MEMPHIS - Calling First Tennessee National Corp.'s projected first-quarter shortfall "a bump in the road" caused by rising interest rates, chairman Ralph Horn said the company has no plans to sell off its struggling mortgage business.

To the contrary, Mr. Horn said in an interview, if rates stabilize by the end of the third quarter the company would still be able to increase earnings by at least 8% for the year, enough to return 20% on equity.

The Federal Reserve Board has raised rates four times since last summer, wreaking havoc on bank stocks and slowing mortgage originations. At First Tennessee, those rate increases have cut deeply into earnings because of the nature of its capital markets business and its large mortgage operations.

Since First Tennessee warned that its first-quarter profits would fall short of Wall Street estimates, investors - careful not to be burned twice - have responded by shaving nearly 30% off the company's market value.

Mr. Horn, who is also president and chief executive officer of the $18.4 billion-asset company, said he believes that the troubles do not reflect fundamental problems, and that no overhaul is needed to return it to its place as a top earner among banks and a favorite of analysts.

"We have had a bump in the road here, but we believe that is all it is," he said. "We are not proud of what happened - in fact we are devastated by it - but this steady increase in rates has just nailed us."

Mr. Horn said that the company's capital markets customers - most of which are smaller banks - have been unwilling to buy bonds until they see how high interest rates go. In mortgage banking, rates have risen too fast and too steadily for First Tennessee's hedges to compensate.

"Typically, in any kind of interest rate environment, you have spurts and corrections," Mr. Horn said. "In both of those businesses you need that rate volatility in order to create buying and selling opportunities. What happened this time was that rates have gone up, up, up, and we didn't have any opportunity to profit off of gyrations."

Since the earnings announcement, some analysts have suggested that the company should divest part or all of its mortgage operations to reduce its dependence on the business. Mortgage banking represents about 20% of First Tennessee's bottom-line earnings.

Mr. Horn said he sees much potential in that business. The company recently created a single brand, called First Horizon Home Loans, from all of its mortgage businesses. It plans on using that brand to sell insurance and banking products to its mortgage customers.

"We have as many customers outside our retail commercial banking franchise as we do inside our franchise, and most of those outside are one-product customers," he said. "This interest rate situation is not going to last forever, and we believe we have an awful lot of opportunity out there by holding on to and selling to these customers."

Mr. Horn said he does not like being grouped with the other bank companies that have issued earnings warnings. Without referring to any company by name, he suggested that there are important differences between First Tennessee and companies such as First Union Corp. and Bank One Corp., for example.

When First Union and Bank One announced earnings revisions last year, much of the blame fell on customer defections after the companies bought a bank and a credit card company, respectively.

"Unlike some of our good friends and competitors who have had to make similar announcements, we have not lost any customers; and morale is still high, because we haven't had to fire anyone," he said. "We have a lot of work to do. But I would much rather be in our position trying to manage through this than to have to go out and rebuild a customer base."


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