-----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, BtI1eIBBE7oJsnd8KeEhPg5KQ9dOuAQhQoC0bNDRZ9jo+tArUSRTphFIklM8C130 KBQtQhFyXxyA8lxt/waVNg== 0000950144-01-508929.txt : 20020410 0000950144-01-508929.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950144-01-508929 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 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: 1934 Act SEC FILE NUMBER: 001-15185 FILM NUMBER: 1784939 BUSINESS ADDRESS: STREET 1: 165 MADISON AVE CITY: MEMPHIS STATE: TN ZIP: 38103 BUSINESS PHONE: 9015234638 MAIL ADDRESS: STREET 1: 165 MADISON AVE CITY: MEMPHIS STATE: TN ZIP: 38103 FORMER COMPANY: FORMER CONFORMED NAME: FIRST TENNESSEE BANKS INC DATE OF NAME CHANGE: 19600201 10-Q 1 g72558e10-q.txt FIRST TENNESSEE NATIONAL CORPORATION 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, 2001 ------------------ 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 000-4491 -------- 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) 523-4444 -------------------------------------------------------- (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 126,621,440 - ----------------------------- ------------------------------- Class Outstanding on October 31, 2001 FIRST TENNESSEE NATIONAL CORPORATION INDEX Part I. Financial Information Part II. Other Information Signatures Exhibit Index 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.
CONSOLIDATED STATEMENTS OF CONDITION First Tennessee National Corporation - --------------------------------------------------------------------------------------------------------------------- September 30 December 31 -------------------------------- ------------- (Dollars in thousands)(Unaudited) 2001 2000 2000 - ------------------------------------------------------------------------------------------------- ------------- ASSETS: Cash and due from banks $ 898,133 $ 804,330 $ 838,148 Federal funds sold and securities purchased under agreements to resell 158,252 196,671 122,251 - -------------------------------------------------------------------------------------------------- ------------- Total cash and cash equivalents 1,056,385 1,001,001 960,399 - -------------------------------------------------------------------------------------------------- ------------- Investment in bank time deposits 5,570 4,430 3,629 Trading securities 600,168 582,226 253,796 Loans held for sale 2,194,390 2,137,079 1,735,070 Securities available for sale 2,035,628 2,104,990 2,200,741 Securities held to maturity (market value of $510,999 at September 30, 2001; $630,320 at September 30, 2000; and $619,728 at December 31, 2000) 513,496 667,291 638,315 Loans, net of unearned income 10,001,673 10,168,459 10,239,450 Less: Allowance for loan losses 151,180 145,923 143,696 - -------------------------------------------------------------------------------------------------- ------------- Total net loans 9,850,493 10,022,536 10,095,754 - -------------------------------------------------------------------------------------------------- ------------- Premises and equipment, net 259,587 289,574 286,107 Real estate acquired by foreclosure 18,818 15,669 16,290 Mortgage servicing rights, net 526,013 859,022 743,714 Intangible assets, net 127,740 125,156 121,624 Capital markets receivables and other assets 2,494,714 1,410,656 1,499,647 - -------------------------------------------------------------------------------------------------- ------------- TOTAL ASSETS $ 19,683,002 $ 19,219,630 $ 18,555,086 ================================================================================================== ============= LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Interest-bearing $ 8,248,807 $ 10,259,580 $ 9,341,603 Noninterest-bearing 3,401,940 2,918,584 2,847,088 - -------------------------------------------------------------------------------------------------- ------------- Total deposits 11,650,747 13,178,164 12,188,691 - -------------------------------------------------------------------------------------------------- ------------- Federal funds purchased and securities sold under agreements to repurchase 3,179,848 2,730,729 2,981,026 Commercial paper and other short-term borrowings 471,279 494,003 456,535 Capital markets payables and other liabilities 2,206,528 996,828 996,574 Term borrowings 593,737 409,803 409,676 - -------------------------------------------------------------------------------------------------- ------------- Total liabilities 18,102,139 17,809,527 17,032,502 - -------------------------------------------------------------------------------------------------- ------------- Guaranteed preferred beneficial interests in First Tennessee's junior subordinated debentures 100,000 100,000 100,000 Preferred stock of subsidiary 44,162 -- 38,428 - -------------------------------------------------------------------------------------------------- ------------- 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 - 125,874,856 at September 30, 2001; 128,081,182 at September 30, 2000; and 128,744,573 at December 31, 2000) 78,672 80,051 80,465 Capital surplus 103,765 104,868 115,775 Undivided profits 1,215,907 1,129,144 1,172,548 Accumulated other comprehensive income 33,722 (4,513) 14,598 Deferred compensation on restricted stock incentive plans (2,526) (4,400) (4,183) Deferred compensation obligation 7,161 4,953 4,953 - -------------------------------------------------------------------------------------------------- ------------- Total shareholders' equity 1,436,701 1,310,103 1,384,156 - -------------------------------------------------------------------------------------------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 19,683,002 $ 19,219,630 $ 18,555,086 ================================================================================================== ============= See accompanying notes to consolidated financial statements.
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) 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $ 195,088 $ 235,407 $ 626,568 $ 670,309 Interest on investment securities: Taxable 40,620 47,401 127,278 148,854 Tax-exempt 391 484 1,230 1,482 Interest on mortgage loans held for sale 37,918 54,541 117,856 157,778 Interest on trading securities 12,540 9,073 37,466 21,805 Interest on other earning assets 1,623 5,676 6,041 15,772 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest income 288,180 352,582 916,439 1,016,000 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits: Savings 864 1,370 3,191 4,219 Checking interest and money market account 19,539 27,058 72,151 83,043 Certificates of deposit under $100,000 and other time 26,337 33,467 89,158 95,114 Certificates of deposit $100,000 and more 30,148 76,447 112,555 179,392 Interest on short-term borrowings 30,431 58,160 124,950 188,964 Interest on term borrowings 7,922 5,931 23,310 17,769 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest expense 115,241 202,433 425,315 568,501 - ---------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 172,939 150,149 491,124 447,499 Provision for loan losses 22,778 16,593 59,203 49,167 - ---------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 150,161 133,556 431,921 398,332 - ---------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Mortgage banking 189,644 116,406 481,395 309,553 Divestitures -- -- 81,467 40,921 Capital markets 90,268 37,598 234,818 80,935 Deposit transactions and cash management 35,258 30,631 94,692 86,775 Trust services and investment management 13,752 17,086 43,357 49,138 Merchant processing 11,780 12,958 34,740 36,298 Cardholder fees 5,402 7,683 14,982 21,658 Equity securities gains/(losses) 39 (269) (3,264) 206 Debt securities gains/(losses) (1) 35 (238) 1,245 All other income and commissions 30,185 39,074 96,821 107,696 - ---------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 376,327 261,202 1,078,770 734,425 - ---------------------------------------------------------------------------------------------------------------------------------- ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 526,488 394,758 1,510,691 1,132,757 - ---------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Employee compensation, incentives and benefits 199,911 156,305 568,965 442,500 Amortization of mortgage servicing rights 29,524 21,366 82,738 57,749 Occupancy 17,898 17,947 53,460 58,055 Operations services 13,249 17,151 44,763 51,682 Equipment rentals, depreciation and maintenance 15,366 15,476 55,908 48,237 Communications and courier 12,296 11,875 35,392 36,171 Amortization of intangible assets 2,677 2,833 8,434 8,170 All other expense 104,318 67,283 297,361 202,204 - ---------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 395,239 310,236 1,147,021 904,768 - ---------------------------------------------------------------------------------------------------------------------------------- PRETAX INCOME 131,249 84,522 363,670 227,989 Applicable income taxes 42,240 18,575 123,275 67,096 - ---------------------------------------------------------------------------------------------------------------------------------- Income before debt restructurings and cumulative effect of changes in accounting principles 89,009 65,947 240,395 160,893 Debt restructurings -- -- (3,225) -- Cumulative effect of changes in accounting principles -- -- (8,168) -- - ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 89,009 $ 65,947 $ 229,002 $ 160,893 ================================================================================================================================== EARNINGS PER COMMON SHARE BEFORE DEBT RESTRUCTURINGS AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (Note 3) $ .70 $ .51 $ 1.88 $ 1.24 EARNINGS PER COMMON SHARE (Note 3) .70 .51 1.79 1.24 - ---------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER COMMON SHARE BEFORE DEBT RESTRUCTURINGS AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (Note 3) $ .68 $ .50 $ 1.82 $ 1.22 DILUTED EARNINGS PER COMMON SHARE (Note 3) .68 .50 1.74 1.22 - ---------------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING 127,156,679 129,494,136 128,109,322 130,164,417 - ---------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY First Tennessee National Corporation - --------------------------------------------------------------------------------------------- (Dollars in thousands)(Unaudited) 2001 2000 - --------------------------------------------------------------------------------------------- BALANCE, JANUARY 1 $ 1,384,156 $ 1,241,467 Net income 229,002 160,893 Other comprehensive income: Cumulative effect of change in accounting principle 1,449 -- Unrealized market adjustments, net of tax and reclassification adjustment 17,675 17,238 - --------------------------------------------------------------------------------------------- Comprehensive income 248,126 178,131 - --------------------------------------------------------------------------------------------- Cash dividends declared (83,842) (85,462) Common stock issued: For exercise of stock options 63,268 6,813 Elliot Ames, Inc. acquisition -- 1,385 Tax benefit from non-qualified stock options 25,376 -- Common stock repurchased (214,982) (48,476) Amortization on restricted stock incentive plans 1,426 1,503 Other 13,173 14,742 - --------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30 $ 1,436,701 $ 1,310,103 ============================================================================================= See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation - ----------------------------------------------------------------------------------------------- Nine Months Ended September 30 -------------------------------- (Dollars in thousands)(Unaudited) 2001 2000 - ----------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 229,002 $ 160,893 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Provision for loan losses 59,203 49,167 Provision for deferred income tax 6,595 32,213 Depreciation and amortization of premises and equipment 42,320 43,904 Amortization and impairment of mortgage servicing rights 169,934 57,749 Amortization of intangible assets 8,434 8,170 Net other amortization and accretion 10,220 31,138 Net increase in net derivative product assets (7,545) (7,781) Market value adjustment on foreclosed property 7,282 5,961 Loss on sale of securitized loans -- 1,315 Equity securities (gains)/losses 3,264 (206) Debt securities (gains)/losses 238 (1,245) Net losses on disposal of fixed assets 7,513 1,402 Gains on divestitures (81,467) (40,921) Net (increase)/decrease in: Trading securities (191,648) (435,185) Loans held for sale (459,320) 8,990 Capital markets receivables (1,016,575) (78,544) Interest receivable 20,973 (2,650) Other assets 80,136 (159,691) Net increase/(decrease)in: Capital markets payables 1,024,289 108,938 Interest payable (20,120) 695 Other liabilities 174,365 (31,440) - ----------------------------------------------------------------------------------------------- Total adjustments (161,909) (408,021) - ----------------------------------------------------------------------------------------------- Net cash (used)/provided by operating activities 67,093 (247,128) - ----------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Held to maturity securities: Maturities 123,817 102,640 Purchases -- (500) Available for sale securities: Sales 118,221 356,905 Maturities 541,807 414,520 Purchases (634,102) (578,837) Premises and equipment: Sales 174 723 Purchases (17,265) (33,007) Proceeds from loan securitizations -- 184,379 Net increase in loans (321,256) (1,041,935) Net increase in investment in bank time deposits (1,941) (1,167) Proceeds from divestitures 453,279 57,565 Acquisitions, net of cash and cash equivalents acquired (1,925) -- - ----------------------------------------------------------------------------------------------- Net cash (used)/provided by investing activities 260,809 (538,714) - ----------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Common stock: Exercise of stock options 60,320 6,831 Cash dividends (84,352) (85,777) Repurchase of shares (214,981) (48,542) Term borrowings: Issuance 324,151 101,200 Payments (190,333) (50,288) Net increase/(decrease) in: Deposits (390,287) 1,809,584 Short-term borrowings 263,566 (1,181,779) - ----------------------------------------------------------------------------------------------- Net cash (used)/provided by financing activities (231,916) 551,229 - ----------------------------------------------------------------------------------------------- Net increase/(decrease) in cash and cash equivalents 95,986 (234,613) - ----------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 960,399 1,235,614 - ----------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 1,056,385 $ 1,001,001 =============================================================================================== Total interest paid $ 444,858 $ 567,278 Total income taxes paid 90,208 86,228 - ----------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
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, 2001, 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 financial appendix to the 2001 Proxy Statement. On June 30, 2001, the Financial Accounting Standards Board finalized Statement of Financial Accounting Standards No. 141, Business Combinations, and SFAS No. 142 Goodwill and Other Intangible Assets. Under SFAS No. 141 all business combinations initiated after June 30, 2001 must be accounted for using the purchase method. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to an assessment for impairment using a fair-value-based test at least annually. Goodwill associated with equity-method investments is also no longer amortized, but impairment analysis is governed by existing impairment guidance for equity-method investments and not the new impairment rules. Also under the new rules, acquired intangible assets should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold or otherwise transferred, regardless of the acquirer's intent to do so. These new rules are expected to result in more intangible assets being separated from goodwill than generally occurs today. The resulting assets will be amortized over their useful lives. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, which for First Tennessee will mean January 1, 2002. First Tennessee estimates the impact of adopting these new standards will be to reduce noninterest expense annually by approximately $7 million pre-tax without regard to any new acquisitions or future impairment that may occur, the effect of which cannot be predicted at this time. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses accounting and reporting issues related to the impairment of long-lived assets and for long-lived assets to be disposed of. This standard is effective for fiscal years beginning after December 15, 2001, which for First Tennessee will be January 1, 2002. First Tennessee anticipates the impact of adopting this standard will be immaterial. On January 1, 2001, First Tennessee adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and EITF Issue 99-20: Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. SFAS No. 133 establishes accounting standards requiring that every derivative instrument (including certain instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. It requires that changes in the instrument's fair value be recognized currently in earnings (or other comprehensive income). If certain criteria are met, changes in the fair value of the asset or liability being hedged are also recognized currently in earnings. Upon adoption of SFAS No. 133 all derivative instruments were measured at fair value with differences between the previous book value and fair value reported as part of a cumulative effect adjustment, except to the extent that they related to hedges of the variable cash flow exposure of forecasted transactions. To the extent the adoption adjustment related to hedges of the variable cash flow exposure of a forecasted transaction, the remainder of the accounting adjustment, a $1.4 million gain (after-tax) was reported as a cumulative effect adjustment of comprehensive income in first quarter 2001. Offsetting gains and losses on hedged assets and liabilities were recognized as adjustments of their respective book values at the adoption date as part of this cumulative effect adjustment. Additionally, EITF Issue 99-20, which provides impairment and interest income recognition and measurement guidance for interests retained in a securitization transaction accounted for as a sale, was adopted. The initial impact of adopting SFAS No. 133 and EITF Issue 99-20 was an $8.2 million loss (after-tax) net transition adjustment that was recognized as the cumulative effect of a change in accounting principle in first quarter 2001. Fair value is determined on the last business day of a reporting period. This point in time measurement of derivative fair values and the related hedged item fair values may be well suited to the measurement of hedge effectiveness, as well as reported earnings, when hedge time horizons are short. The same measurement however may not consistently reflect the effectiveness of longer-term hedges and, in First Tennessee's view, can distort short-term measures of reported earnings. First Tennessee uses a combination of derivative financial instruments to hedge certain components of the interest rate risk associated with its portfolio of capitalized mortgage servicing rights, which currently have an average life of approximately seven years. Over this long-term time horizon this combination of derivatives can be effective in significantly mitigating the effects of interest rate changes on the value of the servicing portfolio. However, these derivative financial instruments can and do demonstrate significant price volatility depending upon prevailing conditions in the financial markets. If a reporting period ends during a period of volatile financial market conditions, the effect of such point in time conditions on reported earnings does not reflect the underlying economics of the transactions or the true value of the hedges to First Tennessee over their estimated lives. The fact that the fair value of a particular derivative is unusually low or high on the last day of the reporting period is meaningful in evaluating performance during the period only if First Tennessee sells the derivative within the period of time before fair value changes and does not replace the hedge coverage with another derivative. First Tennessee believes the effect of such volatility on short-term measures of earnings ($8.2 million pre-tax gain for the nine-month period ending September 30, 2001) is not indicative of the expected long-term performance of this hedging practice. Certain provisions of SFAS No. 133 continue to undergo significant discussion and debate by the Financial Accounting Standards Board (FASB). One such potential issue involves the assessment of hedge effectiveness (and its impact on qualifying for hedge accounting) when hedging fair value changes of prepayable assets due to changes in the benchmark interest rate. As the FASB continues to deliberate interpretation of the new rules, the potential exists for a difference between First Tennessee's interpretation and that of the FASB, the effects of which cannot presently be anticipated. Adoption of SFAS No. 133 was not retroactive, therefore, the manner in which derivatives historically have been accounted for was not affected, but significant changes have been made in accounting policies related to derivatives and hedges in 2001. Included below are certain accounting policies that were impacted by the adoption of SFAS No. 133. First Tennessee's mortgage lenders originate first-lien mortgage loans primarily for the purpose of selling them in the secondary market. Mortgage loans held for sale (the warehouse), are recorded at the lower of aggregate cost or market value. Gains and losses realized from the sale of these assets and adjustments to market value are included in noninterest income. In certain cases, mortgage banking continues to service securitized mortgage loans and has also retained interest-only strips. The interest-only strips are financial assets that represent rights to receive earnings from serviced assets that exceed contractually specified servicing fees and are recognized on the balance sheet at fair value in trading securities. Mortgage banking has also completed proprietary securitizations of loans from the warehouse with prime quality jumbo fixed rate loans. The resulting securities are sold as senior and subordinate bonds, while servicing rights and a principal cashflow tranche are retained. The retained principal-only strip (PO strip) is initially valued by allocating the total cost between the assets sold, the servicing right and the PO strip based on their relative fair values. The PO strip is recognized on the balance sheet at fair value in trading securities. Servicing rights related to the mortgages sold have historically been mostly retained. Currently, only limited amounts of servicing rights are being retained as mortgage banking intends to curtail growth in the servicing portfolio. Accounting standards require the recognition of mortgage servicing rights (MSRs) as separate assets by allocating the total cost between the loan and the servicing right based on their relative fair values. First Tennessee uses a cash flow valuation model to determine the fair value of the servicing rights created. These valuations are tested for reasonableness against prices obtained from flow and bulk sales of servicing and are validated through an independent market valuation. Model assumptions are periodically reviewed and may be revised from time to time to more accurately reflect current assumptions such as prepayment speeds. For purposes of impairment evaluation and measurement, the MSRs are stratified based on the predominant risk characteristics of the underlying loans. These strata currently include adjustable and fixed rate loans. The fixed rate loans are further stratified by 150 basis-point interest rate bands. Previously the strata included adjustable rate conventional and government and fixed rate conventional and government by interest rate band. The MSRs are amortized as noninterest expense over the period of and in proportion to the estimated net servicing revenues. A quarterly value impairment analysis is performed using a discounted cash flow methodology that is disaggregated by predominant risk characteristics. Impairment, if any, is generally recognized through a valuation allowance for individual strata. Forward contracts used by mortgage banking operations to hedge against interest rate risk in the warehouse are reviewed periodically for correlation with expected changes in value. Interest rate derivative contracts used to hedge against interest rate risk in the servicing portfolio are designated to specific risk tranches of servicing. Derivative contracts utilized in trading activities by capital markets are measured at fair value, with changes in fair value recognized currently in capital markets noninterest income. Related assets are recorded on the balance sheet as capital markets securities inventory or receivables and any liabilities are recognized as capital markets payables. Any contracts that fail to qualify for hedge accounting are measured at fair value with any gains or losses included in current earnings in noninterest income. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires substantial disclosures, but carries over most of SFAS No. 125's provisions without reconsideration. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The disclosure provisions of the statement were effective immediately and have been adopted by First Tennessee. Other provisions became effective for transactions occurring after March 31, 2001. Adoption of the new provisions of SFAS No. 140 was not material to First Tennessee's consolidated financial position or results of operations. On January 1, 1999, First Tennessee adopted SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This Statement amends SFAS No. 65, which required that retained securities be classified as trading securities. SFAS No. 134 allows these securities to be classified as trading, held to maturity or available for sale based on the intent and ability of the enterprise. On January 1, 1999, First Tennessee adopted Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." This Statement requires that the costs of start-up activities, including organization costs, be expensed as incurred. The impact of adopting this standard was immaterial to First Tennessee. NOTE 2 - DIVESTITURES/ACQUISITIONS On June 6, 2001, First Tennessee Bank National Association (FTBNA), the primary banking subsidiary of First Tennessee, along with its partner, International Business Machines Corporation (IBM) completed the sale of its interests in Check Solutions Company to Carreker Corporation of Dallas, Texas. First Tennessee recognized a divestiture gain of $44.9 million. On April 27, 2001, First Tennessee completed the sale of its wholly owned subsidiary, Peoples and Union Bank, of Lewisburg, Tennessee to First Farmers & Merchants National Bank, of Columbia, Tennessee. First Tennessee recognized a divestiture gain of $13.1 million. On April 2, 2001, FTBNA sold its existing portfolio of education loans totaling $342.1 million to Educational Funding of the South, Inc. The transaction resulted in a divestiture gain of $11.8 million. On January 17, 2001, FTBNA completed the sale of $31.4 million of its affinity, co-branded, and certain single relationship credit card accounts and assets, to MBNA Corporation for $37.9 million. The transaction resulted in a divestiture gain of $5.9 million. On October 18, 2000, FTBNA sold its corporate and municipal trust business to The Chase Manhattan Bank. This transaction resulted in an additional divestiture gain of $4.5 million due to an earn-out received in first quarter 2001. On November 15, 2000, First Tennessee Securities Corporation (FTSC), a wholly owned subsidiary of FTBNA, signed a definitive purchase agreement to acquire certain assets of Midwest Research-Maxus Group Limited, a Cleveland-based institutional equity research firm. This transaction was completed for approximately $13.7 million on January 2, 2001. NOTE 3 - EARNINGS PER SHARE The following table shows a reconciliation of earnings per share to diluted earnings per share.
Three Months Ended Nine Months Ended September 30 September 30 ----------------------------- ------------------------------- (Dollars in thousands, except per share data) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- Income before debt restructurings and cumulative effect of changes in accounting principles $ 89,009 $ 65,947 $ 240,395 $ 160,893 Debt restructurings -- -- (3,225) -- Cumulative effect of changes in accounting principles -- -- (8,168) -- - --------------------------------------------------------------------------------------------------------------------------- Net income $ 89,009 $ 65,947 $ 229,002 $ 160,893 =========================================================================================================================== Weighted average shares outstanding 126,275,965 128,880,550 127,355,285 129,626,781 Shares attributable to deferred compensation 880,714 613,586 754,037 537,636 - --------------------------------------------------------------------------------------------------------------------------- Total weighted average shares 127,156,679 129,494,136 128,109,322 130,164,417 =========================================================================================================================== EARNINGS PER COMMON SHARE: Income before debt restructurings and cumulative effect of changes in accounting principles $ .70 $ .51 $ 1.88 $ 1.24 Debt restructurings -- -- (.03) -- Cumulative effect of changes in accounting principles -- -- (.06) -- - --------------------------------------------------------------------------------------------------------------------------- Net income $ .70 $ .51 $ 1.79 $ 1.24 =========================================================================================================================== Weighted average shares outstanding 127,156,679 129,494,136 128,109,322 130,164,417 Dilutive effect due to stock options 3,701,735 1,521,154 3,763,035 1,634,388 - --------------------------------------------------------------------------------------------------------------------------- Total weighted average shares, as adjusted 130,858,414 131,015,290 131,872,357 131,798,805 =========================================================================================================================== DILUTED EARNINGS PER COMMON SHARE COMPUTATION: Income before debt restructurings and cumulative effect of changes in accounting principles $ .68 $ .50 $ 1.82 $ 1.22 Debt restructurings -- -- (.02) -- Cumulative effect of changes in accounting principles -- -- (.06) -- - --------------------------------------------------------------------------------------------------------------------------- Net income $ .68 $ .50 $ 1.74 $ 1.22 ===========================================================================================================================
NOTE 4 - LOANS The composition of the loan portfolio at September 30 is detailed below:
(Dollars in thousands) 2001 2000 - ---------------------------------------------------------------------------------------- Commercial: Commercial, financial and industrial $ 4,046,209 $ 3,837,824 Real estate commercial 908,647 916,427 Real estate construction 453,020 423,303 Retail: Real estate residential 3,638,433 3,432,069 Real estate construction 196,063 164,199 Consumer 480,449 846,116 Credit card receivables 278,852 548,521 - ---------------------------------------------------------------------------------------- Loans, net of unearned income $10,001,673 $10,168,459 Allowance for loan losses 151,180 145,923 - ---------------------------------------------------------------------------------------- Total net loans $ 9,850,493 $10,022,536 ========================================================================================
The following table presents information concerning nonperforming loans at September 30:
(Dollars in thousands) 2001 2000 - ---------------------------------------------------------------------------------------- Impaired loans $ 45,296 $ 15,736 Other nonaccrual loans 24,188 25,480 - ---------------------------------------------------------------------------------------- Total nonperforming loans $ 69,484 $ 41,216 ========================================================================================
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) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------- Total interest on impaired loans $ 213 $ 118 $ 405 $ 312 Average balance of impaired loans 50,442 12,351 52,979 9,203 - -------------------------------------------------------------------------------------------------
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, 2001 and 2000, is summarized as follows:
(Dollars in thousands) Non-impaired Impaired Total - ------------------------------------------------------------------------------------------- Balance on December 31, 1999 $ 136,978 $ 2,625 $ 139,603 Provision for loan losses 45,660 3,507 49,167 Securitization adjustment (2,173) -- (2,173) Charge-offs 43,185 3,798 46,983 Less loan recoveries 4,987 1,322 6,309 - ------------------------------------------------------------------------------------------- Net charge-offs 38,198 2,476 40,674 - ------------------------------------------------------------------------------------------- Balance on September 30, 2000 $ 142,267 $ 3,656 $ 145,923 =========================================================================================== Balance on December 31, 2000 $ 128,339 $15,357 $ 143,696 Provision for loan losses 44,405 14,798 59,203 Divestiture (1,337) -- (1,337) Charge-offs 44,246 14,497 58,743 Less loan recoveries 6,785 1,576 8,361 - ------------------------------------------------------------------------------------------- Net charge-offs 37,461 12,921 50,382 - ------------------------------------------------------------------------------------------- BALANCE ON SEPTEMBER 30, 2001 $ 133,946 $17,234 $ 151,180 ===========================================================================================
NOTE 5 - BUSINESS SEGMENT INFORMATION First Tennessee provides traditional retail/commercial banking and other financial services to its customers. These products and services are categorized into two broad groups: a regional banking group and national lines of business. The regional banking group provides a comprehensive package of financial services including traditional banking, trust services, investments, asset management, insurance, and credit card services to its customers. The national lines of business include mortgage banking, capital markets and transaction processing. The Other segment is used to isolate corporate items such as debt restructurings and the cumulative effect of changes in accounting principles SFAS No. 133 and EITF 99-20 which were adopted on January 1, 2001. The Other segment also includes expense related to guaranteed preferred beneficial interests in First Tennessee's junior subordinated debentures and securities gains or losses which include any venture capital gains or losses and related incentive costs. Total revenue, expense and asset levels reflect those which are specifically identifiable or which are allocated based on an internal allocation method. Because the allocations are based on internally developed assignments and allocations, they are to an extent subjective. This assignment and allocation has been consistently applied for all periods presented. The following table reflects the approximate amounts of consolidated revenue, expense, tax, and assets for the quarterly and year to date periods ending September 30, 2001 and 2000.
