<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 September 30, 2000
------------------
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) 523-4212
----------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.625 par value 128,812,864
----------------------------- -------------------------------
Class Outstanding at October 31, 2000
<PAGE> 2
FIRST TENNESSEE NATIONAL CORPORATION
INDEX
Part I. Financial Information
Part II. Other Information
Signatures
Exhibit Index
<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
----------------------------------------------------------------------------------------------------------------
September 30 December 31
------------------------------- ------------
(Dollars in thousands)(Unaudited) 2000 1999 1999
------------------------------------------------------------------------------------------------- ------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 804,330 $ 860,519 $ 956,077
Federal funds sold and securities
purchased under agreements to resell 196,671 297,398 279,537
------------------------------------------------------------------------------------------------- ------------
Total cash and cash equivalents 1,001,001 1,157,917 1,235,614
------------------------------------------------------------------------------------------------- ------------
Investment in bank time deposits 4,430 1,598 3,263
Capital markets securities inventory 582,226 502,796 147,041
Mortgage loans held for sale 2,137,079 2,910,874 2,049,945
Securities available for sale 2,104,990 1,953,055 2,332,356
Securities held to maturity (market value of
$630,320 at September 30, 2000; $785,065 at
September 30, 1999; and $734,853 at December 31, 1999) 667,291 810,394 768,936
Loans, net of unearned income 10,168,459 8,956,320 9,363,158
Less: Allowance for loan losses 145,923 139,426 139,603
------------------------------------------------------------------------------------------------- ------------
Total net loans 10,022,536 8,816,894 9,223,555
-------------------------------------------------------------------------------------------------- ------------
Premises and equipment, net 289,574 304,553 305,519
Real estate acquired by foreclosure 15,669 17,065 17,870
Mortgage servicing rights, net 859,022 868,589 826,210
Intangible assets, net 125,156 131,162 133,568
Capital markets receivables and other assets 1,410,656 1,627,100 1,329,513
------------------------------------------------------------------------------------------------- ------------
TOTAL ASSETS $ 19,219,630 $ 19,101,997 $ 18,373,390
================================================================================================= ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing $ 10,259,580 $ 9,674,515 $ 8,560,462
Noninterest-bearing 2,918,584 2,748,857 2,798,239
------------------------------------------------------------------------------------------------- ------------
Total deposits 13,178,164 12,423,372 11,358,701
------------------------------------------------------------------------------------------------- ------------
Federal funds purchased and securities
sold under agreements to repurchase 2,730,729 1,979,934 2,856,282
Commercial paper and other short-term borrowings 494,003 1,494,301 1,550,229
Capital markets payables and other liabilities 996,828 1,480,796 908,048
Term borrowings 409,803 376,877 358,663
------------------------------------------------------------------------------------------------- ------------
Total liabilities 17,809,527 17,755,280 17,031,923
------------------------------------------------------------------------------------------------- ------------
Guaranteed preferred beneficial interests in
First Tennessee's junior subordinated debentures 100,000 100,000 100,000
------------------------------------------------------------------------------------------------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock - no par value (5,000,000 shares authorized,
but unissued) -- -- --
Common stock - $.625 par value (shares authorized -
400,000,000; shares issued - 128,081,182 at
September 30, 2000; 130,681,481 at September 30, 1999;
and 129,878,459 at December 31, 1999) 80,051 81,676 81,174
Capital surplus 104,868 159,144 130,636
Undivided profits 1,129,144 1,018,112 1,053,722
Accumulated other comprehensive income (4,513) (9,157) (21,752)
Deferred compensation on restricted stock incentive plans (4,400) (6,245) (5,674)
Deferred compensation obligation 4,953 3,187 3,361
------------------------------------------------------------------------------------------------- ------------
Total shareholders' equity 1,310,103 1,246,717 1,241,467
------------------------------------------------------------------------------------------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 19,219,630 $ 19,101,997 $ 18,373,390
================================================================================================= ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME First Tennessee National Corporation
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------- ------------------------------
(Dollars in thousands except per share data)(Unaudited) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $235,407 $189,399 $ 670,309 $ 552,229
Interest on investment securities:
Taxable 47,401 46,001 148,854 127,250
Tax-exempt 484 602 1,482 2,093
Interest on mortgage loans held for sale 54,541 55,458 157,778 179,570
Interest on capital markets securities inventory 9,073 7,746 21,805 25,057
Interest on other earning assets 5,676 4,006 15,772 10,456
--------------------------------------------------------------------------------------------------------------------------------
Total interest income 352,582 303,212 1,016,000 896,655
--------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits:
Savings 1,370 1,450 4,219 4,317
Checking interest and money market account 27,058 25,900 83,043 78,547
Certificates of deposit under $100,000 and other time 33,467 30,326 95,114 93,431
Certificates of deposit $100,000 and more 76,447 38,878 179,392 115,056
Interest on short-term borrowings 58,160 53,155 188,964 144,403
Interest on term borrowings 5,931 6,176 17,769 19,041
--------------------------------------------------------------------------------------------------------------------------------
Total interest expense 202,433 155,885 568,501 454,795
--------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 150,149 147,327 447,499 441,860
Provision for loan losses 16,593 14,110 49,167 43,915
--------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 133,556 133,217 398,332 397,945
--------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage banking 116,406 158,919 350,474 503,393
Capital markets 37,598 27,832 80,935 102,397
Deposit transactions and cash management 30,631 27,431 86,775 77,255
Trust services and investment management 17,086 15,715 49,138 45,059
Merchant processing 12,958 12,880 36,298 37,805
Cardholder fees 7,683 7,084 21,658 18,098
Equity securities gains/(losses) (269) 1,871 206 1,863
Debt securities gains/(losses) 35 (12) 1,245 (76)
All other income and commissions 39,074 34,592 107,696 81,302
--------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 261,202 286,312 734,425 867,096
--------------------------------------------------------------------------------------------------------------------------------
ADJUSTED GROSS INCOME AFTER PROVISION FOR LOAN LOSSES 394,758 419,529 1,132,757 1,265,041
--------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Employee compensation, incentives and benefits 156,305 154,175 442,500 490,461
Amortization of mortgage servicing rights 21,366 22,784 57,749 83,619
Occupancy 17,947 19,706 58,055 52,408
Operations services 17,151 16,886 51,682 49,449
Equipment rentals, depreciation and maintenance 15,476 14,618 48,237 41,731
Communications and courier 11,875 13,816 36,171 38,853
Amortization of intangible assets 2,833 2,629 8,170 7,806
All other expense 67,283 69,826 202,204 217,601
--------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 310,236 314,440 904,768 981,928
--------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 84,522 105,089 227,989 283,113
Applicable income taxes 18,575 35,671 67,096 99,694
--------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 65,947 $ 69,418 $ 160,893 $ 183,419
================================================================================================================================
EARNINGS PER SHARE $ .51 $ .53 $ 1.24 $ 1.41
--------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ .50 $ .52 $ 1.22 $ 1.37
--------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 129,494,136 131,128,788 130,164,417 130,546,944
--------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY First Tennessee National Corporation
--------------------------------------------------------------------------------------------
(Dollars in thousands)(Unaudited) 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, JANUARY 1 $1,241,467 $1,099,534
Net income 160,893 183,419
Other comprehensive income:
Unrealized market adjustments, net of tax and
reclassification adjustment 17,238 (22,029)
--------------------------------------------------------------------------------------------
Comprehensive income 178,131 161,390
--------------------------------------------------------------------------------------------
Cash dividends declared (85,462) (74,285)
Common stock issued:
Elliot Ames, Inc. acquisition 1,385 --
Keystone Mortgage, Inc. acquisition -- (66)
Cambridge Mortgage Company acquisition -- 704
For exercise of stock options 6,813 29,933
Tax benefit from non-qualified stock options -- 11,320
Common stock repurchased (48,476) (2,908)
Amortization on restricted stock incentive plans 1,503 1,579
Common stock adjustment McGuire Mortgage Co. acquisition -- (259)
Other 14,742 19,775
--------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30 $1,310,103 $1,246,717
============================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS First Tennessee National Corporation
--------------------------------------------------------------------------------------------
Nine Months Ended September 30
------------------------------
