 322,121
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 1,001,621 1,097,969 775,848
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 936,120 $1,001,621 $ 1,097,969
===========================================================================================================================
Total interest paid $ 601,749 $ 454,881 $ 438,830
Total income taxes paid 28,348 61,007 48,345
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 65
FIRST TENNESSEE NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING. The consolidated financial statements of First Tennessee
National Corporation (First Tennessee), including its subsidiaries, are prepared
in conformity with generally accepted accounting principles and follow general
practices within the industries in which it operates. This preparation requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. These estimates and assumptions
are based on information available as of the date of the financial statements
and could differ from actual results.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION. The consolidated
financial statements include the accounts of First Tennessee and its
majority-owned subsidiaries. Affiliates that are not majority owned are
accounted for by the equity method. All significant intercompany transactions
and balances have been eliminated. For purposes of comparability, certain prior
period amounts have been reclassified to conform with current year presentation.
None of these reclassifications had any effect on net income or earnings per
share for any of the periods presented.
Prior year financial statements are restated to include the accounts of
companies that are acquired and accounted for as poolings of interests. Business
combinations accounted for as purchases are included in the financial statements
from the respective dates of acquisition.
STATEMENTS OF CASH FLOWS. For purposes of these statements, cash and due from
banks, federal funds sold, and securities purchased under agreements to resell
are considered cash and cash equivalents. Federal funds are usually sold for
one-day periods, and securities purchased under agreements to resell are
short-term, highly liquid investments.
The following significant non-cash stock transactions have been adjusted for a
two-for-one stock split that First Tennessee effected February 20, 1998, and for
a two-for-one stock split effected February 16, 1996. In 1997, First Tennessee
issued approximately 75,000 shares of its common stock related to the
acquisition of Federal Flood Certification Corporation. In 1998, approximately
190,000 shares of First Tennessee stock were issued related to the acquisition
of Keystone Mortgage, Inc. and approximately 351,000 shares were issued related
to the acquisition of McGuire Mortgage Company.
CAPITAL MARKETS SECURITIES INVENTORY. Inventories purchased in connection with
underwriting or dealer activities are carried at market value. Gains and losses,
both realized and unrealized, on these inventories are reflected in noninterest
income as capital markets income.
INVESTMENT SECURITIES. Securities that First Tennessee has the ability and
positive intent to hold to maturity are classified as securities held to
maturity and are carried at amortized cost. Securities that may be sold prior to
maturity for asset/liability management purposes and equity securities are
classified as securities available for sale and are carried at fair value. The
unrealized gains and losses on securities available for sale are excluded from
earnings and are reported, net of tax, as a component of other comprehensive
income within shareholders' equity.
The amortized cost of all securities is adjusted for amortization of premium and
accretion of discount to maturity, or earlier call date if appropriate, using
the level yield method. Such amortization and accretion is included in interest
income from securities. Realized gains and losses and declines in value judged
to be other than temporary are computed by the specific identification method
and reported in noninterest income.
SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS. First Tennessee Capital Markets enters into short-term
purchases of securities under agreements to resell as a means of converting
proceeds from securities sold short into interest earning assets. Securities
delivered under these transactions are delivered to either the dealer custody
account at the Federal Reserve Bank or to the applicable counterparty.
<PAGE> 66
Securities sold under agreements to repurchase (securities sold) are offered to
cash management customers as an automated, collateralized investment account.
Securities sold are also used by the regional banking group to obtain favorable
borrowing rates on its purchased funds. Under these transactions, securities are
delivered to the counterparty's custody account. In the normal course of
business, First Tennessee does not use this as a primary funding source.
MORTGAGE BANKING. First Tennessee's mortgage lenders originate first-lien
mortgage loans for the purpose of selling them in the secondary market.
Mortgage loans held for sale are recorded at the lower of aggregate cost or
market value. Gains and losses realized from the sale of these assets and
adjustments to market value are included in noninterest income.
Servicing rights related to the mortgages sold are ordinarily retained.
Accounting standards require the recognition of mortgage servicing rights (MSRs)
as separate assets by allocating the total cost between the loan and the
servicing right based on their relative fair values. First Tennessee uses an
industry standard cash flow valuation model to determine the fair value of the
servicing rights created. These valuations are tested for reasonableness against
prices obtained from flow and bulk sales of servicing and are validated through
an independent market valuation. Model assumptions are periodically reviewed and
may be revised from time to time to more accurately reflect current assumptions
such as prepayment speeds.
For purposes of impairment evaluation and measurement, the MSRs are stratified
based on the predominant risk characteristics of the underlying loans. For First
Tennessee, these strata include adjustable rate conventional and government;
fixed rate conventional and government by interest rate band. The MSRs are
amortized as noninterest expense over the period of and in proportion to the
estimated net servicing revenues. A quarterly value impairment analysis is
performed using a discounted cash flow methodology that is disaggregated by
predominant risk characteristics. Impairment, if any, is recognized through a
valuation allowance for individual strata. See further detail about mortgage
banking policies in the derivative financial instruments disclosure below.
LOANS. Loans are stated at principal amounts outstanding, net of unearned
income. Interest on loans is recognized at the applicable interest rate on the
principal amount outstanding. Impaired loans are generally carried on a
nonaccrual status. Loans are ordinarily placed on nonaccrual status when, in
management's opinion, the collection of principal or interest is unlikely, or
when the collection of principal or interest is 90 days or more past due.
Consumer installment loans and credit card receivables are not placed on
nonaccrual status, but are charged off when past due 120 days and 180 days,
respectively.
Accrued but uncollected interest is reversed and charged against interest income
when the loan is placed on nonaccrual status. On consumer loans, accrued but
uncollected interest is reversed when the loan is charged off. Management may
elect to continue the accrual of interest when the estimated net realizable
value of collateral is sufficient to recover the principal balance and accrued
interest. Interest payments received on nonaccrual and impaired loans are
normally applied to principal. Once all principal has been received, additional
interest payments are recognized on a cash basis as interest income.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained at a
level that management determines is adequate to absorb estimated losses inherent
in the loan portfolio. Management's evaluation process used to determine the
adequacy of the allowance combines three factors: historical loss experience
derived from analytical models, current trends and reasonably foreseeable
events. The actual amounts realized could differ in the near term from the
amounts assumed in arriving at the allowance for possible loan losses reported
in the financial statements.
<PAGE> 67
All losses of principal are charged to the account when the loss actually occurs
or when a determination is made that a loss is probable. Additions are made to
the allowance through periodic provisions charged to current operations and
recovery of principal on loans previously charged off.
PREMISES AND EQUIPMENT. Premises and equipment are carried at cost less
accumulated depreciation and amortization and include additions that materially
extend the useful lives of existing premises and equipment. All other
maintenance and repair expenditures are expensed as incurred. Gains and losses
on dispositions are reflected in noninterest income and expense.
Depreciation and amortization are computed principally on the straight-line
method over the estimated useful lives of the assets and are expensed to
noninterest expense. Leasehold improvements are amortized over the lesser of the
lease periods or the estimated useful lives using the straight-line method.
REAL ESTATE ACQUIRED BY FORECLOSURE. Real estate acquired by foreclosure
consists of properties that have been acquired in satisfaction of debt. These
properties are carried at the lower of the outstanding loan amount or the
estimated fair market value minus the estimated cost to sell the real estate.
Losses arising at foreclosure are charged to the allowance for loan losses.
Required developmental costs associated with foreclosed property under
construction are capitalized and included in determining the estimated net
realizable value of the property which is reviewed periodically, and any
write-downs are charged against current earnings as market adjustments.
INTANGIBLE ASSETS. Intangible assets consist of "Premium on purchased deposits
and assets" and "Goodwill." The "Premium on purchased deposits and assets"
represents identified intangible assets, which are amortized over their
estimated useful lives, except for those assets related to deposit bases that
are primarily amortized over 10 years. "Goodwill" represents the excess of cost
over net assets of acquired subsidiaries less identifiable intangible assets and
is amortized to noninterest expense using the straight-line method over periods
ranging from 15 to 40 years. Management evaluates whether events or
circumstances have occurred that indicate the remaining useful life or carrying
value of goodwill should be revised.
DERIVATIVE FINANCIAL INSTRUMENTS. First Tennessee utilizes derivative financial
instruments in order to manage exposure to fluctuations in interest rates and to
meet the financial needs of customers. For interest rate risk management
purposes, First Tennessee primarily utilizes interest rate swaps. Mortgage
banking operations mainly use mandatory forward delivery commitments and
purchased and written options to hedge against risks associated with the
warehouse, the pipeline, or the servicing portfolio. Capital markets uses
various derivatives, including interest rate swaps, futures, forward and option
contracts and securities underwriting commitments in order to meet the needs of
its customers with forwards being the most commonly used instrument.
To qualify as a hedge used to manage interest rate risk, the following criteria
must be met: (1) the asset or liability to be hedged exposes First Tennessee to
interest rate risk; (2) the instrument alters or reduces sensitivity to interest
rate changes; and (3) the instrument is designated and effective as a hedge.
For interest rate contracts used to hedge interest rate risk, income and expense
are deferred and amortized over the lives of the hedged assets or liabilities.
The amortization of this income and expense is an adjustment to interest income
or expense of the hedged item. Fees are deferred and amortized over the lives of
the contracts. Any related assets or liabilities are recorded on the balance
sheet in other assets or other liabilities.
For those derivatives used to manage interest rate risk that are terminated
prior to maturity, realized gains and losses are deferred and amortized
straight-line over the remaining original life of the agreement as an adjustment
to the hedged asset or liability. If the underlying hedged asset or liability is
sold or prepaid, the related portion of any unrecognized gain or loss on the
derivative is recognized in current earnings as part of the gain or loss on the
sale or prepayment.
<PAGE> 68
Forward and option contracts used by mortgage banking operations to hedge
against interest rate risk in the warehouse and the pipeline are designated to a
specific pool of assets and are reviewed periodically for correlation with
expected changes in value. Option contracts used to hedge against interest rate
risk in the servicing portfolio are designated to specific risk tranches of
servicing rights and reduce the risk of market value fluctuations.
Forward and option contracts used to hedge the warehouse are considered in the
lower of cost or market valuation of the warehouse with any related gains or
losses being recognized in mortgage banking noninterest income. Premiums paid
for purchased options are deferred and reported in other assets and are
amortized over the lives of the contracts to mortgage banking noninterest
income.
Options used to hedge the servicing portfolio are adjusted for changes in
intrinsic value with gains and losses recognized as a basis adjustment of the
related mortgage servicing rights risk tranche. Cash flows received from option
contracts are also recognized as an adjustment to mortgage servicing rights.
Premiums are deferred and amortized on a straight-line basis over the contract
life to other noninterest expense. Any unamortized premiums related to the
options are reported in other assets.
For derivatives hedging the warehouse and pipeline that are terminated prior to
maturity, gains and losses are recognized in current earnings as mortgage
banking noninterest income and are deferred and recognized at the time the loan
is sold if the sale is deferred to a future date. For derivatives hedging the
servicing portfolio that are terminated prior to maturity, gains and losses are
split between the return of time value premium and the intrinsic value. Gains or
losses from the change in the intrinsic value are deferred as a basis adjustment
to the related mortgage servicing rights risk tranche, and the gains or losses
resulting from the return of time value premium are recognized in current
earnings in mortgage banking noninterest income.
Any contracts that fail to qualify for hedge accounting are measured at fair
value with any gains or losses included in current earnings in noninterest
income.
Derivative contracts utilized in trading activities by capital markets are
measured at fair value, and gains or losses are recognized in capital markets
noninterest income as they occur. Related assets are recorded on the balance
sheet as capital markets securities inventory or receivables and any liabilities
are recognized as capital markets payables.
Cash flows from derivative contracts are reported as operating activities on the
Consolidated Statements of Cash Flows.
INCOME TAXES. The provision for income taxes is based on income reported for
consolidated financial statement purposes and includes deferred taxes resulting
from the recognition of certain revenues and expenses in different periods for
tax reporting purposes. First Tennessee files a consolidated federal income tax
return except for a credit life insurance company which files a separate return.
EARNINGS PER SHARE. Earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for each period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding adjusted to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares resulting from options granted under First Tennessee's stock option plans
had been issued. First Tennessee utilizes the treasury stock method in this
calculation. Previously reported per share amounts have been restated for the
effect of both the February 20, 1998, and February 16, 1996, two-for-one stock
splits.
<PAGE> 69
ACCOUNTING CHANGES. On January 1, 1998, First Tennessee adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which 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 other
comprehensive income for First Tennessee is unrealized holding gains/(losses) on
available for sale securities.
On January 1, 1998, First Tennessee adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which allows for the capitalization of internal and external
personnel costs for the development or modification of qualified internal use
software. During 1998, approximately $14.2 million of internal and external
costs, excluding the software license fees, were capitalized and will be
amortized over the next five years.
For the year ending December 31, 1998, First Tennessee adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
standard requires a business to report financial and descriptive information
about its reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance.
For the year ending December 31, 1998, First Tennessee adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." The
new standard revises the required disclosures for employee benefit plans but
does not change the measurement or recognition of such plans.
On January 1, 1997, First Tennessee adopted SFAS No. 125, "Accounting for the
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings based
on a control-oriented "financial components" approach. Under this approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes liabilities
when extinguished. The adoption of this standard required a change in the method
used to recognize mortgage servicing rights, increasing both the amortization
expense as well as the servicing income.
SFAS No. 128, "Earnings per Share," was adopted as of January 1, 1997. This
standard specifies the computation, presentation and disclosure requirements for
earnings per share (EPS). The objective of SFAS No. 128 is to simplify the
computation and to make the United States' standard more compatible with EPS
standards of other countries and with that of the International Accounting
Standards Committee. First Tennessee now presents on the income statement both
earnings per share and diluted earnings per share for all periods presented.
On January 1, 1996, First Tennessee adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This standard requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the expected undiscounted future cash flows from the use of the
asset and its eventual disposition are less than the carrying amount of the
asset, an impairment loss is recognized. The impairment loss is measured based
upon the present value of the expected future cash flows.
SFAS No. 123, "Accounting for Stock-Based Compensation," was adopted January 1,
1996. SFAS No. 123 defines a fair value-based method of accounting for
stock-based compensation plans. Under the fair value-based method, compensation
cost is measured at the grant date based upon the value of the award and is
recognized over the service period. The standard encourages all entities to
adopt this method of accounting; however, it allows an entity to continue to
measure compensation costs for its plans as prescribed in Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."
<PAGE> 70
Under this election, First Tennessee continues to account for stock-based
compensation in accordance with APB Opinion No. 25 and provides additional
disclosure on the pro forma impact of the fair value-based method under SFAS
No. 123. See Note 20 - Stock Option, Restrictive Stock Incentive, and Dividend
Reinvestment Plans for further disclosure.
