<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- ------------
Commission file number 0-4491
-------
FIRST TENNESSEE NATIONAL CORPORATION
----------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-0803242
- ------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
165 Madison Avenue, Memphis, Tennessee 38103
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(901) 523-4027
----------------------------------------------
(Registrant's telephone number, including area code)
None
---------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.625 par value 127,763,785
- ----------------------------- ----------------------------
Class Outstanding at July 31, 1998
<PAGE> 2
FIRST TENNESSEE NATIONAL CORPORATION
INDEX
Part I. Financial Information
Part II. Other Information
Signatures
Exhibit Index
Exhibit 10(i)
Exhibit 27
<PAGE> 3
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
The Consolidated Statements of Condition
The Consolidated Statements of Income
The Consolidated Statements of Shareholders' Equity
The Consolidated Statements of Cash Flows
The Notes to Consolidated Financial Statements
This financial information reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position and results of operations for the interim periods presented.
<PAGE> 4
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION First Tennessee National Corporation
- -----------------------------------------------------------------------------------------------------------
June 30 December 31
---------------------------- ------------
(Dollars in thousands)(Unaudited) 1998 1997 1997
- ------------------------------------------------------------------------------------------- ------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 766,038 $ 634,748 $ 775,760
Federal funds sold and securities
purchased under agreements to resell 151,614 357,229 225,861
- ------------------------------------------------------------------------------------------- ------------
Total cash and cash equivalents 917,652 991,977 1,001,621
- ------------------------------------------------------------------------------------------- ------------
Investment in bank time deposits 2,536 1,501 2,522
Capital markets inventory 394,992 282,753 253,240
Mortgage loans held for sale 2,483,532 814,160 1,240,648
Securities available for sale 1,916,427 2,081,222 2,133,303
Securities held to maturity (market value of
$731,277 at June 30, 1998; $60,571 at
June 30, 1997; and $54,323 at December 31, 1997) 732,541 59,814 53,230
Loans, net of unearned income 7,945,756 8,006,472 8,311,350
Less: Allowance for loan losses 129,858 123,458 125,859
- ------------------------------------------------------------------------------------------- ------------
Total net loans 7,815,898 7,883,014 8,185,491
- ------------------------------------------------------------------------------------------- ------------
Premises and equipment, net 220,271 190,696 206,895
Real estate acquired by foreclosure 20,923 14,410 12,202
Mortgage servicing rights, net 530,933 330,281 408,921
Intangible assets, net 125,937 113,280 112,411
Capital markets receivables and other assets 1,408,921 916,485 777,413
- ------------------------------------------------------------------------------------------- ------------
TOTAL ASSETS $ 16,570,563 $ 13,679,593 $ 14,387,897
=========================================================================================== ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing $ 8,094,858 $ 6,887,854 $ 7,135,733
Noninterest-bearing 2,848,482 2,166,138 2,536,046
- ------------------------------------------------------------------------------------------- ------------
Total deposits 10,943,340 9,053,992 9,671,779
- ------------------------------------------------------------------------------------------- ------------
Federal funds purchased and securities
sold under agreements to repurchase 1,760,537 1,860,025 2,085,679
Commercial paper and other short-term borrowings 1,249,800 728,314 702,388
Capital markets payables and other liabilities 1,264,862 874,571 705,062
Term borrowings 266,543 181,768 168,893
- ------------------------------------------------------------------------------------------- ------------
Total liabilities 15,485,082 12,698,670 13,333,801
- ------------------------------------------------------------------------------------------- ------------
Guaranteed preferred beneficial interests in
First Tennessee's junior subordinated debentures 100,000 100,000 100,000
- ------------------------------------------------------------------------------------------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock - no par value (5,000,000 shares authorized,
but unissued) -- -- --
Common stock - $.625 par value (shares authorized -
400,000,000; shares issued - 127,695,802 at
June 30, 1998; 128,073,728 at June 30, 1997;
and 128,209,142 at December 31, 1997) 79,810 80,046 80,131
Capital surplus 62,921 46,234 49,536
Undivided profits 827,233 756,281 811,396
Accumulated other comprehensive income 16,120 1,277 15,333
Deferred compensation on restricted stock incentive plans (1,758) (2,915) (2,300)
Deferred compensation obligation 1,155 -- --
- ------------------------------------------------------------------------------------------- ------------
Total shareholders' equity 985,481 880,923 954,096
- ------------------------------------------------------------------------------------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,570,563 $ 13,679,593 $ 14,387,897
=========================================================================================== ============
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME First Tennessee National Corporation
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ------------------------------
(Dollars in thousands except per share data)(Unaudited) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 177,958 $ 173,265 $ 360,789 $ 340,222
Interest on investment securities:
Taxable 39,461 34,268 72,670 68,857
Tax-exempt 952 1,160 1,943 2,366
Interest on mortgage loans held for sale 48,208 15,843 79,058 30,718
Interest on capital markets inventory 5,849 3,373 12,091 5,952
Interest on other earning assets 3,693 3,003 6,611 5,123
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 276,121 230,912 533,162 453,238
- --------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Savings 1,833 2,105 3,654 4,201
Checking interest and money market account 28,083 22,730 57,098 44,982
Certificates of deposit under $100,000 and other time 36,951 40,163 74,660 80,654
Certificates of deposit $100,000 and more 25,301 13,462 42,954 24,047
Interest on short-term borrowings 46,526 29,507 86,571 56,463
Interest on term borrowings 5,238 3,927 8,896 8,364
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 143,932 111,894 273,833 218,711
- --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 132,189 119,018 259,329 234,527
Provision for loan losses 12,785 12,504 26,300 25,030
- --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 119,404 106,514 233,029 209,497
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 122,500 74,421 215,057 139,135
Capital markets 30,223 19,990 68,220 40,455
Deposit transactions and cash management 22,732 21,558 42,767 40,782
Trust services and investment management 13,340 9,498 25,461 18,768
Merchant processing 7,740 8,164 14,949 14,913
Cardholder fees 5,354 4,893 9,866 9,417
Equity securities gains/(losses) 31 (846) 38 (840)
Debt securities gains/(losses) (122) 57 (100) 80
All other income and commissions 18,125 15,442 33,642 29,543
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 219,923 153,177 409,900 292,253
- --------------------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 339,327 259,691 642,929 501,750
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives, and benefits 132,771 96,764 246,414 190,660
Operations services 13,923 12,338 27,958 23,299
Occupancy 12,020 10,963 23,415 21,626
Equipment rentals, depreciation, and maintenance 10,651 10,276 20,387 19,434
Amortization of mortgage servicing rights 24,645 8,656 41,945 17,491
Communications and courier 10,373 8,803 19,704 17,489
Advertising and public relations 5,541 4,437 11,230 9,369
Amortization of intangible assets 2,655 2,403 5,295 4,810
All other 45,791 31,418 92,930 62,206
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 258,370 186,058 489,278 366,384
- --------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 80,957 73,633 153,651 135,366
Applicable income taxes 28,211 27,269 54,550 50,439
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 52,746 $ 46,364 $ 99,101 $ 84,927
==========================================================================================================================
EARNINGS PER SHARE $ .41 $ .36 $ .77 $ .66
- --------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ .40 $ .35 $ .75 $ .64
- --------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 127,899,012 128,011,064 128,023,302 128,585,000
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
<PAGE> 6
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF First Tennessee
SHAREHOLDERS' EQUITY National Corporation
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, JANUARY 1 $ 954,096 $ 954,526
Comprehensive income:
Net income 99,101 84,927
Other comprehensive income, net of tax:
Unrealized market adjustments, net of
reclassification adjustment 788 (1,420)
---------- ----------
Comprehensive income 99,889 83,507
---------- ----------
