-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TalF4HAClVyAkWBPvbX1wvObaZwCUSTKwm1fTYGNzFPYVUog1s/vsHUtJ0ebyVKp d94Evs/dA2SVJalVyUtmEw== 0000950144-98-012457.txt : 19981116 0000950144-98-012457.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950144-98-012457 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST TENNESSEE NATIONAL CORP CENTRAL INDEX KEY: 0000036966 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 620803242 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-04491 FILM NUMBER: 98745939 BUSINESS ADDRESS: STREET 1: 165 MADISON AVE CITY: MEMPHIS STATE: TN ZIP: 38103 BUSINESS PHONE: 9015234444 MAIL ADDRESS: STREET 1: P O BOX 84 CITY: MEMPHIS STATE: TN ZIP: 38101-0084 FORMER COMPANY: FORMER CONFORMED NAME: FIRST TENNESSEE BANKS INC DATE OF NAME CHANGE: 19600201 10-Q 1 FIRST TENNESSEE NATIONAL CORP 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------- Commission file number 0-4491 ------ FIRST TENNESSEE NATIONAL CORPORATION ------------------------------------ (Exact name of registrant as specified in its charter) Tennessee 62-0803242 - ---------------------------------- -------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 165 Madison Avenue, Memphis, Tennessee 38103 - --------------------------------------- --------- (Address of principal executive offices) (Zip Code) (901) 523-4027 ---------------------------------------------------- (Registrant's telephone number, including area code) None --------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.625 par value 128,231,006 - ----------------------------- ------------------------------- Class Outstanding at October 31, 1998 2 FIRST TENNESSEE NATIONAL CORPORATION INDEX Part I. Financial Information Part II. Other Information Signatures Exhibit Index Exhibit 3(b) Exhibit 27 3 PART I. ------ FINANCIAL INFORMATION Item 1. Financial Statements. - ------------------------------ The Consolidated Statements of Condition The Consolidated Statements of Income The Consolidated Statements of Shareholders' Equity The Consolidated Statements of Cash Flows The Notes to Consolidated Financial Statements This financial information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented. 4
CONSOLIDATED STATEMENTS OF CONDITION First Tennessee National Corporation - ------------------------------------------------------------------------------------------------------------------------ September 30 December 31 ------------------------ ----------- (Dollars in thousands)(Unaudited) 1998 1997 1997 - ------------------------------------------------------------------------------------------------- ----------- ASSETS: Cash and due from banks $ 726,605 $ 730,013 $ 775,760 Federal funds sold and securities purchased under agreements to resell 134,011 240,150 225,861 - ------------------------------------------------------------------------------------------------- ----------- Total cash and cash equivalents 860,616 970,163 1,001,621 - ------------------------------------------------------------------------------------------------- ----------- Investment in bank time deposits 2,786 1,672 2,522 Capital markets inventory 397,980 315,199 253,240 Mortgage loans held for sale 2,841,957 1,033,648 1,240,648 Securities available for sale 1,910,299 2,040,983 2,133,303 Securities held to maturity (market value of $686,156 at September 30, 1998; $58,242 at September 30, 1997; and $54,323 at December 31, 1997) 684,491 57,298 53,230 Loans, net of unearned income 8,315,716 8,082,274 8,311,350 Less: Allowance for loan losses 135,413 123,875 125,859 - ------------------------------------------------------------------------------------------------- ----------- Total net loans 8,180,303 7,958,399 8,185,491 - ------------------------------------------------------------------------------------------------- ----------- Premises and equipment, net 236,908 201,356 206,895 Real estate acquired by foreclosure 15,513 12,352 12,202 Mortgage servicing rights, net 518,991 368,037 408,921 Intangible assets, net 129,052 112,611 112,411 Capital markets receivables and other assets 1,469,113 1,010,729 777,413 - ------------------------------------------------------------------------------------------------- ----------- TOTAL ASSETS $17,248,009 $14,082,447 $14,387,897 ================================================================================================= =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Interest-bearing $ 8,384,401 $ 6,910,607 $ 7,135,733 Noninterest-bearing 2,716,088 2,346,463 2,536,046 - ------------------------------------------------------------------------------------------------- ----------- Total deposits 11,100,489 9,257,070 9,671,779 - ------------------------------------------------------------------------------------------------- ----------- Federal funds purchased and securities sold under agreements to repurchase 2,136,500 1,909,928 2,085,679 Commercial paper and other short-term borrowings 1,336,243 731,765 702,388 Capital markets payables and other liabilities 1,257,096 994,858 705,062 Term borrowings 266,468 180,343 168,893 - ------------------------------------------------------------------------------------------------- ----------- Total liabilities 16,096,796 13,073,964 13,333,801 - ------------------------------------------------------------------------------------------------- ----------- Guaranteed preferred beneficial interests in First Tennessee's junior subordinated debentures 100,000 100,000 100,000 - ------------------------------------------------------------------------------------------------- ----------- SHAREHOLDERS' EQUITY: Preferred stock - no par value (5,000,000 shares authorized, but unissued) -- -- -- Common stock - $.625 par value (shares authorized - 400,000,000; shares issued - 128,087,054 at September 30, 1998; 128,119,620 at September 30, 1997; and 128,209,142 at December 31, 1997) 80,054 80,075 80,131 Capital surplus 78,128 44,574 49,536 Undivided profits 867,918 779,653 811,396 Accumulated other comprehensive income 25,392 6,799 15,333 Deferred compensation on restricted stock incentive plans (1,434) (2,618) (2,300) Deferred compensation obligation 1,155 -- -- - ------------------------------------------------------------------------------------------------- ----------- Total shareholders' equity 1,051,213 908,483 954,096 - ------------------------------------------------------------------------------------------------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $17,248,009 $14,082,447 $14,387,897 ================================================================================================= ===========
[FN] See accompanying notes to consolidated financial statements. 5
CONSOLIDATED STATEMENTS OF INCOME First Tennessee National Corporation - ----------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 -------------------------------- ----------------------------------- (Dollars in thousands except per share data)(Unaudited) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $ 181,038 $ 178,530 $ 541,827 $ 518,752 Interest on investment securities: Taxable 42,654 33,307 115,324 102,164 Tax-exempt 895 1,100 2,838 3,466 Interest on mortgage loans held for sale 51,112 21,680 130,170 52,398 Interest on capital markets inventory 9,351 3,661 21,442 9,613 Interest on other earning assets 3,217 3,467 9,828 8,590 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest income 288,267 241,745 821,429 694,983 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits: Savings 1,812 2,035 5,466 6,236 Checking interest and money market account 28,317 23,185 85,415 68,167 Certificates of deposit under $100,000 and other time 35,921 40,164 110,581 120,818 Certificates of deposit $100,000 and more 29,836 11,782 72,790 35,829 Interest on short-term borrowings 52,482 37,084 139,053 93,547 Interest on term borrowings 5,238 3,887 14,134 12,251 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest expense 153,606 118,137 427,439 336,848 - ---------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 134,661 123,608 393,990 358,135 Provision for loan losses 13,127 12,753 39,427 37,783 - ---------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 121,534 110,855 354,563 320,352 - ---------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Mortgage banking 160,063 88,402 375,120 227,537 Capital markets 35,370 28,903 103,590 69,358 Deposit transactions and cash management 23,358 22,327 66,125 63,109 Trust services and investment management 12,619 10,805 38,080 29,573 Merchant processing 10,074 8,575 25,023 23,488 Cardholder fees 5,392 4,941 15,258 14,358 Equity securities gains/(losses) -- (1) 38 (841) Debt securities gains/(losses) 9 (22) (91) 58 All other income and commissions 21,035 16,416 54,677 45,959 - ---------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 267,920 180,346 677,820 472,599 - ---------------------------------------------------------------------------------------------------------------------------------- ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 389,454 291,201 1,032,383 792,951 - ---------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Employee compensation, incentives, and benefits 145,038 109,542 391,452 300,202 Operations services 14,931 12,205 42,889 35,504 Occupancy 13,543 10,995 36,958 32,621 Equipment rentals, depreciation, and maintenance 11,636 9,789 32,023 29,223 Amortization of mortgage servicing rights 28,851 9,371 70,796 26,862 Communications and courier 10,636 8,745 30,340 26,234 Advertising and public relations 7,398 4,370 18,628 13,739 Amortization of intangible assets 2,726 2,419 8,021 7,229 All other 57,948 36,660 150,878 98,866 - ---------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 292,707 204,096 781,985 570,480 - ---------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 96,747 87,105 250,398 222,471 Applicable income taxes 34,927 32,417 89,477 82,856 - ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 61,820 $ 54,688 $ 160,921 $ 139,615 ================================================================================================================================== EARNINGS PER SHARE $ .48 $ .43 $ 1.26 $ 1.09 - ---------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE $ .47 $ .42 $ 1.22 $ 1.06 - ---------------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING 128,264,415 128,098,162 128,104,556 128,420,938 - ----------------------------------------------------------------------------------------------------------------------------------
[FN] See accompanying notes to consolidated financial statements. 6
CONSOLIDATED STATEMENTS OF First Tennessee SHAREHOLDERS' EQUITY National Corporation - ----------------------------------------------------------------------------------- (Dollars in thousands) 1998 1997 - ----------------------------------------------------------------------------------- BALANCE, JANUARY 1 $ 954,096 $ 954,526 Comprehensive income: Net income 160,921 139,615 Other comprehensive income, net of tax: Unrealized market adjustments, net of reclassification adjustment 10,059 4,102 - ----------------------------------------------------------------------------------- Comprehensive income 170,980 143,717 - ----------------------------------------------------------------------------------- Cash dividends declared (63,369) (58,199) Common stock issued: Keystone Mortgage, Inc. acquisition 5,221 -- Federal Flood Certification Corporation acquisition -- 1,362 For exercise of stock options 17,868 16,537 Tax benefit from non-qualified stock options 15,315 -- Common stock repurchased (61,835) (156,781) Amortization of deferred compensation on restricted stock incentive plans 988 957 Other 11,949 6,364 - ----------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30 $ 1,051,213 $ 908,483 ===================================================================================
[FN] See accompanying notes to consolidated financial statements. 7
CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation - ---------------------------------------------------------------------------------------------------- Nine Months Ended September 30 --------------------------------- (Dollars in thousands)(Unaudited) 1998 1997 - ---------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 160,921 $ 139,615 Adjustments to reconcile net income to net cash Provided/(used) by operating activities: Provision for loan losses 39,427 37,783 Provision for deferred income tax 48,158 39,608 Depreciation and amortization of premises and equipment 27,931 24,086 Amortization of mortgage servicing rights 70,796 26,862 Amortization of intangible assets 8,021 7,229 Net other amortization and accretion 9,393 3,767 Market value adjustment on foreclosed property 13,250 3,745 Gain on sale of securitized loans (643) -- Equity securities (gains)/losses (38) 841 Debt securities (gains)/losses 91 (58) Net gain on disposal of fixed assets (385) (816) Gain on sale of bank branches (567) Net increase in: Capital markets securities inventory (144,740) (164,797) Mortgage loans held for sale (1,599,573) (246,286) Capital markets receivables (341,203) (358,028) Interest receivable (14,859) (8,544) Other assets (532,390) (186,491) Net increase/(decrease) in: Capital markets payables 273,909 338,314 Interest payable (7,675) 3,739 Other liabilities 268,180 39,288 - ---------------------------------------------------------------------------------------------------- Total adjustments (1,882,917) (439,758) - ---------------------------------------------------------------------------------------------------- Net cash used by operating activities (1,721,996) (300,143) - ---------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Held to maturity securities: Maturities 86,291 8,586 Purchases -- -- Available for sale securities: Sales 42,387 121,301 Maturities 640,262 441,996 Purchases (439,318) (421,497) Premises and equipment: Sales 1,872 4,134 Purchases (55,382) (42,593) Net decrease in loans (845,589) (393,251) (Increase)/decrease in investment in bank time deposits (264) 250 Proceeds from loan securitizations 72,756 -- Sale of bank branches, net of cash and cash equivalents (7,654) -- Acquisitions, net of cash and cash equivalents acquired (9,311) -- - ---------------------------------------------------------------------------------------------------- Net cash used by investing activities (513,950) (281,074) - ---------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Common stock: Exercise of stock options 18,111 16,599 Cash dividends (84,587) (59,122) Repurchase shares (61,854) (156,781) Term Borrowings: Issuance 99,218 Payments (1,811) (54,430) Issuance of guaranteed preferred beneficial interests in First Tennessee's junior subordinated debentures -- 100,000 Net increase in: Deposits 1,441,188 224,008 Short-term borrowings 684,676 383,137 - ---------------------------------------------------------------------------------------------------- Net cash provided by financing activities 2,094,941 453,411 - ---------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (141,005) (127,806) - ---------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 1,001,621 1,097,969 - ---------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 860,616 $ 970,163 ==================================================================================================== Total interest paid $ 434,922 $ 332,855 Total income taxes paid 22,499 43,248 - ----------------------------------------------------------------------------------------------------