In October 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
134, "Accounting for Mortgage-Backed Securities Retained after Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This Statement
amends SFAS No. 65, which required that retained securities be classified as
trading securities. SFAS No. 134 allows these securities to be classified as
trading, held to maturity or available for sale based on the intent and ability
of the enterprise. This Statement is effective January 1, 1999, and is not
expected to materially impact First Tennessee's financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new Statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. This Statement is effective for all
quarters of fiscal years beginning after June 15, 1999; which for First
Tennessee will mean the first quarter of 2000. Because of the complexity of this
standard and uncertainties associated with predicting future derivative usage
and related fair values, it is not practicable at this time to predict what the
impact of adopting this Statement will be to First Tennessee's financial
position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued SOP
98-5, "Reporting on the Costs of Start-up Activities." This Statement requires
that the costs of start-up activities, including organization costs, be expensed
as incurred. When adopted, previously capitalized start-up and organization
costs should be written off and reported as the cumulative effect of a change in
accounting principle. The Statement is effective for fiscal years beginning
after December 15, 1998, and is not expected to materially impact First
Tennessee's financial position or results of operations.
NOTE 2 - ACQUISITIONS
On December 31, 1998, First Tennessee acquired McGuire Mortgage Company
(McGuire) of Prairie Village, Kansas, for approximately 351,000 shares of its
common stock pending final settlement during 1999. McGuire was merged into FT
Mortgage Companies, an indirect, wholly owned subsidiary of First Tennessee.
This acquisition was accounted for as a purchase and was immaterial to First
Tennessee.
On July 1, 1998, First Tennessee acquired Keystone Mortgage, Inc. (Keystone) of
Kirkland, Washington, and merged Keystone into FT Mortgage Companies. First
Tennessee issued approximately 190,000 shares of its common stock for this
acquisition which was accounted for as a purchase and was immaterial to First
Tennessee.
On January 2, 1998, First Tennessee acquired Martin & Company, LLP (Martin) of
Knoxville, Tennessee, for approximately $19.5 million. This acquisition was
accounted for as a purchase and was immaterial to First Tennessee.
The following table provides information concerning acquisitions completed
during the three years ended December 31, 1998. Acquisitions accounted for as
purchases are included in the financial statements from the date of the
acquisition. All share information reflects the 1998 two-for-one stock split.
<PAGE> 71
<TABLE>
<CAPTION>
Common Shares
Date of Issued Method of
Acquisition Location Acquisition (thousands) Accounting
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
McGuire Mortgage Company Prairie Village, Kansas 12/31/98 351 Purchase
Keystone Mortgage, Inc. Kirkland, Washington 7/1/98 190 Purchase
Martin & Company, LLP Knoxville, Tennessee 1/2/98 $19.5 million cash Purchase
Federal Flood Certification Corporation Dallas, Texas 7/14/97 75 Purchase
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following presents on a proforma basis certain financial data pertaining to
the McGuire, Keystone, and Martin transactions as if they had been acquired at
the beginning of the years presented. The proforma results presented are not
necessarily indicative of the future results of operations that would have
actually occurred had the merger been in effect for the periods presented.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL REVENUE:*
First Tennessee, as originally reported $1,526,042 $1,151,226
First Tennessee proforma 1,559,879 1,181,540
NET INCOME:
First Tennessee, as originally reported $ 226,380 $ 197,472
First Tennessee proforma 227,840 200,411
NET INCOME PER SHARE:
First Tennessee, as originally reported $ 1.77 $ 1.54
First Tennessee proforma 1.77 1.55
DILUTED NET INCOME PER SHARE:
First Tennessee, as originally reported $ 1.72 $ 1.50
First Tennessee proforma 1.72 1.51
- -----------------------------------------------------------------------------------------------------------------
<FN>
* Total revenue is net interest income and noninterest income.
</FN>
</TABLE>
NOTE 3 - INVESTMENT SECURITIES
The following tables summarize First Tennessee's securities held to maturity and
available for sale at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998*
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
States and municipalities $ 40,832 $ 1,267 $ (141) $ 41,958
Private issue CMOs** 568,972 5,752 (6,318) 568,406
- -------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 609,804 $ 7,019 $(6,459) $ 610,364
=============================================================================================================
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and other U.S. government agencies $ 149,512 $ 1,790 $ (87) $ 151,215
Government agency issued MBSs 193,082 2,636 (281) 195,437
Government agency issued CMOs 1,297,152 7,061 (1,112) 1,303,101
States and municipalities 19,124 851 -- 19,975
Private issue CMOs 1,001 18 -- 1,019
Other 11,401 239 (6) 11,634
Equity*** 124,294 9,829 (19) 134,104
- -------------------------------------------------------------------------------------------------------------
Total securities available for sale $1,795,566 $22,424 $(1,505) $1,816,485
=============================================================================================================
<FN>
* Includes $1,655,182,000 of securities pledged to secure public deposits,
securities sold under agreements to repurchase and for other purposes.
** Represents First Tennessee's Real Estate Mortgage Investment Conduit.
*** Equity securities include venture capital investment securities.
</FN>
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
At December 31, 1997*
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
States and municipalities $ 53,230 $ 1,270 $ (177) $ 54,323
- -------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury and other U.S. government agencies $ 364,157 $ 2,242 $ (387) $ 366,012
Government agency issued MBSs 248,876 4,305 (943) 252,238
Government agency issued CMOs 1,380,289 9,040 (884) 1,388,445
States and municipalities 22,539 851 -- 23,390
Private issue CMOs 1,212 23 -- 1,235
Other 10,290 117 (608) 9,799
Equity** 80,608 13,040 (1,464) 92,184
- -------------------------------------------------------------------------------------------------------------
Total securities available for sale $2,107,971 $29,618 $(4,286) $2,133,303
=============================================================================================================
<FN>
* Includes $1,816,347,000 of securities pledged to secure public deposits,
securities sold under agreements to repurchase and for other purposes.
** Equity securities include venture capital investment securities.
</FN>
</TABLE>
Provided below are the amortized cost and estimated fair value by contractual
maturity for the securities portfolios at December 31, 1998:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
--------------------- ---------------------------
Estimated Estimated
By Contractual Maturity Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within 1 year $ 11,759 $ 11,886 $ 28,299 $ 28,410
After 1 year; within 5 years 14,990 15,318 117,910 119,830
After 5 years; within 10 years 8,851 9,178 32,182 32,909
After 10 years 5,232 5,576 1,646 1,675
- -------------------------------------------------------------------------------------------------------------
Subtotal 40,832 41,958 180,037 182,824
- -------------------------------------------------------------------------------------------------------------
Mortgage-backed securities and CMOs 568,972 568,406 1,491,235 1,499,557
Equity securities -- -- 124,294 134,104
- -------------------------------------------------------------------------------------------------------------
Total $609,804 $610,364 $1,795,566 $1,816,485
=============================================================================================================
<FN>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
</FN>
</TABLE>
The table below provides information on realized gross gains and realized gross
losses on sales from the available for sale portfolio for the years ended
December 31:
<TABLE>
<CAPTION>
Available Available
for Sale - for Sale -
(Dollars in thousands) Debt Equity Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Gross gains on sales $ 323 $6,804 $ 7,127
Gross losses on sales (292) -- (292)
- -------------------------------------------------------------------------------------------------------------
1997
Gross gains on sales $ 373 $ 214 $ 587
Gross losses on sales (441) -- (441)
- -------------------------------------------------------------------------------------------------------------
1996
Gross gains on sales $ 1,164 $ 540 $ 1,704
Gross losses on sales (1,385) -- (1,385)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 73
Losses totaling $2,947,000, $1,147,000, and $3,035,000 for the years 1998, 1997
and 1996, respectively, were recognized for securities that, in the opinion of
management, have been permanently impaired.
NOTE 4 - LOANS
A summary of the major categories of loans outstanding at December 31 is shown
below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 4,116,918 $ 3,768,554
Consumer:
Real estate* 2,041,579 1,954,590
Auto 443,674 505,536
Student 274,763 257,518
Other 258,766 137,596
- -------------------------------------------------------------------------------------------------------------
Total consumer 3,018,782 2,855,240
Permanent mortgage 423,200 663,494
Credit card receivables 594,467 581,451
Real estate construction 375,890 404,196
Nonaccrual 27,807 38,415
- -------------------------------------------------------------------------------------------------------------
Loans, net of unearned income** 8,557,064 8,311,350
Allowance for loan losses 136,013 125,859
- -------------------------------------------------------------------------------------------------------------
Total net loans $ 8,421,051 $ 8,185,491
=============================================================================================================
<FN>
* Consumer real estate loans included $1,950,739,000 and $1,910,323,000 of
first and second liens and home equity loans at December 31, 1998 and 1997,
respectively.
** Loans are presented net of $4,661,000 and $5,244,000 of unearned income at
December 31, 1998 and 1997, respectively.
</FN>
</TABLE>
Nonperforming loans consist of loans which management has identified as
impaired, other nonaccrual loans and loans which have been restructured. At
December 31, 1998 and 1997, there were no outstanding commitments to advance
additional funds to customers whose loans had been restructured. The following
table presents nonperforming loans at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans $ 12,111 $ 8,712
Other nonaccrual loans 15,696 29,703
- ----------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 27,807 $ 38,415
==========================================================================================================
<FN>
Restructured impaired loans at December 31, 1997, were $196,000.
</FN>
</TABLE>
Interest income received during 1998 for impaired loans was $1,195,000 and for
other nonaccrual loans was $860,000. Under their original terms, interest
income would have been approximately $1,432,000 for the impaired loans and
$1,224,000 for the other nonaccrual loans outstanding at December 31, 1998. The
average balance of impaired loans was approximately $9,093,000 for 1998 and
$11,187,000 for 1997.
Activity in the allowance for loan losses related to non-impaired and impaired
loans for years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Non-impaired Impaired Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 109,051 $ 3,516 $ 112,567
Provision for loan losses 33,179 2,498 35,677
Charge-offs (39,555) (2,827) (42,382)
Loan recoveries 11,542 344 11,886
- ------------------------------------------------------------------------------------------------------------
Net charge-offs (28,013) (2,483) (30,496)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 114,217 3,531 117,748
Provision for loan losses 46,007 5,108 51,115
Charge-offs (48,974) (5,301) (54,275)
Loan recoveries 10,857 414 11,271
- ------------------------------------------------------------------------------------------------------------
Net charge-offs (38,117) (4,887) (43,004)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 122,107 3,752 125,859
Transfer of allowance due to securitizations (3,575) - (3,575)
Allowance from acquisitions 140 - 140
Provision for loan losses 48,474 2,877 51,351
Charge-offs (43,384) (5,138) (48,522)
Loan recoveries 9,810 950 10,760
- ------------------------------------------------------------------------------------------------------------
Net charge-offs (33,574) (4,188) (37,762)
- ------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 133,572 $ 2,441 $ 136,013
============================================================================================================
</TABLE>
<PAGE> 74
Certain executive officers and directors (and their associates) of First
Tennessee were loan customers during 1998 and 1997. Such loans are at normal
credit terms, including interest rates and collateral, and do not represent
more than a normal risk of collection. The following is a summary of related
party loans outstanding and the activity for the years ended December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 85,867 $ 101,573
Additions 165,049 307,895
Deletions:
Repayments (141,738) (307,383)
No longer related (38,447) (16,218)
- -----------------------------------------------------------------------------
Total deletions (180,185) (323,601)
- -----------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 70,731 $ 85,867
=============================================================================
</TABLE>
Included in "Other assets" and "Other liabilities" on the Consolidated
Statements of Condition are amounts due from customers on acceptances and bank
acceptances outstanding of $6,869,000 and $2,487,000 at December 31, 1998 and
1997, respectively.
NOTE 5 - PREMISES, EQUIPMENT AND LEASES
Premises and equipment at December 31 are summarized below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Land $ 32,026 $ 31,373
Buildings 154,758 137,373
Leasehold improvements 41,009 27,833
Furniture, fixtures and equipment 229,062 183,826
- -----------------------------------------------------------------------------------
Premises and equipment, at cost 456,855 380,405
Less accumulated depreciation and amortization 202,563 173,510
- -----------------------------------------------------------------------------------
Premises and equipment, net $ 254,292 $ 206,895
===================================================================================
</TABLE>
First Tennessee is obligated under a number of noncancelable operating leases
for premises and equipment with terms up to 20 years, which may include the
payment of taxes, insurance and maintenance costs. Minimum future lease
payments for operating leases on premises and equipment at December 31, 1998,
are shown below:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -----------------------------------------------------------------------------------
<S> <C>
1999 $ 32,923
2000 26,750
2001 22,366
2002 17,210
2003 10,933
2004 and after 19,679
- -----------------------------------------------------------------------------------
Total minimum lease payments $ 129,861
===================================================================================
<FN>
Payments required under capital leases are not material.
</FN>
</TABLE>
Aggregate minimum income under sublease agreements for these periods is
$2,129,000.
Rent expense incurred under all operating lease obligations was as follows for
the years ended December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Rent expense, gross $ 35,857 $ 29,820 $ 27,746
Rent income (1,901) (1,670) (1,517)
- ----------------------------------------------------------------------------------
Rent expense, net $ 33,956 $ 28,150 $ 26,229
==================================================================================
</TABLE>
NOTE 6 - CAPITALIZED MORTGAGE SERVICING RIGHTS
Following is a summary of changes in capitalized mortgage servicing rights, net
of accumulated amortization, included in the Consolidated Statements of
Condition:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -----------------------------------------------------------------------------------
<S> <C>
December 31, 1995 $ 149,220
Addition of mortgage servicing rights 144,988
Amortization (26,041)
Sales of mortgage servicing rights (2,140)
- -----------------------------------------------------------------------------------
December 31, 1996 266,027
Addition of mortgage servicing rights 182,959
Amortization (37,452)
Sales of mortgage servicing rights (2,613)
- -----------------------------------------------------------------------------------
December 31, 1997 408,921
Addition of mortgage servicing rights 435,893
Amortization (95,507)
Hedge gains applied (84,557)
Sales of mortgage servicing rights (312)
- -----------------------------------------------------------------------------------
DECEMBER 31, 1998 $ 664,438
===================================================================================
</TABLE>
The mortgage servicing rights at December 31, 1998 and 1997, had estimated
market values of approximately $685.1 million and $437.7 million, respectively.
These balances represent the rights to service approximately $34.0 billion and
$23.8 billion of mortgage loans at December 31, 1998 and 1997. In addition,
First Tennessee had approximately $1.6 billion and $2.3 billion in unpaid
principal balance of mortgage loans for which the servicing rights were not
capitalized at December 31, 1998 and 1997. These mortgage servicing rights had
estimated market values of $10.2 million and $15.8 million, respectively. No
valuation allowance due to impairment was required as of December 31, 1998 or
1997.