Regional Banking Mortgage Capital Transaction (Dollars in thousands) Group Banking Markets Processing Other Consolidated - ---------------------------------------------------------------------------------------------------------------------------- 3Q01 Interest income $ 215,605 $ 57,398 $ 10,448 $ 4,729 $ -- $ 288,180 Interest expense 74,727 31,741 8,469 304 -- 115,241 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 140,878 25,657 1,979 4,425 -- 172,939 Other revenues 68,754 193,109 90,601 23,825 38 376,327 Other expenses* 139,148 190,877 62,317 23,552 2,123 418,017 - ---------------------------------------------------------------------------------------------------------------------------- Pre-tax income 70,484 27,889 30,263 4,698 (2,085) 131,249 Income taxes 19,234 10,538 11,475 1,785 (792) 42,240 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 51,250 $ 17,351 $ 18,788 $ 2,913 $ (1,293) $ 89,009 ============================================================================================================================ Average assets $12,626,033 $ 4,539,356 $1,114,760 $556,296 $ -- $ 18,836,445 - ---------------------------------------------------------------------------------------------------------------------------- 3Q00 Interest income $ 261,387 $ 75,162 $ 11,598 $ 4,435 $ -- $ 352,582 Interest expense 127,672 63,579 10,643 539 -- 202,433 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 133,715 11,583 955 3,896 -- 150,149 Other revenues 75,109 119,631 37,598 29,098 (234) 261,202 Other expenses* 136,499 134,200 27,750 26,257 2,123 326,829 - ---------------------------------------------------------------------------------------------------------------------------- Pre-tax income 72,325 (2,986) 10,803 6,737 (2,357) 84,522 Income taxes 25,188 (12,335) 4,057 2,561 (896) 18,575 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 47,137 $ 9,349 $ 6,746 $ 4,176 $ (1,461) $ 65,947 ============================================================================================================================ Average assets $13,033,152 $ 5,237,054 $ 765,528 $540,145 $ -- $ 19,575,879 - ---------------------------------------------------------------------------------------------------------------------------- YEAR TO DATE 2001 Interest income $ 693,839 $ 178,511 $ 31,460 $ 12,629 $ -- $ 916,439 Interest expense 284,132 111,886 27,798 1,499 -- 425,315 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 409,707 66,625 3,662 11,130 -- 491,124 Other revenues 282,772 493,809 235,431 70,260 (3,502) 1,078,770 Other expenses* 458,842 503,005 163,004 75,004 6,369 1,206,224 - ---------------------------------------------------------------------------------------------------------------------------- Pre-tax income 233,637 57,429 76,089 6,386 (9,871) 363,670 Income taxes 74,376 21,396 28,828 2,426 (3,751) 123,275 - ---------------------------------------------------------------------------------------------------------------------------- Income before debt restructurings and cumulative effect of changes in accounting principles 159,261 36,033 47,261 3,960 (6,120) 240,395 Debt restructurings -- -- -- -- (3,225) (3,225) Cumulative effect of changes in accounting principles -- -- -- -- (8,168) (8,168) - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 159,261 $ 36,033 $ 47,261 $ 3,960 $(17,513) $ 229,002 ============================================================================================================================ Average assets $12,868,503 $ 4,576,413 $ 994,805 $552,543 $ -- $ 18,992,264 - ---------------------------------------------------------------------------------------------------------------------------- Year to Date 2000 Interest income $ 754,332 $ 220,004 $ 29,229 $ 12,435 $ -- $ 1,016,000 Interest expense 352,897 186,915 27,164 1,525 -- 568,501 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 401,435 33,089 2,065 10,910 -- 447,499 Other revenues 205,765 360,056 81,774 85,379 1,451 734,425 Other expenses* 401,661 404,687 64,831 76,387 6,369 953,935 - ---------------------------------------------------------------------------------------------------------------------------- Pre-tax income 205,539 (11,542) 19,008 19,902 (4,918) 227,989 Income taxes 69,867 (15,534) 7,070 7,562 (1,869) 67,096 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 135,672 $ 3,992 $ 11,938 $ 12,340 $ (3,049) $ 160,893 ============================================================================================================================ Average assets $12,873,594 $ 5,256,025 $ 683,808 $559,715 $ -- $ 19,373,142 - ---------------------------------------------------------------------------------------------------------------------------- * Includes loan loss provision.
NOTE 6 - CONTINGENCIES In May 1996, FTBNA was named as a defendant in a purported nationwide class action lawsuit filed in federal court in Alabama in which plaintiffs assert that FTBNA and another defendant engaged in unfair and deceptive practices in connection with the financing of satellite dish television systems (satellite systems). The complaint alleges violations of the Truth in Lending Act (TILA) and the federal RICO statute, and fraud by suppression with respect to Alabama residents. In addition to these theories, plaintiffs proceed against FTBNA on an agency theory. This case has been certified as a nationwide class action on the TILA statutory damages claim which has a cap of $500,000 plus attorney fees. In addition to the Alabama lawsuit, in September 1997, a conditionally certified multi-state class action was filed in state court in Tennessee relating to the same satellite systems financing program. The complaint asserts that material facts were withheld from the purchasers in connection with the financing and that purchasers were misled as to the true nature and conditions of the program. The complaint also alleges unjust enrichment, violations of the Tennessee Consumer Protection Act, negligent training, supervision, and monitoring of persons presenting the terms of financing, as well as civil conspiracy and fraudulent concealment of the causes of action. Plaintiffs seek an accounting of monies received by FTBNA, unspecified compensatory damages, including treble damages as well as punitive damages, injunctive relief, attorney fees, costs, and expenses. The case is presently certified as a class action and FTBNA and First Tennessee have filed a request for an interlocutory appeal on this issue. Five additional satellite systems cases alleging similar causes of action have been filed in Mississippi. In one case, pending in federal court, plaintiffs seek $45 million in actual damages and $900 million in punitive damages. In two other satellite systems cases, filed in the Choctaw Tribal Court, plaintiffs seek unquantified actual and punitive damages, attorney fees, and injunctive relief. In a fourth case, filed by multiple plaintiffs in state court, plaintiffs demand unquantified compensatory and punitive damages, interest, and attorney fees. In a fifth case, also filed in state court, plaintiffs ask for actual, statutory, and compensatory damages of $1 million or greater and punitive damages of $5 million or greater for each of 32 plaintiffs, interest and attorney fees. FTBNA and First Tennessee deny liability, deny that any co-defendant is their agent, and intend to defend these actions vigorously. In 2001, the Tennessee Supreme Court affirmed the Court of Appeals judgment affirming an award of compensatory damages of $209,156 against FTBNA (as the successor by merger to Community Bank of Germantown) as well as a $60,000 award in favor of FTBNA against plaintiff, reversed the Court of Appeals' reversal of the award of punitive damages against FTBNA, vacated the trial court's award of punitive damages and remanded the case to the trial court to consider the record, take such additional evidence as necessary, and apply the factors outlined in a prior Tennessee Supreme Court opinion to arrive at an award of punitive damages. The punitive damages hearing, previously set for November 5, 2001, has been continued. No date has been set. In addition to these cases, various other claims and lawsuits are pending against First Tennessee and its subsidiaries. Although First Tennessee cannot predict the outcome of the foregoing actions, after consulting with counsel, it is management's opinion that when resolved, the amount, if any, will not have a material adverse effect on the consolidated financial statements of First Tennessee and its subsidiaries. Numerous banks and other mortgage lenders, including a First Tennessee subsidiary, have been sued in actions seeking class certification in various courts by mortgage borrowers on the theory that yield spread premiums paid to mortgage brokers constitute referral fees in violation of the Real Estate Settlement Practices Act (RESPA). Under RESPA, the liability for an impermissible referral fee is three times the amount of the fees which are determined to be unlawful, and, accordingly, the amount of potential damages is substantial. The determination and the statements of the Eleventh Circuit referred to hereafter are inconsistent with holdings by other federal courts and in the HUD clarification of its policy statement mentioned below, HUD states that the Eleventh Circuit opinion is incorrect in its application of RESPA. On June 15, 2001, the Court of Appeals for the Eleventh Circuit issued an opinion against a lender unaffiliated with First Tennessee upholding class certification by the district court. Although the court's decision is procedural and does not contain a direct finding on liability, certain statements in the decision could be interpreted to suggest a liability standard, which would be favorable to the plaintiff borrowers. A petition for reconsideration of the Eleventh Circuit opinion and/or for rehearing of that appeal en banc was filed and denied. Subsequently, the Department of Housing and Urban Development issued a clarification of its 1999 Statement of Policy, regarding lender payments to mortgage brokers, which should be favorable to defendants. It is expected that the unaffiliated lender in the above mentioned case will file a petition for writ of certiorari before the United States Supreme Court. First Tennessee believes that its subsidiary's yield spread premium payments, which are consistent with industry practice, are lawful, and intends to defend vigorously the lawsuits against it. Because, however, the suits against the First Tennessee subsidiary are in an early stage of litigation, and the law in this area is not clearly established, First Tennessee cannot at this time evaluate with any degree of precision either the likelihood of an unfavorable outcome or the dollar amount of any potential loss exposure. ITEM 2. FIRST TENNESSEE NATIONAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL INFORMATION - ------------------- First Tennessee National Corporation (First Tennessee) is headquartered in Memphis, Tennessee, and is a nationwide, diversified financial services institution which provides banking and other financial services to its customers through various regional and national business lines. The Regional Banking Group includes the retail/commercial bank, the credit card division, and the trust division. The National Lines of Business include First Horizon Home Loan Corporation (also referred to as First Horizon Home Loans and mortgage banking), First Tennessee Capital Markets (also referred to as capital markets), and transaction processing (credit card merchant processing, payment processing operation, and check clearing). Based on management's best estimates, certain revenue and expenses are allocated and equity is assigned to the various business lines to reflect the inherent risk in each business line. These allocations are periodically reviewed and may be revised from time to time to more accurately reflect current business conditions and risks; the previous history is restated to ensure comparability. For the purpose of this management discussion and analysis (MD&A), noninterest income (also called fee income) and total revenue 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. First Tennessee Bank National Association, the primary bank subsidiary, is also referred to as FTBNA in this discussion. 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, 2001, compared to the three-month and nine-month periods ended September 30, 2000. 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 2000 financial statements, notes, and management's discussion and analysis is provided in the 2000 Annual Financial Disclosures and 2001 Proxy Statement. FORWARD-LOOKING STATEMENTS - -------------------------- Management's discussion and analysis may contain forward-looking statements with respect to First Tennessee's beliefs, plans, goals, expectations, and estimates. These statements are contained in certain sections that follow such as Noninterest Income, Net Interest Income and Other. Forward-looking statements are statements that are not based on historical information but rather are related to future operations, strategies, financial results or other developments. The words "believe", "expect", "anticipate", "intend", "estimate", "should", "is likely", "going forward", and other expressions which indicate future events and trends identify forward-looking statements. 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 and actions (such as acquisitions and divestitures), are subject to change. Examples of uncertainties and contingencies include, among other important factors, general and local economic and business conditions; expectations of and actual timing and amount of interest rate movements (which can have a significant impact on a financial services institution); market and monetary fluctuations; inflation; competition within and outside the financial services industry; possible terrorist activity; technology; and new products and services in the industries in which First Tennessee operates. Other factors are those inherent in originating and servicing loans, including prepayment risks and fluctuation of collateral values and changes in customer profiles. Additionally, the policies of the Office of the Comptroller of the Currency (OCC) 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 executing its business plans and strategies and 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. FINANCIAL SUMMARY (COMPARISON OF THIRD QUARTER 2001 TO THIRD QUARTER 2000) Reported earnings for third quarter 2001 were $89.0 million, an increase of 35 percent from last year's third quarter earnings of $66.0 million. Diluted earnings per common share were $.68 in 2001, an increase of 36 percent from the $.50 earned in 2000. Return on average shareholders' equity was 25.4 percent and return on average assets was 1.87 percent for third quarter 2001. For the same period in 2000, return on average shareholders' equity was 20.6 percent and return on average assets was 1.34 percent. On September 30, 2001, First Tennessee was ranked as one of the top 50 bank holding companies nationally in market capitalization ($4.7 billion) and total assets ($19.7 billion). On September 30, 2000, market capitalization was $2.6 billion and total assets were $19.2 billion. Total revenue increased 33 percent from third quarter 2000, with a 44 percent increase in fee income (noninterest income excluding securities gains and losses) and a 15 percent increase in net interest income. NONINTEREST INCOME - ------------------ Fee income provides the majority of First Tennessee's revenue. In third quarter 2001, fee income contributed 68 percent to total revenues compared with 64 percent for the same period in 2000. Third quarter 2001 fee income increased 44 percent to $376.4 million, from $261.5 million for 2000. Fee income in capital markets and mortgage banking increased 140 percent and 63 percent, respectively, over the levels achieved in third quarter 2000. A more detailed discussion follows. MORTGAGE BANKING First Horizon Home Loans, a subsidiary of FTBNA, originates and services residential mortgage loans. Following origination, the mortgage loans, primarily first-lien, are sold to investors in the secondary market while a majority (approximately 74 percent in third quarter 2001) of the rights to service such loans are sold under flow servicing sales agreements (in prior years a majority of the rights were retained). Various hedging strategies are used to mitigate changes in the market value of the loan during the time period beginning with a price commitment to the customer and ending when the loan is delivered to the investor. Closed loans held during this time period are referred to as the mortgage warehouse. Origination fees and gains or losses from the sale of loans are recognized at the time a mortgage loan is sold into the secondary market. Subsequent to the 2001 adoption of new accounting standards related to derivatives (Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) and EITF 99-20), a portion of the gain or loss formerly recognized with the sale of a mortgage loan is now recognized at the time an interest rate lock commitment is made to the customer. Secondary marketing activities include gains or losses from mortgage warehouse hedging activities, product pricing decisions, and gains or losses from the sale of loans into the secondary market including the capitalized net present value of mortgage servicing rights. Servicing rights permit the collection of fees for gathering and processing monthly mortgage payments for the owner of the mortgage loans. First Horizon Home Loans employs hedging strategies intended to counter a change in the value of its mortgage servicing rights through changing interest rate environments. Miscellaneous income includes servicing rights net value changes (see also Other - Accounting for Derivative Instruments and Hedging Activities), income from the foreclosure repurchase program and other miscellaneous items including net gains or losses related to rebalancing hedges of mortgage servicing rights in 2000. Mortgage banking fee income increased 63 percent to $189.7 million from $116.4 million for third quarter 2000 as shown in Table 1. TABLE 1 - MORTGAGE BANKING