(Dollars in thousands)(Unaudited) 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 160,893 $ 183,419
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Provision for loan losses 49,167 43,915
Provision for deferred income tax 32,213 83,665
Depreciation and amortization of premises 43,904 38,329
and equipment
Amortization of mortgage servicing rights 57,749 83,619
Amortization of intangible assets 8,170 7,806
Net other amortization and accretion 31,138 42,615
Market value adjustment on foreclosed property 5,961 4,240
Loss on sale of securitized loans 1,315 --
Equity securities gains (206) (1,863)
Debt securities (gains)/losses (1,245) 76
Net (gains)/losses on disposal of fixed assets 1,402 (232)
Gain on sale of bank branches -- (4,245)
Gain on sale of HomeBanc division (40,921) --
Net (increase)/decrease in:
Capital markets securities inventory (435,185) (134,976)
Mortgage loans held for sale 8,990 1,316,569
Capital markets receivables (78,544) (278,343)
Interest receivable (2,650) 3,483
Other assets (145,373) (477,836)
Net increase/(decrease)in:
Capital markets payables 108,938 381,491
Interest payable 695 (947)
Other liabilities (53,539) 2,937
--------------------------------------------------------------------------------------------
Total adjustments (408,021) 1,110,303
--------------------------------------------------------------------------------------------
Net cash (used)/provided by operating activities (247,128) 1,293,722
--------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Held to maturity securities:
Maturities 102,640 174,341
Purchases (500) --
Available for sale securities:
Sales 356,905 32,056
Maturities 414,520 568,600
Purchases (578,837) (697,010)
Premises and equipment:
Sales 723 9,301
Purchases (33,007) (91,822)
Proceeds from loan securitizations 184,379 --
Net increase in loans (1,041,935) (853,938)
Net increase in investment in bank time deposits (1,167) (387)
Divestiture of HomeBanc division 57,565 --
Sale of bank branches, net of cash and cash equivalents -- (4,778)
Acquisitions, net of cash and cash equivalents acquired -- (8,505)
--------------------------------------------------------------------------------------------
Net cash used by investing activities (538,714) (872,142)
--------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Common stock:
Exercise of stock options 6,831 32,027
Cash dividends (85,777) (73,857)
Repurchase of shares (48,542) (2,908)
Term borrowings:
Issuance 101,200 52,421
Payments (50,288) (90,273)
Net increase/(decrease) in:
Deposits 1,809,584 747,874
Short-term borrowings (1,181,779) (865,067)
--------------------------------------------------------------------------------------------
Net cash (used)/provided by financing activities 551,229 (199,783)
--------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents (234,613) 221,797
--------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 1,235,614 936,120
--------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,001,001 $ 1,157,917
============================================================================================
Total interest paid $ 567,278 $ 455,527
Total income taxes paid 86,228 18,472
--------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<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 nine month periods ended September 30,
2000, 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 First Tennessee National Corporation's 1999
Annual Report.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting 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. SFAS 133
requires that changes in the instrument's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows the instrument's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting. Upon adoption of SFAS 133, all freestanding derivative
instruments will be remeasured 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 will be recognized as adjustments of their respective book values at
the adoption date as part of this accounting adjustment. Except to the extent
that they relate to hedges of the variable cash flow exposure of forecasted
transactions, a portion of the net accounting adjustment (net of hedge
difference and hedged item difference) will be reported in net income in the
period of adoption. To the extent the adoption adjustment relates to hedges of
the variable cash flow exposure of a forecasted transaction, the remainder of
the accounting adjustments will be reported as a cumulative effect adjustment of
comprehensive income. SFAS 133, as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133", and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement No.
133", is effective for fiscal years beginning after June 15, 2000. First
Tennessee will adopt SFAS 133 on January 1, 2001. Management has not yet
finalized the effects SFAS 133 may have on its financial statements including
the offsetting gains or losses that may be recognized on hedged assets,
liabilities and firm commitments. However, if plans to reposition certain
mortgage banking hedges (see revenue and expense enhancement plans in the
Subsequent Events and Other Forward-Looking Information Section of the MD&A) at
an after-tax cost estimated to be between $35 million and $40 million had been
completed at September 30, 2000, it is estimated that the impact of adopting
SFAS 133 at September 30, 2000, would have resulted in an estimated net
transition adjustment of between $0 and $5 million in after-tax loss. Changes in
the fair value of existing and future freestanding derivative instruments,
hedged assets, liabilities and firm commitments, changes in the book value,
including normal amortization, of these instruments and hedged assets and
liabilities could have a substantial impact on the amount of the one-time
accounting adjustment and its impact on net income. In addition, management is
in the process of evaluating the methods and instruments currently used in
hedging market exposure and changes in hedging practices could also
significantly influence the impact of adopting SFAS 133. The impact of adopting
SFAS 133 could be material at the adoption date and could be substantially
different than the estimate described above. SFAS 133 could also increase the
volatility of earnings and other comprehensive income in the future.
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.
<PAGE> 9
NOTE 2 - DIVESTITURE
On April 28, 2000, First Tennessee sold HomeBanc Mortgage, a division of First
Horizon Home Loan Corporation. The sales price for the division was
approximately $57.6 million in cash with a gain of approximately $40.9 million
being recognized in mortgage banking noninterest income.
On October 18, 2000, First Tennessee sold its corporate and municipal trust
business to The Chase Manhattan Bank. A pre-tax gain of approximately $33
million will be recognized in fourth quarter 2000.
<PAGE> 10
NOTE 3 - EARNINGS PER SHARE
The following table shows a reconciliation of earnings per share to diluted
earnings per share.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------- ------------------------------
(Dollars in thousands, except per share data) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE COMPUTATION:
Net income $65,947 $69,418 $160,893 $183,419
Weighted average shares outstanding 128,880,550 130,685,907 129,626,781 130,153,949
Shares attributable to deferred compensation 613,586 442,881 537,636 392,995
--------------------------------------------------------------------------------------------------------------------------------
Total weighted average shares per income statement 129,494,136 131,128,788 130,164,417 130,546,944
Earnings per share $ .51 $ .53 $ 1.24 $ 1.41
================================================================================================================================
DILUTED EARNINGS PER SHARE COMPUTATION:
Net income $65,947 $69,418 $160,893 $183,419
Weighted average shares outstanding 129,494,136 131,128,788 130,164,417 130,546,944
Dilutive effect due to stock options 1,521,154 3,046,877 1,634,388 3,661,797
--------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding, as adjusted 131,015,290 134,175,665 131,798,805 134,208,741
Diluted earnings per share $ .50 $ .52 $ 1.22 $ 1.37
================================================================================================================================
</TABLE>
<PAGE> 11
NOTE 4 - LOANS
The composition of the loan portfolio at September 30 is detailed below:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 4,740,921 $ 4,330,516
Consumer 3,617,927 3,136,311
Permanent mortgage 634,808 470,550
Credit card receivables 548,521 578,370
Real estate construction 585,066 407,882
Nonaccrual - Regional banking group 15,527 11,476
Nonaccrual - Mortgage banking 25,689 21,215
--------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 10,168,459 8,956,320
Allowance for loan losses 145,923 139,426
--------------------------------------------------------------------------------------------------------------------------------
Total net loans $ 10,022,536 $ 8,816,894
================================================================================================================================
</TABLE>
The following table presents information concerning nonperforming loans at
September 30:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans $ 15,736 $ 12,599
Other nonaccrual loans 25,480 20,092
--------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 41,216 $ 32,691
================================================================================================================================
</TABLE>
Nonperforming loans consist of impaired loans, other nonaccrual loans and
certain restructured loans. An impaired loan is a loan that management believes
the contractual amount due probably will not be collected. Impaired loans are
generally carried on a nonaccrual status. Nonaccrual loans are loans on which
interest accruals have been discontinued due to the borrower's financial
difficulties. Management may elect to continue the accrual of interest when the
estimated net realizable value of collateral is sufficient to recover the
principal balance and accrued interest.