Cash dividends declared (42,233) (38,983)
Common stock issued
for exercise of stock options 15,073 11,073
Tax benefit from non-qualified stock options 13,385 --
Common stock repurchased (60,814) (133,182)
Amortization of deferred compensation
on restricted stock incentive plans 664 660
Other 5,421 3,322
- --------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30 $ 985,481 $ 880,923
========================================================================================================
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
<PAGE> 7
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation
- ------------------------------------------------------------------------------------------------------------
Six Months Ended June 30
-----------------------------
(Dollars in thousands)(Unaudited) 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 99,101 $ 84,927
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Provision for loan losses 26,300 25,030
Provision for deferred income tax 25,668 25,299
Depreciation and amortization of premises
and equipment 17,747 16,044
Amortization of mortgage servicing rights 41,945 17,491
Amortization of intangible assets 5,295 4,810
Net other amortization and accretion 5,718 2,536
Market value adjustment on foreclosed property 7,050 1,645
Gain on sale of securitized loans (643) --
Equity securities (gains)/losses (38) 840
Debt securities (gains)/losses 100 (80)
Net gain on disposal of fixed assets (292) (203)
Net increase in:
Capital markets securities inventory (141,752) (132,351)
Mortgage loans held for sale (1,242,884) (26,798)
Capital markets receivables (374,554) (272,074)
Interest receivable (5,640) (5,004)
Other assets (424,012) (131,628)
Net increase/(decrease) in:
Capital markets payables 298,221 249,030
Interest payable 5,076 (155)
Other liabilities 239,379 26,915
- ------------------------------------------------------------------------------------------------------------
Total adjustments (1,517,316) (198,653)
- ------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (1,418,215) (113,726)
- ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Held to maturity securities:
Maturities 32,739 6,071
Purchases -- --
Available for sale securities:
Sales 40,279 103,950
Maturities 452,014 213,993
Purchases (271,675) (227,359)
Premises and equipment:
Sales 1,208 4,017
Purchases (29,835) (23,924)
Net decrease in loans (457,282) (305,206)
(Increase)/decrease in investment in bank time deposits (14) 421
Proceeds from loan securitizations 72,756 --
Acquisitions, net of cash and cash equivalents acquired (9,412) --
- ------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (169,222) (228,037)
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Common stock:
Exercise of stock options 15,247 11,134
Cash dividends (42,321) (39,931)
Repurchase shares (60,833) (133,182)
Term Borrowings:
Issuance 99,218
Payments (1,674) (52,963)
Issuance of guaranteed preferred beneficial interests
in First Tennessee's junior subordinated debentures -- 100,000
Net increase/(decrease) in:
Deposits 1,271,561 20,930
Short-term borrowings 222,270 329,783
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,503,468 235,771
- ------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (83,969) (105,992)
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 1,001,621 1,097,969
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 917,652 $ 991,977
============================================================================================================
Total interest paid $ 268,589 $ 218,696
Total income taxes paid 21,831 24,159
- ------------------------------------------------------------------------------------------------------------
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
<PAGE> 8
NOTE 1 - FINANCIAL INFORMATION
The unaudited interim consolidated financial statements have been prepared
in accordance with generally accepted accounting principles. In the opinion of
management, all necessary adjustments have been made for a fair presentation of
financial position and results of operations for the periods presented. The
operating results for the three month and six month periods ended June 30, 1998,
are not necessarily indicative of the results that may be expected going
forward. For further information, refer to the audited consolidated financial
statements and footnotes included in the 1998 Proxy Statement & 1997 Financial
Information.
Earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding for each period. Diluted earnings
per share is computed by dividing net income by the weighted average number of
common shares outstanding adjusted to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares
resulting from options granted under First Tennessee's stock option plans had
been issued. First Tennessee utilizes the treasury stock method in this
calculation. All per share amounts have been restated for the effect of the
February 20, 1998, two-for-one stock split.
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting comprehensive income
and its components in the financial statements. Comprehensive income is the
total of net income and all other nonowner changes in equity. The only component
of comprehensive income for First Tennessee is unrealized holding gains/(losses)
on available-for-sale securities. First Tennessee adopted this standard
beginning with the first quarter of 1998. Comparative financial statements for
earlier periods have been adjusted to reflect application of the provisions of
this statement.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits."
The new Statement revises the required disclosures for employee benefit plans,
but it does not change the measurement or recognition of such plans. First
Tennessee will adopt this standard in the 1998 annual financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The new
Statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of condition and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. This Statement
is effective for all quarters of fiscal years beginning after June 15, 1999;
which for First Tennessee will mean the first quarter of 2000. Earlier
application is allowed. Because of the complexity of this standard and
uncertainties associated with predicting future derivative usage and related
fair values, it is not practicable at this time to predict what the impact of
adopting this Statement will be to First Tennessee's financial position and
results of operations.
<PAGE> 9
NOTE 2 - BUSINESS COMBINATIONS
On July 1, 1998, First Tennessee acquired Keystone Mortgage, Inc. of
Kirkland, Washington, for approximately 145,000 shares of its common stock
pending final settlement within 60 days of acquisition. Keystone was merged into
FT Mortgage Companies. This acquisition was accounted for as a purchase and was
immaterial to First Tennessee.
<PAGE> 10
NOTE 3 - REMIC SECURITIES
Through the use of a Real Estate Mortgage Investment Conduit (REMIC), First
Tennessee securitized certain consumer real estate loans. These securitized
loans are now classified as held-to-maturity investment securities. The
following tables provide maturity and market value information on the REMIC
securities as of June 30, 1998:
<TABLE>
<CAPTION>
At June 30, 1998
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REMIC securities $ 683,391 $ 4,233 $ (6,557) $ 681,067
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1998
--------------------------
REMIC Securities
--------------------------
By Contractual Maturity Amortized Estimated
(Dollars in thousands) Cost Fair Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
After 5 years; within 10 years $486,071 $487,457
After 10 years 197,320 193,610
- -------------------------------------------------------------------------------------------------------
Total $683,391 $681,067
=======================================================================================================
</TABLE>
<PAGE> 11
NOTE 4 - LOANS
The composition of the loan portfolio at June 30 is detailed below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $3,985,494 $3,707,017
Consumer* 2,615,277 2,751,428
Permanent mortgage* 366,653 636,859
Credit card receivables 560,995 537,398
Real estate construction 396,075 335,443
Nonaccrual - Regional banking group 8,281 11,506
Nonaccrual - Mortgage banking 12,981 26,821
- --------------------------------------------------------------------------------------------------------
Loans, net of unearned income 7,945,756 8,006,472
Allowance for loan losses 129,858 123,458
- --------------------------------------------------------------------------------------------------------
Total net loans $7,815,898 $7,883,014
========================================================================================================
</TABLE>
[FN]
*As a result of the Real Estate Mortgage Investment Conduit (REMIC) certain
securitized consumer and permanent mortgage loans are now classified as REMIC
securities
</FN>
The following table presents information concerning nonperforming loans at
June 30:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans $ 8,581 $ 11,451
Other nonaccrual loans 12,681 26,876
- --------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 21,262 $ 38,327
========================================================================================================
</TABLE>
[FN]
Restructured impaired loans at June 30, 1998 and 1997, were $117,000 and
$196,000, respectively.