[FN] See accompanying notes to consolidated financial statements. 8 NOTE 1 - FINANCIAL INFORMATION The unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles. In the opinion of management, all necessary adjustments have been made for a fair presentation of financial position and results of operations for the periods presented. The operating results for the three month and nine month periods ended September 30, 1998, are not necessarily indicative of the results that may be expected going forward. For further information, refer to the audited consolidated financial statements and footnotes included in the 1998 Proxy Statement & 1997 Financial Information. Earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for each period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares resulting from options granted under First Tennessee National Corporation's (First Tennessee) stock option plans had been issued. First Tennessee utilizes the treasury stock method in this calculation. All per share amounts have been restated for the effect of the February 20, 1998, two-for-one stock split. Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income is the total of net income and all other nonowner changes in equity. The only component of comprehensive income for First Tennessee is unrealized holding gains/(losses) on available-for-sale securities. First Tennessee adopted this standard beginning with the first quarter of 1998. Comparative financial statements for earlier periods have been adjusted to reflect application of the provisions of this statement. In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The new Statement revises the required disclosures for employee benefit plans, but it does not change the measurement or recognition of such plans. First Tennessee will adopt this standard in the 1998 annual financial statements. In June 1998, the Financial Accounting Standards Board 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. Earlier adoption is allowed. 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 and results of operations. 9 NOTE 2 - BUSINESS COMBINATIONS On July 1, 1998, First Tennessee acquired Keystone Mortgage, Inc. (Keystone) of Kirkland, Washington, and merged Keystone with and into FT Mortgage Companies, an indirect, wholly-owned subsidiary of First Tennessee. First Tennessee will issue approximately 192,000 shares of its common stock for this acquisition which was accounted for as a purchase and was immaterial to First Tennessee. NOTE 3 - REMIC SECURITIES Through the use of a Real Estate Mortgage Investment Conduit (REMIC), First Tennessee securitized certain consumer real estate loans in the second quarter of 1998. These securitized loans are now classified as held-to-maturity investment securities. The following tables provide maturity and market value information on the REMIC securities as of September 30, 1998:
At September 30, 1998 ---------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------- REMIC securities $637,863 $7,077 $(6,766) $638,174 ====================================================================================================
As of September 30, 1998 --------------------------- REMIC Securities --------------------------- By Contractual Maturity Amortized Estimated (Dollars in thousands) Cost Fair Value - ----------------------------------------------------------------------------------------------------- After 5 years; within 10 years $440,309 $445,126 After 10 years 197,554 193,048 - ----------------------------------------------------------------------------------------------------- Total $637,863 $638,174 =====================================================================================================
10 NOTE 4 -- LOANS The composition of the loan portfolio at September 30 is detailed below:
(Dollars in thousands) 1998 1997 - --------------------------------------------------------------------------------------- Commercial $4,076,573 $3,692,179 Consumer* 2,832,518 2,810,802 Permanent mortgage* 408,034 653,054 Credit card receivables 573,248 541,151 Real estate construction 397,686 347,262 Nonaccrual - Regional banking group 8,437 11,671 Nonaccrual - Mortgage banking 19,220 26,155 - --------------------------------------------------------------------------------------- Loans, net of unearned income 8,315,716 8,082,274 Allowance for loan losses 135,413 123,875 - --------------------------------------------------------------------------------------- Total net loans $8,180,303 $7,958,399 =======================================================================================
[FN] *As a result of the Real Estate Mortgage Investment Conduit (REMIC) certain securitized consumer and permanent mortgage loans are now classified as REMIC securities. The following table presents information concerning nonperforming loans at September 30:
(Dollars in thousands) 1998 1997 - --------------------------------------------------------------------------------------- Impaired loans $ 9,270 $ 11,179 Other nonaccrual loans 18,387 26,647 - --------------------------------------------------------------------------------------- Total nonperforming loans $ 27,657 $ 37,826 =======================================================================================
[FN] At September 30, 1997, there were $196,000 of restructured impaired loans. Nonperforming loans consist of impaired loans, other nonaccrual loans and certain restructured loans. An impaired loan is a loan that management believes the contractual amount due probably will not be collected. Impaired loans are generally carried on a nonaccrual status. Nonaccrual loans are loans on which interest accruals have been discontinued due to the borrower's financial difficulties. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to recover the principal balance and accrued interest. Generally, interest payments received on impaired loans are applied to principal. Once all principal has been received, additional payments are recognized as interest income on a cash basis. The following table presents information concerning impaired loans:
Three Months Ended Nine Months Ended September 30 September 30 -------------------------------------------- (Dollars in thousands) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------- Total interest on impaired loans $ 488 $ 57 $ 845 $ 454 Average balance of impaired loans 8,668 10,218 8,904 11,417 - ----------------------------------------------------------------------------------------
11 An allowance for loan losses is maintained for all impaired loans. Activity in the allowance for loan losses related to non-impaired loans, impaired loans, and for the total allowance for the nine months ended September 30, 1998 and 1997, is summarized as follows:
(Dollars in thousands) Non-impaired Impaired Total - ----------------------------------------------------------------------------------- Balance at December 31, 1996 $ 114,217 $ 3,531 $ 117,748 Provision for loan losses 33,982 3,801 37,783 Charge-offs 34,760 3,374 38,134 Less loan recoveries 6,362 116 6,478 - ----------------------------------------------------------------------------------- Net charge-offs 28,398 3,258 31,656 - ----------------------------------------------------------------------------------- Balance at September 30, 1997 $ 119,801 $ 4,074 $ 123,875 =================================================================================== Balance at December 31, 1997 $ 122,107 $ 3,752 $ 125,859 Allowance from acquisitions 140 -- 140 Provision for loan losses 39,487 (60) 39,427 Securitization adjustment (3,575) -- (3,575) Charge-offs 33,562 1,634 35,196 Less loan recoveries 8,126 632 8,758 - ----------------------------------------------------------------------------------- Net charge-offs 25,436 1,002 26,438 - ----------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1998 $ 132,723 $ 2,690 $ 135,413 ===================================================================================
12 NOTE 5 -- 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:
September 30 December 31 ----------------------- ----------- (Dollars in thousands)(Unaudited) 1998 1997 1997 - ---------------------------------------------------------------------------------- ----------- FIRST TENNESSEE NATIONAL CORPORATION: Subordinated capital notes: Matures on June 1, 1999--10 3/8% $ 74,940 $ 74,850 $ 74,873 Matures on November 15, 2005--6 3/4% 74,418 74,336 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 15,000 Matures through 2009--8.10% 2,233 2,433 2,383 Matures on January 1, 2028--4.00% 41 -- -- Matures on May 1, 2028--4.00% 40 -- -- Matured through 1998--7.50% -- 2,739 1,383 Matured on October 3, 1997--8.05% -- 10,000 -- Subordinated capital notes: Matures on April 1, 2008--6.40% 99,257 -- -- Industrial development bond payable to City of Alcoa, Tennessee; matures 1999--6.50% 100 200 200 CLEVELAND BANK AND TRUST COMPANY: Industrial development bond payable to City of Cleveland, Tennessee; matures through 1999-- 65% of prime 439 785 698 - ---------------------------------------------------------------------------------- ----------- TOTAL $266,468 $180,343 $ 168,893 ================================================================================== ===========
13 NOTE 6 - EARNINGS PER SHARE The following table shows a reconciliation of earnings per share to diluted earnings per share. All share and per share data have been adjusted to reflect the 1998 two-for-one stock split.
Three Months Ended Nine Months Ended September 30 September 30 ------------------------------ ------------------------------ (Dollars in thousands, except per share data) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE COMPUTATION: Net income $ 61,820 $ 54,688 $ 160,921 $ 139,615 Weighted average shares outstanding 127,987,844 128,098,162 127,965,200 128,420,938 Shares attributable to deferred compensation 276,571 -- 139,356 -- - ----------------------------------------------------------------------------------------------------------------------------- Total weighted average shares per income statement 128,264,415 128,098,162 128,104,556 128,420,938 Earnings per share $ .48 $ .43 $ 1.26 $ 1.09 - ----------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE COMPUTATION: Net income $ 61,820 $ 54,688 $ 160,921 $ 139,615 Weighted average shares outstanding 128,264,415 128,098,162 128,104,556 128,420,938 Dilutive effect due to stock options 3,215,503 3,663,280 3,669,142 3,485,818 - ----------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding, as adjusted 131,479,918 131,761,442 131,773,698 131,906,756 Diluted earnings per share $ .47 $ .42 $ 1.22 $ 1.06 - -----------------------------------------------------------------------------------------------------------------------------
14 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition DESCRIPTION First Tennessee National Corporation (First Tennessee) is headquartered in Memphis, Tennessee, and is a nationwide, diversified financial services institution which provides banking and other financial services to its customers through various national and regional business lines. The Regional Banking Group includes the retail/commercial bank, the credit card division and the trust division. The National Lines of Business include FT Mortgage Companies and affiliates (also referred to as mortgage banking), First Tennessee Capital Markets (also referred to as capital markets) and transaction processing (credit card merchant processing, automated teller machine network and check clearing operations). INTRODUCTION The following is a discussion and analysis of the financial condition and results of operations of First Tennessee for the three-month and nine-month periods ended September 30, 1998, compared to the three-month and nine-month periods ended September 30, 1997. To assist the reader in obtaining a better understanding of First Tennessee and its performance, this discussion should be read in conjunction with First Tennessee's unaudited consolidated financial statements and accompanying notes appearing in this report. Additional information including the 1997 financial statements, notes, and management's discussion and analysis is provided as an appendix to the 1998 proxy statement. Certain revenues and expenses are allocated and equity is assigned to the various business lines to reflect the inherent risk in each business line, based on management's best estimates. These allocations are periodically reviewed and may be revised from time to time to more accurately reflect current business conditions and risks. In addition, certain reclassifications of accounts may occur to reflect current reporting standards within the industry. In each case the previous history is restated to ensure comparability. For purposes of this discussion, noninterest income and total revenues exclude securities gains and losses. Net interest income has been adjusted to a fully taxable equivalent (FTE) basis for certain tax-exempt loans and investments included in earning assets. Earning assets, including loans, have been expressed as averages, net of unearned income. FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION - -------------------------------------------------------------- Management's discussion and analysis may contain forward-looking statements with respect to First Tennessee's beliefs, plans, goals, expectations, and estimates. Forward-looking statements are statements not based on historical information but rather relate 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 rates, markets 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 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 the second quarter of 1998, First Tennessee Bank National Association (FTBNA) securitized a portion of its direct automobile loan receivables. Also during the second quarter, FTBNA securitized a portion of its consumer real estate loans 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. For a more complete understanding, where significant, these trends 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. 15 THIRD QUARTER OVERVIEW (comparison of third quarter 1998 to third quarter 1997) * Earnings for 1998 were $61.8 million, up 13 percent from last year's earnings of $54.7 million. * Diluted earnings per share (adjusted for the 1998 two-for-one stock split) were $.47 in 1998, up 12 percent over the $.42 earned in 1997. Basic earnings per share were $.48 in 1998 compared with $.43 in 1997. * Return on average shareholders' equity was 24.4 percent in 1998 compared with 24.6 percent in 1997, and return on average assets was 1.45 percent in 1998 compared with 1.61 percent in 1997. The decline in the return on average assets was attributable to the 25 percent growth in average assets, of which 51 percent was in the mortgage warehouse. * Total revenues grew 32 percent with growth in fee income of 49 percent and growth in net interest income of 9 percent. Mortgage banking and capital markets led the increase in fee income with growth of 81 percent and 22 percent, respectively. * The consolidated net interest margin was 3.75 percent in 1998 compared with 4.24 percent in 1997. The lower margin was primarily related to the growth in the mortgage warehouse. * Nonperforming assets improved in both mortgage banking and the regional banking group from the previous year. * At September 30, 1998, First Tennessee was ranked in the top 50 bank holding companies nationally in market capitalization ($3.5 billion) and assets ($17.2 billion). FT Mortgage Companies was ranked in the top 10 nationally in retail mortgage originations, and First Tennessee Capital Markets was again one of the top five underwriters of U.S. agency debt in the third quarter. INCOME STATEMENT ANALYSIS NONINTEREST INCOME - ------------------ Fee income (noninterest income excluding securities gains and losses) provides the majority of First Tennessee's revenue. During the third quarter of 1998, fee income increased 49 percent (from $180.4 million to $267.9 million) and contributed 67 percent to total revenue. Fee income contributed 59 percent to total revenue for the third quarter of 1997. Mortgage banking fee income, First Tennessee's largest contributing business line to noninterest income, grew 81 percent (from $88.4 million to $160.1 million) from the third quarter of 1997 as shown in Table 1. The increase came primarily from the mortgage origination function (loan origination fees and secondary marketing activities). TABLE 1 - MORTGAGE BANKING