Generally, interest payments received on impaired loans are applied to
principal. Once all principal has been received, additional payments are
recognized as interest income on a cash basis. The following table presents
information concerning impaired loans:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- -------------------------
(Dollars in thousands) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest on impaired loans $ 118 $ 50 $ 312 $ 365
Average balance of impaired loans 12,351 12,792 9,203 13,027
---------------------------------------------------------------------------------------------------------------------------
</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 nine months ended September 30, 2000 and 1999,
is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Non-impaired Impaired Total
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance on December 31, 1998 $ 133,572 $ 2,441 $ 136,013
Provision for loan losses 36,492 7,423 43,915
Securitization adjustment (1,790) -- (1,790)
Adjustment due to divestiture (893) -- (893)
Charge-offs 37,416 6,593 44,009
Less loan recoveries 4,885 1,305 6,190
------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 32,531 5,288 37,819
------------------------------------------------------------------------------------------------------------------------------
Balance on September 30, 1999 $ 134,850 $ 4,576 $ 139,426
==============================================================================================================================
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
==============================================================================================================================
</TABLE>
<PAGE> 12
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 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, 2000 and
1999.
<TABLE>
<CAPTION>
Regional
Banking Mortgage Capital Transaction
(Dollars in thousands) Group Banking Markets Processing Other Consolidated
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3Q00
Interest income $ 261,409 $ 75,162 $ 11,598 $ 4,413 $ -- $ 352,582
Interest expense 127,672 63,579 10,643 539 -- 202,433
-------------------------------------------------------------------------------------------------------------------------------
Net interest income 133,737 11,583 955 3,874 -- 150,149
Other revenues 75,997 118,743 37,598 29,098 (234) 261,202
Other expenses* 137,387 133,312 27,750 26,257 2,123 326,829
-------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 72,347 (2,986) 10,803 6,715 (2,357) 84,522
Income taxes 25,197 (12,335) 4,057 2,552 (896) 18,575
-------------------------------------------------------------------------------------------------------------------------------
Net income $ 47,150 $ 9,349 $ 6,746 $ 4,163 $(1,461) $ 65,947
===============================================================================================================================
Average assets $13,033,152 $ 5,237,054 $765,528 $540,145 $ -- $19,575,879
-------------------------------------------------------------------------------------------------------------------------------
3Q99
Interest income $ 223,409 $ 66,222 $ 9,112 $ 4,469 $ -- $ 303,212
Interest expense 94,527 52,727 8,183 448 -- 155,885
-------------------------------------------------------------------------------------------------------------------------------
Net interest income 128,882 13,495 929 4,021 -- 147,327
Other revenues 66,842 161,135 27,845 28,631 1,859 286,312
Other expenses* 127,134 153,710 20,886 24,285 2,535 328,550
-------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 68,590 20,920 7,888 8,367 (676) 105,089
Income taxes 21,718 8,057 2,973 3,179 (256) 35,671
-------------------------------------------------------------------------------------------------------------------------------
Net income $ 46,872 $ 12,863 $ 4,915 $ 5,188 $ (420) $ 69,418
===============================================================================================================================
Average assets $12,206,651 $ 5,182,985 $749,903 $493,788 $ -- $18,633,327
-------------------------------------------------------------------------------------------------------------------------------
<FN>
*Includes loan loss provision.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Regional
Banking Mortgage Capital Transaction
(Dollars in thousands) Group Banking Markets Processing Other Consolidated
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
YEAR TO DATE 2000
Interest income $ 754,393 $ 220,004 $ 29,229 $ 12,374 $ -- $ 1,016,000
Interest expense 352,897 186,915 27,164 1,525 -- 568,501
-------------------------------------------------------------------------------------------------------------------------------
Net interest income 401,496 33,089 2,065 10,849 -- 447,499
Other revenues 206,653 359,168 81,774 85,379 1,451 734,425
Other expenses* 402,549 403,799 64,831 76,387 6,369 953,935
-------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 205,600 (11,542) 19,008 19,841 (4,918) 227,989
Income taxes 69,889 (15,534) 7,070 7,540 (1,869) 67,096
-------------------------------------------------------------------------------------------------------------------------------
Net income $ 135,711 $ 3,992 $ 11,938 $ 12,301 $(3,049) $ 160,893
===============================================================================================================================
Average assets $12,873,594 $ 5,256,025 $683,808 $559,715 $ -- $19,373,142
-------------------------------------------------------------------------------------------------------------------------------
Year To Date 1999
Interest income $ 646,449 $ 205,725 $ 30,845 $ 13,636 $ -- $ 896,655
Interest expense 268,388 157,870 26,911 1,626 -- 454,795
-------------------------------------------------------------------------------------------------------------------------------
Net interest income 378,061 47,855 3,934 12,010 -- 441,860
Other revenues 183,232 508,807 102,411 70,859 1,787 867,096
Other expenses* 374,285 507,808 77,569 59,586 6,595 1,025,843
-------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 187,008 48,854 28,776 23,283 (4,808) 283,113
Income taxes 62,784 19,040 10,849 8,847 (1,826) 99,694
-------------------------------------------------------------------------------------------------------------------------------
Net income $ 124,224 $ 29,814 $ 17,927 $ 14,436 $(2,982) $ 183,419
===============================================================================================================================
Average assets $11,887,829 $ 5,342,462 $841,211 $494,518 $ -- $18,566,020
-------------------------------------------------------------------------------------------------------------------------------
<FN>
*Includes loan loss provision.
</FN>
</TABLE>
<PAGE> 13
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 (formerly FT Mortgage Companies and 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, automated teller machine network, payment processing
operation, and check clearing).
Certain revenue 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; 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, 2000, compared to the three month and nine month
periods ended September 30, 1999. 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 1999 financial statements, notes, and management's
discussion and analysis is provided in the 1999 Annual Report.
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 the 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; 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
<PAGE> 14
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 2000 TO THIRD QUARTER 1999)
Earnings for third quarter 2000 were $66.0 million, a decline of 5 percent from
last year's third quarter earnings of $69.4 million. Diluted earnings per share
were $.50 in 2000, a decline of 4 percent from the $.52 earned in 1999. Basic
earnings per share were $.51 in 2000, a decline of 4 percent from the $.53
earned in 1999. Return on average shareholders' equity was 20.6 percent in 2000
compared with 22.6 percent in 1999. Return on average assets was 1.34 percent in
2000 compared with 1.48 percent in 1999.
On September 30, 2000, First Tennessee ranked as one of the top 50 bank holding
companies nationally in market capitalization and total assets. On September 30,
2000, total assets were $19.2 billion and shareholders' equity was $1.3 billion.
On September 30, 1999, total assets were $19.1 billion and shareholders' equity
was $1.2 billion.
Total revenues declined 5 percent from third quarter 1999, with a 2 percent
increase in net interest income and an 8 percent decline in fee income.