</FN>
Nonperforming loans consist of impaired loans, other nonaccrual loans and
certain restructured loans. An impaired loan is a loan that management believes
the contractual amount due probably will not be collected. Impaired loans are
generally carried on a nonaccrual status. Nonaccrual loans are loans on which
interest accruals have been discontinued due to the borrower's financial
difficulties. Management may elect to continue the accrual of interest when the
estimated net realizable value of collateral is sufficient to recover the
principal balance and accrued interest.
Generally, interest payments received on impaired loans are applied to
principal. Once all principal has been received, additional payments are
recognized as interest income on a cash basis. The following table presents
information concerning impaired loans:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------------------------
(Dollars in thousands) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest on impaired loans $ 225 $ 246 $ 357 $ 397
Average balance of impaired loans 8,667 12,202 9,024 12,026
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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 six months ended June 30, 1998 and 1997, is
summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Non-impaired Impaired Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 114,217 $ 3,531 $ 117,748
Provision for loan losses 23,251 1,779 25,030
Charge-offs 22,124 1,489 23,613
Less loan recoveries 4,206 87 4,293
- --------------------------------------------------------------------------------------------------------
Net charge-offs 17,918 1,402 19,320
- --------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 $ 119,550 $ 3,908 $ 123,458
========================================================================================================
Balance at December 31, 1997 $ 122,107 $ 3,752 $ 125,859
Provision for loan losses 26,727 (427) 26,300
Securitization (3,575) -- (3,575)
Charge-offs 23,013 1,102 24,115
Less loan recoveries 4,852 537 5,389
- --------------------------------------------------------------------------------------------------------
Net charge-offs 18,161 565 18,726
- --------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 $ 127,098 $ 2,760 $ 129,858
========================================================================================================
</TABLE>
<PAGE> 12
NOTE 5 - TERM BORROWINGS
The following table presents information pertaining to term borrowings
(debt with original maturities greater than one year) for First Tennessee and
its subsidiaries:
<TABLE>
<CAPTION>
June 30 December 31
-------------------------- -----------
(Dollars in thousands)(Unaudited) 1998 1997 1997
- ----------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
FIRST TENNESSEE NATIONAL CORPORATION:
Subordinated capital notes:
Matures on June 1, 1999--10 3/8% $ 74,917 $ 74,828 $ 74,873
Matures on November 15, 2005--6 3/4% 74,397 74,315 74,356
FIRST TENNESSEE BANK NATIONAL ASSOCIATION:
Notes payable to Federal Home Loan Bank:
Matures on January 29, 1999--7.95% 15,000 15,000 15,000
Matures through 1998--7.50% -- 4,071 1,383
Matures through 2009--8.10% 2,283 2,483 2,383
Matures on January 1, 2028--4.00% 42 -- --
Matures on May 1, 2028--4.00% 40 -- --
Matured on October 3, 1997--8.05% -- 10,000 --
Subordinated capital notes:
Matures on April 1, 2008--6.40% 99,238 -- --
Industrial development bond payable to City of
Alcoa, Tennessee; matures 1999--6.50% 100 200 200
CLEVELAND BANK AND TRUST COMPANY:
Industrial development bond payable to City of
Cleveland, Tennessee; matures through 1999--
65% of prime 526 871 698
- ----------------------------------------------------------------------------------------- ----------
TOTAL $ 266,543 $ 181,768 $ 168,893
========================================================================================= ==========
</TABLE>
<PAGE> 13
NOTE 6 - EARNINGS PER SHARE
The following table shows a reconciliation of earnings per share to diluted
earnings per share. All share and per share data have been adjusted to reflect
the 1998 two-for-one stock split.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ----------------------------
(Dollars in thousands, except per share data) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE COMPUTATION:
Net income $ 52,746 $ 46,364 $ 99,101 $ 84,927
Weighted average shares outstanding 127,760,553 128,011,064 127,953,690 128,585,000
Shares attributable to deferred compensation 138,459 -- 69,612 --
- -----------------------------------------------------------------------------------------------------------------------
Total weighted average shares per income statement 127,899,012 128,011,064 128,023,302 128,585,000
Earnings per share $ .41 $ .36 $ .77 $ .66
- -----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE COMPUTATION:
Net income $ 52,746 $ 46,364 $ 99,101 $ 84,927
Weighted average shares outstanding 127,899,012 128,011,064 128,023,302 128,585,000
Dilutive effect due to stock options 3,748,256 3,445,920 3,899,720 3,395,616
- -----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding, as adjusted 131,647,268 131,456,984 131,923,022 131,980,616
Diluted earnings per share $ .40 $ .35 $ .75 $ .64
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 14
NOTE 7 - CONTINGENCIES
On July 31, 1998, in Culbreath v. Community Bank of Germantown in the
Chancery Court of Shelby County, Tennessee, a judgment was rendered against
First Tennessee Bank National Association ("Bank"), as the successor by merger
to Community Bank of Germantown ("Community Bank"), for $9 million in punitive
damages. The court had previously entered a judgment against the Bank in the
amount of $209,000 compensatory damages in August of 1997, and a judgment in
favor of the Bank against the plaintiff in the amount of $60,000. The plaintiff
had claimed that Community Bank had obtained additional collateral on a loan by
promising to make a new loan to the plaintiff, which was never made. The
litigation was pending at the time of First Tennessee's acquisition of Community
Bank in February 1995. Management and counsel believe that the Court erred in
its award of damages and will appeal.
Although First Tennessee cannot predict the outcome of the foregoing
action, 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.
<PAGE> 15
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
DESCRIPTION
First Tennessee National Corporation (First Tennessee) is headquartered in
Memphis, Tennessee, and is a nationwide, diversified financial services
institution which provides banking and other financial services to its customers
through various national and regional business lines. The Regional Banking Group
includes the retail/commercial bank, the credit card division and the trust
division. The National Lines of Business include FT Mortgage Companies and
affiliates (also referred to as mortgage banking), First Tennessee Capital
Markets (also referred to as capital markets) and transaction processing (credit
card merchant processing, automated teller machine network and check clearing
operations).
INTRODUCTION
The following is a discussion and analysis of the financial condition and
results of operations of First Tennessee for the three-month and six-month
periods ended June 30, 1998, compared to the three-month and six-month periods
ended June 30, 1997. To assist the reader in obtaining a better understanding of
First Tennessee and its performance, this discussion should be read in
conjunction with First Tennessee's unaudited consolidated financial statements
and accompanying notes appearing in this report. Additional information
including the 1997 financial statements, notes, and management's discussion and
analysis is provided as an appendix to the 1998 proxy statement.
Management's discussion and analysis may contain forward-looking statements with
respect to First Tennessee's beliefs, plans, goals, expectations, and estimates
that are provided to assist in the understanding of anticipated future financial
performance. However, a number of important factors could cause actual results
of the Corporation and/or individual business lines to differ materially from
those expressed in the forward-looking statements. Those factors include, but
are not limited to, general and local, economic and business conditions;
interest rates, markets and monetary fluctuations; inflation; competition within
and without the financial services industry; and new products and services in
the industries in which First Tennessee operates. Other risks are those inherent
in originating loans, including prepayment risks and fluctuating collateral
values. Changes in customer profiles, changes in technology and future
acquisitions can also affect results. Additional factors include the policies of
the Board of Governors of the Federal Reserve System, unanticipated regulatory
and judicial proceedings, and changes in laws and regulations applicable to
First Tennessee and First Tennessee's success in managing the risks involved in
the foregoing. First Tennessee assumes no obligation to update any
forward-looking statements that are made from time to time.