Third Quarter Nine Months -------------------------- Growth -------------------------- Growth (Dollars in millions) 1998 1997 Rate (%) 1998 1997 Rate (%) - --------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Secondary marketing activities $ 69.8 $ 35.1 98.8 $ 157.6 $ 84.1 87.3 Loan origination fees 41.0 24.1 69.6 100.3 61.0 64.3 Servicing fees 30.8 23.4 31.9 83.6 69.5 20.4 Sale of mortgage servicing rights -- 1.8 NM -- 5.1 NM Miscellaneous 18.5 4.0 366.3 33.6 7.8 330.4 - --------------------------------------------------------------------------------------------------------------------- Total noninterest income 160.1 88.4 81.1 375.1 227.5 64.9 ===================================================================================================================== Mortgage loan originations $ 5,636.3 $ 3,028.9 86.1 $ 15,175.4 $ 7,368.1 106.0 Servicing portfolio $ 35,292.6 $ 25,672.2 37.5 $ 35,292.6 $ 25,672.2 37.5 - ---------------------------------------------------------------------------------------------------------------------
[FN] NM = not meaningful 16 Income derived from the mortgage origination function (loan origination fees plus secondary marketing activities) increased 87 percent from the third quarter of 1997 (from $59.2 million to $110.8 million), as FT Mortgage Companies originated a record $5.6 billion of mortgage loans in the third quarter of 1998. FT Mortgage Companies continued to be ranked as one of the top 10 retail mortgage originators in the nation. A favorable interest rate environment and a strong real estate market led to increased mortgage originations. This level of originations was an 86 percent increase over the $3.0 billion of mortgage loans originated in the third quarter of 1997 and resulted in 88 percent more loans sold into the secondary market than in 1997. The higher volume of sales accounted for most of the 99 percent increase in income from secondary marketing activities coupled with more profitable execution of trades stemming from more favorable interest rates. Refinance activity accounted for approximately 47 percent of total loan originations in the third quarter of 1998, compared with 26 percent in the third quarter of 1997. The servicing portfolio totaled $35.3 billion at September 30, 1998, up 37 percent from September 30, 1997, when the portfolio totaled $25.7 billion. Since the third quarter of 1997, the portfolio has grown due to originations of $18.4 billion, reduced by servicing released sales of $1.7 billion and principal reductions and payoffs of $7.1 billion from payments received in the normal course of business. Mortgage servicing fees increased 32 percent from the third quarter of 1997 (from $23.4 million to $30.8 million). No servicing rights were sold during the third quarter of 1998 and only a minimal amount was sold in the third quarter of 1997. The increase in mortgage miscellaneous income relates primarily to recognized gains from hedging the servicing portfolio. The 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 protect the value of the servicing portfolio which can erode when declining interest rates accelerate expected prepayments. 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 for distribution to customers by the sales staff. Inventory is hedged to protect against movements in interest rates. Fee income in capital markets grew 22 percent (from $28.9 million to $35.4 million) over the third quarter of 1997. Total securities bought and sold increased 73 percent over the same period in 1997 (from $63.0 billion to $109.1 billion). The increased core volume growth, paralleling the growth in revenue, came from strong performance in all of the offices including the recently opened New York office, continued expansion of the customer base and additional product penetration. The majority of the remaining volume growth was due to additional emphasis on short-term U. S. agency notes. Total underwritings during the third quarter of 1998 were $12.8 billion compared with $8.5 billion for the same period in 1997. For the third quarter of 1998, capital markets again ranked as one of the top five underwriters of U.S. government agency debt. Noninterest income from deposit transactions and cash management increased 5 percent from the third quarter of 1997 (from $22.3 million to $23.4 million). Since the third quarter of 1997, trust and investment management fees grew 17 percent (from $10.8 million to $12.6 million). This growth was primarily due to growth in assets under management and acquisition activity (Martin & Company, L.P.). Assets under management grew from $6.4 billion in the third quarter of 1997 to $8.2 billion in the third quarter of 1998. Due to higher volume, fee income from merchant processing increased 17 percent from the third quarter of 1997 (from $8.6 million to $10.1 million). In addition, equipment sales and lease fees and expenses, which had previously been recorded separately, are now being recorded as net revenue due to a new outsourcing agreement. Cardholder fees increased 9 percent (from $4.9 million to $5.4 million) during this same period, as strong purchasing volume led to higher interchange collections partially offset by the collection of fewer late fees due to lower delinquencies. All other noninterest income increased 28 percent from the third quarter of 1997 (from $16.4 million to $21.0 million). Other service charges increased 48 percent (from $2.7 million to $4.0 million) and included strong growth in investment/mutual fund sales and servicing fees collected from securitized transactions. Insurance premiums and commissions increased 26 percent (from $1.7 million to $2.1 million) from the third quarter of 1997. While check 17 clearing fees declined 14 percent (from $2.9 million to $2.5 million) from the previous year due to the continuing impact of industry consolidations, these fees have shown a steady improvement during 1998. The remainder of the growth was spread over several categories including gains related to foreclosures, fees received from flood zone certifications, and a gain on the sale of two Mississippi bank branches. NET INTEREST INCOME - ------------------- Net interest income increased 9 percent (from $124.7 million to $135.7 million) from the third quarter of 1997, primarily due to the 23 percent increase in earning assets (from $11.7 billion to $14.4 billion). The consolidated net interest margin (margin) declined from 4.24 percent in the third quarter of 1997 to 3.75 percent in the third quarter of 1998, primarily from the build-up of the mortgage warehouse which produced almost 65 percent of the increase in earning assets. Growth in demand deposit accounts contributed to the improvement in the regional banking group's margin from 4.74 percent in the third quarter of 1997 to 4.87 percent in the third quarter of 1998. Table 2 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 third quarters of 1998 and 1997. TABLE 2 - NET INTEREST MARGIN
Third Quarter --------------------- 1998 1997 - ------------------------------------------------------------------------------ REGIONAL BANKING GROUP: Yields on earning assets 8.23% 8.29 % Rates paid on interest-bearing liabilities 4.38 4.55 - ------------------------------------------------------------------------------ Net interest spread 3.85 3.74 - ------------------------------------------------------------------------------ Effect of interest-free sources .89 .89 Loan fees .13 .11 - ------------------------------------------------------------------------------ Net interest margin - Regional banking group 4.87% 4.74 % MORTGAGE BANKING (.95) (.38) CAPITAL MARKETS (.20) (.14) TRANSACTION PROCESSING .03 .02 - ------------------------------------------------------------------------------ Net interest margin 3.75% 4.24 % ==============================================================================
18 As shown in Table 2, the margin is affected by the activity levels and related funding for First Tennessee's specialty lines of business, as these nonbank business lines typically produce different margins than traditional banking activities. For example, in mortgage banking because the spread between the rates on mortgage loans temporarily in the warehouse and the related short-term funding rates is less than the comparable spread earned in the regional banking group, the overall margin is compressed. Consequently, as the warehouse volume increases, the margin also compresses. Capital markets tends to compress the margin because of its strategy to reduce market risk by hedging its inventory in the cash markets which effectively eliminates net interest income on these positions. As a result, First Tennessee's consolidated margin cannot be readily compared to that of other bank holding companies. NONINTEREST EXPENSE - ------------------- Total noninterest expense (operating expense) for the third quarter of 1998 increased 43 percent (from $204.1 million to $292.7 million) over the same period in 1997. Table 3 provides a breakdown of total expenses by business line. TABLE 3 - OPERATING EXPENSE COMPOSITION
Third Quarter ----------------------------- Growth (Dollars in millions) 1998 1997 Rate (%) - ---------------------------------------------------------------------------- Regional banking group $104.7 $ 90.1 16.3 Mortgage banking 144.7 77.9 85.7 Capital markets 26.6 21.4 24.3 Transaction processing 16.7 14.7 13.5 - --------------------------------------------------------------------------- Total operating expense $292.7 $204.1 43.4 ===========================================================================
19 The increase in operating expense in mortgage banking accounted for 75 percent of the overall expense growth. Mortgage banking expense growth was mainly in personnel from increased loan production and amortization expense due to the larger servicing portfolio and prepayments. Capital markets accounted for 6 percent of the overall expense growth. Excluding mortgage banking and capital markets, overall operating expenses increased 16 percent from the third quarter of 1997. Investments in expanding consumer lending beyond our traditional markets, growth in our insurance business, consolidation expenses of our merchant processing operation, and technology contributed to this growth rate. Employee compensation, incentives, and benefits (personnel expense), the largest category of noninterest expense, increased 32 percent (from $109.5 million to $145.0 million). Personnel expense includes commissions paid in several lines of business such as capital markets and mortgage banking. As sales and/or origination volumes increase or decrease or the product mix changes in these business lines, the commissions change accordingly. Excluding these business lines, personnel expense increased 13 percent largely due to market expansion in our other business lines. As a result of a larger servicing portfolio and additional prepayments, amortization of capitalized mortgage servicing rights increased 208 percent (from $9.4 million to $28.9 million). All other expense consists of numerous categories such as contract employment, supplies, travel and entertainment, foreclosed real estate expenses, legal and professional fees, and other. Since the third quarter of 1997, all other expense increased 58 percent (from $36.7 million to $57.9 million). The majority of this growth was related to mortgage banking. Excluding mortgage banking, all other expense increased 17 percent from the third quarter of 1997 and was spread out over a number of categories. PROVISION FOR LOAN LOSSES/ASSET QUALITY - --------------------------------------- The provision for loan losses increased 3 percent (from $12.8 million to $13.1 million) from third quarter 1997, and reflects loan growth and inherent risk in the loan portfolio. The ratio of allowance for loan losses to loans was 1.63 percent at September 30, 1998, compared with 1.53 percent at September 30, 1997. Additional asset quality information is provided in Table 4 - Asset Quality Information and Table 5 - Charge-off Ratios. TABLE 4 - ASSET QUALITY INFORMATION
September 30 ---------------------------- (Dollars in thousands) 1998 1997 - -------------------------------------------------------------------------------------- Nonperforming loans* $27,657 $37,826 Foreclosed real estate** 15,513 12,352 Other assets 207 221 - -------------------------------------------------------------------------------------- Total nonperforming assets $43,377 $50,399 ====================================================================================== Loans and leases 90 days past due $34,012 $30,298 Potential problem assets*** $70,464 $72,362 Third Quarter ----------------------------- 1998 1997 ----------------------------- ALLOWANCE FOR CREDIT LOSSES: Beginning balance at June 30 $129,858 $ 123,458 Provision for loan losses 13,127 12,753 Allowance from acquisition 140 -- Charge-offs (11,081) (14,521) Loan recoveries 3,369 2,185 - --------------------------------------------------------------------------------------- Ending balance at September 30 $135,413 $ 123,875 ======================================================================================= September 30 ----------------------------- 1998 1997 ----------------------------- Allowance to total loans 1.63% 1.53% Nonperforming loans to total loans .33 .47 Nonperforming assets to total loans, foreclosed real estate and other assets .52 .62 Allowance to nonperforming assets 312 246 - ---------------------------------------------------------------------------------------
[FN] *Includes $19.2 million and $26.2 million in 1998 and 1997, respectively, in mortgage banking. **Includes $10.8 million and $7.4 million in 1998 and 1997, respectively, in mortgage banking. ***Includes loans and leases 90 days past due. 20 The ratio of net charge-offs to average loans improved from .62 percent for the third quarter of 1997 to .38 percent for the third quarter of 1998. The credit card receivables charge-off ratio improved from 4.54 percent to 3.52 percent over this same period and reached its lowest level since the first quarter of 1996. The favorable change in the commercial and commercial real estate charge-off ratio to a net recovery position for the third quarter of 1998 was due to several recoveries during the quarter. The ratio of nonperforming loans to total loans decreased to .33 percent for the third quarter of 1998 compared with .47 percent for the same period in 1997. At September 30, 1998, First Tennessee had no concentrations of 10 percent or more of total loans in any single industry. TABLE 5 - CHARGE-OFF RATIOS