NONINTEREST INCOME
------------------
Fee income provides the majority of First Tennessee's revenue. In third quarter
2000, fee income contributed approximately 64 percent to total revenues compared
with approximately 66 percent for the same period in 1999. During third quarter
2000, fee income declined 8 percent to $261.5 million, down from $284.4 million
in third quarter 1999. The decline in fee income was related to the mortgage
banking segment which has been operating under market conditions which include a
challenging interest rate environment and the continuing impact of competitive
pricing within the industry. Conversely, all other sources of fee income have
realized growth over the previous year, led by double-digit growth in capital
markets, deposit transactions and cash management, and other income. A more
detailed discussion follows.
MORTGAGE BANKING
First Horizon Home Loan Corporation, 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 the
rights to service such loans are usually 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. Secondary marketing activities include gains or losses from
mortgage warehouse hedging activities, product pricing decisions, gains or
losses from the sale of loans into the secondary market, and the capitalized
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
maintain the value of its mortgage servicing rights through changing interest
rate environments. Miscellaneous income includes the net gains or losses related
to rebalancing hedges of mortgage servicing rights, income from the foreclosure
repurchase program and other miscellaneous items.
<PAGE> 15
Mortgage banking fee income declined 27 percent to $116.4 million from $158.9
million for third quarter 1999 as shown in Table 1.
TABLE 1 - MORTGAGE BANKING
<TABLE>
<CAPTION>
Third Quarter Nine Months
------------------------- Growth ------------------------ Growth
(Dollars in millions) 2000 1999 Rate (%) 2000 1999 Rate (%)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NONINTEREST INCOME:
Loan origination fees $ 36.1 $ 38.9 (7.1) $ 96.6 $ 140.9 (31.5)
Secondary marketing activities 38.1 73.0 (47.9) 83.4 213.5 (61.0)
---------------------------------------------------------------------------------------------------------------------------
Mortgage origination function 74.2 111.9 (33.7) 180.0 354.4 (49.2)
---------------------------------------------------------------------------------------------------------------------------
Servicing fees 41.5 43.4 (4.4) 119.3 126.0 (5.4)
Sale of mortgage servicing rights (1.1) .2 NM 12.6 3.9 226.1
Miscellaneous 1.8 3.4 (46.0) 38.6 19.1 102.7
---------------------------------------------------------------------------------------------------------------------------
Total noninterest income $ 116.4 $ 158.9 (26.8) $ 350.5 $ 503.4 (30.4)
===========================================================================================================================
Refinance originations $ 632.7 $ 852.5 (25.8) $ 1,945.6 $ 6,368.8 (69.5)
Home purchase related originations 3,062.3 3,534.6 (13.4) 9,544.4 9,626.1 (.8)
---------------------------------------------------------------------------------------------------------------------------
Mortgage loan originations $ 3,695.0 $ 4,387.1 (15.8) $11,490.0 $15,994.9 (28.2)
===========================================================================================================================
Servicing portfolio $47,326.1 $46,917.8 .9 $47,326.1 $46,917.8 .9
---------------------------------------------------------------------------------------------------------------------------
<FN>
NM = not meaningful
</FN>
</TABLE>
Total origination volume, consisting of home purchase-related mortgages and
refinanced mortgages, fell 16 percent to $3.7 billion in third quarter 2000
compared with $4.4 billion in the previous year. The decline in volume was due
to higher interest rates, pricing competition throughout the industry, and a
reduction in the number of production offices. Home purchase-related mortgage
originations fell 13 percent to $3.1 billion from $3.5 billion, while refinance
volume declined 26 percent to $.6 billion from $.9 billion. Fees from the
mortgage origination process (loan origination fees, profits from the sale of
loans and secondary marketing activities) decreased 34 percent to $74.2 million,
down from $111.9 million in third quarter 1999. This decline was due primarily
to less production; lower margins related to competitive pricing pressures and a
shift in product mix; and a decrease in the results of hedging and other loan
sale activities compared with third quarter 1999.
The mortgage servicing portfolio totaled $47.3 billion on September 30, 2000,
compared to $46.9 billion on September 30, 1999. The change in the portfolio
since third quarter 1999 and year-end 1999 is shown in Table 2. Mortgage
servicing fees for third quarter 2000 were $41.5 million compared with $43.4
million for the same period in 1999, a decrease of 4 percent. The lower level of
fees was primarily due to the 1999 classification of excess mortgage servicing
rights to "interest-only" strips held in the investment securities portfolio
which resulted in an increase in interest income on securities while reducing
servicing fees. There were no bulk sales or purchases of servicing in third
quarter 2000 or 1999.
For third quarter 2000 miscellaneous mortgage income totaled $1.8 million
compared with $3.4 million in third quarter 1999. The decrease was due to losses
of $2.7 million related to the de-designation of certain servicing hedges in
third quarter 2000.
<PAGE> 16
TABLE 2 - SERVICING PORTFOLIO
<TABLE>
<CAPTION>
Activity for Activity for
9 Months Ending 12 Months Ending
(Dollars in billions) September 30, 2000 September 30, 2000
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Servicing portfolio at beginning of period $44.6 $46.9
Loans added to servicing system 12.8 16.3
Servicing released originations (1.5) (2.0)
Bulk sales of servicing released (2.1) (3.6)
Principal reductions (from payments and
payoffs received in the normal course of business) (3.8) (5.0)
----------------------------------------------------------------------------------------------------------------
Subtotal 50.0 52.6
Change in bulk sales of servicing not yet transferred (1.0) (5.3)
Change in purchased servicing not yet transferred (1.7) --
----------------------------------------------------------------------------------------------------------------
Servicing portfolio at end of period $47.3 $47.3
================================================================================================================
</TABLE>
Near term profitability of the mortgage banking segment is expected to remain
under pressure due to expected seasonal declines in origination volumes,
continued pressure on retail and wholesale pricing margins and the transition to
a downsized operation. While the transition will continue into the fourth
quarter and seasonal weakness in production will affect first quarter 2001,
initiatives are underway to improve the profitability of mortgage banking next
year, even with the continuation of the current pricing environment.
Refinance activity is expected to remain low as mortgage interest rates
fluctuate near current levels. Excluding the effect from the reduction in
production offices and short-term seasonality, home purchase-related mortgage
originations should be reflective of the strength of the economy; however,
current competitive pricing pressures and the overall market environment may
lead to changes in product mix which may affect total margin. Actual results
could differ as mortgage banking performance is affected by numerous factors
including the volume and mix of loans produced and sold, loan pricing decisions,
interest rate levels and volatility, the creditworthiness of applicants, the
current and future estimated levels of prepayments, the effectiveness of hedging
activities, the timing of purchases and sales of bulk servicing rights, as well
as other factors referred to in the Forward-Looking Statements section of the
MD&A.
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 hedged to protect against movements in interest
rates. Capital markets fee income increased 35 percent to $37.6 million during
third quarter 2000, up from $27.8 million in 1999. Much of the increase in fee
income was the result of new revenue initiatives. However, excluding the new
initiatives, capital markets still had its highest quarterly revenues since the
same period last year. As rates fell and markets stabilized in the third
quarter, some investors shifted their focus to secondary market purchases of
agencies and mortgage-backed securities. Capital markets has traditionally
generated much of its revenues from these two product areas. Total securities
bought and sold were $197.4 billion, an increase of 53 percent from $128.8
billion for the same period in 1999. Activity levels continued to grow as
customers, primarily nondepository, invested principally in short-term
securities. Conversely, volumes from depository customers were negatively
affected as these bank customers experienced strong loan growth and limited
deposit growth, which led to a reduced need for securities. Total underwritings
during third quarter 2000 were $2.9 billion compared with $5.9 billion for the
same period in 1999.
