First Horizon Corporation
FHN
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โ‚น1.025 T
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โ‚น2,121
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Change (1 year)

First Horizon Corporation - 10-Q quarterly report FY


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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
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION First Tennessee National Corporation
- ------------------------------------------------------------------------------------------------------------------------
September 30 December 31
------------------------ -----------
(Dollars in thousands)(Unaudited) 1998 1997 1997
- ------------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
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
================================================================================================= ===========
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
5


<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
6


<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF First Tennessee
SHAREHOLDERS' EQUITY National Corporation
- -----------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
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
===================================================================================
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
7





<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation
- ----------------------------------------------------------------------------------------------------
Nine Months Ended September 30
---------------------------------
(Dollars in thousands)(Unaudited) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------------------------
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
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:

<TABLE>
<CAPTION>
At September 30, 1998
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REMIC securities $637,863 $7,077 $(6,766) $638,174
====================================================================================================
</TABLE>



<TABLE>
<CAPTION>
As of September 30, 1998
---------------------------
REMIC Securities
---------------------------
By Contractual Maturity Amortized Estimated
(Dollars in thousands) Cost Fair Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
After 5 years; within 10 years $440,309 $445,126
After 10 years 197,554 193,048
- -----------------------------------------------------------------------------------------------------
Total $637,863 $638,174
=====================================================================================================
</TABLE>
10


NOTE 4 -- LOANS
The composition of the loan portfolio at September 30 is detailed below:

<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
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
=======================================================================================
</TABLE>
[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.
</FN>

The following table presents information concerning nonperforming loans at
September 30:

<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans $ 9,270 $ 11,179
Other nonaccrual loans 18,387 26,647
- ---------------------------------------------------------------------------------------
Total nonperforming loans $ 27,657 $ 37,826
=======================================================================================
</TABLE>
[FN]
At September 30, 1997, there were $196,000 of restructured impaired loans.
</FN>

Nonperforming loans consist of impaired loans, other nonaccrual loans and
certain restructured loans. An impaired loan is a loan that management believes
the contractual amount due probably will not be collected. Impaired loans are
generally carried on a nonaccrual status. Nonaccrual loans are loans on which
interest accruals have been discontinued due to the borrower's financial
difficulties. Management may elect to continue the accrual of interest when the
estimated net realizable value of collateral is sufficient to recover the
principal balance and accrued interest.
Generally, interest payments received on impaired loans are applied to
principal. Once all principal has been received, additional payments are
recognized as interest income on a cash basis. The following table presents
information concerning impaired loans:

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------
(Dollars in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest on impaired loans $ 488 $ 57 $ 845 $ 454
Average balance of impaired loans 8,668 10,218 8,904 11,417
- ----------------------------------------------------------------------------------------
</TABLE>
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:

<TABLE>
<CAPTION>
(Dollars in thousands) Non-impaired Impaired Total
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 114,217 $ 3,531 $ 117,748
Provision for loan losses 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
===================================================================================
</TABLE>
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:

<TABLE>
<CAPTION>
September 30 December 31
----------------------- -----------
(Dollars in thousands)(Unaudited) 1998 1997 1997
- ---------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
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
================================================================================== ===========
</TABLE>
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.

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
(Dollars in thousands, except per share data) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>

Third Quarter Nine Months
-------------------------- Growth -------------------------- Growth
(Dollars in millions) 1998 1997 Rate (%) 1998 1997 Rate (%)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
[FN]
NM = not meaningful
</FN>
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

<TABLE>
<CAPTION>
Third Quarter
---------------------
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
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 %
==============================================================================
</TABLE>
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

<TABLE>
<CAPTION>
Third Quarter
----------------------------- Growth
(Dollars in millions) 1998 1997 Rate (%)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
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
===========================================================================
</TABLE>
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

<TABLE>
<CAPTION>
September 30
----------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
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

<CAPTION>
Third Quarter
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
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
=======================================================================================
<CAPTION>
September 30
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------
</TABLE>
[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.
</FN>
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

<TABLE>
<CAPTION>
Third Quarter
-----------------------------
1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
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%
========================================================================================
</TABLE>
[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.
</FN>
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

<TABLE>
<CAPTION>
1998
AS Growth 1998 Growth
(Dollars in millions) REPORTED 1997 Rate (%) MANAGED* Rate (%)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------
</TABLE>
[FN]
*Excludes managed loans in the mortgage banking servicing portfolio.
</FN>


TABLE 7 - INVESTMENT SECURITIES

<TABLE>
<CAPTION>
1998
1998 EXCLUDING
AS Growth SECURITIZATION Growth
(Dollars in millions) REPORTED 1997 Rate (%) ACTIVITY Rate (%)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
- ----------------------------------------------------------------------------------------------
</TABLE>
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

<TABLE>
<CAPTION>
(Dollars in millions) Notional value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
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
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>

[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.
</FN>

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.

<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------

<S> <C>
3(b) Bylaws, as amended.
4 Instruments defining the rights of security holders,
including indentures.*
27 Financial Data Schedule (for SEC use only).
</TABLE>


[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.
</FN>
(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

<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3(b) Bylaws, as amended.
4 Instruments defining the rights of security holders,
including indentures.*
27 Financial Data Schedule (for SEC use only).
</TABLE>
[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.
</FN>