<PAGE> 75
NOTE 7 - INTANGIBLE ASSETS
Following is a summary of intangible assets, net of accumulated amortization,
included in the Consolidated Statements of Condition:
<TABLE>
<CAPTION>
Premium on
Purchased
Deposits
(Dollars in thousands) Goodwill and Assets
- -------------------------------------------------------------------------
<S> <C> <C>
December 31, 1995 $ 91,792 $ 37,193
Amortization expense (4,386) (5,105)
Acquisitions/Divestitures 237 (266)
- -------------------------------------------------------------------------
December 31, 1996 87,643 31,822
Amortization expense (4,343) (5,288)
Acquisitions 377 2,200
- -------------------------------------------------------------------------
December 31, 1997 83,677 28,734
Amortization expense (5,463) (5,651)
Acquisitions 29,256 2,292
- -------------------------------------------------------------------------
DECEMBER 31, 1998 $ 107,470 $ 25,375
=========================================================================
</TABLE>
NOTE 8 - TIME DEPOSIT MATURITIES
Following is a table of maturities for time deposits outstanding at December
31, 1998, which include "Certificates of deposit under $100,000 and other time"
and "Certificates of deposit $100,000 and more". "Certificates of deposit
$100,000 and more" totaled $2,190,803,000 at December 31, 1998. Time deposits
are included in "Interest-bearing" deposits on the Consolidated Statements of
Condition.
<TABLE>
<CAPTION>
(Dollars in thousands)
- -------------------------------------------------------------------------------
<S> <C>
1999 $ 3,876,004
2000 409,112
2001 116,554
2002 142,748
2003 and after 126,788
- -------------------------------------------------------------------------------
Total $ 4,671,206
===============================================================================
</TABLE>
NOTE 9 - SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased and securities sold under
agreements to repurchase, commercial paper, and other borrowed funds which
include term federal funds purchased, short-term bank notes, and advances from
the Federal Home Loan Bank. The advances from the Federal Home Loan Bank, which
totaled $535,000,000 at December 31, 1998, are collateralized 150 percent with
first-lien permanent mortgage loans of First Tennessee Bank National
Association (FTBNA).
<PAGE> 76
Federal funds purchased and securities sold under agreements to repurchase and
commercial paper generally have maturities of less than 90 days. Other
short-term borrowings have original maturities of one year or less. The detail
of these borrowings for the years 1998, 1997 and 1996 is presented in the
following table:
<TABLE>
<CAPTION>
Federal Funds
Purchased and
Securities Sold Other
Under Agreements Commercial Short-term
(Dollars in thousands) to Repurchase Paper Borrowings
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Average balance $ 2,456,449 $ 22,337 $ 1,263,121
Year-end balance 2,912,018 23,203 1,404,071
Maximum month-end outstanding 3,733,294 26,958 1,511,624
Average rate for the year 4.99% 4.59% 5.79%
Average rate at year-end 4.79 4.12 5.19
- ----------------------------------------------------------------------------------------------------------
1997
Average balance $ 1,790,130 $ 20,792 $ 642,235
Year-end balance 2,085,679 23,176 679,212
Maximum month-end outstanding 2,085,679 24,170 873,739
Average rate for the year 5.01% 4.64% 6.23%
Average rate at year-end 5.56 4.70 6.07
- ----------------------------------------------------------------------------------------------------------
1996
Average balance $ 1,588,101 $ 22,207 $ 497,870
Year-end balance 1,881,187 22,648 354,721
Maximum month-end outstanding 1,881,187 33,790 699,113
Average rate for the year 4.91% 4.39% 6.15%
Average rate at year-end 5.65 4.43 5.92
- ----------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, $50,000,000 of borrowings under unsecured lines of credit
from non-affiliated banks were available to the parent company to provide for
general liquidity needs at an annual facility fee of .10 percent.
NOTE 10 - TERM BORROWINGS
The following table presents information pertaining to term borrowings (debt
with original maturities greater than one year) for First Tennessee and its
subsidiaries at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FIRST TENNESSEE NATIONAL CORPORATION:
Subordinated capital notes:
Matures on June 1, 1999 -- 10 3/8% $ 74,962 $ 74,873
Matures on November 15, 2005 -- 6 3/4% 74,438 74,356
FIRST TENNESSEE BANK NATIONAL ASSOCIATION:
Notes payable to Federal Home Loan Bank*:
Matures on January 29, 1999 -- 7.95% 15,000 15,000
Matures through 2009 -- 8.10% 2,183 2,383
Matures through January 1, 2028 -- 4.00% 41 --
Matures through May 1, 2028 -- 4.00% 40 --
Matured through 1998 -- 7.50% -- 1,383
Subordinated bank notes:
Matures on April 1, 2008 -- 6.40% 99,277 --
Matures on December 1, 2008 -- 5.75% 148,409 --
Industrial development bond payable to City of Alcoa, Tennessee; matures 1999 -- 6.50% 100 200
CLEVELAND BANK AND TRUST COMPANY:
Industrial development bond payable to City of Cleveland, Tennessee; -- 65% of prime
(5.525% at December 31, 1997) -- 698
- -----------------------------------------------------------------------------------------------------------------------
Total $ 414,450 $ 168,893
=======================================================================================================================
<FN>
* The Federal Home Loan Bank borrowings are collateralized 150 percent with
first-lien permanent mortgage loans of FTBNA.
</FN>
</TABLE>
<PAGE> 77
Annual principal repayment requirements as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
1999 $90,302
2000 202
2001 202
2002 202
2003 202
2004 and after 326,254
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
At maturity, the 10 3/8 percent subordinated notes will be redeemed, at First
Tennessee's option, in cash from the proceeds of the sale of capital securities,
or exchanged for qualifying capital securities having a market value equal to
the principal amount of the notes. All subordinated capital and bank notes are
unsecured and are subordinate to other present and future senior indebtedness.
These notes qualify as Tier 2 risk-based capital under the Federal Reserve Board
and Office of the Comptroller of the Currency guidelines for assessing capital
adequacy. The subordinated capital and bank notes may not be redeemed or prepaid
prior to maturity.
NOTE 11 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN FIRST TENNESSEE'S
JUNIOR SUBORDINATED DEBENTURES
On December 30, 1996, First Tennessee, through its underwriters, sold to
institutional investors $100 million of capital securities. First Tennessee
Capital I (Capital I), a Delaware business trust wholly owned by First
Tennessee, issued $100 million of Capital Securities, Series A at 8.07%. The
proceeds were upstreamed to First Tennessee as junior subordinated debt under
the same terms and conditions. First Tennessee has, through various contractual
arrangements, fully and unconditionally guaranteed all of Capital I's
obligations with respect to the capital securities. These capital securities
qualify as Tier 1 capital and are presented in the Consolidated Statements of
Condition as "Guaranteed Preferred Beneficial Interests in First Tennessee's
Junior Subordinated Debentures." The sole asset of Capital I is $103 million of
junior subordinated debentures issued by First Tennessee. These junior
subordinated debentures also carry an interest rate of 8.07 percent. Both the
capital securities of Capital I and the junior subordinated debentures of First
Tennessee will mature on January 6, 2027; however, under certain circumstances,
the maturity of both may be shortened to a date not earlier than January 6,
2017. During 1997, under an accelerated purchase program, a portion of the
proceeds from this issuance were used to repurchase 3.8 million shares at a cost
of $83.3 million.
NOTE 12 - REGULATORY CAPITAL
First Tennessee is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on First Tennessee's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices must be met. Capital amounts and classification are also
subject to qualitative judgment by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require First Tennessee to maintain minimum amounts and ratios of total and Tier
1 capital to risk-weighted assets, and of Tier 1 capital to average assets
(leverage). Management believes, as of December 31, 1998, that First Tennessee
met all capital adequacy requirements to which it was subject.
The most recent notification from the Office of the Comptroller of the Currency
at January 20, 1999, categorized First Tennessee as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized First Tennessee must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. In the opinion
of management, no conditions or events have occurred since that notification
that would change First Tennessee's category.
<PAGE> 78
The actual capital amounts and ratios of First Tennessee and FTBNA (the primary
banking subsidiary of First Tennessee) are presented in the table below:
<TABLE>
<CAPTION>
First Tennessee National First Tennessee Bank
Corporation National Association
--------------------------- --------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Actual:
Total Capital $1,576,009 11.91% $1,424,980 11.24%
Tier 1 Capital 1,038,484 7.85 968,458 7.64
Leverage 1,038,484 5.54 968,458 5.43
For Capital Adequacy Purposes:
Total Capital 1,058,613 >or= 8.00 1,013,884 >or= 8.00
Tier 1 Capital 529,307 >or= 4.00 506,942 >or= 4.00
Leverage 749,176 >or= 4.00 713,870 >or= 4.00
To Be Well Capitalized Under Prompt
Corrective Action Provisions:
Total Capital 1,323,267 >or= 10.00 1,267,355 >or= 10.00
Tier 1 Capital 793,960 >or= 6.00 760,413 >or= 6.00
Leverage 936,470 >or= 5.00 892,338 >or= 5.00
- ---------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Actual:
Total Capital $1,213,578 11.65% $1,041,057 10.61%
Tier 1 Capital 938,456 9.01 848,817 8.65
Leverage 938,456 6.83 848,817 6.62
For Capital Adequacy Purposes:
Total Capital 833,448 >or= 8.00 785,138 >or= 8.00
Tier 1 Capital 416,724 >or= 4.00 392,569 >or= 4.00
Leverage 549,791 >or= 4.00 513,165 >or= 4.00
To Be Well Capitalized Under Prompt
Corrective Action Provisions:
Total Capital 1,041,810 >or= 10.00 981,422 >or= 10.00
Tier 1 Capital 625,086 >or= 6.00 588,853 >or= 6.00
Leverage 687,239 >or= 5.00 641,456 >or= 5.00
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The following table details the actual regulatory capital ratios for other bank
subsidiaries at December 31, 1998:
<TABLE>
<CAPTION>
FNB Peoples and
CBT(1) Springdale(2) Peoples(3) Union(4) Planters(5)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total Capital 13.40% 17.34% 17.28% 14.10% 18.67%
Tier 1 Capital 12.14 16.27 16.03 12.85 17.40
Leverage 7.35 9.40 9.60 7.37 10.66
- -------------------------------------------------------------------------------------------------------------------------
<FN>
(1)Cleveland Bank and Trust Company (2)First National Bank of Springdale
(3)Peoples Bank of Senatobia (4)Peoples and Union Bank (5)Planters Bank
</FN>
</TABLE>
<PAGE> 79
NOTE 13 - COMPONENTS OF OTHER COMPREHENSIVE INCOME
Following is detail of "Accumulated other comprehensive income" as presented in
the Consolidated Statements of Condition:
<TABLE>
<CAPTION>
Accumulated
Gain/(Loss) Tax Other
Before-Tax (Expense)/ Comprehensive
(Dollars in thousands) Amount Benefit Income
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1995 $ 10,582
Other comprehensive income:
Unrealized market adjustments for the period $ (16,443) $ 6,920 (9,523)
Less: adjustment for net losses included in net income (2,681) 1,043 (1,638)
- ------------------------------------------------------------------------------------------------ --------
December 31, 1996 $ (13,762) $ 5,877 2,697
================================================================================================ --------
Other comprehensive income:
Unrealized market adjustments for the period $ 19,842 $ (7,642) 12,200
Less: adjustment for net losses included in net income (713) 277 (436)
- ------------------------------------------------------------------------------------------------ --------
December 31, 1997 $ 20,555 $ (7,919) 15,333
================================================================================================ --------
Other comprehensive income:
Unrealized market adjustments for the period $ (51) $ 19 (32)
Less: adjustment for net gains included in net income 3,976 (1,547) 2,429
- ------------------------------------------------------------------------------------------------ --------
DECEMBER 31, 1998 $ (4,027) $ 1,566 $ 12,872
================================================================================================ ========
</TABLE>
NOTE 14 - OTHER INCOME AND OTHER EXPENSE
Following is detail concerning "All other income and commissions" and "All other
expense" as presented in the Consolidated Statements of Income:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALL OTHER INCOME AND COMMISSIONS:
Other service charges $ 14,863 $ 10,474 $ 9,891
Check clearing fees 9,199 13,043 16,873
Insurance premiums and commissions 8,725 6,457 5,644
Other 42,871 31,496 25,873
- ---------------------------------------------------------------------------------------------------------------------
Total $ 75,658 $ 61,470 $ 58,281
=====================================================================================================================
ALL OTHER EXPENSE:
Contract employment $ 35,937 $ 17,420 $ 11,288
Foreclosed real estate 31,019 10,827 7,533
Legal and professional fees 24,551 13,999 12,050
Supplies 20,195 15,267 14,383
Travel and entertainment 19,485 13,802 10,394
Amortization of hedge instruments 13,345 4,867 -
Computer software 11,629 6,731 4,076
Distributions on guaranteed preferred securities 8,070 8,070 -
Fed service fees 5,307 5,799 7,814
Deposit insurance premium 1,578 1,485 5,129
Other 58,107 43,470 42,252
- ---------------------------------------------------------------------------------------------------------------------
Total $ 229,223 $ 141,737 $ 114,919
=====================================================================================================================
</TABLE>
<PAGE> 80
NOTE 15 - INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 45,374 $ 68,665 $ 52,090
State (2,286) 3,409 10,903
Deferred:
Federal 68,528 34,674 40,266
State 14,926 10,847 (992)
- --------------------------------------------------------------------------------------------------------------
Total $ 126,542 $ 117,595 $ 102,267
==============================================================================================================
</TABLE>
The effective tax rates for 1998, 1997 and 1996 were 35.86 percent, 37.32
percent and 36.24 percent, respectively. Income tax expense was different than
the amounts computed by applying the statutory federal income tax rate to income
before income taxes because of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax rate 35% 35% 35%
- --------------------------------------------------------------------------------------------------------------
Tax computed at statutory rate $ 123,523 $ 110,274 $ 98,761
Increase/(decrease) resulting from:
Tax-exempt interest (2,145) (2,494) (3,269)
State income taxes 8,222 9,073 6,472
Other (3,058) 742 303
- --------------------------------------------------------------------------------------------------------------
Total $ 126,542 $ 117,595 $ 102,267
==============================================================================================================
</TABLE>
A deferred tax asset or liability is recognized for the tax consequences of
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. The tax consequence is calculated
by applying enacted statutory tax rates, applicable to future years, to these
temporary differences. Temporary differences which gave rise to deferred tax
(assets)/liabilities at December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Loss reserves $ (66,332) $ (52,101)
Net operating loss carryforwards (4,381) (4,381)
Other (10,665) (8,896)
- --------------------------------------------------------------------------------------------------------------
Gross deferred tax assets (81,378) (65,378)
- --------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Capitalized mortgage servicing rights 216,413 115,704
Depreciation 9,754 6,553
Investments in loans and securities 8,044 9,424
Employee benefits 2,852 5,866
Purchase accounting adjustments 4,454 4,268
Intangible assets 5,245 6,187
Federal Home Loan Bank stock 6,120 4,683
Operations services 2,728 3,417
Other 13,695 14,448
- --------------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities 269,305 170,550
- --------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ 187,927 $ 105,172
==============================================================================================================
</TABLE>
<PAGE> 81
NOTE 16 - 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 and 1996 two-for-one stock splits.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS PER SHARE COMPUTATION:
Net income $ 226,380 $ 197,472 $ 179,907
Weighted average shares outstanding 128,056,450 128,365,434 134,393,172
Shares attributable to deferred compensation 178,556 -- --
- --------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding 128,235,006 128,365,434 134,393,172
Earnings per share $ 1.77 $ 1.54 $ 1.34
==============================================================================================================
DILUTED EARNINGS PER SHARE COMPUTATION:
Net income $ 226,380 $ 197,472 $ 179,907
Weighted average shares outstanding 128,235,006 128,365,434 134,393,172
Dilutive effect due to stock options 3,627,484 3,621,498 1,986,370
- --------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding, as adjusted 131,862,490 131,986,932 136,379,542
Diluted earnings per share $ 1.72 $ 1.50 $ 1.32
==============================================================================================================
</TABLE>
NOTE 17 - RESTRICTIONS, CONTINGENCIES AND OTHER DISCLOSURES
RESTRICTIONS ON CASH AND DUE FROM BANKS. The commercial banking subsidiaries of
First Tennessee are required to maintain average reserve and clearing balances
with the Federal Reserve Bank under the Federal Reserve Act and Regulation D.