Going forward, capital markets anticipates a more stable interest rate
environment and a continuation of the market conditions experienced in the third
quarter but expects a more moderate impact on future earnings from the new
revenue initiatives implemented during the quarter. Initially these new business
initiatives will likely produce inconsistent revenues from quarter to quarter.
With this in mind, management has paid careful attention to making a portion of
the expenses associated with these businesses variable as well. While the market
<PAGE> 17
expectation for further increases in interest rates has waned, capital markets
expects a gradual return in customers' demand for longer-term securities. Until
then, capital markets' customers are likely to continue to invest in
shorter-term securities. Strong loan growth will also affect depository
customers if loan growth continues to exceed deposit growth. These conditions
have adversely affected capital markets' ability to generate fee income
resulting in declining fee income for the year 2000 compared with the levels
achieved in 1999. Actual results could differ because of several factors,
including those presented in the Forward-Looking Statements section of the MD&A.
OTHER FEE INCOME
Noninterest income from deposit transactions and cash management increased 12
percent to $30.7 million from $27.4 million for third quarter 1999 due primarily
to increased cash management fees, returned check charges, and debit card access
fees. Since third quarter 1999, trust and investment management fees grew 9
percent to $17.0 million up from $15.7 million while assets under management
also grew 9 percent to $9.9 billion compared with $9.0 billion in 1999. Merchant
processing fee income increased to $13.0 million from $12.9 million in third
quarter 1999. This growth was affected by special assessments received from
customers in third quarter 1999 which restrained the fee income growth rate to 1
percent. Merchant processing volume increased 8 percent to 35.6 million
transactions processed in third quarter 2000 compared with 32.9 million
transactions in third quarter 1999. Cardholder fees increased 8 percent in third
quarter 2000 to $7.7 million up from $7.1 million in 1999 due to higher
interchange collections.
All other income and commissions grew 13 percent to $39.1 million from $34.6
million in third quarter 1999. In 1999 a gain of $4.2 million (pre-tax) was
recognized for the sale of a bank branch in Tunica, Mississippi. Excluding this
transaction, other income and commissions would have increased 29 percent in
2000 with this growth being spread over several categories.
NET INTEREST INCOME
-------------------
Net interest income increased 2 percent to $150.8 million in third quarter 2000,
up from $148.1 million in 1999 primarily due to a 6 percent increase in earning
assets; the effect of which was lessened by a tightening in the spread between
yields on earning assets and rates paid on interest-bearing liabilities. The
consolidated net interest spread for third quarter 2000 was 3.04 percent
compared with 3.30 percent for 1999. Rising interest rates reduced the impact of
the narrowing in net interest spread by increasing the benefit from interest
free funding. The consolidated net interest margin (margin) decreased to 3.68
percent for third quarter 2000 compared with 3.82 percent in third quarter 1999.
Strong loan growth and the change in loan mix compared with third quarter 1999
helped mitigate higher funding costs in the regional banking group. Table 3
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 2000 and 1999.
<PAGE> 18
TABLE 3 - NET INTEREST MARGIN
<TABLE>
<CAPTION>
Third Quarter
------------------------
2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
REGIONAL BANKING GROUP:
Yields on earning assets 8.63% 7.98%
Rates paid on interest-bearing liabilities 4.95 3.90
------------------------------------------------------------------------------------------------
Net interest spread 3.68 4.08
------------------------------------------------------------------------------------------------
Effect of interest-free sources .97 .74
Loan fees .14 .15
FRB interest and penalties .01 --
------------------------------------------------------------------------------------------------
Net interest margin - Regional banking group 4.80% 4.97%
MORTGAGE BANKING (.97) (1.00)
CAPITAL MARKETS (.15) (.17)
TRANSACTION PROCESSING -- .02
------------------------------------------------------------------------------------------------
Net interest margin 3.68% 3.82%
================================================================================================
</TABLE>
As shown in Table 3, 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, based on no additional interest rate action by the Federal
Reserve, First Tennessee expects the margin in the near term to remain
relatively stable. However, the 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 (operating expense) for third quarter 2000 decreased 1
percent to $310.2 million from $314.4 million for the same period in 1999.
Expenses in mortgage banking and capital markets fluctuate based on the type and
level of activity. Excluding mortgage banking and capital markets, total
operating expense increased 5 percent.
Employee compensation, incentives and benefits (personnel expense), the largest
component of noninterest expense, increased 1 percent. The percent of change in
personnel expense is affected by the level of activity and type of product
sold/originated in mortgage banking and capital markets. Excluding these two
business lines, total personnel expense increased 2 percent. Additional business
line information related to expenses is provided in Table 4 and the discussion
that follows.
<PAGE> 19
TABLE 4 - OPERATING EXPENSE COMPOSITION
<TABLE>
<CAPTION>
Third Quarter Nine Months
-------------------- Growth -------------------- Growth
(Dollars in millions) 2000 1999 Rate (%) 2000 1999 Rate (%)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Regional banking group $ 120.8 $ 114.7 5.4 $ 353.4 $ 336.7 4.9
Mortgage banking 133.3 152.1 (12.4) 403.8 501.5 (19.5)
Capital markets 27.7 20.8 32.9 64.8 77.5 (16.4)
Transaction processing 26.2 24.3 8.1 76.4 59.6 28.2
Other 2.2 2.5 (16.3) 6.4 6.6 (3.4)
--------------------------------------------------------------------------------------------------------------------------
Total operating expense $ 310.2 $ 314.4 (1.3) $ 904.8 $ 981.9 (7.9)
==========================================================================================================================
</TABLE>
Mortgage banking expenses decreased 12 percent from the previous year. Personnel
expense fell 9 percent to $58.6 million for third quarter 2000 from $64.6
million in 1999 due to lower activity levels. Amortization expense from hedge
instruments fell 36 percent, or $5.0 million, from third quarter 1999 primarily
due to the de-designation in second quarter 2000 of hedge instruments associated
with the mortgage servicing rights. Amortization of capitalized mortgage
servicing rights declined 6 percent to $21.3 million from $22.8 million
primarily due to the classification of excess mortgage servicing rights to
interest-only strips and rising interest rates which have slowed mortgage
prepayments. Due to the closing and consolidation of offices over the last
several quarters, occupancy expense fell 27 percent, or $2.6 million, from third
quarter 1999.
Expenses for the regional banking group increased 5 percent from the previous
year. Expenses in transaction processing grew 8 percent from the previous year.
Capital markets experienced a 33 percent increase in expenses from third quarter
of 1999 due to higher commissions and incentives recognized in third quarter
2000 which caused total personnel expense to increase 41 percent, or $6.9
million from 1999.
INCOME TAX EXPENSE
------------------
The effective tax rate for third quarter 2000 was 22.0 percent, down from 33.9
percent for third quarter 1999. This variance was primarily the result of a tax
benefit related to the issuance by an affiliate of FTBNA of cumulative preferred
stock mandatorily redeemable after 30 years (preferred stock) which resulted in
approximately a 14 percentage point reduction in the effective tax rate for
third 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. The provision for loan losses increased 18
percent to $16.5 million from $14.1 million for third quarter 1999, primarily
due to a change in the loan mix related to growth in loans with higher
risk/reward profiles. Additional asset quality information is provided in
Table 5 - Asset Quality Information and Table 6 - Charge-off Ratios.