Third Quarter Nine Months ------------------------- Growth -------------------------- Growth (Dollars in millions) 2001 2000 Rate (%) 2001 2000 Rate (%) - -------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Loan origination fees $ 46.9 $ 36.1 29.7 $ 134.1 $ 96.6 38.9 Secondary marketing activities 82.1 38.1 115.7 204.5 83.4 145.3 - -------------------------------------------------------------------------------------------------------------------------------- Mortgage origination function 129.0 74.2 73.8 338.6 180.0 88.2 - -------------------------------------------------------------------------------------------------------------------------------- Servicing fees 40.3 41.5 (2.8) 119.3 119.3 .1 Gains/(losses) from trading securities 1.9 -- N/A (5.2) -- N/A Bulk sales of mortgage servicing rights -- (1.1) N/A -- 12.6 N/A Miscellaneous 18.5 1.8 903.5 28.7 (2.3) N/A - -------------------------------------------------------------------------------------------------------------------------------- Total noninterest income $ 189.7 $ 116.4 62.9 $ 481.4 $ 309.6 55.5 ================================================================================================================================ Refinance originations $ 2,904.1 $ 632.7 359.0 $ 9,727.8 $ 1,945.6 400.0 Home purchase-related originations 2,692.2 3,062.3 (12.1) 7,793.1 9,544.4 (18.3) - -------------------------------------------------------------------------------------------------------------------------------- Mortgage loan originations $ 5,596.3 $ 3,695.0 51.5 $17,520.9 $11,490.0 52.5 ================================================================================================================================ Servicing portfolio $44,221.4 $47,326.1 (6.6) $44,221.4 $47,326.1 (6.6) - --------------------------------------------------------------------------------------------------------------------------------
Origination activity increased 51 percent due to the impact that lower interest rates had on refinance activity, which increased $2.3 billion. Total origination volume, consisting of home purchase-related mortgages and refinanced mortgages was $5.6 billion in third quarter 2001 compared with $3.7 billion in the previous year. Home purchase-related mortgage originations decreased $.4 billion primarily due to the closing or other disposition of less profitable production offices in 2000. Fees from the mortgage origination process (loan origination fees, profits from the sale of loans, flow sales of mortgage servicing rights, and other secondary marketing activities) increased 74 percent to $129.0 million from $74.2 million in third quarter 2000. This increase was primarily the result of more loans sold into the secondary market due to increased production, improved margin management, and improvement in the results in hedging and other loan sale activities, as well as the recognition this year of the value of interest rate lock commitments. While the growth in refinance activity produced increased fee income, the impact of increased expenses from amortization and write-downs of mortgage servicing rights (See also Noninterest Expense) offset much of this revenue. Going forward, based upon a continuation of the trend in declining interest rates, the origination volume is expected to continue. Home purchase-related mortgage originations should reflect the relative strength of the economy, but should decrease from third quarter levels due to the seasonality of homebuyers' buying habits. Actual results could differ because of several factors, including those presented in the Forward-Looking Statements section of the MD&A discussion. The mortgage servicing portfolio (which includes servicing for ourselves and others) decreased to $44.2 billion on September 30, 2001, from $47.3 billion on September 30, 2000, due to our stated goal of reducing its size. Mortgage servicing fees for third quarter 2001 were $40.3 million compared with $41.5 million for the same period in 2000. In third quarter 2001, there were no bulk purchases or sales of mortgage servicing rights. For third quarter 2001 a net gain of $1.9 million related to market value adjustments on interest only strips that were classified as trading securities in first quarter 2001 and related hedges was recognized in mortgage banking income. Miscellaneous mortgage income totaled $18.5 million for third quarter 2001, which included $13.2 million of net gains on hedges associated with write-downs of mortgage servicing rights (See also Noninterest Expense) of which $4.5 million is nonoperating servicing rights net value changes under SFAS No. 133 (See also Accounting for Derivative Instruments and Hedging Activities). This compares to miscellaneous mortgage income of $1.8 million in third quarter 2000, which included $2.7 million in net losses on hedge instruments associated with the mortgage servicing portfolio. CAPITAL MARKETS First Tennessee Capital Markets generates fee income primarily from the purchase and sale of securities as both principal and agent. Inventory positions are limited to the procurement of securities solely for distribution to customers by the sales staff. Inventory is effectively hedged to protect against movements in interest rates. For third quarter 2001, capital markets fee income increased 140 percent to $90.3 million from $37.6 million in 2000. Total underwritings during third quarter 2001 were $15.1 billion compared to $2.9 billion for the same period in 2000. Total securities bought and sold were $339.2 billion for third quarter 2001, up from $197.4 billion for the same period in 2000. This increased activity reflects continued growth and penetration into our targeted institutional customer base and changes in product mix. Additionally, fee income was favorably impacted during third quarter 2001 by revenues from new products and services that capital markets began offering in the second half of 2000. These sources of revenue include portfolio advisory, underwriting for financial institutions, various other investment banking services, and the acquisition in first quarter 2001 of MidWest Research Group. This quarter's results include $25.9 million in revenues related to these new products and services, compared to $7.8 million in third quarter 2000. Additionally, capital markets 2001 fee income has benefited from an improvement from last year's distressed market conditions. Going forward, market conditions are likely to stabilize, and new products and services will continue to impact revenues favorably. Actual results could differ because of several factors, including those presented in the Forward-Looking Statements section of the MD&A. OTHER FEE INCOME Fee income from deposit transactions and cash management for third quarter 2001 increased 15 percent to $35.3 million from $30.7 million in 2000. Trust services and investment management fees decreased 20 percent to $13.8 million from $17.0 million in 2000, primarily due to the divestiture of corporate and municipal trust in fourth quarter 2000 and a decline in market values of managed portfolios which fell 15 percent to $8.3 billion on September 30, 2001, from $9.8 billion on September 30, 2000. Third quarter 2001 fee income from merchant processing decreased 9 percent to $11.7 million from $13.0 million in 2000 primarily due to a further slowdown in the hospitality industry. Cardholder fees decreased 30 percent to $5.4 million from $7.7 million in third quarter 2000 primarily due to the sales of certain single relationship credit card accounts in fourth quarter 2000 and first quarter 2001. All other income and commissions decreased 23 percent to $30.2 million from $39.1 million in third quarter 2000 primarily due to the sales of the MONEY BELT(R) ATM network in fourth quarter 2000 and First Tennessee's interest in Check Solutions Company in second quarter 2001. NET INTEREST INCOME - ------------------- Net interest income increased 15 percent to $173.5 million from $150.8 million in third quarter 2000, primarily due to lower funding costs. Earning assets decreased 4 percent to $15.8 billion in third quarter 2001 from $16.4 billion for the same period in 2000. The consolidated net interest margin (margin) increased to 4.39 percent for third quarter 2001 compared with 3.68 percent in 2000. The margin was positively impacted by the lower funding costs and improvement in the negative impact from mortgage banking due to a steeper yield curve. For third quarter 2001, the regional banking group's margin increased to 5.19 percent from 4.80 percent primarily due to the lower funding costs. 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 2001 and 2000. TABLE 2 - NET INTEREST MARGIN
Third Quarter ---------------------- 2001 2000 - ----------------------------------------------------------------------------------- REGIONAL BANKING GROUP: Yields on earning assets 7.34 % 8.63 % Rates paid on interest-bearing liabilities 3.05 4.95 - ----------------------------------------------------------------------------------- Net interest spread 4.29 3.68 - ----------------------------------------------------------------------------------- Effect of interest-free sources .74 .97 Loan fees .16 .14 FRB interest and penalties -- .01 - ----------------------------------------------------------------------------------- Net interest margin - Regional banking group 5.19 % 4.80 % MORTGAGE BANKING (.58) (.98) CAPITAL MARKETS (.24) (.16) TRANSACTION PROCESSING .02 .02 - ----------------------------------------------------------------------------------- Net interest margin 4.39 % 3.68 % ===================================================================================
As shown in Table 2, the margin is affected by the activity levels and related funding for First Tennessee's national lines of business as these nonbank business lines typically produce different margins than traditional banking activities. Mortgage banking can affect the overall margin based on a number of factors, including the size of the mortgage warehouse, the time it takes to deliver loans into the secondary market, the amount of custodial balances, and the level of mortgage servicing rights. 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. Going forward, if short-term rates remain at current levels and the slope of the yield curve does not flatten, the margin is likely to remain stable. Given the current operating environment, with historically low short-term interest rates, First Tennessee's margin may begin to move toward a more normal level as the yield curve flattens; however, it should remain favorable to this year's average level. However, the consolidated margin will continue to be influenced by the activity levels in the nonbanking lines of business, especially mortgage banking. Actual results could differ because of several factors, including those presented in the Forward-Looking Statements section of the MD&A discussion. NONINTEREST EXPENSE - ------------------- Total noninterest expense for third quarter 2001 increased 27 percent to $395.2 million from $310.2 million in 2000. The type and level of activity in mortgage banking and capital markets effect changes in personnel and total noninterest expense. Excluding mortgage banking and capital markets, total noninterest expense decreased 4 percent. Going forward, capital markets, mortgage banking and investments in efficiency and revenue enhancement programs will influence the level of noninterest expense. Employee compensation, incentives and benefits (personnel expense), the largest component of noninterest expense, increased 28 percent in third quarter 2001, primarily due to higher activity levels in mortgage banking and capital markets. Excluding mortgage banking and capital markets, personnel expense decreased 1 percent. Additional business line information related to expenses is provided in Table 3 and the discussion that follows. TABLE 3 - NONINTEREST EXPENSE COMPOSITION
Third Quarter Nine Months ------------------------ Growth ----------------------- Growth (Dollars in millions) 2001 2000 Rate(%) 2001 2000 Rate(%) - ----------------------------------------------------------------------------------------------------------------------------- Mortgage banking $ 190.0 $ 134.2 41.6 $ 499.3 $ 404.7 23.4 Regional banking group 117.2 119.9 (2.3) 403.3 352.5 14.4 Capital markets 62.3 27.7 124.6 163.0 64.8 151.4 Transaction processing 23.5 26.2 (10.3) 75.0 76.4 (1.8) Other 2.2 2.2 -- 6.4 6.4 -- - ----------------------------------------------------------------------------------------------------------------------------- Total operating expense $ 395.2 $ 310.2 27.4 $1,147.0 $ 904.8 26.8 =============================================================================================================================
Mortgage banking expenses increased 42 percent from the previous year. Expense growth for this business line varies with the volume and type of activity. The increase was impacted by a $21.9 million write-down of the book value of mortgage servicing rights due primarily to the increase in actual mortgage prepayments over the projected level as a result of the decrease in mortgage interest rates since third quarter 2000. Also impacting this growth rate was $22.7 million in loss from the establishment of a mortgage servicing rights impairment valuation reserve primarily due to the increase in expected future prepayment speeds (see also Noninterest Income - Mortgage Banking for increase in refinance origination volume). In addition, amortization of mortgage servicing rights increased 38 percent to $29.5 million in third quarter 2001 from $21.3 million in 2000 primarily due to faster projected prepayment speeds associated with lower mortgage interest rates. The increase was also impacted by growth in personnel expense, due to the higher activity levels in third quarter 2001. Partially offsetting these increases was a decrease of $9.7 million in the amount of hedge expense reflected in noninterest expense due to the repositioning of the mortgage servicing hedge portfolio in 2000 and the adoption of SFAS No. 133 in 2001. Going forward, the levels of amortization and write-downs of mortgage servicing rights will be influenced by the volume of mortgages refinanced from the servicing portfolio. Capital markets expenses grew 125 percent from third quarter 2000 primarily due to higher commissions and incentives recognized in third quarter 2001 which caused total personnel expense for this segment to increase 135 percent, or $32.0 million from 2000. Expenses for the regional banking group decreased 2 percent from third quarter 2000, and transaction processing expenses for third quarter 2001 decreased 10 percent from the previous year. The decreases in these segments were primarily due to divestitures and efficiency programs implemented since fourth quarter 2000. PROVISION FOR LOAN LOSSES/ASSET QUALITY - --------------------------------------- The provision for loan losses is the charge to operating earnings that management determines to be necessary to maintain the allowance for loan losses at an adequate level reflecting management's estimate of the risk of loss inherent in the loan portfolio. An analytical model based on historical loss experience, current trends and economic conditions, and reasonable foreseeable events is used to determine the amount of provision to be recognized and to test the adequacy of the loan loss allowance. The provision for loan losses increased for third quarter 2001 to $22.8 million from $16.5 million in third quarter 2000, reflecting economic conditions including the impact of increased nonperforming loans and higher charge-offs. The ratio of allowance for loan losses to total loans, net of unearned income, was 1.51 percent on September 30, 2001, compared to 1.44 percent on September 30, 2000. 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) 2001 2000 - --------------------------------------------------------------------------------------------- REGIONAL BANKING GROUP: Nonperforming loans $ 46,593 $ 15,527 Foreclosed real estate 8,160 5,183 Other assets 140 94 - --------------------------------------------------------------------------------------------- Total nonperforming assets - Regional Banking Group 54,893 20,804 - --------------------------------------------------------------------------------------------- MORTGAGE BANKING: Nonperforming loans 22,891 25,689 Foreclosed real estate 10,658 10,486 - --------------------------------------------------------------------------------------------- Total nonperforming assets - Mortgage Banking 33,549 36,175 - --------------------------------------------------------------------------------------------- Total nonperforming assets $ 88,442 $ 56,979 ============================================================================================= Loans and leases 30 to 89 days past due $ 93,836 $100,734 Loans and leases 90 days past due $ 35,101 $ 36,365 Potential problem assets* $108,141 $110,651
Third Quarter ---------------------------- 2001 2000 ---------------------------- ALLOWANCE FOR LOAN LOSSES: Beginning balance at June 30 $ 148,658 $ 142,722 Provision for loan losses 22,778 16,593 Charge-offs (23,542) (15,574) Loan recoveries 3,286 2,182 - --------------------------------------------------------------------------------------------- Ending balance at September 30 $ 151,180 $ 145,923 =============================================================================================
September 30 --------------------- 2001 2000 --------------------- Allowance to total loans 1.51% 1.44% Allowance to nonperforming loans 218 354 Nonperforming assets to total loans, foreclosed real estate and other assets (Regional Banking Group only) .60 .22 Nonperforming assets to unpaid principal balance of servicing portfolio (Mortgage Banking only) .08 .08 - ---------------------------------------------------------------------------------------------- * Includes loans and leases 90 days past due.