The balances required at December 31, 1998 and 1997, were $213,446,000 and
$181,446,000, respectively. These reserves are included in "Cash and due from
banks" on the Consolidated Statements of Condition.
RESTRICTIONS ON DIVIDENDS. Dividends are paid by First Tennessee from its assets
which are mainly provided by dividends from its subsidiaries. Certain regulatory
restrictions exist regarding the ability of the banking subsidiaries to transfer
funds to First Tennessee in the form of cash, dividends, loans or advances. As
of December 31, 1998, the banking subsidiaries had undivided profits of
$859,913,000 of which $246,104,000 was available for distribution to First
Tennessee as dividends without prior regulatory approval.
RESTRICTIONS ON INTERCOMPANY TRANSACTIONS. Under Federal banking law, banking
subsidiaries may not extend credit to the parent company in excess of 10 percent
of the banks' capital stock and surplus, as defined, or $155,283,000 at December
31, 1998. The parent company had borrowings of $56,950,000 from FTBNA at
December 31, 1998. Certain loan agreements also define other restricted
transactions related to additional borrowings.
CONTINGENCIES. In June 1998, a judgment entered in the circuit court of Houston
County, Alabama became final, approving a settlement of a class action filed
against FTBNA on behalf of persons in Alabama who had financed with FTBNA their
purchases of satellite dish television systems. All individual lawsuits
previously filed in state court in Alabama relating to the financing of
satellite systems by FTBNA were finally settled in 1997.
In May 1996, FTBNA was also named as a defendant in a purported nationwide class
action lawsuit filed in federal court in Alabama in which plaintiffs assert that
FTBNA and another defendant engaged in unfair and deceptive practices in
connection with the financing of satellite systems. The complaint alleges
violations of the Truth in Lending Act and the federal RICO statute, and fraud
by suppression with respect to Alabama residents. In addition to these theories,
plaintiffs proceed against FTBNA on an agency theory. The complaint seeks
unquantified compensatory, triple, and punitive damages. FTBNA has filed a
motion requesting the dismissal of plaintiffs' RICO and fraudulent suppression
claims, but the court has not ruled on the motion. In addition to the Alabama
lawsuits, in September 1997, a nationwide class action was filed in state court
in Tennessee relating to the same satellite systems financing program. The
<PAGE> 82
complaint asserts that material facts were withheld from the purchasers in
connection with the financing, that FTBNA and First Tennessee were unjustly
enriched from the sale of such systems, and that FTBNA and First Tennessee
violated the Tennessee Consumer Protection Act. The trial court entered an order
of conditional class certification and FTBNA and First Tennessee have requested
a review of that certification order for the purpose of having the conditional
order set aside. FTBNA and First Tennessee deny liability, deny that any
co-defendant is their agent, and intend to defend these actions vigorously.
In July 1998, a judgment was rendered in the Chancery Court of Shelby County,
Tennessee against FTBNA as the successor by merger to Community Bank of
Germantown for $9 million in punitive damages. The court had previously entered
a judgment against FTBNA in the amount of $209,000 compensatory damages in
August 1997, and a judgment in favor of the Bank against the plaintiff in the
amount of $60,000. The plaintiff had claimed that Community Bank of Germantown
had obtained additional collateral on a loan by promising to make a new loan to
the plaintiff, which was never made. The litigation was pending at the time of
First Tennessee's acquisition of Community Bank of Germantown in February 1995.
FTBNA believes that the court erred in its award of damages and has appealed.
In June 1997, First Tennessee, FTBNA, FT Mortgage Companies, an affiliate of
FTBNA, and Sunbelt National Mortgage Corporation (Sunbelt), a company acquired
by First Tennessee and merged into FT Mortgage Companies, were sued in
California state court. Plaintiffs allege that Sunbelt charged excessive
document preparation fees in connection with funding mortgage loans in
California. They also assert that Sunbelt disclosed the fee in a way that led
borrowers to think the entire fee was paid to a third party provider, when, in
fact, a portion of the fee was retained by Sunbelt. Plaintiffs allege claims for
violation of California's unfair practices act, breach of contract, fraud, and
unjust enrichment. Nationwide class certification was denied but a class of
Sunbelt's California borrowers has been certified. First Tennessee, FTBNA and FT
Mortgage Companies, for itself and as successor to Sunbelt, deny liability and
intend to defend this action vigorously.
In addition to these cases, various other claims and lawsuits are pending
against First Tennessee and its subsidiaries. Although First Tennessee cannot
predict the outcome of the foregoing actions, after consulting with counsel, it
is management's opinion that when resolved, the amount, if any, will not have a
material adverse effect on the consolidated financial statements of First
Tennessee and its subsidiaries.
OTHER DISCLOSURES - BANK OWNED LIFE INSURANCE. First Tennessee has purchased
life insurance on certain of its employees and is the beneficiary on these
policies. At December 31, 1998, the cash surrender value of these policies,
which is included in "Capital markets receivables and other assets" on the
Consolidated Statements of Condition, was $115,520,000. There are no
restrictions on the proceeds from these benefits, and First Tennessee has not
borrowed against the cash surrender value of these policies.
NOTE 18 - SHAREHOLDER PROTECTION RIGHTS AGREEMENT
On October 20, 1998, First Tennessee adopted a Shareholder Protection Rights
Agreement (the "1998 Agreement") and declared a dividend of one right on each
outstanding share of common stock held on November 2, 1998, or issued thereafter
and prior to the time the rights separate. This plan is substantially identical
to First Tennessee's existing Agreement (defined below) and will not become
operative until the expiration on September 18, 1999, (or an earlier redemption)
of the existing rights. Under the 1998 Agreement, the exercise price is $150.00
per right, the redemption price is a fixed $0.001 per right, and the expiration
date of the plan is December 31, 2009.
In September 1989, First Tennessee adopted a Shareholder Protection Rights
Agreement (the Agreement) and distributed a dividend of one right on each
outstanding share of common stock held on September 18, 1989, or issued
thereafter and prior to the time the rights separate. On January 21, 1997, First
Tennessee amended and restated the Agreement. As so amended, the Agreement
provides that until the 10th business day (subject to certain adjustments
<PAGE> 83
by the board of directors) after a person or group commences a tender or
exchange offer that will result in such person or group owning 10 percent or
more of First Tennessee's common stock, or the public announcement by First
Tennessee that a person or group owns 10 percent or more of First Tennessee's
common stock, the rights will be evidenced by the common stock certificates,
will automatically trade with the common stock, and will not be exercisable.
Thereafter, separate rights certificates will be distributed, and each right
will entitle its holder to purchase one one-hundredth of a share of
participating preferred stock having economic and voting terms similar to those
of one share of common stock for an exercise price of $75.
If any person or group acquires 10 percent or more of First Tennessee's common
stock, then each right (other than rights beneficially owned by holders of 10
percent or more of the common stock or affiliates, associates or transferees
thereof, which rights become void) will entitle its holder to purchase, for the
exercise price, a number of shares of First Tennessee common stock or
participating preferred stock having a market value of twice the exercise price.
Also, if there is a 10 percent shareholder and First Tennessee is involved in
certain significant transactions, each right will entitle its holder to
purchase, for the exercise price, a number of shares of common stock of the
other party having a market value of twice the exercise price. If any person or
group acquires 10 percent or more of First Tennessee's common stock, First
Tennessee's board of directors may, at its option, exchange one share of First
Tennessee common stock or one one-hundredth of a share of participating
preferred stock for each right (other than rights which have become void). The
board of directors may amend the agreement in any respect other than to change
the redemption price or expiration date (and may amend the 1998 Agreement in any
respect) prior to the tenth business day after announcement by First Tennessee
that a person or group had acquired 10 percent or more of First Tennessee's
common stock. The rights will expire on the earliest of one of the following
three times: the time of the exchange described in the preceding sentence;
September 18, 1999; or the date the rights are redeemed as described in the
following sentence. The rights may be redeemed by the board of directors for
$0.0017 per right until 10 business days after First Tennessee announces that
any person or group owns 10 percent or more of First Tennessee's common stock.
NOTE 19 - SAVINGS, PENSION AND OTHER EMPLOYEE BENEFITS
SAVINGS PLAN. Substantially all employees of First Tennessee are covered by a
contributory savings plan in conjunction with a flexible benefits plan. During
the year, First Tennessee makes contributions to each employee's flexible
benefits plan account. These contributions are based on length of service and a
percentage of the employee's salary. The employees have the option to direct a
portion or all of the contribution into their savings plan accounts. Employees
may also make pre-tax and after-tax personal contributions to the savings plan.
First Tennessee matches the majority of employee pre-tax contributions invested
in First Tennessee's common stock at a rate of $.50 for each $1.00 invested up
to 6 percent of the employee's qualifying salary. Contributions made by First
Tennessee to the flexible benefits plan were $15,660,000 for 1998, $13,716,000
for 1997 and $13,202,000 for 1996.
PENSION PLAN. Substantially all employees of First Tennessee are covered by a
noncontributory, defined benefit pension plan. Pension benefits are based on
years of service, average compensation near retirement and estimated social
security benefits at age 65. The annual funding is based on an actuarially
determined amount using the entry age cost method.
OTHER EMPLOYEE BENEFITS. First Tennessee provides postretirement medical
insurance to full-time employees retiring under the provisions of the First
Tennessee Pension Plan. The postretirement medical plan is contributory with
retiree contributions adjusted annually. The plan is based on criteria that are
a combination of the employee's age and years of service and utilizes a two-step
approach. For any employee retiring on or after January 1, 1995, First Tennessee
will contribute a fixed amount based on years of service and age at time of
retirement.
<PAGE> 84
ACTUARIAL ASSUMPTIONS. The actuarial assumptions used in the defined benefit
pension plan and the other employee benefit plans were as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
------------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
SEPTEMBER 30 MEASUREMENT DATE
Discount rate 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
Expected return on plan assets 10.00 10.00 10.00 10.00 10.00 10.00
Expected return on plan assets dedicated to
employees who retired prior to January 1, 1993 N/A N/A N/A 6.50 6.50 6.50
Rate of compensation increase 4.00 4.00 4.00 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of net periodic benefit cost for the plan years 1998, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
------------------------------- ----------------------------
(Dollars in thousands) 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 7,258 $ 5,737 $ 6,083 $ 712 $ 584 $ 608
Interest cost 9,971 8,187 7,895 1,637 1,781 1,689
Expected return on plan assets (18,773) (16,071) (14,558) (1,374) (906) (886)
Amortization of prior service cost 322 290 290 3 3 3
Recognized gains & losses -- -- -- (107) -- --
Amortization of transition obligation or asset (460) (460) (460) 989 989 989
- -----------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost/(benefit) $ (1,682) $ (2,317) $ (750) $ 1,860 $2,451 $2,403
=======================================================================================================================
</TABLE>
The following table sets forth the plans' funded status reconciled to the
amounts shown in the Consolidated Statements of Condition:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
------------------------ ------------------------
(Dollars in thousands) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of plan year $ 139,467 $ 107,403 $ 23,241 $ 23,862
Service cost 7,258 5,737 712 584
Interest cost 9,971 8,187 1,637 1,781
Amendments -- 446 -- --
Actuarial (gain)/loss 19,939 22,261 1,981 (1,520)
Benefits paid (4,570) (4,567) (1,507) (1,466)
- ---------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of plan year $ 172,065 $ 139,467 $ 26,064 $ 23,241
=====================================================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of plan year $ 218,342 $ 169,488 $ 12,210 $ 11,198
Actual return on plan assets 13,288 45,198 1,181 2,478
Employer contribution 1,541 8,223 4,976 --
Benefits paid (4,570) (4,567) (1,507) (1,466)
- ---------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of plan year $ 228,601 $ 218,342 $ 16,860 $ 12,210
=====================================================================================================================
NET FUNDED STATUS AT SEPTEMBER 30 $ 56,536 $ 78,875 $ (9,204) $(11,031)
Unrecognized net actuarial gain 8,595 (16,829) (2,080) (4,362)
Unrecognized net transitional (asset)/obligation (1,860) (2,320) 13,840 14,829
Unrecognized prior service cost 2,682 3,004 35 38
- ---------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost at September 30 65,953 62,730 2,591 (526)
Contributions paid from October 1 to December 31 -- 82 1,037 4,976
- ---------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost at December 31 $ 65,953 $ 62,812 $ 3,628 $ 4,450
=====================================================================================================================
</TABLE>
<PAGE> 85
The following table sets forth the amounts and types of securities of First
Tennessee that are included in the plan assets. First Funds is a family of
mutual funds managed by FTBNA.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
------------------------ -----------------------
(Dollars in thousands) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Funds Capital Appreciation Portfolio Class I $ 26,033 $ 21,186 $ 1,165 $ 1,362
First Funds Growth & Income Portfolio Class I 98,346 120,374 4,358 3,733
First Funds Bond Portfolio Class I 102,920 75,775 4,147 3,216
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The cost of health care benefits was projected to increase at an annual per
capita rate of 7.75 percent in 1998 and decrease evenly to a rate of 5.75
percent by the year 2000 and remain at an even level thereafter. In 1997, the
annual rate of increase was assumed to be 8.75 percent decreasing evenly to a
rate of 5.75 percent by the year 2000 and remaining at an even level thereafter.
In 1996, the annual rate of increase was assumed to be 9.75 percent decreasing
evenly to a rate of 5.75 percent by the year 2000 and remaining at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. A one-percentage-point change in assumed health care
cost trend rates would have the following effects:
<TABLE>
<CAPTION>
(Dollars in thousands) 1% Increase 1% Decrease
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjusted total service and interest cost components $ 2,427 $ 2,283
Adjusted postretirement benefit obligation at end of plan year 27,339 25,037
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
First Tennessee provides benefits to former and inactive employees after
employment but before retirement. The obligation/(benefit) recognized in
accordance with accounting standards was $(.2) million in 1998, $.6 million in
1997 and $(.3) million in 1996.
Medical and group life insurance expenses incurred for active employees are
shown in the following table:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Medical plan expense based on claims incurred $ 12,322 $ 10,802 $ 10,762
Participants 6,689 5,652 5,267
- --------------------------------------------------------------------------------------------------------
Group life insurance expense based on benefits incurred $ 1,120 $ 949 $ 865
Participants 10,097 8,457 8,022
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 86
NOTE 20 - STOCK OPTION, RESTRICTIVE STOCK INCENTIVE, AND DIVIDEND REINVESTMENT
PLANS
At its January 1998 meeting, the board of directors authorized a two-for-one
split of First Tennessee's common stock. The shares were distributed February
20, 1998, to shareholders of record on February 6, 1998. Share and per share
amounts in the accompanying text and tables have been adjusted for this stock
split and the 1996 two-for-one stock split.