<PAGE> 20
TABLE 5 - ASSET QUALITY INFORMATION
<TABLE>
<CAPTION>
September 30
---------------------------
(Dollars in thousands) 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming loans $ 41,216 $32,691
Foreclosed real estate 15,669 17,065
Other assets 94 85
---------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 56,979 $49,841
=====================================================================================================================
Loans and leases 90 days past due $ 36,365 $24,004
Potential problem assets* $110,651 $68,532
Third Quarter
---------------------------
2000 1999
---------------------------
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Beginning balance at June 30 $142,722 $138,595
Provision for loan losses 16,593 14,110
Adjustment due to divestiture -- (893)
Charge-offs (15,574) (14,366)
Loan recoveries 2,182 1,980
---------------------------------------------------------------------------------------------------------------------
Ending balance on September 30 $145,923 $139,426
=====================================================================================================================
September 30
---------------------------
2000 1999
---------------------------
<S> <C> <C>
Allowance to total loans 1.44% 1.56%
Nonperforming loans to total loans .41 .37
Nonperforming assets to total loans, foreclosed real estate and other assets .56 .56
Allowance to nonperforming assets 256 280
---------------------------------------------------------------------------------------------------------------------
<FN>
* Includes loans and leases 90 days past due.
</FN>
</TABLE>
<PAGE> 21
An analytical model is used based on historical loss experience, current trends,
and reasonably foreseeable events to determine the amount of provision to be
recognized and to test the adequacy of the loan loss allowance. The ratio of
allowance for loan losses to total loans, net of unearned income, was 1.44
percent on September 30, 2000 down from 1.56 percent on September 30, 1999.
The ratio of net charge-offs to average loans decreased to .53 percent for third
quarter 2000 from .56 percent for third quarter 1999. This decrease was
primarily due to lower commercial loan net charge-offs ($.1 million in 2000
compared with $1.1 million in 1999). The credit card receivables charge-off
ratio increased to 4.39 percent for third quarter 2000 from 3.55 percent for
third quarter 1999.
The ratio of nonperforming loans to total loans increased to .41 percent for
third quarter 2000 compared with .37 percent for the same period in 1999. On
September 30, 2000, First Tennessee had no concentrations of 10 percent or more
of total loans in any single industry.
TABLE 6 - CHARGE-OFF RATIOS
<TABLE>
<CAPTION>
Third Quarter
----------------------
2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial and commercial real estate .01% .10%
Consumer .77 .74
Credit card receivables 4.39 3.55
Permanent mortgage .28 .46
Total net charge-offs .53 .56
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Going forward, asset quality ratios will be affected by loan sales, other
balance sheet strategies and shifts in loan mix to and from products with higher
risk/return profiles. Asset quality levels are likely to increase from the
historically low levels achieved in recent periods as the growth in the economy
begins to slow. Actual results could differ because of several factors,
including those presented in the Forward-Looking Statements section of the MD&A.
<PAGE> 22
BALANCE SHEET REVIEW
EARNING ASSETS
--------------
Earning assets, consisting primarily of loans, mortgage loans held for sale and
investment securities, increased 6 percent in third quarter 2000 and averaged
$16.4 billion compared with $15.5 billion for third quarter 1999. The increase
in earning assets was due to strong loan growth partially offset by a decrease
in mortgage loans held for sale and capital markets securities inventory. On
September 30, 2000, First Tennessee reported total assets of $19.2 billion
compared with $19.1 billion on September 30, 1999. Average total assets grew 5
percent to $19.6 billion from $18.6 billion for third quarter 1999.
LOANS
Average loans increased 14 percent for third quarter 2000 to $10.1 billion from
$8.8 billion. Average commercial loans increased 10 percent to $4.7 billion from
$4.3 billion in 1999, and average consumer loans increased 16 percent to $3.6
billion from $3.0 billion. First Horizon Equity Lending, a division of FTBNA, is
active in originating first and second mortgages and contributed 72 percent of
the increase in consumer loans. Additional loan information is provided in Table
7 - Average Loans.
TABLE 7 - AVERAGE LOANS
<TABLE>
<CAPTION>
Three Months Ending September 30
-----------------------------------------------------------------------
PERCENT Percent GROWTH
(Dollars in millions) 2000 OF TOTAL 1999 of Total RATE
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 4,731.4 47% $ 4,304.1 49% 9.9%
Consumer 3,550.2 35 3,048.6 35 16.4
Permanent mortgage 622.9 6 460.2 5 35.4
Credit card receivables 546.7 6 572.8 7 (4.6)
Real estate construction 570.1 6 385.3 4 48.0
Nonaccrual 32.0 -- 32.2 -- (.6)
--------------------------------------------------------------------------------------------
Total loans, net of unearned $10,053.3 100% $ 8,803.2 100% 14.2%
============================================================================================
</TABLE>
During second quarter 2000, approximately $190 million of indirect automobile
loan receivables were securitized and sold. During 1999 certain consumer real
estate loans and permanent mortgage loans were securitized with the majority of
these securities being retained by subsidiaries of First Tennessee, including
FTBNA. If these transactions had been included in the growth rate calculation,
total average loans would have grown 13 percent, and average consumer loans
would have grown 15 percent from third quarter 1999.
Average permanent mortgage loans increased 35 percent to $.6 billion from $.5
billion and average real estate construction loans increased 48 percent to $.6
billion from $.4 billion. Growth in both of these loan categories came primarily
from mortgage banking activities.
MORTGAGE LOANS HELD FOR SALE/INVESTMENT SECURITIES
The decline in mortgage originations led to an 11 percent decrease in mortgage
loans held for sale to $2.7 billion for third quarter 2000 compared with $3.0
billion in 1999. Average investment securities remained relatively flat with
last year and averaged $2.8 billion in third quarter 2000.
<PAGE> 23
DEPOSITS AND OTHER SOURCES OF FUNDS
-----------------------------------
Since third quarter 1999, average core deposits declined 2 percent to $8.9
billion from $9.1 billion while interest-bearing core deposits declined 5
percent to $5.9 billion from $6.2 billion as customers shifted their investments
from traditional deposit products to off-balance sheet investment products such
as mutual funds. Noninterest-bearing deposits increased 4 percent to $3.0
billion from $2.9 billion over this period. Short-term purchased funds were up
15 percent to $8.2 billion compared with $7.1 billion for the previous year and
were primarily used to fund growth in loans.
CAPITAL
-------
Total capital (shareholders' equity plus qualifying capital securities) on
September 30, 2000, was $1.4 billion, up 5 percent from $1.3 billion on
September 30, 1999. Shareholders' equity (excluding the qualifying capital
securities) was $1.3 billion on September 30, 2000, an increase of 5 percent
from $1.2 billion on September 30, 1999.
Average shareholders' equity increased 5 percent for third quarter 2000 to $1.3
billion from $1.2 billion for 1999, reflecting internal capital generation. The
average total capital to average assets ratio was 7.01 percent and the average
shareholders' equity to average assets ratio was 6.50 percent for third quarter
2000. This compares with 7.07 percent and 6.53 percent, respectively, for third
quarter 1999.
On September 30, 2000, the corporation's Tier 1 capital ratio was 8.10 percent,
the total capital ratio was 11.07 percent and the leverage ratio was 6.41
percent. On September 30, 2000, First Tennessee's bank affiliates had sufficient
capital to qualify as well-capitalized institutions. The initial sale of
preferred stock by an affiliate of FTBNA, which occurred early in the fourth
quarter of 2000, resulted in approximately an additional $33 million of
regulatory capital.