The ratio of total net charge-offs to average loans increased to .81 percent for third quarter 2001 from .53 percent for third quarter 2000. The increase in commercial loan net charge-offs from the unsustainable low levels in the third quarter of 2000 was primarily from loans to two Tennessee domiciled commercial customers that were previously classified as nonperforming loans since third quarter 2000. The increase in consumer loan net charge-offs was due to deterioration in economic conditions and increased charge-offs of loans with a higher risk and reward profile. The credit card receivables charge-off ratio decreased to 3.99 percent for third quarter 2001 from 4.39 percent for third quarter 2000, due primarily to the sale of the single relationship credit card accounts. TABLE 5 - CHARGE-OFF RATIOS
Third Quarter -------------------- 2001 2001 - -------------------------------------------------------------------------------- Commercial .48% .01% Consumer real estate .82 .39 Other consumer 2.58 1.86 Credit card receivables 3.99 4.39 Total net charge-offs .81 .53 - --------------------------------------------------------------------------------
As regional banking group nonperforming assets increased to $54.9 million on September 30, 2001, the ratio of nonperforming assets to total loan increased to .60 percent. This compares to nonperforming assets of $20.8 million on September 30, 2000, and a nonperforming assets ratio of .22 percent. The growth in nonperforming assets occurred primarily due to two large Tennessee domiciled commercial customers and related parties with total balances of approximately $24 million that were classified as nonperforming loans since third quarter 2000. Mortgage banking nonperforming assets decreased $2.7 million to $33.5 million on September 30, 2001. First Tennessee has not sold any nonperforming loans during 2001 but continues to internally resolve asset quality issues. On September 30, 2001, First Tennessee had no concentrations of 10 percent or more of total loans in any single industry. Recent acts of terrorism have had a negative impact on the passenger airline and property and casualty insurance industries. First Tennessee does not have a material credit exposure in these industries. Going forward, asset quality indicators should reflect the relative strength of the economy and the resolution of existing asset quality issues. Actual results could differ because of several factors, including those presented in the Forward-Looking Statements section of the MD&A discussion. INCOME TAX EXPENSE - ------------------ The effective tax rate for third quarter 2001 was 32 percent up from 22 percent for third quarter 2000. This variance was primarily due to a tax benefit last year related to the issuance of cumulative preferred stock by an affiliate of First Tennessee in third quarter 2000. BALANCE SHEET REVIEW EARNING ASSETS - -------------- Earning assets primarily consist of loans, loans held for sale and investment securities. For third quarter 2001, earning assets averaged $15.8 billion compared with $16.4 billion for third quarter 2000. On September 30, 2001, First Tennessee reported total assets of $19.7 billion compared with $19.2 billion on September 30, 2000. Average total assets decreased 4 percent to $18.8 billion from $19.6 billion in third quarter 2000. LOANS Since third quarter 2000, First Tennessee has sold approximately $300 million of its single-relationship credit card receivables, approximately $340 million of student loans, and Peoples and Union Bank with total loans of approximately $110 million. Excluding the impact of these divestitures, average loans increased approximately 13 percent since third quarter 2000 with growth in commercial loans of 5 percent and approximately 8 percent growth in retail loans. Including the impact of these divestitures, average loans decreased 1 percent to $10.0 billion from $10.1 billion in 2000 and retail loans decreased 7 percent. Additional loan information is provided in Table 6. TABLE 6 - AVERAGE LOANS
Three Months Ending September 30 ----------------------------------------------------------------------- PERCENT GROWTH Percent (Dollars in thousands) 2001 OF TOTAL RATE 2000 of Total - ------------------------------------------------------------------------------------------------------------------------- Commercial: Commercial, financial and industrial $ 4,028.5 41% 5.0 % $ 3,837.8 38% Real estate commercial 930.9 9 3.2 902.0 9 Real estate construction 435.4 4 4.7 416.0 4 Retail: Real estate residential 3,609.3 36 7.5 3,358.4 34 Real estate construction 184.4 2 18.7 155.3 2 Other consumer 484.1 5 (42.2) 837.1 8 Credit card receivables 279.4 3 (48.9) 546.7 5 - ------------------------------------------------------------------------------------------------------------------------- Total loans, net of unearned $ 9,952.0 100% (1.0)% $10,053.3 100% =========================================================================================================================
During years prior to 2001 certain retail loans have been securitized. The majority of these securities are owned by subsidiaries of First Tennessee, including FTBNA, and are classified as investment securities. LOANS HELD FOR SALE/INVESTMENT SECURITIES Loans held for sale, consisting primarily of mortgage loans, decreased 18 percent to $2.2 billion from $2.7 billion due to the earlier delivery of loans out of the warehouse in 2001. Average investment securities decreased 9 percent in third quarter 2001 to $2.5 billion from $2.8 billion primarily due to certain securities available for sale being transferred to trading securities and declining balances of retained securitization interests, which are paying down without being replenished. DEPOSITS AND OTHER SOURCES OF FUNDS - ----------------------------------- Since the third quarter of 2000, total average core deposits increased 3 percent to $9.2 billion from $8.9 billion. While interest-bearing core deposits remained relatively flat at $5.9 billion, noninterest-bearing core deposits increased 12 percent to $3.3 billion from $3.0 billion primarily due to expanded usage of a cash management investment product and growth in mortgage escrow accounts. Short-term purchased funds decreased 21 percent to $6.5 billion from $8.2 billion for the previous year as an increase in core deposits provided additional funding and the mortgage warehouse, which is funded with purchased funds, decreased. CAPITAL - ------- Total capital (shareholders' equity plus qualifying capital securities and subsidiary preferred stock) on September 30, 2001, was $1.6 billion, up 12 percent from $1.4 billion on September 30, 2000. Shareholders' equity (excluding the qualifying capital securities and subsidiary preferred stock) was $1.4 billion on September 30, 2001, an increase of 10 percent from $1.3 billion on September 30, 2000. The increase in total capital was primarily due to the retention of net income after dividends. The change in capital was reduced by share repurchases, primarily related to stock option exercises, which totaled $215.0 million, or 6.5 million shares, since September 30, 2000. On October 16, 2001, the board of directors approved the repurchase of 4.2 million shares of First Tennessee's common stock for use in connection with various stock option plans. The repurchases will occur within the option exercise period. In addition the board of directors extended from June 30, 2002, until December 31, 2004, the non-stock option plan-related repurchases of shares, previously approved in October 2000. Repurchases will be made in the open market or through privately negotiated transactions and will be subject to market conditions, accumulation of excess equity and prudent capital management. Average shareholders' equity increased 9 percent since third quarter 2000 to $1.4 billion from $1.3 billion, reflecting internal capital generation. The average total equity to average assets ratio was 8.14 percent and the average shareholders' equity to average assets ratio was 7.37 percent for third quarter 2001. This compares with 7.01 percent and 6.50 percent, respectively, for third quarter 2000. Unrealized market valuations had no material effect on the ratios during third quarter 2001. On September 30, 2001, the corporation's Tier 1 capital ratio was 9.19 percent, the total capital ratio was 12.46 percent and the leverage ratio was 7.34 percent. On September 30, 2001, First Tennessee's bank affiliates had sufficient capital to qualify as well-capitalized institutions. FINANCIAL SUMMARY (COMPARISON OF FIRST NINE MONTHS OF 2001 TO FIRST NINE MONTHS OF 2000) Earnings for 2001 were $240.4 million before debt restructurings and the cumulative effect of changes in accounting principles related to derivatives (SFAS No. 133 and EITF 99-20). Diluted earnings per common share before debt restructurings and the cumulative effect of changes in accounting principles were $1.82 in 2001. Earnings for 2001 after debt restructurings and the cumulative effect of changes in accounting principles were $229.0 million or $1.74 diluted earnings per common share. Earnings in 2000 were $160.9 million or $1.22 diluted earnings per common share. For the first nine months of 2001, return on average shareholders' equity was 22.2 percent and return on average assets was 1.61 percent, while in 2000 these ratios were 17.0 percent and 1.11 percent, respectively. Total revenue increased 33 percent, with a 48 percent increase in fee income and a 10 percent increase in net interest income. Fee income contributed 69 percent to total revenue in 2001 compared with 62 percent in 2000. INCOME STATEMENT REVIEW - ----------------------- Noninterest income, excluding securities gains and losses, increased 48 percent for the first nine months of 2001 to $1,082.3 million from $733.0 million for the same period last year. Mortgage banking fee income increased 56 percent to $481.4 million from $309.6 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 190 percent to $234.8 million from $80.9 million for 2000. For the first nine months of 2001, fee income in deposit transactions and cash management grew 9 percent to $94.7 million from $86.8 million. For 2001, gains from divestitures were $81.5 million due to gains from the sale of First Tennessee's partnership interest in Check Solutions Company ($45 million), the sale of Peoples and Union Bank ($13 million), the sale of a portfolio of student loans ($12 million), the sale of certain single relationship credit card accounts ($7 million), and an earn-out in 2001 related to the fourth quarter 2000 divestiture of First Tennessee's corporate and municipal trust business ($4 million). There were divestiture gains of $40.9 million in 2000 from the sale of the HomeBanc Mortgage division. Trust services and investment service fees decreased 12 percent to $43.4 million from $49.1 million and merchant-processing fees decreased 4 percent to $34.7 million from $36.3 million. Cardholder fees decreased 31 percent to $15.0 million from $21.7 million. All other income and commissions decreased 10 percent to $96.8 million from $107.7 million. The reasons for the year-to-date trends were similar to the quarterly trend information already discussed. Net interest income increased 10 percent to $492.8 million from $449.4 million for the first nine months of 2000 while earning assets decreased 1 percent to $15.9 billion from $16.1 billion for 2000. Year-to-date consolidated margin increased to 4.12 percent in 2001 from 3.72 percent in 2000. The reasons for the year-to-date trends were similar to the quarterly trend information already discussed. In the regional banking group the year-to-date margin increased to 4.93 percent from 4.88 percent primarily due to lower funding costs. Noninterest expense for the first nine months of 2001 increased 27 percent to $1,147.0 million from $904.8 million. See Table 3 - Noninterest Expense Compensation for a breakdown of total expenses by business line. Mortgage banking expenses increased 23 percent to $499.3 million from $404.7 million. During this period, amortization of capitalized mortgage servicing rights increased 43 percent to $82.7 million from $57.7 million. Also included in this growth is the $64.5 million write-down in 2001 of the book value of mortgage servicing rights primarily due to the increase in actual mortgage prepayments over the projected level as a result of the decrease in mortgage interest rates since third quarter 2000. In addition, $22.7 million in loss was recognized in 2001 from the establishment of a mortgage servicing rights impairment valuation reserve primarily due to the increase in expected future prepayment speeds. Capital markets expenses increased 151 percent over this same period to $163.0 million from $64.8 million. Expense growth for mortgage banking and capital markets varies with the volume and type of activity. Expenses in the regional banking group grew 14 percent from the previous year to $403.3 million from $352.5 million due primarily to the nonoperating expenses associated with asset write-offs, lease abandonment, branch closures, major marketing campaigns to attract new retail customers, litigation losses, consulting fees, and personnel costs related to early retirement and severance. Transaction processing expenses decreased 2 percent for the nine-month period primarily due to divestiture of the MONEY BELT(R) ATM network in fourth quarter 2000. The provision for loan losses increased 20 percent to $59.2 million from $49.1 million for the previous year. The reasons for the year-to-date trends were similar to the quarterly trend information already discussed. DEBT RESTRUCTURINGS - ------------------- In second quarter 2001, there was a $5.1 million pre-tax ($3.2 million after-tax) loss related to debt restructurings. For financial statement presentation purposes this nonoperating loss is treated as an extraordinary item and therefore, net income and earnings per share are indicated before and after the after-tax loss. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES - ----------------------------------------------------- SFAS No. 133 and EITF 99-20 were adopted on January 1, 2001. At that date all freestanding derivative instruments were measured at fair value with differences between the previous book value and fair value reported as a one-time accounting adjustment. Likewise, offsetting gains and losses on hedged assets, liabilities and firm commitments were recognized as adjustments of their respective book values at the adoption date as part of this accounting adjustment, except to the extent that they related to hedges of the variable cash flow exposure of a forecasted transaction. To the extent the adoption adjustment related to hedges of the variable cash flow exposure of a forecasted transaction, the accounting adjustment, a $1.4 million after-tax gain, was reported as a cumulative effect adjustment of comprehensive income. Additionally, the new rules regarding the recognition of impairment and income of interest-only strips were adopted. The net one-time accounting adjustments reported on the income statement as the cumulative effect of changes in accounting principles were an $8.2 million after-tax loss. BALANCE SHEET REVIEW - -------------------- For the first nine months of 2001, total assets averaged $19.0 billion compared with $19.4 billion in 2000. Average loans grew 3 percent to $10.1 billion from $9.8 billion for the first nine months of 2000. Average commercial loans increased 9 percent to $5.4 billion from $5.0 billion. Retail loans decreased 3 percent with an average of $4.7 billion in 2001 compared with $4.8 billion in 2000. Average investment securities decreased 9 percent to $2.6 billion from $2.9 billion for 2000. Loans held for sale, consisting primarily of mortgage loans, decreased 15 percent to $2.2 billion from $2.6 billion. For the first nine months of 2001, average core deposits increased 3 percent to $9.2 billion from $8.9 billion. While interest-bearing core deposits remained relatively flat at $6.0 billion, noninterest-bearing deposits increased 12 percent to $3.2 billion from $2.9 billion in 2000. Short-term purchased funds decreased 15 percent for the nine-month period to $6.8 billion from $8.0 billion. The reasons for the year-to-date balance sheet trends were similar to the quarterly trend information already discussed. OTHER ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - ------------------------------------------------------------ SFAS No. 133, which was adopted on January 1, 2001, establishes accounting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. It requires that changes in the instrument's fair value be recognized currently in earnings (or other comprehensive income). If certain criteria are met, changes in the fair value of the asset or liability being hedged are also recognized currently in earnings. The initial impact of adopting SFAS No. 133 resulted in a net transition adjustment that was recognized as the cumulative effect of a change in accounting principle. Fair value is determined on the last business day of a reporting period. This point in time measurement of derivative fair values and the related hedged item fair values may be well suited to the measurement of hedge effectiveness, as well as reported earnings, when hedge time horizons are short. The same measurement however may not consistently reflect the effectiveness of longer-term hedges and, in First Tennessee's view, can distort short-term measures of reported earnings. First Tennessee uses a combination of derivative financial instruments to hedge certain components of the interest rate risk associated with its portfolio of capitalized mortgage servicing rights, which currently have an average life of approximately seven years. Over this long-term time horizon this combination of derivatives can be effective in significantly mitigating the effects of interest rate changes on the value of the servicing portfolio. However, these derivative