STOCK OPTION PLANS. First Tennessee issues non-qualified stock options under
various plans to employees, non-employee directors, and bank advisory board
members. The plans provide for the issuance of First Tennessee common stock at a
price equal to its fair market value at the date of grant; however, the exercise
price may be less than the fair market value if the grantee has agreed to
receive the options in lieu of compensation. The foregone compensation plus the
exercise price must equal the fair market value of the stock on the date of
grant. All options expire 10 years from the date of grant, except for those
options that were part of compensation deferral, which expire 20 years from the
date of grant. There were 1,999,344 shares available for option plan grants at
December 31, 1998.
As a result of plan amendments adopted by the board of directors during 1997,
employees may defer the receipt of shares upon the exercise of stock options.
The summary of stock option activity is shown below:
<TABLE>
<CAPTION>
Weighted
Options Average
Outstanding Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
January 1, 1996 7,368,468 $ 8.25
Options granted 4,157,596 14.53
Stock options exercised (795,642) 7.16
Stock options canceled (693,786) 12.83
------------
December 31, 1996 10,036,636 10.62
============
Options exercisable 4,571,800 8.40
- -----------------------------------------------------------------------------------------------------------------------
January 1, 1997 10,036,636 $ 10.62
Options granted 4,791,158 20.53
Stock options exercised (1,904,284) 12.76
Stock options canceled (770,280) 15.99
------------
December 31, 1997 12,153,230 13.85
============
Options exercisable 8,554,866 13.67
- -----------------------------------------------------------------------------------------------------------------------
January 1, 1998 12,153,230 $ 13.85
Options granted 4,069,623 30.16
Stock options exercised* (2,468,821) 11.73
Stock options canceled (499,430) 21.20
------------
December 31, 1998 13,254,602 18.96
============
Options exercisable 10,185,877 16.97
- -----------------------------------------------------------------------------------------------------------------------
<FN>
* Stock options exercised includes 307,867 shares converted to stock option
equivalents as part of the deferred compensation program.
</FN>
</TABLE>
<PAGE> 87
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted Weighted
Weighted Average Average
Average Exercise Exercise
Remaining Price - Price -
Options Contractual Options Options Options
Exercise Price Range Outstanding Life Outstanding Exercisable Exercisable
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.00 - $10.00 1,721,367 4.59 years $ 6.58 1,721,367 $ 6.58
$10.01 - $15.00 2,955,063 9.50 years 11.53 2,357,192 11.37
$15.01 - $25.00 4,839,828 11.11 years 19.21 3,799,228 18.84
$25.01 - $35.00 3,738,344 15.45 years 30.22 2,308,090 27.35
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
First Tennessee accounts for these plans under APB Opinion No. 25 pursuant to
which no compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with SFAS No. 123, First Tennessee's net income
and earnings per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
December 31
---------------------------------------
(Dollars in thousands except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $ 226,380 $ 197,472 $ 179,907
Pro forma net income 221,252 189,366 178,068
Earnings per share, as reported 1.77 1.54 1.34
Pro forma earnings per share 1.73 1.48 1.32
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Total compensation costs that would have been recognized in income under SFAS
No. 123 for all stock-based compensation awards was $8,392,000 for 1998,
$13,267,000 for 1997 and $3,010,000 for 1996.
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. First Tennessee
used the Black-Scholes Option Pricing Model to estimate the fair value of stock
options granted in 1998, 1997 and 1996, with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 3.06% 3.31% 3.76%
Expected option lives of options issued at market 6.28 years 6.01 years 5.72 years
Expected option lives of options issued below market 2.20 years 2.36 years 2.65 years
Expected volatility 18.94% 17.29% 16.75%
Risk-free interest rates 5.54% 6.51% 6.16%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Weighted
Average Fair
Number Value per Option
Issued at Grant Date
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998:
Options issued at market on the date of grant 1,559,580 $ 8.42
Options issued below market on the date of grant 2,510,043 6.66
- ----------------------------------------------------------------------------------------------------------------------
1997:
Options issued at market on the date of grant 2,989,752 $ 4.87
Options issued below market on the date of grant 1,801,406 4.81
- ----------------------------------------------------------------------------------------------------------------------
1996:
Options issued at market on the date of grant 2,811,422 $ 2.66
Options issued below market on the date of grant 1,346,174 3.48
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
RESTRICTED STOCK INCENTIVE PLANS. First Tennessee has authorized the issuance of
its common stock for awards to executive employees who have a significant impact
on the profitability of First Tennessee under restricted stock incentive plans.
Additionally, one of the plans provide for 6,000 shares of restricted stock to
be granted to each new non-employee director upon election to the board of
directors with restrictions lapsing as defined in the plans. In 1998, First
Tennessee granted 3,849 restricted shares under the plans. No restricted shares
were granted in 1997, and in 1996, First Tennessee granted 222,392 restricted
shares. Compensation expense related to these plans was $1,212,000, $1,275,000
and $1,541,000 for the years 1998, 1997 and 1996, respectively. There were
<PAGE> 88
749,487 shares available for restricted stock incentive grants at December 31,
1998.
The board of directors approved amendments to the restricted stock plan during
1998 permitting deferral by participants of the receipt of restricted stock
prior to the lapse of restrictions.
DIVIDEND REINVESTMENT PLAN. The Dividend Reinvestment and Stock Purchase Plan,
as amended in 1995, authorizes the sale of First Tennessee's common stock from
authorized, but unissued common stock or from shares acquired on the open market
to shareholders who choose to invest all or a portion of their cash dividends
and make optional cash payments of $25 to $10,000 per quarter without paying
commissions. Since 1988, shares for this plan have been purchased on the open
market. The price of the shares purchased directly from First Tennessee is the
mean between the high and low sales price on the investment date. The price of
shares purchased on the open market is the average price paid.
NOTE 21 - BUSINESS SEGMENT INFORMATION
First Tennessee provides traditional retail/commercial banking and other
financial services to its customers. These products and services are categorized
into two broad groups: a regional banking group and national lines of business.
The regional banking group provides a comprehensive package of financial
services including traditional banking, trust services, investments, asset
management, insurance and credit card services to its customers. Banking
subsidiaries offer general banking products in 19 Tennessee counties, in
northern Mississippi and in northwest Arkansas. The national lines of business
include mortgage banking, capital markets and transaction processing. Mortgage
banking offers first and second mortgages through origination offices in 32
states and also services a multi-billion dollar portfolio. Capital markets
offers investment securities and advisory services such as portfolio analysis,
tax planning and loan securitization to institutional clients nationwide through
offices in Chicago, Dallas, Kansas City, Knoxville, Memphis, Mobile, and New
York. Transaction processing includes credit card merchant processing, an
automated teller machine network, nationwide check clearing and
transaction-oriented cash management products. The Other segment is used to
isolate corporate items such as expense related to guaranteed preferred
beneficial interests in First Tennessee's junior subordinated debentures and
nonrecurring items such as securities gains or losses which include any venture
capital gains or losses and related expenses.
First Tennessee's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The
measurements used in reporting these segments are the same as those reviewed
monthly by the chief operating decision-maker.
Total revenue, expense and asset levels reflect those which are specifically
identifiable or which are allocated based on an internal allocation method. Net
interest income is allocated to the segments using a combination of matched
funding and multiple pool transfer pricing methods. In addition to expenses paid
directly by the segments, allocated expenses may be charged to the lines of
business based on the utilization of resources. Equity is allocated to the
segments through risk analysis that incorporates the appropriate level of
credit, operating, market and franchise risk factors. Because the allocations
are based on internally developed assignments and allocations, they are to an
extent subjective. This assignment and allocation has been consistently applied
for all periods presented. The following table reflects the approximate amounts
of consolidated revenue, expense, tax, and assets for the three years ended
December 31, for each segment:
<PAGE> 89
<TABLE>
<CAPTION>
Regional
Banking Mortgage Capital Transaction
(Dollars in thousands) Group Banking Markets Processing Other Consolidated
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Interest income $ 850,002 $ 228,113 $ 37,555 $ 18,107 $ -- $ 1,133,777
Interest expense 382,003 175,363 33,101 2,771 -- 593,238
- ------------------------------------------------------------------------------------------------------------------
Net interest income 467,999 52,750 4,454 15,336 -- 540,539
Other revenues 207,186 562,601 147,360 64,380 3,976 985,503
Depreciation and
amortization 30,647 127,062 1,748 2,878 -- 162,335
Other expenses* 419,272 414,120 109,283 59,372 8,738 1,010,785
- ------------------------------------------------------------------------------------------------------------------
Pre-tax income 225,266 74,169 40,783 17,466 (4,762) 352,922
Income taxes 79,435 26,951 15,329 6,637 (1,810) 126,542
- ------------------------------------------------------------------------------------------------------------------
Net income $ 145,831 $ 47,218 $ 25,454 $ 10,829 $(2,952) $ 226,380
==================================================================================================================
Average assets $11,200,707 $4,304,449 $729,081 $486,494 $ -- $16,720,731
- ------------------------------------------------------------------------------------------------------------------
Expenditures for
long-lived assets $ 56,988 $ 33,861 $ 1,782 $ 5,633 $ -- $ 98,264
- ------------------------------------------------------------------------------------------------------------------
1997
Interest income $ 817,327 $ 86,151 $ 19,632 $ 17,434 $ 749 $ 941,293
Interest expense 377,953 59,561 17,007 3,676 -- 458,197
- ------------------------------------------------------------------------------------------------------------------
Net interest income 439,374 26,590 2,625 13,758 749 483,096
Other revenues 179,021 330,467 98,311 61,257 (926) 668,130
Depreciation and
amortization 26,550 54,587 1,197 3,449 -- 85,783
Other expenses* 370,158 244,813 73,049 54,235 8,121 750,376
- ------------------------------------------------------------------------------------------------------------------
Pre-tax income 221,687 57,657 26,690 17,331 (8,298) 315,067
Income taxes 81,739 22,427 10,002 6,580 (3,153) 117,595
- ------------------------------------------------------------------------------------------------------------------
Net income $ 139,948 $ 35,230 $ 16,688 $ 10,751 $(5,145) $ 197,472
==================================================================================================================
Average assets $10,662,569 $1,767,923 $366,416 $483,665 $ -- $13,280,573
- ------------------------------------------------------------------------------------------------------------------
Expenditures for
long-lived assets $ 32,280 $ 19,981 $ 1,408 $ 2,430 $ -- $ 56,099
- ------------------------------------------------------------------------------------------------------------------
1996
Interest income $ 779,224 $ 85,965 $ 16,461 $ 14,847 $ -- $ 896,497
Interest expense 380,348 48,493 13,652 2,816 -- 445,309
- ------------------------------------------------------------------------------------------------------------------
Net interest income 398,876 37,472 2,809 12,031 -- 451,188
Other revenues 157,831 274,728 85,871 55,400 (2,681) 571,149
Depreciation and
amortization 32,544 41,689 987 3,571 -- 78,791
Other expenses* 325,719 214,620 65,716 51,494 3,823 661,372
- ------------------------------------------------------------------------------------------------------------------
Pre-tax income 198,444 55,891 21,977 12,366 (6,504) 282,174
Income taxes 71,102 20,845 8,094 4,695 (2,469) 102,267
- ------------------------------------------------------------------------------------------------------------------
Net income $ 127,342 $ 35,046 $ 13,883 $ 7,671 $(4,035) $ 179,907
==================================================================================================================
Average assets $10,316,939 $1,506,098 $307,388 $457,839 $ -- $12,588,264
- ------------------------------------------------------------------------------------------------------------------
Expenditures for
long-lived assets $ 25,154 $ 8,676 $ 1,191 $ 2,528 $ -- $ 37,549
- ------------------------------------------------------------------------------------------------------------------
<FN>
* Includes loan loss provision.
</FN>
</TABLE>
<PAGE> 90
NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting standards require the disclosure of estimated fair values of all
asset, liability and off-balance sheet financial instruments. The following fair
value estimates are determined as of a specific point in time utilizing various
assumptions and estimates. The use of assumptions and various valuation
techniques, as well as the absence of secondary markets for certain financial
instruments, will likely reduce the comparability of fair value disclosures
between financial institutions. In some cases, book value is a reasonable
estimate of fair value due to the relatively short period of time between
origination of the instrument and its expected realization. The following table
summarizes the book value and estimated fair value of financial instruments
recorded in the Consolidated Statements of Condition as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 At December 31, 1997
-------------------------------- --------------------------------
Book Fair Book Fair
(Dollars in thousands) Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Loans, net of unearned income:
Floating $ 4,081,673 $ 4,081,677 $ 4,150,569 $ 4,151,045
Fixed 4,447,584 4,432,309 4,122,366 4,137,707
Nonaccrual 27,807 27,807 38,415 38,415
Allowance for loan losses (136,013) (136,013) (125,859) (125,859)
- ---------------------------------------------------------------------------------------------------------------------------------
Total net loans 8,421,051 8,405,780 8,185,491 8,201,308
Liquid assets 483,754 483,754 481,623 481,623
Mortgage loans held for sale* 4,227,443 4,220,385 1,240,648 1,248,114
Securities available for sale 1,816,485 1,816,485 2,133,303 2,133,303
Securities held to maturity 609,804 610,364 53,230 54,323
Nonearning assets 1,170,477 1,170,477 966,201 966,201
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits:
Defined maturity $ 4,671,206 $ 4,679,626 $ 3,430,870 $ 3,470,409
Undefined maturity 7,051,833 7,051,833 6,240,909 6,240,909
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 11,723,039 11,731,459 9,671,779 9,711,318
Short-term borrowings 4,339,292 4,339,673 2,788,067 2,788,067
Term borrowings 414,450 420,147 168,893 174,854
Other noninterest-bearing liabilities 315,805 314,735 212,565 210,919
Guaranteed preferred beneficial interests in First
Tennessee's junior subordinated debentures 100,000 111,857 100,000 106,453
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
*Mortgage loans held for sale had an additional fair value related to mortgage
servicing rights of approximately $46,485,000 and $9,344,000 at December 31,
1998 and 1997, respectively.
Information on the fair value of off-balance sheet financial instruments can be
found in Note 23 - Financial Instruments with Off-Balance Sheet Risk.
</FN>
</TABLE>
The following describes the assumptions and methodologies used to estimate the
fair value for financial instruments:
FLOATING RATE LOANS. With the exception of floating rate 1-4 family residential
mortgage loans, the fair value is approximated by the book value. Floating rate
1-4 family residential mortgage loans reprice annually and will lag movements in
market rates; whereas, commercial and consumer loans typically reprice monthly.
The fair value for floating rate 1-4 family mortgage loans is calculated by
discounting future cash flows to their present value. Future cash flows are
discounted to their present value by using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
time period. Prepayment assumptions based on historical prepayment speeds have
been applied to the floating rate 1-4 family residential mortgage portfolio.