<PAGE> 24
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 ON SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
(Dollars in millions) Notional Value
--------------------------------------------------------------------------------------------------------------------------
<S> <C>
LENDING Commitments to extend credit:
RELATED: Consumer credit card lines $ 2,162.5
Consumer home equity 712.6
Commercial real estate and construction and land development 951.6
Mortgage banking 840.9
Other 1,537.5
Other commitments:
Standby letters of credit 311.8
Other 215.0
--------------------------------------------------------------------------------------------------------------------------
MORTGAGE Mortgage pipeline and warehouse hedging:
BANKING: Interest rate contracts:
Forward contracts - commitments to sell $ 2,242.2
Caps - purchased* 1,900.0
Servicing portfolio hedging:
Interest rate contracts*:
Forward contracts - purchased 600.0
Caps - purchased 500.0
Floors - purchased 13,750.0
Swaptions - purchased 1,200.0
Swaps 975.0
Principal only swaps 144.9
Interest rate floors - purchased 7,025.0
--------------------------------------------------------------------------------------------------------------------------
INTEREST Interest rate contracts:
RATE RISK Swaps - receive fixed/pay floating $ 200.0
MANAGEMENT: Swaps - receive floating/pay floating 200.0
Caps - purchased 20.0
Caps - written 20.0
Equity contracts:
Purchased options 1.9
--------------------------------------------------------------------------------------------------------------------------
CAPITAL Forward contracts:
MARKETS: Commitments to buy $ 1,377.1
Commitments to sell 1,475.3
Option contracts:
Purchased 390.0
Written 390.0
Swaps:
Purchased 61.5
Written 61.5
--------------------------------------------------------------------------------------------------------------------------
<FN>
* Mortgage banking contracts had a net book value of $162.0 million on
September 30, 2000.
</FN>
</TABLE>
<PAGE> 25
FINANCIAL SUMMARY (COMPARISON OF FIRST NINE MONTHS OF 2000 TO FIRST NINE MONTHS
OF 1999)
Earnings for the first nine months of 2000 were $160.9 million, a decline of 12
percent from last year's $183.4 million. Diluted earnings per share were $1.22
in 2000, a decline of 11 percent from the $1.37 earned in 1999. Basic earnings
per share were $1.24 in 2000 and $1.41 in 1999. Return on average shareholders'
equity was 17.0 percent in 2000 compared with a return of 20.9 percent in 1999.
Return on average assets was 1.11 percent in 2000 compared with 1.32 percent in
1999.
Total revenue declined 10 percent with a 15 percent decline in fee income and a
1 percent increase in net interest income. Fee income contributed 62 percent to
total revenue in 2000 compared with 66 percent in 1999.
INCOME STATEMENT REVIEW
-----------------------
Noninterest income, excluding securities gains and losses, declined 15 percent
to $733.0 million from $865.3 million for the same period last year. Fee income
represented 62 percent of total revenues during the first nine months of 2000
and 66 percent for the same period in 1999. Mortgage banking fee income declined
30 percent to $350.5 million for the first nine months of 2000, down from $503.4
million in 1999. The reasons for the year-to-date trends in origination and
servicing fees are similar to the quarterly trend information. Miscellaneous
mortgage fee income increased 103 percent from 1999, primarily due to the second
quarter sale of the HomeBanc Mortgage division that resulted in a $40.9 million
pre-tax gain. Fees from the sale of mortgage servicing increased 226 percent in
2000 due to bulk sales of servicing of approximately $3.7 billion in 2000
(principally in first quarter) compared with bulk sales of approximately $1.9
billion in second quarter 1999. 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 for the nine month period
decreased 21 percent to $80.9 million from $102.4 million in 1999 due to the
negative impact of rising interest rates and lack of liquidity in the financial
services during the first half of 2000. For the first nine months of 2000, fee
income in deposit transactions and cash management grew 12 percent to $86.8
million from $77.2 million. Trust services and investment management fees
increased 9 percent to $49.1 million from $45.1 million for the nine month
period. The reasons for the year-to-date trends in these two categories were
similar to the quarterly trend information already discussed. Merchant
processing fees decreased 4 percent to $36.3 million from $37.8 million due to
special assessments received in 1999, while cardholder fees increased 20 percent
to $21.7 million from $18.1 million due to higher interchange collections and
price increases. All other income and commissions grew 32 percent to $107.7
million from $81.3 million. Growth in this category was positively affected in
2000 by the revenues generated from the remittance processing operation acquired
June 1999 from National Processing Co. (NPC). Excluding NPC, the growth in other
income and commissions would have been 24 percent for the first nine months of
2000. The remaining growth was spread over several categories, including First
Tennessee's investment in company-owned life insurance, other service charges
and fees related to the reinsurance program.
Net interest income increased 1 percent in 2000 to $449.4 million from $444.1
million for the first nine months of 1999, while earning assets increased 3
percent to $16.1 billion from $15.6 billion over the same period. Year-to-date
consolidated margin declined in 2000 to 3.72 percent from 3.80 percent in 1999.
In the regional banking group the year-to-date margin declined to 4.86 percent
from 4.95 percent in 1999. The reasons for the year-to-date trends were similar
to the quarterly trend information already discussed.
Noninterest expense decreased 8 percent for the first nine months of 2000 to
$904.8 million from $981.9 million in 1999. See Table 4 - Operating Expense
Composition for a breakdown of total expenses by business line. Mortgage banking
expenses declined 19 percent for the first nine months of 2000 as compared to
the same period in 1999 to $403.8 million from $501.5 million. During this
period, amortization of capitalized mortgage servicing rights decreased 31
percent to $57.7 million from $83.6 million. Capital markets expenses declined
16 percent over this same period to $64.8 million from $77.5 million. Expense
growth for mortgage banking and capital markets varies with the volume and type
of activity. The regional banking group experienced moderate expense growth of 5
percent from the previous year. Transaction processing expenses grew 28 percent
for the nine month period primarily due to the acquisition of NPC. The reasons
for the year-to-date trends were similar to the quarterly trend information
<PAGE> 26
already discussed. The provision for loan losses increased 12 percent to $49.1
million from $43.9 million for the previous year. The increase reflects the
change in inherent risk caused by loan mix, loss experience and current trends.
BALANCE SHEET REVIEW
--------------------
Average total assets grew 4 percent to $19.4 billion from $18.6 billion and
average loans grew 13 percent to $9.8 billion from $8.7 billion for the first
nine months of 1999. Average commercial loans increased 9 percent to $4.6
billion from $4.2 billion, average consumer loans grew 15 percent to $3.5
billion from $3.0 billion and average credit card receivables fell 2 percent
while averaging $.6 billion for the first nine months of 2000. The permanent
mortgage portfolio increased 31 percent to $.6 billion from $.4 billion and real
estate construction loans increased 42 percent to $.5 billion from $.4 billion
primarily from mortgage banking activities. Average investment securities
increased 9 percent in the first nine months of 2000 to $2.9 billion from $2.6
billion in 1999. The decline in mortgage originations led to a 22 percent
decrease in mortgage loans held for sale to $2.6 billion from $3.4 billion in
1999.
For the first nine months of 2000, average core deposits decreased 3 percent to
$8.9 billion from $9.2 billion and interest-bearing core deposits decreased 4
percent to $6.1 billion from $6.3 billion. Noninterest-bearing deposits
increased 1 percent in 2000 to $2.9 billion from $2.8 billion in 1999.
Short-term purchased funds increased 14 percent to $8.0 billion from $7.0
billion for the nine month period.