Certain revenues and expenses are allocated and equity is assigned to the
various business lines to reflect the inherent risk in each business line, based
on management's best estimates. These allocations are periodically reviewed and
may be revised from time to time to more accurately reflect current business
conditions and risks. In addition, certain reclassifications of accounts may
occur to reflect current reporting standards within the industry. In each case
the previous history is restated to ensure comparability. For purposes of this
discussion, noninterest income and total revenues exclude securities gains and
losses. Net interest income has been adjusted to a fully taxable equivalent
(FTE) basis for certain tax-exempt loans and investments included in earning
assets. Earning assets, including loans, have been expressed as averages, net of
unearned income.
SECURITIZATION ACTIVITY
During the second quarter of 1998, First Tennessee Bank National Association
(FTBNA) securitized approximately $73 million of direct automobile loan
receivables. These loans were securitized and sold in a private placement
offering. As a result of this transaction, a gain of $.6 million was recognized
and is included in All Other noninterest income. First Tennessee's exposure to
credit losses is contractually limited for the automobile loans securitized.
This transaction resulted in a $.7 million reduction in loan loss reserves.
<PAGE> 16
Also during the second quarter, FTBNA securitized $711 million in consumer real
estate loans through the use of a Real Estate Mortgage Investment Conduit
(REMIC). All of the interests in the REMIC are owned by subsidiaries of First
Tennessee, including FTBNA. There is no current plan to sell any of the
securities to other parties. As a result of the REMIC securitization, these
consumer and permanent mortgage loans are now classified as held to maturity
investment securities on the financial statements. Additionally, loan loss
reserves were reduced $2.9 million and a separate reserve was established
against these securities.
The accounting for securitizations complicates the understanding of underlying
trends in net interest income, net interest margin and noninterest income, as
well as the underlying growth rates of reported loans. When loans are
securitized, an initial gain on the sale of the receivables is recorded, the
loans and the related allowance for credit losses are removed from the balance
sheet, and certain amounts that would have been previously reported as net
interest income are instead reported as noninterest income since servicing is
retained. The effect of any credit losses related to these receivables is now
recognized as a yield adjustment rather than a charge against the provision.
Although the REMIC securitization does not affect the overall risk sensitivity
position of the Corporation, the transaction itself affects categorization of
individual line items on the balance sheet. Consequently, loans have now been
reduced and investment securities have been increased. As of June 30, 1998, the
REMIC securities totaled $.7 billion of which $.5 billion have contractual
maturities of 5 to 10 years and $.2 billion have contractual maturities of
greater than 10 years. The estimated average life adjusted for early paydowns is
4.7 years. For further detail see Note 3 - REMIC Securities.
For a more complete understanding, where significant, these trends are discussed
and identified as "Managed" information, which adds data on these securitized
loans to "Reported" data for loans. "Reported" information has been prepared in
conformity with generally accepted accounting principles. "Managed" information
treats loans securitized and sold with servicing retained and loans securitized
through the REMIC as if they had not been securitized and/or sold. "Managed"
information does not include the mortgage banking servicing portfolio.
SECOND QUARTER OVERVIEW (comparison of second quarter 1998 to second quarter
1997)
* Earnings for 1998 were $52.7 million, up 14 percent from last year's
earnings of $46.4 million.
* Diluted earnings per share (adjusted for the 1998 two-for-one stock split)
were $.40 in 1998, up 14 percent over the $.35 earned in 1997. Basic
earnings per share were $.41 in 1998 compared with $.36 in 1997.
* Return on average shareholders' equity was 22.2 percent in 1998 compared
with 21.8 percent in 1997, and return on average assets was 1.31 percent in
1998 compared with 1.43 percent in 1997. The decline in the return on
average assets was attributable to the 24 percent growth in average assets,
of which 60 percent was in the mortgage warehouse.
* Total revenues grew 29 percent with growth in fee income of 43 percent and
growth in net interest income of 11 percent. Mortgage banking and capital
markets led the increase in fee income with growth of 65 percent and 51
percent, respectively.
* The consolidated net interest margin was 3.86 percent in 1998 compared with
4.26 percent in 1997. The lower margin was primarily related to the
growth in the mortgage warehouse.
* Asset quality remained strong with improvement in nonperforming assets in
both mortgage banking and the regional banking group from the previous
year.
* At June 30, 1998, First Tennessee was ranked in the top 50 bank holding
companies nationally in market capitalization ($4.0 billion) and assets
($16.6 billion).
<PAGE> 17
INCOME STATEMENT ANALYSIS
NONINTEREST INCOME
- ------------------
Fee income (noninterest income excluding securities gains and losses) provides
the majority of First Tennessee's revenue. During the second quarter of 1998,
fee income increased 43 percent (from $154.0 million to $220.0 million) and
contributed 62 percent to total revenue. Fee income contributed 56 percent to
total revenue for the second quarter of 1997.
Mortgage banking fee income, First Tennessee's largest contributing business
line to noninterest income, grew 65 percent (from $74.4 million to $122.5
million) from the second quarter of 1997 as shown in Table 1. The increase came
primarily from the mortgage origination function (loan origination and secondary
marketing activities).
TABLE 1 - MORTGAGE BANKING
<TABLE>
<CAPTION>
Second Quarter Six Months
------------------------ Growth ------------------------ Growth
(Dollars in millions) 1998 1997 Rate (%) 1998 1997 Rate (%)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NONINTEREST INCOME:
Secondary marketing activities $ 47.1 $ 27.8 69.0 $ 87.8 $ 49.0 79.1
Loan origination fees 36.8 19.2 92.4 59.3 36.9 60.9
Servicing fees 27.5 22.4 23.0 52.8 46.1 14.6
Sale of mortgage servicing rights -- 1.7 NM -- 3.3 NM
Miscellaneous 11.1 3.3 233.0 15.2 3.8 293.3
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest income 122.5 74.4 64.6 215.1 139.1 54.6
- ---------------------------------------------------------------------------------------------------------------------
Mortgage loan originations $ 4,862.4 $ 2,389.7 103.5 $ 9,539.1 $ 4,339.2 119.8
Servicing portfolio $ 32,147.5 $ 23,924.4 34.4 $ 32,147.5 $ 23,924.4 34.4
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
[FN]
NM = not meaningful
</FN>
Income derived from the loan origination process (loan origination fees plus
secondary marketing activities) increased 79 percent from the second quarter of
1997 (from $47.0 million to $83.9 million), as FT Mortgage Companies originated
a record $4.9 billion of mortgage loans in the second quarter of 1998. This
level of originations ranked FT Mortgage Companies as one of the top 10 retail
mortgage originators in the nation. During the second quarter of 1997, $2.4
billion of mortgage loans were originated. A favorable interest rate environment
and a strong real estate market led to increased mortgage originations.
Refinance activity accounted for approximately 45 percent of total loan
originations in the second quarter of 1998, compared with 20 percent in the
second quarter of 1997.
The servicing portfolio totaled $32.1 billion at June 30, 1998, up 34 percent
from June 30, 1997, when the portfolio totaled $23.9 billion. Since the second
quarter of 1997, the portfolio has grown due to originations of $15.8 billion,
reduced by servicing released sales of $1.7 billion and principal reductions and
payoffs of $5.9 billion from payments received in the normal course of business.