FIXED RATE LOANS. The fair value is estimated by discounting future cash flows
to their present value. Future cash flows are discounted to their present value
by using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same time period. Prepayment assumptions
based on historical prepayment speeds have been applied to the fixed rate
mortgage and installment loan portfolios.
<PAGE> 91
NONACCRUAL LOANS. The fair value is approximated by the book value.
ALLOWANCE FOR LOAN LOSSES. The fair value is approximated by the book value.
Additionally, the credit exposure known to exist in the loan portfolio is
embodied in the allowance for loan losses.
LIQUID ASSETS. The fair value is approximated by the book value. For the purpose
of this disclosure, liquid assets consist of federal funds sold, securities
purchased under agreements to resell, capital markets securities inventory and
investment in bank time deposits.
MORTGAGE LOANS HELD FOR SALE. Fair values are based primarily on quoted market
prices.
SECURITIES AVAILABLE FOR SALE. Fair values are based primarily on quoted market
prices.
SECURITIES HELD TO MATURITY. Fair values are based primarily on quoted market
prices.
NONEARNING ASSETS. The fair value is approximated by the book value. For the
purpose of this disclosure, nonearning assets include cash and due from banks,
accrued interest receivable and capital markets receivables.
DEFINED MATURITY DEPOSITS. The fair value is estimated by discounting future
cash flows to their present value. Future cash flows are discounted by using the
current market rates of similar instruments applicable to the remaining
maturity. For the purpose of this disclosure, defined maturity deposits include
all certificates of deposit and other time deposits.
UNDEFINED MATURITY DEPOSITS. The fair value is considered to be equal to the
book value. For the purpose of this disclosure, undefined maturity deposits
include demand deposits, checking interest accounts, savings accounts, and money
market accounts.
SHORT-TERM BORROWINGS. The fair value of federal funds purchased, securities
sold under agreements to repurchase, commercial paper, bank notes and other
short-term borrowings is approximated by the book value. The fair value for
Federal Home Loan Bank borrowings is determined using discounted future cash
flows.
TERM BORROWINGS. The fair value is approximated by the present value of the
contractual cash flows discounted by the investor's yield which considers First
Tennessee's and FTBNA's debt ratings.
OTHER NONINTEREST-BEARING LIABILITIES. For the purpose of this disclosure, other
noninterest-bearing liabilities include accrued interest payable and capital
markets payables. Accrued interest, which is not payable until maturity, has
been discounted to its present value given current market rates and the maturity
structure of the financial instrument. The fair value of capital markets
payables approximates the book value.
GUARANTEED PREFERRED BENEFICIAL INTERESTS. The fair value is approximated by the
present value of the contractual cash flows discounted by the investor's yield
which considers First Tennessee's debt rating.
<PAGE> 92
NOTE 23 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
First Tennessee utilizes various financial instruments as part of its risk
management strategy and as a means to meet customers' needs. These instruments
are subject to credit and market risks that are not reflected on the balance
sheet. The activities that currently employ financial instruments with off-
balance sheet risk are mortgage banking, interest rate risk management and
capital markets operations. First Tennessee also enters into commitments for
lending related purposes to meet customers' financial needs. Controls and
monitoring procedures for these instruments have been established and are
routinely revised. The Asset/Liability Committee (ALCO) monitors the usage and
effectiveness of financial instruments. ALCO, in conjunction with senior credit
officers, also periodically reviews and revises counterparty credit limits.
Credit Risk represents the maximum potential loss due to possible
non-performance by obligors and counterparties under the terms of contracts.
First Tennessee manages credit risk by entering into financial instrument
transactions through national exchanges, primary dealers or approved
counterparties, and using mutual margining agreements whenever possible to limit
potential exposure. With exchange-traded contracts, the credit risk is limited
to the clearinghouse used. For non-exchange traded instruments, credit risk may
occur when there is a gain in the fair value of the financial instrument and the
counterparty fails to perform according to the terms of the contract and/or when
the collateral proves to be of insufficient value.
Market Risk represents the potential loss due to the decrease in the value of a
financial instrument caused primarily by changes in interest rates, prepayment
speeds or the prices of debt instruments. The measurement of market risk
associated with financial instruments is meaningful only when all related and
offsetting on- and off-balance sheet hedges are aggregated, and the resulting
net positions are identified.
LENDING RELATED
First Tennessee enters into fixed and variable loan commitments with customers.
When these commitments have contract rate adjustments that lag changes in market
rates, the financial instruments have characteristics similar to option
contracts. First Tennessee follows the same credit policies and underwriting
practices in making commitments as it does for on-balance sheet instruments.
Each counterparty's creditworthiness is evaluated on a case-by-case basis. The
amount of collateral obtained, if any, is based on management's credit
evaluation of the counterparty.
Commitments to Extend Credit are contractual obligations to lend to a customer
as long as all established contractual conditions are met. These commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The majority of First Tennessee's loan commitments
have maturities less than one year and reflect the prevailing market rates at
the time of the commitment. Since commitments may expire without being fully
drawn upon, the total contract amount does not necessarily represent future cash
requirements.
Commercial and Standby Letters of Credit are conditional commitments issued by
First Tennessee to guarantee the performance and/or payment of a customer to a
third party in connection with specified transactions. The credit risk involved
in issuing commercial and standby letters of credit is essentially the same as
that involved in extending loan facilities to customers.
<PAGE> 93
The following is a summary of the maximum credit exposure of each class of
lending related off-balance sheet financial instruments outstanding at December
31:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit:
Consumer credit card lines $ 2,246.3 $ 1,866.7
Consumer home equity 534.0 413.4
Commercial real estate and construction and land development 363.6 371.4
Mortgage banking 1,783.8 761.6
Commercial and other 1,835.9 1,876.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total loan commitments 6,763.6 5,289.9
Other commitments:
Standby letters of credit 480.1 513.0
Commercial letters of credit 7.5 5.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total loan and other commitments $ 7,251.2 $ 5,808.4
====================================================================================================================================
<FN>
The following table shows the notional or contractual amounts and related fair
values for the off-balance sheet financial instruments at December 31:
</FN>
</TABLE>
<TABLE>
<CAPTION>
1998 1997
----------------------------- ----------------------------
Notional Fair Notional Fair
(Dollars in millions) Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan commitments $ 6,763.6 $ 2.9 $ 5,289.9 $ 5.4
Commercial and standby letters of credit 487.6 6.0 518.5 6.4
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign exchange contracts:
Contracts to buy $ (.5) * $ (2.5) *
Contracts to sell .5 * 2.7 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net position $ -- $ .2
====================================================================================================================================
<FN>
* Amount is less than $100,000.
Mortgage banking loan commitments had an additional fair value related to
mortgage servicing rights of approximately $13.2 million at December 31, 1998,
and $3.8 million at December 31, 1997.
</FN>
</TABLE>
MORTGAGE BANKING
First Tennessee uses both forward sales commitments and option contracts to
protect the value of residential mortgage loans originated for sale in the
secondary market. Adverse market interest rate changes, between the time a
customer receives a rate-lock commitment and the time the loan is sold to an
investor, can erode the value of that mortgage. Therefore, First Tennessee
enters into forward sales commitments and option contracts to mitigate the
interest rate risk associated with the origination and sale of mortgage loans.
First Tennessee enters into interest rate contracts to counterbalance the loss
in value of its mortgage servicing rights from the effects of increased
prepayment activity that generally results from declining interest rates. With
respect to the purchased interest rate contracts, First Tennessee is not exposed
to loss beyond its initial outlay to acquire the hedge instruments and
therefore, there is no off-balance sheet risk. These financial instruments are
included in the discussion to fully disclose the servicing hedging position. The
credit risk inherent in these transactions relates to the possibility of
counterparties not performing according to the terms of the contract. This
credit risk is controlled through credit approvals, risk control limits and
on-going monitoring procedures through ALCO. The credit risk is represented by
the aggregate fair value of only those interest rate contracts that currently
have a positive fair value.
Interest Rate Forward Contracts are over-the-counter contracts where two parties
agree to purchase and sell a specific quantity of a financial instrument at a
specified price, with delivery or settlement at a specified date. Interest Rate
Option Contracts give the purchaser the right, but not the obligation, to buy or
sell a specified quantity of a financial instrument, at a specified price,
during a specified period of time. Caps and Floors are options that are linked
to a notional principal amount and an underlying indexed interest rate. Exposure
to loss on all interest rate contracts will increase or decrease as interest
rates fluctuate. The following disclosures of the fair value of interest rate
contracts are made using available market information and appropriate valuation
methodologies. Fair value is defined as the amount First Tennessee would receive
or pay to replace the contracts as of the valuation date.
<PAGE> 94
<TABLE>
<CAPTION>
1998 1997
------------------------- ----------------------
Notional Fair Notional Fair
(Dollars in millions) Value Value Value Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts:
Mortgage pipeline and warehouse hedging:
Forward contracts - commitments to sell $ 3,925.9 $ (3.1) $1,644.8 $(4.3)
Option contracts - put options purchased** -- -- 26.0 *
Option contracts - call options written** (150.0) (1.3) -- --
Servicing portfolio hedging**:
Option contracts - call options purchased 150.0 1.1 640.0 2.5
Floors:
Purchased 16,750.0 264.2 3,750.0 27.5
Written (5,400.0) (79.7) -- --
Caps:
Purchased 1,250.0 4.4 -- --
Written (1,250.0) (9.2) -- --
- ----------------------------------------------------------------------------------------------------------
<FN>
* Amount is less than $100,000.
** Option contracts in total had a book value at December 31, 1998, of $173.7
million, and $17.8 million at December 31, 1997.
</FN>
</TABLE>
Residential first-lien mortgage loans are originated by First Tennessee to be
sold in the secondary market. Some of these loans are sold with provisions of
recourse. As of December 31, 1998 and 1997, the outstanding principal amount of
these loans and the amount of credit risk was $154.7 million and $111.6 million,
respectively. A reserve has been established to cover any inherent losses. These
loans are reviewed on a regular basis to ensure that reserves are adequate to
provide for foreclosure losses. In addition, First Tennessee originates, sells
and services loans guaranteed by the Veterans Administration (VA). A VA guaranty
typically covers only the lesser of $46,000 or 25 percent to 50 percent of the
unpaid loan balance. In the event of foreclosure, First Tennessee, as a servicer
of VA loans, has credit risk to the extent that the outstanding loan balance
exceeds the VA guaranty and the value of the underlying real estate. As of
December 31, 1998 and 1997, the outstanding principal balance of VA loans
serviced was $4.5 billion and $3.2 billion, respectively. These loans are
reviewed on a regular basis, and a reserve has been established to cover any
inherent losses.
INTEREST RATE RISK MANAGEMENT
First Tennessee's ALCO focuses on managing market risk by controlling and
limiting earnings volatility attributable to changes in interest rates. Interest
rate risk exists to the extent that interest-earning assets and liabilities have
different maturity or repricing characteristics. First Tennessee uses
off-balance sheet financial instruments that are designed to moderate the impact
on earnings as interest rates change.
Interest Rate Swaps involve the exchange of interest payments at specified
intervals between two parties without the exchange of any underlying principal.
Notional amounts are used in such contracts to calculate interest payments due
to counterparties and do not represent credit exposure. The primary risks
associated with swaps are the exposure to movements in interest rates and the
ability of counterparties to meet the terms of the contracts.
<TABLE>
<CAPTION>
Weighted Final
Notional Fair Average Maturity
(Dollars in millions) Value Value Receive Rate In
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Interest rate contracts:
Swaps - receive fixed/pay floating* $ 432.0 $ .7 5.837% 1999
Swaps - receive floating/pay floating* 150.0 (.2) 4.937% 1999
Caps:
Purchased 20.0 .1 Strike 8% 2002
Written (20.0) (.1) Strike 8% 2002
Equity contracts:
Purchased options 1.9 .7 2003
- ---------------------------------------------------------------------------------------------------------------
1997
Interest rate contracts:
Swaps - receive fixed/pay floating* $ 210.0 $ .1 6.200% 1998
Caps:
Purchased 20.0 .1 Strike 8% 2002
Written (20.0) (.1) Strike 8% 2002
- ---------------------------------------------------------------------------------------------------------------
<FN>
* The weighted average rate paid on interest rate swaps at December 31, 1998,
was 5.280 percent and 5.899 percent at December 31, 1997.
</FN>
</TABLE>
<PAGE> 95
CAPITAL MARKETS
Capital markets buys and sells mortgage securities, municipal bonds and other
securities for trading purposes. When these securities settle on a delayed
basis, they are considered forward contracts. These transactions are measured at
fair value, and gains or losses are recognized in earnings as they occur.
Capital markets utilize futures contracts, from time to time, to manage exposure
arising from the inventory position. Credit risk related to these transactions
is controlled through credit approvals, risk control limits and on-going
monitoring procedures through ALCO.
<TABLE>
<CAPTION>
AT FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
--------------------- ---------------------
Net Average
Notional Fair Gain/ Fair
(Dollars in millions) Value Value (Loss) Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Forward contracts:
Commitments to buy:
Gain position $ (855.7) $ 2.3
Loss position (1,639.6) (3.9)
Commitments to sell:
Gain position 1,707.6 2.5
Loss position 779.5 (2.8)
- ------------------------------------------------------------------------------------------------------------------
Net position $ (8.2) $ (1.9) $ 136.5 $ (2.1)
==================================================================================================================
<CAPTION>
At For the Year Ended
December 31, 1997 December 31, 1997
--------------------- ---------------------
Net Average
Notional Fair Gain/ Fair
(Dollars in millions) Value Value (Loss) Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Forward contracts:
Commitments to buy:
Gain position $ (424.1) $ 1.4
Loss position (1,174.4) (4.2)
Commitments to sell:
Gain position 1,062.5 2.6
Loss position 608.0 (1.9)
- ------------------------------------------------------------------------------------------------------------------
Net position $ 72.0 $ (2.1) $ 61.2 $ (1.5)
==================================================================================================================
Option contracts:
Purchased $ 11.0 $ * $ -- $ *
Written (11.0) * -- *
- ------------------------------------------------------------------------------------------------------------------
Net position $ -- $ -- $ -- $ --
==================================================================================================================
<FN>
* Amount is less than $100,000.