financial instruments can and do demonstrate significant price volatility depending upon prevailing conditions in the financial markets. If a reporting period ends during a period of volatile financial market conditions, the effect of such point in time conditions on reported earnings does not reflect the underlying economics of the transactions or the true value of the hedges to First Tennessee over their estimated lives. The fact that the fair value of a particular derivative is unusually low or high on the last day of the reporting period is meaningful in evaluating performance during the period only if First Tennessee sells the derivative within the period of time before fair value changes and does not replace the hedge coverage with another derivative. First Tennessee believes the effect of such volatility on short-term measures of earnings is not indicative of the expected long-term performance of this hedging practice. First Tennessee believes that difficulties in interpreting the effects of SFAS No. 133 are sufficiently great that it may be worthwhile to be able to identify and isolate these effects and to determine what net income would be excluding certain SFAS No. 133 adjustments related to mortgage banking capitalized servicing rights. Therefore, this analysis has been added as a recurring part of management's discussion of operating results. This new item, servicing rights net value changes under SFAS No. 133, represents the change in the fair value of hedged interest rate risk of capitalized mortgage servicing rights, net of changes in the fair value of derivative financial instruments designated to hedge such risks excluding the impact of cash settlements and interest accruals on derivatives with periodic cash flows and changes in fair value due to the passage of time including time decay of options, and beginning in the third quarter, the time price convergence of forward instruments. For the first nine months of 2001, a pre-tax gain of $8.2 million ($5.2 million after tax) was recognized as servicing right net value changes under SFAS No. 133. For the third quarter, a pre-tax gain of $4.5 million ($2.9 million after tax) was recognized. The impact on earnings from hedging of the mortgage servicing rights portfolio is included on the Statement of Income in noninterest income. First Tennessee believes a review of the trend, if any, of the servicing rights net value changes under SFAS No. 133 over a long period of time, preferably over an interest rate business cycle, is a more meaningful measure to determine the effectiveness of hedging strategies. For its internal evaluation of performance for each applicable period, First Tennessee subtracts SFAS No. 133 gains from reported net income and adds SFAS No. 133 losses to reported net income. The internal evaluation of long-term performance will include the long-term trend, if any, in SFAS No. 133 gains or losses. FURTHER INTERPRETATIONS OF SFAS NO. 133 - --------------------------------------- Certain provisions of SFAS No. 133 continue to undergo significant discussion and debate by the Financial Accounting Standards Board (FASB). One such potential issue involves the assessment of hedge effectiveness (and its impact on qualifying for hedge accounting) when hedging fair value changes of prepayable assets due to changes in the benchmark interest rate. As the FASB continues to deliberate interpretation of the new rules, the potential exists for a difference between First Tennessee's interpretation and that of the FASB, the effects of which cannot presently be anticipated. ACCOUNTING CHANGES - ------------------ On June 30, 2001, the FASB finalized SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 141 all business combinations initiated after June 30, 2001, must be accounted for using the purchase method. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to an assessment for impairment using a fair-value-based test at least annually. Goodwill associated with equity-method investments is also no longer amortized, but impairment analysis is governed by existing impairment guidance for equity-method investments and not the new impairment rules. Also under the new rules, acquired intangible assets should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold or otherwise transferred, regardless of the acquirer's intent to do so. These new rules are expected to result in more intangible assets being separated from goodwill than generally occurs today. The resulting assets will be amortized over their useful lives. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, which for First Tennessee will mean January 1, 2002. First Tennessee estimates the impact of adopting these new standards will be to reduce noninterest expense annually by approximately $7 million pre-tax without regard to any new acquisitions or future impairment that may occur, the effect of which cannot be predicted at this time. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses accounting and reporting issues related to the impairment of long-lived assets and for long-lived assets to be disposed of. This standard is effective for fiscal years beginning after December 15, 2001, which for First Tennessee will be January 1, 2002. First Tennessee anticipates the impact of adopting this standard will be immaterial. 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 Notes 1 and 24 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 appendix to the Corporation's 2001 Proxy Statement. Part II. OTHER INFORMATION Items 1, 2, 3, 4 and 5 - ---------------------- As of the end of the third quarter, 2001, the answers to Items 1, 2, 3, 4 and 5 were either inapplicable or negative, and therefore, these items are omitted. Item 6 - Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit No. Description - ----------- ----------- 3(ii) Bylaws of the Corporation, as amended and restated. 4 Instruments defining the rights of security holders, including indentures.* **10(a) Management Incentive Plan, as amended and restated. **10(c) 1997 Employee Stock Option Plan, as amended and restated, incorporated herein by reference to Exhibit 10(c) to the Corporation's 2000 Annual Report on Form 10-K and 10-16-01 amendment. * 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. ** This is a management contract or compensatory plan required to be filed as an exhibit. (b) Reports on Form 8-K. No report on Form 8-K was filed during the third quarter of 2001. 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: 11/13/01 By: /s/ Elbert L. Thomas Jr. --------------------- --------------------------------- Elbert L. Thomas Jr. Executive Vice President and Chief Financial Controller (Duly Authorized Officer and Principal Financial Officer) EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 3(ii) Bylaws of the Corporation, as amended and restated. 4 Instruments defining the rights of security holders, including indentures.* **10(a) Management Incentive Plan, as amended and restated. **10(c) 1997 Employee Stock Option Plan, as amended and restated, incorporated herein by reference to Exhibit 10(c) to the Corporation's 2000 Annual Report on Form 10-K and 10-16-01 amendment. * 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. ** This is a management contract or compensatory plan required to be filed as an exhibit. EX-3.(II) 3 g72558ex3-ii.txt BYLAWS OF THE CORPORATION EXHIBIT 3(ii) BYLAWS OF FIRST TENNESSEE NATIONAL CORPORATION (AS AMENDED AND RESTATED OCTOBER 16, 2001) 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, 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. 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 thirteen 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 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. 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, an Executive Vice President-Employee Services, a President-Business Financial Services, a President-Retail Financial Services, a Secretary, and a Treasurer, and such number of Senior Executive Vice Presidents, 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. 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 Executive Vice President-Employee Services 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. 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 EXECUTIVE VICE PRESIDENT-EMPLOYEE SERVICES. The Executive Vice President-Employee Services 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 PRESIDENT-BUSINESS FINANCIAL SERVICES. The President-Business Financial Services 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 PRESIDENT-RETAIL FINANCIAL SERVICES. The President-Retail Financial Services 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. 4.17 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. 4.18 SENIOR EXECUTIVE VICE PRESIDENTS, EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND VICE PRESIDENTS. Senior Executive 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. 4.19 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. 4.20 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, 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. 4.21 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. 4.22 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. 4.23 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. 4.24 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 (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: (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. 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; provided, however, any director first elected to the Board of Directors prior to April 17, 1996, may serve a minimum of two three-year terms. (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 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 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 Senior Executive Vice President, any Executive Vice President, any Senior Vice President, any Vice President, the Chief Financial Officer, the Chief Credit Officer, the General Counsel, the Executive Vice President-Employee Services, the President - Retail Financial Services, the President - Business Financial Services, 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. 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 one of the following officers: Chairman of the Board, Chief Executive Officer, President, any Vice Chairman, any Senior Executive Vice President, any Senior Executive Vice President, any Executive Vice President, Chief Credit Officer, Chief Financial Officer, Controller, General Counsel, Manager of Risk Management, Executive Vice President-Employee Services, President-Business Financial Services, President-Retail Financial Services, 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 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. EX-10.(A) 4 g72558ex10-a.txt MANAGEMENT INCENTIVE PLAN FIRST TENNESSEE NATIONAL CORPORATION MANAGEMENT INCENTIVE PLAN (Amended and Restated October 16, 2001) 1. PURPOSE. The purpose of the First Tennessee National Corporation Management Incentive Plan (the "Plan") is to promote the interests of the shareholders of First Tennessee National Corporation (the "Company") by providing an incentive to key officers and employees of the Company and subsidiaries of the Company who can contribute most to the short-term and long-term growth and profitability of the Company. It is intended that incentive awards paid under the Plan fall within the "performance-based compensation" exception contained in Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Tax Code"). 2. EFFECTIVE DATE OF PLAN. The Plan was originally effective January 1, 1974. The Plan, as amended and restated on October 20, 1999, shall be effective immediately. 3. PLAN ADMINISTRATION. The Plan shall be administered by a committee ("Committee") whose members shall be appointed from time to time by, and shall serve at the pleasure of, the Board of Directors of the Company. In addition, all members shall be directors and shall meet the definitional requirements for both "non-employee director" (with any exceptions therein permitted) contained in the then current Securities and Exchange Commission Rule 16b-3 or any successor provision and "outside director" as defined for purposes of Section 162(m) of the Tax Code or any successor provision. The Committee shall adopt such rules of procedure as it may deem proper. The powers of the Committee shall include plenary authority to interpret the Plan, and subject to the provisions hereof, to determine the persons who are eligible to receive awards under the Plan, the terms of any awards, the Corporate Financial Criteria, Performance Goals, and other criteria applicable to such awards, and the extent to which the Company and the Participants in the Plan have achieved the performance goals. The Committee shall have the power, in its sole and complete discretion, to reduce the amount of or eliminate any award under the Plan, but the Committee shall have no power to increase any award that has been calculated pursuant to the provisions of this Plan. 4. ELIGIBILITY. All key officers and employees of the Company or any of its subsidiaries are eligible for participation in the Plan. Actual participation in the Plan for the Plan Year will be limited to and awards may be granted under the Plan to those key officers and employees of the Company or any subsidiary of the Company who, in the judgment of the Committee, have an identifiable impact upon the growth and profitability of the Company who are selected for participation in the Plan for the Plan Year by the Committee. Determination by the Committee of the key officers and employees who will participate in the Plan for the Plan Year shall be conclusive. 5. AWARDS. Prior to or within 90 days after the commencement of each calendar year (the "Plan Year"), the Committee shall designate the following: 1. The key officers and employees, if any, who will participate (the "Participants") in the Plan for the Plan Year. 2. The Corporate Financial Criteria, as defined herein, which will apply to awards for the Plan Year and the weighting of the Corporate Financial Criteria. 3. The Performance Goals, as defined herein, to be met by the Company for Participants to earn awards for the Plan Year and a payout matrix or grid or formula for such Corporate Financial Criteria and Performance Goals. After the period of time specified in the prior sentence, the Committee may designate additional officers and employees who will participate in the Plan for the Plan Year (also "Participants" for purposes hereof); provided, however, that any award earned by such Participant for participation for such partial Plan Year will be pro-rated based on the number of days during the Plan Year in which the Participant participated in the Plan. Awards under the Plan shall be paid to the Participants as provided for herein in cash and common stock of the Company in such proportion as may be established by the Committee from time to time. A maximum of 300,000 shares of the Company's common stock, $0.625 par value (the "common stock"), in the aggregate may be issued to Participants as awards under the Plan. If common stock is used in payment of awards, it will be provided from shares purchased in the open market or privately or by the issuance of previously authorized but unissued shares and shall be issued at 100% of fair market value as of the date the award is approved by the Committee. "Fair Market Value" for purposes of the Plan shall be the mean between the high and low sales prices at which shares of the Company were sold on the valuation day as quoted by the Nasdaq Stock Market or, if there were no sales on that day, then on the last day prior to the valuation day during which there were sales. In the event that this method of valuation is not practicable, then the Committee, in its discretion, shall establish the method by which fair market value shall be determined. A Participant who terminates employment, either voluntarily or involuntarily, before the payment date for awards for the Plan Year that have not been deferred is thereby ineligible for an award under the Plan; provided, however, the Committee may, in its sole and complete discretion, determine to pay an award in the event termination was the result of death, disability, retirement, or a reduction in work force. 6. CORPORATE FINANCIAL CRITERIA. For each Plan Year, the Committee shall designate one or more of the corporate financial criteria (the "Corporate Financial Criteria") set forth in this Section 6 for use in determining an award for a Participant for such Plan Year. Corporate financial criteria designated for any Participant for a Plan Year may be different from those designated for other Participants in the same year. The Committee may specify Corporate Financial Criteria in relation to consolidated Company performance or in relation to performance of identifiable segments, business lines, departments, or subsidiaries of the Company. Corporate Financial Criteria shall consist of the following financial measures: book value, earnings per share, market capitalization, net income, price-earnings ratio, return on assets, return on equity, and return on revenue; provided, however, that the Committee retains the discretion to determine whether an award will be paid under any one or more of such Corporate Financial Criteria. 7. PERFORMANCE GOALS. For each Plan Year, the Committee shall establish specific, objective performance goals (the "Performance Goals"), for each of the Corporate Financial Criteria designated by the Committee for the Plan Year against which actual performance is to be measured to determine the amount of awards. Performance Goals established by the Committee may be described by means of a grid or matrix, providing for goals resulting in the payment of awards in such percentages as the Committee may designate of the target award payable to the Participant pursuant to the provisions of this Plan. A Performance Goal may be expressed in any form the Committee determines, including, but not limited to, the following: percentage growth, absolute growth, cumulative growth, performance versus an index, performance versus a peer group, a designated absolute amount, and a per share amount. 