Third Quarter ----------------------------- 1998 1997 - ---------------------------------------------------------------------------------------- Commercial and commercial real estate (.04)% .17% Consumer .36 .39 Credit card receivables 3.52 4.54 Permanent mortgage* .01 .18 ======================================================================================== Total net charge-offs excluding repurchased mortgages .35 % .55% Impact of repurchased mortgages .03 .07 - ---------------------------------------------------------------------------------------- Total net charge-offs .38 % .62% ========================================================================================
[FN] *Excludes mortgage loans repurchased beginning the first quarter of 1997 to correct file documentation in order to certify loan pools. This occurred principally from the consolidation of five separate mortgage operations during 1996. 21 BALANCE SHEET LOANS AND DEPOSITS - ------------------ As previously discussed, 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 6 - Selected Loans includes information for reported and managed assets and Table 7 - - Investment Securities includes reported information and information excluding the REMIC. At September 30, 1998, First Tennessee reported total assets of $17.2 billion compared with $14.1 billion at September 30, 1997. Mortgage loans held for sale (mortgage warehouse) increased 175 percent (from $1.0 billion to $2.8 billion) from September 30, 1997. An increase in core deposits of 7 percent (from $8.4 billion to $9.0 billion) and a 61 percent increase in short-term purchased funds (from $3.5 billion to $5.6 billion) funded the growth in the period-end balance sheet. TABLE 6 - SELECTED LOANS
1998 AS Growth 1998 Growth (Dollars in millions) REPORTED 1997 Rate (%) MANAGED* Rate (%) - ----------------------------------------------------------------------------------------- SEPTEMBER 30 PERIOD-END Consumer loans $ 2,832.5 $ 2,810.8 .8 $ 3,209.3 14.2 Permanent mortgages 408.0 653.1 (37.5) 697.3 6.8 Total loans 8,315.7 8,082.3 2.9 8,981.8 11.1 - ----------------------------------------------------------------------------------------- THIRD QUARTER AVERAGES Consumer loans $ 2,698.7 $ 2,781.3 (3.0) $ 3,094.5 11.3 Permanent mortgages 390.9 640.7 (39.0) 690.8 7.8 Total loans 8,102.2 8,014.9 1.1 8,797.9 9.8 - ----------------------------------------------------------------------------------------- YEAR-TO-DATE AVERAGES Consumer loans $ 2,750.1 $ 2,737.4 .5 $ 2,980.4 8.9 Permanent mortgages 503.2 632.7 (20.5) 675.1 6.7 Total loans 8,174.5 7,883.5 3.7 8,576.6 8.8 - -----------------------------------------------------------------------------------------
[FN] *Excludes managed loans in the mortgage banking servicing portfolio. TABLE 7 - INVESTMENT SECURITIES
1998 1998 EXCLUDING AS Growth SECURITIZATION Growth (Dollars in millions) REPORTED 1997 Rate (%) ACTIVITY Rate (%) - ---------------------------------------------------------------------------------------------- September 30 period-end $ 2,594.8 $ 2,098.3 23.7 $ 1,956.8 (6.7) Third quarter averages 2,615.8 2,102.7 24.4 1,950.7 (7.2) Year-to-date averages 2,380.9 2,155.6 10.5 1,999.4 (7.2) - ----------------------------------------------------------------------------------------------
22 23 Average total assets grew 25 percent (from $13.5 billion to $16.9 billion) from the third quarter of 1997. Due to strong origination volume, the mortgage warehouse increased 154 percent (from $1.1 billion to $2.9 billion) and accounted for over 50 percent of the increase in total assets. For the third quarter of 1998, managed total loans grew 10 percent (from $8.0 billion to $8.8 billion). Average commercial loans increased 9 percent (from $3.7 billion to $4.0 billion) and represented 46 percent of total managed loans. This increase was above the national average and was due to growth in a number of different industries. The 11 percent increase in managed consumer loans (from $2.8 billion to $3.1 billion) came primarily from real estate-related lending, and these loans represented 35 percent of total managed loans. Managed permanent mortgage loans increased 8 percent (from $.6 billion to $.7 billion), with the majority of the growth originated by mortgage banking. In addition, most of the 20 percent increase (from $.3 billion to $.4 billion) in average real estate construction loans came from growth in residential construction loans originated by mortgage banking. Average credit card receivables grew 5 percent (from $.5 billion to $.6 billion). Average investment securities increased 24 percent from third quarter 1997 (from $2.1 billion to $2.6 billion). Table 7 - Investment Securities shows the impact the securitization activity had on this growth rate. Since the third quarter of 1997, average core deposits grew 8 percent (from $8.3 billion to $9.0 billion) and interest-bearing core deposits grew 4 percent (from $6.1 billion to $6.3 billion). Noninterest-bearing deposits grew 20 percent (from $2.2 billion to $2.7 billion) over this same period with growth in mortgage escrow balances accounting for 53 percent of this increase. Short-term purchased funds were up 67 percent (from $3.6 billion to $5.9 billion) from the previous year, and were primarily used to fund the growth in the mortgage warehouse. CAPITAL - ------- Total capital (shareholders' equity plus qualifying capital securities) at September 30, 1998, was $1.2 billion, up 14 percent from September 30, 1997. Shareholders' equity (excluding the qualifying capital securities) was $1.1 billion at September 30, 1998, an increase of 16 percent from $.9 billion at September 30, 1997. Average shareholders' equity increased 14 percent (from $.9 billion to $1.0 billion) since the third quarter of 1997. Despite the increase in shareholders' equity, the capital ratios declined as a result of the 25 percent increase in average assets driven by the 154 percent growth in the mortgage warehouse. The average total capital to average assets ratio was 6.55 percent and the average shareholders' equity to average assets ratio was 5.96 percent for the third quarter of 1998. This compares with 7.29 percent and 6.55 percent, respectively, for the third quarter of 1997. Excluding the effects of unrealized market valuations, the average total capital to average assets ratio would have been 6.46 percent and the average shareholders' equity to average assets ratio would have been 5.87 percent for the third quarter of 1998. At September 30, 1998, the corporation's Tier 1 capital ratio was 8.51 percent, the total capital ratio was 11.72 percent and the leverage ratio was 6.08 percent. On September 30, 1998, First Tennessee's bank affiliates had sufficient capital to qualify as well capitalized institutions. OFF-BALANCE SHEET ACTIVITY In the normal course of business, First Tennessee is a party to financial instruments that are not required to be reflected on a balance sheet. First Tennessee enters into transactions involving these instruments to meet the financial needs of its customers and manage its own exposure to fluctuations in interest rates. These instruments are categorized into "Lending related," "Mortgage banking," "Interest rate risk management," and "Capital markets" as noted in Table 8. 24 TABLE 8 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AT SEPTEMBER 30, 1998
(Dollars in millions) Notional value - ------------------------------------------------------------------------------------------------------------------------ LENDING RELATED: Commitments to extend credit: Consumer credit card lines $2,038.3 Consumer home equity 505.8 Commercial real estate and construction and land development 400.7 Mortgage banking 2,902.2 Other 1,815.3 Other commitments: Standby letters of credit 463.6 Commercial letters of credit 12.6 Foreign exchange contracts - net position .3 MORTGAGE BANKING: Mortgage pipeline and warehouse hedging: Interest rate contracts: Forward contracts - commitments to sell 3,514.9 Option contracts: Put options purchased* 55.0 Call options written 100.0 Servicing portfolio hedging: Interest rate contracts: Floors - purchased* 9,575.0 Floors - written 6,600.0 INTEREST RATE RISK MANAGEMENT: Interest rate contracts: Swaps - receive fixed/pay floating 617.0 Swaps - receive floating/pay floating 150.0 Caps - purchased 20.0 Caps - written 20.0 Equity contracts: Purchased options 1.9 CAPITAL MARKETS: Forward contracts: Commitments to buy 2,117.2 Commitments to sell 2,215.5 Securities underwriting commitments .2 - ----------------------------------------------------------------------------------------------------------------------
[FN] *Mortgage banking purchased interest rate contracts had a value of $172.2 million recognized in the Consolidated Statements of Condition at September 30, 1998. NINE MONTH REVIEW (comparison of first nine months of 1998 to first nine months of 1997) * Earnings for 1998 were $160.9 million, up 15 percent from last year's earnings of $139.6 million. * Diluted earnings per share (adjusted for the 1998 two-for-one stock split) were $1.22 in 1998, up 15 percent over the $1.06 earned in 1997. Basic earnings per share were $1.26 in 1998 and $1.09 in 1997. * Return on average shareholders' equity was 22.1 percent in 1998 compared with a return of 21.5 percent in 1997 and return on average assets was 1.35 percent in 1998 compared with 1.43 percent in 1997. The decline in the return on average assets was attributable to the 22 percent growth in average assets, of which 52 percent was in the mortgage warehouse. * Total revenues grew 29 percent with growth in fee income of 43 percent and growth in net interest income of 10 percent. Mortgage banking and capital markets led the increase in fee income with growth of 65 percent and 49 percent, respectively. * The consolidated net interest margin was 3.87 percent in 1998 compared with 4.25 percent in 1997. 25 INCOME STATEMENT REVIEW - ----------------------- Noninterest income, excluding securities gains and losses, increased 43 percent (from $473.4 million to $677.9 million) over the same period last year. Fee income represented 63 percent of total revenues during the first nine months of 1998 and 57 percent for the same period in 1997. Mortgage banking fee income grew 65 percent (from $227.5 million to $375.1 million). See Table 1 - Mortgage Banking for a breakout of noninterest income as well as mortgage banking origination volume and servicing portfolio levels. Fee income from capital markets increased 49 percent (from $69.4 million to $103.6 million) from 1997, reflecting a record nine-month period. The increase was principally due to strong performance in all offices, increased underwriting activity, customer base expansion and additional emphasis on short-term agency notes. For the first nine months of 1998, fee income in deposit transactions and cash management grew 5 percent (from $63.1 million to $66.1 million). The 29 percent increase in trust services and investment service fees (from $29.6 million to $38.1 million) was principally due to acquisition activity, increased assets under management and strong market performance. Merchant processing fees increased 7 percent (from $23.5 million to $25.0 million), and cardholder fees increased 6 percent (from $14.4 million to $15.3 million). All other income and commissions increased 19 percent (from $46.0 million to $54.7 million). Other service charges increased 44 percent (from $7.8 million to $11.2 million) and insurance premiums and commissions increased 22 percent (from $4.7 million to $5.7 million). Check clearing fees declined 35 percent (from $10.7 million to $7.0 million). The reasons for the year-to-date trends were similar to the quarterly trend information already discussed. Net interest income increased 10 percent (from $361.4 million to $397.0 million) from the first nine months of 1997. The year-to-date consolidated margin declined from 4.25 percent in 1997 to 3.87 in 1998, primarily from the build-up of the mortgage warehouse which produced 65 percent of the 20 percent increase in earning assets year-over-year. Growth in demand deposit accounts contributed to the year-to-date improvement in the regional banking group's margin from 4.67 percent in 1997 to 4.83 percent in 1998. The provision for loan losses increased 4 percent (from $37.8 million to $39.4 million) from the previous year. The increase reflects the change in loan mix due to securitizations, the inherent risk in the loan portfolio and a higher amount of allowance commensurate with loan growth. Noninterest expense increased 37 percent (from $570.5 million to $782.0 million) from the first nine months of 1997. Excluding the commission-based businesses of mortgage banking and capital markets, total noninterest expense increased 12 percent. Personnel expense, the largest category, increased 30 percent (from $300.2 million to $391.5 million). Excluding mortgage banking and capital markets, personnel expense increased 13 percent. Due to a larger servicing portfolio and higher prepayments, amortization expense of mortgage servicing rights increased 164 percent (from $26.9 million to $70.8 million). All other expense increased 53 percent (from $98.9 million to $150.9 million) primarily due to mortgage banking. Excluding this line of business, all other expense increased 11 percent over the same period last year. The reasons for the year-to-date trends were similar to the quarterly trend information already discussed. BALANCE SHEET REVIEW - -------------------- Average total assets grew 22 percent (from $13.1 billion to $16.0 billion) year over year. With the strong origination volume, the mortgage warehouse grew 167 percent (from $.9 billion to $2.4 billion) and accounted for over 50 percent of the growth in total assets. Total managed loans grew 9 percent (from $7.9 billion to $8.6 billion) from the first nine months of 1997. Average commercial loans increased 8 percent (from $3.6 billion to $3.9 billion), average managed consumer loans grew 9 percent (from $2.7 billion to $3.0 billion) and average credit card receivables grew 3 percent (from $.5 billion to $.6 billion). Managed permanent mortgages increased 7 percent (from $.6 billion to $.7 billion). Real estate construction loans grew 29 percent (from $.3 billion to $.4 billion), primarily due to growth in residential construction loans originated by mortgage banking. For a better understanding of the impact securitizations had on these growth trends refer to Table 6 - Selected Loans. Due to the securitization activity, average investment securities increased 10 percent (from $2.2 billion to $2.4 billion) from 1997. Table 7 - Investment Securities discloses the impact securitization activity had on this growth rate. 26 Average core deposits increased 8 percent (from $8.3 billion to $8.9 billion) and interest-bearing core deposits increased 4 percent (from $6.1 billion to $6.3 billion). Noninterest-bearing deposits increased 19 percent (from $2.2 billion to $2.6 billion). Short-term purchased funds increased 61 percent (from $3.2 billion to $5.2 billion) for the nine-month period, primarily funding the growth in the mortgage warehouse. YEAR 2000 - --------- Many computer programs were originally designed to store and process data using two digits rather than four to define a calendar year. Any of First Tennessee's programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This "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 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 must be Year 2000 compliant. Modifications to systems are made in the renovation phase. These modifications are then subjected to intensive testing during the next phase, the validation phase. Finally, after systems are adequately tested, the implementation phase begins. Training and product integration occur during this final phase to assure a smooth transition to the normal day-to-day operations. The completion of these phases is expected to occur early in 1999. As of September 30, 1998, First Tennessee had completed approximately 90 percent of renovation, 70 percent of validation and 65 percent of implementation for mission critical systems. For all systems, the completion status was approximately 85 percent renovated, 55 percent validated and 45 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 $35 million to $40 million, of which approximately $20 million had been incurred as of September 30, 1998, with approximately 70 percent of this being capitalized. Consistent with current corporate accounting policy, the capitalized costs will be amortized on a straight-line basis over a five-year period 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, 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 has 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 assessment process is expected to be completed early in 1999. While First Tennessee continues 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 prepare for the most significant potential risks from these external sources. The Office of the Comptroller of the Currency, which is our primary bank regulator, will be including a review of the risk assessments and contingency plans in its quarterly examination of Year 2000 preparedness. Our contingency plans will be 27 adapted to include such items as outsourcing options, business resumption plans for all of the business units, identifying alternative sources of liquidity, and evaluating alternative manual processes. The adaptation and testing of these contingency plans should be finalized early in 1999. The foregoing statements are forward looking. Actual results could differ because of several factors, including those set forth in the subsection entitled "Factors That May Affect Future Results and Financial Condition." Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------ The information called for by this item is incorporated herein by reference to Management's Discussion and Analysis included as Item 2 of Part I of this report and to Note 1 of the Consolidated Financial Statements and the "Risk Management-Interest Rate Risk Management" Subsection of the Management's Discussion and Analysis section contained in the Financial Information Appendix to the Corporation's proxy statement furnished to shareholders in connection with the Annual Meeting of Shareholders held on April 21, 1998, filed March 19, 1998. 28 Part II. OTHER INFORMATION Items 1, 3, and 4. - ------------------ As of the end of the third quarter, 1998, the answers to Items 1, 3, and 4 were either inapplicable or negative, and therefore, these items are omitted. Item 2 - Changes in Securities. - ------------------------------- On July 1, 1998, the Corporation acquired Keystone Mortgage, Inc. ("Keystone"), Kirkland, Washington, and merged Keystone with and into FT Mortgage Companies, an indirect, wholly-owned subsidiary of the Corporation. At closing, the Corporation acquired from the 16 shareholders of Keystone all 1,000 shares of Keystone's common stock, no par value, in exchange for an initial closing payment of 144,531 shares of the Corporation's common stock, $0.625 par value. An estimated 47,000 additional shares of the Corporation's common stock will be issued to the shareholders of Keystone during the fourth quarter of 1998 in payment of the balance of the acquisition price. No underwriter was involved in the transaction. The shares were sold in a private offering pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, based on the limited number of shareholders receiving the Corporation's common stock. Item 5 - Other Information. - --------------------------- The Securities and Exchange Commission ("SEC") amended its proxy rules, generally effective June 29, 1998, to require a disclosure in issuer proxy statements of the date after which notice of a shareholder proposal submitted outside the SEC Rule 14(a)-8 proxy rule process is considered untimely, either calculated in a manner provided by SEC rules or as established by an issuer's advance notice bylaw provision, if any. Under the Corporation's advance notice bylaw provision, which was amended by the Board of Directors of the Corporation on October 21, 1998, procedures must be followed by a shareholder desiring to submit an item for vote at a shareholder meeting. The notice required by the proxy rules, which reflects the amendment to the advance bylaw notice provision and updates the disclosure in the Corporation's March 20, 1998 Proxy Statement, is as follows: SHAREHOLDER PROPOSALS If you intend to present a shareholder proposal at the 1999 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 20, 1998, 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, which require a written notification to us, generally not less than 90 nor more than 120 days prior to the date of the shareholder meeting. If, however, we give fewer than 100 days' notice or prior 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. As provided in the Corporation's bylaws, the date and time of the annual meeting shall be the third Tuesday in April, or if that day is a legal holiday, on the next succeeding business day not a legal holiday, at 10:00 a.m. Memphis time or such other day and/or at such other time as the Board of Directors may fix by resolution. The meeting date for 1999, computed according to the bylaws, is April 20, 1999. 29 Item 6 - Exhibits and Reports on Form 8-K. - ------------------------------------------ (a) Exhibits.
Exhibit No. Description - ----------- ----------- 3(b) Bylaws, as amended. 4 Instruments defining the rights of security holders, including indentures.* 27 Financial Data Schedule (for SEC use only).
[FN] *The Corporation agrees to furnish copies of the instruments, including indentures, defining the rights of the holders of the long-term debt of the Corporation and its consolidated subsidiaries to the Securities and Exchange Commission upon request. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the third quarter of 1998. 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST TENNESSEE NATIONAL CORPORATION ------------------------------------ (Registrant) DATE: 11/12/98 By:Elbert L. Thomas Jr. --------------------- ------------------------------ Elbert L. Thomas Jr. Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 31 Exhibit Index
Exhibit No. Description - ----------- ----------- 3(b) Bylaws, as amended. 4 Instruments defining the rights of security holders, including indentures.* 27 Financial Data Schedule (for SEC use only).
[FN] *The Corporation agrees to furnish copies of the instruments, including indentures, defining the rights of the holders of the long-term debt of the Corporation and its consolidated subsidiaries to the Securities and Exchange Commission upon request. EX-3.B 2 BYLAWS AS AMMENDED 1 Exhibit 3(b) BYLAWS OF FIRST TENNESSEE NATIONAL CORPORATION (AS AMENDED AND RESTATED OCTOBER 21, 1998) ARTICLE ONE OFFICES 1.1 PRINCIPAL OFFICE. The principal office of First Tennessee National Corporation (the "Corporation") shall be 165 Madison Avenue, Memphis, Tennessee. 1.2 OTHER OFFICES. The Corporation may have offices at such other places, either within or without the State of Tennessee, as the Board of Directors may from time to time designate or as the business of the Corporation may from time to time require. 1.3 REGISTERED OFFICE. The registered office of the Corporation required to be maintained in the State of Tennessee shall be the same as its principal office and may be changed from time to time as provided by law. ARTICLE TWO SHAREHOLDERS 2.1 PLACE OF MEETINGS. Meetings of the shareholders of the Corporation may be held either in the State of Tennessee or elsewhere; but in the absence of notice to the contrary, shareholders' meetings shall be held at the principal office of the Corporation in Memphis, Tennessee. 2.2 QUORUM AND ADJOURNMENTS. The holders of a majority of the shares issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite, and shall constitute a quorum at all meetings of the shareholders, for the transaction of business, except as otherwise provided by law, the Restated Charter of the Corporation, as amended from time to time (the "Charter), or these Bylaws. In the event a quorum is not obtained at the meeting, the holders of a majority of the shares entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time and, whether or not a quorum is obtained at the meeting, the Chairman of the meeting shall have the power to adjourn the meeting from time to time, in either case without notice, except as otherwise provided by law, other than announcement at the meeting. At such adjourned meeting at which the requisite amount of voting shares shall be represented, any business may be transacted which might have been transacted at the meeting as originally notified. 2.3 NOTICE OF MEETINGS. Unless otherwise required by applicable law, written notice of the annual and each special meeting stating the date, time and place of the meeting shall be mailed, postage prepaid, or otherwise delivered to each shareholder entitled to vote thereat at such address as appears on the records of shareholders of the Corporation, at least ten (10) days, but not more than two (2) months, prior to the meeting date. In addition, notice of any special meeting shall state the purpose or purposes for which the meeting is called and the person or persons calling the meeting. In the event of an adjournment of a meeting to a date more than four months after the date fixed for the original meeting or the Board of Directors fixes a new record date for the adjourned meeting, a new notice of the adjourned meeting must be given to shareholders as of the new record date. Any previously scheduled meeting may be postponed, and any special meeting may be canceled, by resolution of the Board of Directors upon public notice given prior to the date scheduled for such meeting. 2.4 ANNUAL MEETINGS. The annual meeting of shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year on the third Tuesday in April, or if that day is a legal holiday, on the next succeeding business day not a legal holiday, at 10:00 a.m. Memphis time or on such other date and/or at such other time as the Board of Directors may fix by resolution by vote of a majority of the entire Board of Directors. At the meeting, the shareholders shall elect by ballot, by plurality vote, 1 2 directors to succeed directors in the class of directors whose term expires at the meeting and directors elected by the Board of Directors to fill vacancies in other classes of directors and may transact such other business as may properly come before the meeting. 2.5 SPECIAL MEETINGS. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by statute, may be called by Chairman of the Board and shall be called by the Chairman of the Board or the Secretary at the request in writing of a majority of the Board of Directors. Only such business within the purpose or purposes described in the notice of the meeting may be conducted at the meeting. 2.6 WAIVER OF NOTICE. Any shareholder may waive in writing notice of any meeting either before, at or after the meeting. Attendance by a shareholder in person or by proxy at a meeting shall constitute a waiver of objection to lack of notice or defective notice and a waiver of objection to consideration of a matter that was not described in the meeting notice unless the shareholder objects in the manner required by law. 2.7 VOTING. Unless otherwise required by the Charter, at each meeting of shareholders, each shareholder shall have one vote for each share of stock having voting power registered in the shareholder's name on the records of the Corporation on the record date for that meeting, and every shareholder having the right to vote shall be entitled to vote in person or by proxy appointed by instrument in writing or any other method permitted by law. 2.8 PROCEDURES FOR BRINGING BUSINESS BEFORE SHAREHOLDER MEETING. At an annual or special meeting of shareholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before an annual or special meeting of shareholders. To be properly brought before an annual or special meeting of shareholders, business must be (i) in the case of a special meeting called by the Chairman of the Board or at the request of the Board of Directors, specified in the notice of the special meeting (or any supplement thereto), or (ii) in the case of an annual meeting properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before the annual or special meeting by a shareholder. For business to be properly brought before such a meeting of shareholders by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days nor more than 120 days prior to the date of the meeting; provided, however, that if fewer than 100 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholders to be timely must be so delivered or received not later than the close of business on the 10th day following the earlier of (i) the day on which such notice of the date of such meeting was mailed or (ii) the day on which such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before a meeting of shareholders (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business and any other shareholders known by such shareholder to be supporting such proposal, (iii) the class and number of shares of the Corporation which are beneficially owned by such shareholder on the date of such shareholder's notice and by any other shareholders known by such shareholder to be supporting such proposal on the date of such shareholder's notice, and (iv) any material interest of the shareholder in such proposal. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at a meeting of shareholders except in accordance with the procedures set forth in this Section 2.8. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting in accordance with the procedures prescribed by these Bylaws, and if the Chairman should so determine, the Chairman shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 2.9 SEC PROXY RULES. In addition to complying with the provisions of Section 2.8, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder with respect to the matters set forth in Section 2.8. Nothing in Section 2.8 shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to rules of the Securities and Exchange Commission. For such proposals to be acted upon at a meeting, however, compliance with the notice provisions of Section 2.8 is also required. 