</FN>
</TABLE>
<PAGE> 96
NOTE 24 - PARENT COMPANY FINANCIAL INFORMATION
Following are condensed statements of the parent company:
<TABLE>
<CAPTION>
STATEMENT OF CONDITION December 31
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash $ 1 $ 2
Securities purchased from subsidiary bank under agreements to resell 36,279 85,891
- -------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 36,280 85,893
Investment in bank time deposits 53,171 5,094
Securities available for sale 59,160 23,760
Notes receivable--long-term 75,000 75,000
Investments in subsidiaries at equity:
Bank 1,202,910 1,063,646
Non-bank 33,944 16,636
Other assets 45,052 36,051
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,505,517 $ 1,306,080
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Commercial paper and other short-term borrowings $ 23,204 $ 23,176
Accrued employee benefits and other liabilities 73,325 54,501
Term borrowings 309,454 274,307
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 405,983 351,984
Shareholders' equity 1,099,534 954,096
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,505,517 $ 1,306,080
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME Year Ended December 31
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend income:
Bank $ 122,484 $ 175,965 $ 87,130
Non-bank 6,059 3,557 2,850
- -------------------------------------------------------------------------------------------------------------------------
Total dividend income 128,543 179,522 89,980
Interest income 12,117 11,287 9,626
Other income 432 460 38
- -------------------------------------------------------------------------------------------------------------------------
Total income 141,092 191,269 99,644
- -------------------------------------------------------------------------------------------------------------------------
Interest expense:
Short-term debt 1,112 1,132 1,725
Term borrowings 23,594 22,729 13,150
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 24,706 23,861 14,875
Compensation, employee benefits and other expense 12,085 10,903 10,203
- -------------------------------------------------------------------------------------------------------------------------
Total expense 36,791 34,764 25,078
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed net income
of subsidiaries 104,301 156,505 74,566
Applicable income taxes (10,522) (10,458) (6,099)
- -------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of subsidiaries 114,823 166,963 80,665
Equity in undistributed net income of subsidiaries:
Bank 110,566 29,439 98,148
Non-bank 991 1,070 1,094
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 226,380 $ 197,472 $ 179,907
=========================================================================================================================
</TABLE>
<PAGE> 97
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS Year Ended December 31
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 226,380 $ 197,472 $ 179,907
Less undistributed net income of subsidiaries 111,557 30,509 99,242
- -------------------------------------------------------------------------------------------------------------------------------
Income before undistributed net income of subsidiaries 114,823 166,963 80,665
Adjustments to reconcile income to net cash provided by operating activities:
Provision/(benefit) for deferred income taxes (1,207) 1,797 (2,763)
Depreciation and amortization 2,101 2,176 2,087
Loss/(gain) on disposal of fixed assets -- 3 56
Net change in interest receivable and other assets (5,100) (4,740) (1,541)
Net change in interest payable and other liabilities 19,415 5,678 9,879
- -------------------------------------------------------------------------------------------------------------------------------
Total adjustments 15,209 4,914 7,718
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 130,032 171,877 88,383
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Securities:
Maturities -- 40 270
Purchases (35,400) (3,900) (18,660)
Premises and equipment:
Sales -- -- 21
Purchases (45) (72) (166)
Investment in subsidiaries -- (3,093) --
Increase in investment in bank time deposits (48,077) (854) (4,140)
Acquisitions, cash received/(paid) (9,719) (185) 400
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided/(used) by investing activities (93,241) (8,064) (22,275)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Common stock:
Exercise of stock options 24,943 24,309 5,779
Cash dividends (84,521) (78,348) (71,310)
Repurchase of shares (61,854) (169,520) (28,356)
Term borrowings:
Issuance 35,000 106,793 18,250
Decrease in short-term borrowings 28 (9,472) (16,753)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (86,404) (126,238) (92,390)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents (49,613) 37,575 (26,282)
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 85,893 48,318 74,600
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 36,280 $ 85,893 $ 48,318
===============================================================================================================================
Total interest paid $ 24,035 $ 19,167 $ 14,706
Total income taxes paid 25,631 60,050 47,812
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 98
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of First Tennessee National
Corporation:
We have audited the accompanying consolidated statements of condition of First
Tennessee National Corporation (a Tennessee corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Tennessee National
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/Arthur Andersen LLP
Memphis, Tennessee,
January 19, 1999.
<PAGE> 99
<TABLE>
<CAPTION>
CONSOLIDATED HISTORICAL STATEMENTS OF INCOME (UNAUDITED) FIRST TENNESSEE NATIONAL CORPORATION
- ----------------------------------------------------------------------------------------------------------------------------
Growth Rates (%)
-----------------
(Dollars in millions except per share data) 1998 1997 1996 1995 1994 1993 98/97 98/93*
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Commercial $ 322.5 $ 298.9 $277.2 $264.4 $211.6 $178.7 7.9 + 12.5 +
Consumer 258.0 248.7 229.9 206.0 166.8 128.1 3.7 + 15.0 +
Permanent mortgage 38.7 51.0 51.7 52.1 44.0 45.9 24.1 - 3.4 -
Credit card receivables 67.7 67.9 67.6 65.5 56.6 51.1 .3 - 5.8 +
Real estate construction 39.0 33.1 27.1 23.0 11.4 7.3 17.8 + 39.8 +
Investment securities:
Taxable 155.9 135.3 136.0 130.9 128.9 175.8 15.2 + 2.4 -
Tax-exempt 3.7 4.5 5.1 4.6 5.2 7.2 17.8 - 12.5 -
Other earning assets:
Mortgage loans held for sale 205.7 76.9 82.1 54.7 56.0 44.9 167.5 + 35.6 +
Investments in bank time deposits 2.0 .5 .7 .2 .2 .2 300.0 + 58.5 +
Federal funds sold and securities
purchased under agreements to resell 10.1 11.1 5.0 8.5 7.6 3.7 9.0 - 22.2 +
Capital markets securities inventory 30.5 13.4 14.1 12.6 12.8 9.3 127.6 + 26.8 +
- --------------------------------------------------------------------------------------------------------
Total interest income 1,133.8 941.3 896.5 822.5 701.1 652.2 20.5 + 11.7 +
- --------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
Savings 7.1 8.2 9.4 10.8 13.4 15.4 13.4 - 14.3 -
Checking interest and money market 113.2 95.1 92.7 95.8 65.7 54.3 19.0 + 15.8 +
Certificates of deposit under $100,000 and
other time 144.9 160.5 166.5 167.8 122.0 117.3 9.7 - 4.3 +
Certificates of deposit $100,000 and more 111.5 47.7 46.3 30.6 18.7 16.2 133.8 + 47.1 +
Federal funds purchased and securities
sold under agreements to repurchase 122.6 89.8 78.0 80.9 40.5 29.2 36.5 + 33.2 +
Commercial paper and other short-term borrowings 72.6 39.2 29.3 25.7 35.6 33.6 85.2 + 16.7 +
Federal Reserve Bank penalties 1.5 1.8 2.3 2.2 1.1 .5 16.7 - 24.6 +
Term borrowings 19.9 15.9 20.8 18.0 9.6 9.6 25.2 + 15.7 +
- --------------------------------------------------------------------------------------------------------
Total interest expense 593.3 458.2 445.3 431.8 306.6 276.1 29.5 + 16.5 +
- --------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 540.5 483.1 451.2 390.7 394.5 376.1 11.9 + 7.5 +
Provision for loan losses 51.3 51.1 35.7 20.6 17.2 36.5 .4 + 7.0 +
- --------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION 489.2 432.0 415.5 370.1 377.3 339.6 13.2 + 7.6 +
- --------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 558.4 330.1 275.4 213.6 188.2 139.6 69.1 + 32.0 +
Capital markets 147.4 98.3 85.9 82.8 77.5 91.5 49.9 + 10.0 +
Deposit transactions and cash management 90.4 86.1 78.2 74.1 65.8 59.6 5.1 + 8.7 +
Trust services and investment management 51.2 40.9 34.7 34.4 27.9 25.5 25.1 + 14.9 +
Merchant processing 37.5 32.1 24.2 19.2 14.7 12.0 16.7 + 25.5 +
Cardholder fees 21.0 19.8 17.2 14.9 15.6 15.8 6.1 + 5.9 +
Equity securities gains/(losses) 3.9 (.8) (2.5) 3.2 24.3 (.5) N/A N/A
Debt securities gains/(losses) -- .1 (.2) (.8) (4.3) 1.4 N/A N/A
All other income and commissions 75.7 61.5 58.3 51.2 46.5 43.2 23.1 + 11.9 +
- --------------------------------------------------------------------------------------------------------
Total noninterest income 985.5 668.1 571.2 492.6 456.2 388.1 47.5 + 20.5 +
- --------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION 1,474.7 1,100.1 986.7 862.7 833.5 727.7 34.1 + 15.2 +
- --------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives and benefits 563.6 409.8 385.4 340.5 349.8 308.6 37.5 + 12.8 +
Amortization of mortgage servicing rights 95.5 37.4 26.0 15.0 14.9 25.5 155.0 + 30.2 +
Operations services 58.5 49.9 44.1 38.8 33.7 28.7 17.3 + 15.3 +
Occupancy 51.4 42.8 39.8 37.9 34.1 27.7 20.0 + 13.2 +
Equipment rentals, depreciation and maintenance 45.8 40.1 34.1 31.8 29.2 22.2 14.2 + 15.5 +
Communications and courier 41.5 34.9 33.0 29.9 30.7 24.8 18.8 + 10.9 +
Advertising and public relations 25.2 18.7 17.6 13.0 10.7 8.0 34.5 + 25.8 +
Amortization of intangible assets 11.1 9.6 9.5 8.1 6.4 5.8 15.4 + 13.6 +
All other expense 229.2 141.8 115.0 94.7 116.2 101.3 61.7 + 17.8 +
- --------------------------------------------------------------------------------------------------------
Total noninterest expense 1,121.8 785.0 704.5 609.7 625.7 552.6 42.9 + 15.2 +
- --------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 352.9 315.1 282.2 253.0 207.8 175.1 12.0 + 15.0 +
Applicable income taxes 126.5 117.6 102.3 88.1 60.7 65.4 7.6 + 14.1 +
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 226.4 $ 197.5 $179.9 $164.9 $147.1 $109.7 14.6 + 15.6 +
========================================================================================================
FULLY TAXABLE EQUIVALENT ADJUSTMENT $ 3.8 $ 4.3 $ 5.4 $ 5.0 $ 4.8 $ 6.3 11.6 - 9.6 -
- --------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ 1.77 $ 1.54 $ 1.34 $ 1.21 $ 1.07 $ .81 14.9 + 16.9 +
- --------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ 1.72 $ 1.50 $ 1.32 $ 1.20 $ 1.07 $ .80 14.7 + 16.5 +
- --------------------------------------------------------------------------------------------------------
<FN>
* Compound annual growth rate.
Certain previously reported amounts have been reclassified to agree with current
presentation. Per share data reflect the 1998 and 1996 two-for-one stock splits.
</FN>
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (UNAUDITED) FIRST TENNESSEE NATIONAL CORPORATION
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 Average
----------------------------- ----------------------------- Balance
Interest Average Interest Average Growth(%)
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ ---------
(Dollars in millions) Balance Expense Rates Balance Expense Rates 98/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans, net of unearned income:
Commercial $ 3,966.3 $ 323.1 8.15% $ 3,624.8 $299.8 8.27% 9.4 +
Consumer 2,794.4 258.1 9.23 2,760.0 248.7 9.01 1.2 +
Permanent mortgage 481.6 38.7 8.03 638.4 51.0 7.99 24.6 -
Credit card receivables 563.5 67.7 12.02 544.7 67.9 12.47 3.5 +
Real estate construction 405.4 38.9 9.60 337.4 33.0 9.79 20.2 +
Nonaccrual loans 30.9 .9 3.03 39.8 .9 2.16 22.4 -
- ------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income 8,242.1 727.4 8.83 7,945.1 701.3 8.83 3.7 +
- ------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. Treasury and other U.S. government agencies 1,795.2 117.8 6.56 1,963.3 129.3 6.59 8.6 -
States and municipalities 69.8 5.4 7.80 83.7 6.8 8.06 16.6 -
Other 560.8 38.4 6.84 92.4 6.1 6.65 506.9 +
- ------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,425.8 161.6 6.66 2,139.4 142.2 6.65 13.4 +
- ------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Mortgage loans held for sale 2,911.2 205.7 7.06 1,005.9 76.9 7.64 189.4 +
Investment in bank time deposits 40.8 2.0 4.81 9.8 .5 5.05 316.3 +
Federal funds sold and securities purchased
under agreements to resell 193.4 10.1 5.22 207.1 11.1 5.37 6.6 -
Capital markets securities inventory 507.2 30.8 6.07 204.8 13.6 6.65 147.7 +
- ------------------------------------------------------------------------------------------------------------------------
Total other earning assets 3,652.6 248.6 6.80 1,427.6 102.1 7.15 155.9 +
- ------------------------------------------------------------------------------------------------------------------------
Total earning assets 14,320.5 1,137.6 7.94 11,512.1 945.6 8.21 24.4 +
Allowance for loan losses (133.1) (123.6) 7.7 +
Cash and due from banks 697.6 658.6 5.9 +
Premises and equipment, net 222.4 195.1 14.0 +
Capital markets receivables and other assets 1,613.3 1,038.4 55.4 +
- ------------------------------------------------------------------------------------------------------------------------
Total assets/Interest income $16,720.7 $1,137.6 $13,280.6 $945.6 25.9 +
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Savings $ 347.5 $ 7.1 2.05% $ 376.5 $ 8.2 2.17% 7.7 -
Checking interest and money market 3,403.7 113.2 3.32 2,963.7 95.1 3.21 14.8 +
Certificates of deposit under $100,000 and other time 2,588.7 144.9 5.60 2,798.0 160.5 5.74 7.5 -
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing core deposits 6,339.9 265.2 4.18 6,138.2 263.8 4.30 3.3 +
Certificates of deposit $100,000 and more 1,992.5 111.5 5.59 843.0 47.7 5.66 136.4 +
Federal funds purchased and securities sold
under agreements to repurchase 2,456.4 122.6 4.99 1,790.1 89.8 5.01 37.2 +
Commercial paper and other short-term borrowings 1,285.5 74.1 5.76 663.0 41.0 6.18 93.9 +
Term borrowings 252.7 19.9 7.91 185.5 15.9 8.60 36.2 +
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 12,327.0 593.3 4.81 9,619.8 458.2 4.76 28.1 +
Demand deposits 1,749.0 1,695.8 3.1 +
Other noninterest-bearing deposits 915.0 530.1 72.6 +
Capital markets payables and other liabilities 633.7 457.5 38.5 +
Guaranteed preferred beneficial interests in
First Tennessee's junior subordinated debentures 100.0 98.6 1.4 +
Shareholders' equity 996.0 878.8 13.3 +
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity/Interest expense $16,720.7 $ 593.3 $13,280.6 $458.2 25.9 +
========================================================================================================================
Net interest income-tax equivalent basis/Yield $ 544.3 3.80% $487.4 4.23%
Fully taxable equivalent adjustment (3.8) (4.3)
- ------------------------------------------------------------------------------------------------------------------------
Net interest income $ 540.5 $483.1
========================================================================================================================
Net interest spread 3.13% 3.45%
Effect of interest-free sources used to fund earning assets .67 .78
- ------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.80% 4.23%
========================================================================================================================
<FN>
Certain previously reported amounts have been reclassified to agree with current
presentation. Yields and corresponding income amounts are adjusted to a fully
taxable equivalent. Earning assets yields are expressed net of unearned income.
Rates are expressed net of unamortized debenture cost for long-term debt. Net
interest margin is computed using total net interest income.