Mortgage servicing fees increased 23 percent from the second quarter of 1997
(from $22.4 million to $27.5 million). No servicing rights were sold during the
second quarter of 1998 and only a minimal amount was sold in the second quarter
of 1997.
The growth in mortgage miscellaneous income is related to gains from the sale of
interests in a multi-family joint venture, repositioning servicing hedges, and
income generated from a strategy of early repurchase of delinquent loans.
First Tennessee Capital Markets generates fee income primarily from the purchase
and sale of securities as both principal and agent. Inventory positions are
limited to the procurement of securities for distribution to customers by the
sales staff. Inventory is hedged to protect against movements in interest rates.
Fee income in capital markets grew 51 percent (from $20.0 million to $30.2
million) over the second quarter of 1997. Total securities bought and sold
increased 107 percent over the same period in 1997 (from $46.0 billion to $95.2
billion). This growth in volume reflects an expanded product mix. Total
underwritings during the second quarter of 1998 were $7.1 billion compared with
$4.8 billion for the same period in 1997. For the second quarter of 1998,
capital markets again ranked as one of the top five underwriters of U.S.
government agency debt. The increase in fee income came from growth in
underwriting activity, strong performance in the regional offices and the
continued expansion of the customer base. During the second quarter, as part of
its customer expansion plan, First Tennessee Capital Markets opened an office in
New York City. In addition, a corporate finance group was added during 1998 to
provide additional financial services to customers.
<PAGE> 18
Noninterest income from deposit transactions and cash management increased 5
percent from the second quarter of 1997 (from $21.6 million to $22.7 million).
Since the second quarter of 1997, trust and investment management fees grew 40
percent (from $9.5 million to $13.3 million). This growth was primarily due to
substantial sales growth, strong market performance, growth in assets under
management, and acquisition activity (Martin & Company, L.P.). Assets under
management grew from $6.1 billion in the second quarter of 1997 to $8.5 billion
in the second quarter of 1998. Fee income from merchant processing declined 5
percent from the second quarter of 1997 (from $8.2 million to $7.7 million). The
majority of this decline was due to a new outsourcing agreement in which
equipment sales and lease fees and expenses which had previously been recorded
separately are now being recorded as net revenue, thus showing a reduction in
revenues when compared to the previous period. Cardholder fees increased 9
percent (from $4.9 million to $5.4 million) during this same period, as strong
purchasing volume led to higher interchange collections partially offset by the
collection of fewer late fees due to lower delinquencies.
All Other noninterest income increased 17 percent from the second quarter of
1997 (from $15.4 million to $18.1 million). Check clearing fees declined 39
percent (from $3.9 million to $2.4 million) due to the continuing impact of
industry consolidations. Other service charges increased 74 percent (from $2.4
million to $4.2 million) and included strong growth in mutual fund sales, retail
brokerage activity and servicing fees collected from securitized transactions.
Insurance premiums and commissions increased 26 percent (from $1.5 million to
$1.9 million) from the second quarter of 1997. Additionally, fees of $1.2
million were received from flood zone certifications, a new line of business
acquired in July of 1997.
NET INTEREST INCOME
- -------------------
Net interest income increased 11 percent (from $120.1 million to $133.2 million)
from the second quarter of 1997, primarily due to the 22 percent increase in
earning assets (from $11.3 billion to $13.8 billion). The consolidated net
interest margin (margin) declined from 4.26 percent in the second quarter of
1997 to 3.86 percent in the second quarter of 1998, primarily from the build-up
of the mortgage warehouse which produced 74 percent of the increase in earning
assets. Growth in demand deposit accounts contributed to the improvement in the
regional banking group's margin from 4.65 percent in the second quarter of 1997
to 4.86 percent in the second quarter of 1998. Table 2 details the computation
of the net interest margin for the regional banking group and the impact that
the other business lines had on the overall margin for the second quarters of
1998 and 1997.
TABLE 2 - NET INTEREST MARGIN
<TABLE>
<CAPTION>
Second Quarter
------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
REGIONAL BANKING GROUP:
Yields on earning assets 8.23% 8.24%
Rates paid on interest-bearing liabilities 4.40 4.53
- --------------------------------------------------------------------------------
Net interest spread 3.83 3.71
- --------------------------------------------------------------------------------
Effect of interest-free sources .90 .84
Loan fees .13 .10
- --------------------------------------------------------------------------------
Net interest margin - Regional banking group 4.86% 4.65%
MORTGAGE BANKING (.88) (.32)
CAPITAL MARKETS (.13) (.09)
TRANSACTION PROCESSING .01 .02
- --------------------------------------------------------------------------------
Net interest margin 3.86% 4.26%
================================================================================
</TABLE>
As shown in Table 2, the margin is affected by the activity levels and related
funding for First Tennessee's specialty lines of business, as these nonbank
business lines typically produce different margins than traditional banking
activities. For example, in mortgage banking because the spread between the
rates on mortgage loans temporarily in the warehouse and the related short-term
<PAGE> 19
funding rates is less than the comparable spread earned in the regional banking
group, the overall margin is compressed. Consequently, as the warehouse volume
increases, the margin also compresses. Capital markets tends to compress the
margin because of its strategy to reduce market risk by hedging its inventory in
the cash markets which effectively eliminates net interest income on these
positions. As a result, First Tennessee's consolidated margin cannot be readily
compared to that of other bank holding companies.
NONINTEREST EXPENSE
- -------------------
Total noninterest expense (operating expense) for the second quarter of 1998
increased 39 percent (from $186.1 million to $258.4 million) over the same
period in 1997. Employee compensation, incentives, and benefits (personnel
expense), the largest category, increased 37 percent (from $96.8 million to
$132.8 million). Personnel expense includes commissions paid in several lines of
business such as capital markets and mortgage banking. As sales and/or
origination volumes increase or decrease or the product mix changes in these
business lines, the commissions change accordingly. Table 3 provides a breakdown
of total expenses by business line.
TABLE 3 - OPERATING EXPENSE COMPOSITION
<TABLE>
<CAPTION>
Second Quarter
-------------- Growth
(Dollars in millions) 1998 1997 Rate (%)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Regional banking group $100.5 $ 87.4 15.0
Mortgage banking 119.2 68.5 74.0
Capital markets 23.5 15.6 51.1
Transaction processing 15.2 14.6 3.9
- ----------------------------------------------------------------------------
Total operating expense $258.4 $186.1 38.9
======================================================================================
</TABLE>
The increase in operating expense in mortgage banking accounted for 70 percent
of the overall expense growth. Mortgage banking expense growth was driven by
increased loan production volume and the larger servicing portfolio. Capital
markets accounted for 11 percent of the overall expense growth. Excluding
mortgage banking and capital markets, overall operating expenses increased 13
percent from the second quarter of 1997. Investments in expanding consumer
lending beyond our traditional markets, growth in our insurance business,
technology investments, and the consolidation of our merchant processing
operation contributed to this growth rate.
As a result of a larger servicing portfolio and increased payoffs, amortization
of capitalized mortgage servicing rights increased 185 percent (from $8.7
million to $24.6 million). All Other expense consists of many smaller categories
such as contract employment, supplies, travel and entertainment, Fed service
fees, foreclosed real estate expenses, deposit insurance premiums,
contributions, and other. Since the second quarter of 1997, All Other expense
increased 46 percent (from $31.4 million to $45.8 million). The majority of this
growth was related to mortgage banking.