2 3 ARTICLE THREE DIRECTORS 3.1 POWERS OF DIRECTORS. The business and affairs of the Corporation shall be managed under the direction of and all corporate powers shall be exercised by or under the authority of the Board of Directors. 3.2 NUMBER AND QUALIFICATIONS. The Board of Directors shall consist of 12 members. The Board of Directors has the power to change from time to time the number of directors specified in the preceding sentence. Any such change in the number of directors constituting the Corporation's Board Directors must be made exclusively by means of an amendment to these Bylaws adopted by a majority of the entire Board of Directors then in office. Directors need not be shareholders of the Corporation nor residents of the State of Tennessee. 3.3 TERM OF OFFICE. Except as otherwise provided by law or by the Charter, the term of each director hereafter elected shall be from the time of his or her election and qualification until the third annual meeting next following such election and until a successor shall have been duly elected and qualified; subject, however, to the right of the removal of any director as provided by law, by the Charter or by these Bylaws. 3.4 COMPENSATION. The directors shall be paid for their services on the Board of Directors and on any Committee thereof such compensation (which may include cash, shares of stock of the Corporation and options thereon) and benefits together with reasonable expenses, if any, at such times as may, from time to time, be determined by resolution adopted by a majority of the entire Board of Directors; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and being compensated therefor. 3.5 COMMITTEES. The directors, by resolution adopted by a majority of the entire Board of Directors, may designate an executive committee and other committees, consisting of two or more directors, and may delegate to such committee or committees all such authority of the Board of Directors that it deems desirable, including, without limitation, authority to appoint corporate officers, fix their salaries, and, to the extent such is not provided by law, the Charter or these Bylaws, to establish their authority and responsibility, except that no such committee or committees shall have and exercise the authority of the Board of Directors to: (a) authorize distributions (which include dividend declarations), except according to a formula or method prescribed by the Board of Directors, (b) fill vacancies on the Board of Directors or on any of its committees, (c) adopt, amend or repeal bylaws, (d) authorize or approve the reacquisition of shares, except according to a formula or method prescribed by the Board of Directors, or (e) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board of Directors may authorize a committee to do so within limits specifically prescribed by the Board of Directors. 3.6 PROCEDURES FOR DIRECTOR NOMINATIONS. Except as provided in Section 3.7 with respect to vacancies on the Board of Directors, only persons nominated in accordance with the procedures set forth in this Section 3.6 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors may be made at a meeting of shareholders (i) by or at the direction of the Board of Directors, or (ii) by any shareholder of the Corporation entitled to vote for the election of directors at such meeting who complies with the notice procedures set forth in this Section 3.6. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days nor more 3 4 than 120 days prior to the date of a meeting; provided, however, that if fewer than 100 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so delivered or received not later than the close of business on the 10th day following the earlier of (i) the day on which such notice of the date of such meeting was mailed or (ii) the day on which such public disclosure was made. A shareholder's notice to the Secretary shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a director (a) the name, age, business address and residence address of such person, (b) the principal occupation or employment of such person, (c) the class and number of shares of the Corporation which are beneficially owned by such person on the date of such shareholder's notice and (d) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors or, is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the shareholder giving the notice (a) the name and address, as they appear on the Corporation's books, of such shareholder and any other shareholders known by such shareholder to be supporting such nominees and (b) the class and number of shares of the Corporation which are beneficially owned by such shareholder on the date of such shareholder's notice and by any other shareholders known by such shareholder to be supporting such nominees on the date of such shareholder's notice. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3.6. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if the Chairman should so determine, the Chairman shall so declare to the meeting and the defective nomination shall be disregarded. 3.7 VACANCIES; REMOVAL FROM OFFICE. Except as otherwise provided by law or by the Charter, newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification or any other cause (except removal from office) shall be filled only by the Board of Directors, provided that a quorum is then in office and present, or only by a majority of the directors then in office, if less than a quorum is then in office or by the sole remaining director. Any vacancies on the Board of Directors resulting from removal from office may be filled by the affirmative vote of the holders of at least a majority of the voting power of all outstanding voting stock or, if the shareholders do not so fill such a vacancy, by a majority of the directors then in office. Directors elected to fill a newly created directorship or other vacancy shall hold office for a term expiring at the next shareholders' meeting at which directors are elected and until such director's successor has been duly elected and qualified. The directors of any class of directors of the Corporation may be removed by the shareholders only for cause by the affirmative vote of the holders of at least a majority of the voting power of all outstanding voting stock. 3.8 PLACE OF MEETINGS. The directors may hold meetings of the Board of Directors or of a committee thereof at the principal office of the Corporation in Memphis, Tennessee, or at such other place or places, either in the State of Tennessee or elsewhere, as the Board of Directors or the members of the committee, as applicable, may from time to time determine by resolution or by written consent or as may be specified in the notice of the meeting. 3.9 QUORUM. A majority of the directors shall constitute a quorum for the transaction of business, but a smaller number may adjourn from time to time, without further notice, if the time and place to which the meeting is adjourned are fixed at the meeting at which the adjournment is taken and if the period of adjournment does not exceed thirty (30) days in any one (1) adjournment. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the vote of a greater number is required by law, the Charter, or these Bylaws. 3.10 REGULAR MEETINGS. Following each annual meeting of shareholders, the newly elected directors, together with the incumbent directors whose terms do not expire at such meeting, shall meet for the purpose of organization, the appointment of officers and the transaction of other business, and, if a majority of the directors be present at such place, day and hour, no prior notice of such meeting shall be required to be given to the directors. The place, day and hour of such meeting may also be fixed by resolution or by written consent of the directors. In addition, the Board of Directors may approve an annual schedule for additional regular meetings of the Board of Directors and of committees thereof. 4 5 3.11 SPECIAL MEETINGS. Special meetings of the directors may be called by the Chairman of the Board, the Chief Executive Officer, or the President (or as to any committee of the Board of Directors, by the person or persons specified in the resolution of the Board of Directors establishing the committee) on two days' notice by mail or on one day's notice by telegram or cablegram, or on two hours' notice given personally or by telephone or facsimile transmission to each director (or member of the committee, as appropriate), and shall be called by the Chairman of the Board or Secretary in like manner on the written request of a majority of directors then in office. The notice shall state the day and hour of the meeting and the place where the meeting is to be held. Special meetings of the directors may be held at any time on written waiver of notice or by consent of all the directors, either of which may be given either before, at or after the meeting. 3.12 ACTION WITHOUT A MEETING. The directors may (whether acting in lieu of a meeting of the Board of Directors or of a committee thereof) take action which they are required or permitted to take, without a meeting, on written consent setting forth the action so taken, signed by all of the directors entitled to vote thereon. If all the directors entitled to vote consent to taking such action without a meeting, the affirmative vote of the number of directors necessary to authorize or take such action at a meeting is the act of the Board of Directors or committee, as appropriate. 3.13 TELEPHONE MEETINGS. Directors may participate in a meeting of the Board of Directors or of a committee thereof by, or conduct a meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director so participating is deemed to be present in person at such meeting. ARTICLE FOUR OFFICERS 4.1 DESIGNATED OFFICERS. The officers of the Corporation shall consist of a Chairman of the Board, a Chief Executive Officer, a President, such number of Vice Chairmen as the Board may from time to time determine and appoint, an Auditor, a Chief Credit Officer, a Chief Financial Officer, a Controller, a General Counsel, a Manager of Risk Management, a Personnel Division Manager, a Secretary, and a Treasurer, and such number of Executive Vice Presidents, Senior Vice Presidents and Vice Presidents and such other Officers and assistant Officers as may be from time to time determined and appointed in accordance with the provisions of this Article Four. The title of any officer may include any additional descriptive designation determined to be appropriate. Any person may hold two or more offices, except that the President shall not also be the Secretary or an Assistant Secretary. The officers, other than the Chairman of the Board, need not be directors, and officers need not be shareholders. 4.2 APPOINTMENT OF OFFICERS. Except as otherwise provided in this Section 4.2, the officers of the Corporation shall be appointed by the Board of Directors at the annual organizational meeting of the Board of Directors following the annual meeting of shareholders. The Board of Directors may delegate to a committee of the Board of Directors the power to create corporate offices, define the authority and responsibility of such offices, except to the extent such authority or responsibility would not be consistent with the law or the Charter, and to appoint persons to any office of the Corporation except the offices of the Chairman of the Board, Chief Executive Officer, and President, any office the incumbent in which is designated by the Board as an Executive Officer (as defined in Section 4.5 hereof), and, upon the recommendation of the Audit Committee, the Auditor. In addition, the Board of Directors may delegate to the officers appointed to the Corporation's personnel committee, acting as a committee, the authority to appoint persons to any offices of the Corporation of the level of Vice President and below annually at the personnel committee meeting following the annual meeting of shareholders and to appoint persons to any office of the Corporation of the level of Senior Vice President and below during the period of time between the annual appointment of officers by the Board of Directors or pursuant to this section 4.2 of the Bylaws. Notwithstanding the delegation of authority pursuant to this section 4.2 of the Bylaws, the Board of Directors retains the authority to appoint all officers and such other officers and agents as it shall deem necessary, who shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. 5 6 4.3 TERM. The officers of the Corporation shall be appointed for a term of one (1) year and until their successors are appointed and qualified, subject to the right of removal specified in Section 4.4 of these Bylaws. The designation of a specified term does not grant to any officer any contract rights. 4.4 VACANCIES, RESIGNATIONS AND REMOVAL. If the office of any officer or officers becomes vacant for any reason, the vacancy may be filled by the Board of Directors or, if such officer was appointed by a committee, by the committee appointing such officer. Any officer may resign at any time by delivering a written notice to the Chairman of the Board, Chief Executive Officer, President, Secretary, or Personnel Division Manager of the Corporation, or the designee of any of them, which shall be effective upon delivery unless it specifies a later date acceptable to the Corporation. Any officer designated by the Board as an Executive Officer shall be subject to removal at any time with or without cause only by the affirmative vote of a majority of the Board of Directors. The Auditor shall be subject to removal at any time with or without cause only by the affirmative vote of a majority of the Board of Directors, upon the recommendation of the Audit Committee. Any other officer shall be subject to removal at any time with or without cause by the affirmative vote of a majority of the Board of Directors, and in the event the officer was, or could have been, appointed by a committee, then by the affirmative vote of a majority of either such committee or the Board of Directors. 4.5 COMPENSATION. The Board of Directors, or a committee thereof, shall fix the compensation of Executive Officers (as defined herein) of the Corporation. "Executive Officers" shall be those officers of the Corporation identified as such from time to time in a resolution or resolutions of the Board of Directors. The compensation of officers who are not Executive Officers shall be fixed by the Board of Directors, by a committee thereof, or by management under such policies and procedures as shall be established by the Board of Directors or a committee thereof. 4.6 DELEGATION OF OFFICER DUTIES. In case of the absence of any officer of the Corporation, or for any reason that the Board of Directors (or, in addition, in the case of any officer appointed by a committee, such committee or any other committee which could appoint such officer pursuant to Section 4.2 of these Bylaws) may deem sufficient, the Board of Directors (or committee, as applicable) may delegate, for the time being, the powers or duties, or any of them, of such officer to any other officer, or to any director. 