</FN>
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (UNAUDITED) FIRST TENNESSEE NATIONAL CORPORATION
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1995
---------------------------- ----------------------------
Interest Average Interest Average
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/
(Dollars in millions) Balance Expense Rates Balance Expense Rates
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans, net of unearned income:
Commercial $ 3,383.5 $278.2 8.22% $ 3,148.4 $265.3 8.43%
Consumer 2,607.5 229.9 8.82 2,367.1 206.0 8.70
Permanent mortgage 660.0 51.7 7.83 658.4 52.1 7.91
Credit card receivables 530.2 67.6 12.74 480.4 65.5 13.63
Real estate construction 275.1 27.0 9.82 216.4 23.0 10.65
Nonaccrual loans 15.8 1.5 9.62 16.5 1.4 8.48
- --------------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income 7,472.1 655.9 8.78 6,887.2 613.3 8.90
- --------------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. Treasury and other U.S. government agencies 2,031.2 131.0 6.45 2,004.3 125.9 6.28
States and municipalities 98.1 7.9 8.02 81.4 7.0 8.63
Other 73.9 4.8 6.51 75.3 4.9 6.53
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,203.2 143.7 6.52 2,161.0 137.8 6.38
- --------------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Mortgage loans held for sale 1,059.4 82.1 7.74 706.1 54.7 7.75
Investment in bank time deposits 14.6 .7 5.05 3.1 .2 5.79
Federal funds sold and securities purchased
under agreements to resell 94.2 5.0 5.30 157.5 8.5 5.42
Capital markets securities inventory 218.5 14.5 6.66 179.8 13.0 7.22
- --------------------------------------------------------------------------------------------------------------------------------
Total other earning assets 1,386.7 102.3 7.38 1,046.5 76.4 7.30
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets 11,062.0 901.9 8.15 10,094.7 827.5 8.20
Allowance for loan losses (117.1) (113.0)
Cash and due from banks 662.8 659.0
Premises and equipment, net 181.4 166.0
Capital markets receivables and other assets 799.2 552.8
- --------------------------------------------------------------------------------------------------------------------------------
Total assets/Interest income $12,588.3 $901.9 $11,359.5 $827.5
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Savings $ 424.3 $ 9.4 2.23% $ 459.5 $ 10.8 2.35%
Checking interest and money market 2,715.9 92.7 3.41 2,378.9 95.8 4.03
Certificates of deposit under $100,000 and other time 2,885.2 166.5 5.77 2,872.6 167.8 5.84
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing core deposits 6,025.4 268.6 4.46 5,711.0 274.4 4.81
Certificates of deposit $100,000 and more 835.8 46.3 5.54 531.9 30.6 5.75
Federal funds purchased and securities sold
under agreements to repurchase 1,588.1 78.0 4.91 1,491.1 80.9 5.43
Commercial paper and other short-term borrowings 520.1 31.6 6.07 404.2 27.9 6.90
Term borrowings 253.7 20.8 8.24 208.9 18.0 8.63
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 9,223.1 445.3 4.83 8,347.1 431.8 5.17
Demand deposits 1,816.1 1,746.8
Other noninterest-bearing deposits 268.2 142.7
Capital markets payables and other liabilities 383.4 300.1
Guaranteed preferred beneficial interests in
First Tennessee's junior subordinated debentures -- --
Shareholders' equity 897.5 822.8
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity/Interest expense $12,588.3 $445.3 $11,359.5 $431.8
================================================================================================================================
Net interest income-tax equivalent basis/Yield $456.6 4.13% $395.7 3.92%
Fully taxable equivalent adjustment (5.4) (5.0)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $451.2 $390.7
================================================================================================================================
Net interest spread 3.32% 3.03%
Effect of interest-free sources used to fund earning assets .81 .89
- --------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.13% 3.92%
================================================================================================================================
<FN>
Certain previously reported amounts have been reclassified to agree with current
presentation. Yields and corresponding income amounts are adjusted to a fully
taxable equivalent. Earning assets yields are expressed net of unearned income.
Rates are expressed net of unamortized debenture cost for long-term debt. Net
interest margin is computed using total net interest income.
</FN>
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES (UNAUDITED) FIRST TENNESSEE NATIONAL CORPORATION
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1993 Average
---------------------------- ---------------------------- Balance
Interest Average Interest Average Growth(%)
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/ ---------
(Dollars in millions) Balance Expense Rates Balance Expense Rates 98/93*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Loans, net of unearned income:
Commercial $ 2,775.7 $212.4 7.65% $2,435.3 $179.4 7.37% 10.2 +
Consumer 2,082.6 166.8 8.01 1,524.9 128.1 8.40 12.9 +
Permanent mortgage 557.5 44.0 7.90 527.4 45.9 8.70 1.8 -
Credit card receivables 432.7 56.6 13.08 396.5 51.1 12.90 7.3 +
Real estate construction 117.3 11.4 9.71 82.0 7.3 8.92 37.7 +
Nonaccrual loans 18.6 1.3 7.25 30.3 1.8 5.86 .4 +
- -------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income 5,984.4 492.5 8.23 4,996.4 413.6 8.28 10.5 +
- -------------------------------------------------------------------------------------------------------------------------
Investment securities:
U.S. Treasury and other U.S. government agencies 2,063.4 122.8 5.95 2,679.9 160.8 6.00 7.7 -
States and municipalities 84.3 7.8 9.26 109.2 10.8 9.92 8.6 -
Other 101.0 5.9 5.91 226.2 14.9 6.60 19.9 +
- -------------------------------------------------------------------------------------------------------------------------
Total investment securities 2,248.7 136.5 6.07 3,015.3 186.5 6.19 4.3 -
- -------------------------------------------------------------------------------------------------------------------------
Other earning assets:
Mortgage loans held for sale 767.9 56.0 7.29 615.3 44.9 7.29 36.5 +
Investment in bank time deposits 5.3 .2 3.88 4.2 .2 3.84 57.6 +
Federal funds sold and securities purchased
under agreements to resell 191.9 7.6 3.97 142.0 3.7 2.63 6.4 +
Capital markets securities inventory 208.0 13.1 6.28 180.4 9.6 5.34 23.0 +
- -------------------------------------------------------------------------------------------------------------------------
Total other earning assets 1,173.1 76.9 6.55 941.9 58.4 6.20 31.1 +
- -------------------------------------------------------------------------------------------------------------------------
Total earning assets 9,406.2 705.9 7.50 8,953.6 658.5 7.35 9.8 +
Allowance for loan losses (113.1) (109.6) 4.0 +
Cash and due from banks 659.7 582.5 3.7 +
Premises and equipment, net 149.1 126.3 12.0 +
Capital markets receivables and other assets 477.9 429.6 30.3 +
- -------------------------------------------------------------------------------------------------------------------------
Total assets/Interest income $10,579.8 $705.9 $9,982.4 $658.5 10.9 +
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing deposits:
Savings $ 544.3 $ 13.4 2.47% $ 567.9 $ 15.4 2.72% 9.4 -
Checking interest and money market 2,295.6 65.7 2.86 2,221.9 54.3 2.44 8.9 +
Certificates of deposit under $100,000 and other time 2,529.4 122.0 4.82 2,439.4 117.3 4.81 1.2 +
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing core deposits 5,369.3 201.1 3.75 5,229.2 187.0 3.58 3.9 +
Certificates of deposit $100,000 and more 460.2 18.7 4.06 414.0 16.2 3.91 36.9 +
Federal funds purchased and securities sold
under agreements to repurchase 1,045.6 40.5 3.87 1,029.0 29.2 2.84 19.0 +
Commercial paper and other short-term borrowings 683.2 36.7 5.37 724.5 34.1 4.70 12.2 +
Term borrowings 101.8 9.6 9.41 102.8 9.6 9.39 19.7 +
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 7,660.1 306.6 4.00 7,499.5 276.1 3.68 10.4 +
Demand deposits 1,742.7 1,542.8 2.5 +
Other noninterest-bearing deposits 142.2 -- N/A
Capital markets payables and other liabilities 275.3 256.0 19.9 +
Guaranteed preferred beneficial interests in
First Tennessee's junior subordinated debentures -- -- N/A
Shareholders' equity 759.5 684.1 7.8 +
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity/Interest expense $10,579.8 $306.6 $9,982.4 $276.1 10.9 +
=========================================================================================================================
Net interest income-tax equivalent basis/Yield $399.3 4.25% $382.4 4.27%
Fully taxable equivalent adjustment (4.8) (6.3)
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $394.5 $376.1
=========================================================================================================================
Net interest spread 3.50% 3.67%
Effect of interest-free sources used to fund earning assets .75 .60
- -------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.25% 4.27%
=========================================================================================================================
<FN>
*Compound annual growth rate
Certain previously reported amounts have been reclassified to agree with current
presentation. Yields and corresponding income amounts are adjusted to a fully
taxable equivalent. Earning assets yields are expressed net of unearned income.
Rates are expressed net of unamortized debenture cost for long-term debt. Net
interest margin is computed using total net interest income.
</FN>
</TABLE>
<PAGE> 103
<TABLE>
<CAPTION>
CORPORATE AND FIRST
TENNESSEE BANK NATIONAL
ASSOCIATION BOARDS OF
CORPORATE OFFICERS DIRECTORS
- -------------------------------------------------------------------------------------------------------------
<S> <C>
RALPH HORN ROBERT C. BLATTBERG
Chairman of the Board Polk Brothers Distinguished Professor of Retailing
President and Chief Executive Officer J.L. Kellogg Graduate School of Management
Northwestern University
J. KENNETH GLASS CARLOS H. CANTU
President President and Chief Executive Officer
Tennessee Banking Group The ServiceMaster Company
First Tennessee Bank National Association
JOHN C. KELLEY, JR. GEORGE E. CATES
President Chairman of the Board and Chief Executive Officer
Memphis Banking Group Mid-America Apartment Communities, Inc.
First Tennessee Bank National Association
GEORGE P. LEWIS J. KENNETH GLASS
Executive Vice President President - Tennessee Banking Group
Money Management Group First Tennessee Bank National Association
First Tennessee Bank National Association
SUSAN SCHMIDT BIES JAMES A. HASLAM, III
Executive Vice President Chief Executive Officer and Chief Operating Officer
Risk Management Pilot Corporation
HARRY A. JOHNSON, III RALPH HORN
Executive Vice President Chairman of the Board, President and Chief Executive
General Counsel Officer - First Tennessee National Corporation
First Tennessee Bank National Association
SARAH L. MEYERROSE JOHN C. KELLEY, JR.
Executive Vice President President - Memphis Banking Group
Personnel Division Manager First Tennessee Bank National Association
JOHN P. O'CONNOR, JR. R. BRAD MARTIN
Executive Vice President Chairman of the Board and Chief Executive Officer
Chief Credit Officer Saks Incorporated
ELBERT L. THOMAS, JR. JOSEPH ORGILL, III
Executive Vice President Chairman of the Board
Chief Financial Officer Orgill, Inc.
JAMES F. KEEN VICKI R. PALMER
Senior Vice President Corporate Vice President and Treasurer
Corporate Controller Coca-Cola Enterprises, Inc.
TERESA A. ROSENGARTEN MICHAEL D. ROSE
Vice President Private Investor
Treasurer
LENORE S. CRESON WILLIAM B. SANSOM
Corporate Secretary Chairman of the Board and Chief Executive Officer
The H.T. Hackney Co.
</TABLE>
<PAGE> 104
APPENDIX
PROXY
[FIRST TENNESSEE LOGO]
FIRST TENNESSEE NATIONAL CORPORATION
ANNUAL MEETING
April 20, 1999
10:00 a.m. Central Daylight Time
First Tennessee Building
M-Level Auditorium
165 Madison Avenue
Memphis, Tennessee 38103
- --------------------------------------------------------------------------------
FIRST TENNESSEE NATIONAL CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints James L. Boren, Jr., Lewis R. Donelson, and
George P. Lewis, or any one or more of them with full power of substitution, as
Proxy or Proxies, to represent and vote all shares of stock standing in my
name on the books of the Corporation at the close of business on February 26,
1999, which I would be entitled to vote if personally present at the Annual
Meeting of Shareholders of First Tennessee National Corporation to be held in
the Auditorium, First Tennessee Building, 165 Madison Avenue, Memphis,
Tennessee, April 20, 1999, at 10 a.m. CDT or any adjournments thereof, upon the
matters set forth in the notice of said meeting as stated on the reverse side.
The Proxies are further authorized to vote in their discretion as to any other
matters which may come before the meeting. The Board of Directors, at the time
of preparation of the Proxy Statement, knows of no business to come before the
meeting other than that referred to in the Proxy Statement.
THE SHARES COVERED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS GIVEN ON THE REVERSE SIDE AND WHEN NO INSTRUCTIONS ARE GIVEN WILL
BE VOTED FOR THE PROPOSALS DESCRIBED IN THE ACCOMPANYING NOTICE OF ANNUAL
MEETING AND PROXY STATEMENT AND ON THE REVERSE SIDE OF THIS PROXY.
(Continued on reverse side)
YOU CAN VOTE YOUR PROXY BY TELEPHONE, OVER THE INTERNET, OR BY SIGNING
AND RETURNING THIS CARD ON THE REVERSE SIDE.
(See voting instructions on reverse.)
<PAGE> 105
-----------------
COMPANY #
CONTROL #
-----------------
THERE ARE THREE WAYS TO VOTE YOUR PROXY.
Your telephone or Internet vote authorizes the named proxies to vote your
shares in the same manner as if you marked, signed and returned your proxy card.
VOTE BY PHONE - TOLL FREE - 1-800-240-6326 - QUICK *** EASY *** IMMEDIATE
- - Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week.
- - You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number which is located above.
- - Follow the simple voice mail instructions.
VOTE BY INTERNET - http://www.eproxy.com/ften/ - QUICK *** EASY *** IMMEDIATE
- - Use the Internet to vote your proxy 24 hours a day, 7 days a week.
- - You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number which is located above to obtain your records and create an
electronic ballot.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to First Tennessee National Corporation, c/o
Shareowner Services(TM) P.O. Box 64873, St. Paul, MN 55164-9397.
IF YOU VOTE BY PHONE OR INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD.
-- Please detach here --
- --- ---
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ALL ITEMS.
1. Election of four Class III directors to serve until the 2002 Annual
Meeting of Shareholders.
<TABLE>
<S> <C> <C> <C> <C>
Nominees: (01) Carlos H. Cantu (03) James A. Haslam, III / / FOR / / WITHHELD
(02) George E. Cates (04) Ralph Horn all nominees from all nominees
-----------------------------------------------
INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE(S),
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX TO THE RIGHT.
-----------------------------------------------
2. Ratification of appointment of Arthur Andersen LLP as auditors. / / For / / Against / / Abstain
</TABLE>
The undersigned hereby acknowledges receipt of notice of said meeting and the
related proxy statement.
Address Change? Mark Box / /
Indicate changes below: Date 1999
-------------------------------
-----------------------------------------
-----------------------------------------
Signature(s) in Box
Shareholder sign here exactly as shown on
the imprint on this card. When signing
as Attorney, Executor, Administrator,
Trustee or Guardian, please give full
name. If more than one Trustee, all
should sign. All Joint Owners should
sign.
- --- ---