INCOME TAXES
- ------------
The effective tax rate for the second quarter of 1998 was 34.8 percent compared
with 37.0 percent for the second quarter of 1997. The lower tax rate in 1998
primarily came from the implementation of tax planning strategies.
PROVISION FOR LOAN LOSSES/ASSET QUALITY
- ---------------------------------------
The provision for loan losses increased 2 percent (from $12.5 million to $12.8
million) from June 30, 1997, and reflects the change in the loan mix due to
securitizations, inherent risk in the loan portfolio, and loan growth. The ratio
of allowance for loan losses to loans was 1.63 percent at June 30, 1998,
compared with 1.54 percent at June 30, 1997.
The ratio of net charge-offs to average loans improved from .54 percent for the
second quarter of 1997 to .47 percent for the second quarter of 1998 and the
credit card receivables charge-off ratio improved from 5.15 percent to 4.12
percent over this same period. The ratio of nonperforming loans to total loans
decreased to .27 percent for the second quarter of 1998 compared with .48
<PAGE> 20
percent for the same period in 1997. At June 30, 1998, First Tennessee had no
concentrations of 10 percent or more of total loans in any single industry.
Additional asset quality information is provided in Table 4 - Asset Quality
Information and Table 5 - Charge-off Ratios.
TABLE 4 - ASSET QUALITY INFORMATION
<TABLE>
<CAPTION>
June 30
-------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming loans(F1) $ 21,262 $ 38,327
Foreclosed real estate(F2) 20,923 14,410
Other assets 214 227
- --------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 42,399 $ 52,964
- --------------------------------------------------------------------------------------------------------
Loans and leases 90 days past due $ 27,192 $ 31,449
Potential problem assets(F3) $ 66,194 $ 77,926
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance at March 31 $ 130,026 $ 121,688
Provision for loan losses 12,785 12,504
Securitization (3,575) --
Charge-offs (11,739) (12,960)
Loan recoveries 2,361 2,226
- --------------------------------------------------------------------------------------------------------
Ending balance at June 30 $ 129,858 $ 123,458
- --------------------------------------------------------------------------------------------------------
Allowance to total loans 1.63% 1.54%
Nonperforming loans to total loans .27 .48
Nonperforming assets to total loans,
foreclosed real estate and other assets .53 .66
Allowance to nonperforming assets 306 233
- --------------------------------------------------------------------------------------------------------
</TABLE>
[FN]
(F1) Includes $13.0 million and $26.8 million in 1998 and 1997, respectively, in
mortgage banking.
(F2) Includes $16.6 million and $9.7 million in 1998 and 1997,
respectively, in mortgage banking.
(F3) Includes loans and leases 90 days past due.
</FN>
TABLE 5 - CHARGE-OFF RATIOS
<TABLE>
<CAPTION>
Second Quarter
-------------------
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial and commercial real estate .01% .09%
Consumer .30 .35
Credit card receivables 4.12 5.15
Permanent mortgage(F1) (.05) (.01)
- --------------------------------------------------------------------------------------------------------
Total net charge-offs excluding repurchased mortgages .39% .52%
Impact of repurchased mortgages .08 .02
- --------------------------------------------------------------------------------------------------------
Total net charge-offs .47% .54%
- --------------------------------------------------------------------------------------------------------
</TABLE>
[FN]
(F1) Excludes mortgage loans repurchased to correct file documentation in order
to certify loan pools.
</FN>
<PAGE> 21
BALANCE SHEET
LOANS AND DEPOSITS
- ------------------
As previously discussed, for a more complete understanding of loan growth trends
it is helpful to analyze information on a "reported" as well as a "managed"
basis. "Reported" information is derived from consolidated financial statements
which have been prepared in conformity with generally accepted accounting
principles. "Managed" information treats consumer loans securitized and sold
with servicing retained and loans securitized through the REMIC and held by
First Tennessee as if they had not been securitized and/or sold. "Managed"
information does not include the mortgage banking servicing portfolio. Table 6 -
Selected Loans includes information for reported and managed assets and Table 7
- - Investment Securities includes reported information and information excluding
the REMIC.
At June 30, 1998, First Tennessee reported total assets of $16.6 billion
compared with $13.7 billion at June 30, 1997. Mortgage loans held for sale
(mortgage warehouse) increased 205 percent (from $.8 billion to $2.5 billion)
from June 30, 1997. The growth in the period-end balance sheet was funded by an
increase in core deposits of 11 percent (from $8.2 billion to $9.1 billion) and
a 42 percent increase in purchased funds (from $3.6 billion to $5.1 billion).
TABLE 6 - SELECTED LOANS
<TABLE>
<CAPTION>
1998
As Growth 1998 Growth
(Dollars in millions) Reported 1997 Rate (%) Managed(F1) Rate (%)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JUNE 30 PERIOD-END
Consumer loans $2,615.3 $2,751.4 (4.9) $ 3,030.4 10.1
Permanent mortgages 366.7 636.9 (42.4) 676.2 6.2
Total loans 7,945.8 8,006.5 (.8) 8,670.4 8.3
- --------------------------------------------------------------------------------------------------------
SECOND QUARTER AVERAGES
Consumer loans $2,674.4 $2,730.1 (2.0) 2,965.0 8.6
Permanent mortgages 453.0 627.1 (27.8) 665.2 6.1
Total loans 8,055.5 7,889.4 2.1 8,558.3 8.5
- --------------------------------------------------------------------------------------------------------
YEAR-TO-DATE AVERAGES
Consumer loans $2,776.3 $2,715.1 2.3 2,922.4 7.6
Permanent mortgages 560.4 628.7 (10.9) 667.1 6.1
Total loans 8,211.3 7,816.7 5.0 8,464.0 8.3
- --------------------------------------------------------------------------------------------------------
</TABLE>
[FN]
(F1) Excludes managed loans in the mortgage banking servicing portfolio.
</FN>
TABLE 7 - INVESTMENT SECURITIES
<TABLE>
<CAPTION>
1998 1998
AS Growth EXCLUDING Growth
(Dollars in millions) REPORTED 1997 Rate (%) REMIC Rate (%)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 30 period-end $2,649.0 $2,141.0 23.7 $1,965.0 (8.2)
Second quarter averages 2,422.1 2,162.4 12.0 1,950.2 (9.8)
Year-to-date averages 2,261.5 2,182.5 3.6 2,024.2 (7.3)
- -------------------------------------------------------------------------------------------------------
</TABLE>
Average total assets grew 24 percent (from $13.0 billion to $16.1 billion) and
average commercial loans increased 8 percent (from $3.6 billion to $3.9 billion)
and represented 49 percent of total loans. Consumer loans represented 33 percent
of total loans. The 31 percent increase (from $.3 billion to $.4 billion) in
real estate construction loans came primarily from growth in residential
construction loans originated by mortgage banking. Average credit card
receivables grew slightly with 2 percent growth (from $.5 billion to $.6
billion). Strong origination volume was the reason the mortgage warehouse grew
227 percent (from $.8 billion to $2.7 billion) during this same period.
Since the second quarter of 1997, average core deposits grew 8 percent (from
$8.3 billion to $8.9 billion) and interest-bearing core deposits grew 4 percent
(from $6.1 billion to $6.3 billion). Noninterest-bearing deposits grew 20
percent (from $2.2 billion to $2.6 billion) over this same period with growth in
<PAGE> 22
mortgage escrow balances accounting for 59 percent of this increase. Purchased
funds were up 64 percent (from $3.4 billion to $5.5 billion) from the previous
year. This increase was primarily due to growth in the mortgage warehouse and a
higher balance of nonearning assets.