<PAGE> 27
OTHER
-----
SUBSEQUENT EVENTS AND OTHER FORWARD-LOOKING INFORMATION
As a part of First Tennessee's efforts to enhance growth and business mix,
several slower growing businesses have been or are being considered for
divestiture. To date these efforts have resulted in the divestiture of corporate
and municipal trust which was acquired by The Chase Manhattan Bank on October
18, 2000, and resulted in a fourth quarter pre-tax gain of approximately $33
million. First Tennessee estimates that divestiture of this and other businesses
could result in gains of approximately $100 million in the fourth quarter. First
Tennessee will also proceed with various revenue and expense enhancement plans,
including repositioning certain mortgage banking hedges and certain components
of the bank investment portfolio. The total cost of these plans is estimated to
be approximately $85 million in the fourth quarter. The implementation of these
initiatives could impact future trends in various performance ratios (i.e.
earnings, margin, or asset quality). The net result of implementing these
potential divestitures and revenue and expense enhancements is not expected to
have a significant impact on current market estimates for First Tennessee's
fourth quarter 2000 earnings. These initiatives along with the recently adopted
strategic plans should position First Tennessee to meet or exceed earnings
expectations in 2001. Actual results could differ because of several factors,
including those presented in the Forward-Looking Statements section of the MD&A.
FINANCIAL MODERNIZATION LEGISLATION
The Gramm-Leach-Bliley Act (the Act) was enacted into law on November 12, 1999.
The Act repeals or modifies a number of significant provisions of current laws,
which impose restrictions on banking organizations' ability to engage in certain
types of activities. The Act generally allows bank holding companies such as
First Tennessee broad authority to engage in activities that are financial in
nature or incidental to such financial activity, including insurance
underwriting and brokerage; merchant banking; and securities underwriting,
dealing and market-making. A bank holding company may engage in these activities
directly or through subsidiaries by qualifying as a "financial holding company."
To qualify, a bank holding company must file a declaration with the Federal
Reserve and certify that all of its subsidiary depository institutions are
well-managed and well-capitalized. On March 13, 2000, the Federal Reserve acted
to approve First Tennessee's election to become a financial holding company.
The Act also permits national banks to engage in certain of these activities
through financial subsidiaries. To control or hold an interest in a financial
subsidiary, a national bank must meet the following requirements: (1) the
national bank must receive approval from the Comptroller for the financial
subsidiary to engage in the activities, (2) the national bank and its depository
institution affiliates must each be well-capitalized and well-managed, (3) the
aggregate consolidated total assets of all of the national bank's financial
subsidiaries must not exceed 45 percent of the national bank's consolidated
total assets or, if less, $50 billion, (4) the national bank must have in place
adequate policies and procedures to identify and manage financial and
operational risks and to preserve the separate identities and limited liability
of the national bank and the financial subsidiary, and (5) if the financial
subsidiary will engage in principal transactions and the national bank is one of
the one hundred largest banks, the national bank must have outstanding at least
one issue of unsecured long-term debt that is currently rated in one of the
three highest investment grade rating categories or meet alternative criteria as
may be specified for the second fifty largest banks. First Tennessee has two
subsidiaries that have met all of the above requirements to become financial
subsidiaries. No new financial activity may be commenced under the Act unless
the national bank and all of its depository institution affiliates have at least
"satisfactory" Community Reinvestment Act (CRA) ratings.
In addition, the Act contains a number of other provisions that may affect
operations, including functional regulation of First Tennessee's securities and
investment management operations by the Securities and Exchange Commission,
limitations on the insurance powers of the national banks, and limitations on
the use and the disclosure to the third parties of customer information.
The Act was effective March 11, 2000, although certain provisions take effect
later. First Tennessee cannot predict at this time the potential effect that the
Act will have on its business and operations, although management expects that
the general effect of the Act will be to increase competition in the financial
services industry.
SFAS NO. 133 - "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
<PAGE> 28
certain instruments embedded in other contracts) be recorded on the balance
sheet as either an asset or liability measured at its fair value. SFAS 133
requires that changes in the instrument's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows the instrument's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting.
Upon adoption of SFAS 133, all freestanding derivative instruments will be
remeasured 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 will be
recognized as adjustments of their respective book values at the adoption date
as part of this accounting adjustment. Except to the extent that they relate to
hedges of the variable cash flow exposure of forecasted transactions, a portion
of the net accounting adjustment (net of hedge difference and hedged item
difference) will be reported in net income in the period of adoption. To the
extent the adoption adjustment relates to hedges of the variable cash flow
exposure of a forecasted transaction, the remainder of the accounting
adjustments will be reported as a cumulative effect adjustment of comprehensive
income.
SFAS 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133",
and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of FASB Statement No. 133", is effective for
fiscal years beginning after June 15, 2000. First Tennessee will adopt SFAS 133
on January 1, 2001. In Note 23 - Financial Instruments with Off-Balance Sheet
Risk presented in the 1999 Form 10-K, the Mortgage Banking and Interest Rate
Risk Management sections present the year-end book values and fair values of
freestanding derivative instruments that would be required to be recognized in
First Tennessee's balance sheet as assets or liabilities at their fair value.
Management has not yet finalized the effects SFAS 133 may have on its financial
statements including the offsetting gains or losses that may be recognized on
hedged assets, liabilities and firm commitments. However, if plans to reposition
certain mortgage banking hedges (see revenue and expense enhancement plans in
the Subsequent Events and Other Forward-Looking Information section) at an
after-tax cost estimated to be between $35 million and $40 million had been
completed at September 30, 2000, it is estimated that the impact of adopting
SFAS 133 at September 30, 2000, would have resulted in an estimated net
transition adjustment of between $0 and $5 million in after-tax loss. Changes in
the fair value of existing and future freestanding derivative instruments,
hedged assets, liabilities and firm commitments, changes in the book value,
including normal amortization, of these instruments and hedged assets and
liabilities could have a substantial impact on the amount of the one-time
accounting adjustment and its impact on net income. In addition, management is
in the process of evaluating the methods and instruments currently used in
hedging market exposure, and changes in hedging practices could also
significantly influence the impact of adopting SFAS 133. The impact of adopting
SFAS 133 could be material at the adoption date and could be substantially
different than the estimate described above. SFAS 133 could also increase the
volatility of earnings and other comprehensive income in the future. The actual
result of the adoption of SFAS 133 could also be affected by interest rate
movements, ability of management to execute its business strategies, various
actions management may take to reduce the impact of SFAS 133, ongoing
interpretation and amendment activity by the FASB related to SFAS 133, and other
factors, including those presented in the Forward-Looking Statements section at
the beginning of the MD&A.
<PAGE> 29
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 23 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 Corporation's 1999 Annual
Report to Shareholders.
<PAGE> 30
Part II.
OTHER INFORMATION
Items 1, 2, 3, 4 and 5.
-----------------------
As of the end of the third quarter, 2000, 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
----------- -----------
4 Instruments defining the rights of security holders, including
indentures.*
27 Financial Data Schedule (for SEC use only).
[FN]
* The Corporation agrees to furnish copies of the instruments, including
indentures, defining the rights of the holders of the long-term debt of the
Corporation and its consolidated subsidiaries to the Securities and Exchange
Commission upon request.
</FN>
(b) Reports on Form 8-K.
A report on Form 8-K was filed on July 19, 2000 (with a Date of Report of July
18, 2000) disclosing under Item 5 a press release, announcing earnings for the
quarter ended June 30, 2000, and the earnings outlook for 2000.
<PAGE> 31
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: 11/13/00 By: /s/ Elbert L. Thomas Jr.
--------------------- ----------------------------
Elbert L. Thomas Jr.
Executive Vice President and
Chief Financial Controller
(Duly Authorized Officer and
Principal Financial Officer)
<PAGE> 32
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
4 Instruments defining the rights of security holders, including
indentures.*
27 Financial Data Schedule (for SEC use only).
[FN]
*The Corporation agrees to furnish copies of the instruments, including
indentures, defining the rights of the holders of the long-term debt of the
Corporation and its consolidated subsidiaries to the Securities and Exchange
Commission upon request.
</FN>