8. DETERMINATION AND PAYMENT OF AWARDS. 8.1 As soon as practicable after the end of the Plan Year, the Committee will determine the amount of the award earned by each Participant, based on application of the criteria specified in this Section 8 and the recommendation of the Chief Executive Officer of the Company. Payment will be made promptly after determination of the awards by the Committee unless payment of an award has been deferred pursuant to Section 11.6 hereof. Such Committee determination must include a certification in writing that the Performance Goals and any other material terms of the award were in fact satisfied; provided that minutes of the Committee meeting (or any action by written consent) shall satisfy the written certification requirement. 8.2 For any Participant holding the office of Chairman of the Board, Chief Executive Officer or President of the Company, the award will be the amount obtained by multiplying the following amounts: (1) Salary dollars earned by the Participant with respect to the Plan Year, (2) a specified percentage (expressed as a decimal) determined by the Committee to apply to the Participant for the Plan Year, and (3) the percentage achievement (expressed as a decimal) by the Company of the Performance Goals for the Corporate Financial Criteria designated by the Committee for the Plan Year. 8.3 For any Participant who is not covered by Section 8.2, the award will be the amount obtained by multiplying the following amounts: (1) Salary dollars earned by the Participant with respect to the Plan Year, (2) a specified percentage (expressed as a decimal) determined by the Committee to apply to the Participant for the Plan Year, (3) the percentage achievement (expressed as a decimal) by the Company of the Performance Goals for the Corporate Financial Criteria designated by the Committee for the Plan Year, and (4) if the Committee determines to apply the following percentage to the Participant for the Plan Year, the Participant's percentage achievement (expressed as a decimal) of his/her personal plan goals (as recommended by the Chief Executive Officer of the Company and approved by the Committee). 8.4 Notwithstanding anything herein to the contrary, the maximum dollar amount that may be awarded for any Plan Year to any Participant may not exceed $1.5 million. 8.5 Notwithstanding anything herein to the contrary, for each Participant who is the Chief Executive Officer of the Company or other officer whose salary is subject to the provisions of Section 162(m) of the Tax Code, in calculating any award under the Plan "salary" shall be limited to salary at the annual rate established or in effect for the Participant at the time the Committee establishes Performance Goals for the Plan Year and for each Participant specified by a bank regulatory authority of the Company or any of its subsidiaries, that Participant's award shall be calculated as required by such bank regulatory authority, subject to the maximum dollar limitation imposed by Section 8.4 hereof. 9. TERMINATION SUSPENSION OR MODIFICATION OF THE PLAN. The Board of Directors may at any time, with or without notice, terminate, suspend, or modify the Plan in whole or in part, except that the Board of Directors shall not amend the Plan in violation of the law. The Committee is expressly permitted to make any amendment to the Plan, which is not in violation of law, that is required to conform the Plan to the requirements of Section 162(m). 10. CHANGE IN CONTROL. 10.1 For purposes of this Plan, a "Change in Control" means the occurrence of any one of the following events: (I) individuals who, on January 21, 1997, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 21, 1997, whose election or nomination for election was approved by a vote of at least three-fourths (3/4) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director; (ii) any "Person" (as defined under Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Section 13(d) or Section 14(d) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company Voting Securities; provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary, (B) by an employee stock ownership or employee benefit plan or trust sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, or (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii)); (iii) the consummation of a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's stockholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to the consummation of such Business Combination (or, if applicable, is represented by shares in which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan sponsored or maintained by the surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B), and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur. For purposes of this Section 10.1, "Company Voting Securities" means the Company's then outstanding securities eligible to vote for the election of the Board, and "Subsidiary" means an entity in which the Company directly or indirectly beneficially owns more than 50% of the voting securities or interests. 10.2 If a Change in Control occurs, an award under the Plan shall be paid at the time specified below to each Participant without regard to any contrary provisions of the Plan, computed as follows: the award to be paid will be in the form of a lump sum cash amount equal to the portion of the Participant's target award for the Plan Year in which a Change in Control occurs in an amount equal to the product of (I) the Participant's target bonus under the Plan for such Plan Year, and (ii) a fraction, the numerator of which is the number of days in the Plan Year in which a Change in Control occurs through the date of the Change in Control, and the denominator of which is three hundred sixty-five (365). Payment of an award under this Section 10.2 of the Plan shall be made immediately upon the occurrence of an event described in Section 10.1(I), 10.1 (ii) or 10.1 (iv) and, in the event an agreement to effectuate a Change in Control pursuant to a Business Combination has been executed, shall be made three business days prior to the date the Chief Executive Officer of the Company believes in good faith to be the effective date of the merger or other transaction described in Section 10.1 (iii) hereof. Any payments made as a result of the operation of this Section 10.2 of the Plan shall reduce dollar for dollar any other payments otherwise due under the Plan. 11. MISCELLANEOUS. 11.1 NO ASSIGNMENTS. No award under this Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, including any such liability which is for alimony or other payments for the support of a spouse or former spouse, or for any other relative of Participant prior to actually being received by Participant or his/her designated beneficiary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any right to such award shall be void. 11.2 NO RIGHT OF EMPLOYMENT. Neither the adoption of the Plan nor the determination of eligibility to participate in the Plan nor the granting of an award under the Plan shall confer upon any Participant any right to continue in the employ of the Company or any of its subsidiaries or interfere in any way with the right of the Company or the subsidiary to terminate such employment at any time. 11.3 TAX WITHHOLDING. The Company shall have the right to withhold the amount of any tax attributable to amounts payable under the Plan, and the Company may defer making payment or delivery of any benefits under the Plan if any tax is payable until indemnified to its satisfaction. 11.4 GOVERNING LAW. The Plan and all determinations under the Plan shall be governed by and construed in accordance with the laws of the State of Tennessee. 11.5 OTHER PLANS. Nothing in this Plan shall be construed as limiting the authority of the Committee, the Board of Directors, the Company or any subsidiary of the Company to establish any other compensation plan or as in any way limiting its or their authority to pay bonuses or supplemental compensation to any persons employed by the Company or a subsidiary of the Company, whether or not such person is a Participant in this Plan and regardless of how the amount of such compensation or bonus is determined. 11.6 DEFERRALS OF AWARDS. A Participant may elect to defer payment of his/her cash award under the Plan if deferral of an award under the Plan is permitted pursuant to the terms of a deferred compensation program of the Company existing at the time the election to defer is permitted to be made, and the Participant complies with the terms of such program. 11.7 SECTION 162(M). It is the intention of the Company that all payments made under the Plan shall fall within the "performance-based compensation" exception contained in Section 162(m) of the Tax Code. Thus, unless the Board of Directors expressly determines otherwise and, except for Section 10.2 of the Plan, if any Plan provision is found not to be in compliance with such exception, that provision shall be deemed to be amended so that the provision does comply to the extent permitted by law, and in every event, the Plan shall be construed in favor of its meeting the "performance-based compensation" exception contained in Section 162(m). 11.8 ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Any increase in the number of outstanding shares of common stock of the Company occurring through stock splits or stock dividends after the adoption of the Plan shall be reflected proportionately: (I) in an increase in the aggregate number of shares then available for awards under the Plan and (ii) in the number available for award to any one person. Any fractional shares resulting from such adjustments shall be eliminated. If changes in capitalization other than those considered above shall occur, the Board of Directors shall make such adjustments in the number and class of shares for which awards may thereafter be granted as the Board in its discretion may consider appropriate, and all such adjustments shall be conclusive. 12. AUTOMATIC, NON-DISCRETIONARY ADJUSTMENT. 12.1 For the 1999 Plan Year only, the amount of any cash award otherwise payable under Sections 1.0-11.0 of this Plan shall be adjusted in accordance with the provisions of this Section 12.1. The amount of cash that is payable to a participant under the Plan, taking into account the adjustment provided for in this Section 12.1 and net of any amount of bonus that has been deferred, shall be equal to "A"in the following formula: A = B - (.25) (C-D), where B = the cash award payable to the participant, computed under only Sections 1.0-11.0 of the Plan, net of the amount of bonus that has been deferred or in lieu of which the participant has elected to receive a stock option. C = the amount of the participant's target bonus, calculated assuming 100% achievement of the corporate Performance Goals and 90% achievement of the participant's personal plan goals. D = the amount of bonus deemed to be deferred by the participant, assuming the participant's bonus is an amount equal to "C." 12.2 For the 2000 Plan Year only, the amount of any cash award otherwise payable under Sections 1.0-11.0 of this Plan shall be adjusted in accordance with the provisions of this Section 12.2. The amount of cash that is payable to a participant under the Plan, taking into account the adjustment provided for in this Section 12.2 and net of any amount of bonus that has been deferred, shall be equal to "A" in the following formula: A = (.75) B-C, where B = the cash award payable to the participant, computed under only Sections 1.0-11.0 of the Plan. C = the amount of bonus that has been deferred or in lieu of which the participant has elected to receive a stock option. EX-10.(C) 5 g72558ex10-c.txt 1997 EMPLOYEE STOCK OPTION PLAN EXHIBIT 10(c) FIRST TENNESSEE NATIONAL CORPORATION 1997 EMPLOYEE STOCK OPTION PLAN (Adopted 10-22-96, Amended and Restated 10-16-01) 1. PURPOSE. The 1997 Employee Stock Option Plan (the "Plan") of First Tennessee National Corporation and any successor thereto, (the "Company") is designed to enable employees of the Company and its subsidiaries to obtain a proprietary interest in the Company, and thus to share in the future success of the Company's business. Accordingly, the Plan is intended as a further means not only of attracting and retaining outstanding personnel, but also of promoting a closer identity of interest between employees and shareholders. 2. DEFINITIONS. As used in the Plan, the following terms shall have the respective meanings set forth below: (a) "Change in Control" means the occurrence of any one of the following events: (i) individuals who, on January 21, 1997, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 21, 1997, whose election or nomination for election was approved by a vote of at least three-fourths (3/4) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director; (ii) any "Person" (as defined under Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Section 13(d) or Section 14(d) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a change in control by virtue of any of the following acquisitions: (A) by the Company or any entity in which the Company directly or indirectly beneficially owns more than 50% of the voting securities or interests (a "Subsidiary"), (B) by an employee stock ownership or employee benefit plan or trust sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, or (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii)); (iii) the shareholders of the Company approve a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to the consummation of such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or (iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company's assets. Computations required by paragraph (iii) shall be made on and as of the date of shareholder approval and shall be based on reasonable assumptions that will result in the lowest percentage obtainable. Notwithstanding the foregoing, a change in control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a change in control of the Company shall then occur. (b) "Committee" means the Stock Option Committee or any successor committee designated by the Board of Directors to administer the Stock Option Plan, as provided in Section 5(a) hereof. (c) "Early Retirement" means termination of employment after an employee has fulfilled all service requirements for an early pension, and before his or her Normal Retirement Date, under the terms of the First Tennessee National Corporation Pension Plan, as amended from time to time. (d) "Quota" means the portion of the total number of shares subject to an option which the grantee of the option may purchase during the several periods of the term of the option (if the option is subject to quotas), as provided in Section 8(b) hereof. (e) "Retirement" means termination of employment after an employee has fulfilled all service requirements for a pension under the terms of the First Tennessee National Corporation Pension Plan, as amended from time to time. (f) "Subsidiary" means a subsidiary corporation as defined in Section 425 of the Internal Revenue Code. (g) "Successor" means the legal representative of the estate of a deceased grantee or the person or persons who shall acquire the right to exercise an option or related SAR by bequest or inheritance or by reason of the death of the grantee, as provided in Section 10 hereof. (h) "Term of the Option" means the period during which a particular option may be exercised, as provided in Section 8(a) hereof. (i) "Three months after cessation of employment" means a period of time beginning at 12:01 A.M. on the day following the date notice of termination of employment was given and ending at 11:59 P.M. on the date in the third following month corresponding numerically with the date notice of termination of employment was given ( or in the event that the third following month does not have a date so corresponding, then the last day of the third following month). (j) "Five years after (an event occurring on day x)" and "five years from (an event occurring on day x)" means a period of time beginning at 12:01 A.M. on the day following day x and ending at 11:59 P.M. on the date in the fifth following year corresponding numerically with day x (or in the event that the fifth following year does not have a date so corresponding, then the last day of the sixtieth following month). (k) "Voluntary Resignation" means any termination of employment that is not involuntary and that is not the result of the employee's death, disability, early retirement or retirement. (l) "Workforce reduction" means any termination of employment of one or more employees of the Company or one or more of its subsidiaries as a result of the discontinuation by the Company of a business or line of business or a realignment of the Company, or a part thereof, or any other similar type of event; provided, however, in the case of any such event (whether the termination of employment was a result of a discontinuation, a realignment, or another event), that the Committee or the Board of Directors has designated the event as a "workforce reduction" for purposes of this Plan." 3. EFFECTIVE DATE OF PLAN. The Plan shall become effective upon approval by the Board of Director of the Company. No options may be granted under the Plan after the month and day in the year 2006 corresponding to the day before the month and day on which the Plan becomes effective. The term of options granted on or before such date may, however, extend beyond that date. 4. SHARES SUBJECT TO THE PLAN. (a) The Company may grant options under the Plan authorizing the issuance of no more than 26,200,000 shares of its $0.625 par value (adjusted for any stock splits) common stock, which will be provided from shares purchased in the open market or privately (that became authorized but unissued shares under state corporation law) or by the issuance of previously authorized but unissued shares. (b) Shares as to which options previously granted under this Plan shall for any reason lapse shall be restored to the total number available for grant of options. 