CAPITAL
- -------
Total capital (shareholders' equity plus qualifying capital securities) at June
30, 1998, was $1,085.5 million, up 11 percent from June 30, 1997. Shareholders'
equity (excluding the qualifying capital securities) was $985.5 million at June
30, 1998, an increase of 12 percent from $880.9 million at June 30, 1997.
Average shareholders' equity increased 12 percent (from $852.7 million to $953.5
million) since the second quarter of 1997. Despite the increase in shareholders'
equity, the capital ratios declined as a result of the 24 percent increase in
average assets which resulted from the 227 percent growth in the mortgage
warehouse. The average total capital to average assets ratio was 6.53 percent
and the average shareholders' equity to average assets ratio was 5.91 percent
for the second quarter of 1998. This compares with 7.33 percent and 6.56
percent, respectively, for the second quarter of 1997. Excluding the effects of
unrealized market valuations, the average total capital to average assets ratio
would have been 6.45 percent and the average shareholders' equity to average
assets ratio would have been 5.83 percent for the second quarter of 1998.
At June 30, 1998, the corporation's Tier 1 capital ratio was 8.07 percent, the
total capital ratio was 11.31 percent and the leverage ratio was 5.91 percent.
On June 30, 1998, First Tennessee's bank affiliates had sufficient capital to
qualify as well capitalized institutions.
<PAGE> 23
OFF-BALANCE SHEET ACTIVITY
In the normal course of business, First Tennessee is a party to financial
instruments that are not required to be reflected on a balance sheet. First
Tennessee enters into transactions involving these instruments to meet the
financial needs of its customers and manage its own exposure to fluctuations in
interest rates. These instruments are categorized into "Lending related,"
"Mortgage banking," "Interest rate risk management," and "Capital markets" as
noted in Table 8.
TABLE 8 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AT JUNE 30, 1998
<TABLE>
<CAPTION>
(Dollars in millions) Notional value
- ------------------------------------------------------------------------------------------
<S> <C>
LENDING RELATED:
Commitments to extend credit:
Consumer credit card lines $1,902.9
Consumer home equity 481.2
Commercial real estate and construction
and land development 396.0
Mortgage banking 1,864.4
Other 1,812.6
Other commitments:
Standby letters of credit 483.8
Commercial letters of credit 13.2
Foreign exchange contracts - net position 0.3
MORTGAGE BANKING:
Mortgage pipeline and warehouse hedging:
Interest rate contracts:
Forward contracts - commitments to sell 3,293.5
Option contracts - put options purchased(F1) 49.0
Servicing portfolio hedging:
Interest rate contracts:
Floors - purchased(F1) 8,325.0
Floors - written 1,750.0
Caps - purchased(F1) 1,000.0
Caps - written 1,000.0
INTEREST RATE RISK MANAGEMENT:
Interest rate contracts:
Swaps - receive fixed/pay floating 501.0
Swaps - receive floating/pay fixed 150.0
Caps - purchased 20.0
Caps - written 20.0
Equity contracts:
Purchased options 1.9
CAPITAL MARKETS:
Forward contracts:
Commitments to buy 2,258.4
Commitments to sell 2,552.9
Securities underwriting commitments 2.2
- ------------------------------------------------------------------------------------------
</TABLE>
[FN]
(F1) Mortgage banking purchased interest rate contracts had a value of $52.2
million recognized in the Consolidated Statements of Condition at June 30,
1998.
</FN>
<PAGE> 24
SIX MONTH REVIEW (comparison of first six months of 1998 to first six months of
1997)
* Earnings for 1998 were $99.1 million, up 17 percent from last year's
earnings of $84.9 million.
* Diluted earnings per share (adjusted for the 1998 two-for-one stock split)
were $.75 in 1998, up 17 percent over the $.64 earned in 1997. Basic
earnings per share were $.77 in 1998 and $.66 in 1997.
* Return on average shareholders' equity was 20.9 percent in 1998 compared
with a return of 20.0 percent in 1997 and return on average assets was 1.29
percent in 1998 compared with 1.33 percent in 1997.
* Total revenues grew 27 percent with growth in fee income of 40 percent and
growth in net interest income of 11 percent. Mortgage banking and capital
markets led the increase in fee income with growth of 55 percent and 69
percent, respectively.
* The consolidated net interest margin was 3.94 percent in 1998 compared with
4.25 percent in 1997.
INCOME STATEMENT REVIEW
- -----------------------
Noninterest income, excluding securities gains and losses, increased 40 percent
(from $293.0 million to $410.0 million) over the same period last year. Fee
income represented 61 percent of total revenues during the first six months of
1998 and 56 percent for the same period in 1997. Mortgage banking fee income
grew 55 percent (from $139.1 million to $215.1 million). See Table 1 - Mortgage
Banking for a breakout of noninterest income as well as mortgage banking
origination volume and servicing portfolio levels. Fee income from capital
markets increased 69 percent (from $40.5 million to $68.2 million) from 1997,
reflecting a record six-month period. The increase was principally due to
increased underwriting activity and customer base expansion. For the first six
months of 1998, fee income in deposit transactions and cash management grew 5
percent (from $40.8 million to $42.8 million). The 36 percent increase in trust
services and investment service fees (from $18.8 million to $25.5 million) was
principally due to acquisition activity and strong market performance. Merchant
processing fees were relatively flat at $14.9 million, and cardholder fees
increased 5 percent (from $9.4 million to $9.9 million). All Other income and
commissions increased 14 percent (from $29.5 million to $33.6 million). Other
service charges increased 41 percent (from $5.1 million to $7.2 million) while
check clearing fees declined 42 percent (from $7.8 million to $4.5 million). The
reasons for the year-to-date trends were similar to the quarterly trend
information already discussed.
Net interest income increased 10 percent (from $236.8 million to $261.4 million)
from the first six months of 1997. Year-to-date consolidated margin declined
from 4.25 percent in 1997 to 3.94 in 1998, primarily from the build-up of the
mortgage warehouse which produced 66 percent of the 19 percent increase in
earning assets year-over-year. In the regional banking group the year-to-date
margin improved from 4.63 percent in 1997 to 4.81 percent in 1998.
The provision for loan losses increased 5 percent (from $25.0 million to $26.3
million) from the previous year. The increase reflects the change in loan mix
due to securitizations, the inherent risk in the loan portfolio and a higher
amount of allowance commensurate with loan growth.
Noninterest expense increased 34 percent (from $366.4 million to $489.3
million). Excluding the commission-based businesses of mortgage banking and
capital markets, total noninterest expense increased 10 percent. Personnel
expense, the largest category, increased 29 percent (from $190.7 million to
$246.4 million). Personnel expense includes commissions paid in several lines of
business such as capital markets and mortgage banking. As sales and/or
origination volumes increase or decrease or the product mix changes in these
business lines, the commissions change accordingly. Personnel expense increased
36 percent in mortgage banking and 78 percent in capital markets comparing the
six-month period in 1997 to the same period in 1998. Due to a larger servicing
portfolio and higher prepayments, amortization expense of mortgage servicing
rights increased 140 percent (from $17.5 million to $41.9 million).