4.7 CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the shareholders and of the Board of Directors and shall have such powers and perform such duties as may be provided for herein and as are normally incident to the office and as may be assigned by the Board of Directors. If and at such times as the Board of Directors so determines, the Chairman of the Board may also serve as the Chief Executive Officer of the Corporation. 4.8 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer, in the absence of the Chairman of the Board, shall preside at all meetings of the shareholders and of the Board of Directors. The Chief Executive Officer shall be responsible for carrying out the orders of and the resolutions and policies adopted by the Board of Directors and shall have general management of the business of the Corporation and shall exercise general supervision over all of its affairs. In addition, the Chief Executive Officer shall have such powers and perform such duties as may be provided for herein and as are normally incident to the office and as may be prescribed by the Board of Directors. If and at such time as the Board of Directors so determines, the Chief Executive Officer may also serve as the President of the Corporation. 4.9 PRESIDENT. The President, in the absence of the Chairman of the Board and the Chief Executive Officer, shall preside at all meetings of the shareholders and of the Board of Directors. The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors has appointed another person to such office, in which case the President shall be the Chief Operating Officer of the Corporation and shall have such powers and perform such duties as may be provided for herein and as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer. 6 7 4.10 VICE CHAIRMEN. Vice Chairmen shall perform such duties and exercise such powers as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer. 4.11 CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall be the principal financial officer of the Corporation. The Chief Financial Officer is authorized to sign any document filed with the Securities and Exchange Commission or any state securities commission on behalf of the Corporation and shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer. 4.12 CHIEF CREDIT OFFICER. The Chief Credit Officer shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer. 4.13 GENERAL COUNSEL. The General Counsel shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer. 4.14 PERSONNEL DIVISION MANAGER. The Personnel Division Manager shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer. 4.15 MANAGER OF RISK MANAGEMENT. The Manager of Risk Management shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors, the Chairman of the Board, or the Chief Executive Officer. 4.16 EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND VICE PRESIDENTS. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents shall perform such duties and exercise such powers as may be prescribed by the Board of Directors, a committee thereof, the personnel committee, the Chairman of the Board, or the Chief Executive Officer. 4.17 SECRETARY. The Secretary shall attend all sessions of the Board of Directors and of the shareholders and record all votes and the minutes of all proceedings in books to be kept for that purpose. The Secretary shall give or cause to be given notice of all meetings of the shareholders and of the Board of Directors, shall authenticate records of the Corporation, and shall perform such other duties as are incident to the office or as may be prescribed by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. In the absence or disability of the Secretary, the Assistant Secretary or such other officer or officers as may be authorized by the Board of Directors or Executive Committee thereof shall perform all the duties and exercise all of the powers of the Secretary and shall perform such other duties as the Board of Directors, Chairman of the Board or the Chief Executive Officer shall prescribe. 4.18 TREASURER. The Treasurer shall have the custody of the funds and securities of the Corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, or the President, taking proper vouchers for such disbursements, and shall render to the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, or the President, whenever they may require it, an account of all of his or her transactions as Treasurer and of the financial condition of the Corporation, and at a regular meeting of the Board of Directors preceding the annual shareholders' meeting, a like report for the preceding year. The Treasurer shall keep or cause to be kept an account of stock registered and transferred in such manner and subject to such regulations as the Board of Directors may prescribe. The Treasurer shall give the Corporation a bond, if required by the Board of Directors, in such a sum and in form and with security satisfactory to the Board of Directors for the faithful performance of the duties of the office and the restoration to the Corporation, 7 8 in case of his or her death, resignation or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession, belonging to the Corporation. The Treasurer shall perform such other duties as the Board of Directors may from time to time prescribe or require. In the absence or disability of the Treasurer, the Assistant Treasurer shall perform all the duties and exercise all of the powers of the Treasurer and shall perform such other duties as the Board of Directors, the Chairman of the Board, or the Chief Executive Officer shall prescribe. 4.19 AUDITOR. The Auditor shall perform such duties and exercise such powers as are normally incident to the office and as may be prescribed by the Board of Directors or the Chairman of the Audit Committee. 4.20 CONTROLLER. The Controller shall be the principal accounting officer of the Corporation. The Controller is authorized to sign any document filed with the Securities and Exchange Commission or any state securities commission on behalf of the Corporation and shall assist the management of the Corporation in setting the financial goals and policies of the Corporation, shall provide financial and statistical information to the shareholders and to the management of the Corporation and shall perform such other duties and exercise such other powers as may be prescribed by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President. In the absence or disability of the Controller, the Assistant Controller shall perform all the duties and exercise all powers of the Controller and shall perform such duties as the Board of Directors or the Chairman of the Board or the Chief Executive Officer shall prescribe. 4.21 OTHER OFFICERS. Officers holding such other offices as may be created pursuant to Sections 4.1 and 4.2 of these Bylaws shall have such authority and perform such duties and exercise such powers as may be prescribed by the Board of Directors, a committee thereof, the personnel committee, the Chairman of the Board or the Chief Executive Officer. 4.22 OFFICER COMMITTEES. The directors, by resolution adopted by a majority of the entire Board of Directors, may designate one or more committees, consisting of two or more officers, and may delegate to such committee or committees all such authority that the Board of Directors deems desirable that is permitted by law. Members of such committees may take action without a meeting and may participate in meetings to the same extent and in the same manner that directors may take action and may participate pursuant to Sections 3.12 and 3.13 of these Bylaws. ARTICLE FIVE SHARES OF STOCK 5.1 CERTIFICATES. The certificates representing shares of stock of the Corporation shall be numbered, shall be entered in the books or records of the Corporation as they are issued, and shall be signed by the Chairman of the Board or the Chief Executive Officer and any one of the following: the President, the Treasurer, or the Secretary. Either or both of the signatures upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar other than an officer or employee of the Corporation. Each certificate shall include the following upon the face thereof: (a) A statement that the Corporation is organized under the laws of the State of Tennessee; (b) The name of the Corporation; (c) The name of the person to whom issued; (d) The number and class of shares, and the designation of the series, if any, which such certificate represents; (e) The par value of each share represented by such certificate; or a statement that the shares are without par value; and 8 9 (f) Such other provisions as the Board of Directors may from time to time require. 5.2 SHARES NOT REPRESENTED BY CERTIFICATES. Notwithstanding the provisions of Section 5.1 of these Bylaws, the Board of Directors may authorize the issuance of some or all of the shares of any class without certificates. The Corporation shall send to each shareholder to whom such shares have been issued or transferred at the appropriate time any written statement providing information about such shares, which is required by law. 5.3 STOCK TRANSFERS AND RECORD DATES. Transfers of shares of stock shall be made upon the books of the Corporation by the record owner or by an attorney, lawfully constituted in writing, and upon surrender of any certificate therefor. The Board of Directors may appoint suitable agents in Memphis, Tennessee, and elsewhere to facilitate transfers by shareholders under such regulations as the Board of Directors may from time to time prescribe. The transfer books may be closed by the Board of Directors for such period, not to exceed 40 days, as may be deemed advisable for dividend or other purposes, or in lieu of closing the books, the Board of Directors may fix in advance a date as the record date for determining shareholders entitled notice of and to vote at a meeting of shareholders, or entitled to payment of any dividend or other distribution. The record date for voting or taking other action as shareholders shall not be less than 10 days nor more than 70 days prior to the meeting date or action requiring such determination of shareholders. The record date for dividends and other distributions shall not be less than 10 days prior to the payment date of the dividend or other distribution. All certificates surrendered to the Corporation for transfer shall be canceled, and no new certificate shall be issued until the former certificate for like number of shares shall have been surrendered and canceled, except that in case of a lost or destroyed certificate a new one may be issued on the terms prescribed by Section 5.5 of these Bylaws. 5.4 RECORD OWNERS. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof; and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as required by applicable law. 5.5 LOST, DESTROYED, STOLEN OR MUTILATED CERTIFICATES. The agent for transfer of the Corporation's stock may issue new share certificates in place of certificates represented to have been lost, destroyed, stolen or mutilated upon receiving an indemnity satisfactory to the agent and the Secretary or Treasurer of the Corporation, without further action of the Board of Directors. ARTICLE SIX INDEMNIFICATION 6.1 INDEMNIFICATION OF OFFICERS WHEN WHOLLY SUCCESSFUL. If any current or former officer of the Corporation [including for purposes of this Article an individual who, while an officer, is or was serving another corporation or other enterprise (including an employee benefit plan and a political action committee, which serves the interests of the employees of the Corporation or any of its subsidiaries) in any capacity at the request of the Corporation and unless the context requires otherwise the estate or personal representative of such officer] is wholly successful, on the merits or otherwise, in the defense of any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal ("Proceeding"), to which the officer was a party because he or she is or was an officer of the Corporation, the officer shall be indemnified by the Corporation against all reasonable expenses, including attorney fees, incurred in connection with such Proceeding, or any appeal therein. 6.2 INDEMNIFICATION OF OFFICERS WHEN NOT WHOLLY SUCCESSFUL. If any current or former officer of the Corporation has not been wholly successful on the merits or otherwise, in the defense of a Proceeding, to which the officer was or was threatened to be made a party because he or she was or is an officer, the officer shall be indemnified by the Corporation against any judgment, settlement, penalty, fine (including any excise tax assessed with respect to an employee benefit plan), or other liability and any reasonable expenses, including attorney fees, incurred as a result of such Proceeding, or any appeal therein, if authorized in the specific case after a determination has been made that indemnification is permissible because the following standard of conduct has been met: 9 10 (a) The officer conducted himself or herself in good faith, and (b) The officer reasonably believed: (i) in the case of conduct in the officer's official capacity as an officer of the Corporation that the officer's conduct was in the Corporation's best interest; and (ii) in all other cases that the officer's conduct was at least not opposed to its best interests; and (c) In the case of any criminal proceeding, the officer had no reasonable cause to believe his or her conduct was unlawful; provided, however, the Corporation may not indemnify an officer in connection with a Proceeding by or in the right of the Corporation in which the officer was adjudged liable to the Corporation or in connection with any other proceeding charging improper benefit to the officer, whether or not involving action in his or her official capacity, in which the officer was adjudged liable on the basis that personal benefit was improperly received by the officer. 6.3 PROCEDURES FOR INDEMNIFICATION DETERMINATIONS. The determination required by Section 6.2 herein shall be made as follows: (a) By the Board of Directors by a majority vote of a quorum consisting of directors not at the time parties to the Proceeding; (b) If a quorum cannot be obtained, by majority vote of a committee duly designated by the Board of Directors (in which designation directors who are parties may participate) consisting solely of two or more directors not at the time parties to the Proceeding; (c) By independent special legal counsel: (i) selected by the Board of Directors or its committee in the manner prescribed in subsection (a) or (b); or (ii) if a quorum of the Board of Directors cannot be obtained under subsection (a) and a committee cannot be designated under subsection (b), selected by majority vote of the full Board of Directors (in which selection directors who are parties may participate); or, if a determination pursuant to subsections (a), (b), or (c) of this Section 6.3 cannot be obtained, then (d) By the shareholders, but shares owned by or voted under the control of directors who are at the time parties to the Proceeding may not be voted on the determination. 6.4 SERVING AT THE REQUEST OF THE CORPORATION. An officer of the Corporation shall be deemed to be serving another corporation or other enterprise or employee benefit plan or political action committee at the request of the Corporation only if such request is reflected in the records of the Board of Directors or a committee appointed by the Board of Directors for the purpose of making such requests. Approval by the Board of Directors, or a committee thereof, may occur before or after commencement of such service by the officer. 