5. PLAN ADMINISTRATION. (a) The Plan shall be administered by a Stock Option Committee (the "Committee") whose members shall be appointed from time to time by, and shall serve at the pleasure of, the Board of Directors of the Company. In addition, all members shall be directors and shall meet the definitional requirements for "non-employee director" (with any exceptions therein permitted) contained in the then current SEC Rule 16b-3 or any successor provision. (b) The Committee shall adopt such rules of procedure as it may deem proper. (c) The powers of the Committee shall include plenary authority to interpret the Plan, and subject to the provisions hereof, to determine the persons to whom options shall be granted, the number of shares subject to each option, the term of the option, and the date on which options shall be granted. 6. ELIGIBILITY. (a) Options may be granted under the Plan to employees of the Company or any subsidiary selected by the Committee. Determination by the Committee of the employees to whom options shall be granted shall be conclusive. (b) An individual may receive more than one option. 7. OPTION PRICE. The option price per share to be paid by the grantee to the Company upon exercise of the option shall be determined by the Committee, but shall not be less than 100% of the fair market value of the share at the time the option is granted, nor shall the price per share be less than the par value of the share. Notwithstanding the prior sentence, the option price per share may be less than 100% of the fair market value of the share at the time the option is granted if: (a) The grantee of the option has entered into an agreement with the Company pursuant to which the grant of the option is in lieu of the payment of compensation; and (b) The amount of such compensation when added to the cash exercise price of the option equals at least 100% of the fair market value (at the time the option is granted) of the shares subject to option. "Fair market value" for purposes of the Plan shall be the mean between the high and low sales prices at which shares of the Company were sold on the valuation day as quoted by the Nasdaq Stock Market or, if there were no sales on that day, then on the last day prior to the valuation day during which there were sales. In the event that this method of valuation is not practicable, then the Committee, in its discretion, shall establish the method by which fair market value shall be determined. 8. TERMS OR QUOTAS OF OPTIONS: (a) TERM. Each option granted under the Plan shall be exercisable only during a term (the "Term of the Option") commencing one year, or such other period of time (which may be less than or more than one year) as is determined to be appropriate by the Committee, after the date when the option was granted and ending (unless the option shall have terminated earlier under other provisions of the Plan) on a date to be fixed by the Committee. Notwithstanding the foregoing, each option granted under the Plan shall become exercisable in full immediately upon a Change in Control. (b) QUOTAS. The Committee shall have authority to grant options exercisable in full at any time during their term, or exercisable in quotas. Quotas or portions thereof not purchased in earlier periods shall be cumulated and be available for purchase in later periods. In exercising his or her option, the grantee may purchase less than the full quota available to him or her. (c) EXERCISE OF STOCK OPTIONS. Stock options shall be exercised by delivering, mailing, or transmitting to the Committee or its designee (for all purposes under the Plan, in the absence of an express designation by the Committee, the Company's Personnel Division Manager is deemed to be the Committee's designee) the following items: (i) A notice, in the form, by the method, and at times prescribed by the Committee, specifying the number of shares to be purchased; and (ii) A check or money order payable to the Company for the full option price. In addition, the Committee in its sole discretion may determine that it is an appropriate method of payment for grantees to pay, or make partial payment of, the option price with shares of Company common stock in lieu of cash. In addition, in its sole discretion the Committee may determine that it is an appropriate method of payment for grantees to pay for any shares subject to an option by delivering a properly executed exercise notice together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price (a "cashless exercise"). To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. The value of Company common stock surrendered in payment of the exercise price shall be its fair market value, determined pursuant to Section 7, on the date of exercise. Upon receipt of such notice of exercise of a stock option and upon payment of the option price by a method other than a cashless exercise, the Company shall promptly deliver to the grantee (or, in the event the grantee has executed a deferral agreement, the Company shall deliver to the grantee at the time specified in such deferral agreement) a certificate or certificates for the shares purchased, without charge to him or her for issue or transfer tax. (d) POSTPONEMENTS. The Committee may postpone any exercise of an option for such period of time as the Committee in its discretion reasonably believes necessary to prevent any acts or omissions that the Committee reasonably believes will be or will result in the violation of any state or federal law; and the Company shall not be obligated by virtue of any provision of the Plan or the terms of any prior grant of an option to recognize the exercise of an option or to sell or issue shares during the period of such postponement. Any such postponement shall automatically extend the time within which the option may be exercised, as follows: The exercise period shall be extended for a period of time equal to the number of days of the postponement, but in no event shall the exercise period be extended beyond the last day of the postponement for more days than there were remaining in the option exercise period on the first day of the postponement. Neither the Company nor any subsidiary of the Company, nor any of their respective directors or officers shall have any obligation or liability to the grantee of an option or to a successor with respect to any shares as to which the option shall lapse because of such postponement. (e) NON-TRANSFERABILITY. All options granted under the Plan shall be non-transferable other than by will or by the laws of descent and distribution, subject to Section 10 hereof, and an option may be exercised during the lifetime of the grantee only by him or her or by his/her guardian or legal representative. (f) CERTIFICATES. The stock certificate or certificates to be delivered under this Plan may, at the request of the grantee, be issued in his or her name or, with the consent of the Company, the name of another person as specified by the grantee. (g) RESTRICTIONS. This subsection (g) shall be void and of no legal effect in the event of a Change of Control. Notwithstanding anything in any other section or subsection herein to the contrary, the following provisions shall apply to all options (except options designated by the Committee as FirstShare options), exercises and grantees. An amount equal to the spread realized in connection with the exercise of an option within six months prior to a grantee's voluntary resignation shall be paid to the Company by the grantee in the event that the grantee, within six months following voluntary resignation, engages, directly or indirectly, in any activity determined by the Committee to be competitive with any activity of the Company or any of its subsidiaries. (h) TAXES. The Company shall be entitled to withhold the amount of any tax attributable to amounts payable or shares deliverable under the Plan, and the Company may defer making payment or delivery of any benefits under the Plan if any tax is payable until indemnified to its satisfaction. The Committee may, in its discretion and subject to such rules which it may adopt, permit a grantee to satisfy, in whole or in part, any federal, state and local withholding tax obligation which may arise in connection with the exercise of a stock option, by electing either: (i) to have the Company withhold shares of Company common stock from the shares to be issued upon the exercise of the option; (ii) to permit a grantee to tender back shares of Company common stock issued upon the exercise of an option; or (iii) to deliver to the Company previously owned shares of Company common stock, having, in the case of (i), (ii), or (iii), a fair market value equal to the amount of the federal, state, and local withholding tax associated with the exercise of the option. (i) ADDITIONAL PROVISIONS APPLICABLE TO OPTION AGREEMENTS IN LIEU OF COMPENSATION. If the Committee, in its discretion permits participants to enter into agreements as contemplated by Section 7 herein, then such agreements must be irrevocable and cannot be changed by the participant once made, and such agreements must be made at least prior to the performance of any services with respect to which an option may be granted. If any participant who enters into such an agreement terminates employment prior to the grant of the option, then the option will not be granted and all compensation which would have been covered by the option will be paid to the participant in cash. 9. EXERCISE OF OPTION BY GRANTEE ON CESSATION OF EMPLOYMENT. If a person to whom an option has been granted shall cease, for a reason other than his or her death, disability, early retirement, retirement, workforce reduction, or voluntary resignation, to be employed by the Company or a subsidiary, the option shall terminate three months after the cessation of employment, unless it terminates earlier under other provisions of the Plan. Until the option terminates, it may be exercised by the grantee for all or a portion of the shares as to which the right to purchase had accrued under the Plan at the time of cessation of employment, subject to all applicable conditions and restrictions provided in Section 8 hereof. If a person to whom an option has been granted shall retire or become disabled, the option shall terminate five years after the date of early retirement, retirement or disability, unless it terminates earlier under other provisions of the Plan. Although such exercise by a retiree or disabled grantee is not limited to the exercise rights which had accrued at the date of early retirement, retirement or disability, such exercise shall be subject to all applicable conditions and restrictions prescribed in Section 8 hereof. If a person shall voluntarily resign, his option to the extent not previously exercised shall terminate at once. In the event that the sale of certain assets and assumption of certain liabilities (referred to herein as "the sale of the Division") of the HomeBanc Mortgage Corporation division (the "Division") of First Horizon Home Loan Corporation occurs, then notwithstanding anything herein to the contrary, if the grantee of one or more stock options described in the second sentence of Section 7 of the Plan is employed by the Division immediately prior to the closing of the sale of the Division and is not an employee of the Equibanc department of the Division and if the employment of the grantee of such option or options terminates at the time of the closing of the sale of the Division, then each of such stock options shall terminate at 5:00 p.m. Memphis time on the fifth anniversary of the closing of the sale of the Division (or if such date is not a business day, then on the immediately preceding business day), unless it terminates earlier under the Plan. The exercise of each of such options is subject to all applicable conditions and restrictions provided in Section 8 hereof. If the grantee of one or more stock options described in the second sentence of Section 7 of the Plan or as to which the number of shares awarded was based on a formula which included a percentage of the grantee's annual bonus or target bonus or participation in a bonus plan shall cease to be employed as a result of a workforce reduction, then each of such stock options shall terminate on the date specified by the Committee, not to exceed five years after the date of termination, unless it terminates earlier under other provisions of the Plan. Although such exercise is not limited to the exercise rights which had accrued at the date of termination, such exercise shall be subject to all applicable conditions and restrictions prescribed in Section 8 hereof. If the grantee of one or more stock options not described in the prior two sentences of this paragraph shall cease to be employed as a result of a workforce reduction, then each of such stock options shall terminate on the date specified by the Committee, not to exceed three years after the date of termination, unless it terminates earlier under other provisions of the Plan. Although such exercise is not limited to exercise rights which had accrued at the date of termination, such exercise shall be subject to all applicable conditions and restrictions prescribed in Section 8 hereof. 10. EXERCISE OF OPTION AFTER DEATH OF GRANTEE. If the grantee of an option shall die while in the employ of the Company or within three months after ceasing to be an employee, and if the option was in effect at the time of his or her death (whether or not its term had then commenced), the option may, until the expiration of five years from the date of death of the grantee or until the earlier expiration of the term of the option, be exercised by the successor of the deceased grantee. Although such exercise is not limited to the exercise rights which had accrued at the date of death of the grantee, such exercise shall be subject to all applicable conditions and restrictions prescribed in Section 8 hereof. 11. PYRAMIDING OF OPTIONS. The Committee in its sole discretion may from time to time permit the method of exercising options known as pyramiding (the automatic application of shares received upon the exercise of a portion of a stock option to satisfy the exercise price for additional portions of the option). 12. SHAREHOLDER RIGHTS. No person shall have any rights of a shareholder by virtue of a stock option except with respect to shares actually issued to him or her, and issuance of shares shall confer no retroactive right to dividends. 13. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Any increase in the number of outstanding shares of common stock of the Company occurring through stock splits or stock dividends after the adoption of the Plan shall be reflected proportionately: (a) in an increase in the aggregate number of shares then available for the grant of options under the Plan, or becoming available through the termination or forfeiture of options previously granted but unexercised; (b) in the number subject to options then outstanding; and (c) in the quotas remaining available for exercise under outstanding options, and a proportionate reduction shall be made in the per-share option price as to any outstanding options or portions thereof not yet exercised. Any fractional shares resulting from such adjustments shall be eliminated. If changes in capitalization other than those considered above shall occur, the Board of Directors shall make such adjustments in the number and class of shares for which options may thereafter be granted, and in the number and class of shares remaining subject to options previously granted and in the per-share option price as the Board in its discretion may consider appropriate, and all such adjustments shall be conclusive. 14. TERMINATION, SUSPENSION, OR MODIFICATION OF PLAN. The Board of Directors may at any time terminate, suspend, or modify the Plan, except that the Board of Directors shall not amend the Plan in violation of law. No termination, suspension, or modification of the Plan shall adversely affect any right acquired by any grantee, or by any successor of a grantee (as provided in Section 10 hereof), under the terms of an option granted before the date of such termination, suspension, or modification, unless such grantee or successor shall consent, but it shall be conclusively presumed that any adjustment for changes in capitalization as provided in Section 13 does not adversely affect any such right. 15. APPLICATION OF PROCEEDS. The proceeds received by the Company from the sale of its shares under the Plan will be used for general corporate purposes. 16. NO RIGHT TO EMPLOYMENT. Neither the adoption of the Plan nor the granting of any stock option shall confer upon the grantee any right to continue in the employ of the Company or any of its subsidiaries or interfere in any way with the right of the Company or the subsidiary to terminate such employment at any time. 17 GOVERNING LAW. The Plan and all determinations thereunder shall be governed by and construed in accordance with the laws of the State of Tennessee. 18. SUCCESSORS. This Plan shall bind any successor of the Company, its assets or its businesses (whether direct or indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Company would be obligated under this Plan if no succession had taken place. In the case of any transaction in which a successor would not by the foregoing provision or by operation of law be bound by this Plan, the Company shall require such successor expressly and unconditionally to assume and agree to perform the Company's obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. The term "Company," as used in the Plan, shall mean the Company as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by this Plan. -----END PRIVACY-ENHANCED MESSAGE-----