<PAGE> 25
BALANCE SHEET REVIEW
- --------------------
Average total assets grew 21 percent (from $12.9 billion to $15.5 billion) and
average loans grew 5 percent (from $7.8 billion to $8.2 billion) from the first
six months of 1997. Average commercial loans increased 8 percent (from $3.6
billion to $3.9 billion), average consumer loans grew 2 percent (from $2.7
billion to $2.8 billion) and average credit card receivables grew 2 percent with
a balance of approximately $.5 billion for both periods. The permanent mortgage
portfolio decreased 11 percent with a balance of approximately $.6 billion for
both periods. Real estate construction loans grew 34 percent (from $.3 billion
to $.4 billion). The increase in real estate construction loans came primarily
from growth in residential construction loans originated by mortgage banking.
Average investment securities increased 4 percent (from $2.2 billion to $2.3
billion) from 1997. With the strong origination volume, the mortgage warehouse
grew 177 percent (from $.8 billion to $2.2 billion). For a better understanding
of the growth trends in these balances refer to Table - 6 Selected Loans and
Table 7 - Investment Securities.
Average core deposits increased 7 percent (from $8.3 billion to $8.9 billion)
and interest-bearing core deposits increased 4 percent (from $6.1 billion to
$6.4 billion). Noninterest-bearing deposits increased 18 percent (from $2.1
billion to $2.5 billion). Purchased funds increased 55 percent (from $3.2
billion to $5.0 billion) for the six-month period.
Year 2000
- ---------
First Tennessee began planning its Year 2000 conversion process in 1995. Among
other things, the process included the formation of a company-wide project
office that meets regularly to coordinate and review the status of conversion
initiatives. A comprehensive review to identify the systems affected by this
issue was completed, estimated cost projections were determined and an
implementation plan was compiled and is currently being executed and is on
schedule. As a result of the tasks already completed, First Tennessee expects to
either modify or replace certain existing systems. In addition, based on
business plans to meet and exceed future customer needs, as well as growth and
expansion expectations, new systems are being purchased which will be Year 2000
compliant. Adequate training, testing and production integration will occur
early in 1999. First Tennessee is also actively working to assess the compliance
efforts of its major external counterparties and vendors. Based upon current
information, management presently believes that specific costs related to First
Tennessee's Year 2000 systems issues will not have a material impact on the
operations, cash flows or financial condition of First Tennessee.
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 1 of this report
and to Note 1 of the Consolidated Financial Statements and the "Risk Management
- - Interest Rate Risk Management" Subsection of the Management's Discussion and
Analysis section contained in Financial Information Appendix to the
Corporation's Proxy Statement furnished to shareholders in connection with the
Annual Meeting of Shareholders held on April 21, 1998, filed March 19, 1998.
<PAGE> 26
Part II.
OTHER INFORMATION
Items 1, 2, 3, and 5.
As of the end of the second quarter, 1998, the answers to Items 1, 2, 3, and 5
were either inapplicable or negative, and therefore, these items are omitted.
Item 4 - Submission of Matters to a Vote of Security Holders.
(a) The Company's Annual Meeting of Shareholders was held April 21, 1998.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934. There were no solicitations in
opposition to management's nominees for election to Class II (Messrs.
Blattberg, Glass, Kelley, and Rose). The Class II nominees were elected for
a three-year term or until their respective successors are duly elected and
qualified. Directors continuing in office are Messrs. Cantu, Cates, Haslam,
Horn, Martin, Orgill, Palmer and Sansom.
(c) At the Annual Meeting, the shareholders also ratified the appointment of
Arthur Andersen LLP as independent auditors for the year 1998. The
shareholder vote was as follows:
<TABLE>
<CAPTION>
For Withheld
1. Nominees (Class II) --- --------
<S> <C> <C>
Robert C. Blattberg 108,389,298 305,366
J. Kenneth Glass 108,432,267 262,397
John C. Kelley, Jr. 108,397,668 296,996
Michael D. Rose 108,397,200 297,467
<CAPTION>
For Withheld Abstain
--- -------- -------
<S> <C> <C> <C>
2. Ratification of Auditors 108,000,521 323,520 370,623
</TABLE>
There were no "broker non-votes" with respect to any of the nominees or the
ratification of auditors and no abstentions with respect to any of the nominees.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits furnished in accordance with the provisions of the Exhibit Table
of Item 601 of Regulation S-K are included as described in the Exhibit
Index which is a part of this report. Exhibits not listed in the Exhibit
Index are omitted because they are inapplicable.
(b) No reports on Form 8-K were filed during the second quarter of 1998.
<PAGE> 27
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: 8/13/98 By: Elbert L. Thomas Jr.
--------------------- --------------------------------
Elbert L. Thomas Jr.
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description Page No.
- ----------- ------------------- --------
<S> <C> <C>
*10(i) Amended and Restated Pension Restoration
Plan, as amended and restated 4-21-98 attached
as Exhibit 10(i) to the Corporation's Quarterly
Report on Form 10-Q for the quarter ended
3-31-98, and incorporated herein by reference.
27 Financial Data Schedule (for SEC use only). Filed Herewith
</TABLE>
[FN]
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit.
</FN>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST
TENNESSEE NATIONAL CORPORATION'S JUNE 30, 1998, FINANCIAL STATEMENTS FILED IN
ITS 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 766,038
<INT-BEARING-DEPOSITS> 2,536
<FED-FUNDS-SOLD> 151,614
<TRADING-ASSETS> 394,992
<INVESTMENTS-HELD-FOR-SALE> 1,916,427
<INVESTMENTS-CARRYING> 732,541
<INVESTMENTS-MARKET> 731,277
<LOANS> 10,429,288
<ALLOWANCE> 129,858
<TOTAL-ASSETS> 16,570,563
<DEPOSITS> 10,943,340
<SHORT-TERM> 3,010,337
<LIABILITIES-OTHER> 1,264,862
<LONG-TERM> 266,543
100,000
0
<COMMON> 79,810
<OTHER-SE> 905,671
<TOTAL-LIABILITIES-AND-EQUITY> 16,570,563
<INTEREST-LOAN> 439,847
<INTEREST-INVEST> 74,613
<INTEREST-OTHER> 18,702
<INTEREST-TOTAL> 533,162
<INTEREST-DEPOSIT> 178,366
<INTEREST-EXPENSE> 273,833
<INTEREST-INCOME-NET> 259,329
<LOAN-LOSSES> 26,300
<SECURITIES-GAINS> (62)
<EXPENSE-OTHER> 489,278
<INCOME-PRETAX> 153,651
<INCOME-PRE-EXTRAORDINARY> 99,101
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,101
<EPS-PRIMARY> .77<F1>
<EPS-DILUTED> .75<F1>
<YIELD-ACTUAL> 3.94
<LOANS-NON> 21,145
<LOANS-PAST> 28,094
<LOANS-TROUBLED> 117
<LOANS-PROBLEM> 38,100
<ALLOWANCE-OPEN> 125,859
<CHARGE-OFFS> 23,736
<RECOVERIES> 5,010
<ALLOWANCE-CLOSE> 129,858
<ALLOWANCE-DOMESTIC> 129,858
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>FIRST TENNESSEE NATIONAL CORPORATION EFFECTED A TWO-FOR-ONE STOCK SPLIT ON
FEBRUARY 20, 1998. THIS CURRENT FINANCIAL DATA SCHEDULE AND THE DECEMBER 31,
1997 FINANCIAL DATA SCHEDULE FILED WITH THE 1997 FORM 10-K REFLECT THIS STOCK
SPLIT. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED TO REFLECT THE
STOCK SPLIT.
</FN>
</TABLE>