6.5 ADVANCEMENT OF EXPENSES. The Corporation shall pay for or reimburse reasonable expenses, including attorney fees, incurred by an officer who is a party to a Proceeding in advance of the final disposition of the Proceeding if: (a) The officer furnishes to the Corporation a written affirmation of the officer's good faith belief that the officer has met the standard of conduct described in Section 6.2 herein; (b) The officer furnishes to the Corporation a written undertaking, executed personally or on behalf of the officer, to repay the advance if it is ultimately determined that the officer is not entitled to indemnification; and (c) A determination is made that the facts then known to those making the determination would not preclude indemnification under this bylaw. 10 11 6.6 UNDERTAKING REQUIRED FOR EXPENSES. The undertaking required by Section 6.5 herein must be an unlimited general obligation of the officer but need not be secured and may be accepted without reference to financial ability to make repayment. 6.7 PROCEDURES FOR EXPENSE DETERMINATIONS. Determinations and authorizations of payments under Section 6.5 herein shall be made in the same manner as is specified in Section 6.3 herein. 6.8 INDEMNIFICATION OF EMPLOYEES AND FORMER DIRECTORS. Every employee and every former director of the Corporation shall be indemnified by the Corporation to the same extent as officers of the Corporation. 6.9 NONEXCLUSIVITY OF RIGHT OF INDEMNIFICATION. The right of indemnification set forth above shall not be deemed exclusive of any other rights, including, but not limited to, rights created pursuant to Section 6.11 of these Bylaws, to which an officer, employee, or former director seeking indemnification may be entitled. No combination of rights shall permit any officer, employee or former director of the Corporation to receive a double or greater recovery. 6.10 MANDATORY INDEMNIFICATION OF DIRECTORS AND DESIGNATED OFFICERS. The Corporation shall indemnify each of its directors and such of the non-director officers of the Corporation or any of its subsidiaries as the Board of Directors may designate, and shall advance expenses, including attorney's fees, to each director and such designated officers, to the maximum extent permitted (or not prohibited) by law, and in accordance with the foregoing, the Board of Directors is expressly authorized to enter into individual indemnity agreements on behalf of the Corporation with each director and such designated officers which provide for such indemnification and expense advancement and to adopt resolutions which provide for such indemnification and expense advancement. 6.11 INSURANCE. Notwithstanding anything in this Article Six to the contrary, the Corporation shall have the additional power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation, or who, while a director, officer, employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, political action committee, or other enterprise, against liability asserted against or incurred by the person in that capacity or arising from the person's status as a director, officer, employee, or agent, whether or not the Corporation would have the power to indemnify the person against the same liability. ARTICLE SEVEN RETIREMENT 7.1 NON-EMPLOYEE DIRECTORS. Directors who are not also officers of the Corporation or its affiliates shall be retired from the Board of Directors as follows: (a) Any director who shall attain the age of sixty-five (65) on or before the last day of the term for which he or she was elected shall not be nominated for re-election and shall be retired from the Board of Directors at the expiration of such term. (b) For the purpose of maintaining boards of active business and professional persons, directors leaving the occupation or the position held at their last election (by retirement or otherwise) will be expected to tender their resignation from the Board of Directors upon such occasion. A resignation will ordinarily be accepted unless (i) the director assumes another management position deemed appropriate by the Board of Directors for continuation, or (ii) the director is so engaged in some specific project for the Board of Directors as to make his or her resignation detrimental to the Corporation. Under this circumstance, the Board of Directors may elect to set a subsequent date for his or her retirement to coincide with the completion of the project. Directors who are also officers of the Corporation or any of its affiliates will be retired from the Board of Directors on 11 12 the date of the annual meeting coincident with or next following the date of the director's retirement from or other discontinuation of active service with the Corporation and its affiliates. 7.2 OFFICERS AND EMPLOYEES. Except as provided in the following sentence, the Corporation has no compulsory retirement age for its officers or employees. Each officer or employee who has attained 65 years of age and who, for the two-year period immediately before attaining such age, has been employed in a "bona fide executive" or a "high policy-making" position as those terms are used and defined in the Age Discrimination in Employment Act, Section 12(c), and the regulations relating to that section prescribed by the Equal Employment Opportunity Commission, all as amended from time to time (collectively, the "ADEA"), shall automatically be terminated by way of compulsory retirement and his or her salary discontinued on the first day of the month coincident with or immediately following the 65th birthday, provided such employee is entitled to an immediate nonforfeitable annual retirement benefit, as specified in the ADEA, in the aggregate amount of at least $44,000. Notwithstanding the prior sentence, the Board of Directors, in its discretion, may continue any such officer or employee in service and designate the capacity in which he or she shall serve, and shall fix the remuneration he or she shall receive. The Board of Directors may also re-employ any former officer who had theretofore been retired. ARTICLE EIGHT EXECUTION OF DOCUMENTS 8.1 DEFINITION OF "DOCUMENT." For purposes of this Article Eight of the Bylaws, the term "document" shall mean a document of any type, including, but not limited to, an agreement, contract, instrument, power of attorney, endorsement, assignment, transfer, stock or bond power, deed, mortgage, deed of trust, lease, indenture, conveyance, proxy, waiver, consent, certificate, declaration, receipt, discharge, release, satisfaction, settlement, schedule, account, affidavit, security, bill, acceptance, bond, undertaking, check, note or other evidence of indebtedness, draft, guaranty, letter of credit, and order. 8.2 EXECUTION OF DOCUMENTS. Except as expressly provided in Section 5.1 of these Bylaws (with respect to signatures on certificates representing shares of stock of the Corporation), the Chairman of the Board, the Chief Executive Officer, the President, any Vice Chairman, any Executive Vice President, any Senior Vice President, any Vice President, the Chief Financial Officer, the Chief Credit Officer, the General Counsel, the Personnel Division Manager, the Manager of Risk Management, the Controller, the Treasurer, the Secretary, and any other officer, or any of them acting individually, may (i) execute and deliver in the name and on behalf of the Corporation or in the name and on behalf of any division or department of the Corporation any document pertaining to the business, affairs, or property of the Corporation or any division or department of the Corporation, and (ii) delegate to any other officer, employee or agent of the Corporation the power to execute and deliver any such document. In addition, the President - Tennessee Banking, the President - Memphis Banking, and the Group Manager - Money Management of First Tennessee Bank National Association (the "Bank"), the principal subsidiary of the Corporation, or any of them acting individually, may, as agent of the Corporation, execute and deliver in the name and on behalf of the Corporation any such document. 8.3 METHOD OF EXECUTION BY SECRETARY. Unless otherwise required by law, the signature of the Secretary on any document may be a facsimile. ARTICLE NINE EMERGENCY BYLAWS 9.1 DEFINITION OF EMERGENCY. The provisions of this Article Nine shall be effective only during an "emergency." An "emergency" shall be deemed to exist whenever any two of the officers identified in Section 9.2 of these Bylaws in good faith determine that a quorum of the directors cannot readily be assembled because of a catastrophic event. 9.2 NOTICE OF MEETING. A meeting of the Board of Directors may be called by any one director or by any 12 13 one of the following officers: Chairman of the Board, Chief Executive Officer, President, any Vice Chairman, any Executive Vice President, Chief Credit Officer, Chief Financial Officer, Controller, General Counsel, Manager of Risk Management, Personnel Division Manager, or Secretary. Notice of such meeting need be given only to those directors whom it is practical to reach by any means the person calling the meeting deems feasible, including, but not limited to, by publication and radio. Such notice shall be given at least two hours prior to commencement of the meeting. 9.3 QUORUM AND SUBSTITUTE DIRECTORS.. If a quorum has not been obtained, then one or more officers of the Corporation or the Bank present at the emergency meeting of the Board of Directors, as are necessary to achieve a quorum, shall be considered to be substitute directors for purposes of the meeting, and shall serve in order of rank, and within the same rank in order of seniority determined by hire date by the Corporation, the Bank or any of their subsidiaries. In the event that less than a quorum of the directors (including any officers who serve as substitute directors for the meeting) are present, those directors present (including such officers serving as substitute directors) shall constitute a quorum. 9.4 ACTION AT MEETING. The Board as constituted pursuant to Section 9.3 and after notice has been provided pursuant to Section 9.2 may take any of the following actions: (i) prescribe emergency powers of the Corporation, (ii) delegate to any officer or director any of the powers of the Board of Directors, (iii) designate lines of succession of officers and agents in the event that any of them are unable to discharge their duties, (iv) relocate the principal office or designate alternative or multiple principal offices, and (v) take any other action that is convenient, helpful, or necessary to carry on the business of the Corporation. 9.5 EFFECTIVENESS OF NON-EMERGENCY BYLAWS. All provisions of these Bylaws not contained in this Article Nine, which are consistent with the emergency bylaws contained in Article Nine, shall remain effective during the emergency. 9.6 TERMINATION OF EMERGENCY. Any emergency causing this Article Nine to become operative shall be deemed to be terminated whenever either of the following conditions is met: (i) the directors and any substitute directors determine by a majority vote at a meeting that the emergency is over or (ii) a majority of the directors elected pursuant to the provisions of these Bylaws other than this Article Nine hold a meeting and determine that the emergency is over. 9.7 ACTION TAKEN IN GOOD FAITH. Any corporate action taken in good faith in accordance with the provisions of this Article Nine binds the Corporation and may not be used to impose liability on any director, substitute director, officer, employee or agent of the Corporation. ARTICLE TEN MISCELLANEOUS PROVISIONS 10.1 FISCAL YEAR. The Board of Directors of the Corporation shall have authority from time to time to determine whether the Corporation shall operate upon a calendar year basis or upon a fiscal year basis, and if the latter, said Board of Directors shall have power to determine when the said fiscal year shall begin and end. 10.2 DIVIDENDS. Dividends on the capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting pursuant to law. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends or for repairing or maintaining any property of the Corporation, or for such other purposes as the directors shall think conducive to the interest of the Corporation. 10.3 SEAL. This Corporation shall have a Corporate Seal which shall consist of an imprint of the name 13 14 of the Corporation, the state of its incorporation, the year of incorporation and the words "Corporate Seal." The Corporate Seal shall not be required to establish the validity or authenticity of any document executed in the name and on behalf of the Corporation. 10.4 NOTICES. Whenever notice is required to be given to any director, officer or shareholder under any of the provisions of the law, the Charter, or these Bylaws (except for notice required by Sections 2.8 and 3.6 of these Bylaws), it shall not be construed to require personal notice, but such notice may be given in writing by depositing the same in the United States mail, postage prepaid, or by telegram, teletype, facsimile transmission or other form of wire, wireless, or other electronic communication or by private carrier addressed to such shareholder at such address as appears on the Corporation's current record of shareholders, and addressed to such director or officer at such address as appears on the records of the Corporation. If mailed as provided above, notice to a shareholder shall be deemed to be effective at the time when it is deposited in the mail. 10.5 BYLAW AMENDMENTS. The Board of Directors shall have power to make, amend and repeal the Bylaws or any Bylaw of the Corporation by vote of not less than a majority of the directors then in office, at any regular or special meeting of the Board of Directors. The shareholders may make, amend and repeal the Bylaws or any Bylaw of this Corporation at any annual meeting or at a special meeting called for that purpose only by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of all outstanding voting stock, and all Bylaws made by the directors may be amended or repealed by the shareholders only by the vote of the holders of at least eighty percent (80%) of the voting power of all outstanding voting stock. Without further authorization, at any time the Bylaws are amended, the Secretary is authorized to restate the Bylaws to reflect such amendment, and the Bylaws, as so restated, shall be the Bylaws of the Corporation. 14 15 EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST TENNESSEE NATIONAL CORPORATION'S SEPTEMBER 30, 1998, FINANCIAL STATEMENTS FILED IN ITS 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 726,605 2,786 134,011 397,980 1,910,299 684,491 686,156 11,157,673 135,413 17,248,009 11,100,489 3,472,743 1,257,096 266,468 100,000 0 80,054 971,159 17,248,009 671,997 118,162 31,270 821,429 274,252 427,439 393,990 39,427 (53) 781,985 250,398 160,921 0 0 160,921 1.26 1.22 3.87 27,657 35,784 0 34,680 125,859 35,196 8,758 135,413 135,413 0 0 FIRST TENNESSEE NATIONAL CORPORATION EFFECTED A TWO-FOR-ONE STOCK SPLIT ON FEBRUARY 20, 1998. FINANCIAL DATA SCHEDULES BEGINNING WITH THE DECEMBER 31, 1997 FINANCIAL DATA SCHEDULE FILED WITH THE 1997 FORM 10-K REFLECT THIS STOCK SPLIT. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED TO REFLECT THE STOCK SPLIT.
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